facta universitatis series: economics and organization vol. 15, n o 2, 2018, pp. 177 187 https://doi.org/10.22190/fueo1802177t © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper models of distribution of gdp at the global level 1 udc 658.86/.87(100) zoran tomić*, ognjen radović university of niš, faculty of economics, serbia abstract. the problem of distribution has been drawing the attention of researchers for years. in their research they analyze the uniformity of distribution using pareto model of distribution, the lorenz curve and the gini coefficient. also some authors are testing the applicability of models from statistical physics to the problem of distribution to better describe it. in addition to the analysis of distribution at the level of states and certain groups such as the forbes list, the problem is spreading to the global level, where we analyze the distribution of gdp as a measure of the wealth of individual countries. in this paper we analyzed the distribution of gdp of countries applying the pareto model, lorenz curve, gini coefficient and boltzmann gibbs distribution from statistical physics. the analysis was done for 2015, while the gini coefficient analysis was done during the period from 1990 to 2015. key words: the distribution of wealth, gdp, pareto distribution, lorenz curve, gini coefficient, boltzmann gibbs distribution jel classification: d31, r12, c46 introduction for macroeconomic policy holders, it is important to consider the distribution of wealth. one of the goals that every government wants to achieve is the satisfactory rate of economic growth and development. besides a large number of indicators, according to cvetanović (2005) the degree of uniformity of distribution of wealth occupies an important place. one of the aspects of the impact of policy development is the emergence of imbalances. economic development is characterized by a marked inequality in time, space and population received december 04, 2017 / revised april 12, 2018 / accepted april 17, 2018 corresponding author: zoran tomić * phd student at university of niš, faculty of economics university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: zoranzoca@gmail.com 178 z. tomić, o. radović terms. poor distribution of wealth and income in an economy can have negative effects on economic growth and development. the research by the world bank in 1996 in the case of east asia confirms that countries with a more even distribution of wealth and income have higher rates of economic growth. in each east asian economy that has achieved solid economic growth rates in the period between 1965 and 1990, the inequality in income distribution was reduced (kitanović & golubović, 2006, p 345). the issue of distribution of wealth and money is topical today. a large number of authors studies the distribution of wealth and money using various models and types of distributions, of which pareto is the most common. this model was successfully applied in the papers of levy & solomon (1997); klass et al. (2006); dunford et al. (2014). over time, new models are forming that aim to better describe the distribution of wealth as the polynomial model by oltean & kusmartsev (2014). also models from statistical physics which describe the process of money creation, exchange and distribution of wealth are used. these models made from statistical physics are gas models without savings, savings and uneven savings. based on the well-known laws of thermodynamics these models describe economic processes of distribution. some of the authors who have dealt with the development of these models are yakovenko v. (2008), dragulescu (2002) and chakrabarti & chatterjee (2003). as we have seen, economists and physicists are mainly engaged in the issue of distribution of money, wealth and income to the level of a particular community, such as a country's population. a small number of papers deals with the application of the model distribution of wealth at the global level, but where countries are taken as individual entities. this problem was dealt with by dunford et al. (2014), and also by skipper r. (2011). in their they have successfully applied the pareto distribution model which showed that at the global level there is also uneven distribution of wealth, where gdp is taken as a measure of wealth of a particular country. also in paper dunford et al. (2014) analyzed whether pareto's 80-20 rule applies, where it is determined that the rule applied in 1989, while in the later period it is not confirmed. the aim of this paper is to analyze the changes in disparities in the distribution of gdp at the global level by using gini coefficient and checking whether the pareto's 8020 rule applies or a new rule can be found to this type of distribution. in the second part of paper the goal is to see if boltzmann gibbs distribution can be applied for the analysis of distribution of gdp worldwide. 1. distribution models in economics lorenz curve is often used to study the distribution of wealth, income or assets. this model was developed by max lorenz in 1905 to present the inequality of wealth distribution. in addition to this problem, this model is used to study the disparities in the size of plants in ecology and biodiversity studies. together with the lorenz curve, the gini coefficient is used. the gini coefficient was developed by the italian statistician corrado gini and published in his paper "variability and mutability". its value represents the percentage of the area between the line of perfect uniformity of distribution and the observed lorenz curve in the area between the two extreme positions of the lorenz curve. this indicator is now often used as a measure of inequality in the distribution. the value ranges between 0 and 1. higher values for the gini models of distribution of gdp at the global level 179 coefficient indicates uneven distribution, while gini = 1 means full uneven distribution (cvetanović, 2005, p. 94-95). in order to get the true pareto principle "80-20", the value of the gini coefficient should be around 0.76 (dunford et al., 2014, p. 143). vilfredo pareto discovered in 1879 that the high levels of wealth (but also income) distribution is done according to the law degree distribution. distribution parameters can be changed from one society to another, but regardless of the social and political conditions pareto found that the distribution of wealth respects the general law of distribution, which is known as pareto's law. if n is the number of people who have the wealth (money) exceeds the amount x, and a and α are constants, then n = a/x α respectively, log( ) log( ) log( )n a x  (1) in other words, the amount of logarithmic number of people with wealth above a certain limit on the logarithmic graph is a straight line. the coefficient α is determined by the slope and the right and is called the pareto exponent which determines the degree of uniformity of the distribution of resources in the observed population (dunford ret al., 2014, p. 141). general pareto distribution is given by the following probability density function: (1 ) 0( ) ,p w c wrw fo w     for (2) where w is a wealth, p(w) is a function of density, wo is the lower limit of the level of richness and c is a constant and α is known as the pareto-exponent (levy & solomon, 1997, p. 90). a number of researchers proved that the model is excellent with the empirical data (class. et al., 2006), but with certain corrections of the model itself (clementi & gallegati, 2005, p. 3). in the last few years a lot of papers point out that pareto model is not ideal for the description of the overall distribution of wealth, but describes perfectly only the lower part of distribution, i.e. the distribution between the richest of society (about 3 to 5%), while in the poorer part which relates to the problem of divergence, which is described by boltzmann gibbs distribution (dragulescu, 2002, p. 10). this model of distribution has an important use as an indicator of the degree of inequality in the society in the distribution of the fluctuations in the stock markets (levy & solomon, 1997, p. 90). pareto originally developed the model to describe the distribution of wealth among individuals, since it seemed that most of the wealth of the society is in the possession of a small number of the members of the same community. it is known as pareto principle "80-20", which says that 20% of the population controls 80% of the wealth of the community. when the value of the pareto exponent is equal to 1.16, this means that in the observed population there is the "80-20" principle (dunford et al., 2014, p. 142). many authors confirmed that the probability distribution and the cumulative probability of agent-based models can be described by boltzmann gibbs distribution in physics. a fundamental law of equilibrium in statistical physics is the boltzmann gibbs law, which states that the probability of p(ε) in order to find the physical system or subsystem in a state of energy ε is determined by an exponential function: 180 z. tomić, o. radović ( ) tp ce     (3) in the equation c is the constant of normalization, and t is a temperature which is equal to the average energy per particle. the probability value may range to 1. in order equations described function in the system must apply the law of the conservation of energy, i.e. that is the summation of the energy that each particle has the same total sum of energy of the system that is constant and that the probability of the particles having energy equal to the sum of energy of two particles is equal to the probability that the product particles have a particle from that particular energy. dragulescu and yakovenko (2001) used boltzmann gibbs distribution to describe the distribution of money between agents: ( ) m tp m ce   (4) where m is the amount of money that each agent has, and t is the "money temperature" that is equal to the average value of money which each agent has (yakovenko, 2010). dragulescu and yakovlenko (2001) have shown that this model can be applied to describe the distribution of money and income on the example of the us and the uk. based on the performance of the distribution function, it is obtained that the normalization constant is equal to the reciprocal value of "money temperature". for the purposes of this study we will use the gini coefficient for the analysis of uneven distribution for the period 1990 2015, while we apply pareto's model and boltzmann gibbs model for 2015. 2. analysis of the existence of pareto principle at the global level in the analysis we used the statistical data for gdp from united nations, and we looked at the value of gdp in us dollars. the reporting period was from 1990 to 2015 for which data are available. the sample consists of 208 countries that existed in 2015 and the analysis was done for those 208 countries. the analysis was performed in the program gretl. based on the values gained from the analysis that are seen in figure 1 we can see that the value of the gini coefficient in the period from 1990 to 1994 is moving upwards, indicating the increase of disparities in the distribution worldwide. this is the period of the disintegration of the ussr, czechoslovakia and yugoslavia, which has changed completely the distribution of power at the global level and the period of domination of the west and the usa lasted until 2002 when the gini coefficient reached its maximum value. after that period, the distribution of power changes, as among the world's economies asian tigers country are emerging, russia is recovering from the period of the ussr disintegration and china is becoming more powerful. also this is the period when brics slowly strengthen on the world economic scene, which leads to a drop in the value of the gini coefficient which reaches its minimum value in 2013. also since 2008, the economic crisis has contributed to increasing the uniformity of distribution, but the gini coefficient rises again in the period after 2013. figure 2 shows the lorenz curve for 2015. models of distribution of gdp at the global level 181 fig. 1 value of the gini coefficient for the period 1990 2015 source: data processed by the author fig. 2 lorenz curve for 2015 source: data processed by the author 182 z. tomić, o. radović the value of the gini coefficient shows a high degree of uneven distribution of the value of gdp at the global level, which is certainly caused by a number of factors: population, natural resources, the size of the territory, the technological development of the country, the structure of the economy, the education system and so on. based on the obtained value of the gini coefficient when it comes to the distribution of gdp pareto principle does not apply because the gini coefficient is much greater than the value necessary for the "80-20" rule, i.e. 0.76. it is better to say that for this distribution we can apply the "90-20" rule. this conclusion can be drawn from the values shown in figure 3 which shows the relationship between the value of the richness of individual groups of countries. based on the values from figure 3 in the initial period, the share of the richest 20% went up to nearly 95% of the total wealth, while in 2015 this amount was reduced to a little over 91%, which thus proves that when we talk about the distribution of gdp at the global level, the pareto rule does not apply. also it is important to note that here we took into account distribution between countries rather than among the population, as in all countries, there are small groups that are extremely wealthy compared to the rest, so for future research it would be interesting to try to determine whether the pareto principle applies in the distribution of wealth (income, money, etc.) at the level of individual countries or countries of the world. fig. 3 percent share in the global gdp per year source: data processed by the author models of distribution of gdp at the global level 183 3. pareto and boltzmann gibbs distribution of gdp at the global level testing the pareto distribution will start by using the equation (1) where we will determine whether we can apply the pareto distribution to determine the distribution of gdp of countries on the basis of their rank. the analysis was carried out in the origin program and the results were as follows. based on the analysis in origin and from figure 4, we can see that the pareto distribution function best describes the initial part of the distribution, i.e. distribution of gdp between the richest countries (the richest 42 countries, i.e. the richest 20%). this version of the pareto distribution, zipf's function can describe the distribution of wealth (gdp, money,...) only for the richest. the rest of the countries in the graph we see that it does not provide the best description of distribution, i.e. it is a country that ranked lower theoretical value different from the empirical value that is recorded. this finding was confirmed in the work of skipper (2011) that this form of pareto distribution can best describe just distribution of the world's richest countries. also, many authors have tested the pareto distribution and found that in the case of the distribution of wealth among individuals, the pareto model is best to describe the 3-5% of the richest members of the population, while other models describe the rest of the mode of distribution, such as in the papers of dragulescu and yakovenko (2001). fig. 4 pareto distribution source: data processed by the author the following will apply the general pareto distribution and boltzmann gibbs distribution to determine its applicability. 184 z. tomić, o. radović fig. 5 pareto distribution of nominal gdp source: data processed by the author fig. 6 boltzmann gibbs distribution of nominal gdp source: data processed by the author based on figure 5, we can see that the pareto distribution describes well the distribution of gdp at world level. our analysis took into account the 208 countries which are divided into groups depending on the value of their gdp. the coefficient of determination is very models of distribution of gdp at the global level 185 high which shows that this model a 99.9% change in the value of the parameter described by this model. on the same data, we applied boltzmann gibbs model which is given by the equation (5) and the obtained results are shown in figure 6. the boltzmann gibbs model describes well the distribution of gdp. the coefficient of determination in this case is somewhat lower than for the pareto model. we can conclude that both models describe well the distribution of world gdp countries. these models describe individual distribution made, not cumulative. regarding the cumulative distribution, it is shown that the pareto distribution model best describes the observed distribution of the richest part of the population, while the boltzmann gibbs model best describes the distribution of the rest. we will test the data for the distribution of world gdp which can be seen in figure 7. fig. 7 the cumulative probability distribution source: data processed by the author based on the analysis we can see that the combination of the boltzmann and gibbs and pareto distribution perfectly describes the distribution of gdp at world level. we confirmed what drăgulescu and yakovenko (2001) stated in their work using this data. specifically, the pareto function describes the part that refers to the richest countries, while the poorest countries are best described by the boltzmann gibbs function. the information in the case of 208 countries are processed in groups of countries, depending on the value of the country's gdp. based on the data we can conclude that the pareto model perfectly describes the cumulative distribution relating to the distribution of wealth by 2.4% of the richest countries in the world, while the boltzmann gibbs distribution describes the distribution of the rest of the countries, which is another confirmation of the conclusions reached in the research by dragulescu and yakovenko (2001). 186 z. tomić, o. radović conclusion the problem of the distribution of money and wealth attracted the attention of many researchers. in addition to the pareto model, which is most commonly used, there are other models that have been designed by econophysicists, like the boltzmann gibbs model from statistical physics. in this paper we first analyzed the existence of pareto's rule "80-20". we did not confirm the existence of this rule for the distribution of world gdp. in this paper we found that rule "90-20", i.e. 90% of the world gdp is created by 20% of the richest countries in the world (42 countries in total), exists and can be used as the pareto rule when it comes to distribution of the world gdp. in future research, we can try to see if the new form of pareto "80-20" exists, i.e. 80% of the world gdp is owned by 20 richest countries. secondly, in this paper we tested the boltzmann gibbs model of distribution to describe the distribution of gdp among countries worldwide. using a sample of 208 countries, we found that the boltzmann gibbs distribution can be applied to describe the distribution of a number of the poorest countries, while the pareto model can be applied to describe the distribution between the richest countries. this finding confirms the research of dragulescu and yakovenko (2001) as well as other authors. they did theirs research on the examples of the problems of distribution of wealth among individuals. in a study in 2015, we showed that the pareto distribution model describes the cumulative gdp of 2.4% of the world's countries, while the rest is described by the boltzmann gibbs distribution. further studies can test the application of other models, such as the gamma function, to describe the distribution of gdp, as well as work on theoretical grounds for the applicability of the model to describe the distribution. references clementi, f. & gallegati, m. (2005). pareto’s law of income distribution: evidence for germany, the united kingdom, and the united states. in: chatterjee a., yarlagadda s., chakrabarti b.k. (eds) econophysics of wealth distribution (pp.3-14). new york: springer. chakrabarti, b. & chatterjee, a. (2003). ideal gas-like distributions in economics: effects of saving propensity. in: takayasu h. (eds) the application of econophysics (pp.280-285). tokyo: springer. cvetanović, s. (2005). teorija privrednog razvoja [theory of economic development]. niš: ekonomski fakultet u nišu. dragulescu, a. & yakovenko, v. (2001). exponential and power-law probability distributions of wealth and income in the united kingdom and the united states. physica a, 299 (1-2), 213-221. dragulescu, a. (2002). applications of physics to economics and finance: money, income, wealth, and the stock market, dissertation abstracts international, volume: 64-01, section: b, page: 0245.; 94 p (https://arxiv.org/pdf/cond-mat/0307341v2.pdf) dunford, r., su q., tamang e. & wintour a. (2014). the pareto principle. the plymouth student scientist, 7 (1), 140-148. kitanović, d. & golubović, n. (2006). osnovi ekonomije [basic of economics]. niš: ekonomski fakultet u nišu. klass, o., biham, o., levy, m., malcai, o. & solomon, s. (2006). the forbes 400 and the pareto wealth distribution. economics letters, 90, 290 – 295. levy, m. & solomon, s. (1997). new evidence for the power-law distribution of wealth. physica a, 242 (1-2), 90-94. oltean, e. & kusmartsev, f. (2014). an econophysical approach of polynomial distribution applied to income and expenditure. american journal of modern physics, 3 (2), 88-92. sinha, s. (2006). evidence for power-law tail of the wealth distribution in india. physica a, 359 (1), 555-562. models of distribution of gdp at the global level 187 skipper, r. (2011). zipf ’s law and its correlation to the gdp of nations. the university of maryland mcnair scholars undergraduate research journal, 3, 2011, 217-226. yakovenko, v. (2008). econophysics, statistical mechanics approach to. in: encyclopedia of complexity and system science (pp.2800-2826). new york: springer. yakovenko, v. (2010). statistical mechanics of money, debt and energy consumtion. science and culture, 76 (9-10), 430-436. statistical base of un, http://unstats.un.org/unsd/snaama/dnltransfer.asp?fid=2, accessed 31.08.2017. modeli distribucije bdp na svetskom nivou problem distribucije okuplja pažnju istraživača godinama unazad. u svojim istraživanjima se bave analizom ravnomernosti raspodele primenom modela paretove distribucije, lorencove krive i gini koeficijenta. postoje i radovi gde se testiraju primenljivost modela iz statističke fizike kako bi se problem distribucije što bolje opisao. pored analize distribucije na nivou država i određenih grupa poput forbsove liste, problem se širi na svetski nivou gde se analizira distribucija bdpa kao mere bogatstva pojedinih zemalja. u ovom radu analizirali smo distribuciju bdpa zemalja primenom paretovog modela, lorencove krive, gini koeficijenta i bolcman gibsove raspodele iz statističke fizike. izvršena je analiza za 2015. godinu, dok je na osnovu gini koeficijenta izvršena analiza dinamike promene ravnomernosti distribucije u periodu od 1990. do 2015. godine. ključne reči: distribucija bogatstva, bdp, paretova distribucija, lorencova kriva, gini koeficijent, bolcman gibsova raspodela facta universitatis series: economics and organization vol. 18, no 4, special issue, 2021, pp. 397 406 https://doi.org/10.22190/fueo210730028b © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the pandemic waves’ impact on romanian e-market: a non-linear regression model1 udc 616.98:578.834 004.738.5:339 costin radu boldea1, bogdan ion boldea2 1university of craiova, craiova, romania 2west university of timisoara, timisoara, romania orcid id: costin radu boldea n/a bogdan ion boldea n/a abstract. the sars-cov2 pandemic had a strong impact on the romanian and european e-market, manifested by the explosive increase in online sales, especially at the beginning of the two waves of epidemic, in spring and autumn. using a statistical regressive analysis of monthly change in the volume of online sales in romania, we propose a non-linear regression model of growth of this commercial sector that take into account the economic and socials effects of the three pandemic waves in 2020-2021, combining logistic equations of growth with attenuated quasi-periodical variations of market. the model allows a prediction of the overall behavior of online buyers for 2021 and 2022, similar to last year, but with annual growth peaks slightly less pronounced than in 2020. key words: e-market, non-linear regression model, post-pandemic market behaviour jel classification: c51, c53 1. introduction the crisis produced by the spread of covid-19 has severely affected the world both in terms of health and economics. the actions to prevent and combat it, such as social distancing and closing non-essential businesses, have significantly changed the lifestyle of the population. received july 30, 2021 / revised october 02 / accepted november 05, 2021 corresponding author: costin radu boldea university of craiova al.i. cuza street, no. 13, craiova ro-200585, romania | e-mail: cboldea@inf.ucv.ro mailto:cboldea@inf.ucv.ro 398 c. r. boldea, b. i. boldea e-commerce refers to both online commerce and electronic transactions. it has greatly increased its popularity in recent decades and it is beginning to increasingly replace traditional stores. an e-commerce allows you to sell and buy products 24 hours a day, without having to be physically present in a traditional store. while many people think of e-commerce as business to consumer (b2c), there are many other types of e-commerce. these include online auction sites, internet banking, online tickets, reservations and business to business (b2b) transactions. recently, e-commerce has expanded through sales using mobile devices, known as "m-commerce". the e-consumers’ comportment is one of the most transformed behaviors after the spread of covid-19 pandemic situation. with limited access to physical shopping areas and the potential danger of going outside, e-commerce has become the retail alternative of choice for the entire european population. the evolution of purchasing behavior in this time of crisis follows the logic of maslow's pyramid of needs, which classifies human needs in order of importance. to meet their physiological and safety needs (at the base of the pyramid), consumers are mainly supplied with food and pharmaceuticals; they make sure they have the basic equipment to stay at home (electronic devices) and save on funds allocated to holidays or products of luxury. e-commerce largely contributes to increasing globalization. the crystallization of a global network-based market has the advantage of removing the restrictions imposed by traditional trade. if they also take into account the low costs involved in an electronic business transaction, company managers must prefer such a market that provides them with substantial profits (boldea 2010a). the development of e-commerce offers unique opportunities to reorganize business, redefine markets or create new markets. e-commerce initiatives will influence cost reductions, revenue increases and greater efficiency for companies looking to gain an edge in today's competitive environment in light of the covid-19 pandemic. from a macroeconomic point of view at a central bank, the m0 monetary base, the money multiplier, and the m1, restricted money supply, will be severely affected by the development of e-commerce, leading to a significant decrease in primary currency issuance, and hence, the blocking of the transmission of monetary policy through monetary control. this reality also determines the diminution of the right of secrecy of the central bank, with a blocking of the actions influencing the main macroeconomic indicators mainly the financial intermediation, the exchange rate, the balance of payments and the current capital account (boldea 2010b). for all these reasons, the study of effects and evolution of e-commerce in next short and medium term is very important in this period. this paper examines the evolution of e-commerce observed in the romanian retail sector in 2020, trying to propose a nonlinear statistical model with three components: main trend, explosion due to reduction of non-essential businesses and distancing restrictions, modeled by logistic components, and seasonal evolution, due to consumers’ social reaction, of romanian e-commerce market in 2020. the choice of this kind of model is justified by the increase in the number of users of electronic means of payment in various european countries, the diversification of the supply of traders and distributors, as well as the slower return to the classic system of purchases of consumer goods directly from stores by consumers already accustomed to the e-market. after this introduction, we present a brief review of previous studies on the impact of the covid-19 pandemic on e-commerce and the economy in general. the third section is dedicated to the presentation of our model of the global variation concerning the e the pandemic waves impact on romanian e-market: a regression model 399 market after the successive pandemic waves, followed by an interpretation section of the model in view of its applicability for economic forecasts. the article ends with some personal conclusions of the authors. 2. previous studies on the impact of the sars-cov2 pandemic on e-market the sars-cov2 pandemic spread extremely fast, with two successive waves in 2020 and a third in 2021, forcing the governments to impose isolation measure as well as the closure of many non-essential businesses. the result of these social and economic restriction produces major changes in the behavior of current consumption in households, as well as changing the way retail customers make their purchases. baker, farrokhnia, meyer, pagel and yannelis, (2020) analyzed these effects for the case of usa, (dou et al. 2020) for the case of china, and (ker & cardwell 2020) for canada. starting from march 2020, new measures to slow the spread of covid-19 had a significant impact on the way consumers shop in retail. as companies reduced or changed their operations in traditional stores, consumers were also called upon to practice physical distance, with the option of shopping online to become an important alternative to shopping in-person. the vast majority of governments have adopted social distance measures, imposed blockades and temporarily closed certain businesses considered non-vital. all this has led to a growth in the online shopping market, as well as an increased demand for a wide range of digital services, with many consumers opting for purchases made either via the internet or by telephone. several traditional companies have redirected their resources to e-commerce. "the increase in the number of consumers using digital services has led digital service providers and telecommunications operators to strengthen their network capacity and provide cheap or even free data sets and services" (wto, 2020). an exhaustive study on the impact of pandemic on the economic policy of governments was published at the end of 2020 (chen, igan, pierri & presbitero, 2020). from february to may 2020, the total retail sales in europe fell by 17.9%. however, e-commerce retail sales almost tripled (+ 174%), with some retailers relying more on this method of sale than on the classic version (wix e-commerce, 2020). the economic crisis generated by covid-19 pandemic is expected to strongly affect many sectors of activities (such as health, education, living standard) of the developing countries (barbier e & bugess j. 2020), retarding the achievements of several sustainable development goals (sdgs) (shulla, k., 2021). a comparative study between multiple country about the pandemic effect on the retail market was published by the bank for international settlements (alfonso, boar, frost, gambacorta & liu, 2021), stating that “the growth of e-commerce has been higher in countries where there were more stringent containment measures and where e-commerce was initially less developed, and the changes in consumers’ shopping habits and payment behavior may be longer-lasting”. a first regression model of the social and economic consequences of the e-market behavior was proposed in december 2020 (kokh, j., frommeyer, b, & schewe, g, 2021). it is a structural equation multiple linear model, derived from four statistical hypothesis verified by authors. we propose in this paper another non-linear model with higher correlation coefficient between predicted and observed global amounts of retail market, for the case of romania. 400 c. r. boldea, b. i. boldea 3. the proposed regression model of e-market behaviour the evolution of online sales in romania also experienced an upward trend in the year of the pandemic, less pronounced than in other european countries, partly due to the lower spread means of electronic payment or even internet access to the elderly or rural population. fig. 1 presents the variation of monthly online retail sales in romania, expressed in millions of euros, starting from the average monthly level of 2019: 360 million euros (iqads, 2020). it should be noted the existence of two peaks of strong growth of e-commerce corresponding to anti-covid19 restrictions related to the two epidemic waves in spring (march-may) and autumn (september-december). fig. 1 the evolution of online sales in romania in 2020, compared to the average monthly value (euro mill. 360) in 2019 data source: eurostat 2021 the reduction in online sales during the summer is justifiable in terms of reducing government anti-epidemic restrictions. statistically, the romanian online retail trade reached euro bill. 5.6 at the end of 2020, with growth peaks of 27% in may and 60% in december 2020, compared to the average monthly level from 2019. the future evolution of this economic sector will also see increases based on the accustoming of the population to electronic means of payment, even in the absence of pandemic restrictions, as well as on the expansion of this market to the level of the european union. but the growth of the e-commerce sector is not linear, being influenced by the european trend, seasonal variations and possible new waves of epidemics. in this context, our research starts from the hypothesis: (h1) the effect of a pandemic crisis can be positively related to the global increase of sales in e-market. for testing this hypothesis, we chose to analyse a possible regression model based on asymtotical bouded logistical grothw equation. the second hypothesis was: (h2) the effect of a pandemic crisis can be positively related to the accentuation of seasonal variation of e-market. the pandemic waves impact on romanian e-market: a regression model 401 the second hypothesis was tested using a fisher statistical test on the regression equation, including various quasiperiodical terms. in general, an f-test (fisher) in regression compares the fits of different models. unlike t-tests (student) that can assess only one regression coefficient at a time, the f-test can assess multiple coefficients simultaneously. in order to compute the coefficients of the non-linear regression, we used an implementation of nlstool package under r language, a high performant statistical programming language (see baty 2015 for a reference documentation). in our model design, from the beginning we excluded the variant of a uniform growth of the economic sector of online sales, given the instability caused by the pandemic. the main trend is obtained directly from the linear regression on the raw data of the variation of online trade in romania sell (%) ~ -5.48 + 5.47* m (1) where sell represents the percentage of online sales growth compared to the average monthly value in 2019, and m is the time factor expressed in months, which represents an average monthly increase of 5.47%, with an error of 0.48% and the confidence factor r2 = 0.92. first we tested the hypothesis that the main effect of the pandemic crisis on the emarket behavior can be modeled by introduction of a new asymptotic term described by a logistic asymptotic equation, a model induced by the sudden change of interest in the online sale of current products, inspired by a previous work (boldea & boldea 2012): sell (%)~[c0 + c1* m]+[c2/(0.5+exp(c3*(m-c4)))] (2) we obtain the coefficient estimation of the model using the facilities of r language, the nls package. c0~ -1.76, c1~4.211, c2~ 6.074, c3~-0.91, c4~ 7.5 the model has a residual error 5.793 on 8 degrees of freedom and passes the fisher test of significance with an f-coefficient= 63.59. the correlation coefficient between the real sell data and the prediction of model (2) is correl1 = 0.966. the model is represented in fig.2. fig. 2 the logistic regression model of online sales growth in romania in 2020, compared to the average monthly value in 2019 402 c. r. boldea, b. i. boldea in the second part, we introduced a seasonal factor related to the more pronounced variation of sales in the period corresponding to the easter or winter holidays. besides this, although the original data covers only 2020 year, we introduced a new logistic term in order to simulate the effects of the third wave of pandemic in 2021. the final model therefore contains three components: sell (%)~[c0 + c1* m]+[c2/(0.5+exp(c3*(m-7.5)))]+ c5.[sin(π/3*(m-c6))/(exp((m-c7)/12))] ]+[c4/(0.5+exp(c3*(m-15.5)))]+ (3) where the third factor, bi-annual seasonal, has a slow exponential decline in variation over time, based on the assumption that the effect of the pandemic in 2021 and 2022 will be much smaller due to intensive vaccination campaigns. la last logistic term supposes that the maximum of the pandemic crisis was attained in the middle of april 2021. this factor models the consumer reaction to covid pandemic. the coefficients of nonlinear regression model (3) were also obtained using the nls nonlinear regression analysis package facilities from r language: c0~ 7.88, c1~2.03, c2~ 13.05, c3~-0.91, c4~ 13.01,c5 =9.91, c6~ 3.2, c7~ 3.01 fig. 3 nonlinear regression model including seasonal quasi-cyclic factors and pandemic effect the standard error of the model is 0.9226%, the fisher test of relevance being passed with fcalc = 1341, well above the significance limit, and the relevance coefficient of the model was r2 = 0.998; the correlation coefficient between the real sell data and the prediction of model (2) is correl2= 0.99934, which represents a significantly higher value than in the case of logistic regression, undoubtedly allowing the use of this model in shortand medium-term predictions of the behavior of the online sales market in romania. the pandemic waves impact on romanian e-market: a regression model 403 4. the forecasting of the model and interpretation extending the simulation period of the model (3) by 24 months (fig.4), we note the appearance of a phenomenon of constant growth of predictable online sales with an increasingly better-defined trend, having seasonal variations with growth peaks on the months of april-may, respectively october-december, economically significant as they correspond to the periods of maximum commercial activity induced culturally by the spring and winter holidays, respectively. it should also be noted that this quasi-oscillating stretches with an average growth trend of 2.31% per month in the perspective of the next two years is justified by the growing interest of young people (aged 16-24) for e-commerce, according to the raw data at european level (eurostat 2021, fig.5). fig. 4 the expected growth (in percent) of online sales in romania in the period 20202022, compared to the average monthly value in 2019 one of the direct effects of pandemic restriction measures was the massive conversion of almost the entire young population (16-24 years old) to the massive use of the internet, especially for online courses and socialization activities; given that over 78% of them use the electronic environment for shopping at least once a month, we can expect a doping effect on online commerce. thus, the seasonal component, strongly accentuated in 2020 (see fig.5): sell2~ 9.91*sin(π/3*(m-3.2))/(exp((m-3)/12)) (4) with the two pronounced peaks of growth from april-may, respectively octoberdecember, overlaps with the introduction of mandatory online courses for young people and social distancing restrictions, thus being amplified in 2020 by changing the social behavior of pupils, students, and young people in general. the proposed model does not take into account any significant new waves of epidemic, given that we can expect a gradual return to normality after the massive vaccination campaign at european level, probably at the end of 2021. 404 c. r. boldea, b. i. boldea fig. 5 the term of seasonal variation (in percentages) of online sales in romania, related to the main trend of forecast growth of this sector in the period 2020-2022 according to our model, an increase in online commerce is expected until euro mill. 610 per month in romania, in april and may 2021, respectively exceeding euro mill. 920 per month at the end of 2022, with 5% marge of error. taking into account the evolution of the european e-market (wix e-commerce 2020), romanian e-commerce sector will continue to be below european average. 5. conclusions the model we propose in section 3, based on the combination of online sales doping, driven by the effects of pandemic restrictions, with a natural seasonal effect greatly amplified by the drastic change in the behavior of young shoppers in particular has a relevance coefficient, respectively the correlation of the prediction with the real data, very high, both of over 99%, the model being able to be used in predictions for the next two years of the e-market of consumer products behavior. following the results of this statistical study, we can say that the change in consumer behavior in the direction of ecommerce is irreversible, and the codifications that accelerated this trend during the pandemic are a natural evolution of e-market. however, the model proposed in this article did not take into account the impact of the vaccination campaign on consumers' dependence on online product sales (at the time of the study, the term "green passport" does not yet exist, with less benefits), as well as the emergence of new pandemic waves, much more virulent than the previous ones. the regressive model could be adjusted in the future in order to better adapt to their seasonal succession, given that a significant part of the population has already adapted to online commerce. the current pandemic situation will have a sustained impact on e-commerce even after the end of the pandemic restrictions, in several economic areas, not only those that include food and medication. the portrait of the online consumer has certainly changed, at least for now, forcing retailers to adapt to the new online market. there is no doubt that the internet is about to become not only the new global electronic market on which the the pandemic waves impact on romanian e-market: a regression model 405 economic battle between the world's great powers is to take place, but also the means for the integration of small countries into the global economy of the 21st century. references alfonso, v., boar, c., jon frost, j., gambacorta, l., & liu, j. 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https://www.un.org/development/desa/dspd/wp-content/uploads/sites/22/2021/05/shulla_paper1.pdf https://unctad.org/webflyer/covid-19-and-e-commerce-global-review#tab-2 https://www.wto.org/english/tratop_e/covid19_e/ecommerce_report_e.pdf https://fr.wix.com/ecommerce/end-of-year-report?utm_source=ecn&utm_medium=article&utm_campaign=wix https://fr.wix.com/ecommerce/end-of-year-report?utm_source=ecn&utm_medium=article&utm_campaign=wix 406 c. r. boldea, b. i. boldea uticaj pandemičnih talasa na rumunsko e-tržište: model nelinearne regresije pandemija sars-cov2 imala je snažan uticaj na rumunsko i evropsko e-tržište, što se manifestovalo eksplozivnim porastom onlajn prodaje, posebno na početku dva talasa epidemije, u proleće i jesen. koristeći statističku regresivnu analizu mesečnih promena obima onlajn prodaje u rumuniji, predlažemo model nelinearne regresije rasta ovog komercijalnog sektora koji uzima u obzir ekonomske i socijalne efekte tri talasa pandemije u periodu 2020-2021., kombinujući logističke jednačine rasta sa oslabljenim kvaziperiodičnim varijacijama tržišta. model omogućava predviđanje ukupnog ponašanja onlajn kupaca za 2021. i 2022. godinu, slično kao prošle godine, ali sa godišnjim vrhovima rasta nešto manje izraženim nego u 2020. ključne reči: e-tržište, model nelinearne regresije, ponašanje tržišta nakon pandemije plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 1, 2014, pp. 1 8 review paper economic system in the constitutional structure of the republic of serbia  udc 34:330(497.11) 342.4(497.11) sveto purić, srdjan djordjević university of kragujevac faculty of law, serbia abstract. the problem of the relationship between law and economics represents one of the questions that draw the attention of researches from both economic and legal fields with the same intensity. multidisciplinary nature of this relationship is reflected in the formal frame of legal and economic system, as well as in their academic fields. the strength of the mutual interaction of law and economics is particularly notable if this interaction is realized in primary legal document of a state. of course, we are speaking about the constitution and as the authors of this work we will direct our research efforts towards the analysis of the current constitutional provisions of the republic of serbia, starting from the fact that it is a relatively new document, existing less than one decade. the title of this work reveals the focus of our research attention – the economic dimensions of the republic of serbia constitution of 2006. key words: economic system, law, constitutional matter, republic of serbia constitution. introduction the relationship between law and economics is a continual conceptual issue that attempts to eliminate a one-sided and exclusive view when considering these social phenomena. the previous research endeavors have shown that there is an obvious methodological necessity that requires mutual interaction between law and economics related to the use of certain methodological instruments and exploring certain research themes. such methodological pluralism has imposed itself as a necessary method for the realization of scientific needs of contemporary society and scientific community. when considering these issues, special attention should be paid to the question of "what economics has to offer to law" (barković, 2009:78). such an approach is inspiring  received february 19, 2014 / accepted march 31, 2014 corresponding author: sveto purić faculty of law, djure pucara 3, 34000 kragujevac, republic of serbia tel: +381 34 306 526 • e-mail: spuric@jura.kg.ac.rs s. purić, s. djordjević 2 enough to incite us to undertake a set of research procedures in the direction of structural analysis of relevant legal texts that allow us to verify the position of economic fields within law. among such legal acts, constitution represents a particular legal source that reflects the relationship between law and economics. the conclusions to which we have arrived based on the structural analysis of the nomotechnical form of constitutional provisions related to economics, serve as an incentive for conducting further research. setting aside the structural form, there is a possibility to go deeper in our research efforts and explore whether law accepts or ignores the messages sent by economics, and if it accepts them, whether it understands them correctly which may result in its alienation from optimal models for the harmonization of social life in a community. 1. economic system in constitutional matter in the sense of an academic discipline, the issue of "materiae constitutionis" evidently belongs to the list of introductory or general issues of constitutional law as a science. traditional and classical concept of theoretical analysis of this issue starts from assuming the historical motives for the appearance of constitution as the basis for understanding its subject matter. thereto, it has almost become a common practice to consider constitution as a law which was created, before all, as an articulation of constituting a new political concept of state and society in their transition from absolute monarchies to their reshaping into modern states. american and french revolutions greatly motivated and strengthened the political awareness of people that constitutions are created to facilitate harmonized organization of social communities, to establish rules for setting up and functioning of state governments, as well as the rules for regulating the relationship between the government and citizens. such a conceptual approach in theoretical understanding of constitution has created the starting point and opinion that the constitutional subject matter is something to be exclusively sought within the formal regulation of political acts of an organized social community. therefore, it is probably why the politological approach to constitutional analysis is added to the list of basic constitutional problems presented in professional literature within the framework of legal theory. the above given starting points related to the realistic position of constitutional law as a science and its subject matter are also supported by the insufficient presence of the economic dimension of mentioned problems. there is often an unjustified trend of "silent overlooking" of the necessity to underline the economic dimension of constitutional matter, which is the issue which deserves particular attention. on the other hand, "there are few economic articles in economic literature that speak of the presence of economy in law" (weigel, 2003:16). of course, it should be noted that economic issues are present in constitutional science to the extent they are present in constitutional texts, which may point to the significance of gaining the insight into the structural composition of constitutional text. if we sum up this composition, we get a general impression that classical political problems are dominant in regulating the organization and function of a state government and its relationship with citizens. it is interesting to note that constitutional texts of the states that represent contemporary models of western democracy do not give much space to economic issues, while the situation is quite opposite in the states with single-party political systems. this opinion is expressed economic system in the constitutional structure of the republic of serbia  3 on the basis of the analysis of the structural composition of constitutions, while interesting results can also be observed in the practice – in applying these two basic types of constitutional texts. contemporary democratic constitutional systems which treat economic issues in a narrow sense provide more fruitful, rich and free economic life within a state. nondemocratic constitutional systems have rich constitutional regulation of economic issues which entails the restriction of freedom of action of various economic subjects within a society. thus, one might get a general impression that the state, as the most efficient constituent factor, acts according to the program-based vision of further development of society and, depending on the ideological concept of such orientation, the state can impose itself as more or less dominant factor in the economic sphere of society. the above stated considerations are the result of the analysis based on the interpretation of the structural conception of constitutional texts that has developed throughout history in a quite expected, even intentional way. this is the occasion to let us remind you on the period of the development of yugoslav state after the second world war in order to grasp the meaning of the constitutional text that extensively spoke about the economic regulation of state and society. thus, the constitution of federal republic of yugoslavia of 1974, structurally speaking, even in its introductory part abounded in economic issues since three out of ten given principles spoke about the social and economic order, the economic system and the goal of social, economic and political system. in the second part of the constitutional structure, the first section was dedicated to social and economic order embodied in the regulative opus that included 76 articles (from art. 10 to art. 86). the constitution of federal republic of yugoslavia was published in the official gazette of sfry no. 9/1974. accordingly, we can conclude that the analysis of the space which is in a constitutional text dedicated to economic issues and problems leaves us to make certain assumptions. thus, it can be expected, hypothetically, that the restricted regulation of the economic sphere of society is the result of the legislators’ intention to let this sphere be regulated by economic subjects beyond the state influence. in other words, if a concrete constitutional text dedicates considerable space to economic sphere, this reveals the legislators’ intention to assign a monopolistic position to the state in the most significant parts of society’s economic structure. in order to draw such conclusions for each particular state it is necessary to analyze the realistic situation of its economic conditions which requires additional testing and checking of assumed opinions established on the basis of reviewing the structural composition of constitutional texts and the position of economic issues within them. the justification of this approach is additionally supported by contemporary theoretical tendencies, especially present in the last decades of the 20 th century when it seemed to be attractive and popular to research social problems related to law and economics using the advantage of resorting to the principles of both social sciences. thus, for example, the movement law and economics was particularly dominant in the usa whose proponents were focused on the "application of the principles of marketing analysis for the purpose of resolving difficult social problems that affected the postindustrial society. since there is a close link between legal and economic spheres of life, they insisted on law being based on economic principles, such as, rationality and efficacy" (vukadinovic, 2006:26). another justification why we should dedicate a part of the constitutional matter to economic issues lays in the fact that a considerable number of sources of substantive law, including the constitutional law, comprise economic relations that should be regulated by s. purić, s. djordjević 4 basic constitutional rules. this fact also reflects the specific characteristics of economy and its basic principles which in modern democratic states are the subject to economic freedom and mechanisms beyond the state influence. on the other hand, we should bear in mind the well-known fact that scientific research of legal issues has been very much refreshed by the application of economic methods, categories and principles. "when performing a normative analysis, we should take into account that every society has its own assumption about the meaning of social welfare and the instruments of social protection." (sakalaš, lendak-kabok, 2011:118). 2. the republic of serbia constitution of 1990 in order to correctly comprehend the key issue, outlined in the very topic of this work, it is necessary to consider a few important factors which determine the essence of our understanding of the given problem. in one hand, it is a historical dimension embodied in the fact pointing to the radical distinction between the concept of economic order formally established by the republic of serbia constitution and the concept of the economic order that was regulated by the previous serbian constitution of 1990 ("official gazette of rs no. 1/90). in addition, the context of economic ambient of serbian society in the period of the adoption of the existing constitution is a valid indicator which theoretically, logically and successively relies on the previously mentioned historical dimension. this creates the basis for further methodological analysis of the formal structure of the constitutional text and its content from the economic point of view. it would be probably also interesting to explore economic rationality of the constitutional text in the sense of its terminology, which would enable us to understand jurists’ linguistics from the perspective of economic principles and categories. yet, adhering to basic conceptual line that has formulated the headline topic of this work, the authors have decided to abandon this issue, at least for the time being. this constitution had a short preamble and 136 articles systematized within nine sections, while the individual units did not bear any particular title or headline. by establishing the republic’s rights and duties, this constitution actually defined the jurisdiction of the state. having split this jurisdiction between various state organs, the constitution established that the rights given to the republic and responsibilities, to which it was bound, were actually assumed and exercised by its organs, also defined by the constitution, which constituted the organ-based functioning of the state government. as the basis and measure of the authority and responsibility of the state organs which take the constitution as their source, the legislators foresaw three principal value-oriented legal and political categories: 1) human and citizens’ rights and freedoms to which the constitution dedicates special section, 2) equality before law, as the principal basis for establishing the state with the rule of law 3) autonomy and equal position of enterprises and other organizations. these three characteristics were seen by the legislators as three qualifying principal postulates embodied in the phrase "the basis and the measure of the authority and responsibility". while performing the assigned duties within their jurisdiction, the state organs should continually seek the purpose and sense of their existence, particularly exercising their duties in the field of human rights, equality before law and autonomy and equality of all economic subjects and other organizations. these three values represented the bottom line economic system in the constitutional structure of the republic of serbia  5 of the state authority and their violation would mean the violation of the constitutional sense of the state government and its organ-based function. the constitution also foresaw that the rights and duties of the republic of serbia also included the regulation of the following issues: legal position of enterprises and other organizations and their associations and chambers; financial system; the system regulating economic relations with other countries and markets, including planning and other economic relations of general interest; control over the distribution of the assets of economic subjects, financial revision of public expenditure and the method of unified organization of these activities; collecting statistical and other data of general interest; principal goals and guidelines of economic, rural and agricultural development; spatial organization and its economic use; policies and measures aimed at inciting the economic growth and development and finally, financing the implementation of the republic of serbia rights and duties. it is interesting to note that in this constitution the human rights corpus was not systematized through a specific classification that can be encountered in standard constitutional and political theory and practice and on the basis of commonly known criteria that can be found in constitutional and political theory and practice. they were rather dispersed throughout the entire section lacking any catalogized form and approach. 3. contemporary serbian constitution unlike the previously mentioned monotechnical model, the structure of the contemporary serbian constitution (official gazette of rs no. 83/06) includes "three obvious basic systematic units: section, subsection and article. each systematic unit has its own title. there are 10 sections, 16 subsections and 206 articles. the systematic structure of these units is not identical and majority of sections actually do nor have subsections – only four of them do. the third section has two subsections, the second and seventh have three subsections, while the fifth section is the largest and includes nine subsections" (djordjevic: 2010:30). as for the number of articles, two sections comprise 60% of the total number – the section related to the organization of government (68 articles) and the section on human and minority rights and freedoms (64 articles). as for the organization of the economic system, the third section, comprising 15 articles "economic system and public finances" regulates this area of social life. this section is subdivided into two systematic units that the authors, using the freedom of academic expression, named as subsections: "economic system" and "public finances". reviewing the structural composition of the constitutional text, one can get the impression that the scope of constitutional norms that regulate economic system is not very wide. these arguments referring to the restrictive position of economic themes in the structure of the constitutional text are further elaborated and explained by reading the first section of the constitution related to constitutional principles. modern serbian legislators did not deem it important to define and present their principle normative position related to the economic sphere. such legislators’ attitude can be even considered to be "acquired habit" since they actually continued to rely on the same methodological and nomotechnical approach that had been used by the legislators back in 1990. yet, the comparative analysis have shown that the legislators from neighboring countries have taken a different direction and introduced economic issues within the introductory part of constitutional principles. thus, for example, s. purić, s. djordjević 6 the provision from art. 2.4.1 of the republic of croatia constitution prescribes that "the croatian parliament and people shall directly decide on the regulation of economic, legal and political relations in the republic of croatia" ("national journal" no. 76/2010). or, for example, the constitution of the republic of macedonia regulates the fundamental values of its constitutional order in its introductory provisions which, among other values, include "the legal protection of property" (official gazette of rm no. 52/91, 1/92, 31/98, 91/2001, 107/05). analyzing the legislators’ stand towards society’s economic problems, it is also interesting to note that the field of the organization of economic system and public finances is considered to be the part of the constitutional matter whose possible change is not the subject to be decided at a referendum. probably the reasons for this assumption should be sought in the legislators’ opinion that these issues are not considered to be suitable to be the subject of the populations’ comprehension and direct vote. or yet, such assumption can also lead us to conclude that this law is "too important to be left to lawyers to decide on, since it affects the destiny of all individuals, organizations and the state as a whole" (popov, stankovic, 2007:38). let’s go back to the analysis of the part of the text of serbian constitution that regulates human rights and freedoms dividing them into individual, political, economic, social, cultural and ecological rights and freedoms. once again, the legislators did not systematically classify them in the constitutional text, but they rather become obvious during the application of constitutional law. we can only discern just a trace of a partial systematization based on the order of the articles in this second section of the constitution. thus, at the beginning of this section there are the articles that regulate personal rights and freedoms, followed by the articles that include political rights and freedoms, then, economic and social rights and freedoms, and finally, at the very end, those that deal with cultural and environmental rights and freedoms. before presenting the normative analysis of the provisions of the republic of serbia constitution that regulate economic rights and freedoms, we would like to point to an interesting fact from the global constitutional map. thanks to updated internet resources, we can easily and rapidly google out the constitutional texts of almost all countries in the world, either in full, or their partial contents. in this way we can explore the structural composition of these texts and discover that 82 constitutions include separate normative sections that regulate economic rights and freedoms, which constitutes almost one half of all global constitutions (www.constitutteproject.org). of course, we would like to underline that this fact is sourced out from the informative material which needs to be further elaborated and scientifically supported. it would be unprofessional to draw serious conclusions on the presence of economic issues in global constitutional texts on the basis of internet data. however, the systematization presented on the above mentioned internet site was made based on the availability of separate structural composition of constitutional sections, subsections and articles related to various rights and freedoms, and within these separate structural units there are those that include constitutional provisions regulating economic rights and freedoms. if we get back to modern serbian constitution, it should be noted that the ownership rights are in the center of property rights and that this constitution guarantees peaceful and unrestricted enjoyment of these rights, but only if they are obtained in accordance with law. this means that ownership and other property rights that were obtained in an http://www.constitutteproject.org/ economic system in the constitutional structure of the republic of serbia  7 illegal way are not the subject of constitutional protection. the constitution also foresees the possibility of restricting, even confiscating property rights, but these situations may only occur if they are strictly in public interest, also defined by law, and accompanied by fair compensation, not below the market value. the purpose of such restriction or confiscation of property rights must be regulated by law, which is also the case with the public interest, which limits the state’s executive authority. of course, we are here discussing some of the exceptions from general constitutional norms guaranteeing property rights. one of the exceptions also refers to the restriction of models of utilization and management of property. relativization of property rights is also encountered in exceptional cases related to forced payment of taxes and other debts or fines, but these restrictions can be only regulated by the principal law, and not some other subordinate laws and acts. thus, for example, criminal law foresees restriction or termination of property rights as a result of illegal acts of the citizens who are the subject of certain criminal sanctions. conclusion the analysis of the constitutional framework of economic system in serbia was conducted out of purely theoretical reasons, but also based on the investigation of the existing situation in this field. in other words, can we say that the regime of existing constitution satisfy the normative requirements in function of progressive development, or not? therefore, the existing data related to public opinion on the way how this constitution regulates these subjects are of particular importance. we believe that there is a rational justification for the view of the citizens and the elite that "the constitution does not fully guarantee social and economic rights of citizens", as well as that the constitution should better regulate "antimonopoly and free competition" (jelinčić, ilić, 2013:107,109). in this sense, it is necessary to continue the analysis of existing constitutional solutions where scientists and professionals will insist on redefining the existing constitutional rules of economic "game" whereas we are fully aware that constitution should not "impose itself as an obstacle but should allow… unobstructed economic and business transactions and efficient use of available resources" (madţar, 2013:33). we believe that a part of the response to the issue related to the absence of constitutional rules that regulate economic matter lies in the specific historic background. we are here referring to turbulent and oscillatory changes of social order that have burdened serbian society from its beginning as a modern state. the processes of intensive and radical changes of founding structure of social order adversely affected social and economic tissue of this state throughout the entire 20 th century which has destabilized the efforts directed to the establishment of a consistent economic order. in the conditions of transitional turmoil, it is the constitution which is expected to contribute to the consolidation of regulatory mechanism which would secure a stable development. therefore, our concluding remarks are directed towards the needs to start revising those constitutional solutions which inadequately regulated the problems of economic system. here we are particularly underling those constitutional mechanisms which could provide additional depolitization of market economy in order to prevent further "tycoonization" of serbian economic area. such an approach would additionally provide a revision-oriented view directed towards upgrading of social and economic rights and liberties which is bound to happen since it is preconditioned by the needs for harmonizing social relations as a whole. s. purić, s. djordjević 8 references 1. weigel, v. (2003) rechtokonomic, munchen. 2. barkovic i., (2009), interdisciplinarni uspjeh prava i ekonomije: ekonomska analiza prava, ekonomski vjesnici, ekonomski fakultet, osjek, no.1: 77-84. 3. vukadinović, g., (2006) savremena američka jurisprudencija i naša teorija prva na početku xxi veka, u: američka jurisprudencija xx veka, novosadska asocijacija za teoriju etiku i filozofiju prava, novi sad. 4. đorđević, s., (2010) o mitrovdanskom ustavu, institut za pravne i društvene nauke pravnog fakulteta, pravni fakultet, kragujevac. 5. popov, đ., and stanković, f., (2009) osnovi ekonomije, pravni fakultet, novi sad. 6. ustav republike srbije ("sluţbeni glasnik republike srbije", br. 83/06) 7. ustav republike srbije ("sluţbeni glasnik republike srbije", br. 1/90) 8. constitution of the republic of croatia ("off. gazette of rc", no. 83/06) 9. constitution of the republic of macedonia ("off. gazette of rm", no. 83/06) 10. constitution of the republic of sfry ("off. gazette of sfry", no. 83/06) 11. karolina ţ., and lendak-kabok, k., (2011) neki uvodni aspekti ekonomske analize prava, škola biznisa, visoka poslovna škola strukovnih studija, novi sad. ekonomsko uredjenje u strukturi ustava republike srbije problematika odnosa prava i ekonomije predstavlja jedno od onih pitanja, koje sličnim intenzitetom istraživačke pažnje privlači i pravnu i ekonomsku nauku. multidisciplinarnost istaknutog odnosa prisutna je, kako u formalnim okvirima pravnog i ekonomskog poretka, tako i u akademskim oblastima njihovih proučavanja. moć medjusobnih uticaja prava i ekonomije dostiže svoje uočljive domete naročito kada se realizuje kroz primarni pravni dokument državnog poretka. naravno, reč je o ustavu, pa će autori nastojati da istraživački napor usmere u pravcu analize postojeće ustavne regulative u republici srbiji, polazeći od činjenice da je reč o relativno novom aktu, čija se egzistencija postepeno približava prvoj deceniji. svakako da se već iz naslova rada osnovano može pretpostaviti da se akcenat te istraživačke pažnje pomera ka ekonomskim dimenzijama ustava republike srbije iz 2006. godine. ključne reči: ekonomsko uredjenje, pravo, ustavna materija, ustav republike srbije.. facta universitatis series: economics and organization vol. 15, n o 4, 2018, pp. 393 404 https://doi.org/10.22190/fueo1804393m © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication the development effects of the monetary and fiscal policy in contemporary conditions 1 udc 336.02 338.23:336.74 danijel milošević * , vladislav marjanović university of niš, faculty of economics, niš, serbia abstract. one of the biggest problems in economic theory has always been coordination of different elements of economic policy, especially monetary and fiscal policy. in the past, there have been a few theories emphasizing one of them, but in contemporary conditions it is a fact that the only right answer is in coordinated conducting of all of them. therefore, every measure in monetary policy has to be followed by particular action in fiscal policy and the other way around. the question remains whether fiscal or monetary policy should have the priority in decision making and is there a pattern to follow when it comes to creating economic policy. empirical data are the most purposeful source for answering these questions, and therefore we will use variables from four different countries from the last fifteen years and try to find the connection between monetary and fiscal policy and the standard of living. key words: economic policy, monetary policy, fiscal policy jel classification: e52, e62 introduction it seems that the world has not managed to propel economic activity since the last economic crisis of 2008, and that the demand is still very low. what has led to this is a combination of economic and political factors. first of all, terrorist attacks, which have represented the sisyphus’s boulder since the beginning of the twenty-first century, have made business and political risks extremely high. secondly, banking systems all over the world need more time to build the trust they had before the crisis. thirdly, the new received march 26, 2018 / revised june 27, 2018 / revised september 27, 2018 / accepted october 15, 2018 corresponding author: danijel milošević * phd student at university of niš, faculty of economics faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: danijel.m1989@gmail.com 394 d. milošević, v. marjanović technological revolution is getting more and more intense and creating high structural unemployment, which will, almost certainly, last for a few more years. japan has been on the top of the production function for almost twenty years now, and they still cannot find a way to move it upwards. america seems blinded by politics, and deals little with economics. russia is struggling with the eu sanctions, and the rest of the world is struggling with, in the words of the nobel prize winner, joseph stiglitz, globalization and its discontents. only china keeps positive trends in every single parameter, which is not surprising, having in mind that china entered the global flows very carefully and under its own conditions. on the other hand, no other country has had enough power to do the same. the usual recipe in similar situations is a cheap money policy, which should drive the money out of the banks, and make people and firms invest, finally propelling economic activity. however, a cheap money policy has already been led in most parts of the world since the end of the last crisis, but without any results. demand has not reacted. in today’s neoliberal world, it would be extremely difficult to admit that keynes was right, and that the states would have to do their parts in getting out of the crisis. whether that will be a necessity, or whether the market will eventually find its way out, only time will tell. the hypothesis that we will try to prove or confute is that the fiscal policy will have to bear the brunt in contemporary conditions. 1. methodology having in mind that structural unemployment is a very serious issue today, not only in underdeveloped and developing countries, but also in some developed ones, gdp (even gdp per capita) is no longer a fair representative of development in certain countries. therefore, the main parameter in this research, which is also a dependent variable, is the gdp/unemployment rate of workforce. monetary aggregate m2 and interest rate, as representatives of monetary policy, and government expenditures, as a representative of fiscal policy, will be independent variables. we will take into consideration twelve randomly picked countries (an equal number of developing and developed countries), and the data from 2000 to 2015. these twelve countries are firstly grouped in four categories regarding the gdp/unemployment rate of the workforce, using the cluster analysis, after which we chose one from each cluster, and then, using multiple regression, the contribution to a dependent variable is determined for every independent variable. 2. complementary action of fiscal and monetary policy it is clear that in today’s dynamic conditions, it is impossible to exclusively use recommendations of the certain schools of economic policy, as was the case in the twentieth century. therefore, a coordinated management of all elements of economic policy, and especially the monetary and fiscal policy, is a necessity. the most important reason for this is that these two policies have clear effects on one another. it is impossible to correct the fiscal policy without repercussions on the aggregates of monetary policy, or the other way around. with its action, the fiscal policy can upset the monetary one (sergent, wallace, 1981). some potential manifestations of this interference are that, in conditions of low fiscal space, an expansive fiscal policy may create a budget deficit, which undoubtedly affects the the development effects of the monetary and fiscal policy in contemporary conditions 395 monetary policy. in case the government decides to monetize the budget deficit, both the monetary and fiscal policies become expansive, which is allowed only during serious recessions, and only for a short period of time. in other cases, the effect is entering an inflationary spiral. another option for the government is to finance the deficit by public debt, which is also a trigger for inflation, through the exchange rate (campillo, miron, 1997). even a restrictive fiscal policy, or raising taxes, can lead to inflation, because of the prices’ sensitivity to costs. monetary policy can also upset fiscal policy (beetsma, bovenberg, 1998, 1999). interest rates are one of the main factors of accumulation and investments, and therefore, production. besides that, interest rates have a huge significance in financing public debt. inflation too has a significant effect on public finances. there is a rule in economic theory, known as the tanzi effect, which states that, during hyperinflation, taxes are completely insignificant because of the time lag between the moment of the formation of a tax obligation, and the moment of the execution of a tax obligation (tanzi, 1977). during this time lag, money loses its value, and the government loses tax revenue. this is exactly the reason why inflation is the primary target in most central banks today. it is, therefore, not the question which of the policies the government will use for creating a desirable economic environment, but only which one will be accentuated, and that automatically produces the need for creating a coordinated strategy for the other one. in order to coordinate these policies successfully, and to correctly anticipate all the effects of every undertaken measure, one needs to know all the repercussions of the two policies on one another (delong, summers, feldstein and ramey, 2012). creating a coordinated fiscal and monetary policy, taking into consideration that their goals are sometimes opposite, is in fact the game theory, and the ultimate goal is to maximize the summed gain. for this to work, it is necessary to institutionally regulate relations between the subjects of both monetary and fiscal policy, for without that, it is very optimistic to expect that they are going to see the big picture. every one of them will stay focused on their own goals, and the summed gain will be unsatisfactory. the government will worry only about the budget, and the central bank will worry only about inflation, as long as their relations are not regulated. the key lies in the fact that, even though they are limiting factors to one another in a tight perspective, in the long term, it is only possible to achieve stable growth with low inflation, and an ultimately high living standard, by coordinately managing both monetary and fiscal policy. 3. the monetary and fiscal policies’ influence on the economic development of selected countries 2 based on the data about the fiscal and monetary policy in the twelve selected countries, from year 2000 to 2015, as well as the results measured by the ratio between the gdp and the unemployment rate of the workforce in the same period, we will search for the connection between these two, and the answer to the question as to what extent certain elements of the mentioned policies have influenced the achieved results. we will use multiple regression, with a simultaneous inclusion of all independent variables into the 2 in this section we used soldić-aleksić j. (2011). primenjena analiza podataka, ekonomski fakultet u beogradu, pp. 186-239. 396 d. milošević, v. marjanović model, while conducting the influence of independent variables on the dependent variable on the hierarchical scale. independent variables are government expenditure, representing fiscal policy, and monetary aggregate m2 and interest rate, representing monetary policy, and the dependent variable is the gdp/unemployment rate of workforce ratio. the result of the cluster analysis are four groups of countries regarding two parameters: gdp and unemployment of the workforce. that is a step in creating a purposive stratified sample by taking one country from every cluster, in order to avoid the analysis of only countries similar to each other. we chose to do multiple regression on the usa, serbia, germany and china. the standard error – α, is set on 5%, or 0.05. zero hypothesis – h0 is: there are no connections between the independent variables and the dependent one; the first hypothesis – h1 is: there is a connection between at least one of the independent variables and the dependent one. 3.1. multiple regression – the usa the correlations table (table 1) shows the pearson correlation, significance and number of years which we took into consideration. the pearson correlation indicates the strength of the connection between the data, and it varies from -1 to 1, where -1 is the least strong relation, and 1 is, obviously, the strongest one. the third row of the table shows the significance, which, if smaller than the risk of error, in this case 0.05, means that we dismiss the zero hypothesis, h0: there is no connection between the independent and the dependent variable; and accept the first hypothesis, h1: there is a significant connection between the independent and the dependent variable. as we can see, only the significance for the interest rate is lower than 0.05, but for the other two independent variables, there is a significant connection, and we, therefore, accept the first hypothesis, i.e. that there is a significant connection between at least one independent variable and the dependent one. table 1 correlations between independent and dependent variables in the usa gdp/unemployment pearson correlation government expenditures .022 m2 .173 interest rate .449 sig. (1-tailed) government expenditures .468 m2 .261 interest rate .040 n 16 table 2 shows that the multiple correlation coefficient – r equals 0.787, which indicates a very strong correlation between the independent and the dependent variable. the determination coefficient – equals 0.619, which tells us that 61.9% of the variability of the gdp/unemployment ratio is explained by the model. the adjusted determination coefficient takes into account the number of independent variables and the number of observations. the big difference between the adjusted and the simple determination coefficient indicates that we have a relatively small number of observations -16, and that the model would be more valid with more observations. considering that we are doing the same research using data from four countries, we will still try to draw some conclusions based on fewer observations. the development effects of the monetary and fiscal policy in contemporary conditions 397 testing of the statistical validity or justification of using particular variables is done by, among others, f statistics: (1) in this iteration, and are determination coefficients using higher and lower number of variables and and are corresponding levels of freedom. the difference between and is r square change. table 2 model summary statistics, the usa model r r square adjusted r square std. error of the estimate change statistics durbinwatson r square change f change df1 df2 sig. f change 1 .787 .619 .524 3.86394e11 .619 6.508 3 12 .007 1.158 a. predictors: (constant), interest rate, government expenditure, m2 b. dependent variable: gdp/unemployment for testing the assumptions of linear regression it is of great significance to follow the residuals. assumptions are: 1. normal distribution 2. linearity 3. heteroscedasticity the fulfillment of these assumptions can be tested using scatter plot (fig. 1), which shows standardized values of dependent variable on an x axis and standardized residuals on a y axis. fig. 1 scatter plot, dependent variable gdp/unemployment in the usa in this analyzed case, scatter plot shows mostly sporadic deviations of standardized residuals from normal distribution on a 45⁰line. this further proves the absence of heteroscedasticity of residuals and presence of only sporadic atypical dots. the same can be proved by a histogram for analyzed dependable variable – gdp/unemployment in the usa. namely, the histogram shows quite normal distribution of data. 398 d. milošević, v. marjanović fig. 2 histogram for the dependent variable gdp/unemployment in the usa table 3 testing the model for the usa, anova b model sum of squares df mean square f sig. 1 regression 2.915e24 3 9.716e23 6.508 .007 a residual 1.792e24 12 1.493e23 total 4.706e24 15 a. predictors: (constant), interest rate, government expenditure, m2 b. dependent variable: gdp/unemployment the anova (analysis of variance) procedure, showed in table 3, tests the general validity of the model. the so-called f-test shows the correlation between the explained and the unexplained variability of the dependent variable. in this model, the f value of 6.508 and sig. of 0,007 indicates that the determination coefficient is definitely different from zero. table 4 coefficients of influence for independent variables, the usa model unstandardized coefficients standardized coefficients collinearity statistics b std. error beta tolerance vif 1 (constant) 1.248e12 7.903e11 government expenditure -.898 .622 -.650 .157 6.384 m2 321178.678 109822.016 1.337 .152 6.585 interest rate 2.363e11 6.130e10 .895 .589 1.699 the coefficients table is the most significant one for creating a model. in the second column of this table, there are b coefficients, which are usually used for representing the numerical influence of every independent variable. however, for our purposes, the standardized beta coefficients (fourth column) are more suitable because they eliminate the effect of huge numerical differences between the expressions of independent variables on the model itself. based on table 8, we can create a model: (2) the development effects of the monetary and fiscal policy in contemporary conditions 399 in this model (and further), -estand for government expenditures, m2 is clear and iis interest rate. in case of the usa, it is noticeable that monetary policy had higher contribution to gdp/unemployment of workforce ratio. that means that the american economic policy is created in such a way that the monetary policy has a dominant role in achieving economic goals. 3.2. multiple regression – the republic of serbia the pearson correlation indicates a very strong correlation between both government expenditures and m2 aggregate and the gdp/unemployment ratio. interest rate, however, does not affect the gdp/unemployment so strongly. the third row of the table shows that all three independent variables have a significance under 0.05, which means that there is a significant connection between the independent and the dependent variable. table 5 correlations between independent and dependent variables in serbia gdp/unemployment pearson correlation government expenditures .891 m2 .700 interest rate -.563 sig. (1-tailed) government expenditures .000 m2 .001 interest rate .012 n 16 table 6 model summary statistics, serbia model r r square adjusted r square std. error of the estimate change statistics durbinwatson r square change f change df1 df2 sig. f change 1 .892 a .795 .744 3.51673e8 .795 15.528 3 12 .000 1.104 a. predictors: (constant), interest rate, m2, government expenditures b. dependent variable: gdp/unemployment the adjusted determination coefficient shows that 74.4% of the dependent variable’s variability is explained by the model, so the model is valid. table 7 testing the model for serbia, anova b model sum of squares df mean square f sig. 1 regression 5.761e18 3 1.920e18 15.528 .000 a residual 1.484e18 12 1.237e17 total 7.245e18 15 a. predictors: (constant), interest rate, m2, government expenditures b. dependent variable: gdp/unemployment anova confirms the validity of the model, because the explained part of variability is 15.528 times greater than the unexplained one, and sig. is lower than 0.05. 400 d. milošević, v. marjanović table 8 coefficients of influence for independent variables, serbia model unstandardized coefficients standardized coefficients collinearity statistics b std. error beta tolerance vif 1 (constant) 1.481e8 5.040e8 government expenditure .263 .067 .872 .347 2.884 m2 2.717 715.387 .001 .377 2.653 interest rate -4314907.744 2.375e7 -.030 .608 1.644 based on the data from the coefficients table, we create a model: (3) in the case of serbia, the coefficient for government expenditure of 0.872 shows that fiscal policy had much higher contribution to gdp/unemployment of workforce ratio than (0.001) and interest rate (0.030). therefore, opposed to the usa, serbia uses predominantly fiscal policy as an instrument for achieving economic goals. 3.3. multiple regression – the federal republic of germany the pearson correlation shows an extremely strong correlation between both government expenditures and m2 aggregate and the gdp/unemployment ratio. the correlation between the interest rate and the gdp/unemployment ratio is, however, extremely weak. the third row shows significance, which is lower than 0.05 for every independent variable. therefore, there is a significant correlation between the independent and the dependent variable. table 9 correlations between independent and dependent variables in germany gdp/unemployment pearson correlation government expenditures .867 m2 .976 interest rate -.939 sig. (1-tailed) government expenditures .000 m2 .000 interest rate .000 n 16 table 10 model summary statistics, germany model r r square adjusted r square std. error of the estimate change statistics durbinwatson r square change f change df1 df2 sig. f change 1 .978 a .956 .946 4.63988e10 .956 87.948 3 12 .000 1.311 a. predictors: (constant), interest rate, government expenditures, m2 the adjusted determination coefficient indicates that 94.6% of the dependent variable’s variability is explained with the model. this model explains the variability of the dependent variable very successfully. the development effects of the monetary and fiscal policy in contemporary conditions 401 table 11 testing the model for germany, anova b model sum of squares df mean square f sig. 1 regression 5.680e23 3 1.893e23 87.948 .000 a residual 2.583e22 12 2.153e21 total 5.939e23 15 a. predictors: (constant), interest rate, government expenditures, m2 b. dependent variable: gdp/unemployment the f-test shows that the correlation between the explained and the unexplained part of the variability of the dependent variable is very good, and that the explained part is 87.948 times greater than the unexplained one. table 12 coefficients of influence for independent variables, germany model unstandardized coefficients standardized coefficients collinearity statistics b std. error beta tolerance vif 1 (constant) -2.440e11 2.440e11 government expenditure .146 .186 .094 .254 3.937 m2 368382.470 101726.159 .786 .077 12.990 interest rate -1.619e10 2.734e10 -.115 .097 10.360 based on the data from the coefficients table, we create a model: (4) it is clear that monetary policy had higher influence on gdp/unemployment of workforce ratio than fiscal policy in germany. namely, coefficients of 0.786 and 0.115 for the monetary aggregate and for the interest rate, in that order are higher than 0.094 – coefficient for the contribution of government expenditure to the gdp/unemployment of workforce ratio. 3.4. the multiple regression – the people’s republic of china the third column of the correlations table shows us the influence of independent variables on the gdp/unemployment ratio. the pearson correlation indicates a very strong correlation between both government expenditures and m2 aggregate and the gdp/unemployment ratio. the correlation between interest rate and the gdp/unemployment ratio is not that strong. the third row of the table shows a significance which is lower than 0.05 for the independent variables of government expenditures and m2 aggregate. therefore, correlation between the independent variables and the dependent one exists. table 13 correlations between independent and dependent variables in china gdp/unemployment pearson correlation government expenditures .999 m2 .995 interest rate .095 sig. (1-tailed) government expenditures .000 m2 .000 interest rate .363 n 16 402 d. milošević, v. marjanović table 14 model summary statistics, china model r r square adjusted r square std. error of the estimate change statistics durbinwatson r square change f change df1 df2 sig. f change 1 .999 a .999 .999 3.26099e10 .999 3360.763 3 12 .000 1.457 a. predictors: (constant), interest rate, m2, government expenditure b. dependent variable: gdp/unemployment the adjusted determination coefficient tells us that an unbelievable 99.9% of the variability of the dependent variable is explained by the model. therefore, the model explains the variability of the dependent variable successfully. table 15 testing the model for china, anova b model sum of squares df mean square f sig. 1 regression 1.072e25 3 3.574e24 3360.763 .000 a residual 1.276e22 12 1.063e21 total 1.073e25 15 a. predictors: (constant), interest rate, m2, government expenditure b. dependent variable: gdp/unemployment in this case, the explained part of the mentioned variability is 3360.763 times greater than the unexplained one, which undoubtedly confirms validity of the model. table 16 coefficients of influence for independent variables, china model unstandardized coefficients standardized coefficients collinearity statistics b std. error beta tolerance vif 1 (constant) -2.628e11 1.072e11 government expenditure 2.072 .229 1.132 .006 158.635 m2 -2774.866 2568.885 -.135 .006 158.613 interest rate 7.736e10 3.430e10 .023 .995 1.005 based on the data from the coefficients table, we create a model: (5) in the people’s republic of china, fiscal policy had the highest contribution to gdp/unemployment of workforce ratio. it is well known that china has led uniquely restrictive fiscal policy for many decades, and as we can see, the results are impressive. 4. results the results of the conducted analysis are models created on the basis of the data from the first fifteen years of the twenty-first century for four countries, one of which is serbia. two of the countries are developed countries, i.e. the usa and germany, and the fourth the development effects of the monetary and fiscal policy in contemporary conditions 403 one is china, the most influential country of today, even though, by gdp per capita, it is still, formally at least, a developing country. fig. 3 parallel view of the regression coefficients based on figure 3, it is noticeable that the models for serbia and china are mutually similar, just like the models for the usa and germany. namely, the representatives of the developed countries have created their economic policy in such a way that monetary policy had significantly more influence than fiscal policy did on the standard of living, measured by the gdp/unemployment ratio. germany and the usa have, therefore, mainly used monetary policy to stimulate economic growth, keep the unemployment down (wu, xia, 2016) and hold the inflation around the target level. on the other hand, in serbia and china, the fiscal policy had the greatest influence on the dependent variable. it is well-known that china constantly used a restrictive fiscal policy for more than fifty years, and created huge amounts of the budget surplus, which was almost exclusively invested in american bonds (li, 2008). this policy was definitely fruitful. however, it required unimaginable discipline over a very long term. it is also proven that a big part of effects of fiscal policy comes in the future. there is a study that showed the effect of the fiscal policy comes in 1-2% after five years, 2-3% after ten years and 4% after 15 years (gemmell, kneller, sanz, 2011). conclusion every option, therefore, has its price, and the task for the creators of an economic policy is to choose the most optimal solution in the given environment, and to ensure the implementation of the adopted measures at the institutional level in order to accomplish the planned goals. the tricky part is that it is necessary to create such a policy strategically, for a long period of time, and then only cosmetically adjust the measures to amortize the changes and ensure that the country stays on its path. this is especially difficult today, and is becoming more and more difficult every day, because of the extremely dynamic environment that we live in. technological development is changing every single aspect of our lives on a daily basis, and it cannot be ignored. economic policy is therefore going to have to adapt to those changes, and it is going to be a huge challenge for the future. 404 d. milošević, v. marjanović it is also of great importance not to forget that measures of economic policy are not goals themselves. they are only instruments for achieving other goals, which can be summarized in maximizing the production and export. that is the only way of raising the standard of living, the ultimate economic, social and political goal for every single country in the world. references beetsma, r. & bovenberg, a.l. (1998). monetary union without fiscal coordination may discipline policymakers. journal of international economics, 45 (2), 239-258. beetsma, r. & bovenberg, a.l. (1999). does monetary unicication lead to excessive debt accumulation?. journal of public economics, 74 (3), 299-325. campilo, m. & miron, j. (1997). in: monetary policy and low inflation, christina, d. romer and david romer (eds.), why does inflation differ across countries? chicago: the university of chicago press delong, j.b., summers, l.h., feldstein, m. & ramey, v.a. (2012). fiscal policy in a depressed economy, brookings papers on economic activity, brookings institution press, spring 2012 gemmell, n., kneller, r. & sanz, i. (2011). the timing and persistence of fiscal policy impacts on growth: evidence from oecd countries. the economic journal, 121 (550), f33-f58. imf (2000-2016). world economic outlook li, m. (2008). the rise of china and the demise of capitalist world-economy, pluto press, london, uk sargent, t.j. & wallace, n. (1981). some unpleasant monetarist aruthmetic. quarterly review, fall 1981., reprinted in rational expectations and inflation 2nd edition ny: harper collins college publishers 1993 soldić-aleksić, j. (2011). primenjena analiza podataka [applied data analysis]. beograd: ekonomski fakultet u beogradu tanzi, v. (1977). inflation, lags in collection, and the real value of tax revenue. staff papers, 24, march 1977. wu, j.s. & xia f.d. (2016). measuring the macroeconomic impact of monetary policy at the zero lower bound. journal of money, credit and banking, 48, (2-3), 253-291. www.bundesbank.de www.data.oecd.org www.fred.stlouisfed.org www.nbs.rs www.pbc.gov.cn www.unstats.un.org razvojni efekti monetarne i fiskalne politike u savremenim uslovima jedan od najvećih problema u ekonomskoj teoriji je oduvek bila koordinacija različitih elemenata ekonomske politike, a posebno fiskalne i monetarne politike. u prošlosti je bilo ekonomskih teorija koje su favorizovale jednu u odnosu na drugu, ali u savremenim uslovima, činjenica je da je pravi odgovor samo u koordinisanom vođenju obe politike. stoga, svaka mera monetarne politike mora biti propraćena određenom akcijom u fiskalnoj politici i obrnuto. pitanje ostaje da li fiskalna ili monetarna politika treba da ima prioritet prilikom donošenja odluka i da li postoji šablon za kreiranje ekonomske politike. empirijski podaci su najsvrsishodniji izvor za odgovor na ova pitanja, stoga ćemo koristiti promenjive iz četiri različite zemlje za poslednjih petnaest godina, kako bismo pokušali da pronađemo vezu između fiskalne i monetarne politike i životnog standarda. ključne reči: ekonomska politika, monetarna politika, fiskalna politika facta universitatis series: economics and organization vol. 17, no 4, 2020, pp. 375 383 https://doi.org/10.22190/fueo200723027a © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper the conservatism principle in modern financial reporting1 udc 657.375 aleksandra arsenijević university of niš, niš, serbia abstract. various studies point out that the principle of conservatism (prudence) has been too long in the field of accounting, which makes it almost irreplaceable. however, the development of accounting is in line with constant expansion of the circle of stakeholders who impose new requirements regarding information on sources of income, destination of expenditures and calculation of periodic results. this inevitably leads to changes in financial reporting, aimed primarily at applying the fair value concept. key words: the conservatism principle, the historical cost concept, the fair value concept jel classification: m41 introduction modern financial reporting requires high-quality accounting standards, able to respond to a number of challenges that business entities face. financial statements prepared in accordance with the relevant principles and the standards built on them meet the information requirements of numerous stakeholders. the modern accounting tendency denies the importance of certain traditional accounting principles, the conservatism principle (prudence) in particular, with the aim of promoting the fair value concept. the fair value concept provides detailed information on conditions under which business entities operate, the market value of their assets and liabilities and provides a better basis than the historical cost concept, to gain from efficient business risk perception. in other words, the fair value concept is oriented towards the future, while the historical cost concept (with its conservatism principle) is oriented towards the past. this paper shows the importance of applying prudence in the process of generating high received july 23, 2020 / revised september 22, 2020 / accepted september 28, 2020 corresponding author: aleksandra arsenijević university of niš, univerzitetski trg 2, 18000 niš, serbia e-mail: arsenijeviceva@yahoo.com 376 a. arsenijević quality accounting information in order to point out the consequences of inadequate application or even abandoning the conservatism principle. also, our goal is to point out the potentials of simultaneous application of the conservatism principle, as an integral part of the historical cost concept, and the fair value concept. 1. contribution of the conservativism principle to the higher quality of accounting information one of the oldest accounting principles is the conservatism principle (prudence). despite its traditional dominance over other accounting principles, highlighting its importance in financial reporting, theory lacks its uniform definition. the most common is bliss’s definition of 1924, which is used today as an accounting saying, indicating that in conservatism no gain (income) should be anticipated, but that every loss (expense) should be predicted (thijssen & iatridis, 2016, 49). basu also gives a well-known definition of conservatism in his 1997 paper, in which he defines conservatism as an asymmetry in the recognition and presentation of profits that provides a faster and more complete response to “bad news” than “good news” in doing business (hansen, hong & park, 2018, 76). the results of numerous studies on the desirability of applying accounting conservatism in modern financial reporting show that a number of theorists and practitioners mark this principle as a basic characteristic of financial reporting, which is contrary to the opinion of standard setters. on the one hand, theorists and practitioners believe that conservatism tends to emphasize reliability in relation to the relevance of information provided (balachandran & mohanram, 2011), while, on the other, removing reliability from the group of desirable information characteristics means nothing but that standard setters believe that only information that does not contain elements of conservative bias can be called quality information. omitting reliability expressed as a requirement to apply a certain degree of prudence when preparing financial statements from the conceptual framework for financial reporting also means pushing the principle of conservatism (prudence) into the background (savić, 2014, 28). in other words, standard setters believe that the conservatism principle is contrary to the requirement that financial statements should present neutral information to decision makers. the financial market looks at the quality of accounting information in terms of its credibility, seen as the impact of the presented results on the entity’s market value. the value or relevance of accounting information (primarily, financial result) represents “the degree to which book values agree with market values” (thijssen & iatridis, 2016, 59). most studies find a positive link between the level of conservatism and the value that accounting information has for decision makers (kousenidis, ladas & negakis, 2009). in other words, viewed from the perspective of a number of stakeholders, the value of accounting result derives from its ability to explain market returns (francis & schipper, 1999). accounting conservatism increases the timeliness of bad news, i.e. it warns managers and, more importantly, investors in time, who insist on the application of conservative rules in conditions of uncertainty. the studies show that entities that face greater uncertainty report more conservatively (hsieh, ma & novoselov, 2019, 41). however, there are studies indicating that the higher the conservatism, the lower the information relevance, i.e. that there is a negative relationship between these values (basu, the conservatism principle in modern financial reporting 377 1997). this is especially true for intangible assets, which are very difficult to value, so conservatism may decrease the value of information provided by the accounting system (thijssen & iatridis, 2016, 50). “in certain cases, such as the permanent market crisis, higher levels of conservatism appear as a natural mechanism for investor protection” (kousenidis, ladas & negakis, 2009, 221). the results of the research indicate a gradual increase in the level of conservatism in the usa and several eu countries after the market crisis in 1999 (grambovas, giner & christodoulou, 2006). the outcome of the asian financial crisis shows that “conservatism decreases during the crisis” (gul, srinidhi & shieh, 2002), but grows after a period of financial crisis (vichitsarawong, eng, & meek, 2010). a study conducted in 2011 (immediately after the last economic crisis) of over 100,000 entities from the united states finds that the level of conservatism increases (balachandran & mohanram, 2011). it is believed that the increase in the level of conservatism is due, above all, to the increase in the timeliness of recognizing losses. conservative reporting “can increase the reliability of financial information because conservatism results in fewer estimates (and, thus, more objective measurement)” (balachandran & mohanram, 2011), reflecting a close correlation with market values (kousenidis, ladas & negakis, 2009). also, insufficient reliability of information narrows the choice of potential solutions and limits the effects of decisions made by investors, so conservatism is considered to be aimed at increasing rather than decreasing the value of information on business results (kousenidis, ladas & negakis, 2009, 220). 2. potentials of abuse of the conservativism principle the benefits of conservative reporting are not unlimited. an extremely high level of conservatism will reduce rather than increase the relevance of accounting information for decision-making purposes (kousenidis, ladas & negakis, 2009, 221). the research results provide empirical support for the watts’s theoretical basis of 2003, who, on the one hand, reports “numerous arguments in favor of conservatism, but, on the other hand, raises questions about the practice of expensive conservative reporting”, which is a potential reason for distortions of the correlation between result and market return (kousenidis, ladas & negakis, 2009, 219). empirical studies indicate that the conservatism principle in the conditions of ias/ifrs is applied more on a temporary rather than a consistent basis. in the conditions of ias/ifrs, “the principle of conservatism is not applied consistently, but on an ad hoc basis, i.e. according to the current entity and/or management needs” (savić, 2014, 34). the temporary application of conservatism in accordance with the specific circumstances and entities’ goals is reflected in the accounting treatment of certain events (overestimation of provisions or underestimation of income), which leads to the creation of hidden reserves, which will result in uniform or increased results. users of financial statements see this situation as a source of potential information asymmetry, due to much more complex effects on the determined result in relation to the consistent application of this principle (helman, 2008, 82), which will have significant repercussions on the quality of presented information. the historical cost concept and its so-called ex ante assessment of the value of assets and liabilities in uncertain business conditions, i.e. asset write-off and considering contingent liabilities are the main sources of hidden reserves as a certain degree of protection against numerous business risks (savić, 2014, 33). as a segment of equity that 378 a. arsenijević is not shown in the balance sheet, hidden reserves are usually created by underestimating assets, but also by overestimating liabilities. the primary objective of hidden reserve formation is to prevent serious fluctuations in the results presented in the financial statements from being disclosed. specifically, sudden changes in the amount and structure of the financial result can create a public image of unstable business, which consequently affects the risk of investing in entity’s shares. the frequency and proper timing of the formation and decomposition of hidden reserves is a means aimed at achieving time uniformity of results, which is the main argument of critics of hidden reserve policy and its source – the accounting conservatism principle. “it is necessary to develop a culture of creating and decomposing hidden reserves, whose intention is not to mislead balance sheet recipients and lead to wrong business decisions, but to contribute to protecting the interests of the corporation in a dynamic and change-prone business environment” (savić, 2014, 34). opponents of the policy of hidden reserves point to its contraindications, manifested by endangering the principle of truthfulness, since “hidden reserves are created not by underestimating the net assets in any balance sheet, but only the one that is true and accurate” (ranković, 2008, 423). in addition to influencing the presentation of entity’s current business situation, the conservatism principle indirectly has an impact on the accuracy of predicting future results. specifically, managers who have superior business information in relation to all other stakeholders should be able to predict the future expressive results and the impact of accounting conservatism on them. in other words, managers need to be able to adjust their forecasts of the next accounting period (or even more subsequent periods) to the effects of conservatism (sun & xu, 2012, 64). however, in addition to objective limitations (such as the necessary accounting knowledge and experience gained in many years of accounting practice), managers also encounter a subjective limitation in making their predictions embodied in the form of opportunism. specifically, this managerial personality trait can influence their decision to adjust predictions of the expressive result with reference to a certain degree of conservatism. literature (sun & xu, 2012, 66-67) points to three sources of managerial opportunism, which figure as the most important reasons for incomplete forecasting of future results and their inadequate adjustment with reference to the effects of historical (existing) degree of conservatism: 1) planned external business financing or investment in the forthcoming period, 2) “field preparation” for the implementation of planned mergers and acquisitions, and 3) direct conflict of interest and situations when managers plan to cash in on the shares of the entity they manage. when it comes to the first source of managerial opportunism, lang and lundholm (lang & lundholm, 2000) suggest that managers are optimistic in predicting results when applying for additional external capital. the artificial increase in results is done in order to deceive creditors regarding the business prospects and entity’s potentials in order to reduce the price of borrowed capital. given that accounting conservatism leads to an underestimation of the stated result, managers try to reduce the degree of conservatism in their predictions when they anticipate the need for external capital. another source of managerial opportunism appears in a study by erickson and wang (1999), who find that entities have an incentive to increase their results before initiating mergers and acquisitions in order to reduce the cost of business growth. also, kravet (2014) finds that under more conservative accounting practices, managers make less risky acquisitions. that is why managers consciously underestimate the influence of conservatism on results and publish optimistic predictions of results as much as possible. in explaining the third source of managerial opportunism, the study by rogers & stocken (2005) will help, which indicates that managers tend to disclose optimistic forecasts of the conservatism principle in modern financial reporting 379 results when planning to sell their shares in the entities they manage, i.e. the findings show that managers will not adjust results based on the cumulative historical effects of conservatism, and that pessimistic performance predictions are reserved for the accounting period in which managers plan to purchase entity shares. viewed from the perspective of shareholders, conservatism in financial reporting reduces managerial motivation and willingness to invest in riskier investment projects with a positive net present value, which leads to the occurrence of lost returns and represents an opportunity cost or the price of conservatism. the phenomenon of accelerated globalization and internationalization of capital markets has opened up topics of transparency and timeliness of financial reporting (neag & masca, 2015, 1114). entities face increasing business uncertainty, and, in order to survive on the market, their managers need to adhere to prudence in decision-making (ben-haim, 2014). in other words, the benefits of applying the conservatism principles in modern financial reporting “by far outweigh its weaknesses” (škarić-jovanović, 2015a, 63). emphasizing the requirements for detailed ex post reporting on business results and their impact on stock prices, accounting conservatism points to the importance of ex ante information on low returns on investment projects (ball, 2001), i.e. before their implementation, as well as in their early phases, whereby “conservatism increases the value of work-based learning” (hsu, novoselov & wang, 2017). as a striving for stricter verification of “good news” and recognition of their consequences (gains) in relation to “bad news”, accounting conservatism is “a measure that limits the riskiness of information from financial statements” (lin, wu, fang & wun, 2014, 164). in this way, accounting conservatism helps investors and a number of interest groups by controlling managers’ activities (hsieh, ma & novoselov, 2019, 44). 3. the possibility of coexistence of the conservativism principle and the fair value concept the conservatism principle, which leads to the recognition of realized transactions and events with material effects on the financial statements, does not provide information that is a good indicator of business risk, which is why it is not suitable for fully meeting the information requirements of investors. emphasis on the importance of information requirements of investors and creditors and their definition as primary users of financial statements is there because these users invest their financial resources in the entities’ operations and are the main participants on financial markets. accounting information that meets the information needs of primary users is considered to fully meet the information needs of other users of financial statements. it is precisely fair value that has been developed in response to the needs of capital market participants who use anticipated financial data in order to appropriate anticipated profits (richard, 2015, 24). 3.1. the fair value concept in modern financial reporting the fair value concept emphasizes the relevance of financial information, while the historical cost concept emphasizes reliability as one of the most important qualitative characteristics of financial information. “current economic values presented in the balance sheet, rather than assets and liabilities recognized at historical cost, represent real investor requirements” (benston, bromwich, litan & wagenhofer, 2006, 261). in this 380 a. arsenijević way, the purpose of preparation of accounting information changes, i.e. what changes is the direction of the reporting procedure towards the credible presentation of relevant financial information that will be used for timely business decisions. the accounting basis for this approach is the fair value concept, which ensures the achievement of this objective when applied to the entity’s assets and liabilities from period to period. the fair value concept was developed in the anglo-saxon states. the development of their financial-accounting theory and practice is based on the view that fair value is an objective value and represents the optimal basis for financial reporting. “since the accounting system is determined by the characteristics of the financial system, and the anglo-saxon financial system is based on the capital market, the acceptance and application of the fair value concept in anglo-saxon practice has a consistent logic and full justification” (knežević & pavlović, 2008, 8). it is the transition “from the historical cost concept to the fair value concept” that is “driven by market observation of relevance” (hitz, 2007). financial statements prepared in accordance with the fair value concept should reflect economic reality and market conditions, i.e. should provide information on assets and liabilities valued at current market prices. investors need this information to determine whether their share in the fair value of net assets is optimal or needs to be changed (increased or decreased), as well as to monitor management activities. the main objective of financial reporting according to the fair value concept is to determine the amount of fair value of net assets at the reporting date and view the financial result of operations “simply as changes in fair value of assets and liabilities shown in the balance sheet” (škarić-jovanović, 2009, 422) between the two reporting periods, i.e. changes in the fair value of net assets at the end of the reporting period in relation to its beginning. therefore, the reported result includes market-verified gains and losses, but also gains and losses that are not realized on the market, which are a consequence of the increase or decrease in the fair value of assets and liabilities at the reporting date. the similarity between the two concepts is the recognition of losses at the time of their occurrence, and the difference relates to the treatment of gains, since the historical cost concept recognizes gains only after their realization, and according to the fair value concept at the time of their occurrence. the consequence of this measurement of results is the acceptance of the view that “the balance sheet has priority in the annual financial reporting”, while “the income statement has a secondary role” (stojilković, 2011, 94). this is in line with the fact that “often contracts with customers contain such clauses that it is difficult to determine the actual amount of revenue generated by the supplier, which relates to the reporting period” (spasić & arsenijević, 2017, 53). the new ifrs and the revised ias adopted at the beginning of the 21st century include the possibility of expressing the value of individual items in accordance with the fair value concept. however, at the beginning of the application of this concept, no standard defined the procedure for measuring fair value, which quickly proved to be necessary. in may 2011, the ias board adopted ifrs 13 “fair value measurement” with effect from 2013. ifrs 13 “provides guidance in determining the fair value of assets and liabilities of business entities and defines the rules for disclosing related information.” the weak side of the application of the fair value concept refers to the potential impossibility of using inputs from the first hierarchical level defined in accordance with ifrs 13, which are the optimal indicator of the real value of a certain balance sheet item. as a result, there is a frequent application of inputs from the second and third hierarchical levels, which conditions the existence of (debatable) assumptions and assessment models. the conservatism principle in modern financial reporting 381 3.2. mixed basis of financial reporting although the concept of historical cost is a clear and practical method that consistently assesses the value of shares when they are not on an active market, theorists who support the fair value concept as a basis for financial reporting believe that the historical cost concept has lost relevance and should be replaced (hitz, 2007). however, the reliability gap when it comes to the fair value concept contributes to the current situation in accounting theory and practice, which is that standard setters do not accept the fair value concept as the only accounting basis for financial reporting. in order to meet the information needs of modern users of financial statements (above all, investors), a mixed, i.e. combined basis of financial reporting is formed. the normative basis composed as a mixed combination of the two concepts “leads to the conclusion that none of the mentioned concepts alone can provide users with information relevant for making decisions on the allocation of available resources” (škarić-jovanović, 2015b, 327). the hybrid basis of financial reporting implies that the principle of neutrality and the prudence principle are applied together as conditions for credible presentation of information, where “prudence should be understood only as a reasonable response to uncertainties that properly takes into account environmental uncertainties and risks associated with the entity’s operations” (škarić-jovanović, 2015a, 79). standard setters tend to make economic entities adjust their financial statements to the fair value concept, because financial reporting should be the basis for assessing and predicting future business performance. however, in order not to neglect the advantages of the older (historical) basis, the mixed basis for valuing certain forms of assets and liabilities prescribes mandatory compliance with the rules arising from the historical cost concept (for example, inventories and short-term receivables), for other forms of assets and liabilities based on the fair value concept (for example, financial instruments), and there is an alternative option for valuing third forms of assets and liabilities through the use of fair value or historical cost (for example, material investment). in that way, this normative basis is very complex for application, but also for understanding the financial statements obtained by its application (škarić-jovanović, 2015б, 331). also, it should be taken into account that ias/ifrs are built on a mixed basis consisting of two concepts, the historical cost concept (related to the reliability characteristic) and the fair value concept (related to the relevance characteristic). in this way, financial statements present two types of information, reliable and relevant. accounting standard makers and market regulators believe that the extended requirements imposed on entities when applying a mixed basis of financial reporting, which relate to fair value measurements, “increase the usefulness of financial statements” (barth, 2014). specifically, “when users of financial statements consider that the source of information is insufficiently reliable, they will not consider the information useful for making business decisions. in other words, fair value has less informative value when not reliably measured” (hernandez hernandez, 2004). conclusion this research has shown that the fair value concept has a potential to provide more detailed information on the business conditions of economic entities, the market value of their assets and liabilities and a better basis than the historical cost concept to achieve benefits based on efficient business risk perception. the lack of the fair value concept is the absence of a standardized procedure and uniform fair value measurement procedures 382 a. arsenijević which have led to a decrease in the quality of financial reporting in the form of a drastic decline in comparability of data. the combination of elements of the historical cost concept and the fair value concept has been seen as the practical solution from many researchers’ point of view. as the research presented, the application of the conservatism principle is still very widespread in practice, which only proves that accountants and professional users of accounting information believe that financial statements will be more relevant and reliable if compiled in accordance with traditional accounting principles. also, practice has shown that it is not realistic to expect that the application of a certain level of conservatism (as an essential element of the historical cost concept) can be standardized. the reason lies in the fact that the perception of prudence is closely related to the individual’s personality (accountant, manager, investor) and their aversion to risk. references balachandran, s., & 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[application of prudence in financial reporting habit or need?]. acta economica, 13(22), 63-82. škarić-jovanović, k. (2015b). uticaj primene mešovite osnove na interpretaciju merila performansi izveštajnih entiteta [the influence of the combined basis application on the interpretation of the reporting entities’ performance measures]. in: finansijsko izveštavanje u funkciji unapređenja procesa menadžmenta. podgorica: institut sertifikovanih računovođa crne gore, x kongres, bečići, pp. 326-343. princip konzervativizma u savremenom finansijskom izveštavanju često se u literaturi može naći zapažanje da je princip konzervativizma (opreznosti) u službi računovodstvene nauke predugi niz godina i da ga ova karakteristika čini teško zamenljivim. međutim, razvoj računovodstva praćen je konstantnim proširivanjem kruga interesenata koji nameću nove zahteve u vezi informacija o izvorima prihoda, odredištu rashoda i obračunu periodičnog rezultata. ovo neminovno vodi promenama u finansijskom izveštavanju koje su usmerene, pre svega, na primenu koncepta fer vrednosti. ključne reči: princip konzervativizma, koncept istorijskog troška, koncept fer vrednosti. facta universitatis series: economics and organization vol. 15, n o 2, 2018, pp. 125 133 https://doi.org/10.22190/fueo1802125j © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper monetary versus fiscal dominance in emerging european economies 1 udc 336.02 338.23:336.74(4) gordana jevđović 1 , ivan milenković 2 1 guarantee fund of ap vojvodina, serbia, 2 university of novi sad, faculty of economics, subotica abstract. the conventional macroeconomic paradigm is that monetary policy provides the nominal anchor for inflation expectations and that fiscal policy is disciplined in implementing credible and timely revenue-expenditure measures when debt rises, in order to ensure sustainability. in this scenario, monetary policy is active, whereas fiscal policy is passive, which is referred to as monetary dominance. however, the proponents of the fiscal theory of the price level emphasize that another regime may be possible – the one of fiscal dominance. in this setup, primary balance follows some arbitrary path, not necessarily compatible with the evolution of government debt, and monetary policy is faced with limited room for maneuver, as it has no option but to adjust to fiscal developments. following these theoretical foundations, the aim of this paper is to empirically ascertain the prevailing policy regime (monetary versus fiscal dominance) in five emerging european economies (hungary, romania, bulgaria, serbia, and macedonia). in line with expectations, results overwhelmingly suggest that monetary policy may have been subordinated to fiscal policy over the period of analysis in all economies under scrutiny and that fiscally-led regime prevailed. key words: fiscal theory of the price level, fiscal dominance, monetary dominance, emerging european economies jel classification: e62, h62 received february 27, 2018 / accepted april 12, 2018 corresponding author: gordana jevđović guarantee fund of ap vojvodina, novi sad, serbia e-mail: gordana.jevdjovic@gmail.com 126 g. jevđović, i. milenković introduction the 2007/2008 financial crisis and the accompanying great recession have brought an abrupt shift in the attitude towards fiscal policy among both researchers and policymakers. although often neglected as a macroeconomic policy tool, in the wake of the recent crisis it was once again proven that fiscal policy too can have powerful and effective transmission channels that affect aggregate demand. arestis (2011, p. 144) argues that it was precisely fiscal policy that “saved the world from the second great depression and produced only the great recession”. yet, this stabilization came at a price. government measures to rescue the financial sector, provide safety nets for workers and the unemployed and stimulate the economy devastated public finances all over the world. in the aftermath of the great recession, and in some cases even after fiscal consolidation actions, many countries are still faced with substantial fiscal deficits and sizeable debt burdens. in light of these considerations, concerns have emerged about the broader macroeconomic consequences of fiscal developments. often embedded within such concerns is the issue whether or not fiscal trajectories can jeopardize monetary policy objectives. namely, under the so-called fiscally dominant regime central bank independence may not be sufficient to anchor inflation expectations. in particular, price stability cannot be guaranteed without a sustainable fiscal position of the government. taking into account the fact that fiscal dominance is more likely to be a problem in developing economies than in advanced economies (montiel, 2011; zoli, 2005), the idea of this paper is to search for evidence of such dominance in five emerging european economies. the rest of this paper is organized as follows: section 1 outlines an overview of the main theoretical arguments concerning the issue of monetary versus fiscal dominance nexus. section 2 introduces the empirical methodology and presents our dataset. section 3 lays out results of empirical investigation with accompanying discussion, while the last section offers some concluding remarks. 1. the relevance of different regimes theoretical background traditional macroeconomic analysis is based on the fact that fiscal policy makers determine the level of the primary budget balance in order to ensure fiscal sustainability regardless of the price level, whereas monetary authorities are expected to set the desired price level without any constraints. under these circumstances, the prices are determined exogenously, in the money market (for instance, following the quantitative theory of money) as opposed to the primary balance which adjusts endogenously in line with the intertemporal budget constraint. the aforementioned scenario is referred to in the literature as ricardian or monetary dominant (hereinafter: md) regime. however, as bajo-rubio et al. (2009, 2014) highlights, a new trend of economic thought has emerged in the 1990s fiscal theory of the price level (hereinafter: ftpl). sims (1994), leeper (1991) and cochrane (2001), have laid the ftpl groundwork and the theory was further developed for instance by leeper (2010, 2013), cochrane (2011) and many others. the proponents of ftpl challenge the aforementioned conventional assumptions and imply that fiscal authorities may be able to set primary balances that follow some arbitrary process, not necessarily compatible with sustainability. in such a case, the path of the primary budget balance becomes exogenously determined, while the prices now adjust endogenously monetary versus fiscal dominance in emerging european economies 127 in order to maintain sustainability. although monetary policy may still be able to control inflation, it is certainly far less powerful than it would be under md regime. in fact, as observed by sargent & wallace (1981), the only thing that monetary authorities can control in this scenario is the timing of inflation. these propositions represent the essence of the fiscal theory of the price level and the regime based on them is called non-ricardian or fiscal dominant (hereinafter: fd). the issue of whether a particular economy operates in a monetary or fiscally-led regime is determined by the behavior of monetary and fiscal authorities. in fact, as explained by komulainen & pirttila (2000) there are two equilibrium conditions that are critical for price level determination. the first one is well known and refers to quantitative theory of money: (1) where mt stands for money used in the period t, y represents the income (gdp), v is the velocity of money and pt is the price level. the second condition, according to the same authors (komulainen & pirttila, 2000) is: ⁄ ∑ ( ) (2) where wt denotes government liabilities that themselves represent the sum of the stock of net interest bearing liabilities of the government (bt) and mt (i.e. ), β is the discount factor and the sum of sj and τj represent the expected government primary surplus which includes both primary surplus itself (s) and the central bank transfers (seigniorage, τ). the first equation (1) is evidently the money demand function while the second equation (2) expresses the present value of the government intertemporal budget constraint. equilibrium requires both of these equations to hold, and since we are looking at two equations with one unknown (p), the following equilibrium condition can be derived: ⁄ ∑ ⁄ (3) decisions of economic policy makers influence the formation of public debt, primary surplus and money (bt, sj, mt). consequently, fiscal (bt, sj) and monetary (mt) policy must be coordinated in order to achieve the desired price level. but, as emphasized by komulainen & pirttila (2000), two special cases of such coordination can exist. in the first scenario, fiscal policy makers react first and independently set the level of debt and deficit (bt, sj) which requires prices to be determined from the equation that refers to the current value of the intertemporal budget constraint (eq. 2). in this case, fiscal variables determine the price level and monetary variables adjust. on the other hand, if monetary authorities act first and determine the monetary policy variables independently, then the only thing left for fiscal policy makers is to adjust variables bt and st to this (monetary determined) price level. evidently, in the first case, there exists a fiscally-led regime, while the second case is referred to as the monetary dominance. finally, it should be stated that the issue of monetary versus the fiscal dominance is closely related to the indirect way of fiscal sustainability analysis by means of bohn’s (1998) fiscal reaction function framework (see details below). however, it is essential to emphasize that in the equilibrium, fiscal sustainability can exist in both md and fd regime. the crucial difference is how this sustainability has been achieved, or in the words of sargent & wallace (1981) “who has imposed discipline on whom?”. specifically, in the monetary dominant regime, the primary budget balance is set in order to ensure fiscal sustainability, independently 128 g. jevđović, i. milenković of the price level. in this case fiscal policy is subordinated to monetary policy, or as leeper (1991) puts it monetary policy is active whereas fiscal policy is reactive. in contrast,, in fd regime fiscal policy makers tend to set the primary budget balance exogenously to the level of government debt, and monetary policy must accommodate such fiscal path, even at the cost of excessive monetary tightening. in this scenario fiscal policy dominates over monetary policy and may undermine its goals. furthermore, in case of fiscal dominance tighter monetary policy today can cause higher inflation in the future (or even immediately if rational agents anticipate this) – a scenario to which sargent & wallace (1981) refer to as the unpleasant monetarist arithmetic. 2. empirical framework and data according to bajo-rubio et al. (2014) in the game theory, the solution for the monetary versus fiscal dominance nexus would be given by the leader–follower model. in particular, it would be determined by the matter of fact which policymaker has moved first the central bank or the fiscal authority. however, in economic practice, distinction between the two regimes is a pure empirical question centered around ways to examine whether fiscal authorities tend to set an endogenous or exogenous path for primary deficits. in addressing this issue, we follow the so-called backward-looking approach proposed by bohn (1998) who searches for a systematic relationship between the primary surplus and one period lagged level of government debt. yet, instead of estimating fiscal reaction function per se (eq. 4) we are more interested in the direction of causality between the two variables in the system: (4) where pb denotes primary balance (surplus/deficit) scaled by gdp, d represents government debt (scaled by gdp), a and b are parameters and et stands for a white noise error. in a series of papers bohn (1998, 2005, 2007) emphasizes that a positive and significant estimate of parameter b indicates fiscal sustainability as well as prevalence of monetary dominant regime over the period of analysis. however, the proponents of ftpl argue that under certain circumstances the unbiased estimate b > 0 can also indicate fiscal dominance. accordingly, although the question of monetary versus fiscal dominance is closely related to the indirect way of fiscal sustainability investigation by means of bohn’s (1998) fiscal reaction function, that framework may not be able to give a definite answer to the prevalence of a certain policy regime. hence, following the recent literature on this issue (bajo-rubio et al. (2009, 2014), mackiewicz-lyziak (2015), afonso (2017), etc.), in order to distinguish between the two regimes, we resort to granger causality tests between primary balance and public debt. in this sense, unidirectional causality running from primary surplus to government debt would suggest fiscal dominance, while unidirectional causality running the other way around may be an indication of md regime. the above-mentioned causal relationships are addressed by applying toda & yamamoto (1995) granger non-causality test. theoretically simple and calculationally straightforward ty causality procedure involves a modified wald (mwald) test in an augmented var(k+dmax) model, where k refers to the optimal lag length (i.e. the correct var order) and dmax stands for maximal order of integration of underlying time series. the general specification of the augmented (k + dmax) var model for two variables is as follows: monetary versus fiscal dominance in emerging european economies 129 (5) (6) where αj, βj, γj and δj are parameters of the model, k is the optimal number of lags in the original var model, dmax is the maximum order of integration of the series in the system and εt and ηt are two independent white noise errors. our investigation is focused on five emerging european economies, namely: hungary, romania, bulgaria, serbia and macedonia. quarterly data on primary balance and government consolidated gross debt, both in percent of gdp (variables pb and d, respectively) cover the period from 2005q1 to 2016q4 and come from official sources (eurostat in case of eu countries and national ministries of finance in case of serbia and macedonia). we use general government data for all economies, with the only exception of macedonia in case of which similar to trenovski & tashevska (2015), in the absence of such data we resort to central government statistics instead. prior to econometric modeling all the data series have been seasonally adjusted using tramo/seats method. 3. results and discussion as the first step of the analysis, we investigate the order of integration of the primary surplus and government debt variables. to this end, we use common unit root tests such as standard augmented dickey fuller (adf) test as well as more robust df-gls test (elliott et al., 1996). complementary, we also rely on kwiatkowski-phillips-schmidtshin (kpss) stationarity test (kwiatkowski et al., 1992). the null hypothesis under adf and df-gls test is one of a unit root, while kpss test has stationarity as null. as highlighted by hatemi-j (2002) from statistical point of view, not rejecting the null hypothesis does not necessarily imply accepting it. hence, a combination of unit root and stationarity tests seems like a reasonable procedure, since the null hypothesis in one test is the alternative hypothesis in the other. finally, it should be noted that lag lengths in cases of adf and df-gls test are determined using sequential procedure of ng & perron (1995), with max lag set to 6. the bandwidth for the kpss stationarity test is based on the newey–west estimator using the bartlett kernel function. table 1 unit root and stationarity tests (variables in levels) country variable adf df-gls kpss hungary pb -2.952 (1) -2.910 (1) 0.118 (4) d -1.145 (1) -1.279 (1) 0.180 (6) romania pb -2.395 (1) -2.457 (1) 0.153 (5) d -1.309 (1) -1.145 (1) 0.117 (5) bulgaria pb -1.860 (1) -1.975 (1) 0.193 (2) d -2.073 (1) -0.755 (1) 0.226 (5) serbia pb -0.155 (3) -0.636 (3) 0.231 (5) d -2.798 (1) -1.407 (1) 0.185 (6) macedonia pb -2.229 (1) -2.359 (1) 0.162 (4) d -1.813 (2) -1.673 (3) 0.204 (5) notes: constant and trend are included as deterministic components. at 5% significance level critical values are: -3.515 for the adf test, -3.190 for df-gls test and 0.146 for the kpss test. lags are shown in parentheses. source: authors 130 g. jevđović, i. milenković as can be observed on table 1 the underlying variables in levels seem to exhibit a nonstationary kind of behavior over the period of analysis. however, after first-order differencing all time series become stationary (table 2). these findings suggest that both pb and d may be considered integrated of order one, i.e. i(1) in all economies of our sample. table 2 unit root and stationarity tests (variables in first differences) country variable adf df-gls kpss hungary pb -8.089 (0) -7.469 (0) 0.239 (3) d -7.430 (0) -7.513 (0) 0.322 (5) romania pb -10.886 (0) -10.233 (0) 0.077 (4) d -4.551 (0) -3.699 (0) 0.212 (4) bulgaria pb -7.421 (0) -7.435 (0) 0.090 (1) d -3.898 (0) -2.958 (0) 0.781 (4) serbia pb -3.312 (2) -1.748 (2) 0.657 (4) d -3.499 (0) -3.538 (0 0.463 (5) macedonia pb -9.263 (0) -9.099 (0) 0.082 (3) d -3.452 (1) 2.098 (2) 0.453 (4) notes: only constant is included as deterministic component. at 5% significance level critical values are: -2.930 for adf test, -1.948 for df-gls test and 0.463 for kpss test. lags are shown in parentheses. source: authors at this point it is important to emphasize that we acknowledge the fact that traditional unit root tests may not allow us to precisely differentiate between formally integrated and stationary but very persistent time series, especially keeping in mind our relatively small sample size (see also lame et al., 2014). this further corroborates our choice of strategy for granger causality tests, namely toda & yamamoto (1995) approach that is applicable irrespective of integration and cointegration properties exhibited by data. nevertheless, the choice for the maximum order of integration (dmax) in all cases remains one (dmax=1). in line with the empirical methodology outlined earlier, the next step is to determine the appropriate lag length (k) for country-specific bivariate var models. for this purpose usual information criteria are employed (akaike info criterion aic and schwartz bayesian information criterion sic). however, in some cases additional lags are included in order to account for autocorrelation issues. this yielded dynamically stable, well-specified var models, namely var(2) for serbia and macedonia, var(3) for hungary and bulgaria and var(4) for romania, that represent an adequate base for undertaking the toda & yamamoto (1995) granger causality testing. the results of the toda & yamamoto (1995) granger non-causality tests for variables under scrutiny are presented in table 3. as can be seen on this table, the results reflect a rather homogeneous pattern in all emerging economies under investigation. not surprisingly, gathered empirical evidence indicates granger causality that runs from primary surplus to government debt, while causality that goes in the opposite direction has not been found. this suggests fiscally-led regime in romania and serbia (at 5% significance level) as well as in hungary and bulgaria (at 10% level). in case of macedonia no definite conclusion can be drawn at usual significance levels, although some (albeit weak) evidence found at the 15% significance level also confirms fiscal dominance in this country, which is in line with the earlier findings of trenovski & tashevska (2015). monetary versus fiscal dominance in emerging european economies 131 table 3 toda & yamamoto granger non-causality tests null hypothesis k+dmax chi-square p-value hungary d does not granger cause pb 3+1 1.307 0.728 pb does not granger cause d 6.868 0.076 romania d does not granger cause pb 4+1 7.044 0.134 pb does not granger cause d 18.854 0.001 bulgaria d does not granger cause pb 3+1 0.801 0.849 pb does not granger cause d 6.512 0.089 serbia d does not granger cause pb 2+1 2.009 0.366 pb does not granger cause d 6.510 0.039 macedonia d does not granger cause pb 2+1 0.296 0.863 pb does not granger cause d 4.020 0.134 source: authors concluding remarks following theoretical foundations of the fiscal theory of the price level, the aim of this paper was to shed some light on the issue of monetary versus fiscal dominance in five emerging european economies (hungary, romania, bulgaria, serbia, and macedonia). results overwhelmingly indicate that the non-ricardian (fd) regime prevailed, which further suggests that fiscal (not monetary) policy may have been the nominal anchor for inflation expectations in economies under scrutiny. these findings strongly emphasize the need for prudent fiscal policies in all of the examined countries, even though some of them are reporting solid fiscal performance after the full effect of post-crisis consolidation measures. previous considerations are of vital importance especially in those economies that adopted the inflation targeting regime (hungary, romania and serbia) having in mind that it is well documented that fiscal dominance reduces the ability of monetary authority to effectively set policy to achieve its own objectives. taking into account all of the above, a general conclusion would be that credible fiscal policy is absolutely essential not only in terms of strengthening the capacity of public finances and further 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(bis working paper, 174), switzerland: bank for international settlements monetary versus fiscal dominance in emerging european economies 133 monetarna versus fiskalna dominacija u evropskim ekonomijama u razvoju konvencionalno makroekonomsko stanovište podrazumeva da je monetarna politika ključna za usidravanje inflacionih očekivanja, dok je fiskalna politika disciplinovana u sprovođenju kredibilnih i blagovremenih prihodno-rashodnih mera u slučaju rasta javno duga, a kako bi osigurala održivost. u ovom scenariju monetarna politika je aktivna, dok je fiskalna politika pasivna, što se u literaturi označava kao monetarna dominacija. međutim, zagovornici fiskalne teorije nivoa cena naglašavaju da može postojati još jedan režim – režim fiskalne dominacije. u ovoj postavci, primarni budžetski saldo prati neki arbitraran put, koji nije nužno kompatibilan sa evolucijom javnog duga, a monetarna politika se suočava sa ograničenim prostorom za manevar budući da na raspolaganju nema mnogo opcija i u krajnjoj instanci je prinuđena da se prilagodi fiskalnim kretanjima. prateći opisan teorijski okvir, cilj ovog rada je da empirijski utvrdi preovlađujući režim monetarna versus fiskalna dominacija u pet evropskih ekonomija u razvoju mađarska, rumunija, bugarska, srbija i makedonija . u skladu sa očekivanjima, rezultati ukazuju na to da je monetarna politika tokom perioda analize bila potčinjena fiskalnoj u svim analiziranim ekonomijama, odnosno da je preovladavao režim fiskalne dominacije. ključne reči: fiskalna teorija nivoa cena, fiskalna dominacija, monetarna dominacija, emergentne evropske ekonomije plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, n o 2, 2015, pp. 97 108 knowledge as a factor of economic growth of transition countries  udc 001.101:338.1 jelena petrović 1 , tanja stanišić 2 1 faculty of matematics and science, university of niš, serbia 2 faculty od hotel management and tourism in vrnjačka banja, university of kragujevac, serbia abstract. the purpose of this paper is to analyse the impact of knowledge on economic growth of transition countries. the aim is to identify the correlative relationship between the achieved level of development of the knowledge economy measured by kei (knowledge economy index) and level of gdp (gross domestic product) and economic growth in transition countries by applying appropriate methods. the methods of comparative, correlation and regression analysis are used in the paper. the paper includes the following three parts: the analysis of the achieved level of the knowledge economy development in transition countries based on the kei and its pillars; analysis of the actual level of gdp and economic growth in transition countries; testing of correlation between the kei, on the one hand, and gdp and its growth, on the other hand and analysis of the influence of pillars within the kei on gdp of transition countries. the results of the research indicate a weak correlation between the kei and gdp in analysed countries. based on them, we can conclude that knowledge is not a significant factor in the economic growth of transition countries. key words: knowledge, growth, development, gdp, transition countries. introductory discussion and theoretical background knowledge-based economy is a part of the development strategy of every economically developed country and its companies (milisavljević, 2010, p. 115). development of the knowledge economy has become a necessity in developed countries, but also in developing countries and transition economies. the richness of the state no longer depends on the ability to collect and convert raw materials, but on the ability to develop and upgrade intellect in the state, as well as skills related to specific companies. the company's success depends received october 31, 2014 / accepted october 5, 2015 corresponding author: jelena petrović faculty of mathematics and science, university of niš, višegradska 33, 18000 niš, serbia e-mail: jelenapetrovic619@yahoo.com 98 j. petrović, t. stanišić on their ability to operate in a global market that is rapidly changing, and where consumers are more eager to gain new knowledge, where there are a large number of choices, and where relationships between buyers and sellers are constantly changing. development of skills based on knowledge, and those concerning the efficient and effective use of knowledge, is important to increase the absorption capacity of the company (krstić, 2011, p. 275). knowledge management is becoming the dominant form of management in the company, and as such, the basis of management in the new knowledge society. it is continuously directing of all kinds of knowledge individual, group, team or organizational, in order to meet existing and further needs (krstić, 2009, p. 99). the creators of value people and their intellect, become now, in the "knowledge economy", i.e. "information society", a strategic resource of modern economy and its subjects (krstić, 2007, p. 316). for successful economy and its subjects in this environment, people must acquire new skills. in particular, they must acquire skills that enable them to identify, manage, share and utilize information and knowledge. they need "information skills". increase of both organizational and individual skills is the primary success factor in the development of the knowledge economy. many authors point to the importance of improving the knowledge economy, not only in developed countries, but also in countries that have achieved a lower level of economic development. krstić and stanišić have conducted a detailed analysis of the competitiveness of the southeastern europe countries based on the gci (global competitiveness index) and the kei (knowledge economy index), as well as its pillars. "innovative policies, greater investments in education and training, creation of innovations and technological competences, information infrastructure, as well as, stimulating economic environment and institutional regime with the aim of creating, disseminating, transferring, and effective use of knowledge in production, services, and export of see countries, are needed" (krstić, stanišić, 2013, p. 165). the world bank institute, within the program knowledge for development, regards that the successful development of the knowledge-based economy requires long-term investment in education, development of innovation skills, development of information and communication technologies and the existence of legal and economic framework. the world bank divided these features into four elements that are crucial for t the state to be able to develop the economy based on knowledge. the first element relates to the legal and economic framework of the country, the second to the innovation system, the third to education and training, and the fourth to the information and communication system. the first important element of the knowledge economy is the legal and economic framework of the country. its effects depend on whether the state has a well-established and transparent macroeconomic and competitive politics and the legal system that allows economic operators to create and use knowledge freely. legal and economic framework of the state should encourage continuous education, free movement of knowledge, the commercial application of the results of scientific-research development, cooperation between educational institutions and the public and private sector, investment in information and communication technology, encourage entrepreneurship and the like. on that basis, development of professionals is a necessary, but not sufficient determinant of state competitiveness. proper economic policy that encourages improving governance, reducing corruption, encouraging an entrepreneurial climate, and domestic savings is needed. knowledge as a factor of economic growth of transition countries 99 the second element of the knowledge economy refers to the innovation system. innovation system is a network of institutions which contribute to the development and dissemination of new technologies individually and collectively and provide a framework within which the state shapes and implements innovative policy. it is a system of interconnected institutions for creating, storing and transferring the knowledge and skills that are the basis for the development and diffusion of new technologies (metcalfe, 1995, p. 408). innovation system does not lead to progress if its results do not apply, then they are set. science, engineering and technology do not stand still, but constantly progress and most modern technical and technological solutions very quickly become obsolete (aranđelović, gligorijević, 2008, p. 60). scientific research and the application of its results are important for the creation of a competitive economy. based on the importance of innovation for the development of enterprises and the economy, the need for scientific research and inventive work must be integrated into the production flow and become a lever of rapid economic and social development is imperative (hinić, 2001, p. 19). a modern economy needs an education system that is functional, comfortable, efficient and adaptable to the changes and needs of society and the individuals (babić, 2009, p. 58). only an economy whose citizens and employees are educated, skilled, creative and able to adapt to constant change will be successful in the xxi century. people, businesses and economies that want to survive and prosper are forced to continuously and quickly learn that, as soon as they reach the relevant information and knowledge. many studies have indicated that there is a positive correlation between the achieved level of staff education and economic growth. the economy and companies must equally continue to develop their scientific, technological and creative potential if they want to achieve and sustain a competitive advantage in the coming years (despotović, stamatović, 2013, p. 81). the educational process was always a process based on the theoretical and practical application of various knowledge in achieving some objective function. as an important element of the knowledge economy, the education in its content, structure and level of development differs between developed countries and countries in transition. for creating an education system corresponding to the knowledge economy, it is necessary to move to the variable knowledge base by entering new knowledge, and by new systematization of existing knowledge. it is a requirement for knowledge that will enable overviewing the complexities of the world, its understanding and adaptation needs. information and communication technology (ict) sector is the fourth element of the knowledge economy. it refers to the availability, dependability and efficiency of computers, phones, television and radio, as well as the different networks that link them (chen, dahlman, 2005, p. 7). the world bank defines the ict sector as a set of hardware, software, networks, and media for collection, and storage, processing and transmission of data, and presentation of information in the form of voice, data, text and images (the world bank, http://info.worldbank.org). although there is no consensus on the causes of the decrease the global economic growth in the seventies and increase the growth rate of the nineties of the last century, a number of theoretical papers and empirical research suggest that the development of high technologies, especially the internet and related technologies, influenced the growth and development of the global economy at the end of the last and at the beginning of this 100 j. petrović, t. stanišić century. adoption of new internet technologies and the model based on them and the success of using the growth potential that they offer become one of the most important strategic issues, both at the microeconomic and on the overall economy of a country. using the internet in business contributes to increasing its effectiveness and efficiency (avramović, 2006, p. 219). all four mentioned elements of the knowledge economy are equally important. it is necessary to point out that the importance of any part of the knowledge economy can not be extracted. best educated people will not be competitive enough if the economy does not stimulate innovation and entrepreneurship, if there is no rule of law and if information and communication sector is not developed. 1. research methodology and hypotheses bearing in mind that the development of modern economies is based on knowledge, the main objective of this paper is to determine whether the development of transition economies is based on knowledge. the achieved level of the knowledge economy development is measured using the kei, while the level of development of countries is viewed on the basis of the achieved level of gdp and gdp growth rates. the research includes all transition countries (except turkmenistan, due to lack of data) analysed in the transition report 2012, which was prepared by the european bank for reconstruction and development (the european bank for reconstruction and development, 2012). based on the purpose and primary objective of the research, the authors of the paper will test the following hypotheses: h1: more than 50% of transition countries have made progress towards knowledge society and knowledge economy in the period from 1995 to 2012; h2: there is a strong positive correlation between the kei and gdp in transition countries; h3: the achieved level of the knowledge economy development in the transition countries has a significant impact on its economic growth measured by gdp indicator; h4: all pillars of the kei indicator have a significant impact on the gdp level of of transition countries. the data of the world bank represent the information basis of research for data about the kei and gdp. the method of dynamic (comparative) analysis of the competitiveness of transition countries based on the kei, the method of correlation analysis and the method of regression analysis are applied in the paper. 2. dynamic aspect of comparative analysis of the kei changes in transition countries for 1995 and 2012 the world bank institute has developed a methodology for benchmarking the development towards the knowledge economy called "the knowledge assessment methodology" (kam). kam is an interactive program which allows the states, on the basis of systematic analysis and evaluation of the above mentioned parts of the knowledge knowledge as a factor of economic growth of transition countries 101 economy, to see their strengths and weaknesses based on the comparison of the knowledge economy pillars with neighbouring or other countries. comparison within the kam includes 109 structural and qualitative indicators that serve as a replacement for the four pillars of the knowledge society, as well as 146 countries and 9 regions (the world bank, http://info.worldbank.org). the kam indicators are determined on the basis of data from renowned national institutions. data are reliable and consistent with each other, because they are being continuously updated. the kam allows states to identify the problems and dangers with which they are faced and thus focuses attention on future investments that would enable the transformation to a knowledge economy. using a methodology for benchmarking the transformation towards the knowledge economy, every year the world bank forms ranking list of countries according to their level of development using the knowledge economy index and the indicators that determine the level of development of each pillar within the kei. knowledge economy index shows how the environment in the country or region is conducive to effective use of knowledge for the purpose of economic development. it is an aggregate index that shows the achieved phase in the knowledge economy development in the country or region. in order to calculate the knowledge economy index, the level of development of each pillar based on certain indicators is determined: 1) the first pillar – the economic incentive and institutional regime: tariff & nontariff barriers, regulatory quality and rule of law; 2) the second pillar – the innovation system: investments in scientific research as a % of gdp, the cooperation of higher education institutions and the business sector, the number of registered patents per million inhabitants; number of published scientific papers per million inhabitants, private sector investment in scientific research; 3) the third pillar – education: percentage of literate compared to the population over 15 years, public investment in education expressed as a % of gdp, percentage of professors and teachers in staff, investment in staff training; 4) the second pillar – information and communication technology (ict): the number of telephone lines (fixed and mobile) per thousand inhabitants, the number of computers per thousand inhabitants and the number of internet users per thousand inhabitants, and the availability of government services via the internet. table 1 shows the kei score and rank for selected transition economies in 1995 and 2012. based on the value of the kei it can be concluded that estonia had the highest value and the first position relative to other transition countries in 1995 and 2012. estonia recorded an increase in the value of the kei, but also improved the position on the world list of countries in observed period. the lowest value of the kei was recorded in mongolia in 1995, and in tajikistan in 2012. 102 j. petrović, t. stanišić table 1 rank and score of kei for transition economies country 1995 2012 rank score rank score 1 estonia 27 7.94 19 8.4 2 slovenia 28 7.89 28 8.01 3 hungary 33 7.5 27 8.02 4 slovak republic 34 7.22 33 7.64 5 poland 39 6.85 38 7.41 6 bulgaria 40 6.81 45 6.8 7 lithuania 43 6.59 32 7.8 8 latvia 45 6.51 37 7.41 9 croatia 48 6.25 39 7.29 10 ukraine 52 5.96 56 5.73 11 romania 53 5.91 44 6.82 12 belarus 55 5.81 59 5.81 13 russian federation 59 5.67 55 5.78 14 jordan 61 5.55 75 4.95 15 turkey 62 5.46 69 5.16 16 serbia 64 5.35 49 6.02 17 armenia 67 5.25 71 5.08 18 macedonia, fyr 68 5.14 57 5.65 19 georgia 70 5.1 68 5.19 20 moldova 73 5.07 77 4.92 21 kazakhstan 79 4.93 73 5.04 22 uzbekistan 84 4.78 104 3.14 23 egypt 87 4.68 97 3.78 24 azerbaijan 88 4.62 79 4.56 25 tunisia 89 4.54 80 4.56 26 kyrgyz republic 91 4.42 95 3.82 27 bosnia and herzegovina 92 4.39 70 5.12 28 albania 93 4.33 82 4.53 29 morocco 96 4.17 102 3.61 30 tajikistan 97 4.13 105 3.13 31 mongolia 99 4.08 83 4.42 source: the world bank, http://info.worldbank.org/etools/kam2/kam_page5.asp starting from the 145 countries analysed d by the world bank, we can conclude that about 60% of transition countries are located within the first half of the world list of countries according to the kei score. serbia, which is among them, took the 64th place in 1995 and the 49th place in 2012. ten transition countries have decrease of the kei score in 2012 in relation to 1995. nine transition countries are worsening position on the world list of 145 countries in this period. since about 71% of transition countries achieve the improvement of the knowledge economy, we can conclude that the first hypothesis of research is confirmed. in order to view the position of each transition countries, according to each pillar within the kei, its values are given in table 2. http://info.worldbank.org/etools/kam2/kam_page5.asp knowledge as a factor of economic growth of transition countries 103 table 2 the value of the pillars within the kei indicator for transition countries (2012) country economic incentive and institutional regime innovation system education information and communication technology 1 estonia 1 8.81 3 7.75 2 8.6 1 8.44 2 slovenia 2 8.31 1 8.5 8 7.42 3 7.8 3 hungary 3 8.28 2 8.15 3 8.42 7 7.23 4 slovak republic 5 8.17 5 7.3 9 7.42 4 7.68 5 poland 7 8.01 6 7.16 5 7.76 12 6.7 6 bulgaria 9 7.35 7 6.94 13 6.25 13 6.66 7 lithuania 6 8.15 9 6.82 1 8.64 5 7.59 8 latvia 4 8.21 10 6.56 6 7.73 8 7.16 9 croatia 10 7.35 4 7.66 14 6.15 2 8 10 ukraine 24 3.95 14 5.76 4 8.26 18 4.96 11 romania 8 7.39 12 6.14 7 7.55 14 6.19 12 belarus 28 2.5 15 5.7 10 7.37 10 6.79 13 russian federation 29 2.23 8 6.93 12 6.79 9 7.16 14 turkey 12 6.19 13 5.83 29 4.11 25 4.5 15 serbia 23 4.23 11 6.47 15 5.98 6 7.39 16 armenia 13 5.8 22 4.21 11 6.96 28 3.35 17 macedonia, fyr 14 5.73 19 4.99 24 5.15 11 6.74 18 georgia 11 7.28 18 5.15 27 4.61 27 3.72 19 moldova 21 4.44 23 4.16 18 5.79 15 5.28 20 azerbaijan 26 3.36 26 4.01 16 5.95 19 4.93 21 bosnia and herzegovina 16 5.55 21 4.38 19 5.77 21 4.77 22 albania 18 4.69 27 3.37 25 4.81 17 5.26 23 kazakhstan 17 4.88 17 5.59 23 5.16 22 4.65 24 kyrgyz republic 30 1.58 29 3.12 22 5.32 16 5.27 25 mongolia 22 4.3 30 2.91 17 5.83 23 4.63 26 tajikistan 27 2.55 31 2.18 26 4.66 29 3.14 27 uzbekistan 31 0.92 28 3.13 20 5.65 31 2.87 28 egypt 20 4.5 24 4.11 30 3.37 30 3.12 29 jordan 15 5.65 25 4.05 21 5.55 24 4.54 30 morocco 19 4.66 16 5.67 31 2.07 26 4.02 31 tunisia 25 3.81 20 4.97 28 4.55 20 4.89 source: the world bank, http://info.worldbank.org/etools/kam2/kam_page5.asp according to the first pillar the economic incentive and institutional regime, the highest value was observed in estonia, and the lowest in uzbekistan. the country which recorded the highest value of the pillar innovation system is slovenia, the country with the lowest value of this pillar is tajikistan. countries which recorded the highest value of the pillar education are lithuania and slovenia, while morocco recorded the lowest value of this pillar. estonia recorded the highest value of the pillar information and communication technology, and uzbekistan had the lowest value of this pillar. http://info.worldbank.org/etools/kam2/kam_page5.asp 104 j. petrović, t. stanišić 3. analysis of gdp as indicator of economic growth in transition countries for the purpose of further analysis table 3 presents data on the achieved level of gdp in transition countries in 2012. the list of transition countries is given on the basis of the transition report of the european bank for reconstruction and development (тhe european bank for reconstruction and development, 2012). table 3 gdp and gdp growth rate in transition countries (2012) ranking country gdp (millions of us dollars) ∆% gdp 1 8 russian federation 2,014,775 +3.44 2 17 turkey 789,257 +2.24 3 24 poland 489,795 +1.82 4 39 egypt 262,832 +2.21 5 50 kazakhstan 203,521 +5.00 6 54 ukraine 176,309 +0.20 7 56 romania 169,396 +0.35 8 58 hungary 124,600 -1.70 9 62 morocco 95,982 +4.20 10 63 slovak republic 91,348 +1.80 11 67 azerbaijan 66,605 +2.20 12 68 belarus 63,267 +1.50 13 70 croatia 59,228 -1.98 14 74 uzbekistan 51,113 +8.20 15 75 bulgaria 50,972 +0.80 16 78 tunisia 45,662 +3.60 17 79 slovenia 45,378 -2.50 18 83 lithuania 42,344 +3.70 19 87 serbia 37,489 -1.70 20 91 jordan 31,015 +2.65 21 93 latvia 28,373 +5.00 22 102 estonia 22,376 +3.94 23 110 bosnia and herzegovina 17,466 -0.70 24 113 georgia 15,747 +6.00 25 124 albania 12,648 +1.60 26 129 mongolia 10,271 +12.28 27 132 armenia 9,951 +7.19 28 134 macedonia, fyr 9,613 -0.27 29 139 tajikistan 7,633 +7.50 30 141 moldova 7,253 -0.80 31 144 kyrgyz republic 6,475 -0.89 source: the world bank, http://data.worldbank.org/indicator within the observed sample of transition countries, russia has the highest level of gdp. rusia is ranked on the eighth place on the list of the world bank according to the knowledge as a factor of economic growth of transition countries 105 value of gdp. only seven transition countries achieve higher gdp than the average value of gdp (163,184 million) that all the countries in transition have made. serbia is on the 19 th place on the list of transition countries, and on the 87 th place on the world list of 144 countries according to the value of gdp. mongolia recorded the biggest economic growth and increase of gdp in 2012 compared to 2011. the largest decrease of gdp is recorded in slovenia, followed by serbia and hungary. 4. results of examination of interdependence between kei and gdp and impact of kei on gdp in transition economies the results of correlation analysis, which examines the interdependence between the kei indicator and the value of gdp for the group of selected countries in transition in 2012, are given in table 4. based on the correlation coefficient, it can be concluded that there is a very weak correlation between the achieved level of the knowledge economy development, measured by kei, and the achieved level of gdp in the transition countries in 2012. in this way, the second hypothesis of the research is rejected. table 4 correlation between the kei and gdp for transition countries correlations kei gdp kei pearson correlation 1 0.039 sig. (2-tailed) 0.837 n 31 31 source: authors' calculation based on the value of the correlation coefficient presented in table 5, it can be concluded that there is a medium negative correlation between the level of the knowledge economy development measured by kei and increase/decrease of gdp in 2012 (compared to 2011). table 5 correlation between the kei and gdp growth for transition countries correlations kei gdp growth kei pearson correlation 1 -0.412 * sig. (2-tailed) 0.021 n 31 31 * correlation is significant at the 0.05 level (2-tailed). source: authors' calculation the results of correlation analysis shown in table 4 and table 5 indicate that the transition countries do not base their economic growth on the knowledge economy, and that countries that have achieved significant economic growth recorded extremely small value of the kei. at the same time, we can conclude that the third hypothesis of the research is not confirmed. 106 j. petrović, t. stanišić the determination coefficient shows how much of the variance of the dependent variable explains the model. in our case, the determination coefficient is 0.343 (table 6). when we express this as a percentage, we can conclude that 34% of the achieved level of gdp in transition countries are influenced by all pillars of the kei. table 6 impact of all pillars within the kei on the value of gdp in transition countries model summary b model r r square adjusted r square std. error of the estimate 1 0.586 a 0.343 0.242 3.30671e5 a. predictors: (constant), information and communication technology, economic incentive and institutional regime, education, innovation b. dependent variable: gdp source: authors' calculation based on the values of beta from table 7, we can conclude that the innovation pillar has the highest impact on gdp, followed by the pillar economic incentive and institutional regime, while the education pillar has the smallest impact. when the sig. value is smaller than 0.05, the variable makes a significant unique contribution to the prediction of the dependent variable. when this value is greater than 0.05, it should be concluded that this variable does not make a significant unique contribution to the prediction of the dependent variable. table 7 impact of pillars within the kei on the value of gdp in transition countries coefficients a model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 142318.208 251809.203 0.565 0.577 economic incentive and institutional regime -120287.073 38287.473 -0.708 -3.142 0.004 innovation 237214.007 76362.040 1.073 3.106 0.005 education -41281.297 52223.235 -0.173 -0.790 0.436 information and com. technology -62644.806 70228.333 -0.270 -0.892 0.381 a. dependent variable: gdp source: authors' calculation in our case, the innovation pillar and the pillar economic incentive and institutional regime give unique and statistically significant contribution to the prediction of the results of measurements relating to realized gdp. based on the results of regression methods, we can conclude that only two of the four pillars within the kei have a significant impact on the size of gdp in transition countries. the fourth hypothesis of the research is not confirmed. knowledge as a factor of economic growth of transition countries 107 conclusion knowledge becomes a vital development resource and key factor of sustainable economic growth in modern conditions. companies that base their business processes on knowledge have a greater chance to survive and be competitive in the dynamic global market of products and services. knowledge economy and its continuous improvement become the future of modern economies. this statement is valid for both developed economies and developing countries. analysing the situation in transition economies when it comes to the knowledge economy development measured by the knowledge economy index, leads to the conclusion that, from 1995 to 2012, most transition countries, or about 71% of transition countries have made the improvement of the knowledge economy measured by the kei. however, by observing their position in the world rankings, we find that some of these countries are located in the second half of the world list of countries in 2012. in this regard, we conclude that despite adequate progress, there is a possibility that transition economies continue to improve their position when it comes to knowledge society and knowledge economy. the correlation analysis showed that transition countries do not base their growth on knowledge. naimely, the research showed the existence of the weak positive correlation between the kei and gdp in the analysed countries in transition. exploring of correlation between the economy and the knowledge in the context of the knowledge economy development has highlighted the situation and the need to change the role of knowledge, education, innovation system, the information and communication sector and the economic and legal framework of the state. results of regression analysis confirmed the weak impact of the knowledge economy on the level of gross domestic product in the surveyed countries. all this leads us to the conclusion that knowledge is still an unused resource of economic growth, economic development and competitiveness of transition economies. greater investment in education, staff training and research, higher degree of development and 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(1995) the economic foundations of technology policy: equilibrium and evolutionary perspectives handbook of the economics of innovation and technological change, oxford, blackwell publishers. 15. milisavljević, z., nestorović, o., zdravković, d. (2010) menadţment i znanje kao neophodan preduslov odrţivog razvoja, ekonomika, vol. 56 (1): 115-120. 16. the european bank for reconstruction and development (2012) transition report 2012 – integration across borders, http://www.ebrd.com/downloads/research/transition/tr12.pdf (26.06.2014) 17. the world bank (2012) knowledge economy index (kei) 2012 rankings, http://info.worldbank. org/etools/kam2/kam_page5.asp (01.07.2014) 18. the world bank, http://info.worldbank.org (01.07.2014) 19. the world bank, http://data.worldbank.org/indicator (03.07.2014) znanje kao faktor privrednog rasta država u tranziciji svrha ovog rada je da analizira uticaj znanja na privredni rast država u tranziciji. cilj rada je da se primenom odgovarajućih metoda identifikuje korelaciona veza između dostignutog stepena razvoja ekonomije znanja merenom pomoću kei (knowledge economy index) u državama u tranziciji i dostignutog nivoa gdp (gross domestic product) i privrednog rasta. u radu se primenjuje metoda komparativne, korelacione i regresivne analize. rad obuhvata sledeća tri dela: analiza dostignutog nivo razvoja ekonomije znanja u državama u tranziciji na osnovu kei i njegovih elemenata; analiza ostvarenog nivoa gdp i privrednog rasta u državama u tranziciji; ispitivanje korelacione veze između, kei, sa jedne strane, i gdp i njegovog rasta, sa druge strane i analiza uticaja elemenata kei na gdp država u tranziciji. rezultati istraživanja ukazuju na postojanje slabe korelacione veze između kei i gdp. na osnovu njih se može zaključiti da znanje ne predstavlja značajan faktor privrednog rasta država u tranziciji. ključne reči: znanje, rast, razvoj, gdp, države u tranziciji plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 1, 2014, pp. 37 46 review paper reputation and financial performances of a company   udc 65.015.25:336 bojan krstić university of niš, faculty of economics, serbia abstract. as a kind of intangible asset, reputation allows the company to manage the expectations and needs of its stakeholders. it is just another tool in the efforts of each company to survive and improve its competitive position. this asset is difficult to acquire, and its formation usually requires high quality products over several years, solid financial results, constant innovation activity, responsiveness to the stakeholder demands, permanent technological advancement, high business success, etc. reputation is a resource which cannot be imitated, and its strategic relevance in the resource portfolio is growing, because it can create differentiation and barriers in relation to competitors. the purpose of this paper is to examine the interdependence of reputation, as intangible resource of the company, and its financial performances. two research questions are highlighted in this paper: whether actual financial performances affect the company's reputation and whether created reputation affects the financial performances of the company. the answers to these questions are given on the basis of empirical evidences of many studies realized in the previous period. the results of this paper will inevitably reveal significant interdependence, more precisely, the interplay of reputation and financial performances of the company. the contributions of the study are useful to managers in order not to forget the importance of a good reputation for superior financial performances, and also to direct more resources, time and efforts to the process of making a good reputation of their companies. key words: reputation, intangible resources, financial performances, company. introduction contemporary business environment shows that a company has to be part of the society and play an active role in it. the reputation of the company is built over time and  received march 10, 2014 / accepted march 31, 2014 corresponding author: bojan krstić faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 686 • e-mail: bojan.krstic@eknfak.ni.ac.rs  acknowledgement: the paper is a part of the research done within the project 179066, financed by the ministry of education, science and technological development of the republic of serbia. b. krstić 38 it is the result of complex interactions and relationships between the company and its stakeholders. this means that the reputation is based on past actions, experiences, and reactions of stakeholders. in other words, reputation is based on the overall perception of the stakeholders associated with the company. reputation means the development of these complex relationships over time, and it is hard to imitate in a short period of time (grant, 1991). reputation is built on the fundamental values of the company as a business system. for key stakeholders these values are: reliability, credibility, trust and responsibility. in recent years, companies have built and maintained their reputation by developing practices that integrate economic and social role in their corporate and/or business strategy. however, it should be noted that the reputation of the company is a very complex category (dierick, cool, 1989). the reputation of a company combines two essential dimensions of efficiency. the first one is the valuation of a company. the second dimension is, however, evaluating the success of a company in achieving a certain level of corporate social responsibility (fombrun, van riel, 1997). the assessment of company reputation is determined by matching the behaviour and expectations/preferences of its stakeholders. good reputation has strategic significance for the company (dierickx, cool, 1989). according to the resource-based view, firms with resources that are valuable and rare, have a competitive advantage and can expect to make a profit in the future (barney, 1991). also, the companies which assets are difficult to imitate can maintain superior financial performances in relation to their competitors. intangible assets, such as good reputation, are crucial not only for abilities to create value in a company, but also because their intangible nature makes imitation by the competitors much more difficult. a good reputation is a valuable tool that allows the company to achieve long-term profitability or sustainable superior financial performance in relation to market rivals. 1. reputation and financial performances of company: theoretical basis reputation is identified as a key intangible asset that adds value to a company (clulow, gerstman, barry, 2003). however, it should be noted that intangible assets almost never create that value alone, but in combination with other company‟s resources (hall, 1993). the correlation between reputation and financial performance of companies can be realized in several ways: generating profitable sales in a saturated market; successful response to the actions of competitors; attracting capital and strategic partners; capturing new markets without any difficulties; high levels of customer satisfaction and repeat purchases; attracting, motivating and retaining talented employees; successful strategic reaction of company‟s management, etc. because of its intangible nature, the reputation has been identified as a tool that helps a company to increase its intellectual capital. intellectual resources are the basis of competitive advantage in the 21 st century, because intellectual values can differ a company in relation to its competitors and provide better value creation for the customers. if a company wants to lead over the competition, a strong reputation must be its mandatory choice, and not an option. both internal and external factors affect the reputation. internal factors include: the ability to communicate, openness, human resources treatment, innovation ability, manager reputation, adaptability to change, solving the social issues and environmental problems. reputation and financial performances of a company  39 company‟s management has a significant role in shaping the reputation. external factors and stakeholders which impact on reputation are the following: customers, media, financial analysts, and government legislation (lines, 2004). a good reputation helps launch new products and enter new markets, by influencing consumers when choosing the same product in offered pallet of different market players (fombrun, van riel, 2003). companies that are trying to keep up with the competition, invest significantly in product innovation. ability to design and launch a new product is the core of business or market success. reputation is very important for these companies because consumers want to buy products from companies they have confidence. namely, it is a confidence in the ability of the company for successful development of new products that customers want. so, the confidence is a necessary part of corporate reputation. the importance of a good reputation is reflected in reduction of transaction and communication costs with the market, and attraction of new customer‟s confidence. one of the main reputation objectives is the strategic positioning of a company and its products in the market in relation to competitors. this is possible because in the multitude of bidders similar products on the market, when there are no significant differences in their characteristics, the reputation is an essential element for better competitive differentiation. company reputation data come from managers, as well as from market analysts. these are two stakeholder groups whose estimations are extremely important. however, there are other groups of stakeholders (e.g., customers, employees, and suppliers) whose estimations also has implications to financial performances of the company. some studies (davies, chun, da silva vinhas, roper, 2003) show that the attitudes of stakeholders in the enterprise are directly related to the key financial results, and that the image and identity of the company are relative. in addition, this research highlights that reputation management includes the harmonization of these two concepts, and this harmony affect financial results. the perception of the company as a 'good citizen' helps to build a reputation as an intangible value, and to make it contribute to its competitive advantage. reputation deserves the most of the credit for the positive impact of business social dimensions on its financial performances (orlitzky, 2005). corporate social responsibility is a way and a form of investment, that creates opportunities for expansion and growth in the future (husted, 2005). where does the good reputation come from? an interesting view is that reputation is determined by the value (quality) of the previous efforts and behaviours (podolny, phillips, 1996). in many cases, stakeholders in the enterprise can identify these efforts. managers are involved in the activities of the so-called building the explicit reputation (e.g. advertising, sponsorship) to improve the reputation of their company (fombrun, 1996). managers also manage the associations which company exchanges with stakeholders to ensure the benefit from the reputation (podolny, 1994). however, stakeholders do not evaluate directly a range of activities that lead to the formation of their impressions about reputation. they rely mainly on the financial performances achieved in the previous period, because they are a "sign" of the total respect of a company. a good reputation is the result of a construction process in the past, based on the actual financial performances. also, good reputation is the result of current financial performances of the company. however, the reputation of the company in the present will reflect to financial performances in the future. b. krstić 40 the variety of potential benefits, which are the result of a good reputation, point to the significant correlation between reputation and financial performance (podolny, 1993). reputation also serves as the basic product quality indicator of a company, and consumers are willing to pay more for products obtained from the company because of its high reputation, even though there is a high level of uncertainty in the market (shapiro, 1983). a company with a good reputation may have an advantage because employees prefer to work in such firms. in addition, in the case of the company with high reputation, suppliers are less concerned about the contracted current and future transaction. a good reputation leads to lower costs of contracting and monitoring. marketing literature also suggests that good reputation supports sales and its efficiency. it actually attracts potential customers and influences the retention of existing customers. srivastava, mcinnish, wood, capraro (1997) prove in their research in 1997 that stakeholder groups consider a company with a good reputation, less risky in terms of investment, compared to the other companies with similar financial performances, but with a worse reputation. reputation is particularly important in cases of realization of initial public offerings, takeovers, mergers, and strategic partnerships (mcgregor, slovic, dreman, berry, 2000). reputation as an intangible asset, often valued implicitly, by the analysis and sometimes explicitly based on the market share price. davies, chun, vinhas da silva, roper (2003) point out, however, that reputation contributes to the annual company income between 3 and 7.5%, so it can be considered as an investment, and not as a cost to the company. 2. methodological framework and hypotheses many researchers have examined the relationship between corporate reputation and financial performances, and have found that there is a strong and a non-linear relationship between corporate reputation and financial performances (inglis, morley, sammut 2006, sanchez, sotorrio 2007). determining the relationship between reputation and financial performances means responding two questions: 1. does company reputation have an impact on financial performance? 2. do financial performances affect reputation? reputation and financial performances may be interrelated categories. with this in mind, we define two starting positions and hypotheses: h1. financial performances of a company affect its reputation. h2. the reputation of a company influences its financial performances. it is necessary to stress the strategic benefits of a respectable reputation, which (at least in the short term period) can be difficult to imitate by competing firms. also, it is important for the researchers to demonstrate that reputation has a financial impact on the company, because there is a need to prove economic viability, i.e. profitability of investment in communication programs to build the company image and reputation. with the aim of analysing interdependence between reputation and financial performance, we use the previous results of relevant authors‟ research in this field. management theorists agree with one thing – reputation, as a unique and integral part of a company, is difficult to empirically evaluate because its base contains relationships which are almost impossible to statistically test (rose, thomsen, 2004). reputation and financial performances of a company  41 3. impact of reputation on company‟s financial performances: research results successful corporation management directs a significant part of financial resources and its efforts towards maintaining and improving the corporate reputation. essentially, a good reputation has characteristics of intangible asset that can provide a competitive advantages, and which is indicated by the value of market-to-book ratio. when an investor buys shares of a corporation with a respectable reputation, she or he does not pay only for its real corporation property, but also for its reputation. in addition, since the consumer of a corporation products, in many situations, cannot confirm the quality of the products before the actual purchase moment, the respectable reputation can serve them as a sign or a signal of product quality (kreps, wilson, 1982). the corporation can build a brand, and after the formal trademark registration in the authorized institution, corporation receives exclusive property rights and the protection of its intellectual property. brand (trademark) helps to solve, so called, consumers‟ „lack of information“ problem about the quality of the product, but also it can be used as a sign of product quality. in addition, brand (trademark) is important for the consumers which are looking for the products with special qualities to reduce costs. company‟s reputation affects the its relationship with other stakeholders, such as, for example, potential employees (stuart, 2002). thus, a company with a good reputation can attract competent people. in addition, a good reputation can reduce transaction costs, because it allows company to save on the cost of writing a complete contract (willamson, 1985). on the other hand, the suppliers of a company will have lower costs of monitoring (bromley, 2002). moreover, a strong corporate reputation can serve as a defense against market rivals, in a way that complicates their situation when competitors try to imitate the characteristics of companies with a superior reputation. therefore, it does seem likely that the reputation of a company affects its financial performances. however, it should be noted that, when a company achieves outstanding financial performances, these performances can also have a positive impact on company‟s reputation (mcguire, schneeweis, branch, 1990). rose and thomsen (2004) has examined the relationship between company's reputation and financial performances in danish firms. they found that corporate reputation did not affect the value of market to book value ratio, and financial performances had a positive effect on reputation. data collected by fombrun and van riel (2004) suggested that, for a period of five years, companies with a good reputation completely financially surpassed companies with a worse reputation. eberl and schwaiger (2005) explore the relationship between corporate reputation of the company and future financial performances by using the data of german companies. they come to two important conclusions. the first one, financial performances in the past are only one component which affects reputation. the second one, the reputation is a "cognitive component" that has a positive impact on future financial performances, while there are strong evidences that "affective component" has a negative impact. vergin and qoronfleh (1998) following the fortune's list, highlighed an evidence of the positive role of corporate reputation in value creation. jones, jones and little (2000) noted that, in the case of a sudden and unexpected drop in the share value, a company with a good reputation suffered less decline in the share price. they also noted that when b. krstić 42 the crisis is strong, investors were in panic how to overcome the crisis. investors solved this situation by investment decisions, since corporate reputation could not mitigate the decline in share value on the stock exchange. roberts and dowling (1997) also confirmed that reputation allowed companies to keep better financial performances for a long period of time (so called, the transfer effect). several different studies confirmed the connection between reputation and revenue. graham and bansal (2007) found in their research that an airline company reputation grew for 1%, and its customers were willing to pay additional 18 dollars for a ticket. herremans et al. (1993) examined whether large u.s. manufacturing companies with a better reputation in corporate social responsibility could outperform companies with a worse reputation in the six-year period. they measured the following financial performances (herremans, akathaporn, mcinnes, 1993): operating profit margin, net profit margin, return on total assets, and return on equity. this study featured 21 branches, based on fortune's survey about the corporate reputation for the period 1982-1987. the results were consistent with the hypothesis that the company reputation was positively related to financial performances, which wass confirmed by profitability indicators. roberts and dowling (2002) explored the relationship between corporate reputation and high financial performances. their data set was based on a sample of most u.s. corporations during the period from 1984 to 1998 of the fortune magazine report. this study examined whether a good reputation allowed the company to achieve profitability or sustain other superior financial performances. they used annual data about the company‟s profitability, the market to book value ratio, and company size. they discovered that firms with excellent reputation were more likely to maintain financial performances over time. in addition, brown (1998) argued that a bad reputation could signal the investors about the possible catastrophe, and in the moment when it happened, the company would not have necessary public support to overcome the crisis. the complexity of the relationship between corporate reputation and financial performances is also pointed out by fryxell and wang (1994). reputation is essential for corporations in their intention to protect their image and survive in the marketplace. this is important for risk management in corporations when stock markets are volatile, and when the investors, instead of rational decisions, make the decisions driven by fear. corporate management can enhance reputation and influence investors‟ decisions if it reports on financial and social responsibility performances in the proper way. 4. impact of financial performances on company‟s reputation: research results sobol and farrell (1988) revealed the potential impact of financial performance on reputation. they conducted study and introduced earnings per share ratio, price earnings ratio and dividend per share for the ten-year period of time. the results showed that the relevance of financial performance varies according to different attributes of fortune survey and varies from company to company. during the second part of the study, the above mentioned authors presented possible crucial factors that affected the reputation. fombrun and shanley (1990) represented a broader concept of reputation, that observed a reputation as an overall perception of company‟s performances by its stakeholders. the ultimate objective of their study was to illustrate the diversity of information sources reputation and financial performances of a company  43 stakeholders used to evaluate and determine reputation. they chose accounting performances, profitability, and risk in the past, and market value of the company as the most important variables. fombrun and shanley (1990) argued that companies with a higher share price and better reputation, and also had better rating which made reputation an important factor for investors. brown and perry (1994) confirmed the relationship between the return on assets (roa) and reputation. hammond and slocum (1996) stressed that the delay period of the financial performances impact on reputation is from 5 to 10 years. hammond and slocum examined the impact of the past period financial performances on corporate reputation in the future (hammond, slocum, 1996). based on research data of fortune magazine for the period since 1981 to 1993, aforementioned authors pointed out that financial performance indicators, such as profitability and profit margin, affected the future reputation moderately. dunbar and schwalbach (2000) also explored the relationship between reputation and financial performance, but based on the research in 63 german companies in the ten-year period. they found that the financial performances in the past had a strong impact on the future reputation. many german companies have a relatively stable reputation, so reputation had a positive impact on the overall financial business in germany. financial performances of german companies had immediate and delayed effects on corporate reputation. sabate and puente (2003) pointed out that the relationship between reputation and financial performances included the answers on two questions, whether the relationship was positive or negative and whether the reputation had an impact on financial performances, or vice versa. they pointed out that, in developed countries, the positive impact of financial performances on corporate reputation had always been confirmed. according to neville et al. (2005), the financial performances of a company were in relation with its reputation. moreover, they suggested that a positive relationship between corporate reputation and financial performances would contribute to increased competitiveness. conclusion reputation is the effect of the past commitments, efforts, behaviours of the company as a whole, and its managers and other employees, as well as the effect of current results, achievements, quality, and success. managers should not consider the reputation as anything that simply happens spontaneously. ignoring the role of intangible items in value creation for customers and increasing the market value of a company, the management takes the risk of poor management of the most important elements of intellectual capital, and it is the reputation. good company reputation is a distinctive competitive ability, which inevitably leads to a better market position. high-quality intangible assets are associated with maintaining superior business performances. previously mentioned elaborations point to the affirmative answers to both research questions or hypotheses in this paper. namely, the results of many studies have shown there is an impact of the reputation on financial performance, and vice versa. the company has more chance to keep superior performances over time if it has a relatively good reputation. company‟s reputation has a strong impact on profit, rate of return and other financial performances. this emphasizes the importance of strengthening the reputation. companies exert to improve profitability and other financial performances, b. krstić 44 and then, consequently, to maintain and strengthen the already build reputation. good reputation, in turn, makes it easier for companies to maintain a good business (financial) performances over time. good financial performances allow the company to sustain its reputation, and then contribute to the growth of its market value. references 1. barney j.b., (1991) “firm resources and sustained competitive advantage”, journal of management, no. 17, pp. 99–120. 2. bromley, d.b., (2002) “an examination of issues that complicates the concept of reputation in business studies”, international studies in management and organization, vol. 32, no. 3, pp. 65–81. 3. brown t.j., (1998) “corporate associations in marketing: antecedents and consequences”, corporate reputation review, vol. 1, no. 3, pp. 215-233. 4. brown, b., perry, s., (1994) “removing the financial performance halo from fortune‟s “most admired” companies”, academy of management journal, no. 37, pp. 1347-1359. 5. clulow, v., gerstman, j., barry, c., (2003) “the resource-based view and sustainable competitive advantage: the case of a financial services firm”, journal of european industrial training, vol. 27, no. 5, pp. 220-232. 6. davies, g., chun, r., vinhas da silva, r., roper, s., (2003) “corporate reputation and competitiveness,” routledge, london. 7. dierick, i., cool, k., (1989) “asset stock accumulation and sustainability of competitive advantage”. management science, vol. 35, no. 12, pp. 1504-1511. 8. dunbar, r.l.m., schwalbach, j., (2000) “corporate reputation and performance in germany”, corporate reputation review, no. 3, pp. 115–123. 9. eberl, m., schwaiger, m., (2005) “corporate reputation: disentangling the effects on financial performance”, european journal of marketing, no. 39, pp. 838–854. 10. fombrun, c. j., van riel, c. b. m., (1997) “the reputational landscape”, corporate reputation review, vol. 1, no. 1, pp. 5-15. 11. fombrun, c., (1996) “reputation: realizing value from the corporate image”, harvard business school press: boston, m.a., pp. 289-302. 12. fombrun, c., shanley, m., (1990) “what‟s in a name? 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quality products as returns to reputations”, quarterly journal of economics, no. 98, pp. 659–679. 40. sobol, m.g., farrell, g., (1988) “corporate reputation: a function of relative size or financial performance?” review of business and economic research, no. 24, pp. 45–59. 41. srivastava, r.k., mcinnish , t.h., wood , r.a., capraro, a.j., (1997) “the value of corporate reputation: evidence from the equity markets “, corporate reputation review, no. 1, pp. 62-68. 42. stuart, h., (2002) “employee identification with the corporate identity”, international studies of management and organization, no. 3, pp. 28–44. 43. vergin, r.c., qoronfleh, m.w., (1998): “corporate reputation and the stock market”, business horizons, vol. 41, no. 1, pp. 19–26. 44. willamson, e.o., (1985) “the economic institutions of capitalism and firms, markets and relationship contracting”, free press, new york. reputacija i finansijske performanse preduzeća kao jedna vrsta nematerijalne imovine, reputacija omogućava preduzeću da upravlja očekivanjima i potrebama svojih stejkholdera. ona je jedno od važnijih alata u naporima svakog preduzeća da se održi i unapredi svoju konkurentsku poziciju. ova imovina se teško stiče, pa njeno kreiranje obično zahteva višegodišnje kvalitetne proizvode, dobre finansijske rezultate, stalne inovacije, responzivnost na zahteve stejkholdera, kontinuirano tehnološko usavršavanje, visok poslovni uspeh, itd. reputacija se kao resurs ne može imitirati, pa njena strateški značaj u portfoliju resursa jednog preduzeća raste, jer ona može da stvara diferencijaciju i barijere u odnosu na konkurente. svrha ovog rada je da istraži međuzavisnost reputacije kao nematerijalnog resursa preduzeća i njegovih finansijskih performansi. dva istraživačka pitanja istaknuta su u ovom radu: da li ostvarene finansijske performanse utiču na reputaciju i da li izgrađena reputacija utiče na finansijske performanse preduzeća. odgovori na ova pitanja mogu se b. krstić 46 dobiti detaljnijom analizom dokaza koje pružaju mnogobrojne empirijske studije realizovane u prethodnom periodu. rezultati ovog rada neminovno ukazuju na izraženu međuzavisnost, tačnije, međusobni uticaj reputacije i finansijskih performansi preduzeća. doprinosi sprovedenog istraživanja su od koristi menadžerima kako bi bolje razumeli značaj dobre reputacija za superiorne finansijske performanse i kako bi više resursa, vremena i napora usmerili u proces izgradnje dobre reputacije svoje kompanije. ključne reči: reputacija, nematerijalni resurs, finansijske performanse. 2719 facta universitatis series: economics and organization vol. 14, n o 2, 2017, pp. 117 126 doi: 10.22190/fueo1702117r review paper structural reforms of the banking sector regulatory approaches and implications 1 udc 347.734:005.44 jelena radojičić, borko krstić faculty of economics, university of niš, serbia abstract. this paper analyzes alternative regulatory approaches for structural reforms of the banking sector, triggered by the global financial crisis. the structural bank regulation measures proposed or adopted in several jurisdictions are based on the volcker rule in the united states, vickers commission's proposals in the united kingdom and liikanen report in the eu. despite the different approaches by legislatures, structural reforms have the same goal – a more resilient financial system. their common element is to draw a line between commercial banking and certain investment banking activities,, whose combination is seen as a source of systemic risk. structural reforms are designed to reduce the implicit government guarantees and moral hazard of banks. key words: financial crisis, systemic risk, structural reform, universal bank jel classification:g21, g24, g28, k22 introduction global financial crisis revealed regulatory failures that have allowed the systemic risk to grow unchecked, which requires revisiting regulatory approaches. pre-crisis capital regulation has not taken into account systemic effects (the social cost of failure). the regulatory response was raising capital requirements through basel iii and generally strengthening oversight and supervision. capital requirements do not affect the business model. basel measures relating to the bank size and scope are additional loss absorbency requirements for global systemically important banks and a capital surcharge of up to 2.5% imposed on banks is deemed systemically important. it turned out that failing financial institutions could not be identified on the basis of their business model. however, financial crisis has triggered a debate on the optimal size, organizational complexity, and range of activities of banks (viñals et al., 2013) received march 21, 2017 / accepted may 10, 2017 corresponding author: jelena radojiĉić university of niš, faculty of economics, niš, serbia e-mail: jelena.radojicic@eknfak.ni.ac.rs 118 j. radojiĉić, b. krstić and a reassessment of the economic costs and benefits of universal banks’ involvement in proprietary trading and other securities markets activities. structural separation of banks, widely seen as a useful complement to traditional prudential tools, began to form part of the post-crisis regulatory agenda. the various reform proposals aim at changing how banks organize themselves. the common element of all is to draw a line between retail banking and certain types of investment banking businesses whose combination is seen as a source of systemic risk. in order to understand economic impact of regulatory reforms, it is important to pay attention to their legal attributes which reflect society's post-crisis expectation on the role of banks (lehmann, 2014). 1. economic background on bank structural reforms the basic rationale for bank structural reforms is to insulate certain types of financial activities regarded as especially important for the real economy, or significant on consumer/depositor protection grounds, from the risks that emanate from potentially riskier but less important activities (gambacorta and van rixtel, 2013, p. 1). such a separation is nothing new in the united states but for many countries, particularly for continental europe, restrictions on universal banking would be new. glass steagall act (1933) prohibited the combination of investment banking and commercial banking within one banking group. legislation prohibited commercial banks with privileged deposit insurance coverage from engaging in securities activities, while simultaneously excluding investment banks from accepting deposits. the most important restrictions were lifted in 1999 by the grammleach-bliley act (lehmann, 2014). the proposed regulatory changes do not go as far as the previous strict separation. instead of introducing structural separation, the new measures aim to prevent systemic risks by separating bank's high-risk activities, primarily proprietary trading, from its 'core' business, such as deposit-taking or retail payment services. the starting point is that the banks which combine these activities are less safe or that their failure is more expensive for the community. universal banks became vulnerable to falling asset prices during the gfc because of the over-allocation of resources to trading and suffered dramatic losses (fsa, 2009). also, the crisis has shown that there are some pure investment banks (e.g. lehman brothers or bear stearns), some pure retail banks (e.g. irish banks, northern rock), and some universal banks (e.g. ing or rbs) who either failed or were absorbed or required exceptional government support (fernandez-bollo, 2013). although evidence on the probability of failure is indirect and mixed, the general conclusion is that greater reliance on investment banking activity does not lead to lower earnings volatility, or systematic risk declining and costs of failure of universal banks can be larger, since universal banking encourages size and complexity in fact, of the 28 g-sibs that have so far been identified by the financial stability board, 20 can be classified as universal banks (gambacorta and van rixtel, 2013). moreover, besides benefitting from retail deposit insurance (access to stable deposit funding, guaranteed by the state), large banks that combine trading activities with retail banking activities often benefit from their “too big to fail” (tbtf) status (implicit subsidies). tbtfs are being bailed-out by the state to prevent a failure that potentially has systemic consequences) (fsa, 2009) thus, expectations of explicit support lead to implicit guarantees. for this reason financial regulators have focused on reforms which limit the risk of taxpayer and deposit insurance money to be used to cover losses incurred by trading activities. the goal of the reforms is to separate activities that contribute to funding the structural reforms of the banking sector regulatory approaches and implications 119 economy from speculative activities which will reduce the market risks that banks may take at the minimum level needed to conduct the trading activities that are necessary to finance the economy (fernandez-bollo, 2013). 2. structural reforms: review and comparison structural regulation of banking sector is based on the volcker rule (dodd-frank wall street reform and consumer protection act of 2010, sec. 619) in the united states, recommendations of the independent commission on banking (chaired by sir john vickers) in the united kingdom (vickers (chair), 2012) and the recommendations made by the highlevel expert group (chaired by erkki liikanen) in europe (liikanen (chair), 2012). beyond this basic similarity, structural reform initiatives differ in scope (where they draw the separation line) and strictness (how thick that line is) (gambacorta and van rixtel, 2013) as shown in table 1. table 1 comparison of selected structural reform proposals volcker vickers liikanen institutional separation of commercial banking and certain investment activities ring-fencing: structural separation of activities via a ring fence for retail banks subsidiarisation: proprietary and higher-risk trading activity have to be placed in a separate legal entity deposit-taking institution may:  deal as principal in securities and derivatives 1 not permitted not permitted (but other group companies may do so) not permitted (but other group companies may do so)  engage in market-making permitted not permitted (but other group companies may do so) not permitted (but other group companies may do so)  perform underwriting business yes (underwriting in response to client/ counterparty demand) restricted permitted  hold non-trading exposures to other financial intermediaries unrestricted restricted (inside the group) unrestricted  investing in hedge funds and private equity not permitted not permitted (but other group companies may do so) not permitted (but other group companies may do so) holding company with banking and trading subsidiaries not permitted permitted permitted geographical restrictions no limitations for ring-fenced banks in the uk to provide services outside the european economic area no size threshold for application no yes; applies to all banks and building societies with deposits greater than £25 billion yes; applies to all banks with trading books larger than €100 billion, or trading assets more than 15-25% of balance-sheet source: table is based on (gambacorta and van rixtel, 2013, p. 3; viñals, et al. 2013, p. 15) notes: 1 u.s. federal government and agency securities, debt and securities issued by u.s. state and municipal governments and government sponsored enterprises, and derivatives on these securities are exempt from proprietary trading restrictions of the volcker rule. 120 j. radojiĉić, b. krstić the volcker rule is part of the u.s. dodd-frank act of 2010, with implementation beginning in 2015 through 2018. the rule is narrow in scope a prohibition of proprietary trading within the bank holding company while market-making activities on behalf of customers are allowed (gambacorta & van rixtel, 2013). prohibited proprietary trading is defined as: engaging as principal for the trading account of a banking entity in any transaction to purchase or sell specified types of financial instruments such as securities and derivatives. banks may invest in us bonds, underwriting, hedging activities, purchase and sale of securities for the account of its customers, investment in small enterprises, organization of private equity and hedge funds. otherwise, the volcker rule is quite strict. us is known for the highest level of separation in relation to other countries. the prohibition extends not only to individual banks but also to the entire banking group. the volcker rule is introduced in the so-called bank holding companies act of 1956 (amended in 2010) and it forbids the coexistence of trading activities and other banking activities in different subsidiaries within the same group. also, investments in hedge funds and private equity funds are not permitted, except banks are operating in accordance with the so-called “3 percent rule”: (1) the ownership of a bank in these funds must not exceed 3 percent of the total outstanding ownership rights of a fund, and (2) the aggregate value of all ownership rights a banking entity holds in all funds jointly must not exceed 3 percent of its tier-1 capital (krahnen et al., 2016). volcker's rules do not restrict performance of any other activity. for example, banks may invest in us bonds, underwriting, hedging activities, purchase and sale of securities for the account of their customers, investment in small enterprises, organization of private equity and hedge funds. on the one hand, the riskiest activities (economically useless “speculation”) are completely prohibited to banks. on the other hand, depository institutions may continue to offer banking services related to investment (useful banking services to clients). thus, the universal banking model remains completely legal (lehmann, 2014). in united kingdom, the vickers commission proposals are part of the financial services (banking reform) act of 2013 (final regulations are expected to be fully implemented by 2019). this legislation is quite broader in scope in that they exclude a larger set of banking business from the protected entity, including also securities underwriting and secondary market purchases of loans and other financial instruments. retail operations are separated from most market-based and non-european activities (the so-called “retail ringfence”) which should help insulate uk retail banking from global shocks and ensure the supply of credit in the economy (vickers, j. (chair), 2011). a narrow set of retail banking business (retail deposit-taking, overdrafts to individuals and loans to small and mediumsized enterprises) must be “ring-fenced” in a separate protected entity, with limited exposure to the rest of the bank intragroup. protected activities can coexist with others in separate subsidiaries within the same group but they are subject to tight constraints (gambacorta and van rixtel, 2013). the ring-fenced entity should be isolated from the group in the sense of separation of legal and operational links. these entities can be found at the head of a bank group (it is not allowed to have any exposure to other subjects, they cannot keep the action) and they must be free to make their decision independently of the long members of the group. transactions between a ring-fenced entity and a non-ring-fenced entity take place on a “third party basis” (separation of economic links). the proposal recommends increasing the loss-absorbing capacity of the ring-fenced entity through higher regulatory capital requirements (at least 10% of their risk-weighted assets) (krahnen et al., 2016). as a consequence, the depository institutions regulated by uk law will be particularly safe (mayer brown, 2014). structural reforms of the banking sector regulatory approaches and implications 121 based on the liikanen report, france and germany have initiated reforms in 2013 with the aim of reorganizing the banking sector (french law no. 2013-672 of 26 july 2013 on the separation and regulation of banking activities, hereinafter: the french act. i.e. gesetz zur abschirmung von risiken und zur planung der sanierung und abwicklung von kreditinstituten und finanzgruppen [law concerning separation of risks and restructuring and winding-up of credit institutions and financial groups], bgbl. 2013 i nr. 47, 3090. hereinafter: the german act). measures to depository institutions restrict proprietary trading and investing in hedge and leverage investment funds are applied from the beginning of july 2015. the french and german approach follow the ring-fencing approach of the uk but, like the us, these countries have a narrower focus. like ring-fencing in the uk, the main difference between the approaches in the us and french-german approach is that the former is based on institutional discharges and the latter on the functional separation or subsidiarization of risk activities. legislation gives the option of performing these activities within a specific trading entity (which is separate from the retail and commercial entities) which must follow a number of rules (lehmann, 2014):  it must be a separate legal entity which is exclusively engaged in risky activities.  it cannot accept deposits or provide payment services to customers.  it has to comply with capital requirements on an individual basis. in this way deposits will be isolated from any ill losses arising from risky activities while maintaining the ability of the banking group to conduct such a profitable activity. these measures affect only systemically important institutions, which means that not all banks are covered. banking groups are divided into entities that receive deposits and entities engaged in the business trading where trading entities must be subsidiary and not vice versa as opposed to regulatory approach to structural changes in the uk (lehmann, 2014). both the german and french legislation aim at separating speculative activities from deposit-related and customer-orientated activities but there are differences in the definition of activities that cannot deal with depository institutions and in defining the relationship between depository institutions and subsidiaries. the french legislation imposes that proprietary trading and unsecured financing to alternative investment funds above a certain threshold (the “speculative activities”) must be carried out by a trading subsidiary separate from the retail banking entity (mayer brown, 2014). the subsidiary must have a commercial name that is distinct from that of the parent company and different managers which is not the case in germany (lehmann, 2014). the german legislation specifies certain high-risk activities (above a certain threshold in terms of overall trading activity), including proprietary trading, credit and guarantee business with certain alternative investment funds and certain forms of trading in one’s own name with the exception of market-making that must be ring-fenced and transferred to a separate trading entity (mayer brown, 2014). unlike the french act, the german act imposes that the subsidiary must refinance itself independently from the parent company and that transactions with other group members are to be considered as being concluded with third parties (lehmann, 2014). although initiated by the liikanen report, legislative proposals by the european commission on structural reforms of eu banks (submitted on 29th of january 2014) diverges to a certain extent. this proposal includes elements of the approach in the united states and individual eu states. key points of this approach are: 122 j. radojiĉić, b. krstić a) the commission’s proposals (european commission, 2014) envisaged prohibition of proprietary trading in financial instruments not only for individual depository institutions but also for the parent company and its subsidiaries or banking groups (such as the volcker rule). the council considered that it would be better to regulate proprietary trading in a stricter way rather than to prohibit it and proposed a mandatory separation of proprietary trading from the 'core' activities of a credit institution. investing in alternative investment funds is also prohibited, as well as holding shares in any other entity that engages in proprietary trading (council of the european union, 2015). the eu-style volcker rule is limited to systemically important institutions. b) legislation proposed placing other high-risk trading activities (such as marketmaking risky derivatives and complex securitization) and a separate legal entity within the banking group "subsidiarization" (such as the french and german law). unlike liikanen, the eu proposal does not mandatory separate trading activities from retail and commercial banking. instead, legislation provides that national regulators would carry out risk assessment of large banks' trading activities. if a competent authority finds excessive risks, it could require those trading activities to be separated from the 'core' credit institution. therefore, subsidiarization does not happen automatically – it is optional. a further feature of the french and german law relating to the status of trading entities. the proposal requires that trading entities must be legally, economically and operationally separate from the deposit-taking institution (lehmann, 2014). banking group should be formed of two different subgroups: one for basic banking activities and one for trading. ring-fencing of commercial entities resembles the law in the uk: the trading entity’s insolvency must not affect the deposit bank, the trading entity contracts with members of the group should be “length arms”, the two entities’ management structures should be independent and their names should be different (lehmann, 2014). on the basis ofthe final text of the regulation adopted by the european parliament and council by june 2015, it is proposed that the proprietary trading ban would apply as of january 1, 2017 and the effective separation of other trading activities would apply as of july 1, 2018 (mayer brown, 2014). to accommodate existing national rules in member states and to avoid unnecessary overlapping, the council proposes that the member states address excessive risk-taking in banks' trading activities in one of the following two ways: 1) either through national legislation that would require large banks to ring fence their core activities, or 2) through measures that would be imposed by competent authorities in accordance with the regulation (council of the european union, 2015). 3. structural reforms: costs and benefits while the structural reforms are at different stages of implementation, there is a strong ongoing discussion on what possible economic consequences (intended and unintended) are to be expected (krahnen et al., 2016). the table 2 provides an overview of the benefits and costs of structural banking reforms. structural reforms of the banking sector regulatory approaches and implications 123 table 2 structural reforms: costs and benefits benefits ensuing from structural banking reform costs imposed by structural banking reform risk reduction  lowers complexity  reduces financial interconnectedness risk implementation related costs  regulatory ambiguity  supervising the regime  compliance burden and costs on financial institutions and host country authorities improving resolvability lower diversification benefits protection of depositor money  moral hazard market liquidity and borrowing costs  through impact on trading and market making  through subsidiarization of universal banking group (restrictions on intra-group exposures; through adverse impact on cross-subsidization of businesses) risk migration to  shadow banking system,  exempt institutions,  other markets and countries source: table is based on: (krahnen et al., 2016, p.18, viñals et al., 2013) structural reform contributes to financial stability by reducing complexity and interconnectedness and by facilitating lower-cost bank resolution:  risk reduction. the structural measures proposed by the us, uk, and eu aim to prevent systemic risks to the financial system that could be caused by the failure of large, highly complex and interconnected credit institutions. proprietary trading is seen as a source of excessive risk-taking which is induced by an implicit subsidy from lower risk universal banking activities to higher risk market trading activities (krahnen et al., 2016). regulatory proposals are designed to reduce systemic risk by: shielding the institutions carrying out the protected activities from losses incurred elsewhere; preventing any subsidies from supporting the protected activities (e.g. deposit guarantee schemes) from cutting the cost of risk-taking and inducing moral hazard in other business lines and reducing complexity and possibly the size of banking organizations (gambacorta and van rixtel, 2013). uk and eu proposals permit proprietary trading and high-risk investments to survive within the banking group while volcker rule can capture benefits at the group level (viñals et al., 2013).  improving resolvability. the banking supervisor, especially within a short time period, will have a difficult task to unravel the bank’s loan exposures and proprietary trading exposures in a crisis situation if all lines of business are fully integrated into one corporate entity. structural reforms could reduce complexity and facilitate better supervision, hence reducing the risk of failure and lowering resolution costs in the event of failure. (krahnen et al., 2016, viñals et al., 2013) protection of taxpayers' money should be increased, as smaller failing banks can be resolved without recourse to public money. according to the european commission, taxpayers’ support for bank recapitalization, guarantees, asset relief measures and similar solutions in 2014 amounted to approximately €1.6 trillion or 13% of eu gdp. the costs of financial crises are typically very large and go far beyond the direct costs of bank bail-outs (bcbs, 2010). 124 j. radojiĉić, b. krstić  protection of depositor money. deposit insurance reduces the cost of funding for banks, and reduces incentives for depositors to monitor bank’s risk-taking behavior. in the absence of sophisticated and powerful deposit insurance entity, which is capable of correctly assessing bank risk-taking, trading activities splitting is the direct method of protecting banks' deposit taking business and deposit guarantee schemes (krahnen et al., 2016). the costs of the structural reform proposals may arise in several ways:  implementation related costs. regulatory ambiguity and the blurred dividing line between proprietary trading and permitted trading can result in misidentification of permitted or prohibited activities (e.g., proprietary trading vs market making or risk hedging). this is relevant for the volcker rule and the french and german reform proposals while liikanen group recommends placing the market making outside the ringfence alongside proprietary trading. significant costs arising from substantial compliance and reporting requirements apply to banks covered by the volcker rule and also from the unwinding and decomposing integrated companies (viñals et al., 2013).  lower diversification benefits. intended effect of the reforms would be to lead to less diversified banks (diversification may be retained at the group level whenever subsidiarization is allowed) and less benefits derived from “too big to fail” status (gambacorta and van rixtel, 2013). although explicit size restrictions are not part of the legislative proposals, reforms could also lead to smaller institutions (gambacorta and van rixtel, 2013). the results of empirical studies of economies of scale and scope in banking are not unambiguous. although some studies point to certain benefits related to the size and diversification of the financial institutions, research generally provides confirmation of the conclusion that the major banks are riskier and that they are characterized by greater reliance on non-interest income and less stable financial structure (bertay et al., 2013). besides benefitting from diversification, large banks that combine trading activities with retail banking activities have access to implicit subsidies (i.e. being bailedout by the state to prevent a failure that potentially has systemic consequences) (fsa, 2009). in contrast, others hold the view that economies of scale in banking do not only exist but are significant and hence imposing limits on bank size would have unintended consequences (mester, 2010).  market liquidity and borrowing costs. banks, through proprietary trading and market making, are major providers of liquidity. separation of some or all of trading business into a separately capitalized unit would endanger the business model of these market makers and proprietary traders and market depth and market liquidity would be reduced (thakor, 2012; pwc (2014). this can make harder for companies to raise funds in the corporate bond markets, since reduced liquidity usually results in investors' demand for higher prices. also, the increase in borrowing costs is driven by the rise in prices of banking products and services and the reduction in market liquidity due to retrenchment of bank activity in capital markets (pwc, 2014).  tightening activity restrictions on regulated banks may redistribute systemic risk. both proprietary trading prohibition and trading separation may create additional incentives for growth of the shadow banking sector by pushing certain activities to unregulated entities where they can still exert systemic risk. this is why vickers commission preferred ringfencing over full separation (viñals et al., 2013). structural reforms of the banking sector regulatory approaches and implications 125 finally, banks are all starting to comply with the proposed structural reforms from different places, with different business mixes, operating models and legal entity structures. banks could incur significant one-off costs as a result of structural separation: program management, legal and consultancy costs, finance and it infrastructure, human resource management, procurement functions and contract novation, and re-documenting client relationship. it is estimated that eu banks affected by structural reforms could face one-off implementation of around €9 billion and additional annual costs could amount to €21 billion (pwc 2014). conclusion the structural banking reform proposals by volcker, vickers and liikanen differ substantially (which activities are to be separated, and what legal, organizational and financial restrictions will be imposed on separated activities) and they are at different stages of implementation. the main difference is reflected in the fact that there is no ban on proprietary trades outside the ring fence in the eu, while the us adopted stricter ban on banking organizations to engage in proprietary trading and restrictions on banks' participation in private funds. although structural reforms are difficult to implement and coordinate internationally and although they are costly for financial institutions, their implementation can lead to direct financial stability benefits (gambacorta and van rixtel, 2013). the structural banking regulations specify a regulatory framework that creates preconditions for strengthening the connection between banking services and the real economy by protecting those services critical for the real economy (socially important retail banking activities) from excessively risky speculative trading activities. this paradigm shift from trading activities towards traditional core banking business is a reflection of post-crisis view of banks’ emphasized social role. references bcbs (2010). an assessment of the long-term economic impact of stronger capital and liquidity requirements. basel: bank for international settlements. bertay, a. c., demirgüç-kunt, a. and huizinga, h. 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strukturne reforme, univerzalna banka https://www.researchgate.net/deref/http%3a%2f%2fwww.fsa.gov.uk https://www.mayer/ facta universitatis series: economics and organization vol. 12, n o 4, 2015, pp. 347 356 1 earnings management and its relations with corporate social responsibility  udc 005.35 yousf almahrog 1 , awidat marai 1 , goranka knežević 2 1 al-gabel el-gharbi university, faculty of accounting, libya 2 singidunum university, faculty of business in belgrade, serbia abstract. the ethics of financial reporting assumes a center stage in the corporate world in the background of an emerging understanding of corporate social responsibility (csr). we review the literature on the link between earnings management (em) and csr and reveal that there are two contradictory perspectives. one perspective assumes that em is negatively associated to csr, while the other argues that em and csr are positively related. these perspectives are based on the competitive existence theories such as agency, singling, stakeholder, legitimacy theories. while, the negative relationship between em and csr perspective is in line with the legitimacy, agency and singling theories, the positive relationship is in accordance with stakeholder theory. key words: earnings management, corporate social responsibility, stakeholder theory, legitimacy theory, agency theory introduction accounting earnings are one of the most commonly used measures of firm performance. given that the flexibility of accounting standards provides the executive managers of a firm with considerable opportunities for practicing discretion over reported earnings, it is not surprising that executives manipulate earnings when the interests between them and stakeholders are conflicted. this opportunistic behavior is known in the literature as earnings management (em). it has been acknowledged that the practice of em may reduce the financial reports‟ reliability and quality, their usefulness for investment decisions and the shareholders‟ confidence in financial statements. in addition, em has a negative impact on a firm such as, losing stakeholders‟ support, legal actions could be taken by regulators against the firm, the firm‟s products and services may be boycotted, it is likely to be deemed as illegitimate by the local community and it could be exposed by the media. received march 13, 2015 / accepted december 29, 2015 corresponding author: goranka knežević singidunum university, danijelova 32, belgrade, сербиа e-mail: gknezevic@singidunum.ac.rs 348 y. almahrog, a. marai1, g. knežević ultimately, these actions by outsiders may damage the firm‟s reputation, and could result in the managers losing their jobs. on the other hand, in the last few decades, the corporate world has been predisposed by the growing awareness on corporate social responsibility (csr) and become more conscientious on how they generate and expend profits. currently, firms are more concerned about their ethical and moral behavior, and their relationship with relevant societal interest groups. it has been accepted that firms can gain multiple advantages through building a positive image among the stakeholders, and in establishing social bonds with employees and the local community, which generates reputational gains. in practice, those companies who implement csr activities are bound to provide transparent and reliable financial information. some authors demonstrate a commitment to ethical and accountable behavior. however, there is an argument that csr can be used as an entrenchment mechanism to achieve managers „self-interest objectives by distorting earnings information. hence, the aim of this paper is to review the literature on the link between em and csr. the remainder of this paper is organized as follows. section 1 provides em background. section 2 presents background on csr. section 3 reviews the literature and relevant theoretical perspectives on csr and em. in the last section conclusion is presented. 1. em background accounting earnings are one of the most significant components in the financial reporting to provide information about a company‟s performance to various stakeholder groups who are interested in the company‟s activates, such as investors, the government, professional institutions, lenders and employees. since these various stakeholder groups would not have the authority to access this information compared to firm‟s insiders, financial reporting is considered as the main resource used by investors to make investment decisions. the revelations of massive accounting scandals involving large corporations (e.g. enron, worldcom, etc.) indicate that managers have incentives to use their discretion over reported earnings either to mislead shareholders about the firm‟s underlying financial performance or to gain some private benefits at the expense of other stakeholders (healy and wahlen, 1999). the flexibility of the generally accepted accounting principles (gaap) allows managers to use some discretion to estimate reported earnings that might be not accurately reflect the company‟s underlying economic conditions (prior et al., 2008). this opportunist behavior of using managers‟ discretion is known as earnings management (em). em is the process of taking deliberate steps within the constraints of gaap to bring about a desired level of reported earnings (davidson et al. 1987). similarly, schipper (1989, p.92) states that em is “a purposeful intervention in the external financial reporting process, with the intent of obtaining some private gains”. in addition, parfet (2000) illustrates that em is not entirely a bad thing if reasonable and proper practices of em are used in a well-managed business and deliver value to shareholders. in the same vein, beneish (2001) indicates that opportunistic and informative are two perspectives of em. while opportunistic em seeks either to mislead investors or to secure managers‟ jobs, reputations, and compensation within the firm, the informative em aims to provide private information to the investors about the firm‟s future performance. in order to determine whether em is opportunistic behavior or earnings management and its relations with corporate social responsibility 349 informative exercise, it is important to identify managers‟ intent. hence, many attempts have been made in the literature to identify various motivations to manage earnings. however, in some case the opportunistic earnings managing leads to financial fraud, for more see (marai and pavlović, 2013). according to healy and wahlen (1999, p. 370), there are three major incentives to manage earnings: capital market, contractual arrangements and regulatory considerations. with regard to capital market, previous capital market literature indicates that issuing equities and beating or meeting analysis‟ forecasts may motivate managers to manipulate earnings (chen et al., 2010; hafzalla, 2009; payne and robb, 2000; healy and wahlen, 1999). in terms of contractual arrangements, managers have incentives to manipulate reported earnings to influence borrowing and compensation contracts in order to avoid the violation of debt covenants (defond and jiambalvo, 1994) or to gain better bonus rewards (healy, 1985). as a result of the external pressure from authorities on the firm regarding product prices and market share, mangers may prefer to manage earnings to give the impression that their firms are less profitable than they actually are (prior et al., 2008). in addition to these motivations, prior et al. (2008) state that achieving mangers‟ private gains is one of the main reasons why mangers manipulate reported earnings. it is worth mentioning that there are two common types of em: real and accrual-based em. in terms of real em, managers can manipulate earnings via modifying corporate transactions, such as reducing expenditures on research and development, advertising, employee training to increase earnings (guillamon-saorin and osma, 2010). although this type of em is less likely to be detected by auditors and regulators, it is generally believed to be a more costly form of em (hong and andersen, 2011). on the other hand, accrual-based em occurs when managers used their judgment to estimate firm‟s accruals portion without making any changes to real corporate activity such as estimating provisions for dubious accounts and deferring tax assets (guidry et al., 1999; mcnichols and wilson, 1988). because this type of manipulation is accounting based, it is generally believed to be a less costly form of em compared to real em, and thereby, preferred by managers (beneish, 2001). it has been argued that em is more likely to reduce the financial reports‟ reliability and quality, their usefulness for investment decisions and the shareholders‟ confidence in the financial statements (chen et al., 2010). in addition, fombrun et al. (2000a) argue that em has a negative impact on a firm such as losing stakeholders‟ support, legal actions could be taken by regulators against the firm, the firm‟s products and services may be boycotted, it is likely to be deemed as illegitimate by the local community and it could be exposed by the media. such actions by outsiders may damage the firm‟s reputation, and could result in the managers losing their jobs (prior et al., 2008). in order to avoid or mitigate opportunistic em negative consequences, managers have incentives to compensate stakeholders through engaging in corporate social responsibility (csr) activities. 2. csr background according to the classical viewpoint, a firm is only accountable to its shareholders and therefore its role in society is to maximize its economic value, which in turn increases the wealth of its shareholders. hence, managers‟ responsibility is to act in the interest of the firm‟s shareholders and they have no right to engage in social projects that 350 y. almahrog, a. marai1, g. knežević do not maximize the returns of the business (friedman, 1962). in general, the classical viewpoint assumes that the only social responsibility of a business entity is to use its resources to engage in activities that increase its profits without resorting to deception or fraud (friedman, 1962, p.112). however, in the last few decades, the role of corporation has changed as a result of csr developments. thus, corporations are now not only accountable for generating profits for shareholders but also have responsibilities in terms of how they generate these profits. thus, firms have been forced to become more concerned about their ethical and moral behavior as well as their relationship with societal interest groups and their social responsibility (held, 1970). given that csr is related to complex issues such as environmental protection, human resources management, health and safety at work, local community relations, and relationships with suppliers and customers, engagement in such activities might be costly for firms (branco and rodrigues, 2006). however, several incentives have been reported in the literature to motivate csr implementation in general and motivate companies to implement natural environmental management in particular. for example, branco and rodrigues (2006) and orlitzky et al. (2003) argue that csr activities assist firms to enhance their transparency and build a positive image among stakeholders, which in turn helps them to gain support from the society in which they operate. according to fombrun et al. (2000b), a positive image helps managers to establish social bonds between the company, its employees and the local community, and generates reputational gains that improve the firm‟s ability to attract resources, enhance its performance, and build a competitive advantage. in addition, fombrun et al. (2000b, p.85) describe five complementary motivations that induce firms to engage in and pursue csr activities: (1) build community ties and maintain a license to operate; (2) increase morale and attachment of current employees; (3) prepare and attract potential employees; (4) develop potential customers; and (5) enact an environment where the company can prosper. furthermore, branco and rodrigues (2006) demonstrate that, by engaging in social activities, firms can gain support from their various stakeholders and obtain more favorable regulatory treatments, endorsements from activist groups, legitimacy from the community, and favorable coverage from the media. therefore, these activities may help firms to avoid the potentially detrimental impact of government actions. thus, engaging in corporate social responsibility may have positive impacts on the firm‟s reputation within society and may enhance the position of the managers within the firm, particularly when they practice their duties in accordance with the principles of csr. despite the advantages of engaging in csr, it has been argued that managers might have incentives to use csr activities as a strategic tool to compensate stakeholders influence how they perceive the real future of the firm, distracting attention from any activities that reduces financial reporting quality (hemingway and maclagan, 2004). in addition, demacarty (2009) argues that skillful managers may be able to profit personally through measuring csr, and that this could be the reason for the positive relationship between csr and financial performance reported in previous studies. as a result, csr may be adopted by firms in order to create an impression of transparency among the stakeholder groups and then legitimize their activities in order to gain stakeholders support (kim et al., 2012). from this viewpoint, engaging in csr activities is driven from opportunistic behavior rather than moral obligations. earnings management and its relations with corporate social responsibility 351 3. em and csr perspectives the separation between ownership and control in modern corporations, together with the presence of information asymmetries within companies, spawn the possibility of opportunistic behavior by managers from those of the owners, and hence pursue selfinterning objectives (the agency problem) (prior et al., 2008). given that managers practice em either to gain some private benefits at the expense of other stakeholders or to mislead shareholders about the firm‟s underlying financial performance (healy and wahlen, 1999), it has been acknowledge that em is considered as a type of agency cost because managers look after their own interests by releasing financial reporting that do not reflect an accurate economic picture of the company (prior et al., 2008). on the other hand, corporate reported information is viewed as a form of monitoring mechanism used by investors and other external users to reduce the information asymmetry problem (huang and zhang, 2011). hence, information disclosed in financial reporting is considered as one of the possible solutions to reduce the agency problem between managers and shareholders (eng and mak, 2003). theoretically, em and csr are linked through two perspectives. first, it has been argued that firms with strong commitments to csr are less likely to manage earnings since they do not hide unfavorable earnings realizations and, therefore, conduct no em (chih et al., 2008). since em is perceived as an irresponsible act with csr principles, choi et al. (2013) argue that firms with strong commitment to csr are more prone to act in a responsible way when reporting their financial statements. likewise, kim et al. (2012) point out that companies that expend their efforts and resources in designing csr programs and implement these programs to address the ethical interests of stakeholders follow more transparent and reliable financial reporting and less likely to manage earnings. inversely, the second perspective suggests that managers who manage earnings may strategically use csr information to disguise their opportunistic behavior (prior et al., 2008). according to prior et al. (2008), managers who engage in em may resort to csr to deal with their stakeholders‟ activism and vigilance (prior et al., 2008). in line with this argument, choi et al. (2013) argue that managers who act in pursuit of private benefits by distorting earnings information are able to entrench themselves through engaging in csr activities. empirically, the studies of choi et al. (2013); kim et al. (2012); and chih et al. (2008) found that em is negatively related to csr suggesting that firms with strong commitment to csr are less likely to engage in em. on the other hand, several studies have found that em and csr are positively related (gargouri et al., 2010; prior et al., 2008; patten and trompeter, 2003) and suggesting that firms with a higher level of em resort to csr activities to disguise managerial opportunistic behavior. the stakeholder theory offers a beneficial foundation for research into the connection between em and csr. according to the stakeholder theory, csr is seen as obligatory for the firm to discharge wider accountability norms by providing information to relevant stakeholders (buhr, 2001; guay et al., 1996). the stakeholder theory is about groups and individuals who can affect or be affected by the organization, and how the organizations manage those groups and individuals (freeman, 1984). the theory further views that organizations have a duty and obligation to a wider range of stakeholders (buhr, 2001; guay et al., 1996) and the managers decisions need to incorporate the 352 y. almahrog, a. marai1, g. knežević interests of all stakeholders (grougiou et al., 2014). however, this perspective provides a prescription for how managers can undertake strategies to manage and treat their various stakeholders; it does not have a direct role in predicting managerial behavior in practice (deegan, 2002). since the firm is perceived as a multilateral set of relationships amongst stakeholders, grougiou et al. (2014) indicate that since mangers attempt to attend a multilateral set of stakeholders objectives, the information asymmetry between mangers and stakeholder is high. the existence of information asymmetry provides managers an opportunity to practice em. further to this, hoque (2006) argues that managers manipulate earnings to improve their private interests at the expense of other stakeholders. moreover, grougiou et al. (2014); and sun et al. (2010) illustrate that companies that engage in csr to negotiate diverse stakeholders interests are inadvertently expected to practice em. thus one can assume a positive relationship between em and csr in the stakeholder theory framework. since the engagement with csr is one of the management strategies to endorse firm‟s legitimacy (grougiou et al., 2014), we looked into the views of the legitimacy theory on our central issue. the legitimacy theory is perceived as a generalized perception that the actions of any entity are desirable within some socially constructed system of norms, values, beliefs and definitions (suchman, 1995, p.574), argues that an organization activities must be legitimate in the eyes of society if it is to be allowed to continue its operations. hence, if a company loses its legitimacy, society may revoke its contract and prevent it from continuing its operations (deegan and rankin, 1996; guthrie and parker, 1989). various strategies that firms can adopt in order to maintain their legitimacy within the society in which they operate, and all these strategies can be involved to make social disclosure as a means of showing that firms are conforming to society‟s expectations (dowling and pfeffer, 1975). although a firm may choose csr to maintain or increase perceptions of its legitimacy (patten, 1992), it may use this as a means of anticipating or avoiding social pressure as well as enhancing the firm‟s image or reputational status (gray et al., 1988). in terms of em, sun et al. (2010) indicate that managers who manipulate earnings tend to realize that csr can be used to maintain the firm‟s legitimacy, specifically with social and political stakeholders. thus the csr is seen as a means of informing stakeholders on the wider interests of the firm and of its accountability which prompts the firm to behave in a socially responsible manner. it is also possible that managers would be involved in activities that could indirectly harm the company and stakeholders except managers. the separation of ownership and management of a company, together with existence conflicts problem and information asymmetry, could create serious problems because mangers are more concerned about their job security, rewards, ability to remain in power, and to maximize their own wealth (morris, 1987). agency problems occur and conflicts arise between managers and owners when the managers act for their own benefits rather than optimizing the firms‟ value from the stakeholders‟ viewpoint (watts and zimmerman, 1986). information asymmetry occurs when managers have superior access to the information as compared to the owners (fields et al., 2001). while managers work in the firm every day and are knowledgeable about all business transactions and affairs, stakeholders, on the other hand, depend on periodic sources of information, such as annual and interim reports to enable them to valuate firm‟s value. thus, information asymmetry will be higher if the quality of information is low. managers could undertake opportunistic em to achieve their objectives, which in turn, increasing firm‟s agency cost. since agency relationships suffer earnings management and its relations with corporate social responsibility 353 from the problems of conflict of interest and information asymmetry, an optimal solution should be discovered to control such problems. several solutions have been introduced in the literature to solve firm‟s agency problems. for example, watts and zimmerman (1986) argue that the transparency and accountability system is one of the solutions that should be put in place in order to avoid agency problems. jo and kim (2007) argue that em occurs less in companies that disclose more information on their social activities, because when the information transparency is increased, it is expected that the information asymmetry between managers and investors will decrease, which will enable investors to detect em. likewise, eisenhardt (1989, p.60) states that “….since information systems inform the principal about what the agent is actually doing, they are likely to curb agent opportunism because the agent will realize that he or she cannot deceive the principal”. similarly, shleifer (2004) argues that manipulation of earnings occurs less often in corporations with a strong commitment to csr. in addition, chih et al. (2008) state that a strong commitment to csr principles prevents managers from using their opportunistic discretion over earnings. finally, in terms of the signaling theory, gray (2007) illustrates that firms with highquality information tend to use csr as an alternative to the classical financial reporting, while low-quality information companies choose non-disclosure, consistent with constrained accounting information. in addition, gray argues that the quality of company reports is a signal to investors and financial markets that managers are able to control social risks within the company. likewise, sun et al. (2010) indicate that corporate environment disclosure as a part of csr is a signal to investors and other powerful and economic stakeholders that the company is actively taking part in csr and that its market value is in good condition. according to the signaling theory, a company discloses information to reduce information asymmetry and to signal to investors that it is performing better than its competitors (álvarez et al., 2008; miller, 2002). however, hughes (1986) states that the credibility of information provided by a firm is an essential element in ensuring lower information asymmetry. given that em is more likely to occur when information asymmetry is high, the signaling theory assumes that csr information is used as a means to reduce the information symmetry (agency problem) between companies and their investors. therefore, based on the notion that csr information is a useful tool for reducing information asymmetry, prior studies predicted a negative association between csr information and information asymmetry (heflin et al., 2005; brown et al., 2004; coller and yohn, 1997; welker, 1995), which indicates a negative relationship between em and csr. conclusion the aim of this paper is to review the link between em and csr. this review reveals that em and csr are linked through two contradictory perspectives. since em is perceived as an irresponsible act and inconsistent with csr principles, the first perspective argues that firms with strong commitment to csr are more prone to act in a responsible way when reporting their financial statements. on the other hand, the second perspective argues that csr can be used as an effective tool in dealing with stakeholder activism and vigilance when managers manipulate earnings. 354 y. almahrog, a. marai1, g. knežević in line with these perspectives, it can be concluded that the empirical previous studies have found mixed and contradictory results. while several studies find that em and csr are negatively related, others find that em and csr are positively related. references 1. álvarez, i. g., sánchez, i. m. g. domínguez, l. r. 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(1986) positive accounting theory, new jersey: prentice hall. 57. welker, m. (1995) disclosure policy, information asymmetry, and liquidity in equity markets, contemporary accounting research, vol. 11 (2):801-827. upravljanje dobitkom i njegova veza sa korporativnom društvenom odgovornošću u korporativnom svetu danas, etika finansijskog izveštavanja podrazumeva i razumevanje koncepta korporativne društvene odgovornosti. istražili smo dostupnu literaturu pokušavajući da uspostavimo vezu između upravljanja dobitkom i korporativne društvene odgovornosti i kao rezultat došli smo do zaključka da su to dve potpuno različite perspektive. jedna podrazumeva da je upravljanje dobitkom negativno korelirano sa korporativnom društvenom odgovornošću, dok druga dokazuje da su pozitivno korelisane. ove perspektive su zasnovane na teorijama kao što su agencijska, teorija signala, teorija stejkholdera i teorija legitimnosti. negativna veza između upravljanja dobitkom i korporativne društvene odgovornosti je u skladu sa teorijom legitimnosti, agencijskom i teorijom signala, dok je pozitivna veza u skladu sa postulatima teorije stejkholdera. ključne reči: upravljanje dobitkom, korporativna društvena odgovornost, teorija stejkholdera, teorija legitimnosti, agencijska teorija plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 1, 2014, pp. 47 59 review paper role of marketing events in the development of tourist destinations  udc 658.8:338.48 vukašin šušić 1 , jovica mojić 2 1 faculty of economics, university of niš, serbia 2 phd candidate at the faculty of economics, university of niš abstract. the aim of the research study is to analyze and highlight the basic guidelines and potential for development of events tourism in specific tourist destinations. a marketing event involves planning, segmentation of target groups, effective use of communications, work with sponsors and volunteer organizations, promoting events, analyzing the budget, and even providing logistics so that the whole event does not experience failure. the main objective of this paper is to highlight the role of marketing events in the animation and attraction of more visitors and its importance in the promotion of tourist destinations. it also highlights the importance of developing a permanent event as an extremely important component of the attractive factors of tourism in order to build brand destinations. research has shown that the organization of events can contribute to increasing investment, affect the development of the tourism industry, increase economic growth and valorization of natural and anthropogenic resources of tourist destinations. key words: marketing events, tourist destinations, economic role, promotion. introduction an event as a deliberate and focused human activity occurred for the first time a long time ago, almost at the very beginning of ancient civilizations. since the events in modern terms encompass a broad conceptual basis, the occurrence of various events not linked to the same period of time and their development walked in step with the general economic and social development. it is obvious that the economic emergence of events dates back to the society of organized human life, but the study of economic events and especially its management aspects are of a recent date (andrejević, grubor, p. 3).  received august 30, 2013 / accepted march 31, 2014 corresponding author: vukašin šušić faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 693 • e-mail: vukasin.susic@eknfak.ni.ac.rs v. šušić, j. mojić 48 finding out about an event promotion is the basic instrument of the communicative character of the marketing mix. promotion of tourism is the process of mass communication between suppliers and users of tourism products/services, where the subject of communication is the exchange of information that can stimulate sales of the product/service. in fact, promotion is one of the planning instrument that is used to attract visitors and increase the total profits for the organizers of the event. understanding and using the model combinations of forms of promotion is essential in order to meet the objectives of the marketing plan for the event. the main role in promoting event tourism is controlled coordination of all efforts by the seller to establish the flow of information and persuasion with the aim to sell the event. profit for sellers and memorable experience for visitors are the two main objectives of markenting events (finch, 2012, p. 146). marketing experts are often unable to see beyond the basic motivational factors of events, while visitors, as a rule, view them as products with a large number of uses. there are many potential benefits of events for visitors: a new experience, fun, a learning experience, an exciting result, an opportunity to meet other people, opportunities for shopping, drinks and food, the ability to see something unique and so on (vagen karlos, 2009, p. 68). therefore, the promotion of benefits can be used to inform and stimulate tourism demand to purchase, accelerate the decision-making process and indicate the usefulness of visits to a particular destination. tasks promotion is directed towards creating awareness about the tourism product/service on the market, creating a positive image of the product/service and its better positioning. to begin the research, parallel with the review of the literature, it is useful to define the role of event marketing, marketing mix instruments to identify the events, determine the basic marketing objectives, design and develop the product concept of event, choose a strategy of promoting tourist destinations, with the aim to establish a marketing mix and execute promotion events in the integrated marketing communications, and present the results of research marketing events in serbia. 1. literature review social and economic development, raising living standards, altered requirements and consumer expectations of service offer, increasing leisure time, changes in lifestyles of modern consumers, etc., have resulted in the development and improvement of specific elements of the service economy, and economic defining of events. most authors agree that an event in economic sense is a part of service economy, and since it is itself service economy in global terms, dynamically evolving approaches to certain events are characteristics of the environment in which the individual authors work. with their diverse influences and application, events are now essential to the process of branding tourist places, cities, towns and regions. the brand is a name or a symbol which fully represents the product in the minds of consumers creates an overall impression of an event. that is why nowadays, there are special professional event planners who are engaged in elaborating the details of individual events in order to make them perfect. in modern sense, marketing is oriented towards building relationships, both with consumers and with suppliers, stakeholders, factors selected environments, as well as the total public (capon, hulbert, 2001). besides all the prominent characteristics of modern marketing, there is its consumer orientation. in strategic terms, the modern marketing role of marketing events in the development of tourist destinations  49 event focuses on building beneficial relationships and partnerships in the selected environment management events. in professional literature (hall, 1997), the marketing event management function includes events, which are used to keep contact with the participants and visitors (event consumers), identifying their needs and motivations, developing products that meet these needs and building communication programs, which express intentions and goals of events. the effectiveness of marketing events can be achieved by strengthening its consumer orientation, insisting on achieving satisfaction of visitors to the program of events, services provided and offer products associated with maintenance of events. the program of events is supposed to be full of examples of cultural, sports and other activities that take place in tourist destinations. in this way, an optimum marketing effectiveness is achieved by combining the marketing mix of events. the managers of the event deal with finding the optimal combination of marketing mix of events. the instruments of marketing mix events are under full control of the management, and enable the achievement of planned objectives of the event, but also a competitive advantage in the environment chosen event. to find the optimal combination of marketing mix, it is essential to understand the characteristics of the selected environmental events, i.e. the tourist destination. over the past few years, an increasing number of authors have demonstrated the importance of understanding the marketing domain applied to events (allen, 2004, hoyle, 2002, masterman, wood, 2006, supovitz, 2005) in addition to basic marketing body of knowledge (brassington, pettitt, 2003, dibb et al. 2006, jobber, 2004, kotler et al. 2005). 2. economic role of marketing events marketing is focused on identifying and meeting individual and social needs. simply put, marketing means comfort while earning profits, but it is also the process by which a generation of ideas, goods and services are planned and implemented, their price determined, involves promotion and distribution, in order to realize the exchange that will meet the goals of individuals and organizations. in the technical sense, marketing is an organizational function and a set of processes of creating, communicating and delivering value to consumers, as well as customer relationship management, so as to obtain benefits for the organization and its stakeholders (american marketing association, 2004). product events should allow market supply of planning events, as well as to meet the needs, demands and expectations of visitors to the event. the ability of the product of events that represents the market offer of events includes the possibility of earning income. today’s society tries to maintain the sequence of events in the light of the many recent tendencies of the economy. of course, event organization has a number of its policies and activities, and makes a tangle of relationships in this regard. the set must include the event organization and coordination, leadership, planning, evaluating, controlling, human resources, finance and marketing. it is particularly important to organize the event, now in the time of economic crisis, which contributes to increasing domestic and foreign investment. successful marketing of the event management involves taking a large number of activities (andrejević, grubor, 2007), among which these are high in importance:  research the needs, demands and expectations of the target segment of the market events;  defining the concept of product events;  prediction of demand for a product, program or event; v. šušić, j. mojić 50  decisions about the engagement of necessary intermediaries in setting up and execution of the event;  decisions about the amount of price (tickets) for an event that potential visitors are willing to pay;  planning and implementation of promotional activities in the selected environment events;  coordination of all activities of marketing events. increasing attention is paid to the marketing of events that bring together large numbers of people in one place in a short period of time. in the battle for customers' satisfaction, the most important is the economic role of an event and we are primarily talking about marketing of a tourist destination and an event as a tourist attraction. the concept of product events may be associated with targeted marketing. target marketing refers to a variety of segments of the market where the event will offer a particular product events, to meet the needs, requirements and expectations clearly defined by a group of visitors. market segments of visitors to the event are chosen taking into account the criteria of effectiveness, measurable, affordability, feasibility and profitability (jobber, fahy, 2006). linking the concept of product events with target marketing allows appropriate selection of marketing strategies event, within four general strategies targeted marketing events:  undifferentiated marketing events;  differentiated marketing events;  focused marketing events;  customized marketing events. event managers who perform marketing experience can access with the aim of combining the different marketing mix of events, which leads to the differentiation of several basic types of event marketing programs. the management of events known as the following types of marketing programs events:  designed marketing, which is aimed at capturing the sensuality of experience to potential visitors of the event;  sensible marketing, focused on the emotions of potential visitors of the event, with the aim to offer affective experiences,  thought marketing, based on the intellectual characteristics of potential visitors of events, with the aim of offers cognitive experience;  action marketing, which encourages physical experience of potential visitors of the event, in accordance with their lifestyle;  bonding marketing, which combines the advantages of thought, attachment, thought and action in the original marketing event marketing program. marketing experts in a particular tourist destination should help event managers in designing various marketing activities, which will integrate and support the program of events, with the aim of creating and providing value to visitors of the event. under the marketing activities are implied activities related instruments of marketing mix of events, whose combination of the impact on the achievement of defined objectives of a particular event, i.e. those combinations of instruments of market performance, which will ensure the ability of the destination to be competitive in the chosen market segment. the economic role of marketing events affecting the development of the tourism industry, increase economic growth and creates an opportunity for the valorisation of natural and anthropogenic resources tourist destinations. role of marketing events in the development of tourist destinations  51 2.1. marketing objectives of events in the professional literature there is a widespread understanding of the marketing mix of events, which starts with the basic components of event and auxiliary components of a particular event. given that we strive towards the production of those events that basically have to have a positive effect, the target event should be directed towards identifying and predicting the impact of all those who go in the direction of creating positive effects of the events themselves. therefore, the main task of the event manager, in order to achieve positive balance of events, is to perform identification and forecasting, as well as an analysis of any particular influence. it is about taking those preparatory actions that are directed towards the realization of the ultimate goal achieving positive influence events. the main aims of marketing events are to:  increase sales of products and services to customers;  increase interest and demand for products and services;  shorten product distribution channel. fig. 1 marketing mix of events for a tourism destination (getz 1997) in order for marketing managers to create certain preconditions for the realization of high-quality events, or prepare them in advance, they must take into account all the effects arising from the event. 2.2. the concept of product events the concept of marketing product events must be viewed in a broader context, since it should contain a clearly stated value or benefit to the visitors of the event. product of events is not limited to the visible and invisible elements, but it is the original product v. šušić, j. mojić 52 integrating the whole event. therefore, the concept of product events can be decomposed into three basic elements:  a key benefit, which refers to the experiences provided to visitors in overcoming the effects of leisure;  a tangible benefit, which enables the achievement of key benefits, and refers to a regulated venue of the event, its functionality and aesthetic appeal;  an augmented product, which includes additional features necessary for differentiation of events in relation to the competition, and refers to the quality of services provided to visitors (morgan, 1996). product events should allow market supply planning events, as well as to meet the needs, demands and expectations of visitors to the event. the ability of the product of events that represents the market offer of events includes the possibility of earning income out of market exchange offers or events. market exchange offers, products or events generate revenues in four basic ways:  the sale of tickets for the event,  subscription and membership of visitors to the event,  sale of access to visitors of events, as various forms of marketing  communication with visitors events,  the sale of products and services that expand the range of events. fig. 2 product events in target marketing (getz, 1997) role of marketing events in the development of tourist destinations  53 target uses are reflected in the unique characteristics of events, high quality programs, talking about matching the perceived and expected quality program of events, and also apply to services directly related to the maintenance program of a specific event. generic uses are covered by different experiences that visitors get from programs during certain events. in a sense, generic benefits reflect the "elements of style", because they are built, and confirm the authenticity of the program of events. essential services are related to the realization of the attractiveness of the program of events, and a direct effect on the satisfaction of needs, demands and expectations of visitors to the event. essential services build on the specific benefits that represent the basis of events offers a target market segment events. the system of marketing communications in the appointment and execution of events is dealt by event organizer with the product events. the price of the event and the venue of the event attract potential visitors of the event. 3. importance of promotions of events of a tourism destination promotion of the event is aimed at pleasing the expectations and demands of visitors or consumers. in the modern management of events it increasingly needs to be the function of "creating" the visitor or customer events. the point is that it is desirable to devise such a promotion event which will create visitors or customers. promotions events themselves cannot generate visitors, but the relationships that are established and built between the organizers and executors of promotion events, and the visitor, based on direct communication and presentation-quality programs allow you to create potential customers for each type of event. promotion shall mean all activities of events that aim to facilitate and accelerate the acceptance of a product or service on the market for customers and consumers. promotion is a marketing instrument by which a provider realizes communicating with customers or consumers. it represents a method of continuous communication with consumers in the function of encouraging the sale of products and services. promotional mix is a mass communication with consumers. therefore, it is also called the communication mix. the communication mix is tasked to inform the consumer/customer of the product and its characteristics, conditions of purchase, the desire to develop and motivate them to purchase (vračar, 1997). promotion of tourism also consists of activities (tourism advertising, sales promotion, public relations and connections with the media) to be taken to create awareness of tourism products, creating their image and better positioning. promotion of tourism is important for the following reasons (delić, 2010):  providing travel demand in the off season,  purchasing a tourism product that the consumer/purchaser has not seen,  creating customer loyalty,  high competition in the tourism market,  price elasticity of demand,  possibility to substitute the tourism product. the process of the promotional strategy starts from the choice of the market. information about the event should be available in the market, in order to help the tourists make a decision to come to a tourist destination. as the tourist market is too wide and v. šušić, j. mojić 54 varies according to tourist needs, research and segmentation of the tourism market is a precondition for a successful promotional strategy. the selected markets "are attacked" by the general tourist advertising, creating a positive idea of a tourist destination. simultaneously, commercial advertising institutions from the tourism industry attack selected segments of consumers, as well as direct beneficiaries of their own products. in order for the influence of the market to have a real effect, there has to be harmony and coherence between the two mentioned activities. the strategy of promoting tourist destinations implies a few basic tasks:  creating a general image or performances of a tourist destination,  building, maintaining and upgrading the image of a tourist destination,  stimulating the loyalty and support of individual businesses in the promotion,  providing information about tours destinations,  stimulation of tourists with shopping, etc. the process of promotional strategies in tourism includes the following stages (mill, 1990): first phase: selection of markets to be "attacked" by the marketing mix, second phase: establishing goals of the marketing mix, 3 rd phase: determining the appropriate messages, 4 th phase: selection and use of appropriate elements of the marketing mix (advertising, promotion, sales, connections with public relations, personal selling ...) 5 th phase: determining budgets, 6 th phase: control of promotional activities. if we set out to promote certain tasks arising from selected targets to be achieved, then the way, means and methods to achieve the objectives are chosen and it is called a promotional strategy. the choice of the promotional strategies of service industries is affected by a number of factors, such as the nature of the service, phase in the lifecycle of services, the size of the budget, the objectives of communication, positioning services, positioning competitors. the strategy of promoting tourist destinations has a fundamental role to inform and stimulate tourism demand to stay in a given destination and on the basis of a given increased demand for the benefit of its products. the effect of promotion strategies are reflected in timely informing of consumers/tourists about the available attractive, communicative and receptive factors and events of tourism destinations that are involved in meeting the needs of the tourist demand. 3.1. the objectives of a marketing mix the goals for communicating with consumers include developing awareness of different possibilities of a tourist destination, motivating tourists for additional information on the capabilities of the destination, developing the image of the tourism product, enabling to obtain permanent information about events in the tourist destination, accommodation facilities etc. the objectives of a marketing (communication) mix with the media assume the provision of timely, accurate and complete information about the opportunities of destinations, development plans, tourism products, marketing events etc. the scope and structure and promotional activity tourism destination depends on its size, importance and role in the tourism and economy in general. the main instruments of marketing communications and a role of marketing events in the development of tourist destinations  55 marketing mix in tourism are (bakić, 2007): advertising, public relations pr, sales promotion, personal selling, publicity, sponsorship, direct marketing, merchandising. the choice of instruments of a marketing mix is the most important phase of the building process of the promotional strategy. promotional mix is made up of more instruments, out of which the most common are: tourist advertising, sales promotion, public relations, personal selling, etc. the most important role belongs to the mentioned tourist advertising. tourist advertising is one of the most important instruments of communication in tourism. the aim is to develop a tendency for products or services, as well as a reference to a specific purchase. starting from the holders of tourist advertising, the same can be divided into general tourist agencies, and commercial and business advertising. holders of general tourist advertising, i.e. advertising at the local, regional, national or multinational level, are the appropriate state or community organizations or bodies. effects of general tourist advertising are expected in the longer term, in order to attract the attention of potential tourists in certain areas as a whole, and thus to provide an increase in tourist traffic and tourist spending in that area. commercial tourist advertising is carried out by companies of the tourism industry with a particular orientation of the tourist facilities and types of tourist services. it is about advertising as an instrument of policy catering business, tourist, traffic, trade and other companies of the tourism industry, whose effects are short term. to show the performance of the tourism market, tourism advertising uses graphics, projection, personal and spatial resources. 3.2. the basic role of promotion events promotion of the event is the instrument of the marketing mix of events that builds positive public attitude towards the program specific event and its organizers, in a way that favors relative to competitors. promotion of the event is part of the process of integrated marketing communications, including multiple modalities and communicating with visitors of the event, integrating the promotion of events and marketing communications. fig. 3 the system of marketing communications in setting and executing events (salai, hegediš, 1994) v. šušić, j. mojić 56 according to the american association of advertising agencies (aaaa), integrated marketing communication is defined as a concept of marketing communication planning, based on the achievement of added value of integrating different communication activities such as pr, direct marketing, sales promotion and public relations, achieving more consistency and maximize communication activities. promoting an event is realized depending on the characteristics of the event and the target audience. in promoting an event of great physical size and scope, such as mega sporting events, economic propaganda is most commonly applied. promoting events of lesser physical size and scope, as well as local sports events, local festivals, local trade fairs or exhibitions is carried out by business publicity and direct marketing. the system of marketing communications in the appointment and execution of events is dealt by event organizer with the product events, price of the events and the venue of the events attracts potential visitors of the events. 4. event marketing research in serbia research has shown that most of the events/events (of all types) in serbia are held in belgrade. "most of those are traditional events, regional and local events, festivals, sports competitions, celebrations, religious ceremonies, etc." (šušić, djordjevic 2011, pp. 7980). if we take the criterion for the number of visitors compared to the number of inhabitants, the most numerous is the trumpet festival in guča. certainly, guča is a precedent; however, in serbia there are still very well-visited festivals of all kinds. the most visited are those events that do not have admission fees (guča, beer fest, vrnjci carnival, etc.) and which belong to entertainment (music festivals at first). cultural, sports, gastronomy and folk events are of great importance. the number of visitors at events where admission is free is to be taken with a grain of salt. attendance is assessed by organizers themselves and they often do not give a true picture of the number of visitors. including the best known, there are two dozen events of significant potential at the national level that have various facilities to attract large numbers of visitors. for instance, events such as the "mowing on rajac", "homolj motives" and "ljubic horse racing" are visited by about 50,000 people. also very popular are the events that take place in almost all river flows in serbia, and the most popular are the "drina regatta" and "happy run", which brought together about 35,000 rafters (statistics department of tourism). food and drink festivals are recognizable, popular events held on the territory of serbia. "the grapes ball" in vršac has as many as 150,000 visitors, and most of the other wine festivals held in other places are well-visited. at the same time, gastronomic festivals attract a large number of visitors such as the "leskovac barbecue week" which had over 500,000 visitors in 2013 as estimated by the organizers. also, other events, such as "bacon fest", "prosciutto fest", "sausage fest", etc., are visited by up to ten thousand people a day. since food (agriculture and food industry) is a resource of great importance in serbia, and the pub is one of the specific motives for every tourist to enjoy, such events should be given special attention. in serbia, there are a number of events with a long tradition, such as: "vuk's parliament" in tršić which was first held in 1933 and "dragacevo trumpet" (1961). role of marketing events in the development of tourist destinations  57 since the mid-sixties of the last century, there has been a substantial increase in the number of domestic events. organized events of various types have run in parallel with the period of stagnation in the last decade of the twentieth century. since 2000, new events have emerged which have become massive and recognizable. among them are: "exit festival" (2000), "vrnjci carnival" (2002), "belgrade beer fest" (2003) and "kustendorf" festival (2008) (www.turizam.merr.gov.rs). out of a large number of events in serbia, only a few have the popularity that transcends borders and countries and attract a considerable number of foreign visitors. for many other events to become attractive for domestic and foreign tourists, what is necessary is further development of their organization and popularization. professional teams and narrowly specialized institutions dealing with the improvement and promotion of events are needed for those kinds of activities. in addition, there are significant ongoing investigations of specific areas and constant monitoring of their impact on the overall economic development of tourism in serbia. creating a database of events/manifestations in serbia is a basic step towards better organization and promotion. this way you can look at potential events/manifestations and create their development plans of national and international importance. there is no doubt that making an integrated geographic information system would significantly contribute to improving the exchange of information and better informing of the passengers from around the world on the tourism of serbia and its possibilities of leisure and entertainment. conclusion events are an integral part of tourism. they have always existed as part of the tourism product, with greater or lesser importance and influence on the tourist destination, but their commercialization encourages an active interest of the participants and the entire tourism economy to study the area. as well as attracting visitors through the extension of their stay in the resort and the possibility to overcome the seasonal nature of the business, events represent an efficient way in which the community can direct its activities towards certain goals. events tourism is one of the youngest segments of tourism with the rapid development associated with the last decade of the twentieth century, when the events were perceived as a desirable product because of their unquestionable ability to bring economic benefits through tourism promotion, increased consumption by visitors and new business opportunities. events tourism is a promising type of tourism, and as such has a large impact on complex developments in the tourism market. events tourism, like any other sector, enters into the lives of a multitude of fine moments. it is a sector that is constantly growing and involves very large numbers of people, as service providers, and the tourists themselves. as a phenomenon, events tourism has been recognized as one of the most influential phenomenon when it comes to forming the image, creating a profile of the destination and its positioning in the tourism market. the maximum positive impact that an event can have on the positioning of the destination market is achieved by designing and modernizing events that reflect the distinctiveness and uniqueness of a particular community. studies by many authors who have studied events tourism have shown that the central factors which the successful integration of events in the destination brand depends on are: event differentiation, a tradition that binds them, joint planning of key stakeholders and media support. v. šušić, j. mojić 58 serbia is characterized by a large number of events that represent an inexhaustible source of significant potential for development of events tourism in this part of europe. to allow for further, higher quality development of events tourism in serbia, one of the main preconditions is the use of modern knowledge in this field, as well as recognizing the necessity of investment in research and continuous market research in order to timely recognize changes in the needs and demands of tourists and adequately react so as to attract their attention and retain their interests. also, for further development of this segment of tourism, of great importance is the creation of a local marketing strategy for events tourism development, as part of the general strategy of long-term tourism development, based on experience, mentality of the population, the most advanced knowledge in this field and the unification of all stakeholders in the tourism industry. in these times of crisis, where the financial situation is extremely unstable, the key role of event marketing is that its activities may lead to inflow of funds to a particular tourist destination and enable the protection and preservation of the natural environment, local culture, traditions, diversity and everything created. references 1. allen, j., (2004). marketing your event planning business: a creative approach to gaining the competitive edge. 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(2004). principles and practice of marketing. maidenhead, mcgraw-hill international (uk) ltd. 15. jobber, d., fahy, j., (2006). osnovi marketinga, drugo izdanje, data status, beograd. 16. kotler, p., wong, v., saunders, j. and armstrong, g., (2005). principles of marketing. 4th euro edn. london, prentice hall europe. 17. masterman, g. and wood, e., (2006). innovative marketing communications: strategies for the events industry. oxford, elsevier butterworth-heinemann. 18. mill r.c., (1990). tourism the international business, prentice hall international inc. englewood cliffis, new jersey. 19. morgan, m., (1996). marketing for leisure and tourism, london, prentice-hall. inc. 20. salai, s., hegediš, i., (1994). tržišno komuniciranje, ekonomski fakultet, subotica. 21. statistički podaci sektora za turizam, ministarstvo za ekonomske odnose i regionalni razvoj. 22. supovitz, f., (2005). the sports event management and marketing playbook. hoboken, new jersey, john wiley & sons inc. 23. vagen, l,. karlos, b., 2009, evant management upravljanje događanjima, mate, zagreb. 24. vračar d., (1997). strategije tržišnog komuniciranja, ekonomski fakultet beograd. 25. šušić v. and đorđević d (2011). the place and role of events in the tourist development of the southwest serbia cluster, facta universitatis, series: economics and organization vol. 8, no 1, univerzitet u nišu, niš. pp. 69-81 26. www.turizam.merr.gov.rs (20.06.2013). role of marketing events in the development of tourist destinations  59 uloga marketing događaja u razvoju turističke destinacije zadatak istraživanja rada je da sagleda i istakne osnovne smernice i mogućnosti razvoja turizma događaja određene turističke destinacije. marketing događaja podrazumeva planiranje, segmentaciju ciljnih grupa, efektno korišćenje komunikacija, rad sa sponzorima i volonterskim organizacijama, promociju događaja, analizu budžeta, pa čak i obezbeđivanje logistike da ceo događaj ne doživi neuspeh. osnovni cilj rada je da ukaže na ulogu marketing događaja u animiranju i privlačenju većeg broja posetilaca i njen značaj u promociji turističke destinacije. takođe, ukazuje na značaj permanentnog razvijanja događaja kao izuzetno važne komponente atraktivnih faktora turističke ponude u cilju izgrađivanja brenda destinacije. istraživanje je pokazalo da organizacija događaja može da doprinose povećanju investicija, utiče na razvoj turističke privrede, poveća ekonomski rast i valorizuje prirodne i antropogene resurse turističkih destinacija. ključne reči: marketing događaja, turistička destinacija, ekonomska uloga, promocija. facta universitatis series: economics and organization vol. 17, n o 2, 2020, pp. 141 155 https://doi.org/10.22190/fueo191121011s © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper customization – innovation when off-the-shelf is out of the question 1 udc 330.341.1:658.8 milan stamatović 1 , aleksandar jovičić 2 , danijela parojčić 1* 1 university union–nikola tesla, faculty of business and law, serbia 2 fidelity national information services inc – fis, serbia abstract. appointment scheduling applications (asa) are used by service providers (hair salons, dentists, physicians), i.e. b2b customers, and service consumers (people), i.e. b2c customers. the objective is to investigate if innovation, i.e. customization may be applied to enable the product to support specificities of the serbian market (ssm). based on the environmental and competitive (internal and external) analysis and comparison of global vs. customized product (asa) we recommend the launch of customization and sales departments aiming to place the customized product on the serbian market. applied research methodologies include swot and pestel analysis, strategic group mapping, porter’s value chain, boston consulting group matrix, mckinsey’s seven ‘s’ model, comb analysis, porter’s five forces, ansoff’s matrix, stakeholder’s analysis, and the balanced scorecard. the result is a business plan for the market entry of a software producer on the serbian market. appropriate combination of strategies – innovation and customization is formulated on the operational level. keywords: customization, innovation, appointment scheduling application jel classification: m13, m14, m16 received november 21, 2019 / accepted february 11, 2020 corresponding author: milan stamatović university union–nikola tesla, faculty of business and law, belgrade, knez mihailova 33, 11000 belgrade, serbia * phd student at university union–nikola tesla, faculty of business and law, belgrade e-mail: stamatovicm@sbb.rs 142 m.stamatović, a. joviĉić, d. parojĉić introduction software applications for appointment scheduling are used by service industry providers (hair salons, dentists, spas, physicians) and final customers. based on current market situation and the level of it development, it appears to be the right time for a company to focus on the serbian market. existing foreign applications use english language and do not support requirements of the local market. existing domestic applications are mostly in the early stage of development. consequently, it appears to be the right time for a company to invest in a new product – customized foreign application that should use serbian language and support local specificities. serbian office should function as a standalone company offering to foreign companies two key services – customization of foreign applications according to serbian specificities and sales on the serbian market. feasibility is estimated using both internal (environmental and competitive) analysis and external analysis of the serbian office. the idea is to use the existing know how i.e. select a foreign application and enhance it to support serbian specificities such as serbian language and local payment system. strategic approach will be used to create a customized product and propose the appropriate entry strategy (table 1). table 1 research objectives and research methods # research objectives # research method (tool) 1 propose the method for external analysis of company’s environment and competitors. 1 swot analysis. 2 pestel analysis. 3 strategic group mapping. 4 delphi scenario building. 2 propose the method for internal analysis of a company. 5 porter’s value chain. 6 boston consulting group matrix. 7 mckinsey’s seven ‘s’ model. 8 comb analysis. 3 propose few strategy options. what should a company do? 9 porter’s five forces. 10 ansoff’s matrix. 11 stakeholders analysis. 4. propose the method for monitoring the strategy implementation. 12 balanced scorecard. source: the results of the research conducted by the authors 1. the business concept two business entities are analyzed; global company and serbian office. global company is software producer and its key product is the appointment scheduling application (asa). product is offered by service providers and it enables the final customer to schedule the appointment using the application (in english). we analyze the serbian market for the product and answer to the key questions: is there a space for a product on the serbian market and how the product should be customized to meet the specific requirements of the serbian market (ssm). the product (asa) is a computer application designed to automatize the customization – innovation when off-the-shelf is out of the question 143 business processes of scheduling an appointment (table 2). global company produces appointment scheduling applications for various service providers: hair salons, dentists, spas, physicians (table 3). office customizes company products (table 4). table 2 product and market # entity business product market a global it company. production. appointment scheduling application. (asa) world market. b sales. c serbian office. customization. serbian market. d sales. source: the results of the research conducted by the authors table 3 organizational structure of the global company # department activities number of employees percent of employees a production. coding the asa. 10 29% b sales. sales on the world market. 20 57% c general. database, network, payment support. 5 14% d total 35 100% source: the results of the research conducted by the authors table 4 organizational structure of the serbian office # department activities number of employees percent of employees a customization. coding the asa to support the ssm. 4 40% b sales. sales on the serbian market. 2 20% c general. database, network, payment support. 4 40% d total 10 100% source: the results of the research conducted by the authors company produces and sells the product on the world market while serbian office is focused on customization and sales on the serbian market. key company business is application production while key office business is application customization. key markets for the product are world market and local (serbian) market. company produces and sells the product on the global market while office customizes and sells it on the serbian market. regarding the customers, company customers are service providers (hair salons, dentists) which offer asas to service consumers (people) on the world market (table 5). office customers are service providers on the local market. 144 m.stamatović, a. joviĉić, d. parojĉić table 5 customers – service providers and service consumers # product b2b clients service providers b2c clients service consumers a appointment scheduling application (asa) provider 1: hair salons. customer 1: andreja books online an appointment with a hairdresser. b provider 2: dentists. consumer 2: aleksandar books online an appointment with a dentist. c provider 3: physicians. consumer 3: milica books online an appointment with a doctor. d provider 4: legal advisors. consumer 4: đorċe books online an appointment with a legal advisor. source: the results of the research conducted by the authors regarding the competitors, asa producers are classified as global, regional, and local it companies. local companies have a market share (ms) of 95% on the serbian market vs. the ms of 5% held by global and regional companies. regarding the business idea, the company strategy is to produce the best product. serbian office should start with product customization and offer a customized product on the serbian market. regarding the added value, a customized product should support specificities of the serbian market. gui should be modified to provide optimal customer experience with existing average internet connection speed. the additional options should be included, such as the option to cancel the appointment in the last minute, the option to include average delay time caused by the customer being late, and the option to modify the price of the service based on the difference between scheduled and actual time of customer arrival. key opportunity is the fact that most serbian service providers have not started to use any asa – they receive appointment requests from final customers traditionally by phone. 2. research purpose and questions the purpose of this research on the strategic level is to formulate a strategy for product customization. serbian office should answer two questions: should the product be customized and sold on the serbian market. on the operational level, the purpose is to determine local market requirements that should be used to customize the asa. office is expected to investigate which asas are currently used and estimate which additional features of the product are expected to be used by serbian customers in the close future. regarding the problem definition, a few questions have appeared. regarding the first question on customization, the problem is how service providers choose the asa. general factors are costs (price and annual renewal fee), performance with slow internet connection speed, and number of additional options supported. service specific factors are support response time in case of failure, and franchise practice to use specific asa for all branches, such as pizza hut ordering application. regarding the second question on sales, the problem is who decides on the choice of the asa? the answer would be – the service provider managers. regarding the third question on current competition, the problem is which options do serbian customers use? answer would be simple – to schedule and cancel the appointment. regarding the fourth question on the potential for the asa enhancements, the problem is which options are serbian customers going to use customization – innovation when off-the-shelf is out of the question 145 in the future? the answer would be a list of additional features, such as: the ability to pay in domestic and foreign currency, the option to locate available service providers by geolocation and the option to offer discounts based on client loyalty and ability to arrive on time. regarding the internal aspect of research, questions would focus on office strengths and weaknesses. regarding the external aspect, questions would focus on key factors that affect the asa selection, priority (quality vs. price), decision makers and future client expectations. regarding the data, analysis is based both on primary and secondary data (table 6). table 6 data collection # type primary secondary 1 quantitative. n/a data on serbian asa market. future market trend estimates. 2 qualitative. qualitative data related to office mission, vision, and objectives. data on factors that affect the product selection. source: the results of the research conducted by the authors 2.1. external analysis external analysis is related to company environment. the following four methods are used: swot, pestel, strategic group mapping, and delphi method of scenario analysis. 2.1.1. swot analysis swot combines internal and external analysis. internal aims to identify "resources required to maintain competitive advantage", while external aims to identify chances and threats from the environment. competitive environment consists of: "competitor’s resources", "industry environment" identified by porter’s five forces, and "general environment" analyzed with the pestel analysis (sammut‐bonnici t., 2015). table 7 swot analysis for the serbian office 1 strengths 1 meaningful product, because scheduling conflicts and lost appointments cause serious problems for service providers. 2 group of similar products with same core engine (hair salons, physicians, dentists, spas). 3 well educated workforce with the innovative potential. 4 low cost of the workforce. 2 weaknesses 1 small number of existing clients in serbia. 2 product (asa) requires a change in costumer habits. 3 lack of information regarding the local market. 4 absence of sales track-record for the similar industry. 3 opportunities 1 absence of competition from global companies in serbia. 2 improve product (asa) quality using best practice from developed countries. 4 threats 1 potential for other competitors to enter the serbian market. 2 "high level of migration may devaluate the positive effects" of educated workforce. (joviĉić, stamatović, 2018). source: the results of the research conducted by the authors 146 m.stamatović, a. joviĉić, d. parojĉić 2.1.2. pest(el) analysis pest(el) analysis represents the framework for the environment analysis, where environment consists either of four (pest) or six factors pest(el). table 8 pestel analysis for the serbian office # perspective # facts 1 political 1 expected tax decrease in the it industry. 2 expected increase in competition following the admission of serbia into the european union. 2 economic 1 expected decrease of unemployment. 2 currently, service sector is not grouped and it may be regrouped into few big service providers. 3 demand for the asas is expected to increase. 4 service sector is developed. 5 service sector is expected to be stable. 3 social 1 awareness of internet based scheduling benefits. 2 millennials tend to use applications. 4 technological 1 asas should be able to function in serbian technical environment where average user has lower internet connectivity speed and less advanced smart phone (compared to eu average). 2 serbian users expect asas to support domestic payments. 5 ecological 1 high temperatures in summer time should motivate people to schedule appointments and avoid unnecessary exposure to extreme weather. 6 legal 1 eu admission should attract service franchises and increase the asa usage. source: the results of the research conducted by the authors 2.1.3. strategic group mapping strategic group consists of "competitors with similar approach and market position that are subject to same mobility barriers – forces that disable the company to move from one into another strategic group" (mcgee, 2015). maping compares: a – serbian office which offers customized foreign product (asa); b – local company which offers serbian product; c – global company which offers not–customized product, and d – existing ‘absence of asa’ where customers use traditional phones for appointment scheduling (figure 1). comparison provides two conclusions. key competitor of a is b for two reasons: the usage of serbian language and general ease of use. key weakness of a is pricing. customized product is expected to be more expensive compared to competitor’s generic product. fig. 1 strategic group mapping source: the results of the research conducted by the authors customization – innovation when off-the-shelf is out of the question 147 2.1.4. delphi method delphi observes a future as "multiple of possible futures with accociated probabilites that can be estimated and to some extent manipulated" (helmer, 1967). delphi is used to identify stakeholders, their objectives and prioritites (okoli, wang, 2015). decision delphi is a type of delphi where research is customized to specific problem (campbell, fransi, 2017). delphi "provides the consensus within the expert group and decreases the gap between total ignorance and disciplined guess" (velez-pareja, 2003). delphi may analyse industries (duru, bulut, yoshida, 2013) and technologies (aichholzer, 2002). delphi should estimate future requirements of serbian asa users. table 9 delphi method – future demand on the serbian asa market # topic # scenario 1 expectations on future demand for the product (asas). 1 oriented towards low end smart phones. 2 expected entry of big franchises should increase the usage and quality of asas. 3 expected entry of global competitors will increase usage of non-customized asas. 2 recommendations for the product (asas) customization. 1 should work on low end smart phones. 2 should support payments in rsd. 3 should support payments in eur. 4 should support various providers (hair salons, physicians, dentists, spas). source: the results of the research conducted by the authors 2.2. internal analysis the following four methods are used: porter’s value chain analysis, bsg matrix, mckinsey’s seven ‘s’ model and comb analysis. 2.2.1. porter’s value chain analysis internal analysis is related to the company. four methods are used: porter’s value chain, bcg matrix, mckinsey’s seven ‘s’ model and comb analysis. generic value chain formulated by michael porter illustrates the circulation of goods and services within the company. recent critique stipulates that model is outdated due to appearance of social networks and internet (merchant, 2012). value cycle concept introduces additional factors – it and risk management (cordery, woods, collier, 2011). e-commerce value chain introduces a new factor – online trading (kleindl, 2014). table 10 porter’s value chain analysis for the serbian office primary activities group job description employees total a coding related to customization. 20% 60% b functional spec writing and testing related to customization. 20% c sales of customized product on the serbian market. 20% support activities group job description employees total d application support. 10% 40% e database support. 10% f network and payment support. 10% g training and education. 10% source: the results of the research conducted by the authors 148 m.stamatović, a. joviĉić, d. parojĉić a) developers write new code to enable the customization. b) functional specification writing and testing related to customization. c) sales of customized product on the serbian market. d) customer support team should provide the application support to clients. e) database support team should provide the database maintenance. f) should provide fixing of network issues as well as settlement issues. g) office staff should provide the training for each new service provider. 2.2.2. boston consulting group (bcg) product portfolio matrix a product usually starts as a "problematc child" and becomes either a "dog", if market share growth is not significant, or a "star" (if growth is significant), and after that a "cash cow" (when growth declines). "many of todays cows used to be stars, as noted in the matrix flow“ (figure 2 – mohajan, 2018). fig. 2 bcg matrix flows source: mohajan, 2018 as office has only one product (asa), modified matrix is used to display two scenarios. success, where consumers increase the usage of customized asa (figure 3). on the left we see the initial product launch. in the middle we see (a) moving to "stars", and the introduction of (b). on the right we see the market saturation, where (a) moves to "cash cows", and (b) moves to "stars". fig. 3 bcg matrix – scenaro of success source: the results of the research conducted by the authors customization – innovation when off-the-shelf is out of the question 149 failure, where consumers decrease the usage of customized asa (figure 4). on the left we see the initial product launch. in the middle we see (a) moving to "dogs", and the introduction of (b). on the right we see (b) moving to "dogs". office failed because consumers did not start to use asa. fig. 4 bcg matrix – scenario of failure source: the results of the research conducted by the authors 2.2.3. mckinsey’s seven ‘s’ model model is based on seven key "elements that define the organization personality" (peters, 2014). it is a technique based on "inerdependance of seven key factors of organizational effectivenes" (heery, noon, 2017). table 11 mckinsey’s seven ‘s’ model # perspective # comments 1 strategy 1 strategy is to enter the serbian market based on enhanced customer experience provided by customization. i.e. innovation and development of the existing product aiming to suport the ssm. first and second phase of customization will introduce new opitons into existing product. third phase will integratie asa with the food/products online ordering application, i.e. create a new product. 2 structure 1 serbian office should be independent entity. from the business perspective, office will depend on the global company, as it will customize its product – that is good as office will use the know-how, but on a different market (world vs. serbian market). 3 staff 1 20% developers, 50% business analysts and 30% salesforce. office should be able to find educated staff at a reasonable price. 4 skills 1 analysts should understand what enhancements are required by the local market. sales should present the advantages of customized product to clients. 5 systems 1 office structure should be activity based: analysts group, developers group, sales group, support group (database, network, and payments). 6 management style 1 management techniques should be modified aiming "to adjust for serbian cultural specificities" (joviĉić, đokić, stamatović, 2018). 7 shared values (culture) 1 company and office share the same idea–introduce innovations based on the asa customization. 2 all employees (company and office) want to provide the best customer experience to clients. source: the results of the research conducted by the authors 150 m.stamatović, a. joviĉić, d. parojĉić 2.2.4. comb analysis comb chart "helps to estimate what is relevant for a consumer, to what extent our product meets the customer requirements, and how do we stand against the competitors" (cross, 2007). limitation is based on the fact that serbian office does not exist and its performance is based on our estimation. fig. 5 comb chart for the serbian office source: the results of the research conducted by the authors table 12 comb findings and recommendations # type # comment 1 findings 1 key competitors (local) are well positioned on the local market 2 comparing local competitor’s (b) to customer expectations (c), chart shows that (b) is worse than (c). 3 comparing (b) to (a), chart shows that (b) is better only in terms of clients. key advantage of (a) is innovation. 4 comparing (a) to (c), chart shows that (a) is better than (c) in most segments. key advantage of (a) is innovation. 2 recommendations 1 there is a space for customized product on the local market. 2 key office advantage is customized product and investment in the customization department makes sense. source: the results of the research conducted by the authors 2.3. human resources table 13 porter’s value chain – serbian office human resources primary activities group job description employees total a coding related to customization. 2 6 b functional spec writing and testing related to customization. 2 c sales of customized product on the serbian market. 2 support activities d application support. 1 4 e database support. 1 f network and payment support. 1 g training and education. 1 source: the results of the research conducted by the authors customization – innovation when off-the-shelf is out of the question 151 2.4. mission, vision, and core values before a strategy is formulated, we need to define mission, vision and core values. in reality, a lot of these definitions are "an insult to the inteligence and represent generic nonsence or bland gibberish" (beaver, 2000). table 14 serbian office mission, vision, and core values category # statement mission provide customized asa to meet the requirements of serbian customers. vision be recognized by global it companies as a leader on the serbian asa market. core values 1 client focused – include all client requirements and support all serbian specialties. 2 multi product oriented – cover multiple product types (hair salons, dentists, spas, physicians). source: the results of the research conducted by the authors 3. strategy options 3.1. strategic analysis: porter's five forces two strategic analysis tools are used: porter's five forces and ansoff’s matrix. each industry has different forces. analysis should show which factor (out of five) actually provides the profitability in a specific idustry. table 15 porter's five forces on the serbian asa market # force # findings 1 suppliers’ bargaining power. 1 low as b2c clients rarely use asas. 2 will increase when customers accept the asa usage. 3 office will be the only supplier of customized asas. 2 buyers’ bargaining power. 1 most service providers have not started to use asas. 2 service providers will increase the usage of asas. 3 service providers are not grouped in the franchises. 4 service providers will increase the demand for asas once they are regrouped into franchises. 3 threats of substitution. 1 currently, substitutes do not exist. 2 in the future, substitutes are not expected to appear. 4 threat of new entrants. 1 currently, new entrants do not exist. 2 in the future, new entrants may appear, thus we need to launch the business as soon as possible. 5 rivalry among competitors. 1 competitors exist, but they sell the non-customized product, i.e. do not support additional options. 2 existing competitors sell a low-quality product, made without the appropriate experience. source: the results of the research conducted by the author s 152 m.stamatović, a. joviĉić, d. parojĉić 3.2. ansoff’s matrix products a, c and d bear the maximum risk, thus company should invest in advertising to raise the brand awareness. phase-2 should be launched promptly, while phases 3-4 should wait for the b to increase its market share. fig. 6 ansoff’s matrix for the serbian office source: the results of the research conducted by the authors 3.3. stakeholders analysis strategy selection should be based on the stakeholders analysis, using the stakeholders matrix (figure 7). office should move (e) to top-left quadrant as it is a key partner. useful information on registered service providers may be obtained from (i), thus office should move it to top-left quadrant as well. fig. 7 stakeholders power interest matrix for serbian asa market source: the results of the research conducted by the authors customization – innovation when off-the-shelf is out of the question 153 option one would be an independent entity engaged in customization and sales of global asas on the serbian market. option two would be a department within a global company. stakeholder analysis shows that option one is better for the serbian office as it enables the cooperation with many global companies (e), i.e. disbursement of fixed costs on multiple products. 3.4. information systems for sales support decision support system (dss) is often used to optimize the allocation of limited resources to most promissing activities (tables 16, 17 and 18). table 16 information systems for sales support # kpi key performance indicator is type is description comparative advantage 1 number of service providers in our database. decision support system. sales planning system for customer prioritization. sales staff is focused on most potential b2b customers. source: the results of the research conducted by the authors table 17 key performance indicator (kpi) of decision support system # objective kpi target 1 focus on service providers with the highest ordering potential. ratio of service providers in database over total number of service providers. ↑ kpi by 10% in each year. source: the results of the research conducted by the authors table 18 decision support system (dss) for the serbian office # type description # comparative advantage 1 decision support system inputs 1 allocate sales force on the best choice group. 1 allocate sales force on the best choice group. 2 sales dpt.: # of presentations per year to sales providers. outputs 1 list of service providers within the best choice group. 2 improve sales results. source: the results of the research conducted by the authors 3.5. critical success factors (csf) csfs are evasive and hard to define becuse "actual csf on the market will usually be different than those identified by decision makers. various psychological mechanisms cause the wrong perception of the success factors" (grunert & ellegaard, 1992). table 19 critical success factors on the operational level # function # critical success factor 1 customization 1 ability to identify requirements specific for the local market (ssm). 2 ability to customize product to support the identified requirements (ssm). 2 sales 1 availability of experienced sales staff. 2 ability of b2b clients to understand the advantages and accept the usage of asas. source: the results of the research conducted by the authors 154 m.stamatović, a. joviĉić, d. parojĉić 3.6. balanced scorecard (bsc) performance measurement consists of "choice of the appropriate indicators and the interpretation of results" (ittner, 2015). it is estimated that "70% organizations use bsc" (russell, 2015). bsc is a technique for monitoring and evaluation of the success of the business plan implementation, based on four pillars: perspective, objectives, indicators and targets. table 20 bsc for serbian office sales department # perspective objective kpi target 1 customer ↑ knowledge of service providers on asas. number of sales presentations to service providers per year. 1st year: 20 % of customers. 2nd year: ↑ kpi by 20% in 1 year. 2 finance ↑ market share. market share of asa on the serbian market. 1st year: ms 20%. 2nd year: ↑ kpi by 20% in 1 year. 3 processes ↑ asa ability to support serbian specific requirements. number of enhancements introduced to meet serbian market requirements. 1st year: one enhancement monthly. 2nd year: ↑ kpi by 25% in 1 year. 4 staff ↑ staff knowledge on sales & marketing. number of trainings attended by sales staff. 1st year: 5 trainings per year. 2nd year: ↑ kpi by 10% in 1 year. source: the results of the research conducted by the authors conclusion in this research, four techniques (swot, pestel, strategic group mapping, and delphi method of scenario analysis) have been applied to analyze company’s environment and competitors. further, four tehniques for the internal analyis of a company have been used (porter’s value chain, boston consulting group matrix, mckinsey’s seven ‘s’ model and comb analysis). two tools (porter's five forces and ansoff’s matrix) have been used to propose strategic options and one (stakeholders matrix) to evaluate and select the best one. the conclusion of a strategic analysis is: serbian office should function as a standalone company offering to foreign companies two key services: (1) customization of foreign applications aiming to meet specific requirements of the serbian market and (2) sales of the customized product (asa) on the serbian market. strategic analysis has identified four critical success factors (table 19). finally, company should use decision support system (dss) to optimize the allocation of limited resources to most promissing activities and balanced scorecard (bsc) to monitor the implementation of a business plan. references aichholzer, g. 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(2012). why porter’s model no longer works. harvard business review. retrieved from: https://hbr.org/2012/02/why-porters-model-no-longer-wo mcgee, j. (2015). strategic groups, wiley encyclopedia of management. mohajan, h. k. (2018). an analysis on bcg growth sharing matrix. noble international journal of business and management, 2(1), 01-06. okoli, c., & wang, n. (2015). insights from a delphi study. proceedings of the 21st americas conference on is. puerto rico, 2015. peters, g. (2014). the big ida magnificent seven s. london business school review, 25(2), 74-75. russell, r. h. (2015). balanced scorecard. wiley encyclopedia of management. sammut bonnici, t. (2015). swot analysis. wiley encyclopedia of management. velez-pareja, i. (2003). el metodo delphi. politecnico grancolombiano, riesgo e incertidumbre. retrieved from: https://www.researchgate.net/profile/ignacio_velez-pareja/publication/5006691_el_metodo_delphi/links/ 549f17560cf281d393a2540e.pdf kastomizacija – inovacija globalnih proizvoda za lokalno tržište aplikacije za zakazivanje termina (azt) koriste davaoci usluga – b2b klijenti (frizerski saloni, zubari, lekari) i korisnici usluga – b2c klijenti (potrošači). traži se odgovor na pitanje – da li postoji potreba da se postojeće softverske aplikacije inoviraju tj. kastomizuju da bi se podržali specifični zahtevi srpskog tržišta (sst). na osnovu interne i eksterne strategijske analize tj. na osnovu poređenja postojećih nekastomizovanih proizvoda (azt) sa lokalnim tj. kastomizovanim, zaključuje se da postoji tražnja za lokalnim proizvodima i preporučuje se kastomizacija i prodaja kastomizovanih proizvoda na srpskom tržištu. u sklopu interne analize primenjene su sledeće tehnike: swot, pestel, mapiranje strategijskih grupa i delfi. u okviru eksterne analize su primenjeni: porterov lanac vrednosti, bcg matrica, kekkinzijev model sedam „s‟ i comb analiza. predlog strategijskih opcija se vrši na osnovu analize porterovih pet snaga i matrice ansofa. izbor optimalne opcije se vrši na osnovu analize stejkholdera. formulisan je detaljan plan za ulazak kompanije na srpsko tržište za azt i “balanced scorecard” za praćenje implementacije tog plana. odgovarajuće strategije – kastomizacija i inovacija su formulisane na operativnom nivou. kljuĉne reĉi: kastomizacija, inovacija, aplikacija za zakazivanje termina. facta universitatis series: economics and organization vol. 15, n o 2, 2018, pp. 165 176 https://doi.org/10.22190/fueo1802165r © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper harmonization of accounting regulations in the european union with special reference to the eu central and eastern european countries 1 udc 657.375:006.24(4-672eu) dragana ranđelović 1 , tadija đukić 2 1 higher business school of leskovac, leskovac, serbia 2 university of niš, faculty of economics, niš, serbia abstract. the emergence and development of a unified european market imposes a need for harmonization of financial reporting of business entites in the european union. directives and regulations are the basic instruments for harmonization of national regulatory frameworks with aquaris, on the one hand, and for hamozication of accounting practices among member countries, as well as those which are claiming membership, on the other. according to the model of financial reporting, the countries of central and eastern europe belong or belonged to the mixed economy model. our country belongs to the same model. in this paper, we will describe the reaches of certain central and eastern europe economies in harmonization of financial reporting in relation to the current regulations of the european union. using comparative analysis, we will point out the essential features of the regulatory frameworks of certain national economises. positive experiences of these countries in the development of accounting regulations could be applied in our country. key words: financial reporting, harmonization, central and eastern europe, international accounting regulations jel classification: m40, m41 introduction the countries of central and eastern europe, during the transition period, carried out socio-economic reforms in order to achieve economic prosperity and higher living standards. the more dynamic economic development of troubled transitional economies received february 04, 2018 / revised april 15, 2018 / accepted april 20, 2018 corresponding author: dragana ranđelović higher business school of leskovac, leskovac, serbia e-mail: draganaran@hotmail.com 166 d. ranđelović, t. đukić was conditioned by the attraction of foreign capital. the liberalization of economic flows and the establishment of markets in these countries caused the reform of the accounting systems. in the area of financial reporting, the reforms were concerned with the development of existing regulations and practices in accordance with internationally accepted ones. this was done in order to raise the quality of financial statements in terms of relevance, comparability, and transparency of financial information for foreign users. the higher quality of financial reports had a positive influence on the general level of confidence in the financial system of these countries, and therefore, on their competitiveness and appeal for attracting foreign direct and portfolio investments. most of these countries have been, or continue to be strategically oriented towards european integration. because of that, the implemented reforms in the legal and accounting systems of these countries are based on the acquis communautaire of the european union. with regard to the other members of the union, the countries of central and eastern europe differ in terms of socio-economic origin, historical evolution, and the achieved level of development. in the continuation of this paper, we will look at the peculiarities of the accounting systems of individual member states and candidates, as well as the scopes of harmonization of accounting regulations in relation to the current legal framework of the european union. 1. harmonization of the accounting regulations of the analyzed countries of central and eastern europe with the regulatory framework of the european union the accounting systems of individual countries are determined by the economic and political environment, the legal and tax system, professional practice and education. depending on the key features reflected in: the dominant sources of financing, accounting culture, the legal system, the tax system, the financial reporting objectives, the primary users of the financial statements, the accounting principles, the volume of disclosures, etc., national accounting systems had been usually classified in two large groups before accepting of ifrss in most countries of the world:  continental european accounting system (germany, france, greece, belgium, switzerland);  british-american accounting system (united kingdom, netherlands, ireland). the model of mixed economy stood out in europe during the last decade of the 20 th century. this model was characteristic of countries that had implemented transition reforms and had switched to the market economy, which was formally acknowledged by the accession to the european union. also, this model is characteristic of those countries that are still in this process, most of which are striving to join the eu. the european union law was the basis for the transformation of accounting in most central and eastern european countries that transposed the requirements of european directives into their national frameworks and accepted the application of the ias/ifrs for certain categories of entities, during the transition period. the legacies of pre-communist and communist systems, together with national culture and the needs conditioned by global trends, have influenced the development of accounting practices of these countries. the process of the accounting reform was determined and motivated by: political, economic and social conditions and changes; the need of transition economies to attract foreign direct investment; harmonization of internal accounting principles with relevant european directives and the ias/ifrs framework (maclullic & gurảu, 2004). harmonization of accounting regulations in the european union... 167 transition economies have multiple benefits from the harmonization of financial reporting. the harmonization and application of international regulations makes financial statements understandable to foreign investors and creditors. this reduces the information asymmetry and portfolio risk, and avoids the additional costs associated with the conversion of financial information due to differences in applied accounting standards. however, the process of harmonization is conditioned by certain problems, such as the level of development of these economies, the accounting tradition, the strength of the accounting profession, etc. in order to assess the achieved level of harmonization of six selected countries with the harmonized framework for financial reporting in the european union, we will analyze their national accounting regulatory frameworks. the table 1 provides a chronological overview of the most significant events in the development of the accounting legislation of poland, the czech republic, slovakia, hungary, romania and bulgaria. during the transition period, the countries of central and eastern europe included the requirements of the fourth, seventh and eighth directive of the european union in their normative acts. the reason for this was that most countries have become members, or were seeking eu membership, that is, the candidate status. reforms in the accounting system were first implemented by poland, the czech republic, slovakia and hungary, followed by romania and bulgaria. for those countries, the harmonization of the national law with european law resulted in their accession to the eu in 2004 and in 2007. 2. compliance of national accounting regulations of the analyzed countries of central and eastern europe with current eu regulations the european union, by means of regulations and directives as the most important instruments, seeks to harmonize accounting regulations, and achieve a higher level of comparability of financial statements of entities in the member states. these acts differ from the point of view of the obligation, and the way they are applied in certain national economies. european union regulations have the force of law in the community, which means that they are binding for the members, so there is no need to directly engage in individual national frameworks. the directives do not have the force of law, but the member states are the ones who decide on how to adopt and integrate these regulations into their regulatory framework. the most important acts that constitute the accounting regulatory framework in the european union are:  directive 2013/34/ eu;  directive 2014/95/eu;  directive 2006/43/eu;  directive 2014/56/eu;  regulation 1606/2002/ec. in all observed countries, the accounting act is the basic act that regulates financial reporting. whereas, in romania and slovakia, the line ministries have developed regulations that further define the area of financial reporting, as well as the application of national and international standards. the latest amendments to national legislations and national standards adopted by professional organizations or relevant state authorities relate to the transposition of directive 2013/34/eu and directive 2014/95/eu. so, in the continuation of the paper, we will review the harmonization of national accounting systems of these countries with the requirements of european law regarding the most important issues. 168 d. ranđelović, t. đukić table 1 chronology of the development of the accounting legislation of the observed countries in relation to the european union country name of the act the most important events for regulatory development and harmonization with the european framework and ifrs poland accounting act 1994 transposing the provisions of forth and seventh directives 2000 partial inclusion of ias 2004 adoption of a request of regulation 1606/2002/ec 2008 transposing the provisions of forth, seventh and eighth directives, as well as directive 86/635/ eec and directive 91/674/ eec 2013 partial transposing provisions of directive 2013/34/ eu 2016/2017 transposing provisions of directive 2013/34/ eu, directive 2014/56/ eu, directive 2014/95/ eu the czech republic accounting act 1993 transposing the provisions of forth and seventh directives 2003 transposing the provisions of forth, seventh and eight directives and adoption of regulation 1606/2002/ ec 2010 precise application of ias/ifrs 2015/2016 transposing the provisions of directive 2013/34/ eu 2017 transposing the provisions of directive 2013/34/ eu and directive 2014/95/eu slovakia accounting act decree 2002 transposing the provisions of forth, seventh, eighth directive and adoption of ias/ifrs 2005 application of regulation 1606/2002/ ec 2014 -transposing the provisions of directive 2013/34/ eu 2016 transposing the provisions of directive 2013/34 /eu and directive 2014/95/eu hungary accounting act 1991 partial transposing provisions of forth directive 2000 transposing provisions of forth, seventh and eighth directive 2015 transposing profisions of directive 2013/34 eu romania accounting act orders of the ministry of public finance 1991 partial transposing provisions of forth and seventh directive and adoption ias 1999 adoption of order of ministry of public finance no.403 on the application of romanian's gaap that are in line with forth directive and ias 2001 adoption of order of ministry of public finance no.94 on transposition of provisions of fourth directive and the mandatory application of ias for the prescribed entities 2012 adoption of order of ministry of public finance no. 881 on expanding the scope of mandatory application ias/ifrs 2014 adoption of order of ministry of public finance no 1802 transposing of provisions directive 2013/34 eu 2016 adoption of order of ministry of public finance no 1938 transposing of provisions directive 2014/95 eu bulgaria accounting act 1991 changed form and content of financial statements 2001 transposing of provisions of forth, seventh and eight directives and application of ias 2007 harmonization of law and national standards with ifrs 2015 transposing of provisions directive 2013/34 eu and directive 2014/95/ eu source: adapted from information on the accounting systems of analyzed countries published through websites of national professional organizations, ifrs foundation and scientific papers and professional publications harmonization of accounting regulations in the european union... 169 in the european union, over the period of thirty years, the regulation of financial reporting has been based on the fourth (directive 78/660/eec) and the seventh (directive 83/349/eec) directive. during this period, the directives were amended several times, but were not subjected to a detailed revision. however, new disclosure requirements and new valuation rules, primarily in the field of accounting at fair value, burdened the existing regulations, making the directives become too extensive. another problem related to the application of these standards was the large number of options and the difficult comparison of the financial statements of different countries. the regulations became burdensome and complex, which was particularly evident in the case of small and medium-sized enterprises, as it was stated in a 2008 release, the essence of which is described as "think small first". considering that over 99% of european companies belong to the category of small and medium-sized enterprises, a need for a regulatory reform in the field of accounting has arisen. the reform needs to be in accordance with the small and medium-sized enterprise (sme) development strategy 2020. this strategy aims to achieve a sustainable and inclusive economy, with the improvement of sources of financing for this sector. this resulted in the adoption of the new accounting directive (directive 2013/34/eu) on 26 june 2013. the changes in eu regulations are motivated by the creation of an incentive environment for the development of the small and medium-sized business sector, which implies the reduction of the administrative burden and the costs of financial reporting. with the new reclassification of the entities, it is expected that more than 90% of the entities will be classified into a micro group, that is, over 99% in the group of small and medium-sized entities. this will enable them to use simplified procedures in financial reporting. the directive seeks to fully harmonize financial reporting for small and micro entities. this is achieved through the reduction of options and necessary disclosures for the real and fair presentation of the operations of these entities, while taking into account the needs of users in individual national economies. the members can set additional requirements for medium and large entities. the result of such regulation is greater compliance at the lowest level, and also at the highest level, to which ifrs applies. the following table shows the criteria for classification of the entities according to the new accounting directive and the national accounting criteria of the analyzed countries. entities belong to a particular category if two of the three stipulated criteria for the current and previous reporting year are met. it can be perceived that the members of the european union partially harmonized the criteria for the classification of entities, primarily for micro and small enterprises. apart from the czech republic, romania and bulgaria, the remaining members do not have the category of medium-sized entities (gláserová et al., 2017). because of that, the thresholds of criteria for large companies are lower than those prescribed by the directive. this undermines the european legislator's intentions regarding the facilitations for smes. also, differences in the requirements for the preparation of consolidated financial statements in relation to the new accounting directive can be noticed. the new accounting directive sets out the criteria for classification of entity groups into small, medium and large ones. small entity groups are exempted from preparing consolidated financial statements, unless there are entities of public interest in the group. the czech republic, slovakia, and bulgaria have fully harmonized their criteria for the classification of entity groups, as well as the conditions for the exemption with the ones prescribed by the directive. meanwhile, hungary, with the new legal amendment, raised the thresholds for preparing consolidated financial statements to all entity groups that 170 d. ranđelović, t. đukić exceed two of the three stipulated criteria: total assets eur 20,000,000, net sales revenue eur 40,000,000 and average employment 250. this is narrower than what the european law is prescribing (changes to the accounting act on accounting related to the eu directive, 2015) similar to hungary, romania envisages the preparation of consolidated financial statements for large groups of entities that exceed two of the three criteria: total assets eur 23,681,717, net sales revenue eur 47,363,435 and average employment 250 (perrin et al., 2015). according to the polish accounting act, the obligation to prepare consolidated financial statements exists in two cases: a) groups which, in the preceding and current financial years, did not exceed at least two of three of the following thresholds before intragroup eliminations: annual average employment 250, total assets of all group entities eur 9,162,662; total sales and financial income of all group entities eur 18,329,755; b) groups which, in the preceding and current financial years, did not exceed at least two of three of the following thresholds after intragroup eliminations: annual average employment 250, total assets of all group entities eur 7,636,827; total sales and table 2 comparative overview of the criteria for the classification of entities according to the regulations of the analyzed countries and the requirements of directive 2013/34/eu directive 2013/34 eu poland the czech republic slovakia hungary romania bulgaria micro total assets in eur < 350,000 < 351,799 < 333,025 < 350,000 < 316,416 < 338,310 < 357,404 net sales in eur < 700,000 < 703,598 < 666,050 < 700,000 < 632,951 < 676,620 < 715,808 average number of employees < 10 < 10 < 10 < 10 < 10 < 10 < 10 small total assets in eur < 4,000,000 < 3,987,054 < 3,700,278 < 4,000,000 < 3,797,709 < 3,963,953 < 4,090,335 net sales in eur < 8,000,000 < 7,974,108 < 7,400,555 < 8,000,000 < 7,595,417 < 7,893,906 < 8,180,670 average number of employees < 50 < 50 < 50 < 50 < 50 < 50 < 50 medium total assets in eur < 20,000,000 < 18,501,388 < 3,963,953 < 319.429,092 net sales in eur < 40,000,000 < 37,002,775 < 7,893,906 < 338,585,183 average number of employees < 250 < 250 < 50 < 250 large total assets in eur > 20,000,000 > 3,987,054 > 18,501,388 > 40,000,000 > 3,797,709 > 3,963,953 > 19.429. 092 net sales in eur > 40,000,000 > 7,974,108 > 37,002,775 > 80,000,000 > 7,595,417 > 7,893,906 > 38,585,183 average number of employees > 250 > 50 > 250 > 50 > 50 > 50 > 250 source: adapted from information on the accounting systems of analyzed countries published through websites of national professional organizations, ifrs foundation and scientific papers and professional publications harmonization of accounting regulations in the european union... 171 financial income of all group entities eur 15,273,536. (doing business in poland accounting and auditing, 2016). member states have transposed the provisions of the directive 2013/34/eu into their national frameworks, but there are still some differences between them. differences are conditioned by the method of integrating the requirements of the directive, but also by the fact that regulation 1606/2002/ec on the area of the union has established a financial reporting system based on two reporting bases, ifrss and national standards. by comparing the requirements of national accounting frameworks of individual analyzed countries and directive 2013/34/eu, it can be concluded that there are some differences in terms of the prescribed forms and scope of financial reporting. poland, romania, and bulgaria partially provide a reduced amount of information for small and micro entities. however, the intention to reduce the size of the administrative burden for smes has not been fully achieved, as the systems of poland, slovakia and hungary do not recognize the category of medium-sized entities. in addition, in hungary, small entities have an obligation to prepare cash flow statements, while for a specific category of small entities, the preparation of business reports is also required. the czech republic, romania and bulgaria are expanding the mandatory set of financial statements with the cash flow statements and the statements of changes in equity. in poland, the czech republic, slovakia and hungary, the entities are obliged to prepare the business report, that is, the management report. whereas, in romania, poland, and slovakia, the obligation to prepare reports on payments to state authorities, has been introduced. in general, poland, the czech republic, hungary, slovakia, romania, and bulgaria have introduced the obligation to prepare additional reports stipulated by the directive, while retaining the forms envisaged by ifrs, apart from slovakia. in the last three years, the european union and the member states have been actively trying to resolve corporate and non-financial reporting issues, in order to define a framework that would provide more responsible and transparent reporting on socially responsible behavior of the entities. in order to increase the transparency and comparability of non-financial information on entities’ operations, the european union, through the new accounting directive, introduced the obligation to disclose information on the business model, politics, risks and key performances related to environmental, social, and employment issues, including the protection of human rights, corruption and fraud for individual entity categories. with the adoption of the amendment, that is, the directive 2014/95/eu, the obligation to prepare a non-financial report for all companies employing over five hundred employees, or whose asset value exceeds eur 20 million, with a net income greater than eur 40 million, was imposed. entities that do not meet the required criteria present the aforementioned information as part of the business report. meanwhile, member states may exclude small and medium entities from the obligation to publish this information. directive 2014/95 was supposed to contribute to standardization in the preparation and presentation of the corporate social responsibility reports, which could potentially have a positive impact on their coexistence and comparability (thomas & maguire, 2014) in that sense, member states were obliged to transpose directive 2014/95/eu into their national law by the end of 2016, which will come into force in 2018. all the analyzed states have fulfilled this requirement. however, the specifics of national regulations in the field of financial reporting stem from the flexibility and inconsistency of the directive itself, as well as certain differences 172 d. ranđelović, t. đukić in the transposition of requirements. this will cause differences in accounting practices between individual countries. namely, there are differences in the scope of application, given that the analyzed countries define differently large entities, as well as entities of public interest, and therefore, non-financial reporting entities. in all analyzed countries, with the exception of romania, the characteristics and content of the non-financial reporting is identical to the requirements of directive 2014/95/eu. also, in all the analyzed member states, non-financial information is presented in the business report or in a separate report, with the exception of hungary, which does not require the preparation of an independent report. although in the analyzed countries there is compliance regarding the characteristics, content and form of non-financial reporting, the directive itself is flexible in relation to materiality of non-financial reporting, which allows for a different interpretation of this term. in addition, the directive permits the application of various national, international and european reporting frameworks (emas, gri standards, oecd guidelines, iso standards), which is characteristic of the analyzed countries. the only exceptions are slovakia and bulgaria, where the former relies on international and european regulations, whereas the latter applies the act prescribed by the ministry of finance (knežević, et al., 2017). the possibility of applying different frameworks, principles and initiatives in individual countries jeopardizes the coexistence and comparability of the presented information on sustainable development. in the area of the non-financial report auditing, the analyzed countries in accordance with the directive, require verification that the non-financial report is delivered as part of the annual account, while bulgaria also prescribes a review of its content. this approach to the regulation of reporting on sustainable development in the union, and therefore in the analyzed countries, adversely affects the relevance and credibility of the information contained in the non-financial reports of the entities. 3. application of ifrs in the analyzed countries of central and eastern europe the strengthening of the european union was reflected in the tendency to raise the competitiveness of the capital markets of european countries, and thereby, to reduce the domination that the us market had in the last decades of the previous century. it was precisely the development of the european single market that required the establishment of a regulatory framework for financial reporting. during the seventies and eighties, efforts were made to harmonize national accounting standards in the area of the community, but without any progress. the solution was offered in the form of developing a completely new set of standards, or accepting the ias/ifrs. this was done by adopting regulation 1606/2002/ec. this regulation required the mandatory implementation of this set of accounting standards in the preparation of consolidated financial statements for entities whose securities were traded on organized markets in the member states, with the possibility of expanding their application to other categories of entities, this regulation required the mandatory implementation of this set of accounting standards in the preparation of consolidated financial statements for entities whose securities were traded on organized markets in the member states, with the possibility of expanding their application to other categories of entities. the regulation came into effect in 2005, while certain member states had allowed the ias/ifrs voluntary application even before this deadline. according to esma (european securities and markets authority) estimates, around 4,800 european quoted companies prepare their consolidated financial statements in harmonization of accounting regulations in the european union... 173 accordance with ifrs. meanwhile, over 1,000 entities whose securities are traded on eu stock markets, prepare their individual financial statements, although, according to the european regulations, they do not have the obligation to do so (report on enforcement and regulatory activities of accounting enforcers in 2014, 2014). in fact, in most member states, the obligation to apply ifrs has been expanded. in addition to harmonizing the national accounting frameworks with the current eu directives, all analyzed countries, as union members, have the obligation to apply ifrs in accordance with regulation 1606/2002/ec. also, the remaining countries have expanded the scope of the application of ifrs, while the implementation of national gaap is prescribed for all other entities. since 2005, poland has prescribed the mandatory application of ifrs for the preparation of consolidated financial statements of entities in the capital market. this also applies to financial institutions. on the other hand, for individual financial statements, this application is voluntary. other entities apply the polish accounting standard (par). this set of standards has been developed under the strong influence of ias, but some discrepancies can be observed regarding the accounting treatment of fixed assets, property plant and equipment, non-current assets or disposal groups held for sale, inventory, capitalization of borrowing costs, etc. (doing business in poland accounting and auditing, 2016). the czech republic has extended the obligation to apply ifrs in the preparation of individual financial statements of entities whose securities are traded on regulated markets, while for other entities the application of this set of standards is permitted. entities that do not apply international standards have the obligation to apply decrees and czech accounting standards. the czech republic national standards have been developed by the ministry of finance and contain descriptions of accounting methods and procedures that are regarded as the instruments for bookkeeping records. the czech accounting system is rigid, with the accounting profession having a weak influence on it. therefore, national standards cannot reflect the economic essence of transactions, as they are not developed under the influence of "best practice", which shows the differences in relation to ifrs. (miková & zárová, 2015). slovakia requires the preparation of financial statements in accordance with ifrs. the application of ifrs is required in the preparation of individual financial statements of public interest entities, as well as in the preparation of consolidated financial statements of entities that do not participate in the capital market. on the other hand, ifrs application is permitted for all quoted entities that are not considered to be subjects of public interest. other entities apply slovak gaap. ifrs and slovak gaap are, to a significant extent, aligned with each other. hungary has expanded the scope of application of ifrs, allowing their usage in the preparation of consolidated financial statements of entities that are not participants in the capital market. the application of hungarian accounting standards is mandatory in the preparation of individual financial statements. on the other hand, it is permissible to apply ifrs for the preparation of an additional set of financial statements next to a set prepared according to national standards. however, in hungry, the application of ifrs is not deeply rooted, as there is not sufficient awareness of the significance of these standards for establishing business relationships. starting from 2012, romania has expanded the obligation to apply ifrs to all entities whose securities are traded in capital markets, as well as to all credit institutions. ifrs 174 d. ranđelović, t. đukić application is permitted in the preparation of consolidated financial statements of unquoted entities, as well as for other entities for which there is no obligation to apply romanian accounting standards. national standards are developed on two levels, and are different in relation to ifrs and ifrs for sme. an extended set of standards are applied by sme that meet the prescribed criteria, while micro entities apply a simpler framework. in bulgaria, the obligation to apply ifrs has been extended to all entities of public interest, while other entities can decide between international and bulgarian national accounting standards. the first version of the standards adopted in 2005, came into force in 2008, with the aim of aligning the financial reporting of small and medium-sized entities to the current european regulations, while avoiding the application of complex ifrs. in 2007, national standards were revised in order to achieve greater compliance with international standards. they are considered to be a shortened version of ifrs. (basheva & boyanov, 2015). based on the above, it can be noted that the observed countries of central and eastern europe achieved a high degree of alignment in accounting regulations in the field of financial reporting for micro and small entities, by transposing the regulations of directive 2013/34 eu. the higher level of compliance is also achieved in the field of reporting of large entities, by prescribing the application of ifrs. however, there are still some particularities of the national regulatory frameworks that are conditioned by:  the differences in the classification of entities into individual categories, which affects the selection of the reporting base;  the prescribed volume of financial reporting for individual entity categories;  the prescribed scope of ifrs application;  the specifics of national gaap;  the differences between national gaap based on the new accounting directive that creates room for differences between standards of the analyzed countries, by providing different options, but also allows distinctions to exist in relation to ifrs (obradović & karapavlović, 2015). in the area of non-financial reporting, the analyzed countries have mostly harmonized the regulations with the requirements of directive 2014/95 eu. however, due to the flexibility of the directive, the final outcomes of the application of national regulations regarding comparability and transparency of information on sustainable development have been brought into question (stojanović-blab et al., 2016, p. 1353). conclusion in the last few years, the european union has innovated accounting and financial reporting regulations in order to make this process more efficient for all entity categories. the new regulation should ensure less administrative burden and lower reporting costs for sme, with adequate information quality for the needs of the users. this is achieved by prescribing minimum requirements, while member states can extend those requirements with national regulations. on the other hand, the new regulation should also enable greater transparency in reporting on corporate social responsibility and on payments to state authorities for large individual enterprises and entity groups. furthermore, with the development of the directives, the european legislator aimed to achieve greater compliance with ifrs. this has been achieved partly, as there are still differences between these two systems, primarily in the scope of reporting and the accounting treatment of particular issues. harmonization of accounting regulations in the european union... 175 since the beginning of the 1990s to this day, central and eastern european countries have succeeded in building and establishing accounting systems to support their development in the market conditions of business. the harmonization of national accounting systems with international is inevitable, and the analyzed countries have achieved this, in the previous period, to a considerable extent. this process was also partially initiated with broader sociopolitical goals related to the membership status of these countries in the european union. all the analyzed countries, harmonized national accounting and auditing regulations with the regulations of the european union. by establishing a regulatory framework, the european union has achieved certain results in the harmonization of accounting and financial reporting in the member states, primarily in the field of the application of basic accounting principles, valuation methods, and the form of financial statements. however, by analyzing the basic characteristics of the national regulations of the observed countries, certain specificities can be noticed. these specificities are the result of the differences in the transposition of european and international regulations. all of the analyzed members somewhat simplified their sme regulations in accordance with the new accounting directive. but the requirement to reduce the administrative burden for smes has not been fully honored, as there are no middle-sized entity categories in some countries. in addition, in almost all countries, the thresholds for mandatory audit are lower than those required by the directive, which additionally burdens entities who, objectively, do not have the need to hire an independent auditor. regarding the applied reporting bases, all countries apply ifrs in accordance with regulation 1606/2002 ec, while the scope of application of this set is extended to other entities. because of that, it can be said that a higher level of harmonization has been achieved at the highest level of reporting. however, in all the analyzed countries, a national gaap is applied for lower levels of reporting. the application of two systems of standards (national gaap and ifrs), between which there are some differences, is also allowed for those levels of reporting. all of the above indicates that there are still differences caused by the specificities of certain national systems, but also by the specifics of the european union law itself (flexibility, options, etc.), which negatively affects the comparability and transparency of financial statements in the region. references basheva, s. & boyanov, b. (2015). regulation of the bulgarian accounting system and its future perspectives, zeszyty teoretyczne rachunkowości, 84 (140), 49-66. ernst&young . (2016). doing business in poland accounting and auditing, poland: ey, retrieved from: http://www.ey.com/publication/vwluassets/ey-doing-business-in-poland-accounting-andauditing/$file/ey-dbp-accounting-and-auditing.pdf, accessed on: 02.03.2018. esma. (2015). report on enforcement and regulatory activities of accounting enforcers in 2014, retrieved from: https://www.esma.europa.eu/sites/default/files/library/2015/11/2015659_activity_report_on_accounting_enforcers _in_europe_in_2014.pdf, accessed on: 22.02.2018. gláserová, j., otavová m. & dřǐnovská e. (2017). impact of transposition of the directive 2013/34 eu into the national laws of eu members states emphatically v4. acta universitatis agriculturae et silviculturae mendelianae brunensis, 65 (2), 631-639. knežević g., pavlović, v. & stevanović, s. (2017). izveštavanje o održivom razvoju – karakteristike, ograničenja i perspektive u republici srbiji, [reporting on sustainable development characteristics, disadvantages and perspectives in the republic of serbia]. poslovna ekonomija, 11 (1), 83-102. 176 d. ranđelović, t. đukić maclullic k.k. & gurảu c. (2004), the relationship between economic performance and accounting system reform in the cee region: the case of poland and romania, edinburg: heriot-watt university. miková t. & zárová m. (2015). important changes in the czech accounting regulatory system, procedia economics and finance, 25, 185-191. obradović, v. & karapavlović n. (2015). standardi finansijskog izveštavanja u evropskoj uniji i srbiji – komparativna analiza [financial reporting standard in the eu and serbia – comparative analaysis]. in: jakšić m., stojanović aleksić v., mimović, p. (eds), ekonomski i socijalni aspekti priključivanja srbije evropskoj uniji, (pp.415-425). kragujevac: ekonomski fakultet, univerzitet u kragujevcu. perrin, r., schӧb r. & manlache a. (2015). plan contabil chart of accounts, kpmg, retrieved from: https://assets.kpmg.com/content/dam/kpmg/ro/pdf/plan-de-conturi-2016-web.pdf, accessed on: 02.03.2018. stojanović-blab, m., blab, d. & spasić, d. (2016). sustainability reporting – a challenge for serbian companies. teme, 40 (4), 1349-1366. thomas, w. & maguire, a. (2014). changes ahead for corporate sustainability disclosures following publication of new eu directive, new york: willkie farr & gallagher llp, retrieved from: http://www.willkie.com/~/media/files/publications/2014/12/changes_ahead_for_corporate_sustainability _disclosures_following_publication_of_new_eu_directive.pdf, accessed on:14.02.2018. harmonizacija računovodstvene regulative na području evropske unije sa posebnim osvrtom na eu zemlje centralne i istočne evrope nastanak i razvoj jedinstvenog evropskog tržišta nametnuo je potrebu usklađivanja finansijskog izveštavanja poslovnih subjekata na području evropske unije. evropska unija putem regulativa i direktiva, kao osnovnih instrumenata, podstiče harmonizaciju nacionalnih računovodstvenih okvira aquaris-om, s jedne, kao i harmonizaciju računovodstvenih praksi između pojedinih zemalja članica, odnosno, zemalja koje pretenduju na članstvo, s druge strane. zemlje centralne i istočne evrope pripadaju ili su pripadale prema modelu finansijskog izveštavanja tipu mešovite ekonomije, u koji spada i naša zemlja. u ovom radu, sagledaćemo domete određenih zemalja centralne i istočne evrope u harmonizaciji finansijskog izveštavanja u odnosu na aktuelnu regulativu evropske unije. komparativnom analizom ukazaćemo na opšte odlike regulatornih okvira pojedinih nacionalnih ekonomija, čija bi pozitivna iskustva mogla biti primenjena u razvoju računovodstvene regulative naše zemlje. ključne reči: finansijsko izveštavanje, harmonizacija, centralna i istočna evropa, međunarodna računovodstvena regulativa facta universitatis series: economics and organization vol. 17, no 4, 2020, pp. 385 396 https://doi.org/10.22190/fueo200907028t © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper comparative analysis of developmental concepts of social entrepreneurship in europe and the usa1 udc 005.961:005.914.3]:364-3(4+73) miljana talić*, maja ivanović-đukić university of niš, faculty of economics, serbia abstract: the paper presents a comparative analysis of the dominant theoretical concepts and models of social entrepreneurship development in continental europe and the united states. the initial assumption of the paper was the differences in the model of capitalism that are present in these parts of the world, and the dominant theoretical concepts determine the differences in the form of manifestation of social entrepreneurial activity and the degree of population involvement in its implementation. empirical research, with the aim of testing this assumption, was conducted on a sample of 50,000 social entrepreneurs from 25 countries. the results showed that there are no significant differences in the degree of involvement of the population in social entrepreneurial activity between europe and the usa in the initial phase. in the operational phase, there are differences in the degree of involvement of the population in social entrepreneurship between europe and the usa, but they are also present between eastern and western europe, which means that they are not predominantly conditioned by theoretical concepts and models of social entrepreneurship, but by other factors. key words: social entrepreneurship, social enterprises, social innovations, start-up development phase, operational development phase of the se. jel classification: l31 received september 07, 2020 / accepted october 26, 2020 corresponding author: miljana talić * phd student at university of niš, faculty of economics university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: tmiljana@hotmail.com 386 m. talić, m. ivanović-đukić 1. introduction many countries had a problem with unemployment in the 1980s, which they could not solve with the existing mechanisms of social policy. new solutions needed to be found that would allow certain social groups to be introduced to the labor market (certo & miller, 2008). as a possible solution to this problem, social enterprises began to be established. social enterprises were innovations in the public sector whose primary goal was primarily the care of socially vulnerable groups and the training of „people who are disadvantaged in society and cannot be self-employed.“ (raičević & glomazić, 2012, p. 7). initially, social enterprises were founded and financed by the state, but very quickly members of civil society (citizens, informal groups, associations, etc.) self-organized. they independently created social enterprises in various legal forms to enable employment of people who are long-term unemployed and facilitate their inclusion in social flows (hjorth, 2013; monzon & chaves, 2017) or offer goods /services to the most vulnerable social groups, at relatively low prices or completely free and made it easier to overcome the institutional vacuum (kolin & petrušić, 2008). these individual initiatives involved finding new and original ideas for solving social problems, starting a business while providing all the necessary resources and bearing the risk of failure of such a job. in other words, they had all the elements of entrepreneurial activity, so they are beginning to be considered a „form of social entrepreneurship“ (austin et al., 2006; zahra et al., 2009; elkington & hartigan, 2008). the benefits of implementing an individual entrepreneurial initiative in the social sphere to solve social problems are being noticed by many international institutions, so they are starting to work on their promotion and development (hjorth, 2013). these measures have resulted in the emergence of a large number of social enterprises and entrepreneurs (european commission, 2013). the increase in the number of entrepreneurs with social goals in practice begins to draw the attention of scientists and „leads to the development of the theoretical concept of social entrepreneurship“ (johnson, 2000; thompson et al., 2000). as a concept that uses non-governmental organizations, market-based approaches to address social issues, social entrepreneurship is becoming increasingly accepted and is being applied worldwide. however, under the influence of the specific characteristics of the environment in which it develops, social entrepreneurship begins to take different forms in certain parts of the world. the most obvious differences occur in the development of social entrepreneurship in continental europe, on the one hand, and the united states and the united kingdom on the other. according to some authors, one can even speak of different models of social entrepreneurship (bacq & janssen, 2011), while others agree that it is the same concept with certain variations (hjorth, 2013). the subject of this paper is to present the similarities and differences of the "european" and "american" model of social entrepreneurship through a comparative analysis of theoretical concepts and forms of manifestation of entrepreneurial activity in the social sphere. the aim of this paper is to examine whether there are significant differences in social entrepreneurship in these parts of the world. the paper will first present the theoretical concepts of social entrepreneurship and the dominant schools that are present in the literature in europe and the united states. then, a comparative analysis of the practice of social entrepreneurship on both sides of the atlantic will be done and the historical factors that shaped different conceptions of social entrepreneurship will be analyzed. finally, using statistical methods, based on gem data, comparative analysis of developmental concepts of social entrepreneurship in europe and the usa 387 it will be examined whether there are significant differences in the development of social entrepreneurial activity in europe and the united states. 2. literature review 2.1. different theoretical concepts of social entrepreneurship in europe and the usa social entrepreneurship is a relatively new concept. in its theoretical explanation, there are significant differences between individual authors and institutions (dacin et al., 2010). differences in the explanation of the concept of social entrepreneurship appear, first of all, as a consequence of different understandings of entrepreneurship itself. as it is known, entrepreneurship can be viewed as a set of personal characteristics of individuals entrepreneurial spirit or as a set of the activities entrepreneurial process (ivanović-đukić & radosavljević, 2019, p. 152). the first group of definitions explains social entrepreneurship from the aspect of personal characteristics of entrepreneurs. in that sense, a social entrepreneur is most generally defined as an individual who is able to find original ideas for solving social problems, provide the necessary resources and start a business in order to create value for society. the second group of definitions explains social entrepreneurship as a set of activities performed by a social entrepreneur. in this sense, social entrepreneurship is “a process of the value creation by combining resources in new ways” (mair & marti, 2006, p. 37). in addition, there are differences in the understanding of the essence of social entrepreneurship that have conditioned the emergence of: schools of social innovation and schools of social enterprises (dees & battle anderson, 2006). the school of social innovation arose from the theories of entrepreneurship developed by josef schumpeter (schumpeter, 1934). the focus of this approach is innovation, i.e. “finding new and better means to solve social problems by the individual” (dees & battle anderson, 2006). accordingly, a social entrepreneur can be defined as an innovator a person who reforms or revolutionizes traditionally established models of creating social value in the direction of better use of resources to create greater social impact (dees & battle anderson, 2006; peredo & mclean, 2006; sharir & lerner, 2006; thompson et al., 2000; nicholls & cho, 2006). while the primary goal of social entrepreneurial activity is the creation of added value for society by individuals and the introduction of sustainable changes for a society that take precedence over profit creation (mair & marti, 2004; weerawardena & sullivan mort, 2006). the focus of this school is an individual, a social entrepreneur when they consider him an activist of social change. thus, one person who is the bearer of social change, in schumpeter's sense, is a key driver of social entrepreneurship even if a larger number of people can be involved in the creation of its organization (dees & battle anderson, 2006). on the other hand, the school of social enterprises advocates the creation of organizations that will simultaneously achieve a social mission and generate income (defourni & nissens, 2008, p. 3). a social entrepreneur is a visionary who is able to identify opportunities from the environment and use the resources of a certain group of citizens to achieve “a social mission in an economically sustainable way and find innovative solutions to social problems of their community that are not adequately met by the local government” (sullivan mort et al, 2003; dearlove, 2004; roberts & woods, 2005; sharir & lerner, 2006; chell, 2007). the primary goal of social entrepreneurs' activities is to achieve a social mission (all social activities that can be non-profit) in an economically sustainable way, if the business performs activities that generate profit, it must be reinvested in solving social problems (defourni & nissens, 388 m. talić, m. ivanović-đukić 2008). thus, according to this school, the primary role in the social economy is played by social enterprises (citizens' associations), while social entrepreneurs have a secondary role (skoll, 2008). the school of social enterprises is more accepted in europe (defourni & nissens, 2008, p. 3), while in the usa the school of social innovations is dominant. interest in social enterprises in the united states is present only among non-profit organizations working on the establishment of social enterprises to use funds from international funds intended to finance these economic entities (basq & janssen, 2011). 2.2. different practices of social entrepreneurship in europe and the usa the development of social entrepreneurship in practice, in addition to dominant theoretical concepts, is greatly influenced by the institutional environment in which the activities of social entrepreneurs take place. the institutional environment is defined by legal regulations, administrative procedures, social policy and other measures implemented by the state. the institutional environment is specific for each country, so there are certain differences in the development of social entrepreneurship. the biggest differences appear in the concept and manner of development of social entrepreneurship in continental europe on the one hand and the usa and the uk on the other, and they are largely conditioned by the characteristics of capitalism and the role of government. for example, the american model of capitalism is based on individual financial success, short-term financial gain, and media coverage. not much attention is paid to economic differences. poverty is seen as a reflection of laziness and irresponsibility. for these reasons, “unemployment benefits are very low, there is no compulsory health insurance or family allowance” (albert, 1991). on the other hand, the model developed by rhineland, which is present in continental europe and japan, gives greater importance to collective success, encourages long-term orientation and strives to reduce economic disparities in society. the european tradition considers the poor man a victim, not a culprit, so in most european countries there are a large number of forms of social assistance for the most economically vulnerable categories of the population and highly organized social insurance (basq & janssen, 2011). these two very different forms of capitalism lead to a different approach to the development of social entrepreneurship. as the governments of most countries in europe implement a larger number of social policy measures to reduce social exclusion and poverty, all initiatives that help solve these problems are encouraged and supported. social entrepreneurship is considered one of the priorities, so most countries provide various forms of financial and institutional assistance in the direction of its development (they push its development). figure 1 shows the sources of income of social enterprises in europe, where public funds play a significant role. on the other hand, in the united states there are no direct state incentives or institutional measures to support the development of social entrepreneurship. it is considered an instrument for creating a welfare state. through the media, work is done to raise public awareness of its role and importance, but its development is based on the voluntariness and individual initiatives of individuals (dees & battle anderson, 2006). given that there are more incentives to start social entrepreneurial activity in europe, it can be expected that a higher percentage of the population in europe is involved in social entrepreneurial activity in the start-up phase compared to the usa and the uk. therefore, our first hypothesis is: comparative analysis of developmental concepts of social entrepreneurship in europe and the usa 389 h1: percent of people involved in social entrepreneurial activity in the start-up phase is higher in europe, compared to the usa & uk. fig. 1 revenue streams for social enterprises in europe source: european commission (2015) a map of social enterprises and their eco-systems in europe. luxembourg: publications office of the european union in addition to the characteristics of capitalism and the role of the government, legal regulations and dominant theoretical concepts affect the characteristics of organizations as a form of manifestation of entrepreneurial activity with a social mission. according to the school of social innovation, which is dominant in the u.s., the legal form of an organization founded by a social entrepreneur can be different, and the organization itself can be nonprofit or for-profit. for austin, stevenson, and wei-skillern (2006), as well as for mair and marti (2004), “social entrepreneurship should not be limited to any specific legal form. according to these authors, the choice should rather be dictated by the nature of social needs and the amount of resources required.” for mair and marti (2004) an important element is the entrepreneurial spirit that gives social initiatives their entrepreneurial nature. this perspective has resulted in the emergence of various hybrid organizational forms that can: be independent, generate profit, hire people and hire volunteers, adopt innovative strategies in search of social change,” etc. “the advantages of these hybrid organizations include, among other things, higher market response rates, higher efficiency and innovation rates, as well as higher resource mobilization capacity” (haugh, 2005; dees & battle anderson, 2006). given that in the united states, social entrepreneurs have much greater opportunities to take advantage of opportunities from the market, it can be expected that a large percentage of initiated social jobs will survive the initial problems and move from the start-up to the operational phase. our next hypothesis is: h2: percent of people involved in social entrepreneurial activity in the operational phase is higher in the usa & uk compared to europe. 390 m. talić, m. ivanović-đukić in contrast, in europe, the forms of entrepreneurial organizations and the legal forms they can receive are precisely defined. all organizations founded by social entrepreneurs are considered part of the so-called “third sector”, are embedded in the field of social economy and can be: cooperatives, citizens' associations, foundations and mutual benefit societies. two types of definitions can be found in european literature: conceptual and legal. international organizations as well as research centers have provided conceptual definitions. for example, the oecd defines a 'social enterprise' as "any private activity carried out in the public interest, organized by an entrepreneurial strategy, but whose main purpose is not to maximize profits but to achieve certain economic and social goals and which has the ability to bring innovative solutions to problems of social exclusion and unemployment" (oecd, 1999). the european commission's definition in the 2011 strategy paper entitled "social business initiative" explains: rather than making a profit for its owners” (brouard & lariviet, 2011). a comparative overview of these characteristics of social enterprises is given in table 1. table 1 comparative overview of social enterprise in the united states and europe europe united states mission creation of social value revenue generation types of social enterprise few many common organizational type association/cooperative nonprofit focus human services all nonprofit activities activity of most ses market based market based help from the government substantial insignificant iy source: authors' work based on a literature review emes network researchers have developed a common definition of a social enterprise that should fit into the different national contexts of individual eu countries. they list the criteria that an organization needs to meet in order to be considered a social enterprise. on the one hand, “four criteria are stated that reflect the economic and entrepreneurial dimensions of the organization: (1) continuous activity of production and sale of goods and/or services; (2) a high degree of autonomy; (3) a significant level of economic risk; and (4) the minimum amount of work paid.” on the other hand, five criteria are listed that unite the social character of an entrepreneurial initiative: “(1) an explicit goal for the benefit of the community; (2) an initiative launched by a group of citizens; (3) decision-making power that is not based on capital and ownership; (4) participatory nature including all actors of the activity; and (5) limited profit distribution” (defourni & nissens, 2008). using this definition as a starting point for identifying social enterprises, significant differences in the number of social enterprises in european countries can be observed. table 2 provides an overview of the estimated number of social enterprises in the eu and non-eu countries, the number of social enterprises per million inhabitants, as well as the estimated number of employees in these enterprises. comparative analysis of developmental concepts of social entrepreneurship in europe and the usa 391 table 2 estimated number of social enterprise in eu and non-eu countries country year estimated number of ses number of ses per million inhabitants estimated number of employees eu countries austria 2015 approx. 1,535 approx. 174 n.a. belgium 2017 18,004 1,530 572,914 bulgaria 2015-2017 approx. 3,700 approx. 525 26,000 croatia 2018 526 128 n.a. cyprus 2017 190 22 n.a. czech republic 2018 3,773 356 n.a. denmark 2018 411 71 n.a. estonia 2016 121 92 1,603 finland 2018 1,181 214 approx. 52,500 france 2015-2017 approx. 96,603 1,414 >1,187,249 germany 2017 77,459 936 n.a. greece 2019 1,148 107 n.a. hungary 2016 15,855 1,621 72,642 ireland 2009 3,376 699 >25,000 italy 2017 102,461 1,694 894,800 latvia 2018 approx. 200 approx. 103 n.a. lithuania 2016-2017 3,476 1,237 n.a. luxembourg 2017-2018 928 1,546 24,055 malta 2018 31-62 65-130 n.a. netherlands 2015-2016 5,000-6,000 290-350 65,000-80,000 poland 2016-2019 29,535 768 428,700 portugal 2013 7,938 771 145,734 romania 2015-2017 6,317 323 17,117 slovakia 2014 3,737 687 n.a. slovenia 2017 1,393 674 15,063 spain 2017 9,680 208 >91,500 sweden 2009-2016 approx. 3,000 approx. 296 n.a. non-eu countries albania 2018 379 132 2,000-2,500 iceland 2017 258 740 1,488 montenegro 2018 150 241 < 500 north macedonia 2013-2015 551 266 n.a. norway 2016 250 47 n.a. serbia 2012 411 59 4,273 turkey 2016-2018 1,776 22 n.a. united kingdom 2007-2017 30,753 464 353,357 source: european commission (2020) social enterprises and their ecosystems in europe. comparative synthesis report. available at https://europa.eu/!qq64ny legal definitions cite the national governments of each state to establish clear criteria for entities that can be considered social enterprises, and they vary from country to country (basq & janssen, 2011). also, organizations and instruments of support for their development differ. however, there are some elements that are present in most eu countries that provide the basic infrastructure for the development of social entrepreneurship. first, there is legislation in the field of social entrepreneurship. legal regulations define the most important conditions that should be met by the subjects of the social economy, their goals, business principles, forms of organization, establishment procedures, etc. then, in most https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/introduction/list-noneu-countries_en https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/introduction/list-noneu-countries_en https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/introduction/list-noneu-countries_en https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/introduction/list-noneu-countries_en 392 m. talić, m. ivanović-đukić countries, state bodies (ministries, councils, etc.) have been formed that are responsible for implementing measures to create a stimulating environment for the development of social entrepreneurship. these bodies work on strategies and implement policies for the development of social entrepreneurship, work on promoting and supporting social enterprises (through media promotion of the role and importance of social enterprises, providing better access to funding sources, creating institutions supporting social enterprises, etc.). also, the activities of non-governmental organizations that are active in the field of social economy are stimulated. all these measures lead to the creation of a stimulating environment for the development of social entrepreneurship (mitrović & mitrović, 2019). 3. methodology 3.1. sample, model and variables gem (global entrepreneurship monitor) data from 2015 (analysis of social entrepreneurship was performed at that time, while other reports do not contain this data) are used for the analysis (bosma et al., 2016). our sample includes a total of 25 countries: of which 10 are eastern european countries, 13 are western european countries, the uk and the usa. in accordance with the standard gem methodology, each country provides answers for at least 2,000 entrepreneurs, so that our sample includes over 50,000 social entrepreneurs. respondents of the gem database consist of individuals aged 18-64 years. according to gem, a social entrepreneur is defined as “an individual who initiates or currently leads any type of activity, organization or initiative that has a particular social, environmental or common goal” (bosma et al., 2016). there are two phases in the development of social entrepreneurial activity: start-up phase and operational phase. the start-up phase implies the initial entrepreneurial activity and refers to new companies (up to 3.5 years old). this phase is characterized by a number of challenges associated with starting a new business, so many businesses fail in the first few months of business and do not reach the next phase. those companies that have existed for more than three and a half years are in the operational phase. this multi-stage procedure is useful for assessing the state of entrepreneurship at various points. in order to examine whether there are statistically significant differences in the degree of population involvement in social entrepreneurship in the usa and europe, a multivariable analysis of variance (manova) was performed. the variables in the model were the percentage of those involved in se at individual stages in different parts of the world. 3.2. results and discussion the results of descriptive statistics are shown in table 3. it can be seen from the table that the average values for the degree of involvement of the population in social entrepreneurship in the observed regions are approximately uniform. in the start-up phase, the average value in western europe is 4.05%, in eastern europe 3.85%, and in the usa & united kingdom 4%. the highest degree of involvement is in hungary (9.7%) and the lowest in bulgaria 0.6%. eastern european countries have the largest deviations from the average. comparative analysis of developmental concepts of social entrepreneurship in europe and the usa 393 table 3 descriptive statistics mean sd min. max eastern europe involved in se, start-up phase 3.28 6.18 0.6 9.7 involved in se, operational phase 3.14 2.23 0.7 6.9 involved in social goal, start-up phase 1.44 3.78 0.3 5.8 involved in social goal, operational phase 1.64 2.18 0.3 3.9 western europe involved in se, start-up phase 4.05 4.29 0.8 7.4 involved in se, operational phase 4.90 6.3 1.5 10.3 involved in social goal, start-up phase 2.39 1.13 0.5 3.2 involved in social goal, operational phase 3.13 2.37 0.9 5.5 sad &united kingdom involved in se, start-up phase 4 2.85 2.3 5.7 involved in se, operational phase 6.3 3.83 4.2 8.4 involved in social goal, start-up phase 2.4 2.21 1.1 3.7 involved in social goal, operational phase 4 3.33 2.5 5.5 source: authors' work based on: bosma et al. (2016) global entrepreneurship monitor 2015 to 2016: special report on social entrepreneurship. global entrepreneurship research association. in the operational phase, the average involvement in eastern europe is 3.13%, in western europe 3.9%, in the usa & united kingdom 6.3%. the highest degree of inclusion is in luxembourg (10.3%), and the lowest in bulgaria 0.7%. in order to check whether there are statistically significant differences in the degree of involvement of the population in social entrepreneurship in certain phases, manova was done. the results are shown in table 4. table 4 degree of population involvement in social entrepreneurship in europe and the usa eastern europe western europe us & uk f p-value partial eta sq. bonferroni test involved in se, start-up phase 3.28 4.05 4 .59 .623 .01 ns* involved in se, operational phase 3.14 4.90 6.3 4.46 .005 .08 1-2, 1-3, 2-3 involved in social goal, start-up phase 1.28 1.75 2.4 .47 .562 .02 ns* involved in social goal, operational phase 1.46 2.49 4 4.05 .008 .07 1-3,2-3 ns non-significant differences source: author's own work as it can be seen, there are no statistically significant differences in the degree of population involvement in social entrepreneurial activity in the start-up phase between eastern europe, western europe and the us & uk. our first hypothesis has not been proven. when it comes to the operational phase, there are significant differences, both between europe and the us & uk, and between eastern and western europe. this result points to the conclusion that theoretical concepts of se (dacin et al., 2010) and characteristics of capitalism (bacq & 394 m. talić, m. ivanović-đukić janssen, 2011) are not the key cause of differences in the involvement of population in social entrepreneurship in europe vs. usa. the analysis of the factors that predominantly influence the development of social entrepreneurship will be the subject of future research. conclusion the field of social entrepreneurship is characterized by great diversity from the point of view of defining the concept and its application in practice. in addition to discrepancies in different regions, the distinctions are particularly pronounced in the understanding of this concept in different countries and institutional contexts. this differentiation is especially visible when comparing this type of entrepreneurship in europe and the usa. despite the unique understanding of the essence of the concept of social entrepreneurship, there are significant differences in its development in europe and the united states. differences appear in the theoretical explanation and understanding of the essence and in the models of its development in practice. the paper explains the "school of social innovations" and the "school of social enterprises", as theoretical concepts that explain the essence of social entrepreneurship from different aspects. also, the differences that occur in the way the concept is applied in europe and the usa are explained. comparing social enterprises, it was found that in many areas where the united states has difficulties with social entrepreneurship, europe has a better solution and vice versa, which leaves space for mutual learning. however, our empirical research on a sample of 25 countries and over 50,000 social entrepreneurs showed that significant differences in the degree of involvement of the population in social entrepreneurial activity do not exist in the initial phase. in the operational phase, there are differences in the degree of involvement between europe and the united states, but differences also exist between eastern and western europe, which means that they are not predominantly conditioned by theoretical concepts and development models of se, but by some other factors. references albert, m. 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(2000). social entrepreneurship – a new look at the people and the potential. management decision, 38(5), 328-338. weerawardena, j., & sullivan mort, g. (2006). investigating social entrepreneurship: a multidimensional model. journal of world business, 41(1), 21-35. zahra, s. a., gedajlovic, e., neubaum, d. o., & shulman, j. m. (2009). a typology of social entrepreneurs: motives, search processes and ethical challenges. journal of business venturing, 24(5), 519-532. https://www.researchgate.net/journal/1750-8614_social_enterprise_journal https://www.researchgate.net/journal/1750-8614_social_enterprise_journal 396 m. talić, m. ivanović-đukić komparativna analiza razvojinih koncepata socijalnog preduzetništva u evropi i sad u radu je izvršena komparativna analiza dominantnih teorijskih koncepata i modela razvoja socijalnog preduzetništva u kontinentalnoj evropi i sad. polazna pretpostavka rada bile su razlike u modelu kapitalizma koje su prisutne u ovim delovima sveta, a dominantni teorijski koncepti uslovljavaju razlike u obliku manifestacije socijalne preduzetničke aktivnosti i stepenu uključenosti stanovništva u njenoj implementaciji. empirijsko istraživanje, sa ciljem testiranja ove pretpostavke, sprovedeno je na uzorku od 50.000 socijalnih preduzetnika iz 25 zemalja. rezultati su pokazali da ne postoje značajne razlike u stepenu uključenosti stanovništva u socijalnu preduzetničku aktivnost između evrope i sad-a u početnoj fazi. u operativnoj fazi se javljaju razlike u stepenu uključenosti stanovništva u socijalno preduzetništvo između evrope i sad, ali su one takođe prisutne između istočne i zapadne evrope, što znači da nisu dominantno uslovljene teorijskim konceptima i modelom razvoja socijalnog preduzetništva, već nekim drugim faktorima. ključne reči: socijalno preduzetništvo, socijalna preduzeća, socijalne inovacije, start-up faza razvoja, operativna faza razvoja se facta universitatis series: economics and organization vol. 15, n o 3, 2018, pp. 257 270 https://doi.org/10.22190/fueo1803257b © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication image of fujian province as a tourist destination – a foreigner’s perspective 1 udc 338.48:336.1(510) marko blažević*, guisong chen fujian agriculture and forestry university, college of management college of tourism, fuzhou, china abstract. the effect of destination image on tourist behavior was studied on many occasions. this article aims to identify the image of fujian province as a tourist destination in international markets, in order to support a discussion on how to improve tourism experience for foreign tourists. as the basis for the analysis are the results from an online survey, distributed to foreigners who have visited or lived in fujian province, and in-person interviews. research found that the overall image of fujian province is positive and that 50.5 % of respondents stated that the main reason for visiting fujian were holidays, 20% of the respondents had their trips arranged by an agency, 32% stayed in fujian province for more than 6 months and most of the respondents stated that “nature” should be used in international promotion of fujian. these results may indicate that there is a need for a repositioning of the image by the introduction of new elements in the promotional messages. the international tourism market recognizes and appreciates the destination – fujian province in china. the reflections presented may be of great use for the decision makers in charge of international tourism promotion. this article analyzes how foreign tourists perceive fujian province, which has not been done before, and it is a first step in improving the international image of fujian province which will help attract more international tourists. key words: fujian province, destination’s image, tourism consumer trends, promotional campaigns jel classification: z32 received may 15, 2018 / revised june 10, 2018 / revised july 09, 2018 / accepted july 12, 2018 corresponding author: marko blažević * tourism management department, master student fujian agriculture and forestry university, college of management college of tourism, fuzhou, china e-mail: markoblaz@live.com 258 m. blažević, g. chen introduction fujian is a province on the southeast coast of people‘s republic of china (prc), being the sixteenth most populated province, with the population of 36,894,216 people, covering the area of 121,400 km 2 , and having the tenth highest gdp in prc with 3.9% of the total gdp of prc. coordinates of the province are: 25°54‘n 118°18‘e. the provincial capital of fujian is fuzhou city and the largest city is quanzhou, with xiamen being the only sub-provincial city, which means that it is governed by a province, but is administered independently in regard to economy and law. fujian province has three international airports: one in fuzhou, quanzhou and xiamen, and three domestic airports: one in longyan, sanming and wuyishan. railroads are also very well developed, connecting not only cities within fujian province but connecting fujian with other provinces. some of the major railroads include nanchang, jiangxi province – xiamen, chongqing municipality – fuzhou, ganzhou, jiangxi province – jiangsu province, which passes through several cities in fujian, shenzhen, guangdong province hangzhou, zhejiang province, which passes through several cities in fujian, shanghai – ganzhou, which passes through several cities in fujian and beijing – fuzhou amongst others. fig. 1 location of fujian source: google earth fujian province has rich and unique natural resources that are a predisposition for good tourism development. three out of fifty two locations in china from unesco world heritage list are in fujian province; fujian tulou, gulangyu island in xiamen, mount wuyi and danxia landform in taining. due to the big tourism potential that fujian province has, provincial government is putting great attention on tourism personnel training as well as promoting fujian as a touristic destination. as a part of this strategy at the end of 2013 provincial government of fujian province made a campaign by the name of ‗refreshing fujian‘ which is to promote fujian province as an eco-touristic destination. fujian province‘s image as a touristic destination has been under development for a long time but campaign ‗refreshing fujian‘ wants to position fujian province as one of the eco-friendly touristic spots in mainland china and is trying to promote its touristic activities. in 2014 the ‗refreshing fujian‘ ad campaign started broadcasting on national television and presented nine municipal cities of fujian which all serve to develop the image of fujian province as a tourist destination: a foreigner‘s perspective 259 image of fujian province as a touristic destination. when ‗refreshing fujian‘ campaign was formed, the provincial government of fujian province also published seven ‗refreshing fujian‘ special tourism standards, some of them included rating the restaurants according to their services, paying more attention to the preservation of the environment, and so on. since the implementation of the ‗refreshing fujian‘ campaign in 2014 the number of domestic and foreign tourists has increased for16.8% compared to 2013 and the total number of tourists is 234 million; amongst them 229 million are domestic tourists with an increase of 17.1% from the previous year and 544.98 million are foreign tourists with an increase of 6.4% from the previous year. the total income from tourism industry in fujian province in 2014 has been increased for 18.4% and it was 270.767 billion rmb. domestic income from tourism was 240.584 billion rmb with an increase of 20.1%, and income from international tourists was 4.912 billion usd with an increase of 7.4%. income from tourism in fujian province in 2015 has increased 14% from 2014 and the number of tourists was 267 million with an income of 314.151 billion rmb. tourism strategy of provincial government is stressing the importance of a good education for tourism personnel and improving the quality of services provided by tourist destinations. it is planed that 7% of provincial gdp comes from tourism industry by the year 2020; the number of tourists reaches 500 million with an annual growth of 15%; tourism income reaches 690 billion rmb with an annual increase of 17%. this research is exploring the perception of fujian province as a tourist destination from the foreign tourists‘ perspective. in order to successfully implement good brand imaging, which is necessary for a successful tourist destination, first it is necessary to see what the current general opinion is. tourism marketing theories say that the development of tourist destination image is being based on the consumer‘s rationality and emotionality, and is the result of the combination of these two components. image of a destination is a crucial factor when a tourist chooses the travel destination; this means that a tourist destination with a strong and consolidated image in the market has a better opportunity of prosperity. this being said, the destination image is one of the most important elements of a tourist destination and it is something that can be a critical factor for the performance of a tourist destination. the success of a destination is relying mainly on success or failure of tourism management (dominique & lopesi, 2011). 1. literature review research about tourist destinations began when clare a. gunn (1972), an american researcher who used the term ‗destination zone‘ in the 70s of previous century for the first time and since then it started developing as an important term used in a lot of research (lv & zhai, 2016). mayo and hunt noticed that the positive image of the destination results in increased number of visits and it is also put forward that the destination image has an important role in the process of making a decision about visiting a particular destination (gartner & shen, 1992) (woodside & lysonski, 1989) (walmsley & young, 1998). most of the research in this area has been focusing on destination image, which is the term that emerged in the 70s, first used in a phd thesis of an american researcher j.d. hunt and ever since has been a hot topic researched all over the world. even though destination image is a term from the 70s, more than 4 decades later it is still a topic worth of attention and it is still a focus of many tourism research. the reason for the 260 m. blažević, g. chen growing amount of papers researching destination image is the flourishing tourism industry with new international tourist destinations emerging every day. ban o. (2008) discussed variables which destination image contains and what the five stages in researching the tourist destination image are. the five stage model was used in researching destinations in two countries: united states of america and thailand, and the stages are the following: selecting the tourist destination which is going to be studied, generating advantageous attributes; classifying the answers and selecting the final advantageous attributes; developing the main value dimensions by classifying and grouping; and finally, developing the open ending questions in order to evaluate the advantageous image (gartner & shen, 1992). an essential part of destination image is destination branding, therefore in order to ensure a strong positioning of a destination there has to be a strong brand image. a strong, recognizable brand will help the destination thrive and will create a positive opinion of the destination (woodside & lysonski, 1989). ekinici y. (2003) explored the relationship between destination image and destination branding and classified brand personality, part of destination branding and destination branding as a part of destination image which is closely related with tourist self-image (walmsley & young, 1998). all of these factors affect tourists‘ interest in a destination so when trying to construct an international tourist destination, branding and image should be greatly considered. in order to be competitive in the tourism market, destinations have to find innovative ways to improve their destination image by positioning, branding (ban, 2008). a designated area within the territory, or any larger part of the globe, can be described as a tourist destination land. in essence, travel destinations are a combination of travel products, tourism infrastructure and tourist travel experiences. international tourist destination is a destination which attracts a lot of international tourists who came for sightseeing and leisure. it contains the following aspects: firstly, a certain number of domestic and international tourists; secondly, sightseeing, shopping, leisure, meeting, and holiday are some of the many reasons for this destination being an international tourist destination. finally, tourist destinations include not only scenic spots and places of interest but also facilities and architecture. the basic attributes of tourist destinations are cities, tourism products and scenting attractions, space concept (卞显红 & 王苏洁, 2005) (张立明 & 赵黎明, 2005), tourist motivation (dayour & adongo, 2015) (you, o‘leary, morrison, & hong, 2000) (muzapu & sibanda, 2016), image perception (吴晶, 马耀峰, 郑鹏, & 张春晖., 2011) (pechlaner, smeral, & matzler, 2002) (law & cheung, 2010), products (andrades & dimanche, 2017), destination image and so on are the components of constructing a tourist destination (贾士义, 冯文勇, & 褚秀彩, 2015). this article will take fujian province as an example in analyzing what the current positioning of fujian province from the foreign tourists‘ perspective is. 2. the case of fujian province this research has been supported by on online questionnaire aimed at and filled by foreign nationals who have visited or lived in fujian province for some time as well as face to face interviews with some tourists, with an agenda of understanding their views of fujian province, how satisfied they were, and what the main obstacles they encountered while in fujian province were. some of the respondents were visiting tourists and some have been staying in fujian for some time but are still considered tourists at least when they are touring within the province. image of fujian province as a tourist destination: a foreigner‘s perspective 261 2.1. respondents’ demographic information the sample frame consisted of random sample of 103 valid questionnaires. since 42.57% of the respondents answered that they are students it is not surprising that 52.58% respondents are in between 25 and 34 years old, 20.79% are aged between 35 and 44, 18.1% are aged between 18 and 24, the same percentage of respondents 2.97% are aged between 45 and 54 and between 55 and 64 and one 1.98% is aged over 64. ratio of male and female respondents is almost equal, with 50.5% of males, 47.52 females and 1.98% of respondents who would rather not disclose their gender. as it was mentioned earlier 42.57% of the respondents answered that they are students, 19.8% are teachers, 18.81% are company employees, 7.92% are government employees, the same percentage wrote ‗other‘ and disclosed themselves as researchers, freelancers, musicians etc. only 2.97% of the respondents are retired, which can be also noticed because of the age marker. as for the respondents‘ marriage status 56.12% are not married, 38.78% are married and 5.10% are partnered. income-wise, most of the respondents‘ monthly income is up to 1000$; after that are people with up to 500$, which means that people who visited fujian province cannot be classified as a group with high income. this shows that people with less income are more likely to visit fujian than people who earn more than 1000$ per month. 2.2. methodology and data collection the study was mainly carried out in fuzhou city, provincial capital of fujian but the questionnaires were also distributed to foreign tourists in xiamen, a sub-provincial city. the questionnaires were mostly distributed on online platforms using an online surveytool wenjuan (问卷) which is a tool commonly used for surveys in china. the reason for using wenjuan as a survey-tool in this research is the specific make up of internet network in prc, and since most of the participants at the moment of conducting the survey were in china, using a local survey-tool was most appropriate. besides using an online survey-tool for collecting the data 19.42% of survey was conducted in person, where the respondents were also interviewed after answering the questionnaire to explain some of their responses and give a broad picture of their opinions about traveling in fujian province. the data was collected over a course of one month, from 1 st of august until 31 st of august 2017. the questionnaire had thirty questions in total, five of them being demographic data questions about the age, gender, country/region of origin, occupation, monthly income and marriage status. in four of the questions respondents were asked to rate some attributes on likert type-scale of 1 to 5 to the questions: (1) what are your main interests (nature, adventure, nightlife, culture, health, religion, rest, sport, and visiting friends/relatives) in selecting a destination? (in which 1 = not at all important and 5 = very important); (2) what was the reason (fujianese traditional culture, natural scenery, tea culture, getting away from daily routine, learning experience, architecture, weather, sea) for choosing fujian province for travels? (in which 1 = not at all important and 5 = very important); (3) how would you rate the quality of the following attributes in fujian province? (gastronomy, city tours, tea, nature, overnight tourism, coastal tourism, business tourism), (in which 1 = very poor and 5 = very good), (4) how would you assess, in general, the quality of fujian province tourism promotional campaigns in your country? (in which 1 = very poor and 5 = very good). in three of the questions respondents were asked to rate some attributes on likert typescale of 1 to 10 to the questions: (1) how would you rate fujian province as a tourist 262 m. blažević, g. chen destination? (in which 1 = extremely not satisfied and 10 = extremely satisfied); (2) what means of transport (privately owned bicycle, rented bicycle, bus, privately owned car, rent-a-car, taxi, motorbike, e-bike, train, subway) did you use while in fujian province? (in which 1 = most frequently used and 10 = least frequently used); (3) how would you assess, in general, the quality of fujian province tourism promotional campaigns on the internet and social networks? (general internet websites, blogs, wechat, weibo, facebook, twitter, instagram) (in which 1 = extremely not satisfied and 10 = extremely satisfied). in eleven multiple-choice questions respondents were asked: (1) what are the most challenging problems that you face when choosing a destination?; (2) what was the purpose of your visit?; (3) were the trips arranged on your own or planned by an agency?; (4) which places in fujian province have you visited/lived in?; (5) how did you arrive to fujian province?; (6) how did you book your accommodation?; (7) in what kind of accommodation did you stay?; (8) where did you eat while in fujian province?; (9) where did you prefer shopping in fujian province?; (10) what kind of items have you bought in fujian province?; (11) what kind of night life/entertainment have you experienced in fujian province, if any; the last type were open questions: (1) how much time did you spend in fujian province?; (2) what image do you associate with fujian province as a tourist destination?; (3) in your opinion, what key product should be communicated internationally by fujian province for promoting this province as a touristic destination? 2.3. findings and discussion all the respondents were of legal age, they did not include tourists from mainland china and they were coming from over fifty countries/regions, as can be seen in figure 1. 36% of ‗others‘ are marking countries with only one respondent. fig. 2 respondents‘ country of origin source: authors' calculations image of fujian province as a tourist destination: a foreigner‘s perspective 263 when asked what was the purpose of their visit to fujian province, most of the respondents said holidays, 50.5%; in the second place is study or research; after that is work; and the least amount of travelers visited fujian because of friends or relatives, figure 2. fig. 3 purpose of visits source: authors' calculations in terms of the reasons why fujian province was the destination chosen for holidays, natural scenery got the highest rating with an average of 4.44 out of 5 and tea culture got the lowest rating with an average of 3.41 which means that even though tea is one of fujian province‘s most valued treasures, foreign tourists are still not that interested in exploring tea culture in fujian. but the respondents in the open question about what key product should be communicated internationally by fujian province for promoting this province as a touristic destination, put tea as one of the top products, so this means that tea culture is valued but the promotion of it is not very good and that is the reason for tea culture to get the lowest rating. in an open question about which products of fujian province should be communicated internationally, 61 respondents suggested tea, 26 traditional foods (minority nationality food, sea food especially fish) and 7 suggested rice wine which is a special product of this area, made my locals called minnan people. sometimes the image of a tourism destination promoted and the image tourists get from that promotion can be different. that is why destination branding is necessary to be questioned from time to time so it will be known what image tourists actually have about some destinations (ekinc, 2003). in terms of the attractiveness of the destination, the results show that most of the respondents gave rating 7 and also rating 8 is the second highest rating, on a scale of 1-10 (very poor to very attractive), as can be seen in figure 4. attractiveness of the destination and influence of destination image in traveler‘s satisfaction has been researched plenty of times and it has a psychological background. tourists are severely affected by the destination image when choosing their destination but also when experiencing it first-hand (chon, 1990). 264 m. blažević, g. chen fig. 4 quality of the experience source: authors' calculations regarding the product offer respondents were asked to rate the quality of tourism elements in fujian province on a scale from very poor to very good. the best-rated elements were nature and tea, and the worst rated were costal tourism and gastronomy, the reason for them being worst rated is because costal tourism in fujian province is not that developed and well promoted and the problem with gastronomy is not enough special type of restaurants. for example, there are not enough halal restaurants, vegetarian restaurants and people with these and other kinds of special diets had some problems finding an appropriate restaurant for their meals. sometimes their only option is to prepare food on their own or eat only some simple dishes because of the lack of these kinds of restaurants, as it can be seen in figure 5. fig. 5 tourism interests source: authors' calculations in terms of the international tourism promotional campaigns of fujian province to assess participants‘ opinion on this matter, they were asked to rate on a scale from 1 to 5 image of fujian province as a tourist destination: a foreigner‘s perspective 265 (1 being the poor 5 being very good) the quality of fujian province tourism promotional campaigns in their own countries, only 5 respondents rated the quality as very good, total average rating was 2.26, which means that the quality of promotional campaigns abroad are not that good and should improve in order to improve the destination image of fujian and attract more international tourists. regarding respondents‘ perceptions of the quality of the web-based and social networks international promotional campaigns of fujian province, there has been a negative review, most participants assessing the quality of different platforms rated in on a scale of 1-10 (table 1). most of the platforms received a negative review with weibo and twitter getting the lowest scores and wechat and instagram getting the best, but still it is not considered that successful. respondents are from different countries but still in all of these countries promotional campaigns are done quite poorly which is a big obstacle for making fujian province an international tourist destination. table 1 quality of promotional campaigns of fujian in respondents‘ country of origin 1 2 3 4 5 6 7 8 9 10 general internet websites 20 17 18 10 6 6 8 5 5 6 blogs 19 17 23 10 9 5 5 5 4 4 wechat 21 15 16 8 6 10 6 6 2 11 weibo 40 15 8 9 8 6 2 5 3 5 facebook 23 19 14 11 11 3 8 3 3 6 twitter 31 17 22 8 11 2 1 2 2 5 instagram 24 14 21 11 9 5 3 2 2 10 source: authors' calculations when selecting a destination for traveling, the respondents graded their main interests from 1 to 5. (1 being very important 5 being not important) the highest average importance was nature with an average of 1.61 and adventure with 2.54 and the lowest average was rest with 4.17 and health with 4.06, see table 2. according to these results foreign tourist who visited fujian province value nature the most so in future nature should be the most important factor in promotion of fujian as a tourist destination. image destination is composed from many different variables so besides promoting only one factor other ones with strong appeal to tourists should also be included in the promo campaign (ban, 2008). table 2 factors which influence choosing of a destination 1 2 3 4 5 average nature 61 21 7 1 5 1.61 adventure 9 42 24 11 4 2.54 night life 5 5 19 7 10 3.26 culture 8 20 30 32 4 3.04 health 2 2 3 13 15 4.06 religion 6 2 1 9 6 3.29 rest 3 1 8 12 28 4.17 sport 2 1 1 9 10 4.04 visiting friends/relatives 2 4 5 4 16 3.90 source: authors' calculations 266 m. blažević, g. chen according to the results, problems/difficulties foreign tourists encounter when choosing travel destination are prices and language difficulties. language difficulty problem can be extended to whole china, not only fujian province. limited english language skills of the personnel working in the tourism industry, limited access to online maps in english language and also lack of english language public transportation signs. all of this creates a language barrier for foreign tourists who cannot speak chinese and makes it difficult for finding their way around without a help from a chinese-speaking person. one of the differences between chinese and foreign tourists is that chinese tourists prefer to have their trips arranged by an agency and foreign tourists prefer to arrange the trips by themselves which this research also proves. 80% of the respondents of this questionnaire said that when coming to fujian province the arranged the trips by themselves and only 20% had their trips arranged by an agency. respondents answered an open question on how long did they stay in fujian province and according to their answers they were classified into five groups. the most respondents 32% were in fujian for more than six months, 27% of respondents stayed in fujian province up to 10 days, 11 days to 1 month and 1 month to 6 months the total of 40% marked as their answer, which means 20% from the each group. there was also 1% who did not want to disclose how long they stayed in fujian province, as can be seen in figure 6. fig. 6 time spent in fujian province source: authors' calculations as to where the respondents travelled within fujian province most of them visited fuzhou, which is not surprising since the base location of this research is in fuzhou, after that is xiamen, fujian tulu, also called fujian earthen buildings and wuyi mountain, see table 3. besides the options given in the questionnaire some of the respondents also visited putian, taining, pingtan and others. even though tea fields of anxi county was not in the top places respondents visited, still a fair amount of tourists visited it. anxi county is considered to be ―tea capital of south fujian‖ and because of it, it deserves better promotion as a touristic destination. amongst domestic tourists anxi is one of the must visit places in fujian province but a lot of interviewed foreign tourist never even image of fujian province as a tourist destination: a foreigner‘s perspective 267 heard of this place. it is essential that promotional campaigns aiming at international markets are created to appeal to the interests of more international tourists. table 3 places visited by respondents places number of the respondents fuzhou 73 xiamen 58 quanzhou 24 zhangzhou 20 wuyi mountain 31 tea fields of anxi county 15 fujian tulou (fujian earthen buildings) 33 others 14 source: authors' calculations a lot of variables can affect the satisfaction rate of tourists; one of these variables is cultural background (weiermair, 2000). in case of fujian province, respondents rated food and drinks with an average grade 3.83, on 1 to 5 rating scale, but it is quite interesting that people coming from different cultural backgrounds rated this factor differently. people with special kinds of diets (halal, vegetarian, kosher) rated food and drinks in fujian very low, but on the other hand people who do not follow any kind of special diets or do not have any allergies rated food and drinks in fujian very high. from this we can see that the food and drinks are not problems in fujian, however the variety of choices for special diets are limited. in order to accommodate equally people with different kind of needs, it is necessary to have a bigger variety of restaurants or more options in menus. safety has been rated the highest, which is very good but the language barrier has been rated lowest and it needs to improve. fig. 7 satisfaction rate of tourism factors source: authors' calculations 268 m. blažević, g. chen conclusion clearly the image of fujian province from foreign tourists‘ perspective has a lot of space to improve but still overall it can be said that the image is positive. according to current situation, we are forced to reflect on how foreign tourists are behaving while traveling in fujian province and what the main obstacles they face are. in the case of fujian province, according to the results collected in this research, foreign tourists come to fujian from all over the world and most of them were visiting fujian for holidays. even though the promotional campaigns of fujian province in other countries are not considered that good, most of the respondents expressed that fujian province is an attractive destination to them and they were pretty happy with the quality of the services in fujian. moreover, it has been discovered that the main reason for choosing fujian province as their destination are the natural resources this province in china has. this research has included foreign travelers who have spent different amount of time in fujian but most of them express that one of the main problems they face is language barrier. there is only a small amount of travelers who did not note to have faced language barrier, so it is presumed that these respondents have some chinese language knowledge or are with someone with the knowledge of chinese. in order to attract more foreign tourists and better accommodate the current ones employees in tourism related businesses should improve their english skills and also road signs, maps, menus should have an option in english, it this way all of the possible language barrier problems can be avoided. this can help fujian province but also other regions in china improve their foreign tourists flow. food can also be a very big problem for some tourists with special diets for example for people with a vegetarian diet, halal diet, kosher diet or if they are allergic to some foods, this should also be a focus when thinking of attracting more foreign tourists. because of health, religion, allergies some people are not allowed to eat certain foods so there should be more restaurants which offer these kinds of special meals. in a current situation most of the tourists with special diets are avoiding eating out because there are not enough places for these kinds of meals. since food and also drinks are one of the most important factors of tourism industry, it is necessary to try to accommodate the needs of all the tourists. in the case of fujian province, according to the results that have been obtained, there are products that should be a certain option in tourism offer of fujian province, as they might help reverse any negative perceptions associated with conjectural factors. the example shown here, which associate the image of fujian to tea, emerges as a positive message for fujianese tourism, highlighting recent efforts in the international promotion and distribution of this product. this conclusion leads us to another reflection on the value chain of tourism and the impact it may have on the destinations‘ image and development. because tourism is a sector with a bidirectional character – highly dependent on other sectors of the economy, while contributing to the growth of these – it is desirable that the definition of tourism policies and its implementation is aligned with all stakeholders, especially those who may be part of the tourist experience in a perspective of competitive differentiation. the synergies of a joint tourism strategy among key stakeholders of the tourism industry, contribute to maintain a strong image, allowing for the creation of an experience that exceeds the expectations of visitors and stimulates the desire for new visits, while image of fujian province as a tourist destination: a foreigner‘s perspective 269 clarifying positioning issues, which are the most difficult to resolve in the development of destination tourism strategies. limitations and possible future research one of the limitations of this research is that data has not been monitored in a longer period of time so we cannot compare results as in longitudinal study. in order to improve that, it would be good to include that into the future research so the changes over time can be monitored. in this way we can follow the flow of foreign tourists in fujian province and also collect the data about their satisfaction. also one of the limitations of this research is that most of the respondents, we can say almost all of them have visited fujian province at least for some time but it would be also interesting and useful to see how people who have not visited fujian perceive it. this is also a future direction for this research, to spread the spectrum of respondents in order to get a fuller picture of how all internationals see fujian and how that image can be improved. tourists being informed about the destination before and after coming are one of the very important market components. so it necessary 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[research on the construction of tourism website in tourist destination———a case of tourism websites in wutai mountain] 山西师范大学学报, 109-113. marketinški identitet provincije fuđen kao turističke destinacije – kroz perspektivu stranaca uticaj marketinškog indentiteta destinacije na ponašanje turista je bilo tema mnogih istraživanja. cilj ovog članka je identifikacija marketinškog identiteta fuđen provincije kao turističke destinacije na međunarodnim tržištima, kao potpora za nalaženje rešenja kako poboljšati turističko iskustvo za strane turište. kao osnova analize uzimaju se rezultati ankete u elektronskom obliku dobijenim od stranca koji su posetili ili živeli u provinciji fuđen, kao i intervjui. sveukupan marketinški identitet provincije fuđen je pozitivan, gde je 50,5% ispitanika odgovorilo da je glavni razlog posete fuđen provincije odmor, 20% ispitanika je koristilo turističku agenciju za planiranje puta, 32% je provelo u provinciji fuđen više od šest meseci i „priroda” je navedena kao glavni atribut destinacije koji može koristiti u međunarodnoj promociji. rezultati mogu ukazivati na potrebu za uvođenjem novih elemenata u marketinšku strategiju. međunarodno turističko tržište prepoznaje i ceni ovu destinaciju. prikazana razmišljanja mogu biti od velike koristi za donošenje odluka o unapređenju međunarodnog turizma. ovaj članak analizira kako strani turisti doživljavaju provinciju fuđen, što do sada nije bilo urađeno, a to je prvi korak u poboljšanju međunarodnog marketinškog identiteta provincije fuđen koji će biti od pomoći u privlačenju turista iz inostranstva. ključne reči: provincija fuđen, marketinški identitet, trendovi ponašanja potrošača, promotivne kampanje facta universitatis series: economics and organization vol. 17, no 4, 2020, pp. 317 328 https://doi.org/10.22190/fueo200612023j © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the impact of brand value on market performance indicators of high-technology enterprises1 udc 003.65 milica jovanović1, bojan krstić2, sandra milanović1 1innovation center, university of niš, niš, serbia 2faculty of economics, university of niš, niš, serbia abstract. brand valuation gained in importance in the 1980s, when a difference between the price at which some enterprises are bought and their value, according to the balance sheet, was noticed. brand value can be considered an intangible asset of an enterprise, whose impact on the market performance indicators must be taken into account. this paper examines the relationship between brand value and selected market performance indicators using correlation and regression analysis. the analysis is based on interbrand data on brand value and annual reports of selected enterprises from high-technology sector. the sample included top 5 enterprises from high technology sector, whose corporate brands are on the list of the 100 most valuable brands, in all years of the analysed eight-year period (from 2012 to 2019). this paper discovered a statistically significant positive relationship between brand value and market performance indicators and that brand value positively influences those performances of high technology enterprises. the focus of this study is on the following market performance indicators: market capitalization, tobin's q, market to book ratio and earnings per share. the research contributes to the field of brand value management and emphasizes the importance of investments in corporate branding process. keywords: brand value, market performance, market capitalization, tobin's q, market to book ratio, earnings per share jel classification: m21, m31, m40 received june 12, 2020 / revised september 15, 2020 / accepted september 28, 2020 corresponding author: sandra milanović university of niš, innovation center, univerzitetski trg 2, 18000 niš, serbia e-mail: sandramilanovic89@yahoo.com 318 m. jovanović, b. krstić, s. milanović introduction for decades, the value of an enterprise has been expressed based on material, tangible resources, such as buildings, equipment and land. however, in the era of the knowledgebased economy, the importance of financial and physical resources is decreasing and intellectual/intangible resources are becoming increasingly important. drucker (1994) has pointed out that the key to the enterprise's growth is the knowledge of not only employees but also other company stakeholders. the knowledge contained in the management structure of the company, business processes, information systems, patents, brands and other forms of intangible assets becomes a source of gaining and maintaining competitive advantage and improving business performance. the brand valuation concept originates from the uk, from the early 1980s, due to several mergers, joint ventures and licensing. primarily, the goal was to improve company management and create value for company stakeholders (davidson, 1998). the history of brand valuation began in 1984, when the news group included the valuation of publishing titles in its balance sheet and as a result, improved debt-to-equity ratio (blackett, 1991). in the mid-1980s, companies realized the importance of the brand and the need for brand valuation, when a consulting firm, interbrand, conducted the first brand valuation for rank hovis mcdougall company. the goal of this company was to show the value of the brand in the balance sheet and thus improve the company takeover bid that was given (seetharaman et al., 2001). in the late 1980s, many companies were sold at a price that is several times higher than the value of these companies, according to data from the balance sheet and other company's financial statements (kapferer, 2012, p. 2). it was observed that for companies with recognizable brands, acquirers were willing to pay much more than the net value of those enterprise’s assets.2 in this way, buyers have purchased already built customer opinions on products with the brand, which is a guarantee of future earnings. brand value derives from a brand’s ability to generate cash-flows in the long run for the enterprise that owns it. there are many reasons why brand value plays an important role for modern companies that invest in intellectual resources, especially for companies whose business does not depend on fixed assets but human capital and other intangible resources. such is the case with enterprises in the it sector. some of the reasons are the following: connection of the brand valuation model with the enterprise's business model, better allocation of resources, more successful management of the brand portfolio, merger and acquisition planning, tax planning, better communication with internal and external stakeholders of the company (especially with investors), better borrowing conditions, licensing and franchising (brand finance, 2000, p. 7). therefore, different models of brand valuation have been developed. it can be divided into two groups methods based on consumer perception and methods for determining the financial value of the brand (krstić et al., 2014; popović et al., 2015). the aim of this paper is to indicate the relationship between brand value and market performance indicators. the growing concern for the influence of brand value was transferred to the high–technology sector as well, especially because this sector is characterised by companies with a significantly high value of brands. this paper should point out the importance of investing in the branding process and the importance of brand management 2 for example, during that period, nestlé bought rowntree, danone bought nabisco's european business and grand metropolitan bought pillsbury for prices that were significantly higher than the value of the tangible asset of the acquired enterprises, given that it was, in fact, a purchase of recognizable brands (seetharaman et al., 2001). the impact of brand value on market performance indicators of high-technology enterprises 319 in enterprises from the high–technology sector. the research plays an important role because it demonstrates that, by investing in brand value, such companies can improve their market performance. this field of research is becoming increasingly important with increasing corporate investment in intangible assets by companies from the high–technology sector, while intangible assets are becoming dominant in the era of the knowledge economy. the paper is structured into three parts. in the first part, a literature overview is given different understandings of the concept of brand value and brand equity and their differences. the theoretical aspect of the relationship between brand value and selected market performance indicators is also presented. the second section includes the methodology of the research and the last part gives the discussion of the study results. 1. literature review 1.1. brand value or brand equity before statistical analysis, it is necessary to make a distinction between the terms brand value and brand equity, which are often used as synonyms in the literature. however, there are some differences. the concept of brand equity appeared in 1980 (buzdar et al., 2016). there are different definitions of this term as well as different understandings of the dimensions involved in this concept. aaker (1991) defines brand equity through four dimensions – brand awareness, associations, perceived quality and brand loyalty. similarly, yoo and donthu (2001) argue that the concept of brand equity includes three dimensions: brand awareness, brand loyalty and perceived quality. christodoulides and de chernatony (2010) point to certain perspectives involved in this concept. they make the difference between firm-based brand equity the financial perspective of brand equity and consumer-based brand equity. some authors (shankar et al., 2008) developed a model of brand equity that includes financial and consumer perspective. those dimensions of brand equity are based on offering value and relative brand importance. the first term refers to the net present value of the products with a recognizable brand. it requires forecasting of revenues and margin ratios. relative brand importance represents factors of brand image, such as: "brand reputation, brand uniqueness, brand fit, brand associations, brand trust, brand innovation, brand regard, and brand fame" (shankar et al., 2008). there is no consensus in the literature on which concept brand value or brand equity, is a broader concept. feldwick (1996) considers that there are 3 meanings of brand equity – 1) brand description, which is a synonym for the brand image; 2) brand strength, which is a synonym for brand loyalty; and 3) brand value as a monetary category. it can be concluded that according to this approach, brand equity is a broader concept than the concept of brand value since it includes both the monetary value of the brand and the subjective dimensions. doyle (2001) considers that brand value refers to relationships in value creation and brand equity includes an assessment of value created in this way. raggio and leone (2007) point out the brand value to be a broader concept than brand equity. they stated that "brand value represents what the brand means to a focal company". in their opinion, brand value is defined as the sale value of a brand. brand equity plays an important role because it can affect the higher financial results of brand value since it exists within consumers and can influence their behaviour. in this research, the term "brand value" will be used, which includes the value from the consumer's point of view, as well as the financial dimension of a brand. 320 m. jovanović, b. krstić, s. milanović 1.2. brand value as a determinant of market performance indicators many studies indicate the impact of brand value on the enterprises's business performance, both financial (yoo et al., 2000; kim et al., 2003; yeung & ramasamy, 2008; mohan & sequeira, 2013; mizik, 2014; arora & chaudhary, 2016; veljković & kaličanin, 2016) and market performance (barth et al., 1998; kerin & sethuraman, 1998; yeung & ramasamy, 2008; mohan & sequeira, 2013; hsu et al., 2013; kirk et al., 2013; krstić, 2014, p. 196; mizik, 2014; arora & chaudhary, 2016; topuz & akşit, 2016; matsumura et al., 2019). 1.2.1. the link between brand value and key market performance indicators copraro and srivastava (1997) analysed market to book ratios (mb ratios) of fortune 500 enterprises and demonstrated that more than 70% of the market value is based on intangible assets of those enterprises. research shows that there is a correlation between brand value and stock market value (bart et al., 2003; kirk et al., 2012). these authors also point to the impact of brand value on earnings per share (eps). they claim that brand value provides relevant information about future eps. other studies confirm the strong influence of the brand on the share price (dutordoir et al., 2015). topuz and akşit (2016) concluded that brand value has a positive and statistically significant effect on stock prices. while some other authors (basgoze et al., 2016) consider that there is an impact of brand value on stock prices; however, this relationship is based on the relatively long run. it means that it takes a long time for the market response to change brand value. verbeeten and vijn (2010) claim that the financial value of a brand is a factor that affects the stock prices of an enterprise. observing data from the 100 global brands from 2001 to 2010, hsu et al. (2013) confirmed a positive correlation between brand value and stock performance (brand value is positively correlated with year-end share price). these analyses, thus, indirectly indicate the influence of brand values on market capitalization. and other authors point to a link between brand value and stock market performance indicators (yeung & ramasamy, 2008). de mortanges and van riel (2003) also concluded that brand value significantly affects enterprise value. when it comes to the direct impact of brand value on market capitalization, madden et al. (2006) argue that brand value, according to interbrand methodology, includes 37% of enterprise's market capitalization, on average. moreover, other authors emphasize the close connection between brand value and market capitalization (matsumura et al., 2019). the impact of brand value on market performance can be observed through the impact of this value on mb ratio, which indicates the relationship between the market value of the enterprise and the enterprise's value according to the financial statements. lev (1997) suggests that the average mb ratio increased from 2:1 in the late 1980s to 3:1 in the mid-1990s, which is due to the enterprise's intangible resources. he further concludes that in the early 2000s, of every 6 dollars market value, only 1 dollar was shown in the balance sheet, indicating that 5 dollars represent the enterprise's intangible assets (lev, 2001, p. 8). kerin and sethuraman (1998) analysed the relationship between brand value and mb ratio among 50 us consumer goods enterprises. they concluded that enterprises with higher brand value have higher mb ratios. it confirmed a positive relationship between brand value and mb ratio. this research also led to the conclusion that brand value explains as much as 40 per cent of the difference in mb ratios between enterprises. they showed that the relationship is concave with decreasing returns to scale. the impact of brand value on market performance indicators of high-technology enterprises 321 it indicates that, when the accumulated brand value is small, the increase in the enterprise's mb ratio is higher, but enterprises with high accumulated brand value exhibit a relatively modest increase in mb ratio. rasti and gharibvand (2013) claim that the growth of brand value affects book value, which indirectly indicates the impact of brand value growth on mb ratio, but also on tobin's q. tobin's q is the ratio of the company's market value to the replacement cost of assets shown in the balance sheet (tobin, 1969; 1978). the research of varaiya et al. (1987) indicates that management creates value for stakeholders if mb ratio of the company is higher than 1. it means, to create value in a company, the market value of the company must be higher than its book value. this indicates an important influence of market value on value creation. this study shows that mb ratio and tobin's q are theoretically and empirically, equivalent measures of value creation. hirschey and weygandt (1985) concluded that advertising and r&d expenditure, which are determinants of brand value, have positive and significant effects on tobin's q. the study of berzkalne and zelgalve (2014), which included 65 baltic listed companies over the period from 2005 to 2011, indicates that an increase in intangible assets (in which a large part is brand value) leads to increase in tobin's q. the empirical part of the research includes examining the influence of brand value on selected market performance indicators. therefore, based on the theoretical aspect of these relationships which were given in the previous section, the following research hypothesis will be tested: hypothesis h1: brand value is a significant contributor to market performance. 2. methodology of research data collecting procedure. the study focuses on the impact of brand value on the market performance. to do so, secondary data was used collected from the annual reports (balance sheet, income statement, cash flow statement, statement of changes in equity, notes to the financial statements) of the analysed enterprises. furthermore, information from the official websites of the sample enterprises is also used to provide the necessary information. instruments. the research is based on the data of five indicators: brand value, market capitalization, tobin’s q, mb ratio and eps. data for the brand value is obtained from the brand value evaluation done by interbrand methodology. market capitalization is calculated according to sontakke (2016) by multiplying the market price per share with the total number of outstanding shares. tobin’s q is calculated as a ratio of market capitalization and total assets (lindenberg & ross, 1981; perfect & wiles, 1994), while mb ratio is a ratio of market capitalization and net asset of an enterprise (chen et al., 2005; yu et al., 2010). lastly, eps were measured by dividing net income attributable to shareholders of parent enterprise by the total number of outstanding shares (balsam & lipka, 1998; slavin, & yun, 2001; arora & chaudhary, 2016). sample. the sample included top 5 enterprises from high-technology sector, whose brands are on the list of the 100 most valuable brands according to the interbrand methodology (krstić & popović, 2011), taking into account only top 5 enterprises whose corporate brands are on this list in all years of the analysed eight-year period from 2012 to 2019. these are the following: apple, microsoft, ibm, intel, and cisco (table 1). 322 m. jovanović, b. krstić, s. milanović table 1 enterprises and their brand value for the period 2012-2019, in millions of dollars name average brand value apple 159,377 microsoft 75,072 ibm 59,295 intel 38,264 cisco 31,257 source: authors’ calculations based on the interbrand survey from 2012 to 2019 statistical technique. ibm program spss (version 26) was employed for analysing the data. firstly, descriptive analysis was applied to present the main characteristics of the sample. before conducting parametric tests for measuring relationship and influence of variables, normality tests were applied. hence, the hypothesis of normally distributed data was not met, all variables have been transformed by taking their logarithm. secondly, for testing the proposed hypothesis, pearson's correlation and simple linear regression analysis were applied. for pearson's correlation coefficient, values of ± .10 present small, ± .30 medium effect and ± .50 large practical effect (cohen, 1992). the significance level of p<.05 was used as a cut-off point. model formulation. the study used simple linear regression models that allowed investigating the impact of brand value on market performance of the top 5 hightechnology enterprises. the similar research was conducted by arora and chaudhary (2016) where they tested an impact of brand value on the financial performance of indian banks. in our model, brand value was predictor variable while the other four variables were dependent. therefore, the following models were defined: 1st model market capitalization brand value  = + + (1) 2nd model tobin's q brand value  = + + (2) 3rd model market to book ratio brand value  = + + (3) 4th model earnings per share brand value  = + + (4) 3. the results and discussion in this section, the findings and discussion on the relationship and influence of enterprise's brand value on market capitalization, tobin's q, mb ratio and eps will be presented. table 2 descriptive statistical analysis of variables variable n minimum maximum mean st. deviation brand value (in million $) 40 27,197.00 234,241.00 72,653.00 53,305.40 market capitalization (in million $) 40 84,626.64 1,105,000.00 345,032.10 281,896.12 tobin's q 40 .78 3.61 1.86 .69 mb ratio 40 1.65 13.40 5.46 3.09 eps (in $) 40 1.20 15.64 5.56 4.42 source: authors’ calculations the impact of brand value on market performance indicators of high-technology enterprises 323 descriptive statistical analysis was used to present minimum, maximum, mean and standard deviation values of researched variables. table 2 presents the obtained results of the variables analysed in this paper. the average brand value of researched enterprises is 72,653 (st. dev. = 281,896.12) millions of dollars for the eight years, while this value ranges from 27,197 to 234,241 millions of dollars. market capitalization ranges from 84,626.64 to 1,105,000.00 millions of dollars and mean market capitalization was 345,032.10 (st. dev. = 281,896.12) millions of dollars. additional data of researched variables are given in table 2. in the following table, correlations between brand value and market performance indicators are presented. table 3 correlations between researched variables 1 2 3 4 5 1. brand value 1 .861** .635** .644** .625** 2. market capitalization 1 .888** .482** .284 3. tobin's q 1 .379* .069 4. mb ratio 1 .742** 5. eps 1 note: **significant at 0.01; *significant at 0.05 source: authors’ calculations table 3 shows that among most of researched variables there exists significant and positive correlation. the pearson correlation coefficient between brand value and market capitalization of r = 0.861 (p < 0.05, large practical effect) indicates that there is a strong and positive relationship between these variables. furthermore, brand value correlates significantly and positively with tobin's q (r = 0.635, p < 0.05, large practical effect), mb ratio (r = 0.644, p < 0.05, large practical effect), and eps (r = 0.625, p < 0.05, large practical effect). additionally, this analysis has confirmed that when the value of enterprise’s brand increases, firm market performance will increase likewise. simple linear regression analysis was conducted to test the proposed research hypothesis stating that brand value is a significant contributor to market performance. the succeeding table gives an overview of the results obtained. table 4 linear regression results 1st model 2nd model 3rd model 4th model dependent variable market capitalization tobin's q mb ratio eps brand value (β) 1.036*** .392*** .607*** .835*** r square .741 .403 .415 .391 adjusted r2 .734 .388 .399 .375 change r2 .741*** .403*** .415*** .391*** f 108.542*** 25.685*** 26.944*** 24.382*** note: ***significant at 0.001 source: authors’ calculations table 4 reflects that in the first model brand value has a statistically significant positive influence on market capitalization. r square = 0.741 indicates that 74.1% of the 324 m. jovanović, b. krstić, s. milanović variation in market capitalization is explained by brand value. the regression model is statistically significant (f = 108.542; p < 0.05). the second model shows that brand value influences 40.3% of variations in tobin's q (r square = 0.403) and the model is statistically significant (f = 25.685; p < 0.05). similarly, in the third model, brand value explains 41.5% of changes in mb ratio (r square = 0.415). f statistics of this model is 26.944 and statistically significant at the level of 0.000 (p < 0.05). lastly, the fourth model points out that brand value explains 39.1% variations in eps and f statistics indicates that there is a model fit between the independent and dependent variable (f = 24.382; p < 0.05). in all four models, the beta coefficient is statistically significant (p < 0.05) and has a positive value indicating the positive influence of brand value on researched variables. previous results point out that hypothesis h1 stating that brand value is a significant contributor to market performance is confirmed. the results of our study are in the line with matsumura et al. (2019) who have found a significantly high correlation between brand values and market capitalization of japanese companies (r=0.864152, p < 0.01). yang et al. (2018) revealed a positive correlation between brand value and eps of taiwan-based businesses. another study of eng and keh (2007) detected that an advertising expense has a positive correlation with brand value. consequently, brand value has a significant positive correlation with brand sales and brandoperating income and an increase in brand value would lead to an increase in these indicators. they conclude that spending on advertising is beneficial for brand sales and brand profitability, whereas brand value is a good predictor of brand performance. arora and chaudhary (2016) researched the impact of brand value on the financial performance of the top ten indian banks during the period from 2009 to 2014. according to their results, brand value has a negative impact on indicators such as return on assets, return on investment and return on equity, while it has a positive impact on stock prices. when it comes to eps, similarly to results of our study, arora and chaudhary (2016) showed that brand value has a positive influence on eps and together with variables age, ownership and size explains 66.1% of the variability in eps of indian banks. they also state that high brand value contributes to the reputation of the bank and motivates investors to buy shares of that bank. in this way, the eps of banks would increase (arora & chaudhary, 2016 p. 94). rasti and gharibvand (2013) explored the effect of brand value on book value, earnings before interest and taxes and dividend yield in malaysian companies. a positive correlation was found with book value and 40.7% of the change in book value was explained by brand value. moreover, earnings before interest and taxes showed a positive correlation with brand value and brand value determines 50% of fluctuations in earnings before interest and taxes. no significant relationship and influence were found in their study between brand value and dividend yield. conclusion this study researched the relationship between brand value and market performance measured by market capitalization, tobin’s q, mb ratio and eps. moreover, the main objective of the study was to determine the influence that brand value has on the market performance. as the influence of brand value could be significant for one business and its performances, it was important to investigate the extent of that impact using the example of companies from high-technology sector. the impact of brand value on market performance indicators of high-technology enterprises 325 the research was conducted on the sample of five high-technology enterprises rated as valuable brands according to the interbrand methodology. the results have shown that there is a statistically significant positive relationship between brand value and market performance of enterprises, meaning that when the brand value increases, the market performance would increase accordingly. moreover, brand value proved to be a significant predictor which positively influences the fluctuations in market performance of enterprise. this study makes a significant contribution to brand value research by demonstrating that enterprise’s primary business benefits from its brand value. additionally, this study positively answers the question whether it is important for one enterprise from hightechnology sector to make investments in its brand, because this expenditure will generate bigger market capitalization, tobin’s q, mb ratio and eps. there are a few limitations to the study. firstly, the results cannot be generalized for all enterprises and sectors. secondly, the research includes data related to one period of time. therefore, the authors suggest further research in this field that would overcome these shortcomings. references aaker, d. a. 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na listi 100 najvrednijih brendova u svim godinama analiziranog osmogodišnjeg perioda (od 2012. do 2019. godine). istraživanje je pokazalo statistički pozitivan odnos između vrednosti marke i indikatora tržišnih performansi, kao i da vrednost marke pozitivno utiče na performance preduzeća iz ovog sektora. u fokusu ovog rada su sledeći indikatori tržišnih performansi: tržišna kapitalizacija, tobin-ov q, racio tržišne i knjigovodstvene vrednosti i neto dobit po akciji. rad doprinosi polju istraživanja upravljanja vrednošću marke i naglašava važnost ulaganja preduzeća u process korporativnog brendiranja. ključne reči: vrednost marke, tržišne performanse, tržišna kapitalizacija, tobin-ov q, racio tržišne i knjigovodstvene vrednosti, neto dobit po akciji plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 3, 2017, pp. 231 242 https://doi.org/10.22190/fueo1703231d review paper independence and objectivity of internal auditors as determinants of their effectiveness 1 udc 657.6-051-057.3 milica đorđević, tadija đukić university of niš, faculty of economics, serbia abstract. the aim of this paper is to highlight the issue of independence and objectivity of internal auditors, which, given the place and role of internal audit in the system of corporate governance, is increasingly gaining in importance. in determining these concepts, the difference between them is pointed out, with particular emphasis on their importance for internal audit effectiveness. by introducing circumstances in which internal audit functions, the paper especially emphasizes the challenges that internal auditors face in achieving independence and objectivity in their work. in this process, they receive significant support from regulatory decisions regarding the position of internal audit in companies, and especially directions to invest efforts and eliminate all factors that threaten to undermine their independence and objectivity. key words: internal audit, independence, objectivity, specifics and efforts to ensure independence and objectivity jel classification: m42 introduction at the present stage of development, internal audit is a function integrated into the system of corporate governance, which provides assurance of effectiveness of all business functions in the company and consulting services to all management structures in carrying out their responsibilities. in this way, it proactively focuses on creating added value for the company. however, producing corresponding effects, i.e. realization of the strategic role, largely depends on independence and objectivity of internal auditors, as well as the fundamental concepts underlying their work. received may 22, 2017 / accepted july 13, 2017 corresponding author: milica đorđević university of niš, faculty of economics, trg kralja aleksandra 11, serbia e-mail: milica.djordjevic@eknfak.ni.ac.rs 232 m. đorđević, t. đukić true, independence and objectivity have always represented the cornerstone of audit theory and practice, though, in the last twenty years, these concepts have especially gained in importance. this is because, as a response to the need to improve the system of corporate governance, internal audit received a dual role, associating it with other participants in the system. such a unique position has made the issue of independence and objectivity a much larger challenge that must be responded to. in line with the above, the paper is designed to first clarify what is meant by independence and objectivity of internal auditors, as concepts often mentioned in the same context. then it goes on to perceive the specifics of ensuring independence and objectivity of internal auditors, arising from their position in the company and the role they play in the system of corporate governance. the last part of the paper presents the efforts of professional bodies, especially internal auditors themselves, in ensuring and preserving independence and objectivity. 1. independence and objectivity – the fundamental concepts of internal audit achieving independence and objectivity in work is one of the critical preconditions that internal auditors need to meet to serve the purpose. only independent and objective internal audit ensures the survival of the profession, which is why the significance of these concepts for internal auditors is often compared to hippocratic oath for physicians (christopher et al., 2009, p.201). even the very definition of internal audit emphasizes that it is “…an independent, objective assurance and consulting activity...” true, independence and objectivity are strongly related categories and are often mentioned in the same context. however, these are different attributes that standards define in the following manner (isppia 1100): “independence is the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner”. “objectivity is an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made. objectivity requires that internal auditors do not subordinate their judgment on audit matters to others”. further delineation of these concepts is particularly emphasized in the practical guide “independence and objectivity”, which determines objectivity as a state of mind, and independence as a state of affairs (jameson, 2011, p. 4). mutchler (2003) differentiates between these concepts in a similar manner, and describes objectivity as a desirable characteristic of an individual, or the audit team, while independence is the desired characteristic of the environment in which internal audit is performed. in this sense, objectivity is linked to an auditor’s individual view, their behavior, personal relationship with others, and, when performing engagements – a sincere belief in their work product and that no quality compromises are made. on the other hand, independence means ensuring the possibility of objective performance of internal auditor’s duties, and is linked to the organizational positioning of internal audit in the company, reporting relationships with boards of directors, audit committee, or other governing bodies separated from the management, authority for the evaluation of information, reports, and the like. in doing so, independence and objectivity of internal auditors as deteminants of their effectiveness 233 although the previous can suggest that independence is emphasized at the organizational level, the definition shows that it is “equally important at the individual, functional, and level of individual engagement” (stewart & subramaniam, 2010, p. 330). the fact is that objectivity of internal auditors does not mean concomitantly their independence, and vice versa, independence of internal auditors does not necessarily mean their objectivity. however, it can be said that the basis of ensuring internal audit independence is, in fact, ensuring objectivity in work and proper management of threats to its achievement. in particular, timely identification and elimination of threats that can compromise the objectivity of internal auditors is a prerequisite for the implementation of activities that contribute to internal audit independence, relating to: adequate organizational position of internal audit, establishing a strong control system, adoption of audit charter, establishing the practice of employment and dismissal of internal auditors, and others. in this respect, self-reliance in work and refusal to subordinate one’s own judgment to the interests of others, but also one’s own personal interest, is something internal auditors must achieve at every stage of their work. according to mautz and sharaf, pioneers in the development of auditing theory, independence, i.e. freedom from undue control and pressure must be exercised through:  investigative independence – in the selection of areas, relationships, and management policies to be examined,  programming independence – when selecting audit techniques and procedures, and  reporting independence – statement of audit information obtained by the auditor during the implementation of audit procedure (according to: andrić et al., 2012). code of ethics for internal auditors also emphasizes objectivity as a principle by which internal auditors must exhibit the highest level of professional objectivity in the collection, evaluation, and communication of information about the activity or process being examined ..., free from undue influence of their own interests or the interests of others in the formation of judgments. 2. specifics of ensuring independence and objectivity of internal auditors internal audit functions in two ways: (1) ex post – as a provider of objective assurance of efficiency and effectiveness of operations, and (2) ex ante – as a catalyst for change by providing advice and guidance in work, which has provided this function a position that provides assistance to all other participants in the system of corporate governance, above all, management. however, its dual role and a unique position in the company are at the same time the cause of specifics of ensuring internal auditors’ independence and objectivity. this is because internal auditors, as company employees, exercise control and provide assurance of the adequacy of the established governance structure and business activities. hence, it is logical to open a number of issues concerning the possibility of internal auditors to independently and objectively carry out their activities. this primarily refers to the possibility of threats from social pressures by the company management, as well as those arising from personal relationships or intimacy, which is why internal auditors can often be the subjects of conflict. also, practice has shown that company managers require internal audit to expand its activities outside the scope of its work, in order to compensate for the loss of control as a result of the significant complexity of 234 m. đorđević, t. đukić operations (sarens and de beelde, 2006). internal auditors are often treated as their workers, who are expected to be involved and provide assistance in performing daily management activities. it is also not uncommon for managers to perceive internal auditors as partners with whom they need to work closely to achieve the “common goals”, rather than a function that provides assurance of the effectiveness and efficiency of the company processes (christopher et al., 2009, p. 208). such management expectations are certainly a serious threat to internal auditors’ independent and objective performance of activities within the scope of their work. besides, the fact is that, by providing consulting services, internal audit obtains a strategically important position in the company, as it applies a proactive approach to the management process. this, however, may cause internal auditors’ bias, because, quite often, auditors need to provide assurance on the efficiency and effectiveness of a process or activity for which they previously made a recommendation for improvement. nevertheless, although this view is completely logical and relevant, numerous studies show that internal auditors do not fully agree with it. paape et al. (2003) explored the role of internal audit in 15 european countries, and found that 61% of surveyed internal auditors disagreed with the suggestion that they would significantly preserve their independence if they did not accept advisory role. also, research by ahmad and taylor (2009) has shown that internal auditors do not find a significant link between the occurrence of the conflict, on the one hand, and carrying a double role, on the other. peurs (2004) dealt with the similar topic and found that most respondents did not see as a problem at the same time assisting company management and independent assessment of the management process. what is more, the perception of internal auditors themselves, that their independence and objectivity are compromised by performing dual roles, is caused by multiple factors: the nature of consulting activities carried out, the existing ownership structure of the company in which they work, the established system of management, and others. this is confirmed by research conducted by selim et al. (2009), in which they performed a comparative analysis of the extent to which internal audit in companies in ireland and italy is involved in providing advisory services and its impact on, among other things, independence and objectivity. the results showed that 36% of respondents in italy believed that, by providing advisory services, internal audit is able to increase its independence and objectivity, while 38% of respondents in ireland had a different opinion – dual role decreases independence and objectivity. also, 64% of respondents in ireland considered that the risk of conflict of interest largely stems precisely from the dual role of internal audit, while 51% of respondents in italy believed that this role has no effect on the achieved independence and objectivity. the authors explained the observed differences by the fact that internal auditors in ireland are involved in providing advisory services related to a wide range of activities in the company, as opposed to auditors in italy, who traditionally focus on financial audit. also, italy has a greater number of the so-called family businesses, so, besides the generally lower concern about achieving independence and objectivity, the existence of personal/family relationships is another reason. however, despite the beliefs of internal auditors that providing consulting services is not a factor impairing their independence and objectivity, research by brody and lowe (2000) suggests otherwise. the purpose of their study was to determine the way in which internal auditors perceive their advisory role – as something that should provide objective independence and objectivity of internal auditors as deteminants of their effectiveness 235 information to managers, or as service that should provide solutions in the best interest of the company. in this sense, their research focused on assessing the level of the achieved objectivity of internal auditors in the process of company acquisition. the results showed that the reasoning of internal auditors varied significantly depending on whether they worked in a company that was a buyer or a seller. specifically, the study has found that most internal auditors (67.76%), which were in the process of negotiations on the side of the buying company, overestimated the likelihood of inventory obsolescence to achieve lower prices, as opposed to internal auditors on the side of the seller (37.31%). this data indicates that internal auditors are biased and prone to satisfying the interests of their company, following that the provision of consulting services makes them unable to maintain their independence and objectivity. that this is not an isolated case is proven by the results of research conducted by dickins and o’reilly’s (2009), according to which 89% of 99 audit managers at us companies were involved in various forms of compensation packages. bearing in mind that compensation packages are conditioned not only by the overall results of company operations, but also the achieved internal audit performance, bias of internal auditors in performing activities is quite logical. in addition to the dual function they have, specificity of ensuring independence and objectivity of internal auditors resides in the fact that, not infrequently, internal audit is the starting point, i.e. “springboard” for higher management positions. research by goodwin and yeo (2001) shows that 43% of respondents, chief audit executives in enterprises in singapore, confirm the practice, while in the us, the situation is such in more than half of publicly listed companies (rose et al., 2013). also, research by christopher et al. (2009) shows that 56% of internal auditors in australian companies believe that the appointment of internal auditors to higher managerial positions is, in fact, a reflection of the business culture. an argument for this practice is that internal auditors carry out their assurance and consultation role in a number of different company functions, which includes a good knowledge of how to perform the activities and manage these functions. appointing managers, who, based on previous experience in internal audit, stand for well-trained staff, with an excellent understanding of almost the entire company operations, is certainly a significant benefit for the company. however, this may in turn lead to a number of risks to the achievement of independence and objectivity of internal auditors. more specifically, it is a reasonable assumption that internal auditors will, to some extent, be biased in carrying out their activities, bearing in mind that the audited entity has concrete plans to develop their careers. independence and objectivity is surely brought into question as a result of internal auditors’ desire “not to compromise their relationship with the counterparts and not to be characterized as unreliable and untrustworthy colleagues” (rose et al., 2013, p. 1008). in addition, internal auditors hoping or expecting to move to senior management functions are not sufficiently interested to adequately carry out their activities and show no initiative to improve audit quality. 3. efforts to ensure independence and objectivity the fact that only independent and objective internal audit may produce corresponding effects fully justifies the iia efforts to, by making a significant number of standards and related practical advice, ensure compliance with these concepts. thus, the standard 1100 states that internal audit activity must be independent, and internal auditors’ objective in 236 m. đorđević, t. đukić performing their duties. this standard is followed by interpretation, according to which an internal auditor should have direct and unrestricted access to senior management and the board, which is actually achieved by double reporting line. this issue is further determined in the standard 1110, according to which the chief audit executive must report to the management level in the company, which allows the internal audit activity to fulfill its obligations. in this sense, organizational independence is achieved when the chief audit executive functionally reports on its work to the audit committee and administratively to senior management level, where functional reporting includes all the issues relating to the scope of internal audit, from planning to reporting on work results, including the quality control of internal audit activities, while administrative reporting involves communication with the appropriate higher management level on administrative matters related to the daily operations of this function. standard 1120 promotes personal objectivity of internal auditors, according to which internal auditors must have an objective and impartial attitude in the performance of their tasks. also, they must avoid any conflict of interest that may reduce confidence in the internal auditor, the internal audit activity and the profession, and in related practice advisory 1120-1, considerable personal responsibility in this regard belongs to the chief audit executive, who should, whenever possible, periodically rotate tasks of internal audit staff. finally, standard 1130 points to the obligation of disclosure of details of impairment to independence and objectivity of internal audit. abundant practice advisory related to this standard indicates causes of impairment to independence and objectivity, and responsibilities of internal auditors and chief audit executives to disclose details of impairment and adequately react in these situations. the importance of identifying threats to achieving a high level of independence and objectivity has made iia give them special attention in their practical guide. thus, impairing objectivity may result from (jameson, 2011, p. 7-9):  social pressure on internal auditors when external auditors, regulators, management, and others consider that any internal audit engagement must generate certain findings, or when management expects that auditors “overlook” suspicious items, etc.;  economic interests, in the sense that an internal auditor’s negative findings may impact future company operations, and, thus, the realization of their economic benefit as company employee, or in situations where work or department of individuals who directly influence the internal auditor’s status and salary is audited;  personal (family) relationships or intimacy, as a result of long-term co-operation, between internal auditors and individuals whose work or department is audited;  cultural, racial or gender bias of internal auditors;  psychological bias of internal auditors about the role they perform – if auditors have a critical perspective of internal audit, it is very likely that they will overlook the positive things and vice versa, the perception of internal audit as a facilitator for improvement can cause them to overlook negative things;  audit of auditor’s own work, in the sense that audit focuses on activity, process or work of the department for which the auditor previously, serving as a consultant, gave a recommendation for improvement;  threats or intimidation of the internal auditor by the audit client or other stakeholders. in addition to standards and practice advisory, iia code of ethics provides that internal auditors should not participate in any action or attitude (as opposed to the interests independence and objectivity of internal auditors as deteminants of their effectiveness 237 of the organization), or accept anything that might impair or seemingly undermine their professional judgment or independent appraisal. furthermore, they must disclose all material facts with which they are familiar, and which could, were they not disclosed, distort the reporting of activities which were subject to audit. however, despite the existence of professional regulations, independence and objectivity of auditors are much higher requirements than those imposed by rules, because it is not realistic to expect that explicit rules will cover all potential sources of bias. at the same time, they are neither a guarantee, since independence is the subjective characteristics of the individual that is difficult to quantify (andrić et al., 2012, p. 86). independence and objectivity of internal auditors primarily depend on their relations with the governing bodies of the company, from the support they receive at work, and then the skills of internal auditors to withstand various threats. 3.1. establishing appropriate relations with management and the audit committee establishing clear and, above all, fair and constructive relations between internal audit, on the one hand, and company management and the audit committee, on the other, is a precondition of an adequate organizational position of internal audit. in this regard, relations between internal auditors and management are complex in particular, due to their close cooperation that has to be achieved in order to provide mutual support in performing activities, all in order to create added value for the company. this cooperation is necessary; however, it is reasonable to question the extent to which internal auditors can remain independent if they bind and directly subordinate their activities to management; what should be the limits of their cooperation? looking for an adequate response imposed the view that the relationship between internal audit and management should be constructive and balanced – neither too friendly nor unfriendly (european confederation of institutes of internal auditing, 2005). such a relationship is shown in figure 1. fig. 2 relationship between internal audit and senior management source: sarens & de beelde, 2006, p. 224 238 m. đorđević, t. đukić the figure clearly shows that internal audit provides assurance and consulting services, thus providing significant support to company managers in the management and implementation of strategic goals. for these reasons, it should align its objectives with the strategic objectives set by the management, and focus its activities on areas which the management believes are the key to success. on the other hand, company management is also expected to provide significant support to internal audit in performing its activities. this support is determined in performance standards, and, thus, standard 2010 states that management should provide significant inputs when creating audit plans, with the aim of pointing out high risk areas or business opportunities. furthermore, standard 2020 prescribes that the chief audit executive is obliged to inform the management about the planned activities and resource requirements, including any significant changes that have occurred in the meantime, in order to determine whether internal audit objectives and activity plans reflect company plans. and, finally, in order to examine the possibilities of overcoming possibly identified problems, according to performance standard 2060, company management, next to the board, must obtain an internal audit report on the purpose, authority, and responsibilities of internal audit, and performance in relation to the plan. such a relationship should ensure the achievement of synergistic effects and directly contribute to the improvement of company management, while providing the ability to achieve a high level of independence and objectivity of internal audit. managers are the ones who largely orient internal audit activities and provide support for the performance of audit activities. however, this does not mean that internal auditors should be considered as their “servants”, and that the impact on their work should go beyond the powers of management. thus, provision of inputs for internal audit plans and consideration of requests for resources, together with the audit committee, is desired and prescribed by standards, but internal auditors and the audit committee should have full autonomy for the final prioritization. this is because if management does not want internal audit to focus on some specific areas, they can limit internal audit resources, and, thus, significantly reduce audit activity (christopher et al., 2009). also, the issue of employment and dismissal of internal auditors should not be the responsibility of the company managers as audited entities, for direct subordination of internal auditors and bringing their independence and objectivity into risk. based on the above, it can be concluded that “the greater the influence of management on internal auditors, the less they are independent in carrying out the tasks entrusted to them” (kondić & petrović, 2012, p. 133), which is why establishing a balanced relationship to provide both sides with an opportunity for the proper performance of tasks entrusted to them is a priority. unlike company management, greater involvement of the audit committee in internal audit activities is desirable or necessary, because it is an authority with the primary responsibility for the effective functioning of internal audit. the relationship between internal audit and the audit committee is “much more than relationship between the supervised and the supervisor” (goodwin & yeo, 2001, p. 110), because the audit committee primarily focuses on safeguarding the independence of internal audit from management (kamau et al., 2014). this is primarily achieved by:  approval of internal audit charter/rulebook, which sends a special message to management that chief audit executive may appeal to a higher authority in the case independence and objectivity of internal auditors as deteminants of their effectiveness 239 of controversial issues. approval of the charter implies that internal audit is free from barriers that might otherwise prevent it from making the necessary disclosures to the audit committee;  approving risk-based internal audit plan and budget – based on a risk study prepared by internal auditors and significant inputs received from the company management, chief audit executive shall submit to the audit committee a draft plan, which they, as the ultimate coordinator, review and finally approve;  receiving reports from the chief audit executive on the execution of internal audit activities in relation to the plan and on other matters and measures related to significant audit findings in the report that their internal auditors provided;  approving decisions concerning the appointment and dismissal of chief audit executive. although chief audit executive is, as a rule, administratively responsible to company management, audit committee is responsible for their recruitment and dismissal. company management informs the audit committee of potential candidates and makes a proposal. also, management can make a strong statement of reasons why the current chief audit executive is not fulfilling their responsibilities and that they should be transferred or dismissed. after the company management’s decision proposal, audit committee makes the final decision on appointment or dismissal of chief audit executive. by performing these activities, audit committee ensures that internal audit activity is structured in a way that ensures organizational independence. additional support to internal audit comes from complete and unrestricted access to documents and people within the company. also, the possibility of direct and regular communication between the chief audit executive and the audit committee chairman, attending committee meetings to discuss internal audit plan, significant findings, methods of implementation of recommendations, and others further support the independence of internal audit. the great importance here belongs to private meetings between the chief audit executive and the audit committee, bearing in mind that they often discuss sensitive internal audit findings, for which the presence of the company management is not desirable. 3.2. threat management to achieve independence and objectivity achieving independence and objectivity in work is subject to significant efforts made by internal auditors themselves, aimed at adequate assessment and management of any situation that threatens to endanger them. significant support in this regard comes from iia framework, aimed at promoting and fostering independence and objectivity of internal audit in the company (jameson, 2011). specifically, this framework presents the multi-stage process of threat management, which initially involves timely identification of any threats to independence and objectivity. it is the responsibility of internal auditors to even seemingly insignificant events and circumstances that may reduce their ability to freely and impartially carry out their activities recognize as a threat. initial identification of threats at this stage should be communicated to the chief audit executive for a decision on the organization of a proactive approach to eliminate them. in the second phase, it is necessary to assess the significance, i.e. strength of the impact of circumstances or events identified as a threat, and to distinguish whether it is directed at impairment of independence or objectivity. in addition, it is very important to 240 m. đorđević, t. đukić look at whether it is already present or is expected to appear and intensify in the future. this provides the ability to identify specific factors to mitigate the identified threats. more specifically, at this stage, it is important to assess whether it is possible to mitigate the threat and consider how to provide the best results: ensuring support from the audit committee, establishment of legal, i.e. professional penalties and other measures to ensure the smooth performance of tasks. after their application, internal auditors should assess whether and to what extent the threat has been mitigated and the risk of inefficient performance reduced to a minimum. however, internal auditors are expected not to rely on the assumption that measures taken fully eliminated threat. they must assess the residual risk of threat, relying on their reasonable judgment. if they assess that there is risk or if they are not completely sure of their independence and objectivity, they must inform the chief audit executive, and, possibly, the board of directors or audit committee. certainly, internal auditors are expected to proactively manage the remaining threat. by using different tools, such as reference to audit charter, segregation of duties, contracting work with third parties, and the like, internal auditors, to the extent possible, complete tasks without bias and impairment. regardless of the identification of the mitigating factors and the efforts of both auditors and company management, the possibility of threats that cannot be eliminated yet exists. in such situations, the auditor is expected to assess the existence of unresolved threats and, in relation to the corresponding sides, consider the possibility of independent and objective performance of tasks. very often internal auditors inform users of audit services on the circumstances, and, if, after consultation with them, a decision on further work is made, it is important to consider the implications of the report to be prepared by internal auditors. mitigating factors that have been identified, the manner of their implementation, and any measures taken to eliminate threats to independence and objectivity are very important to be adequately documented. this document is an important source of information for management structures within the company and external teams performing quality assessment of internal audit, commitment of internal auditors, and efforts to preserve independence and objectivity. in addition, at this stage, it is important to describe in detail the threats that could not be eliminated and the mode of work in these situations. proper management of threats to independence and objectivity implies continuity in work. chief audit executive is expected to, for each audit engagement, conduct a comprehensive review of activities, not only auditors’, but also of other employees, aimed at safeguarding independence and objectivity. conclusion full utilization of the internal audit’s potentials to improve the corporate governance system is largely conditioned by the independent and objective approach of internal auditors in defining the scope of their work (having full control over the nature of their work), implementing activities (freedom to collect and evaluate evidence) and communicating results (freedom in reporting the results of their work without any pressure). however, the unique place they take in the aforementioned system, as well as the dual roles they have, are the reasons why the independent and objective performance of internal auditors is one of the greatest challenges of modern auditing practice. independence and objectivity of internal auditors as deteminants of their effectiveness 241 the specifics of ensuring independence and objectivity, as determinants of the effective performance of internal auditors, have conditioned that the iia, as the most influential professional organization in this field, specifically directs its efforts to respect these concepts. in addition to adopting a large number of standards, the iia provides support to internal auditors through practical advice, guidance, and the like. apart from respecting professional regulations, internal auditors are expected to be able to recognize and adequately manage any threat of violation of independence and objectivity. in this way they will avoid situations that their 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(2006). the relationship between internal audit and senior management: a qualitative analysis of expectations and perceptions, international journal of auditing, 10, 219-241 selim, g., woodward, s. & allegrini, m. (2009). internal auditing and consulting practice: comparison between uk/ireland and italy, international journal of auditing, 13, 9-25 stewart, j. & subramaniam, n. (2010). internal audit independence and objectivity: emerging research opportunities, managerial auditing journal, (25) 4, 328-360 the institute of internal auditors (2017). international professional practices framework (ippf) 242 m. đorđević, t. đukić nezavisnost i objektivnost internih revizora kao determinante njihove efektivnosti cilj autora ovog rada jeste isticanje problema nezavisnosti i objektivnosti internih revizora, koje zbog mesta i uloge koju interna revizija zauzima u sistemu korporativnog upravljanja, sve više dobija na značaju. determinisanjem ovih koncepata ističe se razlika među njima i posebno apostrofira značaj koji imaju za postizanje efektivnosti interne revizije. predstavljanjem okolnosti u kojima interna revizija deluje, posebno se naglašavaju izazovi sa kojima se interni revizori suočavaju u ostvarivanju nezavisnosti i objektivnosti u radu. značajnu podršku u tome pružaju ima prikazana regulatorna rešenja u vezi sa pozicioniranjem interne revizije u preduzeću, a posebno usmeravanje internih revizora na ulaganje napora u otklanjanju svih faktora koji prete da im ugroze nezavisnost i objektivnost. ključne reči: interna revizija, nezavisnost, objektivnost, specifičnosti i napori u obezbeđivanju efektivnosti interne revizije plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 4, 2017, pp. 359 372 https://doi.org/10.22190/fueo1704359m review paper covered bonds: new opportunity for recovery of serbian capital market 1 udc 336.763.3:336.76(497.11) vladimir mirković 1 , jelena lukić 2 1 economists association of belgrade, serbia 2 modern business school, belgrade, serbia abstract. at the beginning of the xxi century, serbia entered into transition process toward open market economy. one of the segments which should be developed in accordance with market economy principles was financial markets, more precisely capital market. recovery of the belgrade stock exchange and increasing trend in the first half of the xxi century gave optimism in prospective development of the serbian capital market. unfortunately, serbian capital market did not make expected progress. in this paper, the situation on the belgrade stock exchange is analyzed, trading with equity and debt instruments, emphasizing deficiencies which caused insufficient level of development of the serbian capital market. as many opportunities for growth have been missed and capital markets are at the stagnant level for years, there are new, sophisticated products which could give an impulse to further development of financial markets. an example of such products is covered bonds, type of debt instruments with widespread use in the european union. in this paper the main characteristics of those products are elaborated with experiences in other countries that could be very useful for serbia. key words: covered bonds, debt instruments, capital markets, initial public offerings, credit rating agencies jel classification: g21, g24, g31 introduction overall level of capital markets is one of the most significant pillars for the development of each country, especially of countries that are focused on open market economy principles. the role of capital markets in the global economic and financial system is indisputable (erić, received july 27, 2017 /revised august 31, 2017 / accepted october 16, 2017 corresponding author: vladimir mirković društvo ekonomista beograda, beograd, serbia e-mail: vladimir.mirkovic79@gmail.com 360 v. mirković, j. lukić 2013). according to “global competitiveness report 2016-2017” published by world economic forum, serbia is ranked 90 th out of 138 countries (schwab, 2016). observing the financial market development pillar, the positioning of serbia is even worse. namely, serbia is ranked 110 th out of 138 countries, with the average score of 3.4 (scores are distributed between 1 and 7). within the financial development pillar, serbia has the best rank in the segment of access to loans (73 th place, with the average score of 3.8) and only in two more segments is serbia positioned higher than 100 th place (i.e. 99 th place in the segment of soundness of banks with the average score of 4.3 and 68 th place in the segment of legal rights measured by appropriate index, with the average index of 5 – whilst the index is set between 0 as the worst and 10 as the best). the above mentioned describes that serbia is not among countries with well-developed financial markets, indicating that there is a lot of space for improvement in the future. in serbia there is an absence of initial public offering (hereinafter: ipos) although the belgrade stock exchange (abbreviation: bse) was restored in the last decade of the xx century. even some neighboring countries realized ipos successfully (e.g. the government of the republic of croatia conducted ipo of their telekom in 2007 through the sale of 32.5% of shares on stock exchange, while 25% of shares were offered by preferred price to citizens) leaving serbia at the bottom of the list when we are considering the capital market development. compared to croatia’s experience in ipos, in 2006 we had the acquisition of telekom srpska, where telekom srbija was the leading company in financing. the final decision in that process was not ipo of telekom srpska, funding was already realized through commercial loans. after several years, the possibility of telekom’s ipo emerged again, but the budget deficit problems and the absence of political will in the process led to another missed chance. ipos could bring a lot of positive changes such as the introduction of new financial instruments on capital markets. observing the financial markets of developed countries, serbian financial market could be assessed as less developed. it is characterized by the absence of institutional investors and the existence of fewer financial instruments, i.e. tighter options among several investment alternatives. the transition period in serbia has lasted for too long, so inevitable changes were not realized as it is necessary bearing in mind the basic principles of open market economy. furthermore, investment banking is not developed in serbia, while commercial banks are focused on traditional banking, where the vast majority of assets are loans (about 60% of the total assets) disbursed to corporate and retail customers. the mentioned structure implies that commercial banking is more attractive and more developed than investment banking in serbia. insufficient level of development in terms of financial instruments available on the serbian capital market and unawareness of potential investors regarding investment opportunities combined influenced the poor deployment of the capital market. 1. review of capital markets development in serbia analyzing the available opportunities for investment on bse, it is important to take insight into bse’s listings (see fig. 1), such as: 1. prime listing – contains only the major companies in serbia, whose shares are actively traded. there are four shares listed on prime listing: aerodrom nikola tesla (ticker: covered bonds: new opportunity for recovery of serbian capital market 361 aero), energoprojekt holding (ticker: enhl), nis (ticker: niis) and sojaprotein (ticker: sjpt). also, on prime listing are listed bonds issued by two different issuers: republic of serbia (74 bonds in total) and ebrd (1 bond with ticker ebrd01, included on bse since december 13, 2016). 2. standard listing – contains shares of three companies: jedinstvo sevojno (ticker: jesv), komercijalna banka (ticker: kmbn) and metalac (ticker: mtlc). 3. smart listing – include only shares and deposit receipts on shares, with additional terms such as: minimum equity amount of issuer no less than 1 million eur and minimum free-float of shares set at 25% of total outstanding shares (belgrade stock exchange, 2016). 4. open market – consisting of shares of 28 companies. 5. multilateral trading platform (mtp) – the largest number of listed securities is on mtp segment, but those securities are not liquid. the total amount of listed shares is 642 (the number of issuers is 630), while there are also issued municipal bonds – namely two of them: grad šabac (ticker: sabc01) and opština stara pazova (ticker: stpz01). fig. 1 market organization of bse source: adapted from belgrade stock exchange (2017) it is evident that the domestic capital market did not succeed in developing itself in compliance with the rules of open market economy. several reasons could explain the described deficiency, but the most common factor is the absence of political will to make the transition on the market economy principles. the legislative framework was not detached from political will, while due to the same reason potential impulse impersonated in public companies listing on bse was rare. it further ruined all necessary assumptions for the development of a modern stock exchange and slowed the transition process. nevertheless, the recovery process of bse started with simultaneous development of 2 types of instruments: debt and equity financial instruments. debt financial instruments were the first financial instruments of high-quality listed on bse. these were the so-called “old savings bonds” that originated due to the fact that serbian government recognized the debt of state-owned banks regarding savings in foreign currency and for that purpose government issued bonds with maturity dates at each year as the end of may till 2016 (see table 1). the notional value of issued bonds was 4.2 billion eur and trading with this kind of debt instrument was planned to be very http://www.belex.rs/eng/trzista_i_hartije/organizacija_trzista 362 v. mirković, j. lukić attractive (miladinovski, 2012). in that sense, those bonds were excluded from tax burden, whilst they could be used before final maturity date under national amount for several purposes such as: the purchase of company’s shares in the privatization process, the purchase of commercial and residential real estates, tax payments etc. old savings bonds have a great role in serbia as an instrument which brings back the confidence in the financial system and especially banks (see fig. 2 and fig. 3). table 1 volume of converted savings deposits into bonds and otc trading by series description isin ticker volume of conversion (eur) otc trading (eur) bonds rs series a 2002 rsmfrsd60544 ars2002 111.497.645 85 bonds rs series a 2003 rsmfrsd38805 ars2003 186.740.761 20.993.227 bonds rs series a 2004 rsmfrsd62078 ars2004 202.953.790 64.915.906 bonds rs series a 2005 rsmfrsd64033 ars2005 235.726.271 111.950.667 bonds rs series a 2006 rsmfrsd40710 ars2006 223.426.994 126.107.585 bonds rs series a 2007 rsmfrsd60130 ars2007 219.128.818 236.635.102 bonds rs series a 2008 rsmfrsd60916 ars2008 220.665.329 284.166.493 bonds rs series a 2009 rsmfrsd31842 ars2009 226.933.716 395.557.068 bonds rs series a 2010 rsmfrsd14186 ars2010 237.065.229 426.764.602 bonds rs series a 2011 rsmfrsd18757 ars2011 250.814.038 430.060.067 bonds rs series a 2012 rsmfrsd93024 ars2012 267.212.214 501.457.246 bonds rs series a 2013 rsmfrsd68018 ars2013 287.331.015 636.627.469 bonds rs series a 2014 rsmfrsd73810 ars2014 310.896.705 672.987.063 bonds rs series a 2015 rsmfrsd79726 ars2015 334.311.938 778.643.898 bonds rs series a 2016 rsmfrsd70279 ars2016 349.472.127 1.098.350.081 total: 3.664.176.590 5.785.216.559 source: authors based on data from central securities depositary and clearing house fig. 2 conversion of saving deposits into bonds from august 2002 till july 2017 source: central securities depositary and clearing house covered bonds: new opportunity for recovery of serbian capital market 363 fig. 3 otc trading from august 2002 till july 2017 source: central securities depositary and clearing house with the emergence of the global financial crises, in 2009 the government of the republic of serbia issued government treasury bills and bonds. unfortunately, the strategy for debt market development did not give any tangible results, so those securities were not traded frequently and based on market principles (already through direct contract with a known counterparty), while securities of municipalities and cities were not affirmed yet. a similar epilogue was noticed for corporate bonds, due to the fact that with the crisis emerging there was issue of short-term debt securities of overindebted companies with relatively high, unsustainable interest rates. government securities are financial instruments denominated in domestic or in foreign currency, issued by the government or competent ministry and registered in electronic form in the central securities depositary and clearing house csd (rs, ministarstvo finansija, uprava za javni dug, 2013). short-term government securities are those with maturity up to one year, while longterm securities have maturity longer than one year. domestic and foreign legal and physical entities could buy long-term government securities via authorized market participants (such as: banks and brokerages), whilst solely domestic legal and physical entities could buy short-term government securities. the rating of bonds is based on the financial stability of the issuer and it is a crucial indicator of bond’s riskiness. “credit rating is a forward-looking opinion about credit risk and an assessment of the ability and willingness of an issuer to meet its financial obligations in full and on time” (national bank of serbia, 2017). the major rating agencies in the financial market are: standard & poor's (s&p), moody’s investors service (moody’s) and table 2 investment grades per 3 major credit rating agencies moody’s s&p fitch aaa aa aa aa1 aa+ aa+ aa2 aa aa aa3 aaaa a1 a+ a+ a2 a a a3 aa baa1 bbb+ bbb+ baa2 bbb bbb baa3 bbbbbb ba1 bb+ bb+ ba2 bb bb ba3 bbbb b1 b+ b+ b2 b b b3 bb source: quadcapital advisors (2017) 364 v. mirković, j. lukić fitch ratings (fitch) (see table 2). credit rating agencies usually express ratings as letter grades (a, b, c, d) where “aaa” is assigned as the best and “d” as the worst. rating agencies also provide outlooks that indicate the potential direction of rating in the future, which could be: positive, negative, stable and developing. positive outlook means that a rating may be raised. negative outlook means that a rating may be lowered and stable means that it is not likely to change. furthermore, credit ratings of a certain country affect the credit ratings of other issuers headquartered in the same country. table 3 presents the most recent credit rating development for the republic of serbia. table 3 sovereign credit rating republic of serbia standard and poor’s fitch ratings moody’s investors service rating bb/ positive outlook bb/ stable outlook ba3 / stable outlook date 16 june 2017 16 june 2017 17 march 2017 activity rating affirmed rating affirmed rating upgraded source: national bank of serbia table 4 and table 5 present the most recent trends in government securities taking into account the type of holder and currency in which securities are denominated in the period between the end of december 2015 and the end of june 2017. the balance of government securities denominated in eur has an increasing trend in the observed period, with residents as the dominant type of holder (ranging between 94% and 98%). also, considering the total amount of government securities denominated in eur, the largest portion of holdings belongs to banks operating in serbia (ranging between 61% and 69%). considering only the population of residents (which includes the banks in serbia), then the share of banks in government securities denominated in eur is between 62% and 73%. if we separate the whole banking sector in serbia per ownership structure, the results are as follows:  foreign banks have a share between 49% and 51%;  state-owned banks have a portion ranging from 43% to 47%; and  private banks have a minority share which ranges from 4% to 6% at maximum. table 4 government securities by type of holder (residents/non-residents) in serbia pe riods type of holde r eur % rsd % eur % rsd % eur % rsd % non-re side nts 156,947,722 6% 261,502,340,000 39% 95,880,000 3% 202,698,910,000 39% 57,329,872 2% 186,076,740,000 29% re side nts 2,682,187,706 94% 407,435,810,000 61% 2,980,519,727 97% 453,544,740,000 61% 3,220,518,725 98% 455,523,300,000 71% total 2,839,135,428 100% 668,938,150,000 100% 3,076,399,727 100% 656,243,650,000 100% 3,277,848,597 100% 641,600,040,000 100% 31.12.2015 31.12.2016 30.6.2017 source: central securities depositary and clearing house database (2017) table 5 ownership structure of government securities holders in serbian banking sector pe riods owne rship structure eur rsd eur rsd eur rsd fore ign banks 972,749,000 257,532,970,000 987,832,000 251,825,910,000 980,399,000 252,449,660,000 state -owne d banks 913,440,000 81,130,590,000 817,702,000 86,709,370,000 920,629,000 71,780,590,000 private banks 76,874,000 26,093,000,000 113,977,000 27,100,000,000 111,256,000 31,550,600,000 total 1,963,063,000 364,756,560,000 1,919,511,000 365,635,280,000 2,012,284,000 355,780,850,000 30.6.201731.12.2015 31.12.2016 source: central securities depositary and clearing house (2017) on the other hand, the balance of government securities denominated in domestic currency (rsd) has a decreasing trend, again with residents as the dominant type of shareholders ranging covered bonds: new opportunity for recovery of serbian capital market 365 from 61% to 71%. by segregating the total amount of government securities denominated in rsd per banks which operate in serbia, we concluded that banks are recognized as holders in 55% (minimum) or 56% (maximum) cases. within the category of residents separately observed, the portion of banks in government securities denominated in rsd is between 78% (as minimum at the end of june 2017) and 90% (as maximum at the end of december 2015). classifying all banks according to their ownership structure, the movements regarding balance of government securities are as follows: foreign banks have a portion ranging from 69% to 71%; state-owned banks have a share ranging from 20% to 24%; while private banks have the smallest share ranging from 7% to 9% as the maximum. as the debt market (especially the bond market) in serbia was not developed as it could be, in same way sharing the destiny of the overall capital market, the crucial question which arises is: what could be the potential impulse for debt market development in the prospective period and how could it be realized? bearing in mind that the absence of ipos and relatively small number of high-quality shares on bse diminish the potential of equity market in serbia, it is reasonable to initiate the question of debt market upgrade especially when all series of old savings bonds have already matured. short-term and long-term bonds have some kind of important role, but the expected scope of development in this area was not reached. all above mentioned indicated that the revival of the debt market could be found in some new impulse, new product that is already known and established in the developed market economies. such product are covered (or guaranteed) bonds which occupy the central part of this paper. 2. covered bonds as a new product covered bonds are the type of corporate bonds with fixed return (slightly higher than the return of government bonds), where credit risk stays recorded into bank’s balance sheet (the so-called “on-balance securitization”). the main characteristic of this bond is twofold collateralization for investors. namely, the investor in covered bonds has collateral in the equity of issuer (financial institution or bank) on one side, or in priority right over cash flow derived from loan that was the basis for issuance of covered bond (in case of issuer bankruptcy). the investor in covered bonds is exposed to credit risk of the issuer. although, observed historically, those bonds have existed for more than two and a half centuries, finally in the xxi century covered bonds became an irreplaceable and fast-growing segment of capital markets. covered bonds were developed very intensively at the end of the xviii and the beginning of the xix century in prussia, denmark, poland and france. the turning point in the development of covered bonds is related to 1995 and issuing of german benchmark jumbo pfandbriefe bonds primarily aimed at providing liquidity for the public sector and response to investor’s needs (jonathan, 2006). the pfandbriefe act is a legal act, which serves to satisfy the demand of investors for a secure investment. pfandbriefe provides issuers with a very cheap and reliable source of funding. this in turn enables the issuers to supply the credit market with loans on a continuous basis at prices that take their bearings from the capital market (verband deutscher pfandbriefbanken, 2011). after the introduction of euro as the unique currency and general fall of interest rates, banks were motivated to revitalize the covered bond system for the purpose of competitive capital market creation. rapid growth of covered bonds market within the european union 366 v. mirković, j. lukić (hereinafter: eu) was confirmed through development over recent years average growth rate of 7.5% since 2007. in 2015, outstanding volume of covered bonds was on extraordinary level of 2.5 trillion eur with 314 active issuers and 434 programs in 30 countries in and outside the eu (european banking authority, 2016). simultaneously, most of the countries are working on improvement and harmonization of legislation in the segment of covered bonds. in the absence of a unique definition of the “covered bonds” term, there are 4 preconditions which securities must fulfill in order to be considered as covered bonds. those preconditions are (european central bank, 2008): 1) the issuer should be the credit institution which is the subject of supervision and regulation by competent authorities; 2) investors in covered bonds should have privileged position in comparison with other creditors in the case of issuer’s bankruptcy; 3) the issuer of covered bonds is obliged to continuously maintain sufficient coverage in the pool of collaterals for fulfilling obligations toward investors at each point of time; and 4) the obligations of issuers are monitored by a qualified public body or other independent body. the above mentioned preconditions (which are simultaneously characteristics) of covered bonds should be regulated by “special” or general legislative acts. in most countries, the covered bond system is regulated by “a lex specialis”, while in the minority of cases this area is the subject of regulation by general legislative framework. in that sense, covered bonds could be divided into: regulated and structured covered bonds. regulated covered bonds are those whose main attributes are regulated by “a lex specialis” or certain secondary legislative acts. structured covered bonds imitate regulated covered bonds by their attributes, but they are not regulated by “a lex specialis”, but by general laws on contracts and financial activities. covered bonds could be compatible or not compatible with the eu directives. in other words, it does not mean that all regulated covered bonds are at the same time compatible with the eu directives due to the fact that regulation itself is not the only and sufficient requirement for compatibility evaluation. adjustment to the basel standards and requirements by banks put upon demand detailed analysis and treatment of covered bonds. it is necessary to include covered bonds into numerator of lcr ratio (as a part of highly liquid assets) respecting differences in interpretation of conditions given by the basel committee and the european banking authority on one side and the european commission on the other. according to interpretation of the european commission, covered bonds have extraordinary liquid performances and certain covered bonds could be qualified into the segment of liquid assets of the first level for lcr ratio if they fulfill the following provisions: credit rating at 1 given by an external credit rating agency; minimum issue volume of 500 million eur and full coverage of bonds pool with additional coverage over the full amount for minimum 2%. if listed conditions are satisfied then a haircut at the amount of 7% of the market value will be applied to those covered bonds. other covered bonds which have: credit rating 2 given by an external credit rating agency (or assigned risk weighted factor of 20% in case that the rating is not available); minimum issue volume of 250 million eur and full coverage of bonds pool with additional coverage over the full amount for minimum 7%; will be treated as liquid assets of the second level. a haircut factor set at 15% of the market value of covered bonds will be implemented on those assets (bank for international settlements, 2013). covered bonds: new opportunity for recovery of serbian capital market 367 3. covered bonds market in the eu and other countries the development of the covered bonds market within the eu is owed to the eu directives to a great extent and the main directives that arrange covered bonds market are:  directive 2009/65/ec on undertakings for collective investment in transferable securities (abbreviation: ucits) which define concentration limit in terms of investment possibility in a certain security, with constraint that individual limit of 5% could be increased to 25% in case of investments in covered bonds (directive 2009/65/ec of the european parliament and of the council (2009);  2006/48/ec and 2006/49/ec (that together represent crd directive – directive on capital requirements) for the purpose of prescribing rules about calculation of credit risk capital requirements for investments in covered bonds (directive 2013/36/eu of the european parliament and of the council, 2013). in the structure of covered bonds issuers within the eu countries there are:  universal credit institutions – with diversified business operations;  specialized credit institutions – focused on just one type of lending (for example: mortgage lending);  credit institutions that realize issuance via their entities founded just for those special business needs (the so-called “special purpose vehicle” or spv). the european bank for reconstruction (hereinafter: ebrd) is also very active on the covered bonds market development taking into account all potential benefits from a prospective growth of this market. ebrd made some analysis regarding current phase of covered bonds development in some central and eastern europe countries, such as: poland, slovakia, turkey, croatia, romania and lithuania. for a long time poland did not succeed in the covered bonds development, although satisfactory preconditions existed. the main reason for failure was obsoleted legislative framework and structured model of covered bonds, where solely mortgage banks were authorized for issuance of covered bonds. in order to overcome these deficiencies, the creation of new legal and regulatory framework in poland was defined, which should enforce the issuance of covered bonds and usage of more favorable market conditions. in july 2015, the amendments on legal acts for covered bonds were adopted in poland which were put into force starting from january 1, 2016. covered bonds in poland are in compliance with the main provisions of the ucits directive as well as credit risk regulation (crr). at the end of june 2017, ebrd invested 12 million eur in local currency (zloty)-denominated covered bond issue by pko bank hipoteczny s.a. (abbreviation: pko bh). it was fixed rate covered bond issuance of pko bh, backed by polish-zloty-denominated residential mortgage loans and with a provisional rating of aa3 assigned by moody's credit rating agency. pko bh is one of three mortgage banks operating in poland (subsidiary of pko bank polski, the largest commercial bank in poland) and specializes in zloty-denominated residential mortgages (reiserer, 2017a). in croatia, covered bonds are not clearly defined and regulated by the law, although there are obvious expectations from market participants to be involved in the process of issuance or/and investing in covered bonds. those expectations motivated the government of the republic of croatia to bring the law on covered bonds which will overcome deficiencies of the local market and establish a minimum of standards with clearly defined eligibility criteria that are already known and regulated through crr (moraru, kubas & istuk, 2016). 368 v. mirković, j. lukić at the beginning of 2017, as a result of partnership relations between ebrd and ministry of finance, ebrd rolled out 200 million eur framework for mortgage covered bonds in slovakia with the aim of strengthening the development of the local capital market. in the first project under the program, the ebrd invested 49 million eur in a series of 7-year mortgage covered bonds issued by the všeobecná úverová banka (vub), the second largest universal bank in the slovak republic by total assets. the notional amount of the issuance was 250 million, the largest so far on the slovak market (reiserer, 2017b). starting in 2010, action for the issuance of covered bonds were undertaken in romania. the law on covered bonds issuing came into force in march 2016. the issuances of bonds guaranteed with real estate claims contribute to the expansion of the maturity of liabilities, therefore allowing banks to have an adequate balance in their portfolios of assets with longer maturities. romania is in an atypical situation, being among the few eu states still not benefiting from such issuances, although the balance of mortgage loans of over 11.2 billion eur is enough to start issuing covered bonds, this value being higher than the values found in the portfolios of the states in the region where such operations have already started (romanian association of banks, 2017). undoubtedly, similar activities are necessary in serbia in order to create incentives and favorable circumstances for the revival of the debt market. it means that legal acts, incorporated in the eu countries and some neighboring countries (such as: croatia), should define provisions which will cover the covered bonds regulation and should be put into force in the manner that creates prerequisites for primary issuance and active trading on secondary market with those bonds. for the realization of the above mentioned, a cost-benefit analysis should be made regarding inclusion of covered bonds on market, having in mind all specifics of the domestic financial sector and missed opportunities in the past to lift the financial market onto a higher level of development. the legislative framework should be created carefully in order to cover all important provisions, especially the provision related to investor’s protection. protection of investors in covered bonds is one of the key advantages, so the legislation should provide it in two contexts: 1) maintenance of payment dynamic and tenor of bonds in compliance with initially contracted terms; and 2) investors should keep their priority position in relation to other (uninsured) creditors of bank. analyzing data in and outside the eu, there were significant changes in investors’ base and their preferences. central banks as investors increased their share by almost 4 times from 8.9% in 2009 to 30.09% in 2015. oppositely, asset managers, insurance companies and pension funds implemented exit strategy from the market: lowering their share from 50.6% in 2009 to 31.9% in 2015, focusing on other investment alternatives with similar yields (see fig. 4). banks had a stable share in the observed years, meaning that their demand for covered bonds is highly motivated by lcr (liquidity coverage ratio) requirements and eligibility criteria for lcr according to the basel iii standards (mirković, 2015). covered bonds: new opportunity for recovery of serbian capital market 369 fig. 4 allocation of euro benchmark covered bonds by investor type (2009 & 2015) source: european banking authority (2016). eba report on covered bonds, recommendations on harmonisation of covered bond frameworks in the eu more cautious investors usually have on their mind the main shortcomings that are linked with covered bonds as institute of debt market. the main risks of investing in covered bonds are (božović, 2016): 1) credit risk – in case when issuers cannot make their contractual payments partially or fully (when bankruptcy proceedings emerge); 2) interest rate risk – inherent for all types of banking products with a fixed interest rate. the changes of interest rates on the market have a reverse impact on the price of bonds: with an increase of interest rates on the market, the price of bonds declines and vice versa; 3) reinvestment risk – correlated with interest rate risk which occurs at long-term coupon bonds. the increase of interest rates diminishes the value of bonds bought with initial investment; 4) recall risk – inherent to bonds with the recall option; 5) inflation risk – as a probability that an unexpected inflation change will occur. in that moment, all investors lose interest revenue, while if the inflation rate exceeds the coupon rate, all investors have capital losses. banks are focused on the issuance of covered bonds in order to provide liquidity sources, so it is very likely that banks will decide to issue covered bonds when they have a low rate of return and a high loan-to-deposit ratio. after the issuance of covered bonds, the rate of return is growing while loan-to-deposit ratio is declining. covered bonds could have an extraordinary positive impact on the financial markets development, because they are bearing alternative, consistent, sustainable, relatively cheap and available source of funding. investments in covered bonds represent an alternative instrument, but are simultaneously characterized by great quality and stability, which is very important especially in the situation of instability on the financial market. in order to make incentives for further development of the covered bonds market, it is necessary to achieve consensus among banks in terms of their interest to show up as investors in those securities and after that to become active players in trading activities. 370 v. mirković, j. lukić the models of covered bonds which are already implemented in the eu countries could serve as a solid ground and a lesson on which to raise the prospective growth of the covered bonds market in serbia. a different view states that it is not realistic to expect that the emergence of covered bonds as a new debt instrument would change rapidly the relations in the structure of market participants on the serbian financial market. similarly, due to the fact that the serbian financial system is bankocentric (with banks as the major players covering more than 90% of the whole financial market) banks are solely “responsible” for the future development of this debt instrument. banks as issuers are very interested in covered bonds. the interests of banks in covered bonds are additionally supported by the significance which covered bonds have for lcr ratio calculation which is a part of the basel iii regulation. the above mentioned could be realized only if adequate legislation exists to establish precise roles and responsibilities of all market participants and in final instance create assumptions for foreign direct investor’s entrance on the covered bond market (radević & lekpek, 2014). having in mind the sensitivity of this matter and insufficient domestic practice, it is necessary to create special legislation which will cover the subject of covered bonds (lex specialis) as it has already been done in several countries with greater experience in handling and treatment of covered bonds on the debt securities market. conclusion some neighboring countries successfully conducted ipos and in that way enriched the existing offer on their capital markets. at the same time due to a wide variety of instruments on capital markets, those countries became very attractive for foreign investors. unfortunately, that was not the case in serbia. it is specially indicated that several years after the law on the right to free shares to citizens of serbia entered into force, there was the absence of ipos, but also the absence of launch of new debt securities issued by the government, other territory units and municipalities. the period of positive economic conjuncture, manifested into growing trend on bse during the first half of the first decade of this century, was not fruitful for stock exchange development in terms of inclusion of large institutional investors. one of the reasons for that is, to a great extent, the delay in the process of passing the law on investment funds in serbia. the consequence of the delay in the legislative context were delayed activities of investment funds so they have only had an active role in serbia since a declining trend on bse was obvious in 2008. the negative effect of delay in introducing the law on investment funds is impersonated in inadequate development of financial market products, especially in the absence of sophisticated products. bse was not recovered in full manner until today, simultaneously recording very modest daily turnovers in comparison with the potential that was expressed at the beginning of the xxi century. in more detail, the turnover on bse is mostly defined by shares trading (trading of equity instruments) and it seems that additional effort is necessary in order to create a stimulating debt financial market. bearing in mind the above mentioned, the issuing of covered bonds as a new, sophisticated product could be a great step towards a more efficient and effective debt market. generally, it is very difficult to expect that the emergence of covered bonds would change dramatically the whole outlook of the serbian financial market, but it could certainly enrich the offer and indicate the potential positive covered bonds: new opportunity for recovery of serbian capital market 371 movements in the prospective period. in case that the option of covered bonds introduction and implementation in serbia prevails, then the crucial point would be to acquaint investors with the main advantages and disadvantages of covered bonds. in that way, it would be possible to create a stimulating ambience for further development of the capital market and increasing credibility of foreign direct investors into the 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(2017b). ebrd rolls out covered bonds framework in slovakia, retrieved from: http://www.ebrd. com/news/2017/ebrd-rolls-out-covered-bonds-framework-in-slovakia.html, accessed on: 20 july 2017. romanian association of banks (2017). romanian banks could issue covered bonds, retrieved from: http://www.arb.ro/en/mortgage-bonds/, accessed on: 15 july 2017. rs, ministarstvo finansija, uprava za javni dug (2013). vodič za investiranje u državne hartije od vrednosti republike srbije [guideline for investments in government bonds of republic of serbia], beograd. schwab, k. (2016). the global competitiveness report 2016-2017, world economic forum, retrieved from: http://www3.weforum.org/docs/gcr2016-2017/05fullreport/theglobalcompetitivenessreport20162017_final.pdf, accessed on: 24 july 2017. verband deutscher pfandbriefbanken (2011). pf+brief, facts and figures about europe covered bond benchmark, retrieved from: http://www.pfandbrief.de/cms/bcenter.nsf/0/90c291f200c1ce3ec125779a00412aee/ $file/en_pfb%202010%202011.pdf, accessed on: 20 july 2017. pokrivene obveznice: nova šansa za oporavak tržišta kapitala u srbiji početkom xxi veka srbija je otpočela proces tranzicije ka otvorenoj tržišnoj ekonomiji. jedan od segmenata koji je trebalo razviti u skladu sa principima tržišne ekonomije jesu finansijska tržišta, tačnije tržište kapitala. oporavak beogradske berze i rastući trend u prvoj polovini xxi veka su dali optimizam po pitanju budućeg razvoja srpskog tržišta kapitala. nažalost, tržište kapitala u srbiji nije napravilo očekivani napredak. u radu je sprovedena analiza stanja na beogradskoj berzi, trgovanja vlasničkim i dužničkim instrumentima, uz identifikovanje nedostataka koji su doveli do nedovoljnog nivoa razvijenosti srpskog tržišta kapitala. kako su mnoge šanse za rast propuštene i tržište kapitala stagnira nekoliko godina unazad, u radu je istaknuto da postoje novi, sofisticirani proizvodi koji mogu dati impuls daljem razvoj finansijskih tržišta. primer takvih proizvoda su pokrivene obveznice, vrsta dužničkih instrumenata koji se široko primenjuju u evropskoj uniji. u radu se iznose osnovne karakteristike ovog proizvoda zajedno sa iskustvima drugih zemalja koja mogu biti vrlo korisna za srbiju. ključne reči: pokrivene obveznice, dužnički instrumenti, tržište kapitala, inicijalne javne ponude, kreditne rejting agencije plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 4, 2017, pp. 307 319 https://doi.org/10.22190/fueo1704307n review paper suitability of activity – based costing for lean business concept 1 udc 657.474 bojana novićević čečević, ljilja antić university of niš, faculty of economics, niš, serbia abstract. lean business concept is characterized by securing the required customer value, quick product delivery, elimination of all forms of waste both from production and from all business processes in the company. in order to successfully respond to such requests, company managers need an appropriate information base. one of the possible information bases is activity-based costing. the paper deals with the issue of application and suitability of activity-based costing for lean business concept. key words. lean concept, activity-based costing, elimination of waste, performance measurement jel classification: m 41 introduction application of lean business concept began in the last decades of the 20 th century. however, the earliest examples and postulates of lean business concept date back to 1855. specifically, a weapons warehouse recorded a single piece flow. since then, lean business concept has evolved and today represents the leading business paradigm of modern companies. lean business concept includes a business philosophy and culture that eliminates all forms of waste from the company business flows in order to shorten the lead time. this can be achieved by performing value-added activities in the best possible way and constant business process improvement and employee development. the application of the basic principles of lean business concept brings numerous benefits both at operational and strategic levels. at the beginning of the application of lean business concept, only operational improvement is visible. this is because strategic improvement comes only received june 29, 2017 / accepted september 26, 2017 corresponding author: bojana novićević ĉeĉević university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: bojana.novicevic@eknfak.ni.ac.rs 308 b. novićević ĉećević, lj. antić after changing the way of thinking, business culture, and working methods, of both managers and executives. by guiding managers and executives towards reducing waste in business processes, operational improvement becomes strategic. in an effort to adapt to lean business concept and successfully respond to demands of various stakeholders, company managers change their production systems, costing methods, and management methods. one of the concepts that can be successfully applied in the process of continuous improvement is activity-based costing. based on the information arising from activity-based costing, managers can monitor product and service costs, assess their profitability, and find out where they can reduce costs. activity-based costing finds its conceptual basis in activities carried out in a company, and for the allocation of the increased mass of overhead costs, they use adequate bases, both those related to the physical volume of production, and those that do not relate to the physical volume of production, which leads to more precise costing. a particularly important aspect of this costing system is the ability to identify and eliminate non-value-added activities, which increase costs and time necessary for the product to be produced or service delivered. in this regard, the paper is divided into three parts. the first part of the paper points to the essence of lean business concept and the model that should be established in the company in order to achieve a competitive advantage. the second part of the paper presents the basic characteristics of the original activity-based costing concept. finally, similarities and differences between activity-based costing and lean business concept are highlighted. 1. the essence of business concept the term lean business concept is used in the business world to designate a philosophy that incorporates different models, methods, techniques, and tools applied in business processes in order to optimize time, employees, resources and productivity to ensure and improve quality of products and services delivered to customers (lean manufacturing and the toyota production system , 2010). in the initial stages of development, lean business concept focused only on the operational level. at the operational level, it sought to reach customer value by applying appropriate lean techniques and practices. in this respect, the tendency was to improve efficiency and reduce costs in the production process (salehi & yaghtin, 2015), in order to create the value customers expected from a product. thus value became the heart of lean business concept. eliminating waste and unnecessary resource spending during the execution of business processes was seen as the basic goal of the lean concept. waste and unnecessary spending in the lean business concept imply all non-value-added activities, resources, processes, and employees. with their elimination, waste and unnecessary spending of company resources disappear. companies see waste as an enemy, which at the same time restricts operations and impedes the realization of the defined company strategy and goals. however, elimination of waste and unnecessary spending does not necessarily mean elimination of resources, processes, and dismissal of company employees, but the possibility of directing them to some other value-added activities within the company. in any case, elimination of waste and reduction of operating costs are important preconditions for creating lean flows and processes. eliminating non-value-added activities leads to achieving the defined performance targets, ensures better understanding of processes, and facilitates the improvement of business processes and performance. suitability of activitybased costing for lean business concept 309 the focus of lean business concept during the 1990s shifted from operational to strategic level. at the strategic level, the aim was to understand the value provided to customers, in terms of product quality, costs, functionality, delivery speed, and the like. national institute of standards and technology manufacturing extension partnership lean network gave the definition of lean business concept, seeing it as “a systematic approach to identifying and eliminating waste through continuous improvement, flowing the product at the pull of the customer in pursuit of perfection (lean principles)”. this definition of lean business concept is integrated into company strategies and development policies, as customers determine the level of production and product quality. this business concept is the business philosophy rooted in the minds of employees. womack and jones (womack & jones, 2003) gave another definition of lean business concept. they explain lean business concept as the most powerful weapon that creates value while eliminating waste in a company. lean business concept requires value determination, definition of activities needed to create value, and their effective and continuous performance. lean business concept allows one to do more with less and less. less resources refers to less human effort, less equipment, less time, and less space. lean business concept is also defined as the creation of a business system that focuses on streamlining and improving processes in order to shorten the time needed for their performance and resource retention time within the process. consequently, lean business concept focuses on the following objectives: business process improvement in the company, performing only value-added activities, and eliminating all forms of waste and unnecessary spending (chen & taylor, 2009). the above definitions of lean business concept put emphasis on business philosophy, process, people and partners, and problem solving, giving rise to the so-called “4p model”. the 4p model of lean business concept is shown in figure 1. fig. 1 4p model of lean business concept source: liker, j., meier, d. (2006). the toyota way fieldbook, a practical guide for implementing toyota’s 4 ps. new york: mcgraw-hill. p. 26.  respecting long-term contribution to society  growth and development of company performance  respecting the lean method for eliminating waste  respecting “value streams”  business process development and application of appropriate technology  development of leaders who accept lean business concept as a way of life  establishing long-term partnerships with employees and suppliers  building a company that is constantly learning  understanding the way in which processes are performed 310 b. novićević ĉećević, lj. antić the 4p model basis is a business philosophy. modern companies focus on transforming values in the company in order to meet the needs of customers and owners, as well as other numerous stakeholders. each of the listed groups of stakeholders is interested in a certain aspect of company operations. customer satisfaction is only an initial stage, from which company results and contribution go further. in order to achieve this, lean business concept must be seen as a kind of company strategy, which basically relies on reduced operating losses, i.e. lowering costs, better use of resources, and delivering higher value to customers as well as other stakeholders. the second p in this model refers to business processes carried out in the company. toyota, which is considered the cradle of lean business concept, realized that welldesigned processes lead to right results (liker & meier, 2006). business process design involves a long-term activity that brings lower costs and product quality improvement. this, first of all, refers to the establishment of well-organized “value streams” in which lean methods and techniques are used to eliminate all forms of resource waste. an important part of lean business concept is its human aspect, so it is understandable that the next element of the 4p model relates to people, i.e. employees. lean concept respects all employees in the company, from operational workers in the production process to company managers. all employees are part of a team that continually strives to improve business activities. the company success is the success of all employees, not the individuals who lead the company. the behavior and operation of employees depend primarily on the incorporated business philosophy and culture, which employees rely on to achieve continuous improvement of activities they perform. in this sense, lean business concept allows for increasing employee satisfaction by providing very quick feedback with the aim of transforming resource waste and scrap into value-added activities. the last element of the 4p model is problem solving. continuous problem solving at the place where problems occur stimulates learning and growth in the company, and, thus, leads to better performance. spotting the problem where it occurs is possible if one knows the business processes that are performed in the company well and if they are managed by a manager who “lives” lean business concept. the application of the 4p model requires a long-term company orientation to better results, through employee training and education to carry out business processes through continuous problem solving, in a way that will increase the value for all stakeholders. if one of the above model elements is left out, implementation of other elements will not be complete, nor will the desired results be achieved. benefits from the application of lean business concept are noticeable at: operational, administrative, and strategic levels. the first visible business improvement occurs at the operational level. research has shown that companies that applied lean business concept reduced lead time by 90%, increased productivity by 50%, reduced work-in-progress inventory by 80%, improved product quality by 70%, and reduced use of business potential by 75% (womack & jones, 1994). administrative improvement allows (lean principles):  reduction of errors in the product ordering process,  shortening customer waiting time, improving customer service function,  reducing documentation and paperwork of business processes by ensuring that more time is spent on securing value for customers,  that the same number of workers handle a greater number of orders, suitability of activitybased costing for lean business concept 311  lowering costs with the increase in inventory turnover, and  implementation of business standards. strategic business improvement can be seen after a long period of time. this improvement relates to increased market share and rise in cash flow and corporate income. a large number of companies engage professional consultants for lean concept implementation and spend large sums of money. however, lean business concept must first be accepted by the top management to achieve the defined goals. this is because the process of implementing lean business concept must begin with the research and analysis of existing business practices, in order to determine the lean technique that is appropriate to specific business practices. if that is not the case, lean concept will be just a simple tool for business improvement. 2. activity-based costing and management activity-based costing (abc) emerged as a result of the efforts of accounting theory and practice to respond to the information requirements of company management in changed business conditions. the initial goal of activity-based costing was to overcome the weaknesses of traditional costing systems, in terms of finding adequate keys to allocate overhead costs. this is because the new ways of doing business and the changed organizational structure in the company have led to a rise in overhead costs, but also to a reduction in direct labor costs, which were the most commonly used basis for allocating overhead costs. in a situation where the mass of overhead costs is allocated on the basis of direct labor costs, cost of goods determined by traditional approach becomes an unreliable information basis for making business decisions, planning, and control. the basic novelty of activity-based costing is that this concept recognizes that most of the company’s resources are not used in direct production, but in production support activities and sale of products and services (malinić & jovanović, 2011). in fact, activitybased costing implies that costs are incurred when carrying out activities of production and sales of products. the basic task of this method is to allocate overhead costs to products by carefully researching the relationship between products, activities that incur production costs, and resources spent on production. activity-based costing is based on the following assumptions (antić & georgijevski, 2010):  to produce a product or service, it is necessary to carry out appropriate activities,  to carry out an activity, it is necessary to spend some resources,  activities are the basis of cost allocation, and  cost drivers (resource cost drivers and activity drivers) do not have to be related to the physical volume of production. in figure 2, a two-dimensional activity-based costing model is shown. the figure shows the vertical and horizontal dimension of activity-based costing and their interconnectedness with activity-based management (abm). 312 b. novićević ĉećević, lj. antić fig. 2 a two-dimensional activity-based costing model source: cokins, g. (2001) activity-based cost management – an executives guide, john wiley& sons, new york. p.15. vertical dimension refers to costing by cost objects. direct resource costs can, like in traditional costing, be transferred directly to cost objects (antić, 2003). however, indirect resource costs are transferred to cost objects by means of two-step allocation. resource costs are allocated to activities based on the resource cost driver, i.e. on the basis of the amount of resources needed to perform certain activities. then activity costs are allocated to cost objects with the help of activity drivers. activity drivers measure the number of individual activities done in production. at both levels of cost allocation, keys are used that are independent of the physical volume of production (antić & sekulić, 2008). the process of activity-based costing is done in four iterations (weygandt at al, 2008):  identification and classification of activities involved in the production process and allocation of production overhead costs to appropriate activities,  identifying cost drivers associated with activity costs,  calculating the production overhead cost rate for each cost driver; and  allocating production overhead costs from activity costs to products, using overhead cost rate for each driver. the process of designing an activity-based costing system begins with identifying and classifying activities performed in a company from the perspective of available resources. in this regard, the conceptual basis of this costing system lies in activities carried out in the company. activities can be defined as “every repeated action, movement or order of operations, carried out in order to execute the business function, and it can be described with a verb or noun, for example starting the machines or unloading of raw materials suitability of activitybased costing for lean business concept 313 (rainborn et al, 1996). identifying and classifying activities involves a detailed analysis of the work and processes that are performed in a company. specifically, the goal is to determine the level of activity for the execution of defined tasks. the selection of activities will depend on the company size, its organizational structure, types of activities, and the like. an analysis of activities carried out in the company and the identification of resources for their performance create a good basis for allocating overhead costs to activities. this helps to determine the amount of resources spent on performing each activity. there are different ways to classify activities (oliver, 2000):  repetitive activities (those undertaken permanently by the company) and nonrepetitive (one-off or temporary activities),  primary activities (activities directly related to the mission of organizational parts that contribute to the performance of business functions) and secondary activities (activities that support the performance of primary activities and cause spending of time and resources),  value-added activities (activities that customers are willing to pay for because they increase the product value) and non-value-added activities (activities that do not increase the product value and consume time and resources, so customers are not ready to pay for them). these activities can be reduced or eliminated without affecting the quality and quantity of products.  controlled activities (company policies and procedures for doing business) and activities that are out of company control (state regulations and weather conditions)  optional activities (activities that depend on the business policy of the company as well as on managers’ attitudes, but are not necessary for operations) and mandatory activities (activities that must be carried out in the company, because without them the company could not function). information about activities carried out in a company can be obtained in several ways. in this process, company employees play an important role as direct executors of jobs and tasks. based on experience, employees can predict how much resources are spent on each activity. this will identify the causes of resource consumption that are the basis for allocating overhead costs to activities. after allocating overhead costs to activities, cost drivers for each activity are determined, which should reflect the actual consumption of activities for each cost object. activity drivers are usually the number of transactions or the elapsed time (colin, 2003). the number of transactions can be, for example, the number of processed customers, the number of inspections carried out, and the like, while time, as cost driver, refers to the time period required to perform the activity. when selecting activity drivers, it is necessary to take into account the following three factors: level of interconnectedness, costs of measurement, and effects on behavior of employees (hilton, 2009). since the goal of allocation is to determine how much each product consumes activity, the accuracy of cost allocation depends on the level of interconnection between activity consumption and consumption of activity driver. if, for example, the inspection activity takes the number of inspections and the time of inspection as drivers, the adequacy of drivers depends on the consumption ratio of drivers within the inspection activity. thus, if every inspection activity requires the same time, the number of inspections can be used as a driver. however, if there are significant variations in the time of activity, it is easier to establish a link between the inspection activity and the duration of the inspection as the driver 314 b. novićević ĉećević, lj. antić of this activity. stronger connection between activity consumption and its driver consumption gives a more precise allocation of costs from activities to products. the application of activitybased costing allows for the choice of a large number of cost drivers. however, although the choice of a large number of cost drivers leads to greater accuracy of cost allocation, the end result may be higher costs of adopting and maintaining the system. when choosing a cost driver, one should bear in mind the effect of the choice of activities on the behavior of employees. if the procurement activity takes the number of times suppliers were contacted as a cost driver, procurement manager may decide to contact a smaller number of suppliers, which may result in failure to identify the vendor with the lowest cost or the highest quality. it is very important to emphasize that the level of activity drivers should not be reduced in order to reduce costs if it endangers the product quality and its functionality. in the third iteration, the rate of overhead costs is calculated for each activity driver. the overhead cost rate for each driver is obtained by dividing overhead costs with an appropriately determined driver for each activity. in the last iteration of activity-based costing, allocation of overhead costs to products is made using the previously calculated overhead cost rate per activity driver. the costs for each product are obtained by multiplying the overhead cost rate with the expected consumption of driver for each activity. the main argument for the application of activity-based costing is its precision in calculating product costs. by collecting the finest details on individual activities, this costing concept provides a good basis for making strategically important business decisions. because of its information suitability, there was an attempt to further improve this concept. the horizontal dimension was added to the vertical dimension of activity-based costing. horizontal dimension of activity-based costing illustrates the process as a series of interrelated activities to achieve the goals set (antić & sekulić, 2008). this model made it possible to link the process of cost allocation to processes carried out in a company, by establishing a link between activity-based costing and activity-based management. based on cost information and non-financial information on activities derived from the horizontal dimension of the abc model, answers to the following questions can be given: which events trigger the performance of activities, which activities require the most resources, how successfully are activities performed, which factors have a negative impact on the performance of activities, and the like (turney, 1997). bearing in mind the plenty financial and non-financial information underlying this concept, in the early 1990s it turned into activity-based management concept. activitybased management is reflected in the provision of information on the basis of which managers can provide answers to the following questions (kaplan & cooper, 1998):  how can the company achieve better position on the market, and  how can internal capacities be improved and costs per unit reduced? activity-based management is commonly referred to as the process that involves identifying value-added and non-value-added activities for customers, company reengineering, value-added benchmarking, and development of a performance measurement system that will contribute to continuous development. identifying value-added and non-value-added activities is important from the aspect of their improvement and elimination. non-value-added activities are those that cause costs, but do not increase value for customers. in this sense, there is the possibility to eliminate them without affecting the quality of products and services delivered. the next five steps suitability of activitybased costing for lean business concept 315 allow the elimination of non-value-added activities: identifying all activities, identifying non-value-added activities, detecting activity interaction, constructing performance measurement system, and reporting on costs of non-value-added activities (hilton, 2009). value-added activities are those activities that customers are willing to pay for. these activities are necessary for the functioning of the company and there is no possibility of their elimination. value-added activities can be improved in terms of increasing the efficiency of their performance. thus, reengineering, as a process of redesigning the ways in which activities are carried out, is one of the ways to increase the efficiency of performing the appropriate activities. benchmarking can also be used to improve value-added activities. in that sense, activities performed in the company are compared with activities of another company with the best practice. adopting a performance measurement system makes it easy for companies to continuously monitor activities and costs and find ways to reduce costs, eliminate waste, and improve quality. 3. activity-based costing and lean business concept activity-based costing means long-term orientation and focus on calculating product costs. as such, it is a sophisticated method of cost allocation with the help of a cost driver. in this way, managers receive information on where costs occur, and, on the basis of this, link costs with their drivers. by establishing this relationship and improving the process of cost allocation, activity-based costing becomes an effective tool for reducing activity costs. based on information this costing concept provides, it is possible to improve the process of making business decisions. in this regard, activity-based costing can help determine where the value is generated in the company, as well as make an analysis of this value. application of activity-based costing allows identifying nonprofitable products and non-value-added activities that need to be eliminated, which creates conditions that limited company resources are used only to produce profitable products. the application of this concept has greatly facilitated and improved company operations, significantly contributing to cost reduction and increasing the competitive advantage of the company. activity-based costing has been a milestone in the development of costing system, and, as such, is suitable for use in a large number of companies. the concept of activity-based costing has changed and improved in order to eliminate the observed limitations in its application. as such, this costing concept can be applied in companies that apply lean business concept. although there are many similarities of this costing concept and lean business concept, it is logical that certain matching will occur but also the difference between these concepts. table 1 gives an overview of similarities and differences of activity-based costing and lean business concept. the main purpose of doing business in companies that apply lean business concept is to reduce waste in order to increase business efficiency, with precise costing. activitybased costing fits into this requirement of lean business concept in terms of precise costing and long-term orientation. however, activity-based costing does not provide precise information on the actual amount of costs needed to achieve the defined goals. activity-based costing allows one to understand how costs occur in a company, as well as 316 b. novićević ĉećević, lj. antić which products are profitable, and which mix of products favorable for the company. finding information about product profitability involves the collection of additional information about the business processes that are performed in the company. gathering this data implies additional efforts and costs. certainly, the collection of additional information for business decision-making, which results in the adoption of a decision by which the defined goals are achieved, should not constitute a redundant activity, but it is at high risk. managers of companies that apply lean business concept require information support that will immediately produce the desired information, and not bring additional activities and waste. table 1 similarities and differences of activity-based costing and lean business concept lean business concept activity-based costing time of creation toyota 1950-1960 1910, but came to life in 1980 basic purpose reduction of waste and increasing efficiency as accurate calculation of product costs as possible extended purpose philosophy of continuous improvement enable activity-based management optimization promotes optimization not explicitly emphasized time dimension long-term costimprovement process long-term focus on variable costs basic focus company as a whole, cooperation and synergy calculating costs to provide real cost information orientation to improvement kaizen to achieve perfection does not result directly from abc, but is possible in abm production control pull system with kanban does not relate to control overhead costs linking all costs within production cells overhead costs are linked with activities and then with products costs of production accurate and precise calculation of costs precise cost calculation inventory level zero inventory not applicable to inventory level waste focus on elimination not seen before the onset of abm quality ensure quality of products at the source does not apply to quality performance measurement financial and non-financial measurement all costs are related to profitability source: martin, ј. comparing traditional costing, abc, jit, and toc, available at:http://maaw.info/tradabcjittoc.htm the extended purpose of lean business concept in terms of fostering a culture of continuous improvement is not emphasized in activity-based costing, but using activity-based management can accomplish this purpose in a good way. this is because activity-based management encourages the analysis of activities and aims to eliminate non-value-added activities. accordingly, the lack of implementation of activity-based management would refer to the absence of a tendency to optimize activity performance. lean business concept insists on optimizing the performance of business processes with long-term improvement, while activity-based costing does not emphasize explicit optimization, but is focused in the long term on improvement and monitoring variable costs. business http://maaw.info/tradabcjittoc.htm suitability of activitybased costing for lean business concept 317 improvement by applying lean business concept is achieved by kaizen and by the application of numerous lean techniques. improving business processes does not result directly from applying activity-based costing, but can be achieved by applying activity-based management. an important aspect of lean business concept is the zero level of inventories and the production of quality products. activity-based costing does not directly address the level of inventory, but through monitoring of the business process and the activities carried out, it aims at ensuring the required product quality. a special place in ensuring product quality and eliminating plenty of waste belongs to activity-based management. activity-based costing takes into account the flow of processes established in the company as one of the principles of lean business concept. however, this costing system links costs with activities and individual products, not with “value stream” and production cells. activity-based costing does not indicate a direct link between calculating precise operating costs and improving operational performance, which is one of the premises of lean business concept. thus, the original activity-based costing model does not take into account the existence of unused capacities which lean business concept specifically deals with. an attempt was made to eliminate this deficiency by using time-driven activity-based costing, but the deficiency has not been completely eliminated. first of all, this refers to a long and complex process of collecting and processing data needed to calculate costs, as well as the inability to easily update and adapt to changed circumstances. also, there is employees’ subjectivity when assessing the time needed to perform the activity (antić & novićević ĉeĉević, 2016). it should be noted that activity-based costing is complex for everyday use, which is in contrast to simplicity and comprehensibility on which lean business concept insists. based on the foregoing, one can conclude that activity-based costing, together with activitybased management and time-driven activity-based costing, partly fits in the company management requirements when applying lean business concept. because of its great information power and suitability, this costing concept can be applied at the initial stages of company development. in practice, there are cases of activity-based costing application in the initial stages of development, and the companies that applied it facilitated their transformation into lean companies. in the later stages of transformation into a lean company, all of the stated disadvantages of this costing concept come to the fore, so it is necessary to replace this concept with a new one, which will best show the benefits of applying lean business concept. conclusion after toyota had achieved enviable performance with lean business concept, a number of western companies started implementing it. the goal of lean business concept is to reduce all forms of waste that can occur not only in the production but also in all business processes, in order to deliver the product of the required characteristics to the customer just in time. any waste created additionally increases product cost, so the focus should be on its reduction or elimination. in order to survive in the race to achieve a competitive advantage, many companies have begun with lean transformation of the entire business. applying lean business concept is possible in both business and production processes as well as in accounting and finance. this is because the omission of the accounting process from the necessary changes would lead to inability to present the improvement achieved. in this sense, at the beginning of the application of lean business concept, the possible information basis is activity-based costing. 318 b. novićević ĉećević, lj. antić activity-based costing allows measuring costs and performance of activities, resources, and cost objects. this costing system, linking resources with activities and activities with cost objects, recognizes the relationship between cost drivers and activities. as such, activity-based costing enables identification and elimination of non-value-added activities, which increase costs and time necessary for the product to be produced or service delivered. since activity-based costing was a good potential information base for lean business concept, it was necessary to examine its suitability for implementation in such business conditions. activity-based costing appeared in 1910, but its application and full acceptance came much later, while lean business concept came to the fore only after the second world war. given that they appeared in different parts of the world and that the economies of these countries had different problems and characteristics, it is clear why certain differences between these concepts occur. in this regard, activity-based costing can be applied in companies that apply lean business concept because:  abc enables managers to understand the activities performed in the company, establish their hierarchy, and find adequate drivers, which lean business concept requires too to provide a good basis for finding business constraints and potential opportunities for business improvement;  careful review of business processes and activities carried out allows finding the places where costs occur and their precise calculation;  although abc, in contrast to lean business concept, emphasizes the process flow, not the value stream, the establishment of flows of both material and information in the company is an important aspect of business continuity;  the desire to eliminate non-value-added activities is one of the requirements of activitybased costing, as well as of lean business concept. non-value-added activities are considered waste that slows down the company flows, thereby increasing the value of performing certain activities. acknowledgement: the paper is realized in the scope of the project no. 179066 “improving the competitiveness of the public and private sector by networking competences in the process of european integration of serbia”, funded by the ministry of education and science of the republic of serbia. references antić, lj. & georgijevski, m. (2010). obraĉun troškova po aktivnostima zasnovan na vremenu [time drive activity based costing]. ekonomske teme 4, 499-513. antić, lj. & novićević ĉeĉević, b. (2016). time drive activity based costing in hospitality enterprises. in: (editorial board), international thematic monograph – thematic proceedings: modern management tools and economy of tourism sector in present era (pp. 302-316). beograd: udekom. antić, lj. & sekulić, v. (2008). savremeni koncepti obraĉuna i upravljanja troškovima u funkciji oĉuvanja konkurentske prednosti [modern concepts of cost accounting and management with a purpose of preserving the competitive advantage]. u: stanković, lj (ed.), tematski zbornik radova „razvijanje konkurentske prednosti u srbiji u uslovima evropskih integracijaknjiga 2“ (pp. 147-162.). niš: ekonomski fakultet. antić, lj. 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(2003). lean thinking, banish waste and create wealth in your corporation. uk: simon & schuster. podobnost obračuna troškova po aktivnostima za lean koncept poslovanja lean koncept poslovanja karakteriše se obezbeđivanjem zahtevane vrednosti od strane potrošača, brzom isporukom proizvoda, eliminisanjem svih oblika gubitaka kako iz proizvodnog tako i iz svih poslovnih procesa u preduzeću. da bi uspešno odgovorili na ovakve zahteve menadžerima preduzeća potrebna je odgovarajuća informaciona osnova. jedna od mogućih informacionih osnova jeste obračun troškova po aktivnostima. u radu se obrađuje problematika primene i podobnosti obračuna troškova po aktivnostima za lean koncept poslovanja. kljuĉne reĉi: lean koncept, obračun troškova po aktivnostima, eliminisanje gubitaka, merenje performansi plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 15, n o 3, 2018, pp. 189 201 https://doi.org/10.22190/fueo1803189s © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper knowledge management: evidence from serbian banking sector 1 udc 005.94:336.71(497.11) vesna stojanović-aleksić, jelena erić-nielsen, aleksandra bošković university of kragujevac, faculty of economics, serbia abstract. knowledge management is necessary in order to face the contemporary challenges in banking industry, related to hyper-competition, market differentiation and improvement of business performance. it involves several phases, and the paper focuses on the knowledge creation and knowledge sharing. also, a brief insight into the features of an organizational culture that supports knowledge management is provided. the goals of the research are to determine the levels of knowledge creation, knowledge sharing and knowledge-supporting organizational culture, in the serbian banking sector. after the literature review, a survey was conducted and data was processed with a statistical method. the paper contributes to the literature both in the fields of banking management and knowledge management. the findings may be useful to bank managers, because the importance of knowledge management in banks is highlighted and practical guidelines for the improvement of less developed aspects of knowledge creation and sharing are provided. key words: knowledge management, knowledge creation, knowledge sharing, banking management jel classification: m21, d83, m14, g21, g41 1. introduction due to the highly competitive environment and the constant tendency towards maintaining and improving profitability and liquidity, financial institutions are faced with ongoing challenges, such as an urge to provide services more efficiently and manage risks involving complex and intangible elements. dugalic (2016) identified a number of factors that will significantly shape the banks of the future, and some of them are: “the rise of received june 12, 2018 / accepted july 09, 2018 corresponding author: aleksandra bošković university of kragujevac, faculty of economics, đure pucara starog 3, 34000 kragujevac, serbia e-mail: aboskovic@kg.ac.rs 190 v. stojanović-aleksić, j. erić-nielsen, a. bošković new markets, population growth in developing countries, an increasing average age of the population, urbanization, new energy sources, modern technology, etc.“ all of these factors influence the need to make adjustments in order to meet the new market conditions. whether the bank's competitive strategy is based on a cost leadership, market differentiation or focusing on a specific market segment, it is necessary to permanently explore and implement new ways to achieve specific goals. the precondition for solving complex problems is the successful management of knowledge. it is necessary to adapt the organizational design and culture of modern banks to the knowledge management requirements, in order to develop the new ways of providing services and to improve various processes at each organizational level. knowledge management (km) is a system of managerial activities related to the creation, accumulation, sharing or transfer, use and internalization of knowledge (lee et al., 2005). the paper emphasizes the phases of knowledge creation and sharing, as important preconditions for all further activities in knowledge management. we discuss the process of knowledge management in the specific context of the serbian banking sector. based on the insight into the latest available financial position and financial performance report of the banking sector in the republic of serbia, it can be concluded that, although there has been a slight growth of financial indicators in recent years, this sector continues to operate in a high business risk area and is exposed to numerous pressures from the domestic and external environment (association of serbian banks, 2016). many of the issues are related to the problems that permeate the entire domestic economy, as well as the process of legal system reform, which is still in progress. the banks are trying to maintain their stability through different possibilities from regular operations, as well as from the processes of recapitalization, mergers and acquisitions. for all these activities, knowledge and information management is very important, both within the banks themselves, and between potential partners, competitors, and all other stakeholders. the implementation of the knowledge management still faces numerous challenges, even in more developed economies, so there is an increase in the volume of research that examine km development and various individual, organizational, technological, cultural and other factors affecting it (e.g. islam et al., 2015; mahmoudsalehi et al., 2012; gupta & govindarajan, 2000; curado, 2008; jayasundara, 2008; nonaka & takeuchi, 1995; nonaka, 1994: davies et al., 1995). hence, there is still a lot of space for knowledge management improvement in companies operating in serbia, too. the research is motivated by a tendency to contribute to domestic and foreign literature from the problem area covered, as well as to provide relevant information to banking management, in order to guide future decisions and activities more successfully. the main goals of the research are to determine the levels of development of the knowledge creation, knowledge sharing and organizational culture that supports knowledge in the banking sector in serbia. also, we strive to find out whether the hierarchical level influences the processes of creating and sharing knowledge, and to formulate specificproposals and practical guidelines for improving knowledge management and knowledge culture in banks. after the literature review, the quantitative methodology was applied. the survey method was applied, and the results were analyzed using adequate statistical techniques. knowledge management: evidence from serbian banking sector 191 2. the concept of knowledge management unlike the traditional resource-based perspective of an enterprise, the knowledge based view of an organization has taken the growing importance in modern strategic management, and the concept of knowledge management is especially pointed out. in fact, knowledge is a critical resource for almost all modern organizations, regardless of activity, size, age, which affects their sustainable competitive advantage. the knowledge management process consists of numerous sub-processes, which different authors classify in different ways. generally speaking, the most striking differences are between creating knowledge, sharing knowledge, and using or applying knowledge. knowledge creation is the first phase in the knowledge management process and it is a very complex process itself, which is difficult to conceptualize, operationalize and measure. it was introduced by nonaka et al. (1994, 2000), who developed one of the earliest theories of knowledge creation, based on three elements (seci model, ba, and knowledge assets). knowledge sharing or transfer is the exchange of information between the two parties, the source, who owns and shares knowledge and the recipient, who receives or acquires knowledge (cavaliere et al., 2015; ma et al., 2014; tangaraja et al., 2015). these parties are individuals and groups within the organization, but knowledge sharing can also take place among actors formally belonging to different organizations, which is especially pronounced in organizational networks and flexible organizational systems with fluid borders. although, theoretically, there is a distinction between the process of creating, sharing and using knowledge, as well as many other related processes and subprocesses, in practice these activities are usually carried out simultaneously and there are many interdependencies among them (slavković, 2013). essentially, the use of knowledge refers to the establishment of systems and processes that enable all other phases and subphases within the organization's knowledge management process. 3. the importance of knowledge management in banking sector banks around the world are faced with rising competition and a constant pressure to improve their market performance. in the last decades, their customers are much more demanding and it is increasingly difficult to build and maintain loyalty. also, customers have the tendency to use the services of more than one bank and/or financial institution and to make frequent changes in their funding sources in order to achieve short-term benefits (davies et al., 1995), which is particularly expressed in the retail banking. on the other hand, there are constant problems of small and medium-sized enterprises (smes) related to finding sources of funding. this problem is especially pronounced in serbia where a large number of companies continue to operate in the high risk zone (association of serbian banks, 2016, p. 10), which also increases the credit risk for banks. however, in addition to its real component, the risk in the b2b market can be caused by an informational asymmetry between enterprises and banks (della peruta et al., 2014; hutchinson & xavier, 2006), which increases the risk for banks when doing business on the b2b market. this is a risk component that can be minimized by adequate knowledge management. market differentiation is particularly difficult in the banking sector, bearing in mind the generic character of financial services. in addition, it is very important to maintain the good relations with many stakeholders. this requires the establishment of a balance 192 v. stojanović-aleksić, j. erić-nielsen, a. bošković between different, often conflicting goals and requirements. consequently, the banks must continuously focus on improving the efficiency and quality of each segment of the business process, and still generating innovations where it is possible. a variety of data and information from the internal and external environment must be received and correctly interpreted in a short time, which is why it is very important to develop knowledge creation process, as a sub-phase of the knowledge management process. the knowledge can be created inside of an organization or in interaction with the external actors. some of the important preconditions for successful knowledge creation are related to the use of electronic bulletin boards, the awareness of what information is needed for the performance of tasks, gradually bringing employees into new tasks, i.e. training employees to work on new procedures and applications, brainstorming, using different knowledge sources provided by the organization (lee et al., 2005). in addition, management should value the new ideas coming from employees, encourage them to connect with experts outside the organization and motivate them to actively improve their competencies. bearing in mind the high interdependence of activities and tasks in banking, both at the same hierarchical level and between different levels and organizational units, knowledge sharing is a prerequisite for efficient and quality service delivery, risks minimization, reduction of errors and increase in customer satisfaction and loyalty, as an ultimate goal of the modern banks. it is equally important to create and share knowledge within an organization, on the one hand, and to exchange the information with the external stakeholders, such as clients, experts, regulators, media and other actors, on the other hand. according to della peruta et al. (2014) knowledge sharing is very important in cooperation between banks and small and mediumsized enterprises. namely, the access to funding sources can be improved through cooperation, in particular by supporting the relationship between smes and the banking system, which leads to converting complex risks into the simpler ones. facing all these requirements in the banking sector must be supported by an adequate knowledge management system, based on advanced ic technology (mirzaee & ghaffari, 2018). within the process of technology development, the big data softwares have emerged, that enable handling of large amounts of data that traditional applications cannot process in an adequate way. organizations use big databases, which often include unstructured data, such as, for example, data from mobile phones, gps maps, video surveillance cameras, etc. (aleksić-mirić, 2017), that are available in real time. in big data analytics, knowledge management plays a central role. on the one hand, knowledge management in modern organizations is not possible without the analysis of a big data, and on the other hand, human knowledge is up to the development of technology and people are the ones who decide how to use information generated from large databases (pauleen & wang, 2017). some of the specific support systems for knowledge management, which are often used in banks, include information support systems for risk management, decision support systems, data warehouse and data mining (jayasundara, 2008). most of the banks have implemented modern it solutions, and science and practice are still searching for new ways to digitize banking operations. the specific challenges are related to attracting and educating customers regarding the use of electronic and mobile banking, where it is important to ensure a high quality knowledge transfer process between the bank and its customers. in addition to the technology, there are various individual, organizational and other factors that influence the knowledge creation and sharing in general, and also in the knowledge management: evidence from serbian banking sector 193 banking sector. however, the paper focuses on organizational culture as a factor of knowledge creation and sharing, bearing in mind the importance of the culture for the performance of financial organizations (al-abdullat & dababneh, 2018; faisal et al., 2013). knowledge supporting culture, also known as the knowledge culture, is one of the most important conditions that ensure the effective and efficient movement of knowledge through the organization (islam et al., 2015). some of the most significant characteristics of the organizational culture that supports knowledge are: an accessible relationship of colleagues, a willingness to help others, but also to seek help, awareness and understanding of the importance of knowledge for the success of the company, encouraging employees to research and experiment, evaluating individual performance based on knowledge and expertise, motivation to discuss business, senior management support in terms of creating, sharing and applying knowledge. 4. knowledge creation and knowledge sharing in serbian banking sector: results of the research starting from the research goals, a short survey was conducted on the sample of banks operating on the territory of the republic of serbia. out of 31 banks in serbia (national bank of serbia, 2018), a sample of 11 banks was selected based on the random sampling procedure. bank managers were contacted and asked in person to distribute questionnaires to different employees (in terms of their organizational role) throughout the company, by their own random selection. this decision was motivated by the tendency to get as diverse responses as possible, since the processes of knowledge creation and sharing may differ between organizational units, roles and hierarchical positions. in consultation with managers, the authors decided to send five questionnaires per company. the respondents were informed that the survey is completely anonymous, voluntary based and that the results will be used only for the scientific research purposes. out of the 55 distributed, we received 40 filled-in and usable questionnaires, so the response rate is 72.7%, which is a high percentage. the structure of the sample is shown in table 1. table 1 structure of respondents according to demographic characteristics n % gender male 16 40.0% femaele 24 60.0% education high school 5 12.5% college 6 15.0% university (bsc) 24 60.0% msc/phd 5 12.5% hierarchy employee 14 35.0% manager 26 65.0% age <25 2 5.0% 26-35 13 32.5% 36-45 14 35.0% 46-55 6 15.0% >55 5 12.5% total 40 100% source: authors 194 v. stojanović-aleksić, j. erić-nielsen, a. bošković the questionnaire is composed of four parts and includes a total of 20 questions. the development of the questionnaire is based on the literature review, but the final structure of the questionnaire is the result of the original scientific approach of the co-authors. first, a focus group was formed consisting of co-authors of this paper and a few other university professors who discussed the existing scales and decided what items should be included in the questionnaire in accordance with the purpose and goals of research, and how to translate and adapt them to the understanding of domestic respondents in the banking sector. the first part consists of 4 items related to knowledge creation based on the findings of lee et al. (2005) and mitchell and boyle (2010). the second part includes 5 items related to knowledge sharing, adapted from lee et al. (2005) and liao et al. (2011). the third part of the questionnaire includes questions about an organizational culture that supports knowledge management, based on the questionnaire developed by the gold et al. (2001). all items in the first three sections are of scalar type (five-level likert scale). the fourth part of the questionnaire is aimed at collecting the general information about respondents, such as gender, age, position in the company and level of education, based on a closed type question. data processing was done using appropriate methods and techniques within the framework of the spss package 20.0. the reliability of the scales knowledge creation, knowledge sharing and knowledge culture was analyzed using cronbach's alpha coefficient. each of them has a high level of reliability (α1 = 0.887 (4 items), α2 = 0.758 (5 items), α3 = 0.777 (7 items)). for the purpose of testing the degree of knowledge creation and sharing in the serbian banking sector, we calculated measures of descriptive statistics, arithmetic mean and standard deviation. table 2 shows the results related to the knowledge creation. all the means are at the medium level (between 3 and 4), and the statement where the highest agreement is shown by the respondents is kc2 (mean = 3.60). this result is in line with previous research, which shows the importance of continuous training and development of bank employees (stojanović-aleksić et al., 2016, p. 46), since adequate training affects employee satisfaction, and consequently organizational performance (jones et al., 2009, p. 170). nevertheless, there is a space for improvement in this respect, too. on the other hand, knowledge creation from external sources, specifically external associates or experts outside the bank, is insufficiently developed. table 2 knowledge creation in the serbian banking sector no. item n min. max mean sd kc1 in our bank, initiatives and activities undertaken towards the generation of new ideas are valued. 40 1 5 3.28 1.377 kc2 my predecessor adequately introduced me to my tasks, through educational programs for employees. 40 2 5 3.60 0.955 kc3 employees are encouraged to search information for tasks from various knowledge sources, eg. external experts 40 1 5 3.10 1.105 kc4 employees actively promote the existing knowledge through new ideas. 40 2 5 3.35 0.921 source: authors table 3 presents results related to knowledge sharing. the item ks6 has the highest mean (4.18), which indicates the consciousness of the link between knowledge sharing and organizational performance. namely, employees in banks firmly believe that knowledge knowledge management: evidence from serbian banking sector 195 sharing increases the efficiency of the tasks. however, the perception about the existence of a reward system for knowledge sharing is significantly less developed (mean = 2.75). thus, we can notice that employees in banks share knowledge primarily on the basis of personal initiative and on an ad-hoc basis, rather than as a result of the designed managerial approach. this segment should be improved, starting from the managerial level. table 3 knowledge sharing in the serbian banking sector no. item n min max mean sd ks5 my colleagues and i share the information and knowledge needed to carry out our tasks. 40 2 5 4.08 0.694 ks6 we improve task efficiency by sharing information and knowledge. 40 3 5 4.18 0.675 ks7 in our bank, there are developed information systems, such as intranets or electronic bulletin boards, for sharing information and knowledge. 40 2 5 3.80 0.939 ks8 we promote the sharing of information and knowledge with other teams in the bank. 40 2 5 3.82 0.984 ks9 in our bank, there is a system for rewarding knowledge sharing. 40 1 5 2.75 1.032 source: authors we applied the mann whitney u test (table 4) to compare statistically significant differences between two independent groups (employees and managers). this nonparametric test is applied because the variables do not follow the normal distribution, and the sample is big enough in relation to the entire population. the test is significant if the value of the indicator p is less than or equal to 0.05. based on the test results, the following conclusions can be drawn:  there are statistically significant differences (p<0,05) in the level of knowledge creation and sharing between employees and managers;  the statistically significant differences are present in all individual items within the knowledge creation scale;  the statistically significant differences are identified in items marked as ks7 and ks8 within the knowledge sharing scale. table 4 differences in knowledge creation and sharing depending on the hierarchical level item knowledge creation kc1 kc2 kc3 kc4 kc5 mann-whitney u 58.0 69.0 81.0 54.0 87.0 127.00 wilcoxon w 163.0 174.0 186.0 159.0 192.0 232.00 z -3.538 -3.288 -3.026 -3.760 -2.846 -1.781 p 0.000* 0.001* 0.002* 0.000* 0.004* 0.075 item knowledge sharing ks6 ks7 ks8 ks9 mann-whitney u 71.00 113.00 97.00 91.500 130.500 wilcoxon w 176,00 218.00 202.00 196.500 235.500 z -3.187 -2.163 -2.577 -2.747 -1.562 p 0.001* 0.031 0.010* 0.006* 0.118 source: authors 196 v. stojanović-aleksić, j. erić-nielsen, a. bošković after we identified the statements in which there are statistically significant differences, it was necessary to determine which category of respondents expressed a higher level of agreement with them. therefore, the medians were calculated and the results are shown in the table 5. it can be noted that all the results are higher when respondents are managers. when it comes to knowledge creation, the differences are bigger in kc1 and kc3, and somewhat lower in kc2 and kc4. thus, it can be concluded that managers in banks consider that their creativity and innovation are valued, while employees considerably less agree with this statement. in addition, bank managers believe that employees are encouraged to connect with experts outside the organization, while the employees much less agree with it. when it comes to the knowledge sharing, there is also a greater agreement with the statements shown by managers, although the differences are not so pronounced. table 5 comparison of the knowledge creation and sharing between employees and managers hierarchial level employee manager n median n median kc1 in our bank, initiatives and activities undertaken towards the generation of new ideas are valued. 14 2.00 26 4.00 kc2 my predecessor adequately introduced me to my tasks, through educational programs for employees. 14 3.00 26 4.00 kc3 employees are encouraged to search information for tasks from various knowledge sources, eg. external experts 14 2.00 26 4.00 kc4 employees actively promote the existing knowledge through new ideas. 14 3.00 26 4.00 knowledge creation – total 14 2.50 26 3.75 ks7 in our bank, there are developed information systems, such as intranets or electronic bulletin boards, for sharing information and knowledge. 14 3.00 26 4.00 ks8 we promote the sharing of information and knowledge with other teams in the bank. 14 3.00 26 4.00 knowledge sharing – total 14 3.40 26 4.00 source: authors based on the data presented in table 5, it can be concluded that this result is consistent with the attitude that knowledge management in banks is considerably more developed at higher hierarchical levels than in the lower ones. 5. knowledge-supporting culture in serbian banking sector: results of the research the previous literature review leads to a conclusion that the organizational culture of enterprises is an important factor in the development of the knowledge creation and knowledge sharing. namely, it is necessary to develop such a culture, which encompasses components (e.g. values, beliefs, norms, symbols) that support the concept of knowledge knowledge management: evidence from serbian banking sector 197 management. therefore, for the purposes of this research, we applied the scale, composed of 7 items, which relate to the characteristics of the knowledge culture, and the results are shown in table 6. table 6 organizational culture that supports knowledge management no. item n min max mean sd c10 my colleagues are very approachable. 40 2 5 3.78 1.050 c11 employees understand the importance of knowledge for the success of a bank. 40 2 5 4.25 0.870 c12 employees are encouraged to explore and experiment. 40 1 5 3.12 0.966 c13 employees are valued on the basis of their knowledge and expertise. 40 1 5 3.15 1.272 c14 employees are encouraged to seek help from others when they need it. 40 2 5 3.48 0.784 c15 employees are encouraged to discuss the business with colleagues. 40 2 5 3.15 0.921 c16 senior management set clear vision and emphasized the importance of knowledge for the success of our bank. 40 2 5 3.63 0.868 source: authors the results show that the knowledge culture in the banking sector is at the medium level, and that there are differences in the development of certain components of this culture. namely, the best estimated item is: "employees understand the importance of knowledge knowledge for the success of a bank" (mean = 4.25), which is a good prerequisite for knowledge creation in banking sector. however, there is a significantly lower average for the following items: c12 (mean = 3.12); c13 (mean = 3.15) and c15 (mean = 3.15). it can therefore be assumed that employees, although having a relatively developed awareness of the importance of knowledge and good communication to colleagues, are not motivated or encouraged enough to manage knowledge. 6. conclusion knowledge is the most important and unique source of sustainable competitive advantage in the era of knowledge economy (nonaka & takeuchi, 1995). knowledge creation and knowledge sharing influence the improvement of the service quality, shortening the time needed to perform tasks, creating the conditions for developing new ideas, which increases both the effectiveness and efficiency of the bank. bearing in mind the significance of these processes, the paper focuses on identifying the level of knowledge creation and sharing in the serbian banking sector, with a special emphasis on the differences in the level of development of these processes between managers and employees. in addition, as a relevant knowledge management factor, the degree of development of an organizational culture that supports knowledge is examined. the findings of an empirical study indicate the medium level of the knowledge creation. banking management devotes a lot of attention to the development of 198 v. stojanović-aleksić, j. erić-nielsen, a. bošković knowledge through the programs of training and professional development. also, it can be noted that the employees strive to actively improve their competencies. it is necessary to continue with this practice and to further develop it, in order to make the advancement from a very good to the excellent level. on the other hand, less knowledge is created through networking or connecting with external sources of knowledge, such as, for example, external associates. encouraging employees to connect with experts outside the organization is one of the challenges that management needs to face in the future period. when it comes to knowledge sharing, there is a high level of deviation of the individual statements’ scores from the overall average score. namely, the respondents assessed better the degree of knowledge sharing and the benefits of sharing information with colleagues, while the results are lower for the ict support for knowledge sharing. the results are the lowest when it comes to the system for rewarding knowledge sharing. both knowledge creation and sharing are more developed at the managerial level. however, it is not possible to make at a general conclusion about the cause of such a gap between the hierarchical levels, so it would be interesting to further analyze the factors that lead to these differences in future research. it can only be assumed that the reasons are diverse, linked to individual factors, such as, for example, personal characteristics, level of education or organizational factors leadership style, motivation system, communication and more. still, it is possible to refer certain recommendations and guidelines to the banking management in serbia in terms of encouraging the knowledge creation and sharing at lower levels. although creativity and innovativeness of all employees is not essential in carrying out banking activities, it is very important to take into account the opinions and ideas of employees regarding how to perform tasks, relationship with clients, communication with colleagues and many other issues. if management shows interest in suggestions and ideas of employees and allows them to participate in decision-making regarding their work, i.e. if the level of vertical specialization is reduced at lower hierarchical levels, the process of knowledge creation can be improved. additionally, although managers are in charge of establishing cooperation with external parties, they should also motivate employees to participate in such forms of cooperation through an active support and exchange of contacts, in order to enrich the knowledge not only from internal but also from external sources. one of the essential incentive factors for knowledge creation and sharing is an organizational culture that supports knowledge. the results of the survey show that certain elements of organizational culture create a good base for the knowledge management in serbian banking sector. those elements are the awareness of the importance of knowledge both for employees and management and good communication with colleagues, but there is still a potential for the further improvement and development. in this respect, the roles of leaders in banks are significant. they should encourage and motivate employees in the right way to acquire, share and apply knowledge. it is very important to develop an environment in which there are equal conditions for everyone and where people are valued on the basis of their knowledge and expertise. leaders and managers should evaluate and value both tacit and explicit components of employees’ knowledge. future consideration on the employee performance evaluation should be focused on incorporating intangible intellectual capital factors, in addition to the hard, quantitative indicators. knowledge management has not been explored enough in the banking sector, and especially not in serbia. the findings in this paper provide a significant contribution to knowledge management: evidence from serbian banking sector 199 the literature, both in the fields of banking management and knowledge management. we highlight the importance of the problem area and point to a number of issues and problems that need to be further explored in order to properly manage the knowledge as a resource in banks. on the other hand, the practical implications of research are reflected in providing information to the bank managers in serbia about the level of development of the knowledge creation, knowledge sharing and knowledge culture. it is possible to identify the specific elements of the observed processes and culture, which are at a high, medium and low level, and accordingly direct future efforts to improve the knowledge management, with the aim of improving the quality of providing banking services and achieving a sustainable competitive advantage. in addition to significant contributions, there are certain limitations. first of all, the empirical study shows the level of knowledge creation, knowledge sharing and knowledge culture in serbian banking sector, but the factors that affect them are not explored. therefore, future research should consolidate the findings through the investigation of different individual, organizational and technological factors of knowledge management in banks. the second limitation stems from the known shortcomings of the survey, as data collection techniques, and above all from the subjectivity of the respondents and the impossibility of reaching more extensive responses and better observations. the sample accounts for about 37% of the total number of banks in serbia, which is a relatively large sample, but there is still a probability of making mistakes, as well as the possibility of expanding the database of respondents in the future. fourthly, the research was carried out at a single point of time, which makes it difficult to monitor the dynamics of the knowledge management process. despite the limitations, the paper is a good basis for future research, as it points to a number of relevant research questions, such as: whether and how the knowledge creation and sharing in the banking sector affect the degree of knowledge application, why there are differences in the knowledge creation and sharing between the hierarchical levels, what is the extent of the influence of knowledge culture on the knowledge management in banks, what are the other factors that determine the level of knowledge management in banks, etc. these and many other issues once again point to the importance of the topic and motivate researchers to 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(2016). social responsibility in the banking sector: experience from serbia. bankarstvo, 45 (2), 35-55. doi: 10.5937/bankarstvo1602034s. knowledge management: evidence from serbian banking sector 201 upravljanje znanjem u bankarskom sektoru republike srbije suočavanje sa savremenim izazovima u bankarskom sektoru, vezanim za hiperkonkurenciju i sve teže tržišno diferenciranje, kao i održavanje i unapređenje poslovnih rezultata, zahteva podršku odgovarajućeg sistema upravljanja znanjem. upravljanje znanjem uključuje više faza, a u radu je poseban akcenat stavljen na kreiranje i deljenje znanja. pored toga, rad pruža kratak uvid u karakteristike organizacione kulture koja podržava upravljanje znanjem. osnovni ciljevi istraživanja jesu da se utvrde nivoi razvijenosti kreiranja znanja, deljenja znanja i organizacione kulture koja podržava znanje u bankarskom sektoru u srbiji. pored pregleda literature, sprovedena je anketa, nakon čega su podaci obrađeni statističkim metodom. rad pruža doprinos literaturi, kako iz oblasti bankarskog menadžmenta, tako i upravljanja znanjem. saznanja do kojih se dolazi mogu biti korisna i menadžerima banaka, jer se osvetljava značaj upravljanja znanjem u bankama i ukazuje na razvijene, manje razvijene i nedovoljno razvijene aspekte procesa kreiranja i deljenja znanja, pružajući praktične smernice za unapređenje istih. ključne reči: upravljanje znanjem, kreiranje znanja, deljenje znanja, bankarski menadžment plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 4, 2014, pp. 319 336 employee motivation and reward system in local government  udc 005.88:352 bojana novićević čečević, radmila trklja university of niš, faculty of economics, niš, serbia high economic school of professional studies peć in leposavić, serbia abstract. since the beginning of the 80s of the last century, many changes in the contemporary business environment have contributed to the economy of serbia having problems regarding business improvement and motivating employees. business improvement, employees motivation, and knowledge generating is certainly a major problem in most of transition countries. facing new circumstances, business systems require flexible behavior, in regard to changes in business environmental conditions. knowledge and team work are main and key drivers of business productivity growth in all business areas, and because of that, motivation and rewarding of employees are both the condition and assumption of productivity growth in private and public business sector. in this paper, the authors research and analyze the system of motivating and rewarding employees in local government, which evolves under specific political, security and economic conditions. key words: contemporary business conditions, motivation system, rewarding employees, motivators, team work introduction new business conditions require changes in business behavior of economic entities. traditional business and employee motivation and reward systems, which were, many years ago, the key factors in a stable economic environment, are not able to fulfill the goals determined in front of them today, because of their static nature, inappropriate attitude towards employees and limited motivation that was focused only on salary. the future belongs to those business systems which will be able to adjust to the changes, and to be most innovative and flexible. innovation, flexibility, communication, learning and acceptance of changes are the essence of development of new employees' motivation and rewarding system in business systems, organizations and institutions, both in private and in public sector, including also local governments.  received december 14, 2014 / accepted march 25, 2015 corresponding author: bojana novićević ĉeĉević faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 612  e-mail: bojana.novicevic@eknfak.ni.ac.rs 320 b. novićević ĉeĉević, r. trklja by arrival of foreign companies, domestic private business systems intensively, and public sector gradually have accepted experience from most developed countries in the sense of doing business and motivation and rewarding systems. such experiences are transferred from public sector to the local governments. the way of doing business is connected to the improvement of quality, strengthening of research and development function, permanent work on the innovation of knowledge, especially in information and communication technology domains. there is also a need for constant improvement of knowledge, skills, abilities and values of employees and managers, which in sum increase the level of motivation to achieve targeted goals. nonmaterial incentives are represented in form of various recognitions and work measurements, participation in managing, shaping and determining work, public commendation, organizing of seminars, paid courses etc. all of that is needed to secure desirable employees' behavior. in that sense, in this paper, we will first give theoretical basis, then key elements and forms of incentives in motivating and rewarding systems for employees, after which we will set the hypothesis, explain research methodology for development of motivation and rewarding systems for employees in local government ''city of priština'', and in the end we will show the results of research with appropriate discussion and give conclusions. 1. theoretical background: motivation and reward system of employees and key factors the traditional business system which could have been proved as effective in a more stable business environments is no longer able to cope with challenges and problems that new business conditions bring due to its limitations in contemporary business environment (sekerez, 2003, 210). many of our economic entities have organizational structure founded during the self-management period, which had such main values as: maximum employees' protection, guaranteed work place, and their right to make decisions about the management of the company, which represent strong obstacles for employees' adoption of new business systems (maslow, a. (2004); janićijević, n. (2008); jovanovićboţinović, m., kulić, ţ., cvetković, t. (2004); grinberg, dţ., baron, a.r. (1998)). according to the forecasts of the leading experts in the fields of economics and management, the dominant influence on the development of the current companies will be (matić, 2007, p.12-14):  economic,  social,  information,  political environment. when it comes to the economic environment, primary business goals are maximum profit and minimal costs, with models, methods, techniques and instruments for achieving this goal in the sense of minimization of activity costs which do not add value for buyers, and with maximizing activity costs which add value for buyers, because all that leads to the maximization of profit (šarĉević, m., balotić, g. (2011). social impact implies the integration of economic and social values, with stronger accent on the preservation of business environment. information environment has a special impact on business operations, because with the introduction of high productive, information and communication technologies, conditions are created for increasing employee motivation and reward system in local government 321 effectiveness and efficiency of modern business systems, as well as application of modern models, methods, techniques and instruments of managing. in order to make a profit, it is necessary to follow the modern trends in the development of science and technology, advancements of information technology and modern management information system. better knowledge of all the types of information technology enables better communication in the global market and favorable results in terms of international economy. political environment is very important, especially in respect of making important strategic decisions. the government regulation and the political system in the country enhance or limit impact of all factors of environment, on existence, growth and development of business systems. complex and altering business conditions in the new business environment require flexible behavior from the economic entities with regard to the changed business conditions. in order to adapt to the business, it is required from the management structure to be ready for the appropriate actions that will contribute to increasing competitiveness. a necessary condition for this kind of action is the motivation and incentives for all of the employees, starting from the head managers to the executors of tasks. in order to survive, an economic entity has to implement a reward system as one of the company's motivational policy factors, which will include both the management structure and the staff of the company as a whole and its organizational units (gajić, 2003, 190; malinić, s. (2000); trklja, r. (2010)). according to this, key factors for building and development of the new reward and motivation system are (www.telecollege.dcccd.edu):  employee salary for full working time, commonly speaking, is projected to fulfill all basic employee's needs. possibility to earn bigger salary by doing the same work in the same period of time encourages managers and all employees to change their working position within their current business system or outside the current business system. it should be emphasized that the increased intensity of work in current working place can be the cause for extra earning, on condition that the system of motivation and reward predict that issue. however, it must be also emphasized that " money is not the only factor of motivation, but far away from other factors of motivation". namely, with growth of living standard, the significance of this motivator is decreasing, and building of adequate motivation and reward system in company demands incorporation of current potential motivators such as rewards, material or non material stimulations, promotion of work satisfaction and enrichment of work, participation in decision making and collective negotiation, possibility of research in preferred area and similar motivators.  working conditions are another important factor for the development of the new reward and motivation system. for some people, good working conditions are related to career advancement, and for the others, to health, lifestyle, standard of living etc., and in both cases working conditions can be the factor for bigger engagement of employees and better result achievement. good working conditions enable the activation of creative energy of employees and relieve the feeling of discomfort which characterizes poor working conditions. on the other hand , bad working conditions in longer period of time will affect employees' motivation negatively, and they can be the cause for leaving current business system.  work organization is also an important factor that management would need to address in order to encourage employees to make a greater effort and better performance. good work organization will enable each employee to find their place and contribute to accomplishment of work tasks and objectives of the organization. revised terms of business operation require work within teams with responsibility and authority. for an 322 b. novićević ĉeĉević, r. trklja efficient operation of a team and team management, the team composition is of exceptional importance, operation mode and objectives of the team, as a group of people, which are, together with the head of the team, directly involved in realization of a particular task or project. teams have the responsibility and authority within the new business environment. they are transferred from the managers to the team members, so that they manage their own operations by themselves, they have authorization to make decisions concerning the tasks entrusted to them, and bear the consequences if the task is not completed as it was planned, or if satisfactory performance is not achieved. in contrast, the lack of good working organization cancels employees' devotion effects and affects them discouragingly.  it is very important that the management fosters fair interpersonal relationships and collaboration among employees, creating a climate of understanding and awareness of legitimate rights of workers. working climate and culture means creation of conditions for progressing at work, personal affirmation, professional development, more responsible, creative and interesting work, awards for work, etc. such climate and culture will encourage employees to research for possibility of acquiring competences, which will contribute to the increase of work efficiency.  extremely important factors which make people think good about themselves and have a positive impact on the reward and motivation system are strong competitive instinct and learning throughout life. it is the energy in person, which encourages his/her competitive potential. competitive instinct is constantly raising the level of knowledge and skills, especially leadership skills, thus creating huge potential for dealing with the increasingly complex and dynamic global economy. motivation and reward system means that harmonization and achievement of different individual needs of employees are in line with the goals of business system. properly placed reward system is directed to bigger productivity of employees and to the success of business system. new system of rewarding encourages high level of motivation and responsibility in taken commitment, which, for business system, is possibility for attracting competent persons (ćamilović, s., vujić, v. (2007). rewarding system involves the existence of incentives in material and non material form. material incentives are shown in form of salaries, stimulations, encouragements, bonuses, benefits in form of life, social, health and pension insurance, and they can be earned as substitute for inputted labor of employees. non-material forms of incentives contribute to the increasing of the motivation of employees by meeting the needs that are not related to money or other material rewards. non-material work incentives are related to (vidaković, 2012, 166; malinić, 2000, 138; henderson, i.r. (2000); janković, i. (2006)):  higher order needs (need for recognition and respect);  self-affirmation and development of personal skills;  the opportunity to research within the desired field;  the opportunity for advancement through the hierarchy of management structure;  feeling of satisfaction with the achieved performance and achievement of the generally established goals, the work environment, interpersonal relationship in the workplace;  working conditions, clean and healthy environment; management style, job enrichment, job improving;  prestige, status, reputation etc. employee motivation and reward system in local government 323 afore determined reward and motivation system is valid for all business systems, organizations and institutions, whether they perform their activity in private or in public sector. it is valid, also, for systems in local governments. on the example of local government 'city of priština' with seat in graĉanica, we will survey the development level of employees' reward and motivation system, in the sense of implementation level of theoretical and practically applied forms of rewards in local governments of developed countries (pantić, s. (2010)). 2. research methodology and hypothesis formulation the local government unit "city of priština" was founded in 1946 as an administrative center of the autonomous kosovo-metochia area, within the people's republic of serbia, and in 1963, within the autonomous province of kosovo and metochia. until the war of 1999, it was headquartered in pristina and included 14 secretariats with 271 employees. after the war in kosovo and metochia, the local government unit 'city of pristina' was dislocated to graĉanica, as the state bodies of the republic of serbia which should take care about all aspects of the development of serbian community, although "constitutional framework for provisional self-government in kosovo" was proclaimed by the decree (uredba br.2001/9) by the special representative of the un secretary-general, and taking into account the decrees (uredba br.1999/1 od 25.jula.1999.god.) of the united nations interim administration mission in kosovo (unmik) and its amendments on the authority of the interim administration in kosovo. in other words, it is the area that is now under the patronage of the international community, the area which apart from numerous economic, social, demographic and personnel problems, is faced with a problem of personal safety and the safety of citizens. also, albanian authorities have declared independence in february 2007. on the other hand, the constitution of the republic of serbia, within the seventh section precisely regulates the territorial organization of serbia, defining an autonomous province, local government and cities. named entities have legal entity status (article 176), and responsibilities for their development. in respect of that, local government 'city of priština' is governed by principles and system of republic of serbia, and employees' motivation and reward system must be based on laws and rules of the republic of serbia. local government 'city of pristina', at the time of study, has 194 employees, 110 of them are employed, 57 are working on the minimum wage, 9 of them on the minimum wage +30% (zakljuĉak vlade republike srbije, 05 broj 02-4586/03-01 od 17.07.2003.god.), 6 are appointees and 12 are appointed officials. review of this structure is depicted in the graph 1. graph 1 number of employees of local government – "city of pristina" 324 b. novićević ĉeĉević, r. trklja local government 'city of pristina' besides development activities, in the operative part provides to its beneficiaries (zakon o matiĉnim knjigama („sl.glasnik rs", br. 20/2009):  document notarization services,  issuance of birth certificates,  issuance of certificate of citizenship,  parental and child support services,  cadastral services (real estate certificate, certificate of ownership, blueprints and deeds),  internally displaced persons services provided by the commissioner for refugees,  payment of fees to the young mothers in collaboration with the ministry of labor and social affairs etc. based on the rule book on the organization and decisions on the city governments (odluka o gradskim upravama grada prištine), hierarchical and functional organizational structure of the local government unit "city of pristina" is established, which ensures the exercise of activities in accordance with the business principles. the organizational structure of the "city of pristina" is shown in the graph 2. graph 2 organizational structure of the local government "city of pristina" management structure of the 'city of pristina' consists of 5 members of the temporary body, 1 and the secretary. within the local government of the 'city of pristina' there are 12 authorities with 2 to 3 divisions as separate organizational units. the subject of the study is the level of development of motivation and reward system of local government from the aspect of involvement, primarily, theoretically investigated and practically applied form of rewards in developed economies. researches are based on the following hypotheses: hypothesis 1: in the local government 'city of priština', employees prefer salaries and material forms of incentives, which are in line with dynamic of salary payment. hypothesis 2: employees in local government 'city of priština' are not satisfied with current motivation and reward system. 1 sluţbeni glasnik republike srbije br.073/2013, kao i rešenje o imenovanju predsednika i ĉlanova privremenog organa u gradu prištini doneto na vladi republike srbije 24 broj 119-7131/2013 od 16.08.2013.god. employee motivation and reward system in local government 325 hypothesis 3: motivation and reward systems of local government 'city of priština' do not motivate employees to increase quality, engagement, creativity and innovativeness of work. the research was conducted with the survey and comparing obtained results with theoretically investigated and practically applied motivation and reward system in developed economies. keeping in mind the complexity and delicacy of subject research, as well as the fact that the respondents have different levels of education, work profile, different age and interests, the questionnaire for the purpose of this work included 70 working personnel from total number of 110 working personnel in the local government 'city of priština'. the survey was conducted according to precise guidelines, so that the obtained data are considered to be reliable. the questionnaires were distributed to the authorities. from a total of 70 respondents, which is the size of the sample of this survey, 43 respondents answered the questions, which represents 61% of the sample which is considered relevant for this research. with the aim of getting more quality research the respondents are divided according to: a) respondent's gender, b) respondent's years of service, c) respondent's education level d) functions in the company. a) respondent's gender was defined on two possible levels as follows:  male respondents,  female respondents. the number and structure of respondents by gender is presented in table 1. table 1 respondent's gender employees number participation percent gender male 23 54% gender female 20 46% b) respondent's years of service i.e. working experience, was defined on the four levels, by number and percentage share, which is shown by table 2. table 2 respondent's years of service employees number participation percent from 0 to 10 years 8 19% from 11 to 20 years 14 33% from 21 to 30 years 17 39% above 30 years 4 9% c) respondent's education level was defined on the four levels, according to number and percentage share: skilled workers (vkv),secondary education – iv level (sss), higher degree – vi level of expertise (všs) and graduate level – vii level of expertise (vss), which is shown in the table 3 below: 326 b. novićević ĉeĉević, r. trklja table 3 respondent's education level employees number participation percent sw 1 2% se 23 53% hd 2 5% gl 17 40% d) functions in the local government defined on the two levels by number and share is shown in table 4.  managers,  executors. table 4 functions in company employees number participation percent function in company managers 8 19% function in company executors 35 81% in addition, table 5 and figure 3 show disposition of participants on the 'city of pristina' authorities, as well as employees' degree of responsiveness. table 5 distribution of questionnaire participants by the "city of pristina" authorities city authorities no. of distributed questionnaires no. of filled questionnaires degree of responsiveness (%) finance authority 8 5 62,5% investment and development authority 3 3 100% public utilities and supervision authority 5 2 40% spatial planning, construction and environment authority 5 2 40% property authority 6 3 50% education, culture, sport and information authority 3 1 33,33% health, social policy and social childcare authority 10 8 80% economic resources authority 5 4 80% local community government and general administration authority 4 2 50% mayor and city bodies common affairs authority 6 4 66,7% inspection authority 7 4 57,14% maintenance, security and service delivery agency 8 5 62,5% total 70 43 61,4% employee motivation and reward system in local government 327 graph 3 distribution of questionnaire participants by the "city of pristina" authorities all employees in local government filled out the same questionnaire, which included a total of 11 multiple-choice questions. 3. research results and discussion the main indicators of the sample structure with respect to the essential characteristics of the respondents are presented within this research as tables and graphics. in data processing software packages such as microsoft office word 2007 and microsoft office excel 2007 have been used. the total number of the respondents was 43. the number of female respondents was 23, and male 20. the respondents that have 0-10 years of service were 8, 14 respondents have 11-20 years of service, 17 respondents have 21-30 years of service and 4 respondents have above 30 years of service. among the surveyed there were 8 managers, and 35 executors. the majority of sample consists of male respondents, who have 21-30 years of service, secondary education and are executives. during the research respondents chose from the offered answers. the questions have been conceived according to the main characteristics of the new motivation and reward system. satisfaction with a job is one of important assumptions for growing work intensity or productivity, which is essential of new motivation and reward system, from which arises the first question: 328 b. novićević ĉeĉević, r. trklja question number 1: are you satisfied with your job? offered answers:  satisfied,  neutral,  unsatisfied. results in percentages are given on the graph 4. graph 4 structure of answers to the question: are you satisfied with your job? as you can see on the graph, 81% of the respondents were satisfied with their job, while 7% were neutral, and 12% of the respondents were unsatisfied. this proves that more than half of the respondents were satisfied with their job, but there are some which are unsatisfied and neutral. 8 respondents are unsatisfied or neutral, which shows that there is a growing tendency towards changing the job and leaving the local government. objectively there is no chance for changing or leaving current job position in given circumstances, because there are no attractive jobs in local government at the present, and by leaving local government they will practically lose their job, because there are no other chances for finding jobs on their territory. good working conditions give, beside salary that secures material condition for existence, activation and creative energy, and in line with that we ask them the second question: question number 2: what does the job that you are currently doing in the company mean to you? offered answers:  only a way of securing financial conditions of life,  accomplishment of professional preferences and interests,  both. results in percentages are given on the graph 5. graph 5 structure of answers to the question: what does the job that you are currently doing in the company mean to you? employee motivation and reward system in local government 329 as we can see on the graph, 68% of respondents chose the third answer which means that the largest number of respondents believes that their job will bring them both the financial conditions of life and accomplishment of professional preferences and interests. it may show that the largest number of employees in local government are assigned jobs and tasks for which adequate salary is determined and on which professional propensity and interests can be realized. however, 28 % of respondents said that their job represented to them a way of ensuring the financial conditions of life, not a way for realization of professional affinity and interest, and that a limitation of possibility for finding other jobs, forces them to stay on these jobs and tasks. it is interesting that 3 respondents or 7 % of the respondents see their jobs and tasks like a basis for realization of professional affinity and interest. as one of important tasks of management in all business system, including the local government, is permanently following work and dedication of employees, and their results, with the aim of objective and fair evaluation and measurement of height and shape of rewards, it is logical to answer the next questions: question number 3: are you satisfied with the attitude of your immediate supervisor towards you? offered answers:  very satisfied,  mostly satisfied,  not satisfied,  no answer. results in percentages are given on the graph 6. graph 6 structure of answers to the question: are you satisfied with the attitude of your immediate supervisor towards you? this graph crearly shows that 49 % of the respondents claim that their work and dedication are permanently growing and that their immediate supervisor have correct attitude towards them, but under the economic crisis the reward in any form is absent, except maybe occasional commendations. however, 39 % of the respondents consider that the attitude of immediate supervisors is only periodically corect. two respondents consider that their work is not evaluated in the adequate way, and three respondents have not formed an opinion about the relations between the superior and inferior. 330 b. novićević ĉeĉević, r. trklja the salary is a key element of all motivation and reward system, so it logicaly imposed the following questions: question number 4: are you satisfied with your salary? offered answers:  very satisfied,  mostly satisfied,  not at all satisfied,  i have no precise opinion on the topic. results in percentages are given on the graph 7. graph 7 structure of answers to the question: are you satisfied with your salary? 58% of the respondents were partly satisfied with the salary level. general discontent was manifested by 23% of the respondents. realtivly small nuber of respondents, only 7 or 16% are very satisfied with their salary, and 1 respondent does not have precise opinion about that. besides that, we can conclude that a very small number od respondents is satisfied with their salary level. incentive in any motivation and reward system appears in material and non material form. which type of incentives are perfered by employees in analayzing local government was the fifth question. question number 5: what type of incentive, in your opinion, has the greatest impact on the employees? offered answers:  monthly incentive,  quarterly, semi-annual or annual bonus,  praise or public acknowledgment,  i have no strong views about it. the structure of answers is shown in graph 8. graph 8 structure of answers to the question: what type of incentive, in your opinion, has the greatest impact on the employees? employee motivation and reward system in local government 331 on the graph it can be clearly seen that the incentive in material form is preferred by 77% of the respondents. from that number, 29 respondents preferred monthly incentive to quarterly, semi-annual or annual incentive. these answers are logic, having in mind the answers to question number 5. only 3 respondents prefer praise and public acknowledgment, as non-material form of incentive. through these answers to questions number 5 and 4, the hypothesis number 1 is proven, which means that the local government 'city of pristina' employees prefer only salary and material form of incentives which are delivered with the dynamics of salary disbursement. the possibility of advancing in carrier is one of the important aspects of working conditions, as an element of motivation and reward system, and because of that for the system evaluating it is necessary to ask the following question. question number 6: are you satisfied with the opportunities for advancement? offered answers  fully satisfied,  partially satisfied,  not satisfied,  i do not know the answer. the structure of answers is shown in graph 9. graph 9 structure of answers to the question: are you satisfied with the opportunities for advancement? from 43 respondents, 6 of them believe that they have conditions for advancement, 21 of them consider that conditions are partially satisfactory, 13 respondents believe that good conditions do not exsist and 3 respondents do not have any opinion about the conditions for advancement. good motivation and reward system stimulate work quallity, engagement, creativity and inovativity, and because of that we ask the respondents to answer the next question. question number 7: does, in your opinion, the reward system within the local government encourage quality of work, devotion, creativity and innovativeness? offered answers:  fully encourages,  partially encourages,  does not encourage,  i do not have precise answer. the structure of answers is shown in graph 10. 9% 33% 51% 7% fully satisfied partially satisfied not satisfied i do not know the answer 332 b. novićević ĉeĉević, r. trklja graph 10 structure of answers to the question: does, in your opinion, the reward system within the local government encourage quality of work, devotion, creativity and innovativeness? on the graph it can be clearly seen that only 3 respondents, or 7%, beleived that the reward system within the company fully encouraged quality of work and devotion, 22 of them, i.e. 51%, said that it was partially encouraging, 14 respondents (33%) said that it was not encouraging, and the rest of respondents do not have precise answer. having in mind the above stated, we proved hypothesis 3, that motivation and rewarding system in local government 'city of priština' does not motivate employees to work with more effort, devotion, creativity and inovativity. question number 8: are you satisfied with the emphasis that local government puts on vocational and proffesional education and staff development (seminars, foreign languagues, training courses, workshops...)? offered answers:  fully satisfied,  partially satisfied,  not satisfied,  i do not have presice views about it. the structure of answers is shown in graph 11. graph 11 structure of answers to the question: are you satisfied with the emphasis that local government puts on vocational and proffesional education and staff development (seminars, foreign languagues, training courses, workshops...)? the graphical ilustration clearly shows that more than 50% of respondents are not satisfied with emphasis that the local government puts on vocational and proffesional education and staff development; 26% of respondents are partialy satisfied, as many as 21% of respondents do not have an answer to this question. only 2% of respondents are employee motivation and reward system in local government 333 satisfied with emphasis that the local government puts on vocational and proffesional education and staff development. all that goes in favour of hypothesis 3.. conditions necessary to be met for promotion at work are an important component of quality motiavion and reward system. whether such conditions exist was the next question. question number 9: do you belive that you have all conditions for career advancement within the authority? offered answers:  fully beleive,  partially beleive,  do not belive,  i do not have precise views about that. the structure of answers is shown in graph 12. graph 12 structure of answers to the question: do you belive that you have all conditions for career advanecement within the authority? we obtained the following results from the survey: 6 respondents (14%) beleive they have all conditions for advancement within the company, 17 respondents (39%) beleive that they have partial conditions, 17 of them (40%) said that there are no satisfying conditions, and only 3% of the respondents did not have precise views about it. by looking at these answers we can get the impression that employees do not have all the necessary conditions for career advancment within the 'city of pristina', headquartered in gracanica. question number 10: if you could change your job you would be: offered answers:  satisfied,  neutral,  unsatisfied. the structure of answers is shown in graph 13. graph 13 structure of answers to the question on willingness to change jobs 334 b. novićević ĉeĉević, r. trklja because the respondents answered as follows: 17 respondents (39%) would be satisfied if they changed their job, 18 of them, which represents 42%, gave a vague answer, while 8 respondents would be unsatisfied with changing their job; it can be concluded that majority of the respondents were not satisfied with their current job, and expressed a desire to change it. question number 11: do you agree with the research results which suggest that the motivation of employees is above the earnings? offered answers:  i agree,  i do not have precise view on the topic,  i do not agree. the structure of answers is shown in graph 14. graph 14 structure of answers to the question: do you agree with the research results which suggest that the motivation of employees is above the earnings? based on the answers to the last question from the questionnaire, it can be seen that the greatest motivator in the 'city of pristina' is salary, and that there is no investment in new forms of rewarding (by proffesional specialization, seminars, training courses etc) in order to adopt to the newly formed business conditions and changes conclusion and recommendations dramatic changes in the environment, during which the traditional reward and motivation systems have "lost track of time", created the need for establishing a new reward and motivation system based on non-material form of rewarding that is characteristic of new business environment. modern management puts the greatest emphasis on people, recognizing their knowledge, skills and abilities as its most valuable resource. according to the new concept of employees management, motivation and rewarding, special importance is attributed to the problem of hiring a person as an independent individual and holder of professional knowledge. in order to achieve success in business, economic entities and local government units need to motivate and adequately reward employees for performing entrusted tasks. it is necessary to build such a reward system that will serve the motivation of employees that will represent the optimum combination of financial and non-financial rewards determined by the objective evaluation of the contribution of employees to achieving the goals of organization. employee motivation and reward system in local government 335 quality research of motivation and reward system in local government 'city of priština', with seat in graĉanica, showed that system is developed in framework of specific political, security and economic conditions, and as such, system could not be capable of 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"management modern", available at:www.telecollege.dcccd.edu.accessed 25.05.2012. motivacija zaposlenih i sistem nagrađivanja u lokalnoj samoupravi od početka 80-ih godina prošlog veka, mnoge promene u savremenom poslovnom okruženju su doprinele tome da privreda srbije ima problema sa unapređenjem poslovanja i motivacije zaposlenih. poslovno poboljšanje, motivacija zaposlenih i generisanje znanja su svakako veliki problemi u većini zemalja u tranziciji. suočeni sa novim okolnostima, poslovni sistemi zahtevaju fleksibilno ponašanje prema promenama u poslovnim uslovima sredine. znanje i timski rad su glavni i ključni pokretači rasta poslovne produktivnosti u svim oblastima poslovanja, i zbog toga. motivacija i nagrađivanja zaposlenih su uslov i pretpostavka rasta produktivnosti u privatnom i javnom poslovnom sektorau u ovom radu autori istražuju i analiziraju sistem motivacije i nagrađivanja zaposlenih u lokalnoj upravi, koja se razvija u specifičnim političkim, bezbednosnim i ekonomskim uslovima. kljuĉne reĉi: savremeni uslovi poslovanja, system motivacije, nagrađivanje zaposlenih, motivatori, timski rad. facta universitatis series: economics and organization vol. 17, no 3, 2020, pp. 249 260 https://doi.org/10.22190/fueo200416016o © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper adoption of voluntary global governance initiatives: equator principles and banks in nigeria1 udc 336.71 (669) ben emukufia akpoyomare oghojafor1, sunday adekunle aduloju2 1department of business administration, university of lagos, lagos, nigeria 2department of actuarial science and insurance, university of lagos, lagos, nigeria abstract. due to the growing level of dissatisfaction with the traditional models of governance established by the state, international governance initiatives have attracted more attention. this exploratory study is aimed at finding out the level of awareness and adoption of one such initiative, the equator principles (eps), by banks in nigeria. these principles were said to represent a good standard where environmental and social risks inherent in development projects can be identified, assessed and managed. the study was anchored on two theories: the club theory and the theory of institutional isomorphism. the survey data were gathered from 124 managers of the leading 10 deposit money banks in nigeria. data were analyzed using descriptive statistics presented in frequency tables and percentages. the findings show a high level of awareness of the eps among the banks in nigeria, but a low level of adoption. although the study is limited by a small sample, it offers evidence that difficulties in measurability of benefits of adopting equator principles and lack of enforcements of sanctions for noncompliance seriously limit the number of financial institutions adopting the regime in nigeria. key words: globalization, governance, equator principles, club theory, institutional isomorphism jel classification: m21, m14 introduction the great importance attached to issues of governance in organizations is shown in the high number of studies conducted in the area (al-ahdala, alsamhi, tabash & farhand, received april 16, 2020 / revised june 27, 2020 / accepted july 06, 2020 corresponding author: sunday adekunle aduloju department of actuarial science and insurance, university of lagos, lagos, nigeria e-mail: ksaduloju@gmail.com 250 b. e. a oghojafor, s. a. aduloju 2020; ibitamuno, onuchuku & nteegah, 2018; akintoye & iyaniwura, 2017; aboutorabifard, 2016; michelberger, 2016; claessens & yurtoglu, 2013). in fact, disparate findings have emerged on the true effects of corporate governance on organizations. for instance, a review by michelberger (2016) shows that firms that adopt principles of corporate governance enjoy better performance. as reported by akintoye and iyaniwura (2017), the nigerian security and exchange commission’s (sec) first code of corporate governance was launched in 2003 in the belief that companies practicing good governance have the potentials of attracting foreign investments. it is also shown that organizations adopting good governance experience higher firm valuations and support of all stakeholders (claessens & yurtoglu, 2013), as they are able to fulfill their responsibilities to clients and society (ene & alem, 2016). in contrast, the findings in ibitamuno, onuchuku and nteegah (2018) show that none of the corporate governance variables significantly affect banks’ performance. similarly, sayari and marcum (2018) find a negative relationship between ethic policy and performance. also, negative relationships were found in falah (2017), where returns on assets and returns on equity were dependent variables, and in afolabi, awoyemi, atsuwa and kehinde (2017) where after tax profit and board composition were variables of study. ethical issues and corporate practices in banks have generated much interest among various stakeholders because of their role of financial intermediation (ibitamuno, onuchuku & nteegah, 2018). this role differentiates banks from other commercial firms (fidanoski, mateska & simeonovski, 2013). the global financial crisis of 2007-2008 is a clear reminder of the critical role played by the banking system in promoting good corporate practices in other sectors with which it interacts (nakpodia, 2018). the removal in 2009 of some top executives of banks in nigeria by the regulatory authority was linked to the issue of corporate practices in the banking industry (okoro, 2015). in the agency theory, there is said to be a link between corporate governance and organizational performance (meckling, 1976). many argue that satisfactory corporate governance involves some forces external to the organization (williams, 2016). traditionally, it is the duty of the state to regulate corporate ethical conduct. however, events of the recent past that plunged the whole world into financial crisis reveal that state regulations alone are not enough (weber & feltmate, 2016). the failure of some big firms around the world has triggered the calls for new ways of entrenching good governance in organizations, prominent of which is sarbanes−oxley act 2002. it was reported that members of the us congress, in a bid to provide solutions to such governance challenges, put together that law hurriedly (veasey, (2003). aside from the state regulations on business in a country, there are codes of conduct that are industry-based to self-regulate, as well as international regulations designed to deal with matters of global nature (abbott & snidal, 2009). there is also the need to assure the investors of transparency in transactions and the safety of their investments (garuba & donwa, 2011). in addition, some environmentalists have put the blame for destructive environmental impacts of infrastructure projects at the doorstep of some multilateral development banks (mdbs) that provided finance for such projects. to mitigate this negative image, some big financial institutions have come up with many voluntary programs that will address environmental issues (principles for responsible investment, 2012). one such program is the equator principles (eps) put together to standardize issues of environmental sustainability in the case of large-scale infrastructure projects (meyerstein, 2016). these principles are to serve as a reassurance to the public that adverse environmental and social impacts resulting from developmental projects would be addressed (wright, adoption of voluntary global governance initiatives: equator principles and banks in nigeria 251 2008). emergence of eps has triggered more actions on how the issues of environmental and social risks can be mitigated (abbott, & snidal, 2009). however, as laudable as it is, eps program has only 97 members from 37 nations, including two from nigeria. this current study is aimed at determining the level of awareness of eps among commercial banks in nigeria. another objective is to examine the theoretical and empirical evidence as to why most banks are yet to adopt the regime in nigeria. this paper is structured as follows: after this introduction, we have section 1 which is the theories and concepts; section 2 methodology of research; section 3 results and discussion; and section 4 conclusions. 1. theories and concepts 1.1. club theory one of the theories that underlie a motive of an entity to adopt a group’s behavior is the club theory, which provides economic reasons for an organization’s involvement in voluntary programs (prakash & potoski, 2007). a club refers to a group whose membership is voluntary and whose members agree to participate in a program, share the costs involved and consequently enjoy the benefits derivable from participating as members (sandler & tschirhart, 1997). club theory explains that individuals will be involved in the activities of a group based on the benefits they anticipate. according to prokopovych (2010), iso 14000 certification, a standard for handling environmental issues, is an illustration that voluntary programs are examples of club goods. the anticipation of enjoying voluntary program benefits, especially those involving good reputation, may motivate an organization to participate in the activity that will be of benefit to the public, such as environmental sustainability (prakash & potoski, 2012). club theory does not set the rules of engagement in managing environmental risks; however, it specifies what an organization can do and what it can gain by belonging to a voluntary program. prakash and potoski (2006) explain that organizations, while enjoying a good reputation from belonging to a club, would also make some sacrifices by way of compliance that enabled them to produce public goods. club theory, thus, provides an insight into what motivations are there for organizations to join any voluntary program (prokopovych, 2010), in that top executives must be able to assess what their firms stand to gain from involving in such programs (rivera, 2002). it is argued however, that the strictness of principles and serious enforcements of rules will determine the efficacy of a voluntary club initiative. generally, it is more difficult to produce both tangible and attractive incentives in many voluntary programs. in contrast with the state laws where there is capability of state agencies to coerce firms to obey, execution of a voluntary initiative’s principles is not readily observable. it is this inability of the public to verify what the voluntary initiatives claim to be doing that makes some raise doubts on the integrity and accountability of non-governmental private initiatives (prakash & potoski, 2012). the eps regime, as it currently is, seems to lack the power to coerce members to implement the principles and the authority to follow up compliance (aboutorabifard, 2016), hence its low attractiveness to many institutions. 1.2. theory of institutional isomorphism the theory of isomorphism explains why an organization will join a non-compulsory program where benefits obtainable from such a move are not readily available (dimaggio 252 b. e. a oghojafor, s. a. aduloju & powell, 1983). the theory proposes that since organizations in the same environment face similar issues, one can handle its problems by adopting systems used by others in that environment (johnston, 2013). in coercive isomorphism, a firm responds to pressure from other firms to conform to certain rules of conduct in an environment. this is especially true if it relies on those other firms in some ways in carrying out its activities (roszkowska-menkes & aluchna, 2017). also, it may respond to that pressure if it anticipates benefits by way of good public image and legal recognition. coercive isomorphism holds when an organization embraces an institutionalized regime under the power of coercion by the larger community or when persuaded by other organizations (cormier & magnan, 2017). isomorphism of coercive type can be used to explain the motive for joining such voluntary initiatives as the eps by banks (morimoto, 2012) in order to mitigate the reputational risk without incurring needless expenses. in mimetic isomorphism, an organization tries to imitate other organizations in the same environment, especially when it is relatively young and inexperienced and would need to learn from others recognized as market leaders (seyfried, ansmann & pohlenz, 2019). by extension, organizations in the less developed nations try to mimic what other organizations in the developed world do. for instance, a bank in a developing country may try to adopt eps in imitation of bigger banks in advanced countries to gain international recognition. normative isomorphism, the third dimension, results from the pressure exercised by a professional body on members to act in a manner expected of professionals in a particular field. it is assumed that individuals belonging to a certain profession, through participation in the professional activities, will develop certain pattern of conduct characteristic of that profession. such individuals may influence their organization’s overall behavioral patterns towards what is considered acceptable in a particular profession (dimaggio & powell, 1983). for instance, a bank may decide to join a voluntary program like eps, as is expected of professional bankers, so as to improve its ratings on environmental sustainability (deegan & blomquist, 2006). 1.3. corporate governance there have been calls by stakeholders for strict implementation of good management principles and imposition of punishment for the erring managers (onuoha, ogbuji, ameh & oregwu, 2013). one tenet of corporate governance is to spell out the ways various interested parties in an organization should relate to one another (oecd, 2015). corporate governance specifies what privileges are given to various parties, what duties they have, what processes to follow in making decisions, and outlines the manners in which organizational strategies are set and the means of reaching key organizational goals. many organizations benefit immensely by fashioning their codes of governance after some precepts embedded in the oecd documents. (jesover & kirkpatrick, 2005). the term “gubernare”, from latin, translated “governance”, carries the idea of providing guidance to an organization (hamanyanga, 2002). this implies that corporate governance primarily relates to the act of directing, in conformity with the specified rules of conduct by those entrusted to do so (hamanyanga, 2002). thus, managers in a corporation would need to understand how their act of managing is influenced by various sources of regulations (michelberger, 2016). the crises faced by the nigerian banking sector over a decade ago were linked to the issue of governance (paseda, 2012). the perceived failure of previous codes led to the formulation in 2018 of a comprehensive code of governance to take effect from 2019. the object of this code is to entrench tenets of good practices that will promote trust, adoption of voluntary global governance initiatives: equator principles and banks in nigeria 253 accountability and transparency in corporations (financial reporting council of nigeria, 2019). one of the seven parts of the code is sustainability, which is concerned with safety and environmental issues. research findings in governance have largely been inconsistent. for example, lu and li (2019) found out that corporate governance does not improve investors’ shareholdings, and tshipa, brummer, wolmarans and toit (2018) found out that any effects of corporate governance will depend on the particular economic periods. many findings suggest that simply adopting the oecd guidelines on governance may not yield the desired outcomes (chen, li & shapiro, 2011). there have been cases where negative effects of corporate governance were recorded, necessitating the use of caution in adopting certain strategies of governance (dedu & chitan, 2013). for instance, corporate governance mechanisms have been found to influence bank risk negatively (felício, rodrigues, grove & greiner, 2018). 1.4. globalization of governance malets (2017) conceptualizes globalization, first, as a set of economic transformations, and second, as a set of governance projects. some developing counties try to integrate their domestic financial system into global financial market so as to benefit from liberalization (prasad, rogoff, wei & kose, 2003). they see globalization of financial system as a means of improving governance in domestic market. interest in the true effects of globalization is reflected in the number of studies (ortega, otero-iglesias & steinberg, 2018; onwuka, & eguavoen, 2018). some view globalization as a method which mixes world economies, know-how and governance (obadan, 2006), and as a combination of many features of the current trends (snyder, 2002). it appears there is no universal definition of globalization as each professional views it from his own field. for example, mousten (2008) traces the term to the 50s and 60s in the context of trade and commerce. the growing interest in global governance is a reflection of disappointment with the state’s regulations and some local private sector initiatives (higgott, 2004). one such global governance program is the eps packaged in 2003 as a set of benchmarks for banks in handling environmental problems while giving project loans (weber, acheta & adeniyi, 2016). this program emerged as a response to agitation from some concerned environmental activists (aboutorabifard, 2016) and transformed into an association consisting of 97 members as at the time of writing. banks voluntarily join the program in order to give a proof of a paradigm shift in their approach towards environmental and social risks (calderon, 2015). in adopting this program, the equator principles financial institutions (epfis) would request borrowers of funds to commission environmental impact assessments (eias), conduct consultations with project-affected communities, and develop an environmental action plan that identifies mitigation measures before giving facilities for projects (wright, 2008). banks adopting eps are likely to enjoy some measure of acceptability because they give consideration to such burning issues as ecologies and transparency (wright, 2008). based on risse and sikkink (1999) ‘spiral model’, the adoption of the eps seems to be a tactical admittance of responsibility for negative outcomes of loan facilities by many banks, and as a way of adhering to the world bank’s guidelines on project financing. signatories to the eps agree to conform to the requirements specified in the principles when granting loan facilities for projects as specified in the preceding paragraph (johnson, 2014). the eps, as shown in table 1, are ten in number, and indicate the necessary requirements epfi’s clients 254 b. e. a oghojafor, s. a. aduloju must meet before project facilities are given, which include environmental assessment, stakeholder engagement and governance mechanism. table 1 equator principles s/no principles principle 1 review and categorization categorization of project that requires finance facilities based on the risk classifications (a, b and c) principle 2 environmental and social assessment the requirement that clients applying for finance facilities must conduct environmental and social assessment when projects fall under categories a and b before facilities can be granted by banks that are signatories to eps. principle 3 applicable environmental and social standards environmental assessment must take cognizance of the relevant laws and regulations of a particular country where a project is being financed with due regard to international conventions such as those of ifc and who principle 4 environmental and social management system and equator principle action plan a client applying for project finance must also submit, in respect of category a and b projects, an environmental and social management plan to take care of any issues that may arise principle 5 stakeholder engagement clients requiring finance must also show that they have in place a system where all stakeholders that might be affected are engaged continuously, in respect of projects in category a and b so as to alleviate any negative effects the said projects might cause. principle 6 grievance mechanism applicants for project finance must put in place a system where complaints and grievances on environmental and social issues from the affected stakeholders can be lodged and addressed principle 7 independent review there must be a system of review by an independent assessor to assess the level of compliance with issues relating to environmental standards principle 8 covenants the applicant for project finance must pledge to abide by the process of assessment in the financing agreement and also submit regular reports as required principle 9 independent monitoring and reporting for categories a and b projects, an independent monitoring and reporting professional must be kept by the one applying for project financing principle 10 reporting and transparency banks providing project finance will provide annual report to the public on such transactions and their actual observations on their client performance source: adapted from johnson (2014) in spite of the beauties of globalization, some research findings show that weaknesses in a country’s finance sector might make adoption of global governance initiatives relatively difficult (knight, 1998). ortega et al. (2018) submit that the race for attaining a global status is gradually losing its luster in many countries due to its failure to achieve the goals of sustainability and improved quality of life, because while some countries benefit in terms of progress, others do not (keat & young, 2006). it then appears that no global initiative can subsist unless it takes cognizance of all the diverse features of the local environment. because of this, guillén (1999) has called on countries to put in place adoption of voluntary global governance initiatives: equator principles and banks in nigeria 255 codes of governance that will take into consideration their peculiar economic structure in relation to the world market. darnall (2008) specifies three important conditions for successful implementation of voluntary programs, namely, specific performance-based standards, regular reviews of members in such programs by independent examiners, and a system of rewarding those that actually complied after performance is authenticated. borck (2008) argues that eps, unlike conventional programs, suffer from non-availability and non-measurability of data, making it difficult to measure the benefits flowing from participation. meyerstein (2011) concludes that in the absence of some form of coercion, members in voluntary programs will fail to attain a substantial level of implementation. 2. methodology of research the research design adopted is survey which has the advantage of providing insights into the characteristics of the study population. data were obtained via a questionnaire, a preferred instrument so as to minimize bias (kothari, 2004). draft copies of the questionnaire were given to some experts in the field of governance and project financing to ascertain the level of reliability of the instrument. their inputs were incorporated into the final instrument that was administered to the respondents. the letter accompanying the questionnaire explained that participation in the exercise was completely voluntary and free of monetary benefits. the study population consists of the 18,320 employees at senior level of all the commercial banks in nigeria as at december 2018 (national bureau of statistics, 2019). these would be in a better position to know their organization’s policies on governance and environmental sustainability. the largest ten commercial banks based on assets were selected from the 24 operating in the country (banker, 2019). each bank was administered the number of questionnaire copies proportionate to its assets. using yamane (1967) formula, the original sample size was 392 derived as follows: 2 (1 ( )) n n n e   =   +  where: n = sample size n = population e = error limit (0.05 on the basis of 95% confidence level) therefore, n = 18, 320 / [1 + 18, 320 (0.052)] n = 18, 320 / 1+18, 320 (0.0025) n= 392. 3. results and discussion of the total number of questionnaire copies sent, 147 were retrieved out of which only 124 were found usable, and then processed for the study. table 2. shows the respondents’ characteristics. most of the survey participants fell within the age brackets of 31-50 (66.13%) indicating their maturity to give meaningful answers to the research questions. also, over 87% of them had a minimum qualification of not less than bachelor’s degree, 256 b. e. a oghojafor, s. a. aduloju suggesting they were capable of giving enlightened opinions on the issue of governance. in addition, more than half (54.03%) had spent not less than 5 years in their organizations, indicating that they would be familiar with their organization’s policies on environmental and social risks. table 2 descriptive statistics variable frequency percent gender (sex) male 68 54.84% female 56 45.16% total 124 100.00% age (years) 20 – 30 years 34 27.42% 31 – 40 years 45 36.29% 41 – 50 years 37 29.84% over 50 years 8 6.45% total 124 100.00% marital status single 65 52.42% married 59 47.58% total 124 100.00% educational status g.c.e./s.s.c. nil 0.00% nce/ond 7 5.65% hnd 9 7.26% bachelor’s degree 76 61.29% master’s degree 32 25.80% others nil 0.00% total 124 100.00% years of service less than 5 years 57 45.97% 5-10 years 54 43.55% over 10 years 13 10.48% total 124 100.00% source: field survey, 2019 the first research question is intended to find out the level of awareness of equator principles (eps) among financial institutions in nigeria. from table 3, eighty-nine (71%) of the 124 respondents agree that they have some knowledge of eps, while 17 (13%) admitted that they have gone on some training where eps were discussed. this shows that while there is a relatively high level of awareness of eps among the financial institutions in nigeria, most of their staff have not been given formal training in the area. the second research question is aimed at finding out the level of adoption of the principles. only three (2.41%) affirm that their organizations have adopted the eps. the third research question relates to the challenges militating against the adoption of eps by financial institutions in nigeria. seventy-two respondents (58%) choose lack of adequate knowledge of the principles; 69 (56%) point to the difficulties in implementation; 87 (70%) indicate a lack of enforcement of the principles; and 76 (61%) mention lack of tangible benefits derivable from the eps adoption. adoption of voluntary global governance initiatives: equator principles and banks in nigeria 257 table 3 analysis of research questions s/n research questions results 1 level of awareness of equator principles among the financial institutions in nigeria 71% agreed that they have some knowledge of eps 13% admitted that they have had training on eps 2 level of adoption of the equator principles 2.41% agreed their companies have adopted the eps 3 challenges militating against the adoption of eps 58%: lack of adequate knowledge of eps 56%: difficulties in implementation of eps 70%: lack of enforcement 61%: lack of tangible benefits source: field survey, 2019 these results are in consonance with some recent findings, especially those of schleifer, fiorini and auld (2019), where the general hypothesis that involvement in voluntary programs will lead to increased accountability and openness was not statistically supported. instead, the results show that voluntary governance initiatives that have direct participation by the agencies of the state record higher level of success, because public actors’ participation in a program’s decision making may have some elements of enforcement of rules. conclusions our analysis shows a high level of awareness of the eps among commercial banks in nigeria. the low level of adoption shown in the results is consistent with the information on the homepage of eps listing only two (2) financial institutions from nigeria as members. a lack of quantifiable outcomes of eps implementation militates against their adoption by most banks in nigeria, as is the case in many other countries. this is in consonance with the findings in wright (2008) that financial institutions that apply such practices and wish to enforce them on their customers could go out of business where potential borrowers do not see the commercial value in abiding by the principles, and where there are alternative sources of funding with no such conditions attached. zhao (2016) thus proposes that developing countries need to fashion out their own codes of governance rather than adopt wholesale principles developed by institutions elsewhere, because governance transformations occur in response to structural economic transformations (malets, 2017). interestingly, onwuka and eguavoen (2018) observe that due to its cultural and economic peculiarities, nigeria is yet to substantially gain financially from adopting international programs. these conclusions, however, must be understood in the light of the observed limitations of the study. first, is the limited sample size which may affect the overall results in line with the law of large numbers. second, is the use of self-reported data which may have some bearings on the general validity of the results of the findings (myrtveit, ariansen, wilhelmsen, krokstad, & mykletu, 2013). third, the data have not been subjected to rigorous tests of hypothesis, the results of which may slightly vary from that of the current study. however, this study contribution can be seen in that it has provided support and theoretical basis for a lack of adoption of equator principles in particular and voluntary initiatives in general by many financial institutions in nigeria. 258 b. e. a oghojafor, s. a. aduloju references aboutorabifard, h. 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(2016). promoting a more efficient corporate governance model in emerging markets through corporate law, 15 wash. u. global stud. l. rev. 447, retrieved on 02/10/2018 from http://openscholarship.wustl.edu/ law_globalstudies/vol15/iss3/6 prihvatanje dobrovoljnih globalnih upravljačkih inicijativa: ekvator principi i banke u nigeriji zbog rastućeg nivoa nezadovoljstva tradicionalnim modelima upravljanja koje određuje država, međunarodne upravljačke inicijative privlače sve više pažnje. ovo istraživanje ima za cilj da otkrije nivo poznavanja i prihvatanja jedne takve inicijative, ekvator principa (ep) od strane banaka u nigeriji. ovaj princip predstavlja dobar standard u okviru koga se ekološki i socijalni rizici inherentni u razvojnim projektima mogu identifikovati, proceniti i njima upravljati. studija se zasniva na dve teorije: teoriji kluba i teoriji institucionalnog izomorfizma. istraživački podaci su sakupljeni od 124 menadžera 10 vodećih depozinih banaka u nigeriji. podaci su analizirani korišćenjem deskriptivne statistike prezentovane u tabelama frkventnosti i procentima. rezultati pokazuju visok nivo poznavanja ep od strane banaka u nigeriji, ali nizak nivo prihvatanja. iako je studija ograničena malim uzorkom, nudi dokaze da teškoće u merljivosti benefita u prihvatanju ekvator principa i nedostatak sprovođenja sankcija za neispunjavanje značajno ograničavaju broj finansijskih institucija koje prihvataju ovaj režim u nigeriji. ključne reči: globalizacija, uprava, ekvator principi, teorija kluba, institucionalni izomorfizam facta universitatis series: economics and organization vol. 18, no 2, 2021, pp. 203 216 https://doi.org/10.22190/fueo210123014n © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper target costing suitability for improvements of lean supply chains1 udc 658.7 657.47 bojana novićević čečević, ljilja antić university of niš, faculty of economics, serbia abstract. competitive advantage can be seen as the superiority of some market participants to properly use resources and utilize key competencies to deliver greater value than competitors, without compromising product quality and functionality. in that sense, accounting, especially management accounting, successfully responds to managers’ needs for information that will be their adequate support in strategy implementation. lean concept and target costing are just some of the concepts whose strategic orientation can be a good support to managers. the aim of this paper is to point out the similarities and differences between lean concept and target costing and to show on a practical example how these concepts bring business improvements in supply chain. key words: lean concept, target costing, cost reduction, improvement jel classification: l11, m41 introduction increased competition on the national and foreign markets, rapid technological development, diverse customer needs, as well as shorter product life cycle have led to the spread of the lean concept outside the company itself. spreading principles of lean concept means redefining the corporate strategy and identifying the key processes that take place in the company. lean concept was implemented at toyota for the first time in the 1950s and was aimed at building a continuous flow of value creation, while eliminating non-value-added activities in order to speed up the production cycle. it eliminated non-value-added activities and paid more attention to improving value-added activities. the company processes are connected in a received january 23, 2021 / revised april 21, 2021 / accepted april 24, 2021 corresponding author: bojana novićević čečević university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: bojana.novicevic@eknfak.ni.ac.rs 204 b. novićević čečevič, lj. antić continuous flow, the work is reorganized through teams made up of people from different sectors and there is constant striving for improvement. this aspiration is driven by savings in human resources, space, machinery, time and cost reduction to meet the desires and needs of demanding consumers. initially, the lean concept was applied in the field of production, and later spread to other organizational parts of the company as well as to the relationships that the company establishes with partners outside the company. in order to take advantage of the lean concept, it is possible to combine it with some other concepts. among others, the concept that fits lean requirements is target costing. target costing was primarily applied as a cost control technique to eventually grow into an allencompassing concept aimed at profitability management. although it has had a predominant focus on the costs incurred in the product design phase, this concept also considers the costs incurred throughout the product life cycle as well as in the entire supply chain. specifically, it aims to reduce costs in different phases of the production cycle of the company through the analysis of costs of each phase and the improvement of technological and production character. due to its information suitability and numerous tools, this concept has grown into a powerful strategic instrument for profit management and planning. target costing helps managers produce new product with price that the market accepts and ensure a certain margin and rate of return, as well as increase consumer satisfaction. in that sense, the paper is divided into three parts. the first part of the paper points out the basics of the lean concept. the second part of the paper highlights the similarities and differences between the lean concept and target costing. finally, a practical example shows how the application of these two concepts brings business improvements in lean supply chain. 1. extended application of lean concept lean concept was primarily applied in the production process. numerous benefits observed from the application of the lean concept in the production process quickly gained the attention of the scientific and professional community, as well as the managers of the world’s leading companies. in that sense, the lean concept began to be applied in the whole company. this is because the need to reduce or, if possible, eliminate waste and non-valueadded activities in human resources, inventory, time to order the required information/ products/services, business premises, etc. existed in almost all organizational parts of the company, from those central to product delivery to supporting parts (kovacheva, 2010). the extended application of the lean concept to all organizational parts of the company has led to the formation of a new business organization called the lean enterprise (womack & jones, 1994). the lean enterprise is a group of individuals who, in a connected and synchronized manner, perform activities in a more efficient and economical way with the aim of quickly responding to the requirements of the next process or organizational part and deliver the required value. the goal is to analyze and direct the “value stream” in order to include as many activities as possible that focus on production and service delivery that provide maximum value. in that sense, it is important to focus on the company performance as a whole, rather than the performance of individuals, functions and organizational parts. the formation of lean enterprise implies the application of five basic principles to all processes and organizational parts of the company. the first business principle is to define values. external value definition becomes the premise which the company relies target costing suitability for improvements of lean supply chains 205 on. end consumers define the value and the company should try to best meet their needs and delivered required value. in an enterprise, the next stage of a process represents the end user of materials or information. establishment of “value streams” in the company is the second principle of the lean business concept. the “value streams” that are established in the company refer to the entire business process, not only to the production process. of course, in the company it is necessary to determine which are the key activities and processes that are performed and which deliver the required value, so they should be included in the value stream. properly established “value streams” in the company enable the elimination of non-value-added activities, eliminate waste, downtime, reduce defects and the like. properly established “value streams” ensure the removal of all obstacles and smooth flow of information, documentation and necessary materials to their users, which is the third principle of the lean business concept. the fourth principle refers to the introduction of a pull system. the signal to provide the necessary information is sent by the end consumer/user. the last principle is the pursuit of perfection. when “value streams” are established and their smooth functioning is ensured, the goal is to achieve the best possible functioning of the company as a whole. here, the emphasis is primarily on key processes, but chances for improvement are also sought in the supporting processes (novićević čečević & djordjević, 2020). key processes include processes that are directly related to the delivery of value required by consumers and processes that are not directly involved in value creation, such as integration with suppliers. the inclusion of processes related to establishing relationships with partners in the company strategy is important to ensure product quality and achieve a competitive advantage for the company. by applying the lean principle outside the company, a lean supply chain is created. lean supply chain refers to activities, functions and processes that take place not only in the company but also in all upstream activities and downstream activities. it includes suppliers, manufacturers, distributors and end consumers. the goal of a lean supply chain is to optimize the services provided, minimize costs, and maximize flexibility (gallone & taylor, 2001). the nine-zero concept derived from the lean concept can be used to achieve the goals of the lean supply chain. the nine-zero concept implies (charron et. all, 2015): ▪ zero dissatisfaction of partners, ▪ zero non-compliance, ▪ zero bureaucracy, ▪ zero dissatisfaction of stakeholders, ▪ zero delayed information, ▪ zero waste, ▪ zero non-value added activities, ▪ zero errors and defects and ▪ zero missed chances. some of the features of the lean supply chain are efficient communication and information transfer, synchronization of flows, elimination of waste, establishing a close long-term relationship, ensuring transparency, managing uncertainties and risks, striving for innovation and new knowledge and low inventory (ugochukwu, engstrom, & langstrand, 2012). the formation of a lean supply chain is a key basis for achieving and improving competitive advantage. in this regard, special attention should be paid to the choice of partners for a particular lean supply chain. when selecting a partner for a lean supply chain, certain criteria must be respected. these criteria relate to the behavior and attitude of both suppliers and 206 b. novićević čečevič, lj. antić consumers, the quality they deliver, the capacity they possess and the ability to deliver on time, payment terms and costs (harris, harris, & streeter, 2011) (jeffrey, 2004). the first criterion for selecting participants in the value chain is the behavior and attitude of the partner. the attitude and behavior of the partner implies their attitude towards the company with which they establish partnership, as well as towards changes and improvements. if the partner has a positive attitude about the company, they will want to establish long-term partnerships with it. however, if the partner does not have a positive attitude towards the company, in order to deliver the value demanded by consumers, they must find a new partner. perhaps the most important criterion for selecting participants in the value chain is their attitude towards change. specifically, it should be re-examined whether the partner applies lean business principles. if this is the case then they want to maximize the value they deliver through constant and continuous improvements, while eliminating waste, and they should definitely be included. if the partner does not apply the lean business principles, and has the qualities to enter the process of lean values, it is possible to establish cooperation with them through training and pointing out the numerous advantages of applying the lean concept. the next criterion when choosing a partner for long-term cooperation is the quality that is delivered. as quality is one of the vital elements of the “value stream”, special attention should be paid to this criterion. if a potential partner applies lean business principles, they should provide the required quality and can be considered a candidate for establishing partnerships. the capacity of the participants in the value chain, both in terms of machinery and means of transport, and in terms of employees, is another criterion that the candidate should meet. capacity is especially important for periods of demand fluctuation. not only existing but also future capacities should be considered. the capacity available to the partner is closely related to product delivery on time. in this sense, if the partner wants to invest more in their capacity, with the aim of delivering the product on time, cooperation can be established with them. payment terms and credit standards are the next criteria for selecting a partner. to establish a long-term relationship, it is important that there is trust between the partners. payment method and conditions will also depend on the level of trust. if the level of trust is higher, it is possible to get more favorable payment terms that will facilitate business. when it comes to payment, the application of advanced technologies among the participants in the supply chain should also be considered. examining the functioning of the payment system is an important aspect for the company because of the possibility of improving the payment process and the company's accounting itself, which will be discussed later. the last, but not least important criterion for choosing a partner for a lean supply chain is cost. the relevant supply chain should include all relevant partnership costs and decide on the establishment of cooperation on that basis. establishing long-term relationships and forming a lean supply chain will not be possible if partners do not meet all or most of the criteria. if the partners do not meet all the criteria, and there is an obvious desire to improve the business, it is possible to establish relations with them and with joint cooperation to improve the characteristics of the supply chain by performing two groups of activities. the first group of activities refers to the “development” of partners, while the second involves their coordination. “development” of a partner means providing assistance in improving the strategy, tools and techniques applied by the participant in the supply chain in order to achieve a competitive advantage and at the same time eliminate waste in the resulting partnership. target costing suitability for improvements of lean supply chains 207 coordination means harmonizing the procedures that the company applies with the procedures of other participants in the supply chain in order to standardize them. 2. target costing and lean concept – similarities and differences improving the competitive position on a highly competitive and dynamic market implies the acceptance of new business concepts and a change in the organization of production and business processes in the company. the new concept should focus on the following (vasile & ion, 2013): ▪ organization of the production process through the management of material, money and information flows, which will enable the reduction of costs, time, inventory and the like; ▪ connecting phases and establishing a synchronized flow of the process that will indicate possible problems that arise and the possibility of their improvement and ▪ integration with external partners in terms of cooperation and collaboration for the purpose of achieving a high level of performance. the lean concept and the target concept meet the stated requirements for application in companies in the modern business environment. in the following text, we will show the extent to which the requirements of these two concepts coincide, as well as where there are certain disagreements. although many believe that target costing originated in japan, the first evidence of implementation this concept was discovered as early as 1900 in the ford motor company. in this company, managers focused their efforts on finding the best way to manage costs in the production process. target costing is a concept that focuses on consumer requirements, in terms of understanding what consumers want and what competitors do in order to meet consumer demand. in that sense, it is necessary to monitor the signals from the market and perform analyses on the basis of which the company will be able to produce the product in accordance with the required characteristics. this external company orientation reduces the probability of entering the market with a product that will not be profitable. in this sense, target costing is directly aimed at the implementation of the lean business principle in the following (ward, 2003): ▪ explicit focus on continuous improvement, cost reduction and elimination of waste in the product design phase; ▪ focus on providing value to consumers through targeted sales prices; ▪ precisely defined goals related to the company strategy and understandable to all company employees; ▪ reducing business risk by defining the target profit; ▪ encouraging product and process innovation through the application of value engineering; ▪ demand for a high level of cooperation between different organizational parts of the company, as well as company cooperation with suppliers and partners; ▪ a holistic management approach that can be extended to the entire product life cycle that matches the “value stream”. the concept of target cost is a proactive future-oriented management approach, which encourages rapid product development and rapid design, which on a highly competitive 208 b. novićević čečevič, lj. antić market can be one of the prerequisites for achieving a leadership position, which a lean business concept seeks to achieve (antić & novićević, 2011). also, this management concept establishes a direct link between specific consumer requirements and product design and costs, which is basically a lean business concept (innes, 2004). however, in addition to numerous advantages, which are achieved by applying the concept of target cost in a lean business environment, certain shortcomings have been noticed. a well-set target costing determines the directions of reaching the target costs and the target profit margin. but sometimes choosing a particular direction can require very strong pressure on employees. for example, striving to shorten product development time may require overtime, which by its nature increases employee tension and leads to their dissatisfaction, low motivation, exhaustion, and poorer results. this situation is unacceptable for companies operating in a lean business environment. this is primarily because employees are the main driving force of the company and employee satisfaction in the workplace is the premise from which to start in achieving a defined company strategy. the concept of target-cost-based management emphasizes the role of designers, in terms of ensuring certain quality and functionality of products, and the role of managers, who control and coordinate cost management. also, the role of strategic management accountants as managers and experts is important for achieving the target cost (malinić, 2008). this concept pays little attention to employees who are directly involved in product creation. on the other hand, lean business concept of strengthening the role of employees is a very important success factor. this is due to the fact that managers in consultation with direct executors set projects for continuous business improvement. issues of cost reduction, operating losses, inventory levels, business optimization and product quality make target costing partially eligible for application in the lean supply chain (antić, stevanović, & novićević čečević, 2019). the concept of target cost takes into account all the above aspects of business, but not to the extent required of companies operating in a lean business environment. specifically, the concept of target cost is aimed at reducing costs in the phase of product planning and development, while the lean business environment requires a focus on all stages of product development and business processes in the company. target costing determines the amount of costs that provides a competitive market price of the product and target profit, which does not necessarily mean lowering costs to the lowest level, which is basically a lean business concept. specifically, costs in the concept of management based on the target cost are reduced only to the amount of the target reduction, and not to the level at which all types of waste are eliminated, as required by the lean business concept. inventory levels are determined in cooperation with suppliers, where the needs for product components play a significant role, so eliminating all type of waste and achieving zero inventory levels cannot be achieved by the target cost concept. lean business concept strives to optimize and continuously improve all business processes at all stages of the product life cycle using a number of techniques, which leads to lower inventory levels. in the concept of management based on the target cost, the aspiration for business optimization is not particularly pronounced because continuous improvements are focused on the product design phase. the focus of this concept on the product design phase is important for the lean business concept, because it is in this phase that activities that determine quality, price, cost, functionality and the like are performed (cooper & slagmulder, 1997). product quality as an attribute and controls with pull system are required by lean concept. externally determined product value and quality is a good side of the target cost concept. but, the aspiration of this concept is to ensure cost reduction and product quality, not to ensure quality at the very source target costing suitability for improvements of lean supply chains 209 of product development, which is the task of the lean business concept. instead of applying a pull system in a lean business environment, the concept of target cost applies the technique of value engineering. the application of this technique gives good results, but it is for the longterm business operations in a lean business environment more adequate to apply the pull system (antić & novićević čečević, 2018). based on all of the above, we can say that the concept of target cost can be a good tool to manage operations in a lean business environment. specifically, the calculation of the target cost is not a completely adequate, nor a complete information basis for making business decisions in conditions of emerging lean production, but it can be of great help for the management of lean companies. 3. application of target costing in achieving lean reduction although the match between lean concept and target costing is not complete, their joint application can give good results in order to reduce costs, improve business and achieve set goals. how the target costing can be a good information basis for a lean business concept and lean improvements will be shown on a practical example of a company in the field of construction material production (al-hashimi & al-ardawe, 2020). the managers of this company decided to apply target costing through three levels: determining the amount of target cost, reaching the target cost and continuously improving it for the needs of future cost reduction (zengin & ada, 2010). in this company, four centers of responsibility have been identified for which further research is needed in order to reduce costs (example adapted from al-hashimi & alardawe, 2020). they are: production center, service production center, service marketing center and service administrative center. the production center covers the production process in the company and refers to raw materials acquisition and handling, blending, and pyro processing – making clinker, and finished cement grinding. the service production center includes those jobs and activities that do not add value to the product, but without their performance, even the regular activity of the company could not take place. within it, the following costs have been identified: electric power, mechanical workshops and maintenance. warehousing and logistics, distribution and transportation, and marketing and sales are the costs identified within the service marketing sector. logistical support for the company’s activities is summarized in the service administrative service and refers to costs of auditing, quality control, human resources and research and development. in order to determine the amount of the target cost, the company performed an analysis of the prices that competitors have for the same products. the market leader sells products at a price of 76 eur so the managers of this company decided that their target selling price would be 75 eur. based on the determined target sales price, the target profit margin is established. the target profit is determined by applying the target profit margin to the target selling price. of course, the target profit should be in line with the strategic plans of the company, so as such it must receive support from the top managers of the company (novićević čečević, 2016). the target profit margin based on market conditions and company experience is 10% of the target sales price. target sales price per unit of product obtained by the formula target sales price target profit margin is 67.5 eur (75 eur 7.5 eur). in that sense, the managers of this company should find the best way to 210 b. novićević čečevič, lj. antić reduce the price of the product, but also to increase the annual volume of production and sales in order to use the available capacities. the second level of implementation is reaching the target cost. in order to achieve the target costs, the current information base on the complete process of performing operations in the company and the amount of their costs must first be analyzed. an overview of operations by responsibility centers in the company is provided in table 1. table 1 overview of operations and actual costs per operation cost centers actual costs production / sales cost per ton (thousand eur) volume (eur) raw materials acquisition 12,000,000 700,000 17.143 making clinker 10,000,000 700,000 14.286 finished cement grinding 8,000,000 700,000 11.429 electric power 7,000,000 700,000 10.714 mechanical workshops 5,000,000 700,000 7.571 maintenance 3,500,000 700,000 5.000 marketing services 4,500,000 700,000 6.429 administrative services 5,700,000 700,000 8.143 total cost 56,500,000 700,000 80.714 source: author's calculation adapted from al-hashemi & al-ardawe, 2020. from the presented overview, it is noticeable that the costs per unit of product are 80,714 eur. by comparing the amount of actual costs per unit with the amount of target cost per unit which is 67.5 eur it is clear that the costs incurred by this company are 16% higher than the target cost. as the given amounts of actual costs are presented on an annual basis, further calculations are aimed at determining the annual (total) amount of the target cost and the annual amount of reduction. the annual amount of reduction can be viewed as a lean reduction or a target reduction. in that sense, the total target cost is the product of the target cost per unit and volume of production and amounts to 47,250,000 eur (67.5 eur * 700,000 j.). the amount of the lean reduction will be the difference between the annual amount of actual costs and the total target cost and amounts to 56,500,000 eur – 47,250,000 eur = 9,250,000 eur the amount of 9,250,000 eur is the value that should be reduced in the coming period at the enterprise level. this amount of lean reduction should be broken down in more detail into the operations and jobs performed in the company. for these purposes, it is necessary to calculate the amount of the target cost of each operation as well as the amount of the target reduction for a specific operation. the target cost of a specific operation is obtained based on the following formula: target cost of activity = total target cost x actual cost of activity / total actual costs by applying this formula, for example, to the operation raw materials acquisition, the amount of the target cost of the operation of 10,035,398 eur (47,250,000 eur * 12,000,000 eur) / 56,500,000 eur is obtained. the amount of lean reduction of this operation is 1,964,602 eur, and it is obtained as follows: 12,000,000 eur 10,035,398 eur. overview of target costs by operations and lean reductions for each operation are given in table 2. target costing suitability for improvements of lean supply chains 211 table 2 overview of target cost and lean reduction for each operation supply chain activities actual costs target cost lean cost cost lean per unit (thousand eur) raw materials acquisition 12,000,000 10,035,398 1,964,602 2.8066 making clinker 10,000,000 8,362,832 1,637,168 2.3388 finished cement grinding 8,000,000 6,690,265 1,309,735 1.8710 electric power 7,500,000 6,272,124 1,227,876 1.7541 mechanical workshops 5,300,000 4,432,301 867,699 1.2396 maintenance 3,500,000 2,926,991 573,009 0.8186 marketing services 4,500,000 3,763,274 736,726 1.0525 administrative services 5,700,000 4,766,814 933,186 1.3331 total cost 56,500,000 47,250,000 9,250,000 13.2143 source: author's calculation adapted from al-hashemi & al-ardawe, 2020. considering that the company is a set of mutually purposefully connected parts, such separation of costs and the amount of reduction by individual operations will be in the function of participation of all parts in achieving the company’s goals. once the target costs and the amount of lean reduction for each operation have been calculated, it is now necessary to review the costs within each operation and see the potential for reducing them. for the sake of clarity and simplicity of the analysis, as well as due to the need to obtain information that is important for reducing costs, the identified operations performed in the company are divided into two categories of internal and external activities (al-hashimi & al-ardawe, 2020). internal activities refer to those that the company performs independently and do not depend on suppliers and other participants, such as the production process. external activities are those activities that the company performs in cooperation with its partners and can view them as upstream activities and downstream activities. within each group of activities, key operations and costs divided into variable and fixed will be identified. internal activities, as we have stated, refer to the key production process in the company which is performed in two operations, making clinker and finished cement grinding. in addition to the costs of these two operations, the costs of internal activities include electric power, mechanical workshops and maintenance. as making clinker and finished cement grinding are operations that add value and have a significant role in the delivery of the final product, there is further division of costs within these operations into variable and fixed. an overview of variable and fixed costs within these operations is given in table 3. this cost overview allows you to see exactly what the costs are within each operation. based on this overview of costs for key operations, managers come to the conclusion that first of all we need to shorten the idle time of machines, further train workers to increase productivity and shorten waiting times, outsource certain raw materials, improve cooperation with recipients in terms of obtaining more favorable prices for larger quantities of ordered raw materials and the like. these conclusions were reached on the basis of the fact that the operations making clinker and finished cement grinding are oriented primarily on the machining of raw materials, so the high share of fixed wage costs is unjustified. the reason for the high costs is that the company has hired more engineers and technical workers than they need. earnings costs should be determined based on the value provided by the activities provided. 212 b. novićević čečevič, lj. antić table 3 variable and fixed costs within making clinker and finished cement grinding cost elements making clinker finished cement grinding total actual costs (thousand eur) ratio to total cost % total actual costs (thousand eur) ratio to total cost % total variable costs 3,900,000 39.00% 4,970,000 62.13% direct wages 800,000 8.00% 1,600,000 20.00% indirect wages 600,000 6.00% 1,200,000 15.00% commodities supplies 1,400,000 14.00% 1,210,000 15.13% service supplies 800,000 8.00% 800,000 10.00% other costs 300,000 3.00% 160,000 2.00% total fixed costs 6,100,000 61.00% 3,030,000 37.88% salaries 2,100,000 21.00% 900,000 11.25% commodity supplies 1,500,000 15.00% 740,000 9.25% service supplies 1,200,000 12.00% 660,000 8.25% interest and rents 600,000 6.00% 280,000 3.50% depreciation 500,000 5.00% 350,000 4.38% other costs 200,000 2.00% 100,000 1.25% total 10,000,000 100.00% 8,000,000 100.00% source: author's calculation adapted from al-hashemi & al-ardawe, 2020. also, the raw materials needed to perform operations are distributed based on the number of machine hours and not based on the actual capacity of the machine, which leads to higher variable and fixed costs of operation commodities supplies, whose share in total costs ranges from 10-15%. the second group of activities that take place in the company are external activities and we will look at them as upstream activities and downstream activities. raw materials acquisition is a key operation within upstream activities. within this operation, various necessary raw materials are added, such as limestone, clay, iron, water, etc., which are necessary for further operations. these costs otherwise make up 20% of the total costs. in table 4. the costs of this operation are divided into variable and fixed, as well as the percentage share of these costs in the total costs of this operation. table 4 overview of variable and fixed costs within raw materials acquisition cost elements total actual costs ratio to total (thousand eur) cost % total variable costs 5,380,000 44.83% direct wages 1,200,000 10.00% indirect wages 800,000 6.67% commodities supplies 1,900,000 15.83% service supplies 1,000,000 8.33% other costs 480,000 4.00% total fixed costs 6,620,000 55.17% salaries 1,800,000 15.00% commodity supplies 1,400,000 11.67% service supplies 1,200,000 10.00% interest and rents 1,300,000 10.83% depreciation 540,000 4.50% other costs 380,000 3.17% total 12,000,000 100.00% source: author's calculation adapted from al-hashemi & al-ardawe, 2020. target costing suitability for improvements of lean supply chains 213 by further analyzing the costs within this operation, company managers identify potential opportunities for improvement. they relate to: eliminating the cost of unused capacity, reducing the cost of raw materials, reducing the cost of services such as maintenance and transportation, increasing productivity and reducing the number of employees. in order to achieve potential improvements, the managers focus their attention primarily on the following costs: commodities supplies, service supplies and salaries. the costs of commodities supplies refer to the costs of collecting raw materials necessary to perform operations such as fuel, spare parts, electricity and the like. the share of fixed costs of commodities supplies is about 12 and is high if we compare it with the variable costs of this category. for the amount of variable costs of commodities supplies managers of this company have entered into cooperation agreements with suppliers, which is not the case for the amount of these fixed costs. in this sense, managers must negotiate with suppliers and ensure lower raw material prices. the costs of service supplies relate primarily to maintenance, equipment rental, transportation, telecommunications, insurance and the like. their percentage is higher if we take into account that they are mainly related to maintenance. even when contracting these costs, managers must contact suppliers and enter into contracts that will ensure the provision of quality services for a better price instead of the company performing these tasks independently. in the end, the amount of salaries within fixed costs and indirect salaries within variable costs exceed the amounts of salaries received by employees who are directly involved in the process. a significant difference in salaries is a cost that does not add value if we take into account that all employees perform the same tasks, either definite or indefinite. observing the costs of downstream activities, which in this company relate to marketing services and administrative services, one can notice their large percentage share. based on the information on how these processes are performed and what problems arise during their performance, the following measures for potential improvements have been proposed (alhashimi & al-ardawe, 2020): ▪ transportation logistics and reduce costs, ▪ careful selection of sales agents and negotiate with them on the method of payment whether cash or deferred to meet the supplier’s payment, ▪ on-time delivery to reduce inventory costs to a minimum, ▪ improving the financial system and information flow by using it system and ▪ concern to the efficiency of personnel and opting between permanent employee or outsourcing, especially for quality inspection and product development. the ability and efficiency of the company manager will be especially expressed when it comes to achieving lean reduction. for these needs, companies can use very efficient target costing techniques such as value engineering, value analysis, kaizen costing and quality function deployment and numerous lean techniques. in any case, care should be taken to ensure that the product achieves primary functionality that will satisfy the desires of consumers at an acceptable cost. the last level of application of target costing is continuous improvement. this step is especially important when reaching the target cost because tc is a continuous process. also, the process of business improvement and cost reduction does not end with the product entering the production phase but is continuing through small and continuous improvements to achieve maximum efficiency. continuous improvements are achieved by applying the kaizen technique. kaizen implies small incremental improvements at 214 b. novićević čečevič, lj. antić every step before making major innovations. when continuously improving, care should be taken (al-maryani, 2015): ▪ that human resources are the most important resource of the company, ▪ that there are small gradual improvements before radical changes ▪ that changes are based on continuous business monitoring and properly measured performance. it is better to improve the company's business immediately by 10%, than to wait for the moment when the business can be 100% improved. waiting for the moment to come when the business can be fully improved requires a lot of time, and market conditions are relentlessly changing, so the company can be late with reactions to demand and thus lose the race with the competition. conclusion the extended application of the lean concept from production to the whole company, and later outside the company, led to the creation of a lean supply chain. in the lean supply chain, business is organized so that the value required by the user of that value is delivered as soon as possible. users of value, in addition to consumers, are organizational parts within the company, as well as partners upstream and downstream in the chain. the goal of the extended application of the lean concept is to eliminate all forms of waste, increase product quality, deliver the required value on time, quickly respond to requests and the like. in order to be able to measure their financial benefits from the application of the lean concept, managers apply a more modern concept of calculation and costing such as target costing. target costing is a cost management concept that aims to manage the costs of all products through the design phase. at the same time, with the help of tc, it is ensured that the product is profitable enough to justify its production. in this sense, it can be used as a profit planning mechanism. target costing is not limited to the selling price of a product; it is an approach that can be applied to the entire supply chain. tc is much more than a cost accounting system because it respects the wishes and requirements of consumers, focuses on product design, involves the cooperation of employees from different fields and departments not only within the company but throughout the supply chain to minimize costs throughout the product life cycle. in order to achieve a competitive position in a modern business environment, it is necessary to combine two or more concepts while exploiting their advantages. in this sense, a comparative analysis of the lean concept and target costing has shown the key aspects of importance to consumers common to both concepts and that their combination can lead to business improvement. thanks to the application of target costing and certain elements of the lean concept, companies will be able to: ▪ define the selling price of products at a level that can give them a competitive advantage; ▪ based on the selling price, plan the profit and the rate of return on the engaged funds; ▪ get acquainted with the costs incurred in the company in different phases, determine the cost limits for each operation and on the basis of this information the required value of the product within the defined cost limits; target costing suitability for improvements of lean supply chains 215 ▪ identify and manage costs not only at the production stage but at all stages of the process; ▪ determine the cause-and-effect relationships between operations and jobs that take place in the company and resource consumption; ▪ perform targeted cost reduction and efficiency gains through the application of target costing techniques and the lean concept; ▪ develop close and partnership relations both between the employees in the company and with other companies in the supply chain; ▪ carefully select partners that will meet the requirements in terms of quality, price and delivery time; ▪ improve profitability and long-term business efficiency; ▪ reduce business risk and encourage innovation; ▪ provide a basis for strategic decision making and continuous performance improvement. a well-established lean concept and target costing will ensure that teams inside and outside the company work together to meet customer requirements but also to meet each other's requirements while increasing the value created and the performance of the company and partners. to achieve this, it is necessary to carefully consider the entire business process, identify key processes and their costs and resources, as well as select partners who also apply these concepts and take into account the value that is delivered. all these requirements need to be harmonized with the defined sales price or target costs, value orientation and continuous improvement in the lean supply chain. references al-hashimi, a., & al-ardawe, a. (2020). implementing target costing within the supply chain to lean costs: case study in najaf cement factory. journal of xi'an university of architecture & technology, 13081320. al-maryani, m. a. (2015). the strategic impact of integration between target costing and continuous improvements techniques in achieving cost reductions and competitive advantage: an analytical study. journal of accounting, auditing, economics and finance. antić, lj., stevanović, t., & novićević čečević, b. (2019). koncepti obračuna i upravljanja troškovima u lean poslovnom okruženju [concepts of cost and management accounting in a lean business environment]. niš: ekonomski fakultet niš. antić, lj., & novićević čečević, b. (2018) the (no)alignment of costing and enterprise management concepts with lean business concept. contemporary issues in economics, business and management – ebm 2018, faculty of economics, university of kragujevac, 383391. antić, lj., & novićević b. (2011). target costing for the purpose of generic strategies' realization, facta universitatis – series economics and organization, 8(3), 247-262. charron, r., harrington, j., voehl, f., & wiggin, h. (2015). the lean management systems handbook. ny: productivity press. cooper, r., & slagmulder, r. (1997). target costing and value engineering, productivity press, portland or. http:/www.tx.ncsu.edu/jtatm/volume2issue4/articles/hergeth/39 02 full.pdf gallone, p., & taylor, d. (2001). from value stream mapping to the development of a lean logistics strategy. in manufacturing operations and supply chain management, the lean approach. uk: thomson learning. harris, c., harris, r., & streeter, c. (2011). lean supplier development. ny: productivity press. innes, j. (2004). handbook of management accounting. cima publishing. jeffrey, p. w. (2004). lean supply chain management: a handbook for strategic procurement. ny: productivity press. kovacheva, a. (2010). challenges in lean implementation successful transformation towards lean enterprise, 1–58. retrieved from http://pure.au.dk/portal-asb-student/files/9093/ak83188...pdf malinić, s. (2008). upravljačko računovodstveni aspekti kaizen costinga-a [management accounting aspects of kaizen costing]. računovodstvo 3-4, 3-13. 216 b. novićević čečevič, lj. antić novićević čečević, b. (2016). upravljačko-računovodstvena podrška menadžmentu preduzeća u lean poslovnom okruženju [managerial accounting support to the enterprise management in a lean business environment]. unpublished phd thesis, university of niš, faculty of economics. novićević čečević, b., & djordjević, m. (2020). lean accounting and value stream costing for more efficient business processes. ekonomske teme, 58(4), 573-592. https://doi.org/10.2478/ethemes-2020-0032 ugochukwu, p., engstrom, j., & langstrand, j. (2012). lean in the supply chain: a literature review. management and production engineering review, 3(4), 87–96. vasile, e., & ion, c. (2013). target cost – tool for planning, managing and controlling costs. romanian journal of economics, 114-127. ward, y. c. (2003). cost management and accounting method to support lean aerospace enterprises. retrieved from http://www.bath.ac.uk/management/aerospace/pdf/lean_measurement.pdf womack, p., & jones, d. (1994). from lean production to the lean enterprise. harvard business review, 93-103. zengin, y., & ada, e. (2010.). cost management through product design: target costing approach. international journal of production research, 48(19), 5593-5611. podobnost target costinga za potrebe unapređenja lean lanca snabdevanja konkurentsku prednost možemo da posmatramo kao superiornost nekog od učesnika na tržištu da pravilnom upotrebom resursa i iskorišćavanjem ključnih kompetencija isporuči veću vrednost od konkurenata a da pri tome ne ugrozi kvalitet i funkcionalnost proizvoda. u tom smislu, računovodstvo, a posebno upravljačko računovodstvo, uspešno odgovara na zahteve manadžera za obezbeđivanjem informacija koje će biti adekvatna podrška menadžerima u realizaciji postavljene strategije. lean koncept i target costing samo su neki od koncepta koji svojom strategijskom orijentacijom mogu biti dobra podrška menadžerima. cilj rada je da ukaže na sličnosti i razlike lean koncepta i target costinga i da prikaže na praktičnom primeru kako se iskorišćavanjem prednosti navedenih koncepta postižu unapređenja poslovanja u lancu snabdevanja. ključne reči: lean koncept, target costing, redukcija troškova, unapređenja facta universitatis series: economics and organization vol. 18, no 4, special issue, 2021, pp. 369 381 https://doi.org/10.22190/fueo210817026b © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper moving from non-financial to sustainability reporting: analyzing the eu commission’s proposal for a corporate sustainability reporting directive (csrd)1 udc 657.3 josef baumüller1, stefan o. grbenic2 1vienna university of economics and business, vienna, austria 2graz university of technology, graz, austria orcid id: josef baumüller https://orcid.org/0000-0001-8274-9338 stefan o. grbenic https://orcid.org/0000-0003-1245-5929 abstract. non-financial reporting as established through the nfrd (2014/95/eu) has become a core element of the eu commission’s ambitions to transform the european economy towards more sustainability. to address the increased criticism which meets the current reporting requirements, the eu commission initiated the development of a new set of european sustainability reporting standards, followed by issuing the proposal for a new directive to supersede the nfrd. this paper analyzed these proposals in the light of previous findings from academia and corporate practice, contributing to an ex-ante impact assessment. as a result, it shows that improving completeness, comparability and reliability are the two main goals of the eu commission. however, many of the new proposed requirements are excessive and raise fundamental questions concerning acceptable levels of administrative burden for companies as well as necessary conceptual fundaments for a reporting framework. key words: non-financial reporting, sustainability reporting, sustainable finance, nfrd (2014/95/eu); csr directive (2021/0104 (cod)) jel classification: m41, q56 received august 17, 2021 / revised december 01 / accepted december 04, 2021 corresponding author: josef baumüller vienna university of economics and business, building ad, 1st floor, welthandelsplatz 1, 1020 vienna, austria | e-mail: josef.baumueller@wu.ac.at https://orcid.org/0000-0001-8274-9338 https://orcid.org/0000-0003-1245-5929 mailto:josef.baumueller@wu.ac.at 370 j. baumüller, s. o. grbenic 1. introduction on april 21, 2021, the european commission published its draft for a new eu directive on sustainability reporting: the corporate sustainability reporting directive (hereinafter csrd). the aim of this proposed directive is to supersede the reporting requirements introduced into european accounting law by the non-financial reporting directive (2014/95/eu; hereinafter nfrd) in 2014. this first directive aimed at improving the transparency in sustainability-related aspects of business activities – and soon became a core element of the far-reaching initiatives of sustainable finance (european commission, 2018) and of the green new deal (european commission, 2019). however, the provisions set forth by the nfrd soon proved to be inadequate in scope and content to keep up with the regulatory development (european commission, 2021d). for that reason, the announcements of the green new deal have already put forth the aim to improve the provisions of the nfrd (european commission, 2019). previous studies and consultations by the eu commission have pointed out various important fields that required improvements for the european non-financial reporting regime. after a further consultation was carried out in the first half of the year 2020 (european commission, 2020), the european commission started with its work on the new directive. also, the efrag’s european lab was mandated to start with the preliminary work on european non-financial reporting standards. the idea of a new standardization of non-financial reporting was introduced by several stakeholders in the past and it aims at providing more extensive guidelines to the companies in order to improve comparability of the information being reported. at the same time, however, it strengthens the aims of the european commission to establish a specific european reporting regime that is tailored to the specifics of the ongoing reform program on sustainability within the eu – even at the cost of limited alignment with established international reporting frameworks (sopp & baumüller, 2021). in early march 2021, the eu commission published the final reports of the european lab. only slightly more than one month later, the proposal for a new directive followed: the csrd. the consultation period for this proposal was open until mid of july. the first resonance by stakeholder considered the new rules that were put forward as “major step forward in sustainability reporting” (deloitte, 2021) or even “nothing short of a revolution” (value reporting foundation, 2021). nevertheless, these reactions indicate that european companies will face considerable changes in their reporting environment with regard to the efforts that they face. the aim of this paper is to highlight the cornerstones of the proposed csrd. they are discussed in the light of the previous findings which led to the criticism on and the need to revise the currently applicable nfrd. by addressing these aspects, this paper gives an answer to the question on the implications of the csrd for the non-financial reporting regime in the eu. moreover, the consequences that european companies and companies from other countries will face, as well as needs for further clarifications in the proposals are concluded. with regard to the limitations of this study, it shall be noticed that several aspects covered by the csrd – such as issues related to the audit (verification) of the disclosed non-financial information – are only briefly addressed and not expanded upon for further discussion, see e. g. velte, 2021). this paper’s focus lies on the overall architecture and on reporting-related core issues of the csrd. furthermore, the question whether or not the proposals seem adequate to truly put sustainability deeper in the hearts of european moving from non-financial to sustainability reporting ... 371 companies or run the risk of merely inducing new and different forms of greenwashing is not in the focus of this paper. also, an empirical study on the practical implications for european companies as contrasted by their current reporting practices is not conducted (see e. g. zülch et al., 2021). 2. elements of the new sustainability reporting regime 2.1. overview the csrd replaces the provisions of the nfrd and completely reshapes the european reporting framework on sustainability reporting. on the one hand, it extends the scope of companies forced to publish such reports substantially and, on the other hand, it proposes a considerable number of new topics that must be reported. these new requirements are outlined in the subsequent chapters. what is striking at first is the change in the name of the requirements put forth by the directive from “non-financial” to “sustainability” reporting. this follows the criticism that was increasingly prevalent on the vagueness of the term “non-financial”, being criticized for just representing a negation without carrying a defined (positive) content. for that reason, the european lab already proposed this change in terminology in its final reports on european sustainability reporting standards (european lab, 2021). besides, the well-established concept of sustainability reporting is characterized by certain features such as a dominant inside-out view on reporting contents that the eu commission also wants to stress with its proposed new reporting requirements (baumüller, 2020). furthermore, the proposals of the csrd aim at aligning the european provisions for corporate sustainability reporting with the further requirements put forth by other sustainability-regulated regulations. most importantly, two other legal acts published in 2019 and 2020, respectively, force companies to extend their reporting: first, the sustainable finance disclosure regulation (hereinafter sfdr) (2019/2088) requires specific sustainability‐related disclosures for companies working in the financial services sector. especially, the extent to which investments in financial products are sustainable must be disclosed in a quantified manner. second, the taxonomy regulation (2020/852) contains fundamental definitions on environmental sustainability within the eu and amends the reporting requirements of the sfdr. furthermore, all companies that fall under the european reporting regime set forth by the nfrd (or in the future: by the csrd) must disclose how and to what extent their activities are environmentally sustainable. for financial institutions, this also includes information on their “green asset ratio”, requiring an increased transparency on the sustainability-related impacts of their lending (eba, 2021). the eu commission’s sustainable corporate governance initiative is expected to contain further references to the european sustainability reporting regime in the future. relevant aspects include, among others, an extended responsibility for sustainability along the value chains of companies as well as linking the remuneration systems of board members closer to sustainability metrics (e. g. from the published sustainability reports) (european commission, 2021a). figure 1 summarizes the interconnections between the csrd and the most important complementing regulations. 372 j. baumüller, s. o. grbenic fig. 1 regulations addressing the transparency of european companies the proposals of the csrd shall apply to financial years starting on or after january 1, 2023. however, they first must be agreed upon on the european level and then, second, they must be transposed into the national laws of the member countries. although, the number of member state options in the csrd is limited as compared to the nfrd, heterogeneity is expected since the transposition of the nfrd has already highlighted differences in the efforts to implement sustainability-related regulations of corporate practices (csr europe & gri, 2017). table 1 summarizes the timeline planned to finish the work on the csrd and for its initial implementation. table 1 proposed timeline (source: drsc, 2021a) april 21, 2021 official decision on the proposal of the csrd in the college of eu commissioners april 2021 to june 2022 at the latest negotiations in the european council of ministers and the eu parliament by june 2022 compromise on the content of the csrd under the french council presidency july 2022 onwards beginning of transposition into national law by end of october 2022 binding adoption of core standards developed by efrag through delegated act by december 1, 2022 completion of legal transposition by eu member countries january 1, 2023 onwards beginning of the first financial year in which the new regulations of the csrd must be applied by end of october 2023 binding adoption of enhanced standards and sme standards through delegated acts january 1, 2024 onwards publication of the first management reports prepared in accordance with the new regulations of the csrd moving from non-financial to sustainability reporting ... 373 2.2. scope of application one of the most drastic changes proposed by the csrd refers to the scope of companies that fall under the reporting regime. whilst the nfrd contains three criteria that have to be met cumulatively (“[i] large undertakings [ii] which are public-interest entities [iii] exceeding on their balance sheet dates the criterion of the average number of 500 employees during the financial year“), the csrd extends the scope considerably. based on the proposals, the following types of european companies will have to draw up sustainability reports: (i) all companies that are publicly traded and operate under the legal form of a limited liability company. only micro-sized entities are exempted. for small and medium-sized entities, additional time is granted for their preparations (as the proposed reporting require the preparation of the first reports from january 1, 2026, onwards). (ii) all large companies operating under the legal form of a limited liability company, even if they are not publicly traded. (iii) all large insurance companies and banks, irrespective of the legal form they employ (e. g. cooperatives). for consolidated sustainability reporting, all parents of large groups fall under the scope of the csrd. therefore, in contrast to the nfrd, the existence of an obligation to draw up consolidated financial reports is irrelevant (e. g. for reasons of applicable exemptions). for the first time, also third-country issuers within the eu must prepare sustainability reports based on european law. this aims at establishing a “level play field” for european companies (european commission, 2021b, p. 11). the requirements of the transparency directive (2006/43/ec) are amended accordingly by the csrd – whilst the exemptions stated in article 8 of this directive also remain unchanged. as it is currently the case under the nfrd, subsidiaries are exempted from their obligation to publish sustainability reports if they are included in consolidated reports of their parents. in case the parent is located in a third country, however, the parent’s sustainability report must meet the requirements of the sustainability reports published by european companies. based on the first assessments of the eu commission, the increased scope put forward should increase the number of companies that have to publish sustainability reports from approx. 11,600 to 49,000 (european commission, 2021b, p. 10). for some member states like germany, however, the actual effect is expected to be much bigger (drsc, 2021a). this increase is mainly driven by the regulations of the sfdr and the taxonomy regulation which require a higher degree of data availability for the financial sector (e. g. european commission, 2010). 2.3. reporting contents the concept of materiality is the cornerstone of the current non-financial reporting requirements set forth by the nfrd – as well as for most other frameworks and standards addressing sustainability-related information. one of the most notable changes made to the european sustainability reporting regime is the – explicit – introduction of the principle of “double materiality” (baumüller & sopp, 2021). in order to assess which sustainability matters have to be reported on, companies have to consider both matters that impact their financial performance and position in the short, medium and long term – as well as the impacts of their business activities on these matters. i.e., for the first time it is clearly stated that a reporting obligation also exists for sustainability matters that are only material from one of the two stated perspectives, e. g. associated with relevant impacts on the environment but 374 j. baumüller, s. o. grbenic without financial relevance to the reporting company (adams et al., 2021). this is in line with previous demands addressed to european companies by the eu commission as well as other stakeholders (especially ngos). additionally, it reflects the essence of a sustainability reporting system as compared to the previous requirements for non-financial reporting (baumüller & omazic, 2021). however, findings on the application of the ambiguous principle of materiality as set forth by the nfrd shows that european companies obviously struggle to understand or translate the principle of double materiality into practice. in parts, this might be attributable to specific challenges with regard to its operationalization (ceps, 2020). in that respect, also the proposals put forth by the csrd do not bring clarity to the question of how to apply the principle of double materiality. furthermore, the csrd also proposes extended reporting requirements for those topics that are identified as material. besides the information that is already required by the nfrd, new requirements address: (i) extended reporting contents (aims and strategies), (ii) applicable time frames (retrospective and forward-looking information is required), and (iii) newly structured and extended reporting matters (governance matters; more focus on value chain). these fundamentally changed reporting requirements obviously reflect the criticism on the nfrd’s current requirements that reporting practices were inadequate, are too often lacking depth, and are too often lacking a clear connection to the companies’ strategies and governance processes (alliance for corporate transparency, 2020). it seems that for the same reason, the process of materiality analyses must be disclosed by companies and the comply-or-explain principle is dropped. inconsequently, the csrd still includes a safeguard clause which allows companies to omit information under certain (very restrictive) circumstances. but, since the application of the identical option in the current nfrd is associated with many questions, the practical relevance of this provision is limited (and would have merited at least further clarification; baumüller, 2020). adding to that, a new reporting requirement addresses information on intangibles that are not reported in the financial statements. the csrd refers to intellectual, human, social and relationship capital, but also stresses the importance of information on research and development. nevertheless, the essence of this requirement remains vague, especially as the definitions at the beginning of the eu commission’s proposals link this reporting obligation to the process of value creation by companies (european commission, 2021b, article 1 paragraph 2) – a concept which is grounded on the ideas of integrated reporting and thus new to european accounting law. further references that seem applicable address the ongoing efforts by the efrag in terms of accounting for intellectual property rights (efrag, 2021) as well as the initiatives towards the concept of natural capital accounting (capitals coalition, 2021). again, further clarification is to be expected in any case. all companies under the regime of the csrd additionally have to apply article 8 of the taxonomy regulation. this regulation forces them to report the extent to which their revenues, capex and opex are environmentally sustainable as set forth by that regulation. for companies that already fall under the regime of the nfrd, the reporting requirements of the taxonomy regulations already must be applied for reports published in the year 2022. currently, these companies face considerable challenges in implementing the relevant processes and collecting data to meet their upcoming obligations (enbw, 2021). for companies which just fall under the extended scope of the csrd for sustainability reporting, article 8 of the taxonomy regulation will have to be applied for reports published in the year 2024 and later. moving from non-financial to sustainability reporting ... 375 2.4. standardization a new element introduced by the csrd to european sustainability reporting is the standardization of reporting requirements. besides the basic requirements put forth by the csrd itself, the eu commission mandates the efrag to become a full-fledged standard setter and to develop detailed standards applicable for all companies falling under the regime of the directive (mcguinness, 2021). the eu commission’s proposals widely follow the suggestions put forth by the efrag in early 2021 (european lab, 2021). the new standards shall include sector-agnostic, sectorspecific and company-specific information. the relevant reporting matters comprise environmental, social and governance matters (esg) – thus changing the structure of the current nfrd. for each of these matters, a minimum of topics to be captured is given. by october 31, 2022, a first set of standards shall be adopted reflecting the information needs of financial market participants subject to the sfdr (2019/2088), implying a focus on environmental matters. by october 31, 2023, a second set of standards shall be published to introduce sector-specific reporting requirements. furthermore, this second set shall also include specific reporting requirements for sme. as the efrag is a private organization, the standards that will be developed have to be endorsed by the eu commission. this is intended to be done via delegated acts, following a specific endorsement mechanism based on systematic criteria defined by the csrd. delegated acts become immediately applicable in all eu member countries and, thus, require no further transposition. the directive requires the eu commission to consider relevant development in the works of global standard-setting initiatives, e. g. by the ifrs foundation or with regard to natural capital accounting. however, this requirement still seems vague and will require further clarification once the csrd enters into force and the first delegated acts are to be adopted. so far, this aspect of the proposed directive seems to attract considerable attention since many companies and stakeholders doubt that a european way in sustainability reporting is effective given the international scope of activities that european companies are engaged in (e. g. drsc, 2021a). but, obviously, the eu commission’s initiative and the project of the ifrs foundation seem to move in different directions concerning the structure and priorities of the developed standards, which might induce considerable complexity and cost for european companies having to consider both developments in their reports factually (lanfermann et. al., 2021). furthermore, the csrd refers to mechanisms for assessing the equivalence of standards applied by third-country issuers. this is important with regard to the extended scope of the proposed reporting obligations as well as to exemptions applicable for european subsidiaries of third-country parent companies. unfortunately, the csrd again misses any further clarification. this might be due to the fact that the european sustainability reporting standards are also still under construction and, thus, an assessment of potentially equivalent other standards is difficult at the moment. for third-country issuers, however, this is an aspect of utmost importance (and corresponding time pressure). 2.5. disclosure concerning the way that sustainability reports are published, the csrd proposes to abolish the current nfrd’s option to either disclose information in the management commentary or as a separate (stand-alone) report. in order to improve the connectivity of 376 j. baumüller, s. o. grbenic financial and sustainability-related information, only a publication as part of the management commentary shall be possible. however, it is not specified whether this shall be made in the form of a separate chapter of the management commentary or even fully integrated into its various chapters. reflecting the current practice in many eu member countries showing a prevalence of separate non-financial reports (e. g. drsc, 2021b), this would imply the need for a fundamental change in the reporting practice having impact on the amount and the style of reporting of information as well as on the costs associated (ceps, 2020). conceptually, it introduces inconsistencies with the traditional focus of financial reporting in the management commentary – given the extended perspectives that have to be taken into consideration (müller et al., 2021). furthermore, the csrd requires companies to prepare their sustainability information in a single electronic reporting format (following the esef regulation). this is of fundamental importance to the plans of the eu commission to introduce the european single access point (esap) being announced in the capital markets union action plan. by this esap, a universal accessibility of the information generated by companies with regard to their financial and sustainability-related performance would be achieved (european commission, 2021c). this link is of high importance for financial market participants in order to fulfill their reporting requirements as mandated by the sfdr. 2.6. corporate governance ultimately, the csrd focuses on governance mechanisms within companies that underlie their sustainability reporting regime. specifically, it addresses both internal and external mechanisms. this focus refers to the criticism on the limited reliability of information published by companies. concerning internal governance mechanisms, the duties of the management and supervisory board are addressed. first, the responsibility statement of the management boards is extended to sustainability information. second, the responsibilities of the audit committee are also extended to the sustainability reporting of companies. with regard to the proposed new reporting requirements themselves, also the need to report on the role of the administrative, management and supervisory bodies for sustainability matters as well as on the link to the company’s strategies forces these boards to further engage in the relevant matters. concerning external governance mechanisms, the mandatory assurance of published sustainability reports is introduced. the company’s auditor shall be responsible to assess the compliance of the published sustainability reports along with the requirements of the csrd. specifically, the directive stresses four fields to focus the work on: (i) the compliance of the sustainability reporting with the european sustainability reporting standards developed by the efrag, (ii) the adequacy of the process of materiality analysis carried out, (iii) the compliance with the requirement to mark-up sustainability reporting in accordance with the esef regulation and (iv) the compliance with the reporting requirements of article 8 of the taxonomy regulation. besides the auditors of the financial statements published by the company, also other assurance providers – as specified by the csrd – can be mandated to perform these assessments. for the first three years, these assessments must be based on the level of “limited assurance”; subsequently, the eu commission is required to evaluate the provisions of the csrd and to consider the introduction of more extensive requirements with regard to moving from non-financial to sustainability reporting ... 377 “reasonable assurance” (european commission, 2021b, p. 12). the latter would reflect the demand formulated by many stakeholders in order to ensure equal levels of reliability for financial and sustainability-related information (e. g. ak europe, 2020). however, at least for the beginning, serious concerns about the robustness of established data collection processes and systems as well as the methodologies employed and capacities by assurance providers seem to have played a vital role for these proposals set forth by the csrd (e. g. accountancy europe, 2020). with regard to the provision of external assurance, the csrd contains several requirements, e. g. for professional training and education of the assurance providers and for securing their professional independence. furthermore, the application of the european enforcement regime on the published sustainability reports is explicitly stated. finally, detailed provisions for penalties applicable in the case of violations against the reporting obligations are also included in the directive. 3. discussion and implications for companies in and outside the european union the csrd represents one further step towards more explicit and extensive reporting requirements with regard to sustainability matters. by that, it ultimately abandons the idea of voluntary (reporting) practices or the sole reliance on market mechanisms to drive company reporting. this is obviously a reaction to the shortcomings of the current reporting regime under the nfrd – also in the light of the high time pressure given to achieve sustainable change in the global economy because of urgent issues such as climate change and its impact on mankind. however, this development also runs the risk of crowding out the sincere ambitions of many to contribute to this required sustainable change as well as of increasingly introducing a “tick-box mentality” to (european) sustainability reporting (adams & abhayawansa, 2021). furthermore, the detailed requirements of the future reporting regime aim at inducing change to company behavior, by distinguishing “right” from “wrong” in their actions at least in an implicit way. the question in how far a political body like the european commission has the legitimacy to act in such a prescriptive way remains open for further discussion. the reporting requirements of the csrd require an increased amount of information that has to be reported on the sustainability performance. beyond this reporting content, also the underlying reporting processes (e. g. for materiality analyses) and governance structures (e. g. with regard to the responsibilities of the boards) are addressed by the proposals. this will require additional efforts and considerable investments even from companies that already fall under the regime of the nfrd. although the csrd is still a draft version for the new standard and variations in the detailed reporting requirements are possible, companies seem well advised to take the proposed reporting requirements as the starting point for their preparations as soon as possible. even more challenges will be faced by companies that currently do not fall under the regime of the nfrd but will have to start with their preparations for publishing the first sustainability reports in accordance with the csrd in 2024. the fact that only in mid2022 the final version of the csrd is expected to be published and the transposition into national law is currently required by the end of the same year implies that the time for these companies for their preparation will be even shorter. based on the current proposal 378 j. baumüller, s. o. grbenic of the csrd, especially large european corporations that are currently not in the scope of the nfrd will face considerable challenges (hommelhoff, 2021). however, the first outlook on the future sustainability reporting standards that are developed by efrag also show that pressure on all companies as well as associated reporting costs will probably be high (dai, 2021). but also third-country issuers within the eu are well advised to pay immediate attention due to the perspective of being obliged to apply the requirements of the csrd. the mechanisms for assessing the equivalence of international or foreign frameworks will play an important role with regard to the extent to which these companies face additional costs and challenges by the csrd. the same relevance is given for companies from third countries that are not publicly traded on european regulated markets, but have (large) subsidiaries operating within the eu. but not only companies that fall under the regime of the csrd, both inside or outside of the eu, are affected by these changing reporting requirements. a mediate effect is to be expected due to the demand from the european capital markets for sustainability-related information. furthermore, since companies in its scope must report on the impacts along their value chain, they might require additional information from their business partners. as a consequence, virtually every company that engages in business activities within the eu should consider the possible impact of the proposed new reporting requirements on its own (legal or just factual) reporting obligations, processes and governance structures (kpmg, 2020). with regard to the further negotiations on the csrd and its practical acceptance inside and outside of the eu, its relation to the project by the ifrs foundation to publish its own set of sustainability reporting standards will be of high importance. for companies, the perspective of having to adhere to two different set of standards at the same time seems repelling because of assumably higher reporting compliance costs and the possible risk of increased complexity and confusion associated with parallel reporting practices. business representatives responded to this threat by increasing their pressure on the eu commission to follow the global developments aiming at establishing a “baseline” for sustainability reporting – which could imply that the ifrs foundation’s standards serve as the starting point for core reporting requirements around the world to which jurisdictions such as the eu add additional requirements given the specifics of their reporting environments and different political priorities (world economic forum, 2021). both from a conceptual perspective as with regard to the practical implications of the many initiatives on the field of sustainability reporting on a global level, this approach seems promising in order to arrive at a balance between ambitious regulations towards sustainable development and pragmatic needs from practice. however, so far the eu commission has hardly shown signs to step down from its high ambitions and to integrate its project into the broader scope of international developments on the field of sustainability standard-setting and current convergence initiatives. this underlines the political perspective of the current changes in the reporting landscape; given the momentum surrounding the ifrs foundation’s project and its increased relevance as further illustrated by the mergers of existing international standard setters with its newly established international sustainability standards board (issb) (ifrs foundation, 2021), the eu commission’s proposals face the considerable risk of lacking their relevance on a global scale and thus missing one of their main aims. moving from non-financial to sustainability reporting ... 379 4. conclusion via the csrd, the eu commission aims at improving the completeness, comparability and reliability of sustainability reports within the eu. furthermore, gaps in the relevant sustainability-related european regulations are closed – especially with regard to the sfdr and the taxonomy regulation. for that reason, the scope of companies that must apply the reporting regime as well as the elements of these reports are considerably increased. thus, it seems justified to call the proposals published on april 21, 2021, a major step forward in the field of corporate transparency. however, this development comes at a cost that are borne by european companies that must invest into their processes and structures in order to come up with improved reports. the impact of these changes on the corporate decision-making is the ultimate goal of the recent flood of regulations that address sustainability within the eu (e. g. european lab, 2021). still, specific points can be outlined that merit further consideration. many requirements of the csrd are still vague or raise important questions with regard to the alignment with existing (international or foreign) frameworks and standards. the high time pressure that is put on companies along with the uncertainties they currently face about the contents of both the final version of the csrd and the european sustainability reporting standards raise serious concerns. there seem to be good reasons for slowing down and reflecting the cost to benefit relation of the proposed regulation. however, the experiences from the past few years show that the eu commission is following its sustainability-related aims with considerable determination and might not pay enough attention to the needs of corporate practice. these developments are not only important within the eu but also for companies located in third countries. other jurisdictions are increasingly turning towards the eu commission’s initiative and try to come up with similar solutions (kpmg, 2020). but also the csrd extends its scope of application to these companies for the first time. consequently, there is a need for all these companies to analyse the impacts of the eu commission’s proposals on them and to deduct the need for appropriate reactions as soon as possible. the importance of sustainability per se and of 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(2021). primärrechtlich begründete mängel im csrd-vorschlag und deren beseitigung [primary law-based deficiencies in the csrd proposal and their elimination]. der betrieb, 74(42), 2437–2447. ifrs foundation (2021). ifrs foundation announces international sustainability standards board, consolidation with cdsb and vrf, and publication of prototype disclosure requirements. retrieved from: https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-withcdsb-vrf-publication-of-prototypes/. accessed on november 30, 2021. kpmg (2020). rbi: adoption of the indirect counter-proposal. retrieved from: https://home.kpmg/ch/de/blogs/home/ posts/2020/11/adoption-of-the-indirect-counterproposal.html. accessed on: june 26, 2021. lanfermann, g., schwedler, k., & schmotz, t. (2021). nachhaltigkeitsberichtsstandards im fokus der eugesetzgebung [sustainability reporting standards in the focus of the eu commission]. die wirtschaftsprüfung, 74(12), 762–767. mcguinness (2021). letter to jean-paul gauzès. retrieved from: https://www.efrag.org/assets/download?asseturl= /sites/webpublishing/siteassets/210512+commissioner+mcguinness+to+efrag+on+sustainability.pdf. accessed on: june 26, 2021. müller, s., scheid, o., & baumüller, j. (2021). kommissionsvorschlag zur corporate sustainability reporting directive: von der nichtfinanziellen berichterstattung zur nachhaltigkeitsberichterstattung [the eu commission’s proposal on the corporate sustainability reporting directive: from non-financial reporting to sustainability reporting]. betriebs-berater, 73(22), 1323–1327. sopp, k., & baumüller, j. 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(2021). prüfung von nachhaltigkeitsberichten nach dem entwurf einer „csr-richtlinie 2.0“: vergleichende analyse der reformmaßnahmen und kritische würdigung [audit of sustainability reports according to the draft of a "csr directive 2.0": comparative analysis of the reform measures and critical appraisal]. die wirtschaftsprüfung, 74(10), 613–620. world economic forum (2021). 60 organizations release open letter for eu to act on esg. retrieved from: https://www.weforum.org/agenda/2021/10/57-organizations-release-open-letter-for-eu-to-act-on-esg/. accessed on november 30, 2021. zülch, h., ottenstein, p., & schneider, a. (2021). the new corporate sustainability reporting directive (csrd) proposal – are german firms already compliant?. zeitschrift für internationale und kapitalmarktorientierte rechnungslegung, 21(7–8), 345–348. prelazak sa nefinansijskog na izveštavanje o održivosti: analiza predloga evropske komisije za direktivu o izveštavanju o korporativnoj održivosti (csrd) kako je ustanovljeno kroz nfrd (2014/95/eu), nefinansijsko izveštavanje postalo je ključni element ambicija evropske komisije da transformiše evropsku ekonomiju ka većoj održivosti. da bi odgovorila na povećane kritike koje ispunjavaju trenutne zahteve za izveštavanje, komisija eu je pokrenula razvoj novog seta evropskih standarda za izveštavanje o održivosti, nakon čega je izdala predlog nove direktive koja bi zamenila nfrd. ovaj rad analizira ove predloge u svetlu prethodnih zaključaka iz akademske zajednice i korporativne prakse, doprinoseći ex-ante proceni uticaja. kao rezultat toga, pokazuje da su poboljšanje kompletnosti, uporedivosti i pouzdanosti dva glavna cilja komisije eu. međutim, mnogi od novih predloženih zahteva su preterani i postavljaju fundamentalna pitanja u vezi sa prihvatljivim nivoima administrativnog opterećenja za kompanije, kao i neophodnim konceptualnim osnovama za okvir izveštavanja. ključne reči: nefinansijsko izveštavanje, izveštavanje o održivosti, održive finansije, nfrd (2014/95/eu); direktiva o društveno odgovornom poslovanju (2021/0104 (cod)) https://www.efrag.org/assets/download?asseturl=%2fsites%2fwebpublishing%2fsiteassets%2fefrag%2520ptf-nfrs_main_report.pdf https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/ https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/ https://home.kpmg/ch/de/blogs/home/posts/2020/11/adoption-of-the-indirect-counterproposal.html https://home.kpmg/ch/de/blogs/home/posts/2020/11/adoption-of-the-indirect-counterproposal.html https://www.efrag.org/assets/download?asseturl=/sites/webpublishing/siteassets/210512+commissioner+mcguinness+to+efrag+on+sustainability.pdf https://www.efrag.org/assets/download?asseturl=/sites/webpublishing/siteassets/210512+commissioner+mcguinness+to+efrag+on+sustainability.pdf https://integratedreporting.org/news/creating-value-managing-impact-through-integrated-sustainability-disclosure-event/ https://integratedreporting.org/news/creating-value-managing-impact-through-integrated-sustainability-disclosure-event/ https://www.weforum.org/agenda/2021/10/57-organizations-release-open-letter-for-eu-to-act-on-esg/ plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 18, no 5, 2021, pp. 457 470 https://doi.org/10.22190/fueo210702032k © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper the possibility of using distributed ledger technologies as payment infrastructure1 udc 004.738.5 zorana kostić1, nenad tomić2 1university of niš, faculty of mechanical engineering, niš, serbia 2university of kragujevac, faculty of economics, kragujevac, serbia orcid id: zorana kostić https://orcid.org/0000-0001-8974-3916 nenad tomić https://orcid.org/0000-0003-1565-3197 abstract. the internet of things represents a communication network that enables people to interact with things, machines and objects in the business and living environment. adding the ability to perform transactions to the information component leads to the creation of the so-called internet of value. modern payment processing mechanisms do not meet the needs of the internet of value. in order to achieve a fast and economical financial flow, it is necessary to overcome the fragmentation of traditional payment systems and adopt the organizational structure of the internet. the subject of the paper is the characteristics of three distributed ledger technologies. the aim of this paper is to determine the possibility of their use in order to build a payment infrastructure for the realization of the internet of value concept. although the issue of security of the new payment infrastructure is equally important, the paper will focus on three key performances of the observed distributed ledger technologies: costs, throughput and scalability. the qualitative analysis shows that none of the analyzed technologies in practice has adequate performance in terms of throughput and scalability. most operational solutions, even in experimental conditions, achieve poorer results than theoretically predicted ones. key words: internet of value, blockchain, hashgraph, tangle, distributed ledger technologies, internet of things, financial-technological integration jel classification: l17, o33 received july 02, 2021 / revised november 13, 2021 / accepted november 22, 2021 corresponding author: zorana kostić university of niš, faculty of mechanical engineering, aleksandra medvedeva 14, 18000 niš, serbia | e-mail: zorana.kostic@masfak.ni.ac.rs https://orcid.org/0000-0001-8974-3916 https://orcid.org/0000-0003-1565-3197 mailto:zorana.kostic@masfak.ni.ac.rs 458 z. kostić, n. tomić introduction the beginning of the 21st century was marked by the race of manufacturers to raise the clock speed of computer processors and graphics cards and increase the internet throughput. with the achievement of values that enabled the transfer of large amounts of data and its timely processing in application programs, the research focused on networking as many devices and learning given behaviors (tomić, 2020, p. 363). the new information revolution relies on three processes: the internet of things, the processing of large amounts of data, and machine learning. the internet of things means a communication network that enables people to interact with things, machines and objects in the business and living environment (tomić & todorović, 2017, p. 97). in order to be involved in communication, devices must be equipped with appropriate sensors and microprocessors for receiving and processing basic information, actuators used to take certain actions, a modem for connecting to the internet and software, which should enable data processing and, if possible, behavioral learning (gupta & gupta, 2020, p. 9). in this way, the internet of things represents the starting point of the information revolution, which provides inputs for processing large amounts of data and increases the need for machine learning. a large number of established connections and communications do not have to refer only to the distribution of information, but can also imply the execution of payment transactions. the internet of things would thus become the basis for decentralized initiation and execution of transactions. adding a financial component to the information would lead to the creation of the so-called internet of value (floros, 2019). the biggest obstacle to the operationalization of this concept is the rigidity of traditional payment operations. in order to fully use the potentials of the internet of things, it is necessary to build an adequate payment system. it should be borne in mind that the payment system would have to allow relatively fast finality of a large number of transactions, which would often belong to the category of micropayments. that is why the security and efficiency of the system are two key issues when designing a payment infrastructure for the internet of things. the subject of the paper will be the functional characteristics of three distributed ledger technologies (dltss). the aim of this paper is to determine the possibility of their use in order to build a payment infrastructure for the realization of the concept of the internet of value. the paper consists of three parts. the first part will explain the concept of the internet of value, identify its potentials for changing the way of doing business and life and determine the conditions for its implementation. in the second part of the paper, the technical characteristics of all three technologies will be analyzed individually: blockchain, tangle and hashgraph. a qualitative analysis against three criteria: costs, throughput and scalability, will be in the focus of the third part. a conclusion regarding the possibilities of using dlts for the construction of a new payment infrastructure will be made upon comparing their performances against desired values of these criteria. 1. financial-technological integration with the aim of creating the internet of value the internet of things represents a paradigm of information integration, in which devices and objects, which are passive in nature, become intelligent stakeholders, capable of collecting and distributing information (tiwary et al., 2018, p. 23). information sharing is the possibility of using distributed ledger technologies as payment infrastructure 459 not focused only on the people involved in certain processes, but the communication takes place on a m2m (man-to-machine or machine-to-machine) route. intelligent objects not only process information, but also have the ability to take certain action, in terms of giving answers or sending requests. given their ability to receive, process and transmit information, devices connected to the internet of things create a “smart work environment” or “smart home”. the end result of integrating devices into the internet of things should be the automation of routine activities in which the key source of error is the human factor. denisco (2017) lists manufacturing, transportation, medicine, power management, and consumer electronics as the five primary areas of application of the internet of things. basically, the internet of things does not require the implementation of payment solutions. the messages sent by the mentioned stakeholders do not have to be only of an informative nature, but they can initiate an action that involves making payment. this would give the devices, with the prior authorization of the owner, the opportunity to make purchases of the necessary products and services. internet of values is the key to permanent supply chains, whether they are households or industrial systems. smart home appliances would be able to order new stocks of consumer goods on time, the condition of which they can monitor. smart industrial systems would provide an additional tool for managing just-in-time supply chains, removing the human factor as the cause of temporary downtime in the production cycle. in a broader context, the internet of value refers not only to enabling devices to perform a transaction, but to networking all stakeholders into a global value exchange network. money transfer would be only one aspect of the exchange, because the same infrastructure could be used to exchange financial instruments and for smart contracts (finance monthly, 2018). in addition to the unique infrastructure, the key advantage of the internet of value should be the elimination of middleman and the reduction of exchange costs to a level close to zero (ripple, 2017). modern payment organization does not meet the needs of the internet of value. due to its manual nature, cash payments are not considered. non-cash payment system shows good throughput characteristics, which means that it is able to support the growing volume of transactions. however, the key drawback in this case is the cost of transactions and the issue of creating a digital identity of devices as payment initiators. due to the large number of middlemen (which, depending on the situation, may involve two to four institutions), noncash payment transactions produce certain costs, which are charged in the form of a commission. that is why such a way of organizing is inadequate for micropayments. in order to achieve a fast and economical financial flow, it is necessary to overcome the fragmentation of traditional payment systems and adopt the organizational structure of the internet. in other words, a payment system that would support the creation of the internet of value must enable the integration of traditional payment transactions, electronic payment systems such as digital wallets, electronic money and cryptocurrencies, through the construction of a completely new infrastructure (cheng, 2015). existing payment instruments could be replaced by completely new ones within this new infrastructure. the construction of a new payment infrastructure would redefine the number and role of middlemen in transactions, which would enable not only faster payment, but also lower costs. there is an immanent security problem for all electronic payment systems. therefore, ensuring the security of the new payment infrastructure would be one of the key issues. in addition, the new infrastructure must have satisfactory operational characteristics. in order to achieve the aim of the paper, the authors have formed a research question: do existing distributed ledger technologies have satisfactory operational characteristics? the 460 z. kostić, n. tomić analysis will include in particular cost, throughput and scalability. in the third part of the paper, a qualitative analysis will be performed in order to obtain the answer. a positive answer would mean that some or all of them can be used as the technological basis of the payment system for the internet of value. in case of a negative answer, the authors will explain their key operational shortcomings. 2. distributed ledger technologies distributed ledger technologies are considered to be one of the foundations of the fourth industrial revolution. the concept became known to the general public with the advent of bitcoin, the first cryptocurrency (nakamoto, 2008). although blockchain, as the best-known form of this technology, is often equated with cryptocurrency systems themselves, dlts are widely used in supply chain management, transportation, healthcare, and other industries. the basis of this technology is the general ledger, which records transactions between two parties, so that once entered ledgers cannot be subsequently changed (iansiti & lakhani, 2017). transactions are any instruction that lead to a change in the state of the system and do not have to refer only to payments. dlts are digitally stored data with consensus-based accuracy, mutually synchronized and shared independently of national borders, platforms used for its reading and writing, or institutions and organizations using it (walport, 2015, p. 5). there is no single system administrator or central database in which data is entered first (scardovi, 2016, п. 36). in addition to blockchain, tangle and hashgraph have been developed as alternative operational solutions to dlt. in the following parts, the key functional characteristics of all three technologies will be presented. 2.1. blockchain blockchain is the first operational form of dlt. it is designed to operate in an environment where there is no central institution to validate data and where participants do not trust each other (bamakan, motavali & bondarti, 2020). it consists of a series of blocks, in which the executed transactions are stored. the content of each subsequent block must be in accordance with the state to which the previously installed blocks have led. this means that entity x would not be able to spend in transaction q the funds it has already spent in previously accepted transaction p. if it tried, transaction q would be discarded and could not become part of the new block. the mechanism by which the authenticity of new transactions is verified and packed into blocks is called a consensus protocol (schneider, 1990). figure 1 shows a general way of connecting blocks of information. the block has two parts: a header and a body. in the block header, enter the ordinal number, then the timestamp, to determine the chronological order of the assembled blocks, hash of the previous block, the merkel tree root, which means that new transactions must be related to all previously entered, and hash of the new block. in the part that is marked as the body of the block, there are transactions that the miner wants to confirm. the blockchain is characterized by the division of roles among the participants. nodes are participants that have permission to execute transactions, i.e. to appear as payers and recipients of funds. miners are participants who pack transactions into blocks, validate them and add new blocks to the chain. the validation process itself involves the possibility of using distributed ledger technologies as payment infrastructure 461 reaching consensus among miners and can be more or less computer-intensive (ismail & materwala, 2019). the choice of consensus protocol depends on the type of blockchain system used. fig. 1 basic layout of connected blocks in a blockchain source: zhu, zheng & liv (2018) the basic classification of blockchain systems is into public and private. with public blockchains, there is no strict division of roles, so one participant can only be a node or a miner if able to meet the criteria that are most often technical (lin & liao, 2017). with private blockchains, there is a clear division of roles. a small number of pre-identified participants, who often form a consortium related to a business process regulated by a blockchain, may play the role of a miner (wang et al., 2019). depending on the design of the system, the role of nodes can either be publicly available, or obtained under certain criteria. private blockchain systems are intended for business applications with a finite number of participants, which are often known in advance. to create a payment infrastructure, it is necessary that the role of nodes be publicly available to all interested participants, while the role of miners can be reserved for known participants. blockchain is already used in the construction of the payment infrastructure of a large number of cryptocurrencies. it has long been believed that cryptocurrencies will become not only decentralized electronic money, free of political influence, but also a means of micropayments, inherent in the internet of things. however, the reality is that cryptocurrencies are currently applicable as instruments of speculative investment. one of the reasons is the frequent and sudden change in the price of leading cryptocurrencies. another reason is the performance of the consensus protocol. all protocols intended for public blockchain systems have problems with scalability, although there are marked differences in this group (tomić, todorović & jakšić, 2021). furthermore, miners in all protocols of this group must bear relatively high financial investments (with significant differences in terms of the amount of investment). as a result, all protocols imply the existence of some form of financial reward for assembling the block, which makes the system expensive and unsuitable for micropayments. the problem of protocols intended for private blockchain systems is insufficient application in the field of cryptocurrencies. theoretically, this group of protocols shows higher scalability and lower cost of the system itself (tomić, 2021). examples on which that can 462 z. kostić, n. tomić be determined are not representative, due to the very low use of cryptocurrencies based on them. in practice, the most widely used protocol is known as proof-of-work (pow). it is at the same time the most unfavorable protocol in terms of performance, due to high initial investments, high energy load of the system and poor scalability. 2.2. tangle the first noticeable difference between tangle and blockchain is that transactions are not packed in blocks, but are entered independently in the public ledger. although both blockchain and tangle rely on the mathematical concept of directed acyclic graph (dag), blockchain has only one path (from the previous to the next block), while tangle represents a more complex network, in which transactions are not linearly related to each other, but involve branching. when entering each new transaction, the two previously entered ones must be validated so the initiator guarantees that they do not lead to double spending (makhdoom et al. 2019, p. 259). in this way, tangle technology brings the validation of transactions closer. all participants in the network are equal, without division of roles into initiators and miners (safraz et al. 2019, p. 361). the appearance of a hypothetical tangle network can be seen in figure 2. fig. 2 hypothetical appearance of a tangle transaction network source: popov, saa & finardi (2019, p. 162) at the left end of the picture is the initial transaction, while the light squares mark all subsequent transactions that have been validated (in terminology they are marked as vertices). the directional arrows indicate which two transactions each new transaction selected as a reference when entering. gray squares indicate new transactions that have been entered but have not yet been validated (in terminology, they are referred to as tips). the best outcome for the whole system would be that each initiator when entering a new transaction chooses tips for reference. however, in practice, the initiator does not know whether the transaction they take for reference has already been validated by other initiators. therefore, figure 2 shows that certain transactions are references for only the next one, while other references are for as many as the next four. in practice, markov chain monte carlo (mcmc) simulation is used to select reference transactions. after the selection, the initiator must check that the transactions do not represent a double spending of funds. they then perform an abbreviated form of the pow algorithm, which is simpler the possibility of using distributed ledger technologies as payment infrastructure 463 than that applied to bitcoin and other cryptocurrencies. it is necessary to find the appropriate nonce, whose hash fits with certain data in reference transactions (popov, 2015, p. 3). because it is simpler, pow consumes less energy and lasts shorter than cryptocurrencies. after all this, the new transaction becomes part of the network, but remains a tip. in order for a transaction to become a vertice, its “weight” needs to exceed the previously determined limit. the weight is proportional to the work invested in validating it. the total weight is the sum of the weight of the transaction itself and the weight of all transactions that directly or indirectly validate it (silvano & marcelino, 2020, p. 309). thanks to mcmc simulation, those branches of the network that have a higher total weight are more likely to be selected to add new transactions, while the rest of the network is abandoned. in this way, the system is protected from the possibility of hiding certain transactions in a cut-off part of the network, which would enable double spending. tangle technology was designed as an infrastructure for iota cryptocurrency in 2015. as the name of the cryptocurrency itself suggests, its primary goal is to be used in the internet of things ecosystem. the absence of specialized miners allows the iota system to function without commissions, which makes it cheaper compared to competing cryptocurrency systems. the absence of commissions makes iota a good choice for micropayments, which will account for a significant share of total payments in the internet of things ecosystem (jiang et al. 2019, p. 2). the biggest potential disadvantage of tangle is considered to be the lack of implementation of smart contracts. 2.3. hashgraph hashgraph is a variant of dag, developed in 2016 by swirld (baird, 2016). the basic idea was to bring technology closer to the way people communicate and t ransmit information to each other. nodes in hashgraph often communicate, choosing a partner at random. during communication, they share information about new transactions initiated by them, but also about transactions initiated by other nodes. in that way, each node can check whether it is up to date with the latest events on the network, i.e. whether there is data on the last performed transactions. if it turns out that the node already knows everything it learns when communicating with the partner, it means that its information is equal to or better than the information of the partner. if it turns out that during the communication it received information about new transactions that it did not know, the node adjusts its database to new knowledge. the goal is for all nodes to be as well informed as possible thanks to frequent mutual communications (sharma et al. 2020, str. 342-343). the principle of information exchange is based on the same principle on which gossip is transmitted between people. during communication, the node tells the partner what it has done since the previous communication, but also what it has learned about other nodes during communication with them. that is why the way of determining the order and validity of transactions with a hashgraph is called “gossip about gossip”. a hypothetical network of hashgraphs can be seen in figure 3. nodes are marked with a-e, while vertices denote events, which represent the process of information exchange. for example, bob contacts ed, where everyone exchanges information about known transactions. dave and carol do it at the same time. after that, ed contacts carol, conveys the information he had and the information he learned from bob in the previous event. carol contacts bob at about the same time, passing on the information she had and the information she learned from dave in the previous event. if there are no new transactions in the meantime, all four nodes – bob, carol, dave and ed – 464 z. kostić, n. tomić have exactly the same information. in the next step, bob contacts alice, so she also gets all the information that bob previously possessed. fig. 3 hypothetical appearance of a network of events in a hashgraph source: baird (2016) the event consists of four components: a timestamp, which serves to establish a chronological order, transaction lists, hash of parents of the event, and transaction lists (hassija, saxena & chamola, 2020, p. 54). the time of occurrence of the event is not the timestamp indicated by the initiator of the transaction, but the medial timestamp, which is determined based on the moment of receipt at all involved nodes. this prevents the initiator from falsifying the origin of the transaction and moving it chronologically earlier. another consequence of this feature is that of the two transactions that occurred at the same time, the one about which gossip was distributed faster will be positioned chronologically earlier. hash values represent the records of the last event for each of the included nodes. achieving consensus, i.e. validation of transactions, is done by the so-called virtual voting. since all nodes have a copy of the same record of transactions, it can be assumed that each of them would declare to vote. therefore, it is not necessary for the nodes to really vote, because based on the same information and the same sequence of events, they will always adopt the same list of transactions (kaur & gandhi, 2020, p. 393). since the votes are not really sent, there is no burden on the network by sending messages, nor waiting for all nodes to declare themselves, so the decision is made immediately. the hashgraph provides network security in accordance with the principle of asynchronous federated byzantine agreement (afba), which leads to a positive outcome in the case when less than n/3 nodes are malicious, where n is the total number of nodes (graczyk, 2018). even in the event that malicious nodes virtually vote for the list of fraudulent transactions, in the following events, a fair majority will convince them that there is another list of true transactions. the possibility of using distributed ledger technologies as payment infrastructure 465 3. comparative analysis of distributed ledger technologies the key operational performances of the payment systems are costs, throughput and scalability. in other words, the payment system must have an acceptable price of functioning, because the costs are passed on to the users of the system in the form of commissions. an ideal payment system would allow financial flow with costs close to zero. then, the payment system must allow the flow of a large number of transactions per unit of time, thus demonstrating its applicability in global payments. finally, the system must be scalable, i.e. its key characteristics (including throughput and cost) must not change drastically with the increase in the number of participants (laudon & traver, 2008). systems that do not show good results according to the stated criteria can lead to a slowdown in the economic activity they need to service. blockchain is a pioneering endeavor in the field of dlt. its qualities come to the fore when creating closed decentralized platforms, because it enables distributed input of new data and immutability of already entered ones (schueffel, 2017). it is the dominant technical basis for creating cryptocurrencies. despite that, blockchain does not show good characteristics as a payment infrastructure. the main problems of pow as the most common algorithm for reaching consensus are low throughput and low scalability. low throughput leads to the accumulation of outstanding transactions, so payers have to offer more commissions for new transactions, in order to be built into the block across the line. poor scalability is observed during a sharp increase in the number of miners who are actively working on assembling blocks. as the algorithm adapts to the total computing power, this means that as the number of miners increases, it will be relatively more difficult to find an appropriate solution to the cryptographic puzzle. since the number of assembled blocks does not change, the reward that miners receive will not change either. this means that the entire system will operate at a loss, because the same reward will be shared with a larger number of miners, who consume more energy and invest more computing power. both negative characteristics affect the increase in the price of an individual transaction. the final conclusion is that blockchain systems are as expensive as the technical infrastructure for the payment system of the future. such a conclusion may seem contradictory at first glance, with the conclusion that almost all cryptocurrencies are based on them. it should be borne in mind that the most popular cryptocurrencies function as investment instruments and not as electronic money. their value fluctuates too often with pronounced amplitudes, making them unsuitable for measuring the value of other goods (ammous, 2018). consequently, cryptocurrencies actually record many times fewer transactions than they would realize if actually used for payments. despite this, most cryptocurrencies are already facing a backlog of transactions. the exception is ripple, the cryptocurrency that uses the fba protocol to reach consensus, which is intended for closed blockchain systems. this protocol enables the execution of many times more transactions per second compared to the protocols for public blockchain systems (tomić, 2021). the company that issued ripple is currently aiming to build a single payment system, which would enable the interoperability of the various payment systems that exist today. when it comes to the cryptocurrency itself, theoretically its throughput is up to 10,000 transactions per second, although the experiment yielded two and a half times lower value (mccaleb, 2017). the problem is that these values are not achieved in practice over a long period of time, as well as the high volatility of values. tangle currently represents the technical basis of a small number of cryptocurrencies, of which iota and nano should be singled out. the advantage of tangle is the reduction 466 z. kostić, n. tomić of transaction costs by eliminating the division of participants into nodes and miners. also, it is possible to speed up the validation of executed transactions at the very moments when the system suffers the most pressure (divya & biradar, 2018). therefore, the throughput of iota and nano is higher than that of the most commonly used cryptocurrencies and can be compared to the values shown by ripple. the advantage that these currencies have is that transactions are not packed in blocks, so the waiting time for validation of the transaction is shorter. while most systems suffer from the problem of scalability with the growth of the number of participants and executed processes, the situation is reversed with tangle – the greater danger is the absence of participants and a small number of transactions, because it raises the time required to execute an individual transaction. the main problem is that neither iota nor nano are in the group of large cryptocurrencies. this does not mean that they have not yet been tested at the level of workload they would suffer with the number of users who have ether or bitcoin. at the beginning of march 2021, bitcoin had a market capitalization of over 930 billion us dollars, iota about 3.7 billion, and nano only 0.7 billion us dollars (coinmarketcap.com). low capitalization was accompanied by lower trading volume. two conclusions can be drawn: first, iota and nano did not have the opportunity to show real limitations in throughput and scalability, and second, as less attractive in trade, they were partially spared the attacks suffered by systems of more popular cryptocurrencies. despite this fact, iota suffered a serious attack at the beginning of 2020, which stopped the operation of the system for several days (osbnorne, 2020). a major drawback in the case of the widespread use of tangle-based cryptocurrencies may be the use of the pow protocol when validating transactions. regardless of the fact that the cryptographic puzzle is simpler than with the blockchain, there is certainly a strain on the computer’s processor and power consumption. therefore, it can be concluded that transaction costs still exist, only they are expressed indirectly, through energy consumption, and not directly through commission (fernandes, 2018). hashgraph in theory offers the highest throughput of the observed technologies (it is estimated that there could be hundreds of thousands of transactions per second). another advantage is that the hashgraph alone ensures that all transactions are viewed chronologically and executed in that order. since the system is closed, swirld’s primary goal was not to create a new cryptocurrency, but to build dedicated business applications for customers. the hedera hashgraph is the first open platform based on that technology, which in 2019 issued the hbar token. the market capitalization of one hbar coin at the beginning of july 2021 was about 1.62 billion us dollars, with a price of about 0.18 dollars per coin. the small significance that the hbar token has in the cryptocurrency ecosystem does not provide an opportunity to validate the theoretically predicted high throughput values in practice. conclusion the use of dlt in the development of payment systems has two trends. the first shows that a dominant number of cryptocurrencies are being developed on the technological basis of blockchain, with pow as a consensus protocol. the vast majority of cryptocurrencies have a negligibly small application in payments, so the problems of low throughput and scalability do not interfere with their work. it can be said that all decentralized cryptocurrencies are used only as speculative investment instruments. the possibility of using distributed ledger technologies as payment infrastructure 467 in contrast, there is a trend of gradual centralization in dlt-based payment systems. the first venture in this direction came from ripple, which proposed the development of cryptocurrency, but also an inter-institutional payment system, in which cross-border payments would be made faster and cheaper with the use of cryptocurrency as a means of currency conversion. technology giant facebook announced in june 2019 the creation of a new centralized stablecoin, libra, which should be supported by a large consortium of companies from various sectors. the covid-19 pandemic slowed down the implementation of this system, but the project is still active. hashgraph technology fits into this trend, and can be used to create a closed system in which payment institutions communicate with each other and harmonize transaction lists. however, due to the equalization of nodes and miners, the tangle could not be the basis for the creation of a centralized system. the paper provides sufficient evidence to answer the formulated research question. none of the analyzed technologies has shown in practice that it has adequate performance in terms of throughput and scalability. most operational solutions have shown that even in experimental conditions they achieve poorer results than theoretically predicted ones. in addition, almost all operational solutions are burdened with high costs, whether they are expressed directly, through commissions, or burden users indirectly, through electricity costs. most systems have suffered a number of serious attacks in the past that have resulted in financial losses for some participants. although security was not the criterion of analysis, the fact that in order to achieve adequate security, the payment system of the internet of value should be centralized cannot be ignored. payment operations have always functioned on the principle of centralization. in this regard, the demand for complete repression of middlemen from the new payment infrastructure is not realistic. the paper can contribute by providing key guidelines for building new systems and modifying existing ones in order to transform payment transactions. the internet-of-value-based payment system may require high throughput and low costs, but it can by no means be fully open and decentralized. the paper shows that the elimination of middlemen does not necessarily lead to a reduction in transaction costs, but opens up greater opportunities for abuse. the key limitation of the paper is the lack of security analysis of these technologies. although it is stated that the systems based on them suffered attacks from third parties, there was no analysis of the built-in protection mechanisms. it should be borne in mind that it is not possible to ensure the security of a system that does not bring costs, but it is only a question of how the costs will be distributed. if decentralized systems are insisted upon, consensus protocols will create lower or higher costs for participants. if security is entrusted to a centralized institution, or a consortium of a smaller number of participants, other users will have to pay for that security through commissions. subsequent research on this topic should be conducted periodically, in line with the progress of technological advances. only blockchain has been more than a decade old at the time of writing, while the other two technologies are still so new that they have not been adequately tested in practice. within a few years, modifications may occur, which would bring some of the observed technologies closer to the possibility of being the technological basis of the payment infrastructure of the internet of value. at the same time, the number of networked devices in the internet of things will increase, which may change the perspective of looking at the problem of integration with the payment system. 468 z. kostić, n. tomić acknowledgement: this research was financially supported by the ministry of education, science and 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(2018). anonymous voting scheme for boardroom with blockchain. international journal of performability engineering, 14(10), 2414-2422. https://doi.org/10.23940/ijpe.18.10.p17.24142422 mogućnost korišćenja distributivnih ledger tehnologija kao infrastrukture plaćanja internet stvari označava komunikacionu mrežu koja omogućava interakciju ljudi sa predmetima, mašinama i objektima iz poslovnog i životnog okruženja. dodavanje mogućnosti izvođenja transakcija informacionoj komponenti, vodi stvaranju tzv. interneta vrednosti. savremena organizacija platnog prometa nikako ne odgovara potrebama interneta vrednosti. da bi se postigao brz i ekonomičan protok finansijskih sredstava, potrebno je prevazići fragmentiranost tradicionalnih platnih sistema i usvojiti organizacionu strukturu interneta. predmet rada su karakteristike tri tehnologije za decentralizovano upravljanje bazama podataka. cilj rada je da se utvrdi mogućnost njihove upotrebe u cilju izgradnje platne infrastrukture za realizaciju 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330.341.1:334.012.63/.64 david jovović university of kosovska mitrovica, faculty of agriculture, kosovska mitrovica, serbia abstract. the paper discusses characteristics of the model of open innovations as an inseparable part of operations of contemporary enterprises and their influence on the development of small and medium-sized business. it starts from the viewpoint that small and medium-sized enterprises make great efforts to use their potentials for growth and development in the best possible way by using the model of open innovations. these efforts involve reliance to own innovation activities and use of external sources of innovations, i.e. the sources which promote the chain of values through external commercialisation of the right to intellectual property at their disposal, as well as commercialisation of the knowledge and innovations of others. these business entities have certain advantages in the innovation process which make them a suitable partner for network connectivity, since they are less bureaucratically organised and often have a pronounced motive to be more successful than large enterprises. key words: knowledge, innovations, concept of open innovations, small and mediumsized enterprises jel classification: o30 introduction in economic theory, the phenomenon of innovations has received great attention for the last twenty years. this is understandable when it is known that the capability of innovation predominantly determines possibilities of growth and development of enterprises and economy as a whole. only those economies with a great number of enterprises which efficiently received august 28, 2017 / accepted october 16, 2017 corresponding author: david jovović university of kosovska mitrovica, faculty of agriculture, serbia e-mail: jovovicdavid1@gmail.com 346 d. jovović commercially transform knowledge into innovations can provide high employment rate and income of the population, thus creating conditions for future sustainable economic growth. traditional model of business activity of an enterprise which functioned until the end of the twentieth century implied a model of closed innovations. the innovation activities of an enterprise were determined by the knowledge and technology at their disposal. the enterprises were not extremely interested in changing their successful business model and the established relations with their customers (greenhalgh & rogers, 2011). the enterprises tried to optimise the time of promotion of new products, which would provide new values for customers and creation of competitive advantages on the market (mroczkowski, 2012). the advanced development of science and technology, mass use of increasingly powerful information and communication technologies and the internet, the availability of the large amount of information and knowledge, the change of structure and mobility of labour, market globalization, changes of habits, needs and wishes of customers, as well as a whole series of events directly or indirectly conditioned by globalization led to gradual obsolescence of the closed business model, and hence the concept of closed innovations in the last decade of the previous century. according to a more comprehensive explanation, business model is a system which shows how an enterprise selects its customers, defines and adjusts its activities, classifies jobs that should be done in and out of the enterprise, optimises its resources, comes on the market, creates products and services for its customers and makes profit (pourdehnad, 2007). the open business model supports and improves cooperation with the environment, exchange of ideas, knowledge, means and technologies, intensifies innovative activities of an enterprise and better satisfies the needs of customers (rahman & ramos, 2011). the model of open innovations (oi) was developed in order to enable an enterprise to respond to current demands related to innovation activities, development of new products, services, and markets, new methods of satisfying customers, protection and use of intellectual property. the model respects the necessity of mutual connection and cooperation between various enterprises in order to decrease potential risks and expenses of not only innovative activities but also entire business on the one hand, and on the other hand increase the efficiency of innovation process at the same time (rahman & ramos, 2011). besides numerous influences on the development of business in this century, the affirmation of the oi model significantly contributed to the promotion of a great number of new small and medium-sized enterprises (smes) which, thanks to joining ideas and necessary resources became an increasingly respectable segment of world economy. for example, the contribution of smes in the non-financial business sector is considerable in the eu. smes make up 99.8% of all enterprises, 57.4% of value added, and 66.8 % of employment. in 2015 just under 23 million smes in the non-financial business sector generated €3.9 trillion of value added and employed 90 million people (annual report on european smes 2015 /2016, p. 3). with their flexibility and speed of reaction, smes reduce the time necessary for a new product to be developed and offered on the market. new model of business activity involves not only competitiveness between various enterprises, but also cooperation through diverse forms of strategic partnership, as well as creation of other more or less formalised forms of business cooperation. the establishment of cooperation on other bases is especially significant in the domain of innovations where the knowledge transfer has become fundamental for successful innovation process. model of open innovations and small and medium-sized enterprises svelepment 347 both developed and developing economies focus on innovations, thus competing globally for talents, resources and market shares. information trends and networks are spread over borders in the processes that were inconceivable before the development of the internet, such as global introduction of mobile telephony and social networks and rapidly increased access to the internet. business models are redefined, jobs are redesigned and the number of smes increases (oecd, 2010). smes are a driving force of contemporary economies due to the contribution which is reflected in technological innovations, employment, increase of export, dynamics of competition, etc. the capabilities of smes for innovations are of great significance because innovations provide competitive advantage to the enterprise, its branch of activity and economy as a whole. new and existing innovative smes contribute to the increase of productivity and competitiveness of economy, thus ousting the enterprises with lower productivity. innovation is a powerful means for new smes to successfully come on the market and change current situation, while allowing the existing enterprises to maintain or improve their position on the market thanks to improving their innovativeness. innovative smes participate in the knowledge transfer within the innovation systems, less as passive knowledge users and increasingly as the significant source of knowledge. bearing in mind the previously explicated statements, the aim of the paper is defined as an attempt to explain closer basic characteristics of the oi model and especially its significance for the development of sme sector. besides the introductory comments, conclusion and the literature references, the structure of the paper includes three sections. the first discusses the commercialised knowledge of innovations as a driver of economic development and specific source of dominance in contemporary conditions of manufacturing. the second explicates the logic of the oi model with special reference to commercialisation of knowledge in innovations often created outside of an enterprise. finally, the third section investigates the advantages and limitations of the application of the oi model in smes. 1. the commercialized knowledge of innovations initiates development and becomes the foundation of economic power throughout a major part of human history the management of territories and property over natural resources was the symbol of power and wealth of some countries. this began to change after the industrial revolution at the end of the eighteenth century. with each stage of technological development, the importance of knowledge increased in comparison to physical production factors (mroczkowski, 2012). nowadays, small countries without natural resources can have enormous economic potential, primarily thanks to their capability to commercialise knowledge of innovations. in last decades, mutually dependent and connected, radical technological innovations led to basic changes of economic structures and change of position of certain countries on the list of the most developed counties in the world (cvetanović et al., 2012). at the turn of the twentieth century it was traditionally considered that the research at universities or by independent researchers should be outsourced by industry (haules, 1999). even for pharmaceutical industry, which, at the time, dominated over commercial valorisation of knowledge this was the most favourable method to conduct scientific 348 d. jovović research until the first world war. it was in the years between the two wars that the activities of research and development (r&d) gained affirmation within leading companies in industrially superior countries such as the usa, germany and great britain (mroczkowski, 2012). the closed model of innovations functioned relatively well for some time. however, the competition in discovering optimum innovation processes especially intensified in the second half of the past century (rotwhel, 1992). many authors think that the period from 1950s until the end of the twentieth century includes five generations of innovations. each of those generations was meant to improve or continue the previous model (trott, 2002). the innovations of the first generation were predominant in the nineteen fifties and sixties. they were based on the idea of r&d within a company as a key source of new technological solutions. innovative solutions were a direct result of commercialisation of scientific discoveries which were made at enterprises. the model absolutely neglected customer and market needs as drivers of innovative activities in an enterprise. in the nineteen sixties the second generation of innovations was promoted. this was also an innovation process with the linear trend but based on demands, i.e. unsatisfied market needs. the idea which initiated the third generation of innovations was feedback. communication and feedback together connected science and technology with market demands. the task of innovation process management primarily included promotion of integration within the sector of research and development, related to sales and market research. the fourth generation of innovations was a result of increasing competitiveness between enterprises. time became a significant factor of competitiveness, as well as the capability of an enterprise to provide quality standards and elicit ideas for improvement of innovativeness from customers and suppliers. at the same time, the enterprises realised that integration in r&d domain was a significant presumption of their technological and economic progress. the fifth generation started in 1990s. it differed from the previous ones in its simultaneous occurrence, not following the foregoing generation. it arose in the period of significantly higher risks as a result of the increasing economic globalization. due to the nature of such environment, enterprises had to maintain high levels of flexibility and responsibility. with the help of open business models, enterprises can create significantly more ideas and include them in the process of creation of added value with external environment by using various methods. the knowledge that is transferred to other business partners on commercial basis provides enterprises with efficient use of own knowledge in the situations when they believe they cannot commercialise it (chesbrough, 2007). out of five models, the first four belong to the category of closed innovations, since they are all characterised by the fact that the enterprise realises the activities of innovation process within the framework of own resources, while the fifth model is represented by oi (chesbrough, 2006). naturally, the mentioned generations of innovation process cannot be treated as final. on the contrary, “with great amount of confidence it can be stated that creativity and innovativeness are going to be most appreciated as both personal and group identifiers and the most reliable „ticket for future‟ to each upcoming inhabitant of this model of open innovations and small and medium-sized enterprises svelepment 349 only planet. therefore, future analysts of these issues will certainly speak about the sixth, seventh, eighth and who knows which generation of innovations” (pоkrаjаc, 2010). the network model is in fact a kind of open innovation because it relies on externalisation in order to complete the activities necessary for the continuation of an innovative process. “the networks that exist between various enterprises are the means by which they join or exchange procedures and work together on the development of new ideas and abilities. the cooperation between enterprises in the domain of innovations can include the scope of tasks from the simplest (joint purchase of necessary inputs) to the most complex (cooperation in research and development activities) in the overall process of development and commercialisation of innovations. in cooperation it is possible to decrease risks and expenses, while at the same time increase the effects of development of innovations, hence it is often connected with their successful commercialisation. the level of cooperation depends on harmonisation of the available means, capabilities and business strategies of partners, which is reflected in transparency of the mutually set aims and abilities of the involved enterprises to fulfil them” (cvijić et al., 2013). the twenty-first century has brought enormous growth of economies led by innovations. new forms of competitiveness have begun to completely reshape the market of knowledge and innovations into global market which develops some new tendencies. the increasing expenses of r&d in public and private sectors lead to the increase of knowledge offer, i.e. the production of knowledge has become global industry. in turn, global competitiveness, especially in the sector of new technologies continues to increase the demand for knowledge. in fact, enterprises have entered global race for marketattractive innovations in the branches such as energetics, bio-pharmacy, new materials, and electronics. multitude of institutions are involved in this competition at various locations where new knowledge is being created. this wide circle includes private enterprises, consulting sectors, state laboratories and numerous universities. all those organisations compete to find the fastest and most efficient routes to new knowledge – the knowledge that may be transformed in new or better products and services for the customers worldwide (narayanan, 2001).in short, new ideas transformed into innovations are a key premise of economic success at all levels. bearing this fact in mind, a theoretician of economy of knowledge, paul romer (2007) brilliantly noticed that the socalled meta-ideas were the most important for economic and social progress in this century. according to romer, meta-ideas are related to how to support the production and exchange of other ideas. pointing to the fact that the british invented patents and copyright in the seventeenth century, while citizens in the usa designed research at universities and practically first applied many significant innovations in the agriculture in the nineteenth century, and initiated rapid development of new models of research in the twentieth century, romer comments that designing the institutions which will provide higher level of r&d activities in private sector is a challenge for industrial countries in this century. globally networked innovation is exactly such a meta-idea for the twentyfirst century. therefore, innovativeness is becoming a priority in the actions of an enterprise. “every enterprise should consider how to change its position from „competitiveness for existence‟ to „competitiveness for achieving preferential position‟ thanks to defining future innovative value which involves new business, economic and social-cultural models” (lalić et al., 2012, p. 238). the model of oi is undoubtedly a significant instrumentation on this pathway. 350 d. jovović 2. the open innovation model the oi model provides the growth of innovativeness due to the fact that it integrates creative potentials of a large number of people. good ideas and inventions come from various, unexpected locations, not only from research laboratories, but also from other organisational units, from customers, suppliers, joint ventures, even from the public (smith, 2006). the oi model is an integral part of contemporary business model of an enterprise. the concept has vitally changed a predominant model of designing innovations in this century. chesbrough (2006, p. 1) defines the oi model as utilisation of meaningful influx and drain of knowledge in order to advance internal innovations and their market extension based on external innovations. a number of analysts go a step further considering the oi model more complex than mere use of external ideas and technology. in their opinion it is the change of model of utilisation, management, employment and creation of intellectual property (west & gallagher, 2006, p. 351). the initiating idea of the oi model is a strategy of business enterprises based on commercialisation of knowledge of innovations, created often outside the organisation. enterprises have to be capable of using both internal and external innovations in a profitable way (afuah, 2003). due to the fact that a great number of innovations are in an enormous network of inventors, these abilities of enterprises are mostly in the function of successful management over partnerships and network transactions (cvetanović, 2011). the oi model assumes that enterprises can and should use not only internal ideas and knowledge, but also external ideas and knowledge together with external and internal means for commercialisation of ideas and knowledge on the market. many tools which are applied in the concept of oi (e.g. licensing, joint agreements on research and development, business angels, venture capital, “spin-off”, etc.) appeared long before the model was realised in theory and practice, and they completely fitted in this model. in the oi model, the innovation has to be adjusted to global environment. it has to enable internal or external knowledge transfer and include all stages of development (rahman & ramos, 2011, p. 471). the oi model develops in globalized environment where knowledge becomes widely available thanks to connections (primarily through the internet), and where individual enterprises (smes above all) do not have enough resources to independently realize necessary r&d activities, but can instead cooperate, purchase, hire or license processes or inventions (such as patents, intellectual property etc.) to other enterprises, organisations or institutions (laboratories, institutes, etc.). also, internal inventions which are a result of innovation activity of an enterprise but cannot be well commercialised on the market (changed strategy of business, or lack of resources for commercialisation) can be sold to other enterprises (e.g. through licensing, joint ventures, spin off, etc.), and thus generate additional income. the oi model implies that enterprises can and should use external ideas, knowledge and technologies equally as internal, together with internal and external methods for commercialisation of innovation results on the market. in the oi model enterprises can continue to initiate and maintain innovations within an enterprise, while at the same time they can rely on alternative ways to present their ideas on the market and benefit from external knowledge. in the io model it is clearly seen how input and output routes of knowledge transparently transform into economic value and how rapid development of a model of open innovations and small and medium-sized enterprises svelepment 351 product and marketing create ideas which lead to development in the chain of values (vanhaverbeke, 2006). numerous factors have led to the development and application of the oi model. obviously, technological intensity of production has increased in many branches, thus even the enterprises with respectable r&d sector are not able or are not ready to rely only on own technological development (gassmann, 2006, p. 224). the innovation process becomes increasingly complex, whereby a great number of complex scientific problems demand interdisciplinary approach to research which, as a rule, results in great expenses and more pronounced risks in the process of innovation (howells et al., 2003, p. 398). thus it happened that the enterprises which are not competent enough in certain domains entrust other organisations or enterprises with the research, whereby still develop technological knowledge on their own in the domains that are most significant for them (the so-called hard technological core). contemporary enterprises need not have the latest or best knowledge at their disposal in order to succeed in the present conditions. the key of success is to combine the internal, already available knowledge well-timed with the available external knowledge and by using thus created knowledge, find new innovative solutions and gain benefits on the market. if open enterprises want the external knowledge and information to be beneficial and contribute to their better functioning, it is necessary to build own innovation capacity, i.e. to investigate the possibilities of creation of new knowledge within the enterprise. when they get new external knowledge it is important to properly adopt itand combine with the existing knowledge at the enterprise. external knowledge does not have any utility value for an enterprise if it is not integrated and combined with the internal knowledge. the quality of thus obtained network of internal and external knowledge determines the quality and efficiency of innovation process, i.e. innovation potential of an enterprise (cvijić et al., 2012, p. 76). this means that enterprises have to be ready for establishing strategically significant connections with other enterprises that have knowledge, skills and experience, necessary for further successful development of innovation process. the possibilities for enterprise to get significant ideas, knowledge and technologies externally is conditioned by the capability and availability of external suppliers, i.e. development and quality of external basis of innovation knowledge. the existence of available suppliers who can offer suitable quality (which often exceeds the quality which the enterprise can internally achieve) makes possible for enterprises to entrust certain functions in the chain of value to other enterprises, thus enabling them to concentrate only on those values in the chain which are the most beneficial for them, or which can be better realised in comparison to other enterprises on the market. due to mobility on the labour market the employees can leave their enterprises and go to other or found their own enterprises which they can finance independently or as a joint venture. the risk that the labourers who leave the enterprise simply take along key elements of the innovation process which was previously developed in an enterprise is real. it means that other (often competitive) enterprises can thus gain significant, previously developed innovation knowledge (west & gallagher, 2006, p. 319). the increasing private investment creates considerable risks for the enterprises which largely rely on internal innovations, since greater possibilities for joint ventures increase the tendency of some employees to establish their own or join to the existing, newly founded 352 d. jovović enterprises (rigby & zook, 2002, p. 83). they are interested in newly established enterprises since they consider their offer more favourable in terms of risk and earnings. the existence of branch convergence is a factor which also influences the development of oi model. branch convergence is the deletion of boundaries between economic activities due to convergence of ideas, technologies and markets (choi & valikangas, 2001, p. 426). it basically represents the influence of innovation development in one economic activity on the development of other activities. convergence appears when the enterprises in one branch apply the knowledge which is fundamentally developed in other branches; thus successful innovations change and complement innovative and technological paradigm of other branches. the influence of innovations in information technologies on business in all other industrial branches can be taken as an example. the oi model is especially suitable for application in service activities based on knowledge and high technologies where enterprises most often simultaneously offer products and services. large enterprises often form separate organisational units which follow oi and strategies that are focused on innovation projects beyond basic economic activity of the enterprise, thus making efforts to keep pace with dynamic branches of economy. customers also have a significant role in the development of oi concept. many customers are innovatively oriented; they tend to improve the existing products and services of the enterprise, thus becoming innovators themselves (bogers et al., 2010). customers as innovators often do experiments related to aesthetic and functional characteristics, purpose and terms of use of the existing products, provide ideas at beginning stages of development of new products and services, suggest new forms of relationships between the enterprise and customers, etc. thus enterprises with the help of their customers as innovators reach adequate innovation solutions and satisfy needs on the market through new or improved products or service. the enterprises which apply open innovation model in their activity, include the existing and potential customers in the innovation process, thus increasing their innovative possibilities (dogston et al., 2008). the oi model has been developed as a response to current demand related to innovation activities of an enterprise, primarily in the domain of r&d and protection and use of intellectual property by the enterprise. the model emphasizes the need for more active cooperation between various enterprises in order to decrease potential risks and expenses and simultaneously increase efficiency of the innovation process and better commercialise the ideas on the market. it is especially suitable for smes which now, compared to the previous period, have the opportunity to influence market trends by joining ideas, innovation activities and investments. in new conditions the advantages immanent to smes are especially pronounced such as flexibility and speed of reaction to market changes. the model provides reduction of time necessary for the development of a product and its appearance on the market. smes have a chance to leave behind large enterprises, thus providing competitive advantage. model of open innovations and small and medium-sized enterprises svelepment 353 3. possibilities and limitations of the application of the oi model in smes smes sector is often the most significant part of innovation efforts in a certain economy, unlike large enterprises which act as an integrator of overall innovation system (cvetanović et al., 2016). since in economy of knowledge smes operate in global environment it is necessary for them to establish cooperation with both larger enterprises in order to create better possibilities and increased use of their capacities, and other smes engaged in the same or different economic activities together with research centres, institutes, laboratories, independent researchers, universities and all other subjects which could contribute to their innovation development. the increase of global competitiveness and the increase of r&d expenses oblige smes to cooperate with external partners in order to promote new products and services on the market before their competitors. at the same time, the innovation will be better accepted if the users of products and services, either other enterprises or individual customers, become increasingly involved in the innovation process (de backer, 2008). two aspects of cooperation are present between smes and other participants in the innovation process. the first is resource transfer (knowledge, ideas) from smes to other enterprises when the existing technological possibilities of smes are used externally. the second aspect is related to external to internal exchange where external sources of innovations are used for improvement of the existing innovation development in smes. smes combine both types of cooperation with their environment in order to improve innovation performances and maximise benefits from innovation efforts (de vrande et al., 2008). thereby, they can focus on four approaches to the oi model: joint r&d activities; b) joint development of a product; c) joint promotion of a product and d) attraction of similar enterprises to create positive environment by cooperation (west & gallagher, 2006, p. 36). in order to develop smes successfully and commercialise new products and create remarkable innovation performances they have to cooperate with external partners (pullen et al., 2008). successful strategy of the oi model for smes should find creative methods to utilise internal innovations and the available external innovations which contribute to the development of an enterprise. smes have certain advantages in the innovation process which make them a suitable partner for connection, since they are usually less bureaucratically organised and generally are more motivated to be more successful than large enterprises (pullen et al., 2008). networks are globally considered valuable because they provide the solution for preservation of flexibility of productive values of smes (acs & audretsch, 1988). by networking, some of the barriers encountered on the way to creation of innovations in these business entities are removed without destruction of their key advantages. in this sense, a number of authors investigate how market uncertainties contribute to the increasing networking of smes. the conclusion is that in the situations when innovation process is a complex system which exceeds the framework of an enterprise, networks provide successful technological cooperation with very pronounced synergic effects (de bresson & amesse, 1991). the advantages of sme networking include innovation chances, lower transaction costs, cost shares, increase of efficiency of innovation process, and increased production efficiency. networks provide the share of risks, costs of studying and other expenses that 354 d. jovović help technological convergence between enterprises, which results in the growth of manufacturing efficiency as well as economy of scope. due to their integrated processes of production, each enterprise has to be concentrated on individual component of their joint final product and more complete access to information (dirckinck-holmfeld, 2009). smes have a crucial role in diversification of innovations in numerous market niches, i.e. domains which are not attractive for large enterprises, bearing in mind possible relationship between potential benefits and risk level. with their activities they often change the limits of production and consumption while searching for the neglected possibilities of creating new jobs and improvement of labour productivity (michael & palandjian, 2004). lately, smes have become more important in the domain of creation of technological innovations. however, due to the fact that the capability of smes to compete on global markets is limited by internal and external conditions (table 1), the cooperation between enterprises aimed at improvement of innovation has become a significant means by which these business entities overcome some of the barriers. the cooperation between smes and large enterprises is becoming a strong force in many industries today. table 1 barriers of open innovation for smes external barriers internal barriers supply demand environment resource resource culture/ human nature system technological information customer needs government regulations lack of internal funds attitude of top management to risk out-of-date accounting system raw materials customers‟ perception of the risk of innovation anti-trust measures technical expertise employee resistance to innovation finance domestic market limitation policy actions management time international market limitation source: rahman & ramos, 2011, 480. some limitations make the application of the oi model in smes difficult. these enterprises have insufficient resources, hence their planning relates to medium time period at most. real incapability of smes to make long-term plans significantly decreases their capability to access the results of external research. it is not always easy for smes to enter the sustainable chain of values on the market, since they are focused only on short-term market promotions. smes even do not often have well-developed medium-term planning of demand due to limited resources and lack of necessary network of contacts. time mismatch of framework of research of external partners (e.g. universities) with the real needs of smes can make a problem, which often does not allow them to appear aggressively on the market with the proper product at the right moment. smes often have problems related to financing of research, lack of qualified staff and a small chance for replacement of adequate products on the market, limited possibilities to promote products etc. besides, there is a large number of other internal and external barriers to innovations in smes which partly decrease and model of open innovations and small and medium-sized enterprises svelepment 355 complicate successful application of the model of open innovation, but they certainly do not reduce the significance of its application for successful innovation development (hanna, & walsh, 2002). changes in business environment (growth of income, increased number of market niches, technological changes and development of open innovations) decrease structural disadvantages of smes which arise from their limited possibilities for application of economy of scope and management of innovation processes. innovative smes have become the most significant developmental potential of contemporary economy. however, due to conditions in which they operate, insufficiently motivating business environment which is not properly adjusted to the developmental needs of innovative smes, a large number of smes do not recognise the importance of innovations or do not have necessary conditions to completely realise their innovation potential. innovative smes are faced with numerous problems and barriers, primarily related to financing, availability of results obtained in research institutions, access to the international market, administrative barriers and possibility of engagement of qualified staff, etc. all these create the need for systemic, well-designed policies and specific supporting programs which should allow smes to use their development and innovation potential. there is also disproportionate distribution of innovations within the smes sector between a small number of highly inventive smes with enormous potential for growth and a large number of smes without clearly expressed innovation orientation and great innovation potential. therefore within the policy of stimulation of innovations, a clear difference between these two groups of smes should be made, i.e. it is necessary to understand and respect the differences in their business conditions, methods and motives for innovations. smes are faced with significant barriers and limitations which have negative influence on their ability to innovate. these barriers are not the same for every enterprise, and the enterprises can have direct effect on their removal. besides internal, significant barriers to innovations are external barriers which smes cannot directly influence, but are forced to adjust to them. these barriers arise from institutional and market environment that affects all small and medium-sized enterprises on the market. conclusion the oi model has been developing since the end of the twentieth century. it reflects the efforts of an enterprise to use the available resources in order to acquire new knowledge and thus commercialise innovations. it prefers increasing mobility of labour, especially highly creative professional one. it accepts increasing business risks and initiation of business ventures, which is especially suitable for the development of sme sector. key advantages of the oi model are greater possibilities of application of innovations, both own and from the environment. this suggests business model which is based on the decision whether cooperation is better than competition. the oi model is favourable for the development of sme sector, which has become increasingly important lately in the process of creation of technological innovations. due to the fact that the capability of smes to compete on global market is limited by many conditions inside and outside the enterprise, the cooperation between enterprises in order to improve innovations has become a significant means by which these business entities overcome some of the barriers. the cooperation between smes and large enterprises is a considerable developmental force in many industries. 356 d. jovović references acs, z. & audretsch, d. 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(2011). open innovation in smes: from closed boundaries to networked paradigm. issues in informing science and information technology, university of minho, guimaraes, braga, portugal, volume 7, 471-487. rigby, d. & zook, c. (2002). open-market innovation. harvard business review, 80(10), 80-89. romer, p. (2007). economic growth. in: henderson, d. fortune encyclopedia of economics, new york: time warner. smith, d. (2010). еxploring innovation. mcgraw-hill. trott, p. (2002). innovation managament and new product development. prentice hall. vanhaverbeke, w. (2006). the interorganizational context of open innovation. in: chesbrough, h., vanhaverbeke, w. & west, j. (eds.). open innovation: researching a new paradigm. oxford, 205-219. west, j. & gallagher, s. (2006). challenges of open innovation: the paradox of firm investment in open-source software. r&d management, 36(3), 319-331. model otvorenih inovacija i razvoj malih i srednjih preduzeća u radu se sagledavaju karakteristike modela otvorenih inovacija kao neodvojivog dela pоslоvanja savremenog prеduzеćа i njihovog uticaja na razvoj sektora malog i srednjeg biznisa. pošlo se od stava da pomoću modela otvorenih inovacija mala sreddnja preduzeća nastoje da na nајbоlji mogući način iskriste mogućnosti za rast u razvoj. to nastojanje podrazumeva oslanjanje na vlastite inovacione aktivnosti, ali i na korušćenje spоljnih izvora inоvаciјa, odnosno izvora kојi prоmоvišu lаnаc vrеdnоsti krоz еkstеrnu kоmеrciјаlizаciјu prava na intеlеktuаlnu svојinu kојom raspolažu i komecijalizaciju znanja i inovacija drugih. ovi poslovni entiteti imајu оdrеđеnе prеdnоsti u inоvаciоnоm prоcеsu kоје ih čini pоgоdnim pаrtnеrоm zа mrežno pоvеzivаnjе, budući da su mаnjе birоkrаtski ustrојеnа i čеstо imајu izraženiji mоtiv dа budu uspеšniја оd vеlikih prеduzеćа. ključne reči: znanje, inovacije, koncept otvorenih inovacija, mala i srednja preduzeća plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 4, 2014, pp. 337 352 developing bonus plans for managers in order to maximize value for owners  udc 005.88 ljiljana bonić 1 , dejan jakšić 2 , kristina mijić 2 1 university of niš, faculty of economics, niš, serbia 2 faculty of economics in subotica, university of novi sad, serbia abstract. rewarding managers in the corporate enterprise means that they receive profit for achieving planned performance while for achieving above the planned level they receive various types of stimulation. bonuses are the most common form of incentives for managers that are paid in proportion to their contribution to the success of the business. in the corporate enterprise it is necessary to develop such a system of rewarding managers which will motivate them to act in accordance with the interests of owners and encourage them to undertake those risky business activities that will contribute to the maximizing of the value for owners. in order to ensure guidance for managers towards the continuous improvement of companies' performances, developed bonus plans should be based on performance measures important to the owners (measures are based on: concept of accounting result, concept of economic results and cash flow concept). for rewarding top managers, the application of measures based on the concept of the accounting result that directly correspond to the price of shares is the most appropriate for the calculation and payment of bonuses (yield rate implied by the price of shares, yield rate provided by the manager in the strategic plan, as well as the price of the capital). for managers of business units it is not always possible to establish a direct link between rewarding and the movement of share prices, therefore the most suitable criteria for the calculation of bonuses are the criteria based on the concept of economic result (the most suitable is eva) and criteria based on the cash flow (the most suitable is sva). rewarding managers on the operational level of management is linked to performance, which in essence represents macro or micro value drivers, that can be directly linked to the performance of these managers. rewarding managers also implies that short-term and long-term incentives are balanced in their compensatory package, which also applies to the bonuses. efficient compensatory system should contribute to the harmonization of the individual goals of the managers and the objectives of the owners, in the short and long term, and to ensure fair distribution of bonuses in the management structure. rewarding managers by bonus disbursement should ensure readiness and loyalty of the management to achieve the expected yields for the owners not only in short, but in the long run as well.  received november 14, 2014 / accepted march 25, 2015 corresponding author: ljiljana bonić faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 695  e-mail: ljiljana.bonic@eknfak.ni.ac.rs 338 lj. bonić, d. jakšić, k. mijić key words: bonus plan, bonus bank, bonus, investment yield, economic value added, shareholder value added introduction in the modern corporate enterprise, in which the function of ownership is separated from management function, the development of compensatory system (reward system) represents an important step in achieving the primary objective of business i.e. maximizing value for owners. despite the fact that the goals of the managers often differ from the objectives of shareholders, the task of management is to realize the expectations of the owner. different interests of managers and owners can evoke agency problem (the problem of decision-making by management which are not in the interest of the owner). in addition to solving this problem, the development of an adequate system of remuneration should contribute to directing the behavior of managers and other employees towards continuous improvement in business performance and creating value for its owners. this requires for the compensatory system to be based on performance criteria important for the owners. selected performance criteria should enable the determination of the contribution of managers to the achieved success and level of adequate financial and nonfinancial incentives that may be significant for meeting the objectives of managers and owners, and thereby reducing agency costs. as components of compensation packages for managers there appear: earnings (basic salary), stimulations, various types of benefits (supplementary pension insurance, life insurance, etc.) and other benefits (soft loans, free legal and financial advice, paid seminars, as well as some non-monetary benefits). rewarding a manager entails that they gain profit for the achievement of planned (target) performance, whereas achievement above the planned level brings special incentives. in the structure of incentives most frequently occur: raise of the base salary on a monthly or annual basis, special awards for achieving above average results, lump-sum payments (for professional engagement for example), options on shares for top managers and others. still, the best-known form of stimulation are bonuses, which are not an integral part of their earnings, but are realized on the basis of the contribution of managers to the business success of the company. the planning of a bonus in the short run is done through bonus plans, and bonus payments may be immediate or delayed, usually in cash. long-term motivation of managers is realized through various instruments of their involvement in the ownership, typically through a free allotment or sale of shares under certain conditions. as far as long-term planning of a bonus as a form of compensation for managers is concerned, it is achieved through a bonus bank, as a special bonus fund. in the compensatory system based on values there are multiple solutions for rewarding managers at different levels of governance through bonuses, and they vary in terms of performance criteria through which the performance of managers is monitored (the performance criteria based on: the concept of accounting result, the concept of economic results and cash flow concept). the subject of this paper are bonus plans developed in order to reward managers in accordance with their contribution to the success of the business based on various performance criteria significant to the owners of the capital. the aim is to show the different types of bonus plans for managers who depart from the performance criteria based developing bonus plans for managers in order to maximize value for owners 339 on different concepts of results (the concept of accounting result, the concept of economic results and cash flow concept), as well as to highlight their advantages and disadvantages in the context of the motivation of managers to contribute to maximizing value for capital owners in the corporate enterprise. 1. traditional bonus plan based on the concept of accounting results based on the performance criteria significant to the owners bonus plans for managers differ: bonus plans based on the concept of accounting results, bonus plans based on the concept of economic performance and bonus plans based on the cash flow concept [12, 153-170]. this division is in accordance with the classification of criteria of success significant for the owners of the capital in three groups [12, 65-103]: criteria based on accounting profits (eps, roi, rona, roce, roe) 1 , criteria based on economic result (eva, mva) 2 and criteria based on cash flow concept (fcf, rogi, cfroi, tsr, tbr, cva, sva) 3 . bonus plans for managers based on the concept of accounting result in the calculation and payment of bonuses start from the accounting performance criteria such as absolute criteria (operating profit, net profit, etc.) and different types of yield rates on capital invested in the business. the traditional bonus plan is based on the concept of accounting result and has the following essential characteristics [21, 131-133]:  target bonus is related to planning (target) financial performance,  the minimum level of performance that must be realized in order to achieve bonus is provided and  there is no upper limit for the payment of a bonus. the traditional bonus plan based on the concept of accounting result is presented in figure 1. in most cases, traditional bonus plan provides a minimum level of performance which provides rewards at the level of 80% of target performances. below this level, the bonus is not earned. the maximum bonus is calculated at the level of 120% of target performance. traditional bonus plans, mainly in corporations in developed countries, include a payment of a 50% bonus in the case of a minimum level of performance, and 150% reward at achieving maximum performance level. 1 earnings per share (eps), return on investment (roi) return on net assets (rona), return on capital employed (roce), return on equity (roe) 2 economic profit or economic value added (eva), market value added (mva) 3 free cash flow (fcf), cash flow return on gross investment (rogi) cash flow return on investment (cfroi), total shareholder return (tsr) total business return (tbr), cash value added (cva), shareholder value added (sva) https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn4 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn4 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn4 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn5 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn5 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn6 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn7 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn8 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn9 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn9 340 lj. bonić, d. jakšić, k. mijić fig. 1 traditional bonus plan based on the concept of accounting result source: [21, 132] disadvantages of traditional bonus plan from the standpoint of maximizing value for the owners are the following:  accounting performance criteria (operating profit, yield rate on capital employed) often do not have a strong connection with creating value for owners [21, 133]; added value for owners need not always be achieved if there is an increase of accounting performance criteria, which can happen when a positive yield rate on investments can not cover the total cost of capital, and there will be a reduction in shareholder value, although there is no basis for compensation payment;  this reward system may condition speculative behavior in managers of business units; this implies that, in the case where managers have achieved performance which provides maximum bonus in the current period, they can postpone income for the next period; that way they can apply a redistribution of income in successive accounting periods, allowing them a maximum bonus for a longer period;  there may be problems in defining new performance targets for the next accounting period; successful managers of business units will be punished with new bonus plan for the next fiscal year because of the reduced opportunities for achieving superior performance that are anticipated at a higher level and are more difficult to achieve compared to the previous period; unsuccessful managers of business units will, in turn, be rewarded because their new bonus plan reduces the level of performance targets and does not set ambitious goals;  traditional bonus plan may initiate a conflict while achieving the goals (short and long-term) of managers and owners; with this bonus plan short-term results are pushed in the foreground, which is often only in the interests of managers but with long-term negative consequences for both managers and owners;  traditional bonus plan is not conducive to good managers, while for mediocre managers fees are guaranteed; https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn10 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn11 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn11 developing bonus plans for managers in order to maximize value for owners 341  managers set the target performance and report on their accomplishment, which can lead to manipulation by managers which can affect the level of bonus paid; on the one hand, traditional bonus plans can often be subjective, because managers are the ones who design the financial parameters of success, which opens up space for underestimating potential (target) levels of performances; on the other hand, inadequate accounting policies and low targets performances may influence managers in the financial statements to present unrealistically high achieved performance and achieve high bonuses [5, 103]. in practice, a linear bonus plan is known, based on performance criteria based on the concept of accounting result which seeks to limit, i.e. eliminate manipulating of managers to some extent, which can lead to poor management decisions and have a negative impact on the value for the owners. this bonus plan emphasizes the principle of paying for realized performances, rather than potentiate the determination of objectives and the lower and upper limit of the bonus, so that it defines a bonus formula by which the bonus is directly tied to specific performances [11, 129]: achieved performance x % bonus if, however, an objective is determined, formula for determining bonuses would look like this: target performance x effectiveness of achieving target performance x % bonus linear bonus plan is shown in figure 2: fig. 2 linear bonus plan source: [8, 98] the position and slope of the bonus in the chart are very important. if this curve moves to the right in the creation of the compensation plan, it means that the possibility to receive bonuses is hindered, while the movement of the curve to the left indicates the facilitation of opportunities to obtain bonus. this bonus plan allows you to set the curve https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn12 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn12 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn14 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn14 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn15 342 lj. bonić, d. jakšić, k. mijić of the bonus on long-term projection of accounting performance criteria and the development of enterprise, which is an advantage over the traditional bonus plan. the disadvantage is that it is not easy for the managers to accept the linear model of determining bonuses because objective-based bonuses are deeply embedded in their thinking. also, the disadvantage of this bonus plan is that the success of its application will depend on selected accounting performance criteria that are used to define the objectives, positioning of the bonus line and its slope. it should be noted that the bonus plans based on the concept of accounting result are particularly suitable for the calculation and payment of incentives to top managers. to determine the bonuses of top managers the most appropriate yield criteria based on the accounting concept of results which directly correspond to the price of shares are as follows: yield rate implied by the share prices and the yield rate provided by the manager in the strategic plan, but also the cost of capital [17, 110]. theorists who favor these performance criteria argue that their use of remuneration enables harmonizing of the interests of top managers with the interests of the owner and that they should be rewarded only if they meet or surpass market expectations 4 . bonuses for managers of business units (divisions) can also be determined using the bonus plans which start from performance criteria based on the accounting concept of results. most appropriate performance criteria for this level of managers are: net gain 5 , the rate of return on capital employed (roce), return on equity (roe) 6 . however, as mentioned, performance measures do not directly correspond to the share price, they are considered insufficiently appropriate for rewarding managers of business units. for managers at lower (operational) levels of management bonus plans based on performance criteria that fall within the domain of macro and micro drivers of value are suitable. usually, these criteria are based on the concept of accounting result complemented by specific non-financial criteria that can be linked to the performance of the managers at this level of management. the deficiencies of the performance criteria based on the accounting concept of results influenced the change in the basic postulation of successful business enterprises and in the placing of new demands in the sense of performance measurement and enterprise management. all this has resulted in the development of more suitable concepts of performance measures in the function of creating shareholder value. certain conditions should be met for a performance measure to show success of the company and an increase in the value for owners [21, 34]:  there should exist an adequate database on the basis of which performance measure may be determined in practice; 4 in the setting of the system for rewarding managers the following relations are typically used: capital sum of market expectations = corporate rate of return implied in the price of shares capital cost, and planned surplus or deficit = corporate rate of return anticipated strategic plan – corporate rate of return implied in the price shares. the difference, however, between the capital sum of market expectations and planned surplus (or deficit) is a part of the capital sum of market expectations that managers must achieve. for more see: a. rappaport, "creating shareholder value: a guide for managers and investors", the free press, 1998, p. 110. 5 bonus plan defines a certain percentage of the realized net profit of business units (divisions). 6 the application of these rates implies the definition of profitability rates and comes to the profit potential that divisional manager needs to realize. if they achieve lower profitability, there is no basis for stimulation, but for punishment. for the realized rate of profitability higher than the target, divisional manager is rewarded. https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn16 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn16 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn17 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn18 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn20 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn20 developing bonus plans for managers in order to maximize value for owners 343  it should provide an opportunity for detailed analysis;  there should exist a direct relationship with the created value of an enterprise;  it should evaluate the performance of the company, taking into account the risk and expected yield of the owner;  there should be a possibility of comparison with other enterprises;  it should also allow use in lower organizational units of the enterprise;  it should stem from the assumption that the main goal of the enterprise is the longterm growth of capital value. with this in mind, it is considered necessary that the bonus plan for managers proceed from those performance measures that would be a good basis for remuneration, on the one hand, and in relation to the contribution of managers to the created value for owners, on the other hand. hence, in practice, there has been the development of bonus plans based on performance criteria that enable better measurement of projected and created value for the owners in relation to criteria based on the accounting concept of results. these are bonus plans based on the concept of economic results and cash flow concept, which will be presented in the next two sections. 2. bonus plan based on the concept of economic result (economic profit) the group of criteria based on the concept of economic result starts from the economic result (economic profit), which represents the difference between the accounting net result (profit) and cost of total capital (own and borrowed). the concept of economic profit in contemporary business becomes the conceptual basis for the development of new criteria for measuring the newly created value for owners (eva, mva, discounted economic profit) [12, 153-184]. economic value added (eva) 7 occurs in the 90s of xx century, when it was patented as the "invention" of stern, stewart & co.; it is similar to economic profit with the inclusion of numerous modifications of accounting data when calculating 8 . among other things, eva has proved to be a good measure for the development of bonus plans for managers, because it shows the absolute amount of value that the enterprise had realized or lost during the year [19, 66]. in theory and in practice there are two known versions of the bonus plans based on the concept of eva: original and modern bonus plan based on the concept of eva. the original version of the bonus plan that is based on the concept of eva has been an important tool for the creation of strong, sustainable and cost-effective incentives. original eva bonus was calculated at a certain percentage of eva [21, 135]: 7 eva is calculated as follows: a) commercial approach: eva = nopat  (wacc x ic), wherein: nopat net business (operating) profit after tax wacc average weighted price of capital ic invested capital b) financial approach: eva = (roic wacc) x ic roic profitability of invested capital (roic wacc) – range of return ic invested capital 8 there are 160 possibilities to adjust the gain according to generally accepted accounting principles (gaap), however, it is not necessary in every enterprise to make all the adjustments, given that some components are of negligibly small value. because of this it is considered that the economic value added (eva) is only one of the variants of residual profits. https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn21 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn21 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn22 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn24 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn24 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn25 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn25 344 lj. bonić, d. jakšić, k. mijić bonus = x% x eva which can be shown in figure 3: fig. 3 eva original bonus plan source: [21, 135] compared to traditional and linear bonus plans which are based on the accounting performance criteria, the original eva bonus plan provides realistic bonus payments in accordance with the contribution of managers to the created value for owners. however, the eva bonus plan was not fully able to realize all the goals of compensations. the shortcomings of the original bonus plan are as follows:  this bonus plan provides bonuses to managers of business units in the case when the rate of return on investment is higher than the cost of capital; if the rate of return on investment equals the cost of capital, managers will not get bonuses; in cases where managers improve performance (for example from a negative rate of return to the rate of return that corresponds to the cost of capital) it is unfair because they lose their bonuses;  this bonus plan can be expensive for the shareholders in the event of problems in calculating eva criteria; for example, if the capital is stated at historical accounting value instead of the market value, eva will be positive, even if the owners do not get a fair return on invested capital;  even when eva is well calculated, the bonus plan does not take into account the fact that the market value of the company is reflected next to the property value and the value of possible future growth; as the shareholders pay for both components of the market value of the company, they expect a return of the entire market value of their investment and future growth; positive eva enables the realization of the first component only, but if there is a decrease in stock prices at the same time, eva bonus plan will contribute to the creation of high costs for shareholders because they are obligated to pay a bonus; conversely, negative eva, which is accompanied by an increase in stock prices and the creation of opportunities for future growth, will condition the absence of bonuses;  complicated calculation of eva performance can increase the effective cost to shareholders and make this bonus plan expensive for them, and therefore, in order to create incentives that will not result in excessive costs for the shareholders, it is necessary to focus on changes in eva performance; this has led to the development of https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn26 developing bonus plans for managers in order to maximize value for owners 345 the original eva bonus plan in terms of its reliance on the percentage of a certain level of eva and the percentage of change in eva: bonus = (x% x eva) + (y% x δ eva). such calculation of bonuses avoids the problems that occur with the original bonus plan, because the percentage that is applied to the expected eva can provide a good incentive for managers, while the percentage from the improvement of eva can provide a competitive bonus. further development of the bonus plan has been directed towards designing a modern bonus plan that is based on the improvement of eva criteria. there are three reasons for this:  changes (improvements) of eva criteria enable efficient incentives,  changes (improvements) of eva can be calculated and applied in every company (in those with a positive as well as in those with a negative eva) and  eva changes (improvements) provide a direct connection between a bonus and the return to the shareholders. the total bonus in modern eva bonus plan equals the sum of the target bonus and the percentage (fixed percentage of excess eva improvement) of differences between the actual and expected eva improvement [21, 139]: bonus = target bonus 9 + incremental (additional) bonus, or bonus = target bonus + y% (δ eva  ei) δ eva  improvement of eva (eva 1 eva 0) ei  expected improvement of eva (eva interval) y  fixed percentage of excess eva improvement. representation of modern eva bonus plan is given in figure 4: fig. 4 modern eva bonus plan source: [21, 139] 9 target bonus, according to the advocates of such a plan is necessary to make it more consistent with the practice in the labor market in relation to the payment of bonuses for planned or expected performance. https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn27 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn27 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn28 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn29 346 lj. bonić, d. jakšić, k. mijić the chart shows that the total bonus earned is the summation of the target bonus and a fixed percentage of eva improvement. the target bonus is consistent with the practice of bonus that is valid at the market manager, and is provided on the basis of expected eva improvement. contemporary bonus plan is determined annually in a process called calibration of bonus plans 10 . three key points are determined in the process [21, 141]:  target bonus,  expected eva improvement and  eva interval (ei). the target bonus of an enterprise/ business unit is determined at the level of the target bonus of the enterprise with similar competence. business unit managers will achieve the target bonus if they achieve the expected eva improvement. then the expected eva improvement should bring the return on the market worth of their investments in the amount of the price of the capital to the shareholders, which is identical to their expectations. if the expected eva improvement is exceeded, managers will gain bonus above target bonus, however if the expected eva improvement is not achieved, their bonus will be below the level of the target bonus. in order to truly align the interests of managers and owners, the expected eva improvement should reflect investors' expectations in terms of performance. only when the expected improvements of eva are realized will the investors get a refund i.e. the return on market value of their investments. a good approach in evaluating the expected eva improvement involves extrapolation of a series of future expected eva improvements which includes the current stock price of the enterprise 11 . also, the eva advocates recommend the use of perennial and predefined expected eva improvement, because the annulment of ei each year can result in rewarding of poor performances with lower ei and punishing of good performances with higher ei. eva interval (ei) should be defined so that managers receive zero bonus for achieved zero level of return (refund) for shareholders. to determine the eva interval it is necessary to establish the excess return on the market value of investments (enterprises) via the formula [21, 142]: excess return = wacc x market value of investments in the company wacc  average weighted cost of capital eva interval is then determined as follows: eva interval (ei) = excess return / ((1wacc) / wacc). when the adjustment of the expected performance of eva and eva interval (ei) is based on market expectations, it is possible to align managers' fees with investors' return. however, that can put a lot of pressure on managers and create a problem for their retention and motivation. in order to prevent this, the adjusting of the expected performance of eva and ei can be performed, consistent with the desired probability of zero bonus during the period covered by the plan. 10 bonus plan calibration according to young, s., o'byrne d., f, s. 11 the approach in the implementation of eva in the original eva bonus plan involved a combination of eva from the previous years and set goals related to eva in previous periods. https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn31 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn31 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn33 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn33 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn33 developing bonus plans for managers in order to maximize value for owners 347 a problem that can arise from focusing on eva performance of the current period at the expense of future performance can be solved by using a system of eva bonus bank. the basic idea behind eva bonus bank is that managers are only paid a portion of the bonus (one-third) which had been earned during the period, while the remaining part (two-thirds) of the bonus is transferred to the next year. eva bonus bank provides:  taking into account the long term interests of the owner,  limitation of large variations in the payment of bonuses,  payment of bonuses to managers in accordance with the improvement of eva and  linking of short-term and long-term decision-making. continuity in the payment of bonuses will only exist if there is sustainability in increasing eva. otherwise there will not be payments of bonuses. such a situation should affect the managers to focus on achieving long-term, sustainable improvements of eva, and not on the current performance of the eva. these incentives can be strengthened by using non-financial criteria such as customer satisfaction, product innovation, etc. these criteria, along with the movement of stock prices, can facilitate understanding of problems in the actions taken to improve eva in the current period. eva bonus bank enables retention of the managers, because the leaving manager has to sacrifice a fee earned in the previous period, which would be paid in the future. eva bonus bank at the same time provides an opportunity for good managers (with a large positive bonus in the bank) to remain in the company and encourages bad managers (with the negative balance in the bank) to leave the company. the advantages of a modern eva bonus plan are:  objectivity in the definition of planned (target) performance in accordance with the expected value for the owners;  encourages good managers to remain with the company, and bad to leave it;  contributes to resolving the agency problem ie. encourages managers to make decisions in accordance with the interests of the owner;  enables the connection of short-term and long-term incentives for managers in order to get them closer to the interests of the owners and to maximize value for owners.  provides remuneration of managers at the business unit level. disadvantages of modern eva bonus plan are:  some authors argue that the movement of eva performance does not adequately monitor the movement of share prices, and for that reason it is not so good for rewarding managers, as thought by the advocates of application of eva concept in the development of bonus plans;  there are limitations to this bonus plan which are conditioned by cultural differences in certain countries [7, 46-74]; in countries whose national culture is characterized by uncertainty avoidance, low degree of individualism and difficulty in accepting challenges eva bonus plan will be ignored, while in countries whose national culture is characterized by individualism, readiness to change in the organizational structure of the corporate enterprise eva bonus plan will be well accepted;  it requires implementation of the eva concept at all levels of management, which may cause a problem of delegation of responsibility in the achievement of eva performance at the operational levels of management; it showed that eva is not suitable for use in rewarding managers at the operational management level, because it https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn34 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn34 348 lj. bonić, d. jakšić, k. mijić is not possible to reliably determine the relationship between the contribution of their work and created values for owners;  differences in tendencies towards risk taking in business among managers at different levels of management and owners can be a problem in the development of eva compensatory system in the corporate enterprise; managers of business units are more afraid of risks in the business than top managers and owners;  shows certain limitations, i.e. it is not always a suitable foundation for rewarding in corporate enterprises which operate in emerging markets, as well as in industries with cyclical movement [21, 142-145]. 3. bonus plan based on a cash flow concept in the compensatory system based on cash flow performance criteria, the remuneration of employees is mainly done according to the following criteria: total business return (tbr) and shareholders value added (sva). tbr in the development of bonus plans based on cash flow concept proved to be suitable for rewarding managers in long and short term. tbr 12 can be used as a basis for compensatory system in two ways: firstly, in the case of long-term investments, when used to measure the created value during several years (usually five years) and secondly, as a basis for defining annual objectives to be achieved in order to achieve long-term results 13 . the level of bonus based on tbr is determined as follows: bonus = tbr x target bonus at the business unit level, rewarding of managers based on tbr is a common approach of the phantom option plan [21, 421-422]. the level of remuneration established by this plan is obtained by applying a fixed percentage to the increase of the shareholding wealth. increase in shareholding wealth represents the difference between the shareholding wealth at the end and shareholding wealth at the beginning of the observation period. in this system of planned bonuses, rewards for managers of business units depend on the size factor of the net operating profit after taxes (nopat-a 14 ), which is used for calculating the value which remains to the owners with extinguishing businesses. and the impact of that residual value in forming a basis for rewarding compared to the achieved yearly performances makes this compensatory system inferior to the reward system based on the concept of eva, as well as the one based on the concept of sva. compensatory system for rewarding managers of business units based on sva 15 provides reward only in the case of achieving superior sva. the calculation of superior sva is done in six steps [18, 91-101]:  the first step projection of value drivers: the rate of sales growth, nopat rate and the rate of incremental investment in fixed assets and net current assets. the 12 tbr is calculated using the formula: tbr = (net present value of cash flow / net cash invested in assets) x 100% 13 in planning the level of annual operating profit, which will provide the desired level of tbr. 14 net operating profit after tax 15 sva is calculated as follows:     1 1 1 . . 1 t t t t t t n n nopat inkrement investment sva cumulativeforproject period wacc 1 wacc wacc           . https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn35 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn35 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn36 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn38 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn38 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn40 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn41 https://translate.google.com/toolkit/content?did=00ahom000mn6qyfsjvuo&rid=759&hl=en#_ftn41 developing bonus plans for managers in order to maximize value for owners 349 projection is performed on the basis of historical performances, business plans of a business unit and strategic moves of the competition;  the second step translating the projected value drivers into the projections of annual cash flows and determining the present value of projected annual cash flows using the price of capital (this is the price of capital specific to a particular business unit).obtained projections lead to the valuation of each business unit;  the third step the aggregation of value of each business unit to check whether the aggregate amount is approximately equal to the market value of the entire enterprise;  the fourth step determining of expected annual sva in the planned period (usually three years).this is done on the basis of projected cash flows;  the fifth step the calculation of the realized sva at the end of each year. the calculation is done as in the previous step, but this time using the actual rather than projected data;  the sixth step determining the difference between realized sva and expected sva. if the realized sva is higher than the expected sva, realized sva is superior. this positive difference is the basis for rewarding managers of business units. compensatory system based on the concept of sva is suitable for rewarding managers of business units because it can be developed in the long-term (usually for a period of three years). this is done because the creation of value is a long-term phenomenon. thus setting the annual level of performance, the realization of which brings a bonus, must be based on long-term planning of maximizing value for owners. in this compensatory system, rewarding managers of business units is carried out according to the three-year plan of variable sva called a rolling three-year plan of variable sva. conclusion in the corporate enterprise managers are those who govern and decide on the allocation of capital, and the owners are striving to control them and to ensure that they are taking actions that will lead to increase of their wealth. bonuses are an important element in the structure of compensations (incentives) for managers. in the foundation of bonus payments to managers there is the intention to establish a strong link between managerial behavior and realized business performances, as well as to motivate them to take action in order to maximize value for the owners. development of bonus plans that are based on measures significant to the owners (measures based on concept of accounting result, measures based on concept of economic result and measures based on cash flow concept) contributes to that. in theory and in practice there are two known types of bonus plans based on the concept of accounting result traditional and linear bonus plan, developed by using accounting performance measures (absolute profitability measures, different types of rates of return on invested capital, but also measures that are directly related to the movement of stock prices such as yield rate implied in the price of stocks, the yield rate anticipated by managers in the strategic plan and the cost of capital). the advantages of a traditional bonus plan are: remuneration of managers is based on the target bonus which is linked to a planned (target) financial performance, there is a lower and upper limit for the payment of bonuses and it is particularly suitable for rewarding top managers, as well as those at the operational level (in combination with other performances). 350 lj. bonić, d. jakšić, k. mijić the disadvantages of this bonus plan are: accounting performance criteria often do not have a strong connection with creating value for the owners, and bonus payments may not always be accompanied by the creation of value for the owners; it may condition the speculative behavior of managers of business units so it will hold off revenues for the next accounting periods and thus provide bonuses for a longer period; it may initiate a conflict in achieving short-term and long-term interests of managers and owners, because short-term results are placed in the foreground; it is not conducive to good managers, while it guarantees bonuses for mediocre managers; managers set the target performances and report on their achievement, which can lead to manipulation by managers that can affect the level of bonuses paid. linear bonus plan based on the accounting criteria of performance in the calculation and payment of the bonuses starts from the accomplished accounting performances or from the achievements of effectiveness of target performance. it also enables long-term projection of accounting performance criteria and the development of enterprises, which is an advantage over the traditional bonus plan. however, what is criticized in this bonus plan is that success in its implementation will depend on the chosen accounting performance criterion and is not popular with managers because of their propensity to calculation and payment of bonuses which are based on a set goal. in order to eliminate serious deficiencies of bonus plans based on the concept of accounting result, there has been a development of bonus plans based on the concept of value for the owners (based on the concept of economic result and cash flow concept), which provide rewarding of managers according to their contribution to the created value for owners. in practice, eva (original and modern) bonus plans and bonus plans based on tbr and sva proved the most suitable. proponents of eva concept believe that the eva performance measure is best suited for rewarding managers. this is supported by: objectivity in the definition of planned (target) performance in accordance with the expected value for the owners; the possibility of bonus payments to managers according to their contribution to the created value for the owners (even when the negative eva is achieved) in the short and long term; contribution to solving the agency problem and retaining good managers, while bad managers are encouraged to leave the corporate enterprise. there are still some objections to eva bonus plans: some authors believe that the movement of eva performance does not adequately follow the movement of share prices; the implementation of the eva concept is required at all levels of management (and it is not good enough for rewarding managers at the operational level); differences in tendencies to taking risks in business can cause a problem with managers and owners in the development of eva compensatory system in the corporate enterprise and the limitations of this bonus plan conditioned by cultural differences across countries. from bonus plans based on cash flow concept sva bonus plan proved to be most suitable in practice. it provides rewarding of managers with almost the same benefits as the eva bonus plan, only in remuneration it starts from the calculation of the realized sva and its comparison with the expected sva. the disadvantages are the complexity and high cost of construction of this compensatory system for rewarding managers. developing bonus plans for managers in order to maximize value for owners 351 references 1. allen, r. s., helms, m. m., (2001), reward practices and organizational performance, compensation & benefits review, 33(4): 74-80. 2. allen, s. r., takeda, b. m., charles, s. white. s. c., helms, m. m., (2004), rewards and organizational performance in japan and the united states: a comparison, compensation & benefits review 36(1): 7-14 3. chingos p., (ed.) (2002), paying for performance – a guide to compensation management, john wiley & sons, inc. 4. ducharme, j. m., singh, p., mark podolsky, m., (2005), exploring the links between performance appraisals and pay satisfaction, compensation & benefits review 37 (5): 46-52 5. ehrbar, a., (1998), eva: economic value added-the real key to creating wealth, john wiley & sons, inc. 6. gerhart, b., rynes, s. l., fulmer, i. s., (2009). pay and performance: individuals, groups, and executives, academy of management annals, 3, 251-315. 7. hofstede, g. (1983) natural cultures in four dimensions, international studies of management & organization. spring/summer83, vol. 13, no. 1/2, pp. 46-74 8. jensen m. c, murphy k. j., (1990), ceo incentives: it’s not how much you pay, but how, harvard business review, vol. 68., no 3: 138-153 9. kaličanin, đ., (2006), menadžment vrednosti preduzeća, centar za izdavačku delatnost ekonomskog fakulteta, beograd 10. krstić, b., (2002), merenje performansi i menadžment kompenzacijama menadžera (1), poslovna politika, mart, str. 38-42 11. krstić b., sekulić v., (2013), upravljanje performansama preduzeća, ekonomski fakultet, niš 12. krstić, b., bonić, lj., (2013.), upravljanje vrednošću za vlasnike preduzeća, ekonomski fakultet, niš 13. malinić d., (2007), kompenzacione šeme za menadžere, zbornik radova: korporativno i javno upravljanje u funkciji razvoja konkurentnosti, miločerski ekonomski forum, str. 63-97 14. murphy k., jensen m., (2011), ceo bonus plans: and how to fix them, harvard business school nom unit working paper no. 12-022, september 30 15. mihir, a. d., ferri, f., treadwell s., (2001), understanding economic value added, harvard business review, note 206-016 16. park, s., sturman, c. m., (2012), how and what you pay matters: the relative effectiveness of merit pay, bonuses and long-term incentives on future job performance, compensation & benefits review 44(2): 80-85 17. rappaport a., (1998), creating shareholder value: a guide for managers and investitors, the free press 18. rappaport, a., (1999), new thinking on how to link executive pay with performance, harvard busines review (march-april) 91-101 19. riceman, s. s., cahan, s. f., lal, m. (2002), do managers perform better under eva bonus schemes?, the european accounting review, volume 11 number 3 537-568 20. young s., d., o’byrne f., s., (2001), eva and value-based management: a practical guide to implementation, mcgraw-hill 21. weldon, d., (2012), linking total compensation to performance, compensation & benefits review 44(3): 149-153. razvijanje bonus planova za menadžere u cilju maksimizacije vrednosti za vlasnike nagrađivanje menadžera u korporativnom preduzeću podrazumeva da oni za ostvarivanje planiranih performansi dobijaju zaradu, a za ostvarenja iznad tog planskog nivoa dobijaju različite vidove stimulacija. bonusi su najčešći vid stimulacija za menadžere koji se isplaćuje srazmerno njihovom doprinosu ostvarenom uspehu poslovanja. u korporativnom preduzeću potrebno je razviti takav sistem nagrađivanja menadžera koji će ih motivisati da deluju u skladu sa interesima vlasnika i podstaknuti ih da preduzimaju one rizične poslovne aktivnosti koje će doprineti maksimizaciji vrednosti za vlasnike. radi obezbeđenja usmeravanja menadžera u pravcu kontinuiranog poboljšanja performansii preduzeća razvijeni bonus planovi treba da budu zasnovani na merilima performansi značajnim za vlasnike (merila zasnovana na: konceptu računovodstvenog rezultata, konceptu ekonomskog rezultata i cash flow konceptu). za nagrađivanje top menadžera kao osnova za obračun i isplatu bonusa 352 lj. bonić, d. jakšić, k. mijić najpogodnija je primena merila zasnovanih na konceptu računovodstvenog retultata koja direktno korespondiraju sa cenom akcija (stopa prinosa implicirana u ceni akcija, stopa prinosa predviđena od strane menadžera u strategijskom planu, kao i cena kapitala). za menadžere poslovnih jedinica nije moguće uspostaviti uvek direktnu vezu nagrađivanja sa kretanjem cena akcija, pa su se za obračun bonusa kao pogodnija pokazala merila zasnovana na konceptu ekonomskog rezultata (najpogodnija je eva) i merila zasnovana na cash flow-u (najprimerenija je sva). nagrađivanje menadžera operativnog nivoa upravljanja se vezuje za performanse koje u svojoj suštini predstavljaju makro ili miropokretače vrednosti, a koje se mogu direktno povezati sa učinkom rada ovih menadžera. nagrađivanje menadžera, takođe, podrazumeva da se u njihovom kompenzacionom paketu izbalansiraju kratkoročni i dugoročni podsticaji, što važi i za bonuse. efikasan kompenzacioni sistem treba da doprinese usklađivanju individualnih ciljeva menadžera i ciljeva vlasnika, u kratkom i dugom periodu, kao i da obezbedi pravednu alokaciju bonusa u upravljačkoj strukturi. nagrađivanje menadžera isplatom bonusa treba da obezbedi spremnost i lojalnost menadžmenta da ostvari očekivane prinose za vlasnike ne samo u kratkom, već i u dugom roku. ključne reči: bonus plan, bonus banka, bonus, stopa prinosa na ulaganja, dodata ekonomska vrednost, dodata vrednost za akcionare. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 15, n o 1, 2018, pp. 57 72 https://doi.org/10.22190/fueo1801057b © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper tendencies in development of external and internal audit in the public sector 1 udc 657.6:351.076(4-672eu+497) ljiljana bonić 1 , dejan jakšić 2 , kristina mijić 2 1 university of niš, faculty of economics niš, serbia 2 university of novi sad, faculty of economics subotica, serbia abstract. although they have different and clearly defined roles, the general purpose of external and internal audit in the public sector is to contribute to good governance of public funds, that is, efficiency, effectiveness and economy of public administration. as part of the numerous reforms in the public sector of the eu countries, as well as the balkan countries, which began at the beginning of the 21st century, the external audit of the public sector (state audit) is developing an integral approach in its scope of work, which means providing attestations to the parliament and the citizens of the state that the public funds are used effectively, efficiently and economically, and that the financial statements and operations of the public sector entities are in line with professional and legal regulations (emphasis is on the performance audit). the internal audit of public funds users, in addition to providing assurance services, is increasingly focused on advisory services with the aim of providing management with support in improving public resource and risk management, the efficiency of spending public funds and the provision of quality public services. key words: state audit, internal audit, public sector, integral approach, advisory services, eu and balkan countries jel classification: m42. received november 08, 2017 / accepted january 18, 2018 corresponding author: ljiljana bonić university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: ljiljana.bonic@eknfak.ni.ac.rs 58 lj. bonić, d. jakšić, k. mijić introduction high demands for transparency in the area of accountability with activities and use of public funds, i.e. cost accounting, as well as the requirement that any public spending brings increase in profits, have in the last two decades imposed comprehensive reforms in the public sector in eu countries, as well as in the balkan countries. in order to promote greater accountability of the public sector governance structures and achieve greater effectiveness and efficiency in the use of public resources, measures have been taken that have contributed to the development of the so-called new public management (npm), which involves the adoption of management concepts and styles characteristic for the private sector. npm, among other things, involves a gradual replacement of the cashbased by accrual-based accounting. financial statements compiled using the cash basis do not contain a report on the financial position of an entity, business report, information on service costs, performance indicators, relative position of an entity is unclear, and the like (montesinos, bargues, 1996). accrual-based accounting allows the production of information on the basis of which it is possible to evaluate the total assets that the entity controls, assess the usefulness of the way of using assets, evaluate performance, perceive the financial position and cash flows, and the like. in addition, public sector reforms in eu member states and balkan countries include: activity-based budgeting and accounting in the public sector (abm); changing the budgeting model from linear to programme-based (based on performance); development of an integrated approach in the scope of work of supreme audit institutions; building an integrated internal control framework; changes in the pic system (public internal control system); development of the pifc system (public internal financial control system) in the countries acceding to the eu; directing and monitoring the development of pifc schemes by the european commission (dg financial control); audit and evaluation of the pifc system in the countries acceding to the eu, implemented by: the european council, the european commission, the european parliament (cbc) and the european court of auditors; implementation of reforms in the internal control system in the “old” member states (from a centralized to a decentralized system); decentralization of internal audit; decentralized use of eu funds in order to support these reforms, and the like. given the significant impact that can be made on improving public accountability, the reforms include government and public audit in the public sector. in this context, there is a trend of transition from a traditional to an integrated approach to state audit, and the expansion of the scope of work and decentralization of internal audit in the public sector, as well as the strengthening of cooperation and coordination of these forms of control. it should be noted, however, that there are numerous differences between eu countries, and the balkan countries in terms of “why, when, and how” they implemented reforms in external and internal audit in the public sector. the aim of the paper is to compare trends in the development of external and internal audit in the public sector in eu countries and balkan countries. tendencies in development of external and internal audit in the public sector 59 1. development of an integrated approach to external audit in the public sector in the eu countries in developed countries, the tradition of state audit dates back to mid-19 th century. the global significance of performance audit has been increasing since the adoption of the 1977 lima declaration, through the resolution of the 12 th intosai congress in sydney in 1986, then the 13 th intosai congress in berlin in 1989, and the 14 th intosai congress in washington in 1992 (akrap et al., 2009). most of the state audit institutions around the world apply the intosai standards – issai by the international organization of supreme audit institutions, as well as the intosai guidance for good governance, including our sai (see more: state audit institution, 2017). some eu countries apply their own state audit standards, such as great britain and ireland, which use their own standards compliant with the issai. all of the above standards (issai and national audit standards) provide for the performance of regularity audit (financial audit and compliance audit) and performance audit. however, for sai, performance (expediency) audit is a challenging task, as part of the development of an integrated approach in carrying out state audit. this is especially true for sai of individual developing countries or those in the transition process, which do not have a decades-long tradition in the field of public sector auditing (tiron tudor, 2007). audit institutions in the united states, canada, great britain, sweden and other developed countries started developing performance audit in 1960s, although similar ideas began to emerge in the 1940s. in the united states, the united states government accountability office (gao), since 1970, in addition to financial audit for the needs of the us congress, devotes over 90% of its work to performance audit. sai is an independent institution between the parliament and the public sector, with the task of providing assurance of public expenditure, and, communicating with both sides, can see much further and perceive the public sector much wider than any other public sector institution (joscelyne, 2003). until the 1980s and 1990s, traditional audit approach was dominant in the work of state audit institutions (akrap, v. et al., 2009, 354), and included regularity audit (financial and compliance audit). since then, there has been a noticeable shift from a traditional approach to a wider integrated or whole-of approach to audit (intosai development initiative, 1995, 7-9). traditional public sector audit focuses on regularity audit (intosai framework of professional pronouncements, 2016), which includes: control of statements that the executive and public sector entities submit to the parliament on public expenditure (attestation audit) (issai 100, issai 200, issai 1000), as well as the legality of the work of these authorities and entities (compliance audit) (issai 100, issai 400, issai 4000, issai 4100, issai 4200). an integrated approach to state audit, in addition to regularity audit (financial and compliance), includes performance audit (performance audit, value for money audit, effectiveness auditing) (akrap et al., 2009). the main goal of sai, in conducting performance audit, is to examine the economy, efficiency and effectiveness of collecting and spending public funds and managing government assets (bonić, stojković-krstić, antić-marinković, 2016). in this way, it contributes to the rational use of public funds and the achievement of better effects in the management of those funds. sai becomes an advisor and assistant to the government in using public resources rationally and efficiently and satisfying citizens’ demands for quality public services, and is also available to citizens, as it informs them, 60 lj. bonić, d. jakšić, k. mijić and prevents and discovers illegal and criminal actions in the process of managing public funds. also, sai helps the public administration to manage human resources on the basis of evaluation of work, accuracy, excellence, and free exchange of ideas. a state auditor may assist the management of a public sector entity to better manage insufficient public funds, but at the same time must retain independence. all eu countries have adopted an integrated approach to state audit. however, it can be noted that countries with a long tradition in the development of state audit have gone the furthest in this process (great britain, germany, france, denmark, norway, etc.). it is also noted that the sai organization model has an impact on the representation of certain audit types (see table 1) (compendium of the public internal control systems in the eu member states 2012, pic compendium data, 2014). thus, the eu countries with state audit model based on court of audit, although heading in the direction of an integrated approach to audit, primarily emphasize compliance audit (audit of business compliance with laws and other regulatory, parliamentary requirements) and sanctioning unlawfulness and irregularity in the work of public sector entities. state audit in this model is the task of auditors, while the court of auditors also includes judges, who perform court activity and sanction all established illegal and criminal actions in the public sector. this is because state audit in these countries is part of the judiciary, and is independent of the legislative and executive authorities. therefore, in these sais, controlling efficiency and effectiveness of public sector work has a minor role in relation to compliance audit. the lack of parliamentary involvement in these sais can result in a smaller public interest. eu countries with state audit organized according to a monocratic office model (westminster type, where audit institution is headed by a single person), such as great britain, ireland, and denmark, although developing an integrated approach to audit, focus on financial audit. this is due to the strong relationship between sai and the parliament, which takes place through the parliamentary public accounts committee, which reports to the parliament. committee members are mainly accountants and auditors, so there is strong financial control. in most eu countries, state audit is organized according to the collegial body model, with a collegial decision-making method and without judicial activity, directed at parliament. at the head of the audit institution there is a committee (council, collegial body), and the work of the institution does not depend on one person only, but the collegial structure can make the decision-making process difficult and slow. as this model is present in most newly-admitted eu members (formerly socialist countries), an integrated approach to audit is still under way there. table 1 gives a comparative overview of the sai organization models in eu countries and the scope of development of state audit approach. tendencies in development of external and internal audit in the public sector 61 table 1 a comparative overview of the sai organization model and a built-in approach to state audit in eu countries country year of establishment sai organization model approach to state audit austria 1761 court of audit (coa) dominant compliance audit, court activity, development of performance audit belgium 1830 court of audit (coa) dominant compliance audit, court activity, development of integrated approach bulgaria 1880 collegial body model (nao) development of integrated approach cyprus 1879 collegial body model (nao) integrated approach czech republic 1993 collegial body model (sai) development of integrated approach denmark 1849 monocratic office model (nao) development of integrated approach estonia 1990 collegial body model (nao) development of integrated approach finland 1824 collegial body model (nao) development of integrated approach france 1318 court of audit (coa) dominant compliance audit, development of performance audit, court activity germany 1714 the court of audit model that went into the collegial body model whole-of approach, no court activity greece 1862 court of audit (coa) dominant compliance audit, court activity hungary 1990 collegial body model (sao) development of integrated approach ireland 1923 monocratic office model (c & ag) focus on financial audit, development of integrated approach italy 1862 court of audit (coa) dominant compliance audit, court activity latvia 1918 collegial body model (nao) development of integrated approach lithuania 1919 collegial body model (nao) development of integrated approach luxembourg 1840 court of audit (coa) dominant compliance audit, court activity malta 1885 collegial body model (nao) integrated approach the netherlands 1447 court of audit (coa) dominant compliance audit, court activity poland 1919 collegial body model (sao) development of integrated approach portugal 1933 court of audit (coa) dominant compliance audit, court activity romania 1864 court of audit (coa) court activity, integrated approach, development of performance audit slovakia 1993 collegial body model (sao) development of integrated approach slovenia 1994 court of audit (coa) court activity, integrated approach, development of performance audit spain 1436 court of audit (coa) dominant compliance audit, judicial activity sweden 1651 collegial body model (nao) development of integrated approach great britain 1314 monocratic office model (nao) focus on financial audit, integrated approach croatia 1993 collegial body model (sao) development of integrated approach, development of performance audit source: the table is the result of research according to the pic compendium data, second edition, analysis overview, 2014 (bonić, đorđević, 2017) 2. the development of public-sector internal audit consulting services with the aim of improving public fund management in eu countries for the purpose of more efficient functioning of the public sector, it is justified that both the state and professional community insist on the “consistent implementation of managerial accountability and the development of the role of executives and accountants” (borović, zakić, 2013). particular contribution to this comes from the well-organized public internal control in the public sector (internal control and internal audit) 62 lj. bonić, d. jakšić, k. mijić public internal control in public sector entities should help and support the improvement of the management function: improving the management system and improving operational performance (bonić, 2016). improving the management function should ensure secure functioning of the public sector, through the protection of business sustainability (going concern principle) and the maintenance of the planned spending of previously allocated funds (principle of budgetary financing). also, public internal control in public sector entities should contribute to risk management (koning, 2007), risks most often occurring as: misuse of financial, personnel, and technical resources; failure to implement budget policy decisions in a regular and effective manner; fraud and errors; inadequate accounting records; failure to provide timely and reliable information on the management of finances and resources (see more in: akrap et al., 2009). risk management is a process of identifying, assessing, and controlling risks in order to provide reasonable assurance of the achievement of the organization’s objectives. internal audit in the public sector, in the context of providing support to the top management in governance, provides: a) assurance services on the adequacy of risk management, internal control, and governance processes of the public sector entities in achieving the set goals, b) consulting services consisting of recommendations, guidance, training, assistance, and other services in order to increase the value and improve the entity management and internal control processes. trends in the development of internal audit within the pic system in eu countries (regardless of whether it develops as a specific pic system or a pifc system) are the following (compendium of the public internal control systems in the eu member states, 2012; pic compendium, 2014):  the trend of decentralization of pubic internal control and the connection and harmonization of its elements since the beginning of the 21 st century, most of the current 28 eu countries have been engaged in the modernization of the control environment in the public sector (compendium of the public internal control systems in the eu member states, 2012). some countries have special internal control institutions, independent of public sector entities (strong public internal control centralization), such as intervención general de la administración del estado (igae) in spain, or inspection générale des finances in luxembourg (compendium of the public internal control systems in the eu member states, 2012). a large number of eu countries (germany, the netherlands, sweden, great britain, the 13 new eu member states) consider that public sector entities need to build a public internal control system within their internal management process. decentralization of public internal control (internal control and internal audit) should ensure the improvement of public fund management, greater accountability when spending public funds, and impact on the prevention and detection of fraud and corruption in the public sector.  internal audit in the public sector – scope of work, regulations, organization for most eu members with a decentralized internal audit system, risk management is becoming part of the governance mechanism in the public sector. this is the case in estonia and sweden, while in some countries, like ireland, only some departments are implementing risk management strategies. several countries, on the other hand, do not mention explicitly risk assessment within their internal oversight arrangements (germany, italy, luxembourg, and spain). tendencies in development of external and internal audit in the public sector 63 the basic components of today’s work programs for most internal audit functions are audit of financial information and audit of compliance, i.e. regularity of financial management. however, the introduction of performance-based budgeting (program budgeting), evaluation, risk management, and the growing complexity of technology, used to provide government services, have a significant impact on increasing demands for the provision of diverse expertise, consulting services, and higher quality of all services from internal audit. the extension of internal audit scope is reflected in the implementation of: financial services, financial assurance services, management services, it audit, performance audit, information safety and security, and others. only data from estonia is out of this, as it shows that the demand for consulting services has declined in this country. all eu member states have an established internal audit function in the public sector. some eu countries (luxembourg, greece) have plans to decentralize internal audit in the public sector, and currently rely on other arrangements. in italy, a special committee was entrusted to provide the minimum legal basis for the functioning of internal audit. spain attaches great significance to a form of ex ante internal audit, and a form of subsequent audit of public sector activities is also being developed. many eu member states have established audit boards/audit committees. regarding the professional regulatory framework for internal audit in the eu member states, the international standards for the professional practice of internal auditing of the institute of internal auditors and the code of ethics are generally accepted, while 18 member states have a specific set of internal audit standards in the public sector. internal audit does not cover all parts of the public sector in the same way in all eu member states. in some countries, in addition to the central level of government, internal audit covers both regional and local governments (lithuania, estonia), while some countries intend to develop an internal audit at local government level (romania). in sweden, only some agencies (which manage complex and sensitive operations, with large resources and high costs) have an obligation to set up internal audit. most eu countries have organized internal audit in state bodies and institutions.  harmonization and coordination of internal control and internal audit in the public sector eu member states use different methods to harmonize and coordinate internal control and internal audit, from making recommendations for professional networking between financial control mechanisms and internal and external auditors to the establishment of a central harmonization unit. however, more than half of the eu countries have established a central harmonization unit (chu), which is responsible for: proposing regulations in this field, harmonizing standards, monitoring quality and success, and establishing and coordinating human resources training activities. in most cases, chu is part of the ministry of finance, and is sometimes supported by independent advisory boards or committees. several eu member states have special forms of networking arrangements that can provide the necessary level of coordination (for example, austria, cyprus, denmark, germany, and latvia). the czech republic recently abolished its central harmonization unit for efficiency reasons. some eu countries (france, hungary, portugal, and great britain) highlight the importance of central harmonization units, in particular to create good and efficient arrangements for cooperation between managers of public entities and financial controllers and internal auditors. 64 lj. bonić, d. jakšić, k. mijić  cooperation of internal and external (state) audit in the public sector most eu member states have developed relationships between internal and external audit in the public sector, particularly in the area of (intosai gov9150): assessment of the subject of the audit (control environment, compliance of financial statements with legal and professional regulations, operational performance, entity management, risk management, and the like); documenting the entity’s operational processes (submission of plans and internal audit reports to sai); developing and implementing audit procedures; methodology and training of personnel; information on internal controls; investigating fraud and corruption. collaboration helps the exchange of ideas and knowledge between state and internal audit in the public sector, which affects the harmonization of their scope of work, and certainly contributes to strengthening the position of these professions in the public sector. this allows for identifying opportunities for joint promotion of good governance and accountability of public sector entities. special benefits stem from reducing the likelihood of job duplication, which largely ensures a high degree of efficiency of the conducted audit procedures without endangering effectiveness. thus, although the goal when assessing the achieved level of efficiency and effectiveness of internal control system is different, information exchange and joint implementation of inspection and other procedures are very important (endaya, 2014). coordination of plans provides a better understanding of the risks that the public sector entity faces, leading to more targeted audit, and, consequently, more useful recommendations. mutual communication provides better coordination of activities, clearer understanding of individual roles and demands of state and internal audit, better mutual understanding of the results of the work of the other, etc. the results of the 2015 survey (eurosai – eciia joint paper, 2015), conducted by the european organization of supreme audit institutions (eurosai) and the european confederation of institutes of internal auditors (eciia), provide a great deal of detail on the achieved cooperation between state and internal audit. in general, the most common ways of cooperation between state and internal audit are as follows:  mutual communication of audit reports (belgium, croatia, cyprus, denmark, finland, france, latvia, malta, the netherlands, poland, portugal, slovakia, spain),  regular meetings of state and internal auditors (austria, belgium, croatia, czech republic, denmark, france, hungary, latvia, lithuania, malta, the netherlands, slovakia),  using the results of the work of the other party in order to determine the nature, timing, and scope of the audit procedures to be carried out (belgium, bulgaria, croatia, czech republic, the netherlands, poland). table 2 gives a review of the organization of internal control/internal audit and the scope of established cooperation between external and internal audit in the public sector in the eu countries. tendencies in development of external and internal audit in the public sector 65 table 2 the organization of internal control/internal audit and the scope of established cooperation between external and internal audit in the public sector in the eu countries country model of internal control organization/ establishment of ia cooperation between external and internal audit in public sector austria accepted components of pifc access to the eu. ia establishment in all ministries, state selfgovernments and 50% of agencies and public enterprises well-established (informal) cooperation in the field of planning, information exchange, reporting belgium accepted components by pifc access to eu/ ia is performed in 22 institutions of executive power formal cooperation is established at the regional level, while formal agreement does not exist with ir in individual entities and provinces bulgaria decentralized internal control. established pifc system and ia within it established cooperation between state and internal audit through agreement cyprus centralized internal control. ia is in charge of the internal audit service (ias), headed by the commissioner of internal audit internal audit reports are taken into account when developing an annual external audit plan czech republic decentralized internal control, established pifc system and ia within it mutual use of work in order to determine the nature, timing and scope of audit procedures denmark decentralized internal control. within each ministry ia established in all departments of the federal administration realizing cooperation through the organization of quarterly meetings. cooperation regulated by law. estonia established pifc system and ia within it high level of cooperation and coordination finland established pifc system ia is performed in government ministries and state bodies strong cooperation established france strong centralization of internal control. starting the process of decentralization of internal control there is cooperation in the domain of internal audit work for the needs of the court of audit germany ia organized in all departments of the federal administration the decisions on the nature and degree of contact between the state and internal audit are the responsibility of the state audit unit. greece the trend of decentralization of the pic, centralized ia for ministries and regions no cooperation agreement hungary decentralized internal control, established pifc system established cooperation. state audit uses the work of internal audit but also involves it directly in carrying out the audit procedure ireland decentralized internal control, ia established in all government departments and state organs joint review of financial statements italy the trend of decentralization, ia is performed within the ministry of economy and finance there is no cooperation agreement latvia decentralized internal control. ia established in ministries and institutions directly responsible prime minister the external audit cooperates with the internal audit through the ministry of finance and the state revenue service lithuania decentralized internal control. established pifc system established strong cooperation and coordination of work luxembourg strong centralization of internal control ia is performed by the general inspectorate of finance establishing cooperation 66 lj. bonić, d. jakšić, k. mijić country model of internal control organization/ establishment of ia cooperation between external and internal audit in public sector malta centralized ia is performed by the internal audit and investigation department (iaid) established cooperation. meetings are organized to discuss relevant issues and proposals of the audit program netherlands ia is centralized for the minister, but it is operatively present in all ministries. it is performed by the central government audit department there is intense cooperation between the court of audit and the internal audit at the national level poland decentralized internal control, established pifc system state auditors cooperate with internal auditors on a daily basis during auditing activities. portugal decentralized internal control; ia is organized at the level of ministries and most bodies in the public sector the law regulates cooperation at the highest state level. at lower levels, internal audit cooperation is carried out as needed. romania decentralized internal control. adopted pifc system cooperation is regulated by the concluded protocol between the ministry of finance and the court of audit. slovakia decentralized internal control. adopted pifc system cooperation between state and internal audit is covered by the strategies for the development of state audit. slovenia decentralized internal control. adopted pifc system although informal, strong cooperation has been established in a number of areas: planning, reporting, risk assessment, etc. spain centralized internal control, ir is performed by the interagency general de la administración del estado – igae formal cooperation has not been established. sweden accepted pifc components when accessing the eu informally established cooperation in the field of assistance in the work, information exchange and reporting in individual engagements. great britain decentralized internal control ia organized in all entities cooperation established in the exchange of strategies, plans and work. croatia decentralized internal control. adopted pifc system the agreement established cooperation, giving and monitoring the implementation of recommendations. source: the authors created the table based on: compendium of the public internal control systems in the eu member states, 2012; pic compendium, 2014 3. trends in the development of external and internal audit in the public sector of the balkan countries the balkan countries, slovenia, croatia, romania, and bulgaria, are eu members, while montenegro, bosnia and herzegovina, serbia, and macedonia are in the process of joining the eu. as part of the eu accession process, these countries had to implement numerous reforms in the public sector, as well as other areas, in terms of harmonizing and accepting appropriate legislation (eu legal acquisitions and professional regulation) and establishing good governance practices, not just using eu funds, but also by collected public funds. reforms in the public finance management and control system require: activity-based budgeting and accounting in the public sector (abm); transformation of the accounting basis tendencies in development of external and internal audit in the public sector 67 from cash to accrual; changing the budgeting model from linear to program-based (based on performance); building an integrated internal control framework; development of pifc – public internal financial control system (internal financial control system in the public sector); directing and monitoring the development of pifc schemes by the european commission (dg financial control); audit and evaluation of the pifc system carried out by: the european council, the european commission, the european parliament (ep), and the european court of auditors; decentralization of internal supervision; construction of new public management (npm), development of an integrated approach to audit in state audit institutions, development of coordination and cooperation between sai and internal audit in the public sector. in the balkan countries, state audit was established relatively late in relation to european countries with a long tradition in this field. regulatory framework related to state audit in these countries includes laws, by-laws, and professional regulations (bonić, đorċević, 2017). the sais of slovenia, romania, croatia, and bulgaria have established integrated approach to audit, while bosnia and herzegovina, montenegro, macedonia, and serbia, in addition to the established financial audit and compliance audit, develop performance audit. the court of audit model was accepted in slovenia and romania in the organization of state audit, while croatia, bulgaria, bosnia and herzegovina, montenegro, macedonia, and serbia defined the collegial body model. the balkan countries have adopted the concept of a pifc system for organizing internal public sector oversight by opening negotiation chapter 32 – financial control, which, among other things, requires the establishment of internal financial control in the public sector. the pifc system has been developed by the european commission with the aim of establishing effective internal oversight in the public sector for the purpose of protecting and ensuring the proper use of public funds in countries acceding to the eu. in the process of joining the eu, the pifc system is introduced into the candidate country practice through two processes. one is the preparation and use of pre-accession eu assistance programs, for which institutions must have fully established system of internal financial controls, in line with eu requirements. the second is the negotiation process, in which negotiation chapter 32 obliges the candidate country to establish and implement a system of internal financial controls (see more in: informacioni centar eu u beogradu, 2015). all balkan countries have adopted the strategy for the development of internal financial control (oversight) in the public sector. the pifc system has become an integral and vital part of the public sector in these countries, and executives in internal financial management, internal control, and internal audit become, or have become, a special professional category of public sector employees with formal qualifications and long-term training programs. the main components of the pifc system in these countries are: 1. financial management and control, 2. functionally independent internal audit, and 3. central unit for harmonization and coordination of the financial management and control system and internal audit methodology (chu). the countries of the balkans currently in the process of joining the eu face the challenges of implementing the pifc system, the process of decentralization of internal oversight, the establishment of internal audit in all public sector entities, directing internal oversight to the governance function of public sector entities (especially risk management) and improving their operations. the construction of the pifc system should contribute to the strengthening of public administrations and increase accountability regarding public spending and finances (especially those derived from eu funds) of the balkan countries that are in the process of eu accession. 68 lj. bonić, d. jakšić, k. mijić internal audit, as part of the pifc system, is institutionalized in the balkan countries through laws, by-laws, and professional regulations (bonić, đorċević, 2017). internal audit in the public sector in the balkan countries is mandatory for direct and indirect users of public funds, and it is established mostly in one of the following four ways: as an independent internal audit unit, by the appointment of an internal auditor, the establishment of a joint internal audit unit or an agreement with the entity that performs internal audit in one of the three preceding ways, with the prior approval of the chu. internal audit in the public sector is an independent activity that should provide independent, objective assurance and professional opinion in order to improve the performance of the users of public funds. in this context, it should provide: a) assurance services and b) consulting services consisting of recommendations, guidelines, training, assistance, and other services in order to increase value and improve the entity management process (performance, i.e. expediency audit, it audit, expertise, financial assurance services, management improvement, risk management, information safety and security, implementation of training...). internal audit in the public sector refers to all business functions and processes, identifying deficiencies and weaknesses, and making recommendations for improvement. it should be emphasized that the balkan countries that joined the eu managed to develop these services, while the balkan countries that are in the process of eu accession generally provide assurance services and are in the stage of development of consulting services. table 3 gives a review of the model of organization and approach to state audit, the coverage of public sector parts by internal audit and its scope of work, as well as forms of cooperation between state and internal audit. cooperation between external and internal audit in the public sector in the balkan countries has been established by agreement between sai and the central harmonization unit, but in the countries that are in eu accession stage, it is still at a more formal level, and implies internal audit by state auditors. often, the cooperation of external and internal audit in the public sector in these countries is based on initiatives undertaken by sais. numerous benefits are expected from the establishment of better links between internal and state audit: exchange of ideas and knowledge, reducing unnecessary duplication of auditors’ work, and increasing audit coverage based on risk assessment. supreme audit institutions (sais) and internal auditors should communicate in the area of audit planning, jointly develop methodologies, organize joint training, and inform each other about submitted reports. also, within the framework of eu accession, sai should oversee the development of the pifc system (and internal audit within it) in the public sector. cooperation between external and internal audit in the public sector in the balkan countries has been established by agreement between sai and the central harmonization unit, but in the countries that are in eu accession stage, it is still at a more formal level, and implies internal audit by state auditors. often, the cooperation of external and internal audit in the public sector in these countries is based on initiatives undertaken by sais. numerous benefits are expected from the establishment of better links between internal and state audit: exchange of ideas and knowledge, reducing unnecessary duplication of auditors’ work, and increasing audit coverage based on risk assessment. supreme audit institutions (sais) and internal auditors should communicate in the area of audit planning, jointly develop methodologies, organize joint training, and inform each other about submitted reports. also, sai should, in accordance with the opening of negotiation chapter 32 – financial control, oversee the development of the pifc system (and internal audit within it) in the public sector. tendencies in development of external and internal audit in the public sector 69 table 3 external (state) and internal audit in the public sector and cooperation between them in the balkan countries country sai internal audit in the public sector sai organization model approach to state audit coverage of public sector parts by internal audit scope of work of internal audit in the public sector 11. slovenia court of audit (coa) court activity, integrated approach at central government level, 90100% of state entities, development at the level of local self-governments and municipalities assurance services* consulting services** 2. croatia collegial body (sao) development of integrated approach at central government level, 5060% of state entities, development at the level of local self-governments and municipalities assurance services* development of some consulting services** 3. romania court of audit (coa) court activity, integrated approach at central government level, 5060% of state entities, development at the level of local self-governments and municipalities (development of partnership on a geographical basis acor) assurance services* consulting services** 4. bulgaria collegial body (nao) development of integrated approach at central government level, 90100% of state entities, development at the level of local self-governments and municipalities assurance services* consulting services** 5. montenegro collegial body (sai) development of integrated approach, development of performance audit at central government level, some state entities, development at the level of local selfgovernments and municipalities mainly assurance services* 6. bosnia and herzegovina collegial body (sao) development of integrated approach, development of performance audit at central government level, 5060% of state entities, development at the level of local self-governments and municipalities mainly assurance services* 7. macedonia collegial body (sao) development of integrated approach, development of performance audit at central government level, 5060% of state entities, development at the level of local self-governments and municipalities assurance services* development of some consulting services** 8. serbia collegial body (sai) development of integrated approach, development of performance audit at central government level, state entities, development at the level of local self-governments and municipalities mainly assurance services* source: the table was created by the authors based on: eurosai eciia joint paper (2015), pic compendium (2014) * assurance services – performed through financial audit, compliance audit, evaluation of internal controls, and making proposals for their improvement ** consulting services – relate to the performance of: various expertise, financial assurance services, management improvement (in particular risk management), it audits, performance audits (expediency), information safety and security 70 lj. bonić, d. jakšić, k. mijić areas where no cooperation is achieved between internal and external audit in the public sector in the balkan countries are (eurosai – eciia joint paper, 2015): evaluation of performance of internal audit units, development of internal audit procedures, implementation of audit procedures (audit of multi-location entities), and research into abuses and corruption. the attention of the european commission, numerous consultants, and twinning partners is focused on the implementation of the pifc system, and, therefore, the implementation of internal audit in the public sector in the countries of the balkans, as well as in countries covered by the european neighbourhoods policy (enp) programs. the eu’s assistance to the balkan countries in building the elements of the pifc system also includes programs that were abundant since the beginning of the 21 st century: cards program; strategy paper for eu countries and individual countries that do not belong to the eu; programs that are part of the regional strategy paper; multi-annual indicative programs; several important ipa documents for the balkan countries; support for improvement in governance and management; project enhancement of municipal audit for accountability and efficiency in public finance management. support to these programs and internal control reforms, including the development of cooperation between external and internal audit in the public sector, is provided by sigma, consulting firms, twinning arrangements, and there are also experiences of the countries that have been admitted to the eu. also, there is support from the european commission and its bodies, as well as other competent european institutions. conclusion in the process of serious public sector reform in all eu and balkan countries, there has been a change and development in the scope of work of external and internal audit of the public sector in order to contribute to transparency and accountability in the use of public funds and the prevention of public sector abuse and corruption. in addition to the control role (providing assurance services), the state audit increasingly receives a consultative role (providing recommendations and advice), resulting in the development of an integrated audit approach. internal audit in the public sector is becoming the third line of defence for public funds users, through communication among three levels of internal oversight in defence against unplanned and irrational spending of public funds, and helps managers in the process of improving business management. the decentralization of internal audit and the focus of the state audit on the performance audit should contribute to the greater accountability of public sector managers in the spending of public funds. coordination and cooperation of internal and 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http://ec.europa.eu/budget/pic/compendium/index_en.cfm https://www.dri.rs/revizije/issai-okvir---medjunarodni-standardi-vri.82.html https://www.dri.rs/revizije/issai-okvir---medjunarodni-standardi-vri.82.html 72 lj. bonić, d. jakšić, k. mijić tendencije u razvoju eksterne i interne revizije u javnom sektoru u zemljama eu i balkana iako imaju različite i jasno definisane uloge, opšta svrha eksterne i interne revizije u javnom sektoru jeste da doprinesu dobrom upravljanju javnim sredstvima, odnosno efikasnosti, efektivnosti i ekonomičnosti državne uprave. u sklopu brojnih reformi u javnom sektoru zemalja eu, kao i zemalja balkana, koje su otpočele početkom 21. veka, eksterna revizija javnog sektora (državna revizija) razvija integralni pristup u svom delokrugu rada, što podrazumeva pružanje uveravanja parlamentu i građanima države da se javna sredstva koriste efektivno, efikasno i ekonomično i da su finansijski izveštaji i poslovanje entiteta javnog sektora u skladu sa profesionalnom i zakonskom regulativom (akcenat je na reviziji uspeha). interna revizija korisnika javnih sredstava pored pružanja usluga uveravanja, sve više je usmerena ka savetodavnim uslugama sa ciljem da menadžmentu pruži podršku u unapređenju upravljanja javnim resursima i rizicima, efikasnosti trošenja javnih sredstava i obezbeđenju kvalitetnih javnih usluga. kljlučne reči: državna revizija, interna revizija, javni sektor, integralni pristup, savetodavne usluge, zemlje eu i balkana facta universitatis series: economics and organization vol. 18, no 1, 2021, pp. 59 72 https://doi.org/10.22190/fueo201211005a © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the nigerian insurance industry competitive advantage: the role of innovation capability udc 368(669) sunday abayomi adebisi, joyce m. odiachi, abdul-hammed a. sulaimon university of lagos, lagos, nigeria abstract. emerging technologies have given rise to greater opportunities within the insurance sector with innovations upturning the traditional business model. this study examined competitive advantage and the relationship with innovation capability in nigerian insurance sector. employing a cross sectional research design, the study utilised primary data obtained from selected insurance companies through the use of a structured questionnaire. multistage sampling technique was used and data collected was analysed using regression analysis. the findings revealed innovation capability had a significant influence on competitive advantage. the study concluded that there was a need to pay attention to this capability with a capacity to boost the activities of the industry and recommendations were made. key words: competitive advantage, insurance, innovation capability jel classification: o31, o32 1. introduction organisations that aspire to effectively sustain competitive advantage may require an edge to contest on the boundaries of competence and technology. increased force in terms of product development, ease of imitation and shorter product life cycles amid global market competition, have created immense pressure on organisations’ activities geared towards innovation and their bid to sustain competitive advantage (chadha, 2009). porter (1985) observed technological change as one of the major catalysts of competition and is received december 11, 2020 / revised january 21, 2021 / revised february 12, 2021 / accepted february 17, 2021 corresponding author: joyce m. odiachi university of lagos, lagos, nigeria e-mail: joycemodiachi@gmail.com 60 s. a. adebisi, j. m. odiachi, a-h. a. sulaimon not important for its own sake, but for the effect it has on competitive advantage and industry structure. according to iddris (2016), latest changes in technology, market conditions as well as variations in consumer preferences, have shown the importance of innovation capability to an organisation and its survival. innovation activity is the ability of an organisation to replicate innovation success and has been recognised as an essential source of competitive advantage (aas & breunig, 2017; calantone, cavusgil & zhao, 2002). innovation helps insurance firms reduce costs, create efficiencies in service delivery, improved flexibility and demand for its products and services (ernst & young, 2015). an organisation’s ability to change the base of its resource by crafting, incorporating, recombining and discharging same is referred to as capability (eisenhardt and martin, 2000). breakthrough technologies such as cloud computing, data analytics, telematics, and so on have spurred fundamental transformation of the insurance industry worldwide. these same innovations may perhaps assist the nigerian insurance industry enhance its product offerings, create better efficiencies in customer experience, minimise the claims processing time amongst others. these technologies are enabling new product creation and business models (iif, 2016). whilst these emerging technologies offer opportunities for growth, practitioners with the existing old models, are forced to respond to these changes. the last few decades have seen the rise in globalisation which has shrunk the barriers in trade across continents thus enabling cross continent business and has inadvertently given rise to the need for insurance on a global scale. it is thus expected that companies who want to play within this global space, have capabilities that will enable them offer customers a robust platform to deal with regarding insurance. the resource-based view theory (rbv) has been repeatedly employed as the base theory in terms of organisational resources usage to attain competitive advantage. when referring to the rbv, it does not relate only to just resources, but also attributes, required by these resources in order to gain competitive advantage (barney & clark, 2007). for organisations to gain competitive advantage, they require competitive positioning further than their marginal competitor (peteraf & barney, 2003). organisations’ leaders devise strategies and allocate resources to meet goals. to achieve this, technology is required for value creation, seamless integration and improved competitive advantage. the need to pay attention to value creation has risen due to an increased demand for insurance. the focus for organisations may perhaps be delivering products and services to customers that are appropriate and align with their needs as against selling to them existing products, with an obligation to meet these demands through improved capacity while still keeping an eye on making a difference. insurance is more or less a promise that cannot be seen, as such, a certain level of guarantee is required and this guarantee is very important to the customer. mathur and tripathi (2014) note that the reinforcement of this comfort is further guaranteed when the customers believe and experience differentiated processes, speed and efficiency. challenges within the insurance sector cut across a plethora of issues from political, regulatory to technological, which all exert pressure thus leading to increased competition with little or no effort to diversify (rajapathirana & hui, 2017). developments and changes in technology, growth within the economy, regulatory frameworks have all started calling for new techniques in the way things are done. while some of these frameworks like recapitalisation, will help create excess liquidity and opportunities for the companies to improve their level the nigerian insurance industry competitive advantage: the role of innovation capability 61 of innovative offering, others such as product guidelines may unwittingly suffocate innovation (abongo, mutinda and otieno, 2019). in recent times, there have been quite a number of innovations globally in the insurance sector relating to telematics, customer relations management, big data, product innovation, amongst others (klapkiv & klapkiv, 2017). the use of big data is to mine information in profiling customers, identifying specific needs, innovating new products to suit these needs and enhancing product offerings. better efficiencies are also created in customer experience with the use of customer relationship management tools that assist to store information, recognize sales opportunities, record possible service issues and give opportunity for improvement. another benefit to the insurance industry is the use of telematics in the tracking of vehicles which has become quite common and assist in the recovery of vehicles when stolen. these and many more, may assist the industry create more interconnections, improve risks management and enhance service delivery. according to czerniak and klapkiv (2018), the process of underwriting is a major stage in an insurance contract. gnatzy and moser (2012) in a study note that there is a need to have an innovation business model that is designed for insurance, while on the other hand, maina (2016) observe that there existed very poor implementation within insurance companies of innovation strategies and sound management programs designed towards innovation which could help create competitive advantage. the nigerian financial sector has quite a number of players within the insurance sub-sector which is the 5th largest insurance market in sub-saharan africa with reports however, that contribution to the gdp and penetration rate is still lower than most other african countries (pwc, 2015). the industry gross premium income grew from n300bn in 2017 to n413bn in 2018 (nia, 2018). despite this improvement, nigeria still is one of the few countries with such a huge market base to invest less in innovation capability. according to porter (1996), organisations who focus more on strategic positioning by executing different tasks than their contenders or comparable jobs in a unique way, rather than operational efficiency as a source of competitive positioning stand a better chance of attaining competitive advantage. application of strong innovation capability may improve the competitive advantage of insurance companies in nigeria. several studies have shown that innovation capability facilitates competitive advantage, most of these studies have focused on developed economies with a few on the developing economies, some on other sectors of the economy, while others on marketing or claims management (alsamydai, alnawas & yousif, 2010; bell and figueiro, 2012; rajapathirana & hui, 2017; anand & monin, 2013). however, to the knowledge of these researchers, there seems to be very little highlighted on innovation within the underwriting process in the nigerian insurance industry. to address this gap, this study explores companies within the sector and seeks to examine the relationship between innovation capability and competitive advantage. in line with the above objective, research question was asked and hypothesised thus: innovation capability will not influence competitive advantage in the nigerian insurance industry. 1.1. theoretical underpinning the resource-based view theory underpins this study. it acknowledges organisational resource as a mixture of its assets, information, knowledge, processes and capabilities 62 s. a. adebisi, j. m. odiachi, a-h. a. sulaimon within its control and assists in the conceptualisation and implementation of various strategies that have positive impact on the organisation (kimani & juma, 2015). the rbv theory as popularised by wernerfelt (1984) and barney (1991) is a well-known viewpoint in strategic management which states that every organisation requires specific competences and resources to sustain its competitive position. capabilities are complex patterns of skills which the rbv theory explains as a combination of a firm’s skills and knowledge accumulated over time (zhou, pan & urban, 2018). innovation capability may be categorised as an intangible resource. according to rua, franca and ortiz, (2017), intangible assets are considered to be strategic variables and sources of sustainable value. in line with the rbv theory, it is the conception, ownership, management and distribution of intangibles that expound variations in performance. resources, where they assist an organisation in improving its performance, may be designated strategic instruments (massey, 2016). according to wu, gu and zhang (2008) innovation capabilities are the abilities of an organisation to create and transmit to financial practice, new technological potentials that have the ability to respond to the changing environment. rbv theory supposes that a relationship exists between the resources and capabilities being deployed and competitive advantage (shan, luo, zhou & wei, 2019). it is thus not farfetched, in the context of this study, to say that innovation capability being an intangible asset and acting as an organisational resource, may perhaps be critical to competitive advantage of insurance firms. 1.2. innovation capability (ic) innovation is a tactical tool for organisations in their quest for competitive advantage and sustainable performance and its significance has repeatedly improved and supported the growth of businesses globally (chaudhry & verma, 2016). zawislak, fracasso and tellogamarra (2018) describe innovation as a means of competitive advantage and an organisation’s ability to absorb, alter and adapt into particular managerial and operational routines, a certain technology that has the capacity to lead the organisation to immense profitability and thus preserve itself. the oecd (2005) describe innovation as the implementation of a process, new method in business practice or marketing, or implementation of a new product or an improved product, goods or service that impacts the organisation or its external relations. studies on innovation have established that innovation not only is the opening up of new markets, but also the offering of new ways to serve existing and established markets (lambert & davidson, 2013). innovation as a basis of a business’s advantage is a consolidated subject in literature, and is viewed as a process dependent on technological capability (katz, 1984; desai, 1984; lall, 1992). capability as a concept is not a parameter for performance, but a guide as to the level to which an organisation is prepared in terms of development of innovation forces (borjesson & elmquist, 2011). innovation capability is, therefore, defined as the capacity of an organisation to identify new ideas and transform the same into new products, improved services and processes that are beneficial to the organisation. rajapathirana and hui (2018) observed that innovation is more a matter of survival than of competitive advantage. innovation capability can be described as the capacity of an organisation to identify new ideas and transform the same into new products, improved services and processes that are beneficial to the organisation. it is entrenched with all the strategies and structure that are in support of innovation in an organisation (gloet & samson, the nigerian insurance industry competitive advantage: the role of innovation capability 63 2016). an organisation’s innovation capability according to lerro, linzalone and schiuma (2014), is the skill to transform continuously ideas and knowledge and convert to new products, processes and systems that are beneficial to the organisation and other stakeholders. the study viewed ic from the perspectives of process, product, market and organizational innovation. existing literature has focused on different aspects of innovation and revealed a positive relationship between innovation activities implementation and organisational performance (slater, mohr & sengupta, 2014; vicente, abrantes & teixeira, 2015; hill, brandeau, truelove & lineback, 2015). ic has been measured as a single dimension, a dichotomous construct and multi-dimensional (cavusgil, calantone & zhao, 2003; cassiman & golovko, 2011). this study, while adopting the definition of lerro et al. (2009), will view innovative capability as a uni-dimensional construct. 1.3. competitive advantage (ca) competitive advantage is exhibited as positional advantage greater than that of competitors in either marketing or technological know-how which translates into hard-to imitate innovative products (hwang, choi & shin, 2020). according to barney and hesterly (2009), competitive advantage is the ability of a company to produce a higher amount of financial worth than their competitors. the art of creating value for an organisation’s client in a more improved manner than the competition is competitive advantage which can be achieved through differentiation, focus and cost strategies (porter, 2008). peteraf (1993) noted that an organisation that wishes to have competitive advantage, needs to ensure that resources are properly matched to environmental opportunities. the rbv premises that an organisation’s specific capabilities are warehoused within a single firm and the search for competitive advantage lies therein (wernerfelt, 1984). with the increase in global rivalry for supremacy by organisations, achieving and sustaining competitive advantage may have become important. stevenson (2009) noted that the achievement of an organisation in the deployment of its resources in meeting requests of its consumers when compared to their competitors is the measure of competitive advantage. for an organisation to effectively sustain competitive advantage, they need to look inwards to their unique resources and capabilities that they have control over and ensure that the foundation of its advantage is not easily duplicated by competitors (chen, zhou, zhou & xue, 2017; mahdi, nassar & almsafir, 2018). several extant literatures have defined and measured competitive advantage in various ways (christensen & fahey, 1984; stevenson, 2009), this study while reviewing as a uni-dimensional construct, will adopt the definition of li, ragu-nathan, ragu-nathan and rao (2006). 1.4. innovation capability and the insurance industry competitive advantage insurance the world over has grown over time, africa and nigeria not excluded. underlying drivers of change within the insurance industry across the world and great moves by insurtechs have seen the rise of innovations towards customer experience (iif, 2016). in recent times the insurance sector globally with the evolution of digital platforms, has focused quite heavily on technology solutions to enhance their services ranging from automated processes, use of telematics in motor insurance, building systems, and more recently, applying artificial intelligence and application programming interface in their activities. 64 s. a. adebisi, j. m. odiachi, a-h. a. sulaimon in an increasing competitive global market, organisations within this sector have come to understand innovation as an important component in the drive to meet up with the constantly changing demographic and technological competition. empirical evidence suggests that innovation thrives in a setting where frontrunners are able to see possible connections, spot chances and take advantage of them. and that organisations who imbibe innovation along with the application of better productive process, tend to have a more positive customer perception (gundaya, ulousoy, kilic & alpkan, 2011). economists concur that innovation is responsible for a considerable proportion of progress in the profitability of organisations and that innovation thrives in a setting where frontrunners are able to see possible connections, spot chances and take advantage of them (chatterji, glaeser & kerr, 2013; abongo, mutinda & otieno, 2019). according to aio (2018) the insurance industry across the globe has grown tremendously and in africa, this growth is led by south africa at an outstanding 14.2%, kenya at 3% and ghana at 1%. while the sector is plagued with a few challenges as earlier highlighted, some repeatedly identified ones are low penetration, poor awareness, low trust level, and regulatory stiffness amongst others. to drive the continued growth of the sector, and help address the perennial problems, there is a need to embrace innovation. according to lambert and davidson (2013), a business model is a value creation design by which an insurance company creates value to its clients and is embedded with delivery mechanism. most companies use a model by which they are well identified and this signifies the type of offerings they provide to their clients the business models are often very rigid in nature, constraining and prolonged in terms of response times (mcgrath, 2010). traditional models of agency, brokerage and bancassurance in the distribution and marketing of their products and services have been the norm (gera, costonis, sandquist, bramblet & secchi, 2018) while the nigerian model is commonly a revenue generation focused one where sale of policy is the major indicator (mudaly, 2017). however, of recent, the enforcement of a customer-based approach has been included in the market conduct and business practice guidelines for insurance institutions issued by the national insurance commission (naicom). though these still constitute the major channels in most insurance markets, the recent entry of insurtechs start-ups providing insurance services are turning the tide of these old models (kottmann & dordrechter, 2018). the market is a maze of forever changing scenarios across all fronts and this requires companies to implement very high-level expertise in its structure and service delivery (ernst and young, 2015). though there have been some great signs of improvement within the nigerian insurance sector, in comparison to other emerging markets, there is still room for more with a current penetration level of 0.3% in comparison to other countries both overseas and in africa (aio, 2018). insurance as a risk transfer mechanism is a socially germane to the economy, innovation is an indispensable driver of change. the sector globally, is gradually embracing recent technological developments (schanz, & sommerrock, 2016). the penetration rate and gdp contribution is quite discouraging and in need for a shift, with discussions around technology and innovation. the aio (2018) noted that increasing levels of literacy and wealth have created a new middle class across the continent, thus increasing the pool of insurable assets and lives of an untapped potential market. they further noted that to increase penetration, strategies need to move from the previous inward looking to a more outer focused view through implementation of technology such as data analytics, internet of things and so on. innovative technology will further aid ease of interaction and access to customers as well as client profiling, product design and quality service (lehman, 2017). the nigerian insurance industry competitive advantage: the role of innovation capability 65 1.5. empirical review rajapathirana and hui (2018) explored innovation capability and innovation type and their relationship to firm performance in sri lanka. the results observed that ic and innovation efforts had significant relationship with firm performance and concluded that effective innovation capability had the ability to assist insurance companies deliver more effective innovation outcomes. the study recommended that insurance companies apply this as it would help improve firm performance. czerniak and klapkiv (2018) explored characterization of innovations of underwriting patents in the insurance market. the study results showed that there was no significant correlation between premium growth and the number of patents from the industry. the study concluded that innovation activity was a strong propellant for the insurance industry development. hwang, choi and shin (2020) investigated the mediating role of ic in the relationship between individual level entrepreneurial competencies (ec) and firm level ca in korean smes. results showed that a stronger relationship between the indirect effects of ec through organisational innovation capabilities and ca than the direct effects. the study concluded that improving ic was beneficial and increased competitiveness. it recommended that firms should inculcate innovation capability to sustain their superior position. abd aziz and samad (2016) investigated the moderating effect of firm age on the relationship between innovation and competitive advantage. using smes in the food sector of malaysia, the study employed structural equation modelling to test the hypotheses. the results revealed that innovation had a significant impact on competitive advantage and that firm age moderated the relationship. the study recommended that smes should invest in innovation to gain competitive advantage. waseem, loo-see, adeel and riaz (2018) examined innovation capability and organisational performance. the study observed that intellectual capital dimensions portrayed substantial affirmative direct and indirect effects on organisational performance unlike structural capital which was found to be insignificant. abongo et al., (2019) investigated the application of knowledge and skills in marketing of insurance in kenya as an exchange driver and found that innovation capabilities were largely directed towards external rather than internal developments. the study also noted that these components had no impact on performance and that the companies had failed to sustain the innovative capabilities for the future. anand and monin (2013) reviewed innovation processes in emerging markets. the study identified seven processes and postulated that these processes responded to some basic issues in respect of values, affordability and accessibility. the study concluded that while these issues may also be existent in developed markets, they have higher prevalence in emerging markets and recommended that innovation processes within the service space aim to trigger evolution and development. klapkiv and klapkiv (2017) investigated technological innovations in the insurance industry. the study viewed the use of technologies such as analytics, algorithms and sensors within the industry and its effect on the value chain. results showed that most of the processes within the value chain had been impacted by technology and concluded that whilst it had a positive impact, there might be increased dependence of the industry on other sectors. lerro, linzalone and schiuma (2014) who viewed described innovation capability from the perspectives of process, product, market and organisational innovation, investigated the role of innovation, intellectual capital, performance improvement and competitive advantage on an organisation’s value creation. the study found certain assumptions and concluded that 66 s. a. adebisi, j. m. odiachi, a-h. a. sulaimon there was a need for organisations to have dynamic capabilities and also engage the passion and imagination of the public through innovation. hagen, hales, reifel, pei and miller (2009) examined technology as the pivot point in the insurance industry and noted five main trends currently and that technology could play a role in transforming the insurance industry. the findings of the study suggested that social networking, telematics and service-oriented architectures are essential to the growth of a competitive advantage. chaudhry and verma (2016) reviewed innovation capability evaluation factors and observed that innovation capability had a strong influence on an organization’s competency and its capacity to sustain competitive advantage. 2. methodology of research the study employed a cross-sectional survey design. the study populace consisted of employees of 55 registered insurance companies in nigeria across license types (composite business, general business and life business) (naicom, 2019). the target population consisted of employees of selected companies. the sample size for this study was total enumeration of professional staff of the selected insurance companies. stratified random sampling was used in the first stage to select thirty companies ranked into three groups comprising top ten from each license type (composite business, general business and life business). the justification for selection was based on organisations with operational location in lagos state and shareholders’ funds. these criteria are assumed to provide good liquidity base and act as a possible edge in terms of innovation. six (6) companies were randomly selected in the second stage, with two companies from each of the group to ensure sufficient variance within the sample. sample size of 150 was derived employing convenience sampling of 25 employees of each organisation. data collection instrument was a questionnaire. measures for the study variables were adapted from extant literature. measurement for innovation capability which was defined as the skill to continuously transform ideas and knowledge and convert the same to new products and systems beneficial to all stakeholders (lerro et al., 2014), was done with ten items; competitive advantage defined as an organisation’s advantage to outperform its competitors (kay, 1994), was measured using nine items. the cronbach alpha for all scales were above the accepted range (α = 0.70). responses were elicited by means of a 5-point likert scale of strongly agree at “5” to strongly disagree at “1”. in line with the study of wu & chen, (2011) the study included size of the company and age as control variables in order to account for the effects of extraneous variables. the organisation size was calculated using the employee size while the age was calculated using number of years of operation. the study employed regression analysis to test the relationship between the study variables. 3. results table 1 report the descriptive statistics, the mean and standard deviation of the study constructs. table 1 shows the result of the descriptive statistics of the study constructs. the results show that innovation capability items had a mean score range of between 3.50 and 4.17 with a reasonable distribution about this central tendency measure, while the standard the nigerian insurance industry competitive advantage: the role of innovation capability 67 deviation had a range between 0.722 and 1.007. the study results further show that competitive advantage measured with 9 items had a mean score range between 3.52 and 3.95 while the standard deviation had a range of between 0.754 and 0.954. table 1 descriptive statistics constructs items questionnaire description mean sd innovation capability 1 in my organisation, there is adequate funding for innovation 4.01 .995 2 there is a culture of risk taking in my organisation 3.50 1.007 3 there is a process for innovation in my organisation 3.75 1.018 4 in my organisation, there is recognition for innovation 3.70 .938 5 there is development of new product, services and solutions in my organization 3.91 1.001 6 my organisation, successfully introduced and implemented innovative products/services 3.72 .933 7 our market ranking has increased due to innovation in my organization 4.17 .760 8 there is a target for innovation in my organisation 3.75 1.007 9 we have savings due to our innovation strategy in my organization 3.59 .912 10 in my organisation, our research and innovation management is excellent 3.66 .722 competitive advantage 1 the prices of our products are competitive in my organization 3.59 .954 2 in my organisation, our products/services have unique benefits than those of our competitors 3.52 .906 3 our products/services are of superior quality than those of our competitors / we are able to compete based on quality 3.57 .800 4 our services are more advanced than those of competitors in the same market in my organisation 3.89 .851 5 in my organisation, our products/services are customized to meet clients’ need 3.94 .765 6 we respond to clients’ request for new features in my organization 3.62 .887 7 in my organisation, our products/services are delivered on time and to specification 3.74 .754 8 in my organisation, our products/services are the first to hit the market 3.53 .861 9 our product development is fast in my organisation 3.95 .809 note: n=103; the summary statistics are reported. to effectively measure the relationship between the study variables in response to our hypothesis, the study employed regression analysis to test the relationship and the result is as shown in table 2 and 3 below. table 2 shows the result of the study when the control variables of firm size and firm age are treated. the result indicates that firm size and firm age when controlled, have no significant relationship with competitive advantage (f=2.921; p>.05). the results further show that (r2=0.055), thus indicating that the control variables account for only 1% variation in competitive advantage. 68 s. a. adebisi, j. m. odiachi, a-h. a. sulaimon table 2 model summary model r r2 adjusted r2 std error of the estimate 0.235 0.055 0.036 4.972 anovaa model sum of squares df mean square f sig. regression 144.393 2 72.197 2.921 .058 residual 2471.588 100 24.716 total 2615.981 102 coefficientsa unstandardized coefficients std coeff model b std error beta t sig. (constant) 38.703 2.290 16.900 .000 firm size -.200 .469 -.048 -.426 .671 firm age -1.428 .782 -.207 -1.827 .071 predictors: firm size, firm age dependent variable: competitive advantage source: field survey 2020 table 3 shows the regression results when the study variables firm size, firm age and innovation capability are treated. table 3 model summary model r r2 adjusted r2 std error of the estimate 0.628 0.395 0.377 3.998 anovaa model sum of squares df mean square f sig. regression 1033.272 3 344.424 21.544 .000b residual 1582.708 99 15.987 total 2615.981 102 coefficientsa unstandardized coefficients std coeff model b std error beta t sig. firm size -.303 .378 -.073 -.801 .425 firm age -.742 .635 -.107 -1.168 .246 innovation capability .515 .069 .590 7.457 .000 dependent variable: competitive advantage source: field survey 2020 the results in the model summary show correlation amongst the study variables with r= 0.628. the result also shows that r2 = 0.395, suggesting that 39.5% variation in competitive advantage is due to innovation capability, firm size and age with an unexplained 61.5% outside the scope of this study. the anova results reflect a positive significant relationship between the study variables in the model (f=21.544; p<.05). furthermore, the results show that innovation capability makes a significant contribution to the overall model (β = 0.590; t = 7.457, p < 0.05). therefore, the null hypothesis cannot be accepted, meaning that innovation capability does have an influence on competitive advantage after controlling for firm size and firm age. the nigerian insurance industry competitive advantage: the role of innovation capability 69 4. discussion and conclusion using selected companies with emphasis on the underwriting process within the companies, this study examined the relationship between innovation capability and competitive advantage in nigerian insurance companies. the study results showed that innovation capability had a significant relationship with competitive advantage. the results align with the study of chaudhry and verma (2016) who notes that innovative organisations tend to do better than organisations that are not very innovative. the study findings in relation to the contributions of innovation capability on competitive advantage corroborate existing studies (hagen, hales, reifel, pei & miller, 2009; czerniak & klapkiv, 2018) who observe that technology played a pivotal role in the required transformation and development of the insurance industry market. the results also agree with the study of klapkiv and klapkiv (2017) that processes within the insurance value chain had been impacted by technology. however, the result of this study extends the literature on innovation capability further, with emphasis on the underwriting process within the context of developing countries like nigeria. a very critical component of the insurance contract is the underwriting process. and one of the important areas within this process is the risk assessment and premium rating. having correct estimates from these two activities assists the organisation derive accurate results in terms of premiums charged, which translates to income which in turn aids financial stability. this study results in general highlight the importance of innovation capability and the need for the insurance industry in nigeria to take cognizance of this capability and its potential to assist achieve competitive advantage. the study concludes that insurance companies maximizing this potential focus on improving and harnessing the same across all operational functions rather than engage in a rate cutting war. the study results however, should be considered in light of some limitations which include the number of participants and the use of cross-sectional survey. expansion in the participants and a longitudinal research is suggested for future studies. this study looked at underwriting process, deviating from the usual focus on product and customer. future studies should look at other units within the organisation. the population of the study was limited. it is thus suggested that the population be expanded for future research. the study contributes to existing literature on innovation capability and competitive advantage by considering the impact on underwriting process within the insurance market in nigeria. the policy implication is that global market and customers are aligning more with industry players who have the capability to meet the requirements, immediate interactions and play internationally, which are only enabled through innovative techniques. thus, insurance firms should harness available growth in the technology space as this is a key factor to their ability to sustain competitive advantage. the study further recommended that insurance companies in nigeria understand and exploit intangibles as valuables, especially in terms of innovation capability, identify and harness innovation capability through adequate investments and align with market shifts to help improve competitive advantage. references aas, t. h., & breunig, k. j. 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(2018). comparing the international knowledge flow of china’s wind and solar photovoltaic (pv) industries: patent analysis and implications for sustainable development. sustainability, 10(6), 1883. konkurentna prednost nigerijske industrije osiguranja: uloga inovacione sposobnosti nove tehnologije su omogućile veće mogućnosti u okviru sektora osiguranja, gde su inovacije preokrenule tradicionalni biznis model. ovaj rad proučava konkurentnu prednost i njen odnos sa sposobnošću za inovacije nigerijskog sektora osiguranja. uz pomoć međusektorskog dizajna istraživanja, studija koristi primarne podatke dobijene od odabranih osiguravajućih kompanija uz pomoć strukturisanog upitnika. korišćena je tehnika višefaznog uzrokovanja, a dobijeni podaci su analizirani uz pomoć regresivne analize. rezultati su pokazali da je sposobnost za inovacije imala značajnog uticaja na komparativnu prednost. studija zaključuje da postoji potreba da se obrati pažnja na ovu sposobnost sa mogućnošću da se pojačaju aktivnosti industriuje i date su preporuke. ključne reči: konkurentna prednost, osiguranje, inovaciona sposobnost facta universitatis series: economics and organization vol. 18, no 2, 2021, pp. 187 201 https://doi.org/10.22190/fueo210319013a © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper ownership structure and financial performance of manufacturing firms in sub-saharan africa1 udc 339 mayowa gabriel ajao, jude osazuwa ejokehuma department of banking and finance, faculty of management sciences university of benin, benin city, nigeria abstract. this study investigates the effect of ownership structure on the financial performance of listed manufacturing firms in three sub-saharan africa countries (nigeria, kenya and south–africa) based on the critical mass indices of their respective bourse. relevant data from the financial reports of sampled firms were analyzed using the co-integration test and the system-gmm for a period 2010-2019 using return on asset, and tobin-q as dependent variables while government ownership, block ownership and institutional ownership concentrations were explanatory variables. the empirical results revealed that all the explanatory variables have significant effect on the performance indicators (roa, tobin q). the result of robustness checks also revealed that both government and institutional ownership concentrations have predominately negative effect on financial performance for the respective countries while block ownership concentration is largely positive for most of the manufacturing firms. the study recommends that policy makers should create favorable policies to encourage balanced investment from all categories of investors and ensure only few owners who have the wherewithal to diversify and attract skills and competencies to improve firm performance. government should also retain some ownership in foreign and local firms to enhance shareholders’ confidence. key words: ownership structure, manufacturing firms, performance, gmm jel classification: g32, l25, l60 received march 19, 2021 / revised may 10, 2021 / accepted may 26, 2021 corresponding author: mayowa gabriel ajao department of banking and finance, faculty of management sciences university of benin, benin city, nigeria e-mail: ajao.mayowa@uniben.edu 188 m. g. ajao, j. o. ejokehuma 1. introduction the modern argument about the owner-manager relationship was initiated by berle and means (1932) and proposed an indirect association among the diffusion of equity holdings and company’s profitability. they suggested that a complex diffuse rights break down the relationship among management and ownership, in furtherance optimization of income is hence not certain. the fewer equities each equity holder holds the less authority he or she can exert on the skilled agent. after been torpid for years, the argument was engaged by monsen, chiu and cooley (1968) who examined the influence of the parting of rights from control on the value of big companies. they discovered that principal managed companies were more lucrative than companies managed by agents. the recent past has witnessed significant changes in ownership concentration with respect to ownership structure mechanism, due to breakdown of reputable firms like enron and worldcom in u.s.a. the trend was replicated across the globe as evidenced by collapse of parmalat company in europe, chuo aoyama in asia, jcl and randgold in south africa, skye bank in nigeria, uchumi, imperial bank and chase bank in kenya (ongore & k’obonyo,2011). attracting keen scholarly consideration to the relevance of the various ownership structure influencing profitability of firms, the link between ownership structure and performance of firms has led to a serious concern to corporate investors leading to a significant consideration in the larger scope of modern finance and amongst various stakeholders. jiang (2015) recommends that since ownership structure is an important component in present corporate governance mechanism, there should be a departure of firm ownership from firm management. berghe and levrau (2007) note that ownership structure is primarily the driving force mutually for investing public and creditors because owners of a firm have economic relations with a company and influence the types of decisions taken by the firm to reduce the exposure to financial risk and improve financial performance. this is because ownership concentration has the capacity of putting decent governance structures in place to enhance firm’s ability to attract external funding (trien & chizema, 2011). villalonga and amit (2006) suggest a direct relationship between rights acquisition and company’s profitability because board members elected by the owners’ function as the intermediary between them and their managers. the board is saddled with four main obligations such as: leadership obligation; stewardship obligation; monitoring obligation; and reporting back to owners which has a direct bearing on financial performance. jensen (1989) and lins (2002) argue that the effectiveness of the board helps to alleviate the agency conflicts whenever business decisions and choices of principals are at variance through controlling and monitoring the managerial actions. the internal influence imposed by the board reinforces the external function of the markets in monitoring and controlling managers (jensen, 1989). according to brown (2004), the constraints imposed by the board to the management makes them to be extra vigilant as they exercise their discretion to avoid managerial ineptitude, which leads to weak financial performance and wears away potential investors confidence. mugobo et al (2016) present evidence that in advanced economies, ownership structure is largely dispersed while the ownership structure in developing nations is highly concentrated. they observed that largely absorption of ownership structure is a product of porous legal system in developing nations, which exposes minority shareholders’ interest to financial risk. a majority of quoted firms in sub-sahara africa bourses have mixed forms of ownership, the main forms of ownership are; government, block, institutional, foreign, ownership structure and financial performance of manufacturing firms in sub-saharan africa 189 and managerial ownership that impacts the profitability of the firms either positively or negatively high ownership concentration stands out as a common characteristic of listed firms at the respective bourses. this consequently empowers controlling shareholders to impose power by selectively choosing to undertake activities with an intent of obtaining personal gain. this comes at the expense of marginal shareholders, (mudi, 2017; adebiyi and kajola, 2011). based on the researchers’ understanding, only the work of munisi and randy (2013) recently employed the dynamic–gmm to investigate the effect of concentrated rights on the performance of companies in sub-saharan african countries. this study however built on this previous research to focus on the impact of ownership structure on the profitability of manufacturing companies in sub-saharan african nations for a period of 10 years (2010 to 2019). the justification for this time frame is based on economic globalization regarded as one of the strong motives after the major financial modifications in various subsaharan african countries, an era of global competitiveness among manufacturing firms in the region. the geographical scope selected for this study are nigeria, kenya, and southafrica – the reason for this is centered on the fact that the nigeria bourse in terms of market capitalization is the third biggest bourse in the continent with a total market capitalization of over 13 trillion naira (nigeria stock exchange, 2018). the johannesburg bourse is presently rated the 19th biggest stock exchange in the globe by market capitalization and the biggest bourse in africa (jse.co.za, 2018). nairobi stock exchange has grown to become the continent’s fourth-largest exchange by trading volume and fiftieth largest by market capitalization as a ratio of gdp (nairobi stock exchange, 2018). the rationale for this study is to determine the effect of different ownership structures (government, block and institutional) on two performance measurement variables (return on assets and tobin q) with emphasis on quoted manufacturing firms of three selected ssa economies. the data analysis of the study was on the assessment of changes in the financial performance arising from adoption of different ownership structures. besides, this study adopts the system generalized method of moment (gmm) technique (an active panel data models which pools moment settings for the differenced equation with moments settings for the models in ranks) as a departure from the multiple regression technique commonly found in extant literature. the uniqueness of this study also focus on aggregate analysis of three ssa countries as different from previous studies with emphasis on individual country analysis. the comparative analysis of the two performance variables (roa and tobin q) to determine the best and superior performance measure of manufacturing firms is another significant contribution of this study to extant literature. the remainder of this study is organized as follows. section two reviews the relevant literature and previous studies related to this study. section three describes the methodologies adopted for the studies including the model formulation and data analysis techniques. in section four, the main empirical test results were presented and interpreted while section five summarizes the empirical findings and concludes the study. 2. literature review 2.1. ownership structure ownership structure is a vital internal corporate governance component where principals can scrutinize and oversee the operations of the company to safeguard their investment, (madhani, 2016). it signifies the proportion of equity owned by single shareholder and huge 190 m. g. ajao, j. o. ejokehuma block shareholders (individuals that hold minimum 5% of shares within the firm). according to maina (2014), benjamin & dirk (2015) and nahila & amarjeet (2016) concentrated ownership is defined by the distribution of stakes in relation to the distinctiveness of the equity holders and its classification within company’s governance structure that has impacted firm financial performance for several decades. jiang (2015) recommends that since rights concentration is an important component in present company’s governance structure, there should be a departure of firm ownership from firm management. three basic types of ownership concentration have been identified in the extant literature. block ownership concentration: this is when a proportion of a firm’s equity is acquired by major equity holders. government ownership concentration: a situation in which large proportion of equities and controlling shares of a firm is owned by government. this ownership structure is enhanced through political appointment of the managers. institutional ownership concentration: these are organizations that own huge sums of resources to invest and they do commit huge amount of funds into a firm’s equity e.g. pension reserves, insurance firms, mutual funds and combined performance is termed as the neutrality assumption. 2.2. relationship between ownership concentration and performance of firms: empirical review ownership structure can be along two scopes: rights acquisition and ownership mix. right acquisition implies stakes of the biggest shareholder while ownership mix is the allotment of company’s equity with reference to the distinctiveness of the biggest equity holders. gonzalez and molina (2010) noted that superior rights-acquisition enhances company’s profitability and concluded that rights structure is the essential factor that impacts firm’s ownership and supervises resources distribution, and it has a huge effect on firm performance. though according to friedman (1953), saunders et al (2000), firms operate uniformly well under various rights settings since competition in the market will reduce all ineffective forms in the long run. therefore, there is no influence of rights structure on profitability; an ideal rights structure and profitability depend on the environment. malik (2011) conducted a study on the influence of rights concentration on risk and growth in usa non-financial companies with a sample size of 187 firms, the variance in equity/profit ratio was used as an indicator of risk while its dependency was tested on ownership concentration. the findings of the study showed an insignificant positive correlation between firms coordinated by managers as opposed to firms controlled by owners and in addition a high variance in profit/equity. garcia and sanchez (2011) examined the correlation among ownership structure and profitability of companies by employing a nonbalanced panel consisting of 76 firms in the spanish bourse between 1999 and 2002, the study employed piecewise ols and 2sls regression with random effects. the outcome of the study specified the presence of a quadratic correlation among tobin q and large shareholdings. santamaria and azofra (2011) carried out an examination on the association for ownership structure and corporate profitability of eighty banks in spain. employing panel data collected between 1996 and 2004, analyzed by generalized methods of moments, the study found a point of departure for voting rights and the larger shareholders cash flow for smaller firms by roa. the study was well conducted with reference to financial ratios determining bank performance. similarly, adebiyi and kajola (2011) examined the correlation between rights structure and firm performance in nigeria, using a sample of thirty listed companies from 2001 to 2008, ownership structure and financial performance of manufacturing firms in sub-saharan africa 191 using pooled ols, the outcome being a significant negative association among rights structure and performance of the company. wanjiku (2014) investigated the effect of ownership structure on profitability of sixty-three quoted companies at the nse between 2010 to 2014. the researcher employed both cross-sectional and descriptive survey method to allow for evaluation of the results of the research. the study found that ownership concentration alleviates conflicting interest between managers and owners thus promoting improved monitoring. mutisya (2015) examined the correlation among investors shareholding and firm profitability by adopting a descriptive research design of sixty-four listed companies on the nse from 2010 to 2014. multiple regression analysis results reported a weak positive correlation as the outcome of the study. mugobo et al. (2016) investigated the influence of company’s control through ownership structures; rights acquisition, state ownership and administrative ownership on firm profitability. a multiple regression analysis was used on sampled data gathered over ten years from 2001 to 2010 for eighty south africa firms with roa as indicator for profitability. findings revealed a positive relationship between rights acquisition and profitability of the firm. mudi (2017) investigated the influence of rights structure on profitability of firms quoted on the nse. it employed descriptive survey and longitudinal research design of fifty-two companies quoted on the nse between 2011 and 2016. the research found out that rights acquisition has a huge influence on firm profitability. paniagua, rivelles & sapena (2018) studied firms’ performance with different ownership structure of us firms using generalized non-linear equation technique. the study found that ownership structure has negative relationship with profitability ratio. kao, hodgkinson & jaafar (2018) used data of taiwan listed firms to study the relationship between ownership structure and firm value using panel estimation and 2sls. the study found that ownership structures are positively related to firm value. in the same vein, alabdullah (2018) studied the relationship between ownership structures and firm performance of jordan non-financial firms listed on amman stock exchange. the multiple regression results showed that managerial ownership has a positive impact performance but no significant impact of foreign ownership on performance. sadiq, othman & ooi (2019) studied the relationship between managerial ownership and firm performance of firms listed on bursa malaysia with the aid of single equation model. the study found limited evidence showing the non-linear relationship between firm performance and managerial ownership. feldman, amit & villalonga (2019) also explored the non-linear relationship between managerial ownership and firm profitability of 350 firms using linear regression. they found a positive relationship between ownership structure and tobin’s q for board ownership of between 0 and 5% and negative relationship for board ownership of between 5 and 25%. dakhlallh, rashid, abdullah & dakhlallh (2019) used pool mean estimates to study the effect of ownership structure on firm performance of 180 selected jordan firms. the empirical results showed that ownership structure has a significant effect on the performance of the selected firms. established on the extensive and robust empirical review above, it is clear that ownership acquisition and firm performance have been largely explored from diverse perspectives and methodologies. these methods are largely part of conventional techniques regrettably, these approaches have their drawbacks and demerits in that they are sensitive to outliers, focuses on the mean of the dependent variables, the test statistics might be unreliable when data is not normally distributed. this study however adopts the system generalized 192 m. g. ajao, j. o. ejokehuma method of moment (gmm) technique. accordingly, the system gmm technique is an active panel data model which pools moment settings for the differenced equation with moments settings for the models in ranks which can make assessment most effective. this technique supports the premise that the first difference of instrumental parameters for rank parameters is not connected with unobserved specific effects, that is an indication that the difference of scheduled parameters can be used as a tool for rank equations. 3. methodology the study adopts the causal research design to investigate the impact of ownership concentration on firm performance of selected manufacturing firms in sub-sahara africa countries. all quoted manufacturing firms listed on the stock exchanges of the three selected sub-sahara africa countries (nigeria, kenya and south africa) constitute the population of this study while a sample of one hundred manufacturing firms were purposively selected from each country based on data accessibility and the requisite information for the period (2010-2019) under study. the relevant data for this study were obtained from the various audited financial statements of sampled manufacturing firms with the system generalized method of moment (gmm) technique as the main analytical technique for determining the effect of different ownership structure on two different performance measurement variables. 3.1. model specification this study employs two specific models such as book-keeping base performance and the market base performance indicators. the model incorporating measures (roa and tobin q) and decomposing ownership concentration into various variables (government ownership, block ownership, institutional ownership) to suit the study is stated in a functional form as follow: )1(),,,,( −−−−−−= ageassetsinownblowngownfroa (1) )2(),,,,( −−−= ageassetsinownblowngownftobinq (2) the econometric form of the models is stated below as: )3( 54320 1 −−−++++++= tititittitit uageassetsinownblownigownroa  (3) )4( 543210 −−++++++= tititititit uageassetsinownblowngowntobinq  (4) where: gown = government ownership; blown = block ownership inown = institutional ownership; assets = total asset age = age of firm; roa = return on assets, tobin q = tobin q where i represent companies in all sample and t represents the scope or period of study. 0 to 5 are coefficients of the variables to be appraised and ut is the error term. ownership structure and financial performance of manufacturing firms in sub-saharan africa 193 hence the gmm model specification is: )5( 11 1111 1 1 −−−−−−−−−−−−−++ +++++=   == ==== − − it m j j m j j m j j m j j m j j m j tjtit ageassets inownblowngownroaroa t   )5( 11 1111 1 1 −−−−−−−−−−−−−++ +++++=   == ==== − − it m j j m j j m j j m j j m j j m j tjtit ageassets inownblowngownroaroa t   (5) )6( 11 1111 1 1 −−−−−−−−−−−−−++ +++++=   == ==== − − it m j j m j j m j j m j j m j j m j tjtit ageassets inownblowngownroatobinq t   )6( 11 1111 1 1 −−−−−−−−−−−−−++ +++++=   == ==== − − it m j j m j j m j j m j j m j j m j tjtit ageassets inownblowngownroatobinq t   (6) operationalization of variables: the definitions of the parameters in the model as well as their measurement, expectations and sources of data are stated in table 1 table 1 definition of variables and sources of data employed in regression analysis variable type of variable definition and measurement a priori expectation return on asset (roa) dependent roa= profit after tax/total assets tobin’s q (tq) ,, total market value of equity-total liability /total asset institutional ownership independent the sum of 5% corporate ownership (+) block ownership ,, the sum of all 5% major share ownership (+) government ownership ,, the sum of all 5% and above government shares holding (+) firm age ,, the number of years from the day the firm was established till 2017 (+) assets ,, current assets +fixed assets (+) source: authors’ compilation (2020). 4. data analysis and interpretation stationarity test: from the stationarity tests results (table 2), all the variables under consideration are characterized by first-order integration thus the panel estimations reveal a common unit root process. this further validates the suitability of our choice of estimation techniques since the theoretical built up is predicated on stationarity assumption. the stationarity test follows the levin, lin and chu (which assumes homogeneity in the dynamics of the auto regression coefficients for all panel members); im, pesaran and shins. basically, the study adopts the im, pesaran and shin as well as levin, lin and chu unit root tests approaches. from the stationarity test results, all the parameters employed in this study were found to be stationary, although not at levels, but at first difference i(1). thus, the variable defined in our dynamic panel modelling approach; gmm, are in line with the recommendation of arellano and bond (1991), arellano and bover (1995) and blundell and bond (1998), that variables of the gmm specifications must be stationary in their first difference. 194 m. g. ajao, j. o. ejokehuma panel co-integration test: the co-integration result (table 2) shows evidence of a co-integrating association among the variables in both models as reported by the significance of the fisher statistics from trace test as well as that from max-eigen test. specifically, from the roa equation, trace test indicates 6 co-integrating equations at both 5% and 1% levels, while max-eigen value test indicates 2 co-integrating equations at both 5% and 1% levels. also, from the tobinq model, trace test indicates 6 cointegrating equations at both 5% and 1% levels, while max-eigen value test indicates 2 co-integrating equations at both 5% and 1% levels. the result indicates that the parameters used in the study are all significant at the conventional test levels as shown in panel a and b of table 2. table 2 stationarity test at first differencethe levin, lin and chu; im, pesaran and shin approach variables levin, lin and chu im, pesaran and shin w-stat null hypothesis: unit root (assumes common unit root process) null hypothesis: unit root (assumes individual unit root process) stat prob remark stat prob remark age -2.07 0.02** i(1) -5.00 0.05** i(1) blown -7.92 0.00*** i(1) -4.75 0.00*** i(1) gown -7.93 0.00*** i(1) -3.45 0.00*** i(1) inown -7.51 0.00*** i(1) -4.54 0.00*** i(1) assets -7.11 0.00*** i(1) -3.68 0.00*** i(1) roa -16.70 0.00*** i(1) -8.15 0.00*** i(1) tobinq -19.44 0.00*** i(1) -9.16 0.00*** i(1) nb: *significant at 10%, **significant at 5%,***significant at 1%. source: authors’ computation, 2020 table 3 johansen-fisher co-integration test results panel a: fisher statistics from trace & max-eigen test result for roa model variables variables hypothesized no. of ce(s) trace statistic 5% critical value 1% critical value max-eigen statistic 5% critical value 1% critical value series: age blown gown inown assets roa none 183.69** 94.15 103.18 60.62** 39.37 45.10 at most 1 123.07** 68.52 76.07 40.76** 33.46 38.77 at most 2 82.31** 47.21 54.46 25.49 27.07 32.24 at most 3 56.82** 29.68 35.65 22.39 20.97 25.52 at most 4 34.43** 15.41 20.04 19.15 14.07 18.63 at most 5 15.28** 3.76 6.65 15.28 3.76 6.65 panel b: fisher statistics from trace & max-eigen test result for tobinq model variables variables hypothesized no. of ce(s) trace statistic 5% critical value 1% critical value max-eigen statistic 5% critical value 1% critical value series: age blown gown inown assets tobinq none 168.72** 94.15 103.18 48.47** 39.37 45.10 at most 1 120.25** 68.52 76.07 41.07** 33.46 38.77 at most 2 79.18** 47.21 54.46 24.23 27.07 32.24 at most 3 54.96** 29.68 35.65 20.60 20.97 25.52 at most 4 34.36** 15.41 20.04 18.08 14.07 18.63 at most 5 16.28** 3.76 6.65 16.28 3.76 6.65 source: authors’ computation,2020 nb: *(**) denotes rejection of the hypothesis at the 5%(1%) level ownership structure and financial performance of manufacturing firms in sub-saharan africa 195 discussion of findings and policy implication the panel estimation results for this study are reported in table 4. the hausman specification test reported in the lower segment of table 4 fails to reject the randomeffects model in favor of the fixed effects model. the implication of the above finding is that some parameters may be fixed over time, but vary between countries, and others may be fixed among countries, but vary over time. the inference that can be derived from the hausman specification test is that the random-effects model is favored to the fixedeffects model for the levels regression estimates for the roa model. on the other hand, the result from the traditional panel estimation for tobinq model as reported in table 5 rejects the random-effects model in preference for the fixed effects model. also, results of the dynamic model for roa are presented in the second part of the table 4, while results of the dynamic model for tobin’s q are reported in the first part of the table 5 respectively. the outputs from the second-order serial correlation test for both equations (from the arellano-bond test) indicate that residuals from the dynamic panel equation are not serially correlated. this further implies that the instrumental variables employed in estimation are valid and unbiased. the p-value of the sargan test is judiciously large for both models. thus, we fail to reject the null hypothesis at 1% level, that the set of instruments we used in gmm for both the roa and tobinq models are correctly specified. hence, that there are no problems of misspecification with the set of instruments incorporated into our gmm identity. in addition, all the series incorporated into the dynamic panel model are utilized at first difference, and this follows the prescription of arellano and bond (1991). from the results in table 4, the coefficient of one-period lagged value of roa was positive and significant statistically at 1% in the dynamic panel model and is in consonance with our a priori expectation (similar to the result of tobin q in table 5). precisely, the outcome reveals that a unit increase in the tobin q of sub-sahara african countries in the previous year will lead to a corresponding increase in firm profitability (proxies by roa and tobin’s q) of the entire region in the current year by 0.18 unit. the implication of the above findings is that previous year performance has the tendency to positively influence both current and future performance behavior of the manufacturing sector in sub-sahara africa. this suggests that the impact of the previous shocks in financial performances among manufacturing firms in sub-sahara african countries create positive spill-over effects, which translate into present circumstances and future opportunities of the region. in addition, the coefficient of government ownership concentration was positive in the random and fixed effects models, the gmm model from the tobin q equation as well as the fixed effects model from the roa equation. this finding further substantiates earlier findings of netter & megginson (2001) and boubakri & cosset (2005) who argue that government owned firms are advantaged as the government can allocate capital to them for investment to prompt financial and economic development, mostly for nations that have economic institutions that are underdeveloped and are undertaking government funds for projects with social benefits. ongore and k’obonyo (2011), mrad and hallara (2012) and munisi & randy (2013) further posit that, government retains some ownership in privatized firms to boost shareholder confidence, investment protection and managerial monitoring. it however turned adverse in the case of random effects model as well as the gmm panel data estimation results from roa model. this further confirms previous findings of ongore and k'obonyo (2011), mishari (2012), alulamusi (2013) and mutisya (2015) 196 m. g. ajao, j. o. ejokehuma who observe that government ownership is inefficient, characterized by bureaucratic bottlenecks and the ownership rights of government firms do not have clear incentives to improve firm performance. also, the coefficient of the two-period lagged value of government ownership concentration was positive in all panel estimation results from the roa model. though, it was only significant at 1% level in the fixed effects model. furthermore, the coefficient of block ownership concentration was negative in the roa random effects and dynamic panel models, while it was found to be positive in all estimations for the tobin’s q model as well as the roa fixed effects model. in addition, it was statistically relevant at 1% level in estimating both the roa and tobin’s q fixed effects models as well as the dynamic panel model for tobin’s q relations, while it only became significant statistically at 10% level in the roa dynamic panel model and tobin’s q random effects model, respectively. our results on the positive impacts of block ownership concentration on firm’s profitability further conform to previous findings of holderness and sheehan (1988), morck etal (1988), wruck (1989), gorton and schmid (1996), and shleifer and vishny (1997) who emphasize that a high acquisition of equity tends to create more pressure on agents to behave in certain ways. similarly, the coefficient of one-period lagged value of block ownership concentration was positive in both random effects and panel estimation results from the roa model, while it was found to be negative in all estimations for the tobin’s q model as well as the roa fixed effects model. it was statistically significant at 1% level in both the roa fixed effects model and the dynamic panel estimations from the tobin’s q model respectively. likewise, the coefficient of the two-period lagged value of block ownership concentration, though, only significant at 1% in the fixed effects model, was negative in all panel estimation results from the roa model. in addition, the coefficient of institutional ownership acquisition was positive in the roa random effects and dynamic panel models. this is in line with previous findings of rhoades (2000); elyasiani and jia (2010); mishari (2012); gayan and ishari (2016) who believe that supervision by institutional shareholders is mostly to lead to improved company profitability because, as sophisticated and major investors, institutional shareholders have the strength and expertise to supervise organization at low cost, and capability to wield enough authority to change the control formation and the firms path of operations. however, it was found to be negative in all estimations for the tobin’s q model as well as the roa fixed effects model respectively. interestingly, it was statistically significant at 1% level in the roa fixed effects model as well as the tobin’s q fixed effects and gmm models respectively. although, it only attained statistical significance at 10% level in the roa gmm and tobin’s q random effects models respectively. in the same way, the coefficient of one-period lagged value of institutional ownership concentration was negative in both random effects and panel estimation results from the roa model, while it was found to be positive in all estimations for the tobin’s q model as well as the roa fixed effects model. also, it was statistically significant at 5% level in the determination of profitability of the selected manufacturing that are value-optimizing companies in the sub-sahara africa region from the dynamic panel estimation result for tobinq model and 10% level in both roa and tobin’s q fixed effects models. a positive coefficient ensued in all panel estimations for the roa model in the case of the association between manufacturing performance and two-period lagged value of institutional ownership concentration. however, this was only significant at 1% level in the roa fixed effects model. ownership structure and financial performance of manufacturing firms in sub-saharan africa 197 table 4 panel data estimation results for roa model (sub-sahara africa) variables random effect model fixed effect model panel gmm model coeff t-stats prob coeff t-stats prob coeff t-stat prob c 3.68 0.88 0.38 16.6 8.40 0.00*** roa(-1) 0.21 3.85 0.00*** gown -3.26 -9.13 0.00*** 0.04 0.73 0.47 -2.91 -7.00 0.00*** gown(-1) 2.33 3.99 0.00*** -0.29 -3.88 0.00*** 1.28 1.88 0.06* gown(-2) 0.77 1.42 0.16 0.15 2.68 0.01*** 0.37 0.60 0.55 blown -0.61 -1.36 0.17 0.35 4.90 0.00*** -0.53 -1.64 0.10* blown(-1) 0.45 0.72 0.47 -0.20 -2.69 0.01*** 0.55 1.46 0.15 blown(-2) -0.21 -0.42 0.67 -0.21 -4.02 0.00*** -0.35 -1.35 0.18 inown 0.60 1.26 0.21 -0.36 -4.83 0.00*** 0.60 1.80 0.07* inown(-1) -0.48 -0.72 0.47 0.15 1.79 0.07* -0.67 -1.58 0.12 inown(-2) 0.29 0.54 0.59 0.29 5.48 0.00*** 0.34 1.07 0.29 assets 0.00 0.83 0.41 0.002 3.53 0.00*** 0.002 3.33 0.00*** age -0.01 -0.09 0.93 -0.47 -6.69 0.00*** -0.38 -2.75 0.01*** no. of observation 239 239 209 r-square 0.27 0.76 adjusted r-square 0.23 0.71 f-statistics (prob) 7.55(0.00)*** 15.77 (0.00)*** hausman test chi^2 (11) = 21.10 (0.0323) sargan test chi^2(12)=16.514(0.16) test for second order autocorrelation z=0.5998(0.549) nb: *significant at 10%, **significant at 5%,***significant at 1%. (author comp.2020) table 5 panel data estimation results for tobinq model variables panel gmm model random effect model fixed effect model coeff t-stats prob coeff t-stats prob coeff t-stat prob c 2.23 3.33 0.00*** 2.41 9.12 0.00*** tobinq(-1) 0.18 17.18 0.00*** gown 0.01 0.28 0.78 0.02 0.42 0.67 0.03 8.97 0.00*** gown(-1) -0.01 -0.59 0.56 -0.08 -1.76 0.08* -0.04 -4.37 0.00*** blown 0.10 8.39 0.00*** 0.09 1.85 0.07* 0.03 11.52 0.00*** blown(-1) -0.04 -2.99 0.00*** -0.01 -0.10 0.92 -0.01 -0.81 0.42 inown -0.12 -8.61 0.00*** -0.09 -1.82 0.07* -0.03 -15.59 0.00*** inown(-1) 0.03 2.42 0.02** 0.01 0.13 0.90 0.01 1.70 0.09* assets 0.00 -56.47 0.00*** 0.00 -3.45 0.00*** 0.00 2.60 0.01*** no. of observation 239 269 269 r-square 0.08 0.872 adjusted r-square 0.23 0.053 0.852 f-statistics (prob) 2.887(0.00)*** 15.77 (0.00)*** hausman test chi^2(8)=35.543(0.00) sargan test chi^2 (21) = 27.95(0.14) test for second order autocorrelation z = 1.26(0.21) nb: *significant at 10%, **significant at 5%,***significant at 1%. source: authors’ computation, 2019 5. findings and conclusion the results obtained in the empirical analysis of this study were found to be robust to both specification and data interpretation. the general outcome implies that rights acquisition essentially has huge influence on performance of manufacturing firms. more specifically, 198 m. g. ajao, j. o. ejokehuma both government and block ownership structures have a huge negative effect on performance of manufacturing firms in sub-sahara africa countries while institutional rights ownership has a significant direct effect on performance of manufacturing companies in sub-sahara africa countries. however, based on market base measurement (tobin q) model, both government and block ownership structure have significant direct effect on the performance of manufacturing firms in sub-sahara africa countries. institutional ownership concentration however has a significant negative effect on profitability of manufacturing firms in sub-sahara africa countries. total assets has a significant positive impact on performance of manufacturing companies in sub-sahara africa countries. firm’s age has an adverse significant effect on profitability of manufacturing companies in sub-sahara africa countries. it is worthy to note that on the basis of comparison between the two indicators of profitability of manufacturing firms in ssa countries, the market base valuation model is a better measure based on the findings above. this finding is mostly important because it has shown that there is no one best financial performance measurement at all time, the uniqueness of the situation will enable corporate managers of manufacturing firms to know the best performance measurement variable to adopt when analyzing their firm performance in relation to ownership structure. conclusion this study investigates the effect of ownership structure on the financial performance of listed manufacturing firms in three sub-saharan africa countries (nigeria, kenya and south–africa) using the system generalized method of moment (gmm) technique of data analysis. generally, our findings show that there was a robust relationship among rights acquisition and profitability of listed manufacturing firms sub-sahara africa. therefore, it can be concluded that different ownership structures were statistically significant in influencing the performance of manufacturing companies quoted in the respective bourses of selected sub-sahara africa economies this conclusion corroborates the conclusion of alabdullah (2018), feldman et al (2019) and dakhlallh et al (2019) whose respective studies also conclude that ownership structures significantly influence the performance of firms, but contradict paniagua et al (2018) whose study concludes that ownership structure has negative relationship with profitability ratio. ownership structure of manufacturing firms has been embraced by most firms and has taken center stage of most economies in the world. this is so because it helps in building an efficient and robust corporate governance which can enhance performance of the individual manufacturing firm and lead to the overall growth of the various national economies. in order to gain extensively from the benefits of an effective corporate governance mechanism, regulatory agencies of ssa countries should put in place different institutional reforms that will help in carrying out operational activities within the ssa region with little or no stringent rules that can help manufacturing firm operate efficiently. this study contributes to extant literatures by employing the system gmm technique which provides a framework within which the relationship between ownership structure and financial performance were considered. besides, the study also compares the impact of different ownership structures on different measures of financial performance thereby revealing which type of structure has the most significant influence on which performance measure especially when considering manufacturing firms in ssa context. ownership structure and financial performance of manufacturing firms in sub-saharan africa 199 this study being an aggregate cross-country study encountered the limitation of heterogeneity in data collection and measurement. this problem arose because of the different data computational techniques across the ssa countries, however, the system gmm estimator was able to produce less bias and more precise data estimate. recommendations the results from the empirical analysis provide strong background and inferences for certain policy and practical recommendations for practitioners and policy makers. in the first place, the study shows that a long run correlation occurs among ownership concentration and profitability among the manufacturing firms in ssa region. thus firms need to consider corporate governance as a long run strategy for promoting growth and other forms of expansions. since the study has shown that the impact of rights acquisition differs on the basis of possession dimension, there is need for investors to consider the area of interest before engaging in investment. the regulatory agencies within each of the countries in the region should also consider providing enabling environment for encouraging intra-regional integration for manufacturing firms to enhance operational activities. the future direction of research in this study is dynamic in the context that there is need to consider the influence of dispersed ownership together with ownership structure with regards to the effect of both forms of ownership on firm performance. besides, financial sector development indices may also be included in future studies models. also econometrically, further study can use non-linear (as different from linear equation adopted in this study) single equation model to test the relationship between ownership structure and financial performance of manufacturing firms. 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(2015). the effect of ownership structure on the financial performance of firms listed at the nairobi securities exchange. retrieved from: http://erepository.uonbi.ac.ke/bitstream/handle/11295/93458/ wanjiku_the%20effect%20of%20ownership%20structure%20on%20the%20financial%20performance%2 0of%20firms.pdf?isallowed=y&sequence=3 vlasnička struktura i finansijske performanse proizvodnih kompanija u podsaharskoj africi ovaj rad istražuje uticaj vlasničke structure na finansijske performanse navedenih proizvodnih kompanija u tri podsaharske zemlje (kenija, nigerija, južnoafrička republika) na osnovu indeksa kritilčne mase na njihovim orgovarajućim berzama. relevantni podaci iz finansijskih izveštaja uzrokovanih firmi su analizirani uz pomoć ko-integracionog testa i gmm sistema za period 20102019 korišćenjem roa i tobin-q kao zavisne varijabile dok su objašnjenja varijabile bila državno vasništvo, zajedničko vlasništvo i institucionalno vlasništvo. empirijski rezultati su otkrili da sve objašnjavajuće varijabile imaju značajnog uticaja na indikatore performansi (roa, tobin q). rezultati provere robusnosti su takođe otkrili da koncentracije i državnog i institucionalnog vlasništva imaju dominantno negativni uticaj na finansijske performanse navedenih zemalja dok je koncentracija blok vlasništva u velikoj meri pozitivna za većinu proizvodnih kompanija. studija preporučuje donosiocima odluka da stvore povoljne politike koje bi ohrabrile balansirano insvestiranje od strane svih kategorija investitora i obezbede da samo onih nekoliko vlasnika koji imaju neophodna stredstva da diverzifikuju i privuku veštine i kompetrencije poboljšaju performanse preduzeća. vlada takođe treba da zadrži neki udeo u vlasništvu domaćih i stranih firmi da bi povećala poverenje akcionara. ključne reči: vlasnička struktura, proizvodne kompanije, performanse, gmm plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 18, no 1, 2021, pp. 1 16 https://doi.org/10.22190/fueo201102002z © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper testing heckscher-ohlin-vanek theorem by using normalized trade balance approach1 udc 332.053 berislav žmuk, hrvoje jošić university of zagreb, faculty of economics and business, croatia abstract. the study described here introduces new approach for testing the heckscherohlin-vanek (hov) theorem based on the normalized trade balance concept. the intention was to include in the analysis all countries worldwide but due to the lack of data a certain number of countries had to be excluded. overall 111 countries were observed according to region and income level for the year 2014. the hov model was estimated using the sign test. it compared the expected sign of the normalized trade balance or net exports, according to the sitc 2 product classification, with the relative endowment of production factors intensively used in the production of a specific product. production factors were divided into groups such as produced capital, labour force and natural resources further divided into forests, metals and minerals, oil, coal and gas, pastureland and cropland. researchers in r&d per million people variable represented the impact of technological differences across countries. the results of the sign test have shown that the hov theorem held in 55% of cases. the percentage of matched signs was highest for the non-oecd high income countries (75%) and lowest for the lower middle income and low income countries (below 50%). key words: heckscher-ohlin-vanek model, sign test, normalized trade balance approach, the world jel classification: f1, f2 1. introduction classical theories of international trade observed price determination and trade pattern only from the supply side. at that time labour was the only factor of production. adam smith’s theory of absolute advantages determined the pattern of trade and specialization from received november 02, 2020 / revised december 07, 2020 / accepted december 09, 2020 corresponding author: berislav žmuk faculty of economics and business, university of zagreb, trg j. f. kennedyja 6, hr-10000 zagreb, croatia e-mail: bzmuk@net.efzg.hr 2 b. žmuk, h. jošić the different labour productivity in countries, while david ricardo’s theory of comparative advantages was based on different relative labour productivity. after the industrial revolution the capital was recognized as a factor of production as well. the neoclassical theory of international trade, established in 1920s and 1930s, was based on the heckscherohlin theory or also called the factor proportions model (heckscher, 1919 and ohlin, 1924). in the heckscher-ohlin theory there are two factors of production, labour and capital. comparative advantages are determined from the relative abundance of production factors. a country which is relatively abundant in a certain factor of production should export a commodity which intensively uses that factor of production. leontief (1953) confronted the heckscher-ohlin theory with data for the united states using 1947 input-output tables. he came to the conclusion that the united states exported labour-intensive products and imported capital-intensive products, which was in contrast with the heckscher-ohlin theory, the result later named the leontief paradox. the heckscher-ohlin theory has been subject of rigorous empirical investigation by many scientists but with little success. the results achieved on the sign test were often no better than flipping a coin. vanek (1968) expanded the standard heckscher-ohlin model on a multi-country, multi-factor and multi-commodity framework and explained if a country’s endowment in a certain factor of production exceeds that country’s share in total world’s gdp than that factor of production should be considered abundant. the so called heckscher-ohlin-vanek (hov) model or factor content model predicted that the content of relatively abundant factor embodied in export commodities should be larger than the content embodied in import commodities. the hov theorem, however, did poorly in empirical research, primarily because of restrictive assumptions of the very theorem. according to davis et al. (1997), the hov theorem is a central theorem in international economics theory but empirically it is a flop. the empirical failure is owed extensively to examining the theory in its least realistic form. the goal of this paper is to introduce a new approach for testing the heckscher-ohlinvanek theorem based on the normalized trade balance concept and its application by using sign test. the novelty of our approach is implementation of normalized trade balance concept alongside with the use of sign test instead of calculating the factor content of trade. therefore, the main advantage of this approach is simplification of the overall model by replacing the complex and complicated input-output matrix calculation process with the normalized trade balance. in addition, this simplified approach allows the larger sample of countries to be included in the analysis. there are five chapters in the paper. after the introduction, the second chapter provides literature review about empirical findings on the hov model. data and methodology are presented in chapter three. in the fourth chapter the results of the hov model analysis are presented and elaborated while the last chapter offers concluding remarks. 2. literature review in this chapter, literature review of empirical studies on the hov model after vanek’s (1968) seminal paper are to be presented and elaborated. bowen, leamer and sveikauskas (1987) examined the factor content of trade in a multi-factor and multi-country framework. the hov theorem was tested using sign and rank test on twelve factors of production for 27 countries for the year 1967 by using the 1966 united states technology matrix. the number of correctly matched sign on the sign test was greater than 50% for eleven out of twelve factors testing heckscher-ohlin-vanek theorem by using normalized trade balance approach 3 and but greater than 70% for only four factors of production. the authors found that the main reasons why the hov theorem has no strong support in data are disproportionate consumption, technological differences across countries and measurement errors. kim (1991) used the factor content model to evaluate the trade patterns of korea in trade with the united states and japan using 1978 korea’s and the united states’ total input requirements. he observed whether the factor abundance determines the sign of net exports. it was shown that the hov theorem does not perform well in predicting trade patterns when differences in technological capabilities are ignored. trefler (1995) investigated the features of data that led to the poor performance of the hov theorem identifying pronounced patterns in the deviations from the hov model. important facts such as the case of missing trade and the endowments paradox have often gone unnoticed. davis et al. (1997) used japanese regional data to test the hov model. the strict hov theorem performed poorly. the authors made two modifications regarding the general model; they abandoned the notion of identical technologies across countries and focused on production and absorption instead of using trade data. furthermore, when the assumption of universal factor price equalization was relaxed, the hov model performed remarkably well. maskus and webster (1999) developed a version of the hov theorem with parametric technological differences. the econometric model on factor contents of trade data, output and consumption for the united states and the united kingdom allowed for factorspecific and industry-specific productivity differences. davis and weinsten (2001) emphasized the importance of intermediates, aggregation bias and differences in patterns of absorption. choi (2004) relaxed the assumption of ideal factor price equalization deriving a modified hov theorem to predict the factor content of trade. the modified hov theorem used inputoutput coefficients of the source country for each traded good which resulted in approval of theorem validity. romalis (2004) derived and examined the factor proportions model in commodity markets. he made modifications in the standard heckscher-ohlin model by introducing transport costs and monopolistic competition. there was support in data for the rybczynski effect for fast-growing economies. chakrabarti (2005) demonstrated the importance of accounting for the absorption of inputs in a factor augmenting model of international productivity differences. the absence of such accounting can lead to biases in calculation of productivity parameters and could raise concerns about the decision about the hov theorem acceptance or rejection. requena et al. (2005) studied the hov model empirically using spanish regional data. after relaxing the strict assumptions of the hov theorem such as factor price equalization, identical homothetic preferences and hicks neutral technological differences, the model performed poorly. nishioka (2005) explored the international trade within the hov model for the developed oecd countries. the knowledge factor was introduced into the hov framework. it played an important role in determining comparative advantages for technologically advanced oecd countries. the strict hov model with the inclusion of knowledge capital held on its own. maskus and nishioka (2006) estimated factor productivities from individual technology data for 15 oecd countries. the hov theorem showed ability to explain north-south factor trade depending on factor abundance and productivity gaps. factor-augmenting productivity differences were found as appropriate modification of the hov theorem. artal-tur et al. (2008) built an assemble dataset for 17 spanish regions for the years 1995, 2001 and 2004 by employing regional specific input-output tables. the inclusion of intermediate inputs in the computation of technology matrix slightly improved the number of correct matches on the sign test. lu, milner and yu (2009) applied factor content tests using data for 58 countries and six factors of production. the results in general showed weak support for the hov model with minor improvements achieved after adjusting for technology differences across countries. 4 b. žmuk, h. jošić srivastava (2012) tackled the hov theorem with the help of the excess supply approach by examining trade performances of ten manufacturing industries in 46 countries for the year 2009. the major source of comparative advantages were capital stock and secondary and higher educated labour. the hov theorem proved to be valid in more than 60% of cases. srivastava and mathur (2014) performed partial and complete tests to investigate the validity of the hov theorem using india’s industry level data from 1989 to 2008 and five factors of production (primary educated labour force, secondary and tertiary level of educated labour force, capital and arable land). measured signs were correct in more than 50% of cases. zimring (2015) observed a large and rapid expansion of labour force in west bank due to near-elimination of commuting into israel. production shifted to more labour-intensive industries (the rybczynski effect). allowing for district specific deviations the changes in production were consistent with the hov model of trade. jošić (2016) tested the factor proportions model in the case of croatia based on the bilateral merchandise trade data between croatia and the countries of the european union and worldwide using the sign test. the results of the sign test have shown that croatia does not use its comparative advantages effectively, leading to the rejection of the factor proportions model. wu et al. (2017) investigated the greenhouse gas emissions intensities in canadian agriculture and processed food industry. natural resources were found to be the determining factor of canadian agricultural structure whereby canadian exports were more capital-intensive than imports. 3. data and methodology the intention was to include in the analysis all countries worldwide. unfortunately, due to the lack of data a certain number of countries had to be excluded from the analysis. despite that, 111 countries were observed overall. table 1 reveals that all parts of the world are well represented regionally. table 2 shows the distribution of observed countries according to their income. the full list of observed countries is displayed in table 7. table 1 distribution of observed countries according to their geographic region region number of countries east asia & pacific 13 europe & central asia 37 latin america & caribbean 16 middle east & north africa 12 north america 2 south asia 4 sub-saharan africa 27 total 111 source: authors according to world bank (2018, 2019a-d) and trade map (2019). table 2 distribution of observed countries according to their income income level number of countries low income 17 lower middle income 27 upper middle income 24 high income: non-oecd 14 high income: oecd 29 total 111 source: authors according to world bank (2018, 2019a-d) and trade map (2019). testing heckscher-ohlin-vanek theorem by using normalized trade balance approach 5 in order to perform the factor endowment analysis, the data have been collected for 10 different variables representing factors of production, gdp and technology differences. the starting point for the variable selection were the previous findings in this field of research with papers presented in the literature review. the final decision upon the list of variables which were included in the analysis, was made based on data availability. world bank (2018, 2019a-d) and trade map (2019) databases were used as data sources. the complete list of observed variables is displayed in table 3. table 3 list of observed variables variable group variable code variable income gdp gross domestic product (gdp) (in usd) production factors pcap produced capital (in usd) labf labour force (number of persons) natural resources for forests (in usd) mmin metals and minerals (in usd) ocng oil, coal and natural gas (in usd) past pastureland (in usd) crop cropland (in usd) fish fishing (in metric tons) technology r&d number of researchers in r&d per million people source: authors according to world bank (2018, 2019a-d) and trade map (2019). furthermore, the data availability determined the observed period as well. it has been decided that data which are available for the most recent period will be collected. according to the observed databases it turned out that the data for the year 2014 are the most recent one for the most of observed variables. unfortunately, the r&d variable had missing data for 46 countries (41.44%). in these cases, the data for the period closest to the year 2014 were used as an approximation for 2014 data. the fact that the missing values were imputed by using data from different periods should be taken as a limitation of the research. therefore, the results where r&d variable was included in the analysis should be observed and discussed with special attention. according to erlat and erlat (2003) products can be grouped into five groups with a different product factor intensity level. the goods have been classified into five product groups according to their product intensity. those are raw material intensive goods (rmig), labour-intensive goods (lig), capital-intensive goods (cig), easy-to-imitate research-intensive goods (eirig) and difficult-to-imitate researchintensive goods (dirig). the hov model is defined as follows (feenstra, 2003): 𝐹𝑖 = 𝑉𝑖 − 𝑠𝑖 𝑉𝑤 (1) where 𝐹𝑖 is the factor content of trade of country 𝑖, 𝑉𝑖 is the factor abundance of the country 𝑖, 𝑠𝑖 is the share of 𝑖 -th country’s gdp in the world gdp and 𝑉𝑤 is the world factor abundance. in the traditional hov model the signs on the left and right side of the equation 1 are compared. standard sign tests of the hov theorem go roughly as follows: (1) calculate the imports and exports of a country in terms of factors embodied in the goods that are traded, (2) compare the country's share of world’s gdp to a country's share of each factor of endowment in the total world’s endowment of that factor and (3) a country should be a net exporter of products that intensively uses abundant factor of production. 6 b. žmuk, h. jošić this paper implements new approach to explore the validity of the heckscher-ohlin-vanek theorem by using normalized trade balance concept on the left side of the equation 1. therefore, instead of calculating net factor content of trade from input-output tables, the normalized trade balance was calculated. the normalized trade balance is calculated using the following equation: 𝑇𝐵𝑖𝑗 = 𝐸𝑖𝑗−𝐼𝑖𝑗 𝐸𝑖𝑗+𝐼𝑖𝑗 (2) where 𝑇𝐵𝑖𝑗 is trade balance of country 𝑖 for the product group 𝑗, 𝐸𝑖𝑗 is export of country 𝑖 for product group 𝑗 and 𝐼𝑖𝑗 is the import of country 𝑖 for the product group 𝑗. according to the equation 2, if the export of products in a country 𝑖 is larger than the import of the same product groups, the resulting sign is positive and vice versa. the equation 2 assumes identical technology and factor content of imports and exports, which can be observed as a disadvantage of new the approach. the normalized trade balance alone, however, does not measure the factor content of trade. it has been used as a concept in the literature for decades as an alternative measure for the revealed comparative advantage. therefore, in the paper the sign test is conducted by comparing the expected sign of the net exports of sitc 2 product classification with the relative endowment of production factors intensively used in the production of a specific product, as given here: 𝑆𝑖𝑔𝑛(𝑇𝐵) = 𝑆𝑖𝑔𝑛(𝑉𝑖 𝑘 − 𝑠𝑖 𝑉𝑤 𝑘 ) (3) this paper takes a different approach, testing the hov theorem good-by-good. that is, instead of testing whether country's total trade in a factor is as we would expect from the country's factor abundance, it tests, for each good the country trades, whether it is traded (on net) in the right direction. for example, if a country is labour abundant, it tests whether each good that is produced with the labour intensive technology is (on net) exported. the whole analysis procedure can be briefly described as follows. firstly, the standardized trade balances for each of 96 product groups (there are no groups of products with codes 00, 77 and 98 whereas the product group 99 includes everything that was not classified before and because of that it is omitted from the analysis) of all 111 countries are calculated separately. afterwards, the values of variables for each observed country are compared to the world value and the corresponding share (proportion) is calculated. due to the specific characteristics of the r&d variable, for this variable the countries values are compared to the world average value. the resulting shares or proportions are then compared to the gdp share of the observed country in the overall world gdp value. if the calculated share is higher than the gdp share, it is assumed that the observed country is abundant in that factor of production. consequently, the conclusion is that the country should export product which intensively uses the abundant factor of production and in that case the positive sign will be achieved on the sign test. finally, two estimated signs are compared and it is checked whether they match or not. it is assumed that the sign test will result in a match in at least 50% of cases. testing heckscher-ohlin-vanek theorem by using normalized trade balance approach 7 4. results and discussion the sign test will be conducted by using the total of 10 variables observed in the data and methodology section. in order to get the insight about the distributions of the observed variables in table 4, the basic descriptive statistics of results is provided. table 4 descriptive statistics results of the observed variables, n=111 selected countries, data for 2014 variable unit statistics average st. dev. coeff. var. min 1st quart. median 3rd quart. max gdp bil. usd 669 2,038 304 1 20 66 405 17,428 pcap bil. usd 2,688 8,164 304 3 66 236 1,425 68,943 labf mill. per. 27 89 332 0 2 6 19 787 mmin bil. usd 87 315 362 0 0 3 21 2,101 for bil. usd 21 52 251 0 1 5 16 353 ocng bil. usd 275 765 279 0 0 4 80 4,952 past bil. usd 119 350 295 0 10 29 75 2,848 crop bil. usd 225 963 427 0 10 43 123 9,676 fish mill. mt 2 8 479 0 0 0 1 76 r&d no. per mill. 1,566 2,024 129 7 70 565 2,640 7,311 source: authors’ calculation. according to the descriptive statistics results from the table 4 it can be easily concluded that there are huge differences between 111 observed countries for each of the selected variables. the lowest variation in data, according to the coefficient of variation, seems to be for the r&d variable (129%) whereas the largest is for the fish variable (479%). the comparison of differences between the minimum and the maximum values shows that data ranges are very wide. if the values of quartiles are observed, it can be concluded that all variables are highly positively skewed. the main descriptive statistics results of calculated shares for the observed countries in the whole world value are shown in table 5. as expected, according to the results from table 4, huge differences in shares (proportions) are present here as well. table 5 descriptive statistics of calculated shares for the observed countries in the whole world value, n=111 selected countries, data for 2014 statistics variable gdp pcap labf mmin for ocng past crop fish r&d average 0.0085 0.0089 0.0081 0.0086 0.0087 0.0070 0.0085 0.0087 0.0081 1.0628 st.dev. 0.0258 0.0269 0.0268 0.0310 0.0218 0.0196 0.0250 0.0372 0.0390 1.3742 coeff.var. 304 304 332 362 251 279 295 427 479 129 min 0.0000 0.0000 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0049 1st quar. 0.0002 0.0002 0.0007 0.0000 0.0004 0.0000 0.0007 0.0004 0.0001 0.0476 median 0.0008 0.0008 0.0019 0.0003 0.0019 0.0001 0.0021 0.0016 0.0009 0.3832 3rd quar. 0.0051 0.0047 0.0058 0.0021 0.0067 0.0020 0.0054 0.0048 0.0032 1.7920 max 0.2202 0.2271 0.2360 0.2069 0.1471 0.1267 0.2036 0.3736 0.3934 4.9628 source: authors’ calculation. 8 b. žmuk, h. jošić fig. 1 factor endowment shares, top five countries according to the gdp share in the world value and the rest of the world, data from 2014 in figure 1 the top five countries according to the share of gdp value in the total world gdp value are emphasized. according to the figure 1, those five countries (the united states of america, china, japan, germany and the united kingdom) together encompass the half of the world’s total gdp. what’s more intriguing, they together dispose with more than half of the world’s total produced capital. in other observed variables, the main contributor to the share of those five countries in the total world’s values is china meaning that china is abundant in these factors of production. whereas in figure 1 five countries with the largest gdp share in the world value were pointed out, in table 6 countries with the lowest shares of each variable in the whole world value were displayed. table 6 the last five observed countries according to observed variables values compared to the world level, data for 2014 variable statistics rank 111 rank 110 rank 109 rank 108 rank 107 gdp country gambia swaziland togo malawi moldova value 1.5911e-05 5.5317e-05 5.7738e-05 7.6427e-05 1.0089e-04 pcap country gambia togo malawi rwanda madagascar value 9.8129e-06 4.6023e-05 5.1648e-05 5.7452e-05 7.1365e-05 labf country iceland malta luxembourg swaziland mauritius value 5.9652e-05 5.9865e-05 8.2163e-05 1.2904e-04 1.7930e-04 mmin country bahrain, belgium, cambodia, denmark, el salvador, estonia, gambia, iceland, italy, kuwait, latvia, lithuania, malta, mauritius, moldova, nepal, netherlands, paraguay, qatar, singapore, slovenia, swaziland, united arab emirates, west bank and gaza value 0 for country malta, west bank and gaza bahrain iceland oman value 0 2.1372e-07 5.3979e-07 8.9456e-07 ocng country belgium, burkina faso, cambodia, costa rica, el salvador, finland, gambia, honduras, iceland, kenya, latvia, luxembourg, madagascar, mali, malta, mauritius, namibia, nicaragua, panama, paraguay, portugal, rwanda, singapore, sri lanka, sweden, switzerland, togo, uganda, uruguay, west bank and gaza value 0 past country singapore malta bahrain mauritius qatar value 1.4069e-07 1.4813e-05 3.4674e-05 3.5316e-05 6.5091e-05 crop country iceland singapore bahrain malta luxembourg value 2.4472e-06 6.9917e-06 1.0849e-05 1.7096e-05 1.7712e-05 fish country luxembourg swaziland botswana macedonia, fyr jordan value 0 8.5295e-07 6.0379e-06 7.7334e-06 9.0878e-06 r&d country congo, dem. rep. niger rwanda lao pdr tanzania value 4.9069e-03 5.0343e-03 8.3818e-03 1.0743e-02 1.2448e-02 source: authors’ calculation. testing heckscher-ohlin-vanek theorem by using normalized trade balance approach 9 table 7 results of the sign tests according to the observed countries, data for 2014 country sign matching share of matched signs country sign matching share of matched signs yes no yes no albania 27 68 28% madagascar 52 44 54% argentina 75 21 78% malawi 47 49 49% australia 57 39 59% malaysia 47 49 49% austria 58 38 60% mali 39 57 41% bahrain 84 12 88% malta 71 25 74% belgium 47 49 49% mauritius 59 37 61% bolivia 49 47 51% mexico 60 36 63% bosnia and herzegovina 37 59 39% moldova 41 54 43% botswana 50 46 52% morocco 35 61 36% brazil 65 31 68% mozambique 40 56 42% bulgaria 35 61 36% namibia 54 42 56% burkina faso 46 48 49% nepal 48 48 50% cambodia 50 45 53% netherlands 62 34 65% canada 54 42 56% nicaragua 39 57 41% chad 42 53 44% niger 23 70 25% chile 74 22 77% nigeria 36 60 38% china 61 35 64% norway 65 31 68% colombia 48 48 50% oman 87 8 92% congo, dem. rep. 30 66 31% pakistan 57 39 59% congo, rep. 23 72 24% panama 79 17 82% costa rica 49 47 51% papua new guinea 43 53 45% cote d'ivoire 48 48 50% paraguay 49 47 51% croatia 63 33 66% philippines 52 44 54% denmark 49 47 51% poland 47 49 49% ecuador 44 52 46% portugal 44 52 46% egypt, arab rep. 49 47 51% qatar 88 8 92% el salvador 45 51 47% romania 34 59 37% estonia 57 39 59% russian federation 63 33 66% ethiopia 48 47 51% rwanda 43 53 45% finland 64 32 67% senegal 45 51 47% france 59 37 61% singapore 67 29 70% gambia, the 41 53 44% slovak republic 59 37 61% georgia 35 61 36% slovenia 58 38 60% germany 51 45 53% south africa 36 59 38% ghana 41 55 43% spain 45 51 47% greece 54 42 56% sri lanka 60 36 63% guatemala 43 53 45% swaziland 35 61 36% honduras 39 57 41% sweden 63 33 66% hungary 45 51 47% switzerland 63 33 66% iceland 57 39 59% tanzania 50 46 52% india 62 34 65% thailand 63 33 66% indonesia 59 37 61% togo 41 51 45% iraq 87 3 97% tunisia 43 53 45% ireland 66 30 69% turkey 64 32 67% italy 44 52 46% uganda 50 46 52% japan 68 28 71% ukraine 39 56 41% jordan 54 41 57% united arab emirates 70 26 73% kazakhstan 72 23 76% united kingdom 68 28 71% kenya 50 46 52% united states 59 37 61% korea, rep. 64 32 67% uruguay 63 33 66% kuwait 89 7 93% venezuela, rb 75 21 78% lao pdr 45 51 47% vietnam 53 42 56% latvia 54 42 56% west bank and gaza 30 62 33% lithuania 58 38 60% zambia 32 64 33% luxembourg 61 35 64% zimbabwe 43 53 45% macedonia, fyr 41 54 43% source: authors’ calculation. the calculated shares for the observed countries in the whole world value are paired with a certain product groups and are compared with the gdp share. in the case when the calculated share for a certain product group in a country is larger than the share of gdp in 10 b. žmuk, h. jošić total world’s gdp value, a positive sign is attached to that product group. namely, in that case, it is expected that the country should have a positive net exports in that product. the equation 2 is used to calculate the normalized trade balances for each product groups and for each country. if the normalized trade balance results in a positive score, a positive sign should also be obtained for country’s factor endowment. the sign test is conducted by checking whether the two estimated signs match or not. the assumption is that the factor endowment signs and normalized trade balance signs would match in at least 50% of cases. in table 7 the results of the sign tests for each of the observed countries are shown. overall sign matching rate turned out to be 55% (5,845 matched signs and 4,774 unmatched signs) which is similar to what has been found out within the standard signs test in previous studies leading to the conclusion that hov theorem does not offer a very good description of reality. the countries with the highest sign matching rates, which are above 90%, are iraq (97%), kuwait (93%), qatar (92%) and oman (92%). on the other hand, countries with the lowest sign matching rates, which are below 30%, are the republic of the congo (24%), niger (25%) and albania (28%). table 8 results of the sign tests according to the groups of products, data for 2014 code product sign matching share of matched signs yes no 01 live animals 44 67 40% 02 meat and edible meat offal 52 59 47% 03 fish and crustaceans, molluscs and other aquatic invertebrates 75 36 68% 04 dairy produce; birds' eggs; natural honey; edible products of animal origin 45 66 41% 05 products of animal origin, not elsewhere specified or included 55 56 50% 06 live trees and other plants; bulbs, roots and the like; cut flowers etc. 65 46 59% 07 edible vegetables and certain roots and tubers 68 43 61% 08 edible fruit and nuts; peel of citrus fruit or melons 77 34 69% 09 coffee, tea, maté and spices 77 34 69% 10 cereals 49 62 44% 11 products of the milling industry; malt; starches; inulin; wheat gluten 48 63 43% 12 oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; etc. 67 44 60% 13 lac; gums, resins and other vegetable saps and extracts 54 57 49% 14 vegetable plaiting materials; vegetable products not elsewhere spec. etc. 78 31 72% 15 animal or vegetable fats and oils and their cleavage products; etc. 64 47 58% 16 preparations of meat, of fish or of crustaceans, molluscs etc. 73 38 66% 17 sugars and sugar confectionery 60 51 54% 18 cocoa and cocoa preparations 58 53 52% 19 preparations of cereals, flour, starch or milk; pastry cooks' products 46 65 41% 20 preparations of vegetables, fruit, nuts or other parts of plants 64 47 58% 21 miscellaneous edible preparations 43 68 39% 22 beverages, spirits and vinegar 65 46 59% 23 residues and waste from the food industries; prepared animal fodder 56 55 50% 24 tobacco and manufactured tobacco substitutes 53 58 48% 25 salt; sulphur; earths and stone; plastering materials, lime and cement 64 47 58% 26 ores, slag and ash 81 30 73% 27 mineral fuels, mineral oils and products of their distillation; etc. 95 16 86% 28 inorganic chemicals; organic or inorganic compounds etc. 68 43 61% 29 organic chemicals 76 35 68% 30 pharmaceutical products 85 26 77% 31 fertilisers 64 47 58% 32 tanning or dyeing extracts; tannins and their derivatives; dyes, etc. 78 33 70% 33 essential oils and resinoids; perfumery, cosmetic or toilet preparations 65 46 59% 34 soap, organic surface-active agents, washing preparations, etc. 70 41 63% testing heckscher-ohlin-vanek theorem by using normalized trade balance approach 11 code product sign matching share of matched signs yes no 35 albuminoidal substances; modified starches; glues; enzymes 85 26 77% 36 explosives; pyrotechnic products; matches; pyrophoric alloys; etc. 74 37 67% 37 photographic or cinematographic goods 81 30 73% 38 miscellaneous chemical products 82 29 74% 39 plastics and articles thereof 85 26 77% 40 rubber and articles thereof 35 76 32% 41 raw hides and skins (other than fur skins) and leather 62 49 56% 42 articles of leather; saddlery and harness; travel goods, handbags etc. 55 56 50% 43 fur skins and artificial fur; manufactures thereof 45 60 43% 44 wood and articles of wood; wood charcoal 78 33 70% 45 cork and articles of cork 49 62 44% 46 manufactures of straw, of esparto or of other plaiting materials; etc. 70 41 63% 47 pulp of wood or of other fibrous cellulosic material; recovered etc. 60 50 55% 48 paper and paperboard; articles of paper pulp, of paper or of paperboard 39 72 35% 49 printed books, newspapers, pictures and other products of the printing etc. 37 74 33% 50 silk 51 58 47% 51 wool, fine or coarse animal hair; horsehair yarn and woven fabric 38 73 34% 52 cotton 55 56 50% 53 other vegetable textile fibres; paper yarn and woven fabrics of paper yarn 54 57 49% 54 man-made filaments; strip and the like of man-made textile materials 44 67 40% 55 man-made staple fibres 46 65 41% 56 wadding, felt and nonwovens; special yarns; twine, cordage, ropes etc. 43 68 39% 57 carpets and other textile floor coverings 50 61 45% 58 special woven fabrics; tufted textile fabrics; lace; tapestries; etc. 42 69 38% 59 impregnated, coated, covered or laminated textile fabrics; etc. 36 75 32% 60 knitted or crocheted fabrics 36 74 33% 61 articles of apparel and clothing accessories, knitted or crocheted 71 40 64% 62 articles of apparel and clothing accessories, not knitted or crocheted 70 41 63% 63 other made-up textile articles; sets; worn clothing, etc. 59 52 53% 64 footwear, gaiters and the like; parts of such articles 61 50 55% 65 headgear and parts thereof 57 54 51% 66 umbrellas, sun umbrellas, walking sticks, seat-sticks, whips, etc. 49 61 45% 67 prepared feathers and down and articles made of feathers or of down; etc. 60 51 54% 68 articles of stone, plaster, cement, asbestos, mica or similar materials 42 69 38% 69 ceramic products 47 64 42% 70 glass and glassware 42 69 38% 71 natural or cultured pearls, precious or semi-precious stones, etc. 65 45 59% 72 iron and steel 70 41 63% 73 articles of iron or steel 72 39 65% 74 copper and articles thereof 72 39 65% 75 nickel and articles thereof 66 45 59% 76 aluminium and articles thereof 68 43 61% 78 lead and articles thereof 55 55 50% 79 zinc and articles thereof 72 38 65% 80 tin and articles thereof 59 50 54% 81 other base metals; cermets; articles thereof 59 49 55% 82 tools, implements, cutlery, spoons and forks, of base metal; etc. 41 70 37% 83 miscellaneous articles of base metal 42 69 38% 84 machinery, mechanical appliances, nuclear reactors, boilers; parts thereof 87 24 78% 85 electrical machinery and equipment and parts thereof; etc. 84 27 76% 86 railway or tramway locomotives, rolling stock and parts thereof; etc. 81 30 73% 87 vehicles other than railway or tramway rolling stock, and parts etc. 78 33 70% 88 aircraft, spacecraft, and parts thereof 75 35 68% 89 ships, boats and floating structures 76 34 69% 90 optical, photographic, cinematographic, measuring, checking, etc. 91 20 82% 91 clocks and watches and parts thereof 74 37 67% 92 musical instruments; parts and accessories of such articles 54 57 49% 93 arms and ammunition; parts and accessories thereof 32 66 33% 94 furniture; bedding, mattresses, mattress supports, cushions etc. 50 61 45% 95 toys, games and sports requisites; parts and accessories thereof 52 59 47% 96 miscellaneous manufactured articles 43 68 39% 97 works of art, collectors' pieces and antiques 55 55 50% total 5,845 4,774 55% note: due to the limited space, the titles of product groups have been cut. source: authors’ calculation. 12 b. žmuk, h. jošić table 8 shows the results of the sign tests according to the product groups. the product groups with the highest sign matching rates, which are above 80%, are mineral fuels, mineral oils and products of their distillation; bituminous substances; etc. – code 27 (86%) and optical, photographic, cinematographic, measuring, checking, precision, medical or surgical etc. – code 90 (82%). on the other hand, the product groups with the lowest sign matching rates, which are below 35%, are rubber and articles thereof – code 40 (32%), impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable etc. – code 59 (32%), arms and ammunition; parts and accessories thereof – code 93 (33%), knitted or crocheted fabrics – code 60 (33%), printed books, newspapers, pictures and other products of the printing industry; manuscripts – code 49 (33%) and wool, fine or coarse animal hair; horsehair yarn and woven fabric – code 51 (34%). in figure 2 the percentages of matched signs according to geographical region of a country are shown. the most successful matched signs rate was achieved in countries from the middle east and north africa (69%). the key finding is that hov mainly holds in oil-rich economies. one of the reasons for this could be a focus on exports of only one essential product, oil, but a more detailed analysis should be conducted to validate this result. on the other hand, only countries from sub-saharan africa achieved the percentage of matched signs below 50%. fig. 2 percentage of matched signs according to geographical region of a country, n=111 observed countries, data for 2014 fig. 3 percentage of matched signs according to income level of countries, n=111 observed countries, data for 2014 testing heckscher-ohlin-vanek theorem by using normalized trade balance approach 13 the successfulness of signs matching was observed according to the country income level as well. figure 3 shows that the highest percentage of matched signs is achieved for countries having high income and which are not members of the organisation for economic cooperation and development (oecd). countries with lower middle income (46%) and low income (45%) achieved lower percentage of matched signs in comparison to the benchmark value of 50%. it could be asked: why do rich countries have higher matching rates than poor countries? the reason could be more efficient use of country's comparative advantages and the specialization in production and export. fig. 4 histogram of distribution of matched signs, n=111 observed countries, data for 2014 finally, in figure 4 the histogram of distribution of matched signs across countries is shown. it turned out that most countries (32) have a percentage of matched signs between 40% and 50%. it has to be emphasized that three countries, out of thirty-two, have a percentage of matched signs that equals 50%. however, 68 countries or 61% of observed countries have a percentage of matched signs above the benchmark value of 50%. previous empirical tests mainly failed to prove hov theorem, or did so only in a certain extent, which provides ground for further (amended) tests. we should keep in mind that completely random pattern of signs, such as obtained by flipping a coin, would still generate correct signs 50% of the time in a large sample. overall result of the sign test conducted in this paper is only 55% of matched signs, which is not enough to present it as a proof of hov theorem validity. therefore, the sign test must do considerably better in order to be concluded that the hov theorem is empirically sound. the advantage of this approach is that it allows for the larger sample of countries to be included in the analysis. disadvantage of this approach is that it assumes the identical technology in countries despite the inclusion of the r&d variable. also gross value of trade flows does not reveal country's value added comprised in these flows. for example, china's huge exports of hi14 b. žmuk, h. jošić tech electronics do not represent its net exports of capital intensive and r&d intensive products, because its value added in this sector is different from value added upward in the global value chain. 5. conclusions this paper introduces new approach for testing the heckscher-ohlin-vanek theorem. the hov theorem was tested in the case of 111 countries worldwide. instead of calculating the factor content requirements based on the input-output tables, the normalized trade balance was calculated. the products or goods are divided into five groups according to their production intensity (labour-intensive goods, capital intensive goods, natural-resources intensive goods, easy-to-imitate technology intensive goods and hard-to-imitate technology intensive goods). furthermore, the countries’ factors of production are divided into produced capital, labour force and natural resources further divided into six factors. the sign test inspected correct matching signs between normalized trade balance indices and factor endowments for each country and product according to the sitc 2 classification of products. overall sign matching rate turned out to be 55% (5,845 matched signs and 4,774 unmatched signs). countries with the highest sign matching rates of above 90% were iraq (97%), kuwait (93%), qatar (92%) and oman (92%). countries with the lowest sign matching rates, of below 30% were the republic of the congo (24%), niger (25%) and albania (28%). it seems that countries with a higher income level have higher percentage of matched signs (high-income non-oecd and high-income oecd countries with 75% and 60% of sign matches respectively). on the other hand, lower-middle income and lowincome countries had a percentage of matched signs below 50%. the fact that the missing values were imputed by using data from other periods should be taken as a limitation of research so the results where the r&d variable was included in the analysis should be carefully discussed. further research should be made by using this new approach. improvement could be made by including productivity differences among countries by calculating the effective factor endowments. references artal-tur, a., castillo‐giménez, j., requena‐silvente, r., & llano‐verduras, c. 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(2015). testing the heckscher-ohlin-vanek theory with a natural experiment. canadian journal of economics, 52(1), 58-92. testiranje heckscher-ohlin-vanekovog teorema korišćenjem pristupa normalizovanog trgovinskog bilansa studija opisana ovde uvodi pristup normalizovanog trgovinskog bilansa za testiranje heckscherohlin-vanekovog (hov) teorema. namera je bila da se sve zemlje širom sveta uključe u analizu, ali je zbog nedostatka podataka određeni broj zemalja morao da bude isključen iz analize. zbog toga je ukupno 111 zemalja primećeno prema regionu i nivou prihoda u 2014. pri proceni hov modela koristio se test predznaka. test je uporedio očekivani znak normalizovanog trgovinskog bilansa ili neto izvoza prema klasifikaciji proizvoda sitc 2 sa relativnom zadužbinom proizvodnih faktora koji se intenzivno 16 b. žmuk, h. jošić koriste u proizvodnji određenog proizvoda. proizvodni faktori su podeljeni na grupe kao što su proizvedeni kapital, radna snaga i prirodni resursi koji su dodatno podeljeni na šume, metale i minerale, naftu, ugalj i gas, pašnjake i useve. varijabla istraživači u r&d na milion ljudi predstavlja uticaj tehnoloških razlika širom zemalja. rezultat testa predznaka je pokazao da hov teorem drži u 55 odsto slučajeva. procenat podudarnih predznakova je najveći za zemlje sa visokim prihodima koje nisu članice oecd-a (75%) i najniži za zemlje sa nižim srednjim prihodima i niskim prihodima (ispod 50%). ključne reči: heckscher-ohlin-vanekov model, test predznaka, pristup normalizovanog trgovinskog bilansa, svet facta universitatis series: economics and organization vol. 17, n o 2, 2020, pp. 157 172 https://doi.org/10.22190/fueo191223012s © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the relationship between population ageing and medical expenditures in romania 1 udc 316.346.32:[657.474:615.2(498) lucian adrian sala* university of craiova, romania abstract. with recent developments in the medical field and faster access to medical professional and healthcare services providers, accompanied by better education and a higher level of hygiene, life expectancy for both males and females in romania is increasing at a steady pace. from a medical point of view, this is a remarkable accomplishment when compared with past decades when the average life expectancy was much lower than in recent times. a longer life span will automatically, for the most part, have the unwanted effect of increasing spending on medical services on behalf of the state to ensure a better quality of life for the elderly. therefore, the public health system will be placed under additional pressure on behalf of healthcare providers to offer higher quality services to the elderly. this paper aims to explore the degree of influence that age and income have on the growing costs of medical expenditures on a per capita level. the method employed in exploring to what extent the growing share of elderly individuals and income can explain the rise in medical expenditures is a multiple linear regression model. the expected results are that as the share of elderly individuals grows within romania’s population and similarly as income on a per capita bases rises, there will be a noticeable increase in per capita medical expenditures. key words: population ageing, population decline, demographic transition, healthcare expenditures, multiple linear regression jel classification: c12, j11 received december 23, 2019 / revised january 19, 2020 / accepted february 12, 2020 corresponding author: lucian adrian sala university of craiova, a.i.cuza street, no. 3, postal code 200585, craiova, romania * phd student at the university of craiova, romania e-mail: sala_lucian@yahoo.com 158 l. a. sala introduction during the last decades, european union member states (eu ms) have gone through considerable changes in the age structure and size of their populations, this trend being reflected to a pronounced degree in romania (european commission, 2018). the number of individuals with ages of 65 years and older has increased at a steady pace as a result of natural demographic transition factors presented in the scientific literature and recognised within scientific circles as population ageing and as one of the dominant demographic phenomena of the 21st century (feldstein, 2006). population ageing represents “the shift in the distribution of a country’s population toward older ages” mainly due to “an increase in the population’s mean or median age, a decline in the fraction of the population composed of children, or a rise in the fraction of the population that is elderly are all aspects of population ageing” (weil, 2006, p. 3). this demographic trend is expected to continue over the coming decades with adverse effects on social, economic and political spheres of influence, but most notably on the healthcare industry that may come under tremendous stress from a sharp increase in healthcare expenditures (hce). the general perception is that as the share of individuals over the age of 65 years and older increases, so will per capita healthcare expenditures, as there exists a strong relationship between the two. similarly, as income per capita increases further due to economic development, the demand on behalf of the population for medical services will soar, adding further to costs. in a study published by the organisation for economic co-operation and development (oecd), projections support the argument that gains in the share of elderly (65 years and older) may increase age-related social expenditures from an average of 19% of gross domestic product to 26% by 2050 with increases in both long term hce and public pension schemes (dang et al., 2001). comparable results are expected within romania, where an increase in healthcare expenditures will be initiated by the restructuring efforts of governing bodies at the local level combined with demographic factors. population ageing will exert a direct effect on the level and structure of healthcare expenditures in romania, due to the accelerated ageing process that is currently underway. the focus of this paper is on analysing to what extent the rising share of the population ages 65 years and older and 80 years and older and gross domestic product (gdp) per capita can explain the variation in hce on a per capita basis within romania’s population using a multiple linear regression model. through the utilisation of econometric techniques, the current paper introduces an element of novelty, supplementing the existing literature that covers the effects of ageing on healthcare in romania. the expected results are the existence of a strong relationship between healthcare expenditures on a per capita basis, the elderly share of the population and gdp on a per capita basis, demonstrated by way of correlation analysis. equally, it is expected that the variation in healthcare expenditures will be explained to a high degree by the selected explanatory variables. most notably the factors that contribute the most to the rise in hce are expected to be the share of the population ages 80 years and older followed by gdp per capita. it is crucial to underline that the rise in healthcare expenditures in romania’s given its economic perspective may prove to be more burdensome than for other eu ms, thus it should take a more central role in decision-making processes at an administrative level. the relationship between population ageing and medical expenditures in romania 159 the paper is structured in five parts, with the first part covering the relevant scientific literature encompassing works on the relationship between population ageing and healthcare expenditures. the second part contains an overview of the present and future trends regarding population ageing and healthcare in romania. in the third section, the reader is introduced to the applied research methodology and the selected data sets utilised in the analysis. the fourth section covers the application of the research methodology accompanied by an assessment of the results obtained in connection to similar research papers. the final section contains concluding remarks and observations based on the results obtained, including policy implications and future research directions. 1.the link between population ageing and healthcare expenditures the behaviour and requirements of a population have historically been influenced by demographic changes, while technological breakthroughs, such as early detection of lifethreatening illness, non-invasive procedures and revolutionary treatments have helped to extend it (thimbleby, 2013). demographic changes are shaped by two significant forces, most notably fluctuations in the mortality and fertility rate, that in certain combinations affect the development and structure of a population (caselli & vallin, 1990). the effects of a decline in the mortality rate in a population are much more complicated than the decrease in the fertility rate, where the decline in mortality among infants and children has the effect of rejuvenating the population and at older ages of increasing the proportion of adults in the population. historically, declines in mortality among younger generations have led to gains in life expectancy, so a shift from high mortality rates to moderate mortality rates tends to change the structure of the population over time (sanderson & scherbov, 2007). increases in life expectancy or longevity result in a more significant share of individuals surviving to advanced ages, this “life-changing” phenomenon leads to lower mortality rates in later stages of life (beltrán-sánchez et al., 2015; dormont et al., 2010). at present, the phenomenon of demographic ageing is expected to continue over the coming decades with adverse effects on social, economic and political spheres of influence, but most notably on the healthcare industry (hi) that may come under tremendous stress from a sharp increase in healthcare expenditures. the general perception is that as the share of individuals over the age of 65 years and older increases so will per capita hce, as there exists a strong relationship between the two. when taking into consideration more extended periods of time, it has been observed that hce have a lower contribution in decreasing mortality in comparison to other factors such as nutrition and general public health measures (b. harris, 2004). but in recent decades, the decline in mortality for older generations can be accredited in a more direct manner to the surge in hce (cutler et al., 2006). the main factors driving the increase in hce are the rise in income per capita and the share of the elderly individual's ages 65 years and older. some additional factors that contribute to the rise in hce include: the process of urbanisation; the number of hospitals; the number of physicians and nurses and the education level of individuals. 160 l. a. sala demographic ageing is linked to the rising number of illnesses disproportionately burdening older generations and to the additional years gained due to increases in longevity that are characterised by health impairments, which often lead to the limitation of mobility and work capacity (shergold et al., 2015; who, 2011). when examining the causes of increases in hce over time, the main factors contributing can be grouped into two broad categories, namely social and individual factors that are interlinked and that exert a certain degree of influence on indvidualisation of healthcare services. socials factors can determine how access and care is provided to patients based on standard guidelines establish within a healthcare system, on medical breakthroughs and implementation of technologies and devices that might encourage individuals to access treatment (i.e. new drugs, robotic prosthetics, non-invasive surgery, etc.). likewise, the income and cost side of accessing treatment is fundamental when making health related choices (i.e. more expensive treatment may be scarcer and might require waiting lists). the development of medical breakthroughs can be accredited to a desire to push the known limitations of science and to develop a better understanding of current medical conditions and of the human body. thus, the desire to sustain medial progress can be seen as one of the main drivers of hce growth through research and development (r&d), producing new innovations that will at first have higher costs (weisbrod, 1991). innovation through r&d in the medical field has the effect over time of reducing costs, but this added benefit in return tends to increase the use of new medical devices resulting in spikes in cost at first (morris, 2010). medical novelties are centred around illnesses that affect for the most part elderly individuals; this can be seen as one of the main factors for a longer life span for this age group (christensen et al., 2009). the increase in technological advancements and implementation of revolutionary medical equipment is one of the primary factors driving the increases in medical expenditure. it has been argued that, due to technological factors, a “compression of morbidity” may occur, where individuals’ lifespans are not greatly increased but the quality of healthy life would improve causing a decrease of medical expenditures since the proximity to death will become more manageable (aristovnik, 2015; chappell & hollander, 2011; dormont et al., 2010). a series of studies support the assertion that increasing medical expenditures can be more directly attributed to the rise in medical interventions and demand for emerging curative technologies in the pharmaceutical and medical fields as opposed to the general belief that the rising share of elderly individuals is the main driver of healthcare expenditure increases (aristovnik, 2015; baltagi et al., 2017; xu et al., 2018). income per capita has a direct effect on hce since health expenditures are “more sensitive to per capita income cyclical movements than to trend movements, and that the adjustment to income changes in those countries with a higher share of private health expenditure over total expenditure is faster” (lago-peñas et al., 2013, p. 1). as income per capita fluctuates so will hce, the intensity differing based on the size of disposable income, signalling that healthcare preferences will change as income per capita shifts (lago-peñas et al., 2013). the relationship between population ageing and medical expenditures in romania 161 on an individual basis, as income increases over time due to increases in productivity and the specialization of labour, so does the inclination to rely more heavily on healthcare providers (t. getzen, 2000; t. e. getzen, 1992). the demand for prescription drugs is also likely to increase at a more rapid pace due to higher demand on behalf of elderly individuals. as individuals age, pharmaceutical drugs help to keep chronic diseases at a manageable level. however, as drug tolerance increases so does the need for higher dosages to help keep in check life-threatening conditions raising demand and costs. proximity to death plays an essential role in the latter stages of life, when prescription drug usage increases sharply as individual needs for pharmaceutical and pharmacological drugs rise (kildemoes et al., 2006). kildemoes et al. (2006) estimate that the latter two years of life are the costliest in terms of prescription drug usage and other hce. thus, it can be argued that age per se is not as an essential factor as proximity to death and the costs of dying are. individual factors form the second category and refer to issues that influence the utilisation of public or private healthcare services based on health, behaviour and demographical factors (age, gender, sex, status). these factors exert an influence on an individual basis or in synergy determining to a certain extent how individuals utilise available resources. when considering an individual’s health and behaviour, the medical literature suggests that a great deal of chronic diseases can be prevented by the decline and prevention of habits that include smoking, drinking and dietary change (beltrán-sánchez et al., 2015; who, 2007). furthermore, increasing physical activities in addition to habit and dietary change may prove to be a cost-effective solution to lowering medical expenditures (berwick et al., 2008; chappell & hollander, 2011). the world health organization has estimated that for every dollar invested in physical activity programs, a reduction of approximately 3.2 dollars can be achieved in medical expenditures over the course of life (chappell & hollander, 2011; who, 2002, 2007). a similar investment has been observed to reduce medical expenditures between 6 and 8 dollars for every single dollar invested in health-related awareness campaigns (who, 2002). when analysing the changes in medical expenditures per age groups, the share of costs attributed to young adults is lower than the cost of caring for elderly individuals. then the main cause can be linked to the decreasing share of young adults in the total population due to lower birth rates and the increasing share of elderly individuals due to population ageing, offsetting medical costs to some degree (beltrán-sánchez et al., 2015). medical expenditures per age groups tend to increase at a much faster pace for individuals ages 50 years and older, due to an acceleration of the ageing process. a significant increase in hce occurs for newborns due to medical expenditures associated with giving birth and primary medical care services available for infants and young adults (european commission, 2018). a mirroring of this tendency occurs for women that give birth where hce tend to increase during childbirth, these costs peaking between the ages of 25 and 30 years. another interesting aspect of age-related expenditures occurs after the age of 50 years where hce for women are rising at a slower pace due to a better health condition than men (european commission, 2018). 162 l. a. sala 2.population ageing and healthcare trends in romania during the last three decades, romania has faced a wave of changes within its demographic structure. these changes, for the most part, can be summarized as increases in life expectancy, declines in birth rates and an increasing proportion of old adults in the total population that can be summed up as population ageing (european commission, 2017; feldstein, 2006; mihai, 2016). according to the estimates of the national institute of statistics (ins), between 20172060, the proportion of the population ages 60 years and older will grow at an accelerated pace. the number of centenaries will rise from 1,558 in 2015, to 5,094 in 2030, reaching about 22,587 centenarians alive by 2060 (ins, 2017). fig. 1 population by age groups projections, romania source: own creation, based on eurostat data to further support these claims, we can observe in figure 1, the decline in the share of individuals ages 0-14 years old in the period between 1948 and 2015 from 28.9% to 15.7% and based on projections a further decline to 14.8 % is expected by 2030 (ins, 2017). the opposite scenario is emerging for age groups between 65 and 79 years old and 80 + years, that has increased at an accelerated pace, with projections for 2030 of 16.2% for individuals ages 65 to 79 years and 5.8% for individuals age 80 years and above (ins, 2017). similarly, the old-age dependency ratio is expected to follow an upward trend, since the number of elderly individuals is expected to rise in comparison to individuals active in the labour market. thus, the cost of social services and hce will increase to match demand becoming costlier over the long run. between 1980 and 2010, the old-age dependency ratio has steadily grown to reflect the rising share of elderly individuals within the population and the declining size of the workforce. this process has been accelerated to some extent by the high levels of economic emigrants that have traversed to neighbouring countries for better working conditions and higher remuneration (figure2) (enache & pânzaru, 2012; horváth & anghel, 2018). the old-age dependency ratio (figure 2) is expected to rise to 28.8% in 2020 and to 50% by the year 2050, as the population ageing phenomenon advances. this expected increase will lead to increased stress on social security and healthcare programs in the relationship between population ageing and medical expenditures in romania 163 romania due to sharp increases in expenditures (cylus et al., 2018; eurostat, 2019e; thimbleby, 2013; vladescu et al., 2016). fig. 2 old-age dependency ratio projections, romania source: own creation, based on eurostat data life expectancy at birth in romania has increased between 2000 and 2017, for males by 4 years from 61.7 years to 71.7 years and by 4.3 additional years from 74.8 years to 79.1 years for females in the same period of time (eurostat, 2019d). however, despite these remarkable improvements in longevity, romania is lagging behind the eu ms average for both men and women (eurostat, 2019d). a major cause of concern for romania’s healthcare system is the high level of infant mortality recorded, that is among the highest of eu ms with 6.7 deaths per 1000 live births in 2017, the number of infant mortalities recorded is almost double that of average figures recorded at the level of eu ms (eurostat, 2019c). some of the main factors that lead to the early demise of individuals and that contribute to the increase in hce are diseases of the cardiovascular system, different forms of cancer that have increased abruptly and infectious diseases, romania having the highest incident of tuberculosis with a third of the cases presenting drug-resistant strains (savin, 2014; simionescu et al., 2019). other significant determinants of the health status of romania’s population represent the high consumption of alcohol that has increased both among men and women paired with the increasing cases of obesity among adults and children that raise the risk of cardiovascular diseases (simionescu et al., 2019). healthcare expenditures per capita have grown from 236.10 euros in 2000 to 1376.46 euros in 2017a near six-fold increase. however, romania is positioned among the lowest places when it comes to healthcare expenditures on a per capita basis within the eu ms (eurostat, 2019a). healthcare expenditures as a percentage of gdp in romania recorded a value of 5.16% in 2017, representing the lowest level of all 28 eu ms, below the average of 9.9% (eurostat, 2019b). 164 l. a. sala among some of the main factors contributing to the poor state of romania’s healthcare system is the lack of universal coverage for all citizens, where a discrepancy exists between access to and the quality of healthcare services in rural and urban areas. these aspects can be traced back to the unsuccessful reform of the public health system and to political instability. in effect, due to the deficiency in medical infrastructure, staff and necessary medicine, romania is slightly above the average when considering unmet medical and healthcare needs within the eu ms (eurostat, 2019f). a series of attempts have been made to decentralise the public health system with limited result. currently, the ministry of health provides the general policy direction and administers regulatory oversite in an inefficient and burdensome manner, with local authorities responsible for the delivery of services (vladescu et al., 2016). to the effect of the information described above, it is acceptable to state that population ageing coupled with a poorly governed healthcare system produces a great deal of social and political implications. to offset these effects a series of policy contributions on behalf of government bodies have been implemented in a gradual manner to help mitigate the effects of an ageing population (increasing the retirement age, legislative changes that are aimed at improving working conditions for women, changes in the public health insurance system, increasing investments in adult education programs) (bodogai & cutler, 2014). despite the efforts and government measures focused at easing the transition to a “silver economy”, romania’s population will continue to decline resulting in a significant restructuring within all age groups, from a regional to a national level, with significant declines in the number of newborns and increases in the share of older adults (cristea & mitrica, 2016). 3. materials and methods in order to understand to what degree longevity and income explain the variation within healthcare expenditures in romania, a series of data sets have been collected from official sources. the data collected for the purposes of econometric analysis (table 1), have been gathered from eurostat in the form of time series and contain data on healthcare expenditures per capita, the share of the population ages 65 years and older and 80 years and older and gross domestic product per capita. the period is between 2000 and 2017, based on the availability of published data. table 1 variable inputs for econometric model abbreviation description denominator spr_exp health expenditures per capita euros/capita pop_65 share of population age 65 years and over percentage (%) pop_80 share of population age 80 years and over percentage (%) gdp_cap gross domestic product per capita euros/capita source: own creation, based on eurostat data the utilisation of econometric techniques may help in shedding some light on the effects that a growing share of elderly individuals has on healthcare expenditures on a per the relationship between population ageing and medical expenditures in romania 165 capita basis. linear regression methodology can be traced back to the 18 th century, being applied by researchers as a least squared method approach in various fields from biology to astronomy (draper & smith, 2014; yan & su, 2009). most notably in 1809, carl friedrich gauss in his paper titled “theoria modus corporum coelestium” used a least squared approach to address the challenge of “determining from astronomical observations the orbits of bodies around the sun” (chatterjee & simonoff, 2013; yan & su, 2009). regression analysis can be defined as a “method to discover the relationship between one or more response variables (also called dependent variables, explained variables, predicted variables, or regressands, usually denoted by y) and the predictors (also called independent variables, explanatory variables, control variables, or regressors)” (yan & su, 2009, p. 2). depending on the requirements and the number of variables, researchers can utilise a simple linear regression that models the linear relationship between two variables or a multiple linear regression that models the relationship between one dependent and more than one independent variables (davison & tsai, 1992; draper & smith, 2014). the multiple linear regression model employed in this paper can be represented as follows (1.1) (yan & su, 2009, p. 3): 𝑦𝑖 = 𝛽0 + 𝛽1𝑥1𝑖 + ⋯+ 𝛽𝑝𝑥𝑝𝑖 + 𝜀𝑖 (1.1) where: y – dependent variable; – independent variable; – parameter; – error. one of the purposes of running a multiple regression analysis on a selected data sets is to determine the degree to which a set of independent variables can explain the variation within the dependent variable (olive, 2017). when running a multiple linear regression analysis, a two-step process needs to be adopted that consists of, firstly, preparing the data sets, and secondly, employing a series of statistical tests meant to evaluate the validity and relative fit of the selected model (weisberg, 2013; yan & su, 2009). the required tests will be applied in stata 16 to assess the assumptions that “there should be homoscedasticity of residuals (equal error variances); there should be no multicollinearity; there should be no significant outliers, high leverage points or highly influential points; and the errors (residuals) should be approximately normally distributed” (laerd statistics, 2019; ucla, 2019). one of the first tests to be applied to the data sets is to verify the independence of variables. thus, the durbin-watson test is computed to verifying the absence of 1st-order correlation within the regression model. the durbin-watson test is computed utilising the following formula (1.2) (yan & su, 2009, p. 235): 𝐷𝑊 = (𝜀 𝑖 − 𝜀 𝑖−1) 2𝑛 𝑖=2 𝜀 2𝑖 𝑛 𝑖−1 (1.2) where represents the residuals from the ordinary least squares fit. 166 l. a. sala 4. results of analysis in the process of running a multiple regression model, one of the first advised steps consists of plotting a scatter plot matrix as well as running a correlation analysis in order to asses the nature and strength of the bivariate relationships between the selected variables included in the model (uyanık & güler, 2013). a scatter plot matrix permits visual inspections of the relationship between variables, helping to determine the existence of gaps and outliers within the data sets. when analysing the scatter plot matrix in figure 3, we can observe a close relationship between healthcare expenditures on a per capita basis, gdp per capita and the share of population ages 65 years and older and 80 years and older. fig. 3 scatter plot matrix source: own processing in stata 16 similarly, we can observe the results obtained in the form of a correlation matrix (table 2), as a result of running a pearson correlation between the variables included in the model, where a strong relationship can be observed. table 2 matrix of correlations variables (1) (2) (3) (4) (1) spr_exp 1.000 (2) gdp_capita 0.978 1.000 (3) pop_65 0.956 0.937 1.000 (4) pop_80 0.968 0.933 0.991 1.000 source: own processing in stata 16 the rise in healthcare expenditures on a per capita basis in romania can be explained to a great extent by the rise in gdp per capita and the share of population ages 65 years and older and 80 years and older through the results obtained by way of the linear regression model (table 3). the relationship between population ageing and medical expenditures in romania 167 table 3 linear regression results spr_exp coef. st.err. t-value p-value [95% conf interval] sig gdp_cap 0.101 0.014 7.41 0.000 0.072 0.131 *** pop_65 -135.635 45.693 -2.97 0.012 -235.192 -36.079 ** pop_80 430.944 93.176 4.63 0.001 227.931 633.958 *** constant 1838.476 692.881 2.65 0.021 328.818 3348.134 ** mean dependent var 879.281 sd dependent var 350.772 r-squared 0.989 number of observations 16.000 f-test 359.363 prob > f 0.000 akaike crit. (aic) 167.752 bayesian crit. (bic) 170.842 *** p<0.01, ** p<0.05, * p<0.1 source: own processing in stata 16 the variables included in the multiple linear regression can explain with a high level of confidence the level of healthcare expenditures per capita in romania, f(3, 12) = 359.36, p < .0005, accounting for 98.90% of the variation in healthcare expenditures per capita with an adjusted value for r 2 = 98.62%, which represents a high level according to cohen (1988). the linearity of the variables was assessed with the help of scatter plots of healthcare expenditures against gdp per capita, the share of individuals ages 65 years and older and the share of individuals ages 80 years and older, in each case a regression line has been superimposed. after inspecting the resulting graphs, a linear relationship was confirmed in all cases. further analysis indicated that residuals were normally distributed, and there is homoscedasticity (draper & smith, 2014). to determine the independence of residuals, the durbin-watson test was applied with a result of 1.875, indicating no autocorrelation (durbin & watson, 1971). for outlier detection, a standard visual inspection and a statistical analysis of studentized residuals were employed, confirming that no outliers were detected. the resulting predicted equation for the multiple regression model can be presented as follows (1.3): spr exp =1838.48+0.101×gdp per capita -135.64×pop 65 +430.94×pop 80 (1.3) as can be observed in table 3, gdp per capita is statistically significant at p < 0.01 with a value of 0.101; similar results have been observed in the scientific literature, where an increase in income does not necessarily translate to an equal increase in medical expenditures (baltagi et al., 2017). the main reason being that even with an increase in earning power, ageing individuals that are healthy will have only moderate increases in healthcare expenditures. in the presence of illness, expenditures will begin to increase and as the proximity to death window narrows, expenditures will begin to sharply increase for the final years of life (de meijer et al., 2013; gray, 2005) an increase in the segment of the population ages 65 years and older seems to exert a negative effect at a significance level of p < 0.05, confirming previous studies that underlie increases in healthcare expenditure as a result of health and not necessarily of age (gray, 2005). 168 l. a. sala finally, the variable that seems to contribute the most to healthcare expenditure per capita is the segment of the population ages 80 years and older at a significance level of p < 0.05. the sharp increase in healthcare expenditures attributed to the segment of individuals ages 80 years and older has been observed in most developed countries and reflected in seminal research papers (de meijer et al., 2013; dormont et al., 2008; a. harris & sharma, 2018). as this share of the population continues to grow, an expected rise in healthcare expenditures is expected, thus an adequate response is in order t o help alleviate some of the pressure on the healthcare system (a. harris & sharma, 2018; vladescu et al., 2016). some of the main policy responses available include: a better management of resources within the public healthcare system; reducing the number of hospital days for elderly individuals in favour of out of hospital care when it is permitted; active measures that are aimed at reducing the risk of illness and that support an active and healthy ageing process; awareness campaigns through the use of mass media targeting the most common causes of morbidity and disability (diet, drinking, smoking, lack of physical exercise) (rechel et al., 2009). 5.conclusion population ageing presents a set of formidable provocations on the healthcare sector, driving innovation of new technologies through r&d but at a greater cost for society over the long run. as more investment capital flows into r&d, economic growth may be spurred in the medical field and other adjacent fields like electronics and the information technology industry. however, this capital transfer will come at the cost of other developments in industrial production, transportation, education and other key branches of the economy. when trying to understand how healthcare expenditures will change over the coming periods, it becomes difficult to predict a certain outcome due to the lack of a well-defined framework since it becomes unclear which demographic aspects have the sturdiest effects on healthcare expenditures. the variables with most influence being the number of individuals that surpass a certain age, the number of individuals that suffer from illness or disability and the expected number of years that individuals cope with an illness or disability until demise also known as “time till death” (oecd, 2019). one of the key policies adopted at a global level has been the active ageing policy, introduced in 2002 by the world health organisation, that has been established with the purpose of empowering individuals to pursue lifelong goals of self-improvement and societal contribution to the highest extent, under the premise of good health, high mobility and peak mental performance. the concept of active ageing has been further refined by healthy ageing policies and objectives aimed at “emphasising the need for action across multiple sectors and enabling older people to remain a resource to their families, communities and economies” (who, 2019). healthy ageing can be defined as “the process of developing and maintaining the functional ability that enables wellbeing in older age” (who, 2019). these measures introduced some critical aspects of a healthier lifestyle, having been adopted to some extent by eu ms but changing health and work habits paradigms will require a more extensive effort on behalf of member states. the relationship between population ageing and medical expenditures in romania 169 the implementation of active ageing and healthy ageing measures requires “constant policy rethinking, adequate strategies, measures and tools for the active ageing population support” with the objective of integrating elderly individuals in all meaningful areas of life (thalassinos et al., 2019, p. 9). adopting and integrating active ageing and healthy ageing policies in romania will require a long-term commitment with involvement on behalf of public and private partners in a variety of areas from environmental to economic, health and social services. good stewardship of the healthcare system and healthy living programs represent a big part of the healthy ageing agenda, where individuals are encouraged to maintain and improve the quality of life by exercising more, changing dietary habits, reducing alcohol consumption and smoking (who, 2007). in regards to policy implication, the most important measures implemented to curb the effects of population ageing on social security services and healthcare providers has been the decision to increase the mandatory retirement age. this decision has the added benefit of supporting the workforce through a longer working life on behalf of employees. thus, since a bigger share of older individuals is involved in an active way in the workforce for longer periods of time, the balance will shift in favour of active individuals, lowering the dependency ratio for the elderly. declines in healthcare expenditures can be further supported by informal caregiving offered by family members to elderly individuals in need of assistance. thus, as caregiving is transferred to local communities, the cost will tend to decrease in favour of public care facilities and hospitals lowering the overall burden on public healthcare services (chappell & hollander, 2011; who, 2002). informal caregiving must be supported by well-governed and implemented policies and must be done more directly only with the support and guidance of healthcare professional (chappell & hollander, 2011; simionescu et al., 2019). research limitations encompass the limited data sets and a general lack of statistical information available, limiting the possibility of more in-depth analysis. likewise, the lack of a well-defined framework within the healthcare industry makes it difficult to evaluate and predict how healthcare expenditures might react to shift in the population structure. based on current results, the application of a vector autoregression model (var) might help in assessing how healthcare expenditures may respond to changes in the population structure due to the ageing phenomenon and gdp per capita. acknowledgement: this work was supported by the grant pocu/380/6/13/123990, co-financed by the european social fund within the sectorial operational program human capital 2014 – 2020. references aristovnik, a. 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(2009). linear regression analysis: theory and computing. world scientific. 172 l. a. sala odnos između starenja populacije i medicinskih troškova u rumuniji rezime. sa skorašnjim razvojem na polju medicine i bržim pristupom medicinskim stručnjacima i negovateljima, uz dodatak boljeg obrazovanja i višeg nivoa highene, dužina života se u rumuniji stalno povećava, i za muškarce i za žene. sa medicinske tačke gledišta, ovo je izvanredno postignuće kad se uporedi sa prošlim dekadama kada je očekivani životni vek bio mnogo kraći nego u poslednje vreme. duži životni vek će automatski, u najvećem broju slučajeva, imati i neželjeni efekat povećane potrošnje na medicinske usluge od strane države da bi se starijima omogućio bolji kvalitet života. stoga, javni zdravstveni sistem će biti izložen dodatnom pritisku od strane pružalaca zdravstvenih usluga da bi se starijima pružile kvalitetnije usluge. ovaj rad ima za cilj da istraži nivo uticaja koji godine i prihodi imaju na povećanje medicinskih troškova na per capita nivou. metoda koja je korišćena u istraživanju do kog nivoa rastući deo starijih i prihoda mogu da objasne povećanje medicinskih troškova je višestruki model linerane regresije. očekivani rezultati su da procenat starijih osoba raste u populaciji rumunije i slično tome, kako prihod na per capita nivou raste, javiće se i vidno povećanje u medicinskim troškovima per capita. ključne reči: starenje popuilacije, opadanje populacije, demografska tranzicija, zdravstveni troškovi, višestruka linearna regresija. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 1, 2014, pp. 9 19 review paper liberalization of financial markets: an opportunity or risk for developing countries  udc 336.71:338.124.4 borislav radević, ahmedin lekpek state university of novi pazar, serbia abstract. the process of financial liberalization has created enormous opportunities for profit for banks and other financial institutions, but it has also led to an increased risk to their business and numerous banking and financial crises around the world. for decades, a considerable number of countries have isolated the economy and financial markets, resulting in greater protection from international financial shocks, but also reduced efficiency of local financial markets. in recent years more and more countries have chosen the liberalization of financial flows, reduction of government interference and have opened doors to foreign investors. these changes have led to increased opportunities for economic and financial subjects, but also to large exposures and frequent crisis. the paper considers different aspects of liberalization and analyzes positive and negative aspects of controlled and liberalized markets, as well as the consequences of institutional changes in the markets in the process of liberalization, with the aim to resolve the question of whether liberalization represents a chance or risk to financial markets of developing countries. key words: liberalization, developing countries, banking crises, credit boom, institutions. introductory remarks due to political and economic changes that have swept the world in the late 80’s, a large number of developing countries started the liberalization of its financial markets. this process in the world of finance was not new, since, a decade earlier, it affected the developed countries, which have thus begun the process of abandoning the keynesian economic approach, which dominated the period of the great depression, and especially after world war ii. the liberalization process has opened many opportunities for developing countries, enabling even more rapid development, creating more opportunities  received june 20, 2013 / accepted february 17, 2014 corresponding author: borislav radević state university of novi pazar, vuka karadžića bb, 36300 novi pazar, serbia tel: +381 20 317 754 • e-mail: bradevic@np.ac.rs b. radević, a. lekpek 10 to make profit for all market participants, but at the same time, establishing an open market, despite numerous chances, and bringing significant risks, particularly in the form of rapid transmission of crises from one market to another. since the late 80’s communism, as one of the two dominant world political and economic ideologies, has suffered defeat and more and more countries are turning to capitalism, adjusting to its numerous demands. one of those requirements was the implementation of liberalization, above all, of financial markets, which was based on: 1) freely formed capital prices, 2) increased concurrence among various financial intermediaries, 3) the opening of financial markets to foreign actors. some developing countries had already reached a considerable level of economic and financial development, while administering the state controlled their own version of capitalism and bank-centric financial system. liberalization, which was promoted by western experts, who basically had the washington consensus, was to be conducted in the same way in all countries regardless of their specificity and the level of economic development. at first glance, the opening of alternative channels of financing and the creation of free-market stocks and bonds had to result in greater efficiency and more rapid economic development. however, in most countries, in response to the imposed changes, there were strong banking crisis, which left serious consequences on the economies of these countries. the question is, why did it happen, if it is a great part of diligently executing instructions proponents of financial liberalization? in this paper, through three interrelated parts, the attempt was made to answer this question on a deeper level. the first question was the lack of controlled financial system, then the quality of the process of liberalization and the end result, which is caused by liberalization in developing countries and their causes phenomenon. 1. disorders of repressed financial markets in developing countries, channels of financial intermediation, banks and institutions to finance development are responsible for the emission of loans. banks are responsible for short-term loans, while the development of financial sector institutions is in charge of long-term loans. development financial institutions issued, often politically directed, preferential loans to some industries. the money for these purposes was mainly obtained from international funds through loans and grants. these financial institutions were used by the government to fund the selected sectors (in europe after world war ii) and for giving the so-called "soft loans" (in central and eastern europe). commercial banks have to abstain from long-term loans, the maximum credit limit, with branch restrictions (pill, pradhan 1997). foreign banks were prevented from operating on the market in these countries, so the major role in this markets was played by domestic banks, which are usually state-owned. in this way, there was a monopolized structure of financial markets, where only preferred domestic banks could operate. their freedom in business was very limited by the simple fact that they had management imposed by the state. the effects of monopolization and state control over the financial markets were extremely negative. the nominal interest rate fell below the level of inflation, there was a chronic lack of capital, and balance of payments equilibrium constant was achieved by borrowing funds from international funds and foreign financial institutions. liberalization of financial markets: an opportunity or risk for developing countries  11 a similar situation was with the securities markets, because it had the small length and width, with the greatest government in the trade. these markets have had little impact on savings due to a lot of similar financial substitutes, such as the short-term government bonds. there are many reasons to expect that the wider public participation in these markets will be limited. most depositors are not properly informed and familiar with the financial market system, so they are very cautious and risk-averse when investing money. the division of property by individuals tends to be limited to those with high incomes who can allocate their risks through a variety of portfolios. the factor of uncertainty is further enhanced by the commitment to cash in respect of securities, whose value varies. in less developed markets the state is the major buyer of securities, mostly through its investment funds, state enterprises and public financial institutions. on the other hand, commercial banks are the most important actor in financial markets from the private sector, while other financial institutions, businesses and, ultimately, individuals are of less importance for the functioning of these markets (drake 1977). in recent decades, a number of developing countries have gradually opened to foreign investment, so that many crucial sectors have been left to foreign firms. what proved to be a rule of thumb is that foreign companies would rather not raise funds on the local market, except if required, due to the regulations of local authorities. however, in recent years, multinational companies operating in developing countries have striven towards the least engaging of funds from domestic sources, preferring international sources and combining them in order to protect themselves from the risk of external borrowing. on the other hand, protection against inflation and political instability in the country in which they operate, multinational companies have found in collecting money in domestic currency. securities transactions are typically small in underdeveloped countries. from time to time, there is a most unexpected sharp acceleration of trade, however, these changes are results of speculative operations, which lead to additional markets and price volatility (umutlu, akdeniz, altay-salih 2010). thus potential serious investors get another reason to bypass these capital markets. over time, several experts have pointed to the negative consequences of financial repression. they presented cases of increased efficiency of asset using due to deregulation and liberalization of financial flows. special focus is placed on the important elements of financial intermediation, such as deregulation of interest rates, reduction of reserve requirements, directed credit programs issue and interest rate ceilings. according to the advocates of liberalization, high interest rates for lenders and borrowers to introduce dynamism that is desirable in the development, which attracts a net savings and divert investment from inferior use to encourage technical improvement. high interest rates encouraged mature borrowers to seek funding rather than bank loans. the liberalization of interest rates strengthen savings and encouraged new private investment (demir 2009). to accelerate the development of financial markets and raise efficiency in trading securities, the state must take a stimulative policy. first of all, companies should be encouraged to collect funds through the issuance of securities, offering them legal and any other logistics until they enter the financial market, and a variety of tax relief of funds collected in this way. moreover, the incentive must be given to potential investors, primarily through favorable tax treatment of the profit. demand for the securities will increase liquidity, which will, on the other hand, improve the readiness of the central bank to rediscount, and the willingness of commercial banks to accept securities as collateral for the overdraft. finally, official surveillance of trading in b. radević, a. lekpek 12 the securities market is imperative if one wants stocks and bonds to become more attractive assets. the aim of the official regulation should provide full disclosure and dissemination of accurate information on companies, whose securities are traded. the ultimate effect of successful regulation should be to prevent various forms of market fraud and protect the interests of minority shareholders, as well as to encourage the development of specialized services and technology. these measures should be taken in the spirit of promoting capital markets, because regulations, which do not achieve these objectives, can actually prevent the development of capital markets. 2. process of financial liberalization in the previous section we have shown the shortcomings of the completely controlled financial system and emphasized the arguments in favor of liberalization of financial flows. recent years in the world were marked by intense process of liberalization in the business world, which strongly affected financial transactions. clear boundaries between the local financial markets are increasingly disappearing and the world is slowly evolved into a single global financial market. restrictive policies that have been led by governments of developing countries, gave way to liberalization of financial market operations, which opened the way for privatization of existing banks and the creation of new domestic banks and entering of foreign financial institutions to the local markets, making the competition in this field significantly heightened. financial liberalization is a process, not a single event. it has two distinct dimensions: internal and external liberalization. the following table presents the elements of these two dimensions of liberalization and their specific effects on the functioning of the banking and stock market (ameer 2003). table 1 the dimensions of the liberalization d im e n s io n s in t e r n a l banks stock exchange the entry of foreign banks in domestic banking market removing ceiling interest rates  deposit interest rates  lending interest rates reduction in reserve requirements  cash-reserve  legal requirements liquidity reduction policy directed loans privatization of state banks prudential regulations for banks the scope of financial services opening the market to foreigners trading systems incentives for foreign investors investment banks / non-bank financial institutions (nbfi) in securities issuance of shares e x t e r n a l off-shore loans from international banks currency convertibility cross listing, investment funds mergers and acquisitions portfolio investment foreign direct investment source: bandiera et al. (2000) liberalization of financial markets: an opportunity or risk for developing countries  13 internal liberalization is implemented due to local deregulation and reduced state involvement in direct financial operations and control of the financial flows. external liberalization is largely conditioned by the just implementation of the measures of internal liberalization and creating the conditions for entry of foreign companies on the domestic market. in addition, major measures of liberalization are: 1) macroeconomic variables, measured by trading volume of shares or cash flow, and 2) the date of liberalization. the first approach is more objective because it does not rely on the custom scheduling. another approach relies on country reports, which provide updated information on the status of the reform program, either voluntarily or because of the demands of international financial institutions time methodology is often used to identify when a component of liberalization adopted, then the frequency components in one year is added and is defined as an index of liberalization for the year. the table below gives the introduction of certain components of financial liberalization in the six countries (ameer 2003). table 2 the dynamics of liberalization in some countries component liberalization india indonesia malaysia pakistan thailand south korea deregulation of interest rates 1996 1983 1991 1995 1990 199193 reduction in reserve requirements 1993 1988 1994 1993 1992 1996 the abolition of priority loans 1994 1990 1991 1995 1980 1992 bank privatization  1992  1991  198183 the entry of foreign banks 1993 1988 1994 1991 1995 1987 range of banking  1988  1991 1995 198991 prudential regulation 1996 1997 1989 1994 1997 1991 opening the market shares 1986 1989 1987 1991 1988 1987 the incentives for foreigners 1992   1997  1992 trading system 1992 1992  1997  investing in nbfi 1992 1996  1997 1995  issuance of capital 1992 1996  1996   liberalization of exchange activity 1988 1970 1994 1994 1991 1989 source: laeven (2003) it is very clear from the table that there are earlier and later liberalized countries in the sample. indonesia, korea and thailand liberalized early, while pakistan, malaysia and india carried out liberalization later. government intervention in the process of financial intermediation in many developing countries has been reduced, after the phase of reform, starting with the liberalization of interest rates in many countries in the sample. these measures followed a reduction in reserve requirements and opened the banking sector to foreign competition. these measures had to revive the offer of loans and ensure a better allocation in these countries. similarly, the stock market was opened to foreigners in most countries, but b. radević, a. lekpek 14 incentives to increase foreign investment, as well as the installation of modern financial technology, were launched quite late in many countries in the sample (ameer 2003). 3. effects of financial liberalization by developing countries the process of liberalization is often met with very diverse opinions, because there are different views and observations on successes and failures of internal and external liberalization. the concept of financial liberalization has also been targeted by critics neostructuralists (morisset 1993), as well as modern economists, because many of the initial premises of the liberalization process, such as perfect information and perfect markets, were taken lightly by the advocates of liberalization, without further study of their reality. none of these assumptions existed in developing countries at the time of liberalization. neostructuralists argue that the limited market has information advantage over the institution in a liberalized market, while borrowing funds and the monitoring of loans. on the other hand, supporters of the liberalization point out that the strictly controlled market is burdened with numerous restrictions and occasional shocks in the operation, so it is unable to effectively respond to requests for funds, necessary for individuals and businesses. whose arguments are real can at best be seen through practical experience. according to the position of many prominent economists, liberalization is the cause of the recent disturbances in the money and banking crises. liberalization has made the local economy threatened by a global infectious shock. modern financial transactions, such as bank loans securitization, have led to credit and other risks, incurred in the business of a bank, it can easily be transferred to the buyer and the newly created securities, and thus undermine the market in which it operates. this kind of financial transactions has largely contributed to the consequences of wrong policies and credit risk of u.s. banks be felt fundamentally by the global market (radević, lekpek 2010). therefore, many experts who have studied this issue say that financial liberalization has a cost in terms of increasing financial exposure. do these attitudes and experiences of individual countries suggest that policy makers should abandon in favor of increasing liberalization of direct intervention in financial markets? of course, the answer depends on whether the costs exceed the financial fragility of the social benefits of liberalization, as well as on whether the government can expect to design and implement regulations to correct market failures, rather than enhancing them. the answer to this question is complex and it is very difficult in a work or study to completely eliminate this dilemma. however, it is possible, using the results of some experiments, to analyze one aspect of this problem. this is primarily the question of whether financial liberalization and frequent banking crises affect economic growth through their impact on financial development. one of the most important sectors, which is directly touched by the process of liberalization is the banking sector. many scientific studies that dealt with banking crises have become aware that there are channels of influence, through which the implementation process of liberalization may affect banking stability. this occurs for several reasons. first, deregulation of interest rates in the initial period which leads to their significant increase. because of the maturity gap, which is due to the process of maturity transformation, later performance can be worse, because deregulation led to an increase in funding costs of banks. at the same time, because of their long life, interest rates on loans do not adjust liberalization of financial markets: an opportunity or risk for developing countries  15 to that speed to market changes, which altogether leads to a significant reduction in grain yields in the bank. second, financial liberalization is associated with the opening of financial markets. for banks, the opening of the financial system has meant access to significant sources of funding, which could be obtained in foreign markets (allegret et al. 2003). however, lending in foreign currencies are stable in the short term, and then placing the funds in the long run and often in a domestic, not so stable currency were the main cause embrittlement of the domestic financial system to capital outflows. liberalisation provides great mobility of capital and elimination of obstacles to investment and withdrawal of funds. for economies that have just adapted to new rules of the game and are becoming increasingly dependent on foreign investors, changing the mood of investors has meant major upheaval and caused serious crisis. such crises have afflicted chile in 1981, mexico in 1995, southeast asia in 1997, turkey in 1994. the following chart clarifies the scope of the currency gap in some developing countries, considering the development of foreign activities of banks. decline in the economy of some asian countries on the eve of 1997, could be predicted by looking at increasing share of foreign liabilities in total liabilities. chart 1 ratio foreign banking liabilities to total banking liabilities source: imf, international financial statistics third, lending process released of strict regulations and control significantly increases the number of commercial bank loans to the private sector. chart 2 shows the increase in borrowing, that is. increasing the ratio of domestic credit to gdp. such an enormous increase in lending was seen by mexican economy, with increasing ratio domestic credit to gdp by 21 percentage points between 1990 and 1994. similar trends have appeared in many other countries, which started liberalization of financial markets, and are thus eliminated the political restrictions on commercial bank loans. this explosion of lending is only a short term solve problems that have arisen in the markets of these countries. in the long term, this phenomenon has led to increased credit risk, which banks took on themselves, which has reinforced the possibility of erosion of banking income. b. radević, a. lekpek 16 chart 2 lending boom source: imf, international financial statistics however, the occurrence of an explosion of credit, which many experts are often called "over-borrowing syndrome" in large part the result of the initial euphoria, the financial markets due to the transition from controlled to completely liberalized (pill, pradhan 1997). this phenomenon calls into question the efficiency and stability of the banking system. more specifically, the existence of government guarantees for bank deposits, causing counterproductive effect of bank stability, due to the presence of moral hazard (allegret et al. 2003). any analysis of banking crises without considering the role of institutional factors would be incomplete. but, starting from the washington consensus, as a fundamental doctrine of global financial institutions, we come to different conclusions. specifically, the washington consensus, which emphasizes liberalization as a necessary condition for global growth, has proven very often as completely inadequate for the simple reason as his agents claim that the very process of liberalization makes it unnecessary investment in the institution, which would be champions of change of the existing financial system before implementing radical reforms. it was precisely this approach that the market gives divine infallibility feature has led to the fact that the institutional vaakum created, because the former market institutions destroyed, while still not been made new, that would be replaced. one of the main partner of developing countries in the process of liberalization has been the imf, offering a sequential approach in the process of financial liberalization. this approach involves financial liberalization in a general program of macro-and microeconomic reforms. accordingly, it is emphasized that macroeconomic stability is a precondition for financial liberalization. some experts go further and argue that there are five prerequisites which must be met in order to be successful financial liberalization. these are (allegret et al. 2003): 1) adequate prudential supervision and regulation of commercial banks, 2) a reasonable level of price stability, 3) budget discipline, which limits the negative effects of inflation tax, 4) behavior of commercial banks, in order to maximize profit, 5) the fiscal system, which is neutral on the issue of intermediary activities. the major limitation of the sequential approach is the omission of an essential aspect of change that concerns of developing countries, and to institutional change, which underlies the process of financial liberalization. in this respect, allegret et al. (2003) point liberalization of financial markets: an opportunity or risk for developing countries  17 out that financial liberalization in asia led to destructive competition and excessive investment in some companies, because of the removal of coordination methods used by the government in economic decision-making. the financial crisis has occurred because of neglect of traditional coordination mechanisms, which existed in part planned and bank-based system of asian capitalism, rather than because of inefficient financial supervision and regulatory capacity. the causes of financial instability and perceptions of institutional infrastructure, which formed the basis of financial liberalization, shows how difficult it through (which exist in developing countries) and liberalization make coherent. dominating the financial systems in most countries that joined the process of financial liberalization have been dominated by banks, ie. major role in the functioning of financial intermediation and banks have had. thus, a centralized system would allow authorities facilitated control over economic and financial developments in the country. for this reason, many advocates of a radical approach to liberalization, they argued that the eminent role of banks is one of the major constraints in the process of liberalization of financial markets. they felt that the role of banks should be reduced so that they become just one of a wide range of stakeholders in the financial market. however, later confirmed that it was a completely wrong assumption. blinded by the idea of a uniform approach to the development of financial flows in the country, they went from being the only copy the experience of most developed western countries, whose market-based financial system, may be right for developing countries. true, we have already emphasized the central role of banks, which are at the same time were under firm government control, often had a negative impact on the efficiency in the financial system and economy, because many times the economic motive remained on the sidelines when making investment decisions. these experiences, however, should not be viewed unilaterally. many years of experience bank-centric system, which was used for decades in these countries and has become the engine of their development can not be completely dismissed as a failure. change course need to be, but these changes should flow the other way, primarily to the abandonment of the banking system administered under strong government control, and implementation of marketization banks. it is necessary to transition from the model limited to the model bank, which is fully oriented to providing services and meeting the needs of its clients. in other words, it is strengthening the role of markets by enhancing market access to banks. regardless of these facts, the imf, which largely represents the doctrine of free markets, while giving advice to developing countries, have remained completely blind to these facts, seeking abandonment of the practice, which so often has been successful and what were the needs of only some changes in order to be more successful. they still stubbornly offer, even countries that have reached a significant level of economic development, the western form of governance, which even in economically and financially powerful and mature states, often showing their instability and lack of immunity to the crisis. rational solution experts as a successful example rather point out japan, which has developed a market-based bank-based system in which banks play a major role in the stabilization of financial companies, because as soon as the company sank into a crisis, the right management company switches from enterprise management to the bank, with which company work directly, and therefore emphasizes the central role of banks in the business discipline companies. b. radević, a. lekpek 18 conclusion expectations of countries that have entered the process of liberalization were to have a liberalized market, with increased competition participants and additional capabilities for collecting and placing the funds, give great impetus to economic development, most countries that have embarked on this process are directly faced with financial crisis primarily in the banking sector. there are more reasons for this phenomenon. the previous system, which was considered ineffective, based on the established institutions, laws and experiences, represented a great support. advisors in developing countries completely neglected the need to build new institutions that would start to track changes so that the so-called "wild capitalism" occurred which had no clear rules and regulations. as a result, regulation of financial flows was left to still immature market and foreign speculators, who saw this country as an outstanding opportunity for high profits. however, these facts should not be an argument that the impact of liberalization process and to reject the favors of the concept of state-controlled financial markets. complete state control of financial markets was proved to lead to inefficient investment, political and not economic to favor projects, as well as reduce the chances of a successful business. liberalization that would primarily have a role to overcome the shortcomings and establish a stronger market orientation of banks, a concept that has been successfully used for decades in japan. liberalization is necessary but there must be a significant dose of caution regarding the pace and patterns of its implementation, not losing sight of specific countries and regions where they are committed. references 1. ameer, r. (2003) financial liberalization and capital structure dynamics in developing countries: evidence of emerging markets of south east asia, abs finance working paper, no. 01/2003. 2. allegret, j.-p., courbis, b., dulbecco, ph. (2003) financial liberalization and stability of financial system in emerging markets: the institutional dimension of financial crise, review of international political economy, volume 10(1): 73-92. 3. bandiera, o. et al. (2000) does financial reform raise or reduce savings, review of economics and statistics. volume 82 (2): 239-263. 4. bilson, c., hooper, v., jaugietis, m. (2001) the impact of liberalization and regionalism upon capital markets in emerging asian economies, international finance review, volume 1(1): 199-235. 5. chu, k. h. (2007) financial crises, liberalization and government size, cato journal, volume 27 (1). 6. demir, f. (2009) financial liberalization, private investment and portfolio choice: financialization of real sectors in emerging markets, journal of development economics 88 (2): 314-324. 7. drake, p. j. (1977) securities markets in less developed countries, journal of development studies, volume 13 (2): 73-91. 8. imf, international financial statistics, http://www.imf.org/external/data.htm (20.9. 2011.). 9. johnston, r. b. (1998) sequencing capital account liberalizations and financial sector reform, imf paper on policy analysis and assessment. 10. laeven, l. (2003) does financial liberalization reduce financing constraints: evidence from panel data on emerging market, financial management, volume 32 (1): 5-34. 11. morisset, j. (1993) does financial liberalization really improve private investment in developing countries?, journal of development economics, volume 40 (1): 133-150. 12. pill, h., pradhan, m. (1997) financial liberalization in africa and asia. finance and development, imf and world bank. washington dc. 13. radević, b., lekpek, a. (2010) credit risk transfer as a mechanism of protection against risks, facta universitatis series: economics and organization, volume 7 (4): 385-393. http://www.imf.org/external/data.htm liberalization of financial markets: an opportunity or risk for developing countries  19 14. umutlu, m., akdeniz, l., altay-salih, a. (2010) the degree of financial liberalization and aggregated stock-return volatility in emerging markets, journal of banking & finance 34 (3): 509–521. 15. zhang, x. k. (2002) domestic institutions, liberalization patterns and uneven crises in korea and taiwan, pacific review, volume 15 (13): 409-422. liberalizacija finansijskih tržišta: šansa ili opasnost za zemlje u razvoju proces finansijske liberalizacije je stvorio ogromne profitne mogućnosti bankama i drugim finansijskim institucijama, ali i doveo do povećane rizičnosti njihovog poslovanja i brojnih bankarskih i finansijskih kriza širom sveta. znatan broj zemalja je decenijama imao izolovanu privredu i finansijska tržišta, što je rezultiralo većom zaštićenošću od međunarodnih finansijskih potresa, ali i smanjenom efikasnošću lokalnih finansijskih tržišta. poslednjih godina sve veći broj zemalja odlučuje se za liberalizaciju finansijskih tokova, smanjenje državnog uplitanja i otvaranje vrata stranim investitorima. te promene su dovele do povećanih mogućnosti za privredne i finansijske subjekte, ali i do velike izloženosti riziku i učestalim pojavama kriza. u ovom radu razmatrani su različiti aspekti liberalizacije, analizirane su pozitivne i negativne strane kontrolisanog i liberalizovanog tržišta, kao i posledice institucionalnih promena na tržištima u procesu liberlizacije, a sve u cilju razrešavanja pitanja da li je liberalizacija šansa ili opasnost po finansijska tržišta zemalja u razvoju. ključne reči: liberalizacija, zemlje u razvoju, bankarska kriza, kreditni bum, institutucije. facta universitatis series: economics and organization vol. 18, no 3, 2021, pp. 217 228 https://doi.org/10.22190/fueo210628015a © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the dynamic causal relationship between oil price and economic growth in oil-importing ssa countries: a multivariate model1 udc 622.323:338.5]:330.34 motunrayo o. akinsola, nicholas m. odhiambo university of south africa, department of economics, pretoria, south africa orcid id: motunrayo o. akinsola https://orcid.org/0000-0002-9822-2888 nicholas m. odhiambo https://orcid.org/0000-0003-4988-0259 abstract. this study examines the causal relationship between oil price and economic growth in 14 oil-importing countries in sub-saharan africa during the period 1990 to 2018. the countries are further divided into two groups, namely seven low-income countries (lics) and seven middle-income countries (mics) in order to test whether the causality between oil price and economic growth depends on the countries’ income levels. unlike previous studies that used a bivariate model, this study employs a multivariate granger-causality model, which incorporates oil consumption and real exchange rate as intermittent variables in a bivariate setting between oil price and economic growth. the study employs panel cointegration and the panel granger-causality tests to examine this linkage. the results of the study show that in the short run, there is a bidirectional causality between oil price and economic growth for the entire dataset, and both for the lics and mics. however, in the long run, there is a bidirectional causal relationship between oil price and economic growth for the entire dataset and mics, but a unidirectional causality from economic growth to oil price for the lics. overall, the study found a feedback relationship between oil price and economic growth to be predominant. key words: oil price, economic growth, panel analysis, granger causality, low-income countries, middle-income countries jel classification: q43; o55; c33 received june 28, 2021 / revised september 08 / accepted september 14, 2021 corresponding author: motunrayo akinsola university of south africa, department of economics, p.o box 392, unisa 0003, pretoria, south africa | e-mail: tunrayo_sokoya@yahoo.com https://orcid.org/0000-0002-9822-2888 https://orcid.org/0000-0003-4988-0259 218 m. o. akinsola, n. m. odhiambo 1. introduction research on the cause of oil price shocks has developed away from the traditional exogenous political disruptions in organization of the petroleum exporting countries (opec) member countries. since the early 1980s, research has shown that oil price shocks from 1973 have mainly been due to shifts in the demand for crude oil, especially shifts in the global business cycle (baumeister and peersman, 2013; kilian and murphy, 2014; baumeister and kilian, 2016a; baumeister and kilian, 2016b). baumeister and kilian (2016a) highlight two determinants for the price of oil. first, an increase in global economic activities raises the demand for production input of oil, in particular, thereby raising the price of oil. secondly, a speculative demand for oil might arise against future shortages in the oil market. the speculative demand for oil puts upward pressure on the expected price of oil. a persistent increase in the price of international crude oil puts upward pressure on domestic prices. the foreign exchange reserves are also affected through the exchange rate channel and make the oil-importing sub-saharan african (ssa) countries highly vulnerable to oil price shocks. the complete reliance of ssa countries on imported oil increases its vulnerability. the share of oil in the total energy mix for ssa countries is energy-dependent. energy generation from coal is becoming popular beyond south africa, but oil is still the largest in the energy mix of ssa countries. the demand for oil in ssa countries is estimated to be 1.8 million barrels per day. south africa accounts for the highest oil demand in africa with approximately 30% of the total demand for africa. nigeria accounts for more than 20% (oecd/iea, 2014). other countries in the region collectively consume the remaining half. the literature confirms that there is a relationship between oil price and economic growth (narayan et al., 2008; du & wei, 2010; aliyu, 2011; romer, 2018; sarwar et al., 2017). the existence of cointegration among the variables confirms the presence of a causal relationship among them in at least one direction; however, it does not explicitly state the direction of this causal relationship (engle and granger, 1987; shahbaz et al., 2017). moreover, findings on the causal relationship are mixed. in addition, some of the studies tend to suffer from omission-of-variable biases because they are based on bivariate analysis. moreover, studies using panel data analysis for ssa countries are scanty. this study, therefore, uses a multivariate analysis to examine the causal relationship between oil price and economic growth in ssa countries during the period 1990 to 2018. the study further divides ssa countries into two groups, namely seven low-income countries (lics) and seven middle-income countries (mics)2 in order to test whether the causality between oil price and economic growth depends on the countries’ income levels. the study employs panel cointegration and panel ecm-based granger-causality tests to examine this linkage. to our knowledge, this study may be the first of its kind to examine in detail the causal relationship between oil price and economic growth in oil-importing countries in subsaharan africa, using a multivariate panel granger-causality model. the rest of this paper is organised as follows: section 2 gives a summary of previous studies on the relationship between oil price and economic growth; section 3 presents the estimation techniques, empirical analysis and the discussion of the results, while section 4 concludes the paper. 2 the lics include ethiopia, gambia, mali, mozambique, senegal, tanzania and uganda. the mics include botswana, kenya, mauritania, mauritius, namibia, south africa and zambia. the dynamic causal relationship between oil price and economic growth in oil-importing ssa ... 219 2. literature review the causality between oil price and economic growth has been empirically tested in some studies as well, though the results are far from being consistent. studies on the causal relationship between oil price and economic growth can be divided into four categories. the first category found granger-causality flow from oil prices to economic growth. the second category found the granger-causal relationship flow is from economic growth to oil prices. the third category of studies found the flow to be feedback hypothesis (two-way causal relationship) while the fourth category is the neutrality hypothesis (where there is no causal relationship). while most studies that exist have been conducted on developed countries, particularly the us, most studies on developing countries have been in asia and latin america. little attention has been given to ssa countries that are usually mostly hit by oil price shocks. studies on oil prices and economic growth are few in comparison to studies on energy consumption and economic growth. few studies have examined the nexus between oil prices and economic growth. some of the studies that have examined oil price and economic growth include hooker (1996a), lescaroux and mignon (2008), cunado and perez-de-gracia (2003), rafiq et al. (2009) and kumar (2009). while some studies found a unidirectional causal relationship, other studies found the feedback hypothesis. some studies also found mixed results for studies conducted in more than one country. there is, therefore, either causality or no causality in some of the countries employed in the study and under different data periods. the consensus in the literature shows that oil and its price is pivotal in the economic activities of the world. similarly, the magnitude and direction of its causal relationship are widely still debated in the literature. assessing the consequences of oil price fluctuation on economic growth is specifically relevant to the case of oil-importing countries in ssa. as most of the oil-importing countries are small open economies and they have no real power on the global price of oil, hence they are greatly influenced by the effect of oil price variation especially as an importer of refined oil. on the one hand, some studies found a unidirectional causal relationship between oil price and gdp. these include rafiq et al. (2009); kumar (2009) and odhiambo and nyasha (2019). rafiq et al. (2009) analyzed data from thailand and found that oil price does granger cause and have a significant impact on macroeconomic indicators in the country. kumar (2009) confirmed similar results for india using linear and nonlinear specifications of multivariate var. evidence showed that oil price does granger cause macroeconomic activities. a one percent decrease in the growth of industrial production is attributed to a one hundred percent increase in the oil price. another study that found a unidirectional causality is jayaraman and choong (2009) in an analysis of four selected pacific island countries. they found that the causality runs from oil price to economic growth. odhiambo and nyasha (2019) also found a unidirectional causal relationship between oil price and economic growth in kenya. the causal relationship, however, flows from economic growth to oil prices. other studies on african countries that found a unidirectional causality between oil price and economic growth include mensah et al. (2019) for a panel of 22 african countries and awunyo-victor et al. (2018) for ghana. on the other hand, a bidirectional causal relationship was found between oil price and economic growth in studies such as sarwar et al. (2017); shahbaz et al. (2017); jiménezrodríguez and sánchez (2005); and ebohon (1996). in a panel analysis of 157 countries, sarwar et al. (2017) confirmed a bidirectional causal relationship in a multivariate analysis between oil price, gdp, electricity consumption, fixed capital formation and population. shahbaz et al. (2017) found a similar result in a multivariate analysis of oil price, gdp and electricity 220 m. o. akinsola, n. m. odhiambo consumption in a panel of 157 countries. in another study for eight oecd countries, jiménezrodríguez and sánchez (2005) found a bi-directional relationship for five of the countries, namely: japan, canada, germany, uk, and france. however, a unidirectional relationship (oil price granger causes gdp) is found for the usa, italy, and norway. ebohon (1996) also found a bidirectional relationship between energy and economic growth for both nigeria and tanzania. other studies found mixed results in their analysis. hooker (1996a) found that oil price does not granger-cause industrial production for the us using the var methodology from 1947 to 1994; however, oil price granger causes unemployment and employment growth rates for data from 1947 to 1973 but not after 1973. hooker (1996b) also found that oil price does not granger-cause gdp for the us. cunado and perez-de-gracia (2005) analyzed six asian countries using var and quarterly data from 1975 to 2002. they found that oil price does not granger-cause economic growth for half of the countries in the shortrun but does granger cause economic growth in south korea, japan, and thailand. lescaroux and mignon (2008) examined three panel groups of oil-importing, oil-exporting and opec countries, and posited that oil price granger-causes gdp for the oil importers and opec countries. however, they do not granger-cause gdp for other oil exporters. cunado and perez-de-gracia (2003) analysed 14 european countries using quarterly data from 1960 to 1999, and a var technique. they observed that oil prices granger-cause gdp for half of the countries, but do not granger-cause gdp for the other half. 3. estimation techniques and empirical analysis 3.1. empirical model specification the granger-causality test as proposed by engle and granger (1987; 2004) is extended to examine the causal relationship between oil price, economic growth and oil consumption in a panel of 14 countries. given the flaws of the bivariate causality framework (dumitrescu and hurlin, 2012), the current study uses a multivariate causality test to examine this linkage. according to behmiri and manso (2013), the omission of a vital variable in the causal link between two variables could result in omitted variable bias. to address this shortfall, a multivariate causality model is used to examine the causal relationship between real oil price (rop) and economic growth (y). oil consumption (oc) and real effective exchange rate (reer) are used as the intermittent variables in the multivariate models. the variables are expressed in their logarithm form. the model used in this study can be expressed as follows: ∆𝑦𝑖𝑡 =∝1𝑗+ ∑ 𝜕11𝑖𝑘 𝑛 𝑘=1 ∆𝑦𝑖𝑡−𝑘 + ∑ 𝜕12𝑖𝑘 𝑛 𝑘=1 ∆𝑅𝑂𝑃𝑖𝑡−𝑘 + ∑ 𝜕13𝑖𝑘 𝑛 𝑘=1 ∆𝑂𝐶𝑖𝑡−𝑘 + ∑ 𝜕14𝑖𝑘 𝑛 𝑘=1 ∆𝑅𝐸𝐸𝑅𝑖𝑡−𝑘 + 𝜑1𝑖𝐸𝐶𝑇1𝑖𝑡−1 + 𝜇1𝑖𝑡 (1) ∆𝑅𝑂𝑃𝑖𝑡 =∝2𝑗+ ∑ 𝜕21𝑖𝑘 𝑛 𝑘=1 ∆𝑦𝑖𝑡−𝑘 + ∑ 𝜕22𝑖𝑘 𝑛 𝑘=1 ∆𝑅𝑂𝑃𝑖𝑡−𝑘 + ∑ 𝜕23𝑖𝑘 𝑛 𝑘=1 ∆𝑂𝐶𝑖𝑡−𝑘 + ∑ 𝜕24𝑖𝑘 𝑛 𝑘=1 ∆𝑅𝐸𝐸𝑅𝑖𝑡−𝑘 + 𝜑2𝑖𝐸𝐶𝑇2𝑖𝑡−1 + 𝜇2𝑖𝑡 (2) ∆𝑂𝐶𝑖𝑡 =∝3𝑗+ ∑ 𝜕31𝑖𝑘 𝑛 𝑘=1 ∆𝑦𝑖𝑡−𝑘 + ∑ 𝜕32𝑖𝑘 𝑛 𝑘=1 ∆𝑅𝑂𝑃𝑖𝑡−𝑘 + ∑ 𝜕33𝑖𝑘 𝑛 𝑘=1 ∆𝑂𝐶𝑖𝑡−𝑘 + ∑ 𝜕34𝑖𝑘 𝑛 𝑘=1 ∆𝑅𝐸𝐸𝑅𝑖𝑡−𝑘 + 𝜑3𝑖𝐸𝐶𝑇3𝑖𝑡−1 + 𝜇3𝑖𝑡 (3) ∆𝑅𝐸𝐸𝑅𝑖𝑡 =∝4𝑗+ ∑ 𝜕41𝑖𝑘 𝑛 𝑘=1 ∆𝑦𝑖𝑡−𝑘 + ∑ 𝜕42𝑖𝑘 𝑛 𝑘=1 ∆𝑅𝑂𝑃𝑖𝑡−𝑘 + ∑ 𝜕43𝑖𝑘 𝑛 𝑘=1 ∆𝑂𝐶𝑖𝑡−𝑘 + ∑ 𝜕44𝑖𝑘 𝑛 𝑘=1 ∆𝑅𝐸𝐸𝑅𝑖𝑡−𝑘 + 𝜑4𝑖𝐸𝐶𝑇4𝑖𝑡−1 + 𝜇4𝑖𝑡 (4) the dynamic causal relationship between oil price and economic growth in oil-importing ssa ... 221 𝐸𝐶𝑇𝑖𝑡 are the error correction terms (ects). the long-run causality is measured by the significance of the t statistics of the ects. the short-run granger causality is tested by using f-statistics. the regression analysis will be conducted in three steps. in the first step, the unit root test which is aimed at testing the order of cointegration is carried out. if the variables are integrated at i(0) or i(1), a cointegration test is conducted as the second step. once the variables are found to be cointegrated, the ecm term will be included in the causality model leading to an ecm based granger-causality test. the f-statistics captures the shortrun causality and the ecm captures the long-run causality. 3.2. data source this study examined and analysed the causal relationship between real oil price and economic growth from 1990 to 2018 for a panel dataset of seven low-income and seven middle-income oil-importing countries in ssa. this study used the world bank (2018) classification of economies to categorise the countries into lics and mics. the lics include ethiopia, gambia, mali, mozambique, senegal, tanzania and uganda. the mics include botswana, kenya, mauritania, mauritius, namibia, south africa and zambia. annual data were employed in this study and were sourced from the world development indicator (wdi, 2019), the us energy information administration (eia) and the bp statistical report, 2019. table 1 data description variable definition source y the real gdp per capita at constant 2010 national prices (in millions 2010 us$) world development indicators (wdi) rop the real oil price is the spot price of crude oil, per barrel, sold on the international market which is adjusted for inflation (in us$) bp statistical review oc oil consumption is the quantity of oil consumed. it is measured in thousands of barrels per day (mb/d) us energy information administration (eia) reer the real effective exchange rate is defined as the nominal exchange rate adjusted by the respective consumer price index of the trading partners. bruegel dataset 4. results and discussion 4.1. panel unit root tests the estimation begins with the unit root test to determine the order of integration of the variables. to test the stationarity of the variables, five-panel unit root tests are employed. the tests are divided into the homogenous unit root process and the heterogeneous unit root process. the levin, lin & chu t* (llc) and breitung t-stat are classified as the homogeneous unit root process, while the im, pesaran and chin (2003), adf-fisher chisquare and the pp-fisher chi-square tests assume the heterogeneous unit root process. 222 m. o. akinsola, n. m. odhiambo table 2 panel unit root tests method at level at first difference order of integration intercept trend intercept trend y llc 0.32 (0.626) 1.36 (0.913) -7.24*** (0.000) -6.80***(0.000) i(1) breitung 1.08 (0.859) -3.45***(0.000) ips 5.00 (1.000) -1.05 (0.147) -8.91*** (0.000) -7.23***(0.000) adf-fisher 6.31 (1.000) 39.37* (0.075) 133.19*** (0.000) 106.48***(0.000) pp-fisher 6.34 (1.000) 48.74***(0.009) 210.57*** (0.000) 426.75***(0.000) rop llc -4.98*** (0.000) -1.77** (0.039) -8.60***(0.000) i(1) breitung -0.85 (0.199) -6.09***(0.000) ips -3.61*** (0.000) -1.59** (0.056) -8.13***(0.000) adf-fisher 61.18*** (0.000) 36.19 (0.138) 110.94***(0.000) pp-fisher 61.30*** (0.000) 32.23 (0.265) 109.34***(0.000) oc llc 0.51 (0.695) -2.39***(0.008) -8.67*** (0.000) i(1) breitung -2.19** (0.014) ips 3.80 (1.000) -3.01***(0.001) -11.14*** (0.000) adf-fisher 11.79 (0.997) 55.28***(0.002) 167.54*** (0.000) pp-fisher 29.51 (0.387) 61.70***(0.000) 285.02*** (0.000) reer llc 0.19 (0.574) -1.44* (0.075) 11.85*** (0.000) i(1) breitung -3.32***(0.000) ips -1.48* (0.070) -2.51***(0.006) -12.55*** (0.000) adf-fisher 39.94* (0.067) 46.64** (0.015) 195.54*** (0.000) pp-fisher 34.31 (0.191) 26.52 (0.545) 250.62*** (0.000) 589.47***(0.000) for all probability values, *, ** and *** denote significance at 10%, 5% and 1% level of significance, respectively. 4.2. panel cointegration test before establishing the direction of causality between the variables, the panel cointegration test is performed to confirm the existence of a cointegrating relationship among the variables of interest. tables 3 and 4 present the results of the panel cointegration test for the entire dataset, and the panel of lics and mics. the results in table 3 show that there is a cointegrating relationship among the variables used in this study. these variables are real gdp per capita, real oil price, oil consumption and real effective exchange rate. in the entire dataset, four statistics out of seven reject the null hypothesis of no cointegration. for the country groups, five statistics reject the null hypothesis of no cointegration in the panel of lics, while four statistics reject the null hypothesis in the panel of mics. the presence of a cointegrating relationship is further buttressed by the results of the kao cointegration test reported in table 4, which reject the null hypothesis of no cointegration for all the datasets used in this study at the 5% level of significance. the dynamic causal relationship between oil price and economic growth in oil-importing ssa ... 223 table 3 results of pedroni cointegration test entire dataset test statistic prob. weighted statistic prob. within-dimension panel v-statistic 9.370*** 0.000 4.943*** 0.000 panel rho-statistic 0.274 0.608 1.749 0.960 panel pp-statistic -3.660*** 0.000 -0.717 0.237 panel adf-statistic -4.275*** 0.000 -1.684** 0.046 between-dimension group rho-statistic 2.808 0.998 group pp-statistic -0.551 0.291 group adf-statistic -2.763*** 0.003 lic statistic prob. weighted statistic prob. within-dimension panel v-statistic 7.195*** 0.000 3.568*** 0.000 panel rho-statistic -0.572 0.284 0.949 0.829 panel pp-statistic -4.129*** 0.000 -1.052 0.146 panel adf-statistic -4.769*** 0.000 -2.308** 0.011 between-dimension group rho-statistic 1.902 0.971 group pp-statistic -0.378 0.353 group adf-statistic -2.024** 0.022 mic statistic prob. weighted statistic prob. within-dimension panel v-statistic -1.603 0.946 -1.727 0.958 panel rho-statistic -0.284 0.388 -0.324 0.373 panel pp-statistic -1.552* 0.060 -1.575** 0.058 panel adf-statistic -1.810** 0.035 -1.776** 0.038 between-dimension group rho-statistic 0.270 0.607 group pp-statistic -2.346** 0.010 group adf-statistic -2.980*** 0.001 for all probability values, *, ** and *** denote significance at 10%, 5% and 1% level of significance, respectively. table 4 results of kao cointegration test statistics prob cointegration status entire dataset -2.243** 0.013 cointegrated lic -1.952** 0.025 cointegrated mic -2.243** 0.012 cointegrated for all probability values, *, ** and *** denote significance at 10%, 5% and 1% level of significance, respectively. 224 m. o. akinsola, n. m. odhiambo 4.3 ecm-based causality model this study analyses the causality between oil price and economic growth for the entire dataset and compares the causality in the two country groups, namely lics and mics. the cointegrating regressions indicate the presence of causality at least in one direction. however, they do not indicate the direction of causal relationships between the variables (see granger, 1988; narayan and smith, 2008; odhiambo, 2009; saidi et al., 2017). the direction of the long-run causal relationship can be observed from the error-correction model (ecm) obtained from the long-run cointegrating vectors (apergis and payne, 2010; saidi and mbarek, 2016; saidi et al., 2017). the long-run causal relationship is, therefore, observed through the significance of the t-statistics of the error correction terms (ects) in the cointegrating equation (asongu et al., 2016). the statistical significance of the fstatistics, on the other hand, determines the short-run causal relationship between the variables used in the model (see saidi and mbarek, 2016; apergis and payne, 2010). the acceptance or rejection of the null hypothesis for the causal relationships is confirmed at 1%, 5% and 10% significance levels. table 5 presents the causal relationship between oil price and economic growth for the entire dataset. table 5 results of panel granger causality for the entire dataset dependent variables sources of causality (independent variables) short-run long-run ∆y ∆rop ∆oc ∆reer ect ∆y 4.648** (0.032) 10.261*** (0.002) 24.906*** (0.000) -0.001*** [-4.583] ∆rop 3.622** (0.058) 4.126** (0.043) 25.544*** (0.000) -0.119*** [-7.374] ∆oc 12.052*** (0.001) 7.887*** (0.005) 0.126 (0.723) -0.001*** [-3.298] ∆reer 11.018*** (0.001) 9.594*** (0.002) 5.766** (0.017) -0.067*** [-4.495] for all probability values, *, ** and *** denote levels of significance at 10%, 5% and 1%, respectively. the results reported in table 5 show that there is evidence of a short-run causality running from real oil price to real gdp per capita and from real gdp per capita to real oil price for the entire dataset. the results are supported by the corresponding f-statistics in the real gdp and oil price equations, which are statistically significant. this finding, therefore, supports a short-run bidirectional causality between oil price and economic growth. similarly, the long-run results show that there is a bidirectional causality between oil price and economic growth for the entire dataset. this is confirmed by the coefficients of the ects in the real gdp and oil price equations, which are negative and statistically significant. the results of the causality test between oil price and real gdp for lics and mics datasets are reported in table 6. the results reported in table 6 show that for the lics, there is a bidirectional causal relationship between real oil price and real gdp in the short run, but a unidirectional causality running from economic growth to real oil price in the long run. a short-run bidirectional is confirmed by the corresponding f-statistics in the real gdp and oil price equations, which have been found to be statistically significant. a long-run unidirectional the dynamic causal relationship between oil price and economic growth in oil-importing ssa ... 225 causality running from economic growth to real oil price is confirmed by the coefficient of the ect in the oil price equation, which is negative and statistically significant. for the mics, the results show that there is a bidirectional causality between oil price and real gdp in the short run and the long run. the short-run result is confirmed by the corresponding fstatistics in the real gdp and oil price equations, which have been found to be statistically significant. the long-run result, on the other hand, is confirmed by the corresponding coefficients of the ect in the real gdp and oil price equations, which have been found to be negative and statistically significant. table 7 summary of causality tests panels causality general conclusion lic (in the short run) there is a bidirectional causality between real oil price and economic growth y ↔ rop lic (in the long run) there is a unidirectional causality from economic growth to real oil price y → rop mic (in the short run) there is a bidirectional causality between real oil price and economic growth y ↔ rop mic (in the long run) there is a bidirectional causality between real oil price and economic growth y ↔ rop note: y ↔ rop represents a bidirectional causality; y → rop represents a unidirectional causality from economic growth to real oil price 5. conclusion in this study, the causal relationship between oil price and economic growth has been examined in 14 oil-importing sub-saharan african (ssa) countries during the period 1990–2018. although the causal relationship between oil price and economic growth has been examined in a number of studies, very few studies have been conducted in africa in general and in ssa in particular. moreover, the majority of studies conducted suffer from methodological weaknesses. as an example, some studies used bivariate granger-causality, table 6 comparison of the panel granger causality for the panel of lics and mics lic mic dependent variables sources of causality (independent variables) sources of causality (independent variables) short-run long-run short-run long-run ∆y ∆rop ∆oc ∆reer ect ∆y ∆rop ∆oc ∆reer ect ∆y 7.919*** (0.006) 1.808 (0.181) 4.167** (0.043) -0.039 [-1.488] 3.379* (0.069) 5.413** (0.022) 14.452*** (0.000) -0.151*** [-3.195] ∆rop 7.984*** (0.005) 3.396* (0.067) 22.671*** (0.000) -0.056*** [-3.233] 4.524** (0.035) 1.022 (0.314) 12.521*** (0.001) -0.055*** [-3.211] ∆oc 2.046** (0.043) 10.693*** (0.001) 2.538 (0.113) -0.175** [-2.607] 15.433*** (0.000) 0.010 (0.920) 17.608*** (0.000) -0.004*** [-2.868] ∆reer 4.136** (0.044) 2.561 (0.112) 3.429* (0.066) -0.035*** [-3.736] 0.322 (0.572) 2.107 (0.149) 6.352** (0.013) -0.042*** [-3.311] for all probability values, *, ** and ***, denote significance at 10%, 5% and 1% levels of significance, respectively. 226 m. o. akinsola, n. m. odhiambo yet studies have shown that bivariate causality suffers from omission bias. moreover, the majority of the previous studies lumped low-income and middle-income countries together; however, studies have shown that the relationship between oil price and economic growth could be dependent on the level of income of the countries. these findings have important policy recommendations. for the low-income countries, energy conservation policies are necessary in the long run to ensure that energy is used efficiently as a result of the increase in economic growth. middle-income countries should pay attention to the efficient use of energy while pursuing economic trajectories. in particular, they may consider regulatory policies aimed at normalising oil prices, especially in the long run. unlike some of the previous studies, this study uses a multivariate granger-causality model, which incorporates oil consumption and real exchange rate as intermittent variables between oil price and economic growth. the study employed panel cointegration and the panel granger-causality tests to examine this linkage. in addition, the study countries were divided into two groups, namely lics and mics in order to test whether the causality between oil price and economic growth depends on the countries’ income levels. the results from this study show that the causality between oil price and economic growth depends on the countries’ income levels. specifically, the results show that for the lics, a bidirectional causality between oil price and real gdp tends to prevail in the short run, while a unidirectional causality running from economic growth to real oil price predominates in the long run. however, for mics, the results show that there is a bidirectional causality between oil price and real gdp in the short run and the long run. other results show that in lics, there is: i) a bidirectional causality between real exchange rate and economic growth, and between oil consumption and oil price; ii) a unidirectional causality from real exchange rate to oil price; iii) a unidirectional causality from economic growth to oil consumption. these results apply irrespective of whether the causality is estimated in the short run or the long run. the results for mics, on the other hand, show that there is: i) a bidirectional causality between oil consumption and economic growth, and between oil consumption and exchange rate; and ii) a unidirectional causality from real exchange rate to oil price and economic growth. 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ekonomskog razvoja. studija koristi panel kointegracijske i panel grendžer-uzročne testove da bi ispitala ovu vezu. rezultati studije pokazuju da kratkoročno postoji dvosmerna uzročnost uzmeđu cene nafte i ekonomskog razvoja za čitav skup podataka, za lic i mic podjednako. međutim, dugoročno, postoji dvosmerna uzročna veza između cene nafte i ekonomskog razvoja za ceo skup podataka i mic, ali jednosmerna uzročnost od ekonomskog razvoja do cene nafte za lic. sveukupno, studija je utvrdila da je povratni odnos između cene nafte i ekonomskog razvoja dominantan. ključne reči: cena nafte, ekonomski razvoj, panel analiza, grendžer uzročnost, zemlje sa niskim prihodima, zemlje sa srednjim prihodima https://doi.org/10.1016/j.resourpol.2008.09.001 https://doi.org/10.1016/j.resourpol.2008.09.001 https://doi.org/10.1016/j.pnucene.2016.01.018 https://doi.org/10.1016/j.scs.2017.05.013 https://doi.org/10.1016/j.rser.2017.03.063 plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, n o 1, 2015, pp. 41 54 the importance of information technologies for automotive cluster of the republic of serbia  udc 334.75 aleksandra anđelković, nada barac, marija radosavljević faculty of economics, university of niš, serbia abstract. enterprise networking occurs as a consequence of the globalization and the tendency to increase the ability to meet customer requirements. the functioning of networked enterprises as complex interorganizational networks in modern conditions is impossible without the implementation of appropriate information technology (it). they provide stronger partnerships, fast and easier sharing of information, more transparency and less distorted information. the importance of the application of it will be highlighted through the advantages of it, as well as factors that may limit the process of their application. the analysis was conducted based on a sample of 28 enterprises which are the cluster members. the general conclusion based of the analysis is that there is a link among it implementation and achievement of positive effects in certain business segments (sharing information, supply reliability, inventory reduction, cost reduction, fast delivery, product quality, process continuity), which means that enterprises that have implemented it generate positive effects in the observed fields. the analysis was performed by application of the following statistical tools: descriptive statistics, fisher's exact probability test, correlation analysis and cluster analysis. key words: enterprise networking, information technology, automotive cluster, correlation analysis, cluster analysis. introduction modern competition is imposed by the need to achieve competitive advantage through interorganizational networking. the impossibility of providing all the necessary resources, capabilities and skills in modern conditions, accelerates the development of interorganizational networks. at the same time, a large number of different networked enterprises has influenced the emergence of conflicts among competing objectives and strategies of the partners. the basic requirement for achieving effective partnership is  received january 22, 2015 / accepted april 10, 2015 corresponding author: nada barac faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: nadabarac52@gmail.com 42 a. anđelković, n. barac, m. radosavljević teamwork. however, it is impossible to achieve this without the cooperation, coordination and collaboration among partners, the behavior known as c3 behavior (weaver, visich and roethlein, 2012). c3 behavior is inevitable in the case of improvement of processes, structure, and skills at the level of interorganizational network. this behavior means that partners imply joint efforts in order to achieve common goals. c3 behavior enables the realization of creative and innovative solutions necessary to create new values, products or processes, as well as intangible value. many authors point out that for achieving high level of collaboration within the network it is necessary to provide interdependence among partners, long-term orientation and sharing information (pigni, ravarino, saglietti, 2010). in order to provide improvements in interorganizational network, the aforementioned information sharing among partners must include sharing of strategic information, and not just transactional data (krishnapriya, rupashree, 2014). therefore, the possibility of achieving cooperation, coordination and collaboration among partners is limited by the lack of it implementation. through sharing information among partners, different its increase the level of transparency within network, but at the same time ensure the creation of greater value for the consumer, through the elimination of conflicts, which proceed from sharing incorrect or distorted information. in this sense, it, both at the level of individual enterprises, and the level of interorganizational networks, is considered as one of the sources of competitive advantage. 1. application of information technologies within interorganizational network information and communication technologies are an important support for the development and functioning of interorganizational networks. it provides opportunities for enterprises to achieve full integration with their partners within the network, at relatively low cost (baihaqi, beaumont, sohal, 2008). gerard and marshall in their study analyzed the contribution of it and information exchange on demand between a supplier and a large number of retailers. these authors found that sharing information has led to costs reduction by 13.8%, within the network (zhang, 2008). before the introduction of it, sharing information, both among functional areas within enterprises and among the enterprises within the network, included the paper form. this way for sharing information was slow, unreliable and full of errors (moharana, murty, senapati, khuntia, 2011). in the mid-1970s first serious technical solutions appeared, and they supported the efficient functioning of supply system, such as kanban system, the original version of just-in-time system delivering spare parts for toyota from japan to america for final processing. almost simultaneously appeared the first control concepts on the procurement such as material requirements planning mrp i, manufacturing resource planning mrp ii, distribution resource planning drp and enterprise resource planning erp. the appearance of these technologies enabled effective communication among partners across national borders, regardless of the distance (higuchi, troutt and polin, 2005). increasing speed and reducing cost of communication are some of the main drives for the development of interorganizational networks. a major contribution represents facilitating personal and business contacts. the development possibilities of electronic processing and transmission of data, voice, letters, pictures and so on gave a huge contribution to reducing the cost of communication. a similar revolution, in the context of transport technologies, has enabled the achievement of significant effects, through fast and cheaper transport of goods (đogić, ĉengić, 2008). the importance of information technologies for automotive cluster of the republic of serbia 43 in spite of the fact that the internet appeared much later than the concept of interorganizational networks, the internet has accelerated its development significantly. the internet has affected easier design and implementation of business activity in networks. it facilitates and accelerates sharing information in real time. it speeds up and simplifies the process of market research. these are some of the reasons that contributed to porter's claim that the internet is the most powerful tool available to enhance operational efficiency (milovanovic, 2004, 82). however, there are technologies whose appearance and development was initiated by the need to establish better communication and coordination in interorganizational networks. some of them are: vendor-managed inventory vmi, collaborative planning, forecasting and replenishment cpfr, continuous replenishment program crp. the above mentioned technologies can be classified into several categories, depending on whether they are applied within an organization or among several organizations and whether they are used in planning or executive actions. table 1 its which have contributed to development networks considering their field of application field of application it technologies which are used in planning technologies which are used in executive activities inter-organizational technologies cpfr edi (electronic data interchange) vmi (vendor managed inventory) intra-organizational technologies mrp i mrp ii erp wms (warehouse management system) source: mangan, j., lalwani, ch. and butcher, t., (2008), global logistics and supply chain management, john wiley & sons, ltd, new york. one of the modern technologies has found its application in interorganizational networks. it is a radio frequency identification rfid. rfid technology contributes to improving the efficiency of interorganizational networks. application of this technology has provided real-time information and transparency among all partners in interogranization networks (jones, chung, 2008, 119). data in real time, which are transmitted via radio waves, provide to participants in the supply chain current information on inventory and logistics (barac, milovanovic, andjelkovic, 2009, 121). rfid technology contributes to continual sharing of information throughout the network, thus ensuring coordination among all partners (barac, milovanovic, andjelkovic, 2009, 12). problems in supply chain caused by poor coordination, can be overcome by using rfid chips in all members of the chain. the bullwhip effect can be explained as a result of insufficient or missing communication among supply chain parthers, and it can be avoided by introducing these chips. 2. clusters as a form of interorganizational networking clusters are a type of inter-organizational networks, which involve linked enterprises from similar business sectors, and are initiated by common interests for increasing competitive advantage and market position, through sharing knowledge, skills, experience, resources 44 a. anđelković, n. barac, m. radosavljević and activities (porter, 1998). by networking enterprises through clusters the synergistic effect at the level of individual enterprises, as well as at the level of the network is achieved due to the great interdependence of all the members, quick implementation of technological, marketing and managerial skills, etc (ilić, 2006). these inter-organisational networks, incurred by connecting material as well as immaterial resources, provide competitiveness not only at the local, national and regional level, but also in the global environment, for the enterprises involved. by entering the cluster, enterprises increase their competitiveness through increasing productivity and innovation based on networking. networking through clusters provides for the enterprises’ increase of their capabilities, resources, capacities, etc., without loss of expertise and control of business, as well as independence in performing certain activities. within the cluster there are many different partners, such as manufacturers, suppliers, retailers, service enterprises, but also educational and scientific institutions, agencies or associations, which represent some kind of supporting institutions (petković, aleksić mirić, petrović, 2011). a number of authors have pointed out the dual importance of enterprises networking through clusters, in terms of increased competitive advantage at the level of industry, around which enterprises are networked, as well as at the level of individual enterprises, which are parts of cluster. ever more this kind of networking is the only way for survival of small and medium-sized enterprises, which are characterized by limitations in terms of lack of financial resources, experience, skills and material resources. some advantages of networking through clusters are (rapić, 2010, 154):  easier access to the latest knowledge and research capacities,  existence of a framework for cooperation,  reliance on existing organizational infrastructure,  efficient access to raw materials, specialized workforce and suppliers,  access to it database in a particular area,  easier application of new technologies,  existence of competition within the cluster, thus strengthening the international competitiveness,  access to government programs for development of clusters, i.e. the possibility of subsidies and tax incentives,  achieving economies of scale and  joint marketing mechanism (joint participation in international fairs). often mentioned elements as a base of realization of competitive advantages are: ideas, knowledge, information, efficiency, inventiveness and innovation, quality products and services, lower operating costs, differentiation of products and services compared to competitors, flexibility, agility, velocity in satisfying market demand, etc (ilić, 2006). clusters are structured in a manner that provides establishing cooperation and undisturbed sharing of information among partners. enterprises networked through clusters by learning, sharing knowledge, experiences, information and innovation are able to overcome problems that arise in the process of carrying out the activities (rapić, 2010). these innovations that arise as a result of the developed knowledge, interconnections and relationships, represent a competitive advantage of clusters, as shown in figure 1. previous studies have shown that networking through clusters has increasing importance and role in the growth and development of enterprises, with the emphasis that in some cases these inter-organizational networks provide greater benefits for small and mediumsized rather than for large enterprises. the importance of information technologies for automotive cluster of the republic of serbia 45 fig. 1 achieving competitive advantage through cluster (konkurentnost privrede srbije, 2003, 305) in addition to the aforementioned benefits, there is one more, frequently mentioned, and it is reflected in the cluster’s role as a source of information. however, achieving all these benefits of inter-organisational networking through clusters is limited by the lack of adequate it to provide sharing of information among both, partners within the cluster, and beyond it. it enables the undisturbed information flow, timely and accurate, or sharing of information in order to facilitate the rapid adjustment of associated partners to market demands while minimizing costs. in this regard, the clusters are imposed by the requirements regarding the introduction of it, which will ensure easier performing of activities within these complex networks (ilić, stojanović, 2009). the use of it and communication solutions in open economies contributes to linking two or more economies of the region within a country or more regions from a number of countries (ilić, 2006). this statement proves that the it provides a higher level of communication and cooperation within the cluster, but also may provide a higher level of collaboration with partners from other regions or even other countries. 3. application of information technologies within the automotive cluster in the republic of serbia on the territory of the republic of serbia there are more than 50 clusters. in order to analyze the importance of it for the need of interorganization networking in the form of clusters, the authors have chosen the automotive cluster of the republic of serbia. the choice of this cluster is justified by the fact that the automotive industry is one of the most complex, given the number of participants and suppliers of various parts, and there is certainly the need to establish coordination and sharing of information. clusters from the mentioned area have a large number of partners that base their processes on lean principles, and the principles of the just-in-time and just-in-sequence, which is impossible to achieve without the implementation of appropriate it (thun, printing & hoenig, 2011, 5511). at the moment when the empirical research was conducted the automotive cluster of the republic of serbia had 43 enterprises. in order to carry out empirical research, a structured questionnaire was used. data were collected by sending questionnaires to email addresses of the owner or manager of enterprises that are part of the automotive cluster. respondents participating in the survey answered questions related to the use of it, the benefits of their implementation, as well as the reasons why until today the enterprise has not launched implementaion it. cluster profit enterprises infrastructure institutions educational institutions learning knowledge innovations competitive advantage 46 a. anđelković, n. barac, m. radosavljević concerning the way managers answered the questions, due to the fact that the sample was small, for the evaluation of the effects it was needed, instead of the classical evaluation of likert scale, that managers add the dichotomous responses, too (whether the effect exists or not). due to that, a more detailed statistical analysis and application of certain tools, which will be particularly highlighted and explained in our futher reseach, was possible. of all the enterprises that were found in the sample (28), 12 belong to the group that implements some of the it, or about 43%. the sample included 7 large and 21 small (and medium) enterprises (figure 2). the same structure of the sample exists when it is about distribution of enterprises according to the origin of the majority of capital, in favor of enterprises with greater domestic capital. fig. 2 the structure of enterprises in the sample by size the structure of the sample depending on the implementation of it and enterprise size is shown in table 2. the table displays absolute and proportional participation. table 2 crosstabulation: enterprises by size and it implementation enterprise size total large small it applied count 4 8 12 % within it 33.3% 66.7% 100.0% % within cluster number of case 57.1% 38.1% 42.9% not applied count 3 13 16 % within it 18.8% 81.3% 100.0% % within cluster number of case 42.9% 61.9% 57.1% total count 7 21 28 % within it 25.0% 75.0% 100.0% % within cluster number of case 100.0% 100.0% 100.0% in order to determine whether there is a connection or relationship between it applications and the size of the enterprises it is necessary to apply the χ 2 test. however, χ 2 test is limited with the fact that frequencies have to be at least equal to 5 (which is not the case in this study). this has causes the application of the fisher's exact probability test of the null hypothesis. this test is performed exclusively at the table contingency 2 × 2, the importance of information technologies for automotive cluster of the republic of serbia 47 when the value of symbols can be displayed dichotomous, (in this case: applied it – not applied it, and enterprise size: large small or are not large). in this case, the null hypothesis can be formulated as: ''there is no correlation between the size of the enterprise and the implementation of it“, and as an alternative: „there is a correlation between the size of the enterprise and the implementation of it“. the results of fisher's exact test showed that the significance level is 0.328, which is greater than 0.01, and means that the null hypothesis should not be rejected, or that between the observed variables there is no dependency. the structure of the sample depending on the implementation of it and the origin of the majority of capital is shown in table 3. the table shows absolute and proportional participation, as in the previous case. table 3 crosstabulation: enterprises by capital origin and it implementation origin of capital total large small it applied count 6 6 12 % within it 50.0% 50.0% 100.0% % within cluster number of case 85.7% 28.6% 42.9% not applied count 1 15 16 % within it 6.3% 93.8% 100.0% % within cluster number of case 14.3% 71.4% 57.1% total count 7 21 28 % within it 25.0% 75.0% 100.0% % within cluster number of case 100.0% 100.0% 100.0% when it comes to the relationship between these two variables, the same method as in the previous case has been used. the null hypothesis is formulated as: ''there is no correlation between the origin of the majority of capital and the implementation of it“, and the alternative as: “there is a correlation between the origin of the majority of capital and the implementation of it“. however, the use of fisher's exact test showed that in this case the null hypothesis should be rejected, and that the observed variables are interdependent. table 4 shows the descriptive statistics as a result of managers evaluation, where managers declared what are, from their view, the advantages of it. the process continuity received the highest average grade (3.6429). based on these results it appears that managers are aware of the importance of it for the process continuity in the cluster. however, in the past year in the enterprise fiat, around which enterprises are gathered in the automotive cluster, there has been production cease three times and disruption of the process continuity. given that 57% of enterprises in the sample said that they do not apply it, this can be one of the reasons for disrupting the continuity of the production process in enterprises around fiat. the greatest standard deviation or variance in responses of managers is present with cost reduction (1.31535), as the benefits of the it implementation. 48 a. anđelković, n. barac, m. radosavljević table 4 descriptive statistics – benefits from it implementation sample size min max mean std. deviation is * 28 1.00 5.00 3.4643 1.26146 sr 28 2.00 5.00 3.2857 1.24297 ir 28 2.00 5.00 3.1071 1.19689 cr 28 2.00 5.00 3.2143 1.31535 fd 28 2.00 5.00 3.4286 1.28894 pq 28 1.00 5.00 3.1429 1.29713 pc 28 2.00 5.00 3.6429 1.19301 table 5 presents descriptive statistics for the reasons why 16 enterprises from the sample had approached the it implementation. the highest average grade was given by the managers to the reason lack of financial resources (4.3750). in addition, it is the only reason that, by the managers, does not deserve grades 1 and 2 (min grade is 3). however, as in the structure of enterprises that do not apply it there is a larger number of small (and medium) enterprises, the fact that lack of financial resources was most often cited by the managers as the reason for missing implementation of it is not a big surprise. the reason is that, in contemporary literature, lack of financial resources is usually mentioned as one of the key constraints for survival and development of small and medium-sized enterprises. the highest standard deviation in responses of managers is noticeable for the reason the possibility of carrying out all tasks without introducing it, which indicates a discrepancy in attitudes of managers of enterprises that do not apply it about their usefulness and needs. table 5 descriptive statistics – reasons for not implementing it sample size min max mean std. deviation inadequately trained employees 16 2.00 5.00 3.6875 .87321 lack of financial resources 16 3.00 5.00 4.3750 .71880 no technical possibilities for the application of technology 16 2.00 4.00 2.5000 .63246 the possibility of carrying out all tasks without introducing it 16 2.00 5.00 3.4375 1.31498 to determine whether the effects of the implementation of it are interconnected (referring to the attitudes of managers of the existence and significance of the effects of applying it), correlation analysis has been applied. more specifically, the correlation analysis shows that between the assessment of effects of implementation of it there is a positive quantitative correlation, since all correlation coefficients are positive. the degree of correlation is not uniform, but it can be generally concluded that the effects of the application of it are interconnected (table 6). strongest connections can be seen between sharing information and process continuity (0.796), supply reliability and product quality (0.537), information sharing and fast delivery (0.525), as well as between fast delivery and process continuity (0,520). * is – information sharing, sr – supply reliability, id – inventory reduction, cd – costs reduction, fd – fast delivery, pq – product (service) quality, pc – process continuity. the importance of information technologies for automotive cluster of the republic of serbia 49 similar results proceeded from the application of hierarchical cluster analysis. the aim of this analysis is grouping or linking the observed variables, in this case the effects of the it application. the dendrogram shows the way these effects are interconnected (figure 3). fig. 3 the dendrogram based on hierarchical cluster analysis table 6 correlation analysis: it implementation effects is sr ir cr fd pq pc is correlation coefficient 1.000 .455(*) .393(*) .323 .525(**) .266 .796(**) sig. (2-tailed) . .015 .039 .094 .004 .171 .000 sample size 28 28 28 28 28 28 28 sr correlation coefficient .455(*) 1.000 .221 .418(*) .341 .537(**) .371 sig. (2-tailed) .015 . .258 .027 .076 .003 .052 sample size 28 28 28 28 28 28 28 ir correlation coefficient .393(*) .221 1.000 .386(*) .426(*) .269 .220 sig. (2-tailed) .039 .258 . .043 .024 .166 .260 sample size 28 28 28 28 28 28 28 cr correlation coefficient .323 .418(*) .386(*) 1.000 .368 .389(*) .367 sig. (2-tailed) .094 .027 .043 . .054 .041 .055 sample size 28 28 28 28 28 28 28 fd correlation coefficient .525(**) .341 .426(*) .368 1.000 .461(*) .520(**) sig. (2-tailed) .004 .076 .024 .054 . .014 .005 sample size 28 28 28 28 28 28 28 pq correlation coefficient .266 .537(**) .269 .389(*) .461(*) 1.000 .331 sig. (2-tailed) .171 .003 .166 .041 .014 . .086 sample size 28 28 28 28 28 28 28 pc correlation coefficient .796(**) .371 .220 .367 .520(**) .331 1.000 sig. (2-tailed) .000 .052 .260 .055 .005 .086 . sample size 28 28 28 28 28 28 28 ** correlation is significant at the 0.01 level (2-tailed). * correlation is significant at the 0.05 level (2-tailed). the dendrogram was constructed by using ward's method, where euclidean distance was used as the criterion. from the dendrogram it can be seen that the strongest connection is between information sharing and process continuity, and at the next level fast delivery joins them. on the other hand, there is a strong link between supply reliability and product quality, and while weakly linked are the effects inventory reduction and costs reduction. 50 a. anđelković, n. barac, m. radosavljević if the dependence of the orientation of managers regarding the effects of it application in relation to the ownership of capital, the size of the enterprise and the application of it is analyzed, it can be concluded that the first two independent variables (ownership of capital and enterprise size) do not affect the managers' attitude on the usefulness of it, for any of the above effects. however, when it comes to the impact of it application, the analysis shows that its presence in the enterprises is affected by the attitude of managers on the effects of application. statistically significant influence occurs for the following effects: inventory reduction, cost reduction and product quality. tables 7, 8, 9, and 10 show where dependence exsists (the table for product quality is missing since the results for this effect are the same as in the case of cost reduction). table 7 crosstabulation: enterprises by the effect inventory reduction and it implementation ir total yes no it applied count 9 3 12 % within it 75.0% 25.0% 100.0% % within cluster number of case 69.2% 20.0% 42.9% not applied count 4 12 16 % within it 25.0% 75.0% 100.0% % within cluster number of case 30.8% 80.0% 57.1% total count 13 15 28 % within it 46.4% 53.6% 100.0% % within cluster number of case 100.0% 100.0% 100.0% table 8 fisher's exact test value df asymp. sig. (2-sided) exact sig. pearson chi-square 6.892(b) 1 .009 continuity correction(a) 5.029 1 .025 likelihood ratio 7.182 1 .007 fisher's exact test .010 sample size 28 table 9 crosstabulation: enterprises by the effect costs reduction and it implementation cr total yes no it applied count 9 3 12 % within it 75.0% 25.0% 100.0% % within cluster number of case 75.0% 18.8% 42.9% not applied count 3 13 16 % within it 18.8% 81.3% 100.0% % within cluster number of case 25.0% 81.3% 57.1% total count 12 16 28 % within it 42.9% 57.1% 100.0% % within cluster number of case 100.0% 100.0% 100.0% the importance of information technologies for automotive cluster of the republic of serbia 51 table 10 fisher's exact test value df asymp. sig. (2-sided) exact sig. pearson chi-square 8.859(b) 1 .003 continuity correction(a) 6.711 1 .010 likelihood ratio 9.304 1 .002 fisher's exact test .004 sample size 28 in order to complete the analysis it seems necessary and justified to include the cluster analysis of enterprises in the sample, in terms of their grouping into clusters depending on the effects of the it application. in this case clustering was performed by using the kmean cluster. in adition, tables are presented from which can be seen the average grades of the effects of it application (table 11), and the number of enterprises belonging to the clusters according to these assessments (table 12). table 11 final cluster centers table 12 custer size clusters 1 2 is 4.15 2.87 sr 4.15 2.53 ir 3.69 2.60 cr 4.15 2.40 fd 4.31 2.67 pq 4.00 2.40 pc 4.38 3.00 size cluster 1 13 2 15 total 28 based on the above tables, it can be concluded that the enterprises that belong to the first cluster are considered to have significant effects of applying it, unlike enterprises that belong to the second cluster. based on table 12, it can be seen that the first cluster is smaller (13) compared to the second, which includes the enterprises where the effects of it are considered less important. finally, in order to accept a general conclusion that the it application is associated with the achievement of positive effects in the observed fields, correlation analysis has been used (to indentify connection between the use of it and belonging of enterprises to previously shown clusters). for the same reason as in the previous cases, fisher's exact probability test has been used again (tables 13 and 14). in this case, the null hypothesis can be formulated as: ''there is no correlation beetween belonging to clusters and application of it“, and as an alternative: “there is a correlation beetween belonging to clusters and application of it“. 52 a. anđelković, n. barac, m. radosavljević table 13 crosstabulation: enterprises by cluster affiliation and it implementation cluster affiliation total cluster 1 cluster 2 it applied count 11 1 12 % within it 91.7% 8.3% 100.0% % within cluster number of case 84.6% 6.7% 42.9% not applied count 2 14 16 % within it 12.5% 87.5% 100.0% % within cluster number of case 15.4% 93.3% 57.1% total count 13 15 28 % within it 46.4% 53.6% 100.0% % within cluster number of case 100.0% 100.0% 100.0% table 14 fisher's exact test value df asymp. sig. (2-sided) exact sig. pearson chi-square 17.279(b) 1 .000 continuity correction(a) 14.242 1 .000 likelihood ratio 19.733 1 .000 fisher's exact test .000 sample size 28 based on the previous tables, precisely basis on the significance level in the table that refers to the result of fisher's exact probability (table 14), which is 0.000, and that means less than 0.01, it can be concluded that the null hypothesis should be rejected. this means that there is a positive correlation between the use of it and managers' awareness about the effects that it provides. conclusion the importance of the application of it was highlighted through the advantages of it, as well as factors that may limit the process of their application. the automotive cluster of the republic of serbia, as a form of enterprises networking, is a source of competitive advantage, especially for small and medium-sized enterprises that do not have the possibility, due to limited resources, to survive independently in modern conditions. in addition, the automotive cluster enables connection of local enterprises with successful partners from other countries, which ensures the exchange of knowledge, experience and skills. in this way, the automotive cluster, besides being a source of competitive advantage for individual enterprises, included within the network, certainly contributes to greater regional development and survival of the automotive industry in the republic of serbia. like other forms of networking, automotive cluster functioning cannot be imagined without appropriate it. the aim of the research was to examine the usefulness of it implementation, in terms of the effects that occur as a result. on the other hand, the aim was to examine the reasons for rejection of it and the possibility of their elimination. the importance of information technologies for automotive cluster of the republic of serbia 53 the most important effects of applying it are process continuity, sharing information and fast delivery, which does not mean that the application of it should only be expected in those areas. however, regardless of this "average" determination of managers, there are a lot of others who do not believe that the use of it can contribute to accomplishment these and other aforementioned effects, and that indicates a fairly high standard deviation. regarding the factors that contribute to the lack of application of it the most significant are: lack of financial resources and the possibility of carrying out all tasks without introducing it. since the second reason has very high standard deviation, it can be concluded that some enterprises really have a problem with the lack of financial resources, but there are those whose managers believe that the implementation of it is not a necessary condition for successful management in modern conditions. the results of the analysis, which could be seen as promoters of it application, are related to the correlation analysis. according to the results of this analysis, it is concluded that the effects of the application of it are interconnected, which means that it can be expected that they, in fact, provide synergistic effects. apart from a few exceptions, the correlation coefficients that show the connection between the effects of the application of it, range from about 0.380 to as much as 0.796. although the results generally confirm the relationship among the use of it and the expected effects, based on the application of fisher's exact test, it was found that there is a direct correlation in the case of inventory reduction, cost reduction and product quality. finally, the confirmation that the enterprises whose managers consider it implementation as significant and justified are mainly those that apply it, provides cluster analysis, and also testing hypotheses based on fisher's exact probability test. this means that enterprises that have implemented it are realized utility, or had the opportunity to realize the positive effects of the application of it. on the other hand, most of the enterprises that have not yet implemented it are not even aware of the significance of it for achieving positive effects and improving the quality of business. this conclusion is fully consistent with the view of managers of enterprises that have not yet implemented it. according to their opinion one of the most important factors for the lack of implementation is the belief that “it is possible to carry out all the tasks without the introduction of it“. references 1. baihaqi, i., beaumont, n. and sohal, a., (2008), sharing information in supply chains: a survey of australian manufacturing, international review of business research papers, 4(2): 1-12. 2. barac, n., milovanović, g. and anċelković, a., (2009), tendency in implementation rfid technology in transition economies, страны с переходной экономикой в условиях глобализации, российский университет дружбы народов, москва. 3. barac, n., milovanović, g., 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(eds. chan, c. k. and lee, h.w.j.) 6. ilić, m., (2006), poslovni inkubatori i klasteri kao model razvoja malih i srednjih preduzeća u industriji, industrija, 34(4): 63-98. 7. ilić, s., stojanović, s., (2009), softverska rešenja u funkciji optimalnog upravljanja u lancu snabdevanja, zbornik radova, xv konferencija yu info, kopaonik. 54 a. anđelković, n. barac, m. radosavljević 8. jones, e. and chung, ch., (2008), rfid in logistics: a practical introduction, crc press, taylor & francis group. 9. konkurentnost privrede srbije (2003), belgrade: jefferson institute. 10. krishnapriya, v. and rupashree, b., (2014), supply chain integration – a competency based perspective, international journal of managing value and supply chains (ijmvsc), 5(3): 45-60. 11. mangan, j., lalwani, ch. and butcher, t., (2008), global logistics and supply chain management, john wiley & sons, ltd. 12. milovanović, g. 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(2011), importance of information technology for effective supply chain management, international journal of modern engineering research (ijmer), 1 (2): 747-751. 14. petković, m., aleksić mirić, a., petrović m., (2011), izgradnja interorganizacionih procesa u funkciji podizanja konkurentnosti: primer klastera u srbiji, novi metodi menadžmenta i marketinga u podizanju konkurentnosti srpske privrede, ekonomski fakultet univerzitet u beogradu, ekonomski fakultet subotica univerzitet u novom sadu, nauĉno društvo ekonomista srbije, beograd (eds. janićijević, n., lovreta, s.). 15. pigni, f., ravarini, a. and saglietto, l., (2010), an explorative analysis of the effects of information and communication technologies and inter-organizational relationships on supply chain management systems, an international journal supply chain forum, 11(4): 36-48. 16. porter, m., (1998), clusters and the new economics of competition. harvard business review, 76(6): 77-90. 17. rapić, s., (2010), unapreċenje menadžmenta lanca snabdevanja kroz klastere, montenegrin journal of economics, vi(11): 149-156. 18. thun, j., drüke, m., hoenig, d., (2011), managing uncertainty: an empirical analysis of supply chain risk management in small and medium-sized enterprises, international journal of production research, 49(18): 5511-5525. 19. weaver, b., visich, j. and roethlein, c. j., (2012), coordination, cooperation, and collaboration: defining the c3 framework, annual meeting of the 43rd decision sciences institute annual meeting, san francisco marriot, san francisco. 20. zhang, q., (2008), essentials for information coordination in supply chain systems, asian social science, 4(10): 55-59. značaj informacionih tehnologija za automobilski klaster republike srbije umrežavanje preduzeća javlja se kao jedna od posledica trenda globalizacije i težnje za povećanjem sposobnosti radi ostvarenja zahteva potrošača. funkcionisanje umreženih preduzeća, kao složenih interorganizacionih mreža, u savremenim uslovima nije moguće bez implementacije adekvatnih informacionih tehnologija (it). kako poslovni klasteri predstavljaju jedan od oblika umrežavanja preduzeća, u cilju povećanja konkurentske prednosti i tržišne pozicije, u radu će biti analizirana primena it u klasterima, na primeru automobilskog klastera republike srbije. analiza je sprovedena na bazi uzorka od 28 preduzeća, članica klastera. generalni zaključak koji se nameće na osnovu rezultata analize jeste da postoji veza između implementacije it i ostvarenja pozitivnih efekata u određenim segmentima poslovanja (razmena informacija, pouzdanost snabdevanja, smanjenje zaliha, smanjenje troškova, brza isporuka, kvalitet proizvoda i kontinuitet procesa), što znači da preduzeća koja su implementirala it ostvaruju pozitivne efekte u posmatranim oblastima. u postupku analize primenjeni su statistički alati: deskriptivna statistika, fišerov test tačne verovatnoće, korelaciona analiza i klaster analiza. kljuĉne reĉi: umrežavanje preduzeća, informacione tehnologije, automobilski klaster, korelaciona analiza, klaster analiza. facta universitatis series: economics and organization vol. 15, n o 3, 2018, pp. 231 244 https://doi.org/10.22190/fueo1803231o © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper sales leadership and salespeople’s performance in kogi state: an investigation of herbal mixture marketing managers 1 udc 005.3:658.8(662.2) elijah e. ogbadu 1 , akeem tunde nafiu 2 , danlami joseph aduku 1 1 department of business administration, kogi state university, anyigba, nigeria 2 centre for pre-degree and diploma studies, kogi state university, anyigba, nigeria abstract. this study focused on leadership styles and job performance of salespeople of herbal mixture marketing organizations in kogi state, nigeria. the population of this study is not definite, and as such bill godden method was used to determine the sample size of 384. for the field survey, the instrument used was structured questionnaire. the study analyzed data with descriptive statistics, t-test, correlation and multiple regressions. finding indicates that there are significant differences between transformational and transactional sales leaders of herbal mixture marketing organizations in kogi state, nigeria. finding further shows that welfare concern and carrot & stick system has significantly positive effect on salespeople’s performance, where the effect of team spirit building is negative. the study concludes that the differences between transformational and transactional sales leadership are evident, and the practice of these leadership approaches may vary from country to country, region to region and culture to culture. this study therefore recommends that herbal mixture marketing managers should adopt more of transformational sales leadership, and focus more on welfares and carrot & stick system strategically to enhance desired salespeople’s performance. key words: transformational sales leadership, transactional sales leadership, welfares, carrot & stick system, team spirit building jel classification: l20, m10 received april 30, 2018 / revised june 20, 2018 / accepted june 25, 2018 corresponding author: akeem tunde nafiu centre for pre-degree and diploma studies, kogi state university, anyigba, nigeria e-mail: tundenafiu01@gmail.com 232 e.e. ogdabu, a.t. naifu, d.j. aduku 1. introduction recently, the issue of leadership has raised more research attention. leadership is observed as the main subject of concern in marketing as it has very strong connection with superior job performance and success of salespeople. leadership stimulates a bond which makes people work together (bushra et al., 2011) in one direction with team spirit, following the corporate roadmap for the achievement of superior salespeople’s performance and success. a number of research reports have identified imperative leadership style that can influence performance. researches (bass & riggio, 2006; chully & sandhya, 2012; rahman et al., 2014; mottoh, 2015; ho et al., 2016; fernandes & awamleh, n.d.) focused on transformational and transactional leadership styles as being critical to job performance. the study conducted by walumbwa, avolio, and zhu (2008) reported that transformational leadership is one of the most popular aspects in understanding follower’s attitudes, behavior and performance. transformational leadership concentrates on individual and team level job performance which lead the organization towards success (judge & piccolo, 2004). the position of researchers appears to be contrary when the sales leadership style adopted by herbal mixture marketers is taken into consideration in kogi state. although personal selling and sales leadership are particularly important in business-to-business marketing (bingham & gomes, 2001; minett, 2002; dwyer & tanner, 2002), it is also relevant in other marketing areas. it appears that though transformational sales leadership approach is adopted by some marketers; transactional sales leadership approach is more eminent among marketers of herbal mixture in kogi state, nigeria. the nigerian economic factor appears to have supported this leadership style; salespeople are aware of the carrot-and-stick reward system, and are forced to pursue corporate goals based on the known consequence of crashing out of their jobs. rahman et al. (2014) stressed that transactional leadership approach apparently promotes a performance oriented work culture by rewarding performance and weeding out incompetents. sequel to this, job performance has maintained a status quo. contrarily et al., (2000) argued that transactional leadership style generates lower performance than transformational leadership style. it is however certain that both leadership approaches and styles are critical to job performance of salespeople depending on the agility of the marketing manager in question. this study is focused on the sales leadership and salespeople’s performance of herbal mixture in kogi state. the study does not consider the impact of the four dimensions of transformational leadership suggested by bass (yammarino & dubinsky, 1994) which are charisma, inspiration, intellectual stimulation and individualized consideration (wilkinson, 2007), and the dimension of transactional leadership are not taken into consideration. unlike wilkinson (2007) who decided not to consider reasons for poor salesperson performance because other researchers (such as decarlo et al., 1997; dubinsky, 1999; huffman & cain, 2000) have already reported on those reasons. 1.1. statement of the problem for long, there has been a problem of identifying more effective sales leadership approach in the field of marketing in kogi state, nigeria. effort to identifying and distinguishing transformational and transactional sales leadership styles is not intensive enough, particularly when considering factors such as team spirit building, welfare sales leadership and salespeople’s performance in kogi state... 233 concern, carrot & stick system and performance. yet, leadership researches (awamleh & gardner, 1999; bass, 1985; conger & kanungo, 1987; house, 1977) have been conducted based on the observed behaviour among managers in various organizations in the developed countries. basically, salespeople’s performance is linked up with the kind of leadership approaches adopted by marketing managers of herbal mixture in kogi state, nigeria. it appears that some marketing managers who demonstrate transformational sales leadership approach produce peculiar results which distinguished them from those that adopt transactional sales leadership approach. the marketing managers with transformational sales leadership approach seem to be more salespeople-oriented, and this induces relationship between individual salesperson’s team spirit, job performance and organizational success. tarricone & luca (2002) opined that unsuccessful teamwork is as a result of the disappearance of team spirit. ingram (2000) expressed that teamwork may be viewed as a strategy with wide focus on improved performance of individuals and organizations. in addition, marketing managers with transactional leadership approach have more concern for tasks (and not salespeople’s welfares), which is believed to be connected with improved performance of individual salesperson and the herbal mixture companies at large. it therefore becomes an objective of researches to investigate the disparity among leaders considering these factors, and equally which approach tends to produce more outcomes for herbal mixture marketing organizations in kogi state, nigeria. this study intends to fill the gaps as discussed. 1.2. objective of the study this study seeks to investigate differences between transformational and transactional sales leadership, considering factors such as team spirit building, welfare concern, carrot & stick system and performance, as they are believed to cause disparity among marketing managers of herbal mixture in kogi state, nigeria. 2. review of relevant literature salespeople are strategically significant to every organization’s life cycle. organizations have a starting point and nobody is expected to know its end, but unfortunately the success of the organization may be truncated through competition in the marketing environment; this may in no doubt bring the life of the organization to an end. the activities of salespersons are critical to the lifecycle of the organization as revenue generators. still, the salespersons have several other key duties. ingram et al. (2005) asserted that sales leaders are critical to the success in salespeople’s selling. specifically, as there are various activities in the selling process, some requiring very different selling skills, it seems likely that different sales leadership activities may be necessary at different stages of the selling process (wilkinson, 2007). salespeople possess a range of attitudes that can be spurred by organizational lifestyle and culture. extant studies have established that most of the variance in a salesperson’s attitude and behavior can be explained by controllable organizational actions such as closeness of sales/marketing managers, clarity of goals, training and feedback (evans et al., 2007; rigopoulou et al., 2012). essential display of organizational actions is believed to be affected by the kind of leadership style (transformational and transactional) adopted. salespeople exhibit negative attitudinal and behavioural pattern to favourable organizational 234 e.e. ogdabu, a.t. naifu, d.j. aduku actions, ceteris paribus. most of the theories of leadership styles in organizations and salespeople’s attitudes and behaviors in response to the leadership style have been primarily developed and tested in the u.s. and other developed countries (gelfand et al., 2007). according to harris & ogbonna (2001), “researchers have alluded to the importance of top management knowledge, skills and commitment in marketing and this lacuna in marketing theory are despite numerous indirect references to the importance of leaders in developing a market oriented culture”. the reason for the need for more researches in sales leadership is that its style simply affects the pattern of providing direction, implementing plans, and motivating salespeople. still, there seems to be controversy over classified leadership styles for several decades as proven by colossal researches previously. each of the leadership style has a peculiar potential which is driven by the zeal to achieve corporate marketing objectives. ghanbari & eskandari (n.d) noted that organizations today, for improvement of efficiency, effectiveness, and productivity require using new methods of leadership. transformational leadership and transactional leadership are the classes of leadership styles which are probably adopted to enhance efficiency and effectiveness in the marketing environment. in his view, northouse (2010) asserted that transformational leadership is currently one of the most popular approaches to leadership. meanwhile, transactional leadership prioritizes result above all other events, which makes business as usual follow the same direction in goal path. although “different theoretical approaches focus on leadership but most renowned framework is transformational and transactional leadership" (hambley et al., 2007). nevertheless, the choice of whatever leadership style that fits any marketing organization most depends largely on the marketing orientation, culture and goals. to promise the success of a marketing organization, it is important to adopt the appropriate leadership style (paracha et al., 2012). this study believes that transformational sales leadership’s focus is on identifying needed change, creating a vision to guide the change via motivation, and executing the change in tandem with committed salespeople. these would have been appreciable phases in transformational sales leadership, but bass and avolio (1994) had suggested that transformational leadership has four dimensions called "the four i's" as shown in figure 1. the brief enlightenment from bass & avolio ibid is as follows: i. idealized influence, which described a behaviour of leaders that makes followers admire, respect and believe in it as well. ii. inspirational motivation: in this dimension, transformational leaders are described as leaders who are able to articulate clear expectations of achievement of followers, showing the commitment to the whole purpose of the organization, and are able to inspire the team spirit within the organization through optimism. iii. intellectual stimulation: transformational leader must be able to foster new ideas, provide creative solutions to problems faced by the followers, and provide motivation to followers for seeking new approaches in performing organizational tasks. iv. individualized consideration: in this dimension, leaders described as transformational leaders listen attentively to the opinion of followers and specifically pay attention to the followers’ career development. sales leadership and salespeople’s performance in kogi state... 235 fig 1 dimensions of sales leadership source: gathered from bass and avolio (1994) in addition, bass and avolio ibid also defined the dimensions of transactional leadership as follows: i. contingent reward, the process of setting standards and rewarding salespeople for their acceptable performance ii. passive management by exception, where a marketing manager encourages initiative of salespeople and workflow without interference unless an issue arises iii. active management by exception, in which marketing managers are proactive, anticipate problems, monitor progress and issue corrective measures many current leadership theorists agree that principals of transactional and transformational leadership can be combined for ideal outcomes for both management and the workforce (spahr, 2016). salespeople performance transformational leader idealized influence inspirational motivation intellectual stimulation individualized consideration dimensions transactional leader contingent reward passive management by exception active management by exception 236 e.e. ogdabu, a.t. naifu, d.j. aduku 3. research methods this study used survey research design. multiple-method was adopted, and this enables the survey to gather data from multiple units within the universe. the study measures two types of sales leadership styles and the performance of salespeople in terms of sales volume. a well-structured questionnaire was used for gathering primary data. the population of this study includes salespeople of herbal mixture products found in metropolises of kogi state. yet, it was difficult to ascertain the population size of the salespeople in the study area. in view of this, godden (2004)’ method was used to determine a reasonable sample size. the initial concern of godden ibid is that most often population size of the study area is unknown and he advocated “sample size infinite population” (where the population is probably greater than 50,000). the formula is thus: 2 2 )1()( c pxpxz ss   ss = sample size z = z-value (1.96 for a 95 percent confidence level) p = percentage of population (1/5 = 20 percent) c = confidence interval (.04 = +/4 percentage points) a z-value (as could be found in cumulative normal probability table), and it shows the probability that a sample will be within a particular distribution. 384 0016.0 8.02.08416.3  xx ss for this study, 384 sample size was used. two criteria were adopted (inclusion and exclusion criteria). for inclusion criteria, salespeople that are regular at the sales territory are selected. as for the exclusion criteria, the following were excluded from the study: 1. salespersons who were absent for unknown reason during the time of the research 2. salespersons who were contract staff 3. salespersons that were less than 4 months in the service in this study, descriptive statistics, correlation and multiple regression models were used for the purpose of analysis. the model is specified as follows: y1= b0+b1x1+b2x2+ µ …………………………… (i) where y1= sales performance x1= team spirit x2= welfare concern x3= carrot & stick system b0= intercept b1 to b8= coefficient to be estimated and x1 to x2 are the independent variables. a priori expectation of the study the a priori expectation of this study is that team spirit building, welfare concern and carrot & stick system are factors that will affect salespeople's performance positively. these factors are observed to be having potential differences in their power of influence. sales leadership and salespeople’s performance in kogi state... 237 it is expected that the factors will distinguish between transformational sales leadership and transactional sales leadership of herbal mixture marketing organization in the metropolises of kogi state. table 1 definition of factors s/n factors author definition 1 team cohen & bailey (1999) a sales team is a collection of individuals who are interdependent in the tasks and who share responsibility for the outcomes. 2 welfare greve (2008) welfare consists of both material and immaterial needs of salespeople. 3 carrot & stick system akçay & kanat (2017) carrot & stick system is an approach that can force desirable behavior of salespeople. source: gathered from literature on the general note, it is expected that team spirit facilitate increased outcome or performance. team spirit among salespeople remains a stimulant to teamwork and improved performance. still, teamwork and performance are likely to be unrealistic without individual’s readiness to share fundamental sales knowledge, skills and abilities in the team. in a study, tarricone & luca (2002) discovered that one team was highly successful while another team experienced dysfunctionality due to severe problems. this study views leadership ideology and practices as a pointer of rigidity and non-rigidity of marketing managers in marketing organizations. fig 2 the a priori expectation source: authors salesperson’s welfare appears to be what concerns or bothers around the well-being of salespeople. in the understanding of deacon (1992), welfare also encapsulates altruism, pursuit of self-interest, transition to work and moral regeneration. welfare spans from the team spirit building welfare concern carrot & stick system transformational leadership transactional leadership salespeople’s performance 238 e.e. ogdabu, a.t. naifu, d.j. aduku concept of economic rationality of salespeople as human beings. in a probe into money as nigerians’ most considerable economic factor, the study of greve (2008) queried the rationality behind using income and utility as a derivative for welfare. the main fact is that salesperson’s welfare is associated with satisfaction (when found abundant) and dissatisfaction (when not found abundant), and these affect performance. thus, salesperson’s welfare is expected to influence sales performance. carrot & stick system is a buffering word for assuring reward for the reinstatement of acceptable work behaviour and punishment for discouraging unacceptable work behaviour. the carrot is assumed to be a product of the rationality of the economic man. the term is credited to john locke who views the probability of establishing and utilizing motivation power of reward and punishment. akçay & kanat (2017) noted that this approach propels the motivation of desirable behaviors and makes salespeople attractive with rewards. as such, carrot & stick system is expected to be instrumental to improved performance. 4. demographic data presentation and analysis this section deals with the analysis of the demographic data obtained from the survey. the results of the analysis are presented in the following tables and qualitatively interpreted. table 2 showing demographic characteristics of the respondents responses frequency percentage mean/mode age 15-25 139 40.4 34.77 26-36 47 13.7 37-47 79 23.0 48-58 59 17.2 59 & above 20 5.8 total 344 100.0 gender male 232 67.4 232 female 112 32.6 total 344 100.0 marital status single 125 36.3 married 132 38.4 132 divorcee 72 20.9 widow(er) 15 4.4 total 344 100.0 educational background pslc 64 18.6 ssce 184 53.5 184 higher institution 96 27.9 total 344 100.0 source: field survey, 2016 sales leadership and salespeople’s performance in kogi state... 239 table 2 shows the demographic characteristics of respondents. the table shows that 139 respondents (40.4%) fall within the age range of 15 to 25; 47 respondents (13.7%) fall within the age range of 26 to 36; 79 respondents (23.0%) fall within the age range of 37 to 47; 59 respondents (17.2%) fall within the age range of 48 to 58; and 20 respondents (5.8%) fall within the age range of 59 and above. the value of the mean shows that majority of the active salespeople are 35 year old. from the table 2, 232 respondents (67.4%) were male; and 112 respondents (32.6%) were female. the mode of this gender (232) implies that majority of the respondents were male. the implication of this is that the male salespeople have responsibilities they have assumed in their social group which forced them into taking the sales of herbal medicine in the study area. from the table 2, 125 respondents (36.3%) were single; 132 respondents (38.2%) were married; 72 respondents (20.9%) were divorcee; and 15 respondents (4.4%) were widow(er). the mode of this marital status (132) shows that majority of the respondent are married. it is believed that the economic condition of kogi state may have translated into the take-up of sales job, since the survival of the family unit is highly paramount to an average kogite. table 2 shows that 64 respondents (18.6%) reported that they hold first school leaving certificate; 184 respondents (53.5%) hold senior school certificate; and 96 respondents (27.9%) hold higher institution certificate. the mode (184) shows that majority of the respondent were senior school certificate holders. 5. results and discussion this section deals with the analysis of variables from which results are presented in the tables as follows and are qualitatively interpreted. table 3 showing t-test of the sales leadership styles of herbal mixture marketers in kogi state adoption transformational leadership transformational leadership t-test p-value team spirit building m sd 4.01 1.125 2.16 1.208 21.730 0.01 welfare concern m sd 1.88 1.103 1.39 0.736 7.214 0.01 carrot & stick reward system m sd 1.83 1.036 2.77 1.446 9.596 0.01 performance focus m sd 2.61 1.559 2.06 0.976 6.697 0.01 note: *significant at the .01; mmean; sdstandard deviation table 3 shows the differences between transformational and transactional sales leadership. the mean of the team spirit building for transformational sales leadership is 4.01 (standard deviation= 1.125) and the mean of the team spirit building for transactional sales leadership is 2.16 (standard deviation= 1.208). the standard deviation of the team spirit building of the transformational and transactional sales leadership shows 240 e.e. ogdabu, a.t. naifu, d.j. aduku divergence. the t-test value of 21.730 appears to be significant. this shows a clear difference in team spirit building adoption between transformational and transactional sales leadership of herbal mixture marketing organizations in kogi state. table 3 shows that transformational sales leaders have more welfare concern with the mean of 1.88 (standard deviation= 1.103) compared to the transactional sales leaders with the mean of 1.39 (standard deviation= 0.736). still, the observed difference seems to be very little based on the compared mean scores. the t-test value of 7.214 is significant. this result shows that transformational sales leaders have little more welfare concern than transactional sales leaders of herbal mixture marketing organizations in kogi state. table 3 shows that the mean score of 1.83 (standard deviation= 1.036) of adoption of carrot and stick reward system by transformational sales leadership is less than the mean score of 2.77 (standard deviation= 1.446) of adoption of carrot and stick reward system by transactional sales leadership. the t-test value of 9.596 is significant at 0.01. this result shows that transactional sales leaders adopt more of carrot and stick reward system than transformational sales leaders of herbal mixture marketing organizations in kogi state. table 3 shows that the performance focus of transformational sales leaders with the mean of 2.61 (standard deviation= 1.559) is more than that of transactional sales leaders with the mean of 2.06 (standard deviation= 0.976). the t-test value of 6.697 is significant at 0.01. this result shows that the performance focus of transformational sales leaders is significantly different from that of transactional sales leaders. still, the margin of the adoption mean of performance focus between the two categories of sales leaders of herbal mixture marketing organizations in kogi state is not wide enough. this finding aligns with the assertion of judge & piccolo (2004) that transformational leadership concentrates more on job performance. table 4 showing the correlation among team spirit building, welfare concern and carrot & stick system variables mean correlations 1 2 3 team spirit building 6.17 1 welfare concern 3.27 .136* 1 carrot & stick system 4.60 -.130* .459* 1 note: * significant at the .001 the mean for the team spirit building, welfare concern, and carrot & stick system is presented in table 4. correlations between team spirit building, welfare concern, and carrot & stick system are also presented in table 3. the table shows that there was a significant positive correlation between team spirit building and welfare concern (r = .136, p = 0.01). the implication of this is that there is likelihood of salespeople building more team spirit when their welfare is strategically prioritized. based on the result, the level of focus on salesperson’s welfare may bring about similar proportion in the level at which salespeople build more spirit within team. meanwhile, a significant positive correlation was also found between welfare concern and carrot & stick system (r = .459, p = 0.01). this implies that managers who focus on the welfare of the salespeople also adopt carrot and stick approach in kogi state. where more concern is given to welfares, sales leadership and salespeople’s performance in kogi state... 241 carrot and stick approach is likely to take another dimension; as most managers do not willingly commit themselves into doing this to enhance salespeople’s job satisfaction, but for the actualization of predetermined goals. the rationale behind this is that they take praise and get rewarded for high performance, and tagged “bad signal” for unacceptable performance which may often lead to firing. the correlation between team spirit building and carrot & stick system is found negative (r = -.130, p = 0.01). the implication of this is that the salespeople’s team spirit reduces as the carrot & stick system is strengthened. however, the correlation among these three variables is found weak with varying degree. table 5 summary of multiple regression analysis of potential covariates with salespeople’s performance covariate coefficients () standard error () value of t-statistics value of r 2 team spirit building -.014 .045 .224 .621* welfare concern .010 .054 8.495* carrot & stick system .462 .041 15.151* note: *significant at the .01 level table 5 shows that 62.1% of the variation in salespeople’s performance is explained by covariates (such as team spirit building, welfare concern and carrot & stick system). the presence of 37.9% unexplained variation suggests that there are other predictor variables which affect variations in salespeople’s performance in the herbal mixture marketing organizations in kogi state. the co-efficient for team spirit building (-0.014, p = 0.01); welfare concern (0.010, p= 0.01); and carrot & stick system (0.462, p = 0.01) show that relationship within the three variables. the result proves that 1.4% change in team spirit building brings about proportional decrease in salespeople’s performance in the study area. this may be as a result of the appearance of other unexplained factors in this study area. the apriori expectation would have been that increase in team spirit building will in turn enhance increase in performance level. the t-statistics (0.224) indicate that differences in individual performance of salespeople are not significantly demonstrated by team spirit building. the result also shows that increasing welfare concern will lead to increasing salespeople’s performance at the study area. though the effect is almost not explicit (as at 1%) enough, but it implies that change in welfare concern for salespeople will bring about proportional change in their performance level. the t-statistics (8.495) indicate that the differences in individual performance of salespeople are significantly demonstrated by how well the salespeople are given welfare concern. the result further shows that 46.2% change in the adoption and implementation level of carrot & stick system will lead to proportional change in the performance of salespeople in the study area. the t-statistics (15.151) indicate that the differences in individual performance of salespeople are significantly affected by adoption and implementation level of carrot & stick system. 242 e.e. ogdabu, a.t. naifu, d.j. aduku 6. conclusion the differences between transformational and transactional sales leadership is evident, and the practice of these leadership approaches may vary from country to country, region to region and culture to culture. in kogi state, transformational sales leaders appear to focus more on team spirit building and welfare of salespeople than transactional sales leaders. on the contrary, transformational sales leaders adopt less of carrot and stick reward system compared to transactional sales leaders. although both transformational and transactional sales leaders of herbal mixture marketing organizations in kogi state pursue high performance through their various approaches adopted, empirical verification proves a slight difference as the former is seen to strategically focus on performance achievement than the later. in addition, there is significant positive relationship between these variables except team spirit building and carrot & stick system whose relationship is significantly negative. however, team spirit building, welfare concern and carrot & stick system have very strong effect on salespeople’s performance. where welfare concern and carrot & stick system appear to be positively influencing salespeople’s performance, team spirit building appears to be contrary at almost the same percentage. this will mean that managers may not likely pay more attention on only team spirit building to achieve the salespeople’s performance in kogi state. this study recommends that: i. herbal mixture marketing managers should adopt more of transformational sales leadership. ii. for herbal mixture marketing managers to build strong team spirit among salespeople, more welfare concern should be embraced. iii. herbal mixture marketing managers should focus more on welfare concern and carrot & stick system so as to enhance desired salespeople’s performance. iv. herbal mixture marketing managers should 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(1994). transformational leadership theory: using levels of analysis to determine boundary conditions. personnel psychology, 47, 787-811. liderstvo u prodaji i performanse prodavaca u državi kogi: istraživanje marketing menadžera biljnih mešavina ovaj rad se fokusira na stilove liderstva i performanse prodavaca u organizacijama za marketing biljnih mešavina u državi kogi u nigeriji. populacija ove studije nije tačno poznata, i stoga je korišćen bil goden metod da se odredi uzorak veličine 384. za terensko istraživanje korišćen je instrument strukturisanog upitnika. studija je analizirala podatke metodom deskriptivne statistike, t-testova, korelacije i višestruke regresije. nalazi ukazuju da postoje značajne razlike između transformacionih i transakcionih lidera u prodaji u organizacijama za marketing biljnih mešavina u državi kogi u nigeriji. dalji nalazi pokazuiju da briga za dobrobit prodavaca i sistem štapa i šargarepe imaju značajan pozitivni uticaj na performanse prodavaca, dok je efekat izgradnje timskog duha (timbildinga) negativan. studija zaključuje da su razlike između transformacionog i transakcionog stila liderstva u prodaji očigledne, i da se prakse ovih pristupa liderstvu mogu razlikovati od zemlje do zemlje, regiona do regiona, kulture do kulture. studija stoga preporučuje da marketing menadžeri biljnih mešavina treba da prihvate više transformacionog stila u liderstvu i da se više strateški fokusiraju na dobrobiti i sistem štapa i šargarepe kako bi poboljšali željene performaske prodavaca. ključne reči: transformacioni stil liderstva u prodaji, transkcioni stil liderstva u prodaji, dobrobit, sistem štapa i šargarepe, timbilding 2767 facta universitatis series: economics and organization vol. 14, n o 2, 2017, pp. 163 173 doi: 10.22190/fueo1702163a review paper creative cash flow reporting 1 udc 006.44:657.2 336.146 aleksandra arsenijević * , tadija đukić university of niš, faculty of economics, niš, serbia abstract. financial statements should realistically show financial position, performance, and cash flows of a company. creative financial reporting represents a deliberate manipulation of information in financial statements in order to create misperceptions on company operations. creative financial statements are primarily intended for investors, in order to encourage them to purchase company shares and thus increase its market value. creativity in compiling cash flow statements lies in presentation of operating activities as investing and financing activities, and vice versa. key words: creative accounting, cash flow statement, operating activities, investing activities, financing activities jel classification: m41, m42 introduction “as a social science, accounting is the product of its environment” (saudagaran, 2009, 1). changing economic circumstances in which reporting entities do business, primarily the global movement of capital, emergence of new forms of funding, and development of new technological and communication devices, created the need for further development of accounting standards. economic globalization and the creation of global financial market significantly increased the possibility of creativity in financial reporting. practice shows that creativity of accountants is now much higher than in the past. particularly as a result of this creativity, credibility of financial statements and accountants themselves received april 5, 2017 / accepted may 10, 2017 corresponding author: aleksandra arsenijević * phd student university of niš, faculty of economics, niš, serbia e-mail: arsenijeviceva@yahoo.com 164 a. arsenijević, t. đukić decreased. in order to make reliable and timely business decisions in today’s business environment, the focus is on sound financial reporting. the importance of cash flow statement arises from its connection with other financial statements, which allow management, as internal users, as well as external users, to gain complete insight into company’s liquidity and solvency. defining new amendments to standards referring to the area of cash flows has become a necessity, because it is necessary to provide additional assurance regarding the quality of cash flow reporting. the paper points to creative financial reporting, the importance of information on company cash flows, the impact of creative cash flow reporting on the presentation power of financial statements, and amendments to the current ias 7. 1. creative financial reporting financial statements are an indispensable source of information for making business decisions. however, for high-quality financial reporting, “a good normative basis is a necessary, but not sufficient condition” (škarić-jovanović, 2007, 52). company management, “the only present stakeholder with control over the creation of financial statements” (stevanović & malinić, 2009, 63), is responsible for adequate implementation of the prescribed standards when preparing and disclosing financial statements. recognizing the separation of company ownership and management, on the one hand, and development of financial markets, on the other hand, motivated some managers to use financial statements to obtain significant benefits for the company and for themselves. “creative financial reporting involves intentional, premeditated manipulation of information in financial statements in order to create misperceptions about the company’s financial position and performance, and deceive certain stakeholders, particularly investors” (malinić, 2009a, 140). creative accounting practices in financial reporting are seen as “the art of faking the balance sheet” (bertolus), “the art of calculating the balance sheet” (lignon), “the art of presenting the balance sheet” (gounin), and, finally, “the art of saving money” (ledouble) (tassadaq & malik, 2015, 544). “the complexity of business and financial life of the company, inability to develop perfect accounting rules for each specific situation, and existence of accounting options in order to elegantly solve reporting problems at the same time open up significant maneuver room for the creation of financial statements that may significantly deviate from economic reality” (malinić, 2009b, 138). each financial accounting activity, taken to create an image that is different from the real situation, can be classified as creative accounting. there are no clearly defined boundaries of permissible and impermissible activities and it is not defined which creative accounting act made by accountants exceeds flexibility of accounting regulations and turns into crime (đukić & pavlović, 2014, 226). application of accounting rules in a way that is contrary to their spirit, or refusal to apply them represents the creative accounting decision that separates it from the financial reporting policy. even though its targets are close to creative accounting ones, financial reporting realizes them only by using the space provided by standards offered (škarić-jovanović, 2007, 54). “creative accounting is neither legal nor illegal, only the maximum use of it pushes a company in scandals” (tassadaq & malik, 2015, 550). creative cash flow reporting 165 creative accounting and its, unfortunately, widespread use in practice “does not have any positive connotation” (malinić, 2009b, 138). the effects of creative accounting negatively affect investors and the company, accountants, as well as the national economy, which suffers damages based on capital market instability and the financial system as a whole. “a large number of stakeholders, such as investors, creditors, regulators, and labor, have learnt lessons from the crisis caused by the collapse of “enron” and “worldcom” companies in 2002” (gherai & balaciu, 2011). creative financial reporting seriously threatens the use value of financial statements. it is self-evident that direct use of information contained in creatively prepared financial statements (for example, on profit, value of inventories, receivables, amount of liabilities, debt, etc.) is very risky, especially for external stakeholders (malinić, 2009a, 156). one of the ways to overcome information asymmetry caused by creative financial reporting could be in broader and more reliable disclosures. “disclosures regarding significant events that have affected business performance, ... are essential for the assessment of management’s tendencies towards disclosure of specific accounting policies” (denčić-mihajlov & spasić, 2016, 29). in the case of transition economies mandatory disclosures are often not able to prevent harmful creative accounting. for example, “low level of disclosure quality of serbian companies could be attributed to ineffectiveness in the functions of internal and external auditors and poor corporate governance” (spasić & denčić-mihajlov, 2014, 104). in that sense, users of financial statements should pay special attention to creative reporting issues. “using creative accounting always means giving priority to short-term objectives of management in relation to long-term goals of the company” (škarić-jovanović, 2007, 69). in today’s dynamic business conditions, ethical behavior of accountants is a way to save the company from scandal and fraud. “it is clear that even the best designed programs and mechanisms cannot provide a guarantee that abuse will not occur, so internal audit is a function of which much is expected on this issue” (đorđević & đukić, 2015, 307). however, internal audit is not the only mechanism that can be used for this purpose. internal control and external audit should also have significant roles in this process. 2. importance of cash flow statements in financial reporting cash flow statement is a financial report, whose task is to follow the money that goes in and out of the company. if information in this report connects adequately with information from other financial statements, it will provide management, as internal users, as well as external users, complete insight into company’s liquidity and solvency. management uses this information when making series of business decisions and evaluating performance in the fields of achieving objectives, liquidity, dividend policy, then when reviewing results of operating, investing, and financing activities, and to determine contribution of each of these activities to business performance. specifically, cash flow statement is an instrument that shows managers how changes in the balance sheet and income statement impact on cash. it also allows management, in the definition of the business policy, to recognize the main directions of its business activities and thus ensure maximum business success. for external users, information in cash flow statement is critical for analyzing companies in terms of evaluating operating performance, liquidity, and solvency of the company. 166 a. arsenijević, t. đukić investors, creditors, government, and other interested users thus gain insight into the company profitability, its debt, and carry out risk assessment of cooperation with it. “this statement, in most general terms, provides information to interested parties about where cash during the reporting period comes from, how cash is used during the reporting period, and what changes in cash occurred at the end compared to the beginning of the period” (kimmel, weygandt & kieso, 2011, 15). “cash flow statement explains what in the reporting period affected cash balance shown in the balance sheet at the beginning of the reporting period in order to come to a new cash balance at the end of the accounting period” (libby, libby & daniel, 2011, 638). 3. correlation between cash flow statement and other financial statements in creative financial reporting “creative cash flow reporting is related to any step in order to create a different image than the actual cash flows, and in that way providing the wrong signal about the ability of the company to generate sustainable cash flows” (mulford & comiskey, 2005). there are accountants who are willing to take advantage of the flexibility offered by certain ias in order to increase the amount of cash flows presented primarily from operating activities. since operating activities include all activities from the main area of company’s business, “sustainability of total cash flows depends directly on sustainability of cash flows from operating activities” (đukić & pavlović, 2014, 227). therefore, despite the fact that creative activities increase net cash flow from operating activities, they, actually, “do not increase sustainable cash flows because it is a one-time increase” (đukić & pavlović, 2014, 230), which will not be repeated next year. creative alterations and amendments to cash flow statement are made to attract potential investors, for ease of obtaining favorable loans, and growth of share prices on the stock exchange. “they can comprise a wide range of legal and illegal management procedures” (petrova, 2008, 24). there are two basic ways to creatively adjust operating activities in cash flow statement:  increase in cash inflow from operating activities, and  decrease in cash outflow from operating activities. on the one hand, by expanding the definition of what makes inflows from operating activities and narrowing of what belongs to inflow from investing and financing activities, and, on the other hand, narrowing the definition of what makes outflows from operating activities and expanding what belongs to outflows from investing and financing activities, “the company wants to show itself as more successful” (jones, 2011, 61) to their stakeholders. accounting theory and practice recognize the following methods to manipulate cash flow statement (schilit & perler, 2010, 190):  transferring cash inflow from financing activities to inflow from operating activities,  transferring cash outflow from operating activities to outflow from investing activities,  increase in cash flow from operating activities using acquisition of part or all of the company, and  increase in cash flow from operating activities using the additional “ancillary” activities. creative cash flow reporting 167 professional accountants know that, when expressing their creativity in preparing and presenting financial statements, they need to look at the interplay of financial statement items that make the annual statement. specifically, change of a specific item of cash flow statement is caused by changes of certain items in income statement and/or balance sheet. 3.1. correlation between income statement and cash flow statement in creative financial reporting it must be borne in mind that any manipulation on income and expenses directly or indirectly affects cash inflows and outflows. time mismatch between income and expense recognition transactions, on the one hand, and collection of receivables from customers and payment of liabilities to suppliers and creditors, on the other hand, can lead to a dilemma regarding classification of cash flows. generally, manipulation that links these two statements is reduced to increasing income and reducing expenses. in order to minimize doubts about the presented financial statements, managers carry out the so-called double manipulation, which includes artificial increase in sales revenue with an increased inflow from operating activities. however, “a large number of controllers who detect unrealistic increase in sales revenue neglect this fact, so that this kind of manipulation often does not get noticed” (dimitrijević, 2015, 145). ifrs provide opportunities for businesses to capitalize on certain business expenses or present them as an expense when incurred. one of the most common manipulations that connects income statement and cash flow statement is capitalization of costs from the group of operating costs. this operation can reduce expenses and improve business results. however, “a large number of companies forget that it burdens cash flows, which may result in a negatively expressed cash flow” (dimitrijević, 2015, 147). when operating expenses are viewed as a cost, they reduce net result, and, consequently, net cash flow from operating activities. their capitalization exempts them from expenses in income statement and they are presented as outflows from investing activities in cash flow statement. in this way, accountants achieve the objective of not reducing net cash flow from operating activities. it should be borne in mind that “effects of capitalization on cash flows from operating activities are especially evident when a company changes its capitalization policy” (đukić & pavlović, 2014, 232). period costs are capitalized to show better results, i.e. they are included in the value of assets belonging to fixed assets, so that they do not represent period costs. they are shown as costs at the time when those particular fixed assets are depreciated, so they are written off successively over several future periods. most often capitalization applies when it comes to: marketing costs (according to ias 38 intangible assets), research and development costs (according to ias 38 – intangible assets), direct costs incurred prior to starting the plant (according to ias 16 – property, plant, and equipment), maintenance and repair costs (according to ias 16 – property, plant, and equipment), interest on loans used to purchase fixed assets (according to ias 23 – borrowing costs), and cost of software development (according to ias 38 – intangible assets) (đukić & pavlović, 2014, 231-232). costs incurred during the purchase of materials or goods by their nature cannot be part of cash flows from investing activities. their goal determines classification of cash outflows as a component of operating activities (stevanović, belopavlović & lazarević-moravčević, 2013, 34). treatment of certain current assets as a segment of fixed assets, i.e. of cash 168 a. arsenijević, t. đukić outflow for their purchase as outflow from investing activities, rather than presenting them as outflow from operating activities, leads to overestimation of net operating cash flow. companies of equal capital intensity can report on a different net cash flow from operating activities in the event that a company procures equipment on the basis of business lease, and a second company buys the same equipment. the company that leases equipment presents leasing costs as outflow from operating activities, while the company that buys equipment sees purchase costs as capital expenditure, and classifies them into cash outflow from investing activities (white, sondhi & fried, 2003). “misrepresentation of outflows for leasing as investment and its exclusion from the group of operating cash flows would lead to overestimation of cash flows from operating activities” (stevanović, belopavlović & lazarević-moravčević, 2013, 35). another well-known example comes from the company “worldcom”, which committed one of the biggest frauds in financial statements in history. “worldcom” presented its operating expenses as the purchase of fixed assets, and classified them in the cash flow statement as outflows from investing activities, rather than operating activities. in this way, “worldcom” reclassified over 5 billion dollars in cash outflows during 2000 and 2001 from operating into investing activities (beresford, katzenbach & rogers, 2003). also known is the case of “health south”, which capitalized costs of sponsoring hockey team from pennsylvania as costs of advertising in daily newspapers (đukić & pavlović, 2014, 231-232). 3.2. correlation between balance sheet and cash flow statement in creative financial reporting manipulation of assets and liabilities in the balance sheet and cash flow in cash flow statement is “harder to detect and prevent in relation to manipulation with income and expenses in the income statement” (dimitrijević, 2015, 137). the most common forms of manipulation that connect balance sheet and cash flow statement are: sale of receivables before the deadline, collection of fraudulent receivables from customers, accelerating the pace of debt collection, use of bank loans, “boomerang” transactions, reclassification of cash flows from operations with securities, slowing the pace of payment of liabilities, reducing the volume of inventory purchase, use of inflow from acquisition of all or part of the company. when selling receivables, usually to a bank, the company pays a commission to reduce the amount of receivables sold. this type of sale is seen as cash inflow from financing activities. however, companies usually define this inflow as inflow from operating activities because they result from the sale of receivables resulting from goods supplied and services rendered. a characteristic example (sec report, 2007) for this type of manipulation is related to the us pharmaceutical distributor “cardinal health”. this company had a problem with a lack of money, so it decided to sell a certain number of receivables on the basis of which it accumulated over 800 million dollars. the subject sale increased inflow from operating activities during 2004, which, compared to the previous year, was an increase of 971 million dollars. in this way, the company transferred inflows from the future into the present period, and thereby reduced future cash inflows from operating activities. “it is, therefore, important to, when analyzing inflow from operating activities, notice a sharp rise, and consider not only the amount of increase, but also the reason that led to this increase” (dimitrijević, 2015, 146). creative cash flow reporting 169 another way to increase inflow from operating activities in the current period is through collection of false receivables from customers. studies (ketz, 2004) know of an instance of an american company “peregrine systems”, which presented false income in the income statement, as well as false accounts receivable in the balance sheet (based on which it allegedly realized this income). at the same time, the company sold these nonexisting accounts receivable, thereby increasing its inflows in the cash flow statement. bank purchased these receivables, but the risk of collection or non-collection of those debts was taken by “peregrine systems”. from an economic standpoint, it was a bank loan, because “peregrine systems” received the subject cash flow from the bank with collateral in the form of false receivables. therefore, this cash inflow should be shown as inflow from financing activities, rather than as a cash inflow from operating activities. there is also the possibility of time matching of fictitious purchase of equipment and fictitious receivables from existing customers (mulford & comiskey, 2005). purchase of new equipment is presented in cash flow statement as outflow from investing activities, and an increase of receivables from the sale of products and provision of services as an increase in inflow from operating activities. fictional inflow from operating activities and fictitious outflow from investing activities can be deliberately the same so the aforementioned transactions have no impact on the cash balance at the end of the period, but result in overestimation of net operating cash flow (stevanović, belopavlović & lazarević-moravčević, 2013, 32). presenting increased cash inflow from operating activities on the basis of regular bank loans is another in a series of cash flow manipulations. the american company “delphi corporation” in the fourth quarter of 2000 had a negative net cash flow from operating activities. in december of the same year, “delphi corporation” offered to the “bank one” shares worth 200 million dollars for sale. the bank refused this offer, so “delphi corporation” offered the bank to purchase these inventories, and “sell” it to them again in a few weeks. in return, “delphi corporation” paid a certain amount to the bank, determined based on the sales value of inventories. in essence, this was a classic short-term bank loan. this method of lending in the cash flow statement should be recorded as an increase in cash flows from financing activities, and in the balance sheet as a liability to the bank. however, “delphi corporation” presented this loan as a classic sale of inventories to the bank, which increased its sales revenue in the income statement and cash inflows from operating activities in cash flow statement by 200 million dollars. in this way, “delphi corporation” presented in a 2000 cash flow statement a total of 268 million dollars of inflow from operating activities, of which only 68 million was real (sec report, 2006). overdraft is seen as a short-term bank loan, where cash inflow based on the use of overdraft and cash outflow related to interest payment, as price for the use of overdraft, are seen as cash flow from financing activities. a situation where overdraft is shown as inflow from operating activities in cash flow statement could lead to increasing net cash flow from operating activities. by accelerating the pace of collection of receivables from customers, or through collection of receivables before deadline, the company can improve its cash flow. the american company “eds” negotiated with their customers, and collected receivables in the amount of 200 million dollars, which were due in two years. in this way, in the current year, the company presented a sudden jump in cash flows. “from an economic point of view, higher collection of accounts receivable is certainly a good indicator. however, one should always be cautious in making conclusions, and investigate whether rapid collection 170 a. arsenijević, t. đukić is the result of successful business, or a form of fraud” (dimitrijević, 2015, 148). the fact is that inflow provided in this way is the real source of funding provided by customers. based on this, one can conclude that these cash flows should be presented as financing activities in cash flow statement. nevertheless, these cash flows can also be viewed as cash inflows from operating activities, which is explained by the fact that the company has delivered or will deliver (if it comes to paying invoices prior to the delivery) products or services to customers. higher cash flows from operating activities can also be achieved through “boomerang” transactions (dimitrijević, 2015, 146). these transactions mean that the company sells its products to other companies, but, at the same time, purchases a variety of products from these companies in the same amount. the impact of these transactions on cash flows is as follows: the company presents product sale as cash inflow from operating activities, while the purchase of goods is presented as outflow from investing activities. this brings double “benefits”: reduced outflows and increased inflows from operating activities. under ias 39, securities are classified as securities held for trading, securities available for sale, and securities held to maturity. however, there are no strict rules for the classification of securities. this flexibility allows accountants to, if necessary, reclassify cash flows by activities. if, for example, one invests in the purchase of short-term bonds, cash outflow for this transaction belongs to a group of investing activities. purchased short-term bonds can be placed in a group of securities held for trading, aimed at exploitation of short-term price fluctuations of these securities. cash inflows from sale of thus classified short-term bonds belong to a group of operating activities. this reduces net cash flow from investing activities (at the time of their purchase), and increases net cash flow from operating activities (at the time of their sale). the situation is different if the company’s main activity is bond trading, i.e. if it is a financial institution. in this case, these activities should be classified as operating activities, otherwise such classification of cash flows should not be made. the reason, first of all, lies in the fact that this is not a sustainable cash flow, but inflow that appears only once (when sale transaction is made) (đukić & pavlović, 2014, 230-231). rise in cash flows from operating activities based on the slowdown of payment of obligations or delays in cash outflow intended for the settlement of liabilities is considered one of the easiest techniques to manipulate cash flows. for example, liabilities of december of the current year are postponed for january next year, and thus cash flow statement for the current fiscal year presents lower cash outflows. it is important to note that, in this way, managers achieve short-term goals, because liabilities cannot be postponed for an indefinite period of time. another way to increase cash flow from operating activities is to reduce the volume of inventory purchase. the company “the home depot inc.” in 2001 reduced orders from its suppliers, and purchased fewer inventories than in the past per each store, i.e. the company changed the pace of inventory purchase. in this way, the company reduced cash outflows for the purchase of inventories from 1.1 billion dollars in 2000 to as much as 166 million dollars in 2001 (grow, 2007). acquisition improves cash flows of the acquiring company. in the event that the target company is purchased in cash, the acquirer presents it as outflow from investing activities, rather than from operating activities. if acquisition is carried out through shares, then there is no cash outflow. also, any sale made by a target company is in the acquirer’s creative cash flow reporting 171 financial statements presented as sales revenue or cash inflow from operating activities. however, the greatest opportunity to improve cash flow through acquisition lies in acquired receivables and assets (dimitrijević, 2015, 147). when acquiring receivables and assets, there are certain expenses and cash outflows, incurred before acquisition. in other words, the acquirer has no outflows from operating activities related to acquisition of subject receivables and assets, as they have been incurred prior to acquisition. following acquisition and collection of receivables and the sale of assets of the target company (acquired before acquisition), cash inflows are classified as cash inflows from operating activities of the acquirer. unrealistic results also come from some other creative activities of accountants or managers, such as: “giving up on certain business transactions, non-recording of incurred transactions, delaying procurement, non-recording of procurement of materials and goods, because invoice is not received or materials and goods are on the way, etc.” (škarićjovanović, 2007, 63). the reason is largely subjective and linked to adverse effects (mostly from managers’ standpoint) on net cash from operating activities. the fact is that the amount of net cash flow as a whole, i.e. cash balance at the end of the reporting period, is not affected by manipulative actions of management. however, the above cannot justify the existence of creative cash flow reporting. amendments to ias 7 aim to improve information on cash flows and disclosure, to help users of financial statements understand liquidity of an entity. the ias committee suggests that an entity should, in the initial and final balance sheet, disclose the balanced amount of each item whose cash flow is, or will be, classified as a financing activity in the cash flow statement, without the inclusion of capital items. the result of balancing the required amounts should disclose to investors important information regarding the entity’s debt and changes in debt structure during the reporting period. also, the ias committee proposes to expand the disclosures required in ias 7 on liquidity of entities and restrictions that affect the entity’s decisions to use cash and cash equivalents, including tax obligations, which would increase based on distribution of cash and cash equivalents generated abroad. conclusion “international financial reporting is a dynamic, evolving research area. powerful new technology and communication devices make the world open to explosion in international trade and creation of capital” (haskins, ferris & selling, 2000, 1). loss of customer trust in the information presented in financial statements would have incalculable consequences for global financial market, and, thus global economy, because high-quality financial reporting is considered a basic assumption of stability and competitiveness of the global financial market. prevalence of manipulation in the presented financial statements depends on the situation in the economic, legal, and political environment, quality of financial reporting normative base, quality of corporate governance, and accountants’ abilities to comply with professional and ethical standards. late 20 th and early 21 st century were a fertile ground for various manipulations in all financial statements. the biggest accounting scandals took place in that period and in the most developed country of the world, the united states. “the importance of information that cash flow statement provides to its users increases the need for creativity in this area” (đukić & pavlović, 2014, 233). successful company is 172 a. arsenijević, t. đukić the one that achieves positive net cash flow from operating activities in the amount of not less than the amount of the previous year, i.e. net cash flow from operating activities that is sustainable. after a certain period of time, manipulation with results, net cash flow from operating activities, and share price becomes evident, which decreases trust of shareholders, investors, and other stakeholders in the success of business. it is precisely for reasons of preventing manipulation, as well as adapting to new business conditions, that ias corrections occur. reporting on changes in cash flows of companies and definition of requirements for the disclosure of information in cash flow statement are regulated by ias 7 – statement of cash flows. improving standards that regulate cash flows is necessary due to the fact that without information on company cash flow it is not possible to make the right decisions and, thus, maximize business success. references beresford, d., katzenbach, n. & rogers, c. 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(2007). kreativno računovodstvo – motivi, instrumenti i posledice [creative accounting motive, instruments and effects]. u: savez računovođa i revizora republike srpske, mjesto i uloga računovodstva, revizije i finansija u novom korporativnom okruženju, 51-70. teslić: savez računovođa i revizora republike srpske. tassadaq, f. & malik, q.a. (2015). creative accounting and financial reporting: model development and empirical testing. international journal of economics and financial issues: 5(2), 544-551. white, g., sondhi, a. & fried, d. (2003). the analysis and use of financial statements. new jersey: john wiley and sons inc. kreativno finansijsko izveštavanje o novčanim tokovima finansijski izveštaji treba realno da prikazuju finansijski položaj, uspešnost poslovanja i novčane tokove preduzeća. kreativno finansijsko izveštavanje predstavlja smišljeno manipulisanje informacijama u finansijskim izveštajima radi stvaranja pogrešne predstave o efektima poslovanja preduzeća. kreativni finansijski izveštaji su prvenstveno namenjeni investitorima, u cilju ohrabrivanja kupovine akcija preduzeća i time utiču na povećanje njegove tržišne vrednosti. kreativnost u sastavljanju izveštaja o novčanim tokovima sastoji se u prekvalifikaciji aktivnosti iz poslovnih u investicione i finansijske aktivnosti i obrnuto. ključne reči: kreativno računovodstvo, izveštaj o novčanim tokovima, poslovne aktivnosti, investicione aktivnosti, finansijske aktivnosti plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, n o 1, 2015, pp. 27 39 determination of transfer pricing in multinational companies  udc 338: 334.726 ljilja antić, tatjana stevanović, jana gudurić faculty of economics, university of niš, serbia abstract. the issue of transfer pricing in multinational companies assumes strategic importance in modern business conditions. evaluation of performance and goal congruence of all supsidiaries and multinational companies as a whole are determined by the applied rules and methods of transfer pricing. determination of transfer pricing in multinational companies has become more complicated with differentiation of the tax systems of the countries in which subsidiaries are located. due to different tax rates on income, companies transfer their profit from high-tax countries to low-tax countries. according to that, the aim of this work is to indicate the importance of transfer pricing and methods of their determination in multinational companies. during the preparation of this article, analysis methods based on relevant and available foreign literature and practices, methods of synthesis and methods of comparison will be applied. the aim of this paper is to indicate to the domestic and professional public the phenomenon of transfer prices and their implications on the performance of subsidiaries and multinational companies as a whole. key words: transfer pricing, multinational companies, costs, methods. introduction increasing instability of the environment and the complexity of technology, the need for continuous innovation and rapid decisions, have led to a more flexible organizational structure. divisional model of organizational structuring, which is characterized by extreme flexibility and adaptability is present, especially in the organization of multinational companies. as this model is compatible for use in conditions of higher risk and suspense in the environment, its advantages in formulating and implementing the objectives of multinational companies have particularly come to the fore. subsidiaries within the multinational companies, that are relatively independent and functionally capable segments, also possess a high level of responsibility for both their  received february 25, 2015 / accepted april 10, 2015 corresponding author: tatjana jovanović faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: tatjana.jovanovic@eknfak.ni.ac.rs 28 lj. antić, t. stevanović, j. gudurić own results and the results of the entire company. an important aspect of success of subsidiaries and the company as a whole are transfer prices, which is established in terms of internal transfer effects. they are determined to provide reliable and correct determination of involvement of each participant in this transfer and to measure its efficiency. transfer pricing, in contrast to the external market price, affects the performance of subsidiaries that sell and subsidiaries that buy goods and services, but also the company as a whole. control-oriented accounting information system and especially accounting of liability, which provide necessary quantitative and qualitative information are essential for the effective management of multinational companies. they are primarily important for the selection and application of an appropriate transfer-pricing method. therefore, management accounting offers a number of different methods of transfer pricing for multinational companies, as well as an information base for calculation of tax liabilities connected with the transfer of goods and services between the subsidiaries. accordingly, the attention of this work is the implementation of transfer pricing in multinational companies, the effects of their use on the performance of subsidiaries and the company as a whole, as well as transfer-pricing methods, with special emphasis on the role of transfer pricing in managing taxes. 1. the role of transfer pricing in multinational operations specificity of multinational companies is shown through a large geographical coverage, excellent organizational interdependence and ability of coherent integration activities that are taken in different countries. in terms of revenues, profits, capital and available resources, these companies are extremely powerful, and their economic power is often greater than the potential and the results of many countries. great power of multinational companies is based on the enormous size of the company, activity on the global level and social impact derived from these; internationalization of all phases of business; centralization of decision-making; monopolistic control of the world's source of materials and energy; as well as the big potential of scientific and technical development. therefore, multinational companies are the most important factor in the global economy, which controls more than 70% of world trade and 80% of the world's financial potential [17, 277-283]. existing knowledge and accumulated experience of multinational companies come to the fore in situations where they use the good conditions and comparative advantages offered by each geographic location and when they integrate these different locations in the multinational network of research and development, production and sales, or marketing. in terms of complex organizational structures, exchange rate volatility and possible political changes in the host countries, the company tasks such as coordination, control, resource allocation and performance measurement become even more complex [5, 338-350]. internal transfer between some of subsidiaries in multinational companies, that is internalization of international economic transaction, becomes an extremely important part of international trade and the reason why these corporations are dominant on the global market [13, 15]. with increasing internalization, the issues of internal transfer pricing gain in importance. within the company, internal transfer of products and services often occurs, where one subsidiary appears as the seller, and the other one as the customer. internal transfer of products and services includes an appropriate mechanism for determining the price that determination of transfer pricing in multinational companies 29 will be applied, so that revenues and costs can be accurately reflected. the pricing mechanism that is used in these transactions is called transfer pricing. transfer pricing represents the cash basis for quantifying the internal transfer of products/services [1,1075]. the specificity of transfer pricing in relation to the external market pricing is reflected in the fact that transfer pricing conditions the success of buying subsidiaries, selling subsidiaries, but also the entire company success. in this regard, it is necessary to use reliable information support during its formation. the effect of the internal transfer of products and services on the profit of the subsidiary of the company can be both positive and negative. high transfer pricing has resulted in lower profit for the subsidiary office that buys, but a higher profit for the subsidiary that sells. the low transfer pricing has the opposite effect. given the existence of the conflicting interests between the two subsidiaries, where the customer subsidiary is trying to lower the transfer pricing, whereas the seller subsidiary wants to sell a product or service for higher pricing, finding the optimal level of transfer pricing is very important. the policy of transfer pricing may affect the decision of the manager of the independent subsidiary whether to transfer or not. as transfer pricing affects both revenues of the subsidiary that sells and of those that buy products and services, it determines profit, return on investment, and thus the success of managerial performances of both subsidiaries. table 1 illustrates the impact of transfer pricing on the subsidiaries that perform internal transfer as well as on the entire company. table 1 impact of transfer price on transfering divisions and the company as a whole abc multinational company subsisiary a subsidiary c produces component a and transfers it to c for transfer price of 3000 m.u. per unit transfer price = 3000 m.u. per unit revenue to a increases net income increses roi purchases component a from a at transfer price of 3000 m.u. per unit and uses it in production of the final product transfer price = 3000 m.u. per unit costs to c decreases net income decreases roi transfer price revenue = transfer price cost zero impact on abc multinational company *m.u. monetar unit source: [2, 492] subsidiary a produces component a and sells it to a subsidiary belonging to the same company, subsidiary c. the transfer pricing represents revenue for the subsidiary a, so subsidiary a tries to do an internal transfer at the highest possible transfer pricing. on the other hand, the transfer pricing is the cost for subsidiary c, so subsidiary c tries to do an internal transfer at the lowest possible pricing. for the company as a whole, the revenue of subsidiary a faces with the cost of subsidiary c so that the transfer pricing has no impact on its profit. although this internal transaction has no effect on the profit of the company as a whole, if the subsidiaries behaved in accordance with their own interests, ignoring the interest of the company as a whole, the effects would be different. in this case, the system of transfer pricing that is being applied, would also affect the profit of the entire 30 lj. antić, t. stevanović, j. gudurić company. namely, if subsidiary a determined transfer pricing of 3000 m.u. for the component whose production costs is 2400 m.u., and if subsidiary c realized that the same component could be obtained externally at a pricing of 2800 m.u., the internal transfer would not occur. the supply from the external supplier represents a cost saving for subsidiary c of 200 m.u. (3000 m.u., which is the transfer pricing 2800 m.u. which is the market pricing). in this case, the company as a whole suffers a loss in the amount of 400 m.u. (2800 m.u. which is the market pricing 2400 m.u., that are the costs of the production of components that are exchanged). thus, the transfer pricing must be aligned to the interests of individual subsidiaries and the interests of the company as a whole. the task of the management in determining the level of transfer pricing is to provide a harmonized behavior of subsidiaries involved in the internal transfer. the general rule for determining transfer pricing implies that it should be the sum of the additional costs per unit caused by the transfer of products and services and the opportunity costs per unit caused by the realization of transfer [3, 803]. additional costs, incurred in the subsidiary that produces products in order to transfer them, cover all expenses related to the production of goods and services, as well as expenses incurred due to their transfer. opportunity costs are those that the company has because of the realization of the internal transfer. in some situations, there are some difficulties in implementing the rules for determining transfer pricing, due to the fact that the exact amount of opportunity costs cannot always be determined. one of the reasons is the lack of a perfectly competitive market for a particular product or service, or non-existence of markets in general. also, other reasons that make it difficult to determine the opportunity costs are the specificity of certain products or services, the interdependence of different products and services, etc. in most cases, the general rule for determining transfer pricing is applicable. otherwise, companies can use some other methods for transfer pricing. during the formation of transfer pricing, multinational companies are focused on numerous goals. the following figure illustrates the basic objectives of transfer pricing in the domestic and international markets. fig. 1 objectives of transfer pricing in the domestic and international market source: [7, 61] determination of transfer pricing in multinational companies 31 as it can be seen from the picture, multinational companies use international transfers to minimize the taxes, custom duties and the risk of changes in foreign currency exchange rate, while improving competitive position and relations with foreign countries. the goals that the companies are focused on during the formation of transfer pricing in the domestic market, although very important, become secondary when it comes to international transfers. business management within the borders of one country because of the necessity to adapt, because of the national environment and the external environment factors. particularly significant are the differences in tax rates, foreign currency and customs regimes. therefore, the question of transfer pricing and their tax implications is a strategic issue that has a strong influence on profitability, performance and competitiveness of multinational companies [15, 91-93]. transfer pricing at multinational groups level has multiple effects. it directly impacts the business results of the group members in the supply chain. for multinational companies with global supply chains, increased conscience of transfer pricing–related issues leads to the recognition that changes in an operational structure often demand appropriate changes to the tax and legal structure to align business models [10, 375-404]. by transfer pricing, the profit is transferred from countries with high tax rates to countries with lower tax rates. it directly influences the increase in profits in countries with lower rates of income tax. also, the transfer price may have a control part. thus, for example, if the parent company wants to receive dividends from its subsidiaries, which is not possible because of legal restrictions, the parent company will, through transfer pricing, increase their profits and reduce the profit of subsidiaries. since multinational companies tend to lessen their tax obligations and maximize the profit of the system as a whole by applying transfer pricing strategies, it is logical to expect the negative fiscal repercussions of such practices on the economy of the host country. with the application of transfer pricing, the state treasury is losing, and the governments of all countries nowadays face the challenge of applying tighter regulation of transfer pricing and law strengthening whose implementation would contribute to minimizing the negative tax repercussions of such strategic behavior of corporations. transfer pricing also serves as a means for circumventing the payment of withholding tax. directing money from subsidiaries to the parent company in the form of dividends and interest to which the withholding tax is paid can be avoided. instead, the money is transferred through the sale of products and services [14]. the withholding tax is not paid for the transaction of purchasing goods and services. the higher the pricing charged to subsidiaries, the more money can be received from the country in question without the payment of the withholding tax. the same effect can be achieved if the subsidiary sells goods and services to the parent company at low transfer pricing. in this way, companies can bypass the cases when the state puts restrictions on the repatriation of profits. transfer pricing is not agreed on a free, open market and it may differ from the pricing that unrelated subjects agreed upon in a comparable transaction under the same circumstances. therefore, the taxpayer is required to display the related party transactions in the tax balance at pricing "out of reach" (market pricing), that is, to implement adjustments in the tax balance based on the tax laws. tax authorities, on the other hand, tend to adjust the pricing realized in these transactions with the pricing in transactions between unrelated parties, ie. with the pricing that is formed freely on the market. for 32 lj. antić, t. stevanović, j. gudurić these purposes, many different methods are used for determining the pricing "out of reach". in determining tax liability, the tax authority takes into account the transfer pricing arranged by the unrelated persons, and not the transfer pricing arranged by the related parties. the “arm's length” principle (alp) is a guiding principle and manual in the process of determining intra-group transfer pricing, ie. the pricing of intercompany transactions and international standard related to transfer pricing. the difference between the "arm'slength" transfer pricing, formed by independent companies in the free market, and the transfer pricing formed by the related companies is profit, or revenue generated from the transfer goods, services or intellectual property rights. that profit is taxed and included in the tax base. the taxpayer is obliged to separately indicate the value in the tax balance sheet of the transactions in accordance with these principles. the application of the “arm's length” principle is based on a comparison of the conditions of controlled transactions with the conditions of uncontrolled transactions. oecd member countries consider that an appropriate alignment is achieved by establishing conditions from the commercial and financial relations between unrelated parties in comparable transactions and under comparable conditions [16]. significant differences in tax rates on income in different countries are evident. in this regard, multinational companies use a system of transfer pricing as a tool to reduce their tax liabilities. namely, by setting a high transfer pricing of the company, there is an increasing amount of expenses in the buying subsidiary relation located in countries with high taxes, while in the selling subsidiary relation, the amount of revenue increases. this is how the transfer of profits is done from the countries with high tax rates to the countries with low tax rates. all this ultimately results in maximizing profits after taxation at the level of a multinational company as a whole. the effects of transfer pricing to the amount of tax paid will be illustrated on the example of a hypothetical multinational company “xyz”, that has a large number of subsidiaries around the world, among which subsidiary a (located in the country where the tax rate is 60%), which occurs as the customer and subsidiary b (located in the country where the tax rate is 30%), which occurs as the vendor [3, 802-816]. throughout the year, production costs incurred in subsidiary b amounted to 750.000 m.u., and 2.250.000 m.u. in subsidiary a. revenues from sales of subsidiary a were 9.000.000 m.u. other companies imported the same quantity of similar products in the country in which subsidiary a operates for a total of 1.000.000 m.u. the company “xyz” estimated that for the exchange of this product among its subsidiaries, the adequate transfer pricing at which the costs of internal transfers for subsidiary a amounted to 3.750.000 m.u. the following tables illustrate the calculations of tax liabilities in a situation when the transfer pricing is equal to the external pricing at which other companies purchase a specific product, and at which the internal transfer costs amount to 1.000.000 m.u. (table 2) and when the costs of internal transfers amount to 3.750.000 m.u. (table 3). determination of transfer pricing in multinational companies 33 table 2 calculation of tax liability by applying lower transfer price elements subsidiary b subsidiary a revenue 1,000,000 m.u. 9,000,000 m.u. production costs (750,000) m.u. (2,250,000) m.u. transferred goods costs (1,000,000) m.u. taxable income 250,000 m.u. 5,750,000 m.u. tax rate 0.30 0.60 tax liability 75,000 m.u. 3,450,000 m.u. total tax liability 3,525,000 m.u. table 3 calculation of tax liability by applying higher transfer price elements subsidiary b subsidiary a revenue 3,750,000 m.u. 9,000,000 m.u. production costs (750,000) m.u. (2,250,000) m.u. transferred goods costs (3,750,000) m.u. taxable income 3,000,000 m.u. 3,000,000 m.u. tax rate 0.30 0.60 tax liability 900,000 m.u. 1,800,000 m.u. total tax liability 2,700,000 m.u. based on the data presented above, we can conclude that the company “xyz” saved an even 825,000 m.u. by paying fewer tax liabilities, based on the changes in the amount of transfer pricing. transfer pricing can also affect the competitive position of business units abroad. low transfer pricing leads to strengthening the competitive position of certain subsidiaries, while a high transfer pricing weakens the position. multinational companies use transfer pricing also to provide a better bargaining position by maintaining the best possible relations with the local government and its organizations. multinational companies can use transfer pricing to remain competitive in international markets or to break into new markets. when entering a new market, the company may establish a selling subsidiary. in order to win a certain market share, a subsidiary with a discounted pricing has an aggressive approach on the market. to ensure the profitability and competitiveness of the new operations, the parent company can sell products and services at a low transfer pricing to the subsidiary. in this case, the parent company is the one that absorbs the subsidiary discount. a survey taken on a sample of 500 american multinational companies, came to the following variables on which the application of transfer pricing has the greatest impact [3, 814]: 34 lj. antić, t. stevanović, j. gudurić table 4 ranking the impact of transfer pricing on certain variables ranking of average importance score variable 1 overall profit to the company 2 differentials in income tax rates and income tax legislation among countries 3 restrictions imposed by foreign countries on rapatriation of profits or dividends 4 the competitive position of subsidiaries in foreign countries 5 rate of customs duties and customs legislation where the company has operations 6,7,8 restrictions imposed by foreign countries on the amont of royalty management fees that can be charged against foreign subsidiaries 6,7,8 maintaining good relationships with host guvernments 6,7,8 the need to maintain adequate cash flows in foreign subsidaries 9 import restrictions imposed by foreign countries 10 performance evaluation of foreign subsidiaries 11 the need of subsidiaries in foreign countries to seek local funds 12 devaluation and revaluation in countries where the company has operations 13,14 antidumping legislation of foreign countries 13,14 antitrust legislation of foreign countries 15 the interests of local partners in foreign countries 16 rules and requirements of financial reporting for subsidiaries in foreign countries 17 volume of interdivisional transfers 18 rates if inflation in foreign countries 19 risk of expropriation in foreign countries where the company has operations 20 u.s. government requirements on direct foreign investments source: [3,814] almost correctly, transfer pricing can save a company millions of dollars. if not done accurately, transfer pricing can place global companies at considerable risk for audits, interest and penalties, high legal costs, even result in double or triple taxation [12, 35]. this results in an increase in the total cost, the increased total cost makes the corporation less profitable. transfer pricing was found to be an important part of maximizing operating performance [11, 5431–5448]. determination of transfer pricing in multinational companies 35 2. methos of forming transfer prising in multinational companies the pricing of internal transfers that takes place in multinational companies should correspond to the pricing at which similar transactions are carried out on the external market. possible deviations may occur due to the certain differences which may have an impact on the pricing, and which relate to the transportation costs, insurance costs, customs duties and taxes, as well as marketing costs. landing costs (e.g. freight, insurance, customs duties and special taxes) can increase the allowable transfer price, while marketing costs are usually avoided for internal transfer and reduction of transfer price [2, 502]. determining transfer pricing in transactions between subsidiaries of multinational companies is usually based either on costs or estimated market pricing for products and services that are traded. the most commonly applied methods for determining transfer pricing in these types of transactions are the comparable uncontrolled price method, the resale price method, the cost-plus method and the comparable profits method. the transfer pricing determined by the method of comparable uncontrolled price is actually a market pricing. in order for this method to be applicable, it is necessary that there is an external market for a specific product or service, ie. that in addition to the internal sales, the multinational company also sells that product or service to the external market, or that it is being exchanged between the two independent companies. the resale price method includes transfer products and services at a pricing equal to the retail price reduced for a certain amount of profit that is realized by the subsidiary-vendor. the cost-plus method is based on the real costs, and transfer pricing is determined by adding the appropriate amount of profit to the cost of production of goods and services. the comparable profits method involves comparing the profitability of the company that is engaged in the same or similar activity with the profitability of the subsidiary office that uses transfer pricing [6, 399]. the issue of determining transfer pricing by applying the method of comparable uncontrolled price, the resale price method and the cost-plus method will be illustrated in the example of a hypothetical multinational company ''abc'', which has a large number of subsidiaries around the world, among which subsidiary a, which occurs as the buyer and subsidiary b, which occurs as the vendor [2, 502]. subsidiaries a and b are located in different countries. subsidiary a procures the component x from subsidiary b. component x can be purchased from external suppliers at a pricing of 475 m.u. transport costs and insurance costs amount to 60 m.u. commission expenses in the amount of 50 m.u do not need to be paid. the transfer pricing determined by using the method of comparable uncontrolled price is 485 m.u, and is calculated in the following way: market price 475 m.u. transport costs and insurance 60 m.u. comissions (50 m.u.) transfer price 485 m.u. to illustrate the process of determining transfer pricing by using the method of retail pricing, we introduce the assumption that subsidiary b does not have external sales for the component x that transfers to subsidiary a. let us also assume that subsidiary a sells component x at a pricing of 525 m.u. and achieves 40% profit from the purchase pricing of the sold goods. 36 lj. antić, t. stevanović, j. gudurić the transfer pricing determined by using the resale price method, taking into consideration the above-mentioned assumptions is 375 m.u., and is calculated in the following way: resale price = transfer price + markup perentage × transfer price 525 m.u. = transfer price × (markup percentage + 1) 525 m.u. = transfer price × 1,40 transfer price = 525/1,40 transfer price = 375 m.u. the process of determining the transfer pricing by using a cost-plus method will be illustrated by assuming that for component x which is being transferred from subsidiary a to subsidiary b there is no external market and that component x is used in the manufacture of product y. the production costs for component x amount to 250 m.u. the transfer pricing determined by using a cost-plus method taking into consideration the above-mentioned assumptions is 310, and is calculated in the following way: market price = production costs + transport costs and insurence transfer price = 250 m.u. + 60 m.u. transfer price = 310 m.u. when considering range in which the transfer price can be determined, the level of utilization of existing capacity also has to be taken into account. when the subsidiary that sells operates under conditions of full capacity utilization, the opportunity cost per unit is actually the market price of the product [6, 400]. namely, in conditions of full capacity utilization, the seller subsidiary must give up selling the product on the external market if they decide to sell products internal, to the customer subsidiary. in this case the market price represents an upper limit for the transfer price. if the transfer price is established at a level above the market price the buying subsidiary will not be motivated to do an internal transfer. when the selling subsidiary has enough excess capacity, lower limit of transfer pricing is determined by the amount of variable costs. in the conditions of insufficient capacity utilization, the selling subsidiary will not be motivated to complete an internal transfer if the transfer price is set at a level that does not cover variable costs. the problem of determining the lower and upper limits of transfer prices, regarding the level of capacity utilization will be illustrated in the case of hypothetical multinational company “trend”, which has a large number of subsidiaries around the world, among which are subsidiary c, which appears as the seller and subsidiary d, which appears as the buyer [4, 561]. subsidiary c has the capacity to produce 100,000 product units. subsidiary c sells component k to subsidiary d. subsidiary c sells component k to the external market at a price of 38 m.u. variable costs per component k unit are 20 m.u., and fixed costs per unit are 11 mu. subsidiary d uses component k in the production of product p. subsidiary d purchases annually 10,000 units of component k from the external supplier at the price of 36 m.u. per unit. further in the text the identification of a transfer pricing range under different assumptions will be presented. determination of transfer pricing in multinational companies 37 if we assume that subsidiary c has enough excess capacity to meet the need for all 10,000 units of component k that subsidiary d has, where at the same time does not have to give up on sales to external market, lower limit for the transfer price from the selling subsidiary’s point shall be determined as follows: transfer ≥ variable costs + total contibution margin on lost sales price per unit number of units transferred transfer price ≥ 20 m.u. + 0 m.u. / 10.000 units = 20 m.u. subsidiary d would not agree to the transfer price that is greater than 36 m.u., which is the price that external suppliers offer . in this case, the transfer price must be formed in the range from 20 m.u. to 36 m.u. in the case when the selling subsidiary does not exploit fully its available capacity, selling products at a transfer price higher than the level of variable costs is acceptable because of the profit increase. this will happen if the transfer price forms at the level greater than 20 m.u., and lower than 36 m.u. the choice of this transfer price leads to reallocation of the profit in favor of the selling subsidiary, while for the buying subsidiary this price remains more affordable than buying at the external market, due to the difference between the transfer price and the market price [8, 411-417]. supposing that subsidiary c is using all of its available capacity for the production and sale of components on the external market. in order to enforce internal transfer and to respond to subsidiary d’s order, subsidiary c must give up on some of the sales on the external market. when determining the lower limit for transfer pricing in such a case, it is necessary to take into account the variable and opportunity costs. subsidiary c has an opportunity cost that actually represents the total amount of lost sales. the lower limit for the transfer price is 38 m.u. and is determined as follows: transfer ≥ variable costs + total contibution margin on lost sales price per unit number of units transferred transfer price ≥ 20 mu + (38 m.u. – 20 m.u.) × 10.000 10.000 transfer price ≥ 20 m.u. + 18 m.u.. ≥ 38 m.u given that subsidary d can procure the needed components on the external market at a price of 36 monetary units per unit, it is most likely that internal transfer will not occur. if we assume that subsidary c operates at a maximum of its capacities and that by realization of the internal transfers can be saved up to 4 m.u. on the account of variable costs, due to the reduction of the costs of sales, the lower limit of transfer pricing is 34 m.u., from the seliing subsidary perspective. it is determined as follows: transfer ≥ variable costs + total contibution margin on lost sales price per unit number of units transferred transfer price ≥ (20 m.u. – 4 m.u.) + (38 m.u.. – 20 m.u.) × 10.000 10.000 transfer price ≥ 16 m.u. + 18 m.u. ≥ 34 m.u. 38 lj. antić, t. stevanović, j. gudurić subsidary d would not agree with the transfer price that is higher than 36 mu, i.e. the price of the external suppliers. in this case, the transfer price has to be formed somewhere in the range from 34 to 36 m.u. conclusion transfer pricing is an important business area in the modern business world. its importance emerged due to an increase in the number of internal transactions within the company. transfer pricing must be defined and determined to allow harmonization of the objectives of both numerous subsidaries and the company as a unique entity. in order to estimate the performance of the subsidiaries in regular and real terms, it is necessary for the appropriate methods of transfer pricing to be applied. selecting the proper method prevents the overflow of the value from one subsidiary to another. enforcing internal transfers, multinational companies achieve a number of objectives that affect the business by providing: lower taxes, customs duties and charges, lower trade risks, better competitive position and better relations with other countries. being the most important one, stress is put on the role of transfer pricing in minimization of the income tax. by shifting profits from the subsidiaries located in the countries with higher tax rates to the subsidiaries in the countries with lower tax rates, multinational companies maximize profit after taxation for the whole company. in this way, multinational companies are becoming more powerful and influential in the preferred market. the exchange of goods and services between subsidiaries of one multinational company is done at the level of transfer prices. the level of transfer prices by which the goods and services are going to be exchanged, depends on the particular method that is applied, but also on the degree of untilization of the existing capacity of the company. when the subsidiary that sells products and services operates on the level of full employment of its capacities, its oportunity costs are equal to the market price, which determines the upper limit of the transfer pricing. in case when there is enough available capacity, the lower limit of transfer pricing is determined by the amount of the variable costs of the selling subsidiary. references 1. polimeni, r., fabozzi, f. and adelberg, a., (1991) cost accounting, mcgraw-hill, inc., new york. 2. mowen, m., hansen, d. (2011) introduction to cost accounting. south-western, cengage learning, international evolution, p. 491-504. 3. hilton, r., maher, m., selto, f. (2003) cost management. mc grow-hill, boston, p. 802-816. 4. garrison, r., noreen, e. (2003) managerial accounting. mcgraw hill, boston, р. 554-563. 5. milićević, v. (2003) strategijsko upravljačko računovodstvo. beograd: ekonomsku fakultet, str. 356-360. 6. denčić-mihajlov, k., trajčevski, m. (2011) transferne cene u teoriji i praksi poslovanja multinacionalnih kompanija. ekonomske teme, br. 3: 397-414. 7. wagdy m. abdallah, guidelines of ceos in tranfer pricing policies. management accounting 70, no. 3, р. 61. 8. adams, l., drtina, r. (2008) transfer pricing for aligning divisional and corporate decisions. business horizons, 51: 411-417. 9. zimmerman, j. (1995) accounting for decision making and conttrol, irwin, inc., homewood, illinois, p. 173. 10. balachandran, k., li, s. & wang, t. (2010). the role of transfer-pricing schemes in coordinated supply chains. journal of accounting, auditing & finance 25(july), 375-404. determination of transfer pricing in multinational companies 39 11. kumar, s. & sosnoski, m. (2011). decision framework for the analysis and selection of appropriate transfer pricing for a resilient global sme manufacturing operation – a business case. international journal of production research, 49(18), 5431–5448. 12. tully, b. (2012). transfer pricing strategies and the impact on organizations. financialexecutive (july/august), 34-37.retrieved from www.financialexecutives.org. 13. rayome, d. & baker jc, (1995) “foreign direct investment: a review and analysis of the literature”, the international trade journal, vol. ix, no. 1, spring, str. 15. 14. doupnik, t., perera, h. (2012) international accounting. third edition: mcgraw-hill. 15. malinić, s. (2011). transferne cene kao faktor performansi preduzeća i poslovnih segmenata u kontekstu msfi 8. refleksije međunarodnih standarda finansijskog izvještavanja na računovodstvo, reviziju i polsovne finansije. banja vrućica. 15. kongres srrrs, 81-100. 16. smernice oecd za primenu pravila o transfernim cenama za multinacionalna preduzeća i poreske uprave. (2010). retrieved from http://www.stats.govt.nz 17. marković, i. (2003). intrasektorska razmena u uslovima globalizacije. ekonomske teme (2): 277-283. utvrđivanje transfernih cena u multinacionalnim kompanijama pitanje transfernih cena u poslovanju multinacionalnih kompanija u savremenim uslovima poslovanja poprima strategijski značaj. ocena performansi i harmonizacija ciljeva svih divizija i multinacionalne kompanije kao celine, determinisani su primenjenim pravilima i metodama formiranja transfernih cena. utvrđivanje transfernih cena u multinacionalnim kompanijama usložnjeno je diferenciranošću poreskih sistema zemalja u kojima su locirane divizije. usled različitih poreskih stopa na dobit, vrši se transferisanje dobitka iz zemalja sa većim poreskim stopama u zemlje sa nižim poreskim stopama. s tim u vezi, cilj ovog rada je da ukaže na značaj transfernih cena i metoda njihovog utvrđivanja u multinacionalnim kompanijama. u toku izrade članka biće primenjene metode analize na bazi relevantne i raspoložive inostrane literature i prakse, metode sinteze i metode komparacije. od rada se očekuje da domaćoj i stručnoj javnosti ukaže na fenomen transfernih cena i njihove implikacije na performanse divizija i multinacionalne kompanije u celini. ključne reči: transferne cene, multinacionalne kompanije, troškovi, metode. http://www.financialexecutives.org/ http://www.stats.govt.nz/ plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 15, n o 1, 2018, pp. 73 84 https://doi.org/10.22190/fueo1801073s © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper romania’s population decline and demographic future: socio-economic aspects 1 udc 314.7(498) lucian adrian sala* university of craiova, romania abstract. like most of the countries around the world, european member states are suffering from the declining population, due to low birth rates and decreasing death rates. romania’s population is undergoing a series of changes that will continue to unfold in the foreseeable future. demographic transitions are taking place in the case of all member states that are part of eu-28, with various degrees of intensity. romania’s population has been shrinking and undergoing a continuous process of erosion since 1992 when it hit a peak of 23.2 million. under the influence of a decreasing birth rate and death rate, the population is projected to decrease from 19.8 million in 2015 to 14.5 million in 2080. this article examines how these inevitable changes will shape romania's demographic landscape, with an emphasis on the changes over time suffered by the total population, birth rates, and life expectancy, as seen through the ”demographic transition model” stages as put forward by thompson in 1929. also, this article will touch upon some of the main economic consequences that arise as a result of these demographic transitions. key words: demographic transition, population decline, birth rates, death rates, economic consequences, pension expenditures, social expenditures, arma jel classification: c12, j11 received december 05, 2017 / revised january 21, 2018 / accepted february 01, 2018 corresponding author: lucian adrian sala * ph.d. student at the university of craiova university of craiova, romania e-mail: sala_lucian@yahoo.com 74 l. a. sala introduction many european countries are facing the effects of demographic transitions, which are taking place with different levels of intensity. the birth rate and the death rate in all member states are below critical levels and are not showing signs of improvement in the near future. since 1960, romania’s population has seen birth rates higher than death rates, thus leading to an increase in the population, reaching a total of 23.2 million in 1992; however, this trend started to reverse reaching „22,435,205 persons in 2000, reaching 19,913,193 people in 2014” (cristea et al., 2016, p. 29). this high point culminated with a reversal of the birth rate being surpassed by the death rate, resulting in a new phase of growth for romania’s population. population transition is a highly debated subject among researchers and governmental circles, its effects ranging from a smaller workforce, decreased economic growth, higher expenditures on social security programs and decreased investments (cristea et al., 2010). this article focuses on the demographic changes that romania’s population has gone through, with a focus on current and future trends and changes, both demographic and economic. these changes and the main causes that are responsible for the shifts that are taking place will be looked at through the “demographic transition model”. also an analysis of the most pressing economic consequences will be presented. the expected results are that romania is currently experiencing a late stage postindustrial phase defined by very low birth rates and low death rates, which will continue in the future, resulting in a much smaller population with all the effects that it brings with. on the economic side, a gradual rise in government expenditures on social security and pensions is expected, also as a consequence of the demographic transition, an increase in the old-age dependency ratio is also expected. 1. theoretical framework the demographic aging process has emerged at a certain stage in the development of human evolution as a result of the simultaneous actions of decreasing fertility rates, a longer life expectancy, and changes in the demographic structure, caused by post-war generations on top of the age pyramid. population aging can be looked at as an increase in the median age of the population in a region, under the effects of a decrease in fertility rates and a simultaneous increase in life expectancy (eurostat, 2000). as cristea and mitrică (2016) presented, „at a global level, the number of older people is increasing by 2.6% per year, at a faster rate than the annual increase of the entire population, which is increasing by 1.2% per year” (cristea & mitrică, 2016, p. 65). europeans in developed countries enjoy a longer and healthier life, and the generations that follow will benefit from a better quality of life. this spectacular achievement is nevertheless accompanied by inferior fertility rates where the population replacement rate, in a large number of countries, has fallen below the natural threshold of sustainability (börsch-supan, 2013). this is registered in developing countries also, romania being one of them, with demographic shifts that are taking place in neighboring countries. romania’s population decline and demographic future: socio-economic aspects 75 as a result, birth rates continue to decline, while the aging process of population accelerates, anticipating rapid increases in the elderly population over the coming decades (börsch-supan, 2013). the challenges posed by demographic change have increasingly been the focal point of debates on the future of the eu. population and aging of the labor force, in particular, accompanied by a decrease in the labor force, raise concerns about the future economic growth (weil, 2006). the natality and fertility of a population are influenced by a series of "biological, social, cultural, traditional etc. factors that are interdependent and sometimes have contradictory action on birth" (mihăescu, 2001, p. 216). the evolution of mortality "has an inertial load higher than any other demographic phenomenon, as well as greater stability over time" (mihăescu, 2001, p. 220). thus, the pursuit of its evolution over time presents fewer challenges. the interaction between fertility, mortality, and migration determines the magnitude of change in the composition of ages in different european countries, under a common direction, but at a different pace, under the impact of demographic aging. the speeding up of the aging process of the population is a constant trend. changes in the population age structure were predictable, but the magnitude and speed with which they occurred were to some extent surprising. radu (2007) summarized that demographic dynamics in contemporary times can be essentially explained by four fundamental processes: the demographic transition, the population aging, the shifts in women professional activity and the migration (politic, demographic or economic). oliviera-martins et al. (2005) identified the underlying causes of demographic aging, responsible for present and future challenges that need to be addressed until they are out of control. these causes are the following (oliviera-martins et al., 2005):  first of all, the decrease in fertility rates recorded in recent decades led to a reduction in the relative number of young people and pushed up the share of elderly people;  the second factor relates to the recent increases in life expectancy. when one of the key factors of aging is longevity, the aging process is treated as inevitable and global. to better explain the changes in fertility rates and life expectancy, there are a number of models, studies, and theories that have punctuated demographic changes in the literature. thompson (1929) introduced the demographic transition model that laid the foundation for the study of demographic developments and changes, which were carried out in five stages (see figure 1). the first is the pre-industrial stage, characterized by high rates of birth and mortality. the population lives in an agrarian community characterized by a high level of birth, but which is prone to the spread of disease. the second stage is the development stage, which is also known as the rapid expansion phase of the population, characterized by high birth rates and high mortality rates, with mortality rates lower in the first phase. at this stage, agricultural methods and food supply are improved, with crop rotation, selective growth and seeding technology being introduced. in addition, public health is increased, reducing the mortality rate, especially in childhood. moreover, automation at an early stage is emerging and rail transport appears to allow higher mobility. 76 l. a. sala the third stage is distinguished by the urbanization process and is the late extension phase. urbanization changes the traditional values for families, therefore increases the cost of having children and increasing women's participation in the workforce. birth rates and mortality rates are now declining, but mortality rates are lower than birth rates, leading to annual population growth. the fourth stage is the industrialization phase where low birth rates and low mortality rates occur. finally, the fifth stage is the post-industrial phase, which is defined by the overrun of the birth rate by the mortality rate, unless there is an increase in immigration (thompson, 1929, quoted in blacker, 1947). fig. 1 demographic transition model source: http://ourworldindata.org/data/ population-growth-vital-statistics/world-population-growth when thompson (1929) presented the theory of demographic transition, he defined three types of industrialized countries in which the population growth rate differs (kirk, 1996):  the first country, called a, faces a population decline due to the rapid decline in birth rates and the slow decline in mortality;  for the second country, b, the birth rate, and mortality rates have fallen. however, the mortality rate has fallen earlier and faster than the birth rate, so there has been an increase in the population to the point where the birth rate has started to decline, compensating for the initial gains and the population entering in decline;  in the third country, c, the birth rate and mortality rate change in an uncontrolled manner, as population growth will gradually decrease. when the theory of demographic transition was presented, thompson warned of the economic consequences of demographic change (thompson, 1929, quoted in kirk, 1996). demographic transitions are accompanied by economic patterns that result in the transfer of resources from vital areas of the economy (infrastructure spending, education, r&d) to social security, health care and pensions. prettner (2012) found the existence of a positive relationship between aging and economic growth, as the elderly tend to save more, thus resources are available for investments that ultimately positively affect economic growth. romania’s population decline and demographic future: socio-economic aspects 77 demographic aging is accompanied by increased transfers from the active segment of the population to the inactive segment represented by the elderly, by raising income taxes and increasing family expenses (mason & lee, 2011). the increase in the dependency ratio as a result of demographic aging is expected to diminish the disposable income of the active population and lead to a decrease in the fertility rate (hock & weil, 2012). an additional argument suggests that, with the aging of the population, there will be an increase in how funds are allocated by the government to social security programs to the detriment of education and infrastructure investment, these changes in government priorities will have a negative impact on developing countries (eiras & niepelt, 2012). population aging is often seen as a burden, which produces harmful effects on the economy, but this view is to some extent exaggerated. some of the main challenges that arise as a result of population aging are universal and include (prettner, 2012, p. 824):  increasing demand for long-term care, and rising medical costs of the elderly;  disruptions in pension and social security systems;  pressure on public budgets and tax systems;  adapting the economy and jobs to an aging workforce;  potential labor market shortages as the number of older workers decreases;  the likely need to increase the number of trained health professionals;  the potential conflict between generations about the distribution of resources. wanless (2001) argues that a quarter of total health spending in a person's life is achieved over the last period of his life and does not tend to increase proportionately with age. on the other hand, lifetime health expenditures are likely to decrease with age as the elderly cannot physically support complex medical procedures (graham, et al., 2003). current pension system will cause an increase in the government budget deficit and much of the current budget deficit is due to the retirement of more educated workers (yong & saito, 2012). the pension systems in romania and croatia, are also directly influenced by the aging of the population, largely determined by the increase in the share of people over 65 years of age, amid a rise in life expectancy and declining birth rates (cristea et al., 2016). 2. materials and methods based on the demographic shifts that have taken place in romania over the period from 1960 to 2016, and to correctly assert the likely direction of these changes and the economic consequences on government expenditures, a statistical method of analysis has been employed centered on the demographic transition (dt) model presented by thompson (1929) for the demographic and the economic aspects. the analysis allows us to establish the stage which romania is traversing according to the dt model, so an accurate assessment of the changes that have occurred can be made. also, it will allow us to get a better picture of how expenditures related to the demographic process will be influenced over time. the data on population, birth rates, and death rates have been collected from eurostat over a period from 1960 to 2016, with projections until 2080. 78 l. a. sala the date for old-age dependency ratio, pensions, social security expenses has been collected from eurostat over a time period from 2000 to 2015, with projection made for model accuracy until 2020. the method applied is the statistical tool focused on analysis of main indicators changes, and arma model used to forecast economic variables 3. romania’s demographic transition romania has gone through a series of significant changes between 1960 and 2016 with reverberations that will be felt long into the future. at the cause of this transformation are the changes in crude birth rates (cbr) and crude deаth rates (cdr), both shaping the size and structure of the population. between 1960 and 2016 (see figure 2), the population of romania has grown steadily from 18.3 million in 1960 to a peak of 23.2 million in 1991, afterward suffering a slow, steady decline to 22.4 million in 2001, and 21.1 million in 2007, reaching a level of 19.8 million in 2016. the crude birth rates (cbr) (see figure 2) have moved gradually lower in the period from 1960 to 1966, from a high of 19.1 children per 1000 persons to a level of 14.2 children per 1000 persons. in 1967, a sudden spike can be observed in the cbr levels, reaching an all-time a high level of 27 children per 1000 persons. followed by a gradual but steady decline with peaks occurring in 1974 with a value of 20.3 children per 1000 persons. in 1983, cbr registered the minimum value of 14.2 children per 1000 persons. the cbr starting from 1984 began to rise slowly to a peak of 16.7 children per 1000 persons recorded in 1987. after this period, it was followed by a slow and steady decrease until 2016, when it reached an all-time low of 9.6 children per 1000 persons. a significant milestone was in 1992 (see figure 2) when the crude birth rate (cbr) was overtaken for the first time by the crude death rate (cdr), marking a significant reversal in the structure and size of romania's population. fig. 2 changes in crude birth rates (cbr), crude death rates (cdr) in romania, population, 1960-2016 source: own creation, based on eurostat data p e r 1 0 0 0 p e rs o n s p e r 1 0 0 0 p e rs o n s romania’s population decline and demographic future: socio-economic aspects 79 the crude death rate (cdr) has seen a steady increase in the period afterward, with minor fluctuations, but with a sustainable upward trend. the lowest level for the cdr was recorded in 1964 with 8.1 deaths per 1000 persons, and the highest level, in 2015, with 13.2 deaths per 1000 persons. the gap between the crude birth rate (cbr) and the crude death rate (cdr) will continue to widen in the future, showing little signs of reversing. the population pyramid shows the distribution of the population by gender and by age group. each item corresponds to the age group in the total population (male and female). the population pyramid in case of romania is presented in an overlapping structure, revealing the changes that took place in the population structure by age group between 2001 and 2016 (see figure 3). the pyramid takes a narrow shape at the bottom in 2001, and has a tendency to become inverted in 2016 due to the baby boomer generations retiring, on the one hand, and from the declining birth rates and increasing death rates, on the other hand. these baby boomer generations continue to represent an important part of the active old population on the labor market. firsts of these large groups, which was born for a period of 20-30 years, are now approaching the retirement age. a noticeable decrease as a result of lower birth rates can be observed (see figure 3) in the age ranges from 10 to 34 years that have decreased in both cases, for males and females, between 2001 and 2016, giving way to an increase in the range between 35 and 69 years. fig. 3 population pyramid in romania, 2005/2016 source: own creation, based on eurostat data 80 l. a. sala the changes in the structure of romania’s population, as can be seen in figure 5, are forecast to continue, according to the most recent projections (europop2015) that were made to cover the period from 2015 to 2080. romania’s population is forecast to continue its decline from 19.8 million in 2015 to 14.5 million in 2080 (eurostat, 2017). similar projections have been made by gheţău (2007), with forecasts made between 2010 and 2060, where population would continue its downward trend, due to low birth rates, reaching in 2020 the value of 20.7 million, 19.2 million in 2030, 17.3 million in 2040, 15.9 million in 2050, and finally reaching 14.1 million in 2060 (gheţău, 2007). drawing a comparison between the age pyramids from 2016 and 2080 (figure 4), we can notice that romania's population will continue to age in the coming decades, the high number of “baby boomers” will continue to move upwards in the age pyramid, increasing the number of the old group. in 2080, the population pyramid will change its shape to a rectangular shape, shrinking to a great extent in the middle part of the pyramid (ages 40-54). fig. 4 population pyramid, romania, 2016/2080 source: own creation, based on eurostat data an important aspect of the aging process is the gradual erosion of the working segment of the population that is expected to continue its decline up to 2060 (figure 5). the working age group of the population will shrink from 67.1% in 2016, moving slowly to 65.7% in 2020, 63.2% in 2030, reaching 54.1% in 2060, then gradually stabilizing and reaching 55.7% in 2080. romania’s population decline and demographic future: socio-economic aspects 81 fig. 5 population by age groups projections, romania source: own creation, based on eurostat data the age group between 0-14 years will shrink from 15.5 % in 2016, to a minimum of 14.6 % in 2040, gradually returning to the level recorded in 2016 of 15.5 % afterward, to a maximum level of 15.8 % in 2080. the age groups of 65-79 years and of 80+ years will both grow in size much faster than the previous age groups, reaching 20.1% in 2050 for the 65-79 age group, and 13.5% for the 80+ age group in 2070. 4. the impact of demographic changes on the economy of romania the demographic transition process will cause a slowing down in growth and an increase in government expenditures, diverting funds from key critical areas of the economy to cover ever increasing social expenditures. fig. 6 old-age dependency ratio projections, romania source: own creation, based on eurostat data 82 l. a. sala the old-age dependency ratio plots the ratio between individuals of 65 and over, generally when they become economically inactive in comparison to individuals between 15 and 64 years of age. as a result of decreasing birth rates and longer life expectancy, the old-age dependency ratio in romania is projected to continue to increase, from 25.2 elderly per 100 working age individuals in 2015 to a peak of 56.9 in 2060, then gradually moving lower to 51.4 elderly in 2080. fig. 7 total social security expenditures per person, romania source: own creation, based on eurostat data, using arma model with a rising elderly cohort, an increase in total social security expenditures per inhabitant will take place. total social security expenditures which are comprised of social protection benefits, sickness/health care, other expenses and administrative costs have been gradually increasing from 236.1 euros per inhabitant in 2000 to 592.92 euros in 2006. this trend continued, reaching 1083.57 euros in 2010 and 1179.36 euros per inhabitant in 2015. projections from 2016 to 2019 continue to show increasing values, reaching 1251.96 euros in 2016 and 1469.77 euros in 2019 per active inhabitant. fig. 8 pension expenditures as % of gdp, romania source: own creation, based on eurostat data, using arma model romania’s population decline and demographic future: socio-economic aspects 83 pension expenditures, have been slowly rising from 6.1 % of gdp in 2000 to 6.7% of gdp in 2002, and then moving slightly lower to 5.9% of gdp in 2003. after this period, a steady growth of pension expenditures as a percentage in gdp took place, moving from 6.1% in 2004 to a peak of 9.2%. the projection shows a continuation of this trend, moving from 9.3% of gdp in 2017 to a peak of 9.9% of gdp in 2020 and not showing signs of slowing down. conclusion romania’s population is rapidly shrinking, as revealed by the data presented before, this development can be attributed to declining birth rates and the increase in life expectancy. analyzing the data, we can say that romania is in the final stage of the demographic transition model, with low birth rates and low death rates, the effect was not obvious in the last decades since the “baby boomer” generation has contributed in the workforce. the forecasts show that the population will hit 14.5 million in 2080, with a shrinking working-age segment and an increasing elderly segment of the population. these developments will have negative effects on the country's already strained social security services which will continue worsening. the public pension as a percentage of gdp will continue to represent an ever-increasing share, raising questions about its sustainability in the not so distant future. to a great extent, the cohorts of more educated workers that have paid more in contributions, during their working years, due to higher wages and salaries, will contribute to rising expenditures within the public pension system. consequently, the pensions they will receive when they retire will be larger. therefore, an increase in retirement among educated workers is expected to considerably increase government spending on pensions. these consequences depend to a large extent on the types of retirement policies adopted by governments because some policies can compensate for the problem of increasing the deficit in government budgets. with the exit of the “baby boomers” that are currently in the process of retiring, an increasing strain will be placed on the country’s finances, with a greater need for much careful management and new strategies to ease the pressure on future expenditure. an obvious solution is to increase the birth rate by subsidies offered to young families, encouraging them to have more children, a further solution is to increase the retirement age of both male and female workers alike, thus delaying the increase in expenditure until more viable solutions can be implemented. references börsch-supan, a. 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(2011). population aging and the generational economy: key findings. population aging and generational economy project, pp. 3-31. mihăescu, c. (2001). populație & ocupare – trecut. prezent. viitor[population & employment past. present. future]. the economic publishing house. bucharest. oliviera-martins, j. o., gonand, f., antolin, p., maisonneuve , c., & yoo, k.-y. (2005). the impact of ageing on demand, factor markets and growth. oecd. prettner, k. (2012). population aging and endogenous economic growth. journal of population economics, 26, pp. 811-834. radu, c. (2007). causes and consequences of the world population evolution. the young economists journal, 1(7), pp. 137-148. thompson, warren s. (1929). population. american journal of sociology, 34(6), pp. 959-975. wanless, d. (2001). securing our future: taking a long-term view: an interim report. uk treasury, london. weil, d. n. (2006). population aging. national bureau of economic research, working paper. yong, v. & saito, y. (2012). national long-term care insurance policy in japan a decade after implementation: some lessons for aging countries. ageing international, 37, pp. 271-284 opadanje populacije u rumuniji i demografska budućnost: socio-ekonomski aspekti kao i većina zemalja širom sveta, zemlje članice eu pate od smanjenja broja stanovnika, zahvaljujući niskoj stopi rađanja i smanjenoj stopi mortaliteta. rumunsko stanovništvo prolazi kroz niz promena koje će nastaviti da se odvijaju u doglednoj budućnosti. demografske tranzicije se odvijaju u slučaju svih država članica koje su deo eu-28, sa različitim stepenima intenziteta. rumunsko stanovništvo se smanjuje i prolazi kroz kontinuirani proces erozije od 1992. godine kada je dostigao dostiglo maksimum od 23.2 miliona. pod uticajem smanjenja stope nataliteta i smrtnosti, procena je da će se stanovništvo smanjiti od 19.8 miliona u 2015. godini na 14.5 miliona u 2080. godini. ovaj članak ispituje kako će ove neizbežne promene oblikovati demografsku sliku rumunije, sa naglaskom na promene tokom vremena prouzrokovane ukupnim brojem stanovnika, stopom nataliteta i očekivanim životnim vekom, viđeno po fazama „modela demografske tranzicije“ koji je thomson izneo 1929. godine. takođe, ovaj rad će se baviti i glavnim ekonomskim posledicama koje nastaju kao rezultat ovih demografskih tranzicija. ključne reči: demografske promene, opadanje broja stanovnika, stopa nataliteta, stopa smrtnosti, ekonomske posledice, troškovi penzija, troškovi socijalne zaštite, arma facta universitatis series: economics and organization vol. 17, no 4, 2020, pp. 329 341 https://doi.org/10.22190/fueo200729024n © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper exploring the diversity within the workplace of small firms in kogi state, nigeria1 udc 159.942.4(669) 331.101.3(669) akeem tunde nafiu1, unekwu cynthia alogwuja2, dare joseph enimola2 1centre for pre-degree & diploma studies, kogi state university, nigeria 2department of business administration, faculty of management sciences, kogi state university, anyigba, nigeria abstract. this study aimed at exploring diversity within the workplace of small firms in kogi state, nigeria. the study used survey research design. descriptive statistics, mean score from likert scale, anova and multiple regressions were used for data analysis. the study found that age has significant effect on job satisfaction of employees; and that religion, educational background and job experience have strong significant effect on small firms’ organizational outcomes in kogi state. the finding further indicated that gender difference affects organizational performance, job satisfaction, productivity, competitive advantage and customers’ satisfaction. the study concluded that age has significant positive effect on job satisfaction; and other factors such as religion, educational background and job experience of employees only affect the performance of small firms in kogi state positively. this study therefore recommended that ownermanagers of small firms should take cognizance of age as it affects job satisfaction of employees; and should strategically manage factors such as religion, educational background and job experience of employees as they affect performance. key words: diversity, job satisfaction, organizational outcomes, employee turnover, organizational culture jel classification: l20, m10 received july 29, 2020 / revised october 13, 2020 / accepted october 19, 2020 corresponding author: akeem tunde nafiu centre for pre-degree and diploma studies, kogi state university, anyigba, nigeria e-mail: tundenafiu01@gmail.com 330 a. t. naifu, u. c. alogwuja, d. j. enimola 1. introduction organizational outcomes reflect what the small firms want to achieve in kogi state. the outcomes of every organization are shaped by its internal and external environmental situations. for organizational outcomes to be realistic, an effective organizational framework must be put in place. according to madanchian, hussein, noordin, & taherdoost (2017), organization outcomes may reflect corporate performance, job satisfaction, and improved decision. gomez & bernet (2019) viewed organization outcomes in terms of "quality and financial performance" (p.383). hwang & hopkins (2015) added that "organizational commitment, job satisfaction, and intention to leave" are aspects of organization outcomes (p.44). organization outcomes may be productivity, competitive advantage and customers’ satisfaction. notably, organization outcomes are both internal and external. for instance, competitive advantage and customers’ satisfaction are paradigm of the outcomes that are external to the organization while others are internal to the organization. organization outcomes may be predicted given diversity characteristics. gomez & bernet (2019) argued that diversity has the propensity to improve performance. diversity characteristics that place issues before managers of small firms in kogi state are age, gender, race, religion, experiences, educational background and culture among employees. saxena (2014) expressed that small firms have inventory of human resource with differences in age, gender, perception, attitude, caste, religion and region. diversity reflects heterogeneity of characterizing variables in human, but the homogeneity perspective of it is important. this is because a group of employees may possess similar characteristics. for instance, employees within a group may be in the same age bracket, sex or have the same cultural background. today, smes now manage diversity with the aim of taking advantage of diverse employees’ ability. this is targeted at creating a platform for the achievement of desirable outcomes. pitts, hicklin, hawes & melton (2010) opined that there are scanty researches relative to how diversity management can be used to achieve desirable outcomes in diverse organizations. rahman, ferdausy and bhattacharjee (2014) posited that the success of an organization depends on its workforce. among different human resource management issues, workforce diversity has received a considerable, conceptual, and empirical attention in organizational area. the finding of ibidunni et al. (2018) revealed that “workforce diversity significantly influences job satisfaction and commitment” (p.1052). a number of studies (kalleberg & leicht, 1991; gellner and veen, 2009; rehman, ullah & abrar-ul-haq, 2015) revealed that “individual characteristics have considerable relationship with organization performance”. past studies have shown that diversity among employees culminates into both negative and positive effects (kochan et al. 2003). weiliang et al. (2011) attributed “the dual effect to lack of evidence linking workforce diversity to employee performance”. however, lindblad (n.d) clarified that diversity in the workplace is generally regarded as a positive one for smes, but a workforce that has significant differences in ethnicity, race, religion and gender may create destructive tendency at the enterprise. the discussion above shows that there is relatively low empirical research on ‘the influence of factors of workforce diversity on the organizational outcomes of small firms in kogi state’, nigeria. the researcher is therefore induced to cover this gap by undertaking the present study. exploring the diversity within the workplace of small firms in kogi state, nigeria 331 the main objective of this study is to explore the diversity within the workplace of small firms in kogi state, nigeria. the three identified objectives of the study are: i. ascertained gender difference with reference to the organizational outcomes of small firms in kogi state; and ii. investigate the effect of diversity factors on the organizational outcomes of small firms in kogi state. 2. conceptual review there are ample collections of scholarly conceptual definitions of diversity. different perspectives are observed based on peculiarity in disciplines. the conceptual reviews on diversity in this study reflect the business management perspective. according to lindblad (n.d), the society for human resource management defined “diversity as valuing the characteristics that make a person unique, such as age, ethnicity, education level and family background”. the uniqueness as observed from the definition appears to implicitly or explicitly show that employees possess varying characteristics. this is similar to the addition of kokemuller (2011) that diversity is the “presence of people from a wide range of backgrounds and possessing different traits”. also, knippenberg et al. (2004) opined that diversity refers to “an almost infinite number of dimensions, ranging from age to nationality, from religious background to functional background, from task skills to relational skills, and from political preference to sexual preference” (p.1015). diversity research has “mainly focused on gender, age, race/ethnicity, tenure, educational background, and functional background” (milliken & martins, 1996; williams & o’reilly, 1998). however, robbins (2009) refers to “workforce diversity as organizations that are becoming more heterogeneous with the mix of people in terms of gender, age, race, and education background”. the term ‘mix’ in his broad definition appears to mean combination and interaction of people from diverse backgrounds. ehimare & ogagaoghene (2011) posited that “the main concern of this standpoint is that a broad definition may imply that all differences among people are the same” (p.95). workforce diversity means the composite of people with different/similar psychological, sociological, economic and personality factors at the workplace. considering workforce diversity as effective tool for achieving the organizational outcomes of small business firms is very important. workforce diversity may be constructive when managed effectively and destructive to organizational outcomes when managed poorly. the motive behind the effective management of workplace diversity is that the complexity in human element of organizational life is abrupt by dissimilarities in characteristics. the “business benefits of workplace diversity have been widely contested since the idea was conceived” (ehimare & ogaga-oghene, 2011). there is an ongoing debate as to whether there is indeed any discernible business benefit (mulholland, ozbilgin & worman, 2005). it is however worthy of note that workforce diversity functions as a vehicle for organizational success through collection of wealth of experience and ideas. lindblad (n.d) is of the “opinion that the inclusion of diverse individuals fosters a rich exchange of new ideas among employees and helps organization leverage the unique character of its workforce”. andrade (2010) discussed the benefits of workforce diversity in the workplace as follows: 332 a. t. naifu, u. c. alogwuja, d. j. enimola i. increased productivity: there is no doubt that some smes have collection of talents in their enterprise. sme owners can unfold the skills of their employees and take advantage of talents to deliver the best outcome through effective diversity management. it is important to note that diverse employees who have better knowledge of the cultural value of their enterprises may be induced to remain committed to productivity. ii. rising creativity and problem-solving: there is possibility that employees have diverse intellectual properties. these may be useful for smes, and as such, managers may translate the intellectual properties into innovativeness, creativity, diversification and design of the best approach to solving business problems. iii. attracting and retaining talent that add a competitive edge to any smes. sme owners/managers can make use of talented employees to distinct themselves in a competitive environment. when skills pool is increased, smes may be propelled either to compete in the international global world or to increase its diverse customer base in nigeria. iv. help to build synergy in teams and enhances communication skills that brings in new attitudes and processes that profit the whole team v. applying the proper diversity and inclusion management strategies does not only save money on litigation expenses generated by discrimination lawsuits but is the right thing to do for the business. vi. it increases market share and create a satisfied diverse customer base by relating to people from different backgrounds. it does propel the organization and its status to claim its place and success in the global business world of the 21st century. no organization ever exists without people from different and similar background. professionals in the field of human resources must be happy gathering diverse employees for scientifically designed job, and manage such diversity for organizational success. the ability of any organization to plan and manage workforce diversity promotes the tendency of achieving a desired goal. some small firms find it difficult to be successful today, because of their ill-commitment to ensuring that workforce diversity is part of their day-to-day business conduct. this backdrop may be tied to the fact that owner-managers of these small firms have low know-how on effective practice of diversity management, and the contributory elements in the successful management of diversity, and task that can deal with diversity related issues in their workplace. for effective diversity management practice, kokemuller (2011) established that “top management and front-line managers in a diverse organization have to set the tone for an effective culture, as this will promote nondiscriminatory work environment, and fair treatment of all workers in the hiring process, job conditions, work evaluations and promotions”. loriann and carol (2007) insisted that “un-managed diversity is more likely to damage morale, increase turnover, and cause significant communication problems and conflict within the organization”. though, there have been controversies regarding the influence of workforce diversity on organizational outcomes for many decades. milliken and martins (1996) understand that “the influence of diversity on organizational outcomes, such as organizational performance, employee satisfaction, and turnover, is essential”. it is believed that diversity is related to organizational outcomes and success. the organizational outcomes considered for the purpose of this study are organizational performance, job satisfaction, productivity, turnover and competitive advantage. it appears that workforce diversity has a correlative impact on each of these variables, particularly in a complex managerial and organizational environment. exploring the diversity within the workplace of small firms in kogi state, nigeria 333 anderson & metcalfe (2003) argued that “the paucity of stout research examining the impact of diversity upon businesses has raised questions about the existence of any connection between workforce diversity and business outcomes”. though today, there is increased number of quality researches (cox et al., 1991; webber and donahue, 2001; seyedmahmoud, 2004; roberge and rolf, 2010; patrick and kumar, 2012) which have proven the workforce diversity has both positive and negative effect on organizational performance. this made choi & rainey (2010) to express that “previous empirical research on the effects of workforce diversity on organizational performance has found mixed results”. other researches (kalleberg & leicht, 1991; weiliang et al. 2011; rehman et al., 2015) also proved the effect of individual workforce diversity factors on other organizational outcome. diversity factors are comparatively explained by the atmosphere of a particular organization and the external environment in which it sub-systemizes. two organizations may likely witness varying course of workforce diversity due to national or regional factors. the observed fact that has been missing in previous researches is that workforce diversity varies based on economy, individual orientation and organizational culture from country to countries. this implies that research reports are likely to vary according to these factors. this may be a clarification to the studies (bell & berry, 2007; klein & harrison, 2007) with the position that previous researches analyzed “the impacts of diversity taking into account the complex reality of organizations”. the issue is that social and functional factors which are causal of diversity have predictive power on the outcome of small firms. these factors determine the extent at which salient organizational behaviour is approved by organizational members, and this remains the reason it has become essential for effective workforce diversity management. the study of choi & rainey (2010) shows “how managerial efforts and other contextual variables (such as diversity management, organizational culture, and team processes) moderate the relationship between diversity and organizational outcomes” (p.102). 3. methodology the study premised on ‘survey research design’. the study’s population comprised of employees and owner-managers of selected small firms. a purposive sample technique was used to select employees (216) and owner-managers (59) from the selected small firms in kogi state. the choice of this technique was supported with the fact that there is no adequate data regarding small firms in kogi state. a well-structured questionnaire was used for gathering primary data. the questionnaire was administered to two categories of respondents (216 employees and 59 owner-managers) in the study area with the aid of five trained research-assistants. the constructs of this questionnaire were validated by a panel of professionals from the field of industrial relation/human resource management. for the aim of this study, ‘questionnaire’ was scaled and its reliability was subsequently tested through cronbach’s alpha. this study analyzed data using ‘descriptive statistics, analysis of variance (anova) and regression model’. the model is specified as follows: y1= b0+b1x1+b2x2+b3x3+b4x4+ µ ………………………. (i) y2= b0+b1x1+b2x2+b3x3+b4x4+ µ ....………………….… (ii) y3= b0+b1x1+b2x2+b3x3+b4x4+ µ ………………….…… (iii) where y1= organizational performance y2= job satisfaction 334 a. t. naifu, u. c. alogwuja, d. j. enimola y3= employee turnover x1= employee age x2= religion x3= education background x4= job experience b0= intercept b1 to b8= coefficient to be estimated and x1 to x2 are the independent variables. 4. results and discussion table 1 socio-demographic variables of the respondents responses frequency percentage mean/mode employees owner/managers total age 15-25 45 6 51 18.55 26-36 75 22 97 35.27 37-47 20 17 37 13.45 38.84 48-58 46 14 60 21.82 59 & above 30 30 10.91 total 216 59 275 100 gender male 85 33 118 42.91 female 131 26 157 57.09 157 total 216 59 275 100 education fslc 15 15 5.45 ssce 47 13 60 21.82 nce/ond 86 28 114 41.45 114 hnd/bsc 52 8 60 21.82 msc & above 16 10 26 9.45 total 216 59 275 100 religion christianity 68 24 92 33.45 islamic 121 35 156 56.73 traditional 27 27 9.82 total 216 59 275 100 experience 0-5 98 17 115 41.82 7.06 6-10 57 28 85 30.91 11-15 61 14 75 27.27 16-20 total 216 59 275 100 note: fslc first school leaving certificate; sscesenior school certificate; ncenational certificate; hndhigher national diploma; bscbachelor of science certificate; mscmaster of science source: field survey, 2020 table 1 shows the socio-demographic variables of respondents. 51 respondents (18.55%) are within the age bracket of 15 25; 97 respondents (35.27%) are within the exploring the diversity within the workplace of small firms in kogi state, nigeria 335 age bracket of 26 36; 37 respondents (13.45%) are within the age bracket of 37 47; 60 respondents (21.82%) are within the age bracket of 48 58; and 30 respondents (10.91%) are within the age bracket of 59 & above. the mean score indicates that majority of the respondents are 39 years old. from the table ii, 118 respondents (42.91%) were male; and 157 respondents (57.09%) were female. the mode recorded for gender (157) implies that majority of the respondents is female. the table shows that 15 respondents (5.45%) reported that they hold fslc; 60 respondents (21.82%) hold ssce; 114 respondents (41.45%) hold nce (or its equivalent); 60 respondents (21.82%) hold hnd/ bsc; and 26 respondents (9.45%) hold msc (or its equivalent) and above. the mode (114) shows that majority of the respondents have nce (or its equivalent). the table shows that 92 respondents (33.45%) are christians; 156 respondents (56.73%) are muslims; and 27 respondents (9.82%) are traditional worshippers. the mode (156) shows that majority of the respondents are muslims. the results (in table 1) indicate that 115 respondents (41.82%) have the ‘experience’ of about 5 years; 85 respondents (30.91%) have the ‘experience’ of 6 10 years; 75 respondents (27.27%) have the ‘experience’ of 11 15 years; and no respondent has the ‘experience’ of 31 40 years. the mean score (7.06) indicates that majority of the respondents have the ‘experience’ of about 7 years. table 2 descriptive analysis of workforce diversity factors variable factors workforce diversity frequency and percentage sa(%) a(%) ud(%) d(%) sd(%) mean score cut-off point decision age 104 (48.1) 66 (30.6) 12 (5.6) 12 (5.6) 22 (10.2) 4.009 3.050 accepted religion 131 (60.6) 39 (18.1) 12 (5.6) 16 (7.4) 18 (8.3) 4.153 3.050 accepted educational background 79 (36.6) 86 (39.8) 17 (7.9) 4 (1.9) 30 (13.9) 3.833 3.050 accepted job experience 110 (50.9) 69 (31.9) 25 (11.6) 12 (5.6) 4.287 3.050 accepted gender 58 (26.9) 100 (46.3) 44 (20.4) 8 (3.7) 6 (2.8) 3.907 3.050 accepted culture 29 (13.4) 12 (5.6) 46 (21.3) 80 (37.0) 49 (22.7) 2.500 3.050 rejected physical ability 7(3.2) 18 (8.3) 12 (5.6) 66 (30.6) 113 (52.3) 1.796 3.050 rejected source: field survey, 2020 table 2 shows workforce diversity factors among small firms in the study area. the factors which appear to be valid and reliable in association with diversity at the surveyed small firms in kogi state are age, religion, educational background, job experience, gender, culture and physical ability. the mean score of age is 4.009; religion is 4.153; educational background is 3.833; job experience is 4.287; and gender is 3.907 as against the cut-off point of 3.050. since the mean scores of these variables are greater than the cut-off point, they are accepted as prime factors of workforce diversity in the study area. in terms of educational background, khoreva (2011) found that “the individuals who are more educated as judge against to who are less educated make out more gender difference” (p.234). it could be observed that variables such as age, religion and job experience seem to be the most severe workforce diversity factors. the table also shows that the mean score of culture (2.500) and physical ability of employees (1.796) do not enter as viable factors of 336 a. t. naifu, u. c. alogwuja, d. j. enimola workforce diversity in the study area. though, these two factors may be present among the selected small firms, but they may be too insignificant to be noticed. table 3 showing anova for gender difference on the outcomes of small firms in kogi state, nigeria outcomes female male f-value f-crit concern for organizational performance m sd 2.1525 0.8054 1.5763 0.6216 7.334 1.5458 observed value for job and satisfaction m sd 2.2034 0.8047 2.2542 0.7094 18.495 1.5458 contribute effectively to output level through initiative m sd 2.0526 0.8540 2.3509 0.6121 9.505 1.5518 talent for firm’s competitiveness and advantage m sd 2.0678 0.8276 2.0339 0.7420 17.068 1.5458 good customer relation and customer satisfaction concern m sd 2.2034 0.8259 2.1525 0.6647 7.781 1.5458 source: field survey, 2020 firstly, table 3 shows the difference between female and male in terms of concern for organizational performance. females have more concern for organizational performance (2.1525) compared to their male counterpart (1.5763). the standard deviation of concern for organizational performance for female (0.8054) shows more divergence as compared to the male (0.6216). the f-statistics value of 7.3341 appears to be greater than the fcritical value (1.5458). this shows a clear difference in terms of concern for organizational performance between female and male employees of small firms in the study area. it is thus necessary to deduce that in many small firms in kogi state, the female employees strive to ensure organizational performance (profitability) more than the male employees. in terms of gender differences affecting organizational performance, this finding refutes the assertion of kalleberg & leicht (1991) and weiliang et al. (2011) that “the performance criteria for success are expected to be higher for men than for women”. secondly, the table shows that males have more value for their jobs and are satisfied with it (2.2542) compared to their female counterpart (2.2034). though, the observed difference seems to be very little based on the compared mean scores. the standard deviation of observed job value and satisfaction among female (0.8047) shows more divergence as compared to the male (0.7094). the f-statistics value of 18.4951 appears to be greater than the f-critical value (1.5458). this result shows that male employees have more value for their jobs and are more satisfied with the job than the female counterpart of the small firms in the study area. thirdly, the table shows that males contribute more effectively to output level through their initiative (2.3509) compared to their female counterpart (2.0526). the standard deviation of female (0.8540) shows more divergence as compared to the male (0.6121). the f-statistics value of 9.5050 is greater than the f-critical value (1.5458). this result shows that male employees contribute more effectively to output level through their initiative than the female counterpart of the small firms in kogi state. fourthly, the table shows that female possess more talent for firm’s competitiveness and advantage (2.0678) compared to their male counterpart (2.0339). the standard deviation of female (0.8276) shows more divergence as compared to the male (0.7420). exploring the diversity within the workplace of small firms in kogi state, nigeria 337 the f-statistics value of 17.0684 is greater than the f-critical value (1.5458). this result shows that female employees possess more talent for firm’s competitiveness and advantage than the male counterpart of the small firms in kogi state. fifthly, the table shows that females have good customer relations and are more customer-satisfaction concerned (2.2034) compared to their male counterpart (2.1525). the standard deviation of female (0.8259) shows more divergence as compared to the male (0.6647). the f-statistics value of 7.7808 is greater than the f-critical value (1.5458). this result shows that female employees have good customer relations and are more customer-satisfaction concerned than the male counterpart of the small firms in kogi state. table 4 summary of multiple regression analysis of potential covariates with op, js and et covariate coefficients () standard error ()) value of t-statistics value of r2 value of f-statistics op js et op js et op js et op js et op js et ag .476 .579 -.084 .205 .144 .341 2.322 4.029 -.245 .642 .844 .020 5.390 16.229* .060 rg .897 .552 .099 .248 .519 .574 3.623 1.063 .172 .814 .274 .010 13.126* 1.130 .030 eb .967 .907 -.079 .132 .310 .575 7.304 2.926 -.137 .947 .741 .006 53.342** 8.559 .019 je .769 .566 -.215 .100 .355 .440 7.692 1.593 -.488 .952 .458 .074 59.164** 2.539 .238 note: *significant at the .05 level; **significant at the .01 level; ag – age; rg – religion; eb – educational background; je – job experience; op – organizational performance; js – job satisfaction; jp – job performance; etemployee turnover the result (table 4) shows that 84.4% of the variation in job satisfaction is explained by age. the presence of 15.6% unexplained variation suggests that there are other predictor variables which affect variations in job satisfaction among small firms in kogi state. the co-efficient for age (0.579, p < 0.05) indicates ‘positive relationship’ with job satisfaction. the result shows that increase in the age of employees will account for 57.9% increase in job satisfaction. this aligns with the finding of rehman et al. (2015) which found that one year more age leads to increase in job satisfaction. this implies that employees are prompted to be more satisfied with their jobs as they become of age in kogi state. this could be as a result of age limit (27 years) placed on job seekers in nigeria; this explains the minimal employee turnover rate. however, the r2-value of 0.844 shows a strong predictor. thus, age has significant effect on job satisfaction of employees among small firms in kogi state. the result (table 4) reveals that 81.4% of the variation in the performance of small firms in kogi state is explained by religious belief of employees. this may be from the fact that one religion’s doctrine places limits on the level of female employees’ initiatives and commitment to goal pursuit; and the other widely accepted religion teaches morals that encourages hard work in nigerians’ small firms. the presence of 18.6% unexplained variation suggests that there are other predictor variables affecting the performance of small firms in kogi state, nigeria. the co-efficient for religion (0.897, p < 0.05) shows a positive relationship with organizational performance. this means that additional improvement in religious teachings effort will bring about 89.7% improvements in the performance of small firms in kogi state. however, the r2-value of 0.814 shows a strong predictor. we therefore deduce that the religion of employees has strong significant effect on the performance of small firms in kogi state, nigeria. 338 a. t. naifu, u. c. alogwuja, d. j. enimola the table also shows that 94.7% of the variation in the performance of small firms in kogi state is explained by educational background of employees. the presence of 5.3% unexplained variation suggests that there are other predictor variables affecting the performance of small firms in kogi state. the co-efficient for educational background (0.967, p = 0.01) shows a positive relationship with the performance of small firms in kogi state. this implies that increase in knowledge and skill possessed by employees through learning will lead to 96.7% improvement in the performance of small firms in kogi state. this agrees with the finding of weiliang et al. (2011) that “there is significant positive relationship between education background and performance”. it also agrees with the finding of rehman et al. (2015) that a change in educational status will bring proportional improvement in organization performance. however, the r2-value (0.947) indicates a strong predictor. we therefore deduce that educational background of employees has strong significant effect on the performance of small firms in kogi state. the result (table 4) indicates that 95.2% variation in the performance of small firms in kogi state is explained by job experience of employees. the presence of 4.8% unexplained variation suggests that there are other predictor variables affecting the performance of small firms in kogi state. the co-efficient for job experience (0.769, p = 0.01) shows a positive relationship with the performance of small firms in kogi state. this implies that increase in job experience of employees will lead to 76.9% improvement in the ‘performance of small firms’ in kogi state. this aligns with the finding of rehman et al. (2015) that there is positive relationship between experience and organization performance. this simply means that the more the employees accumulate experience on the job, the bigger the tendency for higher performance of small firms in kogi state. however, the r2-value (0.952) indicates a strong predictor. we therefore deduce that job experience of employees has strong ‘significant effect’ on the performance of small firms in kogi state. 5. conclusion and recommendations some factors were investigated as triggering diversity in small firms in kogi state. factors such as age, religion, educational background, job experience, gender, culture and physical ability are found to be peculiar within small firms in kogi state. age, religion, educational background, job experience and gender are significantly strong factors; while culture and physical ability of employees are found weak and insignificant. these two factors may be present among the workforce of the small firms, but they appear to be too insignificant. meanwhile, empirical investigation proves that age has ‘significant positive effect on job satisfaction of employees’ among small firms in kogi state. other factors such as religion, educational background and job experience of employees only affect the performance of these small firms in kogi state positively. female employees are found significant to organizational success. the female employees of small firms in kogi state are more spirited to pursuing the organizational performance (profitability, competitive advantage, productivity, market share, etc.). this is coupled with more excellent talent they possess; which can enhance their firm’s competitiveness and advantage within the business environment of kogi state. in addition, female employees have good customer relations and are more customer-satisfaction concerned than the male counterpart of the small firms in kogi state. exploring the diversity within the workplace of small firms in kogi state, nigeria 339 though, the male employees appear to have more value for their jobs and are more satisfied with the job than the female counterpart of the small firms in kogi state. the difference is apparently too little. based on observed behaviour of employees in organizations in nigeria, the economic situation of a particular period stimulates the job satisfaction of male employees. it is very much apparent that the female employees’ turnover rate is low; and this is a pointer of job satisfaction. however, the result stipulates that male employees contribute more effectively to output level through their initiative than the female counterpart of the small firms in kogi state. this may not have connection with the job value or job satisfaction of employees; as nigerian women have long consented and maintained the fact that they are weaker virtue. in a nutshell, gender difference, if strategically managed, may influence organizational outcome positively. therefore, the study recommends that: i. owner-managers of small firms should take cognizance of age as a significant workforce diversity factor that affects job satisfaction of employees. this is because, the older an employee becomes on the job the more he/she is satisfied with the job in kogi state. ii. owner-managers of small firms should strategically manage workforce diversity factors such as religion, educational background and job experience of employees; as they affect the performance of small firms in kogi state. proper management of these factors will enhance positive performance of small firms in kogi state. iii. owner-managers should strategically manage gender difference in their firms to enhance organizational performance, job satisfaction, productivity, competitive advantage and customers’ satisfaction. references andrade, s. 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poslom, produktivnost, konkurentsku prednost i zadovoljstvo mušterija. studija zaključuje da starost ima značajan pozitivni uticaj na zadovoljstvo poslom, a drugi faktori kao što su religija, obrazovni profil i radno iskustvo samo utiču pozitivno na poslovanje malih preduzeća u državi kogi . preporuka je stoga da vlasnici-menadžeri malih preduzeća uzmu u obzir starost zaposlenih jer ona utilče na zadovoljstvo poslom, i treba strateški da upravljaju faktorima kao što su religija, obrazovni profil i radno iskustvo jer oni utiču na učinak. ključne reči: diverzitet, zadovoljstvo poslom, organizacioni ishodi, fluktuacija zaposlenih, organizaciona kultura facta universitatis series: economics and organization vol. 17, no 3, 2020, pp. 261 273 https://doi.org/10.22190/fueo200407019d © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper population attitudes towards committing fraud in serbian companies1 udc 334.7:343.72(497.11) dragomir dimitrijević1, dragan cvetković2, aleksandar čudan3 1university of kragujevac, faculty of economics, republic of serbia 2belgrade police directorate, criminal police directorate, republic of serbia 3university of criminal investigation and police studies, republic of serbia abstract. fraud in companies, regardless of its scope and shape, creates some loss not only for the company, but very often for the wider community. moreover, no company in the world is immune to fraud, be it small or large, in one country or another, at any level of economic and social development. practical experience has shown that fraud, as well as damage it causes, is inevitable. for these reasons, preventing and detecting all forms of fraud in companies’ operations is very important. to prevent fraud, companies need to understand what motivates people to manipulate and make financial loss. theorists cite a number of factors that motivate fraud perpetrators to commit manipulation, but all agree that, to commit fraud, three things need to be matched: motivation, opportunity and rationalization. for this reason, the research subject in this paper is a detailed analysis of all the factors that motivate and create opportunities for people of serbia to commit fraud in companies, as well as the most common excuses they use to justify their manipulations. we surveyed 306 respondents to analyze their motives for possible fraud, as well as their attitude on the number and forms of fraud in the business operations of serbian companies. key words: motive, fraud, rationalization, opportunity, republic of serbia jel classification: m41, m49 received april 07, 2020 / revised june 03, 2020 / accepted june 22, 2020 corresponding author: dragomir dimitrijević university of kragujevac, faculty of economics, liceja kneževnine srbije 3, 34000 kragujevac, serbia e-mail: dimitrijevicd@kg.ac.rs 262 d. dimitrijević, d. cvetković, a. čudan introduction creating business conditions that prevent any form of fraud is a practice in the realm of utopia. simply, no company is immune to fraud. it is possible to create an environment with satisfactory working conditions for employees and thus reduce the possibility of fraud, but fraud occurs even in such companies. the question is why fraud happens even in companies offering excellent working conditions, excellent salaries, and opportunities for promotion. the answer lies in the psychology of fraud perpetrators, so in order to prevent fraud successfully, one must look behind individuals’ or groups’ motives to manipulate. research has shown that the desire to commit fraud always hides the motive to meet one’s personal goal, the desire for extra money, or simply the need to prove oneself. that is why the objective of this paper is to investigate what motivates citizens of serbia to commit fraud in companies. 1. frauds in companies fraud in companies and daily lives of people alike is nothing new. ever since man realized that fraud can be a useful tool for achieving personal goals, fraud has become a reality. to understand fraud, one first needs a definition of fraud. broadly speaking, fraud can be any crime using primarily deception for gain (wells, 2004, p. 4). there is no precise legal definition of fraud. this term is used to describe acts such as deception, bribery, forgery, extortion, corruption, theft, plotting, embezzlement, misappropriation, giving false information, concealing material facts. fraud is a deliberate deception done for the purpose of accomplishing a specific goal, or in order to harm other people (stančić, dimitrijević and stančić, 2013, p. 1884). fraud always hides a motive of an individual or several people. if the company is perpetrating fraud, then it is expected that the company itself will achieve some gain (rise in stock price, more favorable loans, attracting investors, etc.), as well as persons who enabled the company to achieve it (rise in remuneration, bonuses, shares, benefits, etc.) (slović, 2016, p. 93). in order to understand the purpose and significance of fraud, it is first necessary to distinguish between fraud and error. although the consequences are the same, i.e. disclosure of incorrect financial information, there is a significant difference between errors and fraud. fraud, as opposed to error, is characterized by a conscious intention to accomplish some specific purpose and to manipulate. fraud is typically characterized by several essential elements: misrepresentation of facts relevant to business decisions; individual’s awareness that the information presented is false; person receiving information as reliable and relevant for business decision-making and the occurrence of damage as a consequence of all of the foregoing (škarić-jovanović, 2009, p. 25). there are different criteria for classification of fraud, such as those related to perpetrators and victims (criminal acts of employees, criminal acts of management, investment fraud, seller fraud, customer fraud and other fraud), criteria under the criminal law, criteria related to accounting cycles (sales and billing cycles, purchase and payment cycle, payroll and staffing cycles, inventory and storage cycles, and capital acquisition cycles) and those arising from the manner of committing fraud (petković, 2010, pp. 16-24). nevertheless, fraud is most commonly classified into three groups: corruption, asset misappropriation and financial statements fraud. the results of a study by the association of certified fraud examiners (acfe), conducted every two years for companies doing business in the us, indicate that the most common fraud type is asset misappropriation, and that the median loss in the case population attitudes towards committing fraud in serbian companies 263 of this type of fraud is the lowest. on the other hand, financial statements frauds are the rarest type of fraud, but are the most dominant in terms of the average value of individual damage. the above facts are presented in table 1 and cover the previous three surveys during the period 2014-2018. table 1 classification, percent of cases and median loss type of fruad percent of cases median loss 2014. 2016. 2018. 2014. 2016. 2018. asset misappropriation 85.4% 83.5% 89% 130.000$ 125.000$ 114.000$ corruption 36,8% 35,4% 38% 200.000$ 200.000$ 250.000$ financial statements fraud 9,0% 9,6% 10% 1 mil.$ 975.000$ 800.000$ source: https://www.acfe.com/report-to-the-nations/2018/default.aspx financial statements fraud includes false balance sheets, income statements and cashflow statements of companies (dimitrijević, 2015, p. 137). they have existed since the emergence of financial reporting, because they bring certain short-term gain to managers or owners. acfe defines false financial reporting as “the intentional, deliberate, misstatement or omission of material facts, or accounting data which is misleading and, when considered with all the information made available, would cause the reader to change or alter his or her judgment or decision” (zabihollah, 2002, p. 2). the most common types of damage that financial statement fraud involves include: “manipulating, falsifying, or altering accounting records or supporting documents used in the preparation of financial statements; inaccurate (fraudulent) misrepresentation or intentional omission of significant items or transactions from financial statements and intentional misapplication of accounting rules” (stefanović, 2000, p. 4). corruption can be defined as an act of offering, promising, giving, directly or indirectly extorting, soliciting, accepting and receiving gifts and other benefits related to the performance of duties by persons employed in the private or public sector, when such action constitutes a violation of their obligations arising from their position for the purpose of obtaining illicit property gain for themselves or others (petković, 2010, p. 124). asset misappropriation is generally carried out to alienate company's resources for the personal needs of the perpetrators. 2. motives to commit fraud the question is what motivates someone to choose the dishonest way to meet their goals. the motives for fraud depend on perpetrators’ goals. an individual's motive for fraud is usually based on personal goals (bonuses, job retention, promotion, etc.) or company goals (concealing losses, avoiding bankruptcy, obtaining credit, and the like). donald cressey, a sociologist, in his 1950s study gives the best answer to the question of what motivates fraudsters. he surveys some 200 people convicted of fraud. one of the basic conclusions he draws is that each fraud is characterized by three common factors: pressure (sometimes defined as motivation), rationalization (personal ethics), and opportunity to commit fraud (singleton, t. et al., 2010, p. 18). the result of this study is most commonly shown by the well-known “fraud triangle” in figure 1. https://www.acfe.com/report-to-the-nations/2018/default.aspx 264 d. dimitrijević, d. cvetković, a. čudan pressure opportunity rationalization fraud fig. 1 fraud triangle source: coenen, t. (2008), essentials of corporate fraud, john wiley & sons, new york, p.10. pressure (motivation) usually arises as a consequence of individuals' lifestyles. fraudsters’ life events create the need for extra money or make them prove themselves, which leads to fraud. every fraud perpetrator faces some kind of pressure. pressure can be divided into four groups: 1. financial pressure – practice shows that for most frauds, the pressure on the perpetrator is of financial nature. these forms of pressure usually occur suddenly in the lives of fraud perpetrators and most often as a consequence of their lifestyle. the list of possible types of financial pressure is not short and many factors are correlated (individual greed, desire for a better living standard, personal debts, poor creditworthiness, etc.); 2. vices – this form of pressure is the worst kind of pressure because it is a consequence of the fraud perpetrators’ addiction to substance abuse, gambling, alcohol etc. this form of pressure is often associated with financial pressure. in other words, financial pressure is usually a consequence of this addiction. this form of pressure causes individuals to behave very irrationally and recklessly, so that fraud caused by vices is much easier to spot and detect (dimitrijević, 2018, p. 8); 3. job pressure – with this type of pressure, fraudsters face a situation where they feel they have been unfairly treated at work (others have got undeserved promotion, a person is underpaid for their work, and the like). in such situations, perpetrators cause financial loss to the company. such forms of fraud are often difficult to detect, as they are very thoroughly designed and implemented; 4. other forms of pressure – in some circumstances, fraud can also be triggered by other forms of pressure, such as the challenge or desire to defeat internal control systems or to show one’s hacking skills in mastering computer technologies by breaking through legal entities’, government agencies’ and banks’ security systems (petković, 2010, pp. 26-27). the company management is most responsible for creating fraud opportunities. in other words, an environment without an adequate control system, where workers and their work and commitment are not sufficiently appreciated, creates exceptional opportunities for manipulation. perpetrators of long-planned frauds are always waiting for the right moment to realize this opportunity, so it is difficult to detect and prove such fraud. the most important factor that creates opportunities is the lack of or poor implementation of internal controls. practice has shown that having an effective internal control system is one of the most important steps a business can take in preventing and detecting fraud. from an audit standpoint, internal control consists of “policies and procedures that management establishes to ensure that specific client objectives are fulfilled” (andrić et al., 2004, p. 226). the mere existence of an internal control system is not a guarantee that fraud will not occur. if this population attitudes towards committing fraud in serbian companies 265 system is not properly implemented, there is always a certain risk that fraud will occur, especially if management does not attach sufficient importance to internal control. every fraud perpetrator has rationalization for his or her actions. these justifications can be very different, depending on what motives lay behind the perpetrator’s fraud and manipulation. a number of studies indicate that as many as 85% of perpetrators have not previously committed a crime, so most of them have different justifications. some of them justify themselves with a bad financial situation, some with pressure at work, but most do not see any bad intentions in committing fraud because they did not hurt anyone or wanted to return money. others, however, believe they deserve a raise or a better job, so they simply take matters into their own hands to achieve more equitable relationship. perpetrators cite several common justifications (coenen, 2008, p. 10): ▪ “the company owes me money; ▪ i’m just borrowing money – i’ll pay it back; ▪ no one will be hurt; ▪ i deserve more; ▪ it was done in good faith; ▪ we will arrange the papers as soon as we get out of financial difficulties, and ▪ something must be sacrificed – either my honesty or my reputation.” significantly changed circumstances in financial operations, internal control system reporting and changes in behavior and character of people in new circumstances brought the need for changes or modifications to the “fraud triangle” model, as well as for new models. the base model modifications range within three elements (a triangle), with changes initiated by different approaches and placing emphasis primarily on the act of fraud itself. this modification is based on the view that it is not sufficient to show conditions and circumstances in which fraud takes place, but that the model must also show actions that the perpetrator must take to commit fraud. this is the basis of the fraud element triangle model. theoretical research has shown that moving in a triangle is no longer sufficient to explain fraud, nor to act to prevent fraud. new standpoints result in the conception and proposals of new models. the diamond model introduces a fourth element, the ability to commit fraud. conditions to commit fraud (fraud triangle) are not enough, as there is also the perpetrator's ability to commit fraud. this element is in some ways considered a crucial element because without the ability to commit fraud, despite the existence of three elements of the base model, the fraud may not be likely to be committed. this model also has certain modifications in theoretical proposals. further enhancement of “geometric” models leads to a pentagon fraud model, which highlights the fifth element. in addition to the three elements of the base model, this model contains two more elements. with this model, the conditions under which fraud is committed are complemented by the characteristics of the fraud perpetrators. these are competence or the power of knowledge to commit fraud by an employee and arrogance or lack of conscience. a step further with respect to the base model and the diamond model highlights an individual’s character. however, this model has also been modified so that external regulatory influence emerges as the fifth element. this element makes a transition from purely personal characteristics to external influence that has nothing to do with an individual’s characteristics (e.g. audit). in addition to “geometric” models, the theory also emphasizes models created by overcoming the base model (fraud triangle), which underline other fraud elements that are not necessarily the conditions under which fraud can be not committed, nor bear the personal stamp of the perpetrator’s character. these are “the fraud scale model, m.i.c.e. model and disposition based fraud model” (vukadinović, 2018, pp. 7-8). 266 d. dimitrijević, d. cvetković, a. čudan 3. research results a survey on what motivates citizens of the republic of serbia to commit fraud includes 306 respondents. the targeted population was men and women aged 25 to 55 from the territory of the republic of serbia. the survey response rate was 51% (306 of 600). the time period of data collection was december 2019. the electronically-distributed survey includes 15 questions, of which the first 4 are questions defining respondents’ gender, age, and employment. the next 7 questions deal with the “fraud triangle” elements – motives (pressure), opportunities and rationalization, i.e. the respondents’ opinion on the most common forms of the above elements. the last 4 questions consider the respondents’ opinion on the most common forms of fraud in the republic of serbia and the activities where they occur. if one looks at the respondents’ gender structure, it can be noticed that women (77.8%) are more dominant than men, who make up 22.2% of the total number of respondents. also, considering the respondents’ age, respondents aged 25-35 (67.8%) and respondents aged 35-45 (28.9%) dominate the sample. the results of these questions are shown in table 2. on the other hand, regarding the respondents’ employment status, the results show that the majority of respondents are employed (74.5%). regarding the activities in which the respondents are employed, the structure is very heterogeneous – 30% work in manufacturing companies, 24.2% in public administration, 23.3% in the financial sector and 22.5% in trade. the results of these questions can be seen in table 3. table 2 respondents’ gender and age respondents’ gender respondents’ age women – 77.8% 25-35 – 67.8% men – 22.2 % 35-45 – 28.9% 45-55 – 2.6% 55 and more – 0.7% source: author's calculation table 3 respondents’ employment respondents’ employment respondents’ activities employed – 74.5% manufacturing companies 30% student – 16.7% public administration – 24.2% unemployed – 8.8% financial sector – 23.3% trade – 22.5% source: author's calculation the results show that 62% of the respondents have never witnessed any form of fraud (corruption, money laundering, business fraud, tax evasion...). however, 38% of respondents include a very large number of people who have witnessed fraud and wanted to confirm it. it is also true that many people in serbia do not want to say that they have witnessed crime in fear for their safety. population attitudes towards committing fraud in serbian companies 267 chart 1 have you ever witnessed fraud? source: author's calculation on the other hand, when asked if they would commit fraud if in a position to do so, 75.7% of respondents said no, while 24.3% said yes. when looking at the factors that would prevent respondents from committing possible fraud, the majority of respondents (of those who answered this question) state their conscience (24 respondents) and morality (23 respondents). also, 13 respondents cite their family upbringing and reputation as the reason why they would not commit fraud; other reasons include ethical principles (5 respondents), fear of being fired from work (5 respondents) and personal honesty (2 respondents). the answers to this question are shown in chart 2. chart 2 reasons not to commit fraud source: author's calculation the following four questions concern the elements of the donald cressey’s “fraud triangle” (pressure – motivation, opportunity and rationalization). when asked, “in your opinion, what would be the biggest pressure that would cause someone to commit fraud?”, the majority of respondents point to financial pressure (51.8%). 29.4% of respondents opt for vice as a type of pressure, 8.6% for job pressure, and 10.2% for other types of pressure (desire to prove themselves, beat the control system). it is interesting that, regarding the next question (see chart 3), “which of the above forms of pressure would force you to commit fraud?” most respondents also cite financial pressure as the most common type of pressure that would make them commit fraud (55.3%), while with regard to other factors, job pressure is now in the second place (18.7%), while vices are 268 d. dimitrijević, d. cvetković, a. čudan now in last place (9.9%). this is interesting because with the previous question regarding the biggest pressure that would cause someone to commit fraud vices are in the second place with almost 30%, and when they talk about themselves vices are in the last place. chart 3 pressure that would force you to commit fraud source: author's calculation the tenth question is about opportunities for business fraud. survey results indicate that over 50 percent of respondents (54%) point to the lack of a social value system as the main reason for fraud. the lack of internal control is in the second place with 25.5% of the respondents' answers, other reasons in the third with 10.9%, and lack of external control in the last fourth place (9.6%). this is interesting because employees, students and the unemployed agree on the most important factor (lack of value system), while employees do not think that internal and external controls create opportunities for fraud. it is true that 25% of employees think that lack of internal control is a factor that enables business fraud, but only 11% see lack of external control as a cause of possible fraud. this may be interpreted differently. it can be concluded that employees believe that the current form of external control is sufficient, or that that it should not even exist in its current form. much more important is the issue of internal control, since in the republic of serbia only public companies and financial institutions are required by law to have this type of control. worldwide practice has shown that the presence of internal controls largely prevents and detects business fraud. companies in the republic of serbia do not have this type of control, and those that have to enforce it by law do not attach much importance to it in the fraud prevention process. internal control in companies operating in the republic of serbia is mostly used to analyze the implementation of internal acts and regulations, rather than to establish a system that will prevent possible manipulation and allow employees to report possible fraud. this is precisely the factor that companies need to work on in the future if they want to prevent and detect fraud on time. it should also be noted that it is not enough to just establish an internal control system in the company, but it is extremely important to successfully implement it in all parts of the company. the results of this question are shown in chart 4. population attitudes towards committing fraud in serbian companies 269 chart 4 opportunities for fraud source: author's calculation in the previous questions, the respondents had quite similar answers and some answers had the majority when viewed in aggregate and when viewed individually by different criteria (men, women, employees, students, unemployed and the like). however, with the eleventh question that refers to the justification for fraud, the respondents' answers are very heterogeneous. when asked “which of the following factors would fraud perpetrators most use to rationalize (justify) fraud?”, almost equal number of respondents said: “i deserve more” (20.5%) and “no one will be hurt” (20.2%). 15.6% of the respondents most often said “we will arrange the papers as soon as we get out of financial difficulties”, 13.6% said “i only borrow money – i will pay it back” as the most optimal justification for the perpetrator, while for other justifications the results are as follows: “the firm owes me money” (12.6%), “it was done in good faith” (11.9%) and “something must be sacrificed – either my honesty or my reputation” (5.6%). these results can be interpreted as dividing respondents between the justifications that result from fulfilling the personal fraudsters goals (“i deserve more” and “the firm owes me money”), which together have over 30% of responses and justifications indicating that the perpetrators do not see any evil in what they did and believe they did not damage the company (over 60% of those surveyed gave these answers). the practice has shown similar results, i.e. most of those who have committed business fraud in companies around the world feel that they have not harmed anyone in their actions and that what they have done is the result of a need to fulfill their personal goals. the results of this question are given in chart 5. chart 5 justifications for fraud source: author's calculation 270 d. dimitrijević, d. cvetković, a. čudan after considering the elements of the “fraud triangle”, the research has placed emphasis on the respondents’ opinion of the most common form of fraud in the republic of serbia and the activity in which fraud is most common. the twelfth question in the survey looks at the most common form of business fraud, and the results indicate that citizens label corruption as the most dominant form of manipulation in the republic of serbia (57.8%), followed by money laundering with 17.3%, tax evasion with 14.7%, while financial statements fraud, with 8.2%, and asset misappropriation (2%) are forms of fraud that citizens believe do not occur so often in companies. these results are a bit different from the research results conducted by the association of certified fraud examiners (acfe) over the past ten years around the world, where asset misappropriation is the most common form of fraud, prior to corruption and false financial reporting. the results of this poll indicate that citizens of the republic of serbia believe that corruption is deeply rooted in the systemic values of society and that a wide range of public and private institutions must fight together in order to reduce this form of fraud to a great extent, if not eradicate it. also, the survey results indicate that citizens do not consider financial statements fraud to be dominant, but it should be borne in mind that in practice this form of manipulation not only creates the greatest financial losses but is also the most difficult to detect and prevent. because many citizens are unaware of the dangers of this type of fraud, it is necessary to educate citizens more about the harms of financial statements fraud to the wider community directly or indirectly. on the other hand, in answering the next question, the persons interviewed indicated the activity which, in their opinion, has the most frequent business frauds. the respondents believe that public administration is characterized by common manipulation with 69.8%, followed by the financial sector with 13.8%, trade enterprises with 10.5% and last but not least manufacturing companies with 5.9%. since, in the opinion of the respondents, the most prevalent frauds occur in public administration, the next question addressed the public administration sector subject to fraud. the citizens believe that public companies are most sensitive to manipulation (45.9%). this is followed by healthcare with 25.9%, police with 18%, public administration with 6.6%, education with 3% and the military with 0.7%. this question did not emphasize the form of fraud, but since the respondents indicated in the previous question that they considered corruption to be the most dominant form of fraud, it is assumed that they also believed corruption to be present in these sectors of public administration. chart 6 indicates the opinion on the structure of fraud dominance, while table 4 indicates the activities and sectors of public administration in which fraud occurs. chart 6 most dominant forms of fraud source: author's calculation population attitudes towards committing fraud in serbian companies 271 table 4 activities and sectors of public administration where fraud is present activities sectors of public administration public administration – 69.8% public companies – 45.9% financial sector – 13.8% healthcare – 25.9% trade – 10.5% police – 18% manufacturing companies – 2% public administration – 6.6% education – 3% military – 0.7% source: author's calculation the last question in the survey deals with techniques for preventing business fraud. survey results indicate that respondents believe that penal policy (54.6%) is the most effective tool in this fight. on the other hand, specific measures for fraud prevention (video surveillance, constant surveillance, sudden controls, more detailed employee checking in employment, etc.) with 38.3% and internal control with 36.3% share the second and third place in importance for fraud prevention. a very similar number of respondents opted for measures of “higher fines for petty offenses” (26.1%) and “creating fair business conditions” (23.5%), while educating employees about the harmfulness of fraud and ethical principles of behavior is in the last place with only 13.1%. such answers indicate the respondents’ opinion that introducing a stricter penal policy is the best way to prevent fraud and this can be linked to previous results, especially with the questions that considered the forms of fraud where citizens pointed to corruption as the most prevalent for of fraud. this all points to the general attitude that only criminal policy can stop this kind of corruption, or as respondents said, “hitting the wallet”. therefore, it is considered that if you punish someone adequately, it also shows to other persons who are considering the possible fraud that they will not go well. what is a little worrying is that only 13.1% of citizens think that education on fraud and ethical behavior is a good tool for combating fraud. this is dangerous, because practice has shown that it is precisely through these trainings of company employees and familiarization with possible penalties that many frauds can be prevented. chart 7 shows the structure of fraud prevention measures. chart 7 fraud prevention measures source: author's calculation 272 d. dimitrijević, d. cvetković, a. čudan conclusion business fraud causes losses not only to companies where they arise, but directly or indirectly, such losses are transferred at some point to the wider community. whether fraud is “petty” or creates millions of financial losses, it always has a detrimental effect on the economy. for these reasons, it is necessary to detect and prevent business fraud in a timely manner. for this process to be successful, one of the essential elements is to understand the motives that encourage fraud perpetrators. understanding the motives for committing fraud requires knowledge of the psychology of individuals' behavior. for these reasons, donald cressey, a sociologist, conducted a survey in the 1950s by interviewing some 200 people who were convicted of fraud. one of the basic conclusions he draws is that each fraud is characterized by three common factors: pressure (sometimes defined as motivation), rationalization (personal ethics), and opportunity for fraud. therefore, the main research objective in this paper was to understand the motives of the citizens of the republic of serbia that would encourage them to commit possible fraud in business. the survey was conducted by interviewing 306 respondents through surveys distributed electronically. survey results indicate that the majority of citizens have never witnessed business fraud (61.8% of those surveyed) or participated in any type of fraud (75.7%). on the other hand, more than 50% of those surveyed believe that financial pressure is the most common pressure factor that would encourage them to commit fraud (55.3%). the absence of a value system in society is the most important factor that creates opportunities for fraud (54%), while 25.5% of respondents consider lack of internal control as an important factor that creates opportunities for manipulation. the previous two results speak to the respondents' opinion about the two elements of the "fraud triangle" (pressure and opportunity), while regarding the third element (rationalization) the citizens believe that two justifications (“i deserve more” and “no one will be hurt”) are most used to mitigate the negative elements of fraud. when it comes to the forms of fraud most prevalent in the republic of serbia, citizens believe that corruption is by far the most prevalent (57.8% of those polled), and its highest level occurs in public administration (69.8% of respondents). considering the activities of public administration, the respondents identified public enterprises (45.9%) and healthcare (25.9%) as the areas where corruption is most prevalent. lastly, the results of the survey indicate that the establishment of an adequate penal policy is the best means of preventing fraud, in the opinion of as many as 54.6% of respondents. all these results indicate that although the majority of respondents has never taken part directly in any type of fraud, they are still aware that fraud exists (primarily corruption). respondents believe that public administration, mostly public companies, are most sensitive to manipulation and that close cooperation between state and private control institutions is needed in order to systematically solve the problem of fraud in serbian companies. this is especially evident in answers on opportunities for fraud where the absence of a value system in society is potentiated as one of the biggest problems that allows manipulation. population attitudes towards committing fraud in serbian companies 273 references andrić, m., krsmanović, b., & jakšić, d. (2004). revizija – teorija i praksa [auditing – theory and practice]. subotica: ekonomski fakultet. coenen, t. (2008). essentials of corporate fraud. new york: john wiley & sons. dimitrijević, d. (2015). otkrivanje i sprečavanje manipulacija u bilansu stanja i izveštaju o novčanim tokovima [detection and prevention of manipulations in the balance sheet and cash flow statement]. ekonomski horizonti, 17(2), 137-153. dimitrijević, d. (2018). forenzičko računovodstvo – instrument otkrivanja i sprečavanja prevara [forensic accounting an instrument for detecting and preventing fraud]. univerzitet u kragujevcu – ekonomski fakultet; petković, a. (2010). forenzička revizija: kriminalne radnje u finansijskim izveštajima [forensic audit: frauds in the financial statements]. novi sad: proleter. slović, j. 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(2009). forenzičko računovodstvo – instrument zaštite interesa računovodstvene javnosti [forensic accounting an instrument for protecting the interests of the accounting public]. in: računovodstvo, revizija i finansije u uslovima globalne krize, banja vrućica: savez računovođa i revizora republike srpske, 11-31. vukadinović, p. (2018). modifikacija trougla prevare – novi modeli [modification of the fraud triangle new models]. revizor, 21(83), 7-19. wells, j. (2004). corporate fraud handbook. new york: john willey&sons. zabihollah, r. (2002). financial statement fraud – prevention and detection. new york: john wiley & sons, inc. https://www.acfe.com/report-to-the-nations/2018/default.aspx stavovi stanovništva o ostvarivanju prevara u kompanijama u republici srbiji prevare u poslovanju kompanija, bez obzira na njihovu veličini i oblik, stvaraju neki oblik gubitka ne samo za kompaniju već vrlo često i u široj društvenoj zajednici. takođe, na prevare nisu imune ni najmanje ni najveće kompanije na svetu, u bilo kojoj zemlji, na svim nivoima privrednog i društvenog razvoja kompanije. iskustva iz prakse su pokazale da prevare, kao i šteta koju izazivaju, su neminovnost. iz tih razloga veoma je bitan proces sprečavanja i otkrivanja svih oblika prevara u poslovanju kompanija. kako bi kompanije mogle sprečiti prevare, potrebno je da se razume šta to motiviše ljude da ostvare manipulaciju i načine finansijski gubitak. mnogi teoretičari navode veliki broj faktora koji mogu da motivišu počinioce prevara na ostvarenje manipulacije, ali se svi slažu da za ostvarenje prevare potrebno je da se poklope tri stvari: motivacija, mogućnosti i opravdanje. iz tih razloga predmet istraživanja u ovom radu je detaljna analiza svih faktora koji motivišu i stvaraju mogućnosti građanima republike srbije da ostvare prevare u poslovanju kompanija, kao i najčešće izgovori koje bi građani koristili kako bi opravdali svoje manipulacije. anketirano je 306 građana sa ciljem da se analiziraju njihovi motivi za moguće ostvarivanje prevara, kao i njihov stav o brojnosti i oblicima prevara u poslovanju kompanija u republici srbiji. ključne reči: motiv, prevara, opravdanje, mogućnost, republika srbija plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 4, 2014, pp. 297 307 the strategic intention of multinational enterprises in corporate social responsibilities in nigeria  udc 334.726(669) ja’afaru garba sule 1 , akeem tunde nafiu 2 , a. a. ameh 1 1 department of business administration, faculty of management sciences, kogi state university, nigeria 2 faculty of management sciences, centre for pre-degree and diploma studies, kogi state university, nigeria abstract. multinational enterprises (mnes) around the globe are integrators and the grace for economic flight. one major helping hand given by multinational enterprises in the provision of capital intensive social amenities and infrastructures is obvious in the area of their social responsibilities. in this vein, the study examined the strategic intention of multinational enterprises in corporate social responsibilities in nigeria. in the quest into the subject matter, this study gathered data and information through primary and secondary sources. the study randomly selected 500 respondents from the population of the study area (nigeria). data were analyzed with likert scaling method and simple percentage method. it was discovered that some mnes have demonstrated a two-aim approach (which implies a win-win) as a strategy to keep their operations going in nigeria, and likely, other developing countries of the world. it was concluded that the rationale behind their commitment to corporate social responsibilities is to establish balance of objectives between the multinational enterprises’ home countries and host countries. the study therefore recommended that mnes and the host countries should maintain two-aim approach, so as to ensure that the objective of one party is not hurt. key words: multinational enterprise, social responsibility, development, strategy, profit repatriation, objectives introduction over the years, the increasing trends in globalization have forced the economies of the world into an integrated whole. the integration of the world economies into one is a received november 15, 2014 / accepted march 25, 2015 corresponding author: akeem tunde nafiu faculty of management sciences, centre for pre-degree and diploma studies, kogi state university, nigeria e-mail: tundenafiu01@gmail.com 298 j. g. sule, a. t. nafiu, a. a. ameh phenomenon aptly called global village (onodugo, 2012). there is consensus among scholars that technological changes and globalization agents are forces that have and will continue to transform the economic and social fabrics of the various nations (chaykowski, 2002). multinational enterprises are products of globalization, and they can be indisputably referred to as essential agents of globalization. the multinational enterprises around the globe are logically viewed as integrators and the grace for economic flight. multinational corporations are usually very large entities having a global presence and reach (kim, 2000). the colossal collection of efforts by a huge number of these giant entities is crucial to the economic headway of developing nations. in line with this, onodugo (2012) posited that the number and activities of these mncs have grown over time as nigeria struggles to develop socio-economically as a nation. in nigeria, one major helping hand given by multinational enterprises in the provision of capital intensive social amenities and infrastructures is obvious in the area of their social responsibilities. these capital intensive social amenities and infrastructures are demands that have been a national phenomenon. so frequently neither government institutions nor companies or communities themselves have been properly equipped to respond to them (culverwell et al, 2003). mnes have often shouldered the responsibilities to complement the government effort in providing some social services and welfare programs in addition to their normal economic contributions. burger (2011) expressed that shell brought reliable lighting and electric power to people and small businesses which have never known it before, creating thousands of jobs, educating and training thousands in the process. research objectives the purpose of this study is to systematically investigate and analyze the commitment of multinational enterprises to corporate social responsibilities as a strategic approach to their operations in nigeria, and also to investigate into the critics’ view about mnes. 1. the concept of multinational enterprise the term multinational enterprise is used in various senses such as multinational corporation, multinational companies, multinational organization and even transnational corporation. according to olumba (2009), multinational organizations are those whose operations transcend national frontiers or national boundaries and multinational enterprise is a firm which owns and controls income generating assets in more than one country and accounts for one-fifth of the worlds output excluding the centrally planned economies. nickels et al (2002) viewed multinational company as an organization that manufactures and markets products in many different countries; it has multinational stock – ownership and multinational management. multinational enterprise, according to ile (2000), is a score of small, medium and large sized firms operating in different countries. ogbozor (2000) also viewed multinational corporation as any company conducting business in two or more countries and has at least 20 percent of the firms’ assets or sales from business in countries other than where the parent company is located. in an attempt to create better understandings, the strategic intention of multinational enterprises in corporate social responsibilities in nigeria 299 okey (2007) expressed that multinational enterprises are often categorized into three broad groups which are: i. horizontally integrated multinational corporations, whose management focuses on the production establishments situated in diverse countries to produce homogenous products. ii. vertically integrated multinational corporations, whose management focuses on the production establishment in particular country/countries to produce products that serve as input/component to their production establishment in other country/countries. iii. diversified multinational corporations, whose management focuses on the production establishment situated in different countries that are neither horizontally nor vertically integrated. 1.1. some multinational enterprises in nigeria s/n multinational enterprises s/n multinational enterprises 1 exxon and parker nig. plc 11 up bottling co. plc 2 g.cappa nig. plc 12 dunlop nig. plc 3 may and baker nig. plc 13 smithkline beecham nig. plc 4 arthur andersen 14 cadbury nig. plc 5 cfao nig. plc 15 john holt nig. plc 6 uac nig. plc 16 mobil nig. plc 7 nestle nig plc 17 pz industries nig. 8 guinness nig. plc 18 unipetrol nig. plc 9 julius berger nig. plc 19 unilever nig. plc 10 cocacola bottling company 20 shell research survey, 2014 2. environmental factors affecting multinational enterprises in nigeria owojor and asaolu (2010) identified some of the critical environmental changes affecting multinational enterprises as: i. political instability; ii. capital requirement to meet economic changes; iii. inadequacy of corporative cost advantage law; iv. unstable exchange rate; and v. unemployment dilemma in getting competent consultants to manage the business. this paper dissects the environmental factors affecting multinational enterprises into internal and external factors. the internal factors include employee bartered work commitment, just-in-time material supply, management team disunity and scandals, industrial actions and so on. the external factors include terrorism, cultural factors, government policies, robbery attacks, talents hunt, economic instability, and so on. these elements are also defined as potential barriers to their further growth (goldstein, 2009). 300 j. g. sule, a. t. nafiu, a. a. ameh 3. the perception of multinational corporation the continuous operation of multinational corporations in nigeria, despite the level of turbulences in the business environment, has drawn the attention of scholars into investigations. some scholars deduced that the roles of multinational corporations are either secretive or selfish, and others upheld that their roles are inimical to economic well being in a logical way. two schools of thought viewed multinational corporations in different ways. one upholds that the relevance of multinational corporations is immeasurable, and the other criticizes its presence particularly in the developing countries. okey (2007) highlighted these two schools as shown below: 3.1. dependency school the dependency school of thought viewed all activities of multinational enterprises in resident countries as being inimical to the general objectives. the school believes that multinational enterprises have always hacked into a nation’s wealth, particularly, in the developing countries. their activities are audible to the deaf and visible to the blind in such areas as: i. destruction of indigenous technology ii. the creation of unemployment iii. exploitation of material and human capital iv. political interference v. the production of some low quality goods in their host country vi. pay discrimination 3.2. paternalistic school this school of thought upheld that the activities of multinational enterprises in their host countries cannot be over-emphasized. the school viewed multinational enterprises as answers to the questions of deficiency or turnaround in their host countries’ economy. the school also believed that multinational enterprises are highly significant to the economic growth and development of the third world nations through the following activities: i. foreign direct investment ii. employment creation iii. creation of new products iv. technology transfer 4. is corporate social responsibility a strategy for multinational enterprises? a strategy states the course of actions to be taken in order to achieve an objective. it is one grand tool for improving business growth. the choice of social responsibility by most indigenous firms is backed by a particular long-term goal. since a strategy is long term oriented, it is reasonable to hold a consensus that corporate social responsibility is a strategy. chen and liu (2012) opined that a strategy is the direction and scope of firms in the long run that will bring benefits for the firms through combinations and allocations of resources for carrying out the firms’ major goals and missions within a challenging the strategic intention of multinational enterprises in corporate social responsibilities in nigeria 301 environment. multinational enterprises’ involvement in social responsibility can be viewed as good intentions that can establish the two-aim approach (mutualistic relationship). this approach involves a win-win commitment to socio-economic development of the host countries and the home countries of these multinational enterprises. though, bakan (2004) stated that: a corporation can do good only to help itself do well, a profound limit on just how much good it can. the benevolent rhetoric and deeds of socially responsible corporations create attractive corporate images, and likely do some good in the world. they do not, however, change the corporation’s fundamental institutional nature: its unblinking commitment to its own selfinterest. according to ionescu and oprea (n.d.), multinational corporations exploit host countries and their inhabitants because they capitalize all revenue which is obtained from a location, they migrate into other countries which offer greater advantages for multinational corporations and because these corporations follows only their own interests. mnes intervention in csr is a strategy to do ‘good-good’ and balance up equations between the host country’s economy and the home country’s economy (the enterprise’s country). these will enable adequate measures of economic growth of these mutually benefiting nations. it is crystal clear that the crucification of these multinational enterprises is just the symbol of selfishness and parasitic intentions not uncovered. over the years, series of researches have been directed towards exposing the behavioural pattern of multinational enterprises, particularly, in the area of social and economic perspectives. these researches failed to investigate or detail analysis on the causes of the behaviours of the multinational enterprises towards development in totality. 4.1. the two-aim approach in nigeria, we observed that most effectively functioning enterprises are the foreign enterprises. the result of this may be from the fact that most indigenous enterprises lacked a comprehensive method of matching business to the greater height. neo-liberal economists contend that mne are perhaps the most significant catalysts for sustainable development, because multinational corporations typically possess newer and cleaner technology and have better management practices which can be transferred to their subsidiaries in developing world (hassan, 2013). this approach provides a framework for the establishment of balances between two significant but conflicting interests, such as that of multinational enterprises and the host country. the approach attempts to advocate mutual commitment-mutual benefits, rather than parasitic notion observable through rational thinking and harming objectives between the two parties (the multinational enterprise and the host country). there is no doubt that no one country permits the operation of multinational enterprises without a particular objective, and no one multinational enterprise operates in another country without its particular objective. having understood this, the natural law of fairness requires that each party struggles to achieve its objective in consideration of the other party’s objective, since it is initially conceived as cooperation and not a game of conflict. goluch (2012) posited that in case of games of cooperation, one is dealing with variable sum games –an 302 j. g. sule, a. t. nafiu, a. a. ameh economically interesting phenomenon. a cooperation should be non zero-sum since it is backed up by mutual agreement and guiding principles. the aim of the host country is to fill the loopholes in the development process of its economy, and if the multinational enterprises must exist and operate within the host community, they must give out something to get something. that is to say, they must make the environment where they are operating conducive for the running of their business by way of employing the youth in the community as well as providing the basic social amenities such as construction of roads, building of schools for the host community, building of hospitals, enabling them to achieve their objectives among other things. by so doing, both parties stand to benefit mutually (from: adequate security, technological improvement, adequate revenue generation, better management practice, optimum utilization of resources, learning, human capital development, and so on). 4.1.1. the implication of the two-aim approach this two-aim approach is incapable of working isolatedly without mutual agreement and guiding principles. once these agreement and principles are binding on both parties: i. reconciliation and balance of interests will be achieved. ii. under-performances of the economic agents (multinational enterprises) will become past events, both in the host country’s national and global economy. iii. solution to economic bottlenecks becomes the two parties’ concerns. iv. in the case of nigeria, corruption by some social and political dramatists who influence inapt practices of some multinational enterprises will reduce. v. positive behavioral pattern towards sustainable development becomes enhanced. vi. excessiveness and environmental degradation by some multinational enterprises will reduce. 5. the general impact of multinational enterprises in nigeria in the real sense of global economic activities, no two parties ever get saturated. this is the reason why the ‘selfishness of one is in the interest of gaining it all’. in their work, okereke and ekpe (2002) expressed that rather than re-incest their profits in the economy of the host countries, in to generate other economic activities and hence expand the economy, the multi-national corporations repatriate profits to their home countries in what is often referred to as capital flight. in other words, the term ‘perfect’ has a mere dictionary meaning, as no single human treks without the head shaking. in spite of the positive economic contributions of multinational enterprises, there are numbers of negative implications of their activities. these activities are hugely fueled by some corrupt leaders and elder-statesmen, who benefit from the dilapidating conditions. cole (2006) expressed that the activities of multinational corporations led to an increase in anti-social activities like drug-abuse, prostitution, kidnapping and murder. the corrupt practices, coupled with inapt influences of the social and political dramatists are the source of distortion and confusion about the operations of these multinational enterprises. in his view, onimode (1982) had pinpointed that a thorough empirical analysis of the impact of multinational enterprises on the nigerian economy and consciousness will reveal the following: the strategic intention of multinational enterprises in corporate social responsibilities in nigeria 303 i. profit repatriation ii. technological backwardness iii. structural distortion iv. political instability v. cultural degradation despite that, multinational enterprises are still better off as a tool for desired economic development. for many developing countries, multinational corporations represent the lowest bad thing which they can select; for these countries, the multinational corporations create new jobs, develop infrastructure and stimulate the demand growth (ionescu and oprea, n.d.). thus, rather than ‘pollution havens’, multinational corporations create ‘pollution halos’ in developing countries through the export of modern technologies (hassan, 2013). 6. research methodology in the quest to investigate into the subject matter, this study gathered data and information through primary and secondary sources. the primary source includes questionnaires and interviews; while the secondary source includes textbooks, journals, theses, posts and the internet. the study randomly selected 500 respondents from the population of the study area (nigeria). the data were analyzed with likert scaling method and simple percentage method as shown below: likert scaling, where s.a  strongly agree; a  agree; n  neutral; d  disagree; and s.d  strongly disagree. 100 1 f x n where f = frequency of response and n = number of respondents 7. data presentation, analysis and discussion of findings table 1 questionnaire administration instrument frequencies percentage questionnaires distributed 500 100 questionnaires returned 455 91 questionnaires unreturned 45 9 source: field survey, 2014 table 1 above depicts that out of the 500 questionnaires (100%) distributed in the field, 455 questionnaires (91%) were returned and 45 questionnaires (9%) were not returned. table 2 demography based on sex sex frequencies percentage male 157 34.5 female 298 65.5 total 455 100 source: field survey, 2014 304 j. g. sule, a. t. nafiu, a. a. ameh table 2 shows that the surveyed respondents were 157 males (34.5%) and 298 females (65.5%). table 3 demography based on residence area frequencies percentage rural residence 112 24.6 urban residence 343 75.4 total 455 100 source: field survey, 2014 table 3 shows that the survey consisted of 112 respondents (24.6%) from the rural area and 343 respondents (75.4%) from the urban area. table 4 respondents’ responses based on questions s/n questions sa a n d sd total f(%) f(%) f(%) f(%) f(%) f(%) 1 the presence of mnes in nigeria has helped the economy a great deal. 215 (47.3) 98 (21.5) 25 (5.5) 20 (4.4) 97 (21.3) 455 (100) 2 mnes have often contributed to rural-urban development in the society. 144 (31.6) 100 (22.0) 24 (5.3) 37 (8.1) 150 (33.0) 455 (100) 3 the economy may be weak if all mnes are evacuated from nigeria. 156 (34.3) 83 (18.2) 15 (3.3) 119 (26.2) 82 (18.0) 455 (100) 4 mnes cause environmental hazards and social problems 215 (47.3) 116 (25.5) 9 (2.0) 47 (10.3) 68 (14.9) 455 (100) 5 the mnes operation’s harms outwit their social responsibilities. 128 (28.1) 146 (32.1) 60 (13.2) 51 (11.2) 70 (15.4) 455 (100) sastrongly agree; aagree; nneutral; ddisagree; sdstrongly disagree source: field survey, 2014 from table 4 (question 1): 215 respondents (47.3%) – strongly agreed; 98 respondents (21.5%) – agreed; 25 respondents (5.5%) were neutral; 20 respondents (4.4%) – disagreed; and 97 respondents (21.3%) – strongly disagreed that the presence of mnes in the nigerian economy has helped a great deal. from table 4 (question 2): 144 respondents (31.6%) – strongly agreed; 100 respondents (22.0%) – agreed; 24 respondents (5.3%) were neutral; 37 respondents (8.1%) – disagreed; and 150 respondents (33.0%) – strongly disagreed that mnes have often contributed to rural-urban development in the society. from table 4 (question 3): 156 respondents (34.3%) – strongly agreed; 83 respondents (18.2%) – agreed; 15 respondents (3.3%) were neutral; 119 respondents the strategic intention of multinational enterprises in corporate social responsibilities in nigeria 305 (26.2%) – disagreed; and 82 respondents (18.0%) – strongly disagreed that the economy may be weak if all mnes are evacuated from nigeria. from table 4 (question 4): 215 respondents (47.3%) – strongly agreed; 116 respondents (25.5%) – agreed; 9 respondents (2.0%) were neutral; 47 respondents (10.3%) – disagreed; and 68 respondents (14.9%) – strongly disagreed that mnes cause environmental hazards and social problems in nigeria. from table 4 (question 4): 128 respondents (28.1%) – strongly agreed; 146 respondents (32.1%) – agreed; 60 respondents (13.2%) were neutral; 51 respondents (11.2%) – disagreed; and 70 respondents (15.4%) – strongly disagreed that the mnes operation’s harms in nigeria outwit their social responsibilities. 7.1. discussion of findings 0 10 20 30 40 50 s.a a n d s.d question1 question 2 question 3 fig. 1 analysis of findings following figure 1 line graphs above, it is crystal clear from question one that the country’s economy is no doubt a dependent economy. the respondents’ views reflect the high level of technology transferred into the country, creation of jobs, social development, improved standards of living and human capital development programs observed with mnes. it is discovered that nigeria needs more mnes, and any attempt to repatriate all mnes is dangerous to the health of the economy. it was also discovered from responses to question two that measureable development in some rural and urban areas are championed by these mnes following the highest percentage of respondents. responses in the light of question three also proved that nigerian economy may be in a dilapidated condition if the mnes decided to evacuate. summarily, the study found out that some mnes have demonstrated a two-aim approach (which implies a win-win) as a strategy to keep their operations going in nigeria, and likely, other developing countries of the world. the intentions of critics against the operations of all mnes are what the study is yet to discover. conclusion multinational enterprises are essential agents of globalization that have often shouldered the responsibilities to complement government’s effort in providing some social services and welfare programs in addition to their normal economic activities in any host country. it is 306 j. g. sule, a. t. nafiu, a. a. ameh explicit that this form of commitment to social responsibilities is a strategy to their operations. this strategic commitment of multinational enterprises to socio-economic development can be measured up in their effectiveness and efficiency, technology transfer, human capital development, job creation, provision of social amenities, healthcare services, and so on. though, the aims of some multinational enterprises are kept confidential. there are two schools of thought; one criticizes and the other supports the activities of multinational enterprises in the host countries. these two schools may be right based on varying views, but a fair deduction can only be made if the activities of multinational enterprises are evaluated individually, from state to state and country to country. the nigerian economy, if properly diagnosed, is a clear paradigm for this view. paradoxically, any entity set up to make loss is never regarded as a business entity. the effort into doing business in a better way has led these multinational enterprises into strategic commitment to corporate social responsibilities. the rationale behind this is to establish balance of objectives between the multinational enterprises’ home countries and host countries. their strategic commitment to corporate social responsibilities in nigeria and other developing countries is a ‘two-aim approach’ (that is, win-win strategy) to enhance continuous business operations. recommendations this study recommended that: i. government should attract and motivate foreign direct investment in nigeria. ii. there should be an indomitable mutual agreement and guiding principles between multinational enterprises and the host country, nigeria. iii. the two parties (mnes and the host country) should maintain a two-aim approach, so as to ensure that the objective of one party is not hurt. iv. the government and its appropriate agencies should encourage the economic effort of multinational enterprises in nigeria, as well as in other developing countries. v. multinational enterprises should find all means to avoid hazardous and antisocial activities. vi. multinational enterprises should intensify their commitment to corporate social responsibilities so as to convince critics that their socio-economic development intention is right. vii. due to the fact that not all multinational enterprises have the good socio-economic development intention, the government should adopt a ranking system to enable them to focus on national development rather than the repatriation of profit. multinational enterprises should endure paying the same tax payable in their home countries so as to observe the principle of fairness. references 1. akor, m. e. (2001). the nigerian economy (a selected study). jos: macedonia trust international. 2. bakan, j. (2004) the corporation: the pathological pursuit of profit and power, london: constable and robinson ltd. the strategic intention of multinational enterprises in corporate social responsibilities in nigeria 307 3. burger, a. (2011), shell in nigeria: oil, gas, development and corporate social responsibility, triple pundit. available from: www.triplepundit.com/2011/07/shell-nigeria-csr-corporate-social-responsibility/ 4. chen, m. and liu, b. (2012.), strategic management in chinese manufacturing smes. a master thesis within business administration, jönköping international business school, jönköping university 5. cole, p.d. (2006), politics of oil in the niger-delta, london, macmillan. 6. culverwell, m., lee, b., and koziell, i. (2003). towards an improved governance agenda for the extractive sector. london: royal institute of international affairs.. 7. goldstein, a. (2009). multinational companies from emerging economies. palgrave macmillan. 8. goluch, t. (2012), the use of game theory in small business, being a master thesis submitted to the faculty of management and economics, gdansk university of technology. 9. hassan, o.m. (2013), the inevitability of multi-cooperations towards achieving sustainable development in developing economies: a case study of the nigerian economy, american journal of business and management, vol. 2(3): 256-265. 10. ile, m.n (2000), corporative and international management, enugu, ohumba press limited. 11. ionescu, r. and oprea, r. (n.d.), multinational corporations and the global economy, romania, dunarea de jos university. 12. nickels, b., mchugh j and mchugh s. (2002), understanding business, london, mcgraw-hill irwin. 13. ogbozor, g.c. (2000), understanding international business, enugu, churchill international limited. 14. okereke, o.o. and ekpe, a.e. (2002), development and underdevelopment: politics of the northsouth divide, enugu, john jacob’s classic publisher ltd. 15. okey, a. h. (2007), multinational corporation and total quality management: a study of nigerian bottling company plc ngwo enugu, a thesis submitted to the department of business administration, faculty management sciences, nnamdi azikiwe university, awka anambra state, nigeria. 16. olumba m 2009. saving nigerian from the global economic crises: the g-20 meeting, bank regulation, supervision, illiquidity-insolvency and fiscal policy drama. the fronteira post, april 6, pp. 15-35. 17. onimode, b. (1982). imperialism and underdevelopment in nigeria: the dialectics of mass poverty, london: zed press. 18. onodugo, v.a. (2012), multinational corporations (mnc)and employment and labour conditions of developing countries: the nigerian experience, european journal of business and social sciences, vol. 1(6). 19. owojor, a. a. and asaolu, t. o. (2010), critical evaluation of accounting systems in multinational organizations in nigeria, journal of social sciences, vol. 23(2). strateške namere multinacionalnih preduzeća u pogledu korporativne društvene odgovornosti u nigeriji ultinacionalna pre u e a irom sveta upotpunjuju i aju po sticaj a ekonomski ra voj elika pomo koju pru aju multinacionalna pre u e a u pogle u kapitalno inten ivnih ru tvenih o jekata i in rastrukture je o igle na u o lasti njihovih ru tvenih o govornosti tom smislu, stu ija ispituje strate ke namere multinacionalnih pre u e a u pogle u korporativne ru tvene o govornosti u nigeriji istra ivanju ove teme, studija je sakupila podatke i informacije putem primarnih i sekun arnih i vora za stu iju je meto om slu ajnog u orka i a rano 500 ispitanika i populacije područja studije (nigerija). podaci su analizirani pomoću likertove skale stavova i jednostavnom procentualnom metodom. otkriveno je da su neka multinacionalna preduzeća koristila pristup dva cilja (koji podrazumeva pobednik – pobednik situaciju) kao strategiju da bi se njihovo poslovanje nastavilo u nigeriji i, verovatno, drugim svetskim zemljama u razvoju. aključeno je da je princip njihovog zalaganja za korporativnu dru tvenu odgovornost uspostavljanje ravnote e izme u ciljeva matičnih zemalja multinacionalnih preduzeća i zemalja domaćina. tudija stoga preporučuje da multinacionalna preduzeća i zemlje domaćini treba da zadr e pristup dva cilja kako bi se osiguralo da cilj jedne strane ne bude povre en. ključne reči: multinacionalna pre u e a, ru tvena o govornost, ra voj, strategija, repatrijacija profita, ciljevi. http://www.triplepundit.com/2011/07/s%09hellplane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 18, no 1, 2021, pp. 17 27 https://doi.org/10.22190/fueo201226003c © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper population ageing and welfare dissimilarities within the european union: a new approach based on cluster analysis1 udc 330.342(4-672eu) mirela cristea1, graţiela georgiana noja2, yannis thalassinos3 1university of craiova, faculty of economics and business administration, craiova, romania 2west university of timişoara, faculty of economics and business administration, east european center for research in economics and business, timişoara, romania, 3gulf university in science and technology, kuwait, kuwait abstract. the research aims to identify several dissimilarities between the european union member states (eu-27 ms) in terms of welfare and labour market dimensions under the sheer implications of the ageing phenomenon. the quantitative research methodology emphasizes the cluster analysis based on the ward method, performed for the year 2018. main results denote that only two countries (denmark and sweden) registered soaring performances, especially for the labour market credentials (particularly the employment rate and active policies). other 10 eu-27 ms accounted medium performances in terms of well-being, but also the lowest achievements as regards the old dependency rate, the employment rate of persons aged 55-64 and the birth rate. this paper brings to the fore the keen need to redesign specific policies and tailored strategies by the responsible authorities and business representatives across the eu, in order to enhance achievements and new solutions for the difficulties brought by population ageing, with spillover effects on the labour market integration of older employees and overall economic welfare. the study stands out through the new integrative approach based on cluster analysis that underlines the dissimilarities between the eu member states, and the features of each group of countries, in a pre-settled framework, thus grasping the difficulties, but also the opportunities faced in terms of ageing and economic welfare. key words: labour market, economic development, demographic economics, cluster analysis jel classification: j14, j01, i31 received december 26, 2020 / accepted januray 11, 2021 corresponding author: graţiela georgiana noja west university of timişoara, faculty of economics and business administration, east european center for research in economics and business, timişoara, romania e-mail: gratiela.noja@e-uvt.ro 18 m. cristea, g. g. noja2, y. thalassinos 1. introduction population ageing represents a topical subject on the european and global agenda, being placed in the open conversation on the transition to old societies that is already well under way, since the proportion of youg people has diminished compared to a few decades ago, while the share of early retirees has significantly increased (sidlo et al., 2020; wolf, 2020). these challenges are amplified today in the face of the covid-19 pandemic crisis (kashnitsky & aburto, 2020; mckibbin & fernando, 2020), while the globalization process weakens, and also the labour force shrinks since the growth of the working-age population is severely slowing in the core of the world economy (skufina et al., 2020), and, particularly, in the european economies (calvo-sotomayor et al., 2019; cristea et al, 2020a; jivraj et al., 2020). the european union-wide reference study on grouping the member states (ms) according to the representative indicators of population ageing measurement is the one deployed by the united nations economic commission for europe (unece) and european commission (ec) (unece/ec, 2019), considering the active ageing index (aai) at the level of 2018. the aai represents a composite indicator, including 22 indicators, grouped in four domains, namely, “employment, participation in society, independent healthy and secure living, and capacity and enabling environment for active ageing” (unece/ec, 2019, p. 17). as stated by in this report, the european union (eu) ms were grouped according to the similar characteristics in terms of aai, resulting in 4 groups of countries relative to the eu average (35.8), with scores between 28.1 in the case of greece, and 46.9 in the case of sweden. moreover, in order to measure the existing inequalities between the eu ms, in this report, the aai was connected for each country “to the gdp per capita, gini index and life satisfaction of older people in the eu28” (unece/ec, 2019, p. 54), resulting in significant differences among them. in this frame of reference, current paper aims to advance the unece/ce (2019) study by deploying a cluster analysis across the eu-27 ms, at the level of 2018, in order to assess the interlinkages between population ageing, labour market outcomes and welfare dissimilarities, and to propose specific policies and strategies for each group of countries. after a concise introduction on the research topic, the paper presents a synthesis of the main results obtained in the literature, focused on the implications of demographic ageing on the labour market and economic development, as well as differences and similarities between states, based on these coordinates. then follows the description of the data and the research methodology used, respectively the cluster analysis by the ward method. the obtained results and the discussions are related to those obtained in the specialized literature and are supported by the data from the annex. the conclusions summarize the rendering of the research hypothesis and the main strategies and policies proposed for each group of states. 2. brief literature review the connections between demographic ageing, the labour market and the degree of economic development of countries have been intensely debated in the literature. a number of studies have highlighted the unfavorable implications of the ageing population on labour productivity and, implicitly, on economic growth in all regions of the world. thereby, in the united states of america (usa), maestas et al. (2016) showed that an increase in the stock of population aged over 60 years by 10% generates a reduction in the gross domestic product (gdp) growth rate per capita by 5.5%, due to the lower increase of labour population ageing and welfare dissimilarities within the european union 19 productivity by age groups, concomitant with the easy-going increase of the working age population. at the eu-28 level, cristea et al. (2020a) showed that the unfavorable implications of demographic ageing (measured by the workforce group aged between 55-64 years) on labour productivity were manifested only in countries that registered the aai below the eu average or slightly above it. similar conclusions were drawn by calvo-sotomayor et al. (2019) for 24 eu countries, namely the workforce ageing has negatively influenced the labour productivity for the analysed period 1983-2014. the confined analysis only for the new eu countries (eu13) revealed that labour productivity in these countries “is shaped under the complex implications of older employment and ageing dimensions, further connected to health and wellbeing”, with unfavourable implications if proper policies and strategies would not be implemented (cristea et al., 2020b, p. 74). conde-sala et al. (2016, p. 1059), studying the perceived life quality of people aged over 65 years at the european level, based on the results of the survey of health, aging and retirement in europe (share) in 2013, revealed that the percieved life is much better felt in the cluster of the nordic countries (with a social democratic model), but also at the level of continental countries, which have a “corporate model” (characterized by better socio-economic indicators), compared with clusters comprising the eastern european countries and from the mediterranean area (which have lower socio-economic indicators). due to heteregeneity among the european countries, suchecka and urbaniak (2016, p. 173) proved that “it is possible to divide european countries on the basis of similarities of the status of people aged 65+”, related to the economic and social conditions, with common strategies and policies for each group of countries (clusters). authors (suchecka & urbaniak, 2016) found similarities at the year of 2012, by applying cluster analysis, as regards health and ageing dimensions among switzerland, sweden and norway, on the one hand, and central and eastern european countries, on the other hand. carrying out an analysis at the level of eu countries regarding the way in which active ageing (measured by aai) correlates with the degree of economic development (measured by the gdp per capita and labour productivity), the dimensions of the labour market and other representative indicators of demographic ageing (old dependency ratio) at the level of 2018, thalassinos et al. (2019, p. 598) concluded that “the lowest performance in terms of ageing, welfare and labour market policies was registered by the eu–13 countries (including also greece and portugal), and the highest, by countries from the old eu–15, especially by the nordic states (sweden, denmark, finland)”. the analysis of the slovenian regions grouping, made by rovan and sambt (2003) by applying the cluster methodology, based on demographic factors (population ageing, population growth rate and migration) and certain socio-economic variables available at the territorial level (such as per capita income tax base, unemployment rate, population employed in agriculture, tertiary education and the car park), revealed that the most developed regions were characterized by a demographic ageing and a higher rate of lower unemployment, while in the less developed regions the situation was reversed. these results point out the same unfavorable dependence between population ageing and the degree of economic development of the country. as such, the main results in the literature show significant differences between countries or regions in terms of the economy’s response to the demographic ageing, for which there are different measurement units. in addition, the researchers show that the countries’ homogeneity in terms of demographic ageing and well-being is changing from one period to another (suchecka & urbaniak, 2016). 20 m. cristea, g. g. noja2, y. thalassinos 3. data and methodology by reviewing the relevant underpinnings of the literature related to our own research subject, we have grouped the data into three categories of indicators, namely: welfare variable, ageing credentials and labour market specific indicators, as follows: (i) welfare indicator: gross domestic product (gdp) per capita (gdp_c) (measured in constant 2010 united states dollars – usd), for which the data were extracted from the world development indicators (wdi) (the world bank, 2020); (ii) ageing representative indicators: old age dependency ratio (od_65) as share of population over 65 years aged to active population (15-64 years) (%); life expectancy at birth total population (le) (years); crude birth rate (br) (measured in “number of live births per 1,000 persons”), with data extracted from the eurostat (european commission, 2020a); (iii) labour market specific indicators: employment rate, 55-64 years aged group or workforce ageing (er_55_64) (% of total population), data extracted from the eurostat (european commission, 2020a); active labour market policies (almp) (% of gdp) and passive labour market policies (plmp) (% of gdp), with data extracted from the employment, social affairs & inclusion (european commission, 2020b). the analysis is performed at the level of eu-27 for 2018. fig. 1 chord diagrams of the indicators used in the cluster analysis, eu-27, 2018 legend: r1-austria, r2-belgium, r3-bulgaria, r4-croatia, r5-cyprus, r6-czech republic, r7denmark, r8-estonia, r9-finland, r10-france, r11-germany, r12-greece, r13-hungary, r14ireland, r15-italy, r16-latvia, r17-lithuania, r18-luxembourg, r19-malta, r20-netherlands, r21poland, r22-portugal, r23-romania, r24-slovak republic, r25-slovenia, r26-spain, r27-sweden. source: own configuration in r version 3.6.3, based on the compiled dataset from eurostat (european commission, 2020a) taking a closer look at the data (fig. 1), at a glance, we could observe that there are important welfare dissimilarities across the eu, particularly as regards the ageing population and labour market indicators. population ageing and welfare dissimilarities within the european union 21 in terms of the economic development, measured by the gdp per capita (fig. 2), the gap across the eu-27 countries between the poorest country (bulgaria) and the richest one (luxembourg), in 2018, is over 100 thousand usd. we can see that the highest welfare levels were obtained by the old eu countries and the lowest by the new eu countries (that adhered to the eu after 2004). fig. 2 gdp per capita (constant 2010 usd), eu-27, 2018 source: own configuration in r version 3.6.3, based on the compiled dataset from eurostat (european commission, 2020a) at the same time, the old-age-dependency ratio per 100 persons (fig. 3), namely “the ratio between the number of persons aged 65 and over (age when they are generally economically inactive) and the number of persons aged between 15 and 64” (european commission, 2020a), is significantly high in italy, finland, greece, portugal, germany, approaching 35% in 2018, while in luxembourg, ireland this ration is about 20%. the old dependency ratio in the eu-27 (fig. 3(a)) shows a share of 21% between people over 65 years old and the working population group, aged 15-64 years, registered in luxembourg, and 35% in italy. increased old dependency ratios within the eu induce important long-run economic consequences, in terms of the savings and investment, housing markets or consumption patterns. the highest life expectancy (fig. 3(b)) is in spain (83.5 years), while the lowest is in bulgaria (75 years), and the birth rate (fig. 3(c)) is more pronounced in ireland, sweden and france (over 11 live births per 1,000 persons), while the less is in italy spain and greece (between 7.3 8.1 live births per 1,000 persons). the long-term problematic issues caused by a decrease in the labour force stock, due to decreasing of the birth rate, and an increase in the age dependency ratio could be alleviated by targeted policies designed to increase productivity and the labour market participation of the elderly. 22 m. cristea, g. g. noja2, y. thalassinos (a) (b) (c) fig. 3 old-age-dependency ratio (od_65) (a), life expectancy (le) (b) and birth rate (br) (c), eu-27, 2018 source: own configuration in r version 3.6.3, based on the compiled dataset from eurostat (european commission, 2020a) in the same perspective, in 2018, the employment rate of the population aged between 55-64 years (fig. 4(a)) reached 78% in sweden, while at the opposite end across the eu ms we find greece, luxembourg, croatia and romania, where this rate is only slightly around 40%. progresses still therefore need to be made in this respect by most of the eu countries, particularly from central and eastern europe. labour market policies allocation in gdp (active and passive) is at the highest in denmark and sweden (fig. 4(b)), as regards almp, and in the netherlands, austria, finland and belgium (fig. 4(c)), regarding plmp. the population ageing and welfare dissimilarities within the european union 23 lowest participation of labour market policies in gdp is in romania and cyprus (fig. 4(b)), considering almp, and malta and romania (fig. 4(c)), as regards plmp. (a) (b) (c) fig. 4 employment rate of the population aged from 55 to 64 years (er_55_64) (a), almp (b), plmp (c), eu-27, 2018 source: own configuration in r version 3.6.3, based on the compiled dataset from eurostat (european commission, 2020a) we have therefore focused our research methodology, based on cluster analysis, on these credentials, processed through the stata program, in order to bring new evidence on the interlinkages between population ageing, labour market indicators and economic welfare dissimilarities across the eu member states, at the level of 2018. the cluster forming and analysis is based on the ward method inset on hierarchical clusters (härdle 24 m. cristea, g. g. noja2, y. thalassinos & simar, 2019), which set out that “the distance between two clusters a and b is shown by how much the sum of squares will increase when they are cumulated” (cornish, 2007, p. 3). the data was adjusted by standardisation and logarithm in order to ensure a proper comparability between variables. accordingly, based on the literature review and own methodological endeavour, we pursued to verify the following research hypothesis (h): “there are significant dissimilarities between the eu-27 ms in terms of welfare, ageing phenomenon and labour market implications, the developing eu countries confronting with low performances compared to the developed ones”. 4. results and discussions we have verified our hypothesis, h, by applying the cluster modelling, processed through the ward method. thus, we aim to group the eu-27 countries corresponding to the economic welfare (measured by gdp per capita), the ageing phenomenon dimensions (od_65, le and br) and labour market indicators (er_55_64, almp and plmp) at the level of 2018. the correlation matrix of the considered variables and dendrogram of cluster forming for eu-27 ms, at the level of 2018, are presented in fig. 5(a), respectively fig. 5(b). (a) (b) fig. 5 correlation matrix (a) and dendrogram of cluster modelling in terms of working ageing (b), eu-27, 2018 source: own process of panel data in stata the performances achieved by each country, as revealed the gdp_c, ageing phenomenon dimensions and labour market indicators (table 1, appendix, table a1) have denoted that in few countries from the developed eu ms (grouped into cluster c2), namely denmark and sweden, there are very high performances, especially for er_55_64 (the mean is 2.2866) and almp (the mean is 2.4618). these results are similar to those obtained by thalassinos et al. (2019) (based on aai), and suchecka and urbaniak (2016) (applied for the year 2012). for the 10 countries of the eu-27 ms (grouped into clusters c1 and c3), there were registered medium performances in terms of well-being, ageing process and labour market population ageing and welfare dissimilarities within the european union 25 policies, the lowest od_65, er_55_64 (cluster c3) and br (cluster c1), and the highest gdp_c (cluster c3) and plmp (cluster c1). more specifically, there were low performances accounted by 15 countries enclosed into c4 (mainly, countries of the new eu-13, aside from greece, which registered the lowest economic welfare, gdp_c, from the eu-27 ms in relation with negative implications of plmp, br and le, although the er_55_64 and od_65 was medium), and c5 clusters (despite the highest level of le and br). table 1 clusters associated with the economic welfare (gdp per capita), ageing phenomenon and labour market indicators, eu-27, 2018 clusters (c) eu-27 member states cluster modelling – ward method performance c1 italy, france, spain, the netherlands, finland, germany, belgium, portugal, austria medium (particularly in terms of gdp_c, er_55_64, almp, plmp and le, but low in terms of br and high od_65) c2 denmark, sweden very high (extremely significant in terms of er_55_65 and almp, but also gdp_c, le, plmp and br) c3 luxembourg medium to high (particularly through high levels of gdp_c, almp and le, and the lowest od_65, despite reduced er_55_64, br and plmp) c4 lithuania, the czech republic, hungary, greece, bulgaria, poland, romania, slovenia, the slovak republic, latvia, estonia, malta, croatia low (in terms of the lowest gdp_c, plmp, br and le, and also reduced almp, despite medium er_55_64, and od_65) c5 ireland, cyprus low to medium (particularly through medium levels of er_55_64, le, despite the highest level of le and br, and low level of gdp_c, almp, plmp and od_65) source: own process of panel data in stata based on these findings, we can assert that there are significant dissimilarities between the eu-27 ms in terms of economic welfare connected to ageing phenomenon and labour market implications, the developing countries facing low performances compared to the developed ones, our hypothesis, h, being validated. 5. conclusions by applying the cluster modelling, for testing our research hypothesis, we have pursued for dissimilarities grouping between the eu-27 ms, thus: the lowest performance related to ageing, economic welfare and labour market was registered for the new eu-13 ms (including also greece from the old eu-14 countries), and the highest, for the nordic states (sweden and denmark); overall, the eu-13 countries are confronting with low performances compared to the eu-14 ms. these findings are based on the fact that the nordic states (denmark and sweden) “are well known for their labour market models and best practices at european level (namely the ‘danish model’ of flexicurity) focused on balancing flexibility and security for a proper professional and personal development of employees and an adequate labour market insertion and integration (inclusion)” (noja & cristea, 2018, p. 735). the danish labour market policies are justified by 26 m. cristea, g. g. noja2, y. thalassinos the fact that „each person should, when possible, be active and participate in the social life by working or by attending activation initiatives” (bazzani, 2017, p. 138). as main policies and strategies as regards ageing and welfare, the good practices of the nordic countries consist in „activity centres” dedicated for the older people, with entailing them in governance of these centers, making them „empowered to define meaningfulness in activities, but only as an active member of a community” (evans et al., 2018, p. 1). main limitations of the research conducted in this paper may infer the cross-sectional analysis performed at the level of one year that needs to be complemented with a panel-data analysis in order to be further advanced through accurate policies, including by accounting the implications upon the business environment (pirtea et al., 2014), this type of analysis being targeted as main direction in our future research. references bazzani, t. 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(2019). measuring active ageing within the european union: implications on economic development. equilibrium. quarterly journal of economics and economic policy, 14 (4), 591-609. https://doi.org/10.24136/eq.2019.028 the world bank, (2020). world development indicators, retrieved from: https://databank.worldbank.org/ reports.aspx?source=world-development-indicators accessed on: 12 september 2020. wolf, m. (2020). why inflation could be on the way back, financial review, retrieved from: https://www.afr. com/policy/economy/why-inflation-could-be-on-the-way-back-20201118-p56fle accessed on: 10 september 2020. razlike u starenju populacije i blagostanju unitar evropske unije: novi pristup zasnovan na klaster analizi ovo istraživanje ima za cilj da identifikuje nekoliko razlika među zemljama članicama evropske unije (eu-27 ms) u pogledu dimenzija blagostanja i tržišta rada pod implikacijama fenomena starenja. metodologija kvantitativnog istraživanja naglašava klaster analizu zasnovanu na vard-ovoj metodi za 2018. godinu. glavni rezultati ukazuju da su samo dve zemlje (danska i švedska) registrovale visoke preformanse, naročito za akreditive na tržištu rada (konkretno stopa zaposlenosti i aktivne politike). ostalih deset eu-27 zemalja su pokazale srednje performanse u smislu blagostanja, ali i najniža postignuća u smislu stope zavisnosti starih, stope zaposlenosti osoba između 55 i 64 godina starosti i nataliteta. ovaj rad iznosi u prvi plan jaku potrenu da se ponovo osmisle konkretne politike i prilagođene strategije od strane nadležnih institucija i biznis predstavnika širom eu, da bi se naglasila postignuća i nova rešenja za izazove nastale starenjem populacije, sa efektima prelivanja na integraciju starijih zaposlenih u tržište rada i sveukupno ekonomsko blagostanje. rad se ističe novim integrativnim pristupom baziranim na klaster analizi koja naglašava razlike među zemljama članicama eu, i karaktereistike svake grupe zemalja, unutar unapred utvrđenog okvira, ističući tako poteškoće, ali i mogućnosti koje se pružaju u pogledu starenja i ekonomskog blagostanja. ključne reči: tržište rada, ekonomski razvoj, demografsa ekonomija, klaster analiza appendix table a1 clusters results for the implications of the aging phenomenon and labour market policies upon the gdp per capita, eu-27, 2018 indicators cluster 1 (c1) cluster 2 (c2) cluster 3 (c3) cluster 4 (c4) cluster 5 (c5) f r-sq n mean sd n mean sd n mean sd n mean sd n mean sd gdp_c 9 0.6719 0.4892 2 1.5704 0.2080 1 4.0341 * 13 -0.5037 0.2812 2 -0.2496 0.5194 47.24045*** 0.8957 er_55_64 9 1.0724 0.6265 2 2.2866 0.4993 1 -0.3690 * 13 0.7850 0.7891 2 1.2476 0.0283 3.011615** 0.3538 od_65 9 1.6459 0.6118 2 1.5355 0.2615 1 -0.8447 * 13 1.1569 0.6995 2 -0.4519 0.3595 7.052035** 0.5618 almp 9 0.3614 0.5981 2 2.4618 1.3343 1 0.6421 * 13 -0.5035 0.5138 2 -0.6214 0.5957 11.94874*** 0.6848 plmp 9 1.2150 0.6932 2 0.1321 0.7225 1 -0.2020 * 13 -0.7567 0.2967 2 -0.2118 0.3751 20.63566*** 0.7896 le 9 1.2770 0.2590 2 1.1691 0.3328 1 1.3162 * 13 0.0601 0.7672 2 1.4045 0.1248 7.2119** 0.5673 br 9 -0.8760 0.8314 2 0.2973 0.3733 1 -0.1647 * 13 -0.5150 0.5438 2 0.6932 0.8399 3.040925** 0.3560 source: own process of panel data in stata https://databank.worldbank.org/reports.aspx?source=world-development-indicators https://databank.worldbank.org/reports.aspx?source=world-development-indicators plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, n o 1, 2015, pp. 55 68 analysis of performance to direct taxes in the tax system of the republic of serbia  udc 336.22 marina djordjević faculty of economics, university of niš, serbia abstract. direct taxes are a very important group of taxes revenues. they refer to the personality of the taxpayer and directly affect its economic strength. they are a stable and plentiful source of public revenues. in order to assess their role in the tax system in serbia, it is necessary to observe the goals which can be achieved by their implementation. the intention of the legislator is to provide resources to achieve fiscal and other goals. determining the performance of direct taxes in the tax system in serbia can be based on the criteria of equity, efficiency and yield. the aim of this study is to measure the performance of direct taxes in the tax system in serbia, in order to make more appropriate conclusions about their role and importance in the provision of the budget. in this way, we will point to the need for reform of direct taxes in the tax system of our country and the need to decrease the importance of indirect or consumption tax. key words: direct tax, equity, efficiency, yield, public revenues. introduction tax pluralism, i.e. the existence of a large number of tax forms, is the main characteristic of modern tax systems. however, some of these taxes have large importance, role and participation in the tax revenues, so these are the basic tax forms, while others are property tax. the most important tax forms include: sales tax (vat), personal income tax, corporate income tax, excise, duties and property taxes. these taxes can be classified as direct and indirect taxes. direct taxes are charged to taxpayers and cannot be evaded, while indirect taxes are not charged to a third party rather than the individual taxpayer. john stuart mill was an english economist who defined direct and indirect taxes: "the direct tax is one which is demanded from a person who wants to pay for it. indirect taxes are those which are demanded from a person who charged them from another person." [10] there are many definitions of direct taxes. some of them claim that direct taxes qualify by the fact that the taxpayer and the  received december 13, 2014 / accepted april 10, 2015 corresponding author: marina djordjevic faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: marina.dj@ptt.rs 56 m. djordjević tax destinater are the same person. others assume that they are taxes that the taxpayer paid directly to tax authorities and relate to persons and to corporations. the coverage of direct and indirect taxes varies from country to country [đurovićtodorović, đorđević, 2011a, p.26]. in most countries, direct taxes include: personal income tax, corporate income tax and property tax. however, in some countries it is different. thus, for example, in switzerland inheritance tax is a direct tax; in the eastern european countries vat paid by state-owned companies was included in the group of direct taxes, while in the u.s. gift tax is a direct tax. a positive feature of direct taxes is that they are a stable and plentiful source of government revenue. also, they relate to individual taxpayers and satisfy the principle of fairness in taxation. however, their implementation and payment causes the decrease of the economic potential of the taxpayer, and there is resistance to taxation and tax evasion. in the end, they are very complex and complicated to administer. the abundance of this group of tax forms is very heterogeneous and varies from country to country. in oecd countries, the average is forty percent, while in serbia, and most of the under-developed countries, this share is two times less [đurović-todorović, đorđević, 2011b, p.109]. the data show that denmark has the largest share of direct taxes in gdp (30%), followed by sweden (19.7%), the uk (15.7%) and belgium (15.3%). eastern european countries and serbia have the least share (6.1%). the reason for the low yield of direct taxes in serbia is the low economic power of the taxpayer and the necessity of the reform of direct taxes. in the first part of the paper, the criteria for measuring the performance of direct tax will be discussed. the other parts relate to measuring the performance of direct tax in serbia in relation to fairness, efficiency, and yield. the last part of the paper is the conclusion. 1. criteria for measuring the performance of direct taxes to review the role and importance of a tax form in the tax system, it is necessary to consider the goals that can be achieved by its implementation. the intention of the legislature during the introduction of direct taxes in the tax system in serbia was to achieve fiscal and non-fiscal goals. these are taxes that directly burden the citizens and companies depending on their economic viability. they provide significant funds for the state, but also for achieving various non-fiscal goals (social and economic). direct taxes satisfy the principle of fairness, efficiency, and yield. the use of personal income tax in the tax system in serbia has not given the expected results. that was the reason for its constant questioning and challenging. it is believed that even today, this tax does not realize the goals as expected. the main cause is the current taxation system. a mixed system of income tax means schedular taxation of individual income and annual taxation of total income for persons who earn income in excess of the statutory. this system has a number of disadvantages and, as such, cannot realize the needs of a modern state. therefore, it is necessary to perform the evaluation of the existing system of taxation, in order to determine the direction of further changes. the system of corporate taxation is quite harmonized with the corporate income tax systems in developed economies. first of all, this system was created by model-tax profit in the european union. in the case of personal income tax there is not one model of analysis of performance to direct taxes in the tax system of the republic of serbia 57 taxation for all member states in the eu, but there are several tax systems with numerous modalities. corporate income tax in serbia charged corporations. they pay tax based on the tax balance. tax authorities make a decision on the amount of tax. the tax is paid at the rate of 15%, although for many years it was 10% and that was one of the lowest corporate tax rates in europe. the aim was to attract foreign investment and put less burden on the economy by tax levies. in the system of corporate taxation in serbia there are many deductions and exemptions, but it is necessary to increase their number in order to balance regional development. property tax belongs to the group of direct taxes, but some types of this tax have characteristics closer to indirect taxes. thus, for example, property tax in the statics burdens the property owners directly, but the property transfer tax is an indirect tax and it is usually paid by the buyer. in the case of inheritance tax and gift tax in various jurisdictions there are different tax treatments. the property tax system in serbia has many disadvantages, such as insufficient yield, progressiveness, non-compliance with the principle of fairness, the basis for taxation is determined by the actual market value of the property, poor tax collection, etc. determining the performance of direct taxes in the tax system in serbia can be based on various criteria, some of the most important are: 1 fairness, 2 efficiency, and 3 yield. the principle of justice requires that all citizens of a country should pay taxes in proportion to their ability. under the principle of fairness of taxation, the principle of universality and the principle of uniformity can be extracted. the principle of universality of tax liability means that the tax should be paid by all citizens, except for the poor. because of that, modern tax laws provide a number of exemptions for these groups. uniformity in taxation is the second part of the idea of fairness and it applies to taxation which is done according to the economic strength of the taxpayer. in modern financial theory the prevalent view is that the uniformity in taxation can be achieved by adopting a progressive tax rate, if those who have greater economic power pay not only absolutely but also relatively higher amounts of taxes. the theoretical basis of the principle of fairness in taxation is made on the principle of utility and the principle of ability to pay taxes. according to the principle of utility, the fair tax is that one that provides to each taxpayer as much as they paid in taxes. in practice, it is impossible to benefit directly because the costs that the taxpayer has, have no direct compensation. given that taxes are used to meet general social needs, there is compensation, but it is expressed in an indirect way. respecting the second principle, the fair tax is the tax in which each taxpayer participates in the total income of the state in proportion to his economic strength. in accordance with the principle of ability to pay taxes, the request for horizontal and vertical fairness in taxation can be formulated. horizontal equity means that taxpayers with the same ability to pay should be treated the same. this means that those who earn the same income during the year, regardless of the source of origin of that income, pay (absolute and relative) the same amount of tax. vertical equity means that taxpayers with different ability to pay should be treated differently. this means that those who earn a higher income level for the year pay a higher amount of tax. 58 m. djordjević proportional income taxation distorts the vertical equity, because those who realize higher levels of income are taxed at the same rate as those who have lower levels of income. the vertical equity in taxation is achieved by applying progressive tax rates. the progressive taxation may be direct or indirect. the direct progression represents a way of taxation in which the law prescribes progressive tax rates for a given level of income. indirect progression is reflected in the progressive effective, not in the statutory income tax rat, which is achieved through various tax incentives and exemptions . efficiency means the efficient allocation of resources, and cost efficiency in tax collection. it is a typical economic criterion of taxation which is realized by those taxes that have the least possible impact on the economic decisions of businesses. the direct taxes reduce disposable income, and they cause effects on the behavior of economic entities. if all taxpayers were equal and if the same tax treatment applied at all of them, a flat tax would be the only efficient tax as any other would create various distortions. tax is without distortions if there is nothing that an individual or company can do to change their tax liability. distortions are associated with attempts by individuals or firms to reduce their tax liability. in this context, the direct taxes belong to the group of distorting taxes. taxes with distortions affect economic decisions and spoil efficient choice. they can affect the choice between present and future consumption, the choice between leisure and work and, in accordance with this, the income effect and the substitution effect may be considered. among economists, the prevailing view is that direct taxes should be as allocatively neutral as possible. as for the efficiency costs of tax collection, this criterion will be met by minimizing the cost of direct taxes. this refers to the cost of public administration, as well as the costs incurred by taxpayers when paying taxes. the general rule is that the more complicated the tax form, the higher the application costs. the tax form is more complicated if a larger number of tax rates and higher tax benefits and exemptions are applied within it. tax authorities require certain funds to perform and they cannot be expected to collect tax revenue with no costs at all. it is desirable to achieve the lowest possible cost, but it certainly should not be the key criteria for the introduction of the tax. administrative costs cannot be avoided, because the tax procedure involves the engagement of people and equipment, as well as certain material costs, but they can be minimized. in many modern countries it is estimated that the taxpayers’ cost are larger than the cost of public administration. this refers to the costs incurred based on the tax book keeping, filing tax returns and other documents, payment of tax advisors, etc. direct taxes cannot fully satisfy any of the above mentioned aspects of efficiency. first, they are distorting and cause inefficient allocation of resources. also, when it comes to minimizing costs, it is very difficult to reduce the cost of public administration or costs incurred by taxpayers when paying taxes. as for the first reduction, the tax authorities may impose certain internal and external measures [popović, 1997, p. 313]. internal measures refer to the various procedures to improve the organization of tax administration, and staff training with the use of information technology. also, ceding specific tasks to private companies, the tax administration reduces the cost of performing those tasks. external measures are related to the simplification of tax rules that usually cause the growth of administrative costs. however, as the costs would be enormous if all of the data were checked, the tax administration checks only a random sample and thus reduces costs. yield of direct taxes as a criterion for assessing their performance relates to the total amount of income that their application realized. due emphasis on the importance of this analysis of performance to direct taxes in the tax system of the republic of serbia 59 criteria, its share of total tax revenues, as well as its share of gdp, is often observed. it depends on macroeconomic factors, the basic parameters of the tax and the collection rate [arsić et al, 2010, p. 46]. the most important macroeconomic factors affecting the yield of direct taxes are the employment rate, the volume of production, the value of the property, the savings, the movement of the price of capital and assets, etc. the yield of direct taxation crucially depends on tax parameters such as: tax rate, the level and intensity of tax progression, the amount of non-taxable income, the value of property subject to taxation, the business results of enterprises, the number and extent of tax exemptions, etc. financial capacity does not depend directly on the tax system which is applied. the same level of yield can be achieved by any system of taxation, by choosing appropriate tax parameters. finally, the yield of direct taxes depends on the level of collection which is determined by the performance of the tax administration and the level of tax moral. based on this, one criterion can be extracted for measuring the performance of direct taxes, which manifests itself through the opportunities for tax evasion. the principle of abundance can be met by direct taxation, given that significant funds for the budget can be collected through these tax forms. direct taxes exist as a group of basic tax forms in all tax systems of modern countries, and according to that we can talk about their abundance. in developed economies, the economic power of taxpayers is at a high level, and a large amount of revenue can be collected through direct taxes. however, in less developed economies, the importance of direct taxes, in terms of yield, decreases. 2. measuring the performance of direct taxes in serbia in relation to equity direct taxes may be considered fair if they burden taxpayers progressively and if the tax authority is concerned about the personal characteristics of the taxpayer and his economic power. however, fairness is a very questionable concept and it can be measured by comparing the statutory and effective tax rates. table 1 legal and effective rates of personal income tax in serbia in 2013 types of income legal rates (%) authorized expenses / deductions effective rates (%) income from real estate 20 20% 16 other income 20 20% 16 capital income 15 / 15 capital gains 15 / 15 income from copyright, rights related to copyright and industrial rights 20 34% 43% 50% 13.2 11.4 10 income from agriculture and forestry 10 / 10 income from self-employment 10 / 10 salaries 10 11,000 dinars 7.98 source: law on personal income tax law, official gazette of the republic of serbia 60 m. djordjević if we look at the personal income tax in serbia in terms of fairness, we have to compare the legal tax rates and the actual tax rates. table 1 shows this comparison. as can be seen from the table, four different statutory rates are applied on eight types of income, which range from 10% to 20%. the number of effective tax rate is slightly higher. effective tax rates are either equal to legal rates, if there are no deductions and exemptions, or they are usually lower than the statutory tax rate. effective tax rates are the true indicator of the real tax burden. the current income tax system in serbia significantly violates the principle of horizontal equity. differentiated modes of taxing income from different sources, namely primarily different statutory tax rates and sets of reliefs and exemptions, result in different effective tax rates on personal income tax. as the horizontal equity is achieved only when the effective tax rate on all forms of income is equal, a large number of effective tax rates and their range indicate the absence of horizontal equity in taxation. this means that the current system of income tax in serbia taxes two persons with similar economic power by significantly different tax burden, depending on the structure of their income. since the revenues from all sources are taxed proportionately, the assumptions of vertical equity in taxation are not provided. there is a slight indirect wage progression in taxation only in earnings, due to the nontaxable amount. because of the schedular components of personal income tax in serbia, a degree of vertical equity is negligible. in order to provide the specific degree of vertical equity, a corrective element in the form of annual personal income tax at progressive rates was introduced. it is estimated that the effect of annual personal income tax on vertical equity in taxation is very limited, mainly due to the relatively high tax-free amount (the triple average annual salary paid in serbia in the year that taxation is done for). also, the high set limit above which higher tax rates are applied (six times the average annual salary paid in serbia in the year that taxation is done for) further mitigates the effects of annual personal income tax on vertical equity. this is supported by the fact that in 2011 only about 20.199 people, which is about 1% of all taxpayers, filed the tax return of the annual personal income tax [9]. we will see that the principle of fairness is not satisfied if we look at the corporate income tax in serbia and make a comparison with the eu countries. if we analyze the data in table 2, we can see that in the majority of eu countries the effective tax rate is lower than the prescribed rate. however, the differences among the member countries are lower if you compare real rates that when it is done with a nominal tax rates. otherwise, the tendency to reduce differences between the statutory and effective tax rates over time can also be seen from this table. the difference between these two rates is the largest in belgium (33.99 to 4.8%), france (33.33 to 8.2%) and denmark (25 to 7.4%). such a large difference in prescribed and effective tax rates suggests that the corporate income taxes of these countries present a number of tax incentives and exemptions, which resulted in a decrease in the effective tax rate. as for serbia, the corporate tax rate was 10% until 2013 and then it changed to 15%. this rate is still one of the lowest in europe, and it is lower than the rates that apply in most countries of the region. with the retained system of the investment tax credit, which reduces the tax liability up to one-third, the effective tax rate in serbia of 10% is still among the lowest ones in europe. however, the increase in the tax rate to 15% does not reduce the tax competitiveness of our country [12]. analysis of performance to direct taxes in the tax system of the republic of serbia 61 table 2 the difference between the statutory and effective tax rate of corporate tax in serbia and selected eu countries in 2013 (in %) state legal rates effective rates state legal rates effective rates great britain 28 23.2 ireland 24 11.9 germany 30-33 22.9 romania 16 10.4 italy 31.4 22.8 serbia 15 10 netherlands 20-25 20.9 cyprus 10 9.4 spain 30 20.9 france 33.33 8.2 poland 19 17.7 estonia 21 8 hungary 10/19 16.7 the czech republic 19 7.4 sweden 26.3 16.4 denmark 25 7.4 finland 26 15.9 slovakia 19 7 austria 25 15.7 latvia 15 6.5 portugal 12.5/25 14.99 belgium 33.99 4.8 slovenia 20 14.8 bulgaria 10 4.6 source: www. worldwide-tax. com, www. iiea. com/blogosphere/effective-eu-corporate-tax-rates (11.4.2013) the property tax system in serbia has the differentiation in tax rates and various tax exemptions and we can say that it is an unfair system. 3. measuring the performance of direct taxes in serbia in relation to efficiency the analysis of the effectiveness of direct taxes involves the analysis of the two components of efficiency:  the impact of direct taxes on the efficient allocation and  efficiency from the standpoint of minimizing the cost of collecting the tax. the first aspect of efficiency, which refers to the impact of direct taxes on the efficient allocation, is disrupted due to the fact that these taxes are distorting. applying direct taxes affects directly the economic strength of the taxpayers, which in turn encourages their distorting behavior. what will be the level of the distortion depends on the tax burden that taxpayers suffer because of the introduction of the tax. the table below shows the fiscal burden of gdp direct taxes. table 3 share of direct taxes to gdp in serbia, 2008-2012. years gdp (in million rsd) direct taxes (in million rsd) direct taxes (in %) 2008 2,661.4 111,665.5 4.19 2009 2,720.1 122,460-6 4.50 2010 2,881.9 106,786-6 3.70 2011 3,175.0 128,149.6 4.03 2012 3,267.1 109,130.7 2.99 source: public finance bulletin, january 2013, the ministry of finance of the republic of serbia, available at: http://www.mfin.gov.rs/userfiles/file/bilten%20javne% 20finansije/bilten-201301.pdf, calculations performed by author 62 m. djordjević the fiscal burden of gdp direct taxes has reduced since 2009. in 2012 it was 2.9%. this fact is encouraging, given that it is every country’s interest to burden its economy and citizens as less as possible by fiscal tax, which will result in reducing distortion. fig. 1 share of direct taxes to gdp in serbia, 2008-2012 source: public finance bulletin, january 2013, the ministry of finance of the republic of serbia, available at: http://www.mfin.gov.rs/userfiles/file/bilten%20javne%20finansije/bilten201301.pdf, calculations performed by author one of the proposals to reduce the fiscal burden is the reduction of contributions for compulsory social insurance, while the average tax burden on wages remains the same or increases slightly. the decrease in revenue from social security funds would compensate for the larger transfers from the national budget. the reduction of the fiscal burden on labor would affect favorably the demand for labor, which would ultimately contribute to increasing employment and investment, and reducing undeclared work [arsić et al, 2010, p.22-37]. although the total fiscal burden on labor in serbia is somewhat higher than the average in central and eastern europe, its impact on the international competitiveness of the country is neutral. the following table shows the fiscal burden to 100 rsd of net earnings in the neighboring countries. table 4 fiscal burden earnings in selected countries in 2010 states fiscal burden of salaries the czech republic 68.1 slovakia 55.3 poland 71.2 greece 58.0 bulgaria 47.8 slovenia 69.2 spain 55.3 portugal 48.4 serbia 63.6 source: m arsic., altiparmakov n., ranđelović s., buđić a., vasiljevic d., levitas, t., (2010), poreska politika u srbiji-pogled unapred, sega usaid project, beograd, str. 35. 2008. 2009. 2010. 2011. 2012. analysis of performance to direct taxes in the tax system of the republic of serbia 63 another aspect of observing efficiency refers to minimizing the cost of tax collection. expenses for staff in tax administration are a part of the total administrative costs. on the basis of the following views it can be seen that the salaries of employees in public administration account for a significant portion of the total budget expenditures, and that they have been increasing over time, but their share in total expenditure has declined from 24% to 18.5%, which is likely to result in improvement of tax administration. table 5 share of expenses for employees in public administration in total expenditures in serbia, 2008-2012 years total expenses (in millions rsd) expenditures of public administration in millions rsd in % 2008 740.826,3 180.382,1 24.35 2009 890.612,3 184.157,0 20.68 2010 1.058.635,4 190.383,0 17.98 2011 1.167.835,4 215.076,9 18.42 2012 1.288.922,6 238.671,6 18.56 source: public finance bulletin, january 2013, the ministry of finance of the republic of serbia, available at: http://www.mfin.gov.rs/userfiles/file/bilten%20javne%20finansije/bilten201301.pdf, calculations performed by author the latest tendencies in the work of tax administration are: increase of the autonomy in the work of tax administration, privatization of certain functions (introduction of the partial lease), making adequate strategy with priorities, increasing the tax culture, continuous staff training and the creation of high-quality it support at work [2]. fig. 2 share of expenses for employees in the public administration in total expenditures in serbia, 2008-2012 (in %) source: public finance bulletin, january 2013, the ministry of finance of the republic of serbia, available at: http://www.mfin.gov.rs/userfiles/file/bilten%20javne%20finansije/bilten201301.pdf, calculations performed by author with fiscal reform in 90s of the twentieth century, the tax administration reform has started. the republican tax administration was formed in the form of the board for public revenue. management had difficulty functioning due to the lack of information system of automatic data processing. at that time, a number of tax laws have been passed and it has led to even more difficult work of the board and reduction in public revenue. 2008. 2009. 2010. 2011. 2012. 64 m. djordjević the reforms that followed did not change significantly the earlier basic concept of the tax administration. they have only aimed to increase the level of the tax administration’s efficiency. one of the main goals of the fiscal reform in 2001 was to highlight the reorganization of tax administration in accordance with the tax administrations of the countries with developed market economies. it may be noted that the tax administration since then has experienced many changes in terms of organization, which is an effort in the direction of its introduction into series of tax administrations of modern states. to achieve fairness and efficiency at the same time is almost impossible, because these are conflicting criteria. tax authorities will have to sacrifice efficiency for greater fairness and vice versa. the conflict between efficiency and equity is as old as taxation. this conflict can be resolved in various ways. one of them is the choice of the tax rate, or the number and amount of the tax rate, as well as the decision whether the rates should be proportional or progressive [rosen, 2005, p.182]. 4. measuring the performance of direct taxes in serbia in relation to yield if we analyze the yield of direct taxes in serbia, we will see that they collect a much smaller amount of funds for the budget than it is the case in developed market economies. the yield of personal income tax in serbia is relatively low. the share of personal income tax in total tax revenues in serbia is around 11.5%, although it has reduced in the last few years, so that in 2012 it was 5.6%. table 6 share of personal income tax in total tax revenue, 2007-2012 (in mil. rsd and in%) years total revenues (in million rsd) revenues of personal income tax in million rsd in % 2007 581,841.5 61,409.5 10.5 2008 639,600.3 72,000.0 11.3 2009 698,756.2 81,321.2 11.6 2010 655,971.0 76,019.0 11.6 2011 726,400.0 79,100.0 10.9 2012 750,100.0 42,300.0 5.6 source: data from the budget of the republic of serbia for 2007-2012; calculations performed by author such a small share of the personal income tax in the total tax revenue of our country indicates a dominant share of indirect taxes (vat, excise and customs), which is characteristic of underdeveloped countries. this state of public finances was also caused by many other factors, such as government regulation, political conditions, the economic environment, etc. the share of personal income tax in total tax revenue in serbia was 5.6% in the last year, and it is significantly less than the european and world average. not only is it a lack of plentiful source of revenue for the state, but with such an income tax, it may be difficult to achieve other, non-fiscal goals. we almost cannot talk about reduction of the regressive effect as a result of the application of indirect taxes. analysis of performance to direct taxes in the tax system of the republic of serbia 65 the taxes of income from work have a dominant share in the total revenue from the personal income, which is around 90%, while the capital gains account for only about 10%. the wage tax makes up for about 80% of the total individual income tax, although in the last year it was reduced to 55%, as can be seen from the following review. a small yield of personal income tax is the result of adverse effects of macroeconomic factors, the amount of the tax rate and degree of recovery. regarding macroeconomic factors that affect restrictively revenue growth of personal income tax, it is a low employment rate. a small number of employees reduces the number of taxpayers, just as the low income adversely affects the yield of personal income tax over a low tax base, which often does not exceed the tax-free minimum. low revenue yield of the personal income tax is a consequence of the tax rate. the average effective and top statutory tax rate on personal income in serbia are low compared to other countries. the average effective tax rate is 12.45%, which is significantly lower than in the eu, while the top statutory tax rate on personal income in serbia is 20%. the low level of the collection of personal income tax, also negatively affects his bounty. the number of annual tax returns for income tax is negligible, only 1% of all taxpayers. the reason for this is that in serbia penalties for failure to file tax returns are sufficiently low, and a large number of taxpayers choose to pay the fine, rather than a high amount of tax. in addition to the low level of the collection is the fact that in our country there are still a number of activities taking place outside the legal flows. the corporate income tax has existed in serbia since january 1992 and it is considered a basic tax form. by abundance, it is located just behind the consumption tax and the personal income tax. table 7 share of corporate income tax in total tax revenue, 2007-2012 (in mil. rsd and in%) year total tax revenue (in mil. rsd) corporate income tax in mil. rsd in % 2007 581,841.5 27,297.2 4.6 2008 639,600.3 34,024.4 5.3 2009 698,756.2 44,306.9 6.3 2010 655,971.0 21,971.0 3.3 2011 726,400.0 35,000.0 4.8 2012 750,100.0 39,400.0 5.2 source: data from the budget of the republic of serbia for the period 2007-2012; calculations performed by author unlike in developed countries where the share of this tax in the structure of tax revenues is 9.3%, in our country this percentage is much lower. what is disturbing is the fact that the revenues from the corporate income tax in serbia have decreased from 6.3 % in 2009 to 3.3 % in 2010. this decrease is a result of poor performance of many companies, which is manifested as a result of adverse economic conditions in the country and the impact of the economic crisis, whose negative effects can be felt around the world. in the last two years, these revenues are showing some growth, so they were 5.2% in 2012. the share of property taxes in total revenue budget is much lower than in oecd countries. tax liability of the property tax is relatively small, and this fact is good for the 66 m. djordjević owners of the most valuable assets. if you look at the chart below, we can see that revenue from property taxes in the period 2007-2010 did not exceed 1.5%, while it amounted to only 0.5% of total tax revenue in 2008. revenues from this tax are starting to grow and account for almost 2% in 2011 and 2012. table 8 the share of property taxes in total tax revenue, 2007-2012 (in mil. rsd and in %) year total tax revenue (in mil. rsd) property taxes in mil. rsd in % 2007 581,841.5 6,745.1 1.15 2008 639,600.3 2,945.7 0.46 2009 698,756.2 6,845.8 0.97 2010 655,971.0 9,641.0 1.46 2011 726,400.0 14,049.6 1.93 2012 750,100.0 13,900.7 1.85 source: data from the budget of the republic of serbia 2007-2012; calculations performed by author the property tax base is greatest in the richest parts of the country and the collection of taxes is a way in which the local governments provide the missing funds. also, it is possible to transfer resources from rich to poor municipalities, which would favorably affect the financing system of cities and municipalities. fig. 3 the share of direct taxes in total tax revenue, 2007-2012 source: data from the budget of the republic of serbia for 2007-2012; calculations performed by author property tax was one of the most neglected forms of taxation in serbia until a few years ago. propriety tax is 5% of total revenues of cities and municipalities. it has become the source of local government revenue since 2007. by that time, the property tax had a character of the assigned revenue. propriety tax corporate income tax personal income tax analysis of performance to direct taxes in the tax system of the republic of serbia 67 conclusion based on previous research, we have shown that measuring the performance of direct taxes in serbia is possible through the analysis of the criteria of equity, efficiency and yield. the principle of vertical equity of the tax system in serbia is disrupted by proportional taxation, because persons who earn higher levels of income are taxed at the same rate as persons who have lower levels of income. the current system of personal income tax violates the principle of horizontal equity. differentiated modes of taxing income from different sources, i.e. different statutory tax rate and the number of deductions and exemptions result in different effective rates. also, the system of corporate taxation in serbia does not satisfy the principle of fairness in taxation, as the effective tax rate is lower than statutory. the property tax system in serbia has the differentiation in tax rates and various tax exemptions and we can say that it is an unfair system. regarding the principle of effectiveness, direct taxes in our country cannot satisfy any of the aspects of efficiency. first, they are distorting and cause inefficient allocation of resources. also, it is very difficult to reduce the cost of public administration or the cost of taxpayers. finally, the principle of abundance in taxation is not satisfied, since the direct taxes, in underdeveloped countries, collected a very low level of income. this is confirmed by the example of our country, because these tax forms provide less than 15% of total tax revenue. this shows that the tax system in serbia is very regressive. references 1. аrsić м., аltiparmakov n., ranđelović s., buđić а., vasiljević d., levitas t., (2010), poreska politika u srbiji-pogled unapred, usaid sega projekat, beograd 2. autor., (2008), kontroverze oporezivanja dohotka fizičkih lica, doktorska disertacija, ekonomski fakultet, niš 3. đurović-todorović j., đorđević m., (2011a), direktni porezi, ekonomski fakultet niš 4. đurović-todorović, j., đorđević, m., (2011b)., effects of governmental measures against the world economic crisis in serbia, thematic collection of papers: experiences in overcoming the global economic crisis – the cases of italy and serbia, university of niš, faculty of economics, university ca’ foscari venice 5. law on personal income tax law, official gazette republic of serbia, various numbers 6. popović d., (1997), nauka o porezima i poresko pravo, open society institute, budimpešta 7. rosen s. h., (2005), public finance, mcgraw-hill internacional edition, new york 8. public finance bulletin, january 2013, ministry of finance republic of serbia, available at: http://www.mfin.gov.rs/userfiles/file/bilten%20javne%20finansije/bilten-201301.pdf 9. press release tax administration (25.4.2012) available at: http://www.poreskauprava.gov.rs/ aktuelnosti/ostalo.html 10. glossary of financial terms, available at: http://wmd.hr/rjecnik-pojmovi-d/web/direktni-porez 11. taxation trends in the eu – data for the eu member states, 2011 edition, eurostat, european commission, available at http://epp.eurostat.ec.europa.eu/portal/page/portal/ government_finance_ statistics/introduction 12. what are the effects of the reform of the corporate income tax in serbia, business & finance, available at: htpp://bif.rs/2013/03/kakvi-su-efekti-reforme-poreza-na-dobit-preduzeća-u-srbiji/#sthash.9mbxmo69.dpuf 13. www. worldwide-tax. com, www. iiea. com/blogosphere/effective-eu-corporate-tax-rates. 68 m. djordjević аnaliza performansi direktnih poreza u poreskom sistemu srbije direktni porezi predstavljaju veoma važnu grupu poreskih prihoda. njihova glavna karakteristika je to što se odnose na ličnost poreskog obveznika i direktno pogađaju njegovu ekonomsku snagu. oni predstavljaju stabilan i izdašan izvor prihoda budžeta jedne države. u cilju sagledavanja njihove uloge u poreskom sistemu srbije, neophodno je posmatrati koji se ciljevi njihovom primenom mogu ostvariti. namera zakonodavca je obezbeđenje sredstava za ostvarenje fiskalnih i vanfiskalnih ciljeva. određivanje performansi direktnih poreza u poreskom sistemu srbije može se izvršiti na osnovu kriterijuma pravičnosti, efikasnosti i izdašnosti. cilj ovog rada je merenje performansi direktnih poreza u poreskom sistemu srbije, radi donošenja što adekvatnijih zaključaka o njihovoj ulozi i značaju u obezbeđenju sredstava budžeta. na taj način ukazaće se na potrebu reforme direktnih poreza u poreskom sistemu naše zemlje i na neophodnost smanjenja značaja indirektnih, odnosno poreza na potrošnju. ključne reči: direktni porezi, pravičnost, efikasnost, izdašnost, javni prihodi. facta universitatis series: economics and organization vol. 15, n o 2, 2018, pp. 97 110 https://doi.org/10.22190/fueo1802097p © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper a study of multicriteria decisionmaking for selecting suppliers of linear motion guide  udc 658.74:519.8 goran s. petrović 1 , vesna sekulić 2 , miloš madić 1 , jelena mihajlović 1 1 faculty of mechanical engineering, university of niš, niš, serbia 2 faculty of economics, university of niš, niš, serbia abstract. supplier evaluation and selection is becoming more and more important for companies in today’s logistics and supply chain management. decision making in supplier selection domain, as an essential component of supply chain management, is a complex process due to the fact that a wide range of diverse criteria, stakeholders and possible solutions are embedded into this process. this paper focuses on the application of some single and hybrid multi criteria decision making approaches for the selection of suppliers of transportation and logistics equipment. the analytic hierarchy process (ahp), stepwise weight assessment ratio analysis (swara) and technique for the order preference by similarity to ideal solution (topsis) have been implemented in the "lagerton" company in serbia for evaluation and selection of the supplier in the case of procurement of thk linear motion guide components. the best ranked supplier has been suggested to the company and the sensitivity analysis of ranking orders according to the criteria weights variations has been done. key words: supplier selection, mcdm, ahp, topsis, linear motion guide jel classification: c44, c52. introduction in today’s highly competitive and interrelated environment, the effective selection of suppliers is very important to the success of a logistics and supply chain management functions in an industrial setting. these functions deal with the analysis, design and management of flows of row materials, goods, information, people and energy, and involves a wide range of activities such as: transportation (internal and external), handling, received february 05, 2018 / accepted march 27, 2018 corresponding author: goran s. petrović faculty of mechanical engineering, aleksandra medvedeva 14, 18000 niš, serbia e-mail: goran.petrovic@masfak.ni.ac.rs 98 g. petrović, v. sekulić, m. madić, j. mihajlović packaging, storage, scheduling and inventory management, purchasing, energy supplies, service, maintenance, life cycle cost management, customer relationship management, etc. (madić & petrović, 2016). today, organizations are under tremendous pressure of global competition, and companies strive to achieve excellence in delivering high quality and low cost products and services to their customers by improving the efficiency of their supply chain system to gain competitive advantages (moghaddam, 2015). including all of the activities related to the capital, material and information flows between its members, supply chain involves the suppliers, manufacturers, distributors, retailers, and customers who are accompanying with each other in satisfying the end customers’ requirements and needs (bowersox at al., 2002). the process of supply chain management seeks to relate and integrate these activities to enable the supply chain and its members to realize their goals. supply chain management is considered as one of the most important competitive strategies used by modern companies which main aim is to connect and integrate various suppliers in order to satisfy market demand. namely, the modern companies establish their own supply chain striving to find more efficient suppliers in order to increase their supply chain competitiveness. so, a key issue in establishing a supply chain and improving its efficiency and competitiveness is to find or select more collaborative suppliers who can develop long term efficient relationships. one of the most important activities that impacts the company’s performance as well as the entire supply chain competitiveness is evaluation and selection of suppliers. supplier evaluation and selection is a multi-criteria decision making problem (mcdm) involving a set of different and opposite criteria. information and communication technology, financial position, flexibility in meeting customer needs, reputation and position in industry, attitude, flexibility, packaging ability, management and organization, geographical location, production facilities and capacity, personnel capability, warranties and claim policies, repair service, payment options, parity, cost can be considered as main criteria that influence the supplier selection of a given product in a supply chain management (madić et al., 2014). 1. literature review in this section, some studies that were performed in previous years on the multicriteria supplier selection were analyzed in order to determine the criteria and appropriate methods that were used for the selection of suppliers. according to international scientific journals and books, available in electronic databases such as elsevier’s science direct, taylor & francis, springer and wiley, there has been a steady increase in research for the last five years in the area of multi-criteria supplier selection. such distribution of the published papers and books is presented in figure 1. various mcdm methods and different optimization techniques have been proposed to aid the supplier selection process. according to yıldız & yayla (2015) 16 percent of the supplier selection studies presented in the reviewed literature were from the automotive sector, 13 percent from the manufacturing sector and only 4 percent from the transportation-logistics sector. a number of very extensive reviews of mcdm methods for supplier evaluation and selection have already been conducted. to the best of authors’ knowledge, the most recent reviews have been published by chai et al. (2013), govindan et al. (2015), simić et al. (2017), and ghorabaee et al. (2017). a study of multi criteria decision making for selecting suppliers of linear motion guide 99 fig. 1 increase of researches in supplier selection field for the last five years especially in the field of transportation and logistics single mcdm approaches and case studies are considered individually. the case study research done by cieśla (2016) considers supplier selection of aluminum for a hypothetical manufacturer of transportation equipment located in poland. evaluation of five suppliers has been conducted using a weighted scoring method, a strengths and weaknesses method and a graphical method according to the following criteria: price, location, market position, date of payment, completion terms, availability on the market, quality (e.g. iso certificate). šimunović et al. (2011) applied ahp method for the purpose of systematic evaluation and selection of suppliers. they considered evaluation and selection of three suppliers of a mechanical part for the company dealing with the assembly of agricultural machines, according to five criteria: cost, delivery time, deferred payment, parity and packing. shyur and shih (2006) proposed the usage of ahp and topsis methods as a hybrid mcdm approach for strategic supplier selection. authors evaluated four vendors according to seven criteria: ontime delivery, product quality, price/cost, facility and technology, responsiveness to customer needs, professionalism of salesperson, and quality of relationship with vendor. finally, an approach proposed by jamil et al. (2013) evaluated the effectiveness of five decision making tools based on ahp and topsis methods and their fuzzy extensions. they concluded that all considered mcdm methods are applicable and accurate for supplier selection in automotive industry. however, in case when the number of suppliers (alternatives) becomes large or when more criteria need to be considered, the decision maker may be faced with computational problem in the case of ahp method (pairwise comparison in a big matrix). as seen from literature, many mcdm methods have been proposed for solving supplier selection problem. ahp method and its hybrid extensions with other mcdm methods represents appropriate decision making tool, but in some cases the results show great variation in the final ranking scores. in those cases, there is a need to compare final ranking scores obtained using ahp method with some other mcdm approaches. in this paper real life example of evaluation and selection of suppliers for linear motion guide components is solved by using different mcdm methods. also, summarizing the considered criteria in literature, supplier selection evaluations are generally based on price, logistics costs, quality, delivery characteristics, flexibility, supplier background capacity and rating. 100 g. petrović, v. sekulić, m. madić, j. mihajlović 2. supplier selection strategies and criteria after making a decision to buy the needed resources, it is necessary to make an adequate supplier selection, which means a set of activities within the supply chain management process that includes several different stages – to identify potential suppliers as supply sources, evaluate them, select the right suppliers among them, evaluate supplier performance and develop the productive supplier relationship for future partnership (hokey, 2015). the process of searching for the appropriate supplier is often complicated and for making it simpler a company should first explore and leverage the reliable source of information about the potential suppliers. the list of potential suppliers that the company uses to acquire its resources represents a kind of supplier base (wisner et al., 2012). an effective supplier base significantly contributes to competitive advantage of the company and is often critical to its success. it is thus vital to understand the strategic role of suppliers and relationship with them. after preparing a short, manageable list of the potential suppliers and gathering information about them, it is necessary to investigate if they are indeed worthy of serious consideration for cooperation. that primarily means to evaluate the suppliers and compare them in terms of their ability to provide right products and/or services with the right price at the right time (hokey, 2015). this ability can be reflected in certain supplier evaluation attributes, given in table 1. although the importance of these attributes to supplier evaluation can vary between companies, considering these attributes will help to identify the strengths and weaknesses of each potential supplier and select the appropriate ones. among these attributes, some studies on supplier evaluation (min & galle, 1991; verma & pullman, 1998) have shown that quality, price, and delivery services/performance are the most dominant factors for evaluating and selecting a particular supplier, strategically important for a company. however, the process of selecting the competent suppliers for important resources, which can potentially impact the competitive advantage of the company, is a complex one and should be based on multiple criteria. so, in addition to cost and delivery performance, companies should also consider how their suppliers can contribute to product and process technology. this means that in the process of supplier selection companies should consider some of the following factors (wisner et al., 2012):  process and product technologies with the help of which suppliers should be competent to produce superior products at a reasonable cost,  willingness to share technologies and information, which allows the use of the supplier's capabilities and to focus on core competencies,  quality – high and consistent product quality directly affect the quality of the finished goods,  cost, including primarily the unit price of the material and the total cost of ownership, which can significantly affect the purchase decision,  reliability of supplier characteristics,  capacity of a supplier to fill orders to meet requirements and the ability to fill large orders, if needed,  communication capability, which facilitates communication between the parties,  location – geographical location can affect the delivery, transportation and logistical costs,  service – suppliers should be able to back up their products and provide good services when needed. a study of multi criteria decision making for selecting suppliers of linear motion guide 101 table 1 supplier evaluation attributes criteria attributes quality quality of products warranty quality certification willingness to take the corrective actions price competitive price no hidden costs delivery services good packaging geographical location delivery on schedule prompt responses to emergent delivery requests production capacity and technical capacity adequate facility, equipment, and know-how adequate maintenance skilled labour technical ability for innovation information technology financial stability credit rating cash flow, liquidity, profitability bank reference environmental compliance environment policy iso 14000 certification source: hokey, m. (2015) the essentials of supply chain management: new business concepts and applications, pearson education ltd, p. 284 there are numerous other strategic and tactical factors that a company should take into account when choosing suppliers. the ability of the company to select competent strategic suppliers directly affects its competitive success. in the conventional supply chain management, the companies evaluate and select their suppliers based on price, quality, delivery time, and provided services. these criteria should be treated as conventional criteria which mostly play a key role in supplier evaluation and selection. but besides the conventional supplier selection, the number of researches incorporates the environmental and social factors in supplier evaluation and selection (green at al., 1996; enarsson, 1998). namely, with paying more attention to the exhaustible natural resources and industrial pollution, sustainable supply chain management and sustainable supplier selection have been significantly attracted. in order to produce sustainable products in a sustainable supply chain, it must consider the sustainability criteria in selecting the appropriate suppliers. supply performance measurement is another important basis for selecting a supplier and negotiates with him. namely, it is important to hold each logistics activity accountable to business measurements that align the activity with the other logistics activities, which in the final motivate highly competitive performance. doing so requires a set of financial, productivity, quality, and response-time metrics (frazelle, 2002). these indicators are a set of measures for monitoring the performance of internal supply organization in the company and the performance of its suppliers. the most important are the supply financial indicators and they include the following: total supply cost (all the costs related to supply planning, supplier management, and procurement execution), purchase order cost (affecting the size of order quantities and related inventories), supplier return on inventory and total 102 g. petrović, v. sekulić, m. madić, j. mihajlović acquisition cost (total ownership cost or total logistics cost). all these supplier metrics should be a foundation for a supplier selection and negotiation program (frazelle, 2002). 3. mcdm methods the methodological framework of the research decision analysis is concerned with those situations where a decision maker has to choose the best alternative among several candidates while considering a set of conflicting criteria (chatterjee, 2011). in order to evaluate the overall effectiveness of the candidate alternatives, rank and select the most appropriate (the best) supplier, the primary objective of a mcdm methodology is to identify the relevant supplier selection problem criteria, assess the alternatives information relating to those criteria and develop methodologies for evaluating the significance of criteria. in this section a brief description of the applied mcdm methods is given. in order to calculate criteria weights, ahp and swara methods are used, while ahp and topsis methods are used for evaluation of alternatives. 3.1. analytic hierarchy process method the analytic hierarchy process (ahp) method was originally proposed by thomas saaty (1977, 1980). it represents one of the best known and the most commonly used mcdm method. the ahp can be implemented in a few simple consecutive steps: step 1: computing the vector of criteria weights. the vector of criteria weights can be computed by creating a pairwise comparison matrix a where each element aij of the matrix a represents the importance of the i th criterion relative to the j th criterion. the comparisons between two elements are assembled, using the values from 1 to 9 from fundamental saaty scale. final determination of criteria weights is based on geometric mean method as shown by following equation: (∏ ) ⁄ ∑ (1) where gmj are geometric means of each row and is the number of considered criteria. step 2: testing the consistency of results. the pairwise comparisons made by ahp method are subjective and this method tolerates inconsistency through the amount of redundancy in the approach. the value that measure consistency of the subjective comparisons is consistency index ci: (2) where is the maximum eigenvalue of the pairwise comparison matrix a. finally, the ratio ci/ri, that is termed the consistency ratio cr, should be less than 0.1. in eq. 2 ri is the random index (tabular value), i.e. the consistency index when the entries of matrix a are completely random. step 3: comparison of alternatives with respect to each criterion. this step implies determination of pairwise alternative comparison matrix bj, where elements of this matrix represent the preference of the k th alternative relative to the l th alternative according to criterion j. the comparisons have to be done using the values from 1 to 9 from saaty scale in the same way as described in step 1. a study of multi criteria decision making for selecting suppliers of linear motion guide 103 step 4: synthesize the global ratings. the final step is the multiplication of local priorities by the weight of the respective criterion and the results are summed up to produce the overall priority of each alternative (global ratings). 3.2. stepwise weight assessment ratio analysis the stepwise weight assessment ratio analysis (swara) method was developed by kersuliene et al. (2010) with an aim to identify importance of criteria and relative weights of criteria. according to stanujkić et al.(2015) the process of determining the relative weights of criteria using swara method can be implemented using five following steps: step 1: the criteria should be sorted in descending order based on their expected significances. step 2: starting from the second criterion, the respondent (decision maker) expresses the relative importance of criterion j in relation to the previous (j-1) criterion, for each particular criterion. this ratio is called the comparative importance of average value, sj; step 3: determine the coefficient kj as follows:       11 11 js j k j j ; (3) step 4: determine the recalculated weight qj as follows:          1 1 11 j k k j q j j j ; (4) step 5: the relative weights of the evaluation criteria can be determined as follows:    n k k j j q q w 1 , (5) where wj denotes the relative weight of criterion j and n is the total number of criteria. 3.3. technique for the order preference by similarity to ideal solution the technique for the order preference by similarity to ideal solution (topsis) method was introduced by hwang and yoon (1981). the ordinary topsis method is based on the concept that the best alternative should have the shortest euclidian distance from the ideal solution and at the same time the farthest from the anti-ideal solution. topsis method can be implemented using following steps: step 1: method starts with determination of a decision matrix x = (xij)m  n, in which element xij indicates the performance of alternative ai when it is evaluated in terms of decision criterion cj, (for i = 1, 2, 3,..., m and j = 1, 2, 3,..., n): 104 g. petrović, v. sekulić, m. madić, j. mihajlović                mnmm n n m n ij xxx xxx xxx a a a ccc xx ... ... ... 21 22221 11211 2 1 21  ; (6) step 2: determine the normalized decision matrix which elements are ijr :    m i ij ij ij x x r 1 2 , (7) step 3: obtain the weighted normalized decision matrix whose elements are vij by multiplying each column j of the normalized decision matrix by its associated weight wj (obtained using e.g., ahp or swara method): jijij wrv  , (8) step 4: determine the positive ideal and the negative ideal solutions: })}{(max}),{{(min),...,,( })}{(min}),{{(max),...,,( 21 21 cjvbjvvvvv cjvbjvvvvv ijiijin ijiijin     , (9) where b and c are associated with the maximization and minimization criteria sets, respectively. step 5: calculate the separation measures (euclidean metric) from the positive ideal solution and the negative ideal solution. the separation of each alternative from the positive ideal solution is given as:     n j jiji vvs 1 2 )( . (10) the separation of each alternative from the negative ideal solution is given as:     n j jiji vvs 1 2 )( . (11) step 6: calculate the relative closeness of the i-th alternative ai to the positive ideal solution:     ii i i ss s p . (12) a study of multi criteria decision making for selecting suppliers of linear motion guide 105 the relative closeness pi can have values between [0, 1], whereby, pi = 0 represents negative ideal solution, while pi = 1 stands for positive ideal solution. according to pi values the alternatives can be ranked. the best alternative has the highest value pi because it is the closest to the positive ideal solution. 4. case study thk linear motion guide supplier selection the proposed mcdm methods for supplier evaluation and selection have been implemented in the "lagerton" company (limited liability company) in serbia which is the authorized distributor of a number of mechanical components. in order to illustrate and validate the applicability of proposed mcdm methods a real-life problem, considering evaluation and selection of linear motion guide technologies supplier, is solved here. linear motion guide is a product of thk company from japan. it provides a component that enables linear rolling motion for practical usage in high-precision, highrigidity, energy-saving, high-speed machines. the "lagerton" company procures components for a known buyer (figure 2):  slide block srs 12 gm uu;  rail srs 12/570 – 10 – 10. fig. 2 thk linear motion guide components the company acquires components through a selection of the best supplier from european market qualified suppliers. four companies (s1, s2, s3 and s4) have been evaluated and the main criteria for evaluation and selection that were used are: product price (c1), transportation costs (c2), delivery time (c3), company rating (c4) and established cooperation (c5). the first three criteria are minimization criteria where lower attribute values are preferred. the last two criteria are maximization criteria where higher attribute values are preferable. company rating (c4) and established cooperation (c5) are qualitative criteria and both are numerically represented using the values from 1 to 9 from fundamental saaty scale. 106 g. petrović, v. sekulić, m. madić, j. mihajlović fig. 3 a model for supplier selection of thk linear motion guide components in an interview, the management team of the “lagerton” company, responsible for evaluation and selection of suppliers, estimated performance ratings of four suppliers and the results are shown in table 2. table 2 suppliers performance ratings– decision matrix alternatives criteria c1 [eur] c2 [days] c3 [eur] c4 [-] c5 [-] min min min max max s1 350 50 15 9 9 s2 390 60 15 9 1 s3 400 60 15 5 1 s4 367 60 7 4 1 source: the internal documentation of the “lagerton” company the management team also evaluated the significance of the defined criteria by creating a pairwise comparison matrix (table 3): table 3 evaluation of the criteria – pairwise comparison matrix criteria c1 c2 c3 c4 c5 c1 1 3 5 9 0.333 c2 0.333 1 3 7 0.333 c3 0.2 0.333 1 5 0.333 c4 0.111 0.143 0.2 1 0.143 c5 3 3 3 7 1 source: the internal documentation of the “lagerton” company a study of multi criteria decision making for selecting suppliers of linear motion guide 107 as described in section 3, ahp and swara methods are used in order to calculate criteria weights. based on pairwise comparison matrix (table 3), criteria weights are obtained as shown in table 4: table 4 criteria weights obtained using ahp and swara methods criteria weights c1 c2 c3 c4 c5 ahp 0.298 0.170 0.100 0.032 0.400 swara 0.242 0.181 0.136 0.119 0.322 table 4 clearly indicates that management team singled out c5 established cooperation as the most important criterion, more significant than c1 product price. on the other hand, c4 rating of the company is the least significant criterion probably due to the fact that all the considered companies are almost similar in renown, quality etc. in order to evaluate suppliers ahp method and two hybrid combinations of mcdm methods (ahp+topsis and swara+topsis) are used. the application of the proposed hybrid mcdm approaches gives the complete ranking of the suppliers as shown in table 5. the complete rankings are given according to calculated utility functions (step 4 for ahp and eq. 12 for topsis) for each approach. table 5 complete rankings of the suppliers according to different mcdm approaches supplier s1 s2 s3 s4 ahp 0.459 (1) 0.176 (3) 0.169 (4) 0.196 (2) ahp+topsis 0.922 (1) 0.033 (3) 0.006 (4) 0.0846 (2) swara+topsis 0.876 (1) 0.128 (2) 0.028 (4) 0.128 (2) according to this table, the supplier order preference is given below: supplier s1> supplier s4> supplier s2> supplier s3. the best choice is supplier s1 and the worst choice is supplier s3. one of the most interesting research tasks related to the supplier selection decision making problem is to explore the influence of criteria weights variations to the ranking orders obtained according to the selected mcdm approaches. in this study, the monte carlo simulation covering 1000 different scenarios of criteria weights was implemented for both hybrid approaches. values of criteria weights are randomly chosen from the intervals which was defined as ±10%, ±20% ... ±100% of original criteria weights. the changes of alternative ranks relative to the first solution (obtained with original criteria weights) were monitored and the sums of all ranking changes were calculated. the results are shown in figure 4. this figure clearly show that different scenarios of criteria weights do not significantly affect the ranking of alternatives in both hybrid combinations of the mcdm methods up to 50 percent of criteria weights changes. it should be noted that the best alternative – supplier s1 and the worst alternative – supplier s3 remain unchanged for all scenarios of criteria weights. 108 g. petrović, v. sekulić, m. madić, j. mihajlović fig. 4 stability of the alternative ranks relative to the criteria weights changes conclusion this research has demonstrated the applicability of some single and hybrid mcdm approaches (ahp, ahp+topsis and swara+topsis) in the selection of suppliers of transportation and logistics equipment. as a final conclusion, few points can be emphasized as follows:  in the case of thk linear motion guide components procurement all considered approaches give insignificant variation in the final ranking scores. supplier s1 is suggested to the serbian company "lagerton" as the best choice.  application of different mcdm approaches to the problem of supplier selection helps to make more objective and reliable decisions. ahp method is one of the most used for supplier selection in transportation and logistics industries. on the other hand, hybrid approaches, such as combination of different mcdm methods as illustrated in this study, can provide computationally more efficient procedure.  in the formulation and solving procedure of supplier selection problems mcdm methods often involve active participation of decision makers. this is particularly related to relative importance of criteria formulation as well as to analysis, ranking and selection of the final solution, which means the best alternative. therefore,the most important future endeavours are directed to the development of expert and intelligent decision making systems. acknowledgement: this study was supported by the ministry of education, science and technological development of the republic of serbia (project no. tr-35049). 0 200 400 600 800 1000 1200 1400 0 10 20 30 40 50 60 70 80 90 100 s u m s o f a ll r a n k in g c h a n g e s % ahp+topsis swara+topsis a study of multi criteria decision making for selecting suppliers of linear motion guide 109 references bowersox, j.d., cioss, j.d. & cooper b.m. 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(2015). multi-criteria decision-making methods for supplier selection: a literature review. south african journal of industrial engineering, 26 (2), 158-177. http://www.thk.com/ 110 g. petrović, v. sekulić, m. madić, j. mihajlović studija višekriterijumskog odlučivanja za izbor dobavljača linearnih profilisanih vođica evaluacija i izbor dobavljača postaju sve važniji za kompanije u današnjoj logistici i upravljanju lancima snabdevanja. donošenje odluka u domenu izbora dobavljača, kao osnovne komponente upravljanja lancima snabdevanja, predstavlja kompleksan proces zbog činjenice da su širok spektar različitih kriterijuma, različite interesne grupe i mnoštvo različitih rešenja uključeni u ovaj proces. ova studija je usmerena na primenu pojedinačnih i hibridnih pristupa višekriterijumskom odlučivanju za izbor dobavljača opreme u oblasti transporta i logistike. metode višekriterijumskog odlučivanja ahp, swara i topsis primenjene su u kompaniji "lagerton" u srbiji za evaluaciju i izbor dobavljača komponenti linearnih profilisanih vođica proizvođača thk iz japana.najbolje rangirani dobavljač predložen je kompaniji i urađena je analiza senzitivnosti određenih rangova na promenu težinskih koeficijenata razmatranih kriterijuma. ključne reči: izbor dobavljača, mcdm, ahp, topsis, linearne tehnologije facta universitatis series: economics and organization vol. 15, n o 2, 2018, pp. 149 163 https://doi.org/10.22190/fueo1802149s © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper balanced scorecard and lean business concept 1 udc 65.015.25 tatjana stevanović, bojana novićević čečević university of niš, faculty of economics, serbia abstract. changing modern business environment necessarily triggers the need to constantly search for new business concepts, management modes, and performance measurement systems. in recent decades, lean business concept has been widely applied in companies. this concept focuses on creating value for customers. the value refers to the delivery of products and services with all the characteristics required by customers, just in time, and at the lowest price possible. as the basic task of the company is to satisfy different needs, it is understandable that the company success will depend on the success in satisfying its customers’ needs. in this sense, the research subject in this paper is defining a possible system of performance measures in companies that apply lean business concept. the research results show that balanced scorecard can be applied in companies that apply the basic lean principles. this is because it primarily takes into account the value delivered to customers, and, based on this value, forms performance measures within the given perspectives. also, an important aspect of balanced scorecard refers to internal processes and learning and growth, which lean concept is particularly concerned with. key words: balanced scorecard, lean concept, performance measures jel classification: m41 introduction modern companies that strive to deliver the required value to customers while searching for perfection apply, among other things, lean business concept. lean business concept involves eliminating all forms of waste from business processes so that the customer gets the required value. the goal is to establish a continuous flow of operations without interruption and delay, and reduce operating costs. received november 06, 2017 / revised march 12, 2018 / accepted march 27, 2018 corresponding author: tatjana stevanović university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: tatjana.master@gmail.com 150 t. stevanović, b. novićević ĉeĉević in new business conditions, characterized by the application of basic lean business concept principles, designing an efficient performance measurement system is one of the prerequisites for successful business and preserving the competitive advantage. in such business conditions, orientation to financial performance measures only is insufficient to effectively manage the company, so managers must also focus their attention on nonfinancial performance measures. the number and variety of performance measures depend on the characteristics of the company’s business. in this sense, a company should develop its own performance measurement system. taking into account both financial and non-financial performance measures and the basic principles of lean business concept, balanced scorecard comes to the fore. balanced scorecard enables translating the company strategy into concrete actions and performance measures through four balanced interrelated perspectives: financial, customer, internal processes, and learning and growth perspective. as such, balanced scorecard is suitable for use in both production and service companies. in this sense, the paper is divided into three parts. the first part points to basic principles of lean business concept. the second part explains balanced scorecard perspectives, and points to its compatibility with the basic principles of lean business concept. finally, using the example of a telecommunication service provider, key performance measures are introduced, with the application of balanced scorecard. 1. lean business concept lean business concept creates business processes that generate greater value for customers, increasing the speed of performance, minimizing waste and balancing the flows of materials, information, and money. it is long, hard and time-consuming work, but the result of its implementation is sure success. to yield long-term effects, changes occurring in a company as a result of lean concept application must include organizational structure, business culture, and performance reporting system. this does not mean abandoning the existing organizational structure, business culture, and reporting systems, but their continuous improvement, because organization, culture, and reporting identified indicate advantages, disadvantages, potential business problems, and areas where some of the lean techniques and practices need to be applied (al-ashaab et al., 2016). lean business concept is not universal and cannot be applied in every company in the same way (sekerez, 2009). company managers and employees determine areas in which changes will be introduced. to secure the benefits of applying lean business concept, the following principles must be respected (womack & jones, 2003; olesen et al., 2015):  specify value,  value stream,  flow,  pull system,  perfection. the starting point of lean business concept is value definition. the value of a product or service is defined by the value end-user. the delivered product or service must satisfy the customer’s needs in terms of price, functionality, quality, costs, and the like. value is created by manufacturers or service providers. producing value is the reason for the balanced scorecard and lean business concept 151 existence of a company. the company creates value if it reduces internal waste, in terms of non-value-added activities and their associated costs, thereby increasing the total value delivered to customers. further increase in the value created can be achieved by adding new features to products which customers are interested in, in shorter delivery time and in the scope needed (hines et al., 2004). identifying values in lean business concept implies understanding all the activities that are performed in a company to produce a particular product, and optimizing the entire process. business processes carried out in a company must be considered from the endcustomer perspective. observing the processes in this way helps identify three types of activities in a company. these are: value-added activities, non-value-added activities that cannot be omitted from business processes, and non-value-added activities that can be omitted from business processes (schiman & brewton, 2009, p. 10). establishing a value stream makes the balance between activities performed and the reasons why they are being performed. value stream means a set of specific activities that are necessary to accomplish three main business tasks of a company. these tasks relate to: solving business problems, information management, and physical transformation (womack & jones, 2003, p. 11). identifying value stream for each product or family of products requires a lot of effort, but this process removes large amounts of waste in a company. what is important when identifying value stream is that they can be managed as a whole and used to measure the result achieved. in this way, conditions will be provided in which the company does not compete with competition, but focuses its efforts on achieving perfection by identifying and eliminating activities that are considered excessive. established value streams in a company relate to the entire business process, not just to individual segments. when determining value streams in a company, value stream mapping has an important role (andrade et al., 2016). once the value and value streams are identified, it is possible to connect all valueadded activities into an uninterrupted flow. this implies providing conditions for the uninterrupted flow of information, material, and other resources without delay, continuously, one by one. in this sense, this principle of lean business concept aims at eliminating all unnecessary waste on the resource path through the company. the next principle of lean business concept is to bring the product flow in line with customer requirements (pull system). there are two well-known systems for harmonizing product flow and customer requirements push and pull system. the application of the push system means that more work should be done to fill the warehouse with the finished products (melton, 2005, p. 666). unlike the push system, the pull system requires one-piece processing. pull system focuses on customer demands, and, as such, tends to provide conditions for the acquisition of resources, data, and information and the production of products to start when a signal from the market is received. this implies that production begins when a customer needs a product. the introduction of the pull system allows the company to have the appropriate level of inventory to deliver the required value at the time when there is a need for it. in fact, the difference between push and pull systems is precisely in the signal that initiates supply or production. kanban is used as a convenient signal for production in lean business conditions according to pull principle. the last principle of lean business concept is tendency towards perfection. advocates of lean business concept tend to think that first it is necessary to make the tasks and activities in the company “right” (to perform them in the right way, without interruption and waste), and only then to start optimizing them. it is clear that when the value and value stream in the company are identified and their uninterrupted process ensured, the process of 152 t. stevanović, b. novićević ĉeĉević lean transformation does not end. this means that the process of reducing effort, time, space, costs, and business errors never ends. when the company wins customers’ attention, it wants to retain it indefinitely, anticipating future needs and creating products that will meet their needs, thus building the image of a sensitive company and creating its image on the market as a faster producer of products, better than competitors’ (novićević et al., 2013, p. 151). lean business concept presented in this way differs in relation to traditionally accepted business principles. table 1 gives a comparative overview of traditional and lean business concepts. table 1 traditional and lean business concept traditional concept lean concept complex processes simple and easily detectable processes improvements are made on the basis of financial statements improvements are made on the basis of process observation improvements are made by accelerating value-added activities improvements are made by reducing nonvalue-added activities push business system pull business system serial flows flows in the company occur one by one – simultaneously control as inspection control as prevention managers answer questions about process improvement managers ask questions to employees to improve processes source: womack. & jones, 2003; schimann & brewton, 2009. the traditional business concept applied to complex and demanding processes. complex business processes caused a number of business problems, and control in mass production conditions was greatly hampered. traditional business concept focused on providing benefits to equity holders. however, such an orientation in terms of applying lean business concept is unacceptable. traditional business concept was designed for mass production conditions and worked in such conditions for many years. however, numerous changes both in and outside the company have led to traditional business concept becoming inadequate for application in a dynamic and highly competitive business environment. business processes in companies that apply lean business concept are documented and easy to see. these business processes are easier to manage and control. when business processes are easy to see, management is considerably easier too. lean business concept shortens lead time, so improving business processes can be done by eliminating non-value-added processes and activities (womack & jones, 1994). such efforts result in lean processes, which ensure high-quality products for customers at low prices, just in time and without keeping inventory. pull system replaced serial flows, thus creating the basis for the implementation of controls for the purpose of preventive action, rather than inspection. lean concept includes philosophy, culture, and business principles embedded in employee behavior, which ensures elimination of all forms of waste and obstacles in material and information flows, in order to improve business processes and deliver value required by customers. in this sense, lean business concept focuses on education and balanced scorecard and lean business concept 153 training of employees, on the one hand, and on providing the highest value for customers, on the other. lean business concept aims to satisfy the needs of customers and achieve the strategic goals of the company through efficient execution of business processes. lean concept focuses on daily incremental improvements. the advocates of lean concept believe that it is better to improve company operations immediately by 10%, rather than wait for the moment when operations can be improved by 100%. waiting for the moment when business can be fully improved takes time, while market conditions are ruthlessly changing, so the company can be late with its response to demand and thus lose battle with the competition. 2. balanced scorecard –a performance measurement system within lean business concept balanced scorecard was first used by robert kaplan and david norton at harvard business school in the early nineteen-nineties. the basic idea was to create a new performance measurement system for organizations. combining financial and nonfinancial performance measures in one report, balanced scorecard enabled managers to get more relevant information about the activities that are performed in the company that they manage. the authors emphasized that managers needed new management tools in conditions in which knowledge and information were power. balanced scorecard is based on cause-effect relationship between everyday activities in the business process and strategic goals, to verify whether the company is on the right path to achieve the defined strategy. the initial goal of balanced scorecard was to help managers in implementing a longterm strategy and facilitate company performance management. however, later it became a widely accepted business language in modern business conditions, contributing to better strategy implementation. by setting a system of balanced performance measures, balanced scorecard facilitates the implementation of company strategy, provides an effective and efficient system of performance measures, allows for successful communication of managers with employees and external stakeholders, and determines the framework for management activities. in addition to the above, balanced scorecard objectives also include: translating the company strategy into a coherent set of performance measures to control the targeted achievements (garengo & biazzo, 2013), providing information to manage the process of value creation, securing long-term and short-term financial and non-financial performance measures, harmonizing company systems and subsystems and providing for the measurement of the impact of organizational structure elements on the overall company operations (garengo & biazzo, 2012). balanced scorecard is an understandable framework that contains the following perspectives and tries to answer the following questions (janjić, 2006): a) financial perspective – how do stakeholders see us? b) customer perspective – how should we appear before customers? c) internal process perspective – what do we need to achieve? d) learning and growth perspective – can we continually improve and create value? a) financial perspective of performance measurement defines long-term business goals of the company. this perspective focuses on shareholders, and all other measures 154 t. stevanović, b. novićević ĉeĉević are causally related and result in improved financial indicators. this is because financial indicators such as income growth, cost reduction, productivity growth, risk reduction provide the necessary links that permeate all other perspectives. the main task within this area is to provide return on shareholders’ investment (vasiljevic et al., 2014). in addition to this measure, revenue and profit growth, rise in market share, cash flow and the like can be monitored. a good information base for measuring improvement within a financial perspective is value stream costing. value stream costing provides relevant, accurate and understandable cost information that will help managers make business decisions and effectively carry out their activities. the basic characteristics of value stream costing are that it is (baggaley & maskell, 2003, p. 26):  focused on value stream,  simple and easy to use,  focused on measuring value stream performance,  oriented to eliminate the calculation and allocation of overhead costs, and  clear and understandable to all company employees. the simplicity of value stream costing arises from the fact that detailed data on actual company costs is not used to calculate costs. costs are calculated at the value stream level at the end of each week. value stream costing is easy, simple, and understandable to most company employees, not just accountants. data on value stream costs presented in reports correspond to actual costs incurred in a particular week. thus, when broken down and presented for a shorter period, costs allow for increasing the quality of financial information from the aspect of timeliness, which leads to faster decision-making (for more on value strem costing see antić & novićević (2013). b) in the past, companies mostly concentrated on their internal potentials, such as product performance and technological innovation. today, in changed business conditions, they have to shift their focus to external, i.e. customer orientation. it is clear that if a company wants to do business in the long run, it has to create products and services that have value for customers. the focus of this perspective is on analyzing different types of customers, their level of satisfaction, and processes of distributing products and services to customers. in this regard, the heart of performance measurement within the customer perspective would be (kaplan & norton, 1996, p. 67):  market share,  customer retention  customer acquisition,  customer satisfaction and  customer profitability. regardless of how these areas look generic for all company types, they have to be tailored to target groups of customers, which the future company growth and business depend on. market share shows how much the company is penetrating the desired market. the company can achieve significant sales growth on the market that it did not designate as the target, without increasing sales on the target market. thus, measuring the market share with target customers will send financial signals on the strategy necessary for achieving the desired results. balanced scorecard and lean business concept 155 customer retention along with customer acquisition allows for the discovery of customer needs. customer satisfaction measurement gives feedback on how well the company works. however, the importance of customer satisfaction should not be overemphasized. in fact, achieving a certain level of satisfaction is not sufficient to achieve a satisfactory level of customer loyalty and profitability. only when customers determine their purchase as complete and absolutely satisfactory can the company count again on purchase by those customers. value for customers is an attribute that companies provide through their products and services, to ensure loyalty and satisfaction in the target market segment. identifying value for customers is key to understanding the way to achieve satisfaction, retain old and acquire new customers, and achieve market share. although the value varies from customer to customer in different market segments, certain attributes occur with all customers, classified into attributes of products and services, customer relationships, and image and reputation. product/service attributes show the functionality of products and services, their price and quality. the image and reputation that the company has with customers allow the company to define its importance for its customers. customer relationship is a very important category for the success of products and services. it includes the delivery of products to customers, which includes both delivery time and how customers experience purchase. through the customer perspective, balanced scorecard highlights the value that is delivered to customers, which implies that the product or service has all the required qualities. as value is one of the key principles of lean business concept, it is clear that this performance measurement system is suitable for use in a modern business environment. c) internal process perspective refers to the identification of critical internal processes that must take place in a company. critical internal processes enable the company to create value for customers in target market segments and to meet all stakeholder expectations regarding financial results. measures in this perspective must focus on internal processes that have the greatest impact on customer satisfaction and the achievement of financial goals of companies. within this perspective, the company is most often considering the following issues (novićević et al., 2006):  how good is the company’s business?  do the products and services offered meet customer expectations?  what are the critical processes for achieving both customer and stakeholder satisfaction?  what activities should a company perform?  what activities should it retain in the future?  what are the internal processes that a company needs to improve if it does not achieve its goals? performance measures in this perspective can be: production time, quality criteria, time to market, and the like (pimentel & major, 2014). in order to successfully achieve defined performance measures within this perspective, companies should apply one of the lean business concept techniques – value stream mapping. value stream mapping is the starting point for the formation of an uninterrupted flow through all the processes in the company. value stream map represents a picture of all the processes performed in the company, from the supply of raw materials to the delivery of the finished product to customers or the provision of services. value stream map helps company managers (rother & shook, 2003, p. 4): 156 t. stevanović, b. novićević ĉeĉević  perceive the flow, not just one part of the process,  see not only losses, but sources of losses in the value stream,  build a generally understandable language about the production process,  bring lean business concept and techniques in line,  provide the basics for building an implementation plan,  establish links between flows of information and materials,  present a qualitative tool that shows in detail how to organize a business to form a flow, and  provide means of communication, business planning and business process management. technically, value stream mapping is nothing but drawing material and information flow with a pen on paper. it involves monitoring product flow from suppliers to customers. at the beginning, value stream mapping is a very difficult and demanding task. however, once a map of all processes is drawn, i.e. a map of material and information flows, it is easy to see how customer value is created, as well as the places where there are losses and nonvalue-added activities. it should be taken into consideration that the map represents the flow of the product through the organization rather than the map of the entire organization. value stream mapping process takes place in four phases: preparation for mapping, mapping the present state, mapping the future state, and planning and implementation. value stream mapping involves multidisciplinary teams, which separately show processes that add value and processes that do not add value. the number of processes in the value stream map depends on the size and complexity of the company. created in this way, value stream map guides managers towards necessary process improvement and helps them focus on specific goals. after identifying the value stream map, lean concept techniques are applied to improve the process. these techniques range from those aimed at reducing the set-up to those that reduce space to perform certain processes. d) the last but not least is learning and growth perspective. it refers to the creation of an infrastructure in which the organization will be able to create value in the long run. this perspective identifies factors necessary for the present and future success of the company. the main sources of organizational learning and growth are: people, system, and organizational procedures. the other three perspectives of balanced scorecard clearly show the big gap between the capabilities of people, systems, and processes, and what is required to achieve the goals. in order to eliminate this gap, companies must invest in employee education, improve the information and technology system, and harmonize procedures and organizational routines. these goals are crucial within the learning and growth perspective. in order to create a company that operates according to lean business principles, it is necessary to create an organization that learns at three levels (chiarini et al., 2016, p. 67). these levels include the individual level, the function (group) level, and the company level. individual learning is considered a starting point for all other learning. this learning is determined by preferences, interests, and abilities of individuals. when establishing a lean company, particular attention should be paid to the needs of individuals and their motivation to learn and make progress. in that sense, if an individual sees a lean company as the reason to eliminate the need for their work, it will be very difficult to have motivation for further learning. focusing the company organization on value stream indicates the existence of redundant workers and effort spent in company processes. for the success of a lean company, it is important that employees be fully committed to balanced scorecard and lean business concept 157 value stream to which they are assigned. traditional organization of business by departments must be replaced with teams with a clear focus, to ensure smooth flow without limitations and delays. the next learning level is the group or function level in a company. employees with relevant knowledge are associated with the corresponding function in the company. however, the functions in the company are much more than a set of knowledge. a request for new knowledge implies a lot of time and effort to get that knowledge. within functions, training of employees with a lower degree of professional skills is carried out, with a search for new knowledge that will improve business processes. in this way, the learning organization will be created. the focus on establishing a value stream exceeds the need to organize a company by functions. in this sense, company division into functions must be overcome by the establishment of multifunctional teams that will lead to close cooperation within the company (womack & jones, 1994). learning at the organization level refers to all those activities that encourage the application of organizational rules, routines, and business policies. in that sense, learning at the organization level refers to the process of institutionalization and the construction of a new organizational structure (tortorella et al., 2015). the success in forming a lean company will depend directly on the ability of managers to synchronize all levels of learning and the needs of individuals participating in it. establishing a value stream is the best way to satisfy all these needs. by forming a lean company, it is possible to market products more quickly, increase sales, and develop a more efficient strategy. lean company is a flexible and innovative organization. it involves directing all parts of the company into one value stream to increase productivity, improve quality and operational excellence by eliminating unnecessary resource spending. the organization of business around the value stream is important because value streams established in a lean company represent new business profit centers (katko, 2014, p. 14). the company requires fundamental changes in business organization to be accessible for all forms of cooperation. traditional focus on narrow organizational parts and business processes in which knowledge, skills and ideas are jealously guarded must be replaced by a new way of doing business. the basic difference between narrow organizational parts and business processes, on the one hand, and value streams, on the other hand, is precisely in the fact that value streams generate revenue. 3. application of bsc in telecommunication companies literature abounds in practical examples of the bsc implementation process, generally suited to large companies. commercial application can be too expensive or too difficult for small and medium businesses, so free and publicly available software is a good way to start developing a performance measurement system in them. in small and medium-sized businesses, vision and strategy are not always rigorously documented, organizational culture and management culture are different in relation to large companies, it is difficult to retain competent staff with resources seriously limited, and the current status is highly dependent on aspirations, goals, and experiences of owners or managers. selection and implementation of a competitive strategy is at the heart of entrepreneurs’ activities, but strategic management is still a non-conscious process. most small and medium-sized businesses operate with poor forecasting and 158 t. stevanović, b. novićević ĉeĉević planning systems and are vulnerable to business failures mainly due to poor risk management, inadequate decision-making, and implicit strategic planning. during 2000 and 2001, the so-called “sake” system was established, a publicly funded project in finland, where three pilot companies took part in designing their performance measurement systems. the goal of the project was to create a simple instrument for measuring performance adequate for small and medium businesses, which will help them build their own system of measures without the assistance of external consultants. the required system characteristics are specified and programmed in the basic programming language, and up to now over 300 companies have downloaded software from the internet or purchased a compact disk. the case study, which will be in focus in the following segments, is based on the ongoing development project in “telekolmio oy”, a finnish medium-sized company in the telecommunications services sector. “telekolmio oy” has divided its business into four departments: mobile and information technology, voice systems, data processing, and data security services. the company employs 104 workers and had a turnover of 16,500,000 euros in 2002. prior to this project, it did not have a developed performance measurement system. although the development of mobile and internet technology posed high challenges to the company, management accounting was carried out in an old way. the company needed a system that would measure the achievement of operational goals derived from strategic ones, so the first task was to accept a performance measurement system in the data security department, which would serve as a pilot project (tenhunen et al., 2004). the process of designing a new performance measurement system, illustrated in figure 1, begins by defining the existing basic and accompanying processes and activities. an important starting point for designing a new system is to identify the connection between the processes themselves. key management, sales, material management, production design and marketing staff are in charge of defining and describing the connection between the processes. the next step is to define the vision and strategic goals of the company. based on a vision, defined as “to be a market leader in its field”, the following strategic values are identified: customer trust, team work, entrepreneurial personality, and profitable business. when visualizing the company strategy and explaining its purpose, determining the type of action or event that will lead to the desired goal, determining the causality between different performance dimensions, and eliminating unnecessary or overlapping performance measures, significant help comes from a success map, which indicates the causal relationships leading to successful business. the essence of the success map is that the quality of processes depends largely on employee skills and innovation, customer satisfaction is conditioned by process quality, and financial performance is a logical consequence of customer satisfaction. “telekolmio oy” has formulated and developed functional strategies, in order to increase business efficiency of both an organizational data security department, and company as a whole. by developing special skills, i.e. the core of competence in the data security department, managers can increase the competence of the entire company. respecting the vision, values, and strategy, key success factors have been identified, and grouped into four perspectives: financial perspective, customer perspective, process perspective, and learning and innovation perspective (nejatian & zarei, 2013). consequently, key success factors are related to: profitable business and focus on core actions, customer interface management and comprehensive customer-related project management, professional telephone line management and continuous improvement, development of interactions, technological knowledge, and innovation. balanced scorecard and lean business concept 159 in line with strategic values and key success factors, strategic goals are set. long-term goals are determined at company level, and then for each department within the organizational structure. within the financial perspective, goals of concentration on profitable customers and areas, profit growth, and profitable growth are defined; customer perspective focuses on goals of personal customer consulting and contracts with key customers; process perspective focuses on efficient and high-quality standards, efficient project management, and networking with local partners; and learning and innovation perspective involves focusing on core competences and demanding applications. for the purpose of achieving strategic goals, working groups are formed and an action plan created. the plan determines the global goals of profitability, continuous improvement, and innovation, and consists of documented management for all major projects, employee development planning, organization of co-operation between stakeholders, and introduction of innovation. finally, the company chooses dimensions and performance measures. finance, customer, internal process, and learning and innovation dimensions have been selected. the first version of the developed system of measures for the pilot department has a total of 13 measures. in the future, it will be interesting to examine whether it is possible to expand the measurement system in the value chain backwards, which will mean networking with subcontractors and their measurement or evaluation in terms of monitoring the impact on the company performance. the selected balanced package consists of both operational and strategic performance measures, on the basis of which strategic and operational controls are carried out. the system of measures corresponding to a formulated and developed strategy and key success factors includes profit, financing costs, return on equity and borrowed capital, ratio of timely services, market share ratio, ratio of sales increase, customer satisfaction, ratio of profitable activities and high-quality processes, inventory turnover ratio, staff training time, and development of professional skills and core competences. an integral part of the project is the development of a performance measurement manual that contains the form for each measure, frequency of measurement, goal value, range and purpose of a particular measure. the manual also contains explanation of the sources of information on measurement and weight factors in the system. in other words, the manual provides detailed information about the designed performance measurement system. after the completed manual, training sessions covering the business philosophy of the company and the relationship between strategic goals and the necessary activities are carried out. in the context of training, it is a real challenge to acquire complete staff for the implementation of new ways of thinking and everyday activities. the initial idea is that the performance measurement system needs to be developed, implemented, and tested in the data security department, after which it needs to be extended to other departments at the company level. after the development of the pilot system, the company has decided to build systems for other departments as well as for the company as a whole. the design of the performance measurement system lasted for about three months. during that time, there was full commitment to its design, development, and implementation, as well as the adequate allocation of necessary resources to the development team. the use of the finished “sake” application further accelerated the process. the main causes for postponing system trial run were data availability and the necessity of changing the attitudes of all employees in order to initiate comprehensive measurement. 160 t. stevanović, b. novićević ĉeĉević fig. 1 target plan of the “telekolmio oy” pilot department source: tenhunen et al., 2004 vision pilot department is the market leader in its field. values customers trust us play for a team everyone is an entrepreneur profitable business financial perspective customer perspective process perspective learning and innovation perspective profitable business concentration on core actions customer interface management comprehensive customer-related project management knowledge of networks constant improvement knowledge of interactions technological knowledge use of innovation and opportunities concentration on profitable customers and areas profit growth profitable growth personal customer consulting contracts with key customers efficient and high-quality process standard well-managed projects networking with local partners concentration on core competences and demanding applications documented management for all major projects employee development planning organization of stakeholder cooperation introducing innovation profit financing costs rates of return professional skills core of competences staff training profitable activities high-quality processes turnover ratio speed and timeliness market share sales increase customer 2 . 3 . 4 . 1) success factors 2) strategic goals 3) action plan 4) key indicators 1 balanced scorecard and lean business concept 161 conclusion going through several development stages, balanced scorecard has become a performance measurement system that translates the company strategy into concrete actions and performance measures through four balanced interrelated perspectives: financial perspective, customer perspective, internal process perspective, and learning and growth perspective. the goal of balanced scorecard implementation is to achieve the highest possible functionality and relevance of strategic goals. each of the balanced scorecard perspectives is closely related to lean business concept principles, so this system is indispensable for measuring the performance of modern companies. emphasizing the importance of shareholders, financial perspective defines long-term goals of the company. in order to obtain adequate data for measuring the financial success of a company, lean concept proposes the application of value stream costing. this cost accounting system helps managers clearly identify the information they need to make business decisions and plan further operations. this is because the purpose of value stream costing is to provide simple, clear and timely information. identifying value is an essential feature of lean business concept. the value is determined by the customer, as the end-user of this value. the value delivered to customers will determine the success of the company itself. external value determination, as a premise of a modern business environment, is also present in the balanced scorecard application. internal process perspective is closely related to customer satisfaction and the achievement of financial goals. in this sense, lean business concept requires the consideration of all business processes, identification of obstacles and shortcomings, and elimination of all unnecessary spending. for these purposes, it is necessary to apply a value stream map. multidisciplinary teams are involved in value stream mapping, separately presenting processes that add value and processes that do not add value. value stream map guides managers towards necessary process improvement and helps them focus on specific goals. learning and growth are important aspects in modern companies, and, as such, they are included in the lean business concept and balanced scorecard. in this sense, it is necessary to create an organization that can permanently produce value for customers, adapting to their different requirements. the success of a company will depend directly on the ability of managers to use their knowledge and skills to bring employees in line with the company goals and to constantly strive for their own improvement. references al-ashaab, a., golob, m., urrutia, u., gourdin, m., petritsch, c., summers, m. & el-nounu, a. 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(2003). lean thinking, banish waste and create wealth in your corporation. uk: simon & schuster. http://dx.doi.org/10.1080/14783363.2013.850811 balanced scorecard and lean business concept 163 balanced scorecard i lean koncept poslovanja promene savremenog poslovnog ambijenta nužno izazivaju potrebu da se stalno traga za novim konceptima poslovanja, načinima upravljanja i sistemima mera performansi. poslednjih decenija veoma aktuelan za primenu u preduzećima jeste lean koncept poslovanja. ovaj koncept podrazumeva i u prvi plan ističe kreiranje vrednosti za potrošače. pod vrednošću se podrazumeva isporuka proizvoda i usluga koji poseduju sve zahtevane karakteristike od strane potrošača u što kraćem vremenskom periodu i po što nižoj ceni. kako je osnovni zadatak preduzeća da zadovolji različite potrebe, razumljivo je što od uspešnosti zadovoljavanja potreba potrošača zavisi i uspešnost samog preduzeća. rezultati istraživanja pokazuju da se balanced scorecard može primeniti u preduzećima koja primenjuju osnovne lean principe. ovo iz razloga što prvenstveno uvažava vrednost koja se isporučuje potrošačima, a na osnovnu te vrednosti formira i mere performansi u okviru predviđenih perspektiva. takođe, važan aspekt balanced scorecard odnosi se na interne procese i učenje i rast, o čemu lean koncept posebno brine. kljuĉne reĉi: balanced scorecard, lean koncept, mere performansi facta universitatis series: economics and organization vol. 15, n o 1, 2018, pp. 29 41 https://doi.org/10.22190/fueo1801029m © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper key predictors of internal supervision of financial statements 1 udc 657.6 sunčica milutinović 1 , ivana medved 1 , dragomir dimitrijević 2 1 university of novi sad, faculty of economics in subotica, serbia 2 university of kragujevac, faculty of economics, serbia abstract. investors and other external stakeholders have more confidence in the reliability and quality of financial statements if they have information that entities continuously carry out preventive and comprehensive internal supervision of financial statements. the research was carried out with the aim of identifying factors that have a direct impact on the internal supervision of financial statements. as the key predictors of the internal supervision of financial statements in the republic of serbia, the category of entity, the internal supervision of the compliance of financial statements with the regulations, and the internal supervision of the preparation of financial statements have been identified. two regression models are also defined that best describe the relationship between the observed phenomena. key words: supervision, financial statements, compliance, preparation, regulations. jel classification: m41, m42, m48. introduction interpretation of supervision is best described by isaac (1951, 7-9), who after making an etymologically sharp demarcation between the terms of audit, supervision, surplus and inspection, concluded that they have to complement each other in order to achieve adequate supervision of entity. therefore, isaac incorporates audit, supervision and inspection under the concept of "supervision". in this paper, supervision will be observed under this comprehensive term, but more closely monitored – from the aspect of supervision of financial statements. received august 10, 2017 / revised november 11, 2017 / accepted november 20, 2017 corresponding author: sunčica milutinović university of novi sad, faculty of economics in subotica, segedinski put 9-11, 24000 subotica, serbia e-mail: suncica@ef.uns.ac.rs 30 s. milutinović, i. medved, d. dimitrijević although the supervision of financial statements significantly improves their quality and supervision is the best basis for risk management in the financial reporting domain, absolute assurance in the reliability and quality of financial statements is not possible, because supervision is a process whose planning, creation, implementation, monitoring and reporting is under the influence of a human factor. since people make the most important element of the supervision environment, assurances can be qualified exclusively as "reasonable" (dmitrović & milutinović, 2011). this is the initial deficiency of the supervision over financial statements. within the framework of this paper, internal supervision (of the preparation of financial statements, and of the compliance of financial statements with regulations) is the process carried out by internal bodies in entity, such as supervisory boards, internal auditors, and others. in the scope of this paper, external supervision (of the preparation of financial statements, and of the compliance of financial statements with regulations) is the process carried out by the government's supervisory and regulatory bodies in the field of accounting, which include: department for financial system of the ministry of finance, the national commission for accounting, and tax administration (milutinović & medved, 2017, pp. 102-104). external supervision in the questionnaire is defined as an oversight performed by an external body outside entity, without being an external auditor. the research with the aim of identifying the predictors of internal supervision of financial statements in the republic of serbia, according to the authors’ knowledge, has not been carried out so far in domicile conditions. the specific goal of the research in this paper could be set in the form of two research questions: what factors predict the probability that internal bodies in entity will monitor the preparation of financial statements? what factors predict the probability that internal bodies in entity will monitor the compliance of financial statements with regulations? the results of the research are significant for the reason that the creators of the national financial reporting system and the regulatory framework can be in this way informed about the "situation on the ground" through the results presented in this paper. timely feedback from practice is a key determinant of well-created both legislation and internal regulation, and this research is not significant only for the above-mentioned creators, but also for members of the accounting profession, supervisory authorities and management bodies in entity. originality of paper is reflected in the fact that similar studies have not yet been implemented in domestic practice. the importance of the research is undeniable, given the fact that the area of financial reporting is very dynamic in terms of frequent changes of regulations, both professional and legislation regulation. in order to timely observe novelties and effects of changes in this area, constant research is necessary, especially in the domestic practice as it unjustifiably lacks this type of research. on the other hand, research results are an important source of information before the planned improvement of the financial reporting system and the improvement of existing regulations in the republic of serbia. the limitation of the paper of an objective nature is the lack of similar research in the country and the region in order to do parallel analysis and get a wider picture of this problem. the limitation of the paper of a subjective nature is a limited number of initial factors that have been taken into account in the research in order to identify the predictors. key predictors of internal supervision of financial statements 31 1. literature review the responsibility for the preparation and publication of financial statements, in accordance with the directive 2013/34/eu (official journal of the eu, 2013), is on members of administrative, management and supervisory bodies of entity in the form of the so-called collective responsibility. on the other hand, according to the law on accounting (official gazette of rs, 2013), the legal representative, the managing authority, the supervisory body and the person responsible for keeping business books and drawing up financial statements are responsibility holders in domicile conditions. taking into account that both in professional and legislation regulation responsibility holders are the supervisory authorities, the focus in the paper is on the internal supervision – supervision carried out by the internal bodies of entity – to the internal supervision of the preparation of financial statements, on the one hand, and the internal supervision of the compliance of financial statements with the regulations, on the other hand. there were several studies in past four years in asia about factors affecting internal audit or internal control over financial reporting. alzeban and gwilliam (2014) investigated factors that may influence internal audit effectiveness within public sector organizations in saudi arabia, a nation just beginning to use internal audits. their study employs several measures of internal audit effectiveness, including the department’s perceived ability to plan, to improve the organization’s productivity, to assess the consistency of results with established objectives and goals, to implement internal audit recommendations, to evaluate and improve risk management, to evaluate internal control systems, and to provide recommendations for improvement. furthermore, their study provides evidence as to the manner in which competence, size of the internal audit department, relationship between internal and external auditors, independence of internal audit, and extent of management support for the internal audit function, contribute to perceived effectiveness of the internal audit function in the saudi public sector. dejnaronk, little, mujtaba and mcclelland (2015) were the first ones that examined the factors influencing the effectiveness of internal audit function in thailand. their study included seven influencing variables, which were useful in thai companies: objectivity, independence, top management support, risk-based audit plan, compliance with iia standards (international standards for the professional practice of internal auditing by the institute of internal auditors), communication and reporting, and quality assurance and improvement program. three influencing factors found are compliance with iia standards, risk-based audit plan, and quality assurance and improvement program. yazawa (2015) examined the incentive factors for the (non-)disclosure of material weakness in internal control over financial reporting in japanese companies. the results indicate that companies that do not disclose material weakness are characterized by longer management tenure, large auditors, lower audit fees, larger boards of directors, fewer outside directors, and greater involvement of their main banks. in addition, non-disclosure of material weakness at the company level is associated with longer management tenure, a larger management shareholding, and greater main bank involvement, whereas non-disclosure of material weakness at the account-specific level is associated with large auditors, lower audit fees, higher non-audit fees, and greater main bank involvement. these results suggest that the assessment and audit process of internal control systems in japan is sensitive to (non-)disclosure incentives for managements and auditors. 32 s. milutinović, i. medved, d. dimitrijević some of the studies conducted in america are summarized below. gramling, o’donnell and vandervelde (2013) examined how different types of audit evidence accumulated during the audit influence auditor judgment of internal control over financial reporting operating effectiveness and about whether an identified control deficiency is a material weakness in internal control over financial reporting. they experimentally examined audit managers’ and partners’ assessments of internal control over financial reporting operating effectiveness and judgments of whether a control deficiency is a material weakness to determine the influence of the presence of: (1) a material weakness unrelated to the deficiency being assessed, and (2) a known misstatement associated with the identified control deficiency. results suggest that the presence of either an unrelated material weakness or a known misstatement influences the assessed operating effectiveness of an internal control and the likelihood of a material weakness assessment. lin, wang, chiou and huang (2014) find that ceos with higher ownership, longer tenure, and younger age are significantly associated with a material internal control weakness disclosure under sarbanes-oxley section 404 (sox 404). their results demonstrate that entrenchment and age may affect ceos’ behavior in response to the sox 404 internal control requirements. this study points out that ceo entrenchment and age are likely to affect the strength of internal control mechanisms. christ, masli, sharp and wood (2015) find that companies that use a rotational staffing model for the internal audit function (systematically rotate their internal auditors into management positions outside of internal audit) have significantly lower financial reporting quality than companies that do not. clinton, pinello and skaife (2014) investigated consequences of ineffective internal control for an important class of financial statement users and suggested the required reporting on the effectiveness of internal control is beneficial to understanding the properties of analysts’ forecasts. they find that analysts provide less accurate forecasts and there is greater forecast dispersion for firms with ineffective internal control. they also find that firms that disclose internal control problems have less analyst coverage and that analyst following declines after the material weakness in internal control is disclosed. the latest research was conducted in africa. bruwer, coetzee and meiring (2017) determined the empirical relationships that exist between two of the elements of a sound internal control system, namely internal control activities and managerial conduct, and the perceived sustainability of south african small, medium and micro enterprises (smmes). they find out that there exist positive statistically significant relationships between general management skills and the perceived sustainability of south african smmes. study indicates that internal control activities and managerial conduct had a limited influence on the perceived sustainability of south african smmes. 2. research methodology and hypotheses the research was directed at all employees in the accounting and/or auditing positions in the private sector of the republic of serbia, regardless of their professional title and years of experience. the sample meets all the requirements of a representative sample and consists of 338 (first regression model) or 336 respondents (second regression model). a random sample in the research is considered an ideal sample. the sample in this study was selected randomly, because every member of the basic set had the same chances, i.e. the same probability of being selected into the sample. in addition, the selection of each key predictors of internal supervision of financial statements 33 member of the sample was independent, i.e. the selection of one member did not influence the selection of any other member of the sample. the study was conducted during 20142015 and the research was completed in 2016. the research faced the same problems that usually appear in research of financial reporting: research cannot be conducted in conditions of a supervision led experiment, it is impossible to include all variables and identify all the factors that influence the research problem, the research sample is often small, and any research, including one in the area of financial research, comprises mistakes, both those that can be predicted before the start of the research and mistakes that cannot be predicted. however, these problems have not significantly affected the independence and regularity of the research, nor the credibility and presentation capacity of the obtained results. two hypotheses have been tested in this paper. the first hypothesis (h1) that is the subject of proof in the paper reads: internal supervision of the preparation of financial statements (ispfs) is directly influenced by the category of entity, external and internal supervision of compliance of financial statements with regulations and external supervision of the preparation of financial statements. the first hypothesis will be proved using the following auxiliary hypotheses: h1a: the category of entity has a direct negative impact on internal supervision of the preparation of financial statements. h1b: performing external supervision of compliance of financial statements with regulations has a direct positive impact on internal supervision of the preparation of financial statements. h1c: performing internal supervision of compliance of financial statements with regulations has a direct positive impact on internal supervision of the preparation of financial statements. h1d: performing external supervision of the preparation of financial statements has a direct positive impact on internal supervision of the preparation of financial statements. the second hypothesis (h2) that is the subject of proof in the paper reads: internal supervision of the compliance of financial statements with regulations is directly influenced by the category of entity, external and internal supervision of the preparation of financial statements and external supervision of the compliance of financial statements with regulations. the second hypothesis will be proved using the following auxiliary hypotheses: h2a: the category of entity has a direct negative impact on internal supervision of the compliance of financial statements with regulations. h2b: performing external supervision of the preparation of financial statements has a direct positive impact on internal supervision of the compliance of financial statements with regulations. h2c: performing internal supervision of the preparation of financial statements has a direct positive impact on internal supervision of the compliance of financial statements with regulations. h2d: performing external supervision of the compliance of financial statements with regulations has a direct positive influence on internal supervision of the compliance of financial statements with regulations. to test hypotheses in order to prove them, direct logistic regression will be used. then, regression models that best describe the relationship between phenomena will be determined. based on these models, values of dependent variables (ŷ1, ŷ2) will be evaluated and predicted for selected values of predictor (independent) variables (x1... xn). dependent variables are: ŷ1 – internal supervision of preparation of financial statements (ispfs hereinafter) and ŷ2 – internal 34 s. milutinović, i. medved, d. dimitrijević supervision of compliance of financial statements with regulations (iscfsr hereinafter). predictor variables that were taken into consideration are: category of entity, external/internal supervision of compliance of financial statements with regulations and external/internal supervision of preparation of financial statements. 3. findings and discussion 3.1. predictors of internal supervision of preparation of financial statements table 1 shows the predictors included in the first model as well as the values that are taken with the frequencies. number of analyzed cases is 338. table 1 categorical variables codings #1 frequency parameter coding (1) (2) (3) (4) (5) the category of entity large ifrs 38 .000 .000 .000 .000 .000 medium-sized ifrs 44 1.000 .000 .000 .000 .000 medium ifrs smes 15 .000 1.000 .000 .000 .000 small ifrs smes 74 .000 .000 1.000 .000 .000 small rb 2 29 .000 .000 .000 1.000 .000 micro 138 .000 .000 .000 .000 1.000 external supervision of compliance of fs with regulations (escfsr) no 263 .000 yes 75 1.000 internal supervision of compliance of fs with regulations (iscfsr) no 205 .000 yes 133 1.000 external supervision of the preparation of fs (espfs) no 263 .000 yes 75 1.000 source: authors’ calculation the goodness of fit test in table 2 shows how well the model predicts results. the obtained results are very significant, since the significance takes values p<0.0005. the model with the selected set of variables shown in table 1 provides better than the initial model (without any independent variables) obtained assuming that ispfs is never performed. the hisquare indicator is 236.57 with 8 degrees of freedom. table 2 omnibus tests of model coefficients #1 chi-square df sig. step 1 step 236.566 8 .000 block 236.566 8 .000 model 236.566 8 .000 source: authors’ calculation 2 rulebook on the manner of recognition, measurement, presentation and disclosure of positions in the individual financial statements of micro and other entities, official gazette of rs, no. 118 of december 30 th 2013, 95 of september 5 th 2014 (rb hereinafter). key predictors of internal supervision of financial statements 35 the hosmer and lemeshow goodness of fit test in table 3 is ibm spss's most reliable model prediction quality test. the model is supported because significance takes values p>0.05. the h-square for hosmer and lemeshow test is 2.43 with a significance of 0.88. table 3 hosmer and lemeshow test #1 step chi-square df sig. 1 2.428 6 .876 source: authors’ calculation table 4 shows the values of cox&snell r square and nagelkerke r square. the model, or the set of variables, explains between 50.3% and 67.8% of the variance of the dependent variable. table 4 model summary #1 step -2 log likelihood cox&snell r square nagelkerke r square 1 221.294 .503 .678 source: authors’ calculation table 5 shows that the model, or the set of variables, correctly classifies 89.3% of all cases that is better than 58.9%, which represents value of this indicator before including predictor variables in the model. positive and negative predictive values are calculated on the basis of data in table 5. the positive predictive value shows that the model correctly selected 88.72% of respondents who answered that ispfs performs in entity where they are employed. the negative predictive value shows that the model correctly selected 89.76% of respondents who answered that ispfs does not perform in entity where they are employed. table 5 classification table #1 step observed predicted internal supervision of preparation of fs percentage correct no yes 1 internal supervision of preparation of fs no 184 15 92.5 yes 21 118 84.9 overall percentage 89.3 source: authors’ calculation table 6 shows a variable that significantly contributes to predictive capabilities of the model. the main factor influencing whether ispfs will be performed is iscfsr. entities that perform iscfsr are most likely to have ispfs also. 36 s. milutinović, i. medved, d. dimitrijević table 6 variables in the equation #1 β s.e. wald df sig. exp(β) 95% c.i.for exp(β) lower upper s te p 1 large ifrs -.443 .728 .370 1 .543 .642 .154 2.675 medium-sized ifrs -.213 .949 .051 1 .822 .808 .126 5.186 medium ifrs smes -.411 .666 .380 1 .538 .663 .180 2.449 small ifrs smes -.176 .818 .047 1 .829 .838 .169 4.165 small rb -.856 .629 1.856 1 .173 .425 .124 1.456 espfs .295 .632 .218 1 .641 1.343 .389 4.635 escfsr .699 .633 1.220 1 .269 2.012 .582 6.960 iscfsr 4.021 .365 121.32 1 .000 55.765 27.265 114.056 constant -1.792 .599 8.943 1 .003 .167 source: authors’ calculation based on the obtained values of the β coefficient, the regression equation of the first model is: 11 021.4792.1ˆ xy  (1) legend: ŷ1 – the expected value of the dependent variable (ispfs) x1 – predictive variable (iscfsr) a direct logistic regression was conducted to assess the impact of several factors on the likelihood that ispfs performs in entity. the model contained four predictors (independent variables) and was statistically significant, c² (8, n=338) = 236.57, p<0.001, indicating that the model distinguishes respondents who responded and those who did not respond that ispfs performs in entity where they are employed. the model explains as a whole between 50.3% (cox&snell’s r²) and 67.8% (nagelkerke’s r²) variance of dependent variables and accurately classifies 89.3% of cases. the strongest predictor of the responses that there is the performance of ispfs in entity (see table 6) was the performance of iscfsr, whose quotient of probability is 55.77. it shows that respondents from entity that performs iscfsr over 55 times more often answer with “yes” on the question about the performance of ispfs in contrast to respondents from entity that does not perform iscfsr, with all other equal factors in the model. 3.2. predictors of internal supervision of the compliance of financial statements with regulations table 7 shows the predictors included in the second model as well as the values that are taken with the frequencies. number of analyzed cases is 336. the goodness of fit test in table 8 shows how well the model predicts results. the obtained results are very significant (p<0.0005) and the model with selected set of variables shown in table 7 predicts better than the initial model (without any independent variables) obtained assuming that iscfsr is never performed. the hi-square indicator is 248.54 with 8 degrees of freedom. key predictors of internal supervision of financial statements 37 table 7 categorical variables codings #2 frequency parameter coding (1) (2) (3) (4) (5) the category of entity large ifrs 36 .000 .000 .000 .000 .000 medium-sized ifrs 44 1.000 .000 .000 .000 .000 medium ifrs smes 15 .000 1.000 .000 .000 .000 small ifrs smes 74 .000 .000 1.000 .000 .000 small rb 29 .000 .000 .000 1.000 .000 micro 138 .000 .000 .000 .000 1.000 external supervision of the preparation of fs (espfs) no 263 .000 yes 73 1.000 internal supervision of the preparation of fs (ispfs) no 199 .000 yes 137 1.000 external supervision of compliance of fs with regulations (escfsr) no 263 .000 yes 73 1.000 source: authors’ calculation table 8 omnibus tests of model coefficients #2 chi-square df sig. step 1 step 248.54 8 .000 block 248.54 8 .000 model 248.54 8 .000 source: authors’ calculation the model is supported (p>0.05) according to results from table 9. the h-square for hosmer and lemeshow test is 2.84 with a significance of 0.9. table 9 hosmer and lemeshow test #2 step chi-square df sig. 1 2.837 7 .900 source: authors’ calculation the model explains between 52.3% and 70.8% of the variance of the dependent variable (see table 10). table 10 model summary #2 step -2 log likelihood cox&snell r square nagelkerke r square 1 202.565 .523 .708 source: authors’ calculation table 11 shows that the model correctly classifies 89.9% of all cases, that is better than 60.4%, which represents value of this indicator before including predictor variables in the model. positive and negative predictive values are calculated on the basis of data in table 11. the positive predictive value shows that the model correctly selected 86.13% of respondents who answered that iscfsr performs in entity where they are employed. the 38 s. milutinović, i. medved, d. dimitrijević negative predictive value shows that the model correctly selected 92.46% of respondents who answered that iscfsr does not perform in entity where they are employed. table 11 classification table #2 step observed predicted internal supervision of compliance of fs with regulations percentage correct no yes 1 internal super. of compliance of fs with regulations no 184 19 90.6 yes 15 118 88.7 overall percentage 89.9 source: authors’ calculation table 12 shows variables that significantly contribute to predictive capabilities of the model. the main factors influencing whether iscfsr will be performed are:  the category of entity: the change in the category of entity for one (from larger to smaller entity, or from the one that uses ifrs to the other that does not use ifrs) reduces the likelihood of performing iscfsr. the smaller entity has lower likelihood of performing iscfsr, and vice versa. entities that use ifrs have higher likelihood of performing iscfsr than those which do not use ifrs.  internal supervision of the preparation of financial statements: entities that perform ispfs are most likely to perform iscfsr. it means, respondents from entities with ispfs answer to the greatest extent with "yes" on the question of whether iscfsr is performed. table 12 variables in the equation #2 β s.e. wald df sig. exp(β) 95% c.i.for exp(β) lower upper s te p 1 large ifrs -1.592 .785 4.114 1 .043 .204 .044 .948 medium-sized ifrs -2.075 1.019 4.143 1 .042 .126 .017 .926 medium ifrs smes -1.355 .710 3.642 1 .056 .258 .064 1.037 small ifrs smes -1.545 .867 3.175 1 .075 .213 .039 1.167 small rb -1.882 .676 7.757 1 .005 .152 .040 .573 escfsr .777 .646 1.448 1 .229 2.175 .614 7.712 espfs .361 .650 .308 1 .579 1.434 .401 5.130 ispfs 4.173 .382 119.61 1 .000 64.912 30.728 137.124 constant -1.182 .607 3.785 1 .052 .307 source: authors’ calculation based on the obtained values of the β coefficient, the regression equation of the second model is: 43212 173.4882.1075.2592.1182.1ˆ xxxxy  (2) legend: ŷ2 – the expected value of the dependent variable (iscfsr) x1, x2, x3, x4 – predictive variables from table 12. key predictors of internal supervision of financial statements 39 a direct logistic regression was conducted to assess the impact of several factors on the likelihood that iscfsr performs in entity. the model contained four predictors (independent variables) and was statistically significant, c² (8, n=336) = 248.54, p<0.001, indicating that the model distinguishes respondents who responded and those who did not respond that iscfsr performs in entity where they are employed. the model explains as a whole between 52.3% (cox&snell’s r²) and 70.8% (nagelkerke’s r²) variance of dependent variables and accurately classifies 89.9% of cases. the strongest predictor of the responses that there is the performance of ispfs in entity (see table 12) was the performance of iscfsr, whose quotient of probability is 64.91. it shows that respondents from entity that performs ispfs almost 65 times more often answer with “yes” on the question about the performance of iscfsr in contrast to respondents from entity that does not perform ispfs, with all other equal factors in the model. conclusion both regression models are supported, statistically significant and accurately classified over 89% of cases. the variable that significantly contributes to the predictive possibilities of the first regression model is the internal supervision of compliance of financial statements with regulations, while the remaining three variables do not have a significant contribution to the model. variables that significantly contribute to the predictive possibilities of the second regression model are the size of an entity and internal supervision of preparation of financial statements, while the remaining two variables do not have a significant contribution to the model. the above results provide an answer to the research questions raised at the beginning of this paper. the key factor that predicts the probability that internal bodies within an entity will perform supervision of preparation of financial statements is performance of internal supervision of compliance of financial statements with regulations. key factors that predict the probability that internal bodies within an entity will perform supervision of compliance of financial statements with regulations are the category of entity and performance of internal supervision of preparation of financial statements. based on the analyzed results of the dependent variable ŷ1, it can be concluded that the internal supervision of preparation of financial statements is under direct negative influence of the category of entity (the change in the category of entity for one – from the one that uses ifrs to the other one that does not use ifrs – reduces the likelihood of performing ispfs), direct positive influence of both external and internal supervisions of compliance of financial statements with regulations and direct positive influence of external supervision of preparation of financial statements. according to the above, the first hypothesis was confirmed in its entirety. based on the analyzed results of the dependent variable ŷ2, it can be concluded that the internal supervision of compliance of financial statements with regulations is under direct negative influence of the category of entity (the change in the category of entity for one – from the one that uses ifrs to the other one that does not use ifrs – reduces the likelihood of performing iscfsr), direct positive influence of both external and internal supervisions of preparation of financial statements and direct positive influence of external supervision of compliance of financial statements with regulations. according to the above, the second hypothesis was confirmed in its entirety. such outcomes have resulted in the following conclusions. 40 s. milutinović, i. medved, d. dimitrijević regulators and lawmakers should form team of experts constituted of professional accountants and auditors who would create a quality legal framework and develop instruments for the financial reporting process supervision. the sarbanes-oxley act represents an excellent example of successful state regulation of financial reporting. in the republic of serbia, state supervision in this area is desirable, but it must be carefully thought out in order to avoid overlapping and interfering with the competencies of state authorities and internal bodies in entities. the first preferred solution would be to define a model by which the management of entity would be entrusted with the obligation to perform an assessment of the effectiveness of internal supervision, and that this assessment is subsequently verified by the external supervise bodies – department for financial system of the ministry of finance, the national commission for accounting and tax administration. the second preferred solution would be the introduction of practice of public disclosure on the functioning and success of the internal supervision system in entity, as has long existed in the countries of the anglo-saxon accounting model. this solution would increase the transparency of financial reporting, which would have a long-term impact on increasing its quality. on the other hand, the research results have shown that entities applying professional accounting regulations tend to organize internal supervision of compliance of financial statements with regulations, in contrast to entities that do not use ifrss or ifrs for smes. this leads to the proposal of the third preferred solution that is the continuation of the convergence of legislation with professional regulation and the work on dissemination of the application of ifrss and ifrs for smes among entities. our results should be of interest to management, professional accountants and auditors, state regulators, lawmakers, standard setters, external supervise bodies and internal supervise bodies. our research provides insights into key factors that management and internal supervise bodies are likely considering when assessing the need for implementation of internal supervision. after the expected changes in the legislation regulation, the research is planned to be repeated. the aim of the future research will be to obtain new regression models in order to test existing regression models for the purpose of passing a conclusion on the success of the implemented changes in the legal regulations in the republic of serbia. if the findings demonstrated in this research are in contrast to what was intended by the state regulators and lawmakers, they 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(2015). the incentive factors for the (non-)disclosure of material weakness in internal control over financial reporting. international journal of auditing. 19 (2015). 103–116. doi: 10.1111/ijau.12035 ključni prediktori internog nadzora finansijskih izveštaja investitori i ostali eksterni stejkholderi imaju više poverenja u pouzdanost i kvalitet finansijskih izveštaja ukoliko raspolažu informacijama da se u pravnom licu kontinuirano obavlja preventivni i sveobuhvatni interni nadzor finansijskih izveštaja. istraživanje je izvršeno s ciljem da se prepoznaju faktori koji imaju direktni uticaj na odvijanje internog nadzora finansijskih izveštaja. kao ključni prediktori internog nadzora finansijskih izveštaja u republici srbiji identifikovani su kategorija pravnog lica, sprovođenje internog nadzora usklađenosti finansijskih izveštaja sa regulativom i sprovođenje internog nadzora pripreme finansijskih izveštaja. definisana su i dva regresiona modela koja najbolje opisuju vezu između posmatranih pojava. ključne reči: nadzor, finansijski izveštaji, usklađenost, priprema, regulativa. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 15, n o 3, 2018, pp. 203 215 https://doi.org/10.22190/fueo1803203m © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication the influence of psychological contract breach on job satisfaction 1 udc 005.32:331.101.32 sandra milanović*, milica đokić*, biljana đorđević university of niš, faculty of economics, serbia abstract. psychological contract represents the implicit assumptions of the employees (or employer) regarding the content of their mutual exchange in addition to those that are specified in the formal employment contract. in the case of breaching it, many negatively consequences could arise. one of them is the lower level of job satisfaction. in the study that has been conducted we tried to find out the answer whether the psychological contract breach in unfavorable economic conditions negatively influences job satisfaction as it has been found in most studies conducted in developed countries. the research method that we used was the case study method. in order to test the hypothesis, we used anova test and linear regression. the results of the study showed that psychological contract breach negatively influences job satisfaction of employees despite the unfavorable economic conditions in which they work. key words: psychological contract, breach, job satisfaction, employees. jel classification: j28, j29, j41 introduction relationship between an employer and an employee is primarily defined by the contract which both parties have to sign up before the employment agreement starts. by signing it, both parties confirm that they agree with the contract terms, i.e. with the obligations and rights that stem from this contract. however, both parties included in this relationship could also form additional expectations regarding their future exchange. these expectations are implicit and, hence, do not have to be signed in any document. the employers` additional expectations regarding the mutual exchange usually refer to received march 17, 2018 / revised april 17, 2018 / accepted april 20, 2018 corresponding author: sandra milanović * phd student at university of niš, faculty of economics faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: sandramilanovic89@yahoo.com 204 s. milanović, m. đokić, b. đorđević that the employees should be loyal to the company, that they will work overtime when it is necessary, etc. when it comes to the additional expectations of the employees, they usually refer to the future promotions, job security, earnings, etc. these implicit expectations are an integral part of the so called psychological contract (argyris, 1960; levinson et al., 1962; rousseau, 1989; robinson & rousseau, 1994; morrison & robinson, 1997). the basic characteristic of this contract is that it has no written form. from this fact steams another one: it has no legal strength. therefore, in the case of breaching there will not be any legal consequences. but nevertheless, many negative effects could also appear. in many studies it was found that psychological contract breach caused a lower trust of the employees (robinson & rousseau, 1994; morrison & robinson, 1997; raja et al., 2004), lower commitment (rousseau, 1990; robinson et al. 1994; anderson & schalk, 1998; robinson & morrison, 1995; cassar & briner, 2011), reduced motivation (pines, 2002; parzefall & hakanen, 2010), decreased performance (turnley et al., 2003; zhao et al., 2007), higher absenteeism (hackett, 1989; griffeth et al., 2000) and higher turnover intentions (robinson & rousseau, 1994; zhao et al., 2007; suazo, 2009; hess & jepsen, 2009) etc. one of the negative consequences resulting from the psychological contract breach is decrease of employees’ job satisfaction as well. job satisfaction is a phenomenon that reflects how employees feel towards their job in general or some aspects of the job (work tasks, salary, promotion and other incentives, working conditions, relationship with coworkers and job security) (spector, 1997). many studies, that have been conducted so far, have confirmed that when employees experience the psychological contract breach, their job satisfaction decreases (robinson & rousseau, 1994; knights & kennedy, 2005; zhao et al., 2007; suazo, 2009). however, regarding these studies one important fact arises: these kinds of researches were mostly done in developed countries and are quite rare in developing countries, such as serbia. on the other hand, the context in which employees work in developing countries is quite different comparing to the developed countries. in developing countries unemployment rate is usually much higher than in developed countries, while the living standard is at the lower level 2 . as a consequence of these unfavorable economic conditions, many highly educated people in developing countries accept the jobs that are under their capabilities. yet, these jobs provide them financial resources for everyday living. having in mind all these facts, the question that arises here is whether psychological contract breach in developing countries influences job satisfaction in the same way as it does in developed countries (negatively), or since in developing countries it is hard to get any kind of job, psychological contract breach does not negatively influence job satisfaction. in order to find out the answer to these questions, the authors of the paper carried out an empirical research. it was conducted by the case study method. the paper is structured as follows: in the first part of the paper, the literature reviews on psychological contract and job satisfaction is given. in the second part, the methodology of the research, the 2 according to the data of statistical office of the republic of serbia, the unemployment rate in serbia for the last few years has been between 15% and 20%, while in the usa, where most of the research has been done, it was around 4,3 % (united states department of labor, bureau of labor statistics, 2017). when it comes to the average net salary, in serbia in october 2017 it was around $ 460 (statistical office of the republic of serbia, 2017), while median weekly earnings of full-time wage and salary workers in usa in the third quarter of 2017 were $ 859 (united states department of labor, 2017). the influence of psychological contract breach on job satisfaction 205 research results and their discussion are presented. the final part of the paper refers to the practical implication of the paper and concluding remarks. 1. literature review 1.1. psychological contract the term “psychological work contract” was used for the first time by argyris (1960). he perceived the psychological contract as an implicit agreement between employees and their supervisors regarding the exchange that would happen between them. levinson et al. (1962) also highlighted that psychological contract refers to the mutual expectations between an employee and the employer, but suggested that each party may not even be aware of their own expectations since they could have subconscious background (levinson et al., 1962). schein (1978) also made a significant contribution to the conceptualization of the psychological contract. he stated that psychological contract is “a set of unwritten reciprocal expectations between an individual employee and the organization” (schein, 1978, p. 48) stressing that there is a match in expectations between employee and organization. this congruence, on the other hand, is crucial to attaining many positive outcomes such as job satisfaction, commitment and performance (coyleshapiro et al., 2008). probably the most significant contribution to the development of the theory of the psychological contract in recent period was given by denise rousseau. she was the first one who defined the psychological contract from an individual’s perspective, stating that it represents “an individual's belief regarding the terms and conditions of a reciprocal exchange agreement between that focal person and another party (usually between an employer and an employee)” (rousseau, 1989, p.123). later, she simplified her first definition, stating that psychological contract in “an individual's beliefs regarding reciprocal obligations” (rousseau, 1990, p. 390) and suggesting that the parties in the relationship do not necessarily need to agree on the content of the contract. the general opinion in the literature is that there are two basic types of psychological contract. these are the "old" psychological contract and the "new" psychological contract. the basic feature of the "old" psychological contract is employees’ beliefs that if they work hard, adequately fulfill their obligations to the employer and contribute to the achievement of company’s goals, they can count on job security (dunahee & wangler, 1974; rousseau 1989; sims, 1994; makin et al. 1996; singh, 1998). however, after the 80s of the 20 th century, when many companies went through mergers, acquisitions and downsizing processes (and consequently many employees were laid off), employees started to form the “new” psychological contract. its fundamental characteristic is that employees can not count on job security anymore, but the best that they can get from the employers are fair salary and opportunities for personal growth (sims, 1994; robinson et al.,1994; kissler, 1994; sparrow, 1996; hiltrop, 1996; schalk & roe 2007). psychological contracts could also be distinguished upon whether financial or relational elements dominate in their content. accordingly, there are two types of psychological contracts: transactional and relational (macneil, 1980; rousseau, 1990; robinson et al., 1994). since any psychological contract is not purely transactional or relational, recently two additional forms have been identified. these are balanced psychological contract (it has the 206 s. milanović, m. đokić, b. đorđević same characteristics as relational psychological contract, but also contains financial elements) and transitional psychological contract (it forms in the period of a crisis or when a company is undergoing some radical organizational changes) (rousseau, 2004). the most important issue from the employees’ perspective is whether their expectations are fulfilled. if that is not the case, their psychological contract is, actually, breached. some authors insist on a distinction between two terms – violation and breach of psychological contract. according to morrison and robinson (1997) “perceived breach refers to the cognition that one’s organization has failed to meet one or more obligations within one’s psychological contract in a manner commensurate with one’s contributions” (morrison & robinson, 1997, p. 230). therefore, perceived breach represents a cognitive assessment of contract fulfillment, based on an employee’s perception. on the other hand, term violation refers to the “emotional and affective state that may, under certain conditions, follow from the belief that one’s organization has failed to adequately maintain the psychological contract” (morrison & robinson, 1997, p. 230). thus, violation is considered as an emotional experience. perceived psychological contract breach may occur for many reasons, but two main causes are identified: reneging and incongruence (morrison & robinson, 1997). reneging refers to the situation when organizational agents knowingly fail to meet their obligations and promises towards an employee. it occurs either because the organization is unable to fulfill given promises or because it is unwilling to do so. incongruence, on the other hand, is a situation when an employee and agents of the organization have different understanding about the mutual obligations and promises. these different perceptions usually appear due to the complexity and ambiguity of reciprocal obligations and expectations, bad communication between employees and organizational agents and disparity in cognitive schemata they possess. 1.2. job satisfaction job satisfaction as a phenomenon could be seen as a global feeling about a job or as a constellation of the attitudes about various aspects of a job (spector, 1997). it could also be defined as a result of a cognitive, affective and evaluative reaction of an individual on various dimensions of job (judge at al., 2001). however, the most cited definition of job satisfaction in literature is probably locke’s definition who states that job satisfaction is "a pleasurable or positive emotional state resulting from the appraisal of one’s job or job experiences" (locke, 1976, p. 1304). very useful opinions that enable understanding of this concept are also the opinions of mcshane (2004) and fako et al. (2009). according to mcshane (2004), job satisfaction represents the level of divergence between what a worker expects to receive and what he/she actually experiences in the workplace (mcshane, 2004). furthermore, fako et al. (2009) state that if one expects little and gets little, he/she would be satisfied as much as one who expects a lot and gets a lot. on the other hand, if one expects a lot and gets little, he/she would be dissatisfied (fako et al., 2009). job satisfaction is a very complex phenomenon which could be influenced by various factors. based on their nature, there are three basic models which explain the causality of job satisfaction. these models are: situational model, dispositional model and interactional model (judge & klinger, 2008). the situational model of job satisfaction is based on the premise that the influence of psychological contract breach on job satisfaction 207 job satisfaction stems from the job characteristics or other aspects of the work environment. according to this model, job satisfaction could be influenced by the salary, job tasks, possibilities for promotion, relationship with co-workers etc. (spector, 1997; giri & kumar, 2010; hauff et al., 2015). on the other hand, the dispositional model is based on the premise that certain relatively stable personal characteristics influence job satisfaction regardless of the job characteristics and situation. judge and his colleagues (1998), for example, proposed that there are four personal characteristics that determine one’s disposition towards job satisfaction. these are: self-esteem, general self-efficacy, locus of control and neuroticism (judge et al., 1998). these authors state that higher levels of self-esteem and general self-efficacy lead to higher job satisfaction. in addition, they also found that job satisfaction is associated with internal locus of control and lower level of neuroticism (judge et al., 1998). finally, the interactional model of job satisfaction is based on the premise that the fit between a person and the environment influences job satisfaction (chatman, 1989). one of the situational factors which have a proven negative effect on employees job satisfaction is breaching of their psychological contract. this has been confirmed in numerous studies that have been conducted in developed countries so far (robinson & rousseau, 1994; knights & kennedy, 2005; zhao et al., 2007; suazo, 2009). however, the context in which employees work in developed countries is quite different comparing to the context of work of employees in developing countries. in developing countries, the employees are faced with high rate of unemployment, low living standard etc., so the question that arises here is whether psychological contract breach in such context influences job satisfaction of employees in the same way as it does in developed countries negatively. in order to find out the answer to this question the hypothesis that will be tested in our research are as follows: h1: there is a negative relationship between psychological contract breach and job satisfaction. h2: psychological contract breach influences negatively job satisfaction of the employees in the context of high unemployment rate and low living standard. 2. methodology of research method of the research. for the purpose of testing the above hypothesis, an empirical research has been conducted. empirical research has been carried out by the case study method. this method was chosen since such empirical research has not been conducted on the territory of the republic of serbia so far, and since this research is the first phase of a more comprehensive one. content of the research. the research has been conducted in the company aura which was founded in 1996 in nis as a company for the production and sale of cosmetics. nis is one of the largest cities in serbia where the unemployment rate is very high, especially among the younger people. a few decades ago, this city was the center of electronic, mechanical and tobacco industry, with some of the most successful companies of that time. however, since the 90s, due to the transition process, the country went through many economic and political challenges. the industry collapsed and around 40.000 people in nis have lost their jobs. the city was faced with catastrophic economic situation 208 s. milanović, m. đokić, b. đorđević and has not been able to recover ever since. although the number of unemployed has slightly decreased in the last couple of years, mainly because of the foreign investors and their companies, it is still very high. research variables and instruments. regarding the psychological contract breach, we used the questionnaire created by robinson & morrison (2000). for gathering the data about job satisfaction, we used the questionnaire created by eisenberger et al. (1997). each item in questionnaires was assessed using five-point likert scale, ranging from 1 – strongly disagree, to 5 – strongly agree. an answer of 4 or more points expresses high level of agreement, answer of 3 points indicates neutral opinion, while low level of agreement is expressed by an answer below 3 points. since there were reverse questions in the part of psychological contract breach questionnaire, a reversal of initial coding was applied during the analysis. data collection techniques and instruments. the number of questionnaires that were distributed was 100. the questionnaires in paper form were distributed during may of 2017. the response rate was 60%. there was no missing data and all returned questionnaires were used and analyzed. sample characteristics. the demographic characteristics of the respondents are presented in the table 1. table 1 respondent characteristics variable frequency percent gender 60 100 male 16 26.7 female 44 73.3 age 60 100 <25 2 3.3 26-40 28 46.7 41-55 26 43.3 >55 4 6.7 education 60 100 iii level 8 13.3 iv level 32 53.3 vi level 2 3.3 vii level 16 26.7 viii level 2 3.3 work experience in current job 60 100 <1 year 2 3.3 1-5 years 20 33.3 6-10 years 2 3.3 11-20 years 34 56.7 21-30 years 2 3.3 source: authors' calculations analyses and procedures. the collected data were analyzed using the program ibm spss, version 23. regarding the purpose and objectives of the research we used anova test and linear regression. the influence of psychological contract breach on job satisfaction 209 3. the results and discussion in order to evaluate internal consistency of the instruments, cronbach's alpha coefficient was calculated. the cronbach's alpha coefficient of job satisfaction was 0.75 while for psychological contract breach it was 0.83. in both cases the values of calculated coefficients indicated that the instruments have sufficient internal reliability. the questionnaire created by robinson & morrison (2000) with five items was used to measure the level of psychological contract breach of the participants. the following table presents the minimum, the maximum and the mean values, as well as the standard deviation of each item in the questionnaire. table 2 descriptive statistics of the items measuring psychological contract breach item n minimum maximum mean sd 1. almost all of the promises made by my employer during recruitment have been kept so far. 60 1.00 4.00 1.80 .92 2. i feel that my employer has come through in fulfilling the promises made to me when i was hired. 60 1.00 4.00 1.77 .81 3. so far my employer has done an excellent job of fulfilling their promises to me. 60 1.00 5.00 1.87 1.00 4. i have not received everything promised to me in exchange for my contributions. 60 1.00 4.00 2.23 1.06 5. my employer has broken many of their promises to me even though i have upheld my side of the deal. 60 1.00 3.00 1.83 .69 source: authors' calculations table 2 presents original items that were set in questionnaire spread to the case study participants. since the main aim of the questionnaire was to measure the level of psychological contract breach, the first three questions are reformulated in order to achieve negative formulation of all items. so, when reverse coding was done, answer of 5 points became 1 point on 5-point likert scale used in this research. right side of table 2 shows descriptive statistics for re-coded answers to first three items and for original answers to statements 4 and 5. it is notable in four of five questions that total breach of psychological contract does not exists. although, there is an answer of 5 points to question 3, the mean of this question is around same level as mean of other questions. the mean of all five items is lower then 3 and with all negatively formulated statements that means the employees believe that the employer fulfilled their expectations. the following table presents descriptive statistics of the items defined by eisenberger et al. (1997) for measuring the job satisfaction of employees. table 3 shows that in the company aura there are employees who are totally dissatisfied with their job (the items 2, 3, and 4 are assessed with 1 point). however, there are also employees who are very satisfied with their job (all the items in the questionnaire are assessed with 5 points by certain employees). the presented data show that the first item has the least mean value 3.73 (if a good friend of his/her said that he/she is interested in working in a job like his/hers, he/she would strongly recommend it). the 210 s. milanović, m. đokić, b. đorđević mean values of the other answers are 4 points, or higher, indicating the high level of job satisfaction. table 3 descriptive statistics of the items measuring job satisfaction item n minimum maximum mean sd 1. if a good friend of mine told me that he/she was interested in working in a job like mine i would strongly recommend it. 60 2.00 5.00 3.73 .82 2. all in all, i am very satisfied with my current job. 60 1.00 5.00 4.27 .90 3. in general, my job measures up to the sort of job i wanted when i took it. 60 1.00 5.00 4.00 1.07 4. knowing what i know now, if i had to decide all over again whether to take my job, i would. 60 1.00 5.00 4.33 .88 source: authors' calculations following table represents the minimum, maximum and the mean value of psychological contract breach and job satisfaction and their standard deviations. table 4 descriptive statistics of studied variables variable n minimum maximum mean std. deviation psychological contract breach 60 1.00 3.80 1.90 .70 job satisfaction 60 1.50 5.00 4.08 .71 source: authors' calculations table 4 shows that the mean value of psychological contract breach is 1.90 points which indicates relatively high level of perception that the employer fulfilled the expectations employees had. on the other hand, the mean value of job satisfaction is 4.08 points which represents relatively high level of job satisfaction. standard deviations for both variables are close to 1, which is at an acceptable level. in order to test the hypothesis h1, we calculated the correlation between psychological contract breach and job satisfaction. table 5 correlation between psychological contract breach and job satisfaction psychological contract breach job satisfaction psychological contract breach pearson correlation 1 -.479** sig. (2-tailed) .007 n 60 60 job satisfaction pearson correlation -.479** 1 sig. (2-tailed) .007 n 60 60 **. correlation is significant at the 0.01 level (2-tailed). source: authors' calculations the influence of psychological contract breach on job satisfaction 211 table 5 shows that the pearson correlation coefficient is -.479, p < .01 indicating that there is a negative correlation between psychological contract breach and job satisfaction of the employees. based on these results, it can be concluded that the research hypothesis h1, which states that there is a negative relationship between psychological contract breaches and job satisfaction, is confirmed. that means that as the level of psychological contract breach increases, the level of job satisfaction decreases. for the purposes of this study, pearson correlation coefficient values of ± .10 represent a small effect, ± .30 is a medium effect and ± .50 is a large effect (cohen, 1992). the results of study show that psychological contract breach is significantly and negatively related to job satisfaction (p < .01, medium practical effect). in order to investigate if there is the effect of psychological breach on job satisfaction, the linear regression coefficient was calculated (table 6). table 6 regression analysis of studied variables model summary model r r square adjusted r square std. error of the estimate 1 .479 a .230 .216 .61884 a. predictors: (constant), psychological contract breach anova a model sum of squares df mean square f sig. 1 regression 6.622 1 6.622 17.291 .000 b residual 22.212 58 .383 total 28.833 59 a. dependent variable: job satisfaction b. predictors: (constant), psychological contract breach coefficients model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound 1 (constant) 4.995 .233 21.406 .000 4.528 5.462 psychological contract breach -.480 .115 -.479 -4.158 .000 -.711 -.249 a. dependent variable: job satisfaction linear regression analysis in table 6 shows that r value = .479 represents the correlation between psychological contract breach and job satisfaction. r square = .230 indicates that 23.0 % change in job satisfaction is due to psychological contract breach. f = 17.291, is significant at the 0.000 level (p < .05), shows that there is a model fit between psychological contract breach and job satisfaction. regression coefficient (b) of psychological contract 212 s. milanović, m. đokić, b. đorđević breach of -.480 shows that 1 unit change in psychological contract breach will bring -.480 unit changes in job satisfaction. based on these results, it can be concluded that hypothesis h2 is confirmed, i.e. psychological contract breach negatively influences job satisfaction of the employees in the context of high unemployment rate and low living standard. although the sample in our research was small, comparing to the samples in similar studies conducted in developed countries, the results that we obtained are to some extent similar to the results that many other authors have found in their studies. for example, zhao et al. (2007) also found that psychological contract breach is strongly correlated with job satisfaction (r = -.54) indicating that as the level of psychological contract breach increases, the level of job satisfaction decreases. furthermore, the results of our study are similar to the results of the study conducted by suazo (2009). in this study, it was found that psychological contract breach is relatively strongly related to job satisfaction (r = .40). suazo (2009) also found that psychological contract breach affects significant amount of variance of job satisfaction. he found that psychological contract breach explains 20 percent of variance in job satisfaction. the results of the study that we conducted are also similar to the results of the study conducted by xiaoqing and his colleagues (2015). they have found that psychological contract breach has negative effect on job satisfaction (r = 0.39). they have also found that 15.5 percent of change in job satisfaction is due to psychological contract breach. the findings in our research, that are supported by the literature, suggest that the employees, even though working in the conditions of high unemployment and low living standard, if they perceive that their expectations are not met by the employer, they will be less satisfied with their job. conclusion in this paper, we analyzed the relationship between the psychological contract breach and job satisfaction of the employees in the company aura founded in nis (serbia). this study has been conducted by the case study method which is generally suitable for examination the phenomena which have not previously been the subject of a comprehensive research and when it is necessary to determine the possible directions in further research (evers & van staa, 2010). these conditions were fulfilled in our research: the relationship between psychological breach and job satisfaction has not been examined on the territory of the republic of serbia and this research is the first phase of the more comprehensive one. therefore, this method was the optimal solution for the research we conducted. the result of the study showed that there is statistically significant negative relationship among these variables. the linear regression analysis showed that 23 percent of change in job satisfaction is due to the psychological contract breach. furthermore, it was also found that psychological contract breach influences job satisfaction, so if psychological contract breach increases for 1 unit that will bring decrease in job satisfaction for 0.480 units. since the results also showed that the employees in this company generally believe that the employer fulfilled their expectations (mean value of breaching the psychological contract is 1.90), managers of this company should continue to dedicate attention to the communication the influence of psychological contract breach on job satisfaction 213 with employees in order to help them create realistic expectations. furthermore, the management should keep all of its promises that are made to the employees. based on the implemented method of the empirical research, there are some limitations of this study. first, because of the small sample, generalizations for the sector of cosmetics production or the whole private and public sector in serbia can not be made. second, the data has been collected via questionnaire with limited number of the items (especially when it comes to the job satisfaction), so it was not possible to determine which job related characteristics produce the lowest level of job satisfaction. that information would be useful for creating effective human resource management practices. in order to overcome these limitations, our future research will be based on a bigger sample and the questionnaire regarding the job satisfaction with more items will be used. references argyris, c. 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(2007). the impact of psychological contract breach on work-related outcomes: a meta-analysis. personnel psychology, 60, 647–680. uticaj kršenja psihološkog ugovora na zadovoljstvo poslom psihološki ugovor predstavlja implicitne pretpostavke zaposlenog (ili poslodavca) u pogledu sadr aja njihove me uso ne razmene pored onih koje su specificirane u formalnom ugovoru o radu slu aju njegovog kršenja mo e do i do mnogih negativnih posledica edna od njih je ni i nivo zadovoljstva poslom. u studiji koja je sprovedena pokušali smo da na emo odgovor da li je kršenje psihološkog ugovora u nepovoljnim ekonomskim uslovima negativno uticalo na zadovoljstvo poslom kao što je utvr eno u ve ini studija sprovedenih u razvijenim zemljama metod istra ivanja koji smo koristili io je metod studije slu aja da bismo testirali hipotezu, koristili smo anova test i linearnu regresiju rezultati studije su pokazali da kršenje psihološkog ugovora negativno uti e na zadovoljstvo poslom zaposlenog uprkos nepovoljnim ekonomskim uslovima u kojima rade. ključne reči: psihološki ugovor kršenje zadovoljstvo poslom zaposleni plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 3, 2017, pp. 243 253 https://doi.org/10.22190/fueo1703243j review paper impact of tax policies on tourism competitiveness in serbia and other neighboring and european union countries 1 udc 336.2:338.48(497.11:4-672eu) sonja jovanović 1 , maja božilović 2 1 university of niš, faculty of economics, niš, serbia 2 tax administration niš, serbia abstract. tax policy has a significant impact on the tourism sector, its development, employment, and the decision of tourists to visit a destination. the impact of tax policy on the price of tourism services also reflects on the tourism and travel sector’s competitiveness level. the subject of this paper is tax policy in the area of tourism in serbia and some neighboring and european union countries (croatia, montenegro, albania, macedonia, bulgaria, slovenia, hungary, romania). the aim of the paper is the analysis of tax rates in the tourism sector in the countries under consideration, and the level of tourism sector’s competitiveness in terms of the impact of tax policy on business and investment. methodological basis in this paper relies on the world economic forum data (wef) on travel & tourism competitiveness index (ttci). research has shown unfavorable position of serbia, as well as most countries in the region, in terms of effects of tax policy on business and investment. key words: competitiveness, taxes, tourism, hotel management jel classification: h2, z32, k34. introduction the tourism sector is nowadays important for a number of countries in terms of its share in gross domestic product (gdp), employment, foreign exchange inflows, and it also encourages the development of other tourism-related activities. according to the world travel & tourism council (wttc) for the year 2015, the share of tourism in global gdp was 9.8%, with 284 million people employed, and future growth projections received june 01, 2017 / accepted july 11, 2017 corresponding author: sonja jovanović university of niš, faculty of economics, trg kralja aleksandra 11, serbia e-mail: sonja.interal@gmail.com 244 s. jovanović, m. božilović of 4% per year and employment of 370 million people at a global level by 2026. this means that every ninth job position will be in the tourism sector (wttc, 2016). the tourism sector is a source of tax revenue, but, on the other hand, the tax policy can significantly foster the development of tourism, investment in the tourism sector, and create multiple development effects. the tax rate on accommodation or in the hospitality industry has a significant impact on tourists’ choice of destinations for travel or accommodation. the research subject is the tax policy in the field of tourism in serbia and other neighbouring and european union countries. the aim is to analyze the level of tax rates in the tourism sector in serbia and some countries in the region. in addition, the aim is to look at the achieved level of competitiveness of the tourism sector in terms of the tax policy impact on business and investment. 1. tax policy in the field of tourism in serbia and some neighboring countries one of the important public policies, with a significant impact on the tourism sector, is tax policy. tax rates have an impact on investment in this industry, prices of tourism products and services, but also tourists’ preference to pay higher prices for services. one of the most important factors for tourists when selecting a tourist destination is the price of accommodation and food. tourists tend to choose countries with more favorable prices. (dombrovski & hodžić 2010, p. 137) table 1 vat rate in tourism and hospitality in 2016 (%) country vat rate in tourism and hospitality accommodation restaurant and catering services slovenia 9,5* *22 (9.5% applies to the preparation of meals) croatia 13* 13* montenegro 7** 19** albania 20**** 20**** macedonia 5*** 18 serbia 10 20 bulgaria 9* 20* hungary 18* 27* romania 20 (9% accommodation provided in hotels and similar establishments, including the letting of places in camping. in case of half board, full board or all-inclusive accommodation, the 9% rate applies to the total price of accommodation which may include alcoholic beverages)* 20 (9% excluding alcoholic beverages other than draft beer)* source: *european commission, vat rates applied in the member states of the european union, august 2016. **ministry of sustainable development and tourism of montenegro, http://www.mrt.gov.me/vijesti/164337/unapredenje-konkurentnosti-crne-gore-kao-turisticke-destinacije.html (24.01.2017) ***republic of macedonia, public revenue office, http://www.ujp.gov.mk/s/plakjanje/povlasteni_danocni_stapki (19.01.2017.) ****tmf group, 2016 vat rate changes in europe, https://www.tmfgroup.com/~/media/files/pdfs/vat%20documents/2016%20vat%20rate%20changes%20in%20europe_table_ digital.pdf; there is an on-going debate on reducing vat in tourism from 20 to 5% (24.01.2017) http://www.mrt.gov.me/vijesti/164337/unapredenje-konkurentnosti-crne-gore-kao-turisticke-destinacije.html http://www.ujp.gov.mk/s/plakjanje/povlasteni_danocni_stapki impact of tax policies on tourism competitiveness in serbia and other neighboring the eu countries 245 “the rise in tourism competitiveness will increasingly require strengthening efforts to retain existing and attract new visitors. the decisive factor in this regard is the quality of service and the price of the tourism product. the largest expenditure is hotel accommodation, which is substantially determined by the level of fiscal and non-fiscal burdens” (bratić et al., 2012, p. 256). an increase in tax burdens significantly affects, i.e. endangers the tourism sector (tax reform threatens tourism, dw). higher tourism tax rates decrease price competitiveness and competitiveness of the overall business environment for the development of a tourist destination. the tourism sector is significantly affected by the tax rates on accommodation and hospitality services. thus, the tax rates for these two types of services are substantially different, with hospitality services usually involving higher tax rates. in serbia, the rate of value added tax (vat) in hospitality industry is 20%, while a special value added tax rate of 10% is applied to accommodation services in accordance with the law governing tourism (law on value added tax, article 23). based on the analysis of the current vat rate in the accommodation and hospitality industry in serbia and analyzed countries (table 1 and figure 1), it can be noted that romania and albania have the highest vat rate in the accommodation sector (20%), while the lowest is recorded in macedonia (5%). the highest vat rate in the hospitality industry is recorded in hungary (27%), followed by slovenia (22%), romania, albania, bulgaria, and serbia, with 20% each. if one looks at the average level of vat rates in the observed group of countries, it is evident that serbia has a lower vat rate in the accommodation sector in relation to the average of the observed group of countries, and a slightly higher vat rate in the hospitality industry compared to the average. fig. 1 vat rates in the accommodation and hospitality industry in serbia and neighboring countries for the year 2016 a large number of countries which reduced the tourism vat rate experienced significant benefits. reducing vat in the tourism industry lowers prices, stimulates demand, and generates revenue for investment in manpower and tourist facilities (geoff, 2014). 246 s. jovanović, m. božilović referring to a study by deloitte and touche in 1998, bratić, bejaković, and devĉić (2012) indicate that higher tax burdens lead to a decrease in tourism revenues, while an increase or decrease in the tax rate significantly influences the decision about the destination where tourists travel and the type of accommodation. thus, in montenegro, “in the last ten years, the vat rate on accommodation in hotels and other similar forms of accommodation has been at the level of 7%, and, in that period, the revenue from tourism has risen from 200 to 800 million euros” (ministry of sustainable development and tourism of montenegro, 2017). the study entitled “information on the analysis of impact of incentives and tax reliefs in tourism on the economy and public finances of montenegro in the medium term” analyzes the impact of fiscal incentives to improve tourism competitiveness. “the analysis shows that the application of incentives and tax reliefs in the tourism industry will have a net positive impact on public finances in the amount of 101 million cumulatively over a period of three years (27.7 million euros in 2016, 27.7 million in 2017, and 45.6 million in 2018), generated primarily by the growth of budget revenues in construction and related industry, based on the ministry of sustainable development and tourism’s assumption on the construction and reconstruction of 76 hotels and hybrid hotels with 4 and 5 stars in this period” (government of montenegro, 2017). in croatia, the “measure to lower the level of vat was introduced in 2014, thus increasing price competitiveness and investment in the entire sector. comparing prices in restaurants and hotels in greece, italy, and turkey with croatia shows that croatian tourism is competitive. these prices are about 4 percent lower than in turkey, and even almost 50 percent lower than in italy” (cota, 2016). the reduction of tax rates in the tourism sector has a significant impact on employment. thus, “the 2012 deloitte survey indicates that the reduction in the vat rate on food in french restaurants from 19.6% to 5.5% of 1 july 2009 in the first five quarters after this measure resulted in 28,200 new jobs, and prevented the closure of 15,000 businesses and 30,000 jobs” (ministry of sustainable development and tourism of montenegro, 2016). in ireland, the ministry of finance in 2011 reduced vat in the tourism sector from 13.5% to 9.5%, in order to support tourism and stimulate employment in this sector. the analysis shows that the first 12 months since the introduction of lower tax rates saw an increase in activity in the tourism sector, improved tourists’ assessment of services in terms of “value for money”, and increase in the number of employees in the tourism sector by about 10,000 (oecd, 2014). 2. the importance of tax policy to improve the competitiveness of the tourism sector competitiveness of the tourism sector can be monitored by the travel and tourism competitiveness index published by the world economic forum. the structure of this index is composed of four subindices (world economic forum, 2015): 1) enabling environment, 2) travel and tourism policy and enabling conditions, 3) infrastructure, and 4) natural and cultural resources. impact of tax policies on tourism competitiveness in serbia and other neighboring the eu countries 247 travel and tourism competitiveness report of the world economic forum for 2015 analyzes the performance of the tourism industry in 141 countries in the world. table 2 shows scores and ranking of the analyzed group of countries by travel and tourism competitiveness in the period 2009-2015. the top-ranked country is croatia (33 rd in the world), followed by slovenia (39 th ), hungary, romania, and montenegro. the lowest ranked countries in the observed group are macedonia (82 nd ), serbia (95 th ), and albania (108 th place). serbia has significantly worsened its position in the global list of countries according to the travel and tourism competitiveness index. serbian ranking has dropped by as much as 13 positions in 2015, compared to 2011. table 2 travel and tourism competitiveness index in serbia and observed countries in the period 2009-2015 country/year 2009 2011 2013 2015 ranking score ranking score ranking score ranking score slovenia 35 4.53 33 4.64 36 4.58 39 4.17 croatia 34 4.54 34 4.61 35 4.59 33 4.30 montenegro 52 4.29 36 4.56 40 4.50 67 3.75 albania 90 3.68 71 4.01 77 3.97 108 3.22 macedonia 80 3.81 76 3.96 75 3.98 82 3.50 serbia 88 3.71 82 3.85 89 3.78 95 3.34 bulgaria 50 4.30 48 4.39 50 4.38 49 4.05 hungary 38 4.45 38 4.54 39 4.51 41 4.14 romania 66 4.04 63 4.17 68 4.04 66 3.78 source: world economic forum, the travel and tourism competitiveness report 2009, 2011, 2013, 2015, geneva, switzerland of importance for the analysis of the effects of tax policy on the tourism sector is first the analysis of the observed countries’ positions according to the travel and tourism competitiveness index subindex – enabling environment. the analyzed subindex, enabling environment for travel and tourism development, comprises five pillars based on which to assess the level of competitiveness: 1. business environment 2. safety and security 3. health and hygiene 4. human resources and labour market, and 5. ict readiness (world economic forum, 2015, p. 4). the country with the most favourable environment for travel and tourism development in 2015 is hungary (33 rd in the world), followed by slovenia and bulgaria. serbia, with respect to all the analyzed countries in the region, has the worst environment for travel and tourism development, and is 67 th in the world (table 3). 248 s. jovanović, m. božilović table 3 position of serbia in relation to observed countries according to the structure of the travel and tourism competitiveness index in 2015 country/travel and tourism competitiveness index subindices enabling environment travel & tourism policy and enabling conditions infrastructure natural and cultural resources rank score rank score rank score rank score slovenia 42 5.21 25 4.43 42 4.43 53 2.64 croatia 52 5.08 39 4.33 38 4.54 30 3.23 montenegro 56 5.01 91 3.95 47 4.12 105 1.93 albania 49 4.68 122 3.59 90 3.04 135 1.59 macedonia 49 5.11 110 3.74 74 3.41 125 1.72 serbia 67 4.72 113 3.71 81 3.19 122 1.75 bulgaria 46 5.13 22 4.44 52 3.93 48 2.70 hungary 33 5.28 2 4.76 48 4.06 62 2.47 romania 59 4.88 35 4.37 71 3.49 66 2.38 source: world economic forum, 2015. the travel and tourism competitiveness report 2015, geneva, switzerland table 4 provides an overview of scores and rankings of serbia and observed countries according to the business environment pillar. serbia has the worst ranking in relation to all analyzed countries by this parameter of competitiveness as well. specifically, serbia is in the 133 rd place in the world (out of 141 countries) by competitiveness of business environment for tourism development. this shows that serbia is not competitive, compared to other countries, according to the business environment that should enable tourism development. table 4 position of serbia in relation to observed countries according to the business environment pillar within the enabling environment subindex in 2015 country enabling environment subindex pillar – business environment rank score slovenia 106 4.03 croatia 125 3.65 montenegro 73 4.39 albania 93 4.11 macedonia 34 4.87 serbia 133 3.38 bulgaria 85 4.22 hungary 79 4.28 romania 90 4.11 source: world economic forum, 2015. the travel and tourism competitiveness report 2015, geneva, switzerland in the observed group of countries, the best business environment for travel and tourism development is found in macedonia, montenegro, and hungary. the least favourable business environment is in serbia and croatia. the mean value of the business environment pillar for the countries of southern and western europe is 4.56. besides macedonia, whose business environment pillar value is impact of tax policies on tourism competitiveness in serbia and other neighboring the eu countries 249 above the average among the countries of western and southern europe (4.87), all other countries observed have a lower score of business environment for the performance of tourism activity. in the observed group of countries, as well as among all the countries of western and southern europe, the worst ranked business environment is in serbia. hungary, bulgaria, and romania belong to the group of countries of northern and eastern europe whose business environment pillar mean value is 4.72. values of the pillar for these three countries are below the average for the group of countries of northern and eastern europe. the business environment pillar within the subindex enabling environment is composed of 12 indicators. these indicators are used to identify the extent to which business environment is favourable in a country, including environment for travel and tourism activities. thus, some business environment indicators are property rights, time required for obtaining building permits, which is especially important for tourism development, time required to start a business, business start-up costs, scope and effects of taxation on incentives to work, scope and effects of taxation on incentives to invest, level of tax rates (world economic forum, 2015, p. 6). table 5 position of serbia compared to observed countries, according to some business environment pillar indicators in 2015 country/indicators effect of taxation on incentives to work effect of taxation on incentives to invest rank score ran score slovenia 134 2.5 132 2.8 croatia 139 2.2 139 2.1 montenegro 63 3.7 43 4.0 albania 52 3.8 82 3.6 macedonia 19 4.4 19 4.5 serbia 133 2.6 134 2.7 bulgaria 89 3.4 80 3.6 hungary 126 2.8 131 2.8 romania 137 2.5 126 2.9 source: world economic forum, 2015. the travel and tourism competitiveness report 2015, geneva, switzerland the position of serbia, as well as most countries in the region, is unfavourable in terms of effects of taxation on incentives to work (table 5). the score of the effect of taxation on incentives to work indicator is obtained based on the world economic forum research, in an answer to the question: “to what extent do taxes affect reduction in business activity in your country?” the answer scores range from 1 to 7. score 1 is given in situation when taxes significantly affect business activity reduction, while 7 means that taxes do not affect business activity reduction. the score of the effect of taxation on incentives to invest indicator is also obtained through research and answer to the question: “to what extent do taxes affect reduction of investment activity in your country?” (world economic forum, 2015, p. 484) specifically, serbia is 133 rd in the world (compared to 141 nations) by effects of tax policy on business. poor ranking in the observed group of countries is also recorded in hungary (126 th place), slovenia (134 th place), romania (137 th place), croatia (139 th place). top ranked countries by effects of tax policy on business are macedonia (19 th ), albania (52 nd ), and montenegro (63 rd place). 250 s. jovanović, m. božilović the effects of tax policy on investment are unfavourable in serbia (134 th place in the world), croatia (139 th place), slovenia (132 nd place), hungary (131 st place). these countries are among the last 10 countries in the world by effects of tax policy on investment. this indicates that serbia has no competitive advantage when it comes to tax policy and its effects on tourism development. business environment with stimulating tax policy is of particular importance for business and investment in the field of tourism. thus, there is a need to introduce various forms of incentives and tax reliefs to stimulate new investment and projects that bring new jobs in the tourism industry. “in order to increase tourism competitiveness, it is necessary to continuously monitor the effects of the existing fiscal burdens and evaluate opportunities to reduce them (especially when it comes to: vat on accommodation used by foreign tourists, income tax, tax on salaries and other employee benefits, salary contribution, exemption from payment of utilities and other payments, etc.) or eliminate them” (ĉerović et al. 2015, p. 6). 3. tax incentives in the field of tourism in serbia to ensure economic growth, development of small and medium-sized enterprises, concession investment, employment and better ecological situation, there are various tax incentives (radiĉević & raiĉević, 2008, p. 143). of importance to encouraging the development of the tourist industry is the existence of stimulating tax provisions in the law on corporate income tax, law on personal income tax, and law on mandatory social insurance contributions. law on corporate income tax (law on corporate income tax) prescribes specific incentives that apply to tax reliefs and incentives for investment. article 50a of this law stipulates that “a taxpayer who invests in their own fixed assets, i.e. in whose fixed assets another entity invests more than a billion dinars, uses these funds to conduct primary activity and activities listed in the founding act of the taxpayer, i.e. listed in another act of the taxpayer, which defines activities that the taxpayer performs in the investment period, employs permanently at least 100 people, is exempt from paying corporate income tax for a period of ten years in proportion to the investment”. however, to benefit from this tax relief, enterprises in the tourism sector, with less than 100 employees, may find the listed preconditions difficult to achieve. although tax incentives are introduced in order to increase the volume of economic activities, the income tax reform abolished some tax benefits that a large number of tourist companies could use, such as incentives for businesses operating in undeveloped areas, tax credit for companies that perform activities of special interest, and so on. thus, in 2012, article 47 of the law on corporate income tax was repealed, which allowed taxpayers to reduce profit generated in the newly established business unit in underdeveloped areas by corporate income tax for a period of two years, in proportion to the share of such realized profits in total company profits (law on corporate income tax law). the most important amendment to the law on corporate income tax, adopted in may 2013, was abolition of the right to tax credit on investment in fixed assets. the importance that both the above-mentioned allowances had to a large number of tourist legal entities was reflected in both the freedom of the amount of investment, and in no requirement regarding the number of employees. impact of tax policies on tourism competitiveness in serbia and other neighboring the eu countries 251 no less significant was tax relief abolished in 2010, which was defined in article 49 of the same law. a taxpayer who employed new workers for an indefinite period of time was allowed to reduce the calculated tax by the amount equal to the amount of 100% of gross wages, i.e. salaries, paid to these employees, plus accrued public revenues paid by the employer. tax credit was recognized for a period of two years from the date of employment, provided that during that period the number of employees did not decrease, and that the taxpayer in the 12 months prior to the date of employment did not decrease the number of employees. looking at the abolition of explained tax relief, and considering applicable tax incentives included in the law on corporate income tax, it can be noted that tax reliefs are poorly applicable in companies in the field of tourism. as tax reliefs in this law are used in order to build competitiveness, it is necessary to redesign them in the field of income taxation, without compromising the attractiveness of the tax system. law on alterations and amendments to the law on personal income tax and law on alterations and amendments to the law on mandatory social insurance contributions, published in the “official gazette of rs”, no. 112/2015, entered into force and applies as of 1 january 2016, except for certain provisions. the newly added article 21d of the law on personal income tax (law on personal income tax) and the newly added article 45v of the law on mandatory social insurance contributions (law on mandatory social insurance contributions) prescribe new incentives for employers who employ workers. tax relief consists in the right to a refund of 75% of tax paid on earnings and 75% of paid contributions, paid by the employee and the employer, for the newly employed person, up to and including earnings paid by 31 december 2017. this means that 75% of income tax and 75% of all contributions, both at the expense of the employer, and at the expense of the employee, are subsidized. these reliefs can be used by employers, i.e. legal entities, which are, according to accounting regulations, classified as small and micro legal entities and entrepreneurs, according to paragraph 1 of article 21v of the law on personal income tax. to get these benefits, i.e. a refund of taxes and contributions, employers need to employ at least two new workers, in relation to the number of employees that the employer had on 31 october 2015, in line with paragraph 5 of article 21v of the law on personal income tax. in serbia, there has been an increase in the tax rate, so the income tax rate increased from 10% to 15%, the vat rate on accommodation increased from 8% to 10%, while the vat rate on food and drink increased from 18% to 20%. to encourage investment and overall tourism activity, it is certainly necessary to examine the possibilities of reducing tax burdens, which would also contribute to improving the competitive position of serbia as a tourist destination. conclusion for a large number of countries, tourism is a significant source of budget revenue. the tourism sector is sensitive to changes in tax policy, especially to price changes influenced by changes in taxes. tax burden has an impact on investment in this industry, prices of tourism products and services, but also tourists’ preference for a specific destination. a large number of countries in the region (bearing in mind that some are eu members), 252 s. jovanović, m. božilović which have reduced the vat rate in tourism, experienced significant benefits in the form of enhanced tourist activities, increased employment, and increased price competitiveness and competitiveness of the entire tourism sector. the position of serbia, as well as of most countries in the region, is unfavourable in terms of the effects of tax policy on business and investment. serbia is in the 133rd place in the world (compared to 141 countries) by effects of tax policy on business. serbia, croatia, slovenia, and hungary are among the last 10 countries in the world by effects of tax policy on investment. this indicates that serbia has no competitive advantage when it comes to tax policy and its effects on the development of tourism. tax reliefs and other incentives that may be prescribed by legislation are important to encourage the development of the tourism sector. thus, the law on corporate income tax law in serbia prescribes specific incentives relating to tax exemptions and incentives for investment. the law on personal income tax and the law on mandatory social insurance contributions prescribe reliefs for employers who hire new workers. prescribed benefits can be used by companies in the field of tourism, but there is a requirement regarding the amount of investment and the number of new employees which companies in the tourism industry can hardly fulfill. at the same time, some incentives relevant to the tourism sector have been repealed. to improve the competitive position of serbia as a tourist destination, there is certainly a need to examine the possibilities of reducing tax burdens, which would encourage investment, total 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(2008). javne finansije teorija i praksa [public finance theory and practice], datastatus. republic of macedonia, public revenue office, retrieved from: http://www.ujp.gov.mk/s/plakjanje/ povlasteni_danocni_stapki, accessed on: 19 january 2017. tax reform threatens tourism (2015). dw, 24.06.2015., retrieved from: http://www.dw.com/sr/reformaporeza-ugro%c5%beava-turizam/a-18537737, accessed on: 20 january 2017. tmf group, 2016 vat rate changes in europe, retrieved from: https://www.tmf-group.com/~/media/ files/pdfs/vat%20documents/2016%20vat%20rate%20changes%20in%20europe_table_digital.pdf, accessed on: 24 january 2017. world economic forum (2015) the travel and tourism competitiveness report 2015, geneva, switzerland. wttc, travel & tourism economic impact 2016 annual update summary, london, united kingdom, retrieved from: https://www.wttc.org/-media/files/reports/economic%20impact%20research/2016% 20documents/economic%20impact%20summary%202016_a4%20web.pdf, accessed on: 5 february 2017. uticaj poreske politike na konkurentnost turizma u srbiji i nekim zemljama u okruženju i evropske unije poreska politika ima značajan uticaj na poslovanje turističkog sektora, njegov razvoj, zaposlenost, ali i na odluku turista o poseti neke destinacije. uticaj poreske politike na visinu cena usluga u turizmu odražava se i na nivo konkurentnosti sektora turizma i putovanja. predmet istraživanja u ovom radu jeste poreska politika u oblasti turizma u srbiji i zemljama u okruženju, od kojih su neke članice evropske unije (hrvatska, crna gora, albanija, makedonija, bugarska, slovenija. mađarska, rumunija). cilj rada je analiza stope poreza u sektoru turizma u analiziranim zemljama i sagledavanje nivoa konkurentnosti turističkih privreda sa aspekta uticaja poreske politike na podsticanje poslovanja i podsticanje investicija. metodološku osnovu u ovom radu čine podaci svetskog ekonomskog foruma (world economic forum – wef) o indeksu konkurentnosti turizma i putovanja (travel & tourism competitiveness index – ttci). istraživanje je pokazalo da je pozicija srbije, ali i većine zemalja u okruženju nepovoljna sa aspekta efekata poreske politike na podsticanje poslovanja i podsticanje investicija. kljuĉne reĉi: konkurentnost, porezi, turizam, hotelijerstvo. https://www.wttc.org/-/media/files/reports/economic%20impact%20research/2016%20documents/economic%20impact%20summary%202016_a4%20web.pdf https://www.wttc.org/-/media/files/reports/economic%20impact%20research/2016%20documents/economic%20impact%20summary%202016_a4%20web.pdf facta universitatis series: economics and organization vol. 17, n o 2, 2020, pp. 97 112 https://doi.org/10.22190/fueo191112008m © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper industry 4.0 development conditions in the republic of serbia 1 udc 004.9 vladimir mićić university of kragujevac, faculty of economics, serbia abstract. the fourth industrial revolution is about the development of industry 4.0, the changing of the production paradigm and economic digitalization. the research subject are the development conditions of industry 4.0 in the republic of serbia. the main research objective is to point out the importance of the efficient development of industry 4.0 and the implementation of structural changes through the process of digitalization and application of technological innovation in the manufacturing industry. the method of analysis is used to identify the concepts of industry 4.0 and the new industrial paradigm. the comparative method is used to compare technological criteria and changes. the development conditions of industry 4.0 are analyzed indirectly through technological criteria and innovation, i.e. data obtained from survey on innovation, individual innovation and technology indicators and composite indicators. industry 4.0 is an important factor in technological and structural change, economic growth and competitiveness. the research results show that the republic of serbia lacks incentives for the development of industry 4.0. the research results are useful to industrial policy makers as they point to some of the key factors and directions of change to create the conditions for the development of industry 4.0, the manufacturing industry and the digital transformation of the economy. key words: industry 4.0, manufacturing industry, digitalization, innovation, technological change jel classification: o14, o30, o33 received november 12, 2019 / accepted february 11, 2020 corresponding author: vladimir mićić university of kragujevac, faculty of economics, liceja kneževnine srbije 3, 34000 kragujevac, serbia e-mail: wlademic@gmail.com 98 v. mićić 1. introduction the fourth industrial revolution concerns the development of industry 4.0 (industry 4.0 – i4.0) or networked “smart” industries and factories of the future, which is related to the concept of smart (intelligent) production. the fourth industrial revolution and “smart factories” are creating a world that enables virtual and physical production systems to engage in global and flexible collaboration. this allows for complete customization of products and creation of new business models (schwab, 2017). the concept of i4.0 is thought to be the main driver of the fourth industrial revolution (stankovic, et al., 2017), and is based on knowledge and a range of new trends and technologies, notably artificial intelligence, new generations of digital technology and infrastructure, artificial intelligence, machine learning, robotics, the internet, nano technology, genetic modification, new types and modes of energy and information storage, quantum computing, genetics and biotechnology. the fourth industrial revolution relies on digital revolution technology, which focuses on artificial intelligence, nano technology and mobile devices. “these innovation platforms provide limitless opportunities for knowledge creation and transfer. they rapidly multiply innovations, which affects development of a society, its structure and dynamics, its value system, as well as people’s daily lives” (bazić, 2017). the start of the fourth industrial revolution links to the 2011 hanover industrial technology fair in germany. it has become a driving force of exit from recession, reindustrialization, competitiveness growth and recovery of eu economies. in the fourth industrial revolution, new technology and innovation are introduced much faster, and in some parts of the world revolutions are not over yet. the fourth industrial revolution is also unique because of the increasing integration of different disciplines and discoveries (schwab, 2017). certainly the most significant change and challenges lie in new and efficient technologies, but also a profound impact on the industry dynamics and structure, the need for new industrial policy, digital globalization, and the changing role of training and education (vujović, 2019). although focusing on the manufacturing industry, i4.0 is broader in scope than the fourth industrial revolution, and it is widely believed that i4.0 is the driver and structural component of the revolution. the fourth industrial revolution relies on digital revolution, which means new ways for technology to become a building block of the economy, and is marked by the emergence of technological innovation in numerous domains of human society. compared to the previous ones, it develops at an exponential pace, and the breadth and depth of its changes influence the transformation of production, management and governance (wef, 2016). i4.0 is a new industrial paradigm that embraces the application of modern technologies in industrial production (pereira & romero, 2017), such as cyber-physical systems (cps), internet of things (internet of things-iot), internet of services (ios), robotics, computer-aided design (cad), big data analytics, cloud computing, augmented reality, and so on. in this regard, the research subject in this paper are the conditions for the development of i4.0 in serbian manufacturing industry. the main research objective is to point out the importance of efficient development of industry 4.0 and implementation of structural changes through the process of digitalization and application of technological innovations in the manufacturing industry of the republic of serbia. industry 4.0 development conditions in the republic of serbia 99 2. development and characteristics of industry 4.0 i4.0 is described as digitalization or full automation. it is also defined in relation to new technologies. although digitalization has led to i4.0, it cannot be defined solely through the technological paradigm, due to the convergence of industries, transformation of businesses, changes in business models, organization and culture (wef, 2016). the way the internet creates tremendous value by connecting people virtually, the internet of things does this by connecting things. “cyber-physical systems lead to smart manufacturing, with intelligent products, machines, networks and systems that independently communicate and interact with each other during the manufacturing process. the advances in digital technologies and their impact on i4.0 are profound, leading to a change in boundaries between industry and other sectors, as well as between buyers and sellers. what is more, the roles of the public and private sectors change, as well as the conditions of market competition. current production systems, driven by global value chains, become more dynamic, flexible, efficient and sustainable, with personalization capabilities” (stankovic, et al., 2017). the concept of i4.0 was introduced by the german scientific research association in 2011, and comes from the german government’s strategic initiative aimed at digitalizing the manufacturing industry, i.e. creating a production process completely independent of man (buhr, 2015). it is a strategic initiative within a high-tech strategy, and the goal is for smes to take advantage of i4.0 capabilities, especially in the areas of standardization, norms, security, legal frameworks, research and workforce transformation. the i4.0 concept is “a comprehensive concept and new trend in the manufacturing industry and relevant sectors, based on the integration of a range of technologies that enable the ecosystem of intelligent, autonomous and decentralized factories and integrated products and services” (stankovic, et al., 2017). the i4.0 concept is also associated with “smart data and information gathering and deployment in real time, as well as networking of all elements, to reduce operation complexity, increase efficiency and effectiveness, and reduce costs over the long term” (santos, et al., 2017). i4.0 goal is to turn machines into self-aware ones to improve maintenance, performance and interaction with the environment. i4.0 aims to build an open, smart manufacturing platform for deploying information across an industrial network. the main requirements of i4.0 are real-time data monitoring, product monitoring and positioning, and management of production process control instructions. i4.0 is an emerging structure where cps uses a global ict network for automated information sharing, with production and business processes aligned. the main drivers of i4.0 are the internet of things, the industrial internet of things, the industrial cloud and smart manufacturing, which helps transform the manufacturing process into a digitalized and intelligent production model (vaidya, et al., 2018). i4.0 concerns the development phase in the organization and management of the industry value chain. i4.0 consists of nine pillars linking production into an integrated, automated and optimized flow, resulting in greater efficiency and change in supplier, manufacturer and consumer relationships, as well as between humans and machines. the nine pillars are: (1) big data and big data analytics, (2) autonomous robots, (3) simulation, (4) horizontal and vertical system integration, (5) industrial internet of things, (6) cyber security and cps, (7) cloud, (8) 3d printing, (9) augmented reality (gtai, 2014; vaidya, et al., 2018; xu, xu, & li, 2018). 100 v. mićić the i4.0 concept is being implemented in the eu, especially in the german industry. in the us, i4.0 also uses the terms internet of things, internet of everything and industrial internet. what they have in common is that industry and manufacturing are influenced by digitalization. for now, i4.0 is more of a vision than a reality, but it has an impact on business digitalization so that machines do most of the work as people develop and control them. while traditional manufacturing methods and factors retreat, innovators make progress. new business and organizational models, products, services, and distribution channels develop. people, processes, services and data network, and production become faster and more flexible. productivity grows because resources are used more efficiently (finance, 2015). the concept of i4.0 contributes to productivity growth through ict-based real-time control and the use of robots. key success factors are knowledge, flexibility, creativity and innovation. the application of ict in industry is increasing, leading to the development of manufacturing processes. the state should support i4.0 with appropriate policies, with other stakeholders who need to embrace the importance of innovation for digitalization, because change does not only affect industry, but the whole economy (stankovic, et al., 2017). digitalization of manufacturing in factories also creates new skill requirements, with automation leading to redundancies while creating new jobs (links, 2013). i4.0 is the result of digitalization where everything in the value chain is networked with direct information exchange. the consequences of i4.0 are automation, decentralization, new business models, accelerated value creation process, flexibility, transparency, personalized production, more efficient use of resources. the larger the company, the more seriously it takes the need for digitalization, while smes lag behind (buhr, 2015). the main features of i4.0 are interoperability, virtualization, decentralization, real-time functioning, service orientation and modularity (smit, et al., 2016). in addition to industry, i4.0 has an impact on services, business models, market, work environment, skills (pereira & romero, 2017). i4.0 has the biggest impact in the manufacturing industry through productivity and competitiveness growth. structural changes in the manufacturing industry are influenced by digitalization and automation, as well as the integration of manufacturing sites into a comprehensive value chain (roblek, meško, & krapež, 2016). the potential for i4.0 is huge, taking into account individual requirements and customization of products. faster and more flexible production reduces the use of resources and risks, highlights its own benefits, facilitates data processing, increases quality, reduces manufacturing errors, develops infrastructure. all this contributes to the creation of greater added value (finance, 2015). in i4.0, data collection and analysis is the standard for real-time decision making. collecting and analyzing data between machines brings a faster and more flexible process of producing higher-quality products at lower costs, modifying the workforce profile. this leads to productivity growth, competitiveness and industrial growth. productivity levels determine the rate of return, the rate of economic growth and the growth of investment (wef, 2018). new technology brings greater efficiency and changing relationships between suppliers, manufacturers and customers, as well as between humans and machines. the production uses robots for complex operations, as well as simulations for creating virtual models, which allows testing and optimizing machines before deployment, thus reducing industry 4.0 development conditions in the republic of serbia 101 production time. this means faster response to consumer needs, improving flexibility, speed, productivity and production quality. the connection between machines and humans requires new standards that define the interaction of these elements in the digital factory of the future (rüßmann, et al., 2015). i4.0 starts with production in the manufacturing industry, but its impact extends to other segments of society, including utilities, smart buildings, roads, cities, where activities are coordinated to meet the increased energy needs of smart grids. new technologies develop to manage the broad ict infrastructure (stankovic, et al., 2017). the fourth industrial revolution is causing radical changes in the industry. the breadth and depth of these changes transforms the system of production, management and public administration. today, it is impossible to predict all the potentials of i4.0 (lodder, 2016). it is still partly a visionary conception. there are certain challenges that arise during its development such as: (1) intelligent decision-making and negotiation mechanisms, (2) smart high-speed wireless network protocols, (3) industry-specific big data and analytics, (4) system modelling and analysis, (5) cyber security, (6) modularized and flexible physical objects, (7) size problems (vaidya, et al., 2018). 3. change in the industrial paradigm and workforce competences in the digitalization era i4.0 is a shift in the production paradigm from centralized to decentralized smart manufacturing. it computerizes production and creates smart factory (the factory of the future), in which physical objects are integrated into the information network. production systems are vertically networked with business processes in factories, and horizontally linked to real-time value-creation networks, managed from the moment of order to outbound logistics. “this interaction between implemented systems, based on special software and the user interface, which is integrated into digital networks, creates a new world of system functionality for horizontal and vertical integration” (chukalov, 2017). the distinction between industry and services is increasingly blurred. digital technologies are linked to products and services into hybrids. in smart factories, cps and networks monitor physical processes, create virtual physical systems, and make decisions. by using iot and cps, systems communicate and interact with each other and with people, while through ios, participants in the value chain offer and use internal and interorganizational services. smart data is collected throughout the product life cycle. this optimizes smart, flexible supply chains and distribution models, and leads to efficient and optimized use of machinery and equipment. businesses are able to make faster, smarter decisions, responding quickly to requests, while minimizing costs (stankovic, et al., 2017). it is expected that i4.0 will in the long run in four ways affect the changing industrial paradigm as well as the structure of the manufacturing industry. above all, by changing and improving the relationship between factories and nature, factories and the local community, factories and value chains, and factories and people (santos, et al., 2017). changing industrial paradigm comes from new technologies that make it possible to produce faster and cleaner products, at a lower cost. higher newly created values will be the result of innovation, and technologies will reshape production, the way additive manufacturing does. when technological solutions are fully integrated into products and 102 v. mićić networks, they facilitate the ways in which products are designed, manufactured, offered and used. the difference between cheap mass products and pricier custom products will drop due to the number and types of products. new digital technologies will bring personalization with a direct customer contribution to the design, allowing custom products to be produced in shorter production cycles, at a lower cost. the producer and the buyer will work together to create new value (foresight, 2013). i4.0 development and the digitalization of the economy require a wide range of value chain skills, and a whole new approach to education (smit, et al., 2016). digitalization and new technologies change both the type of workers and the type of skills required. smart manufacturing requires workers with multidisciplinary knowledge, i.e. hybrid capabilities that include technical specialization and business awareness (foresight, 2013). the eu is of the view that competence in science, technology, engineering and mathematics is becoming an important part of literacy in the knowledge economy. formal and informal education and knowledge acquisition in natural sciences are important in order to raise awareness of various technologies, and to respond to the challenges of stem (stem education, 2019). stem defines the areas in which i4.0 professionals will develop, and the most successful will be those that connect multiple areas. sustainable interaction between the various educational institutions, research and innovation funding institutions, the practicing industry, as well as policymakers (european commission, 2019a) is important. research has shown that the employment of stem workforce in the eu is on the rise, but that there are differences between member states and that part of the increase is a result of migration policy and labor mobility (caprile, m. et al., 2015). in 2016, the eu launched digitalization and implementation of measures to create a single digital market. part of the measures refers to digital skills (european commission, 2019b). the eu seeks to identify the challenges of digitalization, strengthen the role of industry and research organizations to take action. it seeks to improve the understanding of the skills needed for new technologies, which is part of horizon 2020, which promotes the development of digital skills, and to launch the creation of digital innovation centers (european commission, 2019c). research on eu member states' prospects for the development of i4.0 based on digitalization by criteria of industrial excellence and value networks shows four groups of economies (dujin, geissler, & horstkötter, 2014): (1) leaders – members who are making good progress in the digitalization and development of i4.0 (germany, sweden, austria and ireland); (2) potentialists – members where the industrial base is weak but the corporate sector is modern and has potential (uk, france, belgium, denmark, the netherlands); (3) traditionalists – members with a large industrial base, but few of which have initiated the development of i4.0 (czech republic, slovakia, slovenia, hungary and lithuania); (4) undecided – members with an industrial base but low financial capacity to develop i4.0 (italy, spain, estonia, portugal, poland, bulgaria and croatia). industry 4.0 development conditions in the republic of serbia 103 4. research methodology and hypotheses the analysis method is used to identify the concepts of i4.0 and the new industrial paradigm. the synthesis method is applied when integrating elements of i4.0 concepts and technological changes into a single whole and conclusions. the comparative method is used when comparing technological criteria and changes, manufacturing industry of the republic of serbia and selected eu member states. the concept of i4.0 mostly concerns the digitalization of the manufacturing industry and the development of a range of new high technologies. in order to examine the conditions of development of i4.0, the paper analyzes technological changes and innovations, which are diverse and dominantly shape all areas of production. the complex nature of technological change in industry can also be explained by the characteristics of innovation (evangelista, et al., 1997). the connections and relationships between i4.0 innovation and development are complex in nature and will therefore be the result of an indirect analysis of technological criteria (galindo-rueda & verger, 2016). some of the relevant criteria are process sophistication, quality of workforce, innovation, patents, added value and openness of the industry (dujin, geissler, & horstkötter, 2014). the paper uses the survey on innovation, individual innovation and technological indicators and composite indicators in the assessment and innovation processes. the most commonly used innovation measurement survey is the community innovation survey (cis) (biagi, pesole & stancik, (2016). indicators are mostly covered by high-tech statistics in the knowledge-intensive industry, with employment, science, technology, innovation, patents, based on technological intensity. the sectoral approach is used to identify the intensity of technology, which groups the activities of the manufacturing industry according to the degree of technological intensity, i.e. the amount of investment in research and development, with a production approach that considers the level of technological intensity of products and trade in high-tech products. the list of products is based on r&d intensity and total sales. high-tech product groups are determined on the basis of the standard international trade classification. total r&d expenditures in gdp are important indicators of the conditions for the development of science, technology, production, and digitalization tech-intensity, which is one of the key indicators of the europe 2020 strategy. composite indicators of the productive capabilities of industries that measure technological change used in the analysis are the summary innovation index (sii), the knowledge economy index (kei), the global innovation index (gii), the global competitiveness index (gci 4.0) and the competitive industrial performance index (cip). in order to determine the conditions and the potentials for the development of industry 4.0, especially in relation to eu members from central europe with a large industrial base, the following hypotheses are tested in the paper: hypothesis 1: innovation processes influence technological changes, improve and increase technological level of production of manufacturing industry in serbia. hypothesis 2: investment in r&d affects the digitalization of the manufacturing industry in the republic of serbia data from eurostat, ebrd, wipo (world intellectual property organization) and unido databases is used in the analysis of selected eu member states and serbia. 104 v. mićić 5. research results and discussion according to cis, the share of manufacturing industry companies in the republic of serbia that introduced at least one type of innovation was about 43.2% in 2016, so it can be concluded that manufacturing industry is innovative (table 1). although the share is below the eu average and above the share of some of the observed members, especially from the region, this share is well below the leading members in the process of digitalization and transformation. however, when it comes to product and process innovation, the share of innovative businesses is much lower. technological innovation of products and processes is insufficient, with inefficient mechanisms of practical application of the manufacturing industry research results. table 1 cis – manufacturing enterprises that have introduced an innovation, 2016 (%) all types product innovative eu28 53.2 11.1 bulgaria 25.1 6.8 czech r. 44.9 8.4 croatia 47.5 5.1 hungary 27.6 8.3 romania 9.8 1.2 slovenia 37.4 10.0 slovakia 29.3 7.3 r. serbia 43.0 14.5 source: author’s calculation based on eurostat database, 2019 the economy and industry of the republic of serbia belong to the group of countries that are moderate innovators and whose innovative performance has increased since 2011. relative performance relative to the eu was 63.7% in 2018 (table 2). according to the dimensions of sii, the republic of serbia is below the eu average, with the best results in the area of enterprise investment, owing to the level of innovation expenditures of enterprises not related to r&d. the most disadvantaged position is in the area of intellectual property and the research system (hugo, nordine & iris, 2019). the comparison shows that serbia has a higher sii than some selected eu member states, but significantly lower values than the members with a large industrial base, which indicates modest innovation performance of the manufacturing industry. table 2 indicators of innovative and productive ability, 2018. sii kei gii value 0 min -100 max 1 min-10 max 0 min -100 max czech r. 89.4 6.28 49.43 hungary 69.0 5.33 44.51 slovenia 87.6 6.65 45.25 slovakia 69.1 5.40 42.05 romania 34.1 5.01 36.76 bulgaria 48.7 5.18 40.35 croatia 59.6 5.62 37.82 r. serbia 63.7 5.13 35.71 source: author’s based on hugo, nordine & iris, 2019, ebrd, wipo, 2019 industry 4.0 development conditions in the republic of serbia 105 kei is an aggregate indicator that measures the ability to develop a knowledge-based economy and industry. according to the ebrd, in 2018, the kei value for the republic of serbia was 5.13 (table 2). it ranked 13 th out of 37 ranked states. it has the best record in the ict infrastructure pillar (ebrd, 2019). with the exception of romania, according to the value of kei, the republic of serbia lags far behind all selected eu member states, especially those with developed industries, with almost all pillars of the knowledge economy. serbia has the lowest gii value compared to selected eu member states, although it has improved in value but not the rank since 2011 (table 2). according to gii, out of 129 countries, the republic of serbia ranked 62 nd in 2018. the value of innovation inputs is greater than innovation outputs. with innovation inputs, the best result is with institutions and human resources and research. on the side of innovation outputs, values are greater in the field of knowledge and technological outputs than in creative outputs (wipo, 2019). according to the gci 4.0 methodology for the competitiveness of economies, innovation at all levels and the development of human capital are needed at the time of i4.0 development. of the four groups of factors, innovation concerns the dynamic environment and the ability to innovate, i.e. the ability to create and apply new technologies and innovative products, as well as to conduct quantitative r&d. what is good for the growth of the competitiveness of the serbian economy is the growth of the rank and value of the pillar of innovation, where at the level of individual pillars business dynamics recorded 54 th , and the ability to innovate 59 th position out of 141 ranked countries in 2018 (table 3). pillar ability to innovate has the lowest value among gci 4.0 pillars. the innovation pillar saw growth in value due to a slight increase in inventions, patents, r&d expenditures in gdp, as well as the development of clusters and increased collaboration between employees, businesses and universities. however, the comparison points to a large gap between the rank and value of the two pillars in comparison to eu member states. the reason, when it comes to product and process innovation, is the low share of innovative manufacturing industry companies. the rise in value is primarily in the purchase and transfer of new products and processes, digital technologies, not their development through internal r&d activities, which is the case in other observed industries. table 3 gci4.0 innovation ecosystem, 2018. business dynamism innovation capability rang/141 value rang/141 value germany 5 79.5 1 86.8 slovenia 26 70.1 28 58.2 czech r. 32 68.7 29 56.9 r. serbia 54 63.1 59 40.2 slovakia 55 62.8 44 46.3 bulgaria 61 61.9 48 45.0 romania 72 59.7 55 42.3 hungary 83 58.1 41 47.4 croatia 101 54.7 73 37.8 source: wef. (2019). the global competitiveness report 2019. wef. 106 v. mićić despite the rise in value and the improvement of rank, as measured by the cip index, the competitiveness of the manufacturing industry of the republic of serbia is low. with a cip value of 0.0416 in 2018, it has the lowest value and ranking of competitiveness, i.e. the worst performance against eu members. that it is low and does not sufficiently improve the competitiveness of the manufacturing industry is confirmed by the fact that of 41 ranked european countries, serbia was ranked 31 st in 2017 (table 4). the value of the cip index changes little due to its slow change in the short term due to technological changes that are not intensive enough in the serbian manufacturing industry and supported by technological innovations. table 4 rank and value of cip index in 2018. rank in europe cip index 2012 2018 2018 δ2012 czech r. 11 11 0.2148 -0.0067 slovakia 16 15 0.1604 -0.0103 hungary 17 16 0.1493 -0.0085 slovenia 21 18 0.1109 -0.0055 romania 22 22 0.1015 -0.0109 croatia 30 28 0.0552 0 bulgaria 31 29 0.0524 -0.0023 r. serbia 35 31 0.0416 0.0109 source: author’s calculation based on unido database. 2019. high-tech manufacturing in the manufacturing industry of the republic of serbia employed 0.5% of employees in 2018, while this percentage in the eu was 1.1 (table 5). the share differs significantly from the observed eu member states, and even more so when looking at the number of employees per 1,000, with hungary and the czech republic ahead, while r. serbia has only 14 per 1,000 employees. in the eu, the average employment growth rate in the high-tech industry was negative during 2011-2018. there are differences among members when comparing employment changes. some have seen a decrease as a result of the economic crisis. r. serbia saw a slight increase in high-tech production. table 5 employment in high-tech manufacturing. 2018. total in 1000's % of total employment δ2011 eu28 441 1.1 -0.4 bulgaria 22 0.7 -2.4 czech r. 88 1.7 2.1 croatia 12 0.7 -1.4 hungary 114 2.6 0.7 romania 71 0.8 4.3 slovenia 20 2.0 2.3 slovakia 39 1.5 -1.1 r. serbia 14 0.5 0.6 source: author’s calculation based on eurostat database. 2019 industry 4.0 development conditions in the republic of serbia 107 high-tech products accounted for 15.4% of total eu exports in 2018, with considerable differences between member states (table 6). the highest share, as well as the increase in the share of high-tech products in the observed period, was recorded in ireland, germany, and austria, as the leaders of digitalization, but also countries with a large industrial base, such as the czech republic and hungary, which recorded the largest decrease in share. it is clear that in terms of quality and export of high-tech products, the manufacturing industry of the republic of serbia is lagging behind the eu member states. exports are dominated by products that are intensive with natural resources and low skilled and cheap labor. table 6 exports of high technology products as a share of total exports 2011 2018 δ2011 eu28 15.4 17.9 2.5 bulgaria 3.7 5.9 2.2 czech r. 16.4 17.8 1.4 croatia 5.8 8.1 2.3 hungary 20.9 15.6 -5.6 romania 8.8 8.4 -0.4 slovenia 5.3 5.8 0.5 slovakia 6.6 9.6 3.0 r. serbia 2.0 1.9 -0.1 source: author’s calculation based on eurostat database. 2019 exports of high-tech products from the republic of serbia are significantly different from eu members. the electronics-telecommunications and aviation product groups account for 29.2% of high-tech exports, one-and-a-half times lower than the 2017 eu level. pharmaceuticals follow with 15.1%, computers with 12.9% and scientific instruments with 11.8%. other groups account for 31% of exports (table 7). the fact is that the technological level of production has not improved, and digitalization is a condition for raising the share of high-tech products and increasing their exports. intensive structural changes are needed in the forthcoming period, which would increase the technological level of production and exports, through domestic innovations and their commercialization, as well as technology transfers from abroad. table 7 exports of high-tech group of products as a share of total exports, 2017. electronicstelecommunications aerospace computers pharmacy scientific instruments other eu28 28.2 17.5 12.4 18.7 13.4 9.8 czech r. 43.0 2.8 38.8 1.8 6.3 7.3 slovenia 25.6 4.6 7.2 26.1 15.8 20.7 slovakia 76.6 0.2 13.2 0.9 3.8 5.3 hungary 45.5 0.6 19.8 8.8 13.9 11.4 croatia 19.6 2.1 3.1 47.4 7.7 20.1 bulgaria 48.3 2.7 10.6 13.1 13.6 11.7 romania 62.0 1.5 3.9 2.7 21.4 8.5 r. serbia 26.6 2.6 12.9 15.1 11.8 31.0 source: author’s calculation based on eurostat database, 2019 108 v. mićić the level of r&d expenditure in the eu increased from 1.24% in 2011 to 1.36% of gdp in 2017 (table 8). the members of central europe seek to increase the quality of the industrial base and have significant overall r&d allocations from the manufacturing industry, while recording their growth. despite recorded growth, data on the share of total r&d expenditures is extremely unfavorable for the republic of serbia. the situation is even more unfavorable when considering the share of manufacturing industry allocations for r&d. it is also a very modest expenditure in absolute terms, especially given the importance of r&d expenditures for the digitalization and development of i4.0. therefore, the aim is to increase investment in the manufacturing industry r&d, which will enable the development and application of knowledge through the development of new products and processes. table 8 r&d expenditure, percentage of gdp all sectors manufacturing 2011 2017 δ2011 2011 2017 δ2011 eu28 1.24 1.36 0.12 / / 0.17 czech r. 0.86 1.13 0.27 0.48 0.55 0.07 slovenia 1.79 1.39 -0.40 1.22 1.14 0.12 slovakia 0.25 0.48 0.23 0.15 0.27 / hungary 0.74 0.99 0.25 0.46 0.43 -0.84 croatia 0.34 0.42 0.08 0.13 0.26 -0.03 bulgaria 0.28 0.53 0.25 0.03 0.2 0.07 romania 0.18 0.29 0.11 0.09 0.1 -0.08 r. serbia 0.06 0.32 0.26 0.01 0.02 0.17 source: author’s calculation based on eurostat database, 2019 data on the share of total domestic r&d expenditure financed by the private sector is unfavorable for the republic of serbia because it is several times lower than in the eu member states. the situation is somewhat different when the state expenditure is taken into consideration, which is at a similar level (table 9). table 9 r&d expenditure by sectors, percentage of gdp, 2017. all sectors business enterprise sector government sector higher education sector eu28 2.06 1.36 0.23 0.45 czech r. 1.79 1.13 0.31 0.35 slovakia 0.88 0.48 0.18 0.22 slovenia 1.86 1.39 0.26 0.21 hungary 1.35 0.99 0.17 0.18 romania 0.5 0.29 0.16 0.05 bulgaria 0.75 0.53 0.17 0.04 croatia 0.86 0.42 0.19 0.25 r. serbia 0.87 0.32 0.24 0.32 source: author’s calculation based on eurostat database, 2019 industry 4.0 development conditions in the republic of serbia 109 in most of the countries observed, the private sector contributes with over 0.5 to r&d expenditure, while this percentage in the republic of serbia in 2017 was 0.32% of gdp. the reason is the lack of integration of the private sector into the innovation system. the private sector in the eu member states seeks to expand and enhance the structure of the industrial base and increases the relative allocations of the private sector to domestic r&d expenditures, which enhances the process of digitalization and the creation of a single digital market. it can be estimated that r&d allocations, both private and public, as well as allocations for science in the republic of serbia are not at the level that could make a significant contribution to creating conditions for the process of digitalization and development of i4.0. patents represent r&d results and are indicators of inventive activity, yet indirectly show the results of innovative activities. r. serbia has a low patent activity compared to the observed eu members (table 10). table 10 patent applications, 2018. resident non-resident abroad czech r. 921 54 1,330 slovakia 267 14 293 slovenia 355 23 383 hungary 529 36 811 romania 1,150 47 351 bulgaria 212 18 247 croatia 135 15 66 r. serbia 172 11 136 source: author’s based on wipo, 2019. according to the number of resident patent applications, croatia had worse results than serbia in 2018. the low inventive activity of residents is due to the low investment in r&d, the small number of researchers and the underdevelopment of the industry. the inventive activity of non-residents is also very low due to patent regulation and competition. this is the reason for high filing abroad. 6. conclusion the fourth industrial revolution is the emerging one and is about the development of i4.0 or smart industries and factories. it is based on a number of emerging trends and digital and other technologies. the fact is that it is now impossible to predict all the potentials of i4.0. what is certain is that countries will develop i4.0 at different speeds and modes, directing the process of digitalization and re-industrialization. the fourth wave of technological advancement due to digitalization is benefiting the industry by increasing productivity, value added, employment and investment in r&d, manufacturing new products, and rise in productivity, affecting economic development. the new paradigm of industrial production will be not only a condition of productivity growth, global industrial competitiveness, but also of transformation and development of markets, qualifications and education, and sustainable development of society as a whole. just as all the previous radical technological novelties have formed the structural basis for 110 v. mićić this revolution, so i4.0, in the future, will enable the development of the next technological revolution, new industries, the paradigm of industrial production and new production effects. data from innovation surveys, technological indicators and criteria, both individual and composite, indicate that the technological level has not improved or that no effective technological changes have been made. this does not confirm the first hypothesis that innovation processes influence technological changes, improvement and increase of technological level of the serbian manufacturing industry. the reason is the insufficient number of technological innovations of products and processes, but also the practical application of the results of domestic scientific and research activities. data on r&d expenditures at the sector level, especially in the manufacturing industry, as well as patents and inventive activity, also do not confirm the second hypothesis that the digitalization of the manufacturing industry in the republic of serbia is affected by investing in r&d. eu member states with a large industrial base in central europe create conditions for the transition of the manufacturing industry, based on natural and physical resources, into industries based on intellectual resources, application of knowledge and new digital technologies, resulting in i4.0 and smart future factories that are high-technology-intensive. the analysis confirms transition and digital transformation. the creation and effective use of digital and new technologies is important in the global competitiveness of the observed eu member states. high-tech industries and smart businesses will be the drivers of their economic and productivity growth, and will increase competitiveness, structure and level of added value and employment. in these eu member states, industrial policy develops i4.0 and at the same time drives re-industrialization. an important research finding indicates that the conditions and potentials of i4.0 development are very small compared to the eu member states in central europe with a large industrial base, and even more modest than the old members which are making good progress in the digitalization and development of i4.0. digitalization in the republic of serbia is not driven by the results of science, technology and innovation. the re-industrialization of the economy needs to be done on these grounds. the obtained research findings are very useful for industrial policy makers in the republic of serbia as they point to some of the key factors and directions of change in order to create the conditions for the development of i4.0, the manufacturing industry and the digital transformation of the economy. references bazić, j. r. 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(2019). industrial statistics database. retrieved from: https://www.unido.org/researchers/statisticaldatabases accessed on: 25 september 2019. https://rio.jrc.ec.europa.eu/en/library/stem-action-plan https://rio.jrc.ec.europa.eu/en/library/stem-action-plan https://ec.europa.eu/digital-single-market/en/policies/digital-skills https://ec.europa.eu/digital-single-market/en/policies/digital-skills https://ec.europa.eu/eurostat/web/science-technology-innovation/data/database https://ec.europa.eu/eurostat/web/science-technology-innovation/data/database 112 v. mićić uslovi razvoja industrija 4.0 u republici srbiji rezime: četvrta industrijska revolucija se odnosi na razvoj industrija 4.0, promenu proizvodne paradigme i digitalizaciju ekonomije. predmet istraživanja rada su uslovi razvoja industrija 4.0 u r. srbiji. osnovni cilј istraživanja je da ukaže na značaj efikasnog razvoja industrija 4.0 i sprovoďenja strukturnih promena kroz proces digitalizacije i primene tehnoloških inovacija u preraďivačkoj industriji. metod analize korišćen je za identifikovanje koncepata industrije 4.0 i nove industrijske paradigme. komparativni metod je korišćen prilikom poreďenja tehnoloških kriterijima i promena. uslovi razvoja industrija 4.0 su analizirani posrednim putem preko tehnoloških kriterijuma i inovacija tj. podataka iz ankete o inovacijama, pojedinačnih inovacionih i tehnoloških indikatora i kompozitnih indikatora. industrije 4.0 su važan faktor tehnoloških i strukturnih promena, ekonomskog rasta i konkurentnosti. rezultati istraživanja pokazuju da nepostoje dovoljno podsticajni uslovi za razvoj industrija 4.0 u r. srbiji. rezultati ovog istraživanja su korisni kreatorima industrijske politike jer ukazujuju na neke od ključnih faktora i pravaca promena kako bi se stvorili uslovi za razvoj industrija 4.0, preraďivačke industrije i digitalnu transformaciju ekonomije. kljuĉne reĉi: industrija 4.0, preraďivačka industrija, digitalizacija, inovacije, tehnološke promene facta universitatis series: economics and organization vol. 17, n o 2, 2020, pp. 113 125 https://doi.org/10.22190/fueo191202009o © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper exploring the inflationary effect of oil price volatility in africa's oil exporting countries 1 udc 622.323:338.5(6) sina jimoh ogede, emmanuel oladapo george, ibrahim ayoade adekunle* olabisi onabanjo university, nigeria abstract. a range of explanations had been offered for the apparent change in oil priceinflation relationship outcomes ranging from the possible use of alternate energy sources, change in the structure of output regarding fewer oil intensive sectors and the role of fiscal and monetary in the affected oil-exporting countries. these changes had drawn the attention of stakeholders, government and the society at large to the anecdotal relationship among oil price volatility, inflation, and output in africa oil-exporting countries. this study leans empirical credence to the impact of oil price volatility on inflation and economic performance in the africa oil-exporting countries from 1995 through 2017. we employed the pool mean group estimation procedure with the inference drawn at a 5% level of significance. we found that oil price volatility had a negative and significant effect on inflation in africa oil-exporting countries. the study concluded that oil price volatility had a substantial impact on inflation in the africa oilexporting countries. the study, therefore, recommended that africa oil-exporting countries should adopt precautionary measures to monitor inflation potentials due to different responses of inflation to positive and negative oil price shocks. key words: oil price volatility; inflation; growth outcomes; pool mean group; africa. jel classification: c33, o55, q41 received december 02, 2019 / revised march 13, 2020 / accepted march 18, 2020 corresponding author: ibrahim ayoade adekunle olabisi onabanjo university, ago-iwoye, ogun state, nigeria * phd student at olabisi onabanjo university, nigeria e-mail: adekunle_ia@yahoo.com 114 s. j. ogede, e. o. george, i. a. adekunle 1. introduction the significance of crude oil and its resulting volatilities of prices have been studied expansively since the oil price fluctuations of 1973 and 1979, the yom kippur war and the iran crisis, amongst others. the significant changes in the oil prices from the first quarter of 1975 to the fourth quarter of 2016 revealed some striking features in the global economies. in the 1970s, economies around the world witnessed growing inflation rates that were subsequently ensured by a rapid increase in global oil prices (mohaddes & pesaran, 2017). in contrast to the 1970s experiences, a downward trend of oil prices and inflation was witnessed in 1980s and 1990s, respectively, and further attributed to dwindling oil prices in global markets (hamilton, 1996). in the 2000s, oil prices steadily increased with sharp thwart in 2008, followed by a substantial decrease in 2009 and remained throughout the fourth quarter of 2014, and rebound after that (bala, chin, kaliappan & ismail, 2017). prominent volatility of price in these developments and thereafter will deepen the understanding of all economic agents, namely government, firms and households on the sizeable effects of oil price volatility on inflation in both oilexporting and importing economies (shafiee & topal, 2010). theoretically, oil price volatility should affect oil importing and exporting countries differently at microeconomic and macroeconomic levels (mohaddes & pesaran, 2017). for oil-importing countries, at the macro level, the decrease in oil prices should support robust growth, reduce inflation, and expand fiscal stabilities, which should mitigate macroeconomic weaknesses and, consequently, broaden policy scope. conversely, increases in oil prices reduce active household income in various ways. firstly, households pay more for energyintensive products they consume directly (zhang, broadstock, & cao, 2014). secondly, an increase in oil prices intensifies the prices of all goods and services that use fossil fuels and the associative by-product of crude for domestic purposes (elder & serletis, 2010). higher oil prices reduce the growth rate of gdp and consequently reduce the household income (ahmed, bhutto & kalhoro, 2018). for africa's oil-exporting countries within the opec, oil price volatilities have exerted enormous consequences on their economies due to over-reliance on oil earnings as their primary source of revenue. raising oil prices generates a supplementary income for oilproducing economies which can be used to develop infrastructure or diversify the local economy and subsequent investment in the foreign economies (omojolaibi, 2013). conversely, the rising oil prices not only hinder output growth but also ignite the overall rise in the price level in the economy due to the significance of oil as a respective input for the production (kilian, 2014). an increase in input costs would compel a further rise in the cost of final products. a slight increase in oil prices compels carrying a charge and other allied fees of piloting economic activities to increase, which are eventually borne by final consumers (salisu, isah, oyewole & akanni, 2017). this perception mostly induces both firms and households to lessen their consumptions and investments. hence, how much variations in the consumer price index can be credited to oil price volatility? which structural policy frameworks govern the size of the inflationary effect of oil price volatility? forms significant policy and research questions if we are serious about redefining the scope of oil price stability and associative welfare implications that are usually threatened by the inflationary factor. it is challenging that most of the recent studies on the impact of oil price volatility on inflationary effect have mainly focused on developed countries, oil-importing countries and country-specific without considering africa's group of opec's oil-exporting countries despite exploring the inflationary effect of oil price volatility in africas’ oil exporting countries 115 their growing importance in oil consumption arena. selected africa's oil-exporting countries, namely nigeria, angola, gabon, libya and algeria control 6.95% and 6.46% of the global oil production and the world's oil reserves respectively (opec, 2016). these countries are not only oil-exporting nations, but they also engage in the importation of petroleum products which might be attributed to low national oil production, environmental factors and national oil reserve. besides, for more than a decade now, both oil-exporting and importing countries in africa have been experiencing macroeconomic instabilities of remarkable magnitude (bashiri behmiri & pires manso, 2013; chironga, leke, van wamelen, & lund, 2011; ordway, naylor, nkongho, & lambin, 2017). an indispensable feature described by sizeable fiscal disparity, inflation, recession, weakening output, increasing unemployment and alarming weakening characterises africa's oil-exporting opec member countries (george, 2012). this study is significant for two reasons. first, it examines the dynamic relationship between oil price volatility and inflation in a group of countries that possesses about 8.82% of the world's proven oil reserves in 2017 (opec, 2018). with their vast oil reserves, africa's oil-exporting countries within the opec have become significant players in the global oil market. secondly, oil is a crucial input factor in production, and a primary driver of economic performance in the majority of opec member's countries as their government revenues and gross domestic product (gdp) depend heavily on oil revenues. it then becomes apt to appropriate data and methodology to lean experimental proof to the underlying structural relationship between oil price volatility and inflation in africa's oil-exporting countries that are members of opec. the study attempts to explain the fundamental dynamics of the oil-price-inflation nexus in africa with a view of coming up with crucial policy implications and for research purposes. 2. literature review sequel to the empirical work of hamilton (1983) on examination of the effects of oil price changes on economic activities, the author resolves that oil price uncertainty has a sizeable impact on the u.s economy following world war ii. however, hamilton's empirical results have been subjected to empirical confirmation by several subsequent studies (mork, 1989; hooker, 1996 and mork, olsen, & mysen, 1994), thereby renewing the examination of the effects of oil price fluctuations on diverse economic variables with a given country or other. for instance, cuestas and gil-alana (2018) investigate the impact of oil price movements on unemployment in central and eastern europe. wei and guo (2016) examine the implications of oil price shocks on china's stock market. allegret, couharde and coulibaly (2014) investigate the effects of oil price fluctuations on the current account position for 27 selected oil-exporting countries. in another study, nusair (2016) examines the impacts of oil price shocks on the real gdp of the gulf cooperation council (gcc) countries through nonlinear ardl model. the authors report evidence of asymmetries in all the samples or groups. contrastingly, tang, wu, and zhang (2010) employ a structural vector autoregressive (svar) model on a study on china and affirm that an oil price increase negatively influenced investment and output, and positively influenced inflation rate and interest rate respectively. álvarez, hurtado, sánchez and thomas (2011) examine the impact of oil price fluctuations on consumer price inflation in spain and the euro area and resolve that the inflationary impact of oil price increases in both economies is 116 s. j. ogede, e. o. george, i. a. adekunle negligible. the authors report that the 10 percent changes in oil prices are linked to averages 0.2 percent points of consumer price inflation shifts in both spain and the euro area, which is a relatively small number. given the oil price-inflation relationship, extant literature predominately focuses on developed and developing countries with almost no studies on africa's oil-exporting countries. for example, using the nonlinear ardl model, lacheheb and sirag (2019) suggest that oil price increases have a positive and significant effect on inflation in algeria, but insignificant falling oil prices. lorusso and pieroni (2018) resolve that u.k. inflation increases in response to adverse oil supply shocks. utilising symmetric and asymmetric panel ardl models, salisu et al. (2017) report a significant long-run and positive influence on inflation as induced by variations in oil price in selected oilexporting and oil-importing countries. there exist mixed results for the short-run effect. they also find that the cost of oil has a more significant impact on inflation in the longrun in net oil-importing countries than in net oil-exporting countries and that oil price asymmetries are more critical for oil-exporting countries. kun (2017) explored the effects of oil prices fluctuations on malaysia's domestic price inflation at disaggregated levels using both linear and nonlinear autoregressive distributed lag (ardl) techniques. the author provides evidence of symmetric and asymmetric pass-through effects of oil price changes on domestic prices across sectors. oil price changes lead to the positive impact of higher output growth but may directly cause higher import and production prices in the long run through cost channels. on the other hand, oil price changes have a limited direct effect on consumer prices in the long term. the impact of oil prices on consumer prices occurs indirectly through transmission from import prices and production costs. bala et al. (2017) report a positive relationship between the oil prices and inflation in an autoregressive distributed lag (ardl) of the model of malaysia. while artami and hara (2018) analyse the asymmetric impact of oil price fluctuations on the economic growth of and inflation in indonesia through the vector autoregressive (var) estimation model spanning from the first quarter of 1990 to the fourth quarter of 2016. the authors resolve that oil price-growth relationship is asymmetric. the resultant implications of favourable and unfavourable fluctuations of oil prices are established to be not statistically significant to inflation. in order to investigate the long-run effect of oil exports and food output on inflation in opec member countries in africa, bala and chin (2018) explore the ardl model. the models gauge oil price-inflation relationship and reveal there is a negative relationship between the index of food production and inflation, indicating that a rise in food supply decreases the rate of inflation. the results also show that oil exports have a significant positive impact on inflation. also, choi, furceri, loungani, mishra and poplawski-ribeiro (2018) consider the impact of oil price fluctuations on domestic inflation of selected developed and developing economies over the period from january 1970 to december 2015. the authors report that an increase in oil inflation by ten percent would initiate about 0.4 percent increases in domestic inflation in both developed and developing countries. they also report a case of asymmetric, suggesting that positive oil price shocks are having a more substantial effect than adverse oil price shocks. they resolve that such results have declined over time due to a credible monetary policy put in place and less reliance on energy imports by the domestic economy. in selected central and eastern european countries, živkov, đurašković, and papićblagojević (2020) examine the effect of oil price fluctuations on the consumer price. the authors explore a markov wavelet-based switching technique to split different time exploring the inflationary effect of oil price volatility in africas’ oil exporting countries 117 horizons between the impacts. the findings show that in central and eastern european countries, the transmission of oil price increases to inflation is relatively low to about 1–6 percent points as an oil price increase to 100 percent. however, the findings show that exchange rates are not a significant factor in the transmission of oil shocks to inflation, even when high depreciation occurs. by and large, one can conclude that, despite the vast literature related to inflation and oil price volatility, there is no shared consensus. there are few studies in oil-exporting nations, but such studies are carried out majorly when the oil price was increasing and before the global financial crisis of 2008. studies that integrated the crisis and boom periods to examine both symmetric and asymmetric effects on output growth and overall price level are almost non-existent in the literature. 3. data and methodology 3.1. data the dataset explored to estimate the models were sourced from the world development indicators (wdi), international monetary fund's international financial statistics (ifs) database, while oil price data were obtained from opec (2018) annual statistical bulletin. the variables considered in this study included the consumer price index (cpi), real gross domestic product (gdp) growth rate, oil prices, and government final consumption expenditure and, the data used in the study were quarterly, covering a period from 1995 to 2017. this data included the periods of the global food crisis and the recession of 2008 to 2009 because the macroeconomic performances of mostly all the economies were affected and this brought about significant volatility in macroeconomic indicators and oil prices. the choice of the macroeconomic variables was based on the submission of hooker (1996). real gdp as a measure of growth outcomes agrees with the exact standard measure in the literature (see cunado et al., 2015; akinleye & ekpo, 2013; iwayemi & fowowe, 2011; hooker, 1996 for examples). thus, the import from the previous empirical studies on oil prices and economic activities revealed that two different features ranging from the approach at which oil prices are used at their levels and employs various volatility measures to capture the oil price uncertainty. these two methods differ in the way in which they integrate oil price into their models. in divergence to the vast number of studies that examine the impact of oil price shocks, this study investigated the effect of oil price volatility on inflation by considering realised volatility. the realised oil price volatility (r.v.) was chosen following rafiq and salim (2014) as the oil price volatility index in the study. realised volatility is based on the idea of using the sum of squared intraday returns to generate more accurate daily volatility measures. according to andersen and bollerslev (1998), the daily realised volatility is estimated as the sum of squared intraday returns. it is viewed as an alternative measure of volatility due to an unbiased and highly efficient estimator of the volatility of returns, as reported in barndorff-nielsen and shepherd (2002). 3.2. methodology a fundamental assumption is that the economic responses to oil price volatility can be explained using both supply and demand channels. we illuminated the diverse impact of the oil price volatility and inflation in the period of review for selected africa's oilexporting countries within opec. the study panel sample has five (5) countries and 23 118 s. j. ogede, e. o. george, i. a. adekunle years, and so has more years than cross-sample observation; some of the variables were stationary at a level while others at the first difference i(1). given this, the most appropriate model is the pool mean group autoregressive distributed lag (ardl) model proposed by pesaran, shin and smith (1999). according to the authors, the superiority of the ardl model over dynamic panel models relies on the ability to produce consistent estimates and ability to produce country-specific results. a dynamic heterogeneous panel regression was written by using ardl (p, q) approach where 'p' is the lags of the dependent variable and 'q' is the lags of the independent variables (pesaran et al., 1999). the model estimated has the form of an ardl (p, q…q) as: ∑ ∑ (1) where x represents the vector of explanatory variables. modifying equation (1) turns to: ( ) ∑ ∑ (2) equation (2) was transformed as: ∑ ∑ (3) where i and i denoted the group-specific effect and the number of groups respectively. t represented the number of periods while cpiit gives the semi derivatives of consumer price index used as a proxy for inflation. yt denoted the logarithm of economic performance (proxy by real gdp growth rate) and rvt is the logarithm of oil price volatility. the log transformation of these series facilitates the computation of elasticity coefficients that are time-invariant for the oil price-inflation relationship. 4. empirical results and discussion 4.1. panel unit roots and cointegration tests we begin by presenting results from the modelling of the effect of oil price volatility on inflation. the preliminary tests of univariate properties of variables affirmed that none of the variables was integrated of the order of 2, that is i(2). presence of variables of order i(2) would require greater exponential smoothening of the model. four conventional unit root tests, the levin-lin-chu (l.l. test) im, pesaran and shin (ips test), fisher adf test and fisher pp test were conducted to ascertain the preliminary properties of the data set. the test results are reported in tables 1-3, respectively. table 1 levin-lin-chu panel unit root test variables level 1st difference order of integration lncpi 1.95556 (0.0253) ** i(0) lnir -0.75431 (0.2253) -7.72287 (0.0000) * i(1) lnrgdp_gr 2.75957 (0.9971) -2.04247 (0.0206) ** i(1) rv -9.43083 (0.0000) * i(0) gexp 0.64438 (0.7403) -1.91495 (0.0277) ** i(1) * represents a 1% level of significance ** represents 5% level of significance exploring the inflationary effect of oil price volatility in africas’ oil exporting countries 119 table 2 im, pesaran and shin test variables level 1st difference order of integration lncpi 1.83222 (0.9665) -8.07326 (0.0000) * i(1) lnir 0.08348 (0.5333) -9.29338 (0.0000) * i(1) lnrgdp_gr -2.4241 (0.0077) * i(0) rv -7.86806 (0.0000) * i(0) gexp 2.15631 (0.9845) -5.30161 (0.0000) * i(1) * represents 1% level of significance table 3 fisher adf and fisher pp panel unit root test variables unit root fisher adf test fisher pp test level 1st difference order of integration level 1st difference order of integration lncpi 3.66617 (0.9612) 89.5012 (0.0000) * i(1) 4.27335 (0.9342) 120.182 (0.0000) * i(1) lnir 10.6403 (0.2229) 91.7322 (0.0000) * i(1) 12.2613 (0.1399) 113.115 (0.0000) * i(1) lnrgdp_gr 29.1377 (0.0012) i(0) 35.6923 (0.0001) * i(0) rv 80.2751 (0.0000) * i(0) 142.001 (0.0000) * i(0) gexp 1.89689 0.9971) 50.0835 (0.0000) * i(1) 2.95446 (0.9825) 30.9297 (0.0006)* i(1) * represents 1% level of significance tables 1, 2 and 3 show the p-values obtained from the four different unit root tests. both level and first difference of the unit-roots were carried out to ensure all variables are stationary. thus, given the findings of the various unit root tests, all the under-listed variables were suitable to be included in our panel models. the cointegration test results were reported in table 4. the pedroni cointegration test presented the pedroni cointegration test with seven different sets of residual-based tests. these residual-based tests were divided into two groups. four out of the seven trials were within-dimension tests (the panel vstatistic test, the panel rho-statistic test, the panel pp-statistic test, and the panel adpstatistic test). the remaining three tests were between-dimension tests (the group rhostatistic test, the group pp-statistic test, and the group adf-statistic test). within-dimension regression was based on pooling the estimators in the autoregressive coefficient across individual countries on the residuals, while between-dimension regression was based on averaging the individual coefficient estimators of each country. the table showed the pedroni residual cointegration test with different deterministic trend specification model assumptions. the within-dimension tests presupposed standard auto-regressive (a.r.) coefficients among cross-sections while the between-dimension presupposed individual a.r. coefficients. the lag length was determined with schwarz information criterion while the spectral estimation and bandwidth were done with the bartlett method and with neweywest procedure respectively. from table 4, the null hypothesis of the test is that there is no cointegration amongst these variables. thus, given the results, as seen in table 4, we rejected the null hypothesis more times than accepting. consequently, we drew the same conclusion for each of the 120 s. j. ogede, e. o. george, i. a. adekunle deterministic trend specifications on the pedroni test. these tests, therefore, suggested that there was no cointegration amongst the variables in the model. table 4 pedroni residual cointegration test for panel data alternative hypothesis: common ar coefficients. (within-dimension) pedroni's technique group 1 group 2 group 3 statistic prob. statistic prob. statistic prob. panel v-statistic -20.38685 1.0000 -28.92190 1.0000 -19.67369 1.0000 panel rho-statistic -2.389373 0.0084 -4.062819 0.0000 -2.766529 0.0028 panel pp-statistic -2.459962 0.0069 -4.713079 0.0000 -2.748783 0.0030 panel adf-statistic -2.670857 0.0038 -4.954406 0.0000 -2.912634 0.0018 group rho-statistic 0.576641 0.7179 -0.028946 0.4885 0.229310 0.5907 group pp-statistic 0.084655 0.5337 -0.949898 0.1711 -0.634294 0.2629 group adf-statistic -0.121212 0.4518 -0.780730 0.2175 -0.782130 0.2171 note: all statistics are from pedroni's procedure (1999) where the adjusted values can be compared to the n (0, 1) distribution. the pedroni (2004) statistics are one-sided tests with a critical value of -1.64 (k < -1.64 implies rejection of the null), except the v-statistic that has a significant value of 1.64 (k > 1.64 suggests rejection of the null). source: author's computation (2019) 4.2. estimation results table 5 presented the results of the panel ardl/pmg estimate of the effect of oil price volatility on inflation of five (5) africa oil-exporting countries. table 5 oil price volatility and inflation ardl/pmg results variable coefficient t-statistic prob. long run equation rv -0.025568 -2.018450 0.0442 ** lnrgdp_gr -0.238907 -3.881039 0.0001 ** lngexp 0.388006 8.522404 0.0000 ** short run equation ect -0.030077 -1.754551 0.0801 d(rv) 0.000547 1.346863 0.1788 d(lnrgdp_gr) -0.022931 -0.588841 0.5563 d(lngexp) 0.014575 0.850065 0.3958 c -0.084903 -1.500434 0.1343 notes: dependent variable is the log of cpi * significant at 5 percent level source: author's computation (2019) the results of the model were presented in table 5. table 5 showed the summary of the pmg estimation results for the panel containing the sample of all african countries where the long-term and short-term coefficients are based on the elasticity of cpi in equation (3). the pmg estimation results in table 5 showed that oil price volatility is negatively and statistically significant with the inflation in the long-run. this suggested that if there is any deviation from long-run equilibrium, the error term will modify the model such that it returns to equilibrium. the ardl pmg estimator results in table 5 revealed that in the long run, a percentage increase in the global oil price volatility would exploring the inflationary effect of oil price volatility in africas’ oil exporting countries 121 lead to a 0.02 percent decrease in inflation, proxy with consumer price index (cpi) of african opec members' countries. while table 5 revealed further that inflation is positively related to fiscal policy measure, government final consumption expenditure increases in the long run. the results showed that in the long term, a percentage increase in the government final consumer expenditure would lead to a 0.38 percent increase in inflation. meanwhile, the results seem to be diverse and insignificant in the short-run. the countryspecific effects of oil price volatility on inflation were presented in table 6. as noted in the corresponding table, a result of the estimate of four all countries appeared to have a significant error correction term (ect) within the range of 0 and -2 which specified the appropriateness of the model. the results, however, the pmg ect p-value of the model confirmed the short-run relationship for all countries. this implied that the short-run for each country (algeria, angola, gabon, libya, and nigeria) were the same. for five countries, they confirmed our expectations that all the variables were correlated in the short term. the results in table 6 suggested, however, for the cross-countries analyses data that the pmg estimators allow for heterogeneity in short-run coefficients. the short-run results revealed that global oil price volatility has a positive and significant effect on the economies of four of the 5 african opec members' countries, namely algeria, angola, gabon, and nigeria. all things being equal, a 1% increase in global oil price volatility significantly increases inflation by 0.01%, 0.17%, 0.07% and 0.07% in algeria, angola, gabon, and nigeria respectively. while a negative relationship was exerted in the case of libya (-0.00067; p=0.000) suggesting that a 1 % increase in global oil price volatility significantly decreases inflation (cpi) by 0.06%. table 6 country-specific results of the effect of oil price volatility on inflation in the africa oil-exporting countries country variables coefficient t-statistic prob. algeria ect -0.041131 -133.9829 0.0000 ** d(rv) 0.000120 234.3942 0.0000 ** d(lnrgdp_gr) 0.001157 0.031546 0.9768 d(lngexp) -0.026727 -23.61686 0.0002 ** angola ect -0.004751 -874.5635 0.0000 ** d(rv) 0.001799 684.9063 0.0000 ** d(lnrgdp_gr) -0.058337 -1.059066 0.3673 d(lngexp) -0.014226 -30.42526 0.0001 ** gabon ect -0.014013 -146.5629 0.0000 ** d(rv) 0.000717 1715.846 0.0000 ** d(lnrgdp_gr) 0.081021 10.88570 0.0017 ** d(lngexp) 0.032834 57.85326 0.0000 ** libya ect -0.092124 -212.9785 0.0000 ** d(rv) -0.000667 -212.9785 0.0000 ** d(lnrgdp_gr) 0.012605 695.2135 0.0000 ** d(lngexp) 0.069366 61.52553 0.0000 ** nigeria ect 0.001635 24.15500 0.0002 ** d(rv) 0.000767 528.3258 0.0000 ** d(lnrgdp_gr) -0.151101 -2.434628 0.0929 d(lngexp) 0.011627 14.65194 0.0007 ** notes: dependent variable is the log of cpi * significant at 5 percent level source: author's computation (2019) 122 s. j. ogede, e. o. george, i. a. adekunle table 6 further revealed that, in the short-run individual country analysis, fiscal policy measure, proxy with government final consumption expenditure is positively related to inflation in gabon (0.033 p=0.000), libya (0.069; p=0.000) and nigeria (0.012; p=0.007) respectively, but negatively related to inflation in algeria and angola. all things being equal, a 1% increase in government final consumption expenditure significantly increases inflation (consumer price index) by 3.3% 6.9% and 1.2% in gabon, libya, and nigeria respectively. also, the gdp growth, proxy of economic performance is positively linked to inflation in algeria (0.001; p=0.976), gabon (0.08 p=0.001) and libya (0.012; p=0.000), but exerted negative relationship with inflation in angola (-0.058; p=0.3673) and nigeria (0.151; p=0.093), though, insignificant. 4.3. discussion of findings the broad objective of this study was to examine the impact of oil price volatility on inflation in selected africa's oil-exporting countries within opec. this study employed both descriptive statistics and econometric techniques to analyse quarterly data from the selected african opec countries from 1995 to 2017. the panel ardl/pmg results reveal an antagonistic relationship for the persistent rise in the general price level (inflation) as induced by volatility in the price of oil in african opec's oil-producing nations. the ardl/pmg revealed that in the long run, a percent increase in the global oil price volatility would lead to a 0.02 percent decrease in inflation. studies such as mork (1989); mork, el al (1994); blanchard and gali (2007); and hamilton (1996) have affirmed the existence of oil price-inflation relationship. the findings also explained that inflation is positively related to fiscal policy, measured with government final consumption expenditure in the long run. the results revealed that in the long run, a percent increase in the government final consumer expenditure would lead to a 0.38 percent increase in inflation. this suggested that the central authorities in the selected countries need to implement a practical expansive monetary cum restrictive fiscal policy measures to achieve price stability target. we found an inconsequential short-run association in the model estimated. the country-specific effects of oil price volatility on inflation results revealed that global oil price volatility has a positive and significant effect on the economies of four of the five africa oil-exporting countries within opec, namely algeria, angola, gabon, and nigeria. all things being equal, a % increase in global oil price volatility significantly increases inflation by 0.01%, 0.17%, 0.07% and 0.07% in algeria, angola, gabon, and nigeria respectively. while a negative relationship was exerted in the case of libya (-0.00067; p=0.000) suggesting that a % increase in global oil price volatility significantly decreases inflation by 0.06%. the fiscal policy measure, proxy with government final consumption expenditure is positively related to inflation in gabon (0.033 p=0.000), libya (0.069; p=0.000) and nigeria (0.012; p=0.007) respectively, but negatively related to inflation in algeria and angola. all things being equal, a % increase in government final consumption expenditure significantly increases inflation by 3.3% 6.9% and 1.2% in gabon, libya, and nigeria respectively. also, the gdp growth, is positively linked to inflation in algeria (0.001; p=0.976), gabon (0.08 p=0.001) and libya (0.012; p=0.000) but exerted negative relationship with inflation in angola (-0.058; p=0.3673) and nigeria (-0.151; p=0.093), though, insignificant. exploring the inflationary effect of oil price volatility in africas’ oil exporting countries 123 5. conclusions and policy implication the study explored an empirical analysis of the impact of oil price volatility on inflation and economic performance in africa's oil-exporting countries. given that a vast number of studies on the effects of oil volatility on both oil-exporting and importing countries and such studies have primarily driven theoretical propositions about the oil, inflation and economic performance relationship, the uniqueness of this study is that oil price volatility was measured using realised volatility, and focused mainly on selected members of the organisation of petroleum exporting countries (opec). the result of the effect of oil price volatility on inflation showed that oil price volatility (β= -0.0255; t=0.044) had a negative and significant impact on inflation in opec's africa oilexporting countries. the study concluded that oil price volatility had a significant effect on inflation in the opec's africa oil-exporting countries in the long run, but seemed to be diverse in the short run. this conclusion further confirms the apparent weakening of the relationship between oil price-economy and inflation relationship due to monetary and fiscal dynamics that have characterised the african economy over time. the finding that an increase in oil price initiates the inflation rate deserves singular attention. each of selected opec's africa's oil-exporting countries should diversify their export structures and develop their manufacturing export capability. each of them should encourage domestic food production both in quantity and quality since food production is antiinflationary. precisely, the agricultural administrators of these opec's africa's oilexporting countries need to come up with effective programs that would scale up food production to benefit their economies during oil price hikes. consequently, each authority should also upkeep and inspire the private sector to invest in and grow the agricultural industry. other intervention tools that policy-makers can use to combat inflation and improve economic performance are monetary and fiscal policies, and these should be maximally optimised for social welfare gains. references ahmed, k., bhutto, o., & kalhoro, m. 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(2014). international oil shocks and household consumption in china. energy policy, 75, 146–156. https://doi.org/10.1016/j.enpol.2014.08.034 istraživanje inflantornog uticaja na volatilnost cene nafte u afričkim zemljama-izvoznicima nafte rezime: ponuđen je niz objašnjenja za očiglednu promenu u ishodima odnosa između cene nafte i inflacije, od mogućeg korišćenja alternativnih izvora energije, preko promena u strukturi proizvodnje u okviru naftno-intenzivnog sektora, do uloge fiskalne i moneterne politike u zemljama koje su izvoznici nafte. ove promene su privukle pažnju stejkholdera, vlada i celokupnog društva na anegdotski odnost između volatilnosti cene nafte, inflacije i proizvodnje u afričkim zemljama – izvoznicama nafte. ova studija oslanja se na empirijsku verodostojnost uticaja volatilnosti cene nafte na inflaciju i ekonomski učinak afričkih zemaljaizvoznica nafte od 1995. do 2017. godine. koristili smo proceduru procene objedinjene srednje grupe sa zaključkom izvedenim na nivou značaja od 5%. utvrdili smo da volatilnost cene nafte ima značajan uticaj na inflaciju u afričkim zemljalaizvoznicama nafte. studija, prema tome, predlaže da afričke zemlje-izvoznice nafte treba da preduzmu mere predostrožnosti i da prate inflatorne potencijale usled različitih odgovora inflacije na pozitivne i negativne skokove cene nafte. ključne reči: volatilnost cene nafte; inflacija; ishodi rasta; objedinjena grupa; afrika. facta universitatis series: economics and organization vol. 15, n o 3, 2018, pp. 279 293 https://doi.org/10.22190/fueo1803279p © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication the interdependence between environmental and social performances and company’s economic value: the case study of titan cement kosjerić 1 udc 502/504:65.015.25 005.35 marija petrović-ranđelović, tatjana stevanović, vesna janković-milić university of niš, faculty of economics, serbia abstract. the purpose of this paper is to research the relationship between environmental and social performances and company’s economic value in case of the titan cement kosjerić, and contribute to a clearer understanding of the importance of integrating the sustainable development principles into the business strategy and processes. the research was conducted using the data on selected financial and nonfinancial performances of the company from the reports on corporate social responsibility and sustainable development for the period from 2011 to 2015. to confirm the initial hypothesis, the method of analysis, method of synthesis, and the correlation analysis method were used. the empirical findings of this research indicate that there is a high degree of interdependence between environmental and social performance and company’s economic value, which is in line with the company's commitment to sustainable development and socially responsible business. the main contribution of this paper is inhighlighting the importance of carrying out the socially responsible practices in the cement industry companies for improving all aspects of sustainable business financial, environmental, and social. key words: sustainable development, environmental and social performances, company’s economic value, titan cement kosjerić jel classification: f21, q01, q50, q53 received may 26, 2018 / revised july 08, 2018 / accepted july 12, 2018 corresponding author: marija petrović-ranđelović faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: mrjpetrovic76@gmail.com 280 m. petrović-ranđelović, t. stevanović, v. janković-milić 1. introduction contemporary technological development with intensive use of the environment as a source of inputs for the production process, direct recipients of negative production externals and space through which the distribution, use and disposal of manufactured products is made, has called into question the existence prerequisites for maintaining a healthy environment and limited the possibilities for sustainable development (adapted according: hemmelskamp & leone, 2001). furthemore, “climate changes and more frequent environmental degradation have influenced human awareness that their life and business style can seriously affect the quality of the environment” (perović & radukić, 2017, p. 747), and that “the biological existence of a human depends on healthy environment, so the existence of the ever-lasting tendency for his survival is quite clear” (magdalinović kalinović & radukić, p. 428). the impact of economic sectors on the state of the environment is uneven in time and in terms of intensity. one of the main pollution sources and generation of significant waste quantities is the industry sector. “however, all industrial branches do not have the same impact on the natural environment. this influence depends on the applied technique and technology characteristics, the type and origin of the obtained or processed raw materials in the technological processes of production” (gligorijević & bošković, 2013, p. 350). generally speaking, the industry sector environmental impact is reflected in the exhaustion of natural non-renewable resources, high energy consumption, soil, water and air pollution, climate change and global warming, acid rain and generating large quantities of harmful waste. however, “the role of industry and business in general in the achievement of sustainable development is beyond doubt, as demonstrated by emerging concepts such as responsible entrepreneurship and eco-efficiency and the capacity of enterprises to face new challenges such as globalization, the information society and the change of production and consumption patterns” (european commission, 1999, p. 5). the cement industry today distinguished itself as one environmentally sensitive industrial branch for several reasons. first, cement production requires the consumption of a huge quantity of resources and energy. the cement industry is highly energy-intensive, since around 90% of the energy needed for cement production consists of thermal energy generated by direct fuel combustion in cement kilns. second, with the rise of the world’s population, demand for energy and construction materials is constantly increasing, which has an impact on the increase in greenhouse gas emissions. the cement industry participates with around 5% in the total broadcasted quantity at the global level. third and associated with the previous, increased global warming caused by carbon dioxide (co2) emissions causes climate change with multiple negative economic, environmental and social impacts globally. besides the introductory considerations, this paper consists of the following parts: in the second part of the paper the attention is devoted to the importance of integration, environmental and social components in the company's management system, with particular focus on sustainable development concept application in the cement industry. the third part of the paper provides an insight into the research methodology and initial research hypothesis. the research results and their discussion are given in the fourth part of the paper. finally, concluding observations are made in the last part of the paper. the interdependence between environmental and social performances and company’s economic value... 281 2. research context 2.1. integration of environmental and social components into the company’s management system the concept of sustainable development is presented with a model of three pillars that consist of economic, environmental and social. the economic pillar indicates the need to ensure the well-being of people through the efficient use of natural resources. the social pillar of sustainable development is a requirement for social services to be more accessible to people, including several different dimensions: provision of educational services, access to health services, the provision of acceptable living standards and employment, and so on. the environmental pillar of sustainable development implies conservation and preservation of the physical and biological bases of the ecosystem (adapted according to: jovanović et al., 2011, p. 49-50). environmental exposure type of environmental intervention activities specific to the enterprise emissions (in air, water and land) ... waste ... material inputs / material intensity ... energy intensity ... noise and vibration ... thermal energy loss ... radiation ... direct interventions in nature ... fig. 1 a framework for identifying the environmental exposure of companies source: figge, f., hahn, t., schaltegger, s. & wagner, m. (2002). the sustainability balanced scorecard – linking sustainability management to business strategy. business strategy and the environment, 11(5), 269-284, p. 277. identification of exposure to the environmental and social dimension, both at the level of the business unit and at the company level, is a necessary step in defining the management system for long-term business strategy management. as a result of these efforts, the profile of environmental and social exposure is identified, for the purpose of identifying all relevant environmental and social aspects. there are two frameworks that are used to identify the degree of environmental and social exposure of companies. the first framework represents the company’s environmental exposure, and the main idea is to display environmental interventions that arise from company-specific operations. the environmental exposure is shown in figure 1. strategically relevant social aspects can be identified in line with environmental aspects. however, given the large number of differences in social aspects and the lack of foundation in natural sciences, it is difficult to achieve their comprehensive classification. it is important to note that the social aspect mostly depends on the preferences and values of the different subjects who act on the business scene. it is recommended that the classification of social factors is carried out by the actors involved, not by their content. 282 m. petrović-ranđelović, t. stevanović, v. janković-milić the stakeholder approach provides a quality and useful basis for the classification of actors of different social requirements. figure 2 shows a classification according to the previous criteria. the social aspect can be identified systematically, following a comprehensive framework of potentially relevant stakeholder groups. these stakeholders can be divided into: internal stakeholders, stakeholders from the value chain, stakeholders from the local community and social stakeholders. stakeholders can be classified into two groups direct and indirect. the direct group includes stakeholders who connect with a company through direct exchange of material resources, while with indirect stakeholders there is no such type of exchange. in the first step, all relevant stakeholder groups need to be identified. it is then necessary to determine the social requirements and issues raised by those groups. social exposure direct stakeholders indirect stakeholders internal from the value chain from the local community social internal from the value chain from the local community social special groups of stakehold. … requests / questions … special groups of stakehold. … requests / questions … special groups of stakehold. … requests / questions … special groups of stakehold. … requests / questions … special groups of stakehold. … requests / questions … special groups of stakehold. … requests / questions … special groups of stakehold. … requests / questions … special groups of stakehold. … requests / questions … fig. 2 a framework for identifying the social exposure of companies source: figge, f., hahn, t., schaltegger, s. & wagner, m. (2002). the sustainability balanced scorecard – linking sustainability management to business strategy. business strategy and the environment, 11(5), 269-284, p. 278. determining strategical relevant aspects is a key step both in the classical and in the new, expanded concept of the control system. the basic purpose of such step is to translate a formulated strategy into cause-and-effect related goals and indicators. it is necessary to repeat kaplan and norton’s (1992) recommends that the process of identifying strategically relevant aspects is realized on the top-down principle, i.e. that all major initiatives, proposals and solutions go from top management. of course, the same approach, which is valid in the traditional concept, can also be applied to the sustainable development management system. the only difference is that, in addition to standard perspectives, environmental and social considerations are taken into account. it should be noted that the hierarchical and causal link is guaranteed so that it will serve to unify all strategically important aspects in the direction of the successful conversion of the strategy and its direction towards long-term development. there are three levels of the environmental and social component strategic relevance in the literature and they are presented in the following way (figge et al., 2002, p. 279): 1) environmental and social components can be strategic key items for which the so called, consequential indicators must be identified. their basic role is to measure whether strategic and substantive requirements are achieved in perspective. the interdependence between environmental and social performances and company’s economic value... 283 2) key performance measures, presented by leading indicators, show how to achieve results in each perspective, which are reflected in subsequent indicators. leading indicators have a high level of business specificity and will reflect environmental and social aspects in every situation in which they act as key performance benchmarks. 3) environmental and social aspects can also be represented by the so-called, clean (hygienic) factors that can best be seen through diagnostic indicators. clean factors are items that need to be managed sufficiently to ensure the successful execution of business operations, but the inclusion of these factors does not contribute to any comparative advantage. simply, hygienic factors represent a necessary but not sufficient condition for successful implementation of the company strategy. for this reason, these factors are not included in the bsc concept. environmental exposure social exposure direct stakeholders indirect stakeholders e m is si o n s w a st e m a te ri a l in p u ts e n e rg y in te n si ty n o is e t h e rm a l e n e rg y l o ss r a d ia ti o n d ir e c t in te rv e n ti o n s v a lu e c h a in l o c a l c o m m u n it y s o c ia l in te rn a l v a lu e c h a in l o c a l c o m m u n it y s o c ia l s o c ia l s tr a te g ic e ss e n ti a l it e m s k e y p e rf o rm a n c e in d ic a to rs fig. 3 matrix for determining the strategic relevance of the environmental and social component source: figge, f., hahn, t., schaltegger, s. & wagner, m. (2002). the sustainability balanced scorecard – linking sustainability management to business strategy. business strategy and the environment, 11(5), 269-284, p. 279. it is necessary to emphasize the strategic importance of the environmental and social component and to determine whether they represent strategic key items, key performance metrics or pure factors. for this reason, a matrix that will interconnect one with another, environmental and social exposure, and on the other hand, the category of leading and consequential indicators is shown in figure 3. 284 m. petrović-ranđelović, t. stevanović, v. janković-milić 2.2. application of the sustainable development concept in the cement industry many companies operating in the cement industry are today faced with numerous challenges in all three sustainable development dimensions. within the economic dimension, the key issue is to ensure the financial prosperity of the company and all its stakeholders, since creating enterprise value for cement companies is linked to their ability to address external stakeholder issues. within the social dimension, they are faced with problems related to the cement production impact on human well-being and satisfying the employees’ needs and the society as a whole. problems in the domain of environmental dimensions require the use of exante and ex-post activities in order to ensure the overall environmental favorable business of the company. these include addressing issues related to resource extraction and their impact on environmental quality; using non-renewable resources; quarrying, cement production, dust transport emissions; the air emissions (such as emissions of nox, so2, co, etc.), and also co2 emissions that cause global climate change. companies operating in this environmentally sensitive industry have found that in order to remain competitive they must combine sound financial performance with an environmental responsibility commitment, and open and honest interaction with stakeholders (world business council for sustainable development, 2002). they today bear great responsibility for achieving sustainable development, applying such policies that contribute to the achievement of continuous economic growth without causing damage to the environment and exploitation of the workforce by respecting key labor standards. the key factors that contributed to the increase of the cement companies’ environmental responsibility include:  the need to increase resource efficiency, reduce operating costs through waste reduction, recycling and secondary use of waste.  the pressure of key stakeholders towards greening the business.  customers’ demands and needs in terms of using environmentally preferable cement plant products.  local communities’ environmental concerns in terms of cement production externalities.  stronger environmental regulations of the host country and home country governments.  innovations towards introducing new environmental technologies and production processes.  increasing demand for global accountability and transparency of company’s activities. in addition to the aforementioned so-called push factors there are also certain limiting factors that hinder the efforts of cement companies to implement the sustainable development concept. these include the following:  inability to change product characteristics or manufacturing process.  high resource and capital intensity that limits the ability for faster changes in the production process.  product standards designed to provide safety and integrity of built structures limit product innovation.  market demand in the direction of use and higher strength cement lead to faster resource depletion.  relatively uniform price of cement industry products across companies makes it difficult to take investments in sustainable business practices. the interdependence between environmental and social performances and company’s economic value... 285 in april 2002, the cement factory in kosjerić became a part of titan group, a renowned cement and building materials producer that operates in 36 countries, employs approximately 5.500 workers worldwide and has a business tradition longer than 11 decades (adapted according: titan group, 2018). the acquisition of a factory by one of the largest construction material manufacturers in the world has opened a new chapter in the social business responsibility and cement factory development for several reasons. first, the titan group since the establishment and commissioning of the first cement plant in greece in 1902 follows the principles of corporate social responsibility. the social dimension of business was confirmed already in 1922 when the company insured employees in the event of an injury at work, providing numerous benefits to employees and assisting the vulnerable population in situations of natural disasters and during the second world war. the company implemented its first environmental activities by introducing the first electrostatic filter at the plant in greece in 1960. the company’s commitment to the implementation of corporate social responsibility is confirmed by the fact that as a leader in this field and in order to ensure transparency of its activities, it published the first annual social report, entitled social balance, in 1983. second, titan cement kosjerić is a good example of a company that is due to the efforts to the achievement of sustainable development principles gaining a reputation of an environmentally and socially responsible company. the philosophy of sustainable development is a permanent commitment of the company, and long-term results of this commitment are reflected through investments in manufacturing technology, the implementation of various projects in the fields of environment, education, health and safety at work, the local community and its immediate surroundings (addapted according: titan cementara kosjerić, 2018a). third, the corporate social responsibility policy adopted in 2010 determines corporate social responsibility in line with the corporate vision. also, in order to increase the transparency of activities and to maintain the reputation of an environmentally conscientious investor, in 2011 titan cement kosjerić issued its first annual report on corporate social responsibility and sustainable development. fourth, “commitment of titan group to corporate social responsibility and sustainable development is confirmed through business policies and practices and through active participation in international initiatives” (titan cementara kosjerić, 2018b). as a first greek signatory company to the un global compact, titan strives to ensure the human and labor rights protection, environmental protection, and to fight against bribery and corruption. also, titan is a member of csr europe, the wbcsd initiative for sustainability in the cement industry and the european alliance for csr. fifth, titan cement kosjerić is the first company in the republic of serbia, which submitted in march 2010 complete documentation for publishing the integrated permit to the ministry of environment and spatial planning. in line with the law on integrated prevention and environmental pollution control, the company receives an integrated permit (ippc) in june 2011. sixth, the company undertakes proactive activities on identifying and managing risks and opportunities in order to track future business guidelines in a competitive and rapidly changing global market. within the identified risks, climate change takes a special place. the company’s strategic reaction to climate change is reflected on steering the efforts to find the best available technologies, increasing the use of alternative raw materials and 286 m. petrović-ranđelović, t. stevanović, v. janković-milić fuel, and improving energy efficiency. such strategic orientation is confirmed by adopting the strategy for mitigating climate change in 2006, with which is harmonized business imperative, contained in the task that in the production process makes less bad, while ensuring that it makes more good. 3. research methodology and hypothesis the titan cement kosjerić company is committed to improving environmental performances, promoting socially responsible business towards the main challenges of the 21 st century. the key activities with which the company confirms concerns for future generations and maintains the reputation of an environmentally responsible company relates to reducing air emissions and impact on climate change, reducing water and fossil fuel consumption, conserving biodiversity, and managing waste. these target-oriented activities ensure the compatibility between the strategic business objectives and the sustainable development principles and contribute to company’s operational efficiency. titan cement kosjerić applies high business standards and adheres to valid regulations, which further confirms its responsible attitude towards the environment and serves as an example of best practice of responsible business for other companies. the key institutional support for sustainable environmental management in the company provides the environmental management system, which establishes, promotes and reviews the company’s contribution in this field. in addition, the company’s commitment to preserving natural resources can be identified by providing financial support in the implementation of research programs and improving the technological basis of production, as well as by raising the employees’ awareness, as well as all relevant actors in the value chain. in addition to the environmental dimension, an important dimension of the company’s sustainable business makes the company’s commitment to continuous improvement of the employees’ quality by organizing various training programs and seminars, and learning through work. in particular, the company contributes to the development and expansion of a security culture through theoretical education and practical operational training for the safe execution of all operations. the quantification of the efforts that titan cement kosjerić makes in the direction of improving the environmental and social performances is the subject of the research that is covered in this paper. the basic hypotheses from which the research begins are as follows: h1: the company’s results are related to defined targets in reducing greenhouse gas emissions and packaging waste management by 2020. h2: there is direct interdependence between the company’s economic value and the social performances. in confirming the above laid hypotheses, the method of analysis, method of synthesis, and the correlation analysis method were used, that is, the specificcalculation of nonparametric quantitative agreement indicators (spearman's coefficient of correlation of ranks). research is conducted using the data on selected financial and nonfinancial performances from the available titan cement kosjerić reports on corporate social responsibility and sustainable development for the period from 2011 to 2015 (see table 1). the interdependence between environmental and social performances and company’s economic value... 287 table 1 selected financial and nonfinancial indicators of business performances, titan cement kosjerić, 2011-2015 2011 2012 2013 2014 2015 selected financial indicators total cement production 517,456 442,201 364,849 380,272 410,115 net profit (after income taxes (000 €) 13,257 15,869 8,439 8,993 8,065 increase of the company’s economic value (000 €) 15,354 12,518 9,766 10,175 9,807 selected nonfinancial indicators natural raw materials consumption (t) 649,349 617,695.5 468,191.7 466,429 514,503.01 secondary raw materials share in the consumption of materials 13.98% 9.8% 10.2% 15.2% 11.53 total direct c02 emissions (kg/tproduct) 623 650 623 615 605 air emissions particulate matters total emissions (t) 1.8 1.55 1.05 1.08 1.14 nox total emissions (t) 428 461.75 296.9 329.4 262.3 recycled waste quantity (t) 83.74 166.58 417.4 163.16 no. of employees (end of year) 307 261 259 234 233 no. of training hours per employee 25.75 33.74 29.67 33.47 33.81 source: titan cementara kosjerić (2011, 2012, 2013, 2014, 2015). društveno odgovorno poslovanje i održivi razvoj [corporate social responsibility and sustainable development], retrieved from: http://www.titan.rs/public/uploaded_files/titan_csr_prikaz_srp_web2.pdf; http://www.titan.rs/public/uploaded_files/2012_titan_csr_report_srb.pdf; http://www.titan.rs/public/uploaded_files/titan_2013_srp_web.pdf; http://www.titan.rs/public/uploaded_files/titan_dopizvestaj_2014_srb_web.pdf; http://www.titan.rs/public/uploaded_files/titan_2015_izvestaj_o_dop_i_or.pdf, accessed on: 15th april 2018. 4. research results and discussion in dynamic and uncertain business conditions, titan cement kosjerić implements its social responsibility policy, which, as one of the company's core values, lays out the way for business activities growth, but also contributes to improving the company’s financial performances. the coefficient of multiple correlations between the financial indicators is 0.792, which means that there is a high degree of direct relationship between these three variables. partial correlation coefficients show that there is a strong inverse relationship between the cement production and the increase of the company’s economic value (pallant, 2013; the relationship is strong if the coefficient of correlation is greater than 0.5), while between the cement production and net profit there exists a strong direct dependence (the coefficient is 0.6). the strategic effort of the company’s management to conserve natural resources is reflected in the reduction of the natural raw materials consumption, as well in the increase in the alternative raw materials share in the total consumption of materials. 288 m. petrović-ranđelović, t. stevanović, v. janković-milić table 2 correlation of financial indicators cement production increase of the company’s economic value net profit spearman's rho cement production correlation coefficient 1.000 -.600 .600 sig. (2-tailed) . .285 .285 n 5 5 5 increase of the company’s economic value correlation coefficient -.600 1.000 -.800 sig. (2-tailed) .285 . .104 n 5 5 5 net profit correlation coefficient .600 -.800 1.000 sig. (2-tailed) .285 .104 . n 5 5 5 source: authors' own presentation as can be seen from table 3, between the natural raw materials consumption and the secondary raw materials share in the consumption of materials there exists a negligible inverse relationship (the coefficient is -0.30). in the periods of declining natural raw materials quantities, the secondary raw material share of total consumption increased, apropos, the company’s management intensively worked on their substitution. in particular, the increase of the secondary raw materials share in total consumption of materials in 2014 led to an increase in the selected financial indicators cement production, increase of the company’s economic value and net profit. table 3 correlation between the natural raw materials consumption and the secondary raw materials share in the total consumption of materials natural raw materials consumption secondary raw materials share in the consumption of materials spearman's rho natural raw materials consumption correlation coefficient 1.000 -.300 sig. (2-tailed) . .624 n 5 5 secondary raw materials share in the consumption of materials correlation coefficient -.300 1.000 sig. (2-tailed) .624 . n 5 5 source: authors' own presentation in addition to raw materials, thermal and electric energy make basic resources for the cement and construction industry, which are highly energy-intensive. whereas those operations can have a far-reaching impact on climate change, table 4 shows the correlation between the indicators of harmful gases emissions. when the effect of the produced cement quantity by years is removed, the partial correlation coefficients between the indicators of the harmful gases emissions have shown the following: the interdependence between environmental and social performances and company’s economic value... 289 1. there is a direct strong, almost perfect correlation (0.999) between the co2 emission and the particulate matters total emission, as well as between co2 emission and nox total emission. apropos, with the co2 emissions reduction, the particulate matters total emission also decreases; as well as with the co2 emission reduction reduces air emissions (nox) produced during cement production also reduce. this directly confirms the internal emissions management system efficiency in the company, through the adequate production processes management, the regular equipment maintenance, and the continuous emission levels monitoring on major broadcasters. in addition, the co2 emission and recycled waste quantity are indirectly related, whereby this connection is of extremely low intensity (-0.272). 2. there exists an almost perfect direct correlation (0.946) between the particulate matters total emission and nox total emission. apropos, in the whole observed period, air emissions are reduced. 3. there exists an inverse negligible relationship (-0.223) between the particulate matters total emission and the recycled waste quantity, which is logical since the recycled waste quantity is increasing from year to year and the particulate matters total emissions fall. 4. there is a negligible direct correlation between the nox total emissions and the recycled waste quantity (0.105). table 4 correlation between the indicators of harmful gases emissions control variables co2 emission particulate matters total emission nox total emission recycled waste quantity cement production co2 emission correlation 1.000 .999 .928 -.272 significance (2-tailed) . .033 .242 .824 df 0 1 1 1 particulate matters total emission correlation .999 1.000 .946 -.223 significance (2-tailed) .033 . .210 .857 df 1 0 1 1 nox total emission correlation .928 .946 1.000 .105 significance (2-tailed) .242 .210 . .933 df 1 1 0 1 recycled waste quantity correlation -.272 -.223 .105 1.000 significance (2-tailed) .824 .857 .933 . df 1 1 1 0 source: authors' own presentation also, the correlation analysis has shown (table 5) that between the cement production and recycled waste quantity there exists an inverse strong correlation (-0.800). 290 m. petrović-ranđelović, t. stevanović, v. janković-milić table 5 correlations between the cement production and the recycled waste quantity recycled waste quantity cement production spearman's rho recycled waste quantity correlation coefficient 1.000 -.800 sig. (2-tailed) . .200 n 4 4 cement production correlation coefficient -.800 1.000 sig. (2-tailed) .200 . n 4 5 source: authors' own presentation none of the obtained correlation coefficients are statistically significant, primarily because they are calculated on the basis of a short period of time. the improvement of the company’s social performances is largely determined by its financial performances and in particular by company’s economic value. this statement is confirmed by the results of a correlation analysis between the company’s economic value and selected indicators of social performances (table 6). table 6 correlation analysis between the company’s economic value and the selected indicators of social performances increase of the company’s economic value no. of employees no. of training hours per employee spearman's rho increase of the company’s economic value correlation coefficient 1.000 -1.000 ** .700 sig. (2-tailed) . . .188 n 5 5 5 no. of employees correlation coefficient -1.000 ** 1.000 -.700 sig. (2-tailed) . . .188 n 5 5 5 no. of training hours per employee correlation coefficient .700 -.700 1.000 sig. (2-tailed) .188 .188 . n 5 5 5 **. correlation is significant at the 0.01 level (2-tailed). source: authors' own presentation it could be noted that there is a perfect inverse relationship between the number of employees and the company’s economic value (spearman rank correlation coefficient 1.000). apropos, the reduction in the number of employees follows the reduction in the company’s economic value. between the company’s economic value and the number of training hours per employee there exists a direct relation (0.700). in other words, as the company’s economic value increases, the number of training hours per employee also the interdependence between environmental and social performances and company’s economic value... 291 increases, which confirms the company's efforts towards improving the competencies of employees. in addition, it is noticeable that between the number of employees and the number of training hours per employee there exists an inverse relationship (-0.700). the reason is that in the observed period the number of employees has been steadily decreasing, while the number of training hours per employee has registered a steady increase. this can be explained by the fact that the company’s management has focused more attention on additional training of existing employees. 5. conclusion business activities that are carried out in titan cement kosjerić include the process of ore extraction, crushing, grinding, mixing and baking of raw materials, cement grinding, packaging and distribution of the product. due to the fact that these activities can make a potentially large environmental and social damage, the company’s management activities are aimed at minimizing or eliminating environmental and social risks according to the business vision: “we strive to always achieve the business goals and create value in an ethical and socially responsible manner, making it less bad, striving to do better” (titan cementara kosjerić, 2014, p. 9). titan cement kosjerić is an active promoter of the sustainable development concept. recognizing the importance of inclusion in the sustainable development program for the company’s financial performance, and aware of the direct environmental impact of cement production, the company’s management committed to full responsibility in respecting of the sustainable development principles. consistent application of the sustainable development principles permeates the company’s business that is directed towards the realization of the objectives in the field of corporate social responsibility until 2020. this statement is confirmed by the research results that provided the basis for making the following conclusions. first, there is a high degree of interdependence between the total cement production, net profit and the increase of company’s economic value, as financial indicators of company’s business performance. second, the continuous innovating of the production process by applying the best available technologies has contributed to reducing the natural raw materials consumption and increasing the secondary raw materials share in total consumption in the observed period. third, the reduction of the total co2 emission arises due to the measures taken to increase the energy efficiency of the clinker production process, reducing the clinker share in cement and using alternative fuels or biomass. with the reduction of co2 emission are also reduced the particulate matter total emissions and nox total emission that occur during the production of cement. among the particulate matter total emissions and nox total emissions almost perfect direct correlation (0.946) is affirmed, which leads to the conclusion that in the whole observed period air emissions decreased. in addition, throughout the period the waste recycled quantity increased. all the above mentioned confirms the assumption that the company made great efforts to reduce greenhouse gases emissions and more efficient packaging waste management in the observed period. 292 m. petrović-ranđelović, t. stevanović, v. janković-milić fourth, regarding the company’s social performances through indicators the number of employees and number of training hours per employee, it was found that between a number of employees and the company’s economic value there exists a perfect inverse relationship; and that between the company’s economic value and the number of training hours per employee there exists a direct relation (0,700). increasing the number of training hours per employee in the observed period, despite a constant reduction of the employees’ number is explained by the predominant directionality of the company’s management to additional training of existing employees. it also confirms the company’s strategic commitment to improving the employees’ quality and strengthening company’s social performances. it could be concluded that the company titan cement kosjerić applies the good business practice that respects the basic sustainable development principles. compliance with codes of ethics, continuous implementation of activities towards improving the employees competence and skills and continuous innovation of production processes by introducing technology that is less environmentally intensive contributing to the increasing of company’s economic value and encouraging positive changes in the company’s environmental and social performances. references european commission (1999). commission staff working paper on sustainable industrial development, retrieved from: http://ec.europa.eu/environment/archives/action-programme/pdf/sec991729_en.pdf, accessed on: 15 april 2018. figge, f., hahn, t., schaltegger, s. & wagner, m. (2002). the sustainability balanced scorecard – linking sustainability management to business strategy. business strategy and the environment, 11 (5), 269-284. gligorijević, ž. & bošković, g. (2013). industrijski menadžment [industrial management]. niš: ekonomski fakultet. hemmelskamp, j. & leone, f. (2001). do environmental taxes and standards induce innovation? in: welfens, p.j.j. (ed.), internalization of the economy and environmental policy options (301-325). berlin: springer. jovanović, s., radukić, s. & petrović-ranđelović, m. (2011). teorijski i institucionalni okvir održivog razvoja [theoretical and institutional framework of sustainable development]. niš: ekonomski fakultet univerziteta u nišu. kaplan, r. & norton, d. (1992). the balanced scorecard – measures that drive performance. harvard business review, january-february. magdalinović kalinović, m. & radukić, s. (2016). economic effects and regulatory limits in implementation of environmental taxes. facta universitatis, series: economics and organization, 13 (4), 427-438. pallant, j. (2013). spss survival manual: a step by step guide to data analysis using ibm spss (4th ed.). crows nest, nsw: allen & unwin. perović, d. & radukić, s. (2017). comparative analysis of sustainable development components for the republic of serbia and neighbouring countries. teme, 41 (3), 747-765. titan cementara kosjerić (2011). društveno odgovorno poslovanje i održivi razvoj [corporate social responsibility and sustainable development], retrieved from: http://www.titan.rs/public/uploaded_files/titan_csr_prikaz_srp_ web2.pdf, accessed on: 15 april 2018. titan cementara kosjerić (2012). društveno odgovorno poslovanje i održivi razvoj [corporate social responsibility and sustainable development], retrieved from: http://www.titan.rs/public/uploaded_files/2012_titan_csr_ report_srb.pdf, accessed on: 15 april 2018. titan cementara kosjerić (2013). društveno odgovorno poslovanje i održivi razvoj [corporate social responsibility and sustainable development], retrieved from: http://www.titan.rs/public/uploaded_files/titan_2013_srp_web.pdf, accessed on: 15 april 2018. titan cementara kosjerić (2014). društveno odgovorno poslovanje i održivi razvoj [corporate social responsibility and sustainable development], retrieved from: http://www.titan.rs/public/uploaded_files/titan_dopizvestaj_2014_ srb_web.pdf, accessed on: 15 april 2018. titan cementara kosjerić (2015). društveno odgovorno poslovanje i održivi razvoj [corporate social responsibility and sustainable development], retrieved from: http://www.titan.rs/public/uploaded_files/titan_2015_ izvestaj_o_dop_i_or.pdf, accessed on: 15 april 2018. the interdependence between environmental and social performances and company’s economic value... 293 titan cementara kosjerić (2018a). retrieved from: http://www.titan.rs/home/page/1/titan-cementara-kosjer, accessed on: 15 april 2018. titan cementara kosjerić (2018b), retrieved from: http://www.titan.rs/home/page/0/o-nama, accessed on: 15 april 2018. titan group (2018), retrieved from: http://www.titan.gr/en/titan-group/, accessed on: 15 april 2018. world business council for sustainable development (2002). toward sustainable cement industry: summary report, retrieved from: https://www.wbcsdcement.org/pdf/battelle/final_report8.pdf, accessed on: 15 april 2018. međuzavisnost između ekoloških i socijalnih performansi i ekonomske vrednosti kompanije: primer titan cementare kosjerić cilj ovog rada je da ispita odnos između ekoloških i socijalnih performansi i ekonomske vrednosti kompanije na primeru titan cementare kosjerić, kao i da doprinese jasnijem razumevanju značaja integracije principa održivog razvoja u poslovne strategije i procese. istraživanje je sprovedeno korišćenjem podataka o odabranim finansijskim i nefinansijskim performansama kompanije iz izveštaja o društveno odgovornom poslovanju i održivom razvoju za period od 2011. do 2015. godine. u cilju potvrđivanja polaznih hipoteza korišćeni su metod analize, metod sinteze i metod korelacione analize. emprijski nalazi ovog istraživanja ukazuju da postoji visok stepen međuzavisnosti između ekoloških i socijalnih performansi i ekonomske vrednosti kompanije, što je u skladu sa obavezivanjem kompanije na održivi razvoj i društveno odgovorno poslovanje. glavni doprinos rada ogleda se u naglašavanju značaja realizacije društveno odgovorne prakse u kompanijama iz oblasti industrije cementa za unapređenje svih aspekata održivog poslovanja finansijskog, ekološkog i socijalnog. ključne reči: održivi razvoj, ekološke i socijalne performanse, ekonomska vrednost kompanije, titan cementara kosjerić. facta universitatis series: economics and organization vol. 18, no 5, 2021, pp. 471 485 https://doi.org/10.22190/fueo210903033m original scientific paper the drivers of private sector investment in botswana: an exploratory review udc 005:330.322 glenda maluleke, nicholas m. odhiambo, sheilla nyasha university of south africa, department of economics, pretoria, south africa orcid id: glenda maluleke https://orcid.org/0000-0002-5234-3115 nicholas m. odhiambo https://orcid.org/0000-0003-4988-0259 sheilla nyasha https://orcid.org/0000-0003-2930-094x abstract. this paper reviews the drivers of investment by the private sector in botswana for the period from 1980 to 2018. the paper discusses the investment policies that the government has adopted over the years, the incentives, as well as the institutions that have been established to promote private sector investment. the botswana government’s economic development strategy is aimed at promoting economic growth through the private sector. some of the key determinants of private investment, which have been analysed, include economic growth, public investment, credit to the private sector, gross domestic savings, trade openness, interest rate, inflation and foreign direct investment. since the 1980s, the private sector investment has been fluctuating between 34.5 percent and 12.1 percent, with the highest level being recorded in 1980 and the lowest in 1996. the study shows that economic growth averaged 6.4 percent, public investment was 10.3 percent, credit to the private sector was 18.3 percent, gross domestic savings was 35.9, trade openness was 101.4 percent, interest rate was 3.6 percent, inflation was 8.9 percent and lastly, foreign direct investment was 2.6 percent during the study period. key words: private sector investment, economic growth, determinants, policies, botswana jel classification: e2 received september 03, 2021 / revised november 14, 2021 / accepted november 22, 2021 corresponding author: glenda maluleke university of south africa, department of economics, unisa, p.o box 392, preller street muckleneuk, pretoria, 0002, south africa | e-mail: malulg@unisa.ac.za © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd https://orcid.org/0000-0002-5234-3115 https://orcid.org/0000-0003-4988-0259 https://orcid.org/0000-0003-2930-094x mailto:malulg@unisa.ac.za 472 g. maluleke, n. m. odhiambo, s. nyasha 1. introduction economic growth is an important determinant of private investment. the linkage between economic growth and private investment has been studied by various researchers and their findings indicate a positive relationship between the two variables (see karagoz, 2010; adugna, 2013; and nainggolan et al. 2015). the desired capital stock is determined by the cost of capital and the level of output (serven & solimano, 1992). many studies in the literature have proposed the determinants of private investment. the determinants are public investment (ribeiro and teixeira, 2001; bint-e-ajaz & ellahi, 2012); credit to the private sector ((mitiku, 1996; asante, 2000); trade-related variables such as trade openness, terms of trade and exchange rates (acosta & loza, 2005; karagoz, 2010). other variables include public debt; external debt; financial markets; credit markets; political instability; savings and financial development (see acosta & loza, 2005; sisay, 2010; lau et al., 2019); and interest rates (see bader & malawi, 2010; suhendra & anwar, 2014; magableh & ajlouni, 2016). the private sector has been identified by the government of botswana as one of the key drivers of economic growth, diversification and employment creation and the government has come up with several policies and initiatives to promote the sector (republic of botswana, 2019). according to oecd (2005:112), “enforcing market discipline and promoting efficient allocation and use of economic resources, through the encouragement of private sector involvement in the country’s economic development, has been one of the key aspects of public policy and public sector reform agenda in botswana”. against this background, this study aims to analyse the trends of private investment and its determinants in botswana during the period 1980 – 2018. the study further assesses the policies that have been pursued to promote private investment in botswana during the study period. the rest of the study is organised as follows: section 2 reviews the government’s investment policies, incentives to promote private investment, and the institutions established to promote private investment. section 3 discusses the trends of private investment and section 4 reviews the macroeconomic drivers of private investment in botswana. section 5 concludes the study. 2. investment policies in botswana since its independence in 1966, the botswana government has been working on economic diversification and private sector development. the republic of botswana (2019) states that the new economic development strategy is to promote economic growth through the private sector. the economic growth of the country over the years has been due to the prolonged and rapid expansion of the mining sector and the government, which has been largely financed by the revenue from the mining sector (bank of botswana, 2000). as the government and the mining sector account for almost half of the country’s gross domestic product (gdp), the country needs to diversify as it cannot depend on one sector of the economy (bank of botswana, 2000). since the mineral sector lacks the potential for rapid economic growth, in order to boost diversification, the government needs to promote investment in other sectors of the economy and this was the objective of the national development plan (ndp) 7 and 8 (kgakge, 2002). the efforts by the government have been working as there has been a decrease in the share of the mining sector and an increase of the non-mining sectors in the economy (republic of botswana, the drivers of private sector investment in botswana: an exploratory review 473 2019). the contribution of the mining sector share to gdp declined from 25 percent in 2008 to 18 percent in 2018, while that of the non-mining sectors increased from 75 percent to 82 percent during the same period (republic of botswana, 2019:4) the ndp 10, which was for the period april 2009 to march 2016, prioritised growth in the private sector. according to the republic of botswana (2009), the acceleration of the diversification of the economy from dependence on diamond towards the growth of the private sector was the plan of the ndp 10. for the ndp 10, the government had the strategy that seeks to “create a private-sector enabling and supportive policy environment, stimulate increased domestic and foreign private investment, and enhance competitiveness in goods and services markets” (ministry of finance and development planning, 2013:5). to develop a private-sector-friendly environment, the government aimed to improve the business climate by removing the negative effects of all the administrative, bureaucratic and regulatory barriers detrimental to private sector development (republic of botswana, 2009). in the ndp 11, the first medium-term plan, which starts from march 2017 to march 2023 towards the implementation of the country’s second vision – vision 2036 is outlined (republic of botswana, 2017). the ndp 11 aims to eliminate poverty and create employment. according to the government of botswana, this will be achieved through the “implementation of six national priorities, namely i) developing diversified sources of economic growth; ii) human capital development; iii) social development; iv) the sustainable use of national resources; v) consolidation of good governance and strengthening of national security; and vi) the implementation of an effective monitoring and evaluation system” (republic of botswana, 2017:xv). according to the ndp 11 the strategies to create employment opportunities and promote economic growth will be implemented by “developing diversified sources of economic growth through initiatives such as beneficiation; cluster development; special economic zones; an economic diversification drive; and local economic development” (republic of botswana, 2017:xv). according to ndp 11, the botswana government aims to maximize the value addition from minerals through mineral beneficiation in order to promote the development of the private sector and grow the economy (republic of botswana, 2017). the government will also aim to adopt a cluster-based agenda that focuses on sectors in which the economy has a comparative advantage, such as the diamond, beef, tourism, financial services and mining sectors, emerging education as well as health services sectors (republic of botswana, 2017:59). the programmes such as local economic development and the private sector development strategy (psds) will be used to implement this initiative (republic of botswana, 2017). as part of cluster development, the ndp 11 aims to promote the special economic zones through tax and regulatory reforms that will enable them to create job opportunities and grow the economy (republic of botswana, 2017). this initiative will promote the domestic and foreign direct investment which will significantly contribute to economic growth and create job opportunities (republic of botswana, 2017). during the ndp 11, the achievements of the economic diversification drive strategy will be consolidated by implementing the new industrial development policy (idp) in order to achieve the government objective of diversified and sustainable industries and ensure the beneficiation of local raw materials (republic of botswana, 2017:60). the last initiative will be local economic development, which will ensure that the country creates an environment that will encourage local investment and promote both smmes and major industries in the economy 474 g. maluleke, n. m. odhiambo, s. nyasha and access to external markets, private investment and provision for infrastructure crucial for this initiative (republic of botswana, 2017). over the years, the botswana government has implemented a number of schemes aimed at investment in private sector enterprises and parastatals. according to the bank of botswana (2001), some of the schemes implemented to finance private sector enterprises include the financial assistance policy (fap) and small, medium and micro enterprises (smmes). the fap was introduced in 1982 with the objective of facilitating the development of new and expanding productive enterprises in order to create employment opportunities and diversify the economy which is dependent on the mining sector (valentine (1993). the objectives of the fap were to facilitate rapid industrialisation; to diversify the economy away from dependence on large-scale mining and non-cattle and non-traditional agricultural projects; diversify the economy across regions, away from the major urban and peri-urban areas, and encourage rural industrialisation; to encourage sustained employment of unskilled labour and address botswana's unemployment problem; to promote the acquisition and upgrading of the skills of botswana citizens through training; and to stimulate citizen participation in the ownership of productive assets (valentine, 1993:10). the smmes policy, which is a financing programme, was introduced in 1999 (bank of botswana, 2000). the smmes policy aimed to achieve the following objectives, which are “to foster citizen entrepreneurship and empowerment; encourage the development of a competitive and sustainable sme community; achieve economic diversification; create sustainable employment opportunities; promote exports; promote the development of vertical integration and horizontal linkages in primary industries (agriculture, mining and tourism) for smes; and improve efficiency in the delivery of products to business.” (oecd, 2005:113). due to the shortcomings of these schemes, both the fap and smmes have been discontinued and replaced by the citizen entrepreneurial development agency (ceda). the ceda provides subsidised loans to commercially viable enterprises and runs a venture capital scheme (bank of botswana, 2001). the venture capital is made available for joint ventures between local and foreign investors (bank of botswana, 2001). the objectives of the ceda are as follows: (i) to support business development through various funding mechanisms; (ii) to back agro-business, services property and manufacturing through subsidised loans, as well as to help citizens partner with foreigners in joint ventures; (iii) to foster citizen entrepreneurship and empowerment and promote economic diversification; (iv) to encourage the development of competitive and sustainable citizen enterprises; and (v) to create sustainable employment opportunities (bank of botswana, 2015:107). one of the tax incentives to encourage investment is that companies registered with the international financial services centre (ifsc), which has been replaced by the botswana investment and trade centre (bitc), benefit from zero-rated vat and exemption from both withholding tax and capital gains tax, while other companies pay 10 percent vat, 7.5 percent withholding tax (reduced from 15 percent since 2011), and 15 percent capital gains tax (oecd, 2014). the government has also established institutions to promote investment, such as the botswana export development and investment authority (bedia), which took over the work of the trade investment and promotion agency (tipa) which is export development and investment promotion (bank of botswana, 2000). bedia’s objective is to promote investment, especially in the manufacturing sector (bank of botswana (2000). it aims to achieve its objectives through the promotion of the country as an investment destination and to serve as a one-stop service centre that assists investors with permits for work and the drivers of private sector investment in botswana: an exploratory review 475 residence; securing of land and buildings; business licensing; and assist with identifying potential citizen joint venture partners (bank of botswana (2000:87). another institution is the botswana investment and trade centre (bitc) which, according to the oecd (2014), was launched in 2012 after the merger of bedia with the brand botswana management organisation (bbmo) and the international financial services centre (ifsc). its objectives include investment promotion and attraction, and export promotion and development and as a one-stop service centre for investors, it minimises regulatory and bureaucratic costs (bank of botswana, 2015). in addition, the bitc provides business facilitation services such as company and business registration, trade licence applications and entry visas, and work and residence permits (bank of botswana, 2015). 3. private investment trends in botswana the botswana government has created an enabling environment for the private sector in order to grow the economy. private investments in botswana have fluctuated since the 1980s and averaged 18.9 percent as a percentage of gdp for the period 1980 to 2018. the highest level of private investment being recorded was 34.5 percent in 1980 and the lowest was 12.1 percent in 1996. private investment decreased from 34.52 percent in 1980 to 12.62 percent in 1986 before it increased to 23.77 percent in 1990. after 1990 it dropped and stayed below 15 percent for most of the 1990s. investment by the private sector as a percentage of gdp declined from 23.77 percent in 1990 to 12.14 percent in 1996. in the period 1992 to 2009, the performance of the private sector was lower at an annual average of less than 20 percent. however, private sector investment as a percentage of gdp improved in 2010 when it rose to 20.53 percent. figure 1 shows the trends of private investment in botswana as a percentage of gdp from 1980 to 2018. 35 30 25 20 15 10 year fig. 1 private investment as a percentage of gdp in botswana (1980–2018) source: own compilation from world bank development indicators (2020). private investment increased from 14.39 percent in 2001 to 18.54 percent in 2004. in the 2003/04 period, total gross domestic investment accounted for 25.5 percent of gdp, private investment p e rc e n ta g e o f g d p 476 g. maluleke, n. m. odhiambo, s. nyasha compared with 24.5 percent in the 2002/03 period and the increase was due to growth in private investment (oecd, 2005). private investment was on the decrease before the 2008 financial crisis that affected many economies. private investment decreased from 18.63 percent in 2007 to 15.33 percent in 2008. from 2009 investment by the private sector was on the rise once more and reached 28.69 percent in 2012 before decreasing to 21.22 percent in 2014. 4. trends of macroeconomic drivers of private investment in botswana many macroeconomic variables have been identified in the literature as the determinants of private investment. they include economic growth, public investment credit to the private sector, inflation, gross savings, foreign direct investment, interest rate, and openness of the economy. these macroeconomic variables are discussed within the botswana context in this section. 4.1. economic growth the economic growth rate in botswana fluctuated in the review period. for the period 1980 to 2018, private investment averaged 18.9 percent as a percentage of gdp whereas economic growth averaged only 6.4 percent in the same period. the highest growth rate was 19.5 percent in 1988 and the lowest in 2009 with a growth rate of –7.7 percent (see figure 2). figure 2 presents economic growth rates and private investment as a percentage of gdp in botswana from 1980 to 2018. 40 30 20 10 0 -10 year fig. 2 gdp growth rate and private investment in botswana (1980–2018) source: own compilation from world bank development indicators (2020) the sharp decrease from 8.3 percent in 1997 to 0.4 percent in 1998 could have been because of the financial crisis that affected many economies. after 1998, the economy of botswana grew to 9.7 percent in 1999 before it slowed down to 0.3 percent in 2001. the reason for higher growth in 1999 was increased activity in the mining sector and the gdp growth private investment p e rc e n ta g e the drivers of private sector investment in botswana: an exploratory review 477 orapa expansion project during the first half of 2000 (bank of botswana, 2000). in 2010 economic growth picked up and spiked to 8.6 percent. afterwards, it decreased to –1.7 percent in 2015. 4.2. public investment public investment is a determinant of private investment as it can either crowd in or crowd out private investment (see ghali, 1998). from 1980 to 2018, private investment in botswana has always exceeded investment by the public sector. botswana private investment as a percentage of gdp averaged 18.9 percent, while public investment as a percentage of gdp averaged 10.3 percent for the period 1980 to 2018. figure 3 displays public and private investment as a percentage of gdp in botswana from 1980 to 2018. 35 30 25 20 15 10 5 0 year fig. 3 public investment and private investment in botswana (1980–2018) source: own compilation from world bank development indicators (2020) while private investment declined continuously from 1990 to 1994, public investment continuously increased (see figure 3). investment by the public sector strengthened from 8.6 percent in 1990 to 13.7 percent in 1994. according to the bank of botswana (2000), the share of gross fixed capital formation, which showed the increased pace of the government’s investment programme, grew during the mid-1990s. but public investment as a percentage of gdp decreased from 13.2 percent in 1998 to 10.6 percent in 2000. the share of gross fixed capital formation declined in 1999/2000 owing to the slower real growth rates of government development spending (bank of botswana, 2000). in 2003 public investment declined to 11.5 percent from 12.2 percent in 2002 and continued to diminish until 2006. in 2007, it rose to 9.8 percent and reached 17.2 percent in 2009 to decline again to 7.1 percent in 2013. for the period 2008 to 2009, both public and private investment averaged 15 percent in 2008 and 17 percent in 2009. public investment was below 10 percent as a percentage of gdp from 2014 to 2018, whereas private investment as a percentage of gdp was above 20 percent. public investment private investment p e rc e n ta g e o f g d p 478 g. maluleke, n. m. odhiambo, s. nyasha 4.3. domestic credit to the private sector credit is an important determinant of investment. for the period 1980 to 2018, private investment as a percentage of gdp averaged 18.9 whereas credit to the private sector as a percentage of gdp averaged 18.3 in the same period. as can be seen from figure 4, from 1980 to 1997, an upward and a downward trend in domestic credit to the private sector was evident in botswana. it decreased from 11.3 percent in 1980 to 9.7 percent in 1997. however, from 1998 it started to grow, and from 2001 until 2018, it surpassed private investment levels. credit to the private sector increased from 22.7 percent in 2007 to 25.8 percent in 2008. it continued to rise to 28.9 percent in 2009 but dived to 27.2 percent in 2010. unlike most other african countries, botswana was able to provide finance for the smes through the two financial schemes, which are the micro credit scheme and the credit guarantee scheme that it established (oecd, 2005). the trend shows that when domestic credit decreases, private investment decreases, and when domestic credit increases, private investment also increases. the reason for this could be that the private sector needs credit from banks to finance its projects. figure 4 presents domestic credit to the private sector and private investment as a percentage of gdp in botswana from 1980 to 2018. 35 30 25 20 15 10 5 year fig. 4 domestic credit to private sector and private investment in botswana (1980–2018) source: own compilation from world bank development indicators (2020) 4.4. gross domestic savings domestic savings also boost investment, and according to munir et al. (2010), private savings speed up private investment. gross domestic savings for the period 1980 to 2018 averaged 35.9 percent as a percentage of gdp in botswana. figure 5 shows that from 1982 gross domestic savings were higher than private investment. the botswana government is a major saver, and in june 1990, it accounted for over half of gross domestic savings, but this figure fell to just below 30 percent by june 1995 (bank of botswana, 2001). figure 5 illustrates gross domestic savings and private investment as a percentage of gdp in botswana from 1980 to 2018. domestic credit to private sector private investment p e rc e n ta g e o f g d p the drivers of private sector investment in botswana: an exploratory review 479 60 50 40 30 20 10 year fig. 5 gross domestic savings and private investment in botswana (1980–2018) source: own compilation from world bank development indicators (2020) the botswana government’s savings performance depends largely on revenue from the mining sector (bank of botswana, 2001). it steadily rose from 1982 to 1988 and then continuously declined from 1988 to 1995. the performance of gross domestic savings in botswana during the 1980s was characterised by an increasing trend but in the early 1990s by a declining trend (see figure 5). in the late 1980s, private investment intensified whereas in the early 1990s, it slumped. in 1996 gross domestic savings increased to 38.4 percent from 30.5 percent in 1995 before declining to 33 percent in 1998. gross national savings decreased in 2002 to 40.3 percent from 42.1 percent in 2001. by 2004 it stood at 39.7 percent. according to the bank of botswana (2001), the decline in gross domestic savings during this period was due to a decrease in public savings. in 2009 gross savings stood at 28.2 percent compared to 35.6 percent in 2008 and 44.2 percent in 2006. after 2009 savings improved and rose to 35.2 percent in 2011. 4.5. trade openness the openness of a country is vital, and according to fielding (1997), an increase in trade has a positive impact on domestic investment. trade openness is measured by the ratio of imports plus exports to the gdp. botswana’s ratio of imports plus exports to its gdp exceeded 70 percent for the period 1980 to 2018. for the period 1980 to 2018, private investment averaged 18.9 percent as a percentage of gdp, whereas trade openness averaged 101.4 percent as a percentage of gdp in the same period. the oecd (2005) affirms that exports in the country are limited to a small number of commodities (minerals) and focused at just a few destinations which are mostly in europe. the country membership in the southern african customs union (sacu) may have largely dictated its trade policy over the years because the agreement states that all trade negotiations or agreements between botswana and third parties must be acceptable to other sacu members (oecd, 2005). figure 6 shows trade openness and private investment as a percentage of botswana’s gdp from 1980 to 2018. gross domestic savings private investment p e rc e n ta g e o f g d p 480 g. maluleke, n. m. odhiambo, s. nyasha trade openness private investment 130 40 120 35 110 30 100 25 90 20 80 15 70 10 year fig. 6 trade openness and private investment in botswana (1980–2018) source: own compilation from world bank development indicators (2020) in the early 1980s, trade openness grew from 119.5 percent in 1980 to 124.6 percent in 1983. however, from the late 1980s to the early 1990s, there was a decline in trade openness measured by the ratio of imports plus exports to botswana’s gdp. the level of trade openness dropped from 123.6 percent in 1987 to 86.2 percent in 1993. in 1994 it started to rise and stood at 91 percent in 1995. the improvement in the country’s trade openness during this period coincided with measures towards a more liberal trade regime (malefane & odhiambo, 2016). trade openness improved to 108.6 percent in 1997 and, thereafter, continuously declined to 87.5 in 2001. trade openness in the 1990s and 2000s was less than in the 1980s. according to malefane and odhiambo (2016), the decline in botswana’s trade openness in the 1990s coincided with the agricultural sector’s declining share in exports. botswana’s trade openness dropped from 96.7 in 2008 to 86.7 in 2009. the country’s economy recovered after 2009, and trade openness increased from 86.7 percent in 2009 and to 123 percent in 2013. from 2013 to 2017, it continuously declined. trade openness fell from 123 percent in 2013 to 73.9 percent in 2017. a factor that could have contributed to the slowdown was the decline in the export of rough diamonds in 2015 because of a decrease in the global market demand (bank of botswana, 2015). 4.6. real interest rate the real interest rate is a determinant of private investment. a study by greene and villanueva (1991) shows that there is a negative relationship between interest rates and private investment. for the period 1980 to 2018, private investment averaged 18.9 percent as a percentage of gdp, whereas real interest rate averaged 3.6 percent in the same period. the real interest rate of botswana fluctuated from 1980 to 2018. in 1980, the interest rate was –1.6 percent, and in 2018 it reached 5.5 percent. figure 7 presents the trends of real interest rate and private investment as a percentage of botswana’s gdp during the period 1980-2018. p r iv a te in v e s tm e n t t r a d e o p e n n e s s the drivers of private sector investment in botswana: an exploratory review 481 40 30 20 10 0 -10 -20 year fig. 7 real interest rate and private investment in botswana (1980–2018) source: own compilation from world bank development indicators (2020) in 1980, the real interest rate was –1.6 percent. a sharp increase to 19.8 percent followed in 1982, the highest for the period 1980 to 2018. it declined sharply from 19.78 percent in 1982 to –9.3 in 1985. the trend shows that from 1984 to 1989, the real interest rate was negative. from 1989 it steadily grew to 6.9 percent in 1992 only to fluctuate again. in 1996, it was a negative rate of –1.4 percent before rising to 8.5 percent in 1997 and decreasing to 0.5 percent in 1999. botswana’s real interest rate spiked to 14.8 percent in 2002 from 1.1 percent in 2000. it fell to 0.2 percent in 2005, then rose to 11.3 percent in 2008, and declined again to –2.6 percent in 2011. in 2012, there was a sharp increase from -2.6 percent in 2011 to 10.8 percent. the increase in the real interest rate in 2012 was owing to a decline in inflation (bank of botswana, 2012). 4.7. inflation rate inflation is also a determinant of private investment, and according to hassan and salim (2011), inflation erodes the purchasing power of money. during the period 1980-2018, private investment averaged 18.9 percent as a percentage of gdp, whereas inflation averaged only 8.9 percent in the same period. inflation was 13.6 percent in 1980 and 8.1 percent in 1985, the lowest for the 1980s. it then increased to 10 percent in 1986 before it sank to 8.4 percent in 1988. in 1992 the inflation rate grew to 16.2 percent, the highest annual inflation rate since 1981. after 1992, it continuously declined. it was 6.7 percent in 1998, increased to 8.6 percent in 2000, before it declined to 6.6 percent in 2001. it then rose to 9.2 percent in 2003. according to the bank of botswana (2000), a rise in fuel prices was one of the factors that drove inflation in 2000, which led to increased production costs. the decline in 2001 was the result of less external inflationary pressure, reinforced by the tight monetary policy maintained throughout the year (bank of botswana, 2001). figure 8 indicates the inflation rate and private investment as a percentage of botswana’s gdp from 1980 to 2018. real interest rate private investment p e r c e n ta g e 482 g. maluleke, n. m. odhiambo, s. nyasha inflation rate private investment 18 45 16 40 14 35 12 30 10 25 8 20 6 15 4 10 2 5 year fig. 8 inflation rate and private investment in botswana (1980–2018) source: own compilation from world bank development indicators (2020) inflation declined from 11.6 percent in 2006 to 7.1 percent in 2007 before it increased to 12.7 percent in 2008. the high inflation in 2006 was due to the higher world prices of petroleum and the result of the new exchange rate regime that was introduced in may 2005 (bank of botswana, 2007). in 2007 the monetary policy statement (mps) set an annual inflation objective of 4 to 7 percent, but because of rising international oil prices and subsequent cost increases of imported foodstuff and petroleum products, the inflation rate was above 7 percent (bank of botswana, 2007). it maintained its downward trend from 12.7 percent in 2008 to 7 percent in 2010. the trend of the inflation rate shows that from 2013 until 2018, the inflation rate was within the target of 3 to 6 percent (see figure 8). 4.8. foreign direct investment foreign direct investment is also a determinant of private investment. foreign investment can stimulate domestic private investment, but it can also crowd out domestic private investment, as was found by mutenyo et al. (2010). in botswana, private investment has been higher than foreign direct investment for the period 1980 to 2018. for the period 1980 to 2018, private investment averaged 18.9 percent as a percentage of gdp, whereas foreign direct investment as a percentage of gdp averaged only 2.6 percent in the same period. foreign direct investment was higher in the 1980s than in the 1990s: it averaged 4.6 percent in the 1980s and just 0.3 percent in the 1990s. in the 1990s, it was negative, for example, in the period 1991 to 1994. in 1990 it increased to 2.5 percent from 1.4 percent in 1989 before attaining a record low of –6.9 percent in 1993 (see figure 9). for the period 2000 to 2018, foreign direct investment averaged 2.8 percent, whereas private investment averaged 20.1 percent. in 2000, foreign direct investment was recorded at 1 percent before declining to 0.56 in 2001. then in 2002, it rose to 7.5 percent, which was the highest for the period 2000 to 2018 before declining to 5.6 percent in 2003. it dropped further to 4.4 percent in 2004 and fluctuated until it reached 1.3 percent in 2018. figure 9 p r iv a te in v e s tm e n t in fl a ti o n r a te the drivers of private sector investment in botswana: an exploratory review 483 reflects the foreign direct investment and private investment as a percentage of gdp trends in botswana from 1980 to 2018. 40 30 20 10 0 -10 year fig. 9 foreign direct investment and private investment in botswana (1980–2018) source: own compilation from world bank development indicators (2020) 5. conclusion in this study, the policies and incentives of the botswana government to promote private sector investment have been analysed. since its independence in 1966, the government of botswana has focused on economic diversification and private sector development. the private sector has been identified by the government as key in driving economic growth and, over many years, developed policies and initiatives to encourage private sector involvement. the government of botswana has, over decades, implemented a number of incentives aimed at providing finance for investment. these include the fap, which was established in 1982 with the aim of providing assistance to new and expanding enterprises, and the smmes, which were established in 1999. this study also examined the macroeconomic drivers of private investment in botswana in the period 1980 to 2018. the drivers include economic growth, public investment, credit to the private sector, gross domestic savings, openness of the economy, interest rate, inflation, and foreign direct investment. the findings of the study show that the policies that the government has implemented to promote the private sector have been working, as shown by the upward trend recorded during the periods, such as 1986-1990, 2001-2004, and 2008-2012. since the 1980s, the private sector investment has been fluctuating between 34.5 percent and 12.1 percent with the highest level being recorded in 1980 and the lowest in 1996. the study shows that economic growth averaged 6.4 percent, public investment was 10.3 percent, credit to the private sector was 18.3 percent, gross domestic savings was 35.9, trade openness was 101.4 percent, interest rate was 3.6 percent, inflation was 8.9 percent and lastly foreign direct investment was 2.6 percent during the study period. in the foreign direct investment private investment p e r c e n ta g e o f g d p 484 g. maluleke, n. m. odhiambo, s. nyasha current study, the exploratory approach is used to analyse the key determinants of private investment and the co-movement between private investment and its determinants. it is recommended that future studies use empirical analysis and consider modern econometric techniques to examine the relationship between private investment and its determinants. the study is also mainly focused on the macroeconomic determinants; therefore, future studies can look at other drivers of private investment, such as institutional drivers that can explain the performance of private investment. acknowledgement: this paper is based on doctoral research at the university of south africa (unisa). the usual disclaimer applies. references acosta, p., & loza, a. 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(2020). world development indicators. retrieved from https://databank.worldbank.org/data/source/world development-indicators#, date: 07 april 2020 pokretači investiranja u privatni sektor u bocvani: istraživački pregled ovaj rad se bavi pokretačima investiranja privatnog sektora u bocvani za period od 1980 do 2018. rad analizira investicione politike koje je vlada usvajala tokom godina, podsticaje, kao i institucije koje su uspostavljene da bi se promovisale investicije u privatni sektor. razvojna strategija vlade bocvane usmerena je na promovisanje ekonomskog rasta putem privatnog sektora. neke od ključnih determinanti privatnih investicija, koje se analiziraju, uključuju ekonomski rast, javne investicije, bruto društvenu štednju, otvorenost tržišta, kamatne stope, inflaciju i strane direktne investicije. od 1980ih, investicije u privatni sektor fluktuišu između 34.5 procenata i 12.1 procenta, pri čemu je najviši nivo zabeležen 1980 a najniži 1996. godine. studija pokazuje da je ekonomski razvoj u proseku bio: 6.4%, javne investicije 10.3%, krediti za privatni sektor 18.3%, bruto društvena štednja 35.9%, otvorenost tržišta 101.4%, kamatna stopa 3.6%, inflacija 8.9% i najzad strane direktne investicije su bile 2.6 procenata za vreme perioda istraživanja. ključne reči: investiranje u privatni sektor, ekonomski rast, determinante, politike, bocvana https://doi.org/10.5539/ijms.v2n1p140 https://doi.org/10.5539/ijms.v2n1p140 https://doi.org/10.19044/esj.2016.v12n28p240 https://doi.org/10.19044/esj.2016.v12n28p240 http://www.oecd.org/dev/aeo http://dx.doi.org/10.1787/9789264203365-en http://dx.doi.org/10.1787/9789264203365-en https://www.finance.gov.bw/images/ndp-ten/ndp_ten_final.pdf https://www.finance.gov.bw/images/ndp-ten/ndp_ten_final.pdf https://www.finance.gov.bw/index.php?option=com_content&view=category&id=28&itemid=126 https://www.finance.gov.bw/index.php?option=com_content&view=category&id=28&itemid=126 https://doi.org/10.1093/wbro/7.1.95 https://doi.org/10.4314/eje.v19i1.71845 https://databank.worldbank.org/data/source/world-development-indicators https://databank.worldbank.org/data/source/world-development-indicators plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 17, no 3, 2020, pp. 275 284 https://doi.org/10.22190/fueo200118020c © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper social and economic inclusion of disabled individuals. a literature review1 udc 364-056.26 elena-sorina caragiani university of craiova, faculty of economics and business administration, craiova, romania abstract. considering the vulnerable groups’ economic, social and political life, the main aim of this research is to review the connection between the disabled individuals’ social and economic inclusion and the economic development. different from other papers, i have pointed out the background dissimilarities of disabled people among eu member states. the methodological research consists in employing a review of existing literature into this field, in order to draw up an integrative and substantiated approach of the disabled people. the main results of the paper bring a comprehensive contribution for the continuous struggle to improve the life standards of disabled individuals. thus, this paper represents the foremost foundation for further research, for deepening the macroeconometric endeavor, in order to support the disabled individuals’ social and economic inclusion, by reshaping the existing strategies and policies. key words: social and economic inclusion, disabled people, sustainable economic development, literature review. jel classification: a14, e71, p46 1. introduction social inclusion is commonly deployed interchangeably with notions concerning social integration, cohesion and participation, as opposite to social exclusion. the social exclusion represents a contested notion, which encloses a great variety of phenomena and actions regarding poverty and deprivation, but it refers to marginalized and impoverished places and individuals. economic inclusion implies the creation of sources of employment or favorable conditions for them, the provision of basic health and nutrition conditions, decent and received january 18, 2020 / revised march 16, 2020 / accepted march 30, 2020 corresponding author: elena-sorina caragiani university of craiova, faculty of economics and business administration, 13 a.i. cuza street, craiova, dolj 200585, romania e-mail: sorina_caragiani@yahoo.com 276 e. s. caragiani safe housing, education and physical and legal security, among many other indicators that help the society as a whole to develop without social inequalities. the present article underlines the concepts of social and economic inclusion of disabled people, which interferes with their attempts to exercise their societal rights, based on the main results obtained by the researchers in the literature in these directions. according to the european union (eu) strategy on disabled individuals for 2010-2020, around 80 million people in the eu, i.e. a share of sixth of its total residents suffer from some form of disability. these people are often prevented and discouraged to participate actively in social and economic life through barriers posed by their environment. the percentage of people suffering from disabilities is growing since the eu population is aging (cristea and mitrica, 2016). although the developed and the evolving eu countries are primarily responsible for implementing measures beneficial to disabled people, the eu complements their efforts and creates the appropriate framework for continued progress in this area. the eu launched actions to benefit disabled people through which they analyzed applicable aspects of member states (ms) policies. this attempt eases to clarify the needs of disabled people and eu legislation and policy enrichment. therefore, the eu intends to guarantee that all disabled individuals can use all the rights that they have. research conducted in this area has also been the subject of nobel prize for economics in 2019. the prize was jointly awarded to abhijit banerjee, esther duflo and michael kremer for their experimental approach to combating global poverty, according to the announcement by the swedish academy (wearden, 2019). the purpose of the research was to make sure that the fight against poverty is based on scientific evidence. their work has shown how to tackle poverty, questioning specific situations in areas such as education and health care, which makes problems easier to solve. amid such importance assigned to disabled individuals, the aim of this research paper is to review the relation between economic and social inclusion of the disabled and the manner in which it is reflected on the eu ms. the essential idea is that living with some form of disability requires social protection. as the degree of disability persists in society, there is a more acute need to understand its consequences for many aspects of social and economic inclusion. throughout this paper the author is providing a thorough analysis of the transition to an acceptance of these human categories and consequences related to different features of social and economic inclusion. as a scientific method of research for accomplishment of this material, the author has used the observation, by investigating the theories, concepts, models, and opinions, previously stated in the literature in the field. after the introduction part, the present paper is structured in three parts: a literature review section, discussions and conclusions. the essence of the paper is concentrated in the second part, which includes debates on the concept of disability, the limits/barriers of social and economic inclusion of disabled individuals, the relation between disabled people and labor market, and the impact of disabled individuals’ social inclusion on sustainable economic development. social and economic inclusion of disabled individuals. a literature review 277 2. literature review 2.1. the concept of disability thomas (1999) defines disability as a set of measures that limit disabled people and their acomplishments. it concerns both the prevention of the good performance of disabled people’s daily activities, and their ranking as inferior from the standpoint of their intellectual abilities, but also of their ability to express their feelings and to respond to them. thomas’s definition emphasises the effects of the negative experience of disabled people on socio-human wellbeing. most disabled people face difficulties in everyday life, being hired and private life fulfilment. this approach does not resemble the social model interpretation which claims that disabilities alone do not represent an obstacle in the performance of everyday activities, which do not prevent individuals from living and working comfortably and with dignity. crow (1996) reinforces the ideas of this model, claiming that it is essential in strengthening the self-confidence of people with disabilities and that disability is just an issue of perception, all people being, thus, able to do remarkable things. in shakespeare and watson’s (2002) vision, depreciations have a negative impact on activities and constitute barriers to services we consider to be normal. reeve (2004) claims that the psychological aspects of disabled people’s personal experience strengthen the barriers which prevent them from participating actively in communities. they can have neither an independent life, nor control over the decisions they make regarding the way they live. it leads to discrimination of the person concerned by the society, and implicitly, to the reduction of their freedom of expression and action. johnston (1997) notices that the social model helps in finding solutions for improving the lives of disadvantaged people, by encouraging them to take control and exert their actions, tasks, and participation in life situations. he considers that rehabilitation therapists give the individual the opportunity to become emotionally stable, avoid prolonged isolation, overcome the stages of traumatic experience negation and become a socially and relationally active person. therapies themselves boost the level of confidence and assurance that there is a chance of having a normal life concurrent with a form of disability, helping them amplify their motivations and rhythm of change. the perspective based on rights provides a model which focuses on disabled people’s integration in a society which would perpetuate equal human rights, without judging or condemning those who are not even given the chance to have a decent life. miles (1999) believes that social inclusion and support of disabled people represents the basis for equal rights for everyone. observing and defending human fundamental rights, it is mandatory to involve people with disabilities in the activities of regular people and to encourage them to develop similarly to those who are capable. it implies more than a mere encouragement. 2.2. limits/barriers of the economic and social inclusion of disabled individuals the social and economic inclusion of disabled people represents a real preoccupation regarding disability worldwide (barnes, 1998). the world bank (2003) considers that institutional unification and granting of benefits in order to facilitate various people’s access to a normal life, full of opportunities and equal rights to participate to all aspects of life, is the right definition of social inclusion. this definition promotes equality and removes discrimination based on disability, eliminating the differential treatment vulnerable people receive from institutions that do not offer them the same opportunities as those of 278 e. s. caragiani other people. hence, there results the inequality between the vulnerable and especially the disabled and the people with the labor power results (barnes, 1991). disabled people wish, in their turn, for things the rest of the world benefits from normally, they want to participate to the process of normalisation. social inclusion targets disabled people’s accessibility to the public environment. accessibility is actually the first condition in reaching a real inclusion of these people, in order to stimulate an independent life. it brings great benefit to the community for people with disabilities to be exposed as much as possible to the public and have access to development within the society, even if to a small extent, but each step is a plus towards social integration and people must be aware of the existence of such people. life tries us all and with difficult times. yet, in the case of disabled people, these barriers affect them the most. there are still multiple obstacles that can make disabled people’s performance extremely difficult and even impossible: prejudice, attitude, communication, transportation, education, discrimination and so on (oliver, 1996). sometimes, several of them happen simultaneously. elimination of these barriers is very important in the reduction of extensive and complex problems. one should neither avoid or run from disabled people, nor reject them. they live in the society as being different, abnormal, inferior, marginalised, not by choice, but by the others’ perception and attitude which needs to change. society, culture and circumstances draw certain risk factors of social vulnerability, which provoke, especially in the case of poverty, an obvious situation of social exclusion by a person and even by their entire community. researches targeting the situation of people with disabilities in the context of poverty are influenced by these circumstances. even financial institutions impose them. handicap international (2006) highlighted the fact that mechanisms of exclusion in financial institutions are reflected in the percentage of disabled clients that is lower than 0,5%, considering that most countries have a percentage of 10% of disabled people. bank service suppliers consider that disabled people cannot align to the measures of protection against the risk of default they impose and do not grant them the quality of good credit. moreover, these policies are inclined to exclude the most needy members of society and disabled people own a significant share, these categories of vulnerable people being considered to be problematic. disabled people’s inclusion in the process of education is limited (jonsson and wiman, 2001). for disabled people, the barriers of the approach to teaching and participation allow us to satisfy the necessities of students who are vulnerable to the exclusion processes from the educational system. barriers in the cultures of learning and participation affect disabled children’s life and even that of the entire society. 2.3. associating disabled individuals with the labor market disabled people face exclusion from work and from a productive life, which represents a factor of discrimination, but it also represents a significant cost to the countries. among the barriers of entry into the labour market, there are: educational gap between disabled people and the able-bodied population, psychological barriers which are reflected in the negative attitudes towards this group and difficulties disabled people have in accessing the available data effectively and in participating in a selection process. in order to overcome these barriers, it is mandatory to provide disabled individuals’ access to professional training programmes, which help them to integrate economically. (coleridge, 2006). depending on the job opportunities and economic branches developed social and economic inclusion of disabled individuals. a literature review 279 in the area they live in, vulnerable people must participate in proper mechanisms in order to satisfy the local need of labour force. they can, thus, participate in professional training courses which develop their technical, economic and digital competences, by acquiring basic information on reasonable accommodation in the area of employment. the percentage of disabled workers varies greatly from one job to another, being underrepresented in certain jobs and over-represented in others. considering their inferior level of training and qualification, disabled people are disposed disproportionately as regards their access to labour market via jobs where the best paid competences are not evaluated, such as those related to abilities of informing, knowledge and communication, besides the fact that there are jobs which do not usually require previous experience. in its turn, the frequency of underemployment, to which disabled people are forced, leads them to small wages and lower security and stability. in order to enter labour market, it is mandatory to have self-respect, self-esteem and competences “and the skill discrepancy in connection with the modifying complexity of the skills required by employers and effects of 2008 economic crisis” (cristea and noja, 2018, p. 720, referred to in “the new skills agenda for europe strategy”). many disabled people do not get a job because of their lack of confidence, as they may believe that their situation would not allow them to make progress in different fields of their lives. then, if they themselves hardly appreciate their abilities, they will never search for a job, losing, thus, the capacity to make the others see their abilities. most disabled people do not get a job, as companies must have a support programme or social responsibility. there must be changes in order to instruct the staff who recruits employees, the manager, the executive, so that we promote awareness of disabilities. here arise the perceptions, attitudes and assessment by colleagues in their work group, which can negatively influence disabled people’s expectations, perceived ability and performance, all these causing, in their turn, real effects on their self-perception and judgement about themselves, negatively affecting the level of self-efficacy, emotional adjustment and their performance. they must understand that disabled people can work in the best possible way even if they have a different physical aspect or face difficulties in using transportation means. in the event in which disabled individuals are hired by a company, they may face a working environment which is not adapted to their needs or employees end up believing that such people are not productive enough for their companies and not take in consideration the latter’s promotion or hierarchic growth (arthur and zarb, 1995). most entrepreneurs, who are not familiar with the conditions or have no knowledge of how to cope with them, reject disabled people. many countries worldwide have now set as their main aim to offer disabled people opportunities to enter labour market. political regulatory and strategic frames with a positive impact include measures of active integration in the formal sector. there is still the case in which society members deal with the situation when they are confronted with extremely profound and complex deficiencies and, thus, cannot cope with the interactions and requests imposed by the economic activity, thus, never being able to get hired. from abberley’s (1999) viewpoint, development policies and strategies that support the employment of people with disabilities, may still risk to marginalise those who might never be hired. it goes without saying that disabled people are often unsuitable or unemployed, as compared to able-bodied people, and employment rates in most countries continue to be disproportionate from the general population (barnes, 1999). he also underlined the fact that positive attitude and lack of constraints on 280 e. s. caragiani disabled people must not depend on their success in the economic activity, the personal plan remaining distinct from the professional one. these problems must be discussed by specialists who provide support and assistance, hence the necessity of the idea according to which disability can influence the ability to be integrated into social life and that it should not have severe repercussions, which require a significant degree of support and assistance. there are people who have a form of disability from birth and people who acquire it at a certain point in their life. even though people display a disability in both cases, they face situations differently, because there are different stages of life which affect the rest of their lives. although it has enough consequences for life, a disability which is acquired at a certain point in life, at an older age, gives that person the possibility to accumulate aptitudes, seniority and experience in the professional life up to that age (powers, 2008). it is completely normal for an individual, after having suffered an accident or a disease, which put them in a wheelchair, to feel incapable of living on their own and consider that they should constantly depend on another person on a daily basis, and, thus, it is essential to analyse this experience individually, not homogeneously. local factors may support these situations in order to modify the conditions of development and socialisation totally. enfield and harris (2003) consider that the difficulties which prevent one from professional development are of three types. those with the greatest impacts are related to the physical environment, followed by those imposed by institutions and those related to attitudes and each person’s degree of improvement. these barriers must lead people to different types of rehabilitation in order to become less dependent on their family members, such as their spouses, children or parents. these barriers are normal and expected, however, they are neither clear, nor in any specific order. people differ in the way in which they overcome these inconveniences. some do better than others, some may skip a stage or overcome them in a different order. as regards the physical environment, barriers are structural obstacles in natural or man-made environments, which obstruct mobility or access (braithwaite et al, 2008). proper transportation, elements of technology and means of providing information are essential to disabled people’s social and economic integration. helaakoski and merilainen (2001) distinguish the obstacles between the entrance in man-made environments and accessibility to this environment without another person’s help. they argue that the manner of construction in developing countries did not take into account the two aspects, and, thus, there are stairs and turns which impede access to buildings or sidewalks of people with disabilities. arthur and zarb (1995) also focus on the improvement of life quality by a simultaneous accomplishment of types of accessibility in order to facilitate employment. with a view to facilitating unhindered access to a job, the code of practice on handling disability at work (ilo, 2001) suggests the presence of the following: accessible means of providing information, adapted toilets, adapted laundries, individualised intervention measures, audio and video life-saving signals and first aid, signal lamps and buttons. in the future, the insurance of people’s physical accessibility to the socio-economic infrastructure must be covered since the initial stage of project. berman-bieler (2010) considers that adapting infrastructure to disabled people’s needs is pricier than their suitable design in the initial stage. communication barriers are also barriers created by the environment, which affect employment and must be supported by a series of services in this respect. they affect all human senses, and information must be transposed in various communication means in order to satisfy all forms of disabilities (miles, 1999). social and economic inclusion of disabled individuals. a literature review 281 albert et al. (2004) underline the fact that proper technological support in the shape of equipments and services can be used in order to favour the functional capacities of disabled people in their independent life. they claim that there are relevant and important technological resources especially designed to allow disabled people’s accessibility. metts (2000) believes that disabled people can access technologies of communication and information, such as computers or tablets. these means do not have as their main aim to provide disabled people’s accessibility, but they have gradually incorporated several elements, applications and innovations which favour inclusion, which is more accessible that the design of specialised technologies. institutional barriers are developed by administrative tools and capacities and work procedures of specialised institutions in the society (enfield and harris, 2003). institutions do not exercise their social responsibility appropriately towards the disabled people’s needs, they are often not taken into consideration and face discrimination from authorities (barnes, 1991). institutions which are especially relevant for economic empowerment include education institutions, professional training, and financial institutions, such as banks. arthur and zarb (1995) describe the discriminatory processes at work, which can affect security at work, chances of promotion, but also prevention of entrance into the labour market. macfadyen and ncube (2006) also comment upon these discriminatory processes, noticing that, although a young disabled person succeeds in finding a job, they may be given lower wages or benefits. 3. discussions strategies of economic empowerment for development, as coleridge (2006) notices, should take into account and be influenced by the local cultural and economic conditions. a rapidly ageing global population and chronic health conditions favour a future rise of the number of disabled people. thomas (2005) points out that the older people get, the more accentuated are the reasons of disability growth. moreover, progress in the field of medicine can generate better survivor rates for disabled children, leading to a rise of the number of people who need daily assistance from others (world health organisation, 2001). while the progress in the promotion and protection of disabled people’s rights is of paramount importance for social inclusion, but also for the economic development, we must not overlook the fact that increasing number of disabled employees can benefit the economy of the entire society. powers (2008) highlights that the increase in the stage of disabled people’s integration into the labour market raises both the quantitative level of supplied services and goods, and the services and goods demanded, contributing, thus, to the general welfare, in which there is an increase in the demand and supply in economy. this idea is considered to be an incertitude and it is supported by the statistics made by the world bank in 2000, which claim that the global gdp to which other important economic variables are compared is diminished annually because of the disability, with values between 1,37 trillion usd and 1,94 trillion usd (metts, 2000). studies on this topic were conducted also by buckup (2009). all eu states have switched to the recalculation of the historical values of the main macroeconomic indicators. buckup presented a new methodology of calculating the main macroeconomic variables by using data on prevalence disability rates and the 282 e. s. caragiani employment rate in ten lowand middle-income countries. buckup (2009) showed, thus, that the economic loss resulting from the exclusion of people who have a form of disability from work is between 3% and 7% from gdp. these studies emphasise the high costs of the lack of disabled people’s participation in economy. it all happens because of the disabled people’s attitude and the attitude towards disabled people, because they deal with several difficulties during the employment process. the focus must be on the group’s general integration in the society as much as possible. disabilities are highly diverse. while some health problems related to disabilities result in poor health and major needs of healthcare, it does not happen to others. some disabled people have a greater need of care, affecting also the life of close persons, family, obliging them to withdraw from their job in order to offer them the necessary support. (braithwaite et al., 2008). most vulnerable people cannot have an independent life, have no control over their everyday life. but there are also people who do not need any help or need others only for complex problems, such as money management, not for everyday life activities. as such, the author considers that disabled people’s economic integration and access to a job market are based on the fundamental human right which promotes reforms which guarantee an appropriate due process and ensure the right to equality and non-discrimination. disabled people’s rights provide a framework in order to meet the needs of survivors and provide full compliance with their human rights and observance of their dignity. respecting them represents a tool in creating sustainable economic growth. 4. conclusions the author can observe from literature the fact that disability is a complex phenomenon, reflecting an interaction between the properties of the human body and those of the society it lives in. disability has been regarded in very different ways over the years. the society we live in now has made great steps towards the understanding of disability and its relation with the environment. overcoming the old prejudices related to disability facilitates social interventions, broadens concepts about people with the greatest limitations and modifies the vision of the human being, harnessing difference and diversity. moreover, it strengthens the idea that nobody lives in exclusion, as we are looking for equal opportunities regardless of age, gender, ideology, ability and interests. it is true that the society is increasingly informed about disability, but we must not forget that it is still a language which lacks respect and discriminates. results prove that disabled people have a much lower level of economic and social inclusion and imply the fact that socio-economic policies should focus on disabled people’s heterogeneity, depending on the respective transitions in disability and their duration. local employers should participate in the development of competence development programmes, as required in the “matching” model of the winner of the nobel prize in economics, pissarides (2010, p. 397), respectively “a process whereby both workers and firms search for each other and jointly either accept or reject the match seemed to be closer to reality”. the author pointed out the importance of different approaches in the development of abilities and tied up that it is mandatory to pay attention to which abilities disabled people should have in order to increase their opportunity of being hired. social and economic inclusion of disabled individuals. a literature review 283 it is a loss for the society that millions of people in developing countries are not provided the means to fulfill their wishes or fully contribute to the societies they belong to. the potential of local communities, including disabled people’s families, should not be underestimated. research, via viable and sustainable solutions, will contribute visibly to the continuous fight to improve life conditions for all disabled people. thus, the present research constitutes a valuable theoretical framework for further research regarding the empirical analysis of the relation between disabled people and economic and social welfare, distinctly analysed for developing and developed countries. acknowledgement: this work was supported by the grant pocu380/6/13/123990, co-financed by the european social fund within the sectorial operational program human capital 2014 – 2020. references abberley, p. 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(2005). disability, poverty and the millennium development goals: relevance, challenges and opportunities for dfid. dfid report. retrieved from: www.disabilitykar.ne accessed on: 16 september 2019. wearden, g. (2019). nobel prize in economics won by banerjee, duflo and kremer for fighting poverty. the guardian, 14 october. world bank (2000). attacking poverty. world development report. washington dc: world bank. retrieved from: http://web.worldbank.org accessed on: 24 september 2019. world bank (2003). social analysis sourcebook.social development department. retrieved from: www.worldbank.org/socialanalysissourcebook/socialanalysissourcebookfinal2003dec .dpdf accessed on: 17 september 2019. socijalna i ekonomska inkluzija osoba sa invaliditetom. pregled literature imajući u vidu ekonomski, društveni i politički život ranjivih grupa, glavni cilj ovog istraživanja je da se osvrne na vezu između socijalne i ekonomske inkluizije osoba sa invaliditetom i ekonomskog razvoja. za razliku od drugih radova, autor je istakao različitosti osoba sa invaliditetrom među različitim državama-članicama eu. metodologija istraživanja se sastoji u prikazu postojeće literature iz ove oblasti, ne bi li se sastavio integrativni i potkrepljeni pristup problem osoba sa invaliditetom. glavni rezultati rada donose sadržajni doprinos trajnoj borbi za poboljšanje životnog standarda osoba sa invaliditetom. stoga, rad predstavlja pre svega osnovu za buduća istraživanja, za produbljivanje makro-ekonometrijskoh napora, da bi se podržala socijalna i ekonomska inkluzija osoba sa invaliditetom, ponovnim promišljanjem postojećih strategija i politika. ključne reči: socijalna i ekonomska inkluzija, osobe sa invaliditetom, održivi ekonomski razvoj, pregled literature plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 15, n o 1, 2018, pp. 85 96 https://doi.org/10.22190/fueo1801085d © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper functioning mechanism of bitcoin * udc 336.744 004.738.5:339 aleksandar đorđević*, miloš todorović university of niš, faculty of economics, niš, serbia abstract. the connection between financial innovation and information technology industry has provided and kept the crypto currencies for some ten years on the market, a kind of offset of monetary evolution after the introduction of virtual, electronic and digital money. although their essence is still wrapped up under the veil of secrets, the facts show that the value of bitcoin as the first crypto currency has a rising trend, and that an increasing number of firms and individuals are deciding to use it. this will result in the emergence of over 1000 new crypto currencies. this paper explains the emergence and functioning of the bitcoin, its characteristics and functions, the benefits and risks that it carries, as well as possible scenarios of further development of the international monetary system with crypto currencies. key words: virtual currencies, crypto currencies, bitcoin, money functions, international payments jel classification: e40, f30, o30 introduction the end of the 20th and the beginning of the 21st century in economic history will be recognizable by the final victory of liberal capitalism and the superiority of individualism over the collectivist structure of society. if we can summarize these processes in two words, they could be reduced to privatization and globalization. an indispensable requirement for these processes was an information technology revolution that compressed time and space. but it has also created a parallel, virtual world that is increasingly present received november 14, 2017 / revised december 10 / accepted january 24, 2018 corresponding author: aleksandar đorċević * phd student at university of niš, faculty of economics university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: djaleksandar91@gmail.com 86 a. đorđević, m. todorović in both real and financial flows. the combination of privatization and informatics has also created electronic money, crypto currencies and perhaps even the privatization of monetary flows. this is exactly how the idea of a currency that is totally independent of central and commercial banks, monetary authorities, different rules and regulations of the state arose. the economic motive for the emergence of the crypto currencies is very strong given that the most profitable export product of all time is the us dollar and that it has brought huge profits to the united states. if the private sector took on many jobs and profits that traditionally belonged to the state, why would not this happen with the profit brought by the issuance of the currency? who is the creator of the crypto currency, the state or individuals? the question is even more intriguing if it is known that the creator of the crypto currency is unknown, and that a lot of capital, time and computer work should have been invested in the project. finally, will the world accept the new international monetary system built on a completely virtual basis? 1. fundamentals, types and specifics of the crypto currencies the analysis of the etymology of the word "crypto" leads us to the greek language in which the adjective "kryptos" means hidden, secretive. in most indo-european languages, even in serbian, this prefix is used to construct a compound word with the meaning of hidden or secret. according to this logic, crypto currencies would be hidden or secret currencies. and indeed, these currencies exist only in the hidden, virtual world of information technology and computers. that is why the biggest mystery will remain how this unreal money came in touch with real goods. the legend says that the first transaction with crypto currencies – bitcoin was done in jacksonville, florida on may 22 nd , 2010, when 10.000 bitcoins were offered for two family pizzas (zohar, 2015). the amount of 10.000 bitcoins today is worth over $60 million, and then it was assumed that their value was only $100 with a suspicion that they could be exchanged for a real currency at all. so, with crypto currencies it is not known either who issued them or whether there is any real value behind them. by making a parallel with real assets, we could say that the crypto currencies are genetically modified currencies because they are present in international payments, but it is unknown what effects can they cause over long-term use. the intention of the creators of new virtual currencies (crypto currencies) is to be used within a specific virtual community, within a specific web site or a network of users who have special software for managing this currency and making payments. each new virtual currency has a certain type of rules for its creators about where and how it can be used as well as the specific technical infrastructure in which payment is made. the virtual currency itself, a special set of rules and technical infrastructure together form a small payment system, also called a virtual currency scheme. in closed schemes, virtual currency can neither be bought nor sold (digital currency) but only in some way earned and utilized within that system (for example, the computer game world of warcraft and gold coins in that game). if a virtual currency can be bought with a national currency, but cannot be subsequently replaced for the national currency, it is a one-way flow scheme (a coin example on amazon.com). such crypto currencies are considered non-convertible. in case when a virtual currency can be bought and sold outside a particular website, it is a two-way flow scheme (convertible crypto currency). as an example of such a double-flow scheme, bitcoin appears. however, these categories can overlap (segendorf, 2014). therefore, virtual currencies are those that do not exist in the form of cash, functioning mechanism of bitcoin 87 but they perform some functions of money, most often the unit of account and function of medium of exchange. as virtual currency forms, digital currencies operate in closed systems and cannot be included in real financial flows. electronic money is the one that is kept on accounts in the form of files (electronic, not on paper). finally, the crypto currency will also be a form of virtual currency, not being emitted by the central bank, and it will be in a specific way (by encrypting) the transmitted payment messages. it is interesting that the international monetary fund considers virtual currencies as a form of digital currency (dong et all., 2016), which is in some ways illogical because virtual currencies existed even before the informational revolution. even the imf itself used such unit of account special drawing rights (sdr). further differentiation is done depending on whether the crypto currency is centralized or decentralized. as with banknotes and metal money, the payment with crypto currencies is done by changing the ownership of the means of payment. therefore, the ownership structure must be registered somewhere, otherwise the one who has the crypto currency would try to use it more than once. the centralized crypto currency scheme has a centralized system for verifying and executing transactions mainly by the issuer. in practice, the issuer manages all payment orders. in a decentralized virtual scheme, such as bitcoin, transactions are verified and executed through a network of users who actively participate in it. the right to register an event is delegated to participants in the network. decentralized virtual currencies are often based on the exchange of encrypted (coded) messages and are therefore called the crypto currency. this provides anonymity and security, and these are the key principles under which the bitcoin, the first and the most famous crypto currency, functions. bitcoin is a decentralized virtual currency scheme with two-way flow and a crypto currency (peng, 2013). it is designed to be independent of governments, banks and other institutions. it can essentially be purchased on special websites where it is exchanged for national currencies. the exchange rate of bitcoin is determined as a function of supply and demand on the market. bitcoin payments can be made between any entities that possess the appropriate software on a computer, smartphone or tablet. this software is called a wallet. however, bitcoin is not digital cash, since these are not digital value units which are stored on a computer, but it is considered as a certain asset in the account. when a payment is made, the payer does not send digital notes and coins to the payee, but the account of the payer is debited, and it is claimed by the receiver`s account. payment is done by exchanging encrypted messages and it is verified within the user's network. bitcoin payment is not executed in real time. it takes up to 10 minutes for the payment to be verified and the general rule is that it usually takes up to six verification circles to ensure that the payment is added to the list. sometimes obtaining verification for payment can take up to one hour. depending on the situation, this can be understood as a short but also as a long period of time. it should also be noted that due to the sharing of technology and the verification process, there is no central data warehouse, but each network user has the information on all parts of the data. the concept of "electronic money" should not be confused with the crypto currency. electronic money is an electronically stored monetary value representing an issuer's claim, it has a value equal to the amount for which it was purchased, and it is accepted by others, not only by the issuer. crypto currency must be accepted by a sufficiently wide circle of companies. precisely because of this, the bitcoin is not electronic money, since it does not represent the claim of the issuer. crypto currency can fulfill some of the aforementioned criteria, but not each one of them. this refers to the fact that most of the 88 a. đorđević, m. todorović crypto currencies are not accepted by a sufficiently wide circle of recipients. it is also not possible to always exchange the crypto currency for the national currency and they are expressed in different units as well. currency is usually controlled by its issuer, however, here there is no supervision and the issuer is a non-financial company, so it is not possible to gain control over crypto currencies. the oldest crypto currency is bitcoin. the etymological analysis of the word bitcoin indicates that it represents a compound composed of the word bit which denotes the smallest unit of information in the computing (usually required to distinguish two mutually exclusive states, often represented as one (1) and zero (0), yes/no, true/false, has/no voltage, etc.), and the word coin which is usually used to denote a metal coin of mostly smaller denominations. bitcoin is created with the appearance of the original article on october 30 th in 2008, issued by the author under the pseudonym satoshi nakamoto. it has never been discovered who was the person or the team of people who actually created bitcoin. here exists a doubt about the connection with the world financial crisis that took place in 2007, and in 2008 spilled over into the real sector and turned into the world economic crisis. however, it is unlikely that such a complex code system could be created in such a short time. it is more likely that this system was created and that it waited for a convenient moment to enter the world stage and the crisis just created the ambiance. due to uncertainty in the banking and financial system, the electronic crypto currency appears, which according to the original published article is not controlled by any institution but by the users themselves. this seems attractive for the placement of capital, circumvention of tax obligations and banking fees, as well as for secret transfers. what is bitcoin exactly? opinions here are widely divided. one group of authors considers bitcoin as a brand new, virtual currency. the second group says that in fact it is a kind of digital good, while some place it a means of international liquidity, whose popularity in recent years has been steadily rising primarily thanks to the ever more massive use of this crypto currency. it is interesting that there is no answer to several key questions about the bitcoin, that the whole story is covered by a veil of secrets, despite the fact that its share in transactions has grown for years. bitcoin allows payments via the internet directly with a peer-to-peer payment without the involvement of financial institutions and without their fees. what makes this currency more intriguing is the increasing number of clients operating in the real world and accepting payments in bitcoin in return for products or services. there are thousands of websites that accept bitcoin: in december of 2015, there were approximately 200,000 daily bitcoin transactions (carrick, 2016), but this volume is tiny compared to other currencies. probably the greatest popularity of the bitcoin is given by numerous celebrities from the world of business who optimistically look at its future. richard branson, a billionaire and founder of virgin airlines even announced the acceptance of payments in this currency for his new travel project into space. then there is bill gates, who still does not accept this currency in exchange for his products, but he predicts that it will have bright future. it is possible that all this is part of a wider marketing campaign, so this inevitably poses some questions: who benefits from bitcoin? are certain brokers who sell this currency, the users themselves, or maybe it companies that sell equipment to use and create bitcoin, earning the most? is there latent support by some countries towards this currency and what is their ultimate motive? naturally, there are bitcoin skeptics who believe that it is a pyramidal structure, a monetary fraud on the global level, and that the question is when the organizers of the game will functioning mechanism of bitcoin 89 withdraw from the story, and this virtual monetary structure will collapse in one day. the most reputable banks in the world kept their deposits anonymous, while the crypto currencies hide the transactions even from the banks that showed their unreliability in the mortgage crisis. high volatility and the possibility of speculative deals on stock exchanges, the possibility of avoiding taxes, money laundering and financing of secret actions (even terrorism) will result in an increase in the use of these currencies. after the bitcoin, other crypto currencies have been created, but bitcoin remained dominant, measured by the scope of the transactions and market capitalization. more than 1000 currencies seek their place in international monetary flows. all of them are called with one name – altcoin (alternative coin) and they are trying to compensate the observed defects of bitcoin. long-lasting market share of bitcoin that was over 90% fell in 2017 to below 50%. the highlight will be the creation of crypto currency derivatives that will allow additional speculation considering the high volatility of crypto currency value (brito, 2014). 2. bitcoin performance bitcoin is conceived as an electronic crypto currency with a final offer of 21 million units. there is a complex system for creating these currencies, the literal translation would be mining the currency. a block of 25 bitcoins can be formed over a period of 10 minutes (nakamoto, 2008). a block arises when a series of data is found, to which a special algorithm is applied, and it creates a precisely determined specific pattern. the size of the block decreases with the amount of already "mined" bitcoins, and finding new bitcoins is getting harder. the emission of the bitcoin is fully planned, i.e. programmed, and its management is assigned to the network itself, that is, to those computers that perform the verification of transactions. such an algorithm is chosen because it approximates to a large extent the growth rate of extraction of certain ores such as gold, since the amount of bitcoin that can exist at one point in the system and the maximum amount that can be "excavated" are limited. it is supposed that the bitcoin should evolve like gold. when its excavation becomes very difficult, its value will be determined by the amount of transactions being executed and by the demand for this currency. some believe that this is a significant financial innovation in the last few years, and what certainly attracts attention is the sudden rise in the price of bitcoin. the final goal of bitcoin is to become an alternative to existing payment systems. it provides cross-border transactions without interference by states or central banks, as well as without commercial banks. in order to use bitcoin users must have an id number i.e. a public key and a "private key" for verification on the public ledger, also called a blockchain. individual users – "miners" use the power of their computers to verify the credibility of the transaction by solving technically complex problems. in return, the first user who finds the solution to the problem is rewarded with a certain number of bitcoins, being added to the total number of bitcoins, thereby encouraging the creation of this currency. the preprogrammed algorithm adjusts the complexity of transaction verification with the computer to ensure that each transaction takes an average of 10 minutes to verify. this same algorithm also sets the total supply of bitcoin which is limited to 21 million and programmed not be 90 a. đorđević, m. todorović "excavated" by the year 2140, although it does not show the exact path of growth of this crypto currency. certain randomness when verifying each transaction is inevitable so verification time will vary. there are two ways to become the owner of bitcoin, one is the aforementioned – mining, while the other is purchasing the already created bitcoins with real currencies, on many stock exchanges that operate around the world and trade with bitcoin. in serbia, there are three atms where you can buy bitcoin. 3. benefits and risks for bitcoin users bitcoin and other crypto currencies record large oscillations in value on both daily and annual levels. the fact that, globally speaking, the trend of demand for bitcoin is growing indicates the benefits that the transactions with this crypto currency are bringing. but the veil of secrets, as well as the lack of any guarantee, also carries the risk of converting real into the crypto currency. benefits are mostly related to anonymity or integrity, convenience and speed of transaction execution, and a maximum reduction in the cost of payment. as a noted shortcoming, mostly mentioned is the lack of any kind of user protection. the most important characteristics of the bitcoin could be indicated as (segendorf, 2014):  payment by bitcoin covers the identity of the participants in the transaction. hence, only the person who pays and the person to whom the payment is done know the transaction. in this way, banks that guaranteed the secrecy of data and transactions were bypassed. even the users who confirm the transaction receive only the codes, but not the names of the participants in the payment.  bitcoin is not regulated by any national legislation, and no appeal can be made to these business transactions. the whole system rests on the users’ confidence. there is no central emitter of bitcoin because the value units are created automatically in the network itself. bitcoin does not represent a claim from a party, but its value is entirely based on the expectation that it can be used in further transactions. therefore, the value is very sensitive to changes in these expectations.  the user also has a risk of losing value either by deceit or accidentally by destroying hardware. the bitcoin wallet and encryption keys are stored on the media (hard disk). its damage inevitably leads to the destruction of the wallet. also, by hacking a computer, access to the wallet and the bitcoins in it can be gained. that is how mt gox was hacked, the world's largest virtual currency exchange company, located in japan, that has been offering services around the world. it is suspected that the hackers manipulated a list of payments, so it seemed like the payment did not reach the beneficiary, and mt gox then made a repayment which ultimately led to the fact that it was left without bitcoins in the long run. the company had difficulty with paying off at the end of 2013 and it completely discontinued payment at the beginning of february 2014. it is suspected that nearly 850,000 bitcoins were missing. according to the current value, this would amount to over $2.5 billion. in canada, there was also a $600,000 theft from a company flexcoin that worked with bitcoin. there are three main types of benefits that virtual currencies like bitcoin bring to society. primarily, the payment is accompanied by lower transaction costs compared to the traditional payment method. this can bring significant savings to the users of bitcoin because payments will be exempt from banking and other fees. another significant advantage of the crypto currency is the introduction of an alternative method of payment in relation to, for functioning mechanism of bitcoin 91 the time being, the only one officially possible through the banking system. this competition will also affect the reduction of the prices of banking services. existence of the alternative is always beneficial to market flows. third, as the it revolution has eased and lowered the cost of transferring money and capital, so it might happen that the crypto currency is an innovation that will technically and economically improve international business. permanently improving the programs on which the crypto currencies are based makes it truly possible. crypto currencies carry a certain risk for the economy and society. first, there is a risk that potential distrust in bitcoin can be expanded and lead to distrust in other retailers. this can further lead to a massive rejection of this type of payment by users and companies and the return to more expensive and slower payment methods. second, if key market participants such as banks and financial companies hold a large amount of bitcoin, it can expose them to significant financial risk. if a fall in value occurs, there may be a halt in the functioning of the entire system. certainly, one of the negative sides is that these virtual currency schemes, like bitcoin, since they allow anonymous payments, can be used for money laundering and for criminal activities. an example of this is the silk road web site offering drug and criminal services in exchange for bitcoins. it was closed in 2013 by the fbi. currently, bitcoin is mainly used for relatively low value payments and for speculative deals on the stock market. a drastic rise in stock prices certainly contributed to the increase in its market share, but there are also factors that act in the opposite direction. those are:  lack of user protection or control; legal regulation of this area would, on the one hand, reduce the risk and favorably affect the trust of clients, but would also bring a loss because it practically contradicts the essence of the bitcoin i.e. independent functioning in relation to monetary and executive authorities.  bitcoin is not suitable for all types of payments; to verify the transaction, it usually takes around ten minutes, but sometimes even more than an hour which makes it unsuitable for some common payments (for example, paying cash at the supermarket).  variation of interest in the extraction of bitcoins; if there is no more motive for mining bitcoin, the whole system can easily collapse. every day, there is an ever-decreasing amount of bitcoin at the disposal of miners, which deteriorates the ratio of investment in hardware, electricity, and other costs relative to the value of mined bitcoins;  permanently increasing the list of executed transactions; the public ledger currently has over 140 gigabytes. this makes the network bulky. the incentive to manage such an extensive list has declined, and the number of those who own it on their machines has been reduced. if this trend continues, bitcoin can become more centralized. if the miners’ incentives disappear, there is a risk of halting the decentralized transaction verification and thus making it impossible to use bitcoins.  the emergence of other crypto currencies; it should be kept in mind that bitcoin is the first, but not the only crypto currency in the market. currently, there are over 1000 crypto currencies and the number is constantly increasing. some of them took bitcoin`s structure as the basis and then modified or improved it. others simply wanted to exploit and profit from the attention caused by the bitcoin by introducing better solutions for its perceived defects. but, no doubt, they all compete with one another, seeking greater market share. 92 a. đorđević, m. todorović 4. functions of bitcoin if the use of bitcoin as an international liquidity asset is being talked about and it is conditionally referred to as a currency, it is necessary to see if it could perform the function of money. the three basic functions of money are: medium of exchange, unit of account and store of value. these three functions distinguish money from other types of property in the economy, such as shares, bonds, real estate and art works. the exchange of goods and services is maximally facilitated by the discovery of money, i.e. its universality. this explains the function of money as a means of exchange (payment means). but the money itself will become the object of the exchange and will also perform the function of the trading asset. the function of the accounting unit is exhausted through the unit of measurement. calculating and presenting values and debts is practically impossible without the accounting function of money. finally, money with its universality allows to store value and to preserve wealth that can be replaced at any moment for any good or service. to serve as a medium of exchange, bitcoin must be accepted as a means of payment for a sufficiently large number of goods, services, by individuals and legal entities that will accept it as a symbol of value. namely, fiduciary money is accepted as a medium of exchange for products and services if the market participant is certain that other participants will also accept and use this asset. however, unlike national currencies behind bitcoin there is not one sovereign institution that guarantees its value. so, if it wants to function as a means of exchange, it has to rely on the individual expectations and confidence of the market participants who decide whether to accept it or not. from the very beginning, its use was limited to e-commerce sites, primarily on the purchase of products and services of lower values. however, with the rise in the value of bitcoin the circle of participants in the market that accept this crypto currency is expanding. in order to protect themselves from the high volatility of bitcoin, sellers are expressing all the prices in dollars, while prices in bitcoins are calculated every 10 to 15 minutes, since that time is necessary to create a new block of bitcoin and potentially influence on the change of exchange rate. some sellers point out how much is saved by buying with bitcoins, and what sellers are doing is reducing taxes and expenditures that are usually paid to banks and financial institutions. it can be said with certainty that bitcoin fully functions as a means of exchange in the circle of partners who have accepted this crypto currency. but, for the time being, it does not possess the universality as the real top currencies do. the accounting and the function of keeping value for bitcoin and other crypto currencies are under the big question mark. the reason for such a claim lies in the high volatility of the crypto currency exchange rate. that is why sellers who accepted bitcoin as a means of payment immediately convert it into a real currency just after the transaction is completed. even the prices are generally expressed in real currencies, and only the payments can be realized by bitcoins. rogojanu and badea (2014) noted that one of the challenges with bitcoin is that the number of bitcoins is limited to 21 million, but van alstyne (2014) pointed out that fractional ownership of a bitcoin is possible; therefore, the 21 million is not a limiting number. compared to national currencies whose basis is the real value of monetary gold or the guarantee of a central bank that covers trust in fiduciary money, trust in the crypto currency should be built by the market participants themselves by massively accepting the crypto currency. because of this, bitcoin is also subject to speculation and prone to price "bubbles". high volatility, numerous headlines about large speculative investment in bitcoin, as well as possible hacker attacks make it not so desirable for the store functioning mechanism of bitcoin 93 of value function and the accounting unit. however, many currencies incur extreme volatility and are still considered currencies (dornbusch et al., 1995). beyond the crypto currency, there is not one institution whose priority task is to fight for the stability of their value as the central bank does for the value of national currencies. speaking of crypto currencies, all participants are motivated exclusively by profit, which in case of a major change in exchange rate can result only in inflating the bubble. large oscillations of bitcoin value can be characterized as ideal for speculative stock trading. given that the supply is relatively constant, planning the future business activities of speculators is facilitated to only following the demand. only in may 2017, bitcoin increased its value from about $1200 to $2400 in just ten days. this will be a sufficient motive for the emergence of other crypto currencies and their listing on the stock exchanges. therefore, as the dominant function of crypto currencies and bitcoin is the exchange in which they represent goods in the hands of speculators on the stock exchanges. the reason for such a conclusion is clear – such use of the crypto currency can make the greatest profit by taking the appropriate risk. the number of profit-oriented individuals is likely to be the reason for expanding its usage in practice, as well as the unexpected rise in the value of bitcoin and other crypto currencies. there is also a question whether bitcoin is a medium of an international liquidity used for international payments. since it is necessary to have partner's consent for paying with bitcoins, this crypto currency could be declared as a medium of international liquidity. but it does not meet all the necessary conditions for performing international payments, since these transactions are not yet recorded in the balance of payments. of course, it is a matter of time when this area will be regulated by both national legislations and the international monetary fund. 5. movement of bitcoin value the value of bitcoin depends exclusively on the market, i.e. on offer and demand. the maximum supply on the market is 21 million bitcoins, but is currently it is lower (around 16 million), since the number of bitcoins in circulation can be increased exclusively by "mining". additionally, it is possible to control the number of mined units through software, but that would, on the other hand, abolish the decentralization of the system. fig. 1. bitcoin value in us dollars over time source: coin desk 94 a. đorđević, m. todorović from its very appearance, almost until 2013, the value of bitcoin was negligible and was used by technologically enthusiastic people as well as those interested in cryptography. however, after that, there is an immense jump in value, especially at the end of 2013, when the price on some stock exchanges reached the maximum at that time of 1,000$. then, after reaching the peak, numerous fluctuations occurred, but the value did not fall below 250$. up until 2014 the trend of rapid growth in the value of bitcoin was recorded. steepest drop in value was recorded in 2014 (about 50%) due to a hacker attack, which led to a loss of confidence in the entire system. since 2015 there has been a steady increase in the value of bitcoin. as early as march 3 rd , 2017, the price of bitcoin exceeded the price of gold. on that day, the ounce of gold reached 1233$, while bitcoin was worth 1290$. bitcoin was split into two derivative crypto currencies, classic bitcoin (btc) and bitcoin cash (bch) on august 1 st , 2017. as a result, price climbed to 3.000$, then 4.000$, and it peaked on september 1 st , 2017, when a bitcoin was worth 5.000$. but on september 12 th , 2017, the price of bitcoin sharply declined because of a slump in the chinese market as it represents almost one quarter of the world's global bitcoin market, and the price dropped to $2,900 reaching its recent bottom. after recovering from this, price reached an all-time high of 7.850$. currently the value is fluctuating between 6.000$ and 7.000$. as demand almost exclusively affects the value of bitcoin, it is possible to assume that the intention of the creators of this currency was to offer a very small quantity to the market and to make the market projected shallow. this means that a relatively small number of new clients could significantly increase the percentage of demand and with a presumption of stable supply would lead to a drastic increase in the price of bitcoin. it would have a double effect. on the one hand, this would diminish the suspicions of bitcoin that followed it from its creation, while on the other hand it would be a magnet for speculators on stock exchanges, which would further increase the demand. thus, these two processes would feed each other, which would result in a constant increase in the value of bitcoin. in any case, whether this strategy was planned or not, it has borne fruit and the value of bitcoin has a growing trend with occasional falls that are necessary for popularity with speculators. conclusion based on the most important features of the crypto currencies (user anonymity, elimination of tax and payment fees, the risk of converting real currencies into virtual ones for which no one offers any guarantees, high volatility of value), the future of bitcoin and other crypto currencies can take several directions:  an optimistic scenario assumes an increase in the popularity of bitcoin that would lead to further growth in value, provided that the maximum amount of bitcoin that can be found on the market remains limited to 21 million units. but that would also mean the pressure to increase the supply that is probably not a problem to do from the software point, but would open doubts about the manipulation of the creators with the entire system. also, the risks from losing state control over the monetary and fiscal policy measures are automatically opened up. functioning mechanism of bitcoin 95  another possibility is the strengthening of other crypto currencies to meet the growing demand. there is already a serious competition between the crypto currencies for acquiring clients who are willing to take the risk and do business with virtual money without the guarantee of any institution;  the third scenario is advocated by supporters of the conventional monetary system concept. according to them, it is a matter of time when the creators of crypto currencies would make a fatal error that would eliminate them from the market, or when the organizers of the game from the top of this pyramidal structure would withdraw and the whole building would collapse in one day. this could happen even if serious frauds were detected in payments with these currencies. the blast that would occur around the bitcoin would resemble a real estate bubble in america that burst in 2007. many also compare bitcoin with the "tulip mania" that was actual in the netherlands during the 17th century. pessimists assume that one steep decline in the price of this virtual currency would lead to its general abandonment, huge sums of money would be lost, and bitcoin would become just another interesting story;  the most optimistic view is that these currencies will take a firm position in monetary relations. this does not mean that they will completely suppress the national currencies, and especially the real value of gold, as the emergence of electronic money did not completely expel the cash from circulation. it could be said that, according to this scenario, the crypto currencies would acquire their stable share in the portfolio of assets of an individual, firm, and perhaps a state. the longer the crypto currencies remain on the market, the states would be under greater pressure to legally regulate this area. it is hard to believe that through crypto currencies private interests could be embedded into monetary policy, which should protect the interests of the state. but hasn’t the federal reserve system, which has been functioning as a central bank of the united states, since its creation, been functioning as a private institution? perhaps the monetary system should be put into the function of generating profit and private interests so that liberal capitalism can reach its maximum amplitude. perhaps this is the only way to prove that economy and society, as well as nature, do not rest on extremes, but that they are only passing points, and that the essence of survival and development lies only in movement. references brito j., houman b. shadab & castillo a. 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(2015). bitcoin: under the hood. communications of the acm, 58(9), september 2015, 104-113. acm new york, ny, usa. mehanizam funkcionisanja bitkoina spoj finansijskih inovacija i informatičke tehnologije je iznedrio i već desetak godina na tržištu održava kripto valute, svojevrstan izdanak monetarne evolucije nakon uvođenja virtuelnog, elektronskog i digitalnog novca. iako je njihova suština još uvek obavijena velom tajne, činjenice pokazuju da vrednost bitkoina kao prve kripto valute ima rastući trend, te da se sve veći broj firmi i pojedinaca opredeljuje za njegovo korišćenje. to će rezultirati pojavom preko 1000 novih kripto valuta. ovaj rad objašnjava nastanak i funkcionisanje bitkoina, njegove karakteristike i funkcije, koristi i rizike koje sa sobom nosi, kao i moguće scenarije daljeg razvoja međunarodnog monetarnog sistema sa kripto valutama. kljuĉne reĉi: virtuelne valute, kriptovalute, bitkoin, funkcije novca, međunarodna plaćanja plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 1, 2014, pp. 61 74 review paper property tax burden and progressivity in the case of serbia  udc 336.221(497.11) stevan luković faculty of economics, university of kragujevac, serbia abstract. property taxation has been in the focus of economic considerations in serbia only in the last few years. in the absence of the alternative revenue sources, the property tax is designated by the state authorities in serbia as a potential source of additional revenue. legislative changes, particularly property taxes law amendments in 2010, made the formal conditions for the increase of the property tax burden and progressivity. as the motive for increasing the property tax burden, the government has appointed more appropriate property valuation, while for increasing the tax progressivity achieving greater vertical equity argument has been selected, along with higher tax revenues that remain available to local authorities. this paper considers whether there has been an increase in the tax burden and progressivity of the property tax in serbia, via the empirical measurement of theoretically funded indicators. the results show that, in general, property tax in the future may generate a greater burden, particularly for taxpayers who own valuable properties, which may be followed by moderate increase in tax progressivity. key words: property taxation; tax burden; tax progressivity, serbia. introduction property taxation in serbia is passed to the local government with the adoption of the local government finance law in 2006. the local authorities are responsible for the assessment of the tax base, tax collection and establishing tax rates within the limits set in the state legislative provisions. this direction of local authorities funding is also supported by changes of the property taxes law, which defines the basic elements of the taxation object, tax base, tax rates and tax credits. in recent years, a large number of studies have considered property tax as one of the taxes that could increase tax revenue, while simultaneously achieving a more equitable income redistribution. the scope of  received february 10, 2014 / accepted march 31, 2014 corresponding author: stevan luković faculty of economics kragujevac ðure pucara starog 3, 34000 kragujevac, serbia tel: +381 34 303 500 • e-mail: slukovic@kg.ac.rs s. luković 62 property tax can be widened, through more efficient defining of the taxpayer’s responsibilites and property tax base. this is the aspect of the property tax that mostly draws the attention of economic experts in serbia. however, recently the focus of considerations is on increasing the tax burden to be borne by taxpayers, accompanied by increase in the tax progressivity. as the main impulse for the tax burden increase the government authorities have selected more adequate valuation of the property, while as the key motivation for progressivity increase greater vertical equity is pointed out. regarding this, the amendments to the property taxes law from 2010 altered certain elements of the final tax liability calculation. the main objective of this study is to determine whether the legislative changes from 2010 increased the burden and/or the progressivity of the taxation of property owned by individuals, and whether the increase has affected only individuals that own valuable properties or if it has affected the owners of the low value properties as well. the hypothesis tested in this paper is that, after the legislative changes from 2010, an increase in the property tax burden has occured, as well as an increase in the property tax progressivity. to determine the characteristics of the property tax burden and progressivity, the range of real estate values is considered with the introduction of certain assumptions about real estate and taxpayer. by using legally prescribed parameters for tax liability calculation, tax is levied to pay for each of the real estate values within a defined value range, both before legislative changes in 2010 and after the legislative changes in 2010. afterward, we introduce five fiscal indicators, of which the first three measure the tax burden, and the last two measure the tax progressivity. comparing values before and after the legislative changes, conclusions are given regarding changes in the tax burden and progressivity. the paper is arranged as follows. after the introduction, the second section provides the review of property taxes law amendment act in 2010, which has introduced significant adjustments in all phases of tax liability calculation. the third part of the paper refers to the methodology of measuring the tax burden and progressivity. in the fourth part, the results of the analysis are given. the final part presents the conclusions. 1. property taxes law amendment act from 2010 property taxation in serbia is regulated by property taxes law, which was changed in several occasions after the adoption in 2001. over a number of years the property tax has been criticized, especially in terms of complexity and ambiguity in the tax base assessment. all rights on the property covered by the property taxes law are subject to taxation. property tax in serbia is local tax defined as a source of local governments revenue (local government finance law, article 6). however, the elements that constitute tax base and the maximum tax rate that local governments may apply are determined by the property taxes law, while the tax rate decision is made by the local government within the limits established by the central government (popović, d., p. 353). amendments to the property taxes law were made repeatedly in serbia, but in this paper we focus on the property taxes law amendment act from 2010. this law amendment introduced a number of changes in all phases of the tax liability calculation. at the real estate value assessment phase, value of real estate is accepted as a tax base. the value is calculated by applying the basic and corrective elements. the basic elements are usable area and the administrative average price per square meter of suitable real estate in property tax burden and progressivity in the case of serbia  63 the territory of a municipality, while the corrective elements are location and the quality of real estate (property taxes law, article 6). finally, the value calculated in this way is modified by the annual depreciation factor. the law amendment lowered the amount of annual depreciation from 1.5% to 0.8%, while the maximum amount of depreciation that could be applied has been reduced from 70 % to 40 % (property taxes law, article 5). as for tax rates and tax brackets, some changes have also been made. before the amendments, the tax structure looked as follows: tax base tax rates 1 up to 6,000,000 dinars up to 0.40% 2 6,000,001 – 15,000,000 dinars tax (1) + up to 0.80% on the amount above 6,000,000 dinars 3 15,000,001 – 30,000,000 dinars tax (2) + up to 1.50% on the amount above 15,000,000 dinars 4 above 30,000,000 dinars tax (3) + up to 3% on the amount above 30,000,000 dinars source: property taxes law, official gazette of rs, no. 26/01, 45/02, 42/02, 80/02, 135/04, 61/07, 5/09 if only marginal tax rates are considered, it might be concluded that the property taxation in serbia was very progressive because the tax rates rise from 0.4 % up to 3%. however, it should be noted that, according to the tax administration data, in 99.7% of tax returns, the tax base calculated for real estates owned by individuals amounted to less than 6 million dinars in 2006, i.e., taxed at a rate which stood at 0.4 % or below that percent. however, this figure was significantly reduced in 2009, especially in larger towns where the most valuable properties owned by individuals are located, primarily because local governments have increased the average price per square meter of real estate by 10% to 30% (levitas, t. et al., 2010, p. 109). with adequate real estate valuation and the gradual introduction of market values as a tax base, it can be expected that the number of taxpayers in the higher tax brackets increases. after the law amendment, composition of tax rates and tax brackets looks as in the table: tax base tax rates 1 up to 10,000,000 dinars up to 0,40% 2 10,000,001 – 25,000,000 dinars tax (1) + up to 0,60% on the amount above 10,000,000 dinars 3 25,000,001 – 50,000,000 dinars tax (2) + up to 1,00% on the amount above 25,000,000 dinars 4 above 50,000,000 dinars tax (3) + up to 2% on the amount above 50,000,000 dinars source: property taxes law, official gazette of rs, no. 26/01, 45/02, 42/02, 80/02, 135/04, 61/07, 5/09, 101/10 if only changes in the composition of tax rates and brackets are observed and other changes are neglected, a premature conclusion that a mitigation of progressivity occured could be derived. in the final phase of tax liability calculation, the total amount of the tax credit has been reduced. the tax credit, which amounted 40% of tax liability for the sole resident taxpayer and 10% for each household member (provided that the total amount of the tax s. luković 64 credit could not exceed 70% of the tax liability) is corrected. for the sole taxpayer, providing the condition of residency in the taxable real estate is fulfilled, the tax credit has been raised to 50% of the tax liability, but it can not exceed the amount of 20,000 dinars (property taxes law, article 13). in this way, this tax incentive can be fully utilized only for taxpayers whose tax liability before the application of the tax credit is less than or equal to the amount of 40,000 dinars, which significantly increases the progressivity of the property tax at the higher tax bases. 2. the methodology of measuring the property tax burden and progressivity measures of tax burden are indicators of how well tax policy meets one of its primary goals, equitably raising the revenues needed to run government. equity has two aspects. the first, vertical equity, concerns the way taxes are distributed among taxpayers with different abilities to pay. the second, horizontal equity, concerns the way taxes are distributed among taxpayers with the same ability to pay. tax burden measures thus answer broad economic and social questions about the effect of tax policy on the distribution of income and wealth (atrostic, b.k. and nunns, j.r., 1991, p. 343). over time, a number of different indicators of tax burden have appeared, which can be classified into four broad categories: 1) tax rates (nominal, statutory), 2) tax/gdp ratios, 3) implicit/effective tax rates on consumption, labour or capital and 4) the effective ex-ante tax rates (wolff, g., 2005, p. 2). nominal rates and the tax/gdp ratios were originally used as indicators of tax burden, mainly because of the simplicity and accessibility of the necessary data. with the growing complexity of national tax systems, the methodology of calculating the tax burden has become more complicated. effective tax rates eliminate some of the disadvantages of using nominal tax rates, and are used in many papers to measure the consumption, capital or labour tax burden. in the past, most of the papers were focused on the profit tax burden, and its impact on the investment process. as a reaction to this trend, methodologies of average effective (aetr) and marginal effective (metr) tax rates were developed. in recent years, an emphasis has been placed on the tax burden on labour as a factor of production, where the effective tax rates have been used to show the labour tax burden at different income levels for the representative individual with strictly defined characteristics. there are only few papers that analytically approach the problem of determining the property tax burden. papers dealing with the property taxation mainly studied other aspects of the property tax, while the tax burden has been ignored. in the united states, the property tax burden has always attracted the attention of economists, since it is the most important revenue to local authorities and the differences in the tax burden in various states are significant. the two most popular indicators of the property tax burden that american economists have used are the property taxes per capita and property taxes per $1,000 of total income. these indicators are the perfect tools for comparative analysis because they can show the differences in the tax burden in individual states, local communities and cities. in addition, the effective tax rate as the ratio of tax paid and the market value of the real estate is also a popular measure, because it indicates differences in the tax burden borne by taxpayers in different tax jurisdictions for real estate with the same characteristics. a large number of studies in the united states use just these indicators of the tax burden, while in european countries, there is hardly any significant research that deals with this aspect of property tax. property tax burden and progressivity in the case of serbia  65 as far as progressivity, generally speaking, tax can be proportional, progressive or regressive. the tax is considered progressive if the average tax rate increases with income before tax, that is, if the marginal tax rate is higher than average tax rate along the entire income scale. the rate of progressivity is a term often used by economists and politicians, but with no clear meaning (jakobson, u., 1976, p. 161). generally, tax theory distinguishes local and global progressivity. local (point, interval) progressivity measures the change of the average tax rate in one point or between two selected points in the income scale and it is closely linked to effective taxation. the outcomes of its analysis can help to specify the income intervals where the tax progressivity is the highest or the lowest, in what income intervals there are eventual turning points in tax progressivity, i.e. when tax changes from one form of progressivity (e.g. progressive) to the other form (proportional or regressive) (široky, j., and makova, k., 2007, p. 4). while local tax progressivity measures progressivity in a certain range of taxpayer's income, and can be used to determine the effects of partial tax legislation changes to the specific group of taxpayers, the macroeconomic analysis is necessary to determine the index that measures the progressivity along the entire income range. musgrave and thin (1948), in a very influential paper “income tax progression from 1929 to 1948”, introduced four local progressivity measures: 1) progression of average tax rate; 2) progression of marginal tax rate; 3) progression of tax liabilities; 4) progression of residual income. also, in order to arrive at a single measure of progression, musgrave and thin (i 948) compared the inequality of the before-tax and after-tax income distributions. a progressive tax system is associated with a decrease in income inequality, while regressive tax rates will be reflected by an increase in income inequality (kakwani m., 1977, p. 72). available literature regarding the tax progressivity can be divided into studies that focus either on the local or global measures of tax progressivity. the largest number of early researches has focused on two of the aforementioned four indicators of local progressivity, i.e. progressivity of the tax liabilities and progressivity of residual income. the former measures the elasticity of the tax liability compared to change in pretax income, while the latter measures the elasticity of after-tax income compared to change in pre-tax income (at a certain point of the income scale). very few papers deal with the calculation of property tax progressivity. even researches that consider the progressivity focus more on the aspect of vertical in(equality) as an element of importance. a vertically inequitable tax system can be classified as “regressive” if higher value properties are taxed more favorably than lower value properties and “progressive” if higher value properties are taxed less favorably than lower value properties (allen, m., and dare, w., 2009, p. 82). on the other hand, in a number of works, global progressivity of national tax systems is measured with the inclusion of property tax in the observed taxes, so global indices of progressivity of different taxes are calculated (suits's index, kakwani index and others). these indices are mainly relying on lorentz distribution of income and the gini coefficient of inequality as tools to measure progressivity (kakinaka, m., and pereira, m., 2006, p. 1). to assess the effects of property taxation in serbia, a range of real estate value from 2.5 million dinars to 50 million dinars is established, with a fixed increase in the value of real estate of 2.5 million dinars, which gives 20 levels of real estate value. in order to determine the tax liability, it is necessary to introduce some assumptions: s. luković 66 1. real estate subject to taxation falls within the category of buildings and is located in the municipality of kragujevac; 2. age of the building is 10 years; 3. location coefficient is 0.6 (the real estate in the suburban area); 4. quality coefficient of property is 560/695 (0.86); 5. taxpayer is an individual who resides in the taxable property with three household members. these assumptions allow us to calculate the tax base, on which the tax rates are imposed in the municipality of kragujevac, before and after the property taxes law amendment from 2010 (table 1). in this way tax liability is calculated, but it must be adjusted by applying the tax credit. the remaining amount represents the final tax liability. as it can be seen, only the taxation of real estate owned by individuals is considered, while taxation of enterprises is not the subject of this paper. table 1 property tax structure in the municipality of kragujevac (before and after the property taxes law amendment in 2010) before amendment after amendment tax base tax rates tax base tax rates up to 6 milion dinars 0.30% up to 10 milion dinars 0.20% 6  15 milion dinars 18 thousand dinars + 0.80% on the amount above 6 mil. dinars 10  25 milion dinars 20 thousand dinars + 0.60% on the amount above 10 mil. dinars 15  30 milion dinars 90 thousand dinars + 1.50% on the amount above 15 mil. dinars 25  50 milion rsd 110 thousand dinars + 1% on the amount above 25 mil. dinars above 30 milion dinars 315 thousand dinars + 3% on the amount above 30 mil. dinars above 50 milion rsd 360 thousand dinars + 2% on the amount above 50 mil. dinars source: property taxes law, kragujevac local government decision on the property tax rate for 2009 and 2010 to analyze the property tax burden and progressivity five measures are used: 1) the total amount of tax liability; 2) tax rate t1, calculated as a ratio of the total tax paid and the tax base; 3) tax rate t2, calculated as a ratio of tax before the tax credit and the property value; 4) local index of progressivity of tax liability, which is obtained using the formula 1 0 0 1 1 0 0 ( ) / ( ) / t t t v y y y    , i.e., 0 1 0 / / t t v y y    , where t is the amount of tax due, and y is the value of property on which the tax is levied. 5) local index of residual progressivity, obtained using the formula 2 / / x y x y     , where x is the value of the property after tax (y  t), t is the amount of tax and y is the pre-tax property value. property tax burden and progressivity in the case of serbia  67 the first three indicators measure the burden that property tax creates for property owners. while the tax burden just shows what part of taxpayer’s income is transfered in the form of taxes, the extent of progressivity shows changes in the tax burden of taxpayers in accordance with income changes. local measure of progressivity of the tax liability shows that, if its value is greater than 1, a progressive tax is in place, while if value is smaller than 1, tax is considered to be regressive. its value can show in what real estate value range an increase in the tax progressivity occurs. also, if the value of the residual progressivity measure is smaller than 1 tax is considered progressive, otherwise, if its value is greater than 1, tax is regressive. the analysis is carried out with respect to the previously defined assumptions concerning the characteristics of taxpayer and property. respecting different sets of assumptions, we could get quite different results. also, local tax progressivity measures are used, which do not provide a comprehensive measure of tax progressivity. calculating a global index of progressivity, which requires a large set of specialized data on the income distribution and the tax burden, would generate more useful information about the nature of the property tax progressivity in serbia. 3. the results after identifying all important elements, all the above mentioned tax indicators can be calculated. the values are shown in table 2 and the graphs that follow. table 2 shows the increase in tax liability that occured after legislative changes for the real estate value up to table 2 property tax burden and progressivity, before and after the property taxes law amendment in 2010 1) tax liability 2) tax rate t1 3) tax rate t2 4) indicator υ1 5) indicator υ2 value before after before after before after before after before after 2.5 mil. 986,9 1186,8 0,090 0,100 0,132 0,095     5 mil. 1973,7 2373,6 0,090 0,100 0,132 0,095 1 1 1,00000 1,00000 7.5 mil. 2960,6 3560,4 0,090 0,100 0,132 0,095 1 1 1,00000 1,00000 10 mil. 3947,4 4747,2 0,090 0,100 0,132 0,095 1 1 1,00000 1,00000 12.5 mil. 4934,3 5934,0 0,090 0,100 0,132 0,095 1 1 1,00000 1,00000 15 mil. 6789,6 7120,8 0,103 0,100 0,151 0,095 1,88 1 0,99971 1,00000 17.5 mil. 9421,2 8307,6 0,123 0,100 0,179 0,095 2,32 1 0,99949 1,00000 20 mil. 12052,8 9494,4 0,137 0,100 0,201 0,095 1,95 1 0,99955 1,00000 22.5 mil. 14684,4 12043,6 0,149 0,113 0,218 0,107 1,75 2,15 0,99960 0,99952 25 mil. 17316,0 15604,0 0,158 0,131 0,231 0,125 1,61 2,66 0,99964 0,99920 27.5 mil. 19947,6 19164,4 0,165 0,147 0,242 0,139 1,52 2,28 0,99967 0,99927 30 mil. 22579,2 25449,6 0,172 0,179 0,251 0,151 1,45 3,61 0,99970 0,99833 32.5 mil. 25210,8 32570,4 0,177 0,211 0,259 0,162 1,39 3,36 0,99972 0,99815 35 mil. 28579,5 39691,2 0,186 0,239 0,272 0,171 1,74 2,84 0,99947 0,99828 37.5 mil. 33513,8 46812,0 0,204 0,263 0,298 0,178 2,42 2,51 0,99892 0,99840 40 mil. 38448,0 53932,8 0,219 0,284 0,320 0,185 2,21 2,28 0,99899 0,99850 42.5 mil. 43382,3 61053,6 0,233 0,303 0,340 0,191 2,05 2,11 0,99905 0,99859 45 mil. 48316,5 68174,4 0,245 0,319 0,358 0,196 1,93 1,98 0,99910 0,99866 47.5 mil. 53250,8 75295,2 0,256 0,334 0,374 0,201 1,84 1,88 0,99915 0,99873 50 mil 58185,0 82416,0 0,265 0,347 0,388 0,205 1,76 1,79 0,99919 0,99880 source: author’s calculations s. luković 68 15 million dinars, and a decline in the range from 17.5 to 27.5 million dinars. for the higher values there is a continuous increase in the tax liabiliy, that can be seen in the chart 1a. this trend can be confirmed by observing tax rate t1, which keeps the pace with changes in tax liability. in the graph 1b three distinctive zones can be discerned. in the first zone, (real estate value ranging from 2.5 to 15 million dinars) tax rates before and after property taxes law amendment are approximately equal. in the second zone, ranging from 17.5 to 27.5 million dinars, tax rate before is higher than the tax rate after the law amendment. only in the third zone, ranging from 30 to 50 mil. dinars, tax rate after the legislative changes becomes greater than the tax rate before the changes, and the difference rises with the increase in real estate value. as it will be shown later, the main factor influencing this behaviour of tax liability and indicator t1 is tax credit. a: tax liability b: tax rate t1 c: tax rate t2 d: indicator υ1 e: indicator υ2 fig. 1 the amount of tax liability, tax rate t1, tax rate t2 and indicators of local progressivity υ1 and υ2, before and after the legislative changes 0.0 10000.0 20000.0 30000.0 40000.0 50000.0 60000.0 70000.0 80000.0 90000.0 25 00 00 0.0 75 00 00 0.0 12 50 00 00 .0 17 50 00 00 .0 22 50 00 00 .0 27 50 00 00 .0 32 50 00 00 .0 37 50 00 00 .0 42 50 00 00 .0 47 50 00 00 .0 before changes after changes 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 25 00 00 0. 0 10 00 00 00 .0 17 50 00 00 .0 25 00 00 00 .0 32 50 00 00 .0 40 00 00 00 .0 47 50 00 00 .0 before changes after changes 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 0.450 25 00 00 0. 0 10 00 00 00 .0 17 50 00 00 .0 25 00 00 00 .0 32 50 00 00 .0 40 00 00 00 .0 47 50 00 00 .0 before changes after changes 0 0.5 1 1.5 2 2.5 3 3.5 4 25 00 00 0. 0 50 00 00 0. 0 75 00 00 0. 0 10 00 00 00 .0 12 50 00 00 .0 15 00 00 00 .0 17 50 00 00 .0 20 00 00 00 .0 22 50 00 00 .0 25 00 00 00 .0 27 50 00 00 .0 30 00 00 00 .0 32 50 00 00 .0 35 00 00 00 .0 37 50 00 00 .0 40 00 00 00 .0 42 50 00 00 .0 45 00 00 00 .0 47 50 00 00 .0 before changes after changes 0.99700 0.99750 0.99800 0.99850 0.99900 0.99950 1.00000 1.00050 25 00 00 0. 0 75 00 00 0. 0 12 50 00 00 .0 17 50 00 00 .0 22 50 00 00 .0 27 50 00 00 .0 32 50 00 00 .0 37 50 00 00 .0 42 50 00 00 .0 47 50 00 00 .0 before changes after changes property tax burden and progressivity in the case of serbia  69 unlike t1, indicator t2 displays continuous increase compared to the values after the legislative changes. this can be explained by the fact that t2 is the ratio of tax liability before applying tax credit, so tax credit change does not affect the t2 value (figure 1c). local progressivity of the tax liability is higher after legislative changes in the real estate value range from 22.5 to 50 million dinars (figure 1d). however, this indicator shows that progressivity rises for the real estate values ranging from 22.5 to 35 million dinars, while the progressivity before and after tax changes are very close for values ranging from 37.5 to 50 million dinars. this trend is confirmed by the indicator of the residual progressivity (figure 1e), whose value after legislative changes is continuously lower than the value before the legislative changes for the real estate values in the 22.550 million dinars range. having established the above mentioned indicators, the remainder of the paper deals with the question which of the taxation elements that were subject to legislative changes contribute to increase in the tax burden and/or progressivity, and which are acting in the opposite direction. the elements which were altered are the amount of depreciation, tax rates, tax brackets and the tax credit. to determine which elements have increased the tax burden and progressivity, it is necessary to recalculate the previously observed indicators, but in a way that only one of the elements changes, while keeping the other elements unchanged (ceteris paribus). in this way, only the element that is modified affects the tax burden and progressivity, so the direction of its isolated effect can be observed. this procedure is implemented for each of the elements. 3.1. the effects of tax credit change observing the isolated effect of change in the tax credit, we can notice that it is a factor that dramatically increases the value of the tax rate t1, especially at higher real estate values, because starting from real estate value 17.5 mil. dinars, the tax credit "freezes" at 20,000 dinars, and just after this level there is a significant increase of difference between the tax rate before and after the legislative changes. the tax rate t2 measures the ratio of tax liability before the tax credit and the value of the property, and since it is not affected by the value of tax credit, the tax rate before and after the legislative changes remains the same. we conclude that the tax credit is a factor that leads to a significant increase in the tax burden, especially for taxpayers with valuable real estates. as for local progressivity of the tax liability, for the real estate value up to 20.0 mil. dinars, progressivity before and after legislative changes are approximately equal. for higher real estate values, progressivity after the legislative changes is constantly higher than the progressivity before the changes. due to the occurrence of significant differences in the amount of tax credit before and after the legislative changes, at the level of real estate value of 22.5 million dinars a swift rise of υ1 occurs, which at that point reaches its maximum. indicator of residual progressivity υ2 tracks changes of the progressivity of tax liability, because its values before and after the legislative changes up to the real estate value of 17.5 million rsd are approximately equal, but after that point a significant difference is noticeable. for easier interpretation, the indicators are graphically shown (figure 2), where we can see all the above trends. s. luković 70 a: t1 b: t2 c: υ1 d: υ2 fig. 2 isolated effect of change in tax credit tax rates t1, t2 and local indicators of progressivity υ1 and υ2 3.2. the effects of tax rates and tax brackets changes regarding changes in tax rates and tax brackets, in fig. 3 a decrease in the value of tax rates t1 and t2 for all real estate values after legislative changes is apparent. the tax rate t1, after legislative changes, remains continuously lower than the tax rate before the changes. with the increase in real estate value, the difference between tax rates increases. a similar trend can be observed for the tax rate t2. looking at these two indicators, we can state that the isolated changes in tax rates and brackets caused the reduction of the tax burden, which is intensifying as the real estate value rises. considering the progressivity of the tax liability, there is no single trend. the reason for this lies in the fact that the progressivity of the tax liability represents the ratio of two relative values, the relative change of tax liability and the relative change in real estate value. given that the relative change in real estate value is fixed before and after the legislative changes, the difference in the value of the indicator before and after legislative changes is only affected by the relative change in tax liability. prior to legislative changes, indicator of progressivity of the tax liability had two peaks (one peak for the real 0.000 0.100 0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900 25 00 00 0. 0 75 00 00 0. 0 12 50 00 00 .0 17 50 00 00 .0 22 50 00 00 .0 27 50 00 00 .0 32 50 00 00 .0 37 50 00 00 .0 42 50 00 00 .0 47 50 00 00 .0 before changes after changes 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 0.450 25 00 00 0. 0 75 00 00 0. 0 12 50 00 00 .0 17 50 00 00 .0 22 50 00 00 .0 27 50 00 00 .0 32 50 00 00 .0 37 50 00 00 .0 42 50 00 00 .0 47 50 00 00 .0 before changes after changes 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 25 00 00 0. 0 75 00 00 0. 0 12 50 00 00 .0 17 50 00 00 .0 22 50 00 00 .0 27 50 00 00 .0 32 50 00 00 .0 37 50 00 00 .0 42 50 00 00 .0 47 50 00 00 .0 before changes after changes 0.993 0.994 0.995 0.996 0.997 0.998 0.999 1 1.001 2 5 0 0 0 0 0 .0 7 5 0 0 0 0 0 .0 1 2 5 0 0 0 0 0 .0 1 7 5 0 0 0 0 0 .0 2 2 5 0 0 0 0 0 .0 2 7 5 0 0 0 0 0 .0 3 2 5 0 0 0 0 0 .0 3 7 5 0 0 0 0 0 .0 4 2 5 0 0 0 0 0 .0 4 7 5 0 0 0 0 0 .0 before changes after changes property tax burden and progressivity in the case of serbia  71 estate value of 17.5 mil. dinars, and the other for the real estate value of 37.5 mil. dinars). this can be explained by transitions to higher tax brackets, because for a given range of the tax base, before the legislative changes three tax brackets were established, and the jump in the indicator value happens immediately after the point where the marginal tax rate rises. in the first case, for the real estate value of 15 million dinars the marginal tax rates rises from 0.3 % to 0.8 %, and in that point progressivity increases and reaches the first peak at the next real estate value. in the second case, for the real estate value of 35 mil. dinars, marginal tax rates rises from 0.8 % to 1.5 %, and in that point progressivity increases and reaches the second peak at the next real estate value. on the other hand, after legislative changes, tax brackets are set in a way that only one transition to the next bracket exists, at the real estate value of 25 mil. dinars, where progressivity indicator reaches its maximum (fig. 3c). similar jumps can be observed with indicator of residual progressivity (fig. 3d), which also reports the existence of two points at which a decline in indicator value happens before legislative changes, while after changes there is only one point where a sharp decline occurs. a: t1 b: t2 c: υ1 d: υ2 fig. 3 isolated effect of changes in the composition of tax rates and tax brackets tax rates t1, t2 and local indicators of progressivity υ1 and υ2 based on all the foregoing, we conclude that the isolated change in the tax structure has led to a reduction in the progressivity of taxation, that is, a new tax structure is less 0.000 0.050 0.100 0.150 0.200 0.250 0.300 25 00 00 0. 0 75 00 00 0. 0 12 50 00 00 .0 17 50 00 00 .0 22 50 00 00 .0 27 50 00 00 .0 32 50 00 00 .0 37 50 00 00 .0 42 50 00 00 .0 47 50 00 00 .0 before changes after changes 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 0.450 25 00 00 0. 0 75 00 00 0. 0 12 50 00 00 .0 17 50 00 00 .0 22 50 00 00 .0 27 50 00 00 .0 32 50 00 00 .0 37 50 00 00 .0 42 50 00 00 .0 47 50 00 00 .0 before changes after changes 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 50 00 00 0. 0 10 00 00 00 .0 15 00 00 00 .0 20 00 00 00 .0 25 00 00 00 .0 30 00 00 00 .0 35 00 00 00 .0 40 00 00 00 .0 45 00 00 00 .0 50 00 00 00 .0 before changes after changes 0.99820 0.99840 0.99860 0.99880 0.99900 0.99920 0.99940 0.99960 0.99980 1.00000 1.00020 25 00 00 0. 0 75 00 00 0. 0 12 50 00 00 .0 17 50 00 00 .0 22 50 00 00 .0 27 50 00 00 .0 32 50 00 00 .0 37 50 00 00 .0 42 50 00 00 .0 47 50 00 00 .0 before changes after changes s. luković 72 progressive compared to the previous tax structure in the range of real estate value from 2.5 to 22.5 million dinars., but, for a range of values from 25 to 35 million dinars it becomes more progressive. finally, for the range of values from 37.5 to 50 mil. dinars, again it is less progressive compared to the previous tax structure. 3.3. the effects of depreciation changes thanks to the reduction in depreciation percentage, after the legislative changes the amount of tax to pay is higher for all levels of real estate values. the increase in the tax burden can be seen both in the amount of tax payments, as well as with indicators t1 and t2, which are higher after legislative changes for all levels of real estate value (fig. 4a and 4b). a: t1 b: t2 c: υ1 d: υ2 fig. 4 isolated effect of change in depreciation tax rates t1, t2 and local indicators of progressivity υ1 and υ2 regarding isolated effect of the depreciation reduction on progressivity, it is a change that affects all taxpayers across the entire range of real estate values in the same way. accordingly, changes in the progressivity (fig. 4c and 4d) can be attributed to transitions from one tax bracket to another tax bracket, but not to the reduction in depreciation rates. depreciation decrease is a change that has led to the tax burden increase, but does not affect the progressivity. 0.000 0.050 0.100 0.150 0.200 0.250 0.300 2 5 0 0 0 0 0 .0 7 5 0 0 0 0 0 .0 1 2 5 0 0 0 0 0 .0 1 7 5 0 0 0 0 0 .0 2 2 5 0 0 0 0 0 .0 2 7 5 0 0 0 0 0 .0 3 2 5 0 0 0 0 0 .0 3 7 5 0 0 0 0 0 .0 4 2 5 0 0 0 0 0 .0 4 7 5 0 0 0 0 0 .0 before changes after changes 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 0.450 0.500 2 5 0 0 0 0 0 .0 7 5 0 0 0 0 0 .0 1 2 5 0 0 0 0 0 .0 1 7 5 0 0 0 0 0 .0 2 2 5 0 0 0 0 0 .0 2 7 5 0 0 0 0 0 .0 3 2 5 0 0 0 0 0 .0 3 7 5 0 0 0 0 0 .0 4 2 5 0 0 0 0 0 .0 4 7 5 0 0 0 0 0 .0 before changes after changes 0.00 0.50 1.00 1.50 2.00 2.50 3.00 5 0 0 0 0 0 0 .0 1 0 0 0 0 0 0 0 .0 1 5 0 0 0 0 0 0 .0 2 0 0 0 0 0 0 0 .0 2 5 0 0 0 0 0 0 .0 3 0 0 0 0 0 0 0 .0 3 5 0 0 0 0 0 0 .0 4 0 0 0 0 0 0 0 .0 4 5 0 0 0 0 0 0 .0 5 0 0 0 0 0 0 0 .0 before changes after changes 0.9982 0.9984 0.9986 0.9988 0.999 0.9992 0.9994 0.9996 0.9998 1 1.0002 2 5 0 0 0 0 0 .0 7 5 0 0 0 0 0 .0 1 2 5 0 0 0 0 0 .0 1 7 5 0 0 0 0 0 .0 2 2 5 0 0 0 0 0 .0 2 7 5 0 0 0 0 0 .0 3 2 5 0 0 0 0 0 .0 3 7 5 0 0 0 0 0 .0 4 2 5 0 0 0 0 0 .0 4 7 5 0 0 0 0 0 .0 before changes after changes property tax burden and progressivity in the case of serbia  73 final remarks based on all the above, we can see that the changes of parameters in tax payment calculation introduced by 2010 law amendment produced an increase of tax burden to be borne by taxpayers. factors that have led to an increase in the tax burden are reduction of real estate depreciation, to a lesser extent, and, to a much greater extent, tax credit reduction, especially at higher levels of real estate value. on the other hand, isolated changes made in the composition of tax brackets and tax rates have generated the reduction in the tax burden at all real estate value levels, but this reduction is not enough to offset the impact of tax credit change. in the hypothetical example presented here, tax liability becomes constantly higher after legislative changes, but only at higher values that exceed 30 million dinars. for lower real estate values, the tax liability in the real estate value range from 2.5 to 15 million dinars becomes higher after legislative changes, but in the range from 17.5 to 27.5 mil. dinars it becomes lower. in this range the tax rate applied is lower after the law amendments, but the tax credit percent also becomes lower along with the lower depreciation rate. the combined impact of the tax credit and depreciation prevails so tax liability increases. however, in the range from 17.5 to 27.5 million dinars, the tax liability after the legislative changes is lower, suggesting that the combined impact of tax rates and tax brackets is stronger than the combined impact of tax credit and depreciation. for the 30-50 million dinars range, a significant decrease of tax credit occurs, which increases the amount of tax liability, i.e., the impact of tax credit and depreciation prevails over the influence of tax rates/brackets changes. values of local tax progressivity indicators before and after legislative changes inform us that an increase in tax progressivity occurred, but not along the entire scale of real estate values. for a real estate value range from 2.5 to 10 million dinars, both progressivity indicators have a value of 1, which means that there is no progressivity in taxation (this is a proportional tax). progressivity is more pronounced before the legislative changes in the 12.5-17.5 million dinars range, while at higher values, in the 20-50 million dinars range, property tax progressivity is more pronounced after the legislative changes. using more detailed analysis, we have found that the tax credit change led to an increase in progressivity at higher real estate values, that is, the effect of changes in tax credit in the direction of increasing progressivity is more pronounced than the tax rates/brackets change in the direction of reducing progressivity. on the other hand, the impact of changes in the composition of tax rates and tax brackets led to reduction in the progressivity at lower real estate values. state authorities in serbia are oriented toward increasing property tax revenue. first of all, this will be achieved by introducing market values of the real estate as tax base. currently, due to the tax base undervaluation, the analysis conducted in this paper has a theoretical character, because the share of taxpayers in the higher tax brackets is low. also, the authorities for two years in a row limit the full implementation of the legal provisions through prevention of interannual rise of tax liabilities reported in the annual tax returns. with the introduction of market-valued tax base, it can be expected that the degree of undervaluation of the base will be significantly reduced. in this case, the burden of paying taxes will be higher, especially for taxpayers who own valuable properties, which will lead to an increase in property tax revenue. as far as progressivity, legislative changes have resulted in greater tax progressivity for valuable real estates, which, accompanied by an increase in average tax rates can lead to achieving greater redistributive effects and more equitable income redistribution. however, given the low property tax revenue, it can hardly be expected that this effect will be overly significant. s. luković 74 references 1. allen m., dare w., (2009), changes in property tax progressiveness for florida homeowners after the "save our homes amendment", journal of real estate reasearch, vol. 31 , no. 1 2. atrostic b.k., nunns j.r., (1991), measuring tax burden: a historical perspective, fifty years of economic measurement the jubilee of the conference on research in income and wealth, university of chicago press, pp. 343-420 3. jakobson u., (1976), on the measurement of the degree of progression, journal of public economics, no. 5, northholland publishing company pp. 161-168 4. kakinaka m., pereira, m., (2006), a new measurement of tax progressivity, gsir working paper series, economic development and policy series, edp 06-7 5. kakwani m., (1977), measurement of tax progressivity: an international comparison, the economic journal, vol. 87, no. 345, pp. 71-80 6. kragujevac local government decision on the property tax rate for 2009 and 2010, official gazette of kragujevac, no. 31/10 and 14/11 7. levitas t., vasiljević d., bućić a., (2010), property tax analysis of the situation and prospects of reform, tax policy in serbia looking ahead, sega usaid project 8. local government finance law, official gazette of the republic of serbia, no. 62/2006, 47/2011 and 93/2012 9. musgrave r. a, thin t., (1948), income tax progression, 1929-48, the journal of political economy, no. 56 (6), pp. 498-514 10. popović d., (2008), tax law, faculty of law, university of belgrade 11. property taxes law, official gazette of the republic of serbia, no. 26/ 01, 45 /02, 80 /02, 135/ 04, 61 /07, 5/09, 101/10, 24/11, 78/ 11 and 57/12 12. široky j., makova k., (2007), theoretical approaches to measuring of the tax progressiveness, labsi international conference on political economy and public choice: theory and experiments, university of siena 13. wolff g., (2005), measuring tax burden in europe, zei working paper no. 09/2005, center for european integration studies, rheinische friedrich wilhelms universität bonn. poreski teret i progresivnost poreza na imovinu u srbiji oporezivanje imovine u srbiji je tek u poslednjih nekoliko godina u fokusu javnofinansijskih rasprava. u nedostatku drugih načina za ubiranje nedostajućih budžetskih sredstava, porez na imovinu je poreski oblik koji su državni organi u srbiji odredili kao potencijalan izvor dodatnih prihoda. zakonskim izmenama, a naročito izmenom zakona o porezima na imovinu iz 2010. godine, stvoreni su formalni uslovi za povećanje poreskog opterećenja i progresivnosti u oporezivanju. kao osnovni motiv za povećanje izdašnosti poreza na imovinu državni organi navode adekvatnije vrednovanje imovine, dok se kao osnovni motiv za povećanje progresivnosti navodi postizanje veće vertikalne pravičnosti, uz istovremeno povećanje poreskih prihoda koji ostaju na raspolaganju lokalnim vlastima. u ovom radu utvrđuje se da li je došlo do povećanja poreskog opterećenja i progresivnosti u oporezivanju imovine u srbiji, empirijskim utvrđivanjem vrednosti teorijski definisanih pokazatelja. rezultati analize pokazuju da će, generalno, porez na imovinu u budućnosti stvoriti veće opterećenje, i to naročito za poreske obveznike koji poseduju vrednije nepokretnosti, što će biti praćeno skromnim rastom progresivnosti u oporezivanju. ključne reči: oporezivanje imovine; poreski teret; progresivnost u oporezivanju, srbija. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 17, no 3, 2020, pp. 203 218 https://doi.org/10.22190/fueo200501015r © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper staffing for scenarios of sustainable development of kharkiv region economic sectors1 udc 331.5:502.131.1(477 harkov) volodymyr rodchenko, ganna rekun, eugenia naidina, yuliia prus, valeriia medenets v.n. karazin kharkiv national university, education and research institute “karazin business school”, kharkiv, ukraine abstract. the article is devoted to the study of the emergence and deepening of staffing gaps that affect the development of the region under the influence of transforming production dominants in the conditions of economy 4.0. in the course of the study, the system of factors for the emergence of staffing gaps that affect the sustainable development of the region is generalized. a matrix approach to determining staffing gaps is proposed and sectorial scenarios for preventing them in kharkiv region economy are developed. the assumption about the perspective structure of economy sectors in kharkiv region according to the scenarios of inertial and innovative ways of development of ukraine is formed. key words: economy 4.0; human resources; staffing gaps; technology; sustainable development. jel classification: j21, m54, r11 introduction over the last decade in the conditions of economy 4.0, the transformation of production dominants based on ict and global automation has led to significant adjustments to existing levels of economic sectors and employment patterns (brynjolfsson et al., 2014). modern challenges create contradictions such as technological pressure on jobs and it determines deepening of staffing gaps in both individual regions and the country as a whole. regular monitoring of staffing gaps allows for timely redistribution of labor force, improvement of received may 01, 2020 / revised june 03, 2020 / accepted june 08, 2020 corresponding author: yuliia prus v.n. karazin kharkiv national university, education and research institute “karazin business school”, myronosytska str., kharkiv, 61002, ukraine e-mail: yuliaprus@karazin.ua 204 v. rodchenko, g. rekun, e. naidina, y. prus, v. medenets education system and training of skilled and flexible workforce. exactly these qualities of human capital are important components of competitiveness and they contribute to attracting investment and developing economics. an increase in the employment of high-skilled workers and a corresponding decrease in employment among low-skilled workers has caused global digitalization (balsmeier et al., 2019). thus, in developed economies, there is a growing polarization of labor market opportunities between high-skilled jobs, unemployment and underemployment, especially among young people, and stagnant incomes for a large proportion of households (mckinsey global institute, 2017). according to the future of jobs report 2018 world economic forum, by 2022 the number of new jobs should increase from 16% to 27% of the total number of employees in large firms worldwide. however, jobs that are currently affected by lack of technology should decrease from 31% to 21% (the future of jobs, 2018). 75 million current jobs may be shifted because of changes in the division of labor between humans, machines, and algorithms, while 133 million new jobs may be created simultaneously (kvasniy et al., 2014). the transformation of production dominants in economy 4.0 directly affects reduction and even complete destruction of jobs. according to research by oxford university, by 2033 in the us, robots with artificial intelligence will replace 47% of workers (vartanova, 2018, p.38). thus, the changes taking place in the world labor market under the influence of the transformation of production dominants in the conditions of economy 4.0 require appropriate changes in the structure of employment and proper solutions to the issues of filling staffing gaps. inertial development of economic sectors of the regions of ukraine creates an asymmetry of the regional labor market, which will become a threat to the economy as a whole in the face of new opportunities and challenges (semykina et al., 2012). solving the problem of formation, use and development of human resources in accordance with the rapidly changing aspects of the external and internal environment of the country, regional or individual industry necessitates certain prospects and options for future socio-economic development of the territory. as for the objectives of the study, the work is organized as follows: the first part of the article considers the methodology of building a matrix to study staffing gaps within the region. to determine and further forecast future strategic gaps, the analysis of the economic portfolio for each sector of the economy of kharkiv region was used. the second part identifies the factors of strategic staffing gaps, calculates labor productivity by sectors of the economy of kharkiv region, and applies the matrix approach to determine the mismatch of staffing needs to human resources by sectors of the economy. also based on the scenario method, scenarios for managing strategic staffing gaps for each sector of the economy have been developed on the example of kharkiv region. the final part of the article presents relevant conclusions of the study. 1. methodology in the course of research, the following general scientific and special methods were applied: theoretical generalization – when determining the content of the basic categories of research; content analysis and bibliographic search – when studying global trends that shape the modern workplace; logical and structural approach – when generalizing the system of staffng for scenarios of sustainable development of kharkiv region economic sectors 205 factors for the emergence of staffing gaps for the development of the region; calculation – when determining labor productivity by types of economic activity in kharkiv region; matrix approach – when doing the strategic analysis of staffing development of kharkiv region; scenario forecasting – when developing sectorial scenarios for kharkiv region. the basis of sectorial scenarios of staffing is the assumption that the present and past state of the region economy determine its future to a significant extent (kyfyak, 2016). to determine staffing gaps using matrix approach, we propose the following methodology. according to the method of portfolio analysis, one has to determine the matrix parameters which will evaluate the efficiency of using human resources in the implementation of labor activities in foreign trade (growth rate of labor productivity by sector and relative productivity levels); to take the average values of selected parameters as such that divide the axis of the matrix in half; to calculate the values of selected parameters for each segment in the economic activity of the region; to distribute the types of economic activity of the region in one of the four quandrants of the matrix, basing on preliminary calculations; to classify the sectors of the regional economic activity by the number of the quandrant to which they belong, namely: i, ii, iii, iv. the characteristics of matrix quadrants for the study of staffing gaps that affect the development of the region are given in table 1. table 1 characteristic of matrix quadrant indexes quadrants of matrix і іі ііі iv labor productivity low high average low growth rates of labor productivity average / high high low low realtive level of productivity low high average low part of employees growing growing constant falling source: authors’ 2. results and discussions 2.1. identification and analysis of staffing gaps that affect the development of kharkiv region the prerequisite for the emergence of staffing gaps is the transformation of production dominants in the conditions of economy 4.0, which focuses on the mobilization of all national resources, including personnel, in order to accelerate technological changes. different literary sources often suggest that the broad economic impact of innovation determines such phenomena as polarization and inequality between highly qualified personnel resources in advanced industries and less qualified personnel in the field of personal services. for example, a study of cities with strong high-tech economies suggested that, though an increase in the employment of skilled workers may create new jobs for unskilled workers, the latter are still not well-paid (lee et al., 2019). there is another viewpoint on the relationship between innovation and employment. according to the “theory of compensation”, which was supported by such classical economists as d. ricardo, k. marx and others, the introduction of innovations affects the increase in labor efficiency, which in turn reflects in the growth of demand and hence 206 v. rodchenko, g. rekun, e. naidina, y. prus, v. medenets employment (vincent, 2018). these mechanisms have a positive effect only in competitive markets. as in monopolistic markets, where there is low elasticity of demand and no competition, the introduction of innovations in the short term can cause a reduction in employment. however, compensation mechanisms may be more or less effective in maintaining or creating new jobs, depending on existing economic conditions. the expectations of consumers and sellers also determine the extent to which the latest technologies affect employment (nerdrum et al., 2001). recent studies show that patented innovations are fully friendly to employment in the newest sectors of the economy with high elasticity of demand and significant technological opportunities, in which the effect of creating new products prevails over the replacement of existing ones (medical and optical equipment, electrical appliances and electronics, etc.) (vincent, 2018). meanwhile in ukraine, more traditional and low-tech approaches to production and service prevail and this will become a threat to the staffing of the country as a whole in the conditions of new opportunities and challenges of the economy. factors that affect the emergence of staffing gaps (see fig.1). fig. 1 factors that contribute to the emergence of staffing gaps in the region source: authors’ these factors are divided into demand factors and supply factors. it is the demand factor, through the growth of supply and wages for higher salary and the desire to work in the economy with high added value, which generates a supply of workers with appropriate qualifications, an increase in working-age population and reduction in migration. thus, staffing gaps should be considered as a mismatch between the factors of supply and demand in the labor market, namely, the mismatch of the need for personnel to the human resources potential, which has already been formed or should be formed at each level of economic activity. thus, the identification and analysis of “strategic staffing gaps” should be carried out on the way to the strategic management of staffing for kharkiv region. factors of staffing gaps emergence demand factors supply factors wage rate of the industry growing age characteristics qualification skills labor migration discrepancy staffng for scenarios of sustainable development of kharkiv region economic sectors 207 2.2. matrix approach to the analysis of staffing gaps that affect the development of kharkiv region the main criterion for the efficiency of economy, which forms the economic basis for the growth of life quality of the population, is labor productivity. the level of labor productivity against the background of market relations determines the competitiveness of the country’s economy as a whole. after all, this indicator makes it possible to assess the efficiency of production of goods and services, knowledge and understanding of what is necessary for a qualitative increase in added value. in the regional context, labor productivity is determined through the proportions of gross regional income and demand for human resources and employment of the population of the region by sectors of the economy. at the same time, the dynamics of these indicators allows us to assess the degree of increase in efficiency in the management of economic processes. the higher labor productivity in the sectors of the region economy gets, the higher the level of meeting social needs becomes and the more opportunities to reproduce the quality of human resources appear (fagerberg, 2000). to analyze the productivity of kharkiv region, the following formula was used: gvan lp en = , (1) where: lp – labor productivity by type of economic activity; gva – gross value added; e – number of employees; n – type of economic activity. the results of the calculations are presented in fig. 2. a matrix approach can be used to diagnose and further manage strategic staffing gaps in the region. it will allow us to compare the current state and dynamic characteristics of labor productivity in the region. the analysis is carried out on the example of kharkiv region. fig. 2 labor productivity by spheres of economic activity in kharkiv region in 2017, thousand uah source: authors’ 208 v. rodchenko, g. rekun, e. naidina, y. prus, v. medenets the logic of the approach to the assessment of staffing gaps takes into account three features. the first one is dynamic, which is a measurement of global technological changes that determine the change in productivity of a particular industry compared to the previous periods of time. the second one is relative, which reveals the specifics of local conditions of the economy when comparing the productivity of the industry and the region as a whole. the third one is structural, which characterizes employment of a particular industry in comparison with others. to construct the matrix we propose using the following indicators: ▪ growth rates of labor productivity by sectors of the economy (%) (horizontally). calculated as the ratio of labor productivity of a particular sector of the economy for the reporting period (2017) to labor productivity of a particular sector of the economy for the base period (2012); ▪ relative level of labor productivity or relative share of the economic link in terms of labor productivity (%) (vertical). calculated as the ratio of labor productivity of a particular sector of the economy to labor productivity in all sectors of the region; ▪ ball diameter is the share of employees, which is calculated as the ratio of the number of employees in a particular sector of the economy to the number of employees in the whole region in 2017. this view allows us to identify the sectors of the economy where staffing gaps are at the high level, or which sectors are promising, or to which sectors to redistribute human resources. the appearance of gaps is associated with the imbalance of supply and demand in the labor market both in terms of the ratio of their volumes, and in the direction of professional and qualification imbalance of supply and demand. the possibilities of structural transformation of the economy largely depend on the qualitative and quantitative characteristics of the available labor force. thus, quadrant i of the matrix will include sectors of the economy in which relative labor productivity is low and the growth rate of labor productivity is high. such sectors require significant investment in their development. as a rule, these sectors are characterized by high employment, but low profitability. those employed in such sectors tend to receive low wages, which does not attract skilled workers. for the sectors of this quadrant, interventionist measures aimed at state support of the inflow of human resources are recommended. quadrant ii will include sectors of the economy in which the relative productivity and productivity growth are high. as a rule, these sectors of the economy are actively developing and are promising in the future. in these industries, there is high demand and supply of labor, as well as owing to retraining from other sectors. quadrant iii will include sectors of the economy in which relative labor productivity is high and the growth rate of labor productivity is low. as a rule, these sectors of the economy have a stable demand for labor, but need constant updating of skills in order to be attractive and grow steadily. quadrant iv will include sectors of the economy in which both relative productivity and productivity growth are low. these sectors tend to have a slow pace of development, and therefore require measures aimed at controlled disposal of human resources on condition of providing support to such sectors. in the course of the strategic analysis of staffing that affects the development of kharkiv region applying the suggested approach, we used the calculations of labor productivity by the spheres of economic activity in kharkiv region (fig. 2), as well as the staffng for scenarios of sustainable development of kharkiv region economic sectors 209 data of the state statistics service of ukraine. the results of the study of staffing in kharkiv region are given in fig. 3. most sectors of kharkiv regional economy were included in quadrant i. among these sectors, it is possible to distinguish those branches that provide mainly non-market services. such services per se do not ensure conditions of economic development; the state provides and supervises their provision. this group includes the following sectors of kharkiv region economy: “professional, scientific and technical activities”, “healthcare and social assistance”, “education”, “art, sports, entertainment and leisure”. fig. 3 matrix of research of staffing that affects the development of kharkiv region source: authors’ the low relative level of labor productivity in these industries is due to the social, auxiliary, scientific and technological basis of their functioning. the outdated system of financing and public administration limits the possibilities of creating added value in these industries. at the same time, most of these sectors of the economy have an urgent ii quadrant i quadrant iii quadrant iv quadrant art, sports, entertainment and leisure (63;162) 210 v. rodchenko, g. rekun, e. naidina, y. prus, v. medenets need for personnel because the wage is lower than the average value of the corresponding indicator in the region. it can be argued that the increase in wage in 2017 in the fields of “professional, scientific and technical activities”, “healthcare and social assistance”, “education”, “art, sports, entertainment and leisure” by 13%, 16%, 21% and 10%, respectively had the nature of compensation. this means that the inflation rate played a key role in raising wages in these sectors of kharkiv region economy. however, this measure did not consider the increase in prices for goods and services for the population, due to which there was a decrease in the number of employees by 1-2% in 2017 in “healthcare and social assistance”, “education”, “art, sports, entertainment and leisure”. the functioning of these sectors of the economy is an integral element of the social infrastructure of the state. according to the authors, the growth opportunities of these sectors are determined by the possibility of transforming the model of their functioning through changing the model of public services to the model of profitable sectors of the economy with different sources of financing. “wholesale and retail trade; repair of motor vehicles and motorcycles” sector is also included in the quadrant. on the contrary, here we witness the largest share of employment among the industries of kharkiv region with slightly above average growth rates of labor productivity in the region. after all, this sector of the economy is dominated by relatively low input requirements regarding the level of education of human resources, relative to other sectors of kharkiv region economy, with an average level of real wage. overstaffing of this economy sector determines high turnover of personnel, predominance of low-skilled personnel and a significant proportion of unofficially employed people. such sectors of kharkiv region economy as “information and telecommunications”, “industry”, “public administration and defense; compulsory social insurance”, “financial and insurance activities” fell to quadrant ii of the matrix. “information and telecommunications” branch is characterized by high productivity among the sectors of kharkiv region economy (as of 2017 – uah 401.7 thousand per person). it is worth noting that the real relative share of employment in “information and telecommunications” sector is much higher through a significant percentage of unofficial employment. the leading consulting company pricewaterhousecoopers conducted an in-depth analysis of the preconditions for staffing gaps by order of the it cluster in the city of kharkiv. it clearly shows that even it sector that is growing rapidly and offers highly competitive wage will have staffing shortages because the lack of skilled professionals remains a significant problem today (kharkiv it research, 2018). according to kharkiv it-research, in 2018, 31% of the total number of recruited it professionals were students (kharkiv it research, 2018). therefore, the task of managing the strategic aspects of staffing for kharkiv region in “information and telecommunications” sector should be to increase employment by establishing a network of contacts between universities and the private sector. such measures will help to meet the needs of employers who search for the relevant skills of human resources. in kharkiv region economy, “industry” sector also got to quadrant ii and took the second place after “trade” sector with the proportion of the employed that remained constant in 2015 – 2017. therefore, in the context of staffing, redistribution of the employed in specified sector of kharkiv region economy should be done among other industries that appeared in quadrants iii and iv. as for “public administration and defense; compulsory social insurance” sector, during 2016-2017 there was an increase in labor productivity by 44%, its level exceeds uah 154 staffng for scenarios of sustainable development of kharkiv region economic sectors 211 thousand per one employee. taking into consideration the economic situation in the country, this trend of labor productivity in this industry seems illogical, despite the fact that within the framework of economic production it is considered in accordance with the sna methodology (kryvusha, 2017). quadrant iii includes the following sectors of kharkiv region economy: “transport, warehousing, postal and courier activities” and “real estate operations”. these sectors of the economy are characterized by a high relative level of labor productivity at low growth rates of labor productivity during 2016-2017. in the context of bridging staffing gaps in the development of kharkiv region, the main strategic impacts for economic activities that are located in quadrant iii should focus on increasing productivity growth by attracting staff to the relevant sectors through the development of locally adapted skills policies. we should pay special attention to the sectors of kharkiv region economy, which are located in quadrant iv, especially “agriculture, forestry and fisheries”. after all, this sector, according to the results of the analysis, has the lowest growth rates of labor productivity (97%) and a low relative level of labor productivity (80%), with a significant share of employed residents of the region (13.8%). one of the tasks of bridging staffing gaps in “agriculture, forestry and fisheries” sector of kharkiv region should be a set of measures to form a network of public-private partnerships to reduce the discrepancy between skills that are priority for employers and skills that human resources receive on the basis of training at the higher education institution. 2.3. no-change scenario for different sectors of kharkiv region economy on condition of available staffing one of the tools that allows us to determine the future condition and make an effective management decision taking into account the conditions, specifics and features of the territory is scenario planning. the use of this forecasting tool made it possible to form an assumption about the prospective structure of the sectors of kharkiv region economy according to the scenarios: constant (inertial) productivity and growth of labor productivity to the world level. according to the no-change scenario of the territorial development, relative socioeconomic stability is ensured, but there is a certain conservation of the traditional sectors of the region’s economy. due to this, the main risk of the development of economic activities on condition of available staffing is the loss of competitiveness of human resources and the region economy as a whole (blyzniuk et al., 2018). according to the no-change scenario, such traditional sectors of economic activity as “industry”, “agriculture, forestry and fisheries” and “wholesale and retail trade; repair of motor vehicles and motorcycles” will remain the basis of socio-economic development of kharkiv region. after all, today, kharkiv region is characterized by industrial, agricultural and trade specialization of the economy (development strategy of kharkiv region, 2015). for a certain period, specified kinds of economic activities will develop trends that have developed in 2016-2017, but in the long term, we can expect a significant reduction in gva in the economic complex of the region, the deterioration patterns of consumption and decline in the living standards of the population as a whole. there may be expected a slight decrease in gva in the sectors of industry and agriculture due to the deterioration of the material and technical base and the inability to obtain funds from commercial investors. the number of the employed will remain unchanged or there will 212 v. rodchenko, g. rekun, e. naidina, y. prus, v. medenets be a slight increase in their number at the expense of low-skilled labor. however, the increasing mismatch of skills to the needs of employers in the industrial and agricultural sectors and the spread of migration processes will deepen the acute shortage among certain specialists in these sectors of the region’s economy. thus, during 2015-2017, skilled agricultural and industrial workers were quite active before leaving abroad and accounted for 20.2% and 43.9%, respectively, of the total number of labor migrants who worked before leaving abroad (ukrainian society: a migration dimension, 2018). as a result, the shortage of human resources of a certain profession (tractor driver, tailor, electric and gas welder, locksmith, etc.) in the mentioned sectors of economic activity can affect the aggravation of competition in the regional labor market. this trend, on the positive side, can affect the improvement of working conditions and increase the salary of a deficit worker. however, in terms of constant (inertial) labor productivity, there might appear human resources for positions that are above their skill level and available human capital (lewis, 1954). there will also be a reduction in the production of agricultural products and an increase in the cost of production due to an increase in wage. in “wholesale and retail trade; repair of motor vehicles and motorcycles” sector, an increase in the number of employees is projected, a significant proportion of which will be unofficially employed persons, which reduces the possibility of increasing the degree of protection of labor and social rights of labor resources in the region. this social and economic phenomenon will affect the increase in overstaffing in “wholesale and retail trade; repair of motor vehicles and motorcycles” sector. the following situation can lead to mass dismissal among persons who were employed in the specified sector of kharkiv region economy during 10 years. under conditions of the no-change scenario for the development, kharkiv economic branches that provide non-market services will not be able to meet social needs of the population completely due to the inability to attract funds from international grant organizations. it is expected to reduce the number of people employed in these economic activities through the preservation of compensatory nature of wages, which does not allow for the increase in prices for goods and services for the population. there is also a threat for kharkiv region to lose its title as “the center for educational services” because there is the lack of opportunities to update the material and technical base and infrastructure. that is why kharkiv universities might attract students from less solvent and demanding sectors, including asian one (development strategy of kharkiv region, 2015). thus, there might happen an outflow of the best domestic students for quality education to the capital of ukraine or abroad. thus, in 2016-2017 academic year, almost 77.5 thousand ukrainian students (about 8% of the total number of full-time students) were studying abroad, which is almost three times as many as the corresponding figure in 2018 (ukrainian students abroad, 2018). in the sector of “information and telecommunications” of kharkiv region, there will be an increase in the percentage of unofficial employment with constant labor productivity. after all, according to the “theory of compensation”, the introduction of innovations to the latest sectors of economy with high elasticity of demand and significant technological capabilities affects the increase in labor efficiency, which in turn is reflected in the growth of demand, and hence employment (vincent, 2018). at the same time, it might increase the outflow of the most qualified specialists of the it sector abroad. in addition, the transfer of achievements of kharkiv it specialists abroad will increase. staffng for scenarios of sustainable development of kharkiv region economic sectors 213 the functioning of the sectors of kharkiv region economy under the scenario of constant (inertial) labor productivity by type of economic activity allows us to make assumptions about the future structure of the sectors of the region economy (fig. 4). according to figure 1, most sectors of kharkiv region economy that provide services may fall into quadrant i of the matrix: including: “education”, “healthcare and social assistance” and others. high growth rates of labor productivity and low relative level of labor productivity are characteristic to these sectors. fig. 4 perspective structure of sectors of kharkiv region economy according to the nochange scenario source: authors’ quadrant ii includes “public administration and defense; compulsory social insurance” sector with high relative labor indicators. such tendency exists due to the prospective increase in material and technical base because of the military conflict in the east of ukraine. “information and telecommunications” sector also got to quadrant ii and it will be able to keep its positions due to the use of the latest technologies and a decrease in the average growth rate of labor productivity. such sectors of kharkiv region economic activity as “industry” and “financial and insurance activities” will move from quadrant ii to quadrant iii. “real estate operations” sector will remain in quadrant iii. quadrant iv of the matrix includes the following sectors of kharkiv region economy: “agriculture, forestry and fisheries” and “transport, warehousing, postal and courier activities”; they are represented with the lowest relative labor indicators. “wholesale and retail trade; repair of motor vehicles and motorcycles” sector will also go to quadrant iv. in the strategic perspective, we can expect a “boom in unemployment” because overstaffing and low growth rates of the industry will affect mass dismissal of those employed in the field of trade. 100 iii iv ii average rate of labor productivity, % growth rate of labor productivity, % public administration and defense other service sectors of the economy information and telecommunication s industry transport real estate operations i financial and insurance activities trade agriculture, forestry and fisheries 214 v. rodchenko, g. rekun, e. naidina, y. prus, v. medenets therefore, functioning of the sectors of kharkiv region economy under the scenario of constant (inertial) labor productivity for 5-10 years will provide positive indicators of the development of traditional sectors of economic activity for the territory, as well as for it sector. however, the level of overall competitiveness of the region against the background of aging logistics and inefficient employment system will decline. 2.4. modernization scenario for different sectors of kharkiv region economy on condition of available staffing benchmarks for implementing modernization scenario for developing sectors of territorial economy is re-orienting the region’s specialization based on competitive advantages, ensuring the optimal structure of employment, creating certain conditions for the successful implementation of the decentralization strategy, improving the efficiency of international integration in the region and so on. the main prerequisite for the development of various economic activities on condition of available staffing in kharkiv region is to reduce restrictions on the development of economic and public relations in the international space (development strategy of kharkiv region, 2015). promotion of economic interests of kharkiv region to international markets will strengthen the position of the region in the international space, not only in the markets with traditional (for kharkiv region) specialization (industrial, agricultural, service and trade sectors), but also in the latest high-tech markets. in the framework of modernization scenario, “industry”, “education” and “information and telecommunications” will become the drivers of sustainable economic development of kharkiv region. moreover, labor productivity growth in these sectors may lead to a corresponding increase in other parts of the economic activities. in the industrial sector, the increase in labor productivity to the world level will be due to the improvement of the state of fixed assets and the introduction of new technologies to the traditional branches of the processing industry (new industrialization a real chance for ukraine, 2018). attraction of world brands to the industry will allow receiving consultations on professional training and provide further training to workers. the increase in the real wage in this area will reduce the rate of migration of relevant professionals abroad. taking into account the number of citizens who have already left ukraine, according to the modernization scenario, scientific research indicates the gradual return of those emigrants who have already formed or will form readiness for re-emigration (blyzniuk et al., 2018). the increase in labor productivity in “education” sector, in particular by improving social infrastructure of universities, will increase the attractiveness of kharkiv region as a center for providing educational services in europe and develop academic mobility among teachers and students. this, in turn, will affect the increase in productivity in “professional, scientific and technical activities” sector through the transfer of knowledge, the commercialization of new technologies and the development of innovative entrepreneurship. according to the modernization scenario, “information and telecommunications” sector may increase the demand for human resources. increasing youth employment in this sector in kharkiv region will take place if a network of contacts between universities and the private sector is established. expanding sectors that focus on digital solutions in kharkiv region will increase the creation of gva in other economic activities. staffng for scenarios of sustainable development of kharkiv region economic sectors 215 the growth of labor productivity to the world level in the field of agriculture will occur due to the intensive use of land and the introduction of new technologies for processing agricultural products. on condition of creation of public-private partnership in a strategic perspective in this sector of kharkiv region economy, it will be possible to overcome the existing mismatch in the skills of human resources in accordance with the needs of employers of the agricultural complex. the functioning of the sectors of kharkiv region economy according to the scenario of growth of labor productivity by types of economic activities to the world level allows making assumptions about the optimal structure of economic sectors in the future (fig. 5). it is predicted that quadrant i of the matrix will include most sectors of kharkiv region economy that provide non-market services: “healthcare and social assistance”, “art, sports, entertainment and leisure”, “activities in the field of administrative and support services” and others. quadrant i will also include “construction” sector. as expected, quadrant ii will include such sectors as “information and telecommunications”, “industry”; “education” sector will be added. economic activities such as “financial and insurance activities” and “agriculture, forestry and fisheries” will move to quadrant iii of the matrix from quadrants ii and iv respectively. this quadrant will also include “real estate operations” and “transport, warehousing, postal and courier activities”. fig. 5 perspective structure of sectors of kharkiv region economy in the framework of modernization scenario source: authors’ according to the indicator of labor productivity, quadrant iv of the matrix will include the following types of economic activity: “wholesale and retail trade; repair of motor vehicles and motorcycles” and “temporary accommodation and catering”. thus, in the strategic perspective, functioning of the sectors of kharkiv region economy on condition of available staffing under the scenario of labor productivity growth to the world level will ensure sustainable economic development of the territory in accordance with the european principle of “smart specialization”. 100 financial and insurance activities temporary accommodation and catering iii iv ii average rate of labor productivity, % growth rate of labor productivity, % education agriculture trade other sectors of the economy providing non-market services information and telecommunications industry transport real estate operations i construction 216 v. rodchenko, g. rekun, e. naidina, y. prus, v. medenets the diversity of research areas and the search for approaches to personnel management, including the regional level, sustainable development have been highlighted in the scientific works of foreign and domestic scientists: l. g. kvasniy, w. lewis, v.v.onikienko, e. m. libanova, s. mcguinness, v. v. blyzniuk and others. the problem of the relationship between innovation and employment is the subject of scientific research by such foreign scientists as v. v. roy, b. balsmeier, m. woerter, n. lee, d. acemoglu, d. autor. the works of many scientists, including j. fagerberg, s. kryvusha, a. tertichny, l. makarova and others, are devoted to various aspects of the study of labour productivity as a catalyst for the effective use of human resources. at the same time, we should question the verification of the scenario direction of future staffing gaps that are determined by no-change dynamics of quantitative traits of human resources and the turbulence of technological changes in different sectors of the regional economy and when the corresponding changes in demand for human resources occur. conclusion based on the calculation of labor productivity by kinds of economic activities of kharkiv region, we justified the policy of transformation for kharkiv region economy, which is oriented to growing sectors with high productivity. in the strategic perspective, this policy will determine the formation of an effective employment structure, in accordance with the global challenges that shape modern workplace. the use of a matrix approach to the definition of strategic staffing gaps according to the sectors of kharkiv region economy is proposed. quadrant i includes most sectors of the region economy that provide non-market services, as well as the sphere of trade, with high growth rates and a small relative share of labor productivity. quadrant ii includes “information and telecommunications”, “industry”, “financial and insurance activities” and others with the highest indicators of labor productivity. quadrant iii includes such sectors of the economy as “real estate operations” and “transport”, with low growth rates and a significant relative share of labor productivity. the quadrant with the lowest productivity indicators includes “agriculture, forestry and fisheries”, “administrative services” and others. the scenarios of redistribution of human resources to the industry with high productivity and the corresponding changes in the employment structure of kharkiv region were given. the development of sectorial scenarios for the development of kharkiv region on condition of available staffing, specifics and features of the territory provides an opportunity to form recommendations for effective management of human resources in the region, which will further settle the contradictions of sustainable development of the territory. it is revealed that the functioning of the sectors of kharkiv region economy, under the scenario of constant (inertial) labor productivity for 5-10 years, will provide positive indicators of the development of the traditional sectors for the territory, as well as for the it sector. nevertheless, the level of overall competitiveness of the region against the background of aging logistics and inefficient employment system will decline. this will negatively affect the ability to attract funds to the region and the functioning of industries that provide nonmarket services. this, in turn, will affect the degradation of residential areas in kharkiv region, the reduction of the working-age population, the increase in the load on one working person at the expense of pensioners, and it will create prerequisites for the outflow of human resources. staffng for scenarios of sustainable development of kharkiv region economic sectors 217 it is determined that “industry”, “education” and “information and telecommunications” sectors will become the drivers of sustainable economic development of kharkiv region in the long term. these sectors of kharkiv region economy will only function on condition of available staffing in the framework of modernization scenario. labor productivity growth will provoke a corresponding increase in other parts of the economic activities of the region. in addition, it is argued that the development of kharkiv region under the scenario of productivity growth will ensure sustainable economic development of the territory in accordance with the european principle of “smart specialization”. therefore, the trends of staffing should be considered as one of the central directions of the regional development under the influence of the fourth industrial revolution. creation of infrastructure, protection of resources, and formation of the business climate are strategically important measures to introduce positive 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(2018). technology and employment: mass unemployment or job creation? empirical evidence from european patenting firms. research policy, 47, 1762–1776. zapošljavanje za scenarije održivog razvoja ekonomskih sektora u regionu harkova ovaj članak se bavi proučavanjem pojave i produbljavanja jaza u zapošljavanju koji utiče na razvoj regije pod uticajem transformišuće proizvodne dominante u uslovima ekonomije 4.0. u sklopu rada, daje se generalizacija sistema faktora za pojavu jaza u zapošljavanju koji utiče na održivi razvoj regije. predstavljena je matrica kojea određuje jaz u zapošljavanju i razvijeni su sektorski scenariji za sprečavanje ovog jaza u regionalnoj ekonomiji harkova. stvorena je pretpostavka o mogućoj strukturi ekonomskih sektora u regionu harkova prema scenarijima inertnog, odnosno inovativnog načina razvoja ukrajine. ključne reči: ekonomija 4.0; ljudski resursi; jaz u zapošljavanju; tehnologija; održivi razvoj https://uspp.ua/assets/doc/maket_nov_2019.pdf https://idss.org.ua/monografii/2013_rynok_praci_onikienko.pdf https://core.ac.uk/%0breader/84826460 https://core.ac.uk/%0breader/84826460 http://www3.weforum.org/docs/wef_future_of_jobs_2018.pdf https://cedos.org.ua/uk/articles/%0bukrainske-studentstvo-za-kordonom-dani-do-201718-navchalnoho-roku https://cedos.org.ua/uk/articles/%0bukrainske-studentstvo-za-kordonom-dani-do-201718-navchalnoho-roku https://www.idss.org.ua/arhiv/ukraine_migration.pdf plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 18, no 1, 2021, pp. 45 57 https://doi.org/10.22190/fueo201102004s © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper sustainability risk management in the digital economy udc 005.334:501.131.1 jelena z. stanković, evica petrović, jovica stanković university of niš, faculty of economics, serbia abstract. the problem of sustainable development has become an imperative of globalization, which resolutely sets the request for companies to operate socially responsibly, i.e., to create value in a manner that is sustainable in the future by achieving economic, environmental and social goals. the wave of change, conditioned by digital transformation, is considered an opportunity, but also a challenge for the realization of the concept of sustainable development. therefore, the aim of this paper is to consider the risks of sustainable business emerging from the implementation of ict in the business process, with focus on the companies in the republic of serbia. key words: sustainability risks, digitalization, risk management, sustainable development jel classification: q01, q56, l86, q55, g32 1. introduction the increase in the number of risks associated with climate change and social disturbances, as well as the intensity of their effects, is estimated to reduce the gross domestic product of the global economy by up to 20% in the future (stern & stern, 2007). in such business conditions, the problem of sustainable development is becoming increasingly important in corporate governance, due to the fact that companies are required to operate in a socially responsible way by achieving economic, environmental and social goals (dangelico & pujari, 2010). based on data on corporate social responsibility, it can be concluded that the number of companies that apply the principles of sustainable development in their business has increased. thus, in 2011, only 20% of the total number of companies received november 02, 2020 / accepted february 17, 2021 corresponding author: jelena z. stanković university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: jelenas@eknfak.ni.ac.rs 46 j. z. stanković, e. petrović, j. stanković included in the s&p 500 index basket published reports on sustainable operations, while in 2016 their number increased to 81% (coppola, 2016). the application of information and communication technologies (ict) can provide solutions to many existing business challenges, such as shortening innovation cycles, increasing volatility and competitiveness in a dynamic business environment (kagermann, 2015). however, if the importance of the digitization process for human life and work is taken into account, it can be concluded that this process will be crucial for achieving a long-term balance between social development and the environment (souter et al., 2010). as the concept of sustainable development cannot be achieved without global communication and knowledge exchange (maclean et al., 2007), business digitalization can be an opportunity to overcome development constraints, but also a serious risk factor for sustainable development, because the effects of industry 4.0 on sustainability are still uncertain (birkel et al., 2019). due to the fact that 8 of the 10 most important business risks are directly related to the environmental and social problems (schulte & hallstedt, 2017), risk management is a key factor for integrating the principles of sustainable development into business operations (schulte & hallstedt, 2018). thus, the aim of this paper is to consider the risks of sustainable business, arising from the implementation of ict in the business process. moreover, the application of ict in companies in the republic of serbia for achieving the goals of sustainable business is assessed. according to this, the paper is structured in the following way: the second part describes the impact of ict on socially responsible business, the third part explains the risks of sustainable development in the digital economy and opportunities for their integration into existing risk management frameworks. in order to access the risks of business digital transformation in the republic of serbia, a swot analysis of the application of ict in companies in serbia is presented in the fourth part of the paper. in the conclusion, the potential effects of the synergy of the digital economy and socially responsible business are presented, as well as the limitations of the existing application of ict, especially in companies in the republic of serbia. 2. socially responsible business in conditions of digitalization the technological development of modern civilization has reached the stage of meeting different development goals, and the tendency to maintain the traditional model of economic growth leads to a conflict between economic and environmental goals. the combination of multiple pressures, such as continuous population growth, changes in consumption patterns and climate change, leads to a reduction of limited resources such as food, water, energy and materials, below the critical limit. therefore, the concept of sustainable development has been gradually expanding by connecting sociology, economy and ecology. the focus of interest is on a complex, multidimensional ecosocial system, which provides basic services to society, such as food, drinking water, energy, and whose key components are environmental and social subsystems. the complex and dynamic process of economic development has initiated a number of structural changes in the economy, both locally and globally. these changes include changes in the structure of demand and production, changes in the professional and qualification structure of the workforce, foreign trade and finance. the main characteristic of these changes is that they are not realized immediately, but in a long period of time through economic crises, transformations and improvements. as a result, there is an enormous increase in the impact of sustainability risk management in the digital economy 47 human activities on the ecological subsystem and the ecosocial system as a whole, but also the emergence of risks. digitalization, as one of the biggest drivers of change in the 21st century, has completely changed the concept of development of the global economy and society, putting in the forefront the potential of ict and the challenges of environmental sustainability (ciocoiu, 2011). the process of digitalization, as a process of connecting people and things and continuous convergence of the real and virtual world based on ict, has had such a great impact on the ecosocial system that it has caused a re-examination of the basic structures of this system. information and communication technologies have a dominant role in redefining products, processes, organizational structure and business models in many economic activities. digital transformation can be defined as the expanded use of modern information technologies, such as analytics, mobile devices, social networks or smart integrated devices, as well as the advanced use of traditional technologies, such as erp, to improve business (westerman et al., 2014). this great wave of change is considered an opportunity, but also a challenge to achieve the united nations sustainable development goals (sdg), especially when it comes to reducing various forms of inequality, ensuring decent work and responsible production and consumption. implementation in various spheres and the development of digital technologies create unique opportunities for improving social and environmental well-being, and further enhancing global living standards while preserving and improving the environment for future generations (linkov et al., 2018). however, its impact on sustainable development is still not possible to assess reliably, although digitalization is expected to transform the economy, as well as society, in terms of economic, environmental and social performance (muller et al., 2018). the classification of possible impacts of ict on sustainable development depends on the level of development and application of information technologies in one community and is shown in table 1. table 1 classification of the impact of ict on sustainable development order of effects impact direction of action first order effects: production and application of ict increased level of pollution and energy consumption necessary for the production and application of ict, as well as for its disposal after use. negative second order effects: use of ict in order to reduce energy / water consumption, reduce pollution optimization of production processes and unsustainable consumption due to the application of ict (e.g. reduction of energy consumption using various applications). mostly positive third order effects: change of life habits the cumulative mediumto long-term impact that the use of ict can have by large numbers of people (e.g., teleworking instead of traveling). positive fourth order effects improving overall social decision-making capacities and measuring their impact in the field of real-time sustainable development policy implementation. positive source: forge et al. (2009) current research studies are devoted mainly to the technical challenges of implementing the industry 4.0 concept (liao et al., 2017), while the analysis of the risks associated with it has not yet been systematically described in the scientific literature. isolated risk observation 48 j. z. stanković, e. petrović, j. stanković does not contribute to the detection of interdependencies that exist between the risks of traditional and digital business, which can cause a decrease in profit or reallocation of business due to loss of comparative advantages of companies that do not achieve adequate ict implementation in the existing business model (ghanbari et al., 2017). the transformation of the organization of the company can be further slowed down by social risks, such as requirements for retraining of employees or termination of jobs, especially for simple and routine operations, which are replaced by automated processes (kazancoglu & ozkan-ozen, 2018). therefore, in the continuation of the paper, the changed effect of basic and additional business risks conditioned by the application of ict in business will be explained. 3. risks of sustainable business in the digital economy digitalization of management process, supported by comprehensive data analysis, advanced decision-making algorithms, and artificial intelligence, affects all three dimensions of sustainability (kiel et al., 2017). however, in addition, the technical aspects of the implementation of the industry 4.0 concept have opened up a number of questions regarding technical and regulatory requirements (müller & voigt, 2018), which, if not adequately regulated, can become risk factors (fig. 1). economic risks of ict implementation in business operations affect the achievement of business results. considering the complexity of information technology, the high value of investments, both in equipment and in employees, can be identified as one of the basic economic risks (birkel et al., 2019). due to the inability to accurately assess the economic life of the implemented technology, as well as the uncertainty regarding cash flow planning in the long run, decisions on the realization of these business ventures are very often classified in the group of those that require a careful assessment of the beginning of the investment period (raj et al., 2020). actually, investing in ict in the mature phase of development, may cause smaller investments, but it does not provide the company with the expected comparative advantage. on the other hand, investments in underdeveloped technologies carry an additional risk of choosing the wrong technological solutions, which will not provide the company with the desired competitive position in the market. as an additional aspect of the impact of ict on economic risks, the emergence of new business models can be pointed out, such as business cooperation through platforms (kagerman, 2015), which, in addition to being an additional instrument for increasing business value, also creates the so-called risk of cannibalization of existing business models. the implementation of digital technologies in business practice leads to the emergence of numerous environmental risks. the first effects of the use of ict are mostly negative and relate to the excessive use of energy and a large quantity of raw materials for the production of equipment (stock et al., 2018). excessive use of energy is the result of the complex work process, especially the usage of additional services in data processing. environmental pollution can be caused by inadequate disposal of equipment after use since for the most of the technology materials recycling processes are not available or are unprofitable to conduct (behrendt, 2018). despite significant efforts to reuse or adapt existing plants and equipment, this is not possible in most cases when more advanced technical and technological solutions have appeared in order to reduce costs and resources. the complexity of new technologies and the required capacities for their implementation sustainability risk management in the digital economy 49 limit the possibilities for using the existing capacities of the company. in addition, there may be an increase in the amount of waste due to mass personalization of products (wang et al., 2017), which highlights the negative effects of the application of ict in business and in the mature stages of its implementation. the integration of digital technologies into the business process inevitably imposes the need for new competencies of employees, especially in terms of using ict, reducing the number of business activities, but also increasing the flexibility of work organization, which can create additional pressures on the existing social tension (schwab, 2017). in other words, employees are expected to have qualifications and skills to use advanced tools and technologies, as well as to be able to solve problems and perform multiple work tasks simultaneously in a complex environment (bonekamp & sure, 2015). such requirements often create a stressful work environment in which employees do not understand the role of advanced technologies in work, and often do not accept the changes that business modernization requires, despite additional training and education. in extreme situations, companies decide to relocate their business facilities, which increases unemployment and deepens the problem of social inequality. fig. 1 ict risks of sustainable development and their interdependence source: birkel et al. (2019) a specific group of sustainability risks in the digital economy is represented by the risks of technical integration of the concept of digitalization into the business of the company (kagermann, 2015). an integrated approach to business can have great potential for the growth and development of companies, but it is conditioned by a high level of complexity in implementation. this way of doing business becomes too dependent on technology, so the failure of software or systems can lead to a break in the entire value chain. vertical and horizontal integration of business through ict opens the business system to various external influences, and makes it vulnerable to cyber-attacks, but also calls into question the protection of data and the way they are used. therefore, at the national level, it is necessary to have an adequate infrastructure, which will support the implementation of advanced ict in business (raj et al., 2020), and the globalization of business implies a high level of standardization 50 j. z. stanković, e. petrović, j. stanković (schwab, 2017). mass digitalization of business opens numerous problems, such as data protection, determining working hours, but also the protection and safety of employees at work, which is why the impact of advanced technologies on sustainability needs to be considered in terms of regulatory risks. in accordance with these risks, there is a change in the role and importance of enterprise risk management in modern business conditions in a way that the long-term sustainability of business is closely linked to enterprise risk management (erm). in such circumstances, the triple bottom line becomes a mandatory framework for measuring the results of socially responsible business. companies that focus on socially responsible business are primarily engaged in activities that avoid future business problems, but also society, as a whole, is protected from potentially harmful effects of business operations (godfrey et al., 2009). the fact is that these risks may have an impact on firm performance in the long run, but the effects of their manifestation cannot yet be adequately assessed, nor the link between long-term and short-term effects of sustainability risks and business risks (bromiley et al., 2015). this situation is a consequence of the inconsistency of the way of integrating the concept of sustainable development into the existing framework of corporate governance and erm. in other words, the requirement for corporate social responsibility can be seen as a specific business goal of the company (saardchom, 2013) or existing business goals can be seen through the perspective of corporate social responsibility (faris et al., 2013). the chosen aspect of the integration of the principles of sustainable development into the business will also affect the way of integrating sustainability risk into the erm framework. erm frameworks should be adapted to the new requirements for sustainability by including the concept of sustainability in all phases of risk management (saardchom, 2013). defining an adequate risk management framework enables companies to comprehensively and systematically assess, control, use, finance and monitor financial, strategic and operational risks, which in the short and long term may affect the interests of stakeholders. in order to incorporate the principles of corporate social responsibility into the strategic management process, it is necessary to be aware of the risks of sustainability when performing all business activities from daily, operational business to investment decision-making. the process of business digitalization goes beyond the digitalization of resources and involves the transformation of key business activities, products and processes, leading to modified or completely new business models, so the implementation of this process requires an appropriate strategy (bharadwaj et al., 2013). in order to formulate and implement a digital transformation strategy, companies must consider: the use of technology, changes in value creation, structural changes and financial aspects of this process. when it comes to the external environment, market conditions, competition, technological trends, regulatory requirements, climate change, country risks and political risks can be considered the key factors of business success and sustainability, but also the conditions and method of financing, needs and requirements of external stakeholders and all other external influences and risks associated with them. the complexity of the company in terms of its size, number of organizational units, level of vertical integration, internal regulations, as well as the existing business strategy can be considered the internal factors that affect erm in terms of digitalization and sustainability of the company. therefore, in the following part of the paper the main risks of digitalization in the republic of serbia will be assessed using swot analysis. sustainability risk management in the digital economy 51 4. risks of digitalization in the republic of serbia the ict sector in serbia offers potential for sustainable development. in 2017, the ict sector participated with 4.42% in the creation of gdp (eurostat database), while in the same period, eur 768 million (nbs database) was generated from the export of ict services. however, the application of ict is still not in the function of sustainable development and increasing competitiveness. in the republic of serbia, 100% of companies have internet connection, 84.4% of companies have a website, but only 27.9% of companies sell products or services online (sors, 2020). moreover, the largest number of companies (over 50%) made less than 25% of profit through the online sales. this situation, as well as the fact that only 23% of companies use crm to manage customer information, indicates that companies in serbia do not sufficiently use the potential of the ict sector. the impact of digitalization on sustainable development in the republic of serbia will be assessed by analyzing two indices: the network readiness index and the sustainable development index. the network readiness index (nri) is a composite index that comprehensively assesses how society and the economy influence the development and application of information and communication technology. in order to adequately assess the impact of ict on the development of society and the economy, nri has changed its structure since 2002, when it was first presented to the public. thus, in 2019 the index was significantly revised and improved. data for the republic of serbia in comparison with the surrounding countries are higher, and a growing trend can be observed during the observed period (2009 2015), but not as high as in the eu member states (table 2). table 2 descriptive statistics of nri and sdi indicators in the period 2009 – 2015 in the republic of serbia and neighboring countries serbia north macedonia bulgaria croatia bosnia and herzegovina albania nri sdi nri sdi nri sdi nri sdi nri sdi nri sdi min 3,51 0,40 3,64 0,71 3,66 0,76 3,91 0,70 3,07 0,72 3,23 0,78 max 4,00 0,68 4,40 0,74 4,00 0,78 4,34 0,75 3,99 0,74 3,89 0,81 mean 3,70 0,52 3,93 0,72 3,85 0,77 4,13 0,73 3,50 0,73 3,58 0,80 st. dev. 0,18 0,10 0,28 0,01 0,11 0,01 0,17 0,02 0,37 0,01 0,25 0,01 source: authors’ calculation on the other hand, if the level of sustainable development index (sdi) is observed, it can be concluded that in the observed period (2009 – 2015) the republic of serbia was the least ecologically efficient in the process of human development (table 2). contrary to expectations, the value of sdi decreased during the period, so that the value of sdi fell from 0.69 in 2009 to 0.40 in 2015 (fig. 2). spearman's rank correlation coefficient was calculated and its significance was tested in order to examine the interdependence between variations in nri and sdi values in the republic of serbia. this indicator belongs to the category of nonparametric indicators and represents a nonparametric analogy of the simple linear correlation coefficient. since the calculation of spearman's rank correlation coefficient does not require the fulfillment of assumptions related to data distribution, its application is considered adequate in this case. 52 j. z. stanković, e. petrović, j. stanković fig. 2 nri and its sub-indices scores and sdi scores for the republic of serbia source: authors’ presentation table 3 spearman’s correlation coefficient values by indices and their sub-indices nri a: environment b: readiness c: usage sdi nri 1.00 0.73 0.93* 0.99* -0.79* a: environment 0.73 1.00 0.58 0.73 -0.93* b: readiness 0.93* 0.58 1.00 0.93* -0.61 c: usage 0.99* 0.73 0.93* 1.00 -0.79* sdi -0.79* -0.93* -0.61 -0.79* 1.00 *statistically significant correlation with p-value less than 0.05 source: authors’ calculation the calculated values of spearman's rank correlation coefficient between variations in the estimates of nri and its sub-indices and sdi, shown in table 3, indicate the existence of a strong negative correlation, which is at the same time statistically significant. the value of the correlation coefficient between nri and sdi is -0.79 and is statistically significant. the high values of spearman's correlation coefficient between sdi and the nri sub-indices environment and usage indicate a strong degree of indirect agreement in variations in the capacity of the environment and the use of ict with the assessment of sustainable development in the republic of serbia. specifically, the constant increase in the value of nri scores is not sufficiently in accordance with the changes in sdi values. due to the adoption of agenda 2030 and the sustainable development goals in 2015, the method of calculating sdi has changed significantly, and during 2019 and 2020, the nri index included for the first time the impact of ict on sustainable development. having in mind the mentioned risks of digitalization for sustainable development, the potential impacts of ict on sustainable development in the republic of serbia were assessed using swot analysis. in this case, the assessments of the most important sustainability risk management in the digital economy 53 constituents of the nri for the republic of serbia and their rank in relation to the score of the related sub-pillar, as well as in relation to the average score for the eu and countries of the same level of development were discussed. in accordance with the chosen method of assessment, the main weaknesses of industry 4.0 and threats that could potentially slow down the achievement of the sustainable development goals of the economy of the republic of serbia have been identified (table 4). if economic risks are observed, it can be concluded that insufficient investment is one of the basic weaknesses of companies in the republic of serbia. digital technologies in the form of e-services, robotics or process management solutions can help companies achieve their business goals in the sdg context. however, investments of serbian companies in the development of the ict are very modest only 2.06% of total investments in research and development relate to programming, consulting and related activities (eurostat database). specifically, only 18.6% of companies pay for the cloud services (rzs, 2020). table 4 swot analysis of the ict risks and opportunities in the republic of serbia strengths ▪ large number of firms having own website ▪ secured access to website ▪ quality of e-government services ▪ accessibility, quality and relevance of government websites weaknesses ▪ insufficient investment in and adoption of ai, robotics, applications and websites for e-commerce, big data analytics and cloud computing ▪ low value of purchased or leased computer software ▪ inadequate computer literacy skills of employees ▪ low level of mobile and e-business usage opportunities ▪ high r&d expenditure in ict by governments and higher education ▪ internet access and usage ▪ fixed-broadband access ▪ wide area coverage for mobile network access (4g) ▪ regulatory and legal framework for ict ▪ satisfactory legal protection of internet privacy threats ▪ low availability of government published open data ▪ cybersecurity risks ▪ low level of usage of e-bank and m-bank services, especially in rural areas ▪ inadequate policy and regulatory environment for private sector development ▪ slow policy and regulatory adaptability to disruptive technologies ▪ unsatisfactory legal framework for e-commerce ▪ internet usage gender inequality ▪ low level of environment monitoring source: authors’ elaboration according to dutta and lanvin (2020) in regards to social risks, companies are burdened by the lack of basic ict skills of employees, but also by the lack of permanently employed ict experts. only 19.3% of companies in serbia permanently employ the ict experts, while 14.6% provide ict training for their employees and 56.6% outsource ict services (sors, 2020). low level of investments in employee training prevents better exploitation of available ict capacities and slows down their integration into business models of companies. however, demand for qualified ict experts in companies is high, since 43.7% of companies have unsuccessfully tried to employ ict experts. the main obstacles for ict experts’ engagement are the lack of relevant experience (71.4%), the lack for adequate qualifications (65.6%), as well as high expectations regarding salaries (28.6%) (sors, 2020). considering the low level of robots’ usage – only 3% of companies use some type of robots in their business 54 j. z. stanković, e. petrović, j. stanković (eurostat database), it can be concluded that there is still no significant risk of job losses nor organization structure changes. ict infrastructure and legal regulations in the field of ict provide a solid basis for the development of industry 4.0 in the republic of serbia. however, the legislation does not sufficiently follow the specific areas of ict application and does not adapt quickly enough to the changes that have occurred. specifically, the weakest component of ict legislative environment is the e-commerce legislation (serbia’s rank 77/134) and the adaptability of current legislative to emerging technologies (serbia’s rank 72/134) (dutta & lanvin, 2020). this can be an obstacle to the development of e-business and the use of e-banking and mbanking services, as well as significant change of existing business models. the technical risks that companies in the republic of serbia face are mainly related to the availability of open data, data security and the implementation of cloud solutions. low availability of government published open data places serbia to 65th place out of 134, while cybersecurity risks rank is 60/134 (dutta & lanvin, 2020). thus, very small number of companies uses big data analysis only 2% of companies in the republic of serbia comparing to the 13% of companies in the eu (eurostat database). on the other hand, the contribution of ict to the environment in the republic of serbia cannot be reliably assessed, because despite the fact that the application of ict should contribute to improving environmental planning, natural disaster management and increased energy efficiency, environmental monitoring in the republic of serbia is very low and this information is usually not available. instead, the most important contribution of ict to sdg is observed for sustainability of cities and communities (41/134), quality education (45/134) and gender equality (53/134), while the contribution to achieving goals of affordable and clean energy is rather low (109/134), as well as good health and well-being (88/134) (dutta & lanvin, 2020). 5. conclusion the company's business has changed significantly in recent decades. companies operating in modern business conditions are directed to socially responsible business, which implies progress in terms of economic prosperity, environmental quality and social justice. technical and technological changes, which have influenced knowledge and networks to play a greater role in economic development than capital, have led to the emergence of the concept of a sustainable digital economy as a solution to environmental and social problems. the synergetic effects of the digital economy and sustainable development have been recognized in developed economies. besides this, based on experience, it can be concluded that ict can support sustainable development in the following ways (iisd, 2010): ▪ reducing the direct effects of production, distribution, use and disposal of equipment on the environment by improving energy efficiency, using energy from renewable sources, reducing the use of toxic materials and improving recycling and waste disposal. icts are used to optimize the operations, thus increasing their efficiency while reducing pollution and resource consumption. ▪ increasing the effects of the ict usage on sustainable development through improving the efficiency of production, distribution and consumption of goods and services. complete or partial dematerialization of products and services enables the creation of their virtual sustainability risk management in the digital economy 55 substitutes, the production and use of which can significantly reduce emissions and energy use. ▪ supporting systemic effects resulting from changes in the behavior, affinities and value systems of individuals as citizens and consumers; changes in economic and social structures and political processes. ict is used in the visualization and communication of information relevant to sustainable development, such as the use of energy, water or co2 emissions, which is a prerequisite for the application of the principles of sustainable development. although countries have recognized the potential of combining the digital economy and the principles of sustainable development, a large number of companies still do not consider the integration of sustainability principles to be essential for their business (ernst & young, 2017) and view these requirements exclusively from a risk management perspective. analysis of the nri and sdi index imply that serbian companies do not apply ict in the context of achieving sdgs. companies confront many ict risks, mainly regarding ict skilled employees and financial means for investment in ict. moreover, legislative does not regulate the specific areas of ict application and does not adapt quickly enough to the dynamics of digital economy decreasing the potential of ict for sustainable development. however, effective sustainability risk management implies adequate integration of these risks into existing risk management frameworks, but there are some limitations in practical application (schulte & hallstedt, 2017). unlike traditional risks, these risks have certain properties, such as the dynamics of change, qualitative assessment of the effects, pronounced uncertainty of manifestation. according to the available reports, the effects of most ict risks on the economy are not available. in addition, there is no consensus on the definition of sustainable development, which prevents the creation of a clear risk management strategy, obscures accountability and prevents the establishment of an interdependence between costs and benefits. all this points to the insufficient maturity of the erm to manage the risks of sustainable development. acknowledgement: the paper is a part of the research done with the support of the erasmus+ programme of the european union within the project no. 611831-epp-1-2019-1-rs-eppjmomodule. references behrendt, s. 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(2014). the nine elements of digital transformation. mit sloan management review, 55(3), 1-6. upravljanje rizicima održivog razvoja u digitalnoj ekonomiji problem održivog razvoja je postao imperativ globalizacije, koji pred preduzeća sve odlučnije postavlja zahtev da posluju društveno odgovorno, odnosno stvaraju vrednost na način koji je održiv u budućem periodu ostvarujući ekonomske, ekološke i društvene ciljeve. talas promena uslovljen digitalnom transformacijom se smatra mogućnošću, ali i izazovom za ostvarenje koncepta održivog razvoja. stoga je cilj ovog rada sagledavanje rizika održivog poslovanja, koji proizilaze iz implementacije ikt u proces poslovanja, sa posebnim osvrtom na preduzeća koja posluju u republici srbiji. ključne reči: rizici održivosti, digitalizacija, upravljanje rizicima, održivi razvoj. facta universitatis series: economics and organization vol. 18, no 1, 2021, pp. 29 43 https://doi.org/10.22190/fueo201028001r © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper credit scoring with an ensemble deep learning classification methods – comparison with traditional methods1 udc 336.77:519.2 ognjen radović, srđan marinković, jelena radojičić university of niš, faculty of economics, serbia abstract. credit scoring attracts special attention of financial institutions. in recent years, deep learning methods have been particularly interesting. in this paper, we compare the performance of ensemble deep learning methods based on decision trees with the best traditional method, logistic regression, and the machine learning method benchmark, support vector machines. each method tests several different algorithms. we use different performance indicators. the research focuses on standard datasets relevant for this type of classification, the australian and german datasets. the best method, according to the mcc indicator, proves to be the ensemble method with boosted decision trees. also, on average, ensemble methods prove to be more successful than svm. key words: credit scoring; classifier ensemble, deep learning, support vector machine jel classification: c38, c45, c55, g17, g24 1. introduction credit scoring is a quantitative method for assessing the credit risk involved in granting a loan to a borrower. credit scoring is one of the key stages in credit analysis. it is a method of assessing the creditworthiness of a client applying for a loan. the goal of creditworthiness assessment is to classify credit applications into acceptable and unacceptable, but also to provide the necessary inputs for the next phases of credit analysis, such as determining the credit volume, interest rates, collateral, restrictive clauses and the like. traditional credit analysis relies on historical and verifiable information or accounting data. the most general credit analysis framework many traditional lenders use to assess credit users is the 5c approach. credit analysts make decisions based on the following criteria: debtors’ character, capacity (ability to repay), capital, collateral and market conditions. the main advantage of this method is that it can be received october 28, 2020 / accepted december 02, 2020 corresponding author: jelena radojičić university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: jelena.radojicic@eknfak.ni.ac.rs 30 o. radović, s. marinković, j. radojičić used to make credit decisions in various types of business and consumer loans without significant adjustments. traditionally, creditworthiness assessment of a corporate borrower is based on financial indicators that indicate possible problems in loan repayment and play an important role in calculating credit risk levels. these indicators are characterized by objectivity because they are calculated on the basis of data in borrowers’ financial statements. the analyst’s experience and impressions can play a significant role in creditworthiness assessment of the entity applying for a loan. prior to the credit scoring model, the decision to grant a loan was made based on the credit analyst’s assessment. one of the disadvantages of such an approach is the inability to process a large number of applications per day, which has given rise to various credit scoring models to quantify the credit risk (dastile, celik, & potsane, 2020). banks used information received within a loan application (e.g., number of dependents, period in the current job, etc.) to calculate the borrowers’ numerical score (lewis, 1992). credit scoring, as a precise and automatic creditworthiness assessment tool, is a particularly important factor in the expansion of consumer lending (thomas, crook, & edelman, 2002). credit scoring is mostly applied in consumer loans, credit cards and mortgage loans (einav, jenkins, & levin, 2013). advances in information technology facilitate further development of credit scoring models for making objective and quick decisions (thomas, crook, & edelman, 2002). credit scoring is a technique that financial organizations use when making a decision to approve a loan or reject their clients’ loan application (application scoring). credit scoring models can be applied to analyze the behavior of already existing clients, and then the score represents a numerical summary of the bank’s experience with the client (behavior scoring) (hui, li, & zongfang, 2017). the basel ii agreement of 2004 expanded the field for developing more sophisticated credit scoring models, thus allowing banks to assess the probability of default on their own under the internal ratings-based (irb) approach (goh & lee, 2019). 2. traditional statistical methods used in credit scoring credit scoring is a multi-stage process (bequé & lessmann, 2017), and it basically compares the borrower’s characteristics and the characteristics of other clients from the previous period. the statistical model relies on historical data. its goal is to predict future behavior in loan repayment based on previous experience with loan users with similar characteristics. if the borrower is similar to “bad” clients (who did not repay the approved loan properly), the application is rejected, and if the borrower is similar to “good” clients (who returned the approved loan properly), the loan application is approved. the loan applicant’s score is compared with the established cut-off score. if the obtained score is higher than the cut-off score, credit is approved, and if the score is lower than the cut-off, application is rejected. the cut-off score is crucial for the usefulness of the credit scoring model and mainly relies on the credit decision makers’ attitudes towards risk. so, there is no optimal cut-off value. “it varies from one environment to another and from one bank to another inside the same country” (abdou & pointon, 2011). the final step is to measure the accuracy of the credit scoring model and monitor business performance indicators. “the choice of a statistical model is crucial because it affects all subsequent activities and credit scoring performance” (bequé & lessmann, 2017). the models that financial institutions use help them decide whether or not to grant a loan. as the final decision on approval is binary, there is a problem of binary classification. credit scoring involves “formal statistical methods to classify loan applicants into “good” credit scoring with an ensemble deep learning classification methods – comparison with traditional... 31 and “bad” risk classes” (hand & henley, 1997). credit scoring algorithms are basically statistical in nature: they use empirical evidence to formulate predictions about the future. prediction models assess a continuous variable while classification models predict class membership. in credit scoring, the dependent variable is actually binary, so most algorithms can be considered classification algorithms (abdou & pointon, 2011). statistical methods such as linear regression and discriminant analysis require the assumption of a linear relationship between variables. in credit scoring, linear regression is used as a binary classification problem. discriminant analysis is a simple parametric statistical technique for classifying loans into good and bad. fischer (1936) suggests the application of discriminant analysis as a classification technique, and in 1941 durand used discriminant analysis to classify “good” and “bad” car loans, thus beginning the trend of applying statistical models in credit scoring. later, altman (1968) developed a z-score model with financial indicators, using variables from corporate financial statements as input variables for a discriminant analysis model to predict company bankruptcies. “discriminant analysis is one of the frequently used techniques in credit scoring” (abdou & pointon, 2011). ogrler (1971) applies regression analysis for credit scoring of consumer loans in banks, after using this method somewhat earlier to evaluate the already existing commercial loans (orgler, 1971). he concludes that “information not included in the loan application form has a greater predictive ability” to assess loan quality in the future than the information included in the form. in 1980, ohlson proposed the use of logistic regression (logit) as a creditworthiness assessment method in companies (ohlson, 1980). the outcome variable in logistic regression is dichotomous (outcome 0/1), so this method is suitable for modeling binary outcomes and is widely used in creditworthiness assessment due to its simplicity and transparency (dastile, celik, & potsane, 2020; abdou & pointon, 2011). within traditional methods, logistic regression has become the standard credit scoring model due to its compliance with the basel ii standard (goh & lee, 2019). 3. application of machine learning in credit scoring more sophisticated methods of credit scoring that literature has offered in recent years are machine learning algorithms and data mining methods. the point of using sophisticated techniques is their ability to model extremely complex functions (abdou & pointon, 2011). machine learning models learn from available data, thus allowing the calculation of predictive value. a machine learning algorithm learns a set of rules based on the information available in a training set of examples. machine learning models have the potential to replace the logistic regression model in credit scoring because they show great prediction accuracy. however, the impossibility of certain models to explain the predictions, i.e. lack of transparency, limits their application in regulated financial institutions. the application of machine learning algorithms may include (dastile, celik, & potsane, 2020): „k-nearest neighbor (k-nn), decision trees (dts), support vector machines (svms), artificial neural networks (anns), random forests (rfs), boosting, extreme gradient boost (xgboost), bagging, restricted boltzmann machines (rbms), deep multi-layer perceptron, (dmlp), convolutional neural networks (cnns) and deep belief neural networks (dbns)“. the decision tree creates a discriminant function in the form of a tree, from the root to the leaves. each node represents a logical test of the attribute value, and the leaves denote 32 o. radović, s. marinković, j. radojičić classes. input observations are recursively split into subbranches, i.e. until the final result (class designation). mathematical formulas such as the gini index (cart) or entropy (in id3, c4.5, c5, j4.8 decision tree algorithms) are used to determine the splitting threshold (patil, aghav, & sareen, 2016; bequé & lessmann, 2017). the tree learns by asking questions that will solve the problem in the fastest and most accurate way. each time the algorithm is repeated, the attribute value is compared to the threshold. thresholds determine which attribute should be tested and when tree growth should be stopped (bequé & lessmann, 2017). after the training, the tree can predict the outcome if applied to data of the same type and format. the low decision tree accuracy may be affected by low depth and presence of noise (overfitting). this classification technique is widely used in credit scoring models (dastile, celik, & potsane, 2020). since its introduction into the theory of statistical learning in 1998 (vapnik, 1998), the support vector machines method (support vector machines – svm) has been used as a binary classifier of machine learning. svm algorithms in the field of credit scoring were introduced by baesens et al. (2003) and through comparison with other classification algorithms (logistic regression, discriminant analysis, k-nearest neighbor, neural networks, decision tree) indicated its good performance. svm, as a discriminant model, is based on the margin for classification between classes, i.e. it focuses on finding the boundary that separates two classes with the smallest error. in the svm model, data is viewed as vectors in n-dimensional space. the focus is on the maximum margin between classes, i.e. the space between two hyperplanes that separate data from different classes, i.e. which belong to one or more support vectors. the separating hyperplane is located farthest from the data and is determined by the position of the data of both classes closest to it. if the classes are denoted by y=+1 and y=-1, in the version of the linear svm classifier, the margin ‖𝛼‖ = √∑ 𝛼𝑖 2𝑚 𝑖=1 between the negative and positive hyperplanes is maximized. the following equation is used to assign a class (dastile, celik, & potsane, 2020): 𝑦 = { +1, 𝑖𝑓 𝑏 + 𝛼 𝑇 𝑥 ≥ +1 −1, 𝑖𝑓 𝑏 + 𝛼 𝑇 𝑥 ≤ −1 (1) where b is bias. the svm method can also be used for data classes that are not linearly separable. “for nonlinear classification, a kernel trick is used to modify the svm formulation” (dastile, celik, & potsane, 2020). using the appropriate kernel function, the example is mapped to a space with a larger number of dimensions and the nonlinear problem is transformed into a linear one. neural network consists of several neurons that work in parallel, without centralized control. an artificial neural network mimics the way a biological neural network processes information. neurons are usually complex in layers. the neural network usually consists of three layers: input, hidden, and output parameters. there are several types of neural networks, but their common components are a set of nodes and connections between nodes. nodes represent computer units whose task is to receive inputs, process inputs and produce and output (bequé & lessmann, 2017). first, the input characteristics are processed to the hidden parameters, and then the hidden parameters calculate the adequate weight before forwarding the information to the output parameters. each layer of the neural network “consists of several elements, i.e. neurons. the number of input neurons depends on the number of predictors, the number of hidden neurons is a setting parameter determined by the analyst, and the number of output neurons is determined by the modeling task itself, credit scoring with an ensemble deep learning classification methods – comparison with traditional... 33 e.g. for binary classification it is one” (bequé & lessmann, 2017). artificial neural networks were first applied by odom and sharda (1990) in credit scoring. for a given vector of the input attribute x, the three-layer neural network calculates the output value�̂� as follows (dastile, celik, & potsane, 2020): �̂� = 𝑎2(𝑎1 (𝛼 (1)𝑥 + 𝛼0 (1) )𝛼 (2)𝑥 + 𝛼0 (2) ) (2) where (𝛼0 (1) , 𝛼 (1)) , (𝛼0 (2) , 𝛼 (2)) are weights, and 𝑎2 and 𝑎2 are activation functions between the input and hidden layer. neural networks are trained through a training set, and the final decision is made by applying the decision function to �̂�. 4. ensemble of classifiers – literature review elementary classifiers represent a unique set of statistical relationships. ensemble of classifiers consist of a set of individually trained base classifiers whose decisions are combined in a certain way (weighted voting or unweighted voting) when new examples are classified. ensemble of classifiers is a “combination of classifiers so that their fusion achieves better performance than stand-alone classifiers” (nanni & lumini, 2009). combining different machine learning algorithms can improve the accuracy of results (dastile, celik, & potsane, 2020). ensemble algorithm techniques are used to aggregate the results of “unstable” algorithms in which small changes in the training set lead to large changes in the learned set of rules (e.g. neural networks, decision trees). the application of ensemble learning techniques requires the simultaneous fulfillment of the following assumptions (pławiak, abdar, & acharya, 2019): “a) quality, b) statistical independence (diversity) and c) efficiency (speed)”. ensemble of classifiers is used to achieve better performance in various research areas such as computer intelligence, statistics, and machine learning (ren, zhang, & suganthan, 2016). different ensembles of classifiers are used in literature (pławiak, abdar, & acharya, 2019): a) boosting (adaboost), b) bagging (bootstrap aggregation), c) random forest, d) stacking (stacked generalization) and e) mixtures of experts. boosting is the most commonly used method in the ensemble of classifiers (dastile, celik, & potsane, 2020). it starts with a weak model (for example, a shallow decision tree), and then the models are iteratively evaluated and amplified (freund & schapire, 1997). boosting produces a series of classifiers (bequé & lessmann, 2017). each subsequent classifier focuses on examples that have been misclassified by the previous classifier. each example in the training set is assigned a weight in accordance with the significance of the example in the set. examples misclassified by the previous model are assigned a higher weight. after individual classifier learning, the weights are updated on the test set. the accuracy of individual classifiers on a test set is determined by the weight of that classifier in the classification of new examples by applying an ensemble of classifiers. one of the most well-known boosting techniques is adaptive boosting (adaboost) (freund & schapire, 1997). adaboost algorithm has one parameter t – the number of generated classifiers (iteration) and is characterized by simplicity and efficiency. adaboost assigns a class to an input attribute vector that is classified (x) as follows: �̂� = 𝑠𝑖𝑔𝑛 (∑ 𝛼𝑡 𝜙𝑡 𝑇 𝑡=1 (𝑥)) (3) where 𝛼𝑡 is the weight of the classifier 𝜙𝑡 (𝑥). 34 o. radović, s. marinković, j. radojičić bagging generates multiple versions of classifiers that are used as an aggregate predictor through a voting mechanism (breiman, 1996). bootstrap aggregation is used to generate classifiers, with no iterative division into a training set and a test set, but random selection with return. the training set is formed by successive sampling (with repetition) of data from the initial set. data never selected form a test set, while the rest is used for training. the process is repeated several times, and the overall score is obtained as the average score on all thus formed sets for verification (breiman, 1996). bootstrapping generates k training sets, and then one basic classifier is trained on each of them. the class rating is awarded by a majority vote of k classifiers, as follows (dastile, celik, & potsane, 2020): 𝑦 = 𝑎𝑟𝑔𝑚𝑎𝑥 𝑦∈{+1,−1} ∑ 1(𝑦 = 𝜙𝑖(𝑥)) 𝐾 𝑖=1 (4) where 1(𝑦 = 𝜙𝑖 (𝑥)) = { 1, 𝑖𝑓 𝑦 = 𝜙𝑖 (𝑥); 0, 𝑖𝑓 𝑦 ≠ 𝜙𝑖 (𝑥). (5) the random forest algorithm consists of several decision trees. the new examples are classified by the voting method based on the decisions of individual trees. not all samples and attributes are taken for training individual trees, but a certain number of randomly selected attributes and samples from the training dataset. each decision tree develops on a subset of randomly selected attributes. the best attribute is chosen for the decision tree node. selecting the right attributes (questions) to be tested in a particular node reduces the entropy, or provides additional information about the sample. in a random forest algorithm, multiple decision trees learn from randomly selected data leading to greater tree diversity and depth. the greater depth of the trees makes the random forest algorithm more resistant to underfitting (insufficiently good interpretation of the relationships between variables within the dataset) and overfitting (noise in the data) compared to individual decision trees. deep learning, as one of the machine learning fields, is based on a hierarchical architecture that includes multiple layers of nonlinear operations and steps in information processing. some of the deep machine learning techniques used in credit scoring are (pławiak, abdar, & acharya, 2019): „(a) deep discriminant models such as: deep neural networks (dnns), recurrent neural networks (rnns), as well as convolutional neural networks (cnns), (b) unsupervised learning (generative models) such as: restricted boltzmann machines (rbms), deep belief networks (dbns), deep boltzmann machines (dbms) as well as regularized autoencoders.” deep learning classifiers are not widely used in credit scoring (dastile, celik, & potsane, 2020). disadvantages of deep learning are (pławiak, abdar, & acharya, 2019): “(1) computationally complex training, (2) long and inefficient training and (3) the overfitting effect, which prevents its effective practical use”. predictive accuracy is a basic measure of classification success. prediction accuracy is the percentage of success in classifying new examples using learned rules. even small errors in creditworthiness assessment can lead to large losses, so increasing the accuracy of credit scoring is of great importance for the profitability of banks (pławiak, abdar, & acharya, 2019). in this regard, more sophisticated credit scoring models have significant potential (dastile, celik, & potsane, 2020). in one of the earliest reviews of statistical methods and data mining methods applied in credit scoring, hand and henley (1997) conclude that further development should go towards more complex dm models, which later literature reviews confirmed (sadatrasoul, et. al. 2013). a comparison of different approaches to credit scoring shows that advanced machine learning-based techniques may credit scoring with an ensemble deep learning classification methods – comparison with traditional... 35 have better predictive ability than conventional techniques such as logistic regression and discriminant analysis (abdou & pointon, 2011). nanni and lumini (2009) investigate several ensemble of classifier systems used in credit scoring and bankruptcy prediction and improve the performance obtained using the stand-alone classifiers. wang et al. (2011) carry out a comparative performance evaluation of “three ensemble methods (bagging, boosting, stacking) of basic classifiers: logistic regression, decision tree, artificial neural network, and support vector machine (svm)”. the results show that ensemble method improves performance and that bagging gives better results than boosting. lou et al. (2017) compare classification success of deep learning algorithms in credit scoring and widely used models such as logistic regression and svm, to find that deep learning models have better performance. li et al. (2017) develop a “model for credit risk assessment using deep neural networks” and show that the proposed algorithm has greater accuracy in credit risk assessment. the results of the simulation by zhou et al. (2012) show that extreme learning machines (elm) is a more suitable approach for credit risk assessment than svm. bequé and lessmann (2017) investigate the potential application of elm for credit scoring and compare it with other classifiers (neural networks, k-nearest neighbor, svm, classification and regression decision tree, logistic regression) within three dimensions: “ease of use, computational complexity and predictive performance”. they conclude that “elm shows competitive or better results in each dimension of comparison and especially proves high discriminant power, both in isolation and within the ensemble and, therefore, represents a competitive alternative to already established classifiers in the field of credit scoring”. neagoe et al. (2018) design a credit scoring model using a neural network classifier, namely: the multilayer perceptron (mlp) approach and the thirteen-layer dcnn variant. the obtained results confirm the efficiency of the proposed approach, indicating a significant advantage of dcnn over mlp. proceeding from the idea to imitate the work of the human brain in terms of fusion and information flow, plawiak et al. (2019) create the “deep genetic cascade ensembles of classifiers (dgcec) based on the fusion of stratified 10-fold cv method, ensemble learning, deep learning, layered learning and supervised training. the applied model combines three machine learning techniques: evolutionary, ensemble and deep learning.” the solution the authors propose provides a fast and efficient approach to training, which increases the accuracy of creditworthiness assessment. in the dgcec method, each first-layer classifier is trained to increase the recognition performance of accepted or rejected borrowers based on the pre-processed data on borrowers. in other layers, based on the preprocessed user data and the classifier response from the first and previous layers using deep learning techniques and selection of genetic characteristics, a knowledge extraction process takes place that leads to the final result. the results show better performance of this approach compared to previously applied approaches in terms of the accuracy of creditworthiness assessment of borrowers in australia. the highest accuracy of creditworthiness assessment in previously conducted studies is 91.97%, while the method proposed by the authors allows higher prediction accuracy, i.e. of 97.39%. (pławiak, abdar, & acharya, 2019). recent literature research shows that ensemble models have better performance than individual classifiers and that deep learning models give better results compared to statistical and traditional machine learning models (dastile, celik, & potsane, 2020). 36 o. radović, s. marinković, j. radojičić 5. research methodology empirical research includes checking the performance of deep learning algorithms over known credit scoring datasets. in this paper, we use two datasets, the australian credit and the german credit (uci machine learning repository, asuncion & newman, 2010). datasets include a different number of independent variables. australian credit data consists of 307 cases of creditworthy candidates and 383 cases of candidates to whom credit should not be granted. the german dataset is somewhat more asymmetric, with many more creditworthy examples (700) than those that should not be granted credit (300). the australian dataset has 14 attributes, while the german has 24 attributes. both sets have two classes {approved, rejected} and are a good mix of different types of attributes: continuous and nominal. variables can be grouped into several categories (beque and lessmann, 2017): financial (assets, monthly income, etc.), socio-demographic (age, place of residence, etc.), others (possession of a credit card or a mobile phone). k-fold cross-validation is used to assess the classification model, which works as follows (dietterich, 1998): 1. dividing a training dataset into k randomly selected non-overlapping data subsets of approximately equal size; 2. one subset is used to validate the model of trained over the remaining data subsets; 3. this procedure is repeated k-times so that each subset is used exactly once for model validation; 4. performance is assessed for each partition and the average error on all k-partitions is reported. this is one of the most popular techniques for cross-validation and is good at assessing the predictive accuracy of the classification model. in our study, 5-fold cross-validation is used for both credit rating datasets. also, in order to reduce the dimensionality of the predictor space, principal component analysis (pca) is used. pca linearly transforms predictors to remove redundant dimensions and prevent overfitting. to assess the performance of classification models, several standard indicators are used, for the calculation of which the values of correct and incorrect predictions are used: the number of borrowers correctly classified as {approved} (defaults) (true positives -tp), the number of borrowers incorrectly classified as {approved (defaults) (false positives fp), the number of borrowers correctly classified as {rejected} (non-defaults) (true negatives tn), and the number of borrowers incorrectly classified as {rejected} (nondefaults) (false negatives fn). the total number of examples is n=tp+fp+fn+tn. the false positive rate (fp) is defined as the share of misclassified loan approval cases. in contrast, the rate of false negative results (fn) is defined as the share of misclassified cases refused to be given a loan (qualifying for a loan). the set of indicators consists of: pcc (percentage correctly classified), auc (area under the curve), sensitivity, specificity, precision, g-mean, f-measure and matthews correlation coefficient mcc. the selection of indicators is based on previous research (oztekin, al-ebbini, sevkli, & delen, 2018; kim et al, 2020). percentage correctly classified (pcc) is the ratio of correct predictions of a case classification model in two categories {approved, rejected}. it is calculated as pcc = (tp+tn)/(tp+tn+fp+fn). pcc is the average percentage of correctly classified cases and is a measure of correct classification over sets unused for learning (subset for validation in 5-fold cross-validation). sensitivity/recall is the ratio of correctly classified cases in the class {approved} to the total number of examples in the class {approved} and is calculated credit scoring with an ensemble deep learning classification methods – comparison with traditional... 37 as sen = tp/(tp+fn). specificity is the ratio of correctly classified cases in the class {rejected} to the total number of examples in the class {rejected} and is obtained as tn/(tn+fp). sensitivity and specificity show the accuracy of class-level classifiers. geometric-mean (g-mean) is obtained as follows: 𝐺– 𝑚𝑒𝑎𝑛 = √ 𝑇𝑁 (𝐹𝑃 + 𝑇𝑁) 𝑥 𝑇𝑃 (𝑇𝑃 + 𝐹𝑁) (6) f-measure is calculated as: 𝐹– 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 = 2× 𝑆𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 × 𝑃𝑟𝑒𝑐𝑖𝑠𝑖𝑜𝑛 𝑃𝑟𝑒𝑐𝑖𝑠𝑖𝑜𝑛 + 𝑆𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 (7) where precision = tp/(tp+fp). g-mean and f-measure indicate imbalance between classes. auc or area under the receiver operating characteristic curve is one of the indicators that illustrates the performance of the classification model. the larger this area, the better the model. auc can be seen as the ability to distinguish positive from negative classification. matthews correlation coefficient (mcc) is another performance indicator. the mcc value is -1 to 1. perfect prediction has a value of 1, completely incorrect prediction is -1, while random prediction has a value of 0. the mcc generates a high score only if the model can correctly predict most positive credits and most correctly rejected credits. it is considered one of the best indicators of accuracy in the evaluation of machine learning algorithms. the formula for calculating the mcc is as follows (matthews, 1975; jurman et al, 2012): 𝑀𝐶𝐶 = 𝑇𝑃∙𝑇𝑁−𝐹𝑃∙𝐹𝑁 √(𝑇𝑃+𝐹𝑃)∙(𝑇𝑃+𝐹𝑁)∙(𝑇𝑁+𝐹𝑃)∙(𝑇𝑁+𝐹𝑁) (8) the following classifiers are used to compare the performance of ensemble models: logistic regression and support vectors. the svm models used to compare classification performance use different learning algorithms (linear, quadratic, cubic, fine gaussian, medium gaussian, coarse gaussian). the tested ensemble models use three learning algorithms (boosted trees (adaboost), bagged trees and rusboosted trees) over decision trees (random forest techniques). the research is conducted in the classification learner application module using the matlab 2019b software package. all calculations are performed in a windows 10 environment (amd ryzen 7 3700u with 12gb ram). 6. results and discussion tables 1 and 2 show the performance of predictive models for the australian and german datasets, respectively. the tables show assessment of categorical prediction accuracy and the discriminant ability of the included classifiers. performance assessment is average accuracy on test sets. for each model, auc (area under the receiver operating characteristic curve), true positive classification rate (tp), false positive classification rate (fp), true negative classification rate (tn), false negative classification rate (fn), and pcc are shown (percent correctly classified). these results are the average values determined for each of the 5 independent non-overlapping partitions of the dataset used in the 5-fold cross-validation. for both datasets, the approved case rate is higher than the rejection rate for all models tested, meaning that false negative results are less common than false positive results relative to the overall prediction (with the exception of the fine gaussian svm). it is 38 o. radović, s. marinković, j. radojičić debatable whether false negative predictions are more serious than false positive ones from the point of view of credit risk. if someone is predicted to be able to repay the loan and it turns out that they are not able to, that can lead to certain losses. conversely, if someone is rejected, and they are able to repay the loan, it leads to a loss of earnings on the loan. at the australian dataset, according to the auc criterion, the best classifier is the ensemble bagged trees model (table 1) with a value of 0.92 (87.41%). the gaussian svm model has the lowest false positive case rate (fp), while the linear gaussian svm models have the lowest false negative case rate (fn). according to the criterion of false positive cases (fp), ensemble models show the best results. this means that these models prove to be less risky in terms of incorrectly granted credit. according to the pcc criteria, the ensemble bagged trees model proves to be the best classifier (table 1). however, some svm methods (gaussian svm) show better results than other ensemble methods. however, in general, ensemble methods show better results than svm methods. on average, according to the pcc indicator, ensemble models are better than other tested models. our results confirm the beque and lessmann (2017), but it should be noted that our research relies on the matlab package while beque and lessmann (2017) use the r programming environment. our research on the australian dataset shows that logistic regression is inferior to svm and ensemble methods. table 1 summary of results of individual classifiers obtained in predicting the australian credit scoring dataset classification learner auc tp fp tn fn pcc logistic regression logistic regression 0.90 (0.13,0.82) 266 (87%) 69 (18%) 314 (82%) 41 (13%) 84.06% support vector machines (box constraint level, manual kernel scale) linear (1,-) 0.91 (0.07,0.80) 285 (93%) 78 (20%) 305 (80%) 22 (7%) 85.51% quadratic (1,-) 0.90 (0.16,0.84) 257 (84%) 62 (16%) 321 (84%) 50 (16%) 83.77% cubic (1,-) 0.90 (0.18,0.84) 253 (82%) 60 (16%) 323 (84%) 54 (18%) 83.48% fine gaussian (1,0.94) 0.89 (0.24,0.89) 233 (76%) 43 (11%) 340 (89%) 74 (24%) 83.04% medium gaussian (1,3.7) 0.92 (0.07,0.80) 285 (93%) 77 (20%) 306 (80%) 22 (7%) 85.65% coarse gaussian (1,15) 0.92 (0.07,0.80) 285 (93%) 77 (20%) 306 (80%) 22 (7%) 85.65% ensemble (method, maximum number of splits, number of learners, learning rate) boosted trees (adaboost, 20,30,0.1)) 0.92 (0.20,0.87) 246 (80%) 49 (13%) 334 (87%) 61 (20%) 84.06% bagged trees (bag, 689,30,-) 0.92 (0.12,0.87) 269 (88%) 49 (13%) 334 (87%) 38 (12%) 87.39% rusboosted trees (rusboost, 20,30,0.1) 0.91 (0.16,0.86) 259 (84%) 52 (14%) 331 (86%) 48 (16%) 85.51% source: data processed by the author credit scoring with an ensemble deep learning classification methods – comparison with traditional... 39 in the german dataset, according to the auc criterion, the best classifier is the ensemble rusboosted trees with a value of 0.76 (70.38%), and logistic regression, linear and medium gaussian svm are close to it with 0.77 (about 65%) (table 2). the rusboosted trees model has the lowest rate of false positive cases (fp), while the gaussian svm models have the lowest rate of false negative cases (fn). according to the criterion of false positive cases (fp), ensemble models give the best results. according to the pcc criteria, the medium gaussian svm model (table 2) proves to be the best classifier with accuracy of 74.10%. on average, according to the pcc indicator, ensemble models are equal to svm models. in the german dataset, logistic regression yields results on a par with svm and ensemble methods. table 2 summary of results of individual classifiers obtained in predicting the german credit scoring dataset classification learner auc tp fp tn fn pcc logistic regression logistic regression 0.77 (0.54,0.86) 602 (86.0%) 163 (54.3%) 137 (45.7%) 98 (14.0%) 73.90% support vector machines (box constraint level, manual kernel scale) linear (1,-) 0.77 (0.60,088) 616 (88.0%) 179 (59.7%) 121 (40.3%) 84 (12.0%) 73.70% quadratic (1,-) 0.75 (0.57,0.85) 592 (84.6%) 171 (57.0%) 108 (43.0%) 129 (15.4%) 70.00% cubic (1,-) 0.70 (0.53,0.78) 547 (78.1%) 158 (52.7%) 142 (47.3%) 153 (21.9%) 68.90% fine gaussian (1,0.94) 0.71 (0.99,1.0) 699 (99.9%) 296 (98.7) 4 (1.3%) 1 (0.1%) 70.30% medium gaussian (1,3.7) 0.77 (0.68,0.92) 645 (92.1%) 204 (68.0%) 96 (32.0%) 55 (7.9%) 74.10% ensemble (method, maximum number of splits, number of learners, learning rate) boosted trees (adaboost, 20,30,0.1)) 0.76 (0.61,0.87) 608 (86.9%) 182 (60.7%) 118 (39.3%) 92 (13.1%) 72.60% bagged trees (bag, 689,30,-) 0.75 (0.58,0.86) 605 (86.4%) 173 (57.7%) 127 (42.3%) 95 (13.6%) 73.20% rusboosted trees (rusboost, 20,30,0.1) 0.76 (0.25,0.65) 458 (65.4%) 74 (24.7%) 226 (75.3%) 242 (34.6%) 68.40% source: data processed by the author tables 3 and 4 show the performance indicators of different classifiers for australian and german datasets, respectively. the models with the best performance indicators are in bold. all classifiers in both tested datasets record a high value of sensitivity, with large differences observed in terms of specificity indicator in german dataset. in both datasets, the fine gaussian svm has the highest sensitivity value. in the australian dataset, svm algorithms have the highest specificity. however, the best ensemble in the german dataset is the ensemble rusboosted trees. the sensitivity of svm methods is on average higher than ensemble methods in both datasets. however, the specificity of ensemble methods is on average higher than svm in both datasets. similarly, in terms of g-average and fmeasure, which show a balance between sensitivity and specificity, ensemble methods, on average, show slightly better results than svm in terms of g-average but lower in fmeasure. in terms of mcc indicators, as the most relevant for the assessment of binary 40 o. radović, s. marinković, j. radojičić classification techniques of machine learning, in both datasets, the best results are recorded with ensemble techniques. in the australian dataset, the mcc correlation of 74.60% ensemble bagged trees shows that the predicted class and the correct class are highly correlated. however, the mcc/ensemble rusboosted trees correlation of 37.44% shows that the predicted class and the correct class are not as highly correlated (as with the australian dataset). taking into account all indicators, the analysis of classifiers and their predictive abilities do not identify an individual classifier with high predictive power for all, or at least most performance indicators. table 3 performance comparison of individual classifiers for the australian credit scoring dataset method sensitivity/recall specificity g-mean f-measure mcc logistic regression 81.98% 86.64% 84.28% 83.01% 68.24% linear svm 79.63% 92.83% 85.98% 82.47% 72.13% quadratic svm 83.81% 83.71% 83.76% 83.79% 67.31% cubic svm 84.33% 82.41% 83.37% 83.90% 66.63% fine gaussian svm 88.77% 75.90% 82.08% 85.81% 65.60% medium gaussian svm 79.90% 92.83% 86.12% 82.67% 72.37% coarse gaussian svm 79.90% 92.83% 86.12% 82.67% 72.37% ensemble boosted trees 87.21% 80.13% 83.59% 85.60% 67.64% ensemble bagged trees 87.21% 87.62% 87.41% 87.30% 74.60% ensemble rusboosted trees 86.42% 84.36% 85.39% 85.96% 70.70% source: data processed by the author table 4 performance comparison of individual classifiers for the german credit scoring dataset method sensitivity/ recall specificity g-mean f-measure mcc logistic regression 86.00% 45.67% 62.67% 79.49% 34.23% linear svm 88.00% 40.33% 59.58% 80.22% 32.16% quadratic svm 82.11% 38.71% 56.38% 75.57% 21.96% cubic svm 78.14% 47.33% 60.82% 73.23% 25.60% fine gaussian svm 99.86% 1.33% 11.54% 82.51% 7.73% medium gaussian svm 92.14% 32.00% 54.30% 82.14% 30.90% ensemble boosted trees 86.86% 39.33% 58.45% 79.09% 29.47% ensemble bagged trees 86.43% 42.33% 60.49% 79.27% 31.71% ensemble rusboosted trees 65.43% 75.33% 70.21% 66.88% 37.44% source: data processed by the author 7. conclusion credit scoring is a widely used technique that helps banks decide when granting loans to applicants. in addition to using standard statistical decision-making techniques, such as logistic regression or decision tree, credit scoring is a very interesting task for machine learning and artificial intelligence methods. in recent years, machine learning technologies have been developing rapidly and ensemble learning is being studied more and more. credit scoring with an ensemble deep learning classification methods – comparison with traditional... 41 several papers have shown the advantages of deep learning over traditional credit scoring methods. in this paper, we investigated the predictive capabilities of ensemble algorithms over credit scoring decision trees and compared them with traditional methods – logistic regression and svm support vectors. ensemble methods are promising classifier and predictive techniques and represent an alternative to classical artificial neural networks (ann). a large number of studies have shown that in problems of credit scoring classification, ensemble techniques are better than svm techniques, as well as than traditional techniques such as logistic regression and decision tree. according to each comparison criterion, ensemble methods show better results or at least competitive results with tested predictive techniques. based on australian and german credit scoring data, performance of different classification models is compared. the performance of logistic regression (lr), support vector machine (svm), and deep learning based on decision tree ensembles is analyzed. several different performance indicators are used. according to the mcc indicator, which is considered to be the most adequate for classification problems, on average, deep learning methods prove to be the best. individually, ensembles with boosted trees work best in the australian dataset, and ensembles with rusboosted trees in the german dataset. logistic regression performance is relatively poor compared to the ensemble method and svm. logistic regression, as the best of the traditional methods, fails to match the tools of machine learning. the results of this paper confirm previous research on the advantages of machine learning methods over traditional models. also, the division regarding the obvious advantage of deep learning over svm methods is confirmed. according to certain criteria, svm shows better characteristics compared to ensembles. nevertheless, ensemble methods are promising tools and provide potential for future research. references 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(2012). credit risk evaluation with extreme learning machine. ieee international conference on systems, man, and cybernetics (smc), (pp. 1064-1069). seoul. credit scoring with an ensemble deep learning classification methods – comparison with traditional... 43 kreditno bodovanje pomoću ansamblerskih metoda dubokog učenja za klasifikaciju – poređenje sa tradicionalnim metodama kreditni skoring (kreditno bodovanje) privlači posebnu pažnju finansijskih institucija. poslednjih godina, posebno su interesantni metodi zasnovani na dubokom učenju. u ovom radu, upoređujemo performanse ansamblerskim metodama dubokog učenja zasnovanih na stablima odlučivanja sa najboljom klasičnom metodom, logističkom regresijom i već postavljenim reperom za metode mašinskog učenja, mašinama sa vektorskom podrškom. za svaku metodu testirano je više različitih algoritama. takođe, korišćeni su različiti indikatori performansi. istraživanje je izvršeno nad standardnim bazama za ovu vrstu klasifikacije, australijskim i nemačkim skupom podataka. kao najbolja metoda, prema mcc indikatoru, pokazala se ansemblerska metoda sa boosted stablima odlučivnja. takođe, u proseku, ansemblerske metode su se pokazele uspešnijim od svm. ključne reči: kreditno bodovanje, ansambli za klasifikaciju, duboko učenje, mašine za vektorsku podršku facta universitatis series: economics and organization vol. 18, no 2, 2021, pp. 169 186 https://doi.org/10.22190/fueo210222012c © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the contribution of sme development organization on export: regional example1 udc 334.012.63/.64:339.564 selim corekcioglu szent istván university, doctoral school of management and business administration, gödöllő, hungary abstract. in this study, the effects of kosgeb subsidies on the foreign trade of smes were examined and the actions necessary to be taken by kosgeb (sme development organization in turkey) were emphasized. in the study, t test, anova test and tukey tests were used and the study was conducted in gaziantep, which is the 6th biggest city in turkey. according to the results, companies’ problems are accessing markets, financial problems, qualified personnel, language, and high personnel, raw material and production costs. carrying out activities by kosgeb such as market research, finding customers, providing financial support, contribution to qualified personnel salary, encouraging and supporting r&d activities, and providing consultancy are very important to solve the problems. key words: grant, trade, export, sme jel classification: f 40, f61, h81 1. introduction in recent years, many studies were carried out on the development and facilitating of international trade. export companies are in a more productive position than companies operating only in the domestic market (hu & tan, 2016). export firms face additional costs, such as market research, adjustment of products to regulations or shipping costs, among other costs. these additional costs are a reason for more efficient firms to choose international markets. received february 22, 2021 / revised may 10, 2021 / accepted may 26, 2021 corresponding author: selim corekcioglu doctoral school of management and business administration, szent istván university, páter károly u. 1, 2100, gödöllő, hungary e-mail: selim3977@hotmail.com 170 s. corekcioglu in addition, exporting firms tend to pay higher wages to their employees than nonexporting firms in the market (fryges & wagner, 2010). it is essential for exporters to gain productivity advantage before they start exporting. exporters can export not just because they export but because they are efficient, that is, because they are more productive. when considered on an enterprise basis, although an sme's place in the economy is on a micro scale, these micro scales combine to contribute to the economy on a macro scale. for this reason, exporting firms with high productivity will grow faster when costs are reduced, whereas firms with low productivity and non-exporters will not be the same (bernard et al., 2007). an economic stabilization program implemented in 1980, the free trade liberalization and market-oriented economic, started reforms in turkey. in this program, export subsidies and export-oriented growth policies were applied instead of import subsidy policies. since then, integration into global markets and export orientation became new policy of turkey. in a few years, these policies had positive effects on turkish exports (ci̇nar & koc, 2017). traditional international trade theories state that the exported products, and accordingly sectors, have a comparative advantage compared to the sectors of other countries, while they state that the imported products, accordingly sectors, have a comparative disadvantage compared to the sectors of other countries (gnizy et al., 2017). companies operating in turkey must be supported by the state in order to have an advantageous position in the foreign market. public institutions play an important role during that time. companies that export or have the potential should be supported not only financially but also with consultancy and coaching services (astarlioglu, 2017). beside these, foreign trade has much importance for companies. these are things like increased revenue, competitive environment, longer product lifecycle, better risk management, exchange rate utilization, access to export finance. following the introduction, literature review, which includes former papers related to topic, has been investigated. in the third section, brief information about kosgeb supports was given. the fourth section contains several discussions: the reason why this analysis was conducted, what is the importance of the paper. after this section, the analyzing techniques for data were given. in the sixth section, data collected from companies analyzed in spss software and test result were demonstrated. in the last section, by considering all information such as literature review and test results, suggestions are presented for both policy makers and researchers. 2. literature review (coase, 1960) made a number of assumptions about the government's market interventions. he stated that market interventions should be limited and that the regulation of the market can be done by the market itself. it was argued that the government should only intervene in the market to ensure low transaction costs. depending on the government, political influences should not be allowed to be involved in the regulatory process. (stigler, 1971) examined the effect of the regulation on “cost / benefit” and “supply / demand” in the related to the sector. putting it all into account, the entry limit is one of the most fundamental pieces that regulatory agencies can do for industry from political interests, according to stigler. political decisions sometimes do not reflect the position of majority voters, although political decisions have to maximize the votes of politicians’ the contribution of sme development organization on export: regional example 171 subjects to the constraints of the total economic rents to be redistributed. it talks about the cost of information, training, and most importantly organizational costs for the group and the use of regulation in general. stigler thinks of political parties as natural monopolies that make regulatory decisions. stigler's analysis emphasizes that masses of relative group size have an influence on such arrangements, so these decisions are sometimes ineffective (huberman & kahn, 1988). the political authority creates a natural monopoly on both decision and regulation processes. competition for getting the benefits from regulation must increase total welfare for the whole society. regulation needs for market must be analyzed in detail, meet the requirements of the industry and the benefits of the consumer (deardorff, 1995). international trade is considered one of the most important factors of economic development and global integration. it is thought that international trade has a positive effect on countries in many ways. countries experiencing trade liberalization face different aspects and consequences of bilateral trade and international trade. the relationship between trade and income levels and convergence between countries were discussed in a way that takes into account total factor productivity, technological differences and factor accumulation. david ricardo's dynamic two models of good production proved that trade benefits another group within the country at the cost of diminishing the utility of some groups, taking into account the country's prosperity and growth, and ultimately increased the overall welfare level (zhang & song, 2001). another view on the effects of trade on growth and economic welfare implies that, because of the size and economic power of some countries, they can act like a monopoly in the market, so policies are very important in this direction (rourke, 2001). it is also stated that the role of economic integration through trade history had different effects on the new world as it became more unequal compared to the old world at the end of the 19th century. trade policies, complemented by the redistribution elements are significantly important to create an economically and socially sustainable environment at both national and global levels (alesina & rodrik, 1994). venables, for example, showed that regional inequality in developing countries depends on the natural advantages of some regions over others (evenett & venables, 2002). the venables model showed that companies investing in big cities due to "increased returns to scale" cause urban structures to deteriorate and make markets inadequate due to the growth of these cities above the optimal. therefore, he states that this situation leads the economy to export. in fact, this argument contradicts krugman's argument, indicating that the nature of the geographical environment can be modified to some extent by external factors (krugman, 1999). developing a simple economic geography model (krugman, 1991) showed that a country can become an industrialized "core" or agricultural "environment". by taking into the consideration approach of (anderson, 1979) very similar to the gravity model, krugman argued that firms often tend to locate production facilities closer to geographies with greater demands to utilize economies of scale, minimizing transportation costs. he concluded that the emergence of a differentiation between core and periphery depends on transportation costs, economies of scale, and the share of production in national income. in a more recent study, krugman makes two conflicting views on geography. while the first view deals with the static role of these features due to the nature of geographical features, the second one considers that similar locations may result in different economic roles depending on factors such as factor inactivity and land rents, depending on the relationship between similar regions. so, it was stated that it can result in two different 172 s. corekcioglu efficiency levels with different economic organizations. as a result, although geography was a destiny affecting the economy in the past, it has started to cease to be a destiny today. (bergstrand, 1985) 's empirical tests supported the assumption that goods produced domestically are not perfect substitutes and imported products are a stronger substitute for local goods. grossman and helpman, who work on the trade policies that the government can follow directly by transferring money to a group, can be mentioned. this series of research has opened up the role of the political and institutional environment in determining trade policy (grossman & helpman, 1994). (girma et al., 2020) analyzed whether manufacturing grant has effect on chinese companies' export. at the beginning, they used an analyzing method that takes into account both direct and indirect impact of the government support on export. the findings showed that manufacturing grant affected chinese companies' export performance positively. (brown & troutt, 2018) studied on a research which explores the effect of export subsidies on welfare. the current research assumes that imports are restricted by the exporting country. (brown & troutt, 2018) believe that this theory is wrong on many dimensions: it contradicts the ceteris paribus assumption used in economic analysis; it is impractical in a world with rapidly declining shipping prices and free trade; and it conceals the real result of an export subsidy, which leads to inadequate intra-industry trade. (defever & riano, 2016) analyzed, through a two-country exchange model with heterogeneous companies, the impact of grants subject to export share requirements that is conditioned on exports with at least a fraction of their production on welfare, exports and competitiveness. the model states that this form of government support boosts exports better and gives more protection to domestic companies, but with significant welfare costs, than a regular unconditional export subsidy. (broocks & van biesebroeck, 2017)’s paper is another study on export subsidies. they are asserting that it is important for companies learning how to increase or start exporting especially for small economies. countries which have small and open economies generally provide subsidies to boost export. they studied with the data of company located to flanders region in belgium. the main aim of authors is to see if subsidies increase the export outside the eu. the analysis showed that subsidies have a positive effect on export. the paper of (srhoj & walde, 2020) analyzed the effect of an export subsidies plan created in expectation of participation of a country to the european union. this plan intended to encourage activity in international market introductions and in technological advancement for emerging or current goods. they found that this new approach has a positive impact on the company's profits, export and net income. supports were categorized in 2 section which are technological grants and marketing-oriented grants. technological grants affect exports and capital stocks positively, while marketing-oriented grants affect exports and intermediate inputs positively. they also found no impacts on wages, and just a minor impact on total factor productivity. (sørensen, 2020) proposed a one sector two country heterogeneous company model. it included companies financed by export promotion organization. the result of the study showed that government support affects export positively, because via intra-industry reallocations, companies share what was learnt or gained from support with the trading partner. so, the knowledge related to export will spread and many companies will benefit from support directly or indirectly. the contribution of sme development organization on export: regional example 173 (esaku, 2020) investigated the impact of physical capital spending on companies’ decision to enter the international market and increase export volume. he found that physical capital expenditure at the company level raises the likelihood of small businesses entering export markets. it was also discovered that export knowledge has a huge impact on a firm's decision to invest, most likely as a means of improving manufacturing technology. at the policy stage, it was offered that export subsidies should be targeted to solve capability and technology problems, which make it difficult for small companies to enter the international market and increase their export strength. 3. kosgeb support in order to increase the share and effectiveness of small and medium-sized enterprises in meeting the economic and social needs of the country, to increase their competitiveness and level, to realize the integration in the industry in accordance with economic developments, the small and medium enterprises development and support administration was established. the short name of the organization is kosgeb (legislation information system, 1990). kosgeb is a public institution related to the ministry of industry and technology, has a legal personality and is subject to private law provisions in all its transactions. kosgeb provides support to businesses in many areas. kosgeb supports are important for exporting enterprises. these supports can be summarized as follows. r&d support is a support provided when businesses find a new product or develop an existing product. there are support items such as r&d support, lease support, machineryequipment, hardware, raw material, software and service procurement expenses support, personnel expense support, initial capital support, project development support. the total support limit of r&d support is 750,000 tl. the support rate is 75%. the main purpose of r&d support is to find a prototype of a product. if a prototype of the product is found, the technological product investment support program is offered to commercialize this product. the technological product investment support program includes supports such as machineequipment, hardware, consumables, software and design expenses support, personnel expense support. collaboration and cooperation support program is a support created to find common solutions to common problems. for purposes such as joint procurement, joint manufacturing and service delivery, joint marketing, joint laboratory, joint design, businesses need to come together and establish a new business. in order to benefit from the support, projects to be prepared by at least 5 enterprises coming together and if they will operate in the mediumhigh and high technology fields, the projects to be prepared by at least 3 companies are supported. the support rate is 60%. in this context, the expenditures of enterprises such as machinery equipment, software and personnel are supported. in the medium-high and high technology areas, 300,000 tl non-refundable 1,200,000 tl refundable and 300,000 tl nonrefundable 700,000 tl refundable support is provided to enterprises. common raw material prices are one of the biggest problems encountered while exporting. if businesses become larger, they will gain an advantage for themselves by providing cheaper raw materials. it is also difficult for small businesses to establish a market research unit. in case the business grows, they will be able to establish units for export by establishing departments under their own roof. the growth of businesses will also bring institutionalization to businesses and therefore have a positive effect on exports. 174 s. corekcioglu loan interest support, which is generally opened by call, aims to solve the financial problems of businesses. the relevant interest is important for all businesses as well as for exporting businesses. this flexible support, which can be used in places such as the purchase of machinery equipment or raw materials, is important in terms of exports. the general support program is divided into 15 different branches. the total support amount reaches 470,000 tl. here, branch of this support which has highest contribution to exports in this program can be described as follows. domestic fair support is important for buyers from abroad to find the products they want to buy and to get to know the business. the total support amount of the fair is 50,000 tl. the amount of this support is 20,000 tl. instead of supporting individual trips of businesses, supporting the trips made by institutions such as chambers of commerce contributes to exports by providing a more effective foreign trade by communicating on the basis of institutions and reaching the purpose of the trip. it is important for businesses to be able to print catalogs, to advertise in printed publications abroad and to make business promotions. thus, it enables businesses to reach a wider audience and thus increase their exports. the amount of support is 25,000 tl. qualified staff support amount is 50,000 tl. when businesses want to employ qualified staff, who can speak a language with a high level of education, they usually face cost problems due to high wages. it is an important support in solving this problem. it is impossible for businesses to know the legislation in foreign countries completely, or they do not have personnel to do such work. for this reason, businesses may have to get support from outside. if they want to train their own staff to get support in this regard, they can benefit from training support, if they only want to receive consultancy, they can benefit from consultancy support. the amount of consultancy support is 22,500 and the amount of training support is 20,000 tl. it is important for businesses to find opportunities to reduce their costs while competing in the foreign market. logistics support is a support of 40,000 tl that reduces the transportation costs of the enterprises and thus increases their competitiveness in exports. one of the most important problems of smes is finding customers. thanks to the matching support, companies that want to export products can find customers through the matching centers. the support amount is 30,000 tl. the european business network is a structure that has many companies within itself, allows these companies to sell their products, and provides mentorship to businesses rather than financial support. being in such a wide network will give businesses a great advantage in finding customers. in addition, it is an important support to turkey in terms of attracting external funding by writing projects. 4. objective, importance, and scope of the research the aim of the research is to investigate the effects of kosgeb supports on the foreign trade of smes and how important kosgeb supports are for smes. as known, the positive effects of exports on the economy are quite high. increasing these positive effects will contribute to economies in many aspects, such as decrease in unemployment and increase in income level. therefore, this research was aimed to work on how to remove the obstacles in front of exports by kosgeb and then how to increase exports. the contribution of sme development organization on export: regional example 175 exchange bottlenecks, on occasion, emerge in turkish economy. these bottlenecks cause some damages on the economy both in general and regionally. in order to minimize these damages, some support should be provided by the state. for this reason, this study is important in terms of determining the needs of smes and seeing what kind of support can be provided for these problems in terms of kosgeb. within the scope of the research, smes registered to the southeastern anatolia exporters union and located in gaziantep were included in the analysis. it was seen that there are 2321 companies registered in the database. the sample size was determined by considering the population number of 2321. with a margin of error as 10%, it was seen that 92 companies would be sufficient to answer the questionnaire at 95% confidence level. however, the number of surveys answered was 103 and the survey results were evaluated by considering these 103 companies. the questionnaire method was used as the research method in this paper. survey questions were directed to smes and their problems, situations and needs were tried to be analyzed. in the survey, the enterprises were asked 16 questions, 1 of which was openended. in this context, the first 12 questions are about getting to know the smes, the 13th question is about understanding the problems faced by smes in exports, the 14th question is on measuring the effects of kosgeb supports on exports and the 15th question is on measuring expectations of smes from kosgeb. 16. the question is an open-ended question and it is the question asked to see the expectations, suggestions, opinions of the smes from kosgeb to increase exports. 5. methods reliability test provides information about whether the data used in an analysis is consistent. in other words, it shows whether individual’s answers to survey questions are consistent or not. under the same conditions, a reliable test should give the same results when re-applied. to put it another way, reliability analysis is a requirement for obtaining reliable outcomes from the analysis to be performed. in sum, unreliable data cannot be used in analysis. briefly, reliability analysis is used to see if the scale questions are reliable. the value, which is α, is between 0 and 1. the α value can be seen below (cronbach, 1951; cronbach & shavelson, 2004). 0 ≤ α < 0.4 is not reliable, 0.4 ≤ α < 0.6 reliability is low, 0.6 ≤ α < 0.8 is reliable 0.8 ≤ α < 1 is highly reliable. t test, anova analysis and tukey analysis are also other methods for questionnaire analysis. the main aim of these analyses is to reveal if there is a significant difference between groups. the t-test is one of the most often used predictive research techniques. this test is a foundational component in many univariate analyses and one of the most often used methods in hypothesis testing studies. it is used to test if the variance between constant variables or classes is statistically important, or to establish whether the average observable value differs from the expected value. in brief, t test compares two means, so 176 s. corekcioglu it reveals whether these 2 means are different or not. to put it another way, it shows if the emerging differences resulted by chance or not (student, 1908). the purpose of anova test is to see if there is a significant difference between the means of independent groups. anova is used for comparison of a numerical variable in at least three groups. this examination mostly examines when one group at least differs from the other. in sum, anova analysis is similar to t test, if there is more than 2 groups this method is used. this analysis usually evaluates the difference between groups. when the anova test shows a statistically significant p value, tukey test is used to determine the difference among the groups. tukey analysis is one of post hoc analyses. the main aim of post-hoc analysis is to compare 2 groups. there are some issues that need to be taken into account while examining the mean of the groups. these issues are deviations and averages of the groups. tukey analysis is a more specific analysis than anova, and tukey method is used to see significant difference groups individually (lindman, 1974). within the scope of the research, the hypotheses were formed as follows. h1: there are differences between the problems faced by sme groups who benefit and do not benefit from the programs offered by kosgeb. h2: there are differences between the problems sme groups face according to the sectors in which smes operate. h3: there are differences among the problems sme groups face according to the export amounts. h4: there are differences between the problems sme groups face according to the net sales amounts. h5: there are differences between the problems faced by sme groups according to the export regions. h6: there are differences between the problems sme groups face according to the most important competitors. 6. results results of the analysis can be seen below. according to reliability analysis, as seen below, questions are reliable, because cronbach’s alpha value is 0,881. as seen, the value is between 0.8 ≤ α < 1. it means the values is highly reliable, so further analysis can be implemented to questionaries result. table 1 reliability analysis cronbach’s alpha number of questions 0.881 28 source: own calculation based on available data as seen in the table 2, the problems faced by smes were analyzed according to whether they have benefitted from kosgeb supports or not in the last 3 years. as a result, it was observed that there was a significant difference between the two groups regarding high salaries. it shows that businesses that benefit from kosgeb supports have less problems in this regard than those that do not. the contribution of sme development organization on export: regional example 177 the skilled staff issue is crucial for companies. it is clear that skilled staff are working on the market for a higher wage. while supporting employees, it is also important to be more selective to help the employees who contribute to firms more effectively, instead of supporting both graduates and undergraduate students and supplying a small amount of support. table 2 analysis of the problems faced by smes in cases of benefiting and not benefiting from kosgeb supports (last 3 years) benefitting or not benefiting from kosgeb support n mean std. deviation std. error mean t p bureaucratic barriers yes 52 3.4423 1.17846 0.16342 3.607 0.060 no 51 3.5098 0.94599 0.13247 problems in accessing markets yes 52 3.3846 1.06925 0.14828 0.002 0.963 no 51 3.4314 1.08176 0.15148 raw material costs yes 52 4.2308 1.07768 0.14945 0.406 0.526 no 51 4.1373 1.00039 0.14008 financial problems yes 52 3.7308 1.06854 0.14818 1.728 0.192 no 51 3.4706 1.22234 0.17116 qualified personnel or language problems yes 52 3.3846 1.17413 0.16282 0.149 0.700 no 51 2.7647 1.30519 0.18276 high staff salaries yes 52 2.5490 1.23796 0.17335 4.831 0.030 no 51 2.9423 1.03684 0.14378 problems in accessing incentives and supports yes 52 3.5577 1.03684 0.14378 1.102 0.296 no 51 3.8824 1.01286 0.14183 high logistics costs yes 52 3.8462 1,10940 0.15385 2.106 0.150 no 51 3.8431 0.90272 0.12641 high production costs yes 52 4.0962 0.97538 0.13526 0.000 0.994 no 51 4.1569 0.94599 0.13247 source: own calculation based on available data the problems faced by smes in the different sectors have been analyzed. the main purpose is to see whether there is a difference between the sectors compared. as a result, when the problems were taken into consideration, no significant difference was observed between the groups. as seen in the table 3, the problems faced by smes according to export volumes were analyzed. the main purpose is to see if there is a difference in the problems encountered according to export volumes. as a result, considering the problems, a significant difference was found between the groups in terms of qualified personnel or language problems and high personnel salaries. after considering these results, tukey analysis should be implemented. 178 s. corekcioglu table 3 analysis of the problems faced by smes according to export volumes (anova) n mean std. dev std. err f p bureaucratic barriers 0-499,000$ 49 3.4898 1.12031 0.16004 0.382 0.766 500,000-999,999 $ 20 3.3000 1.26074 0.28191 1,000,000-4,999,999$ 23 3.4783 0.89796 0.18724 5,000,000$ and more 11 3.7273 0.78625 0.23706 total 103 3.4757 1.06499 0.10494 problems in accessing markets 0-499,000$ 49 3.5306 1.13838 0.16263 0.603 0.615 500,000-999,999 $ 20 3.1500 1.18210 0.26433 1,000,000-4,999,999$ 23 3.3913 0.94094 0.19620 5,000,000$ and more 11 3.3636 0.80904 0.24393 total 103 3.4078 1.07043 0.10547 raw material costs 0-499,000$ 49 4.0612 1.12561 0.16080 0.436 0.728 500,000-999,999 $ 20 4.3000 1.21828 0.27242 1,000,000-4,999,999$ 23 4.3043 0.87567 0.18259 5,000,000$ and more 11 4.2727 0.46710 0.14084 total 103 4.1845 1.03609 0.10209 financial problems 0-499,000$ 49 3.7959 1.17224 0.16746 1.304 0.277 500,000-999,999 $ 20 3.6500 1.34849 0.30153 1,000,000-4,999,999$ 23 3.3043 1.06322 0.22170 5,000,000$ and more 11 3.2727 0.64667 0.19498 total 103 3.6019 1.14908 0.11322 qualified personnel or language problems 0-499,000$ 49 3.5918 1.20621 0.17232 8.096 0.000 500,000-999,999 $ 20 3.1000 0.96791 0.21643 1,000,000-4,999,999$ 23 2.2609 1.17618 0.24525 5,000,000$ and more 11 2.4545 1.21356 0.36590 total 103 3.0777 1.27333 0.12546 high staff salaries 0-499,000$ 49 3.2041 1.09886 0.15698 7.157 0.000 500,000-999,999 $ 20 2.7000 1.08094 0.24170 1,000,000-4,999,999$ 23 2.0435 0.97600 0.20351 5,000,000$ and more 11 2.2727 1.00905 0.30424 total 103 2.7476 1.15231 0.11354 problems in accessing incentives and supports 0-499,000$ 49 3.8571 1.00000 0.14286 0.934 0.427 500,000-999,999 $ 20 3.6500 1.30888 0.29267 1,000,000-4,999,999$ 23 3.4348 0.94514 0.19707 5,000,000$ and more 11 3.8182 0.75076 0.22636 total 103 3.7184 1.03296 0.10178 high logistics costs 0-499,000$ 49 3.6531 1.16460 0.16637 1.467 0.228 500,000-999,999 $ 20 4.0000 1.07606 0.24061 1,000,000-4,999,999$ 23 3.9130 0.66831 0.13935 5,000,000$ and more 11 4.2727 0.46710 0.14084 total 103 3.8447 1.00740 0.09926 high production costs 0-499,000$ 49 4.0204 1.12712 0.16102 0.652 0.584 500,000-999,999 $ 20 4.3000 0.97872 0.21885 1,000,000-4,999,999$ 23 4.0870 0.66831 0.13935 5,000,000$ and more 11 4.3636 0.50452 0.15212 total 103 4.1262 0.95671 0.09427 source: own calculation based on available data the contribution of sme development organization on export: regional example 179 table 4 analysis of the problems faced by smes according to export volumes (tukey significance analysis) export volume tukey sig. qualified personnel or language problems 0499,000$ 1.000.0004.999.999$ 0.000 5.000.000$ and more 0.021 high staff salaries 0-499,000$ 1.000.0004.999.999$ 0.000 5.000.000$ and more 0.048 source: own calculation based on available data table 5 analysis of the problems faced by smes according to export volumes export vol. mean qualified personnel or language problems 0-499,000$* 3.5918 1,000,0004,999,999$* 2.2609 5,000,000$ and more* 2.4545 high staff salaries 0-499,000$ 3.2041 1,000,0004,999,999$ 2.0435 5,000,000$ and more 2.2727 source: own calculation based on available data as seen in tables 4 and 5 above, significance was found in the anova analysis for "qualified personnel or language problems" and "high staff salaries", and hence the tukey analysis was applied. as seen from the above table, there is a significant difference in terms of qualified personnel or language problems between those with export volume of 0-499,000 $ and those with 1,000,000 $ 4,999,999 and 5,000,000 $ and more. in terms of high staff salaries, a significant difference was determined between those with export volumes of 500,000-999,999 $ and those with export volumes of 1,000,000 4,999,999 $ and 5,000,000 $ and above. similarly, it was observed that there is a significant difference between smes with an export volume of 500,000-999,999 and those with an export volume of $ 1,000,000$ 4,999,999. test results show that companies with low export level experience greater problems with qualified personnel or language problems. similarly, high personnel wages pose a bigger problem for businesses with an export volume of up to $ 500,000. for this reason, while providing support, businesses with an export volume of up to $ 500,000 can be privileged and more support should be given in this regard. for example, these companies can be made more attractive than other companies by providing salary support and ensuring that the business pays higher salaries to qualified personnel. the problems encountered were analyzed considering the net sales volumes. the main purpose is to see whether there are differences in terms of problems according to the net sales volumes encountered. as a result, when the problems were taken into consideration, no significant difference was observed between the groups. however, in terms of net sales volumes, no significant difference was detected in the problems encountered. 180 s. corekcioglu table 6 analysis of the problems faced by smes according to the most exported region (anova) n mean std. deviation std. error f p bureaucratic barriers europe zone 28 3.7857 0.95674 0.18081 1.725 0.150 america zone 11 3.9091 0.83121 0.25062 middle east zone 39 3.2821 1.09901 0.17598 asia zone 13 3.2308 1.16575 0.32332 other 12 3.2500 1.13818 0.32856 total 103 3.4757 1.06499 0.10494 problems in accessing markets europe zone 28 3.3571 1.02611 0.19392 1.269 0.287 america zone 11 3.7273 1.00905 0.30424 middle east zone 39 3.2821 1.07480 0.17211 asia zone 13 3.1538 1.28103 0.35529 other 12 3.9167 0.90034 0.25990 total 103 3.4078 1.07043 0.10547 raw material costs europe zone 28 4.3214 1.05597 0.19956 1.442 0.226 america zone 11 4.7273 0.46710 0.14084 middle east zone 39 3.9487 1.14590 0.1834 asia zone 13 4.2308 0.92681 0.2570 other 12 4.0833 0.99620 0.28758 total 103 4.1845 1.03609 0.10209 financial problems europe zone 28 3.5357 0.96156 0.18172 0.262 0.902 america zone 11 3.4545 1.50756 0.45455 middle east zone 39 3.5641 1.20950 0.19367 asia zone 13 3.7692 1.09193 0.30285 other 12 3.8333 1.19342 0.34451 total 103 3.6019 1.14908 0.11322 qualified personnel or language problems europe zone 28 3.1786 0.94491 0.17857 2.534 0.045 america zone 11 3.3636 1.36182 0.41060 middle east zone 39 2.6923 1.37943 0.22089 asia zone 13 3.0000 1.15470 0.32026 other 12 3.9167 1.31137 0.37856 total 103 3.0777 1.27333 0.12546 high staff salaries europe zone 28 2.6786 0.86297 0.16309 1.742 0.147 america zone 11 3.0909 1.13618 0.34257 middle east zone 39 2.5128 1.27469 0.20411 asia zone 13 2.6923 1.18213 0.32786 other 12 3.4167 1.16450 0.33616 total 103 2.7476 1.15231 0.11354 problems in accessing incentives and supports europe zone 28 3.7143 0.93718 0.17711 0.890 0.473 america zone 11 3.2727 1.48936 0.44906 middle east zone 39 3.7436 0.96567 0.15463 asia zone 13 3.6923 1.03155 0.28610 other 12 4.0833 0.99620 0.28758 total 103 3.7184 1.03296 0.10178 high logistics costs europe zone 28 3.7857 0.95674 0.18081 4.645 0.002 america zone 11 4.8182 0.40452 0.12197 middle east zone 39 3.4872 0.94233 0.15089 asia zone 13 4.0769 0.95407 0.26461 other 12 4.0000 1.20605 0.34816 total 103 3.8447 1.00740 0.09926 high production costs europe zone 28 3.9643 0.83808 0.15838 1.319 0.268 america zone 11 4.5455 0.68755 0.20730 middle east zone 39 4.0000 0.94591 0.15147 asia zone 13 4.4615 0.87706 0.24325 other 12 4.1667 1.40346 0.40514 total 103 4.1262 0.95671 0.09427 source: own calculation based on available data the contribution of sme development organization on export: regional example 181 the problems encountered were analyzed by considering the regions where the most exports are made to. as a result, considering the problems, no significant difference was observed between the groups in terms of qualified personnel or language problems and high logistics costs. tukey analysis is required to see between which groups this significant difference exists. table 7 analysis of problems faced by smes according to the most exported region (tukey significance analysis) the most exported region tukey sig. qualified personnel or language problems middle east zone 0.028 high logistics costs europe zone 0.022 america zone 0.001 source: own calculation based on available data table 8 analysis of problems faced by smes according to the most exported region (tukey) the most exported region mean qualified personnel or language problems middle east zone* 2.692 other* 3.917 high logistics costs europe zone* 3.786 america zone* 4.818 middle east zone* 3.487 source: own calculation based on available data when tukey analysis was carried out, there is a significant difference for qualified personnel or language problems between the middle east and other regions; for the problems of high logistics costs, there is a significant difference between the european region america region and america region middle east region. the results of tests indicate that businesses exporting to another area have more difficulty with qualified staff or with language issues. so, companies exporting other zones can be prioritized while providing incentives and grants by the government. in addition, companies exporting to america zone should be provided with more logistic support due to the high cost. providing consultancy service about trade legislation will also accelerate and facilitate export. the problems encountered were analyzed by considering the most important competitors of the smes. as a result, no significant difference was found between the groups when the problems were taken into account. 182 s. corekcioglu table 9 hypothesis results hypothesis result h1: there are differences between the problems faced by sme groups who benefit from and do not benefit from the programs offered by kosgeb. accepted h2: there are differences between the problems sme groups face according to the sectors in which smes operate. rejected h3: there are differences among the problems sme groups face according to the export amounts. accepted h4: there are differences between the problems sme groups face according to the net sales amounts. rejected h5: there are differences between the problems faced by sme groups according to the export regions. accepted h6: there are differences between the problems sme groups face according to the most important competitors. rejected 7. conclusion export plays an important role in the development of the country's economies. the export made by companies will not only contribute to the relevant sector, but also to the entire country's economy as it provides foreign currency inflow to the country. kosgeb has an important role as well as many public institutions in terms of smes not having problems in exports and increasing their exports even more in their companies that do not have problems. therefore, some actions should be taken considering the needs of the smes. in view of the responses of the smes involved in the study, the problems faced by companies can be seen. one of the most important problems, in this context, was the problem in accessing markets. so, market research conducted by kosgeb will make an important contribution to increasing exports. international business trip support is also important for smes to find new markets. the fact that matching support is provided by kosgeb contributes to finding new buyers, customers. apart from this, it should be ensured that smes are included in the cosme network and thus reach many buyers and sellers in a wide network. another problem faced by smes were financial problems. in order to solve financial problems, credit support should be provided for the needs of smes. however, considering the possibility that the enterprises will behave unconscionably while using the related loan, it is necessary to follow up where the loan will be spent. otherwise, the relevant support will go to the personal and luxury needs of the companies’ authorities (for example, the purchase of higher model vehicles, etc.) and the current account deficit will grow further. another problem faced by smes is the inability to access support. therefore, the promotion of support should increase and the application processes for support should become easier. the lack of research and development is another issue. however, the importance of this issue should be explained to the enterprises operating in sectors such as machinery and software that have strategic importance and should be encouraged in this regard. companies are of the opinion that r&d, innovation, industrialization support program is important for export. one of the biggest reasons is that the return of technology-based products is both easier to export and their return is high. today, the market value of some big companies the contribution of sme development organization on export: regional example 183 working on technology-based companies such as apple and amazon, is more than one trillion dollars. therefore, supporting r&d activities will make a great contribution to exports. it is another fact that smes have problems with raw material prices and production costs. considering the economies of scale, it can be seen that large companies experience fewer problems in terms of supply and cost than other companies. for this purpose, the merger of small businesses and establishing a new company will provide many advantages such as reducing their costs and facilitating the procurement process. in order to increase export volumes, the promotion of both the enterprise and their products should be increased. in this context, supports such as fair support and promotional support are important in terms of increasing exports, as can be seen from the survey results. it is impossible to know everything about foreign markets. in this respect, it is essential to get support from professionals. the fact that this support can be obtained from kosgeb under the name of training support or consultancy support will again contribute positively to exports. although it was seen that a wide sample size was reached in the research, efforts should be made to increase the promotion of the existing supports, and a wider population should be reached. so, kosgeb's promotional activities should be increased. although it is very important to support smes financially, as can be seen from the results of the survey, smes also need consultancy and training. although consultancy support is provided to solve this problem, the number of consultants who will provide quality information or conduct research is not enough in the market, unlike in kosgeb, which has a very wide network of information about the markets. for this, such support should be provided to enterprises by kosgeb. in this paper six hypotheses are created. while “h1: there are differences between the problems faced by sme groups who benefit from and do not benefit from the programs offered by kosgeb. h3: there are differences among the problems sme groups face according to the export amounts. h5: there are differences between the problems faced by sme groups according to the export regions.” are accepted, “h2: there are differences between the problems sme groups face according to the sectors in which smes operate. h4: there are differences between the problems sme groups face according to the net sales amounts. h6: there are differences between the problems sme groups face according to the most important competitors.” are rejected. in the h1 hypothesis, the problems faced by smes in the last 3 years were evaluated in the test results according to whether or not they have been supported by kosgeb. as a result, it was seen that there was a significant difference in the salary rates between the two classes. the problem of qualified personnel, language and high personnel salaries were another striking issue. it was quite natural that these problems are seen at the same time in companies. because it was obvious that qualified personnel work for a higher salary in the market. therefore, while supporting the staff, instead of supporting all graduates and undergraduates and providing a low amount of support, it is necessary to be more selective and give higher support to the staff who will contribute to the companies at a higher rate. therefore, within the scope of the business development support program, privilege that should be given to the company exporting for qualified personnel will have a positive effect. 184 s. corekcioglu in the h2 hypothesis, the difficulties that smes face in various sectors have been investigated. the main goal is to see if there is a difference between the sectors that are being compared. as a consequence, when the issues were considered, there was no significant difference between the sectors. in the third hypothesis, the issues that smes face were examined by looking at export volumes. it was seen that there was a significant difference in terms of skilled staff or language issues between those with export volumes of 0-499,000 dollars and those with 1,000,000 dollars, 4,999,999 dollars, and 5,000,000 dollars and more. there was a significant difference, with regards to high staff salaries, between those with export volumes of 500,000999,999 $ and those with export volumes of 1,000,0004,999,999 $ and 5,000,000 $ and above. similarly, a major difference was found between smes with export volumes of $500,000-999,999 and those with export volumes of $ 1,000,000-$ 4,999,999. according to test results, companies with a low export level have more issues with qualified workers or language barriers. similarly, for companies with an export amount of up to $500,000, high personnel wages are a bigger problem. as a result, companies with export volumes of up to $500,000 could be given priority, and further assistance should be provided in this region. for example, these businesses can be made more appealing than others by offering wage support and ensuring that eligible employees are paid higher wages. in the fourth hypothesis, the problems that smes face were examined by regarding the net sales volumes. consequently, when the problems were taken into account, there was no significant difference between the classes. in the h5 hypothesis, issues which companies encountered were analyzed by regarding the regions where the most exports are directed. there is a significant difference between the middle east and other regions in terms of skilled workers or language issues; there is a significant difference between the european area america region and the america region middle east region in terms of high logistical costs. test findings show that companies exporting to other regions have more trouble finding skilled workers or dealing with language barriers. as a result, while businesses exporting to other zones can be prioritized while the government provides incentives and grants. in addition, because of the high cost, companies exporting to the americas zone should be given more logistic support. the aim of h6 hypothesis is to check if there are any differences between company groups, considering their most important competitors. when the problems were analyzed, there was no significant difference detected between the groups. considering the results, it was seen that there are some problems arising for companies and these problems should be solved. it is obvious that the majority of kosgeb supports are effective on exports and will play an active role in solving these problems. references alesina, a., & rodrik, d. 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(2001). promoting exports: the role of inward fdi in china. china economic review, 11(4), 385–396. 186 s. corekcioglu doprinos organizacije za razvoj msp izvozu: primer iz regiona u ovom radu, proučavani su efekti subvencija agencije kosgeb (organizacija za razvoj msp u turskoj) na izvozne aktivnosti msp i naglašene su aktivnosti koje bi kosgeb trebalo da preduzme. korišćeni su t test, anova test i tukey test, a istraživanje je sprovedeno u gazijantepu, šestom po veličini gradu u turskoj. prema rezultatima, problemi kompanija su pristup tržištima, finansijski problemi, kvalifikovano osoblje, jezici, i visoki troškovi za kadrove, sirovine i proizvodnju. za rešavanje ovih problema, kosgeb treba da sprovede aktivnosti kao što su istraživanje tržišta, pronalazak mušterija, pružanje finsnijske podrške, doprinos platama kvalifikovanog osoblja, podrška aktivnostima istraživanja i razvoja i pružanje konsultatntskih usluga. ključne reči: grant, trgovina, izvoz, msp facta universitatis series: economics and organization vol. 17, no 4, 2020, pp. 357 373 https://doi.org/10.22190/fueo200803026o © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper macroeconomic factors and stock market behaviour: an analysis of the 2008 crisis1 udc 330.101.541:336.76 ifuero osad osamwonyi1, godfrey ayegbeni audu2 1university of benin, faculty of management sciences, department of banking and finance, benin city, edo state, nigeria 2globacom nigeria limited, 1 mike adenuga close, victoria island, lagos state, nigeria abstract. this study investigates the long term relationship between the behaviour of stock markets during the 2008 crisis and some selected international macroeconomic variables using information from january 2005 to december 2015. the procedures of the autoregressive distributed lag modeling techniques (ardl) are employed for the analysis. the bounds testing procedure in the ardl framework is used to test for the existence of long term relationships between stock market behaviour and global economic factors (interest rate, exchange rate, index of industrial production and oil price) as well as the direction of effects, while estimated coefficients are used to test the pattern of long term relationships among the variables. the study revealed that a significant long term relationship exists between stock price movements and these global economic trends while the stock market crash significantly impacted the efficiency of the markets under review. thus, it is recommended that market fundamentals should remain the capstone of stock market analysis, and policies should encourage the delinking of stock markets from the international commodity market factors. key words: stock market behaviour, macroeconomic variables, ardl model. jel classification: goi, g1, g14 received august 03, 2020 / revised november 03, 2020 / accepted november 09, 2020 corresponding author: ifuero osad osamwonyi university of benin, faculty of management sciences, department of banking and finance, benin city, edo state, nigeria e-mail: ifuero.osamwonyi@uniben.edu 358 i. o. osamwonyi, g. a. audu 1. introduction external (non-fundamental) forces have always been acknowledged to have certain levels of influences on stock market behaviour over the years. for instance, it has been demonstrated that the immediate factor behind the 2008 market crashes was the widespread mortgage default in the united states that led to general financial sector collapse which was most extensively reflected on interest rate and exchange rate instability (kim, rachev, bianchi, mitov & fabozzi, 2010; malkiel, 2011). in the same vein, unctad (2012) noted that price boom in international markets for primary commodities has been one of the main features of the world economy since 2002. they noted that such higher prices for primary commodities have an immediate positive impact on most financial markets. such positive relationship would imply that a sharp negative shock in the price of these commodities could send financial markets spiraling downwards. interestingly, price developments in the international stock markets have also coincided with a greater weight on commodity derivatives markets by portfolio managers. the increased linkage of the financial markets with commodity markets has led to ‘financialization’ of commodity markets (unctad 2012) which was accelerated significantly beginning from the 2002–2004 period. this has led to “increasingly close correlation between returns on investment in commodities and equities, as well as those related to the exchange rates of currencies affected by trade speculation.” this kind of arrangement has presented extensive risks for the financial markets and is argued in this study to effectively contribute to market crashes. this may well focus more extensively on development in international commodity markets in determining the future patterns in the stock markets (obadan & adegboye, 2016). other relevant works include basu & charola (2012), chen, mrkaic, & nabar (2019), and sumner (2019). in this study, the effects of macroeconomic variables on stock market behaviour are investigated. the relationship between international macroeconomic variables and stock market crashes over time may be inferred. 2. review of related literature and theoretical issues stock price behaviour: in the literature, stock price movement is generally attributed to two major factors: these are the fundamental factors and technical factors. “prices of securities in the stock market fluctuate daily on account of continuous buying and selling. stock prices move in trends and cycles” (kevin, 2001). fundamental analysis is used to determine the intrinsic value or worth of a share by studying and evaluating the basic information that underlies the company’s performance. the essential factors usually studied cut across information on the company itself, the industry it belongs to as well as the economy. in recent times, researchers have attributed a significant percentage of the movement in share prices to a wide range of economy fundamentals. for instance, osamwonyi & evbayiro-osagie (2012) empirically demonstrated that macroeconomic variables influence stock market index in nigeria. see also spelta, pecora & kaltwasser (2018), and brownlee, chabot, glysels & kurz (2020). other relevant studies include seth & tripathi (2014), victor & el massah (2018), lee & wang (2015), mensi, hammoudeh, yoon & balcilar (2016), and olokoyo, ibhagui & babajide (2020). technical analysis is based on the premise that key fundamental factors that are important are already reflected in share prices, and that past patterns in share price movement repeat themselves over time. the technical analysts argue that psychological macroeconomic factors and stock market behaviour: an analysis of the 2008 crisis 359 factors and other factors, like investors’ emotion exemplified in the “sometimes irrational behaviour of investors are also important in determining the behaviour of share prices.” hence, “it is possible to predict the future price of a stock by diligently and carefully carrying out a study of the historical price behaviour of the stock in the market” (osaze, 2007). the fundamental and technical approaches to the determination of stock prices challenged the efficient market hypothesis. the random-walk analysts see the stock market as perfect and the stock prices as reflecting all the information available to the market participants. hence, they conclude that the price changes are completely unrelated and therefore unsystematic (kendall, 1953; samuelson, 1965; fama, 1965 & malkiel, 1973). for random walk theory, the market has no memory (eriki, 1995). osaze (2007) asserts that “in spite of the arguments of the technical and fundamental analysts about the price behaviour of stocks, there is the major underlying theory of stock price behaviour which contends that the market is efficient, so efficient that one cannot beat it.” this underlying theory is referred to as the efficient market hypothesis (emh). the random walk theory argues that there is no serial correlation between past price movements, hence, knowledge of the past price movement cannot help in predicting prices of securities in the future. fama (1965) asserts that the random walk hypothesis is not likely to provide an exact description of stock price behaviour in the market. however, for realistic reasons the theory “may be acceptable even though it does not fit the facts exactly.” this is because successive price change may not be accurately independent but the actual amount of dependency may not be significant. hence, fundamental analysis would only be of value if the analyst has new information that is not fully reflected in current market prices. the rational expectations hypothesis developed by john f. muth in the early part of 1960 and extended by robert lucas in 1976 is a theory that describes an economic situation in which its outcome is partly a function of people’s expectations. the rational expectations hypothesis states that people make decisions based on their reasonable prospect for the future, available information and past experiences. as exemplified by sargent (1987), and sargent and wallace (1975), the value of a currency and the rate at which it depreciates depend partly on people’s expectation of what the rate of depreciation would be. this is as a result of the fact that people rush to sell a currency that they expect a loss in value, thereby contributing to its actual loss in value. similarly, “the price of a security depends partly on what prospective buyers and sellers believe it will be in the future.” one of the earliest and most striking applications of the concept of rational expectations is the efficient markets theory. the efficient market hypothesis “uses the concept of rational expectations to reach the conclusion that, when properly adjusted for discounting and dividends, stock price changes follow a random walk.” 3. methodology in the analytical framework in this study, the goal is to determine i. whether a long term relationship exists between stock price movements and the selected economic variables; ii. whether the economic variables are forcing variables (i.e. exogenous in the determination of stock market movements in the long run); and iii. the direction of long term impact of the economic variables on stock market movements. 360 i. o. osamwonyi, g. a. audu the procedures of the autoregressive distributed lag modeling techniques are employed for the analysis. the bounds testing procedure in the ardl framework is used to test the existence of long term relationships among the variables as well as the direction of effects, while estimated coefficients are used to test the pattern of long term relationships among the variables. the autoregressive distributed lags approach to cointegration model: the ardl modeling procedure simultaneously tests the existence of long term relationships among variables while estimating the short run and long term effects. the system is applied to address the issue of endogeneity between stock market price movement and selected global economic variables that have been empirically shown to have contributed to stock market crashes. after ensuring the direction of movement between stock market price movements and the other variables, the model is also used to test for a long term relationship between them. if stock market price movements are shown to move together over time, with the global economic indicators (which are the forcing variables or explanatory variables), then, it can be argued that the variables contribute to stock market crashes over time. we seek association with four global economic variables, namely, oil prices (oilp), international interest rates (rint), us output (usinp) proxied by index of industrial production, and the real exchange rates (rint). the ardl is based on the methodology outlined in pesaran and shin (1995). “the main advantage of this procedure is that it can be applied regardless of the stationary properties of the variables in the sample and allows for inferences on long-run estimates, which is not possible under alternative cointegration procedures.” the bounds testing procedure proposed by pesaran, shin and smith (1996, 2001) is used “to test for the existence of a linear long-run relationship, when the order of integration of the underlying regressors are not known with certainty.” the regression model specified in this direction “is an error-correction form of an ardl model in the variables of interest” (belke & polleit, 2005). more specifically, an unrestricted error-correction model (ecm) regression is initially specified from where all the tests and estimations are carried out. given a dependent variable, y and a vector of independent variables, x, the ardl model to be estimated is shown as: ∆𝑦𝑡 = 𝛼0 + 𝜙𝑦𝑡−1 + 𝛿1𝑥1,𝑡−1 + ⋯ + 𝛿𝑘𝑥𝑘,𝑡−1 + 𝜓𝑖δ𝑦𝑡−𝑖 + 𝑝−1 𝑖=1 𝜑1δ𝑥1,𝑡−𝑖 + 𝑞1−1 𝑖 =1 … + 𝜑𝑖δ𝑥𝑘 ,𝑡−𝑖 + 𝑞𝑘 −1 𝑖=1 𝜉𝑡 (1) in the model, ϕ and the δ's represent the long-run multipliers which show the long term effects of the independent variables on y; ψ and the σ’s represents the short-run dynamic coefficients (which help to estimate the error correction mechanism); p, q represent the order of the underlying ardl-model (p refers to y, q refers to x); t is a deterministic time trend; k is the number of explanatory variables; and ξ is the disturbance term that is uncorrelated with the x’s. the second step is to test for long term relationship between the dependent variable and each of the independent variables. the null hypothesis of non-existence of a longterm relationship is defined by testing the hypothesis: macroeconomic factors and stock market behaviour: an analysis of the 2008 crisis 361 φ = δ1 = … = δk = 0 (2) this test is the bounds testing procedure introduced by (pesaran et al., 1996), along with the critical value bounds for these tests. the test is performed by comparing the fstatistic computed from the ardl equation with the upper and lower 90, 95 or 99 percent critical value bounds (fu and fl). “in the case where the f-statistic lies below the lower bound, the long term relationship may be rejected. on the other hand, if the fstatistic is higher than the upper bound of the critical value band the null hypothesis of no long term relationship between the variables can be rejected irrespective of their order of integration. in the case that the f-statistic is between the two bounds then a unit root test would be applied” (ioannides, katrakilidis & lake, 2005). if the above procedure for testing cointegration is repeated for ardl regressions of each element of the vector of x's on the remaining relevant variables (including y), the direction of effects (in terms of which variable is endogenous) can be determined. in relation to the current study, the expanded ardl model that explains long term relationship between stock returns movements and global economic variables is specified as: ∆𝑟𝑡 = 𝛼0 + 𝜙𝑟𝑡−1 + 𝛿1𝑜𝑖𝑙𝑝𝑡−1 + 𝛿2𝑢𝑠𝑖𝑛𝑝𝑡−1 + 𝛿3𝑟𝑒𝑥𝑟𝑡𝑡−1 + 𝛿4𝑟𝑖𝑛𝑡𝑡−1 + 𝜓𝑖δ𝑟𝑡−𝑖 + 𝑝−1 𝑖=1 𝜑1𝑜𝑖𝑙𝑝𝑡−𝑖 + 𝑞1−1 𝑖=1 𝜑2δ𝑢𝑠𝑖𝑛𝑝𝑡−𝑖 + 𝑞1−1 𝑖=1 + 𝜑3𝛥𝑟𝑒𝑥𝑟𝑡𝑡−𝑖 + 𝑞1−1 𝑖=1 𝜑4𝑟𝑖𝑛𝑡𝑡−𝑖 + 𝑞1−1 𝑖=1 𝜉𝑡 (3) where r is the returns in a stock market computed as: 𝑅𝑡 = 𝑙𝑛 𝑆𝑃𝑡 𝑆𝑃𝑡−1 ∗ 100 where rt = return on stock market index spt = contemporary market price index spt-1 = previous period stock market price index ln = natural logarithm oilp = oil prices in the international market (used to represent commodity prices) usinp = index of industrial production in the us rexrt = real exchange rate of a given country rint = real interest rate in the international market (represented by the us fed rate) “the conditional long-run model can then be produced from the reduced form solution of (3), when the first-differenced variables jointly equal zero. the long-run coefficients and error correction model are estimated by the ardl approach to cointegration, where the conditional ecm is estimated using ols and then the schwarzbayesian criteria is used to select the optimal lag structure for the ardl specification of the short-run dynamics.” this approach has been used by alqaralleh (2020). 362 i. o. osamwonyi, g. a. audu variables in the model: stock market returns are computed as indicated earlier. the stock market index prices are taken as the reported index of the stock market for the given period. oil prices (oilp) are the prices of oil in the international market and they are used to represent commodity prices. they are measured in dollars per barrel and are expected to move in the same direction with stock returns. in this study as in unctad (2012), it is expected that oil price movements precipitate stock market movements in the long run. evidence is provided in yin & ma (2020), yin, peng & tang (2018), hoque, wah & zaidi (2019), hu, liu, pan, chen & xia (2018). index of industrial production in the us (usinp) is the variable used to capture real sector performance in the us. the 2008 stock market crashes all over the world began from the us and the variable is included in the study to capture the influence of the us economic indicator on stock market crashes. evidence of impact of the market is presented in basu & charola (2012), chen, mrkaic & nabar (2019), and sumner (2019). real exchange rate (rexrt): one major point of the transmission of foreign or external influences into domestic market is through the real exchange rate effect (krugman, obsfeld & melitz, 2008). exchange rate depreciation is expected to lead to deterioration in the stock market indices. supporting evidence is provided in anetor, esho & verhoef (2020), matlasedi (2017), and zarei, ariff & bhatti (2019). real interest rate (rint): is the real us fed rate which is used to represent the real interest rate in the international market. sharp changes in the interest rates during the period of financial crises have strong signaling impact on the stock market. the choice of real interest rate reflects the impact of inflation rate as evidenced in studies such as singh & padmakumari (2020), and ashraf et al. (2019). data sources: data used in this study covers eleven stock markets that were categorized into advanced, emerging and frontier markets. these are uk, usa, france, germany, japan, and hong kong (as advanced markets), china and south africa (as emerging markets), nigeria, kenya and ghana (as frontier markets). monthly data covering the period 2005 to 2015 were employed for the empirical analysis. the data for stock market indicators were sourced from global stock indices, supplied by morgan stanley capital international (msci) and the dow jones indexes country classification system. while the data for macroeconomic variables were sourced from the world bank world development indicators and the imf financial structure database. test of hypothesis: the hypothesis in its null form is – there is no significant long term relationship between stock market crashes and other global economic trends. the method of testing this hypothesis was to examine whether a long term relationship exists between stock price movements and the selected economic variables, whether the economic variables are forcing variables (i.e. exogenous in the determination of stock market movements in the long run), and the direction of long term impact of the economic variables on stock market movements. the ardl model in equation (1) and expanded in equation (3) was used for the general test. the bounds testing procedure is used to test the existence of long term relationships among the variables as well as the direction of effects, while the t-ratios and signs of the coefficients are used to test the pattern of long term relationships among the variables. macroeconomic factors and stock market behaviour: an analysis of the 2008 crisis 363 4. empirical analysis time series properties of stock returns: a major perspective for analysis of stock return behaviour over time is to examine the time series properties of the data in terms of mean reversion (using unit roots or autocorrelation tests) and long term patterns. in this section, the correlation pattern of the stock returns for each of the markets in the study is evaluated. autocorrelation tests provide strong background for evaluating the structure of markets in terms of stability or tendencies for crashes within short periods (mollah, 2007). table 1 time series properties stock returns (non-crisis period) country ̂ 1 ̂ 2 ̂ 3 ̂ 4 ̂ 6 ̂ 12 q12 p-value uk 0.43 -0.242 0.133 0.178 -0.291 -0.277 23.45* 0.02 us 0.357 -0.405 0.407 -0.006 -0.141 -0.224 19.5 0.07 france 0.264 -0.42 0.198 0.083 -0.105 -0.322 27.6* 0.01 germany 0.216 -0.408 0.19 0.075 0.006 -0.287 24.38* 0.02 japan 0.349 -0.402 0.265 0.092 -0.18 -0.193 17.85 0.12 hong kong 0.397 -0.288 0.237 0.201 -0.193 -0.305 21.53* 0.04 china 0.072 -0.001 -0.007 0.152 0.048 -0.279 7.17 0.84 south africa 0.165 -0.227 0.103 0.125 0.003 -0.282 12.8 0.37 nigeria 0.002 0.176 0.345 -0.37 -0.063 -0.165 13.29 0.34 kenya 0.097 -0.061 0.183 0.071 -0.251 -0.016 7.97 0.78 ghana 0.122 0.091 -0.329 -0.128 0.027 -0.022 13.71 0.32 note: the 𝜌 𝑖𝑠 are the autocorrelation coefficients; * indicates significance at 5 percent level source: author’s compilation from regression estimates, november 2016 in table 1, the time series properties of monthly stock returns for the sample period are presented. again, for the purpose of comparison, the properties are presented for the crisis and non-crisis periods. in the properties reported in table 1, the first-order autocorrelation is relatively high for the uk, us, japan and hong kong markets. this suggests that for these markets, there may likely be strong persistence of disequilibrium at any given time. in other words, any short-term deviation from the mean returns in these markets may take a relatively long period to be restored. apart from the returns on the advanced markets in the analysis, the autocorrelation values for each of the markets generally reduce drastically over time (from period 1 to 12). it can be seen that the developed markets exhibit a pattern where autocorrelation initially rises and then falls rapidly. it is also noted that none of the frontier markets have significantly large autocorrelation values for any of the periods in the table, suggesting that returns in these markets do not heavily or generally rely on market activities in its trend. in table 2, the result of the autocorrelation tests for stock returns during the crisis period is reported. surprisingly, fewer markets in the sample appear to exhibit autocorrelations in stock returns for the crisis period than for the non-crisis period. in this case, only hong kong, china, and ghana have significant joint autocorrelation test coefficient (at 5 percent level). note that none of the advanced markets exhibited autocorrelation (persistent in stock returns disequilibrium) during the crisis period. this gives an idea with respect to the level of response of developed markets to crisis compared to emerging or frontier markets. 364 i. o. osamwonyi, g. a. audu table 2 time series property stock returns (crisis period) country ̂ 1 ̂ 2 ̂ 3 ̂ 4 ̂ 6 ̂ 12 q12 p-value uk -0.169 -0.06 0.153 0.02 -0.013 0.118 14.12 0.29 us -0.109 -0.073 -0.039 0.053 0.074 -0.043 7.56 0.82 france -0.087 -0.043 0.054 0.055 -0.048 0.035 6.23 0.91 germany 0 -0.131 0.056 0.041 -0.124 0.029 13.96 0.54 japan 0.022 0.01 0.069 -0.107 0.002 -0.14 6.71 0.83 hong kong -0.12 -0.018 0.186 -0.128 -0.196 0.174 23.2* 0.02 china 0.106 0.005 0.084 -0.131 -0.15 0.156 20.75* 0.05 south africa -0.078 -0.005 0.102 0.026 -0.038 -0.007 5.45 0.94 nigeria 0.229 -0.042 0.031 -0.01 0.112 0.062 15.11 0.21 kenya 0.198 0.199 -0.171 -0.075 0.008 0.096 13.04 0.32 ghana 0.368 -0.065 0.052 -0.043 0.101 -0.021 22.53* 0.03 note: the 𝜌 𝑖𝑠 are the autocorrelation coefficients; * indicates significance at the 5 percent level source: author’s compilation from regression estimates, november 2016 preliminary analysis: the argument in this study is that returns in global stock markets are greatly influenced, if not critically caused, by movements in international macroeconomic variables which have had strong linkages with the markets. thus, frequent occurrences of market crashes could be as a result of market inefficiency arising from the sharp influences of international macroeconomic variables. as shown in the previous section, four international macroeconomic variables are highlighted as closely linked with long term pattern of movements of stock market returns across the globe. in this sub-section, these variables are estimated as they relate to stock returns for the selected markets in the study. table 3 descriptive statistics for international macroeconomic variables for non-crisis and crisis periods non-crash regime crash regime mean std. dev. j-b prob. mean std. dev. j-b prob. intr 1.83 2.09 18.27 0 1.533 1.43 2.98 0.23 usinp 0.86 4.97 156.3 0 0.805 4.25 0.84 0.66 oilp 79.75 25.0 9.26 0.01 97.52 20.37 0.53 0.77 source: author’s compilation from regression estimates, november 2016 the initial analysis is to investigate the characteristics of the variables for the two sub-periods in the study, namely, the non-crash period and the crash period. the result of the descriptive statistics for the variables is presented in table 3. in the table, the mean international interest rate (the london inter-bank offered rate) was 1.83 in the non-crash period and 1.53 in the crash period. this shows that the interest rates were lower during the market crash period. since the market crash was a culmination of the crises in the entire financial system in the global economy, the drop in interest rates can be seen as the general prevailing condition in the market at that period. the standard deviation for the interest rate is higher for the crash period than for the non-crash period, though the average value was higher in the former period. this suggests that the variations in interest rate were larger during the crisis period. the j-b statistics reveal that the interest rates macroeconomic factors and stock market behaviour: an analysis of the 2008 crisis 365 were normally distributed during the crash period, perhaps due to the fact that a steady decline in the market could result in the nature of the interest rates at this period. for the index of industrial production in the us – indicates the rate of global economic performance, the average rate for the periods were 0.86 for the non-crash period and 0.81 for the crash period. surprisingly, the growth rate of the us index was quite close for the two periods, though that of the crash period is lower. this shows that industrial production growth was lower during the market crash period than during the period without crash in the market. the standard deviations for the two periods are also similar, but the j-b value for the non-crash period is significant while that of the crash period is not significant. this implies that there were not many large opposite directional movements in this index during the crisis period. indeed, the j-b values for each of the variables for the crash period are significant and imply normally distributed functions. real interest rates oil price fig. 1 oil price and real interest rates source: authors’ analysis the oil price index was higher in the crisis period than during the non-crash period. average oil price was 79.75 dollars for the non-crash period but was 97.52 dollars for the crisis period. although the directions of causality are not tested, many studies have shown the oil price movements usually precede stock market volatility in most markets (see unctad, 2012; obadan & adegboye, 2016). in fig. 1, the correlation chart and regression line for the relationship between oil prices and real interest rates in the international market is presented. a negative slope is shown for the relationship, indicating that increase in one of the variables leads to decline in the other variables. this confirms the results from the descriptive statistics where the drop in interest rate during the crash period was accompanied by rise in oil prices. the implication of this is that rising oil prices and falling interest rates may combine to generate stock market crashes or act as reinforcement for on-going crashes in the market. 366 i. o. osamwonyi, g. a. audu index of p oil price fig. 2 oil price and index of industrial production source: authors’ analysis in fig. 2, the result of the correlation between oil prices and index of industrial production in the us is presented. the positive slope of the regression line indicates that increase in one variable goes hand-in-hand with increase in the other variable. thus, oil price spikes are likely to be accompanied by increased global output. this result is surprising though it has interesting implications for the stock markets. positive correlation between oil prices and index of us industrial production shows that stock markets may have positive responses to oil price spikes since industrial production or global economic activities tend to improve during these periods. essentially, if the rise in economic performance is greater than the rise in oil prices, then this will be beneficial to the stock markets. in terms of the effects of the macroeconomic variables on stock market returns, the study proposed the test of long term autoregressive pattern of relationship. the first analysis therefore is to examine whether a long term relationship exists between stock returns for each market and the selected macroeconomic variables. table 4 shows the result of the bounds test of long term effects for the ardl specification. the evaluation of the results is based on the critical f-statistic values for the lower and upper bounds as also reported in the results. according to the empirical value of the f-values in table 4, we find that the null hypothesis of no long-term relationship in the case of unrestricted regressions of the stock market returns on the entire macroeconomic variables is rejected for all the markets at the 5 percent level. these results reveal that for each of the markets, the macroeconomic variables had strong long term relationships with the stock returns. apparently, stock market returns move along with these variables and when these variables change sharply, the returns in the markets tend to follow suit. macroeconomic factors and stock market behaviour: an analysis of the 2008 crisis 367 table 4 testing the existence of a long-term relationship between stock market returns and international macroeconomic variables market lower bound (5% critical val. = 2.86) upper bound (5% critical val. = 4.01) us 22.15 15.90 uk 2.51 4.62 japan 22.24 10.16 france 22.51 25.30 germany 11.51 11.51 hong kong 12.41 6.15 china 25.23 20.35 south africa 35.95 29.07 nigeria 13.74 13.20 kenya 34.54 35.03 ghana 10.82 10.82 source: authors’ compilation from regression estimates the ardl results: the bounds test for long term relationships show that the selected macroeconomic variables in the study actually move together with stock market returns across all the markets in the study. this gives the mandate to proceed for the estimation of the long term ardl models that were specified in chapter three. the optimum lag length for the model was selected based on the shwarze-bayesian information criterion (sic). the results of the estimates are again presented in table 5 for the market groupings. in table 5, the estimates of the ardl model for the advanced markets are presented. the goodness of fit statistics for the results for each of the markets is generally low although it is quite high for the uk. the performance of each of the macroeconomic variables in explaining stock market returns for the markets is determined by the pattern of the individual coefficients in the model. for the lagged return variables, the coefficients are significant for most of the markets. only the lagged coefficient for japan fails the significance test at the 5 percent level. this indicates that for japan, disequilibrium in the system tends to revert to long term pattern very rapidly. the indexes of industrial us production were significant for japan result up till the fourth lag, and for the first lag for the us. the coefficients are mostly positive, implying that industrial production tends to stimulate stock returns for the markets. the exchange rate did not have significant impact on stock returns in the us but has significant and mostly negative impacts on the other markets in the advanced markets. this indicates that exchange rate has strong negative impacts on the stock returns in the markets. real interest rate also exerts oscillatory effects on stock return, with initial effects on the markets being positive, then it moves to negative and back to positive. for oil prices, the significant effects in the us are negative, but positive current impact in uk and japan, while the lag effects for these markets are also negative. for france, the current impact is positive and significant. these results suggest that oil prices have strong positive short term impacts on stock returns in the advanced markets. the coefficient of exchange rate is negative and significant only for hong kong market, suggesting that depreciation in exchange rate significantly depletes returns in the market. for oil prices, the effect in the hong kong market is initially positive, and then negative subsequently. 368 i. o. osamwonyi, g. a. audu table 5 ardl for advanced economies panel 1 us uk japan variable coef. pr. coef. pr. coef. pr. r(-1) -0.11 0.22 0.65 0 0.08 0.39 r(-2) -0.22 0.02 0.25 0.00 r(-3) r(-4) usinp -0.23 0.47 0.00 0.09 -0.14 0.70 usinp(-1) 0.60 0.20 0.52 0.32 usinp(-2) 0.41 0.40 0.60 0.26 usinp(-3) -0.66 0.03 -1.78 0.00 usinp(-4) 1.01 0.00 exrt 1.89 0.97 -0.56 0.00 81.56 0.03 exrt(-1) 5.99 0.92 -0.19 0.50 -90.93 0.11 exrt(-2) 39.62 0.51 -0.09 0.74 85.36 0.13 exrt(-3) 23.46 0.68 0.59 0.00 -82.96 0.02 -exrt(-4) -102.58 0.01 rintr -10.82 0.13 -0.09 0.01 -28.17 0.00 rintr(-1) 11.02 0.12 0.04 0.53 25.19 0.08 rintr(-2) 0.11 0.08 25.01 0.10 rintr(-3) -0.08 0.04 -42.43 0.01 rintr(-4) 19.53 0.04 oilp 19.17 0.06 0.12 0.03 21.20 0.03 oilp(-1) 0.75 0.96 -0.15 0.01 -32.77 0.00 oilp(-2) -25.17 0.03 oilp(-3) c 17.90 0.00 0.75 0.00 35.79 0.08 r-squared 0.341 0.96 0.431 adj. r-sq. 0.246 0.95 0.372 f-statistic 3.6 196 5.382 source: author’s compilation from regression estimates table 5 ardl for advanced economies panel 2 france germany hong kong variable coef. pr. coef. pr. coef. pr. r(-1) -0.23 0.01 -0.08 0.37 -0.13 0.17 r(-2) -0.17 0.05 -0.20 0.02 0.02 0.83 r(-3) 0.11 0.17 0.07 0.43 r(-4) -0.21 0.02 usinp 0.19 0.19 0.23 0.15 0.07 0.88 usinp(-1) 1.27 0.07 usinp(-2) -1.00 0.03 usinp(-3) usinp(-4) exrt -188.8 0.00 -183.2 0.01 -2994.9 0.01 exrt(-1) 231.3 0.00 205.4 0.00 2249.6 0.04 exrt(-2) exrt(-3) -exrt(-4) rintr -28.80 0.01 -19.87 0.11 -43.96 0.00 rintr(-1) 10.41 0.59 3.28 0.88 43.23 0.00 rintr(-2) 44.19 0.03 47.03 0.03 rintr(-3) -50.48 0.01 -53.12 0.02 rintr(-4) 23.38 0.06 21.50 0.11 oilp 33.78 0.03 24.86 0.15 28.87 0.05 oilp(-1) -20.95 0.36 -7.22 0.77 -5.32 0.82 oilp(-2) 3.27 0.88 -27.29 0.11 -38.71 0.01 oilp(-3) -22.52 0.11 c 17.31 0.11 21.44 0.07 692.7 0.22 r-squared 0.401 0.356 0.35 adj. r-sq. 0.327 0.276 0.27 f-statistic 5.399 4.461 4.26 source: author’s compilation from regression estimates macroeconomic factors and stock market behaviour: an analysis of the 2008 crisis 369 the results for the emerging markets are reported in table 6. in the result the lags are significantly less than those of the advanced markets, indicating that the effects of the variables on market returns are quite more immediate in the emerging markets than in the advanced markets. the goodness of fit statistics is also low, with r squared values a 0.30 for south africa and 0.19 for china. this implies that there are other determinant (external) variables that affect the dependent variable that are not captured in the study. for the significance of the variables, the results show that the effect of the index of us industrial production on the returns is delayed and is only felt after two months have elapsed. the coefficients are negative for the two markets and show that a rise in us industrial production will cause stock market returns to fall significantly after some time in these markets. the impact of international real interest rate on stock returns appears to be very strong, especially for south african market. real exchange rate is significant for the two lags in both markets; it is initially positive and then turns negative after a lag. the result also shows that as oil prices rise, stock market returns in the country initially fall, but as the prices persistently increase, stock returns begin to improve in the markets. table 6 ardl results for emerging markets sa china variable coef. pr. coef. pr. r(-1) -0.20 0.03 -0.03 0.78 usinp -0.36 0.53 -0.13 0.84 usinp(-1) 1.65 0.06 1.90 0.04 usinp(-2) -1.18 0.04 -1.51 0.02 exrt 63.28 0.05 -58.97 0.24 exrt(-1) -56.49 0.08 rintr -34.09 0.01 -30.37 0.03 rintr(-1) 20.00 0.41 34.16 0.01 rintr(-2) 47.74 0.07 rintr(-3) -58.16 0.02 rintr(-4) 23.51 0.13 oilp 67.79 0.00 29.38 0.12 oilp(-1) -80.14 0.00 -22.91 0.44 oilp(-2) -27.66 0.16 c 17.98 0.16 90.45 0.08 r-squared 0.30 0.19 adjusted r-squared 0.22 0.12 f-statistic 3.72 2.77 source: authors’ compilation the result for the frontier market is presented in table 7. the results are also generally average in terms of overall fit. the f-values for each of the results are, however, significant at the 5 percent level. the result shows that the impact of the usinp has delayed impacts on the markets with the impact being mostly negative. exchange rate also has delayed negative impacts on the stock returns for most of the markets. the impact of international real interest rate on stock returns appears to be very strong, especially for nigeria and ghana. the results are basically positive, suggesting that as the interest rates rise, stock returns tend to rise also. apparently, investment in international money market instrument appears to be competitive with investment in the stock markets. 370 i. o. osamwonyi, g. a. audu the effects of oil prices are also mixed for the frontier markets with positive and negative alternating between periods. the overall effects appear to be positive and stimulating. this shows that periods of impressive oil price performance in the international markets tend to mark period of higher stock market returns for the frontier markets. table 7 ardl results for frontier market nig kenya ghana variable coef. pr. coef. pr. coef. pr. r(-1) 0.08 0.33 -0.17 0.06 0.31 0.00 r(-2) -0.18 0.03 r(-3) 0.07 0.37 r(-4) -0.35 0.00 usinp 1.45 0.05 -0.21 0.70 -0.72 0.35 usinp(-1) -0.96 0.18 1.40 0.07 2.12 0.04 usinp(-2) 0.02 0.98 0.47 0.64 usinp(-3) -1.81 0.02 -1.33 0.05 usinp(-4) 0.79 0.14 exrt -195.7 0.08 -350.7 0.00 9.73 0.23 exrt(-1) 427.1 0.01 215.5 0.01 exrt(-2) -359.5 0.03 -4.96 0.95 exrt(-3) 210.0 0.05 135.5 0.01 rintr -29.21 0.07 -21.33 0.06 -9.95 0.51 rintr(-1) 21.26 0.45 20.04 0.10 10.15 0.70 rintr(-2) 75.27 0.01 0.80 14.06 0.60 rintr(-3) -127.27 0.00 0.81 -61.22 0.03 rintr(-4) 70.14 0.00 60.31 0.00 oilp 70.67 0.00 -1.44 -25.80 0.24 oilp(-1) -33.07 0.32 121.0 0.00 oilp(-2) -32.44 0.14 -94.46 0.00 c -185.8 0.03 12.90 0.58 0.97 r-squared 0.50 0.44 0.42 adjusted r-squared 0.42 0.38 0.31 f-statistic 5.99 6.92 3.85 source: authors’ compilation. hypothesis testing: there is no significant long term relationship between stock market crashes and other global economic trends. the analysis of the bounds test of long term effects for the ardl specification addresses the hypothesis of this study. the evaluation of the results is based on the critical f-statistic values for the lower and upper bounds. from the f-values obtained at 5 percent level of significance, the results indicate that the selected macroeconomic variables in the study actually move together with stock market returns across all the markets in the study. in particular, all the variables in the study moved steadily with stock market crashes over time while oil prices and real interest rates have very strong destabilizing impacts on stock markets across the globe. the null hypothesis of no longterm relationship is thus rejected in this section since the statistical test have confirmed that there is a significant long term relationship between stock market crashes and other global economic trends. macroeconomic factors and stock market behaviour: an analysis of the 2008 crisis 371 5. conclusion macroeconomic factors with international linkages have been increasingly related to stock market patterns around the world, leading to questions on the implications for stock markets efficiency. their roles in stock market crashes have also been a major issue for consideration. apparently, long term movements in the stock returns in major markets could be determined by observing long term trends in such macroeconomic variables. this study employed data on eleven stock markets that were categorized into advanced, emerging and frontier markets, to investigate the effects of the macroeconomic variables on stock markets behaviour across the globe. the analysis of the study was done along this line of demarcation in order to observe any differences that may exist in the behavioural patterns of the different market segmentation. moreover, the autoregressive distributed lags (ardl) approach was adopted in determining the long term effects of the macroeconomic variables on stock market for the selected countries. the findings from the study have shown that there is a significant long term relationship between stock market behaviour and global economic trends. essentially, all the variables in the study moved steadily with stock market activities over time, thus suggesting that these variables could be either stimulating factors or response elements in stock market crashes over time. the strong link between the macroeconomic variables and stock market activities reveals that these variables tend to explain or demonstrate the pattern of stock markets around the globe. moreover, it was shown in the study that oil prices and real interest rates have very strong de-stabilizing impacts on stock markets across the globe. thus, strong changes in these variables have been shown to exhibit capacity to generate market crashes, especially for emerging and african markets. based on the findings of this study, there is need for the monetary authorities to adopt measures to, at least, limit the impact of the movement of other macroeconomic variables, especially external ones. policies that have been found useful include diversification, and the use of sovereign wealth fund to manage the impact of oil market volatilities on national budgets, other measures would have to include exchange rate management techniques that will ensure sustainability of international financial transactions even when oil prices are down (or rising rapidly). in the same vein, prudential regulation of financial institutions at the national level for each country needs to be intensified in the face of increased interlinkages between real sector markets and the stock market. adequate regulation of the stock market for instance, would ensure that practices that could jeopardize market stability and efficiency are prevented. finally, the realization that modern markets (whether financial or commodities) are strongly interlinked is particularly relevant in terms of market functioning. such inter-linkages result from global interactions as well as investors’ appetite in modern markets. a more feasible means of dealing with undesirable outcomes of such interactions would be to devise instruments that could fine-tune the relationships and foster unique patterns for future interactions. 372 i. o. osamwonyi, g. a. audu references 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(2019). the impact of exchange rates on stock market returns: new evidence from seven free-floating currencies. the european journal of finance 25(14), 1277-1288. makroekonomski faktori i ponašanje na berzi: analiza krize iz 2008. godine ovaj rad istražuje dugoročnu vezu između ponašanja na berzi tokom krize 2008. godine i nekih odabranih makroekonomskih internacionalnih varijabila koristeći informacije od januara 2005. godine do decembra 2015. u analizi su korišćene procedure ardl tehnike (autoregresivni distribuirani lag). procedura testiranja granica u okviru ardl je korišćena da se testira postojanje dugoročnih veza između ponašanja na berzi i globalnih ekonomskih faktora (kamatne stope, kursne razlike, indeksa industrijske proizvodnje i cene nafte), kao i smer efekata, dok su procenjeni koeficijenti korišćeni za testiranje obrazaca dugoročnih veza među varijablama. studija je otkrila da značajne dugoročne veze postoje između kretanja na berzi i ovih globalnih ekonomskih trendova, dok je krah berze značajno uticao na efikasnost tržišta koje su predmet ispitivanja. prema tome, preporuka je da tržišne osnove ostanu kruna analza berzanskih kretanja, a donosioci odluka trebalo bi da ohrabre kidanje veze između berzi i faktora međunarodnih robnih tržišta. ključne reči: ponašanje na berzi, makroekonomske varjabile, ardl model plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 4, 2017, pp. 291 306 https://doi.org/10.22190/fueo1704291d review paper development of sustainability indicators: approaches, challenges and opportunities 1 udc 502.131.1:339.137.2 ksenija denčić-mihajlov 1 , stefan zeranski 2 1 university of niš, faculty of economics, niš, serbia 2 ostfalia university of applied sciences, faculty of law, institute for finance, tax and law, wolfenbüttel, germany abstract: rapidly changing and complex business environment requires from enterprises to cautiously develop their business strategies in order to achieve and maintain competitive advantage over the long term. with the awareness of importance of environmental consequences and sustainability, market value is no longer determined by single financial performance indicators. the sustainability framework which encompasses economic, environmental and social performances has rather received an international attention of both corporate and financial sector. even though it is generally accepted that the adoption of sustainability ratios is a most adequate and effective way for sustainability performances’ assessment, both the creation/selection of sustainability ratios and their implementation and analysis have been still examined at national and corporate levels. most companies have adopted the internationally recognized performance evaluation systems (such as global reporting initiative or united nations global compact). still, there is increasing number of companies that apply self-developed sustainable performance evaluation methodologies. the main purpose of this paper is to investigate the development and application of the performance indicators of sustainable management with the aim to offer suggestions for selection of sustainability ratios the application of which should increase the effectiveness of controlling and decision-making process and would lead to long term competitive advantage. key words: sustainability reporting, economic, environmental and social performance indicators, gri standards, controlling. jel classification: g30, q56, m14, m48 received june 22, 2017 / accepted september 27, 2017 corresponding author: ksenija denĉić-mihajlov university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: ksenija.dencic-mihajlov@eknfak.ni.ac.rs 292 k. denĉić-mihajlov, s. zeranski introduction sustainability is an area of growing importance in today‘s business. the concept of sustainability and sustainability management has attracted a lot of attention during the last decades. corporate reporting is influenced by this trend too. numerous challenges, such as global warming, climate change and energy regulation, data protection, resource scarcity, social conflicts and migrations etc., force companies to respect the requirements for sustainability management. the changes in corporate environment have as a consequence the reshaping of investor‘s (and other interest groups‘) requirements for information. the retrospective orientation based exclusively on financial indicators/ performances is no longer sufficient to provide and sustain long-term business success and competitive advantage. it alone reflects only conditionally systematic risks and actual costs of applied corporate policies (sikora & downar, 2014). while conventional accounting and financial metrics give an insight into a company‘s market value, forward-looking voluntary reporting is becoming more relevant to a business‘s overall value proposition and is regarded as a prerequisite for financial and overall firm competitiveness (denĉić-mihajlov & spasić, 2015). recent years have witnessed an increasing number of companies reporting on environmental, ethical and social aspects of their business activities through a particular form of disclosure. sustainability reporting is a very important part of today`s external corporate reporting. adequate inclusion of sustainability issues in company`s reports is one of the key issues for further development of corporate communications with stakeholders (stojanović-blab et al., 2016). many companies have made a conscious effort to ―go green‖ and pursue actions that are optimal for a broad class rather than simply one class of shareholders (rezaee & rezaee, 2014), and actions designed to lead to a ―desirable future state‖ for all stakeholders (funk, 2003). numerous international and european organizations and institutions consider issues relating to the content and type of reporting on economic, environmental and social aspects of the business and try to jointly create adequate guidance and guidelines in this area. from the accounting point of view significant are directive 2003/51, directive 2013/34/eu and especially directive 2014/95/eu or the so-called csr directive. in addition to these directives, the engagement of the federation of european accountants, which worked on the establishment of a generally accepted framework for environmental reporting, is also meaningful in this area (denĉić-mihajlov & stojanović-blab, forthcoming). at the global level, the most adopted multi-stakeholder standards which address a wide range of sustainability issues are the global reporting initiative (gri) and the un global compact (ungc). as pointed out by rasche (2010), the ‗market‘ for sustainability reporting is nowadays highly fragmented with numerous standards, certifications, principles etc. which, on one hand, increases the opportunities for reporting, but, on the other hand, creates difficulties for corporations and stakeholders in operating and evaluating firm performances. the global reporting initiative has, over the past decades, made substantial progress in assembling a list of sustainability indicators relevant to a wide spectrum of stakeholders and applicable to corporations across all sectors (on the different versions of the gri sustainability reporting guidelines see: blab et al. 2014). in may 2013, the global reporting initiative set up the fourth generation of its sustainability reporting guidelines, the gri g4 sustainability guidelines (consisting of two parts reporting principles and standard disclosures and implementation manual), which remain valid till 1 july 2018. in comparison to previous g3 and g3.1, g4 guidelines do not bring changes regarding reporting principles, but offer development of sustainability indicators: approaches, challenges and opportunities 293 novelty on how to determine material aspects (encourage organizations to provide only information critical to their business and stakeholders) and the effects they may have. the g4 guidelines offer the so-called core option and comprehensive option as two independent options of how organization‘s sustainability report can comply with the guidelines. the core option requires the provision of minimal foundation information and reporting of at least one indicator for all identified material aspects. comprehensive option builds on the core option, by demanding supplementary disclosures about the organization‘s strategy, governance, ethics and integrity. if deciding on the comprehensive option, an organization must report all indicators for all identified material aspects (gri, 2015). the new gri standards issued in october 2016 by the global sustainability standards board are created as the first universal set of regulations for sustainability reporting, which offer companies a universal tool for disclosing non-financial information. sustainability reporting based on the gri reporting framework consists of reporting principles, reporting guidance, and standard disclosures (including company strategy and profile, management approach and sustainability performance indicators). with the gri standards, ―gri aims to maintain the proven principles of sustainability reporting, but to provide users with more flexibility, clearer instructions, clear terminology and a modular structure of the gri standards, to remedy content redundancies and to provide a more logical structure of the gri standards compared to gri g4― (on the comparison between gri g4 and gri standards see: stojanovic-blab & blab, 2017). unlike gri, which is viewed mainly as a reporting standard, the ungc is termed as a principle-based standard (rasche, 2010). the ungc framework has a simple and relatively logical structure with criteria related to the four core sustainability issues (human rights, labor, environment and anti-corruption) and 10 ungc principles for responsible and sustainable business behavior that corporations are required to report. other relevant and globally-recognized frameworks for sustainability reporting are given by sustainability accounting standards board (sasb), international labor organization (ilo), oecd guidelines for multinational enterprises, cdp, world resources institute (wri) and world business council for sustainable development (wbcsd) among others (about the complementarity of these frameworks see: gri/the complementarity of frameworks (2016)). as pointed out by lydenberg et al. (2010), in order to maximize the usefulness of sustainability reporting, it is essential that reporting regime integrates a means of identifying key sustainability performance indicators at a sector level. these indicators focus on the sustainability data material to most stakeholders and enable corporate stakeholders to give support for the improvements in the most important aspects of a company‘s sustainability performance; they should align all levels of an organization with clearly defined targets and benchmarks to create accountability and to track progress (hrebiĉek et al. (2011). in this way, the selected sustainability performance indicators would focus on the ‗key‘ measures as the most important to understanding the business and thus avoid the trend toward extended reporting on a wide range of less relevant measures. the aim of the paper is to investigate the development and application of the performance indicators of sustainable management with the aim to offer suggestions for selection of sustainability ratios the application of which should increase the effectiveness of controlling and decision-making process and would lead to long term competitive advantage. the structure of the paper is as follows. in section 2 we give an overview of sustainability indicators types, goals and selection process. following gri reporting framework, triplebottom principle is adopted to present economic, environmental and social performance sustainability indicators in section 3, 4 and 5 respectively. the final section provides conclusions and proposes the objectives for future research. 294 k. denĉić-mihajlov, s. zeranski 1. sustainability indicators: nature, purpose and selection the advantages of an integrated approach to social, environmental and economic business goals have been shown in a variety of publications (for a literature review see giovannoni & fabietti, 2014). sustainability reporting should not be an objective by itself. sustainability reporting should be regarded as a key action in implementing corporate strategy which is aiming at recognizing the impact on company's stakeholders, influencing stock specific opportunities and mitigating risks and negative impacts on the economy, society and the environment. consequently, of central importance is to specify most suitable performance indicators to support operational decision-making in enterprises. according to ey& gri (2014), one of the key drivers behind the increase in sustainability reporting has been the acknowledgment that, to be meaningful, a sustainability strategy must be based on reliable, concrete data, which can only be the case once the mechanisms and systems for reporting the facts are put in place. as shown in table 1, this selection process starts with taking into account globally recognized sustainability reporting initiatives and guidelines. having recognized and encompassed specific sector issues, the process of sustainability indicators selection ends up with the consideration of company relevant characteristics and market position (such as age, size, geographic exposure, complexity, history, news flow). such a process enables organizations to recognize and track the results and, more importantly, to establish a system that properly indicates firms‘ values and requirements (searcy et al., 2005). table 1 the process of selecting sustainability indicators global initiatives and guidelines un global impact oecd guidlines for mnc global reporting initiative other frameworks (sasb, ilo, wri and wbcsd) ↓ sector issues internally defined sector key issues msci esg resereach gri sectors disclosures ↓ company specific indiators geografic scope; multinationalty age and size ownership concentration & structure business complexity ↓ sustainability indicators source: adapted from columbia threadneedle investments (2016) the indicators are measurements that show the status of an environmental, economic, or social system over time (redefining progress, sustainable seattle, and tyler norris associates, 1997). these are simple units of measure that are critical when making decisions in a complex environment. sustainability indicators can be classified along various dimensions of measurement, such as sustainability attributes (for example development of sustainability indicators: approaches, challenges and opportunities 295 economic, social or environmental attributes) or frameworks (for example dpsir-indicators) (singh et al., 2012). waas et al (2014) classify sustainability indicators into several categories following their important aspects in practice:  descriptive (give a description of an actual situation) vs. normative (compare an actual situation with a desired one);  quantitative vs. qualitative;  objective (that are sensed by instruments outside the individual) vs. subjective (only verifiable through ―subjective‖ explanations);  community vs. expert (classification depending on who develops the sustainability indicators—stakeholders ―bottom up‖ and/or experts ―top down‖);  ex-ante vs. ex-post. fiksel et al. (1999) indicate that sustainability indicators can address inputs and processes (leading indicators) and outcomes (lagging indicators). since leading indicators tend to be internally-focused, it is not surprising that the majority of externally-reported indicators are in the lagging category. according to objectives and purposes, sustainability indicators can be represented in various forms, such as qualitative or quantitative, general or specific, and absolute or relative indicators (bae & smardon, 2011). key sustainability indicators are usually quantitative measures (given for example in terms of mass, volume or number of environmental pollutants or physical materials), defined with a purpose to manage sustainability control and to plan qualitative fields of action in the area of sustainability management. however, some indicators cannot be defined in physical terms and have to be expressed qualitatively. indicators which are based only on subjective estimates (qualitative indicators), usually include social dimensions of a firm‘s activities and play a decisive role for nonmonetary goals, such as reputation, transparency, compliance and credibility. general indicators are used by companies across all sectors (therefore are easily comparable) and deal with globally discussed issues (for example, climate agreements such as montreal protocol or kyoto protocol). on the other hand, specific indicators are specified for an industry or firm. for instance, in a report toward a sustainable cement industry, battelle memorial institute (2002) proposes key performance indicators for companies in this industry (such as non-product output, i.e., waste per ton of cement, or net co2 (kg) per ton of cement). absolute indicators are used to measure a firm‘s quantitative environmental and social impact related to its activities, products, and services (bae & smardon, 2011). in this regard, companies report, for example, on total amount of energy/water consumed per year or total amount of hazardous waste generated. relative indicators (such as ratio of waste per unit of input material as an example of eco-efficiency indicator) are given in terms of a ratio or proportion that compares two absolute indicators, which assures a process of trend evaluation, comparison and consideration of possibly better sustainable opportunities and practices. with regard to sustainability indicators selection process, as staniškis & arbaĉiauskas (2009) point out, ―a particularly important aspect is related to the application of a product life cycle approach. frequently, enterprises limit performance analyses to production and to other internal processes, sales and general economic indicators. yet, there are cases when a product use impact on the environment is stronger than that caused by the production phase‖. 296 k. denĉić-mihajlov, s. zeranski having identified the indicators and metrics (as a specific means of measuring and tracking a performance indicator), the company should set short and long term targets, as a determined level of performances it is aiming at. indicators designate a measurable dimension of performance, metrics provide a means of quantifying the indicators, and targets provide a basis for tracking and assessing improvement, they guide decision-making efforts and support stakeholder communication (fiksel et al., 1999). the main purpose of sustainability indicators‘ calculation and application is, thus, to monitor and evaluate effectiveness and performance of goals and targets in a decision-making strategy for sustainable development (parris & kates, 2003). key sustainability indicators can be used for strategy implementation and control, in the realization phase, especially when transferring decisions to be given to implementing sustainability instances. in this way, they fulfill the information task for the stakeholders. some sustainability indicators are suitable for comparison purposes, while some can also be a subject of benchmarking (hentze, 2014). in this way, key indicators in the sustainability planning process can serve as a stimulus for the identification and analysis of problems, or for comparison actions and performance of firms that may or may not be implementing sustainable business (kuhndt et al., 2002). the majority of published theoretical and empirical studies on sustainable indicators and performance measurement address the issue of balance in the number of indicators and stress the need to develop a small set of indicators. according to the european federation of financial analysts societies, one of the ―essential criteria‖ for a useable key performance indicator (kpi) set is that it ―should be manageable in dimension, e.g. a small set of 30 kpis max.‖ (effas, 2009). o‘connor & spangenberg (2008) address the issue of a proper number of sustainability indicators, as the question of a ‗balance‘ in the number of indicators associated with each performance issue, with each stakeholder type, for each site. according to the gri guidelines (2011), each level application requires minimal number of reported sustainability indicators (at the c level, the company must only report on 10 gri indicators, at the b level on 20, and at the a level all 50 gri ―core‖ indicators must be represented, either with data or a valid explanation as to why the indicator is not reported). even though the main impetus for sustainability performance reporting comes externally, from shareholders and other stakeholders, nowadays companies use sustainability performance evaluation for both external and internal reasons. if properly selected, sustainability performance indicators can support the identification of the possibilities for activities‘ optimization, point out to the inefficiencies that could be resolved by preventive actions, develop the process of exchanging information (staniškis & arbaĉiauskas, 2009), create more incentives for management to refocus its goals, strategic decisions, and actions from a short-term to a long-term prospect (rezaee & rezaee, 2014), help to identify risks, as well as the potential for improving efficiency and finding new markets and can have a significant impact on the overall performance, as well as investors‘ perceptions and access to capital (ey & gri, 2014). companies use data and facts from the sustainability reports with the aim to conduct actions of sustainability management as well as for the engagements in the field of global corporate strategy, products and supply chains management, employees, society and social commitment (hentze, 2014). key figures and facts are presented according to the thematic areas in sustainability reports, such as economic, environmental, social, ecoefficiency, social-economic or social-environmental. they are the object of sustainability controlling, which is a part of sustainability management. in this way, a special ―service function‖ of sustainability reporting fulfills its purpose. in order to develop an operational development of sustainability indicators: approaches, challenges and opportunities 297 system to bring value to the enterprise, according to toth & arbaĉiauskas (2005), sustainability performance indicators should be (a) meaningful, (b) comparable, (c) integral, (d) clear, (e) continuous, and (f) efficient. with the process of technology and digitalization development and sophistication of the systems for data gathering, the processes of controlling and improving sustainability performances will become more closely related to each other, and the sustainability and market performance indicators performance will be more strategically linked. following the gri reporting framework, the triple-bottom principle is adopted to present economic, environmental and social performance sustainability indicators in the following text. 2. economic performance indicators financial performance indicators measure companies‘ profitability and current financial status and give information necessary to meet primary objectives of companies, such as maximizing shareholder wealth and growth/survival as well the information on the shareholder return and profits and the relationship between profits and shareholder value. as lin et al. (2014) point out, ―economic performance in sustainability reports is frequently confused with the financial performance in accounting reports‖. the economic indicators go one step further than the standard financial disclosure in explaining the process of value creation, and in reporting its distribution and reinvestment for future growth. ―they measure a company‘s influences on its stakeholders‘ economic circumstances and on the economic systems at local, national, and/or international levels‖ (gri, 2006). in this way, both human and financial capital is taken into account. this economic aspect of performance gained in popularity during the 1990s and the observed changes in demand for sustainability reports by the users. ―it was intended to measure flows of capital among different stakeholders and the economic impacts of the organization on the society‖ (gri, 2006). gri guidelines (g3) specifies three economic performance aspects: (1) economic performance; (2) market presence; and (3) indirect economic impacts. each of these categories contains a set of sub-indicators. the 200 series of the gri standards (2016) include topic-specific standards used to report information on an organization‘s material impacts related to economic issues such as: gri 201: economic performance , gri 202: market presence, gri 203: indirect economic impacts , gri 204: procurement practices, gri 205: anti-corruption and gri 206: anti-competitive behavior. gri standards 201: economic performance (2016), for example, encompasses topic specific disclosures such as:  disclosure 201-1: direct economic value generated and distributed, that includes indicators related to (i) direct economic value generated (revenues), (ii) economic value distributed (a) operating costs, such as royalties, payments for contract workers, training costs or costs for personal protective clothing, (b) employee wages and benefits, payments to providers of capital, payments to government by country, and community investments and (iii) economic value retained;  disclosure 201-2: financial implications and other risks and opportunities due to climate change, i.e. risks and opportunities resulting from climate change that could significantly impact operations, revenue, or expenditures;  disclosure 201-3: defined benefit plan obligations and other retirement plans;  disclosure 201-4: financial assistance received from the government. javascript:void(null); javascript:void(null); javascript:void(null); javascript:void(null); javascript:void(null); javascript:void(null); 298 k. denĉić-mihajlov, s. zeranski according to bae & smardon (2011), five most used economic performance indicators among companies quoted on the new york stock exchange in the period 1999-2006 are annual profits, annual revenues, annual sales, fines and donations. these are general and absolute indicators, relatively easy for calculation and comparison. as reported by lin et al (2014), among three economic performance aspects proposed by the gri guidelines (g3), the most disclosed by companies listed in the gri database is economic performance, while the lowest rated aspect is indirect economic impact. they also reveal that ―economic performance indicators are considered less important compared relatively to the social and environmental indicators, and explain that by the fact that economic aspect was the most recent addition to sustainability reporting and therefore it is less familiar to both the preparers and users‖. table 2 the most used sustainability indicators economic performance indicators  annual profits  annual revenues  annual sales  annual operating costs (based on ehs)  costs saving (based on ehs)  capital expenditure (environmental)  annual productivity  fines  r & d investment (based on ehs)  r & d investment (total)  donations  annual turnover  value added environmental performance indicators  total amount of water used  total amount of energy used  total amount of greenhouse gases generated (co2)  total amount of solid waste generated  total amount of hazardous waste generated  total amount of waste recycled or reused  total amount of volatile organic compound (voc) generated  total amount of air emissions generated (sox, nox)  total number and volume of significant spills and accidents  total number of environmental violations social performance indicators  female, disabled person‘s  the recruitment of people from ethnic minorities, older workers, women  empowerment of employees  average hours of training/ employee  number of employees  recordable illness rate  lost time rate  whether or not firms implement a broad range of voluntary activities  whether or not firms provide opportunities to communicate internally and externally to interested parties  breakdown of employees in terms of gender, age, and minority group source: adapted from bae and smardon (2011) development of sustainability indicators: approaches, challenges and opportunities 299 3. environmental performance indicators the attention to environmental protection rose after a chain of ecological and environmental disasters during the 1970s and 1980s. the problem of environmental protection has grown to such a degree that the issue of resolving this problem has become the subject of significant international conventions and conferences, such as, the first united nations conference on the human environment in 1972 (adopted document: stockholm declaration), the un conference on environment and development in 1992 (rio declaration and agenda 21), the un conference on sustainable development in 2012 (final document "the future we want"), etc. (for a chronological review of most important conventions and conferences see: stojanović, 2015). environmental reporting became a part of many sustainability reports, while environmental disclosures became mandated in many countries, including both developed and developing. environmental performance measurement evaluates interrelatedness between the business and the environment and could be analyzed at the level of individual environmental performance indicators, the level of the overall performance measurement system and at the level of the relationship of this system with the external environment (olsthoorn et al., 2001). these indicators are ―numerical measures, financial or nonfinancial, that provide key information about environmental impact, regulatory compliance, stakeholder relations and organizational systems‖ (veleva & ellenbecker, 2001). in the context of the gri standards (gri, 2016), the environmental aspect of sustainability is related to the effects that an organization has on living and non-living natural systems (on land, air, water and ecosystems). the disclosure standard gri 301: material 2016, can provide information about an organization‘s impacts related to materials (renewable or non-renewable), and how it manages these impacts (indicated by its approach to recycling, reusing and reclaiming materials, products, and packaging). gri 302: energy 2016 sets out reporting requirements on the topic of energy (energy consumption within and outside the organization, energy intensity, reduction of energy consumption and reduction in energy requirements of products and services). energy intensity ratios, for example, can be specified on the product, services or sales level (such as energy consumed per unit produced, per service, or per monetary unit of sales). gri 303: water 2016 designs reporting requirements on the topic of water (like water withdrawal by source, water recycled and reuse, etc.). in this regard, the indicator of water reuse and recycling (total volume of water recycled and reused as a percentage of the total water withdrawal) is a measure of efficiency and demonstrates the success of an organization in reducing total water withdrawals and discharges. gri 304 addresses the topic of biodiversity, with the indicators related to significant impacts of activities, products and services on biodiversity or habitats protected or restored. gri 305 focuses on direct and indirect emissions into air (greenhouse gas (ghg), ozone-depleting substances, etc). ghg emissions intensity expresses the amount of ghg emissions per unit of activity, output, or any other organization-specific metric. gri 306 addresses the topic of effluents and waste, and includes indicators related to water discharges, generation, treatment and disposal of waste and spills of chemicals, oils, fuels and other substances. gri 307 deals with the topic of environmental compliance, covering an organization‘s compliance with environmental laws and/or regulations. this includes compliance with international declarations, conventions and treaties, as well as national, sub-national, regional and local regulations. gri 308 addresses the topic of supplier environmental assessment. 300 k. denĉić-mihajlov, s. zeranski in a recent study, bae & smardon (2011) point out that five most used absolute environmental performance indicators among nyse listed companies (table 2) are total amount of water used, total amount of energy used, total amount of greenhouse gases generated, total amount of solid waste generated, as well as total amount of hazardous waste generated. the empirical study realized by henri & journeault (2008) suggests that canadian manufacturing firms devote moderate importance to the various environmental indicators. these authors indicate that the most used indicators are those that measure conformity with inputs of energy, community relations, outputs of solid waste and outputs of air emissions, while the indicators that are considered least important are those providing information on the local, regional or national condition of the environment, measuring the inputs of auxiliary materials or the implementation of environmental policies and programs. a new study done by székely and vom brocke (2017) on 9,500 corporate sustainability reports published between 1999 and 2015, shows that the most reported indicators on environmental sustainability are related to energy and emissions, while biodiversity and renewable energy sources receive little attention in reports by organizations. the process of selection of environmental indicators should take into account the trade-off between environmental and corporate performance criteria. as delmas and blass (2010) point out, ―it is advisable to favor environmental indicators that might have a more direct and immediate impact on firms‘ operations and performance over those that might be less directly related to a firm‘s operations, but could potentially have a bigger environmental impact‖. 4. social performance indicators the social dimension of sustainability deals with the company's influence on the social systems within which it operates. progress in social sustainability at the firm level requests a simultaneous improvement of social (institutional interaction between individuals on all levels of a company) and human (knowledge and experience of individuals) capital (spangenberg & bonniot, 1998). social reporting, with its assessment of the social impact of corporate operations, is regarded as the first supplement to traditional financial reporting. according to ranganathan (1998), social performance indicators measure the relationship of business with its stakeholders. most companies have a long history of applied measures and accountability mechanisms for shareholders and customers as key stakeholders. a new challenge in this reporting field is to define performance indicators related to impact on other stakeholders, such as communities, employees, suppliers, by including topics of business ethics. with this purpose, ranganathan selects (a) employment, (b) community relations, (c) ethical sourcing and (d) social impact of products as crucial components of social performance. elkington et al. (1998) suggest that there are social issues and indicators with broad utility across stakeholders, companies and sectors. they classify social indicators into different categories concerning four related issues: 1) employment practices (indicators such as: gender and ethnic ratios, pay rates, benefits, holidays, training, job satisfaction, a safe working environment, etc.), 2) community relations (with indicators like contributions to community development, job creation, taxes paid/ tax breaks received), 3) supplier and customer relations (fair trading practices with suppliers, distributors and partners, number of products sourced locally, use of child or forced labor), and 4) social impact of product (indicators such as contribution of products and services to social welfare and equity, the meeting of basic human needs, etc.). https://www.ncbi.nlm.nih.gov/pubmed/?term=sz%26%23x000e9%3bkely%20n%5bauthor%5d&cauthor=true&cauthor_uid=28403158 https://www.ncbi.nlm.nih.gov/pubmed/?term=vom%20brocke%20j%5bauthor%5d&cauthor=true&cauthor_uid=28403158 development of sustainability indicators: approaches, challenges and opportunities 301 warhust (2002) concludes that the current state of development of corporate social performance and sustainability indicators is running at least a decade behind that of the development of environmental performance and sustainability indicators. many of the organizations working on social performance issues are only just beginning to turn their attention to the development of measures relating to social performance, and those that are doing so are typically working in isolation. gri standards (2016) lists 19 indicators for social performance: employment, labor/management relations, occupational health and safety, training and education, diversity and equal opportunity, non-discrimination, freedom of association and collective bargaining, child labor, forced or compulsory labor, security practice, wrights of indigenous people, human rights assessment, local communities, supplier social assessment, public policy, customer health and safety, marketing and labeling, customer privacy and socioeconomic compliance. the indicators in this field of reporting describe the influence organizations have on the society as well as the management of potential risks occurring from interactions with other social institutions (particularly the risks linked with bribery and corruption, undue influence in public policy-making and monopoly practices). for instance, total number and rate of new employee hires during the reporting period, by age group, gender and region, total number and rate of employee turnover during the reporting period, by age group, gender and region, or total number of employees that took parental leave are the indicators belonging to indicators‘ sub-group employment, while average hours of training per year per employee or percentage of employees receiving regular performance and career development reviews are social indicators assigned to category training and education. conclusion – lessons learned from sustainability indicators application in practice the aim of reporting via key economic, social and ecological performance indicators is improvement of the quality of the sustainability reports and their relevance for stakeholders (for example, in the field of risks and opportunities), controllability and comparability (at acceptable costs) across different periods and companies. in order to fill out these functions, the indicators should be objective, understandable, significant, consistent with the objectives, responsive to stakeholder expectations. the application of the sustainability indicators in the praxis has indicated that they should be "workable", i.e. the data required to implement them should be indeed available in practice. identifying appropriate set of sustainability indicators is a complex and time and resource consuming task. however, even incomplete and imperfect sustainability performance measurement is better than measurement disconnected from business objectives. on the other hand, previous research has suggested that many firms engage in sustainability and environmental reporting for symbolic reasons rather than out of a genuine concern for accountability to a wider set of stakeholders (adams, 2004); thus, an increase in reporting is not always a reflection of increased sustainability (price, 2008). firms can choose to report whatever information they want, so there is obviously an incentive to focus on positive outcomes. these findings suggest that more objective measures of sustainability performance would be useful. 302 k. denĉić-mihajlov, s. zeranski as indicated in sustainability and reporting trends in 2025 (gri, 2015a), new indicators, enabled by technology development and digitalization, will in coming years enable companies to operate and report in a highly-integrated way. in this regard, new indicators to measure trust as well as the correlated indicators (showing the connection between different factors in the context in which the decision will be made) and the integrated indicators (to guide the decision by integrating a company‘s performance measurement and reporting with that of its supply chain, regional partners or sectorial peers) will need to be created and monitored constantly. another important challenge when developing and applying sustainability indicators, as illustrated by latawiec & agol (2015), refers to the conceptual problems with interpretations of sustainability and its subjectivity. subjectivity is closely linked to issues with values, in the context of sustainability, with the conflicts between human wellbeing, environmental conservation and economic development. therefore, it is necessary to recognize all the multiplicity and ambiguity related with indicators, and understand and accommodate multiple views on sustainability. the praxis of sustainability management shows that maintaining the interrelatedness of sustainability with various corporate aspects such as company strategy, decision on company growth, risk management, reputation or executive remuneration, is frequently a difficult task. if a company strategy is related, for instance, to an expanding of worldwide operations, it would be expected to link sustainability indicators and considerations to its strategic management of social, political and economic factors. as funk (2003) points out, some famous episodes in the public eye, shell‘s conflict with the ogoni people of nigeria and allegations about nike‘s labor practices for example, demonstrate that sustainable operations are an opportunity to avoid or reduce future costs. early measurement and reporting of leading indicators of sustainability initiatives also helps build better relationships with stakeholders, especially at the local level. in the field of risk management, funk indicates that proactive investing in environmental measures beyond that required by law can be good for the bottom line, if for no other reason than to limit the downside risk of damages, hefty litigation fees and public relations disasters. if pursuing sustainable business strategies can increase a company‘s expected value, it is sensible to infer that integrating sustainability considerations into other kinds of risk management will lead to better decision making. however, a study done by eumedion (2012), which analyzes the use of key performance indicators in the sustainability reporting by the largest dutch publicly listed firms, indicates that in relation to risk management, only 52% of the companies provide a link between sustainability and the company‘s risk management in the annual report (while only 33% of the companies apply sustainability indicators in executive remuneration). managers ―myopia‖ and their orientation towards the pressure for immediate results for this quarter, is often in contradiction with a long-term strategic consideration of sustainability. however, sustainability reporting practice has shown that the disclosure of both financial and intangible performance information, and more importantly the ability to act and react on the basis of its perception, can supply decision makers with a more comprehensive insight into key issues for successful long-term performances. it should be emphasized that the impact of indicators on overall sustainability could be evaluated and changes in indicators could be linked to competitiveness performance measures such as stock price, earnings per share or market share. as the social, ecological and environmental problems become more tangible, financial and investment success increasingly depends on the efficiency with which companies solve them. traditionally, environmental compliance and social welfare development of sustainability indicators: approaches, challenges and opportunities 303 expenditures were regarded as extra costs that bring no added value. however, recent studies suggest that sustainability reporting has a positive impact on competitive advantage and improves financial performances (see for example adams et al. 2011, hussain, 2015), which implies that firms should devote more attention to improving both their sustainability and transparency. apart from the relevance of sustainability performance indicators to financial performance, the increase in sustainability reporting practice and the publication of the reports have been accompanied by growing interest in the accuracy and completeness of these reports (see haller et al. 2016, 2016a). here, one should pay attention to two facts. first, while the percentage of companies issuing a formal sustainability report has been increasing in the last few years, the percentage of companies assuring their sustainability report is stagnate (mori et al., 2014). second, the lack of uniformity of sustainability accounting reporting and assurance 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(2002). sustainability indicators and sustainability performance management professor alyson, warwick business school, retrieved from: http://valorminero.cl/wp/referencias/v_compilados/3_193_ aw.pdf, assessed on april 18, 2017 ocena pokazatelja održivog razvoja: pristupi, izazovi i mogućnosti dinamično i kompleksno poslovno okruženje zahteva od predu e a da pažljivo razvijaju svoje poslovne strategije kako bi ostvarila i održala konkurentsku prednost u dugoročnom periodu. razvijanje svesti o značaju očuvanja životne sredine i održivog razvoja ima za posledicu da tržišnu vrednost predu e a više ne određuju pojedinačni pokazatelji finansijskog učinka. okvir održivog razvoja, koji obuhvata ekonomske, ekološke i društvene performanse, je duži period predmet međunarodne pažnje, kako realnog, tako i finansijskog sektora. iako je opšte prihva eno da je usvajanje indikatora održivog razvoja najadekvatniji i najefikasniji način procene performansi održivog razvoja, kreiranje/selekcija ovih pokazatelja i njihova primena i analiza su i dalje predmet http://www.sristudies.org/blank+and+carty+(2002) http://lhzbw.gbv.de/db=1/lng=du/lrset=1/set=1/sid=a956f2ab-0/ttl=1/mat=/nomat=t/clk?ikt=1016&trm=unternehmenseckdaten http://lhzbw.gbv.de/db=1/lng=du/lrset=1/set=1/sid=a956f2ab-0/ttl=1/mat=/nomat=t/clk?ikt=1016&trm=deutschen http://lhzbw.gbv.de/db=1/lng=du/lrset=1/set=1/sid=a956f2ab-0/ttl=1/mat=/nomat=t/clk?ikt=1016&trm=nachhaltigkeitsberichten https://www.ncbi.nlm.nih.gov/pubmed/?term=sz%26%23x000e9%3bkely%20n%5bauthor%5d&cauthor=true&cauthor_uid=28403158 https://www.ncbi.nlm.nih.gov/pubmed/?term=vom%20brocke%20j%5bauthor%5d&cauthor=true&cauthor_uid=28403158 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc5389611/ http://valorminero.cl/wp/referencias/v_compilados/3_193_aw.pdf http://valorminero.cl/wp/referencias/v_compilados/3_193_aw.pdf 306 k. denĉić-mihajlov, s. zeranski detaljnih analiza, kako na nacionalnom, tako i na korporativnom nivou. e ina kompanija usvojila je međunarodno pri natu metodlogiju i metriku evaluacije performansi (na primer global reporting nitiative ili lobal ompact of nited ations eđutim, sve je ve i broj kompanija koje primjenjuju samostalno razvijenu metodologiju ocenjivanja performansi održivog ra voja osnovni cilj rada je istraživanje procesa kreiranja, selekcije i primene indikatora održivog ra voja s ciljem da se daju predlo i a odabir poka atelja održivosti čija bi primena bila u funkciji pove anja efikasnosti kontrolinga i procesa donošenja odluka i re ultirala dugoročnoj konkurentskoj prednosti kljuĉne reĉi: izvešavanje o održivom razvoju, ekonomski, ekološki i društevni indikatori performansi, gri standardi, kontroling. facta universitatis series: economics and organization vol. 18, no 2, 2021, pp. 135 156 https://doi.org/10.22190/fueo210326008j original scientific paper assessing the quality of covid-19 data: evidence from newcomb-benford law1 udc 616.98:578.834 519.213 hrvoje jošić, berislav žmuk university of zagreb, faculty of economics and business, croatia abstract. the covid-19 infection started in wuhan, china, spreading all over the world, creating global healthcare and economic crisis. countries all over the world are fighting hard against this pandemic; however, there are doubts on the reported number of cases. in this paper newcomb-benford law is used for the detection of possible false number of reported covid-19 cases. the analysis, when all countries have been observed together, showed that there is a doubt that countries potentially falsify their data of new covid-19 cases of infection intentionally. when the analysis was lowered on the individual country level, it was shown that most countries do not diminish their numbers of new covid-19 cases deliberately. it was found that distributions of covid-19 data for 15% to 19% of countries for the first digit analysis and 30% to 39% of countries for the last digit analysis do not conform with the newcomb-benford law distribution. further investigation should be made in this field in order to validate the results of this research. the results obtained from this paper can be important for economic and health policy makers in order to guide covid-19 surveillance and implement public health policy measures. key words: covid-19, misreporting, newcomb-benford law, kolmogorov-smirnov z test, chi-square test jel classification: c12, i10 1. introduction the covid-19 has been initially identified in wuhan, china, spreading all over the world causing global healthcare and economic crisis. there has been a slowdown in all economic received march 26, 2021 / revised april 15, 2021 / accepted may 14, 2021 corresponding author: hrvoje jošić university of zagreb, faculty of economics and business administration, trg j. f. kennedyja 6, hr-10000 zagreb, croatia e-mail: hjosic@efzg.hr 136 h. jošić, b. žmuk sectors worldwide, namely tourism, oil industry, aviation, financial and healthcare sector, shohini (2020). the spread of the virus benefited from the underlying interconnectedness due to globalization, catapulting a global health crisis into a global economic shock, hitting the most vulnerable the hardest, united nations (2020:6). world health organization declared the outbreak of the covid-19 infection to be a public health emergency of international concern, zhang (2020). countries reported their first cases of infection transparently; however, there were doubts about the reported number of cases. there also appears to be a doubt regarding the reported number of cases in the early stages of the epidemic. there were ongoing concerns about the level of transparency around the data from china. the manipulation of pandemic numbers by underreporting for the interest of politics risks lives, cambell and gunia (2020). accurate pandemic numbers are essential for shaping an ongoing response and in making informed decisions on easing restrictions. reporting accurate numbers is hard because many countries have struggled with adequate testing, which skews the official numbers of those infected, alwine and goodrum sterling (2020). the politics continue to obfuscate the inconvenient truths about the true numbers of covid-19 cases and deaths. this was encouraged in order to create a false sense of security but the covid-19 data must be collected and released independently of politics, alwine and goodrum sterling (2020). in this paper the interaction between new daily cases of covid-19 disease and the conformance with the newcomb-benford law (nbl) or benford's law, newcomb (1881) and benford (1938) was investigated. the aim of the analysis is primarily not to report whether a particular country misreports or manipulates the covid-19 data. the purpose is to assess the quality of covid-19 data by using newcomb-benford law as a tool. newcomb-benford law is a natural occurrence of digits which are not uniformly distributed. the property of the newcomb-benford law is that the fraudulent or misreported data deviate significantly from the nbl distribution, balashov et al. (2020). the analysis was made for the early stages of the epidemic for which the numbers of new cases rose exponentially and the benford's law should hold, kennedy and yam (2020). benford's law (bl), or newcomb-benford law (nbl), has many applications in economics. the most important one is as a forensic accounting tool in auditing and fraud detection, nigrini (2012). this paper follows on previous investigation in this field (balashov et al. (2020), kennedy and yam (2020), kilani and georgiou (2020), zhang (2020)) by analysing the conformance of covid-19 data with the nbl distribution. in order to detect possible misreported numbers of infection, the distribution of first and last digits of the new cases of covid-19 infection for 206 countries and self-government territories worldwide will be analysed. the compliance with the newcomb-benford law will be inspected by using chisquare and kolmogorov-smirnov z tests. the expected result is that the distribution of first digits of new covid-19 cases of infection would follow the newcomb-benford law distribution, meaning that countries do not falsify or diminish their covid-19 data intentionally. it is also expected that the distribution of last digits in new cases of infection would follow the uniform distribution or equal probability of occurrence. main contribution of this paper is comprehensive analysis of conformity between new cases of infection and nbl distribution for almost all countries and self-government dependencies in the world in the beginning period of the covid-19 epidemic, from december 31st, 2019 to april 23rd, 2020. paper is organised in six sections. after the introduction, in literature review the history of newcomb-benford law is explained with main applications in the field of economics and epidemiology. in the methodology and data section the newcomb-benford law distribution is derived, the methodology for conducting the chi-square and kolmogorov assessing the quality of covid-19 data: evidence from newcomb-benford law 137 smirnov z tests explained as well as descriptive statistics of data. in the results and discussion section the main results of the analysis are displayed, both for the first and last digits of covid-19 cases by using newcomb-benford law and uniform distribution as a tool. final chapter presents concluding remarks. 2. literature review benford’s law or newcomb-benford law is a natural observation in many occurring selections of numbers for which the first digit is not uniformly distributed. the history of newcomb-benford law originates in 1881 when simon newcomb (newcomb, 1881) noticed that the first pages of logarithmic tables were more worn out than the rest. that implies there are more digits starting with the digit one than that is expected under the uniform distribution. newcomb described this phenomenon in his paper “note on the frequency of use of the different digits in natural numbers”. unaware of newcomb’s findings, frank benford came to the similar conclusion almost 60 years later in his paper “the law of anomalous numbers“, benford (1938). therefore, newcomb-benford law was named according to both deserving economists. newcomb-benford law has applications in various fields of economics but the most important one is as a tool for forensic accounting and fraud detection, nigrini (1996). other applications of newcomb-benford law are for campaign fraud detection, cho and gaines (2007), governmental statistics inspection, hindls and hronová (2015), fraudulent scientific data, diekmann (2007) and for inspection whether countries falsify their economic data strategically, michalski and stoltz (2013). jošić and žmuk (2018) used benford's law for psychological pricing detection. seminal paper in this field was published by el sehity et al. (2005) which analyses consumer price digits before and after the euro introduction. another piece of empirical evidence on psychological pricing was related to austrian retailers, wagner and jamsawang (2012). zhang (2020) proposed a test for checking the reported number of covid-19 cases in china using the newcomb-benford law. the obtained p-value of 92.8% indicated that the distribution of covid-19 cumulative cases abide by the newcomb-benford law. the author stated that the reported number of cases could be lower than the real number of infected people due to the lack of medical equipment and resources. balashov et al. (2020) used newcomb-benford law to test whether countries manipulate their covid-19 data during the pandemics. the most important finding of the paper was that democratic countries with higher values of gross domestic product per capita, higher healthcare expenditures and universal healthcare coverage are the ones less likely to deviate from the newcomb-benford law. it was found that roughly one third out of the 185 countries in the world affected by the pandemics seem to misreport their data. kennedy and yam (2020) studied the applicability of benford’s law to national covid-19 case figures. the aim was to establish guidelines for methods of fraud detection in epidemiology. benford’s law largely held across countries in the early stages of the epidemic for which the number of infected people is relatively small in regards to the population. this argument also held for the second digit analysis. kilani and georgiou (2020) collected a database of potential data misreports by 171 countries regarding their covid-19 daily reported cases. they employ three different tests (chi-square, kuiper and mean absolute deviation (mad)) in order to determine if data for each observed country fit the benford’s law. for most of the countries the results showed the conformity of covid-19 data with the benford’s law. koch and 138 h. jošić, b. žmuk okamura (2020) emphasized the importance of veracity of reported contagious diseases data in real time. the authors found that the chinese, united states and italian data matched the distribution expected by benford’s law. if the numbers were taken from the exponential distribution, it could be demonstrated that they automatically follow the benford’s law distribution, lee et al. (2020). the number of cases of infections and/or deaths will not obey the benford’s law if the current control interventions are successful in flattening the epidemic curve. it is the case when the epidemic growth rate is below the exponential growth rate. investigating whether countries misreport or diminish their numbers of covid-19 cases in the early stages of infection can be therefore considered as valid. moreno-montoya (2020) propose a new test in evaluating compliance with the benford’s law distribution in the case of small data samples because conventional statistical methods for evaluation of small data samples are controversial. according to peng and nagata (2020), china’s empirical distribution of new cases of infection appears to be particularly different from other countries. despite being the first country affected by the disease, there was a linear trend present in the early stages of infection. silva and figueiredo filho (2020) employed newcomb–benford law to evaluate the reliability of covid-19 figures in brazil in the period from february 25th to september 15th . they found strong evidence that brazilian reports do not conform with the newcomb-benford law theoretical predictions showing that the brazilian epidemiological surveillance system failed to provide trustful data on the covid-19 epidemic. 3. data and methodology newcomb-benford law (nbl) is empirical wellknown pattern for frequency of first digit occurrence in various datasets. the first digit is not uniformly distributed: the number one appears as a leading digit in 30.1% of cases, the number two appears as a leading digit in 17.6% of cases while the number nine occurs as the first digit in 4.5% of the time. checking for conformance with the nbl would be the best approach in a forensic analysis looking at potential manipulations of the number of cases since the distribution of first digits that deviates from the expected distribution may indicate frauds, lee et al. (2020:4). in this paper it is analysed whether distribution of new cases of covid-19 disease conform with the newcomb-benford law distribution for the first leading digit and whether distribution of new cases of the covid-19 conform with the uniform distribution for the last digit. a reasonable assumption will be that covid-19 new case numbers should follow the newcomb-benford law distribution. it seems the infection grows exponentially, particularly at the beginning in the early stage, zhang (2020). it is hard to fabricate data closely following the newcomb-benford law distribution. that implies if the distribution of first digits for new daily cases of covid-19 follows the nbl distribution then there is no misreporting or possible diminishing of the number of new daily cases. also, it is expected that the distribution of last digits of new daily cases would follow the uniform distribution, meaning the same frequency of number occurrence, leading again to the conclusion that there are no frauds or misreports of data detected. the probabilities of first digit occurrence in the newcomb-benford law are derived using the following equation 1: assessing the quality of covid-19 data: evidence from newcomb-benford law 139 10 1 ( ) log 1p d d   = +    , where d  {1,2,3,...,8,9}. (1) the probabilities for the second digit occurrence in the nbl are derived from the equation 2: 9 10 1 1 ( ) log 1 10 k p d k d =   = +  +   , where 0,1, 2,...,9.d = (2) in equation 3 the probabilities of occurrence for the higher-order digits up to the last digit with equal probability of 0.1 which is identical to uniform distribution are derived. 1 2 1 9 9 9 10 1 0 0 1 1 ( ) ... log 1 10k k k k id d d i i p d d− −= = = =       = +            ,where 0,1, 2,..., 9.kd = (3) the calculated probabilities of occurrence for the first digit, second digit, higher-order and the last digit are presented in table 1. table 1 expected frequencies of digit occurrence in nbl distribution number 1st digit 2nd digit 3rd digit 4th digit 5th digit 0 0.11968 0.10178 0.10018 0.10 1 0.30103 0.11389 0.10138 0.10014 0.10 2 0.17609 0.10882 0.10097 0.10010 0.10 3 0.12494 0.10433 0.10057 0.10006 0.10 4 0.09691 0.10031 0.10018 0.10002 0.10 5 0.07918 0.09668 0.09979 0.09998 0.10 6 0.06695 0.09337 0.09940 0.09994 0.10 7 0.05799 0.09035 0.09902 0.09990 0.10 8 0.05115 0.08757 0.09864 0.09986 0.10 9 0.04576 0.08500 0.09827 0.09982 0.10 source: nigrini (1996), jošić and žmuk (2018) epidemics such as covid-19, which we are experiencing at the moment, are classic examples of exponential growth function. the number of infected people tomorrow, i1 , is equal to constant  times the amount of infected people today, i0, that is i1 =   i0. this expression could be generalized for t days as i1 =  t  i0 . this exponential growth could obey newcomb-benford law, peng and nagata (2020). kennedy and yam (2020) provided a justification for the emergence of benford’s law during the early stages of epidemic. let s(t) denote the number of susceptible individuals. in the early stages of the epidemic the upper constraint of population size is negligible. under the assumptions of fixed infectiousness  > 0, fixed recovery rate  > 0 and  <  , the evolution of i(t) can be described by: i(t + 1) = i(t) + ( +  i t + 1)i(t) − ( +  r t + 1)i(t) (4) 140 h. jošić, b. žmuk for t = 1,...,t − 1,  i t are independent and identically distributed (i.i.d.) random noise terms, as are  rt . the evolution of s(t) is analogously defined as: s(t + 1) = s(t) − ( +  i t + 1)i(t) + ( +  r t + 1)i(t) (5) the epidemic growth of i(t) can be further expressed as: i(t + 1) = at + 1  at  ...  a1 (6) where 𝐴𝑡 ≜ 1 + 𝜃 − 𝛿 + 𝑡 𝐼 − 𝑡 𝑅 (7) the equation 6 suggests that newcomb-benford law should emerge naturally during the early stages of an epidemic. data about new cases of covid-19 infection are taken from the eu open data portal database, eu open data portal (2020). the number of new cases is observed from the start of the infection, from december 31st, 2019 up to april 23rd, 2020. the days in which there were no new cases of covid-19 infection were omitted from the analysis. the data for overall 206 countries and self-government dependencies in the world were collected. firstly, the analysis will be conducted by taking into account all observed countries together. after that the analysis will be conducted for each country separately. in order to inspect whether the distributions of the first and the last digits follow nbl or uniform distribution, chi-square and kolmogorov-smirnov z tests will be used. the chisquare test values will be calculated by using the following equation 8: 𝜒2 = 𝑓𝑖 − 𝑒𝑖 2 𝑒𝑖 𝑛 𝑖=1 (8) where are the actual values for the i-th first digit or the i-th last digit, are actual values of the i-the first digit or the i-th last digit under the assumption that the distribution of the first digits is distributed according to the nbl distribution and the distribution of the last digits is distributed according to the uniform distribution. similarly, the values for kolmogorov-smirnov z test will be calculated as follows: 𝐾 − 𝑆 = − 1 2 𝑙𝑛 𝛼 2 𝑛 (9) where is statistical significance level (here 0.05) and is the total number of new daily values. for both statistical tests the null hypothesis contains an assumption that the observed daily new cases of covid-19 will follow the certain distribution (here nbl or uniform distribution). on the other hand, the alternative hypothesis assumes that the observed data will not follow the certain data distribution. before conducting the chisquare and kolmogorov-smirnov z tests, basic descriptive statistics analysis was done. in table 2 basic descriptive statistics results for the new cases of covid-19 infection, first digit and the last digit of the new cases by taking into account all countries together are presented. assessing the quality of covid-19 data: evidence from newcomb-benford law 141 table 2 descriptive statistics for the new cases, first and last digit, all countries together, daily values from december 31st, 2019 to april 23rd, 2020 statistics new cases first digit last digit sample size 6,787 6,787 6,787 mean 381.36 3.17 3.95 standard deviation 1,998.73 2.34 2.76 coeff. of variation 524% 74% 70% skewness 12 0.98 0.35 kurtosis 176 -0.09 -1.11 mode 1 1 1 minimum 1 1 0 1st quartile 4 1 1 median 19 2 4 3rd quartile 106 5 6 maximum 37,289 9 9 range 37,288 8 9 interquartile range 102 4 5 source: eu open data portal (2020), authors. according to the results from table 2 there were overall 6,787 daily data about new cases of covid-19 infection. the total number of days in the observed period was 12,596, but there were 5,809 days without new cases of infection which were excluded from the analysis. on average there were 381 new cases of infection daily with an average deviation of 1,999 new cases or 524%. the very high variability level is obvious if just minimum and maximum values are compared. from the new cases values their first and last digits are taken and basic descriptive statistics analysis is conducted as well. the results are shown in the last two columns and they are quite similar. 4. results and discussion in addition to the numeric analysis for the first digits, their distributions and comparison with the newcomb-benford law distribution are graphically shown in figure 1. according to the figure 1, the most common first digit is one. it appeared in 2,279 cases or 33.58% of total cases. on the other hand, the number eight the lowest appearance had; it appeared in 244 cases or 3.60% of total cases. from the graphical analysis it can be seen that the daily distribution of new cases of infection and newcomb-benford law distribution are close to each other indicating that the distribution of the first digits for new cases of covid-19 infection is conforming with the newcomb-benford law distribution. however, in order to be sure, statistical tests (chi-square and kolmogorov-smirnov z test) are going to be applied. the results of the chi-square and the kolmogorov-smirnov z tests for the first digit of new cases of covid-19 infection on the overall sample of countries are presented in tables 2 and 3. 142 h. jošić, b. žmuk fig. 1 distribution of first digits of the new cases and comparison with the nbl distribution it is examined whether distribution of first digits in the sample follows the distribution defined by the newcomb-benford law. the hypotheses are as follows: h0... the distribution of first digits for the number of new cases of covid-19 follows the distribution defined by the newcomb-benford law. h1... the distribution of first digits for the number of new cases of covid-19 does not follow the distribution defined by the newcomb-benford law. table 3 chi-square test for the first digit of new cases of covid-19 infection first digit number of days percentage of days benford rate fi ei (fi-ei)2/ei 1 2,279 33.58% 30.10% 2,279 2,043 27 2 1,250 18.42% 17.61% 1,250 1,195 3 3 882 13.00% 12.49% 882 848 1 4 657 9.68% 9.69% 657 658 0 5 486 7.16% 7.92% 486 537 5 6 400 5.89% 6.69% 400 454 7 7 324 4.77% 5.80% 324 394 12 8 244 3.60% 5.12% 244 347 31 9 265 3.90% 4.58% 265 311 7 total obs. 6,787 100.00% 100.00% 6,787 6,787 92 source: authors’ calculations. according to the chi-square test results presented in table 3 (empirical chi-square value equal to 92.196, theoretical chi-square of 15.51 ( =0,05), p-value < 0.0001 and with 8 degrees of freedom) the null hypothesis of the chi-square test can be rejected at any commonly used statistical significance level. it can be concluded that the first digit distribution of new cases, when all countries are observed together, is not following the newcomb-benford law distribution, meaning that countries are possibly misreporting the number of new covid-19 cases of infection. comparison of the first digit cumulative density distribution of covid-19 assessing the quality of covid-19 data: evidence from newcomb-benford law 143 new cases and the cumulative density of newcomb-benford law distribution is presented in figure a1 in appendix. table 4 kolmogorov-smirnov z test for the first digit of new cases of covid-19 infection first digit number of days percentage of days benford rate cum. density new cases distribution cum. density benford's law distribution absolute difference 1 2,279 33.58% 30.10% 0.3358 0.3010 0.0348 2 1,250 18.42% 17.61% 0.5200 0.4771 0.0428 3 882 13.00% 12.49% 0.6499 0.6021 0.0479 4 657 9.68% 9.69% 0.7467 0.6990 0.0478 5 486 7.16% 7.92% 0.8183 0.7782 0.0402 6 400 5.89% 6.69% 0.8773 0.8451 0.0322 7 324 4.77% 5.80% 0.9250 0.9031 0.0219 8 244 3.60% 5.12% 0.9610 0.9542 0.0067 9 265 3.90% 4.58% 1.0000 1.0000 0.0000 total 6,787 100.00% 100.00% source: authors’ calculations. again, at first, it could be said that the first digit distribution of new cases follows the newcomb benford law distribution. however, the conducted kolmogorov-smirnov z test (empirical test value equal to 0.0479, theoretical k-s value of 0.0015) indicates that the null hypothesis can be rejected at any commonly used statistically significant level. so, the conclusion is that the first digit distribution of new cases does not follow the newcomb-benford law distribution. in figure 2 distribution of last digits of the new cases of covid-19 and comparison with the uniform distribution is presented. fig. 2 distribution of last digits of the cases and comparison with the uniform distribution according to the figure 2 the most common last digit is one (1,242 cases or 18.30% of total cases) and the least common last digit is zero (478 cases or 7.04% of total cases). 144 h. jošić, b. žmuk from the graphical representation it is obvious that the last digit distribution of new cases does not follow the uniform distribution. in the following hypotheses it is examined whether distribution of the last digits in the sample conforms with the uniform distribution. h0... the distribution of the last digits for the new cases of covid-19 infection follows the uniform distribution. h1... the distribution of the last digits for the new cases of covid-19 infection does not follow the uniform distribution. table 5 chi-square test for the last digit of new cases of covid-19 infection last digit number of days percentage of units uniform distribution fi ei (fi-ei)2/ei 0 478 7.04% 10.00% 478 679 59 1 1,242 18.30% 10.00% 1,242 679 468 2 928 13.67% 10.00% 928 679 92 3 731 10.77% 10.00% 731 679 4 4 658 9.70% 10.00% 658 679 1 5 614 9.05% 10.00% 614 679 6 6 620 9.14% 10.00% 620 679 5 7 513 7.56% 10.00% 513 679 40 8 502 7.40% 10.00% 502 679 46 9 501 7.38% 10.00% 501 679 47 total 6,787 100.00% 100.00% 6,787 6,787 767 source: authors’ calculations. the conducted chi-square test (empirical chi-square value equal to 767.33, theoretical chi square 16.92, p-value < 0.0001 with 9 degrees of freedom) confirmed that the null hypothesis of the test can be rejected at any usually used statistically significance level. in figure a2 in appendix the comparison between the last digit cumulative density distribution of new cases and the cumulative density uniform distribution is presented. table 6 kolmogorov-smirnov z test for the last digit of new cases of covid-19 infection last digit number of days percentage of units uniform distribution cumulative density new cases distribution cumulative density uniform distribution 0 478 7.04% 10.00% 0.0704 0.1000 1 1,242 18.30% 10.00% 0.2534 0.2000 2 928 13.67% 10.00% 0.3902 0.3000 3 731 10.77% 10.00% 0.4979 0.4000 4 658 9.70% 10.00% 0.5948 0.5000 5 614 9.05% 10.00% 0.6853 0.6000 6 620 9.14% 10.00% 0.7766 0.7000 7 513 7.56% 10.00% 0.8522 0.8000 8 502 7.40% 10.00% 0.9262 0.9000 9 501 7.38% 10.00% 1.0000 1.0000 total 6,787 100.00% 100.00% source: authors’ calculations. assessing the quality of covid-19 data: evidence from newcomb-benford law 145 the kolmogorov-smirnov z test (empirical test value equal to 0.0979 and theoretical kolmogorov-smirnov z value of 0.0015) led to the same conclusion as the corresponding chi-square test. the conclusion is that the last digit distribution of new cases does not follow the uniform distribution. it can be concluded that when all countries in the world are observed together, there is a potential doubt that countries misreport their data of new cases of infection. the same analysis, as explained here for all countries together, is conducted for each country separately. the aggregated results are shown in table 7. table 7 summary results for individual countries, 206 countries, data are daily values of new cases in the period from december 31st, 2019 to april 23rd, 2020 continent test conclusion at significance level 0.05 null hypothesis: the distribution of the first digits of new cases is following the nbl distribution null hypothesis: the distribution of the last digits of new cases is following the uniform distribution chi-square test kolmogorovsmirnov z test chi-square test kolmogorovsmirnov z test overall do not reject null hypothesis 167 175 127 146 reject null hypothesis 39 31 79 60 africa do not reject null hypothesis 50 47 28 32 reject null hypothesis 2 5 24 20 america do not reject null hypothesis 40 43 22 34 reject null hypothesis 9 6 27 15 asia do not reject null hypothesis 32 34 27 27 reject null hypothesis 10 8 15 15 europe do not reject null hypothesis 36 43 46 48 reject null hypothesis 18 11 8 6 oceania do not reject null hypothesis 8 7 3 4 reject null hypothesis 0 1 5 4 other do not reject null hypothesis 1 1 1 1 reject null hypothesis 0 0 0 0 source: eu open data portal (2020), authors. when the analysis is lowered on the individual country level, different conclusions could bereached. detailed results of conducted chi-square and kolmogorov-smirnov z tests for the first and last digit for 206 countries and self-government dependencies are presented in table a1 in appendix. the chi-square tests have shown that for 167 countries (out of 206) the distribution of the first digits for new cases follows the newcomb benford’s distribution meaning that countries do not misreport or diminish data of new cases of covid19. the distribution of the last digits of new cases is following the uniform distribution for 127 countries, leading to the similar conclusion. the kolmogorov-smirnov z tests results are going even more in favour of not rejecting the null hypothesis. the difference between the results achieved in the analysis for all countries together and on the individual country level can be explained with heterogeneity in data or unique characteristics of each individual country. the obtained results are in the line with previous investigation in this field of research, however, there is no general theory that the epidemics like covid-19 should obey the newcomb-benford law. balashov et al. (2020) came to the conclusion that roughly one third out of 185 countries misreport their data intentionally, which are results similar to our 146 h. jošić, b. žmuk findings. we found that 39 out of 206 countries for the chi-square test and 31 out of 206 countries for the kolmogorov-smirnov z test for the first digit analysis which is result in the range of 15%-19% of countries, potentially misreport their data. on the other hand, we found that 79 out of 206 countries for the chi-square test and 60 out of 206 countries for the kolmogorov-smirnov z test for the last digit analysis, which is in the range of 29%-38% of countries, potentially misreport their data. lee at al. (2020) found that 9 out of 10 countries satisfy the newcomb-benford law, indicating that the growth rates of covid-19 in these 9 countries were close to an exponential trend. kilani and georgiou (2020) made ranges of tests (chi-square, kuiper and mad) for 171 countries regarding their covid-19 daily reported cases. the results of chi-square and kuiper tests mostly confirmed the conformity with the benford’s law, in 78.4% and 65.50% respectively. on the other hand, the mad test pointed out to different conclusion; 111 out of 171 countries or 64.91% showed the nonconformity with the newcomb-benford law. the authors devised the conformity ranges with the nbl distributions dividing them into close conformity, acceptable conformity, marginable acceptable conformity and nonconformity. kennedy and yam (2020) found empirical evidence that benford’s law largely hold across countries while deviations could be easily explained, including constrained testing, poorly defined start dates or government intervention through social distancing measures in slowing down transmission of the disease. zhang (2020) showed that newcomb-benford law held for the cumulative case numbers of covid-19 on data for 31 province-level divisions in china in the period from january 15th 2020 to february 10th 2020. there were overall 628 data points in the analysis which was not a big dataset compared to ours (6,787 data points). miranda (2020) conducted test of frauds by examining the cumulative distribution of the philipinnian covid-19 data and the newcomb-benford law distribution by employing the kolmogorov-smirnov test in order to analyse the differences between the distributions. the data were used for three months after the first case of covid-19 in the country, that is in the beginning of the epidemic, similar as in this paper. there was no significant difference between the covid-19 data’s first digit distribution and the distribution set by nbl suggesting no evidence for data manipulation. wong et al. (2020) focused the study on two southeast asian countries: indonesia and malaysia during the period between march and november 2020. a chi-square test was recruited to quantify the closeness of the data and newcomb-benford law distribution. distribution of daily infection and death cases in indonesia followed the newcomb-benford law while the opposite result was obtained for malaysia. contribution of this paper to the existing theory and knowledge in this field of research is twofold. firstly, in line with conducting the first digit analysis for the new cases of covid-19 infection, the analysis was broadened to the last digit analysis using uniform distribution as a reference distribution. secondly, the dataset included almost all countries in the world with consequent cases of infection at the beginning of the epidemics. according to the kennedy and yam (2020) there are some ambiguities in how the timeline of the epidemic should be defined; the beginning of the epidemic should be set on date when sustained community transmission firstly occur, as opposed to the emergence of the first case of infection. this study has important implications for the government health care systems and overall community. similar tests can be applied to epidemics other than covid-19. countries should report their numbers of covid-19 cases correctly. however, the motivation for possible data misreporting or diminishing could be to avoid travel bans and decline in tourism. assessing the quality of covid-19 data: evidence from newcomb-benford law 147 that could lead to taking the disease not seriously so there is clear need to verify the data throughout rigorous statistical techniques, help detect fraudulent behavior and verify the authenticity of published figures. without valid data it is almost impossible to correctly evaluate the government intervention measures. it can be concluded that falsifying epidemic data is a short-lived strategy for governments and is not sustainable over the long run, balashov et al. (2020). 5. conclusions main findings of the paper can be summarized as: (1) the results of the kolmogorovsmirnov z test and chi-square test, when all countries in the world were observed together, pointed out to the conclusion that the distribution of the first digits of new covid-19 cases was not following the nbl distribution meaning that countries are potentially misreporting their covid-19 data, (2) the aforementioned tests confirmed that the distribution of the last digits of new cases did not follow the uniform distribution, (3) when the analysis was lowered on an individual country level, both tests, chi-square and kolmogorov-smirnov z test, pointed out to the conclusion that the distribution of first digits in most cases (167 out of 206 and 175 out of 206) obey the nbl, indicating that most of the countries do not diminish their numbers of new covid-19 cases deliberately, (4) when the distribution of the last digits of new cases of infection was observed, the similar conclusion could be reached. it can be concluded that the quality of covid-19 data in most of countries in the world at the beginning of the epidemic is on the satisfactory level of trust. the divergences from the expected distributions should not be attributed to the deliberate falsification of data from governments but possibly from the low quality or structural breaks in data. in addition, government measures intended to flatten the epidemic curve could influence the results even at the early stages of the epidemic, in its exponential phase of growth. when the main findings of this paper are compared with the previous research it can be said that they are in the line with the state of the art of economic theory. the covid-19 data show exponential growth at the beginning of the epidemic with distribution conforming with the newcomb-benford law distribution. limitations of the research are related to the uneven number of observed days of infection duration for the each observed country, meaning that the reported number of cases is actually lower than the real number of infected people. the data are incomplete due to the lack of medical equipment and resources with many suspected cases remaining to be confirmed. there is also a cyclic component of data reports on weekends, especially sundays, for which the data of new cases of infection are usually lower due to less testing on these days. there are several areas of future research that could be built upon this paper such as detailed analysis of individual countries, second and/or higher order digit analysis, observation of cumulative number of cases or the number of reported deaths. the spread of the disease come in waves, so similar analysis could be made for the start of the second and third wave of infection or any other successive wave. the methodology displayed in this paper could be additionally improved in order to include government measures for preventing the disease through limitation of social contacts and lockdowns, in testing the compliance of covid-19 data distribution with the newcomb-benford law distribution. the results 148 h. jošić, b. žmuk obtained in this paper can be important for economic and health policy makers in order to guide the covid-19 surveillance by evaluating the effectiveness and performance of covid-19 control interventions and public health surveillance systems. acknowledgement: this manuscript is an improved version of the paper „do countries diminish the number of new covid-19 cases? a test using benford’s law and uniform distribution” authors berislav žmuk and hrvoje jošić presented online at the 3rd conference titled "economic system of the european union and accession of bosnia and herzegovina challenges and policies ahead", mostar, bosnia and herzegovina, 24th october, 2020. references alwine, j., & goodrum sterling, f. 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(2020). newcomb-benford law analysis on covid-19 daily infection cases and deaths in indonesia and malaysia. available at: https://unctad.org/system/ files/official-document/osg2020d1en.pdf [accessed: 2021-03-10]. zhang, j. (2020). testing case number of coronavirus disease 2019 in china with newcomb-benford law. physics and society, 1-7. žmuk, b., & jošić, h. (2020) do countries diminish the number of new covid-19 cases? a test using benford’s law and uniform distribution, 3rd conference titled "economic system of the european union and accession of bosnia and herzegovina challenges and policies ahead", mostar, bosnia and herzegovina, online, 24 october, 2020. procena kvaliteta covid-19 podataka: primena newcomb-benfordovog zakona infekcija covid-19 započela je u kineskom grad wuhanu, šireći se celim svetom stvarajući globalnu zdravstveno-zaštitnu i ekonomsku krizu. zemlje širomsveta se žestoko bore protiv ove pandemije, međutim, postoje sumnje u prijavljeni broj zaraženih ljudi. u ovom se radu newcombbenfordov zakon koristi za otkrivanje lažnog broja prijavljenih slučajeva covid-19. analiza, kada su sve zemlje posmatrane zajedno, je pokazala da postoji potencijalna sumnja da zemlje prijavljuju lažne podatke o novim slučajevima zaraze. kada je analiza spuštena na nivopojedinih zemalja, pokazala je da većina zemalja ne umanjuje broj novih slučajeva covid-19 namerno. u analizi prvih cifara je utvrđeno da u 15-19 odsto slučajeva kao i u analizi zadnjihcifara u 30-39 odsto slučajeva da distribucija covid-19 brojki ne odgovara distribuciji newcomb-benfordovog zakona. međutim, na ovom polju je potrebno činiti daljnja istraživanja kako bi se potvrdili rezultati ovog rada. rezultati dobijeni u ovom istraživanju mogu biti važni za kreatore ekonomskih i javnozdravstvenih politika kako bi usmeravali nadzor nad covid-19 sprovođenjem mera politike javnog zdravstva. ključne reči: covid-19, pogrešno prijavljivanje, newcomb-benfordov zakon, kolmogorov-smirnov z test, hi-kvadrat test https://doi.org/10.1093/pubmed/fdaa193 150 h. jošić, b. žmuk appendix fig. 1a comparison of the first digit cumulative density distribution of covid-19 new cases and the cumulative density benford’s law distribution fig. 2a comparison of the last digit cumulative density distribution of covid-19 new cases and the uniform distribution assessing the quality of covid-19 data: evidence from newcomb-benford law 151 152 h. jošić, b. žmuk assessing the quality of covid-19 data: evidence from newcomb-benford law 153 154 h. jošić, b. žmuk assessing the quality of covid-19 data: evidence from newcomb-benford law 155 156 h. jošić, b. žmuk plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 18, no 5, 2021, pp. 487 498 https://doi.org/10.22190/fueo210817034s © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper flood risk vulnerability visualization for sustainable risk management the case of serbia1 udc 005.334(497.11) jovica stanković1, zoran tomić2, milan gocić3 1university of niš, faculty of economics, niš, serbia 2university of niš, faculty of agriculture, kruševac, serbia 3university of niš, faculty of civil engineering and architecture, niš, serbia orcid id: jovica stanković https://orcid.org/0000-0002-9174-0260 zoran tomić n.a. milan gocić https://orcid.org/0000-0001-8398-6570 abstract. the main objective of this study is to visualize the flood risk vulnerability of municipalities in the republic of serbia through mapping and spatial analysis of precipitation data and data related to the losses. gis tools enable spatial analysis and visualization of historical data on losses combined with temporal and geo-spatial distribution of precipitation, and qgis tool was used for visualization of precipitation data and data on damages caused by floods and flash floods. as a result of these analyses, areas with potential high risks of losses are detected, which enables undertaking appropriate steps and measures in order to minimize future losses. key words: risk visualization, floods, gis, spatial analysis jel classification: c63, c82, c88, q54, q01 1. introduction climate change is becoming the primary environmental challenge in the 21st century. society and economy are exposed to numerous risks which can significantly affect their development. realization of these risks can cause material and non-material damage. it is important, both from the individual point of view and from the national point of view, to work on the identification, monitoring and prevention of the same risks. thus, extreme received august 17, 2021 / accepted december 15, 2021 corresponding author: jovica stanković university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia | e-mail: jovica.stankovic@eknfak.ni.ac.rs https://orcid.org/0000-0002-9174-0260 https://orcid.org/0000-0001-8398-6570 mailto:jovica.stankovic@eknfak.ni.ac.rs 488 j. stanković, z. tomić, m. gocić risks, natural disasters and climate change are important issues that occupy the attention of the scientific public, but also of policy makers due to the negative socio-economic consequences they may have. the region of south east europe is very vulnerable to climate change. heavy rainfall and subsequent flooding in may 2014 can be considered an extremely important factor affecting the regional growth, because the floods that hit this region indicated a high degree of vulnerability and unpreparedness of countries in this region to manage such risks. considering the fact that 17.1% of the territory and 17.5% of the population of the republic of serbia are at risk of natural disasters, it can be concluded that serbia is a country of “relatively high risk of multiple hazards” (dilley et al., 2005). moreover, according to the projections of climate change, it can be presumed that present hazards, especially hydrological ones, may intensify (vuković et al., 2018). this alarming estimation provided incentive for the development of improved approaches and policies for flood risk management across europe. selecting an optimal risk management strategy and minimizing the negative effects of floods depends on the accuracy of precipitation assessment. precipitation, as one of the most important parts of the earth’s water cycle, has very important role for environment and life processes, but also can have destructive role causing losses and damages. the focus of this paper is on mapping and spatial analysis of measured precipitation values using gis tools and techniques. the main objective of this study is to visualize the flood risk vulnerability for sustainable risk management in the republic of serbia through mapping and spatial analysis of precipitation data and data related to the losses. thus, the aim of this study is twofold. the first goal is to obtain the precipitation map for the whole territory of the republic of serbia and to visually present registered losses. subsequently, we intend to investigate which areas have higher risk potential caused by heavy rains and flash floods. the paper is structured as follows: section 2 provides an overview of the types and consequences of natural disasters, especially floods, and possibilities for spatial analysis of these disasters using gis tools; data and methodology are described in section 3 and obtained results are presented in section 4, and section 5 concludes the presented work. 2. literature review a thorough knowledge on natural disasters and their shortand long-term effects on the economic system is critical precondition for conceptualization of effective mechanisms and procedures of disaster risk management. the level of economic development (raschky, 2008), as well as employment, education and age structure of inhabitants (noy, 2009) are some of the main determinants of national and regional society’s vulnerability to natural disaster losses. considering the effects of natural processes on the human community, as well as the effects of human activities on shaping the environment, it can be concluded that there is a strong bi-directional and multidimensional relation between natural and social processes (kovačević-majkić et al., 2014). the changes in climate parameters already affect gdp, as well as revenues within sectors which are particularly important to the growth and development of the serbian economy – agriculture and production, transmission and distribution of electric power and heat energy (world bank, 2015). moreover, given the expected climate changes, the impact on the gdp of the republic of serbia is expected to flood risk vulnerability visualization for sustainable risk management – the case of serbia 489 continue. it is also apparent that the negative influence of climate change on the gdp is increasing with the rise in mean global temperatures (božanić and mitrović, 2019, p. 6). although exposed to multiple types of natural hazards, flooding is a recurring risk that largely varies depending on exposure, vulnerability and coping capacity (stanković, tomić & stanković, 2020). the floods, that are caused by prolonged intervals of rainfall and intensive snow melting, “are occurring most frequently in the vojvodina region and along with the river courses of the sava, drina, velika morava, južna morava and zapadna morava”. flash floods caused by short intensive rainfall can occur in the smaller river basins (stat, 2018, pp. 2). thus, economic development should be complemented by investments in adapting to climate change and mitigating the effects in order to transform the society in the ongoing transition process. the approach to flood risk management has changed and became more comprehensive and sustainable in order to achieve the financial resilience and minimize the negative effects of natural disasters on the economic growth of the republic of serbia (world bank group, 2016). this change has been promoted by international actions and legislation, while at the european level the most important act is the european floods directive 2007/60/ec, which envisages the development of flood risk management plans. the development of the risk management plan in areas with significant flood risk is preceded by a preliminary flood risk assessment, preparation of flood hazard maps and flood risk maps. there are a number of methods for visualizing data which provide different possibilities for analysing data and relations hidden in data. selecting the appropriate visualization method is influenced by the nature of data and the intention of visualization. most important analyses enable comparing categorical values (i.e. comparisons between the relative and absolute sizes of categorical values), assessing hierarchies and part-of-a-whole relationships (i.e. breakdown of categorical values in their relationship to a set of values or as constituent elements of hierarchical structures), showing changes over time (i.e. exploit temporal data and show the changing trends and patterns of values over a continuous timeframe), mapping geo-spatial data (i.e. plot and present datasets with geo-spatial properties) and charting and graphing relationships (i.e. assess the associations, distributions, and patterns that exists between multivariate datasets) (kirk, 2012). geographic information system (gis) is a special type of information system which enables collecting, storing, analyses and visualization of spatial data. it is convenient for complex research, design and management problems dealing with geo spatial data. with spatial tools and methods, which are part of modern gis software, users can discover hidden geographic patterns in their data and detect possible spatial relations between studied phenomena. one of the main advantages of gis systems is that it is an invaluable tool for different visualization and representation of data (bednarz et al., 2006). another more important feature is that gis tools provide spatial analysis. spatial analysis is the process of analysing and processing spatial data in order to get valuable insights from data. important part of the spatial analysis is data visualization. gis tools enable generation of numerous visualizations of geo spatial-data, and the most convenient are choropleth maps, dot plot maps, bubble plot maps, contour maps, various cartograms and network connection maps. choropleth maps are a particularly effective way for visualisation of geo-spatial data. choropleth maps colour the corresponding geographical areas (such as municipalities or countries) in different colours, or the appropriate colour shades (from light to dark), based on quantitative values of the 490 j. stanković, z. tomić, m. gocić observed variables. this can show a change in value according to location, which makes it easier to spot patterns or deviations in values. 3. data and methodology the republic of sebia was selected as the study area, and two data sources were used for analyses. the first source are monthly precipitation data from 26 meteorological stations at the selected territory. the data were obtained from the annual hydrological journals issued by the republic hydrometeorological service of serbia. the spatial distribution of selected meteorological stations was presented in fig. 1. precipitation data for serbia have been analysed in different contexts started from the trend analysis (bajat et al., 2013; gocic and trajkovic, 2013; unkasevic and tosic, 2011) to analysis in the context of droughts and floods (gocic and trajkovic, 2014). fig. 1 distribution of meteorological stations in serbia source: author’s illustration based on data obtained from republic hydrometeorological service of serbia data for the analysis of disasters are obtained from the "desinventar" database which provides disaster loss data for sustainable development goals and which is developed under supervision of united nations office for disaster risk reduction (unisdr). desinventar offers “tools for the generation of national disaster inventories and the construction of databases of damage, losses and in general the effects of disasters”. it contains spatial and temporal data, types of events and causes, sources of damages and both direct and indirect effects (deaths, houses, infrastructure, economic sectors etc.). the second tool is analysis module which allows data queries for obtaining desired data and presenting that data with tables, graphics and thematic maps. it is an open-source software, flood risk vulnerability visualization for sustainable risk management – the case of serbia 491 free of charge, with aim to provide disaster loss data for sustainable development goals. this database provides very detailed information on the effects of all types of disasters such as drought, earthquake, explosion, fire, forest fire, flash flood, flood, frost, hailstorm, landslide, rains, snowstorm, storm, windstorm etc. every data entry represents single event and describes it in detail by 140 attributes such as disaster type, location of the event, time and effects of disasters (e.g., people directly and indirectly affected, number of houses destroyed or damaged etc.) the data on disaster events for the republic of serbia are available for the 40-year period since 1980 till 2021, and database contains a total of 2,175 data entries. the most dominant events are forest fire (26.71%), flood (25.79%), fire (13.38%), hailstorm (13.38%) and snowstorm (6.80%). quality of data is not so good for earlier entries, but it has improved during time and is very detailed with numerous attributes describing each event. publicly available dataset enables us to perform different types of analysis, including multidimensional analysis using online analytical processing (olap), power pivot, geospatial analysis, and numerous data mining algorithms. the aim of these analyses is grouping data by disaster type (e.g., flood and flash flood), spatial dimension (e.g., municipality or region) and time dimension (e.g., year), and visualization and different kind of analysis of this data from a desired perspective. according to the analysis of the temporal distribution of damages caused by floods, flash floods and landslides in the period between 2010 and 2020 (table 1.), period between june and august 2018 was chosen for further analysis as a period with biggest number of damages caused by intensive rains in some regions of the country. table 1 temporal distribution of damages caused by floods, flash floods and landslides (2010-2020) month 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 total jan 19 1 1 4 1 8 34 feb 7 3 7 5 1 4 27 mar 2 2 5 12 1 16 13 20 4 75 apr 17 1 1 2 37 3 1 6 7 75 may 3 3 14 3 39 3 2 67 june 9 11 1 2 3 3 19 19 41 108 july 3 2 4 5 1 2 15 1 1 34 aug 1 1 1 4 1 1 6 2 17 sept 2 1 7 10 oct 1 1 2 nov 4 1 2 1 8 dec 11 1 12 total 79 17 44 26 95 35 22 8 66 33 44 474 source: author’s illustration based on data obtained from desinventar data base considering the fact that natural risks mainly influence the subsistence of people who live in rural areas and/or small municipalities, analyses of the socio-economic impacts of natural disasters will be performed in the terms of the regional development of the republic of serbia. the general data on the development of the regions in serbia are presented in table a1 in annex. gis software, as mentioned before, is a commercial or open-source software for dealing with geo spatial data. for the analysis and visualization of data quantum gis (qgis), opensource tool free of charge was used, which is very similar to arcmap and other commercial 492 j. stanković, z. tomić, m. gocić gis tools, offering powerful features for mapping and visualizing data. it offers users friendly interface and support for various datatypes, one of the most useful being shapefiles for presenting geographic areas. qgis package release 3.16, which can be obtained from qgis.org/en/site was used for data mapping. shapefile with a map of the earth for serbia was imported as a basic layer with country borders. second layer was created for presenting geographical position of 26 meteorological stations, and precipitation data from these stations were interpolated to present geospatial distribution of the amount of precipitation for the chosen period (period june-august 2018). since there are only 26 available meteorological stations in the republic of serbia, which are not evenly spread across region, obtained information is limited to the meteorological stations, that means discrete points in space. interpolation techniques are required for mapping corresponding meteorological variables for the whole republic of serbia. precipitation map for whole country was made using spatial interpolation process in which points with known values are used for estimating values at unknown points in space. spatial interpolation can estimate the precipitation values at locations without available data by using precipitation data at nearby meteorological stations. a suitable interpolation method has to be used for estimating the values at those locations where no samples or measurements were taken. numerous spatial interpolation methods have already been developed for supporting transformation from point data to continuous surface map. those methods can be divided into geographical statistics, non-geographical statistics and hybrid approach. inverse distance weighting (idw) interpolation method was chosen, as widely used for interpolation in spatial analysis and available in most gis tools (li et al., 2018). in the idw interpolation method, the sample points are weighted during interpolation in such a way that closer point have higher impact and the influence of points declines with increasing distance from the point whose value is interpolated. as a result of interpolation process, a precipitation map was created for the whole region of serbia. since available data about disasters are based on geographical regions (municipalities) it could be plotted as a layer on the map. shapefile with a map of the earth for serbia was imported as a layer with municipality borders. second layer was created for presenting numerical data describing disasters, and after joining map shapefile and data, that data was used to determine the colours of the map for each municipality – greater values are presented with darker colour according to defined scale. 4. results and discussion geospatial distribution of precipitation for the period june-august 2018 in serbia is presented in fig. 2. according to the previously published analysis of precipitation data for the period 1946-2019 (gocić et al., 2021), the west part of the country is the wettest part while the northern and southern parts of the country are dry. according to fig. 2, some irregularities in precipitation distribution can be observed. mountains zlatibor, kopaonik and crni vrh had significant values of the precipitation (more than 300 mm), and municipalities with the greatest values of the total precipitation in the analysed period are požega, kraljevo and sjenica with 330.7, 321.3 and 268.5 mm, respectively. the lowest amount of precipitation was in south-east part of the country in municipalities vranje, negotin and niš (97.7 mm). https://qgis.org/en/site flood risk vulnerability visualization for sustainable risk management – the case of serbia 493 fig. 2 geospatial distribution of precipitation for the period june-august 2018 source: author’s illustration fig. 3 geospatial distribution of people affected by floods and landslides source: author’s illustration five municipalities in serbia (žagubica, osečina, mionica, lučani and bela crkva) were identified as the most vulnerable concerning the number of affected people by floods and landslides as a result of increased precipitation in the analysed period (fig. 3). more than 20 people were affected in each of those municipalities, and the largest number of affected people was in žagubica i.e., 419. four out of five vulnerable municipalities territorially belong to the 494 j. stanković, z. tomić, m. gocić regions of šumadija and western serbia and southern and eastern serbia, which are characterized by large number of small municipalities. in the case of these regions, close to 2,000 municipalities are located in the area of approximately 26,000 km2. having in mind this fact, it can be observed that every-day life and work of people in small and underdeveloped municipalities are highly affected by the flood risk. geospatial distribution of destroyed and damaged houses in serbia is presented in fig. 4. the number of destroyed and damaged houses greater than 500 houses was recorded on the territory of two municipalities (petrovac na mlavi and kraljevo). aranđelovac and žagubica had the number of damaged houses between 250 and 500, while čačak had 182 damaged houses. in relation to the material damage, it can be noticed that the number of destroyed and damaged houses is especially great in the municipalities located in the region of šumadija and western serbia. considering the level of gdp per capita in this region, it is evident that people in the least developed regions suffered the most severe damage of their properties. fig. 4 geospatial distribution of destroyed and damaged houses source: author’s illustration if we take into consideration the share of agriculture, forestry and fishing in gdp creation, the regions of vojvodina (14.9%) and šumadija and western serbia (11.4%) are especially dependent on the efficiency of this industry. therefore, damage to crops may be examined as the indicator of the impact of natural disasters on the economy of the republic of serbia. geospatial distribution of damages on crops is presented in fig. 5. in total, thirteen municipalities were identified as a vulnerable. the damages were presented in hectares. the most significant damages on crops, on more than 1000 hectares, were recorded in three municipalities (velika plana, petrovac na mlavi and priboj). important flood risk vulnerability visualization for sustainable risk management – the case of serbia 495 observation is that there were serious damages on crops in the municipalities velika plana and priboj which are not followed by other damages, while in petrovac na mlavi there were numerous destroyed houses also. although the manifestation of flood risk can be prevented, the concerning fact is that its influence on agriculture in the areas, where this industry is of special importance for economic development, is not mitigated. fig. 5 geospatial distribution of damages on crops source: author’s illustration considering economic losses, the observed database records of the losses caused by natural disasters at the territory of the republic of serbia are presented in the local currency and only for 30.17% cases. the largest number of economic losses is available for the region of šumadija and western serbia (47.35%) and the region of southern and eastern serbia (30.57%), while the largest number of records concerns flood damage (46.92%). geospatial distribution of losses in million rsd is presented in fig. 6. the most endangered municipality was žagubica, while at the second level of vulnerable municipalities were petrovac na mlavi, grocka and lučani. detailed data on losses showed that žagubica had the biggest losses in the observed period in all categories – 419 affected people, 304 destroyed and damaged houses, 200 hectares of damages on crops. unfortunately, since there is no meteorological station in žagubica, interpolated precipitation visualization for that part of the country is not precise. detail analysis of losses in the period between 2010 and 2020 on the territory of 496 j. stanković, z. tomić, m. gocić municipality of žagubica shows that there were losses also in 2014 and 2020, the most significant are damages on crops – 320 hectares in 2014 and 300 hectares in 2020. fig. 6 geospatial distribution of losses in million rsd source: author’s illustration 5. conclusion flash floods have a serious impact on society and economy. these events commonly occur on the limited areas and spread up to a few hundreds of square kilometres (gaume et al., 2009). however, flash floods are the most dominant and severe hydrological risk in a number of countries. the floods are among the most frequent risk in the republic of serbia, i.e. 25.79% of all losses are caused by floods. the spatial distribution of damages related to floods in the republic of serbia, despite the different geographical characteristics of the observed regions, indicates that this risk causes greater damage to the property and crops to people in less developed regions. thus, the municipalities in the regions of šumadija and western serbia and southern and eastern serbia, which are most exposed to hydrological risks, are suffering the greatest socio-economic effects of floods. the fact that flood risk is the common seasonal risk in these areas indicates the need for thorough analysis of the effects and dynamics of these risks. comprehensive information on flood risks could enable prevention of large-scale disasters and efficient disaster risk management. despite expectations, the average consequences of floods are increasing. large material and economic losses affect the existence of people in these areas. this situation reveals the scarcity of firm empirical evidence on the socio-economic consequences of natural flood risk vulnerability visualization for sustainable risk management – the case of serbia 497 disasters leading to the inadequate flood risk assessment and consequently exiguous strategy for disaster risk management. aiming to minimize the negative effects of floods, local communities face numerous challenges to transform information about precipitation into tangible implications on vulnerability and implement obtained results into concrete measures. thus, the importance of precipitation mapping is growing considering that visual information is better communicated to different experts, as well as communities and policymakers, whose involvement in sustainable flood risk management is necessary. gis tools enable spatial analysis and visualization of historical data on losses (caused by flash floods, floods and landslide as a result of heavy rains) combined with temporal and geo-spatial distribution of precipitation. as a result of these analyses, areas with potential high risks of losses could be detected, and appropriate steps and measures could be undertaken in order to minimize future losses. spatial analysis and comparison of precipitation maps and maps of losses show that there are some areas with significant losses, while other areas are not affected with similar amount of precipitation. this indicates the need to analyse landscape, geology and spatial, as well as social and economic determinants of flood risk vulnerability. since there are only 26 available meteorological stations in the republic of serbia, which are not evenly spread across region, available information is limited to the location of meteorological stations and, therefore, to discrete points in space. precipitation data for other regions is obtained by interpolation techniques, which inputs bias in analyses. using radar and satellite data on precipitation, instead of data from rain gauges, and/or using more sophisticated interpolation algorithms, could improve analyses and provide better detection of areas with potential risk of flooding, particularly for flash floods in small catchments driven by extreme rainfall intensities over short durations. acknowledgement: the presented research is a part of the project of two erasmus+ jean monnet modules i.e. “sustainable finance and insurance: eu principles, practices and challenges” (ref. no. 611831-epp-1-2019-1-rs-eppjmo-module) and “eu water policy and innovative solutions in water resources management” (ref. no. 620003-epp-1-2020-1-rs-eppjmo-module). references bajat, b., pejovic, m., lukovic, j., manojlovic, p., ducic, v., & mustafic, s. (2013). mapping average annual precipitation in serbia (1961–1990) by using regression kriging. theoretical and applied climatology 112, 1-13. https://doi.org/10.1007/s00704-012-0702-2 bednarz, s. w., acheson, g., & bednarz, r. s. (2006). maps and map learning in social studies. social education, 70(7), 398. retrieved from https://www.learntechlib.org/p/77446/ božanić, d., mitrović, đ. (2019). study on the socio-economic aspects of climate change in the republic of serbia. united nations development program, belgrade. dilley, m., chen, r. s., deichmann, u., lerner-lam, a., arnold, m., agwe, j., ... & yetman, g. (2005). natural disaster hotspots. a global risk analysis. the world bank. hazard management unit, washington, dc. gocic, m. & trajkovic, s. (2013). analysis of precipitation and drought data in serbia over the period 1980– 2010. journal of hydrology 494, 32-42. https://doi.org/10.1016/j.jhydrol.2013.04.044 gocic, m. & trajkovic, s. 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(2014). vulnerability to natural disasters in serbia: spatial and temporal comparison. natural hazards, 72(2), 945-968. https://doi.org/10.1007/s11069014-1045-3 https://doi.org/10.1007/s00704-012-0702-2 https://www.learntechlib.org/p/77446/ https://doi.org/10.1016/j.jhydrol.2013.04.044 https://doi.org/10.1016/j.jhydrol.2013.12.030 https://doi.org/10.1007/s12145-020-00543-9 https://doi.org/10.1007/s11069-014-1045-3 https://doi.org/10.1007/s11069-014-1045-3 498 j. stanković, z. tomić, m. gocić li, z., wang, k., ma, h., & wu, y. (2018, november). an adjusted inverse distance weighted spatial interpolation method. in proceedings of the 2018 3rd international conference on communications, information management and network security (cimns 2018). https://dx.doi.org/10.2991/cimns-18.2018.29 longley, p. a., goodchild, m. f., maguire, d. j., & rhind, d. w. (2005). geographic information systems and science. john wiley & sons. noy, i. (2009). the macroeconomic consequences of disasters. journal of development economics, 88(2), 221231. https://doi.org/10.1016/j.jdeveco.2008.02.005 raschky, p. a. (2008). institutions and the losses from natural disasters. natural hazards and earth system sciences, 8(4), 627-634. https://doi.org/10.5194/nhess-8-627-2008 stanković, j., tomić, z., & stanković, j. (2020). socio-economic impact of natural disasters in the republic of serbia. economic analysis, 53(2), 20-38. https://doi.org/10.28934/ea.20.53.2.pp20-38 stat, f. (2018). food and agricultural organization of the united nation. economic and social department. statistic division (ess). retreived from fao stat website: http://www.fao.org/about/whowe-are/departments/statisticsdivision/en unkašević, m., & tošić, i. (2011). a statistical analysis of the daily precipitation over serbia: trends and indices. theoretical and applied climatology, 106(1), 69-78. https://doi.org/10.1007/s00704-011-0418-8 vuković, a. j., vujadinović, m. p., rendulić, s. m., đurđević, v. s., ruml, m. m., babić, v. p., & popović, d. p. (2018). global warming impact on climate change in serbia for the period 1961-2100. thermal science, 22(6 part a), 2267-2280. https://doi.org/10.2298/tsci180411168v world bank group. (2016). disaster risk finance country note: serbia. world bank. world bank. (2015). coping with floods, strengthening growth. south east europe regular economic report 7. vizuelizacija ranjivosti od rizika poplave u svrhu održivog upravljanja rizikom – primer republike srbije osnovni cilj ove studije je vizuelizacija ranjivosti opština u republici srbiji od poplava kroz mapiranje i prostornu analizu podataka o padavinama i gubicima. gis alati omogućavaju prostornu analizu i vizuelizaciju istorijskih podataka o gubicima u kombinaciji sa vremenskom i geoprostornom distribucijom padavina, a qgis alat je korišćen za vizuelizaciju podataka o padavinama i podataka o štetama nastalim od poplava i bujičnih poplava. kao rezultat ovih analiza detektovana su područja sa potencijalno visokim rizicima od gubitaka, što omogućava preduzimanje odgovarajućih koraka i mera u cilju minimiziranja budućih gubitaka. ključne reči: vizuelizacija rizika, poplave, gis, prostorna analiza appendix table a1 regions in the republic of serbia – general data for 2018 regions number of municipalities area (km2) number of inhabitants* gdp per capita (000 rsd) gva agriculture, forestry and fisheries belgrade region 174 3,234 1,690,193 1,240 1.1% vojvodina region 446 21,614 1,861,863 705 14.9% region of šumadija and western serbia 1,935 26,493 1,924,816 489 11.4% region of southern and eastern serbia 1,967 26,248 1,505,732 476 8.5% * estimation made on june 30, 2018 source: authors' calculation, based on the data from the statistical office of the republic of serbia https://dx.doi.org/10.2991/cimns-18.2018.29 https://doi.org/10.1016/j.jdeveco.2008.02.005 https://doi.org/10.5194/nhess-8-627-2008 https://doi.org/10.28934/ea.20.53.2.pp20-38 http://www.fao.org/about/whowe-are/departments/statistics-division/en http://www.fao.org/about/whowe-are/departments/statistics-division/en https://doi.org/10.1007/s00704-011-0418-8 https://doi.org/10.2298/tsci180411168v facta universitatis series: economics and organization vol. 15, n o 3, 2018, pp. 271 278 https://doi.org/10.22190/fueo1803271r © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication a time series analysis of four major cryptocurrencies 1 udc 336.74:004.738.5 boris radovanov, aleksandra marcikić, nebojša gvozdenović faculty of economics subotica, university of novi sad, serbia abstract. because of an increasing interest in cryptocurrency investments, there is a need to quantify their variation over time. therefore, in this paper we try to answer a few important questions related to a time series of cryptocurrencies. according to our goals and due to market capitalization, here we discuss the daily market price data of four major cryptocurrencies: bitcoin (btc), ethereum (eth), ripple (xrp) and litecoin (ltc). in the first phase, we characterize the daily returns of exchange rates versus the u.s. dollar by assessing the main statistical properties of them. in many ways, the interpretation of these results could be a crucial point in the investment decision making process. in the following phase, we apply an autocorrelation function in order to find repeating patterns or a random walk of daily returns. also, the lack of literature on the comparison of cryptocurrency price movements refers to the correlation analysis between the aforementioned data series. these findings are an appropriate base for portfolio management. finally, the paper conducts an analysis of volatility using dynamic volatility models such as garch, gjr and egarch. the results confirm that volatility is persistent over time and the asymmetry of volatility is small for daily returns. key words: cryptocurrencies, time series, volatility jel classification: c58, g15 1. introduction since the beginning of the web and introduction of electronic payment systems, there have existed ideas of avoiding transaction costs and payment uncertainties on the internet. this was mainly a theoretical concept until an electronic payment system based on received may 04, 2018 / revised may 28, 2018 / accepted june 04, 2018 corresponding author: nebojša gvozdenović university of novi sad, faculty of economics subotica, segedinski put 9-11, 24000 subotica, serbia e-mail: nebojsa.gvozdenovic@gmail.com 272 b. radovanov, a. marcikić, n. gvozdenović cryptographic proof was introduced. the system allowed any two willing parties to transact openly with each other without the necessity to introduce a trusted third party (nakamoto, 2008). in such a manner, bitcoin was first proposed as a cryptocurrency at the beginning of 2009, and lately, its block chain system for maintaining a decentralized system has been widely recognized as a new distributed platform for financial institutions. as a cryptocurrency, bitcoin utilizes special encryption to generate money. since 2009, numerous cryptocurrencies have been established together with several systems for maintenance and transaction recordings. such systems are mainly based on distributed ledger tehnology (pinna & ruttenberg 2016). most of the cryptocurrencies rely on decentralized concept of transactions which is supported by cryptocurrency miners. moreover, these transactions are also anonymous which resulted in huge legislation challenges. recently, some cryptocurrencies rely on distributed ledger technology while at the same time they have a centralized token system. differences and challenges between decentralized and centralized cryptocurrencies are usually called k-y paradox (hegadekatti 2017) according to coinmarketcap (coinmarketcap, 2018), at the moment there are 914 cryptocurrencies in the market. the combined market capitalization of all cryptocurrencies is approximately $371 billion, where the top 5 currencies represent over 83% of the market. our analysis will cover four of the five top currencies in the market. many of cryptocurrency price properties have attracted attention. recently, a few research papers have found some similarities between usual financial time series and time series of major cryptocurrencies (takaishi, 2017, chan et al., 2017 and catania et al., 2018). similar to equity prices, cryptocurrencies reveal time varying volatility, heavy tails and an asymmetric reaction of the volatility process to the sign of past observations. there has been a large amount of research done about bitcoin, as it is the most popular cryptocurrency, while other important cryptocurrencies are still neglected. due to the similar walk of time series of other cryptocurrencies, some advanced knowledge on bitcoin price movements could be used in analysis of other observed currencies. hence, in this paper we briefly consider some of the most important results in popular studies. using weekly data of bitcoin prices, briere et al. (2015) examine diversified investment portfolios and discover that bitcoin is extremely volatile and demonstrates high mean returns. kristoufek (2015) found short and long links between bitcoin and influencing factors. correspondingly, in the same study, bitcoin exhibits the properties of both standard financial assets and speculative assets. cheah and fry (2015) confirm that the bitcoin market is highly speculative, and more volatile and susceptible to speculative bubbles than other currencies. therefore, an examination of its volatility is crucial for investors. if we look at the aspect of volatility of cryptocurrencies, barivieara et al. (2017) notice that the existence of long memory and persistent volatility explains the application of garch-type models. moreover, an adequate usage of the garch model specification suggests the significance of having both a short and long-run element of conditional variance (katsiampa, 2017). many extensions of garch have been carried out to effectively estimate bitcoin price dynamics (dyhrberg, 2016, bouri et al., 2017). the asymmetry in the bitcoin market is still significant, suggesting that bitcoin prices were driven more by negative than positive shocks (bouoiyour and selmi, 2016). it suggests that the bitcoin market is still far from being mature. a time series analysis of four major cryptocurrencies 273 considering previous studies, we attempt to offer some basic stylized facts about major cryptocurrency movements and potential linkages among them. our research presented in the following paper encompasses four sections. after an adequate introduction, explanations and a literature review, we continue with the second section where we offer some basic statistical properties of the four cryptocurrencies. the third section explains the volatility dynamics of a cryptocurrency`s daily returns and introduces three garch type models. finally, we conclude the paper with some remarks and recommendations. 2. data and its statistical properties in view of our goal, in this paper we look at the daily market price data of four major cryptocurrencies: bitcoin (btc), ethereum (eth), ripple (xrp) and litecoin (ltc). for the analysis, we selected to use daily market data taken from august 6th, 2015 to march 11th, 2018, or exactly 948 daily observations. a start date was chosen based on the trading release date of ethereum cryptocurrency. other mentioned cryptocurrencies werereleased earlier (bitcoin in 2009, litecoin in 2011 and ripple in 2013). table 1 contains summary statistics of daily logarithmic or continuously compounded returns of the exchange rates of four cryptocurrencies. the assumption is that the data are independent and identically distributed, have no serial correlation and have no heteroskedasticity. table 1 summary statistics statistics btc eth xrp ltc mean 0.0037 0.0067 0.0049 0.0040 median 0.0032 0.0000 -0.0015 0.0000 maximum 0.2276 0.3830 1.0280 0.5516 minimum -0.1892 -0.3101 -0.6530 -0.3125 std. dev. 0.0409 0.0776 0.0976 0.0598 skewness -0.2046 0.2243 1.8397 1.9040 kurtosis 7.3981 6.4764 23.0633 18.4828 jarque-bera 769.85 484.82 16417.56 10030.9 probability 0.0000 0.0000 0.0000 0.0000 ρ(1) 0.0050 -0.0518 -0.2066 0.0231 ρ(2) -0.0064 -0.0124 0.0732 -0.0368 ρ(3) 0.0085 0.0942 0.1055 0.0269 ρ(4) -0.0494 -0.0689 -0.0588 0.0225 adf -30.5688 -34.5773 -16.1419 -30.0424 pp -30.5683 -34.6049 -37.0895 -30.0842 arch(4) 17.3163 19.0455 16.8507 10.1807 source: authors` research the results in table 1 emphasize positive expected daily returns in case of all four observed cryptocurrencies. minimum and maximum refers to the presence of extreme observations in the sample period (i.e. heavy tails of distribution). the standard deviation shows better relative stability of exchange rates in the case of bitcoin than for the other 274 b. radovanov, a. marcikić, n. gvozdenović cryptocurrencies. the findings related to normal distribution assumptions demonstrate strongly the leptokurtic feature of the data series with some signs of skewness. bitcoin poses negative, while other cryptocurrencies show positive skewness. the generally accepted financial theory assumes that rational investors prefer positive asymmetry where big losses are less likely to appear. the argument to invest with positive skewness lies in the fact that median is more than mean. hence, there is a better chance to yield a profit. on the other hand, negative skewness attracts investors who are ready to risk and adopt the rules of active investment management. some interesting research on stock price skewness proves that negative asymmetry is more likely to happen to stocks with increase in trading volume, positive returns in last 36 months and bigger share in market capitalization (chen et al., 2001). expectedly, the jarque-berra statistics in all four cases refer to the hypothesis that reject the existence of normal distribution of returns of exchange rates. serial correlation or autocorrelation ρ(i), estimated at lag i for each data series, are usually small. such results provide long term surplus profits as opposed to short term profits that do not automatically perform any possible trends in returns of cryptocurrency’s exchange rates (radovanov, marcikić, 2017). additionally, the results of augmented dickey-fuller (adf) and phillips-perron (pp) unit-root test show rejection of the null hypothesis of a unit root for the returns and accept the presence of stationarity in data series of returns. table 1 contains the results of arch lm test for autoregressive conditional heteroskedasticity in the residuals with four lagged residuals in the model. the values of arch (4) confirm that there exist arch effects in the returns of cryptocurrencies, suggesting that the model for the conditional mean needs to be expanded with autoregressive conditional heteroskedasticity model for the conditional variance (katsiampa, 2017). considering all previous facts and findings, particularly serial correlation and arch lm test, the log returns of the exchange rates of observed four cryptocurrencies are approximately independent and identically distributed, have no serial correlation and have heteroskedasticity. table 2 correlation matrix btc eth ltc xrp btc 1.0000 0.9145 0.9582 0.8292 eth 0.9145 1.0000 0.9320 0.9061 ltc 0.9582 0.9320 1.0000 0.8752 xrp 0.8292 0.9061 0.8752 1.0000 source: authors` research table 2 represents the correlation matrix of returns of cryptocurrency`s exchange rates. the intersection of a row and column in table 2 shows the results of the correlation coefficient between two cryptocurrencies. due to the level of correlation which is positive and closer to 1, we noticed similarities in movements of returns in the case of all four cryptocurrencies. nevertheless, a risk diversified investment portfolio does not include assets with high positive correlation. theoretically, that cannot reduce portfolio risk. what additionally substantiates the fact of a bad choice to have a portfolio with two or more mentioned cryptocurrencies, is the analysis of cross-correlations within the same data set. the results show a high degree of correlation within +/12 lags (days). table 3 a time series analysis of four major cryptocurrencies 275 presents the cross-correlation coefficient between btc and eth. cross-correlation results indicate the level of similarities between two time series in different moments of time. therefore, correlation changes over time will not improve portfolio risk diversification by including two or more cryptocurrencies. table 3 cross-correlations between btc and eth i btc,eth(-i) btc,eth(+i) 1 0.9053 0.9162 2 0.8968 0.9181 3 0.8883 0.9193 4 0.8795 0.9203 5 0.8713 0.9214 6 0.8627 0.9214 7 0.8533 0.9208 8 0.8444 0.9193 9 0.8359 0.9172 10 0.8287 0.9155 11 0.8217 0.9142 12 0.8148 0.9134 source: authors` research 3. volatility of cryptocurrencies due to the dynamic nature of returns of cryptocurrencies, the garch-type models will be applied in this paper. besides standard garch(1,1), we will present a volatility analysis by using gjrgarch and egarch concerning asymmetry in volatility of returns. standard garch(1,1) (bollerslev, 1986) contains a conditional variance equation as follows: 2 2 2 1 1t t t e         (1) where 2 t  denotes time-depending variance, 2 1t e  is lagged error term and  > 0,  > 0 and  > 0. the gjrgarch(1,1) (glosten et al., 1993) model has the following conditional variance equation: 2 2 2 2 1 1 1 1t t t t t e e i             (2) where 1 1 t i   if 1 0 t e   and 1 1 t i   if 1 0 t e   . the exponential garch model (nelson, 1991) denoted by egarch(1,1) has a conditional variance equation as follows: 2 21 1 12 2 1 1 ln lnt t t t t t e e                         (3) 276 b. radovanov, a. marcikić, n. gvozdenović in all three types of garch models, we used the univariate ar(1) model for conditional mean equation. table 4 presents the estimated results of the aforementioned garch models in the case of four cryptocurrencies. table 4 estimation results of garch models cryptocurrency bitcoin ethereum model ar-garch ar-gjr ar-egarch ar-garch ar-gjr ar-egarch c 0.0029*** 0.0032*** 0.0029*** 0.0032** 0.0033** 0.0032** ar(1) -0.0173* -0.0206* -0.0478* -0.0179* -0.0180* -0.0491* ω 0.0000*** 0.0000*** -0.6458*** 0.0002*** 0.0002*** -0.8019*** α 0.1862*** 0.2471*** 0.0257*** 0.2797*** 0.2617*** 0.0641*** β 0.8036*** 0.7082*** 0.9472*** 0.7124*** 0.7129*** 0.9136*** γ -0.0491* -0.0056 δ -0.0009 0.0211 cryptocurrency ripple litecoin model ar-garch ar-gjr ar-egarch ar-garch ar-gjr ar-egarch c -0.0036* -0.0020* -0.0028* 0.0014 0.0014 0.0022** ar(1) -0.1664*** -0.1667*** -0.1956*** 0.0297 0.0022 0.0088 ω 0.0008*** 0.0008*** -1.0038*** 0.0001*** 0.0001*** -0.2831*** α 0.4504*** 0.4264*** 0.1265*** 0.0909*** 0.1070*** 0.0426*** β 0.5455*** 0.5362*** 0.8662*** 0.9007*** 0.8818*** 0.9471*** γ -0.2943*** -0.1067*** δ 0.1056*** 0.0924*** source: authors` research note: in table 4 * represents the significance at the 10% level, ** represents the significance at the 5% level, while *** denotes the significance at the 1% level. in the first two rows of each model, table 4 presents the results of conditional mean equation estimated parameters, while the other five rows are reserved for conditional variance estimated parameters. in each estimated model, α + β is close to 1 and it indicates the persistency of volatility over time. mostly, the larger values of β parameters mean that large changes in the volatility will affect future volatilizes for a long period of time. however, we cannot neglect the significance of arch effects estimated in parameter α. in gjr and egarch models the asymmetry of positive and negative innovations on the volatility has been involved. in the case of btc and eth, there is no significance in estimated parameters γ and δ, thus the effects on sign are inconsiderable. in other words, the results demonstrate a small level of volatility asymmetry for daily returns. on the other hand, asymmetry parameters in the case of xrp and ltc reveal the existence of positive asymmetry where good news increases the volatility more than bad news of the same size, which is totally different than the cases of other financial time series. a time series analysis of four major cryptocurrencies 277 4. conclusions the cryptocurrency market has lately seen huge growth. due to the increasing demand and interest in cryptocurrencies, chu et al. (2017) believe that they should not be treated as more than just a novelty. the same authors are looking at cryptocurrencies in terms of financial assets, where most market participants trade them for investment purposes. however, as cryptocurrencies are both decentralized and mainly unregulated they will never behave precisely like other currencies on the market. nevertheless, their current position on the market is somewhere between classical commodities and currency because of their decentralized nature and limited market size. the answer about the future of cryptocurrencies lies in resolving legislation challenges since open block chains are currently not ready for usage in traditional economies. governments and corporations worldwide already observed that they can benefit from block chain technology, and a lot of research is being conducted in order to enable block chain systems for regulated global usage. for the central bank of a country, a centralized cryptocurrency can be considered as a retail e-currency for the whole country. finally, it can lead to a legal framework for the whole unregulated tokenized crypto exchanges, because it is much easier to organize and regulate taxation and accounting for the centralized cryptocurrency. examining the statistical properties and the volatility of cryptocurrencies would be mainly valuable in terms of portfolio management, risk analysis and market sentiment analysis. the results shown in this paper prove to substantially support the investment decision making process. highlighting the importance of active investment management, the volatility modelling process demonstrates the equal importance of the short and longrun components of conditional variance. additionally, cryptocurrencies can be used as a tool for risk-averse investors in anticipation of bad news. references bariviera, a., basgall, m.j., hasperue, w. & naiouf, m. 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(2016) distributed ledger technologies in securities post-trading. retrieved from: https://bravenewcoin.com/assets/industry-reports-2016/european-central-bank-distributed-ledgertechnologies-report.pdf. accessed on: 17 february 2018. radovanov, b. & marcikić, a. (2017). bootstrap testing of trading strategies in emerging balkan stock markets. ekonomie a management, 20 (4), 103-119. takaishi, t. (2017). statistical properties and multifractality of bitcoin. cornel university library. retrieved from: http://arxiv.org/abs/1707.07618 accessed on: 15 january 2018. analiza vremenskih serija četiri glavne kriptovalute kako raste interes ka investiranju u kriptovalute, jasno je da postoji potreba da se kvantifikuju njihove varijacije kroz vreme. zbog toga u ovom radu mi pokušavamo da odgovorimo na nekoliko važnih pitanja koja se odnose na vremenske serije kriptovaluta. spram naših ciljeva i tržišne kapitalizacije, analiziramo dnevne cene četiri glavne kriptovalute: bitkoin (btc), eterijum (eth), ripl (xrp) i lajtkoin (ltc). u prvom delu opisujemo dnevne stope prinosa u odnosu na kurs američkog dolara posmatrajući osnovne statističke pokazatelje. interpretacija ovih rezultata u mnogome može biti glavna smernica tokom procesa odlučivanja o ulaganju. u sledećoj fazi primenjujemo autokorelaciju sa ciljem da utvrdimo ponavljajuće obrasce ili slučajno kretanje dnevnih povrata. sem toga, nedostatak literature koji se bavi upoređivanjem kretanja cena kriptovaluta upućuje na analizu korelacije između navedenih vremenskih serija. zaključci ovakve analize su osnova portfolio menadžmenta. na kraju, urađena je analiza volatilnosti koristeći garch, gjr i egarch, kao modele za dinamičnu volatilnost. rezultati potvrđuju da je volatilnost perzistentna tokom vremena, a da je asimetričnost volatilnosti mala kada se posamtraju dnevni prinosi. ključne reči: kriptovalute, vremenske serije, volatilnost plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 18, no 5, 2021, pp. 435 455 https://doi.org/10.22190/fueo210702031p © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the complexity paradigm: towards a model for the analysis of social systems and problems1 udc 316.344.233 artur parreira1, ana lorga da silva2 1gesc santa úrsula university, rio de janeiro, brazil 2lusófona university, lisbon, portugal orcid id: artur parreira https://orcid.org/0000-0002-5707-8787 ana lorga da silva https://orcid.org/0000-0001-7514-8278 abstract. the article proposes the complexity paradigm as an innovative reasoning for analyzing problems in behavioral sciences. it begins to explain the contributions of the major authors of the complex reasoning paradigm: gödel, prigogine and morin. they offer the basis to a model of analysis and assessment of complex systems and problems (acsip model). the four postulates of the model are explained, emphasizing the principal hypothesis of the model – the level of cognitive operations is the most important factor of complexity of a system; then to understand it, the cognitive level of analysis must be at minimum equal to that of the system or the problem under analysis. in the second part the article, an illustrative application of the acsip model is applied to the analysis of the sdg 9 from the un 20/30 agenda, showing the analysis of a complex problem, guided by the complexity reasoning model. following that, an empirical research is presented, to verify the hypothesis underlying the fourth postulate of the model. the results confirm the hypothesis: the use of information by a group is inversely proportional to the use of power (authority). these results allow us to conclude that the complex reasoning paradigm is a promising tool to obtain synergic results in the scientific analysis and resolution of concrete social problems and to face the complex challenges brought by artificial intelligence systems. key words: morin’s operators; cognitive complexity; acsip model; socioeconomic inequalities; results synergy jel classification: i32, j18 received july 02, 2021 / revised november 29, 2021 / accepted november 30, 2021 corresponding author: ana lorga da silva lusófona university, avenida do campo grande, 376 – 1749-024 lisbon, portugal | e-mail: ana.lorga@ulusofona.pt https://orcid.org/0000-0002-5707-8787 https://orcid.org/0000-0001-7514-8278 mailto:ana.lorga@ulusofona.pt 436 a. parreira, a. lorga da silva 1. introduction the article explores the complexity paradigm as an innovative reasoning for analyzing social systems and problems, taking into account that they are usually quite entangled and requiring an interdisciplinary approach. the article has as its main objective the formulation of an analysis model based on the complex reasoning paradigm and the explanation of its core postulates and its interdisciplinary and multi-level analysis of social problems. to accomplish this purpose, we begin to record the path of the complexity idea in psychology and other behavioral sciences, before advancing to the work of the authors who are the pillars of the complexity paradigm in present scientific realm. psychology addressed the problem of human cognitive complexity, as early as 1955: bieri (1955) was concerned with cognitive complexity and its effect on predictive behavior; kelly, also in 1955, investigated the cognitive complexity in the structuring of personality; nidorf and crockett (1965), karlins et al. (1967) and schröder (1971a) continued these studies, exploring the effect of cognitive complexity on creativity, conflict resolution and the structure of personality, while others oriented themselves towards the integration of complex thinking into the area of organizational behavior: mitchell (1971), studied the effect of cognitive complexity on team productivity; streufert and streufert (1978) and streufert and swezey (1986) explored the impact of context complexity on organizational behavior. these studies address problems from a variety of models, but they all have some common bases: ▪ our mind is made up of interrelated cognitive processes, responsible for the organization of our knowledge; ▪ these cognitive processes occur in a certain order, albeit flexible; but the concern with the method, a core issue in addressing the cognitive complexity (neufeld and stein, 1999), is an evident trait; ▪ they are not restricted to their neurological support substrate, although they depend on it and its organization: the mind is a processor of symbols and meanings, which are related to the objects of the context; ▪ the human relationship with the external world is, therefore, intentional and autonomous. the integration of the complexity paradigm in psychology was continued by the work of authors such as hooijberg, hunt and dodge (1997), lichtenstein and plowman (2009), schneider and somers (2006) or uhl-bien and marion (2007), on leadership complex models and complex systems organization. the contribution of psychology to the understanding and application of the paradigm of complex thinking cannot be ignored (streufert, 2006); and the willingness of these psychologists to adopt different explanatory models, recognizing that the notion of complexity needs multiple approaches, in order to be fully understood and explained, expanded to other social sciences – mainly sociology and economy. we cannot forget the contribution of scholars of economic organizations, such as herbert simon, with their works on the limited rationality of our decisions (simon, 1987), as well as on the architecture of cognitive complexity (simon, 1962); von neumann for his studies on cybernetic systems; the work of albin and göttinger (1983) on the complexity in the economic area; chemical and biological scientists such as prigogine and his colleague nicolis (1989); and sociologists such as edgar morin (1977; 1990; 2001; 2011) and le moigne (1999) in social sciences epistemology. all these authors pave the ground which nourishes the complex reasoning paradigm, and mainly those who are the pillars of the complexity paradigm: towards a model for the analysis of social systems and problems 437 model proposed in this article: gödel, prigogine and morin. on the basis of these authors’ ideas about the factors of systems complexity and the tools of complex reasoning, a model is formulated (acsipanalysis of complex systems and problems), with an interdisciplinary and multi-level view of social problems. its aim is to understand the factors of systems complexity and their dilemmatic relationship, and to allow us to manage them at the cognitive level required by their complexity, in order to avoid any perverse effects, frequently observed, when interventions are not guided by the appropriate level of knowledge. 2. on the shoulders of giants: the three pillars of a complex reasoning model as it was stated by bernardo de chatres2, if our eyes can reach very distant horizons, this is due to the fact that we are seated on the shoulders of giants, those thinkers who opened our way to the knowledge we enjoy today: the three referred authors who are at the source of the complex reasoning paradigm and who established its pillars and mainstays. 2.1. gödel’s foundational work the complexity paradigm, whose first foundation can be found in the work of kurt gödel (1931) on the incompleteness of the demonstrability of propositions recognized as true within a logical system, received theoretical contributions over time, from several authors. his work on the demonstration of the undecidable propositions and the formulation of the incompleteness theorems had a discreet repercussion; but it was the first stone of the new style of thinking that would come to be affirmed throughout the xx century, in several scientific domains. beyond its repercussion on logic and mathematics, the idea of complexity impacted also on cognitive and social psychology and its interventions on organizational behavior: decision theory and cybernetic systems (simon, 1962); research work on biological systems (prigogineand stengers,1997); studies on the complexity of economic processes (albin e göttinger, 1983); the work of sociologists like le moigne (1999), and psychologists, mainly from the area of cognitive psychology (bieri, 1955) and kelly (1955) and organizational behavior (mitchell, 1971; streufert and streufert, 1978). in a tribute article on the centenary of gödel's birth, alkaine, says that gödel's work shows the limits of reason, and therefore they should “be taken into account in modern areas of the exact sciences, since these works “greatly affected the way we think today” (alkaine, 2006, p. 526). gödel showed that the appearance of paradoxes in mathematics is inevitable; and to keep the system consistent with itself they must be accepted as undecidables: “propositions that cannot be decided as false or true within the system itself, but only from an external conceptual field. this is the price to pay for the consistency of the system” (kubrusly, 2006, p.8). as gödel argued at the königsberg congress on epistemology of the exact sciences, (1) if a formal system containing arithmetic is consistent, then it contains true arithmetic propositions which, however, are undecidable; (2) there is no computable procedure to prove the consistency of the theory within itself (lannes, 2014, p.4). 2 it seems to have been bernard of chartres the father of the sentence which newton (quoted in hawking, 2003) made famous in a letter to hooke “ if i have seen further, it is by standing on the shoulders of giants”. https://pt.wikipedia.org/wiki/bernardo_de_chartres 438 a. parreira, a. lorga da silva the truth or falsity of an undecidable, will always have to be based on a more comprehensive and less restrictive logic than that adopted for the mathematical system in question (kubrusly, 2006). the impact of these two theorems turned out to be a liberating influence, when they triggered a new style of thought in epistemology (fleck, 1979, quoted in lannes, 2014); and this impact led precisely to a change in attitude towards the realm of science today, the arguments with which we intend to affirm it, their limitations and even the weaknesses of their roots. gödel's work showed that the logical foundation of an interpretative system of reality has to be sought in a conceptual system in a broader rationality. this requirement places gödel as a primary source of the complex thinking paradigm, as it becomes visible in the letter from von neumann to gödel (quoted in ferreira, 2006, p. 1): i must testify all my admiration (...): you solved this enormous problem with masterly simplicity (...) to show that the consistency of mathematics is not demonstrable (...) reading your study was really an aesthetic experience at the highest level. this article aims to highlight the impact of this new style of thinking and transpose the practices which it recommends into the domain of the social sciences (lannes, 2014). to do it, it explores the contribution of thinkers who are the pillars of the complexity paradigm and led to the change in attitude that is the heart of scientific thinking today. prigogine is responsible for some fundamental ideas that helped to broaden the horizons of scientific thought towards the incorporation of the idea of complexity, by his proposal of three main ideas: ▪ the end of certainties in science; ▪ the idea of bifurcation, which opens possible alternatives of structuring, based on the condition of unstable structures (dissipative structures), leading to more or less extensive changes; ▪ the irreversibility of time linked to the former concept, which enriched the meaning of the change processes with the idea of history. 2.2. prigogine's contribution prigogine is responsible for some fundamental ideas that helped to broaden the horizons of scientific thought towards the incorporation of the idea of complexity, by his proposal of three main ideas: ▪ the end of certainties in science; ▪ the condition of unstable structures (dissipative structures) as a source of more or less extensive changes; ▪ the idea of bifurcation, which opens possible alternatives of structuring things, linked to the concept of time irreversibility, which enriched the meaning of the change processes with the idea of history. 2.2.1. the end of certainties the end of certainties does not mean for prigogine the empire of ignorance; what he underlines is that this new vision leads us to leave aside “the tranquil certainties of traditional dynamics” (massoni, 2008, p. 2308-7). in place of them, to broaden their scope, prigogine proposes that science incorporates indeterminism, which acquires a precise meaning: it is not the absence of predictability, but the knowledge of the limits of the complexity paradigm: towards a model for the analysis of social systems and problems 439 predictability (prigogine, 1997): it expresses not what is right, but what is possible; and this possible is the new meaning of the laws of nature (massoni,2008). consequently, determinism breaks down, because everything is in motion in this universe of complex systems, with multiple possibilities open to the system (prigogine, 2009). that is why the probability is directly linked to uncertainty or, if the term is preferred, to indeterminism. on the other hand, the questions addressed in science are not eternal, they are linked to a determined historical time (carvalho, 2014), they result from the questioning of previous knowledge and the growing disillusion caused by the answers it offers (bachelard, 1940). this is the end of the neutral and seemingly timeless certainties, not the end of knowing which is complex. it only breaks the symmetry of temporal reversibility and integrates entropy as one of the indicators of the irreversibility of time. the awareness that the field of current science is not that of the tranquil certainties of classical determinism gets stronger: the new state of matter (far from equilibrium, which cannot be described by linear equations) forces us to see under another light the world around us, the phenomena of life, of time, of the multiplicity of structures. scientific reasoning leaves the field of bounded certainty of linearity (simon, 1962; 1987) and enters the territory of the multilinear possibilities to be explained, in line with gödel's undecidable. 2.2.2. the idea of dissipative structures and bifurcations prigogine considered bifurcation the most important characteristic of complex systems, because “bifurcation is the critical point through which a new state becomes possible in nature” (prigogine & stengers, 1997, p. 122). bifurcations arise from two moments: disordered and turbulent movements due to forces that cause a state of imbalance in the system and push it to the edge of chaos; creation of dissipative structures of the energy which causes the state of imbalance. the dissipative structures allow order to emerge from chaos, from entropic movements, through the entrance of the system in one of the possible bifurcations open to the future3. “each complex being is formed by a plurality of entangled times. in this way, history, as a process of a living being or of a society can never be reduced to the monotonous simplicity of a single time” (prigogine & stengers, 1997, p. 211). in the succession of bifurcations, deterministic zones alternate between bifurcations and points of probabilistic behavior, the bifurcation points; in these bifurcations there are generally many possibilities open to the system. the appearance of the new structures is rooted in the energydissipating structures. this emergency implies time in a defined direction, which led prigogine (1980) to assert that the logic of irreversible processes of systems far from equilibrium is not a logic of equilibrium, but a narrative logic, that is the activity of dissipative structures is defined as history and not just as a balance of energies. the result is a breakdown of determinism, even on the macroscopic scale (prigogine & stengers, 1984). the multiple possibilities open to the system cannot be reduced to a single scheme (prigogine & stengers, 2009). the system can never be explained based on the simplicity of a single time path: it became complex, as it is constituted by a plurality of times in which past, present and future are interwoven. any state the system is not something that can be deduced, as others were also possible. the explanation must be historical or genetic: to describe the path that constitutes the system's past, enumerate the bifurcations 3 the challenge put by the covid-19 pandemic is an example of an event at the edge of chaos, which forced the emergence of cooperative behavior even between political adversaries, more, between nations “geopolitical competitors”. it may contribute to the emergence of a new world order. 440 a. parreira, a. lorga da silva crossed and the fluctuations that decided the real history, among all possible ones (prigogine & stengers, 1997). bifurcations introduce time as a fundamental variable: time no longer can be ignored, even in physico-chemical ones, where entropy is the indicator of an irreversible temporal movement. eddington (1928) called it the arrow of time, because it indicates the degradation of the energy and the matter that constitute them. in living systems, which in addition to energy and matter exchange information with the environment, the emergence of new states (negentropy, as morin designed it) is another indicator of the arrow of time4. the arrow of time is the way we experience it, a subjective perception of what we ourselves are: the irreversibility of time is a function of movement in a finite system, subject to entropy processes, whose logic is that of narrative, not that of symmetrical balance. to know a complex system requires to know its past and calculate its future, based on a careful view of its past and present (prigogine, 2008). the system is a totality of time5. the multiple choices in the bifurcations define the degrees of freedom and intrinsic creativity of complex systems and force us to incorporate uncertainty as a component of knowledge, no longer as a negative posture, but as a way of seeing reality. a way more attentive to its multiple plans, more open and questioning, in which the certainty of what is known contains the awareness of its limitation, of its uncertainty, typical of all finite systems (tarsky, 1933, quoted in sher, 1999, p.150). by scientifically contributing to the end of limited and limiting certainties, prigogine continued gödel's reflection on the inherent limitation of logical systems and the need to move up to higher conceptual systems, as a condition for understanding complex realities. studying the emergence of order from states close to chaos, due to the dissipative energy structures and the opening of bifurcations, prigogine took a decisive step to explain the changes which lead to the emergence of new structures and new meanings, an essential component of the dynamic complexity of the systems. finally, with the idea that time is an irreversible path for living systems and that these can only be understood as complex history, prigogine introduces another essential factor for complexity, in line with the dialogic and recursive principles, proposed by morin to understand the circular processes that build the total complexity of the systems. 2.3. morin's fundamental contribution edgar morin is the most notorious author associated with the complex reasoning paradigm (morin, 1990). according to him, all human activity obeys a tetralogy of relationships: order, disorder, interaction, (re) organization (morin, 2011). order and 4 in physico-chemical systems, subject to the second law of thermodynamics, entropy is the indicator of the arrow of time (eddington, 1928), because it marks the degradation of their energy and matter; in living systems, which exchange not only energy and matter with the environment, but also information, bifurcations and the emergence of new states (negentropy) are the second indicator of the arrow of time. the idea of the irreversibility of time may seem to contradict the position of bradford skow (2015), who defends the idea that all times are coexistent in the universal fabric of time: this is one of the constituents of the universe, and past, present and future would coexist in that fabric. but there is no contradiction: the arrow of time is the way we experience it, a relative perception, subjective to what we ourselves are. we can say, with prigogine, that the irreversibility of time is a function of the movement in a finite system. 5 quoting heidegger (1977), if the dasein, the living human system, is a being to death, only in the end of his irreversible time, his own history, he can resolve the anguish of his existence, having reached his completeness and no more changeable identity (his totality as dasein is now fixed). the complexity paradigm: towards a model for the analysis of social systems and problems 441 disorder must be understood as a pair in dialogical relationship, which produces new configurations, based on the interaction of the parties and their reorganization. in this process, cause and effect interact in a reciprocal movement, which is opposed to the simplicity of linear causality: time allows the feedback of the effects on their causes, forming a multidirectional complex causal circle. the complexity of a system results, therefore, from the multiplicity of its conditions and the variety of its movements (interaction and reorganization). the internal diversity of a system, the variety of its component parts, can be considered the first criterion for assessing complexity (static complexity); the variety of the internal movements adds to the diversity of the parts in the construction of complexity, as stated by kochugovindan and vriend (1998, p.56): “complex systems are based on a large number of agents, who interact with each other in various ways and modify their actions as a result of the events in the interaction process ” (dynamic complexity). to understand the complexity of the real, morin proposes a method, which he himself rooted in three theories (morin, 2011): the systems theory, and the idea that the whole is superior to its parts, since it exhibits emerged qualities; information theory, which places us in an universe where order and disorder coexist, where information has the role of creating new realities; cybernetics, which highlights the feedback processes: one (negative feedback), responsible for the stability of the system; the other (positive feedback), responsible for their change. from these roots, morin elaborated the methodological principles of complex thinking, which constitute the framework of what he called the paradigm of complexity and proposes as an instrument for understanding the real. in his words, disorder, translates into uncertainty (...) it brings chance, inevitable ingredient of everything that appears to us as disorder (...) every order process occurs due to a greater disorder related to the second principle of thermodynamics (...) agitation, the encounter at random are necessary for the organization of the universe and that it is disintegrating that the world is organized this is a typically complex idea because it unites the two notions, order and disorder. a strictly deterministic universe would be just order, it would be a universe without innovation, without creation (morin, 2001, p.87). the logical requirement for this way of reasoning must be greater than that of any simplifying thinking: it is evident that a reality that is organized in a complex way requires, for your understanding, a complex thought, that ... must go beyond the closed entities, isolated objects, clear and distinct ideas, but also not to be confined in the confusion, in the vaporous, in the ambiguity, in the contradiction: it must be a game / work with / against uncertainty, imprecision, the contradiction (morin, 2001, p. 87) morin (2011, p. 141) uses this logic in the tetralog, to explain the recursive circuit: complementary (societies, associations, mutualisms), competitive (competitions and rivalries) and antagonist (parasitism, depredation) relationships: fig. 1 the tetralog source: morin (2011, p141) 442 a. parreira, a. lorga da silva the idea of complexity does not intend to replace concepts like clarity, certainty, determination and coherence by those of ambiguity, uncertainty and contradiction: it is based on the interaction and mutual work between such principles (morin, 2001, p.88). it requires a strategic vision (not only tactical or operative) which morin defined as the art of "using the information that emerges during the action, integrating it, formulating action plans and being able to gather as many certainties as possible, to face the uncertain". (morin, 2001, p.90). to put the tetralogic ring into practice, morin proposes three conceptual operators: dialogic, recursive, holographic. 2.3.1. the dialogic operator the dialogic operator (which morin views as superior to the concept of dialectics) consists in identifying the different parts of the system as accurately as possible, to link what seems separate or even contradictory. the systematic use of the dialogic operator is fundamental to think the real, to apprehend it in its unity and multiplicity, not trying to explain it by its particular elements, which are reducing. this will help us to arrive at a “true, open rationality dialoguing with a reality that resists it, a rationality aware of its insufficiencies” (morin, 2011, p.23). to do so it is crucial to understand the diverse and elaborate the concepts that allow to build the unitas multiplex: the unity of the whole which does not suppress, but on the contrary takes advantage of diversity. 2.3.2. the recursive operator the recursive operator is related to negative and positive feedback processes proposed by wiener (1961). to morin, recursive causality is not limited to regulating processes or expanding deviations; it is ontological, it is an instrument for constructing the complex system itself: at a higher level, recursion is translated by consciousness, the last emergence of complexity, specific of the human spirit (...) consciousness is reflexive, implies an unceasing return to the thoughts that produce it, to transform them ... providing the faculties of doubt, of self-examination…consolidating in ourselves the uniduality of the observed subject and the subject who observes (morin, 2011, p.143). it is not a linear relation – cause→effect but it is about understanding the interactions that unfold the system and make it evolve, in the whole and in its parts, as it builds itself along the arrow of time (an arrow in spiral, where setbacks are present overvaluations of the weight of past causes). 2.3.3. the holographic operator according to morin himself, the idea of this operator came from systems theory and directly from the contact with atlan and his ideas about self-organizing chance and the autopoiesis of complex living systems (atlan, 1994). the self-organization of the system as a whole results from the emergence of integrating components and qualities, through the recursive process. so, holographic reasoning requires an effective knowledge of these components and the perception of their contribution to a different whole, which receives meaning from its parts, but which also gives to each of them a sense of their own. the whole is not a pot pourri of confused ideas, but the clarity of the particular in the whole the complexity paradigm: towards a model for the analysis of social systems and problems 443 and the clarity of the whole in the particular. it is the effort to understand the complexity of a real that can only be well understood in this dialogical junction of opposites. thinking the real and a knowledge based on these operators is at the heart of morin's ideas about complexity. his reflection includes the essential epistemological acquisitions of the authors who have explored this paradigm: ▪ the lesson of gödel's paradox: to explain a complex phenomenon one has to look for knowledge outside it (in the context, in higher-level models); otherwise, the system will always contain undecidable propositions, which we believe to be substantiated, but which cannot be demonstrated within the system; ▪ the concept of dissipative structures, from prigogine, that allow to understand the emergence of a new order with a new meaning, expressing the dynamic complexity of the system; ▪ the belief that humans must be operators of complexity, capable of overcoming a mere intra-disciplinary reasoning and building a multidimensional, interdisciplinary science; ▪ the idea that information is the tool for reflexivity, self-reference, creativity, because it is the articulating axis of the constructed real (subject-object): it “allows us to move beyond the paradigm of classical science and logic, without rejecting them, but integrating them in the paradigm of complexity ”(morin, 2011, p. 151). this opens a door to other levels of reality (nicolescu, 1999) and new insights, in the spiral path of knowledge construction. morin’s reasoning is completed by kaufmann (1993; 1995) and gell-mann (1994), who advance in the elaboration of an operational model of complex reasoning. kaufmann argues that complexity is based on four variables: n, number of system components; k, the level of components interactions; p, the common elements between the components which ensure the emergence of the totality; c, the interactions of the system and its components with other entities in the context. gell-mann emphasizes the role of information in defining the level of complexity, pointing out that the complexity of a system is a function of the difficulty in describing it, verbally or mathematically, making explicit a fundamental aspect of the concept of complexity. with this gell-mann explains a fundamental aspect of the concept of complexity, already touched on by morin and anchored in gödel's incompleteness theorem. 3. a complex model for system and problem analysis starting from the ideas proposed, four postulates are delineated, which define a complex reasoning model, for the analysis and evaluation of systems and problems in human and social sciences. the first postulate of the model defines the static (structural) complexity of a system and is based on: ▪ morin's idea that the whole is more than its parts (it has properties that emerge and are not in them), but it is simultaneously less than its parts (constituting itself as such, it inhibits potentialities inherent in the parts that constitute it); ▪ kaufmann's (1995) idea that the complexity of the system is determined by the number of parts that make it up. first postulate the greater the number of different parts of a system, from which its global identity emerges, the greater is its complexity (static complexity). 444 a. parreira, a. lorga da silva the second postulate combines prigogine's ideas the emergence of new configurations in systems far from equilibrium (due to the dissipative structures of energy and the bifurcations they open in time) and morin's ideas about recursive processes and the tetralogic ring (the interactions that create order/disorder, organization/disorganization). but, in addition to these movements of internal dynamics, there is the external dynamics of interactions with the context, which integrates physical, economic, social, cultural, political factors. these movements as a whole define the dynamic complexity of the system. second postulate the internal and external movements of the system define its lived history, subject to the process of irreversibility of time, whether they are entropic or negentropic movements. the greater the variety of these movements, the greater, ceteris paribus, the complexity of the system (dynamic complexity). there is yet another criterion to define complexity: the level and mode of integration of diversity in a system with its own identity. the system is not the mere sum of its parts, it is built as a unitary whole, continually emerging from the interaction of these parts, integrating the nature of each one in a new nature, its own as a system. that is why morin called it unitas multiplex, a unit of multiplicity: the unit of the system is not the unit of unum, it is simultaneously one and not one. there is a loophole and shadow in the logic of identity. we have already seen that there is not only diversity in the one, but also relativity of the one, otherness in the one, uncertainties, ambiguities, dualities, splits, antagonisms (morin, 1977, p. 140). the processes of articulation and integration of these parts, leading to distinctive patterns of behavior, are, therefore, nuclear. the integration of diversity in the unit can be achieved through two processes: the use of energy (power, in human systems); and information, which articulates diversity, through the discovery and use of adjustment processes that take advantage of it. morin extensively advocates the role of information in building complexity. in his matrix idea, obtaining the unity of a system through the use of power leads to a more or less extensive reduction in diversity, because the unification by the use of power forces us to homogenize what is integrated; building unity and simultaneously maintaining diversity is only feasible by learning new and more comprehensive ways and by exchanging information, until a suitable format is found. this new format, therefore, necessarily integrates more information than the previous ones. this is the idea that supports the third postulate of the model. third postulate the more the emergence of the identity of a system from its components is carried out through information and not power processes, the greater will be its internal variety, the higher the informational level of interactions and, consequently, the complexity of the system. thus, the substantive complexity of a system can be assessed on the basis of its position in the criteria established by the postulates. similarly, an explanatory model based on these postulates is an instrument for the operational use of complex reasoning, the main challenge of this article: to build a model of cognitive complexity suitable for the analysis of complex systems and problems that we face in the social sciences area. the fourth postulate takes up the idea of gödel's undecidables and expresses the cognitive conditions of the complex reasoning paradigm, highlighted by the gell-mann criterion: the complexity of a system is all the greater the more difficult is its verbal or mathematical description. the complexity paradigm: towards a model for the analysis of social systems and problems 445 fourth postulate to understand a system or to solve a problem with a certain level of information complexity, it is required a cognitive complexity, at a level equal or above the informational complexity of the concerned system or problem. the figures 2 and 3 show the interactions between the model’s variables and present the basic formulas that express them. fig. 2 the acsip model – complex analysis of systems and problems source: authors where: 1 n ii iv cs = = − internal variety of the system or problem csi − i = 1,...,n the systemcomponents or the dimensions of the problem ve − external variety of a system ! m jj ve cc = =  ccj − j = 1,...,m − context components interacting with the system cd − system's dynamic complexity (which varies over time) cd = i (csi, ccj), so as i − competitive interactions and resolutive interactions s − system p − problem cinf (s, p) − information complexity of the system or problem ninf (s, p) − information level inside the system or the problem, which includes gi (s, p) gi (s, p) − interdisciplinarity degree inside the system or the problem nca − level of knowledge at what analysis is conducted 446 a. parreira, a. lorga da silva fig. 3 formulas for the required complexity of analysis source: authors the first formula expresses the complexity of a system or a problem as defined in the first three postulates of the acsip model: it is derived from the combination of the number of different components of the system or the problem (vi); the internal movements of these components; external movements in the system's relationship with its context; and the informational level inherent in the system and its operations (ninf (s,p)). the second and third formulas are directly related to the fourth postulate of the model: the second defines that the required cognitive complexity has to be greater than that of the system or the problem (ccr > cinf (s,p)) to be capable to understand and explain it; the third indicates the requirements to be met (nca  ccr), so that the analysis of a complex system or problem can resolve them. 4. entering into the practice of complex reasoning we enter now into the empirical part of this study: the impact of several power conditions on the operationalization of information by problem-solving groups is evaluated, to test a hypothesis (h1) related to the postulates three and four of the model: the use of useful information for the analysis and resolution of problems is all the greater the less the power used in the interactions between the leader and the group and among members themselves. secondly, the operationalization of the acsip model is shown, using an example of the analysis and decision of a complex problem, posed by the sdg 9 of the un 20/30 agenda, 2017. at the individual level, cognitive complexity requires to develop an interdisciplinary attitude, with the perception of the divergent and the ability to ask and dialogue with divergent knowledge views. to achieve this attitude, sufficient emotional self-regulation is required (bar-on, maree & elias, 2007), based on the well-known criteria of emotional intelligence (goleman, 1996): at the individual level, cognitive complexity requires mainly to develop an interdisciplinary attitude, with the perception of the divergent and the ability to ask and the complexity paradigm: towards a model for the analysis of social systems and problems 447 dialogue with divergent knowledge views. to achieve this attitude, sufficient emotional self-regulation is required (bar-on, maree & elias, 2007), based on the well-known criteria of emotional intelligence (goleman, 1996): ▪ the self-regulation of emotions allows to increase the quantity and diversity of descriptors used in explaining the real, and better encompass the internal and external variety of the analyzed system or problem (kaufmann, 1995); ▪ the increase in the variety of descriptors raises the level of interpretations, as it increases the ability to integrate divergent or contradictory information (morin's dialogic operator; gell-mann’s proposal); ▪ the level of precision in the use of descriptors makes them operationally more effective, explaining more completely the global identity of what is analyzed, and its context (morin, 2001). but today, scientific and technical interdisciplinary analysis cannot be individually guaranteed: it requires the support of a team that accepts that diversity and builds interdisciplinary models of high enough level to integrate diverging views, without distorting them. to ensure an open discussion and the exchange of useful information, the analysis team must be conducted by a participative leadership centered on the search for information6 (parreira, 2010), excluding or greatly reducing the usual forms of power. however, the complexity required to the human subject goes beyond the purely cognitive domain. interventions in nature and society, without adequate knowledge of its impact on reality, can lead to dangerous, often not realized, changes. actually, intervening on the real implies using technology and technology is mainly power, requiring an accurate knowledge of its potential effects. it is a challenge to the human operator: all these studies and the proposed model point to the advantage of increasing the complexity level of reasoning in people, teams and organizations; but, as streufert and strufert (1978) state, the training of cognitive complexity, although difficult, is possible. 4.1. an empirical test of a hypothesis related to the third and fourth postulates the use of the highest level of information available is essential for an analysis covering the complexity of the problems to be resolved. the hypothesis (h1) to be tested is derived from the stated postulates. h1: the use of useful information for the analysis and resolution of problems is all the greater the less the power used in the interactions between the leader and the group and among members themselves. to test h1, a questionnaire survey was carried out, with a sample of university teachers and students, with the objective of measuring the impact that the use of power by the leader and members of a group could have on the utilization of information, when analysing and finding solutions for problems faced by the group. 4.2. the instrument the instrument used in the research was a questionnaire in the format of a semantic differential; this format was chosen to make it easier for respondents to simultaneously 6 participatory leadership is used here in the definition of the multiplex model (parreira, 2010): leader-group interactions are extensively of a resolutive and non-competitive type; using restricted power, varying only with the task and preparation of the group, always privileging information as asked by morin. 448 a. parreira, a. lorga da silva consider the two types of possible impact (positive and negative) associated to the power behavior pattern. responses are given on an interval scale based on adverbs of quantity (each adverbial position has a numerical value established in studies carried out since 2003). the questionnaire has construct validity, since the items describe situations presented in the studies of the classic authors on leadership and power (day, 2014), and are part of the experience of people in different work contexts. in addition, the questionnaire was subjected to a pre-test in three groups of people of different profession and education (over 12 years of schooling), and their observations led to modify some aspects of the wording describing the stimulus situations. six situations are presented, and respondents evaluate the possible impact of the power described in each one on the operationalization of information; the evaluations are made in the above referred scale. it is written in portuguese and translated into english, in this paper. 4.2.1. an example of the initial instructions and the two extreme situations probably you have already experienced situations where the leader and the group members used to a greater or lesser extent attitudes of power and authority, to make the group accept the solutions they proposed; in other situations, this pressure was less or almost not used. please pay attention to the situations presented below and try to assess to what extent attitudes of power in the group have a negative or a positive impact on the use of useful information to resolve the problems. if you think that the behavior described in the situation has a negative impact, please mark x in the adverb that best corresponds to your idea, in the left branch of the scale; if you consider that the described behavior has a positive impact, mark x in the adverb that best corresponds to your idea, in the right branch of the scale. if you have no idea about the possible impact of the described behavior, mark x in the box “i can’t decide”. all answers are correct, as long as they express what you actually think. table 1 the two extreme situations presented in the questionnaire 1. the leader and group members used extremely competitive attitudes and enforced their ideas, when analysing problems and discussing solutions to them. it was extremely difficult to convince them to analyse any idea divergent from their own. negative impact of the described behaviors on the use of information positive extremely very much medially little i can’t decide little medially very much extremely situations 2, 3, 4, 5 6. the leader and group members almost did not use competitive attitudes nor imposed their ideas, when analysing problems and discussing solutions to them. their attitudes were very open and everyone always accepted to analyse and discuss any solution, even if it was divergent from his own. negative impact of the described behaviors on the use of information positive extremely very much medially little i can’t decide little medially very much extremely source: authors the used scale, expressed in quantity adverbs may be an example of the fruitful synergy between qualitative and quantitative methods: it is a mix of a qualitative expression (adverb), used currently to evaluate objects and situations, and a quantitative measure (numerical interval scale), based on the numerical value attributed to the adverbs and adverbial expressions, in studies carried out since 2003 (parreira & lorga da silva, 2016). the complexity paradigm: towards a model for the analysis of social systems and problems 449 the authors believe that this enhances the validity of the scales, namely because they are not a mere ordinal but an interval scale (between nothing at all (=0.54) and extremely (9.25), the values obtained in the referred studies the qualitative-quantitative mix is reinforced by the description of situations as behavioral complex situations; so, the respondents must understand the described behavior and evaluate its impact as resulting from the situation, perceived as a unit. this highlights, once more, the synergy between qualitative and quantitative methods, showing that every number tells a qualitative story bancaleiro (2006). the questionnaire was subjected to cronbach's alpha procedure, to evaluate its reliability. as seen in table 2, the instrument has good reliability (0.86), so it can support statistical analysis and interpretations related to the measurements obtained, who had no difficulty in understanding its questions. the questionnaire was also subjected to cronbach's alpha procedure, to evaluate its reliability. as seen in table 2, the instrument has good reliability (0.86), so it can support statistical analysis and interpretations related to the measurements obtained. table 2 cronbach’s alpha from p-i questionnaire n cronbach’s alpha cases 225 0.861 source: authors 4.2.2. the sample the sample was composed of 225 university students and teachers and collected between september and november 2019. sample structure: 153 students, from the third year of management, economy, sociology and political science courses; 72 teachers of the referred courses. male respondents: 149; female respondents: 76; no other gender signaled 4.2.3. the results table 3 shows that the variables use of power and use of information have a strong negative correlation. it is a first confirmation of the stated hypothesis.. table 3 correlation between the use of power and the use of information power used managed information power used pearson correlation sig. (2-tailed) n 1 225 -.857** .000 225 managed information pearson correlation sig. (2-tailed) n .857** .000 225 1 225 ** correlation significant at 0,01 level (2-tailed) source: authors 450 a. parreira, a. lorga da silva table 4 impact of different levels of power on the use of information, by gender power behavior used in situations information utilized (mean) difference between means women men situation 1 (extreme power used) 1.4643 2.3889 0.9246 situation 2 (much power used) 2.2957 2.7389 0.4432 situation 3 (a lot of power used) 2.8414 3.3206 0.4792 situation 4 (medium power used) 2.8414 3.3206 0.1356 situation 5 (little power used) 5.6033 5.7389 0.2075 situation 6 (almost no power used) 7.6986 7.4911 1.0676 source: authors fig. 4 use of power and utilization of information in group data analysis and problem solving source: authors when the use of power is great (extremely; a lot) the inhibition of the use of information is stronger in them; conversely, when power is little or very little used, the positive effect on the use of information is more evident in women than in men. as power has an impact on people through emotions, which are the energetic basis of human motivators (pestana, parreira and moutinho, 2020), this difference may have a psychological explanation, the natural stereotype that emotions are stringer in women; however, the differences are not statistically significant. however, the results are interesting in two ways: ▪ they confirm h1, showing that people perceive the negative impact of power attitude and tactics on the effective use of information in problem analysis and solving; ▪ they offer guidelines for the practice of leadership in problem solving and creativity groups. if a leader wants to make good use of the group's knowledge (large or small), he must reduce the use of power practices: these lower the level of truth in interactions; decrease the number of initiatives to inform the leader and the complexity paradigm: towards a model for the analysis of social systems and problems 451 the group; distort the perception of the real; reduce the objectivity and relevance of the information provided. to do so, it is crucial to prepare the group to adopt predominant information-based practices; if it has a low level of knowledge and works essentially on an emotional basis, the leader must use more power to lead the group; but in that case, he must not forget that this behavior reduces group intelligence. as information is a more flexible and positive tool than power, the model advises to adopt a participative leadership, as much as the situations allow it (parreira, pestana and oliveira, 2018). if a leader wants to make good use of the group's knowledge (large or small), he must reduce the use of power practices to adopt predominant information-based practices; if it has a low level of knowledge and works essentially on an emotional basis, the leader must use more power to lead the group; but in that case, he must not forget that this behavior reduces group intelligence. as the information instrument is more flexible and positive than the power instrument, the model advises to adopt a participative leadership, as much as the situations allow it (parreira, pestana and oliveira, 2018). 4.2.4. an example of problem analysis, guided by the acsip model we can now advance to the second part of this section and present an example of analysis and decision on a complex problem, guided by the acsip model. problem: to reduce inequality within (and between) nations (sdg 9 of the un 20/30 agenda, 2017) this problem was chosen for its connection with other problems (poverty, education, health, as the un text states itself) and the transformation of the world economic model, now discussed by scientific and academic groups involved with the so called “pope francisco’s economy”, but also by political leaders, moved by the covid-19 pandemic crisis and the climate threats. the example is focused in the inequality within nations which is sufficient to highlight the modus operandi of the acsip model, will follow an identical path in the analysis of other complex problems. first step: 1. define the physical boundaries of the system locate the problem in the system define with extent and precision the system and its physical boundaries. example: state of brazil, rio de janeiro (rj), questions: is the geographic and geological situation (oil exploration and related economic processes, for example) a negative or positive factor to the inequality phenomenon? ▪ how do the economic, sociocultural, political features of the state impact the observed inequality (including migrants from other states)? ▪ how are the relations with different entities of the context a positive factor to the inequality phenomenon? 2. indicators for this analysis: traditional and current cultural practices; educational indicators; socioeconomic indicators; urban indicators; data on population movements and attitudes. 3. assess how the system characteristics affect the complexity of the problem. result: the problem is located and the variables to analyse are identified. 452 a. parreira, a. lorga da silva second step determine the informational complexity of the problem 1. the informational complexity of the inequality problem ( ( , )cinf s p ) includes its different dimensions, focused on the model's interdisciplinary approach. sociology, with a focus on social diversity and the drivers of inequality; psychology, focused on the individual and patterns of interaction; economy, focusing on income and employment issues; medical sciences, focused on health-related issues; urbanism and architecture, with a focus on housing conditions, the quality of surroundings and mobility; political science, applied to the study of individual rights and citizenship conditions. third step determine and ensure the level of required knowledge 1. ensure the appropriate level of knowledge: is it sufficiently complex (in each discipline involved) for a comprehensive analysis and an effective solution to the problem? in sdg9, the complexity of the problem appears to be very high, in each discipline; therefore, the available level for the analysis and construction of solutions must be at the doctoral level, to fully understand the issues and to elaborate effective and encompassing solutions. 2. ensure an analysis team with at least one doctorate in each discipline involved. 3. check whether the work team shows effective open mind, listens to every argument, values information even divergent, avoids rigid or authoritative positions in the problem discussion and analysis, demonstrating that team operates ( , )nca cinf s p . 4. ensure that the methodologies and technical instruments used are based on the criteria of the required interdisciplinarity and are adequate to the required cognitive level: interview; questionnaire; impersonal and participant observation methods; urban and architectural methods of analysis; methods and criteria of economic analysis; interpretation of data based on an interdisciplinary view. fourth step ensure that the methodologies and technical instruments used are based on the criteria of the required interdisciplinarity 1. check the use of the dialogical operator in the analysis of all the variables: variables interact; how much synergy is seen in the results; what contradictions are visible; where interdependencies manifest themselves. example: interactions between inequality and: poverty, education, housing, exclusion, inequality; and between each one with the others. 2. check the use of the recursive operator in the analysis of causal relationships and their effects in the set of identified variables. to what extent can causal relationships be checked and controlled in the set of identified variables. 3. verify the use of the holographic operator in the interpretation of the data and proposed solutions. to what extent is it possible to have an integrated view of the problem? how do the components build the whole and how it maintains each component’s identity? example: establishing a general framework of indicators and drivers of inequality, combining effects of social, cultural and gender barriers; measuring socioeconomic competition intensity, poverty level, housing conditions and personal history. result a unitas multiplex portrait of the problem is accomplished, as the model recommends. the complexity paradigm: towards a model for the analysis of social systems and problems 453 fifth step – establish a flexible and adaptive action plan the knowledge obtained is a solid basis for triggering factors to reduce inequality, assessing their impact multidimensionally, following the acsip model requirements, namely the process of informed negotiation7, recommended in point 3 of the third step. result that will most probably ensure the control over internal and external effects of the decisions made and lead to solutions free of perverse effects 5. an open conclusion as an open conclusion, we underline the goal of this article: to highlight the impact of the complex reasoning paradigm, and transfer it to the social and behavioral research practices, as lannes (2014) recommends. the results enhance the importance of the work of the authors which were considered the basis of this way of thinking: gödel’s foundational work; prigogine’s explorations about the end of certainties, dissipative structures and bifurcations; morin, with his epistemological scheme of complex qualitative and quantitative reasoning. the flexibility of complex thinking allows us to adjust the model to a wide variety of problems, including complexity of real problems, where the data are certainly much more entangled than those shown in the chosen example, requiring undoubtedly more powerful tools, with a longer, heavier and more complicated process. but the level of complexity was sufficiently highlighted: a multi-level interdisciplinary analysis, to capture the complexity of the problem and ensure a more informed decision-making, at a higher conceptual level, therefore less likely to generate perverse effects. focused on these results, the authors are willing to continue this study, convinced that the complex reasoning paradigm is a promising tool to face the challenges resulting from the expansion of new technological systems into all fields of human life. references albin, p., & göttinger, h. 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(1961). cybernetics, or control and communication in the animal and the machine (2nd ed.). mit press; john wiley & sons inc. https://doi.org/10.1037/13140-000 paradigma kompleksnosti: jedan model analize socijalnih sistema i problema ovaj rad predlaže paradigmu kompleksnosti kao inovativno rasuđivanje za analizu problema u bihevijoralnim naukama. počinje objašnjavanjem doprinosa najvažnijih autora koji su se bavili kompleksnom paradigmom rasuđivanja: gedela, prigožina i morina. oni nude osnovu za model analize i procene kompleksnih sistema i problema (acsip model). objašnjena su četiri postulata modela i naglašena glavna hipoteza modela nivo kognitivnih operacija je najvažniji faktor kompleksnosti sistema; da bi ga razumeli, kognitivni nivo analize mora da bude najmanje jednak nivou sistema ili problema koji se analizira. u drugom delu rada, ilustrativna primena acsip modela se primenjuje na analizu sdg 9 iz un agende 20/30, pokazujući analizu kompleksnog problema koju vodi model kompleksnog rasuđivanja. nakon toga, predstavljeno je empirijsko istraživanje da bi se verifikovala hipoteza četvrtog postulata modela. rezultati potvrđuju hipotezu: korišćenje informacija od strane grupe je obrnuto proporcionalno korišćenju autoriteta (moći). ovi rezultati nas navode da zaključimo da je paradigma kompleksnog rasuđivanja obećavajuće alatka za dobijanje sinergijskih rezultata u naučnoj analizi i rešavanju konkretnih socijalnih problema i da se suočimo sa kompleksnim izazovima koje donose sistemi veštaačke inteligencije. ključne reči: morinovi operateri; kognitivna kompleksnost; acsip model; socioekonomske nejednakosti, sinergija rezultata https://doi.org/10.1590/s0104-40362016000100005 https://doi.org/10.1016/j.jdmm.2018.12.006 https://doi.org/10.1016/j.jdmm.2018.12.006 https://doi.org/10.1016/j.leaqua.2006.04.006 https://doi.org/10.1023/a:1006246322119 http://www.jstor.org/stable/985254 https://doi.org/10.1037/h0027047 https://doi.org/10.1111/j.1559-1816.1997.tb01641.x https://doi.org/10.1016/j.leaqua.2007.04.002 https://doi.org/10.1016/j.leaqua.2007.04.002 https://doi.org/10.1037/13140-000 plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 1, 2014, pp. 21 36 review paper an overview of earnings management measurement approaches: development and evaluation   udc 658.155:005 awidat marai 1 , vladan pavlović 2 1 al-gabel el-gharbi university, libya 2 faculty of economics, university of priština, serbia abstract. earnings management practice has received much consideration and interest from regulators and practitioners as well as academics, with literature in the accounting field providing three key approaches for the identification of the various practice levels and techniques, including aggregate accruals, specific accruals and statistical distribution approach. despite the fact that many studies have been directed towards enhancing the overall power and specification of each approach, there are nevertheless pros and cons linked with the application of each model. this paper provides and reviews the literature available on the development and assessment of such frameworks in an attempt to emphasis the various points studies should be considering when identifying earnings management. key words: earnings management, measurement of earnings management, aggregate accruals approach, specific accruals approach statistical, distribution approach. introduction the concept of earnings management has received much consideration and interest from regulators and practitioners in the field, with the literature referring to this practice through the use of various terms, including accounting manipulation, aggressive accounting, creative accounting, earnings management, and income smoothing (stlowy and breton, 2004; atik 2009). earnings management occurs when management direct their judgment and utilize estimated permitted by accounting standards or structure transactions in order to amend financial reports with the aim of misleading stakeholders in regard to  received september 30, 2013 / accepted january 25, 2014 corresponding author: vladan pavlović university of priština, faculty of economics, kolašinska 156, 38220, kosovska mitrovica, serbia tel: +381 28 497 934 • e-mail: vladan.pavlovic@pr.ac.rs  acknowledgement: this paper is part of the results of the research on project 179001 supported by the ministry of education, science and technological development of the republic of serbia. a. marai, v. pavlović 22 the firm's economic performance, or otherwise to impact contractual outcomes that rest on the accounting figures reported (healy and wahlen, 1999). such a practice does not commonly go against any accounting standards (marai and pavlović, 2013). despite the commonly held view that earnings management is prevalence practice within the companies, it remains that it has been remarkably difficult for researchers to document such a practice (healy and wahlen, 1999). such a difficulty arises mainly owing to the fact that earnings management is unobservable, meaning its magnitude cannot be measured directly. accordingly, for researchers to establish whether or not earnings have undergone management there is a need for earnings to be estimated prior to earnings management effects being seen. the second issue is the fact that earnings management may be carried out through a number of different techniques, which causes difficulties in terms of establishing precisely which techniques have been utilized in order to amend the earnings reported. since earnings are the sum of cash flow and accruals, earning can be manipulated through the use of accruals and/or operating cash flow, as highlighted by (xu, taylor and dugan, 2007). the use of accruals for earnings management is referred to as accounting-based earnings management, which encompasses the use of judgments or estimates permitted by accounting standards, namely through salvaging values of long-term assets and expected lives, deferred taxes, losses from asset impairments and bad debt, obligations for pension benefits and other post-employment benefits; the management of through operating cash flow is referred to as real earnings management, which encompasses changes in production, debt–equity swaps, discretionary expenditures and the reduction of prices (xu, taylor and dugan, 2007) . when reviewing the accounting literature, three different study designs are recognized as widely used in identifying earnings management, namely aggregate accruals, specific accruals and the statistic distribution of earnings, as recognized by mcnichols (2000). despite the fact that all of these methods are centered on various ideas and assumptions to provide a solution to the previously highlighted problems, there is no sole technique with the ability to completely answer the mean questions in relation to magnitude, and the techniques of earnings management. this paper has the aim of presenting and discussing the estimating methods and the assumptions developed by each of the approach in regard to dealing with previous problems. moreover, it also seeks to emphasize some of the points needing to be taken into account by researches when selecting the most suitable amongst the research designs available. this discussion is centered on introducing and reviewing the literature in terms of how each approach has developed and is assessed. 1. aggregate accruals approach this method is essentially centered on two assumptions, the first of which is concerned with overcoming the problem that arises from techniques that managers can use to alter reported earnings. in this way, the assumption is made that accruals give management the ability and resources to manage reported earnings in comparison with cash earnings, which are less likely to be managed owing to the difficulties associated with their manipulation. as has been mentioned by paul m. healy (1985), managers exercise discretion over discretionary accrual only. the second assumption underpinning this method is that total an overview of earnings management measurement approaches: development and evaluation  23 accruals are elements of non-discretionary and discretionary, the former of which represents the choices made by the management to alter reported earnings. accordingly, the common starting point for the measurement of earnings management is the calculation of total accruals. subsequently, a certain framework is utilised for the estimation of the nondiscretionary element of total accruals, facilitating total accruals to be decomposed into a non-discretionary and discretionary component (dechow, sloan and sweeney, 1995). in an attempt to break down total accruals into discretionary accrual and non-discretionary accrual elements, a number of different models have been devised by researchers, ranging from the more simple ones in which total accruals are utilized as an alternative for discretionary accruals, and subsequently spanning to the more complex, where regression analysis is utilized in order to do so. the literature review of the models adopted most commonly will be discussed in this subsection. healy (1985) the study of healy (1985) is the first to have presented total accruals as a measure for earnings management. through this study, he suggests that total accruals encompass nondiscretionary and discretionary accrual aspects, but ultimately does not provide a distinction between discretionary accruals and non-discretionary accruals; rather, the assumption is made that total accruals are equal to non-discretionary accruals when there is no presence of earnings management. this suggests that total accruals are equal to nondiscretionary accruals, with both representing earnings prior to the impact of earnings management during the period of estimation, which may be presented symbolically as highlighted below: ∑ nda: estimating discretionary accruals for the firm i in a given time t. ta: total accruals, defined as the difference between reported earnings and operating cash flows. t= 1, 2…. t is a year subscript for the years included in the estimation period; and  = a year subscript indicating a year in the event period. deangelo (1986) in much the same way as healy (1985), deangelo (1986) implements total accruals as a proxy for earnings management, with a definition of total accruals as the difference between operating cash flows and net income. she further emphasizes that ta (total accruals) encompass both nda (non-discretionary) and da (discretionary) elements. in contrast, however, the model presented by healy was criticized by deangelo in the sense that, if nda is considered to be too large in comparison to ta, the latter measure would then be considered a poor alternative for the degree of earnings management in period t=1, and thus, for her research, nda may be considered too significant and systematically negative for a large number of organizations—even those lacking in systematic manipulation. in this way, an empirical observation has been made that ta<0 has the ability to create an erroneous inference that management had intentionally understated earnings, when the more precise explanation is that total accruals commonly comprise a (material) negative a. marai, v. pavlović 24 non-discretionary elements. as a substitute, a non-zero benchmark was developed for the ''normal'' or expected total accrual in periods before the management buyout. for this reason, the total accrual in the immediately prior period is taken as a benchmark for what the current accrual would be without income manipulation. more specifically, deangelo (1986) examined whether or not the 'abnormal' total accrual's average value is notably negative for the sample firms in periods before the buyout (jones, 1991). this particular average is calculated as described as follows: ( ) ( ) ( ). this model and the implications of such are interpreted by deangelo as proof of a systematic earnings understatement. such a view relies on the assumption that the general change in non-discretionary accruals ( ) is approximately zero, where a notable average decrease in total accruals ( ) mainly represents a notable average decrease in discretionary accruals ( ). jones (1991) the study by jones is the first to have presented the model where total accrual changes may be predicted through the use of explanatory variables. it has been observed that total accrual changes are likely to arise in some way from the organization's economic position (non-discretionary accruals), meaning that total accrual changes may be the outcome stemming from earnings without manipulation. for instance, if non-discretionary accruals are a function of revenue, the negative changes witnessed through the accruals may be owing to the non-discretionary changes as opposed to the discretionary accruals. in contrast, the researcher also takes into account the fact that total accrual changes may result from discretionary accrual changes; in this instance, this is earnings management. accordingly, in an attempt to control the impacts of economic circumstances in regard to total accruals—otherwise stated the non-discretionary accrual changes in total accruals— the expectation model detailed below may be utilised. [ ] [ ] [ ] total accruals = non-discretionary accruals + discretionary accruals where: = total accruals in year t for firm i; = revenues in year t less revenues in year t-1 for firm i; = gross property, plant, and equipment in year t for firm i; = error term in year t for firm i; i =1…. n, firm index; t= 1… ti, year index for the years included in the estimation period for firm i (it ranges between 14-23 years). as can be seen in above equation, the calculation of total accruals may be performed as following: the change in non-cash working capital before income taxes payable less total depreciation expense. gross property, plant, and equipment and change in revenues are included in the expectations model to control for changes in nondiscretionary accruals induced by changing conditions. revenues are utilised with the aim of controlling for the organisation's economic setting owing to the fact that they are an objective measure of the an overview of earnings management measurement approaches: development and evaluation  25 operations of the firm prior to the manipulations induced by management, although notably they are not entirely exogenous. all of the elements encompassed within the accruals expectations model are scaled by lagged assets in order to decrease heteroscedasticity. through the utilisation of the longest time series of observations available before year 1 for all firms and the ordinary least squares, the estimation was made by jones of α1, b1, and b2; of αi, β1i, and β2i, respectively. following the estimation of the parameters outlined in the equation above, these will be incorporated within the following model with the aim of assessing the prediction error in the event period, which represents earnings management in the prediction (event) period. in line with the assumption that the link between the explanatory and non-discretionary accruals is stationary, the following outlines the prediction error: ( * + * + * +) discretionary accruals = total accruals non-discretionary accruals where: = the prediction error. the p = year index for the years included in the prediction period. the prediction error (µip) signifies the degree of discretionary accruals in firm i at time p (prediction period) and subsequently demonstrates the earnings management of the firm at time p. dechow et al. (1995) the overall performance of previous accruals-based models, such as those by healy (1995), deangelo (1986), dechow and sloan (1991) and jones (1991), is assessed by dechow et al. (1995) with the aim of drawing a comparison between these and the new amended version by jones. consideration is directed towards the as can be seen in above equation modified version, with the view held that the standard jones specification may be taken as being unable to capture the effects of sales-based manipulation owing to the fact that sales changes are recognised as giving rise to non-discretionary accruals. accordingly, the new version has been developed with the aim of eradicating the conjectured tendency of the jones model so as to ensure the discretionary accruals with error can be measured when discretion is exercised over revenues. in the newer version, non-discretionary accruals are predicted throughout the period of the event, i.e. during the times for which there is the hypothesis of earnings management, as following (dechow et al., 1995): ( ) ( ) ( ) where: = net receivables in year τ less net receivables in year τ-1 scaled by total assets at τ-1. the estimates of α1, α2, α3 and non-discretionary accruals throughout the period of estimation (during which there is no systematic earnings management hypothesis) are those gathered through the original model presented by jones. the only change relative to the first model of jones is that revenue changes are amended in line with the change in receivables during the period of event. the preliminary model directly suggests that discretion is not adopted in regard to revenue through either the event or estimation period. a. marai, v. pavlović 26 the modified version makes the direct assumption that all credit sales changes during the event period are an outcome of earnings management owing to the fact that earnings are managed more easily through exercising discretion over the acknowledgment of credit sales revenue than through exercising discretion over the cash sales revenue. if such changes are recognised as successful, the earnings management predictions should then be unbiased in the case of those samples where earnings management has been implemented through revenue management. peasnell, pope and young (2000) peasnell et al. (2000) have provided a different cross-sectional model centred on predicting unusual accruals, referred to as the margin model. comparable to the original model presented by jones, as well as the modified version, a two-stage approach is utilised in order to predict unusual accruals. the primary phase comprises the regression of accounting accruals on a course of explanatory variables aimed to capture those accruals that have not been managed. unlike the two previous models, deferent explanatory variables are included within the first-phase regression, which are taken from a formal framework that provides a link between accruals, earnings and sales. a further deferent from other models is the application of wca (working capital accruals) as opposed to ta (total accruals), as well as the exclusion of depreciation from the margin model. as has been discussed through the work of (peasnell et al., 2000), the justification behind the exclusion of depreciation from accruals measure is the fact that such an item is an inadequate instrument in systematic earnings management. furthermore, appropriate tool for such estimation is modelling change in working capital accruals through three key aspects, namely creditors (∆credit), debtors net of bad debt allowance (∆debt) and stocks (∆stock), each of which may be further described below (peasnell et al., 2000): ∆stock = pur  cogs (1) ∆debt = revc  crc  bde (2) ∆credit =pur  cps (3) where pur is purchases of materials, cogs is cost of finished goods sold, revc is revenue from credit sales, crc is cash received from customers, bde is the bad debt expense, and cps is cash paid to suppliers. it should be acknowledged that, although ∆ stock in (1) encompasses inventories of materials, works-in-progress and completed goods, all intermediate transfers between such inventory categories involve the cancelling of entries that can be ignored when inventories are aggregated. the second aspect is a modeling wca, as shown below: wca = (∆stock=∆debt) -∆credit +other = (revc cogs  bde ) + (cps crc ) + other =sm.revc –cm.crc +other (4) where sm equals the gross margin on recorded sales, cm equals the gross cash contribution on cash collections from customers, and other includes all non-cash current assets besides stocks and trade debtors, and all current liabilities besides creditors. the postulation is made that other is orthogonal to revc and crc in equation (4). the aim is that equation (4) establishes accrual recognition prior to being impacted through earnings management. working capital is communicated as the total of two contributory margins, an overview of earnings management measurement approaches: development and evaluation  27 namely the margin on cash received, referred to as the 'cash margin', and the gross margin on its cash flow analogue and sales. through the application of this method, working capital accruals that are not established through sales and cash collections throughout the specified time are recognised as 'abnormal', and therefore are recognised as being the most probable to manifest (discretionary accruals) earnings management. equation (4) is utilised on an empirical basis through the application of the ols regression tool, with peasnell et al. (2000) also examining the ability to identify accrual management by adopting a cross-sectional prediction approach; the academics suggest that a greater ability to identify systematic earnings management can be seen through a working capital accrual measure when compared with a total accruals measure. when drawing a comparison between the models by jones and the modified jones version, and their own margin model, it was established that the modified version of jones is more capable of identifying revenue-based manipulation, whilst the margin model is more capable of highlighting non-bad debt expense manipulations. kothari et al. (2005) kothari, leone and wasley (2005) presented a new model centred on identifying earnings management, with the model referred to as performance matching. the scholars also drew a comparison between the model efficiency in contrast with the regressionbased approach, more specifically the original and amended models of jones. in much the same way as the jones model, this model utilises residuals from the annual cross-sectional industry regression, although there are two main differences: the first is the fact that it comprises return on assets, which is used to control for organisational performance; the second involves the use of a constant, which provides a greater degree of control in terms of heteroskedasticity, and it further elementals the issues associated with an omitted scale variable and allows the discretionary measure to be more symmetric. the model is seen as follows (kothari et al., 2005): ( ) ( ) where = total accruals predicted as the change in non-cash current assets minus the change in current liabilities excluding the current portion of long-term debt, minus depreciation and amortization, scaled by lagged total assets. = change in sales scaled by lagged total assets. = total assets = net property, plant and equipment scaled by assetsit-1. ( ) = return on assets dechow et al., 2012 dechow et al. (2012) introduce a new method for detecting accrual-based earnings management, with this method built on the assumption that, in any period, accrual-based earnings management would reverse during another period. furthermore, the view is also claimed by the scholars that, if the academics have priors in regard to the reversal timing, encompassing such priors could ultimately enhance the ability and the criteria of tests in a. marai, v. pavlović 28 the context of earnings management. their findings suggest that the involvement of reversals could enhance test power by as much as 40%, and may also deliver a sound approach to avoiding model misspecifications that stem from related omitted variables. in some regard, this approach depends on the previous models to decompose accruals into non-discretionary and discretionary elements; on the other hand, however, they also encompass earnings management reversals within these models and analyse improvements. nevertheless, there has been some criticism directed towards this model in regard to its failure to highlight the way in which the investigator can establish or outline priors for the periods during which there has been the occurrence and reversal of accruals-based earnings management. rather, their method adopts the view that the scholar recognises the periods during which there will be the occurrence and reversal of earnings management (gerakos, 2012). 2. specific accruals approach in contrast with the total accruals models, one key element of this approach is modelling particular accruals' behaviours in an attempt to identify its non-discretionary and discretionary aspects. this method commonly directs attention towards a particular sector environment where an individual accrual is sizeable and demands significant judgement. it determines earnings management from examining management discretions through an individual accrual account, namely the claim loss reserve, for example, which is a very material accrual for the insurance sector. moreover, loan provisions are a particular accrual requiring significant judgement within the banking arena, or bad debt provision and depreciation predictions in an alternative setting. in line with such elements, in addition to subjective proof, the investigators may consider that, through a specific accrual or set of accruals, management discretion may be reflected. the section following provides a prior literature linked with this method. mcnichols and wilson (1988) the research by mcnichols and wilson is the first to utilise the specific accruals model to analyse whether or not management manage earnings, with attention directed towards a single accrual, namely bad debts provision, as opposed to a number of accruals. moreover, it also implements the gaap framework in order to examine the way in which a specific accounting number, bad debts provision, would be seen when there is a lack of earnings management. in actuality, the research utilises the residual provision for bad debts as proxy for earnings management. in order to calculate this residual, the authors model the expected provision for bad debt as a linear function of the beginning balance in the allowance for bad debts and the magnitude of current and next year's write offs. through ensuring the control of such elements, the view is made that their method removes the non-discretionary aspects of bad debts expense, and thus gathers a bad debt provision, which mainly highlights accounting discretion amongst management. accordingly, the model is as follows (mcnichols & wilson, 1988): prov t = α0 + α1 bgbl t + α2 write-off t + α3 write-off t+1 + resprov t where: prov t: the provision for bad debts, deflated by period t sales bgbl t: the beginning balance of allowance for bad debts in period t, deflated by period t sales. an overview of earnings management measurement approaches: development and evaluation  29 write-off t: write-offs for period t, deflated by period t sales. write-off t+1: write-offs for period t +1, deflated by period t sales. resprov t: the projection error, which by design is orthogonal to the repressors. it can be seen that this model is similar to total accruals models in terms of decomposing total accruals into managed and unmanaged components. to do so it uses regression model. beneish (1997) beneish (1997) introduces a model centred on identifying earnings management from organisations dealing with significant financial performance, and examines actual earnings management occurrences, contrasting the performance of the model to that of the aggregate accrual approaches, particularly the modified jones by dechow et al. (1995). the method establishes a distinction between gaap violators and aggressive accruals, and is centred on the explanatory variables able to capture and differentiate between elements that establish incentives to violate, and the likelihood of identifying gaap violation. moreover, they utilise a number of different possible variables that establish incentives to violate gapp, and further take into account another eight financial statement variables, which could impact the overall likelihood of being identified by the market participants, with such variables capturing misrepresentations in financial data, as derived through gaap violation. this delivers a probability prediction of the potential for earnings management between organisations in which abnormal accruals are not correctly outlined. the model is detailed as follows: mi = bxi + θ where: m: a dichotomous variable which takes a value of i for violators and 0 otherwise. x: the matrix of explanatory variables. θ: a vector of mean zero independent and identically normally distributed residuals. as such, beneish (1997) highlights that the capacity of the modified jones model to separate discretion among firms with significant performance may be improved through incorporating lagged total accruals and a tool for measuring past price performance as explanatory. such additional variables are in line with the estimation made by guay, kothari and watts (1996), who suggest that accruals models that consider the incentives of management and who acknowledge the reversals of discretionary accruals are more likely to detect discretionary accruals. cecchini, jackson and liu (2012) the study of cecchini et al. (2012) examines whether or not the ipo (initial public offering) organisations manage earnings through the application of an individual accrual account on the balance sheet and an individual accrual account on the income statement, notably the allowance for uncollectible accounts and bad debt expense, respectively. comparable to the approach of teoh, wong and rao (1998), the writers begin through drawing a comparison with the scaled allowance of non-ipo organisations to the scaled allowance of ipo organisations, where the scaled allowances receivables are introduced in terms of percentage form . where: is the allowance for uncollectible accounts. is a gross accounts receivable, i and t are firm and year subscript a. marai, v. pavlović 30 the study of cecchini et al. (2012) further develops such an analysis by placing emphasis on the ratio of the receivables allowance to leading write-offs. the ratio is expressed through the percentage where: the allowance for uncollectible accounts. write-offs of uncollectible accounts, i and t are firm and year subscript. making the assumption that leading write-offs is mainly linked with the receivables allowance in year t, the ratio of 1 should suggest that the allowance is precisely adequate. ratios seen to be more than 1 would suggest that the organisation has exaggerated its allowance, whereas the organisation may have understated its allowance if the ratio is much below 1. in terms of the examinations of bad debt expense, the work of cecchini et al. (2012) examined the differences in the scaled bad debt expense between ipo firms and matched non-ipo firms through the application of scales as a scaling variable. this can be illustrated in the following way: . where is the bad debt expense is the net sales and i and t are firm and year subscript. the findings suggest that there is no notable difference when comparing the non-ipo and the ipo organisations. this finding somewhat challenges the view those ipo businesses understate their receivables-related accrual accounts. moreover, cecchini et al. (2012) apply the model presented by mcnichols and wilson (1988) with the aim to examine whether or not bad debt expense is seen to be much different between non-ipo and matched ipo organisations following the controlling for economic determinants of bad debt expense. this model is detailed as shown below: where: , , and , are defined above; is an indicator variable coded as 1 for ipo firms and 0 otherwise. the coefficient on can be communicated as negative, where the coefficients on and are expected to be positive. markedly, a positive coefficient on suggests that ipo organisations detail greater bad debt expenses than matched non-ipo firms, whilst a negative coefficient on suggests that ipo organisations detail more minor bad debt expense than matched non-ipo organisations. 3. statistical distribution approach this method is centred on the assumption that management commonly have incentives driving them to satisfy particular benchmarks and goals; thus, earnings distribution encompasses lesser observations than expected just below the threshold, with more observations than expected above the threshold. upon the analysis of the frequency and dissemination of reported earnings surrounding such thresholds, distribution discontinuities may be observed. importantly, if the distribution is balanced, no earnings management is adopted; on the other hand, however, if earnings are recognised at a particular benchmark or at 0, earnings management may have been implemented. nevertheless, earnings distribution in itself is not adequate; there needs to be particular thresholds that seek out and establish the an overview of earnings management measurement approaches: development and evaluation  31 discontinuity apparent at such thresholds. the following section considers the most commonly cited researches linked with this method. burgstahler and dichev (1997) the study of burgstahler and dichev (1997) delivers the first cross-sectional distribution method in order to analyse whether, why and how organisations achieve earnings management. this study establishes three thresholds that drive the manipulation of earnings. these are: to avoid reporting earnings decreases, to maintain positive earnings and to avoid losses. this research centres on the view that earnings management with the aim of avoiding decreases in earnings is likely to be highlighted through cross-sectional distributions of earnings changes. such distribution takes the form of uncommonly high frequencies of minor earnings increases and uncommonly low frequencies of minor earning decreases. in much the same way, earnings manipulation to avoid losses will be highlighted through the form of unusual high frequencies of minor positive earnings and unusual low frequencies of minor losses. with the aim of examining this assumption, two different forms of evidence are utilised, the first of which is graphical through the adoption of histograms in order to epitomise the pooled cross-sectional earnings data gathered, and to further emphasise the changes in earnings around zero and the lack of continuity of earnings; the second test is statistical in nature, and adopts the assumption that, within the null hypothesis of no earnings management, it is considered that there would be a smooth cross-sectional dissemination of earnings changes and earnings levels. from an operational standpoint, smoothness, in this context, is described as being the number of observations expected during any distribution period. this expected number is collocated as the average of the numerous observations in the two intervals immediately closest. degeorge et al. (1999) degeorge, patel and zeckhauser (1999) presented a method centred on behavioural thresholds for earnings management; with this particular model demonstrating the way in which efforts to surpass thresholds create certain earnings management patterns. the process begins with the establishment of three thresholds, each of which is considered a probable earnings management driver. the first of these is centred on reporting profits, which stems from the psychological value recognised in terms of the distinction between negative and positive results. the second is maintaining recent performance; in other words, to earn at least the same as the previous year. the third is to meet the expectations of analysts, especially the consensus of analysts in their earnings predictions. such thresholds are recognised as fundamental for management owing to the fact that the parties in question, along with the organisation, also view them as valuable. the model assumes that executives perform earnings management with the aim of impacting the views of outsiders, including banks, investors and suppliers, with the aim of deriving personal satisfaction from making a target. at the same time, outsiders make use of thresholds as a way of rewards and assessing executives; in this regard, upon the response of executives to such thresholds, reported earnings distribution becomes unclear. essentially, too many earnings fall above the threshold whilst too few fall below. the assumption is also made that, when earnings are recognised as being within an unacceptable range, upwards management incentives are notable. furthermore, if bonus plans limits are exceeded by earnings, limits will be moved, thus meaning future limits will be easier to achieve. a. marai, v. pavlović 32 gore et al. (2007) the study of gore, pope and singh (2007) adds additional value to the literature in two key ways. primarily, it examines a wide-ranging non-american dataset, which has not been done before, thus validating the belief that those discontinuities reported in the literature previously are not particular to the us environment. secondly, it further presents innovative tests, providing further support to the idea that the discontinuities in the distribution of earnings are linked with accruals centred on earnings management within their particular sample. moreover, it also examines the links and associations between working capital accrual discretionary components, earnings target achievement frequency and the discontinuity observed in the distribution of earnings alongside basic targets. the scholars also implemented an in-depth assessment of earnings management in regard to earnings thresholds with the use of a significant sample of organisations in the united kingdom. emphasis was placed on earnings management with the inclusion of working capital accruals manipulation. evidence was detailed as being consistent with earnings management with the aim of achieving goals. more specifically, they highlight that earnings adjustment for discretionary accruals eradicates earnings target discontinuity. 4. discussion of developing and evaluating the different approaches despite the fact that all discretionary accruals models share the common concept— utilising non-discretionary accruals as a measure for earnings management—it remains that there are fundamental differences between the models. particularly in regard to separating the non-discretionary accruals aspect from the total accruals, and their capacity to deal with changes in organisations' economic circumstances, in addition to the power and specification of each model. the models provided by healy (1985) and deangelo (1986) hold the assumption that there is stability amongst non-discretionary accruals, with such limits recognised as unrealistic owing to the fact that accounting accruals experience change in line with the economic environment (kaplan, 1985, cited by dechow et al., 2012). as a substitute to the model provided by jones (1991), the amended version by dechow et al. (1995), in addition to the performance-adjusted discretionary accruals presented by kothari et al. (2005), the variations of non-discretionary accruals are controlled through consideration to the changes in total assets, receivables and revenues, in addition to the performance of the organization (e.g. return on assets). in terms of the power and specification of all models, the original and modified version of the model of jones are acknowledged throughout the literature as being the most capable tools in terms of identifying earnings management (dechow et al., 1995; young, 1999). a number of researches conducted recently provided a comparison of the performance of alternative total accruals models in identifying earnings management. for instance, dechow et al. (1995) and guay et al. (1996) assess the overall performance of five deferent models with the aim of measuring discretionary accruals, in particular those of healy (1985), deangelo (1986), jones (1991) and dechow & sloan (1991), as well as the model suggested in their research—the amended jones model. the findings suggest that the amended jones model displays the greatest ability in terms of testing earnings management. moreover, literature published previously, such as the works of subramanyam (1996) and peasnell et al. (2000) all emphasise highlight the superiority associated with adopting the jones model in regard to cross-sectional data over their time-series counterparts. an overview of earnings management measurement approaches: development and evaluation  33 this is owing to the fact that the former decreases time effect issues and creates a larger sample, thus inducing a greater coefficients estimate. the main benefit associated with this method is its capacity to capture the scale of earnings management; in contrast, however, it is not able to highlight the accounts utilised by management. one further matter for consideration is the aggregate accruals models, which utilises residuals in order to calculate the discretionary accruals. in the time-series scenario it is recognised that residuals use is suitable, measuring the difference between abnormal and normal accruals throughout the estimation and event periods, respectively; on cross-sectional settings, on the other hand, this is not the same case. in theory, residuals should average zero, thus meaning that the model's specifications are significantly queried when measuring discretionary accruals. in relation to specific accruals methods, seeking to identify earnings management through the use of single accruals can be both beneficial and disadvantageous, with three pros and cons highlighted by mcnichols (2000) as linked with this particular accruals approach. the main benefit is, firstly, the fact that intuition may be used by the researcher for the main elements impacting the accrual behaviour, with knowledge of generally accepted accounting principles exploited; secondly, a particular accrual method may be adopted across those sectors where business practices cause the accrual to be a likely object of discretion and judgment; and thirdly, the direct estimation of the link between the explanatory factors and single accrual factors. in contrast, there are three key drawbacks: primarily, there may be the identification of earnings management within a single accrual approach, but only if the accruals under analysis are managed, thus meaning there are problems associated with establishing those accruals utilised for earnings management. importantly, even if the most suitable accrual is analysed, the impacts of managing an accrual alone may not be significant enough to achieve statistical significance. it is claimed by mcnichols and wilson (1988) that, upon specific accruals representing a small aspect of the discretionary component, they may not be successful in highlighting earnings management in instances where other discretionary elements have been manipulated. in this way, the aggregate accruals models may introduce a more in-depth study design when capturing the discretionary elements. secondly, it is reasonable to suggest that management utilises more than one accrual during the process of earnings management; therefore, although the single accrual approach is efficient in terms of identifying the management of earnings in some cases, earnings management in most situations cannot be identified (mcnichols and wilson, 1988). thirdly, the numerous organisations for which a particular accrual is managed could have a small relative to the number of organizations with aggregate accruals, which could ultimately restrict the generality and understanding of the results concerning particular accruals researches. regarding the distribution approach, it is key feature is being relatively simple to use, and it is a graphical description of the earnings after the alteration of reported earnings has accrued. in addition, this approach detects earnings management while avoiding the issue of measurement error and misspecification resulting from accrual-based earnings management models (sun and rath, 2010). mcnichols (2000) stats that the distribution models are powerful in earnings management investigations, because they provide the researchers with a strong prediction based in the frequency of earnings realizations rather than the estimation of the discretionary accrual. moreover, it is considered a suitable powerful method for measuring earnings management when an enormous number of firms sceptic to be managing earnings. however, the results of empirical studies that a. marai, v. pavlović 34 question the shapes of earnings distributions as evidence for absence / presence of earnings management do not support the assumption that earnings management can be completely explained by the discontinuity of the earnings distribution. for example, dechow, richardson and tuna (2003) do not find an association between discretionary operating accruals and the earnings discontinuity. also durtschi and easton (2005) provide results that should be taken in consideration when using the shapes of the frequency distributions of earnings as indicator for earnings management practices. they show that these shapes can be affected by deflation, sample selection, and a difference between the characteristics of profit and loss observations (such as market pricing and analyst optimism/pessimism). the same findings established by beaver, mcnichols and nelson (2007), durtschi and easton (2009) who emphasize that researchers should consider evidence beyond the shapes of distribution and should be caution when interpreting a discontinuity in the distribution of earnings as indicator for earnings management. in contrary to these studies which questioned distribution approach for earnings management measurement, jacob and jorgensen (2007) reexamine the findings of burgstahler and dichev (1997) and support the findings in burgstahler and dichev (1997) and indicate that these findings are not induced by scaling. above of all, it can be seen that this approach can indicate earnings management practice existence but delivers no insight into the techniques or magnitude of earnings management. overall, the various methods available for identifying the management of earnings are numerous, with the benefits of all methods seemingly reliant on their overall capability in terms of measuring earnings management level and methods. accordingly, establishing which method is most suitable ultimately rests on the aim of the study: if the study is concerned with analysing the degree of earnings management with lesser attention directed towards the approaches, the aggregate method would be viewed as most suitable. the specific accruals approach is more suitable if the objective is to test whether particular approaches have been adopted in order to manage earnings; however, the results of particular accruals can be problematic to generalise when particular accruals are not very sensitive. in contrast, the method of distribution frequency is valuable when testing for the present management of earnings, although it is not able to detect the degree or the instruments associated with the changes in the earnings reported. conclusion the measurement of earnings management is a common consideration amongst professionals and academics in the field; however, owing to the fact that these practices cannot be observed directly, as well as the numerous methods management adopt in its application, identification is problematic. accounting literature does provide a number of different approaches for the measurement of earnings management; however, their abilities remain questionable, with all methods comprising benefits and drawbacks in comparison to others, which need to be acknowledged by academics when identifying earnings management. in actuality, the pros and cons of all methods ultimately depend on their ability to measure the level and instruments of amending the earnings reported. furthermore, aggregate accruals approach are recognised as being the most widely utilised and capable, particularly the original devised by jones, the subsequent modified model of jones, and the performance model. the ability is derived from its capacity to control organisational an overview of earnings management measurement approaches: development and evaluation  35 performance when separating total accruals into non-discretionary and discretionary accruals, and subsequently utilising the former as a proxy for earnings management. researchers should consider such approaches, which are able to highlight the level of earnings management without detailing the approaches applied. the specific accruals method is not only able to measure the management of earnings in regard to the level, but also has the ability to identify the tools implemented. nevertheless, the results of such a method are problematic in terms of generalisation when particular accruals are not adequately sensitive. in relation to the frequency distribution method, this can be adopted simply and avoids measurement error that can arise with the implementation of different methods. nevertheless, it may be utilised with the aim of identifying whether or not there is the presence of earnings management, but delivers no insight into the instruments or magnitude of earnings management. references 1. atik, a. 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(2007): review of real earnings management literature, journal of accounting literature, 26(1): 195-228. prikaz pristupa identifikovanja nivoa upravljanja dobitkom: razvoj i evaluacija praksa upravljanja dobitkom izazvala je značajnu pažnju te postala predmet interesovanja regulatornih tela, praktičara i naučne javnosti. u literaturi iz oblasti računovodstva, navode se tri ključna pristupa za identifikovanje nivoa i tehnika upravljanja dobitkom. u pitanju su pristup zasnovan na ukupnoj razlici između operativnog cash flow-a i dobitka, pristup zasnovan na specifičnim razlikama i statistički pristup zasnovan na distribuciji raspodela. uprkos činjenici da su brojna istraživanja usmerena ka poboljšanju svakog od navedenih pristupa, ograničenja su i dalje prisutna, te svaki pristup ima svoje prednosti i slabosti. u radu je dat kritički osvrt metoda za ocenu nivoa upravljanja dobitkom prisutnih u literaturi, uključujući i prikaz razvoja ovih metoda, uz naglašavanje prednosti i ograničenja koje je u istraživanjima usmerenih ka identifikovanju upravljanja dobitkom potrebno uzeti u obzir. ključne reči: upravljanje dobitkom, kvantifikovanje upravljanja dobitkom, pristup zasnovan na razlici između cash flow-a i dobitka, disruptivni pristup, pristup zasnovan na distribuciji raspodela. facta universitatis series: economics and organization vol. 18, no 4, special issue, 2021, pp. 325 339 https://doi.org/10.22190/fueo210628023t © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper banks' corporate social responsibility (csr) disclosure and their role in the betterment of society in the republic of north macedonia1 udc 005.35(497.7) marina trpeska, todor tocev, ivan dionisijev, bojan malchev ss. cyril and methodius university in skopje, faculty of economics – skopje, republic of north macedonia orcid id: marina trpeska https://orcid.org/0000-0001-9996-7286 todor tocev https://orcid.org/0000-0001-7656-1240 ivan dionisijev https://orcid.org/0000-0001-5986-3343 bojan malchev https://orcid.org/0000-0002-7657-3564 abstract. corporate social responsibility (csr) is of great importance for companies and other stakeholders, which obliges the companies to establish a way of management that will simultaneously take care of the environmental, social, and ethical aspects of factors. if corporate responsibility is the guiding factor for companies, they can easily gain a competitive advantage over others. this paper researches how the banks in the republic of north macedonia report on csr and in what report format csr data is published. the research is based on the method of content analysis and statistical analysis to determine whether the size and profit of banks affect the csr reporting. the sample included in the research is 14 banks that the national bank of the republic of north macedonia has granted a license to operate. the results of this research show that the size of banks has a positive effect on csr reporting, while on the other hand, profit does not affect it. keywords: csr, disclosure, banks, north macedonia jel classification: g21, m14 received june 28, 2021 / accepted july 15, 2021 corresponding author: marina trpeska ss cyril and methodius university, faculty of economics skopje, department of accounting and auditing, bul. goce delcev 9v, 1000 skopje, republic of north macedonia | e-mail: marina.serafimoska@eccf.ukim.edu.mk https://orcid.org/0000-0001-9996-7286 https://orcid.org/0000-0001-7656-1240 https://orcid.org/0000-0001-5986-3343 https://orcid.org/0000-0002-7657-3564 mailto:marina.serafimoska@eccf.ukim.edu.mk 326 m. trpeska, t. tocev, i. dionisijev, b. malchev 1. introduction corporate social responsibility (csr) reports refer to a company’s systematic disclosure of information about its social performance. the term social performance has a broad understanding and refers to social, environmental and governance issues that are not generally included in financial performance indicators. compared to management accounting, csr reporting is primarily directed at external stakeholders, such as clients, investors, and the public. in the absence of mandatory formal rules, csr reports differ greatly in form (design, means of distribution, reporting frequency, etc.) and content (scope, quality, etc.) (schreck, 2013). in recent years, the scope of voluntary csr reports has been expanded in response to demands that companies should be more responsible for their actions (kpmg, 2020). a corporate social responsibility or sustainability report is periodic report (usually annual report) or more generally part of the company’s financial/annual reports, aimed at sharing its philanthropy, corporate social responsibility actions and results. the report synthesizes and discloses the information that the organization decides to convey about its commitments and actions in the social and environmental fields. by doing so, the organization allows stakeholders to understand how they integrate the principles of sustainability into their daily operations (youmatter, 2020). regardless of the precise definition, with growing attention to firms’ csr strategies, interest in how firms account for, and report on, their csr activities have also increased, and social responsibility is considered essential to the long-term survival of the company (simms, 2002). today, many industry different companies across many countries have introduced some form of social performance disclosure. banks are increasingly involved in financing activities aimed at sustainable development (scholtens, 2009). the issue of voluntary and mandatory csr disclosure has been debated for several years. proponents of voluntary disclosure note that corporate social responsibility reporting has increased in the last decade and believe that, for various reasons, companies have an incentive to disclose social and environmental behaviors without being forced (jain et al., 2015). guided by the following issues and current topic in the increasingly complex environment and the necessary role of companies in society, the main objective of this paper is to measure the level of csr reporting of actively operating banks in north macedonia, the way they report and analysis of indicators that have a potential impact on the level of social responsibility, such as the size of the bank through the prism of total assets and profits as individual and related variables. method of content analysis and statistical testing are taken into account as an approach to determine the situation and csr disclosure in all banks that operate on the macedonian market. the paper first summarizes the relevant literature and current data related to social responsibility reporting, followed by a specific presentation on the situation of the csr in north macedonia. the conducted research is explained through the used methodology of data collection and statistical testing, the obtained results and appropriate interpretation of the same. in the further part of the paper, all the limitations and suggestions for further research are mentioned, as well as a complete conclusion based on the literature and the conducted research. banks' corporate social responsabilty (csr) disclosure and their role in the betterment of society ... 327 2. theoretical framework banks play an important role in the modern economy of society, where a well-functioning financial system is essential. as an intermediary, banks provide a wide range of financing and savings solutions, risk management and payment services for various clients, and advise them, thus playing a fundamental role in society. the importance of banks can be also seen in the fact that they are considered the lifeblood of the modern economy. although banks do not create wealth, their essential activities promote the process of wealth production, exchange, and distribution (farooq, 2020). compared with the practices of the 21st century, management that does not meet the needs and expectations of community stakeholders will not be competitive. corporate social performance (csp) is as important as corporate financial performance (cfp) (baird et al., 2012). banks have a unique way of impacting on society, that is, they can engage themselves in csr activities or they can influence other companies by financing the latter’s projects with social, ethical, and environmental issues (scholtens, 2006). therefore, banks can also influence sustainable development through their environmental actions and impacts, and help limit or conversely strengthen the socio-economic problems that plague modern society (lukasz & justyna, 2019). the growth in reporting suggests that the issue of csr is receiving more attention from the firms and that the number of reportable policy initiatives has increased. the main purpose of a sustainability report or csr is to increase the transparency of organizational activities. there are two goals (youmatter, 2020): on the one hand, the csr report aims to allow companies to measure the environmental, social and economic impact of their activities (the famous triple-bottom-line). in this way, companies can obtain accurate and enlightening data which will help them improve their processes and have a more positive impact on society and the world. on the other hand, a csr or sustainability report also allows companies to externally communicate their sustainability and corporate social responsibility goals to their stakeholders. banks are more likely to present cr information in their annual financial report than companies in any other sector (kpmg, 2016). banks and other financial services providers play an important role because banks are not only recipients of socially responsible investments, but also providers. obviously, banks can benefit from applying some of the most basic concepts of csr to their own human resource policies, and community engagement policies, but the involvement of banks in csr reporting is neither overwhelming nor uniform in all countries. some countries (e.g. france) have made csr and its reporting mandatory, while in other countries, banks have carried out more or less csr activities on a voluntary basis (khan, halabi, & samy, 2009). companies that demonstrate a sense of social responsibility get specific benefits. these benefits according to adams & ambika (2004) include: better recruitment and retention of employees, improved internal decision making and cost savings, improved corporate image and relations with stakeholders, improved financial returns, etc. gri (global reporting initiative) is an independent international organization that provides companies and other organizations with a universal language to communicate these impacts through the most widely used sustainability reporting standards in the world – the gri standards, thus helping companies and other organizations to take responsibility for their impacts 328 m. trpeska, t. tocev, i. dionisijev, b. malchev 3. literature review according to carroll (1979), csr is “economic, legal, ethical and discretionary expectations that society has of organizations at a given point of time”. matuszak et al. (2019) based on this definition and drawing attention to the fact that society has defined expectations for company operations and wants to know about such activities i.e. what companies contribute and do for the good of society. even though a common traditional belief is that organizations need only to prepare financial reports that are required under the laws, accounting standards, or stack-exchange listing rules, acca (2015) suggests and indicates the importance of the environmental report, which is the production of narrative and numerical information on an organization’s environmental impact within the reporting period. summarizing all relevant concepts, garriga & melé (2004) and rogošić (2014) classify the main theories and related approaches of csr into four categories: 1. instrumental theories, where the organizations are only seen as a profitable business, and social activities are only seen as a means for achieving financial benefits; 2. political theories, through which corporations, using social responsibility, gain power and political status in society; 3. integrative theories, where the company focuses on satisfying social needs; and 4. ethical theories, which are based on philanthropy, moral and ethical responsibilities of companies to society. pwc (2013) revealed a document referring to “the rise of corporate social responsibility” that describes the scr report as a “tool for sustainable development in the middle east and suggests to the companies that greater access to more contextual and non-financial information increases the confidence of securities analysts when preparing recommendations for the buying/selling of companies’ shares, but also increases the public trust and confidence”. the kpmg (2013 & 2015) view of corporate responsibility is that many companies no longer see it as an ethical issue, but rather as a core business risk, raising the question: what is the potential financial impact of these risks? and what steps does the company take to alleviate it. according to the hauser institute for civil society (2015), with increasing social pressure to strengthen financial and corporate market regulation and transparency, corporate social responsibility reporting has increasingly become an area of concern. this growth in reporting practice and interest from investors illustrates that businesses are responding to both increased regulation and cultural shifts in how individuals view the operation of corporations and the financial system at large. from the kpmg (2020) survey of sustainability reporting it can be seen that (96%), or almost all of the 250 largest companies in the world (the g250) reported on their sustainability performance. for n100 –5,200 companies comprised of the 100 largest companies in 52 countries – 80% do report. gri remains the most widely used reporting standard or framework, utilized by approximately two-thirds of n100 respondents and approximately three-quarters of g250 respondents. the application of the gri standards (launched at the end of 2016) has increased significantly since 2017 and has continued to grow in recent years. one of the first comprehensive studies on the status and level of csr in north macedonia was published in 2007 from undp, called the baseline study. this study refers to the level of acceptance and awareness of csr in north macedonia and reveals banks' corporate social responsabilty (csr) disclosure and their role in the betterment of society ... 329 that the business community has not yet fully understood and implemented it, due to the lack of relevant knowledge and practical tools (baseline study). in 2008, north macedonia became the third eu country to adopt a national csr agenda after denmark and lithuania (stamenkova, 2011). the csr agenda is a comprehensive governmental plan that addresses csr in north macedonia. it is very similar to the danish action plan, but there is an important difference between the two that is worth mentioning. according to the macedonian document, the concept of csr includes compliance with legal obligations, minimizing or eliminating the company’s negative impact on society and increasing the positive impact. on the other hand, the danish action plan limits the definition of csr to voluntary initiatives (stamenkova, 2011). rogošić (2014) in his research paper confirmed that there is a positive correlation between asset value and profits and the csr reporting levels of the banks from croatia, bosnia and herzegovina, and montenegro by using statistical regression analysis where the level of csr reporting was set as a dependent variable. matuszak et al. (2019) through content analysis and panel data analysis of annual reports and csr reports of the banks operating in poland for the period between 2008 – 2015, obtained results from testing several hypotheses which indicates that there are statistically significant differences in the level of csr disclosures between banks with a different ownership structure; compared to unlisted companies, the public listing has a positive impact on corporate social responsibility; almost all variables related to the size, management board and foreign board members are relevant and have a significant positive effect on csr disclosure. levkov & palamidovska-sterjadovska (2019) used a sample for the research of 102 banks, actively operating in the western balkan countries for a three –yearperiod (2015 – 2017) and the results reveal that in north macedonia, foreign and local banks attained an equal average score of csr reporting, while in serbia, kosovo, bosnia herzegovina, and montenegro, foreign banks have attained a higher score, i.e. higher level of csr disclosure. the results from conducted regression analysis show that the size of the bank (total assets) is a moderate predictor of csr reporting. overall, their study shows that there are inconsistencies in disclosure of csr initiatives on different markets, considering western balkan countries. the method of content analysis and regression analysis with the size bank (total assets) and the profitability as an independent variable were used in previous studies (branco and rodrigues, (2006); hinson, boateng & madichie, (2010); khan, (2010); nyarku and hinson, (2017); matuszak et al., (2019); levkov & palamidovska-sterjadovska, (2019)) to determine the disclosure of social responsibility in annual reports and banks’ websites. in order to avoid the problem that arises from covering only descriptive data (jiang et al., (2011), nyarku & hinson (2017)) and guided by the latest research conducted on the macedonian banking sector together with the countries of the western balkan (levkov & palamidovskasterjadovska, 2019), which was also based on research from matuszak et al. (2019) and previous studies (fatma & rahman, (2014); kılıç, m., & uyar, a. (2014); nyarku & hinson, (2017)), we used a binary scoring method of the csr disclosures recorded in 1) annual reports, 2) financial reports and/or 3) web (online) content as a separate csr heading. following the same studies and due to the similar concept and social status of the banks, we used the already recognized and defined four key stakeholder groups in this sector: (1) environment, (2) employees, (3) customers, and (4) community. according to hinson et al., (2010) environment related activities аre the company’s environmental concern, loan 330 m. trpeska, t. tocev, i. dionisijev, b. malchev and investment policies, energy conservation in business operations, and other supporting activities and calls for a cleaner and ecological environment; employees – working environment, employee health and safety, team buildings and trainings and employee remuneration; customers – product and service quality, customer complaints/satisfaction and services provided to customers with physical disabilities; community – charitable donations and activities, support for education and sports sponsoring or recreational projects. as achua (2008) states that banks have an important role in financial stability and economic development in countries, they must take social responsibility in order to build a reputation and attract investors, expand their customer base, attract qualified employees and earn the trust of the public. taking social responsibility is becoming the focus of banks’ attention because their reputation depends on their csr policies and plans (dorasamy, 2013). consumers and governments are pushing business organizations to become more involved in social responsibility initiatives, which is why businesses today are working hard to become more involved in csr initiatives and to publicly promote their csr activities through their websites (levkov & palamidovska-sterjadovska, 2019). 4. csr reporting in macedonian banking industry in north macedonia, corporate social responsibility (csr) was first introduced as a concept in 2002 through the activities of the world bank institute of the world bank group, undp, and usaid (stamenkova, 2011). in december 2007, the ministry of economy of north macedonia established the national coordinating body for corporate social responsibility (ncb csr) as a permanent working group within the economic and social council of the government of north macedonia. ncb csr is a crosssectorial body responsible for developing multiple dialogues and identifying joint actions for the promotion and implementation of csr. in june 2008, as part of the ncb’s csr work plan, the “national agenda for corporate social responsibility” was prepared. the agenda was adopted by the government in october 2008. the goals of the agenda are to raise csr awareness, develop capacities and competencies to help establish csr and provide a favorable csr environment. the banking sector plays a vital role in the macedonian economy and can undoubtedly contribute to economic growth and social welfare. historically, banks have been considered as public trust institutions, so people have expectations about their highly professional and socially responsible behaviors (molyneux et al., 2014). the important role of the banks has been increased through csr initiatives, including environmental protection and sustainability, community participation, occupational health and safety, employee development and training, bank products for marginalized groups, etc. (levkov & palamidovska-sterjadovska, 2019). according to the latest reports of the national bank of north macedonia including 31 december 2020, fourteen banks have actively been working, and five out of them count as large banks, six are medium-sized banks, and three are small banks. compared to the previous two years 2018 and 2017 which are taken into account for the research, there is a change in the number of medium-sized banks, due to the closure of eurostandard bank. due to the small market share of a large number of banks, the macedonian banking market qualifies as a non-competitive environment (filipovska, 2019). we focus on the csr reporting activity of all licensed banks, but the main focus and discussion are based on large banks, because almost all csr reports are issued individually or as part of the annual report. banks' corporate social responsabilty (csr) disclosure and their role in the betterment of society ... 331 in the macedonian environment where “the rule of law is still not to be taken for granted” (stamenkova, 2011), it shows that csr is still not legally required, but it is still a vague concept, frequently equated with donations, sponsorships, and philanthropy, usually perceived as an obligation for large and profitable companies only. banks in north macedonia, following the global trend of the manner of reporting on social responsibility, disclose csr information mainly through their websites, as well as in the annual reports where the descriptive part lists the social activities, but it is worth to be noted that neither are they listed and compiled in the financial statements nor are csr financial expenditure data available. 5. research methodology in this research we applied content analysis methods to measure the csr reporting activities of all licensed banks in north macedonia, focusing on the large banks, which are actively operating until december 2020, and regression analysis on asset values and csr reporting levels. the population and the sample used for this research is composed of 14 banks all banks actively operating in north macedonia. the data about granted licenses were obtained from the official website of the national bank of the republic of north macedonia. all banks operating on the macedonian market have an official accessible website and published financial statements and annual reports from which csr data were obtained. as it was mentioned before, to overcome the limitation of using only descriptive data, we use a binary scoring approach of the csr disclosures. the scoring was conducted depending on whether csr data are available at all (whether published in financial statements, annual reports, or as a separate section of a website) and whether the four key stakeholders in the banking sector are covered, namely: (1) environment, (2) employees, (3) customers and (4) community. to be able to provide the essential data, i.e. csr data, we followed the procedure of searching the banks' financial statements and annual reports, independent csr reports, and website through all headings on the web and links that lead to data on corporate social responsibility of the bank. table 1 summarizes the research methodology for how points are generated and how many total points a bank can earn. table 1 research methodology for csr points description “yes” max points “no” min points 1. are csr data available? 1 0 2. csr reporting referring to the environment? 1 0 3. csr reporting referring to employees? 1 0 4. csr reporting referring to customers? 1 0 5. csr reporting referring to the community? 1 0 total points per bank for 1 year 5 0 total points for the observed period of 3 years (2017-2019) 15 0 source: authors' calculation 332 m. trpeska, t. tocev, i. dionisijev, b. malchev in addition to the content analysis and summarized relevant literature from already conducted research, the following hypotheses are set: h1 = the size of a bank has a positive impact on the level of csr reporting done by banks. h2 = the bank's profit has a positive impact on the level of csr reporting done by banks. due to the current situation caused by the pandemic covid-19, many changes are taking place in both the world and the domestic market. large and successful companies are expected to contribute to the easier overcoming of the crisis and make a positive contribution to society. according to media reports and information on social networks, banks in north macedonia are one of the largest donors, which is an important issue worthy studying and discussing. due to still unpublished annual reports by the bank, there is a restriction on access to annual data for csr activities in the period of covid19 and therefore it will be processed only descriptively. for testing the hypotheses, the appropriate indicators are taken into account, i.e. for the bank size in this research, the value of the average total assets for 2017, 2018, and 2019 are used (h1), which are presented in the balance sheet of the banks and the measurement of the bank profit is de facto the average absolute amount of the profit for 2017, 2018 and 2019 (h2), which are stated in the income statement of the banks. this research uses a quantitative research method. the processing of the collected data was done through several statistical methods and tests, using spss software. the model is formulated as follows: y = 0 + 1x1 + 2x2 +  (1) where: y = csr reporting; x1 = bank size; x2 = bank profit;  = random error the analysis of the collected data includes several statistical tests, as follows: 1. data normality testing to determine if data are normally distributed for decision making and conclusions. this test involves preparing a histogram of the dependent variable to see if the residual is skewed and a simple kolmogorov-smirnov test is performed. if the significance value of the test is greater than 0.05 then it means that the data are normally distributed. 2. multicollinearity test to determine the relationship between the independent variables. multicollinearity can be detected by the variance inflation factor (vif). if the value of centered vif is less than 10, then it means that there is no multicollinearity. 3. regression testing to see if the change in variable y can be explained by variable x. in this test, we use the coefficient r2 (r square). 6. results and discussion from conducted content analysis for the level of the banks' reporting on social responsibility, table 2 presents the total csr score according to bank size. banks' corporate social responsabilty (csr) disclosure and their role in the betterment of society ... 333 table 2 csr reporting in banking sector according to their size banks number of banks total csr points average csr score max points min points number of banks with max points number of banks with min points large sized banks 5 65 13 15 11 2 0 medium sized banks 6 21 3,5 9 0 1 3 small sized banks 3 12 4 6 0 2 1 total 14 2* 4 *total number of banks with max 15 points source: authors' calculation only two out of fourteen banks have the maximum number of points (15) for csr reporting which are from the large banks' group, while a total of four banks have a score of 0 points. the csr activity report score used in this paper ranks banks according to the indicators in table 3. table 3 csr disclosure of banks in north macedonia banks csr data availability environment employees customers community large sized banks 15 10 15 10 15 medium sized banks 9 6 0 0 6 small sized banks 6 0 0 0 6 total 30 16 15 10 27 source: authors' calculation from the total maximum of 42 points that banks can achieve if they have published data about csr for the period of three years (2017-2019), it can be seen that the total number of achieved points is 30, or 71%. according to the four indicators i.e. stakeholders as an element of whether they are included in the reporting, the following data were obtained: environmental 16 points (38%), employees 15 points (36%), customers 10 points (24%), and community 27 points (65%). it can be concluded that most of the banks are active in the activities intended for the community. table 4 summarizes the results regarding the instruments used by banks in the disclosure of social responsibility information. table 4 instruments used by banks to conduct csr data banks independent report part of annual or financial report web csr link/heading large-sized banks 1 4 / medium-sized banks / 2 1 small-sized banks / 2 / total 1 8 1 source: authors' calculation 334 m. trpeska, t. tocev, i. dionisijev, b. malchev of all banks that actively operate in north macedonia, ten out of a total of fourteen banks (71%) report on social activities. only one bank from the group of large-sized banks has an independent report for csr activities, which indicates that banks in north macedonia are not inclined to prepare a separate report exclusively for the csr. most banks that report on csr summarize the data as part of an annual or financial report. the results obtained from statistical data processing using spss software for testing the hypotheses of whether bank size and profit affect the csr reporting are presented as follows: ▪ residual normality test using one-sample kolmogorov-smirnov test this test is done to determine if the sample in the research is normally distributed or not, by testing the normality of the residuals. the first test is shown in histogram 1 and table 2 below. histogram 1 data distribution source: authors' calculation table 5 one-sample kolmogorov-smirnov test csr profit size n 14 14 14 normal parametersa,b mean 7.00 559966.5000 35321.5000 std. deviation 5.533 807350.53484 36009.72815 most extreme differences absolute .183 .298 .233 positive .183 .298 .233 negative -.143 -.246 -.182 kolmogorov-smirnov z .684 1.116 .870 asymp. sig. (2-tailed) .738 .166 .436 a. test distribution is normal. b. calculated from data. source: authors' calculation histogram 1 shows that the residuals are normally distributed, it is not skewed either left or right. from table 5, it can also be concluded that the obtained values of 0.738, 0.166 and 0.436 (asymp. sig. 2-tailed) respectively are greater than 0.05, which means that the residuals have a normal distribution. this data can be used in the further research process. banks' corporate social responsabilty (csr) disclosure and their role in the betterment of society ... 335 ▪ multicollinearity test table 6 shows the variance inflation factor (vif) values for the two independent variables (size and profit) and all values are less than 10. this means that there is no multicollinearity between the two variables. table 6 multicollinearity test coefficients model unstandardized coefficients standardized coefficients correlations collinearity statistics b std. error beta zeroorder partial part tolerance vif 1 (constant) 2.338 1.471 profit -2.571e-06 .000 -.375 .651 -.247 -.154 .168 5.960 size .000 .000 1.124 .782 .606 .460 .168 5.960 a. dependent variable: csr source: authors' calculation ▪ regression tests simultaneous test (f test) to see if the independent variables simultaneously affect the dependent variable, the following hypotheses are set: h0: bank size and bank profit do not have a simultaneous effect on csr reporting. h1: bank size and bank profit have a simultaneous effect on csr reporting. table 7 anova model sum of squares df mean square f sig. 1 regression 252.813 2 126.407 9.577 .004b residual 145.187 11 13.199 total 398.000 13 a. dependent variable: csr b. predictors: (constant), size, profit source: authors' calculation as we can see, table 7 anova shows the significance value of 0.004 which is < 0.05 so h0 is rejected, which means bank size and bank profit simultaneously affect the csr reporting. with this result, we can continue the regression further by testing the individual variables with t-tests. so, for the independent variable 'bank size', we set the following hypotheses: h0: the size of a bank has no impact on the level of csr reporting done by banks. h1: the size of a bank has a positive impact on the level of csr reporting done by banks. 336 m. trpeska, t. tocev, i. dionisijev, b. malchev table 8 multiple regression coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 2.338 1.471 1.589 .140 profit -2.571e-06 .000 -.375 -.844 .417 size .000 .000 1.124 2.529 .028 a. dependent variable: csr source: authors' calculation table 8 shows the results from multiple regression and it can be seen that the value of bank size variable significance is 0.028 which is < 0.05 and hence, it can be concluded that h0 is rejected and h1 is accepted. this means that the size of the bank affects the csr reporting, which means the bigger the banks are, the more they report for their csr. furthermore, we continue with the profit variable and set the hypotheses: h0: the bank's profitability has no impact on the level of csr reporting done by banks. h1: the bank's profitability has a positive impact on the level of csr reporting done by banks. from the тable 8 for the profit variable, it is noticed that the value of the significance is 0.417 which is greater than 0.05, so in this case, we accept h0 and reject h1. this means that the profit or loss incurred by the bank does not affect their reporting of csr. although it is logical to assume that the size of the realized profit is actually a larger amount of available funds that can be allocated by the banks for social responsibility and improvement of the society, while not disturbing their liquidity and survival, still the conducted statistical tests show that profits do not affect the level of csr reporting in north macedonia. this result can be explained by the characteristics of the population, habits, inertia of change, awareness of social responsibility etc. social responsibility is increasingly found in the goals and policies of banks, which can be seen in their confidence that greater contribution and active participation in improving society will ensure better future results for all, especially for society and the financial results of banks, too. changes can be expected in the near future as the population becomes more aware of the importance and significance of social responsibility, thus greater investment by banks in this field. finally, we will complete the analysis with the determination test. the purpose of this test is to see how the independent variable can explain the changes in the dependent variable. table 9 r square model summaryb model r r square adjusted r square std. error of the estimate 1 .797a .635 .569 3.633 predictors: (constant), size, profita dependent variable: csrb source: authors' calculation r square of the model is 0.635 which means that the size and profit of the banks explain as much as 63.5% of the csr reporting by the banks in the republic of north macedonia. banks' corporate social responsabilty (csr) disclosure and their role in the betterment of society ... 337 7. research limitations csr reporting is becoming increasingly important for companies on the one hand, as a means of attracting attention and proving their participation and status in society, but also for the general public as current or potential users of their services and current residents in the environment. the survey was conducted based on publicly disclosed information about their acts on social responsibility, for which other activities are likely to have been undertaken, but they were not highlighted or included in the report or part of csr passage. for the purpose of the survey, only secondary data collected from financial/annual reports or links and headings published on websites were used. no data were used from primary sources that would be collected through interviews and survey questionnaires. in the published information on csr activities by the banks, there are no financial indicators or amounts that would make a better comparison and statistical tests, but only descriptive information which was then processed through the binary score to enable hypothesis testing. apart from one of the large banks, there are no separate reports on social responsibility activities, so the data collection process was carried out through a detailed analysis of the financial and annual reports, as well as csr links and headings published on the official websites. the covid-19 pandemic is a current topic and period in which banks actively participate with their donations, support, deferred loan installments, etc., but, due to the time period of the research, the reports for 2020 have not been published yet, which would provide significant information and a comparative analysis of bank charities before and during the pandemic can be made, which is our recommendation for future research. it is also worth mentioning that there is not much research and published papers on corporate social responsibility in macedonian practice, especially for the banking system. 8. conclusion acting in a socially responsible manner is not only a moral behavior or philanthropy, but it is an essential part of the banks' strategies and long-term survival. many international papers and surveys conducted by academic researchers, audit firms, and other regulatory bodies and stakeholders state that csr reporting is increasingly and continuously becoming a field of social and public interest that makes pressure for greater regulation and transparency of corporate social impacts. on the other hand, by attracting high-quality employees, negotiating better contracts, expanding the customer base, attracting investors and gaining the trust of the public, addressing csr is crucial to the profitability of the company. among banks, being socially responsible is becoming a strategic goal and competitive advantage since their reputation depends on their csr policies and programs. the results obtained from the conducted content analysis show that ten banks (71%) report on their philanthropy and voluntary participation in the betterment of society, while four banks (29%) do not report on their social activities. in the statistical analysis, two independent variables were used: the size and the profit of the banks, in order to determine whether they affect the csr reporting. the conducted statistical tests show that the influence of the bank's profit is not significant. conversely, the size of the bank has a very significant effect on csr reporting. this shows that the size expressed through the total assets of the bank means larger available assets, more 338 m. trpeska, t. tocev, i. dionisijev, b. malchev employees and more stakeholders, which increases their role, both, in the financial sector and from a social point of view. however, the 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(2020). csr or sustainability report: definition, meaning, benefits & examples from companies. retrieved march 31, 2021, from youmatter: https://youmatter.world/en/definition/definitions-csr-report-importantexamples/ objavljivanje korporativne socijalne odgovornosti (csr) banaka i njihova uloga u poboljšanju društva u republici severnoj makedoniji društveno odgovorno poslovanje (dop) je od velike važnosti za kompanije i druge zainteresovane strane, što obavezuje kompanije da uspostave način upravljanja koji će istovremeno voditi računa o ekološkim, socijalnim i etičkim aspektima faktora. ako je korporativna odgovornost vodeći faktor za kompanije, one mogu lako steći konkurentsku prednost u odnosu na druge. ovaj rad istražuje kako banke u republici severnoj makedoniji izveštavaju o dop-u i u kom formatu izveštaja se objavljuju podaci o dop-u. istraživanje se zasniva na metodi analize sadržaja i statističke analize kako bi se utvrdilo da li veličina i profit banaka utiču na izveštavanje o dop-u. uzorak obuhvaćen istraživanjem je 14 banaka kojima je narodna banka republike severne makedonije odobrila rad. rezultati ovog istraživanja pokazuju da veličina banaka pozitivno utiče na izveštavanje o dop-u, dok s druge strane profit na to ne utiče. ključne reči: dop, objavljivanje podataka, banke, severna makedonija facta universitatis series: economics and organization vol. 12, n o 2, 2015, pp. 143 155 attitudes of serbian urban residents toward tourism development  udc 338.48(497.11 kragujevac) darko dimitrovski 1 , veljko marinković 2 , vladimir senić 1 1 faculty of hotel management and tourism, university of kragujevac, serbia 2 faculty of economics, university of kragujevac, serbia abstract. tourism is one of the main driving forces of economic development in modern era, offering new opportunities for employment, increase in living standard and improvement of quality of life in the cities. over time, tourism has had influence on urban environment and its inhabitants, through reshaping their initial attitudes regarding benefits and deficiencies of its further development. urban population is not homogeneous and as such is not uniform in perception related to tourism development, but some general conclusions can be drawn. this study aims to understand perception of residents about tourism development in city of kragujevac, given that city authorities are keen to extend number of tourist visits and overnight stays within their tourism campaign efforts. the objective is to identify key factors related to the significance of tourism development based on attitudes of inhabitants of kragujevac, as well as to determine whether there are differences in attitudes based on age and place of birth of the respondents. through factor analysis seven factors surfaced, including: economic development, healthy and clean environment, development of local communities, sport and entertainment, preservation of environment, culture and real-estate. results suggest that there is statistical difference in attitudes among respondents’ in terms of their age and place of birth. key words: attitudes, tourism development, urban residents, city of kragujevac. introduction tourism in serbia is still in its infancy and as such it is profiled and adapted to tourists and their demands. the largest cities in serbia represent the nation’s most frequently visited tourist destination which is particularly pronounced in the number of overnight stays by foreign tourists. given this, it is rather necessary to examine urban residents’ attitudes towards tourism development and various ways in which it impacts received march 1, 2015 / accepted october 5, 2015 corresponding author: darko dimitrovski faculty of hotel management and tourism, university of kragujevac, vojvođanska 5a, 36210 vrnjačka banja, serbia e-mail: darko.dimitrovski@kg.ac.rs 144 d. dimitrovski, v. marinković, v. senić their local communities. the city of kragujevac was traditionally attractive to tourists. yet, in the past several years the city has experienced full affirmation, with the number of tourists staying in the city steadily increasing. one of the main reasons for increased number of visitors is related to fiat’s heavy investment into the car production facilities located in the city. this resulted in increased demands on behalf of tourists, which reflected both on adjusting overall city’s tourist products and on socio-economic changes among local inhabitants. table 1 changes in the number of tourist arrivals and overnight stays between domestic and foreign tourists from 2007 to 2014 in the city of kragujevac source: tourist organization of the city of kragujevac table 1 shows a noticeable increase in the number of tourist arrivals and overnight stays in both categories, especially when it comes to foreign tourists. in the first phase, the attitude of urban population to more intensive growth in tourist arrivals will be extremely positive, expecting certain benefits, especially in the aspects of future employment, improvement of the standard of living and the opportunity to start small and family businesses. in the period after the initial euphoria, it is expected that urban population over time with a more pronounced increase in the number of arrivals and overnight stays of foreign tourists, will reach a certain saturation among locals and even possibly irritation. therefore, these kind of studies are justified, because tourism development and its future development depend on the attitude and the support of the urban population. 1. theoretical considerations 1.1 attitudes of urban population a “perceived” impact represents a personal view of such impact (ap, crompton, 1998). using this method of observing the attitudes, researchers have found that residents’ attitudes towards tourism are not only the reflections of their perceptions of tourism impact, but also the result of interaction between residents’ attitudes and factors that have an influence on them (lankford et al., 1994). cities themselves are very attractive for tourist visitors because of their specific historical and cultural contents. as tourism in urban environments is developing, both the significant economic effect and socio-cultural liaison between local residents and tourists of different religions, nationalities and interests are created. on the other hand, urban and domestic tourists foreign tourists tourist arrivals overnight stays tourist arrivals overnight stays 2007 12.830 28.938 7.543 16.165 2008 15.710 40.952 7.795 18.905 2009 14.590 31.068 9.007 22.825 2010 16.599 32.464 10.449 23.231 2011 16.778 39.828 13.895 44.819 2012 15.515 34.417 20.846 83.052 2013 16.670 32.528 15.956 50.911 2014 17.833 32.236 15.660 33.761 attitudes of serbian urban residents toward tourism development 145 rural residents do not have the same attitude towards tourism. there is also a significant difference in urban and rural infrastructure because urban infrastructures have better conditions, with larger hotel capacity, enabling them to accommodate larger number of visitors. yet, there are only a few studies related to urban communities that investigate mentioned issues (schofield, 2010; chen, 2000; iroegbu, chen 2002; andriotis, vaughan 2003). snaith and haley (1995) focused their research on the relationship between resident attitudes and support for tourism development in an urban area. they claim that it is necessary to understand urban residents’ needs and desires, and to find the way to direct tourism development in order to accomplish general welfare of the local community. the best solution is to find out more about the urban residents’ attitudes towards tourism development, recognize them and certainly use them as the foundation for developing sustainable tourism strategies. for successful development of tourism industry, effective planning should be undertaken aiming to identify tourists’ demands. studies on host communities have identified factors that influence residents’ attitudes towards tourism and its future development (fredline, faulkner 2000; upchurch, teivane 2000; weaver, lawton 2001; williams, lawson 2001; besculides et al., 2002; tеye et al., 2002). 1.2 attitudes toward tourism support of local residents plays the essential role for regional destinations where tourism is not on a high level of development, which is the case of serbia, because that kind of support improves chances of long-term success. indeed, several studies report that it is not possible to sustain tourism on a destination that lacks support of the local community (ahn, lee, shafer, 2002; twinning-ward, butler 2002; mccool, moisey, nickerson, 2001). variety of studies have shown a connection between tourists’ attitudes and their behavioral intentions (lee, graefe, burns, 2004; yu, littrell 2005). according to andereck and nyaupane (2011) tourism enhances the overall life satisfaction of residents in a community. it would be of a great importance for the tourism industry, especially for regional tourism development projects, to understand urban residents’ attitudes and perceptions in order to evaluate how they affect the future prospects of tourism development in that area or region. before development of tourism is initialized by residents, it is very important to comprehend how they feel about such development. a sustainable tourism industry in a community can be hardly developed without the support provided by a community. residents are absolutely entitled to determine which tourism impacts are accepted and which impacts can cause problems (andereck, vogt 2000). numerous studies on community residents’ perceptions of tourism impacts have been conducted (andereck et al., 2005; choi, sirakaya 2005; sheldon, abenoja 2001; sirakaya et al., 2001; teye et al., 2002; upchurch, teivane 2000). residents’ perceptions are found to be critical regarding distribution of the environmental, social and economic costs and benefits that tourism can cause, which increases sustainable tourism development (twining-ward, butler, 2002). many local communities consider that tourism can induce change in social, cultural, environmental and economic dimensions in the circumstances when tourism activities have been closely connected with the local communities (beeton, 2006; richards, hall, 2000). when tourism development does not affect local residents' lifestyles, residents acquire a higher degree of social tolerance for 146 d. dimitrovski, v. marinković, v. senić visitors, and the interaction between tourists and residents is more satisfying. as some researchers argue, the nature, depth and quality of interaction between tourists and local residents considerably affects tourists’ subjective experiences (sheldon, abenoya, 2001). it is documented in the literature that tourism development has both positive and negative impacts on host communities. thus, as it produces benefits, it also imposes costs (jafari, 2001). when local residents estimate benefits and costs of tourism development, they establish their own attitude toward tourism. hence, tourism should not be regarded as a commercial activity without any significant impact on the natural, human-made, and socio-cultural environments in which it is situated (garrod, 1998). tourist destinations tend to ensure long-term viability that would bring benefits to both the tourism industry and host communities. however, this goal can be difficult to attain because tourism development usually has harmful effect to host communities, so their social, economic, and environmental prosperity can start deteriorating as tourism industry is expanding. as the literature suggests, residents should be included in the planning of tourism development in host communities in order to avoid negative impacts of tourism on host communities (sheldon, abenoya, 2001; choi, sirakaya, 2005). residents’ participation in planning and development stages is also a necessity for sustainability of the development (mowforth, munt, 2003; dyer et al., 2007). if local communities want their traditional lifestyles and values to be respected and to ensure their benefits, they should necessarily involve themselves in decision-making processes (mitchell, reid, 2001; sheldon, abenoja, 2001). an important part of literature refers to the economic, socio-cultural and environmental impacts that tourism development has on resident communities and the residents’ attitudes towards tourism development. both positive and negative aspects of tourism impact have been found in many local communities. residents of any host community may positively accept tourism because it allows job creation, income generation and it also improves community infrastructure (mitchell, reid, 2001; andriotis, 2002). residents who benefit from tourism through employment will have more favourable perceptions than those who do not (fredline, 2004). on the other hand, tourism may be negatively accepted by the residents of host communities because of the socio-cultural and environmental costs it generates (chen, 2000). residents will be able to understand positive and negative aspects of tourism and they will make their conclusions on the basis of balancing benefits and the costs. balance of residents’ perceptions of the costs and benefits that tourism can cause is the most important factor in visitor satisfaction and conditional for success of the tourism industry. in the circumstances when the number of tourists to a particular region increases, residents who initially had excessively positive attitude towards their guests over time developed a certain distance related to long-term benefits of tourism. this change of attitude may arise because the original expectations of the benefits of tourism were exaggerated or because it is believed that only a small number of people will attain the benefits. there are many circumstances under which negative attitudes towards tourism development can arise. most often they refer to poor relationship between locals and authority, problems with distribution of benefits to local residents and exclusion of local population from decision-making process. residents are more tolerant to negative social consequences because they are less important in determining the quality of life. attitudes towards tourism are mainly determined by resident values referring to economic benefits with a clear priority to job creation. according to the research on residents’ attitude, residents who value economic impact will have positive attitudes towards tourism, but negative ones toward environmental and attitudes of serbian urban residents toward tourism development 147 cultural change (walpole, goodwin, 2001; yoon et al., 2001). residents with the most economic gain provide the best support to the tourism industry (harrill, 2004). realizing that the costs of tourism exceed the benefits, residents can develop feelings of resentment and irritation towards tourism, diminishing community satisfaction (ko, stewart, 2002). hardly any work has been devoted to examining residents’ attitudes in developing countries, especially at the stage when the support and involvement of the local community is critical for the overall success of tourism development efforts. usually studies about attitudes of city residents toward tourism development are performed by western researchers. thus, the relevance of the findings in serbia may not fit the existing pattern. tourist destinations, such as the city of kragujevac, have a greater urgency to determine resident sentiments so the chosen path of development has community support, before it becomes too late. this kind of support can be achieved through strong patronization of local residents and their positive attitude towards tourism growth and development wherever it is required. through extending our limited knowledge of city resident attitudes to tourism development, especially in serbia, this research provides significant insights into urban community concerns and priorities in serbia, and also discusses the practical implications of the results. as such, it makes a contribution both in theoretical and practical context. the aim of the survey was to truly understand resident’s views and concerns about potential impacts of tourism development through community perspective, and to facilitate the preparation of a tourism strategy that incorporates needs of the host population and desires of tourists. within this framework, there were two specific objectives: a) to examine the key factors affecting resident attitudes and b) to determine difference between certain age groups and between locally and non-locally born populations. 2. materials and methods the study focuses on the city of kragujevac in central serbia and examines the results from an urban community survey to determine resident attitudes toward tourism development. the location of the study was the city of kragujevac, a big town (835 square kilometers) situated in the central part of serbia. the area has become a popular and well-established tourist destination widely known as former serbian capital. kragujevac is the fourth largest city in serbia, the main city of šumadija region and the administrative centre of šumadija district. it is situated on the banks of the lepenica river. according to official results of the 2011 census, the city has a population of 147,281 inhabitants, while municipality has a population of 177,468. kragujevac was the first capital of modern serbia (1818–1839), and the first constitution in the balkans was proclaimed in this city in 1835. further on, the first full-fledged university in the newly independent serbia was founded in 1838, preceeded by the first grammar school (gimnazija), printworks (both in 1833), professional national theatre (1835) and the military academy (1837). the city of kragujevac, as a tourist destination, is significant due to cultural and historical heritage, natural surrounding, and pleasant and hospitable people. survey was conducted on the territory of the city of kragujevac. the city itself is the fourth largest serbian city located in the central part of the country. after the world war ii, kragujevac developed industry which relied on producing cars, trucks, hunting arms, leather and textile. the city is mainly dependent on further development of industry, but tourism can also generate employment opportunities for a large proportion of local population. http://en.wikipedia.org/wiki/gymnasium_%28school%29 148 d. dimitrovski, v. marinković, v. senić the study on citizens’ attitudes on further tourism development was carried through a survey method. specifically, a five-point likert scale was used, where mark 1 meant that respondent completely disagrees with a specific statement, while mark 5 meant that respondent completely agrees with a statement. survey consists of 29 statements that express various aspects of tourism significance. selection of statements was done through literature review (schofield, 2010; aref, redzuan, gill, 2009; sonmez, teye, sirakaya, 2002; ko, stewart, 2002). essentially, all statements describe different aspects of tourism development in urban areas. for developing countries, further economic progress usually comes from tourism development and this is most evident to citizens who have direct benefits from tourism. the impact of tourism through perception of urban population includes aspects of environment preservation, improvement of sports and entertainment contents, as well as encouraging cultural activities and better understanding among people. for the survey purposes, convenience sample was used. sample consisted of a total of 188 respondents. from a total number of respondents, 83 were males (44.2%), and 105 were females (55.8%). in terms of age, respondents were classified into three groups: younger – up to 30 years of age (60 respondents, 31.9%), middle age – between 30 and 50 years of age (113 respondents, 60.1%) and older – over 50 years of age (15 respondents, 8%). from the perspective of professional status as a criterion for segmentation, 125 respondents have a job (66.5%), while 63 respondents are unemployed (33.5%). finally, 140 respondents were born in the city where the survey was conducted (74.5%) and 48 respondents (25.5%) were born elsewhere, but now live and work there. data gathering was conducted through a personal interview. surveying itself was conducted in the homes of respondents, which gave respondents enough time to think thoroughly about statements in the questionnaire. prior to surveying, the questionnaire was pre-tested on a sample of 30 respondents. data analysis was done in statistical package for social sciences version 13. in terms of statistical analyses, we used independent samples t test, variance analysis (anova) and explorative factor analysis. given that the certain number of statements is related to examining the significance of tourism on further development of local community, we wanted to investigate whether there is a statistically significant difference among those born in the city and those who are born elsewhere, but live and work in the city of kragujevac. for the purposes of this analysis, we used independent t test. comparison of means among different age groups was done based on the results of anova test, given that we used three age groups. in cases when anova test shows significant differences among different groups, it is important to identify among which groups these differences were manifested. for that reason, we conducted post hoc tukey test. finally, by implementing explorative factor analysis (principal component analysis), 29 statements were grouped in several different factors. fig. 1 city of kragujevac, serbia attitudes of serbian urban residents toward tourism development 149 3. results two fundamental objectives of the study were to determine statistically significant differences between different groups of respondents based on 29 statements and to identify factors that highlight significance of tourism for the development of a given society and its national economy. in the first step of analysis, through use of t test, we distinguished five statements where significant differences appeared in attitudes of residents of local origin (respondents born in kragujevac) and residents of non-local origin (respondents born elsewhere). in all five statements, non-local residents showed more positive attitude on the significance of tourism (table 2). table 2 results of independent samples t test locally born non-locally born statements m (sd) m (sd) t tourism development stimulates increased investments 4.02 (0.92) 4.31 (0.55) 2.06 ** tourism development improves coverage with public toilets 3.45 (1.05) 3.73 (0.79) 1.93 * tourism development improves of environment preservation 3.59 (1.16) 3.90 (0.90) 1.86 * tourism development improves environmental consciousness of local population 3.41 (0.91) 3.67 (0.95) 1.68 * tourism development improves shopping options 3.51 (0.93) 3.83 (0.72) 2.44 *** notes: m – mean; sd – standard deviation; *** p < 0.01; ** p < 0.05; * p < 0.1 * table refers only to statements where there are statistically significant differences among two groups of respondents. when we speak about forming segments on the basis of age, statistically significant difference appeared only for three statements. results of anova test are shown in table 3. it can be inferred that different age groups of respondents have homogeneous attitudes on different aspects of tourism significance. nevertheless, post hoc tukey test has identified among which groups there are significant differences. in the case of statement “tourism development improves environmental consciousness of local population” older respondents are statistically different in their views on this issue (arithmetic mean – m = 4.21) in comparison to younger respondents (m = 3.35) and mid-age respondents (m = 3.45). when we speak of statement “tourism development helps lower the noise” there is a significant difference between younger respondents (m = 2.57) and mid-age respondents (m = 2.18). finally, for the statement “tourism development contributes to cleaner streets” attitude of mid-age respondents (m = 2.62) is significantly different from those respondents belonging to older population (м = 3.29). table 3 results of anova test statements f p tourism development improves environmental consciousness of local population 5.27 0.006 *** tourism development helps lower the noise 2.60 0.077 * tourism development contributes to cleaner streets 3.11 0.047 ** notes: *** p < 0.01; ** p < 0.05; * p < 0.1 * table refers only to statements where there are statistically significant differences among two groups of respondents. 150 d. dimitrovski, v. marinković, v. senić table 4 results of factor analysis factors factor loading eigenvalue % of variance explained cronbach’s alpha f1: economic development 3.300 11.378 0.80 tourism development improves infrastructure 0.763 tourism development improves entertainment options 0.685 tourism development generates employment opportunities 0.664 tourism development assures economic benefits to small business 0.632 tourism development stimulates increased investments 0.607 tourism development improves hospitality options 0.512 f2: healthy and clean environment 3.105 10.706 0.82 tourism development helps lower the noise 0.833 tourism development helps lower the traffic congestion 0.812 tourism development helps lower air-pollution 0.751 tourism development contributes to cleaner streets 0.655 f3: development of local communities 2.896 9.985 0.76 tourism development improves tourist signalization 0.713 tourism development improves possibilities for development of local communities 0.665 local population has great benefits from tourism development 0.615 tourism development has an impact on improvement of living standard of a local community 0.608 f4: sport and entertainment 2.428 8.374 0.69 tourism development increases areas under parks and spaces for recreation 0.773 tourism development increases variety of cultural and sport activities 0.718 tourism development improves shopping options 0.681 f5: preservation of environment 2.387 8.232 0.77 tourism development improves coverage with public toilets 0.793 tourism development improves of environment preservation 0.763 tourism development increases the number of parking lots 0.560 tourism development improves environmental consciousness of local population 0.536 f6: culture 2.201 7.590 0.70 tourism development improves understanding and acceptance of differences 0.732 tourism development improves preservation of our culture and tradition 0.729 tourism development improves cultural exchange and better understanding among people 0.610 tourism development improves preservation of cultural and historic heritage 0.514 f7: real estate 1.387 4.784 tourism development results in increase of real-estate prices 0.706 notes: extraction method: principal component analysis: rotation method: varimax: only loadings greater than 0.5 are reported; total percentage of explained variance 61.047%; kmo = 0.850; bartlett test of sphericity: p = 0.000 attitudes of serbian urban residents toward tourism development 151 in order to identify a lesser number of factors we conducted explorative factor analysis (principal component analysis with varimax rotation). by implementing kaiser-meyer-olkin (kmo) test and bartlett’s test of sphercity we tested the adequacy of using factor analysis. in both cases we obtained adequate factor analysis (kmo = 0.850; bartlett’s test of sphericity: p = 0.000). varimax rotation identified a total of seven factors (economic development, healthy and clean environment, development of local communities, sport and entertainment, preservation of environment, culture and real-estate). results of explorative factor analysis are presented in table 4. all factors have a high level of reliability. values of cronbach’s alpha coefficient for obtained factors are higher than required minimum threshold which is 0.6 (robinson et al., 1991). three statements (tourism development allows easier access to information of local significance; tourism development improves the quality of public services; tourism development results in increase in personal income) are excluded from further analysis, given that they were not sufficiently correlated with any of the formed factors. hair et al. (1995) suggest that only factor loadings higher than 0.5 should be considered as significant. in that context, if a certain statement has a loading lower then mentioned threshold, then it is excluded from the further analysis. the most statements grouped around the first factor – economic development (a total of six statements). factor related to economic development describes the largest portion of variance, and groups statements that are dealing with improving tourist offering (improving of hospitality services and entertainment options) as well as with economic consequences of tourism development, including: employment opportunities, stimulating investments, infrastructure improvement. around factor that is related to real-estate, only two statements grouped (tourism development results in increase of real-estate prices, tourism development results in increase in personal income). however, given the level of correlation of statement “tourism development results in increase in personal income” with a factor “real-estate” is 0.4, this statement was excluded from the further analysis. obtained factors describe 61% of total variance. 4. discussion two basic objectives of the study are: determining statistically significant differences in attitudes of respondents on the impact of tourism development in terms of age and place of birth, as well as identifying factors that are significant for economic development and society in general. results indicate statistically significant differences in five statements in terms of attitudes locally and non-locally born citizens of kragujevac. in all five statements it is noticeable that non-locally born inhabitants are more positive in terms of the significance of tourism, especially, that tourism stimulates investments, preserving environment and improvement of ecologic state of mind, but also in terms of wider range of available services and products. sheldon and var (1984) in their study reveal relatedness of attitudes towards tourism between locally and non-locally born inhabitants, while um and crompton (1987) in their research show that the more an inhabitant is connected to the local community, through birth, heritage or duration of stay in it, they has less positive attitude towards tourism development, with increased expectations of negative effects on local community and quality of environment. gursoy and rutherford (2004) stress also the aspect of emotional relatedness to local community. gursoy and rutherford (2004) and nicholas, thapa and ko (2009) used place of birth or the period of 152 d. dimitrovski, v. marinković, v. senić residence in the locality as key factors influencing the perceptions and attitudes of residents towards changes or developments in their community. through utilizing anova test we determined that different age groups of respondents have homogeneous attitudes in general on different aspects of tourism significance, even though there are significant exceptions among certain groups. namely, between older and younger population there is a difference in attitudes on whether tourism raises environmental consciousness. between younger and mid-aged population there is a difference on perception of noise resulting from tourism development and finally, there is a difference in attitudes of mid-aged and older population on waste generation as a consequence of tourism development. age is stressed as an important factor in terms of attitude of urban population towards tourism development. in their study on australian golden coast, tomljenović and faulkner (2000) found little difference according to residents’ age. older respondents are equally supportive of tourism development as younger respondents, even showing that older generations are more tolerant towards foreign tourists and are less worried of tourism’s harmful effects on environment. cavus and tanrisevdi (2002), in the study they conducted in kuşadasi, turkey, found a significant relation between age, duration of stay and attitude towards tourism development, with older population having a more pronounced negative attitude towards tourism development. according to weaver and lawton (2001) younger residents are generally more supportive of tourism development. based on the conducted factor analysis, seven factors were determined, including: economic development, healthy and clean environment, development of local communities, sport and entertainment, preservation of environment, culture and real-estate. economic development surfaced as the most important of all seven factors. this was expected in a current economic situation if we take into consideration that local communities are directed towards tourism in order to generate increase in revenues, employment and quality of life. tourism development is often linked to economic development, while ignoring other segments of improving quality of life in urban settings that are a direct consequence of tourism development. factors such as healthy and clean environment and preservation of environment nowadays are getting greater global and social significance, and are including statements as lower noise, air-pollution, waste generation, as well as improvement of environment and raising environmental consciousness of urban population. in addition, tourism development is frequently found in conflict with preserving environment, but if followed with adequate strategy, tourism development can lead towards improving environment. it is important to stress the factor of local community as one of the fundamental reasons for tourism development which improves quality of life and living standard of population. among mentioned factors, as very important elements of improving tourist offer are sport and entertainment (recreation, sports activities, wider options for shopping) and culture (improved preservation of cultural-historic heritage, preservation of culture/ tradition and better understanding among people). real-estate as a factor includes statement that tourism development leads to increase in housing prices, which is somewhat expected, given that with the development of tourist destination, housing market becomes important. attitudes of serbian urban residents toward tourism development 153 conclusions tourism is increasingly perceived as a potential source providing local employment opportunities, tax revenues, reducing poverty and economic diversity. currently, kragujevac, with its undergoing revitalization of industry, has put tourism as a priority, with an objective of bringing businesses and tourists into the city in order to help boost the local economy. significance of conducted study is twofold – theoretical and practical. the study is directed onto two different aspects of development, planning of tourism development with giving support to economic activities and better understanding of the needs of local community and ways of solving the existing issues. research is also important because of specific domain that it covered, which so far has not been a subject of other studies. research itself has some limitations and they are related to classifying groups of respondents into locally and non-locally born urban population. criteria for respondents selection was that they live in kragujevac, after which they were classified based on their place of birth, and not on the basis of their duration of living in the city, so we were unable to gain data on time lived in the city and emotional liaison that results from the time spent in the city, which on the other hand, directly affects attitudes on the impact of tourism development. findings of this study suggested that understanding of local residents’ attitudes toward any form of tourism development requires an examination of a set of very complex and interrelated factors. some residents are more concerned about economic benefits, while others are more concerned regarding specific social, cultural or environmental benefits. results of this study suggested that seven factors influence attitudes and especially impact perceptions of tourism development. according to the results of the study, future research should link local government as a developer of tourism and policy makers with attitudes of residents in a manner that will help understand interaction among perceptions of tourism development and their long term needs. finally, it would be interesting to determine if there is a statistically significant difference among urban and rural populations. references 1. andereck, k.l., valentine, k.m., knopf, r.c., vogt c.a. 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(2001) local attitudes towards conservation and tourism around komodo national park, indonesia, environmental conservation, 28: 160-166. 43. weaver, d., lawton, l. (2001) resident perceptions in the urban-rural fringe, annals of tourism research, 28: 439-458. 44. williams, j., lawson, r. (2001) community issues and resident opinions of tourism, annals of tourism research, 28: 269-290. 45. yoon, y., gursoy, d., chen, j. (2001) validating a tourism development theory with structural equation modeling,. tourism management, 22: 363-372. 46. yu, h., littrell, m.a. (2005) tourists’ shopping orientations for handcrafts: what are key influences? journal of travel and tourism marketing, 18 (4): 1–21. odnos urbanog stanovništva u srbiji prema razvoju turizma razvoj turizma je jedan od pokretača ekonomskog razvoja u savremenom dobu, omogućavajući nove mogućnosti za zapošljavanje, rast standarda i kvaliteta života u gradovima. turizam je vremenom uticao na gradsku sredinu i stanovništvo menjajući njihove prvobitne stavove o prednostima i nedostatcima njegovog razvoja. gradsko stanovništvo nije homogeno i kao takvo nije jedinstveno u percepciji razvoja turizma, ali se ipak mogu doneti neki opšti zaključci. u radu se istrazuju stavovi koje lokalno stanovnistvo ima prema razvoju turizma. cilj studije je da, putem studije slučaja u gradu kragujevcu, razume percepciju urbanog stanovništva kada je u pitanju razvoj turizma, posebno u svetlu napora koje gradske institucije ulažu u povećanje broja turističkih poseta i noćenja gostiju. ilj rada je da izdvoji ključne faktore za razvoj turizma na osnovu stavova stanovništva grada kragujevca, kao i da utvrdi da li postoje razlike u stavovima u zavisnosti od starosti i mestu rođenja ispitanika. faktorskom analizom izdvojeno je šest faktora: ekonomski razvoj, zdrava i čista sredina, razvoj lokalnih zajednica, sport i zabava, očuvanje životne sredine, kultura i nekretnine. rezultati pokazuju da postoje statistički značajne razlike u stavovima ispitanika kada su u pitanju starost i mesto rođenja. ključne reči: stavovi, razvoj turizma, urbano stanovništvo, grad kragujevac plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 1, 2014, pp. 75 84 review paper concentration risk for placed assets by the largest banks in serbia  udc 347.734(497.11) nataša spahić 1 , petar tomić 2 1 university in novi sad, faculty of science, novi sad, serbia 2 otp banka srbija, finance division, novi sad, serbia abstract. the fact that the u.s., in the recent past, faced a financial collapse which led to the global economic crisis, and the fact that the euro zone felt the financial collapse of greece about five years ago has caused the public sector in serbia, as well as all european countries to be seriously shaken. the significant decrease of transactions in the money market has resulted in the increase of exchange rates, the decline in interest rates, inflation and a decrease in the gdp. this has all been reflected on the economy, which has drastically reduced the number of employees, which has had a direct impact on the living standards of the population with the decrease in living standards, people are in a weaker position to pay back loans, which in turn can lead to some global crisis. the vicious circle is hard to break, and the european and world public is directing its forces, on one hand, to the recovery of the economy and on the other to bailing out banks. in this situation, it is not easy for banks to decide how to optimize the risk they are exposed to, i.e., which industrial branch, for what term and which region is the most optimal for investments. the authors have conducted a study, the results of which illustrate the current situation in serbia and the trends in serbia's largest banks. key words: bank, loan, concentration, risk, activity, region. introduction the problems facing all economic entities in serbia are mutually connected. the range of problems is broad from global ones to those specific to one branch activity. the economic crisis is universal, the state has no funds, the industry is in ruins, the gdp is low, unemployment and inflation are high, living standards are low and so on in a circle. a way out of this situation cannot happen abruptly, solutions must be systemic. however, how to begin the fight and what to expect?  received february 20, 2014 / accepted march 31, 2014 corresponding author: nataša spahić faculty of science, dositeja obradovića 3, 21000 novi sad, serbia e-mail: natasa.spahic@dmi.uns.ac.rs n. spahić, p. tomić 76 the authors of this study started from the assumption that banks are business subjects who are the quickest at finding a solution. namely, before banks there is the largest set of laws, those taken from developed countries which are slowly pulling themselves out of the global crisis. additionally, banks have the strongest government oversight in terms of the practical application of these laws and respect for recommendations given by the basel committee and the oecd. in addition, primarily foreign banks operate on the serbian market who are trying to break the vicious circle by implement solutions from their own countries. the national bank of serbia insists on constant improvements to the existing methods of risk management, control and management of the bank's processes. however, nothing comes of itself, and so banks too have had to adapt to the new conditions and circumstances and to invest considerable efforts in order to develop an adequate risk management system. in terms of the banking industry, concentration of risk holds an important place in literature and represents a current topic discussed in international academic circles. there are a lot of models for measuring concentration of risk and they are constantly being developed. banks have focused on this issue and, as already mentioned, are obliged to apply the minimum prescribed by the basel committee, which has been implemented in the national legislation of our country. precisely for these reasons, the authors have not chosen to view concentration of risk from the perspective of the banking industry, but from the perspective of industry that uses banking services. the authors, by using the methodology of bank audits of balance sheet items for loans given and investments, place the focus on the largest banks in serbia, where the criterion for the size of the bank is the amount of total assets of the bank. the database includes publicly disclosed audit reports for 9 of the largest banks in serbia, that is the balance sheet positions for loans and investments in the largest banks in serbia. it is important to note that the analyzed position for loans and investments is comprised of:  cash and cash equivalents (with special attention to foreign currency accounts that the banks have with other banks);  revocable deposits and loans (in the vast majority of cases these are repo transactions 1 );  receivables from interest, fees and other;  loans and deposits given;  securities (held for trading, held to maturity and held for sale);  shares (equity participation in other entities);  other investments. the aim of the research is to illustrate in which industries serbian banks are investing assets in times of economic crisis, as well as the maturity of those investments and the geographic area which they prefer. the research will also predict the future trend of activities. 1 repo transactions (repurchase agreement) with securities means the purchase and sale of securities in which the contracting parties agree that at the date of purchase the seller sells the securities to the buyer, who pays the purchase price for the security, at the same time the buyer is obligated to on the contracted date resell the same securities to the seller, who is obligated to pay the agreed repurchase price. concentration risk for placed assets by the largest banks in serbia  77 1. a review of the largest banks in serbia serbian banks are ranked according to the criteria of the largest balance sheet sums (total assets measured in billion dinars). the study covered 9 of the largest banks in serbia as on december 31, 2012. figure 1 illustrates the ranking of these banks by rating their participating in the total assets of the entire serbian banking sector. fig. 1 overview of the top 9 banks in serbia in 2012* *data source: nbs (2013): kontrola poslovanja banaka, izveštaj za iv tromesečje 2012. godine, http://www.nbs.rs/internet/english/55/55_4/index.html (15.06.2013) the authors note that 68.7% of the total balance sheet assets of all serbian banks have been covered by the research, or 68.7% of the serbian banking market, which represents an adequate sample for making the relevant conclusion using the audit methodology. 2. concentration of risk for investments of the largest banks concentration risk is risk allocation according to some pre-defined criteria. the professional literature, under the term "concentration of risk" implies the direct or indirect exposure to the same or a similar source of risk occurrence. the criteria for concentration of risk presented in the study are industrial activities, regions and maturity of investments. this is important from the point of view of the bank, because the bank determines the objectives for future operations based on risk concentration. for example: low-risk regions will be attractive for banks to open up more branches in those cities, in order to spread its business network. also, banks will have more concerns toward highrisk activities, as such they will apply more stringent measures for loans, as they will, depending on the liquidity, decide whether to invest assets for a short or long term. 2.1. concentration of risk according to industrial activities when investments by clients are in question, it is important to the bank which activities the client performs. those more profitable activities will certainly carry less 413 324 244 200 203 169 168 154 104 3.6% 5.4% 5.9% 5.9% 6.9% 7.0% 8.5% 11.3% 14.4% banca intesa komercijalna banka unicredit bank raiffeisen bank societe generale eurobank efg hypo alpe adria aik banka vojvođanska banka http://www.nbs.rs/internet/english/55/55_4/index.html n. spahić, p. tomić 78 risk, because the likelihood of those clients paying back their loans is greater, given that they have a profitable business. on the other hand, there are industry branches which have been in a crisis in the past few years and banks will be cautious during loan disbursement to those clients. on figure 2 (figures are in millions of dinars) we can see the analyses of risk concentration for loans and investments by sectors for the period from 2010 to 2012, which is scaled in a way to show in which industries banks invest the most: fig. 2 risk concentration by industries* *data source: official audited reports available on the bank’s web presentations from the results it is evident that there is no activity that can be singled out as the one most invested in, but it can be noted that loans to the population occupy a large share of 133 89 104 2010 2011 2012 financial institutions 58 79 78 2010 2011 2012 public sector and state institutions 27 27 35 2010 2011 2012 agriculture 105 115 105 2010 2011 2012 construction 226 248 264 2010 2011 2012 mining and processing industries 14 14 12 2010 2011 2012 energy supply 129 156 181 2010 2011 2012 transport, hospitality and other 227 226 241 2010 2011 2012 trade 310 331 363 2010 2011 2012 population 75 75 100 2010 2011 2012 other industries concentration risk for placed assets by the largest banks in serbia  79 total investments with all banks (on average 2 that is about 24% for all three years observed). trade, as well as mining and the processing industry, are among the activities that make up about 17% of total investments, on average. viewing relative changes in 2011 compared to 2010, it can be seen that the largest increase in exposure was noted in the public sector and state institutions, as well as transport, tourism, hospitality and the service industry, 35% and 21%, respectively. positive displacement, but in smaller percentages, was recorded in mining and processing industries (10%), construction (9%), energy supply (7%) and population (4%). imperceptible changes have occurred in agriculture (1% growth), trade and other activities (almost unchanged state). the decrease was only noticeable in financial institutions (down 33%). noting again the relative changes, but now in 2012 compared to 2010, a reverse situation is noticeable. investments in the public sector and state institutions, where we had the largest increase in exposure, now note the largest decrease in gross exposure in the amount of 24%. a decrease in 18% and 9% occurred in energy supply and construction, respectively. mining and the processing industry, trade and loans to households rose by 6%, 7% and 10%, respectively. traffic, hospitality, tourism and service industries have felt a higher growth of 16% and a similar increase (17%) was reported in the financial sector. investments in agriculture (30%) and other activities (32%) have had the highest increase. only mining and processing industries, traffic, tourism, hospitality and service activities have had a constant growth over all of the three years the interesting fact is that largest serbian banks have been continuously increasing their investments in the entrepreneurs sector during the observed period, which we can see in figure 3: fig. 3 lending frowth entrepreneurs* *data source: association of serbian banks (2013): study about contribution of banking sector in the economy and society of serbia 2.2. concentration of risk according to maturity of investments maturity of investments is very important from the point of view of a banks liquidity. the bank must have enough of both short-and long-term assets. the first group is more liquid and those investments are more easily converted into cash to be able to cover some 2 it is a weighted average, while the total gross exposure of banks was used as a weight. 51,768 79,740 114,067 2010 2011 2012 +48% n. spahić, p. tomić 80 unexpected expenses. additionally, short-term investments (those that mature within one year) carry less risk than long-term (those that mature in more than one year), because it is easier to predict what will happen in the following year, rather than what will happen in five or more years. long-term are riskier (the likelihood that the client will not return funds is greater), but that is also the reason that they are more profitable as they enable an inflow of money into the bank over the long run. it is important to note that the study only included maturity of balance sheet items for loans and deposits given, as that is the most important item for credit risk, as well as the problem defined as the subject of research herein. the fact that other balance sheet items, whose maturity is usually up to a year, do not have as much importance on the balance sheet of the bank and its concentration of risk by maturity, represents an additional problem for serbian banks the problem of a lack of diversification of maturity which has led serbian banks to the problem of reconciliation the maturity of funding sources with the maturity of obligations it was precisely this problem which confronted the serbian economy with the fact that the banks were not their "allies". short-term investments consist mostly of loans per current accounts (i.e. overdraft loans) for natural as well as legal entities. it also includes loans to industry and small and medium-sized companies which they use to fund some unexpected expenses. investments with maturities of 1 to 5 years comprise the largest group of these investments (on average). this includes cash, consumer and auto loans, credit cards and other types of loans to natural persons, while for legal entities there are loans for working capital and investment loans. the group of loans with a maturity of over 5 years is mostly residential and mortgage loans with a maturity of up to 30 years. figure 4 illustrates the trend of allocating loans according to their residual maturity, looking at the weighed average for the largest banks in serbia. fig. 4 distribution of total gross loans according to remaining matury* *data source: official audited reports available on the bank’s web presentations 47% 42% 39% 32% 34% 38% 21% 24% 23% 2010 2011 2012 0 1 years 1 5 years over 5 years concentration risk for placed assets by the largest banks in serbia  81 what can be seen from the research is that the share of short-term investments decreases every year (in 2010 it was 47% while in 2012 it was 39%), while the share of loans with a maturity of over one year increases. this attests to the fact that the banks intend to do business on the territory of serbia for a long time and that they are investing into our economy on the long run, which is certainly encouraging. 2.3. concentration of risk by region a bank, as an economic subject, never operates within one geographic area rather it operates through its network of branch offices which are geographically dispersed. consequently there are those regions which are more profitable for banks and those that are less. additionally, banks are active on the interbank market, both at home and abroad. more developed regions carry less risk and therefore banks focus more on them. looking at the operations of the 9 largest banks in serbia the conclusion imposes itself that banks invest mainly in belgrade and its surroundings, as well as in vojvodina, with an emphasis on the south bačka district. the serbian economy cannot be satisfied with this policy because in this manner there isn't even a hidden hope that the situation in the economy of the less developed regions will improve. the following chart (figure 5) presents the geographical concentration of credit risk in the largest banks in serbia (in billions of dinars): fig. 5 overview of the geographic concentration of the serbian largest banks* *data source: official audited reports available on the bank’s web presentations as for investments into serbia, leading are investments in and around belgrade, as the largest and most developed region of serbia. investments in vojvodina take a second place in the amount of investments by serbian banks, while investments in other parts of serbia (central and southern serbia) are less represented. below (figure 6) we present a summary of investments in serbia, europe and other countries, in billions of dinars. 401 358 386 142 135 99 116 105 88 2012 2011 2010 belgrade vojvodina central and southern serbia n. spahić, p. tomić 82 fig. 6 overview of the geographic concentration of the serbian largest banks* *data source: official audited reports available on the bank’s web presentations as might be expected, banks in serbia invest the most in serbia. it is noticed that the investments in serbia are increasing respectively, which again testifies to the fact that the banks are intent on staying and expanding their operations in this region. on the other hand, the fall in investment in european countries and other countries throughout the world is evident, which means that the serbian banking industry lacks great power and still needs the help of foreign investors. conclusions from the enclosed research we can conclude that in our country banks represent the main and almost only source of equity for industry, but those investments are insufficient due to the following facts:  serbian banks invest the most into the population.  out of all branches of industry the most is invested in mining and the processing industry.  traffic, catering and other service activities are also supported by serbian banks.  serbian banks classify the construction industry and energy supply in the highest risk branches of industry.  "there is hope" for the agricultural industry but the banks still hugely rely on state support.  the banks feel the need of the industry for long-term investments, but as of yet have not made significant progress in terms of granting long term investments – although they have sense for the industry needs for restructuring/reprograming of the old loans.  the industry can receive cash only in the short term.  the banks will support you more often if you do business in belgrade and vojvodina than in central and southern serbia. all of the above stated facts indicate that the serbian banks behave in a manner compliant with the macroeconomic conditions of the environment. they apply the safest 1,103 987 944 36 43 92 2 3 6 2012 2011 2010 serbia europe other countries concentration risk for placed assets by the largest banks in serbia  83 investment scenario, i.e. take as few risks as possible. it is obvious that banks need support from their parent companies, as well as the support of the state. the crisis in the region has caused all of the above elements of a "vicious circle" to need financial help which is most difficult to receive. the only safe conclusion is that it is possible, even though you have lost several battles, to win the war. the presented research clearly shows the trend that the largest banks in serbia are increasing investments into the domestic economy. the amount of investment is not sufficient, just as the maturity of investments is not compatible with the real needs of industry. however, despite the fact that the diversification of the loan portfolio is insufficient and slow, the development of the region is not impossible. respecting the fact that our economy and our country in general carry a great risk, the trend indicating that banks are willing to take a risk is encouraging, as evidenced by the presented investment growth both from the perspective of branches of industry and from the point of maturity of investments. the road is bumpy and slow but can bring expected progress. references 1. basel committee on banking supervision (2013), the non-internal model method for capitalizing counterparty credit risk exposures consultative document 2. basel committee on banking supervision (2006), studies on credit risk concentration: an overview of the issues and a synopsis of the results from the research task force project (working papers no. 15) 3. hibbeln m., (2010), risk management in credit portfolios: concentracion risk and basel ii 4. hunseler m. 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http://www.bancaintesa.rs/code/navigate.aspx?id=178 http://www.bancaintesa.rs/code/navigate.aspx?id=178 http://bif.rs/2013/06/kako-resavati-pitanje-problematicnih-kredita-u-jugoistocnoj-evropi/ http://www.eurobank.rs/finansijski-izvestaji/finansijski-izvestaji.881.html http://www.eurobank.rs/finansijski-izvestaji/finansijski-izvestaji.881.html http://www.hypo-alpe-adria.rs/sr/content/finansijski-pregled http://www.hypo-alpe-adria.rs/sr/content/finansijski-pregled http://www.kombank.com/srp/tekst.asp?id=7 http://www.kombank.com/srp/tekst.asp?id=7 http://www.nbs.rs/internet/english/55/55_4/index.html http://raiffeisenbank.rs/code/navigate.aspx?id=46 http://raiffeisenbank.rs/code/navigate.aspx?id=46 http://www.societegenerale.rs/index.php?id=182 http://www.societegenerale.rs/index.php?id=182 http://www.unicreditbank.rs/?jez=&p=7 http://www.unicreditbank.rs/?jez=&p=7 http://www.voban.co.rs/sr/home/o_nama/publikacije/godisnji_izvestaj/ http://www.voban.co.rs/sr/home/o_nama/publikacije/godisnji_izvestaj/ n. spahić, p. tomić 84 rizik koncentracije plasiranih sredstava najvećih banaka srbije činjenica da su se sad u bliskoj prošlosti suočile sa finansijksim krahom što je dovelo do svetske ekonomske krize, kao i činjenica da je evrozona pre oko pet godina osetila finansijski krah grčke, uzrokovale su da se stanje javnog sektora srbije, kao i svih evrtopskih zemalja ozbiljno poljulja. transakcije na novčanom tržištu su znatno opale, što je imalo za uticaj porast deviznih kurseva, opadanje kamatnih stopa, rast inflacije i pad bdp-a. to se sve reflektovalo i na privredu, u kojoj se drastično smanjio broj zaposlenih, što je imalo direktan uticaj na životni standard stanovništva. sa smanjenjem životnog standarda, ljudi su u slabijoj mogućnosti da vraćaju uzete kredite, što opet može dovesti do neke globalne krize. začarani krug je teško prekinuti, a evropska i svetska javnost usmeravaju svoje snage s jedne strane na oporavak privrede, a s druge strane na spašavanje banaka. u takvoj situaciji bankama nimalo nije lako odlučiti na koji način da optimizuju rizik kojem se izlažu tj. u koju industrijsku granu, na koji rok i u koju regiju je najoptimalnije plasirati sredstva. autori su sproveli istraživanje čiji rezultati očitavaju trenutno stanje u srbiji ali i trendove najvećih srpskih banaka. ključne reči: banka, kredit, koncentracija, rizik, delatnost, regija, ročnost. facta universitatis series: economics and organization vol. 17, n o 2, 2020, pp. 127 139 https://doi.org/10.22190/fueo191118010v © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper developing a model to predict corporate bankruptcy using decision tree in the republic of serbia 1 udc 347.736(497.11) sanja vlaović begović 1 , ljiljana bonić 2 1 school of business novi sad, serbia 2 university of niš, faculty of economics in niš, serbia abstract. decision trees made by visualizing the decision-making process solve a problem that requires more successive decisions to be made. they are also used for classification and to solve problems usually addressed by regression analysis. one of the problems of classification that arises is the proper classification of bankrupt companies and non-bankruptcy companies, which is then used to predict the likelihood of bankruptcy. the paper uses a random forests decision tree to predict bankruptcy of companies in the republic of serbia. the research results show the high predictive power of the model with as much as 98% average prediction accuracy, and it is recommended for auditors, investors, financial institutions and other stakeholders to predict bankruptcy of companies in republic of serbia. key words: decision trees, bankruptcy, prediction, model jel classification: c44, c53, g33 1. introduction a quantitative method that iteratively detects links between attributes, data subject to testing, is called data mining. data mining relies on decision trees that visualize the decision-making process to solve a problem that requires several successive decisions (sikavica, et al., 2014, p. 476). decision trees are often used to solve classification problems, i.e. to determine belonging to a particular class, and to solve regression problems. received november 18, 2019 / revised march 18, 2020 / accepted march 25, 2020 corresponding author: sanja vlaović begović school of business novi sad, vladimira perića – valtera 4, 21102 novi sad, serbia e-mail: sanjavbegovic@gmail.com 128 s. vlaović begović, lj. bonić one of the classification problems is the proper classification of bankruptcy and nonbankruptcy companies, thus making a prediction of corporate operations. identifying business difficulties that lead to bankruptcy is a core task for numerous stakeholders. banks, managers, investors, customers, suppliers avoid major losses by timely discovering unstable operations leading to bankruptcy. however, forecasting bankruptcies under current business conditions has become an increasingly significant challenge for analysts due to the globalization and complexity of companies, as well as the fact that certain economists perceive the initiation of bankruptcy as a strategic solution for the limitation of liability arising from court-imposed penalties (kliestik et al., 2018). various bankruptcy prediction models have been developed bearing in mind the significance of bankruptcy forecasting to numerous market participants and factors that affect the forecasting accuracy. decision trees are categorized as contemporary models which, based on input data (numeric and categorical), predict bankruptcy. the remainder of this paper is structured as follows. first, the theoretical and methodological basis of the decision tree is given, as well as an overview of some of the models used to predict bankruptcy. the advantages and disadvantages of the decision tree are highlighted as well as the previous research results in this area. finally, a decision tree is implemented to predict corporate bankruptcy in republic of serbia. an overview of the influence of individual variables on the prediction result is also given. 2. theoretical and methodological bases of models for corporate bankruptcy prediction using decision tree decision trees can be a graphic overview of decision making by experts based on a hand-created tree. in addition to the expert’s decision, decision trees can rely on data finding its mutual links to obtain predictive values. such trees are called classification and regression trees (cart) and were developed by a group of american statisticians, breiman, friedman, olshen, and stone (1984). the goal of classification trees is to assign attributes to a subset of known classes. specifically, the attribute space is divided into several different regions that do not overlap. a new object is determined to belong to one of the regions based on the values of the attributes describing the object (for example, corporate business operations are described by financial ratios). the object will be assigned to the class that dominates the region in which the object is located (james, et.al. 2013 p. 311) (for example, the class may be to continue business or go bankrupt). the regression trees were developed in a similar way to the classification trees, except that the result of the analysis does not represent belonging to a class but an approximation of an unknown regression function. regression trees are estimated using non-parametric regression functions (härdle & simar, 2007, 401). the decision tree is based on recursive, binary splitting data, moving from a higher (tree) to a lower (leaf) level. each tree node represents one test of the input attribute (variable) value, and each branch stemming from the node shows one of the possible attribute values. a leaf represents a class to which subset attributes belong (stanojević, et al. 2017 p. 94). the tree is then formed by splitting the input dataset into subsets based on data value testing. the figure 1 shows a decision tree for predicting company bankruptcy, classifying each company as succeeding or failing. assuming one of the attributes is ratio developing a model to predict corporate bankruptcy using decision tree in the republic of serbia 129 1 – working capital/total assets, then the first splitting rule is to branch the tree into two sides, as follows (gepp & kumar, 2015, p. 398):  ―left sub-tree, if ratio is 1 ≤ 0,11, or  right sub-tree, if ratio is 1 > 0,11‖. fig. 1 an example of a decision tree classifying company operations source: gepp, a., & kumar, k. (2015). predicting financial distress: a comparison of survival analysis and decision tree techniques. procedia computer science, 54, p. 398. in addition to classification and regression trees (cart), there are other popular algorithms that use top-down recursive data splitting, such as id3 (quinlan, 1986) and c4.5 (quinlan, 1993). in the decision tree development process, the c4.5 and cart algorithms include two conceptual phases, namely: the growth phase and the tree pruning phase. other algorithms only apply the growth phase when developing the decision tree. methods such as bagging, random forests and boosting methods are often used when developing the decision tree. the paper uses the random forests method, which is an advanced bagged decision tree. the difference to the bagged tree is that the modified decision tree algorithm ―at each candidate split in the learning process selects a random subset of features‖ (james, et al. 2013 p.319). 3. an overview of studies on the use of the decision tree to develop bankruptcy prediction unlike the frequent use of neural networks to predict corporate bankruptcy, researchers in the field of economics do not widely use decision trees. although the first model was developed back in 1985, studies scarcely address the decision tree application to predict corporate bankruptcy. 1) halina frydman, edward altman, and duen-li kao (1985) were the first to apply the decision tree, as a non-parametric model, to predict corporate bankruptcy and circumvent assumptions imposed by discriminant analysis and logistic regression. they used a recursive partitioning algorithm to develop a decision tree. the sample consisted of 58 bankrupt 130 s. vlaović begović, lj. bonić companies and 142 active manufacturing and trading companies. the survey covered the period from 1971 to 1981. the authors used 20 financial ratios they considered significant for predicting bankruptcy in previous studies. in relation to the number of input variables, the authors developed 2 decision tree models (larger, more complex, and smaller, simpler decision trees) and 2 models based on discriminant analysis (one model containing 4 and one with 10 variables). the research results showed the superiority of the decision tree model over the discriminant analysis models. in line with expectations, smaller decision tree showed better results, while complex decision trees highlighted the potential risk of over-training and poorer predictive results. 2) thomas e. mckee (1995a) implemented the id3 inductive inferencing algorithm to predict the bankruptcy of 60 us publicly traded companies. half of the sample companies were bankrupt companies and the other half were active companies. the survey covered the period from 1986 to 1989. the input variables were 8 financial ratios (mckee, 1995a. p. 30):  ―net income/total assets  working capital/total assets  current assets/current liabilities  cash/total assets  current assets/sales  long-term debt/total assets  accounts receivable/sales revenue‖. as the final research result, the author proposed a bankruptcy prediction model containing only two financial ratios, namely: current assets to current liabilities ratio and net income to total assets ratio. the model showed to predict the sample company bankruptcy with 97% accuracy. the author notes that the model should be tested using a larger sample, but still recommends auditors, investors and other stakeholders to use the model to predict bankruptcy. in the same year, the author mckee (1995b) developed a recursive partitioning algorithm to predict bankruptcy, with the rule that if the current liquidity ratio was greater than or equal to 0.64 and the ratio of net income to total assets greater than or equal to 0, then the company will not file for bankruptcy, otherwise it is believed that the company will file for bankruptcy. the model was developed and tested using a sample of 202 companies, half of which were bankrupt and the other half actively operating. a few years later, mckee and greenstein (2000) tested the robustness of the same model using an extended sample over a different time period and with different data. the results of the study showed that the developed model had a higher average percentage of prediction accuracy than the logit model and the neural network model. however, when it comes to predicting bankrupt company bankruptcy, the developed model showed less predictive power than the other models examined. 3) adrian gepp, kuldeep kumar, and sukanto bhattacharya (2010) extended the frydman et al. research, applying different decision tree algorithms to predict corporate bankruptcy. in addition to the recursive partitioning algorithm, the authors implemented the cart and see5 algorithm. they compared the results of different decision trees, but also compared the results of the decision tree with the discriminant analysis model. interestingly, the authors conducted a survey using the sample used by frydman et al, with the same number of input variables. developing a model to predict corporate bankruptcy using decision tree in the republic of serbia 131 algorithms play a role in managing the decision tree development process, with two main tasks (gepp, et.al. 2010 p. 540):  selection of the best splitting rule of data at each node distinguishing between active and bankrupt companies, and  managing the complexity of the decision tree (number of nodes). many algorithms first develop a very complex tree, and then prune it to the desired complexity. the results of the study confirmed the results of previous studies that smaller and simpler decision tree models ―are better predictors than more complex models‖ (gepp, et.al. 2010 p. 546). the authors emphasize that the recursive partitioning algorithm is a superior classifier and predictor of corporate bankruptcy. on the other hand, the see5 algorithm showed the best classification ability but also the worst predictive power. the cart algorithm showed very similar results to the recursive partitioning algorithm. compared to the discriminant analysis model, all decision tree models showed their superiority. 4. advantages and disadvantages of corporate bankruptcy prediction models using decision tree „decision trees are powerful classification algorithms that are becoming increasingly popular due to intuitive explanatory features― (olson, et al. 2012 p. 466). nayab (a review of decision tree analysis advantages, retrieved from: https://www.brighthubpm.com/projectplanning/106000-advantages-of-decision-tree-analysis/, 11/08/2019) summarized the benefits of a decision tree in several points:  transparency – decision trees explicitly provide all possible alternatives and present each alternative to a final conclusion, thus enabling alternatives to be compared;  specificity – the ability of the decision tree to assign certain values to the decisions (problem) and results of each decision, thereby reducing ambiguities in decision making  comprehensiveness – decision trees provide a comprehensive analysis of the consequences of any decision that may end with a definitive conclusion, uncertainty or lead to new issues that require a repeat of the process;  ease of use – decision trees provide a graphical representation of problems and alternatives in a simple and easy to understand format that requires no further explanation;  flexibility – the ability of the decision tree to handle different types of data (value and categorical);  resilience – decision trees focus on the relationship between different events, depicting the natural course of events. that way, they remain robust to error, provided the input is correct;  confirmation – decision trees are used as a quantitative analysis of problems in corporate operations, but also for validation of the results of statistical tests. because of their structure, decision trees are believed to be similar to human decision making, and graphical representation facilitates interpretation, especially with small trees. the ability to manage qualitative predictors does not require the introduction of dummy variables (james, et al. 2013 p. 315). developing a decision tree is possible by applying different algorithms, which have their advantages and disadvantages. one of the most famous algorithms for generating a 132 s. vlaović begović, lj. bonić decision tree is the id3 algorithm. noting the shortcoming of an original decision tree, reflected in dealing with noisy and/or incomplete data, quinlan (1986) compares two ways to modify methodology and overcome the shortcoming by introducing a new algorithm. quinlan (1987) investigated four methods for simplifying decision trees in a way that does not compromise predictive accuracy to ensure ease of use. the author concludes that the „pessimistic pruning method is faster than other applied methods and does not require a special test sample for validation―. at the same time, the author states that the reduced error pruning method requires a separate test sample, and another weakness of the method is that parts of the original tree that are less frequent and specific cases are not presented in the test sample and can be cut. finally, the author concludes that the simplifying to production rules method has proven particularly powerful. nayab found disadvantages of the decision tree (a review of decision tree disadvantages. retrieved form: https://www.brighthubpm.com/project-planning/106005disadvantages-to-using-decision-trees/, 11 august 2019) in the following features:  instability – reliability of information in the decision tree depends on the accuracy of the input data. even a small change in data entry can cause major changes in the tree, which may require the development of a new tree;  complexity, unwieldy – although the decision tree is easy to use compared to other models, developing a decision tree is a complex and time-consuming process. complexity is particularly pronounced in large trees with many branches, and expertise and experience are crucial to solving such problems. large trees are often cumbersome, leading to difficulties and incomprehensibility in their presentation;  costs – as already mentioned, developing large trees requires human training and expertise, and training costs for using a decision tree are imposed as a necessity;  information overload – although decision trees are capable of generating large amounts of data, which is considered a positive feature, it may sometimes be that decision makers face a wealth of information. in these circumstances, it takes time for the decision maker to process all the data, making the decision-making process timeconsuming and costly. compared to other regression and classification approaches, the decision tree generally does not have the same level of prediction accuracy. however, by modifying the decision tree by introducing different methods such as bagging, random forests, and boosting, predictive power significantly improves (james, et al. 2013 p. 316). kim and upneja (2014) used a decision tree and an adaboosted decision tree to examine the key factors for the financial failure of a publicly traded restaurant in the us. the authors found that restaurants with financial problems had a higher share of debt in the capital structure, a lower rate of increase in assets, a lower profit margin, and a lower current liquidity ratio than restaurants that were not financially disadvantaged. due to the good performance of predicting business failure, the authors recommend using an adaboosted decision tree. in the credit rating evaluation, bastos (2008) applied a boosted decision tree. considering that the boosted decision tree outperformed multilayer perceptron and the support vector machines, the author concludes that the model is competitive with other credit rating models. shirata (1998) applies classification and regression trees (cart) to select the variables that will be used in the discriminant analysis model to predict the bankruptcy of developing a model to predict corporate bankruptcy using decision tree in the republic of serbia 133 japanese companies. using cart, it is possible to calculate significance for each variable. in order to predict the bankruptcy of huarng, yu and chen (2005) applied cart and demonstrated its superiority over other models. the main objection to their research is that the sample included only 12 companies and 5 variables. li, sun and wu (2010) also confirmed the superiority of cart, highlighting the positive sides reflected in ease of application and results, accuracy and stability, non-linear estimation and nonparametric model. durica et al. (2019) applied the card and chaid decision tree algorithm to predict the bankruptcy of polish companies, whereby the average prediction accuracy of the final models was 97.9% for the cart model and 98.2% for the chaid model. application simplicity, handling of missing data and easy interpretation of results were the most prominent advantages of these models. cha and tappert (2009) applied a genetic algorithm to make decision trees compact and near-optimal. by limiting the height of the tree, the authors state that the derived model offers the same or better results than the best known algorithms. although they prefer to use the decision tree to predict corporate bankruptcy over logistic regression models, neural networks and support vector machines, olson et al. state that comprehensibility, as a major advantage of the decision tree, is undermined by too many rules in developing the tree itself. avoiding this problem is possible by controlling the „number of rules obtained from decision tree algorithms to a certain degree, by setting different minimum levels of support― (olson, et al. 2012 p. 464). 5. implementation of the decision tree to develop bankruptcy prediction models of manufacturing and trade companies in the republic of serbia for the research purposes, a sample of 204 (large and medium-sized) manufacturing and trade companies operating in republic of serbia was formed. half of the sample companies are bankruptcy companies from 2011 to 2017. the other half is made up of non-bankruptcy companies, timed with those in bankruptcy. companies that initiated bankruptcy proceedings were selected on the basis of a list of active bankruptcy proceedings published by the bankruptcy licensing agency (bankruptcy statistics, 2018). non-bankruptcy companies are those that continuously and unhindered carry out their business activity, matched by industry (manufacturing and trade companies ) and asset sizе with bankruptcy companies, selected from the database of the business registers agency (unified search, 2018). the total sample is divided into two parts. one part represents the training sample and is used for model development, while the other part is the validation sample and is used to control, i.e. to check the predictive power of the developed model (banasik, crook, & thomas, 2003). the largest part of the total sample should be related to the model construction, and it is accepted in practice that this ratio can be 80:20 or 70:30 in favor of the training sample (nikolić, et al. 2013). 80:20 ratio, 42 companies in validation sample and 162 companies in training sample were used in the paper. based on previous studies dealing with the corporate bankruptcy prediction, 56 initial variables were selected. after a t-test that eliminated variables that did not significantly influence bankruptcy prediction and eliminated multicollinearity, there were 15 variables left to use to develop the decision tree: 134 s. vlaović begović, lj. bonić  (ebit + amortization) / interest expense  net income / sales  net income / total assets  total liabilities / (retained earnings + amortization)  working capital / total assets  current assets / current liabilities  total debt / equity  sales / accounts receivable  retained earnings / total assets  sales / total assets  cuurent assets / sales  total assets (log)  cash flow from operation / current liabilities  current assets / total assets  long-term debt / total assets the paper uses a random forests decision tree. the results of the accuracy of bankruptcy prediction of the analyzed companies are presented in table 1. table 1 bankruptcy prediction using a random forests decision tree companies precision recall f1-score support bankruptcy 0.95 1.00 0.98 21 non-bankruptcy 1.00 0.95 0.98 21 avg / total 0.98 0.98 0.98 42 source: authors’ calculations precision is a measure of the success of a classifier that shows the percentage that actual bankruptcy companies make relative to all companies designated as bankruptcy companies. based on table 1, it can be concluded that the decision tree correctly classified 95% of bankruptcy companies in relation to the number of companies designated as bankruptcy. also, it can be concluded that all actual non-bankruptcy companies are properly classified in relation to companies designated as non-bankruptcy. recall is a classifier performance measure that shows what percentage of companies are classified as bankruptcy relative to all companies that are truly bankruptcy. the survey results show that the decision tree classified all bankrupt companies in the bankruptcy class. however, some non-bankruptcy companies were also classified into bankruptcy class. the f1-score is a measure of the success of a qualifier that combines precision and recall allowing a simpler comparison of different algorithms. the f1-score gives equal importance to precision and recall and is 0.98 equal to the average accuracy of predicting bankruptcy of a company using a decision tree. as compared to the results of the study conducted by stanišić et al. (2013) who, by comparing the predictive power of models based on discriminatory and logit analysis, neural networks and decision trees, found that decision trees had accurately classified 49 of 65 bankrupt and active companies (75.4% accuracy), our results show a far greater predictive power of the decision tree. developing a model to predict corporate bankruptcy using decision tree in the republic of serbia 135 the results obtained are in line with the bastos (2008) study, which established a generalization accuracy of 94.03% for australian data using boosted decision trees. largely similar results were obtained by durica et al. (2019) who established an average accuracy of the bankruptcy prediction model in cases of polish companies of 97.9% for the cart and 98.2% for the chaid decision tree. berent et al. (2017) consider that the focus of research has shifted from maximizing the accuracy of predictive models to analyzing the informational significance of individual predictor variables. berent et al. (2017) consider that the focus of research has shifted from maximizing the accuracy of predictive models to analyzing the informational significance of individual predictor variables. depending on the business conditions, explanatory variables in models vary from country to country (kovacova et al., 2019). thus observed, the specifics of individual activities may also affect the selection of variables. using the decision tree, the relative importance of variables in bankruptcy prediction first for all sample firms and then individually for manufacturing and trading companies was examined. figure 2 shows three variables affecting the prediction result by more than 15%. these are the following:  (ebit + amortization) / interest expense  net income / sales  net income / total assets. fig. 2 the average variable impact on the prediction result profitability and indebtedness had the greatest average impact on the bankruptcy prediction of the sample companies. however, if only manufacturing companies are observed, the variables that have the greatest impact on the prediction result also change, as figure 3 shows. 136 s. vlaović begović, lj. bonić fig. 3 average variable impact on the prediction result of manufacturing companies the highest average impact on the bankruptcy prediction of manufacturing companies is the ratio of net income to sales, with more than 17%. it is followed by indicators of indebtedness, profitability and liquidity. figure 4 shows the average impact of variables on bankruptcy prediction of trading companies. fig. 4 the average variable impact on prediction result of trading companies figure 4 shows that the same variables (the first three) have the greatest average influence on the prediction result of trading companies, when looking at the total sample. significant variables include liquidity ratios. developing a model to predict corporate bankruptcy using decision tree in the republic of serbia 137 the variable that has proven significant for bankruptcy in all companies is the net income and total assets ratio, which is one of two variables used by mckee (mckee, 1995b; mckee & greenstein, 2000) in their decision tree models to predict bankruptcy. net income to total assets ratio is the most commonly used variable in bankruptcy prediction models (bellovary, et al. 2007 p. 42) 6. conclusion the need to predict the business failure of a company facing bankruptcy proceedings has led researchers to search for a model that will most accurately predict future business. from discriminant analysis, logistic regression, to neural networks and various hybrid models, new models that may be the most appropriate to predict the bankruptcy of companies operating in a specific economic environment are constantly emerging. compared to traditional bankruptcy prediction models (discriminatory, logit and probit models), decision trees have a number of advantages, which are reflected in the simplicity of implementation, easy interpretation of results, handling of different data types and overcoming data deficiency issues. flexibility and customization enable using decision trees to predict the bankruptcy of companies operating in different economies. in addition, the differences in predicting bankruptcies of companies engaged in various activities are perceived with ease. however, the underlying issues appearing upon the application of a decision tree arise from its instability, where even slight alterations of input data may lead to a significant change in the tree and its prediction power. a relatively broad data sample is desirable for tree development; otherwise, there is a risk of quick overfitting (weissova et al., 2016). understandability, as one of the advantages of using decision trees, may be undermined by too many rules related to tree development; this may be avoided by controlling the number of rules by setting up various minimum support levels. the paper uses a random forests decision tree to predict bankruptcy of companies in republic of serbia. the research results show the high predictive power of the model with as much as 98% average prediction accuracy, and it is recommended for managers of companies and financial institutions, investors, the bankruptcy licensing agency, as well as other stakeholders in predicting the bankruptcy of a particular company in the republic of serbia. references agencija za licenciranje stečajnih upravnika (2018). statistika stečajnih postupaka [bankruptcy statistics]. retrieved from: http://alsu.gov.rs/statistika-stecajnih-postupaka/ accessed on 01.05.2018. agencija za privredne registre (2018). objedinjena pretraga [unified search]. retrieved from: http://pretraga2.apr.gov.rs/unifiedentitysearch accessed on 10.05.2018. banasik, j., crook, j., & thomas, l. 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(2014) poslovno odlučivanje [business decision making]. zagreb: školska knjiga. stanišić, n., mizdraković, v., & knežević, g. (2013). corporate bankruptcy prediction in the republic of serbia. industrija. 41(4), 145-159. stanojević, s., đorđević, n., & volf, d. (2017). primena kvantitativnih metoda u predviđanju poslovanja privrednih društava [applying the machine learning method in predicting business winners vs. losers through financial reports]. oditor-časopis za menadžment, finansije i pravo, 3(1), 92-101. weissova, i., siekelova, a., & kramarova, k. (2016). modeling of company´s default probability in relation to its credit risk. global journal of business, economics and management: current issues, 6(2), 130-137. developing a model to predict corporate bankruptcy using decision tree in the republic of serbia 139 razvijanje modela za predviđanje stečaja zasnovanog na stablu odlučivanja u republici srbiji stabla odlučivanja vizuelizacijom procesa odlučivanja rešavaju problem koji zahteva donošenje više sukcesivnih odluka. često se koriste i za rešavanje problema klasifikacije i regresije. jedan od problema klasifikacije koji se pojavljuje jeste pravilno klasifikovanje preduzeća u stečaju i aktivnih preduzeća, na osnovu čega je moguće predviditi verovatnoću pokretanje stečaja. u radu je primenjeno random forests stablo odlučivanja za predviďanje stečaja preduzeća u republici srbiji. rezultati istraživanja pokazuju visoku prediktivnu moć modela sa čak 98% prosečne tačnosti predviďanja, te se preporučuje njegovo korišćenje revizorima, investitorima, finansijskim institucijama i ostalim stejkholderima za predviďanje stečja preduzeća u republici srbiji. ključne reči: stabla odlučivanja, stečaj, predviďanje, model plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 15, n o 1, 2018, pp. 15 27 https://doi.org/10.22190/fueo1801015m © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper on the threshold of “adulthood”: western balkans’ transition failures 1 udc 330.342(497-15) slavica manić, ljubinka joksimović university of belgrade, faculty of economics, niš, serbia abstract. after the beginning of the transformation of centrally-planned economies into market economies, the implementation of a transition project in the case of new eu members (a total of 10 countries joined through the enlargements of 2004 and 2007) lasted for almost two decades, far longer than the pessimistic forecasters announced. by contrast, the western balkan countries (in total 6 of them), with the exception of croatia (eu member since 2013.), have neither continuity nor adequate success in carrying out the reform processes. that is why their transition still has an uncertain outcome and an unpredictable duration. in order to determine to which stages the less developed countries have arrived at the moment when those more advanced have almost finished their transition, we will use the ebrd indicators. we will then explain the phases of western balkans transition dynamics (first wave reforms and deeper reforms) in order to show that these economies have partially followed the pattern reccommended by advanced economies, leaving the segment of deeper reforms unfinished. finally, relying on the new model for measuring transitional progress (which the ebrd has been using since 2011), we will try to evaluate which part of the predicted trajectory western balkans really crossed on their path to transitional “adulthood”. key words: transition, western balkans, structural reforms jel classification: p27, p52 introduction the economic transformation of former centrally planned economies officially began more than a quarter of century ago and was initiated with the intention of achieving the standards of developed market economies. at the time, researchers were arguing and received january 20, 2018 / accepted february 14, 2018 corresponding author: slavica manić university of belgrade, faculty of economics, kamenička 6, 11000 belgrade, serbia e-mail: slavica@ekof.bg.ac.rs 16 s. manić, lj. joksimović disputing about the time-frame of the project of transition (dornbusch, 1990), the sequence of steps that should be undertaken, as well as ways of institutionalizing changes (eatwell et all., 1995). they claimed that either inconsistent policies or the very concept of a transitional project should be blamed for omissions expressed in the absence of relevant results and/or failure to fulfill them within the foreseen deadline. the importance of institutional development is rarely emphasized meanwhile (campos, 1999). it has become significant no sooner than ten years after the beginning of the transition, when researchers recognized the importance of the initial (inherited) conditions as well as the duration of their effects for the successful implementation of the transitional project (stiglitz, 1999). countries that will be labeled as "new members of the european union" (after the enlargements done in 2004 and 2007) have relatively successfully completed the key reform processes and materialized their results (through the above mentioned membership). however, it turned out that their economic and structural transformation was an unpredictable and difficult process that lasted longer than the theoreticians anticipated. the countries of the western balkans have been in a far more difficult position, as they can not boast of a continuous tradition in the implementation of structural reforms in their economies. in fact, these processes were initiated more seriously with the delay of ten years, but now under significantly changed economic, political, demographic and other circumstances. after nearly two decades of undertaking a variety of reform initiatives (which is a sufficiently long time interval for producing certain results, judging by experience of new members of the eu), it seems quite appropriate to set up the following question: will their transition be completed soon? although the answer to this question seems to be determined by the way it is set up, we will try to justify the origin of our suspicion regarding the relatively near end of the transition. using the ebrd indicators, we will measure the success in implementing the reform process on the example of 16 transition countries. we want to determine to which stages the less developed economies arrived at the moment when advanced countries have almost finished their transition. we will then explain the phases of the western balkans transition dynamics (first wave reform and deeper reform) in order to show that they more or less have followed the pattern recommended by advanced economies, leaving the segment of deeper reforms unfinished (imf, 2015). finally, relying on the new model for measuring transitional progress (which the ebrd has been using since 2011), we will try to evaluate which part of the predicted trajectory western balkans crossed so far. in the light of new empirical insights into their current position, we intend to try to determine whether and when the ending of transitional processes in this region could be expected. 1. carrying out of transition: how long would it take? the very beginnings of the transition were marked by non-productive discussions of two (well known) contradictory points of view regarding the speed of reform changes. the attractiveness of this topic was relatively quickly materialized through empirical works that attempted to formulate an appropriate methodology for measuring progress in transition. over time, ebrd indicators were established as the most prominent in analytical work, as they covered all those important areas of reforms that are necessary for the introduction of a market economy model. these indicators (there are a total of 9) are the following ones: on the threshold of “adulthood”: western balkans’ transitional failures 17 privatization of small enterprises, privatization of large enterprises, restructuring of enterprises, price liberalization, trade liberalization and exchange rate regime, competition policy, liberalization of the banking sector, reform of non-banking institutions, infrastructure reform. progress assessment for each indicator ranges from 1 (equivalent to the situation in which reform processes did not begin) to 4+ (or approximately 4.33, for a stage in which transition economies reach the standards of developed market economies). in fact, the sum for all nine indicators can be at least 9 and a maximum 38.97 (9 x 4.33) points. in other words, as cerović and nojković explicitly pointed out (2009), even when there are no reforms, it is assumed that the country is earning 9 points (as if it crossed almost a quarter of the transition trajectory). if we apply an approach that eliminates this inappropriate point allocation, progress in transition can be measured in the following way: we will deduct the undeserved "start-ups" from the points achieved, and put the resulting amount in relation to the total (projected) "length" of the path (29.97 points) that each transition economy is supposed to pass through in order to reach the level of developed market economies (the difference between the maximum of 38.97 and the minimum of 9 points). the following tables illustrate the evolution of transition economies (new members of the eu and the western balkan countries) in selected years 1999, 2004, 2007 and 2010. these data are consciously (although subjectively) selected: 1999 as the synonym for a decade-long reform attempts in advanced transitional economies; 2004 as the year in which as many as ten transition countries joined the european union after at least 15 years of implementation of the reform processes; 2007 which (from the global point of view) was the last pre-crisis year, and 2010 as the last year in which the ebrd measured the progress in transition in this way. comparing the values of the indicators for the analyzed countries, we found that the 2000 and 2005 reports did not provide identical data for the year 1999 (the differences range from 0.6 to 1.2 points for all 9 indicators). data for the mentioned year for most countries were taken from the 2000 report, except in the case of serbia and montenegro (where, out of objective reasons, we had to rely on the 2005 report, since those countries were not part of the 2000 report). and the calculation looks like this (if we take bulgaria’s result for 1999 as the example): 9 starting points will be deducted from 25.9; the result obtained is 16.9 and in relation to the projected length of the transition path 29.97 points, we got 56.9% as the measure of the progress achieved. table 1 progress in transition in % new eu member states (1999 and 2004) country ebrd indicators 1999 progress made (in %) ebrd indicators 2004 progress made (in %) bulgaria 25.9 56.39 30.3 71.07 czech republic 30.7 72.41 33.5 81.75 estonia 31.4 74.74 34.1 83.42 hungary 33.3 81.08 34.9 86.42 latvia 27.7 62.39 32.0 76.74 lithuania 27.6 62.06 31.6 75.41 poland 31.0 73.41 32.8 79.42 romania 25.7 55.72 28.9 66.39 slovakia 28.7 65.73 32.9 79.75 slovenia 28.5 65.06 30.3 71.07 source: ebrd (2000) and ebrd (2005) for columns 2 and 4 respectively; calculation of authors for columns 3 and 5. 18 s. manić, lj. joksimović table 2 progress in transition in % new eu member states (2007 and 2010) country ebrd indicators 2007 progress made (in %) ebrd indicators 2010 progress made (in %) bulgaria 31.4 74.74 32.0 76.74 czech republic 34.3 84.42 * / estonia 35.3 87.75 35.3 87.75 hungary 35.6 88.76 35.6 88.76 latvia 32.6 78.74 32.6 78.75 lithuania 33.2 80.75 33.2 80.75 poland 33.9 83.08 33.9 83.08 romania 30.7 72.41 31.0 73.41 slovakia 33.6 82.08 33.9 83.08 slovenia 30.3 71.07 30.6 72.07 source: ebrd (2008) and ebrd (2010) for columns 2 and 4 respectively; calculation of authors for columns 3 and 5. table 3 progress in transition in % western balkans (1999 and 2004) country ebrd indicators 1999 progress made (in %) ebrd indicators 2004 progress made (in %) albania 22.2 44.04 26.0 56.72 bosnia and herzegovina 17.4 28.03 22.7 45.71 croatia 26.9 59.73 30.9 73.07 macedonia 23.8 49.38 27.2 60.73 montenegro 13.0 13.35 21.7 42.38 serbia 13.0 13.35 21.9 43.04 source: ebrd (2000) and ebrd (2005) for columns 2 and 4 respectively; calculation of authors for columns 3 and 5. table 4 progress in transition in % western balkans (2007 and 2010) country ebrd indicators 2007 progress made (in %) ebrd indicators 2010 progress made (in %) albania 26.6 58.73 27.6 62.06 bosnia and herzegovina 24.4 51.38 25.0 53.39 croatia 31.6 75.41 31.9 76.41 macedonia 28.2 64.06 29.3 67.73 montenegro 25.1 53.72 26.0 56.72 serbia 24.7 52.39 26.0 56.72 source: ebrd (2008) and ebrd (2010) for columns 2 and 4 respectively; calculation of authors for columns 3 and 5. speaking of new eu members, it is noticed that ten years after the start of the transition only hungary has managed to make a dramatic shift to the regime of market economy. at that time, estonia, poland and the czech republic were closely approaching the threshold (75% of the reforms done). the worst results were achieved by romania and bulgaria (as well as underestimated slovenia), whereas other countries have been exposed to similar pace of changes. all these results fit into the dynamics of the european union's enlargement that will follow. by looking at the data for 2004, 2007 and 2010, it is notable that for most of on the threshold of “adulthood”: western balkans’ transitional failures 19 analyzed countries the implementation of the transitional "project" took approximately 15 years, i.e. that it lasted longer than even pessimistic prediction (fischer and gelb, 1991). with the exception of croatia, which at that time (a decade after “official” start of transition) approached the level of almost 60% of the reforms implemented, the group of other western balkan countries, in terms of the overall reform process, could not, in any way, be able to compare with any of the ten countries belonging to the group of new eu member states. five years later, three out of six western balkan countries have not yet reached half of the transition path. when two decades expired and the transition cycle in advanced economies is somehow rounding up, in the area of western balkan the situation has only slightly improved. it means that all the countries of this group have crossed halfway; if we exclude croatia from the analysis (as the most successful one, which in the meantime became an eu member), we will find that the average value of transition indicator for the remaining five countries is 26.78, which is the equivalent of progress in reforms at the level of 59.32%. is there any chance to explain and/or to justify these modest results? the experiences of other transition countries and the measurement of their progress in transition have been translated into various studies (de melo et al, 1997) arguing that the inherited economic and institutional conditions dominantly affect economic performance only for a shorter period (5-6 years), and that their disadvantages can be compensated by the greater commitment of policy makers and higher speed in the implementation of reform policies. however, a systematic review of some transition settings (stiglitz, 1999) resulted in a different standpoint emphasizing that the speed of reforms is the endogenous variable predetermined by initial (inherited) conditions. it has been established that the impact of initial conditions (macroeconomic (in) stability and institutional capacity) is decisive for reform activities, and that its effects are prolonged for the entire transition period. in other words, the pace of achieving reforms was predominantly determined by the initial conditions (level of general and particularly institutional development). that is why contextually unspecified programs (which did not respect the inheritance of each country) could not cause better results (cerović & nojković, 2009). 2. pace of reforms in the western balkans is there any regularity in making the transition progress either for the entire balkan region or for any of its countries? did they respect the recommended sequencing and what pace did the reforms take? it is known that political turmoil and war in this area have significantly delayed the onset of economic and structural transformation. it is commonly claimed in the literature that, after a decade of delay comparing to advanced transitional economies, the western balkan countries strongly embarked on reform changes, accelerating their implementation in a very short period of time (2000-2002). unfortunately, this momentum lasted briefly and was followed by a change in policy course firstly denying and consequently slowing down the reform processes (cerović & nojković, 2008). according to the values of the transition indicators for 2004, 2007 and 2010, assuming that 1999 is taken as the base year, in the next table we will calculate the corresponding indexes. they will serve us to separate the periods in which the reforms gripped from the ones in which they slowed down (manić, 2015). 20 s. manić, lj. joksimović table 5 western balkans transition indexes for selected years (1999 = 100) country 2004 2007 2010 albania 117.1 119.8 124.3 bosnia and herzegovina 130.5 140.2 143.6 croatia 114.9 117.5 118.6 macedonia 114.3 118.5 123 montenegro 166.9 193 200 serbia 168.5 190 200 source: calculation of authors according to ebrd (2000); ebrd (2005); ebrd (2008) and ebrd (2010) although 70% of the reform process was made by 2004, in the case of albania the core changes occurred in 2000, since 52% of the total progress made during the decade was realized exactly in one year. by 2004, bosnia and herzegovina had implemented two-thirds of reforms, which is similar to the situation in macedonia (62% of the reforms were undertaken till 2004), whereas key moves were made at the very beginning of the transition (2000/2001 and 2000 respectively). by 2004 and 2005, croatia and montenegro achieved 80% and 82% of overall progress in the analyzed period, and the pace of implementation of reforms was the most dynamic in 2000 in the case of croatia, and in 2001 and 2002 in the case of montenegro. serbia followed a similar pattern: accelerated changes were carried out in 2001 and 2002, followed by a slowdown in reform. of the total progress made since 1999, twothirds were realized during the above mentioned years. if the balkan countries really started the transition ten years later than the others, their modest results can be justified by the delay in transition. it is also possible that the longevity of their transition can be attributed to a different sequence of reform undertakings. finally, it would be worth examining if there were any adjustments of economic policies at turning points in transition development. if we divide the reform changes to two categories those belonging to so-called the first wave reforms (represented by 4 transition indicators: price liberalization, liberalization of exchange rates and trade, privatization of small and large enterprises) and the others belonging to deeper (institutional and structural) reforms (represented by the remaining 5 indicators: enterprise restructuring, competition policy, liberalization of the banking sector, reform of non-banking institutions, infrastructure reform) it is easier to see which reform processes have been completed and when, as well as which of them are still in the infancy phase (tables 6-8). table 6 indicators of first wave reforms (unweighted average) country 1999 2004 2007 2010 albania 3.6 3.9 3.9 4.1 bosnia and herzegovina 2.75 3.25 3.42 3.5 croatia 3.82 3.98 3,98 3.98 macedonia 3.75 3.82 3.98 3.98 montenegro 2.18 3.25 3.75 3.75 serbia 1.82 3.15 3.42 3.6 source: calculation of authors according to ebrd (2000); ebrd (2005); ebrd (2007); ebrd (2008) and ebrd (2010) on the threshold of “adulthood”: western balkans’ transitional failures 21 table 7 indicators of deeper reform (unweighted average) country 1999 2004 2007 2010 albania 1.56 2.14 2.2 2.26 bosnia and herzegovina 1.28 1.94 2.14 2.2 croatia 2.32 3 3.14 3.2 macedonia 1.76 2.38 2.46 2.68 montenegro 0.86 1.74 2.02 2.2 serbia 1.14 1.86 2.2 2.32 source: calculation of authors according to ebrd (2000); ebrd (2005); ebrd (2007); ebrd (2008) and ebrd (2010) table 8 indicators of overall reform (unweighted average) country 1999 2004 2007 2010 albania 2.47 2.88 2.95 3.06 bosnia and herzegovina 1.93 2.52 2.71 2.77 croatia 2.98 3.43 3.51 3.54 macedonia 2.64 3.02 3.13 3.25 montenegro 1.44 2.41 2.78 2.88 serbia 1.44 2.43 2.74 2.88 source: calculation of authors according to ebrd (2000); ebrd (2005); ebrd (2007); ebrd (2008) and ebrd (2010) based on the data given in table 6, it is noted that, on average, the countries of the western balkans till 1999 had implemented the reforms belonging to the so-called first wave; in this respect their lagging behind the developed transitional economies was only a couple of years (imf, 2015, p. 21). since the turning point occurs at the value of 2.92 (i.e. at the level of 58% of realized activities in this domain cerović & nojković, 2011), and the balkan countries have overcome this threshold at the beginning of this century, the first wave reforms’ effect on growth was expected to be much lower after this point. in addition, although these countries respected sequencing of reforms recommended by the advanced transitional economies (price, trade and exchange liberalization, the small scale privatization), some important interventions (such as the privatization of large companies) were postponed (imf, 2015). progress in this segment was uneven across the region: no matter whether we speak about sectors where large privatizations were conducted (like banking, telecommunications and energy) or those where they were not even started (public services); also, there are countries significantly delaying in the initiation of these processes (such as serbia, bih and montenegro). when it comes to deeper reforms (table 7), turning points are at values of 1.87 and 2.6, which means that such types of reforms are insignificant for growth between these two turning points. during the first decade of this century, western balkan countries (with the exception of croatia) have found themselves in a position that proves they have already missed the right moment for institutional and structural reforms. due to this, their lagging behind the advanced transitional economies has increased. nevertheless, on the example of these countries, it has been shown that the failure to implement these reforms is less detrimental to their growth in times of crisis. it turned out that in the developed transitional economies (which have far advanced in this regard), the degree of achieved deep reforms negatively and significantly influenced their economic performance (uvalić, 2011). 22 s. manić, lj. joksimović if we look at the indicator of total reforms, at a value below 2.03 the impact of the reform processes (together with certain inherited conditions) on the growth of the economy is strong, positive, but less significant when the value exceeds 2.81 (or 2.92 if the period of crisis is included); also, the influence of reforms is statistically insignificant for all values between 2.03 and 2.81 (i.e. during the central phase of the reform). in the case of the western balkan countries, the overall reform index is increasing (table 8), but this growth is not significant for the central phase of transition in which these economies are located. with the progression of transition reforms, the growth model is transformed (by achieving relevant turning points; cerović & nojković, 2011; cerović, 2012), which requires an appropriate adjustment of economic policies. however, the balkan countries based their development on expecting the spontaneous effects of the implemented reforms to arise, rather than on the new development approach. in fact, since they missed the opportunity to make changes, western balkan economies remained within the framework of spontaneously generated growth models resulting from the reforms that belong to the first wave (cerović & nojković, 2011a, pp. 34-37). 3. western balkans: stuck in transition? compared to the european union average, the lagging behind of the balkan countries is of such a range that there is a significant need for structural reforms in almost all areas. what reform processes should be actualized and prioritized? as we have already mentioned, it is widely accepted that structural reforms can stimulate economic prosperity. although the effect of reforms is generally beneficial, for middle and low income countries (like the western balkans), institutional as well as infrastructure reforms are relatively more important (owing to their positive impact on growth). therefore, for their further advancement reforms’ compatibility and existence of market supporting institutions seem to be crucial (coricelli & maurel, 2010). that is why ebrd proposed a new model for measuring transitional progress a couple of years ago. it examines the degree of development of market-supporting institutions that are systematized in four basic sectors: corporate, energy, infrastructure and financial. the actual state of affairs in these sectors is shown by descriptive estimates, defining the lag of transition to developed market economies as large, medium, small and negligible. applying the methodology which attributes the numerical values 1, 2, 3 and 4 to those descriptive estimates (cerović & nojković, 2011a), we will present the results for the western balkan countries in the period 2012-2014. table 9 market supporting institutions sectoral assessments (2012) country corporate energy infrastructure finance total rank albania 8 6 5 8 27 4 bosnia and herzegovina 7 3 5 8 23 6 croatia 11 7 10 13 41 1 macedonia 9 6 6 8 29 3 montenegro 7 6 5 9 27 4 serbia 8 4 7 11 30 2 source: calculation of authors according to ebrd (2012) and cerović&nojković (2011a) on the threshold of “adulthood”: western balkans’ transitional failures 23 table 10 market supporting institutions sectoral assessments (2013) country corporate energy infrastructure finance total rank albania 7 6 6 7 26 4 bosnia and herzegovina 6 3 7 8 24 6 croatia 11 6 9 12 38 1 macedonia 8 5 7 8 28 3 montenegro 9 5 8 8 30 2 serbia 7 4 7 8 26 4 source: calculation of authors according to ebrd (2013) and cerović&nojković (2011a) table 11 market supporting institutions sectoral assessments (2014) country corporate energy infrastructure finance total rank albania 8 6 5 8 27 5 bosnia and herzegovina 7 3 7 8 25 6 croatia 11 7 10 13 41 1 macedonia 9 6 6 8 29 3 montenegro 8 7 5 9 29 3 serbia 8 4 7 11 30 2 source: calculation of authors according to ebrd (2014) and cerović & nojković (2011a) based on the data in tables 9-11, we note that only croatia has made substantial progress in institutional reforms, although its backlog in relation to developed market economies is significant. in fact, if in each of the 16 sub-sectors this lagging behind was negligible, the total score would be 64; in the case of croatia, it is 41, which is 64% of institutional development level of advanced market economies. although such a measurement of transition progress is not in line with the previously used ebrd's transition indicators, their findings are similar and troubling when considering the slow pace of reform changes in the western balkans. based on the data presented in table 7, the average value of the deeper reform indicator for the five western balkan countries in a comparably similar position for 2010 is 2.33; according to the already applied method of calculation, it is equivalent to the implementation of less than 40% of the deeper reforms. based on the data in table 11, we calculate the average score in 2014 for the same group of countries 28, which is almost equivalent to the medium lag behind institutionalized economies (roughly 44% of realized institutional reforms). having reviewed its transition concept last year, ebrd decided to adopt an updated interpretation of transition focusing on key qualities of sustainable market economy. this conceptual shift caused announcing of new methodology and new set of scores that are not comparable with previously used sectoral scores. that is why we excluded data for the year 2017 from our study and included ebrd reports from years 2015 and 2016 which have kept the sectoral assessment approach. it means that progress in transition is expressed through reducing sectors’ and sub-sectors’ gaps in regard to developed market economies. however, some methodological adjustments were made: a respect to the sustainable development logic has imposed separate and more detailed monitoring of the "sustainability" component; instead of sectoral-level transition indicators that provide an insight into the state of market supporting institutions, the ebrd publishes an overview of the results achieved through traditional scores (ranging from 1 to 4+), which comprehensively assess challenges ahead (by merging market structures and market supporting institutions within existing framework). 24 s. manić, lj. joksimović for the sake of comparability with tables 9-11, we decided to extract from the consolidated data those related to the market supporting institutions. this was only feasible if we strictly followed the ebrd’s methodological notes on weights attached to the market structure and the market-supporting institutions for each of the 15 sub-sectors, plus those concerning "sustainability" component. in order to determine whether the lag in each of the subsectors is large, medium, small or negligible, the obtained score should be related to the maximum value that could be achieved (these maximums are of course different, since the weight attributed either to the market structure or to institutions are diversed). for exampe: in the case of albania, the transition score for the subsector agribusiness is 3(numerically it is equivalent to 2.67); since the ebrd methodology suggests that both market structure and institutions contribute evenly (50%:50%) it follows that the score representing contribution of market supporting institutions to the agribusiness sub-sector is 1.335 (i.e. half of 2.67). the minimum value of this score may be 0.5 whereas its maximum is 2.165 (half of the minimum (1) and maximum total score (4.33), respectively). the gap is considered to be large if the analyzed country did not realize at least 50% of the maximum score (if the score is below 1.0825); medium gap exists if less than 70% of the maximum is achieved (the score below 1.52), the small backlog is represented by values between 70 and 90% of the maximum (the score between 1.52 and 1.95), and the lag is negligible if the result in the analyzed segment exceeds 90% of the maximum score. as we have already mentioned, the following numerical values can be attributed to these lags: 1 large; 2 medium; 3 small and 4 – negligible gap. in other words, a score of 1.335 "brings" 2 out of 9 points “earned” by corporate sector in albania. the same method of calculation is applied to each of 16 sub-sectors in every country of the western balkan and the results are presented in tables 12 and 13. table 12 market supporting institutions sectoral assessments (2015) country corporate energy infrastructure finance total rank albania 9 6 7 7 29 4 bosnia and herzegovina 6 4 8 8 26 6 croatia 12 7 11 13 43 1 macedonia 9 5 8 8 30 3 montenegro 9 7 7 8 31 2 serbia 8 5 8 8 29 4 source: calculation of authors according to ebrd (2015) table 13 market supporting institutions sectoral assessments (2016) country corporate energy infrastructure finance total rank albania 9 6 7 7 29 5 bosnia and herzegovina 6 4 7 8 25 6 croatia 12 7 11 13 43 1 macedonia 9 5 8 8 30 4 montenegro 9 7 7 8 31 2 serbia 9 6 8 8 31 2 source: calculation of authors according to ebrd (2016) according to estimated institutional support to the market economy croatia crossed two thirds (67%) of the way to the goal reaching the status of institutionally developed on the threshold of “adulthood”: western balkans’ transitional failures 25 economies (tables 12-13). still, its lagging behind advanced countries confirms that the development of institutions is neither sufficient nor the basic growth factor (chang, 2011). and yet, the finding that croatia kept the distance from the rest of the region suggests that it is easier to make transition advancement under better institutional preconditions. based on the data in tables 12 and 13, once again we calculate the average scores in 2015 and 2016 for western balkans (croatia excluding). they are 29 and 29.2, representing 45.3% and 45.6% of realized institutional reforms, respectively. moreover, results for the year 2015 correspond to the claims pointing out that gaps in relation to the new eu members are most pronounced in serbia, albania and bih, and less significant in the case of montenegro and macedonia (imf, 2015). having in mind that during last five years institutional changes in five western balkan countries did not vary considerably in terms of their pace and magnitude, the region seems to be stuck in transition. therefore, in the case of unchanged dynamics of the transformation of these countries, and assuming that other economies maintain the current level of institutional development, the finalization of these processes could last till the middle of this century. and certainly, western balkan economies would not be comforted by the fact that even ebrd admits “there is no such thing as a “standard” market economy and no single way of getting there” (ebrd, 2017, p. 107). conclusion transition project’s implementation in the case of advanced transition countries, new eu member states, lasted for almost two decades, which is far longer than the prediction of the pessimistic forecasters announced after the beginning of the transformation of centrallyplanned economies into market economies. using traditional indicators of the ebrd that measures progress in transition, we have found out that, over the same period of time, the countries of the western balkans (croatia excluding) on average crossed a little bit more than half of the transitional path. analyzing the extent to which they were implementing programs recommended by the theoreticians (and experienced by new eu members) we realized the following: the western balkan countries have respected the same sequence of reform’s steps, and to a certain extent uniform dynamics regarding the so-called "the first wave of reforms”; although it is thought that in this region the transition began with a decade of delays, it is noticeable that the processes of liberalization of prices, trade and exchange rate, as well as small scale privatization were mostly and relatively well finished at the beginning of this century (by accelerating refoms and dynamizing changes in the period 2000-2002). what is following thereafter is a period of reforms’ slowing down, which is characterized by their facing with some postponed problems (like large scale privatization) as well as the challenges imposed by barely initiated deeper (institutional) reforms. having compared the results achieved by these countries with regard to the indicator of deeper reforms by 2010, with the findings obtained by applying the new ebrd model for measuring transition progress during the period 2012-2016, we have concluded that institutional adjustments were and still are going on slowly: during observed period achieved results are modest, since till the end of 2016 approximately 45% of reforms in this domain have been implemented. if such dynamics continues, there is no room for optimism about sooner ending of their transition. 26 s. manić, lj. joksimović acknowledgement: the paper is part of the research done within the project 179065 (“the role of the state in the new growth model of the serbian economy”). references campos, n. 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(1991). the process of socialist economic transformation, the journal of economic perspectives, vol. 5, no. 4, pp. 91-105. imf (2015). western balkan: 15 years of transition, washington d.c. retrieved from: http://www.imf.org/external/pubs/ft/reo/2015/eur/eng/erei0315.htm (08.04.2015.). manić, s. (2015). zapadni balkan: ima li kraja tranziciji? [transition in western balkans: never ending story?] u: aranđelović, z. (red.), regionalni razvoj i demografski tokovi zemalja jugoistocne evrope [regional development and demographic trends of the countries of southeastern europe], ekonomski fakultet, univerzitet u nišu, str. 61-74. on the threshold of “adulthood”: western balkans’ transitional failures 27 sitglitz, j. e. (1999). whither reform? ten years of transition, paper for the annual conference on development economics, world bank; reprinted in: chang, n. j. (ed), joseph stiglitz and the world bank: the rebel within, anthem press, london, 2001. uvalić, m. (2011). zašto zapadni balkan kasni za centralnom i istočnom evropom?,[why western balkan is lagging behind central and eastern europe?] u: cerović, b. & uvalić, m. (red.), kontroverze ekonomskog razvoja u tranziciji – srbija i zapadni balkan [controversies of economic development in transition – serbia and the western balkans], ekonomski fakultet, beograd, str. 9-25. na pragu “punoletstva”: tranzicioni propusti zemalja zapadnog balkana nakon otpočinjanja transformacije centralno-planskih u tržišne privrede, implementacija tranzicionog projekta u slučaju novih članica eu (ukupno 10 zemalja koje su se pridružile kroz proširenja iz 2004. i 2007. godine) trajala je skoro dve decenije, daleko duže od predviđanja najvećih pesimista. za razliku od gore pomenutih, zemlje zapadnog balkana (ukupno 6), sa izuzetkom hrvatske (koja je članica eu od 2013. godine), nemaju ni kontinuitet ni adekvatan uspeh u sprovođenju reformskih procesa. zato njihova tranzicija i dalje ima neizvesan ishod i nepredvidljivo trajanje. da ismo utvrdili do koje su faze manje razvijene zemlje stigle u trenutku kada su one naprednije gotovo završile svoju tranziciju, koristićemo pokazatelje ebrd-a. zatim ćemo o jasniti faze tranzicione dinamike zapadnog balkana (reforme prvog talasa i du lje reforme) kako ismo pokazali da su ove ekonomije delimično pratile reformski o razac naprednih privreda, ostavljajući segment du ljih reformi nedovršenim. onačno, oslanjajući se na novi model za merenje tranzicionog napretka (koji ebrd koristi od 2011. godine), pokušaćemo da procenimo koji je deo predviđene trajektorije zapadni balkan zaista prešao na svom putu ka tranzicionom “punoletstvu". ključne reči: tranzicija, zapadni balkan, strukturne reforme plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 3, 2017, pp. 189 202 https://doi.org/10.22190/fueo1703189r review paper the microeconomic perspectives of intellectual capital measurement 1 udc 330.101.542:005.336.4 tamara rađenović, bojan krstić university of niš, faculty of economics, niš, serbia abstract. intellectual capital has become a widely studied issue among researchers in the knowledge economy. this is due to the fact that intellectual resources are the main driver of growth and competitiveness in the globalized environment. however, measuring intellectual capital, as an intangible resource, is not an easy task. researchers have been trying for decades to put in place a measurement system that can provide useful information for managers. definitely, there are numerous measuring methodologies available, but the list is non-exclusive. appropriate usage of intellectual capital measuring methodologies enables adequate management of intellectual capital and thus leads to the creation of competitive advantage and value for enterprises and wealth for nations. therefore, the aim of the paper is to examine various microeconomic measurement methodologies of intellectual capital focusing on the level of organization. the authors critically evaluate numerous noteworthy methods of the intellectual capital appraisal, as well as the indicators used in order to capture the performances of intellectual capital, thus contributing to the improved management of invisible, valuable non-material resources in the process of value creation for various stakeholders and enhancing competitiveness of an enterprise. key words: intellectual capital, intangible assets, knowledge, knowledge economy, measurement methodologies, competitiveness jel classification: d83, l25, o34 received may 11, 2017 / accepted july 05, 2017 corresponding author: tamara rađenović university of niš, faculty of economics, trg kralja aleksandra 11, serbia e-mail: tamara.radjenovic@eknfak.ni.ac.rs 190 t. rađenović, b. krstić introduction knowledge, as the most important intellectual resource, is the principal factor which drives the competitiveness of an economy and results in higher living standards for its citizens. knowledge became the most important factor of economic growth and competitiveness with the process of globalization. globalization has altered the way in which companies and economies mutually interact, but also the resources which drive growth. therefore, companies, cities, regions, nations have become aware of the possibility to succeed in the international market by employing and developing a new and unlimited resource – knowledge. instead of the simple usage of production factors which a country has in its possession, in the time of the globalized economy, it is of extreme importance how enterprises and countries improve the quality of production factors, increase the productivity of their usage and create new factors. comparative advantage, which is based on costs of production factors, cannot serve as the base for development strategy in an economy in the long run, since this kind of advantage is threatened by the possibility of appearance in the world market economies with even lower costs of production factors or willingness of governments to subsidies such development strategies (ivanić & paunović, 2010, p. 10). therefore, the competitive advantage must be based on new knowledge and innovations. the concept of intellectual capital has become a widely studied issue among researchers since the beginning of the 1990s. this concept incorporates three different components at the micro level: human capital, relational capital and structural capital. once the importance of the concept has been determined at the level of firms, researchers have expanded their research to the level of national economies, especially in investigating the role intellectual capital has in creating and sustaining high positions in the international market. therefore, the focus has been put on measuring methodologies for valuing this unlimited resource. however, the consensus has not been reached yet due to the immaterial nature of intellectual capital, and this creates a room for further investigation of the issue. in this regard, this study focuses on determining advantages and disadvantages of various measurement methodologies for the purpose of enhancing the intellectual capital management in an enterprise. the paper is organized in the following manner. the subsequent part focuses on the explanation of knowledge and its use in enhancing economic growth and competitiveness. afterwards the role of intellectual capital as a source of value creation in the knowledge economy will be elaborated, followed by the motivation for measuring intellectual capital. subsequently, the methodologies for measuring intellectual capital at micro level will be critically assessed. finally, the conclusion will summarize the main findings of the paper. 1. knowledge as the factor of economic growth and competitiveness in contemporary circumstances, knowledge is spreading increasingly fast. due to the development of information and communication technologies, information is widely available to everyone, and hence it is hard to be different and unique in the knowledge market economy. thus, it is of great importance to organize and manage resources in an innovative manner. all modern companies and countries compete in knowledge. this is because they understand that the only way to reach high positions in the international market is to base production on the intellectual capital and search for new innovative ways of production. the microeconomic perspectives of intellectual capital measurement 191 “an economy becomes a knowledge economy by putting knowledge at the centre of the process of economic development” (krstić & stanišić, 2013, p. 153). in the past, the competitiveness of firms and nations was based on comparative advantages they possess. this was in line with ricardo’s theory of comparative advantage. however, globalization of competition and technology has put classical theory in industrial developed countries aside (rakić & rađenović, 2016a). today, the competitiveness of firms and nations is based on competitive advantages they create. this is in line with porter’s view of national competitiveness and his diamond theory. according to porter (1990), it is necessary to connect and strengthen forces in the diamond to achieve competitive advantage by promoting innovation and progress. this porter’s view is in line with endogenous growth theories in which knowledge represents a key factor of productivity and economic growth. knowledge, innovations and networking have become three basic elements of new infrastructure needed for the prosperity in the new knowledge economy (krstić & vukadinović, 2009, p. 460). knowledge, as a factor of production, compensates to some extent for land, labour and other resources. the main characteristic of economic prosperity in the global economy is competitiveness based on knowledge and innovation. this has been well recognised by the oecd, as this organisation considers innovation capacity and marketable innovations to be the crucial determinants of the national competitiveness (2007, p. 3). after the industrialization era, the knowledge era has taken the throne, and hence the basic source of competitive advantage of a country is knowledge. in contemporary circumstances the wealth of nations, regions, and cities depends on the level of knowledge and its effective and efficient usage (krstić & vukadinović, 2009, p. 460). trends of globalisation and liberalisation of economic and financial flows, as well as constant technological changes have led to the transformation of industrial economies to the knowledge economies (laroche et al., 1999, p. 88), i.e. shifting focus from natural resources to knowledge and innovation. knowledge economies are those in which intellectual capital represents a fundamental production factor (bedford, 2013, p. 278). production and services based on intellectual capabilities can lead to the accelerated pace of technological and scientific progress (powell & snellman, 2004, p. 199). however, these new technological advances do not have notable value for those countries which do not have educated and trained labour force to use those advances, pointing to the fact that economic growth to a great extent depends on the synergy between new knowledge and human capital (rakić & rađenović, 2016b, p. 96). only those countries in which main technological advances were followed by increased trends of education and training have reached significant economic growth (becker, 2008). 2. intellectual capital as a source of value creation in the knowledge economy the notion of intellectual capital can be traced back to the beginning of the xx century and taylor’s “the principles of scientific management” in 1911 (kolaković, 2003, p. 927). although the research on the importance of knowledge can be extended even further in the past, this can be viewed as the first attempt to set scientific explanation of knowledge, experience and skills of employees. further progress in the economic theory was made by schumpeter (1934), who emphasised the recombination of knowledge as a necessary precondition for the appearance of new innovative products. 192 t. rađenović, b. krstić the traditional neoclassical growth model (solow, 1957) does not explain the major determinants of productivity growth (viedma marti & cabrita, 2012, p. 18). namely, the huge amount of growth is explained by solow’s residual, the part of output growth that cannot be accounted for by growth in the primary production factors, i.e. capital and labour. this residual capture other exogenous factors that have an influence on growth and is often attributed to technological progress. hence, in the solow’s growth model technological progress is set as exogenous, and based on the critics of this model new theories have emerged. these new theories observed these other factors as endogenous. the main position is given to human capital in form of accumulated knowledge, education and innovation (romer, 1986; 1990; lucas, 1988). romer (1986) recognised accumulation of knowledge at all levels as a fundamental driver of economic growth. according to romer only people can create new ideas that result in the recombination of things and their new usages and thus lead to economic prosperity. in order to support economic growth and development governments in both developed and developing countries have to create the macroeconomic policies that encourage investments in the research and development of new ideas as well as to subsidize the accumulation of total human capital (romer, 1990, p. s99). by linking all available analyses and theories of human capital with the ideas and innovations which human capital produces, romer is perceived as the founder of the new area of research – the concept of intellectual capital (kolaković, 2003, p. 930). the concept of intellectual capital is firmly based on a modern competitiveness theory. although it would be expected to discover the fundamentals of the intellectual capital theory in the managerial and organizational theories, this theory draws its roots from all the above mentioned macroeconomic theories. the intellectual capital theory can be viewed as one of the endogenous theories which is based on premises that the value of an enterprise is generated from human capital, structural capital and relational capital, i.e. when one form of capital is transformed into another form (kolaković, 2003, p. 925). for example, the value is created when individuals’ capabilities (human capital) create new organisational processes (structural capital) resulting in better services for customers and increased loyalty (relational capital). the first attempt to investigate the growth process in firms can, most likely, be ascribed to penrose’s (1959) effort to visualise the firm’s growth as a collective endogenous process in which its participants accumulate valuable knowledge, through a dynamic learning process embedded in the interactions between firm’s productive resources and market opportunities. the resource-based theory of the firm (penrose, 1959; wernerfelt, 1984; barney, 1991) views a firm as a unique set of the different resources and capabilities, thus pointing to the fact that the diversity between firms originates from its internal characteristics, i.e. the heterogeneous resources and capabilities it accumulates, improves and uses in the process of value creation. apart from the resource-based view, the competitiveness theory involves two other segments: the dynamic capabilities theory and the knowledge-based theory. the dynamic capabilities theory points to the fact that the resources of a firm and their efficient utilization are not enough to achieve sustainable competitive advantage, but specific capabilities of a firm are also required (krstić, 2007). teece et al. (1997) observe the dynamic capabilities of a firm as its capacity to integrate, develop and recreate the internal and external competencies to effectively respond to the fast changing environment. the microeconomic perspectives of intellectual capital measurement 193 the knowledge-based theory puts emphasis on the knowledge, as an imperfectly imitable resource, which differentiates and provides a competitive advantage (leonard-barton, 1992). the proponent of the knowledge-based theory grant (1996) points to the fact that “the critical input in production and primary source of value is knowledge” (p. 112). this lead to a conclusion that in the constantly changing surroundings, the most successful firms are those which produce original knowledge, spread it within the organization and quickly turn into innovative products. 3. reasons for measuring intellectual capital it is due to its immaterial nature, that intellectual capital is hard to define and even harder to measure. usually, intellectual capital is observed as the “knowledge that creates value” (viedma marti & cabrita, 2012, p. 69), or “any valuable intangible resource gained through experience and learning that can be used in the production of further wealth” (marr & moustaghfir, 2005, p. 1116). intellectual capital determines the future growth and development perspectives of an enterprise. modern knowledge enterprises, with high business performances, have beforehand acknowledged the importance of intellectual capital for their growth and development, and as a result they emphasise the following priority activities (krstić, 2014, p. 11):  identifying and increasing visibility of intellectual resources in the reports of business success and competitiveness;  guiding improvement and increase of intellectual capital of an enterprise through professional development, continuous training and education, research and development, cooperation, effective application of information technology and the concept of knowledge management;  creating and adding value to products and enterprises by the process of renewing and disseminating knowledge;  identifying key intellectual resources of an enterprise for the value increase and with the highest influence on its strategic position, growth and development. there are several reasons why it is essential for the enterprises in the globalized economy and intensive development of information and communication technologies, to measure the performances of intellectual resources and their intellectual capital, as well as to report on its performances and value. one of the reason is the change in the resource structure of the modern enterprise from tangible resources toward intangible intellectual resources (krstić, 2014, p. 67). namely, in the knowledge-based economy the managers of the knowledge enterprises, as well as stakeholders and investors are not content with the traditional measurement and reporting system of intellectual capital, since this system does not offer necessary information for the decision making process. the traditional measurement and reporting system concentrates on the financial information from official financial reports thus covering only one part of the intellectual resources such as intellectual property identified in the balance sheet of an enterprise. such a system does not provide room for the monitoring and valuing of the non-financial performances of intellectual resources. however, this does not mean that these intellectual resources do not exist in an enterprise. contrarily, these resources have to be efficiently managed due to their significance in the process of value creation, and hence in order to 194 t. rađenović, b. krstić be manageable, these resources have to be monitored, measured and reported about their performances to the internal and external stakeholders. in the knowledge economy it is evident that the traditional financial reports are far from exact reporting of the real value of a firm, and hence are inadequate starting point for the projections of its future possible business performances and value, especially as knowledge has taken the central place in the process of value creation. according to marr et al. (2003) modern enterprises are measuring their intellectual capital because of the following reasons (p. 443):  assisting enterprises in the formulation of their strategies;  supervising and assessing the implementation of the formulated strategies;  facilitating the strategic decision regarding diversification, expansion, integration and development;  helping in determining compensation benefits for employees and managers;  conveying activities and business performances to the external stakeholders. the problem of measuring performances of the intellectual capital and its segments comes from the intangible nature of the intellectual resources, but also because the economic outcomes are generated by the interactions and common utilization of diverse resources. therefore, it is hard to measure value and other performances of any partial component of intellectual capital, but instead it is usually measured as a single aggregate measure (krstić, 2014). 4. measurement methodologies at micro level there are several different methodologies for measuring unreported, invisible intellectual capital of enterprises. some are based on the financial approach tending to express the value of intellectual capital or financial value of some of its segments: human, structural or relational, (financial evaluation methodologies), while others do not apt to financially express and quantify the value of intellectual capital, but include various process measures more suitable for the immaterial nature of intellectual capital (non-financial evaluation methodologies) (krstić, 2014, p. 86). within these two broad sets of intellectual capital valuation methodologies, further diversification can be found in the literature (jurczak, 2008; sveiby, 2010; pike & roos, 2004; 2011; viedma marti & cabrita, 2012): direct intellectual capital (dic) methods, market capitalisation (mc) methods, return on assets (roa) methods, scorecard (sc) methods, proper measurement systems (ms) and other (see table 1). 4.1. direct intellectual capital methods dic methods estimate monetary value of intangible resources by identifying and valuing their different constitutive elements, either separately or as one aggregate coefficient. the main representatives of this group of methods are brooking’s “technology broker intellectual capital audit” (brooking, 1996), as well as sullivan’s “intellectual asset valuation” (sullivan, 2000). these methods offer a wide range of details and have proved to be very useful for measuring intellectual capital at any level of the organisation (pike & roos, 2004). also, dic methods are very useful for the non-government organisations, organisational units, government organisations and bodies, as well as, for the ecological, societal and public objectives (jurczak, 2008). however, the problem with this group of indicators is the concern of comprehensiveness, since even when they tend “to include as the microeconomic perspectives of intellectual capital measurement 195 many of the resources as possible, this only addresses the area of intrinsic value leaving the area of resource use or instrumental value unaddressed” (pike & roos, 2004, p. 10). brooking’s “intellectual capital audit” differentiates between four components of ic (1996, pp. 13-16):  market assets refer to the market-related intangibles such as: brands, consumers, loyalty, distribution channels, licensing, franchise, etc.;  human-centred assets involve employee’s competences, capabilities, expertise, skills, etc.;  intellectual property assets comprise know-how, trade secrets, copyrights, patents, marks, etc.; and  infrastructure assets encompass the corporate culture, communication systems, financial structure and other technologies and processes that enables the organisation functioning. according to this model, the value of intellectual capital is assessed from the analysis of the enterprise’s responses to the questionnaire comprising of 20 questions about these four main components of intellectual capital (komnenić, 2013). this value of intellectual capital is calculated as a monetary value by means of “traditional valuation approaches (market, income or cost) to each category” (viedma marti & cabrita, 2012, p. 152). table 1 methods for measuring intellectual capital direct intellectual capital methods scorecard methods  evvicaetm  dynamic monetary model  the value explorertm  intellectual asset valuation  total value creation (tvctm)  accounting for the future (aftf)  technology broker (ic audit)  citation-weighted patents  hr statement  human resource costing & accounting (hrca)  financial method of intangible assets measuring (fimiam)  icu report  intellectual asset-based management (iabm)  sicap  topplinjen/business iq  public sector ic  danish guidelines  dynamic valuation of intellectual capital (icdval tm )  intellectus model  ic rating tm  value chain scoreboard tm  meritum guidelines  intangible assets statement  knowledge audit cycle  value creation index (vci)  ic index tm  holistic accounts  skandia navigator tm  intangible asset monitor (iam)  balanced scorecard  german guideline – ics made in germany  intellectual capital benchmarking systems (icbs)  measuring and accounting ic (magic)  incas market capitalisation methods  the invisible balance sheet  market-to-book value  investor assigned market value (iamvtm)  tobin’s q  calculated intangible value return on assets methods  economic value added (eva tm )  calculated intangible value (civ)  knowledge capital earnings  value added intellectual coefficient (vaic tm )  eic method proper measurement systems  holistic value approach (hva)  inclusive value management (ivm tm ) source: adapted from viedma marti and cabrita (2012, p. 132) 196 t. rađenović, b. krstić sullivan’s “intellectual asset valuation” measures the market value of the firm as the sum of the values of the tangible assets and intellectual capital, where “the discounted value of the cash flow generated by intellectual capital equals the value of intellectual capital” (andriessen, 2004, p. 355). according to sullivan (2000, p. 119) “market capitalization reflects the market’s view of two things. first, it reflects the market’s understanding of the value of the firm’s fixed assets, those found on the company’s balance sheet. second, it reflects the market’s intuition or perception of both the amounts of (a company’s) intellectual capital as well as its ability to leverage that intellectual capital in its market place”. the sullivan’s method differentiates three earnings streams from: intellectual capital, complementary business assets and structural capital, but without detailed explanation how to isolate and estimate these earnings (andriessen, 2004). 4.2. market capitalisation methods mc methods determine the value of intellectual capital as the difference between the market capitalisation value and shareholders’ equity value of a company. the robustness of these methods comes from the fact that they rely on financial figures which are, if not ideal, at least auditable and are proven to be useful for the rough comparison of companies from the same industry, although without many details (jurczak, 2008, p. 41). but, the main weakness of these models comes from the fact that they are trying to link the financial figures with the market share prices that are changing constantly (pike & roos, 2004). the most noticeable method within this group is market-to-book value which evaluates the value of off-balance sheet intellectual capital by calculating the difference between the market value of the shareholders’ equity and book value of the firm’s net assets (krstić, 2014, p. 87). this method is easy to implement and enables comparison over time and with other entities. however, this method only evaluates the value of the intellectual capital of the firm, but without determining the value of some of the intellectual capital components. besides, this method is not reliable due to the daily fluctuations of the share prices (an, 2015). 4.3. return on assets methods roa methods are commonly applied for comparison of the roa between various companies. return on assets is calculated when the earnings before taxes of an enterprise for a given period is divided by the average value of the total tangible assets reported in the balance sheet (viedma marti & cabrita, 2012, p. 133). the roa indicator calculated in this manner is then compared with the average roa of the industry to which that enterprise belongs. in case when the roa of the enterprise is above the average roa for the given industry, then the enterprise has generated the extra value that is attributable to the intellectual capital (krstić, 2014). the opposite is also possible, meaning that when the enterprise’s roa is below the average roa of a given industry, then the value of intellectual capital does not exist, i.e. it is equal to zero. the difference between the enterprise’s roa and the industry roa is multiplied with the average value of the tangible assets reported in the balance sheet, in order to determine the part of the earnings that represent the contribution of the intangible assets not reported in the balance sheet, that is the contribution of intellectual capital (krstić, 2014). the estimated value of the intellectual capital is determined by dividing this part of the earnings with the cost of capital or an interest rate (jurczak, 2008). the microeconomic perspectives of intellectual capital measurement 197 roa methods provide information based on the financial data and therefore, similar to mc methods, serve as a solid base for the comparison of firms in the same industry. however, these methods are very sensitive to the interest rate assumption and opposite to dic methods are of no value for the non-profit organisations and government agencies (roos et al., 2005). for example, the steward’s “calculated intangible value” belongs to this group of methods. the “calculated intangible value” method draws its roots from the assumption that the premium on an enterprise value results from its intangible assets (andriessen, 2004). steward (1997) illustrates this method through the seven step procedure: 1. determine the average before tax earnings for a three-year period; 2. determine the average value of tangible assets over the same period; 3. compute the roa; 4. determine the average industry roa for the same period; 5. determine the above-average return of a firm (premium) by multiplying the average industry roa with the value of the firm’s intangible assets and subtracting the result from the before tax earnings; 6. determine the net premium by multiplying the excess return with the average tax rate; 7. determine the present value of the net premium by discounting it with a proper discount rate. this method is a sophisticated method which uses publicly obtainable information to determine the intellectual capital premium, but this calculated intangible value does not reflect the value of all intangible resources, since the earnings from the reported intangibles are not encompassed (andriessen, 2004). in the group of roa methods an interesting methodological framework is developed by krstić and bonić (2016) for measuring the efficiency of the total intellectual capital of an enterprise (eic) by calculating the partial efficiency measures of the intellectual capital components. eic method combines the financial accounting valuation with the market valuation by determining the value of the intellectual capital from two parts: the intellectual capital disclosed on the balance sheet of a firm and the undisclosed intellectual capital (krstić & bonić, 2016). this method is easy to apply especially to the companies listed on the stock exchanges since it is based on the publicly available information, but experience limitations with the companies that are not listed on the market and requires other solutions for the calculation of the market value. 4.4. scorecard methods sc methods include various methods for measuring and reporting on intellectual capital performances, which identify different groups of intellectual resources and offer indicators for their measurement. these methods are to some extent identical to the dic methods with a difference that they do not make financial valuation and do not provide the aggregate composite index of intellectual capital, but rather a set of partial indicators for each category of intellectual capital according to the basic classification (krstić, 2014). at the same time these methods are used for the reporting on the performances of intellectual capital, such as the “balanced scorecard” developed by kaplan and norton (1996) and sveiby’s “intangible asset monitor” (1997). these methods provide more information than other methods, can be easily implemented to any organisational level, use a bottom up approach in measuring intellectual resources and are 198 t. rađenović, b. krstić very useful for non-profit organisations, government bodies and various business units (roos et al., 2005). however, these methods provide contextual indicators that cannot be compared between organisations and cannot be easily aligned with the financial results (pike & roos, 2004). the “balanced scorecard” method is a very popular and widely used model that evolved from performance measurement through strategy implementation and management to a management framework for the readiness of intangibles (kaplan & norton, 1992; 1996; 2001; 2004). the balanced scorecard model interprets the firm’s mission and strategy through the broad set of performance measures thus providing the basis for the strategic system of measurement and management (viedma marti & cabrita, 2012). this method “encourages companies to monitor their performance not only from the financial but also from the nonfinancial perspective, comprising the customer, the internal business process, and the learning and growth perspective” (an, 2015, p. 26). by combining all these perspectives into a comprehensible system, this model facilitates the decision making process of top management by providing powerful analysis of the firm’s performances. an efficient balanced scorecard model translates the four fundamental components: mission, values, vision and strategy of a firm, “into objectives and key performance indicators based on four different perspectives” (roos et al., 2005, p. 304). however, this model has been criticized for the rigidness since it concentrates only on four perspectives, thus some key success factors may be unnoticed (andriessen, 2004). further, the model only takes care of some stakeholders such as consumers and shareholders, while excluding employees, providers, associates and the community (roos et al., 2005). the sveiby’s “intangible asset monitor” also belongs to the group of sc methods. the conceptual framework of the model comprises of three-by-three matrix (an, 2015). in this matrix the first “three” refers to the three components of the intellectual capital: the external structure, the internal structure and competence, while the second “three” refers to three groups of indicators for each intellectual capital component: indicators of growth/renewal, indicators of efficiency and indicators of stability (sveiby, 1997, p. 78). the indicators are selected based on the firm’s strategy and for each intangible asset only a limited number of the measurement indicators should be included “with the most important areas needing to be covered those of growth and renewal, efficiency and stability” (bontis, 2001, p. 52). it is very simple to use. 4.5. proper measurement systems ms methods take everything of value inside or outside the company and break them down into measurable attributes which are then organized into a measurement system, valued by using the real data and combined with financial data to deliver value for money and related outputs (pike & roos, 2004). this approach aims at all-inclusiveness and consistency with a clear handling of all aspects of intangible value, and hence if done properly offers the possibility of reliable measurement as well as an adequate combination of intellectual capital resources and financial resources (roos et al., 2005). the representative model in this group is the “holistic value approach” developed by pike and roos (2000). the hva is the third generation of the intellectual capital practice (chatzkel, 2002), that resolves the difficulty of creating one overall measure from numerous measures of different units. opposite to other intellectual capital models in which the combination of diverse the microeconomic perspectives of intellectual capital measurement 199 measures did not fulfil the obligatory requirements and validity conditions as defined by measurement theory, the hva does satisfy these requirements, since it merges the elements of the intellectual capital index tm developed by roos et al. (1997) and the inclusive value methodology tm developed by m’pherson and pike (2001). this model makes a difference between the value created within the organisation, and the value created externally with various sources this value comes from (pike & roos, 2000). these internal and external, financial and non-financial values, are grouped “within the definition of inclusive value” (viedma marti & cabrita, 2012, p. 154). value is generated through the various value creation paths which represent the business model of a company (chatzkel, 2002). these value creation paths are displayed in one picture – “navigator that visualizes how value is really created in the organization” (viedma marti & cabrita, 2012, p. 154). the starting point in the model is to identify the key stakeholders and outline the strategic objectives of the organization, its activities and values. this model starts with the premise that value is subjective, i.e. “value, like beauty, is in the eye of the beholder” (chatzkel, 2002, p. 115), meaning that the same indicator can have different value through the lens of different observers/stakeholders. however, the axiology states that “value is measurable if the preferences of the beholder are well defined” (andriessen, 2004, p. 301), that is, if the hierarchy of value exists for each stakeholder involved in value measurement (pike et al., 2002). the hva is based on the assumption that all stakeholders will generally have a similar set of objectives, however the hierarchy of the objectives will be different among them due to the relative importance of each objective (pike & roos, 2000). therefore, each objective will be assigned appropriate weights relative to its importance to the stakeholder. the following stage in the model refers to the translation of the objectives into measurable attributes. the described process of identification and ranking of objectives and the measurement of attributes can be accomplished only by operating personnel that perform daily business operations. the determined relations between the measurable attributes identifies the business value-creating pathways (viedma marti & cabrita, 2012). in a navigator picture each main resource is denoted by a circle whose size depends on the relative importance of the key resource, while the linking arrows symbolise the change of one resource into another and the arrows’ thickness reveals the importance of change (andriessen, 2004). the result is a model of the business as a value generator (pike & roos, 2000). the hva model is a very useful tool for making trade-off decisions, especially in circumstances where the interests of several stakeholders have to be addressed and thus could play a significant role in the straightforward communication with particular stakeholder groups (andriessen, 2004). however, from the above described process it is evident that this method is somewhat complex to implement without the expert support. conclusion the trends of globalization, deregulation and remarkable technological developments, especially concerning the information and communication technologies, have formed a new era that has redesigned the global socioeconomic settings. the rapid development of information and communication technologies brings substantial benefits which are used to intensify the dynamics of economic development of countries and regions, thus leading to the effective transformation of knowledge, skills, talents and know-how of individuals in profit and non-profit organisations and enterprises. these processes are altering the 200 t. rađenović, b. krstić competitive market structure. in this new conditions, the knowledge has become the crucial production factor, and driver of the firm’s value creation, sustainable competitive advantage and national prosperity. the long-term economic growth and development are at the same time driven and constrained by the knowledge creation, dissemination and use. the importance of intellectual resources in the knowledge-based economy has given rise to the development of numerous measurement methods with the aim to satisfy the requirements of various stakeholders and to enable the management of these invisible resources. one of the reasons for measuring and reporting on intangibles is the changed structure of resources in the modern knowledge enterprises from tangible resources toward intangible intellectual resources. managers, shareholders and other stakeholders acknowledge the importance of proper measurement and reporting of these valuable resources. additionally, these knowledge enterprises have appreciated that the proper management, especially of non-financial performances of intellectual capital, can enhance the strategic decision making processes in the organization, enable better determination of the compensation benefits for workers, and improve the communication of firm’s performances to the external stakeholders. however, in order to properly manage intangibles, it is necessary to develop and implement a sound measurement methodology that will address the requirements of all interested parties. hence, the most significant methods for the intellectual capital measurement at microeconomic level have been elaborated in this paper, since the list of the measurement methodologies is non-exhaustive. the authors have highlighted the advantages and disadvantages of the given models, so that the managers can choose the appropriate model for their organization, based on the outcomes they want to achieve. certainly, the most comprehensive measurement system is the holistic value approach which captures the financial and non-financial value of intellectual capital. from all the above mentioned, it is clear that intellectual capital is the most important driver for creating value and competitive advantage, and therefore its significance must be communicated to all stakeholders through a sound measurement system. acknowledgement: the paper is a 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(1997). intangible assets monitor. journal of human resource costing and accounting, 2(1), 73-97. doi:10.1108/eb029036 teece, d. j., pisano, g., & shuen, a. (1997). dynamic capabilities and strategic management. strategic management journal, 18, 509-533. viedma marti, j. m., & cabrita, m. r. (2012). entrepreneurial excellence in the knowledge economy: intellectual capital benchmarking systems. basingstoke: palgrave macmillan. wernerfelt, b. (1984). a resource-based view of the firm. strategic management journal, 5(2), 171-180. retrieved from http://www.jstor.org/stable/2486175 mikroekonomske perspektive merenja intelektualnog kapitala intelektualni kapital je izuzetno proučavan koncept među istraživačima u ekonomiji znanja. ovo iz razloga što su intelektualni resursi ključni pokretači rasta i konkurentnosti u globalizovanom okruženju. međutim, merenje intelektualnog kapitala, kao nematerijalnog resursa, nije jednostavan zadatak. istraživači već nekoliko decenija pokušavaju da postave sistem merenja koji će omogućiti korisne upravljačke informacije menadžerima. postoje brojne metodologije merenja, ali lista nije konačna. adekvatna upotreba metodologija merenja intelektualnog kapitala omogućava adekvatno upravljanje intelektualnim kapitalom i time vodi do stvaranja konkurentske prednosti i uvećanja vrednosti za preduzeća i bogatstva nacije. zbog toga, cilj rada je da analizira različite mikroekonomske metodologije merenja intelektualnog kapitala koje se fokusiraju na nivo organizacije. autori kritički analiziraju brojne zapažene metode vrednovanja intelektualnog kapitala, kao i indikatore koji se koriste kako bi se obuhvatile performanse intelektualnog kapitala, doprinoseći time unapređenju procesa upravljanja nevidljivim, vrednim nematerijalnim resursima u cilju stvaranja vrednosti za različite stejkholdere i unapređenja konkurentnosti preduzeća. ključne reči: intelektualni kapital, nematerijalna aktiva, znanje, ekonomija znanja, metodologije merenja, konkurentnost plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 17, no 3, 2020, pp. 219 230 https://doi.org/10.22190/fueo200408017g © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper analysis of socioeconomic status, gender, and academic achievements influence on student career maturity1 udc 159.923.2.072-057.875 muhammad abdul ghofur, ady soejoto, heni purwa pamungkas universitas negeri surabaya, faculty of economics and business, surabaya, indonesia abstract. career maturity is defined as a person's ability to identify and prepare for a career choice. career maturity will be necessary for students because as the level of career maturity increases, the achievement of their work will also increase. this study aims to determine the factors that influence student career maturity. the type of research used is correlational research with quantitative methods. data were collected using a questionnaire method and data analysis techniques using multiple linear regression. the results of the regression analysis showed that gender variables influenced career maturity, while academic achievement and socioeconomic status do not have a significant influence on student career maturity. key words: career maturity, academic achievement, socioeconomic status. jel classification: j16, a23, o15. 1. introduction an increase in the number of graduates with no education is accompanied by an increase in the absorption of teacher personnel, resulting in increasingly fierce levels of competition for graduate education. in response to this, career maturity is essential for students. simply stated, career maturity is interpreted as a person's ability to determine and prepare for their chosen career. super and knasel (1981) say that career maturity defines as readiness in determining career choices, attitudes, and competencies as well as relevant information needed in determining career choices. creed (2001) states that career maturity includes the ability of individuals to make appropriate career choices, including considerations when making reliable and consistent received april 08, 2020 / revised april 21, 2020 / revised june 13, 2020 / accepted june 22, 2020 corresponding author: muhammad abdul ghofur department of economics educations, universitas negeri surabaya, indonesia e-mail: muhammadghofur@unesa.ac.id 220 m. a. ghofur, a. soejoto, h. p. pamungkas decisions. besides, career maturity also involves various aspects of a person. janeiro (2010) states that the development of one's career behavior requires complex processes, including interactions between cognitive, motivational, and affective dimensions. the cognitive dimension consists of decision-making skills, while the affective dimension includes attitudes in the decision-making process. furthermore, super and knasel (1981) divided the stages of a person's career development into five stages, namely: (1) the stage of growth at the age of 0-14 years; (2) the exploration stage when someone is 14-24 years old; (3) stabilization stage; (4) maintaining stage; and (5) the release stage. at the exploration stage, there are three sub-stages, namely: the tentative stage when a person is 15-17 years old, then the crystallization stage of job choices, and the stage of job choice specifications. at each stage, some separate tasks and characteristics must be fulfilled. determination of one's career maturity is influenced by various aspects, including socioeconomic status, parental support, gender, academic achievement, learning motivation, and so on. these factors determine the level of maturity in one's career. there has not been much research that examines the factors that influence student career maturity. choi et. al (2012) state that parental support has a positive effect on a person's career maturity. parent intervention influences decisions in determining careers. other research conducted by luzzo (1995) examined the impact of gender differences on the career maturity of students; the results of this study stated that there were differences in career maturity between male and female students. nevertheless, empirically there are still many differences in the career maturity levels of male and female students in various contexts. some studies state that there is no significant difference in career maturity between male and female students, for example, the research of lee and hughey (2001). research conducted by jawarneh (2016) revealed the same results. the study involved 284 students in jordan, with a majority of female participants as much as 91.5% (260 students) and men as little as 8.5% (24 students). the study concluded that there were no differences in the level of career maturity based on gender. still, there were differences in the dimensions of career planning between second-year students and final year students. heo and kim (2016) conducted a study to examine the relationship between self-esteem and adolescent career maturity in south korea. this longitudinal study was carried out over four years and used stratified multistage cluster sampling in determining samples. the results of the study stated that there were differences in the level of self-esteem of participants from year to year. still, there were no differences in the level of career maturity between female and male participants. on the other hand, several studies have different results from the above studies. other studies suggest that women are more mature than men, as lee (2001) and patton and creed (2003) research. in line with the results of the above study, the research of yon, choi, and goh (2013) shows that gender and socioeconomic status variables correlate with one's career maturity. but in the analysis conducted by previous researchers, the career maturity of students from various levels of social status is relatively the same, or there is no real difference, even though students from higher socioeconomic status have lower career maturity levels (rinanda and ghofur, 2019). as previously mentioned, the research conducted by jawarneh (2016) in jordania and heo and kim (2016) in south korea equally concluded that gender does not affect the level of career maturity. the results were in contrast to the research conducted by koumoundourou, kounenou, and siavara (2012), stating that there is a difference in career maturity between male and female students. the research of patton and creed (2002) examining the level of analysis of socioeconomic status, gender, and academic achievements to student career maturity 221 career maturity involving 377 adolescents in australia, also concluded that girls have a higher score than teenage boys in terms of career planning, workplace information, and career decision-making. research related factors affecting the level of career maturity have different outcomes. many factors affect the difference in these outcomes. therefore, current research aims to continue previous research. when viewed in terms of age, according to super and knasel (1981), students enter a period of crystallizing work tendencies, that is, a time when someone already has realistic considerations when entering the workforce, choosing work preferences, and developing realistic self-concepts. career maturity is essential for students to have because it will have an impact on work performance. a well-prepared career will have a positive effect on future career success (spurk et al. 2015). as the level of career maturity gets higher, the achievement of one's work will also increase. on the contrary, when the level of career maturity is low, the individual does not have a plan regarding what career will be chosen, what competencies are needed, and how to prepare to achieve the chosen career. based on observations in the field, not all students have a high level of career maturity. there are still students who do not yet have a career planning or grasp of the future. how to prepare themselves, whether the chosen majors by the field of work should be pursued, as well as what skills are needed to achieve that career. also, some students do not even know what they will become after graduating from college. so, when they enter the world of work, there are students who work not following the area of expertise learned during college, though learning on campus is an integral part of one's career (stephen and burke, 1994). the learning experience on campus is also very closely related to how students can build their careers; students who focus on learning related to the chosen career can develop careers more easily (kim and shin, 2020). the learning experience will also encourage students to strive for optimal learning outcomes; of course, they will try to get the best grades in those lectures that are closely related to their chosen career. the value of learning outcomes is often considered a measure of one's competence (chhinzer and russo, 2018; rothman, 2017). knowing the level of student career maturity is needed by various parties, especially managers of a university. knowing some critical factors related to student career maturity can be important initial information for future learning policymaking. career maturity plays a vital role in the stages of one's career development. the ability to determine and prepare for a career needs to be conditioned to run according to the stages. therefore, this study aims to examine the relationship between socioeconomic status, gender, and academic achievement on student career maturity. 2. literature review 2.1. career maturity crites and savickas (1996) state that career maturity is the ability and readiness of a person to determine their career choices both now and in the future, whereas patton and creed (2001) state that career maturity includes the ability of individuals to make appropriate career choices, including considerations when making reliable and consistent decisions. a person's career maturity can be used to measure the level of affective and cognitive career development that has been achieved. janeiro (2010) states that the development of one's career behavior involves complex processes, including interactions 222 m. a. ghofur, a. soejoto, h. p. pamungkas between cognitive, motivational, and affective dimensions. “the cognitive dimension consists of decision-making skills, while the affective dimension includes attitudes in the decision-making process.” crites (1973) argues that a person's career maturity divided can be seen in five aspects. namely: “(a) involvement in the choice process; (b) orientation toward work; (c) independence in decision making; (d) preference for vocational choice factors; and (e) conception of the choice process.” career choice and development is an essential process in implementing one's selfconcept (super 1980). the concept of self is a very complex interaction of several factors, including physical and mental development, personal experience, and environmental characteristics. in its development, a person's career stage can be divided into five stages. other opinions about the stages of career maturity come from cobb and yvette (2008), who stated that a person's career development would go through seven phases, namely: exploration, personal assessment, analysis, decision making, planning, implementation, and management of the world of work. another career development theory was coined by gottfredson (2002), which states that choosing a career is a process that requires a high level of cognitive ability. gottfredson's theory combines innate characteristics with the surrounding environment. a person's career inspiration is more influenced by the surrounding environment (e.g., gender, social status) than the personal aspects of self-concept (e.g., skills and interests). there are four stages in the process of one's career development, including: “(1) orientation to size and power, (2) orientation to sex-roles, (3) orientation to social valuation, (4) orientation to the internal.” another theory was coined by lent (2013), who described the relationship between people and the environment. the theory is better known as the social cognitive career theory (scct). this theory explains three things, namely: (a) academic and vocational development; (b) how individuals choose education and careers; (c) career education and performance. furthermore, scct explained that the development of career goals and choices as a function of the interaction between self-efficacy expected outcomes and interests. choosing a career is a process in which the environment and individuals influence one another. this involves career choices or goals, actions to achieve those goals, and individual experiences that match the objectives. 2.2. socioeconomic status based on the social cognitive career theory (ssct), socioeconomic status is an aspect that affects the development of one's self-efficacy. the family's socioeconomic status is associated with a person's achievement/strata in community life. individuals who have a high level of socioeconomic status will have the opportunity to gain higher education, support parents, and have more role models in selecting jobs (hsieh and huang 2014). some research has proved that parent support variables and family structures as indicators of family socioeconomic status have an essential role in the development of adult careers. the research conducted by metheny and mcwhirter (2013) proved that family socioeconomic status and family support influenced career development. the study involved 270 male and female students. the variable predictor used is a family socioeconomic status, family support, the intensity of career-related family interactions. contrary to the research conducted by hsieh and huang (2014) and also metheny and mcwhirter (2013), several studies have different results. research conducted (patel et al., 2008) reveals that gender, parental support, family social support, and socioeconomic status analysis of socioeconomic status, gender, and academic achievements to student career maturity 223 do not contribute to the self-efficacy of career decision making. the study took a sampling of teenagers in vietnam, of 85 people. another study by shin and lee (2018) also gave similar results. the study tested gender variables, socioeconomic status, classism, and locus of control as contributing factors to student career selection. the study involved 139 students. the results of the survey stated that (a) gender and socioeconomic status did not contribute significantly to the self-efficacy of student career selection, (b) classism and modern sexism contributed to student career selection. it indicated that classism and modern sexism are more critical than the socioeconomic status in predicting the self-efficacy of student career selection. indicators of socioeconomic status can be measured through three variables: parents' income, parental education level, and parental work (sirin 2005). parents' income is an ses indicator that describes the resources available to students in education. 2.3. academic achievement academic achievement is one of the measures of learning outcomes at formal institutions. academic achievement is also associated with lower stress, higher self-concept, higher self-efficacy, and health. academic achievement is essential to achieving learning objectives at school. also, academic achievement can be interpreted as a person's achievement in the dimension of knowledge, skills, and behavior. it is reflected in the mastery of knowledge and skills on a particular subject. rugutt and chemosit (2005) stated that several factors are affecting academic achievement, namely: early student skills, motivation, age, teaching instruction quality, learning climate, etc. 3. methodology this is a correlational study, whereas when viewed from the angle of the approach or method used, it was quantitative. the model of this research is explained in figure 1. the independent variable in this study is socioeconomic status (x1), gender (d), and academic achievement (x2). the dependent variable is career maturity (y). gender is a variable with a nominal scale, so in the analysis, it uses regression dummy variable analysis. chen, et.all (2018) state that socioeconomic status is measured from three dimensions, namely: family income, parental education level, and parental occupation, while the academic cumulation index regulates academic achievement in the last semester of students. while the data analysis technique used is multiple linear regression analysis techniques with dummy variables. fig. 1 research model socioeconomic status (x1) gender (d) academic achievement (x2) career maturity (y) 224 m. a. ghofur, a. soejoto, h. p. pamungkas the population of this study was all active students of the faculty of economics, universitas negeri surabaya. total students who meet the criteria as a population amounts to 947 students. data were taken from 175 students in 4 different programs—determination of respondents who became the study sample using the stratified random sampling method. the data collection method in this study uses a closed questionnaire. the questionnaire contains age-related information, gender, parental income, and parental education. also, the poll comes with a question to measure the maturity level of the student career socioeconomic status. the variable item of student career maturity was developed by the researchers based on the career maturity inventory of savickas and porfeli (2011). the student's socioeconomic status was measured by several indicators, namely: father's education, father's income, father's job, mother's education, mother's job, and mother's income. the level of parental education was divided into four levels: junior high school, high school, undergraduate, and postgraduate. the academic achievement variables of this study were measured based on the academic achievement index in the last semester of the student. the academic achievement data is taken directly from the data owned by the campus administration. 4. result and discussion the level of student career maturity is still mostly in the medium category. in table 1. it can be seen that only 8% of students categorized as having good career maturity. the remaining 92% still need attention because they have not prepared their careers well. most of them, if they graduate later, will possibly face a pretty hard time in tackling the competition. table 1 frequency distribution for student career maturity interval midpt frequency rel. cum. < 32.250 27.000 1 0.57% 0.57% 32.250 42.750 37.500 10 5.71% 6.29% 42.750 53.250 48.000 65 37.14% 43.43% 53.250 63.750 58.500 85 48.57% 92.00% >= 63.750 69.000 14 8.00% 100.00% from table 2 that illustrates the distribution of the cumulative value index of students, it is known that this range of values is divided into five interval ranges. there was only one person with an index <2.45, students with grades between 3.24-3.64 are 141 people, and students with grades> 3.6 are 27 people. overall, the average student score was 3.49. the value of this student, when compared to the size of the index value in indonesia, is outstanding. regardless of how students obtain these grades, this value index is often a requirement in applying for jobs. table 2 frequency distribution for academic achievements interval midpt frequency rel. cum. < 2,4575 2,2600 1 0,57% 0,57% 2,4575 2,8525 2,6550 0 0,00% 0,57% 2,8525 3,2475 3,0500 6 3,43% 4,00% 3,2475 3,6425 3,4450 141 80,57% 84,57% >= 3,6425 3,8400 27 15,43% 100,00% analysis of socioeconomic status, gender, and academic achievements to student career maturity 225 female students dominated the students who became the sample of this study. 82.86% of the sample were female, and 17.14% were male. this information is a picture of the general condition in universities, where most of their study programs are scientific fields in education in indonesia. the socioeconomic status of the respondents is depicted in table 3. most respondents come from families with socioeconomic status down to the middle. as many as 78.86% of them are in the lower and middle socioeconomic status indicating that they are in a reasonably stable socioeconomic environment. table 3 frequency distribution for socioeconomic status frequency rel. cum. 1 81 46.29% 46.29% 2 57 32.57% 78.86% 3 36 20.57% 99.43% 4 1 0.57% 100.00% from the regression results in table 4, it is concluded that only the gender variable is proven to influence career maturity. in contrast, the two other variables, namely academic achievement, and unconfirmed social status, have a significant effect on career maturity. the gender variable has a p-value of 0.0516, with a coefficient of -2.6905. the p-value indicates that gender influences career maturity. table 4 regression result, dependent variable: career maturity variable coefficient std. error t-ratio p-value const 42.0787 10.5078 4.005 <0.0001 academic achievement 4.26869 3.00796 1.419 0.1577 dummy gender −2.69048 1.37277 −1.960 0.0516 dummy socio-economic_1 −1.47341 1.44043 −1.023 0.3078 dummy socio-economic_2 −0.224781 1.17283 −0.1917 0.8482 the difference in career maturity between female and male students is confirmed in this study. these results also confirm research conducted by luzzo (1995) that “there are differences in career maturity between male and female students.” in the context of the career maturity of economics students, it turns out that the level of career maturity of a student can be seen from their gender. the coefficient value of the variable career maturity is negative in this study because the quantification of the male gender is number 1. at the same time, the female is number 0, indicating that the career maturity of female students is better than male students. conclusions of research such as those by lee (2001) patton and creed (2003), which state that the career maturity of women is better than men are confirmed in this study. conclusions from the study of yon et al. (2013) can be valuable information about why this can happen, where female students have a higher interest in finding information about jobs and skills that must be possessed for their future. the level of career maturity of female students who are better than men still does not guarantee that their careers in the future can develop better; there are still many obstacles that must be faced by women in developing their careers. although women have a high 226 m. a. ghofur, a. soejoto, h. p. pamungkas desire to improve their career, they have to deal with obstacles that almost all women will face, namely: less personal time burdens, enormous responsibilities for caring for families, and lack of extra work time opportunities (ismail and ibrahim 2008; matot et al. 2020). views of the society about gender in certain occupations have not changed, especially in the asian region (ronald, susan, and debra 2006). many of them still hold the traditional view that some jobs are not optimal when done by women. “career barriers identified by women in academic operations are very complex and include cultural factors from within and outside the profession, as well as other practical factors” (tlaiss and kauser 2010). identifying and dismantling barriers, especially those that harm perceptions of ownership, is crucial for creating a culture of sustainable excellence (cochran, neumayer, and elder 2019). however, women today are part of a precious resource for the survival of the world economy. efforts to support women's career development must not only be made in the learning process but still need to be done after a period of work, or work environment should be able to support women's career development (eyigör et al. 2020; kitada and harada 2019). all parties must have an active role in supporting women's career development. both in an academic environment, where they are still preparing for their future and in a work environment, where they must have a significant contribution. the correlation between career maturity and academic achievement can be seen from the p-value of academic achievement. the results of the regression analysis stated that the academic achievement p-value was 0.1577, and the regression coefficient value was 4.26869. from the p-value, it can be seen that academic achievement does not significantly influence career maturity. the results of this study support research conducted by roth and clarke (1998), which states that the level of academic achievement does not reflect one's work performance. this matter might be due to the measurement of academic achievement that uses academic achievement which does not yet reflect one's abilities. lei, bassiri, and schultz (2001) state that in determining academic achievement, there are differences in assessment criteria between one teacher and another. so, there is a possibility that grades can increase without being accompanied by an increase in students' abilities. another reason that is closer to career maturity is that many students think that academic achievement is not essential to them. they tend to pay attention to how they play a role in career achievement. the perceived role in learning related to a planned career was a more substantial effect than the value of the course (peteranetz et al. 2018). although many have found that adolescents with a secure future orientation, who have invested in career planning activities tend to perform better in school and vice versa, high academic achievement further reinforces the positive outlook of teens about their vocational future. however, it turns out that in the longitudinal perspective, the relationship between career maturity and academic achievement proves the opposite, there are no significant links. these longitudinal relationship patterns apply to male and female students (negrusubtirica and pop, 2016). in the long run, academic achievement is also not very important in one's career development. “a high-performance orientation protects potential negative influences from low levels of academic competence and value on career satisfaction” (van dierendonck and van der gaast 2013). the social status in this study was also not confirmed to have a significant effect on a person's career maturity. this matter can be seen from the p-value of 0.3078, where the value is higher than the alpha value, so ho is not rejected and ha must be rejected. social status has a analysis of socioeconomic status, gender, and academic achievements to student career maturity 227 regression coefficient of -1.44734, which means that social status harms career maturity, although it is not significant. this conclusion is consistent with the analysis of research conducted by previous researchers, the career maturity of students from various levels of social status is relatively the same, or there is no real difference. however, students from higher socioeconomic status have lower career maturity levels (rinanda and ghofur, 2019). although the research of yon, choi, and goh (2013) proves that gender and socioeconomic status variables correlate with one's career maturity, conclusions in some other studies show that there is indeed often a difference. in sweden, the original social position is a less significant predictor of the level of education a person attains and the socioeconomic or occupational position (sorjonen et al. 2012) although this study did not find a strong relationship between socioeconomic status and career maturity, it must remain a concern because there is a possibility that those from the lower classes have limited access to the network. behtoui and neergaard's (2012) research proves that socioeconomic background and gender have an impact on their access to a network of valuable resources. what should be of concern to the university is how to equip students with the ability to adapt well in the work environment. this ability to adapt is essential in the success of work (monteiro, taveira, and almeida 2019). for students from high economic backgrounds, the current career maturity tends to be lower than for students with lower socioeconomic status, because they have not found the right view on the future of their current job. they pay more attention to salary levels, future financial prospects, and job security because they are used to having a high standard of living (ayodele 2019). 5. conclusion the results of the data analysis showed that the socioeconomic status variable and academic achievement did not influence the career maturity of the students of the faculty of economics, universitas negeri surabaya. this matter is because academic achievement, as measured by the latest academic achievement index, does not yet reflect the true abilities of students. the gender variable influences the career maturity of students of the faculty of economics, universitas negeri surabaya, although the effect is not too significant. for further research, it is expected that the variables that affect the career maturity of students who have not been considered in this study, for example, variables of self-efficacy, age, parental support, and attitude will be considered. there are some limitations to this study. firstly, research samples are limited to only four courses that exist in the faculty of economics and dominated by female students. further research expected to develop research with a balanced proportion between female and male participants. secondly, an academic prestige indicator uses the academic achievement index. the provision of value feared there are significant elements of the subjectivity of each lecturer. so, it is feared that the academic achievement index has not been able to represent real academic achievements. therefore, subsequent research should use other variables to measure student academic achievements. thirdly, this study only examines variables that are socioeconomic status, gender difference, and academic achievement. advice 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(2013). career maturity growth curve and sex-role stereotypes of korean adolescents. journal of career development, 40(3), 203–222. https://doi.org/10.1177/0894845312445515 analiza uticaja socioekonomskog statusa, pola i akademskih postignuća na nivo karijerne zrelosti studenata karijerna zrelost se definiše kao sposobnost osobe da identifikuje i pripremi se za izbor karijere. karijerna zrelost je neophodna studentima jer, što je nivo karijerne zrelosti veći, povećaće se i njihova postignuća u radu. ova studija ima za cilj da odredi faktore koji utiču na karijernu zrelost studenata. vrsta istraživanja koja je koriščena je korelaciono istraživanje sa kvantitativnim metodama. podaci su sakupljeni korišćenjem metoda upitnika i tehnike analize podataka korišćenjem višestruke linearne regresije. rezultati regresione analize pokazali su da vaijabla pola utiče na karijernu zrelost, dok akademsko postignuće i socioekonomski status nemaju značajnog uticaja na karijernu zrelost studenata. ključne reči: karijerna zrelost, akademska postignuća, socioekonomski status facta universitatis series: economics and organization vol. 17, n o 2, 2020, pp. 187 202 https://doi.org/10.22190/fueo200304014d © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper comparative analysis of ppp projects sectoral structure in developed and developing countries 1 udc 005.8:352.07 658.114.2 aleksandar đorđević 1 , biljana rakić 2 1 university of niš, innovation center, serbia 2 university of niš, faculty of economics, serbia abstract. this paper aims to compare the type of public-private partnership (ppp) projects and their sectoral structure in developed and developing countries. this will be done through a comparative analysis of eight countries that belong to the categories of developed and developing countries and besides that implement numerous ppp projects. the results of the analysis indicate that developed countries chosen for this analysis implement more projects and record a higher total value of projects. their projects are more diversified and apart from economic infrastructure encompass social infrastructure, which does have a higher number of projects, and in some developed countries higher value than economic infrastructure sectors. there is some overlapping between the groups and the sectors as this is not a strict rule that could be applied to all the countries, as each economy is an individual and specific case. as adequate ppp structure leads to economic growth and prosperity of the national economy, it is recommended to adjust the institutional framework, laws and regulations for ppp, attract more private capital, develop basic economic infrastructure and with its help attempt to converge the ppp project structure of developing countries to that of developed countries. the final goal is to have well developed economic infrastructure and then invest more in social infrastructure projects that can affect the wellbeing of all residents in an economy. key words: public-private partnership, sectoral structure, developed countries, developing countries jel classification: h42, h44 received march 04, 2020 / accepted may 01, 2020 corresponding author: aleksandar đorđević university of niš, innovation center, univerzitetski trg 2, 18000 niš, serbia e-mail: djaleksandar91@gmail.com 188 a. đorđević, b. rakić 1. introduction throughout the history developed countries have always tried not only to hold their position and not allow undeveloped and developing countries to get close to them, but they even worked on widening the gap between the level of economic development between them. the behaviour is not much different concerning the public-private partnership (ppp). the first ones to adopt the concept were the most developed countries as it first appeared in the uk, france and usa. initially they were implemented in sectors of infrastructure, more specifically for building toll roads and bridges. there are some assumptions that even old romans have assigned some road concessions to the salasi tribe for maintenance of a road through a mountain range, obliging them to keep the passage clean and secure the signs for it. (grimsey & lewis, 2004). afterwards, a “turnpike system” for toll roads was used in the uk and usa, a subway was built in london from the year 1894 to 1907. in france, the main type of ppp was concession development. many channels and roads have been built under this model. in recent history, public-private partnership started its wider implementation in the 1990s, mostly in the already developed countries. western european countries, as well as the united states of america, were some of the biggest beneficiaries of the newly adopted concept followed by developing countries in the brics area. regarding the structure, it was mainly used in infrastructure projects, building roads, hospitals, power plants, airports, metros, etc. in recent years it is also being introduced to other sectors like information technology, education, entertainment, and other profitable areas of public services (sredojević, 2010). another difference between developed and developing countries is about the size of the ppp projects being implemented. developed countries have already secured a stable economic growth and thus tend to have more micro and small projects which will solve some personal and individual problems or small group problems. on the other hand, developing and undeveloped countries tend to balance their public finances and thus have more macro projects involving big national companies, usually natural monopolies, that can affect the whole economy and make a significant impact on economic growth and development. public-private partnership does not have a specific world agreed definition. generally, it is a contract between a public and a private entity made for providing usually an infrastructure asset or service. throughout the history, public and private sector have cooperated, but their interests and motives for partnership have changed, so defining ppp is not the same today as it was before (rakić, 2011, p.8). therefore, “the main characteristics of public-private partnership are as follows:  long-term contractual cooperation – 25 or 30 years  the contract defines the integration of all phases of the project, sharing of investments, responsibilities and credits for as long as the contract is valid  the contract defines demanded performances as the final, output specifications  the public partner is the one that defines the aims of the construction in the public interest and sets the demands in terms of construction, maintenance and service quality standards  the private partner takes the risk, that would otherwise be taken by the public sector, although risk-sharing differs in each individual case  the public partner pays the fee to the private partner for the construction and operation of the constructed building and undertakes the obligation to use the building for the contract-envisaged purpose  after the expiration of the contractual period, the constructed building is returned into the public sector ownership.” (rakić & rađenović, 2011, p. 209). comparative analysis of ppp projects sectoral structure in developed and developing countries 189 in this paper, the analysis of different developed and developing regions, representative countries from those regions and their available data will be presented and compared. 2. theoretical background public-private partnership has not been a very popular subject for researchers, especially the differences between developed and developing countries. however, some works could be found and used to enhance this research and the paper. usually, the literature compares two specific countries, one from the group of developed, and another from undeveloped or developing countries. there is no comprehensive analysis of more countries from both groups. for example, kahyaoğullari (2013) has made a comparison between the uk and turkey. some of the points in his paper were about the differences between developed and developing countries where the author listed five items: “(i) how ppp policy penetrates into the political agenda, (ii) with what aims ppp policy is adopted, (iii) the sectoral distribution, (iv) the form it takes and (v) the regulatory framework, differs between developed and developing countries.” (kahyaoğullari, 2013, p.268) for the first, the author states that developed countries are motivated from a national level while developing are faced with the international and outer pressure to implement ppp projects rather than that being a national strategy. the second part explains that developed countries use ppp to solve some microeconomic problems while developed countries still solve macroeconomic problems. third implies that developed countries use ppp more in social sectors while developing countries use it predominantly for economic infrastructure. next, he claims that developed countries use different forms, more complex and innovative, insist on collaboration and transparency; on the other hand developing countries use basic forms, mostly concessions, and tend to keep these contracts and their details a secret. regulations and institutions are far better and precise in developed countries. for the purpose of this paper, the third point where sectoral distribution is mentioned is the most relevant, while undoubtedly other aspects are also remarkably interesting. as an economy progresses and becomes more developed, the differences melt and developing countries converge towards developed ones also regarding the ppp and aforementioned remarks. what is interesting is that publicprivate partnership helps a country to improve and grow from developing into a developed one, thus creating a dynamic development system. governments usually use ppp for economic or social infrastructure. under economic infrastructure there are sectors such as energy, electricity, roads, airports, ports, railways transport, while social infrastructure includes education, health, water and sanitation and urban or rural development. (grimsey & lewis, 2004). sectors which developing countries implement require a substantial initial investment, as they do not have a good public finance situation. as a national economy develops, it tends to get from economic to social infrastructure, invest more in the quality of services like health, education and entertainment, although physical infrastructure, i.e. roads and telecommunications need to be maintained to keep social services reachable (kahyaoğullari, 2013). osei-kyei and chan (2017) examined implementation constraints in public-private partnership in developing and developed countries by analysing the economies of ghana and hong kong as respective examples. before making a questionnaire and distributing it they found some of the constraints appearing in available literature about: “corruption, weak institutional structure, very costly end charges to the users, lack of competition in the 190 a. đorđević, b. rakić procurement process, unstable macroeconomic indicators, immature financial market and incomplete risk transfer”(osei-kyei, r. & chan, a, 2017, p. 92). on the other hand, developed countries have some other issues which differ and encompass: “high transaction and participation costs, lengthy contract negotiations, a great deal of management time spent in contract transaction, confusion over government objectives and evaluation criteria” (oseikyei, r. & chan, a, 2017, p. 92). authors made a questionnaire and distributed it among ppp professionals and people who have dealt with it in their career. survey had fifteen constraints that should be marked by respondents. results showed that six out of fifteen factors were perceived differently in these countries confirming differences between developed and developing countries. most of these factors are about the general investment climate, lack of experience and institutions and regulations. long-lasting negotiations process and political support showed the importance in both countries while the negative public image was not highly ranked as a constraint in either of the countries. under the leadership of thatcher and reagan, who insisted on privatisation and had neoliberal attitudes, uk and usa were among the first economies to implement the concept of public-private partnership (mitchell-weaver & manning, 1991). after witnessing the success and development of the mentioned countries, other developed and developing countries started the implementation of the concept. however, the way of implementation and issues encountered along were considerably different. another author named michael busler (2014) in his paper “the role of properly structured public-private partnerships in promoting economic development” examines the proper structuring of the ppp and notes that firstly it is important to form a national agency which deals with these projects and tracks its progress. afterwards, industries and sectors to be invested in should be defined. next step is deciding on the private actors of the partnership, determining their key characteristics and choosing the ones who will participate in a ppp. lastly, this author says that an exit strategy for the public part must exist, so when a company is doing well the public partner can leave it out completely to the private part. agency should be run by elected officials. public part in the partnership should be less than half so the management could be done by the private part. busler (2014) introduces a logic of implementing ppp projects in different sectors and markets by using maslow`s hierarchy of needs. firstly, low developed countries invest in the agriculture industry, which can become more productive with investing capital in mass production facilities, to satisfy the basic needs for food. after that is met, partnerships are made for acquiring security, and then for satisfying higher degrees of needs. another remark is that a well-structured ppp strategy leads to economic growth (busler, 2014). 3. methodology and data analysis for the purpose of this research comparative method analysis will be implemented. concerning the issue, some things could be concluded by analysing the list of implemented projects, while the other ones require more detailed research and specific information from companies and governments. the hypothesis which would be assessed in this paper include the following: 1. developed countries have more ppp projects from the group of social infrastructures while developing countries have more economic infrastructure projects. 2. developed countries have more micro while developing countries have more macro ppp projects. comparative analysis of ppp projects sectoral structure in developed and developing countries 191 3. technologically more advanced projects are implemented in developed countries. 4. developed countries have a bigger number of small projects while developing countries have larger infrastructure projects. there are a lot of constrains regarding the available data about this subject; first, it must be said that a comprehensive database where all the data from all the countries could be found does not exist. even when referring to some world databases, there are significant discordances with national statistics and public offices dealing with public-private partnership. there is a paper by prats, demaestri & chiara (2018) questioning the congruence of national and international databases. international databases tend to provide information for researchers and investors, while national databases focus more on the investors and promoting ppp as a concept. if an investment agency makes the database, it is leaned towards the investors' needs and if the ministry of finance makes it then transparency and objectivity are its main focuses. the number of projects included in international and national databases is not the same and national ones include in some cases several times more projects. most bases, whether national or international, have information about before the finish of the project and do not provide the profitability after finalization. some do not possess or do not present contact details concerning specific ppp project. information about the final financial construction and the benefits for the private and public partners tend to miss out from the available data. risk sharing and its allocation among the involved entities are not presented in either of the datasets (prats, demaestri & chiara, 2018). this inevitably implies some limitations to this research and paper. some of the sources for the international data about ppp are: ifrappp, epec, ppi world bank database, ppiaf, and more. national databases are usually from special agencies or ministries of economics or finances department. after thorough research the most detailed base is infrappp for the developed and ppi world bank database for the developing, with regards that the first one represents a private company, thus requiring payment for the data. 3.1. geographical structure of ppp implementation according to a research paper done by kpmg (2015) made for australian infrastructure development through ppp, an overview of the global ppp market has been made. some of the key aspects of the market according to the report indicate a rise of social infrastructure compared to the economic one, stagnation of the uk market, advancing of north america, and rise from the developing economies such as brazil and india. on the following figure 1, world ppp market and its saturation are presented. united kingdom was the pioneer of the ppp concept but now experiences a downward trend due to the maturity of the market. north america is taking over the leading role as a growth market, including canada and united stated who have a vast pipeline of projects, strong political support, and a good institutional base with detailed laws and regulations. emerging markets are found in india, latin america and south-east asia. they are also using ppp to attract foreign direct investment. china is promoting the concept as a reform tool and procurement method for building infrastructure and attracts both foreign and domestic private sector. australia is a mature ppp market, although it still has a good flow of projects for building infrastructure (kpmg, 2015). 192 a. đorđević, b. rakić fig. 1 world ppp market source: kpmg public-private partnership 2015. p. 8 some regions of the world participate more in the private investment in infrastructure and some less. on the following figure 2, levels of each region will be presented from 2010 to 2019. for instance, the region of east asia and pacific recorded an increase for eight years and from 2017. show a slight decline, although from that year they accounted for the most investments. in the first half of 2019, they are still dominating global investment and represent around 40% of the private participation in infrastructure. latin america and the caribbean dominated the market for most years as can be seen in figure 2. now they show almost double the investment in 2019 than in 2018, rising from 17 to 32% (world bank group, 2020c). investments in south-east asia continue to grow and are slightly bigger than last year. other regions, sub-saharan africa, europe and central asia and the middle east and north africa all record a decline compared to last year’s results. fig. 2 geographical structure of infrastructure investments source: wb group h1 2019 private participation in infrastructure. 2020c. p. 7 comparative analysis of ppp projects sectoral structure in developed and developing countries 193 analysed from the country perspective, there is a huge inequality, namely five countries represent around ¾ of the whole market in the first half of 2019. china is the leading country as expected, considering its size and the number of residents, followed by brazil, india, russia and the philippines (world bank group, 2020c). 3.2. sectoral structure of ppp according to the report of private participation in infrastructure (ppi) of world bank group, total private investment in low and middle-income countries was us$49.8 billion across 175 projects in 38 countries in the first half of 2019. half of the year showed an increase of 14% over the last year period and 18% over the five-year average for that period. most of the investment was concentrated in five countries: china, brazil, india, the russian federation and the philippines. regarding the sectors, transport sector was more invested in than the energy sector, water sector was lower than in 2018. and ict sector investment declined. as it can be seen in the next figure 3 energy and transport sector occupy the most in emerging and developing economies (emde). in 2019 private investments in the transport sector represent more than half of all. the water sector is slowly growing and being more invested in than ict (world bank group, 2020c). fig. 3 sector structure of emdes 2010-2019 source: wb group h1 2019 private participation in infrastructure. 2020c. p. 14 if sectors are seen from a country perspective, transport sector recorded the biggest investments in china, india and russia. energy sector recorded the lowest amount in the last five years. this is due to the steep decline of solar projects in china. as the main country, china is appearing again in the water and sewerage sector, next to brazil and vietnam. this sector recorded a decrease compared to last year (world bank group, 2020c). according to the imf categorisation by criterion gdp per capita, countries could be divided into developed and developing. namely developed countries have gdp per capita higher than 25.000 us dollars while developing have between 2.500 and 25.000 us dollars. 194 a. đorđević, b. rakić fig. 4 developed and developing countries gdp per capita source: imf. world economic outlook. 2020. in the following chapters, developed countries that implement ppp in their economies, uk, usa, australia and france will be presented next to developing countries from bric group: brazil, russian federation, india and china. these countries and their gdp per capita could be seen in figure 4 above. the united states of america has the highest, while india has the lowest score. china and the russian federation record higher scores than brazil and india, but they are still far from the 25.000 us dollar border of highly developed countries. the united states and australia have higher scores in their group than the united kingdom and france, which has the lowest score in the developed group (imf, 2020). 3.3. sectoral structure of ppp in developed countries the history of ppp started in the united kingdom a few centuries ago, and then in its modern form from the 1990s until the world financial crisis in 2007 it recorded constant growth as can be seen on the figure 5. united kingdom has special forms of ppp called private financial initiative (pfi) and private financing (pf2). a number of these projects grew consistently with their capital value. fig. 5 pfi and pf2 projects in the uk – number and capital value source: hm treasury. 2019. p.6 comparative analysis of ppp projects sectoral structure in developed and developing countries 195 at the time of the global financial crisis, a drastic fall in both the number and the value followed, slightly recovering in 2009 and 2010 before facing another steep decline almost until today. the decline was partially due to the saturation of the market and exhausting the possible projects. structure of the ongoing projects also changed, as now the dominant sector is health and insurance, by capital value, which can be noted in the next figure 6. fig. 6 current pfi and pf2 projects by department source: hm treasury. 2019. p.6 department for education has the highest number of projects while being in third place by the value of the projects. defence sector and transport department closely follow. some other social infrastructure sectors such as department for environment, food and rural affairs and ministry of housing, communities and local appear on the list, indicating a shift from purely economic investment in ppp projects to social. the united states of america showed a decline as the whole global market during the world economic crisis, but afterwards, it recorded fast growth. in 2019 ppp market has more than quadrupled with 83.3 billion while in 2018 it amounted to 19.5 and in 2017 19.7 billion dollars (infrappp, 2020b). from the structure perspective as can be seen in figure 7, the biggest number of projects and the value is seen in the transport sector, followed by social and health, water and waste, and telecom, while energy sector comes in last. fig. 7 usa ppp market source: infrappp reports. usa ppp market. 2020b. 196 a. đorđević, b. rakić australia as a mature ppp market and a developed economy presents a stable investment market for the private sector. it has a particularly good regulatory framework and a strong base of ppp projects. in 2019 it recorded 69 billion us dollars of investment after 27.7 billion in 2018 and 2.3 billion in 2017 (infrappp, 2020a). fig. 8 australian ppp market source: infrappp reports. australia ppp market. 2020a. from the sector point of view, transport leads with more than half of the number of projects and almost 90% of the value of all ppp projects. social and health is the next sector by the number of projects, while water and waste have the least number of projects and capital value, as indicated in figure 8. (infrappp, 2020a). france represents one of the cradles of public-private partnership, especially the concession type. it is considered to be one of the most developed countries in the world and a mature ppp market. from the database of the european ppp expertise centre (epec), it could be seen that the highest value of all sectors belongs to transport, followed by telecom, education, and other social infrastructure. fig. 9 france ppp project value source: epec, https://data.eib.org/epec the number of projects shows almost equal amount of transport and education sector, followed by recreation and culture, public order and safety and other social infrastructure (epec, 2020). france being the least developed in this group still has the most investments and highest number of projects in the economic infrastructure sector. comparative analysis of ppp projects sectoral structure in developed and developing countries 197 fig. 10 france ppp sectoral structure source: epec, https://data.eib.org/epec 3.4. sectoral structure of ppp in developing countries in recent history, these countries have been recognized as rising and developing economies, which led them to form an informal bric group. the acronym is formed from the names of the countries that make up the group: brazil, russia, india and china. these countries are also advanced in implementing public-private partnership projects. presented data is from the private participation in infrastructure database from world bank group as it represents universal methodology and it is quite difficult to acquire national data let alone make it comparable. data is recorded from 2018 to 2019, in order to be comparable to the data of developed countries presented in the former chapter. brazil presents the most developed economy in latin america and one of the biggest ppp markets. most projects relate to economic infrastructure, providing electricity, natural gas, collection and transport, and some of them belong to social infrastructure providing ict and water and sewage as shown in figure 11. in the last year, 60 projects reached financial closure with the total amount of 18.628 billion dollars (world bank group, 2020a). fig. 11 brazil ppp market in 2018 source: https://ppi.worldbank.org/en/snapshots/country/brazil the most valuable project was an investment in natural gas and a lot of investments in electricity. brazil also recorded high infrastructure investment in 2014 and 2016 while hosting world football championship and summer olympic games. 198 a. đorđević, b. rakić russian federation is still in development considering public-private partnership, it is fine-tuning its laws and regulations, but many regional ppp projects and the need for building infrastructure positively affect the development of the concept. there are many risks tied with this concept, considering that financial market and laws and regulations are not well developed in russia. on the other hand, these projects can stimulate technology and management innovations, improve service quality and bring many more benefits (maslova, & yushkov, 2017). during the past year, russia recorded 17 projects that reached financial closure with 7.2 billion dollars in total investment (world bank group, 2020e). most of the projects were from the economic infrastructure, encompassing electricity, collection and transport, ports, roads, airports, as can be seen in figure 12. fig. 12 russia ppp market in 2018 source: https://ppi.worldbank.org/en/snapshots/country/russian-federation russia has a lot of improvements to incorporate in order to implement more ppp projects from the number point and by the investment amount. while improving the scores it is also advancing in economic growth and development. india is one of the nations with the biggest population in the world and pursuing fast economic growth. that is putting a lot of pressure on its already limited infrastructure. government is searching for a way to finance the infrastructure without making a lot of investments and going into debt. public-private partnership comes as almost an ideal solution for this problem. a lot of work on the policy and transparency is much needed for the concept to work adequately (kutumbale & telang, 2014). in the last year, from 2018 to 2019 india has had 83 projects which reached financial closure with the total investment of 15.549 billion us dollars (world bank group, 2020d). fig. 13 india ppp market in 2018 source: https://ppi.worldbank.org/en/snapshots/country/india comparative analysis of ppp projects sectoral structure in developed and developing countries 199 as it can be noticed from the figure 13 above, almost all of the projects are from economic infrastructure including dominantly roads, electricity, airports, ports, and only a few of them belong to social infrastructure from treatment disposal, integrated municipal solid waste and water and sewage sectors. china has a similar position as india regarding the number of residents and a limited infrastructure; government budget is under pressure due to increased economic development and overloading of urban areas. in the case of china, private part of the investment in many cases is a government-owned company, and very rarely a truly private one or a foreign company (ke et al., 2014). fig. 14 china ppp market in 2018 source: https://ppi.worldbank.org/en/snapshots/country/china figure 14 shows that most projects as in the whole group of developing countries occupy economic infrastructure: roads, electricity, airports, although here a substantial part goes to social infrastructure including disposal treatment and water and sewage. china has implemented a total of 189 projects from 2018 to 2019 with a total value of 48.57 billion us dollars (world bank group, 2020b). this country is working on updating its legal framework and regulations to be ready to attract more private partners and also working on changing the attitude of the public towards private capital participation in infrastructure projects. 4. conclusion from the presented data several conclusions could be drawn out and help to decide on the hypothesis set in the methodology and data analysis part. developed economies, analysed in this paper, have a lot more projects, and their higher total value than developing ones considering that they are smaller countries from the population and country size point of view. projects implemented in the developing countries tend to be more turned towards building social infrastructure including sectors like health and social care, education, defence, water and waste, informational and communicational technology and similar. this could be explained in two ways. one is that these economies have a higher level of development and consequently already built strong economic infrastructure, including roads, airports, energy sectors, while another is that they have been implementing public-private partnership for a longer period and have used it in the beginning for building economic infrastructure and now they have switched to social as the need for the economic one has been satisfied. this confirms the first hypothesis that developed countries have more 200 a. đorđević, b. rakić projects that are in the category of social infrastructure and developing ones have more in the economic infrastructure part. the second hypothesis that stated that developed countries have more micro and developing more macro projects could not be confirmed nor rejected from the available data. namely, both types of analysed countries implement micro and macro projects, so projects of the big value and long duration could be found both in developing and in developed countries. this also stands for micro-projects which could be found in all analysed countries. it could be said that the second hypothesis is being rejected based on available and analysed data and countries. the third hypothesis could not be confirmed as advanced technology is being used throughout all of ppp projects, as one of the main purposes to implement the partnership is being the transfer of technology from the private entity to the public one. the fourth hypothesis implied that developed countries have a bigger number of small projects while developing countries have larger infrastructure projects. set like this it could be partly confirmed and partly rejected. developed countries implement a larger number of ppp projects and that part can be confirmed, while on the other hand they also have large infrastructure projects bringing to the conclusion that second part of the hypothesis stating that developing countries have larger infrastructure projects can be rejected. the public-private partnership serves as a tool to promote and catalyse the growth and the development of an economy, enabling developing countries by undertaking proper actions to converge towards developed ones and even overtake them. acknowledgement: this work is the result of research on obligations under the agreement on the implementation and financing of scientific research work in 2020 (registration number 451-03-68 / 2020-14 / 200371) concluded between the ministry of education, science and technological development of the republic of serbia and the innovation center, university of niš and an agreement on the implementation and financing of scientific research work in 2020 (registration number 45103-68 / 2020-14 / 200100) concluded between the ministry of education, science and technological development of the republic of serbia and the faculty of economics, university of niš. references busler, m. 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(2020e). russia ppp market in 2018. retrieved from: https://ppi.worldbank.org/ en/snapshots/country/russian-federation accessed on: 25.02.2020. 202 a. đorđević, b. rakić komparativna analiza sektorske strukture projekata jpp u razvijenim zemljama i zemljama u razvoju cilj ovog rada je analiza vrsta projekata javno-privatnog partnerstva (jpp) i njihove sektorske strukture u razvijenim i zemljama u razvoju. to će biti postignuto uporednom analizom osam zemalja koje pripadaju kategorijama razvijenih i zemalja u razvoju i pored toga implementiraju brojne projekte jpp-a. rezultati analize pokazuju da razvijene zemlje odabrane za ovu analizu realizuju više projekata i beleže višu ukupnu vrednost projekata. njihovi projekti su raznovrsniji i osim ekonomske infrastrukture obuhvataju i socijalnu infrastrukturu koja ima veći broj projekata, a u nekim razvijenim zemljama i višu vrednost od sektora ekonomske infrastrukture. između grupa i sektora postoje određena preklapanja, jer to nije strogo pravilo koje bi se moglo primeniti na sve zemlje, jer je svaka ekonomija pojedinačan i poseban slučaj. kako adekvatna struktura jpp-a vodi ekonomskom rastu i razvoju nacionalne ekonomije, preporučuje se prilagođavanje institucionalnog okvira, zakona i propisa o jpp, privlačenje više privatnog kapitala, razvoj osnovne ekonomske infrastrukture i uz njegovu pomoć nastojanje da se struktura projekta jpp zemalja u razvoju približi strukturi razvijenih zemalja. cilj je prvenstveno dostići adekvatno razvijenu ekonomsku infrastrukturu, a zatim više ulagati u projekte socijalne infrastrukture koji mogu povećati nivo društvenog blagostanja. ključne reči: javno-privatno partnerstvo, sektorska struktura, razvijene zemlje, zemlje u razvoju facta universitatis series: economics and organization vol. 18, no 2, 2021, pp. 103 116 https://doi.org/10.22190/fueo210110009k © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper millennials in the creation of social value of the enterprise1 udc 005.35 anna kramarenko v.n. karazin kharkiv national university, educational and scientific institute “karazin business school”, department of management and administration, ukraine abstract. the article emphasizes the creative activity that underlies the concept of "social value", which forms in the course of solving actual social problems. social responsibility is mainly determined by reducing the negative impact of business on the basis of support and development of innovative projects. an analytical comparison of the categories of "social value" and "social responsibility" with the sustainable development goals revealed a greater correspondence of the concept of "social value" to the sustainable development strategy. a statistical study of data from european countries allowed to draw a conclusion about the increase in social value in consumption, recycling of production resources, the use of renewable energy sources, and the growth of preferences for the development of own business. based on the conducted research, the article highlights the exceptional role of millennials in updating the issues of social focus of business. key words: social responsibility, social value, sustainable development strategy, gen y. jel classification: m140 introduction in deloitte's 2019 global human capital trends report, 44% of business and hr executives surveyed said social entrepreneurship issues are more important to their organizations than they were three years ago, and 56% expect them to become even more important in three years (deloitte, 2020). in deloitte's 2019 global cxos survey, 73% said their organizations had changed or developed products or services in the past year to make a positive impact on society (deloitte, 2020). received january 10, 2021 / revised january 22, 2021 / revised march 07, 2021 / accepted march 14, 2021 corresponding author: anna kramarenko v.n. karazin kharkiv national university, educational and scientific institute “karazin business school”, department of management and administration, kharkiv, ukraine e-mail: a.o.kramarenko@karazin.ua 104 a. kramarenko the research results show the increasing relevance of the issues of social influence of business. if we consider the impact of the activities of enterprises on society, it is worth paying special attention to the study of the essence of the concepts of "social responsibility" and "social value". questions of social focus of business are interesting not only for entrepreneurs, but also for scientists. for example, recent research has identified a u-shaped relationship between an entrepreneur's age and their willingness to create social value (brieger et al, 2020). according to the researchers, the emphasis on creating social values decreases with increasing age throughout early middle age, during which entrepreneurs are more likely to prioritize personal values. however, the age factor can be considered as one of the determinants motivating the creation of social value. thus, a more detailed study of the social identity of the main stakeholders of the social orientation of business is of scientific interest. as part of the study, a literature review of publications related to the social identity of millennial, the concepts of "social responsibility" and "social value" was conducted. based on the literature review, scientific hypotheses were put forward, the verification of which was described in the results. at the end of the study, the conclusions obtained as a result of studying the problems of social orientation of business are presented. literature review and hypothesis development recent studies demonstrate that individuals enjoy the pursuit of specific brands to express their sense of belonging to a social group or status (helal & ozuem, 2019; aaker, 2004; adjei et al, 2009; algesheimer et al, 2005, tsimonis & dimitriadis, 2014). the point of discussion is the direction of mutual influence of brand demand and belonging to a social group (brickson, 2007; gielnik et al, 2012; kanfer & ackerman, 2004; kautonen et al, 2011). perhaps it is belonging to a social group that determines the demand for specific brands. researchers claim that millennial influence should be reflected in organizations’ strategic plans, brand messaging, and stakeholder networks (maiers, 2017; acs et al, 2013; athayde, 2009). agreeing with this statement, we note that it is worth delving into the advantages of such a strategy. the influence of gen z is expanding, but what is the social influence of representatives of this generation (francis & hoefel, 2020). recent studies point different features of millennials, such as thinking complexly (afifah, 2020), extraordinary thinking abilities (yusri, 2020), idealistic, altruistic generation (gay, 2017), collaborative, accessible, responsible (haber, 2016), looking for employers with csr values (pwc, 2020), impacted by internet influencers (loeb, 2020). at the same time, it is advisable to systematize scientific developments in order to more fully reveal the social influence of generation y. recent research shows dramatic shifts in youth behaviors, attitudes and lifestyles (dimock, 2019). it is the issue whether entrepreneurs’ individual resources influence their willingness to create social value and to meet principles of sustainable development (brieger& de clercq, 2019; carsrud & brännback, 2011; cohen et al, 2008; hörisch et al, 2017; hörisch et al, 2019; kautonen et al, 2014; wiernik et al, 2013) and what are the causes of social tensions inside the countries (gontareva et al, 2021; de clercq et al, 2013; estrin et al, 2013; estrin et al, 2016). millennials in the creation of social value of the enterprise 105 thus, we summarized our thoughts in the following hypotheses: hypothesis 1: "social value" in a conceptual comparison with the concept of "social responsibility", which previously was the base for progressive corporate strategies, demonstrates greater compliance with the current principles of sustainable development. hypothesis 2: the most motivated actors in creating social value for businesses are gen y (millennials) social and entrepreneurial identities. the purpose of the research is to test hypotheses theoretically and practically, to define the social aspects of entrepreneurship, to determine the correspondence of the social and environmental principles of modern business, to identify the key actors in the formation and promotion of the social value of entrepreneurship. to achieve the goal of the study, comparison, generalization, analysis, synthesis, deduction, induction, as well as statistical analysis were used. results first, the existing approaches to determining the social responsibility of the enterprise were studied. the main definitions of the categories "social responsibility" and "social value" are presented in tables 1 and 2 accordingly. table 1 definition of the category "social responsibility" source definition investopedia “social responsibility means that a business, in addition to maximizing shareholder value, must act in a way that benefits society. however, critics argue that the basic nature of business does not view society as an interested party” (ganty, 2020). american society for q uality (asq) “social responsibility is a means to achieve sustainability. adopting key principles of social responsibility, such as accountability and transparency, can help ensure the long-term viability and success of any organization or system” (american society for quality, 2020). united nations industrial development organisation (unido) “corporate social responsibility is a management concept in which companies integrate social and environmental concerns into their business operations and interactions with their stakeholders” (united nations industrial development organisation, 2020). business news daily “corporate social responsibility (csr) is a type of self regulation of a business to ensure social responsibility; many corporate csr initiatives seek to make a positive contribution to society, the economy, or the environment” (schooley, 2020) source: built by author based on ganty, 2020, american society for quality, 2020, united nations industrial development organisation, 2020, schooley, 2020 106 a. kramarenko table 2 definition of the category "social value" organization definition bristol city council “social value is about maximizing the impact of public expenditure to get the best possible outcomes, and recognizing that local people are central to determining how these can be achieved”. businessdictionary.com “social value is larger concept which includes social capital as well as the subjective aspects of the citizens’ well-being, such as their ability to participate in making decisions that affect them”. kirklees council “if £1 is spent on delivery of services, can that same £1 be used to also produce a wider benefit to the community?” national association of certified valuation analysts (nacva) “social value is about maximizing the impact of public expenditure. it looks at what is created, and sometimes what is forsaken, through a commissioning process”. social value hub “social value is the benefit to the community from a commissioning/procurement process over and above the direct purchasing of goods, services and outcomes”. sustainable procurement task force 2006 “social value is a process whereby organizations meet their needs for goods, services, works and utilities in a way that achieves value for money on a whole life basis in terms of generating benefits to society and the economy, whilst minimizing damage to the environment”. the public services (social value) act 2012 “social value seeks to maximize the additional benefit that can be created by procuring or commissioning services, above and beyond the benefit of merely the services themselves”. source: uk green building council, 2018 based on tables 1 and 2, the categories "social responsibility" and "social value" were compared according to the criteria of key areas of activity, areas of influence and stakeholders. the results are presented in table 3. table 3 comparison of the categories "social responsibility" and "social value" comparison criteria social responsibility social value key areas of activity innovative technologies green energy solving urgent social problems key impact harm reduction, correction of influence creating positive external effects key actors medium and large businesses, global corporations microenterprises startups stakeholders government, business vulnerable social groups territorial communities source: built by author based on hopkins, 2006 further research is aimed at studying the correspondence of the concept of "social responsibility" and "social value" to the main goals of sustainable development. “the world commission on environment and development (the brundtland commission) in its report to millennials in the creation of social value of the enterprise 107 the united nations in 1987 defined sustainable development as meeting the needs of the present without compromising the ability of future generation to meet their own needs” (united nations, 2020). thus, the principles of sustainable development determine the future of social development, the future of business. the desire of entrepreneurs to coordinate business activities is due not only to economic benefits, but also to the motivation to create a social effect. the formation of an entrepreneurial strategy is based on clear performance criteria. in this regard, it was studied to what extent the concepts of "social responsibility" and "social value" correspond to the goals of sustainable development. agenda 21, adopted during the united nations conference on environment and development (unced) called earth summit held in rio de janeiro in brazil in 1992 is a blue print on how to make development socially, economically and environmentally sustainable (united nations, 2020). the results of the study of the degree of influence of social orientations on the achievement of the sustainable development goals are presented in table 4. table 4 compliance of the concepts of "social responsibility" and "social value" with the sustainable development goals sustainable development goals (united nations) "social responsibility" "social value" goal 1: no poverty enterprises that create social value are focused on involving people with different income levels in the creation of marketable products goal 2: zero hunger manufacturing is focused on creating the most sought-after products, satisfaction is first and foremost of the basic needs goal 3: good health and well-being development and active implementation of comprehensive wellness programs for the company's employees goal 4: quality education corporations and the government as stakeholders and partners in the design and creation of innovative educational programs goal 5: gender equality equal gender opportunities as part of corporate culture women's employment as a response to domestic violence, as well as equal gender opportunities for starting own business goal 6: clean water and sanitation financing of environmental projects creating startups based on ecodevelopments goal 7: affordable and clean energy the implementation and promotion of innovative technological solutions based on green energy 108 a. kramarenko sustainable development goals (united nations) "social responsibility" "social value" goal 8: decent work and economic growth involvement of representatives of various social groups in the process of creating added value goal 9: industry, innovation, and infrastructure investment in the creation and development of infrastructure to scale the business goal 10: reduced inequalities involvement of representatives of various social groups in the process of creating added value goal 11: sustainable cities and communities the implementation and promotion of innovative technological solutions based on green energy goal 12: responsible consumption and production development of corporate ethics aimed at reducing the negative impact on the environment promotion of business ideas based on the principles of responsible consumption and production goal 13: climate action development of corporate ethics aimed at reducing the negative impact on the environment promotion of business ideas based on the principles of responsible consumption and production goal 14: life below water implementation and promotion of technological business ideas based on elimination of pollution results and improvement of ecosystems goal 15: life on land implementation and promotion of technological business ideas based on elimination of pollution results and improvement of ecosystems goal 16: peace, justice and strong institutions creating prerequisites for "bottom-up management" goal 17: partnerships active interaction with stakeholders in order to implement business ideas and scale them total number of compliance points 7 14 source: built by author thus, the concept of social value is more consistent with the goals of sustainable development. an entrepreneurial approach based on the creation of social value is becoming more relevant. millennials in the creation of social value of the enterprise 109 to test hypothesis 2, we generalize the characteristics of millennials. special attention is paid to the following issues: ▪ what products are most in demand by millennials (consumption characteristics); ▪ entrepreneurial activity of millennials (investment and creation of their own business); ▪ changing the standards of production activities (use of renewable energy and reuse of resources). based on the study of scientific materials devoted to the various socio-age groups of the population, the main information presented in table 5 was systematized. table 5 characteristics of social and age groups of the population baby boomer gen x gen y (millennial) gen z 1946-1964 1965-1980 1981-1996 1997-2020 age in 2020 56-74 years 40-55 years 24-39 years up to 23 years behavior basics idealism collectivist materialistic competitive individualistic globalist questioning oriented to self undefined id communaholic dialoguer realistic consumption focus ideology movies status brands luxury experience travel flagships uniqueness unlimited ethical source: built by author based on fry & parker, 2018, van den bergh et al., 2019 summarizing the results of modern research, scientific publications and global surveys, it is possible to identify the main criteria for revealing the socio-economic identity of the millennial generation. these results are presented in table 6 below. table 6 socio-economic identity gen y (millennial) parameter characteristics 1) balance of personal and social values ▪ ability to think comprehensively, be creative, responsible and find solutions to surrounding problems; ▪ low assessment of the influence of leaders on society and the desire of leaders to improve the world; ▪ the desire to travel and help society is greater (46%) than the desire to create families or own a business (34%); ▪ among the 20 problems facing society, the most personal concerns are about climate change and environmental protection. 2) consumer behavior ▪ “42% of millennials said they started or deepened business relationships because the company's products or services have a positive impact on society and / or the environment”; ▪ 37% of millennials said they ended or weakened business relationships because of the company's ethical behavior; ▪ “36% of millennials started / deepened relationships because they believed the company was ethical”; ▪ millennials choose brands that actively voice social, cultural, political and environmental motivation; they are even willing to overpay for these brands. 110 a. kramarenko parameter characteristics 3) attitude to business ▪ “millennials believe that businesses should prioritize the production of high-quality goods and services (36%) and job creation (35%)”; ▪ “the majority (55%) considers making a profit to be the main achievement of the business”; ▪ according to millennials, business does not make enough efforts to improve the skills of employees (33% said this is a priority; 16% said it is being implemented), improve society (32% vs. 16%), improve and protect the environment (27% vs. 12%); ▪ business (30%) is most responsible for training employees, followed by educational institutions (24%). 4) entrepreneurial activity ▪ striving for an open atmosphere of cooperation. millennials believe in themselves and their colleagues, because unlike previous generations, generation y was raised in an atmosphere of equal relations and joint decision-making; ▪ 55% of millennials are interested in starting their own business one day; ▪ 63% of millennials believe that the biggest obstacle to innovation is the attitude of management. ▪ 13% of millennials surveyed said that their career goal includes promotion. but 67 % stated their goal to start their own business. 5) a sense of social responsibility ▪ serious attitude to academic achievement (94% of millennials believe that higher education is necessary for success in life); ▪ the rate of violent crimes involving young people is at an all-time low. since 1991, the number of teenage pregnancies has decreased by 51 %. the number of teenagers smoking has plummeted. drug use has declined. all this indicates a higher level of responsibility; ▪ a high level of environmental component of demand (the use of green packaging promotes promotion among young consumers); ▪ a high degree of humanism and philanthropy (the average millennial gives almost $ 600 a year to charity). source: built by author based on auliandri et al, 2018, awaluddin & hamid, 2019, deloitte, 2020, gay, 2017, giarratana & pasquini, 2019, haber, 2016, francis & hoefel, 2020, pew research center, 2020, shetty et al, 2019, smerichevskyi et al, 2018 based on the table 6, it can be argued that gen y representatives are often personally concerned about social and environmental problems, and base their consumer choices on these assumptions. millennials believe that business is responsible not only for the quality of products, but also for the educational, cultural and political components of public relations. in this regard, gen y is more motivated to create a business and is ready to take responsibility for the results of their business activities. to test hypothesis 2, a statistical study of data from eu countries was also conducted on the example of france, germany, greece and poland. testing of hypothesis 2 was carried out in three directions: 1) products most in demand by gen y representatives (consumption characteristics). within the framework of the direction, the level of social inclusion (risk of poverty), the dynamics of greenhouse gas emissions were studied. the study of these indicators makes it possible to determine how rational and socially responsible millennials are in their consumption, as well as how representatives of this social group align their consumer ambitions with social and environmental effects. millennials in the creation of social value of the enterprise 111 2) entrepreneurial activity of millennials. within the framework of the direction, the level of investment of households and the dynamics of motivation to create their own business were studied. based on the data of the global entrepreneurship monitor, the indicator entrepreneurship as a good career choice rate was studied (fig. 5): “percentage of 18-64 population who agree with the statement that in their country, most people consider starting a business as a desirable career choice” (global entrepreneurship monitor, 2020). regression analysis of these indicators makes it possible to draw a conclusion about the trends of responsibility for creating a public product, a healthy competitive environment. 3) change in production standards. within the framework of the direction, the degree of resource reuse and the level of renewable energy use were studied. the analysis of these indicators in connection with the dynamics of the composition of the social group of millennials makes it possible to assess the impact of gen y on the change in the priorities of production standards towards socialization and greening. the indicators used in the study are consistent with the sustainable development goals, such as no poverty, affordable and clean energy, decent work and economic growth, sustainable cities and communities, responsible consumption and production. it is these goals that correspond to the creation of social value. the study was conducted using regression analysis methods based on statistical data eurostat database and global entrepreneurship monitor in 2009-2019. using regression analysis, hypotheses were tested regarding the presence of an “impact-result” relationship (linear dependence) between a number of the studied values. the main parameters of the studied models are: 1) r the multiple correlation coefficient. 2) r2 the coefficient of determination that characterizes the quality of the model (the higher the value of this parameter, the greater the proportion of values that characterize this model). 3) the coefficients a and b, which are the parameters of the linear regression equation y=a+b*x, where: x variable impact y resulting parameter. the sign and value of the coefficients a and b help to estimate the direction of the connection between y and x, as well as the strength of this connection. the results of the analysis are presented in the tables. table 7 results of the regression analysis for germany x (impact) y (result) r r2 coefficient a coefficient b gen y (millennial) population rate population at risk of poverty or social exclusion 0.69 0.48 0.79 -0.19 gen y (millennial) population rate greenhouse gas emissions 0.75 0.56 100.18 -1.12 gen y (millennial) population rate household investment share of gdp 0.69 0.48 4.19 0.08 gen y (millennial) population rate entrepreneurship as a good career choice rate 0.66 0.44 41.39 0.40 gen y (millennial) population rate circular material use rate 0.88 0.77 -2.53 0.59 gen y (millennial) population rate share of renewable energy in gross final energy consumption 0.90 0.82 -29.26 1.88 source: built by author 112 a. kramarenko table 8 results of the regression analysis for greece x (impact) y (result) r r2 coefficient a coefficient b gen y (millennial) population rate population at risk of poverty or social exclusion 0.67 0.45 27.43 -1.33 gen y (millennial) population rate greenhouse gas emissions 0.92 0.84 364.62 -11.22 gen y (millennial) population rate household investment share of gdp 0.84 0.72 -55.65 2.20 gen y (millennial) population rate entrepreneurship as a good career choice rate 0.76 0.58 35.10 1.41 gen y (millennial) population rate circular material use rate 0.56 0.31 -9.95 0.52 gen y (millennial) population rate share of renewable energy in gross final energy consumption 0.89 0.79 -61.51 3.23 source: built by author table 9 results of the regression analysis for france x (impact) y (result) r r2 coefficient a coefficient b gen y (millennial) population rate population at risk of poverty or social exclusion 0.76 0.58 46.66 -1.17 gen y (millennial) population rate greenhouse gas emissions 0.71 0.51 169.3 -3.36 gen y (millennial) population rate household investment share of gdp 0.71 0.51 0.82 0.16 gen y (millennial) population rate entrepreneurship as a good career choice rate 0.67 0.45 4.57 2.23 gen y (millennial) population rate circular material use rate 0.76 0.59 -34.97 2.20 gen y (millennial) population rate share of renewable energy in gross final energy consumption 0.76 0.59 -50.15 2.67 source: built by author table 10 results of the regression analysis for poland x (impact) y (result) r r2 coefficient a coefficient b gen y (millennial) population rate population at risk of poverty or social exclusion 0.64 0.41 32.53 -1.3 gen y (millennial) population rate greenhouse gas emissions 0.91 0.84 68.22 -1.65 gen y (millennial) population rate household investment share of gdp 0.89 0.79 0.7 0.30 gen y (millennial) population rate entrepreneurship as a good career choice rate 0.67 0.46 1.69 2.57 gen y (millennial) population rate circular material use rate 0.74 0.55 7.41 0.25 gen y (millennial) population rate share of renewable energy in gross final energy consumption 0.79 0.62 4.19 0.25 source: built by author millennials in the creation of social value of the enterprise 113 according to the results of the regression analysis, in european countries there is a strong relationship between the number of millennials and the studied indicators (a linear relationship is confirmed in at least 41% of cases). at the same time, the values of the coefficients a indicate that the relationship between the number of gen y and the level of poverty, as well as the volume of greenhouse gas emissions, is reversed, i.e., with the growth of the number of millennial generation, these indicators tend to decrease. the relationship between the other indicators is direct, i.e. with the growth of the number of gen y, the level of household investment, motivation for entrepreneurial activity, circular use of resources, and the use of renewable energy increases. the observed trends indicate an increase in not only consumer, but also entrepreneurial consciousness. this is reflected in the increasing orientation of business not only to reduce, but also to create a positive social impact (solving environmental problems, fighting poverty, helping vulnerable social groups). given the growing share of gen y representatives in the population of countries, there is a high level of dependence between the social identity of gen y and the social orientation of entrepreneurship. conclusion an in-depth study of the essence of the concepts of "social responsibility" and "social value", as well as their comparison based on the sustainable development goals, allowed us to conclude that the orientation of modern business strategies to "social value" is more promising. it is the concept of "social value" that has an advantage over the concept of "social responsibility" according to such goals as no poverty, zero hunger, affordable and clean energy, decent work and economic growth, reduced inequalities, sustainable cities and communities, life below water, life on land, peace, justice and strong institutions, partnerships. a review of the results of previous studies made it possible to formulate the main characteristics of the gen y, such as concern about social and environmental problems, belief in the responsibility of the business for the quality of products, as well as for the educational, cultural and political components of public relations, high level of motivation to create a business and to take responsibility for the results of their business activities. the 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(2020). millenial generation opportunities as the economic driver through the creative economy. in: proceedings of the first national seminar universitas sari mulia, ns-unism 2019, 23rd november 2019, banjarmasin, south kalimantan, indonesia. retrieved from: https://eudl.eu/doi/10.4108/ eai.23-11-2019.2298374 accessed on: 08 january 2021. 116 a. kramarenko milenijalci u stvaranju društvene vrednosti preduzeća ovaj rad naglašava kreativne aktivnosti koje se nalaze u suštini koncepta „društvene vrednosti“ koja se stvara prilikom rešavanja konkretnih socijalnih problema. društvenu odgovornost uglavnom određuje smanjenje negativnog uticaja preduzeća na osnovu podrške i razvijanja inovativnih projekata. analitičko poređenje kategorija „društvena vrednost“ i „društvena odgovornost“ sa ciljevima održivog razvoja otkrilo je da koncept „društvene vrednosti“ više korespondira sa strategijom održivog razvoja. statističko proučavanje podataka iz evropskih zemalja omogućilo je da se izvede zaključak o povećanju društvene vrednosti u potrošnji, recikliranju proizvodnih resursa, korišćčenju obnovljivih izvora energije i razvoju preferenci za rayvijanje sopstvenog biznisa. na osnovu sprovedenog istraživanja, rad naglašava izuzetnu ulogu milenijalaca u modernizovanju pitanja društvenog fokusa biznisa. ključne reči: društvena odgovornost, društvena vrednost, strategija održivog razvoja, generacija y plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 15, n o 1, 2018, pp. 1 13 https://doi.org/10.22190/fueo1801001d © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper civic and political participation in transition countries: the case of serbia 1 udc 347.471:329(497.11) marija džunić, nataša golubović university of niš, faculty of economics, niš, serbia abstract. the purpose of this paper is to explore the dynamics of civic participation in serbia, as well as to test its relevance for the level of citizens’ political involvement. for estimating the impact of the membership in civic associations on political party membership and non-conventional types of political activism, the non-parametric analyses of variance test, followed by post hoc testing has been employed. the main findings of the analysis suggest that civic participation is a significant predictor of political activism of serbian citizens. the results of the empirical procedures indicate significant differences in the degree of political participation, based on the levels of citizens’ engagement in community organizations. the implications of the study could serve as the grounds for designing policies aimed at strengthening civic society and creating incentives for citizens’ active involvement in political life. key words: civic society, political participation, transition, democracy jel classification: p26, d71 introduction civic society represents a part of the public space between the family and the state (morje, 2003), essential for the credibility of institutions and articulation of citizens‟ demands, as well as a mechanism which provides accountability of politicians. low levels of electoral turnout, lack of trust in political institutions and declining levels of civic engagement are perceived as a serious sign of the erosion of democracy. for transition countries, that have implemented extensive political and economic changes in the last few decades, civic participation is of essential importance. this region has put much effort on reforming formal institutions, while the informal dimension of received november 07, 2017 / accepted december 11, 2017 corresponding author: marija džunić university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: marija_dzunic@ni.ac.rs 2 m. džunić, n. golubović democratic consolidation had received much less attention. the first phase of the transition from non-democratic to democratic regimes in central and eastern europe consisted of liberalization and the demise of authoritarian system, followed by democratization and social modernization. after the institutional base of a democratic system was created, the next necessary step was democratic consolidation, as the final step in the transformation process, in order to embed democratic values and practices into the citizens‟ political culture. the gap between formal and substantive democracy in central and eastern europe is often explained as the result of the legacy of authoritarianism and the weakness of democratic institutions. there is a rising concern regarding the quality and magnitude of citizen participation throughout the transition countries. numerous research studies imply that civic participation in these countries is low compared to the level recorded in western europe and north america. the weakness of civic society and low levels of citizens‟ participation has often been linked to low levels of social capital and the legacy of centrally-planned economy. at the beginning of the transition, it was expected that reforms will lead to the increase of civic engagement. instead, many authors claim that we are dealing with the civic demobilization, and that civil society which initiated extensive political and economic changes at the beginning of the transition is on the downward path. the assumptions regarding passive civil society and political apathy throughout the region and the hypothesis about weakness of post-communist civil society have not been conclusively confirmed. also, despite common communist legacy, there are significant differences in the development of civic society in different countries during transition so that the post-communist civil society could not be referred to as a singular phenomenon. this paper explores the dynamics of civic and political participation in serbia in the aftermath of the transition reforms. patterns of political participation will be studied in relation to the intensity of civic engagement in order to establish the relevance of civic participation for explaining citizens‟ involvement in political activities, and consequently, its role in fostering democratic consolidation. 1. literature review over the last decades, there is a growing academic interest for the economic analysis of civic engagement. the 2009 nobel prize for economics, granted to elinor ostrom, rewarded research on civic participation. ostrom (1990) argues that common pool resources can be governed sustainably in a community. although relatively new in economics, the analysis of civic participation has for a long time occupied the attention of scholars in the social sciences. referring to his journey across the united states during 1831, alexis de tocqueville described in detail the richness of civil associations that support american democracy and economic power (de tocqueville, 1835, 1840 [1990]). interactions within voluntary associations are a kind of, as he puts it "social glue" that connects americans, as opposed to formal relations which are based on traditional and hierarchical relationships which have been observed in europe. some sixty years later, the french sociologist emil durkheim dealt with social relationships as a source of social order (durkheim, 1984 [1893]). it seems that rising interest in this field in the last few decades is caused by declining electoral turnout, lack of trust in political institutions and declining levels of civic civic and political participation in transition countries: the case of serbia 3 engagement (putnam, 2000). putnam was among the first authors to express concerns about the decline of civic engagement. according to putnam, one of the factors that causes differences in the efficiency of local governments and regional economic performances in italy are differences in social structures. part of the economic success of northern italy (compared to the southern part of the country) is related to civic associations, which instill in their members a sense of cooperation, solidarity and general interest (putnam, 1993, p. 89-90). effective governance draws (relies) on the tradition of civic engagement and civic networks. in the regions characterized by dense horizontal social relations, based on trust and common values, participation in voluntary organizations and associations is more intensive and social capital is highly developed. regions with successful government and efficient economy are characterized by horizontal relationships that foster and encourage civic engagement. putnam considers that any form of civic engagement is beneficial for society and tends to correlate with a functioning democracy and market economy (putnam, 1993). the key problem is that virtually all forms of political and social engagement are on the verge of decline in the usa since 1940s, meaning that american democracy is eroding from the inside (putnam, 1995; 2000). similar concerns were expressed in a number of different studies, where the decline of participation in social and political activities through traditional channels has been established (skocpol & fiorina, 1999; norris, 1999). it has been argued that the decline in participation could lead to the erosion of democracy (kaase & newton, 1995; norris, 2002). putnam‟s work sparked a wide debate about the future of democracy, but the key problem with this argument is that putnam never established a precise definition of civic engagement (adler & goggin, 2005). his understanding of civic participation includes a wide range of formal and informal activities, from reading newspapers, interpersonal trust, associational involvement to various forms of political participation. a number of such heterogeneous activities are placed under the umbrella of social capital. according to some authors (berger, 2009, p. 336; sartori, 1970), civic engagement is a typical example of conceptual stretching, i.e. concept that comprises a bit of everything. it is not universally accepted that a decline in civic participation levels is the same thing as the erosion of democracy. also, there is a strong dispute about whether we are dealing with the decline of civic engagement at all (norris, 2002, pp. 5-7; stolle & hooghe, 2005; berger, 2009). the evidence of a decline in civic participation is still rather inconclusive. verba et al. (1995, p. 71) find that some forms of political activity increased from 1967 to 1987 (persuading others to vote, working for candidates, contributing money to candidates and parties; and contacting public officials). rosenstone and hansen (1993, ch. 3) found no clear trend in the activities such as working for parties or candidates and in signing petitions, but found strong increases in campaign contributions. using data from the roper social and political trend data set from 1974 to 1994, uslaner (2005) presented evidence of a consistent decline of political participation. for each of the investigated political activities (contacting public officials, attending rallies and public meetings, running for office, organizing and serving as an officer on committees, writing letters or articles for the press, working for a party, giving a speech, and being a member of a political club) there has been a decline in participation over time. however, uslaner did not find indisputable evidence for the decline of other forms of civic engagement. one plausible explanation is that although membership in the traditional civic groups has experienced a decline, in the meantime many new forms of civic organizations emerged that may have replaced old style civic groups that were popular in the time of putnam‟s research (wuthnow, 1998). general 4 m. džunić, n. golubović social survey data (gss) show that decreases in membership has been registered for only four groups out of 15: religious and church, labour and fraternal organizations. membership in other groups either remained unchanged or has actually increased (professional associations). uslaner (2005) claims that there are many different forms of participation which have different roots (meaning that what works to get people involved in one arena often has little effect in another) which explains why some forms of participation have declined, others have risen, and some have remained flat. uslaner classifies the long list of social and political activities into three dimensions: political involvement, religious participation and community engagement. he found that these dimensions are largely mutually independent. although community engagement is correlated with both religious and political activities, these correlations are far from strong. what stands out particularly from his analysis is that group memberships are unrelated to any other form of participation. it means that a community involvement does not mean that a person is more or less likely to take part in political activities. some people are engaged in religious activities, some are politically active and other are prone to take part in communal activities. transition countries have implemented extensive political and economic reforms during the past few decades. prior to transition, a long history of repression discouraged people from broadly associating with others, which has led to political apathy among citizens of those countries. there were very few civic organizations, and those that existed were in the service of the state, and they were mainly concentrated in the areas of sports and culture (rose-ackerman, 2001). trade unions and professional associations are organizations whose existence has been allowed, but without a significant social impact. just before the start of the transition, in some countries independent organizations have begun to emerge and from the last decade of the previous century, most of them began to gain autonomy and their own identity. over time, more or less forced participation was gradually replaced by voluntary activities. relatively stronger emphasis on sports and culture, as well as on professional associations and trade unions that existed in the previous system, apparently was kept during the transition, and the development of other organizations was heavily dependent on financial support. the beginning of the transition period was marked by the significant rise of civic initiative, expressed through officially registered organisations. rapid development was followed by the slowing-down of civil society growth since the mid-1990s, that is, consolidation of civil society, further development and strengthening of existing organization and to a much lesser extent establishment of new ones. scholars from different disciplines warn us that civil society is structurally deficient in post-communist countries, since new democracies did not manage to develop and strengthen civic initiatives and participation in governance (lomax, 1997; ely, 1994). these countries are characterized by the low level of interpersonal and institutional trust and associational activity (wallace et al., 2012). since civic and political participation are crucial for the consolidation of new democracies in the region (badescu & radu, 2010), the rising popularity of radical right parties in central and east european countries has been perceived as a natural outcome of the low level of civic engagement (rupnik, 2007; minkenberg, 2002). majority of debates about civic participation in transition countries are rooted in marc morje howard‟s „weakness of civil society‟ hypothesis. according to this hypothesis, citizens in these countries exhibit lower levels of civic and political engagement compared to other democracies. howard points out to the existence of closed networks based on family ties and a lack of trust towards people outside of those networks. this is civic and political participation in transition countries: the case of serbia 5 the so called bonding social capital and these societies did not manage do develop bridging social capital, which is very important for the development of interpersonal trust. in addition, howard points out to the legacy of distrust towards communist organisations and disappointment with post-communist politics (howard, 2002; 2003). participation in voluntary associations has not been encouraged in former socialist countries. autocratic control resulted in low levels of interpersonal trust, which became a permanent characteristic of post-socialist societies (inglehart, 1999; rose, 2009). low level of interpersonal trust discouraged citizens to take risks that are necessary for social change, which is perceived as a sign that political culture in former socialist countries is subjective and passive. petričušić (2013) points out to the legacy of social and political distrust, resulting in a greater prominence of informal, rather than formal or associational type of networks. countries with low levels of interpersonal trust are less likely to build the kind of vibrant civil society that spurs strong government performance, and the result is low citizen confidence in government and public institutions (newton & norris, 2000). there is a disagreement among scholars about whether civil society in the region should be considered as vibrant or vulnerable. not everybody agrees with the claim that the level of civic engagement in the post-communist countries is low. since there was seemingly very mobilized and active civil society at the beginning of transition, which gave rise to development of democracy, civil and political rights and freedom, we should expect vibrant civic activity, instead of civic passivity. ekiert and foa (2011) suggest that the argument about passive civil society and political apathy throughout the region is not true, and that the argument about the weakness of post-communist civil society has not been empirically confirmed. 2. data overview and methodology the data used in this study is obtained from the european bank for reconstruction and development (hereafter ebrd) survey of households and individuals across the transition region – the life in transition survey (ebrd, 2016). this survey provides data on individual views of citizens on democracy, market economy and the impact transition reforms have had on their lives. the survey aims to explore life satisfaction and expectations regarding the future, interviewing over 51000 households in 29 transition countries. in our empirical estimations, data from the most recent round of the survey (lits, 2016), carried out in over 1500 households in serbia during the year of 2016, will be used, along with data collected in previous rounds of the survey (lits, 2006; lits, 2010) for the purpose of comparisons. to estimate the relevance of civic engagement in voluntary associations on political involvement in serbia, we perform a non-parametric analyses of variance test, the kruskal-wallis h test (kruskal and wallis 1952). this procedure is used for testing the assumption that the intensity of political participation differs based on the level of participation in community associations. in other words, we test whether there are significant differences in multiple forms of political participation between groups characterized by different degrees of civic activism (active membership, non-active membership and not being a member). as the test confirms the presence of significant differences, we employ post hoc tests to determine which specific groups differ significantly among each other. the variable approximating civic participation used in our analysis is the membership in voluntary organisations. this quantitative measure estimates the intensity of civic 6 m. džunić, n. golubović engagement by counting the respondents engaged in various types of community organisations. this measure allows for the differentiation of the degrees of activism, since it indicates the extent to which respondents are active in civic associations (as active, passive, or non-members). following the majority of studies in this area, we explore the extent of participation in a wide range of associations and groups as the main indicator of citizens‟ participation in the social life. the dynamics of political participation is captured by data on conventional participation in terms of political party membership, but also on self-reporting participation in three forms of non-conventional political activities, such as attending demonstrations, participating in strikes and signing petitions. since political participation is a more complex phenomenon that includes not only voting behaviour, but also demonstrations, strikes, boycotts and other forms through which citizens can influence politics, political participation nowadays is usually understood as a range of voluntary activities by citizens, with the aim to influence political choices at various levels of the political system (milbrath, goel 1977, 2; kaase, marsch 1979, 42). these measures of political involvement are frequently used in empirical studies of political participation, as most reliable indicators of political involvement, closely related to the mechanisms of political representation. representing more demanding and active forms of political participation, the indicated variables indirectly reflect the quality of democratic system. table 1 levels of civic participation in serbia (% of total respondents) community organizations active member inactive member not a member 2010 2016 2010 2016 2010 2016 religious 3,82 7,89 24,29 12,93 71,89 79,18 sports and recreational 3,69 3,38 2,70 7,49 93,61 89,12 art music or educational 2,63 2,06 1,18 4,58 96,18 93,37 labour unions 2,96 1,92 5,01 7,10 92,03 90,98 environment 0,53 0,53 1,05 3,85 98,42 95,62 professional 2,37 2,59 1,78 4,05 95,85 93,37 humanitarian or charitable 1,78 1,13 1,78 6,23 96,45 92,64 youth 0,66 0,73 0,59 1,99 98,75 97,28 women's groups / 0,66 / 2,65 / 96,68 farming cooperatives / 0,80 / 2,06 / 97,15 source: lits, 2010; 2016 2 to explore the patterns of civic participation in serbia, table 1 reports the percentages of active, inactive and non-members in a number of voluntary organizations. the findings indicate that a majority of serbian citizens refrain from participating in formal community organizations. over 65% of all respondents do not belong to any of them, 17,6% report membership (active or inactive) in one organization, 7,5% claim to participate in two community organizations, while 9% of the respondents participate in 3 or more associations (not enclosed in table, author‟s calculations based on lits, 2016). narrowing the concept of civic participation to active membership in community organizations indicates that only 10% of citizens are actively engaged in one organization, while the minority of citizens (around 5%) are active in two or more associations. 2 comparable data on membership in voluntary organizations are available only in the second and third round of the lits. civic and political participation in transition countries: the case of serbia 7 comparing the degree of associational activity with countries belonging to the developed world, western europe or north america, the findings suggest that civic participation in serbia is hardly prevalent, measured by formal group membership. there is a lively debate on which types of community engagement seem to be relevant for political pluralism and democratic consolidation, resulting in a wide list of heterogeneous organizations that are supposed to affect citizenry competence and political involvement in different ways. the assumption is that membership in various organizations, even if not being considered politically relevant or involving active participation, does improve civic competence and efficacy (almond and verba, 1963). the distribution of membership across different types of civic organizations indicates that among the minority of citizens that join community groups, the most popular organizations are church, sports associations and labour unions. the interest in vocational associations, such as professional or arts, music and educational groups is somewhat lower. least popular civic associations are those belonging to third sector (humanitarian organizations, groups protecting women rights, youth cooperatives, environmental associations). the citizens of serbia appear to be reluctant to join the associations that capture the original notion of civic society (such as organizations of the non-profit sector), while being more apt to participate in business and life-style associations and work force related organizations. the dynamics of civic participation in serbia in the post-transition period does not support the assumption of discouraged citizen engagement. compared to the findings of the first round of the survey (lits, 2006), where only around 7% of the respondents reported to be members of a civic/voluntary organization (club, association), ten years later over 35% of citizens are actively or passively engaged in one of the many types of civic associations. furthermore, in the last five years, the degree of civic participation has increased in all types of associations, except for the church. however, a closer look into the pattern of participation in the majority of organizations reveals that, although the total membership has indeed increased since the last measurement, the increase has largely concerned the passive forms of participation. active participation has only improved in professional and youth organizations. tables 2 and 3 report on data concerning forms of political participation in serbia in the last decade. the proportion of respondents that are members of political parties is 8,5%. this contrasts sharply from, for example, germany, as an established democracy, where selfreported party membership mounts up to 13,6%, but also from italy, where party membership is only 3,3%. these facts imply that even established democracies are highly differentiated in terms of party membership, so the value of this indicator does not make serbia a special case. however, the data clearly indicate a slight political disengagement of citizens, measured in terms of membership, as a conventional form of participation. on the other hand, the dynamics of political participation in terms of non-conventional political activities seems to follow the pattern observed in civic participation. namely, the proportion of citizens that express reluctance to alternative forms of political activism, such as joining demonstrations, strikes or petitions is obviously lower than ten years ago (the third column of table 3 indicates smaller percentages of citizens that would never engage in such activities). however, increased interest in political activities has mostly been directed to passive considerations of participating in such activities (might do), rather than active political involvement (have done). the indicators that capture true participatory political behavior imply a decreasing intensity of active political engagement. 8 m. džunić, n. golubović table 2 membership in political parties in serbia (in %) yes no 2006 2016 2006 2016 membership in a political party 11,36 8,48 88,64 91,52 source: lits, 2006; 2016 table 3 forms of political activism in serbia (in %) have done might do would never do 2006 2016 2006 2016 2006 2016 demonstrations 14,00 7,16 21,70 32,36 64,30 60,48 strike 9,50 6,63 26,10 34,95 64,40 58,42 petitions 12,91 11,60 42,74 44,63 44,34 43,77 source: 2006; 2016 3. results and discussion for estimating the relevance of civic participation on the intensity of political involvement of citizens in serbia, we employ the non-parametric analysis of variance test, kruskal-wallis h test. this procedure tests whether there are statistically significant differences between two or more groups of an independent variable, that is measured on an ordinal scale. the results of this analysis should imply whether the participation of citizens in different types of community organizations (independent variables) would affect citizens‟ decisions on membership in political parties or participating in various political activities, such as strikes, demonstrations, petitions (dependent variables). since each type of community involvement is assumed to affect political participation in different ways, the analysis will be performed separately for each type. the data in our analysis meet the assumptions that underpin the kruskal-wallis procedure: the variables are measured on the ordinal scales, independent variables (involvement in different organizations) consist of three independent categorical groups (active member, inactive member, not a member), the observations are independent between and within the groups and the distributions of scores for groups of independent variable reflect the same variability. table 4 kruskal-wallis equality-of-populations rank test df membership demonstrations strikes petitions χ 2 p>|t| χ 2 p>|t| χ 2 p>|t| χ 2 p>|t| religious 2 20,09* 0,0001 29,58* 0.0001 20,92* 0.0001 6,59* 0,0371 sports 2 26,73* 0,0001 76,72* 0.0001 78,46* 0.0001 46,40* 0.0001 art 2 10,95* 0,0042 68,24* 0.0001 57,42* 0.0001 40,02* 0.0001 labour union 2 39,47* 0,0001 66,60* 0.0001 73,29* 0.0001 44,38* 0.0001 environmental 2 20,77* 0,0001 26,35* 0.0001 17,63* 0.0001 9,54* 0.0085 professional 2 24,30* 0,0001 62,20* 0.0001 59,02* 0.0001 53,00* 0.0001 humanitarian 2 44,51* 0,0001 21,21* 0.0001 26,43* 0.0001 22,23* 0.0001 youth 2 1,93 0,3810 34,78* 0.0001 17,88* 0.0001 7,67* 0.0216 women 2 10,45* 0,0054 16,55* 0.0003 10,58* 0.0050 9,88* 0,0072 farmer 2 15,04* 0,0005 14,80* 0.0006 11,66* 0.0029 5,13 0,0770 source: lits, 2016, author’s calculations; *significant at 5% level civic and political participation in transition countries: the case of serbia 9 table 4 reports on the results of the test that determined if citizens‟ political involvement was different for three groups that either actively participated in a particular community organization (1), were passive members (2) or not members at all (3). the finding suggest that there are statistically significant differences in all forms of political participation, based on actors‟ involvement in organizations of civic society. the minor exceptions relate to participation in youth organizations not affecting party membership, while being a member of farmer cooperatives does not influence the political activity of signing petitions (obtained χ 2 values, degrees of freedom and significance levels included in the output). as the analysis performed only indicates that at least two groups within the civic participation variable differ from each other, we use post hoc test to determine which specific groups are significantly different in terms of political involvement. the results of pairwise comparisons of means, displayed in table 5, indicate statistically significant differences at the p<0.05 levels in alternative forms of political participation between particular groups of citizens with different levels of civic participation. considering party membership (with the assigned values yes – 1 and no – 2) as dependent on the involvement in a civic association, the findings are mostly conclusive – groups of citizens that are not members of a particular organization tend to be less inclined to become members of a political party, compared to passive or active members. minor exceptions are related to sports organizations, where the analysis determined that active sports members are less interested to be members of political parties than passive ones. membership in youth organizations does not seem to be relevant for political involvement, as previously stated. considering all other cases, the degree of activity in civic organizations encourages political activism in terms of party membership. according to the findings, community engagement is a significant predictor of nonconventional political activities. the values assigned to the variables concerning attendance on demonstrations, strikes and signing petitions (have done -1, might do -2, would never do 3) are higher for the non-members compared to members. there are variations present when analyzing the relevance of being an active or passive member of an organization for political activism, that depend on a particular type of association. for example, active members of labor unions and professional organization tend to participate more actively in strikes, while for the majority of organizations, being active or passive member does not have an impact on political activity. in most situations, the membership itself is positively affecting political activism. in general, our analysis confirms the significance of membership in associations for political involvement in serbia. such results are consistent with previous empirical findings about the relevance of participation in voluntary organizations for the level of political involvement in transition countries. a majority of studies have confirmed that people participating in larger social networks do express larger interest for politics (knack, 1992; rosenstone and hansen, 2003). letki (2004) confirms a large impact of community association membership on political involvement, although emphasizing that associations do vary in terms of their relevance for political involvement. in testing the determinants of both conventional and non-conventional political participation in romania, uslaner (2004) finds strong effects of active participation in civic organizations on participation in political life. the studies, however, indicate a wide range of other potential determinants of political participation that are beyond the scope of our analysis, such as social trust, socio-economic characteristics of citizens (income, education, age, gender), along with country level factors that reflect state of democracy and quality of political institutions. 10 m. džunić, n. golubović table 5 membership in political parties in serbia (in %) membership demonstrations strikes petitions contrast p>|t| contrast p>|t| contrast p>|t| contrast p>|t| religious 2 vs 1 .010 .752 .227 .002* .188 .009* .091 .246 3 vs 1 .086 .001* .307 .000* .252 .000* .137 .034* 3 vs 2 .076 .000* .081 .093 .064 .178 .046 .374 sports 2 vs 1 -.135 .005* -.081 .432 -.051 .619 -.085 .445 3 vs 1 .008 .846 .385 .000* .409 .000* .302 .001* 3 vs 2 .142 .000* .466 .000* .460 .000* .387 .000* art 2 vs 1 .005 .940 -.237 .073 -.240 .067 -.037 .797 3 vs 1 .100 .059 .375 .001* .324 .003* .415 .001* 3 vs 2 .095 .005* .612 .000* .564 .000* .452 .000* labour union 2 vs 1 .036 .546 -.192 .135 .376 .003* -.144 .299 3 vs 1 .189 .000* .298 .010* .144 .205 .289 .020* 3 vs 2 .153 .000* .490 .000* .520 .000* .433 .000* environmental 2 vs 1 .049 .657 -.004 .985 .065 .780 -.073 .772 3 vs 1 .208 .048* .427 .052 .408 .061 .209 .380 3 vs 2 .158 .000* .431 .000* .344 .000* .282 .002* professional 2 vs 1 .130 .023* .301 .016* .301 .015* .184 .174 3 vs 1 .206 .000* .723 .000* .706 .000* .639 .000* 3 vs 2 .076 .038* .421 .000* .405 .000* .455 .000* humanitarian 2 vs 1 .047 .518 -.156 .340 -.033 .837 -.027 .878 3 vs 1 .223 .001* .142 .352 .307 .040* .285 .080 3 vs 2 .176 .000* .298 .000* .340 .000* .312 .000* youth 2 vs 1 -.133 .175 .248 .256 .291 .180 -.058 .807 3 vs 1 -.084 .317 .730 .000* .620 .001* .238 .240 3 vs 2 .048 .342 .481 .000* .329 .004* .296 .017* women 2 vs 1 -.125 .203 -.350 .113 -.300 .169 -.300 .205 3 vs 1 .019 .827 .044 .824 .027 .891 .031 .886 3 vs 2 .144 .001* .393 .000* .327 .001* .331 .001* farmer 2 vs 1 .133 .160 .341 .107 -.005 .980 -.102 .654 3 vs 1 .253 .002* .627 .001* .362 .043* .162 .406 3 vs 2 .120 .019* .286 .012* .367 .001* .264 .077 source: lits, 2016; *significant at 5% level civic and political participation in transition countries: the case of serbia 11 conclusion the paper deals with the issues of civic and political participation, with a special focus on the post transition period in the countries that have transformed their economic and political systems, usually referred to as new democracies. our analysis tends to contribute to the existing literature by empirically investigating the relevance of the involvement in civic associations for the citizens‟ political participation in serbia. contrary to the assumptions of civic demobilization in transition countries, our findings indicate that proportions of citizens engaged in various types of community organizations have steadily grown over the last decade. however, the dynamics of civic participation reveals that the increase has been largely limited to the passive forms of participation. furthermore, compared to established democracies, the degree of associational activity in serbia is rather low. the patterns of political participation, especially the non-conventional forms of political activism, seem to follow the dynamics of civic participation. the employed empirical procedures confirm the assumptions that associational activity is a significant predictor of all types of political engagement, which is in line with prior empirical investigations on the relation between civic and political participation in both developed and transition countries. the obtained empirical findings are to be interpreted bearing in mind the usual methodological limitations related to the usage of survey data on subjective preferences and attitudes. further research should focus on exploring a wider set of determinants that affect the levels of political participation in countries that are still going through the democratic consolidation process. such studies provide useful implications for the policies aimed at strengthening civic society and creating incentives for citizens‟ active involvement in political life as an essential element of credibility of institutions. acknowledgement: the paper is a part of the research done within the project 179066. the authors would like to thank to the ministry of education, science and technological development for funding. references adler, r. p. & goggin, j. 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(1998). loose connections: joining together in america’s fragmented communities. cambridge: harvard university press. http://www.ebrd.com/what-we-do/economic-research-and-data/data/lits.html http://www.ebrd.com/what-we-do/economic-research-and-data/data/lits.html http://www.ebrd.com/what-we-do/economic-research-and-data/data/lits.html http://www.ebrd.com/what-we-do/economic-research-and-data/data/lits.html civic and political participation in transition countries: the case of serbia 13 građanska i politička participacija u tranzicionim zemljama: slučaj srbije cilj rada je da istraži dinamiku građanske participacije u srbiji, kao i da ispita njen uitcaj na političko angažovanje građana srbije. za ispitivanje uticaja članstva u građanskim udruženjima na članstvo u političkim partijama i nekonvencionalne oblike političkog aktivizma, primenjen je neparametarski test analize varijanse i post hoc test. glavni nalazi istraživanja ukazuju da građanska participacija predstavlja značajan faktor političkog aktivizma građana srbije. rezultati empirijskih analiza ukazuju na značajne razlike u stepenu političke participacije, koje su zasnovane na razlikama u stepenu građanskog angažovanja u društvenim organizacijama. implikacije ovog istraživanja mogu da predstavljaju osnov za kreiranje politika usmerenih ka jačanju građanskog društva i stvaranje podsticaja za aktivno učešće građana u političkom životu. ključne reči: građansko društvo, politička participacija, tranzicija, demokratija facta universitatis series: economics and organization vol. 17, no 4, 2020, pp. 343 356 https://doi.org/10.22190/fueo201005025v © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper measuring supply concentration on the serbian oil and oil derivates market by herfindahl-hirschman index1 udc 339.13:553.982 milan veselinović1, snežana radukić2 1higher economics school of professional studies pec leposavic, serbia 2faculty of economics, university of niš, serbia abstract. one aspect of the intensity of competition analysis of the national oil market is the measurement of the concentration of supply, to which this paper is dedicated. that is why it is not surprising that there are different interpretations of these economic categories. the analysis of these phenomena dates back to the emergence of production relations and production forces. the relaxation of regulatory measures on the national oil market has opened the space for building quality competitive relationships between the participants. market opportunities, conditions and competition in practice are determined by concentration in the certain observed market. competitive relations between market participants change over time. those changes impact on concentration level of certain and well defined market, in this case the oil market of the republic of serbia. as the competition changes, the concentration level changes as well. this is the reason why this paper is focused on concentration level measurement and analysis. in measuring and expressing the concentration level of the certain market, many concentration indicators could be applied. our choice was herfindahl-hirschman index. key words: oil and oil derivatives market, concentration indices, competition level jel classification: l13 received october 05, 2020 / revised october 30, 2020 / revised november 05, 2020 / accepted november 09, 2020 corresponding author: milan veselinović higher economics school of professional studies pec-leposavic, serbia e-mail: milanveselinovicnis@gmail.com 344 m. veselinović, s. radukić introduction each relevant market could be described and characterized by a certain level of competition between participants. the market strength of participants in the observed market can be determined based on competitive relations. for this reason, this paper focuses on the competitive relationships between participants, on the level of market concentration, and on the market power that arises from such relationships. market strength can be defined as the ability of a company, or several of them, to profitably increase the price of the product(s) in a certain market, above the marginal costs, i.e. competitive prices (zdravković et al., 2013). according to kostić, “from the fact that every company operates in the market area and that its market power is expressed in it, it follows that the relevant market should be precisely defined, firstly in a place in which a particular company operates, and then the market power of the company itself”, (kostić, 2013, p. 41), it could be said that the relationship between competitors within a particular relevant market largely determines the degree of concentration in a certain market. therefore, when studying the concentration and market power of market participants, it is necessary to first determine the framework of the market itself, i.e. the relevant market, and then select an adequate form for its measurement, which is done in this paper. however, according to kostić (2016), “the level of concentration in a given relevant market is influenced by various factors, such as competitors, dispersion of market share, barriers to entry/exit from the market, economic potential, geographic size of the market, level of regulation of trade flows, regional integration, technological development, rapid information flow, legal regulations, etc.” (kostić, et al., 2016, p. 94). thus, the importance of concentration indicators is relative over the time dimension, bearing in mind that they are influenced by many different factors, and the influence of many factors itself changes its intensity over time. however, their importance in measuring the market power of economic entities and pointing out inequalities in the relevant market is not negligible, because they indicate the nature of the branch (market) and the ability of consumers to choose which product to buy. the technological factor and the fast flow of information can have a positive effect on the course of the analysis because it is easier and faster to get the desired data, information, calculations, and possible changes in the relevant market. in economic theory, many examples of measuring the market power of companies could be found that determine the degree of limitation of the observed market. (veselinović, 2016). research by kostić provides and promotes a large number of indices that could be used for this purpose; we have considered to include in this analysis the lerner index, crosselasticity of demand index, and concentration indices. this paper is dedicated to concentration indices. as such, they are used in the implementation of antitrust policy measures, which gives the results presented in this paper practical significance (kostić, 2009). antitrust policymakers often rely on the calculated values of these indicators to make important decisions regarding the appearance of certain economic entities in the relevant market. they enable the analysis of the current market situation, taking into account the changes that are happening in it, and they are also used to predict and analyze future market trends. what we would especially like to point out in this paper is that concentration indices are subject to changes that economic entities go through, and they are related to their market share in the relevant market. therefore, under these changes, the value of the concentration index also changes. for the concentration indices to be comparable between different branches and periods, they are often subject to appropriate mathematical operations to reduce their value to the interval from 0 to 1 (zeigenfuss, 2000). measuring supply concentration on the serbian oil and oil derivates market by herfindal-hirschman index 345 there is a long list of indicators of concentration that economic experts may use to describe as accurately as possible the degree of concentration in the market, or restrictions on competition in the market. the analysis could include the following indicators: 1. concentration ratio; 2. herfindahl-hirschman index; 3. dominance index; 4. hal-tidman and rosenblatt index; 5. comprehensive branch concentration index; 6. gini coefficient; 7. lorentz curve; 8. entropy coefficient, etc. generally, the image of the level of restrictions on competition in the market, above all, depends on market participants and the distribution of market share, sales, revenue, region, resources in one market, but also the availability of data. if the level of concentration of the four largest companies in the relevant market is methodologically accurate, the difference in the size of market share between all companies in the relevant market is accurate, as well as the uneven distribution of market shares between companies, the image of the level of competition restrictions in the relevant market can be much clearer. then a series of conclusions and/or further decisions could be extracted regarding the strengthening of competitive relations within the branch. taking into account the above, and according to the available data, in this paper, we decided to analyze the results obtained by calculating the herfindahl hirschman index. 1. herfindahl-hirschman index – theoretical background this concentration index takes into account the difference in the size of market share between companies. also, in the calculation of concentration through this index, all companies operating within the branch are taken into account. the herfindahl-hirschman concentration index (hereinafter hhi) represents the sum of market shares of companies weighted by their market share:  == == n i n i siwisihhi 1 2 1 )( (1) where wi represents ponder, and si is the market share of the i-th company (waldman & jensen, 2011). each firm is assigned a specific weight that corresponds to its market share (wi = si). mathematically speaking, according to kostić, „hhi represents a convex function of market shares, so it is very sensitive to inequality in the distribution of market share“, (kostic, 2013, p. 122). hhi respects market shares in the industry, with the focus on companies with higher market shares, and a larger number of such companies affect the growth of this index. as can be seen in table 1, its value ranges from 0 to 1, or from 0 to 10,000, (begović et al., 2002). in the case of an unlimited number of companies with a very small market share, its value will be equal to 0. conversely, its value will be equal to 1 if a monopoly 346 m. veselinović, s. radukić structure operates in a particular market. more detailed levels of concentration are given in the following table 1. table 1 herfindahl-hirschman concentration index levels hhi value level of the concentration hhi less than 1,000 (0.1) low concentrated supply hhi between 1,000 (0.10) and 1,800 (0.18) medium concentrated supply hhi between 1,800 (0.18) and 2,600 (0.26) highly concentrated supply hhi between 2,600 (0.26) and 10,000 (1.00) very highly concentrated supply hhi greater than 10,000 (1.00) monopoly concentrated supply source: begović, b., bukvić, r., mijatović, b., paunović, m., sepi, r., hiber, d., 2002. antitrust policy in fr yugoslavia, center for liberal-democratic studies, belgrade, p. 35. the application of hhi enables a clearer analysis of the observed market. the herfindahl-hirschman concentration index or hhi is widely accepted in the economic theory and practice of many countries, because it is very easy to calculate and interpret, and it also provides additional info-benefits. namely, its reciprocal value shows how many economic entities of the same size can achieve a given value on the observed market, (kate, 2006). the reciprocal value pattern ( 1 hhi ) is as follows: hhi si n i n i n n i sisi 11 1 2 1 2 )2( 1 2 1 21 1 )()( == = = = =  = − − (2) the value of the reciprocal value of hhi can be from 1 to n. if its value is 1, then there is one dominant company in the market, and if it is n, then in the market all economic entities have the same size and the same market share, (waldman & jensen, 2011). in practice, a special form is sometimes used when expert bodies cannot determine market shares for all companies in the observed market. this is the following pattern: 2 1 2 1 2 100             − +=   = = m si msihhi n i n i (3) measuring supply concentration on the serbian oil and oil derivates market by herfindal-hirschman index 347 in this form, n represents the number of identified and m the number of unidentified companies. for this form to be expedient, it is necessary for the number of identified companies to be higher than the unidentified ones. if there are a large number of unidentified companies, this pattern loses relevance in assessing the concentration of the observed market, (maksimović, et al., 2011). 2. methodology, data collection and market concentration measurement procedure the concentration of the market on the supply side reflects the degree to which the total sales (supply) in a particular market is under the control of a small number of companies, i.e. only one company in the last resort. starting from the theoretical basis presented in the previous part of the paper, research was performed that includes an analysis of the domestic market of oil and oil derivatives to examine the degree of concentration and conditions of competition. the analysis covers the market of oil and oil derivatives on the territory of the republic of serbia. the research was conducted in the period from december 21st, 2018, to july 31st, 2020, and included the following research steps: 1. developing hypotheses and defining subjects and goals, as well as preparing research; 2. data collection, the definition of the relevant market and selection of variables; 3. data processing and analysis; 4. presentation of data gained and conclusions. setting hypotheses and defining goals was the starting point in the research. in addition to the active ones, the most important oil companies have been defined, which stand out from other companies in the domestic market of oil and oil derivatives in terms of revenue, and which will be the focus of research. also, the forms of data that will be collected are defined based on the possibilities of data collection, planned methods of application, and their significance, (kostić, 2014). during each step, certain actions were realized that were planned for each step, so we will explain them first. the null and alternative hypotheses from which we started are: h0: in the relevant oil and oil products market there exists a high concentration between participants; h1: in the relevant oil and oil products market a high concentration between participants does not exist. taking into account the views from the null and alternative hypotheses, it is clear that the focus is on concentration in the relevant market. the subject of this paper is the analysis of market circumstances in the domestic market of oil and oil products and the verification of initial hypotheses. the period of 9 years of business, 2010-2018, was observed. a large number of oil companies operate on the market of oil and oil derivatives of the republic of serbia. based on the data of the serbian business registers agency, in the period 2010-2018, a total of 16 representative economic entities were identified and thus selected, which in that period operated on the domestic market of oil and oil derivatives (veselinović, 2016). in the meantime, one business entity was excluded from the survey due to the initiated bankruptcy procedure, so the final total number of oil companies for the observed period was 15. the aim of the research should be a more realistic assessment of the degree of market constraints and market power of certain companies in a given market in order to assess 348 m. veselinović, s. radukić market circumstances, as well as giving recommendations to strengthen competition. the results of the research will also be used to undertake economically based activities. therefore, the research aims to determine the level of limitations of the market of oil and oil derivatives under the obtained results, but also at the measures that should be applied. the measures should take into account the size and complexity of the serbian market of oil and oil derivatives, but also the economy size itself. 3. definition of the relevant market for the concentration measurement in the process of measuring the concentration and market power of participants in a particular market, it is necessary to define a framework within which to analyze the competitive positions of economic entities themselves. the market to be determined, to which the concentration indicators will relate, is the relevant market. the purpose of its definition, i.e. determining its boundaries, is to identify economic entities that will be in the focus of the application of economic analysis as mutual competitors in that market (gerald & ewin, 2008). determining the domain of analysis implies determining the relevant market. the relevant market is closely related to the elasticity of supply and demand, depending on the nature of supply and demand of the market itself. also, the relevant market has a subject and a spatial dimension. therefore, the determination of the relevant market implies its determination both from the geographical aspect and from the aspect of the product sold on that market. thus, from the aspect of the activity of participants in a certain market, we distinguish between the relevant product market and the relevant geographic market (zeigenfuss, 2000). the area dealing with the definition of the relevant market uses data on price movements, production, domestic consumption, and total sales to form the boundaries of the relevant product market and the relevant geographic market. to define the relevant product market, we used the correlation test in price movements, and for defining the boundaries of the relevant geographic market the elzinga-hogarthy test. the data used for these tests were taken from secondary sources, and the methodology and results are presented below. in determining the relevant product market, we started from the conclusion that there are no very close substitutes for oil and petroleum products. starting from the manner and representation in meeting the same or similar needs, one of the substitutes could be electricity. to examine the correlation, we started from statistical hypotheses: ho: there is no statistically significant correlation between the movement of average retail prices of oil and oil derivatives and electricity; h1: there is a statistically significant correlation between the movement of average retail prices of oil and oil derivatives and electricity. measuring supply concentration on the serbian oil and oil derivates market by herfindal-hirschman index 349 table 2 movement of current prices, annual inflation rate, and adjusted prices of fuel and electrical energy in the period from 2006 to 2015 year the average retail price of fuel (per liter) average retail price el. energy (per kilowatt-hour) average annual inflation (%) average the retail price of fuel (per liter) in 2006 prices average retail price el. energy (per kilowatt-hour) in 2006 prices 2006 80.2 5.1 12.7 80.2 5.1 2007 83.3 5.3 6.5 80.1 5.6 2008 112.1 6.8 12.4 126.0 7.6 2009 99.8 6.9 6.7 186.5 7.4 2010 110.4 6.8 6.6 117.7 7.2 2011 121.4 7.5 5.5 128.1 7.9 2012 124.6 7.6 4.9 130.7 8.0 2013 133.2 7.8 4.4 109.1 8.1 2014 131.5 7.9 4.3 137.2 8.2 2015 130.1 8.1 4.2 135.6 8.4 source: republic bureau of statistics, review, http://webrzs.stat.gov.rs/website/public/pageview.aspx?pkey=3, visited on july 5/2019 the level at which average retail prices of oil and petroleum products and electricity correlate over ten years (2006-2015) is estimated (table 2). the correlation testing is performed through prices adjusted to the 2006 level. to eliminate the effect of image distortion provided by testing, we have canceled the effect of inflation. we did this by using data on the calculation, i.e. correctors on the inflation rate, which were determined through the movement of consumer prices obtained from the website of the european bank for reconstruction and development and the republic bureau of statistics website. based on the obtained results on the degree of correlation and indicators of statistical significance, we rejected the zero and accepted the alternative hypothesis. it turns out that there is a direct correlation between the prices of the observed products (table 3). the relationship is statistically significant, which confirms the probability value of r, which is less than 0.05 (0.042 / 0.027). however, the value of the correlation coefficient that we obtained indicates that these two products are not substitutes (0.661), i.e. the value of r is not above 0.8 (0.661 / 0.685). we believe that similar results would be obtained if similar potential substitutes were taken into account. thus, the market for oil and oil derivatives independently constitutes the relevant product market. table 3 correlation coefficient of the movement of average retail prices of fuel and electrical energy in the period from 2006 to 2015 mpc2006 pearson correlation 1 .661* sig. (2-tailed) .042 n 10 10 mpcee2006 pearson correlation .685* 1 sig. (2-tailed) .027 n 10 10 * correlation is significant at the 0.05 level (2-tailed). source: author's calculation based on the database of the european bank for reconstruction and development, public stat., http://www.ebrd.com/where-we-are/serbia/overview.html, accessed 22.11.2019 350 m. veselinović, s. radukić furthermore, the data required for the elzing-hogarthy test were also collected from secondary sources, i.e. statistical yearbooks of the republic of serbia, the energy balance of the republic of serbia, and the european bank for reconstruction and development web site, where the statistical calendar of important variables is presented. based on the results of lofi, i.e. lifo tests, it is clearly determined where the domestic market of oil and oil derivatives belongs (table 4 and 5). the lofi test measures the share of exports in the production of the relevant market, and the lifo test measures the share of imports in the consumption of the relevant market. this statement can be followed by the fact that during the last fifteen years, several european well-known oil companies have entered the domestic market, such as lukoil, omv, gazpromneft, eko. namely, “frech argued while the computation of lifo and lofi in a given area is a straightforward task, an area in which both the lifo and lofi criteria are simultaneously satisfied need not be unique. for example (using zip codes as the “building blocks” with which to construct a geographic market, as is common in practice), suppose that for a given zip code, lifo and/or lofi does not meet the 0.75 thresholds. this implies that this zip code in isolation does not constitute a geographic market according to the elzing-hogarthy criteria, and thus to create a geographic market, additional zip codes need to be included. the choice of which zip code(s) should be incrementally added to the initial zip code can potentially affect the size of a market and the number of competitors. for example, adding zip codes based on a fixed radius from an initial geographic point can produce a different market than if one were to iteratively add zip codes based on the zip code that contributes the most to either the lifo or lofi statistic”, (as cited in gaynor, 2012, p. 9). table 4 relevant geographic market depending on the value of elzinga-hogarty test results (lofi/lifo test) lofi /lifo value description of the relevant geographic market < 10% highly relevant market 10% 25% poorly relevant market >25% share of the wider relevant market source: hendry, l.c., eglese, r.w. 1990. data envelopment analysis. operational research society. the united kingdom. table 5 values of the elzing-hogarthy test (lofi/lifo test) for the period from 2011 to 2014 year lofi values lifo values 2011 0.091 44.6 2012 0.063 44.5 2013 0.059 43.3 2014 0.052 40.2 source: author's calculation based on the database of the european bank for reconstruction and development, public stat., http://www.ebrd.com/where-we-are/serbia/overview.html, accessed 22.11.2016 starting from the fact that the territory of the republic of serbia is a rounded territory where the legal framework, antitrust regulations, and numerous oil companies operate, we concluded that the relevant geographic market of oil and oil derivatives is independently measuring supply concentration on the serbian oil and oil derivates market by herfindal-hirschman index 351 constituted in the republic of serbia. the relevant geographic market of oil and oil derivatives on the territory of the republic of serbia is also confirmed by the results of the elzinga-hogarti test (lofi/lifo test), obtained based on the collected data. to make the results more objective, we took into account the period longer than two years (2011-2014), which is part of the time frame of the analysis itself. based on the criteria presented in table 4 and based on the data shown in table 5, it can be concluded that the domestic market of oil and oil derivatives is a very relevant geographic market viewed from the aspect of exports, i.e. part of the wider relevant market from the aspect of imports. namely, the values for the observed period moved between 5.2% and 9.1% (table 5). after collecting, supplementing, and verifying data obtained from the serbian business registers agency, the serbian republic bureau of statistics, and the european bank for reconstruction and development, the survey included 15 oil companies. the representative sample is also included. namely, there is a belief that taking a large number of economic entities into the analysis can reduce the analytical significance of this concentration indicator by increasing the value of this index, and for that reason, we followed the recommendations in the instructions for calculating selected indicators. the representative sample contains four to seven large, medium, and small companies, depending on the methodology and instructions for calculating the indicators themselves. in addition to nis i.e. gazprom neft, omv, lukoil, eko, and knez petrol also stand out as large companies. some of the above also deal with the wholesale trade of oil and oil derivatives, for example, the transnafta company. in addition to larger oil companies, a large number of small oil companies have been registered. according to the collected data, a larger number operate unprofitably and are on the verge of bankruptcy, while a certain smaller number successfully manage the market and generate significant revenues. 4. market concentration analysis by using herfindahl-hirschman index after defining the relevant market, the obligatory step is the selection of the appropriate variable through which the degree of concentration of competitors in the relevant market will be measured. the variable is used to calculate the market share of each economic entity in the relevant market. taking into account the subject and goal of economic analysis, but also the availability of primary and secondary data sources, in practice it can be used through variables such as profit, realized income, and production for a certain period, number of employees, total assets, number of branches, sub-branches, and their turnover, distribution of organizational units, number of subcontractors, etc. combining variables is possible, but only under specific circumstances. in general, economic analysis can also yield contradictory conclusions if different variables are used. at the very least, such results may be seemingly accurate, but substantially far from the desired objectivity. for that reason, it must be borne in mind that each variable brings with it certain limitations. the practical application of the obtained results often depends on the analytical and subjective assessment of the researcher, but also on the circumstances under which the analysis itself is realized. for the purposes of this paper, the results obtained based on the analysis could be applicable only if, when determining the domain of the analysis, they put market power in the foreground. as market power is reflected through the realized income on the relevant market, the focus of this research is in the first place the realized income that the companies realized on the relevant market for the observed period. 352 m. veselinović, s. radukić annual realized income is taken as an adequate indicator for many reasons: it gives us information about the value of sales on an annual basis, regardless of whether the product/service was created in the observed or previous year, and sales revenue is related to the core business of oil companies and excludes revenue generated on the other bases. annual realized incomes of oil companies can be found in the attached link addresses, and the percentage shares of realized incomes of individual oil companies in the total realized revenue for the period 2010-2018, which we will rely on in the assessment, are given in table 6. table 6 the percentage share of realized incomes of individual oil companies in the realized total income of all oil companies for the period 2010–2018 company/year 2010 2011 2012 2013 2014 2015 2016 2017 2018 nis/gazprom novi sad 55.1 52.7 54.4 60.2 59.9 57 54 56.6 58.8 lukoil serbia belgrade 13 12.4 10.9 7.2 8.4 9.1 8.8 7.4 7.6 омv serbia belgrade 11.1 9.8 9.2 7.4 7.2 9.2 8.5 8.0 8.0 кnez petrol serbia belgrade 6.4 8.8 9.7 8.9 9.7 6.2 7.7 10.6 9.7 intermol serbia belgrade 3.9 3.7 4.3 4.8 4.9 10 11 10.3 9.8 nafte serbia belgrade 3.2 3.6 1.3 1.2 1.3 0.9 0.3 0.0 0.0 pc transnafta pancevo 0.17 0.13 0.14 0.20 0.16 0.0 0.0 0.0 0.0 source: made by the author based on data from the business registers agency of the republic of serbia, http://www.apr.gov.rs, visited 7.5. 2020 based on the data about the market shares of oil companies shown in table 6, it can be said that the market of oil and oil derivatives of the republic of serbia is an oligopolistic market with one dominant company (about 55% market share), several large ones that follow it (about 10% market shares), several smaller (followed by 5-10% shares), and a group of small businesses (less than 1% shares). in the following, based on the collected information, the level of limited competition on the market of oil and oil derivatives of the republic of serbia for the period 2010-2018, will be determined by estimating the herfindahl-hirschman index. the hhi index for the relevant market in the observed period 2010-2018 ranged between 3,100 and 3,840, which can be seen in the attached table 7 and on the graph in figure 1. measuring supply concentration on the serbian oil and oil derivates market by herfindal-hirschman index 353 table 7 herfindahl-hirschman index of supply concentration in the relevant market of oil and petroleum products in the period 2010 – 2018 year/hhindex hhi ∆hhi 2010 3360.45 2011 3133.17 -227.28 2012 3286.19 153.02 2013 3838.34 552.15 2014 3793.49 -44.85 2015 3638.90 -154.59 2016 3212.98 -425.92 2017 3538.72 325.74 2018 3768.37 229.65 source: author's calculation based on the data of the business registers agency of the republic of serbia, http://www.apr.gov.rs, visited 7.6. 2020. fig. 1 herfindahl-hirschman supply concentration index in the relevant market of oil and oil derivatives in the period 2010 2018 source: graphic presentation based on the author's calculation based on the data of the business registers agency of the republic of serbia, http://www.apr.gov.rs, visited 7.6. 2020 nis/gazprom neft, lukoil, omv, knez petrol, and mol are big players in the domestic supply market. this is confirmed by the data on the market share of each oil company in the realized income, which is shown in table 1. therefore, the obtained values of the herfindahl-hirschman concentration index objectively reflect the distribution of market share and market power concentration in the relevant market (table 7). according to the value of hhi, it is obvious that the offer on the relevant market is very highly concentrated. 354 m. veselinović, s. radukić concluding remarks the obtained results of the conducted research give us a basis for drawing interesting conclusions. the results of the analysis of the relevant market for the period from 2010 to 2018 unequivocally indicate a high level of concentration, and resume may be in the next form: hhi index for the relevant market in the observed period ranged between 3,100 and 3,840. it is unequivocally clear that the supply of the oil and oil derivatives market of the republic of serbia is very highly concentrated. the obtained values of the calculated coefficients and the specific state of uneven distribution are caused by the high concentration of supply on the domestic market of oil and oil derivatives. this is confirmed by the data on the market share of each oil company in the realized incomes, shown in the first table. of course, nis/gazprom neft with 55%, and the group lukoil/knez petrol/mol/omv stand out in terms of the percentage share of the realized incomes, and together hold over 85% of the participation in total realized incomes. more specifically, the oil and oil products market is an oligopolistic market with one dominant company nis/gazprom neft (about 55% market share), several large ones following it (about 10% market share), several smaller ones following them (5-10% participation) and the group of the smallest companies (less than 1% participation). as a reflection of these relations on the market, the upward growth of the trend of uneven distribution of market share stands out. the high values of the hhi also reflect structural changes and developments in the domestic market of oil and oil derivatives. during 2010, the program of transformation and modernization of nis/gazprom neft was realized, which enabled a profitable and stable position of this oil company. since 2011, the already large market share of nis/gazprom neft has gradually increased. thanks to investments and support from the state, nis/gazprom neft has become a vertically integrated company since 2013. the complete process from research and development, through production and logistics, all the way to wholesale and retail represents one closed functional system of nis/gazprom neft. that is why it is not surprising that this oil company dominates the relevant market of oil and oil derivatives of the republic of serbia. the relative decreases in the values of certain indicators during 2011 and 2016 are related to the decrease in the number of gas stations (supply quantity) of nis/gazprom neft concerning the decrease/increase in the number of gas stations of other serious market participants (lukoil, omv, eko) during the observed period. it is logical that this analysis also results in a better understanding of the competitive behavior of the leading oil companies in the market. as the market for oil and oil derivatives is relatively small, no increase in the number of participants on the supply side is expected. for this type of market, it is typical for companies to use a limited market to install a large profit margin, and to make as much profit as possible, all at the expense of customers. this kind of situation in the domestic oil and oil derivatives market is subjected to the anti-monopoly policy of both domestic and foreign legislation. commission for protection of competition should pay special attention to the policy of the retail price formation. appropriate implementation of the regulation for forming prices in the oil and oil derivatives market is only possible under the strict control of the commission, because the chances of an agreed performance in the relevant market are really big, which is supported by indicators. in this context, we draw attention to the potential for the agreed performance and the agreed price. formal and tacit agreements certainly exist, but they are difficult to prove. this practice should be stopped as soon as possible by adequate and systematic measures. the measuring supply concentration on the serbian oil and oil derivates market by herfindal-hirschman index 355 strengthening of competitive relations, and thus the increase of business efficiency between companies is not expected unless the state reacts. based on the derived conclusions and findings, appropriate measures can be taken to increase competition and the business efficiency of oil companies. in such circumstances, maintaining and raising the quality of products and services is questionable, and it would be best to encourage competition between oil companies and increase their economic efficiency. however, it should be emphasized that large companies, such as nis/gazprom neft in the observed market, greatly contribute to increasing efficiency across the branch. we should keep in mind that restricting the operations of nis/gazprom neft and/or lukoil may be wrong, and the applied measures could be ineffective and wrong. large companies, such as nis/gazprom neft, by investing in the development of efficient business, 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(2000). measuring performance. internal auditor, 57(1), 18-27. merenje koncentracije ponude nafte i naftnih derivata u republici srbiji herfindal-hiršmanovim indeksom jedan od aspekata analize intenziteta konkurencije na određenom tržištu jeste merenje koncentracije ponude, čemu je ovaj rad i posvećen. zato i ne čudi činjenica da postoje različita tumačenja ovih ekonomskih kategorija. analiza ovih fenomena datira još od nastanka proizvodnih odnosa i proizvodnih snaga. liberalizacija domaćeg tržišta nafte i naftnih derivata otvorila je prostor za izgradnju kvalitetnih konkurentskih odnosa. tržišni uslovi i konkurencija u praksi su određeni nivoom koncentracije na posmatranom tržištu. konkurentski odnosi između tržišnih učesnika se menjaju tokom vremena. te promene utiču na nivo koncentracije određenih i jasno definisanih tržišta, u ovom slučaju tržište nafte republike srbije. kako se nivo konkurencije menja, nivo koncentracije se takođe menja. iz tog razloga je ovaj rad posvećen merenju i analizi nivoa koncentracije. postoji niz pokazatelja koncentracije koji se mogu primeniti u cilju merenja i prikaza nivoa koncentracije na određenom tržištu. naš izbor je herfindal-hiršmanov indeks. ključne reči: tržište nafte i naftnih derivata, indeksi koncentracije, nivo konkurencije plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 15, n o 1, 2018, pp. 43 55 https://doi.org/10.22190/fueo1801043j © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper tqm and kaizen for continuous quality management 1 udc 005.6 vesna janjić, mirjana todorović, violeta domanović university of kragujevac, faculty of economics, serbia abstract. there is almost a generally accepted view that quality is one of the most important factors of company competitiveness. for this reason, quality needs to be managed. in response to the need for management and requirements for high quality, theory and practice have developed several concepts. total quality management (tqm) and kaizen are two basic concepts directly involved in continuous improvement of product and process quality in the company, aimed at achieving positive transformation in the minds and actions of employees and managers. the focus of this paper is the analysis of the mentioned concepts and their contribution to the program of continuous quality improvement. hence, the goal set by this paper is to review the basic characteristics of tqm and kaizen, and, on the basis of a comparative analysis, draw conclusion about the distinction between them in terms of essence and practical application in the field of quality management. key words: quality, continuous improvement, concept, total quality management, kaizen jel classification: m21, m41 introduction the end of the second millennium was characterized by dramatic changes in all spheres of life and work, and omnipresent globalization. under the pressure of global competition, companies increasingly seek solutions and outputs in continuous improvement of their capacities and performance, in order to preserve and even improve their business and position on the globalized market. rapid technological advancement, along with global competition, drives managers to produce products and deliver high-quality services at the received august 25, 2017 / revised january 15, 2018 / accepted january 24, 2018 corresponding author: vesna janjić university of kragujevac, faculty of economics, đure pucara starog 3, 34000 kragujevac, serbia e-mail: vesnajanjic64@gmail.com 44 v. janjić, m. todorović, v. domanović lowest average cost (domanović, 2016a, 474). that is, the key to success for many companies around the world is quality, so 21 st century will with good reason be marked by quality and aspiration to establish higher standards. quality is becoming one of the important aspects of company adaptation to environmental changes, and quality management is one of the most important tasks of company management. that is, improving and mastering quality is set as a priority task of management. one of the basic requirements of quality management is precisely the requirement for continuous improvement. to strive for continuous quality improvement means working to meet the wishes and expectations of customers by improving process capacities, to result in higher quality of products and/or services. continuous improvement should be a daily task and practice, i.e. an integral part of the company’s business philosophy motivated by competition, a desire to increase the level of quality and profit, and customer satisfaction. hence, the subject of research in the paper is quality, as an important and key factor of business success, which cannot be viewed as isolated from other forms of improvement, such as maximizing quantitative results, as well as from changing the social and cultural dimension of company operations. specifically, the subject of the analysis are total quality management (tqm) and kaizen, as two basic concepts that directly deal with continuous quality improvement of products and processes. the aim of the paper is to point out the importance of complementary application of these concepts, make their comparative analysis, and show their contribution to the program of continuous quality improvement. due to the similarity in practical application, it is necessary to point out the specifics of individual concepts. the key hypothesis in this paper is that only the integrated and complementary application of these two concepts will have synergistic effects on the quality of the overall company operations. testing the starting hypothesis will rely on qualitative methodology, based on the study of relevant domestic and international literature involving theoretical generalization and experience of authors who explored the subject under consideration. the structure of the paper is conceived in accordance with the defined subject, basic goal, and starting hypothesis. in the first part, the issue of quality management is considered. the second part includes the discussion about continuous quality improvement through kaizen concept. the third part deals with the practical application of the kaizen concept. the fourth part deals with the tqm. the effects and analysis of the practical application of tqm are given in part five. the last, sixth part, deals with a comparative analysis of two concepts and points to similarities and differences between them. 1. quality management – the imperative of the modern era an important determinant of the competitive advantage of profit-oriented companies in modern market relations is the quality of products and services. today, in professional literature and business practice, there is almost a general consensus that quality is one of the key strategic variables, which directly affects the level of customer satisfaction. companies that achieve a high quality of their products can achieve greater profitability thanks to the ability to charge a higher price for higher quality. quality is becoming a paradigm of competitiveness, bearing in mind the quality of products and services and the quality of business processes, and its realization requires coordination of work of all tqm and kaizen for continuous quality management 45 employees, from direct executives to top management. customer criterion becomes dominant when choosing a supplier and it does not represent luxury, as it used to be thought, but economical and adjusted response to the stated needs. it is becoming clear that quality is now more important than ever before. hence, quality is globally considered to be the most important phenomenon of our age, with the tendency of its further emphasis and importance. improving the process quality and maintaining an acceptable level of work quality are key success factors for each company. quality management, as a multidimensional approach to company management, is the basis for achieving and improving the quality of products as well as business processes. quality management, as a business management subsystem, includes coordinated activities to guide and manage the organization from a quality point of view. it is a systemic mode of operation that guarantees that all company activities will take place in a planned manner. it implies the definition and implementation of the procedures necessary for the creation of products/services with the desired characteristics. in other words, it means managing the activities and their results. it is oriented towards creating a quality culture, delivering superior value to stakeholders, and creating a lasting competitive advantage in the company. such an approach includes “increased product functionality, reliability, perseverance, and serviceability” (domanović, 2016b, 252). the quality management function, as part of the total quality management function in the company, is achieved through quality planning, operational quality management, quality control, and quality improvement. quality planning is the first phase of quality management and a function that meets quality goals and tasks. operational quality management is a function that relates to operational activities and procedures for achieving quality requirements. internal and external quality system control involves quality assurance. quality improvement is undertaken throughout the company in order to increase the efficiency and effectiveness of activities and improve the process in order to achieve success for both the company and customers. establishing a quality system within the business system, through the process of continuous improvement, opens the way to the development of tqm and kaizen concepts. 2. continuouos quality improvement through kaizen concept changes for the better are an inevitable and necessary path if the company wants to survive and succeed in conditions of competitive economic environment. changes can be perceived as gradual or sudden. the key difference between how changes are understood in japan and in the west lies in kaizen concept. kaizen history began in 1950, when deming the advocate and creator of kaizen concept, began his work in japan, first in toyota, where the quality control cycle in production was first implemented. deming’s idea was to encourage managers to find opportunities for small product quality improvements and cost reduction in the production process. small and continuous improvement, small steps and progress in productivity, quality, and cost reduction soon became apparent and significant. the japanese named the total changes made and the resulting success kaizen, with the general term having more meanings: kaizen philosophy, costing, technique, and concept (janjić, 2009, 108-110; domanović, 2016b, 251-252). 46 v. janjić, m. todorović, v. domanović kaizen concept is part of a business philosophy in the field of business with a set of relevant components aimed at satisfying customer expectations (rof, 2011, 151-167). the process of its implementation is simple, based on the sound mind of employees and no-highcost approaches, providing in turn incremental progress by applying small innovation, payable in the long run (janjić, todorović & jovanović, 2013, 226-230). one component of kaizen concept is total quality control (see: masaaki, 1986, 3-8). applying total quality control (tqc) emphasizes quality in companies as a priority in relation to other goals. tqc emphasizes the role of human resources in producing a high-quality product. building quality in people means building awareness of the existence of kaizen, as an opportunity to identify and solve problems in companies. tqc can be defined as a systematic and statistical approach in implementing kaizen concept and problem solving, which puts perfect quality of products and services in the first place, but also their continuous improvement, which is implemented at the level of the whole company and takes place everywhere in the company, from managers to employees (janjić, 2009, 170-173). in addition to the tqm,several other kaizen concept components positively affect company performance by improving quality, reducing costs, increasing sales volume, and increasing profits. the effects of kaizen concept in the business process are numerous, and for the addressed issue the impact on the product quality is the most important one. in order to achieve this effect, kaizen concept should provide a positive impact on the development of cooperation, communication, and mutual harmony between employees, managers, experts, and executives, strengthening of business morale and establishing discipline in the workplace, more productive use of resources, labour, working area, and more economical use of material (janjić, 2009, 185). changes occurring through kaizen are not large in scope, and are usually caused by workers themselves in their workplace (in gemba). therefore, all workers need to be involved in the process of quality creation. otherwise, there are defects that cause delays in the delivery of products/parts and require the existence of inventory to replace defective products or parts. hence, the basis of kaizen concept is quality in the first place, not profit. kaizen concept puts emphasis on improving quality through small changes in processes and workplaces, and the result is reflected in reductions in different types of waste, lower operating costs, lower price, increased sales volume, and increased profits. 3. application of kaizen concept in practice experience in applying kaizen concept in developed market-oriented countries should be followed using the japanese industry example, as well as the one from the us industry (although examples of applications exist in the uk, sweden, but also in montenegro, indonesia etc.). examples of kaizen concept application are companies from the automotive industry, aviation industry, electrical industry, with the tendency of spreading the application in the non-productive areas. the practical implementation of kaizen concept began at toyota corporation, while producing toyota’s best-selling car of the 21 st century, toyota corolla. today, there is hardly any bigger company in japan that does not apply kaizen concept (for example: olympus optical company, daihatsu, canon, komatsu, hitachi, etc.). in usa kaizen has been applied by ford motor, boing, dana corporation, in germany, it is mercedes, in great britain, dieselco, in montenegro, daido, and, more recently also japan tqm and kaizen for continuous quality management 47 tobacco international-senta in the republic of serbia. in recent times, japan has been supporting the development of kaizen concept in developing countries, with assistance first focusing on east asian countries, south asia, latin america, and eastern europe. when it comes to african underdeveloped countries, knowledge exchange and the use of kaizen are quite limited. production companies in africa are not only disadvantaged in terms of technological development, but also regarding lack of knowledge of key management methods. there are several limitations for implementation of kaizen in africa. first, in countries with socialist elements, such as ethiopia, company strength is concentrated in the hands of top management, while kaizen concept emphasizes the empowerment of workers in the workplace (in gemba). second, the most common sources of productivity decline are outside the company, especially the delay in the delivery of materials. improving the business network, both back and forth, should be an important element of improving productivity for most african manufacturers. the study conducted in the three pilot companies: mesfin industrial engineering plc (mie), almeda textile factory plc, and sheba leather industry (admasu, 2015, 4) has shown that 59% of respondents accept kaizen and fully understand it, while 41% accept this concept with a certain amount of uncertainty and confusion. as a result of poor education and training, there is a lag in the implementation of kaizen techniques and tools, especially in the application of 5s technique (asayehgn et al., 2014, 39-57). based on this observation, it could be concluded that training on the kaizen application is crucial. in general, two measures should be considered for dissemination of kaizen in african countries. first, kaizen must be announced as a national movement. second, spreading the idea of kaizen through professional institutions will be vital (admasu, 2015, 2-3). the experience of underdeveloped countries, developing countries, and developed countries regarding the application of kaizen concept can be of great importance for companies in the republic of serbia. it should be expected that kaizen concept will find its place and role in companies in the republic of serbia, primarily because of its simplicity, ease of understanding, and small investment. the prospects for its transition into the business environment of the republic of serbia are encouraging, provided companies release their long-standing habits, especially those that see employees only on the basis of their status in the company hierarchy, and not according to their efforts to achieve the business goal. hence, the experience of other countries can be helpful to companies in the republic of serbia in implementing kaizen concept, especially because until recently they have had neither theoretical nor practical experience in its implementation. 4. total quality management: essence and implementation total quality management – tqm concept is synonymous with business excellence, a new business philosophy that implies access to quality-oriented company management. tqm can be described as the most powerful, most demanding, and most complex management approach which evolved in the uk in the 1970s and early 1980s. there are several approaches to tqm, such as juran’s, deming’s, ishikawa’s, crosby’s, all of which having a unique view of the development and application of tqm in the organization. in this paper we will focus on deming’s approach which is probably the most extensive. the top level of quality can be achieved only through a total quality management model, which shows the 48 v. janjić, m. todorović, v. domanović professional and scientific way to achieve business success both in the present and in future, using methods and techniques, improvement, and with the participation of all employees, as well as all stakeholders in the process. tqm is a management approach in the company that seeks to align customer needs and shareholders’ interests, motivating all employees to achieve that goal (antić, novićević, 2012, 201). companies, in which management plays a leading role in the realization of this concept, produce higher-quality products in comparison with companies in which management is not committed to quality of the organization itself (saleem, et al., 2012, 35). in its structure, tqm is a multiconceptual discipline that includes the concepts of quality and management. it is an answer to traditional approach to quality and a new way of improving the competitive position through a comprehensive view of quality management. therefore, quality is the basis of the total quality management concept, and the main goal is the company’s ability to satisfy customer needs. in the present business environment, a large number of companies recognize and see that total quality management is important and useful. it is a method of gradual improvement of the entire organization, using systematic approach based on hard work, discipline, selfdiscipline, intensive training, application of existing and new techniques and resources. numerous companies have successfully implemented tqm (woon, 2000), but there are also companies that have never tried to accept it or have given up on its introduction and failed (mat naim et. al, 2015). the truth is that companies have problems with implementation. strict requests for the implementation of tqm program have made many companies give up on implementation. then, companies should consider key factors of implementation, for example: top management’s commitment, teamwork, empowering employees, quality education and training, customer focus, continuous improvement, quality systems and policies, relationship with suppliers, process orientation, customer satisfaction, and business result (ozden, 2003, 345-350). a survey conducted in spain shows how structural, internal, and external factors influence the acceptance of tqm concept ideas. the research results have shown that larger companies, the ones that form parts of multinational companies, that export most of their products, produce durable goods, unlike those that produce consumer goods, those with higher competition, greater automation, and mass production, with great technological changes, have a higher degree of adoption of tqm concept (merino-diaz de cerio, 2003). the impact of organizational learning on tqm implementation is illustrated by a survey conducted in small and medium-sized enterprises in malaysia in 2014 and in australia in 1998. the survey has shown that tqm implementation rate is low and slow, and that only a small number of middle and small businesses have reached the stage of development and can effectively deal with tqm concept. problems with tqm implementation are related to difficulties in the field of finance, technical equipment, and lack of management experience. the high rate of failure of tqm implementation is conditioned by limited organizational learning. the most significant challenge is the lack of human capital. developing skills and knowledge in companies is crucial for development, which can be achieved through organizational learning (nurazree & hilmi, 2014). in particular, the important role in promoting and encouraging companies to adopt tqm belongs to political structures. national quality awards established in many countries stand for recognition of companies that achieved business success through the acceptance of tqm practice. following the establishment of the national quality award, malcolm tqm and kaizen for continuous quality management 49 boldridge (mbnqa), in the united states, the quality award in the uk, the european quality award (eqa), and deming’s quality awards in japan, many other countries have established their national awards (pui‐mun, 2002, 142-149). most national quality awards use a set of criteria to assess the company quality based on the achieved performance. in order to present the business excellence model of companies that implemented tqm, a case study was conducted in four companies, the winners of the singapore quality award (sqa). the basis for developing the business excellence model is a set of quality criteria that encompass all areas of activity carried out in the company. an example of this may be the presentation of the seven main criteria for the singapore quality award, given in figure 1. fig. 1 sqa criteria source: pui‐mun, 2002, 145. the presented model provides companies with a schematic presentation of the plan for introducing tqm in a structured way, with clear and defined goals (pui‐mun, 2002). the model should be structured to provide the company with core values (quality driven by customers), defined in the singapore quality award workflow, by systematically developing access within the pdca cycle (plan-do-check-act) (figure 2). based on interviews with representatives of award winners, a set of best practices in implementing tqm for each phase of the pdca cycle was made (pui‐mun, 2002). fig. 2 the framework for excellence model source (adapted from): pui‐mun, 2002, 147. 50 v. janjić, m. todorović, v. domanović to apply the excellence model, the company should set goals regarding core values. for example, the core value goal (quality driven by customers) may be to achieve a customer satisfaction rate of 98% over a period of three years. after the established goal, the company enters the “planning” phase. the basis for drawing up the plan should be best practices of quality award winners. for the transition and realization of the “do” phase, the company also starts with experience or best practices. an example can be the selection of one day in a year that will be dedicated to customers, to indicate their importance to the company business. another initiative is to set up customer satisfaction teams whose role is to continually seek to increase customer satisfaction. the next is a “check” phase, tasked with adopting initiatives to monitor the effectiveness of proposals introduced at the previous stage. for example, a company may choose certain performance measures, also based on best practice, to measure the effectiveness of previous initiatives, such as the number of complaints, the number of rejected products, the number of lost customers, and the like. finally, after the initiative assessment mechanism is built, the company should focus on the “act” phase. the focus is on continuous improvement based on initiatives, using information obtained based on calculated performance. experience with quality training, customer management training, and the like can be adopted by companies at this stage. developing this model for achieving business excellence using the pdca cycle allows companies to continuously improve their initiatives and programs (pui‐mun, 2002). since the core values defined in the singapore quality award are rather universal in terms of quality management, the given model could be adopted by other companies from other parts of the world that would like to use the guiding operating framework for the introduction and maintenance of tqm program. this applies in particular as singapore is the third most competitive economy in the world (the global competitiveness report 2017-2018 http://www3.weforum.org/docs/gcr20172018/05fullreport/theglobalcompetitivenessrepo rt2017%e2%80%932018.pdf). an important aspect of implementation is the selection and application of different quality programs. quality control circles, just-in-time concept, statistical process control, quality audit, and total productive maintenance are the most common quality programs used during tqm implementation process. it is interesting to note that as many as 81% of companies that have not introduced tqm use quality control circles in turkey, and in malaysian companies, quality control circles, 5s, just-in-time and kanban are the most popular quality programs introduced. the most commonly used tqm tools in the introduction process are the pareto diagram, statistical quality control, causal loop diagram, and process flowcharts. in a study of 140 manufacturing companies in saudi arabia, it was concluded that the flowchart, causal loop diagram, affinity diagrams, and checklists are the most commonly used quality management tools (ozden, 2003, 346-347). an equally important aspect of implementation refers to the effects of tqm application. 5. effects of tqm application in practice literature claims and empirical research confirms, that tqm implementation positively reflects on the company performance, especially profitability, and that non-application or inadequate application can lead to high quality costs and inadequate quality levels that directly affect product profitability. the goal of tqm concept, zero-defect production is http://www3.weforum.org/docs/gcr20172018/05fullreport/theglobalcompetitivenessreport2017%e2%80%932018.pdf http://www3.weforum.org/docs/gcr20172018/05fullreport/theglobalcompetitivenessreport2017%e2%80%932018.pdf tqm and kaizen for continuous quality management 51 often emphasized. the relationship between product/service quality and quality costs and company profitability is a basic, elementary assumption of tqm (sila, 2007). achieving the basic economic goal, expressed through company profitability, is not easy, especially in conditions of high competition, so quality management has become an important business discipline, and the achievement of overall quality a top strategic issue. a number of studies investigating the correlation between tqm application and the company financial performance show that the increase in quality has a positive effect on the financial performance measurement (york & miree, 2004, 291–311), increase the retention rate of existing customers and attracting new ones , leading to increase in market share and sales revenue (anderson & sohal, 1999). high-quality products and services can lead to increased customer loyalty, higher prices, reduction in post-sales services, and productivity increase (santos-vijande & alvarezgonzalez, 2007, 21-41). ensuring high quality of products and services requires continuous improvement of organizational processes. hence, tqm strives to form a company that is based on continuous improvement, i.e. the way of life of a company characterized by continuous improvement, positive work environment based on teamwork, system approach, full application of knowledge and experience in process improvement, and inclusion of all employees in the organization and quality management system. an interesting survey of the presence of tqm in large companies in the republic of croatia was conducted during the second half of 2008. the results have shown that, among nonfinancial performance measures, customer satisfaction and loyalty, quality of products and services, and continuous business improvement are most represented. in terms of quality, the results have shown that all companies apply quality standards and possess appropriate iso certificates. also, 67% of respondents apply tqm in their business. researchers warn that such a high score could be a subjective top management opinion, and other studies have shown that a large number of companies apply iso standards, but not tqm. hence, the final conclusion is that more than half of companies applying iso certificates do not fully apply tqm concept (vrdoljak, 2010) what is the correlation between customer satisfaction and tqm application, as well as between customer satisfaction and financial performance, is shown in a survey conducted in malaysia on a sample of manufacturing companies publicly trading on the kuala lumpur stock market. the results show that the high level of tqm implementation improves customer satisfaction, which ultimately increases company’s business success. as factors increasing customer satisfaction, commitment of top management, customer focus, good relationships with suppliers, and the role of human factors in the realization of tqm have been identified. also, product quality has been identified as a critical factor of customer satisfaction. the results of high quality are increased market share, sales, and profitability, even when increase in quality implies more expensive material and production process. the price of differentiation exceeds increased costs. in addition, the reputation of high-quality products reduces the elasticity of demand. the key conclusion is that one should strive to ensure high-quality products, as well as other exceptional product characteristics and delivery time (agus, et al., 2000) during 2003, a survey was conducted at large manufacturing companies in turkey, with the main goal of determining the current status of tqm application, as well as investigating success factors for the introduction of tqm. of the 100 companies that made the sample, 62% fully implemented tqm and in 61.4% of study participants tqm introduction was initiated by the top management. the results of tqm introduction are expressed by reduced customer complaints, increased customer satisfaction, improved quality, lower prices, zero-defect 52 v. janjić, m. todorović, v. domanović production, and increased market share, increased employee satisfaction, achieving teamwork, and reduced costs. similar surveys carried out in 127 malaysian companies show that mainly top management and consultants are in charge of introducing tqm into company practice. the results of the analysis also show that the average time of introducing tqm is between 5 and 7 years, in malaysian companies 6.33, and in a study conducted in 73 taiwanese companies, the results indicate that it is between 1 and 5 years. the application of tqm in turkish companies faced certain difficulties and problems, most often seen in inadequate knowledge of tqm concept, resistance of some employees to its application, and lack of top management support (ozden, 2003). knowing potential barriers should be the basis for their easy overcoming. 6. comparative analysis of kaizen and tqm kaizen and tqm concepts are closely related, but not identical. the most important common feature is effort towards continuous improvement in order to achieve the quality of products and processes in the company. they are complementary concepts that share the same philosophy. the most successful companies almost always use them at the same time to maximize benefits. the basis for successful quality improvement in both concepts is the deming cycle, as a series of related activities – plan, do, check, and act. to reach a better quality that meets customers’ needs, these four stages (steps) should be constantly rotated, whereby quality becomes the main criterion (janjić, 2009, 209-210). in the revised version of the deming cycle, the first step (plan) is replaced by standardization. so, the basis for improving quality lies in standards, which, when achieved, are replaced with new, higher standards, relying on improvement. standardization is one of the most important pillars in implementation of both kaizen and tqm. higher quality, which leads to increased customer satisfaction, which further conditions better business performance, is the goal of both tqm and kaizen. thus, both concepts focus on continuous quality improvement, with kaizen focusing on small and gradual improvement, and tqm pointing out that radical improvement is important and crucial for achieving great effects (saleem, et al., 2012, 36). these two concepts differ in the way they are implemented. kaizen focuses on step-bystep improvement, while tqm focuses on simultaneous operations in all processes, i.e. maintenance and improvement take place in parallel (saleem, et al., 2012, 38). kaizen means little incremental but continuous improvement, and rests on the idea of “disassembling and reassembling in a better way” in order to improve the process, quality, and performance in a company (todorović, 2013, 24). there is no discontinuity in tqm process of continuous improvement. kaizen alternately performs maintenance and improvement processes. implementation of the maintenance component is done by assigning tasks to all employees based on standard operating procedures. improvement implies the establishment of higher standards, and when the establishment of a new standard is completed, then a new process of its maintenance begins. kaizen puts the human factor at the forefront, i.e. the quality of people, while tqm concept is oriented towards quality of products and services. western business philosophy insists on enhancing and improving technology, in contrast to kaizen that can be used in every aspect of business. while kaizen is limited to specific projects, tqm is present throughout the organization, in all processes, departments, and organizational units. thus, kaizen is applied in the form of tqm and kaizen for continuous quality management 53 small improvement projects aimed at a specific business aspect, with the intention of quickly discovering the cause of the problem and effectively applying solution with the help of an independent multifunctional team. when seeking suggestions for improvement, kaizen involves all stakeholders at all organizational levels. tqm improvements are performed in all business aspects, including all company employees, who are responsible for improving the product quality. when it comes to suggestions for improvement, kaizen concept follows a bottom-up approach. tqm concept follows the bottom-up and top-to-bottom approach, i.e. top management as much as the company’s employees suggest and introduce the need for improvement (saleem, et al., 2012). furthermore, kaizen focuses on improving the use of available resources, which implies that its implementation does not require large investment or requires almost none. tqm requires investment to improve the quality of products or processes (purchasing a new machine, automation, innovation). what is evident is that tqm achieves continuous improvement through the use of kaizen and through innovation. it can be concluded that, despite differences in methodology, focus, and range of activities, kaizen approach is the basis of tqm, focused on the production phase in the value chain and continuous improvement of quality, processes, and performance through small changes in processes and in the workplace, thus reducing various types of waste. tqm focuses on improving quality by adding value, creating a perfect product, improving productivity, and reducing variations in measures and processes (saleem, et al., 2012). conclusions quality should be understood as one of the key factors of business success, i.e. one of the strategic variables, which directly affects customer satisfaction, and contributes to achieving the company goals. quality, in modern business conditions, becomes a paradigm of competitiveness, bearing in mind that achieving the quality of products, services, and business processes requires the coordination and engagement of all employees. quality is not once-forall given value, and it is necessary to take measures for its continuous improvement. in theory and practice, numerous tools for improving and managing quality have been developed. the subject of this paper have been total quality management and kaizen. the analysis has shown that these are the concepts that directly enable continuous quality improvement. based on the above, it can be concluded that tqm and kaizen are two concepts with certain similarities and differences, which can form the basis of successful business of a modern company, and have the potential for integrated application, which confirms the underlying hypothesis. the application of tqm and kaizen implies radical changes in business organization, connecting customers and suppliers, and relationships with customers, and the companies that implement them face certain difficulties. the most common problems arising in the application of tqm are the lack of qualified quality consultants, the conflict of management structures and tqm, expensive and long-lasting application, inadequate knowledge of tqm, employee resistance, and insufficient top management support. the conducted research has shown that these problems are most often expressed in the introduction of tqm in small and medium enterprises. although kaizen implementation is much less demanding, it encounters difficulties that are most often seen in the resistance of employees. employee resistance is often the result of overload, stress, and loss of self-confidence, resulting in a decline in motivation 54 v. janjić, m. todorović, v. domanović and rise in dissatisfaction. one of the solutions to overcome these problems and maximize the effects of the application is knowledge. hence, training and education should include all employees in order to continually improve quality, processes, and effects by joint application of kaizen and tqm concepts. strong competitive pressure forced many companies, both production and service-oriented, to actively accept tqm and kaizen in order to survive and succeed in their business. given that tqm and kaizen have the potential to create a competitive advantage, the number of companies that implement them increases. experience in the application of tqm and kaizen concepts in companies around the world, especially in large ones, has shown significant results, expressed primarily through quality improvement, cost reduction, and enhanced financial performance, and can serve as a good practice for application in companies in the republic of serbia. references admasu, a. 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(eds.). unapređenje konkurentnosti privrede republike srbije [improving the competitiveness of the economy of the republic of serbia]. kragujevac: ekonomski fakultet, 249-265. janjić, v., todorović, m. & jovanović, d. (2013). koncepti i sistemi integrisane računovodstvene podrške upravljanju troskovima u fazi proizodnje [concepts and systems of integrated accounting support to the cost management in the production phase]. u: marković, d., vuksanović, e., stefanović, r. & ljubisavljević, s. (redaktori). finansije i računovodstvo u funkciji privrednog rasta [finance and accounting in function of economic development]. kragujevac: univerzitet u kragujevcu ekonomski fakultet, 226-230. janjić, v. (2009). kaizen costing-upravljačko računovodstveni koncept, sistem i tehnika u funkciji strategije troškovnog liderstva [kaizen-costing – management accounting concept, system and technique in function of the cost-leadership strategy]. neobjavljena doktorska disertacija. kragujevac: ekonomski fakultet univerziteta u kragujevcu. masaaki, i. (1986). kaizen (the key to japan`s competitive success). new york, usa. mat naim, a., asmoni, m., abdul hakim, m., janice lee yim, m. & low sheau, t. (2015). critical success factors of project quality management system for malaysian construction industry. journal teknologi, 74(2), 123-131. merino-diaz, de c. j. (2003). factors relating to the adoption of quality management practices: an analysis for spanish manufacturing firms. total quality management, 14(1), 25-44. nurazree, m. & hilmi, m. f. (2014). tqm and malaysian smes performance: the mediating roles of organization learning. procedia social and behavioral sciences, 130(2014), 216 – 225, doi: 10.1016/j.sbspro.2014.04.026. ozden, b. (2003). total quality management (tqm) practices in turkish manufacturing organizations. the tqm magazine, 15(5), 345-350. tqm and kaizen for continuous quality management 55 pui-mun, l. (2002). sustaining business excellence through a framework of best practices in tqm. the tqm magazine, 14(3), 142-149. rof, l. m. (2011). kaizen costing method and its in the management of on entity. revista tinerilor economist (the young economists journal), 1(16), 151-167. saleem, m., nawar, k. & shafqat, h. & abbas ch, m. (2012). an analysis of relationship between total quality management and kaizen. life science journal, 9(3), 31-40, doi: http://www.dx.doi.org/10.7537/ marslsj090312.05. santos-vijande, m. l. & alvarez-gonzalez, l. i. (2007). tqm and firms performance: an efqm excellence model research based survey. journal of business science and applied management, 2(2), 21-41. sila, i. (2007). examining the effects of contextual factors on tqm and performance through the lens of organizational theories : an empirical study. journal of operations management, 25, 83-109. todorović, m. (2013). obračun troškova po aktivnostima baziran na vremenu – instrument integrisanog upravljanja lean poslovnim procesima [time driven activity based costing – an instrument of integrated lean business process management]. neobjavljena doktorska disertacija. kragujevac: ekonomski fakultetet univerziteta u kragujevcu. the global competitiveness report 2017-2018. retrived: http://www3.weforum.org/docs/gcr20172018/ 05fullreport/theglobalcompetitivenessreport2017%e2%80%932018.pdf vrdoljak, r. i. (2010). specifičnosti metodoloških pristupa mjerenju uspješnosti poslovanja kvalitativnim pokazateljima [the specificity of the methodological approaches to business performance measurement by qualitative indicators]. poslovna izvrsnost, 2, 107-117. woon. k. c. (2000). tqm implementation: comparing singapore’s service and manufacturing leaders. managing service quality: an international journal, 10(5), 318-331, https://doi.org/10.1108/09604520010345777 york, k. m. & miree, c. e. (2004). causation or covariation: an empirical re-examination of the link between tqm and financial performance. journal of operations management, 22, 291–311, doi: 10.1016/ j.jom.2004.02.001. tqm i kaizen u funkciji kontinuiranog upravljanja kvalitetom gotovo da postoji opšteprihvaćeni stav da je kvalitet jedan od najvažnijih faktora konkurentnosti preduzeća. iz tog razloga, kvalitetom je neophodno upravljati. kao odgovor na potrebu upravljanja i zahteve za visokim kvalitetom u teoriji i praksi razvijeno je više koncepata. upravljanje ukupnim kvalitetom (total quality management – tqm) i kaizen predstavljaju dva osnovna koncepta koji se direktno bave kontinuiranim poboljšanjem kvaliteta proizvoda i procesa preduzeća kako bi se postigle pozitivne transformacije u razmišljanjima i aktivnostima zaposlenih i menadžmenta. u fokusu ovog rada jeste analiza pomenutih koncepata i njihov doprinos programu kontinuiranog poboljšanja kvaliteta. otuda, cilj postavljen ovim radom jeste razmatranje osnovnih karakteristika tqm i kaizen koncepta, te na osnovama uporedne analize izvođenje zaključaka o distinkciji između njih u pogledu suštinskog određenja i praktične primene u domenu upravljanja kvalitetom. ključne reči: kvalitet, kontinuirano poboljšanje,koncept, upravljanje ukupnim kvalitetom, kaizen. http://www.dx.doi.org/10.7537/marslsj090312.05 http://www.dx.doi.org/10.7537/marslsj090312.05 facta universitatis series: economics and organization vol. 12, n o 2, 2015, pp. 121 128 domestic and external factors of currency crises  udc 336.741.242:336.717 milan marković faculty of economics, university of niš, serbia abstract. the aim of this paper is to explain the essence and basic causes of currency crises in the last decade of the twentieth century. in doing so, we will not dwell on the description of the crisis of individual countries. we will analyze the aggregate (essential) factors which determine and encourage the development of currency crises. research shows that poor macroeconomic policies and adverse external shocks are the most important and the most common factors of currency instability. these are the following determinants which are often associated: long retention of appreciated exchange rate, the bad conduct of monetary policy in a fixed exchange rate regime and the negative impact of speculative capital. key words: currency crises, exchange rate, speculative capital, expansionary monetary policy, monetary stability. introduction currency crises are crises afflicting many economies with major problems from the standpoint of internal and external macroeconomic imbalances. in explaining currency crises, we highlight that they are very harmful for the economy because these crises lead to inflation, financial and economic disorders and reduce the value of the national currency. therefore, in studies of currency crises special emphasis is on determinants (causes) which encourage its expansion. currency crises usually occur as a result of government efforts to maintain overestimated value of the domestic currency (burda and viploš, 2012, p. 389). it happens primarily in countries that have a fixed exchange rate regime. developing countries with unfavorable structural characteristics are more susceptible to the functioning of currency crises. the problems deepened with the desire of speculators to profit from foreign currency trading. it is often said that speculative pressures, as an external factor, increase the likelihood of an outbreak, i.e. the development of currency crises. received december 1, 2014 / accepted october 5, 2015 corresponding author: milan marković faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: markovicmilan89@gmail.com 122 m. marković first-generation crisis models are mentioned most often in the theoretical considerations, which are linked to krugman (1979). these models are linked to a situation where it is impossible to achieve both internal and external balance by using expansionary monetary policy. the only effect of expansionary monetary policy is reflected in the reduction of foreign exchange reserves (in order to defend the fixed exchange rate), and speculation in the foreign exchange market due to the loss of confidence in the fixed exchange rate. in practice, they are usually linked with developing countries, such as argentina, mexico, brazil, russia, southeast asian countries ("asian tigers"). they were the result of misguided macroeconomic policies, as well as the rational expectations of speculators. in almost all the crises of the nineties of the last century in latin america, east asia, russia, effects of speculative capital were present. latin america is a striking example of synergy of all factors of emergence of currency crises that are mentioned in the study, while east asian countries were faced with a financial crisis that was not the result of inadequate monetary policy. in the case of these countries it was observed that the currency crisis quickly caused the financial (banking) crisis, which is usually marked by the liquidity crisis. the liquidity crisis and the withdrawal of speculative capital work towards the formation of a deep economic crisis. to prevent the development and transfer of currency crises in the financial and real sector, several solutions are used. one of the measures involves the sale of foreign exchange reserves of the central bank. then, the devaluation of the national currency and the third proposes a reduction in interest rates that will act as an incentive in attracting foreign capital. here it should be pointed out that the sale of foreign exchange reserves in the foreign exchange market is only a short-term solution, while reducing interest rates together with the increase in the exchange rate can lead the country into a state of hyperinflation. 1. bad economic policy as a basic cause of currency instability 1.1. too long retention of appreciated exchange rate in the regime of fixed exchange rate many countries are trying to prevent the creation of inflationary pressures by overvaluing national currency. it is the role of the exchange rate as a nominal anchor. in order to neutralize the high rates of inflation, the exchange rate is often held to unrealistic levels. it should be noted that in the short term exchange rate fixing is an important instrument of macroeconomic stabilization. however, in the long term (due to the inflationary sensitivity of an economy) comes to an appreciation of the real exchange rate which causes a reduction in the competitiveness of domestic exports. from this stems the external imbalance due to a decrease in exports, while the nominal exchange rate will rise. furthermore, an unfavorable balance of trade causes devaluation and monetary instability (inflation), which is quite contrary to its original goal of strengthening currencies. given the dominance of purchasing power parity as a major determinant of the exchange rate, price increase causes the re devaluation of the national currency (câmara and vernengo, 2004). in developing countries, in the process of macroeconomic stabilization, exchange rate policy as a nominal anchor is often applied (miljković, 2008, p. 350). on the one hand, internal balance is achieved in a very short term by drastic reduction in the inflation rate. on the other hand, there are negative consequences of the loss of competitiveness of the domestic and external factors of currency crises 123 domestic economy if they too defend a fixed exchange rate. so-called inflation-devaluation spiral appears which introduces country into complete collapse (dornbusch, 1996). therefore, we propose a solution that includes an exit strategy, i.e. abandonment of the fixed exchange rate system. also, if some countries have more durable higher inflation rates than the currency dominant countries in the world, they are not able to apply the fixed exchange rate regime which would be constantly defended (ćirović, 2000, p. 82). dornbusch’s work exhaustively explains how anti-inflation strategy by fixing exchange rate may cause a currency crisis. the work is called "latin triangle" keeping in mind the situation in many latin american countries (brazil, chile, mexico), not limiting the analysis only to the case of these countries. horizontal axis shows the level of output, while the vertical one real wages (nominal wages adjusted for the effects of inflation), respectively, the real exchange rate. the curve yy is the level of domestic product at optimum employment. to the right of it there is excessive employment and lack of employment, to the left. the curve ff is the curve of current account balance, while ww curve represents the real wage in the national currency that ensures social peace in the country. right above the curve of ff there is a current account surplus, while under the curve ww appear lower wages than the "optimal". accordingly, point c symbolizes the simultaneous internal and external balance, while other points are the points of imbalances. in conditions of hyperinflation, many countries, in the process of macroeconomic stabilization (which is desperately needed in this case), introduce a fixed exchange rate. this often involves an enormous appreciation of the national currency. inertia in the growth of nominal wages in the fixed exchange rate regime causes an increase in real wages, which shifts the real wages upward, so that more simultaneous equilibrium does not exist, and a triangle is underway. if the economy reaches the point a there will be social peace and optimal employment, but will be in the balance of payments deficit. this is because the constant habit of increasing wages contributes to inflation that reduces the real exchange rate and makes it uncompetitive economy, so the decrease in exports and an increase in "cheap" imports cause the deficit of the current balance of payments. the question is whether this situation is sustainable. of course it is not . it continues, as a rule, as long as a short-term borrowing abroad is possible. when foreign exchange reserves are exhausted, then a currency crisis comes. to avoid such an outcome, it is possible to carry out a devaluation of the national currency, which will gradually lead the economy from point a to point c. in terms of the requirements for achieving positive effects of devaluation on the balance of payments, at this point would be to achieve a balance of current account and the economy will remain at the level of full employment. the only problem is the lower wages in foreign currency due to an increase in the nominal exchange rate. social unrest, which will obviously follow, returns the economy to point a, opening fig. 1 latin triangle source: dornbusch, 1996. 124 m. marković the possibility for the manifestation of inflation-devaluation spiral. the alternative is a deflationary adjustment of the balance of payments including reducing aggregate demand and employment, through the measures of restrictive fiscal and monetary policy. it is the unpopular measures that are the condition for aid from the international monetary fund. if the economy crosses from point a to point b, which is logical in terms of reduction of absorption, this situation brings with it certain consequences. there will be involuntary unemployment, which is solved by devaluation of the national currency, which is an instrument for increasing the price competitiveness of exports. reducing the price of exports in foreign currency and increasing import prices in domestic currency, enables increasing production, exports and consequently, employment. as an example of this, we will give argentina, which in 1989 implemented reforms that were related to privatization, trade liberalization, deregulation and the implementation of the currency board regime, which proved to be very successful. the international monetary fund insisted on the currency board regime, which is broken down inflation in the short term. however, this policy precisely involves the appreciation of the real exchange rate and leads to a crisis in the middle, especially in the long term. unsustainablility of such exchange rate policy caused the current account deficit and the attacks on the currency. namely, the one chosen exchange rate regime is not an optimal solution for all time (miljković, 2008, p. 412). however, if the central bank does not increase domestic loans in order to maintain the original level of foreign exchange reserves (keeping in mind that foreign exchange reserves with loans to domestic entities make up the money supply), this can lead to contraction of the money supply. in this case, the interest rates become very high and international investors increase demand for domestic assets, so the foreign exchange reserves quickly recharge (burda and viploš, 2012, p. 499). 1.2. improper conduct of monetary policy in a fixed exchange rate regime another important factor for currency crises is linked to the inappropriate conduct of economic policy (especially monetary) in terms of a fixed exchange rate. in explaining this problem, we analyze the situation where there is imperfect capital mobility, fixed exchange rate regime, while the country's central bank guides expansionary policy. this will be displayed using the "famous" mundell-fleming model. fig. 2 mundell-fleming model under conditions of imperfect capital mobility, fixed exchange rate and an expansionary monetary policy domestic and external factors of currency crises 125 figure 2 shows the mundell-fleming model, which assumes that the central bank is pursuing expansionary monetary policy in a fixed exchange rate regime. each point on the is curve implies equality of investment and savings, while each point on the lm curve represents equality of supply and demand in the money market. bb curve shows the point where the balance of payments is in equilibrium. it does not move because the whole analysis is performed in terms of a fixed exchange rate and under the assumption that monetary policy measures do not directly affect the balance of payments. equilibrium is reached in the point a. this point shows the combination of interest rate r and the total output y for achieving simultaneous internal and external macroeconomic equilibrium. the internal equilibrium of the economy means situation without involuntary unemployment and inflation, while the external equilibrium reflects the balance of payments balance. if the central bank decides for the conduct of an expansionary monetary policy, the lm curve will shift to the right and down to the level of lm. expansionary monetary policy implies that the central bank increases the money supply and/or reduces the interest rate. these are the two main variables of monetary policy. expansionary policy is conducted usually by reducing the required reserves, reducing the benchmark interest rates and the purchase of securities on the open market (marković, 2014). the model also assumes that the money supply consists of foreign exchange reserves and domestic corporate loans. the increase in the money supply in this model was induced by increasing the sum of domestic credit. by increasing the money supply, the balance moves and now the economy is at point b. the interest rate is reduced due to the increased supply of money, while aggregate output (production) increases due to increased spending (primarily investment, due to reduced rates of borrowed capital). lower interest rates lead to an outflow of capital from the country and increased production increases consumption and imports, especially in less developed economies that are dependent on imports. so, at this point expresses the balance of payments deficit, so there is no balance. as the monetary authority is obliged to maintain external balance and to defend exchange rate, the central bank brings out the foreign exchange reserves. since the foreign exchange reserves are decreased (as a component of the money supply), it is clear that the money supply reduces returning the economy to point a. the money supply is the same; the interest rate and gross domestic product are the same, while foreign exchange reserves are only decreased. based on all the above, the view that the central bank should not use expansionary monetary policy to solve the problems of economic development of the country with fixed exchange rate may be accepted. such monetary policy of the central bank will return like a boomerang in the form of an increase in the inflation rate which is difficult to control if, so-called inflationary spiral of exchange rate and price is opened (todorović, marković, 2013, p. 128). 2. destructive effect of speculative capital to monetary stability many economists believe that speculative capital movements are the main initiator of currency crises. others say that they only support the further expansion of the currency crisis. either way, in modern conditions of financial globalization they represent a significant (external) factor of currency crises. 126 m. marković developing countries represent a fertile ground for attracting and operation of speculative capital due to their greater absorptive power of capital (marković, 2013, p. 109). often, the currency crises are defined as speculative pressures on the foreign exchange market. if these countries report high rates of inflation, there is a cumulative appreciation of the real exchange rate. the deterioration in price competitiveness of the domestic economy in world commodity markets affect the formation of the increased deficit of the current balance of payments, which is a necessary condition for the increased inflow of foreign capital (ćirović, 2000, p. 410). thus, the overvalued exchange rate causes a balance of payments deficit, which is a signal to foreign capital that will probably come to the devaluation of the national currency. often this reduces the deficit by increasing interest rates, which is a double-edged sword. this is because the policy of high interest rates covers the current account deficit and controls inflation, but also increases the possibility of higher short-term capital inflows (hot money) with speculative intentions and characters. talking about the effects of speculative capital, we consider the causes of currency crises through its negative effects on the exchange rate. this is because such movement of capital can have a stabilizing effect, too. for example, in the case of excess of supply over demand of foreign currency, the exchange rate falls (in direct notation). speculators may have the expectation that the exchange rate will rise in the coming period, and therefore, they can decide to purchase them. they do it because they earn interest on the difference between the buying and selling price of foreign exchange (exchange rate). this situation is similar to speculation with other products. as soon as the price of a good is lower (assuming the same quality) an increase in demand for it is normally expected. thus, with increasing the demand for foreign currency, speculators prevent a significant drop in the exchange rate, and maintain it at a relatively stable level. however, in most cases, speculative capital is not going down that road. the negative effects of speculation in the foreign exchange market in particular are present in a fixed exchange rate regime. let us start from the assumption that the country has fixed exchange rate regime and that the balance of payments deficit is caused by a decrease in exports. in this case, the inflow of foreign currency is lower (because the export charges in foreign currency). this leads to an increase in pressure on the exchange rate; each increase in the exchange rate necessary leads to price increases to a certain percentage, depending on the stronger or weaker exchange rate pass-through to inflation (see markovic and markovic, 2014). in the system of fixed exchange rates an antagonistic relationship is formed between the monetary authority (central bank) and foreign exchange dealers (speculators) who occasionally attack the currency parity when estimate conditions for exchange rate changes (ćirović, 2000, p. 26). then, the short-term speculative capital is transferred from weaker to stable, as a rule, stronger currencies. the central bank has two obvious solutions to the new situation:  to sell foreign currency from foreign exchange reserves and/or  to borrow abroad in the short term. in the sixties of the twentieth century, the monetary authorities in most countries were able to defend the exchange rate by means of these measures because the capital was available to a large extent and they were able to easily borrow abroad. but, the question is whether this is possible in modern conditions. countries with balance of payments problems have lower credit rating due to the lower probability of repayment of debt, interest rates are higher which worsens the conditions of borrowing and foreign exchange reserves are still limited. domestic and external factors of currency crises 127 if the central bank defends the exchange rate, then it will come out as a winner in the short term. however, if speculators win, loss of confidence in the fixed exchange rate of a currency crisis will occur. specifically, the central bank can defend the exchange rate due to the balance of payments deficit. but when speculators recognize the long-term external imbalances, they are becoming aware that the devaluation of the national currency will come inevitably. speculators then increase the demand for foreign currency expecting further growth rate, while the central bank increases the supply of foreign exchange by reducing foreign exchange reserves. in fact, when they feel that the moment of discharge of foreign exchange reserves is closer, they increase the purchase of foreign currencies expecting the sudden devaluation (the case of mexico and some asian countries) (jevċović, 2013). if the central bank doe nott defend a peg against a foreign currency, currency crisis becomes inevitable, accompanied by high rates of devaluation and inflation. the impression is that the currency crises, due to adverse external shocks, occur only in those countries with a fixed exchange rate regime. however, a system of flexible exchange rates is not t immune to speculative attacks, especially in developing countries with large quantum of foreign capital. less suspicion towards worsening performance of the national economy can lead to a drastic increase in the outflow of capital. as soon as there is a suspicion i.e. lack of confidence in monetary stability in the country by foreign investors, there comes a sudden withdrawal of capital from the country. stable public finances, wage flexibility and a healthy banking system are the guarantee of the stability of prices and exchange rates, as well as the entire economy. speculators, to make a profit, must choose the right time to buy and sell foreign currency, bearing in mind the expected moment of manifestation of a currency crisis. if they start too early to buy foreign currency, e they may not earn anything because the central bank may initially defend the exchange rate, while the losses are likely to occur due to the payment of costs of conversion. conversely, if speculators start buying too late, after the currency has been devalued, they will end with a loss (burda and viploš, 2012, p. 498). conclusion every crisis has distinct characteristics and factors that encourage its development. these factors may be the result of misguided macroeconomic policies (monetary and foreign exchange, primarily), or those that originate from the environment. according to our research, we can clearly observe common, usually present interrelated causes of recent currency crises:  long retention of appreciated exchange rate,  inadequate conduct of monetary policy under fixed exchange rates and  speculative capital movements (its devastating effect). in a fixed exchange rate regime, monetary authority is committed to defending the value of the national currency. the central bank must intervene through a reduction in foreign exchange reserves to increase the supply of foreign exchange, although it is aware that there is a real appreciation of the exchange rate and that it is not sustainable in the long term. since foreign exchange reserves are not an inexhaustible source of financing balance of payments imbalances, it is quite obvious that the rescue of a fixed exchange rate becomes impossible after a certain period of time. in this case, the monetary authority is faced with the impossibility of defending a particular level of the exchange rate and this 128 m. marković leads to inflation (hyperinflation usually) because of high rate of devaluation of the national currency. then, the currency crisis is being largely present. also, anyone conducting expansionary monetary and credit policy in terms of a fixed exchange rate, and in order to stimulate economic activity, is being inefficient. in the medium and long term this policy cannot be maintained in order to stimulate economic growth. the economy returns to its original equilibrium, and foreign currency reserves decrease. since they are not unlimited, inexhaustible source, reactions of speculators are possible. due to prediction of the devaluation of the national currency in the future, many players decide to sell, and then purchase foreign currency, and so the central bank has enormous problems in defending the established level of the exchange rate. in these conditions, the market becomes very sensitive, while the thought of devaluation by some agents causes the actual reaction of market participants towards the sale of the domestic currency. the monetary authority spends available foreign exchange reserves, and then, in most cases "brutal adjustment" will appear. speculators know that the exchange rate will not take place in these circumstances. every crisis ends with the transition to a floating exchange rate (due to the inability to defend the established level), with hyperinflation and a high rate of currency devaluation. on this basis, we conclude that many of the causes of currency crises are intertwined, and they cannot be considered separately because of their common and simultaneous action. references 1. burda, m., viploš, ĉ. (2012), makroekonomija: evropski udžbenik, beograd, centar za izdavaĉku delatnost ekonomskog fakulteta. 2. câmara, a., vernengo, m. (2004), contemporary post keynesian analysis, in randall wray and mathew forstater (eds.), allied, german and latin perspectives on inflation, edward elgar, cheltenham, uk and northampton, ma, usa, pp. 172-184. 3. dornbusch, r. (1996), latin triangle, massachusetts institute of technology. 4. jevċović, g. (2013), suština i aktuelnost mandel-flemingovog modela, bankarstvo, 11 (2): 90-121. 5. krugman (1979), a model of balance of payments crisis, journal of money, credit and banking, 11. 6. marković, i. (2013), ekonomska politika versus valutna kriza, finansije, 68 (1-6): 107-121. 7. marković, i., marković, m. (2014), uticaj transmisionog mehanizma deviznog kursa na konkurentnost izvoza srbije, ekonomske teme, 52 (2): 205-221. 8. marković, m. (2014), uloga narodne banke srbije u postizanju monetarne stabilnosti, ekonomika, 60 (1): 192-200. 9. miljković, d. (2008), međunarodne finansije, beograd, ekonomski fakultet. 10. todorović, m., marković, i. (2013), međunarodna ekonomija, niš, ekonomski fakultet. 11. ćirović, m. (2000), devizni kursevi, beograd, bridge company. domaći i spoljni faktori valutnih kriza cilj ovog rada sastoji se u objašnjenju suštine i osnovnih uzroka valutnih kriza u poslednjoj deceniji dvadesetog veka. pri tome, nećemo se zadržavati na opis kriza pojedinačnih zemalja. analiziraćemo agregatne (suštinske) faktore koji uslovljavaju i podstiču razvoj valutnih kriza. istraživanje pokazuje da loša makroekonomska politika i negativni eksterni šokovi jesu najznačajniji i najčešći činioci valutne nestabilnosti. radi se o sledećim determinantama koje su često povezane: predugo zadržavanje apresiranog deviznog kursa, loše vođenje monetarne politike u režimu fiksnog deviznog kursa i negativno dejstvo špekulativnog kapitala. kljuĉne reĉi: valutne krize, devizni kurs, špekulativni kapital, ekspanzivna monetarna politika, monetarna stabilnost facta universitatis series: economics and organization vol. 17, no 3, 2020, pp. 285 297 https://doi.org/10.22190/fueo191218021s © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper the importance of lean manufacturing and six sigma concept for quality management of supply chain business processes1 udc 658.5.012.2 jovana stojanović*, goran milovanović university of niš, faculty of economics, republic of serbia abstract. the aim of this paper is to evaluate the importance of lean and six sigma concepts and techniques on the basis of systematic knowledge gathered from relevant scientific sources, both for discovering supply chain processes where potential waste can occur and for improving the quality of those processes. the paper will first outline the key features and effects of applying lean and six sigma concepts in manufacturing and supply chains. the focus is on the frameworks and potentials of implementing the lean concept in the republic of serbia. then, the possibilities of integrating these concepts into the lean six sigma concept are presented and its role in eliminating defects in business processes. the penultimate part of the paper outlines the key features of lean supply chain while the final part contains the mathematical frameworks for designing six sigma supply chains. key words: lean manufacturing, six sigma, lean supply chain, business process, delivery precision jel classification: l15, m11, m16 introduction fast and unpredictable changes in the business environment require companies to constantly struggle to gain and maintain a competitive edge. in order to gain and maintain their competitive advantage in such an environment, companies (suppliers, manufacturers, carriers and traders) tend to minimize inventory, shorten the order process, manufacturing and delivery time to end customers and reduce overall costs. received december 18, 2019 / revised april 11, 2020 / accepted april 29, 2020 corresponding author: jovana stojanović * phd student at university of niš, faculty of economics university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: jovana.stojanovic992@gmail.com 286 j. stojanović, g. milovanović companies are increasingly seeking to improve business process performance by implementing lean and six sigma concepts. their integration creates the lean six sigma concept (lss), which is much more than a methodology for efficient project realization. by implementing the lss concept, companies reduce or eliminate the weaknesses of both concepts − lean cannot bring a particular business process under statistical control while six sigma cannot significantly increase the speed of a business process or reduce capital investment. the following parts of the paper first point out that, by implementing lean concept, companies can minimize or eliminate various types of waste such as unnecessary flows of materials and people, unnecessary waste of time and excess inventory. we pay special attention to the effects of applying lean principles and techniques in manufacturing. what follows is a brief outline of the lean concept business frameworks in the republic of serbia and then the role of the six sigma concept in identifying and eliminating errors in supply chain business processes. the fourth part of this paper deals with the specifics of integrating these concepts and using them to improve the quality of companies' production and transactional processes. the fifth part of the paper briefly discusses the characteristics of lean supply chains, while the final part of the paper is reserved for designing six sigma supply chains based on linear programming. 1. lean business concept and lean manufacturing lean business concept is a management philosophy aimed at eliminating all kinds of business process defects in the company. with the help of various instruments and techniques applied, this concept can help ensure continuity of production, eliminate waste, increase the level of quality, but also optimize human resources, tools and productivity. however, for the lean concept to have the expected effects, all company employees must understand the essence of the concept and focus on its proper implementation. employees should first be trained to recognize waste (defects, errors, waiting, excess inventory, etc.) that reduce the value of output, and then use adequate lean tools to eliminate waste. the implementation of the lean concept is not only an issue for individuals but for the whole company. however, it is up to the company management to evaluate whether and under what conditions it will be implemented. looking at the development of the lean business concept, it can be noticed that in the initial stages of development this business model was related exclusively to the production process. the lean production philosophy comes from the toyota production system (tps) described in the book “the machine that changed the world”. at the operational level, with the help of certain lean techniques and tools, the aim was to eliminate waste, deliver the required value to customers, and achieve pre-set performance. the goal was to improve efficiency and reduce costs in the production process. with the evolution of the lean business concept, towards the end of the previous century, the management center was shifted from operational to strategic level. at this level, the goal was to understand the value that needed to be provided to customers in terms of quality, price, functionality and shorter delivery time (novićević čečević & antić, 2016, p. 274). although initially the lean concept was applied only in production, later it began to be applied in health, state and local government, as well as in education. many countries and cities around the world are implementing the lean concept today. since 2012, china has the importance of lean manufacturing and six sigma concept for quality management of supply chain... 287 been implementing lean methods and techniques in healthcare, while canada has long had a minister for lean. despite the fact that almost all foreign companies operating in the republic of serbia work under “lean” management, it is still an enigma in the republic of serbia. after developing production with lean elements, lean principles and techniques give full effect if all company employees are committed to their application. that is how a lean company comes into being, which is much more than lean production. becoming aware of business performance improvement, company managers then strive to apply lean principles and techniques outside the company, thus creating a lean supply chain. lean manufacturing is a comprehensive business system that strives to accelerate all processes. lean manufacturing involves applying the following key lean concept principles: ▪ recognize waste – recognize all non-value-added processes, ▪ standardize processes – define precise and detailed procedures that reduce variability, ▪ create a “value stream” – eliminate non-value-added activities, reduce defects, interruptions, eliminate waste, etc., ▪ perform only the necessary processes and only when necessary, ▪ detect errors in their initial phase, and ▪ strive for perfection by constantly eliminating waste (moeller, 2009, p. 313). lean manufacturing includes the concept of “nine zeros”, which implies the complete elimination of: 1) partner dissatisfaction, 2) mismatch, 3) bureaucracy, 4) dissatisfied stakeholders, 5) delayed information, 6) waste, 7) non-value-added work , 8) errors, and 9) missed chances (charron et al., 2015, pp. 107-108). lean production tends to low-level work-in-progress flow, without stopping the production process and without storage (cooper & slagmulder, 1999, pp. 23-33). lean production has the character of a revolutionary process. it strives for continuous improvement of the process and work area to ensure that work is done effectively. 2. the lean concept in the republic of serbia with an overview of the healthcare sector the awareness of serbian managers of the importance of lean concept, both in companies and in state administration and local self-governments, is growing, but it has not yet reached the level of developed countries. people leading companies, institutions and self-governments still do not understand the business mission of the lean concept. one of the reasons for this situation in the republic of serbia is that managers are not familiar enough with assumptions and principles underlying the concept. in addition, the volume of work and fear of the unknown prevent managers from embarking on promoting lean principles and trying to reduce waste and improve business process performance without major investment. managers are de facto not aware enough that implementing lean techniques and tools leads to the shortest possible lead time in service delivery while eliminating waste. a key consequence of this is the lack of economic benefits (increasing productivity, eliminating duplicate operations, increasing profits) generated by lean techniques and tools. fortunately, those responsible for a growing number of companies, health care, public administration and local governments in the republic of serbia realize that to implement the lean concept in practice on a broader scale, it is necessary to initiate lean transformation 288 j. stojanović, g. milovanović and create lean culture, based on the principle of “do more with less". although with unequal speed and success, the scope of this concept is expanding. the lean concept is based on a continuous drive to meet customer needs while reducing unnecessary spending and wastage. in the spirit of continuous improvement of the process, this concept is oriented towards finding errors and their causes, which creates a positive effect on performance, in the form of higher quality, lower costs, as well as shorter production (delivery) time of the product. the lean concept not only contributes to greater process efficiency through optimization of internal processes, but also creates a positive effect on business efficiency by advocating the implementation of the necessary activities only, when needed, in a specific amount, with reduced resource consumption (todorović, 2013, p. 10). improving effectiveness (doing the right thing) and efficiency (doing it the right way) increases customer satisfaction and improves employee self-esteem. through lean transformation, business processes in companies, government, local governments and healthcare become simpler and more efficient. with this transformation, the logic of “we have always done it that way” gives way to the logic of “we can do more with less”. with a higher level of employee training on lean logic and strategy, companies as well as institutions and governments can significantly improve the performance of their business processes. successful examples of lean transformation in the world, especially in entrepreneurship, the public sector and health, are not a panacea, but models of process improvement that can be of benefit to managers in the republic of serbia. the lean concept is not only reserved for production, but for every job and process. whether the republic of serbia will become a world-class community – a place where people want to live and work and companies to invest and locate their resources, without defects and at a reasonable price – depends largely on whether lean business transformation will become possible, an environmentally sustainable and long-term profitable endeavour. the increasing importance of the service sector over the last few decades has brought the lean concept to the service sector as well. managers of various institutions, organizations and companies are becoming increasingly aware that the lean concept is strategically oriented to achieve the shortest lead time of service delivery while eliminating different types of waste. healthcare institutions around the world have recognized the importance of applying the lean concept in the process of providing healthcare services and have begun to apply some of its tools and techniques. the lean concept is also being applied in healthcare institutions in the republic of serbia. according to the research results (stoiljković, 2013), most foreign companies operating in the republic of serbia apply some of the six sigma tools and techniques, i.e. the lean concept. however, despite the seminars held on this topic, the interest of managers of domestic companies has almost never been at the level of interest of managers of foreign companies operating in the republic of serbia. the clinical center in niš has implemented two lean projects. the first project used lean tools, such as 5s and standardization of work, to reduce wastage in business processes (errors, redundant work, waiting, underutilized human potential, transportation, supplies, unnecessary movement and unnecessary processing) identified by teams in charge of the process improvement. during the course of the project, team members went through various types of lean techniques training, including training on the jit lean concept technique. in the implementation of the second lean project, the aim was to achieve goals such as shortening the importance of lean manufacturing and six sigma concept for quality management of supply chain... 289 the process time, increasing the quality of health services, reducing errors, freeing up space and reducing inventory level. results of implemented lean projects indicate that losses and overload in the business process were successfully recognized in the health system of the clinical center in niš. with the help of some lean tools, it took months to reduce them. since correcting and eliminating defects at the time when they have already occurred can be a costly, timeconsuming and complicated process, attention should be paid to detecting errors in their initial stages of development, as an essential principle of the lean concept. the project managers were able to adequately use the standardization of work, as one of the lean tools, which was not easy at all. the application of this tool in the case of provision of healthcare services could be a challenge for managers, given the heterogeneity of certain patient requirements. however, the staff of the clinical center in niš were persistent, using this lean tool mainly for recurring activities. we believe that the implementation of the mentioned projects depended significantly on the experience of the experts, but also on the positive attitude of the employees towards the changes, as well as on their willingness to accept such changes in order to increase the quality of healthcare services. among the many factors on which the success of the lean concept depends, great importance is attached to the impact that employees have, as the carriers of the current or future process. in addition, the developed information technology has made it possible to apply lean tools in different areas of healthcare at the clinical center. with digitalization, some processes have become more efficient, with the greater ability to track them. such business conditions have enabled better data analysis as well as more accurate and secure diagnostics. so, in order to improve business, organizations in the republic of serbia should consider modifying the business culture and finding ways to eliminate unnecessary spending and non-value-added activities. unfortunately, managers and employees are still having a difficult and slow time changing their mindset. therefore, any change requires educated managers and employees who understand that their new business culture will enable them to make more profit. employees must have leaders who themselves understand the need for change and show an interest in the new business concept. but, mostly because of established work habits, employees can resist the very mention of change. in order to improve overall business performance, domestic companies should apply the lean concept on a larger scale. due to the growing economic internationalization of the republic of serbia and the inflow of foreign capital from parent foreign companies, one can expect positive changes in the field of applying the lean concept. 3. six sigma concept and its relevance to business process performance the six sigma revolution started in motorola in the 1980s. as a concept of process-oriented quality management, six sigma has attracted the attention of scientists and practitioners, as it is based on a comprehensive analysis of a network of business processes aimed at creating and delivering value to consumers. six sigma is a business management strategy used by companies to help improve process quality by identifying and eliminating the causes of deficiencies, while striving to keep variations in the manufacturing process to a minimum (wedgwood, 2006). according to mustapha & muda (2012, p. 693), by implementing the six sigma concept, an organization can 290 j. stojanović, g. milovanović significantly improve the execution of its business process by monitoring day-to-day business activities so that losses and resources are reduced while increasing the level of customer satisfaction. theorists suggest that implementing this concept requires the use of statistics to determine average values of process performance, that is, average differences in performance and quality of results (o’rourke, 2005, p. 14). six sigma is based on the assumption that process performance data can be represented by a normal distribution curve. based on the established deviations of the actual process indicators from the normal distribution curve, it is possible to evaluate the quality of the process. today, 1.5 is considered to be the “standard” for the worst case of shifting the mean of the process. the 1.5 is the result of the natural process instability. if the shift of the process mean around the expected value is 1.5, the number of values that go beyond the limits increases to 3.4 per million possibilities (3.4 dpmo). the range between the upper specification limit (usl) and the lower specification limit (lsl) represents the specification range (figure 1). fig. 1 process mean shift source: šest sigma (http://www.tfzr.uns.ac.rs/content/files/0/koncept_six_sigma.pdf) figure 1 shows that if the statistical set is subject to normal distribution, the area under the curve bounded by ± 6 comprises 99.9999998% of that set. this means that two values per billion values go beyond the aforementioned limits. organizations should implement the six sigma concept according to dmaic (define, measure, analyze, improve, control) methodology and quantified financial goals. the implementation of the six sigma concept according to the dmaic methodology takes place through five stages. the first stage is defining the problem to be solved. the aim of this phase is to bring the business process performance to a predefined level, i.e. within the allowed http://www.tfzr.uns.ac.rs/content/files/0/koncept_six_sigma.pdf the importance of lean manufacturing and six sigma concept for quality management of supply chain... 291 deviation level. in the second phase, appropriate measuring tools are used, with the aim of determining the limits of the deviation. during this phase, a process map is created and relevant data collected. the process maps are first produced at a high level and then continually refined as quantitative data is constantly collected. at this stage, graphical analyses of deviations, such as time series graphs, pareto diagrams, etc., are made, displaying data in chronological order and process change over time. the preceding procedure sets the stage for the third stage, i.e. development of analytical tools to identify the cause of deviations. in the fourth phase, deviations are eliminated with the help of key factors identified in the analysis. in the last phase, the results from the previous stages are controlled and monitored in order to improve and prevent the recurrence of the errors observed (o'rourke, 2005, pp. 1516). the dmaic relies on a pdca cycle, with the basic difference that it refers to the project life cycle (exclusive project orientation), whereas the pdca, as a tool, is used specifically in the management phase. the implementation of the six sigma concept contributes to improving the performance of the enterprise, focusing on process changes through constant work to reduce errors and defects. as an instrument that transforms the way business is done and places emphasis on control and quality, six sigma enables businesses to gain significant competitive advantage. “some analyses indicate that the application of this concept allows for business results to be improved by up to 20%, quality improvement by 12-18% and cost reduction by 1030%” (todorović, 2013, p. 70). authors examining the relationship between the six sigma concept and its effects on performance generally agree that six sigma has positive effects on the organization's performance (ertürk et al., 2016). the results of the empirical research of these authors show that companies using six sigma methodology achieve better operational, but also financial performance that exceeds funds invested in the new business concept. thanks to the dmaic methodology, companies have been able to achieve greater efficiency and productivity, reduce operating costs, which has ultimately led to greater customer satisfaction. according to hammer (2002), six sigma uses a methodology based on solving a specific problem identified in the company. in this context, it is necessary to engage employees and professionals with adequate knowledge and skills to apply the techniques and tools. one of the significances of this concept is precisely the orientation towards organizational and personnel structure, which clearly defines knowledge and skills that are necessary to overcome problems and improve the process (todorović, 2013, p. 71). companies where the six sigma concept had a positive impact on business performance had a well-defined process as well as adequately applied information technology (rajamanoharan & collier, 2006). the analyzes of these authors also show that companies that had an adequate performance measurement system were able to eliminate defects, that is, to ensure the quality of the process. on the other hand, there are companies that have failed to take advantage of the positive effects that six sigma provides. some scientists believe that managers have not adequately understood the principles and risks of this concept, stating that this concept simply repackages the traditional quality management system (dahlgaard & dahlgaard-park, 2006). however, the emerging trend aimed at advancement is the integration of lean and six sigma concepts, which opens up new business improvement opportunities. 292 j. stojanović, g. milovanović 4. integration of lean and six sigma concepts – a prerequisite for business process improvement ways to improve business processes within the company have changed throughout history. formerly, business process improvements were made solely with the help of machines that accelerated production, while today this process may involve the use of different statistical methods to analyze companies, business processes and individuals. in addition to reducing costs and increasing quality, successful business improvement also requires a change in company culture, which should motivate employees to constantly work to improve business processes and business policies. such change requires the support of structural methods and continuous improvement programs (o'rourke, 2005, p. 1). lss is primarily a company philosophy that focuses on constantly improving its performance through systematic waste elimination as well as reducing process variation. lss combines lean manufacturing/lean company principles and six sigma to eliminate eight types of waste (muda). the six sigma concept is more about the process quality, and the lean concept is about the speed of its implementation. the integration of these concepts into the lss concept provides the basis for improving production and transaction processes in the company, without considering that they are based on different methodologies and principles for achieving improvement. the implementation of the lss concept involves the planned and phased implementation of effective tools and many other business concepts. the lss concept provides a framework for changing the overall organizational culture (knapp, 2015, pp. 855-863). however, there is no model for implementing the lss concept to suit the needs and capabilities of each company. by combining lean and six sigma concepts, a company can increase revenues, reduce costs, improve internal and external collaboration and, therefore, the process quality (sunder, 2016, pp. 132-150). many companies and organizations have embraced lean, six sigma, and lss concepts as strategies for finding a balance between quality, cost and delivery time. the question of “which of these strategies to use first to improve the quality of the business process” is always present. the answer to this question depends on the nature of the problem and the goal pursued (antony, 2014, pp. 257-264). 5. lean supply chain in order to fully implement lean transformation and achieve a satisfactory competitive market position, managers should first apply lean principles and techniques in production and in all other company parts and then beyond. to achieve this, managers need to redefine company strategies and identify key processes performed. when lean principles and techniques are applied outside the company, a lean supply chain is formed, with suppliers, manufacturers, distributors, organizations that store goods and end customers. lean supply chain strives to optimize the services provided while minimizing costs. it presupposes effective communication, transfer of information, synchronization of flows, elimination of waste and establishment of a long-term cooperation between its participants (novićević čečević, 2016, p. 74). key features of the lean supply chain are: “member integration; effective communication and exchange of information; effective demand management; focusing on the end customer; continuous improvements; low inventory and small number of suppliers; and continuous flow and long-term contracts between members” (ugochukwu et al., 2012, p. 92). significant the importance of lean manufacturing and six sigma concept for quality management of supply chain... 293 improvement in the management of such a supply chain is most evident in manufacturing. the production process can be improved to reduce waste, resources, and non-value-added activities, while maintaining operational performance at the same level. if managers do not implement adequate strategies to reduce these deficiencies, the opportunities for creating an efficient supply chain may drop (milovanović et al., 2017, pp. 31-40). lean supply chain, especially the one that applies to multinational companies, requires lean logistics. lean logistics is associated with certain challenges that multinational companies face. the greater the number of such companies in the supply chain, the greater the likelihood of disturbing flow synchronization. for example, international shipments require the inclusion of more different companies in the supply chain (e.g. suppliers, port organizations, freight forwarders, customs brokers, railways, air and ocean freight companies) than domestic shipments. implementing lean logistics in such a large supply chain is not an easy task. this means that some of the companies involved work together and face each single delivery at the same time, resulting in waste and non-value-added activities. 6. implementation of the six sigma concept in the supply chain the implementation of the six sigma concept in the supply chain takes four phases in order to test, analyze, improve and standardize improved business processes (kilibarda, 2005). the first phase defines the entire supply chain from the supplier to the end customer, with particular reference to identifying the processes and activities that take place there. the next phase involves measuring and analyzing those processes. de facto, for each process, relative performance, defects, and opportunities for error are identified. the third phase is to identify activities that influence process improvement, using appropriate methodologies to identify and, if possible, eliminate those non-value-added activities. the final phase standardizes the realized quality improvements by individual processes (maslarić & cakić, 2006, p. 189). motorola has won the malcolm baldrige national quality award based on the results of the six sigma concept implementation. in modern business, just-in-time delivery of inventory within the supply chain is considered an important indicator of the quality of logistics services. a supply chain cannot be competitive on the market unless all its business processes are aligned. to achieve this, company managers should strive to minimize process variability within the supply chain (garg et al., 2004). maslarić and cakić outline one of the quality measurement concepts relating to respecting the delivery time of inventory to a particular participant in the supply chain. given that the supply chain consists of multiple processes, the basic idea maslarić and cakić advocate is to find a way to supply inventory in a timely manner between participants at different stages of the supply chain (maslarić & cakić, 2006, p. 190). in order to deliver inventory quickly and accurately to their customers in the supply chain, there is a need for a high degree of synchronization across business processes − from the supply of raw materials to the delivery of the finished product to the end customer. with the increase in the volume of resources and the number of operations and organizations in the supply chain, variability of supplies among its members increases. managers need to improve the delivery of inventory within the supply chain and thus its competitiveness and profitability. garg et al. introduce a new concept of quality performance measurement – the “accuracy of logistics service delivery time”, called six sigma supply chains. six sigma 294 j. stojanović, g. milovanović describes and quantifies supply chains in terms of fast and accurate delivery and develops a new approach to design such networks. their basic idea is to draw an analogy for the functioning of supply chains with complex assemblies (mechanical, electro-mechanical, etc.), where statistical tolerance has become widely used (garg et al., 2004). de facto, these authors compare the functioning of the supply chain with complex assemblies, where statistical tolerance within mechanical tolerance has been widely used. the complex supply chain network resembles a complex electromechanical assembly. each individual business process in a given supply chain is analogous to a single sub-assembly within a complete assembly. minimizing obsolete inventory within the supply chain can be seen as minimizing defects in electromechanical assemblies (garg et al., 2004). garg et al. have chosen to explore three current areas, namely: 1) reducing the variability of supply time between supply chain participants, 2) statistical tolerance, and 3) the six sigma concept (garg et al., 2004). to reduce the variability of supply chain business processes, it is first necessary to determine the cp process capability indicators (precision index or process potential index), cpk (capability index) and cpm (machine potential capability) and define the relationships between them. on this basis, a new measure of delivery time performance is defined, which is called respect for delivery deadlines (precision), i.e. number of wrong deliveries (wd) in addition to the existing measure − probability of delivery accuracy (da). lastly, wd is included in the six sigma concept used in designing quality across supply chains. the six sigma supply chain is the supply chain in which the number of occurrences of wrong deliveries (wd) is not more than 3.4 per million possible cases (maslarić & cakić, 2006, p. 190). proper supply chain design is implemented to deliver supplies between each of its participants at a time interval that should largely coincide with the required delivery time of the inventory. garg et al. respect the fact that the supply chain encompasses a large number of business processes between its individual participants. the number of business processes is denoted by n. each of these processes takes place over a period of time – from the moment the participant orders a particular type of stock to the moment of delivery. with xi they indicate the delivery time of inventory for a given process i, where each xi represents a variable with mean μi and standard deviation σi (garg et al. 2004, p. 45). given the above, the total delivery time of inventory between participants within the supply chain (y) can be represented by the following function: y = f (x1, x2, . . . , xn) (1) assuming that the cost of delivering inventory between participants in the supply chain is a function of the mean (μi) and standard deviation (σi), the cost of delivering inventory between participants in the entire supply chain (z) can be represented by the following function: z = g (μ1, σ1, . . . , μn, σn) (2) each participant in the supply chain, as the ordering party of a particular type of inventory at a particular stage of the process, defines the lower and upper limit of the time interval within which they are prepared to wait for the delivery of the required inventory. with this in mind, supply chain design can be seen as a linear programming model that requires the minimum value of the following objective function to be determined: min z = g (μ1, σ1, . . . , μn, σn) (3) subject to the following limitations: the importance of lean manufacturing and six sigma concept for quality management of supply chain... 295 dp for total delivery time ≥ c*pm da for total delivery time ≥ 6σ μ1 > 0 σ1 > 0 c*pm requires a lower limit for a defined dp performance measure (maslarić & cakić, 2006, p. 191). the solution of the set linear programming model gives values for the parameters xi of all business processes in the supply chain, which satisfy all the necessary limitations and conditions, i.e. ensure the quality of delivery time at the level of six sigma. this means that the goal of supply chain companies is to complete all processes so that all parameters of each process have the lowest precision index (potential) cp = 2. in this case, less than 3.4 defects per million possible occur in the supply chain processes. conclusion with the help of an adequate logistical strategy, and in order to survive in the market, it is possible to fulfill all the increasingly specific consumer needs related to the delivery of the right product, at the right time and at the right price. when the company understands the demands of the market and has the access thereto, the logistics strategy created can be tailored to the needs of the supply chain as well as to the needs of end customers. companies can improve the quality of their business processes by eliminating waste and non-value-added activities by adequately managing their supply chain, with a thorough analysis of each part of that chain. regardless of their independent evaluation, today lean and six sigma represent logistics disciplines and tools that can be used to identify waste, in terms of time, cost and supplies, as well as different types of process inefficiencies. in the spirit of continuous improvement in order to minimize various forms of waste, the lean concept is focused on simplicity, speed, flexibility, transparency of business processes and their integration into a continuous flow. since the supply chain includes a great number of business processes among its individual participants, the lean concept is one of the important factors for their integration and synchronization. due to the relentless pursuit of continuous improvement, the lean is focused on identifying quality problems in the order fulfillment process through the supply chain, and the application thereof can indicate the place in the supply chain where quality defects occur. developed by expanding the lean concept with the use of advanced statistical tools, the six sigma concept has found its place not only within companies but also in their supply chains. the presented supply chain design model clearly shows that in order to achieve a satisfactory level of quality (compliance with deadlines) of delivery, it is necessary to bring the processes and activities of the supply chain as close as possible to the six sigma level. in today's business environment, achieving high quality can be realized through the use of new supply chain technology, thereby reducing variability, having greater business process synchronization, and therefore better performance within the supply chain. with a sufficient level of interconnection and compatibility, by integrating the previous two concepts, the lean six sigma concept was created. by implementing this concept, companies and supply chains can improve business processes and maximize value for 296 j. stojanović, g. milovanović consumers and owners. given the exceptional application possibility, as well as through numerous synergy effects, lean and six sigma integration, it is possible to achieve satisfactory results when it comes to minimizing unnecessary wastage, and to achieve high quality in delivering value to participants within the supply chain. with respect to the degree of depletion of the lean concept potential, the republic of serbia is still inferior to the developed countries. however, managers of a growing number of companies are successfully promoting lean 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(2006). six sigma implementation, organizational change and the impact on performance measurement systems. international journal of six sigma and competitive advantage, 2(1), 48-68. stoiljković, v. (2013). lean u zdravstvu [lean in health]. niš: despot book. sunder, v. (2016). lean six sigma project management – a stakeholder management perspective. the tqm journal, (28)1, 132-150. šest.sigma. retrieved.from http://www.tfzr.uns.ac.rs/content/files/0/koncept_six_sigma.pdf. accessed on: 16 october 2019. the importance of lean manufacturing and six sigma concept for quality management of supply chain... 297 todorović, m. (2013). obračun troškova po aktivnostima baziran na vremenu – instrument integrisanog upravljanja lean poslovnim procesima [time-driven activity-based costing – an instrument of integrated lean business process management]. ph.d. thesis. kragujevac: ekonomski fakultet. ugochukwu, p., engstrom, j., & langstrand, j. (2012). lean in the supply chain: a literature review. management and production engineering review, (3)4, 87–96. wedgwood, i. (2006). lean sigma: a practitioner's guide. new jersey: prentice hall. značaj lean proizvodnje i six sigma koncepta za upravljanje kvalitetom poslovnih procesa lanca snabdevanja cilj rada je da se na bazi sistematizovanih saznanja, prikupljenih iz relevantnih naučnih izvora, oceni značaj lean i six sigma koncepta i tehnika, kako za otkrivanje procesa lanca snabdevanja u kojima se mogu javiti potencijalni gubici, tako i za unapređenje kvaliteta tih procesa. u radu ćе najpre biti predstavljene ključne karakteristike i efekti primene lean i six sigma koncepata u proizvodnji i lancima snabdevanja. pažnja će biti posvećena okvirima i potencijalima implementiranja lean koncepta u republici srbiji. zatim će biti prikazane mogućnosti integrisanja pomenutih koncepata u lean six sigma koncept i razmotrena njegova uloga u otklanjanju nedostataka u poslovnim procesima. u pretposlednjem delu rada biće prikazana ključna obeležja lean lanca snabdevanja, dok će poslednji deo sadržati matematičke okvire dizajniranja six sigma lanca snabdevanja. ključne reči: lean proizvodnja, six sigma, lean lanac snabdevanja, poslovni proces, preciznost isporuke facta universitatis series: economics and organization vol. 15, n o 3, 2018, pp. 245 256 https://doi.org/10.22190/fueo1803245l © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper factors affecting customer loyalty in the business market an empirical study in the republic of serbia 1 udc 336.1(497.11) vinko lepojević, suzana đukić university of niš, faculty of economics, serbia abstract. in modern business conditions characterized by the requirements for achieving superior profit margins, customer satisfaction and loyalty have become the basic company business priorities. the ability of the company to achieve a high level of customer loyalty, in conditions of intense competition is determined by delivery of superior quality service, but also by creating a positive overall customer experience with the company. such a situation implies the relationship development based on the trust and commitment of the buyer to the supplier. the aim of the paper is to investigate the impact of satisfaction, trust, buyer loyalty and perceived quality of services on the level of achieved loyalty. empirical research was carried out on a sample of small and medium-sized enterprises in order to identify loyal and disloyal customers. statistical analysis is based on the application of multivariate techniques that enabled simultaneous analysis of the mutual relationship between the identified four independent variables on the dependent variable, i.e. on degree of buyer loyalty. key words: customers, loyalty, satisfaction, trust, commitment, business market jel classification: m310, m210 introduction one of the most important problems of perfect marketing theory and practice is how to keep the customer, make him satisfied and loyal for a long period of time. instead of focusing on attracting new customers and creating transactions, companies are increasingly focusing on delivering superior value to consumers and on building long received may 30, 2018 / accepted july 04, 2018 corresponding author: vinko lepojević university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: vinko.lepojevic@eknfak.ni.ac.rs 246 v. lepojević, s. đukić term relationships with customers in order to keep them. the retention of existing ones in relation to the conquest of new consumers is conditioned, above all, by intense competitive pressures, visible changes in customer behavior and high cost of acquisitions. creation of satisfaction and loyalty in such conditions requires the companies to deliver high quality services as the preconditions for developing the trust and loyalty of the buyer (mital & kamakura, 2001). both learning and feedback with customers are the source of valuable information about their future requirements, shopping intentions and consumption (paquette, 2006). the problem of customer retention is noticeable in the business market where the success of a company is limited by a small number of worthy customers, and where the interdependence relationship between sellers and customers is a limiting factor of business success. being informed and professionalism of business customers, as well as the dominance of rational motives in decision-making process, increase their negotiating strength and power and make difficulties for companies to support long-term loyalty. this has led to a number of theoretical considerations and empirical research on how to achieve consumer loyalty and identify factors that motivate / demotivate such customer behavior. starting from the above, the main goal of the paperis to identify and determine the significance of certain factors in order to improve customer loyalty. starting with the identified factors of loyalty, the research objectives are: customer satisfaction, customer trust and commitment, and importance of perceived quality of service for loyalty enhancement. the work consists of two parts. in the first part of the paper, a literature review of significance and method of customer loyalty insurance is given, while the second part of the paper explains the methodology and presents results of the empirical research, their discussion and reached conclusions. 1. theoretical backgrounds 1.1. significance and problems in ensuring customer loyalty ensuring a high level of customer loyalty is one of the most important tasks of modern management. preference of retaining the existing ones toward winning new customers is conditioned, primarily, by intense competitive pressures, customer demands and high costs to get them. the most effective way to keep buyers in such conditions are to build loyalty by continued assurance of satisfaction and by creating high costs of switching to other brands. loyal customers are important "assets" of companies and profit generators. a positive relationship between customer loyalty, profit and company's competitive advantage has been confirmed by numerous studies (kumar & shah, 2004; gruca & rego, 2005; kotler & keller, 2007; kumar et al., 2011). they regularly repeat purchases, often buy a complete line of products and /or services, show lower sensitivity to price changes, tie-up for longer to the company, demonstrate immunity to competition. increase in profit is the result of lower costs for servicing of existing ones than the costs of getting new customers (kotler & keller, 2007). loyal customers also show the so-called active loyalty, i.e. they recommend the company and its brands to other customers, which leads to greater business stability, growth and profitability of the company (diller, 2000; gruca & rego, 2005; rust & ming-hui, 2014). factors affecting customer loyalty in the business market an empirical study in the republic of serbia 247 the problems in ensuring customer loyalty in modern business conditions have caused numerous theoretical considerations and empirical research dedicated to identifying the factors which lead to such customer behavior. the starting point in the measurement is the realization of essential loyalty. satisfaction is a necessary, but not sufficient, requirement of essential customer loyalty. the relationship between satisfaction and loyalty, due to the action of many factors, is complex and not always proportional. the positive attitude of buyers is also not a guarantee of a focal mark repurchasing, if such a decision is more pronounced towards another brand. in order to maintain long-term loyalty, the power of the consumer positive attitude is necessary, and the strong attitude differentiation compared to other brands that shows a tendency towards future behavior (kumar & shah, 2004). this means that the product and/or brand should represent the best alternative choice for the customer to remain loyal. therefore, customer loyalty measurement is based on a combination of loyalty behavior and loyalty attitude. the behavior of buyers takes a consistent repetition of behavior. measuring customer attitudes, on the other hand, is based on information about attitudes that reflect the emotional and psychological aspect of loyalty. measuring the emotional aspect of customer loyalty emphasizes the importance of factors that imply feeling, committing, trusting. moorman et al. (1993) consider that the customer's confidence, the involvement of customers in value creation, customer loyalty and perceived quality, are the most important factors that lead to loyalty (moorman et al., 1993). kumar et al. (2011) consider that, except trust and affiliation, the great influence on the overall quality of company's relationship with the buyer, has mutual desire to invest in relationship development as well as expectations regarding its duration. later research by the authors distinguishes customer confidence and commitment as key factors of customer loyalty. bearing in mind the above, it can be concluded that in the research work, the following factors of customer loyalty have been frequently repeated: customer satisfaction, customer trust, customer commitment and perceived quality of service. 1.2. customer loyalty factors 1.2.1. satisfaction of customers customer satisfaction is an essential factor of their loyalty. the customer satisfaction assessment is based on a comparison of the customer's expectations and post-sales perceptions (kotler & keller, 2012). in the meantime, customer satisfaction is the expression of satisfaction or disappointment that arises as a result of the comparison of deliveries and the expectation of value. the result shows that the assessment of the realization of the customer's expectations is individual and can be positive or negative (satisfaction / dissatisfaction). it includes objective and subjective elements related to tangible and intangible aspects of value. it can be based on emotional and rational motives. kundu & datta (2015) state that satisfaction is an affirmative, emotional state that is the result of the process of all aspects of the relationship between the partners. the impact of satisfaction on business performance, on the other hand, can be viewed from two aspects behavioral and psychological. the first aspect relies on understanding that customer satisfaction influences the resulting behavior, such as: re-purchase (trasorras et al., 2009), customer loyalty (bowen & chen, 2015), giving recommendations to others 248 v. lepojević, s. đukić (ulaga & eggert, 2006), but also purchase cessation, complaints, negative verbal advertising, in case of lower satisfactory degree of complete dissatisfaction. the second, psychological aspect of customer satisfaction is emphasizing satisfaction dimension that does not have to be linked to the future behavior of the customer, but to his inner feeling, in terms of "with consuming, the customer fulfills some need, desire, goal, etc. which gives satisfaction". this means that the satisfaction has to be viewed as a predictor of coordination and continuity in the process of relation developing (ulaga & eggert, 2006). therefore, through the satisfaction and continuity of the relationship, both sides have to develop desire for growth. the presence of both dimensions determines the cumulative satisfaction which is a necessary but not sufficient condition for buyer's loyalty. research of business customers satisfaction is complex. the complexity stems from the complexity of the customer decision-making process, the number of people involved in this process, the number of seller-buyer interactions, and factors that influence satisfaction or dissatisfaction and their transition into measurable attributes. therefore, research of satisfaction in the business market requires inherent complexity and consideration of multiple aspects and different contexts that affect satisfaction as a managerial phenomenon. dyad relationship between the buyer and the seller must be studied in the context of a larger set of interorganizational relationships that form a complex context of business purchasing. various forms of cooperation and partnerships in the business market emphasize more complete survey of the satisfaction and the common nature of involved parties. the achieved satisfaction is seen as a cohesive factor or strength in development of further and deeper relations. in case of long-term relationships, the re-purchase situation is at the same time the pre-purchase situation and the buyer will not repeat his purchase if his expectations are not met. high degree of customer satisfaction often creates confidence and commitment between parties in interaction, which increases customer loyalty and duration of relationships. involving the customer in production performance and other business processes, results in his partial responsibility for his own satisfaction. starting from these facts, the traditional method of determining the satisfaction of business customers with the subsequent evaluation of the completed purchase becomes inadequate because it does not reveal the reasons of satisfaction / dissatisfaction. the focus of modern research is overall satisfaction, i.e., overall performance of the supplier. according to one survey, it can be measured by seven dimensions: product satisfaction, strength of sale, product-related information, ordering process, services, interaction with employees, and satisfaction with complaints solving (ghijsen et al., 2010). in order to ensure a more realistic approach to investigating customer satisfaction, it is necessary to focus on three areas: the internal context of customer and seller relations, the context of the network, and the context of external influences (tikkanen et al., 2000). starting from the above hypothesis, tested h1 is: h1: satisfaction of customers increases their loyalty in the business market. 1.2.2. customer trust trust is an important determinant of the buyer's behavior in the purchasing process. it arises as a result of the overall customer experience with the product and the company, and its tangible and intangible attributes. trust development generates positive attitudes and customer loyalty (moreira & silva, 2015). trust in brand reduces the customer's factors affecting customer loyalty in the business market an empirical study in the republic of serbia 249 hesitation in the purchasing process which can arise from factors such as: product complexity, purchasing risk, cognitive dissonance, and high transaction costs. a customer who believes in an enterprise becomes a valuable source of information in the process of value creation. mutual trust of the buyer and company creates conditions for the exchange of important information in the process of value creation and the construction of a longterm, mutually beneficial relationship. it is therefore considered that confidence is an essential factor that leads to long-term customer retention (moorman et al., 1993; anderson & mittal, 2016). lost trust means a lost customer. characteristics of trust based relationships are: cooperation between buyer and seller, first-class, long-term relationships and quality of cooperation. cooperation is based on the fact that trust reduces uncertainty and risk, which increases the cooperation between the supplier and buyer. from relationships based on trust and cooperation, the seller and buyer learn that mutual activities give better effects than reliance on individual ones. confidence encourages both sides to work to preserve interpersonal relationship and a desire to overcome potential conflicts. preference is on long-term benefits. the trust between the company and the buyer means that the customer will become more involved in the process of value creation and mutual business, which contributes to lasting relationship. confidence-based trusts mean quality cooperation and better exchange of information and knowledge, which increases their usefulness. misunderstandings and conflicts are resolved in an efficient and friendly manner (morgan & huntt, 1994; moorman et al., 1993; ndubisi, 2011). trust as a factor of loyalty is difficult to understand and anticipate. in order to explain the notion of trust, the majority of authors look for the base in psychology, starting from the partner's belief they will behave in a relationship and act in mutual interest. such relationships are characterized by: credibility, reliability, intimacy, and self-orientation (peppers & rogers, 2004). the first three components are positive in building trust between the buyer and the seller. the trustworthiness of the partners, delivery of the promised, understanding between them, creation of a pleasant atmosphere and the sense of security, strengthen and enhance trust. common goals and values, interdependence, communication quality and non-opportunistic behavior are the most important factors on which it depends. open communication, formal and informal, harmonizes expectations, solves doubts and reduces uncertainty. relations based on trust, loyalty, cooperation and strength of partners enable us to create values in relationships and to strengthen the competitive advantage of partners (palmatier, 2008; ndubisi, 2011). research of credit cooperatives in brazil has shown that relations between the strength of partners in a dyad relationship, between buyer and a seller, customer confidence, their commitment and cooperation, largely determines the quality of relationships with a central organization. on the other hand, self-orientation and self-reliance of partners in relationships means predominance of individual and non-synchronized over synchronized and mutual action. the strength of this component is important, because if the customer feels misunderstanding from the company which works for its own benefit, that causes dishonesty and disobedience and that, on the other hand, reduces trust and loyalty of the buyer. bearing in mind the above, the tested hypothesis h2 is: h2: trust leads to an increase in customer loyalty in the business market. 250 v. lepojević, s. đukić 1.2.3. consumer commitment relations based on trust between seller and buyer are the basis of mutual attachment creation. quality communication among buyer and seller, synchronized behavior and mutual work create trust and attachment. together, both factors directly lead to cooperative behavior, long-term relationships based on loyalty (morgan & hunt, 1994). creating affection means that for both buyer and seller relations are important and there is a mutual desire to continue and develop them in the future. it is a power that drives participants to continue their cooperation. relationships built on trust and commitment are a guarantee that the efforts made to maintain and develop relationships in the future will result in mutual benefits. that strengthens trust and commitment, increases customer loyalty and all performances of relationships. commitment as a complex factor can be defined from different points of view. the opinion that the psychological component is crucial for creating attachments, which emphasizes emotional loyalty and engagement of the participants in the relationship, prevails. affective component of loyalty is associated with the long-term orientation of involved parties and with their focus on achieving long-term loyalty and goals, as well as the belief that relations will bring desired results. such attachment is based on trust, willingness to resolve conflict in a friendly manner, and supports the long-term benefits of relationship. in this sense, the partner behaves in a way he expects from the other side and has confidence in such behavior (ndubisi, 2011). attachment may also arise from the self-interest of a particular party in current relation, as a result of the observed difference between costs and benefits (economic, social and status). in this case, this is so-called prolonged attachment. normative attachment arises as a result of moral obligations of partners to continue cooperation. the largest number of research connected with the relationship of trust, commitment and loyalty of customers, confirms the high degree of correlation of trust and devotion on the one hand, and retention of customers and future intentions for relationship developing, on the other. attraction in relationships very often means sensitivity and dependence, which builds relationships that are worthy of the trust of the partner. continuity of relationships over time motivates companies to work together to achieve goals and mutual benefits. each side is aware that continued delivery of superior benefits will be valued from the other side, which therefore wants to engage in a relationship. starting from the above, the h3 hypothesis is: h3: there is a strong correlation between customer loyalty and retail sales. 1.2.4. perceived quality of service numerous studies have shown that perceived quality of service is an important determinant of customer satisfaction and loyalty (lovelock & wirtz, 2011; wilson et al., 2012; moreira & silva, 2015). this influence can be reached through degree of satisfaction, considering that the concept of customer satisfaction and service quality concept are connected, and often they are identifiable. starting from that point, one can speak of a linear relationship between the quality of service and satisfaction, which means that a higher level of service quality leads to a higher level of customer satisfaction. there is also a perception that the quality of service is not the only determinant of customer satisfaction, even if it is often crucial (veljković, 2009). according to this opinion, factors affecting customer loyalty in the business market an empirical study in the republic of serbia 251 besides the quality of services, customer satisfaction is determined also by other elements (quality of the accompanying product, prices, situation factors and personal factors). research based on such insight did not show a strong correlation between the perceived quality of services from users and their satisfaction, especially when it comes to certain elements of service quality. the problem of the quality of service measurement comes out from the complexity and multidimensionality of the concept of service quality (jain & gupta, 2004). the service's intangibility is one of the key reasons for this. therefore, there is no autho's' consent in terms of defining the quality of services. dominant opinion is that the quality of service comes out from the compliance with customer expectations, i.e., it is the result of their comparison between expectations and their perceptions of services to be provided (caruna et al., 2000). the emphasis that the overall quality assessment depends on evaluation of the benefits provided by the particular service, and also on the process of its delivery, points to complexity and multidimensionality of the service quality concept. comparatively, the consent of authors matches the belief of pollack (2008) that there are three basic elements of service quality: the quality of results (the actual result of service contact), the quality of interaction (estimation of overall customer relationship with the service staff) and the quality of service environment (physical environment where interaction occurs). starting from the above, the hypothesis h4 is: h4: perceived quality increases customer loyalty in the business market. 2. methodology of research the aim of the research is to examine factors that influence the loyalty of customers. the basic research question for which the empirical research was supposed to provide the answer is: is there a statistically positive correlation between customer loyalty and loyalty factors customer satisfaction, trust, customer loyalty and perceived quality of services? fig. 1 model of conditionality of customer loyalty source: authors, adapted to: rauyruen & miller (2007) 252 v. lepojević, s. đukić starting from the set goals, we tried to check the following hypotheses: h1: satisfaction of customers increases their loyalty in the business market. h2: trust leads to an increase in customer loyalty in the business market. h3: there is a strong correlation between customer loyalty and customer commitment in the business market. h4: perceived quality increases customer loyalty in the business market. in order to identify the significance of each factor of loyalty in the business market, the research used a model that includes four independent variables (customer satisfaction, customer trust, customer commitment, and perceived quality of service) and customer loyalty as a dependent variable (figure 1). in order to test the hypotheses, the empirical research was conducted. respondents’ opinions were recorded on the 5-fold likert scale, where 1 indicates "i do not agree in general", while 5 means "i completely agree" the sample was made up of small, average and big companies i.e.. of small shops, specialized shops and cafes from the territory of southeastern serbia (pčinja, jablanica, nis, toplica, zajecar and pirot districts). one hundred and fifty questionnaires were distributed and all were completed and processed. research was conducted from 06.05.2018 until 10.5.2018. descriptive statistics, correlation and multiple regression analysis methods were used in statistical analysis. a questionnaire was used as a tool for collecting information. the questionnaire was created based on the idea of woon et al. (2015) and consists of two parts. the questions in the first part of the questionnaire refer to general customer data (customer size, length of cooperation, purchase frequency). in the second part, questions refer to investigated dimensions of loyalty, i.e., loyalty factors. loyalty as a dependent variable was measured through four dimensions (questions l1-l4), while independent variables: (1) customer satisfaction was measured through two dimensions (questions s1-s2), (2) commitment was measured through three dimensions (pr1-pr3 questions), (3) trust through three dimensions (po1-po3) and quality perception was also measured through three dimensions (per1-per3), which can be seen in table 1. 3. results of the research and discussion in order to obtain a better picture of observed indicators value taken into consideration when analyzing the loyalty of customers from the sample, descriptive measures were first determined, which is shown in table 1. according to these data, the average rating of loyalty provided by customers, measured through four dimensions, is 4.26, with a standard deviation of 0.87. the highest average grade was given in answers for perception of quality questions and it was 4.51. this estimate also has the lowest standard deviation 0.67, which clearly indicates that customers give great importance to the quality of products. the least average rating was given by the customers to attachment dimension and it is 4.18 with a standard deviation of 0.83. table 2 provides data for correlation between variables. according to this table, we conclude that there is a strong direct connection between dependent and independent variables, i.e. between customer loyalty and the factors on which it depends. according to cohen (1988), the value of the pearson correlation coefficient by 0.3 indicates a weak correlation between phenomena; the value of this coefficient between 0.30 and 0.5 factors affecting customer loyalty in the business market an empirical study in the republic of serbia 253 indicates average, and over 0.5 a strong relationship between phenomena. bearing in mind the above-mentioned scale for interpreting the strength of the correlation link, we find that the values of the pearson coefficient of correlation between dependent variable and independent variables are over 0.5, and we can conclude that this bond is strong. also, all the coefficients are significant at the level of 0.01. table 1 descriptive statistics question number question average rating standard deviation customer satisfaction 4.24 0.79 s1 supplier always meets my expectations 4.13 .87 s2 satisfied with the cooperation with the supplier 4.35 .72 commitment 4.18 0.83 pr1 very attached to supplier 3.74 1.05 pr2 i will continue to cooperate with supplier 4.43 .746 pr3 it is important for me to maintain good business relationships with supplier 4.39 .703 trust 4.30 0.79 po1 ready to rely on suppliers' products 4.09 .89 po2 have trust in supplier 4.31 .84 po3 consider employees professional and responsible 4.51 .65 quality perception 4.51 0.67 per1 product quality corresponds to declared 4.40 .73 per2 staff is professional 4.59 .59 per3 payment terms are correct 4.56 .69 customer loyalty 4.26 0.87 l1 i would recommend suppliers to business partners 4.41 .80 l2 supplier is my first purchase choice 4.01 1.10 l3 i plan to stay with supplier in next few years 4.36 .77 l4 consider myself a loyal customer of a given supplier 4.28 .82 source: calculation of authors having in mind the data from table 2, we conclude that we have proved all four hypotheses; we have proved that there is a strong direct correlation between customer loyalty and determination factors. research results prove that the strongest quantitative match is between customer loyalty and commitment, and the weakest is between customer loyalty and satisfaction. that confirms results of many studies by which satisfaction is necessary but not sufficient condition for the loyal behavior of the buyer (tikkanen et al., 2000; ghijsen et al., 2010). apart from the fact that the customer is satisfied with the company that meets his expectations, the key factor for customer engagement is continuity of cooperation, which shows that both buyer and seller are important and there is a mutual desire to continue and develop it in the future. 254 v. lepojević, s. đukić table 2 correlation customer loyalty satisfaction trust commitment quality perception customer loyalty 1 .541** .813** .741** .656** satisfaction 1 .590** .611** .376** trust 1 .736** .613** commitment 1 .617** quality perception 1 ** level of significance 0.01 source: calculation of authors the mutual relationship of loyalty and the conditioning factor were examined by applying the multiple regression analysis. based on the data from table 3, it can be seen that changes in customer loyalty are explained by 72.5% of changes in independent variables, i.e. with factor changes by which loyalty is conditioned. if stricter criterion is explained, given as a corrected coefficient of multiple determination, it is somewhat smaller, and according to it, the degree of explained variability is 71.8%. table 3 regression beta sig. unstandardized standardized (constant) -.338 .228 satisfaction .026 .027 .636 trust .532 .509 .000 commitment .257 .232 .001 quality perception .257 .191 .001 r .852 r square .725 adjusted r square .718 source: calculation of authors as shown in beta standardized column, commitment has the highest absolute value, this means that this variable individually has the greatest contribution to the explanation of dependent variable, i.e., commitment has a dominant influence on customer loyalty. the smallest contribution to changes in dependent variable has satisfaction. in addition, it should be noted that the significance of this coefficient has not been proven, and this factor should be excluded from further analysis. if we look at the non-standardized values of the regression coefficients, we have another proof of direct dependence between the loyalty and the factors it is conditioned upon. in this way we confirmed the starting hypotheses once again. conclusion customer satisfaction and loyalty measurement is an important segment of marketing control in order to gather information on what is necessary for customers to repeat their purchase and to decide whether that is sufficient for essential loyalty. measuring of customer loyalty in the business market is complex and often linked with the subjectivity of researchers. often, researchers in customer loyalty measurements are focused on factors affecting customer loyalty in the business market an empirical study in the republic of serbia 255 delivered product / service quality measuring. repeated purchases can, on the other hand, be an important indicator, but due to preferences, it is not enough to provide essential loyalty. the essence of customer loyalty measuring is getting feedback that determines their long-term repetition of buying and pursuing it in spite of competing pressures. customer satisfaction is an important indicator of customer loyalty, but it is not sufficient. customers may be happy, but they do not have to repeat shopping from the same company. according to that, satisfaction involves cooperation and information exchange with the company. main requirement is existence of mutual trust with sharing sensitive information in the process of creating value for customers, and developing a long-term relationship with them. trust creates customer loyalty which explicitly and implicitly means that an open, frequent and honest communication will develop. such communication increases credibility, reliability and intimacy, and reduces doubt, uncertainty, one-sided orientation and preoccupation. trust improves customer responsiveness, especially emotional, which increases customer readiness to cooperate and engage more in relationships. it has been proved in the paper that there is a strong 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(2015). factors influencing customer loyalty in airline industry in malaysia, retrieved from: http://eprints.utar.edu.my/1802/1/bac-2015-12068201.pdf, accessed on: 20 march 2018. faktori koji utiču na lojalnost kupaca na poslovnom tržištu – empirijska studija u republici srbiji u savremenim uslovima poslovanja koje karakterišu zahtevi za ostvarenje superiornih profitnih marži, satisfakcija i lojalnost kupca su postali osnovni poslovni prioriteti preduzeća. sposobnost preduzeća da ostvari visoku stopu lojalnosti kupaca u uslovima intenzivne konkurencije uslovljena je isporukom usluge superiornog kvaliteta, ali i stvaranjem pozitivnog ukupnog iskustva kupca sa preduzećem. takva situacija podrazumeva razvijanje odnosa koji se zasnivaju na poverenju i privrženosti kupca preduzeću i njegovim markama. cilj autora u radu je da istraže uticaj satisfakcije, poverenja, privrženost kupca i percipiranog kvaliteta usluga na stepen ostvarene lojalnost. empirijsko istraživanje je realizovano na uzorku malih i srednjih preduzeća u cilju istraživanja povezanosti lojalnosti i faktora kojima je ona uslovljena. statistička analiza zasnovana je na primeni multivarijacionih tehnika koje su omogućile simultanu analizu međusobnog odnosa između identifikovane četiri nezavisne varijable na zavisnu varijablu, odnosno na stepen lojalnosti kupca. u tom smislu je korišćena višestuka regresiona i korelaciona analiza. ključne reči: potrošači, lojalnost, satisfakcija, poverenje, privrženost, poslovno tržište https://www.ncbi.nlm.nih.gov/pubmed/?term=moreira%20ac%5bauthor%5d&cauthor=true&cauthor_uid=25860922 https://www.ncbi.nlm.nih.gov/pubmed/?term=silva%20pm%5bauthor%5d&cauthor=true&cauthor_uid=25860922 plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 15, n o 3, 2018, pp. 217 229 https://doi.org/10.22190/fueo1803217l © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper sources of workplace stress in service sector organizations1 udc 005.32 jelena m. lukić 1 , snežana lj. lazarević 2 1 modern business school, belgrade, serbia 2 college of sports and health, belgrade, serbia abstract. stress, as a dominant feature of the modern society, represents a serious problem for numerous organizations as it has significant effects on their business results. the aim of this paper is to examine and analyze the various sources of stress which employees in service sector organizations face. the key tendency of service sector organizations is to achieve efficiency, cost decrease, income growth, all of which impose high expectations and pressure upon employees. the sources of workplace stress in those organizations are observed from the perspective of job characteristics, organizational context and the employees’ personality traits. a review of key stress factors from the above-mentioned perspectives enables a holistic approach to human resource managers, which could be of great importance for setting up a strategy and planned approach to managing workplace stress. key words: workplace stress, employees, job, services, organizational behavior jel classification: m12, m54 introduction from the moment of birth, there are all sorts of expectations that each person faces: to take first steps, to learn to read and write, to do well at school and university, to find a well-paid job, to choose a life partner, to form a family, to have a successful career (claridge & cooper, 2014). all these expectations represent a potential source of pressure. from the perspective of persons capable of working, digital revolution and technological innovations have brought about a number of changes in work environment received march 22, 2018 / revised april 25, 2018 / accepted april 30, 2018 corresponding author: jelena m. lukić modern business school, terazlije 27, 11000 belgrade, serbia e-mail: jelena.lukic@mbs.edu.rs 218 j. lukić, s. lazarević and working conditions. apart from a lot of positive effects, there have also been various negative effects including higher complexity of jobs, unrealistic expectations from employees, longer working hours, less time for family and private life. moreover, employees are facing the challenge of adapting and adjusting to new methods of doing business in addition to fulfilling ever-growing customer demands. all these factors and their combined effects lead to an increasing number of stressful situations at a workplace. over the past several years, stress has been considered to be one of the most important problems in contemporary organizations operating in the conditions of strong competition (cranwell-ward & abbey, 2005; balkan & serin, 2014). the objective of this paper is to point to the most significant sources of workplace stress for employees of service sector organizations from three different perspectives job characteristics, organizational context and the employees’ personality traits. a review of key stress factors from the above-mentioned perspectives enables a holistic approach to workplace stress, which could be of high importance for setting up a strategy and planned approach to managing workplace stress, as it is considered that healthy and satisfied employees produce better work results (cooper & cartwright, 1994; žarevac-bošković, 2017). 1. definition of workplace stress the term stress in the context known nowadays was first used in 1936 when hans selye defined it as a “specific body response to every demand for change” (nagarajan, 2017, p. 337). the national institute for occupational safety and health defines workplace stress as any harmful physical and emotional response of employees to increased job demands that are not in line with their knowledge and skills (niosh, 1999). in other words, stress is the response of the mind and body to a certain event and causes the feeling of doubt in one’s own abilities to act with regard to the recent event (lal & singh, 2015; kular, 2017). lazarus and folkman examined a relation between a person and the environment, and concluded that stress occurs when a person feels that the environment is too demanding for their capacities and capabilities (lazarus & folkman, 2004). to put it another way, stress occurs every time a person cannot handle the circumstances they are facing, or the circumstances that they can face and deal with have negative consequences on them (glavan, petrovan & radu, 2016). workplace stress, occupational stress, organizational stress, stress on job are the expressions used to describe stress experienced by employed people. even though workplace stress is only one of the numerous types of stress that a person is exposed to, it is considered to be among the most distinctive ones, because employees spend most of their time at work which represents the foundation of their existence and standard of living (weinberg, sutherland & cooper 2010; britt & jex, 2015). stress may have a positive impact on employees only up to the level that they perceive it as a motivational factor, or up to the level of their psychophysical tolerance (stranks, 2005; khuong & yen, 2016). above that level, stress becomes negative – not only for the employees, but for the entire organization, as indicated in fig. 1 (landy & conte, 2013). sources of workplace stress in service sector organisations 219 fig 1. the impact of stress level on employees’ performance source: adapted from weinberg, sutherland & cooper, 2010, p. 79 workplace stress is experienced by all employees regardless of the profession and the position they hold (valcik & benavides, 2011; claridge & cooper, 2014). for example, policemen and employees at psychiatric departments are often exposed to violent people, nurses at oncology departments work with severely ill patients whose treatment outcome is uncertain, ambulance drivers and firemen often face situations including deceased or heavily wounded persons. also, jobs that at first glance may not seem stressful may involve various forms of stress as there is no single organization that functions independently and free from interactions with the environment (kompier & kristensen, 2001). furthermore, there are different forms and levels of stress. when employees are faced with tasks and work requirements that exceed their knowledge, skills and capabilities, the first symptoms of stress occur and cause a change in employees’ behaviour in the following ways: loss of one’s sense of humor, chronic fatigue, lack of concentration, frustration, difficulties in decision making, lack of motivation, lack of interest and keeping to oneself in relationship with colleagues and customers (stranks, 2005). the next level of stress begins to affect the physical condition of an employee and may manifest as: lack of sleep, decreased or increased appetite, headache, tachycardia, sweating, coughing. should stress-causing factors become stronger or remain unchanged for a longer period of time, employees may suffer from psychological disorders, cardiovascular or digestive diseases, immune system disorders and other diseases (claridge & cooper, 2014). due to the above reasons, it is not surprising that the american association of psychologists ranked chronic stress among top six causes of death (nagarajan, 2017), while the world health organization characterized stress as the health epidemic of the 21st century (mequilibrium, 2013). 220 j. lukić, s. lazarević 2. key sources of workplace stress in service sector organizations until a few decades ago, service sector was very attractive for candidates looking for a job. there was a general opinion that the organizations within this sector provide more agreeable work conditions, higher salaries, lower stress level, greater possibilities to acquire knowledge and skills, and significantly better conditions and possibilities for women when compared to production sector organizations (bosch & wagner, 2010). today, the opinion about service sector organizations is significantly different – many jobs in service-related areas are low-paid and do not provide the opportunities for promotion, while working with customers is considered increasingly demanding and difficult. the globalization of business operations and fierce competition have resulted in higher standards and customer expectations. some authors pointed out that for service sector organizations, “customers are as important as the air we breathe” and that organizations that have loyal customers may feel certain about expecting revenues, higher market share and profitability growth in future (viardot, 2017). the overall result of any organization within the service sector depends on the manner of providing service and the quality of the provided service which puts additional pressure on employees (inghilleri & solomon, 2010). furthermore, those organizations are more likely to undertake initiatives for development of new products and services in order to meet all market demands and to improve all segments of relationships with stakeholders (raċenović & krstić, 2017). key demands placed before employees in service sector organizations include (fottler, ford & heaton, 2010):  identifying customers’ needs, desires and expectations;  providing all requested information to customers;  treating customer as a guest and providing all pertaining services;  monitoring and increasing customer satisfaction level;  eliminating and decreasing customers’ negative experiences;  attracting and keeping customers;  building long-term relationships with customers. moreover, employees are expected to quickly master every new technology, fulfill the set objectives, attend business meetings, learn new procedures, rules and regulations and be aware of any change in the legal regulations (stranks, 2005; kular, 2017). all these demands put certain pressure on employees that may lead to stress. based on the available literature, several different classifications and sources of stress can be noticed. there are three key perspectives based on which the stress-causing factors at a workplace will be considered in this paper: job characteristics, organizational context and employees’ personality traits (table 1). observing the sources of workplace stress from those three perspectives is important because it provides a holistic approach to the sources of workplace stress, thus enabling human resource managers to review the key sources of employees’ workplace stress, and to find a best way to eliminate or reduce them (grawitch, ballard & erb, 2015). sources of workplace stress in service sector organisations 221 table 1 the overview of the key sources of workplace stress from different perspectives s o u r c e s o f s t r e s s job characteristics job content and nature scope of job tasks and activities employees’ autonomy when performing job tasks and activities continuous setting up of new goals too demanding customers job insecurity working hours working conditions organizational context organizational structure and culture mutual relations in an organization employees’ roles in an organization career development leadership style employees’ personality traits psychological characteristics of employees age and work experience gender structure source: authors, based on the literature 3. job characteristics as a source of workplace stress key job characteristics that may be the sources of stress include: job content and nature, the scope of job tasks and activities, the autonomy of employees, continuous setting up of new goals, too demanding customers, job insecurity, working hours and working conditions. job content and nature may be the sources of stress regardless of whether the job is a routine-based and monotonous, or a more complex and difficult one. in recent years, in organizations that base their working processes and activities mostly on information and communication technologies, employees often notice some symptoms of stress. communication conducted via email, without physical presence, does not enable hearing the other party’s voice tone and assessing the elements of non-verbal communication and gesticulation, which may lead to alienation among employees and, consequently, to stress. researches show that employees who work remotely in various virtual project teams with time become concerned that they are less respected and appreciated i.e. that they are “out of sight, out of mind” (mccloskey & igbaria, 2003, p. 19). furthermore, employees often become frustrated due to the inability to collect and process a large amount of data and information that result from the intensive use of information technologies. as a consequence of the large amount of information that employees face, various health issues may occur, including insomnia, lack of sleep, poor concentration, headache and stress (lazarević & lukić, 2016). position that employees have in organization can also be the source of stress. it is considered that employees who work on managerial positions experience higher level of stress compared to those who do not hold managerial positions (weinberg, sutherland & cooper, 2010). 222 j. lukić, s. lazarević scope of job tasks and activities. in organizations that feature an insufficient number of employees for the scope of work that needs to be performed, employees become overburdened and consequently stress occurs. employees may be also overburdened with work in cases of other colleagues’ sick-leaves or absence, as they need to take over their responsibilities and activities in addition to their own. predefined project realization deadlines represent one of the sources of stress for employees who perform a lot of tasks and have short deadlines for their realization (cranwell-ward & abbey, 2005). multitasking (a simultaneous performance of a large number of activities) also represents a source of stress for employees who are expected to perform several tasks simultaneously within a short period of time (toister, 2013). employees’ autonomy when performing job tasks and activities. the degree of independence and the personalization of the job mean greater freedom for employees to make decisions regarding the manner of conducting their job tasks and activities (nagarajan, 2017). when employees have no impact on their work, i.e. no control over job tasks and activities and do not take part in the decision-making process, frustration and stress may occur in job performance as they are expected to fulfill the goals while they cannot impact the jobs and activities they are performing. continuous setting up of new goals. the goals set before employees are becoming increasingly ambitious, whereas the deadlines for their realization are getting shorter. as a consequence, this puts certain pressure on employees and leads to stress. even if employees are aware that they will be rewarded if they achieve set goals, the pressure that they feel may jeopardize their health. too demanding customers. a specific source of stress, especially for employees in the service sector organizations, comes from customers who are too demanding. employees in service sector organizations do their best to meet all the demands and requests of their customers, which is why any inconvenience that they experience may lead to stressful situations (toister, 2013). working with demanding customers becomes even more stressful in situations when employees do not have the support of their superiors and managers. job insecurity. employees have become burdened with fear that they may not keep their position and that their labour agreement may not be extended after the agreed period expires. over the past few years, there has been an increase in the number of employers who offer labour contracts for a definite period of time, part-time jobs or hire staff for temporary projects (eurofound, 2012), which leads to stress for employees due to constant uncertainty about the job and future living. in addition, due to the automatization of a number of job tasks and activities, employees started fearing that they might lose their jobs. a research conducted by the mckinsey institute shows that due to the effects of the automatization by 2030 between 400 and 800 million people will be replaced by cutting-edge technology and robots, whereas between 75 and 375 million of employees will have to acquire new knowledge and skills in order to be able to perform job tasks and activities (manyika et al., 2017). other researches have also shown that the chronic fear of keeping a job is a stronger stressor for health deterioration then smoking or high blood pressure, as well as that living with the constant fear of job loss is worse than unemployment (nagarajan, 2017). working hours. overloading employees with job tasks and activities results in longer working hours. eight hours’ working time has become a “dead letter“ on the contract and sources of workplace stress in service sector organisations 223 job description. employees spend a lot more time at work or doing activities related to working at home (e.g. responding to electronic mail out of working hours or during the weekend). overtime work may lead to the imbalance between job and employees’ private lives (golubović & golubović, 2015). work in shifts is also considered a source of stress. the results of numerous research studies showed that employees who work in alternative shifts are exposed to higher level of stress compared to those who work only one shift, as well as that the employees who work night shifts for many years are more exposed to stress than their colleagues who work daily shifts (kular, 2017). working conditions. if business premises lack appropriate heating, light and ventilation, employees cannot give their maximum at work and may experience stress. if the tools and resources used for work are not organized appropriately and available to employees, they will get tired easily. furthermore, it is very important that a workplace provides adequate sanitary conditions, privacy, protection and safety, but also that it is possible to purchase food and refreshments nearby. frequent travelling may also present one of the sources of stress for employees. although business trips are most often considered as a privilege, employees still need to finish their office work, and they spend time separated from their families. also, airplane flights are often organized so that it is necessary to be at the airport either early in the morning or late at night which may lead to disrupted sleep and daily routine. 4. organizational context as a source of workplace stress the key characteristics of the organizational context that may cause stress include: organizational structure and culture, mutual relations in an organization, employees’ roles in an organization, career development, leadership style. organizational structure and culture. in a bureaucratic organizational structure, the dominant value systems and rigorous codes of conduct may lead to an incongruence between organizational and individual standpoints, norms, values and beliefs which most often represents the cause of conflicts and stressful situations at work. waiting for a large number of approvals in order to complete an activity may lead to frustration and stress for employees. on the other hand, an adaptive organizational structure characterized by flexibility, agility, fewer hierarchy levels, decentralized decision-making process may also result in a high degree of uncertainty and stress for employees (petković & lukić, 2014). in times of organizational changes (reorganization, restructuring, redesign), employees take part in them and change their cognitive and behavioural spheres of personality by changing knowledge, standpoints, values, norms, rituals and conduct (wright, 2015). they may witness layoffs, relocations and decreases in the number of employees which may lead to unpleasant feelings and stress. mutual relations in the organization. employees spend most of the time working in different teams composed of members with different personality traits, beliefs, values standpoints, behavioural norms. should employees not fit into the team, different types of conflicts and stress may occur. there are numerous factors related to mutual relations among employees in an organization that may lead to stress. this particularly refers to: unconstructive criticism, hostility and animosity, racism, discrimination, inadequate information and lack of communication, burying and not resolving conflicts, insufficient 224 j. lukić, s. lazarević transparency in the organization, different forms and types of physical and psychological violence and harassment (stranks, 2005; choudhary, 2013). a source of stress may also be workplace mobbing, as a form of psychological harassment, belittling, harming one’s reputation, honor, human dignity and personal integrity at work. workplace mobbing may take form of inadequate behaviour and unacceptable verbal communication, gestures or written communication. some of its types/forms include not allowing an employee to express their opinion, ungrounded and constant criticizing and disparaging of the work results of an employee, interrupting an employee while talking, louder tone of voice in communication with employees, ignoring, making fun of, gossiping about, spreading false information and slandering an employee, excluding an employee from the social life of the organization, etc. (law, no. 36/2010; rulebook no. 62/2010). exposure to such forms of workplace mobbing is correlated with tiredness, exhaustion, tensions, anxiety, depression, apathy, insecurity, insomnia, and often psychosomatic symptoms (migraine, gastritis, ulcer, arrhythmia, hypertension, etc.) (petrović, ĉizmić & vukelić, 2014). employees’ roles in an organization. each employee in an organization has at least one role, but may also have more than one role at the same time. stress may be the result of indistinct roles or the consequence of the fact that employees are allocated multiple roles they must perform in a short period of time, as well as insufficiently clear assignment of responsibilities. moreover, stress may occur if an employee’s roles in an organization are changed too frequently, and they do not understand what is expected from them and how to fulfill those expectations (mccormack, 2014). career development. relocation to other positions, promotion to higher positions in an organizational structure and relocation to lower positions are the processes of organizational mobility that provide employees with opportunities to gain work experience and directly impact their career development. promotion, even though it represents a motive for more challenging work and higher salary, sometimes may be a source of stress for employees if they believe that they do not possess sufficient knowledge or expertise to perform new job which requires higher responsibility, and/or if they lack confidence. also, stress may be experienced by employees who got new responsibilities and competences, but no salary increase, as well as by those who expected a promotion but for some reason were not promoted. relocations to lower positions are experienced as completely degrading and this may be another source of workplace stress. leadership style. leadership style as a combination of various aspects of a leader’s behaviour toward their followers represents an important factor that determines the functioning of an organization and their employees (stojanović-aleksić, stamenković & milanović, 2016). a generally accepted statement that “employees don’t leave companies, they leave managers” shows the importance leadership style holds for employees – their satisfaction, morale and stress level (cranwell-ward & abbey, 2005). in cases of autocratic leadership style where employees are not allowed to participate in the decision making process, express their opinions and suggestions, the result is a negative and unproductive atmosphere. furthermore, if an employee does not receive the needed support and assistance from their superior in performing their daily tasks and activities, the feeling of dissatisfaction and stress will come with time. sources of workplace stress in service sector organisations 225 5. employees’ personality traits as a source of workplace stress the key personality traits of employees that may cause stress include: the psychological characteristics of employees, their age, working experience, and gender structure. the psychological characteristics of employees. the analysis of employees’ personality structure in service sector organizations indicates that specific personality traits, i.e. psychological dispositions have significant effects on the occurrence and experience of a stressful situation. this primarily refers to the degree of resistance to frustrating situations and the level of emotional stability and self-control in terms of behaviour, persistence, decisiveness, responsibility, high level of self-confidence and temperament type. every person is unique and their reactions to stress depend on their psychological personality traits (cranwell-ward & abbey, 2005). a person who in circumstances of a simple frustrating situation feels an increased degree of emotional excitement, has inadequate reactions and loses self-control is bound to experience such a situation as stressful. on the other hand, a person who is emotionally stable i.e. whose temperament traits enable them to keep the same situation under control and remain calm, shall not feel that such a situation is stressful. experiencing stress causes numerous physiological and psychological reactions that have negative effects on the motivation a person needs to fulfill goals. just as any activity requires “optimal” motivation, accompanied by psychophysiological and other dynamic processes in the organism, every surpassing of that optimal level is most often the source of stress that reflects on: the decrease and narrowing of cognitive abilities especially when it is required to make fast and right decisions that are part of any service-related activity. in addition, conscientious and responsible employees often disrupt the balance between work and private life by taking their job home and working from home. it is a frequent case that employees, even though they are at home, feel burdened by thinking about work and therefore cannot be fully dedicated to their family and friends and cannot take part in daily activities. it is a common opinion that without an adequate balance between work and private life, employees will not be able to fully dedicate themselves either to work or to private life, which leads to weaker performance in all areas. besides, mutual relations in an organization are also affected by the level of the emotional intelligence of employees – if employees, particularly managers, do not possess developed emotional intelligence, that may lead to numerous conflict situations and stress for all employees (radosavljević & đorċević, 2016). over the last few decades, special attention has been given to the “burnout syndrome” of employees at work as a response to long-term chronic stress due to the following three dimensions – emotional exhaustion, the loss of the feeling of personal identity (depersonalization) and the loss of the feeling of personal achievement at work (maslach & jackson, 1981; maslach, schaufeli & leiter 2001). age and work experience of employees. generally, young people who do not have work experience are exposed to a higher level of stress than those who have accumulated experience and have already built stress-fighting mechanisms (robbins & judge, 2017). over the past few years, it has been noticed that young people increasingly often sign specific contracts with their first employers that contain clauses on trial work, work for a definite period of time, part-time work, or temporary engagement for the needs of concrete projects (eichhorst et al., 2014), which causes stress due to job uncertainty. 226 j. lukić, s. lazarević gender structure of employees. women experience higher level of stress compared to men due to their role at home and in family life. they are expected to be competitive at work in terms of achieving goals, whereas at home they perform traditional roles related to nurturing family values. in addition, unequal salary levels, the evaluation of achieved performances and the manner of rewarding men and women for performing the same jobs causes increased stress levels for women (nagarajan, 2017). 6. implications of workplace stress on human resource management regardless of occupation, hierarchical position in organization, industry in which organization operates and its environment, it is even impossible to imagine a job that is not stressful. workplace stress has negative implications not only on employees, but on the entire organization. with the main purpose to minimize or eliminate negative effects and consequences of stress on employees, human resource managers may take various activities through:  job analysis and job description. based on the job description, by determining the nature and content of a job and identifying specific working conditions, it is possible to determine potential sources of stress with the aim of permanently working on providing conditions for achieving a “healthy” workplace from the organizational and psychological aspect. stress tolerance, as a measure which shows how effectively employees deal with high workplace stress, should be calculated for each occupation and examined in the process of job analysis.  recruitment and selection process. in many job advertisements it is stated that the ideal candidates for job are those who are able to “deal with stress”, “work in stressful environment”, “manage stressful situation”. in that way, employers put it clear to potential candidates that job sometimes may be stressful. furthermore, by using appropriate predictors (personality tests) in the selection process, human resource managers intend to choose such candidates whose psychological personality profiles and high stress tolerance will fully comply with the job requirements.  employees performance evaluation. stress has negative impact on productivity and overall performance of employees, and consequently organizations. in the process of performance evaluation, the results of employees which are under stress may be significantly lover comparing to results of employees which are not under stress. for that reason, human resource managers should identify the causes of poorly performance of employees, encourage and motivate employees during feedback interviews to cope with stress and point out to the various methods and techniques which can be valuable when dealing with stressful situations.  establishment of stress management programs. in many organizations, human resource managers started to implement different stress management methods and techniques with the aim of eliminating or reducing the sources of workplace stress and their intensity. one of the most popular approaches to stress management is the establishment of workplace wellness – programs for helping employees to stop smoking, manage their diabetes, weight, healthy lunch, and various programs which include physical activity of employees (gym, tai chi, fitness, yoga, meditation and relaxing). sources of workplace stress in service sector organisations 227  establishment a culture of zero-tolerance to bullying and mobbing. human resource managers should establish a culture of mutual respect and trust in the workplace in which all employees feel safe and comfortable. all bullying and mobbing activities in organization should be prevented and punished.  departure of employees from organization. when conducting exit interviews with employees who leave the organization, human resource managers should identify the main reasons for their leaving. if employees state that one of the reasons is workplace stress, organizations should implement set of methods, techniques and activities with the aim of preventing or minimizing stress. all of the above-mentioned activities of human resource managers are very important when dealing with workplace stress, especially having in mind that increasing number of employees feel that they are under stress (holton, barry & chaney, 2016), and all negative consequences that stress has on employees and organizations. conclusion this paper presented the key sources of workplace stress in service sector organizations from the perspective of job characteristics, organizational context and the psychological characteristics of employees. the key tendency of service sector organizations is to achieve efficiency, cost decrease, income growth, all of which impose high expectations and pressure 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(2017). workforce motivation as a factor of productivity. teme, 41(2), 503-516. izvori stresa kod zaposlenih u organizacijama iz uslužnog sektora stres, kao dominantna karakteristika savremenog društva, predstavlja ozbiljan problem mnogih organizacija, s obzirom na činjenicu da ima značajan uticaj na rezultate njihovog poslovanja. cilj ovog rada je da ukaže na izvore stresa sa kojima se suočavaju zaposleni u organizacijama iz uslužnog sektora. organizacije iz uslužnog sektora nastoje da povećaju efikasnost, smanje troškove, povećaju prihode, što pred zaposlene nameće velika očekivanja i određenu dozu pritiska. ključni izvori stresa koji postoje u ovim organizacijama su prikazani iz perspektive karakteristika posla, organizacionog konteksta i karakteristika ličnosti zaposlenih. pregled ključnih izvora stresa iz gore navedenih perspektiva omogućava menadžerima ljudskih resursa holistički pristup problemu stresa, što je od velikog značaja prilikom koncipiranja metoda i tehnika za upravljanje stresom na radnom mestu. kljuĉne reĉi: stres na radnom mestu, zaposleni, posao, usluge, organizaciono ponašanje facta universitatis series: economics and organization vol. 15, n o 2, 2018, pp. 111 123 https://doi.org/10.22190/fueo1802111r © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the role of technological readiness in the global competitiveness of serbian economy  udc 334.34:62(497.11+497) vladimir radivojević 1 , bojan krstić 2 , tanja stanišić 3 1 regional centre niš, ministry of defense, serbia 2 faculty of economics, university of niš, serbia 3 faculty of hotel management and tourism in vrnjačka banja, university of kragujevac, serbia abstract. technological readiness has been an important determinant of the economic and social development in recent decades. therefore, technological readiness has a substantial impact on the global competitiveness of national economies in the contemporary business environment. the purpose of this paper is to evaluate the level of serbian economy competitiveness in terms of technological readiness and to identify the critical factors for its further development. the analysis is based on the data published by world economic forum in annual the global competitiveness reports in the period from 2013 to 2017. the research is conducted through comparative analysis and benchmarking method. the results show significant deviations and negative trend of technological readiness of serbia in comparison not only with european countries but alsowith balkan countries. the conclusions of this research may serve as the directions for technological readiness policy makers in serbia and other balkan countries. key words: technological readiness, competitiveness, serbia, balkan countries, european countries. jel classification: q55, o33, o57 introduction technological readiness is one of key growth elements in every national economy. it is almost impossible to imagine any aspect of human activity without the use of technology tools. received february 07, 2018 / revised april 12, 2018 / accepted april 17, 2018 corresponding author: vladimir radivojević ministry of defence, regional centre niš, serbia e-mail: vladimir.radivojevic@ymail.com 112 v. radivojević, b. krstić, t. stanišić furthermore, technology has a substantial role in creating the way of living, working, communicating, and playing in the modern society. considering such important role in social life and business operations, the results achieved in technological readiness largely define the quality of citizens’ life and the attractiveness of the economy in a particular country. consequently, the level of competitiveness in terms of technological readiness to a great extent determines the general competitiveness of the national economy in a globalised world. these are the key reasons why technological readiness requires special treatment in designing the strategic development of a country and why it should be monitored and improved in each national economy that advocates an open development model. the level of technological readiness development varies from region to region, i.e. from country to country. europe has been the leading region in the field of technological readiness in the world for many years. according to world economic forum (2017-2018), there are seven european countries in the world’s top ten most developed economies in terms of technological readiness. however, although europe as a region achieves impressive results in this area, the level of technological readiness development diverges among european countries. furthermore, there are large differences of the development level even within the european union (eu). thus, it is expected that greater differences exist between eu countries and other european countries that are not eu members, such as some balkan countries. the intention of this paper is to evaluate the level of competitiveness of serbia and other balkan countries in the field of technological readiness, through benchmarking the results achieved by balkan countries with the results achieved by top european countries. the purpose is to identify the factors of technological readiness that are critical for competitiveness of serbia and other balkan countries, i.e. factors that require a priority in the development policy of balkan countries with the aim of bridging the gap with the top european destinations in the future. the study is useful to policy makers of balkan countries in the process of defining development goals and implementing strategic plans in the field of technological readiness. this paper contains four separate segments. the first segment of the paper provides a theoretical background and literature review. research methodology and data basis are defined in the second segment of the paper. the research results are presented and discussed in the third segment. the last segment summarizes the conclusions and recommendations for improving the technological readiness in serbia and other balkan countries. 1. theoretical background and literature review countries and companies in the globalized market are permanently faced with the need to change and develop its structures, processes, and technologies. continuous improvement of these segments provides survival in the market and gaining competitive advantage. at almost each segment of the country and company strategic planning there are technologyrelated decisions as well as the use of technologies with different characteristics in nature (oztemel & polat, 2006; petković & lukić, 2014). these decisions have a huge impact on all their business operations. there are numerous studies in the economic literature that examine some of the aspects of technological readiness. one of these aspects refers to e-readiness, which is defined as “the ability of a country, enterprise or organizational unit to be prepared, willing to adopt, use and benefit from e-innovations such as e-business, e-government, e-procurement, elearning, etc.” (lou, 2010, quoted in: aboelmaged, 2014, p. 639). most of the studies the role of technological readiness in the global competitiveness of serbian economy 113 examine e-readiness on the country-level (bui, sankaran & sebastian, 2003; mutula & van brakel, 2006; hanafizadeh et al., 2009; seyed & sattary, 2009), but there are also studies which test the impact of e-readiness on the firm-level (naseebullah et al., 2011; heeks et al. 2011; muafi et al., 2012; aboelmaged, 2014; gilabert et al., 2014). the authors of these studies argue that e-readiness is one of the crucial factors for improving performances and competitiveness of companies, industries, and even the whole economy. an important prerequisite for successful development of technological readiness (on the country-level or firm-level) is the existence of efficient information and communication technologies (ict). therefore, there is a lot of empirical evidences in the literature that examines the influence of ict on business operations and firms’ performances, but also on productivity and competitiveness of national economies. some of them analyse the impact of the ict on development and competitiveness of the hospitality sector (siguaw, enz & namasivayam, 2000; ham, kim & jeong, 2005; mosleh & shannak, 2009), tourism industry (buhalis & zoge, 2007), and hotel sector (avcikurt et al., 2011; mihali et al., 2015). research findings of these studies point out to the importance of ict in simpler, lowcost, and better service provision in these sectors. other studies (ray et al., 2004; gursoy & swanger, 2007; spyros et al., 2011) are related to different factors of ict which represent important resources in the process of gaining sustainable competitive advantage. for example, piccoli (2004), mcafee & brynjolfsson (2008), and lukić & mirković (2014) consider that investment in ict is a facility to enhance productivity and reduce costs. opposite to the above-mentioned studies, there are researches as mihalič, praničević & arnerić (2015) which are based on the so-called ict paradox theory. the authors of this theory argue that there is no significant impact of ict investments on firms’ value, firms’ performance, and its competitive advantage (willcocks & lester, 1999; carr, 2004; aral et al., 2006; lee & connolly, 2010). however, dominant part of the technological readiness researches confirm its great significance in economic and social development of national economies, but also in successful business operations of firms in a globalized market. 2. research methodology and data basis the aim of this research is to analyse the level of serbian economy competitiveness in terms of technological readiness, but also to identify the critical factors for improving the competitive position of serbia in this field in the future. the identification and analysis of factors that determine technological readiness competitiveness of the national economies are based on the methodology of the world economic forum. secondary data published in the global competitiveness report in the period from 2013-2014 to 2017-2018 represent the data basis for the research. the world economic forum (wef) in its global competitiveness report (2017-2018, p. 11) define competitiveness as „the set of institutions, policies, and factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the economy can achieve“. based on this definition, wef ranks countries according to their results (scores in the interval from 1 to 7) that are summarized in the global competitiveness index (gci). the gci is a composite index that combines 114 indicators which are grouped in 12 pillars. the technological readiness pillar is the ninth pillar of gci, by which wef captures key technological aspects of national competitiveness in one measure that allows comparisons across countries and over time. it consists of the following 7 indicators: 114 v. radivojević, b. krstić, t. stanišić (1) availability of latest technologies; (2) firm-level technology absorption; (3) foreign direct investment (fdi) and technology transfer; (4) internet users (% pop.); (5) fixed-broadband internet subscriptions (/100 pop.); (6) internet bandwidth (kb/s/user) and (7) mobile-broadband subscriptions (/100 pop.). the analysis of technological readiness competitiveness of serbia in this research does not pretend to specify and formulate a unified recommendation for technological readiness development policy. the purpose of this paper is to identify the critical factors of technological readiness competitiveness of serbia and other balkan countries. benchmarking of the results achieved by balkan and top ten european countries is used to determine the critical indicators as segments of the technological readiness development policy of serbia and other balkan countries in the future period. the following ten balkan countries are included in the analysis: albania, bosnia and herzegovina, bulgaria, croatia, greece, macedonia, montenegro, romania, serbia, and slovenia. since the study involves ten balkan countries, the authors define the following group of top ten european countries (according to global rank in terms of technological readiness) as a benchmarking group: denmark, finland, germany, iceland, luxembourg, netherlands, norway, sweden, switzerland, and the united kingdom. 3. research results and discussion 3.1. analysis of score and rank of serbia in the technological readiness pillar the analysis of technological readiness competitiveness of serbia is based on data about score and rank of this pillar in gci. table 1 indicates the score and rank of serbia in the technological readiness pillar in the period from 2013-2014 to 2017-2018. table 1 the score and rank of serbia in technological readiness pillar of gci (from 2013-2014 to 2017-2018) year number of surveyed countries technological readiness pillar changes in technological readiness pillar score rank score rank 2013-2014 148 3.9 60 2014-2015 144 4.4 49 + 0.5 + 11 2015-2016 140 4.5 51 + 0.1 2 2016-2017 138 4.1 70 0.4 -19 2017-2018 137 4.2 72 + 0.1 2 total* + 0.3 12 * note: the results obtained by comparison of score and rank in 2013-2014 and in 2017-2018 source: world economic forum, the global competitiveness report, 2013-2014, 2014-2015, 2015-2016, 2016-2017, 2017-2018 table 1 shows that serbia is located in the first half of the global list in terms of technological readiness in the period from 2013-2014 to 2015-2016, while in the period from 2016-2017 to 2017-2018 it belongs to the group of countries located in the second the role of technological readiness in the global competitiveness of serbian economy 115 half of the global list. it is also important to note that serbia has made moderate oscillations of results in the technological readiness pillar in the mentioned period (from 2013-2014 to 2017-2018). the score ranged from 3.9 to 4.5, while the rank ranged from 49 to 72, which is obvious considering that the number of surveyed countries in that period varied from 137 to 148. it is also obvious that serbia improved its score by 0.3, and at the same time lowered its ranking by 12 positions. data presented in table 2 indicate the score and rank of serbia in gci in the period from 2013-2014 to 2017-2018. comparison of score and rank of technological readiness pillar (table 1) and score and rank of gci (table 2) provides insight into its interdependence, i.e. provides assessment of the impact of technological readiness pillar onto the global competitiveness of serbia. table 2 the score and rank of serbia in gci (from 2013-2014 to 2017-2018) year number of surveyed countries gci changes in gci score rank score rank 2013-2014 148 3.8 101 2014-2015 144 3.9 94 + 0.1 + 7 2015-2016 140 3.9 94 2016-2017 138 4.0 90 + 0.1 + 4 2017-2018 137 4.1 78 + 0.1 + 12 total* + 0.3 + 23 * note: the results obtained by comparison of score and rank in 2013-2014 and in 2017-2018 source: world economic forum, the global competitiveness report, 2013-2014, 2014-2015, 2015-2016, 2016-2017, 2017-2018 analysis and comparison of data from table 1 and table 2 show that technological readiness pillar has a strong impact on the global competitiveness of serbia in the period from 2013-2014 to 2015-2016. in other words, changes in score and rank of technological readiness pillar (table 1) and changes in score and rank of gci (table 2) in the mentioned period are almost the same. however, this conclusion cannot be drawn from the same analysis for the period from 2016-2017 to 2017-2018. it is graphically illustrated in figure 1. 40 50 60 70 80 90 100 110 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 technological readiness pillar gci fig. 1 rank of serbia in the technological readiness pillar and gci (from 2013-2014 to 2017-2018) source: author’s presentation based on data from table 1 and table 2 116 v. radivojević, b. krstić, t. stanišić figure 1 clearly indicates the correlation between technological readiness competitiveness and global competitiveness of serbia in selected years. for example, a rank increase of technological readiness competitiveness for 11 places in 2014-2015 is followed by a rank increase of gci for 7 places in the same year. after that, a little decrease of technological readiness competitiveness for 2 places in 2015-2016 had passed without changing gci rank. however, next year’s ranking of serbia in both competitiveness categories indicates a completely different correlation between them. a rank decrease of technological readiness competitiveness for 19 places in 2016-2017 but also for 2 places in 2017-2018 is followed by a rank increase of gci for 4 places in 2016-2017 and 12 places in 2017-2018. it is a very important finding that the comparison of the first and the last year in the observed period (from 2013-2014 to 2017-2018) shows that serbia achieved a rank decrease in technological readiness pillar for 12 places and increase in gci for 23 places, whereby the score was increased for 0.3 in both competitiveness categories. although the number of countries covered by wef reports (from 2013-2014 to 2017-2018) varied from 137 to 148, previous finding implies that the technological readiness represents a very dynamic competitiveness factor that requires rapid development. in other words, although serbia has improved the results in the area of technological readiness (for 0.3), its competitiveness in this area has dropped (for 12 places). this points to the fact that other countries have made much more progress in the observed period. it is also important to note that the level of technological readiness competitiveness of serbia is higher than the level of its global competitiveness. nevertheless, there is a trend of constant convergence of these competitiveness categories in recent years. the result of this convergence is that serbia is positioned in 72 nd place in the world with a score of 4.2 according to the technological readiness pillar in 2017-2018, which is only for 6 places better position than in gci (78 th place and a score of 4.1). it is a big difference compared to 2013-2014, when serbia reached 60 th place (score 3.9) in technological readiness competitiveness and 101 st place (score 3.8) in global competitiveness. in order to identify the reasons that led to such global position of serbia in terms of technological readiness, it is necessary to analyse all indicators of this pillar. table 3 represents score and rank of serbia in technological readiness pillar by its indicators in the period from 2013-2014 to 2017-2018. data presented in table 3 show that the most significant increase of technological readiness competitiveness in the period from 2013-2014 to 2017-2018 is recorded in the availability of latest technologies indicator (rank growth for 31 places and score growth for 0.3). also, a positive trend is achieved in the following indicators: firm-level technology absorption (rank growth for 20 places), fixed-broadband internet subscriptions/100 pop. (rank growth for 15 places), fdi and technology transfer (rank growth for 14 places), and internet users % pop. (rank growth for 11 places). however, these remarkable results could not compensate negative trend in other indicators. the great decrease of technological readiness competitiveness in the observed period is recorded in the internet bandwidth kb/s/user indicator (rank decline for even 59 places and score decline for 44.2). beside internet bandwidth, the negative trend is also recorded in the mobile-broadband subscriptions/100 pop. (rank decline for 14 places), although the score is increased for 27.2. the role of technological readiness in the global competitiveness of serbian economy 117 table 3 the score and rank of serbia in technological readiness pillar by its indicators (from 2013-2014 to 2017-2018) indicators of technological readiness pillar 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 change (2013-2014 – 2017-2018) score rank score rank score rank score rank score rank score rank i1 availability of latest technologies 4.1 118 4.2 106 4.0 107 4.1 103 4.4 87 + 0.3 + 31 i2 firm-level technology absorption 3.7 137 3.8 127 3.8 127 3.8 122 3.9 117 + 0.2 + 20 i3 fdi and technology transfer 3.9 115 4.0 108 3.8 110 3.7 109 3.9 101 + 14 i4 internet users % pop. 48.1 67 51.5 65 53.5 65 65.3 56 67.1 56 + 19 + 11 i5 fixed-broadband internet subscriptions /100 pop. 10.2 61 13.9 49 15.6 50 16.8 52 18.9 46 + 8.7 + 15 i6 internet bandwidth kb/s/user 70.5 29 108.9 26 112.4 26 20.5 90 26.3 88 44.2 59 i7 mobile-broadband subscriptions /100 pop. 40.2 41 54.8 35 61.1 41 71.8 39 67.4 55 + 27.2 14 source: world economic forum, the global competitiveness report, 2013-2014, 2014-2015, 2015-2016, 2016-2017, 2017-2018 3.2. analysis of score and rank of technological readiness pillar of the top 10 european countries as a group for benchmarking in order to analyse the technological readiness competitiveness of balkan countries, it is relevant to find the competitive position of the top 10 european countries with the best results in technological readiness. the top 10 european countries are the benchmarking group of countries which serves for comparison with 10 balkan countries. table 4 shows the scores of top 10 european countries according to indicators within the technological readiness pillar (2017-2018). table 4 the score of top 10 european countries in the indicators of technological readiness pillar (2017-2018) in d ic at o r l u x em b o u rg s w it ze rl an d n et h er la n d s u n it ed k in g d o m s w ed en g er m an y ic el an d n o rw ay d en m ar k f in la n d a v er ag e sc o re o f to p 1 0 e u ro p ea n c o u n tr ie s i1 6.3 6.5 6.4 6.3 6.5 6.1 6.3 6.6 6.0 6.6 6.36 i2 5.7 5.9 5.9 5.6 6.0 5.7 5.9 5.8 5.7 5.9 5.81 i3 5.8 5.4 5.5 5.5 5.3 5.4 4.3 5.1 4.9 4.8 5.2 i4 97.5 89.4 90.4 94.8 91.5 89.6 98.2 97.3 97.0 87.7 93.34 i5 36.7 46.3 42.2 39.2 36.3 38.1 37.6 40.4 42.8 31.2 39.08 i6 8,397.9 269.2 196.1 449.1 505.6 107.5 997.8 269.0 239.9 216.4 1,164.85 i7 90.2 103.7 87.8 91.4 125.2 80.2 104.0 101.8 124.2 153.0 106.50 trp * 6.5 6.4 6.3 6.3 6.3 6.2 6.2 6.1 6.1 6.0 6.24 1 2 3 4 5 8 10 11 12 16 * note: technological readiness pillar (upper row – score; lower row – global rank) source: world economic forum, the global competitiveness report, 2017-2018 118 v. radivojević, b. krstić, t. stanišić with seven countries in the world’s top 10, europe continues to dominate the rankings of technological readiness (table 4). furthermore, all of the world’s top 5 countries are european countries. luxembourg records the highest score of technological readiness pillar among 137 countries (6.5), followed by second-ranked switzerland (6.4), third-ranked netherlands (6.3), fourth-ranked united kingdom (6.3), and fifth-ranked sweden (6.3). the first five european countries are followed by germany, iceland, norway, denmark, and finland. the scores of top 10 european countries presented in table 4 show that norway and finland record the best score in i1 (availability of latest technologies), sweden is the best in i2 (firm-level technology absorption), luxembourg in i3 (fdi and technology transfer) and in i6 (internet bandwidth kb/s/user), iceland in i4 (internet users % pop.), switzerland in i5 (fixed-broadband internet subscriptions/100 pop.), and finally finland is the best in i7 (mobile-broadband subscriptions/100 pop). 3.3. comparative analysis of indicators in technological readiness pillar in the balkan countries with the aim of analysing the achievements of serbia and other balkan countries in the terms of technological readiness, the scores of all seven indicators within the technological readiness pillar (2017-2018) of balkan countries are presented in table 5. the information table 5 the scores of indicators within the technological readiness pillar of balkan countries (2017-2018) in d ic at o r s lo v en ia b u lg ar ia c ro at ia m o n te n eg ro g re ec e r o m an ia m ac ed o n ia * * b o sn ia a n d h er ze g o v in a s er b ia a lb an ia t h e h ig h es t sc o re o f b al k an c o u n tr ie s a v er ag e sc o re o f b al k an c o u n tr ie s t h e h ig h es t sc o re o f th e to p 1 0 e u ro p ea n c o u n tr ie s a v er ag e sc o re o f th e to p 1 0 e u ro p ea n c o u n tr ie s 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 i1 5.7 4.7 4.8 4.5 4.9 4.7 4.9 4.5 4.4 4.4 5.7 slovenia 4.75 6.6 nor/fin 6.36 i2 4.9 4.5 4.2 4.3 4.3 4.2 4.5 4.2 3.9 4.4 4.9 slovenia 4.34 6.0 sweden 5.81 i3 4.2 4.7 3.7 4.4 3.7 4.1 4.1 3.8 3.9 4.9 4.9 albania 4.15 5.8 luxembourg 5.20 i4 75.5 59.8 72.7 69.9 69.1 59.5 70.4 69.3 67.1 66.4 75.5 slovenia 67.97 98.2 iceland 93.34 i5 28.3 23.3 24.6 18.5 32.5 20.7 17.2 17.4 18.9 8.2 32.5 greece 20.96 46.3 switzerland 39.08 i6 239.2 175.9 119.0 202.9 68.7 155.5 53.9 98.5 26.3 57.0 239.2 slovenia 119.69 8,397.9 luxembourg 1,164.85 i7 62.3 88.4 79.7 60.7 51.3 73.7 56.2 37.4 67.4 52.6 88.4 bulgaria 62.97 153.0 finland 106.50 trp * 5.4 5.1 5.0 4.9 4.8 4.8 4.3 4.3 4.2 4.1 35 39 43 48 50 51 61 69 72 78 * note: technological readiness pillar (upper row – score; lower row – global rank) ** note: data for macedonia (excluded in wef 2017-2018) are from wef 2016-2017 source: world economic forum, the global competitiveness report, 2016-2017, 2017-2018 legend: indicates that the score is below the average score of balkan countries indicates that the score is above the average score of balkan countries the role of technological readiness in the global competitiveness of serbian economy 119 serves to understand the relative position of serbia in the group of balkan countries and european countries, according to each indicator compared to the highest score and the average score of the balkan countries, as well as the highest score and the average score of the top 10 european countries. data presented in table 5 indicate that the average score of every indicator in the technological readiness pillar of balkan countries lags much behind the average score of these indicators of top 10 european countries (see column 13 and 15). serbia is the ninthranked country out of 10 balkan countries. according to these data, it is obvious that balkan countries and especially serbia have many options for improvement of almost all their performances that determine the technological readiness competitiveness. based on the previous analysis, it is possible to identify the list of critical indicators of technological readiness pillar in balkan countries. those indicators need to be priority in development policies and improvements as soon as possible in order to reach the average score of the group. the list of critical indicators of technological readiness pillar in balkan countries is shown in table 6. table 6 indicators within the technological readiness pillar which require priority of development policy by balkan countries (2017-2018) country the critical indicators which show the deviations from the average score of the group of balkan countries number of critical indicators slovenia i7 1 bulgaria i1, i4 2 croatia i2, i3, i6 3 montenegro i1, i2, i5, i7 4 greece i2, i3, i6, i7 4 romania i1, i2, i3, i4, i5 5 macedonia i3, i5, i6, i7 4 bosnia and herzegovina i1, i2, i3, i5, i6, i7 6 serbia i1, i2, i3, i4, i5, i6 6 albania i1, i4, i5, i6, i7 5 source: author’s calculation analysis of data presented in table 6 shows that serbia and bosnia and herzegovina, with 6 critical indicators, are the worst positioned balkan countries according to the total number of deviations below the average score of technological readiness pillar (observed by indicators). albania and romania show deviations in 5 indicators. macedonia, greece, and montenegro have 4 critical indicators. croatia has poorer performances in 3 indicators. bulgaria shows deviations in 2 critical indicators, while slovenia has only one critical indicator. all mentioned countries must necessarily make a lot of effort to make improvements that bring them closer to the average score of the balkan countries. this particularly refers to serbia and bosnia and herzegovina. beside above analysis, it is very important to identify indicators in which most balkan countries record a deviation. table 6 indicates that internet users (i4) need urgent actions in four balkan countries. all other indicators (availability of latest technologies – i1, firm-level technology absorption – i2, fdi and technology transfer – i3, fixed-broadband internet subscriptions – i5, internet bandwidth – i6, mobile-broadband subscriptions – i7) require intervention and improvement by the majority of balkan countries (6 out of 10 countries). 120 v. radivojević, b. krstić, t. stanišić 3.4. benchmarking of technological readiness competitiveness of balkan countries in relation to the top 10 european countries the goal of this research segment is to analyse critical indicators in the technological readiness pillar of balkan countries with special emphasis on serbia. this analysis implies the comparison of the average score of the indicators in a technological readiness pillar of the balkan countries and top 10 european countries. balkan countries recorded worse performances than top 10 european countries in all 7 indicators of the technological readiness pillar according to average score. the difference between the average score of the top 10 european countries and balkan countries isachieved as follows (columns 13 and 15 in table 5): internet bandwidth (1,045.16 kb/s/user), fixedbroadband internet subscriptions/100 pop. (18.2), mobile-broadband subscriptions/100 pop. (43.53), internet users (25.37 % pop.), availability of latest technologies (1.61), firm-level technology absorption (1.47), and fdi and technology transfer (1.05). the important conclusion of this benchmarking is that all indicators in the technological readiness pillar of all balkan countries deviate from the average score of the top 10 european countries. that indicates complete inferiority of technological readiness performances of balkan countries in comparison with the top 10 european countries. the purpose of such benchmarking is to identify benchmark standards that are relevant to guiding and defining development policy, goals, and actions (bendell, boulter & gatford, 1997; codling, 1998; bogetoft, 2012). benchmark standards are target levels that each balkan country can set in the technological readiness development strategy on the national level. such benchmarking allows determination of priorities in development policy for each analysed country. the criteria are based on the urgency or time priority. firstly, balkan countries should improve indicators that deviate from the average score of the balkan countries. when they meet that, the aim should be the average score of the top 10 european countries. after reaching that score, they could set a higher goal – the level of performance of the best countries in the group of top 10 european countries. systematization of indicators within the technological readiness pillar according to the priority of their necessary improvement by balkan countries is presented in table 7. table 7 specification of indicators within the technological readiness pillar according to priority of their necessary improvement by balkan countries country the first level priority of indicators – the benchmark is the average of balkan countries the second level priority of indicators the benchmark is the average of top 10 european countries slovenia i7 i1, i2, i3, i4, i5, i6 bulgaria i1, i4 i2, i3, i5, i6, i7 croatia i2, i3, i6 i1, i4, i5, i7 montenegro i1, i2, i5, i7 i3, i4, i6 greece i2, i3, i6, i7 i1, i4, i5 romania i1, i2, i3, i4, i5 i6, i7 macedonia i3, i5, i6, i7 i1, i2, i4 bosnia and herzegovina i1, i2, i3, i5, i6, i7 i4 serbia i1, i2, i3, i4, i5, i6 i7 albania i1, i4, i5, i6, i7 i2, i3 source: author’s presentation the role of technological readiness in the global competitiveness of serbian economy 121 grouping of indicators into different priority levels as shown in table 7 provides guidance in defining priorities into technological readiness development strategy of each balkan country. the column for third level priority of indicators (for which the benchmark is the best country among top 10 european countries) does not exist in table 7, because there is no balkan country that exceeds the average score of top 10 european countries in any indicator of the technological readiness pillar. it is found that serbia as target country of this analysis has six critical indicators in the first level priority, while slovenia as best-ranked country in the balkan group has one indicator in the first level priority (table 7). a number of critical indicators of other balkan countries in the first level priority varies from two (bulgaria) to six (bosnia and herzegovina). all other indicators of the technological readiness pillar are in the second level priority, for which the benchmark is the average of top 10 european countries. conclusion a general conclusion that can be recognized in this paper is that the level of technological readiness competitiveness of serbian economy is higher than the level of its global competitiveness, but also that there is a trend of constant convergence of this competitiveness categories in recent years. although serbia has improved the results in the area of technological readiness in last five-year period from 2013-2014 to 2017-2018 (for 0.3), its global competitiveness in this area has dropped for twelve places (it should be noted that the number of countries covered by wef reports in the period from 2013-2014 to 2017-2018 varied from 137 to 148). this points to the fact that other countries have made much more progress in the observed period. it implies that the technological readiness represents a very dynamic competitiveness factor that requires the rapid development of serbian economy in the future. research findings of benchmarking method that is applied in the paper point out the competitive factors (indicators) that need to be improved by serbia and other balkan countries and indicate the priority of its improving. the important conclusion of the research is that the average score of all indicators in the technological readiness pillar of balkan countries is much lower than the average score of the top 10 european countries. serbia and bosnia and herzegovina, with six critical indicators in the first level of priority, are the worst positioned balkan countries according to the total number of deviations below the average score of indicators in technological readiness pillar. slovenia is the best-ranked country in the balkan group, with only one indicator in the first level priority. internet users as an indicator of technological readiness pillar need urgent actions in four balkan countries including serbia, while all other indicators (availability of latest technologies, firm-level technology absorption, fdi and technology transfer, fixed-broadband internet subscriptions, internet bandwidth, and mobile-broadband subscriptions) require intervention and improvement by six out of ten balkan countries. after achieving improvements in these indicators which are in the first level of priority, balkan countries should strive to advance the indicators which should reach the average of the top 10 european countries. 122 v. radivojević, b. krstić, t. stanišić references aboelmaged, g.m. 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(1999). beyond the it productivity paradox: assessment issues. chichester: wiley. world economic forum (2013-2014, 2014-2015, 2015-2016, 2016-2017, 2017-2018). the global competitiveness report. geneva: world economic forum, retrieved from: https://www.weforum.org/reports, accessed on: 10 february 2018. uloga tehnološke spremnosti u globalnoj konkurentnosti privrede srbije tehnološka spremnost predstavlja važnu determinantu ekonomskog i društvenog razvoja poslednjih decenija. stoga, tehnološka spremnost značajno utiče na globalnu konkurentnost nacionalnih ekonomija u savremenom poslovnom okruženju. cilj ovog rada je da utvrdi nivo konkurentnosti privrede srbije u pogledu tehnološke spremnosti i da identifikuje kritične faktore za njen budući razvoj. analiza se zasniva na podacima svetskog ekonomskog foruma, objavljenim u godišnjim izveštajima o globalnoj konkurentnosti u periodu od 2013. do 2017. godine. istraživanje je realizovano primenom komparativne analize i metode benčmarkinga. rezultati su pokazali značajna odstupanja i negativan trend tehnološke spremnosti srbije ne samo u poređenju sa evropskim zemljama, već i sa balkanskim zemljama. zaključci ovog istraživanja mogu poslužiti kao smernice donosiocima odluka u oblasti politike razvoja tehnološke spremnosti srbije i drugih balkanskih zemalja. ključne reči: tehnološka spremnost, konkurentnost, srbija, zemlje balkana, zemlje evrope. 8284 facta universitatis series: economics and organization vol. 19, no 1, 2022, pp. 27 37 https://doi.org/10.22190/fueo210920003o © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper heterogeneous dependence of oil-food price dynamics in africa's net oil-exporting countries1 udc 622.323:338.5(6) 338.439:338.5(6) jimoh sina ogede, felix o. ajayi olabisi onabanjo university, department of economics, ago iwoye, nigeria orcid id: jimoh sina ogede https://orcid.org/0000-0002-7592-4406 felix o. ajayi https://orcid.org/0000-0003-3260-133x abstract. the determinants of food prices have attracted sizeable debates among scholars over the last three decades. however, many of these studies ignore the possibility that the impact of oil prices on food prices could vary across the food price distribution. the paper employs a quantile regression technique to ascertain whether food prices respond to the potential heterogeneous impact of crude oil price changes in the six selected african net oil-exporting countries. the coefficient of negative oil price shocks in the panel ols model is insignificant and positive at the 5% significance level. in contrast, the coefficient of positive oil price shocks significantly affects food prices for the chosen african countries. the quantile regression analysis's empirical findings highlight the diverse dependence effects of various ranges on food prices. all coefficients are non-significant across all quantiles for negative oil price shocks, a conclusion consistent with panel least squares estimate results. besides, the findings prove that positive changes in oil prices significantly affect the magnitude of food prices in selected african countries. the article concludes that the influence of crude oil price variations on food prices is diverse and positive across quantiles for a subset of africa's net oilexporting countries. the findings of this study could have a crucial policy and economic implications for economic agents and stakeholders in diverse fiscal environments. as a result, economic agents must make timely decisions to respond to the effects of oil price uncertainty on africa's food market. key words: oil prices, food prices, heterogeneity effects, quantile regression, africa jel classification: q17, q41, o55, c33 received september 20, 2021 / revised march 27, 2022 / accepted march 31, 2022 corresponding author: jimoh sina ogede olabisi onabanjo university, department of economics, wvf9+6r2, 120107 ago iwoye, nigeria | e-mail: sinaogede@oouagoiwoye.edu.ng https://orcid.org/0000-0002-7592-4406 https://orcid.org/0000-0003-3260-133x mailto:sinaogede@oouagoiwoye.edu.ng 28 j. s. ogede, f. o. ajayi 1. introduction global household food prices have generated headlines and raised public anxiety in the aftermath of the covid-19 pandemic. africa is particularly vulnerable to the covid-19 pandemic consequences on four fronts: rising food costs, increasing gasoline prices, decreased tourism earnings, and possibly increased barriers to accessing foreign capital inflows. recent data indicates that covid-19 pandemic has resulted in skyrocketing domestic gasoline prices and a significant increase in consumer food prices, albeit perceptions differ across africa. indeed, rising food and oil prices have begun to trickle down to domestic consumer prices, as retailers, unable to absorb the additional costs, have passed them on to customers. energy costs are increasing, putting a strain on the entire food chain. food prices may rise as demand for oil increases, as it is required to operate agricultural equipment, transport agricultural inputs and produce, and meet end-user demand. similarly, expenditures associated with food imports would result in outflows during periods of rising oil prices, exerting upward pressure on domestic food prices. several oil-producing countries have adversely affected agriculture, notably nigeria, due to increased food costs, severe weather, and reduced farming operations. as a result, crude oil prices are a substantial source of volatility in food prices, and there are serious worries about the domestic policy space available to sustainably solve these problems. as a result, it is necessary to assess the impact of the diverse reliance on oil and food price dynamics in selected african nations. nevertheless, a slew of research has concluded that the price of crude oil has a considerable effect on food prices (see alghalith, 2010; ciaian & kances, 2011; kyung & jeong, 2011; peri & baldi, 2012; nazlioglu & soytas, 2012; baumeister & kilian, 2013; pal & mitra, 2018; koirala et al., 2015; nicola et al., 2016; jadidzadeh & serletis, 2018; taghizadeh-hesary, rasoulinezhad & yoshino, 2018). baumeister and kilian (2013) argue that oil price changes drive food prices. in contrast, studies such as reboredo (2012), gardebroek and hernandez (2013), zhang and chen ((2014), and fowowe (2016), amongst others, confirm neutrality between oil prices and food prices. another viewpoint focuses on the transmission mechanism between crude oil and food prices, which operates continuously in diverse phases. also, recent studies like ibrahim (2015), george and ogede (2020), and adeosun, olayeni, and ayodele (2021) employ nardl methodology to gauge the asymmetries effect of changes in oil prices on explanatory variables. these studies provide conflicting outcomes. thus, an unexpected surge in the actual cost of oil was mirrored by deliberate increases in agricultural output prices in the united states (baumeister & kilian, 2013). also, adeosun et al. (2021) establish a significant oil-food relationship that changes across frequencies. the authors also contend that oil price behaviour may have exhibited structural breaks, suggesting reasons for gauging the distributional effect of oil price shocks. the inconsistent outcomes regarding the oil price and food price debates raise questions about how much intensifying oil prices can explain the increase in food prices. while empirical evidence suggests that asymmetric reactions exist in oil prices and inflation (george & ogede, 2020), the empirical evidence for the link between oil prices and food prices appears to be mixed. methodologically, the literature reveals numerous explanations for various outcomes, ranging from estimation techniques, sample scope, campaigns for substitute energy sources, and monetary policies. besides, the current study contends that these empirical outcomes may be biased, assuming that the distributional heterogeneity of food price returns is ignored. in theory, oil-food price shocks significantly impact society since food accounts for a more significant proportion of poorer customers' https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr1 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr9 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr24 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr31 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr28 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr23 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr29 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr19 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr32 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr15 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr38 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr14 heterogeneous dependence of oil-food price dynamics in africa's net oil-exporting countries 29 demand; a global increase in food prices substantially influences inflation in poorer countries. the same can be said for energy prices, which have skyrocketed. rising food and oil prices on trade terms vary by nation. however, it has been positive in nearly half of the oil-producing countries, particularly those exporting commodities. the impact varies by the economic group; for example, farmers who grow and export commodities may benefit, but urban consumers who use imported food and oil may suffer. hence, given the significance of oil-food debates and the current happenings amid covid-19, it is expedient to examine whether crude oil price changes drive food price changes in africa and whether the effects vary across time and the distribution of food prices in africa. given the preceding, the policy thrust of this study is to gauge the heterogeneous dependence of oil-food price dynamics in the net oil-exporting countries. these countries include algeria, angola, gabon, south africa, egypt, morocco, and nigeria. these countries also import refined products made from crude oil (ogede, george andadekunle, 2020), and their primary source of revenue is crude oil exports. in combination with the covid-19 pandemic, the fluctuating oil prices are a danger to these countries' consumer pricing (ogede, 2020a). besides, the current events have crippled economies and shattered livelihoods, rendering food and health services exorbitant or inaccessible. thus, to our knowledge, the quantile regression model has been validated in studies such as mehnatfar, khanian, and azari (2018), lahiani (2018), nusair and olson (2019), ogede (2020a), and ogede and adegboyega (2021) that examine inflation and exchange rate behaviour in response to changes in oil prices. for example, ogede (2020a) established a significant disparity in the magnitude and sign of the inflation returns. nevertheless, there is a dearth of empirical literature demonstrating a link between oil price changes and food prices in africa using a quantile regression model approach. this study contributes to the body of knowledge in two ways. to begin with, it studies the influence of oil price variations on food prices in a grouping of africa's net oil exporters: morocco, angola, south africa, egypt, algeria, and gabon, as well as nigeria. second, the study uses the quantile regression (qr) model to examine the effects of oil price fluctuations on the median and conditional dispersion of food prices using the quantile regression (qr) model. the essay examines how food prices fluctuate in response to variations in oil prices. the justification for using quantile regression on the equation of oil price changes is that qr can uncover the entire conditional dispersion of consumer price returns. as a result, the study assesses how oil price fluctuations affect food prices based on their location on the dispersion of food price returns. finally, the study contributes to a deeper understanding of the discussion and serves as a policy document discussing well-being assessment and appropriate policy proposals for overcoming emerging oil-food price crises in the selected nations. the outcomes emphasize the varied dependence impacts of multiple quantiles of food prices. all coefficients are insignificant across all quantiles for negative oil price shocks, confirming the panel ols results. furthermore, it is established that increases in oil prices have a considerable impact on the scale of food prices in some african countries. the remainder of the study is structured as a review of pertinent literature. section 3 presents a discussion of methodology and an examination of data sources. the findings are discussed in section 4. section 5 concludes the study and highlights the report's policy recommendations. 30 j. s. ogede, f. o. ajayi 2. review of the related literature a plethora of literature has been documented regarding the oil price and food price debates. the review of the related empirical studies shows that the outcomes are diverse and renews the discourse on how much intensifying oil prices can explain changes in food prices. the first standpoint argues for the existence of linkages between oil prices and food prices (see alghalith, 2010; ciaian & kances, 2011; kyung & jeong, 2011; peri & baldi, 2012; nazlioglu & soytas, 2012; pal & mitra, 2018; jadidzadeh & serletis, 2018; taghizadeh-hesary, rasoulinezhad & yoshino, 2018). for example, taghizadeh-hesary et al. (2018) employ a panel-var model to investigate the interaction between food and energy prices in eight asian economies. according to the authors, oil prices significantly impact food costs. jadidzadeh and serletis (2018) explore whether the market-driven shocks of global oil prices have affected global and us corn prices and whether the underlying marketdriven volatilities in the global oil market account for changes in the overall us corn prices. in divergence to the empirical literature that confirms the existence of linkage, studies such as reboredo (2012), gardebroek and hernandez (2013), baumeister and kilian (2013), zhang and chen (2014), fowowe (2016), amongst others, confirm the neutrality concerning food-energy price dynamics. for instance, zhang and chen (2014) show that the grains index exhibits a substantial response to anticipated volatility in oil prices. additionally, fowowe (2016) reported a comparable outcome for the south africa study. additionally, numerous studies have found possible asymmetries involving oil and food prices by exploring nardl, markov switching, and var methodologies. ibrahim (2015), meyer, sanusi, and hassan (2018), and adeosun et al. (2021) all indicate mixed results regarding food prices' relation to oil prices. meanwhile, there is no long-term relationship between decreased oil costs and lower food prices. additionally, the model demonstrates no short-term asymmetry in food price behaviour, as the association between the waxing and waning in fuel-food prices is minimal. using a panel vector autoregressive (pvar) model, taghizadeh-hesary et al. (2018) examine the relationship between fuel and food prices rigorously and conclude that oil prices have a considerable impact on food rates in designated asian economies. recently, adeosun et al. (2021) employed wavelet and markov-switching techniques to investigate the oil-food price dynamics in nigeria. thus, to eliminate contradicting behaviour and adjust for disturbances near the edge of the wavelet impulses, the author used monthly data from 1995: m1 to 2019: m5. the data demonstrate that the direct response of oil price shocks to food prices shifted across frequencies, indicating that the immediate impact of oil price shocks on food prices predominated, with evidence of a slight spillover effect in the short term. while there is substantial literature on the linear and non-linear effects of oil price variations on food prices, limited studies have been conducted to assess the nexus using the quantile regression technique. as a result of this lacuna, it is conceivable to estimate the heterogeneous dependency of oil price changes on food prices based on the location of food prices within the respective distribution following lahiani (2018). the quantile regression model's advantages over many other techniques include highlighting discoveries that look minor throughout the whole sample year but are highly noteworthy when assessed partially with some sample space. it provides a temporary difference in the elasticity of the food price. additionally, it is reasonable to anticipate that the food price index will be distorted (lahiani, 2018). https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr1 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr9 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr24 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr31 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr28 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr30 heterogeneous dependence of oil-food price dynamics in africa's net oil-exporting countries 31 3. methodology and sources of data this study employs a quantile regression (qr) model to investigate the heterogeneous dependence on oil-food price dynamics in africa’s net oil-exporting countries following the work of lahiani (2018), nusair and olson (2019), and ogede (2020a). the net oilexporting countries include algeria, angola, egypt, gabon, morocco, and nigeria. the study spans 19 years, from 2001 to 2019. the oil price is obtained from the opec bulletin, while the food price index is calculated and sourced by the food and agriculture organization (fao). the food price index is also used to evaluate the monthly change in worldwide food costs for a basket of goods. these studies contend that the impacts of changes in oil prices differ across the distribution of inflation. consequently, the paper structured the qr model as: 𝑍𝑟(𝑍𝑡|𝐾𝑡) = 𝐾𝑡𝛽𝑞 (1) equation (1) is modified to reflect oil-food prices interaction as: 𝑧𝑟(𝐹𝑃𝑡|∆𝑂𝑃𝑡) = 𝛼.(𝑘) + 𝛽(𝑘)∆𝑂𝑃𝑡 + 𝜀𝑡(𝑘) (2) 𝐹𝑃𝑡 and ∆𝑂𝑃𝑡 are the food price and oil price changes, respectively, at the time represented by t, and 𝜀𝑡 is the error term. thus, following ogede (2020a), oil prices are segmented into negative and positive variations to analyze the asymmetric effect of oil-food prices on africa's net oil-exporting countries. besides, the monthly crude oil price sourced from opec statistical bulletins was transformed by modelling realized volatility. the realized volatility model is piloted by andersen & bollerslev (1998) and modified by ogede (2020b) in gauging the monthly oil price volatility as specified in equation (3). these are in divergence to studies such as baumeister & kilian (2013); avalos (2014); fowowe (2016); reboredo (2012); ibrahim (2015); taghizadeh-hesary, rasoulinezhad & yoshino (2018), amongst others, that investigate the impact of oil price shocks on food prices. the monthly realized volatility (mrv) model uses squared intra-month returns to generate more true volatility measures, and it is structured as: 𝑂𝑃𝑡 = 𝑀𝑅𝑉𝑡 = ∑ 𝑟𝑡 2𝐷 𝑡=1 (3) where 𝑂𝑃𝑡 represents the oil prices at time t, 𝑀𝑅𝑉𝑡 and 𝑟𝑡 2depicts the monthly realized volatility and intra-month returns at time t, respectively. the equation is then integrated into to become equation (4), 𝑞𝑟(𝐹𝑃𝑡|∆𝑂𝑃𝑡) = 𝛼.(𝑘) + 𝛽(𝑘)∆𝑀𝑅𝑉𝑡 + 𝛽(𝜏)∆𝑃𝑜𝑠𝑡 + + 𝛽(𝜏)∆𝑃𝑜𝑠𝑡 − + 𝜀𝑡(𝑘) (4) 4. results and discussion this section explores and explains the empirical evidence about the diverse dependence of oil-food price dynamics in africa's net oil-exporting countries. the analyses included a variety of econometric approaches, including panel unit root, ordinary least squares (ols), and quantile regression (qr). table 1 summarizes the results of descriptive statistics on changes in oil prices and the returns on food price indexes. as the standard deviations suggest, food and oil prices have been highly variable during the study period. according to skewness data, food prices and positive oil price changes are positively skewed, whereas 32 j. s. ogede, f. o. ajayi negative crude oil price changes are negatively skewed. at the 5% significance level, all variables have jarque-beta (j-b) probability values less than the 0.05 critical value. table 2 summarizes the results of the stationary tests and demonstrates the confirmation of stationary for the series. table 1 descriptive statistics lnfp_ind neg_shock mrv pos_shock mean 4.3411 -0.0319 0.6395 0.0362 median 4.3355 0.0000 0.5744 0.0191 maximum 4.7629 0.0000 2.9170 0.1959 minimum 3.9466 -0.3109 0.0112 0.0000 std. dev. 0.2649 0.0605 0.5368 0.0441 skewness 0.0337 -2.4547 1.5999 1.2112 kurtosis 1.4952 9.1505 6.2476 3.9477 j-b (prob.) 21.463 (0.000) 585.77 (0.000) 196.61 (0.000) 63.991 (0.000) source: authors’ computation, 2021 table 2 panel unit root test method statistic prob.** cross-sections obs. levin, lin & chu test -2.31121 0.0104 4 901 im, pesaran and shin w-stat + -16.8519 0.0000 4 901 adf fisher chi-square+ 260.422 0.0000 4 901 pp fisher chi-square+ 260.635 0.0000 4 905 source: authors’ computation, 2021 the nexus between food prices and changes in oil prices, negative oil shocks, and positive oil shocks in selected african net oil-exporting countries is presented in table 3. the findings of the ols are presented to illustrate the average influence of changes in oil price shocks on food prices and to compare them to the quantile regression (qr) of the selected nations, namely algeria, angola, gabon, south africa, egypt, morocco, and nigeria. the coefficient of negative oil price shocks in the panel ols model (0.198) is insignificant and positive at the 5% significance level. additionally, the table illustrates that the coefficient of positive oil price shocks (-0.859) has a considerable negative effect on food prices in selected african countries. for the selected african countries, a negative oil price shock often forces these countries to offer incentives to purchasers to take the product off their hands due to concerns about storage capacity running out. the negative oil price shock may also necessitate a drop in crude oil export profits, further undermining the government's commitment to diversification through agricultural production growth and provision of agricultural subsidies. additionally, the empirical data indicate that the overall direction of the coefficients change with quantile and are only minimally different from the ols coefficients. the results of the regressive quantile model are depicted visually in fig. 1a-c. heterogeneous dependence of oil-food price dynamics in africa's net oil-exporting countries 33 3.8 4.0 4.2 4.4 4.6 4.8 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile c -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile neg_shock -4 -3 -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile pos_shock quantile process estimates 3.8 4.0 4.2 4.4 4.6 4.8 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile c -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile neg_shock -4 -3 -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile pos_shock quantile process estimates fig. 1a quantile process estimate of c 3.8 4.0 4.2 4.4 4.6 4.8 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile c -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile neg_shock -4 -3 -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile pos_shock quantile process estimates 3.8 4.0 4.2 4.4 4.6 4.8 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile c -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile neg_shock -4 -3 -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile pos_shock quantile process estimates fig. 1b quantile process estimate of negative shock 3.8 4.0 4.2 4.4 4.6 4.8 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile c -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile neg_shock -4 -3 -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile pos_shock quantile process estimates 3.8 4.0 4.2 4.4 4.6 4.8 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile c -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile neg_shock -4 -3 -2 -1 0 1 2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 quantile pos_shock quantile process estimates fig. 1c quantile process estimates of positive shocks 34 j. s. ogede, f. o. ajayi the indicator of positive oil prices (-2.0734) produces a negative and significant effect on food prices at the 10 per cent significance level. the coefficient of adverse oil prices (0.646) exhibits a positive and insignificant impact on food prices, revealing the asymmetric nexus in the selected african countries. the results further explain that a 1 per cent improvement in the median value of negative oil prices will translate into a 0.64 per cent increase in food price median value. a 1 per cent increase in the median value of a positive oil price shock will translate into a 2.07 per cent decrease in the median value of food prices. table 3 ordinary least square and quantile regression results variable ols qr (median) coefficient prob. coefficient prob. neg_shock 0.198404 0.5392 0.646549 0.2255 pos_shock -0.859670* 0.0533 -2.073452 0.0060* c 4.378592*** 0.0000 4.438553 0.0000*** note: *significant at 10%, **significant at 5%, ***significant at 1%. source: authors’ computation, 2021 table 4 establishes an essential distinction through the conditional distribution of food prices. it provides the results for the 10th to 90th conditional quantiles. the empirical findings of the quantile regression analysis point out the heterogeneous dependence impacts of various distributions on food prices. as shown in table 4, all variables are insignificant throughout all distributions for negative oil prices, similar to the panel ols results. the findings indicate a positive association between food prices and negative oil prices in the lower to higher quantiles of 0.10 to 0.90. furthermore, the result shows that positive changes in oil prices positively impact the food price distributions in the selected african countries. the coefficients are insignificant across the quantiles except in the 0.40, 0.50, and 0.60 quantiles at the 1% and 5% significance levels, respectively. the outcome is in tandem with the empirical investigations of adeosun et al. (2021), lahiani (2018), taghizadeh-hesary et al. (2018), and ogede and adegboyega (2021). for instance, adeosun et al. (2021) demonstrate that the immediate response of oil price changes to food prices shifted across frequencies. however, a fascinating question arising from our findings is whether the results are robust or varied. the paper compared ols results, which gauge the overall impact, with conclusions from qr at each quantile. it is noted that the results diverge. the paper contends that the impact of crude oil price changes on food prices is heterogeneous and positive across quantiles for the selected net oil-exporting countries in africa. thus, the findings support the erstwhile extant studies that expose that oil price changes as crucial potential causes of soaring food prices (baumeister & kilian, 2013; ciaian & kances, 2011; nazlioglu & soytas, 2012; jadidzadeh & serletis, 2018; taghizadeh-hesary, rasoulinezhad & yoshino, 2018). moreover, the quantile process estimates of positive and negative oil price shocks provide lower (0.10) and upper (0.90) quantiles, substantially different from zero. the results indicate that a considerable increase in food prices in response to oil price changes could help investors and policymakers plan ahead of shocks. the findings may require a domestic policy framework to strengthen the economic agents in different economic and financial circumstances. specifically, the conclusion that positive and negative oil price changes positively affect food prices requires particular attention. https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr9 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr28 https://link.springer.com/article/10.1007/s12182-019-0339-1#ref-cr19 heterogeneous dependence of oil-food price dynamics in africa's net oil-exporting countries 35 table 4 quantile process estimates quantile/ variable c neg_shock pos_shock coef. t-stat prob. coef. t-stat prob. coef. t-stat prob. 0.10 4.001 206.9 0.000*** 0.295 0.101 0.919 0.265 -0.056 0.955 0.20 4.056 191.9 0.000*** 0.335 0.383 0.703 0.291 -0.671 0.503 0.30 4.093 54.1 0.000*** 0.575 -0.35 0.724 0.711 -0.190 0.849 0.40 4.333 55.4 0.000*** 0.622 0.514 0.608 0.793 -2.224 0.027** 0.50 4.438 77.7 0.000*** 0.535 1.209 0.228 0.752 -2.759 0.006* 0.60 4.525 148.4 0.000*** 0.561 0.668 0.505 0.692 -3.398 0.001*** 0.70 4.551 126.6 0.000*** 0.416 -0.409 0.682 1.042 -0.805 0.422 0.80 4.653 122.5 0.000*** 0.307 0.699 0.485 0.659 -0.365 0.716 0.90 4.717 287.5 0.000*** 0.279 1.633 0.104 0.253 -0.923 0.357 note: *significant at 10%, **significant at 5%, ***significant at 1%. source: authors’ computation, 2021 5. conclusion and policy recommendations this paper investigates the potential heterogeneous impact of oil price changes on food prices in six (6) net oil-exporting african countries, namely: algeria, angola, egypt, gabon, morocco, and nigeria spanning from 2001 to 2019. the study employs the food price index as a proxy for food and monthly oil prices to gauge the negative and positive oil price changes. the paper uses a quantile regression approach to address the potential heterogeneous impact of the oil price changes on food prices in six (6) african countries. the investigation yielded the following findings and conclusions. firstly, the ordinary least squares and quantile regression (median) results on the connection between food prices and variations in oil prices shocks in selected african net oil-exporting countries. the coefficient of negative oil price shocks in the panel ols model is insignificant and positive at the 5% significance level. in contrast, the coefficient of positive oil price shocks has a significant negative effect on food prices in several african countries. additionally, the quantile regression analysis's empirical findings highlight the diverse dependence effects of various ranges on food prices. all coefficients are non-significant across all quantiles for negative oil price shocks, a conclusion consistent with panel least squares estimate results. additionally, the result of the quantile regression establishes that positive changes in oil prices have a significant effect on the extent of food prices in selected african countries. the article argues that the influence of crude oil price variations on food prices is diverse and positive across quantiles for a subset of africa's net oil-exporting countries. the findings may have significant policy and economic consequences for economic actors and stakeholders operating in various socio-economic situations. for example, the reflection of the quantile process's lower (0.10) and upper (0.90) quantile estimates of positive and negative oil price shocks is significantly different from zero. the above provides helpful information to investors and policymakers about the possibility of a significant increase in food prices in response to oil price changes. the policy makers should also motivate the development of a domestic policy framework to strengthen economic agents in various socioeconomic settings. specifically, the 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(2014). the impact of global oil price shocks on china’s bulk commodity markets and fundamental industries. energy policy, 66, 32-41. https://doi.org/10.1016/j.enpol.2013.09.067 heterogena zavisnost dinamike cena nafte i hrane u afričkim zemljama izvoznicama nafte determinante cena hrane su predmet rasprave među naučnicima u poslednje tri decenije. međutim, mnoge studije zanemaruju mogućnost da uticaj cena nafte na cene hrane može da varira u zavisnosti od distribucije cena hrane. ovaj rad koristi kvantil regresivnu tehniku da odredi da li cene hrane odgovaraju potencijalnom heterogenom uticaju promena cene sirove nafte u šest odabranih afričkih zemalja izvoznica nafte. koeficijent negativnih šokova cene nafte u panel osl modelu nije značajan i pozitivan je na nivou od 5%. nasuprot tome, koeficijent pozitivnih šokova cena nafte značajno utiče na cenu hrane u odabranim afričkim zemljama. empirijski rezultati kvantil regresivne analize naglašavaju efekte zavisnosti različitih rangova na cene hrane. svi koeficijenti su ne-značajni preko svih kvantila za negativne šokove cena nafte, što je u skladu sa rezultatima panel procene najmanjih kvadrata. osim toga, rezultati dokazuju da pozitivne promene u ceni nafte značajno utiču na veličinu cena hrane u odabranim afričkim zemljama. rad zaključuje da je uticaj varijacija cene sirove nafte na cene hrane raznovrstan i pozitivan za odabrane afričke zemlje izvoznice nafte. rezultati ove studije mogli bi imati važne političke i ekonomske implikacije za ekonomske činioce i donosioce odluka u različitim fiskalnim okruženjima. kao rezultat, ekonomski činioci moraju da donose pravovremene odluke kako bi odgovorili na efekte neizvesnosti cene nafte na afričko tržište hrane. ključne reči: cene nafte, cene hrane, efekti heterogenosti, kvantil regresija, afrika https://doi.org/10.1016/j.eneco.2016.04.012 https://doi.org/10.1016/j.eneco.2018.11.009 https://doi.org/10.22190/fueo191202009o http://doi.org/10.15408/sjie.v9i2.15498 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other hand, it should be noted that innovation as a part of intellectual property rights makes a significant element of companies’ activities if they want to be competitive in the market. this is the reason why it is possible to say that competition law belongs to rules of economic relationships. law is important for companies in the sense of promoting economic efficiency. the competitiveness is the ability of a region to export more in value added terms than it imports. that definition is very important for companies and for investors at the same time. due to that, governments have to pay attention to all possible so-called discounts, including an artificially low currency, suppressed wages in export sectors, artificially low taxes on traded sector firms and direct subsidies to exports. governments, but also the legislators should control barriers and obstacles, in order to improve measurements to eliminate them. it could be a very important sign for the investor. finally, intellectual property rights will show their significance through the companies’ competition policy. the whole europe develops research and development area, focusing on major competitors. due to that task, participants are interested especially in the share of private investment in the field of research. key words: innovation, competitiveness, legislation, companies, investors jel classification: o31, d41 introduction generally speaking about innovations, any lawyer has always had on mind differences between law and economics, on the onehand, and law and technology, on the other. definitely, both aspects have to exist, as well as to share experiences and results. the received june 01, 2017 / accepted september 26, 2017 corresponding author: dragana radenković jocić university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: draganarj61@gmail.com 334 d. radenković jocić definition of innovation needs to be so wide in order to integrate both streams. but, the best solution could be to add the third element which involves a social impact. law and economics theories pay attention to regulation for innovation. often, the term innovativeness could be noted in literature. what is the difference, or maybe a better question is: is there difference between the two mentioned terms? innovativeness would be defined as market failures, for example market power. lawyers and economists assume that innovation is good for welfare. also, law and technology, on the other hand would help make up for that flaw to all interested participants in the economic relationships. the reason for that consideration is in the fact that it should be imperative to regulate the innovation, having regarded all mentioned aspects. the lawyers usually make difference between a horizontal dimension (time) and a vertical dimension (level of generality). additionally, lawyers and economists, together, would point out in the other direction. they offer insights into so-called institutional models that allow a balance among law, economy and innovations. the connection between the economic area and regulations on the other hand would maintain a certain level of openness or competition in product markets. oecd, through its principles, in 1996 made a step forward in regulations sense. this organization created some news, for example new products as a part of „environment industry‟. that was a condition for higher level of innovations. generally speaking, that activity entailed more certitude for all economic participants in the innovative process, in particular regarding the intellectual property rights protection. oecd organization prepared and presented the principles. but, as well as the others recommended by this institution, they are not obligatory. they belong to so-called soft law. speaking about the sharing services under the eu law, the group of new technologies involves innovations of telecommunications, as well as the internet services. and the effects of insufficient competition in impeding technology diffusion are visible in the telecommunications sector. having regarded the mentioned rules, it could be noted that they are under monopoly control in many countries. the principles of oecd are the example for that. among member states, only eight allow competition in the underlying telecommunications infrastructure. on the one hand, the mentioned act was amended in 1996. after that period, the innovation area, including the internet in particular, became one of the most important ones for all possible participants in the business world. statistic data show that usage of the internet is five times higher in competitive than in monopoly markets (hoj et al., 1996). on the otherhand, the diffusion rate for mobile phones is directly related to the national regulatory regime. oecd research shows that the monthly growth in subscribers per 1 000 inhabitants is less than 1%, rising to 1.7% in duopolies and to almost 3 percent in markets with open competition (oecd, 1996a). 1. firm size, business operations and innovation intellectual property is directly connected with competition law. on the other hand , it should be noted that innovation as a part of intellectual property rights makes a significant element of companies‟ activities if they want to be competitive in the market. this is the reason why it is possible to say that competition law belongs to rules of economic relationships. law is important for companies in the sense of promoting economic efficiency. generally speaking, that principle involves the situation when the company produces what the consumers need, on the one hand, as well as does it at the lowest possible prices. in business relevance the regulation of innovation with the challenges of information technology and competition 335 practice, there are different theories regarding the relationship between competition laws, first of all the concentration, on the one and innovation, on the other hand. definitely there are numerous different opinions regarding the connection between the companies and innovations. also, in theories there are some significant concepts among social scientists. for example, schumpeter introduced the principle that “concentrated market structures should favor technological progress mainly for reasons of static efficiency based on scale and scope economies” (symeonidis, 1996). following this concept, there is a proposal that the large companies have an important role in the innovation business. several reasons could be found for that. for example, large companies are in a better position to finance serious research projects, and they do it from their own profits. this component is significant for companies due to the possibility to get expected benefits from innovations. large companies know that every innovation improves their status on the market and puts them in a better position among the competitors. however, this opinion is formed following the principle that competition among firms favors innovation and technology development. it means that the absence of competition could result in less innovation. but business practice shows that all large companies do not share the mentioned opinion. clearly, the companies that have monopoly market position would not be interested in innovation process, because they already control all or most of the market. the connection between competition and innovations is needed, definitely. competition policy should be defined by law following the principles that the elimination of monopoly should help efficiency. competition policy, on the national level, as well as generally speaking, involves the competitiveness as obligatory element. competitiveness is the ability of a region to export more in value added terms than it imports. that definition is very important for companies and for investors at the same time. due to that, governments have to pay attention to all possible so-called discounts, including an artificially low currency, suppressed wages in export sectors, artificially low taxes on traded sector firms and direct subsidies to exports. governments, but also the legislators should control barriers and obstacles, in order to improve measurements to eliminate them. it could be a very important sign for investors, including interested innovators. the question is whether the company size is directly linked to its efficiency as well as market success, including innovation possibility. it means that the previous opinion could not be understood generally. it is clear that the value of competition to the innovative process, on the one hand, and economic studies of the relationship between company size and innovation, on the other, have got different problems. however, there is an opinion that there is no general trade-off between the size of a firm and its innovative capacity. generally speaking, innovation should be characteristic of all companies, no matter their size. innovations have to be advances for all kinds of companies. there are many reasons for the mentioned conclusion. large companies highlight the financial advantages in improving innovations and technologies. one of the main results of these activities could be higher productivity and product quality. also, large companies should have a higher level of concentration as well as human resources regarding r&d intensity than other enterprises. at the same time, smalland medium-size companies may have advantages in producing so-called changes to products and technologies. they have to pay attention to the nature of innovation, as well as sectors of innovations development. many of small and medium size companies will organize activities in cooperation due to research efforts, all in order to achieve the scope of advantages of larger companies (symeonidis, 1996). obviously, serious legislators, but also business people know that there should be noted a higher level of competitiveness of companies among own competitors if they provide 336 d. radenković jocić investments in innovation procedures. that conclusion is one of the priorities of the european union competition policy. due to the previous principle, the european union and the member states need to ensure that the conditions necessary for the competitiveness of the community's enterprises exist. the european union „reforms‟ in that area involves facilitating adjustment to structural changes as one of the most important steps. in addition, authorities have to encourage a necessary environment for entrepreneurship, particular in smalland medium-sized enterprises, their cooperation, and an environment. all these measures should make conditions for better exploitation of the innovative potential of enterprises. in period 2001-2013 interesting results among european companies were noted. the commission‟s annual growth survey from 2014 defined some factors that are in position to generate fast growing „innovation companies‟ on a large scale to the market. according to some authors‟ research, it is clear that the capacity of an economy to create jobs in fast growing firms in the most innovative sectors is the main source of gdp growth (harhoff et al., 2003; putnam, 1996; van zeebroeck, 2011). for example, during the period 2001–2013, the european union member states which have the highest effectiveness also noted an annual growth rate of their gdp. at the same time they make a triple of the rate of increase in gdp then the other european union member states. european union commission is not the only subject under whose authority is innovation regulation and research. there are many interested entities. they are trying constantly to define advantages and obstacles in orderto improve the former and eliminate the latter. the lead market initiative for europe (lmi) was established in order to support markets that are highly innovative. it should provide solutions to broader strategic, as well as neccessary societal, environmental and economic challenges. the states which provide these conditions for innovators will have a strong technological and industrial base. obviously, it would be easier to develop the innovative companies. however, it seems that this is easier in theory. business practice shows that only a small percentage of defined companies reach a sufficiently significant size to establish themselves for the long term in the global market. definitely, there is a lack of a sufficiently integrated system of innovation. often innovations are put in market margins, leaving competitors to impose their norms or business cases. having regarded previous statements, according to the operational programme of innovation and competitiveness, adopted by the european union (example bulgaria) for period 2014-2020, this kind of legal act is needed and it should contribute to increasing the investment (it does not matter whether public and private) in the field of research and development, as well as innovation. expectations are particularly connected to the sectors of manufacturing and services, and with the aim to achieve the national goal of 1.5% share of gdp of r&d costs in the named country. legislators know very well that regulations in the field of innovation has to be flexible enough in order to offer the best conditions for all participants. this is a serious aim as well as task, particularly for governments. they have to provide rules for covering interests of companies, innovators, and the other interested parties. these rules can be particularly onerous for small and medium-sized enterprises. it seems that this size of companies could be among the most technologically dynamic of enterprises. the opinion is that smalland medium-sized companies are suitable for establishing the business and at the same time encouraging innovations. but, this opinion should not be understood generally. as it is shown in table 1 in some countries the process of establishing a business can take months and incur substantial costs. innovations need flexible rules, but rules nonetheless. legislators have to pay more attention, especially to protecting participants‟ rights. innovators are very interested relevance the regulation of innovation with the challenges of information technology and competition 337 in that segment, as well as in security for their products. all mentioned elements have to have their own place in the innovation procedure. table 1 comparison of formalities for setting up a business country (type of firm) number of procedures number of days estimated costs (ecu) france (sarl) 15 28 56 1 900 4 600 germany (gmbh) 8 56 168 750 2 000 greece (epe) 24 21 70 750 2 000 italy (spa) 21 154 700 7 000 ireland (ulc) 6 14 28 300 700 united kingdom (plc) 8 42 500 1 000 source: european commission (1995), green paper on innovation 2. obstacles to innovation the regulation is one of the most important elements for innovation development. however, a whole complex of restrictions could be found in the field of innovations. this fact could be presented as an opportunity for innovative lawyers. lawyers have a task to make systematization of services offering the chance to provide responsibility as well as competitive prices for companies as very important participants on market. additionally, there is the importance of presenting the provision of packaged legal services. the possible prediction is that it is an unattractive area from a commercial point of view. on the other hand, this sector could be seen as such that keeping the competition out of the market is central to success. (susskind, 2010, p.37). companies are definitely capable of assessing the quality and risks of legal services delivered through markets. at the same time, companies are in the position to assess the quality and risks associated with very different inputs, for example accounting, investment banking, consulting. companies have to keep in mind the significance and importance of innovation regulation. due to that, many companies make decisions to employ attorneys agents in the legal market, providing a high level of expertise. according to richard susskind (2010) the present challenge for lawyers is to continually innovate the new bespoke offerings. he presents his opinion in the following figure: fig. 1 scope for innovation source: susskind, 2010, p.39 the most important effect of regulation of the market for corporate legal services is the reduced innovation in legal products and services. for modern economy it is 338 d. radenković jocić significant that the law should make order in this area, bring innovation in legal procedure and definitions, for instance, provide the protection for all participants. generally speaking, law makes a few major well-known effects on innovation. maybe the greater impact of professional regulation on the capacity for innovation in legal area probably comes from an indirect obstacle. what is an indirect obstacle-barrier? it could be defined as „the homogeneity of the population of potential innovators‟ (operational programme, 2010-2020). legal regulation is a base for highlights the benefits of diversity. lawyers work together with other experts. in their day-to-day work environment, legal work means that the information exchanged about problems, solutions, and practices is highly restricted. the limitations on diversity in „the client pool‟ imposed by conflict-ofinterest rules ensure further homogeneity of perspective. table 2 barriers for innovation development in selected sectors sector specific to the sector barriers for innovation development interrelated obstacles to innovation ict inadequate system for protecting ict„s assets, such as innovative services and business process innovation shortage of skilled labor lack of cooperation between businesses, universities and research units mechatronics large number of small players at the base line of the value chain energy inefficiency medicine and pharmacy undeveloped system and inappropriate infrastructure for research at initial stage and tests. knowledge intensive services inappropriate system for protecting ip assets, such as innovative services and business process innovation shortage of entrepreneurial skills low level of information for funding opportunities and limited skills and capacity to access such opportunities low level of cooperation between researchers and business. ineffective implementation of ipr limited access to funding source: opic 2014-2020 aims also at overcoming main barriers to innovations in selected areas the innovation strategy for smart specialization is one of the basic rules due to cover many different areas. having regarded the legislators‟ aim, the strategy should make efforts to harmonize existing solutions in the field of economic development, research and innovation. at the same time, the strengthening of the link between science and business is highlighted. the draft version of innovation strategy provides rules for vertical thematic areas. vertical areas involve, for example, mechatronics and clean technologies, as well as informatics, biotechnologies, and new technologies in creative and recreative industries. on the other hand, there are also important areas, in so-called horizontal policies. they cover relevance the regulation of innovation with the challenges of information technology and competition 339 ict sector and resource efficiency, as well as technological niches. operational programme „innovation and competitiveness‟ form march 2015 defines investments in such a way that they are introduced as the first objective. a very important fact is that poic supports activities exclusively within the thematic areas and previously mentioned horizontal policies of goals noted in research innovation strategy. 3. regulation of the intellectual property rights innovations should be seen as a part of intellectual property rights. according to the international law, the field of intellectual property rights involves different segments, such as patents, copyrights, trademarks, and the others. all of them highlight some common conditions. the first one is regulation; it means harmonization of the rules in european countries, not only the european union members. and secondly, as previously mentioned, a very important degree of protection granted by the government to creators and inventors for innovation. legislators have constantly to pay attention to providing a balance between rewarding inventors and invention‟s limitation and increasing the returns to r&d. intellectual property rights law is specified by some limitations. these rights are connected to national regulations, for example territory and timely limitations. in contrast, the other fields (branches) of law are understood as completely international. the result of that could be so-called differences in national approaches regarding intellectual property rights. but, this approach produces difficulties for multinational companies seeking to patent inventions in several countries. having regarded this principle, oecd as international organization had an important role in defining the “first-to-file” rule. according to that rule, the first patent applicant has priority over any subsequent applicants. in other countries, there is the “first-to-invent” rule, characterized by application by which the innovator has to prove the development the innovation (in the united states, for example). such regulatory differences underscore demands for greater world-wide harmonization (oecd, 1996). definitely, the protection of the intellectual property rights has to be in the focus of governments and the other interested entities. this imperative is the result of the present weak protection of intellectual property rights and limits. for example, limited patent duration, or extensive compulsory licensing would reduce the incentive to innovate. often research and development (r&d) is understood as the main segment of intellectual property rights. it is correct that research and development involve all known forms of intellectual rights. also, the expectation of an innovator from research and development is usually based on possible private returns to the investment which will justify the expense. participants have to be very careful. the exclusive rights to exploit an invention provided by overly strong intellectual rights protection can lead to abuse or misuse of monopoly power. the matter of fact is that the benefits of innovation may be greater if it is spread more broadly through society. that could be possible in a case where the research and development provide increasing productive efficiency of the economy. the regulatory challenge is in providing the balance between the interests of the innovator and those of the public. in present economic conditions which are characterized by the globalization period, there are a number of concerns regarding the ability of traditional intellectual property regimes to stimulate innovation and at the same time promote technology diffusion. intellectual property rights will show their significance through the companies‟ competition policy. the whole of europe, including the european union members, develops research and development area, focusing on major competitors. due to that task participants 340 d. radenković jocić are interested especially in the share of private investment in the field of research. it is therefore important to see if more appropriate framework conditions would allow maximizing the impact of public spending, as well as increasing the incentive for the private sector. investing definitely has to result in more possibility of employment and income (the global competitiveness report 2013-2014). the common fact for competitiveness and investment, according to the european economy policy is productivity. in addition, it the link between innovation and productivity could be observed. it is clear that the impact of research and development investment on productivity is very strong. according to van zeebroeck (2011, p.33-62), „public r&d intensity” is the expenditure on r&d performed in the public research system (higher education institutions and other public research organizations) as a % of gdp. the link has shown some serious problems, especially during the crisis after 2007 and 2008. the data noted lower results in all important areas: employment, productivity, competitiveness, and naturally in research. in order to improve their own results, the european union countries tried to compare their position in mentioned areas with the same in the other productions, for example the united states or china. the comparison should show necessary changes, especially in order to make impact to investors‟ interests. the european union has to be worried due to the shortfall of investment over the past few years. the investment was lower of around euro 430 billion than in the previous period. according to the commission report that situation has a negative impact on the capacity for the eu to remain competitive in the long term. the european union makes some impacts and amends new legislation in the innovations area. the significance of the innovations is one of the priorities in european union bodies. one of the basic acts is the investment plan for europe. that act is the part of the better regulation agenda. what is the main aim of the agenda? it should constitute comprehensive packages of various instruments with mutually reinforcing impact. the market has shown different needs as well as questions, and the european union tries to find possible solutions. definitely, as the first step, the existing regulations should be improved in order to make better and stronger impact on innovation. according to the investment plan, the agenda would achieve an optimal balance between predictability of the regulatory environment and adaptability to technological and scientific progress. research and innovation performance in the european union report from 2014 defines all measures which have to be a part of regulations in order to provide approach to the assessment of the combined impact of legislation, involving increasing the effectiveness and coherence of the regulatory framework. innovation is important not only for innovators but for countries, and local governments. all research that must be done before realization should check implementation issues that can affect outcomes. also, in order to eliminate problems on national, regional and local levels, legislation should be the result of common interests belonging to participants in order to identify problems and seek solutions. generally speaking, the commission‟s agenda provides a framework for further work on innovation. for example, in addition to the “lighten the load” website platform is amended. that act provides the realization the interests among stakeholders on regulatory burdens, inefficiencies and obstacles. in 2015 the commission introduced the better regulation guidelines in order to provide a dedicated “research and innovation tool”. the meaning of that act is to define how to evaluate the positive and negative innovation implications of options for new legislative proposals. this is in line with the concept of so-called “innovation principle” (fraunhofer, 2015). the agenda involves the tools that allow the possibilities of the cumulative burdens to be identified. it couldbe important for companies and their market competitiveness. relevance the regulation of innovation with the challenges of information technology and competition 341 innovation is most important for companies that invest in this area. the importance of investing in innovation should result in high quality, as well as cost-effective regulatory framework. these elements directly make strong impact on the companies‟ growth. companies definitely understood that it is “more important in their activities using or producing high technology”. (harhoff et al., 2003) different forms of innovations make it possible to invest in many activities. very fast development in technology area, particularly in the field of new technologies, improves intellectual property rights. it is the european union, as well as the other interested entities that are trying to follow that development by appropriate legislation. there are numerous examples. common characteristic is their positive impact: the water framework directive, the directives concerning drinking water, groundwater, ippc and urban wastewater. having regarded the beginning of regulation of the innovation involving connection with competitiveness, it is possible to find out the directives in the field of energy, as well as car industry. one of the examples is the general purpose of european union regulation in order to reduce energy consumption for a given use of equipment or of cars. the aim is very clear, especially speaking about the european union climate strategy to cut greenhouse gas emissions. common benefit for all member states of such regulation is the positive effect on energy security. three regulatory instruments are of importance: consumer-friendly color labels, mandatory energy limits and credible compliance (com 2014/15). similarly, the end-of-life vehicles directive 2000/53 and annex ii (the last in 2013) were amended in order to reduce waste arising from end-of-life vehicles (elv) for cars and light commercial vehicles. that act has had and still has a significant impact on innovation in the car and car-related industries. also, legislators paid attention to the mobile telephones industry (gsm) and defined a european standard stimulating a breakthrough technology in mobile at the time, with a highly positive impact on the european union mobile equipment industry‟s competitiveness. definitely, innovators are interested in certainties defined by legislations on different levels. the existing legal framework has shown possibility on at least two levels: european union rules, as well as member state‟s law. the european commission has a serious task during harmonization procedure. it seems that it is the only way to eliminate a regulatory obstacle. barriers and obstacles are possible to be noted through the implementation of legal acts. in this way, potential barriers to innovation can be noted and highlighted. member states governments would be involved in solving the problem but without derogation from the existing regulatory framework. it means that the european commission should offer solutions that will be the result of involvement of authorities on all levels and with respect towards national characteristics. there is no same answer from all european union members regarding legal base for the innovation-competitiveness relationship. the european union adopted the innovation deals (idea, 2105). previously, the government of the netherlands started with the implementation of the 'green deal' programme. the netherlands supports the national green growth policy. that policy involves and very successfully provides regulatory clarity for innovative solutions. innovation deals would support specific innovative initiatives. for example, it could be innovations that have only recent and limited or even no access to the market with the potential of wide applicability. the european commission and the relevant member state authorities stay on position that innovation deals would have the chance to find ways to avoid potential innovation barriers arising from the existing eu law or member state implementation. having regarded all possible differences in 342 d. radenković jocić national legislation, and european union rules on the other hand, the innovation deals tries to eliminate some obstacles. due to that task, the outcome of innovation deals would be considered by relevant member state authorities for their policy and legislative actions. it is useful for member state authorities to ask for promotion in order to implement the innovation deals rule on their own economy, environment, growth and job creation. after so many definitions, highlights of legal regulation needs, as well as different opinions and experiences, it is clear that competitiveness, innovations and economic efficiency are directly connected. in the „sea of definitions‟ it is the world economic forum‟s global competitiveness report, where the following note is being used for competitiveness: “the set of institutions, policies, and factors that determine the level of productivity of a country.” additionally, world competitiveness yearbook defines competitiveness similarly, but more broadly, as how an “economy manages the totality of its resources and competencies to increase the prosperity of its population.” (imd world competitiveness center, 2012) the situation in world economy is characterized by increasing globalization. the result of that is that the term competitiveness has become ubiquitous. the question is: what does it actually mean? on the one hand, there are opinions that competitiveness is equal with productivity, particularly if it is noted at national level and gdp growth (putnam, 1996). on the other hand, and it seems numerously so, the importance of making a difference between traded and non-traded sector industries is highlighted. and, it is important to make a difference among companies regarding their activities, as well as a significant share of their geographical area. in addition, there are more specific definitions of competitiveness. but, the most interesting are definitions that have connection with innovation on the one hand, and economy on the other. having regarded previous opinions, competitiveness relates only to the economic health sectors. the question would be how to know the companies will be competitive, and how they can realize the needed level. definitely, the economy policies have to define sectors from which highly productive results regarding employment are expected, as well as the value-added ones in the sense of the amount of value that the named sector companies add to the inputs of production that they purchase. the problem could be in a situation when a stronger economy has larger impact of the value added on competitiveness. 4. the significance of innovation why should competitiveness be compared with innovation definition? generally speaking, competitiveness is almost always incorrectly equated with productivity.in turn, innovation is usually defined narrowly. the reason is in the prediction that the innovation is noted as only technological in nature. it means that innovation should result in new products. however, there are the other meanings of innovation. for example, innovation should be focused only on the research and development activities occurring at universities, national laboratories, and corporations. definitely, definitions could limit the core of any subject. the same situation is regarding competitiveness and innovations. in spite ofpossible limitations, definitions are necessary. because of that, many organizations are trying to improve elements of definitions of these two institutions – competitiveness and innovations. one of the examples is the organization for economic cooperation and development that defines innovation more broadly as “the implementation of a new or significantly improved product (that is, a physical good or service), process, a new marketing method, or a new organizational relevance the regulation of innovation with the challenges of information technology and competition 343 method in business practices, workplace organization, or external relations” (oecd, 2010). additionally, innovations can make significant influence on the development process, using different segments. among important elements, in the sense that innovations could not develop themselves, are technology transfers, production, as well as the deployment or marketplace usage. in economic theory it is possible to find different comparisons among innovation, competitiveness, and productivity. for example, bloomberg includes productivity as one of its seven variables for ranking the 50 most innovative nations (susskind, 2010). it is clear that innovation is directly connected to productivity. but, there is no equality mark between both institutions and competitiveness. in business practice there are many possible situations when innovations have more or less influence onproductivity or competitiveness. a very good example in modern technology industry is that the innovation of the smart electric grid will help boost electric utility productivity, but at the same time it will do little to boost competitiveness, as electric utility services are not typically internationally traded (radoshevich & strogilopulus, 2012) in addition, the development of a new technology should result in better prediction of quality of life. at the same time, it does not mean that it would not directly affect productivity. clearly, there is a completely opposite situation where some sectors or elements in some industries would improve the standard of life, but not lead to competitiveness. having regarded previous statements, the conclusion could be that the innovation can increase productivity and competitiveness; it is not synonymous with either. conclusion innovation must be the priority for all participants. the first entity, in any sense should be the government, as well as the legislator. all levels have to be involved in making decisions. having regarded the innovation as a focus, the actions that will be supported by different subjects should be defined. there are some activities organized in a way of supporting, not at all as a limit for innovations and innovators. legislation and entities that implement the rules should provide the development of cooperation for innovation between companies, as well as between business and academic subjects in order to improve the innovation process. one of the necessary steps is definitely the development and introduction of new products, processes and business models in companies. following, innovation process cannot be completed without supporting for development of environment and research and innovation infrastructure for business needs. finally, innovation process is characterized by the development of cooperation for innovation. obviously, cooperation is needed between companies, as well as „business world‟ (it means investors) and academic researchers. examples for that statement are implementation of different projects, involving clusters and participation in pro-innovative european union networks and platforms. participants have a task to lead to the development of innovative capacity and sharing resources for the development and implementation of innovative processes and products, protection and transfer of intellectual property rights, such as copyrights and license royalties, and commercialization of the results. also, mutual cooperation could be supported through the development of technology transfer entities, agencies and technology centers, for example. support will focus on sciencebusiness relationship management, intellectual property rights, researchers‟ awareness regarding intellectual property rights and commercialization. 344 d. radenković jocić acknowledgement: the paper is result of the project 47005 financed by ministry of education, science and technological development of the republic of serbia. references com/2014/015 report ―a policy framework for climate and energy in the period from 2020 to 2030, european commission harhoff, d., scherer, f.m., vopel, k. (2003). citations, family size, opposition and the value of patent rights. in: research policy 32, pp. 1343-1363. hoj, j., kato, t., and pilat, d., (1996). deregulation and privatisation in the services sector, in: oecd economic studies, no. 25 idea consult/ zew/ niw/ tno/ cea/ ecorys fraunhofer isi (2015): key enabling technologies – first annual report: european commission, dg growth.. imd world competitiveness center (2012). world competitiveness yearbook, retrieved from: http://www.imd.org/wcc/wcy-world-competitiveness-yearbook., accessed on: 18 july 2017. oecd (2010). ministerial report on the oecd innovation strategy, retrieved from: http://www.oecd.org/ sti/45326349.pdf. accessed on: 25 april 2017. oecd (1995). communications outlook, paris: oecd publishing oecd (1996a). information infrastructure convergence and pricing. the internet and mobile cellular communication: pricing strategies and competition, paris: ocde/gd(96)73 oecd (1996b). technology, productivity and job creation, paris: oecd publishing oecd (1996c). the global environmental goods and services industry, paris: oecd publishing oecd (1996d). venture capital and innovation, paris: ocde/gd(96)168 operational programme innovation and competitiveness 2014-2020. (2015). european commission putnam, j., (1996) the value of international patent rights. yale: yale university. radoshevich, s., strogilopulus, (2012) strategies for smart specialization in the field of research and innovation. assessment of bulgaria. european commission susskind, r., (2010) the end of lawyers?. oxford university press symeonidis, g., (1996). innovation, firm size and market structure: schumpeterian hypotheses and some new themes, oecd economics department working paper no. 161. the global competitiveness report 2013-2014, retrieved from: http://ec.europa.eu/europe2020/pdf/ csr2014/eccom2014_en.pdf, accessed on: 16 may 2017. van zeebroeck, n. (2011). the puzzle of patent value indicators. economics of innovation and new technology 20, 33-62. relevantnost regulisanja inovacija sa izazovima informacione tehnologije i konkurencije intelektualna svojina je direktno povezan sa pravom konkurencije. sa druge strane, neophodno je znati da inovacije kao deo prava intelektualne svojine predstavljaju značajan elemenat aktivnosti kompanija, ukoliko žele da budu konkurentne na tržištu. to je razlog zašto je moguće reći da zakoni o konkurenciji pripadaju pravilima ekonomskih odnosa. zakonodavno regulisanje je važno za kompanije u smislu da promoviše ekonomsku efikasnost. konkurentnost je sposobnost regiona da izvozi više u odnosu na dodatu vrednost u odnosu na uvoz. ta definicija je veoma važno za preduzeća i za investitore u isto vreme. zbpog toga vlade država moraju obratiti pažnju na sve takozvane popuste, uključujući veštački nizak kurs valute, iznenađujući naknade u sektoru izvoza, veštački niske stope poreza i direktne pomoći izvozu. vlade, kao i zakonodavci, moraju kontrolisati barijere i prepreke, u cilju poboljšanja mera koje bi eliminisale te prepreke. to bi bio veoma važan znak za investitore. takođe, prava intelektualne svojine pokazju svoj značaj putem razvoja politike konkurencije koja se odnosi na kompanije. cela evropa ulaže u razvij istraživanja, fokusirajući se na najvažnije učesnike. zbog tog zadatka, učesnici su posebno zainteresovani za učešće privatnih investicija u oblasti istraživanja. ključne reči: inovacije, konkurencija, regulativa, kompanije, investitori plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 18, no 1, 2021, pp. 89 102 https://doi.org/10.22190/fueo201130007p © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the importance of marketing communication for attracting and retaining insurance service users1 udc 658.8 368 slavica popović, mira avramović academy of vocational studies southern serbia, department of business studies, leskovac, serbia abstract: the assumption of successful marketing communication within the service sector is the establishment of two-way interactive communication between service users and service companies. the aim of the strategy of marketing communication is attracting new users, but also retaining the existing users of services and establishing long-term relations with them. a successful achievement of the aim of marketing communication requires that the marketing message is created according to the characteristics and preferences of the target audience. the role of marketing communication differs depending on the stage of the selling process. during the pre-purchase stage, the aim of marketing communication is to inform potential users so that they could create preferences towards the company’s offer. by applying the adequate forms of marketing communication during the stage of using the service, the company tends to explain to and introduce users to the process of servicing and to provide support in solving the occurring problems. the confirmation of users’ positive impressions and the resolution of possible problems which can occur during the process of service provision represent the aim of marketing communication during the post-purchase stage. key words: marketing communication, service user, attracting, satisfaction, retaining service users jel classification: m31, m37 received november 30, 2020 / revised december 12, 2020 / accepted december 14, 2020 corresponding author: slavica popović academy of vocational studies southern serbia, department of business studies, leskovac, serbia e-mail: popovic.slavica@hotmail.com 90 s. popović, m. avramović introduction the marketing concept in insurance companies implies a complete orientation towards meeting the needs of insurance service users. through the process of defining and implementing the research programme, the insurance company identifies the needs, desires and demands of service users. on the basis of research results, it creates an adequate offer. by selecting the form, marketing communication informs and creates the awareness of potential users about the offer, and stimulates interest and demand. the offer of insurance companies is standardised and the possible diversification is minimal. therefore, the achievement of competitive advantage of insurance companies is based on the achievement of satisfaction and, thus, retaining insurance service users. the strategy of marketing communication originates from the company’s marketing strategy. depending on the goals set by the company, the priorities and goals of the strategy of marketing communication are defined. the effective and efficient strategy of marketing communication is a prerequisite for business success of insurance companies. if that defined goal of the insurance company is to attract and retain service users, then the role of marketing communication is different in every stage of the purchase process. a logical time order of activities is the creation and announcement of realistic promises, fulfilment of the given promises and the establishment of communication after the completion of the purchase process. a successful implementation of a defined goal requires that the insurance company continually monitors the changes in the users’ needs and demands and that it achieves an intense communication with users during the provision of services, as well as with those users who have stopped cooperating with the insurance company. these activities make service users perceive that the efficient fulfilment of their needs and demands is the focus of all the activities of the insurance company. in this way, marketing communication creates positive impressions which increase the satisfaction of users and contribute to the development of long-term relations with them. the factors such as intense competitiveness, fast development and the application of new information-communication technology, fragmentation of the media and changes in users’ behaviours have influenced changes in the strategy of marketing communication. contemporary business conditions determine the establishment of an interactive dialogue between the company and users and it occurs in all stages of the purchase process. in the pre-purchase stage, the role of marketing communication is to inform potential users, to make them interested and to create preferences towards the company’s offer. by applying the adequate forms of marketing communication during the stage of using the service, the company tends to explain the stages of the process of servicing to users and to provide them with support in solving possible problems. in the post-purchase stage, the aim of marketing communication is to increase the positive experience of service users. the strategy of marketing communication should contribute to the creation of realistic expectations and the fulfilment of promises given to service users. the unrealistic and exaggerated promises given in the pre-purchase stage can increase the level of users’ expectations. if the company is not able to fulfil the given promises during the process of servicing, service users will feel betrayed after the completion of the process of providing services and they will perceive a low level of service quality. all this can affect their decision to end cooperation with the company. the aim of the paper is to show the connection between marketing communication and attracting, satisfying and retaining insurance service users. the paper should point the importance of marketing communication for attracting and retaining insurance service users 91 out the role of marketing communication activities in the establishment, development and maintenance of long-term relations with insurance service users. the results of the empirical research, which are presented in the paper, are significant because they indicate that the insurance company can improve its business performance by implementing and investing into the activities of marketing communication. a better understanding of the role and the increased investment of insurance companies into the activities of marketing communication add to the fact that these types of research are becoming more important. the paper consists of five parts. the first part presents a theoretical concept of marketing communication – the understanding of the role of marketing communication. the second part of the paper analyses the influence of marketing communication on attracting insurance service users. the third part analyses the role of marketing communication in achieving the satisfaction of insurance service users and retaining them. the fourth part of the paper refers to the research methodology, and the fifth part includes a discussion about the research results. 1. marketing communication – theoretical concept a well-defined and implemented strategy of marketing communication enables the achievement of excellent business results and recognition of the company on the market. kotler & keller (2006, p.536) states that by using marketing communication companies tend to inform, persuade and remind the target segment of consumers of the company’s offer. marketing communications represent the “voice” of the company and its brands and are a means by which it can establish a dialogue and build relationships with and among consumers (keller, 2009, p.141). the efficient communication between the company and the target audience assumes that it occurs in both directions (stanković, et.al., 2014, p.15). the fact that, in the contemporary conditions, consumers are exposed to a large number of marketing messages has created the need for companies to start viewing marketing communication as an interactive dialogue which occurs during the process of purchase. in the pre-purchase stage, by employing marketing messages, potential users are given a promise about future satisfaction with the services. in this stage, the role of marketing communication is to inform, draw the attention of potential users and create the preferences towards the company’s offer. the behaviour of potential service users, which is characteristic for this stage, represents focusing a significant amount of attention to the comparison of alternatives with the aim of minimising the level of perceived risk. in this sense, each form of marketing communication will have different credibility with decision-makers. when deciding about the choice of a service or a service company, potential users collect information from different sources. besides a previous experience of the user with the given service or service company, promotional activities of service companies are a significant source of information. however, due to the specificity of services, those potential users who do not have that personal experience will tend to collect information through direct communication, primarily with friends, relatives and acquaintances, but also with the employees of the service company. contrary to classic mass communication of the producers of consumer goods, the employees of service companies, who use a direct contact with service users, have a significant position as the carriers of external marketing communication (senić, et. al., 2008). a marketing message should be created by taking into account the specifics and demands of the target segment of users. in this way, during the stage of providing the service, 92 s. popović, m. avramović the ratio of their cancellation of the service is minimised. the role of marketing communication during the stage of providing service is to introduce and explain to users the stages of the service process. however, during the service process, certain problems can occur. in those situations, marketing communication represents the key instrument for an efficient resolution of the problem, while the emphasis is on the role of the employees who establish direct communication with service users. the sense of confirming or not confirming expectations and promises given to service users is characteristic for the post-purchase stage. in this stage, the role of marketing communication is to use an adequate approach and information in order to resolve potential misunderstandings with users or to strengthen their positive impressions. marketing communication is a mutual term for different types of planned messages used by a company – economic propaganda, sales improvement, direct marketing, personal selling, public relations, sponsorship (duncan, 2005, p.7). shimp states that marketing communication is an approach whose implementation is used by marketing managers in order to inform, persuade and remind users of the company's offer (shimp, et.al., 2013). informing and persuading users and brand differentiating, with the aim of forming their positive attitudes and completing the transaction, are basic functions of marketing communication (stanković, et.al., 2014, p.16). by using the combination of instruments of the communication mix, marketing managers tend to achieve a maximum communication influence. the starting and the ending point in the development of the strategy of marketing communication is the consumer. the consumer does not differentiate between direct and indirect forms of marketing communication, but believes that those are all the ways of persuasion used by the company. the consumer finds it confusing and unconvincing if he/she is faced with a non-consistent message. therefore, in order to efficiently achieve defined goals of marketing communication, it is important that the messages to the consumers are presented in an integrated and consistent manner (avramović, 2008). 2. marketing communication and attraction of insurance service users the main aim of marketing activities of service companies is attracting and retaining service users. the leading factor which affects attracting of new and retaining the existing service users is satisfaction. veljković (2009, p.101) believes that satisfaction is the reaction of consumers to the evaluation of the perceived difference between previous expectations (or a specific standard of performance) and the actual performances. for ljubojević (1998), the concept of satisfaction is abstract, and it represents the function of perception (the probability of an event) and expectation (the evaluation of an event after the delivery of service) of the consumer. the activities of marketing communication contribute to the attraction of service users. potential service users form their expectations on the basis of marketing messages of service companies given through direct and indirect forms of marketing communication, and based on conversations with friends and relatives. they form their expectations during the pre-purchase stage, and the degree of achieved satisfaction is evaluated during the stage after the use of service. the expectations of users are, primarily, oriented towards the quality of service, the adjustment of the offer to their requests, desires and needs, the empathy of employees, and the fulfilment of promises given through marketing communication. the importance of marketing communication for attracting and retaining insurance service users 93 the ability of the company to fulfil and overcome the expectations of service users creates certain advantages. first of all, service users who have achieved a certain level of satisfaction will transfer a positive message to potential users. users are often included in the process of service provision and they transfer their positive or negative experiences through informal direct communication to other potential users. when a potential user needs to make a decision regarding the choice of a service company or a service, an important source of information will include friends, relatives, and acquaintances. then, their positive or negative experiences, i.e. the achieved degree of satisfaction, becomes significant. after making a decision regarding the purchase of a certain service and establishing interaction with the service company, the user forms an experience as a result of comparing previous expectations and achieved gain. they will share their experiences (positive or negative) with friends, acquaintances, relatives or through social networks, which speeds up the transfer of information. when it comes to services, the greatest significance goes to personal selling as a direct form of marketing communication. its goal is to inform potential users about the company’s offer, to stimulate interest and to encourage them to purchase. although the marketing message which is presented by employees to potential users is created in advance, it can be changed and adjusted, depending on a specific situation. the ultimate goal is to succeed in selling. the most significant segment of personal selling includes the employees who establish direct communication with the potential users. personal selling is a very effective factor in establishing contact between salespersons and buyers in two directions. the customers can inquire and ask the salespersons face-to-face questions. at the same time, they can discuss and reach a clear understanding and make a proper buying decision (yousif, 2016, p.130). the contribution of those employees is reflected in understanding needs, collecting information about specific requests, expressing empathy and creating the offer according to the needs and desires of potential users. the role of personal selling in the pre-purchase stage is not emphasised, because the potential user is still collecting necessary information. during the stage of using the service, the user needs additional information which he/she receives through direct communication with employees with the aim of achieving complete satisfaction (vračar, 2005). also, the employees who know the needs of users well enough can represent the channel for offering new services. development and the increasing application of modern technologies has significantly influenced the expressed growth of applying direct marketing in the service sector. direct marketing is based on databases. it enables personalised and interactive communication, receiving an immediate response from the user in the form of purchasing or asking for further information, and the effects can be measured. marketing messages are most often sent by email or sms. the activities of direct marketing enable the identification of potential service users, but also the increased level of loyalty of the existing ones. by receiving a direct response from the users (by phone, mail, or e-mail), companies create a database of potential users. the increase in the level of loyalty is achieved by adjusting the offer created on the basis of data from the database about users’ preferences or special interests. when it comes to mass forms of marketing communication, economic propaganda is applied most often. it attempts to persuade potential customers to purchase or consume a product or service. it is designed in such a way that it creates and reinforces brand image and brand loyalty (kumar, et.al., 2011, p.83). its significance is expressed with attracting new users, i.e. during the pre-purchase stage. the goal is to inform potential users about 94 s. popović, m. avramović the company’s offer and to minimise the perceived risk. the purpose of economic propaganda is to influence potential users so that they could think about or react to a service or a company in a certain way (senić, et.al., 2008). taking into consideration the characteristics of services, primarily the fact that they are not material, the company can “materialise” services by sending adequate marketing messages through economic propaganda. in this way, the potential service users are given the opportunity to compare alternatives and decision-making regarding the purchase is easier. considering the fact that the service sector does not have a large number of mediators, the improvement of sales as a mass form of marketing communication is less significant in relation to the previously mentioned forms. however, the growth of competition and the sensitivity of users to additional services, have conditioned a larger application of the improvement of sales. the activities of sales improvement imply the use of discounts, gifts, coupons, and organization of prizewinning games. the application of means for the improvement of sales enables a short-term increase in the sales volume, encourages users to respond quickly and attracts users of competitive companies, thus increasing the database of its own users, and the accomplished effects are easily measured. 3. marketing communication, satisfaction and retaining service users the key factor for accomplishing a long-term competitive advantage and success of a company on the market is the satisfaction of service users. the specificity of the service sector is the fact that it represents a significant source of dissatisfaction in users. the tendency of users who are not satisfied with a service or a service company is to make a decision to end their cooperation. therefore, with the aim of keeping and developing long-term relations with the users, companies tend to provide them with complete satisfaction. that is why it is important to base the activities of the company on users’ expectations and needs. the satisfaction of users depends on the quality of service and it is based on a specific transaction. satisfied users perceive the company’s offer as having quality, which increases the ratio of repeated purchases, the spread of positive information, and a higher level of loyalty and trust (thaichon, et.al., 2013). the significance of the quality of services is particularly expressed in the process of retaining the existing users. traditionally, service quality has been explained as the gap between customer expectation about the service and perception of how the service has been performed (kumar, 2017, p.160). the quality of service represents the key characteristic of the service offer because that is the dimension through which the user perceives the successfulness of a service company. in order for the company to provide a service of a satisfactory quality, it is necessary to include all employees and to have a good understanding of the needs, demands and desires of users. besides the focus of the company on the creation of a quality offer, there also needs to have a system which will efficiently control the creation and delivery of an adequate quality service. the users form their expectations on the basis of information from formal and informal sources. although the influence of information from informal sources is expressed, the key significance belongs to marketing communication. users’ expectations should be realistic when it comes to the possibilities of the company to satisfy their needs. unrealistic expectations of users can add to the increase in sales volume only short-term, but, longterm, they will result in their dissatisfaction and the end of cooperation. the importance of marketing communication for attracting and retaining insurance service users 95 the satisfaction of users is most often evaluated on the basis of their experiences with the company’s offer, but also on the basis of their overall experience with consumption which is the result of comparing expected and delivered values (stanković, 2002). the measurement of satisfaction is a complex and hardly noticed variable which is the result of the subjective evaluation of service users. the aim of measuring the satisfaction of service users is to quantitatively express their subjective perceptions in an objective manner (veljković, 2009, p.122). the essence of the measuring of satisfaction is reflected in identifying factors which affect the level of loyalty in users and a repeated purchase. the measuring of users’ satisfaction enables the company to acquire information about the cause of satisfaction and which elements of the offer have the strongest effect on the increase in the level of satisfaction. retaining users refers to focusing the marketing activities on the existing database of users. the company which wants to retain existing users, besides the fact that it tends to satisfy their expectations, is also oriented towards motivating them to remain at the company’s offer by increasing their satisfaction (lovreta, et.al., 2010). by delivering the service with additional value, traditional relations between the company and the user becomes a partnership. a satisfied user will use the company’s service again, he/she will recommend the company and its services to other potential users and they will have no reason to consider an offer from competitors. this means that satisfaction is the key factor for retaining users. by creating an offer which is in accordance with the users’ demands and needs, the service company tends to make potential users into first-time users, and then into users who repeat the purchase. however, the users who use the service for the first time, as well as those who repeat their purchase, can simultaneously use competitors’ services. in that case, a well-defined and implemented strategy of marketing communication enables the achievement of their loyalty and the development of long-term relations. personal selling and sales improvement are the forms of marketing communication which have the greatest influence on retaining users, but the activities of economic propaganda, whose aim is reminding about the company’s offer, are also significant (kotler, et.al., 2017). personal selling is directed towards monitoring users’ reactions and the level of achieved satisfaction. the employees tend to collect information about users’ satisfaction through direct communication, to retain them and to encourage them to spread positive information. also, they contribute to the establishment of long-term relations which are based on the confirmation of promises given in the pre-purchase stage. the implementation of activities which are directed towards the achievement of users’ satisfaction will have an influence on their decision to use the company’s services in the future. the role of economic propaganda in the post-purchase stage is crucial for overcoming users’ potential doubts in the correctness of the decision (stanković, et.al., 2014). in this stage, the message of the economic propaganda has the aim of confirming users’ right choice and to encourage them to repeat their purchase. by reminding them of the company’s offer and affirming positive attitudes which have been previously adopted by users, economic propaganda contributes to the increase in repeated purchases. economic propaganda leads to the creation of loyal users who are less sensitive to competitors’ prices and offers (avramović, 2008). 96 s. popović, m. avramović 4. research methodology 4.1. the conceptual research model of the significance of marketing communication for attracting and retaining insurance service users the subject of research of this paper is the analysis of the significance of marketing communication for attracting and retaining insurance service users. the subject of research has been concretised by defining the research framework as it is shown in figure 1. fig. 1 the conceptual research model research questions for the definition of attracting insurance service users on the basis of marketing communication are: 1) what are the sources of information of insurance service users regarding the company’s offer? 2) do insurance service users notice the forms of marketing communication of insurance companies? 3) do insurance service users notice marketing messages of insurance companies sent through the mass media? 4) do insurance service users believe in marketing messages of insurance companies sent through the mass media? 5) do insurance service users believe in marketing messages of insurance companies which they receive from a direct contact with the sellers of insurance services? the research questions which refer to the satisfaction of insurance service users are: 6) how is the quality of the complete offer of the insurance company evaluated by insurance service users? 7) are insurance service users satisfied with the services of the insurance company? the research question for retaining insurance services users is: 8) what will be insurance service users’ decision if the conditions of insurance are changed? 4.2. the characteristics of the sample and the method of research in accordance with the defined subject and research questions, the research has been conducted by applying the research method. the structured questionnaire has been used as the main instrument for collecting primary data. the survey questionnaire mostly contains multiple choice questions, statements with which the respondents either agree or disagree, and the ranking of attitudes has been done by applying a likert scale with scores from 1 to 5. the primary data are collected from the group which consists of 145 respondents, insurance service users. according to the gender of respondents, the numbers are almost equal, 74 women and 71 men. out of the total number of respondents, the largest number of them are 46-55 years old (48), followed by the category of respondents who are 36-45 (38) the importance of marketing communication for attracting and retaining insurance service users 97 and 26-35 (36), while the least represented include the categories of the youngest respondents who are 18-25 (4) and respondents who are over 60 years old (8). according to the level of education, the largest number of respondents has acquired higher education – a university degree (46), a master’s degree (20) or a phd (18), but the participation of respondents with a high-school degree (29) is also significant. most respondents have their own sources of income. the largest number of respondents, 50 of them, state that they earn a monthly household income of 40,001-70,000 rsd, followed by the category of those who earn the income of 70,001-100,000 rsd (45). 5. research results and discussion this part of the paper presents the research results and a discussion on the influence of marketing communication on attracting, satisfying and retaining insurance service users. a) the analysis of attracting insurance service users. the analysis of the answers of respondents to the first research question, regarding the sources of information while selecting the insurance company, shows that most insurance service users, 53 of them, have stated that they receive necessary information about insurance services through direct communication with the employees of the insurance companies, through personal selling. a significant source of information for insurance service users is also the informal communication with friends, relatives and acquaintances. internet browsing and economic propaganda, as the mass form of marketing communication, are a less prevalent source on the basis of which users make a decision to establish cooperation with an insurance company. the research results are shown in table 1. tablе 1 sources of information of insurance service users atitudes of insurance service users n the number of users who provided an answer % users who provided an answer economic propaganda 145 25 17,24 internet browsing 145 16 11,03 talking to friends, relatives, acquaintances 145 51 35,17 personal selling 145 53 36,55 source: authors’ calculations in the further course of the research, the respondents were supposed to state the forms of marketing communication of insurance companies which they have noticed. the answers of the respondents to the second research question – whether service users notice the forms of marketing communication of insurance companies – are shown in table 2. the research results indicate that one insurance service user can notice more than one form of marketing communication. table 2 also shows the respondents’ answers to the third research question – whether service users notice marketing messages of insurance companies sent through the mass media. the largest percentage of respondents has noticed marketing messages sent through television, radio, newspapers, magazines and billboards (44.25%). the percentage of noticed messages sent through the internet (28.29%), as well as the activities of personal selling (17.14%), are also significant. the activities of sales improvement (discounts, prizewinning games, gifts) and direct marketing are noticed the least. 98 s. popović, m. avramović table 2 the percentage of noticed forms of marketing communication of insurance companies the forms of marketing communication n the number of users who provided an answer % of users who provided an answer economic propaganda 145 111 44.25 personal selling 145 43 17.14 sales improvement 145 14 5.58 direct marketing 145 12 4.78 internet 145 71 28.29 source: authors’ calculations the answers of the respondents to the fourth research question – whether insurance service users believe in the marketing messages of insurance companies sent through the mass media – are shown in table 3. although insurance service users have largely noticed the activities of economic propaganda of insurance companies, most of them either partially believe in or are indifferent towards the marketing messages sent through the mass media. the attitude of a relatively small number of respondents is, on the one hand, to completely believe in, or, on the other hand, not to believe at all in the activities of economic propaganda. table 3 the trust of insurance service users in the activities of economic propaganda of insurance companies the attitudes of insurance services users mark n the number of users who provided an answer % of users who provided an answer i completely believe 5 145 14 9.6 i partially believe 4 145 69 47.59 i neither believe nor disbelieve 3 145 36 24.83 i slightly believe 2 145 20 13.80 i don’t believe at all 1 145 6 4.14 source: authors’ calculations unlike the indirect forms of marketing communication, the largest number of insurance service users, 93 of them, partially believe in the information they receive through communication with the sellers of insurance companies. the attitude of 26 respondents is that they completely believe in direct communication with the employees, 10 users slightly believe, while there are no users who do not believe at all. the respondents’ attitudes regarding the fifth research question – whether insurance service users believe in the marketing messages which they receive from a direct contact with the employees – are shown in table 4. table 4 the trust of insurance service users in the activities of personal selling of insurance companies the attitudes of insurance service users mark n the number of users who provided an answer % of users who provided an answer i completely believe 5 145 26 17.93 i partially believe 4 145 93 64.15 i neither believe nor disbelieve 3 145 16 11.00 i slightly believe 2 145 10 6.92 i don’t believe at all 1 145 0 0 source: authors’ calculations the importance of marketing communication for attracting and retaining insurance service users 99 b) the analysis of the level of achieved satisfaction of insurance service users. the quality of the complete offer of an insurance company has been evaluated by the respondents with the application of a likert scale, where 5 is the highest mark, and 1 is the lowest. the respondents’ answers to the sixth research question – the evaluation of the quality of the complete offer of insurance companies – are shown in table 5. the results of the research indicate that a significant number of insurance service users have evaluated the quality of the complete offer of insurance companies with high marks. there have been no lowest marks, while only one user has evaluated the quality of the offer with the mark 2. table 5 the evaluation of the quality of the complete offer of insurance companies mark n the number of users who provided an answer % of users who provided an answer mean value 5 145 70 48.28 4 145 62 42.76 3 145 12 8.27 4.39 2 145 1 0.69 1 145 0 0 source: authors’ calculations in the further course of the research, the respondents were supposed to express their attitudes about the level of achieved satisfaction with insurance services. the respondents’ answers to the seventh research question – whether insurance service users are satisfied with the services of insurance companies – are shown in table 6. the attitude of most insurance service users is that they are very satisfied (58), or somewhat satisfied (63) with the services of insurance companies. the presented research results indicate that there are neither dissatisfied nor very dissatisfied users, while there are 24 users who are indifferent. table 6 the coefficient of the satisfaction of insurance service users the attitudes of insurance service users mark n the number of users who provided an answer value mean value very satisfied 5 145 58 290 somewhat satisfied 4 145 63 252 neither satisfied nor dissatisfied 3 145 24 72 4.23 dissatisfied 2 145 0 very dissatisfied 1 145 0 source: authors’ calculations c) the analysis of retaining insurance service users depending on the level of achieved satisfaction and the fulfilment of promises given in the pre-purchase stage through marketing communication, insurance service users will make a decision regarding further cooperation with an insurance company. the respondents’ answers to the eighth research question – what decision of insurance service users will be in case of changed conditions – are shown in table 7. retaining insurance service users has been measured as a percentage of users out of the whole sample who claim that they will use the services of the same insurance company. the attitude of the majority of insurance service users (66.20%) is that, in case of changed conditions, they would think through 100 s. popović, m. avramović before they make a decision. the decision to still use the services of the same insurance company, regardless of the changes of insurance conditions, will be made by 20.70% of users, while 13.10% of users will change their insurance company. table 7 the ratio of retaining insurance service users the attitudes of insurance service users mark n the number of users who provided an answer % of users who provided an answer still use the services of the same insurance company 3 145 30 20.70 think through before making a decision 2 145 96 66.20 change the insurance company 1 145 19 13.10 source: authors’ calculations conclusion the paper analysed the importance of marketing communication for the user in reaching a decision on using insurance services. the aim of the research was to determine the influence of marketing communication on attracting and retaining insurance beneficiaries. the empirical research was conducted on the sample of 145 insurance beneficiaries. the results of the research showed that there is a positive correlation between marketing communication, and informing and creating the consciousness of potential users about the insurance company’s offer. also, the results indicated that there is a positive correlation between marketing communication and the user’s decision to remain loyal to the insurance company. on the assumption that they have a choice, beneficiaries will remain loyal to the company as long as they are getting higher value in comparison with what they expect. this implies that a well-defined and implemented strategy of marketing communication considerably contributes to the attraction of new and retainment of current insurance beneficiaries. the realized research makes a significant contribution to the research of the role of 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(2003). services marketing, integrating customer focus acros the firm. international edition. new york: mcgraw-hill higher education. 102 s. popović, m. avramović značaj marketing komuniciranja za privlačenje i zadržavanje korisnika usluga osiguranja pretopstavka uspeha procesa marketing komuniciranja u sektoru usluga je ostvarivanje dvosmerne interaktivne komunikacije između korisnika usluga i uslužnih organizacija.uspešna strategija marketing komuniciranja usmerena je na privlačenje novih korisnika, ali i na zadržavanje i izgradnju dugoročnih odnosa sa postojećim korisnicima usluga. marketing poruka treba da bude kreirana u skladu sa definisanim ciljevima, karakteristikama i preferencijama ciljnog auditorijuma. uloga marketing komunikacija je različita u zavisnosti od faze procesa kupovine. u fazi pre kupovine,cilj marketing komunikacija je da informišu potencijalne korisnike i da kreiraju preferencije ka ponudi organizacije. u fazi korišćenja usluge, primenom adekvatnih oblika marketing komunikacija, organizacija nastoji da objasni i upozna korisnike sa procesom usluživanja i da pruži podršku prilikom rešavanja eventualnih problema. potvrđivanje pozitivnih impresija korisnika i rešavanje eventualnih problema nastalih tokom procesa pružanja usluga, cilj je marketing komuniciranja u fazi posle kupovine. ključne reči: marketing komuniciranje, korisnik usluga, privlačenje, satisfakcija, zadržavanje korisnika usluga facta universitatis series: economics and organization vol. 17, n o 1, 2020, pp. 87 96 https://doi.org/10.22190/fueo190828007j © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication short-term forecasting of belexline and belex15 movements 1 udc 336.76:005.44 milena jakšić, marina milanović, dragan stojković university of kragujevac, faculty of economics, serbia abstract. at the onset of 2019, global economy has been facing a number of macroeconomic issues, which significantly multiplied in the course of the past ten-year period. slow-moving rate of economic growth, increased fiscal deficits, enormous public and private debt – these are just some of the issues which led to the plunge of the leading stock market indices at the end of 2018. bearing in mind that s&p 500, djia and nasdaq composite stopped the multiannual growth trend which started on march 22, 2009, new quakes on the global financial market may well be expected. unlike developed global stock markets, which hugely recovered from the 2008 crash, the belgrade stock exchange showed no significant growth trend in the observed period. in this respect, regardless of the detected declines of the world’s best known stock market indices, it is not realistic to expect any significant change in the belgrade stock exchange share market, which the conducted empirical research should confirm. the basic goal of the research is to establish the monthly tendencies of belexline and belex15 movements in the forthcoming one-year period. the basic hypothesis of the research is that there will be no significant changes in the movement of the values of selected stock market indicators in the belgrade stock exchange share market during the one-year period to come. key words: short-term forecasting, belexline, belex15, winters’ additive model, winters’ multiplicative method. jel classification: g17, g23, c22 received august 28, 2019 / revised november 06, 2019 / accepted november 13, 2019 corresponding author: milena jakšić university of kragujevac, faculty of economics, liceja kneževnine srbije 3, 34000 kragujevac, serbia e-mail: milenaj@kg.ac.rs 88 m. jakšić, m. milanović, d. stojković introduction depending on the method of establishing future share price movements, stock market analysts may be divided into two groups: fundamental analysts and technical analysts. the fundamental analysis advocates consider solely the basic market factors, whereas the technical analysis advocates use a number of graphic methods. in order to establish future share values, “fundamentalists” analyze the factors arising from economic and political background (a company’s earnings, dividends, interest rate, etc.). unlike them, technical analysts base their forecasts solely on market data analysis, assuming that all economic, financial, political and psychological factors are instilled in the market price of shares. they maintain their attempt to establish future short-term changes of share prices based on the past quotation analysis (in the period of at least 6 months) (rusu & rusu, 2003). economic forecasting has been underestimated for a long time. however, this field has become very popular in recent years. new researchers, such as lawrence klein, wassily leontief, franco modigliani and james tobin, became nobel prize winners for economics for their achievements in the field of forecasting (lovrić et al., 2013, p. 132). some of the leading scientific journals in this field are international journal of forecasting (international institute of forecasters) and journal of forecasting (wiley). also moreover, the forecasting research may be found in some well-known journals in the field of statistics, management science, econometrics and operational research (journal of business and economic statistics, management science and journal of econometrics) (chatfield, 2001, p. 10). in this paper, the short term forecasting of future movements of belexline and belex15 indexes of the belgrade stock exchange will be carried out. regarding research objectives, the paper is organized in the following manner: the first part of the paper will deal with the analysis of the forecasting methods used in the simillar researches. winter’s additive and winter’s multiplicative method will be used to perform the analysis and the forecasting of belexline and belex15 future values. in the second part, the model testing and the short term forecasting will be carried out, based on the model’s goodness of fit with the historical values of stock indexes. in the final part of the paper, the discussion of the empirical results will be given along with the corresponding conclusions. methodology the time series forecasting methods may be classified into qualitative and quantitative (bovas & ledolter, 2009, p. 2). the qualitative methods are applied in case time series data cannot be expressed quantitatively or are unavailable. these methods are based on the opinions of experts, which means the values of underlying economic phenomena are established based on an assessment of a group of economic experts. the quantitative methods may be used only if a piece of information about a phenomenon whose movement is subject to forecasting may be expressed numerically, i.e. quantified. in this regard, they are based on mathematical and statistical models. in order to apply the quantitative methods, one must use the data relative to the past time series values. the basic premise of the time series forecasting methods is that the series movement will be in the future as it was in the past. the quantitative methods include applicable methods of the statistical analysis of time series (project methods) and causal methods. the methods of the statistical analysis of time series forecast future movement of an economic short-term forecasting of belexline and belex15 movements 89 phenomenon solely on the basis of its values from the past, while the causal methods rest upon a premise that the phenomenon whose movement is subject to forecasting has a cause-and-effect relationship with another economic phenomenon or phenomena. generally speaking, the time series models may be used in case there is a small amount of information regarding the factors which affect the variable value, there is a huge amount of data or the analysis goal is to make a short-term forecast (rusu & rusu, 2003). in this respect, the time series analyses relative to the share prices and stock market index values from the past are suitable for use along with the technical analysis. like the technical analysis, the time series analysis along with the past share price analysis uses different statistical methods to forecast their movement in the future. a majority of research of this kind applies the following methods: time series decomposition, box-jenkins (arima) methodology, neural networks and holt-winters’ exponential smoothing (tseng et al., 2012). nevertheless, in addition to this, the box-jenkins (arima) methodology is predominantly used for short-term forecasting purposes (rusu & rusu, 2003). some of the authors who explained the application of this methodology more closely by means of a stock market index example were varghese et al. (2016). tolosa et al. (2015) used the arima methodology to analyze and forecast the philippine stock exchange indices. seeking to predict the future values of stock market indices they often use the moving average methods in their research. these methods were used by numerous researchers for the analysis and forecasting of daily values of the best-known stock market indicator, the dow jones industrial average (brock et al., 1992; sullivan et al., 1999; siegel, 2008). the moving average methods take the latest dynamic series data into account. the effect of the latest observations wanes with the rise of the number of values (periods) used. if a dynamic series experiences random changes in longer time intervals, a larger amount of data is used, and if random changes occur frequently, i.e. in shorter time intervals, a considerably smaller amount of data is used (rusu & rusu, 2003). although quite complex as well, the neural networks model is frequently used to analyze and forecast the stock market indicator values. leigh et al. (2005) used this model to analyze the nyse composite index and forecast its future movement. the neural networks model was also used by yumlu et al. (2005) while testing the istanbul stock exchange performance, whereas mostafa (2010) used it to forecast the stock market movements in kuwait. the exponential smoothing methods are also often used to make short-term forecasts of time series. this group of methods is suitable for shortterm prediction, step by step. in addition to this, a smoothed value of time series represents a combination of exponentially weighted values, whose movement is represented up to a certain observed period, and specific observed smoothed values during such period. a smoothed time series indicates the basic tendency and principle present in the data. simple exponential smoothing does not recognize the trend in time series, whereas the value forecast by means of the holt-winters’ method includes both the exponentially smoothed component and trend component (rusu & rusu, 2003). besides, time series often feature seasonal variations. in this context, the holt-winters’ forecasting methods were developed and they include the seasonal component; there are additive and multiplicative methods (kalekar, 2004). the goal of time series exponential smoothing is to eliminate the effects of random variations (fluctuations) and discover the basic characteristics of the phenomenon development. by applying the procedure of exponential smoothing to the available data, a smoothed series is obtained by means of suppressed random fluctuations. the resulting smoothed value series is a starting point used to forecast future values. 90 m. jakšić, m. milanović, d. stojković two methods were selected from a vast group of exponential smoothing methods to analyze and forecast the future movement of belex15 and belexline indices: winters’ additive and winters’ multiplicative methods. the application of the above methods to the time series of these indices (separately) resulted in two models per each series. a better adjusted model was selected based on the forecast root-mean-square error as a criterion for the model evaluation. the better model is the one with less forecast error (rootmean-square error (rmse) in this case). all calculations were made in ibm spss software. even though the first organized share trade at the belgrade stock exchange began by the middle of 2001, the stock exchange made its first index, belexfm, on may 1 st , 2004. it was the so-called all-share index, which means it comprised all shares included in the free stock market (fm free market). the enormous rise of share prices and market activities in general in the period before the global financial crisis was improperly illustrated by the general market movement indicator. for this reason, on may 3 rd , 2007 belexfm was replaced by belexline, which provided a much more precise representation of the general performance of the shares traded on the stock exchange. belexline represents all shares traded on a regular basis, i.e. actual market capitalization is indexed. on october 1 st , 2015 the belgrade stock exchange made its second index, belex15, which included only shares traded by continuous trading which met the criteria for inclusion into the index basket. the base values of both indices were 1,000 index points. the monthly value data of belex15 and belexline indices between october 2005 and february 2019 were taken from the belgrade stock exchange website and shown in figure 1 and figure 2. based on the shown values of the main belgrade stock exchange indices the impact of the 2008 global financial crisis is clearly observed. this shock is one of the most influential factors which may affect successful forecasting of the belex15 and belexline time series. fig. 1 original values of belex15 index between october 2005 and february 2019 source: belgrade stock exchange short-term forecasting of belexline and belex15 movements 91 fig. 2 original values of belexline index between october 2005 and february 2019 source: belgrade stock exchange results of the research before making a short-term forecast of the future movement of belex15 and belexline indices of the belgrade stock exchange, it is required to marginalize the impact of the shock incurred by the 2008 crash. in this regard, two time series will be represented in the period between january 2009 and february 2019, which will serve as a basis for the attempted short-term forecasting (figure 3 and figure 4). fig. 3 original values of belex 15 index between january 2009 and february 2019 source: belgrade stock exchange 92 m. jakšić, m. milanović, d. stojković application of the winters' additive and multiplicative models to the belex15 time series will help establish the forecast error during the use of these models. table 1 belex15 index forecast error by the winters’ additive and multiplicative models type of model forecast error winters’ additive model 37.543 winters' multiplicative model 41.200 source: authors based on the shown data it may be concluded that a better adjusted model was obtained for the observed time series by applying the winters’ additive model. fig. 4 original values of belexline index between january 2009 and february 2019 source: belgrade stock exchange as in the previous case, the winters’ additive and multiplicative models were used on the observed time series to establish the forecast error. table 2 belexline index forecast error by the winters’ additive and multiplicative models type of model forecast error winters' additive model 60.232 winters’ multiplicative model 66.517 source: authors it was observed that the winters’ additive method model was better adjusted to the belexline and belex15 time series. accordingly, the winters’ additive model will be used for short-term forecasting of the movement of both indices between march 2019 and february 2020. short-term forecasting of belexline and belex15 movements 93 figures 5 and 6 illustrate how the winters’ additive model matches the original values of belex15 and belexline indices and their forecast values for the one-year period. fig. 5 original (red line), adjusted (thin blue line) and forecast (thick blue line) values of belex 15 index source: authors based on the completed forecast, a mild rise of the belex15 values may be expected in the observed period. also, the forecast includes the values interval (top and bottom values of the interval) for each month subject to the forecast (table 3). table 3 forecast values of belex 15 index between march 2019 and february 2020 forecast value of belex 15: winters' additive model month bottom value of interval individual modeled values top value of interval march 2019 612.56 686.90 761.24 april 2019 590.41 695.58 800.75 may 2019 574.62 703.47 832.33 june 2019 526.73 675.57 824.42 july 2019 515.61 682.09 848.57 august 2019 507.97 690.41 872.85 september 2019 498.18 695.32 892.45 october 2019 494.53 705.36 916.18 november 2019 472.81 696.51 920.21 december 2019 471.81 707.16 943.05 january 2020 462.45 709.96 957.47 february 2020 445.59 704.20 962.81 source: authors 94 m. jakšić, m. milanović, d. stojković based on the data shown in table 3 it is noted that the forecast values of belex15 index for the forthcoming year range between 675.57 and 709.96 index points. this index is expected to reach the lowest value in june 2019 and the highest value in january 2020. fig. 6 original (red line), adjusted (thin blue line) and forecast (thick blue line) values of belexline index source: authors in case of belexline index the forecast shows that a mild rise of belexline index may be expected in the observed period. also, the forecast includes the values interval (top and bottom values of the interval) for each month subject to the forecast (table 4). table 4 forecast values of belexline index between march 2019 and february 2020 forecast value of belexline: winters' additive model month bottom value of interval individual modeled values top value of interval march 2019 1395.24 1514.51 1633.77 april 2019 1358.91 1527.64 1696.37 may 2019 1328.42 1535.16 1741.90 june 2019 1258.90 1497.72 1736.54 july 2019 1234.66 1501.78 1768.89 august 2019 1229.97 1522.69 1815.42 september 2019 1225.51 1541.82 1858.12 october 2019 1216.31 1554.60 1892.88 november 2019 1187.27 1546.22 1905.17 december 2019 1189.43 1567.95 1946.47 january 2020 1178.86 1576.02 1973.18 february 2020 1147.78 1562.76 1977.75 source: authors short-term forecasting of belexline and belex15 movements 95 it can be noticed that the forecast values of belexline index for the forthcoming year range between 1497.72 and 1576.95 index points. as in the case of belex15 index, belexline index is expected to reach its lowest value in june 2019 and its highest value in january 2020. discussion and conclusion the conducted empirical research indicates that the share market in the republic of serbia will have no significant trends in 2019. bearing in mind that the turnover of shares in the belex15 index basket makes more than 60% of the entire share turnover, it may be concluded that the belgrade stock exchange will have a scarce share turnover between march 2019 and january 2020. the expected increase of the belex15 index values in this period shall amount to less than 20 index points. forecasts made by the time series methods are based on the determination of principles in the previous phenomenon development and projection of its movement in the future. however, forecasting cannot precisely establish future movements, so the analysis and interpretation of the obtained results should be regarded as having potential errors. uncertainty and potential errors are in proportion to the length of the forecast period, which suggests that the forecast should be directed towards a short time period. also, in forecasting time series multiple methods should be used in order to compare the results and minimize potential errors. with this in mind, future research concerning the field of short-term forecasting of belex15 and belexline index values may apply other well-utilized methods for this type of research (e.g. the box-jenkins (arima) methodology and neural networks model). references bovas, a. & ledolter, ј. 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(2015). forecasting the philippine stock exchange index using time series analysis box-jenkins. european academic research, 3(3), 3097-3113. tseng, k. c. ojoung k., & tjung l. c. (2012). time series and neural network forecasts of daily stock prices. investment management and financial innovations, 9(1). 96 m. jakšić, m. milanović, d. stojković varghese, a., tarhen, h., shaikh, a., banik, p., & ramadasi, a. (2016). stock market prediction using time series. international journal on recent and innovation trends in computing and communication, 4(5), 427-430. yumlu, s., gurgen, f., & okay, n. (2005). a comparison of global, recurrent and smoothed-piecewise neural models for istanbul stock exchange (ise) prediction. pattern recognition letters, 26(13), 2093-2103. kratkoročno predviđanјe kretanјa belexline i belex15 indeksa početkom 2019. godine globalna ekonomija je suočena sa brojnim makroekonomskim problemima koji su se znatno uvećali tokom prethodnog desetogodišnjeg perioda. usporena stopa ekonomskog rasta, uvećani budžetski deficiti, veliki javni i privatni dug su samo neki od problema koji su krajem 2018. godine doveli do pada vodećih berzanskih indeksa. imajući u vidu da su s&p 500, djia i nasdaq kompozitni indeks prekinuli višegodišnji rastući trend započet 22. marta 2009. godine, mogu se očekivati novi potresi na globalnom finansijskom tržištu. za razliku od razvijenih svetskih berzi koje su se u velikoj meri oporavile od kraha nastalog 2008. godine, beogradska berza u posmatranom periodu nije zabeležila neki značajniji trend rasta. s tim u vezi, bez obzira na zabeležene padove najpoznatijih svetskih berzanskih indeksa, nije realno očekivati neku značajniju promenu na tržištu akcija beogradske berze, što bi trebalo da potvrdi sprovedeno empirijsko istraživanje. osnovni cilј istraživanja jeste utvrđivanje tendencije u kretanju belexline i belex15 indeksa za naredni jednogodišnji period, na mesečnom nivou. osnovna hipoteza rada jeste da na tržištu akcija beogradske berze u narednom jednogodišnjem periodu neće doći do značajnijih promena u kretanju vrednosti odabranih berzanskih pokazatelјa. klјučne reči: kratkoročno prognoziranje, belexline, belex15, winters-ov aditivni metod, winters-ov multiplikativni metod. facta universitatis series: economics and organization vol. 17, no 4, 2020, pp. 299 316 https://doi.org/10.22190/fueo200801022a © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper oil price shocks and macroeconomic performance of the nigerian economy: a structural var approach1 udc 622.323:338.5]:330.101.541(669) raymond osi alenoghena department of economics, university of lagos, akoka, lagos, nigeria abstract. this study examines the effect of oil price shocks on the macroeconomic performance of the nigerian economy covering the period from 1980 to 2018. the effect of oil price shocks is investigated on macroeconomic variables like output growth, inflation, interest rate, exchange rate and industrial production index using the structural vector autoregression (svar) approach. the results of the investigation reveal that oil price shocks have significantly and negatively affected economic growth and industrial output. furthermore, while the results show that oil price shocks have a significant positive effect on inflation, the effect is also positive on interest rate and exchange rate, but it is not significant. the results of impulse response function show a negative effect on output growth, it is positive on inflation, but mild and indeterminate on industrial production, interest rate and exchange rate. based on findings in this study, the renaissance theory and the dutch disease theories of economic growth apply to the nigerian economy. the policy recommendations include the isolation of the country’s real sector from the vagaries of oil price volatility and the pursue of economic diversification to reduce the over-dependence on oil. key words: oil price; economic growth, inflation; exchange rate; industrial production; svar jel classification: c32, e30, f41, q43 1. introduction oil has served as the most potent source of energy supply for the industrial development of nations across the world since the 1950s. the dependence on oil for industrial performance has been marked with uncertainty as a result of several global events that have affected the received august 01, 2020 / revised october 27, 2020 / accepted october 29, 2020 corresponding author: raymond osi alenoghena department of economics, university of lagos, akoka, lagos, nigeria e-mail: raymondalen2002@gmail.com 300 r. o. alenoghena selling price of oil in the world market. for instance, there was the arab-israeli war of 1973, the gulf war of 1990-1991 and the asian financial crisis in 1987. another global financial disruption was witnessed during the terrorist attack at the world trade center in new york on september 11th, 2001. equally remarkable was the global financial crisis of 2007-2008 that was caused by subprime mortgages. perhaps of more significance is the on-going global crisis with very severe financial implications caused by the novel pandemic flu called the coronavirus. as expected, in all of these crises, industrial production was affected, and energy consumption disrupted, leading to a change in the world price of oil. with the advancement of nations and the accelerated growth in several developing countries of the world, the world market price of crude oil maintained an upward trend since the early 70s (ahmed & wadud, 2011). the global price of oil attained a peak of us$145 per barrel on july 3rd, 2008, during the global financial crisis. however, in recent times, the lowest price of oil has been us$12.34 per barrel on april 28th, 2020, based on the world-wide sludge in economic activity occasioned by the coronavirus pandemic. a lot of uncertainty has been associated with the universal production of oil and its pricing as a result of the close link with the world-wide economic and financial events (iwayemi & fowowe, 2011). despite innovations around the world on alternative sources of energy, crude oil still represents the primary source of power in the world today (nazir & hameed, 2015). the role of energy in different sectors of a modern economy cannot be over-emphasized. for instance, oil is needed to produce electricity, operate machines for production and transportation: oil products are used as industrial raw material, in telecommunications, building and construction as well as durable household consumables. it means that oil products are used in all the economies around the world, even where such countries are not endowed with crude oil resources. therefore, most economies around the world are affected by changes in the price of oil in the world market. whenever there is a serious disruption in the supply of oil to the world market, economic entities become skeptical about the future. there is a temporary fall in consumers' spending on investment goods, household appliances, housing, cars, and so on (hamilton, 2003). the existing literature on energy economics has been replete with the debate on the effect of change in world oil price on the level of economic activity. the change in oil price has been found to affect most macroeconomic variables of economies around the world. while oil production would benefit the producing country through revenue earnings from oil sales, it may also have long term effect on the structure and composition of the country's industrial and total output (okonkwo & mojekwu, 2018). changes in the price of oil may also affect inflation and interest rate (sek et al., 2015). since oil sale is denominated in us dollar, the change in the universal price of oil has significantly affected the exchange rate of the oilproducing countries as well as the oil-importing countries (volkov & yuhn, 2016). the nigerian situation is unique as the country exports crude oil and imports refined oil products from the advanced countries of the world. since the production of oil in the 50s, the country grew to systematically neglect the other productive sectors of the economy (udoka & nkamare, 2014). with the focus on oil production and export, the country has become a mono-product economy. the returns from oil exploration made the government relegate other sources of revenue, including taxation. a country that was reputed for producing and exporting groundnut, rubber cocoa, palm oil, has relegated the production of other export items over the years to concentrate on crude oil. between 1981 and 2018, the revenue from crude oil export in nigeria has accounted for over 70% of the total government collected revenue for the period (cbn, 2018). all efforts to develop the oil price shocks and macroeconomic performance of the nigerian economy: a structural var approach 301 manufacturing sector have failed as the existing few functional manufacturing concerns are almost entirely dependent on the importation of raw material inputs to function. most states of the country are notorious for their low igr collections and are condemned therefore to wait for federal allocation and sharing of oil revenue from crude oil export. the country's situation is so bad that the cost of running government, the funding of projects and the monthly remunerations for civil servants all come from federal government oil earnings. the country's oil export is coordinated by the nigerian national petroleum corporation (nnpc), the government behemoth that has been saddled with corruption over the years. inflation in nigeria has been double-digit for many decades, and some authors believe that a significant cause is oil price volatility. omojolaibi (2013) opines that oil revenue has affected inflation in nigeria through money supply. also, some authors have argued that with oil production in nigeria, the structure of production changes, and consumers have acquired the taste for foreign goods (aydına, & acarb, 2011). therefore, as imports are encouraged, and exports are discouraged, the terms of trade could turn against the country. the emerging trend would depreciate the country's domestic currency against the dollar over the years. as new trends from the effect of oil price changes on the economy emerge daily, further studies on the impact of oil price shocks on macroeconomic variables in developing countries like nigeria have remained viable. this study is fashioned to examine the effect of oil price shocks on macroeconomic variables like output growth, inflation, interest rate, exchange rate and industrial production in nigeria. nigeria is a classic example of an emerging developing country that exports crude oil and imports processed oil products. the remaining part of this study is organized as follows. section 2 briefly reviews the relevant literature concerning the effect of oil price shocks on the economy. section 3 is concerned with the applied literature on the subject matter of the study. section 4 discusses the data source, variable definitions and econometric methodology. section 5 examines the empirical analysis and results. finally, section 6 outlines the conclusions and policy implications of the paper. 2. literature review many studies have investigated the effect of oil price shocks on macroeconomic variables around the world. perhaps most outstanding is the effect of oil prices on economic growth, inflation, exchange rate and industrial output. the other studies on this subject matter may include the effect of oil activities on a country’s sovereign risks and perhaps investors’ sentiments and uncertainties. on the relationship with economic growth, there are three categories of outcomes in the studies. the first set of studies argues that oil price shocks have positively impacted on economic growth. for instance, omojolaibi (2013) examined the effect of crude oil price changes on economic activity in nigeria between 1985 and 2014. he concluded that oil price changes positively affected economic growth. in the same year, igberaese (2013) studied the nigerian economy and drew a similar conclusion. ani et al. (2014) examined the causal relationship between four macroeconomic variables: real gdp, exchange rate, inflation rate and interest rate in nigeria. they found that a positive but insignificant relationship existed between oil price and gdp. in the same vein, yukata (2015) in the study of more advanced countries like us, eu and japan, argues that oil price increase benefits the more advanced economies. in a related study, ifeanyi & ayenajeh 302 r. o. alenoghena (2016) utilizing secondary data from 1980 to 2014, concluded that crude oil price volatility positively and significantly related to economic growth in nigeria. the second set of studies on this subject matter argues that oil price shocks have negatively impacted on economic growth. bekhet and yusop (2009), in their study of oil prices and macroeconomic variables in malaysia, concluded that oil prices negatively affected gdp growth and energy consumption. tang et al. (2010), in their study of china from 1998 to 2008, found that an increase in oil-price negatively affected investment and output. iwayemi & fowowe (2011), in their study of nigeria 1985 to 2007, concluded that positive oil shocks did not cause gdp but negative oil shocks significantly caused output and the real exchange rate. similarly, alley et al. (2014) utilized gmm model to investigate the effect of oil price shocks on economic activities in nigeria and concluded that oil price uncertainty reduces the level of economic activity in a small open oil-producing economy like nigeria. also, nazir & hameed (2015), investigated oil prices and gdp in pakistan using data covering from 1972 to 2011 and concluded that oil prices affected real gdp negatively in the long run. kiliçarslan & dumrul (2017) conducted a similar study in turkey and deployed svar analysis for the period from 2005q1 to 2017q2. the evidence confirmed that a rise in the price of crude oil elicited a decline in economic growth and increased crude oil prices, inflation and real exchange rate. the final set of studies on the relationship between oil price shocks and economic growth posit that the variables have no effect on each other. this is the position of muhammad & ghulam (2017) in their study of pakistan. another set of studies investigate the effect of oil price changes on the consumer price index or inflation. oil price changes will likely affect consumer prices since crude oil products constitute a direct input for many consumer goods (sek et al., 2015). one of the earliest studies in this relationship was conducted in india by bhattacharya & bhattacharya (2001) using monthly data running from april 1994 to december 2000. utilizing var models and impulse response function, they found that 20 percentage point shock in oil prices lead to a 1.3 percentage point increase in inflation in other commodities. similarly, dawson (2007) studied the oecd countries and found that a 1% increase in the oil price elicited a 2.9% depreciation in the real exchange rate. also, bermingham (2008) in a study of ireland from 1996 to 2008 deployed engle-granger and ardl approaches and found that the rising price of oil significantly affected inflation. castillo et al. (2010) examined the case of united states of america. they isolated the average levels of the oil price and inflation to form three sub-samples, covering the periods 1970-1983, 1984-2002 and 20022008. they observed that an increase in oil price volatility triggers a higher level of inflation level. ogundipe et al. (2014) used annual data spanning 1970 to 2011 to investigate the effects of oil price, exchange rate volatility, external reserves and interest rate in nigeria. using johansen co-integration and vecm techniques, they found that a proportionate change in oil price elicited a more than proportionate response from exchange rate volatility. jiranyakul (2016) investigated thailand data from 1993 to 2015 using the johansen cointegration test and granger causality tests. the study concluded that an oil price shock causes inflation index to rise while oil price uncertainty has no effect on the increase in inflation. bala & chin (2018) investigated the asymmetric effect of oil price shocks on inflation in small oil exporting economies like nigeria, libya, algeria and angola. utilising the nardl dynamic panels, they observed that both the positive and negative oil price changes affected the level of inflation. while examining the relationship between inflation, oil prices and exchange rate, mukhtarov et al. (2019) studied azerbaijan and utilized vecm technique on data covering the period 1995 to 2017. they found that oil price shocks and macroeconomic performance of the nigerian economy: a structural var approach 303 a 1% increase in oil prices and exchange rate causes inflation to increase by 0.58% and 1.81%, respectively. the market transactions concerning the purchase and sale of oil products and services are usually handled in us$. therefore, any change in the price of oil affects the exchange rate of the countries that may be involved in oil transactions. for instance, an increase in the universal price of oil causes depreciation in the dollar of the oil importing countries and an appreciation of the country that exports the oil. several studies have been conducted on the relationship between oil price changes and the exchange rate of the countries that may be buying or selling oil products and services. olomola & adejumo (2006) deployed var in the study of the effects of oil price shocks on output, money supply, real exchange rate and inflation in nigeria. they found that oil price shocks have a significant effect on the real exchange rate in the long run. similarly, dawson (2007) studied the nordic and oecd countries using multivariate econometric analysis and confirmed that oil price fluctuations significantly affected the relative value of currencies of the countries. more specifically, a 1% increase in the price of oil causes 2.9% depreciation in the real exchange rate in those countries. on the contrary, huang & guo (2007) in the study of china, conclude that real oil price shocks would only stimulate a minor appreciation of the real exchange rate in the long-term because of china's lean dependence on oil that is imported. narayan et al. (2008) investigated the oil price-exchange rate nexus for fiji islands, adopting daily data over the period 2000 to 2006. utilizing garch and egarch models, they observed that a rise in the price of oil induced an appreciation of the local currency (fijian dollar) in relation to the us$. coleman et al. (2010) examined the nonlinear relation between real exchange rate and real oil prices in 13 african countries using quarterly sample that span 1970q12004q4. they found that real oil prices and real exchange rates are co-integrated and that the price of oil plays an important role in real exchange rate determination. studying the oil price-exchange rate linkage in nigeria, adeniyi et al. (2012) utilized monthly data covering the period 2009m1 to 2010m9. deploying garch and egarch techniques, they affirmed that the rise in oil price stimulated an increase in the exchange rate in nigeria over the period of study. tiwari et al. (2013) utilized a wavelet transform framework on monthly data observations spanning the period 1986m2–2009m3. they confirmed that changes in oil prices have a strong influence on the real effective exchange rate fluctuations in both the short run and large time horizons. still on oil price shocks and currency exchange rates, sibanda & mlambo (2014), empirically examined the impact of oil prices on exchange rate in south africa using monthly data covering the period between 1994 and 2012. they found that an increase in oil price stimulated a depreciation of the rand exchange rate. oil price significantly impacted on the nominal exchange rate in south africa. the effect of changes in price of oil on exchange rates in nigeria was examined by osuji (2015) using monthly data covering the period 2008m1 to 2014m12. utilizing ols and vecm, he observed that oil price movements have a significant causal effect on exchange rate and the country’s foreign reserves. volkov & yuhn (2016) investigated the relationship between oil price shocks and the volatility of exchange rate comparing the emerging markets with the developed and advanced markets. using vecm and garch over the period 1998 12, they observed that oil price shock is significant in determining exchange rate in emerging markets (russia, brazil, and mexico), but weak in advanced markets (norway and canada). in an effort to investigate the dynamics of oil price volatility between the us$/euro exchange rate and the general oil market, jawadi et al. (2016) deployed intraday 304 r. o. alenoghena data in a garch volatility approach on a monthly data covering the period between 2014:9 to 2016:1. the analysis revealed that a negative relationship existed between oil returns and the us dollar/euro rates, implying that an appreciation of the us$ reduced the price of oil in the market. also, there is a volatility spillover to the general oil market from the us exchange market through the intraday jumps. in a study of six oil-dependent economies over the periods 2000-2007 and 2010-2016, mensah et al. (2017) used johansen co-integration test to explore the relationship between oil price and exchange rate. they confirmed the existence of a growing inverse relationship between oil price and exchange rate, especially in the post-crisis period. finally, while examining the dynamic effects of the various types of oil price shocks on the real exchange rates of countries that are net importer and exporter, ji et al. (2020) adopted monthly data spanning from 1974:2 to 2016:12 and deployed an svar model. the study results show that oil supply shocks produced greater depreciating effects on exchange rates for the oil exporting countries than the importing countries. some studies have examined the relationship between oil price shocks and industrial output. most of the studies agree that oil price shocks have a negative effect on the industrial output of the economies (ahmed & wadud, 2011; awartani et al. 2019). perhaps more recent studies have emerged on the effect of oil related activities on the sovereign risks of nations. for instance, in the study of the effect of oil volatility shocks on the sovereign risk of brics countries, bouri et al. (2018) adopted monthly data from 2009:7 to 2017:3 and deployed a multivariate quantile regression. the findings underscored the presence of asymmetry between oil exporters and oil importers with the former being more sensitive to positive oil shocks while the latter showed more sensitivity to the negative oil shocks. while deploying daily data spanning from february 14th, 2011 to july 31st, 2019, bouri (2019) examined the effect of oil jumps on the sovereign risk of some major world oil exporters. the results showed that the sovereign risk of the countries, though may not be affected by oil price jumps, were significantly impacted by oil volatility jumps indicating a contagion effect. while deploying a quantile-based approach in a study of oilexporting and importing mena countries, bouri et al. (2020) examined how levels of oil volatility and returns affect the sovereign risk of countries in settings that are static and time-varying. they found that the sovereign risk of the countries in the study had specific implications for the oil crash of 2014-2016. the shocks in oil volatility and prices predicted the sovereign risk of the countries with spreads that are time varying and the oil returns impacts across quantiles that were asymmetric. the impacts of disaggregated oil price shocks on investor sentiments and uncertainties for both the short-run and long-run asymmetries was analysed by shahzad et al. (2019) using the data span of 1995:1 to 2015:12 in a nardl framework. they conclude that while oil demand shocks affected uncertainties, the oil supply shocks impacted treasury rates. investor sentiments are affected by both the oil demand and supply shocks. the gaps in the existing literature on the nigerian economy stem from the fact that the existing studies like iwayemi & fowowe (2011), omojolaibi (2013), ogundipe et al., (2014) and osuji (2015) on the nigerian economy did not cover an extended period and utilized a limited number of variables. this study covers this lacuna by covering the period of oil price volatility in the world market (2015-2016) and utilizing six macroeconomic variables in the study. also, studies of this nature which are conducted on a developing economy that produces and exports oil and imports the finished oil-based products are often very revealing at each stage because of the growing and dynamic nature of the global economy. oil price shocks and macroeconomic performance of the nigerian economy: a structural var approach 305 3. theoretical framework within the economic growth literature, there are several growth theories that attempt to establish the relationship between oil price volatility and the macroeconomy or some parts thereof. in what follows, this study tries to briefly highlight four (4) of such theories, namely the linear/symmetric relationship theory of growth, the asymmetry-in-effect theory of economic growth, the renaissance growth theory, and the dutch disease theory of economic growth. the linear/symmetric relationship theory of growth postulates that the fluctuations in a country’s total output (gdp) are often occasioned by the volatility in oil prices. based on the theory, an inverse relationship exists between oil price volatility and the gdp growth in the economy. the pioneering work on this theory was done by hamilton (1983). as a follow-up, hooker (1996) building on the work of hamilton confirmed that a 10% increase in oil price was associated with a 0.6% drop in gdp growth. also, a similar conclusion was reached by laser (1987) and rotemberg & woodford (1996). on the other hand, lee et al. (1995) observed that such a sudden and unexpected increase in the price of oil, induced a significant and asymmetric effect on total output and other macroeconomic variables including personal incomes and other forms of earnings. the asymmetry-in-effect theory of economic growth proposes that a decline in oil prices is associated with no significant effect on the economic activities in the us and some oecd countries (mork, 1989; lee et al. 1995; ferderer, 1996). for instance, mork (1989) expanded the work of hamilton (1983) by investigating the asymmetric response of oil price volatility by disintegrating oil price volatility into real price increases and decreases. the findings show that oil price drop is significantly different and perhaps zero. the results of mork (1989) are reinforced in the study of lee et al. (1995) when they examined the asymmetry-in effects during the period before and after 1985. lee et al. (1995) were able to resolve the issue of whether the asymmetric effect is dependent on the macroeconomic variable or not. as a follow-up, ferderer (1996) sought to explain the asymmetric relationship between oil price volatility and economic activity by introducing three possible activity channels: sectoral shocks, counter-inflationary monetary policy and uncertainty. ferderer concluded that the asymmetric oil price-output relationship is partly explained by the responses found in asymmetric monetary policy. the renaissance growth theory is considered an extension/fall-out of the symmetric relationship theory of economic growth. the renaissance growth theory attempts to examine the relative effect of oil price changes or oil price volatility on the level of economic activity of a country during a given time frame. along this line, lee (1998) concludes that oil price change and oil price volatility both affect economic growth negatively, but the effect of changes in oil prices wears out immediately after one year. therefore, lee (1998) confirmed that the long run appreciable effect on economic growth may be attributed to the volatility in oil prices rather than the changes in the oil price level. the dutch disease theory of economic growth posits that higher oil prices would generally alter the production structure of the oil-exporting country to ensure that it concentrates more on oil production and exploration while ignoring the growth of the other sectors of the economy. the accruing increased levels of oil revenues would make for the appreciation of the country’s local currency and induce an increase in the country’s taste for and import of consumer goods. consequently, the tendency for increased import of consumer goods would reduce the competitiveness and discourage the local producers. therefore, the dutch disease theory contends that an increase in oil prices will not eventually benefit the economy of an oil exporting country (corden & neary, 1982). 306 r. o. alenoghena 4. the model the dynamics of oil price can be modeled based on the theoretical postulations of huang & gio (2007) and ahmed & wadud (2011). their postulation suggests that a stochastic process relates the oil price (opt) to the aggregate supply (st) and aggregate demand (dt) activity of the economy at any point in time, hence: 𝑂𝑃𝑡 = 𝑂𝑃𝑡−1 + ℰ𝑡 𝑂𝑃 (1) aggregate supply can be modeled as follows: 𝑆𝑡 = 𝑆𝑡−1 + ℰ𝑡 𝑆 (2) similarly, aggregate demand can also be modeled accordingly, 𝐷𝑡 = 𝐷𝑡−1 + ℰ𝑡 𝐷 (3) however, the aggregate supply of output (𝑌𝑡 𝑆) may be determined by the process of random walk which leads to equilibrium and the price of oil may now be given as, 𝑌𝑡 𝑆 = 𝑆𝑡 + 𝛽1𝑂𝑃𝑡 = 𝑆𝑡−1 + ℰ𝑡 𝑆 + 𝛽2𝑂𝑃𝑡 (4) where, 𝛽1𝑎𝑛𝑑 𝛽2 are the coefficients of the elasticity of inverse energy of output. similarly, the process of aggregate demand for output may also be determined by its own process of random walk and exchange rate (e), 𝑌𝑡 𝐷 = 𝐷𝑡 + 𝜓1𝑒𝑡 = 𝐷𝑡−1 + ℰ𝑡 𝐷 + 𝜓2𝑒𝑡 (5) where 𝜓1𝑎𝑛𝑑 𝜓2 are the coefficients of elasticity of demand for energy output. equations (4) and (5) are similar to the lm and is form of the aggregate supply and aggregate demand models in macroeconomics which depict the aggregate domestic supply and demand prices for the output of oil in relation to the exchange rate and other macroeconomic variables like inflation, exchange rate, interest rate and industrial output. huang and guo (2007) have been able to demonstrate why the real gdp is affected by the supply output and the shocks in oil prices; hence, the oil price shocks can potentially affect the real oil price in the long run. the model to be estimated is represented as follows 𝐺𝐷𝑃𝑅𝑡 = 𝛼0 + 𝛼1𝑂𝐼𝐿𝑃𝑡1 + 𝛼2𝐼𝑁𝐹𝐿𝑡2 + 𝛼3𝐼𝑁𝑇𝑅𝑡3 + 𝛼4𝐸𝑋𝑅𝑡4 + 𝛼5𝐼𝑃𝐼𝑡6 + 𝜇𝑡 − 6 (6) where: 𝛼0, 𝛼1, 𝛼2, 𝛼3, 𝛼4 𝑎𝑛𝑑 𝛼5 are the coefficients to be estimated and 𝜇𝑡 is the stochastic error term. furthermore, gdpr represents economic growth; oil is oil price; infl is inflation; intr is interest rate; exr is exchange rate and; ipi is industrial production index. 4.1. data sources the study uses svar model over the period 1981 to 2018, which provides 39 annual observations. the variables adopted include: crude oil price, economic growth, inflation (consumer price), interest rate, exchange rate and industrial production index. the source of data for this work is mainly secondary data from the world development indicators (world bank). the data set for the variables on consumer prices and industrial production through the wdi source ends at 2018, at the time of writing this article. to standardize the variables, we use the natural logarithm for all variables. the full name, description and source of the data are presented in the table 1. oil price shocks and macroeconomic performance of the nigerian economy: a structural var approach 307 table 1 data and variable description variable full name description source oilp brent crude oil price uk brent crude oil in us$ per barrel unctad gdpr economic growth the annual growth rate (percentage) of gdp at market prices: estimated as ( 𝑌𝑡−𝑌𝑡−1 𝑌𝑡−1 ) % for each year wdi infl inflation consumer prices at annual % change wdi intr interest rate lending rate at which banks meet the short and medium-term financing needs of government and the private sector. wdi ipi industrial production index value added is the net output of industrial sectors after adding up all outputs and subtracting intermediate inputs. wdi exr exchange rate price at which nigeria local currency (naira) exchange for one unit of us$ wdi 4.2. analytical framework in the classical state, a var framework has all the variables endogenous and comprised in the set k observations as follows, 𝑌𝑡 = (𝑦1𝑡, 𝑦2𝑡, 𝑦3𝑡, … , 𝑦𝑘𝑡) (7) for k = 1…p. hence, the var (p)-process can be formally defined as: 𝑦𝑡 = 𝐴1𝑦𝑡−1 + 𝐴2𝑦𝑡−2 … + 𝐴𝑝𝑦𝑡−𝑝 + 𝜇𝑡 (8) where 𝐴𝑖 are (k x k) coefficient matrices for i=1… p and 𝜇𝑡 is k-dimensioned with e(𝜇𝑡) = 0 and time-invariant with positively defined covariance matrix e (𝜇𝑡𝜇𝑡 𝑇 ) = ∑𝑢 (white noise). when given sufficient starting values, the var (p)-process is stable and generates stationary time series with reliable means, variances and covariance. a var (p) is a reduced form simultaneous equation model. the dynamics of the var indicators are obtained by a mechanical technique which is unrelated to economic theory. the structural var technique was developed to account for the short-coming of var by imposing restrictions to make the technique more related to existing economic theory. svar model in its standard form can be defined as: 𝐴𝑦𝑡 = 𝐴1 ∗ 𝑦𝑡−1 + 𝐴2 ∗ 𝑦𝑡−2 + ⋯ + 𝐴𝑝 ∗ 𝑦𝑡−𝑝 + 𝛽ℰ𝑡 (9) we can resolve equation (9) for 𝑦𝑡 as follows: 𝐴𝑦𝑡 = 𝐴 −1𝐴1 ∗ 𝑦𝑡−1 + 𝐴 −1𝐴2 ∗ 𝑦𝑡−2 + ⋯ + 𝐴 −1𝐴𝑝 ∗ 𝑦𝑡−𝑝 + 𝐴 −1𝛽ℰ𝑡 (10) where 𝐴𝑖 ∗ for i = 1...p represent the structural coefficients which in general form differ from the corresponding var form counterparts. the svar model is more adjusted to identify shocks through structural impulse response functions (irf). the irf demonstrates the dynamic responses of each variable to the present and future values of the other variables. the structural variance decompositions display the volume of information that each variable gives to the others in the autoregression as the variation in an endogenous variable is divided into component shocks of var and allocates the variance of forecast errors in a given variable to its own shocks and other variables. the svar model emphasizes 308 r. o. alenoghena the imposition of restrictions through the inversion of stationary vector autoregressive representation (var). 𝑦𝑖 = 𝐴1 −1(𝐿) + ℰ𝑡 (11) where 𝑦𝑖 represents the vector of the variables which are to be included in the model and 𝐴1 −1(𝐿) refers to the inverted coefficient matrix while ℰ𝑡 is the error term. to obtain the process of linear combinations which reflect past innovations in line with wald compositions, we make 𝐴1 −1(𝐿) = 𝛷(𝐿). therefore, 𝑦𝑡 = 𝛷(𝐿)𝜇𝑡 = ∑ 𝛷ℎ𝜇𝑡−ℎ ∞ ℎ=0 − − − − (12) to recover the unobservable relevant shocks (ℰ𝑡) out of the observable reduced form innovations, a structural var representation is constituted through the imposition of a set of restrictions. therefore, the structural var form should be stipulated: 𝐴1𝑦1 = ∑ 𝐴1 ∗ 𝑦𝑡−1 + 𝛽ℰ𝑡 ℰ𝑡 ~𝑁(0, 1𝑚) 𝑝 𝑖=1 − − − (13) where: 𝑦1 = 𝑜𝑖𝑙, 𝑔𝑑𝑝, 𝑖𝑛𝑓𝑙, 𝑖𝑛𝑡𝑟, 𝑖𝑝𝑖 & 𝑒𝑥𝑟 and refers to 4 x 1 vector of endogenous variables; 𝐴1 is the (m x m) matrix of contemporaneous effects; 𝐴1 ∗ is the matrix (m x m) with lagged effects and b represents the (m x m) matrix of shocks referring to the "shortrun response" matrix. the next in line is the structural equation that links 𝜇𝑡 𝑡𝑜 ℰ𝑡 which takes account of the restriction. we can retrieve the reduced form residuals the svar model using; 𝜇𝑡 = 𝐴 −1𝐵ℰ𝑡 (14) 𝐴−1 can be estimated to obtain the vector of structural shocks. 𝐴−1𝐵ℰ𝑡 is the response of 𝑦1to the structural shocks. also, the variance-covariance matrix can be represented by 𝜇𝑡 = 𝐴 −1𝐵𝐵𝑇𝐴−𝑇 (15) further adjustments to equation (15) will depend on the restrictions to be imposed (lutkepohl 2006; lutkepohl & kratzig 2004). the structure of restrictions in the model is defined as (𝑘 − 1). hence the number of restrictions to be imposed can be shown: 𝑘(𝑘−1) 2 (16) in this study, we handle the case of 6 variables svar which imposes the long-run c (1), matrix. the article by kozluk & mehrotra (2009) specifies the svar modeling procedure for a six-variable case. note that the 0 element in the matrix means there are no contemporaneous response expectation from specific shock in that element. but, the nonzero elements 𝑎𝑖𝑙 (𝑖 = 1,2,3,4,5,6; 𝑗 = 1,2,3,4,5,6) refer to the coefficients of the i'th element response to the shock of the jth element (chen et al.,2016, p.45 ). the scheme in the matrix of equation (17) follows an order of relationship flowing from the exogenous to the endogenous variables. the svar restrictions in the matrix follow the constraints that flow from economic theory. six restrictions are applied in tandem with economic theory. according to the applicable 𝑐ℎ𝑜𝑙𝑒𝑠𝑘𝑦 triangular factorization, the structural var estimates of short run pattern can be shown as follows: oil price shocks and macroeconomic performance of the nigerian economy: a structural var approach 309 (17) (18) one, oil price is exogenously determined and is not affected by a developing country and minimal producer like nigeria (amaiquema & amaiquema, 2017). two, economic growth does not respond simultaneously to any changes in the domestic variables in the equation (kiliçarslan & dumrul, 2017). three, inflation is mainly affected by changes in gdp and oil price. four, interest rate is not simultaneously affected by exchange rate and industrial output. finally, while industrial output may not directly be affected by only exchange rate, there are no restrictions on the effect on exchange rate by all the other variables (basnet & upadhyaya, 2015). 5. empirical analysis and results 5.1. descriptive statistics this sub-section of the study discusses the statistical properties of the variables that are used in the study. the features that are presented include the mean, median, standard deviation, kurtosis, jarque–bera and probability. the results are presented in table 2. the means of oil price, economic growth, inflation interest rate, industrial production index and exchange rate are 3.54, 11.28, 2.68, 2.85, 3.37 and 3.52 respectively. furthermore, the maximum values associated with the variables are 4.60, 14.17, 4.29, 3.45, 3.63 and 5.72 for oil price, economic growth, inflation interest rate, industrial production index and exchange rate. on the other hand, the minimum values associated with the variables are 2.67, 6.57, 1.68, 2.24, 2.89 and -0.39 for oil price, economic growth, inflation, interest rate, industrial production index and exchange rate respectively. the period of analysis for the variables covers from 1981 to 2018 making 38 observations for all the variables except for the gdp which has 37 observations because of the differencing factor. the variables with the highest variability (standard deviation) for the period are gdp and exchange rate with 2.37 and 1.89 respectively. the peak for the distribution which is measured by kurtosis shows that only interest rate with a value of 3.49 is above 3.0. estimate of matrix a 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 𝑂𝐼𝐿𝑃𝑡 𝐺𝐷𝑃𝑅𝑡 𝐼𝑁𝐹𝐿𝑡 𝐼𝑁𝑇𝑅𝑡 𝐸𝑋𝑅𝑡 𝐼𝑃𝐼𝑡 𝐺𝐷𝑃𝑅𝑡 𝑂𝐼𝐿𝑃𝑡 𝐼𝑁𝐹𝐿𝑡 𝐼𝑁𝑇𝑅𝑡 𝐸𝑋𝑅𝑡 𝐼𝑃𝐼𝑡 1 0 0 0 0 0 𝑎21 1 0 0 0 0 𝑎31 𝑎32 1 0 0 0 𝑎41 𝑎42 𝑎43 1 0 0 𝑎51 𝑎52 𝑎53 𝑎54 1 0 𝑎61 𝑎62 𝑎63 𝑎64 𝑎65 1 (17) estimate of matrix b 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 𝑂𝐼𝐿𝑃𝑡 𝐺𝐷𝑃𝑅𝑡 𝐼𝑁𝐹𝐿𝑡 𝐼𝑁𝑇𝑅𝑡 𝐼𝑃𝐼𝑡 𝐸𝑋𝑅𝑡 𝐺𝐷𝑃𝑅𝑡 𝑂𝐼𝐿𝑃𝑡 𝐼𝑁𝐹𝐿𝑡 𝐼𝑁𝑇𝑅𝑡 𝐸𝑋𝑅𝑡 𝐼𝑃𝐼𝑡 𝑎11 0 0 0 0 0 0 𝑎22 0 0 0 0 0 0 𝑎33 0 0 0 0 0 0 𝑎44 0 0 0 0 0 0 𝑎55 0 0 0 0 0 0 𝑎66 (18) 310 r. o. alenoghena table 2 descriptive statistics loil ldgdp linfl lint lipi lexr mean 3.5435 11.2802 2.6762 2.8547 3.3660 3.5229 median 3.3701 11.7992 2.5301 2.8670 3.3570 4.6220 maximum 4.6019 14.1671 4.2882 3.4547 3.6299 5.7239 minimum 2.6686 6.5658 1.6842 2.2443 2.8999 -0.3953 std. dev. 0.6285 2.3695 0.7081 0.2783 0.1879 1.8923 skewness 0.3638 -0.6229 0.8704 -0.6852 -0.5023 -0.8173 kurtosis 1.7694 2.1344 2.7902 3.4951 2.4876 2.4294 jarque-bera 3.1511 3.5478 4.7399 3.2732 1.9607 4.6214 probability 0.2069 0.1697 0.0935 0.1946 0.3752 0.0992 observations 38 37 38 38 38 38 author’s computation since all other variables of the distribution have kurtosis value less than 3, the distribution can be classified as platykurtic (short-tailed and fat). the probability values for the distribution are compared to the jarque-bera test of normality, to decide the asymptotic test. the table shows that the probability values are low for all the variables, the means are nearly equal to the medians, hence we conclude that the residuals for the distribution are normally distributed. 5.2. time series properties: unit root test the unit root test for the study is conducted using the augmented dickey-fuller (adf) approach. the unit root test is performed on all the variables in the study (oil price, gdp, inflation, interest rate, industrial production index and exchange rate) and the results presented in table 3. the values of the t-statistics became greater that the test critical values at 1%, 5% and 10% at first difference i (1). the probability values at first difference confirm the stationarity of all the variables at the level of integration. at the level of the joint stationarity test, the fisher chi-square value is 146.42 with probability of zero and the choi z-statistic value is -10.75 with probability of zero also. therefore, the unit root test shows that all the variables are integrated at order of first difference [i(1)]. table 3 unit root test with adf method statistic prob.* adf fisher chi-square 146.421 0.0000 adf choi z-stat -10.7456 0.0000 series t-stat prob. order of integrtn max lag obs l(oilp) -5.8071 0.0000 i(1) 2 35 l(dgdp) -8.3071 0.0000 i(1) 2 35 l(infl) -6.7757 0.0000 i(1) 2 35 l(intr) -5.9557 0.0000 i(1) 2 35 l(ipi) -6.4684 0.0000 i(1) 2 35 l(exr) -5.1702 0.0001 i(1) 2 35 test critical values: 1% level -3.626784 5% level -2.945842 10% level -2.611531 source: author’s computation oil price shocks and macroeconomic performance of the nigerian economy: a structural var approach 311 5.3. optimal lag selection the optimal lag selection process is shown in table 4. the lag that is selected to be used for our svar analysis as indicated by aic and sc is lag four. therefore, the lag to be used for our analysis of the svar is lag four. table 4 optimal lag selection var lag order selection criteria endogenous variables: loil ldgdp linfl lint lipi lexr lag logl lr fpe aic sc hq 0 -77.47337 na 6.34e-06 5.058992 5.331084 5.150543 1 59.46202 215.777 1.45e-08 -1.058304 0.846342 -0.417449 2 119.6029 72.898 4.24e-09 -2.521386 1.015814 -1.331226 3 177.6855 49.28226 2.23e-09 -3.859729 1.310024 -2.120265 4 305.8503 62.1405* 5.21e-11* -9.4455* -2.6432* -7.1567* * indicates order of lag selected based on criterion lr: modified lr test statistic (test at 5% level) fpe: final prediction error aic: akaike information criterion sc: schwarz information criterion hq: hannan-quinn information criterion source: author’s computation 5.4. structural var estimates table 5 shows the results of the structural var analysis in the study. the effect of oil price on the macroeconomic variables is shown in the first column of the table. the effect of oil price shock on the country's gdp and industrial production is negative and significant. on the other hand, the effect of oil price shock on inflation and interest rate is positive and significant. however, the effect of oil price shock on exchange rate is positive, but not significant. in other words, an increase in the price of crude oil in nigeria elicits a decrease in gdp and industrial output. on the other hand, a decrease in the price of crude oil is accompanied by an increase in inflation, interest rate and exchange rate. table 5 results of structural var test oilp gdp infl intr ipi exr oilp 0.2561*** '(0.0000) gdp -0.7567*** 0.3406*** (0.0010) (0.0000) infl 0.8130** -0.5970*** 0.4750*** (0.0233) (0.0093) (0.0000) intr 0.0739 0.0079 0.0497 0.1116*** (0.4126) (8936) (0.2105) (0.0000) ipi -0.1860*** -0.0858*** -0.0104 -0.0679 0.0444*** (0.0000) (0.0003) (0.5198) (0.3127) (0.0000) exr 0.2358 -0.2436*** 0.2928*** -0.6512*** -0.2326 0.1443*** (0.1302) (0.0065) (0.0000) (0.0033) (0.6718) (0.0000) note: *** , ** and * indicate significant at 1% , 5% and 10% levels respectively. source: author’s computation 312 r. o. alenoghena 5.5. svar impulse response this study applies the framework of impulse-response function to analyze and interpret the interaction between the variables of study in the short-run. the impulse-response function shows the responses of other variables like economic growth, inflation, interest rate, industrial production and exchange rate to one-time shock changes in oil price. this study performs the cholesky decomposition on the svar equation (17) and examines the responses of economic growth, inflation, interest rate, industrial output and official exchange rate to oil price shocks. figure 1 shows the results of impulse-response functions for the responses of key macroeconomic variables to oil price shocks in nigeria. the first diagram in figure 1 shows the response of oil prices to a shock from itself. the effect starts with a negative response and maintains it up to the 4th period. the effect turns positive up to the 6th period when it becomes negative. the negative trend is maintained until the 8th period when it becomes damp. on the overall scale, the short run response of oil price to a shock by itself is negative. the second diagram in figure 1 shows the response of gdp (economic growth) to short term oil price shocks. the initial response of gdp to oil price shock is negative up to the 2nd period when it turns positive. the upward trend is maintained up until the 5th period. thereafter, a negative trend emerges until the 8th period when it becomes damp until the 10th period. the overall short-run effect of oil price shock on gdp in nigeria appears to be indeterminate. the third diagram in figure 1 illustrates the response of inflation to short term oil price shocks. the starting response of inflation to oil price shocks is positive and maintained up to the 5th period. from the 5th period to the 8th period, the response is negative and becomes positive again to the 10th period. the overall response of inflation to oil price shocks in nigeria is positive. the fourth diagram in figure 1, shows the response of interest rate to oil price shocks in the short term. the initial response of interest rate is a mild negative up to the 4th period. thereafter, it turns mildly positive, gets to the 6th period and becomes negative again. from the 8th period, it becomes positive till the 10th period. the average effect of oil price shock on interest rate is mild, damp and can be largely regarded as indeterminate. fig. 1 impulse-response function oil price shocks and macroeconomic performance of the nigerian economy: a structural var approach 313 the fifth diagram in figure 1 shows the response of industrial production to oil price shocks in the short term. the starting response of industrial output to oil price shock is a dramatic decline before it becomes flat between the 3rd and 4th periods. this is followed by a sharp increase up to the 6th period. thereafter, it declines mildly up until the 9th period when it becomes damp till the end. the overall response of industrial output to oil price shocks is very dramatic and has both positives and negatives. the sixth diagram in figure 1 depicts the short term response of exchange rate to oil price shocks in nigeria. the response of exchange rate starts with a sharp decline and flattens out between the 2nd and 3rd periods. this is followed with a positive which peaks in the 5th period before becoming negative. the decline from the 5th period flattens out between the 7th and 8th periods when it rises gently until the end. 6. conclusions this study examines the effect of oil price shocks on macroeconomic variables in nigeria utilizing annual data over the period 1981 to 2018. specifically, the study investigated the effect of oil price shocks on economic growth, inflation, interest rate, industrial production and exchange rate. nigeria, as a small economy that is crude oil exporting and importer of finished oil products, makes the country an interesting case study. several authors have written on the effect of oil price shocks on developing countries, but very few studies have focused on more than four variables with an expanded period to cover the recent times that witnessed the massive volatility in world oil prices. the study utilized the structural var approach and specifically examined the long-run effect among the variables as well as the short-run impulse response function. the findings in the study suggest that oil price shocks have significantly and negatively affected economic growth and industrial output in nigeria. this position is in tandem with studies like bekhet & yusop (2009), alley et al. (2014) and kiliçarslan & dumrul (2017). however, the conclusion is at variance with omojolaibi (2013), igberaese, (2013), yukata (2015) and ifeanyi & ayenajeh (2016). the other set of results in the study shows that oil price shocks have significant positive effect on inflation. also, while the effect is positive on interest rate and exchange rate, the result is not significant. the impulse response function shows that oil price shocks have negative effect on oil price changes. the results of impulse response function show a negative effect on output growth, while the effect on inflation is positive. while the effect of impulse response function of oil price shocks on industrial production shows large fluctuations, the effect on interest rate and exchange rate is minimal, largely mild and damp. the findings in this study confirm that the response of the nigerian economy to oil price shocks falls in tandem with the renaissance theory of economic growth and the dutch disease theory of economic growth. first, the renaissance theory is operational because an increase in oil price shock is not accompanied by economic growth. second, the discovery and production of oil in nigeria has led to the neglect of the other producing sectors of the economy over the years and stimulated the import of consumer goods. this is in line with the dutch disease theory of economic growth. nigeria’s earnings from nonoil exports are less than 15% of total exports. it explains why the country runs into balance of payments problems any time the earnings from oil export drop. also, nigeria’s industrial sector is heavily dependent on the external sector for raw material inputs. the heavy dependence of the economy on the external sector makes it very vulnerable to the shocks and volatility from the external sector. 314 r. o. alenoghena the results from this study like several others: (omojolaibi, 2013; khuram et al. 2015; ifeanyi & ayenajeh, 2016) show that oil price shocks are a significant cause of macroeconomic fluctuation in oil-importing and exporting small and developing economies like nigeria. important macroeconomic variables like output growth, inflation, industrial production and exchange rate may be adversely affected by oil price volatility and shock. the diversification policy direction entails the conscious development of other important producing sectors of the economy like agriculture and industry. with the abundance of natural resources, the country can emphasize production and semi processing activities in the mines and mineral subsector of the economy. the government should encourage export-oriented operators with modern technological content and appropriate incentives in these sectors of the economy. this policy direction for the oil importing developing economy is to isolate the real sector from the vagaries of oil price volatility and diversify the export earning capability of the nation. therefore, the policy recommendation would ensure that the government pursues the economic diversification that would reduce the nation’s over-dependence on oil. references adeniyi, o., omisakin, o., yaqub, j., & oyinlola, a. 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(2015). oil prices and economic growth in developed countries. international journal of business and social sciences, 6 (11), 1–7. cenovni šokovi nafte i makroekonomske performanse nigerijske ekonomije: strukturalni var pristup ovaj rad proučava efekte cenovnih šokova nafte na makroekonomski performans nigerijske privrede u periodu od 1980 do 2018. uticaj cenovnih šokova nafte se proučava na makroekonomskim varijablama kao što su: rast proizvodnje, inflacija, kamata, devizni kurs i indeks industrijske proizvodnje koristeći svar pristup (strukturna vektorska autoregresija). rezultati istraživanja su pokazali da cenovni šokovi nafte značajno i negativno utiču na ekonomski razvoj i industrijsku proizvodnju. dalje, iako rezulteti pokazuju da cenovni šokovi nafte imaju značajan pozitivni uticaj na inflaciju, njihov efekat je pozitivan i na kamatu i devizni kurs, ali ne značajno. rezultati funkcije impulsnog odziva pokazuju negativan uticaj na rast proizvodnje, pozitivan na inflaciju ali umeren i neodređen na industrijsku proizvodnju, kamatu i devizni kurs. na osnovu nalaza ove studije, teorije “renesanse” i “holandske bolesti” ekonomskog razvoja primenjive su na nigerisjku ekonomiju. preporuke za donosioce odluka uključuju izdvajanje realnog sektora zemlje iz hirovitosti cene nafte i potragu za ekonomskom diverzifikacijom da bi se smanjilo prekomerno oslanjanje na naftu. ključne reči: cena nafte; ekonomski rast; inflacija; devizni kurs; industrijska proizvodnja; svar facta universitatis series: economics and organization vol. 18, no 2, 2021, pp. 157 168 https://doi.org/10.22190/fueo210311011e © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper effectuation and causation decision making logics of managing uncertainty and competitiveness by nigerian retail business entrepreneurs1 udc 658.87(669) 005-51(669) christopher idemudia ebegbetale department of business administration, faculty of management sciences, university of lagos, akoka, yaba, lagos state, nigeria abstract. uncertainty is a major dimension of business that alters business plans and courses of actions. hence, this study primarily examined how entrepreneurs deal with uncertainty using both effectual and causal logics. the study design was cross-sectional while multistage sampling technique was used to collect primary data. these data were analysed using bivariate correlation and hierarchical regression techniques of spss version 23. the results of the correlation analysis showed that causation and three of the four subdimensions of effectuation had significant relation with competitiveness while precommitment did not. the analysis further showed that nigerian retail entrepreneurs tended more towards causation and effectuation. the results from the hierarchical regression revealed that causation made the most unique impact on competitiveness and was closely followed by experimentation and flexibility. however, affordable loss and pre-commitment did not. this study contributed to knowledge by empirically showing that entrepreneurs will not always be more effectual oriented in all cases. it also confirmed that causation and effectuation should be seen as complementary and not exclusive strategies. key words: effectuation, causation, competitiveness, retail business, nigerian entrepreneurs, uncertainty. jel classification: d80, l26 received march 11, 2021 / revised april 21, 2021 / accepted may 26, 2021 corresponding author: christopher idemudia ebegbetale department of business administration, faculty of management sciences, university of lagos, akoka, yaba, lagos state, nigeria e-mail: cebegbetale@live.unilag.edu.ng 158 c. i. ebegbetale 1. introduction uncertainty is a major dimension of business environment causing sleeplessness for business entrepreneurs and other decision makers. it often interrupts plans and changes course of actions for businesses. it also presents opportunities and threats (laine & galkina, 2016) that can alter market positions of leaders, challengers, and followers. brettel, mauer, engelen and kupper (2012) defined uncertainty in terms of the variance between the information possessed by an organisation and those it required to execute a particular task, i.e. predicting future events is not possible by means of probability distribution (frese, geiger & dost, 2019). by means of probability distribution, alvarez and barney (2005) clearly differentiated risk from uncertainty. under risk taking, all possible outcomes of a decision to exploit a market opportunity as well as the probability of the outcomes occurring are known at the time of taking the decision. however, under condition of uncertainty, both the possible outcomes and the probability of each outcome occurring are not known as at the time of making the decision. this according to eijdenberg, paas and masurel (2017) is due to the hostility, dynamism, and heterogeneity of a firm’s industry which react to economic and socio-political conditions of a country and the global environment. uncertainty can vary from high degree to low degree depending on the nature of unanticipated events and the way these degrees are approached for a successful performance has gained the attention of scholars and practitioners of business. traditionally, uncertainty has been managed by rational decision-making logic also known as causation logic, an orientation that focuses on the goal (or effect) the decision maker wants to achieve and subsequently determining the means or resources necessary to achieve the goals (henninger, brem, giones, bican, & wimschneider, 2020). the causal entrepreneur views the future as a continuation of the past that can be predicted and unpredictability as a function of ignorance, inadequate tools and techniques, or statistical anomalies arising from exogenous shocks and irrationality of agents among others. therefore, entrepreneurs or decision makers should focus on how to overcome or avoid these contingencies through better planning (dew, sarasvathy, read, & wiltbank, 2008). causation orientation further assumes that the task of an entrepreneur is to be alert in discovering and exploiting opportunities in uncertain conditions (read, song & smit, 2009). to achieve these, decision makers engage in collecting data on consumer preferences, analysing competitors’ successes and failure, and applying various strategic and financial tools to reduce uncertainty so as to be able to assemble and coordinate the resources required to exploit the identified market opportunities (alvarez & barney, 2005). a new approach to managing uncertainty, effectuation theory, came to limelight as an alternative to the existing traditional decision model, causation (dias, iizuka & boas, 2019). it is an orientation that assumes that entrepreneurs do not necessarily wait to discover opportunities but can create them through their relationship with their stakeholders (read et al., 2009). since the concept emerged in academic discourse, studies have been conducted on how effectuation and causation logics can be adopted to deal with uncertainties in business environment. effectuation encourages entrepreneurs to deal with the challenges of uncertainty by engaging their business partners with their available means and hoping to create opportunities that the firms can eventually exploit (dias et al., 2019). they put more efforts at innovation and novelty which make them less dependent on valid information needed ahead of time to enhance business operations and also making it more difficult for competitors to pre-empt their next actions (gregoire & cherchem, 2019). in this way, they do not need to predict the future but control it through their actions in the industry. effectuation and causation decision making logics of managing uncertainty and competitiveness... 159 there are several claims in the literature on which of causation and effectuation is more superior; yields better performance; or if both can be applied simultaneously to yield better results (eyana, masurel, & paas, 2018). however, none of the studies that examined these claims have done so within the context of retail businesses in nigeria (eijdenberg et al., 2017; eyana, et al., 2018; frese et al., 2019; henninger, et al., 2020; mckelvie, detienne, & chandler, 2013). therefore, this study identifies this gap and intends to examine how nigerian retail business entrepreneurs use effectuation and causation logics during uncertainty to maintain competitiveness. the remaining of the study will be divided into the following headings: literature review, methodology, statistical analysis/results, discussion and conclusion, and contribution to knowledge. 2. literature review 2.1. theoretical framework and hypotheses development 2.1.1. sarasvathy (2001) theory of effectuation sarasvathy (2001) developed a theory that best explains entrepreneurial behaviour during uncertainty. according to her, entrepreneurs are more likely to use effectual logic of decision making in uncertain context to control the future instead of predicting it. in this situation, the future is not clear and unpredictable. the entrepreneur sails these troubled waters with his available resources hoping to get a clearer direction as he sails further. she termed this approach “means based” instead of the usual traditional model of defining what is to be achieved before committing resources which sarasvathy termed, “goal driven” approach. also, an effectual entrepreneur is more guided by how much he can afford to lose by committing available resources to a project instead of the causal logic of how much is expected in gain. she termed this approach, “affordable loss versus expected return orientation”. furthermore, an effectual entrepreneur relies on relationship with stakeholders like customers, suppliers and even competitors through “pre-commitment instead of the causal logic of competitive analysis”. lastly, an effectual entrepreneur leverages on environmental contingencies by being “flexible instead of exploiting pre-existing knowledge”. put differently, effectuation and causation according to early researchers are opposing strategies, mutually exclusive, and inverted. read and sarasvathy (2005) clearly dichotomised the two concepts in these ways: causation operates on the logic of “if the future can be predicted then it can be controlled” while effectuation operates on the logic of “if the future can be controlled, then there is no need to predict it”; causation is driven by goals while effectuation is driven by means; causation is reactional and adaptive while effectuation is enactive and exaptive; causation sees environment as exogenous and outside the control of decision makers while effectuation sees environment as endogenous to decision makers who seek to control it by making pre-commitment with stakeholders like customers, suppliers, competitors, etc. however, more recent scholarly works discovered that effectuation and causation seem to be complementary, rather than exclusive (frese et al., 2019; laine & galkina, 2017). this study will also examine the relevance of this discovery within the nigerian context. chandler et al (2011) advanced sarasvathy theory by providing a framework that allows empirical study to be carried out using quantitative primary data. effectual logic was treated as a latent variable that can be measured using four constructs which are experimentation, 160 c. i. ebegbetale flexibility, affordable loss, and pre-commitment, while causation was treated as a unidimensional construct. this study adopts this framework and develops two central hypotheses that will be tested using primary data that will be collected from nigerian retail business entrepreneurs. in the first hypothesis, the four constructs of effectuation will be measured on competitiveness while in the second hypothesis, causation is measured as a single construct on competitiveness as shown below: h1: there is a significant positive relationship between effectual logic a) experimentation b) affordable loss c) flexibility d) pre-commitment and competitiveness during high uncertainty by nigerian retail business entrepreneurs. h2: there is a significant positive relationship between causal logic and competitiveness during high uncertainty by nigerian retail business entrepreneurs. 2.2. empirical review of literature empirical studies have been conducted on these concepts. however, most were based on experiment and use of qualitative data while only a few studies have used quantitative primary data (eyana, et al., 2018). the first quantitative assessment of the concept of effectuation was carried out eight years after sarasvathy initially delineated the concept in 2001 and subsequent follow up by other various qualitative studies (brettel et al., 2012). for example, chandler, detienne, mckelvie and mumford (2011) carried out a study with an objective to develop sound quantitative likerttype measures that promote empirical research on causation and effectuation constructs in new venture creation. the study employed semi-structured interview on entrepreneurs in the sampling frame. the findings revealed causation as a unidimensional construct and effectuation as a multidimensional construct that include experimentation, affordable loss, flexibility and pre-commitments. the study showed a negative association between causation and uncertainty, and a positive correlation between experimentation, a sub-dimension of effectuation and uncertainty. in another instance, brettel, et al. (2012) conducted a study that investigated how effectuation and causation practices affect r&d project performance. two central hypotheses were formulated to test if effectuation is positively related to success in highly innovative context or if causation approach is beneficial in projects with low innovativeness. many of the results from the analyses of the sub-hypotheses supported the two central hypotheses with a few showing otherwise. furthermore, mckelvie, et al., (2013) theoretically and empirically examined the appropriate dependent variable in effectuation research with an aim to address the divergent views, lack of evidence and limited guidance on appropriate short-and-long term measure of effectuation performance outcomes. the regression analysis showed a pattern of mixed results for effectuation and causation. the implication for research is that decision making under uncertainty using effectuation theory must theoretically identify an important dependent variable. also, laine and galkina (2016) explored the interplay between effectuation and causation in russian smes’ decision making on their foreign suppliers under regulatory shifts and increased institutional uncertainty. their aim was to compensate the research deficiencies on changing from one logic to another, the paradoxical interplay and dynamics of causation and effectuation over time. the study adopted longitudinal multiple-case study method and the analysis of data collected revealed that the firms use both effectuation and causation decision making logic simultaneously but more of effectuation during increased institutional uncertainty. another study by eijdenberg et al. (2017) further investigated how effectuation and causation orientation of small business owners in an emerging country burundi affect effectuation and causation decision making logics of managing uncertainty and competitiveness... 161 their decision-making and growth of their businesses in an environment of uncertainty. hypotheses were developed and tested to determine which of effectuation and causation orientation drives entrepreneurs more during uncertainty. the result from the analyses revealed that small business owners lean more towards effectuation than causation but neither affected small business growth later. the gap for future consideration is to explore other determinants of small business growth in uncertain context. in addition, eyana, et al. (2018) examined the effects of causation and effectuation behaviour of ethiopian entrepreneurs on performance of their new small tourism firms. the study developed and tested two hypotheses on causation and the four dimensions of effectuation also controlled for certain variables to predict firm performance. while the result of hypothesis one showed that causation has more positive impact on employment size than effectuation, the results of the analysis of hypothesis two showed varying effects of the four dimensions of effectuation on firm financial performance with more of the dimensions confirming that effectuation positively affects firm performance more than causation. in contributing to knowledge, the study did not find strong evidence to support the claim that effectuation is superior to causation in a non-western context. subsequently, gregoire and cherchem (2019) did a content analysis of 101 effectuation articles between 1998 and 2016 with the specific goal of identifying series of theoretical and methodological challenges of effectuation research. they observed through the literature that the difficultiy in building on prior studies is because so many of the studies on effectuation used different conceptions, data, and methods of observation. based on these findings, they proposed three ways of advancing effectuation research. the first is to adopt a conceptual articulation of the mode of action for effectuation. second is to define a new means for observing effectuation and its manifestations. third is giving more elaborate explanations on the reasons for the antecedents and consequences effectuation has. at that same time, frese et al. (2019) empirically investigated the determinants of effectuation and causal decision logics in online and high-tech start-up firms to address scholarly concerns about “effectuation research being insufficiently embedded in a nomological network of practically relevant antecedents”. to address the above concern, the study used qualitative method to identify four effectuation antecedents which are founder’s perceived uncertainty, investor influence, management experience, and entrepreneurial experience and validated this finding using quantitative method. the overall results from the qualitative analysis revealed that applying effectual and causal logics look more complementary or partly independent than exclusive; and also, that management experience and investor influence are potential meaningful determinants of effectuation and causation. the results from the quantitative analysis also confirmed what the qualitative analysis reported: that both effectuation and causation are not opposing strategies but rather complementary. finally, henninger, et al. (2020) investigated the use of effectuation in established firms. they observed a pattern in literature that showed that effectuation is often used more in start-ups and causation in established firms. they also found later research that supported the use of effectuation in established firms but how effectuation can be implemented has not been addressed in literature. this formed the focus of their study. they collected data through face-to-face semi-structured in-depth interviews because the instrument is flexible and allows detailed information to be collected as well as followup. the data were analysed using qualitative content analysis approach. the result showed that decision making in established firms frequently used more effectuation approach than the causation approach. this unexpected result negates earlier claims that established firms used more of causation approach because of their size. 162 c. i. ebegbetale within the nigerian context, the author is not aware of any studies conducted in the retail business sector of the economy using quantitative primary data to examine how entrepreneurs deal with uncertainty using both effectual and causal strategies. this study will employ this method. furthermore, eyana, et al (2018) also observed that literature has not been explicit on which of the causation and effectuation decision models yields better effects (performance) but tacitly, the choice of effectuation seems superior in literature tone. effects according to henninger et al., (2020) are goals or impacts a decision-maker is pursuing. in this study, effect will be measured as competitiveness because it is the overall motivation for entrepreneurs (henninger et al., 2020) and without being competitive, it will be difficult to survive and operate in highly uncertain context. in addition, scholars have called for a shift in focus in the advancement of effectuation theory (having evolved from nascent to intermediate stage) by rigorously testing their relationships with other constructs (frese et al., 2019). this study identifies this gap and intends to use competitiveness as the other construct since it is not aware of any existing work in this area within the nigerian context. this way the study will also be contributing to knowledge in the advancement of effectuation. the gap in literature also finds support in mckelvie, et al. (2013) who opined that the impacts effectuation and causation have on firm’s performance may be predicated on differing grounds. hence, this study intends to fill this gap by examining if effectuation and causation strategies are relevant to the competitiveness of nigerian retail business entrepreneurs during uncertainties. the choice of entrepreneurs for this study is supported by read and sarasvathy (2005) who posited that analysing effectuation depends largely on the person being analysed and also based on expertise of entrepreneurs. entrepreneurs in this context refer to the owners of business (eijdenberg et al., 2017) that are actively involved in the running of the business. they become a variable of interest for this study because they are in the best position to give the most appropriate response to items in the research instrument (frese et al., 2019). 2.3. conceptual framework here the researcher presented a model (as shown in figure 1) that depicts the relationship between the exogenous variables (causation and effectuation) and the endogenous variable (competitiveness) in this study. 3. methodology the study employed cross sectional survey design while the population of the study consists of retail businesses limited to supermarkets, boutiques and mini-markets that have a staff strength below 50. the choice of retail businesses stems from the fact that it ranked first among the five major economic sectors in nigeria with 42.3% and closely followed by the agricultural sector with 20.9% (msmes, 2017 national survey). the study was limited to lagos state because it is the commercial hub of the country and has the highest number of enterprises across all sectors of the nigerian economy (msmes, 2017 national survey). furthermore, many micro and small businesses are in retail forms and according to the msmes 2017 report, msmes in nigeria are the bedrock of the economy and contributed 49.78% to the gdp in 2017. effectuation and causation decision making logics of managing uncertainty and competitiveness... 163 fig. 1 conceptual framework source: researcher 2021 a multi-stage sampling technique was employed with purposive sampling technique adopted initially to select the respondents while the convenient sampling technique was then used to administer the questionnaire. the consent of the respondents was sought and anonymity guaranteed. the response rate was 72% which could be due to the researcher’s constant touch during the four weeks’ period (september 15, 2020 to october 6, 2020) within which the copies of the questionnaire were administered and filled for return. the response rate fell within recommended threshold of hair et al. (2010) who recommended 20:1 sample-to-variable ratio for robust factor analysis. this study measured six variables and with 215 respondents. the ratio of 36:1 obtained exceeded the recommended threshold. the questionnaire survey instrument was divided into sections a, b and c. section a was used to gather socio-demographic data like gender, age, marital status, educational level, etc. section b was used to gather data for the independent variables, causation logic and effectuation logic, which were measured by adapting chandler et al. (2011) five point likert measuring scales that ranges from strongly disagree (1) to strongly agree (5). causation logic was measured as a unidimensional construct with seven items while effectuation logic was measured as a multi-dimensional construct with thirteen items. the first, experimentation, was measured with four items. the second, affordable loss, has three items. the third, flexibility, used four items. and the last, pre-commitment, was assessed with two items. section c was used to gather data for the dependent variable, 164 c. i. ebegbetale competitiveness which was assessed by adapting competitor orientation with a 4-item scale developed by narver and slater (1990). the items used a 7 point likert scale ranging from strongly disagree (1) to strongly agree (7). lastly, extraneous variables such as age, educational level, entrepreneurial experience and firm’s size that have been confirmed to affect the relationship between the predictor and outcome variables of this study will be controlled for (eyana et al., 2018). 3.1. reliability test the reliability of the study variables was carried out using statistical package for social sciences (spss) version 23 and the following cronbach’s alpha standardised values: 0.76, 0.75, 0.71, 0.73, 0.71, and 0.72 were respectively obtained for causation orientation, experimentation, affordable loss, flexibility, pre-commitment, and competitiveness. these values were above the threshold of 0.7 recommended by nunnally and bernstein (1994). 4. statistical analysis/results all the analyses were carried out using spss version 23. 4.1. factor analysis a bivariate correlation analysis was carried out to determine whether any relationship existed among the study variables as reported in table 1. the analyses revealed that significant positive relationship existed between causation orientation and competitiveness (r = .482; p < 0.01); experimentation and competitiveness (r = .456; p < 0.01); affordable loss and competitiveness (r = .250; p < 0.01); and flexibility and competitiveness (r = .432; p < 0.01). however, the analysis did not find any significant relationship between pre-commitment and competitiveness (r = .012; p < 0.01). table 1 mean, standard deviation and correlation variables mean sd 1 2 3 4 5 6 com (1) 4.064 .641 1 cau (2) 3.812 .680 .173** 1 exp (3) 3.930 .699 .456** .495** 1 aff (4) 3.875 .800 .250** .412** .466** 1 fle (5) 3.967 .674 .432** .564** .505** .352** 1 prec (6) 2.988 1.033 .012 .152* -.010 .129 .051 1 **p < 0.01 level (2-tailed); *p < 0.05 level (2-tailed); sd: standard deviation com: competitiveness; cau: causation; exp: experimentation; aff: affordable loss; fle: flexibility; prec: pre-commitment. source: author’s computation (2021) 4.3. hierarchical regression to test the hypotheses developed for this study, hierarchical regression analysis was conducted. the analysis began with a preliminary test for multicollinearity, normality, linearity, and homoscedasticity to ensure that the assumptions of regression analysis were effectuation and causation decision making logics of managing uncertainty and competitiveness... 165 not violated. the result of the variance inflation factors (vif) for the multicollinearity test showed that causation orientation, experimentation, affordable loss, flexibility, and pre-commitment respectively had 1.033, 1.045, 1.028, 1.063 and 1.003. since these values fell within recommended range of between 0.10 and 10, it implies that there was no problem of multicollinearity (hair, black, babin, anderson & tatham, 2006). also, the normal p-p plot regression standardised residual and the scatter plot were carried out and their results revealed that the assumptions of normality, linearity and homoscedasticity were met for this study. table 2 hierarchical regression analysis table model variables b beta t sig r r2 f p age -.037 -.059 -.689 .492 1. educ -.023 -.040 -.454 .586 .162 .026 1.407 .233 entreexp .106 .118 -2.110 .036 size -.020 -.030 -.344 .731 age -.022 -.036 -.488 .626 educ -.032 -.055 -.888 .375 entreexp .016 .027 .355 .723 2. size .003 .005 .064 .949 .565 .319 10.626 .000 cauor .269 .286 3.722 .000 exp .229 .249 3.348 .001 aff -.039 -.049 -.707 .481 fle .162 .170 2.256 .025 prec -.037 -.060 -1.012 .313 outcome variable: competitiveness educ: education; entreexp: entrepreneurial experience; cauor: causation orientation; exp: experimentation; aff; affordable loss; fle: flexibility; prec: pre-commitment. source: author’s computation (2021) then, the study proceeded to the hierarchical regression analysis as shown in table 2. the table had two models. model one revealed that the control variables: age, education, entrepreneurial experience, and size significantly affected the outcome variable, competitiveness (f= 1.407; p < 0.05) as shown in the analysis of variance (anova). the value of correlation coefficient (r) is 0.162 while the value of the coefficient of determination (r2) is 0.026. this suggested that the control variable accounted for 2.6% of variation in competitiveness in the first model, implying that there are other variables that accounted for the remaining 97.4% not considered in this study. model two showed that the value of the correlation coefficient (r) is 0.565 while that of the coefficient of determination (r2) is 0.319. this suggested that the predictor variables: causation orientation, experimentation, affordable loss, flexibility, and precommitment together with the control variables jointly accounted for a variation of 31.9% in competitiveness in the second model, implying that there are other variables that accounted for the remaining 68.4% not considered in this study. the anova showed a significant relationship (f=10.626, p < 0.05), implying that the model is suitable for forecasting. finally, the analysis also showed how each component of the predictor variables contributed to competitiveness. causation orientation (beta= .286; t = 3.772; p < 0.005) made the most unique statistical contribution to the outcome variable and closely 166 c. i. ebegbetale followed by experimentation (beta= .249; t = 3.348; p < 0.005), and flexibility (beta= .147; t = 2.256; p < 0.005). however, affordable loss and pre-commitment did not make any unique significant statistical data. 5. discussion and conclusion this study principally focused on how nigerian retail business entrepreneurs deal with uncertainty in the business environment to remain competitive. therefore, two main hypotheses were proposed in this study. the results from the correlation analysis revealed that nigerian retail business entrepreneurs exhibited both causal and effectual behaviour when dealing with uncertainty in the business environment. this finding agrees with studies that suggested that effectuation and causation showed can be seen as complementing rather than exclusive strategies of uncertainty management (frese et al., 2019; laine & galkina, 2016). a further analysis revealed that nigerian retail business entrepreneurs score higher on causation (m =3.812) than on effectuation which gave an aggregate mean score of 3.69 (m =3.69). this revelation contradicts eyana, et al (2018) who found that ethiopian entrepreneurs lean more towards effectuation than causation. the results from the hierarchical regression analysis of hypothesis one were mixed. two dimensions of effectuation, experimentation and flexibility, had significant impact on competitiveness of nigerian retail business entrepreneurs while the remaining two, affordable loss and pre-commitment, did not have any significant impact. this finding is in line with eyana, et al (2018) who also revealed varying effects of the four dimensions of effectuation on the outcome variable of their study. laine and galkina (2016) also discovered that the varying degree is a function of the changing perception of uncertainty. these imply that the adoption of effectuation logic to management of uncertainty requires a comprehensive assessment of the business environment to ascertain which dimensions are appropriate at that point in time. the hierarchical regression result of the analysis of hypothesis two revealed that causation logic had the most unique significant impact on the competitiveness of nigerian retail business entrepreneurs during period of uncertainty. this further lends support to the above correlation report. however, it did not align with eijdenberg et al. (2017) who reported that small businesses lean more towards effectuation than causation. the study concludes that both effectuation and causation are relevant to the competitiveness of nigerian retail business entrepreneurs who seem to tend more towards causation orientation than effectuation. 6. contribution to knowledge the findings from this study revealed that nigerian retail business entrepreneurs applied more of causation logics than effectuation logics when dealing with uncertainties. this finding contradict previous studies that found that entrepreneurs are more effectuation oriented. hence, this study contributes to knowledge by empirically showing that entrepreneurs will not always be more effectual oriented in all cases. in other words, effectuation is not superior to causation in the nigerian context. rather, the study confirmed that causation and effectuation should be seen as complementary and not exclusive strategies. effectuation and causation decision making logics of managing uncertainty and competitiveness... 167 7. limitation and direction for future research this study was restricted to nigerian retail business entrepreneurs in lagos state, nigeria. data collected was based on their perception which could be subjective and might affect the generalisation of findings. therefore, future research may consider more states as well as a larger sample size. references alvarez, s. a., & barney, j. b. 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(2014). theories for competitive advantage. in h. hasan (eds.), being practical with theory: a window into business research (pp. 33-43). https://doi.org/10.1108/jsbed-02-2017-0079 168 c. i. ebegbetale logika efektuacije i kauzacije pri donošenju odluka za upravljanje nesigurnošću i konkurentnošću od strane nigerijskih maloprodajnih preduzetnika nesigurnost je jedna od najvećih dimenzija poslovanja koja menja biznis planove i pravce delovanja. stoga, ovaj rad se pre svega bavi time kako se preduzetnici nose sa nesigurnošću koristeći i efektivnu i kauzalnu logiku. istraživanje je rađeno studijom preseka dok je za prikupljanje primarnih podataka korišćena višestepena tehnika uzorkovanja. ovi podaci su analizirani korišćenjem tehnika bivarijante korelacije i hijerarhijske regresije spss verzije 23. rezultati korelacione analize pokazali su da su kauzacija (uzročnost) i tri od četiri pod-dimenzije efekuacije imale značajnog uticaja na konkurentnost dok pred-obaveze nisu. analiza je dalje pokazala da su nigerijski maloprodajni preduzetnici više naginjali kauzaciji i efektuaciji. rezultati hijerarhijske regresije pokazali su da je najveći uticaj na konkurentnost ostvarila uzročnost, a potom eksperimentisanje i fleksibilnost, međutim, pristupačan gubitak i preduzimanje obaveza nisu. ova studija je doprinela znanju empirijski pokazavši da preduzetnici neće uvek u svim slučajevima biti orijentisani ka efektuaciji, takođe je potvrdila da kauzacija i efektuacija treba da se posmatraju kao komplementarne, a ne kao međusobno isključujuće strategije. ključne reči: efektuacija, kauzacija, konkurentnost, maloprodaja, nigerijski preduzetnici, nesigurnost. facta universitatis series: economics and organization vol. 15, n o 2, 2018, pp. 135 148 https://doi.org/10.22190/fueo1802135k © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper foreign direct investment impact on market concentration in the manufacturing sector of bosnia and herzegovina 1 udc 339.727.22:339.1(497.6) 67.01(497.6) radovan kastratović institute for business research mba, serbia abstract. there is no consensus regarding the effect of foreign direct investment on market concentration in the literature of foreign direct investment and the theory of industrial organization. the aim of the research is to empirically investigate this impact in the context of the manufacturing sector of bosnia and herzegovina. to achieve this aim we estimate the econometric model by applying ordinary least square method. the sample of 21 industries comprising the manufacturing sector of bosnia and herzegovina was used for model estimation. cross-sectional sample data was obtained from the central bank of bosnia and herzegovina and the financial reports of 4924 companies registered in the aforementioned industries for the year 2016. the results suggest that the impact of foreign direct investment on market concentration can best be described with a convex function. key words: foreign direct investment, market concentration, competition jel classification: f21, f23, l11 introduction foreign direct investment may have different sorts of impact on the host economy: the increase in output, employment and export, the transfer of new technologies and knowledge and the growth of productivity. another significant effect of foreign direct investment is the modification of market structure. the aim of the research is to examine the impact of foreign direct investment on the market structure of the manufacturing sector of bosnia and herzegovina. received november 14, 2017 / revised december 29, 2017 / revised march 19, 2018 / accepted april 13, 2018 corresponding author: radovan kastratović institute for business research mba, belgrade serbia e-mail: radovan.kastratovic@institutmba.co.rs 136 r. kastratović according to the data of the united nations conference on trade and development (unctad), in 2016, bosnia and herzegovina recorded the inflows of foreign direct investment of 258.24 million usd, which constituted 1.75% of gross domestic product (unctad, 2017). such results could be characterized as modest, considering the levels of investment flows preceding the global financial crisis. future growth of foreign direct investment inflows can be expected with the further globalization, liberalization of the economy of bosnia and herzegovina, the acceleration of the reforms and european union accession (domazet, 2016). this brings up the question of the potential effects of the aforementioned growth, and this research aims to provide a partial answer. the impact of foreign direct investment on market concentration is the question with an interesting theoretical aspect. there is still no consensus regarding this question in the theory of industrial organization. at least two conflicting hypotheses exist: the first that foreign investments increase market concentration, and the second that, to the contrary, they reduce it. there are theoretical viewpoints according to which the impact of foreign direct investment on market concentration levels can best be described with nonlinear functional forms, particularly in transition countries. the aforesaid hypotheses were tested in a vast number of empirical works in both developed and developing countries without conclusive results. for this reason, it is import to conduct further empirical research in order to improve the understanding of this problem, especially in the countries in which similar research has not previously been conducted. such are all the countries in southeastern europe, including bosnia and herzegovina. this research aims to provide the answer to the question of foreign direct investment impact on market concentration. we test the hypothesis that the impact of foreign direct investment on market concentration is statistically significant, and that it can best be described by a quadratic functional form. the sample includes 21 industries which constitute the manufacturing sector of bosnia and herzegovina. the cross-sectional data was obtained from the financial reports of 4924 companies in 2016. it was used to test the hypothesis by estimating a multiple econometric model, using the method of ordinary least squares. the results confirm the initial hypothesis that the impact of foreign direct investment on market concentration levels can be described by the convex functional form. it can be concluded that this functional form is suitable for describing the effect of foreign direct investment on market concentration in transition countries. the paper is organized as follows. the first section reviews the related theoretical and empirical research. the second section outlays the applied econometric methodology, the construction of the variables used in the model and provides preliminary descriptive analysis of the sample used. in the following section the key empirical results of the research were described, upon which the relevant conclusions were drawn. 1. foreign direct investment and market concentration foreign direct investment can affect the host economy in different ways. one possible effect which is described in the theory of foreign direct investment is the impact on host country market structure (markusen & venables, 1999). market structure can be defined as the level and the type of rivalry which exists among the companies active in the related industries, offering similar products and employing similar marketing strategies (dunning & lundan, 2008, p. 531). the information regarding market structure can be obtained foreign direct investment impact on market concentration... 137 from market concentration. high levels of market concentration indicate an uneven distribution of market power, where one or few market subjects realize a dominant position compared to the other market subjects. the dominant position implies that the companies with the highest market share can act independently from their competitors, buyers and suppliers. such a dominant position could be abused, which could in turn reflect on the dominant company influencing market prices and imposing unfavorable terms of trade to the other market subjects. the dominant position of a company is not forbidden per se, but its abuse is. the abuse is problematic, as the monopolist is not under competitive pressure to improve the efficiency. in this situation, the prices are higher than in the case of higher competition, at the expense of the other competitors and the final consumers. the abuse of market power transfers the assets from the consumers to capital owners, which increases the inequality of the income distribution. the above-average profits realized from the abuse of dominant position by foreign companies can either be repatriated or retained and reinvested, which, as indicated by newfarmer and marsh (1981, p.73), can further strengthen their dominant position and increase the income distribution inequality. the impact of foreign direct investment on market concentration is a controversial topic with two conflicting hypotheses (forte, 2016, p. 241). the first hypothesis states that foreign direct investment reduces concentration on host country markets and spurs competition in the industries with entry barriers which are too high for local companies. the second hypothesis is that multinational companies increase market concentration levels by entering the markets of host country, reducing the intensity of the competition and raising entry barriers for the potential competitors. in the short term, the effect of foreign direct investment on market concentration largely depends on the foreign company’s mode of entry. one of the most common modes of entry in the recent decades is mergers and acquisitions. this mode does not impact market concentration levels in the short term, as the acquisitions of local companies change neither the total number of companies on the market nor their market shares. it could potentially increase competition when the acquisition target is a company with poor performances which would leave the market in the absence of the acquisition. in the case of greenfield investment, a foreign investor creates an entirely new company on the host market, which instantly increases the number of competitors and reduces market concentration. the impact of joint ventures on market concentration cannot be theoretically determined in advance, as it depends on the concrete arrangement among the partners. in the long term, the effect of foreign direct investment on market concentration depends on the competitive strength and technological level of other companies active on the host country’s markets. if the local companies manage to benefit from the potential positive spillover effects and the technology diffusion occurs, then the gradual reduction of the differences in technology and efficiency between local and foreign companies can be expected. this results in the increase of competition intensity manifested in the decrease of host market concentration. however, if the local companies are not on the sufficient level of technological development, the existing technological gap between local and foreign companies widens. as a result, the relative efficiency of foreign companies compared to the local ones improves, and, consequently, they perform better, effectively crowding out of the local companies from the market and increasing the market concentration in the long run. the effects of foreign direct investment on host country market structure also depend on the impact of foreign companies on raising or lowering market entry barriers. the entry 138 r. kastratović barriers can be raised when foreign companies apply superior technology, organization, management and marketing, realizing competitive advantage over the domestic companies. additionally, foreign companies have a considerable financial power, allowing them to tolerate losses in the short term until they neutralize any potential advantage of the local companies, as well as to engage in themselves in price wars against local competitors (blomström, 1986, p. 524). these companies also face lower supply risks as they tend to rely on better, cheaper and more secure inputs in production from their global supply chains, unlike local companies. likewise, foreign companies are advantageous due the information accumulated by all the affiliates over a long period and a number of markets (newfarmer & marsh, 1981, p. 49). the strength of these companies further allows them to lobby with the host country policymakers more successfully. the financial sector of a host country can also be more interested in financing foreign companies, which are perceived as less risky than local companies, due to their size and reputation (kokko & thang, 2014, p. 57). multinational companies and local companies compete in production factors markets as well (barrios et al., 2005, p. 1762). particularly important is the ability to attract high quality workforce by foreign companies, due to the ability to offer higher salaries than their domestic counterparts. besides, the superior working conditions in foreign companies might attract potential entrepreneurs, reducing the entrepreneurship development of the host country, and consequently lowering the number market entrants (grossman, 1984). the previously described dynamics are likely to result in the increase of market concentration through crowding out of local competitors from the market and pressuring the remaining competitors to consolidate and merge as a response to the challenges brought by the presence of foreign affiliates. foreign direct investment can also reduce the entry barriers. if monopolistic structures already exist on the host market, the entry of foreign investors can spur the competition either directly or indirectly, through the creation of additional demand on the related host country markets and the spillover effects which could increase local companies’ productivity. there are factors with the opposing effects of foreign direct investment on market concentration. thus, the theoretic models cannot precisely predict the eventual outcome. caves (1971) was among the first to establish the theoretical problem of the effect of foreign direct investment on market concentration. in their seminal work investigating the determinants of market concentration, caves and porter (1980) single out economies of scale as the key determinant of market concentration, while predicting a negative effect of foreign direct investment. there is also a theoretical model in the literature predicting either a positive or negative effect of foreign direct investment on market concentration, depending on the position of the concrete market in the value chain (markusen & venables, 1999), and the theoretical model describing the effect of foreign direct investment on market concentration with the convex function (barrios et al., 2005). as a result of contradicting theoretical expectations, it is necessary to isolate the net effect of foreign direct investment on market concentration in host countries, through empirical research. the search of the existing literature showed that there have been at least 16 empirical researches investigating this problem in the period from 1970 to 2017, which are discussed below. the aforementioned researches observed both developed and developing countries, obtaining different results and drawing different conclusions. the consensus regarding neither the direction of the foreign direct investment effect on market concentration nor the optimal methodological framework has yet been reached. foreign direct investment impact on market concentration... 139 the initial studies exploring the relationship between foreign direct investment and market concentration were conducted in developed countries. one of the first such pioneering works was performed by rosenbluth (1970), who empirically found a weak, yet statistically significant correlation between the two variables. following this research, caves (1974) has also empirically demonstrated how multinational companies act as a driving force of the competition on the markets of the united states, canada and australia. using the example of the greek manufacturing sector, bourlakis (1987) demonstrated that foreign direct investment increase market concentration. to the contrary, driffield (2001) reached a contrasting conclusion by observing the manufacturing sector of the united kingdom. similarly, negative impact of foreign direct investment on market concentration was identified in the manufacturing sector of portugal (forte & sarmento, 2014). finally, barrios, görg and strobl (2005) found that the impact of foreign direct investment on market concentration can best be described by a quadratic function in the case of irish manufacturing sector. the existing empirical studies based on developing countries indicate a positive impact of foreign direct investment on market concentration. one of the earliest such studies was conducted by lall (1979) who found a positive impact of foreign direct investment on market concentration in the case of malaysian manufacturing sector. similarly, newfarmer and marsh (1981) found a positive correlation between foreign direct investment and market concentration in the case of brazilian electric industry. more generalizable results were obtained by blomström (1986) and willmore (1989) who studied the entire manufacturing industries of brazil and mexico respectively. both authors identified a positive impact of foreign direct investment on market concentration. more recently, singh, joseph and abraham (2011) and adam and khalifah (2012) reported similar findings by observing indian and malaysian manufacturing industries respectively. lastly, kokko and thang (2014) studied the entire economy of vietnam, determining a similar positive impact found in the previous studies in developing countries. the empirical literature treating transition countries is limited. the only work observing a transition country in a manner similar to the previously discussed studies is the one by amess and roberts (2005). the authors report that in the case of polish manufacturing sector foreign direct investment increases market concentration to a certain extent, after which its effect is reversed. additionally, rutkowski (2006) analyzed 13 transition countries from central and eastern europe finding a negative impact of foreign direct investment on market concentration. orazalin and dulambaeva (2013) report the same findings for the case of 26 transition countries of the commonwealth of independent states and central and eastern europe. both of these cross-country studies use the perception of local managers as the measurement of market concentration which is an imprecise and unreliable measurement. it is not possible to draw an unambiguous conclusion regarding the impact of foreign direct investment on market concentration from the previous empirical work. the best solution for future research of the problem seems to be the observation of an individual country and groups of markets and case analysis. the existing research of market concentration in bosnia and herzegovina predominantly focused on individual market concentration and competition analysis, such as the analysis of insurance industry (tomaš, 2013) and the analysis of personal consumption market (kasumović & meholjić kalajdžić, 2013). so far, the effect of foreign direct investment on the market concentration of the markets of bosnia and herzegovina has not yet been investigated, which is the objective of this research. 140 r. kastratović 2. methodology the research design is based on secondary data. drawing from the theory of industrial organization, the most extensively defined econometric model was specified, considering conventionally accepted practice of the related empirical work and the availability of data. by applying the deductive methodological approach, the model was gradually restricted by excluding the statistically insignificant variables. the reduced model was estimated by applying the appropriate econometric methods, using the second hierarchical level of industries of statistical classification of economic activities in the european community (nace revision 2) which comprise the manufacturing sector as the unit of analysis. the most empirical research regarding the impact of foreign direct investment on market concentration is based on cross-sectional data analysis, which was also implemented in this research. the approach entails the estimation of a single regression equation for a specified moment in time on cross-sectional data regarding foreign direct investment and other variables potentially affecting market concentration. this allows the estimation of the effects of foreign direct investment on market concentration levels in the state of equilibrium. however, the process of reaching the equilibrium is dynamic, hence the occurring adjustments might somewhat blur the quantitative results. panel data analysis could improve the results clarity and resolve the possible problems of endogeneity. however, is not applicable in this research due to the nature of the data under disposal. following the approach of forte and sarmento (2014), the model is specified in the most general form as: ( , )c f fdi d= (1) where c represents market concentration, fdi foreign direct investment and d vector of other market concentration determinants. next is the question of functional form in the equation (1). linear functional form for all the determinants of market concentration is most commonly used in the literature, which was implemented in the research. foreign direct investment variable is included in both linear and nonlinear functional form in the related research, depending on the characteristics of the country observed. amess and roberts (2005) propose the application of quadratic function for transition countries. given the fact that bosnia and herzegovina is a transition country and the results of preliminary statistical analysis revealing the suitability of this approach, the foreign direct investment variable was modeled with a quadratic functional form. dependent variable in the research is market concentration (c). the definition of relevant market is crucial for the operationalization of this variable. it consists of three components: product, spatial and temporal. the relevant product market in the research is defined as a second level of hierarchy (2-digit code) of statistical classification of economic activities in the european community. such a definition of relevant product market is problematic as the level of aggregation is high, and it implicitly assumes that the observed companies operate only in the sectors of their corresponding statistical class. therefore, the interpretation of market concentration should be made with caution. the estimated concentration on a market defined as described is merely an approximation, most likely higher than the actual level of market concentration. regardless of the limitations, the presented definition of relevant market was implemented in the research, due to the availability of data regarding foreign direct investment. the relevant market was spatially determined as the territory of bosnia and herzegovina. it is plausible that there are foreign direct investment impact on market concentration... 141 companies in certain industries which are focused on more narrowly geographically defined markets. nevertheless, given the high level of data aggregation, the relevant market determination as a territory of a country can be considered an adequate approximation. the majority of previous research of foreign direct investment effects on market concentration employed discrete indicators of market concentration, that is, different ratios of concentration. some of the exceptions include studies conducted by amess and roberts (2005) and blomström (1986), which utilize herfindahl-hirschman index (hhi). the advantages of employing hhi index are multifold. firstly, this indicator is cumulative and the information obtained from it is more precise. secondly, this indicator is suitable for comparison of concentration in different industries, which precisely is the aim of the research. finally, the indicator is used in antitrust procedures of numerous regulatory bodies, including inter alia the european commission. for the outlined reasons, the research employs hhi index as the main measurement of market concentration. the index is determined for every industry following the approach of hirschman (1964) as: 22 2 1 1 1 1 j j j j n n n i i i n i i ij ii r r s r r                       (2) where 2 i s represents market share of every individual company calculated as a ratio of total income of an individual company (ri) and the total income of all the companies in a given industry (rj), i = 1,...,nj is the index of individual companies within the same industry, where nj is the total number of companies in j-th industry, while j represents the index of two-digit codes of industries. the problem with the application of the equation (2) reflects in the fact that the total revenue of an individual company does not necessarily exclusively refer to one industry. however, the data from the analytical accounting for the companies of bosnia and herzegovina are not publicly available, which prevents the precise separation of revenues according to the originating industries. moreover, the computation of hhi index based on the revenue data from publicly available financial reports implies that the analysis omits the gray economy which, according to some estimates, comprises 24.5% of gross domestic product of bosnia and herzegovina (ernst and young, 2016, p. 36). as a result, the computed market concentration indicators in the research represent conservative estimates, and the actual levels of market concentration are likely lower. to verify the robustness of the results, the alternative, discrete, measurement of market concentration was also used in the research – concentration ratio for eight of the largest companies in each observed industry (cr8), measured by total revenue. this indicator was determined for sets of companies sorted in descending order by total revenue as a ratio of the revenue of individual company and the sum of revenues of all the companies in the given industry. foreign direct investment levels are the independent variable in the research. the paper follows the definition of foreign direct investment, provided by organization of economic cooperation and development (oecd), according to which they represent a lasting interest of the investors, a resident of one country, in the company which is a resident of another country, where the lasting interest is defined as direct or indirect ownership of over 10% of voting-rights equity (oecd, 2008). the definition is used because the same definition is adopted by the central bank of bosnia and herzegovina 142 r. kastratović (centralna banka bosne i hercegovine) in the compilation of foreign investment statistics, which was the source of data in the analysis. the independent variable was calculated as a ratio of total stock of foreign direct investment at two-digit industry level in bosnia and herzegovina at the end of 2016 and the total value of liabilities of all companies in each of the two-digit industries, which is based on the approach first employed by bourlakis (1987, pp. 723-724). on the basis of previous research and preliminary statistical analysis, it is expected that the effect of foreign direct investment on market concentration can be described with a u-shaped function. that means that initially, when the levels of foreign direct investment are low, additional foreign direct investment results in the reduction of concentration level, but on the higher levels of foreign direct investment, it leads to the increase of market concentration. the theory of industrial organization predicts an array of determinants affecting market concentration. some of the most common include: differentiation levels (dif), economies of scale, capital intensity (kl) and market size (r). to obtain more precise results of eventual direct isolated effect of foreign direct investment on market concentration, it is necessary to include the aforementioned variables in the model as control variables. differentiation levels (dif) measures the importance of product differentiation for different industries. the level of differentiation is approximated in the research as a ratio of sum of the accounting position intangible assets from the balance sheet of all the companies from a given industry and the total value of assets of all the companies in the industry. as the higher differentiation level in an industry can be understood as an entry barrier for new potential competitors, a positive effect of the variable can be expected. economies of scale in the markets are often quantified with the minimal efficient scale of production of a facility in a given industry. precise computation of this measurement requires the information regarding the physical production scale of individual companies, which is not available in bosnia and herzegovina. therefore, fixed costs (fc) are used as a substitute instead, calculated as a ratio of total fixed costs (sum of accounting positions labor costs, amortization costs and provisions from the income statement) for all the companies of a given industry, and sum of total business expenses of all the companies in the industry. it is likely that in the industries with relatively high fixed costs fewer companies can survive. thus, a positive effect of this variable on market concentration is expected. capital intensity (kl) might also have an impact on market concentration. the research follows the approach of adam and khalifah (2012) and forte and sarmento (2014), where the capital intensity is measured as the ratio of total assets and total number of employees in a given industry. it is probable that the more capital intensive industries will contain a smaller number of companies compared to the other industries, hence the positive effect of this variable on market concentration can be expected. finally, market concentration may also be affected by market size (r). the research measures market size as total revenues of all the companies competing on the relevant market. as larger markets allow more companies to operate, the negative effect of this variable on market concentration is anticipated. the sample data consists of 21 two-digit manufacturing industries. the manufacturing sector consists of 24 such industries; three industries were, however, excluded from further analysis because the data regarding foreign investments in these industries was not available. data regarding foreign direct investment stock were obtained from panorama nekto database of the central bank of bosnia and herzegovina. all the other data used in the research are obtained from the financial reports of 4924 companies foreign direct investment impact on market concentration... 143 registered in the manufacturing sector for the year 2016. the reports are publicly available on the web-sites of financial intelligence agency (finansijsko-informatička agencija) and agency for intermediary, it and financial services (agencija za posredničke, informatičke i finansijske usluge). for the purpose of descriptive statistical analysis, all of the relevant markets were grouped in three categories, according to the level of market concentration measured by hhi index. for each category an average value of foreign direct investment (fdi) on the markets was determined. the results are presented in table 1. table 1 the average values of foreign direct investment levels on relevant markets with respect to the categories of market concentration hhi number of markets number of companies average fdi (%) less than 1000 13 4 237 8.9 1000-2000 5 541 19.81 more than 2000 3 146 12.05 total 21 4 924 source: author’s calculations based on the data provided by the central bank of bosnia and herzegovina, financial intelligence agency and the agency for intermediary, it and financial services table 1 shows that the majority of markets in the manufacturing sector of bosnia and herzegovina is within the zone of low concentration, as defined by the european commission. most of the companies in bosnia and herzegovina (86%) compete on these markets. the lowest market concentration was recorded in the following industries: manufacture of wood and of products of wood and cork, manufacture of food products and manufacture of rubber and plastic products (with the values of hhi index on the markets equaling approximately 71, 173 and 184, respectively). three markets can be described as highly concentrated: manufacture of coke and refined petroleum products, manufacture of tobacco products and manufacture of paper and paper products (with hhi index values of approximately 4752, 3778 and 2526, respectively). the highest level of foreign direct investment was reported in tobacco products industry (38.85%). it is noticeable that the markets with higher levels of foreign direct investment are also the markets characterized by a higher market concentration. the descriptive statistics of the variables considered in the research is provided in table 2. table 2 descriptive statistics of the variables used in the empirical research variable average minimum maximum st. deviation hhi 1 144 73 4 752 1 217 cr8 0.61 0.17 1.00 0.23 fdi 0.12 0.24 0.38 0.14 dif 0.01 0.00 0.02 0.01 fc 0.24 0.11 0.44 0.09 kl 203 763.10 33 392.37 609 395.20 145 648.50 r 643 341 489 74 010 669 2 721 897 968 633 824 175 source: author’s calculations based on the data provided by the central bank of bosnia and herzegovina, financial intelligence agency and the agency for intermediary, it and financial services for the year 2016 144 r. kastratović the econometric analysis is initiated by estimating the most general form of the model, including all the considered variables and the intercept. the model is presented in the equation (3) as: 2 0 1 2 3 4 5 6 hhi fdi fdi dif fc kl r        (3) market concentration was expressed in terms of quadratic function of foreign direct investment levels and the linear function of control variables. the impact of all the factors not explicitly included in the model is encompassed by error term ε. the model represented by the equation (3) was estimated using ordinary least squares method and performed by the software package eviews 8. statistically insignificant variables were iteratively excluded from the model, using the threshold of 10% significance. variables differentiation level (dif), the share of fixed expenses in total expenses (fc), market size (r) and the intercept were thus eliminated. the reduced model maximizes schwarz information criterion as well as the adjusted coefficient of determination and f-statistic. significant reduction of the model was expected, because of a relatively small sample size, so the lack of statistical significance of the excluded variables does not necessarily rule out the possibility that these variables actually affect market concentration. however, in this concrete case it is capital intensity and foreign direct investment levels that predominantly determine market concentration, which can be expressed in terms of the equation (4): 2 1 2 3 hhi fdi fdi kl    (4) the model represented by the equation (4) was estimated using ordinary least squares. the residuals of the model are normally distributed, demonstrated by the value of jarquebera statistics of 0.02. autocorrelation of model residuals was tested using durbin-watson and breusch-godfrey lm test. neither of the tests revealed the presence of autocorrelation. breusch-pagan and glejser tests indicated no problems with heteroskedasticity. there is no statistically significant correlation between the regressors, meaning that multicollinearity is not present in the model, thus the estimates of the effects of the variables on market concentration are satisfactorily precise and separated. finally, ramsey regression equation specification error test indicated correct specification of the model represented by the equation (4) in terms of functional form, the choice of independent variables and the fulfillment of gauss-markov assumptions regarding the error term. 3. results and discussion the ordinary least squares estimation results of the equation (4) are presented in table 3. the adjusted coefficient of determination shows that most of the variations of market concentration in the manufacturing sector of bosnia and herzegovina (76.29%) were explained by the model. the regression is statistically significant at 1% level. foreign direct investment impact on market concentration... 145 table 3 regression results dependent variable: hhi number of observation: 21 variable coefficient std. error t-statistic p-value kl 0.00465* 0.000942 4.93 0.0001 fdi -3 449.47** 1 276.06 -2.70 0.0146 fdi^2 16 407.64** 6 352.39 2.58 0.0188 0,786618 ̅̅ ̅̅ ̅̅ 1144451 ̅ 0,762909 ̅̅ ̅̅ ̅̅ 1217083 std. error of reg. 592,6224 schwarz information crit. 15,88777 ssr 6321625 dw-statistic 1,969173 f-statistic 48,22432 probability (f) 0,0000 source: author’s calculations foreign direct investment (fdi) statistically significantly affects market concentration measured by hhi index, after controlling for capital intensity of the industry. the effect can be described with quadratic functional form, as expected, and is significant at 5% level. this confirms the hypothesis that foreign direct investment affects market concentration negatively in the industries in which foreign direct investment levels are low, whereas after certain optimal point additional investments cause the increase in market concentration. point estimate of the optimal point equals 10.51%, and the confidence interval equals (0.30%, 17.07%). the robustness of the obtained results was confirmed by replacing dependent variable with the ratio of concentration (cr8) and re-estimating the model. in this case the effect of foreign direct investment on market concentration was again statistically significant (this time at 10% level). the results are in line with the findings of barrios et al. (2005) and amess and roberts (2005). as anticipated, the control variable of capital intensity has a statistically significant and positive effect on market concentration at 1% level. the higher the capital requirements in an industry, the fewer companies can respond to such requirements and, in general, only few companies can maintain sufficiently large scale of production to be profitable. the results suggest that there is an optimal point of foreign direct investment levels which minimizes market concentration. this is possibly due to the existence of monopolistic structures in the industries with low foreign direct investment levels. with the increase of foreign direct investment inflows, these structures disintegrate and the inefficient companies leave the market or restructure. the positions of the companies leaving the market are taken by the more efficient foreign companies. their presence leads to positive spillover effects which improve the performances of other, local companies which eventually results in the intensified competition and is reflected by the reduced values of hhi index. however, the results reveal that such dynamic exists only to the extent where foreign companies do not become dominant market subjects. at that point dominant foreign companies seem to dominate the local counterparts by applying some or all of the factors such as: superior technology, possibilities of lobbying, greater financial strength and possibilities to acquire resources on the factors of production markets. the insufficiently developed local companies leave the market or consolidate in response to the described competitive pressures, which results in the progressive growth of hhi index. it should be taken into account that the increase of hhi index cannot be considered detrimental per se. it implies 146 r. kastratović that few companies realize dominant market position, but it does not necessarily signify the abuse of it. nevertheless, such situation, regardless of its effect on final product market prices limits the possibilities of small local competitors’ development. conclusion the research investigated the impact of foreign direct investment on market concentration in the manufacturing sector of bosnia and herzegovina. the ordinary least squares model of the impact of foreign direct investment on market concentration was estimated based on crosssectional financial data of 4924 companies from 21 markets for the year 2016. the results reveal the existence of statistically significant effect of foreign direct investment on market concentration, robust to the choice of market concentration measurement, which can best be described with quadratic u-shaped functional form. in other words, when the levels of foreign direct investment are lower, their additional inflows lead to the reduction of market concentration, which is true up to a certain optimum. after this point, the additional inflows of foreign direct investment progressively increase market concentration. these results confirm the findings of the related research in transition countries, particularly the one by amess and roberts (2005). it is, therefore, possible that there is certain regularity in transition countries regarding the effect of foreign direct investment on market structure in manufacturing sector. the inflows of foreign direct investment are simultaneously followed by both positive and negative effects affecting the market structure. on the markets with significant foreign companies’ presence, the additional inflows of foreign direct investment results in the negative effects overpowering the positive ones, leading to the consolidation of market subjects and the increase of market concentration. such results might have important implications for the policy regarding the attraction and promotion of foreign direct investment and antitrust policy. the interest of transition countries in attracting foreign direct investment expecting their positive effects is evident from their efforts and provided incentives. however, the potential negative effects must also be taken into consideration. the results suggest that in the foreign investment promotion policies it is necessary to take into account the local companies’ level of development and their ability to absorb the expected spillover effects. excessive insistence on foreign investments in the markets where local companies are insufficiently developed to compete with foreign counterparts can limit their growth possibilities and even survival. eventually, such dynamics might lead to the domination of foreign companies over the markets of bosnia and herzegovina. it is therefore worthwhile for antitrust policy to beware the possibilities of dominant position abuse by the largest foreign companies. at the moment, however, the majority of the industries comprising the manufacturing sector of bosnia and herzegovina are within the zone of low concentration and the overall state of competition can be described as satisfactory. in the previous years, the country has made progress in antitrust regulation. still, the room for improvement exists in the efficiency of the competition council and the harmonization of the bosnian competition regulation with the regulation of the european union. finally, the industries with the highest foreign presence are also the most concentrated, which raises concerns regarding the possibilities of market power abuse by the dominant foreign companies, especially with the further foreign direct investment inflows. foreign direct investment impact on market concentration... 147 further research regarding the effect of foreign direct investment on market concentration, should be based on larger sample, including time component and lower aggregation level of data in order to allow the application of panel data methodology. this would increase the precision of the estimates and help investigate the possible existence of the simultaneous 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(1989). determinants of industrial structure: a brazilian case study. world development, 17 (10), 1601-1617 uticaj stranih direktnih investicija na koncentraciju tržišta u sektoru prerađivačke industrije bosne i hercegovine u literaturi stranih direktnih investicija i teorije industrijske organizacije ne postoji jedinstven stav po pitanju uticaja stranih direktnih investicija na stepen tržišne koncentracije. cilj ovog rada je empirijsko ispitivanje ovog uticaja u slučaju prerađivačke industrije bosne i hercegovine. u tu svrhu ocenjen je ekonometrijski model metodom običnih najmanjih kvadrata. pri tome je korišćen uzorak od 21 delatnosti sektora prerađivačke industrije bosne i hercegovine. izvori korišćenih uporednih podataka su centralna banka bosne i hercegovine i finansijski izveštaji 4.924 preduzeća iz tih delatnosti za 2016. godinu. rezultati istraživanja ukazuju na to da se uticaj stranih direktnih investicija na stepen tržišne koncentracije najbolje može opisati konveksnom funkcijom. ključne reči: strane direktne investicije, koncentracija tržišta, konkurencija plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 4, 2014, pp. 281 295 complementarity between the market and the state as a factor of modern market economy efficacy: lessons for republic of serbia  udc 338.242(497.11) vlastimir leković faculty of economics, university of kragujevac, serbia abstract. market economy is explained as a system characterized by private ownership and a self-regulating market mechanism which enables the coordination of the activities of economic actors. a thesis that only private entrepreneurship ensures economic prosperity is developed based on this concept, given that economic growth is directly determined by the degree of freedom of economic agents. with no intention to challenge the role of the market mechanism, private entrepreneurship and economic freedom, the author, rather, aims to bring to attention the existence of objective factors which in terms of the functioning of modern market economies introduce the need to establish cohesion between the market and the state, as well as the relevant coordination and control mechanisms. this view is based on the experience of the most developed market economies which have achieved their development goals largely owing to an appropriate symbiosis and complementarity of the market and the state. accordingly, the aim of the research is to, based on different theoretical concepts and economic reality of modern market economies, underline the necessity that the republic of serbia should face the reality regarding the creation of its economic system that both the market and the state would be more successful once the complementarity is established. key words: market, state, coordination of economic activities, economic performance, complementarity between the market and the state. introduction the ongoing trends concerning the functioning of modern economies, as the causes and consequences of the global economic crisis, primarily give a good reason for reconsideration of theoretical viewpoints, as well as practical experience relating to different ways of organizing and functioning of an economy. in accordance with the latin received november 12, 2014 / accepted march 25, 2015 corresponding author: vlastimir leković faculty of economics, university of kragujevac, ðure pucara starog 3, 34000 kragujevac, serbia tel: +381 34 303 500  e-mail: lekovic@kg.ac.rs 282 v. leković maxim that repetition is the mother of all learning and the position of p. krugman [2012] that there is a good reason why the old books are back in fashion, we consider it necessary to reconsider the key questions referring to the position and the role of the market function and the allocation and coordination function of the state in the modern economy. given the fact that the concepts of neoliberalism, extensive privatization and deregulation steered the economy into the vortex of the economic crisis the greatest one after the great depression, it is necessary to, instead of addressing the causes of the crisis, create sustainable models of development that will result in improving economic dynamics, such as creation of new job opportunities. at the same time, this implies that, as indicated by p. krugman [2012], the primacy of “destructive conventional wisdom” should be dismantled and arguments supporting expansionary policy offered; this policy is to be implemented in order to successfully overcome depression. in accordance with this approach, the attention is again given to the role of the state, which was considered undesirable in the period when the neoliberalism was the most influential concept. without questioning the role proven in practice related to the self-regulating market mechanism, economic freedom, individual entrepreneurial initiatives and autonomy of the individual economic agents, the need for the state to play a more prominent role is undeniable, not only in terms of protection of general and long-term interests, but also in terms of an essential factor that would be a driving force and a catalyst for rapid economic growth. this implies the need to discuss the interactions between the state and the market, not only from the standpoint of their confrontation and interpretation of state regulations as a “disruptive” factor in the functioning of the market mechanism, but also in terms of their mutual co-operation, i.e. a situation where a market system has a greater need for the presence of a state with its control and coordination mechanisms. this standpoint is supported by numerous arguments in favor of the fact that even in developed and efficient market economies, the implementation of effective state regulation in the economy of a particular state is fully justified and we can even say necessary. moreover, the economic history provides sufficient arguments that the state is a crucial factor in the economic development, as evidenced by our extensive experience; it is in the most developed market economies where appropriate symbiosis between the state and the market made it possible to most fully accomplish their set development goals. at the same time, the most developed market economies, instead of allowing a conflicting relationship between the market and the state, foster that of a true partnership between the public and the private sector [mesarić, 2001]. the concept of mutual dependence between the market and state, as well as between the allocative and coordination mechanisms, as the main point discussed in this paper, is examined in order to highlight the following key aspects distinctive for this concept:  synthesis of the self-regulating market mechanism and the relevant state legislation is one of the vital features of modern market economy;  regarding the extremely averse positions of the market and the state, there are a number of viewpoints that point to the possibility of combining liberal and interventionist conceptions;  the shape, the scope and the methods of state intervention in economic sphere change with the development of the economy and the society, especially concerning the increased complexity of economic interaction; complementarity between the market and the state as a factor of modern market economy efficacy 283  complementarity between the market and the state is essential for the successful functioning of the modern market economy. these are the hypotheses that will be tested in order to substantiate the necessity of objectification of mutual interaction between the market and the state in modern market economies: h1: bearing in mind that the coordination of economic activities is achieved through the market and the state as separate institutions, they need to be considered as equal, complementary and mutually dependent components of a single coordination mechanism. h2: bearing in mind that the coordination of economic activities is achieved through the market and the state as separate institutions, they need to be considered as equal, complementary and mutually dependent components of a single coordination mechanism. research methodology employed in this paper in examining the key aspects of the interaction and complementarity between the market and the state, as well as their implications for the level of success in terms of achieving the economic tasks, is primarily that of analytical description. 1. basic theoretical concepts on the relationship between the market and the state there is a long tradition of economic concepts which consider that the only valid role of the state in the economy is the one that defines and enforces property rights and provides public goods, while any other form of government regulation is inevitably inefficient, unnecessary and counterproductive. namely, it is believed that the state is unnecessary, because all the things the state can do are much more successfully done by the private sector. therefore, a unilateral assertion that the private sector, due to clearly defined property rights, will always solve all problems more efficiently is established. in doing so, the fact that the existence of institutions that grant property rights, secure contract enforcement and availability of complete information as a precondition for the existence of an efficient market, is overlooked since this requires the active involvement of the state. at the same time, successful economic growth has, in most cases, been accompanied by high levels of state intervention, which represents a powerful counterargument to the aforementioned general point of view. in other words, the key determinant for the success of economic activities is determined by the existence of an institutional environment favorable for the stimulation and realization of these activities. in this regard, it is important to point to the fact that the institutions cannot be established and developed in an environment where the influence of the neo-liberal model is dominant. the opposing views discussed above require taking a brief review of the different positions related to allocative and coordination mechanisms that are present in some of the most influential contemporary economic theories. in terms of the neo-liberal concepts, the dominant view is that, in principle, it is not possible to include the state and the market in a particular coordination mechanism given that the state and the market represent mechanisms that are mutually exclusive. the market is considered to be a part of the economic system whose mechanism is based on 284 v. leković incentives and sanctions that are implemented by means of competitive struggle, while the state is seen as an element of the political system, which is why the coordination of economic activity is exercised by political rather than economic instruments [гутник, 2002]. this leads to the conclusion that administrative coordination objectively cancels market coordination. thus, for example, в. рѐпке [2002] starts from the premise that the task concerning the coordination in each particular case can be solved by prices or by the operation of state authorities. between the price, as a market category, and the work of state bodies, coordination is impossible, thus a state of chaos arises. accordingly, it is considered that the economic order can be maintained, either by the market, or by coordination through planning and directives. there is no third option. such a rigid position on the market and the state (to a greater or a lesser degree) is typical of the majority of the modern economic science approaches, as a result of the dominant influence of neoliberal concepts. influenced by the neoliberal concepts, the hypothesis is formed which assumes that the market represents a basic coordination mechanism in terms of economic interactions, while the state, as a part of the political system, complements the market only to the extent to which the market itself is unable to fulfill its functions. however, neither the fundamentally different methodological approaches, nor ideologically opposed positions relating to solving many economic problems, prevent the theoreticians to arrive to the same conclusion: in a particular economy, state implements those actions which cannot be realized by the market in its highest efficiency. in fact, given the position that the market is fully effective only under certain, rather, restrictive assumptions, the main themes of the scientific debates are often appropriateness, scope, forms and methods of state intervention in the economy, without doubting the very principles of uniting the market and state coordination [leković, 2006]. the state, as a subject of regulation, is present only because the market is unable to solve a certain problem in its functioning by employing its mechanisms. here, we refer to market failures, which reduce the efficiency of coordination performed by self-regulating mechanisms and point to the inability of the market to achieve pareto efficiency. accordingly, the general principles of the functioning of the state in the economy are determined by the type of market coordination [абалкин, 1997]. this approach is also typical of the representatives of other schools of economic thought, with the exception of those who support the concept of direct influence of the state on the economy. f. hayek [1967] leaves the state out of economic interactions because the market, with its systems of competition and free price formation, is capable of self-organizing economic activity. in this process, each individual has information on prices, which is characteristic of the system as a whole, and at the same time, thanks to the personal knowledge of the actual situation, has the ability to be integrated into the overall system and to take measures that would allow him/her to generate maximum profits. on the other hand, by its intervention in the economy, the state distorts price signals and, consequently, impairs spontaneous order. therefore, the state is considered as an element of the political system which is essential to facilitating the functioning of markets and, through legal mechanisms, ensuring compliance with the specific rules. accordingly, f. hayek emphasizes that the spontaneous order establishes itself due to the universal rules of conduct that protect private ownership. in such a system, it is necessary that the primary function of the state is limited to the control of these rules. complementarity between the market and the state as a factor of modern market economy efficacy 285 the supporters of the ordoliberalism (compared to the views of the supporters of the neoliberalism) point to the need for greater participation of the state in regulating economic interaction. according to п. в. гутник [2007, 9], the representatives of this school of economic thought believe that it is unrealistic to reduce the role of the state in the economy only to the regulatory function, i.e. support to the business conduct rules. the role of government is fundamentally different and is manifested in the creation of rules, as well as in amending such rules when they cease to be effective. the corrective role of the state is accentuated, given that the market is not able to achieve its coordinating role without appropriate rules that are provided and rectified by the state. in fact, the distortions in economic processes are caused by the external factors that cannot be addressed by the market system itself, therefore the support of the state is indispensable. however, according to post keynesians, the basic role of the state cannot be reduced merely to eliminating the negative externalities and monopolies. the role of the state is reflected in the enforcement of the warning or real coercion, in order to enable fulfillment of contractual obligations, i.e., the state is liable to ensure their implementation. as и. розмаинский [2010] warns us, if there were not for such a role of the state, the confidence in the contract enforcement would be lost, hence forcing the economic agents to avoid entering into contracts, which brings into question the direct role of the market. hinting at those economists who support the views of politicians who oppose higher spending saying that the government cannot create jobs; p. krugman [2012] points to the need to address the functioning of the economy based on the evidence, not prejudice, bearing in mind empirical studies that have confirmed the effects of changes in government spending. namely, the increase in government spending generates economic growth and hence creates new jobs, which explicitly means that the state represents an indispensable factor in the economic performance and success of the market economy. the analysis of the relationship between the state and the market in terms of institutional economy includes viewpoints of the theorists who belong both to traditional institutionalism and new institutionalism (neo-institutionalism). as far as the traditional institutionalism is concerned, the state is seen as an institution that develops and provides general rules in order to increase prosperity and justice. in accordance with the methodological individualism, as the methodological approach of the traditional institutionalism, it is considered that the state should be included in the economy in order to facilitate the efficient functioning of the market. regarding new institutionalism, the state is analyzed as the creator of formal rules and the guarantor of their enforcement, therefore a theory is developed which sees the state as an organization that brings together economic actors who seek to influence political decisions with a view to maximize personal gain. however, this approach fails to examine the market and the state as institutions of coordination; rather, it supports the approach characteristic of the neoclassical understanding of the functions of the state which is based on the concept of market failure: high transaction costs relating to the protection of property rights and competition, establishment of the information exchange channels, provision of public goods, etc. the main problem the neo-institutional analysis is concerned with is how to restrict the power of the state, or, as o. williamson [1985] puts it, to provide citizens with an appropriate set of ex ante protection against the possibility of ex post opportunism of the state. analytical concepts dealing with the property rights, transaction costs and contract theory are very useful in terms of their application to the state. d. north [1981] sees the 286 v. leković state as an organization that possesses comparative advantages in terms of coercion. in other words, the state is the guarantor of the system of economic relations as it applies coercion along with other forms of economic activity. in this way, the economic role of the state is that of regulating the economy as a unified system. on the one hand, it supports the functioning of the market mechanism; while on the other hand, the state corrects its functioning and eliminates negative consequences. it can be said that the major disagreements arise on the extent of government intervention in the economy; however, the prevailing position is that the state is obligated to act primarily concerning the different incidents of social failure. this is the generally accepted practice worldwide regarding the utilization of state property. therefore, it is safe to conclude that the main schools of modern economic thought consider the market and the state as belonging to the different sectors of society and therefore in opposition to one another. the market is seen as belonging to the economic sphere, while the state is seen as a part of the political system. hence, their roles are interpreted as mutually compensating one another, whose polarities are different economic principles of the market and political principles of the state authorities. such an understanding simplifies the socio-economic reality, which is characterized by complexity, dynamism, comprehensiveness and equivocalness, which represents a significant risk in practice, since this opens the door to the possibility that each side is reduced to an unjustified minimum. 2. why is the state necessary in the modern market economy? the analyzed theoretical approaches referring to the relationship between the market and the state rules provide an opportunity to make certain generalizations. clearly, the point is to provide an answer to one of the key economic and social issues: how to organize the economy and the society in order to make better use of available resources? the answer to this question largely depends on the manner in which the relationship between the state and the market elements is established when making economic decisions. not denying the fact that the market makes the most efficient mechanism of economic decision-making and allocation of the factors of production, one should take into consideration the fact that modern economies function as a combination of market and state regulation [leković, 2006]. however, despite this reality, there are still dilemmas both in economic theory and economic practice about the character and the degree of state participation in the economy and its interference regarding the functioning of the market. the often neglected fact is that the state, as the creator of institutional arrangements in the economic system and the creator of instruments and measures of economic policy, has the responsibility for the performance of the economy as a whole, as well as the creation of a favorable environment in which the business entities operate. in this regard, it is necessary to establish such a role of the state that will not diminish the facilitating function of market competition, regulation and allocative mechanisms of the market, freedom, initiative and creativity of individuals and economic entities. rather, the state should initiate, coordinate, direct and support the activities of autonomous economic entities to fully develop their entrepreneurial potential. in other words, the essential role of the state is that of a catalyst and an assistant, motivator and a helping hand of the private sector. this means that the role of the state is seen as a complement to the functioning of the market mechanism when this market mechanism is unable to solve the complementarity between the market and the state as a factor of modern market economy efficacy 287 economic problems adequately by itself. after all, the overall socio-economic development in the world in the 20 th century has shown that we need an effective state that will support sustainable economic development and have a major impact on the economic and social well-being. in search of the concept of a desirable relationship between the market and the state, it is necessary to start from the position that the state regulation does not replace the market mechanism it supplements it. the lack of competitiveness in certain segments of the market is the main reason for the application of state regulations. in other words, the function of the state is to improve the functioning of the market mechanism. this function will be best achieved when complementarity is established between the market and the state. the concept of complementarity is based on the view that the coexistence of two or more constituent elements of a given system contribute to improving the performance of each particular element thanks to the mutual complementary relationship [hall & soskice, 2001]. when formulating a position on the relation between the market and the state, it is necessary to bear in mind that the economy is only one of the important constituent elements of a unique social organism whose components are closely connected. therefore, when considering the relevant issues of socio-economic development, it is essential to equally treat actions, reactions and mutual relations of the basic actors the government and the economy, as well as their contribution to achieving the goals of the society. their interaction usually follows the following scheme: the state stimulates and regulates the economy and, at the same time, supports the organization of the society; the economy determines the possibilities and potential of the state and provides a clearer definition and achievement of the economic interests of society. in fact, although the self-regulating function of the market is irreplaceable in terms of business processes and motivating efficient operations of business entities, it is essential that the market is regulated; however, at the same time, measures of regulation and control must rely on the market mechanism, as well as neutralize adverse effects of the spontaneous operation of this mechanism. the most frequent, as well as the largest mistake that the state can make concerning the industry is to create policies that allow static, short-term benefits, since in this way innovation and economic dynamism are unintentionally hindered [porter, 2008]. in its role as a catalyst and an instigator, the state should support companies that are struggling to raise the level of competitive advantage. regardless of the fact that the government (state) does not create competitive sectors, since this can be done only by companies, it contributes to this goal by creating an environment in which companies can gain competitive advantage. taking into account the integrative relationship between the state, the society and the economy, o. bogomolov [2010] indicates that the state in the economy is affected by the leading ideological doctrines: the state of social awareness, government policy, political orientation, professionalism and efficiency of the administrative apparatus and the legal responsibility of democratic institutions. in accordance with these relations referring to the state and the economy, i.e. the market, the reasons why the modern market economy cannot function successfully without the establishment of an effective mechanism of complementarity with the state are quite clear. the neoliberal concepts insist on the view that it is only possible to make rational economic decisions under the conditions of unrestricted, free market, availability of complete information on all consumer preferences and knowledge of the demand and supply. however, the reality of the functioning of the market shows that the market cannot 288 v. leković successfully perform its regulatory role, since the information provided is incomplete and not equally available to all economic actors. b. greenwald and j. stiglitz [1986] show that free market cannot effectively perform its regulatory role since the information that it provides is incomplete and not available to all economic actors. in this respect, although the market mechanism is irreplaceable in terms of the self-regulation of economic processes and motivation of economic agents for effective and efficient operations, it is necessary that this mechanism, due to its limitations, is aided by the state in its corrective role. by imposing the neoliberal development model as the only option, it is often ignored that in modern conditions there are other models of economy in which the state has a significant regulatory role. in this regard, the report of unctad [2009] entitled the global economic crisis: failures and multilateral remedies, given the state of the economies of the leading western countries and the world economy as a whole, emphasizes that the “market fundamentalist laissez-faire of the last 20 years has dramatically failed the test “. according to this view, in order to overcome the problems that are the result of the systemic failures, it is necessary to review and even abandon key neoliberal viewpoints which enabled the full financial deregulation, which led to the global economic crisis due to proliferation of currency speculation. in terms of the model that successfully fused both market and state regulatory and coordination mechanisms, one should mention the experience of the scandinavian countries where the social orientation of the economy and government policy achieve very successful results over a long period of time. in this respect, l. thurow [1997] emphasizes that the welfare state was not implemented by “wild leftists”, quite the opposite, its creators were learned aristocratic conservatives (bismarck, churchill, roosevelt), who adopted the policy of social welfare, not to destroy, but to save capitalism. critics of the state's role in the economy believe that such a role is inefficient, due to the incompetence of its officials and the fact that it is too bureaucratic and corrupt, therefore the decisions made by the state cannot be considered objective. although the author agrees with the above mentioned positions, he also wishes to point to the question whether the issues about the relationship between the state and the market are approached by taking into consideration comprehensive and objective assessments in respect to the market system. namely, are the market participants infallible in their operations? people often fail to notice that private businesses that seek to increase their profits are also associated with numerous cases of business malpractice, tax evasion and evasion of other liabilities and even criminal activities. therefore, as o. bogomolov [2010] rightly points out, the dilemma between the free market or state control and involvement in the functioning of the market system is artificially imposed. instead of this dilemma, it is necessary to establish an economic system where these two control and coordination mechanisms will be complementary and in function of successful operation and functioning of the economy and the state. in such a system, the state will contribute to creating a business environment that will be favorable for economic actors and will positively influence increase in both domestic and foreign competitiveness by creating an institutional environment and providing efficient management. at the same time, the task of the state is to support domestic economic actors in order to help them gain competitive ability for more equal participation on the global market. this approach is typical for the most developed market economies, and there is no reason to impose different business models on developing countries and economies in transition. complementarity between the market and the state as a factor of modern market economy efficacy 289 given that the market is not able to establish and maintain economic balance, periodic recessions and crises are inevitable, the most serious consequences of which are the mass unemployment and the increase in economic and social inequalities. in addition, it is necessary to bear in mind that the pronounced liberalization preceded majority of the crisis, i.e., the functioning of unregulated or insufficiently regulated market. at the same time, given that the market is controlled by its strongest actors, it cannot have the role of an imaginary mechanism through which prices send signals that are the basis for making rational economic decisions by the economic actors. in this regard, government intervention in the economy is indisputable due to the economic, social and political realities of modern economies, since market coordination can be successful only if complemented by the state regulation [hoff & stiglitz, 1999]. government intervention does not extrude market leverage, but protects competition and at the same time safeguards the interests of society. state regulatory rules complement self-regulation of the market, thereby creating the conditions to achieve optimal use of available resources and to enable sustainable economic growth. “the visible hand” of the state needs to be introduced in circumstances where “invisible hand” of the market fails in terms of resource allocation. the attitude towards inflation is quite an interesting one, as it represents one of the most common phenomenon and indicator of macroeconomic instability. typically, in accordance with the monetarist approach, inflation is explained as the phenomenon that is the result of disparity between the money supply and the real resources. in accordance with these interpretations, the restricting of the money emissions and limiting credit creation is recommended, thus sterilizing the money supply. what is overlooked is that inflation may be a result of rising production costs, due to the growth of raw material prices, higher wages, more expensive imports, etc. also, the price increase is affected by various monopolistic agreements, inflationary expectations, tax burdens, political instability, and the degree of confidence in the stability of the economic system. considering the aforementioned possible causes of inflation, it is necessary that the implementation of the anti-inflation program includes different methods whose creator and proponent is the state. the most effective way for establishing and maintaining price stability in the long-term is to stimulate the production and supply of domestic goods and services. the state is an important factor in stimulating the implementation of this economic strategy. as one of the critics of the neoliberal doctrine, l. tarrow [1997], contrary to the traditional interpretation of inflation, considers that there is no empirical evidence that moderate inflation has a negative impact on economic growth, i.e., the negative correlation between the inflation and rapid economic growth has not yet been verified. as an illustration of this viewpoint he mentions japan, where, despite the high inflation rate, successful economic growth and development has been achieved. tarrow’s position is that growth is not hindered by inflation, but the government measures that imply restrictive monetary policies implemented in order to fight inflation. the consequence of the recession is the growth of unemployment. the people who have lost their jobs are left without income, therefore they do not have any benefits from price stability, but rather, they become victims of monetarist measures to curb inflation. inflation has negative effects only when it grows into hyperinflation and it is when speculative businesses become more profitable than legitimate ones. concerning the issue of unemployment, the position of the neoliberals is that unemployment rate is high because people do not have proper qualifications for the jobs that 290 v. leković are offered. in this way, the responsibility for the situation of high unemployment is shifted from the state to the economy and the unemployed people. however, if this position is correct, the question is why the workers possessing required qualifications are not employed. the conclusion is that the problem is not in qualifications of workers seeking employment, but in fact, according to krugman [2012], here we have the economy crippled by insufficient demand, in which the entire private sector is trying to spend less than it earns and the result is lesser income. by comparing an economy that is in crisis with a car that cannot start because its battery is empty, the author emphasizes that the problem is not in the economic machine, because it is as powerful as ever. this is a technical problem of organization and coordination. as krugman [2012] puts it: “solve this technical problem and the economy will roar back into life”. the solution to this “technical problem” is in higher government spending whose effects have been verified by empirical economic research. in addition to the inability to maintain macroeconomic stability, which is why the cyclical recession becomes an inevitability of the market system, the market mechanism creates disparities in the distribution of income. according to j. k. galbraith [1995], free operation of the market mechanism inevitably leads to unjustified inequality in income distribution. this leads to distortion in the exploitation of resources by “diverting them from meeting the necessary needs of the majority to satisfying the most esoteric needs of minority”. the market, in this way, instead of rewarding differences in abilities and work output undermines the economic and social stability. to ensure that these deviations caused by the market distribution could be corrected, and in order to establish social equilibrium, it is necessary to progressively tax luxury products and to increase the supply of public goods and services. the implementation of these measures which target the distortions caused by the free operation of market mechanism requires an active role of the state. as an indicator of state intervention in the distribution of national income, the experience of developed market economies can be mentioned where the share of the state budget in gdp ranges from 35% to 60%. investments are one of the most important issues of every economic system. with this in mind, j. m. keynes [1987] warned even before the great depression that important issues such as deciding on the level of savings and investments cannot be left to private initiative. given that the investments represent the requirement for the economic growth and development, it is essential that the economy creates a favorable environment that will motivate investors to invest capital. this environment is not created by the economic actors; it is the result of rules by which economic activity takes place, i.e. institutional environment. the responsibility for creating such an environment and granting of its functioning lies with the state. if the state is effective, if the bureaucratic procedures are performed without hindrance and if the political stability is present, investors have confidence in the legal and economic system, which results in their willingness to invest in such an economy, which in turn drives economic dynamics and creates new jobs. in order to establish symbiosis and complementarity between the market and the state, it is necessary that the ideology of neoliberalism, which promotes exclusive and ruthless pursuit of profit maximization, is replaced with a more comprehensive understanding of the economy, which will in a more inclusive way evaluate social, demographic, environmental and psychological consequences of economic decisions. in other words, it is necessary to establish a balance between individual and collective needs and interests, which means that the market mechanism should be complemented by regulatory and corrective action of the complementarity between the market and the state as a factor of modern market economy efficacy 291 state. as indicated by j. stiglitz [2010], it is necessary that the ideologies of egoism and utilitarianism, represented by the neoliberal doctrine, be replaced by the ideology of humanism and solidarity. only such an ideological paradigm can be the basis for an economically successful and socially acceptable society. it is vital to establish a true symbiosis between the market and the state regulation so as to reach complementarity. the state is expected to kick-start, direct, coordinate and assist the activities of autonomous economic entities to develop their full potentials. the role of the state should be understood solely from the perspective of creating objective conditions for the efficient functioning of the market mechanism. at the same time, in search of the way in which the state and the market could successfully cooperate and support each other (which implies that the state should be more efficient), it is necessary that the state relies more on the market and similar mechanisms. 3. recommendations for the economy of the republic of serbia when the transition process begun, its flow was directed in a one-way direction towards the development of the market system, according to a pattern created on the basis of neoliberal concepts, with the decisive influence of the washington consensus. expectations that the development of the free market and its mechanisms would solve all the problems of restructuring and increased efficiency were dominant. proponents of this concept believed that the implementation of liberalization, deregulation and privatization would lead to rapid transformation of the economy and thus create the conditions necessary to initiate the economic growth. this concept disregarded the reality that the economy can function based on the principles of economic liberalism only in special conditions which were not characteristic of any transitional country. therefore, the dominance of the neoliberal concept is considered as one of the reasons for the large transition costs and social tensions, which are present in almost all countries in transition during the process of implementation of their socio-economic reforms. at the same time, market reforms implemented in china and india, which are characterized by unconventional economic policies, and which include a high level of market security, small extent of privatization, government-directed industrial policy, weak fiscal discipline and financial closedness [rodrik, 2008], have resulted in high level of economic performance and most dynamic rates of economic growth. faced with the problem they wanted to solve as soon as possible, the creators of the programs for overcoming economic transition did not take into consideration the reality that in modern societies there are different forms of democracy and markets which are the products of particular historical circumstances, traditions of individual nations and the level of cultural development. attempts to create an economic system based on the model of today's developed countries, such as the united states and eu member states, could not provide desired results because of ignoring the reality of the long-term historical development of these economies and societies, which is why this prefabricated economic models could not be immediately “imposed” on the countries which are at a much lower level of development. as o. bogomolov [2010] points out, the methods of social engineering and shock therapy cannot produce a shift in the attitudes and behavior of people in a short time, nor force them to accept new spiritual and moral values. imperceptive 292 v. leković acceptance of the model of social and economic system that works in developed countries, including the disregard of the historical experience of particular countries, led the majority of former socialist countries in serious economic and social difficulties. in the absence of a carefully planned strategy of the transition process, one-sided forms of democracy and market relations appeared, which resulted in sharp polarization of the society. the experience in the implementation of the transition process, thus far, has confirmed that the active political, economic and social role of the state is essential, because the state represents the entity that will conceptualize, initiate, organize, regulate and control this process. the active role of the state does not imply the role of the state in the capacity of business owners and their administration, but as an architect of institutional arrangements and the bearer of the infrastructure development. internal development and institutional relationships, which are essential for the creation of the system's stability and its efficiency, cannot be successfully achieved through general liberalization of economic relations. key factors that have a decisive influence on the position about the manner of regulating economic relations and coordination of economic activities are the following:  despite the evident limitations and shortcomings, free market is necessary as a mechanism of self-regulation, motivation, dynamics and optimization of economic processes, however, it should be complemented with active government regulatory, corrective and complementary functions, as well as the protection of general social and long-term interests;  when creating the economic system, the goal is not only to build an efficient, stable and dynamic economy, but, primarily, to build a just and humane society;  the balance between the public and private interests, i.e. the achivement of economic efficiency and scial equality should be provided by the active state involvement. in terms of the extent of the involvement of the state in the economic activity, according to f. fukuyama [2005], it is necessary to distinguish between the scope of the state competencies in exercising different functions and objectives, and the capacity of the state, which is reflected in its ability to clearly and transparently plan and implement policy decisions, which presents direct institutional competence. unlike the scope of state competencies (security and protection of public order, social and health insurance, education, etc.), whose hierarchy is inconsistent, the capacity of the state actually involves institutional capacity, whose strengthening should be the top priority in every country. institutional capacity implies the ability of the state to formulate and execute policies and enforce laws and regulations, to have an efficient and small public administration, to control corruption and bribery, to maintain high level of transparency and accountability of government institutions and, primarily, to guarantee the abidance and enforcement of the laws. the above mentioned properties imply variations in the stability of the state in the implementation of various functions. for example, the success of the state in securing public order and peace, rule of law, public health, education, economic regulation and the like will vary. it turned out that many countries that created their policies in accordance with the washington consensus during the transition process, and thus reduced the scope of state jurisdiction, weakened the existing institutional capacity, which resulted in introduction of new functions of the state that had not previously existed. the state has special importance in an environment of incomplete institutional structure and structural imbalance, (as is the case with the republic of serbia and the majority of economies that are currently in transition) when it is necessary to take responsibility in terms complementarity between the market and the state as a factor of modern market economy efficacy 293 of setting the priorities of the transition process and in the creation and implementation of the economic policy. in terms of the economic environment, the role of the state is to create institutional framework and such business environment that will encourage and reward investors, both domestic and foreign ones, and motivate them to invest in innovative activities that include new technologies and more efficient ways of doing business, which is an essential prerequisite for profit maximization. at the same time, by creating a favorable institutional environment, the state contributes to the reduction of economic and any other risks, which is one of the key tasks of the state as a regulatory factor and which enables the more efficient functioning of the market itself. since the stimulation of economic growth and development is priority for the republic of serbia, as well as all other transition economies, one of the most acceptable concepts is that of a developmental state, which is essentially characterized by the following:  responsibility towards the economic, political, social, development and institutional issues;  active participation in investing and direct channeling of development processes;  establishing and regulating the relations between the economy and the policy that supports sustainable industrialization;  establishment of the professional and efficient control mechanism, which is distinctive for its managerial capabilities;  harmonization of the state intervention with the goals of the private sector and the functioning of the market mechanism, i.e., complementarity between the strong state and the free market;  promoting economic development based on productivity and competitiveness. in seeking an answer to the question of what kind of relationship should be established between the market and the state in a particular country, it is necessary to bear in mind that there are no universal formulae for success. some concepts are valid for one time period, but not for another, some concepts have proved successful in some countries but in others they had not been very successful. social and economic reality indisputably shows that the state is always present in the economy and that no one, except a variety of extreme liberals, can claim that the state should be left out in this respect. the task of the economic theory is to persistently explore different combinations of market and state interaction in different conditions and in different environments, as the economic theory has itself evolved thanks to its successes as well as failures. conclusion creating the conditions necessary for the successful functioning of a market economy implies the need to clearly define the role of the state, i.e., to find a suitable form of its efficacy as an allocative and a coordination mechanism, in order to successfully realize the complementary and corrective function in terms of the market. in other words, an efficient institutional system that defines the environment in which the market operates is an imperative, given that in poor institutional environment an increase in the arbitrariness of the state authorities and their officials inevitably occurs which leads to the poor functioning of the market system. this is particularly significant for the societies where the free market is established through the process of transition, because the transition to a 294 v. leković market economy is not just about liberalization and the introduction of private property, but, above all, the establishment of adequate market institutions. the significance of the state is supported by the fact that it is the state that introduces the essential harmony in functioning of the economy, and its role is exercised in accordance with its own institutional capacity. in order to consolidate its productivity, the following three interrelated institutional blocks are vital: defining the rules and ensuring their implementation; establishing competitive environment, both in the country and abroad; initiating establishment and promoting of partnerships both in the economic sphere and the society. modern economics has wholeheartedly embraced the institutional guardianship of the state, since, thanks to this kind of support, the economy was able to concentrate on the continuous improvement of its performance. in this way more out of necessity than out of substantive systemic reasons an alliance between the state and the economy is established. accordingly, the economic necessity imposed the need to establish a symbiosis between the state and the market, sometimes acting as allies and other times acting as rivals. theoretical and methodological analysis of different conceptions of the relationship between the market and the state in a modern economy, as well as references to the reality of the overall socioeconomic development, provide sufficient arguments to confirm the hypothesis of this study. in search of the optimal mode of the influence of the state on economic activity, the emphasis is on increasing the efficiency of the state in implementing its functions. since the inefficiency of the state apparatus produces the additional non-production costs in the economy, it is necessary that the state follows certain market principles. this is one of the basic requirements that enables the state to fulfill its functions in terms of securing firm rules of the game for all economic actors and thus, in the best way, contribute to the creation and development of a true market environment. to put it briefly, the state and the market are connected by a network of interrelations and interactions, which include not only the components of conflict and substitutability, but also the equally firm elements of complementarity, which is a prerequisite for their effectiveness, as well as the economic performance of modern market economy. acknowledgement. this paper is a part of the research project no. 179015 funded by the ministry of education, science and technological development of the republic of serbia. references 1. абалкин, л. 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(1985). the economic institutions of capitalism: firms, markets, relational contracting. new york, the free press. komplementarnost tržišta i države kao faktor uspešnosti savremene tržišne privrede: pouke za republiku srbiju tržišna privreda se tumači kao sistem koji karakterišu privatnosvojinski odnosi i samoregulišući tržišni mehanizam, kojim se ostvaruje koordinacija aktivnosti ekonomskih aktera. u skladu sa takvim shvatanjima, dalje se razvija teza da jedino privatno preduzetništvo omogućava ekonomski prosperitet, s obzirom da je ekonomski rast direktno uslovljen stepenom slobode ekonomskih subjekata. bez namere da se ospori uloga tržišnog mehanizma, privatnog preduzetništva i ekonomske slobode, cilj je da se u radu ukaže na postojanje objektivnih faktora koji uslovljavaju potrebu da se, u funkcionisanju savremenih tržišnih privreda, ostvari uzajamna povezanost tržišta i države, kao koordinacionih i regulatornih mehanizama. ovaj stav se temelji na iskustvima najrazvijenijih tržišnih ekonomija, koje su svoje razvojne ciljeve ostvarile, dobrim delom, zahvaljujući odgovarajućoj simbiozi i komplementarnosti tržišta i države. shodno tome, rezultat istraživanja je da se, na bazi različitih teorijskih stanovišta i ekonomske realnosti savremenih tržišnih ekonomija, ukaže na potrebu da se u kreiranju ekonomskog sistema u republici srbiji uvaži realnost da će i tržište i država biti uspešniji kada je njihov međusobni odnos komplementaran. ključne reči: tržište, država, koordinacija ekonomskih aktivnosti, ekonomska uspešnost, komplementarnost tržišta i države. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 3, 2017, pp. 217 230 https://doi.org/10.22190/fueo1703217t review paper bank regulations in modern financial environment 1 udc 336.71.078.3 violeta todorović, milena jakšić, nenad tomić university of kragujevac, faculty of economics abstract. the paper analyzes the role and importance of bank regulations in ensuring safe and stable banking operations. the modern business environment in which banks operate is unstable, turbulent, and quite unpredictable. unlike traditional business conditions, banks are now exposed to growing and diverse risks, as well as frequent crisis situations. accordingly, control over banking operations is becoming a necessity. the need for regulation can be justified by the fact that the market, left to itself, cannot remain competitive in the long term. to fulfill their goals, regulations must constantly adapt to changes in the environment. the aim of the paper is to point to the necessity of regulatory changes in the banking sector. by critical review of certain regulatory changes, the authors conclude that they significantly contribute to safer banking operations and system stability. key words: bank regulations, regulatory changes, banking crisis, basel regulations jel classification: g21, g28 introduction the banking business is very dynamic and changes in line with the changing economic environment and regulations. the traditional role of banks has rapidly changed in response to changes in the global environment at the end of the twentieth century. these changes, essentially reflected in deregulation, increased competition, growth of fees in total revenues, increase in the relative share of non-performing loans in total loans, emergence of new financial instruments, development of information technology and market globalization, characterize modern environment and influenced, in general, the received july 03, 2017 / accepted august 18, 2017 corresponding author: nenad z. tomić university of kragujevac, faculty of economics, đure pucara starog 3, serbia e-mail: ntomic@kg.ac.rs 218 v. todorović, m. jakšić, n. tomić decline in bank profitability and emergence and growth of new business activities with increased risk (todorović, 2015, p. 16). given that modern banks appear as a reflection of the entire economic and financial system, ensuring optimal efficiency of the banking system and individual banks is crucial. the specificity of banks is reflected primarily in the monetary nature of their sources (a vista deposits) and the role in payment operations. through their lending function and access to information on debtors, banks establish long-term relationships with their users, based on mutual trust and mutual benefit. such a cooperation provides debtors with stable and reliable working capital (even in unexpectedly unfavourable time periods), and banks with reliable sources of high profit. as members of the monetary system, banks are unique institutions in terms of ability to create money, i.e. increase money supply by granting loans. banks are the most important institutions of the financial system and have a primary role in mobilization, concentration, and allocation of funds. the functioning of the economy depends on the supply of money, payment system, and uninterrupted credit flow. in fact, banks’ deposit accounts, as a component of money supply, provide liquidity, mobility, and affordability, which is necessary for the efficient functioning of the payment system in each country. banks are the primary source of liquidity for all participants in the system and the main channel for the implementation of monetary policy. bearing in mind the indisputably important role of banks for overall economic trends, it is important to ensure their successful business and, thereby, preserve systemic stability. therefore, banking operations are, even in deregulated market conditions, most thoroughly regulated area. an adequate regulatory framework should, among other things, protect depositors, investors, and financial systems in different national economies. however, the precrisis regulation model in both national and international frameworks gave wrong incentives to banks, encouraging institutions and individuals to take too big risks. with the advent of crisis, it became clear that the established regulatory framework needed to be changed. therefore, the subject of the paper will focus on regulatory changes in the banking sector, caused by the global financial crisis, which aim to ensure the safety of banking operations and system stability. respecting the previously defined research subject, the main objective of this paper is to review the effectiveness of bank regulations and regulatory policy changes on dealing with banking problems and preserving the stability of banking systems. in line with the defined research subject and objective, the paper will test the following hypothesis: a turbulent and uncertain modern environment requires modern regulatory changes that will contribute to reducing the banks’ exposure to business risks and ensure systemic stability. to test the starting hypothesis, the paper will apply qualitative methodology based on the study and a descriptive analysis of the defined problem. consulting the relevant literature, dealing with theoretical generalization and practical experience of authors who have researched the issue under discussion, will enable a comparison and synthesis of different views, on the basis of which to carry out general conclusion about the impact of specific regulatory changes on bank performance. the paper will first analyze the need for bank regulation. after identifying the crucial importance of regulation for banking operations, attention will focus on possibilities and limits of its proper application. finally, regulatory changes that have become necessary during the crisis will be reviewed. specifically, the most significant is the reform of basel framework, which will be given special attention. bank regulations in modern financial environment 219 1. the need for bank regulations regulation of banking operations is accompanied by a series of concerns. despite changes in the global environment, essentially reflected in deregulation, liberalization, and internationalization of business, banks are generally still most thoroughly regulated institutions in the financial system. regulators agree in their assessment that crisis in the financial and economic system must be avoided even at the cost of overregulation and overprotection of banks when most other economic sectors open up globally. preoccupation with systemic risk is forcing regulators to be tolerant of the anti-competitive behaviour of banks. bearing in mind that users of banking services are the main drivers of the economic system, regulators aim to increase the transparency of banking operations. there are two basic arguments in support of the necessity of regulating banking operations. first, the importance of a stable banking system is reflected in ensuring optimal and efficient allocation of resources, and, thereby, fostering economic growth. past experience and practice have shown that leaving the banking system to spontaneously functioning market laws exposes banks to systemic risks, which also leads to instability of the entire banking system. given the nature of their activities, banks are more sensitive to systemic risk than non-financial institutions. the problems individual banks face may affect the system as a whole, given company insolvency and clients’ fear that their deposits will be threatened both in that and in other banks. bank run occurs, involving sudden and massive withdrawal of deposits and illiquidity problem. due to insufficient reserves to cover the deposit outflow, banks are forced to sell part of their traditionally non-performing loans at prices lower than the market price or at a loss. a chain reaction produces a banking panic, which manifests itself in the entire banking, even economic system illiquidity. in accordance with the foregoing, an adequate regulatory framework should ensure public confidence in the banking system and its stable and secure functioning. second, an adequate regulatory framework is necessary in order to eliminate various market imperfections (asymmetric information, adverse selection, and moral hazard), which significantly reduce the efficiency of operations of all market participants. asymmetric information leads to wrong selection of loan applications due to difficult risk assessment and return on specific projects, while deliberately taking high risks occurs as a result of moral hazard. control over banking operations can be viewed from two aspects: 1) macro-economic, which aims to control the functioning of monetary flows, or the amount of money in circulation, price and exchange rate stability, and the achievement of other economic policy goals, and 2) micro-economic, which aims to regulate the operations of individual banks and to protect the interests of depositors and creditors (beke-trivunac, 1999, p. 16). financial market development, which caused the separation of macro and micro control, diversification of banking operations, and the loss of boundaries between banking and non-banking activities, was made difficult by finding the most appropriate system for the regulation and supervision of complex financial institutions (vuksanović & todorović, 2013, p. 10). integration of different types of financial services and unclear boundaries between different financial institutions imposed a question of choosing between functional and institutional system of regulation and control. a functional regulatory system means that a particular financial activity is subject to a uniform prudential regime, independently of the legal structure of institutions that perform 220 v. todorović, m. jakšić, n. tomić a given activity. from the perspective of the institution, it means that it is subject to control by as many regulatory authorities as many different activities it performs. however, the system of functional regulation requires that, along with individual institutions, there is a supreme institution for the consolidated supervision of the financial institution as a whole. specifically, it will be an entity responsible for assessing overall risks to the entire system of a financial institution. the institutional system of regulation means that every individual type of financial institution is regulated and supervised by a regulatory authority. this system, established according to the sector to which the institution concerned belongs, is effective only in relation to strictly specialized financial institutions. regardless of the chosen system of regulation and control, potentially there is always the possibility that the powers of various regulatory bodies overlap. in this context, integrated prudential supervision could minimize any negative consequences of these regulation systems. it can also allow for the achievement of two objectives: 1) uniform control of institutions supervised, and 2) competitive neutrality of prudential control over all institutions supervised (mešić, 2004, p. 58). regardless of the chosen regulatory system, the fundamental objectives of bank regulations are related to: ensuring security and solidity of banks and financial instruments; ensuring an efficient and competitive financial system; ensuring monetary stability in the country; maintaining integrity of the national payment system; protecting customers from abuse of credit institutions (macdonald & koch, 2006, p. 4). at the same time, it cannot be denied that bank regulation is an expensive process, and incremental costs of compliance with regulatory process are usually passed on to end users, resulting in higher costs of financial services and possibly limited mediation. these are the costs of certain activities required by regulators, which would not be undertaken in the absence of regulation. examples of compliance costs include costs of all additional systems, training, time, and capital required by the regulator. in addition, regulatory costs can act as a barrier to market entry and thus strengthen the monopoly position of certain banks. however, regulatory costs are not a sufficient argument to eliminate the need for regulation of banking operations. regardless of the costs of the regulatory process, the users of banking services themselves require adequate regulation, because market solutions cannot assure them that they are protected in the right way. 2. effectiveness of bank regulations given that underwriting risk is a prerequisite of economic growth, and that banks themselves knowingly and willingly underwrite and manage risks in their business, the question revolves around the primary objectives of bank regulations. it is clear that the basic aim is to limit banks in taking too big risks, in order to eliminate moral hazard within the safety net, designed to protect the banking system and individual depositors. in the modern sense, regulatory framework can be viewed as a “line of defense” or “buffer”, which partially protects public funds from bank losses, by strengthening market discipline and positive assessment of safety net. although they focus on capital, bank regulations include requirements for holding liquid assets, loan loss reserves, loan concentration limits, quick corrective action, different rescue procedures of problem banks, etc. the current bank regulations in modern financial environment 221 regulatory framework is based on three key pillars, namely: (1) prudential norms that seek to harmonize different incentives ex-ante, (2) ex-post safety net (deposit insurance and lender of last resort), aimed to attract small depositors and prevent contagious run on solvent banks, and (3) “line-in-the-sand”, which separates the world of prudentially regulated (commercial banks) from the world of unregulated institutions (torre & ize 2009, p. 6). the third pillar (line in the sand), which separates the regulated and non-regulated financial institutions, is based on three key arguments. first, introducing regulations requires extensive and complicated procedures, and may limit innovation and competition. therefore, it must be accompanied by adequate and expensive supervision. second, the expansion of inadequate monitoring outside the commercial banking leads to an increase in moral hazard. in addition, poorly regulated intermediaries can get undeserved high-quality rating. thirdly, it is considered that market investors (outside the field of small depositors) are well informed and fully responsible for their own investment. as a result, they can effectively oversee unregulated financial intermediaries, and influence them to keep an adequate amount of capital in order to minimize moral hazard. in line with this explanation, only depository institutions are prudently regulated and supervised under the current regulatory architecture. accordingly, they benefit from the safety net. other intermediaries do not enjoy safety protection, and they are also not burdened with prudential norms. instead, unregulated intermediaries are subject to market discipline and specific regulations on the securities market, which focus on transparency, governance, investor protection, market integrity, and so on. it is obvious that such regulatory architecture has many disadvantages and that it is quite unbalanced. exceptionally high growth of the so-called “shadow banking”, which is based on the securitization of credit risk, off-balance sheet operations and assets, and rapid expansion of highly leveraged intervention by investment banks, insurance companies, and hedge funds, justifies the previously stated stance. this especially became apparent with the emergence and expansion of the subprime crisis, when, finally, safety net had to be expanded sharply to cover both regulated to unregulated institutions. in other words, unregulated intermediaries became systemically relevant, and were, therefore, without being asked, involved in the ex-post safety net. based on the above, the question is whether and how bank regulations in general can be justified and effective. the answer to this question depends on the objectives of regulations. in this context, they can be successful in achieving some goals, but less successful in other areas. if safety and stability of the banking system are the primary objectives, with a simultaneous collapse of a large number of banks, other objectives of banking regulations cannot be achieved (todorović & jakšić, 2009, p. 122). a large number of banking bankruptcies and crises, both in previous periods and today, suggests that prudential regulations have limitations, and that in some countries they work better than in others. one of the limitations lies precisely in systemic causes of banking crises. most banking crises are associated with unstable economic conditions, such as deflation of asset prices, rising interest rates and exchange rates, and so on. prolonged stability and strong economic growth could encourage banks to, without adequate credit analysis, enter high-risk lending transactions, which, in the long term, may adversely affect the stability of the banking system (todorović, 2015, p. 90). the question is why similarly caused crises reoccur, despite the development of a large set of prudential regulations over the years, designed to prevent systemic collapse. 222 v. todorović, m. jakšić, n. tomić in many cases, regulations not only failed to prevent, but they significantly worsened the problems raised. for example, the key regulation in the united states, which emerged from the great depression, was the glass-steagall act, which aimed to protect commercial banks from price fluctuations on the stock exchange, by separation of commercial and investment banking. furthermore, savings and loan crisis initiated the regulatory requirements for securitization, as a means of transferring credit risk to financial markets. today it is obvious that investment banks and securitization were the key initiators of the subprime crisis (todorović, 2013, p. 222). the main problems that intermediaries face in their business are: moral hazard, external negative impacts (externalities), and uncertainty. in an attempt to solve a problem, regulations often worsened other problems. the failure of regulations largely resulted from partial (piece by piece) approach to regulatory reform. for example, the introduction of deposit insurance after the great depression, which was intended to alleviate instability caused by depositors’ run on the banking system (problem of externalities), worsened the problem of moral hazard. then, strengthening prudential norms after the savings and loan crisis, which was aimed at solving the problem of moral hazard, indirectly worsened the problem of externalities (there was a rise of unregulated financial intermediaries, who did not have regulatory-induced motives to worry about system liquidity and stability). this problem, coupled with business uncertainty, is in the epicentre of the subprime crisis. the global financial crisis has shown that the regulatory framework had many failures (torre & ize, 2009, p. 21-22). first, there is a clear line between ex-ante prudential standards and ex-post safety net. ex-ante regulatory framework focused on the stability of assets, and ex-post safety net on maintaining liquidity of liabilities. in addition, growing systemic liquidity risks were not covered by regulations, which was their main flaw. second, prudential regulation focused on the safety and strength of individual institutions, based on the assumption that the sum of strong institutions is equivalent to a strong system. however, the subprime crisis has shown that such an approach was completely wrong, because it is the system that is most important for the strength of each institution. third, traditional regulations focused on statistically measurable risks, based on sophisticated and complex measurement techniques and their management. with the development of basel ii capital accord, the existing regulatory framework tried to reduce the gap between the ever-growing risks and regulatory business principles. however, the subprime crisis has shown that risk management techniques were too complex, and the control of bank operations incomplete, followed by rising uncertainty in the environment. finally, it can be concluded that bank regulations need to be changed in order to reflect the volatile environment in which they operate. any reform must integrate all three problems (moral hazard, externalities, and uncertainty), and maintain an adequate balance between financial stability and financial development. this is a difficult task, because each individual problem can lead to different and often inconsistent regulatory implications. 3. regulatory changes in modern banking environment in recent years, the scope and complexity of bank regulations have grown continuously, in response to public reaction to frequent occurrence of financial crises and resulting political pressures. due to increased competition from non-bank financial institutions, bank regulations in modern financial environment 223 bankers themselves require a change in the regulatory environment. at the same time, every change increases regulatory risk. if the bank does not anticipate such a change and does not include it in its business plan, it will be considerably handicapped and riskier than competing banks. it should be noted that certain changes in the regulatory environment are affected by the relative power of special interest groups, trying to secure an advantage for their members (for example, commercial banks as opposed to investment banks, large banks opposite the small banks, etc.). regulatory changes or reforms are conditioned by a number of factors. first, internationalization of banking operations is an important factor affecting the regulatory reform. the development of internationally active banks implies a greater role of foreign banks in many domestic financial sectors. the increased presence of foreign banks raises the question of competence for their regulation. who is responsible when the bank faces problems on foreign markets – regulator from home or the host country? generally, for large and complex banks, regulator in the host country supervises the foreign subsidiary’s activities, but the regulator in the home country is ultimately responsible if the bank faces difficulties. second, the phenomenon of globalization, closely linked to the internationalization of banking operations, affects the change of the regulatory environment. rising international activities and trade of multinational corporations have increased demand for the services of financial institutions that operate across national borders. as a result, banks are more exposed to risks coming from abroad, i.e. their financial stability is becoming less dependent on risks on the domestic market. consolidation in the global banking industry has resulted in the emergence of financial conglomerates, i.e. the creation of universal banks that may engage, either directly or through subsidiaries, in other financial activities, such as insurance, leasing, investment banking, and so on. on this basis, greater coordination between national regulators is needed, as well as greater regulatory monitoring of operations of such institutions. third, the development of financial innovation and their market importance condition regulatory changes, i.e. requests for new regulations. for example, in early 2005 in the us there was a need to regulate hedge funds (private investment funds which, on behalf of their clients, trade in different assets, such as securities, commodities, currencies, and derivatives), due to their rapid growth and potentially destabilizing activities. the reason why financial innovation attracts regulators’ attention is precisely the fact that it often arises from regulatory arbitrage. in other words, financial institutions and markets create new products not only to meet the requirements of their customers, but also to avoid or circumvent existing regulations. if a particular regulation reduces banks’ ability to adequately manage risks and achieve satisfactory return, they have a greater incentive to find ways to circumvent the same (kane, 2015, p. 321). while banks use innovation to circumvent existing regulations, regulators are always one step behind them. this phenomenon is known as regulatory dialectic. in addition to the previously mentioned factors, there are many others that can have a significant impact on the regulatory environment. among other things, changes in the regulatory framework are conditioned by large banking and financial crises. the very emergence of crisis is an indicator that the ex-ante established regulatory framework is not adequate, and, therefore, requires reform. given that, in the world of uncertainty, even best regulations and supervision probably will not completely eliminate the risk of systemic crisis, improving system features of the safety net will have special significance in the new regulatory framework (todorović, 2013, p. 223). thus, the authorities in the united states, shortly after the outbreak of 224 v. todorović, m. jakšić, n. tomić crisis, initiated changes in the deposit insurance system, referring to a temporary increase in the amount of insured deposits. by the emergency economic stabilization act, the united states, on 3 october 2008, increased deposit coverage from 100,000 to 250,000 dollars (hansen et al., 2009, p. 50-51). the current crisis has influenced the temporary increase in insured deposits in the european union in the amount of 50,000 euros in june 2009, and, during 2010, the limit increased to 100,000 euros. at the same time, some countries, such as france and germany, introduced temporary complete deposit coverage, so depositors would not lose their money, and in order to preserve confidence in banks during the crisis. behind unlimited deposit guarantee, there are the state and political structures of a given country (thematic review on deposit insurance systems, 2012, p. 11). a characteristic of the european union market is that national supervisors are not interested in preserving the integral value of their banks operating abroad. during the crisis, the tendency of national supervisors is aimed at preserving the stability of the national parts of cross-border banks. this position is supported by the well-known financial trilemma, which indicates that the three major objectives (maintaining global financial stability, strengthening cross-border financial integration, and preserving national integrity) cannot fit easily (schoenmaker, 2012). each of these three objectives can fit relatively easy with others, but it is difficult, almost impossible, to achieve all three. however, in order to maintain both internal and cross-border value of european banks, it is necessary to consolidate supervision, deposit insurance, lender of last resort, and the process of resolving problem banks at the supranational level, i.e. at the level of the european union (schoenmaker & gros 2012, p. 8). in this respect, the proposal is to establish the european fund for deposit insurance, which would have a significant role in monitoring and resolving problem banks. based on the above, it can be concluded that the current situation requires complete revision and reform of the current regulatory environment. in addition, the design of an appropriate regulatory framework faces two major challenges (torre & ize, 2009, p. 2731). the first relates to the need to build such a regulatory framework that will integrate the problems of moral hazard, externalities, and uncertainties, and that will not, by solving one, worsen other problems. another challenge relates to finding the optimal balance between financial stability and financial development. in this regard, extreme solutions (system resistant to crisis that does not perform its mediating function adequately, or system that is rapidly evolving, but often faces crisis) should be avoided. in contrast to the pre-crisis period, when the components of bank regulations were stability and safety, capital adequacy, and deposit insurance, today, in the post-crisis period, systemic risk that applies to the entire financial system, not its individual participants, is gaining in importance (jickling & murphy, 2010, p. 6). thus, the regulatory reform should aim to improve the compliance of various incentives in order to minimize systemic liquidity risk and counter-cyclical effects of bank capital. strengthening prudential norms that encourage keeping the systemically safe assets can help in limiting banks’ sensitivity to systemic liquidity shocks. in a world where regulations are not applied uniformly, financial flows will sooner or later find the line of least resistance, which will provide unregulated intermediaries with comparative advantage and the possibility of rapid climb to the point where they can become dangerous to the system. this problem can be solved by separation of commercial banks and non-deposit institutions. in addition, non-deposit institutions can choose between being prudently bank regulations in modern financial environment 225 regulated and remaining unregulated. all regulated intermediaries must meet the appropriate prudential requirements in terms of capital adequacy and minimum capital threshold to enter the market, the same as commercial banks. unregulated intermediaries do not have to meet these requirements, and they should be forbidden to borrow directly from the market. in other words, they should be allowed only to borrow from banks or other regulated intermediaries. this would ensure regulatory neutrality and favour innovation and competition. in addition, in order to avoid cross-border arbitrage, reform will have to be supported by a minimum degree of international consensus. at the same time, bearing in mind the problem of uncertainty, the reform will have to pay more attention to the growing risks of financial innovation and to review oversight role of the market and supervisors, so supervisors get more responsibility and more power. through appropriate legislative powers, responsibilities, and instruments, supervisors need to have a greater role in overseeing banking operations. they must focus on the risk and development of the banking system and the establishment of countercyclical prudential requirements, caused by changes in the environment. at the same time, regulators should be given greater authority in the process of regulation, standardization, and approval of all forms of innovation, which must undergo rigorous approval and tests. theory and practice have given rise to a large number of important and detailed proposals for establishing a regulatory framework. it is clear that regulators, having state support, tended to, with the adoption of new regulations and laws, fill gaps and weaknesses in terms of bank regulations and supervision. us regulators adopted dodd-frank act, and tried to improve regulations in relation to deficiencies identified through: highlighting the systemic risk; recomposition of responsibilities of the existing and creation of new regulatory institutions; regulation of banks’ speculative activities; regulation of financial institutions’ liquidation; an end to the concept of “too big to fail”. in order for a regulatory reform to be successful, it is necessary to combine specific rules (which maintain the system within reasonable limits) and institutional reforms that are proportional to greater responsibilities and powers of supervisors and strong enough to overcome a number of difficulties associated with the use of discretion regarding an approach based on transparency and simplicity (page & hooper, 2013, p. 52). the system of bank regulations needs to move from an attitude of too complex and confusing rules. finding the right modalities of implementation and regulatory mix between rules and discretion will be one of the toughest and most important challenges of regulatory reform in the future. 4. changes to basel regulations caused by global financial crisis the basel framework has the most significant impact on the convergence of bank regulation systems, since it allows the transfer of information and exchange of experience on national supervision programs, increases efficiency of international banking supervision techniques, and sets minimum supervision standards, where possible (bcbs, 2009, p. 1). the first two basel accords (basel i and basel ii) had the objective of establishing uniform requirements in terms of the amount of capital, which banks were required to meet. in other words, the objectives were preventing banking crises, promotion of domestic banks as stable and solvent ones, and eliminating problems arising from non-compliance of national legislation. although other factors, such as liquidity and interest rate sensitivity, are perhaps 226 v. todorović, m. jakšić, n. tomić even more important in achieving these objectives, adequate capital was for many years the regulators’ primary problem. it was only the third accord (basel iii) that highlighted the problem of liquidity as a key factor of instability in the banking system (banerjee & mio, p. 2014, 3). basel ii was created in order to resolve the identified deficiencies and simplification of capital indicators in basel i (giving priority to the type, not the quality of assets) (heid, 2007, p. 3885), i.e. accord that did not recognize differences in the quality of credit risk; did not take into account other risks in the banking business, such as, for example, operational risk; ignored the possibility of reducing the credit risk through diversification of assets or through hedging transactions. however, over time, the so-called indirect costs have been identified, associated with pro-cyclical effects that basel ii may cause in macroeconomics. by increasing sensitivity to credit risk, accord has at the same time increased cyclicality of minimum capital requirements. thus, capital management can be a big problem in banks. given recessive economic trends (which today characterize the global economy), banking capital experiences erosion due to losses in credit portfolios (non-performing loans). at the same time, banks are required to hold a higher amount of regulatory capital in relation to the total level of loans, thus decreasing the level of banks’ lending activities and further deepening the crisis in economic activity. the problem of cyclicality of minimum capital requirements of basel ii was the subject of intense discussion in financial and regulatory circles. in this sense, there were requirements to reduce mandatory minimum rate of capital during periods of recession from 8% to, say, 6%, in order to enable credit expansion. of course, in this case, loans would be approved only to creditworthy customers. however, the basel committee, until 2010, relying on several key arguments, stuck to unique and fixed minimum capital rate. first, the introduction of a more flexible capital rate could relativize the basic idea of the basel committee regarding the creation of a solid regulatory capital regime in the context of increased risk and uncertainty in the functioning of the macroeconomic and banking system. second, some raised the question of who would decide on the transition to lower rates of capital – the basel committee or the national supervisor. thirdly, there were no clear criteria for deciding whether there are sufficient macroeconomic reasons for the reduction of regulatory capital. the emergence of the global financial crisis (subprime crisis) actualized the evident failure of basel regulations, reflected in inadequate establishment of dynamic links between monetary and prudential policies. the job of the central bank related to ensuring macro stability and the provision of services of the lender of last resort, while the supervisors were responsible for prudential regulation and financial stability. in addition, regulations did not require their strong mutual cooperation, which is where one of the main causes of the crisis lies. insufficient attention of both monetary authorities in relation to implications of their actions on financial developments and supervisors in relation to macro dynamics deeply contributed to the crisis. since the global financial crisis revealed the conceptual shortcomings of basel ii, which failed to prevent and stop the crisis flows, the need for counter-cyclical control instruments and mechanisms arose, which associated capital needs with the rate of change in bank lending. thus, in 2010, the basel committee issued some guidelines to basel iii, in order to improve banks’ ability to absorb shocks arising from the environment, increase bank regulations in modern financial environment 227 the transparency of banks, and establish appropriate regulatory frameworks at the global level. in other words, this document is a result of the efforts to make the regulatory framework of the banking business more stable, while stressing the importance of adequate risk management. basel iii standards combine two complementary approaches to supervision, micro approach, at the level of individual banks, on the one hand, and macro-approach, on the other hand. micro-prudential supervision refers to the increasing resistance of banks in periods of market uncertainty by establishing higher quality capital, more comprehensive risk coverage and adequate supervision. at the same time, the basis of macro-prudential supervision consists of three elements: capital buffers, liquidity standards, and leverage ratio (matić, 2011, p. 180). request for a minimum total capital remained the same and amounts to 8% of the risk weighted assets, while the minimum amount of primary capital (tier 1) increased from 4% to 6%. in relation to basel ii, changes are reflected in the elimination of tertiary capital (tier iii) and the introduction of new categories, such as protective and countercyclical buffers. the meaning of inclusion of protective capital buffer is the creation of reserves in the expansion phase, which can be used to absorb losses during financial and economic stress periods, without prejudice to the required minimum rate of capital. protective buffer is included in equity, and should be set at 2.5% above the minimum required capital. this will increase the minimum requirements to 8.5% when it comes to primary capital and 10.5% of total capital. banks will be allowed to withdraw protective buffers during stress and crisis, whereby convergence to the minimum requirement for nominal capital will affect larger restrictions and prohibitions of dividend and bonus payments to employees and shareholders. the obligation of forming countercyclical buffer is not directly imposed on banks, and national regulators, depending on threats of systemic nature, may require this type of capital. the amount of countercyclical buffer is in the range of 0-2.5% of risk-weighted assets, in order to provide macro-prudential goal of protecting the banking system in terms of excessive credit growth. practically, regulators use it flexibly to stimulate or reduce loans in various stages of the credit cycle. also, regulators have left the possibility of introducing stricter rules for systemically important banks, i.e. institutions that can easily endanger the financial system. stricter requirements for capital are a necessary but not a sufficient condition for the stability of the banking sector. in order to ensure the necessary conditions for long-term liquidity structure in banking institutions, basel iii has introduced new standards that provide greater resilience of banks to short-term liquidity problems, because it turned out that the problems in banks occurred because of insufficient liquid funds despite possessing adequate amount of capital. two liquidity standards have been formed, namely: 1) liquidity coverage ratio (lcr), as a ratio of highly liquid assets and total net cash outflow in the following 30 days, which should be greater than or equal to 100%. it includes the obligation for banks to hold highly liquid assets in an amount equal to a minimum of net cash flows over the next 30 days. this ratio should allow banks to maintain high-quality assets that can be converted into cash during stressful periods (basel iii: the liquidity coverage ratio and liquidity risk monitoring tools, 2013, 6). liquidity coverage ratio became the minimum standard as of 1 january 2015. 2) net stable funding ratio (nsfr) represents the relationship between the amount of resources available for stable funding and the amount required for stable funding, which 228 v. todorović, m. jakšić, n. tomić must be higher than 100. the ratio is intended to limit over-reliance on short-term financing during periods of stress and encourage better assessment of liquidity risk in balance sheet and off-balance sheet activities. it assumes that long-term liabilities are more stable than short-term liabilities, and that short-term deposits of individuals and small businesses are more stable than large investment of other partners of the same maturity (basel iii: the net stable funding ratio, 2014, p. 2). the net stable funding ratio will become the minimum standard as of 1 january 2018. due to the lack of transparency in financial reporting before the crisis, a large number of banks have sought to ensure maximum benefits through modest investment. in this way, banks have become heavily indebted. therefore, basel iii has introduced a leverage ratio, which should limit the overall exposure of banks to risky activities and eliminate the possibility of their over-indebtedness. leverage ratio, as a ratio of primary capital and total exposure of banks, must not be less than 3%. practically, the basel committee made some recommendations for the reform of bank regulations and supervision of banks, primarily related to an increase in capital adequacy ratio, in line with the growing risks of complex and globalized financial operations and improved quality of primary capital. it also made a recommendation on the introduction of minimum global liquidity standard, which was not previously included in the regulation, but could prevent the loss of liquidity. in addition to the above recommendations for strengthening prudential banking supervision at the micro level, the basel committee made recommendations at the macro level. first, capital adequacy ratio must be supplemented by the corresponding internationally harmonized capital availability ratio, in order to prevent the banks to circumvent the requirements of the new regulations. second, it is necessary to create protective buffers in phases of economic prosperity, which would be activated during the recessive trends in the economy. third, it is necessary to introduce rules on derivatives, to reduce their use as complex high-risk instruments. the new accord has emerged as a compromise between american and european banks, which are generally less capitalized, and will, in this respect, have to raise more capital. however, the new regulation has faced mixed reactions in the banking sector. while the regulators’ goal was to create a safer banking sector, resistant to crises and boom and bust cycles, bankers expressed fears of slow economic recovery, reduced and difficult lending, and increased interest rates. in this sense, the regulators allow the new basel iii rules to be introduced gradually, so that banks have sufficient time to adapt to stricter requirements and in order not to jeopardize the economic recovery after the global crisis. increasing the level of capital began in january 2013, while the new requirements should be fully completed by january 2019. of course, it is expected that most of the commercial banks will be able to timely increase their capital, while maintaining revenues. conclusion based on the generally known bank features, as well as practically confirmed danger of completely free and spontaneous operation of market laws to the stability of the banking system, the paper points out the importance of establishing an adequate regulatory framework. regardless of the chosen regulatory system, the fundamental objectives of bank regulations in modern financial environment 229 bank regulations are related to: ensuring system stability, maintaining security of banking and financial institutions, and protecting customers. an appropriately designed regulatory framework is necessary to make the right operational decisions and ensure public confidence in the banking system, no matter if regulations cannot fully prevent the banking crisis, eliminate risks in the banking business, or guarantee the correct management decisions and ethical behaviour of bank managers. previous remarks require acceptance of the thesis of the necessity of regulating the banking sector. also, it is clear that a permanently applicable and universal concept of bank regulations does not exist. it is conditioned by specifics and structural aspects of the banking sector in a specific country, as well as the depth of the crisis affecting a specific banking system. bank regulations are a dynamic category that, under the influence of theory and practice, changes with the passage of time. looking at the modern business environment, the current regulatory architecture can be characterized as quite imbalanced. credit crunch, triggered by the subprime crisis, led the financial and banking system to the unknown terrain. since the era of stability, i.e. stable prerequisites, is over, the uncertainty on financial markets is today’s norm. it is clear that regulations failed to prevent the collapse of the banking and financial system, which gave rise to some reforms to bring bank regulations in line with the unstable environment in which they operate. at the international level, the most significant changes took place in the basel regulations, reflected in the adoption of the new accord – basel iii. it aims to make the regulatory framework of the banking business more stable, ensure adequate capital and liquidity of banks, reduce systemic risk, and eliminate cyclical fluctuations in the economy, which, in fact, confirmed the starting hypothesis in the paper. finally, it is important to point out that certain regulatory changes, aimed at minimizing the problems of individual banks and systemic problems (such as basel iii), are still in the implementation phase, so their effectiveness cannot be measured reliably. therefore, future research needs to focus on testing the effectiveness of the existing regulatory changes. references banerjee, n. r. & mio, h. (2014). the impact of liquidity regulation on banks (bis working paper, 470). basel: bank for international settlements. basel iii: the liquidity coverage ratio and liquidity risk monitoring tools. (2013). basel: bank for international settlements. basel iii: the net stable funding ratio. (2014). basel: bank for international settlements. bcbs, (2009). history of the basel committee and its membership. basel committee on banking supervision. beke-trivunac, j. (1999). prudenciona regulacija i nadzor nad bankama [prudential regulation and supervision of banks]. beograd: zadužbina andrejević. hansen, k. a., carlson, s. j. & dosch, r. j. (2009). how safe are bank deposits?, the cpa journal, 79(2), 50-53 heid, f. (2007). the cyclical effects of the basel ii capital requirements. journal of banking & finance, 31, 3885-3900 jickling, m. & murphy, e. (2010). who regulates whom? an overview of u.s. financial supervision. washington: congressional research service. kane, j. e. (2015). regulativa i supervizija: etička perspektiva, u: berger, n. a., molyneux, p. & wilson, o. s. j. (eds.) oksfordski priručnik o bankarstvu, prevod, beograd: udruženje banaka srbije. macdonald, s. s. & koch, w. t. (2006). management of banking, 6 th edition, mason, oh: thomson/south-western. matić, v. (2011). bankarski rizik 21 – bazel iii [banking risk 21 – basel iii]. bankarstvo, 40(1-2), 178-181 mešić, d. (2004). prudenciona kontrola banaka i finansijskih konglomerata [prudential control of banks and financial conglomerates]. novi sad: stylos. page, j. & hooper, p. (2013). the fundamentals of bank accounting. the cpa journal, 83(3), 46-52. 230 v. todorović, m. jakšić, n. tomić schoenmaker, d. (2012). banking supervision and resolution: the european dimension. law and financial markets review, 6, 52-60 schoenmaker, d. & gros, d. (2012). a european deposit insurance and resolution fund (ceps working document, 364). brussels: centre for european policy studies. thematic review on deposit insurance systems peer review report. (2012). financial stability board publications. february 8 th . todorović, v. (2013). alternativni regulatorni pristupi upravljanju bankarskim krizama [alternative regulatory approaches to managing banking crises]. ekonomski horizonti, 15(3), 213-227 todorović, v. (2015). upravljanje bankarskim krizama [management of banking crises]. kragujevac: ekonomski fakultet univerziteta u kragujevcu. todorović, v. & jakšić, m. (2009). uloga bankarske regulative u očuvanju stabilnosti finansijskog sistema [the role of banking regulations in preserving the stability of the financial system]. računovodstvo, (9-10). torre, a. & ize a. (2009). regulatory reform: integrating paradigms, (policy research working paper, 4842), the world bank. vuksanović, e. & todorović, v. (2013). regulatorni sistemi bankarskog poslovanja: mogućnosti i ograničenja [banking regulatory systems: opportunities and limitations]. tematski zbornik radova: finansije i računovodstvo u funkciji privrednog rasta, kragujevac: ekonomski fakultet univerziteta u kragujevcu. regulativa banaka u savremenom finansijskom okruženju u radu se analiziraju uloga i značaj bankarske regulative u obezbeđenju sigurnog i stabilnog poslovanja banaka. savremeno poslovno okruženje, u kome banke obavljaju svoju delatnost, je nestabilno, turbulentno i prilično nepredvidivo. za razliku od tradicionalnih uslova poslovanja, danas su banke izložene rastućim i raznovrsnim rizicima, kao i čestim kriznim situacijama. shodno navedenom, kontrola nad poslovanjem banaka postaje nužnost. potreba za regulativom se može pravdati činjenicom da tržište prepušteno samo sebi ne može da održi konkurentnost u dugom roku. da bi određena regulativa ispunila ciljeve zbog kojih je i doneta, ona se mora stalno prilagođavati promenama u okruženju. cilj rada je da se ukaže ukaže na neophodnost regulatornih promena u bankarskom sektoru. kritičkim osvrtom na određene regulatorne promene, autori zaključuju da su one značajno doprinosile sigurnijem poslovanju banaka i sistemskoj stabilnosti ključne reči: regulativa banaka, regulatorne promene, bankarska kriza, bazelska regulativa plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 17, no 3, 2020, pp. 231 248 https://doi.org/10.22190/fueo200526018d © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper application of unconventional monetary policy instruments in mitigation of the economic consequences of the covid 19 virus pandemic1 udc 338.23:336.74 616.98 marina đorđević1, jadranka đurović todorović1, milica ristić cakić2 1university of niš, faculty of economics, niš, serbia 2innovation centre of the university of niš, serbia abstract. unconventional monetary policy instruments are used in conditions when monetary policy has exhausted all the usual measures and instruments that are otherwise applied by the central bank in the regular process of conducting monetary policy. the most commonly used instruments are, of course, quantitative easing or quantitative alleviation. the aim of this paper is to point out the application of unconventional monetary policy instruments during the economic crisis caused by the covid 19 virus pandemic in the most important banks in the world. after a theoretical overview of the concept of quantitative easing, the paper presents the empirical experiences of the bank of japan, the fed, the ecb, and other central banks. based on the analysis of applied measures and data on the use of quantitative facilities in selected central banks, it can be concluded that they resorted to the use of this instrument in times of crisis to a greater or lesser intensity. also, the increased liquidity caused by their implementation had a significant impact on aggregate demand, inflation and gdp. this analysis can be useful to the monetary authorities in serbia if they are to review the application of qe in the leading monetary institutions and help them to draw the conclusions that would lead to the most painless application of this instrument in the republic of serbia. key words: monetary policy, central bank, quantitative easing (qe), „helicopter money” jel classification: e42, e51, e52, e58 received may 26, 2020 / accepted june 22, 2020 corresponding author: marina đorđević university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: marina.dj@ptt.rs 232 m. đorđević, j. đurović todorović, m. ristić cakić 1. introduction unconventional monetary policy instruments, due to their frequency of use in conditions of economic crises caused by various causes, are becoming increasingly applicable in conducting the monetary policy of a large number of the most important central banks. their application is caused by certain unexpected circumstances. however, the central banks reacted very quickly to the very beginning of the crisis, making decisions on the use of quantitative easing as one of the most commonly used unconventional instruments. quantitative easing (qe) is used due to the ineffectiveness of other measures available to central banks. the rapid application of quantitative easing at the beginning of the pandemic crisis is the result of the inability of central banks to use conventional instruments and measures. namely, the most influential central banks, for years now, have kept their reference interest rates at an extremely low level. in conditions of low-interest rates, which tend to zero, central banks are forced to resort to unconventional instruments in conducting monetary policy, such as quantitative easing and “helicopter money”. the first part of the paper provides a theoretical overview of this problem. more precisely, at the beginning of the paper, an attempt is made to explain the concept of quantitative incentives, their comparison with the concept of “helicopter money” and to show qe transmission channels. the second part shows the use of qe in the period before the crisis caused by the pandemic. the application of this instrument in the bank of japan, the fed and the ecb is presented, followed by an example of the application of qe in the bank of england. finally, the use of quantitative easing was pointed out in order to mitigate the economic consequences during the crisis caused by the covid 19 virus pandemic. the state of the economy during the crisis, the fall in gdp and the fall in stock exchange indices are shown. the paper finishes with the analysis of the quantitative easing measures applied by japan, the usa and the eu. 2. review of relevant literature 2.1. theoretical aspect of quantitative easing in the conditions of economic crises, which can be caused by various causes, the turnover on the financial market decreases so much that it causes a decline in the real economy and a simultaneous decline in interest rates. at that moment, the standard measures of central banks can not have the desired effect, so the banks reach out to more extreme measures intended to stimulate the economy. the most commonly used instrument, in such circumstances, is quantitative easing. quantitative easing (qe) is an unconventional type of monetary policy instrument of a central bank and represents the purchase of government and highly ranked corporate securities, using newly created money in the condition of very low-interest rates. more precisely, when interest rates reach such a low level that central banks can no longer manipulate them, the banks use some other instruments that will provide the economy and households with additional liquidity. quantitative incentives are applied due to the ineffectiveness of other measures available to the central bank. in that sense, it is important to emphasize that the amount of money in circulation is increasing, which is of special application of unconventional monetary policy instruments ... 233 importance during the crisis, when a large number of companies and households reduce their investments and consumption; that is the way to avoid an excessive recession. furthermore, “quantitative easing is a tool that central banks can use to inject money directly into the economy. money can be in the form of physical money, like banknotes, or digital, money in a bank account” (bank of england, 2020). also, this term is known as “qe” or “property purchase”. the goal of qe is simple: by creating “new” money, it strives to increase consumption and investment in the economy (bank of england, 2020). moreover, the goal of applying quantitative easing is to boost spending in order to reach the inflation target. the purchase of securities by central banks is of such proportions that it raises their price and reduces their yield. in this way, economic entities from which the central bank bought securities are encouraged to use the new liquidity for the growth of investments and consumption. in addition, the increase in investment and consumption stimulates the level of economic activity and affects the increase in price levels, which enables the establishment of the desired level of inflation. regarding the concept of quantitative easing, there are different interpretations of it. some researchers argue that the relief is “quantitative” because it refers to the creation of a certain “amount” of money, while others believe that it is a mistranslation of a japanese term that means expansive monetary policy (bernanke, 2017, p. 7). however, as the amount of money is created by conventional instruments, it can be assumed that later interpretation of the term is more logical. on the other hand, there is still no agreement on measures that include quantitative easing (blinder, 2010). some economists use the term fiscal monetization, which presents a combination of the fiscal backstop and helicopter monetization. although, masciandro (2020) argues that “the mixing of a fiscal backstop and helicopter monetization is a case of policy blurring that can affect the relationship between politicians and central bankers. conflicts between politicians and central bankers will be more likely and these, in turn, may trigger political pressures on the central bank” (masciandro, 2020). otherwise, it is necessary to distinguish between the concept of quantitative easing and “helicopter money”. “helicopter money” is a theoretical and neo-orthodox monetary policy tool used by central banks to stimulate the economy. economist milton friedman introduced the term “helicopter money” in 1969 (friedman, 1969), but it was popularized in 2002 by former fed president ben bernanke. this measure should be used in conditions of lowinterest rates when economic growth is still weak. “helicopter money” means that “the central bank or government supplies the economy and the population with large amounts of money as if money were being distributed or squandered from a helicopter” (friedman, 1969). “contrary to the concept of using “helicopter money”, central banks use quantitative easing to increase the money supply and lower interest rates by buying government or other financial securities from the market to provoke economic growth” (nickolas, 2017). unlike “helicopter money,” which involves distributing printed money to the public, central banks use quantitative easing to create money and then buy back assets using printed money. “qe has no direct impact on the public, while “helicopter money” is made directly available to consumers in order to increase consumption” (nickolas, 2017). one of the main advantages of “helicopter money” is that it generates demand, which is conditioned by the possibility of increasing spending without worrying about how the money will be financed or used. although households could deposit money into their savings accounts rather than spend it, consumer spending will apparently rise as the measures remain in place over a longer period of time. “the impact of “helicopter money” is permanent and irreversible, because money is given to consumers, and central banks cannot withdraw money 234 m. đorđević, j. đurović todorović, m. ristić cakić if consumers decide to put it in a savings account” (masciandro, 2020). one of the main risks associated with “helicopter money” is that it can lead to a significant devaluation of the currency in international foreign exchange markets. however, the “helicopter money” is not a free lunch (borio, disyatat & zabai, 2016). in other words, it may create monetary externalities (masciandro, 2020). in contrast, qes provide capital to financial institutions, which theoretically promotes increased liquidity and the ability to borrow, as borrowing costs decrease since more money is available. the use of newly printed money to buy securities increases the amount of credit potential. qe aims to encourage banks to give more credit to consumers at a lower rate, which should stimulate the economy and increase consumption. unlike “helicopter money”, the effects of qe could be reduced by selling securities (nickolas, 2017). in the united states, they use the term qe for people instead of „helicopter money”. it can take many forms. basically, it implies the process of creating money as in qe, but money is not placed on the financial market by buying securities, yet it can be distributed to the population or invested in certain strategically important areas. if qe for people is implemented in the form of distribution of money to the population, it is the so-called “helicopter drop” or “helicopter money” concept. this concept has become significant after the crisis of 2008 and numerous waves of quantitative easing. the main danger in the application of this concept lies in the excessive and uncontrolled use of this form of monetary policy. according to o’neill (2020), there is a need for some kind of smart people’s qe now. anyway, “the government can raise taxation or issue debt, where the latter can be purchased by either citizens or the central bank. the government finances its policy by making a simultaneous decision regarding taxes and the issuance of new debt, knowing at the same time the central bank’s choices” (masciandaro, 2020). 2.2. transmission of quantitative easing to real economic variables given that quantitative reliefs are implemented in practice for a relatively short time, there is no single position on the effects of their transmission on the real and financial sector. in order to see the transmission channels of unconventional monetary policy instruments, it is necessary to isolate their impact from other monetary and fiscal measures that are being implemented at the same time (dahlhaus at all, 2018). one of the transmission channels of quantitative easing is the signal channel which refers to the expectations of the public that, even after the economic recovery, the interest rate will remain at a low level. however, the signal channel has a greater impact on interest rates in the medium term as the commitment to low-interest rates will last until the economy recovers sufficiently. one of the most important channels is the liquidity channel, which refers to the increase of investors’ liquidity and the reduction of the liquidity premium on most securities. through this channel, there is an increase in yields on government securities, given that quantitative easing reduces the liquidity premium. the implementation of quantitative easing should have a positive impact on the balance sheets of financial institutions and the possibility of financing economic agents. the portfolio substitution channel is the third channel for transmitting the effects of quantitative easing. this channel refers to the change in the structure and value of the central bank's asset portfolio, which further influences the decisions of economic agents. when the central bank buys a certain type of property, its availability to economic agents decreases and the increased amount of money affects the fall in interest rates, increasing the availability of application of unconventional monetary policy instruments ... 235 loans for households and companies which, consequently, raises consumption and investment. chebbi and derbali (2019) also find “a significant response of volatility to an expected component of a target rate change. they highlight homogeneity in the responsiveness of european stock markets to us news announcements. it is important to note that the persistence of volatility is clear across all regressions”. one of the channels with the fastest direction of action is the inflation channel. it refers to investors' expectations regarding the impact of the quantitative easing policy on the level of inflation in the future. on the other hand, the impact of quantitative easing policies can be seen as an effective way to combat deflation, which is why the bank of japan has used this instrument for many years. blattner and joyce (2020) approximate that, based on “a small macrofinance bayesian vector autoregression (var) model, euro area 10‐year bond yields have been reduced by around 30 bps in 2015; this was caused by the first round of asset purchases under the european central bank's (ecb) public sector purchase program. this resulted in the output gap and inflation being about 0.2 and 0.3 ppt, in 2016” (blattner and joyce, 2020). finally, the stimulus channel refers to the effects of quantitative easing on gdp and interest rates. so far, many studies have shown that there is a significant link between changes in the “amount” of quantitative easing and changes in gdp and interest rates. based on the research, it can be noticed that the increased amount of money in the economy, which is placed in the form of quantitative easing, will have a positive effect on gdp growth, and, vice versa, it will have a proportional effect on interest rates. lowinterest rates will stimulate investment and gdp growth in the long and medium-term. masciandaro (2020) argues that fiscal monetization leads to monetary stability risk, heterogeneity in income, increase in public debt and central banks’ independence. 3. quantitative easing – empirical experiences the use of quantitative easing dates back to the time after the great depression. it is well known that overnight interest rates were at a very low bound immediately after the u.s. great depression (1934-1939). at the same time, american monetary authorities decided to apply policies that could be understood as today's debates on quantitative easing. firstly, there were attempts to stabilize yields on treasury bonds, which was done by open market operations. furthermore, rapid growth in high‐powered money was generated. finally, the authorities did not prevent high-powered money to be impacted by transitory factors. all of this resulted in “a portfolio effect of short‐duration asset supply on term premiums” (hanes, 2018). after this period, central banks very rarely opted for the use of quantitative easing. they resorted to the use of this instrument only in conditions of sudden, unexpected shocks and crises. the central bank of japan (boj) was forced, at the beginning of the 21st century, to introduce some unconventional measures after a long period of stagnation, chronic deflation and a failed zero interest rate policy. japan was the first in the world, in recent history, to start applying quantitative easing in 2001, in order to achieve the desired level of inflation and revive its own economy. the goal of monetary expansion was no longer to reduce short-term interbank interest rates (which were at zero), but to increase banks' liquidity surpluses by buying japanese treasury bills, government bonds and other financial assets from banks. the experience of japan between 1999 and 2006 is a true example of the use of quantitative easing. taking into account deflationary pressures, the central bank of japan 236 m. đorđević, j. đurović todorović, m. ristić cakić introduced a zero interest rate policy in early 1999, committing to keep the interest rate at zero as long as there is a fear of deflation. after a brief economic recovery that manifested itself in an increase in the general price level above zero (lasting only a month), the central bank of japan stopped applying this policy in august 2000. in march 2001, the bank introduced a policy of quantitative easing, committing at the same time to keep the interest rate at zero until the price level stabilizes. at the beginning of the implementation, the amount of 5 billion yen was determined, which was inserted into the financial system as a surplus of reserves. in addition, the central bank announced that it would increase the purchase of long-term government bonds. until the end of the application of quantitative easing, the amount was increased to 30 billion yen. the assistance was intended for both the financial and corporate sectors to improve their credit activities. in march 2011, japan was hit by a devastating earthquake that left great consequences on japan's economy. there was a large drop in industrial production and a decrease in household consumption. during 2013, public debt exceeded the level of 240% of gdp. faced with major economic problems, japan will begin a recovery program in early 2013. the recovery program known as abenomix is based on a combination of fiscal stimulus and strong monetary expansion. the main goal of the program was to stop 15-year deflation by increasing the inflation rate to 2%, all while pursuing an expansionary monetary policy. during japan’s long-running struggle against deflation, it became increasingly clear that stronger monetary easing was needed (ueda, 2012). in april 2013, the central bank of japan introduced a new policy of quantitative easing. quantitative easing is designed to overcome the limitations of other monetary policy instruments. “quantitative relief consists of two main elements: ▪ first, quantitative easing strives to increase inflationary expectations and, therefore, drastically change deflation and the way of public thinking that has emerged through the bank’s strong commitment to achieving the 2% price stability target at the earliest possible time. ▪ second, the pressure of the mass purchases of government bonds by the central bank is strong not only on short-term nominal interest rates, but on the overall yield curve” (https://www.boj.or.jp). ▪ by combining these two elements, quantitative easing allows the bank to significantly reduce not only short-term but also long-term real interest rates. fig. 1 application of quantitative easing in japan, 1994-2015 source: www.tradingeconomics.com application of unconventional monetary policy instruments ... 237 in respect of the purchase of government bonds, the bank bought bonds with a maturity of up to 40 years. when qes were introduced, the bank's operating policy was to buy government bonds. during 2013, the bank bought government bonds worth 50 million yen. the following year, the rate of redemption was increased to 80 million yen. in this way, quantitative easing, which differs drastically from other measures, begins to affect price growth and mild inflation by increasing the amount of money in circulation. fig. 2 the impact of qe on inflation in japan, 2000-2020 source: https://tradingeconomics.com/japan/inflation-cpi (23.4.2020.) the recovery program quickly began to yield results, with the annual gdp growth rate in the first quarter of 2013 increasing by 3.5%, compared to the previous quarter while exports and personal consumption also grew. at the same time, the main goal of the monetary policy of the central bank of japan inflation of 2% “fell into the water” as inflation began to slow down and reached only 0.5% in early 2015. the federal reserve (fed) started implementing quantitative easing during the global economic crisis in november 2008 and applied it in three parts qe1, qe2 and qe3. during these three waves in the implementation of quantitative easing, the value in which securities were redeemed varied, and at the end of the third round, at the end of october 2014, the accumulation of securities was at the level of 4.5 trillion dollars. fig. 3 fed`s quantitative easing, 2008-2014 source: authors, based on the https://www.federalreserve.gov/econres/feds/files/2018071pap.pdf qe 4,5 trillion usd qe1 2008. qe2 2010. qe3 2012. 238 m. đorđević, j. đurović todorović, m. ristić cakić given that the crisis that started from the real estate market had great consequences for the us economy, it was necessary, in conditions of low-interest rates, to apply a new monetary policy instrument, because conventional instruments and measures did not yield results in “revival” of the economy and start-up consumption. by the end of 2008, the targeted federal reserve rate had reached a zero lower limit and qes had become one of the most important instruments for conducting monetary policy. in november 2008, the federal committee for open market operations announced that the fed was moving to implement qe1: the federal reserve had purchased us $ 3 trillion. during 2010 and 2011, the federal reserve implemented two additional programs solely by purchasing treasury bills. the first, in august 2010, the federal committee announced the beginning of the second round of quantitative easing (qe2) which eventually led to a total purchase of us $ 778 billion in long-term government securities. however, given disappointing economic activity and still relatively high unemployment, the third round of quantitative easing (qe3) was launched in september 2012. after the improvement of economic trends, the program was formally completed in october 2014. luck and zimmermann (2018), in their research, come to the conclusion that the effect of qe1 on economic activity and employment in the usa is not strong enough and that it was necessary to apply the other two rounds of quantitative relief in order to obtain certain results. they point out that the impact of unconventional monetary policy instruments and measures on gdp and employment is not of high significance. fig. 4 the impact of qe on employment in usa, 2008-2014 source: https://tradingeconomics.com/united-states/unemployment-rate (1.5.2020.) based on figure 4, it can be seen that, during the qe approval period by the fed, the unemployment rate was high and began to decline only after the third round of quantitative easing. as for the european central bank (ecb), it has also approached the application of quantitative easing in order to mitigate the consequences of the great world economic crisis. due to the fact that the eu implements a unique monetary policy in the countries that use the euro, but different fiscal policy, the ecb has long avoided the implementation of quantitative easing. until the end of 2014, the ecb used the various monetary policy instruments at its disposal to drive economic growth and achieve an inflation target of 2%. the ecb started applying quantitative easing in early 2015, because it did not reach inflation target by applying conventional instruments and measures; this led to problems due to the possible conflict of these measures with the provisions of the eu statute. moreover, the federal application of unconventional monetary policy instruments ... 239 constitutional court of germany has sought an opinion from the european court of justice on the view that the implementation of qe is contrary to the provision of prohibiting the ecb from directly financing governments by purchasing their securities. in the period when inflation in the eurozone, after more than two years of qe implementation, reached a level slightly below 2%, this growth was expected to be influenced by qe. however, although at first glance it seemed that the increase in inflation was a consequence of quantitative easing, certain circumstances that also had an impact on the achieved level of inflation, such as the jump in oil prices, were ignored, and it was concluded that qe did not have such a strong impact on inflation as expected. after that short-term increase in inflation, there was a new decline in the following period, until march 2018, when growth is observed, which all supports the suspicion that the effects of qe are not so strong. fig. 5 inflation trends in the euro area, 2010-2020 source: https://tradingeconomics.com/euro-area/inflation-cpi (28.3.2020.) in addition to the analyzed banks, which were pioneers in the application of quantitative easing, the bank of england should also be mentioned; this bank also used qe during the crisis and after the so-called brexit. while the government was implementing austerity measures, the bank of england, on the other hand, created 445 billion pounds of new money, which was placed on the financial market by buying securities. although qe, combined with an interest rate of almost 0%, helped keep the uk economy from deteriorating further, there were still side effects in terms of deepening inequality among the population, due to rising stock and real estate prices. this, of course, affected the wealthy strata of the population. the bank of england confirmed that the richest 10% of people made a profit of around 350 thousand pounds, which they would not have made without quantitative easing. in august 2016, the bank of england was forced to resort again to buying securities in order to respond to the uncertainty in the market caused by the consequences of brexit. according to the international monetary fund, the quantitative easing provided by large central banks after 2008 appears to have helped improve market confidence and boost economic growth. however, some authors argue that the effects of quantitative easing are controversial. 240 m. đorđević, j. đurović todorović, m. ristić cakić 4. application of qe in overcome the negative effects on the economy during the covid 19 pandemic the second wave of quantitative easing in the world is related to the period after the pandemic caused by the coronavirus. economic policymakers in all countries around the world are facing the effects on the economy of the devastating virus covid-19. public health experts are taking the lead in treating the population, while fiscal policy makers are helping to finance public health while providing critical assistance to people whose lives and livelihoods have been destroyed by the virus and its effects. at that time, the collapse of the economic system caused by the “stay at home” necessity led to the collapse of the financial system through the freezing of lending and consumption, so the goal of monetary policy was to restart both segments. in the short term, public health goals require people to stay at home except in the case of necessary food purchases and doing chores, especially if they are ill or at-risk category of the population. thus, production and consumption inevitably decreased. the actions of the central banks were very similar to those taken during the crisis in 2008 caused by disturbances in the mortgage market. the first steps of the central banks were to lower the reference interest rates as much as possible, given that in some central banks they were already at a very low level. also, many central banks have eased the conditions for obtaining loans to households and the economy. if a company that has financial difficulties lays off or refuses to hire workers, it will lose the experienced employees it needs to continue its normal business. “on the other hand, a family temporarily without income can lose a mortgage, losing a home. to avoid permanent damage from virus-induced deterioration, it is important to ensure that credit is available to otherwise healthy borrowers facing a temporary period of low income or no income” (financial times, 2020). finally, a large number of central banks have resorted to the application of unconventional instruments and measures such as quantitative easing and “helicopter money”. however, monetary policy authorities face an even greater challenge. they must ensure that the economic damage from a pandemic is not long-lasting. ideally, “when the effects of the virus pass, people will return to work, school, shops, and the economy will return to normal. in that scenario, the recession may be deep, but it is necessary to influence all measures to keep it short” (financial times, 2020). however, this is not the only possible scenario; if critical economic relations are disrupted by weak activity that has lasted for months, the economy will need a very long time to recover. in japan, as in all countries of the world, the strong consequences of the crisis were felt, which could be seen on the basis of stock market movements. the nikei index started to fall at the end of february, and in march its value reached its lowest level. a month and a half later, it starts to grow and at the end of april, it increases by 2.14%. according to the data, the japanese retail fell by 4.6% in march compared to the year before, and the consumer confidence index in japan fell to 21.6 in april 2020 from 30.9 in the previous month, reaching its lowest level. application of unconventional monetary policy instruments ... 241 fig. 6 trend of nikei index on the stock market, march 2019 – may 2020.god. source: https://tradingeconomics.com/japan/stock-market (25.4.2020.) the overall events had a strong effect on japan's gdp, reaching 0.8% in 2019 and 1.8% in early 2020. the gdp growth rate decreased by 1.8% in the quarter during the three months to december 2019, which is in line with the preliminary reduction of 1.6%. this was the fastest decline in gdp since the second quarter of 2014, as consumption fell by 2.8% after a sales tax increase in october. in addition, investment spending fell by 4.6%, while government spending rose 0.2% and public investment growth fell to a 0.7% low (https://tradingeconomics.com/japan/gdp-growth). fig. 7 japan`s bdp, 2017-2020 source: https://tradingeconomics.com/japan/gdp-growth (25.4.2020.) “at the monetary policy meeting, the policy board of the bank of japan decided upon the following: ▪ the bank will apply a negative interest rate of minus 0.1 percent to the policy-rate balances in current accounts held by financial institutions at the bank. ▪ the bank will purchase japanese government bonds (jgbs) so that 10-year jgb yields will remain at around zero percent. while doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices. ▪ with regard to asset purchases other than jgb purchases, the bank decided, by a unanimous vote, to set the following guidelines. 242 m. đorđević, j. đurović todorović, m. ristić cakić ▪ the bank will purchase exchange-traded funds (etfs) and japan real estate investment trusts (j-reits) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively. ▪ the bank will continue with ‘quantitative and qualitative monetary easing (qqe) with yield curve control’, aiming to achieve the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner” (bank of japan, 2020). the central bank of japan will monitor “the risks deemed most relevant to the conduct of monetary policy and adjust the policy as necessary, taking into account developments in economic activity and prices as well as financial conditions. in particular, in a situation where the risks are high, the bank will not hesitate to take additional mitigation measures” (bank of japan, 2020). fig. 6 annual variations of monetary aggregate m1 in japan, april 2019 april 2020 source: https://tradingeconomics.com/japan/money-supply-m1 (26.4.2020.) based on the movement of the monetary aggregate m1, it can be noticed that the central bank of japan conducted a very expansive monetary policy during the crisis caused by the coronavirus pandemic. the us federal reserve, as one of the world's leading banks, has had to take careful steps to mitigate the effects of the economic crisis caused by the covid-19 pandemic, given that its decisions are a reference for many of the central banks. the crisis caused by the pandemic was reflected in the financial market, which can be seen based on the movement of the dow jonson index, shown in chart 9. fig. 9 trend of dow jonson index na finansijskom tržin stock market, 2019-2020 source: https://tradingeconomics.com/united-states/stock-market (30.4.2020) application of unconventional monetary policy instruments ... 243 based on the analysis of the movement of the dow jonson index shown in the graph, a strong decline in this index can be observed during the pandemic, i.e. in the first quarter of 2020. after that period, it has started growing slightly. the downward trend of the american economy can also be followed on the basis of gdp trends. the us economy experienced a 4.8% decline in the first quarter of 2020, ending the longest period of economic growth. personal consumption has had the largest decline since 1980, and investment has declined fourfold in the period under review. in addition, exports and imports fell sharply, while government spending rose. fig. 10 united states` gdp falling, first quarter of 2020 source: https://tradingeconomics.com/united-states/gdp-growth (30.4.2020) given the current state of the real and financial spheres of the us economy, the federal reserve announced in january that it would cut the reference interest rate again to boost the economy during the coronavirus epidemic. the plan to alleviate the economic downturn caused by the virus includes cutting interest rates to near zero and implementing a $ 700 billion quantitative easing program. this conditioned the growth of the monetary aggregate m0 from 3.454 billion usd in february to 3.883 billion usd in march 2020. fig. 11 trend of monetary aggregate m0 in usa, april 2019 – april 2020 source: https://tradingeconomics.com/united-states/money-supply-m0 the fed announced the placement of a large amount of money in the form of “helicopter money”, because the secretary of the treasury proposed that a check of $ 1,000 be delivered to every american, saying: “americans need cash now, and the president wants to give them cash now in the next two weeks” (bloomberg, 2020, para 4). numerous measures have been taken on the side of fiscal policy in the form of delaying the payment of obligations for 90 244 m. đorđević, j. đurović todorović, m. ristić cakić days. thus, the fiscal authorities will have to borrow to cover the deficit caused by the direct giving of money to citizens (helicopter money), and the monetary authorities will buy bonds from them and pump liquidity into the system. if printing and giving money to the public causes citizens to go out and spend, “helicopter money” could stimulate inflation, which would not be good for the “wounded” economy. on the other hand, if citizens decide to keep checks for precautionary measures, it would cause a problem due to a large amount of liquidity, but, at the same time, insufficient spending. the european union has also been hit by the economic crisis caused by the covid19 pandemic crisis. given this, it is necessary to, firstly, look at the state of the eu economy based on financial market trends and gdp trends. in terms of financial market trends, it can be observed that the euro stoxx 50 has had a decline of 875 points or 23% since the beginning of 2020. the movement of this reference index from the eurozone is shown in the graph below. fig. 12 trend of euro stoxx 50 index, may 2019 may 2020 source: https://tradingeconomics.com/euro-area/stock-market (1.5.2020.) the eurozone economy experienced a 3.8% decline in the first quarter of 2020, compared to market expectations of -3.5%. this was the biggest reduction in gdp since 1995, because, due to the coronavirus pandemic from the middle of march, a huge number of companies were forced to stop working, and consumers had to stay at home. the economies of france, spain and italy had the biggest decline (https://tradingeconomics.com/euro-area/gdp-growth). fig. 13 gdp falling in european union, first quarter of 2020 source: https://tradingeconomics.com/euro-area/gdp-growth (1.5.2020.) application of unconventional monetary policy instruments ... 245 given this, the european central bank was forced to, in addition to standard instruments and measures and extremely low repo rates, approach non-standard monetary policy measures. “the ecb’s asset purchase programme (app) is part of a package of non-standard monetary policy measures that also includes targeted longer-term refinancing operations, and which was initiated in mid-2014 to support the monetary policy transmission mechanism and provide the amount of policy accommodation needed to ensure price stability. it consists of the: ▪ corporate sector purchase programme (cspp) ▪ public sector purchase programme (pspp) ▪ asset-backed securities purchase programme (abspp) ▪ third covered bond purchase programme (cbpp3)” (https://www.ecb.europa.eu/ mopo/implement/omt/html/index.en.html#abspp). fig. 14 overview of the use of quantitative ecb easing, 2014-2020 source: https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html#abspp (1.5.2020.) in europe, some use the term “corona bonds” to denote bonds which central banks purchase for increasing the liquidity of the economy and population (waltenberger, 2020). based on the graphs, it can be noticed that the ecb used quantitative facilities in the form of programs for the purchase of assets in the period from 2014 to 2018, and after that in 2019 it stopped using them. however, due to the new circumstances related to the coronavirus, they again resorted to the use of these measures. in this regard, the ecb launched the pandemic emergency purchase program (pepp) in march 2020 to address serious risks in the monetary policy transmission mechanism. pepp is a temporary program for the purchase of private and public sector securities with a total amount of 750 billion euros. all eligible asset categories under the existing asset purchase program (app) are also eligible under the new program. the ecb will cancel the net purchase of assets under the pepp after assessing that the crisis phase of covid-19 is over, but in any case not before the end of 2020 (https://www.ecb.europa.eu/press/pr/date/2020/html/ ecb.pr200318_1~3949d6f266.en.html). given the low reference interest rate and the use of unconventional instruments and monetary policy measures, the movement of the monetary aggregate m1 shows a growing trend in the first quarter of 2020. 246 m. đorđević, j. đurović todorović, m. ristić cakić fig. 15 trend of the monetary aggregate m1 in euro area, april 2019 april 2020 source: https://tradingeconomics.com/euro-area/money-supply-m1 (1.5.2020.) the growth of the money supply is the result of the application of instruments and measures of the ecb, but also the activities of the european investment bank, which provided 200 billion euros for the european economy. it set up a “protective shield” for european companies by forming a guarantee fund in response to covid-19, first approving an amount of 25 billion euros. this money is intended for small and medium enterprises and corporations in the real economy and is part of the already mentioned support package. in addition to the analyzed countries, it is necessary to mention the bank of england, whose monetary policy committee voted at a special meeting on march 19th to reduce the reference rate to 0.1% and increase the share of british government bonds by 200 billion pounds. after these central banks, a large number of central banks in the world have approached the use of unconventional instruments and monetary policy measures, such as qe and “helicopter money”. 5. conclusion in conditions when interest rates have reached such a low level that central banks can no longer manipulate them, they resort to the use of unconventional instruments that will provide the economy and the population with additional liquidity. quantitative easing (qe) is the most commonly used instrument from the group of unconventional instruments and is a form of expansionary monetary policy of a central bank. they represent the purchase, primarily of government securities with a long maturity, the use of newly created money, and in conditions of very low interest rates. in addition to quantitative easing, which is aimed primarily at the economy and the financial sector, central banks resort to the use of “helicopter money” aimed at the population. quantitative incentives have been intensively applied during the global economic crisis since 2008. they were used by most of the world's leading banks and had a certain impact on inflation, gdp and employment. the second wave of quantitative easing in the world is related to the period after the pandemic caused by the coronavirus. economic policy makers in all countries around the globe are facing the effects on the economy of the devastating virus covid-19. application of unconventional monetary policy instruments ... 247 public health experts are taking the lead in treating the population, while fiscal policy makers are helping to finance public health while providing critical assistance to people whose lives and livelihoods have been destroyed by the virus and its effects. at that time, the collapse of the economic system caused by the “stay at home” necessity led to the collapse of the financial system through the freezing of lending and consumption, so the goal of monetary policy was to restart both segments. based on the analysis presented in the paper, it can be noticed that all leading central banks, among which the actions of the bank of japan, the fed and the ecb were specifically considered, applied special programs of measures related to increasing liquidity of the economy and households. they “injected” a large amount of money through the socalled quantitative easing and “helicopter money” to start consumption, production, employment and economic growth. acknowledgement: this paper is the result of research realized based on the implementation and financing of scientific research in 2020 (451-03-68/2020-14/200100 and the agreement on the implementation and financing of scientific research organizations (451-03-68/2020-14/ 200371). references asset purchase programmes ecb, avaliable at: https://www.ecb.europa.eu/mopo/implement/omt/html/ index.en.html#abspp baker s. r., bloom n., davis s. j., kost k., sammon m., & viratyosin t. 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(2020). the range of different opinions and moods in germany on collective “corona bonds”. suerf policy notes, n. 155 primena nekonvencionalnih instrumenata monetarne politike u ublažavanju ekonomskih posledica pandemije izazvane virusom covid 19 nekonvencionalni instrumenti monetarne politike koriste se u uslovima kada je monetarna politika iscrpela sve uobičajne mere i instrumente koje inače primenjuje centralna banka u redovnom procesu vođenja monetarne politike. najčešći primenjivan instrument su, svakako, kvantitativne olakšice ili kvantitativna popuštanja. cilj rada je da ukaže na primenu tih nekonvencionalnih instrumenata monetarne politike za vreme ekonomske krize izazvane pandemijom virusa covid 19 u najznačajnijim bankama sveta. nakon teorijskog pregleda pojma kvantitativne olakšice, u radu su prikazana empirijska iskustva banke japana, fed-a, ecb i drugih centralnih banaka. na osnovu analize primenjenih mera i podataka o upotrebi kvantitativnih olakšica u izabranim centralnim bankama, može se zaključiti da su one pribegavale upotrebi ovog instrumenata u periodima kriza. poseban akcenat u radu je dat na upotrebu qe u krizi izazvanoj pandemijom covid 19. ova analiza može biti od koristi nosiocima monetarne vlasti u srbiji radi analize primenjenih instrumenata u vodećim centralnim bankama sveta i njihovoj primeni u centralnoj banci republike srbije. ključne reči: monetarna politika, centralna banka, kvantitativne olakšice (qe), novac iz helikoptera plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 18, no 1, 2021, pp. 73 87 https://doi.org/10.22190/fueo201102006j © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper are costs sticky? evidence from serbia1 udc 657.471.1(497.11) jovana jugović university of belgrade, faculty of economics, belgrade, serbia abstract. this paper is focused on the theory of sticky costs, created out of researches which pointed to the fact that costs do not act symmetrically in the case of equivalent increase and decrease of the activity volume, as it is implied by the traditional cost theory. deliberate business decisions, the ones made in order to increase company’s value, as well as opportunistic decisions aimed at the realization of managers' personal goals are found as some of essential causes of cost stickiness. in order to examine the phenomenon of stickiness in the cost behavior of companies that operate in serbia, we conducted a research on a sample of 917 medium and large companies from manufacturing sector for the period 2007 – 2016. the analysis of panel data pointed to the presence of stickiness in the behavior of operating costs it showed that they grow by 0.847% as revenues grow by 1%, and they fall by 0.718 % due to 1% drop in revenues. we also found a lagged adjustment to operating costs for changes in operating revenues and partial reversal of stickiness in the period after a revenue decrease. key words: cost behavior, cost stickiness, adjustments costs, behavioral finance, agency theory jel classification: m41, d24, g40 introduction cost behavior is the way costs respond to the changes in cost drivers. efficient cost management assumes understanding of the cost functions because of cost planning, calculation and control. cost management is imposed as a complex task, having in mind that different purposes of using information about the costs demand cost categorization to be done in different ways. managers need to make many decisions based precisely on the information about the costs: whether to introduce a new product in the assortment or eliminate some of the existing ones; produce or buy at the external market; sell or process received november 02, 2020 / revised january 18, 2021 / accepted january 21, 2021 corresponding author: jovana jugović university of belgrade, faculty of economics, kamenička 6, 11000 belgrade, serbia e-mail: jovana.jugovic@ekof.bg.ac.rs 74 j. jugović further and the like. the analysis of cost behavior is supposed to be put in the context of how the resource consumption changes along with the change of activity volume. this paper is organized as follows. the basic ideas of sticky cost theory are described in section 1 and compared with the traditional one. section 2 identifies three groups of factors that determine business decisions whose realization causes cost stickiness: adjustment costs, managers’ personal benefits and behavioral factors. the results of panel analysis, conducted with the aim to test cost stickiness in operating costs of manufacturing companies in serbia, are presented in section 3, as well as author's interpretation of the results. 1. cost behavior: traditional and sticky cost theory traditional cost theory classifies costs in two groups, depending on the way costs, in the overall amount, react to the change of activity volume: fixed and variable costs. unlike fixed, whose total amount does not change in the short term, the total variable costs change not only linearly, but also in proportion to the change in the activity volume. reaction of variable costs to the change of activity level is symmetrical in both directions, which means that this category reacts uniformly both to the increase and equivalent decrease of the activity volume. thus, direction and volume of the change of activity are irrelevant for the change of costs. the magnitude of a change in costs will be the same, regardless of whether the activity goes from lower to upper volume or viceversa, as well as whether it is about a relatively small or relatively big change of the activity volume. besides these two basic groups, there is also the third one – mixed costs which, due to the effects of economies of scale, learning curves and the like, show characteristics of both previous groups. still, “these extensions continue to assume a mechanistic relation between cost driver quantities and costs, leaving no room for deliberate managerial decisions motivated by various economic constraints, incentives, and biases” (banker et al., 2018, p. 192-193). upon categorizing costs to fixed and variable ones it is necessary to bear in mind that this classification is conditioned by a relevant range of activities, and it was done in relation to the time period being observed. curve of overall costs shows symmetrical behavior of costs. traditional cost accounting theory, as opposed to economic theory, presents total costs as a linear function of the activity volume, for the relevant range of activities. the reason for this is that the cost curve is almost linear in any relevant range of activities, as shown in figure 1, so the linearity assumption is used for the purposes of short-term planning, calculation and control of costs. fig. 1 cost and revenue function source: malinić et al., p. 324 are costs sticky? evidence from serbia 75 some empirical studies, however, showed that costs do not act symmetrically, as traditional theory claims. the results of these studies pointed out the fact that costs react more to the increase than to equivalent decrease of the activity volume. if demand exceeds the available capacity of existing resources, it will lead to the increase of capacity by acquiring additional resources, which is aimed at absorbing greater demand. however, in case unused capacities exist, “some committed resources will not be utilized unless managers make the deliberate decision to remove them” (anderson et al., 2003, p. 49). costs will be fixed only if the management does not take any action regarding the reduction of unused capacities. this can be an indicator of active cost management. the first empirical confirmation of this idea comes from the research of noreen & soderstrom (1997). the authors showed that costs adjust more difficultly to the fall than to the increase of the activity volume, pointing to a different pattern of cost behavior as determined by the direction of the change of the activity. also, hamerman and pfann (1996) stressed there is no necessary reason why the marginal cost of increasing activity would be the same as that of an equal-size decrease. however, this idea gains importance after the publishing of the research of anderson et al. (2003) which opened ‘the black box’ about the cost behavior and motivated research in the field. authors used the sample of 7,629 industrial companies, observing the period of 20 years (1979 – 1998) and showed that sales, general and administrative costs act asymmetrically. in other words, these costs grow by 0.55% on average upon the increase of sales by 1%, and on average they decrease by only 0.35% in case of 1% fall in sales. this kind of cost behavior is named „sticky” by the authors. “costs are sticky if the magnitude of the increase in costs associated with an increase in volume is greater than the magnitude of the decrease in costs associated with an equivalent decrease in volume” (anderson et al., 2003, 48). so that, according to sticky cost theory, costs are determined both by the change of volume and the direction of activities (banker & byzalov, 2014), unlike traditional cost theory claims, which can be presented: ∆c = ƒ (∆q, direction of change q), (1) where: c – amount of overall costs of a certain category, q – activity volume.2 fig. 2 sticky costs source: maher, stickey, weil (2008), p. 160 2 it would be important to stress that the unlinearity in the behavior of costs is not an equivalent to sticky cost behavior. in case of nonlinear behavior, the same as with linear behavior, marginal costs are determined exclusively by the change of the activity volume, not by the change of direction, while in the case of sticky cost behavior marginal costs were determined both by the change of volume and change of the direction of activity. more to be seen in banker and bzyalov (2014). 76 j. jugović anderson et al. (2003) consider deliberate decision making on resource adjustments as the primary cause of stickiness in the cost behavior. cost stickiness is just one of many ways how managerial decisions may affect cost behavior (banker et al., 2018). numerous researches also highlight the importance of the managers' characteristics and behavior for cost stickiness (kama & weiss, 2010; chen et al. 2012; dierynck et al. 2012; qin et al. 2015; salamah & abulezz, 2017). taking into account time component, as numerous authors have shown (e.g. andersen et al. 2003; dalla via & perego 2014), delayed decision-making and contracting lags cause cost stickiness observed in one period to be reversed in subsequent periods. changes in revenues may reflect current market conditions and may be an indicator of long-term orientation in terms of demand for the company's products. therefore, if there is a drop in demand, managers will need some time to gather information on the basis of which they will conclude about the cause of the fall and make decisions about reducing resources. in addition, even after a decision has been made to reduce resources, it often takes some time for that decision to reflect on cost reduction since contractual arrangements take time to be undone. these time lags will result in cost stickiness bearing in mind that companies will maintain unused resources during the period between the reduction in volume and the adjustment decision. the consequence of this will be that the stickiness observed in one period might be reverted in subsequent periods. 2. deliberate decision making as cause of cost stickiness decisions of the business entity may be a factor of cost variability (malinić et al., 2019, p. 219). “managers choose resource levels subject to various constraints (e.g., demand conditions, production technology, resource adjustment costs, strength of corporate governance, debt covenants, government regulation), incentives (e.g., performance compensation, earnings targets, ownership type, stakeholder activism), and biases (e.g., overconfidence)” (banker et al., 2018, p. 195). managers choose different resource levels for the same activity volume depending on whether it is the upward or downward resource adjustment (anderson et al, 2003). on that occasion, managers make those decisions whose realization they expect to produce the increase of company’s value, as well as the ones which will bring them the fruition of personal benefits, while neglecting the effects that the realization of those decisions could have for the company. we identify three groups of factors that determine business decisions whose realization causes cost stickiness: adjustment costs, managers’ personal benefits and behavioral factors. companies change their demand for resources more slowly than shocks require (hamermesh & pfann,1996, p. 1264.) explanation of this phenomenon lies in adjustment cost, concept which was first presented by lucas (1967). in case of external shocks, caused by the change of demand, it is impossible to adapt resources to changed circumstances regarding the need for them, without following cost adjustments. dismissal, as well as the employment of additional units of resources, entails certain adjustment costs. these can be explicit costs, expressed in monetary units, such as severance costs, costs of organizing vacancies, costs of training and education of new employees, disposal costs, equipment installation costs. however, implicit costs that are not covered by the accounting information system, such as the decline in employee morale due to dismissals, should not be overlooked. these costs may be reflected in the are costs sticky? evidence from serbia 77 financial statements of some future periods, for example, by increasing costs due to reduced efficiency and productivity. cost-benefit analysis is based on the comparison of costs of maintaining unused capacities and adjustment costs. in case of the drop in demand, the release of resources would happen to the point where managers would become indifferent to either releasing or keeping the additional resource unit. in this case keeping resources could be done, not only with the intention to avoid current, but also future cost adjustments, which would occur in case there was a need to acquire additional resource units. contrary to drop, a more considerable increase of market demand can be absorbed only if necessary resources were acquired so that a larger volume of business activities could be performed, under the assumption of complete exploitation of the existing resources. “managers’ resource commitments depend not only on concurrent sales, but also on (1) prior period resource levels, which affect adjustment costs that have to be incurred in the current period, (2) expected future sales, which affect future adjustment costs, and (3) agency and behavioral factors, which drive a wedge between optimal decisions for the firm and managers’ actual choices” (banker & byzalov, 2014, p. 47). proving cost stickiness of overheads is quite challenging. novák et al. (2017) showed that the variability of overheads is affected by the two factors production in kg and total production in minutes in the previous reporting period (month). “in contrast, a fixed/variable model of cost behavior asserts that the amount of costs incurred depends on the volume of realized activity in the current period only” (balakrishnan & gruca, 2008, p. 994). some resources, such as raw material, are purchased with the expectation that they will be consumed in the production process in a short period of time. organizations commit, however, to making many other resources available whether or not the resources will be fully used for current and future activities (cooper & kaplan, 1992), such as buildings, machines, equipment. managers will rather keep a larger volume of the resources, whose adjustment to current circumstances causes high costs, both explicit and implicit, than do what the existing activity level demands. exploiting such resources creates a curve of conventional fixed costs. accordingly, fixed and variable costs are two extreme cost categories determined by higher or lower cost adjustments. if cost adjustments are lower, we can expect that the change of costs will follow the change of the activity volume that caused it. some forms of costs may be classified as variable or fixed costs with huge difficulties, as they behave differently in different situations, such as logistics costs, which is of special interest for cost management (see e.g. novák et al., 2018). adjustment costs may vary with institutional and contractual arrangements (banker & byzalov, 2014). this implies consideration of macro environment, characteristics of sector, capital market movements, labor legislation and social security, contractual obligations to suppliers and the like (see e.g. guenther et al., 2014). also, as observed by li & zheng (2017), management in financially stronger firms has more resources for investment expenditures in spite of a sales fall that can also cause cost stickiness. empirical research on the impact of adjustment costs on the level of cost stickiness has been hampered by difficulties in calculating adjustment costs. banker et al. (2013) investigated the correlation between employment protection and cost stickiness for companies from oecd member countries. they concluded that stricter regulation, which implies higher adjustment costs, is associated with a higher level of cost stickiness, which is in line with theoretical assumptions. upon the analysis of factors that determine managers’ decisions it is inevitable that in specific circumstances the decisions will be motivated, not by maximizing the value of 78 j. jugović company, but by maximizing managers’ personal benefits. jensen’s agency theory foresees that in the relationship between the principal and agent there are justified reasons to believe that the agent, obliged by the contract to perform a service for the principal, will not always work in the best interest of the principal when their interests are in conflict. knowing about the asymmetry of information and agency’s problems, establishing efficient board of directors, suitable compensation systems, acting on the market of corporate control and through other mechanisms of corporate management, rational investors limit managers‘ selfish, rational orientation (todorović, 2011, p. 282). one of manifestations of this problem relates to manager’s tendency to expand the limits of their company beyond optimal scope – empire expansion syndrome. according to jensen (1986), growth increases manager’s power through the increase of resources that they control. insisting on unjustified growth is a reason for investment in projects with negative net present value, overpayment of other companies’ shares and the like. these actions can be interpreted as a need for gaining greater control. despite the assumption that managers’ opportunistic behavior might result in the occurrence of cost stickiness, for many years no empirical research, which would confirm it, has been done. also, empire expansion syndrome is dominantly analyzed in literature through the prism of complex m&a transactions (motis 2007). however, chen et al. (2012) found strong evidence that cost stickiness is positively associated with managers’ empire building incentives due to the agency problem. contrary conclusions are reached if we consider managers’ decisions that are made in order to accomplish defined profit goals. in order to realize personal gains such as a pay rise, bonus and other forms of compensation conditioned by achieving targeted financial performances, in case of a temporary drop in the activity volume managers may be motivated to adjust their resources to that lower level. based on the concept of sticky costs, stimulus to meet earning targets will mostly result in the decrease of the level of cost stickiness (kama & weiss, 2010). empirical research confirmed these assumptions (kama & weiss 2012). dierynck et al. (2012) came to the conclusion that companies which tend to meet or beat zero earnings benchmark show greater readiness to reduce labor costs as the activity volume goes down, while labor costs in companies without this stimulus show stickiness in behavior. however, it often happens that managers, in an attempt to maximize the value of the company, make decisions based on heuristics, which do not necessarily result in positive performance. behavioral finance is based on the breakthrough of psychological principles into the finance theory. tending to explain market anomalies as size effect, calendar effect, price bubble, market crash and the like (todorović, 2011), supporters of this concept think that participants at the market are not usually rational, as it is envisaged by the conventional finance theory. namely, it goes from the fact that individuals have limited abilities for solving complex problems, processing more data and instead of using sophisticated mathematical and statistical models, decisions are mostly based on intuition, former experience, emotions, as well as socially acceptable practices. decisions on the level of resources are primarily based on expectations regarding the activity volume. in addition to the fact that these expectations are based on information on previous trends, the macroeconomic environment, they are also based on the personal judgment of managers about future trends. in general, people in a good mood are more optimistic in their choices and judgments than those in a bad mood. this also applies to managers. among the heuristics recognized by behavioral finance theory, two stand out in the context of the effects they are costs sticky? evidence from serbia 79 have on cost behavior: overconfidence and optimism. it is often considered that these two characteristics are so closely linked that they usually appear together. an individual, who shows overconfidence, is also overly optimistic, and vice-versa. however, there is a need to make a difference between overconfidence and optimism (malmedier & tate 2005; fabre & heude-francois 2009). overconfidence is generally defined as having inaccurate, overly positive perceptions of one’s abilities or knowledge, which is conceptualized in two ways in the psychology literature: better-than-average effect and miscalibration (qin et al., 2015). the "better than average" effect is a type of social comparison in which individuals, comparing their characteristics (or behaviors) to a group (peers, co-workers) believe to be superior to an average representative of that group in various fields (skala, 2008). according to biais et al. (2004) miscalibration involves overestimating the precision of someone's information. individuals who are calibrated well are able to see if they are making a mistake, and in this context, a surplus of confidence appears as a form of wrong calibration. “optimism, on the other hand, can be defined as the tendency or inclination to perceive an event or action as more likely to result in a favorable outcome, irrespective of the objective probability of that outcome actually occurring” (fabre & heude-francois, 2009, p. 80). according to li & zhang (2017, p. 307) “managerial optimism about future demand may prompt managers in firms facing a competitive environment to make investment expenditures in spite of a current sales downturn, while pessimism may cause managers to be unwilling to infuse resources, even to the point where they face strong competition from rivals”. therefore, confidence is primarily based on personal characteristics, skills, while optimism is a perception of external phenomena (malmendier & tate, 2005, p. 2662). numerous authors researched behavioral factors as causes of stickiness in cost behavior. chen et al. (2013), qin et al. (2015) introduced managers’ overconfidence into literature, as a behavioral factor of stickiness. both studies confirmed that companies whose ceo shows a greater level of confidence experience higher level of cost stickiness. salamah & abulezz (2017) showed that company’s costs that are managed by managers who have the aversion to risk show the reversed stickiness (anti stickiness) in behavior. namely, with a drop in the volume of sales, these managers adjust resources to the drop, not wanting to be exposed to the risk of bearing the costs of unused capacity. li & zheng (2017, p. 311) found “evidence suggesting that cost stickiness arising from product market competition is increasing in managerial optimism, proxied by a prior period sales rise; whereas, managerial pessimism, proxied by a prior period sales fall, does not affect the relationship between competition and cost stickiness”. 3. description of data and sample presence of stickiness in cost behavior of companies that operate in serbia will be tested on the sample of medium-sized and big companies belonging to manufacturing sector for the period 2007-2016. the size of a company is determined according to the level of sales revenue throughout the observed period, as a criterion. the research is based on the dataset based on data available in the official financial reports. as it is envisaged by appropriate rulebooks on the content and form of financial reports for companies, cooperatives and entrepreneurs that the income statement is to be made by using the method of total cost, we are not able to analyze the influence of the change of 80 j. jugović operating revenues on the change of the sales, general and administrative costs. having in mind analogous studies (calleya et al., 2006; pervan & pervan, 2012; kama & weiss, 2012; dalla via & perego, 2014; pamplona et al., 2016), we decided to assess the influence of the change of sales revenue on the change of operating costs. in accordance with the requirements of econometric models in terms of data, we included into the sample companies having the data on operating revenues and operating costs for three years in a row, in a mentioned time interval, at which point the amount of operating revenues and operating costs is higher than 0. afterwards we calculated the change of operating revenues and costs during two years in a row and performed data logarithmic which is in line with the conclusions of banker & byzalov (2014). finally, we excluded from the sample 1% of the highest and lowest variable values that are included in the model in order to neutralize the extreme values in the sample. the final sample consists of 917 companies. it is an unbalanced panel, with the number of observations per company ranging from 1 to 8, with an average of 7.125 observations, which makes that our sample has a total of 6,534 observations. of the 917 companies in the sample, 197 are large and 720 are medium-sized. fig. 3 percentage of large and medium-sized companies in sample source: author's calculation an overview of the movement of mean operating revenues and operating costs, with appropriate standard deviations, by year, for the group of large and the group of mediumsized companies from sample is presented in table 1. in 2009 both groups of companies mark a fall in average operating revenues, but also in costs. after that came a period of continuous growth of these indicators, with the exception that in in 2014, compared to last year, there was a slight fall in average operating revenues and costs in the group of large companies. growing operating revenues may be an indicator of the end of recession and overall improvement of business environment since 2010. are costs sticky? evidence from serbia 81 table 1 mean values and standard deviations of operating revenues / operating costs by years, for the group of medium-sized and large companies in sample year medium sized companies large companies operating revenues (mill rsd) operating costs (mill rsd) operating revenues (mill rsd) operating costs (mill rsd) mean std. dev. mean std. dev. mean std. dev. mean std. dev. 2007 577 638 541 600 6,286 21,094 6,055 20,460 2008 665 729 623 680 7,051 24,736 6,807 24,256 2009 636 649 590 584 5,810 12,771 5,519 12,474 2010 758 798 702 723 7,196 16,656 6,665 14,863 2011 911 1,011 848 932 7,776 18,243 7,292 16,166 2012 1,031 1,102 964 1,019 8,564 20,029 7,879 16,575 2013 1,044 1,144 987 1,068 9,693 24,666 9,032 21,667 2014 1,102 997 1,047 993 9,578 23,468 8,946 20,703 2015 1,209 1,008 1,148 996 10,239 21,464 9,542 19,281 2016 1,323 1,087 1,235 1,043 11,197 23,530 10,316 21,064 source: author's calculation 4. specification of panel model and interpretation of results methodology that anderson et al. (2003) used was also used in later studies that dealt with this issue. information about the sales, general and administrative costs are publicly available, while authors approximated the activity volume to the amount of operating revenues due to the data on physical sales volume being unavailable. even though it is often stated as the limitation of the analysis, banker and byzalov (2014) emphasize that the use of operating revenues would be more purposeful even if this problem did not exist because the products, even of the companies doing business in the same branch, are somewhat differentiated, which makes physical units incomparable. having in mind previous researches, as well as availability of data, we estimated the following model (1) in order to test cost stickiness: facta universitatis series: economics and organization vol. , no , , pp. doi: log ci,t ci,t-1 = 𝛽0 + 𝛽1 log ri,t ri,t-1 + 𝛽2 *dummyi,t *log ri,t ri,t-1 + 𝜀i,t (2) where: ci,t amount of operating costs for company i in period t, ri,t amount of operating revenues 3 (sales revenue is increased by revenues from activating own goods and increase of value of finished goods and work in process, and it is decreased by the drop in the value of finished goods and work in process) for company i in period t, dummy variablei,t – takes on value 1 in case of ri,t < ri,t-1 or value 0 in case of ri,t > ri,t-1. 3 having in mind the discrepancy between the schemes of profit and loss account which were used till 2014 and the schemes that were prescribed to be used starting from 2014, certain adjustments were made in order to achieve comparability. when we say discrepancies, we dominantly think of previously prescribed use of production orientated concept method of overall costs in the scheme of profit and loss account, and then the rulebook which envisages the use of market oriented concept method of overall costs was enforced. in order to carry out the analysis, data on operating revenues and expenses for the period 2014-2016 were corrected in a way that costs classified by type remain in the framework, and operating revenues includes, apart from revenues gained from sales, also revenues from activating own goods, as well as appropriate correction through finished goods and work in process. 82 j. jugović as dummy variable takes on value 0 upon the growth of revenues, coefficient β1 shows proportional growth of operating costs with 1% growth of operating revenues, while in the case of fall in revenues dummy variable takes on value 1, which means that the addition of coefficients β1 + β2 shows proportional fall of operating costs upon 1% fall of operating revenues. under the assumption that costs change, as it is envisaged by traditional theory, with a same amount in case of equivalent growth and fall of the activity volume, it is expected for a coefficient β2 to take on value 0. in order to take into account the effect of time on cost stickiness, based on previous research, we applied extended model (2) to test if cost stickiness is reversed in subsequent periods: facta universitatis series: economics and organization vol. , no , , pp. doi: log ci,t ci,t-1 = 𝛽0 + 𝛽1 log ri,t ri,t-1 + 𝛽2 *dummyi,t *log ri,t ri,t-1 + 𝛽3 log ri,t-1 ri,t-2 + 𝛽4 *dummyi,t-1 *log ri,t-1 ri,t-2 + 𝜀i,t (3) where: dummyi,t-1 – takes on value 1 in case of ri,t-1 < ri, t-2, or value 0 in case of ri,t-1 > ri, t-2. according to previous research, the β3 coefficient, if positive, indicates a lagged adjustment to operating costs for changes in sales revenue. further, the β4 coefficient, if positive and lower than absolute value of β2, indicates a partial reversal of the cost stickiness that follows a revenues decrease. choice of specification models was done in line with econometric procedure which entails the application of certain specification tests. the existence of individual effects was tested by the application of the f test for fixed specification and breusch pagan test for the random one. the existence of time effects is tested only by the application of the f test, having in mind that it is about a short-term time horizon and a large number of observation units. table 2 specification tests test realized value of test statistics p-value model 1 model 2 model 1 model 2 f-test (fixed individual) 0.74 0.70 1.0000 1.0000 breusch-pagan (random individual) 0.00 0.00 1.0000 1.0000 f-test (time effects) 13.15 13.03 0.0000 0.0000 source: author's calculation conducted tests point to the fact that individual effects are not statistically important. on the other hand, based on realized value of f statistics, it is concluded that there are significant time effects. we can assume that such a result is the result of a dynamic macroeconomic environment conditioned by the crisis effect of 2008 and 2009. the inclusion of time effects in a regression models was done by introducing dummy variables in the model. in order to neutralize potential autocorrelation and heteroscedasticity problems, specifications with cluster-robust standard errors are used. estimated coefficients are presented in table 3 for both models. are costs sticky? evidence from serbia 83 table 3 estimated coefficients model 1 model 2 β1 0.8469394* (0.0129047) 0.8485476* (0.0143084) β2 -0.1286175* (0.0244261) -0.140712* (0.026359) β3 0.0107644* (0.0048706) β4 0.0705936* (0.0211013) notes: standard errors are given in parentheses; *-significance level of 5%. source: author's calculation using stata software estimated regression models are both significant as a whole, with the calculated f statistics of 865.21 and 788.04 respectively and appropriate p-values of 0. 0000. estimated value of the coefficients β1 in model 1 points to the fact that operating costs increase on average 0.847 % per 1% growth of operating revenues, while, on average, they decrease by 0.718 % upon the fall of operating revenues by 1%, which points to the existence of stickiness in operating costs of observed companies. estimated values of coefficients are statistically significant, at the value level of 5%. results are comparable with the results gained from the research of calleya et al. (2006), where the authors established that operational costs increase by 0.97% on average with 1% growth of revenues, while on the contrary they decrease by 0.91%. dalla via and perego (2014) showed that operational costs increase by 0.94% on average with 1% growth of revenues in manufacturing industry, but they found coefficient β2 to be positive. bugeja et al. (2015) found that costs of australian listed firms increase by 0.885% with 1% increase in operating revenues, but decrease by only 0.797% for 1% decrease in operating revenues. we can find few potential causes of identified presence of cost stickiness. companies from our sample belong to manufacturing sector which is characterized by greater level of fixed assets: machinery, plants and equipment than trading and service sectors. these committed resources cause high adjustment costs, which promotes the emergence of cost stickiness. this is in line with conclusions of weidenmier and subramaniam (2003). having in mind that managers rely on information about past operating revenues in forming expectations about future demand, other potential cause of observed cost stickiness may be managers’ optimism. since there is a continuous growth of business activity, measured by the amount of operating revenues in the observed period, managers will be hesitant to reduce unused resources in the case of a slight decrease of demand in order to avoid adjustment costs. we can assume that the trend of growth is caused by the exit from recession and overall improvement of business environment since 2010. besides, as it is emphasized in pervan & pervan (2012), the only similar research done in the field of sticky costs in the region, managers of state owned companies are surely less prone to dismiss workers in the conditions of fall in business activities due to the implementation of social and employment policies, which can be reflected in these results. however, the confirmation of these assumptions requires similar researches to be done at the level of labor costs, in companies with a different ownership structure. another potential cause of identified cost stickiness may be managerial empire-building incentives. according to 84 j. jugović chen et al. (2012) cost stickiness is more pronounced under weak corporate governance. this is, mainly, a problem of state owned companies. estimated coefficients β1 and β2 in model 2 are similar to their counterparts in model 1, which confirms cost stickiness. the positive and significant estimated coefficient β3 indicates a lagged adjustment to operating costs for changes in operating revenues. additionally, the estimated coefficient β4 is, also, positive and significant, and its value is less than absolute value of estimated coefficient β2 (0.0705936 < |-0.140712|) implying a partial reversal of stickiness in the period after a revenue decrease. we can interpret this as manager's caution in deciding to reduce resources, which takes some time to obtain information about the persistence of changing demand. the other explanation could be that contractual arrangements related to committed resources take time to be undone. besides, cost stickiness observed in one period is partly reverted in subsequent period, after a revenue decrease. “during longer time intervals, the managerial assessment about the permanence of a change in revenues becomes more precise and then adjustment costs become lower relative to the cost of keeping unused resources” (de medeiros & costa, 2004). this shows us that cost stickiness is less pronounced when observed in a longer time period. conclusion determining the pattern of cost behavior is not at all simple. traditional cost theory classifies costs into two groups, depending on how they react in total to a change in the activity volume: fixed and variable costs. however, the costs show different features depending on the time horizon that is observed. in addition, the complexity is especially pronounced when we keep in mind that costs do not have a strictly defined character, but that their behavior is determined by numerous factors. determining the way in which costs move with the change in the activity volume is essential for the needs of planning, cost control, as well as making individual business and financial decisions. the theory of sticky costs indicates that the variable and fixed are the two extreme cost categories determined by low and high adjustment costs, respectively. anderson et al. (2003) consider deliberate decision making on resource adjustment as the primary cause of stickiness in the cost behavior. taking into account the direction of activity volume change, the authors concluded that managers make different decisions on resource adjustment in case of increase or decrease in activity volume. despite popularity and growing interest in this subject in the expert literature, some authors were critical of the theory of sticky cost behavior (e.g. anderson & lanen, 2007). in spite of this, it is certain that the results of the studies based on sticky cost theory provided researchers with enthusiasm regarding the analysis of cost behavior, placing it into new context which is compatible with contemporary ideas of the theory of finance, presented by behavioral finance. framework of sticky costs presents a different way of thinking about the cost behavior in relation to the activity volume, not necessarily opposed to the conventional theory. a better understanding of cost behavior results in more precise and better cost planning. “at a shorter time horizon, cost stickiness potentially affects those corporate decisions which use some variant on a theme of average/standard costs and which typically do not acknowledge that costs, for managerial considerations, do not behave as anticipated” (calleya et al., 2006, 140). the settings of this theory are also important for the are costs sticky? evidence from serbia 85 purpose of predicting financial performance, both for financial analysts and existing and potential investors. ignoring this phenomenon in cost behavior could result in underestimation of budgeted costs in case of less desirable outcomes (decline in sales volume), and thus overestimation of profitability. previous researches testify to minimal awareness of asymmetric cost behavior (e.g. novák et al., 2018). starting from the methodology introduced by anderson et al. (2003), we have shown that the costs of medium and large manufacturing companies that operate in serbia show stickiness. similar research for our country has not been conducted, which makes this one a basis for further studies. in addition, it would be possible to include certain elements of operating costs in the research – i.e. certain categories of costs, where, in the context of adjustment costs, the focus would be on salary costs. future research should focus on determinants of cost stickiness of domestic companies, bearing in mind the complex macroeconomic environment to which companies are exposed in the domestic market, which exceeds the empirical part of this paper. this type of research would enable a better understanding of the business decision-making process, but would also make some progress in the development of cost accounting in our country this research has certain limitations. first of all, we used the amount of sales revenue as a proxy variable for the scope of activities due to the lack of a more adequate publicly available variable. in addition, we must keep in mind that changes in costs and revenues, as proxy variables for activity volume, are conditioned not only by higher sales volumes, but also by changes in sales prices. references anderson, m. c., banker, r. d., & janakiraman, s. n. 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(2003). additional evidence on the sticky behavior of costs. working paper, texas christian university. https://ideas.repec.org/s/cai/finpug.html are costs sticky? evidence from serbia 87 da li su troškovi asimetrični – primer srbije rad je fokusiran na teoriju asimetričnih troškova, iznedrenu istraživanjima koja su ukazala na činjenicu da troškovi ne reaguju simetrično u slučaju ekvivalentnog povećanja i smanjenja obima aktivnosti, kao što to podrazumeva tradicionalna teorija troškova. poslovne odluke donete u cilju povećanja vrednosti kompanije, kao i oportunističke odluke, usmerene na ostvarenje ličnih ciljeva menadžera, ističu se kao jedan od osnovnih uzroka asimetrije troškova. da bismo ispitali postojanje asimetrije u kretanju troškova kompanija koje posluju u srbiji, sproveli smo istraživanje na uzorku od 917 srednjih i velikih preduzeća iz proizvodnog sektora za period 2007 2016. analiza panel podataka ukazala je na prisustvo asimetrije u ponašanju ukupnih troškova, odnosno, pokazala je da ukupni troškovi rastu za 0,847% u slučaju 1%-og rasta poslovnih prihoda, a padaju za 0,718% usled 1%-og pada poslovnih prihoda. utvrdili smo i da se troškovi uz kašnjenje prilagođavaju poslovnim prihodima, kao i da postoji parcijalna reverzibilnost asimetrije troškova u periodu koji sledi period pada poslovnih prihoda. ključne reči: kretanje troškova, asimetrija troškova, troškovi prilagođavanja, bihevioralne finansije, agencijska teorija facta universitatis series: economics and organization vol. 17, n o 2, 2020, pp. 173 186 https://doi.org/10.22190/fueo191021013s © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper informational scopes and the area of application of the equity method 1 udc 658.14 vojislav sekerez university of belgrade, faculty of economics, serbia abstract. the equity investments in other entities may result in different level of control over their activities and different consequential relationships between the investors and investees. for the purposes of valuation of the investments in associates and joint ventures, which are followed by significant influence or joint control of the investor, it is necessary to use the equity method. its application is connected with the number of specific issues that result in a completely different accounting treatment of some business transactions in relation to the acquisition method and consolidation of subsidiaries. the aim of this paper is to analyze the key features and area of application of the equity method, which will be accompanied by the reference to some of its most obvious advantages and disadvantages. key words: significant influence, joint control, equity method, consolidated financial statements, separate financial statement. jel classification: m41 introduction the development of modern capital markets leads to a growing number of transactions that result in significant equity investments in other companies. investors decide to make such investments for various reasons, so the nature of relations established and intensity of control over the investees will be determined not only by the ownership level, but also by a number of other specific factors. accounting treatment and valuation of these investments will primarily depend on whether they have resulted in absolute, significant, joint or common control over the investee’s activities. majority equity investments, which are received october 21, 2019 / revised march 02, 2020 /accepted february 11, 2020 corresponding author: vojislav sekerez university of belgrade, faculty of economics, kamenička 6, 11000 belgrade, serbia e-mail: vsekerez@ekof.bg.ac.rs 174 v. sekerez followed by the control over the subsidiaries, need to be consolidated with the use of the acquisition method.on the other hand, the equity method needs to be used to account for investments in the associates and joint ventures, which are accompanied by the investor’s significant influence or joint control. finally, minority equity investments that are not followed by significant influence of the investor (ownership interest is usually between 10% and 20%), should be valued in accordance with ifrs 9 – financial instruments. therefore, different levels of control and different consequential relations between the investor and investees require a different ways of accounting for investment. the fact that the equity method is widely used in practice, which is accompanied by a specific treatment of certain business transactions during the valuation of investments, imposes the need for a detailed analysis of its features and informational scopes. research in this paper will be focused on the basic characteristics and the way of functioning of the equity method, with special reference to the comparative analysis of differences in accounting treatment of the most important aspects of investments’ valuation, those occurring from the application of equity method and acquisition method. since the percentage of ownership interest (as a financial criterion) serves only as a starting point for determining whether there is a significant influence or joint control of the investor, in this article a detailed analysis of the key prerequisites for the implementation of the equity method will be made. also, a reference will be made to a significant expansion of the area of application of the equity method, which occurred in the last few years due to changes in professional regulation. finally, at the end of the paper, some of the most significant weaknesses and shortcomings of the equity method that have been noticed in practice during its application will be presented. 1. prerequisites for the application of the equity method the equity investments in other companies can be made with different motives and in a wide range of percentage share in equity of investees. from a financial reporting angle, its percentage share represents only a starting point for determining the nature of investment and appropriate accounting method for their valuation. this means that it is necessary to take a broader approach when determining the nature of the relationship between investor and investee, in order to supplement the initial information on the percentage of ownership interest with a clear insight in the intensity of control that is actually achieved. the point is that the intensity of control (significant or absolute) and the resulting investor-investee relationship will crucially determine further accounting treatment and the way of investment’s valuation. in that sense, a framework for ranking equity investments according to the percentage share has been established in accounting regulations and practice, which should provide a starting point for determining the degree of control over the investees. according to the financial criterion shown in table 1, investments in range from 20 to 50% of voting rights are considered as significant ownership interests and they are the initial basis for applying the equity method, but under the condition that they allow significant influence over the associate or joint control over the joint venture. starting with the assumption that significant equity investment in most cases should allow the significant control for investor, ias 28 investments in associates and joint ventures in informational scopes and area of application of the equity method 175 paragrapf 16 additionally emphasizes that exercising significant influence or having joint control is the primary criterion to be fulfilled in order to apply the equity method. this means that the significant equity investment is only the starting point for exercising significant influence, because it, by itself, is not enough since the investor must demonstrate this possibility in practice. the same standard says that “significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies” (ias 28, 2011, par.3 ). thus, having more than 20% of the voting rights of investee suggests that there is significant influence, unless it can be clearly demonstrated that this is not the case. similarly, having less than 20% of the voting rights initially implies that there is no significant influence, unless the existence of such influence can be clearly demonstrated. table 1 financial criterion for accounting treatment of equity investments type of equity investment ownership level control level applicable accounting method common 10-20% absence of significant influence cost method (initially) and fair value significant 20-50% significant influence equity method majority more than 50% control consolidation (acquisition method) source: hoyle, j.b., schaefer, t. f, & doupnik, t.s. (2011). advanced accounting. 10 th edition, new york: mcgraw-hill/irwin, p. 6. (table was modified by author) therefore, having a significant ownership interest in practice does not guarantee the exercise of significant influence, nor does having a majority ownership interest of more than 50% of voting rights always guarantee the control over an entity. ias 28 in paragraph 6 offers a list of criteria whose fulfillment may indicate that there is significant influence. none of them should be used solely, as a basis for conclusion, but should be viewed simultaneously to determine the investor’s ability to exercise significant influence over the investee. these criteria are: representation on the board of directors or equivalent governing body of the investee; participation in policy-making processes (including participation in decisions about dividends); significant transactions between the entity and its investee; interchange of managerial personnel and provision of essential technical information (ias 28, 2011). it is interesting to say that, within fasb asc 323, the above criteria are joined by one additional: extent of ownership by the investor in relation to the size and concentration of other ownership interests in the investee (hoyle, 2010). it is noticeable that the ability to exert significant influence, as a primary criterion for the application of the equity method, is obviously very broadly and vaguely defined, which opens the room for subjective judgment and free interpretations in practice. the range of 20-50% of voting rights has been prety much arbitrarily established, merely to provide clear and consistent guidance for financial reporting purposes. however, the investor’s ability to exercise significant influence, which should be the consequence of the significant ownership interest, often does not exist in practice. therefore, if the ability to exercise significant control is not manifested or, oppositely, if there is control over the investee, equity method should not be applied, regardless of the fulfillment of the initial financial criterion that voting rights are in range between 20% and 50%. for example, the equity method should not be applied (regardless of the fulfillment of the initial financial criterion) in situation when an agreement between investor and investe requires suspension 176 v. sekerez of investor’s significant influence or when investor fails in attempts to obtain representation on the investee’s board of directors of (hoyle, 2010). in the examples above, the investor should treat his ownership interest as common and use the fair value for its further valuation, in accordance with ifrs 9 financial instruments. in contrast, in situations where an investor with 50% or less of voting rights is capable of establishing control over its investee, it is necessary to apply the acquisition method instead of the equity method and to consolidate controlled entity. in such situations, control is achieved through contractual and other arrangements that specify decision making power. therefore, some companies (walt disney company, for example) have been required to reclassify their former equity method investees as so called variable entity investees and to consolidate them. contrary to the examples above, which limited the application of the equity method, despite the fact that investors held 20-50% of voting rights, there are also situations where applying the equity method is necessary, even though investors own less than 20% or more than 50% of voting rights in investee. for example, at&t, inc. used the equity method to account for its 9% equity investment in america movil, a wireless provider in mexico. this is explained by the fact that at&t is a member of the consortium that holds voting control of the america movil, providing it with significant influence. the other extreme, which also makes it possible to apply the equity method, is a situation where investor owns majority ownership interest, but the veto power of minority shareholders prevents him from exercising control over that company. similarly, the lack of control can also occur in situations where the majority owner agrees to share management and control with another investor (hoyle, 2010). hence, the arbitrariness of the starting financial criterion of 20-50% of voting rights imposes the need for a broader approach when determining the existence of investor’s significant influence, which is additionally aggravated by the lack of clarity and precision of the supplementary criteria, offered by the ias 28 or asc 323. the previous discussion suggests that the determination of the existence of significant influence is followed by a number of casespecific characteristics and may be accompanied by a high dose of subjectivity. finally, it is important to say that, due to the lack of space, in this place we will not go into more detail on the concept of joint control, whose existence is a crucial criterion for the application of the equity method in the case of joint venture investments. it should be only emphasized that determining whether an investor engages in joint control brings with it no less difficulties compared to determining the existence of significant influence over the associates. the problem of defining the concept of joint control is addressed by the ifrs 11 – joint arrangements, which emphasizes that “joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control” (ifrs 11, 2011, par. 7). accordingly, in a joint arrangement, no single party controls the arrangement on its own, but all the parties (or a group of the parties) control the arrangement collectively by acting together to direct the relevant activities that significantly affect the variable returns of the arrangement. in the case of joint ventures (as a type of joint arrangements which is different from joint operations according to ifrs 11), joint control allows parties’ rights to the entity’s net assets and obliges them to use the equity method (leitner-hanetseder et al., 2014). informational scopes and area of application of the equity method 177 2. basic characteristics of the equity method as we have previously emphasized, the investor makes a significant ownership interest when owning 20-50% of shares in the investee’s equity, which is often the basis for exercising significant influence over its business. for the purpose of counting for investments in associates or joint ventures, over which the investor exercises significant influence or joint control, it is necessary to use the equity method, according to ias 28. it is the accounting method whereby the investment is initially recognized at cost and adjusted after the acquisition date for the changes in the investor's share of the net assets of the investee (ias 28, 2011 par.3). as a consequence, the investor's profit and loss statement will include the related share of the profit or loss of the investee, and its other comprehensive income includes its share of the other comprehensive income of the investee. in contrast, an acquisition method is used for accounting for majority ownership interests (that allow parent’s control over a subsidiary) and reporting on them in the consolidated financial statements. accordingly, different levels of control and resulting relationships between investors and investees require the application of different accounting methods for equity investments’ valuation and consolidation. the initial recognition is only the first step in applying the equity method and it is carried out in the amount of the cost of the acquired equity share. this means that, unlike the majority ownership interests, which are initially measured at fair value, the costs of significant ownership interests also include any transaction costs that are associated with the acquisition (stock exchange fees, costs of legal and other services etc.). in anticipation of above average returns, when buying an equity share, investor may decide to pay more than the share of the net fair value of the identifiable assets and liabilities of associate or joint venture. this difference between the higher acquisition costs and the lower fair value of the related portion of the investee’s net assets represents goodwill, which is included in the carrying amount of the investment (as its integral part) within investor’s statement of financial position. therefore, goodwill is not disclosed separately, as it is the case when acquiring subsidiaries, and not tested for impairment, but subject of that test is investment as a whole. on the other hand, if the carrying amount of the investment is lower than the related portion of the fair value of the investee’s net assets (a lower amount is paid), the investor on that occasion made an income, which should be disclosed in its statement of comprehensive income (škarić-jovanović, 2014). the essential idea underlying the equity method is that the subsequent investment’s valuation should present the close relationship that has been established between the investor and investee, as a result of significant or joint control. therefore, in accordance with this method, the value of equity investment is constantly changing in line with the changes in net assets of investee, so it can always reflect the associated portion of investee’s net assets in the investor’s statement of financial position. these changes are most often caused by: the subsequent investment or withdrawal of a portion of the investor's ownership interest, the profit or loss of the investee or changes in the fair value of the investee's assets. consequently, through the changes in the value of its equity investment, the investor actually bears full responsibility for the results of associates or joint ventures, given that it exercises a significant influence on their business. in this regard, the subsequent equity investment in associates or joint ventures increases their net assets and, therefore, the amount of investor’s participation, regardless of whether 178 v. sekerez there will be a change in the percentage of ownership interest. if a subsequent investment turns significant ownership interest into a majority interest, the investor should discontinue the use of equity method and the accounting for the investment is further carried out in accordance with ifrs 3 business combinations and ifrs 10 consolidated financial statements. on the other hand, reduction of ownership interest in the associates or joint ventures, whereby the investor retains significant influence and continues to use the equity method, implies that it should reclassify to profit and loss statement the proportion of the gain or loss that had previously been recognised in other comprehensive income, relating to that reduction in ownership interest (ias 28, 2011, par.25). the application of the equity method should be also discontinued if the investor sells part of its ownership interest, whereby the retained remaining interest does not allow exercising significant influence over the investee, that is, when the investee ceases to be an associate or joint venture. if the retained ownership interest is a financial asset, it should be measured at the fair value, in accordance with ifrs 9 financial instruments (ias 28, 2011, par.22). as we have noted above, the associated portion of the investee's profit should be recognized as revenue from investment in the investor’s statement of comprehensive income, while the value of the equity investment also increases by the same amount in the statement of financial position. this amount is derived by applying a percentage of the ownership interest to investee’s profit after taxation. in the case that an associate or joint venture incurs a loss, the investor’s participation would be proportionally impaired. this approach of investment’s valuation fully reflects the basic idea of the equity method and it is one of the key differences with respect to the acquisition method, where only a portion of the subsidiary's profit (dividend paid) is recognized as income from the parent's participation. ias 28 in paragraph 11 emphasizes that revenue recognition, based on the distribution of investee’s profit (as with the acquisition method), does not have to be an adequate measure of income earned by an investor, because the dividend distribution policy itself often has little to do with the performance of investees. therefore, it is considered that the application of the equity method offers more useful and relevant information on the real value of investments, net assets and profit or loss of investor (ias 28, 2011). in this regard, it is important to emphasize that the equity method and the acquisition method differ not only in determining the amount of investor revenues, but also in the moment of their recognition. namely, the equity method implies that the related investor’s revenue is recognized in the same accounting period in which the profit of the investee was earned, while the acquisition method requires that the parent's revenues (dividend income) be recognized and reported only in the following year relative to the year in which the distributed profit of subsidiary was earned (škarić-jovanović, 2014). hence, unlike the accounting treatment of dividend with parent companies, which is recognized as investment’s income in the amount charged, the equity method requires that the value of the investor’s participation should be reduced by amount of the dividend received. this is completely in line with the basic idea of the equity method that any change in the amount of the investee's net assets simultaneously changes the amount of the related investor's proportionate interest. given that dividends paid reduce the investee's net assets, it is correct to reduce the amount of investors participation by amount of received dividend. in addition, the investor has previously already recognised income and increased the amount of its investment by the related part of the investee’s profit (of which dividends are an integral part), so treating the dividend as income would double them. therefore, according to the informational scopes and area of application of the equity method 179 equity method, dividends are not income, but the conversion of part of the equity investment in cash (hoyle et al., 2011). the amount of the net assets of an associate or joint venture may also change in situations where the fair value of certain items of their assets changes (ias 28, 2011, par.10). in such cases, achieved unrealized gains/losses are recognized in the investee’s other comprehensive income, as a component of equity. considering the fact that in the spirit of the equity method, the investor participates not only in the investee’s profit or loss, but also in its other comprehensive income, these changes in the amount of the investee's net assets consequently change the amount of the investor's participation. accordingly, in the case of unrealized gains on the change in the fair value of the investee's assets, both the amount of investor’s share and its other comprehensive income increases proportionately. on the other hand, the proportionate portion of unrealized losses (in the case of a decrease in the fair value of the investee's assets) will simultaneously reduce the amount of the investor's interest and its other comprehensive income (škarić-jovanović, 2014). finally, another reason for the subsequent decrease in the amount of equity investment are the internal gains/losses that arise as a result of making deliveries or providing services between the investor and its associates or joint ventures. according to the equity method, these internal results are treated as unrealized, because the investor and investee are viewed as a single entity. the recognition of the mentioned results is deferred in the investors' financial statements until their external realization to third parties. therefore, at the time of preparation of the financial statements, the investor simultaneously reduces the amount of its investment and the amount of the investment’s income for the part of that unrealized profit, which is proportional to its ownership interest. in contrast, the existence of unrealized losses would entail a simultaneous increase in the amount of the investor's participation and its income for the related part of loss (škarić-jovanović, 2015). it is important to emphasize that the internal results are viewed from the perspective of investee, as they are presented in full in its individual financial statements, without the need for elimination. at the same time, they affect the amount of disclosed result, as a basis for subsequent adjustment of investor’s participation. therefore, the internal profit will occur when the investee makes a delivery (or provide service) to the investitor with gain (uprstream transaction), or when the investor makes a delivery to the investee with loss (downstream transaction), because then the assets were purchased at a price below their costs and the investee’s income was unjustifiably increased by this amount of internal profit. in the case of internal losses, the mentioned transactions will proceed in the opposite direction and with opposite effects. therefore, starting from the fiction that investor and investee are one single entity, the internal results must be eliminated when calculating the amount of equity investment and income from it in investor's financial statements. also, the fiction of a single entity and the resulting need for elimination of internal results is very close to the principles of the full consolidation of parent company and subsidiaries, whereby the acquisition method is used. however, despite the similarity noted above, there is also another important difference between the equity and the acquisition method. namely, the application of the equity method does not require complete consolidation of assets, liabilities, equity, revenues and expenses, as is the case with the acquisition method, so internal results are not eliminated from the value of inventories (which are not an object of consolidation), but the investor’s participation is adjusted for their amount. 180 v. sekerez it should be noted that entities that are exempt from the obligation to prepare consolidated financial statements (in accordance with ifrs 10) are not required to apply the equity method. this method, also, does not have to be applied when all of the following factors are present:  the entity is a wholly or partially-owned subsidiary of some other entity, and its other owners (including those without voting rights) are informed about it and do not object that equity method is not applied;  the entity’s debt or equity instruments are not traded in a public market;  the entity did not fill its financial statements with a securities commission, with the aim of issuing debt or equity instruments in a public market;  the ultimate or any intermediate entity’s parent company already prepares public financial statements that comply with ifrs (ias 28, 2011, par. 17). 3. expanding the scope of application of the equity method in recent years, certain changes in professional regulation have led to a significant expansion of the scope of application of the equity method. namely, the iasb (international accounting standards board) has decided that this method, after several years of pause, can be used again from 2016 as one of the options for equity investments’ valuation in separate financial statements. it is important to say that the separate financial statements are individual reports prepared by the parent companies and investors (with joint control or significant influence over the investees), primarily with the purpose of disclosing the value of their investments in the equity of these entities. ias 27 – separate financial statements, in this respect, explicitly emphasizes that the financial statements of entities that do not have investments in subsidiaries, associates or joint ventures are not separate financial statements (ias 27, 2011, par. 7). this means that holding the majority and significant ownership interests in other companies, followed by the absolute or significant control over their businesses, is a prerequisite for the preparation of separate financial statements. on the other hand, entities that are exempted from the obligation to prepare consolidated financial statements (in accordance with ifrs 10) and entities that are exempted from the obligation to use the equity method (in accordance with ias 28), can prepare separate, as their only financial statements. consequently, we may conclude that ias 27 does not prescribe which entities are required to prepare separate financial statements, but they are prepared when the parent companies and investors voluntarily opt for it or when they have such an obligation in accordance with national regulations. therefore, separate financial statements are reports that can (but, also, don't have to) be prepared together with consolidated or financial statements of investors applying the equity method. otherwise, it should be said that the financial statements of investors in associates and joint ventures are not considered as a consolidated financial statements in the strict sense, because there is no complete consolidation of assets and liabilities (only equity investments are consolidated). therefore, although in a broad sense separate financial statements belong to the category of individual financial statements, the specific requirements of their users make it essential to differentiate them substantially from all other individual financial statements, prepared by the entities that do not have majority or significant ownership interests. it is important to emphasize that the growing importance of consolidated financial statements in the conditions of internationalization of business does not diminish the need for the publication of individual informational scopes and area of application of the equity method 181 or separate financial statements of companies, which are the holders of majority and significant investments in the equity of other entities. separate financial statements of parent companies and investors primarily serve as a means of protecting the interests of users, such as owners, creditors and government bodies, which in this field often make more specific information requirements than what they expect from the consolidated financial statements. this fact has initiated the iasb to publish a particular standard ias 27, which explicitly addresses the issues of their preparation and presentation. in this respect, after the revision of ias 27 consolidated and separate financial statements and ias 28 investments in associates in 2003, the equity method has been eliminated as a tool for valuation of investments in subsidiaries, associates and joint ventures within the separate financial statements, although it had been used for many years as one of the options for the purposes mentioned. at that point, companies were given the opportunity to use the cost or fair value (in accordance with ias 39 – financial instruments: reconition and measurement) for all investments in subsidiaries, associates and jointly controlled entities included in the separate financial statements. the iasb explained this decision by saying that the information provided by the equity method is reflected in consolidated and other financial statements of investors (especially where ias 28 was applied), and that there is no need to provide the same information in the separate financial statements. however, it turned out that such a decision, which was nominally motivated by a reduction in the number of options under ifrs and increased comparability of financial statements, had the opposite effect in practice. specifically, in a number of countries, local regulators require listed companies to prepare separate financial statements and, on that occasion, use the equity method for valuation purposes. as a result, incomparability emerged, because the only difference between the financial statements prepared in accordance with national rules the financial statements prepared in accordance with ifrs was in (non) use of equity method. it turned out that this was a strong enough argument for returning the equity method to the set of allowable tools for the valuation of equity investments in separate financial statements, so in may 2012 the iasb decided to launch an initiative in this field (iasb, 2013). a draft proposal was issued in december 2013, and after discussions and opinions collected, an amendment to ias 27 was issued in august 2014. this amendment permits that the equity method can be used again (as regulated by ias 28) for the purposes of accounting for investments in subsidiaries, associates and joint ventures when preparing separate financial statements. after this decision, the companies had a choice between equity method, cost and fair value (in accordance with ifrs 39 – financial instruments) for the purpose of valuation of the equity investments, but once selected option had to be consistently applied to all categories of equity investments. the effective implementation of this decision began on january 1 st 2016, with early adoption permitted. also, the iasb has ordered retroactive application of the equity method for all accounting periods from the date of acquisition, which undoubtedly increases the complexity and costs of financial statements’ preparation. it should be noted that, during this process, efrag (european financial reporting advisory group) was not opposed to returning the equity method to a set of permitted techniques for accounting for investments within separate financial statements, although it increases the number of options in ifrs and potentially reduces the comparability of financial information. efrag explained this by the fact that the equity method offers a relevant and useful information on the economic value of investor’s net assets and profit 182 v. sekerez or loss in its separate financial statements. this attitude is in line with the opinion of the iasb that “information may be relevant even if some users are already aware of it from other sources. consequently, the fact that equity method provides information that is already reflected in consolidated financial statements does not mean that it would not provide relevant information” (iasb, 2013, par. bc8). however, while considering changes to ias 27, efrag expressed concern that full retrospective application would increase the complexity and costs of preparing the financial statements for entities that opt to use the equity method to account for subsidiaries in their separate financial statements. in addition, efrag also considered that the iasb had not provided a sufficiently clear explanation for the treatment of differences that occur between the value of majority ownership interests in the consolidated and separate financial statements of parent companies that opt to use the equity method. these differences arise from the different accounting treatment that the equity method and the acquisition method have for transactions such as: costs of acquisition, impairment of goodwill, distribution of dividends, elimination of intercompany gains and losses etc., so efrag conluded that the iasb in this regard should offer an additional guidance within ias 28 (efrag, 2014a). nevertheless, in its final report, efrag surprisingly softened its position and accepted all the proposed amendments to ias 27, stating that the differences between separate and consolidated financial statements are understandable to users as consolidated and separate financial statements reflect totally different views – the view of group and the view of an individual entity. efrag finally considered that “following the methodology given by ias 28 as applicable to an associate or a joint venture to account for subsidiaries in separate financial statements will not add undue complexity to the extent that it may impair reliability” (efrag, 2014a, p.7). also, costs for preparers and users, incurred on that occasion, are one-off costs, which should not be significant, given the fact that application of equity method is optional. ultimetely, the decision to make the transition to the equity method will be based on expected benefits that will arise from that change. finally, in addition to the possibility of using the equity method for the preparation of separate financial statements, the expansion of scope of its application was also influenced by the he adoption of ifrs 11 joint arrangements, which have replaced the old ias 31 investments in joint ventures since january 1 st 2013. on that occasion, the equity method has replaced the proportional consolidation method for the purpose of accounting for investments in joint ventures, which also significantly increased the number of its users. this decision of the iasb was motivated primarily by reducing the number of options in standards to increase comparability with us gaap (ašenbrenová, 2016). also, it should be noted that this change has caused numerous reactions in the academic and professional community. analysis of the pros and cons of eliminating the proportional consolidation method and its effects on the practice of financial reporting and the quality of information has been performed by demerens et al., (2014) and so et al., (2018). 4. disadvantages of the equity method notwithstanding the widespread use of the equity method and its positive characteristics, primarily in the domain of providing relevant and useful information on the real economic value of equity investments, this method also exhibits certain shortcomings in practice, which will be briefly highlighted here. the first of them refers to the absence of clear and informational scopes and area of application of the equity method 183 firm criteria for determining the existence of investor’s significant influence, as a major prerequisite for the application of the equity method. although in accounting regulations an attempt has been made to correct this deficiency by offering a clear range of 20-50% of the voting rights, as a framework for demonstrating investor’s significant influence, this financial criterion is only the starting point for determining the significant influence, whose existence is conditioned by the specific circumstances and characteristics of the particular investment. thus, in practice, situations may arise where the investor who owns 50% of voting rights fails to exercise significant influence over the investee and does not have to apply the equity method. oppositely, the second investor, who also owns 50% of voting rights, may exercise control on a contractual basis and, thus, become a parent company, which also precludes the application of the equity method. finally, the third investor may make a significant influence with 50% of ownership interest in the investee (which is the most common case in practice) and therefore be obliged to use the equity method. so, hypothetically, three different investors, with identical ownership interest of 50%, may have three different levels of control over their investees and apply three different methods to account for their investments. in the first part of this paper we have emphasized that the collection of evidence of the presence of significant influence should be based on the guidance, provided by the ias 28 and fasb asc 323, which opens the door for subjective judgment and, in some situations, manipulations in financial reporting. in this regard, many companies have developed the ways to control other entities, despite the fact that their equity participation is 50% and below. such a way of acquiring control is supported by a variety of contractual arrangements, which limit one firm's ability to act without the approval of another, or which concern membership of the board of directors. consequently, an entity may avoid consolidation of financial statements with explanation that control technically does not exist, because the participation is lower than 51% (hoyle, 2010). another disadvantage of the equity method is the fact that it allows and encourages offbalance sheet financing, because its implementation does not entail full acquisition and consolidation of the assets, liabilities, revenues, expenses and capital of associates and joint ventures. investors' financial statements only show the amount of the equity investment and the revenue it brings, while the value of that investment is affected only by changes in the net assets of the investee. the fact that investors, those using the equity method, do not show liabilities and assets of associates and joint ventures leads to a non-transparency and creates conditions for possible misuse of financial reporting. above all, this can motivate companies to manipulate the concept of control and value certain investments using the equity method, rather than to carry out their full consolidation, because it will cover inefficient investments and all the risks involved. in support of this, let us just remember the negative example of company enron regarding to hiding enormous amounts of investee’s debts in its consolidated financial statements. non-disclosure of assets and liabilities of investees, those resulting from the application of the equity method, raises a justifiable question whether the investor should be responsible only for the acquired portion of net assets or should his responsibility also refer to all assets and liabilities of investees. users of investors' financial statements are thus abridged for valuable information that would allow them to more realistically view the risks associated with investing in such entities. the best example of this lack of equity method is the practice of the company coca-cola, which in one period structured many of its investments in 184 v. sekerez companies at just below a 50% of ownership level, following the strict rule that if ownership is 50% or less, control technically does not exist, that is consolidation should be based only on financial control. it allowed coca-cola to legally avoid consolidation of these entities, despite the fact that it had control over majority of them (hsu et al., 2015). also, avoiding the involvement of some entities in the consolidation cycle and the consequent application of the equity method allows companies to eliminate unrealized gains (resulting from intercompany transactions) only in proportion to the ownership interest, while in the case of consolidation, they would be eliminated completely. this suggests that the equity method encourages an increase in the volume of intercompany transactions that are followed by unrealistically high profits, behind which (especially in the case of multinational companies) can be the pursuit of tax savings and manipulation. 2 therefore, not including the investee's assets and liabilities in the financial statements of investors opens the possibility of off-balance sheet financing, which is followed by the presentation of a lower level of indebtedness, higher rates of return for assets and sales and higher earnings per share. hence, the application of the equity method requires additional information about assets, liabilities, revenues, expenses and income of associates and joint ventures to be presented in notes of financial statements. an adequate providing of this additional information (that missing in the main body of financial statements), in some respects may be even an advantage of the equity method, because that kind of information cannot be identified separately in the case of consolidation. this should allow users of financial statements to obtain all relevant information and recognize all financial risks associated with off-balance sheet financing. but, regardless of the level and quality of these additional disclosures, in practice managers are generally motivated to apply the equity method, because the realization of various contractual arrangements, such as managerial compensations, is based primarily on the ratio indicators from the official financial statements (hoyle, 2010). the last important weakness of the equity method is its negative impact on investor’s cash flows and liquidity, because the revenues from the investment are only partially accompanied by the cash inflows from dividends. therefore, the investor's cash inflows will be lower than his revenues exactly for the portion of the investee's profit that has been retained and not distributed through dividends. in addition, higher revenue from investment, recognized in the amount of the part of investee's profit that is commensurate with equity participation, and not in the amount of the dividend paid (as with the acquisition method), increasing investor’s profit, as a basis for taxation and distribution, which additionally threatens its liquidity (škarić-jovanović, 2014). 2 it should be noted that the risks associated with covering up unsuccessful investments and poor financial performances in the consolidated financial statements are reduced by broadening and more comprehensively defining the control concept in accounting regulation (as it is done under ifrs 10, for example). this allows consolidation of entities in which investor's ownership interests is 50% or less, but over which there is an effective investor's control. at the same time, it creates barriers for firms which attempt to use a simple ownership rule to avoid consolidation. informational scopes and area of application of the equity method 185 conclusion equity investments in other entities result in different levels of control of the investor over the investees. accounting treatment of these investmens will primarily depend on whether on that occasion investor achieves absolute, significant, joint or common control. the equity method is used to account for investments in associates and joint ventures, over whose business the investor exercises significant influence or joint control. in determining whether there is a significant influence, as a primary criterion for applying the equity method, acquired voting rights in the range of 20-50% represent only a starting point. it needs to be supplemented by an analysis of other criteria, whose fulfillment proves that the investor exerts a significant influence over the investee. the lack of clarity of these criteria in practice often opens the door for subjective judgement and abuses in financial reporting. it is most often caused by management’s intention to demonstrate more successful company performances and carried out by manipulating the concept of control and avoiding consolidation of subsidiaries. the application of the equity method results in a different accounting treatment of certain business transactions with respect to their treatment when the acquisition method is applied under the consolidation of subsidiaries. examples of these differences, that significantly affect the investor’s financial performance, are different treatment of: impairment of goodwill, distribution of dividends, costs of acquisition, elimination of intercompany profits and losses etc. after the analysis of the information scopes of the equity method, we can conclude that it allows a close relationship between the value of equity investment and the net assets of investee, which results in providing of relevant information about the real economic value of the investor’s assets. it is likely that these informational qualities of the equity method have led to a significant expansion of its scope in recent years, primarily within the separate financial statements and valuation of joint venture investments. however, the application of the equity method in practice also manifests certain serious shortcomings, which are often emphasized by representatives of the academic and professional public. namely, non-inclusion of investee’s assets and liabilities in the investor’s financial statements opens the possibility of off-balance sheet financing and presentation of a lower level of indebtedness. consequently, the users of the financial statements are deprived of information that could allow them to more realistically consider all the risks associated with investing in a particular entity. also, the application of the equity method has a negative effect on investor’s cash flows, since the revenue from investment is only partially accompanied by the cash inflows from dividends received. references ašenbrenová, p. (2016). disclosure of joint ventures and associates in financial statement under ifrs. european financial and accounting journal, 11(3), 85-94. demerens, f., le manh, a., delvaille, p., & pare, j. l. (2014). an ex ante analysis of change in reporting methods: the example of joint ventures. gestion 2000, 31(4), 65-89. doi:10.3917/g2000.314.0065 efrag. (2014). comment letter equity method in separate financial statements ed/2013/10, retrieved from: https://www.efrag.org/assets/download?asseturl=%2fsites%2fwebpublishing%2fproject%20documents%2f30 1%2fefrag%20comment%20letter%20-20equity%20method%20in%20separate%20financial%20 statements%20ed%202013%2010.pdf, accessed on: 11 november 2019. 186 v. sekerez efrag. (2014a). final endorsement advice on ias 27 equity method in separate financial statements. retrieved from: https://www.efrag.org/assets/download?asseturl=%2fsites%2fwebpublishing% 2flists%2_fproject%20news%2fattachments%2f215%2famendments_to_ias_27_efrag__letter_to_the_ ec.pdf, accessed on: 13 november 2019. hoyle, j.b., schaefer, t. f, & doupnik, t. s. (2011). advanced accounting. 10 th edition, new york: mcgrawhill/irwin hsu, a. w., boochun, j., & pourjalali, h. (2015). does international accounting standard no. 27 improve investment efficiency?. journal of accounting, auditing & finance, 30(4), 484508. iasb. (2013). exposure draft: equity method in separate financial statements, ed/2013/10. london: ifrs foundation. iasb. (2011). ias 27 – separate financial statements. london: ifrs foundation iasb. (2011). ias 28 – investments in associates and joint arrangements. london: ifrs foundation iasb. (2011). ifrs 11 – joint arrangements. london: ifrs foundation leitner-hanetseder, s., & stockinger, m. (2014). how does the elimination of the proportionate consolidation method for joint venture investments influence european companies? acrn journal of finance and risk perspectives, 3(1), 1-18. so, s., wang, k. s., zhang, f., & zhang, x. (2018). value relevance of proportionate consolidation versus the equity method: evidence from hong kong. china journal of accountingresearch, 11(4), 255-278. https://doi.org/10.1016/j.cjar.2018.06.002 škarić-jovanović. k. (2014). uticaj primene metode udela na performanse investitora [impact of the equity method’s application on investor’s performances]. acta economica, xii/20, 59-75. škarić-jovanović. k. (2015). zajednički aranžmani – računovodstveni i izveštajni aspect [joint arrangements – accounting and reporting aspect]. finrar, 07/15, 4-15. informacioni dometi i delokrug primene metode udela ulaganja u kapital drugih preduzeća mogu da rezultiraju različitim intenzitetom kontrole nad njihovim poslovanjem i različitim proizilazećim odnosima između investitora i entiteta u koji je investirano. za potrebe vrednovanja učešća u kapitalu pridruženih preduzeća i zajedničkih poduhvata, koja su praćena značajnim uticajem ili zajedničkom kontrolom investitora, koristi se metoda udela. njenu primenu prati niz specifičnosti, koje rezultiraju potpuno drugačijim računovodstvenim tretmanom određenih poslovnih transakcija u odnosu na njihov tretman kada se primenjuje metoda sticanja i vrši puno konsolidovanje zavisnih entiteta. cilj ovog rada se sastoji u analizi ključnih karakteristika i područja primene metode udela, što će biti praćeno posebnim osvrtom na neke od njenih najuočljivijih prednosti i nedostataka. ključne reči: značajan uticaj, zajednička kontrola, metoda udela, konsolidovani finansijski izveštaji, separatni finansijski izveštaji. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 4, 2014, pp. 353 365 needs and specifics of ensuring effective internal audit  udc 657..6 tadija đukić, milica đorđević university of niš, faculty of economics, niš, serbia abstract. in modern business conditions, internal audit has significant potential for creating added value for the company and improving its operations. the extent to which internal audit will realise its objectives is primarily determined by the level of its effectiveness. in this regard, the authors of the paper, in addition to highlighting the importance of internal audit for achieving the strategic goals of the company, deal with the specifics of ensuring its effectiveness. these specifics are related to the issue of measuring the effectiveness of internal audit, as well as to identification and analysis of the factors that largely determine the achieved level of effectiveness of internal audit. key words: internal audit, internal audit effectiveness, measures of effectiveness, factors of effectiveness introduction the development of internal audit, from its emergence until today, has been characterised by continuous expansion of the scope of its work and the powers granted to internal auditors. in addition, a particularly important period of development refers to the last fifteen years, when, under the influence of rapid and continuous changes in the business environment, the companies’ exposure to various risks, especially financial scandals of the late twentieth and early twenty-first century, the establishment and functioning of internal audit in the company has become one of the most important prerequisites for the success of companies’ business. in parallel with the focus on the role and importance of internal audit for the improvement of companies’ business, it has been completely logical that the issue of ensuring its effectiveness will be opened. this is because only effective internal audit can meet all the demands that are placed in front of it and aimed at creating added value for the company. the basic prerequisite of ensuring and increasing the effectiveness of internal audit is, certainly, the development of adequate approach to its measurement. the application of quantitative and qualitative methods that have been developed in practice, especially the received november 20, 2014 / accepted march 25, 2015 corresponding author: tadija đukić faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 649  e-mail: tadija.djukic@eknfak.ni.ac.rs 354 t. đukić, m. đorđević choice of effectiveness measures that will best present the efficiency of internal audit in the creation of added value for the company, makes the issue of ensuring the effectiveness of internal audit very specific. furthermore, when the effectiveness of internal audit is taken into consideration, one must bear in mind that this is a very dynamic category, determined by multiple factors. for these reasons, an important step in ensuring the effectiveness of internal audit is to identify factors that largely determine the level of effectiveness achieved, and then ensure their continuous improvement. 1. the importance of internal audit and the need of ensuring its effectiveness in the modern business environment, internal audit has become an independent business function, which explores, questions, analyses, assesses, and monitors the operation of a certain entity, in order to improve the effectiveness of its operations. however, from its emergence to the present day, internal audit has been subject to continuous changes. these changes have been primarily related to the field of activity of internal audit, as well as the responsibilities, powers, and positions that internal auditors have had in the company. in fact, although it initially focused on the monitoring and control of bookkeeping in order to reduce errors, criminal activity, property alienation, and the like, the advent of management, i.e. the separation of the function of ownership from the function of management, has brought new powers to internal audit. specifically, internal audit has been given the responsibility to monitor, examine, control, and evaluate the work of internal control systems, whereby the scope of activity has not been limited to accounting and finance, but also to business operations in general. thus, the traditional concept of investigation, known as the financial audit, has been replaced with a modern concept, which is in theory and practice known as operational audit, which provides internal audit with a high level of control in all business functions of the company that are managed. however, in the last fifteen years, the extremely complex environment in which the companies operate the new laws and other regulations, and the financial collapses of the late twentieth and early twenty-first century (kapoor, brozzetti, 2012, 32) led to a significant expansion of the scope of work and the role of internal audit. specifically, internal audit is expected to be focused on understanding the risks that could adversely affect the organisation, as well as the establishment of a mechanism to monitor the risk and control it, with a view to its elimination or, at least, reduction. it is also expected to provide support at each stage of the change in the management process, to provide guidance in the design of work processes, to identify possibilities of improvement, and the like. so, in addition to providing assurance, internal audit has been given a significant advisory role, aimed at adequate establishment and improvement of the processes in the company. in this way, the role and activities of modern internal audit are focused on adding value to the company, which is particularly emphasised in the definition of internal audit given by the institute of internal auditors, according to which internal audit is an “independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. it helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes” (iia). the contribution and importance of internal audit to the improvement of a company’s operations, depending on the role and scope of its work, is shown in figure 1. needs and specifics of ensuring effective internal audit 355 increased involvement in strategy management fig. 1 trends in internal audit source: aksoy, bozkus, 2012, 1287 so, today, it is indisputable that internal audit is a highly professional activity, aimed at examining and evaluating the functioning of the entire business system and providing opinions and advice to improve its operations. by focusing its roles and activities on the implementation of the strategic goals of the company, internal audit represents an indispensable participant in the management of the company. however, changes in the “mission” of internal audit have caused the companies to, apart from the “simultaneous and consistent redesigning of roles and activities of internal audit” (arena, azzone, 2009, 44), focus significant attention on ensuring its effectiveness. this is because the adequate establishment of internal audit within the company does not imply necessarily that the company will have some benefits from it, or that internal audit will contribute to achieving the company’s objectives. more precisely, only effective internal audit can justify its existence, provide the best way of carrying out its roles, and meet the expectations that have been placed in front of it. in fact, if the effectiveness of internal audit is seen as “the degree of fulfilment of the objectives for which internal audit has been established” (ippf practice guide), it can be said that it becomes effective when it contributes significantly to the success of business operations through subsequent and preventive action. through subsequent action, aimed at evaluating the effects of past events, i.e. results achieved and errors made, internal audit aims to correct such errors and irregularities and prevent their recurrence in the future. on the other hand, through preventive action, aimed at providing help and support to management in identifying future risks, proposing the establishment of an adequate system of internal controls which will bring those risks under control on time, providing advice for improving the efficiency and effectiveness of business processes, and the like, internal audit contributes to the success of the overall business operations. specifically, achieving a satisfactory level of effectiveness of internal audit ensures the effectiveness of the audited process and the company in general (mihret, 471). 356 t. đukić, m. đorđević furthermore, by achieving the appropriate level of effectiveness, internal audit, in fact, shows how and to what extent it contributes to the improvement of business operations, and proves its value to the company, which, certainly, gets the appropriate reputation. this further implies that internal audit is accepted by the executive management, the board of directors, and owners of the company, as a strategic partner in company management. in such situations, stakeholders observe internal audit as an independent source of objective advice, helpful in implementing corporate governance, risk management and control process management, which helps companies achieve strategic, operational, financial, and goals of regulatory compliance. they also see it as a catalyst of improving the effectiveness and efficiency of the company through internal review and recommendations based on the analysis and compilation of data and business processes. for these reasons, the internal audit profession today focuses more attention precisely on improving its effectiveness, as a prerequisite not only of its contribution to the improvement of company management and the creation of added value, but also of further survival. 2. approaches to measuring the effectiveness of internal audit the first step in ensuring the effectiveness of internal audit is to establish adequate approach to its measurement and evaluation. this view is fully justified by the fact that, as stated by kaplan and norton, if you cannot measure it, you cannot manage it. the need for measuring and evaluating the effectiveness of internal audit is especially emphasised in the international standards for the professional practice of internal auditing, according to which “the chief audit executive must develop and maintain a quality assurance and improvement programme that covers all aspects of the internal audit activity” (ispp 1300). this programme ensures assessment of the effectiveness and efficiency of internal audit, and its required components are both internal and external assessments. measuring the effectiveness of internal audit, as the issue that has become particularly important, at the same time set a challenge that is reflected in the selection of relevant measures of effectiveness, i.e. the fulfilment of the tasks and objectives of internal audit. the institute of internal auditors indicates that the source that should be consulted in the selection of measures of effectiveness is the international professional practices framework, pointing to the compliance of the work of internal auditors with the international standards and code of ethics, as the prerequisite of internal audit best practice. in this regard, the institute has defined several approaches to assessing the compliance of internal audit with the standards. however, although they provide important information, these approaches have significant shortcomings, which are primarily reflected in the fact that the choice of measures is inadequate. these shortcomings are specifically related to the fact that the provided response categories limit the application of descriptive statistics. furthermore, measuring effectiveness on the basis of obtaining explanations or descriptions provides qualitative data that indeed is important, but prevents the application of statistical analysis. in addition, some approaches do not include all standards. characteristics and disadvantages of the recommended approaches are given in table 1. needs and specifics of ensuring effective internal audit 357 table 1 approaches to measuring the effectiveness of internal audit year scales component assessed limitations 2003 categorical -purpose, authority and responsibilities -independence -objectivity -proficiency -due professional care -quality assurance and improvement in internal audit function -providing assurance and generating improvement in the organization -subjective measures -limit answer to yes or no 2006 -subjective answer e.g.: explain, describe -categorical organizational and environment -background of the organization -risk management -governance -accountability and oversight -the internal audit functions -background of internal audit functions -internal audit practice environment -relationship with senior management and board -management of activities -information technology. -internal assessment of: -ongoing review -periodic review -very subjective measures -all are open ended questions -there is no specific question to tap individual components assessed 2007 -categorical -gc, generally conform -pc, partially conform -planning -purpose, authority and responsibilities -internal assessment -professional development -quality assurance program -policies and procedures -resource management -organizational independence -risk management -recording of information -engagement supervision -communicating results -engagement planning -categorical in nature -some of the standards are not covered source: (adapted from: kasim, hanafi, 2009, 3404-3405) 358 t. đukić, m. đorđević the disadvantages of the above-mentioned approaches to measuring the effectiveness of internal audit, among other things, imposed the need for the application of quantitative methods that are easy to understand and based on existing data that can be easily collected. it is believed that the applied quantitative measures more clearly indicate the effectiveness of internal auditors. research conducted by ernst & young in 2007 shows that the most commonly used quantitative measures of effectiveness are: the degree of realisation of internal audit plan, i.e. setting implemented activities in relation to the planned activities in a given period of time, and the time required for the issuance of the final internal audit report. moreover, commonly used measures in practice include: determining eligibility of internal auditors (number of auditors who possess professional certificates, number of years of experience, etc.) and determining the length of time that auditors spend during the day performing audit activities and the time they spend doing other administrative tasks. arena & azzone (2009, 48) point to another objection to the approaches recommended by the institute of internal auditors, emphasising the fact that the harmonisation of procedures, activities, and qualifications of internal auditors with the standard requirements in itself does not mean at the same time the achievement of a high level of effectiveness of internal audit. these, as they call them, process measures, do not indicate the level of achievement of the objectives of modern internal audit, which are reflected in meeting the information needs of stakeholders and consequently improving the overall business of the company and creating the added value. for these reasons, these authors believe that the more appropriate are output measures, which relate to: the percentage of internal audit recommendations that management adopted and implemented, the satisfaction of management, and others. certainly, outcome measures of internal audit are recognised as well, which are reflected in savings in costs, increased profits, higher prices of shares of the company, and the like, which are the result of implementation of internal audit recommendations. however, the fact is that it is very difficult to isolate the contribution of internal audit to these measures, which makes it difficult to apply them in practice. a significant contribution to the measurement of efficiency of internal audit is given by ziegenfuss, who developed 84 measures of effectiveness, classified into the following four groups (2000, 40):  internal audit input: the experience of employees, number of certified internal auditors, the average number of years of experience of internal auditors, the number of hours of training, and the like;  internal audit environment: the number of management requests for internal audit, the audit committee’s satisfaction, management expectations from internal audit, and the like;  internal audit process: the percentage of implemented audits in relation to the planned ones, the number of objections in relation to the work of internal auditors, the accomplished number of hours of work in relation to the budget, and the like, and  internal audit output: the number of recommendations, the number of recommendations implemented by the management, the number of improved processes based on internal audit recommendations, the average response time to management requests, and the like. the combined application of qualitative and quantitative measures, aimed at identifying the harmonisation of the work of internal auditors with professional standards and expectations of stakeholders, implies a comprehensive approach that enables adequate needs and specifics of ensuring effective internal audit 359 measurement of the effectiveness of internal audit and its contribution to the creation of added value, as the foundation on which it is based. 3. factors of effectiveness of internal audit bearing in mind the specifics of measuring the effectiveness of internal audit, primarily in terms of the selection of adequate measures, the logical conclusion is that the effectiveness of internal audit is a dynamic category, conditioned by multiple factors. in this regard, the identification of factors that to a great extent determine the level of achieved effectiveness of internal audit is an issue discussed by many authors. therefore, arena & azzone (2009) claim that available resources and competence of internal audit team, internal audit involvement in risk management, and the relationship between the audit committee and internal audit strongly determine the effectiveness of these functions. furthermore, gansberghe (2005) believes that the greatest impact on the effectiveness of internal audit is exerted by ownership, established organisational and regulatory framework in the company, legislation, resources, and professionalism of internal auditors. soh & martinov-bennie (2011) believe that the structure, status, relationships of internal audit function with stakeholders, and competence of internal auditors are the factors with the greatest impact. our starting standpoint is that the effectiveness of internal audit is primarily determined by competence, independence, and objectivity of internal auditors. however, the attitude of stakeholders towards internal audit, in terms of supporting it and relying on its work, largely depends on the harmonisation of internal audit plans with the strategic plans of the company, as well as approaches and the ways in which internal audit reports to the stakeholders. 3.1. the competence of internal auditors achieving a high level of effectiveness of internal audit is influenced by the competence of internal auditors, which is, as sarens (2009, 4) argues, determined by: education of internal auditors, their working experience, professional certificates, continuing education and the establishment of development programmes, possession of behavioural and technical skills and competence. a strong impact of the competence of internal auditors on internal audit effectiveness has resulted in the numerous studies on this topic. thus, arena & azzone (2009, 45) indicate that competent auditors are able to provide advice that will contribute to the improvement of the internal control system, to adequately complete their work, to use their experience to find consistent solutions and adequately respond to the complex and conflicting situations. belay (2007, 10) suggests that the competence of the chief audit executive and the audit team is the basis for the establishment of a systematic and disciplined approach to evaluation and improvement of business processes in a company. soh & martinov-bennie (2011) indicate that only with the possession of a broad spectrum of knowledge in finance, audit, business management, technology, and legal regulations, can internal auditors produce the expected results. in addition, within the scope of the global research into the specific issues related to internal audit practice, the research foundation of the institute of internal auditors focused special attention on the competence of internal auditors, and came up with the report which identifies and discusses key competences that modern internal auditors must have: general competences, behavioural skills, and technical skills. the overview of these skills is given in table 2. 360 t. đukić, m. đorđević table 2 key competences of internal auditors general competencies behavioral skills technical skills communication skills organizational skills problem identification and solution skills ability to promote value of internal audit conflict resolution/negotiation skills it skills confidentiality judgement team player facilitation leadership change catalyst work independently governance and ethics sensitivity objectivity understanding business business process analysis identifying types of controls operational and management research skills problem-solving tools and techniques financial analysis tools statistical sampling source: (bailey, 2010, 5, 11, 17) character traits of internal auditors determine the possession of some of the abovementioned skills. however, most of these skills are acquired through education and experience in carrying out audit activities. however, although once acquired competences, knowledge, and skills undoubtedly contribute to the proper performance of internal audit activities, they need to be continuously improved through a variety of trainings, education, and development programmes. even the rules of conduct of the code of ethics for internal auditors state that “internal auditors shall continually improve their proficiency and the effectiveness and quality of their services”. certainly, significant opportunities for this are mainly in the hands of internal auditors who are members of relevant professional organisations that are focused on the development of theory, and especially the practice of internal audit. through constant organisation of various educational workshops, research, and dissemination of knowledge about the possible contribution of internal audit to the improvement of the overall business of companies, and gathering of internal auditors from different countries in order to exchange knowledge and experience, these organisations play an important role in the continuous improvement of the competences of internal auditors. in addition, these organisations provide training programmes for acquiring professional titles that specifically affirm the competence and qualifications of internal auditors. 3.2. independence and objectivity of internal auditors independence and objectivity are concepts on which internal audit has always been based, and which significantly determine its effective realisation. however, the expansion of its role brought these concepts to the fore, for the reason that the simultaneous provision of assurance and advisory services can make internal audit the subject of many conflicts. in addition, the issue of objectivity of internal auditors is particularly pronounced given that they are actually employed by the company to which they provide such services (stewart, subramaniam, 329). the importance of ensuring a high level of independence and objectivity of internal audit has made professional bodies focus particular attention on these issues. thus, the international professional practices framework, which was developed by the institute of internal auditors, already in the definition of internal audit states that it is “…an independent, objective assurance and consulting activity…” in addition, numerous performance standards are focused on the issues of providing (1) independence as “freedom from conditions that needs and specifics of ensuring effective internal audit 361 may be a threat to the ability of the internal audit to impartially perform its tasks”, and (2) objectivity as “unbiased mental attitude that allows internal auditors to perform their tasks in such a way that they believe in the result of their work as well as in the fact that no concessions have been made in terms of quality”. with this in mind, it is quite reasonable to say that the effective functioning of internal audit is largely determined by the independence and objectivity of internal audit, in terms of defining the scope of its work, the implementation of activities, and reporting of results (kondić, petrović, 2012, 132). the level of achieved independence and objectivity of internal audit is determined by: the relationship between internal audit and company management, audit committee effectiveness, and competence of auditors (kamau, nduati, mutiso, 2014, 133-134). in fact, although modern internal audit carries the title of a strategic partner to the company management, primarily because it provides advice aimed at improving management process, it does not mean that management should regard internal auditors as “their” employees and include them in the daily management activities. management’s expectations that internal auditors will be actively involved in the management activities, and vice versa, a greater impact of management on work planning, budget approval and implementation of the internal audit activities may significantly jeopardise the independence and objectivity of internal audit. therefore, the establishment and effective functioning of the audit committee, as a body that is composed of non-executive members of the management board, may significantly ensure the independence and objectivity of internal audit in relation to the company management. specifically, the audit committee needs to confirm the charter, approve the internal audit plan and budget, and evaluate its work. certainly, a higher level of committee’s effectiveness, which is, among other things, determined by the possession of different expertise of its members, means a greater contribution to the independence and objectivity of internal audit. this is because the members of the audit committee who have different financial, technical, and other expertise can better understand the work programmes, activities, and results of internal audit, and thus better evaluate the performance of its work. therefore, practical advice 1110-1 states that internal audit should only administratively report to the management (on matters related solely to the daily operations of companies), but not functionally (on issues relating to the scope of work, internal audit planning, etc.). in addition to the internal audit relationship with its stakeholders, a factor that significantly affects the independence and objectivity of internal auditors is their competence. this is because the auditors who possess a high level of different knowledge and skills, common sense, critical thinking, and analysis are able to independently and objectively perform tasks that are within the scope of their work. 3.3. internal audit planning the effectiveness of internal audit is largely determined by the focus of its work on the planned tasks. internal audit planning defines the work priorities, establishes goals that are to be achieved, defines the control measures to ensure that the internal audit objectives are met, and ensures efficient and effective use of audit resources. the responsibility for proposing a plan is in the hands of the chief audit executive, who must establish plans based on risk assessment that is carried out at least once a year. the chief audit executive is obliged to consider the expectations of senior management, the board, and other stakeholders in terms of internal audit opinions and other conclusions, send requests for the appropriate resources, and ensure that they are sufficient and effectively used (ispp 2010). depending on 362 t. đukić, m. đorđević the time period, as well as the level for which the planning is done, we distinguish between planning at the level of internal audit function, which involves strategic and annual planning, and planning at the level of individual processes/engagement. the relationship between these levels of planning is reflected in the fact that strategic and annual planning form the basis for developing a plan of individual engagement. strategic planning of internal audit is crucial for the achievement of a high level of audit effectiveness, as it involves defining strategies, goals, and directing its work towards the fulfilment of defined strategic goals of the company. in this way, strategic internal audit plan is an “instrument that improves the position of internal audit and emphasises its importance within the company” (cecere, nadeau, 2013, 40). according to the guidelines of the american institute of internal auditors, strategic planning involves: introduction to the goals of the company; consideration of the international professional practices framework; introduction to the expectations of stakeholders; harmonisation of the mission and vision of internal audit with the goals of the company; defining critical success factors and performance of swot analysis (institute of internal auditors, 2012). this allows for the definition of specific and measurable objectives of internal audit, which will be supplemented by performance indicators that need to be regularly monitored. in addition, although it is adopted for a period of three to five years, a strategic plan is a very dynamic category, which is reviewed and adapted to changing circumstances. based on the strategic plan, an annual internal audit plan is developed, which defines goals and tasks, i.e. the number and scope of audits to be realised in the coming year, which should be in accordance with the internal rules and the complexity of individual work tasks. furthermore, this plan gives a detailed description of human and other resources necessary for the smooth implementation of planned activities. the annual audit plan is based on an annual risk study, which defines and assesses risk areas within company’s business and quantifies risks in terms of intensity. a study based on the principles of meticulousness and comprehensiveness provides a greater likelihood of making a quality internal audit plan, and thus achieving better final results (dančić, janić, 2012). finally, internal auditors must determine and document the objectives, scope, and perform precise allocation of resources for each individual engagement. individual engagement planning implies that auditors consider: (1) the goal of the activity being audited, and the way to control the execution of the procedures, (2) significant risks to the activity, and the manner in which the potential impact of risk can be reduced to an acceptable level, (3) the adequacy and effectiveness of risk management and control system in comparison to the relevant control framework or model, and (4) the possibility of significant improvement of the risk management and control system (picket, 2006, 143144). a careful individual engagement plan that includes all the necessary elements is a step towards achieving the annual and strategic plans of internal audit. 3.4. internal audit reporting realisation of the role of internal audit includes the control of the work of others, which makes the existence of risk of controlled parties’ aversion to internal audit totally realistic. for these reasons, adequately designed internal audit mode of communication with its users, as well as the quality of internal audit report, significantly determine the level of acceptance and the recognition of the importance of this function. specifically, in addition to providing information on what the performed audit has revealed, internal auditors need to needs and specifics of ensuring effective internal audit 363 convince stakeholders of the value and objectivity of the auditor’s findings, and thus encourage and stimulate management’s actions towards change and improvement (sawyer, dittenhofer, scheiner, 2003, 689). by providing explanations as to why a particular process is audited, which errors are detected, and what are the causes of these errors, as well as by giving recommendations about what should be done to correct the error (moeller, 2009, 352), internal audit is able to produce the expected effects. in doing so, in addition to reporting to the audit committee and the company’s management, internal audit should establish an appropriate communication strategy with other parts of the company. this strategy should be focused on: raising awareness of the role of internal audit by publicising the role, activities, and achievements of internal audit on the company website, in short brochures, etc; active involvement of management in the audit process, in terms of consultation during the drafting of the audit plan, the completion of audit procedures, organisation of workshops dealing with risk, and the like, and proactive actions in order to create added value for the company, by supplementing each individual audit plan with objectives relating to efficiency, effectiveness, cost-effectiveness, and results achieved, and involvement in the work of groups dealing with issues of strategic development as observers or advisors (cox). furthermore, the form and structure of the internal audit report are determined by numerous factors. however, according to the international standards for the professional practice of internal auditing, the report should include a minimum of: a description of the goals and an explanation of why the engagement has been performed; scope, i.e. activities that have been audited and the time period covered by the audit, and the results of engagement – observations, conclusions, opinions, recommendations, and action plans. a particularly important part of the report are recommendations regarding process improvement in the company, i.e. eliminating the causes of problems, which internal auditors suggest and use to urge management to take action in order to increase performance and achieve the desired results of the process. the importance of recommendations is particularly emphasised if internal auditors present the criterion/condition that is desirable to achieve, then the current state of affairs, the actual causes of deviation from the desired state, and, finally, the effect, or risk exposure due to the above-mentioned deviations (sawyer, dittenhofer, scheiner, 2003). in addition, it is important to rank the recommendations according to the degree of risk, because it will be a guide to the company management to identify the most important recommendation that needs to be put into practice first. when preparing reports, internal auditors must take into account the report quality in terms of accuracy, objectivity, clarity, conciseness, constructiveness, completeness and timeliness of information. in addition to adequate reporting on the work results, the stakeholders’ trust in the work of internal audit and its effectiveness are significantly increased if internal audit periodically demonstrates its importance and reports on the quality of its work. in this regard, valencia (2012) points out some of the methods that internal audit can apply: (1) reporting on the annual number of hours spent auditing in relation to the total number of working hours, including hours spent on training, administrative tasks, and the like, (2) reporting on the quality of work, which can be expressed by the number of management’s requests for internal audit, the time needed to respond to these requests, and the like, (3) reporting on the skills of internal auditors that can be expressed by the average number of years of experience, number of certified internal auditors, and the like, (4) reporting on the number of recommendations that produced financial benefits: cost savings, cost reduction, and the like. 364 t. đukić, m. đorđević conclusion there is no doubt that through its dual role, which is reflected in the provision of assurance and advisory services, as well as through a systematic and disciplined approach to evaluating and improving the effectiveness of risk, control, and process management, internal audit provides a great contribution to the company in achieving its goals. however, the establishment of internal audit function, in terms of assigning responsibility and power to internal auditors, is no guarantee that it will achieve its goals. issues that have to be addressed specifically are aimed at ensuring the effectiveness of internal audit, as the basic prerequisite of meeting increasing number of expectations that have been placed before this function. the prerequisite of ensuring the effectiveness of internal audit is the establishment of adequate approach to its measurement. this issue has been discussed by a number of theorists and practitioners, which caused the development and application of different methods – both qualitative and quantitative. each of these methods, whether qualitative or quantitative, has certain limitations, which is why practice suggests their combined use. moreover, practice applies different measures of effectiveness of internal audit. specifically, output measures, related to the satisfaction of the management with internal audit, the percentage of implemented recommendations of internal audit, and the like, are considered to be the ones that best reflect the achievement of the goals of modern internal audit. furthermore, an essential prerequisite for ensuring the effectiveness of internal audit relates to the identification of the factors that determine the degree to which internal audit contributes to the improvement of company management and the achievement of its strategic goals. among the factors with the greatest impact, the following are identified: competence of internal auditors, i.e. internal auditors’ experience, membership in professional organisations, possession of certificates, and the like; independence and objectivity of internal audit, i.e. internal auditors’ cooperation with stakeholders, reporting lines, and the like; internal audit planning, i.e. harmonisation of internal audit plans with the strategic goals of the company and the needs of stakeholders, and approaches to internal audit reporting, i.e. quality, timeliness, and structure of reports. the strength of the impact of these factors on the effectiveness of internal audit causes their continuous review and improvement. references 1. aksoy, t., bozkus, s., (2012), establishment of effective internal audit function: recommendations for best practice, journal of modern accounting and auditing, vol.8, no 9: 1283-1290 2. arena, m., azzone, g. (2009), identifying organizational drivers of internal audit effetctiveness, international journal of auditing, no.13: 43-60 3. bailey, j., (2010), core competencies for today’s internal auditors, the iia’s global internal audit survey, a component of cbok study 4. belay, z., (2007), a study on effective implementation of internal audit function to promote good governance in the public sector, paper presented on “the achievements, challenges, and prospects of the civil service reform program implementation in ethiopia” conference 5. cecere, m., nadeau, y., (2013), planning, a must, ca magazin, january/february 2013: 40-41 6. cox, a., how can internal audit report effectively to its stakeholders?, qfinance, available at: http://www.financepractitioner.com/contentfiles/qf01/g6nqgqq7/1k/0/how-can-internal-audit-reporteffectively-to-its-stakeholders.pdf, (20.10.2014) 7. daničić d., janić m., (2012) „studija rizika u radu odjeljenja interne revizije“, financing 03/12: 51-63 8. developing the internal audit strategic plan, (2012), institute of internal auditors, florida http://www.financepractitioner.com/contentfiles/qf01/g6nqgqq7/1k/0/how-can-internal-audit-report-effectively-to-its-stakeholders.pdf http://www.financepractitioner.com/contentfiles/qf01/g6nqgqq7/1k/0/how-can-internal-audit-report-effectively-to-its-stakeholders.pdf needs and specifics of ensuring effective internal audit 365 9. gansberghe, v., (2005), internal auditing in the public sector: a consultative forum in nairobi, kenya, shores up best practices for government audit professionals in developing nations’, internal auditor, 62, 4: 69-73 10. institute of internal auditors, (2010), measuring internal audit effectiveness and efficiency, ippf practice guide 11. kamau, c., nduati, s., mutiso, a., (2014), exploring internal auditor independence motivators: kenyan perspective, international journal of economics, finance and management sciences, vol. 2, no. 2: 132137 12. kapoor, g., brozzetti, m., (2012), 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sarens, g., (2009), internal audit research: where are we going, editorial, international journal of auditing , no 13: 1-7 19. sawyer, l., dittenhofer, m., scheiner, j., (2003), sawyer’s internal audit, the institute of internal auditors 20. soh, d., martinov-bennie, (2011), the internal audit function: perceptions of internal audit roles, effectiveness and evaluation, managerial auditing journal, vol. 26 iss: 7: 605 – 622 21. stewart, j., subramaniam, n., (2010), internal audit independence and objectivity: emerging research opportunities, managerial auditing journal, vol. 25 no. 4: 328-360 22. the institute of internal auditors, www.theiia.org (18.10.2014.) 23. valencia, c., (2012), five tips: how to measure the value of your internal audit department, audit&risk, chartered institute of internal auditors 24. ziegenfuss, d., (2000), measuring performance, internal auditor, vol. 57, issue 1: 36-40. potreba i specifičnosti obezbeđivanja efektivnosti interne revizije u savremenim uslovima poslovanja interna revizija poseduje značajne potencijale za kreiranje dodate vrednosti za preduzeće i unapređenje njegovog poslovanja. mera u kojoj će interna revizija realizovati svoje ciljeve prvenstveno je uslovljena nivoom njene efektivnosti. u tom smislu, autori se u radu, pored isticanja značaja interne revizije za ostvarenje strateških ciljeva preduzeća, posebno bave specifičnostima obezbeđivanja njene efektivnosti. te specifičnosti se odnose kako na pitanje merenja efektivnosti interne revizije, tako i na identifikovanje i analizu faktora koji u najvećoj meri determinišu ostvareni nivo efektivnosti interne revizije. ključne reči: interna revizija, efektivnost interne revizije, mere efektivnosti, faktori efektivnosti. http://www.theiia.org/ facta universitatis series: economics and organization vol. 18, no 5, 2021, pp. 407 420 https://doi.org/10.22190/fueo210718029r © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper new methodology to study contagion between western and emerging europe: a switching copula approach1 udc 336.7 deyan radev sofia university "st. kliment ohridski", faculty of economics and business administration, sofia, bulgaria orcid id: deyan radev https://orcid.org/0000-0002-0445-0397 abstract. this paper adapts and extends switching copula models to investigate whether financial contagion occurred between western stock markets and their central and eastern european counterparts during the global financial crisis. our methodology focuses on tail dependence as a direct measure of codependence in crisis times and we apply it to two bespoke indices that cover the biggest central and eastern european stock markets. we find an overall increase in dependence between western europe and the transition region during the great recession. however, adding the turkish stock market to our cee regional indices reduces the duration of the impact of the crisis. these results suggest that the transition economies remain a valuable diversification source during periods of crisis. key words: contagion, international financial markets, financial integration jel classification: c32, f36, g15 1. introduction in the two decades prior to 2008, the transition region of central and eastern europe (cee) saw a steady economic growth due to the financial integration with western europe (friedrich et al. 2013; haselmann et al. 2009). however, the sharp decline of the stock markets of these countries during the global recession following the lehman brothers’ collapse raised the question whether in addition to their superior returns in economic received july 18, 2021 / revised november 21, 2021 / accepted november 23, 2021 corresponding author: deyan radev sofia university "st. kliment ohridski", faculty of economics and business administration, 125 tsarigradsko shose blvd., bl.3, 1113 sofia, bulgaria | e-mail: d.radev@feb.uni-sofia.bg https://orcid.org/0000-0002-0445-0397 mailto:d.radev@feb.uni-sofia.bg 408 d. radev upturns, they are a viable source of diversification in times of a turmoil. therefore, the current paper investigates whether the financial markets in the cee region became more interdependent with western european (we) markets during the crisis, which may cast doubt on the region’s diversification potential. we focus on the period from the beginning of 2007 to the beginning of 2010 and examine the stock markets of nine transition economies: bulgaria, croatia, hungary, the czech republic, estonia, poland, romania, slovenia and turkey, and one general western european index, the stoxx600. in our approach, we use an increase in the volatility in the western european index as a potential trigger of financial contagion from we to cee. our methodology derives from the latest advancements in the literature on measuring financial contagion. in the last two decades, the discussion on contagion departed from the assumption of linearity, imposed by the definition of the pearson correlation coefficient, and recognized the importance of tail events in gathering a finer grasp of the stock market fluctuations. this is intuitive, since a crisis is a tail event itself. thus, extreme value theory and markov switching models are becoming increasingly important in analyzing the phenomenon of contagion (see longin & solnik 2001; and hartmann et al. 2004, for the former approach, and ramchard & susmel 1998; ang & bekaert 2002; and rodriguez 2007, for the latter). when we consider dependence, a natural concept that comes to mind is the copula, that is, the pure dependence structure between individual markets. therefore, to gauge financial contagion, we apply switching mixture copula models that capture the influence of different variance regimes, following the approach of rodriguez (2007). using this methodology, rodriguez (2007) manages to identify not only differences in the level (the magnitude of the copula parameters), but also in the structure (the specific proportion of each copula in the copula mixture) of dependence between periods of low and high volatility. the most important benefit of the copula approach is that it provides direct estimates of tail dependence, i.e., the probability that two markets are simultaneously in extreme good or bad states. this concept allows us to test our predictions with regard to the behaviour of stock markets during crisis episodes. to exemplify the usefulness of our approach, we examine the dependence patterns between we and the overall cee region. to this end, we construct a central and eastern european index (ceei) as a weighted average of the stock market indices of the nine transition economies in our sample. this should help us to distinguish any asymmetric responses at the regional level. our results show the following: first, we generally confirm the existence of contagion of the type proposed by forbes & rigobon (2002) in a broad sense – the regional dependence does increase at the time of the peaks of the crisis in the western markets. as far as the second hypothesis is concerned – whether markets tend to comove to a higher extent during downturns than during upturns, at the regional level, we witness a balanced dependence structure, with a fairly symmetric level of dependence in both tails. we have several contributions to the existing financial contagion literature. first, we are among the few to apply copula theory to study the contagion between central and eastern europe and western europe during the subprime crisis, with an explicit focus on tail dependence. second, the use of markov chain models like swarch allows us to endogenize crisis periods, instead of setting arbitrarily fixed dates like previous studies. third, we extend the switching copula methodology to allow us to make not only qualitative, but also quantitative statements about the form of dependence, and thus – to gain more intuition about the level of interdependence between we and cee markets during the subprime crisis. new methodology to study contagion between western and emerging europe: a switching copula 409 this paper is organized as follows: section 2 places the current work within the existing literature regarding contagion and the dependence between the financial markets of we and cee. in section 3, we introduce our switching copula methodology, outline its properties and provide guidelines on how our results should be interpreted. section 4 discusses our dataset and empirical strategy, while section 5 presents our empirical results. section 6 summarizes our results, and discusses possible policy implications and venues for further research. 2. literature review the debate on the issue of contagion in stock markets gained momentum after the ‘peso’ and russian crises in the 90s. this notion is usually discussed in the context of the findings of longin & solnik (2001), who observe a rise in dependence in bear, but not in bull markets. forbes & rigobon (2002) define financial contagion as a substantial rise in market interlinkages after an adverse event in a particular market or region. while the early empirical evidence confirms the rise of correlation during stock market crashes (see bertero & mayer 1990; and king & wadhwani 1990, for the ‘crash of 1987’), boyer et al. (1999) and forbes & rigobon (2002) did not find structural breaks in correlation once they accounted for conditional heteroskedasticity. in the early research activity with regard to the stock markets of the transition economies, authors usually prefer to use vector autoregressive models to detect any cointegration relationships between cee and we and do not explicitly concentrate on extreme-event comovement and contagion during crisis periods (see, e.g., horváth & petrovski 2012, egert & kočenda 2011; tilfani et al. 2019; and beck & stanek 2019). more recently, researchers have started to apply var methods to study contagion in cee more generally and financial contagion in particular. baruník & vácha (2013) use wavelet theory to address some deficiencies in standard var methods applied to time series and find that contagion within the cee region, measured by conditional correlation, has dropped during the global financial crisis. not focusing on any specific crisis period, baele et al. (2015) document significant heterogeneity in stock markets development in the region since 1990 and that smaller and less liquid markets offer high diversification benefits. the authors also find significant premiums in investing in low-volatility markets. horváth et al. (2018) apply var models and quantile regressions to measure financial contagion as defined by forbes and rigobon (2002) and find evidence that general dependence between we and cee stock markets increases during crises. however, using their methodology, they are not able to generate exact estimates of tail dependence and set the crisis period exogenously, in contrast to our markov-chains-based approach that defines crisis periods endogenously. using dcc-garch model, csiki & kiss (2018) find evidence for increased correlation between poland, hungary and the czech republic with the usa and germany. moagăr-poladian et al. (2019), niţoi & pochea (2019) and grabowski (2019) find similar results using a garch-midas approach. overall, these studies suffer from the shortcoming of the earlier literature: they focus on general linear correlation (albeit sometimes in the tails), rather than on tail dependence (which is a probability concept), do not assess how symmetric the market response is in good and bad times and in both tails of the distribution, and define the crisis periods exogenously. to our knowledge, only a couple of recent studies, reboredo et al. (2015) and mohti et al. (2018), apply copulas to study financial contagion in the cee region and are therefore the most closely related articles to our paper. reboredo et al. (2015) use dynamic student-t, 410 d. radev gaussian, clayton and gumbel copulas to find the best fit to the data and document that dependence among cee markets increases during crises and that it is mostly symmetric within the geographic region. in contrast to that study, we focus on tail dependence between cee and we and find that the dependence is symmetric at the region-region level. mohti et al. (2018) analyze financial contagion between the usa and a number of emerging markets in asia, south america and cee and find an increase in dependence during the global financial crisis for cee. these two studies suffer from the pitfalls of most other studies that apply copulas to study financial contagion: first, they horse-race a large number of copulas with different characteristics and properties and look for the one with the best fit with the data. this leads to interpreting the parameters of the ‘winning’ copula, which do not always represent tail dependence directly. instead, in our case, we use a flexible mixture copula with parameters that exactly measure lower and upper tail dependence. second, they set the crises periods exogenously and arbitrarily. our swarch approach allows us to endogenously identify periods with high volatility in stock markets. both these features of our approach yield superior modelling and intuitive interpretation of our results. in a more general context, in terms of sophistication of the copula approach, our study shares common features with the approach of johansson (2011) (aside from the obvious similarities with rodriguez 2007 that we compared with in the introduction). johansson (2011) models the asymmetry in the volatility of east asian and we stock markets using an egarch model and estimates the upper and lower tail dependence using a symmetrized joe-clayton (sjc) copula. the author documents increased volatility in the beginning of the crisis and the period around the bankruptcy of lehman brothers, but assigns the starting dates and the lengths of those periods exogenously, while we endogenize them. a second differentiation is that the copula function that johansson (2011) uses is time-varying, which allows the author to capture the time path of the tail dependence, while we assume a constant dependence structure that may be different in each of the volatility states that we model. the implementation of a time-varying approach has it pitfalls, as the results are sensitive to the choice of lags and length of the rolling estimation window in the time-variation-forcing mechanism. also, although the author documents shifts in tail dependence in western europe and asia during periods of high volatility, he does not analyze different volatility regimes that might lead to a structural break in the tail dependence. fourth, the author does not differentiate between lower and upper tail dependence, while this differentiation is crucial for the current analysis, since it allows us to analyze any potential asymmetric dependencies between the we and cee regions. finally, while johansson (2011) examines the within-regional tail dependence of the we and asian stock markets, we focus on cross-regional tail dependence, since our aim is to investigate contagion patterns between we and cee regions. 3. methodology our procedure entails using publicly available data to model the marginal distributions of the investigated markets as a first step. we start by creating a central and eastern european index (ceei) to analyze the behavior of the region as a whole. following hamilton and susmel (1994) and rodriguez (2007), we use a switching arch (swarch) model to describe the marginal behaviour of each stock market. as a second step, we use the results from the swarch estimation to model the joint behaviour between the cee countries and western europe using copula models. we extend the approach of rodriguez (2007) by introducing a switching parameter version of new methodology to study contagion between western and emerging europe: a switching copula 411 a specific copula, the symmetrized joe-clayton copula, developed by patton (2006). using a single copula, we avoid the non-nestedness of the structures derived from general copula mixtures, which allows us to compare the results across different markets. the symmetrized joe-clayton copula is flexible enough to capture differences in both the level and the structure of dependence. most importantly, this copula’s parameters are consistent tail dependence estimates, that is, estimates of the probability of the markets to simultaneously be in extreme good or bad states. 3.1. switching arch model (hamilton and susmel 1994) we estimate the characteristics of the marginal distributions of the time series using an ar(p)-swarch(k,q) model (hamilton and susmel 1994). to this end, we assume that the conditional mean follows a regime-dependent process: 𝑦𝑡 = 𝜇𝑠𝑡 + �̃�𝑡 , (1) with 𝜇𝑠𝑡 being the mean in the states s = 1, 2, ..., k at the respective time t. �̃�𝑡 is governed by a zero-mean pth-order autoregressive process, �̃�𝑡 = 𝜙1�̃�𝑡−1 + 𝜙2�̃�𝑡−2 + ⋯ + 𝜙𝑝�̃�𝑡−𝑝 + 𝑢𝑡 . (2) furthermore, we model the error term as: 𝑢𝑡 = √𝑔𝑠𝑡 ⋅ �̃�𝑡 , (3) with �̃�𝑡 following an arch(q) process: �̃�𝑡 = ℎ𝑡 ⋅ 𝜈𝑡 , (4) where 𝜈𝑡 is an i.i.d. sequence with a mean equal to zero and a variance equal to one. also, ℎ𝑡 follows ℎ𝑡 2 = 𝑎0 + 𝑎1�̃�𝑡−1 2 + 𝑎2�̃�𝑡−2 2 + ⋯ + 𝑎𝑞 �̃�𝑡−𝑞 2 . (5) the changes in the regimes are captured via changes in the level of the variance process in each state (represented by 𝑔𝑠𝑡 ). a markov chain of the following form describes the latent variable: 𝑃 = [ 𝑝11 𝑝21 ⋯ 𝑝𝑘1 𝑝12 𝑝22 ⋯ 𝑝𝑘2 … ⋯ ⋯ ⋯ 𝑝1𝑘 𝑝2𝑘 ⋯ 𝑝𝑘𝑘 ], with pro b(𝑠𝑡 = 𝑗 ∣ 𝑠𝑡−1 = 𝑖) = 𝑝𝑖𝑗 , 𝑖, 𝑗 = 1,2, … , 𝐾, and where the sum of every column is 1. we choose to model the stock market returns using an ar(1)-swarch (2,1) model, which yields parsimonious results and secures convergence. the residuals 𝜈𝑡 are student tdistributed. 3.2. copulas and tail dependence using copula theory (sklar 1954; cherubini et al. 2004), we define tail dependence as 𝜏 𝑈 = 𝑙𝑖𝑚 𝑞→1  𝑃 𝑟[𝑈1 > 𝑞 ∣ 𝑈2 > 𝑞] = 𝑙𝑖𝑚 𝑞→1  (1 − 2𝑞 − 𝐶(𝑞, 𝑞))/(1 − 𝑞), (10) 412 d. radev and 𝜏 𝐿 = 𝑙𝑖𝑚 𝑞→0  𝑃 𝑟[𝑈1 < 𝑞 ∣ 𝑈2 < 𝑞] = 𝑙𝑖𝑚 𝑞→0  𝐶(𝑞, 𝑞)/𝑞, (11) with 𝜏 𝑈 and 𝜏 𝐿 being estimates of, respectively, upper and lower tail dependence. 𝑈1 and 𝑈2 are uniform integral transforms of processes 𝑋𝑡 and 𝑌𝑡 , 𝑈1 = 𝐹1(𝑋𝑡 ) and 𝑈2 = 𝐹2(𝑌𝑡 ), and 𝑋𝑡 = 𝐹1 −1(𝑈1 ) and 𝑌𝑡 = 𝐹2 −1(𝑈2); q is the quantile of an univariate distribution and 𝐶(𝑞, 𝑞) is a bivariate copula (sklar 1954). the dependence structure can be estimated using many different copulas, which are then usually ranked with the akaike information criterion (aic) to find the best fit. this widely spread approach is problematic because of the non-nestedness of the different copula families. therefore, the tail dependence estimates are not comparable across copulas. we solve this problem by using a flexible mixed copula, the symmetrized joeclayton copula (sjc copula; patton 2006). the sjc copula can capture any type of asymmetry in the tail dependence between markets, including the case of independence. another valuable feature is that, in contrast to most other copulas, where a transformation of the copula parameters is needed to arrive at tail dependence estimate, the parameters of the sjc copula themselves are consistent estimates of 𝜏 𝑈 and 𝜏 𝐿 . our innovation to the approach is that the parameters change with the state of volatility between markets. the standard joe-clayton copula (jc copula; patton 2006) takes the following form: 𝐶𝐽𝐶 (𝑢, 𝑣 ∣ 𝜏 𝑈 , 𝜏 𝐿 ) = 1 − (1 − {[1 − (1 − 𝑢)𝜅 ]−𝛾 + [1 − (1 − 𝑣)𝜅 ]−𝛾 − 1}−1/𝛾 ) 1/𝜅 , (12) where 𝜅 = 1/ log2(2 − 𝜏 𝑈 ), and 𝛾 = −1/ log2(𝜏 𝐿 ). the standard jc copula possesses intrinsic asymmetry even with equal upper and lower tail dependence, hence patton (2006) introduces the sjc as: 𝐶𝑆𝐽𝐶 (𝑢, 𝑣 ∣ 𝜏 𝑈 , 𝜏 𝐿 ) = 0.5 (𝐶𝐽𝐶 (𝑢, 𝑣 ∣ 𝜏 𝑈 , 𝜏 𝐿 )) +0.5(𝐶𝐽𝐶 (1 − 𝑢, 1 − 𝑣 ∣ 𝜏 𝑈 , 𝜏 𝐿 ) + 𝑢 + 𝑣 − 1), (13) with 𝐶𝐽𝐶 (1 − 𝑢, 1 − 𝑣 ∣ 𝜏 𝑈 , 𝜏 𝐿 ) + 𝑢 + 𝑣 − 1 being the survival jc copula. 3.3. switching copulas next, we introduce the mechanism of work of the switching copula for the bivariate case. following ramchard and susmel (1998) and rodriguez (2007), we assume that one of the markets, the we market, is the source of change in volatility and tail dependence. in a two-market setting, there are four states in the markov switching model. as an example, the states of volatility for we and poland at time t are as follows: st = 1: poland – low variance; western europe – low variance. st = 2: poland – high variance; western europe – low variance. st = 3: poland – low variance; western europe – high variance. st = 4: poland – high variance; western europe. – high variance. the elements of the transition matrix p are of the following form: pro b(𝑠𝑡 = 𝑗 ∣ 𝑠𝑡−1 = 𝑖) = 𝑝𝑖𝑗 . according to hamilton and gang (1996), due to its flexibility, such structure can accommodate different relationships between the univariate variance states. in case that, for instance, there is independence between poland and we, each bivariate transitional probability, for instance 𝑝24, could be constructed as the product of the respective univariate probabilities. that is, 𝑝24 = 𝑝12 𝑊𝐸 ⋅ 𝑝22 𝑃𝐿 . new methodology to study contagion between western and emerging europe: a switching copula 413 previous research has shown that the great recession affected cee markets through their links with we (see, for instance, dabrowski 2009 and gardo and martin 2010). therefore, we set the copula parameters to change only when there is a switch from low to high volatility in the we market. hence, tail dependence in states 1 and 2, and in states 3 and 4, respectively. rodriguez (2007) explains that all parameters in the switching model, including these of the sjc copula change jointly when there is a switch in the states of volatility. therefore, we cannot separate the estimation of the marginal distribution and the copula in two steps, as usually done in previous research. the likelihood function then takes the following form: 𝑞𝑡 (𝑥𝑡 , 𝑦𝑡 ∣ 𝐼𝑡−1; 𝛩) = ∑  𝑠𝑡 ∑  𝑠𝑡−1 𝑓𝑡 (𝑥𝑡 ∣ 𝑠𝑡 , 𝑠𝑡−1, 𝐼𝑡−1; 𝛩) × 𝑔𝑡 (𝑦𝑡 ∣ 𝑠𝑡 , 𝑠𝑡−1, 𝐼𝑡−1; 𝛩) × 𝑐 𝑆𝐽𝐶 (𝑢𝑡 , 𝑣𝑡 ∣ 𝑠𝑡 , 𝑠𝑡−1, 𝐼𝑡−1; 𝛩) × 𝑃(𝑠𝑡 , 𝑠𝑡−1 ∣ 𝐼𝑡−1; 𝛩), (14) with 𝑃(𝑠𝑡 , 𝑠𝑡−1 ∣ 𝐼𝑡−1; θ) being the probability of each state at time t given the information set up to t-1; 𝑐 𝑆𝐽𝐶 , f and g are, respectively, the densities of the copula and the marginals. θ represents the set of parameters, and 𝑢𝑡 = 𝐹𝑥 (𝑥𝑡 ∣ 𝑠𝑡 , 𝑠𝑡−1, 𝐼𝑡−1; θ) and 𝑣𝑡 = 𝐹𝑦(𝑦𝑡 ∣ 𝑠𝑡 , 𝑠𝑡−1, 𝐼𝑡−1; θ) are the univariate conditional cumulative distribution functions. then, the maximum likelihood function is represented by the following expression: 𝐿(𝛩) = ∑  𝑇𝑡=1 𝑙𝑜 𝑔[𝑞(𝑥𝑡 , 𝑦𝑡 ∣ 𝐼𝑡−1, 𝛩)] (15) in our exposition, we prefer to report the smoothed probabilities 𝑃(𝑠𝑡 ∣ 𝐼𝑇 ; θ), instead of the filter probability 𝑃(𝑠𝑡 , 𝑠𝑡−1 ∣ 𝐼𝑡−1; θ). the smoothed probabilities take into account the information set of the complete sample. for the univariate series, there are two probabilities – for low and high volatility state, respectively, and for the bivariate case, we arrive at four series for the smoothed probabilities. 4. data 4.1. country and regional data our dataset consists of ten stock price indices, downloaded from datastream. the sample period extends from 03.01.2007 to 09.02.2010. we consider 9 cee markets, which, ordered alphabetically, are: bulgaria, croatia, the czech republic, estonia, hungary, poland, romania, slovenia and turkey. the dynamics of we markets is proxied by stoxx600. every data series consists of 810 observations at a daily frequency. to arrive at tail dependence at the regional level, we introduce 2 variants of our cee index (ceei): ceei includes the member countries of the european union at the time of the great recession, while ceei2 adds croatia and turkey. 4.2. descriptive statistics in table 1, we show the market capitalizations of the cee countries in our analysis, as well as the weights of each market in the respective ceei indices. the captured regional market size increases from €260 billion in ceei, to €405 billion in ceei2. in table 2, we show additional distributional descriptive statistics of the daily logarithmic returns of both indices. for both indices, we observe average returns below zero, left skewness, and, overall, the normality of the series is rejected (see the jarque-bera test statistic). these 414 d. radev observations confirm the fat tails of both series and provide support for our choice to use student t-distribution for the swarch model. table 1 summarizes the market capitalizations (row “m. cap.”, in millions of euro) of the stock markets of the cee countries in our sample in the end of 2006. also listed are the weights of each country in the respective ceei and ceei2 index (rows “weights ceei” and “weights ceei2”). table 1 central and eastern european indices: market capitalizations and weights table 2 presents descriptive statistics for the ceei indices. ceei includes bulgaria, czech republic, estonia, hungary, poland, romania and slovenia. ceei2 adds croatia and turkey. time period: 03.01.2007 to 09.02.2010. table 2 descriptive statistics: central and eastern european indices index ceei ceei2 mean -0.0451 -0.0162 st. dev. 1.5304 1.5667 min -9.3839 -8.9880 max 7.3266 8.7151 skewness -0.4016 -0.2666 kurtosis 4.7169 4.1675 jarque-bera 771.7342 595.0321 observations 809 809 5. empirical results 5.1. univariate results in table 3, we present the results for the marginals estimation for ceei and ceei2. both series have a positive autoregressive component. however, only ceei has significant arch effects. the parameter g, which represents the average difference in volatility between the two states is the same for both series, at 5.19 times. table 3 presents the univariate results from running a switching arch model on the logreturns of our index series. we use a model with one lag for the autoregressive part and arch parts and two volatility states (hence, we use a ar(1)-swarch(2,1) model). time period: 03.01.2007 to 09.02.2010. indices: as shown in the table. standard errors in parentheses. statistical significance at the 1, 5 and 10 percent levels is denoted by ***, **, and *, respectively. country bulgaria czech republic estonia hungary poland romania market cap 14802 57835 9797 31689 112831 21527 weights ceei 0.0569 0.2224 0.0377 0.1219 0.4340 0.0828 weights ceei2 0.0365 0.1427 0.0242 0.0782 0.2785 0.0531 country slovenia croatia turkey total: market cap 11514 22006 123163 m. cap. weights weights ceei 0.0443 259994.3423 1.0000 weights ceei2 0.0284 0.0543 0.3040 405163.8072 1.0000 new methodology to study contagion between western and emerging europe: a switching copula 415 table 3 univariate index results, swarch model markets ceei ceei2 c 0.0130 0.0554 (0.0378) (0.0430) ar(1) 0.1218*** 0.0828** (0.0379) (0.0376) k 0.7230*** 1.0706*** (0.1287) (0.1692) arch(1) 0.0796* 0.0229 (0.0435) (0.0467) g 5.1893*** 5.1852*** (0.8192) (0.8699) dof 7.5722*** 10.0821*** (2.3573) (3.5362) log lik 1346.5766 1393.2723 in figure 1, we show the results for the smoothed probabilities of the high-volatility state for the markets in our sample for our ceei indices. we observe that we is in the high volatility state for a shorter period of time than cee during the peaks of the financial crisis, especially around the collapse of lehman brothers in september 2008. adding turkey in ceei2 reduces the volatility of the index, most notably in the period after may 2009. this figure shows unequivocally that cee markets enter periods of instability in response to increases in uncertainty on we markets. figure 1 presents the smoothed probabilities that the stock index in question (stoxx600, ceei or ceei2) is in high volatility state (this probability is denoted by “pr. h state”). for interpretation of the figure, see figure 1 or the text. stoxx600 is included for the sake of comparison. time period: 03.01.2007 to 09.02.2010. indices: as shown in the figure. fig. 1 univariate case: smoothed probabilities, high volatility state 416 d. radev 5.2. bivariate results figures 2 and 3 present the bivariate smoothed probabilities. the top subplot depicts the probability that both markets are jointly in a state of low volatility. in the second subplot, the we market is in the calm state and the respective cee index is in a state of high volatility. the lower two subplots present he cases where we is in turmoil and cee is in the calm and highly volatile state, respectively. we observe that in both figures, in state 4, the dynamics matches the results for the univariate smoothed probabilities of we in figure 1. this means that when we is in a turmoil, both versions of the cee index are in a state of high volatility, once again supporting our assumption that a crisis in we markets starts before a crisis on cee markets. supporting the last point, on both graphs, we notice a small peak around lehman brothers’ bankruptcy in september 2008 for state 3. this indicates that we enters the high volatility state first, and a few days later it is joined by the transition region (evident by the huge and prolonged peak in state 4 where both markets are in high volatility state). even if this is not a direct proof that the crisis in the latter region was caused by the turmoil in the western markets, we at least find evidence that the crisis in cee was preceded by the crisis in we (hence suggesting granger causality). figure 2 presents the smoothed probabilities that the bivariate couple stoxx600 – ceei is in any of the four states described in section 4.3. the top subplot depicts the probability that both markets are jointly in a state of low volatility. in the second subplot, the we market is in the calm state and the respective cee index is in a state of high volatility. the lower two subplots present the cases where we is in turmoil and cee is in the calm and highly volatile state, respectively. we assume that the dependence structure changes only when we shifts from low to high volatility state (for example, from states 1 or 2 to states 3 or 4; see section3.3.). time period: 03.01.2007 to 09.02.2010. fig. 2 bivariate case: we – ceei new methodology to study contagion between western and emerging europe: a switching copula 417 comparing figures 2 and 3, we notice that the probability of both we and cee regions to be in low volatility state (state 1) is much higher for ceei2 than for ceei after the first quarter of 2009. as turkey is the bigger of both countries added in the broader index, our results suggest that through its diversified economy, this country improves the stability and resilience of the region to external shocks. figure 3 presents the smoothed probabilities that the bivariate couple stoxx600 – ceei2 is in any of the four states described in section 4.3. the top subplot depicts the probability that both markets are jointly in a state of low volatility. in the second subplot, the we market is in the calm state and the respective cee index is in a state of high volatility. the lower two subplots present the cases where we is in turmoil and cee is in the calm and highly volatile state, respectively. we assume that the dependence structure changes only when we shifts from low to high volatility state (for example, from states 1 or 2 to states 3 or 4; see section 3.3.). time period: 03.01.2007 to 09.02.2010. fig. 3 bivariate case: we – ceei2 turning to the analysis of tail dependence between we and cee. the main hypothesis that we test is whether tail dependence increases during turmoils. to this end, we turn our attention to the tail dependence estimates as represented by the coefficients of the switching copula. table 4 summarizes our estimates of upper and lower tail dependence, τu and τl. we notice that all tail dependence coefficients are statistically significant at the 1% level. when we compare upper and lower tail dependence in low and high volatility states, we observe that the dependence structure becomes more symmetric in crisis times (that is, during high volatility periods). the asymmetry in tranquil times is more noticeable for the wider index, where we witness lower upper and higher lower tail dependence, compared to the respective estimates for ceei. we 418 d. radev also notice that for both indices the lower tail dependence increases substantially in high volatility times (37.5 and 24.6 percent for ceei and ceei2, respectively). table 4 presents the tail dependence estimates of a switching symmetrized joe-clayton (sjc) copula between western europe (we) and the two ceei indices, as well as their relative change (in %) when we is in low and high volatility states, respectively. the bottom two rows present the ratios between lower and upper tail dependence in the low and high volatility states. time period: 03.01.2007 to 09.02.2010. indices: as shown in the table. standard errors for the individual tail dependence coefficients in parentheses. statistical significance at the 1, 5 and 10 percent levels is denoted by ***, **, and *, respectively. table 4 tail dependence results: ceei and ceei2 markets ceei ceei2 τu(we low) 0.4023*** 0.3784*** (0.0593) (0.0675) τu(we high) 0.6307*** 0.6503*** (0.0284) (0.0266) τl(we low) 0.4892*** 0.5436*** (0.0447) (0.0415) τl(we high) 0.6724*** 0.6773*** (0.0228) (0.0235) log lik 3872.1934 3889.3090 these results suggest that a shift in dependence between cee and we did occur when western markets entered high volatility states. however, although we observe an asymmetric dependence structure between the regions when we markets are in low-volatility state, we do not confirm its existence during high-volatility periods. nevertheless, lower tail dependence does increase during a turmoil, confirming our expectations. the overall dependence between the regions is relatively symmetric in such periods, but at a higher level. hence, we find support for the existence of financial contagion (as defined by forbes & rigobon 2002) at the regional level. 6. conclusion we introduce an innovative approach to analyze the interactions between the financial markets of we and cee during the great recession. this new approach allows us to investigate changes in both the level and the symmetry of interdependence. our results suggest that dependence, in particular lower tail dependence, has increased during the peaks of the global financial crisis. in general, the two cee indices that we introduce follow the dynamics of their bigger constituents, poland and turkey, and the inclusion of the latter country reduces the duration of the crisis periods in the region. surprisingly, we find that the tail dependence on the we region – cee region level is symmetric during periods of high volatility. however, the level of tail dependence (both upper and lower) of around 0.60 in high volatility states seems exceptionally high and further analysis at the country level is warranted to reveal the interactions between individual markets and the we and whether there is evidence for heterogeneity within the region. new methodology to study contagion between western and emerging europe: a switching copula 419 the outcomes of our study have important implications also 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(2020). revisiting stock market integration in central and eastern european stock markets with a dynamic analysis. post-communist economies, 32(5), 643–674. https://doi.org/10.1080/14631377.2019.1678099 nova metodologija za proučavanje transmisije između zapadne i srednjeistočne evrope: promenljive veze ovaj rad prihvata i proširuje modele promenljivih veza kako bi istražio da li se dogodila finansijska transmisija između zapadnih berzi i njihovih parnjaka u centralnoj i istočnoj evropi tokom globalne finansijske krize. naša metodologija se fokusira na krajnju zavisnost kao direktnu meru ko-zavisnosti u vremenu krize i primenjujemo je na dva indeksa po meri koja pokrivaju najveće centralnoi istočnoevropske berze. nalazimo uopšteno povećanje u zavisnosti između zapadne evrope i tranzicione regije za vreme velike recesije. međutim, dodavanje turske berze u naše cee regionalne indekse smanjuje trajanje usticaja krize. ovi rezultati sugerišu da tranzicione ekonomije ostaju vredni izvori diverzifikacije u kriznm periodima. ključne reči: transmisija, međunarodna finansijska tržišta, finansijska integracija https://doi.org/10.1111/j.1468-2354.2006.00387.x https://doi.org/10.1016/s0927-5398(98)00003-6 https://doi.org/10.1016/j.ecosys.2015.01.002 https://doi.org/10.1016/j.jempfin.2006.07.002 https://doi.org/10.1080/14631377.2019.1678099 facta universitatis series: economics and organization vol. 16, n o 4, 2019, pp. 403 414 https://doi.org/10.22190/fueo1904403j © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper poverty as a heterogeneity factor in eu countries 1 udc 364.662(4-672eu) vesna janković-milić, vinko lepojević, jelena j. stanković university of niš, faculty of economics, niš, serbia abstract. measuring poverty is of utmost importance for any economy in order to look at the extent and causes of the vulnerability of the population, but also to formulate social and economic policy measures and measure their effects. the multidimensionality of poverty makes it difficult to quantify and measure it. the subject of research is the components of the arope (at risk of poverty and social exclusion) indicator in the countries of the european union (eu). using the cluster analysis, the eu countries were grouped into homogeneous units, after which the significance of the difference in the average values of the analyzed indicators was tested. based on the obtained results, the hypothesis of pronounced heterogeneity of eu countries from the aspect of poverty was confirmed. key words: european union, poverty, material deprivation, heterogeneity, cluster analysis. jel classification: i32, c38, c12 1. introduction poverty is one of the critical problems in the modern world. although the number of the poor has more than halved since 1990, the united nations maintain that one fifth of people in developing countries remain poor. that is why, and the fact that poverty threatens achievement in all other areas, ending poverty is a primary goal of the entire agenda. the goals under this objective are to eradicate extreme poverty, reduce to less than half of any form of poverty defined according to national criteria, and strengthen social and financial support for the poor. received july 05, 2019 / revised october 11, 2019 / accepted october 14, 2019 corresponding author: vesna janković-milić university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: vesna.jankovic@eknfak.ni.ac.rs 404 v. janković-milić, v. lepojević, j.j. stanković un member states' development policies will be guided by the 2030 sustainable development goals defined by the un development agenda for 2030 in the coming period. poverty reduction is highlighted as the first goal of sustainable development, which points to the great importance attached to this aspect of development. 2. poverty in european union the rise in the number of people in europe at risk of poverty has initiated one of the major innovations introduced in europe 2020, adopted in 2010, a new common goal in the fight against poverty and social exclusion. the goal includes reducing the number of people living below the national poverty line by 25% and save more than 20 million people out of poverty (https://ec.europa.eu/social). to achieve this, the commission launched the european platform against poverty and social exclusion in 2010 and presented a list of key initiatives such as the evaluation of active inclusion strategies at national level and the white paper on pensions (com:2012:0055:fin:en:pdf). until 2010, the main focus in measuring poverty at eu level was on relative poverty. comparing relative poverty rates between countries does not sufficiently take into account differences in living standards (blanchet et al, 2019). in reality, it is more a measure of inequality. for example, a person who is relatively poor in a rich country usually suffers less material deprivation than a person living in a country where the general standard of living is low. in these countries, poverty may be more extreme, people are more likely to lack the necessary things to live, so survival is more difficult, but the relative poverty rate is lower because the overall standard of living is low, i.e. the difference between the 'poor' and everyone else standard of living is smaller. this can lead to misunderstanding of the extent of poverty and even underestimation of the severity of poverty that some social groups are facing, especially in the new eu member states. the most difficult situation is in those eu countries where the general standard of living is low and at the same time a high relative poverty rate. in order to take into account the different economic situations of different member states, the values of the at-risk-of-poverty line should always be considered in parallel with the indicators of at-risk-of-poverty (boarinni et al, 2006). in the european union, relative poverty is measured using the line of relative income poverty. this indicator involves calculating the average or median national income. typically, poverty lines range between 40% and 70% of household income (milosavljević, 2008). this generates a general at-risk-of-poverty rate, and these values can be further broken down by age, gender, household type and employment status to further clarify which social groups are at highest risk. in this way it is possible to explore the individual situations of specific groups such as children, the elderly, or the unemployed. persons below 60% of the median income in the eu are considered to be at risk of poverty (blanchet et al, 2019). one of the drawbacks of the relative income poverty line is that determining a tipping point is a fairly arbitrary process. it tells us about the proportion of people who are poor, but does not sufficiently take into account other factors that affect their life situations, such as information about how far below the line they are or the duration of their poverty. poverty as a heterogeneity factor in eu countries 405 measuring the at-risk-of-poverty gap can help determine the situation of people below the poverty line, or the extent of poverty. the poverty risk gap measures the distance between the median equivalent income of persons below the at-risk-of-poverty threshold and the value of the at-risk-of-poverty threshold in terms of purchasing power. arope at risk of poverty or social exclusion is an indicator that reflects the multidimensionality of poverty and exclusion within the enlarged eu (martić, 2015). this indicator is defined as the proportion of the population in at least one of the following situations (european comission):  exposure to the risk of poverty (households whose incomes are below the poverty line, i.e. below 60% of the median average national income);  severe material deprivation;  in households with low work intensity. the composite arope indicator only covers part of the picture and does not describe the complexity of poverty. it is important to look at its three components separately. severe material deprivation implies that a household cannot afford at least 4 of the following options (eurostat, 2009):  to bear the unexpected, sudden financial costs;  one week of annual leave outside the place of residence;  one meat meal (red / chicken or fish) or vegetarian equivalent every other day;  adequate home heating;  durable goods, such as washing machine, colour tv, telephone, car;  rent, loan instalments, overhead, which cannot be paid. very low working-intensity households are characterized by households in which the working-age persons have worked less than 20% of their total potential over the previous 12 months. household intensity is the ratio of the total number of months that all household members of working age spent working during the reference year and the total number of months that the same household members could theoretically spend in the same period. a working age person is a person between the ages of 18 and 59, with the exclusion of students in the age group between 18 and 24 years (eurostat, 2009). in addition to those listed, it is important to measure other elements that capture the multidimensional nature of poverty. they include elements such as levels of debt, the extent of ill-health or disadvantage, the number of people living in inappropriate housing or poor environments, and the extent of inability to access public services. 3. dataset and methodology the subject of analysis in this paper is components of arope indicator in eu countries and serbia. the basis for the analysis is eurostat data for 2018. a key hypothesis in the research is that eu countries are very heterogeneous in terms of poverty. in order to confirm this hypothesis, the eu member states were firstly grouped into homogeneous groups by cluster analysis, and then the significance of the difference in the average values of the components of the arope indicators between the formed groups of countries was tested. in addition, for each of the components, the position of the republic of serbia in relation to the eu level was analysed. the at-risk-of-poverty rate is the primary component of the umbrella arope indicator. it is expressed as a percentage of persons at risk of poverty in the total population and by 406 v. janković-milić, v. lepojević, j.j. stanković appropriate categories of sex and age at risk of poverty. the emphasis is placed on the number of persons at risk of poverty after social transfers, wherein the threshold is 60% of the median. in the eu member states, the at-risk-of-poverty rate would be significantly higher than it would be if there were no social transfers. in the most generous and efficient systems, the relative income poverty rate decreases by 50% (in denmark, ireland, luxembourg, austria, finland and sweden) or more, while in the least efficient it decreases by only 20% or less (in bulgaria, greece and italy). poverty risk exposure indicators for the eu and serbia in 2018 are shown in the following table: table 1 at-risk-of-poverty rate in eu countries and serbia country at risk of poverty rate rank within eu deviation from eu average european union 16.9 belgium 16.4 14.5 -0.5 bulgaria 22.0 4.0 5.1 czechia 9.6 28.0 -7.3 denmark 12.7 25.0 -4.2 germany 16.1 16.0 -0.8 estonia 21.9 5.0 5.0 ireland 15.6 18.0 -1.3 greece 18.5 10.0 1.6 spain 21.5 6.0 4.6 france 13.3 22.5 -3.6 croatia 19.4 8.0 2.5 italy 20.3 7.0 3.4 cyprus 15.7 17.0 -1.2 latvia 23.3 2.0 6.4 lithuania 22.9 3.0 6.0 luxembourg 18.7 9.0 1.8 hungary 12.8 24.0 -4.1 malta 16.8 13.0 -0.1 netherlands 13.4 21.0 -3.5 austria 14.3 20.0 -2.6 poland 14.8 19.0 -2.1 portugal 17.3 11.0 0.4 romania 23.5 1.0 6.6 slovenia 13.3 22.5 -3.6 slovakia 12.4 26.0 -4.5 finland 12.0 27.0 -4.9 sweden 16.4 14.5 -0.5 united kingdom 17.0 12.0 0.1 serbia 25.7 8.8 source: http://ec.europa.eu/eurostat/data/database poverty as a heterogeneity factor in eu countries 407 according to the values of the indicator at-risk-of-poverty rate, presented in the table 1, romania has the highest rate within the eu (23.3), while the lowest is in the czech republic (9.6). in serbia, the at-risk-of-poverty rate amounts to 25.7, which is higher compared to all eu countries. at eu level, the at-risk-of-poverty rate amounts to 16.9. compared to this value, 16 member states have a poverty risk rate below this value, while in the remaining 12 countries, the at-risk-of-poverty rate is higher. a graphical representation of deviations from the eu level is shown on the figure 1. fig. 1 at-risk-of-poverty rate deviations from eu level source: forth column from table 1 according to the table 1, and figure 1 also, countries with the at risk of poverty rate below the eu level are: belgium, czech republic, denmark, germany, ireland, france, cyprus, hungary, malta, the netherlands, austria, poland, slovenia, slovakia, finland and sweden. other eu member states, including: bulgaria, estonia, greece, spain, croatia, italy, latvia, lithuania, luxembourg, portugal, romania and the uk, have atrisk-of-poverty rate above eu level. the use of deprivation indicators is another significant approach in measuring relative poverty. they are an attempt to move away from mere monetary, income indicators that take better account of a person's real standard of living. the approach involves identifying goods or activities that are considered essential needs in a particular country. in some countries, the measurement of poverty is based on the combination of the relative income line with indicators of deprivation. at eu level, extreme poverty is estimated using indicator severe material deprivation. this indicator has limitations in terms of the small number of items it includes, as well as the lack of relevance of some of them, so its improvement is constantly being worked on. 408 v. janković-milić, v. lepojević, j.j. stanković table 2 indicator severe material deprivation in eu countries and serbia country severe material deprivation (% of total population) rank within eu deviation from eu level european union 14.5 belgium 10.5 16.5 -4.0 bulgaria 32.9 2.0 18.4 czechia 7.8 23.0 -6.7 denmark 7.2 24.0 -7.3 germany 9.1 20.0 -5.4 estonia 9.9 19.0 -4.6 ireland 14.8 12.0 0.3 greece 33.6 1.0 19.1 spain 13.9 13.0 -0.6 france 11.1 15.0 -3.4 croatia 23.3 5.0 8.8 italy 16.8 9.0 2.3 cyprus 28.6 4.0 14.1 latvia 21.0 7.0 6.5 lithuania 23.1 6.0 8.6 luxembourg 4.4 28.0 -10.1 hungary 19.6 8.0 5.1 malta 8.7 21.0 -5.8 netherlands 6.5 25.0 -8.0 austria 6.3 26.0 -8.2 poland 10.5 16.5 -4.0 portugal 16.6 10.0 2.1 romania 32.2 3.0 17.7 slovenia 10.4 18.0 -4.1 slovakia 16.4 11.0 1.9 finland 8.0 22.0 -6.5 sweden 4.5 27.0 -10.0 united kingdom 12.3 14.0 -2.2 serbia 30.7 16.2 source: http://ec.europa.eu/eurostat/data/database according to the values of the indicators, severe material deprivation, within the eu, the most difficult situation is in greece, where participation is 33.6%, followed by bulgaria (32.9%), while the best situation is in luxembourg (4.4%). analyzing the data for serbia, it can be seen that the participation of the population in the state of severe material deprivation is lower than in greece, bulgaria and romania, as it amounts to 30.7%. graphical representation of the eu countries rankings according to the indicator severe material deprivation for one person is shown in figure 2. http://ec.europa.eu/eurostat/data/database poverty as a heterogeneity factor in eu countries 409 fig. 2 deviation from eu level according to indicator severe material deprivation source: the fourth column from the table 2. as with the at risk of poverty rate, 16 countries are below the eu level in terms of household participation in a severe material deprivation state, while 12 countries are above this level. it is necessary to emphasize that, although the number of countries is the same, their structure differs. countries which have the higher values of this indicator, compared to the eu level, are: bulgaria, ireland, greece, croatia, italy cyprus, latvia, lithuania, hungary, poland, romania and slovakia. according to the eu methodology, very low working-intensity households are households in which working age persons have worked less than 20% of their total potential over the previous 12 months. in the eurostat database the values of this indicator are given for different categories of households (two-member, three-member, and four-member), as well as the total, i.e. average value by country. further research will analyze in detail the average value by country. as can be seen, the highest percentage of people living in very low working intensity households within eu countries is in ireland (16.2) and greece (14.6). the lowest percentage is characteristic of the czech republic, where it stands at 4.5, which is almost four times less than in ireland. it can be concluded that this component of the arope indicator is characterized by a very large dispersion. according to this indicator, the republic of serbia is in a very unenviable position in relation to all eu countries, because the share of households with very low labour intensity is slightly above 20% (20.1%). 410 v. janković-milić, v. lepojević, j.j. stanković table 3 percentage of the population living in very low working intensity households in eu countries and serbia country very low working intensity households rank within eu deviation from eu average european union 9.5 belgium 12.1 3.0 2.6 bulgaria 9 12.5 -0.5 czechia 4.5 28.0 -5 denmark 11.1 6.0 1.6 germany 8.7 14.5 -0.8 estonia 5.2 27.0 -4.3 ireland 16.2 1.0 6.7 greece 14.6 2.0 5.1 spain 10.7 8.0 1.2 france 8.1 16.0 -1.4 croatia 11.2 5.0 1.7 italy 11.3 4.0 1.8 cyprus 9.4 10.0 -0.1 latvia 7.6 17.0 -1.9 lithuania 9 12.5 -0.5 luxembourg 6.9 21.0 -2.6 hungary 5.7 22.0 -3.8 malta 5.5 24.0 -4 netherlands 8.7 14.5 -0.8 austria 7.3 19.0 -2.2 poland 5.6 23.0 -3.9 portugal 7.2 20.0 -2.3 romania 7.4 18.0 -2.1 slovenia 5.4 25.5 -4.1 slovakia 5.4 25.5 -4.1 finland 10.8 7.0 1.3 sweden 9.1 11.0 -0.4 united kingdom 10.1 9.0 0.6 serbia 20.1 10.6 source: http://ec.europa.eu/eurostat/data/database fig. 3 people living in households with very low work intensity – deviation from eu level source: the fourth column from the table 3. poverty as a heterogeneity factor in eu countries 411 although this indicator is characterized by high dispersion, there is a small number of countries with share of households with very low working intensity higher than the eu level (9.5%). more precisely, it is only 9 countries, which can be considered as one third of total membership: belgium, denmark, ireland, greece, spain, croatia, italy, finland and the united kingdom. by observing deviations from the eu level it can be seen that certain eu countries are in a very bad position. namely, the values of all three components of the arope indicator in greece, croatia and italy are above the eu level. the reasons for this position of these countries are numerous. the longstanding crisis and austerity measures in greece have deepened poverty. croatia is characterized by a large heterogeneous spatial distribution of poverty. in italy, the population living in absolute poverty is constantly increasing. 4. results and discussion as part of the statistical analysis of the indicators presented, a correlation analysis was first performed, i.e. the correlation coefficients were calculated. with this measure, the direction and the degree of agreement of the indicators was assessed. as the assumptions for calculating the pearson correlation coefficient are not fulfilled, the spearman`s rho correlation coefficient, as a non-parametric measurement of the interdependence between indicators, has been calculated. all components of the arope indicator are directly correlated. according to this coefficient, the highest interdependence exists between the components at-risk-of-poverty rate and severe material deprivation (r = 0.491, p = 0.008). significantly lower and also insignificant correlation exists between severe material deprivation and low working intensity households (r = 0.277, p = 0.153), as well as between at-risk-of-poverty rate and low working intensity households (r = 0.189, p = 0.336). the analysis of the values of the components of the arope indicators indicates the great heterogeneity of eu countries. to group these into homogeneous entities, a hierarchical cluster analysis was applied (everitt et al, 2011), with a predefined number of clusters (3). ward's method was used as the clustering method and the euclidean distance squared as a similarity measure. the number of countries in the clusters formed is different. there are 8 countries in the first cluster, 7 countries in the second cluster and 13 countries in the third cluster. the structure of the formed cluster is shown in the following table. table 4 cluster membership cluster i cluster ii cluster iii belgium bulgaria czechia ireland greece denmark spain croatia germany italy cyprus estonia hungary latvia france portugal lithuania luxemburg slovakia romania malta united kingdom netherlands austria poland slovenia finland sweden source: authors’ calculation in spss 412 v. janković-milić, v. lepojević, j.j. stanković based on the values of the descriptive measures (table 5), it can be concluded that in the second cluster, average rate of exposure to poverty risk is the highest (20.75), percentage of the population in severe material deprivation is the highest (27.81), while the average percentage of households with very low labour intensity is slightly below the highest average percentage (9.74), which otherwise binds to the first cluster (9.84). the least-poor countries, according to selected indicators, are countries belonging to the third cluster. countries which are classified in the first cluster characterize the highest percentage of households with very low working intensity, a much lower at-risk-of-poverty rate (16.66) and the participation of the population in severe material deprivation (15.11) compared to the countries from the second cluster. as the values of the analyzed indicators in serbia are higher than in the eu countries, it can be assumed that serbia would belong to second cluster. the highest dispersion, according to the indicators at-risk-of-poverty rate and the participation of very low work-intensity households, characterizes the countries belonging to the first cluster. countries belonging to the second cluster, which can be characterized as the "poorest", although there are few, show the highest dispersion according to the value of indicator severe material deprivation. table 5 descriptive statistics indicator cluster mean std. deviation 95% confidence interval for mean min. max. lower bound upper bound at risk of poverty rate 1 16.66 3.19 13.99 19.33 12.4 21.5 2 20.75 2.96 18.02 23.50 15.7 23.5 3 14.87 3.16 12.96 16.78 9.6 21.9 total 16.85 3.86 15.36 18.35 9.6 23.5 severe material deprivation 1 15.11 2.87 12.71 17.51 10.5 19.6 2 27.81 5.30 22.92 32.71 21.0 33.6 3 8.03 2.20 6.70 9.36 4.4 11.1 total 15.00 8.74 11.61 18.39 4.4 33.6 low working intensity households 1 9.84 3.63 6.80 12.87 5.4 16.2 2 9.74 2.48 7.45 12.04 7.4 14.6 3 7.45 2.17 6.14 8.76 4.5 11.1 total 8.71 2.88 7.59 9.82 4.5 16.2 source: authors’ calculation in spss in order to determine the significance of the difference in the average values of the selected indicators, kruskal-wallis test has been applied. the kruskal-wallis test (also called the "one-way anova on ranks") is a rank-based nonparametric test. it is considered the nonparametric alternative to the one-way anova, and an extension of the mannwhitney u test to allow the comparison of more than two independent groups. the characteristics of the clusters formed can also be observed based on the average rank values (table 6). the lowest average rank values for all indicators refer to the third cluster, followed by the first and finally the second cluster. since the testing was conducted at 0.05 significance level, the test results proved a statistically significant difference between the clusters according to the indicators at-risk-of-poverty rate (p = 0.007) and severe material deprivation (p < 0.0001), while in the case of low work intensity this difference was not confirmed. poverty as a heterogeneity factor in eu countries 413 table 6 results of kruskal-wallis test indicator cluster mean rank chi-square df sig. at risk of poverty rate 1 14.19 10.071 2 0.007 2 22.57 3 10.35 severe material deprivation 1 17.31 22.823 2 0.0001 2 25.00 3 7.12 low working intensity households 1 17.44 4.911 2 0.086 2 18.00 3 10.81 source: authors’ calculation in spss 5. conclusion poverty is nowadays most commonly seen as a multidimensional concept, which is also reflected in the overarching official definitions adopted by the european union and the united nations. it is a problem faced by a large number of countries, regardless of their level of economic development. it can also be stated that poverty is a multidimensional phenomenon which, in addition to insufficient income to meet basic living needs, also includes aspects related to human rights, such as: inability to find employment, inadequate housing, inadequate access to social protection, health and utilities, etc. for the purpose of combating poverty and inequality in the eu, the aforementioned europe 2020 strategy has been defined, but numerous pilot projects and programs, various treaties and other acts have been adopted, the directives adopted (racial equality 2000/43 / ec, employment 2000/78 / ec, equal treatment of women and men 2006/54 / ec) and various incentive measures presented. adequate measuring is a very important factor in the process of combating poverty. for this purpose, the complex arope indicator, whose components are analyzed in this paper, has been created. but, this indicator covers only part of the picture and does not describe the complexity of poverty. a statistically significant difference in the average values of the selected indicators is in favour of confirming the key hypothesis in the survey, that is, eu member states are very heterogeneous in terms of poverty. the observed and statistically confirmed differences in the poverty rate of the eu member states suggest that it is very important to regulate this issue at the national, regional and local levels with policies, strategies and other guidelines. acknowledgement: the authors are grateful to the ministry of education, science and technological development of the republic of serbia for the funds and support that made this research possible. references blanchet, t., chancel l. & gethin a. 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(2015). dimenzije i pokazatelji socijalne marginalizacije sa posebnim osvrtom na bosnu i hercegovinu [dimensions and indicators of social marginalization with special reference to bosnia and herzegovina]. gea – centar za istraživanja i studije. milosavljević, m. (2008). siromaštvo u svetu i u srbiji [poverty in the world and in serbia], socijalna misao. 4, beograd. rencher, a. (2002). methods of multivariate analysis, john wiley & sons, usa. world bank (wb), working for a world free of poverty, retrieved from: http://iresearch.worldbank.org/ povcalnet/index.htm?1 accessed on: 04 may 2019. world hunger notes, (2013) world hunger and poverty facts and statistics. retrieved from: http://www.worldhunger. org/articles/learn/world%20hunger%20facts%202002.htm accessed on: 19 may 2019. siromaštvo kao faktor heterogenosti zemalja evropske unije merenje siromaštva je od izuzetnog značaja za bilo koju ekonomiju radi sagledavanja razmera i uzroka ugroženosti stanovništva, ali i radi formulisanja mera socijalne i ekonomske politike i merenja njihovih efekata. multidimenzionalnost siromaštva u velikoj meri otežava njegovu kvantifikaciju i merenje. predment istraživanja u ovom radu su komponente arope (at risk of poverty and social exclusion) indikatora u zemljama evropske unije (eu). primenom klaster analize zemlje evropske unije svrstane su u homogene celine, a nakon 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series: economics and organization vol. 11, n o 4, 2014, pp. 309 317 glass ceiling phenomenon in transition economies the case of south eastern serbia  udc 316.647.82(497.11) danijela stošić, jelena stanković, vesna janković milić, marija radosavljević university of niš, faculty of economics, niš, serbia abstract. the aim of the paper is to test the existence and the height of the glass ceiling for women in south eastern serbia. the research aims to determine the difference in the level of education between employed men and women, the participation of women in managerial positions, as well as the level of management in which they participate equally or participate at all. these issues are analyzed in the context of industry, type of ownership and size of the enterprise. the additional aim of the paper is to make a comparative analysis of business performances of enterprises in which women have a share in managerial positions, compared to the enterprises with an all-male management structure. key words: glass ceiling, discrimination, business performances, south eastern serbia introduction although theoretically conceived in developed economies, the phenomenon of the glass ceiling, that is invisible ceiling through which women can see higher hierarchical positions but cannot reach them [18], was and still is virtually present in the transition countries. the ideology of gender equality was officially the ideology of the former communist system countries, but in practice, the domination of men in the public and in the business sphere was a fact [15]. removing the barriers for women’s career promotion is one of the aspects of reaching gender equality and exploiting the full potential of all members of society. given the persistence of the traditional values in the serbian society [10, p. 1097; 19, p. 46], the assumption is that the women in serbia are in a worse position than the women in most eu countries regarding this issue. therefore, breaking the glass ceiling for serbian women is of a particular importance for their professional and individual development and for the progress of this transition society as a whole. the existence and  received october 8, 2014 / accepted march 25, 2015 corresponding author: danijela.stosic@eknfak.ni.ac.rs faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 682  e-mail: danijela.stosic@eknfak.ni.ac.rs 310 d. stošić, j. stanković, v. janković milić, m. radosavljević height of the glass ceiling for serbian women will be evaluated in the business context of the south eastern serbia. apart from the gender equality issues, involving women in management teams has been gaining in importance given the fact that gender-diversified management teams can improve the quality of decision making and management. in that sense, the relationship between the increased participation of women in management teams and business performances should be examined. the paper is structured as follows: the conceptual framework for developing hypothesis and the hypothesis themselves are presented in the second section of the paper. after explaining the methodology and showing the research results in the third part of the paper, these results are discussed and certain concluding remarks are presented. limitations of the study and propositions for further research are presented in the final part of the paper. 1. conceptual framework and hypothesis development the glass ceiling refers to the invisible barrier that keeps women away from the managerial positions, especially away from the top management level [22]. this ceiling is made of glass which makes it invisible, but nevertheless the existence of the barrier limits the vertical carrier movement of women [2]. if the glass ceiling exists, women are unable to move up to higher management levels despite their qualification and abilities [16]. in most eu member states women make more than half of new university graduates, but they are still the underrepresented gender in a decision making positions [8]. basic indicators on secondary education in the republic of serbia show that half of the pupils in the regular upper secondary education are girls [25]. more than half of the newly enrolled students in serbia are women also [24]. more important for the management potential of women is the fact that 59% of all graduate students in the tertiary education in serbia are women [25]. women represent the majority of graduate students in almost all levels of studies in the republic of serbia (table 1). table 1 gender composition of graduated students by level of studies level of studies % of graduated women students (republic of serbia) % of graduated women students (region of the south eastern serbia) all levels of studies 59% 60% first stage studies 57% 63% basic academic studies 57% 61% basic vocational studies 57% 63% second stage studies 60% 58% master and integrated studies 60% 58% specialist vocational studies 43% 58% specialist academic studies 69% 50% third stage studies 48% 53% doctorate academic studies 48% 53% source: [25] glass ceiling phenomenon in transition economies the case of south eastern serbia 311 going down from the national to the local level, the participation of women in the number of high and higher educated individuals in the south eastern serbia is slightly lower – but still almost equal to the relative number of men (table 2). table 2 population aged 15 and over by educational attainment and sex in the south eastern serbia total male %male female %female total 1347323 661251 100% 49.08% 686072 100% 50.92% without educational attainment 50823 9472 1.43% 18.64% 41351 6.03% 81.36% 1 primary education 314513 152185 23.01% 48.39% 162328 23.66% 51.61% secondary education 605683 334124 50.53% 55.16% 271559 39.58% 44.84% high education 68440 36642 5.54% 53.54% 31798 4.63% 46.46% higher education 99472 51146 7.73% 51.42% 48326 7.04% 48.58% unknown 6700 3128 0.47% 46.69% 3572 0.52% 53.31% source: [25] in the context of the official data for the general population level, the first hypothesis that will be tested refers to the educational level of the employed men and women in the south eastern serbia. therefore, the following hypothesis is defined: h1: there is no significant difference in the level of education of the employed men and women in the south eastern serbia. women represent about one half of the work force but only for a minority of them carrier advancement means reaching managerial positions [17]. working men have more experience in managerial roles than working women [11; 26]. as a barrier that prevents carrier advancement for women, not because of their lack of education, but because of their gender, glass ceiling can exist at different levels, but it mainly blocks the advancement toward the top management positions [20]. not only are they less likely to be managers at all, but the probability of being a top manager is lower for women as well [1; 4; 14]. when they do have certain managerial experience, women dominantly gained it in the operational management level [11]. related to the discussion about the educational level, it can be stated that although there is no difference in that regard, there is a difference in the management experience of men and women, in favour of men. although growing, the rate of women's participation on boards is still low. in 2013 only one in six members, that is 16.6% of the board members of large publicly listed companies in the eu 27 were women [7]. keeping the current dynamics, it would take 50 years to accomplish the eu goal of at least 40% of each gender in the boardrooms 2 . the 1 it is interesting to note that the significant majority of all individuals without educational attainment are women. it is reasonable to assume that the majority of these women are older. nevertheless, this fact signals that women have a significantly worse socio-economic status. 2 of the 33 countries covered by the european commission database, only two – iceland and norway – are close to this goal, and both countries have introduced a quota system for the composition of business boards [7]. the quotas instrument is aimed to achieve a wider and deeper participation of women in different spheres of public life. defining quotas for the inclusion of the under-represented gender in corporate management is a 312 d. stošić, j. stanković, v. janković milić, m. radosavljević situation is not better in the usa as well. in the us, women represent more than a half of the population, and almost a half of the workforce but only 12% of the corporate officers of the fortune 500 companies are women [21]. regardless of the fact that there are more graduated women than men, and that there are more working women that are professional experts – the number of men legislators, administration officials and managers is greater than the number of women in these occupations in the republic of serbia [23]. less than one third (29%) of the legislators, administration officials and managers in the republic of serbia are women [ibid.]. given the available data, it seems that the glass ceiling phenomenon is a statistical fact and that it represents one kind of the subtle form of gender discrimination in the workplace [22]. this discussion leads to a development of the hypothesis regarding the gender composition of the business management structure in the south eastern serbia. therefore, it is hypothesized that: h2a: the number of female managers is significantly lower than the number of male managers in any level of managerial positions. h2b: the male centred composition of the management structure is particularly pronounced in the top management level. given their relational perspective [3], the involvement of women in management teams can encourage dissemination of information, and thus facilitate decision making [13]. women have multiple roles in their lives, and they are often forced to balance between their personal and professional obligations [5], so this can make them more competent for multitasking [13]. this reasoning has been proved by certain studies whose results show that gender diversified management teams contribute to business performances [8; 13], and particularly in firms that are pursuing high growth [6]. studies show that those companies which promote women workers are more successful [9], and that those companies which use the full potential of their employed women are the ones that have competitive advantage and greater results with regards to profits and sustainability [12]. in line with the presented results, the third hypothesis has been developed: h3: there is a positive correlation between gender diversified management teams and better business performances. 2. methodology and results the research presented in this paper included 119 enterprises and 24 entrepreneurs and corresponds to a proportional structure of the employers in the south eastern serbia. the research was conducted in january and february 2014. the questionnaire was designed for employers with questions concerning the gender structure of employees, education level of employees (the share of higher educated employees), management structure (the number of top, middle and operational management positions) and the measure that causes different reactions, but its supporters state that this is a measure for an effective realization of the gender equality goals. glass ceiling phenomenon in transition economies the case of south eastern serbia 313 amount of earnings realized in the respondent companies. the structure of the sample according to gender and educational level of employees is presented in table 3. table 3 educational and gender structure of the sample high education other levels education 92% 8% female male gender 41% 59% high educated employees 44% 56% the methods which are used in order to conduct analyses are: descriptive statistics, chi-square test, z-test, correlation analysis. the sample includes 15564 employees, 6338 of which are female. such gender structure (40.72% of female employees) corresponds to the global gender structure of the labour force in south eastern serbia (40.48% of female employees) and it is slightly less than the country share (41.98%). the structure of the sample regarding the participation of employed women is presented in table 4. table 4 participation of female employees in the research units female employees participation total 0% up to 50% over 50% 100% enterprises 7 76 32 4 119 entrepreneurs 3 8 7 6 24 total 10 84 39 10 143 according to the data in table 4, there are 11 enterprises and 9 entrepreneurs which are so-called ―purely male‖ (7 enterprises and 3 entrepreneurs) or ―purely female‖ (4 enterprises and 6 entrepreneurs). given the fact that it is reasonable to analyse the glass ceiling phenomenon in gender diversified business environments, these units will be excluded from the analyses. from the aspect of business type, all enterprises and entrepreneurs in the sample were classified into four groups: (1) construction companies, (2) industry, (3) service companies and (4) companies in the field of recycling and ecology. the reason why recycling is separated from the rest of the industry is the strategic and economic significance which the development of this branch has not only for south eastern serbia, but for the whole of serbia as well. namely, the latest report of the european commission, at the very moment of the commencement of accession negotiations with the eu, clearly emphasizes that environmental protection in serbia is at a low level. the structure of the sample according to business type and percent of female employees is presented in table 5. the chi square test showed that there is no dependence between the analyzed types of business sectors and the share of female employees (p=0,386). 314 d. stošić, j. stanković, v. janković milić, m. radosavljević table 5 share of female employees in different business sectors share of female employees business sector total construction recycling and ecology industry service companies 0% count 1 0 7 2 10 % within sector 20.0% .0% 8.0% 4.9% 7.0% up to 50% count 4 8 49 23 84 % within sector 80.0% 88.9% 55.7% 56.1% 58.7% over 50% count 0 1 27 11 39 % within sector 0.0% 11.1% 30.7% 26.8% 27.3% 100% count 0 0 5 5 10 % within sector 0.0% 0.0% 5.7% 12.2% 7.0% total 5 9 88 41 143 the number of high educated employees in the sample is 1228. the number of high educated female employees is 539 and they represent 8.50% of total females in the sample and 43.89% of all high educated employees. the highest share of women in the structure of high educated employees is in the field of recycling and ecology. the average share of highly educated women by business sectors is given in the following table. table 6 average share of high educated women in different business sectors sector construction recycling and ecology industry service companies average women’s share in high educated employees 35.60% 54.22% 48.76% 51.63% 49.47% in order to test hypothesis h1, the level of education is expressed through percent of high educated employees. so, this hypothesis can be formulated in the sense that there is no difference in the percent of high educated employees between employed men and women. there are 9226 men in the structure of employees in the sample. 689 are highly educated, which makes 7.47% of the employed men. the significance of the difference in participation of highly educated men and women was tested by using the z-test. the realized value of the significance level of the test (z=0.66, p=0.509) indicates that there is no statistically significant difference between the share of highly educated men and women in the population of the employed individuals in south eastern serbia. the number of male managers in the sample is 597, while the number of women occupying management positions is 317, which means that the number of men in managerial positions is almost two times higher. regarding the relative structure of managers, it can be noted that 65.32% of the management positions in the sample belong to men, while women's participation is 34.68%. according to the applied testing procedure, the significance of the difference in the participation of women and men in managerial positions (p=0.0002) led to the conclusion that the number of female managers is significantly lower than the number of male managers in any level of management position. the levels of top and middle management in the sample are also dominated by men. within 334 positions of top and middle management, 235 positions are occupied by men, glass ceiling phenomenon in transition economies the case of south eastern serbia 315 while women take only 99 positions. the relative structure of the top and middle management positions according to gender is 70.36% compared to 29.64% in favour of men. according to the formulated hypotheses that male centred composition of the management structure is particularly pronounced at the top management level, the one-tailed test of the significance of the difference between two independent proportions has been applied. the test result confirmed the accuracy of the hypothesis (p=0.0001). testing the hypothesis about the correlation between gender diversified management teams and better business performances is based on variables related to the women’s share in management positions and the revenue per employee in 2013 and the average amount of earnings. as an appropriate measure of correlation, the pearson correlation coefficient was calculated. the results obtained by calculation, as well as the significance level, are presented in the table below. table 7 value of pearson correlation coefficient between selected variables variables revenue per employee in 2013 earnings women’s share in all management positions -0.026 (0.788) -0.062 (0.493) women’s share in top and middle management positions 0.080 (0.407) 0.022 (0.808) women’s share in operational management positions 0.091 (0.346) 0.036 (0.693) according to the results presented in the table above, it can be seen that there is negative correlation between the women’s share in all management positions and the selected business performances measures. if the participation of women in various levels of management is considered separately, the correlation with business performances measures is positive, but weak. these results do not support the hypothesis about positive correlation between gender diversified management teams and better business performances because their statistical significance is very low. 3. discussion and conclusion when it comes to participation in groups of highly educated people generally, discrimination against women cannot be noticed, since their participation is a little less than 50%. although table 6 indicates that there is a difference in average share of highly educated men and women, the results of hypothesis testing (z=0.66, p =0.509) show that there is no statistically significant difference between the share of highly educated men and women. these results are in line with the statement of the first hypothesis that there is no significant difference in the level of education of the employed men and women in south eastern serbia. inappropriate levels of education, therefore, cannot be an excuse for the fact that women are underrepresented in the management structures. in accordance with the assumption that there is a glass ceiling for women in south eastern serbia, the statistically testing procedure shows that the number of female managers is significantly lower than the number of male managers in any level of managerial position. more precisely, there is no statistically significant difference between the shares of highly 316 d. stošić, j. stanković, v. janković milić, m. radosavljević educated men and women – 65.32% of management positions in the sample belong to men, while women's participation is 34.68%. the conclusion is based on p-value, which equals 0.0002, which shows that hypothesis h2a should be accepted. as the discussion goes on, new reasons for confirming the glass ceiling phenomenon appear. more precisely, the analysis of the hypothesis that most directly concerns this phenomenon, h2b, is based on the fact that the relative structure of the top and middle management positions according to gender is 70.36% compared to 29.64% in favour of male managers. the p-value confirms the accuracy of this hypothesis (p=0.0001). the results of the last hypothesis analysis are not clear enough to lead to obvious and firm conclusions. even though the results of the correlation analysis between women’s share in all management positions and business performances indicate negative values, the conclusion is blurred with the results of the same kind of analysis concerning correlation of women’s share in specific levels of management (top, middle, operational) and business performances (positive values are indicated). therefore, the h3 hypothesis cannot be accepted based on the data used in this research and analysis. 4. limitations of the study and further research this study is an initial step in revealing the existence and height of the glass ceiling in south eastern serbia. the presented analysis is limited by the available data, the data which was gathered as an additional part of a wider project that is not primarily focused on the glass ceiling issues. this data limitation became obvious particularly in the part of testing the h2b hypothesis. namely, the structure of the questionnaire (which was not specially defined for this research) did not provide a clear distinction between the middle and the top management levels. further on, the results of testing the h3 hypothesis could have been different if another performances measure had been used. together with exploring the height of the glass ceiling toward the top management levels, further directions for academic research of this phenomenon are also related to a need for a deeper analysis of determinants of the glass ceiling phenomenon, and for investigating the awareness of this issue among the employees and employers in serbian companies. only this kind of holistic approach to the problem can give a solid base for defining measures in order to break the glass ceiling. references 1. alsos, a, isaksen, e., junggren, e. 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(2005), ’glass ceiling’, in werhane, p., freeman, e (eds.) the blackwell encyclopaedia of management – volume ii: business ethics, blackwell publishing, malden. 23. statistical office of the republic of serbia (2013a), labour force survey, 2012, statistical office of the republic of serbia, belgrade. 24. statistical office of the republic of serbia (2013b), newly enrolled students in academic/vocational studies, 2013/2014 – statistical release, statistical office of the republic of serbia, belgrade. 25. statistical office of the republic of serbia (2013c), statistical yearbook of the republic of serbia – education 2013, statistical office of the republic of serbia, belgrade. 26. thébaud, s. (2010), gender and entrepreneurship as a career choice: do self-assessments of ability matter?, social psychology quarterly, volume 73 (3): 288-304. fenomen staklenog plafona u ekonomijama u tranziciji – primer jugoistočne srbije cilj rada jeste istraživanje postojanja i visine staklenog plafona za žene u regionu jugoistočne srbije. namera je da se istraživanjem utvrdi postojanje razlika u nivou obrazovanja između zaposlenih žena i zaposlenih muškaraca, prisustvo žena na menadžment pozicijama, kao i nivoa menadžment pozicija na kojima su žene podjednako, ili na kojima su uopšte zastupljene. navedeni aspekti biće sagledani u kontekstu pojedinih grana, privrednih subjekata različite veličine i vlasničke strukture. pored toga, u radu će biti prikazani i rezultati komparativne analize poslovnih performansi privrednih subjekata u kojima su žene zastupljene na menadžment pozicijama i onih u kojima nisu. ključne reči: stakleni plafon, diskriminacija, poslovne performanse, jugoistočna srbija. facta universitatis series: economics and organization vol. 16, n o 4, 2019, pp. 429 442 https://doi.org/10.22190/fueo1904429s © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication job satisfaction of academic staff in the higher education system of serbia: a pilot study 1 udc 371.213.3:378]:005.96(497.11) agneš slavić 1 , julija avakumović 2 , nemanja berber 1 1 university of novi sad, faculty of economics in subotica 2 phd student university of novi sad, faculty of economics in subotica abstract. in the turbulent business environment of today, the competitiveness of all organizations is primarily based on intangible resources. due to global competition, the permanent actualization of employee competencies is imperative for the long-term survival of organizations. the higher education system bears a special responsibility in this process, as it provides an upgrade for the development of the previously obtained competencies of future employees. higher education is the system focused on dual core functions of knowledge creation and knowledge transmission through the processes of research and teaching (houston et al, 2006, 17). to ensure high-level competences in future employees, it is crucial for the higher education system (teaching staff) to provide students with the latest knowledge in their field. the job satisfaction of academic staff is reflected in the quality of teaching and communicating with students (runhaar, 2017, 646-647). the aim of this paper is to determine the level of general and partial satisfaction of teaching staff at the institutions of higher education in the republic of serbia. the method implemented for determining the level of satisfaction, was spector’s job satisfaction survey – jss (spector, 1985), in the form of an on-line questionnaire. the pilot research was conducted in december 2018 and january 2019. the sample consists of 58 respondents teachers from higher educational institutions in the republic of serbia. the results of general job satisfaction survey indicate that teachers are generally ambivalently satisfied with their job, they are neither satisfied, nor dissatisfied. the results of partial satisfaction show that teaching staff is most satisfied with the nature of their job. key words: higher education, job satisfaction, job satisfaction of academic staff, general job satisfaction, partial job satisfaction jel classification: i23, j28, m54 received september 03, 2019 / accepted october 07, 2019 corresponding author: nemanja berber university of novi sad, faculty of economics in subotica, segedinski put 9-11, 24000 subotica, serbia e-mail: berber@ef.uns.ac.rs 430 a. slavić, j. avakumović, n. berber 1. introduction knowledge and human resources are the basis of every society. employee development is directly related to the performance of the employees and also to the performance of the organization (szabó et al., 2019). bogićević milikić (2019) points out that learning and development is directed towards improving individual and organizational performance through the development of an employee's capacity to contribute to the organization's efficiency. stronger human resource development requires stronger links between the education and research systems and all other sectors, in order to make better use of existing and created resources through higher education (rs scientific and technological development strategy, 2016, 5). education system of a society is a key determinant of its development (jovanović-kranjec & despotović, 2018), while investments in education, research and development, and innovation result in knowledge-driven and sustainable development (jednak et al., 2018; krstić et al., 2018), and higher competitiveness of a country (jovanović, 2018). the situation in serbia‟s education system has been influenced by social, political and economic changes in the past two decades. there is an expressed need for reforms in education in order to rebuild the school system, as well as improve and develop education, as a part of the complex reforms of the whole society (hebib & spasenovic, 2011, p. 376). in serbia, the modern reforms of higher education system started with the implementation of the bologna declaration and the establishment of the commission for accreditation and quality assurance (the law on higher education of the republic of serbia, 2005), which was revised in 2018 into the national accreditation body (the law on higher education of the republic of serbia, 2017). the goal of the reforms in the education system was to modulate the existing curriculum and study plans with those similar in the european higher education area, thereby enabling the identification and recognition of a previously acquired education level. the generated “european model” in higher education system in serbia, has normative (cooperation, dialog, variation, mobility) and structural dimensions (bologna process). given the teaching staff‟s international orientation, it has become easier to participate in international networks of higher education. to achieve the established mission and vision, the strategy of education determines specific objectives: stimulating excellence and relevance of scientific research in serbia; strengthening the integration of science, economy and society to stimulate innovations; establishing efficient management system in science and innovation in serbia; assuring excellence and availability of human resources in science, economy and social affairs; promoting international cooperation of science and innovation; increasing investment in research and development through public funding and through stimulating the funding from the business sector (strategy on scientific and technological development of the republic of serbia for the period 2016-2020, 2016, p. 8). the current law on higher education in serbia defines these job positions at faculties: full professor, associate professor, assistant professor and assistant, while at colleges and at colleges of applied studies these are: professor of applied studies, higher college teacher, college teacher and assistant at college. less than 10% of serbia‟s population has a degree in higher education, in fact only 6.5% (statistical pocketbook of serbia, 2018, p. 122-130). academic staff at higher educational institutions has to be equipped with the latest knowledge in their field when teaching their students. the motivation and ability of job satisfaction of academic staff in the higher education system of serbia: a pilot study 431 academic staff to develop students' competences are influenced by many factors, but among them the satisfaction with their own working environment is one of the most crucial ones (runhaar & sanders, 2016, p. 806-808). a positive and healthy working environment will result in a satisfied and motivated member of academic staff (stankovska et al., 2017, p. 159). this is especially true since higher education working environment is the key to organization success and competitive advantage (pham-thai, 2018, p. 951). the results of an organization are the sum of their employees‟ results; actually, the organization‟s results mirror their results of the employees‟ job satisfaction or dissatisfaction (spector, 1997, p. 55). the aim of this paper is to determine the level of job satisfaction of academic staff at higher educational institution in serbia, through the level of general job satisfaction, as well as to determine the level of partial satisfaction concerning the nature of work, co-workers, pay, promotion, fringe benefits, contingent rewards, communication, supervision, and working conditions. 2. theoretical background 2.1. job satisfaction job satisfaction is a vital factor in the field of human resource management, based on employee`s perception – to what extent does the job offer exactly what the employee expects from it (amaresena et al, 2015, p. 541; stankovska et al, 2017, p. 160). job satisfaction can be considered as a general attitude towards work, or satisfaction according to various dimensions of work, such as: pay, job promotion possibility, superiors and colleagues (zimanji, šušnjar, 2007, p. 135). it is an enjoyable or positive emotional state resulting from the appraisal of one`s job or job experiences (locke, 1976; đorđević et al., 2017, p. 265). paul e. spector highlighted three reasons concerning the importance of job satisfaction: humanitarian perspective of work, positive emotional attitude of job and totality positive effect on organization performance (spector, 1997, p. 2). job satisfaction can be defined as a cognitive, affective and evaluative individual reaction to a job. the cognitive component contains what a person believes to know about the subject of attitude; the evaluative component refers to how much the given person likes or dislikes the goods (or person); and behavioristic component contains certain predisposition to acting in a certain direction (zimanji, šušnjar, 2007, p. 135). job satisfaction is an attitude – a feeling of relative like or dislike towards something. employees‟ attitudes consist of feelings, thoughts, and intentions to act. an employee as an individual often adjusts their own attitude in accordance with the attitude of the group (team) he/she belongs to. generally, attitudes are acquired for a long time, so that job satisfaction or dissatisfaction occurs when an employee receives more and more information about his/her work place. if the causes of job satisfaction are determined, they cannot be ignored later, because those causes may vary and lead to job dissatisfaction. permanent monitoring of job satisfaction is a need based on the fact that job satisfaction is a dynamical attitude. job satisfaction is a part of life satisfaction and has interactive influence. apart from job satisfaction, life satisfaction is affected by family, religion, policy and vacation, too (newstrom, 2007, p. 204-205). the antecedents of job satisfaction can be classified into two major categories. first, the job environment itself and factors associated with the job. this includes how people 432 a. slavić, j. avakumović, n. berber are treated, the nature of the task, relations with other people in the workplace, and rewards. second, there are individual factors such as personality and prior experiences. the two categories of antecedents often work together in order to influence employee satisfaction. the basic assumption of job characteristics theory is that people can be motivated by the satisfaction they experience through performing their tasks. when they find their work to be enjoyable and meaningful, people will like their jobs and will be motivated to perform their jobs well (spector, 1997, p. 30-31). if there is harmony between the personality of the employee and the job requirements, the employees will better use their knowledge and ability, which is beneficial and allows them to fulfill their needs for achievement, as well as achieve greater job satisfaction. finding harmony of personality and job requirements is important for the organization, especially in relation to work quality (hadžić & nedeljković, 2010, p. 171). job satisfaction has a direct impact on professional (shamina, 2014, p. 1-3) and organizational commitment (trivellas & santouridis, 2016, p. 171) and also motivates employees to increase their productivity (khan et al, 2014, p. 54). job satisfaction, as an attitude, has significant relations with organizational performances, job performances of employees, organizational citizenship behavior (ivanović-đukić et al., 2018, p. 13), organizational justice (đorđević et al., 2018, p. 148), turnover intentions and absenteeism (došenović, 2018, p. 365). research on job satisfaction should include demographic factors such as gender, age, years of working experience, number of years spent on the work position and level of work position (castillo & cano, 2004, p. 68; hadžić & nedeljković, 2010, p. 187). the measuring of job satisfaction is important, because the results may indicate differences between employee expectations of the job and what the job truly offers (amaresena et al, 2015, p. 544; hadžić & nedeljković, 2010, p. 42-52). today, there are different models of measuring job satisfaction, where the dependent variable is job satisfaction, and the independent variables can be compensation, work environment, characteristics of the job, organizational decisions, leadership, interpersonal relationships, self-respect, workload, autonomy, social recognition and supervision (azumah et al, 2017, p. 3). 2.1.1. job satisfaction of academic staff in higher education job satisfaction is important to perform any job adequately. while satisfaction with the job is an important phenomenon in any sector, it is especially vital in the education sector (nigama et al, 2018, p. 2645). job satisfaction of academic staff is crucial to retain teachers and a significant determinant of the commitment of academic staff, which acts as feedback regarding efficiency of work in a school as organization (munir & khatoon, 2015, p. 454). job satisfaction of the staff employed in educational institutions refers to the effective relation of teachers to their role as lecturers and to the function of the observed relation between what employees expect from the teaching and what the educational institution really offers them (jošanov-vrgović, 2012, p. 16). satisfaction of academic staff brings benefits to teachers, students and educational institution. teachers play an important role in creating better environment and working atmosphere at universities, therefore, teachers who are satisfied with their job can significantly contribute to how successful the educational institution as an organization is (ahmad et al., 2018). job satisfaction of academic staff in the higher education system of serbia: a pilot study 433 job satisfaction of employees in higher education is reflected through a better chance for promotion and professional development (al-rubaish et al., 2011, p. 1), status within the society (saiti & papadopoulos, 2014, p. 74), research funding (ali, 2009, p. 291), flexible working time (popović et al., 2015, p. 34), good work environment (stankovska et al., 2017, p. 160), elements of organizational culture (andreassi et al., 2014, p. 56; ali, 2009, p. 290), good working experience (qazi & jeet, 2017, p. 179) and adequate compensation (khalid et al., 2012, p. 128; nandan & krishna, 2013, p. 134; bodla et al., 2014, p. 23). research about job satisfaction can help management and teachers to further develop the quality of education (toker, 2011, p. 156). in a study at the state university in skopje (north macedonia), the authors used the jss questionnaire (job satisfaction survey: spector, 1985) to measure general job satisfaction. jss contains 36 items, grouped in 9 partial indicators related to employees‟ attitude about the job: payment, promotion, supervision, benefits, rewards, procedures, colleagues, nature of job, and communication at workplace. the results of general job satisfaction indicated that academic staff are satisfied with their job, while the analysis of partial indicators show that academic staff are satisfied with supervision but dissatisfied with benefits and rewards (stankovska et al., 2017, p. 163). to determine the relation between hrm practice and job satisfaction, authors bodla et al. (2014) used correlation and regression analysis in their study. the authors proved that the increase of working performance results in the increase of job satisfaction level, and there is a positive relation between performance appraisal and job satisfaction. the regression coefficient shows that carrier planning and pay increase has a positive and significant impact on the increase of job satisfaction of academic staff. a study at a state university in sri lanka on the assessment of job satisfaction among academic staff used 5-point likert`s scale. the result concerning general job satisfaction is 3.95, which is higher than 3 (the neutral value in this example) and it means that academic staff are satisfied (amaraesena et al., 2015, p. 547). another study (khalid, 2012, p. 130131) obtained at universities in pakistan (both state universities and private ones) indicated differences in compensation between state and private universities. teachers as employees in the private sector are satisfied with their payment and promotion, while employees at state universities are satisfied with the nature of work and job security. one more study, conducted by authors machado et al. (2011) indicated that general job satisfaction is higher at private universities than at state universities. among the analyzed partial indicators, satisfaction with the nature of job is the highest and satisfaction with compensation is the least. the results of this study indicate that teachers are more satisfied than assistants. the level of general job satisfaction measured on a 10-point likert`s scale is 6.7 (machado et al, 2011, p. 1720). the results of job satisfaction research conducted at the faculty of agriculture in belgrade (serbia) indicated that employees are satisfied with flexible working hours, but dissatisfied with payment, which is highly important since it has been found that pay satisfaction is related positively to commitment (adeoye, 2019). the level of general job satisfaction measured by a 6-point likert`s scale is 3.85 (popović et al., 2015, p. 38). it is important to highlight that the standard of living in serbia is lower than in the european union. based on previous research, in the context of research, the authors formulated the present research goals. the first goal is to determine the level of general job satisfaction 434 a. slavić, j. avakumović, n. berber of academic staff at higher educational institution in serbia. the second goal is to determine the partial job satisfaction of academic staff in serbia based on partial indicators of job satisfaction: nature of job, co-workers, pay, promotion, contingent rewards, flexible benefits, communication, supervision and job procedures (spector, 1997, p. 4). 3. methodology to determine the level of job satisfaction of academic staff, the authors performed a pilot research and used spector job satisfaction survey (jss) (spector, 1997) officially translated into serbian language (branko mladenović, 2013), using a 6-point likert`s scale. the first part of the questionnaire contains 36 questions. the second part of the questionnaire contains 19 questions on demographic and organization data. for data process and data analysis ibm spss version 23 was used. the value of general job satisfaction on the sample of 58 employees is determined by a jss questionnaire (spector, 1985; spector 1997), items 1-36. the questionnaire implements likert‟s 6-point scale, where 1 refers to „i highly disagree‟ and 6 refers to „i highly agree‟. the results can range from 36-216, so the results from 36 to 108 represent dissatisfaction with the job, the results between 108-144 represent ambivalence, while results ranging from 144 to 216 represent satisfaction with the job. the jss questionnaire measures partial job satisfaction, too: satisfaction with the nature of the job (items 8,17,27,35), coworkers (items 7,16,25,34), pay (items 1,10,19,28), promotion (items 2,11,20,33), contingent rewards (items 5,14,23,32), flexible benefits (items 4,13,22,29), communication (items 9,18,26,36), supervision (items 3,12,21,30) and job procedures (items 6,15,24,31). the sum of the 4 items for each partial indicator may indicate dissatisfaction (if it is less than 4), ambivalence (between 3 and 4) and satisfaction (above 4). the cronbach's alpha coefficient, which measures the internal consistency (reliability) of the scale, was 0.713 for 36 items. this is an acceptable level of internal consistency of the scale (streiner, 2003). table 1 sample structure according to the type of higher educational institutions type of institution number of respondents percent (%) faculty 28 48.3 college 2 3.4 college of applied studies 28 48.3 ∑ 58 100.0 source: authors‟ research as stated previously, the sample included 58 respondents (table 1), employed as academic staff at a higher educational institution in the republic of serbia (28 employed at faculties, 2 at colleges and 28 at colleges of applied studies). analyzing the gender of 58 respondents, 44 (76%) were women, while 14 (24%) were men. the observed sample included all working positions at the higher education system in serbia: at colleges or universities full professor, associate professor, assistant professor and assistant and employed at college or college of applied studies professor of applied studies, higher college teacher, college teacher and assistant at college (table 2). job satisfaction of academic staff in the higher education system of serbia: a pilot study 435 table 2 sample structure according to the work position of employees at he institution work position at he institution number of respondents percent (%) full professor 4 6.9 associate professor 4 6.9 assistant professor 11 19 professor of applied studies 24 41.4 higher college teacher 1 1.7 college teacher 4 6.9 assistant 9 15.5 college assistant 1 1.7 ∑ 58 100.0 source: authors‟ research based on the working position, the sample included 4 full professors (6.9%), 4 associate professors (6.9%), 11 assistant professors (19%), 9 assistants (15.5%), 24 professors of applied studies (41.4%), 1 higher college teacher (1.7%), 4 college teacher (6.9%) and 1 assistant at college (1.7%). according to the years of work experience, interviewees are grouped as follows: less than 5 years of experience, between 5 and 15 years of experience, between 16 and 20 years of experience, between 21 and 25 years of experience and more than 25 years of experience (table 3). table 3 sample structure according to the years of working experience years of experience number of respondents percent (%) < 5 7 12.1 5-15 25 43.1 16-20 11 19 21-25 7 12.1 >25 8 13.8 ∑ 58 100.0 source: authors‟ research the sample included 7 employees with less than 5 years of experience (12.1%), 25 employees with experience between 5-15 years (43.1%), 11 employees with experience between 16-20 years (19%), 7 employees with experience between 21-25 years (12.1%) and 8 employees with more than 25 years of experience (13.8%). according to the age of respondents, they were grouped as follows: aged between 20-29, aged between 30-39, aged between 40-49, aged between 50-59 and more than 60 years old (table 4). table 4 sample structure according to the age of respondents age of employees number of respondents percent (%) 20-29 2 3.4 30-39 20 34.5 40-49 13 22.4 50-59 22 37.9 >60 1 1.7 ∑ 58 100.0 source: authors‟ research 436 a. slavić, j. avakumović, n. berber the sample included 2 employees aged between 20-29, 20 employees aged between 30-39 (34.5%), 13 employees aged between 40-49 (22.4%), 22 employees aged between 50-59 (37.9%) and 1 employee older than 60. 4. research results the obtained result of 129.86 for general job satisfaction indicates ambivalence. based on the sample of 58 employees at higher educational institutions in serbia, the authors found that the employees are neither satisfied with the job, nor are they dissatisfied. table 5 presents results of general job satisfaction, depending on the type of higher educational institution where employees are employed. table 5 general job satisfaction depending on the type of institution type of institution number of respondents general job satisfaction average faculty 28 132.32 college 2 118.00 college of applied studies 28 128.25 ∑ 58 129.86 source: authors‟ research employees are most satisfied at faculties (132.32), and least satisfied at colleges (118) and colleges of applied studies (128.25). the average values of general job satisfaction depending on the type of higher educational institution belong to the category of ambivalent general satisfaction. table 6 presents the results of general job satisfaction, depending on the work position at the higher educational institution. assistants (139.22) are the most satisfied ones. the average values of general job satisfaction depending on the work position at higher educational institution belong to category of ambivalent general satisfaction. based on the obtained values, academic staff is not satisfied, but neither are they dissatisfied with their job. table 6 general job satisfaction depending on the work position work position at he institution number of respondents general job satisfaction average full professor 4 128.50 associate professor 4 130.75 assistant professor 11 126.91 professor of applied studies 24 127.92 higher teacher at college 1 114.00 college teacher 4 133.00 assistant 9 139.22 college assistant 1 130.00 ∑ 58 129.86 source: authors‟ research job satisfaction of academic staff in the higher education system of serbia: a pilot study 437 table 7 presents the results of general job satisfaction, depending on the years of work experience of employees at the higher educational institution. according to the years of experience, the most satisfied ones are employees with less than 5 years of experience (135), while the least satisfied employees are those who have more than 25 years of experience (119.37). the average values of general job satisfaction depending on the years of work experience at a higher educational institution belong to category of ambivalent general satisfaction. academic staff is neither satisfied, but nor dissatisfied with the job. table 7 general job satisfaction depending on the years of work experience age of employees number of respondents general job satisfaction average <5 7 135.00 5-15 25 132.12 16-20 11 129.82 21-25 7 128.71 <25 8 119.37 ∑ 58 129.86 source: authors‟ research table 8 presents results of general job satisfaction depending on the age of employees at a higher educational institution. the most satisfied are employees between 20-29 years of age (155.50) and the least satisfied are employees with more than 60 years (125). according to the measurement system of spector's jss questionnaire (spector 1985, spector 1997), only one category of respondents (those between 20 and 29 years of age ) is generally satisfied with the job (155.50), since this result falls into the category of job satisfaction (between 144-216). other employee groups based on their age belong to the ambivalent category. table 8 general job satisfaction depending on the age of employees age of employees number of respondents general job satisfaction average 20-29 2 155.50 30-39 20 132.40 40-49 13 123.15 50-59 22 129.41 >60 1 125.00 ∑ 58 129.86 source: authors‟ research table 9 presents the results of partial indicators of job satisfaction at higher educational institutions in serbia. looking at the results of partial job satisfaction calculated with the items entering the individual subscales, the following values have been obtained: satisfaction with the nature of the job (17.34); co-workers (14.81); pay (14.43); promotion (14.16); contingent rewards (13.12); flexible benefits (14.45); communication (13.78); superiors (13.55) and working conditions (14.22). the partial satisfaction scores indicate that teachers in the higher 438 a. slavić, j. avakumović, n. berber education system of serbia are only satisfied with the nature of the job (grade 17.34 higher than 16), while with other causes of satisfaction, teachers are ambivalent, i.e., neither satisfied nor dissatisfied. table 9 partial job satisfaction at higher educational institutions in serbia range min max mean sd nature of job 12.00 10.00 22.00 17.3448 3.08677 co-workers 9.00 10.00 19.00 14.8103 2.06438 pay 12.00 7.00 19.00 14.4310 3.22334 promotion 20.00 4.00 24.00 14.1552 4.81154 contingent rewards 15.00 6.00 21.00 13.1207 2.81024 flexible benefits 10.00 9.00 19.00 14.4483 1.93012 communication 16.00 5.00 21.00 13.7759 3.16806 supervision 15.00 4.00 19.00 13.5517 3.39335 job procedures 12.00 9.00 21.00 14.2241 2.54119 source: authors‟ research 5. discussion and practical implications based on the results of the survey conducted on a sample of 58 respondents employed in higher educational institutions in serbia, on the level of general and partial job satisfaction it can be concluded that the employees are not satisfied with their work, but they are not dissatisfied, either, therefore there is an ambivalent level of general job satisfaction. analyzing the general job satisfaction of the special subgroups of respondents, it can be stated that employees at faculties are more satisfied than employees in colleges and colleges of applied studies. at faculties, assistants are the most satisfied, while at colleges and colleges of applied studies the most satisfied group are college teachers. taking into consideration the years of work experience, the most satisfied employees are those who have less than 5 years of service, while based on age, the most satisfied employees are those between 20 and 29 years of age. similar research conducted by authors nandan & krishna (2013) indicated that the more satisfied employees tend to be the younger population at junior positions, because they have a motive to prove themselves in research work, while their older colleagues spend more time with family (slavić & avakumović, 2018, p. 1219). analyzing indicators of partial job satisfaction (nature of job, co-workers, pay, promotion, fringe benefits, contingent rewards, communication, supervision and working conditions), the authors conclude that employees are most satisfied with nature of job, and least satisfied with supervision, communication and pay. similar results can be found in the research of popović et al. (2015) and saiti & papadopoulos (2014) which indicated that academic staff is most satisfied with nature of job, and least satisfied with compensation (pay, fringe benefits and contingent rewards) (slavić & avakumović, 2018, p. 1218-1219). during the analysis of the research results on job satisfaction it is important to factor in the country‟s situation where the research is conducted, because there are significant differences between national income in different socio-economic systems. sometimes in lessdeveloped countries it is not possible to increase the salary and give rewards, and because of that it is impossible to react to indicators of partial satisfaction with compensation (popović et al., 2015, p. 38). job satisfaction of academic staff in the higher education system of serbia: a pilot study 439 in this paper two research goals were formulated. the results of the general job satisfaction indicate that teachers are generally ambivalently satisfied with their job, they are not satisfied, but neither are they dissatisfied. the research results on partial job satisfaction confirmed that respondents are satisfied with the nature of job. among the analyzed nine indicators of partial job satisfaction, satisfaction with the nature of job ranks highest. 6. conclusions job satisfaction is an important factor in the field of human resource management, based on employee`s perception. the factors influencing job satisfaction can be classified as factors associated with the job (working environment, the nature of the task, relations with other people at the workplace) and individual factors (personality and prior experiences). the adequate measurement of job satisfaction is of key importance, because results may indicate significant differences between employees' expectations of the job and what the job truly offers. job satisfaction of staff employed at higher educational institutions refers to the effective relation of teachers to their role as lecturers and function of observed relation between what employees expect from teaching and what the educational institution really offers. satisfaction of academic staff brings benefits to teachers, students, as well as to the educational institutions themselves. the aim of this paper was to determine the level of general and partial satisfaction of teaching staff at the institutions of higher education in the republic of serbia. the results of the general job satisfaction indicated that teachers are generally ambivalently satisfied with their job, they are not satisfied, but neither dissatisfied, except for the respondents between 20 and 29 years of age. the limitation of this research is the small and non-representative sample. present authors plan to conduct the same research on a larger sample, which will represent the type and ownership of higher education system of serbia, and will include the influence of different hrm activities on job satisfaction. references adeoye, a.o. 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(2019). coaching and its effects on individual and organizational performances in central and eastern europe. anali ekonomskog fakulteta u subotici, 55 (41), 67-80. https://doi.org/10.5937/ aneksub1941067s the law on higher education of the republic of serbia. (2005). official gazette of the republic of serbia, 76. the law on higher education of the republic of serbia. (2017). official gazette of the republic of serbia, 88. toker, b. (2011). job satisfaction of academic staff: an empirical study on turkey. quality assurance in education, 19 (2), 156-169. https://doi.org/10.1108/09684881111125050 trivellas, p. & santouridis, i. (2016). job satisfaction as a mediator of the relationship between service quality and organizational commitment in higher education. an empirical study of faculty and administration staff. total quality management, 27 (2), 169–183. https://doi.org/10.1080/14783363.2014.969595 442 a. slavić, j. avakumović, n. berber zadovoljstvo poslom nastavnog kadra u visokom obrazovanju srbije: pilot istraživanje u današnjem turbulentnom poslovnom okruženju konkurentnost organizacija prevashodno je bazirana na nematerijalnim resursima. kako je konkurencija sve snažnija, stalna aktualizacija kompetencija zaposlenih nameće se kao imperativ dugoročnog opstanka organizacije. posebnu odgovornost u tom procesu zauzima visokoškolsko obrazovanje, koje obezbeđuje nadogradnju i pruža dalji razvoj prethodno stečenih kompetencija budućih zaposlenih. visoko obrazovanje je sistem u kojem se stvaraju i prenose znanja kroz proces istraživanja i odvijanja nastave. (houston et al, 2006, 17) predavači imaju ključnu ulogu u razvoju kompetencija polaznika. sadržaj i metode obuke određuju rezultate procesa obuke, odnosno novostečeno znanje, sposobnosti i osećanja polaznika. kvalitet nastave u velikoj meri zavisi i od zadovoljstva nastavnog kadra. (runhaar, 2017, 646-647) cilj rada je utvrditi nivo opšteg i parcijalnog zadovoljstva nastavnog kadra u visokoškolskim ustanovama u republici srbiji. kao metod utvrđivanja nivoa zadovoljstva korišćen je spektorov job satisfaction survey upitnik (spector, 1985), koji je postavljen kao on-line upitnik. istraživanje je sprovedeno tokom decembra 2018-te i januara 2019-te godine. uzorak predstavlja 58 ispitanika, zaposlenih u nastavi na visokoškolskim ustanovama u republici srbiji. rezultati opšteg nivoa zadovoljstva ukazuju na ambivalentnost zadovoljstva poslom nastavnog osoblja. posmatrajući parcijalne nivoe zadovoljstva, nastavno osoblje je najzadovoljnije prirodom posla. ključne reči: visoko obrazovanje, zadovoljstvo poslom, zadovoljstvo nastavnog kadra, opšte zadovoljstvo poslom, parcijalni pokazatelji zadovoljstva facta universitatis series: economics and organization vol. 17, n o 1, 2020, pp. 27 41 https://doi.org/10.22190/fueo190914003b © 2020 by university of niń, serbia | creative commons licence: cc by-nc-nd original scientific paper macroeconomic divergences and asymmetric responses within the euro zone 1 udc 336.7(4-672eu) emilija beker pucar, olgica glavaški university of novi sad, faculty of economics in subotica, serbia abstract. the paper deals with the nominal and real divergences within the euro-zone (ez) as a background for asymmetric european central bank’s (ecb’s) monetary transmission. in order to shed more light into these issues, the descriptive analysis of key nominal and real indicators confirms the core-periphery dichotomy within original ez12 members, as well as the specific position of the emerging ez19 members. monetary (interest rate) transmission is explored via estimated vector autoregression (var) model for the representatives of the core (germany, france, belgium), as well as the periphery (portugal, spain and greece), in the period 1999q1-2018q4. observing the transmission of ecb’s interest rate (the shock) to gross domestic product (gdp) growth (the response), the results of variance decompositions and impulse responses indicate that interest rate channel works countercyclical in general. however, while stabilizing (countercyclical) effect is evident for the core (especially germany), it is almost absent in the case of greece. the conclusions highlight the vulnerability of the ez in the sense of heterogeneous membership and, accordingly, asymmetric response to ecb’s monetary impulse. our findings support the arguments of numerous research papers in emphasizing core-periphery dualism, german dominance hypothesis, and “one size fits some” monetary policy. key words: euro-zone, the core, the periphery, real and nominal divergence, ecb, monetary transmission. jel classification: e52, e58, e61, f45. received september 14, 2019 / revised november 18, 2019 / accepted november 18, 2019 corresponding author: emilija beker pucar university of novi sad, faculty of economics in subotica, segedinski put 9-11, 24000 subotica, serbia e-mail: emilijabp@gmail.com 28 e. beker pucar, o. glavańki 1. introduction monetary union, as a final stage of european economic integration, was formed in 1999. euro-zone (ez) initially consisted of 11 eu members (12 th member was greece starting from 2001) which accepted common currency by sacrificing monetary sovereignty. until now, 19 eu members accepted the euro after demanding process of a monetary convergence. monetary union is rigid exchange rate arrangement where crucial sacrifice is loss of monetary and exchange rate policy. member countries expect higher benefits from common currency having in mind lower exchange rate risk, lower transaction costs, minimized risks from speculative attacks and, above all, an ambient of macroeconomic stability. mentioned benefits outweigh sacrifices if trade and financial integration is deeper between member states, if production structure is more diversified, while capital and labour are mobile (ricci, 1997; horvath & komarek, 2002). if criteria for optimum currency area (oca) are fulfilled (mundell, 1961) the need for national monetary policy is mitigated making thus monetary union more sustainable (rose, 2008). however, ez is not created as an oca (vrňáková & bartuńková, 2013; koziara, 2016). some of doubts whether europe fulfils oca criteria were hypothetically exposed during eighties and nineties, even before concrete plans for monetary union were set, by for example eichengreen (1991) and feldstein (1997). although europe was seen as an ideal candidate for testing mundell’s oca theory, some economists were aware of divergent economies in economic reality that impede the functioning of european monetary union. burning problem of the ez is the dichotomy between the core and periphery countries. on the one hand, there are export-oriented and mostly industrialized countries, such as germany, the netherlands, and austria. on the other hand, there are countries dependent on imports and inflows of foreign direct investment, largely based on the service sector, such as greece, italy, ireland, portugal and spain (named piigs by the acronym for the names of these periphery economies) (de larosicre, 2012). it is the dichotomy that exposes the currency zone to asymmetric shocks with the resulting imbalances between member states. as mundell (1961) also pointed out different economic conditions (differences in gdp per capita, labour mobility and/or productivity), different levels of development or different sectorial diversification may initiate the dysfunction or sub-optimality of the currency area. the ez crisis can be understood as the outcome of a structural imbalance between the core and the periphery countries (lapavitsas et al., 2010; sklias, 2012; bartlett & prica, 2016). this paper analyses intra-ez divergence as a background for asymmetric monetary responses to ecb’s monetary contraction/expansion through descriptive and econometric analysis. after the introduction section, section 2 includes descriptive analysis of macroeconomic divergences of nominal (subsection 2.1) and real indicators (subsection 2.2) concerning the relation core-periphery-emerging ez members. the econometric analysis within section 3 is based on the estimated var model in which are included ecb’s interest rate and gdp of selected core (germany, france, belgium) and periphery ez countries (greece, spain, portugal). the aim of the above analyses is to understand the divergent positions of the core and periphery, as well as the divergent responses of economic activities to ecb’s monetary expansion/tightening for selected representatives of the core and the periphery. finally, section 4 highlights crucial concluding remarks. macroeconomic divergences and asymmetric resonses within the euro-zone 29 2. the divergence of nominal and real variables within the euro-zone it has emerged that one currency cannot fit all unless the member countries move swiftly to address the underlying causes of economic divergence (micossi, 2015). namely, the common monetary framework cannot function adequately with divergent members subject to asymmetric shocks. nominal and real convergence of economies is important in analysing the optimality of the ez because the closer the countries are, the more effective unique monetary authority will be. more effective monetary authority implies its successful counter-cyclical or stabilizing effect. real convergence is primarily related to rising gdp growth rates in the process of catching up with developed ez members, including narrowing differences of gdp per capita and productivity. the maastricht criteria emphasize nominal convergence defined through nominal variables of inflation, interest rates, exchange rates, public debt and budget deficits. oca theory stresses the degree to which real convergence is sufficient to allow economies to function synchronously within the ez in order to reduce the risk of asymmetric shocks (auf dem brinke, enderlein, & fritz-vannahme, 2015; franks et al., 2018). it is a well-known fact that countries in the ez are extremely heterogeneous from an economic viewpoint. countries with large external surpluses, high gdp per capita levels, good gdp growth rates and low unemployment rates coexist with others faring worse along several of such economic indicators (bonatti & fracasso, 2017). the descriptive analysis that follows will first look at the divergence of the initial member states (ez12) in relation to the core-periphery ez12. the core of ez12 consists of germany, france, austria, belgium, the netherlands, luxembourg, finland, while the periphery of ez12 are represented by greece, spain, italy, portugal and ireland. the emerging part of ez19 consists of the later integrated economies, that is, the former transition countries. emerging ez economies are slovenia (since 2007), cyprus and malta (since 2008), slovakia (since 2009), estonia (since 2011), latvia (since 2014) and lithuania (since 2015). 2.1. nominal ez divergence given the ecb's strict anti-inflation policy, the inflation rate converges (figure 1, left) between the periphery, core and emerging ez members in the period 2007-2018. prior to the accession of the emerging ez economies (2007-2015), their significant deviation was evident, but monetary convergence and meeting the maastricht convergence criterion led to accelerated adjustment to the rest of the ez. the overview of inflation stability in 2018 indicates the persistence of differences (figure 1, right). the latest figures indicate that in 2018 the average inflation rate in the ez was 1.8%, which is in line with the ecb's proclaimed monetary strategy. however, there is a clear difference of about three percentage points between the least inflationary economy (ireland 0.7%) and the most inflationary economy (estonia 3.4%). greater convergence of interest rates than inflation produced lower real interest rates during the early years of the ez, helping to fuel unsustainable capital inflows into lower income countries. however, the divergence of the nominal interest rate variable (another maastricht criterion) is particularly pronounced in the post-crisis period (figure 2). markets were "blind" to whether the ez was truly an oca due to the prevailing assumption that a common currency entails shared risk. nowhere is this false assumption more evident than in examining the interest rates of key ez countries (de larosičre, 30 e. beker pucar, o. glavańki 2012). due to shared risk beliefs, interest rates of ez countries, from germany to greece, were on an almost identical trajectory in the period 2000-2009. it is only in 2009 that markets "woke up" with the understanding that greek bonds (later bonds of other periphery economies) are not as secure as bonds of other ez countries, mainly as a result of divergences between ez members. when markets "awoke" to accept the reality of the divergence of ez countries in 2009 and 2010, long-term interest rates diverged between countries and rose sharply for the countries considered most at risk. fig. 2 the divergence of long-run interest rate (maastricht criteria) in the core, periphery and emerging part of ez19 in the period 2007-2018 source: authors’ review based on yearly eurostat data (https://ec.europa.eu/eurostat/data/database). fig. 1 inflation rate for the core, periphery and emerging part of ez19 in the period 2007-2018 (left) with the overview in 2018 (right) source: authors’ review based on yearly eurostat data (https://ec.europa.eu/eurostat/data/database). https://ec.europa.eu/eurostat/data/database https://ec.europa.eu/eurostat/data/database macroeconomic divergences and asymmetric resonses within the euro-zone 31 having in mind that monetary policy is not under national monetary control, excessive fiscal easing was seen as the main problem within the ez (alessandrini et al., 2014; schiliro, 2017). each of the ez member is responsible for implementing its own fiscal policy but is obliged to respect the maastricht convergence criteria concerning low budget deficits (upper limit 3% of gdp) and public debt (up to 60% of gdp). if a country's budget deficit is estimated to be excessive (exceeding the long-term benchmark), it may be possible to initiate procedures for sanctioning and monitoring the budget of a particular member state. although fiscal discipline has been emphasized as one of the most important preconditions for ez membership, most ez countries have failed to stay within the set limits of the budget deficit. figure 3 identifies the largest discipline in the public finance for the core countries in the period 2007-2018. in the process of monetary convergence and the ez accession, emerging countries are rapidly approaching the ez core. the problem is in the periphery ez12 countries with the huge and deepening budget deficit (average 14% in 2010) with the onset of shocks from the global crisis and the debt ez crisis. the ez debt crisis is evident in figure 3. in addition to the budget deficit relative to gdp, another maastricht criterion concerning public finance and fiscal policy can be observed in figure 3. figure 3 (right) shows the trend of public debt in the period 2007-2018 for the ez12 core and periphery, as well as the emerging part of the ez19. in the core countries, the public debt indicator was within the planned range, just like the budget deficit indicator. on average, emerging economies in the observed period recorded even lower levels of public debt compared to the ez12 core and periphery. a key divergence in the core-periphery relation occurs in the post-crisis period when public debt rose sharply (on average) in the periphery countries. the finding is compatible with the previous indicator of an excessive budget deficit in the post-crisis period. fig. 3 maastricht criteria related to public finance: budget deficit/gdp (left) and public debt/gdp (right) of ez19 members in the period 2007-2018 source: authors’ review based on yearly eurostat data (https://ec.europa.eu/eurostat/data/database). due to the divergent positions of public finances in the ez member states, as well as the role of fiscal destabilization in the debt 2010 crisis, there is a perception that stronger fiscal integration is a necessary step for the ez. close coordination of fiscal policies would ensure compatibility of macroeconomic policies among member states to minimize economic https://ec.europa.eu/eurostat/data/database 32 e. beker pucar, o. glavańki fluctuations and maximize the effectiveness of the common monetary policy (european council, 1989; de grauwe, 2018). if countries reach a consensus on fiscal union with financial transfers between member states, then these transfers can serve as a replacement for the missing flexible exchange rate and even as a substitute for a rigid labour market (immobile labour and rigid wages). ez members should implement a mechanism that provides financial support to member countries affected by asymmetric shock (eichengreen, 1991; feldstein, 1997; dibooglu & horvath, 1997; verdun, 2007; de grauwe, 2009). the implemented stabilization mechanism would be of benefit not only to the recipient countries but also to all members due to economic and political stabilization of the unique currency area. assuming that it is implemented reasonably, such a mechanism would be available to all monetary union member states and would not lead to permanent and unilateral transfers. such an instrument should be available automatically and quickly. otherwise, if decisions are to be made on a case-by-case basis, it will take a long time to reach political consensus (baldwin & wyplosz, 2012). 2.2. real ez divergence while nominal convergence is more recent from the european integration point of view, underlined by the maastricht treaty in the form of convergence criteria, real convergence is a longer-term phenomenon. namely, real convergence is related to the approximation of real variables, such as the level of economic development, standard of living, productivity, etc. within countries that seek greater degree of economic integration. it can be stated that the initiators of european integration (germany, france, italy, belgium, the netherlands, luxembourg), with the later accession of other eu countries (and later the ez members), insisted from the very beginning on the real convergence for the sake of sustainability of shallower integration levels than monetary union. for the functioning of the customs union (common customs policy since 1967) and the common market (single european act since 1987) it was necessary to reduce the differences in the levels of economic development of the member states. however, sharing the same currency as the last stage of economic integration, imposed the need to adjust nominal variables that was formalized by the maastricht criteria. although there was steady income convergence across ez members in the decades leading up to the maastricht treaty, income convergence among ez12 countries slowed after maastricht, while productivity among the ez12 diverged under the single currency (franks et al. 2018). real convergence has not occurred among the initial ez members. gdp growth and productivity growth have not reduced income disparities between richer and poorer countries. in contrast, there has been significant convergence among emerging ez19 who have joined the ez in the period 2007-2015. the lack of convergence between ez12 could be attributed to several factors, notably structural rigidities, weak productivity growth, weak institutions and insufficient policies to address asset price booms (del hoyo et al., 2017). several years before the onset of the global economic crisis, all ez members were in expansion and all went into recession after the crisis. the accumulation of imbalances in the first decade of the ez became unsustainable and triggered a painful correction, which led to a double-dip recession in the ez between 2009 and 2012 (pierluigi & sondermann, 2018). however, significant differences are evident in terms of their post-crisis adjustment. while some countries have regained a stable economic growth trajectory and pre-crisis output levels, other countries have experienced a recurrent economic crisis (figure 4). macroeconomic divergences and asymmetric resonses within the euro-zone 33 fig. 4 the divergence of economic growth (left) and unemployment rate (right) between core-periphery-emerging economies of the ez in the period 1999-2018 source: authors’ review based on yearly eurostat data (https://ec.europa.eu/eurostat/data/database). as figure 4 shows, the structural break in the economic growth (left) and related unemployment rate (right) was evident in the ez, especially for the periphery and emerging parts with the outbreak of the 2007/2008 global crisis. however, an asymmetric shock has hit the ez since 2010 as a result of the debt crisis. asymmetry due to the fact that periphery economies experienced another structural break in the wake of the 2011/2012 economic downturn. the debt crisis has severely affected the economic growth of mentioned economies, while other countries have been affected indirectly and, at worst, in a moderate manner. cyprus, greece, ireland, portugal and spain had to seek financial support. italy has attracted the attention of investors who doubted the sustainability of italian long-term solvency. the bonds of the italian government therefore recorded a high risk premium and the country faced significantly higher refinancing costs (ehmer, 2017). this is why italy is generally considered to belong to the ez periphery. other than italy, the other founding members of european integration are the so-called ez core (along with austria and finland). their economic growth was mostly threatened by economic ties with the periphery economies, and in their case a slight decline in economic activity was evident as a result of the debt crisis (figure 4, left). widening gap between the ez core and the periphery concerning the unemployment rate as a real economy indicator is evident in the post-crisis period (figure 4, right). while the core is close to full employment and their potential growth has not been affected by the last global crisis, secular stagnation is a concern in the periphery economies (bartlett & prica, 2016, onaran, 2018). since the global crisis, the periphery has experienced a permanent reduction in their growth potential. eleven years after the crisis, their economies still register unemployment rates higher than pre-crisis levels and, in most cases, at unacceptable two digit levels. figure 4 (right graph) indicates that there was convergence of unemployment rates in the pre-crisis period, but it has been mainly reversed in the postcrisis period. the global crisis initiated sharp rise of unemployment in the case of ez periphery and milder rise of unemployment in the case of emerging ez economies. https://ec.europa.eu/eurostat/data/database 34 e. beker pucar, o. glavańki 3. heterogeneous real responses to ecb’s monetary impulse weaker ez economies recorded generally higher levels of inflation and unemployment. on the other hand, there are countries like germany with the main priority of maintaining low inflation. the ecb’s monetary decision-making was mostly criticized because it affects ez members differently and could drive their economies out of alignment (salvatore, 2002). the literature on the topic suggests a theory also known as the german dominance hypothesis (gdh), which explains the prevailing role of german's economic goals on the ecb’s decision-making process. as aizenman (2014) states, the euro is a currency without a state, under the dominance of germany. besides highlighting the divergence of ez members, the main purpose of this paper is to shed some light into the question if the ecb's monetary policy is beneficial for the ez members as a whole or only for a select group of countries, which have similar economic profiles. this research establishes the differential interest rate impact of the ecb’s monetary policies on the ez members with the expectations that the policy will benefit mostly the german economy and other economies with similar low-inflation targeting needs (the core), in contrast to others which face generally higher unemployment rates (the periphery). the ecb’s monetary policy is not effective if monetary transmission is asymmetric to the member states. moreover, “one-size-fits-all” monetary policy has created problems for periphery economies with different needs from the core countries. the countercyclical or stabilizing effect of the ecb’s policy on the core countries, with the absence of stabilization in the case of periphery economies, is empirically investigated by the forecast error variance decompositions and impulse response functions of the estimated var model. this type of model is widely used in the empirical literature dealing with the monetary transmission mechanism, as well as transmission of external shocks, e.g. borghijs & kuijs (2004), ito & sato (2006), galesi & lombardi (2009), polito & wickens (2012), arratibel & michaelis (2014), kapuściński et al. (2016), serwa & wdowiński (2016), ulrich (2018), etc. the var model is bivariate because it involves changes in the ecb's short-term interest rate 2 and national gdp 3 of the core (germany, france, belgium) and the periphery (greece, spain, portugal). the impulse or the shock represents an unexpected change in the ecb’s interest rate. the monetary transmission of the shock (interest rate channel) to variations in economic activities (the response) has been tracked for the aforementioned economies during four quarters. counter-cyclicality is reflected in negative reaction of economic growth to the rise of supranational interest rate. the research period covers the start of ez functioning until the last quarter of 2018, 1999:q1-2018:q4. figure 5 shows the tendency of the ecb’s interest rate over the mentioned period. in addition to the rigid position of supranational monetary authority at the beginning of the ez functioning and another tightening with the outbreak of the debt crisis, the ecb takes a more relaxed stance with a sharp interest rate drop in the post-crisis period. 2 money market interest rate – quarterly data, the period 1999:q1-2018:q4, eurostat. 3 nominal gdp (seasonally adjusted) – quarterly data, the period 1999:q1-2018:q4, international financial statistics, imf. macroeconomic divergences and asymmetric resonses within the euro-zone 35 0 .0 0 1 .0 0 2 .0 0 3 .0 0 4 .0 0 5 .0 0 e c b ir 2000q1 2005q1 2010q1 2015q1 2020q1 datevar fig. 5 ecb’s money market interest rate in the period 1999:q1-2018:q4 source: authors’ review based on quarterly eurostat data. figure 6 shows nominal gdp (seasonally adjusted) for germany, france, belgium (upper graphs) and greece, spain and portugal (below graphs). the divergence in gdp trend is clearly evident in presented figures. in addition to a structural break in the crisis year, the core countries continue the path of economic expansion. on the other hand, greek gdp has not yet recovered since the global crisis. in the case of portugal and spain, the recovery was slow. the induction of growth followed in 2015, after years of economic stagnation. germany france belgium 5 0 0 0 0 0 6 0 0 0 0 0 7 0 0 0 0 0 8 0 0 0 0 0 9 0 0 0 0 0 g d p 2000q1 2005q1 2010q1 2015q1 2020q1 datevar 3 5 0 0 0 0 4 0 0 0 0 0 4 5 0 0 0 0 5 0 0 0 0 0 5 5 0 0 0 0 6 0 0 0 0 0 g d p 2000q1 2005q1 2010q1 2015q1 2020q1 datevar 6 0 0 0 0 8 0 0 0 0 1 0 0 0 0 0 1 2 0 0 0 0 g d p 2000q1 2005q1 2010q1 2015q1 2020q1 datevar spain greece portugal 3 5 0 0 0 4 0 0 0 0 4 5 0 0 0 5 0 0 0 0 5 5 0 0 0 6 0 0 0 0 g d p 2000q1 2005q1 2010q1 2015q1 2020q1 datevar 3 0 0 0 0 3 5 0 0 0 4 0 0 0 0 4 5 0 0 0 5 0 0 0 0 g d p 2000q1 2005q1 2010q1 2015q1 2020q1 datevar 1 5 0 0 0 0 2 0 0 0 0 0 2 5 0 0 0 0 3 0 0 0 0 0 g d p 2000q1 2005q1 2010q1 2015q1 2020q1 datevar fig. 6 nominal gdp (seasonally adjusted) of ez core (above) and periphery (below) representatives in the period 2000-2019 source: authors’ review based on quarterly data imf international financial statistics. 36 e. beker pucar, o. glavańki the var model estimation is preceded by stationarity tests of the ecb’s interest rate and national gdp levels of selected core and periphery countries. the dickey-fuller and phillips-perron stationarity tests for both variables, and in all the economies examined, indicate acceptance of the null hypothesis. therefore, the time series of the ecb’s interest rate and the gdp of the ez core and periphery countries are non-stationary. nonstationarity indicates that the economic shock has a lasting effect on these time series and that after the effect of the asymmetric shock it is difficult and slow to return to the equilibrium path. the non-stationarity of gdp levels is not a good signal from the point of view of the functioning of monetary union, as asymmetric shocks initiate longer-term destabilization. the relation between individually non-stationary time series can be examined through the concept of cointegration or long-term equilibrium relationship. a confirmation of the cointegration of non-stationary time series via johansen's cointegration test indicates the estimation of vec (vector error correction) model. or, the rejection of the long-run equilibrium relationship of individually non-stationary time series (cointegration) suggests the estimation of var (vector autoregressive) model. the cointegration between the ecb’s interest rate and national gdp levels is not confirmed. therefore, the first differences of interest rate and national gdp are included in the var model estimation. the order of the var model is determined on the basis of information criteria (akaike-aic, hana-quinnhqic, and schwartz-bayesian-sbic). var model estimates do not automatically allow the derivation of forecast error variance decompositions and impulse response functions. specifically, the stability of the var model, the absence of autocorrelation, and the normal distribution of the residuals of the estimated var model, should be previously confirmed. the results of variance decompositions and impulse responses are performed in order to analyse the effect of economic policy measures. in this case, it is of interest to find out how the sudden change in the ecb's short-term interest rate reflects on the economic activities of the selected core and periphery ez countries. if a change in ecb’s interest rate is differently transmitted to economic activities of investigated economies, then the action of the ez supranational monetary authority is undoubtedly ineffective and asymmetric. table 1 shows the correlation coefficient between the ecb’s interest rate and gdp of the selected countries. this numerical indicator, although cursory, indicates monetary asymmetry in the ecb’s action for the core and the periphery. table 1 correlation coefficient between short-run ecb’s interest rate and gdp for selected ez core and periphery countries in the period 1999:q1-2018:q4 germany france belgium portugal spain greece -0,80 -0,79 -0,82 -0,68 -0,65 -0,07 source: the authors. the effect of the ecb's monetary policy is counter-cyclical, as indicated with negative signs of correlation coefficients. however, it is clearly observed that counter-cyclical influence is more pronounced in the case of the core countries. significant stabilizing effect is evident in the case of belgium, germany and france, while stabilization is moderate in the case of portugal and spain, and almost absent in the case of greece. figure 7 shows the results of forecast error variance decomposition for the economic growth of selected ez economies over the observed period. macroeconomic divergences and asymmetric resonses within the euro-zone 37 fig. 7 forecast error variance decomposition of economic growth/fall as a response to the ecb’s interest rate change (shock) during four quarters source: the authors. the results of variance decompositions of the economic growth for selected core and periphery ez countries confirm the expectation that the countercyclical effect of the ecb's monetary policy is more pronounced for the core. in the case of germany, a change in ecb’s interest rates causes a 20% change in economic activity, with an impact growing in the second quarter to 30%. a similar effect is evident in the case of france and belgium. however, the change in the ecb’s interest rates affects only 3% of gdp variations in the first quarter and 9% of variations in the second quarter in the case of portugal. more generally, about 9% of gdp variations in all periphery countries can be explained by the impact of the ecb after four quarters. the same impact in the core countries is in range of 27-32% after four quarters. the strength of the countercyclical impact or monetary asymmetry between core-periphery is clear on the basis of above mentioned empirical findings. further analysis of the ecb’s interest rate transmission to the real economic activities of the core and the periphery implies examination of the impact direction (provs. countercyclicality), the intensity (stronger or weaker real effect), as well as the length of the monetary impact during 4 quarters. the variance decomposition results do not indicate the direction and duration of the mentioned monetary transmission. in that purpose, impulse response functions are presented in figure 8. the results indicate that the effect of ecb’s monetary policy is generally countercyclical in the case of the observed ez members. countercyclical effect occurs mainly in the 2 nd quarter (figure 8). however, this countercyclical effect on the real economy is relatively weak in the case of greece, portugal and belgium. the impact is relatively stronger in the case of spain, but the strongest in the case of two key core economies – france and germany. as the figure 8 shows, by far the strongest countercyclical effect is observed in the case of germany, confirming the best fit of the ecb's policy to this key core economy. 38 e. beker pucar, o. glavańki fig. 8 impulse response functions – the response of gdp growth of selected ez members to the change of ecb’s money market interest rate during 4 quarters source: the authors. asymmetric and heterogeneous responses of ez member states to ecb’s monetary impulses, especially related to the core-periphery dichotomy, german dominance hypothesis, and “one size fits some” monetary policy are also emphasized in kool (2005), hendricks & kempa (2008), petrova (2010), micossi (2015), wortmann & stahl (2016), botta, tippet & onaran (2018), etc. 4. concluding remarks “diversity in unity” is the famous european slogan, and as far as economic diversity is concerned, this motto seems appropriate. economic heterogeneity in the ez is a well-known phenomenon, ranging from employment to growth rates, from public debt and budget deficit to wage and price dynamics. convergence criteria should not be viewed as a temporary adjustment aimed at adopting a common currency. specifically, the common currency and monetary union are threatened per se if convergence is not maintained in the long run. the global crisis has highlighted already accumulated macroeconomic imbalance and vulnerability of the ez in the pre-crisis period, culminating with the debt ez crisis. the lesson of crisis episodes underlines the need to prevent the aforementioned imbalances within the single currency area, as divergence will lead sooner or later to the ez crisis under sudden external shocks. despite vast literature dealing with the issue of ez vulnerability, the paper aims to contribute with an up-to-date descriptive and econometric analysis of macroeconomic divergences among core-periphery-emerging ez members and consequential asymmetric responses to supranational monetary measures. this paper argues that the ez seems to be a rather complicated framework for certain ez members like greece, portugal, spain, ireland, and italy, namely the weaker or periphery economies. here we especially stress nominal and real divergences having in mind original ez12 core-periphery dichotomy, with even more diversity added by emerging ez19 economies. in the periods during which asymmetric macroeconomic divergences and asymmetric resonses within the euro-zone 39 shocks create fundamentally different economic conditions in the ez, monetary policy is not a very efficient stabilizer. the ecb’s monetary policy has to do justice to the needs of all member states simultaneously and may not be geared to the requirements of individual member states only. however, the effectiveness or stabilization role of supranational monetary policy is weak in mutually divergent economies, subject to asymmetric shocks. the results confirm that ecb’s interest rate monetary transmission is counter-cyclical for the core countries, while for the periphery countries it is a relatively weak stabilization mechanism. especially, the ecb’s impulse is most compatible with the german countercyclical need, then french, and in the least extent adjusted to the greek situation. the convergence of key nominal and real variables is necessary for the proper functioning of the monetary union. however, structural differences of ez members can hardly be narrowed significantly in a relatively short period of time. therefore, persistent economic divergence is a key challenge to keep european monetary union sustainable. important actions have already been taken in establishing the banking union, monitoring and coordinating macroeconomic policies more closely, and pushing for greater structural reforms through the european semester, macroeconomic imbalances procedure, and other initiatives. nevertheless, long term success of the ez depends on continuing process of political unification. budgetary union (and thus political union) is needed, but the willingness today to move in the mentioned direction is relatively weak. this will continue to make the ez a fragile monetary arrangement, without possibility to predict and guarantee its 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(2018). identification of financial and macroeconomic shocks in a var model of the polish economy. a stability analysis. economics and business review, 4(18), 29-43. makroekonomske divergencije i asimetrične reakcije unutar evro zone u radu se ispituje nominalna i realna divergencija unutar evro-zone (ez) kao osnova asimetrične monetarne transmisije evropske centralne banke (ecb). kako bi se rasvetlila pomenuta pitanja, deskriptivna analiza ključnih nominalnih i realnih indikatora potvrđuje dihotomiju jezgro-periferija unutar originalnih ez12 članica, kao i specifičnu poziciju emergentnih članica ez19. monetarna transmisija (kanal kamatne stope) ispitana je pomoću ocenjenog vektorskog autoregresionog (var) modela za zemlje predstavnike jezgra (nemačka, francuska, belgija), kao i zemlje periferije (portugal, španija i grčka) za period 1999q1-2018q4. posmatrajući transmisiju kamatne stope ecb (šok) na promene rasta bruto domaćeg proizvoda (odgovor, reakcija), rezultati dekompozicije varijanse i impulsnih odgovora ukazuju da generalno kanal kamatne stope deluje kontraciklično. međutim, dok je stabilizirajući (kontracikličan) efekat evidentan za jezgro (posebno nemačku), skoro da izostaje u slučaju grčke. zaključci naglašavaju osetljivost ez u kontekstu heterogenog članstva i, posledično, asimetričnog odgovora na monetarne impulse ecb. naši nalazi podržavaju argumente brojnih istraživačkih radova u kojima se naglašava dualizam jezgro-periferija, hipoteza nemačke dominacije, kao i “jedna odgovara nekima” monetarna politika. ključne reči: evro-zona, jezgro, periferija, realna i nominalna divergencija, ecb, monetarna transmisija. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 3, 2016, pp. 313 323 preliminary communication correlation between oil and u.s. stock prices, what companies are resilient the most in energy sector1 udc 622.323:338.5 antonio marchitelli 1 , sandra kamenković 2 , zoran grubišić 2 1 coface insurance group, milan, italy, 2 belgrade banking academy, belgrade, serbia abstract. as opec could not recently find an agreement to contain the dramatic oil prices drop, the us, but also worldwide, stock markets have experienced a new decline, limited not only to energy sectors. in this paper we examine the statistical correlation of oil prices (brent) and us energy sector stocks for the past five years (2011-2015). the analysis is carried out on public available data, such as fred database (federal reserve bank of st. louis), with a weekly granularity. the output highlights which companies have the highest degree of resistance to oil price volatility. it puts then in comparison those resilient companies with their degree of integration along the energy operations. as falling oil prices may have impact in different manner on the sub-sectors, some companies may eventually benefit from their positioning along the value chain (downstream vs. upstream segments). key words: oil prices, stock markets, statistical analysis, data series correlation 1. literature review this paper examines the statistical correlation of oil prices (brent) and the us energy sector stocks in the past five years. an understanding of interactions between commodity and equity markets can be useful in portfolio diversification strategies for investors. this relation is of particular relevance in a period of great instability in stock and bond markets on the one hand and great price drop in oil prices on the other. 1received june 14, 2016 / revised july 27, 2016 / accepted august 18, 2016 corresponding author: sandra kamenković belgrade banking academy, zmaj jovina 12, 11000 belgrade, serbia e-mail: sandra.kamenkovic@bba.edu.rs 314 a. marchitelli, s. kamenković, z. grubišić there was some research in literature on the relations between oil prices and stock market returns. usual assumption is that this relation is negative: increases in oil prices raises costs in many industries, depressing stock prices by lowering expectations about future earnings and dividends. according to this logic, current situation in which the oil price is falling, should lead to rising expectations about future earnings and dividends. there are very few studies that examine the relationship between oil price and stock prices of the oil industries. in the article from 1993 al-mudhaf and goodwin examined the returns from 29 oil companies listed on the new york stock exchange. their findings suggest positive impact of oil price shocks on ex post returns for firms with significant assets in domestic oil production. huang, masulis and stoll (1996) used regression analysis and examined the link between daily oil future returns and daily united states stock returns. their results provide some evidence that oil future prices have a direct impact on oil sector stock prices. shaharudin, samad and bhat (2009) examined the effect of oil prices movements on the stock price of oil and gas companies in three different markets, the us, india and the uk. the results suggest that there are significant shortand long run relationships between oil price and the oil stocks, including the effect of the other variables such as interest rate and the stock index. the oil price volatility transmission has a persistent effect on the volatility of the stocks of the oil companies in all the countries that were studied. limitation of this study is the fact that stocks of the two major companies in each country in the field of oil and gas industry are analyzed, which makes total of six stocks. finally, gilmore, mc manus, sharma and tezel (2016) investigated dynamic relationships between wti crude oil prices, two oil sector stock price indices and three stock market price indices representing large, mid and small capitalization stocks. a vector errorcorrection (vec) model reveals that the stock prices of companies in the integrated oil and gas sector have a long run negative relationship with oil prices, while those in the oil and gas exploration and production sector have a long-run positive relationship with oil prices. 2. introduction as any other commodity, oil price is regulated by rules of supply and demand. the expectations have significant impact on oil price. price of a barrel of oil has fallen more than 70 percent since june 2014, when the barrel cost usd 110. prices recovered a few times last year, but a barrel of oil has already sunk this year to its lowest level since 2004. in the beginning of february, the main international benchmark, brent crude, was trading at around usd 35 per barrel. many economist and analysts emphasize several main reasons for a fall in oil prices. demand is low due to weak economic activities in china and all over the world in general. the economies of europe and developing countries are weak and vehicles are becoming more energy efficient, so demand for fuel is dropping. also, mild winter temperatures have not boosted demand. the united states domestic production has nearly doubled over the last several years, pushing out oil imports that need to be sold elsewhere. saudi, nigerian and algerian oil that was once sold in the united states is suddenly competing for asian markets and the producers are forced to drop prices. canadian and iraqi oil production and exports are rising year after year. even the russians, with all their economic problems, manage to raise their production. correlation between oil and u.s. stock prices, what companies are resilient the most in energy sector 315 however, the saudis have decided not to sacrifice their own market share to curb the falling prices of oil, since this process is most beneficial for russia and iran. their costs of getting oil from the ground are very low usd 5-6 per barrel, much cheaper than other oil producing countries. thus, they started new strategy, letting the price fall and putting high costs producers out of business. previously stipulated circumstances have some specific effects. american frackers who have borrowed heavily on expectation of continuing high prices and who have already constructed more than 20,000 oil wells in the expectations of high oil prices are now in trouble. in trouble are also other western oil companies with high cost projections involving drilling in deep water or in the arctic. hard hit fell on the regimes and nations who are dependent on a high oil price to pay for costly foreign adventures and social programmes, such as russia and iran. russia is already hit by the western sanctions, following its meddling in ukraine and iran which is paying to keep the assad regime afloat in syria. nigeria has been forced to raise interest rates and devalue the naira. venezuela is closer than ever to defaulting on its debt. big importing countries in the euro zone, japan and india, are enjoying especially big windfalls. since these savings are more likely to be spent than stashed in a sovereign wealth fund, global gdp should rise. the falling oil price will reduce already low inflation still further, and so may encourage central bankers towards looser monetary policy. central factor in the sharp price drop, analysts claim, is the continuing unwillingness of opec, a cartel of oil producers, to intervene to stabilize the markets that are widely viewed as oversupplied. iran, venezuela, ecuador and algeria have been pressing the cartel to cut the production to firm up prices, but saudi arabia, the united arab emirates and other gulf allies are refusing to do so. at the same time, iraq is pumping more and iran is expected to become a major exporter again. saudi officials have said that if they cut production and price goes up they will lose the market share and merely benefit their competitors. if prices remain low, for another year or longer, the newly crowned king salaman may find it difficult to persuade other opec members to keep steady against the financial strains. the international monetary fund estimates that the revenues of saudi arabia and its persian gulf allies will fall for approximately usd 300 billion this year. some oil executives are quietly noting that the saudis want to hurt russia and iran, and so does the united states, so the two oil producing nations are trying to force down the prices. if we analyze the history, one of the important factors in bringing down the soviet union was dropping the oil prices in 1980s. while market surplus is expected to continue in 2016, some analysts predict an increasing drop in oil prices for the months to come. on the demand side, 2015 has seen oil consumption slightly increasing to 93.8 mb/d (million barrels per day) according to eia energy information administration. this trend should continue in 2016, where developed economies appear to be modestly recovering and the chinese economy, the world’s second largest oil consumer, is slowing down. on the supply side, oil supply reached 95,7 mb/d in 2015, and forecasts provide a slight increase in 2016 to 95.9 mb/d over 2016. more specifically opec crude oil production is expected to increase by almost 1 mb/d as iran sanctions are suspended. moreover, inventories are at a high level, which also explains the oversupply, and stocks are equivalent to 66 days consumption. 316 a. marchitelli, s. kamenković, z. grubišić at the same time, the us production is already falling as the drop in oil price has weakened the us producers with high impacts on their margins. the us crude oil production is forecast to fall from 9.4 mb/d in 2015 to 8.7 mb/d in 2016, according to eia estimates. the low oil price situation is affecting oil producers already weakened in 2015 by the sudden price decreases. this trend is progressively impacting the whole value chain in the oil-energy sector. as a consequence, global stock markets, traditionally resilient to oil prices fluctuations, have started to decline, showing a growing interconnection with oil prices volatility. this paper explores the statistical correlation of oil prices (brent) and the us energy sector stocks for the past five years and tries to identify what companies/sub-segments of the value chain are more resilient to the oil price volatility. 3. methodology this paper investigates the statistical correlation of oil prices (brent) and us energy sector stocks for the past five years (2011-2015). as a first step we have defined the approach used in this paper, described as follows: phase key criteria algorithm selection  efficient enough to process large series data in short time;  providing a degree of correlation together with a level of significance. sources identification  official and auditable;  retrievable on-line;  covering the chosen observation period. system implementation  able to retrieve data on-line, process data and present results;  quick enough to run the exercise several times in a short period. results analysis  output data including correlation metrics;  3 analysis dimensions: stock, industry and period. in order to highlight which companies and industries have the highest correlation with oil price trends, we had to analyze the problem by looking at hundreds of time series, and comparing them against a given one. this system is called ‘market price trends analyzer’ (mpta). mpta relies on a batch process to find stocks that correlate to the given price time series. it searches thousands of candidate series in under 900ms in order to find the best matches for a target time series. correlation between oil and u.s. stock prices, what companies are resilient the most in energy sector 317 the input series of mtpa consist of weekly average end-of-the-day price points. initially we investigated the use of brute force search for the correlated series, but it resulted immediately too expensive. so we have opted for a statistical algorithms that may result much more performing in terms of speed. the developed approach has then been applied to series of the stock prices within the energy sector, provided by nasdaq and nyse, comparing them against the time series of oil price (brent price). all data are represented as vectors of prices. each vector represents a stock, each element of the vector the average weekly end-of-the-day price of that stock in a given week. we chose to compare vectors using the standard definition for pearson correlation between two time series, specifically: if two vectors u and v are perfectly correlated, then r(u, v) = 1. the distance in this case is equal to zero, so we use the standard definition of pearson correlation distance. stocks prices series may have some ’holes’ in their data. this may happen when a stock is listed during the observation period, when stock trade is temporary suspended for whatever reason, or in a number of other cases. for this reason we needed support for ’holed’ periods. when a vector has missing values (i.e. not real or negatives) we exclude that value for both vectors. as reported in (4), we considered then only positive values (i.e. belonging to q + ) within the observation period. when a value is ’missing’ in one of the series, then the corresponding week data are not computed by the algorithm. the correlation level has been evaluated on the basis of the following table. as a significance test we used the t-student distribution with n-2 degrees of freedom (minimum value critical r), a=0,05. as described, sources must be:  official  auditable  retrievable on-line  able to cover the chosen observation period there are a number of sources (paid and free) that correspond to some of the previous criteria, but only few that fit to all of them. 318 a. marchitelli, s. kamenković, z. grubišić for the purpose of this paper we have chosen the following sources:  crude oil prices  data: brent europe price  description: end of the day price expressed in usd  source: federal reserve bank of st. louis, us (fred database)  frequency: weekly  https://research.stlouisfed.org/fred2/series/dcoilbrenteu# (free)  oil-energy  data: stock ticker  description: set of 630 tickers (including sector, industry and exchange) related to energy companies listed in nyse and nasdaq  source: zacks investment research  frequency: none, sample taken in january 2016, active companies  http://www.zacks.com/screening/stock-screener (paid)  stocks  data: stock prices  description: end of the day price expressed in usd  source: yahoo finance (source: nasdaq and nyse)  frequency: weekly  http://real-chart.finance.yahoo.com/table.csv?s=[ticker]&a=00&b=01&c=2011 &d=11&e=31&f=2015&g=w (free) in the observed period, oil price showed different dynamics moments. so we split the observation period into different temporal segments that we wanted to investigate in terms of correlation with stocks. the resulting 4 temporal periods are described here below (and graphically in (figure 1.)): (1) 2011-2015: last 5 years, a trend with ups and downs (2) jan15-may15: 5 months, sharp drop (3) may15-jul15: 3 months, sharp increase (4) aug15-dec-15 : 5 months, sharp drop fig. 1 temporal periods chosen for the analysis https://research.stlouisfed.org/fred2/series/dcoilbrenteu http://www.zacks.com/screening/stock-screener http://real-chart.finance.yahoo.com/table.csv correlation between oil and u.s. stock prices, what companies are resilient the most in energy sector 319 the resulting data set is large, but still storable in a single database memory: a sample of more than 68,000 data representing the weekly end-of-the-day average price in the last 5 years of 303 companies listed in nyse and nasdaq, under the sector ’oil-energy’. each stock is represented by a vector that consists of 260 weeks of data retrieved on-line. the process provides the following steps: one-off activities (1) storage of the list of tickers representing the stocks listed at nasdaq and nyse under the chosen sector recurring activities (2) on-line data retrieval per each ticker (3) data series storage into vectors (4) vectors cleaning (the system checks validity of data and discards non-valid points) (5) comparison with the brent price equivalent vector: calculation of r coefficient (pearson correlation) and the rc threshold (critical value for two-tailed test, a=0,05) (6) representation of resulting data together with the following dimensions: stock, industry and period. points 5 and 6 are processed 4 times, according to the 4 different temporal segments (jan11-dec15, jan15-may15, may15-jul15, aug15-dec-15), that represent different moments of oil price trends. processing efficiently such an amount of data required the development of software that could replicate the process previously described. so we have chosen to develop the mtpa software as follows:  developed in dot net (microsoft visual studio 2012 development platform)  hosted on web server machine that can run faster all process phases  performances sent via ftp to localhost it took 3 minutes for the server to complete the data gathering phase, and another 5 minutes to calculate correlation and significance, for a total processing time of 8 minutes. the algorithm is on-line and can be run at: http://www.marchitelli.net/bba-correlate-oil-stocks.aspx 4. empirical results as shown in figure 2, the sample is largely represented by oil & gas production industry companies (54%), followed by integrated oil companies (9%), oilfield services/equipment (8%) and natural gas distribution (8%). less important in the sample are the other industries: industrial machinery/components (6%), oil refining/marketing (5%) and coal mining (4%) and metal fabrications (4%). a marginal presence of consumer electronics/appliances (1%) and electric utilities (1%) completes the sample. http://www.marchitelli.net/bba-correlate-oil-stocks.aspx 320 a. marchitelli, s. kamenković, z. grubišić fig. 2 sample composition we have considered significant only those stocks that present very high correlation (i.e. r>=0.8) with oil price series and that passed the significance test (r>= rc). if we consider the whole period (5 years), there are only few industries that show a high number of stocks correlated. these industries belong to the upstream segment of the value chain: oil&gas production is impacted for 2/3 of its companies, metal/coal and utilities for more than a half. on the other hand, downstream segments show a small number of stocks with high correlation. consumer electronics and industrial machinery appear to be highly resilient to oil price fluctuations. fig. 3 percentage of companies with high correlation, split by industry, in period 2011-2015 correlation between oil and u.s. stock prices, what companies are resilient the most in energy sector 321 when it comes to the first semester of 2015 (january to may), the behavior of stocks changes significantly. in this temporal period oil prices were cut by 2 in only a few months. the impact on the sector is expected then to be quite significant. in fact, for both upstream and downstream segments, the correlation is growing and almost all industries are correlated for more than half of their companies. but the most impacted industries are linked to production, mining and metals. oil refining and distribution appears to be less impacted and utilities show no correlation at all. fig. 4 percentage of companies with high correlation, split by industry in period january 2015-may 2015 from may to june 2015 oil price had a sudden increase, in the order of 40%. as the volatility increases, the correlation shows a higher impact for all industries. the vast majority of companies of the sample show a high correlation with oil prices. only coal mining industry shows a better resilience. fig. 5 percentage of companies with high correlation, split by industry, in period may 2015-july 2015 322 a. marchitelli, s. kamenković, z. grubišić in the last part of 2015 oil price had again a sudden drop, moving from almost usd 70 to approximately usd 35.the almost totality of the sample shows a full correlation for this last observation period. even the most resilient industries are now basically following the sharp brent drop. only coal mining shows a slightly lower level of correlated stocks. fig. 6 percentage of companies with high correlation, split by industry, in period august 2015-december 2015 conclusion in this paper we analyzed statistical correlation between oil prices (brent) and us energy sector for the past five years and tried to identify what companies/sub-segments of the value chain are more resilient to the oil price volatility. we analyzed 4 periods. in period jan 2011-dec 2105, some sectors belonging to the downstream segment of the value chain show a little number of stocks with high correlation, and upstream segments show higher correlation. in period jan 2015-may 2015, for both upstream and downstream segments the correlation is growing, almost all industries are correlated for more than half of their companies. in period may 2015jul 2015 the correlation is growing for all industries, the vast majority of companies of the sample show a high correlation with oil prices. finally, in the last five months of 2015 almost all companies are highly correlated to brent trend. even the most resilient industries are basically following the sharp brent drop. interesting finding is that for the whole period from january 2011 to december 2015 about 51% of companies show high correlation with brent, but in the sub-periods this correlation is stronger, 80% in the first, 87% in the second and 96% in the third sub-period. in short periods oil prices have strong impact on stock prices, but in relatively longer time period, changes in stock prices are less related to changes in oil prices, which could be result of many factors influencing the stock prices, such as structural factors. these findings should be useful to investors in their attempts to appropriately structure their overall portfolios. analysis of oil price changes can be used as indicator of stock prices, especially stock prices from oil industry. investors that want to buy stocks, especially stocks from oil industry should be well informed about the oil prices. if they want to invest in something highly correlated, they have to pay attention to oil prices. correlation between oil and u.s. stock prices, what companies are resilient the most in energy sector 323 references al-mudaf, anwar, a, goodwin, thomas h. 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"gulf countries: various reactions to the same shock" n.p., sept. 2015. http://www.coface.com/newspublications/publications/gulf-countries-various-reactions-to-the-same-shock. korelacija između cena nafte i cena američkih akcija, koje kompanije u energetskom sektoru su najotpornije s obzirom da zemlje opek-a nisu postigle dogovor u cilju zaustavljanja dramatičnog pada cene nafte, cene akcija na američkoj berzi, ali i cene akcija na berzama širom sveta su ponovo pale. taj pad cena akcija nije bio ograničen isključivo na energetski sektor. u ovom radu se analizirala statistička korelacija cene nafte (brent) i akcije američkih kompanija koje pripadaju sektoru energetike u prethodnih 5 godina (2011-2015). u analizi su korišćeni javno dostupni podaci , poput fred baze podataka, sa nedeljnom frekvencijom. rezultati analize izdvajaju kompanije koje pokazuju najviši stepen otpornosti na volatilnost cene nafte, a zatim se najotpornije kompanije stavljaju u odnos sa njihovim stepenom integracije duž proizvodnog procesa energetskog sektora. kako pad cene nafte može na različit način uticati na podsektore, neke kompanije mogu imati određene koristi od pozicioniranja duž lanca vrednosti (uzvodni i nizvodni segmenti). ključne reči: cena nafte, berze, statistička analiza, korelacija serije podataka http://repository.um.edu.my/77513/ http://repository.um.edu.my/77513/ http://www.dallasfed.org/assets/documents/institute/wpapers/2015/0249.pdf http://research.google.com/pubs/pub41694.html http://www.cs.cmu.edu/~agray/approxnn.pdf http://link.springer.com/chapter/10.1007/978-3-642-00296-0_5 http://www.coface.com/news-publications/publications/gulf-countries-various-reactions-to-the-same-shock http://www.coface.com/news-publications/publications/gulf-countries-various-reactions-to-the-same-shock facta universitatis series: economics and organization vol. 16, n o 4, 2019, pp. 365 376 https://doi.org/10.22190/fueo1904365s © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the investigation of the influence of psychological contract types on organizational citizenship behaviour 1 udc 349.2:331.106]:005.32 ivana simić, biljana đorđević, sandra milanović* university of niš, faculty of economics, serbia abstract. organizational citizenship behaviour represents the behaviour of the employees that goes beyond their duties. this type of behaviour from the perspective of employer is very desirable since it produces many positive consequences regarding individual and the overall organizational performances. however, readiness of the employees to exert this type of behaviour is influenced by many factors. one of the most important is fulfilment of employees’ psychological contract. since that there are two basic forms of contracts, relational and transactional, the aim of this paper is to investigate the relationship between these types of psychological contract and organizational citizenship behaviour. for the purpose of testing proposed hypothesis, ttest, pearson correlation and multiple linear regression analysis were applied. the results showed that there is a positive relation and positive impact of relational psychological contract on the organizational citizenship behaviour, which was not the case when it was about the transactional contract. key words: relational psychological contract, transactional psychological contract, organizational citizenship behaviour, employees. jel classification: j28, j29 introduction the history of studying the psychological contract begins in 1960s (argyris, 1960; levinson et al., 1962; schein, 1965), but the interest for this concept has grown significantly in the last few decades. the reason for that is that psychological contract received june 07, 2019 / accepted september 18, 2019 corresponding author: sandra milanović * phd student, junior researcher university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: sandramilanovic89@yahoo.com 366 i. simić, b. đorđević, s. milanović appears to be very useful tool to resolve many important human resource related issues (chahar, 2019). it appears that psychological contract is very useful concept for explanation of the issues of motivation (pines, 2002; parzefall & hakanen, 2010), satisfaction of employees (knights & kennedy, 2005; zhao et al., 2007; suazo, 2009), turnover intentions (hess & jepsen, 2009), absenteeism (griffeth et al., 2000), commitment, etc. (robinson & morrison, 1995; anderson & schalk, 1998; cassar & briner, 2011). kishokumar (2018) also states that psychological contract is essential to understand the nature of employeeemployer relationship and to maintain positive relationship between them. in addition to the fact that psychological contract is a useful concept for the explanation of previously mentioned employees’ work related attitudes and behaviour, it is also a very useful concept to explain why some employees engage in the activities that go beyond their job description. in other words, this concept is very useful for the explanation of the organizational citizenship behaviour of employees. in this regard, in many studies positive relationship was found between the fulfilment of employees’ psychological contract and organizational citizenship behaviour (marks, 2001; karagonlar et al., 2016; guest, 2016). on the other hand, it was found that violation of the psychological contact has negative impact on the readiness of employees to exert organizational citizenship behaviour (cassar & briner, 2009). although that there are plenty of studies of relationship between psychological contract (pc) and organizational citizenship behaviour (ocb) in the literature so far, it appears that in the most of them pc was seen as one-dimensional construct. however, in order to get better insight into the relationship between pc and ocb of employees, it is very useful to investigate the influence of different types of pc on ocb of employees. namely, it is a very well-known fact that the basic types of pc are relational and transactional (macneil, 1980; rousseau, 1990; robinson et al., 1994). therefore, it would be very useful to investigate the relation between relational pc and ocb of employees as well as the relationship between transactional pc and ocb of employees. in order to find out the answers on what kind of relationship is between mentioned types of pc and ocb of employees’, an empirical study was conducted on the sample of academic professors at state universities in serbia. this country is interesting for the research in this area since due to socialism it has had a long tradition of paternalistic relation of organisations toward employees. therefore, it is interesting firstly to find out whether employees dominantly form relational or transactional pc and, secondly, to investigate what is the relationship between different types of pc and ocb of employees. the paper is structured as follows. in the first part of the paper the literature review on the concepts of organizational citizenship behaviour and psychological contract is given. in the second part, the methodology of the research, the research results and their discussion are presented. the final part of the paper refers to the practical implication of the paper and concluding remarks. 1. literature review and hypothesis development 1.1. organizational citizenship behaviour the concept of ocb has been established in the literature in the seventies of the twentieth century, but demonstrating of this type of behaviour in working place is much older. in some simplified form, this type of behaviour could be identified with the appearance of the first organizations. the investigation of the influence of psychological contract types on organizational citizenship behaviour 367 in the literature, the form of ocb was identified for the first time by daniel katz in 1964, although he did not use that term. such form of behaviour was denoted by katz (1964) as „an extra-role behaviour”. katz (1964) explained it as a form of behaviour of organizational members which is not defined by their formal roles and tasks within the organization. more precisely, the mentioned author saw this type of behaviour as behaviour that implies willingness and readiness of organizational members to make additional efforts and to do more in relation to what is formally expected of them. the creators of the very term organizational citizenship behaviour are denis w. organ and his colleagues. it appeared in their paper “organizational citizenship behaviour: its nature and antecedents” published in 1983 (smith et al., 1983). since the concept of ocb has aroused interest of many authors, many definitions of this term appeared in the literature lately. first of all, organ, as a creator of this term, defined ocb as individual behaviour that is discretionary, not directly or explicitly recognized by the formal reward system, and that in aggregate promotes effective functioning of the organization (organ, 1988, p. 4). ocb is also defined as any positive organizationally relevant behaviour of organizational members including their in-role behaviour, organizationally pertinent extrarole behaviour, and political behaviour (cummings et al. 1994, p. 766). it was also seen as a set of desirable organizational behaviour that exhibits multidimensional relationships with positive organizational consequences (waltz & niehoff, 2000). in order to determine ocb more precisely, denis organ (1988) pointed five key dimensions of it. they are: altruism, conscientiousness, sportsmanship, courtesy and civic virtue (organ, 1988). their basic characteristics are explained in the following text. altruism reflects the willingness of organization’s members to help their colleagues, or their readiness to spend their own time and energy on others. it is considered that this dimension of ocb has great potential to contribute to enhancing the performances of the employee to whom the altruistic behaviour is channelled. conscientiousness, according to organ, reflects the willingness of members of the organization to use their own time and other available resources efficiently and rationally, as well as to provide an extra contribution to the organization by their complementary efforts. sportsmanship refers to the readiness of organizational members to spend their time and energy for constructive purposes within the organization, and not to complain about some trivial problems or uncomfortable working conditions they currently may face with, to sacrifice personal interests for the organizational ones, etc. the same opinion regarding this dimension of ocb is also shared by podsakoff and his colleagues (2000), and many other authors. courtesy behaviour of members of the organization involves the efforts to share the available information with their colleagues, to remind them of some of their obligations, and so on. such form of behaviour enables co-workers to use their resources and energy more efficiently, and to reduce the level of stress, anger, frustration and conflict. in some specific way, this type of behaviour maintains social order and raises the level of harmony within the organization (organ, 1988; wang et al, 2013). civic virtue refers to willingness or unwillingness of an organizational member to participate actively in the political life of the organization. this type of behaviour is based on the assumption that most of employees usually have the right to take part in some organizational meetings in which their participation is not required, to analyse some organizational issues on personal time, to express their own opinion and so on (wang et al., 2013). 368 i. simić, b. đorđević, s. milanović the mentioned list of ocb dimensions has been corrected by some theorists, whether they have narrowed or expanded it. thus, for example, p. m. podsakoff and his colleagues (2000) proposed seven dimensions of the ocb. they are: helping behaviour, sportsmanship, organizational loyalty, organizational compliance, individual initiative, civic virtue, self development (podsakoff et al., 2000). the degree to which employees will express the ocb form of behaviour is determined by a number of factors. some studies have shown that among the most influential are: job satisfaction, organizational commitment, perceptions of organizational justice, leader support, trust in management, psychological contract etc. (swaen & maignan, 2003; chahar, 2019; kishokumar, 2018). considering that the aim of this paper is to explain the influence of the pc (more precisely, some of its types) on ocb, the essence of this concept is presented in the following text. 1.2. psychological contract the concept of pc originated in 1960 (argyris, 1960), but significant contribution to its development was given by many authors lately. however, probably the most significant contribution to the development of the theory of pc in recent period was given by denise rousseau. she was the first one who defined pc from an individual’s perspective, stating that it represents “an individual’s belief regarding the terms and conditions of a reciprocal exchange agreement between that focal person and another party (usually between an employer and an employee)” (rousseau, 1989, p.123). employees usually expect to be treated fairly as human beings, to be provided with the work that uses their abilities, to be rewarded equitably in accordance with their contribution, to be able to display competence, to have opportunity for further growth and to know what is required from them. the pc has several basic characteristics that distinguish it from the legal employment contract. the first basic characteristic is that pc is not documented and has very intangible nature (chahar, 2019). other important characteristics of pc are that it has perceptual nature, it is based on promises, the elements which the pc consists of have reciprocal nature, it has a dynamic nature, expectations which pc consists of are conditioned by previous experience, etc. (rousseau, 1995; anderson, 1998; davidson, 2002). speaking of the types of pc, there are several classifications that could be found in the literature. firstly, pc could be seen as the "old" one and the "new" one. the basic characteristic of the "old" pc is that employees who form this type of pc believe that if they work hard, adequately fulfil their obligations to the employer and contribute to the achievement of company’s goals, can count on job security (dunahee & wangler, 1974; rousseau 1989; sims, 1994; makin et al. 1996; singh, 1998). however, after 80s of the 20 th century, when many companies went through mergers, acquisitions and downsizing processes (and consequently many employees were laid off), employees started to form the "new" form of pc (milanović et al., 2018). its fundamental characteristic is that employees cannot count on job security any more. they realized that the best that they can get from the employers are fair salary and opportunities for personal growth (sims, 1994; robinson et al., 1994; kissler, 1994; sparrow, 1996; hiltrop, 1996; schalk & roe 2007). beside the mentioned classification of pc, the classification of the elements of which pc dominantly consists of is also very well-known in the literature. accordingly, there are two additional types of pc: transactional and relational (macneil, 1980; rousseau, 1990; robinson et al., 1994). relational contact reflects employees’ affective involvement and beliefs in organizations that they will provide guarantees for employees’ career the investigation of the influence of psychological contract types on organizational citizenship behaviour 369 development, respect, support, etc. in turn, the employees offer loyalty and commitment to the organization’s needs and interests. based on this, when it is about the ocb, which also assumes positive attitudes regarding organization, it is reasonable to expect that the employees who develop relational pc demonstrate ocb as well. therefore, the hypotheses that are going to be tested in our research are as follows: h1: there is a positive relationship between relational pc and ocb of employees. h2: there is the positive impact of pc on ocb of employees. in contrast to relational pc, transactional contract is based on the material benefits. the employees who form this type of pc do not become the organizational members really but they are only concerned about the short-term material rewards and personal benefits (kiskohumar, 2019). closed-ended time frame, exchange of economic resources, unambiguous performance standards and limited mutual investment between employer and employees are also the basic characteristics of transactional contract (robinson & morrison, 1995). since the employee who forms transactional pc has no obligation to remain within the organization and perform only a limited or fixed set of duties, it is reasonable to expect that they do not demonstrate ocb. therefore, additional hypothesis that are going to be tested in the research are as follows: h3: there is negative relationship between transactional pc and ocb of employees. h4: there is the negative impact of transactional pc on ocb of employees. since serbia had a long tradition of socialism, which assumes paternalistic relationship toward employees, it is reasonable to expect that in most cases employees (in our research academic professors) form relational pc. therefore, our next hypothesis is: h5: academic professors rank relational pc higher than transactional pc. 2. methodology of research context of the research. the research has been conducted on the sample of academic professors at state universities and higher schools on the territory of the republic of serbia. in serbia there are eight state universities. the participants of the study were the professors of two universities (university of novi sad, which is at the north of serbia, and university of niš, which is at the south of serbia) and one higher school. research variables and instruments. regarding the pc, we used the questionnaire psychological contract scale developed by millward and hopkins (1998) and later adapted by raja et al. (2004). raja et al. (2004) measured two components of pc, transactional and relational, with 9 items per each category. furthermore, a sixteen-item measure (based on the work of podsakoff et al. (1990), podsakoff and mackenzie (1994) and adapted by shahzad (2011) was used to access ocb. participants were asked to access all the items in the questionnaire on five-point likert scale, ranging from 1 – strongly disagree, to 5 – strongly agree. in both questionnaires, reversed coding was applied with the aim of getting the same direction of items. reliability test by comparing the value of the coefficient cronbach alpha with the criteria of a minimum value of 0.6, defined by griethuijsen et al. (2014), showed the value of 0.85 for relational pc and 0.73 for ocb, all above the threshold. after excluding two items for transactional pc, acceptable level of cronbach alpha coefficient of 0.65 was achieved. 370 i. simić, b. đorđević, s. milanović data collection techniques and instruments. the authors distributed 120 questionnaires in paper form during the winter semester of school year 2018/2019. four faculties (from two universities) and one higher school took part in the research. the response rate was 80.83% with no missing data and, thus, all returned questionnaires were used in the research. the sample characteristics. the demographic characteristics of the respondents are presented in the table 1. table 1 respondent characteristics variable frequency percent gender 97 100 male 40 41.2 female 57 58.8 age 97 100 <30 15 15.5 31-40 36 37.1 41-50 26 26.8 51-60 13 13.4 >61 7 7.2 work experience 97 100 <5 years 15 15.5 6-15 years 37 38.1 16-25 years 29 29.9 > 26 years 16 16.5 position 97 100 full professor 19 19.6 associate professor 22 22.7 assistant professor 17 17.5 assistant 36 37.1 teaching associate 3 3.1 source: authors’ calculations analyses and procedures. the ibm program spss, version 23 was used in order to analyse obtained data. for the purpose of testing proposed hypothesis, t-test, pearson correlation and multiple linear regression analysis were applied. according to cohen (1992), pearson correlation coefficient values of ± .10 represent a small effect, ± .30 is a medium effect and ± .50 is a large effect. 3. the results and discussion this section provides the findings and discussion on relationship and influence of two types of pc (relational and transactional) on ocb of academic professors participated in the research. table 2 descriptive statistics of the researched variables variable n minimum maximum mean sd se transactional pc 97 1.00 3.86 1.93 .53 .054 relational pc 97 1.89 4.44 3.34 .53 .053 ocb 97 3.06 5.00 4.17 .39 .393 source: authors’ calculations the investigation of the influence of psychological contract types on organizational citizenship behaviour 371 table 2 shows that the mean value for transactional pc was 1.93 (sd = 0.53) indicating relatively low level of reciprocal transactional obligations between an employee and his or her organization. on the other hand, the mean value of relational pc is 3.34 (sd = 0.53) showing relatively high level of relational pc. ocb has mean value of 4.17 (sd = 0.39) indicating relatively high level of ocb among academic professors. all standard deviations have values on acceptable level. in order to test the first and the third hypothesis, the correlation between transactional pc, relational pc and ocb were calculated. table 3 correlations between researched variables and reliabilities a variable 1 2 3 1. transactional pc (.65) 2. relational pc -.267 ** (.85) 3. ocb -.510 ** .497 ** (.73) a n= 97; alpha reliabilities are given in parentheses **. correlation is significant at the 0.01 level (2-tailed). source: authors’ calculations table 3 shows that the pearson correlation coefficient is r = −0.510 (p < 0.01, large practical effect) indicating that there is a negative correlation between transactional pc and ocb of academic professors. the same analysis revealed positive (r = 0.497) and statistically significant correlation (p < 0.01, medium practical effect) between relational pc and ocb of professors participated in the research. previous analysis indicates that the hypothesis h1, defined as that there is a positive relationship between relational pc and ocb of employees is confirmed. also, the hypothesis h3, which proposed that there is a negative relationship between transactional pc and ocb of employees, is confirmed. more precisely, the previous analysis showed that when the level of relational pc increases, the level of ocb increases as well and when the level of transactional pc increases, the level of ocb decreases. in order to test the second and the forth hypothesis, multiple linear regression analysis was applied to investigate if there is the effect of relational and transactional pc on ocb (table 4). multiple linear regression analysis (table 4) displays r value of 0.633. r square = 0.401 indicating that components of pc are influencing 40.1% of change in ocb of academic professors. f statistics is 31.452, statistically significant at the level of 0.000 (p < 0.05) indicating that there is a model fit between independent variables and dependent variable. regression coefficients for transactional pc (b = −0.296; p < 0.05) and for relational pc (b = 0.286; p < 0.05) imply that these variables significantly contribute to the ocb of respondents. hence, the regression equation for ocb can be written as follows: ocb = 3.783 – 0.296 (transactional pc) + 0.286 (relational pc) (1) 372 i. simić, b. đorđević, s. milanović table 4 regression analysis of studied variables model summary model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 .633 a .401 .388 .30325 .401 31.452 2 94 .000 a. predictors: (constant), transactional pc, relational pc anova a model sum of squares df mean square f sig. 1 regression 5.785 2 2.892 31.452 .000 b residual 8.645 94 .092 total 14.429 96 a. dependent variable: ocb b. predictors: (constant), transactional pc, relational pc coefficients a model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b collinearity statistics b std. error beta lower bound upper bound tolerance vif 1 (constant) 3.783 .263 14.405 .000 3.262 4.305 transactional pc -.296 .060 -.406 -4.906 .000 -.416 -.176 .929 1.077 relational pc .286 .061 .389 4.694 .000 .165 .408 .929 1.077 a. dependent variable: organizational citizenship behaviour source: authors’ calculations due to significant correlation between independent variables (table 3), tolerance and vif tests were applied. their values are on the acceptable level, vif<10 and tolerance> 0.1, thus there is not a problem of multicollinearity among these variables (field, 2009). it can be concluded that hypotheses h2 stated as that there is the positive impact of relational pc on ocb, and h4 that there is the negative impact of transactional pc on ocb are also confirmed. the results of our research are moderately in line with the results of other authors who investigated the relationship between different types of pc and ocb. our research is similar to mai et al. (2016). they found significant correlations between transactional pc (r = −0.37, p < 0.01) and relational pc (r = 0.50, p < 0.01) with ocb. kishokumar (2018) identified that relational pc and ocb were positively correlated (r = 0.825, p < 0.01). contrary to our findings, kishokumar (2018) revelled that transactional pc is positively related with ocb (r = 0.814, p < 0.01). similarly to this research, relationship between transactional pc and ocb was positive (r = 0.158, p < 0.05) and also between relational pc and ocb (r = 0.198, p < 0.001) in research of byoung et al. (2014). concerning the effects of transactional pc and relational pc, byoung et al. (2014) proved that the positive relationship between organizational identification and ocb will be stronger when the transactional contract is low and when the relational contract is high. more extended research of hui et al. (2004) has shown that transactional and relational pc were positively the investigation of the influence of psychological contract types on organizational citizenship behaviour 373 related with all five components of ocb: altruism, conscientiousness, civic virtue, courtesy, sportsmanship. furthermore, the transactional pc had a direct effect on ocb, but relational pc did not. it predicted instrumentality, which in turn predicted all ocb components. findings of lub et al. (2011) indicate that both transactional pc (r = 0.235, p < 0.05) and relational pc (r = 0.363, p < 0.01) are positively related with ocb. regression analysis showed that 27% of variance in ocb was due to change in transactional and relational pc, but only regression coefficient for relational pc was statistically significant and positive (b = 0.37, p < 0.01). in order to test the hypothesis h5 we conducted t-test to compare values of relational and transactional pc with defined test value of 3. the results have shown that academic professors rank relational pc (t = 6.474, df = 96 p = 0.000) higher than transactional pc (t = −19.719, df = 96, p = 0.000) indicating that hypothesis h5 is confirmed. these findings indicate that academic professors vastly rate relational pc, which is positively related with their ocb. since the transactional pc is negatively related with ocb, variations in ocb of academic professors are explained by positive effect of relational and negative effect of transactional pc. conclusion organizational citizenship behaviour is a form of employees’ behaviour which is very beneficial for the employers. it could result in increasing of the individual performances and in enhancement of the overall organizational performances. therefore, this form of behaviour is very desirable in working place. however, it is influenced by the set of factors among which the fulfilment of the psychological contract is one of the most important ones. in this paper, the relationship between pc types and ocb was analysed. after presenting the theoretical background of these concepts, the results of the empirical study were presented and analysed. the study has been conducted on the sample of academic professors at state universities in serbia. since they work in relatively stable environment and certain percentage of professors had lived partly in socialism, the authors of the paper assumed that the dominant form of psychological contract that they develop is relational. the authors also assumed that there is positive relationship and positive impact of relational pc on ocb of respondents. on the other hand, when it is about the transactional contract, the assumption was that there is negative relationship and negative impact on organizational citizenship behaviour. the results of the study showed that all proposed hypothesis are confirmed. however, there are some limitations of this study. firstly, the research sample was dominated by academic professors. research on a more diverse sample is required to gain more reliable results. secondly, because of the small sample, generalizations of the relationship between pc type and ocb of employees in serbia could not be made. but regardless of these limitations, the information gained from this research could be beneficial, first of all, for those universities participating in the study in order to improve some human resource management practices and communicational channels. as final consequences of that will be the fulfilment of pc of employees at higher level which will bring many positive consequences in working environment. 374 i. simić, b. đorđević, s. milanović references anderson, n. & schalk, r. 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(2007). the impact of psychological contract breach on work-related outcomes: a meta-analysis. personnel psychology, 60 (3), 647–680. doi: 10.1111/j.17446570.2007.00087.x istraživanje uticaja vrsta psihološkog ugovora na organizaciono ponašanje organizaciono građansko ponašanje predstavlja ponašanje zaposlenih koji prevazilazi njihove dužnosti. ovakvo ponašanje iz perspektive poslodavca je veoma poželjno, jer donosi mnoge pozitivne posledice u pogledu individualnih i ukupnih organizacionih performansi. međutim, na spremnost zaposlenih da ispoljavaju ovakvu vrstu ponašanja utiču mnogi faktori. jedan od najvažnijih je ispunjenje psihološkog ugovora zaposlenih. pošto postoje dva osnovna oblika psihološkog ugovora, relacioni i transakcioni, cilj ovog rada je da istraži odnos između ovih vrsta ugovornog organizacionog građanskog ponašanja. u svrhu testiranja predloženih hipoteza, primenjeni su t-test, pirsonova korelacija i višestruka linearna regresiona analiza. rezultati su pokazali da postoji pozitivan odnos i pozitivan uticaj relacionog psihološkog ugovora na organizaciono građansko ponašanje, što nije bio slučaj kada je reč o transakcionom ugovoru. ključne reči: relacioni psihološki ugovor, transakcioni psihološki ugovor, organizaciono građansko ponašanje, zaposleni. facta universitatis series: economics and organization vol. 16, n o 3, 2019, pp. 229 238 https://doi.org/10.22190/fueo1903229f © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper update of the crawl, walk, run methodology framework 1 udc 658.8:004 jelena filipović university of belgrade, faculty of economics, serbia abstract. this study updated the crawl, walk, run methodology framework (cwrm) for the current digital marketing circumstances, observed in the context of the artistic community in virtual space. four main premises of crwm have been considered in order to address the effectiveness of online campaigns based on the laddering support through tiers of engagement (personal, social, advocating); empowering super users; providing source materials for user-generated content; and using tools people are familiar with. the analysis was performed on the data collected from the online community which operated for 43 days. data on the number of registered users, their interactions with web site content and showcased artworks were gathered. the specific online platform was created for the purpose of this research and the campaign for its promotion was conducted both in serbia and globally. the materials for direct communications (email, instant messaging), social media promotion (social networks, blogs) and public relations (articles in online and traditional media) were created. crwm was proved to be efficient framework for the establishment of online presence of the artistic community. however, we propose that social networks should be introduced in the stage three instead of in the stage four, due to the increase of their applications compared to the time when the crwm was formulated. all activities once they start should be maintained and performed throughout the campaign lifetime. this study represents one of the first efforts aimed at updating the crwm theoretical framework and provides business community with hands-on solutions in modern digital marketing. key words: online community; crawl, walk, run methodology; arts; digital marketing jel classification: m15, m31 received march 04, 2019 / revised june 18, 2019 / accepted june 24, 2019 corresponding author: jelena filipović university of belgrade, faculty of economics, kamenička 6, 11000 belgrade, serbia e-mail: jfilipovic@ekof.bg.ac.rs 230 j. filipović 1. introduction online advertising has been constantly on the growth and its revenues have exceeded the level of $20 billion yearly (shaouf, lü & li, 2016). in china in 2011 web advertising surpassed the newspaper advertising revenue for the first time ever (zha, li & yan, 2015), while it is predicted that in 2019 digital ad spending will exceed traditional in the usa (emarketer, 2019). in serbia the value of the digital advertising market amounted to €18.16 million in 2014 (filipovic, 2017, p. 80). in the last decade we have testified to the strong surge in social media marketing usage and relevance (shareef et al., 2019). nevertheless, the term social media marketing covers a broad range of strategies and techniques which can significantly vary in their effectiveness in communication with target groups (willis, 2019). the main aims of all of them are to incite and reinforce consumers’ engagement (tuten & mintu-wimsatt, 2018). despite its relevance and numerous scientific and professional studies that have been conducted in the field of digital business, there is still a paucity of research which propose methodologies and analyze effectiveness of the online campaigns, especially in the field of social media, given the novelty of this concept. in order to reflect the changes of the media landscape and promotional opportunities arisen from the technological development, the methodology framework „crawl, walk, run― (cwrm) was developed by the lutz and edelman team in 2009 and tested in subsequent studies (e.g. aaker & chang., 2009). the aim of this study is to update the current understanding of crwm and explore its applicability in the modern social media circumstances. 2. literature review in general, there is still a debate among scholars of modern theory of advertising on the extent of influence of advertising on consumer behaviour (ognjanov, 2013, p. 180). furthermore, there is also an issue of the effects of advertising on consumers’ attitudes, knowledge and shopping patterns. according to their nature, all models can be divided into two groups: i) advertising impacts individuals in predetermined order of stages; ii) effects may occur simultaneously and not in the specific sequence (ognjanov, 2013, p. 182). both types of models need to be revised, as wijaya (2012, p. 73) pointed out ―the development of information technology has radically changed the way of how people communicate and socialize; as well as a paradigm shift from product-oriented marketing to consumer-oriented marketing or people-oriented marketing. therefore, the variables in the hierarchy of effects model needs to be updated...‖ the „crawl, walk, run model‖ (cwrm) proposes appropriate social media tools for public engagement in different stages of the campaign. according to the lutz & edelman team (2009) there are ten characteristics of a successful online campaign: ―laddering support through tiers of engagement (personal, social, advocating); empowering super users; providing source materials for user-generated content; going where the people are, using tools people are familiar with, ensuring that people can find your content, mobilizing supporters through mobile devices, harnessing analytics to constantly improve engagement activities, building the online operation to scale and choosing the right team‖. notwithstanding importance of all of them and of their interrelations, we particularly explored the ones which are significant for the short term campaigns and virtual social community. more specifically, these are: laddering support through tiers of engagement; update to the crawl, walk, run methodology framework 231 empowering super users; providing source materials for user-generated content; and using tools people are familiar with. these four premises have been investigated in our study and the results are demonstrated in the following sections. cwrm has been efficiently utilized in the investigation in numerous sectors: nonprofit (berkman, 2013), industry (debes et al., 2007; vitas, 2013), army (meliza & barnett, 2006; florio et al., 2010), finances (raisinghani, 2006), branding (neitzel, 2015), interactive television (jensen, 2005) and many others and proved its relevance over time. despite the emergence of other frameworks in digital marketing over time, such as: race (reach, act, convert, engage), cdj (consumer decision journey), peso (paid, earned, shared, owned media), etc., some of the leading companies utilize cwrm in their current digital marketing approach (kerr & moloney, 2018), while scholars (e.g. berman & thelen, 2018) argue its theoretical credibility. however, it should be noted that some updates of cwrm are needed, due to the arrival of some of the new digital marketing tools (compared to 2009 when this concept was established), the acceleration of changes in business environment and burst of global competition in the web space. in these terms, this paper strives to update cwrm and to help its better application in the modern state of affairs of digital marketing. in nowadays media landscape there are hundreds of social media sites that target smaller groups of users with specific interests. one of the groups of users which has drawn considerable attention in the previous period is the community of artists and artisans. the crafting market is estimated to be worth $100 billion annually on the global scale (pymnts, 2017). the relevance of the online community for this sizeable market can be understood from the fact that lovecrafts, the uk-headquartered marketplace for craft products, has raised $33 million in 2017 in new funding from scottish equity partners, as well as previous investors balderton capital and highland europe (cook, 2017). lovecrafts runs two online communities: knitting and crochet. users can follow each other and purchase designs for knitting and crochet projects, while the platform takes a cut of the cost of designs, as well as any of the crafting supplies sold through the site. the other case of the global significance of the artists’ and crafters’ global community is the social network deviantart, which has gathered more than 40 million registered members and showcased over 325 million pieces of original art. israel-based wix.com acquired deviantart in 2017 for $36 million in cash (reuters, 2017). the importance of socializing tools on such online platforms are best reflected by the example of the results of dribbble, where in 2017, designers showed off over 640 thousand of shots of their work, and the community responded with over 27 million likes and 925 thousand comments (dribbble, 2017). artistic and „do it yourself― (diy) virtual communities have attracted considerable attention of researchers in various fields. some of the research areas in which online groups related to arts and diy are represented are: culture (spero & stone, 2004, kuznetsov & paulos, 2010; hall & jayne, 2016), gender studies (bratich & brush, 2011), ecology (cervellon & wernerfelt, 2012), politics (harris, 2008), media (lingel & naaman, 2012) and marketing (liss-marino, 2014; chen & chandler, 2010; wu & fang, 2010). the aim of this research is to re-examine the potency of cwrm in the introduction of a new artistic community to the global virtual space. in the following section of the paper the adopted methods are explained thoroughly, while the subsequent chapters detail on the results that have been obtained and relevance of the study both for scholars and for managers. 232 j. filipović 3. methods for the purpose of this research, a specific web site was registered and developed. in order to reach wider audience, the web site was created in english and indexed under the global domain name www.talentsfair.com. the aim of the platform was to attract artists and artisans to exhibit their works and establish their online portfolios. moreover, the web site also addressed general public who was interested in arts and who wanted to take part in browsing, commenting and voting for various content. the landing page of the website included large picture of logo (artistically designed star), name of the website (talents fair), its credo („you got it, show it!―) and categories of artistic works that could be submitted. the picture of the first page and the typical page of the web site is depicted in figure 1. the prevailing colour of the whole web site (including the landing page) was yellow. fig. 1 pages of the experimental website talents fair there were five different categories of artistic works whose pictures could be presented – these are: photos, paintings, pottery, clothes designs and accessories designs. accessories mainly pertain to jewellery, but also included: hats, bags, boxes, glasses and other fashion pieces. in order to mimic real (i.e. non-experimental) web sites to the highest extent, the subject platform also included sections on terms of use and privacy policy, as well as the banner spaces as a part of promotional opportunities for advertisers. only registered users were able to display their work, therefore, the first step was to open their account and create a profile, by providing their name, user name and email address. after that, they were granted the right to log in. the users accessed the area for the showcase of their work (virtual gallery) through the „user panel―. in this section they could upload their pieces and provide necessary details, e.g. the name of the creation or its description (for instance, if it is for sale, contact details, etc.). the web site construction encompassed some widgets too. these interaction tools included: browsing content in the gallery („previous― and „next― arrows), commenting and scoring (scale 1-5) of each of the exhibits. furthermore, all users could observe top rated, most viewed, last commented and last added content. the links for the listed categories were presented in the top left part of the page, allowing shortcuts and efficient paths for users. update to the crawl, walk, run methodology framework 233 the experiment lasted 43 days, while the relevant results of its usage are presented in the following chapter. in accordance to ethic rules, the relevant parties were notified of the experimental nature of the web site and its limited lifetime. given the aim of the research, only online media were used for the promotion, while offline media were not involved. the experiment acted on the null budget principle, allocating no budget for promotional activities. hence, only free promotional tools were used, mainly relying on social networks. it should be noted that even though the banner space was presented on the web site, its rental was not foreseen within the experiment. in any manner, no request for advertising was received throughout the project’s lifetime. 4. results and discussion in the analysis we will examine the effectiveness of the crawl, walk, run methodology (cwrm) for the social media and investigate whether proposed online tools in each stage result in the expected outcomes. table 1 crawl, walk, run methodology framework crawl walk run fly establish an online presence enrich content engage online influencers embrace community  web site  conversation audit  podcasting  video  games  widgets  blogger outreach  blogger conference calls  advertising  ally development  sponsorships  blogger tours  thought leadership blog  social networks  advocacy  contests  mobile source: lutz & edelman team (2009), the social pulpit, edelman, p. 11, https://cyber.harvard.edu/sites/cyber.harvard.edu/files/social%20pulpit%20%20barack%20obamas%20social%20media%20toolkit%201.09.pdf in the first phase of the span of the social media campaign, the model foresees the introduction of the media content in the virtual space. therefore, the website www.talentsfair.com was launched, under the global domain. previous inspection of the online sources (e.g. deviantart, styleportfolios, artlog, etc.), which was a sort of a conversation audit, concluded that terms such as „talent― and „fair― were associated with arts, artistic portfolios, purchase and other aspects embedded in the main vision and orientation of the subject web site. the stage demarcated as „walk― means populating the website with content. taking into account the peculiar type of the web site (user generated content), this is comprehended in twofold manner: users should be attracted to open their profiles and they need to be incited to showcase their work, by adding their content to the platform. overall, 348 users registered (created their profiles) and submitted 767 different works (artistic photos: 227; paintings: 130; pottery: 80; clothes: 72; accessories: 258). 234 j. filipović moreover, widgets for voting were utilized, resulting in 512 comments on the website, while the top rated content was the picture of a forest, which scored 4.88 (scale 1-5) based on 1561 votes. many other content raised significant interest by the target groups, e.g.: the painting of a dancer (score: 4.99; 401 votes); the sculpture by magdalena pavlovic (score: 4.96; 316 votes), ballet costumes (score: 4.97; 145 votes), a graphic by a professor (score: 4.98; 142 votes), etc. the third and fourth stages were performed simultaneously, given that both of them aim to reach the target group. therefore, in this phase, the users were attracted mainly by social networks, namely by the posts on facebook, twitter, instagram, youtube, skyrock and direct contacts through viber and whatsapp. even though the cwrm proposed by the lutz and edelman team (2009) did not list social networks as the tool within the third stage, we assumed that it was due to the date the cwrm was established, while social network ecosystem and its significance have grown greatly from that time up to nowadays. the engagement of online influencers mostly occurred by direct communication – either personal (face to face and telephone) or by direct online media, such as email, skype and instant messaging on social networks. cwrm suggests that the emphasis should be put on stimulating bloggers, regarded as the dominant influencers in the virtual sphere, to take part in the web site activity. table 2 depicts some of the influencers in each category whose reputation and exhibition of the works on the platform were estimated to have positively affected the web site performance. table 2 influencers who engaged in the web site performance accessory design clothes design paintings photos pottery maruska nakit kostimi kreator rada jovica poguberov milica djeric magdalena pavlovic una nakit diline haljine dragan petkovic istok pavlovic stefan stankovic-peric chicamote gingerita t-shirt milos kostic ivan josifovic ljubica design torbice za frajlice d-fashion by danijela zujic tijana stojanovic etnopark terzic avlija wa wa woom design svetlana blagojevic i georgeone essi branka cvorovic aleksandar mitrovic however, in the modern media landscape, we considered that social networks influencers should be regarded at the same level of importance. testing that assumption, online communities were reached in the specialized groups on social networks (table 3). results demonstrated that „ally development― and „social networks involvement― may encompass the same set of activities, especially in terms of advocacy. this outcome also reinforces the hypothesis that the last two stages of the model need to be conducted parallelly rather than consecutively. table 3 ally programmes – posts on the established social media groups facebook number of members (likes) twitter number of followers novecento cipele beograd 160,000 smajli 2,332 dresscode 60,752 lauro pedraza 1,056 kreativnost 40,046 una nakit 274 elm jewelry 31,903 kreativnost 105 diotima 14,297 update to the crawl, walk, run methodology framework 235 since public relations activities have not been specifically stipulated in the cwrm, it might be supposed that they were blended with advocacy, sponsorship and advertising. thus, articles and posts regarding talentsfair are published in: a) online journals: wannabe magazine and prave novine; and b) print magazines: style magazine and monopollist. many other media were contacted, both traditional and interactive, as well as many associations which gather professionals from target groups (e.g., painters, photographers, sculptors, etc.), but they showed no interest in participating in the work or promotion of this online community. finally, as it has already been explained in the previous section, the web site was created in english, in order to be able to reach global audience. during the project lifetime, the promotional information on talentsfair was published in several languages by diverse web authors: lauro pedraza visual artist, partito artisti del mondo, alex art works, portrety na zamówienie monika malinowska, phanères bijoux, international art contest, nina’s fashion show and blog.dnevnik.hr. 5. conclusions it should be noted that the first two phases last significantly less than the last two phases. dominantly it is due to the fact that they include many preparatory activities, usually performed before the official start of the campaign. however, this does not affect the relevance of the former stages compared to the latter ones, given that the level of their quality will highly determine the overall success or failure of the campaign. it is significant to observe that the first two stages are web site directed, while the second two are user oriented. in fact, the establishment of the online presence and upgrade of its content can be considered as the work on the organization’s offer and online product, whereas the involvement of the opinion leaders (influencers and allies) and community is targeted to obtain consumers. provided that these two spheres cannot exist independently, it may be concluded that the cwrm should be updated to be organized as a simultaneous rather than a sequential model. all activities once they start should be maintained and performed throughout the campaign lifetime. for instance, website maintenance and continuous enriching the content are of substantial importance for the success of the whole campaign. in line with recent changes and trends in the online communications, the authors propose the obligatory introduction of the social media presence in the list of tools listed in the stage of „walk―. mainly, it should be addressed by enabling the sharing of the content on the website on social media platforms, primarily by including appropriate widgets for that purpose in the online platform. similarly to our observation related to social networks, the proposition based on the results of our study is also to include ―thought leadership blog― in the third instead of the fourth phase. in the serbian market, opinion leaders in virtual space usually coincide with professionals in the subject domain in real life. in addition, in the context of the subject web site, the use of the visually specialized social media, such as instagram and pinterest, potentially could improve the effects. this assumption should be addressed by some further studies, exploring the different channels for enriching the content and enhancing the performances based on the nature (verbal vs. visual vs. multimedia) of the online platform. given that the authors of the cwrm (lutz 236 j. filipović & edelman team, 2009) recommended only multimedia tools, which contain audio, video and user-performed content, we suggest that this list should be extended to incorporate tools that demand lower level of users’ involvement, compared to theirs. more specifically, provided the shrinking of users’ available time and concentration span, they should be enabled to participate less extensively, through tools, such as: voting (like, dislike, scoring, etc.), commenting, browsing the content, etc. the lack of interest by established traditional media to promote new initiatives may suggest that there is still a gap between traditional and digital media. however, it may also occur due to the great number of news that compete for limited media space. this notion might also explain why digital media were more prone to participate in the promotion of talentsfair, given that digital space has been inexhaustive and they understood to a higher extent, than their traditional counterparts, the importance of provision of pr to new online businesses. the scarcity of support by professional associations probably was grounded in the understanding of the determined project lifetime and not yet established reputation, due to its novelty, of the web site. further studies should investigate willingness of professional associations to help the growth of confirmed web sites which contain artistic portfolios. its potential for wider international reach can be examined both from the perspective of the brand reputation, as well as from the point of view of (limited vs. unlimited) duration of web site. some limitations of this study should also be considered. firstly, the duration of the experiment was quite short and all phases of the cwrm were executed in condensed form. future research should review the possibility of undertaking 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(2015). advertising value and credibility transfer: attitude towards web advertisi ng and online information acquisition. behaviour & information technology, 34 (5), 520-532. doi: 10.1080/ 0144929x.2014.978380 ažuriranje metodološkog okvira “puzi, hodaj, trči” predmet istraživanja ove studije je ažuriranje metodologije “puzi, hodaj, trči” (phtm) u savremenim okolnostima digitalnog marketinga, posmatrano u kontekstu umetničke zajednice u virtuelnom prostoru azmotrene su četiri glavne premise phtm-a kako i se testiralo da li i onlajn kampanje mogle posti i uspe ne rezultate kroz: faznu podr ku kroz različite nivoe angažovanja (lične, dru tvene, zastupničke) osnaživanje super korisnika o ez e ivanje materijala za sadržaj koji generi u korisnici i kori enje alata sa kojima su korisnici upoznati analiza je izvr ena na podacima prikupljenim iz onlajn zajednice koja je bila aktivna 43 dana. prikupljeni su podaci o broju registrovanih korisnika, njihovim interakcijama sa sadržajem ve stranica i materijalima (umetničkim radovima) koji su ili izloženi na sajtu za potre e ovog istraživanja napravljena je posebna onlajn platforma, a kampanja za njenu promociju sprovedena je kako u srbiji, tako i globalno. kreirani su materijali za: direktne komunikacije (imejl, instant mesindžer), promociju na dru tvenim medijima (dru tvene mreže, logovi) i odnose s javno u (članci u onlajn i tradicionalnim medijima). phtm se pokazao kao efikasan okvir za uspostavljanje onlajn prisutnosti umetničke zajednice me utim, predlažemo da se dru tvene mreže uvedu u tre oj umesto u četvrtoj fazi, s o zirom na pove anje opsega njihovih funkcija u odnosu na vreme kada je phtm formulisan. sve započete aktivnosti treba održavati i izvoditi tokom čitavog trajanja kampanje ova studija predstavlja jedan od prvih napora u cilju ažuriranja phtm teorijskog okvira i pruža poslovnoj zajednici praktična re enja u modernom digitalnom marketingu. ključne reči: onlajn zajednica; puzi, hodaj, trči metodologija; umetnost; digitalni marketing plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 2, 2016, pp. 117 129 visual correlation analysis of financial time series1 udc 519.246.8:336 jovica stanković, jelena z. stanković, ognjen radović university of niš, faculty of economics, serbia abstract. the massive amount of financial time series data that originates from the stock markets generates huge quantity of complex data that is of interest to a large number of market participants. in order to gain a comprehensive understanding of the market mechanism investors require adequate solutions that can effectively handle the information. in this paper the concept of a minimum spanning tree (mst) is used to study patterns of comovements for a set of stocks from the south-east european emerging markets. it is presented how the mst and its related hierarchical tree evolve over time and describe the development of securities linkages. over the sample period, 2007–2014, linkages between securities have changed, especially during the period of global financial crisis, what can have significant implications for investment decision-making. key words: correlation, minimum spanning tree, financial time series, emerging markets introduction financial markets can be considered as complex systems characterized by a large number of elements correlated in a way that is difficult to identify and quantify. however, it is this correlation between the system elements that has a central role in investment theory and risk management, as it stands for a key factor in financial asset pricing and optimization of investment decisions. efficient market hypothesis, as the most important paradigm of mathematical finance, rejects the possibility of predicting the price of securities. specifically, financial time series, according to this theory, can be described by random process, so that it is impossible to predict their future values, because information from the financial market is instantly, fully, and continually reflected in the current prices of securities. in such conditions, prices and returns on financial assets can be considered uncorrelated. if, however, there are certain economic factors that can affect these values, then they exert impact on several financial instruments at the same time. the fact is, 1received march 23, 2016 / revised june 18, 2016 / accepted june 19, 2016 corresponding author: jovica stanković faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: jovica.stankovic@eknfak.ni.ac.rs 118 j. stanković, j. z. stanković, o. radović however, that financial markets are not perfectly efficient and that they exhibit numerous anomalies. therefore, it can be concluded that the time series of financial asset prices carry a large amount of non-redundant information from which it is necessary to single out just that, which, through its specific impact, makes the market inefficient. the modeling of complex features of financial markets and various types of non-linear relations within it has recently used tools and procedures developed for the modeling of physical systems. graphic presentation and analysis of financial markets is considered to be extremely useful, because of an intuitive way of showing the correlation structure of different securities and the possibility of identification of key factors, i.e. market segments. standard analysis of financial issues in econophysics is largely based on the minimum spanning tree. minimum spanning trees are networks of nodes, which are connected with at least one edge, without a loop, in such a way that the sum of all edges is minimal. the application of this method in the graphic presentation of complex networks, such as financial markets, and the filtering of information about correlation between nodes was initiated by mantegna [15]. due to their simplicity, minimum spanning trees are today used in the study and presentation of the financial structure, such as the structure of financial markets [2, 17], currency markets [7], and the correlation of financial markets themselves [22, 3, 16]. taking into account the possibility of portfolio diversification by investing in emerging capital markets [12, 8], as well as the participation of foreign investors in trading on markets in the region, this paper analyzes the correlation of securities traded on belgrade, zagreb, ljubljana, and skopje stock exchanges. the aim of the paper is to use methods of visualization to discover complex correlation between securities on these stock exchanges and point to their hierarchical clustering, as well as to analyze the impact of crisis on correlation of returns on securities analyzed. therefore, this paper will first point to the complexity of financial time series, as an important characteristic that conditions the implementation of multidimensional models, and the second part of the paper will present the minimum spanning tree, as one of the network techniques for the analysis of financial data and extracting of information necessary for decision-making. in the third part of the paper, this specific technique will be applied to the selected sample of stocks, followed by the presentation of the correlation structure, on the basis of which the final part of the paper will provide appropriate conclusion and guidelines for the formation of investment strategies on markets in the region. 1. multidimensional analysis and data mining framework for financial time series analysis huge quantity of complex data that is generated on the financial markets is of interest to a large number of market participants. analysis of financial market information attracted particular public attention in the years of the global financial crisis of 2007-2008, as well as during the european debt crisis of 2010, when a large number of financial instruments lost significant value [14]. given that the effects of the shocks on the stock exchange are transmitted through international financial markets [6] and increasingly affect the global economy [10], the methods for managing information in the monitoring and analysis of financial markets are becoming essential for a large number of stakeholders, especially investors. however, the analysis and understanding of the relations on the financial visual correlation analysis of financial time series 119 market requires the processing of huge amounts of data, which is becoming increasingly challenging, taking into account that in periods of intense trading on financial markets every second generates 50,000 new pieces of data on changes in financial asset prices [29]. one can, therefore, conclude that the processing of data collected over longer time intervals goes beyond the analysts’ capabilities, while the mathematical and statistical models are less and less reliable basis for timely investment decision-making. visualization methods commonly used as an analysis tool, such as a line graph with a time axis and a price axis, cannot be used to display a large number of time series because they are not transparent [24]. the complexity of financial data, accompanied by investors’ aspiration to receive information constantly, timely, and in easily accessible and visually acceptable manner caused the emergence of multi-dimensional data models and sophisticated visualization techniques. business intelligence systems, with olap (online analytic processing) tools, analytical techniques, data warehouses and data visualization, are good source of information in modern business, including investment decision-making. business analytics covers a range of applications and techniques for collecting, storing, analyzing data and providing access to data, to help users bring adequate and timely decisions. all the tools and techniques can be classified into several categories: information and knowledge discovering, decision support and intelligent systems and visualization. business analytics tools and techniques include reporting (formatted reports to a wide range of users), ad hoc query and analysis, statistical analysis and data mining [27]. olap is a set of activities performed by users of business intelligence systems. these activities include generating queries and their results, graphics, statistical analysis, multidimensional analysis and data visualization. olap tools enable discovering of knowledge hidden in existing data, discovering patterns and trends in the historical data, predicting future events and values based on current trends, discovering deviations from the trends and their relation to sudden turbulent movements and so on [23]. several technologies are used for analyzing financial and accounting data stored in a data warehouse, among which the most frequent is olap technology. olap multidimensional model, along with specific aggregation techniques, ensures the organization of large data series, which allows an easy and prompt interpretation [26]. it uses data structures, called cubes, which are organized in multidimensional databases. the process of defining the structure of cubes is called multidimensional modeling. data cube is a multidimensional model that provides a new approach to the organization of data. the number of dimensions may be 3 as in the regular cube as shown in figure 1, or greater depending on the particular problem and data [28]. financial time series data can be presented by data cube whose edges are defined as dimensions of the data, and each cell in the cube is identified by specific values of each dimension. the basic architecture of the dimensional model is the star schema (see fig. 1). star schema contains two types of tables – fact table and dimension tables. data cube stocks is formed, with each cell representing a combination of values from dimensions. the contents of each cell are measures: stock prices and continuously compounded returns. data in dimensions are organized in hierarchies with different levels of aggregation. stock dimension has levels: all sectors, sector and stock. regions dimension has levels: all regions, region and country. time dimension has levels: year, quarter, month and day. data cube was created using oracle analytic work space manager over oracle 12c database [30]. 120 j. stanković, j. z. stanković, o. radović fig. 1 data cube and multidimensional data model data cube stocks consists of data on the securities of the south-east european emerging stock markets. stocks stand for the most liquid securities on the analyzed markets, and most of them are components of the stoxx balkan 50 equity weight index basket. in this paper the following stocks are analyzed:  from the belgrade stock exchange aikb (aik banka a.d. beograd), alfa (alfa plam a.d. vranje), enhl (energoprojekt holding a.d. beograd), kmbn (komercijalna banka a.d. beograd) from the financial sector, and aero (aerdorom nikola tesla a.d. beograd), fito (galenika fitoframacija a.d. zemun), gmon (goša montaža a.d. velika plana), imlk (imlek a.d. beograd), jesv (jedinstvo a.d. sevojno), mtlc (metalac a.d. gornji milanovac), sjpt (sojaprotein a.d. beĉej) from the non-financial sector,  from the zagreb stock exchange adris (adris grupa d.d.), hrtelekom (hrvatski telekom d.d.), ina (ina-industrija nafte d.d.), ledo (ledo d.d.), podravka (podravka prehrambena industrija d.d.) from the non-financial sector,  from the ljubljana stock exchange gorenje (gorenje d.d. velenje), krka (krka d.d. novo mesto), mercator (mercator d.d. ljubljana), petrol (petrol d.d. ljubljana), telekomsi (telekom slovenije d.d. ljubljana) from the nonfinancial sector, and  from the skopje stock exchange kmbmk (komercijalna banka a.d. skopje) from the financial sector, and alkaloid (alkaloid a.d. skopje), granit (granit a.d. skopje), petrolmk (makpetrol a.d. skopje), telmk (makednosnki telekom a.d. skopje) from the non-financial sector. the data period is 8 years long – from january 2007 until the end of december 2014. 2. capital market visualization using minimum spanning tree network the widely used approach to analyses is describing the structure of a market by constructing minimum spanning tree. this graph shows the interconnection among the securities, detecting clusters and mutual relationships in a financial market. the process starts with finding a matrix based on the pearson correlation coefficient between each pair of time series of stock returns. the correlation matrix is than transformed into the distance matrix using the following formula [15] )1(2 ,, jiji d  (1) where ρi,j is correlation coefficient between returns on stocks i and j respectively. visual correlation analysis of financial time series 121 these distances are then used for constructing a network that connects the individual stocks based on the levels of correlation. let g = (v, e) be a connected, undirected graph with a set of nodes v (stocks) and a set of edges e (distances between nodes). each edge e ∈ e has non-negative length ℓ(e), i.e. the function set is ℓ : e → r+ for the length or weight of the edges. what needs to be found is a subset t of edges of graph g so that all nodes from v remain connected when edges of t are used and the sum of the lengths of the edges in t is minimum in all such sets t. it is easy to see that the subgraph (v, t) of graph g is the tree, i.e. the connected non-cyclic graph. this graph is called the minimum spanning tree (mst) of the graph g. for the solution to this problem, two greedy algorithms can be used – prim’s and kruskal’s algorithms. greedy algorithms usually have a simple form and are used to solve optimization problems, such as discovering mst, discovering the shortest path in a graph, or discovering the sequence of some operations. the abstract formulation of optimization problems contains standard characteristic elements, with the following meaning:  set c of all possible (available or allowable) candidates – e.g. edges of the graph.  function that checks whether a particular set s of the selected candidates is a solution to the problem, i.e. whether a set of edges is a link between two selected nodes of the graph.  objective function that gives the value to any solution to the problem. this is the function to be optimized (minimized or maximized) – e.g. total length of the spanning tree or the length of path between two nodes. solving the optimization problem is the search for a set of candidates that represents the solution to the problem and optimizes the value of the objective function. the initial assumption is that the underlying problem has at least one solution, i.e. that there is a subset s ⊆ c, which is the solution to the problem. in the case of mst, candidates are edges of the graph, i.e. c = e. s set of the selected edges is the solution to the problem if the edges of s make the spanning tree of g, i.e. connect all the nodes of v. the s set of edges is allowed if it does not have cyclic connection. depending on the algorithm used, there is or there is no limitation that the set will give the tree for v, i.e. that (v, s) is a connected graph. the problem solution might be a tree, or an unconnected graph – spanning forest with several connected components (trees), which are not interconnected. the main difference between the various greedy algorithms for solving problems in mst is in the method of choice of edges to be added. prim’s algorithm builds a tree that grows, while kruskal’s algorithm greedily makes a forest that gradually merges into a tree. both algorithms are careful not to make a cyclic graph by adding nodes. prim’s algorithm the authors of this algorithm are prim in 1957 [19] and dijkstra in 1959 [4], although it was later discovered that jarnik in 1930 formulated a similar procedure. the algorithm starts from any node – the root of the tree. at the beginning, the set w has a single edge, with any node as an element, and the set t is empty. at each step, the existing tree (w, t) increases, adding to a set t a new edge that touches w, and adding to a set w another node of that edge, which was not in w. in this way, there is a tree that grows until it connects all the nodes in v. function of choice in prim’s algorithm has the following form – at each step, for the current tree (w, t), function of choice selects the shortest edge e = {u, v}, such that u ∈ 122 j. stanković, j. z. stanković, o. radović v \ w and v ∈ w, i.e. node u belongs to the current tree, and node v is the unclassified node from the set of all nodes w. algorithm adds node into a set w, and edge {u, v} into a set t. at any time, edges in set t make a minimum spanning tree of a graph. the algorithm continues until all nodes are connected, or until the sets w and v are equalized. prim’s algorithm performs well, i.e. for the connected, undirected graph g with the cost function ℓ, the algorithm returns a set of edges t, so that (v, t) is the minimum spanning tree of graph g. the algorithm in the loop runs exactly |v| 1 times, because, at each iteration, one node is added to set w. for a graph g, there can be several minimum spanning trees. this is due to the possibility that, at some point, there may be more edges e of minimum length ℓ(e), attached to the current set of nodes w. kruskal’s algorithm this algorithm was formulated by kruskal in 1956 [13]. as with prim’s algorithm, in the set of edges t, mst of graph g is created. the difference is that every iteration uses the whole set of graph nodes. at the beginning, the set of edges is empty and all nodes are unconnected, and then, at each step, an edge with the smallest length is added. prior to the algorithm, all the edges are sorted by weight (cost) in ascending order, and at each next step, the shortest remaining edge is chosen, taking care not to make a cyclic edge. in this way, the subgraph is formed, comprising a number of nodes, and may not be connected. the difference in relation to prim’s algorithm is that here the next edge is added without checking whether nodes of this edge touch some of the already connected nodes. so, the basic difference is in the choice of the edge to be added at each step. prim’s algorithm always starts from the already connected nodes (at the beginning from the arbitrary node). all the edges that touch the already connected nodes are checked, and the edge with the lowest weight added. when the edge is selected, the node belonging to that edge is added. in kruskal’s algorithm, at each step, edge with the lowest weight is added, regardless of whether its nodes are already connected, thus forming a forest – of mutually unconnected trees. it can be concluded that prim’s algorithm starts from nodes, while kruskal’s algorithm is based on the edges of a minimum weight (cost). the condition for the implementation of prim’s algorithm is that the graph is connected. the choice of the algorithm depends on the characteristics of the graph, number of vertices and edges. prim's algorithm is significantly faster in the case of a really dense graph with many more edges than vertices. kruskal performs better in typical situations (sparse graphs) because it uses simpler data structures. in this paper prim’s algorithm is used, where the creation of the tree relied on the use of spantree function from r package “vegan” [18]. after creating mst, dendrograms were created based on the calculation of the distance between all nodes using cophenetic function from the same package and clustering. since data for the analysis is in the data cube oracle r enterprise was used for creating mst and dendrograms. oracle r enterprise integrates r with oracle database, enabling execution of r commands and scripts for statistical and graphical analyses on data stored in oracle database. using oracle r enterprise to prepare and analyze data in an oracle database instance has many advantages for an r user. some of the advantages are: eliminating data movement, operating on database-resident data, keeping data secure, using the memory and processing power of the database, using current data, preparing data in the database and execution of r scripts in the database. visual correlation analysis of financial time series 123 3. results of correlation analysis of emerging financial markets effects of diversification of portfolio investment generated on emerging markets have been pointed out as the most important feature of financial globalization during the nineteen-nineties [1]. emerging markets, as a special group of capital markets, were for the first time defined in 1981 by the world bank, in order to form the third world equity fund. given the fact that there was no single definition of these markets, the basic criterion for classification was gdp per capita. today, however, classification of capital markets based on the development level cannot be linked to economic indicators. emerging markets and frontier markets, which have since emerged as a subgroup of emerging markets, are usually considered separately from the developed markets due to the political environment and their specifics – depth and width, regulatory and institutional infrastructure. these new capital markets in transition countries in europe, south america, asia, middle east, and africa offered investors unusually high returns, compared to developed markets, and a lower level of volatility [9]. the main differences between the developed and frontier markets, which can be characteristic of the analyzed capital markets, are reflected in: level of information efficiency, investor basis, homogeneity of assets, liquidity of stocks, and type of investors interested in these markets. specific functioning of these markets prevented the establishment of relationships with other world markets, protecting them from the impact of global developments. however, connections between the financial markets caused the spillover of crisis to emerging markets and to different types of financial assets [5]. in this way, the emerging markets during the financial crisis 2007-2008 lost 50% of market capitalization, while frontier markets lost 60% [21]. in europe, this financial crisis turned into a sovereign debt crisis in several countries, which did not pass unnoticed on emerging markets, although debt crisis spillover can use various channels, so that the research results are different [11, 25]. therefore, in this paper, the time series of returns on stocks from emerging financial markets were divided into three periods: pre-crisis period, which includes trading in 2007, period during the crisis – from 2008 to the end of 2010, and period after the crisis – from 2011 until the end of 2014. based on the statistical characteristics (table 1), it can be concluded that the probability distribution of correlation coefficients in all the observed periods deviates from normal distribution. the mean value of the correlation coefficient in all three periods under consideration does not change significantly and retains a relatively low value. standard deviation also has similar values in the entire observation period. however, the maximum values of the correlation coefficient in the period before, during, and after the crisis amounted to 0.38, 0.65, and 0.33, respectively. the values of skewness and kurtosis are lower in the crisis period, indicating that the probability distribution curve is wider during the crisis, but it can be concluded that, among the stocks analyzed, negative correlation prevails. table 1 statistical properties of the distribution of cross-correlation coefficients before, during, and after the crisis. period mean crosscorrelation standard deviation skewness kurtosis before 0.10619 0.26774 2.84353 6.77291 during 0.18690 0.27178 1.96439 3.32018 after 0.10151 0.26048 3.02269 7.69843 source: authors’ calculation 124 j. stanković, j. z. stanković, o. radović looking at the minimum spanning tree graph in the period before the crisis (fig. 2), regardless of the fact that this period covers only one year, it can be concluded that there are several centers – stocks, around which returns on other stocks gravitate. the largest number of stocks (6) is related to the alkaloid and petrolmk, as well as to sjpt and mercator (5). all hubs belong to the non-financial sector, as well as the largest number of stocks that gravitate towards them. distance values between returns on the stocks analyzed are in the range from 1.11 to 1.48, and stocks can be grouped into several clusters. fig. 2 minimum spanning tree before the crisis for 25 stocks from emerging markets at the level of distance between 1.3 and 1.35 it is possible to divide the tree into 11 clusters, but two large groups of stocks are being observed (fig. 3). the remaining stocks do not form clear clusters. the first cluster consists mainly of the stocks from the serbian capital market, while the second cluster contains the slovenian and macedonian stocks. the stocks from the croatian capital market do not form a clearly visible cluster. fig. 3 hierarchical tree of 25 stocks from emerging markets before the crisis visual correlation analysis of financial time series 125 the crisis period is characterized by concentration of stocks around three hubs, as follows: aikb (5), sjpt (4), and fito (4) (fig. 4). these stocks are traded on the belgrade stock exchange and belong to different sectors: issuer of stocks aikb belongs to the financial sector, while issuers of stocks sjpt and fito belong to the non-financial sector (manufacturing industry sector). to aikb, as a central hub, sjpt and fito gravitate, as well as stocks from the financial sector of other stock exchanges, so it cannot be argued that the hierarchical structure is determined by sector. during the crisis, there is a more pronounced positive correlation between returns on the observed stocks, with regard to the fact that the distance value ranges from 0.84 to 1.50. fig. 4 minimum spanning tree during the crisis for 26 stocks from emerging markets the height of dendrogram indicates that the distances between the clusters are lower comparing to the pre-crisis period, as in the period after the crisis (fig. 5 and 7), but also that there is a greater range of distances between the clusters (around 0.7) during the crisis period in contrast to the period before and after the crisis (about 0.3). during the crisis the most similar group is the group of slovenian stocks (telekom, krka, merkator, petrol, gorenje), which is followed by a cluster of serbian stocks (enhl, sjpt, aikb, kmbn) and a cluster of macedonian stocks (alkaloid, petrolmk, granit and kmbmk). a cluster of the croatian stocks (ina, hrtelekom, adris, ledo, podravka) can be observed, but the distance within the cluster significantly differs from the previous clusters of stocks. at the level of just over 1.3 it is possible to divide the tree and get the three clusters, and, if gmon is excluded from analysis, two clusters. in the hierarchical structure under this term, one cluster consists of the stocks from zagreb stock exchange and a second cluster of the remaining stocks. 126 j. stanković, j. z. stanković, o. radović fig. 5 hierarchical tree of 26 stocks from emerging markets during the crisis in post-crisis period, financial institutions retain the role of central hubs (fig. 6). the biggest hubs are aikb and kmbn (5), followed by ntlc, enhl, and krka (4). both stocks whose issuers belong to financial sector and stocks whose issuers belong to nonfinancial sector gravitate to these centers. the hierarchical structure is less dispersed, and distance values are in the range from 1.16 to 1.48, based on which one can conclude that the correlation of returns in the period after the crisis is largely negative. fig. 6 minimum spanning tree after the crisis for 26 stocks from emerging markets the height of the hierarchical tree is similar to the dendrogram before the crisis (fig. 7). in the period after the crisis, with the exception of the cluster consisting of the slovenian stocks (telekom, krka, merkator, petrol, gorenje), there are no clearly visible clusters. visual correlation analysis of financial time series 127 fig. 7 hierarchical tree of 26 stocks from emerging markets after the crisis conclusion the massive amount of financial time series data that originates from the stock markets is of interest to a large number of market participants. the complexity of financial data, accompanied by investors’ aspiration to receive information constantly, timely, and in easily accessible and visually acceptable manner caused the emergence of multi-dimensional data models and sophisticated visualization techniques. business intelligence systems, with olap tools, analytical techniques, data warehouses and data visualization, are good sources of information in modern business, including investment decision-making. the widely used approach to analyses is describing the structure of a market by constructing mst, which represents the interconnection among the securities, enables detecting clusters and mutual relationships in a financial market. considering possible diversification effects of investing in emerging markets, correlation structure of the stocks from the four south-east european emerging markets using mst method is presented in this paper. although the observed markets are located in the same geographic region, during the periods without shocks on the capital markets, selected stocks do not reflect significant correlation. however, in the period of the global financial crisis markets show certain interdependence, especially on the movement of the returns in financial sector. in terms of investment decision-making these results can provide useful insights as to which stocks could be included in a portfolio to improve its performance. since the main objective of investors is to diversify the portfolio, selecting stocks that are in different clusters (far away from each other) would be beneficial. this analysis is especially relevant in crisis periods, when investors prefer to have a welldiversified portfolio. since the characteristics of emerging markets are reflected in numerous anomalies, such as information inefficiency, homogeneity of assets and illiquidity of stocks, several directions for the future research can be observed. the analyzed technique should be modified in order to adjust to the distribution of the continuously compounded returns, which is usually not gaussian. on the other hand, the non-linear correlations between 128 j. stanković, j. z. stanković, o. radović financial time series can be observed using different correlation measures, such as the spearman’s rank correlation and the kendall tau correlation. observing the correlation with developed stock market and causal relationship will enable investors to discover key markets that drive trading and 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(2010, october) visual market sector analysis for financial time series data. in visual analytics science and technology (vast), 2010 ieee symposium on (pp. 83-90). ieee. 30. oracle olap user's guide 11g release 2 (11.2), available at: https://docs.oracle.com/cd/e11882_01/ olap.112/e17123.pdf vizuelna korelaciona analiza finansijskih vremenskih serija obiman broj podataka u finansijskim vremenskim serijama sa tržišta kapitala generiše ogromnu količinu kompleksnih podataka koji su od interesa za veliki broj učesnika na tržištu. da bi na sveobuhvatan način razumeli tržišni mehanizam, investitori zahtevaju adekvatna rešenja kojima mogu efikasno manipulisati podacima. u ovom radu korišćen je koncept minimalnog obuhvatnog stabla (mos) u cilju otkrivanja obrazaca promene korelacija u skupu akcija sa novonastalih tržišta jugoistočne evrope. pokazan je način na koji mos i odgovarajuće hijerarjisko stablo evoluiraju tokom vremena i opisuju razvoj međuzavisnosti između akcija sa posmatranih tržišta. tokom perioda posmatranja, 2007-2014, veze između akcija su se menjale, posebno u periodu globalne finansijske krize, što može imati značajne implikacije na donošenje investicionih odluka. kljuĉne reĉi: korelacija, minimalno obuhvatno stablo, finansijske vremenske serije, novonastala tržišta facta universitatis series:economics and organization vol. 16, n o 4, 2019, pp. 389401 https://doi.org/10.22190/fueo1904389d © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper significance of innovation for sustainable economic and agricultural development in the republic of serbia 1 udc 502.131.1:330.34]:330.341.1(497.11) 502.131.1:338.43]:330.341.1(497.11) danijela despotović, lela ristić, miloš dimitrijević university of kragujevac, faculty of economics, kragujevac, republic of serbia abstract. since it is not enough just to achieve economic development, we should strive for sustainable development over a longer period and base it on innovation. it is an extremely important factor of economic and sustainable development. it is particularly important to innovate those economic activities that are crucial for sustainable development and where there are comparative advantages. because of that, the aim of this paper is to prove that innovation is the key to success and achieving sustainable development. the cluster analysis has highlighted innovative leaders and learners. the republic of serbia is a country where agriculture is one of the most important economic activities. in terms of agricultural productivity, it not only lags behind innovative leaders, but also behind other countries of southeast europe, distinguished as innovative learners. in addition, in terms of innovation in agriculture, it significantly lags behind other economic activities at the national level, so that special attention should be paid to this issue. key words: innovation, productivity, sustainable development, economic development, agriculture. jel classification: 011, 013, 031, q01 1. introduction in the modern world, it is very difficult to find a unique pattern of progress and the survival of a certain acceptable state for a longer period. that is why this is the time of new ideas, innovations and constant changes. received august 19, 2019 / revised october 04, 2019 / accepted october 07, 2019 corresponding author: miloš dimitrijević university of kragujevac, faculty of economics, liceja kneževnine srbije 3, 34000 kragujevac, serbia e-mail: mdimitrijevic@kg.ac.rs 390 d. despotović, l. ristić, m. dimitrijević innovation, together with the knowledge that enables it, is an important factor in increasing competitiveness (dajić, 2017). innovation is the key for economic development and increasing employment, which means that this is a very important determinant of sustainable economic development (despotović et al., 2014). it is not enough to achieve only economic development, but it is necessary for this development to be sustainable over a longer period, with respect to the ecological and social component. because sustainable development is a multidimensional concept that relies on all three pillars (giddings et al., 2002): economic, environmental and social. historically, the concept of sustainable development has emerged in the context of environmental problems. interaction of investments in industrialization and agricultural production, exhaustion of natural resources, increase in the population are just some of the elements that are analyzed and based on which proposals are given for mitigation and solving of environmental problems (miltojević, 2011, p. 641). in accordance with the previously mentioned concept of sustainable development, the subject of research in this paper is the relationship between innovation and sustainable development in more economically developed and innovative countries (germany, usa, switzerland, taiwan, sweden, japan, uk, korea, netherlands, finland) and countries of southeast europe (slovenia, croatia, greece, romania, bulgaria, montenegro, albania, bosnia and herzegovina, serbia, north macedonia), with a special accent on serbia. the aim of the paper is to prove that new ideas and innovations are necessary for a sustainable development of the economy and agriculture, which can be born only with greater investment and dedication to science, research and development. based on the subject and aim of the research, a hypothetical framework is defined: x1: innovative countries are developing more rapidly. x2: innovation is a very important factor for the future development of agriculture in the republic of serbia. 2. literature review in addition to research and development (r&d), the growth and innovation capacity of the economy depends on the ability to absorb technology and the demand for its production and use (radošević, 2004, p. 646). innovative activities include internal and external r&d, capital expenditure, human resources development, market design and development, etc. (gault, 2018, p. 618). the most innovative countries are considered innovative leaders, while the least innovative are innovative learners. despotović et al. (2016) indicate that the most innovative economies are mainly economically developed countries. in the innovation segment, the republic of serbia should further encourage the development of patents, improve the quality of scientific and research institutions, and at the same time eliminate weaknesses in the connection between science and the economy (savić et al., 2015, p. 74). the competitiveness of a nation depends on the ability of its economy to innovate and improve (porter, 2008, p. 159). this is particularly important if it positively reflects the dimensions of sustainable development, which could best be seen if sustainable development indicators are considered, such as human development index (hdi) and ecological footprint vs biocapacity per person (moran et al., 2008). the ecological footprint should be less than significance of innovation for sustainalbe economic and agricultural development in serbia 391 bioaccumulation. since this has not been the case in serbia for years, then there is an ecological deficit (global footprint network, 2018). it is important to point out that hdi (undp, 2005) is used as an indicator of sustainable development, and ecological footprint (wackernagel et al., 2002; wackernagel et al., 2005) as an indicator of sustainable consumption. as a minimum, sustainability requires the avoidance of a global overdraft, or the relationship of the ecological relationship to bioaccumulation greater than 1, thus ≤1 is a necessary condition for sustainability (ceballos et al., 2005). although the significance of gdp is inseparable in economic publications, composite indexes that integrate multiple indicators, such as hdi, the global competitiveness index and others, are increasingly used (gligorić et al., 2018, p. 1254). legatum institute prosperity index (lpi) is a relatively newer and more comprehensive indicator that uniquely describes the level and dynamics of prosperity in countries around the world (gligorić et al., 2018), according to which serbia is 56 th (legatum institute, 2018). serbia needs to adapt the development strategy to the new development and technological paradigm in order to establish an innovative environment (bošnjak, 2005a, p. 33). a key element for establishing a more functional interaction between the r&d institutions and the economy is the establishment of a balanced program of long-term technological development that will be complementary to strategic development priorities, especially in the context of integration processes in the european union (jakopin, 2011, p. 85). in addition, the acceptance of the new concept of creating and maintaining competitive advantages based on scientific knowledge and technological development is necessary (bošnjak, 2005b, p. 131). as the most important analytical framework for expressing the achieved level of economy innovation is using the global innovation index (gii) and the 12 th pillar of the global competitiveness index (gci) (despotović et al., 2014). in the research of innovation activities, the elements of the 12 th pillar of the gci are used (innovation as an innovation indicator): capacity for innovation, quality of scientific-research institutions, r&d costs of the company, university-industry cooperation in r&d, government procurement of advanced technology products, availability of scientists and engineers per million population (world economic forum, 2013, p. 51; krstić et al., 2019, p. 20). innovation is considered the main driver of growth. the global median of the pillar innovative capabilities is 36 (out of 100), which is by far the lowest score in 12 th pillars of gci. in 77 countries of 140 innovation is the weakest pillar. the results show that there are only a few innovation forces in the world, i.e. super innovators whose score is above 80: germany, usa, switzerland and taiwan (china) (schwab, 2018, p. 7). according to an innovative system based on business sophistication and innovative capability, europe and north america are predominant (schwab, 2018, p. 25). of the 140 analyzed countries according to the latest report of the world economic forum in 2018, and to the 12 th pillar of the gci, innovation leading countries are: germany (87.5), usa (86.5), switzerland (82.1), taiwan (china) (80.8), sweden (79.8), japan (79.3), uk (79.2), korea (78.2), netherlands (77.5) 76.3), france (76.1), denmark (75.4), canada (75), singapore (75), austria (74.3); while at the bottom of the rankings are: angola (16.8), congo (18.8), haiti (20.3) cape verde (21.4), chad (21.6), liberia (22), eswatini (22.7), yemen (22.8), lesotho (23.7), burkina faso (24.9), zimbabwe (25.5), mauritania (25.5), ethiopia (26.5), benin (26.7), kyrgyz republic (26.7). the change in relation to the previous report came for serbia. it recorded growth in terms of innovation and is now 56 th (39.7) (schwab, 2018). 392 d. despotović, l. ristić, m. dimitrijević according to the latest report gii 2018, switzerland ranks first, followed by the netherlands, sweden, uk, singapore, usa, finland, denmark, germany, ireland (wipo, 2018a, p. 17). the economies which realize at least 10% above the average gdp of other countries are called innovators achieve innovation (wipo, 2018a, p. 34). in 2018, among the innovators according to this criterion, serbia was included (wipo, 2018a, p. 35). serbia occupies 57 th position according to the global innovation efficiency ratio (which is a progress from the 67 th position in 2017 and from 70 th place in 2016), which is 11 th place among 34 countries with upper-middle income. serbia is in the ranking of 39 countries in europe on the 35 th place. compared with the countries of europe, serbia is below the average according to the gii (wipo, 2018b). therefore, serbia is a moderate innovator (european commision, 2018). from the point of view of innovation, it is important to point out that one country's economic policy should be based on the comparative advantages of the country. it is visible that agriculture and food industry in serbia are very important in that context (ančić et al., 2014, p. 306). accordingly, a strategic commitment is needed to make agriculture one of the important economic sectors based on knowledge and innovation (ristić, 2016), in order to transform the comparative advantages of agriculture into competitive ones. creativity and innovation are considered new approaches in the field of rural and agribusiness development (kvrgić & ristić, 2018, p. 35). modern agriculture becomes the area of information technology use (praća et al., 2017, p. 43). at the same time, sustainable agriculture is based on the use of technologies that maximize productivity and minimize negative effects on natural resources (land, water and biodiversity) and human resources (rural population and consumers) (praća et al, 2017, p. 44). the key questions in the field of innovation are why and when it appears, as well as by whom it is initiated. the need for change is an essential component, as well as population growth and environmental change (van der veen, 2010, p. 5), which makes innovation in agriculture different from other sectors, with the fact that the production of sufficient quantity of quality of food appears as an extremely important global issue. 3. empirical research 3.1. research methodology the statistical program spss was used for processing and analysis of collected data. the collected data were analyzed in two levels. the first level of analysis is the cluster of analyzes of selected countries for the period 2007-2017. for the selection of the innovation indicators, the gci is used which is divided into 12 pillars, arranged in three subindices. for the innovation of the economy, the most significant are the 11 th and 12 th pillar (innovation and business sophistication) as the pillars of the third subindex (innovation and sophistication) that is crucial for country innovation (schwab, 2017, p. 12) (fig. 1). significance of innovation for sustainalbe economic and agricultural development in serbia 393 fig. 1 gci framework structure source: schwab, 2017, p. 12. the aim of this analysis is to indicate the differences between innovative leaders and innovative learners (despotović et al., 2016). the innovative leaders have been selected based on the latest report of the world economic forum 2018, according to the 12 th pillar of the gci (schwab, 2018). the innovative learners are countries of southeastern europe. there are 10 countries in both categories. by multivariate linear regression, the influence of innovation parameters on economic development (measured by gdp per capita as a still significant indicator in economic publications) has been explored (gligorić et al., 2018, p. 1254). many authors, such as savić et al. (2015) use the gii, gci and gdppc ppp to explore innovation as a potential for growth. despotović et al. (2016) analyzed innovation using the 12 th pillar of gci and their impact on gdp per capita, which was also useful for this research. in this paper, comparison was made with innovative leaders and learners. the analysis also includes the hdi, which is a wider measure and a better indicator of sustainable development, as stiglic points out (2013). secondary data for this level of analysis were collected from: world economic forum, unctadstat and united nations development programme (undp) (fig. 2). 394 d. despotović, l. ristić, m. dimitrijević fig. 2 hdi framework structure source: undp, 2017 the second level of analysis in this paper was used to examine statistically significant differences between the observed variables, using appropriate statistical tests. firstly, the gross value added (gva) generated by agriculture (measured as percent of gdp) is compared with the other economic activities by using data of the statistical office of the republic of serbia (national accounts), for the period 2007-2017. subsequently, a comparison of productivity in the agriculture of the republic of serbia was made in relation to other countries of southeast europe and the innovative leaders. the gva of agriculture per worker was used as a measure of agricultural productivity because information technology (it) has a direct impact on productivity in agriculture, as pointed out by jurjević et al. (2019). this further leads to the ultimate goal, which is an increase in the profits of agricultural producers and the sustainable development of the agrarian sector. serbian agriculture significantly lags behind the developed european countries (jurjević et al., 2019, p. 45), so it is very important to pay attention to the innovations of serbian agriculture. analysis of technological development, production and use of new technologies, efficiency of r&d systems and realization of scientific-technological policies have traditionally focused on input indicators (r&d costs, human resources, etc.) and outcome indicators results (patents, etc.), whose measureability is standardized and widely used, over the last decades (oecd, 2005). despite constraints, input and output indicators (because of statistical monitoring) continue to be a significant source of information about the content and trends of technological development. the measuring of general innovation of a particular economy is limited by using only quantitative data (kutlača&semenčenko, 2015). bearing all this in mind, in this paper gross domestic expenditures for r&d in the field of science were used as an indicator of input. for the output indicator, the inventions and patents used for the first time in practice (according to the scientific field), were used, in order to pay special attention on agricultural science. in addition, gross domestic expenditures (for r&d by activity) were observed. secondary data for this level of analysis were collected from statistical office of the republic of serbia science, technology and innovation research and development. significance of innovation for sustainalbe economic and agricultural development in serbia 395 3.2. research results 3.2.1. cluster and regression analysis cluster analysis 1 in this paper is based on the parameters of innovation for the 20 selected countries in the period 2007-2017. in the process of grouping the hierarchical clustering method, the countries were grouped according to similarities, based on the selected parameters. the dendogram showed that the first two clusters included 10 countries that were singled out as innovative leaders (uk, netherlands, germany, taiwan, korea, usa, finland, switzerland, japan, sweden), and in the other two were countries of southeast europe see (slovenia, croatia, greece, romania, bulgaria, montenegro, albania, bosnia and herzegovina, serbia, north macedonia). slovenia is the only one of the see countries that has been completely isolated within a single cluster, which means it is the leader in innovation in see. nevertheless, the differences between countries in each of the four clusters are not large. observed by the level of separation between clusters of less than five, there is a connection between the first two clusters and the other two clusters. at the level of the difference of more than five, first two clusters of innovative leaders are merged into one and the other two clusters of countries of southeast europe also in one. therefore, we get two clusters, innovative leaders and innovative learners. there is a big difference between them. that is why in the further analysis they are separately examined i.e. the impact of innovation on their economic development using multiple regression. the assumption about the size of the sample (n>50+8*m) was fulfilled (palant, 2009), where m is the number of independent variables (110>50+8*2). table 1 importance of innovation for economic development observed countries of southeast europe observed innovative leaders countries b t sig (p) b t sig (p) innovation (12th gci) -21.119 -.010 .992 11004.339 2.542 .012 ** business sophistication (11th gci) 17479.17 7.238 .000 * 28089.287 5.694 .000 * note: the value is significant at 1% ( * ), 5% ( * ), and 10% ( *** ) confidence level source: authors’ research in both cases (table 1) is the appropriate model (p=.000). in addition, the assumption of multicollinearity is satisfied, so the model is suitable for application. in the case of southeast europe, there is no impact of innovation on economic development, but only business sophistication as one part of the subindex of innovation and sophistication. in the case of innovative leaders, innovation and business sophistication have an impact on economic development, which suggests that innovation has a major impact on economic development. it means that more innovative countries are economically developed. on the other hand, the countries of southeast europe need to increase their innovation to reach higher levels of economic development. on this basis, the first hypothesis is proven. 1 this research results are not tabulated for reasons of space. 396 d. despotović, l. ristić, m. dimitrijević table 2 importance of innovation for sustainable development observed countries of southeast europe observed innovative leaders countries b t sig (p) b t sig (p) innovation (12th gci) .051 3.864 .000 * .012 2.260 .026 ** business sophistication (11th gci) .072 5.033 .000 * .015 2.220 .029 ** note: the value is significant at 1% ( * ), 5% ( * ), and 10% ( *** ) confidence level source: authors’ research in both cases (table 2) is the appropriate model (p=.000). in addition, the assumption of multicollinearity is satisfied. innovation has a full impact on sustainable development, both in the case of the countries of southeast europe, as well as in the countries of innovative leaders (here taiwan is omitted from the sample, because of the undisclosed hdi data from china). this means that the importance of innovation is even greater for sustainable development, where sustainable development is a broader concept than economic development (stiglic, 2013, p. 316). innovation and business sophistication can be combined into one factor, and by simple linear regression their impact on economic and sustainable development can be examined. table 3 factor of innovation and sophistication (3 rd subindex of gci) economic growth (gdp per capita) sustainable development (hdi) b t sig (p) b t sig (p) observed countries of southeast europe 16613.160 10.635 .000* .122 13.896 .000 * observed innovative leaders countries 37703.582 9.017 .000* .027 4.935 .000 * note: the value is significant at 1% ( * ), 5% ( * ), and 10% ( *** ) confidence level source: authors’ research in both cases in the table 3 is the appropriate model (p=.000). the factor of innovation and sophistication has an impact on the economic and sustainable development of the observed countries. 3.2.2. statistical tests for the second level of analysis, kolmogorov-smirnov and shapiro-wilk tests for the distribution normality found that no indicators have a normal distribution, so nonparametric techniques are needed. kruskal-wallis test was used to determine the contribution of agriculture to the economic development of the republic of serbia in relation to other economic activities, as well as the state of serbian agriculture in relation to the countries of southeast europe and the economically developed countries. significance of innovation for sustainalbe economic and agricultural development in serbia 397 table 4 importance of agriculture for economic development and agricultural productivity gva agriculture value added per worker chi-square 222.042 201.099 asymp. sig. (p) p=.000 * p=.000 * economic activities mean rank country mean rank agriculture 194.45 serbia 32.45 mining 62.86 montenegro 125.55 manufacturing industry 226.00 north macedonia 50.91 electricity, gas and steam supply 111.68 albania 15.82 water supply 50.86 b&h 32.91 construction 155.14 croatia 75.64 trade 210.95 bulgaria 66.09 traffic 164.27 romania 9.36 accommodation services and meals 43.00 slovenia 77.36 information and communication 158.23 greece 100.18 financial activities 99.59 germany 147.09 real estate business 206.59 usa 196.80 professional, scientific, innovation and technical activities 124.23 switzerland 130.27 administrative and support service activities 78.82 sweden 188.82 state administration 123.14 japan 123.30 education 131.09 uk 160.36 health and social protection 174.64 korea 95.55 art, entertainment and recreation 40.05 netherlands 185.00 other service activities 57.41 finland 172.73 activity of the household as an employer 17.00 the activity of extraterritorial organizations and bodies 6.00 note: the value is significant at 1% ( * ), 5% ( * ), and 10% ( *** ) confidence level (the analysis excluded taiwan because of the lack of separate data from china) source: authors’ research in the observed period 2007-2017, it is visible that agriculture has a significant impact on the economic development in the republic of serbia (table 4). from the economic activities classified in the 21 group, agriculture is on the 4 th place, behind the manufacturing industry, trade and real estate business. on the other hand, productivity in the agriculture of the republic of serbia not only lags behind the more developed countries, but also behind many countries of southeast europe. behind serbia are only albania and romania. because of the fact that agriculture contributes significantly to the economic development of serbia, productivity should be increased primarily in agriculture by introducing new technologies and innovations, because they have direct impact on productivity in agriculture (jurjević et al., 2019). this proves the second hypothesis of this paper. simple linear regression has determined that gross domestic expenditure on r&d has an impact on inventions and patents that were firstly used in practice (table 5), according to the scientific field (p = .000), which means that more should be invested in agricultural science. kruskal-wallis test was used to determine the ratio of investments in agricultural science in relation to other sciences in the republic of serbia, in terms of an indicator distribution that is not normal. in the observed period (2007-2017) investing in r&d in agricultural sciences (table 5) was behind the natural, engineering and social sciences, and in front of medical and humanistic sciences. agricultural sciences according to inventions and patents have 398 d. despotović, l. ristić, m. dimitrijević surpassed social sciences, from which it is concluded that agricultural science has achieved better results than the level investment for r&d. table 5 research and development vs inventions and patents (according to the scientific fields in the republic of serbia) research & development inventions and patents chi-square 46.520 36.012 asymp. sig. (p) .000 * .000 * scientific fields mean rank mean rank natural sciences 51.64 37.59 engineering technology 53.95 58.50 medical sciences and health sciences 18.91 31.09 agricultural science 20.68 35.64 social science 37.73 24.18 humanities 13.30 14.00 note: the value is significant at 1% ( * ), 5% ( * ), and 10% ( *** ) confidence level source: authors’ research the kruskal-wallis test found that the gross domestic r&d expenditures by activities, ranging from 71 business activities, places agriculture on the 34 th place (p = .000) 2 . this is also insufficient because agriculture is of great importance for the economic development of the republic of serbia. namely, more resources should be invested for r&d in agriculture, as well as in agricultural science, especially for the launch of innovations. the analysis of business subjects according to innovations and business sectors is also very important for the republic of serbia. table 6 business subjects towards innovation and sectors of activity in the republic of serbia business subjects chi-square 28.427 asymp. sig. (p) .019 ** business sectors mean rank agriculture, forestry and fisheries 24.25 mining 18.63 manufacturing industry 49.38 supply of electricity, gas and steam 48.88 water supply and wastewater management 19.75 construction 25.88 wholesale and retail trade and repair of motor vehicles 32.63 traffic and storage 21.25 accommodation services and meals 30.50 information and communication 48.38 financial activities and insurance 42.50 real estate business 10.25 professional, scientific, innovation and technical activities 43.88 administrative and support service activities 38.88 health and social protection 22.17 art, entertainment and recreation 22.17 note: the value is significant at 1% ( * ), 5% ( * ), and 10% ( *** ) confidence level source: authors’ research 2 this research results are not tabulated for reasons of space. significance of innovation for sustainalbe economic and agricultural development in serbia 399 businesses subjects according to innovation in agriculture are on the 10 th place in comparation with the other sectors (total 16), and it is again insufficient because agriculture is at the top in terms of contribution to economic development. 4. conclusion in addition to the impact on economic development, innovation has an even more pronounced impact on sustainable development. the influence of innovation on economic development in the innovator countries is visible, and it makes them economically developed countries, unlike the countries of southeast europe. this proves the first hypothesis that more innovative countries are the economically developed ones. given that the influence of innovation on the economic development in the countries of southeast europe is missing, where only slovenia is distinguished as an innovative leader, the economic lagging of these countries behind more innovative and at the same time economically developed countries is visible. it is necessary to approach this problem carefully, to stop in the long term even greater lag and negative reflection on sustainable development. for the future research, it is important to analyze how to increase the innovation of southeast europe, and analyze all elements of the 12 th pillar of gci as well as gii, and their impact on economic and the sustainable development of different countries. the analysis should include the relationship between r&d costs, the inventions and patents of the chosen countries, as well as their comparison with economically developed countries. agriculture in the republic of serbia has many natural resources and significant contributon to gdp, employment and exports. namely, agriculture is one of the key economic activities for the serbian economy, but it is lagging behind in terms of productivity. in addition, there is insufficient investment in agriculture and r&d in agricultural sciences. thereby, agricultural businesses lag far behind other sectors of the economy in terms of innovation. considering that many authors emphasize the great importance of introducing modern technologies for increasing productivity in agriculture, it could be concluded that insufficient innovation is one of the important causes of the lagging of agricultural productivity in the republic of serbia, not only behind more developed countries, but also behind many countries in the region. therefore, it is important to introduce innovations in agricultural production process. it could have a very positive impact on productivity growth and sustainable development of the agri-food sector, which is of great importance for economic development of the republic of serbia. accordingly, innovations are very important factors for the future development of agriculture in the republic of serbia. this conclusion proves the second hypothesis of this paper and it requires higher investments in agricultural r&d, as well as other accompanying efforts at macro and micro levels. acknowledgement: the paper is a part of the research done within the project number iii 47005, financed by the ministry of education, science and technological development of the republic of serbia. 400 d. despotović, l. ristić, m. dimitrijević references ančić, j., laketa, m. & laketa, l. 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(2002). tracking the ecological overshoot of the human economy. proceedings of the national academy of sciences of the united states of america, 99 (14), 9266–9271. wipo (2018a). the global innovation index 2018: energizing the world with innovation, retrieved from: https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2018-chapter1.pdf, accessed on: 25 aprl 2019. wipo (2018b). global innovation index 2018 serbia, retrieved from: https://www.wipo.int/edocs/ pubdocs/en/wipo_pub_gii_2018-profile41.pdf, accessed on: 25 aprl 2019. world economic forum (2013). the global competitiveness report 2013-2014, retrieved from: http://www3. weforum.org/docs/wef_globalcompetitivenessreport_2013-14.pdf, accessed on: 28 may 2019. značaj inovativnosti za održivi razvoj privrede i poljoprivrede u republici srbiji s obzirom da nije dovoljno samo ostvariti ekonomski razvoj, već održivi razvoj u dužem vremenskom periodu, neophodno je težiti inovativnosti, koja je izuzetno važan faktor ekonomskog rasta i održivog razvoja. pritom je posebno važno inovirati one privredne delatnosti koje su ključne za privredni razvoj i gde postoje komparativne prednosti. u skladu sa navedenim, cilj ovog rada jeste dokazati da su inovacije ključ uspeha i ostvarivanja održivog razvoja. klaster analizom su izdvojeni tzv. inovativni lideri i učenici. republika srbija je prikazana kao zemlja gde je poljoprivreda jedna od značajnih privrednih delatnosti. i pored toga, po produktivnosti u poljoprivredi ne samo da zaostaje za inovativnim liderima, već i za drugim zemljama jugoistične evrope koje su se izdvojile kao inovativni učenici. takoďe, po inovativnosti u poljoprivredi značajno zaostaje i za drugim privrednim delatnostima na nacionalnom nivou, zbog čega bi posebnu pažnju trebalo posvetiti ovom pitanju. ključne reči: inovativnost, produktivnost, održivi razvoj, privredni razvoj, poljoprivreda. https://doi.org/10.1111/j.0021-9886.2004.00522.x http://hdr.undp.org/en/content/human-development-index-hdi facta universitatis series: economics and organization vol. 17, n o 1, 2020, pp. 43 56 https://doi.org/10.22190/fueo190727004b © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the crowding-out effect of fiscal policy on capital inflows in nigeria 1 udc 336.02(669) abdurrauf babalola, saidat oluwatoyin onikosi-alliyu alhikmah university, department of economics, ilorin, nigeria abstract. the study investigated the effect of fiscal policy on crowding out capital inflows in nigeria using annual data between 1970 and 2011 by using the foreign direct investment (fdi) as proxy to capital inflows represent the dependent variable, budget deficit (bd), foreign borrowing (fl) and domestic borrowing (dl) as proxies to fiscal policy are placed as explanatory variables. cointegration and ecm technique were employed. our finding showed that in both the short and long run, bd does not crowd out but rather crowd in fdi. in the short run, dl averagely has significant positive impact on fdi. however, in the long run, dl has significant negative impact on fdi. more so, in both short run and long run period, fl has significant negative impact on fdi, therefore, fl crowds out fdi. the speed of adjustment back to equilibrium showed that the explanatory variables have capacity to adjust fdi significantly. the study recommends that the government could try to be aware of the implication of its fiscal policy in running a budget deficit and making proper decision in sourcing for funds to finance the deficit. foreign borrowing is less expensive in financing budget deficit, so if the government must borrow, it should give preference to this source. generally, the government should reduce deficit because of the implications inherent in it. key words: fdi, budget deficit, foreign borrowing, domestic borrowing jel classification: b22, b23, c22, e62, h62 1. introduction prior to the great depression in the 1930s, nearly all economies were operating a classical theory of no intervention of government in economic activities except to maintain law and order. keynesian ideas were given prominence during this severe economic recession which received july 27, 2019 / revised january 16, 2020 / accepted january 22, 2020 corresponding author: abdurrauf babalola alhikmah university, department of economics, pmb 1601 ilorin, kwara state, nigeria e-mail: abdclement@yahoo.com 44 a. babalola, s.o. onikosi-alliyu started from the united states, as the classicals could not find any lasting solution to the depression which rocked the advanced economies. keynes (1936) brought the idea that the government intervention (through fiscal policy) is necessary to boost aggregate consumption and revamp the economy back to recovery. this idea was adopted and it gave solution to the economic crisis. also, after the global economic meltdown between 2008 and 2009, the use of expansionary fiscal policy such as increase of government expenditure and decrease of taxation to push the economy forward has been on the increase most especially in developed and developing countries. this is contrary to the prediction of both keynesian model for a non-open economy and mundel-fleming proposition of a small open economy (fleming, 1962, mundell, 1963 and bhaduri, 2002). this reaction has therefore sparked up a re-newed interest of many economists to the effect of expansionary fiscal policy with respect to capital mobility into an economy, especially foreign direct investment (fdi). according to keynesian economists, discretionary fiscal tools can be employed to influence the aggregate demand through its effect on disposable income. however, the multiplier effect will be reduced because of the crowding out effect on private investors. the theory postulated that the higher the level of openness of a nation is, the less significant the effect of fiscal tools. this theory was extended by mundell-fleming model to a small open economy where an inverse relationship between fiscal policy and output or employment was also established. while the advocates of government intervention through fiscal policy say, it will boost and bring back the economy to recovery, the contenders, most especially the monetarists, believe that it will crowd-out the participation of private investors nationally and internationally since it will affect the interest rates of investing. fiscal deficit in nigeria is mostly financed in two ways, through either domestic borrowing or foreign borrowing. monetarists judge that, due to easing fiscal policy through spending increase, the government would necessarily obtain loan through sale of government bonds, which would push up interest rates in the financial market, and thus result in high cost of borrowing which „crowds out‟ private investment in the same market. since the nigerian government is a mixed economic system with both government and private participation, the main question is, which of the two ways of financing budget deficit will have less effect on capital mobility (direct investment) into nigeria? should the government incur budget deficit going by crowding out effect? in perfect capital mobility situation, fiscal policy amplification would result in increase in both income and rate of interest especially in a small open nation. therefore, exchange rate of the home nation appreciates, thereby reducing the effect of fiscal stimulus. besides, under a fixed exchange rate system, the effect of fiscal rule is positively felt when there is perfect capital movement. this is because perfect capital mobility enhances domestic fiscal policy since interest rate cannot rise. as a result, there will be no possibility for crowding out private investors. however, since the nigerian economy only practices guided floating system, the argument remains on which is a better way of getting funds to finance fiscal deficit. three ways could be employed to finance this deficit. first is through tax increase, which tends to cut down disposable income of individuals as well as corporate bodies, reduce savings and then reduce the aggregate demand of the economy which could discourage investment and make employers of labour lay off workers. second is through money finance (seignior-age) by printing more money whose consequence is majorly inflation induced, especially if it is not during recession according to keynes (1936). this method is seldom employed by most the crowding-out effect of fical policy on capital inflows in nigeria 45 economies because of its inherent and conspicuous consequence. third is through borrowing from foreign or domestic sources. this means is used by most economies and nigeria. this is done when the government sells bond to private investors through the central bank to raise funds. the consequence is that the private investors, who buy these government bonds would be left with less capital for further investment in private quarter and hence, government borrowing through this means, would have crowded out private investment. it also has its implication on interest rate hike as explained earlier. in the present day economy where financial integration of economies is very high because of the globalization process, economists have questioned the size of fiscal multiplier in both boom and recession periods (barro, 2009), however, there is no consensus among economists. in nigeria, the research on monetary policy and capital mobility is more pronounced than relationship of capital mobility and fiscal policy. many researchers on fiscal policy focused on the implication it has on economic growth without considering the degree of capital mobility. therefore, this effort is aimed at studying the impact of fiscal policy, proxy of fiscal borrowing, on capital mobility in nigeria. the paper is ordered as follows: second section highlights the relevant literature. the third section discusses the model specification and a full description of the dataset. the fourth section analyses data and results of findings. the fifth section showcases conclusion and policy implications. 2. review of relevant literature 2.1. conceptual review one of the major policies usually utilized for stabilization in an economy is fiscal policy. this is the use of government expenditure and revenue to regulate the economy in order to achieve a predetermined macroeconomic objective. it is usually referred to as aggregate effect of the budget result on economic activities. fiscal policy can either be expansionary (easing) or contractionary (tightening). it is easing when government expenditure exceeds tax revenue, in which case, the government runs a budget deficit. also, fiscal policy is tightening when tax revenue is more than government expenditure. this refers to budget surplus situation. when a government plans to spend more than it collects in taxes, it borrows to finance the deficit. the accrual of past borrowing is the government debt (bhaduri, 2002). the effect of expansionary fiscal policy on aggregate can be viewed from two channels in a closed economy. firstly, the rise in public spending would exactly raise aggregate demand directly. secondly, reduction in tax would affect consumers by increasing their disposable income which would consequently increase their aggregate demand. the investors, as well, would have a robust profit because of reduction in tax and consequent increase in demand. this could mean that government would sponsor the excess by borrowing via the sales of bonds. the action of borrowing through sale of bond would lead to rise in interest rate and consequently “crowd out” a number of personal investment i.e. reduce the portion of yield generated by private investment. the government could also borrow through obtaining loan from international community or print new notes. each of these means has its peculiar economic implication to the system. in an open economy, expansionary fiscal policy would reduce national savings through its impact on the exchange rate as well as trade balance. for example, government deficit 46 a. babalola, s.o. onikosi-alliyu financing leads to increased domestic rates of interest which will in turn attract foreign capital and consequently cause local currency to appreciate. increase in the value of local currency would result to cheaper imported goods in home country. however, the country's exports become dearer outside its shores, leading to a decrease in merchandise trade balance negative net export. crowding out, according to jhingan (2004), means decrease in private capital spending due to increase in public expenditure via deficit budget through a tax cut, increased money supply or issuance of public bond. bhaduri (2002) defines it as the decrease in investment that is triggered when expansionary fiscal policy increases the rate of interest. capital mobility, which in this study is fdi, “is the flow of funding provided by an investor or a lender to establish or acquire a foreign company or to expand or finance an existing foreign company that the investor owns and controls” (pugel, 2012:345). the fdi is quite different from foreign portfolio investment which denotes all foreign securities investments which do not involve management control. fdi is a capital expenditure in a business by an investor from other country for which the foreign investor has power over the company bought. according to cbn (2017), fdi is a type of cross-border investment connected with a resident in one economy having command or a significant degree of impact on the management of a venture that is inhabitant in another economy. businesses that make fdi are known as multinational corporations (mncs) or multinational enterprises (mnes). 2.2. theoretical review fiscal policy is based on the hypothesis of a british economist, john maynard keynes, whose followers are also referred to as the keynesian economists. this hypothesis states that governments could stabilise the economy through adjusting tax revenue and government expenditure. according to this theory, increase in government spending or reduction in tax usually referred to as budget deficit, will stimulate aggregate demand especially during recession, while reduction in government expenditure and rise in tax usually called government surplus, will ensure adequate control on aggregatedemand and price stability during the boom period (bhaduri, 2002). there is variance of opinion between the keynesians and monetarists about budget deficit on the crowding out effect. the main difference between the two arises from the fact that the keynesians emphasise on short run and partial effect, whereas the monetarists emphasise on the long run and ultimate effect. the keynesian crowding out effect states that, when the government resorts to deficit financing by issuing new bonds, spending increases, and national income rises. if the money supply is held constant, people will need more for business which will raise the rate of interest. this will reduce the involvement of private investors to invest as interest rates have gone up. the monetarists emphasise the ultimate effects of budget deficit by taking account of wealth effect. when the government expands its spending by selling bonds in the financial market, their buyers feel themselves wealthier than before, as a result, they tend to demand for money which increases their demand. moreover, the work of fleming (1962) and mundell (1963) formed the pioneer studies on the effectiveness of stabilization policy on capital mobility. the researchers explained that there is a constraint effect of fiscal policy based on the degree of capital mobility. more so, their study established that fiscal policy was negatively connected to the extent of perfect capital movement. specifically, in a micro economy with floating exchange rate, an the crowding-out effect of fical policy on capital inflows in nigeria 47 expansionary fiscal policy results in an increase in the local interest rate. this will result in rise in capital inflow (fdi) which raises the exchange rate, thereby reducing export and increasing imports and hence reducing aggregate demand. therefore, the potency of fiscal policy is reduced. however, if the system operates a fixed exchange rate, the amount of capital movement will enhance the effect of fiscal policy. in addition, han (2014) extended the assumption of mundell-fleming‟s model and discussed the effectiveness of fiscal policy in a big open economy in a separate capital movement scenario. the study concluded that, in a situation of complete capital mobility, fiscal policy is physically powerful in a flat exchange rate, but not at all in a flexible exchange rate. on the other hand, when an economy has a non-perfect capital mobility, fiscal policy is physically powerful both in fixed as well as flexible exchange rate. when it comes to capital immobility, fiscal policy is less effective in a fixed exchange rate although it is strong under floating exchange rate. yeung-nan, (2015) established the theoretical proposition that fiscal policy can be used to stimulate domestic output by extending romer‟s is-mp model. he replaced the lm curve in the mundell-fleming model with monetary reaction function. he therefore claimed that fiscal policy is effective in altering output in a floating exchange rate with perfect capital mobility. another major theory that discusses the effect of fiscal policy is the ricardian equivalence hypothesis. the theory recommends that when a government tries to resuscitate by escalating debt-financed government expenditure, aggregate demand remains unaffected. it explained that the consumer behaviour is the same, regardless of the means of financing the deficit either through taxes or debt. they clearly explained that consumers are futuristic and so consumption is not a function of current income alone (bhaduri, 2002). they did not believe in crowding in or out of fiscal policy. pierzioch (2004) argued that fiscal policy could be efficient in a standard new open macro-economy model (noem). he buttressed his argument by using algorithm method for the noem model. after calibration of the model, he concluded that more capital movement would diminish the efficacy of fiscal policy. in theory, an important question is how much crowding out effect happens in an economy? economists say it depends on the economic condition of the economy. keynes (1936) is of the opinion that if the economy is in recession like that of the great depression, crowding out does occur less since banks have savings to lend but few investors to borrow. the degree of crowding out also depends on the quantity of private savings and inflows of foreign financial investment. 2.3. empirical review rose (1994) examined the adjustment that exists among exchange rate, monetary policies and capital movement usually referred to as unfeasible “holy trinity”. panel data set was used for twenty-two countries. capital mobility variable was generated from different indicators using factor analysis. conditional exchange rate volatility was used in capturing fixed exchange rate while flexible and rigid price monetary models was used to measure the difference in monetary policies. the study showed that the fundamental macroeconomic instability and the extent of capital mobility have impact on exchange rate precariousness. nevertheless, they explained that the study further showed that the evidence is a function of the exact gauge of monetary fundamental as being weak. 48 a. babalola, s.o. onikosi-alliyu hsing, (2005) empirically tested the alternative macroeconomic model of yeing-nan (2015). he used the extended is-mp replica to study the short-run production function in germany. the work demonstrated that the balance gross domestic product in the country is directly connected to stock market realisation and real exchange rate appreciation, and conversely affected by the anticipated inflation rate, the public deficit/gdp ratio, and the u.s. federal funds rate. tytell and wei (2005) studied the effect of dynamic policies on financial globalization using both monetary and fiscal policies. they estimated a simultaneous equation between inflation and budget deficit using transmission matrix approach. this was done to correct the endogeneity problem in the model. their study concluded that financial globalization can stimulate countries to pursue lower inflation rates but could not reduce the budget deficit. as a result, the strength of the discipline effect varies across different public policy. iya et al. (2014) studied the effect of fiscal shortfall on the nigerian economy from 1981 to 2009 using causality and multiple regression to analyse their data. their finding showed that there existed one-direction causality between real gdp and exchange rate from the tool of causality. the multiple regression result indicated that exchange rate, interest rate and government fiscal deficit have direct impact on economic growth in nigeria. navaratnam and mayandy (2016) investigated the impact of fiscal deficit on economic growth in some selected south asian countries. they employed annual data between 1980 and 2014 with cointegration and granger causality test as tools to examine the dynamic association within the variables. findings from their study showed that fiscal shortfall has inverse effect on economic growth in south asian, but nepal has a direct impact. this could be a function of degree of development in the economy. in nigeria, ajogbeje, adeniyi and egwikhide (2018), examined the impact of trilemma policy path on interest rate using a quarterly which spanned between 1971 and 2017 in nigeria. the study employed both long and short run ardl estimation technique. the outcome of their study showed that capital mobility has significant effect on interest rate while exchange rate and independent monetary policy do not affect interest rate independently; they jointly have significant impact on interest rate through their interaction with external reserves. 3. methodology due to few papers on this topic in economic literature, very few methods have been used so far. some used ols; cointegration method which perhaps only analyses the long run relationship; var and vecm which have issues with theory and equality of lag periods of explanatory variables which in real world situations, may not be obtainable. others used svar which is mostly used for relationship with more than six variables; ardl and its error correction. this study employed cointegration and ecm because the techniques of analysis are backed with economic theory and take care of disaggregated impact/effect of both the short run and long run. forecasted variance decomposition was also engaged to decompose the dependent variable. the study started with a preliminary stationary test because of the fear of falling into spurious issues. since phillip peron (pp) and augmented-dickey fuller (adf) test results are usually moving toward the same direction, only the adf was employed to test for the crowding-out effect of fical policy on capital inflows in nigeria 49 unit root in the data. the stability of the ecm, which is paramount, was also engaged alongside the residual tests. 3.1. model specification fdi was made a proxy of capital inflow into nigeria, and stood in as the dependent variable, while budget deficit, foreign loan and domestic loan were proxy of fiscal effect and were made the explanatory variables. hence, the study adapted the model of nwaeze, kalu and tamuno (2017) as: fdi = f (bd, fl, dl) (1) the equation 1 is presented in a mathematical model as fdi = δ0 + δ1bd + δ2fl + δ3 dl (2) since the model might have left some other variables which could affect the dependent variable (fdi) but not captured in the model, we represented these other variables as error term and converted equation 2 into an econometric model as: fdi = δ0 + δ1bd + δ2fl + δ3 dl + ᶙ. (3) where, fdi foreign direct investment bd federal government budget deficit fl foreign loan obtained. dl domestic loan obtained ᶙ. error term, which represents all other necessary variables not captured in the model. the study could not log the variables because of the fear of loss of observations with negative signs and thus, reducing the potency and chance to employ cointegration and error correction techniques. hence, capital flow into nigeria was represented by foreign direct investment (fdi), the fiscal effects were represented by budget deficit (bd), foreign loan (fl) and domestic loan (dl) which represented the explanatory variables. our a priori expectation was that, when budget deficit increases, the government obtains loan from both international and local investors. the action, which will lead to rise in interest rate, will reduce the private investment because the cost of investment would go high. thus, there exists an indirect impact. 3.2. data issue annual time series data covering the period from 1970 to 2011 were sourced from the cbn statistical bulletin 2017 series, which made us have 41 observations in all. the choice of our data set being annual was because the variables used were annual in nature in most economies. the choice of 2011 was because the federal government did not obtain foreign loan, according to cbn (2017), from 2012 to 2016. as such, there would be statistical issues if used like that and the reliability of our results would be at stake. 50 a. babalola, s.o. onikosi-alliyu 4. research findings 4.1. results of unit root test table 1 presents the results of unit root test which employed adf only. from the results, it shows that at level (0), all the variables display presence of trend and thus are non-stationary. at first difference (1), only fdi and bd are stationary while fl and dl are stationary at second difference (2), all at 1% level of significance. table 1 adf unit root test variable at level prob. at 1 st diff prob. at 2 nd diff prob. fdi -1.4853 0.5323 -8.7212 *** 0.0000 bd 4.3700 1.0000 -5.7567 *** 0.0000 fl 4.9455 1.0000 0.2078 0.9697 -5.1808 *** 0.0001 dl 3.4950 1.0000 -0.4863 0.8836 -8.2705 *** 0.0000 *** indicates significance at 1% level source: author‟s extract from e-views 9 table 2 showcases results of the lag order criteria of the model. from the table, all five criteria select 5-lag as the best lag selection for our model. however, because of insufficient data to use this selected lag period, we make use of 2-lag periods as automatically selected by johenson cointegration test. 4.2. result of lag selection order table 2 lag selection order lag logl lr fpe aic sc hq 0 -1348.192 na 4.24e+28 77.26812 77.44587 77.32948 1 -1299.334 83.75735 6.53e+27 75.39049 76.27926 75.69729 2 -1263.347 53.46631 2.17e+27 74.24838 75.84817 74.80063 3 -1217.212 57.99838 4.29e+26 72.52638 74.83718 73.32406 4 -1188.431 29.60322 2.55e+26 71.79604 74.81786 72.83917 5 -1150.352 30.46267 * 1.06e+26 * 70.53442 * 74.26725 * 71.82299 * * indicates lag order selected by the criterion lr: sequential modified lr test statistic (each test at 5% level) fpe: final prediction error aic: akaike information criterion sc: schwarz information criterion hq: hannan-quinn information criterion source: author‟s extract from e-views 9 4.3. results of cointegration test tables 3 and 4 present the johenson cointegration test. the tables show the trace and maximum-eigen statistics, both of which indicate 2 cointegrating equations at 5% level of significance as the mackinnon-haug-michelis (1999) p-values indicate. by implication, it is above the minimum of at least one, meaning that there is existence of long run relationship in the model. hence, the model has satisfied the precondition for employing the ecm. the crowding-out effect of fical policy on capital inflows in nigeria 51 table 3 cointegration: rank test (trace) hypotheised no. of ce(s) eignvalue trace stat 0.05 critical value prob. none * 0.921346 130.3645 47.85613 0.0000 at most 1 * 0.454385 36.28446 29.79707 0.0078 at most 2 0.232021 13.86833 15.49471 0.0866 at most 3 * 0.104907 4.100606 3.841466 0.0429 ** mackinnon-haug-michelis (1999) p-values source: author‟s extract from e-views 9 table 4 cointegration rank test (max-eigenvalue) hypotheised no. of ce(s) eignvalue max-eigen stat 0.05 critical value prob. none * 0.921346 94.07999 27.58434 0.0000 at most 1 * 0.454385 22.41614 21.13162 0.0328 at most 2 0.232021 9.767721 14.26460 0.2276 at most 3 * 0.104907 4.100606 3.841466 0.0429 ** mackinnon-haug-michelis (1999) p-values source: author‟s extract from e-views 9 4.4. results of short run impact and ecm coefficients table 5 showcases the findings of short run impact and ecm coefficient. the table shows that, in the short run period, one and two-lag periods of fdi have negative impact on present fdi and the impacts are both significant as their standard errors (0.121 and 0.138) and t-statistics (-6.519 and -2.424) show. the bd in one and two-lag periods show a positive sign which are also significant, as the standard error shows and the t-statistics (6.39 and 6.16) shows that they are significant at 1% level. in essence, a 1 unit increase in bd, on the average, leads to 36 units (one-lag) and 14 units (two-lag) increase in fdi. table 5 short run impact and ecm coefficients variable coefficient standard error t-stat d(dfdi(-1)) -0.789896 0.12118 -6.51854 d(dfdi(-2)) -0.334069 0.13782 -2.42392 d(ddbd(-1)) 36441807 5698750 6.39470 d(ddbd(-2)) 13571038 2203958 6.15757 d(ddl(-1)) -2958273. 1739875 -1.70028 d(ddl(-2)) 6875330. 2687115 2.55863 d(dfl(-1)) -22121653 1.6e+07 -1.37584 d(dfl(-2)) -9054654. 1.6 e+07 -0.56744 ecm(-1) -0.532639 0.08002 -6.65608 r 2 0.892750 r 2 adjusted 0.857000 source: author‟s extract from e-views 9 the fl (foreign loan) in both periods (one-lag and two-lag) shows a negative impact on fdi, meaning that, a 1 unit increase in fl, on the average, will lead to 22 units and 9 units 52 a. babalola, s.o. onikosi-alliyu reduction in fdi in one-lag and two-lag periods respectively. however, the impacts in both periods are not significant, even at 10% levels as the t-statistics (-1.38 and 0.567) indicate. still on table 5, dl, in one-lag period, shows a negative and significant impact at 10% level of significance, as the t-value (-1.70) indicates, meaning that, 1 unit increase in dl, on average, leads to 2.96 unit decrease in fdi. however, for two-lag period, there exists a positive and significant impact on fdi. the significance is at 5% level as the t-statistics (2.56) indicates. the coefficient of ecm (-0.533) shows the correct negative sign and an average speed of adjustment. in essence, about 53% is the adjustment path between the short and long run periods. the r 2 indicates that about 89% of the variation in fdi is explained by the explanatory variables in the model which is quite high. the r 2 adjusted, which serves as a penalty for adding more explanatory variables, shows about 86%, very close to the r 2 , meaning that, there is no redundancy in the explanatory variables. 4.5. results of long run coefficient table 6 long run coefficient variable coefficient standard error t-stat dfdi(-1) 1.000000 ddbd(-1) 90321707 5245823 17.2178 ddl(-1) -34525662 3193914 -10.8098 dfl(-1) -65648099 2.7e+07 -2.40330 source:author‟s extract from e-views 9 table 6 presents the results of long run coefficients of the model. on the table, bd has positive and significant effect on the fdi. a unit increase in bd, on average, leads to 90 units increase in fdi and it is quite significant at 1% level as the t-statistics (17.22) indicates. the fl and dl both have negative impact on fdi in the long run. therefore, a unit increase in fl and dl, on the average, will lead to 66 and 35 units reduction in fdi and these impacts are significant at 5% and 1% levels, as their t-statistics (-2.4 and -10.8) indicate. figure 1 presents the stability check result using inverse roots of autoregressive characteristic polynomial. from the result, since the condition for stability of our ecm result is that the dots should converge within the circle and none of the dots should be outside, then we conclude that our data, model and variables are stable as evident in figure 1. 4.6. results of forecasted variance decomposition table 7 showcases the results of forecasted variance decomposition of fdi within 10 periods (years). from the table, in period 1, all the variances in fdi are explained by its own innovative shocks only. at period 2, only about 56% is explained by itself while 24%, -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 inverse roots of ar characteristic polynomial fig. 1 stability check source: author‟s extract from e-views 9 the crowding-out effect of fical policy on capital inflows in nigeria 53 19% and 1% are explained by bd, dl and fl respectively. the percentage variance of bd continues to increase up to the 10th period (24-30%), meaning that, bd has a very powerful innovation in explaining changes in fdi. the impact of the innovations of dl and fl are also incremental but end on the 8 th period before declining. the percentage of fl in forecasting fdi, all through, is not more than 3% while the bd and dl have two-digit cause of variation. table 7 forecasted variance decomposition variance decomposition of fdi periods s.e. dfdi ddbd ddl dfl 1 6.08e+08 100.0000 0.000000 0.000000 0.000000 2 8.31e+08 55.71319 23.86799 19.40722 1.011596 3 8.94e+08 50.17710 26.86050 22.06134 0.901062 4 9.80e+08 55.93368 22.42845 18.64530 2.992562 5 1.11e+09 54.30098 18.53903 24.82771 2.332284 6 1.22e+09 44.77193 29.04619 24.17136 2.010526 7 1.36e+09 49.53903 24.13955 24.26994 2.051479 8 1.37e+09 48.31264 24.90136 24.56313 2.222862 9 1.59e+09 48.26415 28.79505 21.28363 1.657159 10 1.61e+09 47.15410 30.32132 20.70525 1.819338 source: author‟s extract from e-views 9 4.7. results of diagnostic check lastly, table 8 presents results of the diagnostic check on the error term in our model. all three tests used to check the assumptions of our error termsnormal distribution; no serial correlation; and no conditional heteroscedasticityshow acceptance of the null hypotheses. jarque-bera statistics (0.3536) shows that we accept the null hypothesis that the distributions are normal, as evident from the probability (0.8379). the langrage multiplier (21.4405) shows that, we accept the h0, that there is no serial correlation as indicated in the probability (0.1622). then the white (chi-sq) test (202.178) means we accept that there is no conditional heteroscedasticity as shown in its probability (0.1233). hence our analysis is reliable, stable and inferences could be drawn from its results. table 8 diagnostic check test null hypothesis (h0) t-statistic prob. jarque-bera (jb) there is a normal distribution 0.3536 0.8379 langrage multiplier (lm) no serial correlation 21.4405 0.1622 white (ch-sq) no conditional heteroscedasticity 202.1784 0.1233 source: author‟s extract from e-views 9 4.8. discussion of result findings and implication of findings the first objective of this study was to investigate whether budget deficit crowds out capital inflow using fdi as proxy. the ecm analysis showed that in both the short and long run, bd (budget deficit) does not crowd out but rather crowd in fdi as bd had a positive and significant impact on fdi. this is in line with the studies of hussain and haque (2016 and 2017) and in contrast with the work of navaratnam and mayandy (2016). 54 a. babalola, s.o. onikosi-alliyu the second objective was to examine the impact of fiscal borrowing on cash inflow into nigeria. our findings revealed that, in the short run, domestic borrowing (dl) averagely had positive and significant impact on fdi, since when the government borrows through selling of bonds within the country, it makes domestic investors have fewer funds to invest and thus, foreign investors would be encouraged to pump in more funds into the economy in the short run. however, in the long run, the impact of dl has negative and significant impact on fdi. this means that, in the long run, the government domestic borrowing will crowd out fdi in nigeria. lastly, our objective was to determine the impact of foreign borrowing (fl) on fdi in nigeria. our results showed that, in both short run funds and long run period, foreign borrowings have negative and significant impact on foreign direct investment, and hence, foreign borrowing of the nigerian government crowds out foreign direct investment (fdi). the speed of adjustment back to equilibrium, as indicated by the ecm analysis, showed that the explanatory variables have an average capacity to adjust fdi significantly. the result of variance decomposition indicated that domestic borrowing had more powers in predicting changes in fdi than foreign borrowing, and that could be the main reason why nigerian government has stopped borrowing from foreign source since 2012. it is also evident that budget deficit had more predictive capacity to explain volatility in fdi. the main implication of our finding is that incurring deficit in nigeria will crowd out foreign direct investment in both the short run and long run periods. in the short run, government borrowing from foreign source improves foreign direct investment but discourages it in the long run. borrowing from domestic source through bonds has negative impact on foreign direct investment in both short and long run periods. 5. conclusion and recommendations the study investigated the effect of fiscal policy in crowding out capital inflows in nigeria using annual data between 1970 and 2011 by making use of foreign direct investment (fdi) as proxy to capital inflows into nigeria, budget deficit (bd), foreign borrowing (fl) and domestic borrowing (dl) as proxies to fiscal policy. fdi was made the dependent variable, and bd, fl and dl, the explanatory variables. the study first removed trends in the time series data used, with the aid of adf only, then employed johenson cointegration and ecm technique to analyse the data and supported it with forecasted variance decomposition tool. afterwards, stability and diagnostic test were carried out to ascertain the credibility and reliability of the data and model employed. our finding showed that in both the short and long run, bd (budget deficit) does not crowd out but rather crowd in fdi as bd had a positive and significant impact on fdi. our result revealed that, in the short run, domestic borrowing (dl) averagely had positive and significant impact on fdi. however, in the long run, the impact of dl has negative and significant impact on fdi. moreover, our results showed that, in both short run funds and long run period, foreign borrowings have negative and significant impact on foreign direct investment, and hence, foreign borrowing of the nigerian government crowds out foreign direct investment (fdi). the speed of adjustment back to equilibrium as indicated by the ecm analysis showed that the explanatory variables have an average capacity to adjust fdi significantly. the crowding-out effect of fical policy on capital inflows in nigeria 55 finally, domestic borrowing had more powers in predicting changes in fdi than foreign borrowing and that could be the main reason why nigerian government has stopped borrowing from foreign source since 2012. it is also evident that budget deficit had more predictive capacity to explain volatility in fdi. the study therefore, recommends that, the government of nigeria could try to be aware of the implication of its fiscal policy in running a budget deficit and making proper decision in sourcing for funds to finance the deficit. foreign borrowing is less expensive in financing budget deficit as it will not crowd out private investment per se, so the government could give preference to this source. more so, the government should try to minimise or even do without the deficit 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(1979). short-and long-run effects of monetary and fiscal policies under flexible exchange rates and perfect capital mobility. the american economic review, 69(1), 176-182. rose, a. k. (1994). exchange rate volatility, monetary policy, and capital mobility: empirical evidence on the holy trinity (no. w4630). national bureau of economic research. tytell, i., & wei, s. j. (2012). global capital flows and national policy choices. imf "foreign direct investment, net inflows (bop, current us$) | data | table". data.worldbank.org. retrieved 17 november 2012. yeung-nan, s. (2015). capital mobility and fiscal policy under flexible exchange rates: an application of romer‟s is-mp model. american journal of business, economics and management, 3(3), 141-144. 56 a. babalola, s.o. onikosi-alliyu efekat istiskivanja fiskalne politike na kapitalne prilive u nigeriji rad je istraživao efekte fiskalne politike na istiskivanje kapitalnih priliva u nigeriji koriste i godišnje podatke između 1970. i 2011. upotrebom direktnih stranih investicija (sdi) kao pokazatelja priliva kapitala koji predstavljaju zavisnu varijablu, dok su budžetski deficit ( d), strana zaduživanja (s ) i doma a zaduživanja (d ) kao pokazatelji fiskalne politike postavljeni kao objašnjavaju e promenljive. oriš ena je kointegracija i tehnika. naši nalazi su pokazali da i kratkoro no i dugoro no d ne istiskuje ve ini deo sdi. ratkoro no, d imaju sna ajan pozitivni uticaj na sdi. eđutim, dugoro no, d ima zna ajan negativni uticaj na sdi. osim toga,i kratkoro no i dugoro no, sz ima zna ajnno negativni uticaj na sdi, prema tome, sz istiskuje sdi. rzina prilagođavanja vra anju ravnoteži pokazala je da objašnjavaju e varijabile imaju sposobnost da zna ajno prilagode sdi. istraživanje preporu uje da vlada može da pokuša da bude svesna implikacija na svoju fiskalnu politiku u vođenju budžetskog deficita i donošenju pravih odluka pri traženju fondova za finansiranje deficita. strano zaduživanje je manje skupo u finansiranju budžetskog deficit, te ako vlada mora da pozajmljuje, trebalo bi da daje prednost ovom izvoru. generalno, vlada bi trebalo da smanji deficit zbog implikacija koje su mu inherentne. ključne reči: sdi, budžetski deficit, inostrani zajmovi, doma i zajmovi facta universitatis series: economics and organization vol. 16, n o 2, 2019, pp. 183 195 https://doi.org/10.22190/fueo1902183s © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper the key issues in the translation of the financial statements of multinational companies 1 udc 657.375: 334.726 bojan savić 1 , nataša obradović 1 , ivan milojević 2 1 university of belgrade, faculty of agriculture, zemun, serbia 2 university of defence, military academy, belgrade, serbia abstract. circumstances, which include international trade intensification, development of various forms of business cooperation outside national borders co-production, transfer of technology, joint ventures, strategic alliances, direct foreign investments, and dynamic changes in the business environment, require the management of a company to change their focus, from a local to a global approach. multinational companies are business leaders in a global framework. the aim of this paper is to highlight the key challenges that multinational companies face when translating foreign currency transactions and the financial statements of foreign business operations for the purpose of compiling consolidated financial statements. in addition, the paper examines whether the chosen functional currency and the exchange rate can be viewed as instruments of their financial reporting policy. key words: consolidated financial statements, ifrs, exchange rate, accounting exposure. jel classification: m41, f23. introduction one of the initial activities of companies that opt for the strategy of business globalization is the purchase and sale of goods and services in foreign markets, that is, import and export. the circumstance that a significant portion of business transactions takes place in currencies other than the presentation currency has an important influence on accounting and, therefore, the financial statements of the related enterprise. in order to achieve economic unity as the basic prerequisite for the preparation of consolidated financial statements, and thus accurate presentation of the group's financial position and performance, received january 13, 2019 / revised may 21, 2019 / accepted may 24, 2019 corresponding author: bojan savić university of belgrade, faculty of agriculture, nemanjina 6, 11080 zemun, serbia e-mail: bsavic@agrif.bg.ac.rs 184 b. savić, n. obradović, i. milojević it is necessary to perform the translation (re-calculation) of foreign transactions and present them in the reporting (presentation) currency of the parent. this provides an important precondition for the preparation of annual financial statements of individual companies, and in the case of a group of companies, at the same time a preparatory measure for consolidation is being implemented, as a part of activities of consolidated financial statements` preparation. currency, by itself, can be equated with other goods, which means it has its own price, while the fact that currency prices fluctuate on a daily basis, so that different exchange rates (daily, average weekly or monthly, that is an exchange rate on the balance sheet date the so-called closing exchange rate) can be used during the translation, leads to the conclusion that the choice of the exchange rate is representative of immediate implementation of an assessment policy which has reflections on all elements of the annual financial report. however, even a company that is exclusively focused on the national market and business within the national framework is also exposed to the effects of the foreign exchange currency rates. this means that all companies are exposed to the influence of a foreign exchange rate change. it is particularly important for the company’s management to be aware of the above said risk and to take appropriate measures to mitigate and manage that risk. all the above mentioned confirms that the accounting coverage of changes in the exchange rate is a very challenging area since it has important implications on the content and the value of individual elements of the financial statements, financial position and profitability of a company. in order to understand all the complexities of the stated issues, in this paper we are going to point out at events that initiate the creation of transactions in a foreign currency, the specifics of accounting inclusion and the treatment of exchange rate differences, as well as the possibility to choose the functional currency and exchange rate as an integral part of the financial reporting policy. 1. foreign currency transactions foreign currency transaction is a transaction that is disclosed or requires a foreign currency account (calculation), that is, a transaction which can be initiated by the following events (shahrokh & saudagaran, 2009):  purchase or sale of goods whose prices are denominated in a foreign currency on the basis of which the statement of financial position contains foreign currency receivables and foreign currency liabilities positions;  lending (investing) or borrowing financial assets, thus creating monetary items receivables and liabilities denominated in a foreign currency;  participation in a non-executed contract in a foreign currency, i.e. the contract whose execution has begun, but which on the date of the statement of financial position is not fully executed, for example, the construction of a property for the needs of an enterprise by a foreign contractor;  other events resulting in the acquisition of assets and the settlement of liabilities denominated in a foreign currency. the accounting coverage of transactions in a foreign currency requires the consideration of the issue of determining or selecting the foreign exchange rate at which transactions expressed in foreign currency will be translated into the reporting (accounting) currency, as well as the key issues in the translation of the financial statements of multinational companies 185 defining the manner in which the effects of the change in the foreign exchange rate should be recognized in the financial statements. the issue of initial recognition of the foreign currency transactions is resolved in accordance with ias 21 the effects of changes in foreign exchange rates, in a way that the translation of income and expenditures items, as well as of the financial position into a reporting exchange rate is performed through the application of the exchange rate valid on the transaction date, that is at the current exchange rate, which has been published by the authorized institution (central bank). for practical reasons, the standard allows the application of a foreign exchange rate that is approximate to the actual exchange rate on the transaction date. hence, for example, the average weekly or monthly rate is relevant for all the transactions which have occurred during a specific period. however, in conditions of significant exchange rate fluctuations such practice is inappropriate because financial transactions would not be expressed at their fair value. different exchange rates can be used for the translation of transactions in foreign currencies closing exchange rate or exchange rate on the balance sheet date, so-called spot rate or spot price that is an exchange rate on the spot, a future exchange rate, which essentially has the character of a hedging instrument against foreign currency risk, the essence of which is reflected in being based on an exchange contract on a future date. in accordance with ias 21, monetary items denominated in a foreign currency, such as liabilities to suppliers or receivables denominated in a foreign currency arising from the purchase or sale of goods, liabilities and receivables on advances and loans received or approved in a foreign currency, as well as cash and balance in a bank denominated in the foreign currency, are translated into the reporting currency using the closing exchange rate. non-monetary items based on a historical basis (purchase price elements, that is cost price) which were paid in a foreign currency during procurement/construction are translated using “the exchange rate on the date of the transaction, whereby no adjustment is made to the amount stated in the financial statements arising from the possible change in the exchange rate in the period from the date of the transaction by the balance sheet date” (gaffikin et al., 2004). expressed through an example, this means that if, during the business year, equipment was purchased from a foreign supplier in the amount of 5000 euro, and at the time of procurement the exchange rate of 1 euro was 120 dinars, followed by the appreciation (strengthening) of the dinar, so that on the balance sheet date 1 euro amounted to 118 dinars, no adjustment of the stated amount is made, unless the foreign liability arising from the purchase of equipment has been settled by the balance sheet date. non-monetary items, which were paid in a foreign currency at the time of acquisition, and were as such recognized at their fair value in the financial reports, are translated into the reporting currency using the exchange rate that was valid at the time when the fair value was determined (kirk, 2009). the question of currency selection for measurement of the performance of foreign subsidiaries of the parent entity is closely linked with the previously examined question – the choice of an exchange rate. hence, there can be a dilemma whether, for example, mnc (multinational company) which was founded in great britain should measure the performance of its subsidiaries in the republic of serbia in pounds or dinars. depending on the direction and size of the dinar changes in comparison to the british pound during the reporting period, the results expressed in the two currencies can vary a lot. thus, for example, it is possible that the business of a subsidiary can be assessed as very profitable 186 b. savić, n. obradović, i. milojević when performance is expressed in dinars, and significantly less profitable when presented in pounds (assuming that the dinar depreciates against the pound). the two key factors that a company must consider, when choosing the reporting currency, include (shahrokh & saudagaran, 2009): 1. the role of the subsidiary in the overall strategy of the group of companies, that is mnc. if the role of the branch is to contribute to the overall profitability of the mnc, then it is appropriate to use the parent company’s currency to measure the performance. however, if the role is somewhat different (for example, there is a focus on r&d activities), then it is justifiable to opt for the local currency; 2. distribution of responsibility for the currency risk management. if the authority for the currency risk management is centralized, then the local currency should be used to measure the performance of a foreign subsidiary. however, if the currency risk management is decentralized, with each subsidiary being autonomous, then it is reasonable to use the currency of the parent company for the purpose of evaluating their performance. the reason for this is in the fact that local subsidiaries cannot be held responsible for the effects of changing exchange rates on their profitability unless they have been assigned an authority of currency risk management. the circumstance that the parent company has authority for this area of responsibility implies that it, as such, bears responsibility for the gains and losses arising from the fluctuation in exchange rates. 2. concept, types and accounting treatment of exchange rate differences enterprises involved in global business are facing the risk of loss due to the effect of exchange rate fluctuations. however, it is important to distinguish between foreign transactions and transactions in a foreign currency, since not all foreign transactions are necessarily denominated in a foreign currency (shahrokh & saudagaran, 2009). for example, an american company that exports goods to the republic of serbia and sends invoices in dinars has transactions in a foreign currency and faces exposure to the currency risk. on the other hand, a domestic company that purchases such goods does not have transactions in a foreign currency, since the invoice is expressed in the national currency. it is also important to distinguish between transactional gains and losses from items of gain and loss made during the translation (so-called translation gains and losses) since the transaction’s gains and losses affect the enterprise’s cash flows. in rare circumstances, foreign receivables will be collected and foreign liabilities will be paid simultaneously with the recognition of the transactions. however, “it is reasonable to expect the existence of a time difference between the date of transaction and the date of payment, and consequently a change in the foreign exchange rate” (bogićević et al., 2016). to clarify facts, let us assume that the us company has sold goods to a domestic company, worth of 10 million dinars at a time when the exchange rate was 100 rsd / 1 usd on a six-month short-term loan. in the given case, the amount that the us company will receive depends on the exchange rate during the specified period. if, within a given time frame, the dollar appreciates against the dinar, for example, with the parity of rsd 105 / usd 1, then the us company will receive fewer dollars. on the contrary, if the dinar appreciates on the maturity date (rsd 98 / usd 1), the us company will receive a larger amount of us dollars. consequently, an exchange rate difference could appear the key issues in the translation of the financial statements of multinational companies 187 which can be either positive or negative. the difference arising from reporting the same number of foreign currency units in the reporting currency at different exchange rates, is called the exchange rate difference. therefore, in order for an exchange rate difference to appear, it is necessary for a transaction to be reported in a foreign currency, as well as that the change in the exchange rate occurs. the first scenario described represents a transaction exchange loss for the us company, while the other points to a transaction exchange gain for the us company. since the invoice is denominated in a foreign currency for the us company – which is the dinar, the us company runs the risk of a fluctuation in the exchange rate. within the given transaction, the domestic company is not, however, affected by the resulting changes in the foreign exchange rate, due to which its cash flows are fixed by invoice reporting in the national currency. the accounting treatment of transaction exchange profit or loss is unambiguous – it has to be included in the profit and loss statement (p&l statement) and as such it affects the result of the period in which it was created. positive exchange rate differences arise when the enterprise settles its foreign liabilities at an exchange rate lower than the one that was in place on the day when the liability was created, that is according to which the obligation was recognized within the statement of financial position. also, positive exchange differences appear when the foreign receivable is liquidated at a rate which is higher that the exchange rate on the day of the transaction, that is the rate at which the claim was presented in the statement of financial position, as well as in periods in which the enterprise disposes of foreign assets, while the foreign currency exchange rate increases. on the contrary, negative exchange rate differences occur when there is an increase in the foreign currency exchange rate, whereas the enterprise has some unpaid liabilities in that currency. such an item is treated as a loss, in accordance with the ias 21 (paragraphs 28-30), which is presented as a separate item in the profit and loss statement (privredni savetnik, 2004). according to ias 21, exchange rate differences arising from the monetary items that, by their nature, represent participation in the equity of a foreign company, are recorded as an integral part of that share (positive exchange differences increase the value of a share, whereas the negative ones contribute to a decrease in its value). namely, the item whose settlement is not certain in the near future, or whose liquidation has not been planned, is essentially an increase or decrease in the value of a share in a foreign company. this means that those items are not included in the calculation of the net profit or loss of the period but, according to ias 1 – presentation of financial statements, they are expressed as an integral part of the statement of changes in equity (mirza & holt, 2011). 3. financial statements of foreign operations domicile companies can operate abroad through their subsidiaries; these are joint ventures or branches. the method used to translate the financial statement of foreign operations is significantly influenced by the manner in which they are financed, as well as by the relationship with the reporting company. precisely because of that it is important to make a distinction between foreign operations: for example, to distinguish foreign operations which make an integral part of the reporting entity, such as a business unit without a legal subjectivity, from those having a certain level of autonomy in relation to the company which compiles the financial statements. the foreign operations belonging to the first group 188 b. savić, n. obradović, i. milojević represent the expansion of the operations of the reporting entity (parent company), which is if they sell goods imported from the reporting company and at the same time allocate sales revenue, so they have a direct impact on the reporting entity’s (parent company’s) operational cash flows. in such circumstances, the exchange rate fluctuation between the reporting currency and the currency of the country where the operations were performed affects monetary items of the foreign operations. hence, the financial statements of such operations are translated as if their transactions were concluded and realized by the reporting company. an analysis of the nature of each item is required for the translation of financial statements (whether an item has a monetary or non-monetary character). monetary items are comprised of assets and liabilities to be received or paid in a fixed or determinable number of currency units. non-monetary items are all those items that are not monetary (property, plant, equipment, intangible assets, inventory, etc.). the translation of non-monetary items weighed at historical cost requires the application of the exchange rate on the date of the transaction, while items weighed at fair value should be reported at the exchange rate that was valid when the fair value was determined (krimpmann, 2015). for the translation of monetary items (funds, long-term receivables or payables, provisions, taxes and other), the closing rate should be applied. for practical reasons, “in conditions of stable exchange rates, the application of average weighted exchange rate for a certain period is allowed” (mackenzie et al, 2013). for the purposes of including the financial statements of foreign entity in the parent company’s financial statements, in cases where the translation is performed using the current rate method, the following rules are applicable (kirk, 2009):  “monetary assets and liabilities are translated at the closing exchange rate;  items of income and expenditure are translated at the exchange rate on the date of the transaction – that is the average weighted exchange rate, while in hyperinflationary conditions they are translated at the closing exchange rate;  all the exchange differences arising from the translation of the financial statements of a foreign entity are recognized as a part of its own equity, in the statement of changes in equity, and after being disposed net investment is recognized as income or expenditures in the profit and loss statement”. the presentation of financial statements of a foreign entity in the reporting currency results in the recognition of exchange rate differences arising from the translations of the above-said items. the circumstance that the differences do not affect the current and future cash flows resulting from the business activities of a foreign entity and of the reporting company, has caused them not to be recognized as income or expenditure of the period, but in accordance with ias 7 statement of cash flows, to be presented as a separate item of the cash flow statement. after the translation of the foreign entity’s financial statements, which assures the comparability of certain elements of the financial statements of the members of the group of enterprises, which otherwise represents a preparatory measure for the consolidation, conventional consolidation procedures are applied, including the elimination of intergroup elements of financial statements (assets, liabilities, equity, etc.) relating to transactions between entities of the group are applied, in accordance with ifrs 10 consolidated financial statements. in case of reclassification of foreign operations, the translation procedures for a new form are applied from the date of the classification change, therefore, prospectively. otherwise, reclassification is necessary if there are significant changes in the way of the key issues in the translation of the financial statements of multinational companies 189 financing, as well as if the character of business relations between the foreign operations and the reporting entity changes. in case foreign operations which were treated in the previous period as an integral part of the reporting company take on the character of a foreign entity due to the reclassification, for example, because of the fact that a part of the share in a subsidiary or a joint venture was sold, the exchange rate differences arising from the translation of non-monetary assets on the date of reclassification are disclosed as part of equity (international accounting standard board, 2012, ias 21, par. 48). changes in a parent company's share in a subsidiary which do not result in a loss of control must be presented as an element of equity. in case of the loss of control, the recognition of the assets, liabilities and related equity components of the subsidiary ceases. any resulting gains or losses must be included in the profit and loss statement. acquiring additional shares in the subsidiary after the acquisition of control is presented as an equity transaction with the owner. the above-said reclassifications actually represent changes in the scope of consolidation which determine the content of the consolidated annual financial report, putting its comparability into question, which requires additional disclosures (škarićjovanović & radovanović, 1998). some multinational companies provide voluntary disclosures of the effects of exchange rate’s fluctuations on their earnings, that are beyond the requirements of individual ifrss so that users could better understand the presented – disclosed information (sorensen et al., 2012). 4. the choice of the functional and the presentation currency the functional currency concept as defined in ias 21 is the currency of the primary economic environment in which the entity operates. as such, a functional currency is the currency in which an entity measures the items of its financial statements, so as to reflect the economic essence of events and circumstances, to provide all the information about the company or the group of companies that is relevant for economic decision-making. it is customary for it to be the currency of the country in which the entity operates, that is, another currency which is very often used or has a rather important influence on the business operations, and all transactions presented in currencies other than the functional currency are to be considered foreign currencies. when it comes to the functional currency, it is necessary to determine whether it is equivalent to the currency of the country in which the entity operates or to another currency, considering that the choice is influenced by factors such as: the specific circumstances in which the business operates, the state of income, the possibility of the occurrence of unusual results, etc. by selecting a functional currency, the yield position (performance) of the branch is significantly affected, and therefore the content of the consolidated financial statements. companies which have acquired resources in the local market, and sell their products to domestic consumers, denominate all their transactions in a local currency. in this case, the local currency can at the same time be a functional currency. however, this premise is almost inappropriate for a group of companies whose business operations are of a global character, since their cash flows are presented (disclosed) in different currencies, and different currencies can also affect their policy of selling prices and other aspects. under such circumstances, determining a functional currency can be a very delicate matter. hence the need for a clear distinction between a functional currency and a presentation currency (elliott & elliott, 2005): 190 b. savić, n. obradović, i. milojević  “the presentation (reporting) currency is the currency in which the segment of a business or an enterprise presents its financial statements;  the functional currency is the currency in which the segment or enterprise measures its financial position and success”. according to ias 21 (paragraphs 9-11), indicators that may have a decisive influence on the choice of a functional currency, which were shown within a hierarchical structure, include the following (bakker et al., 2017; revsine, 1984):  sales market indicators:  the currency that significantly determines the selling price of goods and services;  the currency of the country whose competitive forces and regulations primarily influence the sales prices;  costs indicators: currency that mainly affects labor costs, materials and other resources costs. a secondary set of indicators to be considered under ias 21 are as follows (singh, 2014):  financing indicators: the currency in which a capital was presented, that is in which debt and equity instruments were issued;  cash flow indicators: the currency into which the company converts the cash surpluses. according to ias 21 (paragraph 11), it is necessary to consider some additional factors in determining the functional currency of foreign operations and whether their functional currency is the same as that of the reporting entity – parent company (bakker et al., 2017):  whether the foreign operations` activities are performed as an extension of the reporting entity (parent company), rather than performed with a significant degree of autonomy;  whether transactions with the reporting entity make for a huge or small portion of the foreign operation's activities;  whether cash flows from the foreign operations` activities directly affect the cash flows of the reporting entity – parent company; and whether they are available for a prompt remittance to the reporting entity; and  whether cash flows from the foreign operations` activities are sufficient to service the existing and normally expected debt obligations, without funds being made available by the reporting entity – parent company. if, on the basis of the considered indicators, it is not possible to clearly identify the functional currency, its choice should be based on judgment that involves considering a larger spectrum of factors. in circumstances where these currencies are “different, elements of the financial position and success are initially assessed in a functional currency, and then translated into a presentation (reporting) currency on each reporting date, as follows: assets and liabilities are translated using the final closing exchange rate, income and expenditure using the valid exchange rates on the dates of transactions”, and any exchange rate differences resulting from these conversions are disclosed as a part of the total remaining result (epstain et al., 2010). ias 21 requires the choice of a functional currency that must reflect the substance of transactions, events and circumstances specific to the business operations. changes in the scope of the business operations and relocation of business operations are typical reasons for the change of the functional currency (krimpmann, 2015). all items in that case are translated using the exchange rate on the date of the change. exchange rate differences previously recognised as a part of equity are not recognised in the profit and loss statement until the disposal of the business operations (kirk, 2009). the key issues in the translation of the financial statements of multinational companies 191 exchange rate fluctuation causes three forms of exposure: economic exposure that encompasses two categories: operating exposure that is the economic exposure occurring when the business operations generate a cash flow denominated in a foreign currency, and transaction exposure that is an economic exposure created when contractual obligations are denominated in a foreign currency. finally, the translation exposure is an exposure that occurs when translating financial statements (butler, 2016). the transaction exposure relates to the period between entering and settling a contract. it is defined as a change in the value of monetary (contractual) cash flows caused by the change in exchange rates. the fact that the transaction exposure impacts on future cash flows and profitability, makes it the most visible exposure to the currency risk (bhalla, 2014). transaction exposure depends on current (outstanding) foreign receivables and/оr foreign liabilities presented in the statement of financial position, which will be charged/ settled after the exchange rate changes. additionaly, its effects are also reflected in the profit and loss statement as an exchange gain or loss, that is, positive or negative exchange rate differences (bogićević et al., 2016). from the accounting point of view, which implies the preparation of consolidated financial statements, the most important is the translation exposure, since the financial statements of foreign affiliates, as an integral part of the preparation for the consolidation, have to be translated into a reporting currency of the parent company (škarić-jovanović & radovanović, 1998). the exposure resulting from the translation of the financial statements is also called the accounting exposure in the literature, since the value of net assets and the reported profit of the parent company and the group as a whole can be increased or reduced, not as a result of business transactions and the strategies implemented, but due to the exchange rates` fluctuation. the degree of the accounting exposure when preparing consolidated financial statements can primarily be determined by the share of business operations performed through foreign operations, by the location of foreign subsidiaries, as well as by the applied accounting methods. in order to control the translation exposure, the parent company's management designs gains in all the foreign currencies and determines how the potential changes in the foreign exchange rate of individual currencies can affect not only the amount of the results of individual members of the group, but also the consolidated result and tax liabilities of the group as a whole. more precisely, the appreciation of a foreign currency, in relation to the reporting currency of a parent company will result in an increase in the consolidated result, and vice versa in the period of depreciation of a foreign currency, the yield position (performance) of the group will be weakened (madura, 2012). in order to protect from the translation exposure, the parent company's management can opt for one of the following two strategies: hedging of financial statements. the hedging of the financial position statement is aimed at minimizing the translation exposure through an effort to achieve the equality of assets and liabilities which are denominated in a foreign currency. thus, for example, the change in the exchange rate that results in an increase in the value of assets in the consolidated statement of financial position simultaneously leads to an increase in liabilities in the same amount; thereby nullifying the effect on the net assets of a group (wang et al., 2009). the circumstance that positive exchange rate differences are reflected in the profit and loss statement as an integral part of the financial revenues means that their occurrence is not undesirable, and as such they do not require protection measures. 192 b. savić, n. obradović, i. milojević based on the fact that the amount of the result presented in the consolidated profit and loss statement directly affects the prices of shares and compensation for the management, and that the changes in the parity between the foreign operations` functional currency and the reporting currency of the parent company (parent’s presentation currency) affect the amount of numerous items in the consolidated financial report, a question arises as to whether the choice of a functional currency can be viewed in the context of the financial reporting policy. namely, from the point of view of the users of financial information and the signaling role of the financial information, a management is propelled to put the selection of the currency in the context of the instrument for the realization of the defined goals. when it comes to choosing a functional currency, it is important to highlight that this is not a matter of a management`s discretion, but is rather, as previously shown, based on professional judgement and taking into account material facts: economic circumstances, events and transactions. although there is a possibility of changing a functional currency when there are valid reasons for that, ias 21 requires its consistent application. the newly selected functional currency is applied prospectively, beginning with the date of change. if a company chooses to change the functional currency, as part of its efforts toward achieving the objectives of the financial reporting policy, it is quite unlikely that by doing so it would achieve its long-term desired effects. this is due to the fact that it is almost impossible to predict long-term changes in a currency. possible increase in the group`s profit, stemming from changes in the functional currency, would not have a significant information value for the investors, since for the purposes of evaluation of an entity permanent components of the result are the most relevant. the possibility for achieving goals of the financial reporting policy in the domain of presenting higher equity amount and avoiding sharper fluctuations in the result, exists in the domain of choosing the translation method, then choosing the exchange rate, as well as the presentation currency. when it comes to selecting the exchange rate, a parent company`s management can strategically choose the current, historical or average exchange rate, where such options exist, in accordance with the defined goals, affecting a financial position and the group`s profitability (savić, 2011). when it comes to the translation method, research has shown that the application of a single rate method for translating financial reports of foreign affiliates (applies in case when the local currency is used as the functional currency of a foreign entity, that is when a foreign affiliate is relatively independent in conducting its business operations) implies the application of the current exchange rate on the items of the statement on financial position, except for its own equity, and the application of the historical exchange rate for the items of equity. this translation method for the items in the profit and loss statement uses the average exchange rate for the accounting period and at the same time it assures a higher amount of the result presented (business and net gain). on the other hand, the temporal rate method (e.g. historical method) is applied in conditions when the currency of the parent company is used as a functional currency of the subsidiary, which means that the activities of a subsidiary make for a direct extension of the parent company`s business operations. the aforementioned method is based on applying the historical rate for translating assets and liabilities that are measured by historical cost, and current exchange rate for items that are measured by the current cost or a market value. monetary items are translated using the current exchange rate. this method assures the higher amount of equity, both of the affiliates whose financial reports are being translated, and of entire multinational company (domanović & bogićević, 2016). the problem, the key issues in the translation of the financial statements of multinational companies 193 however, is contained in the fact that the use of the temporal method increases the volatility of the result presented; also, the disclosed result is significantly lower then in conditions of application of the single rate method. on the other hand, the indicators of financial structure, as well as the indicators of liquidity, are significantly more favorable in case of the use of the temporal method (dmitrović-šaponja & bogićević, 2012). the research results also suggest that foreign currency translation adjustments are significantly value relevant. the temporal method is preffered when compensation is based on stock options, and conversely, when compensation is a function of the reported earnings managers tend to adopt the current rate method (pinto, 2002). the choice of the presentation currency is one of the prerequisites for the financial reports` comparability. this is particularly important for the members of the group which are located in different countries and use different national currencies or when the functional currencies of individual members differ from the parent's reporting currency. the functional currency of the parent company is most often used in practice as the presentation currency. in some jurisdictions, reporting in local currency is required, even when it differs from the functional currency of the parent company. most often, this is one of the global currencies, which is of particular importance for the needs of acquiring additional capital in the stock exchange. according to ias 21, however, an entity can present its financial statements in any currency. the change in a reporting currency is seen as a change in the accounting policy and hence it is applied retrospectively. some of the potential reasons for the change can imply efforts to assure better disclosure of business activities of a multinational company and to improve the comparability of users' results in the global context. additionally, in case of a change in the parity between the reporting and the functional currency, the parent company`s management may, by choosing or by changing the reporting currency, influence the amounts presented in the consolidated financial statements. the choice of the reporting value can be adjusted in such a way to affect the amount (value) of particular items. finally, the hedging of financial statements can be viewed as an integral part of the financial reporting policy, since the initiation of certain transactions is consciously planned, in order to balance off receivables and liabilities denominated in a foreign currency. these transactions make for an integral part of the real earnings management, which deliberately shapes the financial structure in the consolidated financial position report. unless there are adequate instruments against exposure to the currency risk, significant exchange rate fluctuations will result in a volatility of the results, which can leave the impression of a risky venture when it comes to investors and consequently increase the required rate of return (chang et al., 2013), provided that there is some evidence that income smoothing reduces firm-specific exchange rate exposure. conclusion business operations in a global context bring about numerous challenges. groups are faced with issues of proper selection of functional and reporting (presentation) currency, as well as of protection against the translation, transaction and economic exposure. numerous studies prove the relevance of this issue and highlight the effects of the change in exchange rates on the value of the entity. more precisely, by the choice of the exchange rate, projections of their volatility, directing activities and resources into particular 194 b. savić, n. obradović, i. milojević segments whose business is included in the relevant currency, it is possible to influence the amount of the presented result and profit tax, and thus other important performance indicators. in this paper, special attention is paid to the issues of the translation exposure of entities, protection measures and consequential implications on the content of the consolidated financial statements. considering the significance of potential effects which may result from the translation of foreign currency transactions and financial reports of foreign subsidiaries, it is possible to use instruments aimed at the targeted design of financial statements, in the aforementioned reporting segment. when it comes to the choice of the functional currency, it cannot be viewed as a segment of the financial reporting policy. the reason lies in the fact that ias 21 provides numerous guidelines regarding the choice of the functional currency, which is defined by the key transactions, events and circumstances in which the business operates. therefore, a financial reporting policy can be discussed in the context of the choice of the translation method, currency exchange, where such an option exists, as well as in the context of the presentation currency. namely, on the basis of the change in parity between a 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(2009). the economics of foreign exchange and global finance. hull: springer. ključna pitanja prevođenja finansijskih izveštaja multinacionalnih kompanija intenziviranje međunarodne trgovine, razvoj različitih oblika poslovne saradnje van nacionalnih granica koprodukcija, transfer tehnologije, zajednička ulaganja, strategijske alijanse, strane direktne investicije, kao i dinamične promene poslovnog okruženja, zahtevaju da menadžment preduzeća preusmeri poslovno razmišljanje sa lokalnog na globalni pristup. multinacionalne kompanije predstavljaju nosioce poslovanja u globalnim okvirima. cilj rada je da ukaže na ključne izazove sa kojima se menadžment multinacionalnih kompanija suočava prilikom prevođenja transakcija u stranoj valuti i finansijskih izveštaja inostranog poslovanja za potrebe sastavljanja konsolidovanih finansijskih izveštaja. dodatno, u radu se istražuje da li je izbor funkcionalne valute i kursa razmene moguće posmatrati kao instrumente politike finansijskog izveštavanja. ključne reči: konsolidovani finansijski izveštaji, msfi, kurs razmene, računovodstvena izloženost. facta universitatis series: economics and organization vol. 16, n o 2, 2019, pp. 215 228 https://doi.org/10.22190/fueo1902215m © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication how high are the performances of organizations operating in serbia? 1 udc 005.332.1(497.11) vuk miletić 1 , slavomir miletić 2 , nemanja berber 3 1 high school of academic studies "dositej", belgrade, serbia 2 university of prishtina, faculty of economics, kosovska mitrovica, serbia 3 university of novi sad, faculty of economics, subotica, serbia abstract. in the conditions of growing competition on the market, organizations must ensure their sustainability, first of all, by implementing a systemic concept of business conduct in which the management is recognized as a powerful process of achieving high organizational performances. it is a concept that enables the meeting of the needs of consumers on a level different to their target value. in this sense, organizations must be structured in such a way as to fulfill certain conditions and criteria thanks to which sustainably high performance is created, which is, in fact, the goal of this research. such performance is created as a result of the development of management within key areas of operation – the quality of products and services, production cost, speed to market, and innovating and developing such products and services. success of such organizations greatly depends on the managers’ ability to develop and keep a talented workforce, which is a key factor in high performance development. by mastering change, outstandingly managing and controlling the future, assumptions for achieving business excellence and achieving high performance results are created. to confirm the starting hypothesis, the method of analysis, the method of synthesis and the method of multiple comparison and statistical test are used. key words: management, organization, performance, hpo model. jel classification: m21, m54 received february 04, 2019 / revised march 27, 2019 / accepted april 11, 2019 corresponding author: slavomir miletić university of prishtina, faculty of economics, kosovska mitrovica, serbia e-mail: mil.slavko@gmail.com 216 v. miletić, s. miletić, n. berber introduction in a complex business environment, numerous organizations operating in serbia have failed to meet the market requirements and have vanished because they could not cope with growing changes. the primary reason is an outdated business model (miletić, 2018, p. 69) which does not give them a real possibility to efficiently combine expedience, cost efficiency, product quality and learning, which should result in high performance. only the organizations that have accepted change in a time of great turmoil and which seek a fast and flexible structure are capable of shaping their business future. heading such organizations that are based on effective „inclusion‟ of all employees in the decisionmaking process are agile managers who promote and develop a new concept of thinking and acting. it is a non-standardized flexible and virtual business model (waal, 2006, rev. 2010) based on learning and performance within which every individual is expected to use all of their skills and capacities for the purpose of realizing the organization‟s goals. thus, it is evident that teamwork capability and a holistic approach to business conduct are important attributes of a network business model that yields results. developed countries have an adequate business environment and a climate suitable for successful operation of high performance organizations (hpo) (waal, 2012c). serbia as a country in transition strives to create the right “conditions by promoting creativity and change as a legitimate goal of its organizations so that they could improve competitiveness and raise overall performance to a higher level” (miletić, 2016, p. 4). in that sense, for the sake of sustainability, it is necessary that the contemporary economic subjects operating in serbia be organized in a way that enables their growth and development (miletić, 2017, p. 201) by achieving performance higher than usual. this means a successful business concept implementation (lawler, p. 14-15) “as a systematically planned and programmed effort to accept new ideas, innovation and change within the organization” which is nothing new in the serbian economic practice. it should give a strategic advantage to organizations, making problem solving easier, by increasing productivity (ničić et. al. 2013, p. 179) and product quality, improving customer service in the option of added value, perfecting communication and cooperation in a way that enables the achievement of high performances. to implement this model is mostly a choice of the bolder, those who are not afraid of change and who are aware that only a swift reaction to change (alexopoulos, tombe, 2012) will secure the survival, development and sustainability of business. business practice (roth, 2005; chalhoub, 2009; abernathy, 2011) has shown that a total implementation of the high performance organization model positively affects an organization‟s operation, which goes to show that the correlation goes from the direction of management practice toward organizational performance. studies published in numerous countries show that there is correlation and interaction (dent, 2003) between techniques and methods including, first of all, the hpo model which is implemented by organizations, and the accomplished organizational performance – direct and indirect (maes et. al., 2005), with or without the display of causality. the studies dealt with determining factors and criteria of high performances and the evaluation of the extent to which hpos are treated through the common influence of the level and duration of operation (johnson, 2005; godfrey, 2010; waal & meingast, 2011; keller, 2011). a difference in performance among different organizations (tadić & boljević, 2015) is mostly connected with domestic circumstances, the kind of product and service, historical events, “cultural differences, the complexity of industry, even luck” (parnell et. al. 2012, p.106). how high are the performances of organizations in the republic of serbia? 217 the hpo model, as known by the anglosaxon busines culture (waal, 2006) is an invitation to reflection and action, but not a magical solution to all problems that organizations operating in serbia come across. prerequisites for strengthening the competitiveness (miletić & božilović, 2015, p. 261) of economy must include transformational management, a new way of organization, and the knowledge to create quality competitive strategies and a supporting business environment. hence, there is no unique recipe either for success or for creating a successful hpo in serbia. while designing an hpo, one of the demands placed before the management (miletić et al., 2017) is the need to successfully implement all of its components. in practice, there are organizations that realize only some of the necessary components (schermerhorn, hunt, osborn, 2004, p. 23-24). such organizations are not real hpos. whether and how far into the future they will work on developing the remaining components of hpos depends on numerous environmental factors, as well as on the extent to which their management (zenger et. al., 2002, p. 138) is prepared and capable to work on interconnecting them. 1. characteristics of high performance organizations in order to survive in a complex environment, contemporary organizations are forced to organize themselves in a different way that should enable them to generate performance at a level significantly higher than before. in difficult economic circumstances, managers tend to choose management models (parnell et. al., 2012) that will help them to improve their organization‟s operation with a higher level of security. in that sense, hpo models represent open systems that are influenced by a variable global external organizational environment. as such, their basic mutual characteristics (waal, 2012a) are those properties that are shared by exceptionally successful organizations and those characteristics that are most widespread and that make them more efficient than other business subjects. such organizations are present on the market during a longer period of time, they possess a structure with less organizational levels (simić, 2005), less hierarchy and greater unit autonomy, highly trained personnel, and agile managers at all levels (waal, 2013, p. 15). item organizations are oriented towards products and services with greater added value for consumers. within such organizations (lawler, 2005), absolute engagement by all employees is implied, i.e. their incitement to plan, complete and verify their work properly. to become a high performance organization, an organization must meet certain conditions and criteria (waal, 2012a). as the main characteristics of an hpo, (waal, 2012b) identifies:  continuous development means that an “organization has adopted a strategy that clearly sets it apart from other organizations”. within it, processes are continuously being developed, simplified and coordinated. the organization continuously improves its products, processes and services (the core of its competence). financial and nonfinancial information is available to organization members via report.  openness and readiness for action means that organization members spend a significant amount of time communicating, learning and exchanging knowledge, and they are always included in important processes. the leadership welcomes change and allows errors.  management quality implies strong leadership; it focuses on achieving results. the management has integrity and it enjoys the trust of organization members. it teaches 218 v. miletić, s. miletić, n. berber (trains) organization members how to achieve better results and it is decisive toward those who fail to carry out what is expected and agreed upon.  workforce quality. an organization has a qualified workforce. the leadership inspires organization members to achieve extraordinary results. organization member are trained to be resilient and flexible.  long-term orientation means that an organization keeps high-quality and long-term relations with all interested parties (stakeholders). an organization‟s goal is to serve the consumers in the best way possible and to grow through the partnership with its suppliers and/or clients. high performance systems, according to (vaill, 1996, p. 61), are those organizations that satisfy most of the following criteria:  they function excellently in relation to known external standards,  they function impeccably in relation to the assumptions regarding their potential performance level,  they function superbly compared to their position at an earlier period,  highly informed experts have judged that, essentially, they act qualitatively better compared to other comparable systems,  regardless of what they do, they do it with far less resources compared to the resources they presumably need,  their modus operandi is considered exemplary for the work that they do, so they become a source of ideas and inspiration for others,  they realize ideas of culture within the framework of their existence at a high level (they demonstrate a high level of „nobility‟),  they are considered to be the only organizations capable to do whatever they are doing, even when, at a first glance, it seems that what they are doing is not particularly difficult. organizations that satisfy most of the abovementioned criteria are considered to possess the basic characteristics of hpos, with emphasis (vaill, 1996, p. 63):  hpos have clearly defined goals, as well all the elements necessary for their accomplishment. they possess a clear idea regarding the purpose of their own existence and the direction of their operation.  hpo member engagement regarding goal accomplishment is not superficial. motivation is always high and specific. what is more significant than the energy level is its focus.  teamwork within an hpo is task-oriented. hpo members reveal those operation aspects which demand integrated action and which promote behavior and attitudes that correspond to those demands.  hpo leadership is strong and clear, although the style could vary within different segments. the style is clearly consistent, reliable and predictable, without any trace of ambivalence.  an hpo is a prolific source of innovation and new methods in terms of defined tasks and select structural forms.  an hpo sets clear boundaries between itself and the environment. a significant amount of energy is spent for the preservation of those boundaries, especially by the management. it is clear that an hpo is significantly different from the other entities in the environment regarding its own character, membership, applied methods, time, and space.  an hpo constantly and uncompromisingly amasses the necessary recourses from the environment and sometimes it represents a source of frustration to certain competitors, especially in a bureaucratic environment. how high are the performances of organizations in the republic of serbia? 219 the case model of an hpo is highly flexible and innovative, and it enables employee development. it is applied in the conditions of a complex and dynamic environment and technology. it receives a special place in new and sophisticated high-tech industries, such as telecommunications, biotechnology, and so on. performance within the model (amstrong, 2006) is usually identified in terms of the output, i.e. the achievement of quantitative goals. of course, performance is not only that which is realized, but also the way in which it is realized and measured (harbour, 1997). a high level of performance is the result not only of adequate behavior and an effective use of the necessary knowledge but also of skills and competence. performance management (thorpe & holloway, 2008) is a complex category considering that intellectual resources represent the key determinant of an organization‟s success in the contemporary environment. thus, an organization requires a balance between different dimensions of performance assessment. in addition to the primary financial dimension, the non-financial dimension considerably contributes to overall business performance not only to the organization itself but also to the other stakeholders. in that sense, the management faces a difficult choice of contemporary non-financial criteria as strategic managerial tools. 2. research methodology this research has been conducted with the purpose of evaluating serbian organizations‟ fulfillment of the conditions and criteria in order to determine to what degree those organizations are high performance organizations. the premise is that the application of the hpo managerial practice is based on the output, i.e. on the accomplishment of quantitative goals, as a result of proper behavior and an effective use of the necessary knowledge, skills, and competence. an innovative business model of a high performance organization, based on intellectual capital, has great potential for application in serbia for achieving business excellence. thanks to communications technology, this model is designed in such a way that it can be managed in a dramatically different way than ever before. the research was realized as an empirical transverse study (a cross-sectional study). in addition to the basic explicative method, the bibliographic speculative method was used in the setting of the theoretical framework of the paper. the multiple comparisons and statistical test method was used in the processing and interpretation of the results. as a research technique, survey was used in order to collect data and information. in order to achieve the aim of the research, whether and to what extent organizations operating in serbia apply the high performance model, i.e. to what extent an organization is an hpo from the aspect of different durations and levels of operation, it was necessary to collect primary data that could be attained through field work, but also with the help of the internet. the research was carried out in several phases (compare with: aaker et al, 2008, p. 5253): questionnaire composition, selection of a representative sample i.e. selecting the companies that will represent the sample, collecting data by surveying the managers of the selected companies operating in serbia, a graphical and statistical representation of the research results, and, finally, drawing conclusions and formulating suggestions for achieving business excellence. the research was based on a sample of 136 companies selected from a database run by the serbian business registers agency. the decisive factor 220 v. miletić, s. miletić, n. berber when selecting the organizations for the sample was the success rate of their business conduct. in the observed sample, the most numerous are the organizations that conduct business on an international market (62), then come the organizations that conduct business on a national market (34), there are 23 organizations that operate regionally, and the organizations who operate only locally number the fewest (17). the questionnaire for this research was specially structured and it comprised 26 questions related to the characteristics of hpos that set them apart from other organizations. data collection was accomplished by asking the respondents (organization managers) to grade (rank) characteristics that they believe determine the performance level of organizations operating in serbia. a likert‟s scale was created, within which it was possible to rank attributes as very significant, both significant and insignificant, and not significant 3. descriptive statistics accepted as a necessity and a challenge, in the serbian business milieu, performance initiates learning a lesson of integration in order to make a certain organization longlasting time and again. comparative statistics was used to process the collected data regarding the evaluation and ranking of properties that domestic organizations should acquire in order to become high performance organizations. the surveyed managers were asked to grade actual performance based on the given criteria within the framework of their business conduct with marks from 1 to 5, where 1 is the lowest rating and 5 is the highest one. performance results are given in table 1. table 2 gives a performance rank based on mean values for each performance. based on the results, it is evident that, in the organizations included in the sample, qualitative operation with regard to the competitors, teamwork, chance for the organization to become a high performance organization, and the level of consistency and clarity of the organization‟s leadership are the characteristics that have received the highest ratings (the average rating is over 4). at the bottom of the table with the lowest ratings (under 3.50) is the level to which the organization‟s employees share the responsibility both for the success and for the failure of the organization, the organization‟s allocation of funds for employee education and training, the level of development of the organization‟s marketing sector, the sources of creativity and new ideas coming from the outside of the organization, and the level of the consultants‟ engagement within the organization. this research asked the respondents to answer the question whether there are any domestic organizations that could be characterized as high performance organizations, and if there are, which organizations they are. out of the organizations listed as high performance organizations by the respondents, the following organizations stand out: “metalac” gornji milanovac (listed twice as a high performance organization); “tigar tyres”; com trade; philip morris operations, co. niš (listed twice as a high performance organization); telekom srbija; nis; “matijević” meat industry; “janković” interiors; telenor; gazprom; fiat (listed twice as a high performance organization); “petrohemija”; the electric power industry of serbia; it companies. how high are the performances of organizations in the republic of serbia? 221 table 1 results of performance in organizations performances r a n g 1 2 3 4 5 af rf af rf af rf af rf af rf level of competitiveness on the market on which the organization operates 7 5.1 12 8.8 42 30.9 29 21.3 46 33.8 product quality on the market on which the organization operates 2 1.5 11 8.1 49 36.0 40 29.4 34 25.0 level of the organization‟s competitive ability 4 2.9 8 5.9 30 22.1 57 41.9 37 27.2 technological level of the organization 0 0 15 11.0 20 14.7 57 41.9 44 32.4 level to which the organization implements the quality concept as demanded by the iso 9000 series of standards 13 9.6 17 12.5 9 6.6 41 30.1 56 41.2 level of development of the organization‟s marketing sector 13 9.6 15 11.0 54 39.7 26 19.1 28 20.6 after-sales services of the organization 7 5.1 3 2.2 32 23.5 45 33.1 49 36.0 level of the organization‟s openness to creativity, new ideas and innovation 2 1.5 5 3.7 36 26.5 45 33.1 48 35.3 the extent to which the organization is a high performance organization, i.e. to what extent it possesses total excellence at all levels 9 6.6 12 8.8 39 28.7 50 36.8 26 19.1 level to which the organization has clearly defined goals and the elements necessary for their successful achievement 4 2.9 6 4.4 21 15.4 68 50.0 37 27.2 level of consistency and clarity of the organization‟s leadership 0 0 9 6.6 24 17.6 60 44.1 43 31.6 functioning of the organization with regard to known external standards 2 1.5 2 1.5 36 26.5 54 39.7 42 30.9 current functioning of the organization with regard to its position at an earlier period 6 4.4 7 5.1 26 19.1 53 39.0 44 32.4 level to which the organization operates with less resources than considered necessary 2 1.5 16 11.8 39 28.7 47 34.6 32 23.5 qualitative operation of the organization with regard to comparable competitors 0 0 2 1.5 22 16.2 57 41.9 55 40.4 teamwork within the organization 3 2.2 10 7.4 16 11.8 51 37.5 56 41.2 organization‟s employees as a source of creativity and new ideas 3 2.2 15 11.0 34 25.0 39 28.7 45 33.1 sources of creativity and new ideas coming from the outside of the organization 5 3.7 31 22.8 50 36.8 29 21.3 21 15.4 work habits of the organization‟s employees 3 2.2 8 5.9 48 35.3 45 33.1 32 23.5 positivity of the employees‟ response to education and training programs, as well as their preparedness for education and training 8 5.9 16 11.8 30 22.1 48 35.3 34 25.0 the organization‟s allocation of funds for employee education and training 12 8.8 26 19.1 23 16.9 41 30.1 34 25.0 justness in selecting the employees to be educated 6 4.4 16 11.8 25 18.4 38 27.9 51 37.5 level to which the idea of business culture is realized within the organization 2 1.5 14 10.3 42 30.9 46 33.8 32 23.5 level to which the organization‟s employees share the responsibility both for the success and for the failure of the organization 5 3.7 28 20.6 34 25.0 33 24.3 36 26.5 level of the consultants‟ engagement within the organization 22 16.2 27 19.9 28 20.6 30 22.1 29 21.3 chance for the organization to become a high performance organization 2 1.5 6 4.4 22 16.2 58 42.6 48 35.3 af absolute frequencies; rf relative frequencies (percentages); m.v. mean values source: miletić, v. (2016). p. 163-166 222 v. miletić, s. miletić, n. berber table 2 performance rank in organizations performances mean value performance rank qualitative operation of the organization with regard to comparable competitors 4.21 1 teamwork within the organization 4.08 2 chance for the organization to become a high performance organization 4.06 3 level of consistency and clarity of the organization‟s leadership 4.01 4 level of the organization‟s openness to creativity, new ideas and innovation 3.97 5 functioning of the organization with regard to known external standards 3.97 5 technological level of the organization 3.96 6 level to which the organization has clearly defined goals and the elements necessary for their successful achievement 3.94 7 after-sales services of the organization 3.93 8 current functioning of the organization with regard to its position at an earlier period 3.90 9 level of the organization‟s competitive ability 3.85 10 justness in selecting the employees to be educated 3.82 11 level to which the organization implements the quality concept as demanded by the iso 9000 series of standards 3.81 12 organization‟s employees as a source of creativity and new ideas 3.79 13 work habits of the organization‟s employees 3.70 14 level of competitiveness on the market on which the organization operates 3.70 14 level to which the idea of business culture is realized within the organization 3.68 15 product quality on the market on which the organization operates 3.68 15 level to which the organization operates with less resources than considered necessary 3.67 16 positivity of the employees‟ response to education and training programs, as well as their preparedness for education and training 3.62 17 the extent to which the organization is a high performance organization, i.e. to what extent it possesses total excellence at all levels 3.53 18 level to which the organization‟s employees share the responsibility both for the success and for the failure of the organization 3.49 19 the organization‟s allocation of funds for employee education and training 3.43 20 level of development of the organization‟s marketing sector 3.30 21 sources of creativity and new ideas coming from the outside of the organization 3.22 22 level of the consultants‟ engagement within the organization 3.13 23 source: ibidem, p. 166-167. table 3 shows that the majority of respondents stated they were not sure whether there are domestic high performance organizations, 13.2% stated there are none, and 33.8% stated that there are high performance organizations. table 3 the existence of domestic high performance organizations are there any high performance organizations absolute frequency relative frequency yes 46 33.8 no 18 13.2 not sure 72 52.9 total 136 100.0 source: ibidem, p.168 how high are the performances of organizations in the republic of serbia? 223 table 4 shows the mean values of ratings regarding the extent to which an organization is a high performance organization, observed in the organizations that operate over a different time period and at a different level for each level and duration of operation. standard deviation represents a deviation of the rating‟s mean value, and n stands for the number of respondents in the sample. it is evident that the extent to which an organization is a high performance organization is the greatest among organizations that operate on a regional market, and among them the highest ratings were received by those organizations that have operated for over 40 years. table 4 mean values of the extent to which an organization is an hpo operation level duration of an organization‟s operation mean std. deviation n local market from 6 to 10 1.50 .577 4 from 11 to 20 4.00 .000 3 from 21 to 30 4.25 .886 8 over 40 years 1.00 .000 2 total 3.18 1.551 17 national market up to 5 3.86 .900 7 from 6 to 10 4.00 .000 2 from 11 to 20 3.11 .782 9 from 21 to 30 2.30 1.252 10 from 31 to 40 years 4.00 .000 2 over 40 years 3.00 .000 4 total 3.12 1.066 34 regional market from 6 to 10 4.00 .000 2 from 11 to 20 3.75 .463 8 from 21 to 30 4.00 1.155 4 over 40 years 4.44 .527 9 total 4.09 .668 23 international market from 6 to 10 3.67 1.175 15 from 11 to 20 4.08 .669 12 from 21 to 30 3.57 1.076 21 from 31 to 40 3.00 .000 3 over 40 years 3.45 1.036 11 total 3.65 1.010 62 total up to 5 3.86 .900 7 from 6 to 10 3.35 1.301 23 from 11 to 20 3.72 .729 32 from 21 to 30 3.44 1.259 43 from 31 to 40 years 3.40 .548 5 over 40 years 3.54 1.174 26 total 3.53 1.102 136 source: ibidem, p. 205 graph 1 shows the mean values of ratings regarding the extent to which an organization is a high performance organization. it is evident that those organizations that have operated on the regional market for over 40 years have been marked as high performance organizations. 224 v. miletić, s. miletić, n. berber graph 1 mean values of the ratings of the extent to which an organization is a high performance organization source: ibidem, p. 206 the influence of the duration of operation and the level of operation on the rating of the extent to which an organization is a high performance organization is given in table 5. in the column operation level/operation duration sig=0.000 which is less than 0.05, so it can be deduced that there are significant differences in the ratings of the extent to which an organization is a high performance organization. the influence of the interaction between the level and duration of operation is statistically significant. after analyzing the common influence, there followed an analysis of individual influences. in the operation level column, sig is 0.001, which is less than 0.05, so it can be deduced that the level of the organization‟s operation has a strong influence on the rating of the extent to which an organization is a high performance organization. in the operation duration column, sig is 0.112, which is higher than 0.05, so it can be ascertained that the duration of operation does not significantly influence the difference in ratings. based on this, we can conclude that the operation level and operation duration significantly affect the differences in the ratings of the extent to which an organization is a high performance level of business organization regional market national market local market m e a n v a lu e s o f th e r a ti n g s 6 5 4 3 2 1 0 over 40 yrs from 31-40 from 21-30 from 11-20 up to 5 yrs duration of an organization‟s operation the extent to which an organization is rated as a hpo from 6-10 international market how high are the performances of organizations in the republic of serbia? 225 organization viewed through the common influence of operation level and operation duration, but the individual influence is significant only in terms of the level of operation. table 5 influence of the interaction of the variables operation level and operation duration on the rating of the extent to which an organization is a high performance organization variables df mean square f sig. operation level 3 4.802 5.842 .001 operation duration 5 1.507 1.834 .112 operation level/operation duration 10 4.432 5.391 .000 source: ibidem, p. 207 it can be noticed that the individual influence of operation level stands out. a subsequent tukey test reveals which organizations in terms of operation level particularly differ in ratings. table 6 shows that the quantifying ratings of the extent to which an organization is a high performance organization significantly differ among organizations that operate on the local and regional market, national and regional market, national and international market. table 6 comparative analysis of organizations with different levels of operation in terms of the extent to which an organization is an hpo (i) operation level of an organization (j) operation level of an organization mean value of the difference (i-j) standard error error significance (sig) 95% confidence interval lower threshold upper threshold local market national market .06 .269 .996 -.64 .76 regional market -.91(*) .290 .011 -1.67 -.15 international market -.47 .248 .239 -1.12 .18 national market local market -.06 .269 .996 -.76 .64 regional market -.97(*) .245 .001 -1.61 -.33 international market -.53(*) .193 .037 -1.03 -.02 regional market local market .91(*) .290 .011 .15 1.67 national market .97(*) .245 .001 .33 1.61 international market .44 .221 .195 -.14 1.02 international market local market .47 .248 .239 -.18 1.12 national market .53(*) .193 .037 .02 1.03 regional market -.44 .221 .195 -1.02 .14 source: ibidem, p. 208 4. results and discussion the purpose of the empirical research was to present a realistic image of the application of the hpo operation concept in the contemporary economic environment of serbia. for this purpose, in the interaction of characteristics of the systemic model the key conditions of transforming an organization operating in serbia into a high performance organization have been evaluated and the premise has been confirmed. based on the research results, it can be concluded that qualitative operation with regard to the competition, teamwork, the chance 226 v. miletić, s. miletić, n. berber for an organization to become an hpo, and the level to which the leadership of an organization is consistent and clear are the key characteristics and they were also the top rated performances. the results of the research also show that some conditions and criteria are not seen as dominant among domestic organizations and they were not rated as relevant to the increase of business performance. attributes that received the lowest marks were the level to which the organization‟s employees share the responsibility both for the success and for the failure of the organization, the organization‟s allocation of funds for employee education and training, the level of development of the organization‟s marketing sector, sources of creativity and new ideas coming from the outside of the organization, and the level of the consultants‟ engagement within the organization. a conclusion that especially stands out is that the greatest number of respondents said they were not sure whether there are high performance organizations in serbia, as well as that the creation and sustainability of hpos depends on the successfulness of their management in facing the challenges of constant changes in a complex environment which possesses a high level of uncertainty and risk. achieving a high performance organization represents a conditioned process of development. the successful design of a high performance organization demands the fulfillment of different demands by the management. the primary demands are, first of all, the securing of a leadership that is capable of achieving high performances, the establishment of strong connections between the organization and its environment, the adoption of an approach based on the network model in the realization of operation, and the integration of components such as information, knowledge, power, and rewards, which are necessary for the successful operation of such an organization. the management was identified as a powerful process of achieving high performances since it offers customer satisfaction at a level different than their target value. the research results show the importance of the role of the leader/manager in the sense that 48% of the respondents stated that an organization would be managed more successfully by the employees who are not among the top management. in that sense, the research results reveal the need for employee education and development in the areas of new managerial technologies as the basis of the concept of business excellence. it is obvious that excellent organizations place the top employees on the jobs with the greatest chance of success, not on the jobs with the greatest problems. by engaging the right people, the problem of motivation and management becomes smaller. thus, employee management is a suggestion for further improvement in this area. the research results show that the extent to which an organization is a high performance organization has received the highest rating in the organizations that operate on a regional market, and among them the highest rated are those that have been operating for over 40 years. also, there are significant differences in the ratings of the extent to which an organization is a high performance organization. it can be concluded that the level of operation and the duration of operation are important factors when it comes to the differences in the ratings of the extent to which an organization is a high performance organization as seen through the common influence of the level of operation and the duration of operation, and the individual influence is significant only for the level of operation. by applying the tukey test, it can be determined that the ratings of the extent to which an organization is a high performance organization are especially different for organizations that operate on a local and regional market, national and regional market, and national and international market. how high are the performances of organizations in the republic of serbia? 227 the obstacles to achieving high performances and to implementing the leadership concept of operation are a lack of financial capital, outdated equipment and technology, and a lack of resources. the research has shown that the systemic concept of operation has a future in serbia. expressed in percentile rank, the chances (4.06) for serbian companies to achieve total excellence and high performance results are increasing. in the national model of a high performance organization, leadership represented at all levels of the organization is required, and here every employee must personally contribute to leadership functions if an organization wants to produce results. based on the respondents‟ opinion, the leadership is responsible for the success and high performances of excellent serbian organizations, and they do not rank technology (3.96) among the top five factors of success even in this time of rapid technological change. the relation between an improved management and increased performances of organizations operating in serbia exists, and it is stronger than linear. the quality of the organization often cannot be and is not better than the quality of the leader who is at its front. finally, the answer to the question of what high performances are should be organization-specific. even better so, for each organization is specific and it has a unique business policy, so logically its high performances are specific. what is important is to recognize whether a domestic organization has reached high performances, since excellent performances do not tolerate compromise. references aaker, d., kumar, v. & day, g. 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(2013). management practices do make a difference. maastricht school of management, endepolsdomein, the netherlands koliko su visoke performanse organizacija koje posluju u srbiji? u uslovima sve snažnije konkurencije na tržištu, organizacije svoju održivost mogu osigurati pre svega implementacijom sistemskog koncepta poslovanja u kome je menadžment prepoznat kao moćni proces za postizanje visokih organizacionih performansi. u pitanju je koncept koji omogućava zadovoljavanje potreba kupaca na nivou drugačijem nego što je njihova ciljna vrednost. u tom smislu organizacije moraju biti struktuirane na način da ispunjavaju određene uslove i kriterijume zahvaljujući kojima se kreiraju održivo visoke performanse, što je ujedno i cilj ovog istraživanja. takve performanse nastaju kao rezultat unapređenja upravljanja u okviru ključnih oblasti poslovanja kvaliteta proizvoda i usluga, troškova proizvodnje, brzine dostavljanja tržištu i inovacija i razvoja takvih proizvoda i usluga. uspeh u takvim organizacijama u velikoj meri zavisi od sposobnosti menadžera da razviju i zadrže talentovanu radnu snagu, što je bitan faktor u razvoju visokih performansi. ovladavanjem promenama, kvalitetnim upravljanjem i kontrolisanjem budućnosti, stvaraju se pretpostavke za postizanje poslovne izvrsnosti i ostvarivanje rezultata visokih performansi. u cilju potvrđivanja polazne hipoteze korišćeni su metod analize, metod sinteze i metod višestrukog upoređivanja i statističkog testa. ključne reči: menadžment, organizacija, performanse, ovp model. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 3, 2016, pp. 287 300 review paper factors influencing e-commerce development in serbia 1 udc 004.738.5:339(497.11) zoran kalinić, vladimir ranković, ljubina kalinić * university of kragujevac, faculty of economics, serbia abstract. in this paper, an overview of current state of e-commerce development in serbia is presented. also, some important factors influencing e-commerce diffusion are discussed. the factors are divided into four groups: technical factors, which cover ecommerce telecommunication and logistics infrastructure; legal factors, i.e. necessary laws and regulations on e-commerce; economic factors, and psychological factors and local culture. the study showed very strong correlation between broadband internet penetration and internet usage on the one hand and online shopping penetration on the other hand. also, strong correlation was found between national economic wealth and online shopping penetration. the development of logistics systems in serbia, national laws and regulations related to e-commerce, e-payment systems and cultural characteristics and habits of serbian customers are discussed. the results show that despite the notable improvement in the last few years, the level of e-commerce development in serbia is still far away from eu28 average. finally, some recommendations for faster e-commerce diffusion are presented. key words: electronic commerce, e-commerce development, b2c, influencing factors, e-payment introduction rapid growth of information-communication technologies (ict) in the last few decades and broad penetration of the internet opened possibilities for new forms of business. one of the most popular and widespread is electronic or e-commerce, usually defined as “the sale or purchase of goods or services conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders” 1received april 5, 2016 / accepted august 30, 2016 corresponding author: zoran kalinić faculty of economics, university of kragujevac, ðure pucara starog 3, 34000 kragujevac, serbia e-mail: zkalinic@kg.ac.rs * phd student 288 z. kalinić, v. ranković, lj. kalinić (world trade organization, 2013), while the payment and the ultimate delivery of the goods or services do not have to be conducted online. laudon and traver (2015) define it as the use of the internet, the web and mobile applications to transact business. e-commerce has had very high growth rates for more than a decade (kalinic, 2014b). it is assumed that today our planet has approximately 7.4 billion inhabitants, out of which 1.2 billion are already shopping online (ecommerce europe, 2015a). as one of the fastest growing parts of commerce today, e-commerce provides significant potential for economic growth in every country, offering numerous benefits to both shoppers and sellers: no time and space constrains i.e. 24/7 availability; access to the global market; wider product offer, lower operating costs, etc. (kalinić and sternad zabukovšek, 2015). e-commerce enables providers to manage customer demands quickly and efficiently. moreover, in e-commerce it is much easier to monitor shopping activities of customers and to use collected data for demand prediction or marketing campaigns (demirdogmez, 2015). e-commerce also brings a lot of benefits to the government, including new jobs and taxes, so some countries made significant efforts for the development of e-commerce in their rural areas, in order to reduce the gap between urban and rural parts of the country (european commission, 2015). it is important to stress that ecommerce development also influences the development of all supportive services, like postal and courier services. although developing countries have a strong potential for e-commerce development, they are still lagging behind developed countries to a significant extent (alyoubi, 2015). the development of e-commerce is also one of the priorities of the eu, and the development of digital single market is one of the seven pillars of the digital agenda for europe, by which two important targets were set: 50% of eu consumers buying online by 2015 and 20% buying online cross-border within the eu (european commission, 2012). serbia signed the stabilization and association agreement with the european union, which entered into force on september 1 st 2013. by this agreement, serbia committed itself to perform structural reforms and fulfill a number of objectives, including the development of the information society (kalinić and sternad zabukovšek, 2015). in order to harmonize its path with eu guidelines given in the digital agenda and related documents, serbian government has adopted strategy for information society development in the republic of serbia by 2020 (grs, 2010). this strategy sets out actions needed to converge to the eu average level of development by 2020 and defines the key objectives, principles and priorities of the development of information society, including telecommunication infrastructure, e-commerce and governmental e-services, like e-health and e-justice. masmi (2015) research shows that already almost half of serbian consumers use internet to inform themselves before shopping. this paper presents the current state of development of b2c e-commerce in serbia, and compares it with the eu countries. also, it brings the analysis of the key factors influencing e-commerce deployment in a developing country like serbia. finally, the study gives some suggestions which could improve and accelerate the implementation of e-commerce in serbia. 1. e-commerce in serbia – state of diffusion internet access, as a basis for e-commerce activities, is widely available in many countries and today people use the internet for a wide range of activities, including buying goods and services online. in the eu28 in 2015, 76% of individuals aged 16 to 74 used the internet almost every day, and nearly 53% of them shopped online (eurostat, 2015). factors influencing e-commerce development in serbia 289 total turnover of b2c e-commerce worldwide in 2015 was estimated at 1,943 billion euros, which is an increase of 24% compared to previous year, mainly due to the significant increase in asia-pacific region. three main e-commerce markets are china, united states and united kingdom, which together account for 61% of all b2c e-commerce sales in the world (ecommerce europe, 2015b). concerning europe, out of 818 million of its inhabitants, 564 million are using internet, and 331 million are shopping online (ecommerce europe, 2015a). total turnover of b2c e-commerce in europe in 2015 was around 424 billion euros, which is an increase of 14% to the previous year, and the main markets remain united kingdom, germany and france. although the share of online retail in europe is still low (6%), it should be stressed that it has high growth rate, and that internet economy contributed to european gdp by 2.5% (ecommerce europe, 2015a). as it can be seen from the figure 1, e-commerce development in serbia, represented by the percentage of individuals shopping online, with 33% still significantly lags behind eu average (53%) and digital agenda milestone (50%), but encouraging fact is that it is better than several eu members, like greece, lithuania, croatia, italy, etc., as it will be presented in figure 2 (eurostat, 2015; sors, 2015a). fig. 1 individuals who purchased something over the internet in the last year (in %) it is very interesting to demonstrate that global financial crisis, started 2008, did not have any negative influence on e-commerce diffusion (kalinić and sternad zabukovšek, 2015). as it can been seen in fig. 1, e-commerce in the eu was developing at high rates even during crisis years, while in serbia it was stagnating. younger serbian consumers, more educated and with higher income, are buying online more frequently (masmi, 2015). almost half of serbian online shoppers are buying clothes, footwear and jewelry, while about one third of them buy electronic equipment (masmi, 2015; sors, 2015b). also, as another measure of e-commerce development, we can analyze the percentage of total turnover coming from e-commerce. the data shows that in 2014, the eu28 average was 17%, but there were big differences between countries, from leading ireland with 37% to the last one, greece, with only 1% (eurostat, 2015). concerning this measure, serbia is, with only 6%, again among the last ones. 290 z. kalinić, v. ranković, lj. kalinić to assess the readiness of countries for e-commerce, the unctad developed composite b2c e-commerce index, based on four indicators: internet use, number of secure servers, credit card penetration and postal delivery services (unctad, 2015), and the value of the index is positively correlated to the percentage of the online shoppers. by this research, serbia is in the 44 th place, out of 130 countries, but in front of some eu member states, like romania and bulgaria, and some other important markets like russia and china. the lowest assessments for our country were for the percentage of internet users and the relative number of secure servers, as the basis for e-commerce, and in the future period special emphasis should be put on these issues. 2. factors influencing e-commerce development factors affecting e-commerce diffusion may be classified as various aspects of economic structure, infrastructure, government policy, culture, etc. (wang and liu, 2015). the challenges for e-commerce diffusion in developing countries can be quite different from those experienced by developed countries (alyoubi, 2015; kapurubandara and lawson, 2006), and they may include the lack of telecommunications infrastructure (including poor internet connectivity) and qualified staff for e-commerce deployment, underdeveloped payment systems (e.g. low credit card penetration), lack of reliable transportation and delivery systems, but also the issues more related to the consumer side, like the lack of computer skills among consumers, low income, low computer and internet penetration rates and high internet access costs (alyoubi, 2015; almousa, 2013; kapurubandara and lawson, 2006). alyoubi (2015) also stresses the lack of effective branding and trust issues, the lack of robust logistic networks, including both delivery services and traffic infrastructure, which is very common in developing countries, and the absence of sound legal and regulatory environment for e-commerce. also, ecommerce raises many issues such as trust, privacy, security, accessibility, awareness, familiarity, etc. (kabango i asa, 2015). wang and liu (2015) discuss the influence factors of e-commerce development in china from various perspectives, such as information infrastructure, economic level, educational level, urbanization, technology deployment, living standards, human capital and price index. as the measures of these perspectives, they propose 12 indexes, as independent variables, such as internet penetration; number of computers per hundred households; number of websites per ten thousand people; mobile phone penetration; real gdp per capita; knowledge index (calculated using the adult literacy rate and the average years of education); urbanization rate, research and development spending as a share of gdp; number of patented applications per ten thousand people; per capita disposable income; proportion-based employment in information industry; and communication price index, while as an output i.e. a measure of e-commerce development, they adopted the proportion of e-commerce turnover accounted for gdp. the results show that the most important factors affecting e-commerce development in china are mobile phone penetration, per capita disposable income, number of computers per hundred households, and urbanization rate, followed by real gdp per capita, knowledge index and internet penetration. sridhar and sridhar (2006) also proposed a model of e-commerce adoption in developing countries which included telecommunication infrastructure factors like internet penetration and quality of internet services, but also other important aspects like security infrastructure and legal framework, payment methods, cultural issues, etc. as key factors affecting e factors influencing e-commerce development in serbia 291 commerce volume in turkey, demirdogmez (2015) identifies gross domestic product per capita, number of internet users and legal regulations. in his study of the barriers to e-commerce adoption in egypt, zaied (2012) divided influencing factors into six categories: economical; legal and regulatory; organizational; political; social and cultural; and technical barriers. as the most important he reported technical issues (especially lack of internet security), followed by legal and regulatory and political barriers, while the least important were social and cultural factors. travica et al. (2007) analyzed complex model of e-commerce adoption in serbia which included factors like traffic infrastructure, delivery services, telecommunications, software industry, e-payment/e-banking, legislation, education and customer e-commerce propensity, and concluded that, at the time of research, the influences are controversial i.e. some of the aspects, like software industry, e-payment/e-banking and legislation are in favor of e-commerce deployment, while some others are underdeveloped. as main barriers of faster e-commerce diffusion in serbia they reported telecommunications infrastructure and ownership and customer beliefs and behavior. in this paper, factors affecting e-commerce development in serbia are divided into four main groups: technical factors, which cover e-commerce telecommunication and logistics infrastructure; legal factors, i.e. necessary laws and regulations on e-commerce; economic and financial factors and finally, psychological and cultural factors, all of which will be discussed in more detail in the following chapters. 2.1. telecommunications infrastructure and logistics the accessibility of technical and telecommunications infrastructure is of vital importance for e-commerce diffusion. although some studies adopt computer penetration in households as an influencing factor, in our study the stress is on internet access, as the main prerequisite for e-commerce. one of the reasons is the rapid growth of mobile technologies, which enables consumers without pc computers to access the internet and to shop using their mobile devices (mobile or m-commerce). internet penetration and speed are very important factors in higher e-commerce diffusion. it is noticeable that the countries with high penetration of fast and affordable internet connection also have high percentages of e-shoppers. the percentage of households with internet access, percentage of individuals using internet almost every day and the percentage of individuals who bought something online during last year in eu28 countries and serbia in 2015 are presented in figure 2 (eurostat, 2015; sors, 2015a). it can be seen that our country lags behind almost all european countries, and that more effort should be put on the telecommunications infrastructure development. also, there are high differences between urban and rural areas i.e. 70% of urban households in serbia have internet access, while only 53% of rural households have the same (sors, 2015b). today, it is especially important not to just have an internet connection, but to have a fast one, because of increasing demands for complex services and transfer of high amounts of data, like for video streaming (kalinic, 2014b). therefore, more relevant factor for ecommerce diffusion is high-speed broadband internet penetration rate, as many e-commerce services strongly depend on it. as it can be seen in figure 3, there is a strong linear correlation between the broadband internet penetration rate and the percentage of online shoppers in the eu28 countries and serbia (pearson‟s r=0,856) (eurostat, 2015; sors, 2015a). 292 z. kalinić, v. ranković, lj. kalinić fig. 2 households with internet access, individuals using internet almost every day and individuals shopping online fig. 3 correlation between broadband internet penetration in households (in %) and individuals who bought something online in last 12 months (in %) factors influencing e-commerce development in serbia 293 another important factor is the actual usage of the internet by the individuals. this factor is analyzed in many studies and it is also included in unctad‟s b2c e-commerce index (unctad, 2015). figure 4 presents strong linear correlation between the percentage of the individuals using the internet almost every day and the percentage of online shoppers in the eu28 countries and serbia (pearson‟s r=0,937) (eurostat, 2015; sors, 2015a). fig. 4 correlation between individuals who use the internet on daily basis (in %) and individuals who bought something online in last 12 months (in %) although the actual usage of e-commerce in our country is still very low, from previous two figures it can be concluded that serbia is “above the line” i.e. it has more online shoppers than could be expected, based on broadband penetration and internet usage. mobile devices are becoming crucial for many commercial activities, and for several years m-commerce even had three-digit growth rates. the most important devices for commerce are mobile phones (especially smartphones) and tablets. in developed countries the number of mobile subscriptions is even higher that the number of inhabitants. for example, mobile penetration (the number of mobile subscriptions per a hundred inhabitants) in european union is 132%, while in the leading latvia it is 231% (eurostat, 2015). the situation in serbia is quite good on this issue, as mobile penetration is 131%, or around eu28 average (ratel, 2015). taking in mind that e-commerce websites require security software, one of possible assessments of the quality of e-commerce infrastructure is the number of secure servers, which use encryption technology for internet transactions (unctad, 2015). the results show that, by this parameter, serbia is well behind all eu28 member states, and even behind some other european countries like macedonia. 294 z. kalinić, v. ranković, lj. kalinić logistical problems represent one of the main barriers to the e-commerce development. underdeveloped delivery systems may collapse during high demand peaks, like national holydays, when they have to process and deliver a huge number of items in a short time (alyoubi, 2015). it is no wonder that unctad (2015) included the share of population having mail delivered at home as one of the factors constituting b2c e-commerce index, as the lack of reliable address and postal systems, like in same underdeveloped countries in africa and asia, may hinder e-commerce development. delivery problems are particularly hard in cross-border e-commerce, where they may include custom delays, changes in shipping costs, lost goods, lengthy delays in shipping to customers, etc. for many years e-commerce has been seen as a main growth driver of postal services (ipc, 2015). international postal deliveries of small parcels have experienced a very rapid growth in the past decade, mainly as a result of cross-border e-commerce (unctad, 2015). the survey of oxford economics (2015) showed that 30% of e-commerce sales in europe are dependent on express delivery services (in netherlands and italy it is more than 45%). another study of copenhagen economics (2013) confirmed that the improvement of delivery services is an important driver to enhance e-commerce. this study included 3,000 e-shoppers in six eu countries and revealed that problems related to delivery services are a key reason for customers for not buying online. study shows that delivery-related problems are responsible for 68% of the situations where e-shoppers abandoned the shopping cart before finalizing the order, although they have already started shopping i.e. they have added items to their shopping cart. the primary reasons are high delivery costs and long delivery times. the main players in this area are national postal operators, international courier services like dhl, ups and fedex and a number of regional and national courier service providers. it is found that e-commerce related shipment volumes are fairly evenly distributed between national postal operators (approx. 40%), multinational integrators (40%) and local or regional carriers (20%) (copenhagen economics, 2013). here it should be stressed, due to the barriers to the cross-border e-commerce sales (kalinic, 2014b), on average, 85 per cent of all ecommerce shipments are domestic (copenhagen economics, 2013). the situation in serbia is not so bad on this issue, as address and postal systems are well developed and 99% of the population have their mail of packages delivered at home (unctad, 2015), using services of national postal operator post of serbia, all important international courier service providers as well as several regional and national ones. 2.2. legal framework the role of the government is extremely important in the area of legislation and the creation of positive ambient for e-commerce development i.e. supportive legal and regulatory environment (alyoubi, 2015). generally speaking, developing countries are lagging behind developed counties in this area, and very often development is delayed because of slow law adoption process, despite the fact that technology and the market are already there. in most countries, e-commerce is usually covered by complex legal frameworks including general consumer protection and contracts laws, specific e-commerce and e-business laws, legislation related to privacy, copyright and data protection and telecommunications laws and regulations, etc. (kalinic, 2014b). in the case of serbia, e-commerce is regulated primarily by the law on e-commerce, the law on electronic document and the law on electronic signature. the law on e factors influencing e-commerce development in serbia 295 commerce, adopted in 2009 and revised in 2013, is the main national legal document in e-commerce implementation. the law on digital signature is also one of the basic legal requirements of e-business and e-commerce. in our country it was adopted in 2004, and it is in line with common practices and regulations of the eu and united states (travica et al., 2007). newly adopted, the law on consumer protection and the law on payment services (both adopted in 2014, in power since october 1 st , 2015), brought some important novelties for the e-commerce, which should increase the consumer trust and enable new payment methods. for example, the law on payment services enables the easier operation of new e-payment providers and e-money institutions. generally speaking, a lot has been done in serbia in the last several years and the legal framework in the area of ecommerce development may be assessed as well developed, with all important laws in the areas of e-transactions, consumer protection, privacy and data protection and cybercrime already in power (unctad, 2015). what may still be an issue is legal framework‟s efficiency and the implementation of adopted regulations. also, there is often the lack of compliance among some of the regulations. for example, the parents in serbia have the right on tax refund for baby equipment, accomplished by presenting fiscal receipt from the shop. as, by the law, online shops of baby equipment do not have an obligation to give fiscal receipt, online buyers are in unfair position compared to offline buyers, because they cannot get tax refund (kalinic, 2014b). 2.3. economic and financial factors some of the factors which are not easy to improve are the national economy and people‟s living standards. in countries with higher living standards, consumer‟s demands for high quality and differentiated goods are higher, which represents a very good environment for e-commerce development. the positive effects go in both ways, i.e. positive moves in national economy promote growth of e-commerce, and in turn the e-commerce development promotes further development of national economy (wang and lin, 2015). travica et al. (2007) also identified low living standards and high interest rates for credit cards as limiting factors in the use of ecommerce. there could be found a strong correlation (pearson‟s r=0,782) between economic wealth of the nation, represented by the gdp per capita and the percentage of online shoppers, as presented in figure 5 (eurostat, 2015; sors, 2015a). another economic factor that may influence e-commerce development is the offer on the national e-market, since it was already presented that more that 80% of e-sales are performed on the national markets. the percentage of companies selling their products and services via the internet for eu28 countries and serbia in 2015 in presented in figure 6 (eurostat, 2015; sors, 2015a). surprisingly, serbia has a very good results on this measure, as, according to national statistics data, 23% of enterprises in serbia were selling via the internet, which is better than eu28 average (18%) and better than most of eu countries. in order to successfully implement e-commerce strategy, the state and its financial system should provide various e-payment systems and mechanisms (alyoubi, 2015). well-developed and reliable payment systems and mechanisms are essential for the successful development of e-commerce. the existing solutions include a wide selection of online payment mechanisms such as payment cards, mobile payments, e-cash, but in many countries, especially developing ones, conventional offline systems such as cash-ondelivery (cod) are still the most popular. 296 z. kalinić, v. ranković, lj. kalinić fig. 5 correlation between gdp per capita (in euros) and individuals who bought something online in the last 12 months (in %) fig. 6 the percentage of enterprises selling via the internet the most popular payment method in serbia is still cash-on-delivery, which is used by 80% of customers (masmi, 2015), while other options like payment cards (19%) and off-line pre-payment (10%), are much less popular. only 5% of serbian consumers use factors influencing e-commerce development in serbia 297 paypal, and the same percentage uses e-banking. this is completely different from the situation in e.g. united states, where payment cards (both credit and debit) account for 78% of all online payments, while the most popular alternative is paypal (laudon and traver, 2015). the same stands for the general world statistics (birovljev, 2015). it is expected that in the near future this trend in serbia will be changed, also taking in mind new law on payment services and its possibilities. as already stated, the credit card penetration is one of key factors included in unctad‟s e-commerce index. in 2015, there was about 6.4 million payment cards issued in serbia, out of which approximately one half is active i.e. with at least one transaction quarterly (nbs, 2016). based on the statistical data of national bank of serbia (nbs, 2016), in 2015 serbian customers spent more than 110 million euros using payment cards in internet shopping, out of which they spent approximately three quarters on foreign websites, and the remaining quarter at domestic online shops. 2.4. consumer psychology and habit national culture and habits may have significant influence on e-commerce acceptance. in some cultures, like in latin america and southern europe, shopping is a social event, and people prefer face-to-face contact in the markets or shops than shopping via internet, and this also stands for serbia. kapurubandara and lawson (2006) also reported that in countries like sri lanka and india, face-to-face contact with seller is very important for overall shopping experience. customer readiness for e-commerce is one of the key conditions for successful e-commerce development (alyoubi, 2015). one of the key psychological factors influencing intention to adopt e-commerce is perceived usefulness, because, like any other new technology, consumers would start using e-commerce only if they find it useful and more convenient that its alternatives like shopping in regular shops or using tele-shops. many research models of technology adoption like tam (technology adoption model) or utaut (unified theory of acceptance and use of technology) are based on the concept of technology usefulness. closely related to usefulness is awareness i.e. the consumer perception and knowledge on ecommerce, which is usually raised by social influence or education (kabango i asa, 2015). awareness is also closely related to trust; i.e. usually the more consumers are aware of all the benefits but also the threats, the more they are trustful to it (kabango i asa, 2015). some of the main consumer concerns are security and confidentiality issues (demirdogmez, 2015). many consumers are still unsure about the security and privacy of their personal and financial information during online shopping (kabango i asa, 2015; kalinic, 2014b). therefore, trust is a very important factor in e-commerce adoption. it gives the consumers faith to purchase services or products even if the e-seller is unknown (kabango i asa, 2015). also, trust should be analyzed as a two-way street i.e. the trust of sellers in customers is equally important to the opposite one (travica et al., 2007). kool et al. (2011) found that trust plays more important role in e-commerce acceptance than in traditional commerce because, compared to buying in traditional shops, consumers perceive more uncertainty or risk when buying online. other important predictors of intention to adopt e-commerce are social influence, perceived ease of use, cost, perceived enjoyment, etc. travica et al. (2007) report that typical serbian consumer is mistrustful, more oriented to traditional ways of commerce. concerning national culture and group psychology, it appears that trust is a major driver of e-commerce in serbia (travica et al., 2007). when buying 298 z. kalinić, v. ranković, lj. kalinić online, about 74% of serbian consumers prefer domestic online shops, 11% of them usually buy on foreign ones, while the remaining 15% is buying on both of them (masmi, 2015). the customers prefer domestic online shops because they believe that they are safer, and because they understand the language and prices are reasonable, while the advantage of foreign websites is that they offer products and services that cannot be purchased in serbia. serbian consumers also, because of perceived security and trust, prefer cash-on-delivery or some other classical method of pre-payment. training and education are some of the most critical factors for successful e-commerce development (alyoubi, 2015). developing countries face digital divide i.e. a significant part of inhabitants has a low level literacy in computer usage and english language, which are fundamental for e-commerce. so, more efforts are needed in the area of education, including areas specific to e-commerce, which in turn will increase perceived trust and customer readiness to adopt e-commerce. the government should provide more educational programs in order to build up the awareness of consumers and companies using different means like mass media and educational institutions (kabango i asa, 2015). today in serbia, a lot of consumers are still not aware of all the benefits of e-commerce, and therefore additional efforts in marketing and education are needed. one of the main objectives of on-going eu-funded ipa project e-business development, with the budget of 2.5 mil. euros, is to raise the awareness of the serbian citizens and companies on the benefits of e-commerce and to educate them in safe e-commerce use. conclusion e-commerce has been one of the main engines of the retail sector growth for the last several years. despite the fact that it accounts for only 6% of the total retail sector globally, e-commerce has a double-digit growth, and this trend will continue. it should not be forgotten that also a lot of purchases in traditional shops are influenced by e-commerce and the internet, as many consumers research on the internet before they make offline purchases. the results presented in this paper show that e-commerce in serbia is on a good track and has a good perspective, but a lot of still remain to be done in order to reach its full potential. good e-commerce infrastructure is the foundation of successful e-commerce development, capable to support increasingly complex transaction process (wang and lin, 2015), so in order to accelerate future development of e-commerce in serbia, further investments in telecommunications network are needed. some improvements in logistics and delivery systems would be welcome. also, special attention should be given to mobile commerce, as an e-commerce segment with the highest growth rate. in the legal area, further harmonization of e-commerce regulations with the relevant eu directives and rules, synchronization among national regulations and more efficient implementation of legal framework is needed. the support of the government in creation of positive environment is also a must. serbian e-market does not have well developed e-payment systems, and this should be improved in the future period. full access to all paypal services is just one of possible steps. also, in many countries with underdeveloped payment system (e.g. some african countries) the focus is on the development and implementation of alternative payment methods, like mobile payment systems, and these projects give very good results. factors influencing e-commerce development in serbia 299 finally, further raise of awareness and education of the customers and companies through campaigns, educational programs and public workshops is necessary. this will spread the importance and benefits of e-commerce, and raise the trust, as one of the main barriers to e-commerce diffusion. acknowledgement: the research presented in this paper was supported by the ministry of education, science and technological development of the republic of serbia, grant iii-44010, title: intelligent systems for software product development and business support based on models. references almousa m. 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(2012). barriers to e-commerce adoption in egyptian smes. international journal of information engineering and electronic business, vol. 3, pp. 9-18. faktori koji utiču na razvoj elektronske trgovine u srbiji u ovom radu je prikazan pregled trenutnog stanja razvoja elektronske trgovine u srbiji. takođe, analizirani su neki značajniji faktori koji utiču na rasprostranjenost e-trgovine. faktori su podeljeni u četiri grupe: tehničke faktore, koji pokrivaju telekomunikacionu i logističku infrastrukturu e-trgovine; pravne faktore odnosno neophodne zakone i propise koji se odnose na e-trgovinu; ekonomske faktore i psihološke faktore i nacionalnu kulturu. studija pokazuje veoma jaku korelaciju između penetracije širokopojasnog interneta i upotrebe interneta sa jedne strane i penetracije kupovine na internetu sa druge strane. takođe, jaka korelacija je utvrđena između nacionalnog ekonomskog bogatstva i penetracije kupovine na internetu. u radu su razmatrani i razvijenost logističkog sistema u srbiji, nacionalni zakoni i propisi u oblasti e-trgovine, elektronski sistemi plaćanja kao i kulturne karakteristike i navike potrošača u srbiji. rezultati pokazuju da uprkos značajnom napretku poslednjih godina, nivo razvijenosti e-trgovine u srbiji je još uvek značajno ispod proseka evropske unije. konačno, date su neke preporuke za brže proširenje e-trgovine u srbiji. ključne reči: elektronska trgovina, razvoj e-trgovine, b2c, uticajni faktori, e-sistemi plaćanja http://www.euroexpress.org/uploads/elibrary/eea_ra2011_lr.pdf facta universitatis series: economics and organization vol. 16, n o 3, 2019, pp. 299 314 https://doi.org/10.22190/fueo1903299z © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper why pay more – world evidence on m&a bid premium determinants 1 udc 334.75 658.14 milutin ţivanović 1 , nataša dţudović 2 1 university of belgrade faculty of economics, belgrade, serbia 2 efront, belgrade, serbia abstract. corporate mergers and acquisitions represent one of the most dynamic fields in the world of business finance. these remarkably complex transactions’ success may vary depending on the economic and institutional environments in which the transactions are performed. this paper investigates the information content of the bid premium determined in the m&a transactions and focuses on the identification of significant differences in its amount depending on: (1) the observed timeframe (width of the event window observed relative to the moment of the transaction announcement); (2) current equity market trends (3) institutional environments and the degree of the economic development of the countries in which the transaction participants operate; and (4) selected payment method and motive for entering the transaction in regard to space and time dimensions of bid premium. examining the sample of 783 merger and acquisition transactions at the global economy level, the research explores the importance and range of time and space determinants of bid premiums in m&a transactions. our results confirm that bid premium carries significant information and that is highly dependent on the observed timeframe, i.e. we find evidence of information “leakage” prior to transaction announcement and sluggish adaptation to expected value creation due to market characteristics, level of economic development of countries in which m&as are operated and specific transaction characteristics such as payment method and motive for participating in such transaction. the paper shows that the results can often differ depending on whether the analysis includes dominant trends in the most important capital markets. key words: mergers, acquisitions, bid premium, market for corporate control, institutional environment, payment method jel classification: g14, g34 received april 24, 2019 / revised july 01, 2019 / accepted july 08, 2019 corresponding author: milutin živanović university of belgrade, faculty of economics, kamenička 6, 11000 belgrade, serbia e-mail: milutinzivanovic@ekof.bg.ac.rs 300 m. živanović, n. džudović 1. introduction rarely does an issue in the area of corporate finance attracts so much continuous attention and interest as does the matter of mergers and acquisitions (“m&as”). in both academic and business circles debates are constantly held on the underlying motives for such transactions and whether they are justified, whether the amounts paid are adequate, who wins and who loses and what information regarding a particular m&a may be revealed from the response of the market prices to the m&a announcement. a particularly interesting series of questions arise upon analysis of the phenomenon of information “leakage” into the market prior to the official m&a announcement as well as whether the market perceives the price offered for the target’s shares as realistic. however, the question of all questions is why the market is so skeptical and strict in anticipation of the successfulness of those transactions. what is substantially typical of the largest number of m&as is payment of an acquisition premium (the so-called bid premium), which is the difference between the price offered by the bidder and the currently trading price of the target’s shares. the empirical research suggest that the average bid premium ranges between 20% and 40% (goergen & renneboog, 2004). the premiums offered by bidder to take over control over the target significantly raise the market expectations and make the market more rigid in comparison to some other transaction types. in fact, when a bidder offers a price above the target’s share price, the bidder must justify the premium paid through the post-transaction integration, through exceeding the market expectations and doing something that the target was unable to do on its own. this exclusively relates to the synergy effects. so, the market is strict and skeptical about m&a transaction success, primarily because the investors are skeptical whether the bidder will be able to firstly conserve the value created within the target prior to the transaction, and on top of that, succeed in creating the expected synergy effects (sirower & sahni, 2006). now that we have considered the main reasons for the market’s caution about m&a transactions, let us state here that different theories address different determinants of m&a transaction successfulness. for instance, upon identification of determinants for the bid premiums in international m&as, the classical m&a theory focuses on the factors such as risk diversification, increased operational effectiveness and change in the market power. on the other hand, the neoclassical theory emphasizes changes in the shareholder rights and changes in the features of the corporate governance resulting from the bidder and the target operating in different institutional environments (bhagat, malhotra & zhu, 2011). xie et al. (2017) find that “institutional and regulatory framework, tax provisions, economic performance, financial markets development, investor protection, geographical setting and cultural factors have differential effects on the inward and outward capital flows”. further, they find that “institutional dichotomous issues like the ruling political party influence, government intervention, higher levels of corruption, and erratic behavior of bureaucracy have detrimental effects on the completion likelihood of publicly announced acquisition transactions”. what makes the field of mergers and acquisitions dynamic and vibrant at all times is the fact that characteristics of these transactions are not universal and static but varying in terms of both space and time. the intention of this paper is to highlight the space and time dimension of m&a transactions. why pay more – world evidence on m&a bid premium determinants 301 2. literature review characteristics of m&a transactions may vary depending on the economic and institutional environments in which the transactions are performed. rossi and volpin (2004) confirm that target companies operating in the united states realize statistically significantly higher abnormal returns against the comparable companies operating in other markets. in fact, it is identified that the average bid premium in the us-based transactions is by 7 percentage points higher than the premiums paid in the non-us transactions. although it has been established that in the us-based m&a transactions statistically significant synergy effects are realized, it turns out that those are not sufficient to account for the differences in bid premiums between the us entities and entities operating in other markets. this means that the explanation for bid premium differences ought to be sought in different legislation and different scope of shareholder rights which are closely related to stronger bargaining power. the main distinction about the us market in comparison to the other countries is higher competition in the market for corporate control reflected in the higher volume of m&a transactions and more diverse and potentially more efficient defense measures against hostile takeovers. m&a activities are considerably higher in volume in the countries with better investor protection, which is regarded as the key prerequisite of an active market for corporate control (rossi & volpin, 2004). the final conclusion hence could be that in the usa there is a higher level of protection of target shareholders than in the practices of other countries, which improves their bargaining power and enables higher bid premiums and the abnormal returns of the targets than those realized by the targets in other markets. it is interesting that the conclusions reached are somewhat modified if the abnormal returns of the bidders are analyzed. alexandridis et al. (2010) show that bidders operating in the markets of continental europe, australia, japan and other countries with relatively low competition in the market for corporate control realize significantly higher returns than the bidders operating in the usa, canada, and the uk. this is in line with the thesis that high competition in the market for corporate control, although having a positive impact on the returns of the targets, may have negative ultimate implications on the returns of the bidders. in fact, the high competition levels in the market for corporate control causes bidders to increase gradually the bid premiums offered for target takeover, resulting in payment of excessive premiums, which are often not justified by commensurately higher synergy effects. in order to measure the competition level in the market for corporate control alexandridis et al. (2010) focus on listed target companies involved in the completed m&a transactions in the specific year relative to the total number of listed companies operating in the market under analysis. the highest competition levels in the market for corporate control are recorded in the us, the uk and canada since these are countries with the largest numbers of listed companies that are subject to control takeover in the specific year. the average bid premium values identified in those markets equal 45.79%, 42.02% and 37.01%, respectively, whereas in the rest of the world the average bid premium recorded in the same period is merely 31.91%. moreover, the abnormal returns of the bidders operating in europe (excluding the uk), japan, the rest of asia, australia and oceania, south africa and latin america are non-negative and statistically significantly higher than those of the bidders from the countries with the largest volume of m&a transactions. ylmaz and tanyeri (2016) find that, viewed on the global level, m&a transactions create value with the cumulative average abnormal return of 1.7%. when it comes to the 302 m. živanović, n. džudović differences in respect of three-day cumulative abnormal returns identified between the companies in developed countries and companies operating in developing countries, results are somewhat different from alexandridis et al. (2010). in terms of the results relating to the returns realized by the target shareholders, there are no deviations from the above discussed results. the results show that car of the targets operating in developed countries equals 8.1%, while that of the targets in developing countries is as low as 2.8%. while the difference between cars realized by the targets was anticipated, the research shows that returns realized by the bidder shareholders are also higher for companies operating in developed countries, although the difference is of a much less scale than the difference identified for the targets . one of the explanations for the divergent results of the aforesaid two studies in terms of abnormal returns realized by the bidders is the use of different event windows for measurement of cumulative abnormal returns. since the developing countries are characterized by a slower pace of the market adaptation to new information (lower market efficiency), the use of shorter event windows for car measurement might cause underestimation of the returns realized by the bidder shareholders upon transaction announcement. relaying on this finding we are introducing time frame as one of the key features of our bid premium analysis. with regard to the generation and distribution of the total gains realized in m&a transactions, results of the sample studies encompassing international m&as ought to be considered, especially those where companies operating in the countries with developed market economies were observed as bidders and companies operating in developing countries as targets. the results of related studies show that shareholders commonly realize positive combined returns in such transactions, whereby the gains are unevenly distributed in favor of the bidders (bellotti & williams, 2008). the increasing volume of international m&as involving companies from developing countries as bidders made some researchers deal with the characteristics of such transactions in more detail. the highest growth in value of such transactions of as much as 392% was identified in the period from 2004 through 2008. in 2006 consulting firm bsg published a study demonstrating that 100 most successful companies from developing countries are constantly strengthening their global influence by increasing their presence in various industries, with such influence strengthening realized not exclusively through export as one of the possible channels, but rather through the ever growing volume of international m&a transactions in which these companies appear as bidders (bhagat & malhotra, 2011). in general, the main drivers of the bidders from developing countries in targeting companies from the countries with developed market economies are classified into two major groups: (1) acquisition of strategically valuable resources such as technology, brand, managerial talent, distribution channels and natural resources and (2) avoidance of institutional restrictions existing in their countries of origin. these transactions create value on the average, where the cultural differences between the bidders and the targets pose the most significant barrier to value creation. in fact, in instances of international m&as, the capacity to learn and the level of adaptability to a new cultural environment are crucial determinants of success. realization of abnormal returns is in line with the so-called bootstrapping hypothesis assuming that bidders realize positive abnormal returns upon transaction announcement where the quality of the target’s corporate governance system is on a higher level. it is assumed that, in such an instance, the bidder enters into the transaction, among other reasons, in order to adopt and implement the higher corporate governance why pay more – world evidence on m&a bid premium determinants 303 quality standards the target has in place (bhagat et al., 2011; de buele and sels, 2016, li et al., 2016). brock (2005) also finds that “the cultural match or mismatch between the parties in international m&as shape their ability to successfully integrate and share resources, which in turn affects the ability to realize synergies”. apart from institutional environment and economic development of m&a transaction participants, payment method and motives for entering the deal are important bid premium determinants. numerous empirical studies investigating the impact of the selected payment method on the bid premium amounts and successfulness of m&a transactions have not produced uniform conclusions. great many studies conducted in the usa almost unanimously found that transactions entirely financed with shares result in negative returns and low performance to the bidders. on the other hand, studies conducted in europe demonstrate that share-based financing of transactions may result in positive and sometimes statistically significant returns to the bidders. similarly, certain authors claim that higher bid premiums positively correlate to the predominant cash payments (de la bruslerie, 2013). chatterjee and kuenzi (2001) find that announcements of m&a transactions involving bidders with surplus cash funds ought to bring about negative returns to the bidder shareholders. the payment method is frequently associated with the level of the shareholder legal protection. the probability of control takeover being financed entirely with cash declines as the level of the shareholder protection in the target’s country of origin rises, which is explained by the fact that the high levels of shareholder protection increase the availability of financing with equity instruments. on the other hand, in the countries with low levels of shareholder protection, shareholders will be more willing to accept offers for payment in cash than share-based payment offers (rossi & volpin, 2004). based on empirical and theoretical findings most commonly expressed motive for entering an m&a transaction is creation of value, which may be realized through synergy effects arising from either the strategic fit (operating synergy) or through utilization of the financial benefits from the combination (financial synergy). although both types of synergy effects are perceived as desirable, it is expected that an existing strategic fit between the bidder and the target increases readiness to pay higher bid premiums. in this regard, a number of empirical studies point out that takeovers realized within the same industries enable realization of higher returns than takeovers aimed at business portfolio diversification. gupta and misra (2007) and golubov et al. (2016) actually confirm the economic theory views that expansion into the related industries enables more successful and faster activation of synergy effects in comparison to that of diversification. in line with the previous research results that are presented in literature review section and our research objective the following hypotheses will be tested: h1: there are statistically significant differences between bid premiums calculated 1 day and 30 days prior to/after the official m&a announcement. h2: there are statistically significant differences in the bid premium amounts calculated prior to/after the official m&a announcement depending on the institutional environment and economic development of the countries the participants in international m&as come from. h3: there are statistically significant differences in the bid premium amounts calculated prior to/after the official m&a announcement depending on selected payment method. h4: there are statistically significant differences in the bid premium amounts calculated prior to/after the official m&a announcement depending on bidders act as strategic or financial buyers. 304 m. živanović, n. džudović 3. data and sample in our research we create the sample by using the data from the mergermarket database that includes mergers and acquisitions at the global economy level, with individual values of above usd 5 million. the analysis focuses on m&a transactions announced in years 2015 and 2016, two periods relevant for examination of m&a transactions characteristics and their behavior in regard to the condition and trends identified in the equity markets throughout the world. in fact, we identify three periods and regard them as three subsamples. the first, from january 1, 2015 to june 12, 2015 is a period prior to the general decline of the investor confidence (pre-confidence decline period). the second period, from june 12, 2015 to february 12, 2016, is a period when in almost all stock markets around the world the investor confidence decreased and the stock exchange indices recorded the most severe drops since the beginning of the global financial crisis in 2008 (confidence decline period). such a trend was not identified in the usa only, where the most significant stock exchange indices recorded either no decline at all or decline much less severe than what happened in other markets. the third period, from february 12, 2016 to december 31, 2016, is a period of recovery and the investor confidence growth, i.e., a period of positive trends identified in all significant stock markets in the world (confidence recovery period). as previously highlighted, in the second half of 2015 a drastic fall in share prices occurred in almost all large equity markets in the world as a result of a number of adverse events that took place in the global economy that year which had extremely negative effects on the global economic trends. one of the key circumstances that stopped the period of the steady increase in share prices in the global stock markets was the crash of the chinese stock market that began in june 2015. from june 12 to august 24, 2015 the shanghai composite index fell by 38% despite the efforts of the chinese government to prevent the negative tendencies in the economy. in addition, due to its default on liabilities toward imf, on june 30, 2015 greece declared bankruptcy. among factors that led to the undoubtedly largest drop of the share prices after 2008, there were a plummet of oil prices, chinese currency devaluation, decrease in investments in developing countries and investor expectations regarding the discontinuation of the expansionary monetary policy of the us federal reserve that would be expected to lead to a rise in general interest rate levels. unlike 2015, which featured dropping share prices in the markets throughout the world, 2016 was a year of recovery and stabilization of the financial markets. as from february 2016, all the stock exchange indices recorded continuous rise apart from the short-term crash immediately before and after the uk referendum (brexit). increase in oil prices, recovery of the demand in the commodity and services markets, positive political trends in some countries and consistent policies of cheap money implemented by almost all central banks are some of the key factors that led to the recovery of the financial markets throughout the world and created positive investor expectations regarding the future performances of the major world economies. the sample includes transactions announced during 2015 and 2016 and completed by the end of q1 2017. given that the focus of our analysis is on target share prices upon the m&a transaction announcement, the sample includes only transactions with targets in the form of public companies whose shares are publicly traded and whose prices are disclosed at the stock exchange. all transactions financed with debt instruments or hybrid equity instruments are excluded from the sample as well as all the transactions for which there is no full set of data required for the analysis. out of the total number of the announced transactions, 834 transactions meet all the pre-defined criteria. why pay more – world evidence on m&a bid premium determinants 305 due to the specificities of operations of the financial institutions in comparison to the real sector companies, we exclude from the sample all transactions involving financial sector entities as targets. in addition, in order to reduce the influence of extreme bid premium values on the statistical testing results, the sample is winsorized by 1% at both the left and right distribution tail, separately for the bid premiums calculated prior and after the official merger announcement. thus the final sample of 783 m&a transactions is obtained. viewed per the three previously defined periods relevant for our research: in the first period 218 transactions meeting all of the required criteria were identified, 312 transactions were identified in the second period and 253 m&a transactions were identified in the third period. beside numerous approaches that may be used in examining the characteristics and successfulness of m&a transactions, the methodological event study approach stands out in literature as particularly suitable (bruner, 2002). adnan and hossain (2016) accentuate some benefits of event studies such as: “(1) short-term event study can screen the influence of outside factors to large extent; (2) data are easy to get publicly, allowing study on large sample; and (3) it is relatively objective public assessment”. upon definition of the methodology framework for the research our starting point relies on the powerful influence of the assumption of the semi-strong equity market efficiency on economic theory, whereby the existing share prices always incorporate and reflect all publicly available and relevant information. this hypothesis provides a theoretical foundation for the dominant implementation of the cumulative abnormal return methodology. given that the contemporary empirical studies more and more often question whether the dominant use of car methodology is justified and that, according to some authors (lim, brooks & kim, 2008), the equity market efficiency form is not unalterable in time but may be changed from a pre-confidence decline, to a crisis and confidence recovery periods, in our research, although we remained within the event study field, we applied a slightly different approach. in this paper we examine the informative content of the bid premium and identify differences in the value of the bid premium depending on: (1) the observed timeframe; (3) characteristics of the market for corporate control in which the target operates and the degree of the economic development of the countries in which the transaction participants operate; and (4) selected payment method and motive for entering the transaction in regard to space and time dimensions of bid premiums. 4. research results 4.1. bid premium behavior before and after the official m&a announcement when the sample is taken on the whole, the expected results are obtained showing that at the significance level of 5% the average bid premium calculated 30 days prior to the official m&a announcement is statistically significantly higher than the average bid premium calculated 1 day prior to the official transaction announcement. such a result is in line with keown and pinkerton (1981) who find that “stock prices react to future mergers about one month before announcements”. there are some authors such as halpern (1973) and mandelker (1974) who find “the price run-up may start several months before m&a announcements” but in our paper we are not considering price run-ups that may occur more than one month before official m&a announcement. while some researchers believe the run-up is caused by market anticipation or toehold acquisition, tang et al. (2016) find “neither of the two is able to explain the target stock price run-up prior to m&a announcements. instead, variables that are associated with unreported insider trading are significantly associated with the run-up”. 306 m. živanović, n. džudović anyway, the use of bid premium calculated 1 day prior to the official transaction announcement for the purposes of analyzing the expected synergy effects and abnormal returns upon transaction announcement could lead to their inadequate evaluation. if, on the other hand, testing is performed on each individual sub-sample defined, the results obtained are not uniform. in the confidence decline and confidence recovery period, the results arrived at, match the results obtained for the entire sample. however, in the period preceding the plummet of the share prices in almost all global stock markets (confidence pre-decline period), the results show that there is no statistically significant difference between the bid premiums calculated 30 days and 1 day prior the official merger announcement. for the sake of consistency, we elected to use the bid premium calculated 30 days prior to the official merger announcement in each of the three observed periods for the purposes of examining the bid premium informative content. the bid premium calculated subsequent to the official m&a announcement is used as a measure of the market response to the information reaching the market with regard to the transaction announcement. if the bidder appropriately measured the expected benefits from the transaction and defined the appropriate bid premium amount accordingly, and if, additionally, there is no uncertainty in respect of the transaction completion at the price defined in the offer, the market ought to equal the target share price to the share price defined in the offer. statistically, this would mean that the bid premium calculated after the official m&a announcement should not be statistically significantly different from zero. we first test whether there is a statistically significant difference between the values of the bid premiums calculated 1 day and 30 days after the official m&a announcement. thereby we want to investigate whether the character of the market response to the transaction announcement changes with the passage of time and whether the market changes its initial “attitude” regarding the justification of the price offered in a particular transaction. testing is first conducted on the entire sample and thereafter on each of the three sub-samples. in both instances identical results are obtained – there is no statistically significant difference between the amounts of 1-day and 30-day post announcement bid premiums. naturally, this still tells little about what attitude the market assumed or whether the attitude changes over a period longer than a month following the official transaction announcement. the results obtained are provided in table 1. table 1 bid premium trends prior and after to transaction announcement paired samples test mean std. deviation t statistic sig. (2-tailed) for the entire sample bid premia share price -1, -30 -0.05684 0.31190 -5.100 0.000 bid premia share price +1, +30 -0.01134 0.35101 -0.904 0.366 pre-confidence decline period bid premia share price -1, -30 -0.05280 0.47005 -1.658 0.099 bid premia share price +1, +30 -0.00646 0.12170 -0.784 0.434 crisis period bid premia share price -1, -30 -0.03750 0.24832 -2.667 0.008 bid premia share price +1, +30 -0.00595 0.13537 -0.776 0.438 confidence recovery period bid premia share price -1, -30 -0.08418 0.18519 -7.230 0.000 bid premia share price +1, +30 -0.02220 0.58890 -0.600 0.549 source: authors’ calculation why pay more – world evidence on m&a bid premium determinants 307 in order to examine the character of the market response to the transaction announcement we test whether the average bid premiums calculated at +1 and +30 points in time statistically significantly differ from zero, which would mean the market’s perception of the prices defined in the offer is unjustifiably high, i.e., that the bid premium value is above its realistic value (results are presented in table 2). when viewed per sub-sample, the testing results on the first two periods are identical, the average bid premiums at +1 and +30 points in time are statistically significantly higher than zero. on one end, these results may be interpreted in the context of the market’s inability to incorporate the new information in the target share prices in the relatively short period of 30 days only. on the other, the explanation may be found in the fact that, despite the adequate and timely market response, the target share prices do not reach the level of the prices offered because the bidder offered an unjustifiably high premium in a particular transaction or there is uncertainty in respect of the transaction completion at the price defined in the offer. we decided to use the bid premium calculated 30 days after the transaction for measurement of the market response to the merger announcement. the main reason for this choice was the fact that we used the bid premium calculated 30 days before the official transaction announcement to measure the expected synergy effects on the bid premium amount. table 2 bid premium and the market response to the transaction announcement one sample statistics (t=0) mean std. deviation t statistic sig. (2-tailed) for the entire sample bid premia share price +1 0.0461 0.18289 7.051 0.000 bid premia share price +30 0.0574 0.38695 4.153 0.000 pre-confidence decline period bid premia share price +1 0.0344 0.18680 2.722 0.007 bid premia share price +30 0.0409 0.24718 2.443 0.015 crisis period bid premia share price +1 0.0608 0.17368 6.179 0.000 bid premia share price +30 0.0667 0.19295 6.106 0.000 confidence recovery period bid premia share price +1 0.0380 0.18992 3.186 0.002 bid premia share price +30 0.0602 0.60476 1.584 0.114 source: authors’ calculation 4.2. bid premium – institutional environment and the degree of the economic development of the countries in which the transaction participants operate due to complexity of the international m&as, we decide to focus on this particular type of transactions and investigate if there are any differences in the bid premium amounts depending on the economic development of the countries of origins of the transaction participants. to this end, based on the united nations’ classification we made four subsamples: sub-sample one, comprised of transactions involving both bidders and targets from developed countries; sub-sample two, comprised of transactions involving both bidders and targets from developing countries; sub-sample three with bidders from developed countries and targets from developing countries; and sub-sample four with bidders from developing countries and targets from developed countries. the testing results demonstrate there are statistically significant differences in the bid premium amounts calculated prior to the official merger announcement depending on the 308 m. živanović, n. džudović level of economic development of the countries the participants in international m&as come from. it is interesting that the highest average bid premium of as much as 37% was identified within the subsample of transactions involving bidders from developing countries and targets from developed economies. such a high average bid premium amount is in line with the previously stated theoretical assumptions and empirical evidence from (li et al., 2016; de buele and sels, 2016; bhagat et al., 2011). almost identical average bid premium of 36.7% was identified, as expected, in the transactions where both bidders and targets come from developed countries. somewhat lower average bid premium (33%) was recorded in the transactions involving bidders from developed and targets from developing countries, which may be due to lower synergy effects expected in such transactions and weaker bargaining power of the target shareholders. definitely the lowest average bid premiums of only 18% were recorded in transactions involving both the bidder and the targets from developing countries. the average bid premiums presented above range between 18% and 37% which is almost in line with goergen and renneboog (2004) 20% 40% bid premium range. next we test if the average bid premiums recorded after the official m&a announcement are statistically significantly different from zero. we are interested in the differences, if any, in the market responses to the transaction announcement depending on the economic development of the country. the testing results show that, in all instances save the one where both bidders and targets operate in the developing countries, the bid premiums calculated upon the transaction announcement are statistically significantly above zero. the highest average bid premium (9%) was identified in the transactions involving bidders from developing and targets from developed economies. as it was previously found that the highest takeover premiums are offered in transactions of this type, the question is whether bidders from developing countries overestimate benefits from penetration in the developed markets and/or have insufficiently strong bargaining power in such circumstances, which all together results in unjustifiably high bid premiums offered and consequent overpayment of transactions. on the other hand, insufficiently positive market response to the announcement of this type of transactions may be a consequence of the market’s skepticism about success of the post-merger integration due to cultural differences and insufficient absorptive capacities of the bidders. in transactions involving both bidders and targets from developed countries, the identified overpayment may be due to the high competition levels in the market for corporate control alexandridis et al. (2010), while the transactions involving bidders from developed and targets from developing countries the high bid premiums at +30 may be caused by both overpayment and the fact that the developing countries are characterized by a slower pace of adaptation to new information coming to the market (lower market efficiency). on the other end, the average bid premium +30 in transactions involving both the bidders and the targets from developing countries is identified as not statistically significantly different from zero, which leads to a conclusion on adequately measured prices offered for takeover of the target shares. it is particularly interesting that in this group of transactions we find a negative average bid premium at +30 point in time (1.4%), which mean that these transactions are not only not overpaid but that the premiums offered are too low which is in line with ang and ismail (2015). why pay more – world evidence on m&a bid premium determinants 309 table 3 bid premium in regard to economic development of the paticipants’ countries anova f statistic sig. (2-tailed) for the entire sample bid premia share price -30 9.347 0.000 bid premia share price +30 1.545 0.201 one sample statistics (t=0) mean std. deviation t statistic sig. (2-tailed) for the entire sample bid premia share price +30 (segment 1) 0.0606 0.41491 3.470 0.001 bid premia share price +30 (segment 2) bid premia share price +30 (segment 3) bid premia share price +30 (segment 4) 0.0114 0.0499 0.1434 0.02329 0.08002 0.42288 0.489 3.414 2.492 0.625 0.002 0.016 source: authors’ calculation 4.3. bid premium payment methods and motives for m&a transactions we first test whether there are statistically significant differences in the bid premium amounts calculated prior to the official transaction announcement depending on whether the transaction is financed with cash, shares or a combination thereof. the results show that there are statistically significant differences in the bid premium amounts per payment method, where the highest average bid premium is identified in cash-financed transactions, and the lowest in entirely share-financed ones. this result correlates to goergen and renneboog (2004) who claim that higher bid premiums positively correlate to the predominant cash payments. however, the testing results per sub-sample suggest that statistically significant differences in the bid premium amounts per selected payment method arise exclusively in the crisis period, while no such differences are identified in the pre-confidence decline and confidence recovery periods. the stronghold for this result we find in the different level of m&a participants’ legal protection relative to general market trends. shah and arora (2014) finds that the level of investor protection is lessened in the period of crisis. on the other hand, analysing the market response to the transaction announcement, the results obtained at the entire sample level show that the average bid premium calculated 30 days after the transaction announcement is statistically significantly above zero for each of the three payment methods. however, at the level of individual period, the results were heterogeneous. in fact, the results demonstrate that the prices offered by bidders in cash-financed transactions are perceived as adequate on the average in both the preconfidence decline period and confidence recovery period, while in the crisis period such prices are perceived as overestimated. however, the results suggest that, in instances of share-financed transactions and those financed with cash and shares combined to some extent, the market perceives the prices offered as unrealistically high, irrespective of the current situation in the equity market which is in line with gupta and misra (2007). here we need to underline another important finding, that in the crisis period, target share prices remain below the price offered after the transaction announcement irrespective of the selected payment method. among other things, this may be a consequence of the market’s higher skepticism during the crisis period as to whether the transactions announced will be completed. 310 m. živanović, n. džudović table 4 bid premium in regard to selected payment method descriptives / anova mean-cash meanequity meanmixed f statistic sig. (2-tailed) for the entire sample bid premia share price -30 0.3570 0.2655 0.2911 3.968 0.019 bid premia share price +30 0.0408 0.1008 0.0963 1.801 0.166 pre-confidence decline period bid premia share price -30 0.3079 0.2335 0.2877 0.652 0.522 bid premia share price +30 0.0187 0.0842 0.787 1.619 0.200 crisis period bid premia share price -30 0.3675 0.2648 0.2465 2.973 0.053 bid premia share price +30 0.0449 0.1414 0.1148 6.066 0.003 confidence recovery period bid premia share price -30 0.3812 0.2966 0.3640 0.824 0.440 bid premia share price +30 0.0525 0.0741 0.0951 0.067 0.935 one sample statistics (t=0) t statistic sig. (2-tailed) for the entire sample bid premia share price +30 (cash) 2.210 0.028 bid premia share price +30 (equity) 4.460 0.000 bid premia share price +30 (mixed) 6.359 0.000 pre-confidence decline period bid premia share price +30 (cash) 0.840 0.402 bid premia share price +30 (equity) 2.012 0.051 bid premia share price +30 (mixed) 3.646 0.001 crisis period bid premia share price +30 (cash) 3.612 0.000 bid premia share price +30 (equity) 4.132 0.000 bid premia share price +30 (mixed) 4.754 0.000 confidence recovery period bid premia share price +30 (cash) 1.042 0.299 bid premia share price +30 (equity) 1.779 0.083 bid premia share price +30 (mixed) 2.576 0.017 source: authors’ calculation in the next instance, we focus on the motive for entering the m&a transactions as one of the key determinants of bid premium value. we test the hypothesis that bid premiums calculated prior to the official m&a announcement involving strategic buyers as bidders are statistically significantly higher than such transactions with financial buyers as bidders. the hypothesis is confirmed at the level of the entire sample (all three periods jointly). such a result unambiguously suggests that acquisition strategy (expansion or diversification) has an impact on the bid premium amount as well as on the willingness to offer higher premiums. these higher premiums should be justified by the “core business” strengthening, strategic fit activation and gaining or increasing of the competitive advantage in the process of post-merger integration. when hypothesis is tested on the sub-samples of pre-confidence decline and confidence recovery periods, the results obtained are identical to those for the entire sample. however, when we observe transactions performed in the crisis period, we come to a conclusion that there why pay more – world evidence on m&a bid premium determinants 311 is no statistically significant difference between the bid premiums calculated prior to the m&a announcement in instances of strategic buyers as bidders and those of financial buyers as bidders. this indicates that in periods featuring negative trends in the stock markets the values of operating and financial synergies become convergent. a relevant study of j.p. morgan that was focused on the research of m&a characteristics in the crisis periods found that, even in such circumstances, due to a more difficult access to the stock market and due to higher capital costs, companies much more turn to achievement of financial synergies (j.p.morgan, 2009). when it comes to the market response to the transaction announcement depending on the primary acquisition motive, viewed at the entire sample level, the market makes no distinction between strategic and financial buyers and perceives both types of bidders as offering unjustifiably high bid premiums. however, somewhat different conclusions imposed on us upon separate testing of the sub-samples. in similarity to the analysis of the impact of the payment method, here as well the market sees prices offered by bidders as unrealistically high in the crisis period, irrespective of the motive for entering the transaction. this may be attributable to the higher market skepticism as to whether the announced transactions will be realized. moreover, upon respective analyses of the preconfidence decline period and the recovery period, we observe that the +30 bid premium was statistically significantly above zero only when strategic buyers appeared as bidders. on the other hand, in transactions involving financial buyers as bidders, the bid premium values did not differ statistically significantly from zero. therefore, we may ultimately table 5 bid premium in regard to payment method and the motive for entering the transaction independent samples test meanstrategic meanfinancial t statistic sig. (2-tailed) for the entire sample bid premia share price -30 0.3532 0.2632 3.255 0.001 bid premia share price +30 0.0663 0.0246 2.026 0.043 pre-confidence decline period bid premia share price -30 0.3103 0.2026 2.356 0.021 bid premia share price +30 0.0510 -0.0054 1.292 0.198 crisis period bid premia share price -30 0.3517 0.2857 1.303 0.194 bid premia share price +30 0.0692 0.0565 0.465 0.643 confidence recovery period bid premia share price -30 0.3961 0.2780 2.167 0.031 bid premia share price +30 0.0769 0.0120 0.745 0.457 one sample statistics (t=0) t statistic sig. (2-tailed) for the entire sample bid premia share price +30 (strategic) 3.836 0.000 bid premia share price +30 (financial) 2.192 0.030 pre-confidence decline period bid premia share price +30 (strategic) 2.545 0.012 bid premia share price +30 (financial) -0.339 0.737 crisis period bid premia share price +30 (strategic) 5.755 0.000 bid premia share price +30 (financial) 2.171 0.034 confidence recovery period bid premia share price +30 (strategic) 1.507 0.134 bid premia share price +30 (financial) 1.234 0.221 source: authors’ calculation 312 m. živanović, n. džudović conclude that the strategically oriented bidders overestimate the expected synergy effects on the average and offer unrealistically high premiums irrespective of the current stock market trends, while bidders focused on financial synergies on the average, save in the crisis periods, adequately value the premiums they offer for takeover of control. 5. conclusion the research demonstrates that in the crisis and confidence recovery periods there are phenomena of the information “leakage” and insider trading in the market, which cause underestimations of the bid premium amounts calculated immediately before the official transaction announcement. however, analysis of the transactions announced in the preconfidence decline period show that there is no statistically significant difference between the bid premium calculated 30 days and those calculated 1 day before the official transaction announcement. upon analysis of the market response to the official transaction announcement, the conclusion arrived at suggests that, irrespective of the current stock market trends, the target shares do not reach the price defined by the takeover bid. on one end, these results may be interpreted in the context of the market’s inability to incorporate the new information in the target share prices in the relatively short period of 30 days only. on the other, the explanation may be found in the fact that, despite the adequate and timely market response, the target share prices do not reach the level of the prices offered because the bidder offered an unjustifiably high premium in a particular transaction. deepening our analysis, rather interestingly, we identify that the highest average bid premium was recorded in transactions involving bidders from developing countries and targets from developed economies. on the other hand, by examining the bid premium calculated at the +30 point in time, we identify a positive correlation with the competition level in the market for corporate control, as well as a strong influence of bidder and target country economic development on the determination of the bid premium amount. additionally, we focus on and selected payment method as well as strategic vs. financial takeovers and find evidence of different behaviors in respect to the market conditions (different points in time) and institutional environments (space dimension) where m&a transactions are being conducted. findings from our study mostly correlate to the empirical research body in the area of mergers and acquisitions. as an extension of this analysis, on one hand, a wider time frame ought to be introduced to verify the implications of the time frame proposition. on the other hand, a broader approach on transaction participants, especially on the bidders’ side would deepen the scope and quality of the research. the broader perspective would be expected to provide more evidence on the bid premium determinants and the willingness of the bidders to pay in an m&a transaction. why pay more – world evidence on m&a bid premium determinants 313 references alexandridis, g., petmezas, d., & travlos, n.g. 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(2016). global merger and acquisition (m&a) activity: 1992 – 2011. finance research letters, 17 (2016), 110 – 117. https://www.jpmorgan.com/jpmpdf/1320675767611.pdf 314 m. živanović, n. džudović zašto platiti više – determinante vrednosti premija za preuzimanje u merdţerima i akvizicijama na svetskom nivou merdžeri i akvizicije predstavljaju jednu od najdinamičnijih oblasti u svetu korporativnih finansija.uspeh ovih izuzetno kompleksnih transakcija može varirati u zavisnosti od ekonomskog i institucionalnog okruženja u kojima se transakcije realizuju u ovom radu se analizira informacioni sadržaj premija za preuzimanje kao i razlike koje se javljaju u njihovim vrednostima u zavisnosti od: (1) posmatranog vremenskog okvira pre i nakon m&a transakcije (2) trenutnih kretanja na tržištima kapitala (3) karakteristika institucionalnog okruženja i nivoa ekonomske razvijenosti zemalja iz kojih učesnici u transakcijama potiču i (4) izabranog metoda plaćanja i motiva za ulazak u transakciju. na uzorku od 783 merdžera i akvizicija realizovanih na globalnom nivou potvrđeno je da se visina premije za preuzimanje razlikuje u zavisnoti od posmatranog vremenskog okvira uz prisustvo fenomena “curenja” informacija kao i uz prisutno neprilagođavanja cena u ponudi cenama akcija targeta u vremenskom okviru +30. vrednost premije za preuzimanje pod jakim je uticajem karakteristika instiucionalnog okruženja i nivoa ekonomskog razvoja zemalja iz kojih potiču preduzeća bidderi i targeti kao i pod uticajem metoda plaćanja i motiva za ulazak u m&a transakcije. u radu je pokazano da se rezultati često razlikuju u zavisnosti od toga da li su u analizu uključeni dominantni trendovi na najznačajnijim tržištima kapitala. ključne reči: merdžeri, akvizicije, premija za preuzimanje, tržište za korporativnu kontrolu, institucionalno okruženje, metode plaćanja plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, n o 1, 2015, pp. 83 95 the influence of the competition policy on state aid and public sector within the european union single market  udc 338.246.027+ 351.076]:339.137.2 žarko rađenović faculty of economics * , university of niš, serbia abstract. a competitive and well-functioning market is imperative for the efficiency of the economy. first, competitive markets help correct distorsions in the structure of production and thus raise productivity levels, and secondly, stronger competition provides an increased incentive for producers in the form of lower prices, higher quality and increased variety. competition policy deals with the restriction of all non-economic behavior entities that cause market distorsions. the paper provides general features of the european union competition policy, as well as its historical development, basic elements and methodological framework. further, this paper provides reforms, tendencies in development and examples from the jurisprudence of the eu competition policy, with a special review of article 81 (prohibition of the restrictive agreements, cartels) and article 82 (prohibition of abuse market dominance) of the ec treaty. key words: competition policy, european union, restrictive agreements. introduction since ancient times and the middle ages, there were many legal forms that prevented disruption of effective competition through market anomaly embodied in the monopolistic actions of certain manufacturers. the earliest document of ancient rome in the area of competition policy is related to the control of prices and unfair competition. competition is one of the first areas of the economy which is regulated launched around the world, primarily in the united states at the end of the nineteenth century and in europe through the principles of english common law on restricting trade. the first modern antitrust law is known as the sherman act of 1890, which is the precursor of modern competition law and about the prohibition of monopolization and cartelization of the market between large firms and criminal justice sanctions characters.  received september 10, 2015 / accepted april 10, 2015 corresponding author: žarko rađenović, faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia * phd student, university of niš, faculty of economics e-mail: zarkoradjenovic2@gmail.com 84 ž. rađenović competition policy is often associated with anti-trust legislation, and, in addition to regulating monopolies, it aims to prevent the occurrence of all forms of behavior of economic entities that could potentially jeopardize the efficiency of an economy and the way of implementation of competition policy. defining the basic principles of competition policy is important for the simple reason that the proper implementation of the same and continuous improvement in terms of the legislation in this area, leading to the prevention of the occurrence of restrictive agreements and abuse of dominant position. this allows for the successful functioning of the free market and almost completely conducts a function that is selective, allocative, distributive and informational. also, a proper enforcement of competition policy to prevent market distortions due to inadequate legislation can lead to damage at the expense of effective competition and the damage at the expense of consumers in terms of higher prices, poorer product range, as well as the deteriorating quality of products and services. besides the impact on customer satisfaction, growth and productivity of the company together with other macroeconomic policies, competition policy operates on the global competitiveness of the country, which means that the antitrust laws complement instruments of law and economic theory. this indicates the importance of standardization of the basic postulates of competition policy which is being implemented at the level of the european union, which helps establish a stronger, more compact and fairly cohesive single market of the european union. the competition policy in a large area of the european union must therefore be balanced and flexible, which is achieved by a correct view of short-term and/or long-term changes in market structure. the aim of such a defined competition policy is to prevent the abuse of dominant position, the creation of allocative inefficiency and loss of general social welfare on the one hand, and the loss of economies of scale and production efficiency due to restrictive policies (competition), on the other hand. 1. competition and the competition policy the belief in the kind of economic competition as a tool that leads to proper distribution of social welfare is an act that comes from countries in which the economy operates on the principles of free markets. competition is most often defined as a struggle for superiority, as to the commercial world, it means striving for the realization of greater profits, and taking a better position in the market compared to direct rivals. regardless of the various types of definitions of competition, the question always rises of whether it occurs by itself, through market forces, or is determined by an organizational prince, who was imminent for the establishment of an adequate business in a given market area. theoretically speaking, by the language of neoclassical economists, each competitor strives for its desired, it is the natural form, perfect competition, where a lot of businesses participating in the offer, but none has an advantage in terms of dictating the market conditions or the amount of sales price. perfect competition, which is almost non-existent in the real world in its original form, is recognized by adam smith who spoke about the "invisible hand" of the market, theorists explain how to maximize the wealth of the consumer. competition is, because it focuses on the efficient allocation and distribution of social welfare, in terms of providing consumers with the required amount of products and services while minimizing costs. on the other hand, imperfect competition, which is precisely regulated by competition policy through legislative form, embodied in the monopolies and cartels, implies a restriction in the distribution of products and services at higher prices and under worse market conditions. it the influence of the competition policy on state aid and public sector within the eu single market 85 is said that it "secretly" brings suboptimal and inefficient allocation of society's resources and becomes the personification of their abuse. regulation of competition means drawing positive features of competition that are embodied primarily in stimulating economic entities as many entrepreneurial initiatives and innovations that besides creating a wide range of products and services, lead to a reduction in unit costs due to economies of scale. the benefit is mutual if the competition is used properly. perfect competition can be harmful, because there is no initiative to offer training which comes just from the rivalry between economic entities, and it creates monotony which causes dissatisfaction of customers themselves and thus lower profits. to achieve the positive effects of competition, there is a competition policy whose methodological and institutionalized framework paves the way for equitable distribution of social wealth. it is necessary for the simple reason that the market can not only neutralize the behavior of business entities who use competition to realize extra profit. its institutionalization involves the intervention of regulatory authorities of the state or of those economic integrations of which it is a member, for which there are a number of reasons. the competition policy acts preventively, because it prevents anti-competitive behavior of market actors, who in order to constantly make extra profit market category in the foreseeable future. preventing maneuvers of large companies that market their actions to confuse other players, the competition policy eliminates the abuse of dominant position and abuse in size in order to achieve business goals at the expense of others. policymakers competitors have a difficult task which consists in detecting and putting under the legal framework of all possible forms of fraud used by business entities in order to get a larger share of the pie. the whole process involves a kind of neutrality and the policamakers have to resist the political and corruptive pressures. the competition policy formation and its implementation is often associated with several key elements of each market and the single market of the european union. these are:  wealth consumers – the technical part of competition policy applies to promote it as a direct link between performance improvement of products and services and customer satisfaction.  protection consumers – implies the action of competition policy to protect individuals from large business entities and their unpopular market moves that generate extra profits. also, this element of competition policy refers to the protection of consumers from political influence.  redistribution of wealth – the competition policy attempts to inhibit a smaller number of business entities in pursuit of appropriation of most of the wealth and therefore political action that is undemocratic when it comes to monopolies and cartels.  protection of small and medium enterprises means protecting "young" industry as an incentive for the development of a large number of small enterprises in order to maintain competition.  regional, social and industrial aspects – this element relates to the role of competition policy as an instrument for the development of backward regions and an instrument for preventing the occurrence of unemployment due to the closure of those sectors that can not stand politics run by monopolies in this market segment.  market integrations – this element is primarily a european phenomenon where competition policy shows its true scope of activities by eliminating barriers to trade on the territory of the european union. such an action of the competition policy contributes to the development of the single market of the european union (sem). 86 ž. rađenović as shown in the previous text, several elements of competition policy imply its various forms that correspond with the reasons for their application. the most frequent meet several dimensions of competition policy, such as policy cartels, monopolies and mergers. thus, for example, firms may join in the application of restrictive practices by forming cartels. these agreements, which may be implicit and informal, may result in setting the price above the real, market prices (price fixing), or mutual sharing of markets between the cartel participants where each company in its market segment appears as a kind of monopoly. agreements may include direct competitors in the market (horizontal agreements) or companies that operate at different levels of the production/distribution process (vertical agreements). the existence of monopoly (one firm that dominates the market) on the other hand, or oligopoly (a small number of large companies that dominate the market) may also have adverse effects on competition. the most commonly seen misuse of position in the market is through lower rates, thus removing other competitors (the socalled predatory pricing), or the behavior that leads consumers to the fact that no matter how high the prices, they have no other alternative but to pay for the desired product or service. mergers and joint ventures are, however, less harmful to competition because they can achieve cooperation with the authorities in respect of the assessment of the market or industry sector in which it is best to make this concentration as a function of satisfying the demand and maintain the market. these three dimensions of competition policy are its pillars regardless of political or social conditions it is applied in, as the main focus of competition policy is the elimination of agreements that significantly prevent, restrict and hinder the efficient operation of "natural" competition. 2. state aid policyarticles 87 and 88. (formerly articles 92 93 of the rome agreement) state aid policy is one of the most original policies of the competition policy of the european union. it mainly allows monitoring of government policy in supporting their national companies. it represents, in some way, braking system strategy of industrial sectors leading to distortion of competition in the single market of the european union. the observation that the single market of the european union threatened not yet thoroughly tested policy of state power is quite true, considering that only with the help of state authorities, injury to competition in a market that is free of barriers "may be justified". thus, the policy of state aid remaining as the only secret weapon for dominance in a market that has no physical, regulatory, or fiscal barriers. many state policies are perceived as an instrument for the fragmentation of the market, which is justified by the holders labeled "state." this type of policy is very different from any other that has a national context, and is not considered a traditional part of the competitive domestic policy. promoted by the directorate of competition, it, however, differs in their characteristics, from the commission's policy of restrictive practices, monopolies and mergers with regard to its regulatory objectives being related to the government or the state, not the company. department g is responsible for the implementation and control of these policies within the directorate for competition. it is divided into seven units: coordination unit, horizontal aid, regional aid, industrial/sectoral assistance, public utilities and services, a unit of analysis and unit reports. the tenth report on competition policy from 1981 talks about the politics of state aid, which can cause distortions in the market and accordingly perform its evaluation and possible the influence of the competition policy on state aid and public sector within the eu single market 87 ban, in order not to be repeated by the national government. however, regardless of this statement, properly used state aid policy can be good in achieving the objectives of the treaty, such as market integration, the reduction of economic and regional disparities or coordination with other forms of competition policy. therefore, according to article 87 of the treaty on european union, any aid granted by a member state or its state resources which distorts or may distort competition by favoring certain undertakings or their products, contrary to the common market to the extent that impairs the exchange between countries member states except in accordance with the provisions of the treaty., it does not contradict the common market in these cases:  when state aid has a social character and when it is allocated to individual consumers without discrimination based on the origin of products,  when the state aid is granted in the case of recovery of the consequences of a natural disaster or other extraordinary circumstances,  when the aid is granted to certain regions of germany that were damaged in the division of west and east to the extent it is necessary to compensate for the lag due to the division of the state. there are also cases where the policy of state aid is in line with the common market.  when state aid is to promote the economic development of an area (region) where the standard of living is below normal, or where there is serious underemployment. in doing so, the commission considers the situation to be bad enough in a region that has less than 75% of the gross national income per capita relative to the eu. help to create employment may be granted by the commission only if it is linked to the achievement of the initial investment and does not exceed a certain percentage of the price of the employee, which is calculated for two years. also, the support for the employment cannot be given if it is not maintained in the next five years and is prohibited for those companies whose costs are reduced because what is important is not the goal, but the impact of the measures on competition.  when state aid is used to promote a specific project of common european interest or the removal of a severe economic disruption in a member state.  when state aid is used to facilitate the development of some important regions, if it does not violate the terms of exchange to the extent contrary to the common interest. however, support for the shipbuilding industry that existed prior to the entry into force of the treaty of rome, to the extent that is introduced due to the lack of tariff protection, was progressively reduced under the conditions which apply to the elimination of customs duties, subject to members of the rome agreement relating to the common commercial policy to third countries.  if state aid is used to promote culture and preservation of cultural and artistic heritage, if it does not affect trading conditions and competition in the union, and if isn’t contrary to the interests of the market.  other categories of assistance that the council establishes a qualified majority on a proposal from the commission. when it comes to making decisions about whether a state aid is contrary to the competition or not, there is firstly the process of notification that includes the publication and delivery of state aid policy implemented by the government in a given industry sector or area in order to see whether such strategy leads to distortion of trade between member countries. the process usually has a time lag that occurs between application of the state 88 ž. rađenović aid and sending a notification to the commission. commission tasks the rapporteur of case to submit facts relating to state aid policy that has been implemented in some of the states within two months. in most cases, this period is enoughto know about a given state aid and if it is positive and approved, then such a decision is published in the commission's official gazette. the commission carries out an investigation for not more than six months of a negative or conditional decision published in the official gazette l series. the commission has the opportunity to conduct an informal investigation into the politics of state aid that allows it more credibility if it all ends favorably because its decisions do not have to be reviewed by the court. in this respect, article 88 is mainly a continuation in a legal sense, of the previous process by defining the activities of the commission and the court regarding the decision. specifically, it points out that the commission is permanently in cooperation with member states granted aid review and suggest measures to improve the development and operation of the common market, where if it finds that aid granted in accordance with the common market is pursuant to article 86 and is abused, the commission shall decide to revoke. if by any chance the member states do not apply this decision the commission or interested party can send a complaint to the court, which has a deadline of three months for having an opinion about the fairness of state aid. control of the behavior of companies and businesses on the market that may receive government assistance in any way must be implemented in order to avoid distortion of competition by favoring certain market participants. that is why article 87 regulates the conditions for granting state aid while article 88, defines the state aid granted. state aid control has not become a domain of concern of the directorate for competition until the late eighties, due to the fact that after 1968 and the establishment of a customs union, there was a removal of tariff barriers. state assistance in maintaining competitiveness was required by businesses who now have a wide market available. cases related to state aid have been a slow process due to the fast-growing cases of restrictive practices that needed to be processed. it was not until the recession in 1973 that the commission was forced to understand the importance of state aid. with the inability to deal with high inflation, rising unemployment, a drop in demand and noncompetitiveness, states have started to increase in public spending in order to provide protection of the industrial sector from the negative effects of the recession. at this point, the commission was faced with a number of notifications, but not the importance of partnership with the member states themselves. that is why the revitalization of this part of the competition policy of the european union was made in 1985 by an act of state aid, which in addition to the legal and statistical significance was established as a trend in the movement of state aid, which is an average of all member states at that time, to the beginning of the nineties, amounted to 15% of public expenditure and 4% of gdp. the act also defined three principles related to the provision of state aid:  certain state aid is not always fair ;  the effectiveness of the policy must be established,  transparency of all aspects of state aid must be a priority.  three subspecies of this policy have emerged through evolution of state aid policy:  regional policy of state aid,  sectoral policies state aid  the general policies of state aid. the influence of the competition policy on state aid and public sector within the eu single market 89 regional policy of state aid has its legal basis in article 87 of the treaty, and it refers to the state aid that promotes economic development in the region where there is low standard of living and high unemployment. this provision means that during the course of providing assistance that facilitates the living conditions in a given region cannot get to the imposition of conditions of exchange, which can jeopardize effective competition in the eu market. these two aspects of regional policy are very difficult to match, but despite that, it makes on average a quarter of the total assistance provided to the state in the territory of the member states of the european union. this policy contains four principles on which its implementation by the directorate for competition is based and that were adopted in 1971 in the resolution of regional aid:  a consistent policy of regional aid in accordance with the needs and development of the region, in comparison with the best of them. this means helping regions facing declining industrial development and their approach towards leading development centers in the member states, so that people have equal opportunities to live and work. toward that end, forming regional maps to help proper distribution;  transparency of regional aid;  the possibility of its quantification;  specificity of assistance for each region separately. sectoral policies state aid refers to aid for the development of certain economic activities, mostly in the industrial sector or a region where the industry as a sector dominated. it is awarded only in the event that the regular operations of the market cannot be achieved given the economic objective. in support of this, the commission has defined the criteria for the application of this principle, which should be distinguished from the criteria for the award of any sectoral aid from those that apply to the sectors in crisis. regarding the first criterion, sectoral assistance must:  be necessary,  re-establish a long-term economic solvency of the company,  be reduced with the passage of time,  be clearly linked to the restructuring of a given sector,  be proportionate to the problem that needs to be resolved, so that the distortion of competition is reduced to a minimum,  prevent migration of industry problems and unemployment from state to state,  be approved in the function of facilitating the social and economic cost change companies if the reform process was time consuming. if this aid is granted for sectors in crisis, it may not act in such a way that a company or a sector come in a better position than the other competitors, but only to stabilize the situation in the sector or company, respectively when assigning sectoral forms of assistance, there are special rules for certain so-called most important areas. in the automotive sector, it is obligatory to apply for help if the value of the investment project exceeds 50 million, or if the amount of the assistance exceeds 5 million. assistance is awarded for innovation in the amount of 10% of total costs, but only in case of industrial and technological risks. regarding the area of research and development, assistance may be approved for large projects of european importance, especially when it comes to the science sector. if the results of scientific research can be utilized without discrimination, then the costs may be covered 100%, but if they can distort competition, then the cover of cost is 25%. sme assistance may be granted in order to achieve the objectives as well as the european interest, with 90 ž. rađenović the help of financial investments must not be higher than 7.5% (except in the case of companies with fewer than 50 employees and whose turnover is less than 7,000 000 euros and the balance is less than 5 million euros when it is 15%), while for the advancement of knowledge of not more than 50%. it is important to note that the european commission believes that small and medium-sized enterprises are those with fewer than 200 employees and an annual turnover of less than eur 40 million or an annual balance sheet of less than 27 million euros. category general state aid policy contains all the help and assistance schemes which can not be classified in the sectoral and regional. although it is more difficult to identify than the previous two, it is spread over almost the whole of economic life of the union. to better clarify this concept, the commission and the directorate of competition issued a lot of regulations and legal framework, including the legal framework of the union state aid for research and development in 1985. after 1993, when the act on state aid for growth, employment and competitiveness was passed, this policy is increasingly treated as a horizontal policy of state aid, whose primary role was related to small and medium-sized enterprises. these companies, according to this act, could receive government assistance only to the extent of 100.000 ecu for three years. 3. competition policy for public sector enterprises and activities of general interest article 86. an important aspect of the relationship governmentindustry refers to the regulation of the sectors which are state-owned. here the accent is primarily on sectors such as manufacturing and electricity, gas distribution, water supply, transport, postal services and telecommunications. after the advent of state aid policy, the commission wanted to, enforce competition rules also in the area of so-called natural monopolies. in fact, for many years, none of the investors dared to step into the sectors of public interest given the high initial cost, and the state is used to charging fees for the provision of these services. it was only with the advent of liberalization and privatization during the thatcher era (privatization of british telecom and the companies supplying gas) that they went into solving the problems that existed in all economiesexistence of an enterprise for activities of common interest with special rights in the operations approved by the state. previous resistance to the implementation of competition among enterprises of the public sector has brought a number of problems:  the quality of services is often not at the satisfactory level;  inefficiency is often a feature of the sector;  throughout the european union, prices for the same services of public sector enterprises are significantly varied;  there was a significant technological backwardness in this area;  unequal conditions that exist for companies in the public sector in various member states and the aggravated interconnection in order to reduce costs and rational operations. the task of the commission consisted of literal confiscation of exclusive state control over these areas, due to the fact that the importance of introducing competition was great, because it not only helps the technological development of these areas, but there are also social and financial implications, such as new jobs and reducing costs of citizens. the the influence of the competition policy on state aid and public sector within the eu single market 91 commission therefore defined article 86, which primarily aims to point out one important fact, which is that no matter what the state, public sector enterprises shall not in any way hinder competition in the area in which they operate. this article very broadly interpreted the concept of the company and the state: in addition to public companies, it includes companies engaged in activities of common interest, enterprises with special rights and fiscal monopolies (exclusive rights granted by a state enterprise where it becomes a monopoly in order to guarantee state revenueexample is the tobacco industry). the concept of public enterprise refers to an enterprise that where a determining influence directly or indirectly, a state or local community through ownership, financing or managing board in which a company does not have to be independent from the state, but may belong to its economic activity. special or exclusive rights are granted in objective and indiscriminatory manner, so that businesses of this title is to eliminate competition. however, such measures are not entirely prohibited between member states if a law of the existence of such a company or enter into a concession agreement. exclusive right pertains to monopoly, while special rights to something of a more complex nature. however, the rights under article 86 cannot be awarded if they are not in accordance with articles 81 and 82. accordingly, the court expressly prohibits assignment of these rights, for example in the field of telecommunications and television frequencies, with a special focus on geographic zones and signal interference of other media, which performs the abuse of dominant position by state television. in order for a company to perform activities of general interest, the commission has defined three criteria that must be met cumulatively:  continuously meet the needs of the widest range of users, products and services;  equal conditions for all;  providing services at a cost without a significant profit. nonetheless, according to the provisions of article 86, there are situations which the court found to be caused by excluding the competition if such a state is absolutely necessary. such is the case with distribution of electricity if costs have to be too high a price is too low. the court ruled that the production, transport and distribution of electricity, at a single price for all consumers and by the same criteria, specific area, and throwing the competition disrupted the market situation. something similar is also in the provision of postal services but only those which are of general interest with regard to the fulfillment of specific requirements of consumers that competition may be justified. companies of general interest cannot perform all activities profitably, which is made up by so-called shifting resources from those activities that provide universal and uniform for all users, which makes up any loss. 3.1. telecommunications the trigger that activated the work of the commission in the telecommunications industry comes from two sources. first, as a result of the increased number of complaints about the abuse of the exclusive rights of national enterprises in the use of telecommunications equipment, and secondly, because the industrial sector has shown significant potential for the development of the competition and has done quite the impact on the flow of the european economy. moreover, globalization and technological innovation also contributed. . either way, the telecom sector has long been eager for the competition due to the heavy dominance of national monopolies upon the use of certain frequencies which led to transactions in the telecommunications market making almost 5% of the gdp of the european union , which 92 ž. rađenović is marked by the division of the market "the biggest" no possibility of creating a single market and the sector. the strategy committee has taken pursuant to this "green paper" in 1987 which is the regulatory framework consisting of three levels:  the first level included the liberalization process, which included changing the entire telecommunications services to the european union in 1990. (satellite services and equipment, cable television, wireless services and network infrastructure, telephony and fixed network infrastructure, fax, modems and connection devices-receivers and routers).  the second level of strategy involved the harmonization of standards in the market of communication or at least a process of standardization of the legislative framework in the member states. hereby proclaimed aim of the commission on the common principles of public networks and services, was confirmed by the council directive to regulate open network in 1990.  last, but not the least, for competition directorate is the third level that brought the innovations regarding the implementation of the competition rules in this sector, and the regulation on the control of mergers in the case of telecom. also, this level is possible with the application of article 86 of easy investigation into the abuse of a dominant position by the largest mobile operators such as french and german telecoms. although the process of liberalization across all member states already flowed, with an emphasis on all elements of such a strategy, through the mediation of the commission, yet there was a broad framework of different targets that had to be achieved simultaneously:  publicize single market and its telecommunications infrastructure and services;  research and development innovations across the market;  unique fee for the development of services at a reasonable price;  financial stability;  contribution to economies of scale by leading companies;  the primacy of european companies in terms of services in the global market. regardless of the contradictory goals and the possibility of politicization of the same, the committee has succeeded in using their instruments to complete the entire story of the liberalization of the industry and continue to efficiently redirect the positive impact of the single market through its legislative tools to the competition. continued development of this sector is reflected in the adoption of the digital agenda, which follows the strategy of the telecommunications until 2020, where the emphasis is put on the regulation of electronic communications and electronic commerce through a number of on-line services. the significant potential of the field of telecommunications is reflected in the fact that internet service european providers in major economies in the last five years make up 21% of gdp. the commission's policy has played a significant role in the media sector in terms of transparency of the licensed rights to the television activity, especially for playing music online. in recent years, it was governed by the dominant position of slovak and german telecoms and the portuguese national operator. the commission's implementation of the provisions of articles 81, 82 and 86 carried by a member in the case of the largest internet search engine google in particular in the case of its application of adwords relating to advertising campaigns. in the field of electronic media the decisions regarding the sector of e-book sales as fast-developed part of the digital economy were adopted. this is primarily thought to regulate the offer price and the prevention of distortion of the influence of the competition policy on state aid and public sector within the eu single market 93 competition from major publishers such as pearson group, macmillan, cbs corporation. for the purpose of delimiting the rights of telecast of the strongest football leagues , the european commission has adopted a program to prevent the distortion of competition. the importance of the role played by the regulation on the control of mergers, which prevented musical productions such as universal and emi in setting up digital music platforms that are uncompetitive in pricing of listening and transfer of the music. 3.2. energy d ring the late eighties the commission began with the strategy of liberalization and increased competition in this sector which was characterized by fragmented markets and high barriers to entry. accordingly, the commission has introduced a number of measures, which opened a new era in energy policy. the focus has been on electricity and gas. globalization and technological progress have not become active in this sector so much, but on the other hand the various systems of production and distribution hampered the commission to work with member states. thus, germany's energy situation was quite complex given that there were a number of companies both large and small, while for example in france, there are only two state-owned enterprises for electricity and gas. in some countries, such as france, there are state-owned companies that had a monopoly in the sector and control, but in the uk for example, the energy model consisted of concluding contracts with foreign energy suppliers. the commission due to all of this started making plans on the internal energy market on the european union level. the arbitrary role of the commission in this sector began in 1990 with the liberalization process that has brought the council directive on the promotion of transparent price of gas and electricity to the directive on the transport of energy through the member states. the plan of the process consisted in the opening quarter of the competitive market in january 1997, for those users who consume more than 100 gigawatt hours of electricity a year, which would mean that they themselves may be their energy supplier. the other part of the market for smaller users will get the prefix "competitive" when the conditions for it appear (for 20 gigawatt hours per year after 2000, a manual 9 gigawatt hours per year after 2003). it also proclaims the pillars on which the energy policy of the union stands:  increase competitioninvolves the efficient allocation of resources across the single market through the implementation of competition rules, the creation of a regulatory framework for investment and punishment of the abuse of a dominant position. thus, the commission conducted an investigation of the bulgarian energy holding of misconduct in the electricity distribution for enterprise customers;  sustainable development with environmental policy where state aid plays an important role in eliminating the negative effects on the environment and society that result from inadequate operating of companies, such as for example, help to companies in the uk to buy environmentally profitable vehicles in terms of emissions or help companies to use the waste to produce heat (austria);  security of energy sector of the european union is largely dependent on imports as they are producing only 48% of energy in comparison to their needs. energy dependence differs through member states, so denmark has become the sole exporter of energy, while the other baltic countries are dependent on a single source of gas distribution. this sector of the eu also featured great needs for investment in infrastructure improvements. the commission continues here with the investigation 94 ž. rađenović and enforcement of competition law which was confirmed in the case of the russian gazpromwho used their position in the market to determine the pipeline map, map supply and price discrimination by tying the price of gas with the price of oil, and czech national supplier of lignite (cez) who discriminated against power plants across the country; when talking about the distribution of gas two models are present. the first consisted of self-selection of suppliers by the user and in accordance with the network characteristics by determining the appropriate price and other terms of the unified distribution and gas prices throughout the eu, where the company is bound by long-term contracts than thirty years. 3.3. transport common transport policy of the european union was defined by articles 74-84 and accordingly, until the eighties little progress has been made in this sector in the field of competition. initially, these members have allowed the commission to use its authority in a competition conducted by road, rail and river transport and the regulation of maritime and air traffic remained due to their complexity so the national authorities of the member states retained their jurisdictional law in these areas. however, the 1987 decision of the council of ministers adopted the rules of competition in the field of maritime and air transport industries. the commission has had the difficult task of breaking the strong state monopolies and international cartels that controlled everything related to aviation industry and with transport ranging from manufacturing to route flights. strong companies in the transport sector have lost their reputation because they were not cost-competitors. this, in addition to knowledge of the violation of the competition, discouraged potential customers more and more. step by step, modeled on the american system of deregulation in this area, the commission has failed to create a competitive market where every carrier i formed a proposition. this enabled harmonization in the performance of all transport activities frompassenger transport to logistics because it enabled everyone to do business equally. strategy for the revitalization of transport at eu level in 1996 enabled the efficient monitoring of state aid and prevented manipulation by price and quality. the main objectives of this strategy are:  the fight against uneven regulation and barriers to entry,  prevention of concentration in the airline sector,  equitable distribution of state aid to rail transport,  providing equal services and fiscal incentives in maritime traffic by port authorities conclusion the european commission has continued to promote competition policy in 2015 to highlight its importance in the functioning of the eu market. the most important asset of this policy in promoting the single market is anti-cartel policy, the implementation of the regulation of mergers and state aid control policies. after the promotion of the twentieth anniversary of the founding of the european single market and cooperation between the commission and the national courts of the european network of competition, there has been a systematic and continuous work to improve the legal framework for specific sectors such as financial services, energy, telecommunications and postal services, the pharmaceutical industry, the market of "smart" phones and electronic shopping, music and it industries, the influence of the competition policy on state aid and public sector within the eu single market 95 and transport. the economic and financial crisis has led to a significant increase in market share of country life businesses with the result that the state aid only in the banking sector from october 2008 to december 2012 amounted to 1.6 trillion euros, or 13% of the gdp of the european union. the contribution of state aid policy is crucial for the survival of the integrity of the single market, which led to the fact that member states create a sustainable strategy for state aid policy until 2020. this will help the european commission to better identify market distortions and direct the "good government assistance," according to regions and companies that will find the proper way to take advantage of these investments. in the end, the commission launched an ambitious program entitled "modernization of the state aid" which aims to assist member states in the legal and economic regulation of this aid through budget framework, in a manner that will correct its policy of public expenditure transparency contributing to the development of investment projects of european interest. references 1. baldwin, r., wyplosz, c., (2006) the economics of european integration, london, mcgraw-hill 2. begović, b., (2010) realni sektor, „institucionalne reforme u 2009. godini“, beograd, centar za liberalno demokratske studije 3. berger, a., klapper, l., turkariss, r., (2009) bank competition and financial stability, journal of financial services research 21, 849-870 стр. 4. brittan, l., (1990) the law and policy of merger control in the eec, “european law review”, no. 15(5), bristol, sweet & maxwell 5. cini, m., mcgowan, l., (2008) competition policy in the european union, 2 nd edition, basingstoke, palgrave macmillan 6. craig, p., grainne, b., (1998) eu law: text, cases and materials, oxford 7. dajković, i., (2002) antimonopolsko pravo, podgorica, cid 8. damnjanović, k., popović, d., (2004) reforma prava konkurencije evropskeunije – uredba broj 1/2003, „revija za evropsko pravo“, vol. 6, br.1, kragujevac, centar za pravo evropske unije; beograd, udruženje za pravo evropske unije 9. dinan, d., (2009) sve bliža unija – uvod u evropsku integraciju, beograd, službeni glasnik 10. european commission, (2009) report on competition policy 2008, brussels, ec 11. european commission, (2010) report on competition policy 2009, brussels, ec. uticaj politike konkurencije na državnu pomoć i javni sektor u okviru jedinstvenog tržišta evropske unije kompetitivno i dobro organizovano tržište je imperativ efikasne ekonomije. prvo, zbog toga što konkurentna tržišta pomažu u korekciji distorzija u okviru proizvodne strukture, što vodi povećanju produktivnosti, i drugo, što jača konkurencija uzrokuje podsticaj proizvođača na smanjenje cena, veći kvalitet i povećanje raznolikosti. politika konkurencije ima za cilj restrikciju neekonomskih oblika ponašanja privrednih subjekata koja dovode do tržišnih distorzija. u radu će biti prikazane osnovne karakteristike politike konkurencije evropske unije kao i njen istorijski razvoj, osnovni elementi i metodološki okvir. pored toga ovaj rad prati reforme, tendencije u razvoju i primere iz sudske prakse politike konkurencije evropske unije sa osvrtom na članove 81. (zabrana restriktivnih sporazuma, tj. kartela) i 82. (zabrana zloupotrebe dominantnog položaja) ugovora o eu. ključne reči: politika konkurencije, evropska unija, restriktivni sporazumi. facta universitatis series: economics and organization vol. 16, n o 1, 2019, pp. 13 30 https://doi.org/10.22190/fueo1901013k © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the importance of science for improving competitiveness of national economy  udc 330.341.1:001.892 miloš krstić 1 , bojan krstić 2 , ratomir antonović 3 1 university of niš, faculty of science and mathematics, serbia 2 university of niš, faculty of economics, serbia 3 faculty of law, security and management “konstantin veliki”, niš, serbia abstract. the aim of the paper is to examine the interdependence of the selected indicators from the global competitiveness report and the innovation pillar, which is used as a proxy indicator of the science competitiveness. this relationship is analyzed within the sample of 9 countries. the analysis uses available information sources in wefs annual reports. the key contribution of this paper consists in providing clearer into factors competitiveness in the analyzed countries and pointing out the priority actions for the authorities to improve and increase the competitiveness level of science, and its contribution to the national economy competitiveness level. the research results can serve policy makers in shaping strategies and policies for the competitiveness improvement and the future of economic development in the analyzed countries. key words: competitiveness, science, young talents, highly skilled professionals, innovation jel classification: i23, o15 introduction competitiveness is a multidimensional concept that includes a multitude of different aspects and factors that determine it. observed from the microeconomic aspect, competitiveness is the ability of the company to continuously meet the needs of consumers with high quality products and services that will enable it to achieve long and stable profit. observed from the macroeconomic aspect, competitiveness is not uniquely determined. in the attempt to answer the question: what is national competitiveness? porter also points to various understandings of received december 14, 2018 / accepted february 28, 2019 corresponding author: miloš krstić faculty of science and mathematics, university of niš, višegradska 33, 18000 niš, serbia e-mail: krsticmilo3@gmail.com 14 m. krstić, b. krstić, r. antonović this term: ―there are attitudes that consider competitiveness as a macroeconomic phenomenon, which is determined by the level of interest rates and budget deficit, as well as the movement of the exchange rate, but also the structure and price of the labor force. attitudes that connect competitiveness with natural resources, but also those who consider that competitiveness is determined by macroeconomic policies for protecting domestic production, promoting exports, subsidizing, etc.― (porter, 2004, p. 76). without diminishing the importance of the aforementioned positions, porter points out that the prosperity of a nation is not inherited, but created by the strategic choices. it links national competitiveness with productivity on the macro level and believes that the standard of living of citizens can only be improved if enterprises are able to achieve a high level of efficiency (productivity, profitability) and increase it over time. thus, the efficiency of a country is ultimately determined by the efficiency of enterprises operating in that country (porter, 2004, p. 31). for comprehensive overview of the competitiveness of a national economy, it is necessary to properly understand the role of the science sector in improving the competitiveness of national economy. in this sense, we will begin by establishing the basic characteristics of the science sector in developing countries, which are comparable, according to their structural and economic-historical characteristics and the trajectory of economic dynamics. then, statistical and analytical data on scientists and their professional career will be presented. in the last part of this work, special attention will be devoted to determination of science indicators that represent the ―lack‖ of the country, but that are important for improving the competitiveness of the economy. for this purpose, the methodology of the world economic forum for measuring the competitiveness of a country will be used. the key contribution of this paper is reflected in clearer understanding of the role and significance of the indicators of the competitiveness of science in improving the competitiveness of the national economy and providing recommendations in the form of desirable activities of the competent state organs in order to maintain the existing competitive advantages and minimize weakness. 1. basic characteristics of the science sector in developing countries science is one of the most perfect forms of accumulation and systemization of knowledge and experience. science is a system for diffusion, sharing and transfer of knowledge. it develops general and specific methodologies and methods of research. mastering these methods and methodologies substantially rationalizes the researcher‘s strength, ―releases‖ researcher from many unproductive jobs, and shortens the path towards discovering the new one. there is growing evidence that science contributes significantly to the overall power of the state, economic prosperity and growth of the living standards (medianik, 2017). without modern science it is impossible to build innovative economy and respond to new challenges and the international standards. in developing countries, where science is not developed, this sector is characterized by: 1) rigid scientists‘ payments scheme with low basic wages, 2) numerous formal criteria for the evolution of productivity of scientists that, as a rule, are non-transparently the importance of science for improving competitiveness of national economy 15 implemented; 3) ―poor‖ academic mobility, and 4) social networks and informal contacts that play a major role in the career development of researchers or during acquiring of scientific titles (gershman & kuznetsova, 2013). in many countries, the development of science takes place under conditions of visible contradictions between the society‘s expectations regarding the quality of research results, on one hand, and the real contribution of science to the development of economy and increase in the well-being of citizens, on the other. the science sector faces problems such as: low reputation and influence of the scientific profession, relatively low wages, obsolete infrastructure and equipment, the high average age of researchers and the ―brain drain‖ (gokhberg et al., 2011). most research and development organizations in developing countries are state owned. these organizations spend a large part of budgetary resources, have poor performance, and are not sufficiently competitive in market conditions. these organizations are under great pressure to adapt to the fast-changing dynamics of innovation, including increased competition for key resources (primarily for highly skilled staff) and changes in public procurement priorities in the area of science, technology and innovation. not surprisingly, state-owned scientific organizations are the key subject of numerous reforms, although the size of the sector indicates that the implementation of such reforms is not a quick and painless process. many countries emphasize providing decent wages to researchers with strict requirements regarding employment in the science sector and acquiring scientific titles (altbach et al., 2012). however, in countries that do not have sufficiently developed science, there are still low basic wages and minimal differences between payment grades. this situation does not contribute to attracting young researchers and retaining good staff and does not allow the increase of international competitiveness of domestic researches. countries that do not have sufficiently developed science need to focus, first of all, on the increase of the basic wages, which requires the increase of resources from the budget for science (gershman & kuznetsova, 2013). for most developing countries, this goal is unattainable, given the available resources. the solution to this problem is to provide additional resources from non-governmental funds. on the whole, the introduction of new mechanisms for researchers‘ payment in research organizations means that researchers can earn wages that are comparable to the salaries in the business sector. as a result, many scientists, including young researchers, will be able to buy an apartment by raising loans form banks. nevertheless, increasing researchers‘ wages, without solving other problems like the increasing productivity or the reduction of unreasonable demands for salary increasement, would be risky. the new mechanism for paying scientific work would be largely meaningless without taking into account these important factors. in addition, the increase in researchers‘ wages can lead to the influx of workers from other sectors into the science sector. however, such inflow does not automatically improve the situation in the science sector. on the contrary, the quality of research and development can be deteriorated by the arrival of incompetent people who are mostly motivated by money (gokhberg et al., 2011). gershman and kuznetsova point to the importance of linking wages of researchers with the productivity of their work. they indicate that more adequate incentives (wages) will be effective only if other measures are applied, like: provision of modern equipment, improvement of working conditions, etc. (gershman & kuznetsova, 2013). 16 m. krstić, b. krstić, r. antonović it should be noted that the results of the researches of the science sector in the countries of central europe indicate that the scientific system in these countries was strongly shaken in the 1990s. the scientific environment was faced with the difficulties caused by the decapitalization of physical infrastructure and the increase in the average age of researchers. the decapitalization of physical infrastructure is considered one of the most important structural problems in the national scientific systems of the countries of central europe, while the increase in the average age of scientific workers caused decrease in wages, which led to internal and external ―brain drain‖ (bulgarian ministry of education and science, 2002). after all, policies in the field of science were not always properly organized and that had a negative impact on their quality. this situation was the responsibility of several ministries that had easily taken into account the poor state of the industry and bad policies in the field of science and technological development. the structure of working hours of researchers in economically underdeveloped countries depends on the level of wages (that is compensated by consulting, tutoring and others), as well as by insufficient equipment for work and the absence of scientific information. because they have quality equipment and reliable information, researchers in developed countries may have advantage in terms of time over researchers in countries where science is not developed enough. therefore, the improvement of technical infrastructure and strengthening of the base of scientific information should, in some way, enable the partial leveling (decreasing) of the differences in the competitiveness between researchers in countries with developed science and researchers in countries with in sufficiently developed science. as already pointed out, measures to increase the productivity of researchers can produce the expected effects only in combination with complex institutional and legal measures that are often not directly related to science. institutional and financial aspects of the organization of science are the subject of ―fierce‖ discussion in many countries that do not have developed science. according to gershman and kuznetsova, in russia, 90% of research teams in some areas of science are inefficient, and many of them have no chance of improving their productivity. for example, in the field of biomedicine, only 450 of nearly 4000 laboratories are productive (gershman & kuznetsova, 2013). significantly increasing wages without systemic reforms in the science sector can be ―disastrous‖. this would not help to solve the problem of ―dead wood‖ (unproductive researchers). increasing wages without wider system changes means that non-productive researchers should be fed by increased wages. institutional reforms must follow the radical modernization of material and technical infrastructure, including premises and equipment. the practice of ―sticking plaster‖ with investments from the budget in several priority areas is not adequate for solving the accumulated problems. the problem of inadequate information of researchers about the state policy in the field of science and technology has several aspects (gokhberg et al., 2011). the low level of information among researchers reflects the low quality of policies that should be modified based on continuous feedback and interaction with the scientific community and specific target groups. information about state policy in the field of science and technology is important for stakeholders, scientific institutes and universities that strive to increase efficiency (productivity) within existing limitations. in general, scientists in developing countries are characterized by passivity, even regarding issues that directly affect their interests. according to the research of gershman and kuznetsova, in russia 16% of managers of scientific institutes and universities and the importance of science for improving competitiveness of national economy 17 36% of researchers of scientific institutes and universities obtained about the changes to remuneration mechanisms during the same research. this fact seems quite surprising, given the degree of ―sharp debates‖ and significant media coverage. it showed that in russia scientists with universities were better informed in relation to researchers of scientific institutes and universities (gershman & kuznetsova, 2013). 2. scientists and their career scientists represent a relatively small proportion of the total population, but their significance is quite high (oecd, 2010). given that they have specialized education and their contribution to science, one should expect that scientists will play an important role in knowledge economy and improve competitiveness of a country. information on the career of scientists and their contribution to science, innovation and economics are important not only for policy makers and state institutions that finance their training and integration into scientific and innovative systems, but also for employers who are interested in the competencies of scientists. unfortunately, the information on these experts is scarce due to the fact that standard statistical sources are too small (auriol et al, 2013). significant changes have occurred in the structure of the labor market and in the organization of research activities that have contributed to the expansion of the trajectory of the career of the persons with the highest academic title the doctor of philosophy. in the run-up to the economic and financial crisis in 2008, doctors of science often changed jobs and did not intend to preserve jobs in the higher education sector. with the increase in the number of doctorate holders, some asked the question: how to successfully exploit this potential in the innovation system? in the countries whose data are available, at least 50% of the persons with the title ‗doctor of science‘ work as researchers. in portugal and poland, more than 80% of those with the highest academic title work as researchers, while the share of these experts is lowest (close to 60%) in turkey, spain and romania (figure 1). doctorate holders in the natural sciences and engineering are the most frequently employed as researchers, except in portugal and poland where there are no obvious differences across fields. fig. 1 distribution of persons with the highest academic title doctor of philosophy by professions source: auriol, l., misu, m., & freeman r. (2013). careers of doctorate holders: analysis of labour market and mobility indicators. paris: oecd publishing. 18 m. krstić, b. krstić, r. antonović the main sector of employment for researchers is higher education (figure 2). the largest share of doctors of philosophy who work as researchers in the higher education sector and the first place on the list of countries whose data are available was recorded by poland, while the lowest share was recorded by the netherlands. in belgium, the united states and the netherlands, the business sector also employs a large number of researchers. fig. 2 distribution of researchers in the sectors source: auriol, l., misu, m., & freeman r. (2013). careers of doctorate holders: analysis of labour market and mobility indicators. paris: oecd publishing. given that they traditionally choose the higher education sector, a large proportion of doctorate holders in the business sector point to high demand for individuals with specialized knowledge outside the higher education sector and/or less employment opportunities in the higher education sector. if we observe the availability of scientists and engineers and company spending on r&d, the business sector appears as the main r&d performer. the efficiency of the transfer of knowledge of researchers into the industry and the cooperation or degree of interconnection between universities and industry in order to develop innovation activities depends on how effectively the competences of scientific staff are used. during the previous round of the cdh project 1 , it was determined that the business sector primarily employs researchers dealing with natural and technical sciences (auriol, 2010). figure 3 shows that the business sector employs natural scientists from natural and technical sciences mostly in countries like belgium, the netherlands and the united states. about half of the total number of researchers dealing with natural and technical sciences is employed in the business sector in these countries. the business sector of these countries is able to ―strengthen‖ its intellectual potential to some extent by employing experts with the title ‗doctor of science‘ in the field of social sciences and humanities. however, their inflow does not exceed 10% (figure 3). many researchers in countries, whose data are available, work in the business non-profit sector. although in 1 the cdh project is a recent initiative launched by the organization for economic cooperation and development (oecd), the unesco institute for statistics and eurostat. these organizations have created databases of doctors of philosophy in different countries in order to obtain statistically robust (reliable or valid) data on scientists and their professional career. the importance of science for improving competitiveness of national economy 19 the business sector there is a great demand for researchers in the field of natural and technical sciences, their supply is significantly low in poland, portugal and turkey. fig 3 distribution of researchers by fields of sciences and sectors source: auriol, l., misu, m., & freeman r. (2013). careers of doctorate holders: analysis of labour market and mobility indicators. paris: oecd publishing. the main goal of many countries is the employment of young and creative professionals in the science sector. still, young people are losing interest in science. in the united states the main reasons for this are: the long time it takes to obtain an advanced degree, the additional unstable postdoctoral training before securing a tenured position, the lowering researchers‘ lifetime earnings expectations and finding a balance between family decisions and research career. female researchers are pariculary bz the latter. the situation is similar in other countries (oecd, 2008). starting from these cognitions, we will discuss the analysis of the indicators of country‘s competitiveness in the field of science in the second part of the paper. the goal is to examine their role in improving the competitiveness of the science sector. 20 m. krstić, b. krstić, r. antonović 3. research hypotheses and methodology world economic forum (wef) analyzes a number of factors that affect the country‘s competitiveness in many segments of life. these factors are classified in 12 pillars of competitiveness. each of the pillars consists of a large number of sub indicators. in order to improve the competitiveness and innovation of science, in our opinion, the following sub indicators are of great importance: hiring and firing practices, country capacity to retain talent, country capacity to attract talent, availability of the latest technology and foreign direct investment and technology transfer. the latest pillar of the wef titled innovation can be considered a composite index of competitiveness of science that is formed as the weighted average of the following sub indicators: 1) capacity for innovation, 2) quality of scientific research institutions, 3) company spending on r&d, 4) university-industry collaboration in r&d, 5) government procurement of advanced technology products, 6) availability of scientists and engineers, 7) pct patents applications/million pop. the aim of this research is to examine the relationship between the 12th pillar of the wef – innovation or ―global innovation index‖, on one hand, and the above-mentioned factors of the competitiveness of science, on the other. in line with the research objective, the following hypotheses will be tested: h1: linear combinations of the observed indicators of competitiveness of science that are in the deepest connection with global innovation index are: 1) foreign direct investment and technology transfer/availability of the latest technology, 2) hiring and firing practices/availability of the latest technologies, 3) availability of the latest technologies/country capacity to retain talent, and 4) country capacity to attract talent/availability of the latest technologies. h2: the individual indicators of the competitiveness of science that most affect the global innovation index in the analyzed countries are: the country capacity to retain talent, the country capacity to attract talent, the availability of the latest technologies and the foreign direct investment and technology transfer. the sample covered 9 countries. the criteria for selecting countries in the sample are: 1) similar characteristics and the path of development of science and 2) the degree of social development. in the sample, we considered countries that faced the inherited institutional structure of the socialistic scientific system and the process of transition to the capitalist economy at the end of the last century. these are countries that had insufficiently developed financing mechanisms of science, a high degree of bureaucratization, fragmentation and centralization of science that did not correspond to the market economy model, universities with weak links to science and military-industrial complex that limited the transfer of technology to the civil sector (schuch, 2014). the level of social development is expressed by gross domestic product per capita per purchasing power parity in current dollars (gdp per capita, ppp (current $)) in 2017 (table 1). the data on per capita gdp per capita purchasing power parity are found in the world bank‘s world development indicators. they are downloaded from the website of this institution https://data.worldbank.org/. the importance of science for improving competitiveness of national economy 21 table 1 gross domestic product per capita ppp (in current us dollars) of selected countries in the sample countries gdp per capita, ppp (current $) in 2017 bulgaria 20,329.3 croatia 25,264.4 hungary 28,107.9 latvia 27,598.3 montenegro 18,765.1 poland 29,026.2 romania 25,840.8 serbia 15,090.0 lithuania 32,095.5 source: https://data.worldbank.org/indicator/ny.gdp.pcap.pp.cd? end=2014&start=1990&view=chart the analysis used the method of multiple linear regression. the global competitiveness report and world bank‘s world development indicators are the informational basis for this research. the analysis used programs for processing and presentation of statistical data: spss and matlab. 3.1. results of research and discussion 3.1.1. analysis of selected countries according to the innovation pillar according to the report of the wef for 2017/2018, serbia is ranked 95 th in terms of the value of the innovation pillar. compared to 2013/2014, the value of the pillar innovation came up by 0.2, which led to the positive shift of serbia by 17 positions (from the 112 th place to the 95 th place on the wef list). table 2 shows the ranks and results of the innovation pillar for serbia from 2013/2014 to 2017/2018. table 2 republic of serbia –the innovation pillar, 2013/2014-2017/2018 year innovation change result rank result rank 2013/2014 2.9 112 2014/2015 2.9 108 0 ↑4 2015/2016 2.9 113 0 ↓5 2016/2017 3.0 108 ↑0.1 ↑5 2017/2018 3.1 95 ↑0.1 ↑7 total ↑0.2 ↑12 source: wef, the global competitiveness reports 2013/2014, 2014/2015, 2015/2016, 2016/2017 and 2017/2018 also, the next diagram illustrates the moving of the innovation pillar for serbia in the period from 2013/2014 to 2017/2018. the diagram was obtained from the data from table 2. 22 m. krstić, b. krstić, r. antonović the red line in figure 4 shows the movement of the results of the innovation pillar, while the blue line shows the movement of the ranks of this pillar in the period from 2013/2014 to 2017/2018. based on figure 4, we see that serbia achieved the greatest ―positive shift‖ in 2017/2018. fig 4 the republic of serbia – scores and rang of innovation pillar, from 2014 to 2018 source: the authors in matlab the following table illustrates the ranking of selected countries in the sample according to the rank and the value of the innovation pillar (table 3). this comparison provides a more precise picture of the competitiveness of science in the observed countries (krstić & stanišić, 2014, 93). table 3 the innovation pillar ranking of analyzed countries country innovation 2013/2014 – world list of countries rank within the analyzed countries in 2013/2014 innovation 2017/2018 – world list of countries rank within the analyzed countries in 2017/2018 change of score rank score rank score bulgaria 105 3.0 8 68 3.3 3 +0.3 croatia 79 3.1 6 106 2.9 9 -0.2 hungary 71 3.6 5 79 3.5 5 -0.1 latvia 70 3.2 4 68 3.6 4 +0.4 montenegro 54 3.4 2 91 3.2 6 -0.2 poland 65 3.2 3 59 3.4 2 +0.2 romania 97 3.0 7 96 3.1 8 +0.1 serbia 112 2.9 9 95 3.1 7 +0.2 lithuania 44 3.6 1 41 3.7 1 +0.1 source: wef, the global competitiveness reports 2013/2014 and 2017/2018 the importance of science for improving competitiveness of national economy 23 lithuania, montenegro, latvia and poland are the best ranked among the analyzed countries according to the rank of the innovation pillar in 2013/2014 (table 3). a similar situation is in 2017/2018. the best ranked countries are: lithuania, poland, bulgaria, and latvia. the worst ranked country in 2013/2014 is serbia, while the worst rank in 2017/2018 was recorded by croatia. we also note that latvia and bulgaria achieved a significant positive change in the observed period. a decrease in the innovation pillar in 2017/2018 compared to 2013/2014 are realized in croatia, montenegro, and hungary (-0.2). 3.1.2. analysis of indicators of competitiveness of science in selected countries in order to provide a more relevant evaluation and more complete presentation of competitive advantages and disadvantages of the selected countries in the field of science, we will carry out a comparative analysis of the parameters of the observed countries in the field of science. table 4 results of the wef indicators in selected countries selected sub indicators b u lg a ri a c ro a ti a h u n g a ry l a tv ia m o n te n e g ro p o la n d r o m a n ia s e rb ia l it h u a n ia hiring and firing practices 67 131 27 91 73 97 51 80 111 country capacity to retain talent 119 131 126 118 100 89 132 134 109 country capacity to attract talent 118 135 112 122 107 113 131 132 117 availability of latest technologies 68 65 43 41 79 64 71 87 31 fdi and technology transfer 47 111 48 80 72 37 86 101 32 availability of scientists and engineers 93 95 91 109 85 52 80 68 57 source: wef, the global competitiveness reports 2017/2018 the analysis of the data presented in table 4 leads to the conclusion that lithuania is best ranked according to the following parameters: availability of latest technologies and fdi and technology transfer. hungary is the best country by the indicator hiring and firing practices. poland has the best position among the analyzed countries according to country capacity to retain talent and availability of scientists and engineers. based on the data in table 4, serbia is best ranked according to availability of scientists and engineers and hiring and firing practices. among the analyzed countries, serbia is ranked as the worst according to the following indicators: capacity of the country to retain highly qualified personnel, capacity of the country to attract young talents and the foreign direct investment and technology transfer. the biggest mistake of serbia is that it allowed the outflow of highly educated and professional people, among which certainly there are those who possess exceptional skills, knowledge and abilities. the question that arises logically is: why do highly educated and professional individuals leave serbia? 24 m. krstić, b. krstić, r. antonović namely, the outflow from the country is generally influenced by two types of factors. pull factors are factors that attract individuals to move to another country, and these are usually: high profits, better working conditions, greater career opportunities, and so on. push factors are those that encourage individuals to leave the country. these are usually lack of prospects and the impossibility of professional development (đorđević, 2016, 119). 3.1.3 analysis of the interdependence of the innovation pillar and indicators of competitiveness of science in order to examine the interdependence of the innovation pillar and the indicators of competitiveness of science in the observed countries, we use the standard multiple linear regression method based on the calculation of the coefficient of determination. the coefficient of determination shows the influence of the value of the observed indicators of competitiveness of science on the innovation pillar. the basic form of the regression model is (green & salkind, 2014): y = b1 x1 + b2 x2 +b0, where: y dependent variable (the innovation pillar (inn)), x1, x2 – independent or explanatory variables, like: hiring and firing practices (hfp), country capacity to retain talent (crt), availability of the latest technologies (alt), availability of scientists and engineers (ase), b1 and b2 are partial slopes for independent variables, а b0 is an additional constant. multiple linear regression shows which indicator of competitiveness of science in the model (a linear combination) better explains variations or changes in the results of the global innovation index (pallant, 2011). so, here we have: 1) one dependent quantitative variable the index of global innovation or the innovation pillar and 2) certain models or linear combinations of independent variables:  model1 = inn1 = b1hfp + b2crt + b0.  model2= inn2 = b1alt + b2ase + b0.  model3= inn3 = b1ftt + в2alt + в0.  model4= inn4 = b1hfp + в2alt + в0.  model5= inn5 = b1ftt + в2hpf + в0.  model6= inn6 = b1alt + в2crt + в0.  model7= inn7 = b1cat + b2alt + b0.  model8= inn9 = b1ase + b2ftt+ b0  model9= inn9 = b1ftt + b2crt+ b0  model10= inn10 = b1crt + b2ase+ b0 table 5 shows the values of the pearson coefficient of correlation between the independent variables in the analyzed models. on the basis of table 5, we can conclude that the strongest link was realized within model9 or, more precisely, between fdi and technology transfer and country capacity to retrain talent. the importance of science for improving competitiveness of national economy 25 table 5 results of the correlation analysis of selected indicators of competitiveness (pearson correlation coefficient) hfp model1 alt model2 ftt model3 hpf model4 ftt model5 alt model6 cat model7 ase model8 ftt model9 crt model10 crt мodel1 -0.035 ase model2 -0.044 alt model3 0.452 alt model4 -0.444 hpf model5 0.324 crt model6 0.226 alt model7 0.285 ftt model 8 0.434 crt model 9 0.724 ase model10 0.325 source: calculation of authors in spss the results of the multiple regression analysis of the model are shown in column r square in table 6. the r square column is the coefficient of determination that shows how much of the percentage of changes in the results of the global innovation index is explained or caused by changes in the model‘s results. table 6 statistical indicators of multiple correlation models model1 model2 model3 model4 model5 model6 model7 model8 model9 model10 b1 0.137 0.538 0.287 0.146 0.443 0.487 0.473 -0.236 0.498 0.294 b2 0.293 0.139 0.393 0.546 0.608 0.193 0.444 0.507 -0.067 -0.033 b0 2.096 0.213 0.132 0.118 1.330 0.155 0.069 1.978 1.836 0.514 r 2 0.329 0.676 0.841 0.743 0.562 0.765 0.892 0.606 0.568 0.254 adjusted r 2 0.105 0.568 0.789 0.657 0.416 0.678 0.842 0.475 0.424 0.006 sig. 0.302 0.034 0.004 0.017 0.084 0.013 0.002 0.051 0.081 0.415 source: calculation of authors in spss for example, the determination coefficient of model3 is 78.9% (table 6). this means that part of the changes in the results of the global innovation index, which appears 26 m. krstić, b. krstić, r. antonović because of its connection with the combination of independent quantitative variables fdi and technology transfer and availability of the latest technologies, is 79%. the impressive degree of matching between model3 and the innovation pillar indicates that the relationship between this pillar, on the one hand, fdi and technology transfer and availability of the latest technologies, on the other, can be illustrated with linear function. inn3= 0.538 ftt+ 0.139alt + 0.213 where: 0.538 b1, ftt fdi and technology transfer, 0.139 b2, alt availability of the latest technologies and 0.213 is b0. the diagram of linear function shows more things (figure 5). first, the straight lines through the main bunch of points can be drawn, and another drawn line shows the trend upwards. trend upwards indicates that this is the positive correlation that is the large values of the independent variables (fdi and technology transfer and availability of the latest technologies) correspond to the high values of the innovation pillar (figure 5). the results of the regression analysis in table 6 indicate that changes in values in model2, model3, model4, model6, model7, and model8 explain from 67% to 89% of the changes in the innovation pillar and these results are statistically significant at the 5% significance level. other regression models (model1, model5, model9, and model10) are not statistically significant. based on table and figure 5, we conclude that the results of multiple regression analysis confirm the hypothesis h1. fig. 5 inn3= 0.538 ftt+ 0.139alt + 0.213 sources: 3d author’s diagram in matlab furthermore, the influence of individual independent variables in the observed models on the competitiveness of the state in the field of science, that is measured by the dynamics the importance of science for improving competitiveness of national economy 27 of the results of the innovation pillar, is examined (table 7). this allows us to answer the following question: which independent variable in a given model helps predict the value of the dependent variable to a higher degree? we will find the answer to this question in the standardized coefficients beta column. for example, in model4, only the variable availability of the latest technologies (alt) has statistically significant value (sig. = 0.007< 0.05). this means that only this variable is useful for predicting the results of the dependent variable. the country capacity to retain talent, the country capacity to attract talent, the availability of the latest technologies and the foreign direct investment and technology transfer have a major impact on the ability of the selected countries to create competitiveness science (table 7). there is significant need for regulation of these areas. having in mind the data in table 7, we conclude that the results of the extensive linear regression analysis confirm the hypothesis h2. table 7 standardized share for each variable in the model variables standardized coefficients beta sig. model1 hfp 0.275 0.443 crt 0.513 0.176 model2 alt 0.811 0.013 ase 0.138 0.138 model3 ftt 0.481 0.539 alt 0.038 0.017 model4 hfp 0.293 0.207 alt 0.823 0.007 model5 ftt 0.744 0.040 hpf 0.016 0.958 model6 alt 0.743 0.011 crt 0.338 0.147 model7 cat 0.495 0.015 alt 0.670 0.004 model8 ase -0.235 0.441 ftt 0.851 0.024 model9 ftt 0.836 0.082 crt -0.117 0.779 model10 crt 0.514 0.217 ase -0.033 0.933 source: calculation of authors in spss 28 m. krstić, b. krstić, r. antonović conclusion in order to achieve a higher level of productivity in science, new activities are needed in terms of engaging in the necessary structural reforms and investments in order to improve productivity in the science sector, because only by raising the level of productivity of researches the sustainable growth of the society can be ensured in the long run. our recommendations for improving productivity of science in the analyzed countries are divided into 3 groups. the first group relates to the capacity of the state to employ young talents and retain good personnel in scientific activity. we propose designing an efficient and flexible system of material incentives that takes into account the complex, creative and intellectual nature of scientific activity. policy makers should deal with the problem of low wages of researchers using the prp schemes (performance-related pay schemes) (oecd, 2005). also, the conclusion of employment contract for indefinite period according to the model of tenure track substantially removes the problem of highly educated and professional people leaving the country. we are committed to forming non-government funds that should be used to finance wages of the most productive researchers, as well as for other needs (procurement of materials, apparatus, samples, etc.). the second set of proposals for increasing productivity in science in the analyzed countries relates to the improvement of technical infrastructure. the state should create the possibility that the creative spirit of domestic companies will revive by stimulating innovation through its procurement. an important recommendation to increase the competitiveness of science is to encourage multinational companies to invest in science, which should contribute to improving the technological capabilities of host countries, especially those lacking technological assets, knowledge and skills for dynamizing the tempo of economic growth (schuch, 2014). the technology and innovative capacities, transferred through the investments of multinational companies, should enable the host country to organize the production of new products, to increase productivity and to develop new activities with high added value. nonetheless, the research of knowledge transfers in the countries of central europe shows contradictory results (biegelbauer et al., 2001). although multinational companies in the 1990s invested in the science sector in the countries of central europe more than domestic companies, these investments did not significantly contribute to the development of research and development capacities. on the other hand, several scientific and technological projects carried out by multinational companies as a rule were not sufficiently connected with the local scientific database. one of the main reasons for this is the low level of development of human capital and the low level of infrastructure development in the host country. the third group of measures to increase the productivity of research and researchers in selected countries relates to availability of scientists and engineers. if training cannot produce educated highly qualified staff of the world reputation in particular country, then it is necessary to seek support in foreign experience and resources (medianik, 2017). in this case, an important role in improving the quality of human capital is the opening of departments of foreign universities in the observed countries. for the teaching activity, the best local and foreign experts will be engaged, and after the end of the training, students will receive two diplomas – diploma of foreign university and a degree from a joint university. it is also important to say that foreign universities such as lomonosov, mit, and stanford are known for their natural and engineering sciences, and those areas of science are of strategic importance for analyzed countries from the point of view of building competitive economy. the importance of science for improving competitiveness of national economy 29 acknowledgement: the paper is a part of the research done within the project 179066 funded by the ministry of education, science and technological development of the republic of serbia. references altbach p., reisberg l., yudkevich m., androushchak g. & pacheco i. 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(2014). participation of the ‗new‘ eu member states in the european research programs — a long way to go. foresight-russia, 8 (3), 6-17. world economic forum. (2013, 2014, 2015, 2016, 2017). the global competitiveness report. geneva: world economic forum, retrieved from: https://www.weforum.org/reports, accessed on: 10 nov 2018. world bank. (2014). world development indicators. new york: world bank https://data.worldbank. org/indicator, accessed on: 10 nov 2018. 30 m. krstić, b. krstić, r. antonović značaj nauke za unapređenje konkurentnosti nacionalne ekonomije cilj rada je da se ispita međuzavisnost analiziranih indikatora svetskog ekonomskog foruma (sef) i stuba inovativnost koji se koristi kao pokazatelj konkurentnosti nauke. ovaj odnos je analiziran u uzorku od 9 zemalja. u analizi su korišćeni raspoloživi izvori informacija o kategorijama koje su predmet opservacije. ključni doprinos ovog rada sastoji se u pružanju jasnijeg uvida u faktore u oblasti nauke koji smanjuju konkurentnost u odabranim zemalja i ukazivanju na prioritetne aktivnosti nadležnih državnih organa u cilju unapređenja i podizanja nivoa konkurentnosti nauke i privrede. rezultati istraživanja mogu da posluže kreatorima javnih politika u formiranju strategije i politike unapređenja konkurentnosti i budućeg razvoja privrede u analiziranim zemljama. ključne reči: konkurentnost, nauka, mladi talenti, visoko-obrazovani stručnjaci, inovativnost plane thermoelastic waves in infinite half-space caused facta universitatis series:economics and organization vol. 13, n o 2, 2016, pp. 217 232 socio-economic determinants of improved rice technologies’ adoption among small scale farmers in kogi state, nigeria1 udc 338.439.4:664.782(669) jamiu olushola saliu, muhammed kabir ibrahim, folashade oluwatosin eniojukan department of agricultural economics and extension, kogi state university, anyigba, nigeria abstract. this study examined the socio-economic determinants of the adoption of improved rice technologies by small scale farmers in kogi state, nigeria. it specifically investigated the influence of socio-economic characteristics on the adoption of improved rice technologies, adoption level of farmers and constraints against adoption of rice technologies. multistage random sampling was used to pick 120 registered rice farmers with the kogi state agricultural development project (adp). frequencies, percentages, mean, mode, mean scores and ordered probit regression were used to analyze the data. from the result, all the farmers adopted the use of agrochemicals (100%) and the farmers were categorized into low, medium and high adopters, with 60% of the farmers being high adopters. the result also showed that lack of infrastructural facilities was a major constraint experienced by farmers in the study area having a mean score of 3.7. however, the ordered probit revealed that membership of cooperative (1.029277 at 1% significance), source of fund (0.0100499 at 1% significance)) and source of labour (0.2746477, at 10% significance) determined the adoption of rice technologies while marginal effect on farm size, household size, contact with extension agents favoured the adoption of all the eight most important rice technologies which could be used as a measure towards pleasant disposition to commercial rice farming. the study recommends that private rice industries should utilize this positive disposition for rice farmers towards rice technology adoption by establishing rice processing industries in the study area and making the farmers’ rice out growers to feed the industries. key words: rice, improved technologies, adoption; socio-economic determinants 1received may 9, 2016 / revised june 10, 2016 / accepted june 15, 2016 corresponding author: jamiu olushola saliu department of agricultural economics and extension, kogi state university, anyigba, nigeria e-mail: josaliu@yahoo.com 218 j. o. saliu, m. k. ibrahim, f.o. eniojukan introduction small scale farmers have consistently remained the major producers of rice in nigeria producing over 80% of the total output (ohajianya and onyenweaku, 2002) yet they are discriminated against in the scheme of agricultural policies and programs with the presumption that they are less technically efficient than large farmers (enwerem and ohajianya, 2013). the demand for domestic rice in nigeria has not been met as a result of continued fluctuation in rice production which is an indication of limited capacity of nigerian economy. this can also be as a result of the inability of the rice farmers to obtain maximum output from the resources committed to enterprise (kolawole, 2010). an average yield of rice in nigeria is 1.8 tons per hectare compared to 3.0 tons per hectare from countries like cote d’iviore and senegal (west african rice development association (warda), 2001). the production level of rice in nigeria therefore, reflects low level of production among rice farmers. some of the reasons for the deficit in rice production are connected with attendant dangers of flood, inadequate water supply at the end of dry season, shortage of agrochemicals, usage of unimproved seeds, crude mode of production, and high cost of labour among others (atala and voh, 1994). studies have shown that rice production in nigeria is primarily done by small scale producers with average farm size of 1.259ha (okoruwa and ogundele, 2006), who are constrained by some factors that do not promote effective and efficient rice production. this unsatisfactory development calls for a comprehensive research to further identify the factors influencing rice production among small scale farmers in nigeria. goni et al. (2007) opined that “the low agricultural productivity in nigeria is revealed by the actual yields of major crops such as rice compared with potential yields”. in a related manner, biyi (2005), reported that, nigeria has the potential to increase her domestic share of the rice market in a medium to long term investment strategy that can develop into selfsufficient industry locally. this implies that there is the tendency to increase output of rice in nigeria with the available land if productive resources and technologies are introduced to the farmers by agent of change and if they are adopted and used efficiently by small scale farmers in kogi state. the increase in the production of rice has not been enough to meet the consumption demand of the ever increasing population in nigeria. despite the importance of nigerian rice production within the west african context, a comprehensive and up to date picture of rice production and processing in particular is lacking (akpokodje et al., 2001). in spite of its contribution to the food requirements of the nigerian population, rice production in the country is put at about 3.2 million tones (babafada, 2003). this has been shown to be far below the national requirement as over $600 million worth of rice is annually being imported into the country (adeoye, 2003). several factors have been associated with adoption behaviour. these are the independent factors like personal, institution, environmental and socio – economic factors (matata et al., 2001). adesina and baidu-forson (1995) asserted in their study that a probit regression on socio-economic determinants revealed that age was negatively related with probability of participating in rice development projects, though asante et al. (2011) recorded a positive relationship. socio-economic determinants of improved rice technologies’ adoption in kogi state, nigeria 219 according to adetiloye (2012), most peasants are uneducated and ageing, the introduction of sustainable credit into agriculture will attract the youth and the educated, but in kogi state, the population of the youths in the rural area has been greatly vitiated by rural-urban migration, as most youth want to obtain white collar jobs and are not interested in farming. lawal and shittu (2006) posited that lack of access to credit causes setbacks to the productivity of farmers as a result of the fact that, these farmers do not have resources to procure improved seedlings, chemicals and hired labour, as well as transport and market their produce which would have improved their productivity. the state agricultural development project (adp) is an intervention initiated by the world bank to assist farmers in adopting improved agricultural production technologies as a means of achieving high productivity among the farmers. kogi state is endowed with vast arable land and human resources for rice production. however, it seems that rice farmers in kogi state have not been able to explore all these favourable variables to farmers to adopt and achieve desirable increase in yield. this could be due to some problems such as the inability of the farmers to adopt improved seed varieties, credits and use of agrochemicals, could also be as a result of the fact that most rice producers in the state are the aged farmers who are somewhat less inclined to adopt new practices as asserted by (bryon et al., 2005). in order to improve on the production of rice in this area, one may want to know the following: i. what are the socio-economic characteristics of small scale rice farmers in the study area? ii. what are the socio-economic characteristics that determine the adoption of improved rice technologies among small scale rice farmers in the study area? iii. what is the level of adoption of improved rice technologies by farmers in the area? iv. what are the factors that militate against the adoption of improved technologies? objectives of the study the main objective of the study is to analyze the socio-economic factors determining the production of rice among small scale farmers in kogi state, nigeria. the specific objectives are to: i. describe the socio-economic characteristics of small scale farmers growing rice ii. find out the influence of socioeconomic characteristics of small scale farmers on the adoption of improved rice technologies iii. find out the level of adoption of improved technologies. iv. find out the constraints against the adoption of improved rice technologies. 1. research methodology 1.1. the study area the study was carried out in kogi state, nigeria. the state lies on latitude 71’ 49 o north and longitude 61’ 45 o east with a geographical feature depicting young sedimentary rocks and alluvium along the riverbeds, which promotes agricultural activities and has an average maximum temperature of 33.2 o c and average minimum of 22.8 o c. it shares 220 j. o. saliu, m. k. ibrahim, f.o. eniojukan common boundaries with niger, kwara, nassarawa and the federal capital territory to the north. to the east, the state is bounded by benue state, to the south by enugu and anambra states, and to the west by ondo, ekiti and edo states. ethnically, igala, okun, egbira, nupe and bassa form the main ethnic groups. kogi state occupies 29,833 square kilometers and has a population of 3,314,043 out of which 1,672,903 are male and 1,641,140 female (npc, 2007). the state has two distinct weathers, the dry season, which lasts from november to march and rainy season that lasts from april to october. annual rainfall ranges from 1016mm to 1524mm retrieved from kogi state website, 17 th may, 2015. fig. 1 map of kogi state, nigeria key adp zone b – bassa adp zone c – koto-karfe and lokoja adp zone dibaji and idah socio-economic determinants of improved rice technologies’ adoption in kogi state, nigeria 221 1.2. sampling procedure the sampling frame for this study consists of farmers growing rice under various cropping systems in selected zones of kogi state. kogi state has four agricultural zones (a, b, c, and d), but b, c and d were purposively selected based on their involvement in rice production. a multistage sampling technique was used to select a total of 120 farmers (respondents) from the three zones. two blocks were selected from each zones, making 6 blocks in whole. a cell was also selected from each block to make 6 cells. finally, random sampling technique was used to select 20 contact farmers from registered rice farmers from each cell making a total of 120 contact farmers. each cell contained between 25 and 35 registered farmers. the sampled farmers were representative of the registered rice farmers. 1.3. method of data collection the data for this study were from primary source, since they were collected from respondents using structured questionnaire, personal interview and informal discussion. structured questionnaire was used for literate farmers and interview schedules for the illiterate ones. the data collected were subjected to statistical analysis using descriptive and inferential analysis. 1.4. method of data analysis data collected were analyzed based on the stated objectives. objective i: the socio-economic characteristics of respondents were analyzed using descriptive statistics such as frequency, percentage, mean and mode objective ii: the socio-economic characteristics of rice farmers that determine the adoption of improved rice technology were analyzed using the ordered probit regression model. the implicit form of the model is given thus: y*= x 1 β + e1 where y* is the exact but unobserved dependent variable x is the vector of independent variables and β is the vector of regression coefficients which is estimated. y = (x1 + x2 + x3 + x4………..xn) +e where: y = adoption level of improved rice technologies x1 = age of farmers in years (numbers) x2 = level of education (years spent in school) x3 = marital status (married=1, others = 0) x4 = sex (dummy variable; 1 = male, 0 = female) x5 = household size in numbers x6 = farmers experience in years x7 = farm size in hectare (ha) x8 = membership of farmers’ association (dummy variable; 1 = members, 0 = non-members) x9= source of labour x10= contact with extension agents (yes=1, no=0) e = error term 222 j. o. saliu, m. k. ibrahim, f.o. eniojukan objective iii: the adoption levels of the various innovations, practices, systems and technologies were placed on a binary or dichotomous variable where the farmers were asked to indicate if they have adopted a set of listed technologies or not. their response categories are as follows: yes-1 and no-0 and were further analyzed using descriptive statistics. the farmers were further grouped under three categories (high, medium and low adopters) using frequencies and percentages. objective iv: constraints militating against adoption of improved rice technology. a list of constraints were presented to the rice farmers to select the extent to which the constraints affects them. a 4-point likert type scale of very severe (vs), moderately severe (ms), less severe (ls) and not severe (ns) with values of 4, 3, 2 and 1 were used. the sum total of 4, 3, 2 &1=10 when divided by 4 gave an average of 2.5. any mean score below 2.5 would be considered not severe or less severe and above 2.5 would be considered either as very severe or moderately severe. 2. results and discussion 2.1. socio-economic characteristics of small scale rice farmers in the study area the result of the socio-economic characteristics of small scale farmers in the study area analyzed using frequency and percentage is shown in table below. they were age, sex, marital status, household size, size of land, source of labour, source of fund, contact with extension agents, cooperative membership, farming experience and educational level. table 1 distribution of the various socioeconomic characteristics of the respondents variable frequency percentage (%) mean/mode age(years) 20-29 30-39 40-49 50-59 60 and above total 13 25 65 10 7 120 10.8 20.8 54.2 8.3 5.8 100 42.25 sex male female total 75 45 120 62.5 37.5 100 75 marital status single married widowed separated total 10 36 11 3 120 8.3 80.0 9.2 2.5 100 36 educational qualification no formal education primary education secondary education tertiary education total 33 20 52 15 120 27.5 16.7 43.3 12.5 100 52 socio-economic determinants of improved rice technologies’ adoption in kogi state, nigeria 223 farming experience(years) 1-5 6-10 11-15 16-20 21 and above total 15 30 13 35 26 120 18.3 25.0 10.8 29.2 21.7 100 14.0 household size 1-5 persons 6-10 persons 11-15 persons 15-20 persons 21-25 persons total 17 80 19 2 2 120 14.2 66.7 15.8 1.7 1.7 100 10.6 size of farmland (ha) 1-5 6-10 11-15 16-20 21-25 total 73 37 10 0 0 120 60.8 30.8 8.3 0 0 100 5.375 cooperative membership yes no total 67 53 120 55.8 44.2 100 67 source of fund personal savings family cooperative loans total 74 16 30 120 61.7 13.3 25 100 74 source of labour family hired both total 38 33 49 120 31.7 27.5 40.8 100 49 contact with extension agents 1-3 times 4-6 times 7-10 times 11-15 times total 102 18 0 0 120 85 15 0 0 100 2.45 source: field survey, 2015 table 1 shows that 5.8% of the respondents were older than 60, 8.3% were between the ages of 50-59, 54.2% were between the ages of 40-49, 20.8% were between the ages of 30-39 and 10.8% were between the ages of 20-29. this implies that the dominant age of the respondents was between the economically productive ages of 40-49, which is in agreement with okoruwa and ogundele (2006) that the average age of rice farmers was estimated to be between 42 and 45 years. 224 j. o. saliu, m. k. ibrahim, f.o. eniojukan there was an indication that majority of the respondents were males with 62.5% and women with 37.5% as presented in table 1. this implies that the majority of the rice farmers in the study area were males. this result tallies with ilo (2007). however, the percentage of women involvement was significantly high, this is in harmony with ibrahim and klock, (2002) that contribution of women farmers in agricultural production is highly recognized, but in practice, they are less represented in most agricultural oriented development plans. eighty percent (80%) of the rice farmers were married. this is an indication that some of them may have support from their family members in carrying out the production of rice. others were 8.3% single, 9.2% widowed and 2.5% were separated. educational qualification showed that majority of the rice farmers constituting 72.5% had various forms of education ranging from primary to tertiary education. this will help to broaden the farmers’ knowledge and makes adoption of improved technologies easy. which is in accord with okoruwa and ogundele (2006) that the average year of schooling for the traditional rice farmers ranges between 7 -12 years, but contrary to mbah (2006) who reported that most of the rice farmers with 69% being either illiterates or semi-illiterates and 27.5% of the rice farmers had no formal education. the table further indicates that 66.7% had a family size ranging from 6-10 persons, with the implication that most of the rice farmers had large family size, and may need little additional labour outside their family to complement farming activities and operations which the family size cannot supply. this result supports the findings of mbah (2006), who said that greater number of rice farmers have large family size of about 1025 members. the table 1 also brought out the fact that 60.8% of the rice farmers had the size of farmland ranging from 1-5 hectares, with most of them having between 1-1.3 hectares and also small scaled, which is similar to the report of amaza and maurice (2005) that most of the rice farmers in nigeria are of small to medium scale categories with an average of 1.2 hectares. also, the table shows that 55.8% of the respondents were members of cooperative societies, while 44.2% were non-members of any cooperative society at all. the locality, distance, level of interactiveness could have made some of the rice farmers not to be members of cooperative. the fairly high percentage of cooperative membership could be due to benefit such as loans, inputs, sharing of ideas and full support from their opinion leaders who are well-educated, which complements the findings of idiong et al. (2007) who affirmed that membership of cooperative affords the farmers opportunities of sharing information on modern rice practices. table 1 shows that 61.67% of the respondents used their personal savings as their major source of fund, 13.33% got support from their families and 25% from cooperative loan. contact with extension agents on table 1 indicates that 85% of the respondents had contact with extension agents within the range of 1-3 times in a year and 15% had contact with extension agents between the range of 4-6 times, which indicates that few of the farmers had opportunity of getting adequate interaction for basic information on improved technologies. this result is in agreement with umunna (2008), who in his study reported that, 88.1% of the farmers that he investigated ranked extension agents as the highest source of agricultural information. 2.2. socio-economic determinants of the adoption of improved rice technologies the table 2 below shows the socio-economic determinants on the adoption of the most important eight (8) improved rice technologies by the respondents. the technologies socio-economic determinants of improved rice technologies’ adoption in kogi state, nigeria 225 are: use of improved varieties, agrochemicals, fertilizer, proper spacing, improved nursery, timely transplanting, improved processing and improved storage methods. table 2 regression result of the influence of socio-economic characteristics on the adoption of improved rice technologies variables coefficients standard error p˃|z| x1 age -0.1593593 0.1916627 0.406 x2 sex 0.2837989 0.2507697 0.258 x3 marital status 0.0040531 0.2379737 0.986 x4 educational level -0.1435379 0.2661899 0.590 x5 farming experience -0.1206955 0.1101299 0.273 x6 household size 0.0291158 0.1933426 0.880 x7 member of cooperative 1.029277 0.3253801 0.002** x8 size of farmland 0.2448807 0.2440001 0.316 x9 source of fund 0.0100499 0.0757207 0.894 x10source of labour 0.2746477 0.1626295 0.091* x11 contact with extension agents 0.069027 0.3180996 0.828 source: field survey, 2015 number of obs = 120 lr chi 2 (13) = 53.86 prob ˃ chi 2 = 0.000 pseudo r 2 = 0.1243 nb: figures in parentheses are z-values* and ** denote 10% and 1% significance respectively. from the result of the ordered probit regression on table 2, the coefficient of determination (lr) of 53.86 and adjusted (pr) 0.000 which implies that 100% of the changes experienced in the total adoption level of the farmers were explained by the variables in the model and the pr ratio of 53.86 was significant at 1%. it could be observed in the table that age, educational level and farming experience were negatively related, which implies that a year increase in age, educational level and/or farming experience could lead to a probable decrease in the adoption of all the selected most important eight(8) improved rice technologies, which is in agreement with adesina and baidu-forson (1995), that age was negatively related with probability of participation in rice development projects, but contrary to the findings of asante et al. (2011) and gbetibouo (2009) that a positive relationship exists between age and adoption of improved technologies. education had negative contribution to the adoption of rice technologies. this is in accord with martey et al, (2012) who asserted that the negative effect of education on adoption level suggests the strong competing effect of diverting skills of household heads to other off-farm employment opportunities. more so, the educated farmers may be willing to select out of the eight most important rice technologies. however, tambo and abdoulaye (2011) reported that education enhances access to information processing for technology uptake and higher farm productivity. other variables such as sex, marital status, household size, membership of cooperative, size of farmland, source of fund and contact with extension agents, all had positive contributions to the adoption of the eight selected improved technologies, which implies that an increase in these variables will lead to an increase in the adoption level of all the rice technologies and as such determine sustainable adoption of rice technologies. in contrast with asante et al. (2011) and gbetibouo (2009) who asserted that older farmers are more 226 j. o. saliu, m. k. ibrahim, f.o. eniojukan experienced which allows them to assess the attributes of an improved technology relative to younger household heads, this study holds that even with the longer years of farming experience of older farmers, younger farmers could be more innovative in terms of technology adoption and are more likely to take risk than older household heads. findings on marital status in this research, disagreed with martey et al. (2013). according to them, marital status was negatively associated with lower probability of participation in adoption of improved technologies. married household heads were less likely to participate in adoption process, which could be due to other off-farm responsibilities that they are also committed to. however, in this study, marital status formed a positive determinant of adopting rice technologies. cooperative membership and source of information were not only positive but significant at 1%, while source of labour was significant at 10%. this further indicates that membership of cooperative, source of fund and labour source and availability would strongly determine the successful adoption of rice technologies for sustainable rice production in kogi state, nigeria. 2.3. marginal effect of socio-economic characteristics on adoption of improved rice technologies the table 3 below shows the marginal effects of socio-economic determinants on adoption of improved rice technologies at different levels ranging from adoption of between 1-8 numbers of technologies adopted. table 3a marginal effects of socio-economic characteristics from 1-8 rice technologies adopted adoption levels (adl) variables adl=1 adl=2 adl=3 adl=4 adl=5 adl=6 adl=7 adl=8 age 0.0009277 0.0018096 0.0146719 0.0176624 0.0254763 -0.005494 -0.01541 -0.01541 sex -0.001868 -0.003529 -0.027460 -0.031841 -0.043574 0.0125942 0.0276827 0.0276827 marital status 0.0000214 0.0000417 0.0003382 0.0004071 0.0005873 -0.000127 -0.000355 -0.000355 educational level 0.0007964 0.0015802 0.0013148 0.0162595 0.0244971 -0.003647 -0.014148 -0.014148 farming experience 0.0007096 0.001384 0.0112221 0.0135094 0.0194861 -0.004202 -0.011787 -0.011787 household size -0.000183 -0.000356 -0.002890 -0.003479 -0.005018 0.0010821 0.0030352 0.0030352 cooperative membership -0.009817 -0.016161 -0.108715 -0.113395 -0.142555 0.048741 0.0946369 0.0946369 source of labour -0.001599 -0.003120 -0.025299 -0.030455 -0.043929 0.0021903 0.0265712 0.0265712 size of farmland -0.001468 -0.002863 -0.023214 -0.027946 -0.040309 0.0086925 0.0243819 0.0243819 contact with extension agents -0.000369 -0.000721 -0.005850 -0.007042 -0.010157 0.0021903 0.0061438 0.0061438 source: field survey, 2015 socio-economic determinants of improved rice technologies’ adoption in kogi state, nigeria 227 the marginal effect of ordered probit table shows the socio-economic determinants of the adoption level of improved rice technologies at different stages ranging from adoption of only one (1) technology all the way to adoption of eight (8) technologies. as shown in the table 3a above, it could be observed that age would positively determine the adoption of 1-5 technologies, which indicates that a year increase in age would lead to an increase in adoption of 1-5 technologies, but increase in the age of the rice farmers would turn negative when the number of rice technologies is increased to between 6-8. this implies that as the farmers advance in age, they lose the capacity of adopting more than 5 rice technologies. the maximum of adopting five out of the eight most important rice technologies was witnessed when marital status, education, farming experience were to determine number of rice technologies to be adopted, meaning that education and marital status ( in the case of more married people as the mode) has a limiting effect to the number of rice technologies that could be adopted, in summary, the socio-economic factors that favour the adoption of only one to five rice technologies out of all the eight most important technologies are likely to be small scale rice producers that may not want to embrace large scale farming. this could be interpreted to mean that the identified socio-economic variables that favour the use of all the eight rice technologies were socio-economic variables that were likely to determine the commercialization of rice production in the study area. in summary, many socio-economic variables that favour commercialization of rice production were found in the study area. 2.4. adoption level of improved rice technologies in the study area table 3b below shows the distribution of farmers according to the rice technology adopted in the study area. improved rice technologies considered were: use of improved varieties, use of agrochemicals, zero tillage, fertilizer application, proper spacing, improved nursery, timely transplanting, line planting, urea deep placement, planting depth, improved processing, improved storage methods, tube well and boreholes. table 3b distribution of respondents according to the rice technology adopted improved technologies frequency percentage (%) use of improved varieties 93 77.5 use of agrochemicals 120 100** zero tillage 9 7.5* fertilizer application 106 88.3 proper spacing 117 97.5** improved nursery 57 47.5 timely transplanting 57 47.5 line planting 112 93.3** urea deep placement 13 10.8* planting depth 108 90 improved processing 87 72.5 improved storage methods 67 55.8 tube well 7 5.8* boreholes 54 45 source: field survey, 2015 ** =high adoption *=low adoption. 228 j. o. saliu, m. k. ibrahim, f.o. eniojukan as indicated in table 3b above, technologies such as use of improved varieties (77.5%), use of agrochemicals (100%), fertilizer application (88.3%), proper spacing (97.5%), line planting (93.3%), planting depth (90%) and improved processing (72.5%) were widely accepted by the farmers in the study area because they have high adoption level. improved storage methods was a little above average with 55.8%, while, zero tillage (7.5%), improved nursery and timely transplanting (47.5%), urea deep placement (10.8%), tube well (5.8%) and boreholes (45%) had low adoption rates, which implies that they were not widely accepted by the better percentage of the rice farmers in the study area. as such irrigation rice farming through the use of tube well could be less adopted by farmers in the study area. the low adoption of tube well is similar to the findings of olaolu et al. (2011) on the impact of national fadama development project ii on rice farmers’ profitability in kogi state and contrary to the findings of umeh and chukwu (2013) where tube well and zero tillage were accepted. 2.5. categorization of farmers into various groups of adopters in table 3c below, eight technologies were purposively selected to classify the farmers into various groups of adopters; low adopters (1-3 technologies), medium adopters (4-5 technologies) and high adopters (6-8technologies) according to the number of technologies adopted. these technologies were selected because of the level of similarity the improved technologies had with existing farming practices. the technologies were: use of improved varieties, use of agrochemicals, fertilizer application, proper spacing, improved nursery, timely transplanting, improved processing and improved storage methods. table 3c distribution of farmers by level of adoption of improved rice technologies no of technologies adopted frequency percentage adoption level 1 1 0.83 low adopters 2 2 1.67 low adopters 3 11 9.17 low adopters 4 11 9.17 medium adopters 5 23 19.17 medium adopters 6 29 24.17 high adopters 7 15 12.50 high adopters 8 28 23.33 high adopters total 120 100.00 source: field survey, 2015 out of the eight technologies, any farmer who adopted 1/3 × 8, which culminate to 2.66 approximately 3 technologies can be regarded as a low adopter, while farmers with 2/3× 8, which is equal to 3-5.3 technologies approximately were classified as medium adopters and 6-8 as high adopters. the table above shows that 11.67% of the respondents were low adopters, 28.33% of the respondents was medium adopters and 60% were high adopters. this implies that rice technologies were adopted in the study area. socio-economic determinants of improved rice technologies’ adoption in kogi state, nigeria 229 2.6. constraints militating against the adoption of improved rice technologies table 4 respondents according to their constraints in the study area source: field survey, 2015 as indicated in table 4 above, problems such as fluctuation of climatic conditions with mean score of 3.5, lack of infrastructural facilities having a mean score 3.7 were perceived to be very severe by the farmers in the study area. problems such as illiteracy with mean score 2.8, lack of tractor hiring service with mean score 3.1 and lack of extension services (mean score 2.6) were perceived to be moderately severe, while lack of awareness of improved technologies and inaccessibility to cooperative organization with mean score of 2.2 and 2.1 respectively were perceived to be less severe problems. these findings are in agreement with guerin and guerin (1994), that there are several constraints to the adoption of improved technologies and innovation by farmers: these include the extent to which the rice farmer finds the new technology to be complex and difficult to comprehend. conclusion findings from this study have revealed that rice farmers in kogi state adopted improved rice technologies in various degrees. they will be willing to adopt between 6 to 8 selected most important technologies. this implies that adopting all eight most important rice technologies is a step towards commercialization of rice production. however, constraints such as availability of tractors and infrastructural facilities may not make the dream of rice commercialization realizable among the small scale rice farmers in the study area. various constraints vs ms ls ns total tvs tms tls tns total mean score remark lack of tractor hire service 45 48 24 3 120 180 144 48 3 375 3.1 moderately severe illiteracy 43 25 37 15 120 172 75 74 15 336 2.8 moderately severe lack of awareness of improved technologies 20 21 47 32 120 80 63 94 32 269 2.2 less severe fluctuation in climatic conditions 70 45 4 1 120 280 135 8 1 424 3.5 very severe lack of infrastructural facilities 95 18 0 7 120 380 54 0 7 441 3.7 very severe inaccessibility to cooperative organization 17 21 33 49 120 68 63 66 49 246 2.1 less severe lack of extension services 22 34 57 7 120 88 102 114 7 311 2.6 moderately severe 230 j. o. saliu, m. k. ibrahim, f.o. eniojukan recommendations i. farmers should receive more training and knowledge about improved rice technologies through steady flow of information by the extension agents. ii. rice processing industries should be established by private organizations to encourage commercial farming to support adoption of more improved rice technologies. iii. the high indication of adoption of the rice technologies should be used to an advantage by private rice industries who can utilize these farmers as out growers to feed their rice industries. iv. enabling environment should be provided through public private partnership to provide policies fashioned to help provide adequate infrastructural facilities in the study area. v. inputs and credit facilities should be made readily available to the farmers by their various cooperative societies in the study area. references 1. adeoye, g. o. 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(2005). identification of factors that influence technical efficiency in rice-based production systems in nigeria. paper presented at workshop on policies and strategies for promoting rice production and food security in sub-saharan africa: 9 november 2005, cotonou (benin). pp 8-9 5. asante, b.o., afari-sefa, v. and sarpong, d.b. (2011). determinants of small scale farmers’ decision to join farmers’ based organisations in ghana. afr. jr. agric. res., 6(10): 2273-2279 6. atala, t.k. and voh, j.p. (1994). utilization and sustainability of fadama in northern nigeria: input and extension delivery system. strategies for sustainable use of fadama land in northern nigeria. ticd and cser, ahmadu bello university, zaria, nigeria. pp. 147-152. 7. babafada, m. (2003). integrated rice production and export in nigeria, paper presented at a seminar on sustainable rice production in nigeria organized by central bank of nigeria, held at hamdala hotel kaduna from jan 14-15. pp. 12-15. 8. biyi, d. (2005). government policies and competitiveness of nigeria rice economy. paperpresented at the workshop on rice policy and food security in sub-saharan africa, organized by warda, cotonou, republic of benin, november, 7-9, 2005. pp. 17-19 9. byron, i. curtis, a. and mackay, j. (2005). providing social and economic data to support regional natural resource management in the burnett mary, bureau of rural sciences, canberra. pp. 21-25 10. gbetibouo, g. a. (2009). understanding farmers’ perception and adaptations to climate change and variability. the case of the limpopo basin south africa, ifpri discussion paper 00849. february, 2009. pp 1-7 11. goni, m., mohammed, s. and baba, b. a. (2007). analysis of resource-use efficiency in rice production in the lake chad area of borno state, nigeria. journal of sustainable development in agriculture and environment. 3(4): pp. 31-37. socio-economic determinants of improved rice technologies’ adoption in kogi state, nigeria 231 12. guerin l. j. and guerin t. f. (1994). constraints to the adoption of innovations in agricultural research and environmental management: australian journal of experimental agriculture,34(4): 549-571 13. ibrahim, a. and klock c. e. (2002). women entrepreneurs in tanzania: job, gender and small enterprises in africa.preliminary report; university of dares salaam entrepreneurship centre (udec). international food policy research institute, kampala, uganda. pp. 19-21 14. idiong, c. i., onyenweaku, e. o., domain, i. a and susan, b. o. (2007). a stochastic frontier analysis of technical efficiency in swamp and upland rice production system in cross river, nigeria. medwell agricultural journal 2(2). 299-305. 15. international labour organization (ilo) (2007). global employment trends for women brief: isbn978 – 92 120136 – 6. 16. kolawole, o. (2010). technical, allocative and economic efficiency in upland rice production system in nigeria. a frontier function approach to food production in a developing economy, pp. 273-279. 17. lawal, j. o. and shittu t. r. (2006). resource availability and cocoa farming in kwara state.a paper presented at science association of nigeria at tai solarin university of education, ijebu-ode, ogun state. pp 8-10 18. martey, e., alexander n. w., asante, b. o., kwame a., wilson, d., caleb, a., alhassan, r. m. (2013). participation in rice development projects. the case of small holder rice farmers in northern ghana. international journal of development and economic sustainability. 7(2): 13-27. 19. martey, e., alhassan, r. m., kuwormu, j. k. m. (2012). commercialization of smallholder agriculture in ghana: a tobit regression analysis. african journal of agricultural research. 7(14): 2131-2141. 20. matata, j. b. w., anandajayasekarani, a., kiriro, t. n., wandera, e.o. and dixon j., (2001).farming systems approach to technology development and transfer: farmesa, harare, zimbabwe. 420pp. 21. mbah s.o. (2006). resources management for rice production in ishiagu, ivo l.g.a. of ebonyi state. pp. 10-15 22. national population commission (npc) (2007). population figure. federal republic of nigeria. retrieved from http://www.npc.gov 23. ohajianya, d. o. and enwerem, v. a. (2013). farm size and technical efficiency of rice farmers in imo state, nigeria. greener journal of agricultural sciences, 3(2): 128-136. 24. ohajianya, d. o. and onyenweaku, c. e. (2002). “farm size and relative efficiency in nigeria. profit function analysis of rice farmers”. amse journal of modelling, measurement and control, 2(2): 1-16. 25. olaolu m. o., ajayi a. r. and akinnagbe o. m. (2011). impact of national fadama development project ii on rice farmers’ profitability in kogi state, nigeria. journal of agricultural extension, 15(1): 69-70. 26. okoruwa v.o. and ogundele o.o. (2006). technical efficiency differentials in rice production technologies in nigeria. a research paper presented at a workshop organized by the nigerian institute of social and economic research (niser) ibadan, nigeria. pp. 25-27 27. tambo, j. a. and abdoulaye, t. (2011). climate change and agricultural technology adoption: the case of drought tolerant maize in rural nigeria. mitigation adaptation strategy global change.17(3):277-292. 28. umeh g. n. and chukwu v. a. (2013). adoption differentials and benefits among farmers in ebonyi state of nigeria. journal of biology, agriculture and healthcare. 5(7). 29. umunna, n.o., (2008). agricultural information sources used by farmers in imo state, nigeria. information development, retrieved from: https://www.echocommunit y.org/ 30. www.officialwebsite\kogistategovernment\ofnigeriastateagenciesandboard\adp.mht retrieved 17 th may, 2015. 31. warda (2001). west africa rice development association strategic plan. 2003 -2010. retrieved from http://en. m.wikipedia.org/wiki/innovation http://www.npc.gov/ https://www.echocommunit/ http://www.officialwebsite/kogistategovernment/ofnigeriastateagenciesandboard/adp.mht 232 j. o. saliu, m. k. ibrahim, f.o. eniojukan socijalno-ekonomske determinante usvajanja unapređenih tehnologija proizvodnje pirinča od strane malih proizvođača u državi kogi u nigeriji ova studija je ispitivala socijalno-ekonomske determinante usvajanja unapređenih tehnologija proizvodnje pirinča od strane malih proizvođača u državi kogi u nigeriji. posebno je istražen uticaj socio-ekonomskih karakteristika na usvajanje unapređenih tehnologija proizvodnje pirinča, nivo usvajanja od strane poljoprivrednika i ograničenja protiv usvajanja ovih tehnologija. metodom slučajnog uzorka u više faza izabrano je 120 registrovanih proizvođača pirinča u okviru projekta poljoprivrednog razvoja države kogi. frekvencije, procenti, srednje vrednosti, modus, srednje ocene i uređena probit regresija su kori eni za analizu podataka. ezultati navode da su svi poljoprivrednici pre li na upotrebu agrohemikalija (100%), kao i da su poljoprivrednici kategorisani prema stepenu usvajanja (nizak, srednji i visok stepen usvajanja), pri čemu je 60% poljoprivrednika zabeležilo visok stepen usvajanja. ezultati su takođe pokazali da je nedostatak infrastrukturnih objekata shva en kao velika prepreka od strane poljoprivrednika u proučavanom području, sa srednjom ocenom od 3,7. međutim, uređena probit regresija je otkrila da su članstvo u zadruzi (1,029277 na 1% značaja), izvor finansija (0,0100499 na 1% značaja)) i izvor radne snage (0,2746477, na 10% značaja) imali uticaj na usvajanje tehnologija proizvodnje pirinča, dok je marginalni efekat na veličinu poseda, veličinu doma instva, kontakt sa savetodavnim agentima povoljno uticao na usvajanje svih osam najvažnijih tehnologija proizvodnje pirinča koje se mogu koristiti kao mera naklonjenosti komercijalnoj proizvodnji pirinča. studija preporučuje da privatne industrije pirinča treba da iskoriste ovaj pozitivan stav proizvođača pirinča ka usvajanju tehnologije proizvodnje pirinča tako to e otvarati pogone za obradu pirinča u posmatranom području i pretvoriti male proizvođače pirinča u glavne snabdevače industrija. ključne reči: pirinač, unapređene tehnologije, usvajanje, socijalno-ekonomske determinante plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 3, 2016, pp. 261 271 review paper the mechanisms of competition protection – significance of applying “the rule of reason” 1 udc 346.545/.546 sonja arsić * university of niš, faculty of economics, niš, serbia abstract. in the court practice of 21 th century the doctrine of the rule of reason is getting more significant despite all the criticism on its behalf in theory. the rule of reason is the essence of this doctrine and one of the crucial elements in the verdicts in the usa and europe. this rule makes legal restrictive agreements which are not by the law, but improve competition and social wellbeing. in this way, the problems of the law application in antitrust law in the usa and the competition law in europe are overcome. the rule recognizes the specifications of the specific agreement and enables the analyses of the agreement effects. the analyses of court decisions in the usa and europe law given in this essay, help us understand the way of applying the rule of reason in practice and what are the advantages of this rule compared to per se rule. key words: rule of reason, per se rule, competition law, antitrust law, restrictive agreements. introduction in recent time in the theoretical circles of american and european legal system, a great debate has been led about justification of the rule of reason legislation and if the application of this law is justified for the enterprises to break "legally" the regulations, or if the application of this rule protects the interests of the individuals who can make the arrangements and agreements with limited regulations to gain the wellbeing of consumers. and while some believe that applying the rule of reason is justified, there are some who believe that the rule has many defects and it is its own greatest enemy. the origin of the rule of reason is from the american antitrust law with whole doctrine of rule of reason and it is used for the interpretation of the first clause of sherman’s law, one of the 1received june 16, 2016 / revised august 16, 2016 / accepted september 5, 2016 corresponding author: sonja arsić faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: sonjaarsic87@hotmail.com * phd student 262 s. arsić most important legal acts in the area of the usa competition. in the american law the rule of reason has a specific meaning. giving the consent whether restrictive practice should be forbidden as unreasonable limitation of competition is analysed from one case to another (which & bailey, 2015, pp. 143-144). the sherman’s law was adopted after the great debate in american congress in 1890, which was started by farmers unsatisfied by increasing power of trusts in the usa. the main goal of sherman’s law is providing the consumers protection and wellbeing by protecting the market competition. later, by applying of the sherman’s law into the justice system of the usa, introducing the rule of reason was needed, so the first act of this law could be applied on agreements and contracts which contain restrictive regulations, but contribute the wellbeing of consumers, in products quality or bigger choice of products, and decreasing the price of products by using the production innovations or the economies of size advantages. so in these cases, the courts were not sure what kind of decision to bring. on the onehand, these agreements were opposite to sherman’s law; on the other, they were increasing the wellbeing of the consumers, which was the purpose of the sherman’s law. the courts saw an overcoming of these limitations by applying the rule of reason, which means, in a specific case, the estimation of positive and negative effect on the restrictive agreement on the competition (and through the competition to the wellbeing of consumers), and depending on the overcoming effects, to bring the decision of the legality of the agreement. for example, in the case of the monopoly, cession of the right to selective sale, or the cession of rights to exclusive production, it is not that simple to determine if such a activity, or agreement, has positive or negative effects on the market competition. in the antitrust american law, the courts have an attitude, before the certain business is "marked “as illegal, it is necessary to examine if that kind of business is hostile to the competition, to be announced as illegal (hovenkamp, 2016, pp. 454-458). this practice of american courts is contrary to previous practice which applied per se rule, without estimation of the effect on consumer’s wellbeing. per se rule implies restrictive agreement with limited clauses, which is opposite to sherman’s law, and itself is illegal and there is no need for further effects analyses of this agreement to consumers competition and wellbeing. this rule is even today applied in american and european court practice, but only to the agreements which represent the hardest competition rights breaking, like fix prices agreements, markets dividing agreements, trade limitation agreements and others. the advantages of per se rule are in the simplicity of court procedure because the prosecutor has an obligation to prove the agreement contains the regulations which are illegal by law. but, the disadvantage of this rule is that the agreements with restrictive regulations marked by lawmaker as per se illegal, are declined as lawless, although they contribute to the wellbeing of consumers, competition or trade development. european competition law has borrowed the rule of reason from the american law. in european competition law, the rule of reason is used for interpretation of the regulations of 101 act in treaty on the functioning of the european union. the application of this rule in european law faced great resistance because of the differences between american antitrust law and european competition law. in spite of the boycott, the application of this rule was accepted by european courts (not officially) in the mid 80s of xx century, and the rule is very often used even today for the analyzing of the positive and negative effects of restrictive competition agreements. the mechanisms of competition protection – significance of applying „the rule of reason“ 263 the rule of reason can be observed as one of the ways of improving the consumer’s wellbeing on the market, but also as an instrument for liberty protection of the individual to make contracts and agreements which inspire society progress. allowance of the restrictive agreements under the rule of reason is interpretive from one case to another and it is a matter of specific analysis of its positive and negative effects. very often, the makers of agreement are not familiar with the fact whether the agreement is legal from the aspect of the rule of reason and for that purpose, analysing the court decisions in concrete cases is needed. this analysis provides better understanding of this rule and the ways of its application in courts practice. besides introduction, conclusion and references, this work also contains two more parts. in the first part, rule of reason is presented from theoretical point of view in american and european law system, while in the other part the application of the rule of reason is presented as held in american and european courts. 1. the rule of reason in american law system and eu law system 1.1. the rule of reason in the antitrust law in the justice system of the usa, the competition is regulated by sherman’s law as the most important act in this area. during the application of this law in practice, it became clear that it is not possible to determine in certain case that the competition has been violated, and is it necessary to recognize the other circumstances of the case when the final decision is made. this is the reason for developing the doctrine known in american theory as the doctrine of common sense. this doctrine implies, while estimating the violation of competition, the necessity of comparison of pro competitive and con competitive effect of the specific behavior, meaning whether it makes more damage or benefits (vukadinovic, 2008, pp. 334-368). in american antritrust law, the difference is made according to the fact whether the regulation of agreement opposite to sherman’s act is the main goal of the agreement or not. if it is not the main goal of the agreement, but it is necessary for goal making of the agreement, and at the same time there are more positive effects on the competition and society, under the wing of the reason doctrine, the court finds that agreement legal. the determination of the goal and intent of the agreement can sometimes be mixed up. for example, both sides can declare that they had a competitive goal in the agreement, based on the real or possible effects, but the court may find that the main goal is non-competitive. in some cases, like standard oil, the court had no doubts in applying the first act of the sherman’s law. however, in european law of competition, there was pronuptia case, when the federal court in germany, bundesgerichtshof addressed the european court of justice for help in applying the act 85(1) of treaty establishing the european community. the regulations for the first and the second act of the sherman’s law determine the behavior which is found inappropriate and bad for the trade, and at the same time, for the wellbeing of the consumer, which is the main goal of this law. the first act of the sherman’s law says: every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is declared to be illegal (sherman act,15 u.s.c. 1-11.). actually, the first act of sherman’s law which prohibits unreasonable trade limitation, gives space for applying the doctrine of rule of reason. 264 s. arsić the act two determines that every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court (sherman act,15 u.s.c. 1-11.). for violation of the first and the second act of the sherman’s law, there are set fines and jail sentences determined by the court. the final goal of the sherman law is the consumer’s protection. the doctrine of the rule of reason is narrowly connected to the consumers’ protection because during the applying the rule of reason on the certain case, “balances" whether the restrictions present "reasonable" or "unreasonable“ trade limitations having in mind the effects of concrete agreement on the consumers. the application of the rule of reason in antitrust law of america is set in three steps. first of all, the prosecutor has a burden of proving that the certain agreement contains restrictions which are "unreasonably“ limiting the trade and it makes it opposite to the sherman’s law. after the prosecutor’s declaration, the burden is placed upon the accused, who stands his defense with the arguments which prove that the certain agreement limits the trade "reasonably“. if the accused stands up with strong evidence to support his statement, the burden of proving is transferred to the prosecutor who has to prove that there is alternative that limits the trade less, and which enables the final goal of the agreement. when the prosecutor fails to prove the more reasonable alternative of the agreement, the "balancing point" is reached. in that case, the balancing test is applied when the court estimates pro-competitive and con-competitive agreements’ effects on trade. if pro-competitive effects overcome, the court finds the agreement legal, if con-competitive effects overcome, the court finds that the agreement "unreasonably" limits the trade and finds it illegal. in the practice of the american justice system, the balance point is reached very seldom and the balance test is applied very rarely. from 300 cases analysed in the courts in america in the last 15 years, only in 5% of the cases the balance test was used (fundakowski, 2013, p.1). there is a question if the rule of reason breaks the antitrust law? in the last years, the supreme court of america made accusations of antitrust law and marked it as “endlessly slow“ and pointed out that because of its defects, court costs are increasing. the congress made antitrust modernization commission in 2002 to examine if the modernization of antitrust law was necessary. this commission reported claims that it was not necessary to revise against monopoly laws and that the rule of reason analysis can successfully valuate pro-competitive effects of questionable behavior (antitrust modernization commission, 2007, pp. 31-47). in the report of the commission, the main goal is the wellbeing of the consumers. 1.2. the rule of reason in eu competition law the rule of reason is borrowed from the american antitrust law and it is used in applying the act 101 of the treaty on the functioning of the european union. during the 80s of 20 th century, there was a great pressure on the european commission to adopt this rule because many of participants on the market saw this rule as a getaway from the act 81 posture 1(today’s act 101) as a way of avoiding due notification of commission (monti, the mechanisms of competition protection – significance of applying „the rule of reason“ 265 2007, pp. 29-31). eu lawyers warned if the commission decides to use the rule of reason during the evaluation of breaking the competition right by agreements, the signatories of the agreement would be spared to declare the agreement to the commission, they would do the economical analyses by themselves if the agreement has restrictive effects on the competition. the arguments for adopting the rule of reason in eu law were always weak (monty, 2007. pp. 29-31). some theorists find that it is not possible to apply the rule of reason on interpretation of the act 101 because of the huge differences between the sherman’s law and the act 101 of the treaty on the functioning of the european union (weatherill&beaumont, 1993 and steiner, 1992). the eu law is materially different from the american law in many aspects and for that reason terminology should not be "imported" from the american legislation (which&surfin, 1987, pp. 1-37). in the usa, the national courts make the judgment if the agreement has anticompetitive effect or not, while in eu law the european commission makes the evaluation of anti-competitive effect of the agreement. further on, by posture 3 of act 101 of the treaty on the functioning of the european union, the exceptions are predicted. that problem can be solved by formal amendment upon the contract with withdrawal of the posture 3 act 81 (act 101 now) or adding posture 3 to posture1 act 81 (buttigieg, 2009, pp. 90-91). the important difference between those two justice systems is that antitrust law does not have de minimus rule. in the european competition law, agreements with fixing price represent illegal activities and they are prohibited per se. in antitrust law of the usa, suggestion of the prices does not involve per se prohibition (european commission, 1997, pp.61-63). 1.3. per se illegal agreements if the restricted agreement contains the regulations marked by american antitrust law as the hardest competition valuations, there is no need for inspecting those effects in such an agreement to competition or if the rule of reason can be applied. such an agreement in the american antitrust law is found to be per se illegal. every agreement that eliminates competition by fixing the prices is per se illegal, but the fact is that this kind of agreement is usually signed by more than one individual which coordinates their activities (silently maybe) and it eliminates the real or potential competition (bork, 1966, pp. 377-415). the agreement which limits the production in antitrust law represent the violation of the competition, but the difference is made between limiting the production (output) and restraining from the trade. restraining from the trade in this legal system is not per se illegal activity. the horizontal agreements on price fixing, vertical agreements on territory or consumers division, the boycott agreements and the certain bonding arrangements also present in american justice system per se illegal activities (starling, 1999). the definition of the activities which by themselves present illegal activities was one of the most important issues of antitrust law of american justice system. in the case of addyston pipe and steel co.v. united states william howard taft, the chief judge of court of appeals at that time, later 27 th president of usa, tried to answer whether the fixing of the prices is reasonable limitation of the trade or not. in the mentioned case the pipes manufacturers united by an agreement so they could artificially rise the price of the pipes on the market. they defended on court that their price is reasonable and there is no unreasonable trade limitation. taff had an opinion that the agreement whose goal is artificial price making breaks the sherman’s act. he pointed out that it did not matter if trust affected the 266 s. arsić prices or they were formed in a fair way. what is important is that the main goal of the agreement artificially affects the market prices (supreme justia court, 1899). in this case the rule per se is applied by which all agreements with the price fixing are illegal by themselves. the price fixing is the biggest violation of competition in the usa and the economy analyses are not necessary in this case because the agreement with the goal of prices fixing is per se illegal (armentano, 2007, pp. 81-99). bork (1993) thinks that taft's opinion in this case is one of the greatest, if not the greatest antitrust opinion in the history of law (bork, 1993, pp. 26-27). there are some harsh critics on per se approach in court practice. the applying of this rule is especially criticized in the big mergers and in horizontal agreements on prices, but that criticism should not be understood like unconditional support to the rule of reason, because this rule approach itself is fatally flawed (armentano, 2007, pp. 81-99). in the case of united states v. realty multy-list the court has concluded that the rule per se is the main trump of the antitrust law. when the prosecutor uses it properly all that is left is to pick up the gainings (supreme justia court, 1896). 2. the rule of reason in court practice 2.1. the use of the rule of reason in the court practice in usa very famous trust in the usa in the time of bringing the sherman’s law was the trust standard oil, under whose control over 40 corporations were functioning. standard oil co was founded in 1870 and it dealt with production, processing and transport of oil. in 1872 this trust had a monopoly position on the oil market, large number of refineries of similar abilities and capital efficiency worked in the framework of south improvement company. by merging of companies, standard oil managed to overcome the depression which struck american economy while the other competitors on the oil market were heavily hit by situation in economy. during 1874 the capital of standard oil was increased to 3500 000$ (montague, 2001, pp. 41-53). because of the doubt of unreasonable limited trade by standard oil, the procedure was started and on may 15 th 1911 the supreme court made a decision that standard oil violates the antimonopoly law of the usa and in that case appled measure "the killing of power" and prohibited further actions that limited trade. in its decision, the court said that the sherman’s act should be interpreted in "the light of reason" and with this act are forbidden all contracts and trusts that "unreasonably" or "exaggeratingly" limit international trade (supreme justia court, 1911). the court pointed out that doctrine that prohibited all the contracts and trusts that limit the trade is replaced by doctrine of common sense in “interest of individual freedom“ which has the right to conclude the deal which is legal only if limitations in it limit the trade in "reasonable" way (supreme justia court, 1911). in this way, the court has shown its commitment to applying the rule of reason in solving the cases, and this case was very important in the history of antitrust law of the usa. in the court practice of the usa, there is the case known as gte sylvania from 1977, when the supreme court made a decision that unpriced limitations which were applied by this company may be interpreted in the frame of the doctrine of rule of reason and cannot present the violation of the first article of the sherman’s act, because those limitations made possible for the manufacturer to achieve certain efficiency in the distribution of his products and obtain the stable supplying of the consumers. actually, the mechanisms of competition protection – significance of applying „the rule of reason“ 267 gte sylvania company is tv manufacturer which sells its products through the distribution network home entertainment products division and it is the 8 th largest manufacturer in the usa. after sale has fallen for 1-2% this company was determined to question its marketing strategy. as a result, in 1962 it adopted a new plan of franchise endorsement to enlarge the competition among franchisees. after applying the new plan of franchise, the sale of the company increased about 5% by 1965. at some point sylvania gave the franchise to the new franchisee to sell on the location only a mile away from the existing location of one of its own franchisee continental t.v. inc. which sued for the same reason. the district court found the giving of the franchise to another franchisee located next to continental a violation of the first act of the sherman’s law which caused loses to continental. the supreme court made a different verdict from the district court. the supreme court thought it should be judged by the rule of reason, not to apply per se rule in this case. the limitation of the location by gte sylvania, supreme court evaluated as the behavior which can be interpreted among the common sense doctrine which makes it legal (supreme justia court, 1977). in this case the supreme court gave an advantage to the rule of reason instead of per se rule because the agreement had positive effects on the competition and consumers. in the case usa against first nat'l bank of lexington (1964) there was a question if the division of the market presents per se illegal activity towards the sherman’s law. in this case, the usa thinks those consolidations of the first and the fourth by size (of the six) commercial banks in the usa represents the breaking of the first and the second act of the sherman’s law. although the consolidation is approved by comptroller of the currency, the federal deposit insurance corporation and the board of governors of the federal reserve system found that this consolidation is not in terms with the sherman’s act. they claimed that uniting of two biggest competitors on the market of commercial banks limits the competition on that market. the comptroller of the currency got the report from the federal deposit insurance corporation and the board of governors which points out that such a consolidation would have negative effects on competition, but the consolidation is still approved. the district court approved the consolidation based on proposal of the comptroller of the currency, but left the space to examine if that consolidation is against the sherman’s law. by the verdict of the supreme court the consolidation was an illegal activity and represents the violation of the competition according to the sherman’s law (supreme justia court, 1964). the supreme court pointed out that the consolidation did not have the intention to ruin the competition, but it would lead to that. so, here we have a case where the goal of the restrictive agreement is not anti-competition, but still the supreme court decided to ban the agreement because of its bad influence on market. 2.2. applying of the rule of reason in the court practice in eu the rule of reason in the "european style" is "born" in famous cassis de dijon case (schrauwen, 2005, pp. 5-11). the legislation of germany prohibited the import of fruit liqueur which contains under 25% of alcohol. the court made a decision that such regulation is "unreasonable" (eur-lex, 1979). this case proves that the rule of reason adopted in eu law is a legitimate approach. first of all, the court of germany used this rule and concluded that the regulation which bans the import is "unreasonable”. the limitation of quantity of import is against the article 30 in the treaty establishing the european economic community, where is said that limitation of import is against the law 268 s. arsić in the member states, and other measurements with such an effect (consolidated versions of the treaty on european union and the treaty establishing the european community, 2002, pp. 1-184) . in the present court practice of the eu three kinds of agreements with the rule of reason are: 1. the contracts of exclusive right of selling on the certain market; 2. the contracts of franchise; 3. the selective sale agreements and distribution (dashwood et all. 2011, p.729). the well known is pronuptia case (1986), the court stands for the contracts of franchisees which refers to the goods distribution and allows to the giver of franchise to gain the financial benefit and increase its reputational power in business without breaking the rule of competition, which is not against the act 101 (1) per se (eur-lex, 1986). in pronuptia case, the giver of the franchise pronuptia de paris gmbh concluded a deal of franchising with the company pronuptia de paris irmgard schillgallis of selling the wedding dresses on the territory of hamburg, oldenburg and hanover. the litigation between franchisor and franchisees was created because the franchisee pronuptia de paris irmgard schillgallis did not pay to franchisor pronuptia de paris gmbh royalty fees for the time between 1978 and 1980. when the case ended up in court, franchisee calls that the contract with franchisor was not valid, because it was against the act 85(1) the treaty establishing the european community. the contract of founding the european economic community. also, the franchisee pointed out that in the commission regulation number 67/67 the contract about the franchising was not named in the group of exceptions block, and because of that cannot be excused from the prohibitions predicted by the article 85(1). the federal court in germany bundesgerichtshof sent the case to the european court of justice, according to act 177 to make the preliminary decision. the european court of justice made a decision that provisions of commission regulations number 67/67 cannot be applied to franchising agreement because of its differences from the contract of exclusive sale which is regulated by this regulation. also it was determined that the contract is not against the article 85(1) because the regulations it contains are necessary to achieve the goal of the agreement which is not anti competitive (hildebrand, 2005, pp. 42-46). the court has determined if the franchising agreement contains the restrictions about market division, this agreement is the violation of the competition according to the article 101(1). the violation of the competition will be concerted practice between giver and the receiver of the franchise about the prices, while the recommendations of the prices by the giver of the franchise do not present the violation of the competition per se. in this case, the european court makes difference between the terms of fixing the prices and suggesting the prices by the franchisor and concludes that the strong fixing of the prices and adjustment of the obligation to the franchisee to sell on the certain price is illegal per se, while the adjustment of the prices, as giving the recommendations about prices that franchisee might, but does not have to hold, is not illegal. this case is very important in the eu law because the commission, relying on the decision of the court, after this case, brought the regulation number 4087/88 on the application of article 85 (3) of the treaty to categories of franchise agreements upon the franchise contracts. the article 1 of this regulation determines that the article 85(1) does not apply to franchise contracts (commission regulation ecc, 1988, pp. 46-52). the mechanisms of competition protection – significance of applying „the rule of reason“ 269 the court of justice of the eu in the case vs. european night services had a stand that the type of violation is crucial during the application the rule of reason (sauter, 2016, pp.98-101). if the limitations of the agreement belong to the group of limitations to the actions, they can be solved by the article 101 paragraph 1: if the limitations are by the object, the solution is by the article 101 paragraph 3 of the treaty on the functioning of the european union (eur-lex, 1998). in the european law, a well-known case is societe technique miniere v. maschinenbau ulm gmbh (1966) where the court of justice concluded that there is an exclusive right of distribution and the contract is not opposite to treaty establishing the european economic community (eur-lex, 1966). the french court asked for the european court of justice’s opinion in this case, because it wasn’t sure that the cession of the rights to exclusive sale automatically presents the violation of article 85 paragraph 1 treaty establishing the european economic community. then the european court started the analysis of the effects of agreement on the trade between the member states to check if there was agreement prevention, restriction or distortion of competition among member states. the agreement had certain anti-competitive effects on trade among the member states, but the parties of agreement said that the limitations are necessary for entering the new market. in this case, the european court set out the new rule in applying the article 85(1) which is, the agreements with the clause of cession of the exclusive right of sale on the certain market are not per se opposite to treaty establishing the european economic community. to determine if these agreements had negative effects on competition on the certain market, the conditions of agreements must be examined, as well as the effects of that agreement. especially analysing the nature and quantity of the products in the agreement, as a position of the giver and receiver of the exclusive right of sale of these products on the certain territory. conclusion the general conclusion is that the rule of reason is introduced into the court practice for two reasons. the first is imprecision of the law that regulates the competition in american and european justice system. in that way, the space is left for the participants to find the ways to bypass the law. the second reason is specificity and difference of the restrictive agreements which cannot be placed in the same form, so the analyses of each effect of agreements are needed. and while the per se rule generalizes the restrictive agreements, by finding the certain restrictive regulations illegal without seeing trough the effects of the agreement on the competition, the rule of reason eases the rigidity of the law and regulations by accepting the specifications of the restrictive agreements and their effects on the consumers’ wellbeing. it seems that the rule of reason is more successful in obtaining the final goal of legally regulated competition the protection of the consumers because it allows restrictive agreements which positively affect the wellbeing of consumers, although they are not by the law because of their restrictive regulations. still, the rule of reason keeps its strictness in law applying, because the agreements whose main goal is anti competitive, despite their positive effects, cannot be legal. 270 s. arsić references antitrust modernization commission (2007). report and recommendations. stratford: imperial graphics, pp. 31-47. armentano, d. t. 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(2008). uvod u institucije i pravo eu. 1rd edition, kragujevac: pravni fakultet u kragujevcu, centar za pravo evropske unije, str. 334-368. weatherill, s., beaumont, p. r. (1993). ec law, uk: penguin books, pp. 701-704. which, r. & bailey, d. (2015). competition law. 8rd edition, oxford: oxford university press, pp. 143-144. whish, r. & sufrin b. e. (1987). article 85 and the rule of reason. yearbook of european law, 7(1): 1-37. mehanizmi zaštite konkurencije – značaj primene „pravila razuma“ u sudskoj praksi xxi veka doktrina vladavine razuma sve više dobija na značaju i pored mnogih kritika na njen račun u teoriji. pravilo razuma čini suštinu ove doktrine i jedan je od nezaobilaznih elemenata mnogih sudskih odluka kako u americi tako i u evropi. ovo pravilo omogućuje legalnost restriktivnih sporazuma koji nisu u skladu sa zakonom a doprinose poboljšanju konkurencije i društvenog blagostanja. time se prevazilaze problemi koji nastaju prilikom primene zakona u antitrusnom pravu u americi i pravu konkurencije u evropi. pravilo uvažava specifičnosti konkretnog sporazuma i omogućava analizu efekata cilja sporazuma. analiza sudskih odluka u američkom i evropskom zakonodavstvu predstavljena ovim radom pomaže da se shvati na koji način se pravilo razuma primenjuje u praksi i koje su prednosti ovog pravila u odnosu na pravilo per se. ključne reči: pravilo razuma, pravilo per se, pravo konkurencije, antitrusno pravo, restriktivni sporazumi. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 3, 2014, pp. 191 205 review paper behavioral analysis of economic choice: contribution to improving economic rationality  udc 159.9.019.4:330 dragan petrović university of niš, faculty of economics, serbia abstract. if we start from the presumption that the aim of the theoretical analysis of the complex socio-economic reality is to provide certain knowledge by applying of which there can be improvement and betterment of that reality, then economical and theoretical mainstream usually does this starting from axiom of the rationality. on the other hand, if we keep in mind the current empirical data on the numerous problems and inefficient functioning of the economic actors, then the logical question that occurs is whether the presumption of the unlimited rationality of the economic subjects should be so easily idealised. starting from the fact that the bihevioral economics has a special role in the powerful critical attack on the “strong core” of the neo-classical mainstream, this paper discusses numerous psychological limitations of the process of economic decision-making, and the possibilities of their overcoming. in relation to this, we especially emphasize the importance of the behavioral analysis and its instrumentalist support directed toward the improvement of economic rationality and the quality of human decisions. key words: rational choice, behavioral economics, behavioral anomalies and biases, „new‟ paternalism introduction it is widespread opinion that the economic science is on a high level in the world of the social sciences. the economic science primarily owns such a reputation to the presumption of the rational behaviour. as a matter of fact, the promoters of the economic ideas have been usually starting from the basic principles of deductive logic when constructing the formal models of the human behaviour. these principles state that the economic research is based on certain presumptions or axioms that don‟t need to be proved. received september 5, 2014 / accepted december 17, 2014 corresponding author: dragan petrović faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 652  e-mail: dragan.petrovic@eknfak.ni.ac.rs d. petrović 192 the typical axiom from which the neoclassical mainstream theory starts is the rational behaviour of the economic subjects in the basis of which is the presumption that the complex social phenomena can be explained within the boundaries of the elemental social impact from which they are constructed. this point of view, known as the methodological individualism, demands from the theoreticians of the rational choice to start their research with the individual impacts, and to analyse the other social phenomena as secondary or as derived from the individual impacts. this means that the starting point are the universal theoretic frames concerned with the individual that behaves rationally no matter in which of the economic activities he takes part (consumer, house hold, enterpriser). after that the theories of consumption, production, prices etc, can be created, with no help of the methodological transmission mechanisms. at the same time the accent is on the concept of the maximising rationality that starts from achieving the high satisfaction of the economic agents and in which the firms are reduced on the manufacturing functions, consumers on the utility functions, the institutions are given, and the process of optimisation is omnipresent. the model of research that starts from the concept of the maximising rationality is close to the economists, or better to say their favourite. however, numerous empirical data about the problems and the inefficient functioning of the economic actors seem to more and more raise the question of whether and how should be persistent in defending the „boundaries‟ of the maximising reality. this dilemma is not a simple one and it can be proved by the fact that any kind of accepting the existence of the bounded rationality would mean that there are also forms of irrational behaviour on the market. on the other hand, one should not ignore the fact that the conception of the full and maximising rationality shows considerable weaknesses related to the real functioning of the economy, or related to the explanation in which way the real human mind brings economic decisions and how it adjusts itself to the circumstances of the real world. the above stated theoretical methodological problems and doubts related to the phenomenology of the human rationality and maximisation, have caused the appearance and development of the concept of the bounded rationality. as the first ones who opposed the concept of the maximising, the representatives of behavioral economic theory should be mentioned. the behavioral economic theory has been created as a symbiosis of the economic science and psychology. its key premise is concerned with giving up the widely accepted model of the rational choice – the fundament on which the traditional economic analysis is based. many experiments, conducted by the behavioral economists have shown that the realistic behavior of people does not have much in common with the main protagonist of the neoclassical theory – hyper-rational homo economicuswho has unlimited calculating capabilities and perfect information. having in mind the strengthening of the reputation and the position of the behavioral economics in various areas, the aim of this paper is to make the realistic insight of its importance from the standpoint of improving the understanding of the economic behavior. this aim will be achieved through examining the hypothesis about the fact that the behavioral analysis of economic choice, on the basis of identifying numerous failures related to the psychological dysfunctions, provides powerful instrumentalist support for designing government measures directed toward improvement quality of human decisions. behavioral analysis of economic choice: contribution to improving economic rationality 193 1. the standard model of the rational choice the standard approach, accepted in the economic theory, presupposes a full rationality of the economic actors. from the standpoint of the methodology and the conception of the scientific progress, the rational choice definitely represents a hard core of the scientific research program of the neoclassical micro economy (lakatos, 1970, p. 191). when the economists talk about the full rationality, they have in mind a couple of things. first of all it assumed that the individuals are capable to hierarchically order their preferences and needs (robins, 1945[1932], pp. 78-79), and therefore to undertake actions in the direction of their full satisfying. next, it is assumed that they have a capability of precise calculating of the expenses and utility connected to different variants of choice. that means that when they face a couple of options, individuals usually choose the one that gives best results (elster, 1989, p. 22). finally, in the conditions of uncertainty, the individuals rely on the calculating of the possibility of happening of certain events and possible outcomes, using all the available information for this purpose, also those that can help them to successfully correct their starting judgments and calculations (camerer, et al., 2003, pp. 1214 -1215). the understanding of rationality, as presented in the modern economic theory, has the epithet of formal. as a matter of fact, on the basis of the formalistic method that presupposes the existence of the formal system of the logical ties (wilber, harrison, 1978, p.62), the notion of rationality doesn‟t speak about whether the aims to which the individuals strive are justified or not, or whether there is any contradiction or opposition of the individual preferences. the dominant purpose of understanding the rationality is making a presumption about the existence of choice, which implies that with any given structure of preferences and group of limitations (physical, institutionalized, informational) the individuals choose for themselves the best variant from the group of available variants of resource usage. this means that from the rational individuals we expect they would make identical choice in the identical situations, without later reconsidering or regret for the alternative they didn‟t choose. in addition to the presumption that the rational individual has personal preferences and that they are the basis of his choice, the notion of the rational individual has mild presumptions of the logical consistency expressed in the following axioms:  the condition of completeness (independently from the degree of difference or similarity of the alternatives, the person that reaches a decision i capable to compare and order them hierarchically),  the condition of transitivity (if a rational individual prefers the alternative option a in relation to the alternative option b, as well as the alternative option c, then he prefers a in relation to c),  the independency of the context (the choice between two options does not depend from the order in which they appear, or whether a third alternative is available). the last axiom refers to the fact that the individuals act and behave in the same way independently from whether they do it separately or together in a system. this axiom can be connected in the theoretical methodological literature with the individualist component of the theory of rational choice and the method of isolation related to this theory. as a matter of fact, the supporters and those who criticize the theory of the rational choice point out that it is psychological and individualistic. it is psychological because it explains the acts of the participants starting from their mental conditions. this theory is simultaneously individualistic because it is applied on the behavior of the individual participants and on d. petrović 194 the individual activities. the social groups are observed solely as aggregates made of individuals, which means that their behavior is explained starting from the mental condition of the individuals and their interactions. therefore, in the basis of this view of the structure of the economic and any other system is the presumption of the possibility to „isolate‟ the individuals and to analise them separately and out of the context of which they are a consistent part (zwirn, 2007, p.54). philosophically speaking, the presumption of the rationality of behavior is equivalent to the presumption about the unity of the economic actors about the existence of a unified „i‟ in each one of them. the argumentation of the representatives of the neoclassical economic theory is in favor of the unified function of utility, it originates according to their opinion from the logical presumption that when we speak about the homo oeconomicus we can not think about a split personality. in addition to the logical explanations, it is interesting that we also have some picturesque explanations related to this, like those that „in each man there is only one nose or one stomach‟ (saint-paul, 2011, p. 20). for the neoclassical theory the principle of rationality has not only the analytical but also a normative meaning, which is expressed not only during describing or explaining of the observed phenomena but also during evaluating the alternative options by the terms good/bad. the statement that the individuals always behave rationally is in an unbreakable tie with the presumption that they excellently know what is in their best interest, and that there is no one who knows it better than them. that is why this presumption is simultaneously normative and positive: the individuals should always act for their best interest (golubović, 2011, p. 156). in this way we actualize the question of how we should decide, which has among other things, influenced during the half of the twentieth century the appearance of the normative theory of decision making. contrary to the descriptive theory whose aim is describing of the things as they are, the normative theory of decision making deals with the concept of rationality and the logic of making decisions, in the way they should be (milicević, et al., 2007, p. 147) 2. the behavioral economics about the standard models of rational choice the theory of the rational choice has proved to be very useful, and it is even empirically proved in many situations such as those of the competition markets (ostrom, 1998). the fact is, however, that their conclusions often don‟t find confirmation in the empirical research. on this, among others, particularly insisted representatives of the new analytical approach that introduced and strengthened the name behavioral economics. its constituting as an independent subdiscipline within the economic science was significantly affected by the „old“ behavioral economics related to h. simon (1955, 1957) and j. katona (1951), that emerged in the 1950s and 1960s. then, in the 1970s, by publishment of the two articles of the well-known psychologists d. kahneman and a. tversky (1974), affirmation new behavioral economics occured. in these articles they criticized the orthodox theory of expected utility, proposing the alternative conception of reaching decisions in the conditions of uncertainty, known under the name „prospect theory‟. the same importance was given to thaler (1980) from the standpoint of popularization of the ideas of behaviorism. in his famous article he listed many empirical evidences about the suboptimality of the economic decisions. following their example a large umber of economists and psychologists entered the process of the „dismantlement‟ of the model of rational choice, bringing up more and behavioral analysis of economic choice: contribution to improving economic rationality 195 more denying facts. among the active representatives of the behavioral economy, among others, we can mention g. akerlof, d. ariely, c. camerer, g. loewenstein, d. laibson, m. rabin, c. sunstein etc. the representatives of the behavioral economics strive to offer numerous empirical proofs about the fact that the real behavior of people is not depicting the key segments and demands of the formal models. “we argue that the deviations of actual behavior from the normative model are too widespread to be ignored, too systematic to be dismissed as random error, and too fundamental to be accommodated by relaxing the normative system” (tversky, kahneman, 1986, p. 252). that is the key reason why “behavioral economics deals with the factors that influence the decisions of market participants, based on bounded not perfect rationality. one is not to start from the assumed behavior but to explore the actual human behavior” (stojanović, 2013, p. 569). this means that it places in the centre of analysis the fact that people have limited knowledge, information and cognitive capabilities, which is why they can not judge about the real events in the way that the standard model of the rational choice demands. the behavioral economics insists that the real life abounds with the examples of irrational behavior, which strongly shakes the philosophical foundations of the conventional choice, especially the presumptions about the identification of the personal interests and the existence of the unified psychological center of decision making. as a matter of fact, the results of the empirical research show that in many cases people find it hard identify, comprehend and represent to the environment their true interests, so that it often happens that in accordance with the emotional inversion in relation to the real standard of the stimulants, they act contrary to them. that is why the question that is repeated is what gives us the right to presuppose that the individuals always know which of the possible variants of impact is the best for them, and whether this presumption pretends to occupy the role of the normative standard for determining the welfare independently from whether we talk about the individuals or the society as a whole (капелюшников, 2013, p. 74). in addition to the difficulties related to identifying and representing the individual interests, the aberrations from the rational behavior are the consequence of the functioning of the complex psychology of the individual. as a matter of fact, people are as a rule characterized by a multipltle i, which is often obvious in the situations in which reaching of the individual decisions is based on fulfilling selfish interests, not taking into consideration the interests of the other individuals. when, however, each individual acts exclusively as a rational maximizing factor of utility, it is expected that the real behavior doesn‟t result in the results that were intended. by giving up the idea of practical impossibility of applying the global, overall rationality, the question that is up-to-date is concerned with the way of understanding and interpreting the surrounding in the conditions of scarce knowledge and limited analytical capabilities. in relation to this we can start the analysis by presenting the two basic conceptions about obtaining and usage of the available data (ходжсон, 2000, pp. 49-50). the first is the conception of the direct cognition of the socio-economic reality. it is a kind of a direct, immediate empiricism which supposes that in the process of cognition we can use the empirical facts freely. it is assumed that the subjects get the information from the surrounding, without the previous structuring of the notions, rules and theories. this means that the information are directly acquired, to be later transformed into the useful knowledge, getting a form of the undeniable facts and precisely defined probabilities of the occurrence of a certain event. the information is precise and sufficiently transparent, so that we can d. petrović 196 expect the rational economic actors to react the same in case they have this information. if they ever had certain wrong understandings and beliefs, they will correct them in accordance with the newly gathered information and fresh experience. that is why it is believed that the wrong beliefs can not last too long, or that they can not be the lasting characteristic of the process of cognition, although there are facts that deny such an optimistic scenario (frey, 1992, p. 244). as opposed to this optimistic version of judging the existing phenomena and events there is a conception of the real cognition of the world. it questions the issue of the capability of the common, average observer to directly and unmistakably decide what to do on the economic plan. additionally, the insufficient capacities in the right judgment are explained by the conceptual difference between the data and information gathered by the senses. as a matter of fact, the data include a multitude of the auditory, visual and other signals that reach the human brain. however, the knowledge about the real socio-economical occurrences is not formed in the moment of obtaining the stimuli of the senses but in the moment of their reaching the human brain and placing in the system of the abstract notions and conceptions. we should adequately value not only the immediate accumulation of the information but also the development of the cognitive capacities, or acquiring of the practical and intellectual habits in the realization of the cognitive process. this means that lots of information can go through the thick „cognitive sieve‟ in order to be interpreted in the right way (petrović, stefanović, 2009, p. 34). that is why when the stimuli of the senses come on the basis of the acquired information they are not strongly contradictory to the existing scheme of the notional conceptions, the individuals can relatively easily realize the process of the cognition of the environment. however if the information is not in accordance with the existing categorical apparatus, the question of forming the perceptions is actualized and also their influence on the decision making. that is why in the case when the stimuli of the senses are not strongly contradicting with the existent scheme of the notional conceptions, the individuals can relatively easily realize the process of cognition of the environment. however if the information is not in accordance with the existing categorical apparatus, the question of forming the perceptions is actualized and also of their influence on the decision making. that is why in the case of the „invasion‟ of insufficiently clarified information it is necessary to ignore them, or to change the existing conceptual structure in accordance with this information. but, whatever happens, it is obvious that the wrong beliefs can not be momentarily excluded and that their correction is along process of the theoreticallyempirical coming face to face. 3. the basic cognitive and behavioral biases in the process of decision making all the economic models that start from the presumptions that the information is available, clear and precise, and that the economic agents always react to the same information in the same way, can be brought into question. the reality abounds with the examples of the aberration from the non-conventional rational model, which is primarily related to the cognitive limitations and mistakes made on this basis. the economic subjects for example can make mistakes when they reach decisions without the influence of the available information, often having too much confidence and in relation to this not giving up the fulfillment of the planned decisions. that is when as a rule they act inertly, unrealistically judging the probability of occurrence of the future events. on the other hand, they can act impulsively behavioral analysis of economic choice: contribution to improving economic rationality 197 and under the influence of the rapidly changing emotional conditions. that is why it is not surprising when in certain situations rather competent, functionally literate and successful people can behave irrationally, which can harm their long-term interests. the research in the field of the human decision making try to detect the system mistakes that people make. among the numerous mistakes related to the psychological dysfunctions, this time we will talk only about those that are most often mentioned among the representatives of the behavioral economics. 1. the hyperbolic discounting. it is well-known that the individuals prefer the present goods and that therefore they are ready to sacrifice a large quantity of the future goods in order to spend the smaller quantity of them in the future. the proportions of this conversion however are the result of the subjective norms connected to the evaluating of the time in the sense of the benefits of enjoying the ongoing consumption. since the subjectively shaped judgments can be rather different from one individual to the other, it can happen that during the decision making about the usage of resources individuals start from different rates of discounting. that is why for example patient people have a lower discount rate while the impatient ones have a high rate. the decisions about the usage of the resources can be considered rational if the rate of discounting is unchanged and constant during time. the „exchange‟ of these two periods of time is then exclusively influenced by their time distance and as such it doesn‟t depend from the time difference of these periods in relation to the actual moment of time. the algorithm of discounting defined in such a way is called the exponent, having in mind that to the extent of distancing in relation to the present moment the value of the future goods is lessened according to the exponent rate. however, as explained by the behaviorists, many people and maybe the majority of them are in the real life inconsistent concerning discounting, practicing the exponential instead of the hyperbolic discounting (rizzo, whitman, 2009, p. 924) this means that the norms of discounting that they use are not consistent, and that they are become higher with the closeness of the period that is being compared with the present period. that is why an individual can judge that 100 dollars that he should get for two years are the equivalent to the amount of 90 dollars that he could get for a year, but simultaneously he can judge that 100 dollars can have the same value in a year as 80 dollars in the actual period of time. it turns out that the discounting factor in the first case is 0.90 and in the second 0.80, or that the individual can have two discounting factors: 0.90 in the two next years in the future and 0.80 between the current and next year (ibid., p. 925). making decisions in the conditions of the hyperbolic discounting gets marks of the disharmonious process in time. for example, at one moment an individual t0 can show his intention to put in the moment t1 85 dollars on a savings account in a bank if the effective interest rate guarantees gaining 100 dollars in the moment t2, starting from the fact that if the discount rate is 0,9 this seems to be a right decision. however, when the moment t1 happens, he can give up his previous intention and 85 dollars, planned for savings can be redirected to spending. placing money in a bank when the discount rate is 0,8 can seem to him as a less payable solution in compared to the spending of the desired goods. it turns out that in the conditions of the hyperbolic discounting, an individual starts a real „discord‟ between the potential alternative decisions, choosing first one and then the other alternative option. it is analogue to the everyday questioning of the decisions in life, which all the people on planet face. for example, a man can plan to start putting money d. petrović 198 aside for saving since the new year‟s eve, or to stop smoking and start strict diet, but when that moment comes he gives up. the above mentioned models of behavior are placed by the behavioral theory in the category of the irrational human acting. there are primarily related to the lack of selfcontrol, reflecting that people are not ready to resist the temptations. the strong impatience is followed by the high short term rate of discount, when those decisions that we assume will bring certain benefit are made, and that the expenses that follow the process of decision making will come gradually over time. such an approach can, unfortunately result in the negative occurrences such as delaying of reaching the important decisions, forming of the portfolio of the mutually exclusive financial instruments (when for example, individuals use credit cards with the high interest rates, while simultaneously they buy valuable papers with lower incomes), to high indebting, low savings etc (капелюшников, 2013, p. 76) 2. psychological state. the process of decision making is strongly influenced by the psychological state of the individuals (“hot” or “cold” state) which can result in the effects which to a large extent from what they would fulfill if they were governed by the elementar norms of the rational behavior. in some affective, biologically „hot‟ and „burning‟ states, individuals tend to make some hasty decisions, which will turn out to be wrong and very „expensive‟ and that after they have been made the return to the old state is impossible (camerer, et al., 2003, p. 1238). the individuals then usually start to overestimate the potential short term utility, ignoring the possible long term damage and high expenses of reaching such decisions. in that way, for example students in the state of disappointment, anger and fear can make a decision about finishing their studies, which in the long term can turn out to be a completely wrong move. 3. the dependency from the context can occur in two basic forms. the first is known as the „framing effect‟ (rizzo, whitman, 2009, p. 928), when the choice is made under the influence of the less important aspects characteristic for certain situations and events. it is related to the violation of the principle of „independence from the insignificant alternatives‟ which is why, among other things the orientation in favor of a or b depends from the order of representing the options a and b. the influence of the psychological aspects on the process of acquiring and processing of information as well as on the hierarchical shaping and organization of the preferences can be characterized as a “disjunction effect: people prefer information x over information y when they know that event a will not occur, but they prefer information y over information x when they do not know whether event a will occur” (garsia, 2013, p. 300). we can illustrate the fact that the choice is very dependent from seemingly unimportant aspects of the situation, like the order of the presented options, by an example from the medical practice: when the patients are being informed that the proposed procedure of therapy has the rate of surviving of 90%, the majority will probably be ready to undergo it. however, if the order of the sentences is different and if we say first that the rate of dying during the proposed procedure is 10%, there is a high probability that the majority will show their intention to give up from it. the dependency from the context can be observed through the possibility of evaluating the available alternatives on the basis of comparison with some referent values, sums or amounts. the referent point with which we compare can be a result of a personal experience, but also of some other factors that come from the surrounding. that is how a student can measure his success in the absolute sense, or in relation to the best possible behavioral analysis of economic choice: contribution to improving economic rationality 199 result that can be achieved by passing the exams. the above mentioned phenomenon however can be approached relatively, comparing one‟s own success with the success of colleagues. similarly to this, the owner of a company can in one context be dissatisfied with the business of the firm, thinking that he didn‟t achieve the desired results. however, in the other context, on the basis of comparison with the business results of the firms from the surrounding, he can even be relatively satisfied with the achieved. the effect of the dependence exists in the case when the answers to the questions are subconsciously adjusted to some of the previously arbitrary offered anchor. the anchoring is a set of influences that are applied in many psychological researches that are related to the beliefs about the uncertain quantities. in these experiments, the subject is asked to judge whether certain value (anchor) in these experiments is higher or lower than the uncertain quantity. the rough result is that the subjects start from the anchor and don‟t succeed to completely correct their judgment in accordance with their basic belief, so that their judgment is inclined toward the anchor. even explicit uninformative hint, for example accidentally chosen number can function as an anchor. usual explanation for the occurrence of anchoring is that the value of the anchor offers, at least temporarily a possibility for the quantity that is estimated to be around that value. for example, houses and cars are sold by bargain that begins from the initial price. it would be surprising if the initial price wouldn‟t have any influence on the perceptions (mekfaden, 2003, pp. 184-185). 4. the mistakes related to the optimism and pessimism (rizzo, whitman, 2009, p. 940). depending whether people are too confident or characterized by a lack of self-confidence, there are mistakes that are in behavioral economics brought into connection with optimism and pessimism. the mistakes caused by optimistic thinking happen as a consequence of ignoring certain probability of happening of the unwanted incidents, which can cause serious damage that can often not be repaired. that is why, for example an optimist can take a great risk, investing means into valuable papers with a high rate of interest. however, the secondary market of capital is because of its dynamics and mobility a typical area with a high level of uncertainty, and an individual has to be aware of this when reaching decision about buying shares of stocks of certain companies. on the other hand, the mistakes on the basis of pessimism are characteristic for people who are not sure of themselves, and who are therefore inclined toward exaggerating the probability of certain incidents occurrence. the consequence of this is that to strong cautiousness which as a rule results in avoiding any risk when it comes to investing. 5. the effect of availability (availability bias) (ibid., p. 940). this effect is about the mistakes that happen when the individuals give too much importance to the easily available and key information, and too little to the initial probabilities, neglecting the fact that the causes are different. it is widely accepted that the first (the primary effect) or the last experiences (the recession effect) of the experience is , chronologically speaking, more easily called into memory than those that happened between them (mekfaden, 2003, pp.186-187). for example, if recently there was a fire or it was written about in the newspaper during previous days, then people will think that the occurrence of fire is rather probable and that it happens often, which perhaps is not corresponding to the reality. when in family violence happens in serbia or a cruel murder, the public is disturbed and there are conclusions that during the last months the violence in family has been intensified, and that the number of murder is enlarged. that, however, does not have to have basis in the statistical data, so more complete research could maybe result in the d. petrović 200 cruel fact that it was always happening, and that it only depicts the complexity of the human relations (kitanović, petrović, 2010, p. 111). the natural inclination of people toward overestimating the probability of occurrence of certain events on the basis of their witnessing such events in the close future, has its „economic weight‟. as a matter of fact, under the effect of the availability the individuals can give up even those projects that have rather moderate, reasonable degrees of risk, damaging in this way their welfare and life standard. for example, if there was recently a liquidation of a famous company, or a strike in a large company, many people will think that the bankruptcy and strikes have lately become often. because of this, among other things, some workers of some companies can give up the intention to make legitimate demands for the salary increase, which can keep the employer in belief that they are satisfied with the salary that they are being paid. 6. the mistakes related to presentation of the status quo (status quo bias) (rizzo, whitman, p. 935). it is related to the human tendency to be reserved toward anything new, even when it can bring a lot of benefit to them or when the expenses are related to „breaking up‟ with the old are relatively low. one of the reasons for such cautious evaluating of any changes is that people are rather emotional toward their work and the results of their impact which is not the case when the observers are not the participants of the observed actions and events. the other reason is related to the procrastination or delaying of reaching the decisions for future times. finally, some people feel aversion toward the loss – the loss aversion which is why during comparing of the equivalent sums they tend to ascribe relatively higher negative value to the potential expenses than to positively evaluate the potential benefits (капелюшников, 2013, p. 78). the endowment effect is closely related to the above mentioned mechanism and this effect is related to the change of relation toward things in the sense of evaluating them higher right after getting ownership over them. as a matter of fact the value of certain goods is in the eyes of individuals considerably higher when they are in their property, which however is not the case when these goods are not owned by them. that is why people appreciate certain diploma more after they get it or they value their houses more after they have built them. it is present even more when the individuals treat their capital that according to their strong belief they obtained by continuous abstinence from spending. that is why it is not surprising “that the minimum compensation that people demand to give up a good has been found to be several larger that the maximum amount they are willing to pay for commensurate entitlement” (knetsch, 1989, p. 1277). 4. behavioral economics in the function of the rational choice and the „new‟ paternalism although the behavioral economics doesn‟t interpret the economic behavior in accordance with the standard model of rational choice, this doesn‟t mean that one can‟t find the elements of any logical connection. the relationship between them is not one sided because the behavioral economics although it rejects the realism of the models of rational choice, doesn‟t question their normative demands and intentions. by pointing out the fact that people can make choices which are not consistent with their best interests, the representatives of the behavioral economics come to the idea that the paternalistically oriented policy can help the individuals to make better and decisions of higher quality. in behavioral analysis of economic choice: contribution to improving economic rationality 201 this way we come to the affirmation of the new normative program of the behavioral economics known under the term „the new paternalism‟. in principle, the paternalism withstands “interference with a person's liberty of action justified by reasons referring exclusively to the welfare, good, happiness, needs, interests or values of the person being coerced” (dworkin, 1972, p. 65). although it doesn‟t have the mark of the state engagement, it is usual that under paternalism we primarily think about the activity in the field of bringing laws and measures that relax the process of decision making. dependently from how deeply we enter the process of individual decision making, we can differentiate the „hard‟ and the „soft‟ paternalism (madhadam, gutmann, 2013, 1-20). although when the other conditions are the same we give priority to the „soft‟ paternalism and the characteristic of minimal limitation of the freedom of choice, we should not underestimate the justification of introducing some immediate prohibitions, direct limitations, as well as high taxes and other state charges. when measures of the „soft‟ paternalism don‟t give the desired results, it is justified that the state intervenes by a „fierce‟ limitation of the free choice. the instruments of the state policy that are supported by the „new‟ paternalists represent the complex combination of the legislative and administrative prohibitions, taxes, offering information that is needed, as well as certain means of persuading and manipulating with the „architecture‟ of choice. it is not only about the new original recommendations but also about the multitude of the usual instruments of the state regulations which were used before. in principle, the behaviorists find all forms of the government regulations to be desirable and allowed if they bring about the efficient prevention and correction of the cognitive and psychological biases and mistakes (rizzo and whitman, 2009, p. 910). although the argumentation about the new paternalism is theoretically rather convincing, the practical realization of the paternalistic actions is not simple. in the conditions of the existence of the „multiple i‟ it is necessary to determine which are the „real‟ preferences of the individuals-which segments of choice should be taken as a starting point, and what can be left out. the additional problem is that the individuals can make not only useful, but from the standpoint of their interests wrong decisions. the fact that we supposedly know what is for our best interest is not automatically guaranteeing that we will behave in accordance with this. for example, the addicts continue with the self-destructive habits, although they have the expenses related to health, money, work and family ties. therefore direct limitations and prohibitions are less supported by the representatives of the behavioral economics and the „new‟ paternalism than some traditional instruments of the government regulations such as sin taxes (alcoholic drinks, smoking, hazardous games) and the unhealthy food and drinks (greasy food, carbonated beverage etc) (o‟ donoghue, rabin, pp. 190-91). by enlarging the expenses related to the consummation of the harmful goods (junk food), „sin taxes‟ can lessen the negative consequences, caused by the defect will and hyperbolic discounting, redirecting in this way the individuals of the bounded rationality to the more reasonable and socially acceptable behavior. the actions of the individuals that are contradicting with their own interests, among other things, happen because they don‟t have sufficient information and unlimited cognitive capabilities. in order to prevent this and to direct the individual in the right way it is desirable to use the paternalistic intervention which would lead the individual to make the decision that he himself would make if he was deciding on the completely rational basis. the contribution of the behavioral economics in the field of promoting the state regulations can be best seen through the support of the process of manipulation with the d. petrović 202 „architecture of choice‟ (santos, 2011, p. 720; wright, ginsburg, 2012, p. 1056). it is related to the fact that the government is due to make a choice for and instead an individual in certain cases, since we can assume that he cannot deal with such a task in certain situations. for example, one could propose to the workers to automatically take part in the savings plans (sunstein, thaler, 2003, p.1172) which helps in excluding the mistakes connected with the inconsistency, the weakness of will, the hyperbolic discounting etc. when we talk about the republic of serbia, and having in mind the negative experiences with the engagement of the state up to now, as well as the absence of the expected effects on the basis of its measures and actions, a question that arises is concerned with the theoretical relevancy and practical basis of the state interventionism as such. it seems that a certain progress can be made by the „new‟ behavioral economics, whose research helped us to be a step closer to the understanding of the behavior of the economic actors. together with this, the presumptions for the affirmation of the „new‟ paternalism would be created and the creating of the corresponding government measures and activities directed toward supporting the efficient allocation of resources. if we have in mind the fact that the carriers of the economic activity in serbia still haven‟t accepted the elementary norms of the market behavior, then the need for the new behaviorist approach and reaffirming of the role of the state in the light of enabling and easement of the rational choice is even more prominent. as opposed to the traditional paternalism, which from the perspective of the citizens of the serbia is related to the need of the state to intervene in order to lessen the unequal share of the incomes and the contribution to the realization of the idea of equality, the „new‟ paternalism is directed toward helping the people to enlarge the level of their own welfare. this means that the role of the state is not in reacting and helping people after they have already certain, often wrong decisions about the allocation of the rare resources. instead it is desirable to define the thought-out engagement of the state with the aim of improving the quality of the individual decisions. that is why the paternalistic syndrome embodied in the expectations of the citizens that the state will protect them even when they haven‟t accomplished the planned aims, should be changed and brought back into the realistic frames where the state is expected to make relative the problems that could possibly appear as a consequence of the cognitive and psychological limitations, to partly solve or even prevent them. in accordance with this, the citizens should gradually give up the beliefs about the government‟s responsibility to provide them medical treatments, education and job, and would gradually accept the market norms of behavior where the role of the state would be to make them capable adequately directed toward making rational decisions. conclusion in spite of the efforts of some authors to point out that all the critiques of the neoclassical maximising hypothesis were futile, it is certain that the real rationality of the economic subjects deviates from the neoclassical model of the maximising rationality. if we add the fact that in the actual circumstances there is a higher level of uncertainty, then the question of sustainability of the model of the maximising reality becomes even more relevant. it seems that in this sense special attention should devote arguments of behavioral economic theory which related to the identifying psychological dysfunctions and anomalies. this is mainly about mistakes and failures that include the inconsistency related to the discounting, the changeability of the psychological and emotional state, the dependency behavioral analysis of economic choice: contribution to improving economic rationality 203 from the context, the lack of self-control, too strong optimism, the orientation toward the status quo etc. the denying of the „illusionist‟ model of unlimited rationality does not mean that the rational efforts of the economic subjects should also be denied, as well as the intentions of the individuals to be rational. instead, from the point of view of the behavioral economics, it is desirable to reconstruct the actions of the individuals in certain situations based on to which we could assume how they would act in concrete circumstances, taking exclusively rational actions and activities. in this way the reconstruction of the behavior would get a form of the normative standard, on the basis of which it is possible to evaluate the effects of different forms of the state interference on the growth of the individual and social welfare. on the basis of all the above statements we can easily conclude that the representatives of the „new‟ behavioral economics have a double sided attitude toward the standard model of the rational choice. when they have in mind their descriptive character, they reject it determinately. however, when they observe it in the sense of the normative ideal, they not only accept it but also defend it fiercely. having in mind that the bihevioral imperfection leads us into the situation that people can make choices which are not consistent with their best interests, the representatives of the behavioral economics came to the idea that the paternalistically oriented state can help the individuals to make better decisions. when observed in this way, the state intervention is turning into a tool, with the help of which we can bring „closer‟ the real behavior of the boundedly rational individuals to the ideal of the full rationality. in this way we come to the affirmation of the new normative program of the behavioral economics known as „the new paternalism‟. the opposing opinion to the classical liberal tradition that takes 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(2000) "правычкы, правила и экономическое поведение", вопросы экономики, но. 1, pp. 38-55. behavioral analysis of economic choice: contribution to improving economic rationality 205 bihevioralna analiza ekonomskog izbora: doprinos unapređenju ekonomske racionalnosti ako pođemo od pretpostavke da je zadatak teorijske analize kompleksne društveno-ekonomske stvarnosti da pruži određena saznanja čijom se praktičnom primenom može doći do unapređenja i poboljšanja te stvarnosti, onda to ekonomsko-teorijski mainstream obično čini polazeći od aksioma racionalnosti. sa druge strane, ako imamo u vidu aktuelne empirijske podatke o brojnim problemima i neefikasnom funkcionisanju ekonomskih aktera, onda se postavlja logično pitanje da li bi pretpostavku o neograničenoj racionalnosti ekonomskih subjekata trebalo olako idealizovati. polazeći od toga da bihevioralna ekonomija ima posebnu ulogu u snažnom kritičkom nasrtaju na "tvrdo jezgro" neoklasičnog mejnstrima, u radu se govori o brojnim psihološkim ograničenjima koja prate proces ekonomskog odlučivanja, kao i mogućnostima njihovog prevladavanja. s tim u vezi posebno se apostrofira značaj bihevioralne analize i njene instrumentalističke podrške usmerene na unapređenje ekonomske racionalnosti i poboljšanje kvaliteta ljudskih odluka. ključne reči: racionalni izbor, bihevioralna ekonomija, bihevioralne anomalije i predrasude, „novi“ paternalizam. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 3, 2014, pp. 207 223 the impact of economic system on environmental policy in the republic of serbia  udc 330.342:502 marija petrović-ranđelović, snežana radukić university of niš, faculty of economics, serbia abstract. political and economic changes in the former socialist countries in the early 90s of the 20th century have not only opened up possibilities for the future democratic development of these countries, but also an opportunity for solving economic, political, social and environmental situation in the context of building a new, market economic system. the unfavourable environmental situation in serbia is caused by many factors, among which frequent changes in the economic system in the past and inadequate economic and system solutions occupy a significant place. a critical approach to the impact of economic system solutions to the political and institutional arrangements for environmental protection in the sfry, fry, serbia and montenegro and rs is therefore a suitable starting point for understanding the importance and the need to take a more active approach to solving environmental problems in serbia. it is also a goal of this work. in addition, solving the problems in the field of environmental protection is crucial for achieving sustainable development and improving the competitiveness of the serbian economy. key words: economic system, reforms, environmental policy, republic of serbia. introduction the economic system of the socialist countries is realized by different models from the central planning model with a dominant share of state ownership to the selfmanagement model present in the former yugoslavia (sfry), which affirmed public property and opened the door for greater action of market mechanism in the economy. however, the presence of market elements and institutions “in some periods was more pronounced, at least in orientation (e.g. the mid-sixties), and there is a large resistance and deviations from the introduction of integrated market elements (the market for goods, labor and capital), when the economic system from that point took a step backwards” received september 4, 2014 / accepted december 17, 2014 corresponding author: marija petrović-ranċelović faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 683  e-mail: marija.randjelovic@eknfak.ni.ac.rs 208 m. petrović-ranđelović, s. radukić (aranċelović, 2004, p. 339). yet, despite these differences, all the socialist countries are characterized by the existence of common institutional commitments, which is clearly shown by numerous examples of attempts of economic reforms. “the programs of reforms in socialist countries were generally initiated for pragmatic reasons. the reforms were a reaction, response to the crises that the socialist countries were going through with the intention to rectify their partial deficiencies. empirically speaking, it can be noted that each new wave of economic reforms was associated with economic failure, i.e. they also appeared as a reaction to the worsening of development performances” (mitrović, 2007, p. 33). the first symptoms of the general socioeconomic crisis in the socialist countries began to manifest clearly after the 70s when a large number of macroeconomic indicators went out of the zone of positive trends. drastic deterioration in macroeconomic performances during the 80s led to the collapse of the socialist economies and contributed to the revival of the vision of the impossibility of maintaining socialism as a system both in terms of economic, as well as environmental efficiency and achieving sustainable development. the basic economic irrationality embedded in socialism as an economic system contributed to economically irrational allocation of resources, which along with the arbitrary pricing resulted in underestimation of the value of natural resources and, inevitably, in degradation of the environment. there are many environmental problems that are common to all the former socialist countries, despite their different geographical and climatic characteristics. essentially, the basic environmental problems in the central and eastern europe are caused by the character of the political and socio-economic systems of these countries. these systems were based on the dominance of state ownership, central planning and investments, unrealistic, controlled prices and outdated and inefficient industries. such an environment for economic development of the socialist countries initiated the creation of an energy and resource-intensive economic structure, followed by a massive production of waste, inefficient management, lower productivity and surplus of unskilled, low-paid workforce. on the other hand, environmental problems are the result of non-compliance and poor enforcement of environmental laws and neglect of environmental problems by the state authorities. institutional structures for the management of environmental issues were underdeveloped and the system of education was inefficient in terms of incorporating environmental issues in the teaching program. in addition, public participation in solving environmental problems was strictly forbidden, while the data on the state of the environment was kept secret in order to prevent any negative reaction of non-governmental environmental organizations. political and economic changes in the former socialist countries in the early 90s of the 20th century have not only opened up possibilities for the future democratic development of these countries, but also the opportunity to solve economic, political, social and environmental situations in the context of building a new, market economic system. the advantages of such orientations are reflected in increasing the efficiency of the economic system, respecting economic, i.e. market laws, introducing a multiparty system and eliminating the domination of politics over the economy, and introducing pluralism in property relations. from the perspective of the objectives of environmental policy and sustainable development, the key elements of economic reforms are privatization and a clear definition of private property rights, the introduction of markets in order to ensure effective valorization and rational use of resources, restructuring and modernization of the industry in order to introduce modern and eco-efficient technological solutions, and eliminating the impact of economic system on environmental policy in republic of serbia 209 unproductive subsidies to inefficient state-owned industries. since the unregulated market economy itself can contribute to protecting the environment, it is necessary to introduce administrative and economic instruments for environmental protection, but also a whole range of environmental regulations and ensure their effective implementation. an integrated environmental management system should contribute to the introduction of preventive measures against pollution, rather than pollution control measures. an efficient environmental management system means, above all, a clear definition of environmental laws and regulations, the introduction of monitoring of environmental performances, command and control state policy through economic instruments, developed information system for decision-making and public participation, and the development of environmental awareness through the education system. nevertheless, the environmental policy in the new socio-economic environment should be based on the principle of “polluter pays” and “user pays”, and higher use of economic instruments to achieve full internalization of environmental costs and provide incentive for polluters to change their behavior towards the environment. in line with the established goal, this paper is structured as follows. the introductory review considers the political and institutional solutions in environmental protection in former yugoslavia. after that, a critical review of the environmental regulations and practices in the fr yugoslavia, and then in the state union of serbia and montenegro, will be given. further, the regulation problematic of environmental issues in the context of building a new, market-oriented economic system in serbia will be discussed. finally, the synthesis of the key considerations will be carried out. 1. political and institutional arrangements for environmental protection in yugoslavia (sfry) from the second half of the 20th century until the dissolution of the former yugoslavia (sfry), the accepted model of development with a focus on accelerating the socialist industrialization and the frequent changes in the economic system caused a gradual destruction of environmental assets and the deterioration of the environment. whereas from the mid-20th century, the anthropogenic influence on the environment has risen in the wider global scale, it could be concluded that the impact of economic activities on the environment in the former yugoslavia did not differ from the global trends in this area. the economic system of the second yugoslavia was declared as socialist and selfmanagement, in accordance with the character of the whole society. in these conditions, the planned organization of the economy has been the backbone of the whole society (aranċelović, 2004, p. 93). in accordance with the defined priorities and the development goals and tasks in the period before the dissolution of sfry, it can follow that the development of the environmental protection system in the former sfry was divided into three main stages of development. the first phase in the development of the environmental protection system, which covers the period from 1945 to 1970, was characterized by intensive use of natural resources in order to achieve the planned objectives of economic development. “after the war, yugoslavia faced the complex task of overcoming the adverse conditions that were the cause of its backwardness and slow economic growth in the past. it was supposed to accelerate this development, create adequate material base for the new social system and mitigate 210 m. petrović-ranđelović, s. radukić significant differences which moved yugoslavia away from industrialized countries” (ĉobeljić, 1980, p. 72). the question of choice of the methods of economic development appears most often in the mode of the dilemma whether to give time priority to agriculture or industry in the initial stage of economic development. however, what is important to note is that this dilemma was not of any particular importance for yugoslavia. the simple reason for it being important was that in the changed social circumstances the process of its industrialization, which started earlier and continued at a slower pace in the period between the two world wars, should significantly accelerate. in addition, the general conditions for economic development, the available natural resources and production potential of the population, consisted a starting point for such a rapid development of the industry. therefore, the initial stage in the economic development of sfry was characterized by strategic orientation for rapid industrialization, in which the starting point represented the priority development of heavy industry and energetics. the second phase in the development of the environmental protection system covers the period from the 70s and lasts until the 80s of the 20th century. by analyzing the experience of the developed countries, it could be seen that the interest of these countries to solve the problems of environmental quality has arisen since the 70s of the 20th century. it is not surprising that efforts are focused not only on technical issues in choosing the right policy to solve the problems, but, in fact, the environmental policies in different countries are a reflection of their unique political culture and institutions. according to these trends in the developed countries, in former sfry, defining the policy to protect and improve the environment was first approached in a comprehensive and coherent manner after the first un conference on the environment in stockholm in 1972. in accordance with the decisions of the tenth congress of the communist party of yugoslavia, the constitution in 1974, the law of associated labor and other system laws, with the support of relevant social and political measures and actions, a big but by nature not a radical change was carried out in the economic system that had certain repercussions on the changes in the socio-economic and productive relationships, as well as in the field of the political system of the socialist self-management. the adoption of the new constitution in 1974 was round one, and for all characteristics, an important stage of development of the yugoslav society on the basis of the socialist selfmanagement. it provided a strong institutional support in defining the policy of protection and improvement of the environment, particularly emphasizing the importance of protecting and promoting human environment in article 87 of the constitution, which says: “working people and citizens, organizations of associated labor, socio-political organizations, local communities and other autonomous organizations and communities have the right and duty to provide conditions for the preservation and development of natural and man-made resources of human environment, and to prevent and eliminate the harmful effects of the pollution of air, soil, water, watercourses and the sea, the noise or other thing that threaten those values or endanger human life and health” (ustav sfrj, 1974). the increasing awareness of the need to address the resulting environmental problems and their close interaction with environmental problems in other countries acted in the direction of the declaration of the constitutional right to a healthy environment, and identification of the main subjects of protection and improvement of the environment. the onset of the third phase in the development of the environmental protection system coincides with the last attempt to reform the economic and social system in the late 80s. the impact of economic system on environmental policy in republic of serbia 211 at the beginning of the ninth decade of the 20th century, a number of indicators pointed to a slowdown of economic growth and the signs of economic and social crisis that put pressure on the yugoslav economy clearly began to manifest. “in these circumstances, one of the last attempts to change the economic system was made, the amendments changed the constitution in 1988 which opened the door to radical changes” (aranċelović, 2008, p. 187). radical changes in the economic system followed the adoption of a set of system laws, late in 1988 and early in 1989, among which company law is certainly the most important. in such circumstances, restoring the role of the company as the holder of the economic activities and for the first time legally forecasting companies in all types of property rights, and decentralization of management is initiated by comprehensive reforms within the general legal framework, as well as the legal framework for decision-making in the field of environmental protection. it should be noted that former sfry had developed international cooperation in protecting and improving the environment with international organizations and institutions, as well as with regional groups, particularly with the european union. the european union (then the european community) was the most important economic partner of sfry in economic and many other fields. during the 80s of the 20th century, there was a trend towards the intensification of cooperation in the protection and improvement of the environment. the start of cooperation in the protection and improvement of the environment can be traced back to 1972, after the adoption of the general resolution at the first ministerial conference on european cooperation in the field of scientific and technological research. in order to provide the necessary support for the priorities of environmental protection, yugoslavia, as one of the signatories of the resolution, was committed to the ratification of most of the documents adopted by the european union and to the gradual harmonization of national environmental legislation with the european union legislation in the field of environmental protection. effective international cooperation with the european union is expected to provide the possibility to better meet environmental requirements and to create preconditions for efficient integration into the framework of the community. based on the analysis of global environmental trends and the assessment of the environmental situation in the country, the environmental policy in the former sfry was supposed to define the priority environmental objectives and instruments to be achieved in a way that contributes to balancing the relationship between the need for greater economic growth and the requirement for the realization of the ecological balance in environment. however, from today’s perspective, it can be seen that, despite raising awareness of environmental issues, there was no comprehensive and consistent environmental policy in the former sfry. this policy, with its measures and applied instruments, should have contributed to the mitigation of environmental problems. that is partly because, in the whole period of its existence, objectives related to the development of socio-economic relations had the advantage and held a high place in the ranking of priority development goals. in addition, frequent changes in the economic system and economic policy influenced the changes in the definition and implementation of the environmental policy, because of which it was left with no visible effects. under the pressure of the general economic problems, especially after the 80s, such as the decline in the gdp rate, high inflation, the deficit in the balance of payments and threatened foreign trade liquidity and, and on the threshold of social and political crisis, in the late 80s, environmental problems lost their importance and were pushed into the background. 212 m. petrović-ranđelović, s. radukić 2. critical review of environmental regulations and practice in the fr yugoslavia 2.1. the economic context the former sfry was pursuing a strategy of industrialization and economic development, which was based on import substitution and protectionist attitude towards the domestic industry and agriculture, with the sole reliance on the exploitation of natural resources. such strategic direction of development is basically characterized by inefficient use of raw materials and energy, which eventually led to the high import dependence on foreign sources of energy and the accumulation of external debt. our prominent academician nikola ĉobeljić (1984, p. 78) lists the five main causes of environmental degradation in yugoslavia: a rapid and specific process of industrialization, urbanization, the use of “profitoriented technology”, “wasteful” consumption patterns and mechanism of market economy. the disintegration of the yugoslav federation in 1991 resulted in the destruction of the common market of yugoslavia which had a negative impact on relations of related supplies between the republics. this was especially true if we bear in mind that between the former yugoslav republics there was a high degree of interdependence of economic activities in view of the large amount of energy resources and production. among the factors that determine such a high degree of interdependence are: the differences in climatic conditions, the differences in the availability of mineral resources, the conditions for the realization of agricultural production, and partly the differences in the level of achieved technological development and the level of wealth between them. with the disruption of trade relations and links among the republics, there was a sharp decline in production, where the industry lost suppliers and markets, and the economic difficulties of the republics were compounded by wartime destruction of fixed assets. the imposition of sanctions against fr yugoslavia by the international community led to serious economic stagnation and impoverishment of the population in the early 90s. the situation in the economy further deteriorated due to hyperinflation, which began in february 1992, and gradually blossomed and reached its peak in january 1994, when it was only during this month that it reached the amount of 313.563,558% (savezni zavod za statistiku, 1994). by cutting the inflationary spiral with the introduction of the new dinar in june 1994, a relative price stability was recorded in the period from 1995 to 1997, but already in 1998 the signs of inflationary pressure started to appear again. however, even after the un sanctions were lifted in december 1995, the expected effects of rapid economic recovery failed to happen. to illustrate, the gdp growth between 1995 and 1998 was of lower intensity, while the already high unemployment rate continued to grow. the unemployment which was at 21% in 1991 increased to 27.9% in 2001. “the period of apparent economic recovery and reform attempts in mid-decade was interrupted by the kosovo crisis in 1999. a significant economic decline in the 90s can be summarized by key macroeconomic indicators. in 2002, in serbia and montenegro the gross national income per capita was only 50% of the level in 1989. the level of export in 2000 was the third of the same amount in 1991. the import was hit less drastic; in 1999 the import was about 60% of its level in 1991 (it is believed that the official indicators of economic activity decreased the actual level of economic activity, given the vast size of the gray economy and exchange of goods, which increased during the 90s).” (svetska banka, 2002, p. 25). the impact of economic system on environmental policy in republic of serbia 213 2.2. the institutional framework for decision making regarding environmental protection the adoption of the new constitution on april 27, 1992 was created as a realistic assumption for the construction and operation of a new economic system, but also defining a new approach to environmental issues and problems. the starting point for the definition of environmental policy in serbia and montenegro was formulated in the constitution of fr yugoslavia and the member republics. “in accordance with the constitution established competences, the right to a healthy environment is formulated as one of the fundamental rights of man. the basis for the functioning of an effective environmental management system is consisted by adjusted principles, delineated responsibilities and contemporary and efficient socio-administrative measures. these measures have their basis in the constitution of the federal republic of yugoslavia” (ministarstvo zdravlja i zaštite životne okoline republike srbije, 2002, p. 7). responsibilities in terms of basic environmental issues were divided between the federal level (department of environment within the federal secretariat for labor, health and social care) and national level (ministry of health and environmental protection of serbia, until may 2002, while after june 2002, a new ministry for protection of natural resources and environment was established, as well as the ministry of environmental protection and spatial planning of montenegro). also, in larger municipalities in both republics, there were institutions that were responsible for environmental protection. specific competencies in the field of environment were awarded to some other ministries and institutions at the federal and republican level. the federal state bore some responsibility for the environment by establishing the conditions and methods for carrying out economic and other activities. its competence was the formulation of policy, adoption and implementation of legislation, other laws and general procedures for the adoption of the law, as well as providing judicial protection in terms of the basis of the environment. in accordance with the recommendations of the united nations conference on environment and development in rio de janeiro, held in 1992, the fr yugoslavia adopted two key strategic documents in 1993 – the resolution of environmental policy in the fry and the resolution on biodiversity conservation. by their adoption, the fry was committed to the acceptance of the concept of sustainable development, which was used as a parameter in the formulation of environmental policy. the resolution of environmental policy defined 12 programs that were related to certain areas of environment and 49 priority measures that should be reviewed and adopted every five years. the following objectives of the policy were proclaimed in the resolution of environmental policy (ministarstvo zdravlja i zaštite životne okoline republike srbije, 2002, p. 220-221):  creating a basis for building human-oriented society in the federal republic of yugoslavia, which will be permanently developed in harmony with nature taking into account the rights of future generations to meet their own needs at the same or higher level.  providing conditions for the conservation, rational use and preventing the degradation of natural resources, preventing uncontrolled pollution and further degradation of the environment and repairing the consequences of past pollution and environmental degradation. 214 m. petrović-ranđelović, s. radukić  environmental management in a way that provides the conditions for the protection and promotion of human health.  developing an integrated system of protection and improvement of environment and quality of life, improving the existing system of environmental protection in man-made environment and providing an institutional framework for the effective functioning of that system.  ensuring the conditions where interests arising from the concept of sustainable development and the protection and enhancement of the environment are analyzed and taken into account when planning settlements and the use of land.  gradual introduction into practice of the principle of “polluter pays”, by unique system solutions for the entire territory of the country.  providing conditions for the development of pollution control technology that is appropriate to the specifics of our area and to the achieved level of development.  preservation of “satisfactory” natural balance in our country and participation in ensuring the protection of the biosphere.  preventing the import and transfer of “dirty technologies”. the environmental policy was based on the following principles: integrity, hierarchy of interests and goals, quality, efficiency, market neutrality, awareness, program orientation, preventive action, the polluter pays and solidarity. the adoption of the law of basic principles of environmental protection in 1998 provided institutional support for the implementation of the resolution on environmental policy in the federal republic of yugoslavia. another key strategic document, resolution on biodiversity conservation policy, clearly defined objectives and principles of the protection of biodiversity policy, and established four programs for their implementation, including program control and program discovery of processes, as well as activities with a negative impact on biodiversity. the last document, the program of medium-term recovery and transition, was prepared for the donors' conference organized by the world bank and the european commission in june 2001. chapter 12, which explicitly refers to the field of environment, defined short-term and long-term goals, and proposed program of work for the environment based on the convergence to the legislation of the european union. the legal framework governing the protection of the environment was well developed, since in addition to the federal law, there were a wide range of laws and regulations on the level of republics. the most important among federal laws is definitely the law on the foundations of environmental protection in 1998 (“službeni list srj”, br. 24/98). particularly, it established an institutional framework for the introduction of an “integrated system of environmental protection, planning and management of natural resources and the implementation of environmental protection measures” (article 4 of the law). in addition, the basic intention for adoption of this law was to bring closer the national legislation on environmental issues to the european union legislation, which is one of the conditions for the integration into the union. 2.3. critical review of the environmental management system in fr yugoslavia during the last decade of the 20th century, there was a multitude of political, economic and demographic changes caused by economic and political sanctions, longstanding conflicts in the region and the transition period. in such conditions, problems related to the the impact of economic system on environmental policy in republic of serbia 215 environment were treated as less important in relation to economic and social problems, and the expected effects of environmental policy, established by the resolution of environmental policy, failed to happen. the report on the state of the environment for 2000 and priority tasks for 2001+ for serbia state that “the results show that, except for the selected fields, environmental protection systems slept for almost a decade, apropos that established system is not implemented (as they are in other countries intensively transformed in accordance with the requirements of the protection and development of environment), and according to the assessment, the cumulated time lag for the developed countries in this area (at least 30 years) we must compensate step-by-step, by profound, carefully and professionally planned activities” (ministarstvo zdravlja i zaštite životne okoline republike srbije, 2002, p. 224). in addition to economic and political reasons, unsatisfactory environmental performance in the fr yugoslavia until 2000 was caused by the institutional deficiencies and weak enforcement of legislation in the field of environment, which was reflected in the following:  environmental protection in the fr yugoslavia in the period to 2001 was regulated by a large number of federal, republican and municipal regulations, making the overall legal framework that governs environmental protection non-harmonized, inconsistent and vague. such an approach to the regulations relating to the protection of the environment resulted in partial solutions, and in particular, the lack of coordination in this area.  inadequate treatment of the environment, regardless of the existence of numerous laws and regulations, was partly caused by non-alignment of existing legislation, both horizontally (across sectors) and vertically (from the municipal to the federal level).  there was a phenomenon over regulation, whereas the jurisdictions of republican and federal authorities were correlated and overlapped in this area.  lack of defined legislation, which prevented operation of the federal government in taking significant actions to eliminate or reduce the consequences of such circumstances.  existence of certain legal inconsistencies in terms of regulating the protection of certain parts of the environment that should have been otherwise uniformly regulated.  low level of legal provisions appliance, due to an insufficient number of employees engaged in inspection and due to the inability to collect taxes and penalties because of the inefficient legal system.  lack of a comprehensive approach to environmental protection at the national level.  low level of information about the state of the environment due to the lack of an integrated information system for the environment.  a system of statistical data collection could only have basic indicators of environmental conditions on the elements that were being monitored, which turned out to be a very modest base. with regard to data collection, available data were summarized screened. in addition, as the data collection methodology was not adapted to collect data relevant to sustainable development, the information on the contribution of population and industry to environmental protection was not available. the resolution on environmental policy envisaged that the policy was implemented from the federal budget for these purposes in the amount of at least 0.1 to 0.3 % of the federal republic of yugoslavia gdp in the period to 2000, and from the fees for the use of natural assets, taxes, contributions and other sources for environmental protection. however, limited economic opportunities in the period after the introduction of sanctions 216 m. petrović-ranđelović, s. radukić against yugoslavia resulted in, among other things, the impossibility of adequate implementation of the program of environmental financing. of the anticipated 0.1-0.3% of the federal republic of yugoslavia gdp, around 0.001% was allocated in the period from 1998 to 2000, which reflected negatively on the possibility of environmental management. the funds appropriated for this purpose in the same period in the republic of serbia amounted to only about 0.02% of the gross national income. in this way, most of the objectives of environmental policy were not realized and the pressure on the environment due to the intensive use of natural resources increased. in addition, the emissions of pollutants increased due to the inability to replace outdated technology and equipment. another consequence of international sanctions on the environment and the overall environmental management system was reflected in some restriction of international cooperation in this area, given that international cooperation on environmental protection and sustainable development depends on the total international relations of the country. the isolation of the fr yugoslavia led to the interruption of official cooperation in the field of environment and its exclusion from international forums such as the united nations. 3. critical review of the environmental protection system in serbia at the beginning of the 21st century after the democratic changes in 2000, serbia has taken a more active approach in the implementation of environmental policy, which is becoming an integral part of the transition process in the country and support to economic development. the government of serbia in june 2001, and the national assembly in september 2001, approved the first report on the state of the environment and the adopted environmental priorities, which primarily related to: (a) the further development of domestic environmental legislation and its harmonization with the european union legislation, (b) access to certain international treaties in the field of environmental protection, and (c) taking part in the work of international organizations and other international initiatives, such as the process “environment for europe” in the field of environmental protection. the report on the state of the environment for 2000 and priority tasks for 2001+ for serbia clearly identified priority areas for the protection of the environment in which the state, in cooperation with other competent authorities in the field of environmental protection, should take an active part (svetska banka, 2002, p. 49). the most important tasks were: building of institutional and legislative capacity, waste management, education regarding environmental protection, access to information, etc. the fry, due to the normalization of international relations and cooperation with international organizations (osce, eu, rec, etc.) and international financial institutions, began to receive financial, technical and other assistance from abroad. foreign assistance played a significant role in the implementation of some of the priority projects in the above mentioned areas, among which is the scepp, a project funded by the european agency for reconstruction, cowi, a project supported by the danish government or yugolex, a project for the development of legislation in the field of environment, which is implemented with the help of the finnish government (the total budget was 2 million euros) in order to support the harmonization of environmental regulation in serbia with the european union legislation. the impact of economic system on environmental policy in republic of serbia 217 4. the development of the environmental protection system in serbia and montenegro the intensification of the transition process of the yugoslavian economy after 2000 resulted in constitutional and state reforms that resulted in the conclusion of the “agreement on principles of relations between serbia and montenegro” by the yugoslav government and relevant state assembly of serbia and montenegro on march 14, 2002. this agreement did not identify environment protection as a common function at the federal level for serbia and montenegro, but the environmental issues were regulated at the level of member states. the reorganization of the federal state that followed the adoption of the constitutional charter by the federal assembly on february 4, 2003 resulted in the transformation of the federal republic of yugoslavia into the state union of serbia and montenegro. these constitutional and state changes did not remain without impact on the environment. in fact, they laid a new foundation for solving problems, inherited and very unfavorable state of the environment, and initiated extensive reforms within the legislation in the field of the environment, and the need for its harmonization with the eu legislation. while the constitutional charter did not concretize the environmental issues at the union level, this disadvantage was partly remedied by adopting the charter of human and minority rights and civil liberties. this is especially emphasized in article 46 of the charter relating to human and minority rights and freedoms, which explicitly emphasizes: a) the liability of any person, and especially the state union and the member states, for the protection of the environment, b) the right of each person to a healthy environment and timely information about its state, and c) the obligation to preserve and improve the environment. improving the condition of the environment and rational approach to environmental problems in the state union involved the application of appropriate policy that found its foothold in the constitutional and legal commitments and unique national legislation. however, by analyzing the experience of the state union, it could be seen that not only was there a single legislation at the state union, but also one of the main causes of the weaknesses and inconsistencies in solving environmental problems was the lack of uniform regulations and procedures to regulate this issue at the member state level. the foundations of environmental protection were only laid at the state union level, while the republics in accordance with their constitutional and legal commitments and adopted laws regulated this area on their own. this, coupled with the lack of harmonization between the economic systems of the member states, partly prevented the creation and functioning of a single market as one of the main goals of the constitutional charter. the differences in the approach to the issue of regulating the environment were reflected in the different starting points in designing environmental policies. these differences were partly consequence of an inherited condition of the institutional and legal framework in the former fr yugoslavia. the foundations of environmental policy in the republic of serbia found their stronghold in the constitution of the republic of serbia (“službeni glasnik rs”, br. 1/90), which establishes the right of a man to a healthy environment, as well as the duty of everyone in accordance with the law, to protect and improve the environment (article 31 of the constitution of rs). the constitution prescribes the responsibility of the government to ensure the functioning of the system of environmental protection. at the level of the 218 m. petrović-ranđelović, s. radukić republic of serbia, environmental issues are regulated in accordance with the federal law on the foundations of environmental protection (“službeni list srj”, no. 24/98, 24/99 and 44/99) and the republic law on environmental protection (“službeni glasnik rs”, no. 66/91, 83/92, 53/93, 67/93, 48/94 and 53/95). the law on environmental protection from 1991 was the most important element of the legislative framework in the field of environmental protection in serbia. this law regulates the system of protection and development of the environment, including urban planning, assessment of environmental impacts and building. in particular, it regulates issues related to the protection of air pollution, water, land, flora and fauna, natural resources, noise, ionizing radiation, waste and hazardous materials, issues related to the financing of protection, inspection and penalties for pollution. “in addition to this law, specific laws on individual factors (water, forests, land, hunting, fishing) were enacted, and there are other laws that govern specific areas that are directly or indirectly related to the environment” (ministarstvo zdravlja i zaštite životne okoline republike srbije, 2002, p. 7). by the adoption of the declaration on the ecological state of montenegro, on september 20, 1991, the state was committed to the establishment of a special relationship with nature by calling on all citizens to prevent a potential environmental disaster. this declaration established environmental protection as one of the top priorities in the implementation of development policy. in the republic of montenegro, environmental issues were regulated by the constitution of montenegro (“službeni list rcg”, br. 48/92), where it was proclaimed that montenegro was a democratic, social, and, especially, ecological state. in accordance with the constitutional commitment, the state emerged as the main subject of environment protection by restricting the freedoms of business and entrepreneurship. environmental issues were specifically regulated by the law on environmental protection from 1996, and by more sub-acts that were supposed to contribute to the effective implementation of this law. other laws that were under the jurisdiction of the ministry of environmental protection and spatial planning, i.e. air protection law and nature protection law, were established in 1980 and 1989. despite the well-placed framework for the decision-making, most projects in the field of environmental protection in the republic of montenegro were not realized due to ten years of economic stagnation caused by the economic and political crisis. however, after 2000, real conditions were created and opportunities increased for achieving environmental objectives and intensive cooperation with the region in this regard. the differences in the approach to environmental issues caused the differences in the way of achieving environmental objectives. this prevented the development of a unified system of environmental management and coordinated approach to decision making. such a situation in the field of legislation governing the protection of the environment required a transformation and improvement of organizational and institutional solutions in the field of environmental protection. in accordance with the recommendations of the first review of the state of the environment, the institutional framework in the field of environmental protection has changed in serbia since 2002. the state has been engaged in the field of establishing the effective institutions to create conditions for the execution of a number of national as well as international obligations arising from international treaties and obligations of the european union in the field of environmental protection. in 2004, for the purpose of division of competence in environmental matters, the key responsibilities were shared between the ministry of science and environmental protection (bureau for environment) and the ministry of the impact of economic system on environmental policy in republic of serbia 219 agriculture, water and forestry, while some environmental issues were the responsibility of other ministries. “in addition to the bureau for environmental protection, the state authorities who deal with the environmental protection are environmental protection agency, which was established in 2004 as a body within the ministry, the fund for environmental protection, which became operational in 2005, the institute for nature protection, the republic hydro meteorological institute and the agency for recycling” (vlada republike srbije, 2006, p. 195). significant organizational innovation within the new institutional arrangements makes the establishment of the agency for environmental protection, whose jurisdiction includes the collection and detailed processing of data on the individual components of the environment in the republic of serbia. the main task of the agency is to overcome the information gap and the establishment and development of an integrated national information system on environmental protection as a basis for the adoption of economically rational and environmentally effective decisions. in 2004, in order to achieve sustainable management of natural resources and provide a healthy environment, in the republic of serbia a new legal framework was laid with the aim of protecting the environment by adopting the law on environmental protection, law on strategic environmental impact assessment (“službeni glasnik rs”, no. 135/04), law on environmental impact assessment (“službeni glasnik rs”, no. 135/04) and law on integrated prevention and control of pollution (“službeni glasnik rs”, no. 135/04), followed by a series of by-laws for effective implementation of the law. the primary purpose of this legislation was the convergence to relevant directives of the european union and the introduction of their principles into national legislation. however, the established institutional framework for the protection of the environment was characterized by a high degree of dispersion and overlapping of responsibilities and competences of environmental protection, which acted in the direction of weakening the environmental protection system and ineffective enforcement of laws. for example, a lack of coordination between the law in the area of environmental protection and other laws defining the jurisdiction of other institutions at the national level led to unequal approach to environmental matters and some overlap. this was partly a consequence of the legal commitments of the new law on environmental protection, which gave the highest competence to the ministry responsible for environmental protection, while not specifying a closer relationship of this ministry with other sectors. a particular problem in the implementation of specific and practical solutions in the field of environmental protection in the period of the state union of serbia and montenegro was related to the undeveloped economic system, which was a real switch in the implementation of solutions in this area. besides the emphasized institutional weaknesses, the problems in the field of environment were initiated by other reasons, mainly by the poor integration of environmental policy with other sectoral policies and non-rounded environmental legislation, inefficient system of financing of environmental protection and the lack of economic incentives for environmentally conscious behavior, unsustainable use of resources, air pollution from industrial, energy and transport sectors, and the pollution of soil, surface water and groundwater by hazardous substances and waste. 220 m. petrović-ranđelović, s. radukić 5. environmental protection system in the republic of serbia with the dissolution of the state union in june 2006, the republic of serbia faced new tasks and challenges in the field of environmental protection. on the one hand, there appeared a need for the elimination of all obstacles to the full response to environmental challenges, initiating institutional transformation (and effective division of competences) and upgrading of legislation through its harmonization with the acquis of eu in the field of environmental protection. on the other hand, there appeared a need for setting the strategic basis for more intense realization of activities in the field of environmental protection. the most important support to environmental issues is provided by the adoption of the national strategy for economic development of serbia for the period 2006-2012, in which the increase in the standard of living and a dynamic and sustainable development are set as the key strategic objectives. the second supporting document is the national strategy on sustainable development, in which the environmental issues receive their full verification. in fact, “one of the national priorities for achieving sustainable development in the republic of serbia is connected to the protection and improvement of the environment and rational use of natural resources. it involves the integration and harmonization of objectives and measures of all sectoral policies, harmonization of national legislation with the eu legislation and its full implementation. priority importance is given to the adoption and implementation of national program of environmental protection and the accompanying action plans, as well as the adoption and implementation of strategy for sustainable use of resources and goods, which were passed by the government” (vlada republike srbije, 2007, p. 72-73). it is expected that the implementation of the strategy for sustainable use of resources and goods will reduce unsustainable pressure on natural resources and, thus, indirectly contribute to reducing the level of pollution and environmental damage. the main emphasis is placed on the development of clean technologies, which will, along with the decrease of the environmental impact of economic sectors, particularly energy and industrial, help to increase energy efficiency, and with the use of incentives to use renewable energy sources contribute to the improvement of environmental quality. an urgent task in the coming period is the implementation of the national environmental protection programme, in accordance with the basic principles of the eu sixth action plan for the environment, in order to make the basic principles of environmental protection and sustainable development. it is essential to adopt an action plan, as an integral element of the strategy, which will support its effective implementation through the precise definition of priority actions, stakeholders, resources and timelines for full implementation of the strategy. conclusion frequent changes in the economic system and economic policy, which insisted on the accelerated industrialization of the country after world war ii, are considered to be the key trigger of the ecological crisis, i.e. raising the level of pollution and intensive environmental degradation. the factors that indirectly contributed to increasing pressure on the environment are uncontrolled exploitation of natural resources and inadequate treatment of industrial wastewater. the state of the environment deteriorated significantly in the early 90s of the 20th century, after the introduction of the new economic system, whose key components, due the impact of economic system on environmental policy in republic of serbia 221 to the effects of material, social and institutional constraints, were not defined until its dissolution. in addition, due to the war conflict, the problems in the environment were of secondary importance. later, the imposition of the international embargo further worsened the condition of the natural resources of the country, and increased pollution due to poor monitoring and the application of obsolete technology. the decline in general economic activity in the period from 1990 to 1999 resulted in some reduction in the level of pollution and environmental pressures. “the economic slowdown in the 90s also contributed to improving the state of the environment in some way. financial problems of farmers and unavailability of chemicals for agriculture significantly limited their use. the average consumption of fertilizers dropped from about 300 kg/ha to 100 kg/ha of arable land during the 90s, and as a consequence, the large-scale pollution became slightly smaller. this trend could be changed to some extent as a result of economic recovery” (vlada republike srbije, 2007, p. 27). it would be wrong to conclude that the decline in general economic activity directly contributed to improving the state of the environment. such distorted images are obtained due to inadequate application of indicators of environmental conditions that are really suggestive of a positive trend in the field of environment (for example, reduction of environmentally harmful emissions from industry, or reducing pollution by certain environmental factors) in terms of the decline of gdp. however, the analysis of the dynamics of emissions per unit of production could reveal the true picture, which could show a negative trend in the field of environmental protection, apropos on the inevitable deterioration of the environment with the revival of economic activity. in order to solve the existing problems, minimizing risks and improving the quality of the environment, in the coming period, along with the intensification of the reform process towards a market economy and a democratic society, it is necessary to establish an environmental management system, which could be achieved through:  establishing and providing an integrated system of environmental protection that would allow equal access to the protection of the environment and ensure the harmonization of national legislation with international law.  establishing unique economic instruments, improvement of laws and regulations, particularly those in the field of market economy.  preparing the guidelines for institutionalized development that is safe for the environment (harmonization of existing development, economic and regional policy).  improving technical and technological measures as a basis for decision-making.  establishing institutional framework for the effective functioning of the administrative and technical systems for the protection and enhancement of the environment.  establishing a unified information system on environment for the entire country, which would include monitoring, cadastres, etc.  further democratization in the field of environmental management through direct involvement of academic institutions, industry, non-governmental organizations, interest groups, etc.  adjusting the laws to the constitution through the adoption of the missing laws, and through harmonization of laws at different levels. acknowledgement. the paper was prepared for the purpose of projects no. 179066 and 44007, which are financed by the ministry of education and science 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(2001) zakonodavno-pravni okviri zaštite životne sredine u sr jugoslaviji, zaštita životne sredine u meċunarodnom i unutrašnjem pravu izbor najznaĉajnijih izvora prava, ministarstvo zdravlja i zaštite životne okoline republike srbije – uprava za zaštitu životne okoline, beograd. 14. republika srbija, ministarstvo za zaštitu prirodnih bogatstava i životne sredine (2003), prikaz stanja životne sredine u srbiji 2002. godine, beograd 15. savezni zavod za statistiku (1994), meseĉni pregled privredne statistike, indeks, br. 2. 16. službeni glasnik rs (1990), ustav republike srbije, br. 1/1990, http://www.arhiva.srbija.gov.rs/cms/ view.php/1014.print.html (25.04.2014.). 17. službeni list rcg (1992), ustav republike crne gore, br. 48/1992, http://www.gov.me/biblioteka/ 1055251939.pdf (25.04.2014). 18. službeni list srj (1998), zakon o osnovavama zaštite životne sredine (the law on the foundations of environmental protection), br. 24/1998. 19. svetska banka (2002), savezna republika jugoslavija: pregled sektora zaštite životne sredine, aneksi, septembar. 20. trajković, m. (2003), savetodavni izveštaj o razvoju sistema zaštite životne sredine u srbiji i crnoj gori u kontekstu zahteva eu procesa stabilizacije i pridruživanja i pristupa sto, beograd, savetodavni centar za ekonomska i pravna pitanja i g17 institut. 21. ustav sfrj 1974, http://mojustav.rs/wp-content/uploads/2013/04/ustav-sfrj-iz-1974.pdf (20.03.2014.). 22. vasić, s. (2004), uloga države u neutralisanju ekoloških eksternih efekata, niš, ekonomski fakultet. 23. vlada republike srbije (2006), nacionalna strategija privrednog razvoja srbije 2006-2012. beograd, novembar. 24. vlada republike srbije (2007), nacionalna strategija održivog razvoja. beograd. 25. zdravković, d., radukić, s. (2006), nacionalni sistem održivog razvoja i zaštite životne sredine u procesu pridruživanja evropskoj uniji, niš, pelikan print. the impact of economic system on environmental policy in republic of serbia 223 uticaj privrednog sistema na politiku zaštite životne sredine u republici srbiji političkim i ekonomskim promenama u bivšim socijalističkim zemljama početkom devedesetih godina xx veka ne samo da je otvorena mogućnost za budući demokratski razvoj ovih zemalja, već i mogućnost za rešavanje ekonomske, političke, socijalne i ekološke situacije u kontekstu izgradnje novog, tržišnog privrednog sistema. nepovoljna ekološka situacija u srbiji uzrokovana je brojnim faktorima među kojima česte promene u privrednom sistemu u prošlosti i neadekvatna privrednosistemska rešenja zauzimaju posebno značajno mesto. kritički prilaz uticaju privredno-sistemskih rešenja na politička i institucionalna rešenja zaštite životne sredine u sfrj, srj, scg i rs, usled toga, predstavlja pogodnu polaznu osnovu za razumevanje značaja i potrebe preduzimanja aktivnijeg pristupa u rešavanju ekoloških problema u srbiji. to ujedno predstavlja i cilj ovog rada. osim toga, rešavanje problema iz domena zaštite životne sredine od ključnog je značaja za ostvarivanje održivog razvoja i unapređenja konkurentnosti srpske privrede. kljuĉne reĉi: privredni sistem, reforme, politika zaštite životne sredine, republika srbija. facta universitatis series: economics and organization vol. 15, n o 4, 2018, pp. 349 362 https://doi.org/10.22190/fueo1804349p © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the role of information technology in the implementation of lean concept 1 udc 004:005 milica pavlović * , marija radosavljević, radenko milojević university of niš, faculty of economics, niš, serbia abstract. achieving and strengthening competitive advantage represents the key factor for survival and success of the modern businesses. it is a fact that successful implementation of lean management leads to increased productivity and competence. however, in order to maintain profitability and business stability, it is necessary to support lean concept, which can be provided, above all, by the application of modern information technology. in that sense, by applying the erp system, it is possible to adapt basic lean principles to the requirements of a modern environment characterized by constant change of demand and needs of the consumers/users. the main goal of the research is to examine the existing level of application of modern information technologies, as well as the level of attention paid to the integration of lean concept and software solutions in enterprises in the republic of serbia. theoretical aspect of the research is related to finding appropriate grounds for making conclusions on the basis of the existing literature. in this paper, research gaps and proposed further research directions have been identified. by applying the appropriate statistical methods (descriptive statistics, cluster analysis, correlation analysis, χ2 test) it was finally concluded that the enterprises which have substantially implemented the practice and principles of lean management are at the same time those which implement it in their business, i.e. the information systems which support the implementation of lean practice. key words: lean management, information technology, software solutions, erp system jel classification: m11, m15 received july 9, 2018 / revised october 6, 2018 / accepted october 15, 2018 corresponding author: milica pavlović * phd student at university of niš, faculty of economics faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: milapavlovic@yahoo.com 350 m. pavlović, m. radosavljević, r. milojević introduction the rapid growth of world markets as well as the application of modern information technologies force companies to change, representing the factor of their survival and growth. in the environment characterized by intense competition, survival is guaranteed only to those companies which realize the importance of constant innovation and introduction of new methods in the area of process quality improvement. a large number of researchers is focused on continuous improvement of business processes. the instrument that has shown remarkable efficiency for the purposes of continuous improvement is lean management. its essence is to add value and eliminate losses by reducing inventory, improving quality and reducing time, while reducing costs is a logic consequence. today, companies have to connect lean practice with the existing technology platform. combining lean philosophy with new technologies gives them the chance to outperform their competitors with business processes designed to quickly respond to changes in consumer demand. this creates greater level of flexibility, too. it is desirable to make the most of the new technologies’ creative power. for the companies facing incompatible information systems and inconsistent business practices, the erp system is the best solution. in this way, companies are given the opportunity to standardize and automate business processes throughout the organization, as well as to incorporate automated error detection (to improve quality), thereby increasing productivity and reducing cycle duration (wang & nah, 2001). the advancement of lean concept by information technology in serbia is still an underdeveloped area. so far, this topic has not been given special attention and similar research has not been carried out. all this additionally enhances the scientific justification of this work. 1. literature review even though there are many definitions of lean management (lm), it might be said that it represents a systematic approach to identifying and eliminating activities that do not add value to business processes (radosavljević et al., 2015). however, the benefits of lean management for an enterprise, possibly to a greater extent, are related to the management of product and information flow. lean management describes a set of management principles and methods in order to differentiate between loss and value in organizations (stone, 2012). apart from exceptional success achieved within the production function, there is an increasing interest in exploring the application of lean management and non-productive functions (arlbjørn & freytag, 2013), since the acceptance of lean philosophy does not imply respecting lean principle only in production but in all processes taking place in the company. according to rother and shook (1999), the basic principles of lean management are value for the customer, value stream, continuous flow, pull strategy and continuous perfection. tanasić (2012, p. 310) also points to several axioms which lean as a modern concept is based on:  the customer represents the essential condition for the existence of an enterprise and therefore should exist in the basis of all business functions;  in order to be fully committed to customers and their needs and wishes, the enterprise must continuously eliminate the waste in everything it does; the role of information technology in the implementation of lean concept 351  the enterprise becomes the organization that learns, putting emphasis on intellectual rather than material capital;  transparency represents the tool of timely response to both internal and external change;  innovation and gradual, continuous improvement become the integral part of the business culture and business philosophy of a modern enterprise;  the enterprise must insist on creating the quality of products at the very source, or at every step of the value stream, at each stage of the business process;  the application of an appropriate measurement system helps the enterprise and employees to stay on the right track, and repair and eliminate any omissions that disturb or slow down their pace. the key elements for the successful implementation of standardization in lm are operations, time, tools and accessories (ősterman & fundin, 2014). by formulating lean strategy, companies tend to differentiate themselves from competitors. in addition, as one of their goals, as has already been pointed out, is providing greater value for consumers, by concentrating on value and by eliminating losses and activities that do not add value, these companies are simultaneously increasing profit. it can be said that lm is actually an approach that allows elimination of nine types of losses waiting, overproduction, unnecessary transport, inefficient process, supplies, unnecessary movement, defects, unused potential, absence of employees (radosavljević et al., 2015). each of these losses can be removed or at least minimized by careful planning of lean initiative and by setting goals related to continuous improvement. at the heart of these initiatives and goals is information technology. ghobakhloo and hong (2014) conducted a study in order to determine whether the application of information technology and the principle of lean management were interdependent or mutually exclusive. based on the data collected (230 leading iranian and malaysian auto parts manufacturers participated in the study), the conclusion was that lean management and information technology are mutually dependent, and that the value of it investments can be effectively transformed into improving business performance if there is a higher degree of implementation of lean management system. pillai et al., (2014) also conclude that information technology and lean management are extremely complementary and that their effective combination continuously improved business processes. together, lean and it can increase efficiency and improve the effectiveness of the process by observing certain principles (epa, 2015, p. 2):  inclusion of it staff at all stages of the project related to the improvement of business processes (even as consultants, to help with the project plan);  using creativity instead of capital with the aim to solve problems (maximize improvement of processes that can be achieved by small, inexpensive changes, and consider whether additional resources are required to be invested in order to generate additional benefits);  rationalization/simplification of the process prior to their automation (otherwise there is the possibility of retention and deterioration of errors, which leads to inefficiency of the process);  monitoring the results of undertaken actions, identifying and addressing previous problems, evaluating the performance of the process with the help of software tools. a large number of organizations implement document management and content management systems, trying to secure safe and fast storage of documents, as well as 352 m. pavlović, m. radosavljević, r. milojević undisturbed access to relevant information. by using software, companies can respond to the needs and demands of consumers in real time, and at the same time all feedback received from consumers can be organized in one database (dubbaka & dadkhah, 2009). the applications use structured information that exists in databases to automate business processes (bell & orzen, 2011). one study shows that lean principle needs to be adopted first, and then business activities that add value should be automated, since the information technology leads to further improvements already achieved by using lean principles (bortolotti & romano, 2012). the effects of traditional lean concepts advancement with information technology are most evident in the field of monitoring and organizational performance improvement. by using technology, it is possible to generate highly effective, proactively targeted indicators that will signal managers and others where their attention is necessary (bell & orzen, 2011). a wellestablished measurement system provides managers, supervisors or expert associates with the opportunity to oversee the field of special interest for them and, if need be, they can get more detailed information. focusing on processes requires a more frequent measurement of expected results over a shorter period (monthly/quarterly). this will enable the intervention to be undertaken as needed, before the negative impact on the outcome is reached. moyano-fuentes et al. (2012) analysed in a case study the link between information technology and lean concept based on data from the automotive industry. the results of the hierarchical regression analysis have shown that the degree of internal it use had a significant impact on the level of the lean concept implementation, while external it had decisive influence only when internal it systems are controlled. in this way, it has been proven that there is a positive link between the level of it usage and the level of lean implementation. the use of it tools mainly involves process automation or their importance in reflected both in providing necessary information for the implementation of advanced lean management and in supporting the decision-making system, in order for managers to choose the appropriate approach at the right time (kobus & westner, 2015). similar conclusions came from ward and zhou (2006), who, in their study, inter alia, empirically investigated the connection between the integration of it and lean practices and their positive impact on the shortening of process implementation time. wan and chen (2009) in their work pointed to web tools that can support the decisionmaking process and can help managers in implementing the lean principles. by using a webbased program, each user is enabled to evaluate the current status of the business system, to identify the segments where urgent reaction is required, and also to develop appropriate techniques and tools for the purpose of formulating a plan. owing to this, the lean concept can be implemented more effectively and systematically. ker et al. (2014) discussed how the application of lean principles and information technology can improve the process of drug/medicine distribution. the results of statistical analysis have shown that the introduction of digital scanning technology has led to a significant reduction in the duration of the process, and at the same time the reduction of costs. confronted with competition and rising consumer expectations, as well as with the need to significantly improve the performance of the process and achieve competitive advantages in the market, companies are nowadays increasingly choosing to apply modern software solutions, primarily for the erp system (harmon, 2014). most companies take their existing processes into account when deciding on the implementation of the erp system. after that, the attention is paid to the erp modules that companies intend to install. the interfaces for the erp applications are links to documents that are in the database. it is necessary to the role of information technology in the implementation of lean concept 353 determine the desired architecture of the process, then look at the specificities of each process and select the activities that need to be implemented (harmon, 2014). when consumers and suppliers request information fully integrated through a value chain, or when executives formulate strategies and tactics in areas such as manufacturing, procurement and accounting, the erp system analyses the data and transforms them into useful information used by companies to support the decision-making process (wang & nah, 2001). riezebos et al. (2009) indicate that erp systems can significantly reduce the time needed to collect information related to products and processes and can help managers in delivering timely and quality information while at the same time costs are being reduced. al-mashari (2002) points out that the use of the erp system can stimulate the adoption of standardized business processes throughout the organization. packowski & francas (2013), riezebos et al. (2009) also point to the importance of increasing the presence of erp systems, the main focus of which is to support internal processes. the examples of the erp support to lean management include planning to improve the responsiveness due to variability of demand and to allow measuring the costs of products per order (webb et al., 2009, p.222). the following figure summarizes the most significant benefits of the erp system application. fig. 1 the most significant benefits of erp system application source: authors, based on: powell, d. (2012). investigating erp support for lean production, ph.d. thesis, norwegian university of science and technology powell (2012) has formulated fifteen ways in which the modern erp system supports lean production. firstly, five key principles of lean concept (value, value stream, flow, pull and perfection) were identified and within them the way in which the erp system can provide support. some of these support modes primarily relate to planning, then to 354 m. pavlović, m. radosavljević, r. milojević control (e.g. support to the production control system kanban), while the others relate simultaneously to planning and control (e.g. support to customer relationship management crm, support for the exchange of information through the entire chain) (powell, 2012, p. 78). table 1 the ways in which erp supports lean production no principle an erp system for lean production should: reference: 1 value support customer relationship management (chen and popovich, 2003) 2 automate necessary non-value adding activities (e.g. backflushing) (hamilton, 2009) 3 value stream enable process-modelling to support standard work processes (ifs, 2008, prediktor, 2010) 4 provide a source for easy-to-find product drawings and standard work instruction (houy, 2005, tjahjono, 2009) 5 support information sharing across the supply chain (bjorklund, 2009, kob et.al., 2008) 6 flow create synchronized and streamlined data flow (internal & external) (hamilton, 2003) 7 support line balancing (steger-jensen and hvolby, 2008) 8 support demand levelling (hamilton, 2009) 9 support order less rate-based planning (e.g. tact-time) (ifs, 2010) 10 provide decision support for shop floor decision making (hamilton, 2009) 11 pull support kanban control (hamilton, 2009, masson and jacobson, 2007) 12 support production levelling (masson and jacobson, 2007) 13 support jit procurement (masson and jacobson, 2007) 14 perfectio n provide a system to support root-cause analysis and for the logging and follow-up of quality problems (bjorklund, 2009) 15 provide highly visual and transparent operational measures (e.g. real time status against plan) (prediktor, 2010) source: powell, d. (2012). investigating erp support for lean production, ph.d. thesis, norwegian university of science and technology, p. 77. 2. research methodology the goal of the empirical research is to determine the direction and intensity of the impact of information technologies on the performance of business processes in enterprises in serbia. in this sense, one of the tasks of empirical research is to discover whether the postulates according to which lean concept operates are present in the republic of serbia’s enterprises. it is expected that the research results will reveal these relations, and the discussion of results will explain the obtained results. the role of information technology in the implementation of lean concept 355 2.1. the assumptions and research methods the survey was conducted on included enterprises from the territory of the republic of serbia that are registered in the serbian business registers agency. the selection of sample enterprises was done randomly. the research was carried out using the survey method based on a structured questionnaire. the questionnaires were distributed to 180 email addresses of managers who evaluated the state of information technology in their enterprise. the response rate was 25.5% (46 enterprises). the main limitation is that the results were obtained by interviewing a limited number of respondents. a five-point likert scale was used to examine the degree of respondents’ agreement with the provided claims. data analysis was performed using appropriate statistical methods, which are: descriptive statistics, correlation analysis and cluster analysis, χ2 test, applying the ibm spss statistical package software. the application of these statistical methods should enable the testing of the following hypotheses: 1. doing business in the enterprises in serbia rests on the postulates of the lean management, 2. elements of the lean management are mutually correlated 3. the application and usefulness of it is at a high level in the enterprises in serbia, 4. the effects of it implementation are mutually correlated, 5. there is statistically significant interdependence between the application and effects of it and the lean practice in enterprises in serbia. bearing in mind the research goal related to determining whether the enterprises in serbia apply lean concept, the appropriate lean claims have been defined: l1: the customer represents the essential reason for the existence of an enterprise and therefore should exist based on all business functions, l2: in order to be fully committed to customers and their needs and wishes, the enterprise must continuously eliminate the waste in everything they do, l3: the enterprise becomes the organization that learns, putting emphasis on intellectual rather than material capital, l4: transparency represents the tool of timely response to both internal and external change, l5: innovation and gradual, continuous improvement become the integral part of the business culture and business philosophy of a modern enterprise, l6: the enterprise must insist on creating the quality of products at the very source, or at every step of the value stream, at each stage of the business process, l7: the application of an appropriate measurement system helps the enterprise and employees stay on the right track, and repair and eliminate any omissions that disturb or slow down their pace. 356 m. pavlović, m. radosavljević, r. milojević in order to create an image of the state of information technologies in the observed enterprises, 12 claims (on the basis of theoretical considerations and corresponding aspects of the application of information technologies) have been defined: it1: employees in the enterprise are trained to use modern information technologies, it2: in the enterprise, software tools are used to a large extent, it3: the erp system is used in the enterprise, it4: employees in the enterprise are trained to use the erp system, it5: using the erp system contributes to reducing the process implementation time, it6: implementation of the erp system leads to the reduction in costs, it7: the erp system supports organizational changes, it8: the erp system contributes to strengthening connections and relationships with suppliers, it9: the erp system provides improvement of the services provided to consumers, it10: performance improvements were made after implementation of the erp system, it11: the erp system contributes to quality improvement, it12: the erp system leads to increased productivity. the first four claims directly concern it implementation, while the purpose of the other 8 claims is to evaluate the effects and usefulness of it, seen from the interviewed managers’ perspective. 2.2. results and discussion the analysis of the significance of certain lean claims has shown that in enterprises the highest importance is attributed to product quality creation at the source, that is, at every step of the value stream, at each stage of the business process (lm6 average score 4.13, standard deviation 1.05). the lm7 claim has the lowest average rating it states that the application of an appropriate measurement system helps the enterprise and employees stay on the right track, and repair and eliminate any omissions that disturb or slow down their pace. consequently, it can be said that the first hypothesis can be accepted since the average value of the claims concerning the lm implementation are all at least 3.5. table 2 descriptive statistics for lean issues n minimum maximum mean std. deviation lm1 46 1.00 5.00 3.6087 1.20145 lm2 46 1.00 5.00 4.0217 1.14483 lm3 46 1.00 5.00 3.9565 1.11468 lm4 46 2.00 5.00 3.9783 .88164 lm5 46 1.00 5.00 3.7609 1.19601 lm6 46 1.00 5.00 4.1304 1.04581 lm7 46 1.00 5.00 3.4783 1.69626 source: authors’ calculation, spss output the role of information technology in the implementation of lean concept 357 table 3 provided the descriptive statistics overview of the claims regarding the application of information technology. in the context of descriptive statistics, the average estimates were made. especially positive is the fact that the best-rated claims are it2: in the enterprise, software tools are used to a large extent (average score 4.24) and it9: the erp system provides improvement of the services provided to consumers (average score 4.28). this is also confirmed by the low standard deviations. it is very important to notice the significance of using modern it, which is a key factor in the success and survival of modern enterprises. accordingly, there is a chance to increase the use of software solutions, in particular the erp system in enterprises in serbia and generate benefits based on their application. the weakest rated claim is it4: employees in the enterprise are trained to use the erp system (average score 3.35). in this way, the weakness, which is still characteristic of the enterprises in serbia, is reflected and it refers to insufficient training of employees for the work with software tools. identical results were achieved by another research, which concluded that better results and overcoming of this problem should be expected in the upcoming period, as in time the change of generation among the employees will happen, and younger people, as a rule, are better at working with modern information technologies (mitić, 2016, p. 82). the research results of the republic statistical office show that in 2016 only 11.8% of enterprises provided training of ict experts, while 30.2% of the enterprises enabled training for other employees to develop ict skills (republic statistical office, 2017). as in case of the first hypothesis, it can be said that the average values of the it implementation and effects indicate that the third hypothesis can also be accepted. table 3 descriptive statistics for it issues n minimum maximum mean std. deviation it1 46 1.00 5.00 3.5870 1.55744 it2 46 1.00 5.00 4.2391 1.15825 it3 46 2.00 5.00 4.1739 .99564 it4 46 1.00 5.00 3.3478 1.36979 it5 46 1.00 5.00 3.7609 1.21445 it6 46 2.00 5.00 4.0435 1.07407 it7 46 1.00 5.00 3.9783 1.54185 it8 46 1.00 5.00 4.1087 1.05889 it9 46 1.00 5.00 4.2826 1.00362 it10 46 1.00 5.00 3.6957 1.19014 it11 46 1.00 5.00 3.9130 1.24412 it12 46 1.00 5.00 4.1304 1.10772 source: authors’ calculation, spss output in order to check the consistency in implementation of lean management, it can be useful to inspect if there is a correlation between the observed claims. the correlation between the claims was investigated by the spearman's correlation coefficient. when it comes to mutual correlation between the lean claims presented in table 4, it is noted that there is a lower or higher degree of correlation, but anyhow, it is positive. therefore, the second hypothesis can be accepted. this means that the postulates, which lean concept relies on, are interconnected and that their synergetic effect can be ensured. 358 m. pavlović, m. radosavljević, r. milojević table 4 correlation analysis between lean variables lm1 lm2 lm3 lm4 lm5 lm6 lm7 lm1 correlation coefficient 1.000 .676 ** .446 ** .563 ** .595 ** .403 ** .679 ** sig. (2-tailed) . .000 .002 .000 .000 .005 .000 n 46 46 46 46 46 46 46 lm2 correlation coefficient .676 ** 1.000 .543 ** .666 ** .640 ** .551 ** .824 ** sig. (2-tailed) .000 . .000 .000 .000 .000 .000 n 46 46 46 46 46 46 46 lm3 correlation coefficient .446 ** .543 ** 1.000 .432 ** .320 * .475 ** .545 ** sig. (2-tailed) .002 .000 . .003 .030 .001 .000 n 46 46 46 46 46 46 46 lm4 correlation coefficient .563 ** .666 ** .432 ** 1.000 .481 ** .468 ** .541 ** sig. (2-tailed) .000 .000 .003 . .001 .001 .000 n 46 46 46 46 46 46 46 lm5 correlation coefficient .595 ** .640 ** .320 * .481 ** 1.000 .373 * .551 ** sig. (2-tailed) .000 .000 .030 .001 . .011 .000 n 46 46 46 46 46 46 46 lm6 correlation coefficient .403 ** .551 ** .475 ** .468 ** .373 * 1.000 .521 ** sig. (2-tailed) .005 .000 .001 .001 .011 . .000 n 46 46 46 46 46 46 46 lm7 correlation coefficient .679 ** .824 ** .545 ** .541 ** .551 ** .521 ** 1.000 sig. (2-tailed) .000 .000 .000 .000 .000 .000 . n 46 46 46 46 46 46 46 ** correlation is significant at the 0.01 level (2-tailed). source: authors’ calculation, spss output since claims from it5 to it12 concern the effects of the implementation of the erp system and the benefits it brings to the enterprise, these claims are used for further analysis, first correlation and then cluster. table 5 presents the results of the correlation analysis for it. the results show that the correlations of claims are positive, but not all statistically significant. this leads to the conclusion that enterprises are not consistent in implementing the erp system or that not all effects of it implementation lead the enterprise in the same direction. this is the case of the claims it6: implementation of the erp system leads to a reduction in costs, it10: performance improvements were made after implementation of the erp system, it11: the erp system contributes to quality improvement, and it12: the erp system leads to increased productivity. consequently, the fourth hypothesis cannot be accepted. the role of information technology in the implementation of lean concept 359 table 5 correlation analysis between it variables it5 it6 it7 it8 it9 it10 it11 it12 it5 correlation coefficient 1.000 .475 ** .542 ** .433 ** .281 .179 .301 * .164 sig. (2-tailed) . .001 .000 .003 .058 .235 .042 .276 n 46 46 46 46 46 46 46 46 it6 correlation coefficient .475 ** 1.000 .492 ** .426 ** .467 ** .191 .252 .095 sig. (2-tailed) .001 . .001 .003 .001 .203 .092 .529 n 46 46 46 46 46 46 46 46 it7 correlation coefficient .542 ** .492 ** 1.000 .614 ** .488 ** .313 * .269 .223 sig. (2-tailed) .000 .001 . .000 .001 .034 .071 .136 n 46 46 46 46 46 46 46 46 it8 correlation coefficient .433 ** .426 ** .614 ** 1.000 .381 ** .305 * .203 .343 * sig. (2-tailed) .003 .003 .000 . .009 .039 .176 .020 n 46 46 46 46 46 46 46 46 it9 correlation coefficient .281 .467 ** .488 ** .381 ** 1.000 .034 .016 .147 sig. (2-tailed) .058 .001 .001 .009 . .823 .917 .329 n 46 46 46 46 46 46 46 46 it10 correlation coefficient .179 .191 .313 * .305 * .034 1.000 .170 .061 sig. (2-tailed) .235 .203 .034 .039 .823 . .260 .690 n 46 46 46 46 46 46 46 46 it11 correlation coefficient .301 * .252 .269 .203 .016 .170 1.000 .388 ** sig. (2-tailed) .042 .092 .071 .176 .917 .260 . .008 n 46 46 46 46 46 46 46 46 it12 correlation coefficient .164 .095 .223 .343 * .147 .061 .388 ** 1.000 sig. (2-tailed) .276 .529 .136 .020 .329 .690 .008 . n 46 46 46 46 46 46 46 46 * correlation is significant at the 0.05 level (2-tailed). ** correlation is significant at the 0.01 level (2-tailed). source: authors’ calculation, spss output in order to test the last hypothesis, the cluster analysis and χ 2 test have been used. the idea is to classify the enterprises into two clusters based on the lm implementation and, also into two clusters based on the it effects, and then to compare the cluster membership of the enterprises based on χ 2 test. according to the answers related to 7 lean claims, enterprises are classified into two clusters. also, according to the benefits that it brings to the enterprise, the enterprises are also classified into two clusters, thus creating the possibility for appropriate comparison. the cluster analysis is performed based on the hierarchical cluster analysis (cluster method with-in groups linkage, interval – squared euclidean distance). based on χ 2 test, the relationship between cluster membership based on it and lm claims has been analysed. the results of χ 2 test are presented in the following table. 360 m. pavlović, m. radosavljević, r. milojević table 6 χ 2 test statistics value df asymp. sig. (2-sided) exact sig. (2-sided) exact sig. (1-sided) pearson chi-square 4.403 1 .036 continuity correction 2.781 1 .095 likelihood ratio 6.638 1 .010 fisher's exact test .078 .038 linear-by-linear association 4.308 1 .038 n of valid cases 46 source: authors’ calculation, spss output based on the significance level, which is 0.036 according to the pearson chi-square and 0.038 according to the fisher’s exact test, it can be concluded that there is a statistically significant relationship between clusters based on it and lm claims. consequently, based on this, it can be concluded that enterprises that have substantially implemented lm practices and principles are at the same time those which consider implementation of it in their business as useful, which consequently means that the information systems represent the support for the implementation of the lean practice. consequently, this means that there is statistically significant interdependence between the application and effects of it and the lm implementation in enterprises in serbia. therefore, the fifth hypothesis can be accepted. conclusion in this paper, the current business practice of the enterprises in the republic of serbia has been analysed. based on this, the existing level of modernity and application of information technologies has been determined, as well as the level of attention paid to software solutions, and especially the erp system. the analysis of the research results confirmed all three hypotheses that represent the starting point of the research. precisely, based on table 2, the first hypothesis was confirmed. the analysis has shown that there is an acceptable level of lm principles implementation, since lean claims have high average scores (especially l6: enterprise must insist on creating the quality of products at the very source, at each stage of the business process and l2: enterprise must continuously eliminate the waste in everything they do). doing business in the enterprises in serbia rests on the postulates of lean management, but the results in table 4 (correlation between lean variables) indicate that there is a group of enterprises that implement lm principles, while, at the same time, there is another group of enterprises whose implementation of lm principles is not at an enviable level. according to table 3, the analysis has shown that there is an acceptable level of it implementation effects. however, table 5 shows that there is a high correlation coefficient between cluster membership and it claims, indicating that there is a group of enterprises that characterises it implementation, while, at the same time, there is another group of enterprises whose it implementation is not at a high level. one must also have in mind that the enterprises in serbia are in different stages of the erp system implementation, so they are faced with different costs, depending on the current stage. in addition, after the erp the role of information technology in the implementation of lean concept 361 system implementation, certain costs related to its maintenance, additional training of employees and the use of consulting services will certainly occur. when it comes to the correlation between the cluster's affiliation to it and lm claims, the significance of 0.036 and 0.038 shows that, in this case, there is a positive relationship that is statistically significant. this precisely points out to the conclusion that in the coming period, there is a chance for even greater application of modern information and communication technologies providing necessary support for the implementation of lean principles in the enterprises in serbia. in order to monitor the variability of the research results, it is necessary to repeat the research after a while, and include even more respondents, as well as to expand the subject of the research. based on the analysis presented in this paper, potential improvements and recommendations can be proposed. first of all, it is necessary to provide additional training to employees in order to reduce the gap between their skills and the requirements imposed by the use of a modern erp system. the recommendation to enterprises is to continuously invest in purchase and maintenance of modern information technologies, since the level of their application in an enterprise has both direct and indirect impact on business performance. further research could involve deeper analysis of the enterprises that have been implementing lm and it, for example, concerning the following independent variables: size, capital origin, managers’ orientation, managers’ origin and so on. references arlbjørn, j. s. & freytag, p. v. 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(2009). measuring the costs of custom products through better technology utilization. the engineering economist, 54 (3), 222–249. uloga informacione tehnologije u implementaciji lean koncepta postizanje i jačanje konkurentske prednosti predstavlja ključni faktor opstanka i uspešnosti poslovanja savremenih preduzeća. činjenica je da uspešna primena lean menadžmenta dovodi do povećanja produktivnosti i kompetentnosti. meďutim, u cilju održavanja profitabilnosti i poslovne stabilnosti, neophodna je podrška lean konceptu koja se ogleda pre svega u primeni savremene informacione tehnologije. primenom erp sistema omogućava se prilagoďavanje osnovnih lean principa zahtevima savremenog okruženja koje karakteriše konstantna promena zahteva i potreba potrošača/korisnika. osnovni cilj istraživanja je da se ispita postojeći nivo primene savremenih informacionih tehnologija, kao i nivo pažnje koji se poklanja integraciji lean koncepta i softverskih rešenja, u preduzećima u srbiji. teorijski aspekt istraživanja odnosi se na pronalaženje odgovarajuće osnove za zaključivanje na bazi postojeće literature. u radu su identifikovani istraživački jazovi i predloženi dalji pravci istraživanja. primenom odgovarajućih statističkih alata (deskriptivna statistika, klaster analiza, korelaciona analiza, χ2 test) konačno je zaključeno da preduzeća koja su u značajnoj meri implementirala praksu i principe lean menadžmenta, jesu istovremeno i ona koja u svom poslovanju primenjuju it, odnosno informacione sisteme za podršku implementaciji lean prakse. ključne reči: lean menadžment, informacione tehnologije, softverska rešenja, erp sistem facta universitatis series: economics and organization vol. 17, n o 1, 2020, pp. 69 86 https://doi.org/10.22190/fueo191003006n © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper relation between job satisfaction of employees and their personality dimensions according to the ‘big five’ theory 1 udc 005.96 milena nedeljkovic knezevic 1 , maja mijatov 1 , aleksandra dragin 1 , sladjana nedeljkovic 2 1 university of novi sad, faculty of sciences, department of geography, tourism and hotel management, serbia 2 jp eps, rb kolubara, lazarevac, serbia abstract. awareness regarding the increasing importance of human resources for achieving the organizational competitiveness on the market became an integral part of modern economy, where people, together with their knowledge and skills, represent strategic organizational resource. the aim of this research is to assess the influence of employees’ personality dimensions, according to the ‘big five’ theory, and certain facets of job satisfaction as well as different facets of job satisfaction on the overall assessment of job satisfaction. the influence of respondents’ socio-demographic characteristics on the individual facets of job satisfaction is also evaluated. the research results indicated that there is a significant difference in the assessment of individual facets of job satisfaction regarding the respondents’ demographic characteristics. also, statistically significant correlations are found between personality dimensions: ‘extraversion’, ‘openness to new experiences’, ‘conscientiousness’, ‘agreeableness’ and ‘neuroticism’ and individual facets of job satisfaction. the research results will be beneficial for providing the appropriate guidelines for improvement of human resource management of large organizations, especially in the case of public-owned organizations within the countries facing significant restructuring changes, such as serbia. key words: job satisfaction, personality dimensions, big five theory, transition jel classification: d90, j28, m12, o15 received october 3, 2019 / revised january 30, 2020 / accepted february 05, 2020 corresponding author: milena nedeljkovic knezevic university of novi sad, faculty of sciences, department of geography, tourism and hotel management, trg dositeja obradovica 3, 21000 novi sad, serbia e-mail: milena.nedeljkovic@dgt.uns.ac.rs 70 m. nedeljkovic knezevic, m. mijatov, a. dragin, s. nedeljkovic 1. introduction in contemporary business environment, including the high level of global competitiveness, there is a need for seeking the adequate organizational responses and their reactions to constant ongoing changes (jansen et al., 2006; olsen & sallis, 2006). changes that take place at strategic level of organizations cannot be implemented without appropriate changes within the management of the human resources (hult et al., 2004; kwon choi et al., 2013; yidong & xinxin, 2013). as a response to inadequacy of bureaucracy, or more precisely to hierarchical organization of work in modern companies, caused by increased complexity of managerial processes, tayloristic principles, based on the strict hierarchy, are increasingly complemented by participative management (fassin et al., 2017). changes in the environment are characterized by the appearance of multi-competition, new intraand interorganizational forms, while advances in information and communication technology have been shown valuable for the implementation of new efficient organizing schemes for the advancement of human resources and effective positioning of competent employees (petković & lukić, 2014). changes in attitudes of contemporary management are also manifested in providing greater importance to the employees‟ job satisfaction, which might further cause numerous positive repercussions for entire organization (pacheco & webber, 2016). job satisfaction is often the topic within the organizational psychology studies, since it is correlated with “the employees‟ motivation and job performances, reduced turnover and absenteeism, organizational citizenship behavior and organizational commitment” (kayal & das, 2016). research regarding the employees‟ satisfaction issues is often related to various sociological and psychological constructs (arthaud-day et al., 2012; lopez et al., 2009). one of important psychological theories, that was also researched in the context of the employees‟ job satisfaction, is labelled as the „big five‟ theory, which is related to five dimensions of personality (berglund et al., 2016; hahn et al., 2016; judge & zapata, 2015). herein, the research was conducted within the large public-owned organization electric power industry of serbia (eps), an organization that is expected to face restructuring period. the awareness regarding the inevitable incoming transformations is very pronounced among the employees and the research results are analyzed in the light of this fact. for majority of the employees, these transformations would cause changes in their job positions or even their dismissal, which could certainly influence the different facets of job satisfaction. 1.1. job satisfaction different authors are defining the term of job satisfaction in different ways. however, definitions of this term as provided by locke (1976) and vroom (1982) are the most frequently cited in the literature. locke noted that job satisfaction is „a positive emotional state that results from assessment of individual‟s job or experience at work‟. on the other hand, vroom, who equally used the terms „job satisfaction‟ and „job attitude‟, said that „job satisfaction is affective orientation of individual towards his/her business tasks‟. previous research indicated that job satisfaction could be considered as a key variable that might be reflected in the employees‟ behavior, which is one of the main reasons why job satisfaction is often researched as integral and important aspect of organizational behavior (burke et al., 2005; cronin et al., 2000). besides, previous research also indicated that job satisfaction could be considered on the basis of different facets, including the relation between job satisfaction and personality dimensions according to the „big five‟ theory 71 employees‟ satisfaction with pay, promotion, supervision, rewards, benefits, relations with co-workers, nature of the work and communication, as well as satisfaction with operating conditions (hur et al., 2015; pantouvakis & bouranta, 2013, weiss, 2002), which was also considered for the purposes of this research. one of the prominent researchers of job satisfaction is paul spector (spector, 1997). he pointed to several reasons for the importance of job satisfaction. the first reason is related to increased humanization of work, which implies that employees should be respected as individuals that are contributing to overall business success of the company, while, on the other hand, job satisfaction could also serve as an indicator of the employees‟ level of business efficiency. furthermore, high level of job satisfaction, according to spector (1997), could also be a sign of positive emotional attitude towards the job, which is important for achieving the high-quality job performances. besides, organization should be aware of the importance of the employees‟ job satisfaction, due to the fact that it could have overall positive effects on the fulfillment of organizational goals, which could be manifested by positive behavior towards the achievement of these goals, or by negative behavior of the employees in the case of their dissatisfaction (spector, 1997; 2000; spector et al., 2000). expressed interest of researchers towards the concept of job satisfaction, as well as towards the identification of its antecedents and consequences, is evident in extensive literature related to job satisfaction (furnham et al., 2002; horppu et al., 2008; kilili & bozdağlar, 2013; lee et al., 2013; moliner et al., 2007; noe et al., 2010; pacheco & webber, 2016). antecedents of job satisfaction (factors that cause job satisfaction) are, for example, interpersonal relations between the employees and their personality characteristics (furnham et al., 2002), representation of participative management as an optimal balance in the degree of involvement of managers and their subordinates in the process of information and knowledge sharing, decision making and problem solving (pacheco & webber, 2016; wright & kim, 2004). consequences of job satisfaction are, for example, higher labor productivity, less absenteeism or less turnover of the employees‟ (horppu et al., 2008; kilili & bozdağlar, 2013; lee et al., 2013; moliner et al., 2007; noe et al., 2010). 1.1. personality dimensions of the ‘big five’ theory and their implication within the business environment there are numerous definitions of the term personality in the literature. personality is defined as “those characteristics that account for a person’s consistent patterns of feeling, thinking, and behaving” (pervin & john 1997, p. 4) or as “an individual’s characteristic patterns of thought, emotion, and behaviour, together with the psychological mechanisms– hidden or not–behind those patterns” (funder, 2004, p. 5). therefore, personality is expressed in different ways, through specific behaviors, opinions and feelings, which make that person different from the other persons. employees are satisfied with their jobs, due to internal dispositions, including their personality, among other things (judge et al., 2002). personality could be considered as a predictor of career success (ward, 2019), life satisfaction (suldo et al., 2015) and job satisfaction (templer, 2012). according to that, numerous researches indicated the correlation between the employees‟ personality and various forms of organizational 72 m. nedeljkovic knezevic, m. mijatov, a. dragin, s. nedeljkovic behavior. relations between personality and business performances (conte et al., 2017; judge & zapata, 2015) and team performances (park et al., 2017; soomro et al., 2016) are subjects for analyzing the problems of correlation between the employees‟ personality and organizational outcomes. the „big five‟ theory of personality dimensions is one of the widely used theories when researching these relations. with minor variability, majority of the authors accepted the following five dimensions of personality: extraversion, neuroticism, agreeableness, conscientiousness and openness to new experiences (atari et al., 2017; sun et al., 2018). extrovert (high level of extraversion) is an expressive person that has many friends, socially oriented, feels good in a group environment and he/she is popular in it. prevalence of empathy has a positive influence on the work setting, characterized by direct contact with customers and public. this is especially represented within the service sector, politics or profession of the pr managers. such a person could also be a good supervisor, since he/she easily makes contact with people, and his/her relations with other employees are also characterized by informality that contributes to the establishment of mutual trust (kaczmarek & kaczmarek-kurczak, 2017; seibert & degeest, 2017). in organizational terms, an individual with a high degree of agreeableness could be excellent team member, due to the fact that such a person usually brings harmony into the team, but also due to the fact that such a person is open for accepting the opinions of other team members, if he/she feels that their ideas could contribute to successful realization of the entire project (judge et al., 2002; judge & zapata, 2015). an individual with high level of conscientiousness is very organized and strict throughout the implementation of established procedures and rules. in business environment, such a person would be successful within the job positions that do not require greater degree of flexibility when choosing directions for accomplishment of business tasks, but consistency in following the established procedures (anwar et al., 2018). furthermore, an individual with a high degree of openness to new experiences is original, creative and innovative, with the belief that changes would cause better situation in business environment. such a person does not avoid complex situations and he/she tries to find a way out of them. all those job positions that require originality, creativity and global approach to solving the problems could be considered as appropriate for these individuals. on the other hand, an individual with low degree of openness to new experiences usually expresses unwillingness for using the non-traditional resources and he/she also expresses doubt regarding the choice of non-standard manners for solving the problems (ivcevic & brackett, 2015; ngek, 2015). an individual with a high degree of neuroticism tends to evaluate numerous situations in life in a negative way, so his/her job dissatisfaction is often a consequence of this personality dimension, rather than the real situation. it is also important to note that an individual with pronounced neuroticism is characterized by the lack of emotional stability and concern. such a person hardly fits into a team, mostly due to his/her pessimism regarding the realization of organizational goals (marchand & vandenberghe, 2016; vandenberghe et al., 2019). relation between job satisfaction and personality dimensions according to the „big five‟ theory 73 1.2. importance of personality dimensions for shaping the employees’ job satisfaction in recent years, there has been a significant increase in the number of researchers regarding the effects of dispositional factors on job satisfaction, with particular interest on affective disposition. the importance of individual factors for gaining the job satisfaction might be changed over time. however, some studies suggest that personality dimensions have certain stabilizing role in assessment of job satisfaction, which is the main reason of increased interest of researchers regarding the personality-related factors (avery et al., 2015; maggiori et al., 2016). existence of different theories regarding the personality dimensions also influences different approaches to researching the job satisfaction. hence, researchers usually choose the appropriate instruments for measuring personality dimensions, which are in accordance with the specific theory accepted as relevant by the researcher (kampkötter, 2017; maggiori et al., 2016). herein, the research is based on the „big five‟ theory of personality dimensions, due to considerable suitability of this theory in studies related to business environment. numerous authors found significant correlation of neuroticism with job satisfaction (hackman & oldham, 1974; fiori et al., 2015; judge et al., 2017). perception and cognition have an important role in different theories related to job satisfaction, which are suggesting that an individual with high neuroticism perceives the environment as generally negative, which might cause negative job experience and low job satisfaction among these employees (fiori et al., 2015; judge et al., 2017). employees‟ job satisfaction surveys were also conducted over prolonged period, which revealed the stability of the employees‟ job satisfaction, despite the frequent changes in business conditions and business tasks. one of the possible explanations for this phenomenon is certain genetic conditionality of the employees‟ perception of job satisfaction (li et al., 2016). arvey, bouchard, segal and abraham (1989) indicated that determinants of job satisfaction could be genetically inherited. they came to these conclusions by examining the monozygotic twins (by using msq), which showed that 30% of the variance in job satisfaction was related to genetic components. this research was stimulated, in particular by the research conducted by staw and ross (1985), who pointed out that, over the five years of research in the same company, job satisfaction was very stable, regardless of the fact that pay and status of numerous employees were changed significantly during the researched period. for example, it happens that people, who were often faced with different failures in any area of life, might generalize their dissatisfaction and transfer it to overall business environment, regardless of the real situation at work, which is confirmed on the basis of the study conducted by zhao, ghiselli, law and ma (2016) who focused their research on the intrinsic motivation and relations between job characteristics, job satisfaction, job stress and life satisfaction. such people could feel the job dissatisfaction without the real grounds. they tend to experience the business tasks even harder than they actually are. on the other hand, personal satisfaction would lead to mature and tolerant way of behaving, which might result in mitigating the negative situations in business environment. personality‟s compliance with specific job requirements allows the balance between the personality traits and job requirements to be consistent. misbalance between personality and business tasks, together with dissatisfaction, caused by the other factors, might lead to different conflicts 74 m. nedeljkovic knezevic, m. mijatov, a. dragin, s. nedeljkovic between the people, absenteeism, fluctuation, passivation, alcoholism, injuries at work, frequent illnesses due to increased sensitivity and reduced resistance to stress (fiori et al., 2015; judge et al., 2017). stress is particularly recognized as a serious problem for the functioning of individuals and organizations (lukić & lazarević, 2018). existence of harmony between the employees and demands of their job positions, enables better usage of their knowledge and abilities and yields the sense of achievement and greater personal satisfaction. on the other hand, organization also benefits in terms of gaining the productivity and achieving the good interpersonal relations (kilili & bozdağlar, 2013; lee et al., 2013; noe et al., 2010). in one meta-analysis, judge, heller and mount (2002) showed that emotional stability (expressing the indifference in conflict situations, providing the optimistic explanation for possible solution of the conflict, rapid consolidation after the conflict and rapid adjustment to new situation) correlates with job satisfaction. loveland et al. (2015) confirmed that high levels of extraversion and emotional stability are significant predictors of job satisfaction. agreeableness is also an important predictor of job satisfaction, according to judge et al. (2017), since high score of this personality dimension implies motivation for achieving high degree of interpersonal closeness, which could further contribute to overall job satisfaction. openness to new experiences is associated with creativity, especially with scientific and artistic creativity and readiness for accepting the divergent attitudes. previous research also indicated that conscientiousness is positively correlated with job satisfaction, as it is associated with positive business performances. this should lead to significant promotion, rewards or benefits as important facets of job satisfaction. finally, previous research also indicated that neuroticism would cause low levels of job satisfaction, although there are disagreements on this finding in the literature, which is understandable, since every study is conducted on specific sample and it could be significantly dependent on the type of specific business organization in which the research is conducted (judge et al., 2017). 2. methodology 2.1. data collecting procedure the survey research was conducted on the sample of the employees in the public company rb kolubara, elektroprivreda srbije (eps). this company was founded in 1992, deals with mining and distribution of coal and employs around 12,000 people. its size and importance of the organization for the entire economy of serbia were the main reasons for choosing this organization as the object of the research. at the beginning of the research, 250 questionnaires were distributed to the employees during 2018, with 222 of them completely answering the questions. respondents provided their answers by using the standard method of pen and paper. subject of the research was focused on the relations between individual facets of job satisfaction and the employees‟ personality dimensions, according to the „big five‟ theory. in addition, the impacts of the respondents‟ demographic variables on individual facets of job satisfaction were to be determined, within the organization that will experience significant changes in the transitional economy. the research results could find their practical implications in improving the employees‟ job satisfaction according to their personality traits in such important organization for serbian economy with almost 12,000 of employees, which is reflecting the importance of conducting this research. relation between job satisfaction and personality dimensions according to the „big five‟ theory 75 2.2. hypotheses based on the literature review, as well as on the basis of aforementioned specifics of the business within the organization in which the research was conducted, three hypotheses of the research could be identified: hypothesis 1 (h1): there is a significant correlation between the employees‟ demographic characteristics (gender, age, education degree, working tenure, job position) and individual facets of job satisfaction. hypothesis 2 (h2): there is a significant correlation between assessment of overall job satisfaction (as dependent variable) and assessment of individual facets of job satisfaction (as independent variables) hypothesis 3 (h3): there is a significant relationship between the dimensions of personality and the facets of job satisfaction. 2.3. instrument the survey research was based on standardized questionnaires, which were affirmed in the literature as questionnaires that comprehensively analyze job satisfaction and personality dimensions within the „big five‟ theory. accordingly, the questionnaire could be divided into four parts. the first part of the questionnaire covered the questions related to the employees‟ demographic characteristics (gender, age, education level, working tenure and job position (subordinate or managerial)). the second part of the questionnaire contains 36 items for measuring nine dimensions of job satisfaction (pay, promotion, nature of the work, supervision, relations between co-workers, communication, benefits, operating conditions and rewards), on the basis of the likert scale, from 1 (completely disagree) to 6 (completely agree), according to the questionnaire formed by paul spector (spector, 1997) and reused in further studies (argyle, 2013; frey & stutzer, 2010). the third part of the questionnaire refers to assessment of overall job satisfaction. respondents expressed their satisfaction/dissatisfaction on the scale from 1 (completely dissatisfied) to 5 (completely satisfied). the fourth part of the questionnaire contained the items for measuring five dimensions of personality (extraversion, neuroticism, agreeableness, openness to new experiences, conscientiousness). these personality dimensions were measured on the basis of the scale established by howard and howard (2000). collected data were statistically processed by using the spss (17.0), on the basis of descriptive statistics, as well as variance, correlation and multiple regression analysis. 3. results 3.1. sample characteristics demographic characteristics of the employees were distributed among the respondents as follows: percentage of the male respondents (62%) was higher than percentage of the female respondents (38%). about 14% of the respondents are up to 30 years old, while 26% of the respondents are between 31 to 40 years old. there are 40% of the respondents in the category between 41 and 50 years, while 20% of the sample belongs to the age category between 51 and 65 years. according to the employees‟ education degree, minority of the respondents gained elementary education degree (3%), while majority of the 76 m. nedeljkovic knezevic, m. mijatov, a. dragin, s. nedeljkovic respondents gained high school education degree (47%). on the other hand, 16% of the respondents gained college (two-years) education degree, while 34% of them gained faculty (four-years) education degree. there were 18% of the respondents in the category that has up to five years of working tenure, 10% of those who have between 6 and 10 years of working tenure, while 6% of the respondents have between 11 and 15 years, 21% have between 16 and 20 years, 24% have between 21 and 25 years and 21% of the respondents have over 25 years of working tenure. most of the respondents (83%) are employed within subordinate job positions, while 17% of them are employed within managerial positions. table 1 descriptive statistics for personality dimensions, facets of job satisfaction and general job satisfaction assessment (n = 222) dimension minimum maximum mean value standard deviation alpha coefficient neuroticism 1.0 7.0 4.25 1.30 0.72 extraversion 1.4 7.0 5.72 1.22 0.78 openness to new experiences 2.0 7.0 5.57 1.02 0.82 agreeableness 1.8 8.0 5.81 1.15 0.75 conscientiousness 1.0 7.2 6.22 0.90 0.81 benefits 1.0 5.75 2.80 0.96 0.79 communication 1.0 7.0 3.27 1.02 0.86 supervision 1.5 6.0 4.26 0.98 0.82 relations with co-workers 1.75 6.0 4.35 0.77 0.83 operating conditions 1.0 5.5 3.46 0.80 0.80 pay 1.0 5.25 2.65 0.93 0.84 nature of the work 1.0 6.0 3.95 0.92 0.78 rewards 1.0 5.5 2.80 0.94 0.81 promotion 1.0 6.0 3.00 0.88 0.78 general job satisfaction 1.0 5.0 2.71 0.80 0.72 influence of the employees‟ demographic characteristics (gender, age, education degree, working tenure and job satisfaction) on individual facets of job satisfaction was analyzed by anova test. according to the respondents‟ job position, the research results pointed to significant difference of this demographic variable on the „nature of the work‟ facet of job satisfaction (f = 8.00; p = .005), as shown in table 2. the research results did not point to significant differences in other facets of job satisfaction on the basis of the respondents‟ job position. table 2 „nature of the work‟ facet of job satisfaction and the respondents‟ job position job position mean value standard deviation f p subordinates 3.86 0.93 8.00 .005 managers 4.32 0.77 also, the research results pointed to significant differences in the facets of job satisfaction „supervision‟ (f = 3.88; p = .010) and „benefits‟ (f = 2.75; p = .043), according to the respondents‟ age, which is shown in table 3. on the other hand, the research results relation between job satisfaction and personality dimensions according to the „big five‟ theory 77 did not point to significant differences in other facets of job satisfaction, on the basis of the respondents‟ age. table 3 „supervision‟ and „benefits‟ facet of job satisfaction and the respondents‟ age age (years) supervision mean value standard deviation f p significant contrast significant differences up to 30 4.70 0.80 3.88 .010 1-3 0.52 31-40 4.38 1.01 1-4 0.69 41-50 4.18 0.94 2-4 0.38 51-65 4.01 0.94 benefits mean value standard deviation f p significant contrast significant differences up to 30 2.91 1.07 2.75 .043 2-4 -0.53 31-40 2.62 0.95 41-50 2.76 0.90 3-4 -0.38 51-65 3.15 0.96 the research results did not point to significant differences in researched facets of job satisfaction on the basis of the respondents‟ educational degree and their working tenure. however, significant difference was found for „operating conditions‟ facet of job satisfaction, according to the respondents‟ gender (f = 4.10; p = .044), which is shown in table 4, while significant differences were not found for other facets of job satisfaction. table 4 „operating conditions‟ facet of job satisfaction and the respondents‟ gender gender mean value standard deviation f p male 3.37 0.83 4.10 .044 female 3.61 0.73 based on the research results, h1 is partially confirmed. there is a correlation between certain demographic variables and individual facets of job satisfaction, according to the research results. more precisely, according to the previously represented research results, there is a correlation between „supervision‟ and „benefits‟ facets of job satisfaction and the respondents‟ age. besides that, significant correlation was recorded between „operating conditions‟ facet of job satisfaction and the respondents‟ gender, while the respondents‟ job position significantly correlates with „nature of the work‟ facet of job satisfaction. finally, multiple step-by-step regression analysis was conducted for identifying the impact of individual facets of job satisfaction factors (as independent variables) on the assessment of overall job satisfaction (as dependent variable). the research results pointed to the following regression rating equation = 0.147639 + 0.0846863 x „communication‟ facet of job satisfaction + 0.103804 x „supervision‟ facet of job satisfaction + 0.184344 x „pay‟ facet of job satisfaction + 0.363224 x „nature of the work‟ facet of job satisfaction + 0.118417 x „recognition‟ facet of job satisfaction +0.0843225 x „promotion‟ facet of job satisfaction 78 m. nedeljkovic knezevic, m. mijatov, a. dragin, s. nedeljkovic significant relation between the variables at significance level of 99% was found. from the previously presented equation it follows that „nature of the work‟ and „pay‟ facets of job satisfaction have the greatest impact on the overall job satisfaction. gained result could be explained by the type of the business tasks that are mostly performed within the researched company. majority of the respondents are employed on the mining positions, in direct production process, where working conditions are difficult, so it is not surprising that „nature of the work‟ is an important facet in assessing the overall job satisfaction. transition period in most of the countries within the central and eastern europe is characterized by high degree of dismissal of workers, thus facing numerous existential problems. on the other hand, such potential problems are already recognized by policymakers, trade unions and employers within developed countries and they are keep in mind when planning the new reforms or changes within the workplace settings (hess et al., 2016). in such situation, job security becomes one of the most important factors affecting their business performances. this, for example, results in the fact that answers to questions about the employees‟ „pay‟ facet of job satisfaction might be strongly influenced by the fact that numerous citizens have no pay at all, which is indicating that unemployment is one of the key macroeconomic problems facing the economy of the republic of serbia, as well as that minimizing the unemployment problem is one of the most important tasks of the modern era, since it has direct negative implications on the quality of life and the average living standard of the population (gnjatović & leković, 2019). it is, therefore, not surprising that employees labeled their „pay‟ facet as the second most important factor in assessing the overall job satisfaction. based on the research results, h2 is partially confirmed. there are significant correlations between assessment of the employees‟ general job satisfaction (as dependent variable) and their assessments of different facets of job satisfaction (as independent variables). the research results also showed that significant linear dependence was found between the following pairs of personality dimensions and job satisfaction facets: „extraversion‟ and „supervision‟, „extraversion‟ and „relations with co-workers‟, „extraversion‟ and „nature of the work‟, „neuroticism‟ and „benefits‟, „neuroticism‟ and „pay‟, „openness to new experiences‟ and „benefits‟, „agreeableness‟ and „supervision‟, „agreeableness‟ „relations with co-workers‟, „conscientiousness‟ and „benefits‟, as shown in table 5. in line with the research results, h3 is confirmed. there are significant relations between certain dimensions of personality and certain facets of job satisfaction. table 5 shows only those facets of job satisfaction that showed significant correlations with individual dimensions of personality. table 5 correlations between personality dimensions and job satisfaction facets (n = 222) supervision relations with co-workers nature of he work benefits pay extraversion 0.1658 * 0.1494 * 0.1368 * -0.0862 -0.0931 neuroticism -0.0126 -0.0204 -0.0636 0.2305 ** 0.1563 * openness to new experiences 0.0619 0.0767 -0.0181 -0.1563 * -0.1249 agreeableness 0.1588 * 0.1433 * 0.0447 -0.0687 -0.0527 conscientiousness 0.1000 0.0984 0.0468 -0.1371 * -0.1070 * correlation is significant at the .05 level (2-tailed). ** correlation is significant at the .01 level (2-tailed). relation between job satisfaction and personality dimensions according to the „big five‟ theory 79 4. discussion based on the research results, the highest assessment by the employees (6.22) was recorded for personality dimension „conscientiousness‟, while the lowest assessment (4.25) was provided for personality dimension „neuroticism‟. such assessments might be result of subjective evaluation of the employees that high level of „conscientiousness‟ is appropriate characteristic that would be highly evaluated by the management throughout the future transformation process when reducing the number of employees. also, high „neuroticism‟ is highly undesirable for teamwork within the organizations that are highly oriented to collaboration between the different workplaces, due to complexity of the business tasks. in the case of facets of job satisfaction, the highest rating (4.35) was recorded for „relations with co-workers‟ facet of job satisfaction, while the lowest grade was recorded for „pay‟ facet of job satisfaction (2.65). earnings in this organization are relatively high comparing to other organizations outside the public sector. for example, monthly incomes within the sector that is mainly operating through the private organization in serbia is tourism. the research results of the study conducted by jovanović et al. (2019) indicated that majority of the respondents (even 45% of them) have monthly incomes between 15,001 and 30,000 rsd, that is under the average monthly incomes in serbia which amounts to around 49,650 rsd according to data basis of statistical office of republic of serbia. on the other hand, also according to data basis of statistical office of serbia, average monthly incomes in the field of mining and distribution of coal amounts to between 76.873 and 79.481 rsd, which is above the average earnings for serbia. one of the possible explanations for such low „pay‟ facet of job satisfaction might be related to the respondents‟ assessment that even this relatively good personal income is still insufficient for the needs of the employees, especially for those with large number of unemployed household members. in addition, this result may be a consequence of a possible organizational practice on rewarding some employees not due their productivity but due to their political engagement or some other non-work-related circumstances, which is viewed as unjust by most of the employees. the research results pointed to significant difference in the employees‟ assessment of „nature of the work‟ facet of job satisfaction, according to the respondents‟ job position, with higher values obtained for the managers in comparison to the subordinates. there are numerous factors that contribute to higher grades of this job satisfaction facet among the managers. managing position provides higher personal incomes, high degree of autonomy in performing the business tasks, realization of self-actualization, which is highly evaluated in the maslow‟s hierarchy of the needs, as well as their greater influence in a decision-making process. in the surveyed environment, managing position often provides greater impact in a wider community, which could also bring certain benefits to these supervisors outside the organization. the research result also indicated significant difference in the employees‟ assessment of „supervision‟ facet of job satisfaction, according to the respondents‟ age, between those who have up to 30 years and between 41 and 50 years, those who have up to 30 years and between 51 and 65 years, as well as between those who have between 31 and 40 years and between 51 and 65 years. it is noticeable that employees‟ assessment of „supervision‟ facet decreases with the increase of their age, which might be a consequence of the employees‟ expectation that their life and work experience should bring them greater respect from the supervisors, greater participation in decision-making process, greater independence in performing their business tasks. the research results also pointed to 80 m. nedeljkovic knezevic, m. mijatov, a. dragin, s. nedeljkovic significant difference in the employees‟ assessment of „benefits‟ facet of job satisfaction, according to the respondents‟ age, between the respondents of the age group 31-40 years and those 51-65 years, as well as between the respondents of the age 41-50 and those 51-65 years. in both relations higher age group also brings higher values for the “benefits” facet. one of the possible explanations could be related to the fact that older employees were repeatedly rewarded throughout their working lives and that they do not have high expectations in the future. for example, existence of organizational resorts allowed the best employees to spend their summer and winter vacations at the expense of the organization, while they also gave financial rewards to successful innovators. aware of the present capabilities of the organization, they look more realistically at the place of this facet of job satisfaction in assessment of overall job satisfaction, which resulted in lower criteria in its assessment. younger employees, who are striving for affirmation and recognition, also have high expectations that remain often unfulfilled in the present conditions, leading to lower assessment of this facet of job satisfaction. the research results also indicated significant difference in the employees‟ assessment of „operating conditions‟ facet of job satisfaction, in accordance to the respondents‟ gender. according to these results, female employees are more satisfied with this facet of job satisfaction, in comparison with their male colleagues. one of the possible explanations might be related to characteristics of the researched organization, due to the fact that significant number of male employees are working in difficult business conditions that require intensive physical work engagement. the gained results indicated significant correlations between personality dimensions and facets of job satisfaction. positive correlation between personality dimension „extraversion‟ with facets of job satisfaction: „supervision‟, „relations with co-workers‟ and „nature of the work‟ are a consequence of the fact that extrovert persons are able to easily establish good relationships with people, including their supervisors and other employees. their relations with people are based on trust in them, which is of great importance for teamwork and such attitude might contribute to creating the harmonious relations between the team members and selfless exchange of knowledge, which might be important during the structural changes within the organizational environment. positive correlations between „neuroticism‟ and facets of job satisfaction „benefits‟ and „pay‟, together with the absence of correlation between „neuroticism‟ with other facets of job satisfaction, are indicating that high degree of „neuroticism‟ does not express high degree of satisfaction with those aspects of the job that are largely influenced by interpersonal relationships among the employees. if such a person is not involved in a teamwork possible increase of his or her personal incomes or receiving some benefits will be a consequence of his/her individual activities and, therefore, such a person expresses greater degree of „pay‟ and „benefits‟ facets of job satisfaction. negative correlation coefficient established as a measure of the linear relations between „openness to new experiences‟ and „benefits‟ facet of job satisfaction could be explained as follows: an individual with high degree of „openness to new experiences‟ is creative, innovative and full of ideas that, if realized, might create an expectation for such a person to receive certain benefits. therefore, his/her expectations of benefits are higher and his/her criteria for high score of this job satisfaction facet are very high. if these criteria are not fulfilled, it could result in relatively low score of satisfaction among the employee with pronounced personality dimension „openness to new experiences‟. person with high „agreeableness‟ and tolerance for other people, who is inclined to forgiveness, will not be relation between job satisfaction and personality dimensions according to the „big five‟ theory 81 demanding in assessing the quality of their „supervision‟ and „relations with co-workers‟ facets of job satisfaction and such a person will have lower criteria that will cause high grades for these relations. individual with expressed „conscientiousness‟, especially if he/she is employed within the job positions characterized by the need for precision, meeting the deadlines and systematic approach in conducting the business tasks, has high work performance, which then induces high expectations of possible benefits. therefore, criteria of such a person for assessing the „benefits‟ facet of job satisfaction are high and, if they are not fulfilled, such a person will give lower rating of aforementioned facet of job satisfaction. according to the research results, conducted in this and other countries, there is no doubt that certain dimensions of personality affect certain aspects of job satisfaction. one of such studies was conducted in a romanian company, with intention of comparing the research results with those conducted in the western companies (van den berg, pitariu, 2005). as romania is a country in transition, as well as serbia, results of that study might be of interest to our companies as well. van den berg and pitariu (2005) conducted the study on the sample of 228 male and 62 female engineers, who were employed within the science centers and now hold executive positions within romanian companies and this research was related to relations between personality dimensions and job satisfaction. they found that significant correlation between extraversion and job satisfaction has not been confirmed, but they also found that there is significant correlation between conscientiousness and job satisfaction. their research results also pointed to the fact that neuroticism is negatively correlated with job satisfaction, while the openness to new experiences is positively correlated with job satisfaction (van den berg, pitariu, 2005). in general, the results obtained, except for the extroversion dimension, are in agreement with the results obtained in the research conducted in western companies. the discrepancy can be explained, as the authors state, by the fact that romania has been under authoritarian rule for a long time, which has also been reflected in relations within companies, with no significant participation of employees in management and no expression of emotions and willingness to cooperate with others. openness, and especially intellectual curiosity, are good predictors of a willingness to change, which is very important in transition times. 5. conclusion the necessity of studying the problems of job satisfaction is especially pronounced in the time of rapid changes, which is one of the main consequences of modern development in technology, politics and economy. nowadays, this issue is approached from the perspective of human resources development, or more precisely from the perspective of the human resource management, which will enable the employees to maximize their potentials and thus enable themselves and the organization to realize the set of individual and organizational goals. harmony between these goals is one of important preconditions for successful implementation of changes and, therefore, one of the most important tasks of management in the organization is to recognize the employees‟ job satisfaction and to take adequate measures for its achievement. results of this study provide some indication of job satisfaction within the researched organization. the low level of pay satisfaction expressed in this research might be a consequence of inadequate organizational rules on rewarding. pay satisfaction might, therefore, be a consequence of comparing the personal income with 82 m. nedeljkovic knezevic, m. mijatov, a. dragin, s. nedeljkovic incomes of other employees in similar job position and information that they have higher personal incomes without a clear work-related reason for this situation. creating the more appropriate rules on rewarding system or providing the more transparent approach in rewarding process would also contribute to development of innovative programs, which is significant in organizations such as the one in which the research was conducted. significant correlation coefficients, which measure the degree of linear dependence between personality dimensions and job satisfaction facets, indicated the expected correlations. thus, positive correlation of extraversion and satisfaction with supervisors, other employees and the nature of the work is, among the other things, a consequence of extroverts‟ ability to easily establish good relations with people in general, including their supervisors and other employees. there was also a positive correlation between the personality dimension “neuroticism” and satisfaction with benefits and pay, as well as the absence of correlation between the personality dimension “neuroticism” and other facets of job satisfaction. negative correlation coefficient was found in the relation between the personality dimension “openness to new experiences” and satisfaction with benefits. positive correlation between the personality dimension “agreeableness” and satisfaction with supervisors, as well as with relations with co-workers was identified, while conscientiousness negatively correlated with the employee‟s satisfaction with benefits. all these correlations are certainly influenced by the specificity of the workplace and therefore they should be considered by the management, in consultation with psychologists, when selecting the candidates and forming the business teams. limitations of the study: about 50% of the employees are field workers in the company, working on the coal mine, which were hard to reach for the purpose of the study and therefore possibly underrepresented in the sample. similar research in other sectors could significantly contribute to the efficiency in managing the organizational changes, improving the business performances and 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(2016). motivating frontline employees: role of job characteristics in work and life satisfaction. journal of hospitality and tourism management, 27, 27-38. www.data.stat.gov.rs/ (retrieved in january 2020) http://www.data.stat.gov.rs/ 86 m. nedeljkovic knezevic, m. mijatov, a. dragin, s. nedeljkovic relacije između zadovoljstva poslom zaposlenih i njihovih dimenzija ličnosti prema teoriji velikih pet svest o sve većem značaju ljudske strane organizacija za postizanje konkuretnosti na tržištu postala je sastavni deo savremene ekonomije, gde u tržišnoj utakmici ljudi sa svojim potencijalima predstavljaju strateške resurse kompanija. predmet ovog istraživanja su relacije između dimenzija ličnosti prema modelu velikih pet i pojedinih dimenzija zadovoljstva poslom uzimajući u obzir i sociodemografske karakteristike ispitanika. dobijeni rezultati su značajni u cilju obezbeđivanja baze podataka koja bi omogućila unapređenje upravljanja ljudskim resursima u zemlji koja prolazi kroz process tranzicije, kakva je srbija. rezultati do kojih smo došli ukazali su da postoji statistički značajna razlika u oceni pojedinih faseta zadovoljstva poslom u odnosu na demografske varijable ispitanika. utvrđene su i statistički značajne korelacije između dimenzija ličnosti prema teoriji velikih pet: ekstraverzija, otvorenost, sistematičnost, prijatnost i negativna afektivnost i pojedinih faseta zadovoljstva poslom. preporuke menadžmentu ljudskih resursa koje su izvedene na osnovu istraživanja, mogu biti relevantne za slične velike organizacije u javnim preduzećima kojima predstoje značajne organizacione promene. ključne reči: zadovoljstvo poslom, dimenzije ličnosti, teorija velikih pet, tranzicija facta universitatis series: economics and organization vol. 16, n o 1, 2019, pp. 103 116 https://doi.org/10.22190/fueo1901103a © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication insurance claims fraud in homeowner’s insurance: empirical evidence from the nigerian insurance industry 1 udc 368.1:343.72(669) sunday stephen ajemunigbohun 1 , ogochukwu augustine isimoya 2 , pretoria moun ipigansi 3 1 lagos state university, department of insurance, lagos state, nigeria 2 university of lagos, department of actuarial science & insurance, lagos state, nigeria 3 niger delta university, department of finance, banking and insurance, bayelsa state, nigeria abstract. this study examines insurance claims fraud in homeowner’s insurance with its empirical findings from the nigerian insurance industry. in this study, a descriptive research design was employed while purposive sampling method was adopted for information selection. a structured questionnaire was used for data collection. 221 participants were drawn from 31 insurance companies, which were basically general insurance companies that represent 61% capacity of the industry in terms of market structure. major statistical techniques employed in the study were simple frequency percentage and t-test statistics. while five relevant research questions were stated and to which verbal interpretation were provided, added with supporting evidence, two hypothetical statements were made. the study recommends that effective fraud deterrent should be in place so as to promote stable, confidence-based, result-oriented and trustworthy market environment, and government on its own part must not fail to exhibit the will-power to drive the anti-fraud strategy designed, built and modeled for the operational efficiency of insurance companies and effective service delivery in the heart of the insuring public. this research work contributes to existing knowledge in that it helps broaden the scope of the regulatory bodies on the need to continually engage academia, insurance practitioners, it experts and other stakeholders in designing and building a more sustainable anti-fraud strategy in improving insurance market penetration and density. key words: claims handling, fraudulent process, homeowner’s insurance, claims cost, fraud detection and prevention jel classification: g22, m21 received july 21, 2018 / revised october 14, 2018 / revised november 11, 2018 / revised february 28, 2019 / accepted march 19, 2019 corresponding author: sunday stephen ajemunigbohun lagos state university, department of insurance, lagos, nigeria e-mail: sunday.ajemunigbohun@lasu.edu.ng 104 s. s. ajemunigbohun, o. a. isimoya, p. m. ipigansi introduction homeowner’s insurance is one of the most recognized and permissible form of property insurance in the world (commonwealth of virginia, 2011; gao, 2014; grace et al., 2004). it has been noted to attract quite an appreciable premium value into the insurance portfolio of most property insurance providers which, in turn, gives a fillip to the financial confidence and capacity of the industry as a whole (grace et al., 2001; majewski, 2013). gao (2014) stressed that whenever perils such as fire, flood, wildfires, lightning, theft, hurricane, etc. occur property, individual and communities get devastated by the destruction of their homes and possessions. hence, these perils have a significant financial impact on homeowners, insurers and government (be it at the state or federal level). the term ‘claim’ is a demand, according to krishnan (2010), on an insurer towards fulfillment of a promissory facet of insurance contract with the policyholder. an earlier submission by brooks et al. (2005) gave it as a demand upon recovery for a loss for which an insurance coverage had been sealed. singh (2012) opined that for an insurer to achieve optimal operational efficiency in claims handling, they must look in the direction of enforcing conventional claims mechanisms, leveraging high level fraud detection techniques and innovating self-service process. fraud, according to brennan (2012), is described as any deliberate act that contravenes laws, rules or policies with the intent to elicit unauthorized financial gains. monetary authority of singapore (2012) sees it as activities involving intentions to profit dishonestly from or illicit benefit accruing to party with an intention to defraud or any other related persons. past studies such as ojikutu et al., 2011; onaolapo, 2000; yusuf & ajemunigbohun, 2015; yusuf & babalola, 2009; had given their contributions with respect to insurance fraud and claims handling process. with clear observations, it shows that none of these studies had been able to touch on property insurance fraud with respect to homeowners. however, in a study conducted by tennyson (2002), it was established as an intertemporal problem that the insureds with more claims experience seem to have a lower tolerance for insurance fraud. also commented in an earlier study by tennyson (1997), that policyholders who think erroneously of their premium in an exorbitant manner are of the tendency to embrace fraud. while the study by miyazaki (2009) pondered on the nexus between deductible and insurance fraud, the study of dean (2004) directed his submission at ethical perception and fraudulent act ensued from individual policyholder. in an attempt to investigate an issue of homeowner’s insurance fraud and abuse, the following relevant research questions were formulated: i. what are the perils with high fraud tendency in homeowner’s insurance claim? ii. what are the perils with high claims cost in homeowner’s insurance? iii. what are the major sources of insurance claims fraud in homeowner’s insurance in nigeria iv. what is the frequency of insurance claims fraud annually detected in homeowner’s insurance? v. what are the factors inducing insurance claims fraud in homeowner’s insurance? the hypothetical propositions, therefore, were stated as below: ho1: adoption of claims fraud preventions have not significantly improved homeowners insurance delivery ho2: insurance claims fraud detections have not significantly reduced homeowners insurance claims cost insurance claims fraud in homeowner’s insurance: empirical evidence from the nigerian insurance industry 105 this paper is aimed at realizing research outcomes that will enable identification of perils with high fraud tendency in homeowner’s insurance claim; perils with high claims cost in homeowner’s insurance; subsequently revealing major sources of insurance claims fraud in homeowner’s insurance and determining frequency of insurance claims fraud annually detected in homeowner’s insurance in nigeria and identifying factors inducing insurance claims fraud in homeowner’s insurance. in order to achieve set objectives, descriptive research is used and relevant statistical tests are implemented. the paper has been structured in the following manner: introduction; research objectives and questions; review of relevant literature; methodology section which takes note of research design, sampling and data processing technique; results and discussion of findings; conclusion, recommendations, research implications and suggestions for further research. 1. review of relevant literature quite a number of studies were conducted in the past with respect to insurance claims fraud (crocker & tennyson, 2002; dionne et al., 2009; gill & randall, 2015; insurance europe, 2013; loughran, 2005; roder & jamieson, 2005; tennyson, 2008). the term ‘fraud’ according to derrig and krauss (1994), is seen as criminal acts, possibly beyond a reasonable doubt, that violate statutes, making the willful act of obtaining money or value for an insurer under false pretense or material misrepresentation of a crime. as recorded by kuria and morange (2014), fraud is described as an omission or intention to making one gain advantage dishonestly in dealings that can be accomplished by knowingly concealing, suppressing, misrepresenting or non-disclosure of material fact relevant to transactions or financial decision; misappropriating assets; and abusing fiduciary responsibility or position of trust. an earlier submission by gill et al. (1994) presupposed fraud in the insurance industry as intentionally making fictitious claims, inflating a claim or adding extra items to a claim, or being in any way dishonest with the intent of gaining more than legal entitlement. however, insurance claims fraud will not only threaten the survival and profitability of an insurer, if not adequately addressed, but thus affects negatively its value system and probably detrimental to sustain its social and economic structure. to this direction, fraud is seen as representation of a threat to the core principles of solidarity that maintains the concept of insurance alive (guillen, 2004; viaene & dedene, 2004). according to viaene et al. (2007), the cost component of an insurance claims fraud is borne directly by all insured parties in terms of increased premium rates. picard (2013), in his view, stipulated that fraud by one policyholder impacts the welfare of the other policyholders and providers, and that the methodology under which the effect is spread is the contracts between the provider of insurance and policyholders. singh et al. (2011) stressed that fraud in insurance transaction range in severity, from marginally exaggerated claims to one that deliberately cause accidents or damage through fraud risk exposure such as: employee-related fraud, vendorrelated third-party fraud, insurance applicants, and surrender of policy or claimants. accordingly, insurance claims fraud poses a serious risk for insurers and probably result in extra costs for their policyholders (singh et al., 2011). sas (2012) averred that fraud, in its real sense, usually weakens the financial position of the insurer and undermines its ability to provide competitive rates and also to underwrite respectable and potentially profit-driven 106 s. s. ajemunigbohun, o. a. isimoya, p. m. ipigansi business; and poses a greater premium cost to the policyholder. in a submission by ramos et al. (2012), data for claims fraud costs in many industries is not always available, but the insurance sector provides prompt data that may serve as sentries of potential situations for integrity in business-to-business and consumer-to-business claims. coalition against insurance fraud (1999) suggested insurance fraud laws as being necessary to combat the increasing impact of fraud on the insurance cost. however, three functional classifications of insurance fraud were proposed, according to viaene and dedene (2004), to include: internal vs. external, underwriting vs. claim, and soft vs. hard. according to henderson et al. (2010), the most common external fraud plans, in the insurance industry, include: fraudulent claims, money laundering, secret commissions, and investment fraud; while internally, the most common fraud plans include: theft of cash/cheque, employee expense fraud, cash receipt/premium fraud/ receivable, fraudulent revenue/underwriting, commission fraud and non-compliance to regulation. some other types of fraud affecting insurance providers are said to include: fake documentation, commission rebate, misspelling, and collusion between parties (singh et al., 2011). according to ramos et al. (2012), an integrated framework with four pillars for effective claims fraud control in variety of industries has been suggested to include: an operating model which integrates activities to reduce claims fraud; focused managerial strategy in claims fraud with exact goals and priorities; improving information access, quality and regularity to support analytical data; and leveraging data analytics to direct personnel’s attention on high risk customers and claims. in earlier submission by henderson et al. (2010), pertinent anti-fraud controls are expected to include: regular fraud risk assessment, governance (.i.e. oversight by the audit committee and board of directors), ethical code of business, incident reporting systems, investigative protocol, remediation procedure, hiring and improvement policies and guidelines, and management control and testing. roder and jamieson (2005) opined that the true economic cost of insurance is near impossible to measure. in the work by chartered global management accountant (2012), effective anti-fraud strategies were suggested to involve: prevention, detection, response and deterrence. in furtherance of its work, it was noted that the quantification of prevention, detection and response can help to create an effective fraud deterrent; in that, while fraud prevention strategy is noted to comprise sound ethical culture and internal control mechanisms, the core tools for detecting fraud include training and experience combined with the essential mindset that fraud is always a possibility. lexis-nexis (2014) suggested that tactics to preventing insurance fraud must be linked with insurers’ operational activities to guarantee the following: ensuring secure information management, improving efficiency in operation, enhancing efficient investigation, reducing false-positive outcome, and facilitating compliance with world regulations. 2. overview of the nigerian insurance industry the nigerian insurance industry is governed by the national insurance commission. the guiding principle regulating the affairs of the industry is insurance act 2003 as amended in 2005. the insurance industry in nigeria is still growing and developing. moreover, it only contributes 0.7% toward gross domestic product (gdp) as juxtapose to other markets such as south africa with penetration status of about 12% (pricewaterhousecoopers international, 2015). insurance claims fraud in homeowner’s insurance: empirical evidence from the nigerian insurance industry 107 the nigerian insurance industry experienced a landmark change in the year 2008 with a post consolidation exercise that produced 49 insurance companies and 2 reinsurance companies, a total market capitalization of over n600 billion (babington-ashaye, 2009). however, the nigerian insurance industry is composed of four strategic players: insurers and reinsurers, insurance brokers, agents, and loss adjusters. the industry primarily focuses on broker driven corporate account especially the oil and gas sector. brokers are dominant insurance distribution channels in the nigerian insurance industry. for strategic desire to be achieved in improving penetration level, the national insurance commission (naicom) came up with the market development and restructuring initiative in 2009, among others, purposely to enforce compulsory insurance and eradicate ‘fake’ policies. by this initiative, 6 insurance products were made obligatory with occupiers’ liability insurance – section 65 of the insurance act 2003 inclusive. with an estimated insurance penetration rate at 0.47, and only 1% of the population holding any form of insurance policy, the opportunities in the nigerian markets are substantial. in 2016, the industry’s gross premium income (gpi) grew by an estimated 10% to n356 billion (agusto & co. research, 2017). there is an increasingly experienced claims payment as is typical in the period of recession. the nigerian insurance industry is no different. in 2016, net claims paid by operators amounted to an estimated n100 billion ($ 327 million @ n305/$), a 19% growth over the preceding year. according to ufomadu (2017), profitability is hampered by weak investment returns, raising maintenance and acquisition expenses as well as increasing claims. 3. research methods this study adopted descriptive research design. the motive for its use was due to its provision of germane interested facets to the researchers and also observation of the occurrence of sample items without any form of manipulation (asika, 2008; sekaran, 2003). it has also been noted to have the capacity to predict dispositions and, thus, assist in collecting the same information concerning all samples (easterby-smith et al., 2008; saunders et al., 2009). data collection was conducted through the field survey among insurance companies with the assistance of structured questionnaire. the use of this data gathering source was because of its appropriateness to the design of the research (babbie, 2005). the data gathering instrument further helped the researcher to elicit responses via its completion by adopting likert-scaling measurement attached with a covering letter. the target population comprises the entire members of staff within the sampling frame of 51 insurance companies operating presently in nigeria (list of registered insurance companies in nigeria, 2016), out of which a sampling unit of 31 insurance companies (specifically, general insurance companies) were surveyed giving a sample size of 221 respondents through the distribution of 10 questionnaires per surveyed company. the sampling frame was drawn within the lagos metropolis hence it houses a larger percentages of insurance firms in nigeria. for due diligence and genuine response, frequent phone calls and visits by research assistants were made to hasten proper filling and returning of the questionnaire. ultimately, among 310 copies of questionnaires distributed, 221 were found useful for analytical results, giving a 71% response rate. 108 s. s. ajemunigbohun, o. a. isimoya, p. m. ipigansi regarding the research validity, theoretical and content were choices of validity. while the former was carried out via variable measures from extant literature, the latter was designed via the administration of a set of questionnaire drafts to scanty selected insurance claims officers, research and development officers, and academia in the insurance profession. eventually, experts deeply pondered on this instrument and gave commendable instructions within the respondents’ comprehension. on the level of reliability, 0.814 was recorded as the cronbach alpha with high sense of indication that the instrument surpassed the required standard of 0.70. 4. results and discussion the simple frequency percentage table was used to analyse the above-stated research questions with the support of verbal interpretation. in a bid to analyse the hypotheses formulated in this study, the t-test statistical technique was employed. 4.1. analysis of research questions table 1 perils with high fraud tendency in homeowner’s insurance claim alternatives responses percentages (%) fire 98 44.3 burglary 48 21.7 theft 36 16.3 flood 21 9.5 windstorm 11 5.0 lightning 07 3.2 total 221 100.0 source: field survey, 2017 the table above shows that perils with high fraud tendency in homeowner’s insurance are fire, followed by burglary, theft, flood, windstorm and lightning. to corroborate this evidence, commonwealth of virginia (2011) opined that purchasing homeowner’s insurance will not prevent fires, theft or some other types of loss, but it can assist in the recovery from financial effects of a loss. table 2 perils with high claims cost in homeowner’s insurance alternatives responses percentages (%) fire 82 37.1 burglary 49 22.2 theft 38 17.2 flood 29 13.1 windstorm 14 6.3 lightning 09 4.1 total 221 100.0 source: field survey, 2017 insurance claims fraud in homeowner’s insurance: empirical evidence from the nigerian insurance industry 109 the results expressed in table 2 imply that perils with high claims cost in homeowner’s insurance are fire with 37.1 %, followed by windstorm, flood, burglary, theft and lightning. in a bid to support this evidence, the work of amorose (2011) and harrington and niehaus (2006) opined that insurers that can minimize their costs of claims by just a single percent have the tendency to achieve substantial saving. they reiterated further that the amount of claim payouts and expenses is the largest spending category for an insurer, responsible for not less than 80% of premium income. sas (2012) arguably stated that creating an impression before policyholders through claim payment could be expensive for an insurer to bear. table 3 major sources of insurance claims fraud in homeowner’s insurance in nigeria alternatives responses percentages (%) policyholders 86 38.9 insurance brokers 63 28.5 employees 31 14.0 loss adjusters 28 12.7 insurance agents 13 5.9 total 221 100.0 source: field survey, 2017 the results from the table above show that policyholders are the highest source of insurance claims fraud with 38.9%, followed by insurance brokers, employees, loss adjusters and insurance agents. as cited in yusuf (2010), four classes of insurance fraud fully expressed in the table, have been said to include: policyholder fraud, intermediary fraud, internal fraud and insurer fraud. the study by terisa (2010) gave supporting evidence that fraud might occur at different phases in the insurance transaction and by different parties ranging from insurance applicants (.i.e. new customers); policyholders (existing customers); third-party claimants; and professional (i.e. insurance brokers, employees of insurance firms, insurance agents, loss adjusters, whose services were required by insurers, etc) who provided services to claimants. derrig (2002) aligned his view to say that the existence of insurance claim fraud is hinged upon information that is asymmetrically distributed between the policyholder and the corresponding insurance company. dulleck and kerschbamer (2006), international association of insurance supervisors (2011), and muller (2013) were of the opinions that, apart from policyholders, other actors potentially linked with the occurrence of insurance fraud include: insurance brokers, intermediaries and service providers. table 4 frequency in insurance claims fraud annually detected in homeowner’s insurance in nigeria alternatives responses percentages (%) less than 11 times 19 8.6 11 – 20 times 57 25.8 21 – 30 times 79 35.7 31 – 40 times 39 17.7 above 40 times 27 12.2 total 221 100.0 source: field survey, 2017 110 s. s. ajemunigbohun, o. a. isimoya, p. m. ipigansi the table shows that annual insurance claims fraud usually recorded in most insurance companies in nigeria with respect to homeowner’s insurance is between 21 to 30 times with 35.7%, followed by 11 – 20 times, 31 – 40 times above 40 times and less than 11 times. this result, then, corroborates the study of goel (2013) who arguably stated that claims managers must focus mainly on the most significant claims tasks that require their attention and also better use of their time. to substantially corroborate the evidence above, johnson and jones (2012) stipulated that the most occurring fraud risk exposures in insurance business are categorized into: false claims, exaggerated claims, multiple claims and inflation claims. table 5 factors inducing insurance claims fraud in homeowner’s insurance alternatives responses percentages (%) personality of the insured 87 39.4 economic/financial 49 22.2 weak organisational system 37 16.7 poor motivation of employees 29 13.1 weak legal system to punish offenders 19 8.6 total 221 100.0 source: field survey, 2017 the result above clearly implies the personality of the insured as the most critical factors inducing insurance claims fraud in homeowner’s insurance. to corroborate this findings, gabaldon et al. (2014) opined that insured’s decision with the intent of getting a greater indemnity that what is precisely owed under the contract is taken to be fraudulent, and the insurers attempt to control such imply a cost, which may either be passed onto other consumers of insurance in the form of inflated premium, or borne by the insurer in the form of reduced profit. 4.2. hypotheses testing in an attempt to further investigate insurance claims fraud in homeowner’s insurance in nigeria’s insurance industry, t-test statistical technique was employed for empiricaloriented results. table 6 respondents’ opinions on hypothetical proposition one alternatives responses percentages (%) strongly agree 10 04.5 agree 34 15.4 undecided 22 10.0 disagree 86 38.9 strongly disagree 69 31.2 total 221 100.0 source: field survey, 2017 insurance claims fraud in homeowner’s insurance: empirical evidence from the nigerian insurance industry 111 table 7 descriptive statistics for testing the adoption of claims fraud prevention and improvement of homeowner’s insurance n mean std. deviation std. error mean adoption of claims fraud prevention and improvement of homeowner’s insurance 221 3.7692 1.17788 .07923 source: authors’ computation, 2017 table 8 one-sample t-test of the adoption of claims fraud prevention and improvement of homeowner’s insurance test value = 3 t df sig. (2-tailed) mean difference 95% confidence interval of the difference lower upper adoption of claims fraud prevention and improvement of homeowner’s insurance 9.705 220 .000 0.76923 0.6137 0.9573 source: authors’ computation, 2017 the result in table 8 shows that the calculated p-value (0.0000), which is lower than 0.05, confirms that there is a statistically significant difference between average respondents’ opinion on hypothetical proposition 1 and hypothetical value 3. hypothesis (ho) which states that adoption of claims fraud preventions could not have significant improvement on homeowner’s insurance delivery is rejected. it is, therefore, germane to note that survey participants have an opinion that adoption of claims fraud preventions could have significant improvement on homeowner’s insurance. this result corroborates the study of asikhia (2010) who had mentioned that until companies are able to deliver their service in an efficient manner, with service-oriented information systems, financial institutions may not be able to retain their customers. in support of the evidence to this result, lexis-nexis (2014) opined that tactics used to prevent insurance fraud must be integrated with insurers’ operational activities to guarantee security of information management, operational efficiency improvement, investigation efficiency improvement, minimisation of false-positive results and promotion of compliance with global regulations. to deliver excellence in insurance claims handling, key components that ought to be in place are said to include: communication, culture and philosophy, people, claims procedure, infrastructure, data management, operations, monitoring and review (association of insurance and risk managers in industry and commerce, 2009; yusuf et al., 2017). 112 s. s. ajemunigbohun, o. a. isimoya, p. m. ipigansi table 9 respondents’ opinions on hypothetical proposition two alternatives responses percentage (%) strongly agree 16 07.2 agree 42 19.0 undecided 28 12.7 disagree 76 34.4 strongly disagree 59 26.7 total 221 100.0 source: field survey, 2017 table 10 descriptive statistics for testing of claims fraud detection and homeowner’s insurance claim costs n mean std. deviation std. error mean claims fraud detection and homeowner’s insurance claim cost 221 3.5430 1.26642 .08519 source: authors’ computation, 2017 table 11 one-sample t-test of claims fraud detection and homeowner’s insurance claim costs test value =3 t df sig.(2-tailed) mean difference 95% confidence interval of the difference lower upper claims fraud detection and homeowner’s insurance claims cost reduction 6.374 220 .000 0.543 0.3761 0.7009 source: authors’ computation, 2017 the result in table 11 shows that the calculated p-value (0.0000), which is lower than0.05, confirms the statistical significance of difference between obtained and hypothetical level of agreement with the statement of hypothesis two. hypothesis (ho) which states that insurance claims fraud detections could not have significant effect on homeowner’s insurance claims cost is rejected. it is, therefore, crucial to note that survey participants have an opinion that insurance claims fraud detections could have significant effect on homeowner’s insurance claims cost. this result corroborates existing submission of the chartered global management accountant (2012), who had suggested training and experience combined with the necessary mindset that fraud is always a possibility as the key tools for detecting fraud. in furtherance of the supporting evidence by ibm (2012), taking an assessment technique, insurance companies are guaranteed with discovery of fraud by examining patterns on data; investigating fraud more efficiently by reducing false claims; accelerating investigations; and visualizing trends to continuously enhancing antifraud efforts. insurance claims fraud in homeowner’s insurance: empirical evidence from the nigerian insurance industry 113 conclusion and recommendations insurance claims fraud has been emphasized in a number of studies; therefore, not taking appropriate step to combat this menace could be devastating, not only to the nigerian insurance market environment but also to the economy globally. however, insurance, among its contributions to the economy, has been said to promote financial stability; reduce fear; facilitate trade and commerce; and mobilize savings. this research work attempted to examine experts’ opinion on insurance claims fraud in homeowner’s insurance among selected insurance companies in nigeria. results from the study have evidence that, according to the subjective assessment of the surveyed employees of the selected insurance companies, the adoption of insurance claims fraud preventions might have significantly improved homeowner’s insurance in nigeria. also, empirical results from the t-test analysis based on experts’ opinion provide evidence that insurance claims fraud detections might have significantly reduced homeowner’s insurance cost. in addition, the results equally showed that speedy, accurate, efficient and effective claims managerial process is thus germane for cost control, due to managerial risk process and capacity building in underwriting. on recommendations, insurance companies are advised to strictly tackle major sources of insurance claims fraud not only in the homeowner’s insurance, but also in other types of insurance, so as to minimise the cost effects on their claims responsibilities to the policyholders. moreover, rigorous efforts should be made to ensure proper implementation of an anti-fraud strategy that would continuously curtail fraudulent activities within and outside the insurance market space. an effective fraud deterrent should be put in place and to which aggressive campaign should be mounted to promote a stable, confidence-based, result-oriented, and trustworthy market environment in the minds of the insuring populace. as to the regulatory authorities, efforts should be made to monitor the anti-fraud progress within and outside the nigerian insurance market space, by creating a more reliable and sustainable data management system that has the capacity to capture any fraudulent attempt or committed fraudulent activities in the running of insurance companies in nigeria. government on its own part must not fail to exhibit the will-power to drive antifraud strategy mechanism that will enhance the operational efficiency of insurance companies and effective service delivery in the heart of the insuring public. this research work contributes to knowledge in that it awakes the regulatory body on the need to continually engage academia, insurance practitioners, it experts and other stakeholders in designing and building a more sustainable anti-fraud strategy in improving insurance market penetration and density. it further stresses the need for managers to be alive to their responsibilities in ensuring that loopholes in the claims managerial procedures are tackled. it benefits the insuring public in terms of effective policy delivery, rise in confidence level etc. on suggestions for further studies, researchers can pull their weight into studying some of the factors inducing insurance claims fraud in other property-related insurance policies. efforts could also be made by other researchers to find out if the various sources of insurance claims fraud in homeowner’s insurance are applicable to other propertyrelated insurance policies. lastly, other interested researchers can direct their research efforts towards insurance claims fraud response from insurance policyholders in nigeria. 114 s. s. ajemunigbohun, o. a. isimoya, p. m. ipigansi references agusto & co. research. 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(2009). control of insurance fraud in nigeria: an exploratory study (case study). journal of financial crime, 16 (4), 418-435. prevare u oblasti osiguranja imovine: empirijski dokazi iz nigerijske industrije osiguranja ova studija ispituje prevare osiguranja u vezi sa zahtevima za naknadu štete u oblasti osiguranja imovine sa empirijskim nalazima iz industrije osiguranja u nigeriji. korišćena je deskriptivna metoda istraživanja dok je ciljna metoda uzorkovanja usvojena za izbor informacija. za prikupljanje podataka korišćen je strukturirani upitnik. učestvovao je 221 ispitanik iz osiguravajućeg društva koja su u osnovi kompanije za opšte osiguranje i koja predstavljaju 61% kapaciteta industrije u pogledu strukture tržišta. glavne statističke tehnike korišćene u studiji bile su jednostavni procenat frekvencije i t-test statistika. postavljene su dve hipoteze na osnovu pet relevantnih istraživačkih pitanja na koja je data verbalna interpretacija, kao i dodatnih dokaza. studija preporučuje stvaranje delotvornih mehanizama sprečavanja prevare kako bi se promovisalo stabilno tržišno okruženje, zasnovano na poverenju i orijentisano na rezultate, dok država sa svoje strane mora da pokaže volju da zastupa strategiju za borbu protiv prevara koja je osmišljena i napravljena kako bi podržala operativnu efikasnost osiguravajućih društava i efikasnu isporuku usluga korisnicima osiguranja. ovaj istraživački rad doprinosi postojećem znanju u tome što pomaže da se ukaže regulatornim telima na potrebu da se kontinuirano angažuju akademici stručnjaci u oblasti osiguranja it stručnjaci i druge zainteresovane strane u osmišljavanju i izgradi održivije strategije za borbu protiv prevara koja bi poboljšala penetraciju i gustinu osiguranja. ključne reči: upravljanje zajtevima za naknadu stete, prevara, osiguranje imovine, troškovi potraživanja, otkrivanje i prevencija prevare facta universitatis series: economics and organization vol. 16, n o 4, 2019, pp. 349 364 https://doi.org/10.22190/fueo1904349l © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper nonperforming loans and financial stability – the case of serbia 1 udc 336.77(497.11) velimir lukić, svetlana popović, irena janković university of belgrade, faculty of economics, serbia abstract. this paper investigates resilience and stability of the serbian banking sector in the light of deteriorated quality of its credit portfolio since the last world economic crisis. nonperforming loans became a burning issue across eastern european region. we used a set of indicators to appraise the magnitude of nonperforming loans’ burden to the banking sector’s soundness. indicators verify that the serbian banking sector was robust and solvent throughout crisis. nonperforming loans were concentrated in nonfinancial corporations’ sector, while households sector performed much better, which influenced remedy measures undertaken. we carried out a comparison with peer countries and reviewed nonperforming loans resolution strategy implemented in serbia. our finding is that measures taken helped noticeably in reducing stock of nonperforming loans, with a caveat that reduction might have been too fast and too large so that bounce back effect cannot be excluded. overall, financial stability has been preserved despite serious threats and without government financial aid. key words: banking sector, nonperforming loans, crisis management, financial stability jel classification: e42, e58, g21 1. introduction central banks were commonly held responsible for maintaining price stability and legal norms referencing to this objective are incorporated in literally all national central banking laws. a global consensus on interpretation of price stability evolved, so it is defined as the rise in the general level of prices of around 2 per cent per annum, which is accomplished by vast majority of countries. received august 28, 2019 / accepted october 02, 2019 corresponding author: velimir lukić university of belgrade, faculty of economics, kamenička 6, 11000 belgrade, serbia e-mail: velimir@ekof.bg.ac.rs 350 v. lukić, s. popović, i. janković commencing in the middle of previous decade, the scope of central banks’ responsibilities started to widen with financial stability becoming a relevant objective gaining increasingly in importance, especially after the financial turmoil. a survey on the central bank objectives stipulated in central bank laws revealed that objectives related to monetary policy were explicitly specified in all 47 central banks included in analysis, while ranked at a second place – with a share of somewhat less than a half of a sample, stood objectives related to financial stability, and with a share of less than a quarter employment, growth and welfare objectives and support policies of government objective were listed (bis, 2009). opposite to the definition of monetary stability, there is still no uniform and easy way to understand definition of financial stability. european central bank (ecb, 2006) defines financial stability as a condition in which the financial system is capable of withstanding shocks and the unravelling of financial imbalances, thereby mitigating the likelihood of disruptions in the financial intermediation process which are severe enough to significantly impair the allocation of savings to profitable investment opportunities. preceding definition enables vast interpretations as it may encompass many possible economic situations. primary negative implication of financial instability is linked to the occurrence of systemic risk. when an event is perceived as a shock that initiates a loss of confidence in a critical portion of financial system by market participants, it possesses power to create serious adverse effects on the real economy and loss of output. for example, friedman and schwartz (1963) argue that banking panics lead to the advent of financial instability due to the general public’s loss of confidence in the banks’ ability to convert deposits into cash money. contraction of deposits follows that triggers cut in money supply and diminishing economic activity. ćirović (2001) emphasizes the importance of systemic risk in banking in the form of a bankruptcy of one large bank that initiates chain process which negatively impacts banking and financial system. besides, there are non-negligible chances of spillover effects from the banking system to the real economy. the main issue for a banking sector, and root cause of financial and banking instability in general in bank-centric financial systems, are nonperforming loans. a nonperforming loan is a loan at which contractually defined payments from debtor to creditor are not met in full or in a due time. a nonperforming loan is more than just an indicator of a debtor’s inability (or unwillingness) to pay, it is a burden for both the lender and the borrower (balgova et al, 2016). anastasiou et al. (2019) argue that high rate of npls may also cause expectations about the stability of the banking system to deteriorate, creating systemic risk that may in turn lead to a run on deposits, significantly reducing the intermediation power of banks. 2. measures and indicators of nonperfoming loans’ burden to banking sector in order to assess the magnitude of nonperforming loans’ burden to the banking sector’s soundness, several indicators have been devised. they are based on accounting data contained in banks’ balance sheet and profit and loss account. most frequently used indicators are: a) nonperforming loans to total loans b) nonperforming loans net of provisions to (regulatory) capital c) provisions for nonperforming loans to nonperforming loans d) provisions for total loans to nonperforming loans nonperforming loans and financial stability – the case of serbia 351 according to the international monetary fund (imf, 2006) a loan should be classified as nonperforming when a) payments of principal and interest are past due by three months (90 days) or more, b) interest payments equal to three months (90 days) interest or more have been capitalized (reinvested into the principal amount), refinanced, or rolled over (payment has been delayed by agreement) or c) payments are less than 90 days past due but its status is envisaged by national regulatory rules, where “unlikely to pay” criterion has been usually pursued. behind “unlikely to pay” criterion may stand a variety of triggers that signal potential financial difficulties of the debtor. such as: a) lawsuit against debtor in order to collect debt, b) multiple restructurings on one credit obligation, c) significant increase in overall leverage, d) loss of major customer, e) materially significant decrease of turnover/operating cash flow, f) fraud, g) negative or qualified opinion of auditor, h) file for bankruptcy etc. (ecb, 2017). importantly, the amount of loan recorded as nonperforming should be the gross value of the loan as recorded on the balance sheet, not just the amount that is overdue. nonperforming loans to total loans is a general indicator and the best available measure of the credit portfolio quality as it shows the share of potentially uncollectible loans to total loans. this indicator is backward looking and summarizes errors of the past credit activity. it is also a lagging indicator due to the time elapsing between nonpayment of loan obligation and its classification as nonperforming. high value of indicator signals credit portfolio of bad quality, while its stable and low value is a sign of well performing portfolio. the strong pace of growth of this indicator in successive time periods may be alarming, suggesting that individual bank or banking sector is losing control over credit portfolio. it is expected to follow the pattern of nonfinancial corporations’ financial standing and overall economic conditions in a country. as with subsequent indicators, its informative power is dependent upon the appropriate recognition of nonperforming loans. data on nonperforming loans are essential for creating a realistic and reliable picture of banking sector financial soundness, which sometimes can be compromised particularly at the level of individual banks facing financial strains. the bank may underestimate the actual deterioration in credit quality, such as in the case of evergreen loans. for analytical purposes, this indicator ought to be calculated for each institutional sector (nonfinancial corporations, households etc.) allowing for a disaggregated view on the credit portfolio quality. in addition, loans to nonfinancial corporations should be further differentiated according to debtor’s core economic sector and indicator in question compiled accordingly by comparing nonperforming loans to total loans for these core sectors. the corporate sector is a key channel through which shocks affect banking sector with change in its leverage ratio having significant impact on banks’ credit portfolio quality with a one year time lag (imf, 2003). second indicator nonperforming loans net of provisions to capital – indicates whether bank capital is enough to withstand loan losses stemming from credit exposures that are yet to be written off. technically, if in any single bank loan losses outweigh capital, the bank is insolvent. two considerations need to be clarified in relation to this indicator. first, it would be an exaggeration to claim that a whole amount of nonperforming loans would need to be backed up by bank capital, meaning that recovery rate on these loans would be zero. banks employ a number of techniques to mitigate credit risk, starting with an adequate 352 v. lukić, s. popović, i. janković collateral and guarantees, due to which as a rule actual loan losses are lower than maximum projected loss. major drawback is that the appraisal of recovery rates is immensely uncertain. secondly, provisioning policy determines when and how much banks should provision against nonperforming loans. loan loss provisions reduce the gross amount of the accompanying loan in the balance sheet so as to calculate its net value, and are often referred to as specific loan loss provisions. net value of a loan is the best guess a bank can make about loan amount it expects to collect from debtor and reflects the loss in value of impaired assets. provisioning is set in a progressive way so as to attribute higher percentage of provisions to loans with a higher likelihood of default and expected loss. formation of specific provisions reduces profit in the respective period and their outstanding amount accumulates through time if the riskiness of the loan rises. the higher specific provisions against an individual loan or collectively assessed group of loans, the less impact will nonperforming loans have on bank capital. loss provisions serve as a buffer against diminishing level of bank capital. low levels of ratio of nonperforming loans net of provisions to capital point to a resilient and solvent banking sector. on the other hand, high levels of ratio indicate inadequate provisioning policy that allowed banks to delay addressing problem with nonperforming loans which grew over time. provisions for nonperforming loans to nonperforming loans provide a measure of the portion of bad loans for which provisions have already been set aside. it is directly related to the numerator of the previous indicator, since it uses the same accounting data. often it is referred to as coverage ratio. when coverage ratio reaches one hundred percent, the net value of nonperforming loan is zero, and it can be completely written off without any bad repercussions to bank capital or financial result in the current reporting period. finally, the last indicator depicts the total capacity of provisions to cover nonperforming loans losses. in most instances, actual value of provisions for total loans to nonperforming loans ratio is very close to provisions for nonperforming loans to nonperforming loans ratio, because provisions for collectible loans are low and usually in the range 0,25-1%. ţivković et al (2018) provide review of additional indicators of bank assets quality. 3. overview of nonperforming loans in serbia in 2014 serbia ranked 7 th worldwide according to the nonperforming loans to total loans ratio. this fact signaled a need for active measures to reduce the stock of nonperforming loans. data on nonperforming loans in banking sector is available as of september 2008, when an official definition concerning them was issued by national bank of serbia (nbs) and first data gathered. nbs adopted the definition from the imf. figure 1 displays stock of nonperforming loans to total loans and regulatory capital. right from the beginning of collecting data for nonperforming loans, a gap between the two ratios has started widening. while ratio of nonperforming loans to total loans doubled in five years, ratio of nonperforming loans to regulatory capital more than tripled, creating stress for both banks and the nbs. despite adverse developments in the two ratios, capital adequacy of the banking sector, measured by regulatory capital to risk-weighted assets, stayed strong during the period featuring most acute problems with nonperforming loans 2009-2014. nonperforming loans and financial stability – the case of serbia 353 fig. 1 nonperforming loans vs. regulatory capital and gross loans source: authors’ presentation based on data from nbs apart from nbs data, association of serbian banks has been gathering data on bank clients` indebtedness and arrears from the establishment of credit bureau in 2004. its data base is accurate, reliable and daily updated and may serve as a cross check vis-a-vis nbs data, while it is especially important for analyzing bad loans data prior to 2008. credit bureau publishes monthly information on the share of defaults (arrears) in credit debt classified by the type of the borrower: a) legal entities (companies), b) entrepreneurs and c) individuals (natural persons). credit reports became available for individuals in october 2004, and for companies and entrepreneurs from may 2006. credit bureau follows clear-cut rules for defining default on outstanding debt. for legal entities and entrepreneurs any debt repayment that has not been cleared in 15 days after due date is to be classified as default, while for individuals that period is extended to 60 days. figure 2 displays data available from credit bureau. the share of defaults in credit debt for individuals (households) has never entered double digit zone. developments in total share of defaults in credit debt were predominantly influenced by nonfinancial corporation sector, which can be explained by the leading role of this sector in total bank loan volume and high level of defaults observed in it. when comparing figure 1 with figure 2, one can observe that ratio of nonperforming loans to total loans is consistently above share of defaults in credit debt, in the range 5-9 percentage point, for the period up to 2016. this discrepancy comes from methodological differences in computing respective ratios, where first ratio includes in the numerator total unpaid amount of principal on the loan of which at least one installment is overdue, while second ratio takes into account only amount actually in default, i.e. only after repayment end date total principal would be included in the numerator. for short-term loans this difference does not make a big effect, while opposite is true when longer term loans are in question where in the first half of the repayment period only small fraction of principal is repaid. 354 v. lukić, s. popović, i. janković fig. 2 share of defaults in credit debt source: authors’ presentation based on data from the association of serbian banks analysis of nonperforming loans of nonfinancial corporations provides insight about what economic sectors financial and economic crisis has been affecting the most. in 2010 more than 75% of total nonperforming loans were related to companies, either ongoing entities or entities that filed for bankruptcy. figure 3 depicts developments of portions of nonperforming loans in each economic sectors in total companies’ nonperforming loans. fig. 3 composition of nonperforming loans of nonfinancial corporations by economic sector (% of absolute amounts) source: authors’ presentation based on data from nbs the bulk of the problem with nonperforming loans in absolute terms is linked to mining, quarrying and manufacturing, and wholesale and retail trade sectors. however, the same situation occurs in normal times since these sectors dominate with highest economic activity and loan volume. thereby, an adequate measure of economic standing nonperforming loans and financial stability – the case of serbia 355 in each sector, and conditions for doing business in it in the course of time, is ratio of nonperforming loans to total loans in each sector. fig. 4 nonperforming loans rates across economic sectors source: authors’ presentation based on data from nbs figure 4 illustrates that already at the outset of crisis the ratio of nonperforming loans was over 20% in agriculture, forestry and fishing, and mining, quarrying and manufacturing. in the first two years of crisis, real estate activities (comprising also professional, scientific, innovation and technical activities, administrative and support services, other services, art and entertainment) and agriculture, forestry and fishing lead in negative reaction to unfavorable economic environment. companies operating in these sectors were facing immense financial difficulties, so default rates rose sharply. interestingly, default rates peaked in 2010 for agriculture, forestry and fishing, and have exhibited declining trend ever since. on the opposite side, from 2010 default rates in construction sector escalated, so in general this sector performed the worst during crisis period together with real estate activity sector. the culmination of problem occurred in 2013 when more than a half of outstanding loans in construction were nonperforming. as for other sectors, their nonperforming loan rates varied in a narrower range; while mining, quarrying and manufacturing as the holder of the largest part of outstanding loans recorded peak rather early in 2009. households sector is also important for banks and it can be observed from figure 2 that it performed much better than nonfinancial corporations in terms of default rates. nonperforming loans ratio of natural persons’ loans stayed below average due to the low ratio for housing loans that have consistently accounted for close to one half of total loans. however, nonperforming loans have been steadily increasing from 2008 with amount of 19,8 billion dinars, up until 2015 when they reached maximum of 88,2 billion dinars. figure 5 shows developments in level and structure of natural persons’ nonperforming loans. nonperforming cash and housing loans have commonly represented the predominant bulk of total nonperforming loans in serbia. the participation of loans for other (business) activities and other loans, two rather heterogeneous categories of loans, rose immensely during crisis years in the composition of nonperforming loans since both posted a double digit share. thereby, these loans inter alia determined developments of overall nonperforming loans in household sector. 356 v. lukić, s. popović, i. janković fig. 5 composition and level of natural persons’ nonperforming loans source: authors’ presentation based on data from nbs more detailed analysis of common types of natural persons’ loans reveals some interesting findings. first, ratio of nonperforming loans for cash loans fluctuated unpredictably in a narrow band (9,3%-11,3%) in 2008-2015 time frame, implying that crisis on average did not influence performance of this type of loan. second, one may observe pattern in movement of ratio of nonperforming loans for housing loans that is in line with appreciation of swiss franc against euro. there were two episodes of appreciation – a) 2010-2011 and b.) one-off shock in 2015. ratio of nonperforming loans increased in both episodes, because of strong adverse impact on swiss franc indexed housing loans, while lagged effect of appreciation with smaller magnitude can be also observed. due to favorable interest rates on housing loans indexed in swiss franc before the crisis, 22 709 loans out of outstanding 85 676 housing loans in 2011 were denominated in it, i.e. more than a quarter of all housing loans. at the same time, and even more striking, they accounted for 37% of outstanding debt on housing loans. third, ratio of nonperforming loans for consumer loans all the way to 2012 was exhibiting downward trend, when it sharply surged upward. in 2014, ratio equaled 28,5% which set consumer loans at the top of list of all type of loans according to the ratio concerned. since 2012, consumer loans have had the highest ratio among common types of natural persons’ loans. fourth, although credit cards loans and current account overdrafts seemingly look like close substitutes, since both act as pre-approved credits, their ratios of nonperforming loans had different dynamics in observed period. ratio for current account overdrafts was already high in 2008 – 14,8%, also the highest in all loan categories, but it did not change a lot in the following period during which it moved both up and down. contrary, ratio for credit cards loans was 6,1% in the same year and followed continually increasing path, made height in 2014 with 14,3%, but has never surpassed respective ratio for current account overdrafts. fifth and finally, car loans entered loan statistics as a distinct type of loan in 2012 and ever since have kept status as a type of loan with the least ratio of nonperforming loans. for many reasons, this fact seems illogical, since one does not commonly expect users of car loans to behave in such a prudent manner. nonperforming loans and financial stability – the case of serbia 357 fig. 6 provisions for nonperforming loans source: authors’ presentation based on data from nbs figure 6 displays three indicators related to nonperforming loans coverage. up to 2014, the coverage through regular accounting provisions was below pre-crisis level, still acceptable. it rose only when banks became exposed to nbs measures that stimulated write-offs and more realistic provisioning. however, regulatory provisions prescribed by nbs were markedly higher than accounting ones, which created an image of adequately capitalized banking sector even under the worst case scenarios. regulatory provisions hence played an important role in preserving financial stability. 4. case of serbia against other nonperforming loans cases in emerging europe since the last world economic crisis in order to assess the depth and uniqueness of the problem with nonperforming loans in serbia, some cross country comparison covering period since the last world economic crisis with similar european countries is deemed instrumental. a group of countries from central and eastern europe represents a natural benchmark. the global economic slowdown ended period of high growth rates in these countries. klein (2013) finds that the level of nonperforming loans in countries considered can be attributed to both macroeconomic conditions and banks` specific factors, with the latter having a relatively low explanatory power. the level of nonperfoming loans tends to increase when gdp falls, unemployment rises, exchange rate depreciates, and inflation is high. a vast recent literature confirms finding that macroeconomic factors are primary determinant of the quality of banks` assets (beck et al., 2013, moinescu, 2012, jakubik & reininger, 2013, vatansever & hepsen, 2013, škarica, 2014, makri et al. 2014, tanasković & jandrić, 2015, kjosevski & petrovski, 2016). figure 7 shows that at the outbreak of the crisis serbia has already had the highest ratio of nonperforming loans – 11,3%, whilst ranked second was the republic of north macedonia with ratio of 6,7%. very quickly other countries started to catch up with serbia. lithuanian case is striking since npl ratio rose from 6,1% to 24% in just a year 358 v. lukić, s. popović, i. janković after the crisis. in 2009, serbia, lithuania and latvia had npl ratio over 10%, to be accompanied by six other countries in 2010. fig. 7 bank nonperforming loans to total loans across countries source: authors’ presentation based on data from imf fsis without exception all countries encountered, to bigger or smaller extent, the issue of nonperforming loans. in terms of the level of nonperforming loans, the case of serbia can be compared to lithuania, romania and albania cases. other european countries faced similar, and even more severe problems. cyprus and greece have been struggling with bad banks’ assets for years. in 2015 reported npls ratio in cyprus was 47,7%, while as of today it did not succeed in resolving nonperforming loans issue that escalated in 2011. greece has been also undergoing difficult times with its banking sector that posted npls ratio of 45,6% in 2017. on the other hand, there were countries that have circumvented nonperforming loans issue – czech republic, slovakia, poland and estonia. interestingly, both czech republic and poland have been having low share of foreign currency denominated loans that has not exceeded 30%. several joint features may be discerned concerning countries from figure 7. first and foremost, foreign component in the banking sector, either directly over the bank ownership, or indirectly through properties of regular operations, was overwhelming. foreign ownership in banking sector was expected to provide better banking, more professional conduct and state of the art technology and practice. also, a sizeable foreign funding was expected to inflow in countries through foreign subsidiaries that would set ground for strong credit growth. however, a detrimental omission has been made since these funding came in foreign currency denominations and whole credit system has been adapted so as to local loans kept the denomination of funding currency. otherwise, banks could have been exposed to heavy exchange rate risk. when a country intends to join the euro area in a foreseeable future, this property should not make a large effect in terms of nonperforming loans emergence, since exchange rate is basically fixed up-front for a considerable time span according to mandatory procedure and phases that lead to euro adoption. for example, one cannot argue that exchange rate risk is nonperforming loans and financial stability – the case of serbia 359 accountable for latvia or lithuania case of nonperforming loans. bulgaria and bosnia and herzegovina have a currency board, while slovenia joined euro area prior the crisis, meaning for all of them exchange rate risk was out of consideration as a potential cause of nonperforming loans. however, for a group of countries encompassing serbia, hungary, romania and albania, currency depreciation impacted on acceleration of nonperforming loans stock due to the high share of foreign currency denominated loans. hungary opted for a set of unconventional measures, some of which might have been in a collision with principles of a free market economy, such as the conversion of foreign currency indexed loans into local currency loans with low interest rates. matolcsy (2015) serves as a good reference for the explanation of measures taken. in sum, we distinguish several additional properties for all banking systems: a) an extremely rapid expansion of balance sheets of banks prior to the crisis fueled by low interest rate environment in euro area, b) the inadequacy of banks` preparedness and capability to deal with nonperforming loans, c) the economic downturn negatively impacting real sector companies and d) a drop in real estate collateral values (both commercial and residential). fig. 8 bank provisions to nonperforming loans across countries source: authors’ presentation based on data from imf gfsr figure 8 helps infer how well prepared were national banking sectors for bad loans writeoffs, and whether banks in accounting sense paid enough attention to addressing nonperforming loans issue internally. it is meaningful to match data on provisions to nonperforming loans with data on npl ratio from figure 7. countries that demonstrate relatively low coverage ratio but also have low npl ratio are less vulnerable in terms of financial stability. however, if a country posted relatively high npl ratio with low coverage ratio, it would imply its heightened vulnerability. this was effectively the case of serbia which, with the exception of 2016, persistently had npl ratio above the average of countries considered, and coverage ratio below average. in 2015, serbia npls market share in 18 countries of central, eastern and south eastern europe (cesee), calculated as serbia gross npls divided by total cesee gross npls, was 9,3%, while its market share in total loans outstanding was only 3,3% (ebrd, 2016). 360 v. lukić, s. popović, i. janković a rise in coverage ratio observed for some countries was usually accomplished by a drop in nonperforming loans stock, i.e. denominator effect, opposite to build-up of additional specific loan loss provisions which is considered more prudent. in general, before the majority of banks in troubled countries there stood three choices for dealing with npls: a) workout, b) sale and c) write-offs. workout comprises measures aimed at restructuring credit obligation or legal collection efforts. there is no predetermined optimal solution and banks need to have good npls strategy in place so as to choose the right option. intuitively, banks would prefer to keep loan on balance sheets as long as there exists some chance to collect unpaid principal. workout is highly uncertain and costly. some statistics show however that, albeit in normal circumstances, 60% of overdue loans are repaid within 90 days. with surpassing 90-day criterion the probability and the amount of recovery decline significantly (ifc, 2011). for example, three quarters of nonperforming loans in serbia in april 2015 were overdue for more than a year (mof, 2015). sale is commonly performed through outright sale of a loan to a third party. since all collection activities with troubled loans are transferred to a third party, bank must accept sale at a discount. finally, with anticipated inefficient loan collection, poor recovery amount or absence of interested buyers, bank should choose loan write-off. in many cases, central banks instruct and/or motivate banks to carry out write-offs. in dealing with huge stock of nonperforming loans, no central bank can keep aside and each country in cesee with bad loans problems sought for assistance from reputed international institutions. in the next section, we will describe major measures implemented in serbia. 5. strategy and measures for resolving nonperforming loans issue in serbia nbs finally made decisive coordinated move with other relevant institutions in order to counter npl issue in 2015. some minor measures have already been undertaken in late 2012 when nbs loosened regulatory impediments to the sale of npls, by allowing banks to assign due corporate loans to either another bank or another legal entity (private equity fund, special purpose vehicle etc.). in addition, new rules governing classification of bank assets were issued regarding the restructuring of receivables from entities participating in the voluntary financial restructuring schemes. banks were given the opportunity to reset calculated number of days in arrears on receivables that were restructured, effectively to zero, according to the scheme mentioned above. the results of these measures were poor. the turnaround point was august 2015 when the government of the republic of serbia adopted a comprehensive npl resolution strategy (nplrs) involving relevant ministries and nbs, and defined action plan for its implementation. nplrs was developed around four pillars: a) enhancing banks’ capacity to deal with npls, b) enabling conditions for development of secondary market for npls, c) improving and incentivizing out-of-court debt restructuring and d) enhancing in-court debt resolution and mortgage framework. nbs on its part has enhanced the regulatory framework for the treatment of restructured receivables that prevents unsustainable refinancing practices. it required banks to set up an independent unit whose task would be to deal with nonperforming loans. a large weight has been put onto proper implementation of accounting standards, with particular emphasis to ias 39 that defines methods of recognition of impairment of receivables in banks` balance sheets, and promotion of the best practice related to write-off policies that banks implemented and cautious recognition of interest on npls. nbs revealed expectation to banks about nonperforming loans and financial stability – the case of serbia 361 enhanced public disclosure of banks regarding data on assets quality, coupled with better reporting to nbs related to collaterals, accrued interest and largest exposures. as a result, banks became obliged to prepare and submit new forms of reports, whereas nbs established a database of valuations of real estate that was used as collateral for loans and of loans that are collateralized with respective real estates. nbs was thus enabled to monitor indicators such as loan to value (ltv) and debt service to income (dsti) due to data from the established database. overall, a lot of emphasis has been put to collateral management, since the crisis revealed that appraised collateral value was far above its sale price when banks used this method of debt collection. thereby, nbs prescribed in provisions the frequency of collateral valuation on every three years. despite earlier nbs measures aimed at emergence of secondary market for npls it remained underdeveloped. neither were banks willing to sell these loans, nor there existed demand for them reflected in interested investors. main impediments on banks’ side were related to taxation matters, inadequate loan loss provisioning and collateral valuation. provisions for tax recognition of write-offs of corporate receivables as expenditures were excessively strict – providing hard evidence on collection actions. in addition, write-offs of receivables were treated as debt release (exposing debtors to additional tax cost equal to 2,5%), and even over that write-offs in cases of natural persons had treatment of private income (exposing banks to effective rate of personal income tax equal to 16%). altogether, it turned out banks were exposed to additional tax costs that amplified original bad debt burden. with amendments to existing laws and related by-laws, tax incentives have been adjusted with the needs of npl market. obstacle related to the inability of npl buyer to take over an ongoing litigation proceedings, instead of commencing new proceedings, was successfully overcome by changes in the civil procedure law. hurdle linked to banking data secrecy that prevented transfer of data on debtors with debt in arrears to third parties was solved by additional interpretation of the banking law issued by nbs. table 1 sale of nonperforming loans portfolio in serbia (publicly available data) year seller type buyer buyer country face value (mil €) 2015 erste bank corporate aps holding czech republic 21 2015 banca intesa sme confidential n/a 35 2017 heta asset resolution commercial real estate undisclosed n/a 289 2017 pireus bank corporate/sme confidential n/a 43 2018 nova ljubljanska banka (nlb) reo (real estate owned) undisclosed n/a 115 2018 undisclosed undisclosed undisclosed undisclosed 74 source: ebrd npl monitor measures implemented finally helped npl market development. in table 1 is given a list of transactions, based on publicly available data, that occurred since the adoption of nplrs. in comparison to other npl markets in cesee, serbian market seems incomparably more opaque. it is rather a rule than an exemption that the identity of buyer is kept confidential or undisclosed. ebrd data shows that 5 out of 18 registered npl servicers in cesee region are in fact active in serbia. in addition, deposit insurance 362 v. lukić, s. popović, i. janković agency (dia) has carried out its first auction for the sale of the npl portfolio with notional value of 242 mil € that was completed in february 2019. total npl portfolio under management of dia amounts close to 1 billion € (imf, 2018), that makes it the biggest npls holder in serbia. the third and fourth pillar of nplrs are essentially related to the strengthening of protection of creditor rights. current legal system performed poorly in terms of assisting creditors to collect due debt. however, professional investors specialized in restructuring of bad assets, buyers of npl portfolios, are critically interested in reliance and speed of legal proceedings that will enable them to pursue their strategy of recovering bad debts. a consensual financial restructuring is a conduit for the implementation of out-of-court debt restructuring. in practice, a general assessment was that restructuring plans agreed previously underperformed the expectations, since rarely these plans ended with viable operations of troubled debtors – a success rate of below 30%. alike banks, state creditors were quite inexperienced with formulating restructuring plans, which in some cases brought prospective plans to a halt. special type of a problem with in-court debt resolution stemmed from corporate groups` npls that accounted for a significant part of total npls (ex. farmakom, beohemija), since the insolvency act recognized debtor as an individual company and not as a part of corporate group comprised of connected companies. it meant that separate legal proceedings needed to be filed for every company and sometimes it involved separate local courts, which proved to be highly inefficient. provisions related to fostering secured creditors` rights, swift disposal of assets where assets are not important for reorganization and protection of creditors that provide new financing in reorganization have been adopted. the capacities of bankruptcy administrators and commercial courts were strengthened, mechanism of tracking and supervising ongoing bankruptcy cases launched with their transparency increased. finally, a lot of work has been invested in the field of the enforcement of mortgages, where particular problems arose with second-instance decision process for land registry case files where a significant backlog of cases has been formed. legal framework surrounding nonperforming loans was thus improved and streamlined in order to counter potential losses for creditors by, inter alia, following changes: a) amendments to the corporate insolvency law, b) law on real estate appraisers, c) law on enforcement and security, d) law on consensual financial restructuring, e) amendments to the mortgage act and f) amendments to the banking act. nplrs with its comprehensive approach delivered measurable effects. in a three-year period starting from the adoption of nplrs, stock of npls has been reduced from 427 to 141 billion rsd. an impressive fall in npls was mainly attributed to write-offs and sale of npls (to the parties outside of banking sector), 177 and 84 billion rsd respectively. besides selling on balance sheet assets, banks have equally sold their off-balance sheet items (loans previously written off). in the observed period, the value of npl market transactions was estimated at 194 billion rsd. pursuant to positive developments abovementioned, npl ratio dropped from 21,6% to 6,4% in the respective time span. 6. conclusion nonperforming loans are a natural ingredient of banking business. however, excessive level of nonperforming loans threatens financial stability. last time when serbia was nonperforming loans and financial stability – the case of serbia 363 confronted with widespread npl problems, it closed four largest banks. current npl crisis was the first crisis of that kind in the post-transition era in serbia, interestingly four banks were also closed during it. a combination of fairly relaxed lending criteria, economic misfortune and numerous faults in legal and accounting framework brought about npl burden to the surface. despite the mandate of preserving financial stability given to the nbs, analysis above shows that instruments at its disposal were not enough to solve npl issue on its own. in addition, nbs reacted to emerging crisis with a notable time lag. judicial system, in all its aspects, proved to be more of a bottleneck than accelerator in tackling with npl crisis. key lessons learned from the case of serbia in coping with npl issue can be summarized as follows: a) regulators need to prepare the setting for and encourage the clean-up of banks` balance sheets in a timely manner, b) banks need to proactively approach the potential building up of npls and professionalize npl management, c) adequate tax, insolvency and enforcement frameworks must be in place together with efficient out-of-court restructuring practices and d) ultimate disposal of toxic assets is dependent upon the existence of secondary market in npls. to some extent, these lessons were reaffirmed in other cesee countries. as a positive, serbian resolution of npls did not draw on utilizing public finances and government budget directly. however, as dia manages the largest stock of npls and its funds were used for paying off insured deposits of closed banks, public funds have been engaged indirectly, which should be taken into consideration. indicators considered in analysis verify that serbian banking sector as a whole, even with high level of npl ratio, was robust and solvent throughout crisis, since provisions for loan losses and capital adequacy were significantly above critical zone. no systematically important bank was in a need for capital injection, though some banks were winded up. two external macroeconomic factors played an important role in relieving debtors of debt burden and reducing npls. first, loose monetary policy of cheap money and negative interest rates of ecb, and second, appreciation of rsd versus euro during implementation of nplrs. there exist some doubts whether a drop in npl ratio is virtual or viable. in 2017, nbs issued a decision according to which banks were obliged to write-off all fully provisioned impaired receivables. soon afterwards, stock of npls shrank considerably. next time, nbs will not be able to surprise banks and force them to do write-offs. secondly, serbian economy is still fragile with below average economic growth rates compared to peer countries. nevertheless, nbs in cooperation with other relevant institutions assembled a solid multilayer mechanism for dealing with banks` bad assets that has just passed a challenging test of resilience. acknowledgement: the paper is a part of the research done within the project „development of institutions and instruments of the financial and mortgage market in serbia“ (code 149041) under the auspices of the ministry of education, science and technology development. references anastasiou, d., louri, h. & tsionas, m. 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(2018). bankarsko poslovanje i platni promet [banking and payment operations]. beograd: ekonomski fakultet u beogradu. www.nbs.rs. www.npl.vienna-initiative.com/ www.ubs-asb.com. problematični krediti i finansijska stabilnost – primer srbije u radu se analizira otpornost i stabilnost bankarskog sektora srbije suočenog sa pogoršanim kvalitetom ukupnog kreditnog portfolija od izbijanja svetske ekonomske krize. na bazi seta odabranih indikatora procenjena je jačina uticaja problematičnih kredita na stabilnost bankarskog sektora. indikatori su potvrdili da je srpski bankarski sektor očuvao solventnost tokom trajanja krize. zaključak rada je da su preduzete mere značajno pomogle obaranju nivoa problematičnih kredita, uz ukazivanje na predostrožnost u krajnjoj oceni jer je smanjenje možda bilo prebrzo i preveliko pa se ne može isključiti efekat njihovog povratka u budućnosti. finansijska stabilnost u srbiji je očuvana i pored ozbiljnih pretnji i bez posezanja za državnom finansijskom pomoći. ključne reči: bankarski sektor, problematični krediti, upravljanje krizom, finansijska stabilnost plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, n o 1, 2015, pp. 69 81 wellness spa – a specific form of health tourism  udc 338.48-6:615.8 vukašin šušić 1 , dobrinka dimitrijević 2 1 faculty of economics, university of niš, serbia, 2 primary health centre, ćuprija, serbia abstract. health tourism implies a temporary change of place of residence for the purpose of preventive health care, rehabilitation, the use of different types of cosmetic services, as well as most complex medical procedures. according to the level of health services within health tourism, those that stand out as specific aspects of health tourism are medical, traditional spa tourism (thermal/mineral springs tourism), spa and wellness tourism. traditional spa tourism is becoming increasingly intertwined with other aspects of health tourism, wellness in particular. modern spas, through the provision of treatment and other professional services, are increasingly promoting wellness, so that today spa industry is considered to be part of the wellness sector. wellness is one of the new trends, not only in health tourism, but also in modern tourism. it is defined as a state of complete physical, mental and social well-being and includes attitudes and actions that prevent disease, improve health and the quality of life and lead to physical and mental balance. key words: health, health tourism, spa, wellness, treatment and recreational function. introduction the fast pace of life in the modern society leads to dissatisfaction, conflict and stress. the high level of stress increases the risk of colds, heart attack and various types of cancer. in addition, stress is connected with obesity, high blood pressure and a number of cardiovascular diseases. „migraine headaches, rheumatoid arthritis, chronic fatigue, receptiveness to allergies, and other maladies are also related to chronic stress. stress may both suppress the body’s immune system and lead to hormonal imbalances that increase production of abnormal cells“ (godbey, 2009, pp. 3-4). for these reasons, the need for rest or recreation is nowadays more pronounced and important. however, it is not enough just to relax, but it is also necessary to confront the fatigue. if one takes into account that the decrease in physical activity in the labour process leads to chronic mental fatigue, then rest has to be physically active recreational. the need  received march 3, 2015 / accepted april 10, 2015 corresponding author: vukašin šušić faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: vukasingeo@gmail.com 70 v. šušić, d. dimitrijević for recreation is necessary in people’s permanent residence, at workplace, at home, or in other locations that are away from their place of residence. from the public health perspective, recreation has all the positive features that are characteristic of sports, as well as a few advantages wider application possibilities both in terms of the age and health condition. recreational tourism is of great importance for the preservation of health; therefore, in recent times there have been many discussions related to health tourism as a special form of tourism. in a narrow sense, health tourism implies trips that are organized for health reasons, without excluding the effects of spending related to meeting secondary needs of the tourist industry. according to tabacchi (ross, 2011) medical tourism represents „any kind of travel to make yourself or a member of your family healthier.“ all persons traveling for health reasons are not necessarily patients with serious illnesses. in a broader sense, medical tourism today includes classical healing by the factor of nature for the purpose of improving health, as well as therapies that are needed for man to preserve good health and fitness (wellness, sport, recreation, healthy meals, entertainment, etc.), as well as treatments in specialized health facilities that offer quality staff and medical equipment for the most complex medical procedures. therefore, what is implied under health tourism in a wider context is a temporary change of permanent residence for health prevention, rehabilitation, use of various spa treatments, as well as the most complex medical procedures. based on this, three groups of service users who meet their health care needs in various ways have been formed over time:  the first group consumers of traditional medical tourism related to natural resources such as the healing properties of thermal mineral water, mud, peloids, waves, the climate and so on.  the second group clients of wellness, which is a set of procedures for achieving physical and mental well-being with the use of natural factors, physical activity, fitness, therapies of classical and alternative medicine, etc.  the third group patients with serious health problems which require complex medical treatments using the services of specialized medical facilities and superior medical personnel (spasojevic, susic 2010). therefore, according to the level of health services that clients use, as special aspects of health tourism, there are treatments by natural factors spa tourism (balneotherapy, climatotherapy, thalassotherapy, etc.), wellness and medical tourism. in this context, medical tourism should be viewed as a subset of health tourism. „while health and medical tourism could be separated on the seriousness of illness and disease and the consequent level of physical and surgical intervention required, this ignores how an individual constructs their own embodiment, condition and treatment, as well as how some treatments may traverse simple categorisation“ (cook, 2008, p. 8). medical tourism includes medical screening, hospitalization and surgery, while in other forms of health tourism the primary goal is to use different treatments to improve health and hedonistic enjoyment in spas and centers of alternative therapies (henderson, 2004, p. 113). therefore, the difference between medical and health tourism is only in the ways in which people improve their health. so, even though it involves complex medical procedures, medical tourism can be considered a specific market niche of health tourism. health tourism, in the strict sense, in addition to the basic natural factors (mineral water, peloid, clay and climate), involves the use of other factors which improve the condition of the body as a whole. modern balneology treatments include factors such as changes in the environment, dietary regimes, active and passive mental and physical relaxation. if wellness spa – a specific form of health tourism 71 necessary, other forms of treatment such as medication and physiotherapy are also used during balneotherapy (stankovic 2009). so, the main goal of health (and wellness) tourism is to improve physical health on one hand, and to improve and maintain mental, psychological and emotional well-being on the other hand (danna, griffin, 1999, p. 361). modern health destination visitors are more mobile, less bound to the facility where they are staying, they eagerly visit local events, attractions and museums, are interested in the culture and traditions, gastronomy, even sports; travel facilities often include experiences of eastern medicine-acupuncture and other forms of stimulation, sauna, kneipp cures and more, as well as a healthy diet. in particular, all the more evident trend is the shift from the traditional thermal treatments towards more complete and broader health-recreation tourism. therefore, there is a need for sketching a new approach that will emphasize preventive health tourism as a form of medical tourism. qualitative and quantitative changes in the tourist demand and supply at the end of the 20th and throughout the 21st century have contributed to health tourism stepping out of the initial frame (natural healing factor) and increasingly involving in a variety of other services such as massage centers, beauty care, fitness, diet therapy, psychotherapy, anti-stress therapy, relaxation and so on. therefore, modern health tourism is a form of tourism undertaken in order to promote, stabilize and, if possible, restore former physical and mental state with the use of natural healing factors, health services, sports and recreation as well as wellness facilities, implying thereby that people using these services do not have permanent residence at that location or destination. 1. traditional spas and spa centres as health tourism destinations there are numerous steps that can be taken to prevent ill health caused by stress. one of these ways is to visit different types of spas spa centers. today the term spa is not only a synonym for a spa in the traditional sense, but for institutions that use different therapies to regain health, slow down the aging process and relax a person. spas in general are nowadays associated with two basic functions: treatment and recreational function. 1.1.traditional spas thermal/mineral springs spa the term thermal/mineral springs mineral springs spa should be linked to the destination located near medicinal thermal and mineral water, mud, etc. the waters of these thermal springs have different therapeutic and recreational properties and are used for the treatment of many diseases. in europe, thermal/mineral springs are still a significant resource and the basis for the development of health spa tourism (global wellness institute, 2014). the use of thermal/mineral resources in european countries has a long tradition and medically qualified professional staff is used for the treatment of a range of physical and mental conditions. the treatment is carried out so that a combination of balneological treatments and other therapies maximally improve the patient's health condition (erfurt-cooper cooper, 2009). apart from europe, onsen mineral waters in japan, thermal mineral pools and aqua parks in south america, china, taiwan etc. are also used for swimming and recreation, and to a lesser extent for treatments. therefore, traditional spas are sanatogenous areas and ideal places for meeting one's different recreational and health needs. these destinations have numerous and varied 72 v. šušić, d. dimitrijević natural features with significant health and recreational functions that give rise to increasing tourist demand. as already pointed, thermal mineral springs, rare gases and mud (peloid), climatic conditions, clean air and rich vegetation belong to natural elements, which are the basis for the development of spa tourism. in the past, these elements had a much larger role in the treatment of various diseases, as well as for the recovery after injury or disease. today, spas around the world have completely changed their concept of medical treatment, as well as their appearance. they are less of hospitals and rehabilitation centers for older clientele, and more of multipolar centers with a variety of tourist supply. generally speaking, the following types of thermal/mineral resources can be divided as follows, according to their use:  geothermal springs or hot springs, with water that has healing properties,  mineral springs with cold and hot waters that are used for balneological purposes;  saline springs with geothermal waters which contain a high percentage of salt and are used in health and wellness treatments,  extreme hot springs, with water which needs to be mixed or cooled for safe use (erfurt-cooper, 2010, p. 1) european spas association (espa) recognizes the following spas according to the characteristics of natural resources which have a beneficial effect on human health:  mineral spas;  brine spas;  thermal spas;  peloid spas;  spas at the seaside and in a healthy climate;  kneipp spas. traditional spas in many countries today are an indispensable segment of the health care system, important cultural heritage and an important economic factor for development. according to the law on the spas of the republic of serbia (rs official gazette 80/1992): " a spa is an area where there is a benefit of one or more of natural healing factors and that meets the requirements in terms of the development and equipment for their use. a spa is a natural resource of public interest controlled by the government. natural healing factors in terms of this act shall include: thermal and mineral water, air, gas, mud (peloid), whose medicinal properties are scientifically tested and proven. " traditional spa tourism is connected to thermal/mineral springs. according to hall, “spa tourism is a component of health tourism that relates to the provision of specific health facilities and destinations which traditionally include the provision of mineral waters" (hall, 2011, p. 3). the importance of this aspect of medical tourism is growing with the increasing elderly population in the total population and ever more present awareness of the need to preserve health. the essence of the strategy of development of modern spas is a tendency to activate self-awareness of the responsibility for one’s own health and create offers that are user-oriented. growing needs and a comprehensive approach towards the user have resulted in a complex offer defined as well-being. this term implies the renewal of the mind, body and soul, which is the essence of the orientation of modern spa tourism. wellness spa – a specific form of health tourism 73 according to the conclusions of the international congress on spa tourism held in galicia in 1999, the concept of strictly specialized and unipolar spa centers is now obsolete. there are two important features of the modern spa spa tourism:  health and recreation, as well as tourist facilities and services that are intended for people of different ages are based on short-term stays and suppress the traditional and other classic spa treatments;  the contemporary development of spa tourism is increasingly based on a wide range of attractions (health services, recreational activities, monumental, event, conference tourism, entertainment and arts facilities, casinos, etc.) which are used to attract a more heterogeneous structure of guests (jovicic 2008). according to the new concept, the features of traditional spas are people-oriented regardless of their age and state of health, since the emphasis is on prevention. staying in these centers is the most convenient for busy people who can not go on longer holidays, and wish to be in a good mood and excellent health, despite a lot of work. the basic concept of the offer of spa products is "health with the help of water" but also beauty, pleasure and the opportunity to renew their internal energy. spas are not only useful for the treatment of diseases or their prevention. these are ideal places for rest and relaxation, recovery of health and strength in contact with unspoilt nature, surrounded by peace and quiet, away from the stress of the modern lifestyle:  tradicional clinics to take the cure or the waters,  hot spring spa resort with medical as well as leisure and wellness facilities,  modern aqua parks using mineral spring water to attract families as well as individuals, both locals and foreigners; and  treatments for healthy and not so healthy visitors (erfurt-cooper, cooper, 2009, p. 9). the significance of traditional thermal/mineral springs lies in the fact that in more than 100 countries around 27,000 spa facilities were built in addition to thermal and mineral springs for the provision of various health and recreational services. these spa facilities and institutions around the world generated revenues of approximately 50 billion dollars in 2013. however, only ¼ of these facilities (6500) provided classic spa services, but nevertheless generated about 2/3 of the total global revenue of this industry. most of these buildings were intended for recreation, swimming and different entertainment activities. the most numerous objects of this type (onsen) are in japan (about 17,000) and china. traditional spa tourism is the most developed in europe, where, in 2013, about five thousand institutions and facilities generated approximately 45% of the total global revenue of this form of tourism (global wellness institute, 2014). despite many changes, traditional spa tourism is still considered an important component of modern medicine. the biggest changes spa tourism has experienced occurred in germany, france, austria, etc. the changes are mainly due to the fact that employees have been given the right to be absent from work for the purpose of medical treatment, without affecting their holiday. according to the new development trend of health tourism in the republic of serbia, spas can be divided into three basic categories:  spas-hospitals receiving patients whose costs are covered by their health insurance (they are not market-oriented and tourist-oriented);  tourist spas, which, in addition to offering treatment and rehabilitation, offer other forms of rejuvenation and health perservation (treatments that are carried 74 v. šušić, d. dimitrijević out here are designed as tourist services and are offered on the tourism market, thus representing a mixed type of spas in terms of funding sources)  market-oriented spas, which are organized as wellness spa centers (destinations). most spas in the republic of serbia are of mixed type. 1.1. the concept of modern spa centres in contemporary literature spas are increasingly called spa centers, due to the abbreviation of an old latin saying salus per aquam (health with the help of water). in this view, it follows that treatments in spa centers are based on the healing properties of water and peloids (mud). according to the european spas association the word spa stands for "a mineral source or a healing place where there is a mineral spring", but this is also the name of a belgian health resort with numerous thermal springs that have attracted visitors since the 17th century. however, isa international spa association in 2004 provided their own definition: "a spa is an institution dedicated to improving man through a wide range of professional services that promote the renewal of mind, body and spirit" (www.fitnese.com.). similarly, in the report of the global spa economy 2007, spas are defined "as establishments that promote wellness through the provision of therapeutic and other professional services aimed at renewing the body, mind, and spirit" (global wellness institute, 2014, p. 3 ). thus defined spas spa centers are the most numerous in the united states. specifically, health (spa) services of different levels are provided in about 23,000 health, recreation, accommodation and other facilities (global spa & wellness economy monitor, 2014, p. 7). most of these facilities are based on providing beauty treatments, and less on traditional spa services, as is the case today in europe. in fact, the demand for spa and wellness services is focused more on improving the exterior (obesity, beauty), and less on solving health problems and the preservation of health. this is illustrated by the fact that daily spas, resorts, hotels and medical spas in the usa (professional health care services botox injections, laser hair removal, etc.) generate about 95% of revenue, whereas in classic spas it amounts to only 5%. in the usa, about 80% of total spa capacities belong to day spas that offer a variety of massages, food therapies, aromatherapy, hydrotherapy and alike. (erfurt-cooper, cooper 2009). it follows that the "spa industry is a melting pot for a range of products and services that enhance health and well-being" (cohen, 2008, p. 5). therefore, practice has shown that the term "spa" can not be compared with the traditional concept of a "spa" since the mentioned spa centers are not necessarily related to thermal mineral water. for instance, within the spa center division just the medical spa and mineral spa use thermal mineral water. after all, in the republic of serbia, especially in larger cities, following global trends, numerous spa and wellness centers having nothing to do with the use of thermo-mineral water spa have been formed. ispa, international spa association was founded in 1991 as a worldwide federation of professional organizations of the spa industry, and as already noted, it defines a spa as a place dedicated to the promotion of the quality of life through a variety of professional services to support the renewal of mind, body and spirit. depending on the level, quality and types of therapy international spa association ispa distinguishes between several types of spas:  club spa the offer is based primarily on fitness and the daily use of spa services,  day spa the offer is based on the daily use of services, mostly beauty treatments of the face and body, massages, sauna, etc. wellness spa – a specific form of health tourism 75  destination spa – where there is a choice in creating healthy habits. this transformation is achieved with the help of professional spa services, fitness, educational programs, healthy food and special interests,  medical spa medical spas are a combination of a clinic and day spa centre and treatments are carried out under the supervision of professional staff. in these centers, apart from spa services, there is a choice of conventional and special treatments and services.  mineral springs spa spa centers that use mineral, thermal or seawater for the purpose of hydrotherapy treatments. this type of spa centres is the most typical for the european spa and wellness sector. the basis of this offer, besides the use of thermomineral waters, consists of various massages, sauna and other treatments.  resort/hotel spa spa centers within hotels and resorts, with fitness and wellness components under the supervision of professional experts. these centers are often located within luxury hotels that have large capacities and richer clientele (e.g. business people). also, their offer includes day spa services for the local population. these spa centers, apart from spa and wellness services, offer a wide range of other recreational and sports activities: golf, swimming, water sports, tennis, horseback riding, skiing and others. in addition to these types of spas, scientific literature also recognizes cruise ship spas (treatments on cruise ships, which include fitness and wellness components, as well as programs of proper and healthy diet), cosmetic spa (providing cosmetic treatments that are not too invasive), airport spa located on significant international airports and usually provide relaxing massages. from the previous division, it follows that spas can be defined as centres that promote wellness by providing therapeutic and professional services in order to renew the body, mind and spirit. as they are not related to thermo-mineral and other natural resources, the number of these spas is constantly increasing and rose from 72,000 in 2007 to 106,000 in 2013. observed by types, day spas with around 60,000 objects and resort/hotel spas with around 22,000 are the most numerous. in other words, these two types accounted for over 85% of the total number of spa centers in the world. there were around 6,500 spa centers related to thermal mineral water (mineral springs spas). observed by continents, spa centers are the most numerous in europe and asia where, in 2013, there was about 2/3 of the global spa centre supply. the largest number of spa centers in 2013 was located on the territory of the united states about 23,000, china around 9,500, followed by japan with 6,000, etc. in europe, the leaders in the number of spa centers are germany (5,500), france, great britain and others. the previous analysis shows that spa centres are becoming an increasingly important segment in the health tourism supply. according to the data for 2013, spa centers employed around two million people and generated a turnover of over $ 94 billion. 2. the modern concept of wellness the imposed pace of life caused by technological progress contributed to the occurrence of wellness as the concept that allows the satisfaction of certain human needs for rest and relaxation. wellness represents a higher level of awareness of one’s own health, whose primary role is that of maintaining the body and mind, physical and mental relaxation, fitness and preservation of inner peace. 76 v. šušić, d. dimitrijević wellness occurred as a product of the new age and needs of the modern man to rest in nature after hard and stressful work, through physical activity, healthy food in a healthy natural environment and favorable social environment. the term wellness was first used in 1961 by halbert dunn in his book "high level wellness" combining the abbreviations of two english words: wellbeing, which means good mood, and fitness, the ability for physical activity (to be fit). so, wellness appeared in order to satisfy certain human needs for active rest and relaxation imposed by the manner and pace of life in modern society. as the most significant segment in health tourism supply, wellness started developing in the 1990s in european countries, especially in those which had already had significant health spa offer, such as germany, italy, austria, switzerland, hungary and others. bearing in mind that traditional spas (spa and thermal/mineral springs) are destinations for treatment, rest and relaxation, they can also represent significant centres of wellness tourism and contribute to its development. on the other hand, wellness enables spas to reshape their image and become important destinations for wellness tourism (global spa summit, 2010). therefore, the concept of wellness is often equated or used in conjunction with spa treatments (spasojevic, susic 2011). the concept of wellness in scientific literature is interpreted in different ways. in europe, the beginnings of the wellness concept are linked to greek and roman culture, when some parts of the population (mostly men, athletes, soldiers, wealthy people, etc.) were interested in health, fitness and hygiene, as well as socializing, which resulted in the use of public baths and fitness temples. the wellness concept, as currently being discussed in scientific literature, aims to prevent disease through the promotion of health, education and encouragement. today, it is considered to be an adequate method for the prevention and preservation of health in the aging society (weiermair, steinhauser, 2003, p. 5). in addition, wellness encompasses a holistic approach to nutrition and aims at mental and spiritual harmony of man (erfurt-cooper, cooper, 2009). so, not only does it include exercise and movement, but wellness also fills the entire human life with a certain content that may assist in solving everyday problems (bartoluci, et al. 2007, p. 196). unlike western medicine, which focuses on disease and pathology, wellness is based on well-being and the absence of disease and weakness in man. basically, wellness can be equated with "health" which was defined as early as 1948 by the world health organization (who) as "a state of physical, mental and social well-being and not merely the absence of disease or infirmity." therefore, there are many definitions which explain the concept of wellness in a similar way, but most of them emphasize that it is a state of optimal well-being combined with energy, vitality, strength, stamina and fitness. according to hettler (1976) wellness is "an active process through which people become aware how to fight for successful existence. wellness is a state of complete wellbeing; a lifelong journey towards holistic health" (www.hettler.com). it is a continuous process that asks man to devote time to himself and his existence. so, wellness is an ongoing process of learning and cognition that allows one to build a lifestyle that leads to a more successful and longer life. the basic concept of wellness is based on the emphasis on positive and proactive approach to life that will increase and enhance all the dimensions of human existence. generally speaking, wellness means a healthy balance of mind and body, resulting in a general positive feeling and quality of life. therefore, we can say that wellness represents the opposition to disease, i.e. a positive component of good health (bartoluci, et al. 2007, p. 198). thus, the main objective of wellness is to improve the mental, physical and spiritual balance. but, wellness is also the ability to wellness spa – a specific form of health tourism 77 "find your desired balance between family, work and environment" (weiermair, steinhauser, 2003, p. 6). despite significant differences in the definition of the wellness concept, several common features can be distinguished:  wellness is multi-dimensional,  wellness is holistic,  wellness changes over time and along a continuum,  wellness is individual, but also influenced by the environment,  wellness is a self-responsibility (global spa summit, 2010, p. 2). from these characteristics it can be concluded that the concept of wellness can be expanded and that, in addition to physical, mental and social dimensions, it can also include sexual, emotional, cultural, spiritual, educational, professional, financial, environmental, ethical and existential dimensions. the holistic concept indicates that the normal functioning of wellness implies the presence of all those dimensions. it is interesting to note that the environment wellness is not of a personal nature, but involves the respect of nature and all the beings surrounding it. it also implies the awareness of the individual about the importance of the environment for the health and survival of the human species. each individual must be aware that clean water, clean air and other components of the environment are the necessary prerequisite for the health of mind and body. in developed countries of the world today wellness has become a lifestyle that includes various aspects of human well-being and happiness. in other words, wellness is a higher level of awareness of human needs, where the health of the individual is the wealth which one has yet to learn to deal with (bartoluci, et al. 2007, p. 199). therefore, the explanation of wellness comes down to maslow’s concept of "the hierarchy of needs." people whose primary needs ("deficient needs") are of psychological, financial and social character, such as food, drink, housing, social contacts, etc are turning to other values and motives of the so-called "needs to increase" social recognition and selfrealization (hrabovski-tomic, 2006, p. 20). today, it is primarily the case of individual values and motives, which both men and women consider to be extremely important. wellness is an interactive process, which involves the acceptance and implementation of healthy and proper choices in life, with the aim of creating a successful and balanced lifestyle. the basis of the philosophy of wellness consists of: process, acceptance, choice and success. the process means that in every moment of a man’s life there is an opportunity to improve the way of life and lifestyle. the acceptance implies that every man, naturally and continuously, seeks new information and more knowledge about the ways to improve one’s life. the choice means that there are several options before a man and one should choose the one that seems most advantageous. the success depends on the achievements in life. closely related to wellness is wellness tourism. in accordance with the general definition of tourism, wellness tourism is a collection of all relationships and phenomena resulting from the travel and stay of people in destinations that allow the preservation or improvement of their health. it includes their stay in specialized institutions that offer professional knowledge and individual care, as well as a service package which includes fitness, care, healthy food, relaxation/meditation and mental activities/education" (mueller & kaufmann 2001, p. 3). wellness tourism can be treated as a special form or niche market of health tourism. "wellness tourism is a collection of all relationships and phenomena arising from the 78 v. šušić, d. dimitrijević travel and stay of people whose main motive is to preserve and improve their health. they require a thorough package of services that includes professional knowledge, fitness, beauty care, healthy nutrition or a diet, relaxation or meditation, physical and mental activity and education" (mueller, kaufmann, 2001, p. 3). a few available studies suggest that those who practice this type of holiday seek not only a physical change of location but also the way to greater self-awareness and satisfaction. unlike traditional spa tourism, wellness tourism is related to clients in good health, who try to maintain their existing health status through a variety of treatments. according to some opinions, wellness is a more comprehensive and broader concept than the concept of spa. the concept of wellness, as already noted above, can be expanded so as to include sexual, emotional, cultural, spiritual, educational, professional, financial, environmental, ethical and existential dimensions in addition to physical, mental and social dimensions (cohen, 2008). while the spa can be based on only one of the elements of wellness (emotional, intellectual, physical, social, etc), the holistic concept of wellness can not function if one of these elements (dimensions) is missing. according to hettler, elements or dimensions of wellness and health function as a whole, like a wheel on a bicycle or a car. as with the bicycle, if all the wires or dimensions function at an optimal level, the wheel will roll easily, i.e. the man will live happily and harmoniously. on the other hand, if a wire or dimension is weak, there will be a balance disorder (www.hettler.com). the increased demand for wellness is especially pronounced at the beginning of the 21st century. the promotion of wellness centres, holistic resorts, spa centers, spiritual pilgrimage and alternative medical treatments is becoming more aggressive. according to many authors, the reason for that expansion in most cases is the result of the process of globalization, a social and economic crisis in developed countries, the breakdown of traditional religion and community fragmentation. in addition, the development of science and medicine has led to the better preserved body, physical health and fitness, whereas in the field of mental, emotional and psychological health satisfactory results have not been achieved. on the basis of numerous programmes and wellness content, a new form of tourist supply addressed to more affluent customers is being created in tourism. actually, wellness includes "travel with the intention of achieving balance and harmony of mental, emotional, physical and spiritual value of man" (health and wellness tourism, 2004, p. 9). "the broadest scope for the development of wellness is provided by health tourism supply, as it already possesses certain objects, facilities and professional staff for providing wellness services" (bartoluci et al. 2007, p. 199). however, in addition to spas and other natural healing resorts, wellness facilities can be developed by other tourist centers and facilities that are in the function of health, entertainment, relaxation and other similar activities. the largest number of wellness and spa programmes is based on the natural potential, considering the fact that the environment itself reduces stress and helps relax man. besides natural and attractive scenery (mountains, spas, rivers, seas, etc.), other facilities used for the development of wellness tourism are indoor and outdoor facilities for sports and recreational purposes, facilities for prophylactic services (massage, sauna, etc), facilities for medical care (diagnosis, therapy, etc) and so on. (spasojevic, susic, 2011). the organizational form of wellness in which classical medical methods are complemented by the principles of alternative medicine, wellness philosophy, eastern methods of treatment, as well as the use of natural medical resources, is called medical wellness in scientific literature. the basic requirement for providing medical wellness services is medical supervision. wellness spa – a specific form of health tourism 79 despite being a new product, wellness within health tourism generates by far the largest turnover. according to the data of the global wellness institute, 2014, the number of clients who used the services of wellness centers in 2013 was estimated at around 585 million. the total consumption in wellness amounted to 494 billion dollars. in national wellness tourism, there were around 490 million users of wellness services, or about 85% of the total wellness traffic around the world. the share of domestic in global wellness tourism was around 70%, which indicates that the consumption of foreign tourists is considerably higher. the highest participation in wellness traffic is of the so-called secondary tourists, the clients for whom wellness is not the main motivation for travel. it is estimated that the share of secondary wellness clients accounted for 87%, 84% in consumption (global wellness institute, 2013). of the total number of users in the world, europe accounted for over 35%, north america 30%, asia and the pacific about 25%. the number of employees in wellness tourism is estimated to be about 14.5 million. the total economic effects of wellness tourism (multiple effects) are estimated at $ 1.5 billion. conclusion today, different scientists claim that the accumulated stress is the number one disease of our time. a significant number of people, particularly the employed, suffer from physical, mental and emotional overload, which threatens to destroy their bodies. numerous studies have shown that people with chronic accumulated stress live shorter and suffer from anxiety and depression. therefore, it is now considered that escape is one of the main motives of tourist movement (goeldner, ritchie, 2006). „escape from an everyday personal or physical environment to one perceived to be likely to give to the traveller all the elements of life he or she feels are missing from those everyday experiences“ (erfurt-cooper, cooper, 2009, p. 6). the fulfillment of the desire for a healthy lifestyle is an essentially important motive for many tourist trips. the increasing need for rest and relaxation, and not only for treatment, have contributed to the transformation of classic spa tourism into the broader concept of health tourism, which, in addition to natural factors, includes other therapeutic methods in the treatment and prevention. there are many things that can be taken to prevent ill health caused by stress one of them is a visit to spa centers, spas, resorts and wellness centers. the tendency to enjoy a relaxing environment turned into a global movement with a significant difference compared to the traditional concept of health spas as a destination mainly for specialized rehabilitation. the new emphasis lies in preventing disease and maintaining good health rather than treatments with high expectations concerning the improvement of health, even if there are no health problems. therefore, there is a growing awareness of the usefulness of combining the classic spa with modern therapies such as wellness. by using modern treatments as well as traditional rehabilitation therapy, with a holistic approach to creating harmony in man, not only the needs of the body are met, but also those of the mind and soul, i.e. psychological needs. traditional spas (thermal/mineral springs spa) are becoming destinations that promote wellness by providing therapeutic and other professional services in order to renew the body, mind and spirit. for these reasons, traditional spas within wellness centers, apart from health treatments, include cosmetic treatments, sports, fitness, relaxation, aromatherapy, reflexology, etc in their offer. many traditional spas are already firmly grounded within the 80 v. šušić, d. dimitrijević growing wellness industry. the tradition of spas as places for healing, rejuvenation, relaxation and well-being, makes spa centers based on the use of the water from mineral springs increasingly important wellness destinations. on the other hand, traditional spas are trying to distinguish themselves from spa wellness centers and retain the characteristics of exclusivity in various ways, such as medical staff, traditional therapy treatment, certification of buildings, etc. modern spa and wellness centers do not promote a healthy lifestyle and health preservation for the tourist clientele only, but also for the local population. spa and wellness centers today offer everything a modern man needs: treatments for the face, body and soul, or therapies that aim to relax and enjoy. the programmes in these centers, in addition to classical balneotherapy, include: aromatherapy massage, traditional chinese, indian, thai and other massages, hot and cold volcanic stones, acupuncture, various electro therapies, physiotherapy, diets, cosmetic surgery, as well as more complex medical procedures. wellness, as already pointed out, is the concept of preserving and improving health that encompasses all the areas of healthy movement, physical exercise, a balanced diet, relaxation and overcoming stress in order to achieve the feeling of satisfaction. it is a journey with the basic motive to achieve balance and harmony of mental, emotional, physical and spiritual values of man. unlike western medicine, which focuses on disease and pathology, wellness is based on well-being and the absence of disease and weakness in man. in fact, modern spa wellness offers not only their own treatments, but also combines spas and spa therapy, thus offering a specific product that will improve both physical and mental state of man. „spas and wellness resorts may therefore be conceptualised in cultural/sociological terms as modern day temples where people can experience rituals, learn to deepen their personal wellness practices, raise their consciousness, become open to enhanced ways of being and deepen their experience of being alive“ (cohen, 2008, p. 8). wellness nowadays focuses on people who are genuinely interested in health, healthy lifestyle, and its improvement and preservation. but wellness is also the possibility to combine recreation, fun and adventure with the medical protection for the purpose of restoring their life energy. thus, wellness aims to improve the physical, mental and general health status of the individual, so it can be identified with health tourism. the increase in the number of old population and the high cost of health services in developed countries, as well as the growing need to use travel to improve one’s psychological condition, restore and preserve the life energy, but also radically improve their health are all the factors that have influenced the development of spa, health and wellness tourism in the new, mostly unknown tourism markets (southeast asia, south asia, south america, etc). that is why today the tourist market of medical tourism promotes package holidays where, in addition to medical treatment, various forms of recreation, relaxation and entertainment, more complex medical examinations and procedures are on offer. references 1. global spa & wellness economy monitor ,(2014), global wellness institute. 2. global spa summit, spas and the global wellness market: synergies and opportunities, prepared by sri international, may 2010. www.globalspasummit.org. (5. 01. 2015) 3. danna,k., griffin, r., w. (1999), health and well-being in the workplace: a review and synthesis of the literature, journal of management, vol. 25, no. 3, 357–384 4. hall, c. m. (2011), health and medical tourism: kill or cure for global public health?, tourism review, 66, tourism studies and global health.de tuorism. 1-6. http://www.globalspasummit.org/ wellness spa – a specific form of health tourism 81 5. spasojević, m & šušić, v. (2010), modern medical tourism as a market niche of health tourism, facta universitates, economics and organization, vol.7, n° 2, niš, university of niš. 201-208. 6. spasojević, m. & šušić, v. (2011), savremene tendencije u razvoju zdravstvenog turizma u svetu i srbiji, teme, g. xxxv, br. 1, niš, univerzitet u nišu, 149-162. 7. erfurt-cooper, p. (2010), the importance of natural geothermal resources in tourism, proceedings world geothermal congress 2010,bali, indonesia, 1-10. 8. cohen, m. (2008), “spas, wellness and human evolution”, in cohen, m. & bodeker, g.(eds.). understanding the global spa industry, london, butterworth-heinemann, 3-25. 9. corbin, c.b. pangrazi, r. p., toward a uniform definition of wellness: a commentary, president’s council on physical fitness and sports, researchdigest, serie 3, no 15. 10. mueller, h., kaufmann, e. (2001), wellness tourism: market analysis of a special health tourisam segment and implications for the hotel industry, journal of vacation markenting, volume 7 no 1. 1-13. 11. ross, k. (2001), health tourism: an overview (hsmai marketing review) http://www.hospitalitynet. org/news/4010521.html. (20. 01. 2015). 12. stanković, s. (2009), banje srbije, zavod za udžbenike, beograd. 13. bartoluci, m., ĉavlek, n. (2007), turizam i sport – razvojni aspekti, zagreb: školska knjiga. 14. joviĉić, d. (2008), uvod u turizmologiju i turistiĉku geografiju, beograd,ton plus. 15. erfurt-cooper, p & cooper, m. (2009), health and wellness spa tourism, spa and hot springs, chennel view publications, bristol, buffalo, toronto. 16. hrabovski-tomić, e 2006, destinacije zdravstvenog turizma (sa osvrtom na banje vojvodine), novi sad, prometej. 17. hettler, b. (1976), origins of the 6 dimensional model of wellness created in 1976 by bill hettler,,www. hettler.com (21.01. 2015) 18. goeldner, c. r., ritchie, r b (2006), tourism, john wile & sons, inc. 19. international spa association – ispa, types of spas, www.experienceispa.com/spa.. ./spa.../types-ofsp... (20. 01. 2015) 20. henderson, j., c. (2004), healthcare tourism in southeast asia, tourism review international, 7 (3-4), 111-121. 21. cook, p., s. (2008) what is health and medical tourism? in: the annual conference of the australian sociological association, the university of melbourne, victoria, qut digital repository: http://eprints. qut.edu.au/. 22. health and wellness tourism global, (2004), travel & tourism analyst, london. 23. godbey, g., (2009), outdoor recreation, health, and wellness:understanding and enhancing the relationship, washington, re sourc es for the future ba ckground study. 24. weiermair, k, steinhauser, k. (2003), new tourism clusters in the field of sports and health; the case of alpine wellness, 12th international tourism and leisure symposiumbarcelona, 1-16. welnes spa – specifičan oblik zdravstvenog turizma zdravstveni turizam podrazumeva privremenu promenu mesta stalnog boravka radi zdravstvene preventive, rehabilitacije, korišćenja različitih vrsta kozmetičkih usluga, kao i najsloženijih medicinskih zahavata. prema nivou zdravstvenih usluga, u okviru zdravstvenog turizma, kao posebni vidovi izdvajaju se medicinski, trdicionalni banjski turizam (thermal/mineral springs turizam), spa i wellness turizam. tradicionalni banjski turizam sve više se prepliće sa drugim vidovima zdravstvenog turizma, posebno sa wellnessom. savremene banje, kroz pružanje terapijskih i drugih stručnih usluga, sve više promovišu wellness, tako da se danas spa industrija smatra sektorom wellnessa. wellness je jedan od novih trendova, ne samo u zdravstvenom turizmu, već i u savremenom turizmu. definiše se kao stanje potpunog fizičkog, mentalnog i socijalnog blagostanja i uključuje stavove i aktivnosti koje sprečavaju bolest, poboljšavaju zdravlje i kvalitet življenja i dovode do fizičke i psihičke ravnoteže čoveka. kljuĉne reĉi: zdravlje, zdravstveni turizam, spa, wellness, lečilišna i rekreativna funkcija. http://www.hospitalitynet.org/news/4010521.html http://www.hospitalitynet.org/news/4010521.html http://www.experienceispa.com/spa plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, n o 1, 2015, pp. 1 14 the imperative of improving the financial regulatory framework under crisis conditions a contradictio in adjecto of the neoliberal paradigm  udc 338.124.4: 329.12 borko krstić, mirjana jemović faculty of economics, university of niš, serbia abstract. the global financial crisis has caused massive interventions by monetary and fiscal authorities, such as the rehabilitation of failed banks, insurance companies and other financial institutions and insertion of huge amounts of money into the financial system, with a view to their rescuing and preventing further spread of the crisis. such an environment has challenged the basic postulates underlying neoliberalism as the ruling economic doctrine of the 1980s. in this regard, the question is whether the imperative requirements for improving the financial regulatory framework have caused a substantial relativization of the hitherto dominant neoliberal paradigm. key words: neoliberalism, global financial crisis, financial regulatory framework. introduction the global financial and economic crisis has highlighted the need for a systemic approach to regulation and supervision of the financial sector, taking into consideration that the costs of the financial crisis are very high and that price stability is not sufficient for achieving financial stability, as well. in such conditions, it became necessary to revise the basic postulates of neoliberalism as the prevailing paradigm. starting from the basic postulates of neoliberal paradigm, the analysis was performed in this paper to determine whether the imperative demands for financial regulatory framework improvement caused a substantial relativization of the hitherto dominant neoliberal paradigm. has the time come for the promotion of a complex economic theory that would result from connecting separate parts of different economic theories, manifested in the historical development, which would allow the emergence of synergetic effects of the complexity economics? the paper is not intended to fully outline the complex economic theory, but its aim is to  received march 16, 2015 / accepted april 10, 2015 corresponding author: borko krstić faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: mirjana.jemovic@eknfak.ni.ac.rs 2 b. krstić, m. jemović analyze the financial regulatory framework in order to indicate possible directions of research. the basic postulates of this theory would be: 1) appreciation of global trends, but also of the specific problems of individual national economies; 2) every economic theory and economic policy should ensure the economic growth and stability at the same time. 1. neoliberal paradigm as a ruling economic doctrine the neoliberal paradigm, based on the neoclassical economic theory, was created after world war ii, and since the end of the seventies of the 20th century, precisely when margaret thatcher came to power in the uk and ronald reagan in the us, it has become the ruling economic doctrine. created in response to a major crisis of keynesian economics, this paradigm is based on the theory of free trade and free market and opposes state intervention in the economy, protectionism, high tax rates and the like. the realization of the ideas of neoliberalism began after 1989, when john williamson introduced a package of neoliberal economic recommendations called "washington consensus". it is the following list of suggestions: 1) fiscal policy discipline; 2) redirection of public spending from subsidies to industries towards policies for economic growth and support of the poor population; 3) tax reform in the direction of lowering taxes; 4) financial liberalization; 5) competitive exchange rates; 6) liberalization of the trade regime towards lifting or lowering taxes and duties on imports; 7) openness to foreign direct investment; 8) privatization; 9) deregulation and 10) protection of property rights (rodrik 2008, p. 143). the implementation of these proposals in developing countries was conducted with the support of the group of developed countries, along with the mediation of international financial institutions, the international monetary fund (imf), world bank (wb) and the world trade organization (wto). while the imf and the wb stipulated lending to developing countries by the acceptance of neoliberal policy, the wto was bringing trade rules especially in those areas in which the developed countries had better predispositions of growth (vrzić, 2008). hereby, the neoliberal reforms were being implemented in a very discriminatory manner, in conformity with the principle of "one rule for the wealthy and powerful countries, the other for the poor and weak countries". inclination towards the rich and powerful countries is not surprising, given that the structure of decision-making in the imf and the wb is determined according to the share that a particular country has in the capital of the fund, on the principle of "one dollar, one vote". in addition, the voting system in the world trade organization, although organized on the principle of one country one vote, was in practice inclined exclusively to the interests of a small number of rich countries. while the developed countries were, through the aforementioned international institutions, promoting neoliberal paradigm in developing countries in order to further amass their own wealth, they at the same time relied precisely on the interventionist policy in their development policies. hereby the awareness has spread that "the developed have never done what they advise the underdeveloped", and the recent crisis event has once again confirmed this statement. the global financial crisis that marked the first decade of the 21st century has triggered a massive intervention by monetary and fiscal authorities in most developed economies, thus challenging many postulates of the neoliberal paradigm. namely, the criticism of neoliberalism, although actualized with the new crisis event, stems just from the elements that formed its basis. stabilization, privatization and liberalization facilitated market the imperative of improving the financial regulatory framework under crisis conditions 3 manipulation and speculation, contributed to the development of some countries to the detriment of others, and finally led to growing inequality in the society. this has created a system in which "an ever smaller number of individuals disposes of ever higher national income". faced with the fact that every country that relied on the neoliberal paradigm in its development generated lower economic growth rates compared to those that were achieved in the era of keynesianism, the leaders of 20 most powerful countries (g20) met in seoul for the enactment of new rules that will reject neoliberal conception, propagated by the washington consensus (kovačević, 2012, p. 42). the adoption of the seoul consensus made a shift from market to state intervention. in order to ensure a dynamic, stable and sustainable growth, the action plan was adopted which identifies six basic principles 1 and eight key areas 2 , where each country needs to shape its development policy in accordance with its own national characteristics (dušanić, 2011). the severity of the financial crisis highlighted the need for a systemic approach to regulation and supervision of the financial sector, bearing in mind that the sector of financial services has a far greater impact on economic activity than it was previously thought. in order to increase the stability of the financial system, and hence the economic system as a whole, a new "re-regulation" trend was recognized. the expression "reregulation" emphasizes that the current system of financial regulation is based on the expost concept, i.e. that it has insufficient preventive capacity. in this sense, it is rather informative, as it explains what has already happened. significant costs of the financial crisis conditioned that special emphasis is put in the work on the basic components of the regulatory framework to preserve the stability of the financial system, which exhibited different characteristics in specific anti-crisis strategies. 2. regulatory framework with a view to financial system stability the regulatory role of the state and its institutions in the financial market is needed to the extent to which it contributes to the smooth functioning and development of financial markets. banks as specific financial institutions are subject to a special regulatory regime that is intended to preserve the solvency of banks, to protect depositors in a situation where the bank is not in a position to meet its obligations, and to prevent the possibility of a systemic risk occurrence (bhattacharya et al., 1998). due to the increasing number of european financial institutions operating abroad as well, financial regulation has come into prominence as a useful instrument of market integration (mašić, 2009). since banks are the institutions through which numerous mutually conflicting interests are refracted, regulation of the banking sector contributes to the increase of clients' confidence in the bank; control of cash flows and fair distribution of financial resources are achieved in order to accomplish broader national economic objectives, such as a higher employment rate and a lower rate of inflation; the risk of bank investments is 1 more specifically, these are the following principles: 1) focusing on economic growth; 2) global partnership in the field of development; 3) focus on issues of systemic character; 4) participation of the private sector; 5) complementarities, and 6) focus on concrete results. 2 as the key areas in which reforms are most needed, the following were singled out: 1) infrastructure; 2) private investment and job creation; 3) development of human resources; 4) trade; 5) availability of financial services (financial inclusion); 6) economic growth along with ensuring stability; 7) food safety; 8) mobilization of domestic resources, and 9) knowledge exchange. 4 b. krstić, m. jemović limited, and ultimately the probability of bank bankruptcy is reduced (bašić, 2012, p. 190). past experience has shown that the state, through a series of its measures, plays a key role in defusing the banking crises and preventing the spread of their adverse effects on the rest of the economy. the swedish model of crisis management in the 90s of the 20th century, through the establishment of public institutions to support banks (bank support authority, crisis management authority) and massive government intervention, confirmed the importance of the role of state in easing the banking crisis. the global financial crisis that marked the beginning of the 21st century has also caused massive government interventions and the establishment of public institution for supporting banks and other financial institutions. thus assumed, banking regulation is indisputably directed towards a safer and more stable banking business. however, as banks are primarily institutions that are guided by the maximization of profit, they have often been forced throughout history to introduce numerous financial innovations, in order to "bypass" current regulations 3 . this practice of banks was identified as a form of "informal" deregulation (krstić, 2003, p. 167). however, as the emergence of new financial instruments requires the creation of a new or modification of the existing regulatory framework, it launches a vicious circle in which regulation encourages search for ways to circumvent it through the introduction of new financial instruments. in such an environment of continuous alternating between regulation and deregulation, it is necessary to ensure effective financial intermediation which will have economic growth as its purpose. this requires the creation of an appropriate regulatory framework that will not sacrifice the economic growth to ensure financial stability and prevent the outbreak of crisis. excessive regulation and the pursuit of international harmonization of banking regulations may lead to unification of banking activities, thereby suppressing the initiative and creativity of banks and endangering their competitive capacity (bašić, 2012, p. 194). in addition, the mere application of new standards and regulations and their harmonization create numerous costs and require an overall adjustment, and in that sense regulation remains justified as long as its benefits (establishing financial stability) outweigh the costs it creates. the stability of the financial system implies its resistance which must be designed in advance. in this regard, concern for financial stability requires the design of an appropriate regulatory framework that includes a variety of institutions, rules and procedures (marinković, 2004). accompanying the life cycle of financial institutions as its unavoidable components, the following were singled out: banking license policy, i.e. the rules of bank entry into the system, the function of lender of last resort, deposit insurance, rules and procedures governing intervention in the banking sector and the rules of bank exit from the system. 2.1. banking license policy banking license policy defines the rules of bank entry into the system, i.e. the requirements for obtaining a license, namely: minimum cash capital required for starting a bank, credit worthiness of the founder, the procedure of establishing a bank, the scope of the banking license, i.e. permitted types of transactions, and other issues related to the policy of bank establishment. 3 well-known examples are the introductions of financial innovations associated with the regulation q in the us (money market funds, transferable deposit certificates, now arrangements, etc.) and with the process of securitization that took place intensively both in the us and in europe. the imperative of improving the financial regulatory framework under crisis conditions 5 as banks are the key financial institutions in most of the financial systems, the control of their operations is extremely important. in the process of business internationalization of financial institutions, the need emerged for an international harmonization of banking regulations. the highest degree of harmonization of banking regulations has been achieved in the field of solvency regulation, as the majority of banking systems apply a unique framework devised within the basel committee on banking supervision 4 (marinković, 2008, p. 238). the reduction of the capital base of a large number of banks around the world during the seventies and eighties of the 20th century resulted in the adoption of the first international agreement on bank capital (basel capital accord), known as basel i. it introduced a unique way for calculating capital adequacy ratio, expressed as the ratio between the capital and the credit risk weighted assets of a bank. although these regulations were legally non-binding, they were initially accepted by over 100 countries around the world, indicating a positive attitude of the countries towards such standards. despite the indisputable benefits that are reflected in the increase in the capital adequacy of internationally active banks, the strengthening of competitiveness of banks at the international level and the increased discipline in the process of capital management, specific shortcomings of basel i standards were manifested after a certain period of time. namely, the emphasis was placed only on credit risk, while other risks (e.g. market and operational risks) were ignored; in the credit risk assessment, no difference was made between debtors of different ratings; balance sheet items were evaluated at book rather than market value; and there was no adequate valorization of both modern financial instruments and risk mitigation techniques. due to the poor adaptability of basel i standards to changes and innovations in the financial market, the committee issued a revised framework in june 2004, and its comprehensive version followed after two years in the form of basel ii standards as a new approach to capital management. it is based on three pillars, namely: a) the definition of minimum capital requirements for credit, market and operational risk (pillar 1); b) the introduction of internal capital adequacy assessment (pillar 2); and c) strengthening market discipline by introducing minimum requirements related to the disclosure of information on banks (pillar 3). after the outbreak of the global financial crisis, weaknesses of the financial systems were identified and changes were initiated in the field of capital regulation, in terms of tightening regulatory requirements, particularly in the part that relates to the regulatory capital (the numerator of the indicator). in addition, minimum standards relating to the required liquidity were introduced for the first time, as well. the above changes were published within the standards of basel iii in june 2011 (basel committee on banking supervision, 2011). the countries represented in the basel committee have started with the implementation of new standards from january 1, 2013 (matić, 2011). regulatory standards for capital adequacy and liquidity of banks, alongside with their positive impact on financial stability, also have their negative effects which are reflected in the reduction of banks' profitability. in fact, by increasing their capital ratios, many banks reduce crediting and other placements, which are usually the main streams for forming the bank profits. for these reasons, the regulatory authorities have to be careful 4 basel committee for banking supervision (bcbs) was established by the group of ten (g10) countries in the late 1974, hosted by the bank for international settlements. 6 b. krstić, m. jemović when passing new regulations, in order to establish a proper balance between stability and profitability of the banking sector. the very essence of the neo-liberal paradigm gives rise to the imperative of freedom of capital movements, full privatization and exclusion of the state from both the real and the financial sectors. as a result, transition and post-transition economies have relatively stable and developed financial systems, but at the same time, the same economies have insufficient or negative rates of economic growth and high unemployment rates. in particular, in the serbian banking system, 21 of 29 operating banks are with foreign capital, whose share in the equity and total assets of the banking sector of serbia is dominant and, according to the data for the iii quarter of 2014, amounts to 60% (national bank of serbia, 2014). the assertion is well known that "the type of ownership has no significance", be it domestic or foreign, but the practice has shown that, when it comes to a crisis, foreign owners of domestic banks give priority to solving problems of their home countries. furthermore, a short-term orientation of such banks and their lack of interest in the economic development and balanced regional development of the states in which they operate, as well as a reduction in lending activity are also known facts. in this sense, after the escalation of the global financial crisis in the second half of 2008, the question arose whether the banks from western europe that have subsidiaries in the emerging markets in central, eastern and southeastern europe (regions) would abandon these markets. the problem lies in the fact that these banks are systemically important in these markets, so their departure would deepen the already existing systemic crisis. for this reason, on a proposal from the european bank for reconstruction and development, the key international financial institutions established in january 2009 an international framework for coordination and cooperation in crisis management the vienna initiative. since it was founded, the vienna initiative has been adapting to new risks and circumstances in the financial sector in the region, setting as its primary objective the preservation of stability of the financial sector in the markets of eastern europe, or the stimulation of cross-border banking groups to maintain their exposure in these markets, while ensuring an adequate level of solvency and liquidity of their subsidiaries. in addition, the problem of implementing an effective monetary policy was also noticed, being that national central banks have to optimize the interests of the domestic financial sector and the financial sector of the countries of bank capital origin in its designing. for the above reasons, it would be opportune that the regulatory framework sets a time limit on the participation of foreign capital in local banks to below 50% (in terms of the number of banks), for example, in a defined number of transition years (5-10 years). 2.2. lender of last resort function the function of lender of last resort represents an inevitable component of the infrastructure of financial system safety, although unlike other components it does not contain elements of obligation (marinković, 2004). the lender of last resort function stands for a system of bank liquidity control and a system for support to banks with endangered liquidity, which are typically organized by the central monetary institution. the position of the central bank as the "bank of banks" entails its specific responsibility towards the members of the banking system (krstić, 2003). the precondition for its intervention is by rule a systemic illiquidity of the banking sector and not problems of individual banks. the imperative of improving the financial regulatory framework under crisis conditions 7 the global financial crisis and concerns about the liquidity of not only banks but also the entire financial system have contributed to the re-activation of the central bank's function as a lender of last resort. this form of liquidity support should be arranged in the form of short-term loans to illiquid but solvent banks that have reliable collateral and are ready to pay a penal interest rate. however, as it is necessary to act quickly in the atmosphere of crisis, and since it is very difficult then to assess the nature of the problem with which the bank is faced, this kind of support is being arranged mainly under preferential conditions (frexias, et al., 2003; krstić and jemović, 2009). 2.3. deposit insurance deposit insurance is an essential institutional component of banking and overall financial system, given that it preserves the confidence of depositors and prevents the run on banks in the conditions of their insolvency. namely, deposits, and above all demand deposits, are an important component of the financial potential of banks. being that, from the standpoint of the bank, these are extremely unstable sources of funding and therefore treated as risky liabilities, the need emerged for their special treatment in the form of protection of deposits. thus, through the deposit protection, the banking system is indirectly protected as well. since banks are the financial institutions with an exclusive license to perform depositlending operations, their membership in the deposit insurance system is mandatory. as such, they are obliged to insure deposits of their clients and pay the insurance premium as required by the law on deposit insurance. on this basis, a system of deposit insurance guarantees depositors the payment of deposited funds up to the insured amount if their deposit bank fails. when the net claim of the depositor is higher than the insured amount, the difference is compensated in the bankruptcy or liquidation proceedings. the operationalization of the deposit insurance system requires solving a number of questions: what scope of protection should be provided, what should be the deadline for the payout of deposits, what should be the structure of financing deposit schemes, what should be the responsibility of the institution that provides deposit insurance (a place just for the disbursement or also for the treatment of insolvent institutions), etc. (ćirović, 2007, p. 425). deposit insurance as a component of the system for preserving the financial system stability is especially gaining importance in the conditions of frequent banking crises. in fact, guaranteeing payment of deposits to the depositors up to the level of the insured amount, deposit insurance prevents a "run" on the bank, and at the same time increases competitiveness in the banking sector, providing the possibility for small and newly established banks to operate under the same conditions as larger and already existing banks. deposit insurance covers the category of small depositors, because it starts from the assumption that small depositors are insufficiently informed about the current state of affairs in the bank. this is not the case with large depositors who will be the first to withdraw their deposits in case of disruptions in the operations of the bank, owing to inside information. in this sense, the deposit insurance system is reasonably directed to small depositors. however, the global financial crisis required a timely response in the sphere of deposit insurance, too. specifically, as the previous insurance threshold proved insufficient, changes were made in the deposit insurance system in the direction of increasing the insured amount (from 50,000 to 100,000), including some other categories of depositors in the system of protection, as well as shortening the time limit for the payout of deposits to only one week. 8 b. krstić, m. jemović 2.4. the rules governing intervention in the banking sector and bank exit from the system the rules for bank exit from the system and procedures governing intervention in the banking sector are inevitable components of the financial regulatory framework at the end of the life cycle of financial institutions. specifically, as the degree of solvency is also used as the main criterion for the license revocation, i.e. the bank exit from the system (marinković, 2008, p. 239), in a situation where the solvency of the bank is significantly undermined it will be assessed whether a more favorable alternative would be to revoke the license of a particular institution or to apply one of the measures of the banking sector restructuring aimed at further existence of such institution. the rules and procedures governing the intervention in the banking sector represent special regulations in the majority of legal systems, due to specificities of those institutions in relation to non-financial firms. being that the insolvency of banks and other financial institutions poses a serious threat to financial stability, bankruptcy procedures must be implemented as soon as possible. a credit institution may be terminated in a regular procedure, or the competent authority may decide on a forced liquidation if it concludes that the situation can not be improved and there are no grounds for bankruptcy. if the liquidator finds later that a reason for bankruptcy has appeared, it shall terminate the compulsory liquidation and declare bankruptcy. financing of interventions in the banking sector is an important item which, in the absence of a special fund for this purpose, as well as with the insufficient amount of the assets of owners and creditors, is ultimately being funded by taxpayers. the current crisis has confirmed this, which is why it is proposed to establish a special fund that will administer the intervention in the banking sector. 3. comparative analysis of the regulatory framework role in most significant anti-crisis strategies negation of the neoliberal paradigm essence since the beginning of the financial crisis, central banks of leading developed countries have taken a number of measures to mitigate the adverse effects of the crisis and curb the tension that prevailed in the money market. this resulted in a significant increase in total assets of the central banks, with the largest increase recorded in countries that were most affected by the crisis, that is, in the united kingdom and the united states. a significant increase in the total assets of leading central banks was also accompanied by substantial changes in the structure of the balance sheets of leading central banks, due to the implementation of many new instruments (non-standard policy measures) for combating the consequences of the crisis (carpenter et al., 2013). non-standard measures in support of liquidity can be divided into two groups: the first, directed towards the banks, and the second, directed towards key market segments. although many of the instruments were abolished, due to the improvement of the functioning of financial markets in late 2009 and early 2010, in the following text we will briefly present the arrangements applied hitherto by the us central bank (fed) and the european central bank (ecb). the imperative of improving the financial regulatory framework under crisis conditions 9 in its anti-crisis strategy, the fed applied different arrangements in the situations when liquidity of financial institutions or liquidity of financial assets were threatened, given the fact that the very concept of liquidity has two dimensions 5 . after the appearance of financial institutions with vulnerable liquidity in the interbank market in august 2007, within the measures for supporting liquidity of financial institutions, the fed modified the existing and introduced new instruments closely related to its traditional role as a guarantor of liquidity of depository institutions. the maturity of this loan agreement was extended, while the borrowing costs were reduced. however, as the borrowing from the discount window exposed deposit institutions to considerable reputational risk, they opted to borrow in the interbank market rather than to use the easy terms of the discount window. for these reasons, only a few months after that, precisely in december 2007, the fed introduced a completely new instrument, term auction facility (taf), which rendered support to liquidity through an auction mechanism. it predetermined the amount of funds that can be borrowed, as well as the maturity of the arrangement (initially 30, and later 90 days). a broader list of asset forms that meet the prescribed criteria was used as credit protection. despite its temporary nature, taf has proved to be quite a successful instrument, as demonstrated by the data on a large number of participants in the auction and on the total auction value. three months after the introduction of taf arrangement, in order to enable access to the discount window to a wider range of institutions, the fed introduced two groups of measures: (a) term securities lending facility (tslf) which is based on replacing less liquid bonds that are kept by primary dealers in their portfolio for more liquid bonds of the ministry of finance, and (b) the primary dealer credit facility (pdcf), providing the possibility to all financial institutions (banking and non-banking) acting as primary dealers to borrow from the fed's discount window against a wider range of collateral. hereby, for the first time in history, the fed expanded its direct lending to investment banks which are beyond its control (for example, bear stearns). in the context of measures for supporting liquidity of the key market segments, in late 2008 the fed encountered a significant systemic risk, due to the growing instability in the commercial paper market. on that occasion, the fed provided additional usd 540 billion to purchase commercial paper issued by companies. this was the first time since the great depression that the fed indirectly credited activities of the private non-financial sector. for these purposes, the fed introduced easy payment terms when buying highranking commercial paper (commercial paper funding facility, cpff); money market mutual funds (asset backed commercial paper money market mutual funds liquidity facility, amlf); as well as securities backed by student loans, auto loans, credit cards (asset-backed securities, abs). like the fed, the ecb started relaxing its monetary policy after the first signs of the crisis. the worsening of the crisis and increasingly serious consequences that it brings along have conditioned a coordinated and immediate response of the central banks of most developed countries. the ecb and the central banks of sweden, the united kingdom and switzerland have lowered their reference interest rates and turned to the 5 liquidity may refer to the institution, when we talk about the liquidity of the fund i.e. institution (funding liquidity), or to the assets, when we talk about the liquidity of the market, i.e. assets (market liquidity). in analogy to the generally accepted view that the assets are liquid if they can be converted into a legal instrument of final payment with economically acceptable costs and in economically reasonable period of time, the institution will be liquid if it has more of such assets compared to liabilities. 10 b. krstić, m. jemović relaxation of monetary policy (kilibarda, et al., 2011). in such conditions, lacks of capital and trust have made loans less available and more expensive. the resulting situation required the implementation of more drastic measures, which would help improve the system liquidity and restore the shaken confidence and prevent, to the extent possible, the continuation of the financial crisis and its spillover to the real sector. it was decided to allocate a sum of 1.700 billion euros for this purpose. the measures have referred to: capital injections in order to increase the liquidity and solvency of financial institutions, guarantees for interbank loans and guarantees on private savings of up to 50,000 euros per year. the high flexibility of the european union monetary system, despite the lack of a centralized fiscal authority, enabled the european central bank, with minor changes in its system of work, to maintain liquidity of both individual financial institutions and asset markets in the first year of the crisis. after the bankruptcy of lehman brothers in september 2008, there were significant disturbances in the eurosystem's money market, which imposed the need for a radical change of the existing system and the introduction of non-standard measures to support liquidity. for the purpose of more efficient support to the liquidity of commercial banks, the ecb switched in mid-october to the so-called fixed rate tender procedures with full allotment, according to which the interested institutions could borrow desired amounts with the payment of fixed interest rate determined in advance by the ecb. as a complementary measure the ecb introduced the possibility of a long-term loan secured by different types of assets as collateral. significant liquidity is also provided by the conclusion of currency swap contracts, most often with the fed, as well as by the purchase of private bonds as the primary sources of bank financing. with the first signs of improving the conditions in the financial market, it was decided to start with the gradual abolition of longterm refinancing operations and currency swaps, and to further perform tender procedure for the three-month long-term financing operations at variable rates. previous arguments clearly show that, after the outbreak of the crisis, the fed and the ecb appeared with a rather aggressive anti-crisis policy. a significant drop in reference interest rates alleviated the terms of conducting monetary policy, while the introduction of non-standard instruments provided necessary liquidity both to individual institutions and key market segments. anti-crisis policy of the ecb revealed, however, certain specific characteristics in relation to the anti-crisis policy of the fed, due to its focusing exclusively on the banking sector liquidity support (ponce, 2010). although different in their application, both anti-crisis strategies were aimed at improving the financial regulatory framework. given that the current crisis scenario extorted increased state intervention, the question arises whether the imperative improvement of the financial regulatory framework challenges the basic postulates of neo-liberal paradigm, and whether the solution should be sought in a convergence or in a synthesis of past and current paradigms. 4. is the solution in the synthesis and synergy of past and current paradigms? the current financial crisis has denied the principle of laissez-faire based on market self-regulation, and re-actualized the need for government intervention. specifically, with the deregulation of financial regulations, banking institutions as key financial intermediaries entered the competition with a heterogeneous group of non-bank financial institutions. a wave of disintermediation, i.e. reduced participation of banks in financial intermediation the imperative of improving the financial regulatory framework under crisis conditions 11 in the 1980s, imposed the need to introduce a range of financial innovations, which should enable them to maintain their market position. in such circumstances, banks introduced the securitization of mortgage loans, having entered high-risk operations with financial derivatives. a high level of financial leverage, in the absence of adequate control of all participants in the securitization mechanism, led to huge losses in balance sheets of banks. in such an environment, government intervention is absolutely necessary, given that the market mechanism has proved to be inadequate as a coordination mechanism. in the book by n. serra and j. stiglitz, entitled "the washington consensus reconsidered", it is emphasized that, in the conditions of growing integration in the areas of it, production and civilization in the 21st century, distrust of state interventionism is impermissible (drašković, 2009, p. 139). the point here is primarily the need to regulate the financial services sector, whose volume of transactions increased several times and exceeded the volume of transactions in the real sphere. however, although state intervention in the financial services sector is utterly indispensable indeed, the question is what the optimal level of intervention would be. one of the misconceptions of the financial crisis is that it is the consequence of inadequate regulation. it should be borne in mind that the concept of financial globalization is based on the model of crisis management. the most important segment of crisis management is the regulation at the international level, in order to alleviate the negative effects arising from different degrees of financial deregulation at individual national levels. but, deregulation effects are so large that they are getting out of control of both national and international regulators. namely, economic and financial, as well as political power of global players has increased, and they do not allow any restriction of their activities. therefore, the expectations from a tightening of regulation are unrealistic, because the changes have a posteriori and cosmetic character, thus ensuring the status quo for global players. moreover, the regulatory changes are formal and of extremely quantitative range. the inability to exert a prospective effect on increasingly complex and risky operations of banks is compensated by stipulating large number of complicated procedures. it is interesting to mention the fact that the glass-steagall act (gs act) of 1933 had only 37 pages, which did not prevent it to provide financial stability all the way to the end of the twentieth century. in contrast to this, the dodd-frank wall street reform and consumer protection act of 2010 has 8,500 pages and over 20,000 additional pages of supporting documents, specifying the members of this act. there is no universal recipe for interference of the state in the financial services sector, but it must be adapted to the specifics of a particular national economy, as well as its internal and external environments. however, the fact that excessive regulation hinders functioning of the market, while on the other hand deregulation contributes in causing the financial system to be prone to crisis incidents, seems to lead to the synthesis and synergy of past and current paradigms. has the time come for the promotion of a complex economic theory that would be the result of mixing individual parts of different economic theories, manifested in the historical development, which would allow the emergence of synergetic effects of the complex economic theory? in this sense, an efficient market with sufficient and adequate regulation is a key assumption of exiting the current global financial and economic crisis and of normal functioning of the financial and real spheres of economy. we believe that the development of economic thought so far provided enough economic theories and models to formulate a universal theoretical paradigm that would, on the one hand, have a preventive effect on the occurrence of the causes of crisis, and at 12 b. krstić, m. jemović the first sign of crisis undertake an anti-crisis action, through the involvement of international and national institutions, on the other hand. accordingly, it is time for a civilization synthesis, which would be underlain by the universal economic-theoretical paradigm. in fact, the change in the ruling paradigm would also enable a change in the political situation in the world and, based on that, a change in the operation of global institutions, on the one hand, and a change of national economic policies, on the other hand. at least two conclusions may be drawn from the above statements: 1) future economic paradigms will be less and less ideologically burdened, given the current trend of relativization of the ideological conflict between capitalism and socialism, because socialism accepts market economy as well; 2) former competition between socialism and capitalism will be transformed into a competition of different variants of the market economy, because there is a process of convergence of social and economic systems as a result of, among other things, economic and financial globalization. in this sense, the balance between market and state is essential. this would mean that the state should act in a corrective manner relative to market dysfunctions, that is, to correct mistakes and regulate the market in the pre-crisis period in order to avoid the crisis, or eliminate market deficiencies when the crisis occurs. when it is said that a balance of market and state is needed, it does not refer to the mathematical or absolute balance, but to a dynamic equilibrium that is based on the functional balance. functional balance allows relatively stable and acceptable rates of economic growth, in the context of sustainable development, as well as an acceptable level of social justice. considering the advanced stage of the globalization process, the balance will be established on two levels: 1) global and 2) national levels. although globalization involves the harmonization of social, economic and financial institutions, instruments, mechanisms and principles, it does not necessarily mean that the international (global) institutions condition their economic and financial assistance to certain economies on their absolute acceptance of global rules of functioning. for example, developing countries and countries in transition cannot be expected to implement the concept of a fully independent central bank whose primary goal is the minimum rate of inflation, and that the same is not required of developed countries that manage these global institutions, and so on. this means that global institutions such as the imf, wb, ecb would have at their disposal a wider range of possible measures to be applied to particular countries, depending on the specifics of their problems. at the same time, global institutions would take into account the specific form of balance necessary for a particular country. having regard to the previous stage of equilibrium, the second one would be established at the level of national economies. weights of the importance of market and economy in the equilibrium model would depend on the phase of the economic cycle and the condition of the social and environmental dimensions of society. in thus devised equilibrium model, an optimal ratio is established between different dimensions of man: homo economicus on one side, and his social and environmental dimensions on the other. in the conditions of economic prosperity, high rates of economic growth provide the realization of all the human dimensions by relatively small state interventions, meaning that the equilibrium model would be based on a greater weight of market significance. in the case of economic recession, where market dysfunctions are increasing, the equilibrium model would involve an increased weight of state participation in the re-establishment of optimal relations between different dimensions of man. thus understood, the equilibrium model involves an interactive relationship between these two global and national levels of balance. the imperative of improving the financial regulatory framework under crisis conditions 13 conclusion the current financial crisis has denied the principle of laissez faire, based on the selfregulating market, and re-actualized the need for government intervention. here it is primarily the issue of the need to regulate the financial services sector, whose volume of transactions increased several times and exceeded the volume of transactions in the real sphere. considerable costs of the financial crisis caused that special emphasis is put in this work on the basic components of the regulatory framework for preserving the stability of the financial system, which exhibited different characteristics in specific anti-crisis strategies. since the current crisis scenario extorted increased state intervention, the question raises whether the imperative improvement of the financial regulatory framework challenged the basic postulates of neoliberal paradigm, as well as whether the solution should be sought in a convergence or a synthesis of past and current paradigms. a universal recipe for state interference in the financial services sector does not exist, but it must be adapted to the specifics of a particular national economy, as well as of its internal and external environments. however, the fact that excessive regulation hinders operation of the market, while on the other hand deregulation contributes to the inclination of the financial system to crisis incidents, seems to lead to the synthesis and synergy of past and current paradigms. in our opinion, former development of economic thought has provided sufficient economic theories and models to formulate a universal theoretical paradigm which would, on the one hand, exert a preventive effect on the occurrence of the causes of crisis and, if the first signs of crisis appear, take an anti-crisis action by involving international and national institutions, on the other hand. references 1. bašić, d. (2012) “aktuelni pravci promjena regulacije finansijskog sistema” acta economica (online), god. 10: 6. 2. basel committee on banking supervision (2011) bazel iii – a global regulatory framework for more resilient banks and banking systems – revised version, http://www.bis.org/publ/bcbs189.htm. 3. bhattacharya, s., boot, a.w.a and thakor, a.v. (1998) “the economics of bank regulation”, journal of money, credit, and banking 30 (4): 745–770. 4. carpenter, s., demiralp, s. and eisenschmidt, j. (2013) “the effectiveness of the non-standard policy measures during the financial crises: the experience of the federal reserve and the european central bank”, ecb working paper series, no. 1562. 5. drašković, m. (2009) “globalna finansijska kriza i neoliberalna dogma”, ekonomija, 16(1): 127-148. 6. dušanić, j. (2011) “seulski umesto vašingtonskog konsenzusa i pokušaj reanimacije neoliberalnih dogmi”, rubrike, ekonomska politika. 7. freixas, x., parigi, b.m. and rochet, j.c. (2003) „the lender of last resort: a 21st century approach“, ecb working paper 298. 8. ćirović, m. (2007) bankarstvo, treće izdanje, naučno društvo srbije, beograd. 9. kilibarda, m., nikčević, al, milić, d., mićunović, a. (2011) globalna finansijska kriza i odgovor evropske unije, centralna banka crne gore. 10. kovačević, m. (2012) “katastrofalne posledice najveće zablude ekonomske nauke – neoliberalizma”, gloobalna kriza i ekonomska nauka: neoliberalizam i alternative, beograd, ekonomski fakultet. 11. krstić, b. (2003) bankarstvo, niš, ekonomski fakultet. 12. krstić, b., jemović m. (2009) „the impact of global financial crisis on changing the central bank role in the market positioning of financial institutions“, facta universitatis series: economics and organization, 6 (3): 221 – 236. 13. krstić, b., marinković, s., jemović, m. (2010) “aktuelne kontraverze o nadležnostima centralne banke u odnosu na njene tradicionalne funkcije”, ekonomske teme, 4:481-498, niš, ekonomski fakultet. 14 b. krstić, m. jemović 14. marinković, s. (2008) finansijsko tržište i finansijske institucije u republici srbiji, niš, ekonomski fakultet. 15. мarinković, s. (2004) „designing an incentive-compatible safety net in a financial system in transition: the case of serbia“, lse/csgg south east europe series discussion paper 35, london. 16. matić, v. (2011) „bazel iii – izmenjeni koncept kapitala“, bankarstvo, 7-8: 172-178. 17. mašić, s. (2009) „regulacija i supervizija prekograničnih banaka“, finansije, bankarstvo i osiguranje, univerzitet singidunum. 18. narodna banka srbije, “bankarski sektor u srbiji: izveštaj za iii tromesečje 2014. godine”, sektor za kontrolu poslovanja banaka. 19. ponce, j. (2010) “lender of last resort policy: what reforms are necessary?” journal of financial intermediation 19(2): 188-206. 20. rodrik, d. (2008) “zbogom vašingtonskom konsenzusu, zdravo vašingtonskoj pometnji? kritički oksvrt na studiju svetske banke “ekonomski rast devedesetih: lekcije na osnovu decenije reformi”, panoeconomicus, 2: 135-156. 21. vrzić, n. (2008) “razvijeni nikad nisu radili ono što savetuju nerazvijenim”, nin, 2: 64-91. imperativno unaprerđenje finansijskog regulatornog okvira – contradictio in adjecto neoliberalne paradigme globalna finansijska kriza uslovila je masovne intervencije monetarnih i fiskalnih vlasti, poput sanacije propalih banaka, osiguravajućih društava i drugih finansijskih institucija i ubacivanja u finansijski sistem ogromnih količina novca, a sve u cilju njihovog spašavanja i sprečavanja daljeg širenja krize. u takvom ambijentu, dovedeni su u pitanje osnovni postulati na kojima počiva neoliberalizam, kao vladajuća ekonomska doktrina od 80-ih godina 20. veka. u tom smislu postavlja se pitanje da li je imperativnim zahtevima za unapređenje finansijskog regulatornog okvira izvršena suštinska relativizacija do tada dominirajuće neoliberalne paradigme. ključne reči: neoliberalizam, globalna finansijska kriza, finansijski regulatorni okvir. facta universitatis series: economics and organization vol. 12, n o 3, 2015, pp. 183 198 comparative analysis of work-life balance in fyr macedonia, montenegro and serbia  udc 316.728:316.343-057.3(497.7+497.1+497.11) nataša golubović 1 , srđan golubović 2 1 university of niš, faculty of economics, serbia 2 university of niš, faculty of law, serbia abstract. reconciling work and family life is one of the key elements of the quality of work and employment. the concept of work-life balance refers to the creation and maintenance of such work environment that allows employees to achieve a balance between work and personal commitments, which create the basis for increase of employee loyalty and productivity growth. exploring the ways in which an individual functions in the spheres of work and private life, as well as mechanisms of achieving balance between these two spheres, provides a fresh perspective on the interaction between work and private life, as well as opportunities to achieve synergy between these two spheres. the aim of this study is to investigate the quality of the actual balance between work and private life in selected countries of the western balkans and on this basis to identify the key problems employees in these countries are confronted with in balancing work and private life. key words: balance, work, private life, working conditions. introduction work plays very important role in the lives of people, firms and society in general. individuals value work for income it provides, but also because it contributes to self-esteem and personal happiness. it is important from the standpoint of the welfare of the individual, but it also constitutes a cornerstone of economic and social development. increasing employment is the backbone of many broader social goals such as poverty reduction, productivity growth and social cohesion. it is therefore not surprising that issues related to work and employment are at the top of the development agenda in almost all countries. certain jobs have a wider significance from the society‟s standpoint. women‟s employment change the structure of household consumption and lead to the growth of investment in health and education of children. jobs associated with global markets helps received may 25, 2015 / accepted october 27, 2015 corresponding author: nataša golubović faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: natasa.golubovic@eknfak.ni.ac.rs 184 n. golubović, s. golubović diffusion of new technologies and managerial knowledge and skills. employment of young people is an alternative to criminal and deviant behavior. it is obvious that employment, in addition to benefits that it brings to individuals, also provides significant benefits for society as a whole. european union pays considerable attention to work and improvement of working conditions is amont the key economic and political goals. eu strategy 2020, which emphasizes the realization of smart, inclusive and cohesive growth, puts at the forefront work and working conditions, especially the impact of economic growth on the quality of work, employment and enterprise performance. priorities formulated within the europe 2020 strategy in the field of work and employment are also priorities of the western balkan countries. reconciling work and family life is one of the key elements of the quality of work and employment, contained in the europe 2020 strategy (european commission 2010a). integrated guidelines for implementing the europe 2020 strategy emphasize the importance of achieving work-life balance, as a determinant of increasing labor market participation (european commission 2010b), especially of the younger population, women and the elderly. unlike the eu, where implementation of the work-life balance programs has been perceived as a segment of corporate social responsibility, in the usa initiative is on the part of enterprises, trying to achieve comparative advanteges through work-life balance programs. results of the implementation of these programs have shown that the comparative advantage and social responsibility are not contradictory, but rather interdependent objectives: enterprises achieve competitive advantage on the basis of employment, productivity and service quality, thus contributing to the society in which they operate. balance between work and private life is determined by a range of factors. on the one hand, this balance depends on the individuals, their ability to juggle work and family life, as well as the situation within the family. on the other hand, relationship between these two spheres of life depends also upon working conditions, working time characteristics, infrastructure, social protection systems and the like. policies aimed at achieving worklife balance and programs aimed at securing the flexibility of work are now synonymous with a set of initiatives oriented toward establishing individual needs. the aim of this study is to investigate the quality of work-life balance in selected western balkan countries. in this study, we will use data from the third quality of life survey in europe (eurofound 2012). this research is based on the perception of citizens regarding different aspects of the quality of life. indicators that are relevant for our study are in the area of work-life. since this research has not yet been conducted in albania and bosnia and herzegovina, we were able to incorporate only serbia, fyr macedonia and montenegro into our analysis. on the basis of research results, we will try to identify the key problems employees in these countries are confronted with while balancing work and private life. 1. determinants of work-life balance concept of work-life balance points out the efforts and needs of employees to share their time and energy between work and other important aspects of their life. it refers to the creation and maintenance of such working environment that allows employees to achieve a balance between work and personal commitments, providing increased loyalty of employes and productivity growth. the key point is that individuals have some control over when, where and how they work. comparative analysis of work-life balance in fyr macedonia, montenegro and serbia 185 reconciling work and family life is one of the key elements of the quality of life. the firm and the family are the two key institutions for individual (mortimer, lorence, & kumka 1986). having in mind that activities related to work and family often take place at different time and in different places, and that according to the established division of labor by gender men have primary responsibilities at work and women in the house, researchers and employers often consider work and family as separate, independent and opposing systems (parsons & bales 1955). by exploring the ways in which an individual functions in the sphere of work and private life, as well as mechanisms that help them to achieve a balance between these two spheres, provides a new angle on the interaction between work and private life, as well as the possibilities to achieve synergy between these two spheres (zedeck 1992). during the last two decades, however, a sharp increase in the number of individuals with significant responsibilities at work and in the family was registered. a growing number of one-parent families, working women, families with one employee, fathers engaged in child care (brief & # 38; nord, 1990; fullerton, 1995) was registered. a significant number of individuals is taking care of elderly family members and those who are unable to care for themselves. for these individuals, achieving a balance between above mentioned two spheres is an imperative (kemske 1998). in the conditions of the rising share of women in the labour force, working parents are struggling to achieve a balance between work and family commitments. today's workers have a lot of responsibilities towards work, children, housework, parents, etc., which increase the pressure on individuals, their families and communities in which they live. the conflict between professional and personal spheres of life is a serious problem that affects workers, their employers and community. this problem becomes more pronounced with the increasing proportion of women in the labor force, rising number of one-parent families and families with both working parents, need to care for the elderly and rising unemployment. bearing in mind the need of employees to reconcile work and private life, employers have introduced a number of changes, such as flexible working time, flexible forms of work engagement, family-responsibility leave, paid maternity leave, childcare facilities for workers with small children, work at home, job-sharing and the like (caudron 1997; flynn, 1997). many companies go even further by changing the organizational culture in a direction that supports family life (galinsky and stein 1990). bailyn (1997) has identified three features of work culture that supports family life: flexible organization of work, flexible work process and recognition by the organizational leadership that familily responsibilities are important. such changes allow employees to devote attention to their families, without jeopardizing career and advancement in the organization (regan 1994). the manner in which work-life balance is accessed is not the same in all countries. in eu countries, programs oriented towards achievement of this balance are result of state legislation and are based on the social responsibilities of corporations, and the concept of corporate social responsibility refers to the company's obligations to take into account interests of customers, employees, shareholders, community and environmental aspects while performing their activities. in the united states above mentioned balance is primarily perceived as a contributing factor to the comparative advantage, in terms of hiring the quality labour force and increasing employees' loyalty towards the company where they work (pocock 2005). from the perspective of enterprise, the benefits of implementation of work-life balance programs are reflected in the field of human resources. work-life balance programs 186 n. golubović, s. golubović represent an effective marketing method to attract workers. these programs help to establish a symbiotic link between the employer and the employee, resulting in numerous benefits. employees who better combine work and private life are satisfied, which in terms of the employer provides productivity growth, strengthens team spirit and loyalty to the employer, reducing the outflow of workers. lower outflow of workers reduce the costs of hiring and training the new employees. it is logical to assume that aforementioned programs improve the efficiency of workers in the workplace. there are no studies, however, that definitively and unequivocally associate efficiency increase in the workplace as a result of the implementation of these programs and financial performance. companies usually quantify the benefits of such programs through various performance indicators that are indirectly related to the financial results. work-life balance is determined by a range of factors income, health, family situation (eurofound 2004). working time characteristics and its structure significantly affect achievement of this balance. whether to work or not, how many hours will individual spend at work are often decided inside a family, depending on the circumstances (eurofound 2012b). requirements in terms of work-life balance vary depending on the life cycle of individual and the gender. cultural factors (mothers who stay at home to care for children), infrastructure (childcare facilities for schoolchildren), availability of flexible working time, also affect how and to what extent men and women manage to reconcile work and private life. we should also mention the role of social protection system. employers can play an important role by allowing certain arrangements concerning working time (suitable to the workers‟ needs) or by requesting more flexibility from workers in accordance with the enterprise needs. this means that flexibility can have a positive, as well as negative aspects for both employers and employees. for instance, if some workers prefer flexible working time in order to fulfil some personal obligations, it may require additional organization by the employer or could simply be impossible. some companies may offer temporary jobs, while workers need permanent employment. the same applies to work in shifts or overtime, which may or may not match employees and companies needs, depending on circumstances or preferences. 2. the methodological framework of the research in our analysis of the work-life balance in selected western balkans countries we shell use data from the third european quality of life survey (eurofound 2012), conducted in all eu member states, as well as seven of the nine countries involved in the enlargement process (croatia, fyr macedonia, iceland, kosovo, montenegro, serbia and turkey). research of the quality of life in europe is a representative survey conducted by eurofound, which serves as a rich source of information about living conditions, housing, local environment, health, public services, social cohesion and the quality of society, as well as subjective well-being. in all countries, testing was conducted using the same methodological approach: face-to-face interviews in people's homes, with selected random sample of the adult population (18 years and older), residing in the country for at least six months. interviews were conducted in the national language/languages of the country. the sample size was 1000 respondents in all the examined countries that are not eu members, except in turkey, where sample size was 2000. comparative analysis of work-life balance in fyr macedonia, montenegro and serbia 187 having in mind rising interest in the quality of life, this study is an important contribution to the monitoring and research of these topic. quality of life research, carried out by the eurofound, involves the following areas: subjective well-being, health and mental well-being, living standards, work-life balance, public services, trust and tension, participation and social exclusion. for each of these areas appropriate groups of indicators were selected. results obtained on the basis of monitoring indicators in selected areas of the quality of life explain objective life conditions, as well as subjective well-being, both individual life circumstances and perception of the quality of society. they help to get an overview of the quality of life in one country. for our research relevant data are those related to the achievement of the balance between work and private life. in albania and bosnia and herzegovina, this research has not been conducted yet, and we are able to include only serbia, fyr macedonia and montenegro in our analysis. quality of life research is carried out every four years, by the eurofound. data used in this analysis were obtained from the third wave of research of the quality of life, published in 2011. in fyr macedonia, serbia and montenegro quality of life research was conducted in may-july 2012. since previous wave of research conducted in 2007 encompassed only fyr macedonia, while data for serbia and montenegro are available only in the third wave of research, we were limited to the analysis of the current situation and were not able to analyze changes in the work-life balance through time. 3. employment in fyr macedonia, montenegro and serbia employment is very important from the individual point of view as a source of income necessary for existence. bearing in mind that labor market is a very important space in which social interactions take place, employment represents the cornerstone of economic and social development. increasing employment is the backbone of many broader social goals such as poverty reduction, productivity growth and social cohesion and issues related to work and employment are at the top of the development agenda in almost all countries. table 1 shows employment rates in fyr macedonia, montenegro and serbia in 2012. table 1 employment rates, total and by gender country total men women fyr macedonia 39,0 47,1 30,8 montenegro 40,1 45,9 34,6 serbia 45,3 52,4 38,1 eu-27 68,5 74,6 62,4 source: anketa o radnoj snazi (2012), republika srbija; anketa o radnoj snazi (2012), crna gora; labour force survey (2012), republic of macedonia; european commision eurostat database, 2012 http://epp.eurostat.ec.europa.eu/portal/page/portal/employment_unemployment_lfs/data/main_tables table 2 shows employment rates by sex and age in the former yugoslav republic of macedonia, serbia and montenegro. data indicate that in the working age population (18-64 years), the employment rate is highest for the age group 25-49. employment rates in all observed groups is greater for men than for women. if we compare employment rates for fyr macedonia, montenegro and serbia with the eu-27 average, we can see that employment rates in these countries are significantly lagging behind the eu average. 188 n. golubović, s. golubović table 2 employment rates, by gender and age country gender 15-24 25-49 50-64 fyr macedonia male 18,1 64,9 54,7 female 12,6 46,3 31,1 montenegro male 14,1 67,3 64,6 female 12,9 55,4 37,1 serbia male 19,1 68,4 49,3 female 9,4 56,4 42,4 eu-27 male 34,8 83,5 65,6 female 30,8 71,4 51,9 source: anketa o radnoj snazi (2012), republika srbija; anketa o radnoj snazi (2012), crna gora; labour force survey (2012), republic of macedonia; european commision eurostat database, 2012 http://epp.eurostat.ec.europa.eu/portal/page/portal/employment_unemployment_lfs/data/main_tables data from the national labor force surveys for fyr macedonia, serbia and montenegro indicate that majority of workers are employees (73.2% in fyr macedonia, 81.9% in montenegro and 69.6% in serbia). the share of self-employment in total employment ranges from 16.1% in montenegro, 18.4% in fyr macedonia, to 22.8% in serbia. selfemployed without employees represents 13.6% of the total employment in fyr macedonia and 18.9% in serbia. the share of self-employed varies depending on gender and age. males have larger share in the category of self-employed in relation to females, whereby this share increases going from the lower (18-24) to higher age groups (50-64 and over). in contrast, the share of females is higher in the category of employees. most workers are employed in the private sector and private sector employment share is highest in fyr macedonia, with 75% of the total number of employees in the private sector. in montenegro, this ratio is 57.3% and in serbia 51.8%. when it comes to employment in the public sector, public sector employment share in total employment is higher for females than for males. thus, for example, in fyr macedonia 24.4% of employed males are working in the public sector, compared to 25.9% of employed females. in serbia this ratio is 40.7% versus 49.6%, while in montenegro 41.2% and 43.9 %. the share of public sector employment in total employment is higher for older age groups. these employment characteristics are very important in terms of the ability of workers to achieve a healthy balance between work and private life. there is a relatively high level of job insecurity. in the survey conducted by the eurofound, respondents were asked to what extent, in their oppinion, is was likely that they could lose their job in the following 6 months. the percentage of those who responded to this possibility „very likely“ or „quite likely“ amounts to 16.6% in serbia, 24.1% in macedonia and 12.8% in montenegro. only in montenegro this percentage is slightly lower than the average for eu-27, which is 13.3%. in all three countries, perception of the possibility of losing the job is greater for females than males. thus high level of job insecurity perception certainly puts additional pressure on the employees and affects the work-life balance. comparative analysis of work-life balance in fyr macedonia, montenegro and serbia 189 4. characteristics of the working week when it comes to the balance between work and private life, the relevant characteristics of individuals and families are gender, age, as well as whether the family is with or without children. in addition, the time spent at work is of significant importance (duxbury et al., 1994; greenhaus and beutell 1985 gutek et al. 1991). we can assume that no one wants a career and job that would not leave him with enough time for a personal life, family and friends. other factors are: job security, support from the supervisors, support from associates, overwork and demanding job, job dissatisfaction, as well as the widespread use of communication technology that blurs the boundaries between work and private life. table 3 average number of hours per week spent on the main job country average number of working hours per week all men women fyr macedonia 42 43 41 montengro 46 49 43 serbia 45 48 43 eu-27 40 43 36 source: eurofound 2012a, calculations by the authors lenght of the working week, or the number of working hours per week, is a very important determinant of the balance between work and private life. a large number of hours spent at work and stressful job do not affect only the ability of workers to reconcile work and private life, but are also associated with numerous health risks related to physical and mental health of individuals. the average number of working hours per week at the main job ranges from 42 in fyr macedonia (43 for man, 41 for women), 45 in serbia (48 men, 43 women), to 46 in montenegro (49 men, 43 women). the average number of working hours per week for the eu-27 is 40, meaning that the average number of working hours in fyr macedonia, montenegro and serbia is higher than the eu average (table 3). when it comes to gender, the average number of working hours per week at main job is lower for females than for males. the average number of working hours per week is lower in countries with the bigger share of part-time employed workers in total employment. the share of workers with part-time employment in total employment in serbia is 8.1%, fyr macedonia 6.4%, and montenegro 4.5%. part-time work is associated with lower income, which is reflected in the fact that the average working week is shorter for individuals who belong to the lowest income quartiles and increases as we go to higher income quartiles. a significant number of employees have a second job in serbia 9.7%, montenegro 8%, fyr macedonia 11.5%, which is higher than in the eu-27 average, where 5% of employees have a second job. number of hours per week they usually spend on the job is also significant – on average 19 hours per week in serbia, 16 in the fyr macedonia and 14 hours in montenegro, which is much higher than the eu-27 average and that is 13 hours per week. 190 n. golubović, s. golubović table 4 preferences of employees in terms of working hours fyrom montenegro serbia eu-27 work less all 61 53 53 44 men 57 56 62 45 women 67 50 41 42 work the same 1 all 32 39 39 43 men 34 34 32 42 women 28 44 49 43 work more all 8 8 8 14 men 9 9 6 12 women 5 6 9 15 source: eurofound 2012a, calculations by the authors there is a clear link between the number of hours that employees are spending on the job and the number of hours they would like to spend (table 4). employees were asked how many hours per week would they prefer to work, taking into account funds needed for a normal life. over half of the employees in all three countries indicated that they would like to work less per week, while the number of those who would like to work more is less than 10%. among employees that belong to the lower income quartiles there are relatively more employees willing to work more hours per week. in serbia, even 28.2% of employees belonging to the lowest income quartile would like to work more hours per week, compared to only 5.4% of those in the highest income-quartile. in fyr macedonia this ratio is 14.9% versus 4.8%, while in montenegro 10.6% and 4.8%. 5. unpaid work: taking care of family members and housework some of the key social roles and responsibilities are realized through unpaid work, during leisure time. housekeeping, taking care of children and sick family members are primarily performed by family members. although these are non-paid jobs, they certainly affect the way individual performs tasks at the workplace. working at home, taking care of those who can not take care of themselves (children, grandchildren, parents or disabled family members), attending various courses and training, participation in voluntary organizations or engagement in political activities require significant amount of time, but can be usefull for individuals, their families and society as a whole. since most of the unpaid work is performed by women, it has important implications in terms of gender equality, particularly regarding the possibility of securing the paid work. men and women have different responsibilities in terms of unpaid work. in general, women take the most of the burden of unpaid work (whether they work full-time or not), while men spend more time on paid work. children play an important role, especially for single parents (men and women) and mothers (who are married). single parents and couples with children have more hours of unpaid work compared to single parents or couples without children. married women with children and single mothers report more hours of unpaid work than men of the same status. table 5 presents the frequency of the unpaid work by gender. indicators in the table were obtained on the basis of answers to the following 1 “work the same” is defined as the existing average ±2 hours. comparative analysis of work-life balance in fyr macedonia, montenegro and serbia 191 question: in general, how often are you involved in any of the following activities outside of paid work: 1) taking care of children, grandchildren; 2) cooking and/or housework; 3) taking care of elderly or disabled relatives. only answers of the respondents who carry out mentioned forms of unpaid work every day or several days a week were taken into account. based on indicators in the table, we can conclude that differences between men and women in related to the unpaid work significant, especially when it comes to housework. slightly smaller differences emerge in the taking care of children, and smallest differences are present in the care for elderly or disabled relatives (table 5). compared to the eu-27 average, in fyr macedonia, montenegro and serbia relatively more employees spend every day or at least several days a week taking care of children or grandchildren. on the other hand, percentage of those who perform cooking and/or housework every day or at least several days a week is higher in eu-27 than in fyr macedonia, montenegro and serbia. the differences between these countries and the eu-27 are negligible when it comes to care for the elderly. in addition to frequency of performing unpaid work, number of hours employees spend doing this work is also important. table 6 show the number of hours per week that employees in fyr macedonia, montenegro and serbia are spending in unpaid work. table 6 hours per week spent in performing unpaid work by those in employment, by country fyrom montenegro serbia eu-27 taking care for children, grandchildren all 17 32 40 18 men 13 21 33 28 women 20 38 46 23 cooking and/or housework all 14 16 16 9 men 10 10 10 14 women 16 17 18 11 taking care for elderly or disabled relatives all 11 16 26 8 men 8 14 20 9 women 13 16 28 8 source: eurofound 2012a, calculations by the authors table 5 hours per week spent doing unpaid work by those in employment, by country (%) fyrom montenegro serbia eu-27 taking care for children all 48 35 43 34 men 42 25 40 29 women 54 45 45 39 cooking and/or housework all 56 50 64 76 men 29 21 38 60 women 82 79 88 91 taking care for elderly or disabled relatives all 7 8 10 9 men 4 8 9 7 women 10 8 10 11 source: eurofound 2012a, calculations by the authors 192 n. golubović, s. golubović number of hours per week that employees in the fyr macedonia, montenegro and serbia are spending doing above mentioned unpaid activities are given in table 6. althought in fyr macedonia even 48% of employees spend each day or at least several days a week taking care of children or grandchildren, number of hours per week devoted to children care is below the average for eu-27. on the other hand, although a smaller percentage of employees in montenegro and serbia spend time in taking care of children, they are spending twice more time for child care than employees in fyr macedonia, and more than the average for eu-27. the average number of hours that employees in serbia spend in taking care for the elderly or disabled relatives was significantly higher than in fyr macedonia and montenegro, as well as in relation to eu-27 average. for all of the mentioned categories women on average spend more hours doing unpaid work compared to men, which certainly reflects on the balance between work and private life. 6. organization and charasteristics of the working week the number of working hours is certainly very important for the quality of life both at work and outside work. however, organization of a working time can also play an important role in balancing work and private life. flexibility in working time arrangements can contribute to a better balance between these two spheres. workers who work full time or overtime are less likely to achieve a satisfactory balance between work and private life. working part-time can have a positive influence on the work-life balance. according to available data, less than 10% of employees working 34 or less hours per week have problems with achieving a work-life balance, compared to over 20% of those working fulltime (eurofound 2012b, p. 90). table 7 compatibility of working time with family and social commitments of employees fyrom montenegro serbia eu-27 very well all 17 12 20 26 men 19 9 20 24 women 14 14 20 27 fairly well all 58 65 40 53 men 54 67 38 52 women 64 63 42 53 not very well all 21 19 31 16 men 23 19 32 17 women 19 18 30 16 not at all well all 4 4 9 5 men 4 4 9 6 women 3 4 8 5 source: eurofound 2012a, calculations by the authors research provided by the eurofond gives us opportunity to explore the extent to which working time arrangements fit with the family and social commitments of employees. respondents were offered four variants of answer: very well, fairly well, not very well and not at all well. results are presented in table 7. in serbia, 40% of employees answered that their existing working time arrangements do not fit very well or not at all well with their comparative analysis of work-life balance in fyr macedonia, montenegro and serbia 193 family and social obligations. in fyr macedonia and montenegro, these shares are much smaller: 25% and 23%. the percentage of those who believe that existing working time arrangements fit very well or fairly well with their family and social obligations is lowest in serbia 60%. in fyr macedonia and montenegro these percentages are significantly higher and amounted to 75% and 77% (table 7). when it comes to relation between genders, women generally report compatibility of the existing working time arrangements with family and social obligations to a lesser degree compared to men. working time schedule, variability and predictability of working hours affect the compatibility of working time arrangements and private life of workers, but the same solutions do not fit to all workers. in some cases workers would like to know exact time they have to come to work and when they go home from work (for example, when they have to take children from kindergarten or school). in other cases, certain flexibility will help workers to cope with the contingencies or adapt to developments in private life. those who are faced with a traffic jam on the way to work benefit from flexible working arrangements. some workers will highly appreciate if they can take a few hours off to visit doctor and the like. table 8 shows availability of various forms of flexible working time arrangements to employees. compared to eu-27 average, a significantly smaller percentage of employees in fyr macedonia, montenegro and serbia have the opportunity to use examined forms of flexible working time arrangements. as in the eu, in montenegro and serbia flexible working time arrangements are more accessible to men than to women. when it comes to possibility to accumulate hours for time off or take a day off at short notice, the exception is fyr macedonia where these forms of flexibility are more accessible to women than men. table 8 availability of flexible working time arrangements (%) fyrom montenegro serbia eu-27 i can vary my start and finish times all 26 23 25 43 men 26 24 31 46 women 25 22 18 40 i can accumulate hours for time off all 35 27 25 41 men 34 30 28 44 women 36 22 21 39 i can take a day off at short notice when i need to all 63 39 40 64 men 62 42 42 67 women 65 35 37 59 source: eurofound 2012a, calculations by the authors as for the importance of different forms of flexible working time arrangements, employees in all three countries mostly valued the possibility of taking the day off when necessary. employees were asked to value benefits of specific working time arrangements. results are presented in table 9. there are obvious differences in the appraisals of the respondents in all three countries. however, most of them consider the ability to take a day off at short notice when needed the most important in balancing work and private life. bearing in mind that women are more involved in unpaid work than men, it is not surprising that noticeable difference occurs in the access to support services. higher evaluation of better access to services such as child care centers and facilities for the elderly is particularly pronounced in countries where this infrastructure is relatively underdeveloped. 194 n. golubović, s. golubović table 9 the role of flexible working time arrangements in balancing work and private life (%) fyrom montenegro serbia eu-27 having more control over start and finish times of my work all 39 39 34 35 men 39 43 33 34 women 38 36 36 36 changing the number of my weekly working hours all 34 38 25 29 men 35 40 24 27 women 34 36 26 30 being able to take a day off at short notice when i need to all 49 50 41 46 men 50 51 37 45 women 47 49 46 47 having better acess to support services (for example, childcare, elderly or long-term care) all 36 40 29 33 men 34 38 26 31 women 38 42 32 35 source: eurofound 2012a, calculations by the authors 7. difficulties in balancing work and private life reconciling work and private life represents a long-term goal of employment and social policy in the eu. it is an integral part of the europe 2020 strategy, not only for the purpose to enable more people to reach the paid work, but also to increase gender equality. table 10 presents the incidence of problems at work due to family responsibilities as well as the impact of work on family life. we took into account only respondents who answered that they face these problems several times a week or several times a month. table 10 difficulties in balancing work and private life, by country (%) fyrom montenegro serbia eu-27 i have come home from work too tired to do some of the household jobs which need to be done all 72 72 79 53 men 63 67 76 50 women 77 78 83 56 it has been difficult for me to fulfil my family responsibilities because of the amount of time i spend on the job all 48 52 50 30 men 44 46 49 29 women 54 61 52 31 i have found it difficult to concentrate at work because of my family responsibilities all 24 31 26 14 men 22 30 24 13 women 26 31 29 16 source: eurofound 2012a, calculations by the authors generally, employees in all three countries believe that work affects their family life more than responsibilities towards the family affect their job performance. in eu-27 there is no significant difference between men and women when it comes to dealing with difficulties in balancing work and private life. in fyr macedonia, montenegro and serbia, women have more difficulties in balancing work and private life in relation to men. there is an obvious link between the problems in achieving a balance between work and private life comparative analysis of work-life balance in fyr macedonia, montenegro and serbia 195 and the number of working hours per week. also, for the same number of working hours per week women have a higher percentage of reported problems in achieving a balance between work and private life. eurofond research allow us to understand difficulties that employees face in an attempt to establish balance between work and private life. in table 11 employees are divided into three groups, according to difficulties in establishing work-life balance: first, where employees are facing difficulties both at work and at home (at least several times a month); second, where they are faced with difficulties either at work or at home; third includes employees who are faced with little or no difficulties. montenegro has the largest share of employees who are faced with difficulties both at work and at home in an attempt to balance work-private life and it is twice as high compared to the eu-27 average. serbia has the highest percentage of employees who are faced with problems in establishing the balance either at work or at home. at the same time, the percentage of employees who are faced with little or no difficulties is significantly lower in serbia than in the fyr macedonia and montenegro and twice as lower as the average for eu-27. table 11 strain-based conflict, by country (%) fyrom montenegro serbia eu-27 both at work and at home conflict all 23 30 25 13 men 21 29 23 12 women 26 30 29 15 work or home conflict all 49 44 55 43 men 46 40 55 42 women 52 48 56 45 no or weak conflict all 28 26 19 43 men 33 30 23 46 women 22 21 15 40 source: eurofound 2012a, calculations by the authors in serbia, fyr macedonia and montenegro there is a relatively high percentage of women and men who experience strain-based conflict between work and private life. serbia has the largest percentage of the population that is experiencing conflict between commitments to work and private life (85% of women and 77% of men). it is possible that it has something to do with the organization of work and inflexible working hours. private life, to a certain extent, is shaped by daily household tasks and their distribution among family members. housework may be a significant additional burden on the behalf of women if they perform all of housework, particularly if they are employed. difference in the contribution of men and women to housework in serbia (50%) is above the eu-27 average (table 12). there is a relatively high percentage of women of a working age (49% in serbia, 58% in montenegro and 49% in fyr macedonia) that are not part of the labour force. however, more than half of them 57% in serbia, 62% in montenegro and 65% in fyr macedonia would like to have a paid job. these data indicate that the country has the potential to increase participation rates in the labor market by developing a more balanced work organization. it would also create conditions for higher gender equality in relation to work and family commitments. 196 n. golubović, s. golubović table 12 work-life balance fyrom montenegro serbia range for 34 surveyed countries eu-27 min max conflict between work and private life (in any aspect, % women) 78 79 85 italy 47 cyprus 86 59 conflict between work and private life (in any aspect, % men) 67 69 77 italy 39 serbia 77 57 performing hosework at least several days a week, difference between men and women (percentage points) 53 58 50 finland 11 turkey 72 30 women, economically inactive, who wants to work (%) 65 62 57 luxemb. 46 island 91 70 source: eurofound 2012c. conclusions in this paper, we examined possibilities of employees in fyr macedonia, montenegro and serbia to harmonize responsibilities at work with private life and family commitments. we conclude that a relatively large percentage of employees in these three countries are faced with difficulties in reconciling work and private life. number of working hours during the week is one of the key factors that determine work-life balance and employees in these countries show preferences toward shorter working time because more than half of the respondents in all three countries indicated that they would like to work less per week. within the same working time arrangements, women expressed more difficulties in reconciling work and private life as a result of their greater engagement in unpaid work compared to men. women spend more hours compared to men performing unpaid work (for all forms of unpaid work), which certainly affects the possibility of achieving satisfactory balance between work and private life. differences between men and women are considerable, especially when it comes to housework and, to a lesser extent, babysitting. it is not just the frequency of performing these tasks, but also the number of hours spent doing these jobs. when it comes to the availability of flexible working time arrangements, considerably smaller percentage of employees in the fyr macedonia, montenegro and serbia have the opportunity to use various forms of flexible working time arrangements compared to the eu-27 average. as in the eu-27, in montenegro and serbia, different forms of flexible working time arrangements are more available to man than to women. employees in the fyr macedonia, montenegro and serbia believe that work affects their family life more than commitment towards the family affect their job performance. at the same time, women have more difficulties in balancing work and private life in relation to men. montenegro has the largest share of employees who are faced with comparative analysis of work-life balance in fyr macedonia, montenegro and serbia 197 difficulties both at work and at home in an attempt to balance work and family life, while serbia has the highest percentage of employees who are faced with problems either at work or at home. serbia has the largest percentage of the employees that experience conflict between work and family life (85% of women and 77% men), which is explained by the organization of work and inflexible working time. our research show that the introduction of various forms of flexible working time arrangements are important for overcoming the difficulties in balancing work and private life. in addition, development of infrastructure and better access to support 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(1992), exploring the domain of work and family concerns, s. zedeck (ed.), work, families, and organizations, san francisco, jossey–bass, pp. 1–32. komparativna analiza ravnoteže posao-privatni život u bjr makedoniji, crnoj gori i srbiji usklađivanje posla i privatnog života jedan je od ključnih elemenata kvaliteta rada i zaposlenosti. koncept ravnoteže posao-privatni život odnosi se na stvaranje i održavanje takvog radnog okruženja koje omogućuje zaposlenima da ostvare ravnotežu između posla i ličnih obaveza, što obezbeđuje povećanje lojalnosti zaposlenih i rast produktivnost. istraživanje načina na koji pojedinac funkcioniše u sferi posla i privatnog života, kao i mehanizama postizanja ravnoteže između ove dve sfere, pruža novi ugao gledanja na interakciju između posla i privatnog života, kao i mogućnosti ostvarivanja sinergije između ove dve sfere. cilj ovog rada je da istraži kvalitet ostvarene ravnoteže između posla i privatnog života u odabranim zemljama zapadnog balkana i da na osnovu toga identifikuje ključne probleme sa kojima se zaposleni u ovim zemljama suočavaju u balansiranju posla i privatnog života. ključne reči: ravnoteža, posao, privatni život, uslovi rada facta universitatis series: economics and organization vol. 18, no 3, 2021, pp. 229 242 https://doi.org/10.22190/fueo210501016o © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper how did covid-19 pandemic affect the tourism index in borsa istanbul?1 udc 338.48:[616.98:578.834(560) ercan özen1, letife özdemir2 1university of uşak, faculty of applied sciences, uşak, turkey 2university of afyon kocatepe, afyonkarahisar, turkey orcid id: ercan özen https://orcid.org/0000-0002-7774-5153 letife özdemir https://orcid.org/0000-0002-8636-2277 abstract. this study aims to determine how and to what extent the covid-19 pandemic impacted the turkish tourism sector index in borsa i̇stanbul. daily data for the period from march 27th 2020 to december 31st 2020 were used to find the relationship between the dependent variable (bist tourism stock index) and the independent variables (covid-19 cases and deaths in turkey). the cointegration relationship between the covid-19 pandemic and the bist tourism index was investigated with the ardl bound test. in addition, the effect of the covid-19 pandemic on the bist tourism index was tested with the cointegrating regression models. as a result of the ardl bound test, it was determined that there is a long-term cointegration relationship between the covid-19 pandemic and the bist tourism index. in addition, it has been determined that the impact of the short-term shocks caused by covid-19 on the bist tourism index will disappear in the long term and will balance again in about a week. according to the cointegrating regression models (fmols, dols and ccr) results, it is seen that the deaths from covid-19 significantly affect the tourism index. according to the models, a 1% increase in the number of deaths causes the bist tourism index to decrease by 0.08%, 0.06% and 0.08%, respectively. the coefficient of the number of covid-19 cases is not significant, showing that the number of cases does not have a sufficient effect on the tourism index. the findings of the paper have some implications for stock investors, policy makers, academicians and the company owners in the tourism index of borsa istanbul. key words: covid-19 pandemic, bist tourism index, ardl bound test, cointegrating regression models jel classification: g10, d53, z33 received may 01, 2021 / accepted august 16, 2021 corresponding author: ercan özen university of uşak, faculty of applied sciences, ankara izmir highway 8. km. 1 eylül campus 64200 uşak, turkey | e-mail: mailto:ercan.ozen@usak.edu.tr https://orcid.org/0000-0002-7774-5153 https://orcid.org/0000-0002-8636-2277 mailto:ercan.ozen@usak.edu.tr 230 e. özen, l. özdemi̇r 1. introduction with the outbreak of covid-19, which was declared as an epidemic by the world health organization (who) on march 11th, 2020, turkey, along with the whole world, entered a serious crisis environment. as of january 15th, 2021, there are more than 94 million confirmed covid-19 cases and over 2 million deaths in 221 countries. as of this date, it is seen that the five countries most affected by covid-19 are the usa, india, brazil, russia and uk, respectively. turkey, among countries affected by the pandemic covid-19 is located as 9th.. on january 15th 2021, a total of 2,373,115 people were infected and 23,664 people died (www.worldometers.info). as seen in figure 1, the first wave was experienced in turkey in april 2020, with the number of infected reaching 10,000 per day. the daily number of cases, which remained low from june to november, reached its second peak in december 2020 (35,000 per day). the number of cases, which decreased again, exceeded 63,000 daily at the end of april 2021, and the third wave was seen. with the intense restrictions applied in the same period and the start of vaccination, the number of daily cases decreased to 5,000 at the end of june 2021 (figure 1). fig. 1 daily covid-19 cases in turkey source: derived from www.worldometers.info, 2021. the continuation of the pandemic has also negatively affected the turkish tourism sector. as of 2019, turkey was among the top 5 countries in the world with 51 million annual visitors and 34 million usd tourism income. tourism revenues are of vital importance in terms of turkey's balance of payments. however, as can be seen in table 1, 2020 has had profound effects on the turkish tourism sector. according to table 1, the number of tourists and tourism income decreased to zero in april-may and june immediately after the pandemic declaration. after this dramatic situation, annual tourism income remained at the level of 12 million usd (65% decrease) and the number of tourists remained at the level of 15.8 million (69% decrease). although decreases are seen in the tourism index due to the number of cases and deaths caused by covid-19, upward movements have emerged in the index again with the expectations that vaccine development and vaccination activities will start in the world. in 2020, there were 8 tourism companies (avtur, ayces, maalt, martı, metur, tektu, ulas and utopia) in the tourism index of borsa istanbul2. these companies are largely hotels that 2 https://www.kap.org.tr/tr/endeksler, accessed on 31.12.2020 http://www.worldometers.info/ http://www.worldometers.info/ https://www.kap.org.tr/tr/endeksler how covid-19 pandemic affected the tourism index in borsa instanbul? 231 provide for customers from abroad. therefore, these companies were significantly negatively affected by the pandemic. table 1 tourism income and number of visitors by months in turkey, 2019-2020 months 2019 2020(1) tourism income (000 $) number of visitors average expenditure per capita ($) tourism income (000 $) number of visitors average expenditure per capita ($) total 34,520,332 51,860,042 666 12,059,320 15,826,266 762 january 1,585,517 2,226,288 712 1,834,008 2,529,423 725 february 1,359,194 1,944,957 699 1,479,447 2,051,923 721 march 1,684,968 2,473,147 681 787,750 1,058,068 745 april 1,996,446 3,266,256 611 may 2,639,675 4,219,837 626 june 3,337,843 5,276,253 633 july 4,384,887 6,703,045 654 561,409 777,043 722 august 5,244,124 8,167,150 642 1,622,303 2,192,917 740 september 4,402,111 6,741,769 653 1,860,644 2,634,195 706 october 4,101,484 5,437,494 754 2,054,889 2,355,124 873 november 2,138,195 3,005,517 711 1,051,951 1,262,757 833 december 1,645,890 2,398,329 686 806,918 964,816 836 note: figures in table may not add up to totals due to rounding. (1) annual data for 2020 include the data for 1st, 3rd and 4th quarters. 'data related to the 2nd quarter of 2020 was not published because survey could not be conducted at border gates due to coronavirus (covid-19) pandemic. calculations are made by extracting the departures of syrians from the gaziantep kargamış, hatay cilvegözü and yayladağı, kilis öncüpınar and şanlıurfa-akçakale border gates from the border figures of general directorate of security. source: turkish statistical institute, turkstat departing visitors survey, 2021. globally, the covid-19 pandemic causes many businesses to close, production to stop, consumption to decline, and unemployment to rise. the economic effects of the epidemic are being felt decidedly between countries and sectors, which negatively affects financial markets. the covid-19 pandemic did not affect sectors at the same level. while some sectors are turning this into an opportunity, companies in some sectors are at risk of bankruptcy. companies in areas such as pharmaceuticals, food, cleaning, chemicals and telecommunication are among those positively affected by the pandemic. while human mobility was a major factor in the spread of the covid-19 epidemic, tourism was one of the sectors most affected due to measures taken to restrict this mobility. covid-19 pandemic causes significant damage to the tourism sector, therefore its effects on the tourism index need to be investigated. because, in terms of trading volume and market value, borsa i̇stanbul is among the top 30 stock exchanges in the world and the top 3 stock exchanges in terms of trading turnover rate. the high speed of trading turnover indicates that borsa istanbul is one of the most liquid stock markets in the world. on the other hand, there are thousands of active and potential investors who have invested in the stocks of tourism companies traded on this exchange. in order for investors to decide to invest in companies included in the tourism index, it is also necessary to analyze the relationship between the number of cases and deaths related to the pandemic and the tourism index. the purpose of this study is to investigate the impact of the covid-19 pandemic on the tourism industry. for this purpose, in order to see the impact of the covid-19 pandemic, the 232 e. özen, l. özdemi̇r daily total number of cases and deaths and the bist tourism sector stock index representing the tourism sector were included in the analysis. in the study, it was tried to determine whether there is a long-term relationship between covid-19 and the tourism index by ardl bound test using daily data for the period of 27.03.2020 31.12.2020. in addition, the impact of the covid-19 pandemic on the tourism index was investigated using the cointegrating regression models (fmols, dols and ccr). in this study, the current literature investigating the impact of the covid-19 pandemic on markets is included in section two. the research methodology is presented in the section three and the data in the section four. the study is completed with the fifth section, where the results of empirical analysis are evaluated. 2. literature review the covid-19 pandemic has had profound effects on the world economy and financial markets. numerous academic studies published since the first cases and deaths have sought to guide policymakers by analyzing the effects of the pandemic on the economy and financial markets. zeren and hızarcı (2020) found that all stock market indices involved in their study with deaths caused by covid-19 move together in the long term. however, while there is a long-term relationship between the total number of covid-19 cases and the sse, kospi and ibex35 markets, there is no long-term relationship between the ftse, mib, cac40 and dax30 markets. liu et al. (2020) determined that the indices declined rapidly after the covid-19 outbreak. in their study, zhang, et al (2020) determined that a high correlation emerged between stock returns and the covid19 pandemic after the outbreak of the pandemic. al-awadhi et al. (2020) found that stock returns were significantly negatively correlated with daily increases in both cases and deaths. similarly, şenol and zeren (2020) found that there is a long-term relationship between the stock markets and covid-19 data. yan (2020) and liew (2020) revealed in their study that the covid-19 outbreak caused stock prices to fall sharply. saka ilgın & sarı (2020) determined a causal relationship from the number of cases and deaths to stock markets in the usa, india, brasil, colombia and turkey. on the other hand, the studies of alber (2020) and ashraf (2020) show that the sensitivity of the indices to the number of cases is stronger than the number of deaths. lin & falk (2021) investigated the changes in the return and volatility of travel and entertainment indices of 3 nordic countries due to covid-19 during the period of june 2018 to june 2020. the authors determined that there was a regime change during the study period. according to the results of the study, while pandemic increased the performance of gambling businesses, it had a negative impact on international transportation, the hotel and restaurant businesses. lee et al (2020) stated that during the first wave of the pandemic, the klci index and all sub-indices were adversely affected, except for the real estate sector index in malaysia. there are also studies in the literature examining the impact of the covid-19 pandemic on turkish financial markets (kandil göker et al., 2020; öztürk et al., 2020; tayar et al., 2020; kılıç, 2020; özdemir, 2020; korkut et al., 2020). kandil goker et al. (2020) found that the highest decreases in the covid-19 period were in the sports, tourism and transport indices. ozturk et al. (2020), in his study, especially metal products, machinery, sports, tourism, transportation, banking and insurance sectors were determined to be among the most affected sectors, while food, beverage, wholesale and retail trade were determined as less affected how covid-19 pandemic affected the tourism index in borsa instanbul? 233 sectors. in the study of kılıç (2020) it was determined that the textile and tourism sectors were exposed to the highest negative impact, while it was concluded that the trade sector provided positive returns during the epidemic process. tayar et al. (2020), in their study, determined that the covid-19 epidemic had significant and negative effects on the electricity, transportation, financial, industrial, technology sectors, while significant effects were not reached in the food-beverage, trade, textile, tourism and services sectors. korkut et al. (2020) determined that both the daily number of covid-19 cases and the number of daily deaths from covid-19 have a cointegrated structure with the bist tourism index. it has been understood that the pandemic data has a negative relationship with the bist tourism index in the short term, and a positive relationship in the long term. ege & metin (2021), on the other hand, investigated the impact of the first covid-19 news in turkey. according to the study, on food and tourism indexes, the first news of covid-19 had a positive effect on the food index and a negative effect on the tourism index. 3. methodology in order to examine the impact of the covid-19 pandemic on the tourism index, it was first tested whether there was a long-term relationship between the variables. later, the cointegrating regression models were established to see the impact levels of the covid19 pandemic on the tourism index. 3.1. auto regressive distributed lag (ardl) bound test cointegration implies that variables move together in the long run. engle and granger (1987), johansen (1988) and johansen & juselius (1990) cointegration tests, which are called classical cointegration tests, test the long-term relationship between stable variables of the same order. on the other hand, in the ardl bound test approach developed by peseran et al. (2001), it is possible to test the cointegration relationship between variables regardless of the constraint of the variables being stationary to the same degree. since the variables used in the study are stationary at different levels, the ardl bound test was used as a cointegration test. in order to determine whether there is cointegration between variables with the ardl bound test, it is necessary to establish an unrestricted error correction model first. equation 1 based on the error correction model used in this study is as follows (polat and gemici, 2017): (1) this equation shows that is the first difference and m is the appropriate number of lags. here, whether there is cointegration between variables is determined by the f test. the calculated f statistic is compared with the critical values in peseran et al.’s (2001) studies. if the f statistic is greater than the lower and upper critical values, it is decided that there is cointegration, if it is between two critical values, the situation is uncertain, if it is below the critical values, it is decided that there is no cointegration. after the cointegration relationship is found, the long-term relationship between the variables is predicted with the conditional ardl model shown in equation 2. 234 e. özen, l. özdemi̇r (2) the variables in the above equation have already been defined in the section above. this step involves finding the most suitable ardl (p, q) model with the help of akaike information criterion (aic). in the last stage, short term parameters are obtained by estimating the error correction model associated with long term parameters. this relationship is given as follows in equation (3): (3) the in the above equation is speed of adjustment and ecm represents the error correction term, which is calculated from the estimated equilibrium relationship established in equation (1). the speed of adjustment constitutes the speed at wich disturbance created by short run shock reaches back to long run equilibrium. 3.2. cointegrating regression models when the variables are cointegrated, a relationship occurs between explanatory variables and error terms, and this situation creates an endogeneity problem. in this case, the variables lose their asymptotic properties. three methods, full modified ordinary least square (fmols), dynamic ordinary least square (dols) and canonical cointegration regression (ccr) have been proposed to overcome these problems. all of these methods make various transformations about variables in order to eliminate the endogeneity problem (berke, 2012). in the fmols estimator, asymptotic bias and externality assumption is used to compensate for the inability of the ols estimator to calculate optimal values of the cointegrated equations (chen & huang, 2013). fmols estimator assumes the existence of a single cointegrated vector (phillips and hansen, 1990). the fmols estimator uses a quasi-parametric correction method to avoid prediction problems caused by the long-term correlation between the cointegrated equation and stochastic shocks. consequently, the estimator is fully efficient and asymptotically neutral, allowing standard wald tests using the asymptotic χ2 distribution. the canonical least squares method (ccr) expressed by park (1992) is similar to the fmols estimation. the ccr method uses the stationary transformations of the data to eliminate the long-term correlation between shocks in the cointegration equation and stochastic variables in determining the least squares estimation. dynamic least squares method (dols) was developed by stock and watson (1993). the dols method is a method that can eliminate the deviations in static regression (especially caused by endogeneity problems) by including dynamic elements in the model. in addition, the method determines the long-term coefficients between variables by adding the preliminary and lagged values of the difference of independent variables to the model. how covid-19 pandemic affected the tourism index in borsa instanbul? 235 4. data the purpose of the study is to determine how and to what extent the covid-19 pandemic impacted the tourism sector. for this purpose, the number of cases caught in the covid-19 pandemic and the number of people who died from the pandemic in turkey with the bist tourism sector stock index are included as variables. in the study, it was analyzed using daily data for the period 27.03.2020 31.12.2020. the reason for the data period to start from 27.03.2020 is that the covid-19 virus was first seen in turkey in march. the data of the covid-19 pandemic was taken from the turkish republic ministry of health covid-19 information platform and stock index data was taken from the investing.com database. the relationship between the covid-19 pandemic and the tourism stock index was analyzed using the eviews package program by taking the logarithm of the daily data of the variables. graphical representation of the variables used in the study is given in figure 2. 6.5 7.0 7.5 8.0 8.5 9.0 m3 m4 m5 m6 m7 m8 m9 m10 m11 m12 2020 case 2.4 2.8 3.2 3.6 4.0 4.4 4.8 5.2 5.6 m3 m4 m5 m6 m7 m8 m9 m10 m11 m12 2020 death 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8 m3 m4 m5 m6 m7 m8 m9 m10 m11 m12 2020 tourism fig. 2 graphics of covid-19 incident and death numbers and tourism index series source: prepared by the author 236 e. özen, l. özdemi̇r the statistical characteristics of the covid-19 case and death and bist tourism index series are shown in table 2. it is seen that the number of covid-19 deaths has a high standard deviation according to the number of cases. this situation indicates that the number of deaths exhibit high volatility. the fact that the calculated jarque -bera values of the series are statistically significant indicates that the series are not normally distributed. table 2 descriptive statistics tourism case death mean 5.224974 7.574138 3.971848 median 5.251278 7.421178 4.060443 maximum 5.710195 8.906664 5.556828 minimum 4.342506 6.666957 2.639057 std. dev. 0.316691 0.581665 0.869617 skewness -0.549196 0.659028 0.146325 kurtosis 2.594380 2.447038 1.923885 jarque-bera 10.91080 16.25920 9.897532 j-b probability 0.004273 0.000295 0.007092 observations 191 191 191 source: compiled by the authors 5. analysis and findings before looking at the relationship between the covid-19 case and death numbers and industry stock indices, it was examined whether the series were stationary or not. for stationarity analysis, adf (extended dickey-fuller) unit root test developed by dickey and fuller (1979) and pp (phillips-perron) unit root test developed by phillips perron (1990) were used. the unit root test results for the regression models in which the series have constant terms, constant terms and trend terms are presented in table 3. table 3 adf and pp unit root test results variables augmented dickey-fuller (adf) test philips-perron (pp) test stationary level intercept trend and intercept intercept trend and intercept tourism level -3.0204** -4.4889*** -3.1046** -4.4791*** i(0) case level -1.4357 -1.6630 -1.3753 -1.6028 i(1) difference -15.1533*** -15.1066*** -15.1127*** -15.067*** death level -0.6815 -1.0382 -0.9458 -1.3054 i(1) difference -14.2892*** -14.3409*** -14.2580*** -14.431*** ** and *** indicate respectively statistical significance at the 5 and 1percent levels. source: compiled by the authors when table 3 was examined, according to the unit root test results, it was revealed that the tourism index series did not have a unit root in both the adf test and the pp test. thus, the null hypothesis that there is a unit root in the series is rejected and it is concluded that the level value of the series is stationary i(0). it has been revealed that the how covid-19 pandemic affected the tourism index in borsa instanbul? 237 covid-19 case and death series have a unit root. thus, it is concluded that the null hypothesis that there is unit root in the series is accepted and that the series are not stationary in the level values. when the first difference of the series is taken, the null hypothesis that it has unit root is rejected at the 1% significance level. thus, the series has become stationary i(1) in the first difference. 5.1. ardl method in the ardl method, first of all, it should be tested whether there is a long-term relationship between variables. to perform the ardl test, an appropriate lag number is selected according to the akaike information criterion (aic). the most suitable lag number was chosen by taking the maximum lag 4. it has been determined that it is the most suitable ardl (1,0,3) model according to the aic information criterion. the most appropriate ardl(1,0,3) bound test model and f statistics created to measure whether there is a cointegration relationship between covid-19 case and death numbers and tourism index are given in table 4. table 4 results of ardl bound test model f-statistic significance i(0) bond i(1) bond ardl(1,0,3) 7.099779** %10 4.307 5.223 %5 5.067 6.103 %1 6.73 8.053 ** indicate statistical significance at the 5 percent levels. source: compiled by the authors since the calculated f statistic is greater than the critical values at the 5% importance level, it is understood that the covid-19 case and death numbers and the tourism index are long-term co-integrated in the relevant period. after confirming that there is a longterm relationship between variables, it is possible to examine the long and short-term effects. long and short term coefficient estimates calculated for ardl (1,0,3) model are presented in table 5. the term shown by ecm (error correction model) in the table is the error correction term. the error correction coefficient of the model (-0.139) is negative and statistically significant at 1% significance level. this shows that the error correction model of the model works and the model is meaningful. this situation shows that in the case of a shock occurring in the short term, 14% of this shock will disappear in each period in the long term and it may return to balance in about seven periods (about a week). in order for the results obtained from the model to be reliable, it must provide some assumptions. diagnostic tests performed to test these assumptions are given in table 6. here; breusch godfrey is used to test the autocorrelation problem, arch value is used to test the variance problem and the ramsey reset test is used to test the error of setting up the model. since the probability values of all tests are not significant at the significance levels, it is understood that the model does not contain autocorrelation and changing variance and does not contain modeling errors. in other words, since the model provides the necessary assumptions, it can be stated that the results obtained are reliable. 238 e. özen, l. özdemi̇r table 5 results of ardl long-term and short-term long run coefficients variable coefficient std. error tstatistic prob. lncase -0.016166 0.048660 -0.332229 0.7401 lndeath -0.021977 0.035653 -0.616407 0.5384 c 4.974469*** 0.261871 18.995859 0.0000 @trend 0.005388*** 0.000318 16.917399 0.0000 error correction form variable coefficient std. error tstatistic prob. d(lncase) -0.002255 0.006770 -0.333037 0.7395 d(lndeath) -0.018114 0.017679 -1.024576 0.3069 d(lncase(-1)) -0.009536 0.022540 -0.423047 0.6728 d(lncase(-2)) -0.019192 0.015399 -1.246353 0.2143 d(@trend) 0.000751*** 0.000197 3.806344 0.0002 ecm -0.139470*** 0.032360 -4.309980 0.0000 *** indicate statistical significance at the 1 percent levels. source: prepared by the authors table 6 results of diagnostic test test statistic (prob.) arch lm 0.045287 (0.8317) breusch-godfrey 0.791976 (0.4545) ramsey reset 0.328268 (0.5674) source: prepared by the authors finally, cusum and cusumq graphs developed by brown et al. (1975) were used to determine whether there was a structural break in the predicted model. these graphs investigate whether there is any structural break in variables using the squares of recycled residuals. cusum and cusumq graphics are shown in figure 3 -40 -30 -20 -10 0 10 20 30 40 m4 m5 m6 m7 m8 m9 m10 m11 m12 2020 cusum 5% significance -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 m4 m5 m6 m7 m8 m9 m10 m11 m12 2020 cusum of squares 5% significance fig. 3 graphics of cusum and cusumq if the cusum and cusumq graphs do not exceed the critical limits at the 5% significance level, it is decided that the estimated long-term coefficients are consistent. when figure 3 is examined, it is seen that cusum and cusumq graphs are within how covid-19 pandemic affected the tourism index in borsa instanbul? 239 critical limits. therefore, it is possible to say that the long-term coefficients between variables are consistent. 5.2. cointegrating regression models at the last stage of the study, the fmols, dols and ccr regression models were used to estimate the coefficients of the tourism index with the covid-19 case and death numbers, with a long-term relationship between them. the model equation established for this purpose is as follows. (4) in the equation, ε denotes the error term of the model. as a result of the fmols, dols and ccr regression models, it was tried to determine whether the covid-19 cases and death numbers had any effect on the tourism index and the effect size. as a result of the analysis, the results of the test statistics regarding the coefficients of the independent variables in the model and the significance of the coefficients are given in table 7. table 7 results of fmols, dols and ccr regression models variables fmols dols ccr coefficient tstatistic coefficient tstatistic coefficient tstatistic lncase 0.027815 0.619611 0.003624 0.106916 0.032623 0.700095 lndeath -0.078747 -2.416905** -0.063987 -2.603810*** -0.082190 -2.443067** c 4.756811 19.82259*** 4.889903 27.47325*** 4.732980 19.09300*** @trend 0.006055 22.61963*** 0.005985 33.00882*** 0.006064 22.75532*** r2 = 0.955952 adj. r2 = 0.955241 r2 = 0.966328 adj. r2 = 0.964626 r2 = 0.955596 adj. r2 = 0.954879 ** and *** indicates statistical significance respectively at the 5 and 1 percent levels. source: prepared by the authors when the results of the fmols regression model were examined, it was determined that the deaths of covid-19 affect the tourism index at a 5% significance level. a 1% increase in the number of deaths causes the tourism index to decrease by 0.08%. the fact that the coefficient of the number of covid-19 cases was not found to be significant shows that this variable did not have a sufficient effect on the tourism index in the relevant period. as a result of the dols regression model, the effect of covid-19 deaths on the tourism index was found to be significant at 1% significance level, while the effect of the number of cases on the tourism index was not statistically significant. according to the dols regression model, a 1% increase in the number of deaths in covid-19 causes the tourism index to decrease by 0.06%. as a result of the ccr regression model, it was seen that the effect of covid-19 death numbers on the tourism index was statistically significant, and the effect of the number of cases on the tourism index was not statistically significant. according to the ccr regression model, a 1% increase in the number of deaths in covid-19 causes the tourism index to decrease by 0.08%. results obtained as a result of fmols, dols and ccr regression models support each other. the high r2 values (0.955, 0.966 and 0.955) of the established cointegrating regression models indicate that the variables explain the highly dependent variable. 240 e. özen, l. özdemi̇r 5. conclusion financial markets are quickly affected by social and economic factors. the covid-19 epidemic spread rapidly all over the world and created a crisis environment. when the covid-19 outbreak was declared by the world health organization as a global pandemic, significant declines occurred in financial markets around the world. even if the crisis in a country affects financial markets negatively, sectors can be affected by this situation in different ways. therefore, how the covid-19 pandemic affects the tourism industry of turkey is the subject of the study. the bist tourism stock index to represent the tourism sector and the number of people caught in the epidemic and the number of people who died to represent the covid-19 pandemic were taken as variables. the covid-19 virus was first seen in march in turkey. therefore, in the study, daily data for the period 27.03.2020 31.12.2020 were used in the analysis. in order to examine the relationship between the covid-19 case and death numbers and the bist tourism index, it is necessary to test whether the series are stationary or not. as a result of the adf and pp unit root tests, it was determined that the bist tourism index was stable at level, and the covid-19 case and death numbers were stable at the first difference. ardl method was used to determine the existence of long-term cointegration relationship between variables that are differently stationary. it has been determined that it is the most suitable ardl (1,0,3) model according to the aic information criterion. as a result of the ardl (1,0,3) model, it was determined that there was a long-term equilibrium relationship between variables during the analysis period. this result supports the cointegration test results of the study conducted by zeren and hızarcı (2020), şenol and zeren (2020) and korkut et al. (2020). the error correction coefficient of the model (-0.139) is negative and statistically significant at 1% significance level. this situation shows that in the case of a shock occurring in the short term, 14% of this shock will disappear in each period in the long term and it may return to balance in about seven periods (about a week). since there is cointegration between variables, the cointegrating regression models (fmols, dols and ccr) have been applied to see the effect of covid-19 case and death numbers on the bist tourism index. the results of fmols dols and ccr regression models support each other. according to the results of the cointegrating regression models, the effect of the number of covid-19 cases on the tourism index was not significant, while the effect of the number of covid-19 deaths on the tourism index was determined to be significant and negative. according to the findings, a 1% increase in the number of deaths causes the tourism index to decrease by 0.08% according to the fmols model, 0.006% according to the dols model and 0.08% according to the ccr model. the conclusion that the covid-19 pandemic has a negative impact on the tourism sector is supported by the studies of kandil göker et al. (2020), kılıç (2020) and korkut et al. (2020). however, we can say that the findings of this study do not comply with findings of alber (2020) and ashraf (2020), because they determine the case effect is more powerful than death numbers effect. this paper gives us the information on the effect of changes on covid-19 pandemics cases and deaths numbers on the tourism index of borsa i̇stanbul. so this is the originality of the present paper. within the framework of these results, investors can accurately evaluate their investments by analyzing the reactions of sectors in bist to the covid-19 pandemic. in other words, there is also the possibility that investors can turn the covid-19 pandemic into an opportunity. in future studies, the returns of the stocks of companies included in the bist tourism index can be estimated by examining the level of exposure to the covid-19 pandemic. how covid-19 pandemic affected the tourism index in borsa instanbul? 241 acknowledgement: the paper is expanded and renewed version of the conference paper presented in international scientific conference “tourism and the global crises”, held in veliko tarnovo bulgaria in 21 april 2021. references al-awadhi, a. m., al-saifi, k., al-awadhi, a., & alhamadi, s. 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(2020). financial markets under the global pandemic of covid-19. finance research letters, 36, 101528. https://doi.org/10.1016/j.frl.2020.101528 republic of turkey ministry of health (2020). covid-19 information page https://covid19.saglik.gov.tr/ , accessed: 1 february 2021 https://www.investing.com/, accessed: 1 february 2021 https://www.kap.org.tr/tr/endeksler, accessed on 31.12.2020 https://www.worldometers.info/coronavirus/country/turkey/#graph-cases-daily, accessed on 07.07.2021 kako je pandemija kovid-19 uticala na indeks turizma na istambulskoj berzi? ovaj rad ima za cilj da utvrdi kako i u kojoj meri je pandemija kovid 19 uticala na turski sektor turizma na istambulskoj berzi (bist). dnevni podaci za period od 27. marta 2020 do 31. decembra 2020 su korišćeni da bi se odredio odnos između zavisne varijabile (bist berzanski indeks turizma) i nezavisne varijabile (broj slučajeva i umrlih od kovid 19 u turskoj). kointegracijski odnos između pandemije kovid 19 i bist indeksa turizma istražen je korišćenjem ardl bound testa. osim toga, efekti pandemije kovid 19 na bist berzanski indeks turizma testirani su uz pomoć kointegracijskog modela regresije. kao rezultat ardl testa, utvrđeno je da postoji dugoročna kointegracijska veza između pandemije kovid 19 i bist indeksa turizma. osim toga, utvrđeno je da će uticaj kratkoročnih šokova koje je kovid 19 izazvao na bist indeks turizma nestati na duge staze i ponovo se izbalansirati za oko nedelju dana. prema rezultatima kointegracijskoh modela regresije (fmols, dols i ccr),vidi se da smrtnost od kovid 19 značajno utiče na sektor turizma. prema modelima, 1% povećanje u broju smrtnih slučajeva izaziva pad bist indeksa turizma za 0.08%, 0.06% odnosno 0.08%. koeficijent broja kovid 19 slučajeva nije značajan, što pokazuje da broj slučajeva nema značajnog efekta na indeks turizma. rezultati ovog rada imaju neke implikacije za investiture na berzi, kreatore politika, akademike i vlasnike kompanija iz indeksa turizma na istambulskoj berzi. ključne reči: pandemija kovid 19, bist indeks turizma, ardl bound test, kointegracijski regresioni modeli https://doi.org/10.1002/jae.616 https://doi.org/10.2307/2297545 http://doi.org/10.17261/pressacademia.2017.749 https://doi.org/10.38155/ksbd.812580 https://doi.org/10.2307/2951763 https://www.worldometers.info/coronavirus/#countries http://ssrn.com/abstract=3574374 https://doi.org/10.32951/mufider.706159 https://doi.org/10.1016/j.frl.2020.101528 https://covid19.saglik.gov.tr/ https://www.investing.com/ https://www.kap.org.tr/tr/endeksler https://www.worldometers.info/coronavirus/country/turkey/#graph-cases-daily facta universitatis series: economics and organization vol. 16, n o 1, 2019, pp. 31 47 https://doi.org/10.22190/fueo1901031a © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper compensation management and employees’ motivation in the insurance sector: evidence from nigeria 1 udc 347.426.6:005 abayomi olarewaju adeoye department of business administration, lagos state university, lagos, nigeria abstract. reimbursement has been one of the frameworks adopted in organisations to attract, hire and keep competent employees that will strategically key in to the firm’s vision, task and goals. retaining skillful employees in officialdom is imperative for the progress and enrichment of general operation of a firm. staff that is well motivated will strive to ensure that competitive advantage goal of the organisation is sustained and achieved over their competitors. the aim of this paper is to explore the association between compensation management and employees’ motivation in the insurance sector of nigeria. this study employed a non-experimental design using questionnaires as a measuring instrument to gather information. there were 250 questionnaires administered, 213 collected while 212 (84.4%) thereof were found to be usable. by employing the pearson product moment correlation coefficient, it was discovered that association exists between reward administration and workers’ motivation but a weak one. it was revealed that in nigeria insurance industry, compensation management bears a minimal influence on the enthusiasm of workers’. it is hence recommended that remuneration package of employees’ in the insurance industry in nigeria should be given priority by carrying out periodic review of the salary and making it at par with other industries in the financial sector of nigeria. key words: compensation management, employees, insurance industry, motivation, nigeria jel classification: m52, m12 received august 07, 2018 / revised november 23, 2018 / accepted january 15, 2019 corresponding author: adeoye abayomi olarewaju department of business administration, lagos state university, lagos, nigeria e-mail: abayomi.adeoye@lasu.edu.ng 32 a. o. adeoye introduction it is essential that organisations formulate plans that facilitate achievement that will lead to best management practice, workers’ improvement; increasing the cutting edge of both the firm and staff is also imperative for the correlation of human resource management (hrm) and the outcome of the firm. across core functional areas of human resource practices such as recruitment, task evaluations, staff enhancement, manpower designing, workers’ engagement, in addition to reward dispensation, affinity of remuneration and effort is a subject of concern in extant literatures. it is assumed that adequate reward system can motivate individuals to perform and therefore contribute positively to the firms’ outcome (al-shaiba & koҫ, 2017; tsai, 2005). one of the functions of hrm is compensation management which entails benefits that individuals are receiving in exchange for the task performed within the establishment (dessler, 2008; khan, aslam & lodhi, 2011; nazim-ud-din, 2013; van der merwe, 2009). compensation is the cost of doing business for many organisations (hackett & mcdermott, 1999; ivancevich, 2004). the issue of remuneration plays a vital role in decision making of new entrants and existing staff of the firm. it encourages organisations in implementing the style of the firm that enhances their aggressive gain against main rivals in the same line of operation (heneman, judge & heinemann, 2000; hyondong, 2006; ivancevich, 2004; rotea, logofatu & ploscaru, 2018). additionally, pecuniary funds are spent in fashioning, systematising and managing recompense arrangements within the company. despite its contributions toward the success and business enlargement, academics and specialists argued that the progress of research investigation of reward strategies has been slow (heneman et al., 2000; kersley & forth, 2005). recently, strategy of administering workers’ emolument has taken a dramatic shift in nature. this is a demonstration of inducement factor on staff’s outcome (heneman et al., 2000; purcell, kinnie, & hutchinson, 2003). motivation simply means encouragement to act in a certain way, which may be negative or positive. it is one of the interesting terms in management literature. motivation is described as one of the fundamental functions of a manager who is responsible for ensuring that the goals of the organisation are accomplished by boosting morale of employees. the word motivation was coined out of latin word ‘movere’ signifying movement (adeoye, 2014; kreitner & kinicki, 1998). motivation denotes ‘those psychological processes that cause stimulation, guidance and endurance of voluntary actions that are goal oriented’ (mitchell, 1982). motivation is said to be the propelling force supporting individual’s action that boost goal comportment in order to fulfil some needs or expectation (ahlstrom & bruton, 2010; kelly, 2009; seiler, lent, pinkowska, & pinazza, 2011). ramlall, (2004: 52), walker, greene and mansell (2006) alluded that motivation is the inclination to put up effort to accomplish structural targets, conditioned by the different types of motivation, namely: financial and non-financial motivation, intrinsic and extrinsic motivation. this study aims to explore the association between reward administration and employees’ motivation. we argue that compensation management influences employee’s motivation through pay satisfaction, fair pay, overtime payment and adequate review of salary (mckee-ryan & harvey, 2011; khoreva, 2012; aguinis, joo & gottfredson, 2013; adeoye & fields, 2014; kalshoven & boon, 2015; kumar, hossain & nasrin, 2015). compensation management and employees’ motivation in the insurance sector: evidence from nigeria 33 1. literature review a major function of compensation management is to modify the employee’s behaviour and cause them to act in certain way. though an organisation intends to encourage employees to stay within the organisation, it also strengthens employees’ effort with adequate reward administration. three major components in motivation are: what is crucial to the employee, trading it for something, then getting the needed behaviour (milkovich & newman, 1999; tang, luna-arocas, sutarso, & tang., 2004). hence, offer from the organisation influences an employee’s behaviour through an exchange procedure. 1.1. compensation management compensation management refers to the function of human resources management (hrm), which talks about the return individuals get for executing a task within the organisation. it is the cost of doing business for many organisations, that is, employees’ trade labour and loyalty for financial and nonfinancial compensation related to wage, allowances, services, as well as recognition. it is also viewed as a propelling engine for employees’ performance when institutions endeavour to make them better persons by adding to employees’ satisfaction and development (nzyoka & orwa, 2016; mabaso & dlamini, 2017; uwizeye & muryungi, 2017). reward system is put in place to achieve fairness that is acceptable to both the employer and employees (mujataba & shuaib, 2010; agwu, 2013). the desired outcome of compensation management is to recruit employees who are enticed to work and encouraged to serve the employer, retain them, reduce labour turnover, absenteeism and thus reduce the potential for industrial conflict (ivancevich, 2004; nickels, mchugh, & mchugh, 1999; nikonova, uspenskaya, nazarova & voikina, 2018). the major function of hrm relating to compensation encompasses managing financial participation such as save-as-you-earn (saye) schemes, share incentive plans (sips) and worker’s retirement and salaries. it also involves employee engagement, fair pay, executive reward, etc. (chartered institute of personnel development (cipd), 2005 & 2006). remuneration administration is strategic in nature especially in line with organisation’s pursuit, vision and corporate goal, as well as supporting human resources strategy (hrs) needs. moreover, an organisation has numerous ways to connect its mission and values to a strategic business-driven payment philosophy. compensation management is associated with better business performance and organisation should connect its mission and values to its compensation systems. there are different methods of determining workers’ remuneration and these include job evaluation, merit pay, market surveys, the change in nature of pay as well as performance-based pay (heneman, 2002). 1.2. objectives of compensation management the reimbursement function is aimed at grafting a system of incentives that is impartial and satisfactory to both parties in employment relationship. the consequential effect of reward is the attraction and encouragement of staff to provide a remarkable service for the employer. nickels et al., (1999) and ivancevich (2004) highlighted the objectives of compensation as follows: 34 a. o. adeoye  draw: drawing the right kind of people that are having the prerequisite qualification and know-how needed by the organisation and in sufficient numbers.  justifiable: fairness should be employed in fixing the amount paid in line with work, capabilities, talents and education attained.  impartial: emolument, returns and recompense should be comprehensive in nature.  protection: assuring personnel’ financial security such as insurance and retirement scheme.  reduced expenses: the wage should not be bogus and be within what the organisation can afford.  inducement offering: the remuneration must offer enticements that will stimulate well, competently and fruitfully at work.  holding: the earnings should hold back valued employees and discourage them from joining competitors or starting similar firms.  competitive position: the pay should maintain a competitive advantage in the marketplace by maintaining low charges through high productivity from a satisfied labour force. 1.3. types of compensation 1.3.1. financial compensation financial compensation is also known as compensation in monetary terms, which comprises of financial rewards and financial incentives. according to armstrong (2003: 687), ‘monetary compensations offer financial recognition for outstanding achievements or recording high above targets or reaching certain levels of competence or expertise while economic spurs aims at motivating people in achieving goals, performance enhancement or improve their proficiency or proficiencies by focusing on specific targets and priorities’. this is a cost to the employers which acts as an antidote to the motivation of an employee that invariably transforms the performance of the employees’ which also translates to positive organizational outcome (idris, hamzah sudiirman & hamid, 2017, mardiyanti, utami & prasetya, 2018). 1.3.2. nonfinancial compensation this is a kind of compensation that does not involve money directly and this reward is normally intrinsic to the job: e.g. accomplishment, sovereignty, appreciation, the span to apply for skill improvement, and tuition and vocational openings (armstrong 2003). this is made up of rewards that boost the employee’s morale and are not costly to the employer (danish & usman, 2010; resurreccion, 2012; whitehead & phippen, 2015, oburu & atambo, 2016; idris, hamzah sudiirman & hamid, 2017, mardiyanti, utami & prasetya, 2018). 1.4 variables relating to compensation the variables related to compensation are as follows: pay dissatisfaction, equitably underpaid, underpaid, overtime underpaid, inadequate review of salary and salary review not based on procedures. compensation management and employees’ motivation in the insurance sector: evidence from nigeria 35 1.4.1. pay dissatisfaction this occurs when employees perceive that what they earn does not match-up with their expectations, that is, when they think that the value of what they earn does not reflect the effort they actually put into their jobs. hence, there is no motivation to execute their duties the way they ought to (rynes, gerhart & minette, 2004; aguinis, joo & gottfredson, 2013; darma & supriyanto, 2017). moreover, if there is a strong pay satisfaction, organisational commitment on the part of workers is increased and vice versa (tang & chiu, 2004; ali & panatik, 2015; pepra-mensah, adjei & agyei, 2017). 1.4.2. equitably underpaid this exists when individuals perceive there is a difference in their jobs and outcomes compared to what they perceive to be the inputs or outcome of others (adams, 1963; leete, 2000; yao, locke & jamal, 2018). the relevant reference group is assumed to be other employees in the same occupation in the same firm, all employees in the same firm, workers in similar occupation in other firms, or other workers in other firms. the presence of the equitably underpaid will dampen the morale of employees’ leading to dissatisfaction, hence, affecting the organisational performance and the performance of individual employees (leete, 2000). 1.4.3. underpaid the concept of underpaid is when the employees perceive that their income and output do not match the perceived income and output of others. when there is underpayment, it results in greater pay dissatisfaction than when there is equity in compensation. underpayment is perceived when there are discrepancies in pay despite the fact that employees put in the same effort (sweeney, 1990; james & kim, 2018). similarly, brown (2001) likened underpayment to inequity. when workers perceive inequity in their salary in relation to others, it has a negative consequence on their productivity and that of the organisation. in addition, maynard, joseph and maynard (2006) argue that underpayment is as a result of underemployment, which has a direct linkage to poor job satisfaction. hence, motivation of the employees is reduced and invariably leads to intention to quit the job on the part of the employees. 1.4.4. overtime underpaid the issue of overtime payment is one of the pertinent factors in determining employees’ motivation. this is part of the cash-based compensation that is adopted by organisation to motivate employees. overtime is the allowance paid for extra time spent over and above the normal working hours. overtime pay has played an important role in workers’ satisfaction (chiu, luk & tang, 2002). the findings of this current study show that many insurance workers are dissatisfied because of the overtime underpayment by their organisation. 1.4.5. inadequate review of salary review of salaries in organisations is one of the crucial factors used to motivate employees’ towards the attainment of greater performance. common practice is for the salary review to be anchored to promotion to the next level or cadre or an annual increment on the basic salary and may include other emoluments. the annual salary review is an ample opportunity to measure and quantify the performance and accomplishments of past effort 36 a. o. adeoye within an accounting period. the review also creates an avenue to draft the next line of action or the objectives for the following year. serhan, achy and nicolas (2018) acceded that adequate and effective review of salary will lead to employees’ motivation in the public sector thereby enhancing high productivity. however, every set objective should be measurable and the mode of measurement should be quantitative in nature. the management should set targets that should carry an assigned value or weighting. specifically, yearly targets or goals should carry numerical weightings and this will enable the employees’ to understand their tasks with the aim of accomplishing them within a reasonable time frame (swartz, 2006). the current study shows that salary review is not often done in insurance firms in nigeria and employees’ are not motivated or geared toward greater performance and in some cases the salary review is done downwardly. 1.5. motivation this is one of the fundamental functions that a manager performs to ascertain that the goals of the organisation are accomplished by boosting employee morale. as already mentioned, the word ‘‘motivation’’ was gotten from a ‘movere’, tantamount to motion (kreitner & kinicki, 1998). stimulus represents ‘those emotional courses that triggers of deliberate engagements focused on a particular goal’ (herzberg, mausner & snyderman, 1959, mitchell, 1982, lin, 2007; woźniak, 2017). motivation is described as a propeller for individual’s actions for putting up certain behaviour to accomplish a purpose (kelly, 2009, ahlstrom & bruton, 2010; olusadum & anulika, 2018). osterloh, frost and frey (2002) and kuranchie-mensah and amponsah-tawiah (2016) say that motivation comprises two dimensions, these being extrinsic and intrinsic in nature. extrinsic motivation is when employee’s satisfy their needs indirectly, especially through monetary or financial remuneration, while intrinsic motivation occurs when an activity achieves the immediate satisfaction of a worker’s needs. egan, yang and bartlett (2004) viewed motivation as a means of knowledge transfer which they described as the intention of the trainee to adopt the knowledge and skills acquired to improve and uplift the job when they are adequately remunerated. adeoye (2001, p. 46) alluded that ‘‘motivation is a bait to stir the staff curiosity to accomplish a set up goal of an organisation’’. 1.5.1. pecuniary motivation pecuniary motivation is said to be straight or overt. straight pecuniary motivation comprises reward of the employees like incomes, earnings, extras or commissions, while overt pecuniary motivation entails pecuniary motivation or booties that are not included in straight pecuniary motivation such as holiday, child welfare or senior citizen welfare care, various kinds of insurance, etc. (ivancevich, 2004). 1.5.2. nonpecuniary motivation this non-pecuniary motivation has no monetary involvement, such as commendation, accountability, respect and appreciation that influences motivation and efficiency of staff (ivancevich, 2004; willis-shattuk, bidwell, thomas, wyness, blaauw & ditlop, 2008; meta, alib & alic, 2015). compensation management and employees’ motivation in the insurance sector: evidence from nigeria 37 1.5.3. intrinsic motivation intrinsic motivation is derived by an employee from doing a job well, which also provides immediate satisfaction or fulfils a need that is enhanced by commitment to the work. osterloh (2005, p. 8) argued that ‘intrinsic motivation is enhanced by dedication to duty, according to the saying that if you want to encourage people to do a good job, assign a good job to them’. lin (2007, p. 137) described intrinsic motivation as something ‘that connotes pursuit for its own sake, passion, or for leisure and fulfilment stemmed from the experience’; while gagne & deci (2005, p. 331) said ‘intrinsic motivation enmeshes people engage in exploits because it is interesting and obtain unplanned gratification from the activity itself’. osterloh and frey (2000) looked at intrinsic motivation as carrying out a task for the provision of immediate needs and satisfaction. they concluded that the perfect incentive is embedded in the work making the staff satisfied and fulfilled. 1.5.4. extrinsic motivation this is how indirect wants are met, e.g. money as gratification for a well done task, e.g. salary adjustment, applause and advancement. as compensation, money is a means to an end, such as paying for a vacation or buying a car, and money is not an end in itself. for example, the job that one does is just a tool to satisfy one’s needs using the salary paid for that job. examples of extrinsic motivation as highlighted by herzberg (1966) in his two-factor theory tagged hygiene factors are: salary, guardianship, social interactions, company policy and administration, working conditions and employment protection. osterloh and frey (2000, p. 539) argued that ‘‘extrinsically staff is inspired when their needs are realised through pecuniary compensation’’. income offers fulfilment that is free of the real pursuit (calder & staw, 1975, p. 599). gagne and deci (2005, p. 331) are of the opinion that ‘‘extrinsic motivation involves relationship concerning the pursuit and distinguishable outcomes like visible or voiced recompenses which leads to contentment from the extrinsic corollaries to which the activity leads. extrinsic incentive targets result in details like encouragements obtained in the cause of carrying out an activity (lin, 2007). individual behaviour is geared to the perceived values and benefits that are attached to an action. organisational rewards are a useful instrument to encourage individuals to perform in a desired way and they can take the form of financial inducements like salary review and leave allowances and non-financial incentives like career advancement and occupation protection (lin, 2007; nell, 2015). 2. research methods quantitative research design was used for this study by distributing questionnaires. a predetermined set of questions was administered to a sample population to gather data for research questions to be addressed (asika, 2008; terre blanche, durrheim & painter, 2006; saunders, lewis & thornhill, 2013). through the engagement of survey enquiry approaches, scholars adopt methods of inferential statistical tools that are applicable to assemble records (baruch & holtom, 2008). from the population of this study, a selected sample was extricated. quantitative survey design was engaged for the purpose of this study. structured questionnaire was employed to elicit information from the respondents from a single insurance company. the data gathering from a single insurance company was due to many 38 a. o. adeoye reasons suggested by byron (2005) as lack of consistency can mar the study outcome and the interpretation problematic. the data were gathered using the staff of one insurance enterprise situated in south-western part of nigeria. human resources section of the insurance firm assisted in the distribution of the instruments to the staff. the management encouraged the employees to partake in the exercise fully. the privacy of the employees ascertained and maintained as completed questionnaires were returned to the hr department anonymously. in the study, 250 questionnaires were distributed, 213 were returned and 212 found usable and satisfactory representing 84.4%. two data collection instruments were employed for this study. motivational questionnaire published scale (mqs) by mottaz (1985) was adapted, while the other one was self-developed. compensation management was rated employing a scale advanced by the researcher tagged compensation management questionnaire scale (cmqs) on a six-item measure to be responded to by the participants. the items used in this study include ‘my salary is proportionate to my responsibility’, ‘my pay is greater than what parallel company pays’ etc., and likert’s seven-point scale was used in measuring reactions of the respondents on 7 (strongly agree) to 1 (strongly disagree). in this study, the cronbach’s α was 0.87 which expresses internal consistency and reliability of the instrument. the assessment of motivation was based on six-items imploring respondents to answer centred on motivation questionnaire scale (mqs) mottaz (1985), brislin, kabgting, macnab, zukies, and worthly (2005), mahaney and lederer’s (2006) and altindis (2011). this is gauged on likert five-point scale ranging from 1 (strongly disagree) to 5 (strongly agree). it is made up of 16 items and two dimensional scales; intrinsic motivation (im) was appraised based on eight elements, illustrated by ‘i do take responsibilities related to my work’, while extrinsic motivation (em) assessed engaging eight items, e.g. ‘my promotional prospects are high’. for this study, im cronbach’s α = .79, im cronbach’s α = .54 and motivation cronbach’s α = .90 which reveals the reliability of the scales (altindis). in this study, likert’s seven-point scale was employed ranging from 7 (strongly agree) to 1 (strongly disagree). current cronbach’s α coefficient is 0.81 depicting internal consistency and reliability of the instrument. test of data reliability and consistency was done by calculating cronbach alpha. cronbach alpha coefficients (α) of the study were α= .869 (for compensation management) and α= .813 for (motivation). the generally accepted cut off is that the alpha scores should be higher than 0.70 (george & mallery, 2003). the entire cronbach alpha depicts core stability and dependability of the data and questionnaire authenticity was done through experts in the field. the data collected could, therefore, be regarded as reliable and valid. 3. results and discussion the data analysis was done using descriptive and inferential statistics. the data was coded and grouped before inputting the result using the computer. the data collected were analysed and this was accomplished with the aid of statistical package for social sciences (spss) version 21. the choice of the package was predicated on its convenience in analysing and interpreting data (muijs, 2011; parke, 2013). the demographic profiles of the participants were explained via descriptive statistics while the study preposition was tested using pearson product moment correlation. compensation management and employees’ motivation in the insurance sector: evidence from nigeria 39 table 1 participant biographical characteristics variable characteristics frequency percentage sex men 122 57.5% women 90 42.5% conjugal category single 75 35.4% married 120 56.6% divorced 7 3.3% widowed 5 2.4% separated 3 1.4% missing item 1 0.9% age 20-30 years 59 27.8% 31-40 years 92 43.4% 41-50 years 45 21.2% 51 years or more 15 7.1% missing item 1 0.5% education school certificate 8 3.8% ond/nce 26 12.3% hnd/bsc 109 51.4% professional 13 6.1% others 6 2.8% work experience 1-3 years 51 24.1% 4-5 years 59 27.8% 6-9 years 52 24.5% 10 years and above 49 23.1% missing item 1 0.5% (n = 212) source: field survey, 2017 from the table, it is clear that there are more men than women that partook in the study, 122 men (57.5%) and 90 were women (42.5%). a total of 120 (56.6%) respondents are wedded. the chunks of the participants were between 31 and 40 years of age, and 51.4% had a first degree, 23.6% had a postgraduate degree and 6.1% had professional qualifications. in terms of working experience, 76.8% had between one and nine years. table 2 descriptive statistics and pearson correlation coefficients variables mean standard deviation 1 2 3 4 5 6 employee’s motivation 25.59 5.592 pay dissatisfaction 3.97 2.015 .424 equitably underpaid 3.12 1.681 .406 .643 underpaid 3.50 1.802 .442 .715 .675 overtime underpaid 2.80 2.354 .492 .369 .392 .405 inadequate review of salary 3.28 1.766 .486 .644 .564 .669 .434 salary review not based on procedures 3.18 1.757 .456 .521 .632 .506 .425 .545 correlation is significant at 0.05 level (1-tailed), p<0.05 source: field survey, 2017 40 a. o. adeoye descriptive statistics are taking the nature of arithmetic means, that is, the average of what the respondents are saying in terms of their conformity to the statements and their perception about the issue. the computed standard deviations for participants for overall employees’ motivation as the dependent variable has 25.59 as weighted average and 5.592 standard deviation as presented in table 2 above and this is to confirm that there may be a great dispersion from what the respondents are saying. questionnaire assessment on compensation management items under table 2 displays averages for pay dissatisfaction, equitably underpaid, underpaid, overtime underpaid, inadequate review of salary and salary review not based on procedures ranged from a low 2.80 to a high 3.97. the pay dissatisfaction, equitably underpaid, underpaid, overtime underpaid, inadequate review of salary and salary review not based on procedures are treated as the independent variable which is compensation. this is an indication of poor motivation but value of overtime underpaid is the lowest which indicates that this is an area that workers are demoralised and discontented. moreover, table 2 portrays that the workers are inspired and happy beside equitably underpaid, salary review not based on procedures, inadequate review of salary, underpaid and pay dissatisfaction items but they are least motivated by the item overtime payment is underpaid. this is in line with herzberg’s (1966) two factor theory where he discussed hygiene elements. pearson’s product moment correlation coefficient was run to establish association that exists between overall employees’ motivation as dependent variable and items of compensation management as the independent variables. however, to explain the relation between the various items of reward administration and workers’ enthusiasm, items that were correlated are presented under table 3. table 3 coefficients between compensation management and employees’ motivation. variables employees’ motivation pay dissatisfaction .424 equitably underpaid .406 underpaid .442 overtime underpaid .492 inadequate review of salary .486 salary review not based on procedures .456 correlation is significant at 0.05 level (1-tailed), p<0.05 source: field survey, 2017 all the variables above are significant but very low and the most significant one is overtime underpaid with .492 followed by inadequate review of salary with significance level of .486. table 3 reveals that statistically, weak association exists amongst all items of compensation management and total motivation. the correlations between overall employees’ motivation and compensation management items show statistically at the 5% level: overall employees’ motivation with overtime underpaid (r=.492, p<.05), overall employees’ motivation with inadequate review of salary (r=.486, p<.05), overall employees’ motivation with salary review not based on procedures (r=.456, p<.05), overall employees’ motivation with underpaid compensation management and employees’ motivation in the insurance sector: evidence from nigeria 41 (r=.442, p<.05), overall employees’ motivation with pay dissatisfaction (r=.424, p<.05), and overall employees’ motivation with equitably underpaid (r=.406, p<.05). all these depict overall employee drive and all items under compensation management are significantly related but weak throughout. the result of this study corroborates the previous work done on compensation and employees’ motivation by (chiu, luk, & tang, 2002; danish and usman, 2010; herpen, praag, and cools, 2005; mawoli and babandako, 2011; solomon, hashim, mehdi and ajagbe, 2012) table 4 pearson correlation between reward administration and employees’ motivation n mean std.d r p reward administration 208 3.9667 2.00334 employees motivation 208 5.7524 1.40433 .648 .000 correlation is significant at the 0.05 level. p<0.05, reward administration and the staff motivation is significantly associated. source: field survey, 2017 table 4 shows the relationship between reward administration and the staff motivation in an insurance firm in nigeria. as indicated in table 4, correlation between reward administration and the employees’ drive is 0.648. the p-value is 0.000 and is lower than .05 with correlation coefficient r=0.648. the correlation between reward administration and workers’ motivation of the insurance firm in nigeria is very strong because the correlation coefficient is 0.648 or 64.8%. this entails that a linear relationship exists amidst the variables which discloses a positive relationship. in other words, compensation management contributes significantly to motivation of staff in insurance industry in nigeria. still association between compensation management and employees’ motivation is not very strong. this study investigates association amid pay dissatisfaction, equitably underpaid, underpaid, over-time underpaid, inadequate review of salary, and salary review not based on procedures, which are compensation management items related to employees’ motivation. the result is in accordance with the objectives of this study. pearson product moment correlation coefficient was computed deliberately to determine relationship between various compensation management items and overall employees’ motivation, the result found was quite revealing and interesting. although the relationship is not strong enough, it still shows that employees’ are not highly motivated in the insurance industry in nigeria. the correlation between overall employee motivation and payment for overtime has the highest significant relationship of 0.492 or 49.2% to the lowest value of 0.406 between overall employees’ motivation and equitable pay with other people in similar jobs. the weak values among the compensation management items are due to the fact that salary review and implementation in the nigerian insurance industry is not often carried out by managements nor is it done periodically. the low employee motivation in the insurance industry in nigeria is a common feature because of the disparity in payments within the industry and this is as a result of the ownership structure, that is, most insurance companies are owned by private individuals. one of the revelations of this study is that there is an outcry through the responses of the participants that there is pay dissatisfaction, equitably underpaid when compared with their counterparts in similar industry. it was also revealed that there is underpaid, overtime underpaid, inadequate review of salary and salary review not based on procedures which culminated to not being motivated 42 a. o. adeoye the result of this study is of immense value for both people at managerial level and decisionmakers. managers should make workers’ salaries commensurate with tasks being carried out. secondly, the management should ensure that the disparity between what the employee receives and what other people in similar jobs are receiving is not wide. thirdly, the rate being paid for overtime should be improved upon to motivate employees when required to work extra hours. fourthly, the salary review should be done fairly and not favour some employees at the expense of others. lastly, the salary review should follow a laid down procedure and should be done periodically especially when the firm is making progress. if all these factors are considered in the insurance industry in nigeria, there will be a reduction in labour intent, absenteeism, strikes and industrial disputes, and it will also lead to high productivity levels, high revenue generation and improved organisational performance. for further studies, focus may be shifted to other industrial sectors of the economy like manufacturing industry, construction industry, and oil industry and could also include focusing on combining organisations within the same sector, for example, banking, and insurance and stockbrokerage industries. the study outcomes have far reaching inferences for human resource administrators in nigeria’s insurance division. specifically, inferences on employee motivation. the analysis revealed weak relationship amidst reward administration and worker motivation in the industry. hr practitioners are encouraged to improve on their compensation management strategies to be able to hire talented skilled people and retain them. the research work further employed bivariate analytical method to test the relationship between the variables with the use of the statistical package for social sciences (spss) version 22.0 where the relationship is of a quantitative nature, and measured the prediction of the value of a variable based on the value of two variables, simple regression technique is applied (mann & lacke, 2010; pallant, 2011). in presenting the estimated model coefficients, the equation obtained from the linear function regression result is given as: y= a0 + β1x1 where a0= constant; β = coefficient of independent variable x1= compensation (independent variable) y= motivation (dependent variable) y= 3.075a+ 0.359x1 a simple regression was run to predict motivation of employees (dependent variable) from compensation (independent variable). table 1 indicates that the independent variables yielded a coefficient of determination (r 2 ) of 0. .329 accounting for 32.9% of the proportion of variation in dependent variable that is explained by the independent variable. table 2, then, shows that the analysis of variance for the simple regression data produced f-ratio value of 102.178 which is significant at 0.05 (.i.e. f (1, 210) = 102.178, p < 0.05). in table 3, the independent variable (i.e compensation) contributed positively and statistically to motivation of employees at a low relationship. the result is in consistence with empirical findings of idris et al. (2017) and mardiyanti et al. (2018) who noted that compensation management acts as an antidote to the motivation of an employee that invariably transforms the performance of the employees’ which also translates to positive organizational outcome. compensation management and employees’ motivation in the insurance sector: evidence from nigeria 43 model summary b model r r square adjusted r square std. error of the estimate 1 .574 a .329 .326 .76005 predictors: (constant), com_mgt dependent variable: motivation anova a model sum of squares df mean square f sig. regression 1 residual total 59.025 120.155 179.180 1 208 209 59.025 .578 102.178 .000 b dependent variable: motivation predictors: (constant), com_mgt coefficients a model unstandardized coefficients standardized coefficients t sig b std. error beta (constant) 1 com_mgt 3.075 .359 .129 .036 .574 23.869 10.108 .000 .000 a. dependent variable: motivation conclusion this study explores the impact of reward administration on employees’ motivation. the analysis revealed weak link amid reward administration and workers’ motivation in insurance industry in nigeria, but overtime payment has shown low mean value and an insignificant relationship to overall employee motivation. the weak or insignificant relationship between compensation management and employee motivation can be improved upon by management through reviewing the pay packages of the employees, making sure that there is equitable pay structure in line with similar industries, and that overtime payment should be adequately worked on. finally, the review of salary should be done in a fair manner, periodically and procedurally. though the contribution of this study is significant to academia and practitioners of hr, there are drawbacks that open up opportunities for future research. firstly, this study covers only an industry from the insurance sector in nigeria. subsequently, researchers can endeavour to extend the study to cover other sectors in nigeria. 44 a. o. adeoye references adams, j.s. 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(2008). motivation and retention of health workers in developing countries: a systematic review. bmc health service resources, 8, 247. woźniak, j. (2017). some factors hindering acceptance of three gamification solutions in motivation systems in small and medium enterprises. management dynamics in the knowledge economy, 5 (4), 663-680. http://dx.doi.org/10.25019/mdke/5.4.11 yao, y.h., locke, e.a. & jamal, m. (2018). on a combined theory of pay level satisfaction. journal of organizational behavior, 39 (4), 448-461. http://dx.doi.org/10.1002/job.2243 upravljanje naknadama i motivacija zaposlenih u sektoru osiguranja: slučaj nigerije nadoknada je jedan od ključnih alata koje organizacije primenjuju da bi privukle, zaposlile i zadržale kompetentne zaposlene koji će se strateški uključiti u viziju, zadatke i ciljeve kompanije. zadržavanje sposobih zaposlenih unitar kompanije je ključno za njen napredak i poboljšanje opšteg poslovanja. kadar koji je dobro motivisan će se truditi da osigura da se ostvari konkurentna prednost organizacije i da se ostvari prednost nad konkurencijom. cilj ovog rada je da istraži vezu između upravljanja naknadama i motivacije zaposlenih u sektoru osiguranja u nigeriji. istraživanje je koristilo ne-eksperimentalnu shemu koristeći upitnike kao istrumetne merenja za prikupljanje informacija. podeljeno je 250 upitnika, sakupljeno 213, od kojih je 212 (84.4%) bilo upotrebljivo. korišćenjem pearsonovog koeficijenta korelacije proizvoda, otkriveno je da postoji veza između raspodela nagrada i motivacije zaposlenih, ali da je ona slaba. otkriveno je da u nigerijskoj industriji osiguranja, upravljanje naknadama ima minimalni uticaj na entuzijazam radnika. stoga se preporučuje da paket naknada zaposlenima u industriji osiguranja u nigeriji treba da dobije prioritet tako što će se periodično vršiti korekcija zarada i usklađivati sa drugim industrijama u finansijskom sektoru nigerije. ključne reči: upravljanje naknadama, zaposleni, industrija osiguranja, motivacija, nigerija 10463 facta universitatis series: economics and organization vol. 19, no 3, 2022, pp. 213 228 https://doi.org/10.22190/fueo220203016m © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper changes in fiscal deficit and public debt of the republic of serbia during the covid-19 pandemic period1 udc 336.02:[616.98:578.834 goran milovanović1, goran radisavljević2, sandra milanović3 1university of niš, faculty of economics, republic of serbia 2municipality of sokobanja, republic of serbia 3university of niš, innovation centre, republic of serbia orcid id: goran milovanović https://orcid.org/0000-0003-0091-2774 goran radisavljević https://orcid.org/0000-0002-6328-750x sandra milanović https://orcid.org/0000-0002-0582-045x abstract. the aim of this paper is to consider the nature of changes in the fiscal deficit and public debt of the republic of serbia and propose measures to reduce them, based on the analysis of selected statistical and academic sources. the fiscal deficit and the public debt of the republic of serbia constitute the subject determination of the paper. after presenting certain effects of the covid-19 pandemic, the authors investigate: the causes of the change in the fiscal deficit and public debt of the republic of serbia; the impact of the covid-19 crisis on the fiscal deficit and public debt of the republic of serbia; and the activity of the government in terms of reducing the fiscal deficit and public debt of the republic of serbia. the knowledge that is the result of this research should: contribute to the improvement of fiscal discipline; enable the determination of factors that make public debt and gdp growth sustainable taking into account fiscal constraints and risks. key words: gdp, fiscal deficit, public debt, covid-19 pandemic, fiscal consolidation. jel classification: h61, h62, h63 received february 03, 2022 / revised september 11, 2022 / accepted september 19, 2022 corresponding author: sandra milanović university of niš, innovation centre, univerzitetski trg 2, 18000 niš, republic of serbia | e-mail: sandramilanovic89@yahoo.com https://orcid.org/0000-0003-0091-2774 https://orcid.org/0000-0002-6328-750x https://orcid.org/0000-0002-0582-045x mailto:sandramilanovic89@yahoo.com 214 g. milovanović, g. radisavljević, s. milanović introduction from the global economic crisis to the covid-19 pandemic, weak fiscal sustainability has been demonstrated by both the european union (eu) and the western balkans. problems such as an increase in the fiscal deficit and public debt, which were generated by the covid-19 pandemic, have not been completely solved by these countries. during the covid-19 pandemic, the eu member states did not manage to comply with the rules of the maastricht agreement regarding public finances within their national framework, and these rules were constantly revised. in addition, this pandemic has reduced the ability of the government of the republic of serbia to maintain the required level of fiscal deficit and public debt. in order to reduce the fiscal deficit and the public debt caused by the deficit, it is necessary to identify the causes of its increase and adjust the conduct of fiscal policy accordingly. in addition to internal factors, the impact of external shocks is also important. for example, the covid-19 pandemic affected all aspects of economic activity, both at the level of individual countries and globally. according to the covid-19 index of economic vulnerability, the republic of serbia belongs to the group of countries with medium risk exposure, due to its high dependence on remittances, but also its inability to respond to shocks due to the reduced potential of the fiscal and banking sectors (davradakis et al., 2020). therefore, this pandemic also affected the budget of the republic of serbia. the trend of a surplus was interrupted by the covid-19 pandemic in 2020. a strong fiscal stimulus, along with an expansive monetary policy, mitigated the decline in gdp in 2020 due to the covid-19 pandemic and declining revenues associated with lower economic activity. the aim of this research is to provide a deeper insight into: the global effects of the covid-19 pandemic; the movement of the fiscal deficit and public debt of the republic of serbia, before and during the covid-19 pandemic; measures that have affected their reduction. getting to know the extent of the impact of this pandemic will be based on showing the dynamics of the fiscal deficit and public debt, both in the republic of serbia and in the eu and eurozone countries. the research questions posed in this paper are: r1. what are the global effects of the covid-19 pandemic? r2. what are the causes of the change in the volume of fiscal deficit and public debt of the republic of serbia? r3. how does the covid-19 pandemic affect the volume of fiscal deficit and public debt of the republic of serbia? r4. what measures contribute to reducing the values of fiscal deficit and public debt of the republic of serbia? the structure of the paper consists of three parts, in addition to the introduction and conclusion. the introduction is a brief overview of the content of the paper. the first part of the paper presents some of the global effects of the covid-19 pandemic. the second part discusses the causes and changes in the fiscal deficit and public debt of the republic of serbia, as well as the impact of the covid-19 pandemic on their change. the third part analyses some of the measures taken to reduce the deficit and public debt. at the end of the paper, conclusions based on previously analysed quantitative data and academic sources are presented. changes in fiscal deficit and public debt of the republic of serbia during the covid-19 ... 215 1. covid-19 pandemic – economic effects by the end of the first week of december 2021, covid-19 had caused the deaths of nearly 5.3 million people (wordlometer, 2021a) and the emergence of hundreds of millions of poor people. about 813,000 people died in the united states alone, and about 1.44 million in europe (wordlometer, 2021b). due to this disease, in 2020 the decline of the global economy was 4.3%. the return of global gdp to the level before the covid19 crisis is not expected before 2022 (radisavljević, milovanović & đukić, 2021). highly developed countries are the most financially capable of enduring the covid19 crisis. however, due to the high share of services in the structure of gdp, the economies of these countries showed a relatively low level of resistance to the covid19 crisis in 2020. for example, us gdp fell by 3.5% in 2020, its biggest drop since 1946, when it reached 11.6%. the consequences of the spread of this disease in 2020 were especially pronounced in the eu and eurozone countries. this year, the gdp of eu countries fell by 6.2% while the gdp of eurozone countries fell by 6.6% (eurostat, 2021a). the covid-19 crisis has not bypassed china, the world's second-largest economy. the closure of this country in the first quarter of 2020, due to the spread of covid-19 disease, led to a historic decline in its economy of 8.7%. in the second quarter of 2020, china's gdp growth rate had a positive sign of 10% compared to the previous year. however, a significant increase in china's gdp occurred in the second half of 2020. in the third quarter of 2020, china's gdp growth was 2.8%, while in the fourth it was 3%. china is the only major world economy to grow in 2020 by 2.8% (congressional research service, 2021). in 2021, china will successfully prove to the world that it has enough knowledge, money, resilience, and self-confidence to overcome the global consequences of the covid19 pandemic. despite the measures of national governments, the covid-19 pandemic spread rapidly not only in 2020 but also in 2021. the end of the first year of the covid-19 crisis was met by the republic of serbia with a 1.1% drop in gdp (government of the republic of serbia, 2021). only four countries (ireland, turkey, norway and lithuania) achieved better results in europe (european commission. 2021a). such a small decline in gdp is partly the result of government measures as well as the structure of the economy of the republic of serbia. almost all countries with a large share of agriculture in gdp, which produce less sophisticated products, whose gdp has a small share of services (especially tourism), and which are less integrated into the global economy, feel fewer negative effects of covid-19 crisis on their gdp. as governments intensified measures to curb the covid-19 pandemic, the global economy grew at the fastest pace in four decades in 2021, according to imf experts as much as 5.9% (imf, 2022). however, these experts are aware of the fact that due to the unpredictability of the pandemic, their forecasts are quite uncertain. despite the measures of governments around the world, it is difficult to expect complete prevention of the spread of covid-19 disease in 2021 and even in 2022. it is certain that the global economy will recover from this disease in 2021, but it is not certain that its recovery will be complete. 216 g. milovanović, g. radisavljević, s. milanović 2. fiscal deficit and public debt of the republic of serbia key generators and the nature of dynamics in the period from 2006 to 2022, the fiscal policy of the republic of serbia changed its direction from pro-cyclical to counter-cyclical or from expansive to restrictive, and vice versa according to the production gap and fiscal impulse changes (government of the republic of serbia, 2021). concerning covid-19 pandemic period, in 2019, fiscal policy was pro-cyclical and expansive, while in 2020 it changed to counter-cyclical and expansive. since 2021, fiscal impulse is counter-cyclical but restrictive and it is planned to withhold that trend until 2025. on the other hand, by 2017, the fiscal deficit was realized, which was accompanied by an increase in public debt. public debt reached a record level of 71.2% of gdp in 2015, followed by a declining trend, and only in 2017 did the successful conduct of fiscal policy enable the realization of a budget surplus (ministry of finance, republic of serbia, 2021). in addition to the fiscal deficit, gdp growth rates, real interest rates, changes in the real exchange rate and the level of guarantees given significantly affect the projections of the public debt-to-gdp ratio. such projections, along with a comparative analysis of other factors influencing the occurrence of the debt crisis, can serve as indicative estimates of the probability of a debt crisis in the republic of serbia (arsić et al., 2012, p. 115). in the next part, the causes and dynamics of the fiscal deficit as a predictor of the public debt of the republic of serbia will be analysed. 2.1. causes and dynamics of the fiscal deficit of the republic of serbia miroljub labus compares the movement of the fiscal deficit of the republic of serbia with the phases of conducting neoliberal, populistic and interventionist policies. during the neoliberal policy phase, which lasted from the fourth quarter of 2000 to mid-2006, a deficit of 1.8% of gdp was inherited and by the end of this phase a surplus of 2.7% of gdp was achieved (labus, 2020, p. 84). during the populistic policy phase, which lasted from the third quarter of 2006 to mid-2012, there was a significant increase in the deficit. in the phase of interventionist policy, which lasted from the third quarter of 2012 to the fourth quarter of 2018, measures were implemented that led to a reduction in the deficit. in the period from 2006 to 2008, the republic of serbia applied an expansive fiscal policy (government of the republic of serbia, 2021), which was justified by economic reasons, such as encouraging employment and economic activities, as well as combating grey economy. an important lesson about the implementation of such a fiscal policy is that it has had favourable effects in the short term, but has led to an unsustainable fiscal deficit and public debt in the long run. the republic of serbia entered 2008 with a relatively low fiscal deficit, amounting to 2.5% of gdp (table 1). the situation in the public finances of the republic of serbia was quite unfavourable even before the world economic crisis if we take into account the impact of cyclical economic oscillations (production gap) on the fiscal deficit. growth has slowed, and the share of gross investment in gdp has fallen from 25% in 2008 to 18% in early 2016 (bartlett, 2019, pp. 147-163). at the beginning of the global economic crisis, gdp and domestic demand fell sharply, leading to a decline in tax revenues and an increase in the fiscal deficit. the two-year freeze on wages and pensions, amid relatively high inflation, increased taxes and reduced transfers to local communities, kept the fiscal deficit relatively low at around 4.5% of gdp during the first two years of the global changes in fiscal deficit and public debt of the republic of serbia during the covid-19 ... 217 economic crisis and was among the lowest in central and eastern europe (cee) (arsić, & randjelović, 2014). in the period from 2008 to 2012, the fiscal deficit in the republic of serbia showed constant growth (table 1), which led to an increase in public debt and the possibility of jeopardizing macroeconomic stability. since mid-2011, the government has re-enacted decisions that have resulted in a permanent increase in the fiscal deficit and the pursuit of counter-cyclical expansionary fiscal policies (fiscal decentralization, wage increases) (world bank, 2020). as a result of these decisions, the fiscal deficit in 2012 reached 6.4% of gdp. table 1 fiscal result of the general government of the republic of serbia from 2008 to 2024 year primary deficit/surplus (% of gdp) consolidated deficit/surplus (% of gdp) 2008 -1.9 -2.5 2009 -3.6 -4.2 2010 -3.4 -4.3 2011 -3.4 -4.5 2012 -4.7 -6.4 2013 -3.0 -5.1 2014 -3.5 -6.2 2015 -0.5 -3.5 2016 1.7 -1.2 2017 3.6 1.1 2018 2.7 0.6 2019 1.8 -0.2 2020 -6.0 -8.0 2021 -2.4 -4.1 estimate for 2022 -1.3 -3.0 estimate for 2023 0.1 -1.5 estimate for 2024 0.6 -1.0 estimate for 2025 1.1 -0.5 source: ministry of finance (2021). basic indicators of macroeconomic trends, november 4th , 2021; government of the republic of serbia (2022). fiscal strategy for 2023 with projections for 2024 and 2025 (p. 67). in order to successfully respond to extremely unfavourable fiscal trends and the growing possibility of a public debt crisis, the government of the republic of serbia began implementing a three-year program of sharp consolidation of public finances at the end of 2014 (bartlett, 2019, pp. 147-163). the implementation of the measures of this program (temporary reduction of pensions, ban on employment in the public sector and payments to the budget of funds from the reduction of salaries in public companies) enabled the fiscal deficit of 6.2% of gdp in 2014 to be reduced to 1.2% gdp in 2016. although these measures had positive effects, the problems of public enterprises remained unresolved (fiscal council, 2016). in 2017, the fiscal surplus of 1.1% of gdp was realized, for the first time since 2005, thanks to the growth of investments and personal consumption. however, net exports in 2017 remained negative (jakopin, 2020, pp. 191-208). in 2018, the fiscal surplus was maintained at the level of 0.6% of gdp. in 2019, a deficit of 0.2% of gdp was recorded again, while public debt remained on a 218 g. milovanović, g. radisavljević, s. milanović downward trajectory (table 1 and table 3). since 2020, various measures had non-structural and structural effects on fiscal deficit. for example, postponed tax revenues will be collected in 2021 and 2022, but expenses connected with infrastructure projects will be increased due to materials’ prices disorders (fiscal council, 2022). 2.2. pandemic covid-19 as a cause of increasing the fiscal deficit of the republic of serbia at the end of 2020, the fiscal deficit of 8.0% of gdp was achieved at the general government level (table 1), which is below the rebalance of the planned fiscal deficit of 8.9% of gdp (fiscal council, 2020a). in the same year, the primary fiscal deficit was 6.0% of gdp. for a more complete understanding of the effects of the covid-19 pandemic on the fiscal deficit of the republic of serbia, it is important to identify its movement in the eu and eurozone countries. according to published eurostat data, in the eurozone, the fiscal deficit against gdp increased from 0.6% in 2019 to 7.1% in 2020, and in the eu from 0.6% to 6.8% (table 2). in all member states, the share of the fiscal deficit in gdp increased in 2020, with spain (10.3%), greece (10.2%), malta (9.5%) and italy (9.6%) having the highest rates. it is noticeable that all 27 eu member states, except denmark, had a deficit of more than 3% of gdp in the state treasury. the fiscal deficits of the eurozone and the eu increased significantly in 2020 compared to 2019. this was mainly due to the measures taken in response to the covid19 pandemic and the decline in tourism revenues. in 2021, deficit in eu member states decreased and that trend is expected to continue in 2022 and 2023 as covid-19 measures continue to fade and economic expansion takes over even during future energy crisis (european commission, 2022a). according to projections for 2022, the deficits in the eu and the eurozone are expected to halve to around 3.7% of gdp and 3.8% of gdp (respectively), thanks to the continued economic recovery and the gradual abolition of pandemic support measures. when it comes to the republic of serbia, the original budget for 2021 envisaged a general government fiscal deficit of 3% of gdp, while its rebalances planned for this year amount to 4.9% of gdp (fiscal council, 2021a). the fiscal deficit of 4.9% of gdp was assessed by the fiscal council as anti-crisis. most of the expenses were incurred due to the elimination of the consequences of the covid-19 pandemic and the implementation of measures to mitigate them. in case of successful elimination of the consequences of the covid-19 crisis in 2021, the planned deficit level of 3% of gdp for 2022 (around 1.7 billion euros) can be revised downwards. the increase in the fiscal deficit in 2020 was primarily due to the health crisis caused by the covid-19 pandemic, but also due to structural weaknesses in the economy and inadequate economic policy measures. indicators of economic growth point to the conclusion that the republic of serbia is less affected by the health crisis than the cee countries. its 0.9% decline in gdp is far less than the average 3.8% decline in gdp in cee countries (fiscal council, 2021a). due to the smaller decline in economic activity, the republic of serbia should have had a significantly smaller fiscal deficit than the cee countries. however, quite the opposite happened. there are several reasons for such a high deficit. first of all, "helicopter money ", inadequate investment in the health system and irrational management of state-owned enterprises (air serbia and eps) have led to the expenditure side of the 2020 budget of about 2.5 percentage points (fiscal council, 2020a). changes in fiscal deficit and public debt of the republic of serbia during the covid-19 ... 219 table 2 general government deficit/surplus in eu countries from 2019 to 2022, % of gdp country deficit/surplus (% of gdp) 2019 2020 2021 2022 (estimation) eu – 27 -0.6 -6.8 -4.7 -3.6 еuro area 19 -0.7 -7.1 -5.1 -3.7 belgium -2.0 -9.0 -5.5 -5.0 bulgaria 2.1 -4.0 -4.1 -3.7 czech republic 0.3 -5.8 -5.9 -4.3 denmark 4.1 -0.2 2.3 -0.9 germany 1.5 -4.3 -3.7 -2.5 estonia 0.1 -5.6 -2.4 -4.4 ireland 0.5 -5.1 -1.9 -0.5 greece 1.1 -10.2 -7.4 -4.3 spain -3.1 -10.3 -6.9 -4.9 france -3.1 -8.9 -6.5 -4.6 croatia 0.2 -7.3 -2.9 -2.3 italy -1.5 -9.6 -7.2 -5.5 cyprus 1.3 -5.8 -1.7 -0.3 latvia -0.6 -4.5 -7.3 -7.2 lithuania 0.5 -7.3 -1.0 -4.6 luxembourg 2.3 -3.4 0.9 -0.1 hungary -2.1 -7.8 -6.8 -6.0 malta 0.6 -9.5 -8.0 -5.6 netherlands 1.7 -3.7 -2.5 -2.7 austria 0.6 -8.0 -5.9 -3.1 poland -0.7 -6.9 -1.9 -4.0 portugal 0.1 -5.8 -2.8 -1.9 romania -4.3 -9.3 -7.1 -7.5 slovenia 0.4 -7.8 -5.2 -4.3 slovakia -1.3 -5.5 -6.2 -3.6 finland -0.9 -5.5 -2.6 -2.2 sweden 1.7 -3.7 -2.5 -0.5 source: eurostat (2022a); european commission (2022a). 2.3. causes and dynamics of the public debt of the republic of serbia before the world economic crisis, the republic of serbia had the lowest public debt in 2008, when it amounted to 28.7% of gdp (government of the republic of serbia, 2021). from 2008 to the end of 2015, public debt was constantly increasing, so in 2015, it reached a record 71.2% of gdp, i.e., it was higher by 42.5 p.p. compared to 2008 (table 3). an even worse indicator of the state of the public debt of the republic of serbia is reflected in the fact that three-fifths of the public debt was of external nature and was exposed to the risk of constant changes in the exchange rate (bartlett, 2019, pp. 147-163). fiscal consolidation measures adopted at the end of 2014 led to a reduction in the primary deficit and a slowdown in public debt growth already in 2015. the reduction of public debt occurred in 2016, a year earlier than envisaged by the arrangement with the international monetary fund (imf). in 2016, a primary surplus of 1.7% of gdp was 220 g. milovanović, g. radisavljević, s. milanović achieved, which finally created the conditions for a decline in the share of public debt in gdp (table 3). this trend continued during 2017, so the primary fiscal surplus of 3.6% of gdp led to a significant reduction in public debt of 10 p.p. of gdp, to 58.6% of gdp. although restrictive fiscal policy measures were eased in 2019, this did not negatively affect the decline in public debt, which was 52.8% of gdp at the end of this year. from 2015 to 2019, the public debt of the republic of serbia was reduced by 18.4 p.p. table 3 public debt of the general government of the republic of serbia from 2008 to 2024 year gdp growth rate (in %) the public debt of the republic of serbia (% of gdp) 2008 5.7 28.7 2009 -2.7 32.8 2010 0.7 41.4 2011 2.0 44.7 2012 -0.7 54.6 2013 2.9 57.5 2014 -1.6 67.5 2015 1.8 71.2 2016 3.3 68.7 2017 2.1 58.6 2018 4.5 54.4 2019 4.3 52.8 2020 -0.9 57.8 2021 7.4 57.1 estimate for 2022 3.5 54.6 estimate for 2023 4.0 53.1 estimate for 2024 4.0 52.0 estimate for 2025 4.5 50.7 source: government of the republic of serbia (2022). fiscal strategy for 2023 with projections for 2024 and 2025 (p. 67). public debt administration (2021). quarterly report on the state and structure of public debt on 30th september 2021. the public debt in 2021 decreased but it is still close to the breaking point of 60%. in 2022 it is expected to be 54.6% (government of the republic of serbia, 2022). on the other hand, after overcoming the negative effects of the covid-19 crisis and implementing fiscal relaxation measures, a period of reduction of the public debt of the republic of serbia will follow. the fiscal strategy for the next medium-term period envisages the stabilization of public finances and significantly lower levels of deficits that will return the public debt to the zone of a declining trend. in this regard, the public debt administration will define a medium-term strategy for public debt management based on a transparent lending process in the domestic and foreign markets, reviving the government securities market and reducing risk exposure (especially foreign exchange risk, because it is the higher part of the debt that is denominated in foreign currencies, as much as 70.5%) (ministry of finance, 2021). the reduction of the deficit will be accompanied by the gdp growth rate projected for the end of 2022 in the amount of 3.5%, while in the following years it will be around 4%. on the other hand, previous prognosis of economic growth for 2022 was 4.5% and in the following years 5.0%. due to contemporary trends on the global market, less optimistic prognosis of economic growth is envisaged. changes in fiscal deficit and public debt of the republic of serbia during the covid-19 ... 221 2.4. the covid-19 pandemic as the cause of the increase in the public debt of the republic of serbia public debt of the republic of serbia in 2020 and 2021 was close to the maximum level defined by the maastricht treaty. this is an unsustainably high debt in relation to the level of development of the republic of serbia. the most important factors that influenced the development of public debt during 2020 and 2021 are: the level of the total and primary fiscal deficit, additional financing needs and repayment of the due part of the debt. the realized fiscal deficit of 8.0% of gdp (primary deficit of 6.0% of gdp) in 2020 and the fiscal deficit of 4.1% of gdp in the 2021, have influenced the fact that, so far, the declining path of public debt participation reversed (fiscal council, 2021a). it is expected that after two crisis years, public debt control will be established and measures to reduce it will be implemented. most of the budget deficit in 2020 was financed by borrowing and increasing public debt by issuing eurobonds and green bonds. if we look at the structure of public debt, the debt denominated in euros dominates, while the rest is in dinars and us dollars. the money from the sale of komercijalna banka was used to service the debt that was taken at a high-interest rate. in that way, the average interest rate on the debts of the republic of serbia was reduced (government of the republic of serbia, 2021). the problem of the relatively high public debt appeared also in 2021. because of an increasement of interest rates in the world, future growth of public debt is not recommended. in that case, the costs of new borrowing of the republic of serbia and refinancing of public debt would be higher, especially because of high borrowing interest rates that are even higher than average interest rates for cee countries. therefore, it is envisaged to decrease public spending and consequently debt until 2025 (fiscal council, 2022). the covid-19 pandemic also affected the dynamics of public debt in the eu and eurozone countries (table 4). the share of public debt in gdp in euro area countries increased from 83.8% in 2019 to 97.2% in 2020, and in eu countries from 77.5% of gdp in 2019 to 90.0% gdp in 2020. greece and italy had the highest percentages of public debt in gdp (206.3% and 155.3%, respectively). during the 2021, public debt increased in several eu countries compared to the previous year (germany, bulgaria, czech republic, latvia, malta, romania and slovakia). on the other hand, reductions in public debt were recorded in all other member states and future prospects are inclined to further reductions in public debt due to higher interest rates and “snowball effect” caused by it (eurostat, 2022b). according to certain forecasts, public debt will reach 87% of gdp in the eu in 2022, while in the eurozone it will be around 95% of gdp. the reduction of public debt is expected in the next two years. in 2023, public debt would account for 85% of gdp in the eu and 93% in the euro area (european commission, 2022b). sapir (2020) proved in his research that the low level of public debt before the covid-19 crisis did not significantly affect the number of losses that eu countries suffered due to this crisis. it should be borne in mind that the maastricht agreement defines two criteria relating to the fiscal deficit and public debt of eu countries: 1) that the eligible deficit does not exceed 3% of gdp and 2) that public debt is less than 60% of gdp (savage, 2001). nevertheless, the data indicate a completely different state of public finances in the eu, i.e., noticeable non-compliance with these criteria. it is paradoxical that some members of the eu do not respect these criteria, but that all countries that want to become members of the eu are uncompromisingly required to do so. the justification that the covid-19 crisis is to blame for such behaviour of some eu members does not sound logical. however, the covid-19 crisis has disrupted the process of managing public 222 g. milovanović, g. radisavljević, s. milanović finances in the eu. namely, in order to improve this process, the eu adopted the architecture of fiscal management (the so-called european semester) in the period from 2011 to 2013. the objectives of this public finance control mechanism are: 1) to define medium-term plans and bear the consequences of inadequate management of their public finances and macroeconomic instability, and 2) not to repeat the cases of over-indebtedness of italy and greece, following the example of germany and northern european countries in managing their public finances (greer, & brooks, 2021). the covid-19 crisis led to the suspension of this control mechanism, but planning and oversight remained in place. table 4 public debt and gdp growth rate in eu countries from 2019 to 2022 country public debt (% of gdp) gdp growth rate (%) 2019 2020 2021 2022 (estimation) 2019 2020 2021 2022 (estimation) eu – 27 77.5 90.0 88.1 87.1 1.8 -5.9 5.4 2.7 еuro area 19 83.8 97.2 95.6 94.7 1.6 -6.3 5.3 2.7 belgium 97.7 112.8 108.2 107.5 2.1 -5.7 6.2 2.0 bulgaria 20.0 24.7 25.1 25.3 4.0 -4.4 4.2 2.1 czech republic 30.1 37.7 41.9 42.8 3.0 -5.5 3.5 1.9 denmark 33.6 42.1 36.7 34.9 1.5 -2.0 4.9 2.6 germany 58.9 68.7 69.3 66.4 1.1 -3.7 2.6 1.9 estonia 8.6 19.0 18.1 20.9 3.7 -0.6 8.0 1.0 ireland 57.2 58.4 56.0 50.3 5.4 6.2 13.6 5.4 greece 180.7 206.3 193.3 185.7 1.8 -9.0 8.3 3.5 spain 98.3 120.0 118.4 115.1 2.1 -10.8 5.1 4.0 france 97.4 114.6 112.9 111.2 1.8 -7.8 6.8 3.1 croatia 71.1 87.3 79.8 75.3 3.5 -8.1 10.2 3.4 italy 134.1 155.3 150.8 147.9 0.5 -9.0 6.6 2.4 cyprus 91.1 115.0 103.6 93.9 5.3 -5.0 5.5 2.3 latvia 36.7 43.3 44.8 47.0 2.5 -3.8 4.5 2.0 lithuania 35.9 46.6 44.3 42.7 4.6 -0.1 5.0 1.7 luxembourg 22.3 24.8 24.4 24.7 3.3 -1.8 6.9 2.2 hungary 65.5 79.6 76.8 76.4 4.6 -4.5 7.1 3.6 malta 40.7 53.4 57.0 58.5 5.9 -8.3 10.3 4.2 netherlands 48.5 54.3 52.1 51.4 2.0 -3.9 4.9 3.3 austria 70.6 83.3 82.8 80.0 1.5 -6.7 4.6 3.9 poland 45.6 57.1 53.8 50.8 4.7 -2.2 5.9 3.7 portugal 116.6 135.2 127.4 119.9 2.7 -8.4 4.9 5.8 romania 35.3 47.2 48.8 50.9 4.2 -3.7 5.9 2.6 slovenia 65.6 79.8 74.7 74.1 3.5 -4.3 8.2 3.7 slovakia 48.1 59.7 63.1 61.7 2.6 -4.4 3.0 2.3 finland 59.6 69.0 65.8 65.9 1.2 -2.2 3.0 1.6 sweden 34.9 39.6 36.7 33.8 2.0 -2.2 5.1 2.3 source: eurostat (2022a); european commission (2022a). in addition to the increase in the fiscal deficit and public debt, the consequence of the covid-19 crisis in 2020 is a drop in economic activity in the eu of 5.9% of gdp. recovery after this crisis can be monitored based on projections of gdp growth rates in 2022 (table 4). on the other hand, cifuentes-faura (2021) points out that it is necessary to implement an expansive fiscal policy while increasing public debt and respecting the postulates of kenyanism on the path to the economic recovery of eu countries from the changes in fiscal deficit and public debt of the republic of serbia during the covid-19 ... 223 covid-19 crisis. in order to reduce supply-side shocks, an expansive fiscal policy would maintain employment levels and reduce the tax burden on companies (jalles, 2021). 3. measures to reduce the fiscal deficit and public debt of the republic of serbia the speed of the recovery of the republic of serbia from covid-19 will largely depend on the recovery of the eu countries as well as on the movements on the world capital market. due to the covid-19 pandemic, the recovery of the economy of the republic of serbia in the first half of 2021 was slow. but at the end of the year, instead of the projected growth of the gdp of the republic of serbia in 2021 of 6%, it was 7.4% and the prognosis for the following medium term is less optimistic and around 4%. public debt in 2021 was on the level of public debt in year before (government of the republic of serbia, 2021). therefore, it is advisable for the republic of serbia to base the recovery of its economy to a greater extent on public debt reduction, especially on expenditure side of debt. the focus of the activities of the government of the republic of serbia should be on reducing the fiscal deficit and limiting the issuance of guarantees. these two variables crucially affect the dynamics of public debt and are under the control of the government. in 2021, the republic of serbia submitted the medium-term program of economic reforms for the period 2021-2023 to the european commission, as part of the dialogue between the eu and the countries of the western balkans and turkey. although the contraction of the economic sector in 2020, due to the covid-19 crisis in the republic of serbia, was mild thanks to the previously implemented fiscal and monetary reform, the reduction of private consumption and investment and the increase in government spending conditioned the growth of the budget deficit and public debt (table 5). table 5 budget projections according to program of economic reforms for the period 2021-2023 of the republic of serbia category 2019 2020 2021 2022 2023 change: 2020-2023 revenues 42.1 40.3 40.4 40.5 39.7 -0.6 taxes and social security contributions 36.8 35.8 36.2 36.3 35.6 -0.3 other (residual) 5.3 4.5 4.2 4.2 4.2 -0.3 expenditures 42.3 49.2 43.4 42.1 40.7 -8.5 primary expenditures: 40.3 47.2 41.5 40.4 39.1 -8.1 gross fixed capital formation 4.9 5.2 5.5 5.6 5.7 0.5 consumption 16.5 18.7 17.7 17.2 16.7 -2.0 transfers and subsidies 16.7 19.4 16.3 15.8 15.3 -4.1 other (residual) 2.1 3.9 2.0 1.7 1.5 -2.5 interest payments 2.0 2.0 1.9 1.7 1.6 -0.4 budget balance -0.2 -8.9 -3.0 -1.6 -1.0 7.9 cyclically adjusted -1.0 -8.1 -3.1 -1.7 -1.2 6.9 primary balance 1.8 -6.9 -1.1 0.1 0.6 7.5 cyclically adjusted 1.0 -6.1 -1.2 0.0 0.4 6.5 gross debt level 52.9 59.0 58.7 57.9 56.0 -3.0 source: european commission (2021c). economic reform programmes of albania, montenegro, north macedonia, serbia, turkey, bosnia and herzegovina and kosovo*: the commission’s overview & country assessments (institutional paper 158). 224 g. milovanović, g. radisavljević, s. milanović after the exclusion of temporary measures for covid-19 crises effect mitigation, recovery and return of budget balance are expected in the forthcoming period 2021-2023. revenues will be stable until 2023. the main change is going to be seen in the social contributions due to a prolonged period of payment from 2020 to 2023. moreover, tax revenues will decrease due to an increment of non-taxable part of the wage. the most important changes are expected on the expenditure side because no extraordinary expenditures will be expected. savings will be encountered in subsidies, other current expenditures and consumption (european commission, 2021c. pp. 158). on the other hand, the government bases its economic reform mostly on expenditures reduction, while it is continuing with fiscal support for recovery from the covid-19 crisis. social transfers are also expected to decrease and supporting reforms of pension and wage indexation are following this prognosis. precisely, pensions are increased by 5.9% and minimum wage by 6.6%. bigger budgetary expenses are seen in ad-hoc increasements of wages for public employees. lastly, capital expenditures are planned to have an upward trend, while investments in road and rail building will make its main part. new events on the global market will cause slowing down in capital investments in following medium term period and decrease in foreign direct investments. the budget deficit for 2021 and the following years are subject to change due to packages for crisis effects mitigation. so plan for 2021 according to the economic reform programmes for 2021-2023 has been already changed because subsidies for wages, „helicopter money“ for citizens, support for the service sector (hospitality and transport) are introduced. although the government deficit is increased and debt followed the rise, the reduction of debt is expected from 2021. debt-to-gdp ratio is planned to gradually decrease, 0.3, 0.8 and 1.9 pp from 2021 to 2023. the positive trajectory of gdp is mostly secured by previous fiscal adjustments before the covid-19 crisis. but one very threatening fact is the large percentage of debt denominated in foreign currencies and exposed to the exchange rates fluctuations. therefore, firm fiscal policy will be the main basis of sustainable government finances. based on the results of research into the causes (strict closure measures, participation of tourism in gdp and quality of public administration) of economic shock during the covid-19 crisis (sapir, 2020), it can be concluded that the recovery of public finances in serbia depends primarily on improving governance mechanism of the state during the implementation of the recovery policy. gootjes and haan (2020) point out that most eu countries in times of crisis implement pro-cyclical fiscal policy instead of countercyclical because although fiscal plans are acyclical, the final effects in the budget are procyclical. however, the results of their research showed that if the government is efficient, compliance with fiscal rules contributes to the successful overcoming of the pro-cyclical response of fiscal policy to economic trends. it should be noted that during 2020 and the covid-19 crisis, a countercyclical fiscal policy was implemented in the republic of serbia (government of the republic of serbia, 2021). the basis for pursuing a policy of reducing the fiscal deficit is to replace expensive debt with the cheaper one. this measure was implemented after the process of sale of komercijalna banka, but in the next period new borrowing is questioned because of interest rates increase (government of the republic of serbia, 2021). the moderate reduction of the fiscal deficit in the coming years aims to leave the possibility of a timely response to external shocks such as the health crisis (ministry of finance, 2021). also, in the coming years, the deficit reduction is expected to be due rather to the slower growth changes in fiscal deficit and public debt of the republic of serbia during the covid-19 ... 225 of public sector wages than the growth of economic activity. the increase of wages in public sector or employing additional labour force in public sector will significantly increase the state budget imbalance (fiscal council, 2022). the fiscal council does not expect the medium-term economic reform program for the period 2021-2023 to succeed without the adoption of pay grades (fiscal council, 2020b). based on this program, the eu council suggests that it is necessary to help households and companies in a planned way that will return the deficit to the planned path by 2022. it also supports the control of salaries as a percentage of gdp through the adoption of fiscal rules that will be followed by fiscal policymakers. in addition to the expenditure side of the budget, it is necessary to increase tax revenues by reducing the grey economy, introducing fiscalization according to the new model, and quantifying and publishing financial reports of public companies that increase fiscal risk of the state budget (council of european union, 2021). the policy of reducing public debt and bringing it closer to the limit of 45% of gdp by 2028 depends on increasing indebtedness and efficient use of previous loans, conversion of expensive for cheap loans and good management of fiscal risks (government of the republic of serbia, 2021). the state must stimulate economic growth by increasing investments in infrastructure, especially in communal infrastructure and environmental protection, which have been at a low level for years (fiscal council, 2021b). of course, several systemic problems were present in the years before the covid-19 pandemic, such as weakening the rule of law, growing corruption, inequality of economic entities, the inefficiency of public enterprises, high allocations for subsidies and other assistance to state-owned enterprises (guarantees and budget loans), which were pushed into the background by the covid-19 pandemic. potential risks are higher when most of the deficit is financed by the government and private sector borrowing rather than remittances and foreign direct investment. additional risks of public debt increasement such as high interest rates and public guaranties for state companies occurred at the beginning of 2022 (fiscal council, 2022). therefore, it is equally important to have balanced control measures for both revenues and expenses of the government budget. conclusion from 2000 to 2021, the republic of serbia pursued a different fiscal policy in accordance with changes in conditions on the domestic and foreign markets. although there are opinions that fiscal policy was neoliberal, populist or interventionist, it was accompanied by a large number of internal and external shocks (world economic crisis, floods, droughts, covid-19 crisis, etc.) that affected its end effects. macroeconomic stability in the republic of serbia was preserved during 2020 and the covid-19 crisis, but in the coming years, it will be a great challenge to maintain it while stimulating economic recovery. conditions for recovery and reaching the potential level of development will be more difficult than in the period before the covid-19 crisis because the recovery of developing countries always goes after the recovery of developed countries. fiscal consolidation in the republic of serbia in the period before the covid-19 crisis was a necessary condition for eliminating the immediate danger of state bankruptcy and improving macroeconomic stability. however, fiscal consolidation in the republic of serbia is still not complete, as the fiscal deficit and the share of public debt in gdp increased 226 g. milovanović, g. radisavljević, s. milanović during 2020. in this context, the 2021 budget strikes a balance between supporting economic recovery and maintaining fiscal discipline. successful implementation of fiscal policy should: 1) lead to an improvement in the structure of public expenditures and reduce fiscal risks in the future, and 2) enable a permanent recovery of public finances of the republic of serbia. in order to reduce public debt in the coming years, it is necessary to significantly reduce the fiscal deficit. this can be achieved through: 1) moderate indexation of salaries and pensions, 2) reduction of subsidies, 3) more successful tax collection, and 4) high level of public investment. specifically, corrective measures are needed both on revenue and expense’s side of the government budget. on the revenue side, measures for tackling down grey economy on the labour market should be considered. inspections on the regular basis and subsidies for new employees could have significant effect on this problem. on the expense side of the budget, taking control of the public companies spending and guaranties given is the long-term solution to the problem of public finances in the republic of serbia. lastly, unplanned increases in wages and number of employees in public sector led to greater deficit so these ad hoc changes in budget should be avoided. when it comes to the growth of the economy of the republic of serbia in 2021, one can talk more about the recovery from the covid-19 crisis than about the typical growth of the economy. if significant epidemiological restrictions are not applied in the next period and if european economies start to recover quickly, the republic of serbia could count on reducing the fiscal deficit and increasing gdp in the medium term. however, there is still no clear answer to the question of how reliable the forecasts for the recovery of the economy of the republic of serbia and the eu are. it is important to keep in mind that forecasts of fiscal deficit and public debt are very sensitive to the political situation in the country and changes in fiscal policy. probably because of that, the forecasts are sometimes wrong with state institutions, as well as the european commission and the imf. acknowledgement: 1. this paper is part of a project that has received funding from the european union’s horizon europe research and innovation programme under grant agreement no 101059994. 2. supported by the ministry of education, science and technological development of the republic of serbia (contract no. 451-03-68/2022-14/200371 and no. 451-03-68/2022-14/200100). references arsić, m., & ranđelović, s. 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uticaj kovid-19 krize na fiskalni deficit i javni dug republike srbije; i aktivnost vlade na planu smanjenja fiskalnog deficita i javnog duga republike srbije. saznanja koja su rezultat ovog istraživanja treba da: doprinesu unapređenju fiskalne discipline i omoguće utvrđivanje faktora koji javni dug i rast bdp-a čine održivim, uzimajući u obzir fiskalna ograničenja i rizike. ključne reči: bdp, fiskalni deficit, javni dug, pandemija kovid-19, fiskalna konsolidacija https://doi.org/10.1111/%0b0033-3352.00004 https://doi.org/10.1111/%0b0033-3352.00004 https://www.worldometers.info/coronavirus/%0b?utm_campaign=homeadvegas1 https://www.worldometers.info/coronavirus/%0b?utm_campaign=homeadvegas1 https://www.worldometers.info/coronavirus/ https://pubdocs.worldbank.org/en/556821591340104788/wbrer17-09-fiscal-bos.pdf https://pubdocs.worldbank.org/en/556821591340104788/wbrer17-09-fiscal-bos.pdf plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 2, 2014, pp. 163 174 review paper manager’s role in raising the level of job satisfaction  udc 005.88 ivana simić, nebojša stojković faculty of economics, university of niš, the republic of serbia abstract. organizations, as a complex systems, in the structure of their subsystems have the human or social subsystem. it is a subsystem that has a significant influence on the functioning of the organization and its competitiveness. the quality of the social organizational subsystem is determined by the quality of the different variables that the subsystem includes. job satisfaction is one of these variables. it is a variable that can have an adequate impact on the effectiveness and efficiency of the organization, as well as on its performance. the aim of the authors of this paper is to point out the nature, the significance, causes and consequences of job satisfaction, as well as the role of managers in raising the level of these organizational variables. key words: job satisfaction, staff, management, organization introduction human behavior, in general, is determined by the nature of human attitudes (simić, 2013, 188). attitude is the appropriate disposition or tendency of an individual to respond to the stimuli from the environment in a positive or in a negative way (bowditch, buono, 1990, 94). attitude can be defined as the evaluation of people, objects or ideas, which results in a positive or negative reactions to what is measured (aronson, wilson, akert, 2005, 217). job satisfaction is one of the most often studied human attitudes related to the job (frañek, vačeřa, 2008, 63). among other things, the reason for this is the fact that the modern organizations consider that their most valuable resources are their employees. therefore they are aware of the fact that they can not reach the desired level of competitiveness if their employees, among other things, are not satisfied with the job they perform within the organization.  received april 15, 2014 / accepted june 25, 2014 corresponding author: ivana simić faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 639  e-mail: ivana.simic@eknfak.ni.ac.rs i. simić, n. stojković 164 1. the nature and the importance of job satisfaction job satisfaction is a complex concept that can be accessed from a variety of aspects and that is interpreted in different ways by various authors. for example, there are theorists who identified job satisfaction with motivation. however, one should bear in mind the fact that job satisfaction is not the same as motivation. job satisfaction can contribute to raising the level of employee motivation, but it is not always the case (mullins, 2010, 700). in the opinion of a number of theorists (mullins, 2010, 700; luthans, 2008, 141; saari, judge, 2004, 396), job satisfaction is, to a greater extent, the appropriate attitude and reflects the internal state of the individual. however, this does not mean that the two terms (“job satisfaction” and “motivation”) can be used interchangeably. in fact, attitudes are broader categories in relation to job satisfaction, and job satisfaction is only one of the subgroups of human attitudes. it is the subgroup of human attitudes concerning the way in which individual evaluates the work done. in mentioned theoretical circumstances, the most important definitions of job satisfaction are created. for example, edwin a. locke defines job satisfaction as a pleasurable or positive emotional state that is a consequence of the way in which individual evaluates their own job or their own experience (locke, 1976, 1304). authors daniel feldman and arnold hugh state that job satisfaction is the amount of positive feelings that an individual has in his job (feldman, arnold, 1983, 192). on the other hand, robert kreitner and angelo kinicki describe job satisfaction as an affective or emotional response of individuals to different aspects of the job they perform (kreitner, kinicki, 1995, 159). keith davis and john w. newstrom believe that job satisfaction is a set of favourable or unfavourable feelings that employees have in relation to the work that they perform (davis, newstrom, 1989, 176). andrew dubrin said that job satisfaction is the amount of satisfaction one experiences doing their job (dubrin, 1988, 58). simply put, job satisfaction is a level of satisfaction that one feels while performing a particular job. the level of job satisfaction could be lower or higher. however, determining the specific level of job satisfaction is not so simple. among other things, it is complicated by the fact that theory offers different measures of job satisfaction. some of the best known are (judge, klinger, 397-398): 1. the job descriptive index (jdi) assesses job satisfaction with five different job areas: pay, promotion, coworkers, supervision, and the work itself (smith et al., 1969); 2. the minnesota satisfaction questionnaire (msq) has its long and short forms (weiss, dawis, england, lofquist, 1967); 3. brayfield and rothe’s (1951) five items job satisfaction scale includes five items: (1) i feel fairly satisfied with my present job; (2) most days i am enthusiastic about my work; (3) each day at work seems like it will never end; (4) i find real enjoyment in my work; (5) i consider my job to be rather unpleasant. 4. judge, boudreau, and bretz’s (1994) a three-item measure of job satisfaction (figure 1). manager’s role in raising the level of job satisfaction 165 1. all things considered, are you satisfied with your present job? (circle one) yes no 2. how satisfied are you with your job in general? very dissatisfied somewhat dissatisfied neutral somewhat satisfied very satisfied (1) (5)(4)(3)(2) 3. bellow, please write down your best estimates on the percent of time you feel satisfied, dissatisfied, and neutral about your present job. the three figures should add up to equal 100%. on the average: * the percent of time i feel satisfied with my present job ______ % * the percent of time i feel dissatisfied with my present job _____% * the percent of time i feel neutral with my present job _____% total ________________% fig. 1 a three item measure of job satisfaction (judge boudreau, bretz) source: judge, klinger, 398 depending on the level of job satisfaction, its effects can be positive or negative. in any case, they are numerous and heterogeneous, which leads to the conclusion that the importance of job satisfaction in the organization may be multiple. in general, the impact of job satisfaction on the functioning of the organization and its employees, could be analyzed from several aspects. among the most important are human-behavioral and economic aspects of job satisfaction. although they are closely related and intertwined, their partial analysis contributes to a more accurate perception of specific consequences that job satisfaction or dissatisfaction can lead to (figure 2). the most complex group of consequences, which may result in appropriate level of job satisfaction or dissatisfaction, are those of the human-behavioral nature. these are the consequences that primarily reflect the psycho-physical state of employees (e.g. monotony, physical effort, fatigue, mental stress, etc.) and the expression of different forms of employee’s behavior. for example, low levels of job satisfaction can be one of the causes of the monotony at work, increased physical and mental fatigue of workers, pronounced mental stress in employees, etc. these psycho-physical manifestation of job dissatisfaction may be reflected in different behavioral aspects of organizational life. thus, for example, as a result of increased job dissatisfaction, the organization may exhibit pronounced tendencies of absence from work, leaving the organization, being late for work, loss of co-operation among staff, frequent complaints by disgruntled workers and the like. although the cause of the above problems should not only be the level of job satisfaction, in situations where the other agents can be excluded, it is expected that higher levels of job satisfaction will lead to a significant reduction or complete elimination of the above-mentioned problems. i. simić, n. stojković 166 consequences of job dissatisfaction human-behavioral economic psycho-physical state of employee: monotony physical effort fatigue mental stress employee’s behavior: absence from work leaving the organization late for work loss of cooperation between staff frequent conflicts individual performance organizational performance fig. 2 consequences of job dissatisfaction practically inseparable with respect to the human-behavioral is the economic aspect of job satisfaction. this aspect refers to all economic (positive or negative) consequences that job satisfaction or dissatisfaction express in relation to the organization. although these consequences could be analyzed in the context of the impact that job satisfaction has on the productivity, the quality and quantity of products or services etc., all of them, in combination with the above-mentioned consequences of human-behavioral aspects, have a corresponding impact on the overall performance of the organization. the problem of the relationship between job satisfaction and performance of employees was the subject of numerous studies. interestingly, the conducted research has offered a lot of variety and non particularly convincing results (see: iffaldano, muchinsky, 1985, 251273). only the meta-analysis conducted by tim judge and his colleagues has shown that there is a positive, though not particularly significant (.30) correlation between the level of job satisfaction and performance of employees (luthans, 2008, 145). 2. factors of job satisfaction the positive impact of job satisfaction on various aspects (human, behavioral, economic) of organizational functioning, suggests that organizations and their managers must make reasonable efforts aimed at raising the level of job satisfaction. to achieve this, it is necessary to know the various factors that may influence the increase or decrease in the level of job satisfaction. manager’s role in raising the level of job satisfaction 167 starting from the key factors that influence job satisfaction, the literature offers three different approaches to job satisfaction. these are (judge, klinger, 398-399): a) situational approach to job satisfaction, b) dispositional approach to job satisfaction, and c) interactive approach to job satisfaction. the situational approach to job satisfaction suggests that job satisfaction is derived from the job characteristics. in contrast, the dispositional approach to job satisfaction suggests that certain relatively stable characteristics of a person influence job satisfaction independently of the job characteristics and situation. the interactive approach to job satisfaction suggests that the fit between the enviornment and the characteristics of a person influences job satisfaction. this approach is also known as the person-enviornment fit (frañek, vačeřa, 2008, 66). in general, the factors that lead to strengthening or to a decline in the level of employees’ job satisfaction, can be classified into three groups (figure 3). one could be described as a group of individual or intrapersonal factors of job satisfaction. the second group of factors of job satisfaction are the appropriate organizational factors. the third group of job satisfaction factors are the so-called environmental factors. job satisfaction factors individual factors of job satisfaction organizational factors of job satisfaction external factors of job satisfaction the nature of personality (agreeableness, conscientiousness, extraversion, neuroticism, self'control) biographical characteristics of the individual (sex, age, social background, marital status) the level of education experience skills (physical, intellectual) individual expectations life satisfaction organizational structure organizational culture organizational technology management system leadership style working conditions the quality of human relationships the job itself the level of individual responsibility possibilities for career development sistem nagrađivanja sistem sankcionisanja sistem informisanja sistem komuniciranja sigurnost posla corporate social responsibility perception of organizational justice perception of organizational trust perception of organizational commitment organizational citizenship behavior economic factors social factors technical factors legal and political factors international factors fig. 3 factors of job satisfaction intrapersonal or individual factors of job satisfaction include different variables that are peculiar to the individual. this group of factors includes: the nature of personality i. simić, n. stojković 168 (manifested through different dimensions of personality, such as: extraversion, conscientiousness, agreeableness, openness to new experience and neuroticism), biographical characteristics of the individual (sex, age, social background, marital status and so on), their level of education, experience, different sets of personal skills (physical, intellectual), individual expectations, the level of life satisfaction and the like. results of some research showed that the different dimensions of personality may be related to the degree of job satisfaction. thus, barrick murray r. and mount michael k. found that conscientiousness, as a dimension of personality, may be a valid indicator of the potential level of job satisfaction (barrick, mount, 1991, 1-26). similar results are obtained by mount michael k. and his colleagues judge timothy a., haller deborah (judge, haller, mount, 2002, 530-541). also, in research examining the relationship between personality dimensions and job satisfaction, conducted in the pharmaceutical industry in turkey, the authors tesdimir yeki m., asghar yaheer muhammad and saeed sana have found that between four out of five personality dimensions contained in the big five model of personality, and the degree of job satisfaction, there is a significant positive correlation. according to this study, the correlation between job satisfaction and neuroticism (a personality dimension) is negative (tesdimir, asghar, saed, 10-11). sex is also one of the variables that, according to certain theorists, is associated with the level of job satisfaction. and while some studies have shown that males exhibit a higher level of job satisfaction (lee), there are some studies that have denied this kind of correlation (tesdimir, asghar, saed, 13). some surveys have even shown that females exhibited higher levels of job satisfaction compared to males (clark, 1997, 341-372). different results were obtained on the basis of research devoted to analyzing the impact of age of employees on the level of their job satisfaction. some studies have shown that the level of job satisfaction decreases with the increase of age (see: robbins, 2001, 24; olorunsola, 49), while another study has indicated that job satisfaction rises to fifty or fifty-nine years of age, when it starts to decline (saleh, otis, 1964, 425-430). a considerable number of previous studies devoted to job satisfaction takes into account the impact of man’s life satisfaction on the level of his job satisfaction (judge, watanabe, 1994; tait, padgett, baldwin, 1989). the results of these studies are shown that between these two variables there is a significant positive correlation. in fact, researchers have found that between the degree of job satisfaction and pleasure of individual’s private life, there is a strong interaction. this is explained by the fact that the man’s work is an integral part of his life and that these two variables are virtually inseparable (saari, judge, 2004, 398). researches devoted to job satisfaction are so numerous and diverse that among them there are those which examine the possible impact of human genes on the level of job satisfaction. one such study is conducted at the university of minnesota. this research is concerned with testing the degree of job satisfaction among pairs of identical twins, who did not grow up together. this study showed that, to some extent, job satisfaction can be attributed to a person’s genetic factor (vecchio, 2003, 268). a very important and quite interesting factor of job satisfaction is the level of employee’s life satisfaction (of his private life), as well as their ability to coordinate their private life and business obligations. discrepancy on this route, whether it is caused by excessive demands and expectations in the sphere of private or business life, will have a negative impact on the level of employee satisfaction (see: calvo-salguero, carrascogonyales, salinas-martinez, 2010, 1248). manager’s role in raising the level of job satisfaction 169 different organizational factors can affect the level of satisfaction at work. among theorists there is no firm consensus on specific organizational factors whose influence on the level of job satisfaction could be characterized as critical. for example, laurie j. mullins believes that, although different organizational factors (the size of organization, formal organizational structure, structure of informal organizational relationships, organizational technology, management system, leadership style, working conditions, organizational culture, the quality of interpersonal relationships, etc.) can affect the level of job satisfaction, the special influence is achieved by the following factors (mullins, 2010, 705):  contributing to increase of the level of job satisfaction, such as: the diversity of jobs, inconspicuous surveillance, increase of accountability, opportunity for advancement, information on the achieved results;  contributing to the decline of the level of job satisfaction, such as: unclear objectives, poor communication, lack of reward, job insecurity. exploring the results obtained on the basis of more than 3000 researches, robert p. vecchio stated that especially influential factors of job satisfaction are: hierarchical position one occupies in the organization, the length of time spent in the organization, and even the race that the individual belongs to (vecchio, 2003, 266-267). although the race is not an organizational factor of job satisfaction, because of its close relationship to the other two mentioned factors which belong to the organizational factors, they will be analyzed together. robert p. vecchio says that the results of those studies showed that employees at higher hierarchical position in the organization demonstrated a higher level of job satisfaction compared to the employees who are at lower hierarchical positions. also, those members who are working, for a long time, in a specific organization, express higher levels of job satisfaction in relation to employees who spend less time in the organization. finally, vecchio says that various surveys showed that afro-american employees are less satisfied at work compared to euro-american workers. of course, the insight into the impact of these factors on the level of job satisfaction does not mean that they should be taken “for granted”. it is necessary to bear in mind that among these, as well as the many other factors of job satisfaction, there is interdependence. thus, for example, for decades, afro-american employees have occupied the lower positioned jobs, compared to workers of euro-american origin. in these work places afroamerican workers have stayed significantly shorter compared to euro-americans who are, at a higher hierarchical positions, trying to stay as long as possible (vecchio, 2003, 266-267). over time, a number of theorists have concluded that the key factors of job satisfaction can be identified as following (luthans, 2008, 142): a) the work itself, i.e. the nature of the particular work that an individual performs. among other things, this factor includes the extent to which a specific job is interesting and challenging to an individual, the degree to which the job provides the opportunity for an individual to keep abreast of new things or makes him/her responsible. b) earnings, i.e. the amount of financial compensation that an individual receives for the work he performs in the organization. this factor also involves the degree to which an individual is considering fair compensation they receive for their work, when compared to the earnings received by the other members of the organization. i. simić, n. stojković 170 c) opportunities for advancement of a member of the organization, either in terms of those opportunities that are based on years spent within the organization, or on the achieved performance. d) supervision, i.e. the management style of surveillance of employees, which is reflected in the ability of a “supervisor” to ensure appropriate technical and behavioral support to the “supervised”. besides reviews of what employees are doing, this factor involves the degree to which the “supervisor” takes into account and respects the personal interests of employees, the degree to which he/she provides them with the necessary assistance, information and advices. e) collegiality reflects the attitude of other members of the organization to the particular employee. this factor of job satisfaction reflects the degree to which other employees are technically, professionally and socially ready to help their fellow, the degree to which members of the organization trust each other, and the extent to which the members of the organization are fair and correct to each other. in certain studies (judge, church, 2000; jurgensen, 1978) that were conducted over the years in different organizations and in different jobs, the employees were asked to rank the above-mentioned organizational factors of job satisfaction (the nature of the job, salary, promotion opportunities, supervision, collegiality). the results show that the majority of employees, as the most important factor of job satisfaction, separates the nature of the work that they perform. these results could be a valuable information for managers. especially, if one takes into account the fact that a number of managers believe that earnings is the most important for employees, and that the salary is the key factor in job satisfaction (saari, judge, 2004, 397). corporate social responsibility is increasingly associated with job satisfaction. numerous studies (turker, 2009, 189-204; brammer, millington, rayton, 2007, 17011719) have shown that positive perceptions of employees about the socially responsible behavior of their organizations have positive effects on various aspects of organizational functioning (affect the level of: organizational citizenship behavior, organizational justice, organizational trust, organizational commitment, etc.) among other things, this perception of social responsibility has a positive effect on employee’s job satisfaction (tziner, bar, oren, kadosh, 2011, 71). the results of some studies, conducted over the last few decades, also indicating the present interaction between job satisfaction and the level of perceived: organizational trust, organizational justice, organizational commitment and organizational citizenship behavior (camgoy, karapinar, 2011; al-zu’bi, 2010; eslami, gharakhani, 2012; iranzadeh, chakherlouy, 2011). laurie j. mullins points out that the ranking of organizational factors of job satisfaction varies depending on the type of organization. he said that the results of research conducted by simmons t. and enz c. a. (1995) show that the most important factors of job satisfaction for the employees of health care organizations, are: good salary, job security, and promotion opportunities. on the other hand, some studies that preceded the above, and that had to do with the degree of job satisfaction of employees in manufacturing organizations, showed that, to the employees in this type of organizations, the following factors are important: interesting work, recognition by peers and a sense of belonging to the organization (mullins, 2010, 701). manager’s role in raising the level of job satisfaction 171 the group of external factors of job satisfaction includes many other factors beyond man’s personal and organizational environment. some of these factors are those in the field of economic, social, technological, legal, political and international sector of external organizational environment. ebru k. points out that certain economic, social and cultural conditions in a particular country may have a corresponding impact on the level of employees’ job satisfaction (ebru, 1995, 22). certain researches (saari, 2000; saari & erez, 2002) also pointed out that a national culture can also affect the nature of the attitudes of the members of particular nations. it follows that it is possible that the specific features of national culture influence the level of satisfaction of the members of the particular nations. 3. implications for managers the analysis of the importance of job satisfaction refers to the observation that the manager’s role in maintaining a high level of job satisfaction, as well as its strengthening, is very important. managers may use different sets of mechanisms with the aim of raising the level of job satisfaction. of particular importance are the mechanisms that are in the fields of human resources and organizational behavior. almost every phase identified in the process of human resource management (human resource planning, recruitment of new and release of existing employees, selection of recruited candidates, orientation of new members, training staff, evaluating staff performance, developing the systems of compensation and benefits, providing career advancement) (simić, 2010, 232), provides a wide area of activity with the aim of raising the level of job satisfaction. also, almost all of the variables identified in the model or organizational behavior (simić, 2009, 44) represent a potential “space” that a skilled manager can use for the purpose of raising the level of job satisfaction. the above-mentioned studies, the results of which showed a positive correlation between the four (conscientiousness, agreeableness, extraversion, openness to new experience) out of five dimensions of personality and job satisfaction, as well as the negative correlation between job satisfaction and personality dimension labeled as neuroticism, should be kept in mind while hiring new staff. independently, or with the help of experts, especially psychologists, managers can assess the nature of personalities of those candidates who apply for entry into the organization. in this way they can choose those candidates whose personality traits are conductive to increasing levels of job satisfaction. this means that, in terms of certain personality dimensions of recruited candidates, managers should select those candidates that are characterized by higher levels of conscientiousness, agreeableness, extraversion and openness to new experiences, as well as those with a lower level of neuroticism. for existing employees, managers need to look for appropriate mechanisms that may contribute to the strengthening of the dimensions of their personalities that positively correlate with job satisfaction (agreeableness, conscientiousness, extraversion, openness to new experience) as well as to mitigate the degree of neuroticism of employees, as a particular dimension that correlates negatively with job satisfaction. also, information about the positive correlation between life satisfaction and job satisfaction, can be skillfully used by managers to the admission of new members of the organization, as well as for the managing of existing human resources. selection of those i. simić, n. stojković 172 candidates who are judged to be satisfied with their lives, represent, in terms of raising the level of job satisfaction, a better solution compared to selecting those candidates whose level of life satisfaction is lower. managers can, also, do the necessary efforts within the existing personnel for the purpose of improving the quality of their lives, i.e. raising the level of their personal life satisfaction. the widest scope of management activities, with the aim of raising the level of job satisfaction is the one positioned within the group of organizational factors of job satisfaction. generally, we could conclude that the improvement of almost any of the organizational variables (e.g. organizational structure, organizational culture, organizational technology, human resources, organizational climate, business strategy, etc.) can potentially contribute to increasing the level of job satisfaction within the organization. the forward analysis of the impact of certain organizational variables on job satisfaction provides more concrete specification of potential activities of managers. with the aim of raising the level of job satisfaction, managers must also carefully and skillfully carry out the selection of new staff. at the very beginning, newly recruited staff should be provided full support, with the aim for them to fit better into the new working environment. this could be done by organizing proper orientation of new organizational members. the goal of the orientation is to provide a sense of safety, comfort and enjoyment of the new members of the organization within the available business comfort of particular organization. also, the tasks that are delegated to the individual members of the organization, must be in accordance with their knowledge, skills and expectations. task which are too simple can affect the decrease in the level of job satisfaction. the facts that employees prefer diverse, challenging, responsible and interesting tasks must be skillfully used by managers when they design specific tasks and jobs. tasks that are delegated to employees must be clear, unambiguous, with precise objectives, supported by relevant information and other resources necessary to achieve them. among other things, the tasks should be designed to provide an opportunity for further development and further advancement of employees. during the implementation of the tasks it is necessary to provide full support to every member of the organization. managers are required to provide this type of support to their staff. at the same time, they must ensure that the members of the organizations help and support each other. acknowledgement. the paper is a part of the research done within the project number 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strukturi svojih podsistema, kao dominantan, imaju i ljudski ili socijalni podsistem. u pitanju je podsistem koji ima značajan uticaj na funkcionisanje organizacije i na njenu konkurentnost. kvalitet socijalnog organizacionog podsistema determinisan je kvalitetom različitih varijabli koje taj podsistem uključuje. zadovoljstvo poslom jedna je od tih varijabli. u pitanju je varijabla koja može imati odgovarajući uticaj na efektivnost i efikasnost organizacije i na njene performanse. cilj autora ovog rada je da ukažu na prirodu, značaj, uzroke i posledice zadovoljstva poslom, kao i na ulogu menadžera u povećanju nivoa ove organizacione varijable. ključne reči: zadovoljstvo poslom, zaposleni, menadžment, organizacija. facta universitatis series: economics and organization vol. 16, n o 2, 2019, pp. 117 127 https://doi.org/10.22190/fueo1902117k © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper quality of institution and economic growth of the countries of the european union and the western balkans 1 udc 330.35(4-672eu:497) vladimir kostić 1 , samir ljajić 2 , slobodan cvetanović 3 , vladimir nedić 4 1 faculty of economics kosovska mitrovica, serbia 2 university of novi pazar, serbia 3 university of niš, faculty of economics, serbia, 4 technical college of aplied studies kragujevac, serbia abstract. the paper analyzes the intensity of the influence of the quality of institutions according to the data from the world bank's specialized worldwide governance indicators database on the growth of gross domestic product per capita of 33 countries of europe through linear and exponential regression analysis for the period from 1996 to 2016. the observed european countries are divided into three groups: 15 european union member states in 1995; 13 eu member states from 2004, 2007 and 2013, as well as five countries of the western balkans that negotiate or have the status of a candidate for eu membership, in the period from 1996 to 2016. the results of the research have shown that the quality of the institutions had a very positive impact on the economic growth of the observed countries of europe. according to statistics, positive interdependence is the most significant among the western balkan countries. the conclusion is that these countries have to pay special attention to the development of institutions in the process of joining the european union. key words: institutions; economic growth; european countries, eu15, eu13, countries of the western balkans jel classification: o43 received january 21, 2019 / accepted march 13, 2019 corresponding author: vladimir nedić technical college of applied studies kragujevac, kosovska 8, 34000 kragujevac, serbia e-mail: vnedic@kg.ac.rs 118 v. kostić, s. ljajić, s. cvetanović, v. nedić 1. introduction the key issue concerning economic growth and development is why some countries are significantly poorer than others. although there are many different explanations of this phenomenon, it can be noted that economic science is still far from having a generally accepted explanation of the key drivers of long-term economic growth (acemoglu, johnson & robinson, 2005). the most important traditional theories of economic growth did not take into account the importance of institutions in the initiation of economic dynamics (cvetanović & mladenović, 2015, p. 71; cvetanović, kostic & milačić, 2016). neoclassical models of economic growth did not take into consideration the significance of institutions in generating economic growth at all (acemoglu et al, 2004). in short, in the neoclassical approach, the institutions are marginalized, and the causes of economic growth are sought exclusively among production factors (land, labor, physical capital). institutions represent the rules of the game in society, that is, the constraints created by people, which design complex interactions of economic actors in complex processes of creating and exchanging new values (north, 1994, p. 360). the study of economic growth involving institutions has begun with the emergence and affirmation of the theory of endogenous growth since the beginning of the last decade of the previous century. because of this, institutions create an environment in which the economic activities of individuals and businesses take place. bearing in mind the fact that the institutions act with varying intensity on the economic growth of countries of different levels of economic development, the subject of research in this paper is determined in terms of understanding the impact of the quality of institutions on the economic growth of the countries of the european union and the western balkans that are in the stages of accession to this regional economic organization. the aim of the paper is to create a model of the impact of the component vector (different indicators of institution development) of institutions on economic growth of three groups of selected european countries at different levels of economic development. the composition of the work is structured in the following way: after the introduction, section 2 gives an overview of the relevant literature in this area, while section 3 presents the theoretical framework for assessing the quality of institutions based on wgi (the worldwide governance indicators) methodology of the world bank (wgi project , n.d.) to quantify their impact on the economic growth of the observed countries, the sources of data used in the work are cited, and the paper also provides a more detailed overview of the applied research methodology. the results achieved by the applied model and their discussion are stated in section 4, and in section 5 the conclusion and implications for policy makers as well as for institution-building policies are presented. 2. review of literature literature primarily points to a positive correlation between the level of institutional development as aggregate size and economic growth. however, the quality of institutions does not have similar effect on economic growth neither in different quality of institution and economic growth of the countries of the european union and western balkans 119 countries, nor at different levels of development of individual economies. this presumably positive contribution of institutions can therefore be seen as an effect of the set of various component indicators of institutional development. in addition, there is the influence of so-called "soft" factors, such as the perception of the institution by the individual, the prevailing social norms and rules, and the broader cultural profile of the particular community we are observing. very often institutions of very similar characteristics produce different outcomes in some national economies (alonso & garcimartín, 2013). a growing interest in researching the quality of institutions as a factor of economic growth was initiated by barro (1991), which included measures of political stability as an assessment of the quality of institutions in the cross-country analysis of long-term growth. barro observed 98 countries in the period from 1960 to 1985, using the average gdp growth rate as the dependent variable during that period, while as independent variables he took the initial gdp, the initial average number of years of schooling, public spending, market distortions and existing investments. the results of the survey confirmed the existence of a positive link between political stability and economic growth. his research is significant because of the fact that he designed a model of econometric model which was then slightly changed by other researchers. the specificity of that work lies in the fact that he used objective measures as an indicator of the quality of institutions the number of revolutions and assassinations. mauro (1995) used three indicators of the quality of institutions: (1) corruption, (2) the efficiency index of the administration, and (3) the political stability index, and established a positive and statistically significant relationship between these indicators with investments and economic growth. knack and keefer (1995) constructed the quality index of institutions that included "government corruption", "rule of law", "risk of expropriation", "quality of bureaucracy" and "non-recognition of contracts". in their research, the improvement of the index for one standard deviation (12 points on a scale of 50) increases the average annual growth rate of gdp per capita by 1.2 percentage points. in particular, they pointed to the fact that the improvement of the protection of property rights has worked to increase the size of investments and the efficiency of the use of resources. a large number of authors have concentrated on the relationship of democracy and growth. tavares and wacziarg (2001) have found that democracy increases the accumulation of human capital, but it reduces the investment in physical capital, so the overall impact on growth is moderately negative. according to the findings so far, the institutions are a very important determinant of investments, sustainable development, transition processes and economic turbulences of national and regional economies, and more and more of the global economies (rodrik, 2008; van den berg, 2016; north, 1994). empirical research shows a big, real and potential role of institutions which becomes obvious in evident and very important differences in the rate of capital accumulation, education, available human resources, variations in productivity of labor, which in the end cause enormous differences in the income of the population of individual regions (where the term region can be observed in a very broad sense). it is quite unquestionable that, for example, the rule of law, political stability and low level of corruption positively affect economic growth (haggard & 120 v. kostić, s. ljajić, s. cvetanović, v. nedić tiede, 2011; rodrik, subramanian & trebbi, 2004). also, a large number of analysts are exploring the driving potential of the private ownership institution as the key cornerstone of modern liberal capitalism to long-term sustainable economic growth (acemoglu, johnson & robinson, 2005; de haan & sturm, 2000). alonso and garcimartin (2013) have looked at the role of the stage of economic development of a particular economy in determining the character and intensity of the effects of institutional development. in the work they detect a certain positive spiral effect when the achieved economic development determines the qualitative change of institutions, which further promote further economic growth. nawaz (2014), as well as valeriani and peluso (2011), also found in their researches that the intensity of the influence of institutions on economic growth is, to a large extent, the function of the economic development phase in which the observed country is located. their conclusion is that institutions are developing better in developed countries than in developing countries. 3. methodology the work is based on:  measuring the quality of institutions according to data from the world bank's specialized database world bank governance indicators (wgi),  determining the degree of influence of the quality of institutions on economic growth,  answering the question that refers to how much and how the degree of development of institutions affects economic development institutions are represented by the indicators of the worldwide governance indicators in six dimensions (figure 1). fig. 1 six dimensions of wgi source: (wgi project). wgi is a tool developed by the world bank to monitor aggregate and individual indicators of the achieved level of state administration institutions and covers more than 200 countries in the period from 1996 to 2016. these aggregate indicators combine the quality of institution and economic growth of the countries of the european union and western balkans 121 views of a large number of businesses, individuals and professionals surveyed in industrial and developing countries. they are based on over 30 individual sources of data produced by various research institutes, think tanks, non-governmental organizations, international organizations and private companies. state planning and administration represent the broadest framework of a society in which both social and economic activities take place. state administration is broadly defined by the tradition and institutions that are exercising authority in the country. this includes a process by which governments are elected, supervised and replaced, and also the government's ability to formulate and implement effectively sound policies and respect for citizens and the state for all institutions that regulate economic and social interactions between them. the influence of institutional quality on the economic growth of selected european countries measured by the size of gross domestic product per capita is quantified by means of a single correlation and regression analysis. the survey covers the period from 1996 to 2016. the following two hypotheses are set: h1 quality level of institutions has a positive impact on economic growth. h2 significance and intensity of positive impact of institution quality is inversely proportional to the achieved level of gdp pc of the observed country groups. in order to test h1 and h2, the appropriate regression model (linear and exponential regression) for the time series in the period from 1996 to 2016 was constructed, where the value of wgi institution was taken as an independent variable (the average value of all 6 defined indicators of the quality of institutions shown in fig. 1). it is a composite indicator because it represents the aggregated value of the corresponding indicators that describe the state of the institutions. the movement of economic growth, as dependent variables, is monitored by the size of gross domestic product per capita in current us dollars. the degree of interdependence of institutional quality and economic growth, gdp per capita (in us $), was examined through a single regression and correlation analysis using (1) linear and (2) exponential functional dependencies. the wgi model of impact on gdp per capita based on formulas 1 and 2 was made: linear model: yt = a + bxt (1) exponential model: yt = a*ebxt (2) where: a, b constants of the linear / exponential model; x independent (exogenous) variable (wgi); y dependent (endogenous) variable (gdp per capita); t -years of data. 4. results of the research and their outcome eu countries are divided into two groups: a) eu15 countries and b) the remaining 13 eu countries. the eu15 group consists of: a) founding members (france, germany, italy, belgium, the netherlands, luxembourg, countries that became members of the eu 122 v. kostić, s. ljajić, s. cvetanović, v. nedić in the first enlargement in 1973 (uk, denmark, ireland), countries that became members of the eu in another enlargement in 1981 (greece), countries that became members of the eu in the third enlargement in 1986 (spain, portugal) and countries that became members of the eu in the fourth enlargement in 1995 (austria, finland, sweden). eu15 are the most economically developed countries in europe. the group of the remaining 13 eu countries consists of: a) countries that became members of the eu in the fifth enlargement of the eu in 2004 (hungary, slovak republic, poland, latvia, cyprus, lithuania, czech republic, slovenia, estonia, malta); countries that joined the eu in the sixth enlargement in 2010 (bulgaria and romania) and the country that became a member in the seventh enlargement in 2013 (croatia). two countries from five western balkan countries are negotiating membership (montenegro and serbia), two are candidates (albania and north macedonia), while bosnia and herzegovina is a potential candidate for eu membership. table 1 average gdp values of pc analyzed groups of countries in the observed period year west balkan eu13 eu15 1996 3,846 9,674 22,599 1998 4,486 10,830 24,911 2000 5,102 12,165 28,390 2002 5,744 14,002 30,813 2003 6,041 14,856 31,433 2004 6,628 15,996 33,112 2005 7,216 17,203 34,364 2006 8,512 19,004 37,500 2007 9,515 20,991 39,676 2008 10,678 22,683 41,011 2009 10,716 21,779 39,647 2010 11,194 22,674 40,848 2011 11,832 24,044 42,393 2012 11,904 24,704 42,845 2013 12,537 25,716 44,299 2014 12,987 26,759 45,619 2015 13,349 27,593 47,532 2016 14,160 28,732 48,502 source: world development indicators. (n.d.) figure 2 illustrates the differences in the average gdp pc of the three observed groups of countries in the period from 1996 to 2016. quality of institution and economic growth of the countries of the european union and western balkans 123 fig. 2 movement of average gdp pc in the observed period source: world development indicators. (n.d.) according to the results of the conducted regression analysis presented in tables 2 and 3, two models of linear and exponential form were obtained table 2 summary linear correlation statistics for the three observed groups of countries variables (1) eu15 (2) eu13 (3) z. balkan gdppc as dependent variable: y wgiaverge as x 552.2*** 452.5*** 291.3*** (87.87) (42.23) (23.99) constant -11,081 -12,941*** -3,109*** (7,780) (3,098) (1,057) observations 270 234 88 r-squared 0.128 0.331 0.632 adjusted r-squared 0.125 0.328 0.627 f statistic (df = 1; 268/232/86) 39.48 114.81 147.41 *** p<0.01, ** p<0.05, * p<0.1;standard errors in parentheses table 3 summarized statistics of exponential correlation for the three observed groups of countries variables (1) eu15 (2) eu13 (3) z. balkan ln(gdppc) as dependent variable: y wgiaverge as x 0.0132*** 0.0269*** 0.0346*** (0.00198) (0.00244) (0.00298) constant 9.315*** 7.856*** 7.584*** (0.176) (0.179) (0.131) observations 270 234 88 r-squared 0.141 0.344 0.611 adjusted r-squared 0.138 0.341 0.606 f statistic (df = 1; 268/232/86) 44.03 121.71 134.81 *** p<0.01, ** p<0.05, * p<0.1;standard errors in parentheses 124 v. kostić, s. ljajić, s. cvetanović, v. nedić graphic interpretation of the linear and exponential regression model of the influence of institution and economic growth is shown in figures 3, 4 and 5. fig. 3 the dependence of gdp per capita on the degree of development of the institution (wgi) for the eu15 countries by the analysis of the relationship shown in figure 2 (for eu 15), the pearson coefficient of correlation r = 0.358 for linear, or r = 0.376 was determined, which is more than the limit for the number of degrees of freedom n = 268 and the significance level p <0.01. fig. 4 dependence of gdp per capita on the level of institution building (wgi) for the eu13 countries the analysis of the relationship shown in figure 4 (for eu 13) determined the pearson correlation coefficient r = 0.575 for linear or r = 0.587, which is more than the limit for the number of degrees of freedom n = 232 and the significance level p <0.01. quality of institution and economic growth of the countries of the european union and western balkans 125 fig. 5 the dependence of gdp per capita on the level of institution building (wgi) for the countries of the western balkans the analysis of the relationship shown in figure 4 (for the five countries of the western balkans) determined the value of the pearson correlation coefficient r = 0.795 for linear, i.e. r = 0.781 for the exponential, which is more than th e limit for the number of degrees of freedom n = 86 and the level of significance p <0.01. it is shown that both applied regression models give approximately the same degree of interdependence of the observed variables for all three groups of analyzed european countries. we are of the opinion that the potential of the relationship between the observed variables institution and gdp pc evidently exists, and that it is particularly evident in the countries of the western balkans. the obtained results indicate: the change of the achieved level of institution development in the period from 1996 to 2016 had a statistically significant impact on the economic growth measured at the level of gdp pc of all three groups of countries observed, eu15, eu13 and the western balkan countries (p <0.01). by this the hypothesis h1 is confirmed. a comparative analysis of the results obtained at the level of the three observed groups of countries in europe shows that: (1) for the eu15 countries, there is a statistical significance of the positive impact of the quality of institutions on economic growth in both applied correlation models (adjusted r2 = 0.125 in linear, or 0.138 in the exponential correlation model). it is considered that according to the assumed model, the variations of the independent variable wgi explain about 13% of the total variations in the economic growth of the eu15, under the assumption of the unchanged values of other explanatory variables. (2) for the eu13 group, there is even more pronounced statistical significance of the positive impact of the development of institutions on economic growth, and also in both of the applied correlation models (adjusted r2 = 0.328 in the linear model, and 0.341 in the exponential correlation model). this implies that the assumed model in the eu13 explains about 33% of variations in economic growth (assuming unchanged values of other explanatory variables). (3) for the group of western balkan countries, there is statistically the most evident significance of the positive impact of institutional development on economic growth, 126 v. kostić, s. ljajić, s. cvetanović, v. nedić which is reflected in the value of adjusted r-squared of as much as 0.626 in linear and 0.606 in the exponential correlation model (partially, this implies that variations of the variable institutions explain about 60% of the total variations in the economic growth of the countries of the western balkans in the period from 1996 to 2016, assuming unchanged values of other explanatory variables); (4) the intensities of the impact of the quality of institutions on economic growth vary both among the group of countries and the correlation function in the model. the linear model shows stronger intensities of the positive influence of the development of institutions, which is proportional to the achieved gdp pc of the observed groups of countries (the intensity of the impact of the independent variable on the dependent for the eu15 is 552.2, the eu13 is 452.5, and the western balkans is 291.3). in the case of the exponential model the situation is different. the intensities of the positive influence of the development of institutions are inversely proportional to the achieved level of gdp pc of the observed groups of countries. (the intensity of the impact of an independent variable on the dependent for the eu15 is 0.0132; for the eu13 it is 0.0269 and 0.0346 for the western balkan countries). (5) it is noted that for the group of western balkan countries, the linear regression model better describes the nature of the influence of institutional development on economic growth (adjusted r-squared 0.627 for a linear model is greater than 0.606 in the exponential model), while in eu13 (adjusted r -squared 0.341 for the exponential model in relation to the 0.328 for the linear model), and especially the eu15 (adjusted r-squared 0.138 in the exponential model with respect to 0.125 for the linear model), the exponential model shows slightly better results. 5. conclusion the results of the survey of the set regression models on the observed sample of european countries confirmed the validity of the hypothesis h1. also, the potential of h2 hypothesis about the nature of the influence of the independent variable x (institution development) on the dependent variable y (gdp per capita) has been confirmed. based on the obtained values in the applied regression models (linear and exponential), the conclusion is that the dominant and approximately linear influence of the quality of institutions on economic growth can be expected at a stage in which the economic growth is based on the efficiency-driven stage to which they belong and institutions (the case of the western balkan countries), while after the end of this phase (in the whole case of the eu15 and partly the case of the remaining eu13 countries), the significance of the impact of institutions is significantly decreasing. in simple terms and in line with h2 hypothesis, countries at lower levels of economic development can achieve a more significant benefit by speeding up the quality of institutions. in order to better understand the impact of institutional development on the economic growth of countries, further research could go towards testing, which takes into account the impact of the achieved level of individual indicators of the composite indicator wgi on economic growth quantified by the gdp per capita indicator. all this implies the imperative that the economic growth of the countries of the western balkans must still largely be based on the accelerated construction of efficient institutions. the basic message is that these countries need to improve their own institutional reform quality of institution and economic growth of the countries of the european union and western balkans 127 strategies as well as to work on the development of institutions. this undoubtedly represents a necessary condition for their further sustainable economic development. references acemoglu, d., johnson, s. & robinson, j. (2005). the rise of europe: atlantic trade. institutional change, and economic growth, 95 (3) 546-579. acemoglu, d., johnson, s., robinson, j. a. & yared, p. (2005). from education to democracy ?. american economic review, 95 (2), 44-49. alonso, j. & garcimartin, c. (2013). the determinants of institutional quality. more on the debate, journal of international development, 25 (2), 206-226. barro, r. (1991). economic growth in a cross section of countries. the quarterly journal of economics, 106 (2), 407-443. cvetanovic, s. & mladenovic, i. (2015). economics of capital and financing of development. nis: own edition. cvetanovic, s. kostic, v. & milacic, lj. (2016). european union: development, constitutional design and common economic policies. kosovska mitrovica: faculty of economics, university of pristina. de haan, j. & sturm, j. e. (2000). on the relationship between economic freedom and economic growth. european journal of political economy, 16 (2), 215-241. haggard, s. & tiede, l.b. (2011). the rule of law and economic growth: where are we?. world development, 39 (5), 673-685. knack s. & keefer, p. (1995). institutions and economic performance: cross-country tests using alternative institutional measures. economics and politics, 7 (3), 207-227. mauro, p. (1995). corruption and growth. the quarterly journal of economics, 110 (3), 681-712. nawaz, s. (2015). growth effects of institutions: a disaggregated analysis. economic modeling, 45, 118-126. north, d. (1994). economic performance through time. the american economic review, 84 (3) 359-368. rodrik, d. (2008). "thinking about governance" in d. north et al., governance, growth and development decision making. washington, dc: world bank, pp. 17-24. rodrik, d., subramanian, a. & trebbi, f. (2004). institutions rule: the primacy of institutions, geography and integration in economic development. journal of economic growth, 9, 131-165. tavares, j. & wacziarg, r. (2001). how democracy affects growth. european economic review, 45 (8), 1341-1378. valeriani, e. & peluso, s. (2011). the impact of institutional quality on economic growth and development: an empirical study. journal of knowledge management, economics and information technology, 1 (6), 1-25. van den berg, h. (2016). economic growth and development. world scientific publishing company. world development indicators. (n.d.). retrieved january 3, 2019, from https://databank.worldbank.org/data/ source/world-development-indicators. world bank databank. wgi project. (n.d.). the worldwide governance indicators. retrieved january 11, 2019, from http://info.worldbank. org/governance/wgi/#home. world bank. kvalitet institucija i ekonomski rast zemalja evropske unije i zapadnog balkana u radu je ispitavan intenzitet uticaja kvaliteta institucija prema podacima iz specijalizovane baze svetske banke worldwide governance indicators na rast bruto domaćeg proizvoda per capita 33 zemlje evrope putem linearne i eksponencijalne regresione analize za vremenski period 1996-2016. sagledavane zemlje evrope su razvrstane u tri grupe: 15 zemalja članica evropske unije zaključlno sa 1995. godinom; 13 zemalja eu članica iz 2004, 2007. i 2013. godine, kao i pet zemalja zapadnog balkana koje pregovaraju ili imaju status kandidata za članstvo u eu, u periodu 1996-2016. rezultati istraživanja su pokazali da je kvalitet institucija imao izrazito pozitivan uticaj na ekonomski rast sagledavanih zemalja evrope. pozitivna međuzavisnost je statistički najizraženija kod grupacije zemalja zapadnog balkana. zaključak je da ove zemlje moraju u procesu pridruživanja evropskoj uniji posebnu pažnju posvetiti razvoju institucija. ključne reči: institucije, ekonomski rast, evropske zemlje, eu15, eu13, zemlje zapadnog balkana facta universitatis series: economics and organization vol. 18, no3, 2021, pp. 259 274 https://doi.org/10.22190/fueo210525018b © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper pigs economies: bail-out vs. bail-in1 udc 336.71 marina beljić university of novi sad, faculty of economics in subotica, department for international and european economics and business, subotica, serbia orcid id: marina beljić https://orcid.org/0000-0003-2657-2421 abstract. this paper analyzes bail-out and bail-in programs in the eurozone periphery economies after the transformation of the global crisis into a debt crisis. continuous rise of debt service costs was leading pigs economies (portugal, ireland, greece, spain) either to abandon of eurozone or to negotiate rescue programs. using panel corrected standard errors (pcse) method, the research shows that bail-out programs had a negative effect on gdp growth in pigs economies in the period 2011-2019, as the consequence of crowding-out effects. however, the results showed that bail-out programs could positively affect fiscal variables. an alternative solution is the bail-in mechanism, which is a sustainable mechanism that does not burden taxpayers. based on examples of banks in spain and portugal, results show that using bail-in programs, panic and contagion effects could be avoided; however, in the case of future crisis, the effects of bail-in programs on the real economy still need to be examined. key words: pigs economies, bail-out, bail-in, crisis. jel classification: g38, e44, h60. 1. introduction eu membership implies the harmonization of a significant number of economic policies, but one of the few that has maintained sovereignty is fiscal policy. although fiscal policy is characterized by certain level of policy coordination in terms of partial harmonization of the tax system, and defined levels of fiscal deficit (3 % of gdp) and public debt (60 % of gdp), each member individually implements public spending received may 25, 2021 / accepted june 08, 2021 corresponding author: marina beljić university of novi sad, faculty of economics in subotica, segedinski put 9-11, 24000 subotica, serbia | e-mail: marina.beljic@ef.uns.ac.rs https://orcid.org/0000-0003-2657-2421 mailto:marina.beljic@ef.uns.ac.rs 260 m. beljić policies. therefore, it is not surprising that each country individually has different causes of excessive fiscal deficit. as the global crisis escalated, eu countries were also affected to varying degrees. although the global crisis was initiated in the mortgage market, it quickly spilled over into the real sector, and then transformed into a debt crisis, primarily in the pigs countries (portugal, ireland, greece, spain). the specificity of these countries is reflected in their affiliation with the eurozone with the single monetary policy of the eurozone, the only macroeconomic instrument for mitigating the consequences of the crisis was fiscal policy. the aim of this paper is to analyze the fiscal difficulties that pigs countries faced during the crisis, as well as bail-out vs. bail-in programs used during the debt crisis. the subject of the paper is the analysis of rescue mechanisms implemented in the pigs countries in terms of bail-out programs in the period 2011-2019 using panel-data model, as well as examples of bail-in programs. the main hypothesis in the paper is that bail-out programs negatively influence gdp growth in the short term and that a long-term solution could be found in bail-in programs. namely, using bail-in programs, instead of tax payers, banks could participate in bearing the costs of restoring a distressed bank and to prevent the negative spillover effects from the banking sector to countries’ public debts. the paper is structured as follows: after the introduction part, the second section presents a review of the literature on bail-out and bail-in programs and section tree shows the theoretical background of bail-out programs in terms of classification and consequences. the fourth section presents the fiscal positions of pigs countries and the motivation for implementing bail-out programs. the fifth section shows the effects of the bail-out program using panel-data model, and bail-in program using example of spain and portugal. as part of the concluding remarks, recommendations were made to macroeconomic policy makers. 2. literature review the complexity of the eurozone debt crisis is explained in the weber’s (2015) paper, pointing out that it is not just a public debt crisis, but simultaneous growth crises, a labor market crisis, a balance of payments crisis, along with a public debt crisis. failures during these crises were solved using bail-out programs from public funding equity in order to rescue debtholders (block, 2010). more precisely, ‘taxpayers have covered more than two-thirds of the cost of resolving and recapitalising financial institutions’ (philippon & salord, 2017). that was especially the case in pigs economies. schunknecht, moutot, rother, and stark (2011) point to the justification of using the rescue mechanism in pigs countries (portugal, ireland, greece, and spain) as solutions to unbridled public finances and growing public debt. initially, italy also belonged to this group of economies, which was analyzed in the work of talani (2013), however, no rescue measures were implemented in italy. kickert & ongaro (2019) propose resolving greece’s public debt at a supranational level. pagoulatos (2019) wrote more about the rescue programs used in greece. this paper discusses the effects of the applied bail-out mechanisms and the belt-tightening policy that is implied during the implementation of the program. gurnani (2016) indicates the economic and financial situation in which portugal found itself, as well as the process of implementing the rescue mechanism, emphasizing the efficiency of the program used. mcdonagh (2017) and whelan (2013) in their papers analyze the causes that led to the escalation of the fiscal deficit and which spilled over into the growth of public debt in ireland. also, the paper deals with the success of the pigs economies: bail-out vs. bail-in 261 applied rescue mechanism. bagus, raillo & neira (2014a, 2014b) talk about the state’s response in the form of a bail-out mechanism in spain (marti & perez, 2016), using a partial rescue program whose funds were directed solely to help the banking sector. further, they conclude that the effectiveness of the program used in spain is questionable, hence analyzing the feasibility of a bail-in (sanchez-roger et al. 2018). on the other hand, as opposite to bail-out programs, governments across europe introduced bail-in programs. dewatripont (2014), discusses in his paper the positive and negative effects of the bail-in mechanism. micossi et al. (2016) believe that new principles and restructuring of the banking sector can prevent excessive risk-taking by bankers and solve the issue of moral hazard. furthermore, conlon & cotter (2013) and avogouleas & goodhart (2015) discuss that topic as well. also, pandolfi (2018) considers that moral hazard can be completely eradicated by applying a bail-in mechanism. on the other hand, bodellini (2018) agrees in his work with this view, but suggests that it is not possible for bail-in to completely replace the bail-out mechanism. sommer (2014) advocates bail-in because his opinion is that ‘successful bail-in has only a marginal effect on competition, and that an unsuccessful bail-in only eliminates a competitor, without creating a bigger one’. namely, according to regulation (eu) no 806/2014 of the european parliament and of the council of july 15th 2014 bail-in as a tool is introduced in eu legislative. ‘formal resolution about bail-in regimes means participation of bank creditors in bearing the costs of restoring a distressed bank (bowman, 2016) and include heavy restrictions on taxpayer support’ (beck, et al. 2017). therefore, in a crisis depending on the specific situation and in line with the applicable legal framework, the single resolution board (srb) reserves the right to intervene (single resolution board 2020). the aim of new bank resolution is to ‘solve the trade-off between imposing market discipline and minimizing the effects of bank failure on the rest of the financial system and the real economy’ (beck, 2011). ‘imposing market discipline implies avoiding the negative impact of bail-outs and public guarantees on bank risk-taking’ (dam & koetter, 2012). while ‘this new tool hypothetically lets banks fail without resorting to public funding, the european regime also allows for extraordinary public support under certain conditions’ (schoenmaker 2017). hence, (bates & gleeson, 2015) ‘bail-in should operate through a private contract, but the power to initiate bail-in and determine the extent of write-offs and fees incurred should be entrusted to a competent public authority’. 3. theoretical background of bail-out mechanisms: types and consequences in analyzing the bail-out mechanisms, ‘it is important to distinguish the concepts of bailout’ and stimulating the economy. according to block (2010), two aforementioned terms represent different government actions, the first representing urgent efforts to prevent an impending collapse or to assist sectors that have already encountered difficulties and cannot overcome them, while the second one is fiscal stimulus is order to create economic growth. bail-out represents narrower action than stimulation, in the sense that the government can take general actions that enable economic growth, while the use of the bail-out mechanism is mainly focused on certain sectors. the bail-out could be said to represent direct one-time actions carried out through the purchase of debts or shares. on the other hand, fiscal stimulation is carried out through the encouragement of businesses or individuals either in general or through the purchase of individual assets (assets) or investment. 262 m. beljić according to block (2010), there are five types of bail-outs: 1. profitable bail-out, means that the government represents an intermediary between vulnerable companies, without spending budget funds. the government assists in finding a solution to overcome the problem, and in such circumstances can even profit, given that ‘all administrative costs are covered by interest and fees and that all loans are repaid in full’. 2. bail-out with low or no cost, by implementing such a program most governments help market players by adjusting to market conditions that can relax the business environment and thus help different sectors to overcome difficulties. the government can take actions that are risk-free if it opts for an intermediary role between investors and private lenders. or to take slightly riskier actions in which it represents a guarantor for private loans. 3. bail-out financed from special funds, the implementation of this program requires the creation of real costs. the implementation of this mechanism requires the establishment of funds, in which earmarked funds will be collected from which the bail-out will be financed. the disadvantage may be the lack of necessary resources when requiring a switch to another form of bail-out. 4. bail-out financed from general government revenues, by applying this mechanism, significantly higher funds are available compared to the previous method, which brings a certain advantage. however, the disadvantage of this form of bail-out financing must not be ignored. expecting state intervention with bail-out programs, companies as well as the banking sector are more willing to take much riskier moves, because they rely on the help of the state if something goes wrong. another disadvantage of this form of bail-out is that the costs of its financing are borne by all taxpayers, not just those who have direct or indirect benefits. 5. combined bail-out can be financed by a combination of earmarked funds allocated to special funds and general tax revenues, which gives some flexibility in the implementation of bail-out programs. it is important to consider the consequences, i.e. the costs of such actions, which is not an easy task since each action is specific to itself. the assessment of the costs and the most transparent costs of bail-outs can hardly be comprehensively considered, given that borrowers may not fully repay the amount of borrowed state funds. the risk, and thus the costs of applying the bail-out mechanism, vary in relation to different types of loans and investment programs, and also depend from one borrower to another. government intervention in the banking sector becomes necessary when illiquidity occurs due to the gap between short-term loans and long-term investments, in which case a combination of bail-out guarantees and central bank guarantees is applied. according to bagus, julian and neira (2014), the consequences of a bail-out can be as follows: 1. non-discriminatory bail-out: governments should not be guided by the premise that all banks or companies are too big to fail; a thorough analysis of the sustainability of certain systems should be performed and only then resort to the bail-out mechanism as a tool to save companies, a bank or the state in order to justify the invested funds and in order not to lay the foundations for the creation of new problematic market players. the new round of rescuing troubled actors who survived only thanks to state interventions actually represents the hidden costs of the bail-out program. 2. crowding-out of private savings: bail out is mainly financed by increasing public debt through the issuance of government bonds, in which savers invest. in that way, the capital market dries out even more, because the use of special funds prevents the free functioning of the credit market. this further aggravates the situation, as the effects spill pigs economies: bail-out vs. bail-in 263 over into both the stock market and the real estate market, increasing the demand for bailout fund expansion, thus not only inadequately wasting scarce resources but also squeezing out private consumption. 3. moral gambling: a non-discriminatory bail-out program further deepens the problem of moral hazard, the consequences of which will be difficult to control in the future. what leads to moral hazard and what does it represent? if the states, the private sector, banks or individuals are aware that whatever moves they have taken and in whatever difficulties they have fallen, the state will stand behind them and will not allow them to fail, such knowledge enables them to take even greater risks that in the future may lead to unsolvable situations collapse, i.e. increase the financial resources needed to save the system, i.e. rescue costs. 4. regulation of decision-making: most bail-out programs simultaneously carry with them capital injections into the entity being rescued, thus narrowing the space for management's independent decision-making. such circumstances not only complicate the business, but can significantly jeopardize the business and further survival of the company. 5. the problem of exit strategy: some bail-out programs involve the government becoming the majority owner of the entity (e.g., financial institutions) it is rescuing. as the majority owner, the government makes business decisions that often coincide with political interests, which significantly jeopardizes the business. fortunately, such situations are shortlived, as most governments want to exit these arrangements. the moment you go out can be a problem. going out too early can destabilize the financial system again, while a late exit can incapacitate or even disperse management that cannot make strategic decisions on its own. such circumstances lead mainly to a decline in the value of shares on the stock exchange, a decrease in profits, a decline in competitiveness and losses for all internal and external stakeholders. 6. uncertainty of the regime: represents a continuation of the previous problem, and was defined by robert higgs, as uncertainty as to what the future economic order will look like, especially how private property will be treated by the state. the uncertainty regime discourages long-term savings and investments that are essential for economic recovery. 4. why bail-out? re-examining fiscal position of pigs economies pigs economies were unable to control their public finances during the debt crisis. continuous rise of debt service costs was leading either to abandonment of eurozone or to negotiating rescue programs. the option of abandoning the euro would mean a return to weak national currencies, which would further open space for speculative attacks that would deepen the already existing problem. consequently, pigs economies have decided to accept rescue packages from several programs: european financial stability facility (efsf), european financial stabilization mechanism (efsm), european stability mechanism (esm). however, the eurozone peripheral economies received different amounts from bail-out programs in different periods, due to different fiscal situations in each economy. the pre-crisis situation in portugal can be defined as anemic, because economic growth was almost invisible and public revenues were insufficient. the economy in such a state is facing a crisis, which implies a threefold increase in the deficit in just one year from 3.7% of gdp in 2008 to 9.9% of gdp in 2009 (figure 1). the government primarily tried to respond to the crisis by the leader of the expansionary fiscal policy introduced with the aim of boosting the overall economy. consumption growth is stimulated by the growth of 264 m. beljić disposable income and the reduction of taxes. through this policy, an attempt was made to reduce the recession gap, increase aggregate demand and reduce unemployment. however, such a policy did not give the desired results, the expansive policy is characterized by the accumulation of public debt, which is why the unlimited use of the heating policy is not sustainable. in order to avoid further accumulation of public debt, portugal was forced to turn to bail-out programs in 2011, which, in addition to funds, also included painful fiscal adjustments. structural reforms were supposed to restore the country's credibility, which would ensure access to the international capital market in the short term. the bail-out program involved primarily a reduction in government expenditures, which meant a reduction in government spending, while reducing the volume of government administration (by 1% annual reduction in government employees), as well as reducing government employees' salaries with increasing its efficiency. further restrictions related to the health sector, education, unemployment benefits and social transfers. on the revenue side of the budget, it was necessary to reform the tax system, which was done by increasing the base for property and income taxes, vat rates were increased, and there were also increases and compensations for health care. a significant part of the portuguese economy was still in the hands of the state, and the signing of the program insisted on increasing the efficiency and competitiveness of the economy, which meant privatization, which provided additional income for the state. the bankruptcy of one bank threatened the collapse of the entire banking sector, as soon as the entire financial sector was endangered, which needed a significant pumping of funds in order to ensure its survival. fig. 1 fiscal deficit/surplus and public debt in portugal in period 2007-2020 source: https://tradingeconomics.com/ ireland was one of the members that was forced to sign bail-out programs financed by the ecb and the imf. at that time, in addition to the approved funds, it had to accept adjustments through fiscal consolidation. the crisis has hit the country hard, which has been characterized by low taxes and low social transfers. in the short period after the onset of the crisis, gdp fell by 4.5%, the decline in gnp was far greater as a result of its connection to exports and foreign ownership of the sector. domestic demand also declined. a complete debacle occurred in the labor market, where from a country with an extremely low unemployment rate of 4.5% (2000s) after the crisis the rate rose to 15%. public debt from the pre-crisis level of 23% of gdp reached the level of 119.5% of gdp in 2012 (figure 2). the deficit escalated to 32% of gdp in 2012, because the banking sector was saved that year. pigs economies: bail-out vs. bail-in 265 during the 2000s, public expenditures flourished, but were cut short in the short term, because otherwise, due to a deficit of 20%, public debt would have accumulated to 180% of gdp. the irish government decided to raise revenues, but twice less in relation to the reduction of expenditures, which ultimately did not produce the desired effect because the collected state revenues were 4 times less than expected. the reduction in spending resulted in a decline in investment projects, which were mostly financed from domestic public-private partnerships, as it took over the financing from eu funds. two years after the crisis, it was necessary to set priorities and investments in capital projects were halved. also, a significant amount of funds intended for education, health, households and public transport has been reduced in order to redirect these funds to encourage entrepreneurship and business. as one of the important austerity measures, the reforms also required dramatic reductions in public sector employees, and in order to mitigate social offers, incentives for voluntary retirement were offered (around 5%). the employment ban also came into force, mostly in the health and social sectors, while the state administration did not feel significant cuts. it was necessary for the public sector to increase efficiency, to achieve much more with less investment, which mostly referred to government agencies (‘especially in the field of social protection’). when analyzing the revenue side of the budget, the question of revenue sustainability arises for two reasons. first, in the pre-crisis period, the government carried out various write-offs of receivables from industry, in order to reduce the burden on companies, encourage economic growth, and thus reduce the nature of taxes. thanks to that decision, ireland faced the crisis with almost 50% less taxpayers, which resulted in a significant reduction in budget funds. the second reason is that economic growth relied almost entirely on tax revenues, thus the entire tax system suffered heavy burdens. such circumstances have put the irish economy at a disadvantage due to the constant changes in tax revenues that have been reflected in the destabilization of the entire country. the consequences of the recession were first felt by rising unemployment, and then by falling tax revenues due to declining employment. in the irish case, it was almost impossible to increase tax rates or carry out any reforms to existing taxes in order to raise more funds. ireland had to resort to creating new taxes, due to the fact that the increase in the corporate tax discourages future investors from investing capital, and thus discourages industrial development. according to whelan (2013), impressive growth is the result of a fundamental increase in productivity and the achievement of labor market flexibility that have been a wind in the back of growth and economic strengthening, which set ireland apart from other eu members who have not done so well with reforms. the deficit in 2015 was within the allowed limits, and such a trend continued in 2016 when it amounted to 0.7% of gdp, and in 2019, ireland achieved a budget surplus of 0.5% of gdp (figure 2). such a result is attributed to revenues collected that were above expectations. given the positive results of the fiscal deficit, there was a drastic reduction in debt observed in 2014 when it amounted to 104.1%, and in 2019 it was within the allowable amount of public debt and amounted to 58.8% of gdp. the moment of continuous decline, which was expected in the coming period, although it is very possible that this trend will change due to the corona virus pandemic, continued in 2016 when it amounted to 0.7% of gdp, and in 2019, ireland achieved a budget surplus of 0.4% of gdp. all this thanks to the collected revenues that are above expectations. given this situation, a drastic reduction in debt was observed in 2014, when it amounted to 104.1%, and in 2019 it was within the limits of the allowed amount of public debt and amounted to 57.4% of gdp in line with the trend of continuous decline, 266 m. beljić which was expected in the coming period, although it is very possible that this trend will change due to the corona virus pandemic. fig. 2 fiscal deficit/surplus and public debt in ireland in period 2007-2020 source: https://tradingeconomics.com/ the crisis that occurred in 2008 shook the already unstable public finances of greece. the reason that brought greece to that position is the long-standing fiscal deficit that has accumulated public debt to such an extent that greece has become the most indebted member of the eu. the main culprit for bringing greece to the brink of bankruptcy is an expansive fiscal policy that enabled the creation of a constant fiscal deficit (around 10%). such a policy is made possible thanks to domestic and foreign funds due to easier access to the capital market. at the same time, economic growth in greece has slowed significantly, leading to a further increase in public debt because interest rates on borrowed funds for refinancing were higher than the rate of economic growth. in addition, the state appears as a guarantor of private loans. the aforementioned reasons, along with the spillover effects of the global crisis, undoubtedly led to an unprecedented crisis after 2008. figure 3 shows that in 2009 fiscal deficit was 15.1% of gdp, while public debt increased to the level of 175.2 % of gdp in 2011. the bail-out programs that followed meant only one thing new borrowing with a policy of tightening the belt. the implementation of the first structural reforms aimed at stabilizing public finances and stimulating competitiveness did not yield results, thus deepening the recession. in order to overcome the crisis, it had to reform almost every segment of the economy, starting with the labor market, it was necessary to make it more competitive, flexible, but also cheaper (proposal to reduce health and social protection programs, abolish the thirteenth salary ...). another significant reform related to the tax systemit was required that the tax policy be better defined and simpler, which would achieve greater efficiency and reduce tax evasion. the positive effects of the bail-out programs were recognized in 2016 in terms of achieving a budget surplus (0.2 % of gdp), while the level of debt was kept at a very high level (about 180 % of gdp). the crisis caused by the covid-19 pandemic in 2020 deepened crisis in public finances again. public finances in spain have been in good condition in the pre-crisis period, given that there was a budget surplus and the low levels of public debt, satisfying the prescribed limits. marti and perez (2016) indicated that the situation in which spain faced the crisis was harmless, given that the public debt in 2007 was at its historical minimum with amount of only 35% of gdp and fiscal surplus of 1.9 % of gdp (figure 4), which made spain one of the least indebted members at the time. pigs economies: bail-out vs. bail-in 267 fig. 3 fiscal deficit/surplus and public debt in greece in period 2007-2020 source: https://tradingeconomics.com/ the consequences of the crisis can be explained in three periods, with the first most obvious consequence being an economic decline of 9%. the first period represents a steep decline in economic activity (2008/9), the second is a period of stagnation (2010/11), and the third period is marked by a recession (2011/13). the negative fiveyear development of economic activity caused a decline in aggregate demand, which led to mass layoffs, and the spillover effect. moreover, the crisis in the banking sector led to a fall in real estate prices. the solution to the problems brought by the crisis appeared in three answers, the first is the phase in which there was an increase in revenues with a decrease in expenditures, the second is the phase of fiscal consolidation and the third answer is the most decisive adoption of sharp and restrictive measures that will enable successful fiscal consolidation. initially, ambitious structural reforms were attempted that involved the implementation of expansionary fiscal policies to help potential product growth. however, the use of such an inadequate policy led to a historically high fiscal deficit, which was recorded in 2009, amounting to 11.3% of gdp (figure 4). the second response related to fiscal consolidation, which required a policy of tightening the belt, large layoffs in the public sector, reducing investment, freezing salaries and pensions to relieve public finances and reduce expenditures (by 1% of gdp per year) and thus reduced an undesirably large deficit. strict measures did not give the desired results, but caused an even stronger decline in economic activity, introducing the spanish economy fig. 4 fiscal deficit/surplus and public debt in spain in period 2007-2020 source: https://tradingeconomics.com/ 268 m. beljić into another recession. spain was in a very unenviable position at the time, hit by two recessions at the same time, which forced it to take even tougher measures of fiscal consolidation and to make a trade-off between growth and social equality in order to overcome the undesirable situation. after the application of bail-out programs in 2012 and 2013, fiscal deficit is reduced to 2.5 % of gdp in 2018, while public debt is kept at around 95 % of gdp in the period before the pandemic crisis (figure 4). 5. effects of rescue programs in pigs economies 5.1. bail-out the eurozone has faced both a banking crisis and a public debt crisis in many eurozone member states. to overcome the difficulties, a bail-out mechanism was used to support european central bank (ecb). according to bagus, julian and neira (2014), ‘through various mechanisms and financial instruments, shadow banking was highly represented, by attracting short-term funds from the money market, investments were made in long-term assets, such as long-term securities (abs assets backed securities), i.e. the most important of them mortgage securities (mbs mortgage backed securities)’. this behavior of the banking system was possible given that in that period there was an enormous supply of credit, which with low interest rates involved in securities trading not only the financial sector but also other individuals and institutions that were willing to take risks for high yields. eventually, a financial bubble was created, which had no coverage, which led to the collapse of the credit market. in the last quarter of 2008, ‘central banks replaced the interbank sector’ and redistributed short-term assets instead between banks that have funds and those that crave them. another measure of the bail-out program to rescue the banking system was the direct injection of funds into financial institutions in order to prevent further bankruptcies and stabilize the credit market. these interventions require certain costs, which, if not directed, can prolong the crisis, which leads to the creation of new costs, i.e. the system is introduced into a vicious circle without a way out. finally, pigs economies plus cyprus have decided to accept rescue packages from several programs: european financial stability facility (efsf), european financial stabilization mechanism (efsm), european stability mechanism (esm). yearly amounts of bail-out programs in pigs economies are presented in table 1. table 1 bail-out programs in billion euros per years and disbursed amount year ireland portugal spain greece source efsf efsf esm esm efsf 2011 € 8.17 bn € 8.11 bn 0 0 0 2012 € 4.56 bn € 11.36 bn € 39.46 bn 0 € 14.32 bn 2013 € 5.66 bn € 6.60 bn € 1.86 bn 0 € 2.53 bn 2014 0 € 6.25 bn 0 0 € 8.30 bn 2015 0 0 0 € 21.42 bn 0 2016 0 0 0 € 10.30 bn 0 2017 0 0 0 € 8.50 bn 0 2018 0 0 0 € 21.70 bn 0 total € 18.41 bn € 27.33 bn € 41.33 bn € 61.93 bn € 18.41 bn disbursed amount 7.32 % 42.61 % 3.35 % 7.71 % repayment until 2042 2040 2027 2060 2070 source: author, using: https://www.esm.europa.eu/assistance/programme-database/programme-overview https://www.esm.europa.eu/assistance/programme-database/programme-overview pigs economies: bail-out vs. bail-in 269 the esm and efsf programs have paid off a total of €289 billion to pigs economies. table 1 shows that percentage of disbursed amount is highest in spain (42.61 % of total amount), while in ireland is still zero. ‘the last active programme is the esm programme for greece, concluded in august 2018’. maturity is the highest in greece using efsf program dating up to 2070. ‘the long loan maturities and favourable interest rates enabled piigs economies to carry out necessary reforms’. those reforms would allow them ‘to return to market financing and economic growth’. therefore, we check the correlation between bail-out programs and gdp growth and bail-out programs’ correlation with other fiscal variables (table 2). table 2 correlation between variable bail-out, gdp growth and other fiscal variables in pigs economies in the period 2011-2019 gdp growth deficit debt interest exp rev pigs -0,392 -0,256 0,613 -0,519 0,539 0,502 ireland -0,253 -0,940 0,787 0,650 0,879 0,740 portugal -0,452 -0,646 -0,149 0,510 0,523 -0,176 greece -0,576 -0,463 -0,369 -0,088 0,534 0,030 spain -0,373 -0,645 -0,276 0,182 0,698 -0,205 source: author correlation analysis shows that bail-out programs are negatively correlated with gdp growth in pigs economies on average, as well as in each economy. in relation to fiscal variables, it could be concluded that between bail-out programs and fiscal deficit exists negative relationship meaning that with the introduction of bail-out mechanisms, fiscal deficit could be reduced. correlation with public debt shows heterogeneous results, on average, public debt increases with the increase of bail-out programs, as well as public expenditure. with the aim to check whether the relationship between bail-out and gdp growth is significant, we estimated panel-data model for the four pigs economies in the period 2011-2019. in order to have robust results, we used panel corrected standard errors (pcse) method, where the dependent variable is gdp growth and independent bail-out and other fiscal variables (table 3). table 3 estimation of bail-out programs impact on gdp growth using method pcse in pigs economies in the period 2011-2019 dependent variable: growth of gdp panel corrected standard errors (pcse) independent variables coefficient panel-corrected standard error z p>z constant 144.384 7.51e-10 -2.15 0.032 bail-out -1.61e-10 2.23919 -4.70 0.000 interest -10.52727 7.72467 18.69 0.000 r – squered 0.4578 wald test 22.10 (0.000) nember of observations 36 number of groups 4 source: author 270 m. beljić the results indicate that bail-out programs determine growth of gdp significantly, with negative effect in the short-run. moreover, growth of gdp is signifinately loaded by interest payments, meaning that interest payments influence negative growth of gdp. therefore, we could confirm hypothesis that bail-out programs were not generators of economic growth in the period 2011-2019, although bail-out programs had effects on fiscal deficit reduction. 5.2. bail-in: example of spain and portugal considering all the consequences of the applied bail-out programs, one can conclude that bail-out is a very expensive and unsustainable mechanism, especially when it comes to resolving banking crises. for this reason, the eu has set up a fund that will provide a sustainable mechanism that will not burden taxpayers at the same time. an alternative to the bail-out mechanism is the bail-in mechanism. the bail-in mechanism represents overcoming problems through private funds. ‘the treaty principles and the new discipline of state aid and the restructuring of banks provide a solid framework for combating moral hazard and removing incentives that encourage excessive risk-taking by bankers’ (micossi, bruzzone and cassell, 2016). in 2014, the eu established the fund as part of the single resolution mechanism, which is financed from bank contributions. the single resolution mechanism is directly responsible for resolving the problems of individual banks and banking groups, under the supervision of the ecb. the authorized institution has the power to sell the assets of endangered banks and thus provide it with further operations, by establishing "bad banks" the liquidity of endangered banks would be provided, in such a way that bad receivables and loans would be purchased from them. the measures also allow the conversion of receivables into shares. in order for bail-in to be truly feasible and convincing (sanchez-roger et al., 2018), ‘it is necessary for banks to ensure a minimum level of bail-in available funds that are convertible into shares or stakes’. also, the bail-in mechanism enables the bank to write off debts or some other items in liabilities with its own funds, and in that way the endangered bank is relieved. there are two ways to implement the bail-in mechanism, by operating in the free market (bagus, rallo and niera, 2014): through the conversion of debt into capital and through the growth of the value of shares / stakes through the capital market. the first mechanism is a typical form of bank reorganization, in which debt is converted into capital. in this way, for example, the bank is recapitalized, which enables the entity to continue to operate until long-term assets mature (long-term receivables are collected). the application of this mechanism solves one of the problems of bail-out, enables the survival of only those entities that are able to fight for a market position and strengthen their competitiveness (sommer, 2014), there are no protected ones that are 'too big to fail', it also prevents squeezing out private savings. however, this mechanism according to pandolfi (2018) does not solve the problem of moral hazard. the second mechanism is the growth of the value of shares / stakes in the capital market. this increases the bank's capital, ‘which helps short-term refinancing of debts, and prevents the suspension of payments’. ‘private refinancing of short-term debts has several advantages’, and they are: they do not have to be non-discriminatory, it is arbitrarily decided which bank will be saved, the problem of moral hazard is solved (bodellini, 2018) and the problem of conflict of interest between management and government is solved. the only problem that cannot be solved is the squeezing out of private consumption. according to bagus, rallo and niera (2014), there pigs economies: bail-out vs. bail-in 271 are certain deviations from the standard bail-in compared to the one that can be implemented in a real situation. first, guaranteed deposits (up to € 100,000) cannot be converted into shares. second, deposits of small and medium-sized enterprises, as well as deposits of the european investment bank have an advantage over deposits of large corporations, thus freeing up more room for maneuver. third, secured liabilities, in the form of government bonds or mortgage securities, are not subject to exchange. fourth, the liabilities of a failing company belonging to employees cannot be converted into shares. fifth, interbank debts shorter than 7 days and all securities used in daily interbank operations cannot be exchanged for shares. for above mentioned reasons, bates, gleeson (2015) believe that the ‘relevant instruments should ensure that the bail-in operates through a private contract, but the power to initiate bail-in and determine the extent of write-offs and fees incurred should be entrusted to a competent public authority’. on the example of spain, bagus, rallo and niera (2014) tried to decipher the question whether the application of the bail-in mechanism would be significantly more efficient and cheaper ‘in relation to the application of the bail-out program’ for the recovery of the spanish banking system. they considered several consequences of bail-out that could have been avoided if bail-in had been applied. first, the application of a partial bail-out to assist the banking sector directly violated the maastricht treaty, which prohibits the application of bail-out programs to national governments. funds have been provided to spain from the funds for the recapitalization of the banking system, which endangers trust in the treaties and eu laws. on the other hand, bail-in mehazinam in no way violates european rules of the game. second, bail-out assistance is provided from taxpayer-funded funds. citizens' contributions help the recovery of mostly private capital, from which the owners benefit the most. such a situation undoubtedly leads to the already mentioned moral hazard. bank owners, as well as their managers, are more willing to take the risk, knowing that possible damages will be compensated from the pockets of citizens. in this way, a transfer is made from the poor to the rich. also, not only is there a distribution between different levels of society within one state, but there is a distribution of tax revenues from one state to another, which undermines certain national conflicts and tensions. these negative consequences would simply be overcome by a bail-in mechanism, financing funds from bank contributions, which would serve to help vulnerable banks. third, as mentioned, the bail-in mechanism would prevent the emergence of a moral hazard in which profits are collected by the owners of capital, while losses are paid by taxpayers. fourth, the application of the bail-out mechanism in the process of rescuing the banking sector leads to an increase in public debt, the consequences of which are again borne by taxpayers. private consumption is being squeezed out, and this is best reflected in the decline in economic activity. in the case of bail-in mechanisms and recapitalization from private funds, the inflow of foreign capital would be enabled, which would ensure not only the recovery of banks but also economic growth. fifth, the bail-out program makes it difficult for banks to make decisions, the management does not have the freedom to manage according to its preferences, but acts according to government instructions, which further complicates the inflow of capital. sixth, the previously changed problem of exit strategy can seriously jeopardize the banking system and destabilize it again, all problems related to the moment of withdrawal of the public sector from the bank management are simply eliminated by the bail-in mechanism since private investors become new bank owners. seventh, uncertainty about the future was also contributed to by the growth of public debt as well as private debt caused by the rescue of the banking 272 m. beljić sector. there is also the uncertainty of the euro, which can significantly affect the crowding out of both domestic and foreign investments. these problems could be alleviated if not completely overcome by applying bail-in, because primarily there would be no increase in debt, but there would be a conversion of debt into shares, which would slow down borrowing, and long-term savings and investments would be encouraged. another example is the portugueese case. in portugal the bail-in mechanism was applied to banco espírito santo. as beck, da-rocha-lopez and silva (2017) and bowman (2016) write, resolution banco espirito santo aimed to preserve the healthy tissue of the bank, by transferring bad debts and low-quality assets to a ‘bad bank’. on the other hand, the new bank has been established, whose capital was fully financed by the combined funds of the portuguese bank rehabilitation fund from 2012 and a loan from 8 banks. other collectible receivables were transferred to the new bank. by applying the bail-in mechanism, borrowers and depositors were protected. although the application of the bail-in mechanism in the case of portugal has had negative implications for real indicators, rising unemployment and declining investment, it can be said that panic and the collapse of the financial market were successfully avoided. namely, the european commission has proposed a framework that enables the rescue of banks that would be on the verge of collapse in the future through the bail-in mechanism (conlon & cotter, 2013). many economies also tend to introduce, or have already introduced, a bank bail-in mechanism, which would mean that the bail-in mechanism assumes a superior role over the bail-out mechanism (avogouleas & goodhart, 2015). however, the positive and negative sides of the initiative need to be examined in more detail so that the bail-out mechanism is completely supplanted by the bail-in mechanism (dewatripont, 2014). 6. conclusions this paper analyzes the rescue programs of the eurozone periphery economies after the transformation of the global crisis into a debt crisis. the research showed that negative effect of this type of assistance is related to source of finance, namely, bail-out programs are financed by taxpayers, moral gambling, regulation of decision-making, exit strategy and crowding-out of private savings. as the bail-out programs are mainly financed by increasing public debt, crowding-out of private savings and investments indicate decline in gdp. this theoretical assumption is confirmed using panel-data model. namely, negative effect of bailout program on gdp growth is estimated using panel corrected standard errors (pcse) method in pigs economies in the period 2011-2019. the results showed that bail-out programs could positively affect fiscal variables, however, bail-out programs do not provide economic growth and positive effects on the real economy. considering all the consequences of the applied bail-out programs, it could be concluded that bail-out is a very expensive and unsustainable mechanism, especially when it comes to resolving banking crises. an alternative solution to the bail-out is the bail-in mechanism, which is a sustainable mechanism that will not burden taxpayers at the same time. since bailin is still not frequently used, previous experiences on the example of banks in spain and portugal show that by using bail-in programs panic and contagion effects could be avoided, however, in the case of future crisis, the effects of bail-in programs on the real economy still need to be examined. pigs economies: bail-out vs. bail-in 273 references avogouleas, e., & goodhart, c. 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beljić pigs ekonomije: bail-out vs. bail-in ovaj rad analizira bail-out i bail-in mehanizme u perifernim ekonomijama evrozone nakon transformacije globalne krize u dužničku krizu. stalni rast troškova servisiranja duga uslovio je ekonomije pigs (portugal, irska, grčka, španija) ili da napuste evrozonu ili da pregovaraju o bail-out programima. korišćenjem metode korigovanih standardnih grešaka (pcse), istraživanje pokazuje da bail-out programi negativno utiču na rast bdp-a u pigs ekonomijama u periodu 2011-2019, kao posledica crowding-out efekata. međutim, rezultati su pokazali da bail-out programi mogu pozitivno uticati na fiskalne varijable. alternativno rešenje je bail-in mehanizam, predstavlja održivi mehanizam koji ne opterećuje poreske obveznike. na osnovu primera banaka u španiji i portugaliji, rezultati pokazuju da bi se korišćenjem bail-in programa mogli izbeći efekti panike i prelivanja, međutim, u slučaju buduće krize, efekti bail-in programa na realnu ekonomiju dalje moraju biti ispitani. ključne reči: pigs ekonomije, bail-out, bail-in, kriza. facta universitatis series: economics and organization vol. 16, n o 1, 2019, pp. 1 12 https://doi.org/10.22190/fueo1901001m © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper sectoral structure of bank loan portfolios: a single country exploratory study 1 udc 336.77 srđan marinković 1 , jelena minović 2 1 university of niš faculty of economics, niš, serbia 2 institute of economic sciences, belgrade, serbia abstract. the paper explores time-varying nature of sectoral composition of bank domestic credit to private sector. bank credit to private sector could be roughly divided into household loans and business (enterprise) loans. the composition appears to have significant influence on economic growth. nevertheless, thus far it has been an overly neglected issue in financial theory. the paper focuses on determinants of household to total domestic private loans ratio in serbian banking industry based on monthly time series from the last fourteen years. we found that both credit supply and credit demand determinants influence the sectoral composition. key words: household and business loans, bank credit to private sector, serbian banking industry, time series analysis jel classification: g21, e51, o16, c22 1. introduction it is widely agreed that financial development has strong influence on economic growth. bank credit (to gdp) and bank credit to private sector are well-established indicators of financial development and also transition success (scholtens, 2000). the first indicator is used to represent so called financial deepness (beck et al., 2007), while the second one contains important information about the sectoral structure of bank credit portfolio. however, the sectoral structure of bank credit portfolio itself goes far beyond the proposed framework in the majority of studies concerning bank credit to private sector. expressed as an aggregate measure, bank credit to private sector hides important information. received december 17, 2018 / accepted february 18, 2019 corresponding author: srđan marinković faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: srdjan.marinkovic@gmail.com 2 s. marinković, j. minović if we allow ourselves some imprecision, private sector loans could be roughly divided into household loans and business (enterprise) loans. bank credit to private sector composition, i.e. the ratio of household to business loans, varies internationally within wide boundaries. according to financial theory, the structure itself influences the growth potential (beck et al., 2012), hence it becomes important policy issue. the aim of this study is to explore the reasons behind the time-varying nature of sectoral structure of loan portfolio of commercial banks in serbia. although we could not find any similar research to be the ground for our study, the opposite is true for guidelines in our search for determinants which were spread throughout the financial theory. to the best of our knowledge, this is the first attempt to explore the determinants of the loan portfolio structure in a single-country framework. the remaining part of this paper is structured as follows. we begin in section 2 with a review of literature on determinants and effects of bank credit to domestic private sector, and specifically its composition. section 3 describes the dataset. section 4 proceeds with the description of research methodology, results, as well as the discussion of main findings. finally, section 5 presents a conclusion. 2. literature review it is theoretically understood that development of financial sector, especially banks, has a vital role for economic activity (goldsmith, 1969; levine and zervos, 1998; rajan and zingales, 2003), and the findings are well documented in a vast number of research papers (king and levine, 1993; demirgüç-kunt and maksimovic, 1998). for decades now, financial science relies on several indicators in order to assess the level of development of banking sector or transition success. so far, the best candidates have been total bank credit and credit to private sector (anderson and kegels, 1998; scholtens, 2000; hermes and lensink, 2000; beck et al. 2007). both indicators are usually recalculated so as to present a share of gdp. expressed in that way, the indicators become useful for international comparisons. if a country has a credit to gdp figure close to its peers (best-performers) it is then considered financially developed. there is no absolute limit of this ratio. interestingly, record values of this ratio may mean well developed banking sector, but also dangerous tendencies that may lead to a credit crisis and economy overheating. this is especially true if the high level is accompanied with the latest records of steep rise of credit to gdp ratio (for a review see marinković, 2015). thus, both an increase and a decrease of this ratio may be assessed as a shift toward or shift away from the equilibrium. the total bank credit figures may mask extremely different developments. in a nutshell, the total bank credit volume consists of bank credit to public and private sector. if a public sector receives comparably high share of total bank domestic credit it is considered suboptimal. it is often a consequence of under-developed private sector, hypertrophy of public sector and government spending, crowding out effect etc. on the other hand, a turn to private sector is traditionally considered a favorable development, since it may indicate discontinuation of financial and political relationship between credit providers and a local government, inherited from the past, more finance for productive investments, etc. the stream of literature that investigates credit to private sector tells barely something about the structure of this aggregate (cottarelli et al., 2005; djankov et al., 2007). moreover, sectoral structure of bank loan portfolios: a single country exploratory study 3 the literature on determinants of the sectoral structure of loan portfolio is nothing but scarce. there are just a few papers that investigate this issue. the paper of beck et al. (2012) is developed in multi-country framework and sheds some light on possible macroeconomic and institutional determinants able to explain cross-country variations in the sectoral structure of loan portfolio. the authors found legal origin and religious composition factors that influence both financial development and credit composition to household and business (enterprise) sector. on the other hand, the composition itself seems to have influence on economic growth, i.e. enterprise credit is found positively associated with the growth and income inequality reduction, while household credit is found unrelated. table 1 household credit: international comparisons bank credit to gdp household credit share developing countries bulgaria 0.219 0.340 egypt 0.446 0.167 india 0.219 0.287 indonesia 0.252 0.324 macedonia 0.187 0.249 mexico 0.186 0.532 pakistan 0.225 0.224 russia 0.147 0.223 thailand 1.226 0.184 turkey 0.179 0.355 uruguay 0.392 0.505 developed countries belgium 0.744 0.578 canada 0.962 0.804 czech republic 0.484 0.352 denmark 0.894 0.851 france 0.850 0.601 germany 1.053 0.380 japan 1.549 0.309 korea 0.698 0.552 netherlands 1.639 0.616 slovenia 0.340 0.293 switzerland 1.603 0.623 united kingdom 1.269 0.561 of which market-based united states 0.498 0.764 source: beck et al. (2012), table 1. the sectoral structure of bank credit to private sector also seems to have an important effect on trade balance. buyukkarabacak and krause (2009) found a strong influence of household loans on trade deficits in a multicountry framework. the rationale for this regularity is the fact that household demand, financed by bank credit, increases consumption of consumer goods which are at least partly imported. the effect is as strong 4 s. marinković, j. minović as ardent is a country struggle to sustain foreign trade in balance. however, although business loans may also increase demand for consumer goods (in case of trade or tourism industry) in a major part it will end up with an increase of import of non-consumer goods like raw material or productive equipment. therefore, if a country suffers from chronic and persistent trade deficits and also is prone to currency crisis, it should put on its radar the level of household loans as a policy issue. the table above (1) presents data on bank credit to gdp and household credit share in total domestic private sector credit (a sum of household and business credit). all the data are from the beck et al. (2012). the original list of countries is here shortlisted, but still gives a valuable overview of cross-country variety. it brings a basic idea that although the share of household credit varies from one country to another, it appears as a regularity that more developed countries have the structure of credit portfolio more inclined to household loans. within the developed countries subsample, it is also the case that in market-based financial systems (e.g. the us) banks are additionally prone to finance households. an obvious explanation is that in such systems business finance in large part goes through financial markets (primarily bond and commercial paper markets). 2.1. risk-return differences of household and business loans: searching for determinants beside the determinants that exert their influence on household/business loan structure from the sphere of overall financial and institutional developments, there have to be some other important elements that might explain either cross-country differences or the changing nature of bank loan portfolio structure. if we delve into the drivers of demand and supply for different types of credit, we can observe some notable differences among the types of loans. with the supply side influences, we cover the reasons why credit providers may favor household credit over business credit and vice versa. first and foremost, do banks charge customers more on household loans relative to business loans? there is not an easy and straightforward answer to this question. interest rates charged on prime business customers are usually comparable to yield that banks earn on riskfree assets (government securities) and, depending on economic conditions, they could be marginally higher or even lower than the yield on government securities. on the other hand, the highest rates are charged on most flexible credit arrangements granted to households (e.g. credit cards overdue). they could be several times higher that rates charged to a prime customer business loan. however, information about return means almost nothing if it is not adjusted for risk. how about risk differences? let us turn to the other side of risk-return relationship. is there any hard fact that household loans could be considered less risky than business loans? at this moment we would underline a rule that helps link mutual interdependence between creditworthiness of business and household units. namely, relative ability of those two sectors to repay bank debt depends on some institutional features. for instance, salary is the most important financial source for households to repay bank debt, while it is at the same time important business expense. some institutional features may rank salaries high on the priority list among business expenses, make it rather fixed costs. if there is a minimum wage regulation, then this „priority effect” could be even more pronounced. exactlythis priority may make household loans less risky than business loans, at least in hostile business sectoral structure of bank loan portfolios: a single country exploratory study 5 environment. other differences are assets available for collateral; net wealth records, personal bankruptcy regulation etc. a major part of business assets belongs to „specific assets“ (non-pledgeable), e.g. know-how, tailor-made or specific purpose equipment (holmström and tirole, 2011), while household assets often can be transferable (e.g. houses and apartments) and better suited to collateral purposes. in terms of net wealth records the things are in favor of enterprises, which regularly have to keep record of all business transactions, assets, liabilities and net worth. from the financial intermediation theory (bhattacharya and thakor, 1993) it comes clearly that a financial intermediary provides two types of services. they are brokers and asset transformers. in doing its transformation services, a financial intermediary transforms maturity, divisibility, default risk and liquidity. by doing this, financial intermediaries often expose themselves to various kinds of risk. let us take into consideration maturity differences. since asset-liability maturity mismatch is a crucial source of interest rate risk and liquidity risk in banks, providing that average maturity of liabilities is a short-term one, the assets that are of longer maturity will expose credit provider to comparably higher risk. household and business loans are inhomogeneous in many relevant features: in terms of maturity, amounts, credit risk etc. however, if average household and business loans differ in those features, sectoral credit composition will make difference for banks risk exposure. an important distinguishing element may be also different behavior of demand for household vs. business loans during some challenging phases of business cycle. for example, in crisis conditions or business recessions the demand for business loans is likely to be weaker. some business units will postpone financing of new and complex business undertakings and remain dedicated only to current assets financing. moreover, for business units bank credit is just one way to finance expenditures and development. on the other hand, households almost exclusively rely on banking loans and often borrow out of necessity besides opportunity. therefore, we could expect that the credit demand in business sector is more interest rate elastic relative to that of household sector. the elements that we have explored above shape risk-return relationship for a typical household and business loan. unfortunately, many of those elements are not easy to test empirically. in the next section we will try to sample a set of operable indicators based on the inputs from financial theory. 3. dataset our dataset comprises a dependent variable and a set of explanatory variables time series. some data were available as early as year 2004. however, there were no records of full set of variables before 2005. therefore, in this study data spans from january 2005 to november 2018. for all variables the source of data is national bank of serbia statistics, which is available publically. the ultimate data source for the dependent variable is commercial banks assets and liabilities composition time series. the dependent variable is defined as a share of household loans in total domestic private sector loans (htl). since domestic private sector loans excludes banks’ claims on non-residents (foreign exchange reserves and other foreign assets), national government (central and local government units) and various claims on national bank of serbia (cash and both local and foreign currency deposits, repo stock etc.), this category generally 6 s. marinković, j. minović consists of bank claims on household and business sector. business loans include several sub-categories (companies, public enterprises and other financial organizations), while household loans beside household loans category includes yet only loans to non-profit and other organizations. this latest sub-category has a minor influence on the structure. unfortunately, no variable able to represent demand side determinants is available with monthly frequency. natural candidates would be household consolidated income and an adequate proxy variable for business sector financial condition. in order to capture at least some influence of changes in sectoral credit demand, we introduced a savings variable. it is clear that bank savings is just a part of total financial wealth of households and even smaller part of total household wealth. however, bank savings records still represent dynamics of overall financial position of households, assuming that the structure of household wealth remains constant overtime. the financial position itself indicates capacity to take out and repay debt, and can be very close to free household income (income in excess of regular consumption). the idea to include savings volume as a predictor into the regression model is also based on the assumption that household savings is primarily used to finance various forms of household loans. the assumption can be justified by the fact that household loans are better matched with savings in terms of divisibility (amounts), maturity and liquidity features. however, level data on savings are clearly trended. therefore, we rearranged the variable so as to represent a share of savings in total banks assets and/or liabilities. this way, saving to total assets ratio (sta) represents a mixture of demand and supply side determinants of sectoral structure of bank credit to domestic private sector. the next variable that entered the model is nominal foreign exchange rate (ner), expressed as rsd vis-à-vis eur. a rationale for regressing the structure of commercial banks loan portfolio on exchange rate is to control for the effect that a change in exchange rate may have on the volume of different claims. namely, because of high level of financial euroization, a volume of loan portfolio when expressed in reporting currency (rsd) becomes highly influenced by the exchange rate. if loans granted to business units differ from loans granted to households in terms of euroization extent, it may influence the very structure of loan portfolio. as we expected, the data on currency structure (includes also contracted hedge) of credit to household and credit to business sector revealed comparably higher share of credit euroization in business loans. based on data from july 2008 onwards, business sector has an average share of local currency (nonhedged) claims of 22.7 %, with extreme values of 9.3 % to 33.4 %. at the same time, household sector reports 34.3 % of local currency claims (min. 20.7 %, max. 50.9%). propensity of banks to prioritize households’ loans over business loans belongs to socalled supply-side determinants. in order to represent at least one determinant of this kind, we introduced a variable constructed as a difference between interest rate charged on household loans and interest rate charged on business loans. in order to avoid negative data, the variable is expressed as a ratio of the rate charged on household to the rate charged on business loans (irr). if available, the rates were average volume weighted interest rates available from national bank of serbia (nbs) official statistical database. the data are annual rates and expressed in percentage. this is exactly where we faced the biggest challenge in sampling the data. namely, the scope and format of the interest rate statistics of nbs were changed radically starting for reporting year 2010. the statistics for the previous period (january 2005 to june 2011) contains no information on average rate charged on total credit granted either to household or business sector. the report concerns only credits sectoral structure of bank loan portfolios: a single country exploratory study 7 granted in local currency, disaggregated based on maturity criterion and types of credit. therefore, for this period, instead of aggregate data we used a sort of representative data. as a representative for a household loan (rate) we took short-term “household loan” in the local currency, while for a business loan we took the rate charged on “other lending” since the other two available types (export and agricultural loans) were less likely to represent a typical business loan. it is also a short-term local currency bank asset. nbs interest rates statistics for the period starting from september 2010 onwards is more detailed and consistent. the report contains data on average volume weighted interest rate charged on all types of household loans (housing, consumer, cash and other loans) and takes into account currency and maturity composition. it is the same with business loans (loans to non-financial enterprises), which comprises main types or purposes (current assets, export, investment and other) disaggregated according to the range of currencies and maturities. because the interest rate data available for different periods were inconsistent to each other, we have opted for separate specification (regressions). although the regression model that we have applied here is generally the same, the first specification deals with the data from 2005 to 2010, while the second one operates with the data for the later period. table 2 descriptive statistics series mean median sd skewness kurtosis j-b prob time series y2005–y2010 htl 0.337 0.361 0.055 –1.285 3.285 20.058 0.000 sta 0.229 0.229 0.021 0.230 2.111 3.008 0.222 ner 87.809 84.873 8.834 0.798 2.499 8.395 0.015 irr 2.177 2.149 0.458 0.162 2.283 1.856 0.395 time series y2011–y2018 htl 0.390 0.390 0.040 0.329 1.923 6.242 0.044 sta 0.304 0.311 0.014 –0.960 2.595 15.076 0.000 ner 116.142 118.168 6.662 –1.093 3.412 19.390 0.000 irr 2.012 2.118 0.535 –0.106 2.132 3.128 0.209 note: sd stands for standard deviation, j-b for jarque-bera. source: authors’ estimation based on visual data presentation and scatter plots (appendix, table 5) there is a rather good fit between the regressand and almost all regressors unilaterally. quite similar distribution of pair points in scatter plots of household to total domestic loans ratio (htl) vs. savings to total assets ratio (sta) and htl vs. ner (nominal exchange rate) indicates that there must be a joint influence of some variable, e.g. it may mean that nominal exchange rate has strongly influenced savings ratio. this was why we joined a scatter plot of sta vs. ner. this scatter plot indicates rather high correlation between those variables. a rationale for this regularity is strong influence of nominal exchange rate on savings to total assets ratio (sta). knowing that high share of savings volume is foreign currency (largely eur) denominated or indexed savings, while it is significantly less in terms of total banks’ assets (ratio denominator), it comes expected that variability of sta becomes largely driven by exchange rate changes. the table 2 presents descriptive statistics for time series. as already underlined, the data for each variable were subsampled into two continuing time series (y2005–y2010 and y2011–y2018) with no overlap, because we had to run separate regressions for two 8 s. marinković, j. minović periods. based on jarque-bera test, all the variables, with exception of interest rate ratio (irr), show normal distribution. however, for this kind of regressions normality of distributions is a desirable but not necessary condition. 4. research methodology, results and discussion before performing the regression analysis, we transformed all variables in logarithm values, and tested the stationarity of all time-series variables (table 3). in both periods, variables household to total (domestic private) loans (htl), savings to total assets (sta), and nominal exchange rate (ner) are nonstationary, while the variable interest rate ratio (irr) is stationary. therefore, we transformed the nonstationary variables in stationary variables using the first differences () of level data. table 3 unit root tests series adf test statistics significance level critical value for the level h0 time series y2005–y2010 htl –1.540 0.05 –3.473 cannot be rejected sta –2.992 0.05 –3.473 cannot be rejected ner –1.496 0.05 –3.473 cannot be rejected irr –4.255 0.05 –3.473 rejected htl –8.019 0.05 –3.473 rejected sta –9.111 0.05 –3.473 rejected ner –9.451 0.05 –3.473 rejected time series y2011–y2018 htl –2.726 0.05 –3.459 cannot be rejected sta –1.495 0.05 –3.459 cannot be rejected ner –1.347 0.05 –3.459 cannot be rejected irr –7.294 0.05 –3.459 rejected htl –9.720 0.05 –3.459 rejected sta –10.606 0.05 –3.459 rejected ner –9.615 0.05 –3.459 rejected note: the null hypothesis h0: unit root exists in the process; the alternative hypothesis: the process is stationary.  denotes first differences of variables. schwarz automatic selection criterion of the lag length has been used for the unit root tests. augmented dickey fuller test (adf) is test statistics for a unit root. source: authors’ estimation after having rearranged the data in order to satisfy stationarity condition of time series, the regression analysis followed (table 4). we have two regressions: one is for the period 2005m01–2010m12, and second is for the period 2011m01–2018m10. both regressions were estimated with time series of monthly frequency. sectoral structure of bank loan portfolios: a single country exploratory study 9 table 4 regression results and diagnostics regression 1 regression 2 savings to total assets (sta) 0.093 0.208* [0.071] [0.121] nominal exchange rate (ner) 0.047 –0.046 [0.072] [0.091] interest rate ratio (irr) –0.038** 0.008** [0.009] [0.003] constant 0.036** –0.002 [0.007] [0.002] diagnostics r 2 0.243 0.100 f 7.177 3.285 (0.000) (0.024) bg(5) 3.944 1.051 (0.004) (0.393) q(10) 48.034 9.907 (0.000) (0.449) note: standard errors of estimated parameters are given in square brackets, and p–values are in parenthesis. values of determination coefficient (r 2 ), f–test for regression significance, ljung–box (q–test) statistics of residuals, and breusch–godfrey’s (bg) test of serial correlation of fifth order are given. ** denotes statistical significance at 1% level; * denotes statistical significance at 10%. source: authors’ estimation both regressions are statistically significant according to the f–test. however, second regression has a satisfactory statistical property, in the sense that, according to the breusch–godfrey (bg) test, there is no autocorrelation of fifth order in the residuals of this model. similarly, according to the ljung–box statistics (q–test) there is no autocorrelation of tenth order in the residuals of this model. in second regression, two explanatory variables (sta and irr) are positive and statistically significant at the 0.1 level and at 0.01 level respectively. however, first regression does not have satisfactory statistical property according to both the bg test and the q–test. in first regression, constant term is positive and statistically significant at the 0.01 level, while irr is negative and statistically significant at the 0.01 level. determination coefficient is relatively small in both regressions. for instance, in second regression r 2 is barely 0.1 indicating that only 10% of variance of the dependent variable (htl) can be explained with the set of explanatory variables. such results do not diminish quality of inference about explanatory power of each tested statistically significant variable. it only warns that the model specifications are not reliable for any prognostic purpose, for instance because of omitted variables possibility. 10 s. marinković, j. minović for further discussion, we will focus on second regression, since this one has necessary statistical properties. firstly, a change in nominal exchange rate has no direct influence on sectoral credit structure. it might be that the variable has some power to explain the structure but it likely goes via saving to total assets ratio. savings to total assets ratio itself is related to household loans share in total domestic private loans exactly as we would predict. the higher share of household savings in bank total assets, the higher would be a share of household loans over the share of business loans. interest rate ratio has the same way of influence (positive sign of the regression coefficient). the variable has a direct positive influence on the dependent variable, which means that if the difference between interest rates charged on household loans and business loans increases, banks will favour more lucrative type of loans. nevertheless, the fact that banks prioritize household loans does not have to bring eventually a change in bank credit portfolio. for that to be in place, households must accept the increase in relative credit costs. the latest finding probably might be explained with assumed difference in interest rate elasticity of credit demand between household and business sectors. 5. conclusion the causal relationship between financial development and economic growth remains one of the most frequently studied topics positioned on the borderline of macroeconomics and financial economics. the main contribution of this strand of literature is economic policy relevance of bank credit activity, especially credit to private sector. however, one specific issue remains on the margins of interest of scientific community. this is the composition of bank credit to private sector; how much of this credit activity is directed to households vs. enterprises. this paper is aimed to fill a gap in the literature concerning drivers of the composition within a single country framework. to the best of our knowledge, this is the first investigation of this kind. the paper brings some empirical evidence but it is equally intriguing in its attempt to assemble ideas concerning risk-return differences of household and business loans, which may shape demand and supply for those loan types. unfortunately, data availability limited our intents to undergo appropriate empirical tests in order to verify our cogitations. nevertheless, the regression analysis confirms that a share of household loans in bank domestic credit to private sector is related to both credit supply and credit demand determinants. we introduced one proxy for each group of determinants and found the share of household savings in total bank assets/liabilities (sta), as well as the interest rates margin charged on household over business loans (irr) statistically significant. moreover, the direction of influence in both cases complies with the theory prediction. somewhat disappointing regression fit indicates that there are likely some determinants remaining out of the model. acknowledgement: the authors are grateful to the ministry of education, science and technological development of the republic of serbia for the funds and support that made this research possible (oi 179066; oi 179015; iii 47009). sectoral structure of bank loan portfolios: a single country exploratory study 11 references anderson, w.r. & kegels, c. (1998). transition banking: financial development of central and eastern europe. oxford: clarendon press. bhattacharya, s. & thakor, a. (1993). contemporary banking theory. journal of financial intermediation, 3, 2-50. beck, t., büyükkarabacak, b., rioja, k.f. & valev, t.n. (2012). who gets the credit? and does it matter? household vs firm lending across countries. the b.e. journal of macroeconomics, 12 (1), 1-46 doi: 10.1515/1935-1690.2262 beck, t., demirgüç-kunt, a. & martinez peria, s.m. (2007). reaching out: access to and use of banking services across countries. journal of financial economics, 85, 234-266. buyukkarabacak, b. & krause, s. (2009). studying the effects of household and firm credit on the trade balance: the composition of funds matters. economic inquiry, 47 (4), 653-666 doi: 10.1111/j.14657295.2008.00173x cottarelli, c., dell’ariccia, g. & vladkova-hollar, i. (2005). early birds, late risers, and sleeping beauties: bank credit growth to the private sector in central and eastern europe and in the balkans. journal of banking and finance, 29, 83-104. demirgüç-kunt, a. & maksimovic, v. (1998). law, finance and firm growth. journal of finance, 53, 2107-2037. djankov, s., mcliesh, c. & shleifer, a. (2007). private credit in 129 countries. journal of financial economics, 84, 299-329. goldsmith, r.w. (1969). financial structure and development. new haven: yale university press. hermes, n. & lensink, r. (2000). financial system development in transition economies. journal of banking and finance, 24 (4), 507-524. holmström, b. & tirole, j. (2011). inside and outside liquidity. cambridge (ma): the mit press. king, g.r., levine, r. (1993). finance, entrepreneurship, and growth: theory and evidence. journal of monetary economics, 32, 513-542. levine, r. & zervos, s. (1998). stock markets, banks, and economic growth. american economic review, 88, 537-558. marinković, s. (2015). managing the financial crisis: credit crunch and response in serbia. in: thomas, m. & bojicic-dzelilovic, v. (eds.), public policy making in the western balkans (pp. 171-196). dordrecht: springer science+business media. rajan, g.r. & zingales, l. (2003). saving capitalism from the capitalists. london: random house business books. scholtens, b. (2000). financial regulation and financial system architecture in central europe. journal of banking and finance, 24 (4), 525-553. sektorska struktura kreditnog portfelja banaka: istraživanje na primeru jedne države u radu istražujemo varijabilitet sektorske strukture bankarskih kredita privatnom sektoru. bankarske kredite privatnom sektoru pojednostavljeno delimo na kredite stanovništvu i kredite privredi. iako se očekuje da sektorska struktura ima značajan uticaj na privredni rast, ovo pitanje je do sada ostalo zanemareno u finansijskoj teoriji. u radu se istražuju determinante učešća kredita stanovništvu u ukupnim domaćim kreditima privatnom sektoru u bankarskom sektoru srbije na bazi vremenskih serija mesečnih podataka za poslednjih četrnaest godina. utvrdili smo da na ovako definisanu sektorsku strukturu kreditnog portfelja banaka utiču kako determinante kreditne ponude tako i determinante kreditne tražnje. ključne reči: krediti stanovništvu i privredi, bankarski kredit privatnom sektoru, bankarski sektor srbije, analiza vremenskih serija http://dx.doi.org/10.1111/j.1465-7295.2008.00173.x http://dx.doi.org/10.1111/j.1465-7295.2008.00173.x 12 s. marinković, j. minović appendix table 5 dynamics of variables and scatter plots source: authors’ calculation based on nbs statistics plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 2, 2014, pp. 117 132 review paper conceptual framwork for understanding the influence of efficient protection of private property rights on economic efficiency  udc 347.233 vladan ivanovic faculty of economics, university of kragujevac, serbia abstract. property rights represent one of the most significant structural determiners of efficiency in economic system. regarding this fact, their content influences the institutional, legal and distribuitive sphere, their effect on economic performances in national economy is complex and substantial. specific characteristics related to social and economic characteristics of a right holder, making adequate incentives, more complete evaluation, their individuality, exclusivity and free tranferability, combinatory effect, specialisation, productivity, social compactness and organizational complexity, caused private property rights to influence considerable economic potential. mechanisms for achieving that refer to enabling trade, boosting market and competition forces, reduction of transaction costs and providing adequate motivation for economic agents. imperfection of political process and the resulting political institutions represent the main causes of inefficient protection and enforcement of private property rights. specific historical experiencies in developing different national economies distinctly confirm their indesputable characteristics in making national economy to work efficiently and in providing high level of long term economic development and growth. key words: private property rights, formal institutions, economic efficiency, imperfect political institutions, economic history. introduction changes and efforts directed towards establishing market economies in former socialistic countries, attempts of building up an adequate institutional structure and performing institutional changes directed towards the establishment of functional market economy in the rest of developing countries represent the most signifficant characteristic  received may 07, 2014 / accepted june 25, 2014 corresponding author: vladan ivanovic ðure pucara starog 3, 34000 kragujevac, 18000 niš, serbia tel: +381 34 303 560  e-mail: vivanovic@kg.ac.rs v. ivanovic 118 of contemporary economic history. divergent results of these countries, as well as their relative stagnation in comparison with the developed market economies or too slow process of convergency, require the reconsideration of mainstream theoretical positions, that were used as and that were actually the explanation background for the developing policy. traditional approaches and economic growth modeling, based on neoclassical, recource based interpretation of economic growth, failed in giving adequate answers for drafting and implementing the appropriate strategies. all these models and approaches could not give substantial answer to the fundamental questions, reffering to the economic growth determination, i.e. what the fundamental causes for economic growth are? factors used in these models, such as innovations, economy size, education, capital accumulation and so on are not the growth causes. they are growth [35, p. 2]. in order to remove the disadvantages and interpret the economic reality in a more suitable way, a specific approach has been developed for interpreting economic dynamic within new institutional economy. this approach referes to the theory of property rights which emphasises the necessary conditions for achieving economic efficiency. property rights represent unique epitheon ornans of the whole institutional structure and make the core of the economic process, that results in economic growth. this theory emphasizes that the rights, not the resources, are owned by economic agents [2, p. 17]. because of this the rights are the subject of exchange on the market and the base for making investments and organizing production. for that reason, if we wish to understand the economic process properly and the causes of economic growth we have to redirect our attention towards the property rights institutions, not towards the physical subject of property rights. property rights and the institutions in general are considered to be so called “deep determiners of economic growth” and the most powerful explanation and fundamental cause of economic growth in western europe [7, p. 140]. clearly defined and effciently enforced property rights do not only directly influence the quality of exchange and the volume of transactions in national economy, but can be observed as a unique mechanism for transfering various characteristics of economic, social and political system on economic efficiency, such as competition, finacial institutions, the rule of law, quality of bureaucracy or a trust. for that reason, pivotal aim of this work is identification of basic dimensions related to property rights, as well as mechanisms for transmitting the influences of property rights on economic efficiency. beside it, the aim is to identify the influences coming from institutions of political system which are crucial in determing their clarity and features of their implementation. thus, we can say that the elementary premise of our paper refers to the proposition that clearly defined and consistently enforced property rights are representing the decesive reguirement for efficient functioning of national economy. qualitative methodology research has been used in our research. it has been modified according to the specific subject and the aim of the paper. constructional elements of methodology approach refer to the usage of comparative and historical method. this implies the analysis of the results of the numerous empiric and theoretic studies which were conducted in order to discover and explain complex linkages between the property rights and economic efficiency. the work consists of five parts, beside the introduction and the conclusion. the first part is devoted to the analysis of the nature and basic dimensions characterizing the property rights institutions. the second part referes to the identification of specific traits of private property rights that make them superior property regime in terms of efficiency conceptual framwork for understanding the influence of efficient protection of private property rights  119 compared to the other alternatives. in the third part the focus is on the identification of the main mechanisms through which the private property rights influence economic performance. specific influences of political institutions in determining the clearty and effective protection property rights protection are the subject of analysis in the fourth part. in tha last, fifth section particular historical experiences are stated that were a milestone in the development of certain national economies. the conclusion gives reflections on the summary results of the previous parts, and points to the possible directions of future researches. 1. multidimensional nature of private property rights considering the fact that the rules of property rights are among the most significant structural determiners of economic behaviour and performances [26, p. 143], it is necessary to indicate the complex nature of this concept. in that way, the multiple influences they produce on economic efficiency are indirectly emphasized. bearing in mind the legal origin of property rights concept, as well as the fact that the prevailing volume of contemporary institutional structure is determined by legal framework, legal perspective is being solicited as unavoidable in determining the substance of this institutional category. in that sense, property rights refer to the right to use goods – uzus, the right to earn the income from the goods – uzus fructus, the right of suffering the concequences, positive or negative, of the change in value of the goods – abusus, as well as the right on alienation of the goods, i.e. ius abutendi [20, p. 11]. in other words, the set of property rights refers to the exclusive right of an owner to use the property, to make an income and to administer the property, as well as to transfer control onto another person [15, p. 86]. it is evident, according to the given specification of property rights, that generally speaking property does not only imply „the right“ over a certain resource, but the whole set of regulatory rights carried through the legal means. understood in this way, property rights as well as the rules related to property aim to set up the allocation of resources towards the most productive uses [4, pp. 51-53]. possible problems in each of these segments may cause huge consequences on economic performances in national economy. the analysis of the property rights from the perspective of institutional economics indicates that they represent the rights of the individual against certain goods and with it related economically, legally or socailly restricted possibility to consume certain property in any way, i.e. directly through consumption or indirectly through exchange [14, p. 99]. for that reason, the property rights can be understood as the rights including both formal regulations (enactments and legislatives) and characteristics of their enforcement, as well as social norms and the attitudes of members of a certain community with respect to what constitutes desirable social model [13]. the full effect of the property rights on the economic growth and unihibited market exchange can be expacted only if all the elements of a social context are fully complient with the requirements of a particular property rights regime. although being obvious, they do not depend only upon the government-run institutional system, but upon the customs, reciprocity and the spontaneous restrictions as well [27, p. 52]. another specific approach in observing property rights highlights their functional character and economic content at the organizational level. in this regard, property v. ivanovic 120 represents a powerful mean seen as a participation in decision-making proccess or a basis for participating in formulating and enforcement of decisions. therefore, having the ownership of a resource means that one have his interests defined and protected as a property, which gives him the right to participate in economic decision-making [39, p. 3]. in circumstances of inadequately specificated or poorly implemented rights, the very process (individual or organizational) of decision-making would be burdened with inefficiencies and concequently poor economic performances. if we emphasize the distributive aspect as a criterion in property rights content analysis, we could say that the property is a substantial indicator for a bundle of relations between the real and the potential income flow, or for different levels of consumption between the holders of the rights and those who are not [40, p. 224]. this is a libertarian and smithian interpretation of the content and implications of the property rights system, which emphasizes the difference between the real– caused by government activities, and potential– which would be determined by market forces, distribution of particular property rights regime. state influence is not only seen in how clear and in what size the property rights will be defined, but also in additional influence on tax policy or regulatory activities of its organizations [9, p. 44]. for that reason, efficient economic process demands coordination in all the activities governed by the state, so that property rights could be fully protected. in those circumstances is to be expected that exchange and investments achieve high levels. judging by the previous analysis of specific dimensions in property rights, though only partially, it is obvious that they exert strong influence on economic efficiency. regarding pretty complex content and different dimensions of property rights, there are apparently more breaking points through which they could exercise restrictive influence on economic activity. 2. supremacy of private property rights from institutional perspective the question of the relationship of property rights and economic efficiency involves a review of those essential features which make private property rights have significant advantages in stimulating economic activity against alternative forms of ownership. this is particularly evident if we look back to the emergence of private property rights. in fact, only with the change of ownership toward private property has been made a significant step in the development and adaptation of new production methods and means that are used in production. the general conclusion to be reached is that the incentives through which private ownership influences the behavior of economic agents, are the source of the rapid progress in material production, beginning from the neolithic era period up to modern civilization [25]. various inducements and their effects on allocative efficiency are the result of social and economic characteristics of property right holders. it is caused by the fact that state and private owners usually react on incentives from various fields. in that sense, according to fundamental characteristics of political system, the state mainly reacts to broader political and social factors, whereas private owners activities are primarily led by market forces [2, p. 22]. another reason why private property is seen as a superior mode of ownership within the institutional economics consists in the fact that individuals appreciate more carefully conceptual framwork for understanding the influence of efficient protection of private property rights  121 some goods if they are holding it. private property enables responsible protection and motivates the owner to make it useful, in the most profitable way. private property is an essential component in market mechanism functioning, because it increases profitability, sale and usefulness of capital usage [23, p. 22]. within the theory of property rights is the dominant view that an effective system of property rights means that it should have three important features. in fact, what is needed is to be an individual, to be freely transferable and to be exclusive [16; 20; 25]. it seems obvious that, in regards to all the three dimensions (especially to the first and the third), private property represents the preferable pattern in terms of efficiency. the following cause for transformation toward private property and its predominance in economic system in contemporary economies, refers to the combination of productivity increase, i.e. specialization and social compactness. in relations to that, it can be added that systems based on high level of compactness have lower significance in modern economies, whereas modern economies in relations to its historical alternatives have become far more productive. the causes of higher productivity in contemporary economies are dual in nature. they are based on technological changes and specialization [10]. an especially significant aspect of specialization is its subverting effect on compactness. this makes additional pressure on the efficiency of the system, which is based on collective (political) decision-making. with regard to the social compactness, it should be noted that this aspect relates to the issue of connectivity or "closeness" that exists among the members of a certain community or a group. thereat, the familiarity or connection may be biological, but geographic and social as well. if the compactness among them exists, cultural norms are of high significance, interaction among people can be identified, and its effects are well predictable, because all the future and past results of interaction are estimated and visible. for example, a small community, both geographically and by population, whose residents remain most of their life within it, is the environment in which collective decision-making makes sense and could be highly efficient. but in the west economies developed after the medieval era, the production was on a large scale for unknown customers on market transcending a relatively narrow biological, geographical and social entities. this has undermined the efficiency of collective decision-making. market exchange became responsitive to market signals largely coming from personal goals of impersonal economic agents on the market. it had enormous consequences on system efficiency. systems based on collective decision making, following the principles of non-market resources allocation, would not be capable of solving the problem of efficient resource usage in the same way as the systems that are relying on the prices which are reflecting the objective facts that are commonly known [10, pp. 661662]. organizational complexity, as a special factor flavoring economic system organization predominately based on private property is also connected with specialization. namely, higher specialization leads to emphasized organizational complexity, whereas coordinate problems, appearing in such conditions, are demanding a system capable of providing continuous coordination of activities in a satisfactory manner. in modern economies, the most adequate system that provides it, is the price system. in order for this system to work, it must have the support of the social and legal structures that are providing trust and support to the enforcement of transactions. legal institutions, defining private property and dictating the exchange, have to be very operative so that organizational complexity, as intrinsic specialization consequence, could lead to higher productivity [10, p. 664v. ivanovic 122 665]. problems in organizational structure, appearing as complexity consequence, can be surpassed in the most adequate manner, within private property right regime, because only within this property regime an adequate functioning of market mechanism and its efficiency can be achieved. the interaction between distorsion of social compactness, specialization (productivity) and organisational complexity caused essential and very dynamic property transformations at the end of xx century. specialization has played a prevalent role in this relation. namely, by decreasing compactness and increasing productivity and organizational complexity, it enabled and caused transformation of contemporary economic systems towards regimes dominantly based on private property. some authors, for example demzetz, empasize that specialization promotes development of complex and dependant economy, which in order to be efficient, must be based on a dominant degree of private property over the resources [10, p. 671]. in spite of the fact that the institutions of private property rights are labeled without an atribute „social“, they are very valid and significant in social manner. the reason for their existence is in a good way the result of their convinience in discovering social values and this value judgements are used as basis for formulating possible solutions for the lack of resources. in this context, we could note that even in a hypothetical society where work is observed as a desired activity, and therefore no need for incentives to work exists, it would be necessary to evaluate various alternative outputs which can be produced. this means that it would be needed to precisely and clearly define property rights as prerequisite for efficient resource allocation [11, p. 18]. finally, it is necessary to emphasize one more argument in favour of private ownership. namely, if the state activities are directed towards protection and property rights enforcement, at least one party in transaction will be interested to help the state in implementing these rights. in that sense, institutional frame based on regime or predominant regime of private property rights will mainly result in efficinet transactions, because there are no incentives by the state not to respect property rights, and at the same time there is immanent concern of each private party that its activities will be additionally monitored and evaluated by the independent instance in case of abuse. on the other hand, deviations from efficient transactions are more likely if one party in transaction appears from public domain, whereas possible ineffficiecies may be multiple – from asset stripping to infringing the private property rights. 3. main mechanisms by which private property rights influence economic growth institutional theory emphasizes that availability and productivity of resources is determined by institutional and political characteristics of environment. although there are certain incompatibilities regarding qualities of the institutions dominantly determining economic efficiency, there is still consensus regarding the fact that property rights have a strong impact on economic growth. based upon that restrictions in exchange and use of resources should be minimal [21, p. 206]. property rights, as a theoretic concept, have deep historical roots in philosophy, which is generally the basic characteristic of economic science. namely, the very concept of economic logics is based on the property contemplation, although in theoretic constructions (especially in economic sense) it has been pretty indirectly considered. helenic and medieval philosophers, such as aristotel and thomas aquinas, emphasized variety of property conceptual framwork for understanding the influence of efficient protection of private property rights  123 characteristics, especially the feature of enabling freedom for the owners. central function of the property is inspiring people to invest care and effort in the things that are in their ownership. classical economic philosophers and economists in the xvii and xviii century, out of which john lock and jeremy bentham are especially important, were particularly focused on this, according to them, central function of the ownership, and stressed it as the central object in considering the property right matters. they pointed out that individuals would be motivated in making effort, investments and careful management because of ownership. in consequence of this behaviour the ownership will encourage wealth production. this point of view is equal to one of the basic postulates in the property rights theory. it consists of the claim that behavioural patterns of individuals, thanks to the adequatly determined incentives through private ownership, will influence the property rights distribution towards the most productive uses [18, p. 61]. the outcome of such production is not only useful for the individuals, but for the society as a whole. contemporary economic theory indicates an additional aspect of property. due to the fact that the property identifies who owns what, trade is made possibile. in turn, trade encourages specialization by awarding an individual's effort with enlarging its personal ownership, creating something smith regarded as „the wealth of nation“ [38, p. 209]. besides the phylosophical, property rights have deep sociological origins as well. in that sense, according to the premise emphasized by max weber, ascetical working ethic (so-called „calvinismus“), rational political and social order, reliable (i.e. clear) and transparent ownership system are the necessary and the most signifficant aspects that should be satistied in order to make development based on capitalistic-market system possible [41, p. 106]. additional channels of property rights influences on economic efficacy are realised through complicated array of economic and social mechanisms. by creating and stimulating the possibility for saving goods value property rights stimulate responsible behaviour contributing to efficiency enhancement. they increase motivation for the increase in value of goods and through that fact spur the investments. they do not only provide direct incentives for investments, but also the property holders are in position to use the owned object as colateral in the lending process. finally, property rights extend market size in a way that they enable and motivate a larger number of investors to compete for the ownership of goods [3, p. 105]. property rights quality, primarilly reflected through the rule of law and property rights protection, influences the efficiency of the economic system in the following ways. on the first level, secure property rights reduce uncertainty, and thus encourage investment activity of companies. on the other hand, property rights a have huge impact on the long-term investments into physical and human capital. if the property rights of investments and its expected returns are perceived as sufficently secure, there is a growth of long term technologically intensive investments in capital with higher additional value. in the opposite case, the economy has to deal with work-intensive, short term investments. if the low transaction costs are present in the economy the tranfer of ownership from less efficient to more efficient economic subjects happens. in this circumstances economic activities based on newly structured property rights structure lead, ceteris paribus, to greater motivation for productive behaviour and to the decrease of rent-seeking the problem [14]. in contrast, insecure property rights often lead to inefficient allocation of resources. uncertainity of the property rights is caused by personal connections of individuals and businesses with the ruling elite and these are used as substitutes for efficient "impersonal" formal rules. the result is that the economic success is determined by personal ties, relative power of v. ivanovic 124 infuence and corruption within the politicized networks. in such conditions, economic efficiency may have a minor role, making the system inefficient in the economic and social way [37, p. 392]. transactional costs could be observed as a separate mechanism in explaining the property rights influence on economic efficiency. in that sense, an inefficient property rights system leads to large transaction costs in national economy due to the lack of the valuable characteristics of goods in public domain. as a consequence of inefficient property rights, possibilities for expansion of the labour division and further specialization are limited. this aspect is particularly evident if there are divergent community ideologies, which has a negative reflection on the level of transactional costs, i.e. on the weaker property rights protection. in addition, inefficient property rights, and the related high transaction costs, increase the rent seeking problem.this type of inefficiency is especially obvious in the developing and transition countries [14, pp. 149-150]. summa summarum, if we observe the property rights influence on individual and organisational level, we may say that they speed up exchange and production: they influence in a positive way the decision-making approach to the resources usage; they optimize time horizon; they specify the allowed use of resources; they define transferability and direct the neto benefit and direct appropriation of net benefits [24]. 4. the dependence of the effective protection and enforcement of private property rights on the quality of political institutions regarding the fact that in every social system property represents the central connetion between the individual and the state [1, p. 25], the system of political institutions represents an unavoidable element in establishing and providing the efficiency of the property rights system. in order for this to be achieved, the most serious problem the state faces is creating unambiguous property rights. only such rules could provide maximum freedom to the economic agents when entering into contracts which are in line with their wishes. once property rights are clear and protected the market process and its indigenous forces of supply and demand get the power to generate high social and economic values [22, p. 116]. the fundamental level in which it is possible to recognize the importance of political institutions is related to the fact that the political rules precede economic. property rights and individual contracts are specified through the legislative framework and enforced in the process of making political and administrative decisions. however, the problem with establishing the efficient property rights system results in the fact that the structure of economic interests in society influences the political strucure. considering that, we may say that the state of the given property rights structure and the characteristics of its implementation will be consistent with the specific set of political rules and its implementation [31, p. 48]. however, since the equilibrium does not imply at the same time efficiency. there are two possible solutions. one, although less likely, is the replacement of inefficient political institutions by efficient ones. the other solution is the attempt to modify them in an incremantal or significant way. the reasons for the inefficiency of the economic system come from the fact that political factors impede the institutionalization of property rights in a way that competitive markets can not function effectively [12, p. 200]. property rights are not an immutable cathegory. they represent an individual's effort in protecting their property, but also an attempt of other economic subjects to take over in conceptual framwork for understanding the influence of efficient protection of private property rights  125 whole or just in part some elements of the others' property rights. because of this they have to be observed as a function of informal and formal private protection and especially public protection. the efficiency of later primarily depends upon the work of police and courts [5, p. 4]. without a strong, accountable and committed state, it would not be possible to establish a functional property regime. provided that all the instances, starting from the individuals included in exchange over the competitiveness in economic environment till court protection efficiency, funtion in a satisfactory manner, the efficiency of the property rights system would be ensured. however, economic markets, both in the past and present, are imperfect in numerous cases and characterized by high transaction costs. in such conditions, “spontaneous” and efficient property rights distribution is very difficult to achieve which directly reduces the economic potential. the situation is further aggravated by the fact that political markets are even less frequent than economic ones, if they exist at all. the reasons for that are multiple. voters ignorance, incomplete information, predominat ideologic steretypes (that fortify subjective models, developed by the individuals in order to explain the environment and make choices) could additionally perpetuate inefficiences on political markets. in that case property rights will remain inappropriately protected and enforced [32]. state relevance is especially reflected in the altered circumstances of economic activities, in realtion to the previuos epoches. this is particularly apparent in relation to the changed role and influence of informal institutions. namely, we could speak about effective property rights protection without formal institutional framework in the previous period, contemporary conditions do not make it possible. the development of the capital markets and large production systems with a large share of fixed costs influenced the evolution of political order, based on force, because more complex impersonal forms of exchange appeared. personal acquaintances, voluntary restrictions in business and ostracism were not very effective and supportive mechanisms for property rights exchange, as it was the case in the past. however, the benefits which could be realized, if it comes to opportunistic behavior solely based on informal constraints, are sufficiently large in modern economies. this is why formal institutional structure became a necessary mechanism in protecting property rights of individuals and organisations [31]. it is particularly important to point out the complexity of the process of establishing an effective political system and proper functioning of political markets. namely, mechanisms of measuring and executing transactions on political markets are far less efficient in comparison with those in economic markets. the subject of the exchange between voters and political parties are the promises for votes. in addition, the motivation of voters to be informed is low, because it is not very likely in their perception that their voice, separately observed, is important. additionally, the whole set of complex influences and interdependances causes always present uncertainty. the mechanism of the implementation of the political agreements is accompanied by a number of difficulties. competition is far less effective than in economic markets. regarding the fact that political system is the one that defines and enforces property rights, the logical outcome is that efficient economic markets are certainly not the rule [28]. another important issue is the specific role and the importance of ideology and the state in maintaining and developing the institutions that particularly determine the domain of ownership. with the growth of exchange between economic agents, it becomes increasingly more specialized and complex. in those circumstances successful contracting requires the support of a third party. strong political institutions are necessary because v. ivanovic 126 their functioning comprises legal domain. however, states vary widely in the way they define property rights, individuals can see the political institutions more or less legitimate, depending on their ideology. the ideological component is especially significant in the context of an efficient property rights system for the following reasons. namely, in case of high level of ideological consensus, aspiration towards opportunistic behaviour is minimal. in such conditions, property rights are protected in the best way. in the opposite situation, with low consensus, contract costs would very likely be higher and much larger effort would be needed in transacting. in that sense, ideological consensus might constitute an effective support to formal rules if not, at least partly, substitute for them [17, p. 115]. the relationship between political institutions and property rights is a result of a specific functional relationship that occurs between them. in concerto, according to the one of the premises of insitutional theory, there is no unique pereto-optimal resources allocation, but only the specific results of structure of power or structure of rights. the resource allocation could be specified through a following functional causality. widely observed, allocation of resources is the function of offer and demand on the market, whereby the two of the mentioned functions are the function of the de facto power. power is, at the same time, the property rights function. further derived relation reflects the fact that the property rights are the function of law. law is the function of legislative and executive authority. finally, executive and legislative authority are regarded as a function of a competition over the control of the state and its institutions, in order to protect certain interests in relation to the other interests [39, p. 6]. previous description of multiple, circular and causal relation creates a possibility to notice the difficulty authorities (excutive, legislative, courtal) are faced with, in order to establish an efficient system of property rights protection and enforcement. in societies with merely economic interests, the problem of property rights would be formulated and solved in a relativly simple manner. however, the complex nature of political process and impacts of different interests are those preventing the discovery of rather simple solutions for this issue. the fact which cannot be overlooked is that property rights allocation reflects the structure of power in society. 1 because of that, negotiations amog the transaction participants are always directed by innitial power distribution. for that very reason, it is necessay that those who establish the formal rules recognize these hazards and model the whole legislative framework in accordance with them. having in mind the signifficance of political institutions in context of determining property rights efficiency, we have to identify the general political framework within the efficient property rights protection is possible. in that sense we could assert that democratic policies 2 are a prerequisite for the efficient functioning of decentralized market economies, with clearly defined and implied property rights. this framework is the closest aproximation of adaptively efficient institutional structure. for that reason, it 1 there is an interesting interpretation which refers to the distribution of power and its reflections on property structure, especially public ownership. namely, in some cases there is no reason, in terms of efficiency, for defining property over certain goods as public. however, public property is frequently the result of interest of those who represent authority and those who support it [19, p. 130]. 2 political regime where property rights are most efficiently protected is the rule of law. though autocracies may ensure the economic growth in short term, the rule of law is an unavoidable mechanism in long term perpective. [29]. conceptual framwork for understanding the influence of efficient protection of private property rights  127 is an essential part of development policy to create those rules which are central for establishing and protecting effective property rights. however, the problem about that is the knowledge imperfectness about how we should create those policies. an additional complicating circumstance is the research in this domain. it is principally concentrated on the usa and the western market economies. on the other hand, in the places where those needs are most pronounced –in third world countries and former socialist economies, this aspect is insufficiently explored [29, pp. 366-367]. the previuos analysis can be summarized with the constatation that in the regime with positive transaction costs, legal frame becomes one of the main factors in determining economic performances. in the situation characterized by large transaction costs, contracts between the two sides are not likely to occur. in that case the costs are often higher than benefits of different property rights distribution [8, pp. 250-251]. the state, i.e. system of political institutions is doubly responsible in that process. it determines adequate definition of property rights, as well as their consistent and impartial implementation. if this is not the case, the economy will function below the level of production frontiers. 6. the role of private property rights in economic development through history it would be wrong to claim that the economic system predominantly based on private property is superior if we take the experiences of socialistic economies and their failure to provide adequate level of efficiency and welfare. the data go much further back in time. two important civilisations that had left large inheritance to the contemporary world, i.e. the greek states-cities and the roman empire were based on private property. those were the first two civilisations with institutionally recognized private property, despite the fact that some fragmentary inscriptions indicate the existence of private property forms much earlier [10, p. 667]. naturally, the existence of private property rights is an insufficient condition for reaching efficiency, and demands certain wider institutional backup. the special role belongs to continuity and stability of the economic and political system. the mentioned features were the crucial characteristics of helenic states and roman society for a pretty long period of time, not only at the peak of their development. historical archive provides a variety of evidence for the claim that property rights need to be adequately protected and enforced. their influence on economic performances is especially reflected in situations where they are not adequatelly specificated. as an example of harmfullness of unclearly and inadequately defined property rights, we may state the feudal system. for a long period of time this system was not able at all to provide adequate incentives for efficient resource allocation. the reason for that was the manner in which the property rights structure was defined. a blurred system of shared responsibility and with it vague distribution of different aspects of property rights between the monarchs, aristocrats and peasants, generated a tremendous inefficiency and long term stagnation of the economic system. in manorial system (based on the relationship between the servant and the master), country folk, lords and the king had the property over the same land, although their rights were differently defined and often intertwined. in such a complicated system, property responsibilities were obviously ambiguously defined. this had disastrous consequences on economic effciency, not to mention immanent social disasters it invokes. only with their radical redifinition and greater specification in terms of rights to v. ivanovic 128 use, transfer or exclude others from use, came to their complete contribution to economic development, especially during the industrial revolution. the specificity of the property rights system does not only reflect the necessity to be established gradually in time, but also significant time is needed until it begins to produce a full effect on economic activity. medieval development of england distinctly confirms the fact that it takes a long period of time to establish an efficient system of private property protection. namely, the appearance of magna carta 3 in 1215 caused a relatively secure protection of property rights. this was especially the truth for those times. however, it took additional four centuries for it to reach political verification and more solid legal basis, which occurred with the parlamentarism triumph in 1689. unlike that, the political voluntarism and pretty insecure political and legal environment often ended with expropriation of property rights by the monarch, especially over financial resources. magna carta established institutional basis that produced political democracy and conditions for long term economic growth. this form was later reproduced and extended, with certain modifications, in british colonies in north america [19, p. 130]. another ilustrative historical example, representing the great role of private property, refers to the usa. namely, one of the highest usa achievements, in the early period of development, was adopting the special law in may, 1875. the law strongly promoted private property rights and this was of indispensable signifficance for further usa development [36, p. 147]. although being suplemented and adapted several times during xx century, it has basically remained the same for a long period. from the present point of view, evolution and adaption of the above mentioned institutions will last for two centuries, but it is exactly they that made usa economic system superior in technological and economic manner during the whole xx century. contrary to the experience with private property rights in the usa, there was strong opposition to property rights allocation toward private ownership in the late middle ages in france and spain, which caused slower economic growth in these countries [24, p. 234]. besides the hesitations or impossibility for adquate property rights definition, various historical experiences distinctly indicate the destructive consequences of violating the established property rights. the very representative example is the confiscation of property rights that took place in france in the xiv century. namely, starting from 1307 onwards philip iv signifficantly assessed tax on the means of the knights templares (ordre du temple), in order to solve seriuos financial problems. five years later, pope clement v, exposed to high pressure from the french king, was obliged to dissolve the order and tranfer part of the money to maltesian knights. the influence of these measures on the economy was very signifficant for this time, since these knights established the first known international bank system. it was based on strong military relations between the members of the order [6, p. 4560]. this kind of expropriation, like the future violations of property rules, caused stagnation in financial system development in france in comparation to the other european economies, especially the dutch. if there is unequivocal, 3 it is interesting to say that magna carta was actually bought. namely, the parliament rights to enact the laws, to investigate the cases of abuse and advise in national politics domain were practically bought from edward i and edward iii. this money was borrowed to them so they could more easily wage the hundred years' war. new military technologies consisting of crossbow, bow and arrow, spear and gunpowder highly increased the war expenses. as a result, the british monarchs were obliged to change certain legislative rules, so they could have sufficent money to finance the war. thereat, their throne depended on the outcome of the war. [19]. conceptual framwork for understanding the influence of efficient protection of private property rights  129 empirically and theoretically confirmed connection between the financial system and economic growth, consequences in terms of missed opportunities can be gleaned. as a contemporary example that is often cited in terms of contrary conclusions to the assertation of the new institutional economics and property rights theory, i.e. their emphasise on the importance of private property rights, some authors cite the experiences of china. the reason for this consists in highlighting the fact that this country has specific ownership structure of the land resources, but also a significant number of companies in the non-private ownership regime. however, china's experience may be observed as additional argument or an excellent example, favouring the property rights theory and private property structure of economy. namely, at the end of the 1970s, when the process of strong economic growth started, fundamenatal changes occurred in the institutional structure of chinese economy. it provided individual instead of collective agricultural land cultivation, whereas economic subjects were given a possibility to make dicentralized instead of centralized decisions about resource allocation [42, p. 49]. it is obvious that this kind of institutional changes influenced the fundamental de facto change in the property rights system and basis changes in incentives, regardless of de jure property status of land or economic organisations. besides that, new tendencies in chinese economy confirm the fact that de jure property structure changes towards the dominant private property. to demontrate this, in 2000 around 80% of public and state companies in provincies and cities were privatized, whereas the rest were open to variuous cooperative relations with the private sector [43, p. 242]. the difficulties in the financial system were probably an additional factor that pushed privatization further. namely, the amount of non-performing loans (npl) in china represented huge burden for future economic growth. although this phenomena is still present in chinese economy and creates signifficant risks for the stability of the whole economy, privatization reduced the possible colapse of the financial system. 7. conclusion in the paper are presented the basic dimensions and mechanisms through which the property rights influence the efficiency of national economy. the conclusion could be summed up noting that the growth and development of the economic system are required as a necessary condition for clear determination and consistent enforcement of private property rights. regarding the multiple aspects of establishing an effective and efficient property rights system, there is a decisive need to coordinate other institutional segments and public policies with those in property sphere. this includes especially the observation and investigation of the distribuitive, legal and wider institutional dependances. the advantages of the private property rights, regarding efficiency, are based on historical factors of social and economic system development, referring to the decrease of social compactness, increase of specialisation and higher organisational complexity. besides that, other inherent characteristics of private property rights– in first line providing appropriate incentives for economic agents, are in the center of understanding all of the other growth factors, such as entrepreneurship or technical innovations. efficient property rights enable and stimulate trade, which influences market expasion and the volume of investments. trade and market expansion influence further division of labour and specialisation, which increases productivity and through that higher rate of economic growth and wealth creation. on the other hand, clearly defined property relations v. ivanovic 130 and a stable institutional system reduce transaction costs, which increases transaction scope. thanks to private property rights strong material incentives and a freedom of economic agents are provided. these are prerequisites for the increase of investments. an efficient property rights system is more the exception than the rule. the sources of such a state in this domain have to be explained. most of them come from the political system. inefficiencies are primarily the consequence of different principles prevailing in political and economical spheres. it refers, beside other things, to the complexity of the aims by political actors and simplificity of goals by economic agents. political institutions based on the rule of the law are conditio sine qua non of the efficient market economy and its undisputable growth and development. the analysis of the variouos historical experiences confirms practical signifficance of property rights in the development of certain countries. the growth and high economic performance of the usa and the uk in the last century and a half could be largely interpreted as the consequence of the established private property rights system. the failures of france and spain to establish credible public obligations of private property protection undoubtedly influenced relative stagnation of these systems. flexibility and continuous development of contemorary chinese economy, in terms of structure and property rights enforcement and protection, represent the pivotal part of the explanation of its economic progress in the last forty years. the work also represents a solid basis for future research in several ways. there is a necessity for more complete comprehension and analysis of the influences from political sphere. through empirical evaluation and analysis of the property rights influences, more detailed explanations about the relative power of mechanims effecting economic efficiency could be provided. finally, studying the specific historical experiences in a large number of countries, uncovered by existing research, opens the possibility for explaining why and how weak property rights determine the stagnation of some countries in the long term. references 1. adelstein, r. 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(hrsg.) in institutionelle ursachen des wohlstands der nationen, duncker und humblot, deutschland, pp. 15-67. 43. wilson, j. (2007), china´s transformation toward capitalism, in d. lane and m. myant (eds.), varieties of capitalism in post-communist countries, palgrave macmillan, london, uk, pp. 239-270. konceptualni okvir za razumevanje uticaja efikasne zaštite privatnih vlasničkih prava na ekonomsku efikasnost vlasnička prava predstavljaju jednu od najznačajnijih strukturnih determinanti efikasnosti ekonomskog sistema. s obzirom da sadržinom zadiru u ukupnu institucionalnu, pravnu i distributivnu sferu, njihov uticaj na ekonomske performanse u nacionalnoj ekonomji je kompleksan i veliki. specifična svojstva povezana sa socijalnim i ekonomskim karakteristikama nosilaca prava, generisanjem adekvatnijih podsticaja, potpunijim vrednovanjem, kao i individualnost, ekskluzivnost i slobodna transferabilnost, kombinovano dejstvo specijalizacije, produktivnosti, socijalne kompaktnosti i organizacione kompleksnosti, učinili su da privatna vlasnička prava generišu značajan ekonomski potencijal. mehanizmi putem kojih se to ostvaruje se odnose na omogućavanje trgovine, povećanje obima tržišta i konkurencije, redukciju transkacionih troškova i obezbeđivanje adekvatne motivacije kod ekonomskih agenata. nesavršenosti političkog procesa i iz njega rezultirajućih političkih institucija predstavljaju glavne uzroke neefikasne zaštite i sprovođenja vlasničkih prava. specifična istorijska iskustva u razvoju pojedinih nacionalnih ekonomija na upečatljiv način potvrđuju njihova nesumljiva svojstva koja stimulišu propulzivnost nacionalne ekonomije i obezbeđuju pretpostavke dinamične ekonomske aktivnosti. ključne reči: vlasnička prava, formalne institucije, ekonomska efikasnost, političke institucije, ekonomska istorija. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 3, 2014, pp. 251 260 adoption and implementation of information technology in small and medium enterprises  udc 004.7: 334.012.63/.64 slavoljub milovanović university of niš, faculty of economics, niš, serbia abstract. small and medium enterprises (smes) have great impact on economy of every country and small business sector is one of the fastest growing sectors of the economy. smes are becoming more dependent on information technologies (it) for their operations. it is a form of organizational resources that can be transformed into a valuable, rare and not easily imitable asset. the asset then makes the base of competitive advantage and high business performance. researches in it implementation have primarily focused on large corporations, but results of the researches may not be fully applicable in small and medium enterprises and there is need to investigate specificity of it adoption and implementation in smes. therefore, this paper researches the most important issues and challenges in adoption and implementation of information technologies in small and medium enterprises. also, the paper treats problems of adoption, implementation and use of groupware technology. key words: information technologies, it adoption, it implementation, small and medium enterprises, groupware. introduction small and medium enterprises (smes) make great part of economy in every country. for example, in the united states, smes make 99.7 percent of all firms and employ 6080 percent of new employees annually, over the last decade. also, in usa about 600,000 new smes are established each year, although more than 500,000 existing smes are closed. crucial question for smes is how to survive in today turbulent environment and competition. (jie et al. 2009, 46-53) in comparison with large companies, smes have limited resources and little influence on the market. their survival depends on their ability to take full potential of the resources and quickly adapt to market changes. it is a driver of operational flexibility and competitive received september 14, 2014 / accepted december 17, 2014 corresponding author: slavoljub milovanović faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 646  e-mail: smilovan@eknfak.ni.ac.rs 252 s. milovanović advantage, and may help smes to be more flexible, to survive and succeed. also, information and communication technology (ict) infrastructure is deemed as important in supporting operational, tactical and strategic goals of enterprises. (wasko et al. 2011, 645-652) however, many studies showing the positive effect of it resources engagement on enterprise performance were conducted in large us-based firms. small number of researches has focused on use of information and communication technologies in smes and the issues related to it adoption and implementation in smes. is (information systems) theories and practices developed for large organizations may not be fully applicable in small and medium enterprises. challenges, opportunities, and management issues of it implementation in smes are unique and deserve special attention of research community. (she-i et al. 2008, 275-294) considering need for new researches in that specific field of is, the paper has focus on adoption and implementation of it in smes with brief view to groupware technology. the paper is organized in five sections. in next section, prior researches on it implementation in smes are briefly presented. in third section, a model of it adoption and implementation in smes with factors influencing on the adoption and implementation are described. in fourth section, main issues in implementation and use of groupware technology in smes are analysed. final section is dedicated to concluding remarks. 1. prior researches on it implementation in smes – a brief review information technologies can improve enterprise business performance and competitive advantage. this is particularly fact if enterprises use it on innovative way to compete with their rivals. however, adoption and application of the new technologies is very complex and difficult task. as we previously mentioned, great number of studies and researches is dedicated to it adoption and implementation in large enterprises, but studies of it implementation in small and medium enterprises are very rare. in addition, small and medium enterprises have specific attributes influencing process of it implementation that require special attention and investigation. smes differ from large enterprises in many aspects. for example, large firms have greater scope of operation and compete in diverse markets, have a better ability to allocate is development costs on larger units of production, and have internal is development technical staff. all the aspects and attributes typically are not related to smes. on the other hand, smes have their own specific attributes. for example, in small enterprises, decision making is centralized in one or two persons, bureaucratic procedures are minimal, standard operation procedures are not well established, long-term planning is limited, and there is greater dependence on external services for is operations. therefore, the problems and opportunities in smes considering is implementation are unique and require special focus. traditionally, smes have been the slowest in adopting modern information technologies. large enterprises make high level of investment in hardware, software, hiring and training it professionals. smes usually lag behind large firms considering adoption and implementation of advanced it products. however, the decreasing cost of storage and processing hardware and the increasing number of software applications designed for smes eliminate barriers that prevent smes from adoption of new it. in recent years, smes invested a significant amount of resources in it implementation. adoption and implementation of information technology in small and medium enterprises 253 a recent survey (zhang et al. 2008, 357-380) shows that it environments of smes are no longer based only on desktop pcs. over 75% of smes have more than one server and the majority of smes have distributed it infrastructures. also, the literature (nambisan 2013, 215-226) on smes suggests that the enterprises can make benefit from using it. for example, it enables smes to better manage their customer bases, keep information about customers in a more organized manner and also share knowledge within the organization more efficiently. other benefits of it that smes can achieve include: cost reduction, improved profitability, better customer service, enlarged market scope, and tighter interorganizational relationships with trading partners. information communication has become important factor of success in the internet age. communication technologies such as e-mail, the web, interorganizational systems (ios), and electronic data interchange have dramatically changed business processes. a common theme in many studies about it implementation in smes is the importance of contextual and organizational factors in achievement of business success. the studies (khazanchi 2005, 88-95) (davison et al. 2013, 89-109) try to find answers to following questions: what kinds of organizational, contextual, and other factors influence it success in smes? what makes one enterprise more innovative compared with other enterprises? for example, there is some evidence that organizational size is just one important factor in making a firm innovate and adopt new it. there are several investigations that explore the factors influencing the adoption of communication technologies in smes. one investigation (premkumar 2003, 91–121) evaluates the impact of six factors (perceived usefulness, cost, compatibility, top management support, competitive advantage, and size) on the adoption of communication technologies. data is collected from 207 firms and the results of data analysis reveal that competitive advantage, top management support, and size are important determinants of adoption of communication technologies. a study (lee, runge 2001, 44-57) of drivers of it adoption in 188 small retail businesses reveals that owner's perceived relative advantage and firm's willingness to innovate have an impact on potential it adoption in smes. in another study (magal, lewis 1995, 75-83), authors investigated factors that affect it success in smes. examination of 150 smes have showed that respondent's awareness of it and attitude toward it are critical factors in their use of new it. mentioned research (khazanchi 2005, 88-95) analyses factors that determine conditions for electronic data interchange (edi) implementation. research question in the research is: under what conditions smes are likely candidates for the information technology implementation? the four distinct factors influencing on the conditions are: internal/external business and technological environment, organizational readiness and trading partner support, financial impact, workflow productivity. although the research is related to the specific it, the four factors are clearly robust and could potentially be applicable to any information technology implementation in the small firm context. in the next section, we try to define a comprehensive and integral model of it adoption and implementation in smes. model shows four major domains or layers with all important factors influencing it adoption and implementation. 254 s. milovanović 2. a model of it adoption and implementation in smes the four major domains or different layers influencing adoption, design and use of information technology are: individual domain, technology domain, organizational domain and environmental domain (thong 1999, 187-214). the main goal of information technology adoption and implementation in an organization is to enable employees to complete various work tasks. primary elements in the domain are the individuals and the tasks that needs to be completed. the technology domain at the next layer provides the tools and information for the individuals in order to do theirs work tasks. the information technology is implemented in the specific organizational context. thus, various characteristics of the organization influence it adoption and implementation. the organizational context is deemed a domain separate from individual domain. organizations are described as a collection of individuals working to accomplish a business objective with a common set of rules, procedures, and value systems. collective vision and belief regarding information systems of organization may not be the same as that of the individuals within the organization. because of that, there is need to differentiate the organization domain from the individual domain influencing adoption and implementation of it. final domain in it adoption and implementation model is external environment. organizations react to the environment by innovations in data processing and analysing in order to compete in the marketplace. model of it adoption and implementation with four domain and all factors influencing the adoption and implementation in smes is shown on figure 1. individual domain inovativeness of ceo it knowledge of ceo technology domain compatibility of it relative advantage of it complexity of it trialability observability cost of it organizational domain size of organization top management support product champions it knowledge of employees information intensity environmental domain environmental uncertainity competition intensity it adoption and implementation in smes fig. 1 model of it adoption and implementation in smes source: (thong 1999, 187-214) adoption and implementation of information technology in small and medium enterprises 255 individual domain. it is difficult to clearly describe the effect of individual characteristics on it implementation because the technology is implemented across multiple individuals. individual factors such as demographics are useful in studying individual-level it implementation. there are many various demographic factors such as education, job tenure, cognitive style, and is expertise and experience that influence it adoption and implementation. also many studies have researched user involvement and user training as factors of it implementation success. some studies considered these factors as an individual variables while others considered the factors at the organizational level. the context of the study determines which approach (individual or organizational) will be accepted (igbaria 1990, 637– 652). in a small and medium organization, ceo (chief executive officer) is usually the owner of the organization and main decision maker. therefore, characteristics of ceo are essential in decision making on adoption and implementation of it. technological innovations and changes (andriole 2012, 61-72) depend not only on factors such as business size or market forces, but also on the abilities and preferences of ceo. ceo can belong to two group of managers: adaptors and innovators. adaptor searches for solutions that have been already tried and understood, while innovator seeks solutions that have not been tried and that are risky. ceo willingness to innovate in it domain impacts on the other members of organization to easily adopt new technological innovation (for example, new software application, new hardware device, new procedure in data processing etc.) second characteristic of sme’s ceo influencing it adoption is his or her technical knowledge. lack of necessary skills and technical knowledge can be serious obstacle to it adoption and implementation. overcoming of the obstacles will lead to greater likelihood of the innovation adoption. ceos in smes often lack basic knowledge of it and consequently they are not aware of it potentials. education of these ceos about the benefits of it will lead to greater readiness for it adoption. (enns, mcdonagh 2012, 1-10). technology domain. innovation/technology characteristics are very important factors influencing it adoption/diffusion in an organization. an individual forms an opinion toward the innovation on basis of the characteristics. the opinion leads to adoption and rejection of innovation and, if the decision is to adopt, to implementation of innovation. the perception of the potential adopter toward an it is main determinant of the it adoption. tornatzky and klein (1982, 28–45) identified three variables that are related to it adoption: compatibility, complexity, and relative advantage. other studies (moore, benbasat 1991, 192–222) have also included other variables such as cost, trialability, and observability compatibility is positively related to adoption of an innovation. compatibility is the degree to which an innovation is consistent with the existing values, past experiences, and needs of the receivers. compatibility has organizational and technical aspect. organizational compatibility means that the innovation should be compatible with the organization’s values and beliefs, while technical compatibility is related to work practices and system interfaces. if the it is compatible with existing work practices and existing software/hardware products, the sme is more likely to adopt it. complexity is the degree to which an innovation is perceived as relatively difficult to understand and use. ease of use of computer systems is positively related to adoption of innovation, while the perceived complexity of the it has negative effect on decision to adopt the it. technology acceptance model (tam) is often used in studies of the impact of ease of use (or complexity) and perceived usefulness (or relative advantage) on it adoption and usage. relative advantage is 256 s. milovanović the degree to which an innovation is perceived as better than previous solution. this factor from technology domain is positively related to it adoption. the positive perceptions of the benefits of it make an incentive for a sme to adopt the innovation. trialability is the degree to which an innovation may be experimented, while observability is the degree to which the results of an innovation are visible to others. however, trialability and observability are factors that are hard to measure. finally, the cost effectiveness of the innovation is significant variable in analysing it adoption and implementation. organizational domain. impact of various organizational factors on is implementation is obvious because most of information systems are implemented in an organizational context. the organizational factors that are important to study are: degree of top management support, existence of a product champion, organizational size, it knowledge of employees, information intensity and communication channels. we have already mentioned user training and user involvement which can be individual factors and organizational factors as well. top management support and commitment sends strong signals within the organization, reduces or eliminates political barriers in it adoption and provides resources for it implementation. product champions play a critical role in propagation of the innovation to the decision makers, developing an implementation plan, facilitating resource allocation, and removing barriers to implementation. considering the impact of organizational size on it implementation there is a threshold level beyond which size is not an important factor. larger organizations have more resources and technical expertise to facilitate it implementation. however, they have more bureaucratic practices and resistance to change that smaller organizations may not have. small businesses have scarce of resources because they operate in following conditions: a highly competitive environment, financial constrains, lack of professional expertise and high pressure of external forces. this unique conditions cause constrains on financial resources, a lack of internal technical expertise and a short-range management perspective. consequently, smes face more obstacles to adoption of it than large organizations. even among smes, if an enterprise is larger, it is more able to hire people with specialized skills, such as knowledge of it. in addition, larger enterprises have more potential to use it than smaller enterprises, because of their larger scale of operations it knowledge of employees in a sme has positive effect on it adoption and implementation, but smes usually have lack of specialized it knowledge and technical skills. problems with developing the necessary skills and technical knowledge may cause that smes postpone adoption of the innovation until they provide sufficient internal expertise. thus, if employees of smes have it knowledge and skills, the enterprises are more willing to adopt it. the degree to which information is present in the product or service of enterprise reflects the level of information intensity of that product or service. similarly, we can measure information intensity of business processes by determination of degree to which information is present in business processes of an enterprise. smes in more information-intensive sectors are more likely to adopt it than those in less information-intensive sectors. for example, financial organizations like banks and insurance companies are more information-intensive, because their main functions are related to processing of financial information. greater information intensity can make ceo of a small enterprise to think of it as main competitive weapon and that increases probability of it adoption. finally, use of various communication channels to get information for adoption is significant factor that impacts on it adoption/diffusion. adoption and implementation of information technology in small and medium enterprises 257 environmental domain. environmental factors have emphasized the use of it to gain competitive advantage. growth of interorganisation information systems (ios) extending organizational boundaries draw attention on the impact of environmental factors on it implementation. users of is are not only internal staff audience, but also organization’s customers, suppliers, and other trading partners. hence, many studies have examined the impact of competitive advantage in initiating the implementation of ios, the role of interorganizational dependence and power on adoption of these systems. in most cases, the powerful trading partner influences it implementation. researchers have also examined the role of incentives and the transaction climate between the trading partners in facilitating the implementation of ios (choudhury 1997, 1–24). generally speaking, competition increases probability of innovation adoption, because strong rivalry between enterprises pushes the enterprises to be innovative. intense competition leads to environmental uncertainty and increases need for innovation and rate of innovation adoption. by adopting it, enterprises will be able to compete in three ways. first, it can change industry structure and thus change the rules of competition. second, it can give enterprises new ways to outperform their rivals and thus create competitive advantage. finally, enterprise can create new business from existing it operations. small or medium enterprise in more competitive environment have greater need to adopt and use it in gaining of competitive advantage. on the other hand, small enterprise in less competitive environment is not pushed to be innovative. 3. implementation and use of groupware in smes groupware technology supports group of users working on common tasks, processes and projects. groupware have some specific attributes which make it different from traditional it. first, groupware technology is not so expensive. there are low cost solutions and even free technologies (e-mail, repositories, etc.). second, groupware technology is complementary and has a supportive role because groupware adoption is parallel to the normal work flows. these two attributes make groupware affordable for smes. third, groupware technology is versatile, because implementation and use of the technology depend on the meaning that users give to it and the its characteristics which they emphasize and use. groupware is collaborative technology that plays a key role in knowledge management. table 1 shows a classification of groupware technologies that categorizes the technologies in two types: systems supporting information exchange (ecs electronic communication systems ) and systems that support group of users constituting team (teamwork systems). the aim of the first category of systems is to make the relationship between individuals or organizations easier. the aim of the second category of systems is to integrate information in work processes that have been previously defined. the systems make automation of defined work flows (mrenoño-cerdán 2008, 87-96). the main characteristic of ecss is the versatility since they affect the communication processes. in the process, there are various levels of interest of users in sharing their information or knowledge and the levels of exploitation of the possibilities offered by these systems. the flexibility of groupware (especially of ecs) means that the group finally defines its use. for example, ecs can be used exclusively in information exchange, but also can be used to support group working in processes and joint decisionmaking. (milovanovic 2011, 469-480) 258 s. milovanović table 1 classification of groupware category of groupware electronic communications systems teamwork systems concept it allows the exchange of information, documents and opinions work is done through the system aim relation integration applications email, discussion forums, repositories, yellow pages workflow, project management, shared databases, group decision systems potential benefits of groupware can be viewed through the perceived usefulness and the relative advantage of the technology. however, the so-called productivity paradox of it can be connected to groupware technology. the real problem related to productivity paradox of groupware technology is the lack of understanding of tacit knowledge and its relationship with the technology. investments in traditional it have limited consequences on competitiveness, but investments in knowledge management technologies like groupware have great impact on gaining competitive advantage. in addition, if groupware supports management of tacit knowledge, enterprise can expect more benefits. tacit knowledge represents the most valuable resource for knowledge management, especially in innovation processes however, if groupware is used in the coding of existing knowledge in explicit forms and sharing this knowledge through the whole organization, benefits are low. tacit knowledge is not easily formulated or modified into explicit forms due to personal and contextual nature of the knowledge. process of modification and conversion of tacit knowledge into explicit form is known as externalization. the communication of tacit knowledge needs a shared system of meaning for its understanding and application. groupware should support the communication in order to gain greater benefits and competitiveness. the benefits derived from groupware (particularly electronic communication systems) depend on its use. technology is socially built. users give the different meanings to it and emphasize its various characteristics and uses. therefore, organizational context that encourages employees' participation and creativity must be created. in the context, groupware is the ideal tool to channel the potential of participants, allowing them to share and develop their individual knowledge. autonomy is a significant dimension of learning and knowledge exchange that facilitate learning among individuals or groups of individuals. the employees' autonomy allows employees to experiment with their knowledge thus improving organizational knowledge assets. consequently, the organizational context influences adoption and implementation of groupware technology. the organizational variables that should be considered are: ceo's innovativeness, knowledge externalization and employees' autonomy. however, the simple adoption of groupware does not lead always to better business performance. this is case particularly in adoption of electronic communication systems, due to versatility of the systems. the reason for that is in the fact that smes often adopt low-cost and low sophisticated technologies with no intention to change business processes and practices. for example, they can adopt document management systems which are just document warehouses without associated search technologies. adoption and implementation of information technology in small and medium enterprises 259 conclusion it is significant driver of every enterprise effectiveness and competitiveness. however, there are conflicting opinions about the role of it on a sme performance. many owners of smes view it as a cost, as opposed to having the potential for enabling them to grow. in addition, adoption and implementation of it in a sme mainly depends on individual characteristics, technical knowledge, and innovativeness of the sme owner which often plays role of ceo. except individual domain, technological, organizational and environmental domains impact adoption and implementation of it in smes. considering groupware, we can conclude that the technology is affordable for smes, but certain adoption and implementation guidelines are needed. groupware should allow the exchange and creation of tacit knowledge in an environment featured by innovation and autonomy. references 1. andriole, s.j. (2012) seven indisputable technology trends that will define 2015, communications of the association for information systems, 2012 (30): 61-72. 2. choudhury, v. (1997) strategic choices in the development of interorganizational information systems, information systems research, 8(1): 1–24. 3. davison, r.m.; ou, c.x.j, martinsons, m.g. (2013) information technology to support informal knowledge sharing. information systems journal, 23(1): 89-109. 4. enns, h.g., mcdonagh, j.j. (2012) irish cios' influence on technology innovation and it-business alignment. communications of the association for information systems. 2012 (30): 1-10. 5. igbaria, m. (1990) end-user computing effectiveness a structural equation model, omega, 18(6): 637–652. 6. jie, z., han, l., ziegelmayer j.l. (2009) resource or capability? a dissection of smes' it infrastructure flexibility and its relationship with it responsiveness, journal of computer information systems, 50(1): 46-53. 7. khazanchi, d. (2005) information technology (it) appropriateness: the contingency theory of "fit" and it implementation in small and medium enterprises, journal of computer information systems, 45(3): 88-95. 8. lee, j., runge, j. (2001) adoption of information technology in small business: testing drivers of adoption for entrepreneurs, journal of computer information systems, 42(1): 44-57. 9. magal, s.r., lewis, c.d. (1995) determinants of information technology success in small businesses, journal of computer information systems, 35(3): 75-83. 10. milovanovic, s. (2011) application of knowledge management information technologies in small and medium enterprises, proceedings of international scientific conference: small and medium enterprises possibilities and perspectives (smepp-2011), novi pazar: 469-480. 11. moore, g. c., benbasat, i. (1991) development of an instrument to measure the perceptions of adopting an information technology innovation, information systems research, 2(3): 192–222. 12. mrenoño-cerdán, a. l. (2008) groupware uses and influence on performance in smes, journal of computer information systems, 48(4): 87-96. 13. nambisan, s. (2013) information technology and product/service innovation: a brief assessment and some suggestions for future research, journal of the association for information systems, 14(4): 215-226. 14. premkumar, g. (2003) a meta-analysis of research on information technology implementation in small business, journal of organizational computing and electronic commerce, 13(2): 91–121. 15. she-i, c., yen, d.c., shi-ming, h., pei-qei, h. (2008) an erp system life cycle-wide management and support framework for small and medium-sized companies, communications of ais, 2008 (22): 275-294. 16. thong, j. (1999) an integrated model of information systems adoption in small business, journal of management information systems, 15(4): 187-214. 17. tornatzky, l. g., klein, k. j. (1982) innovation characteristics and innovation adoption–implementation: a meta-analysis of findings, ieee transactions on engineering management, 29(11): 28–45. 18. wasko, m., robin, t., dorothy, l., jarvenpaa, s. (2011) stepping into the internet: new ventures in virtual worlds, mis quarterly 35(3): 645-652. 19. zhang, m., saonee sarker and suprateek sarker (2008) unpacking the effect of it capability on the performance of export-focused smes: a report from china, information systems journal, 18(4): 357-380. 260 s. milovanović usvajanje i implementacija informacione tehnologije u malim i srednjim preduzećima mala i srednja preduzeća (msp) imaju veliki uticaj na ekonomiju svake zemlje i sektor malog biznisa je jedan od najbrže rastućih u takvim ekonomijama. funkcionisanje msp sve više zavisi od informacionih tehnologija (it). it je forma organizationih resursa koji se mogu transformisati u vredna, retka sredstva koja se teško mogu imitirati. ova sredstva onda čine osnovu konkurentske prednosti i boljih poslovnih performansi. istraživanja implementacije it su primarno bila fokusirana na velika preduzeća i korporacije, ali rezultati tih istraživanja možda nisu u potpunosti primenljiva na mala i srednja preduzeća i postoji potreba za istraživanjem specifičnosti usvajanja i implementacije it u msp. stoga, ovaj rad istražuje najvađnija pitanja i izazove u usvajanju i implementaciji it u msp. takodje, ovaj rad tretira probleme usvajanja, implementacije i korišćenja tehnologije za podršku grupnom radu korisnika. ključne reči: informacione tehnologije, usvajanje it, implementacija it, mala i srednja preduzeća, groupware tehnologija. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 4, 2014, pp. 367 379 economic aspect of electronic circuit design and manufacturing in republic of serbia  udc 621.38(497.11) miljana lj. milić 1 , ivan b. marković 2 , jelena b. milojković 3 1 faculty of electronic engineering, university of niš, serbia 2 university of niš, faculty of economics, niš, serbia 3 icnt – innovation center of advanced technologies, niš, serbia abstract. almost every activity of an electronic system design is closely related to technical as well as to other fields of science. the most important aspect for the future “life in the market” of the electronic product is the economic aspect. foreign direct investment can greatly affect the r & d in the field of electronic industry. the fact that the electronic circuits’ industry affected and affects all areas of social development, requires the establishment of the correlation between electronic circuit design and manufacturing, and economics in general. in this paper, we will try to analyze the position of serbia’s electronic industry perspectives on the global electronic circuit market, considering costs of their development and manufacturing. key words: effects of fdi, electronic circuits, ic design, electronic circuit testing, it introduction the historical moment that we live in today, represents a turning point between machines and the information society. observed from the production point of view, we are witnessing the transition from the era of raw material processing to the era of information and energy (litovski, 2000). describing the period of machine era, we could say that the value of a product and a profit it was bringing, came from raw material i.e. its mass. in that way, a classification of the branches of industry was made: chemical, metal, plastic, food and other industries. industrial products nowadays, on the other hand, are examples of multitechnological complexity. such products are airplanes, computers, cars, telecommunication systems, consumer electronics etc. the profit now mostly comes from software, built-in electronics, and special hightech materials. according to some studies, the information caries twothirds of the new products' value (litovski, 2000; ungson, trudel, 1999: 60-65). advances in technology, received october 24, 2014 / accepted march 25, 2015 corresponding author: miljana lj. milić faculty of electronic engineering, aleksandra medvedeva 14, 18000 niš, serbia tel: +381 18 529 105  e-mail: miljana.milic@elfak.ni.ac.rs 368 m. lj. milić, i. b. marković, j. b. milojković especially in computer-aided logistics, computer-aided product design, and modern communications enable large companies to overcome classic factory work. there are many cases of companies where profit coming from new technologies reached almost 100% of the global profit. the profit from electronic devices industry grows every year. technologies supporting this industry are developing rapidly. this is particularly noticeable in the mobile devices industry. in (osborne, 2014.) according to the worldwide mobile electronic devices' shipments' statistics from 2013 and 2014, an estimate was made that in 2015 a 2.592.000 thousands of units would be sold. this is shown in table 1. it gives a detailed view of the worldwide demand for most popular mobile electronic devices. table 1 worldwide device shipments by segment (thousands of units) device type 2013. 2014. 2015. traditional pcs (desk-based and notebook) 296 131 276 221 261 657 ultramobiles, premium 21 517 32 251 55 032 pc market total 317 648 308 472 316 689 tablets 206 807 256 308 320 964 mobile phones 1 806 964 1 862 766 1 946 456 other ultramobiles (hybrid and clamshell) 2 981 5 381 7 645 total 2 334 400 2 432 927 2 591 753 (source: gartner, june 2014) having this in mind, one can conclude that the key issue in today’s economy development lies in following new trends of electronic devices as well as software that they require. achieved and expected profit depending on device operating systems for the period 20132015 is presented in table 2. table 2 worldwide device shipments by operating system (thousands of units); operating system 2013. 2014. 2015. android 898 944 1 168 282 1 370 893 windows 326 060 333 419 373 694 ios/mac os 236 200 271 115 301 349 others 873 195 660 112 545 817 total 2 334 400 2 432 927 2 591 753 (source: gartner, june 2014) computer aided design (cad) becomes a key industrial and economic activity, no mater of the product type. there are several reasons for such a trend. first, the complexity of new technologies is becoming so high, that nothing could be designed without a computer. computer designing becomes the most important activity that consolidates the development, production and product placement at the market. on the other hand, the most significant factor for the competitiveness of a product is its quality. when high quality of the product is easily achievable, companies that still want to be competitive now have to offer newly designed products that no one else offers. as stated back in 1983 [re83], the delay of just six month in putting a new product to the market, reduces the profit of the economic aspect of electronic circuit design and manufacturing in republic of serbia 369 product for additional 50%. there are plenty of modern industrial products (mostly electronic), whose time for development lasts longer than the product itself. the key activity to overcome such a scenario is the efficient design. in this way cad becomes one of the main drivers of the industrial development. 1. economic state and the future of serbia’s electronic industry the importance of fdi for economic growth in the modern economy is becoming increasingly evident on two grounds (damijan et al, 2003). quantitative growing importance of fdi, measured by total fdi flows or state, beyond the absolute values of key economic indicators such as gdp, exports and domestic capital investment (marković 2010). qualitatively, tnk, as the main sdi agents become dominant participants in the world economic space by integrating themselves into the basic methods of economic activity and investment, trade in goods and services, transfer of technology and financial flows. to the potential host country, fdi brings an integrated package of tangible and intangible resources (capital, technology, management, marketing, organizational knowledge, training, workforce, etc.) that serve as an alternative to labor migration and as a stimulus to economic development (marković, janković-milić, 2013). investment package, on the one hand, supplemented by available domestic factors of production both creates the conditions for new employment and work, and encourage, on the other hand, the growth of the host country through technology transfer, training, workforce, establishing a connection with the rest of the local economy and creates local roads producers to the world market. serbia has indeed become an attractive location for foreign direct investment and now that foreign investors are finally beginning to invest in it and its capital, it is necessary to do a lot of things (mencinger, 2003). this primarily refers to the continued political and economic stability, the adoption of the new system of laws with european standards (including the adoption of the law on foreign investment, which would guarantee the rights of foreign investors), rescheduling and partial write-off of foreign debt, as well as the implementation of more aggressive promotional policies and strategies. it also requires faster and further implementation of initiated economic reforms, addressing legal and regulatory issues related to foreign investments, the use of the tried and tested but also finding new incentives to attract fdi, the inclusion of serbia in international financial and political organizations, and the like. otherwise, foreign investors would still continue to be treated as a high risk area, extremely unattractive for investment, which in our economy due to the lack of domestic capital and modest inflows of fdi, may have devastating consequences (hausmann, pritchett, dani, 2005). while investment in all sectors of the economy is needed and welcomed, the following sectors have been identified as those who could contribute most to considering the competitive advantage you have or may have in serbia:  agriculture and food processing industries: food and non-food agricultural products, with an emphasis on organic products,  car parts: focus on companies-suppliers of new factory car and truck manufacturers / heavy vehicles,  banking and financial services  engineering: specialized services, designing, building on a "turnkey", and so on.  wood industry: first, the production of wood furniture, which is based on craft skills, 370 m. lj. milić, i. b. marković, j. b. milojković  information and communication technology (ict): products and services with the possibility of software, administrative and business services, call centers, initiatives that are based on the ability of universities / research centers,  pharmaceutical / healthcare / clinical research and the chemical industry,  public-private partnerships: energy / telecommunications / infrastructure / metallurgy, mining and exploration / traffic checkpoints and distribution centers,  textile industry: short-term production branded clothing and orientation specific markets,  tourism. the above sectors are distinguished for the following reasons:  they have the potential to create a significant number of new, permanent jobs.  projects sdi many of these sectors can enable progress in certain areas in serbia.  projects in these sectors may increase exports.  it is possible to connect local companies and attract foreign companies-suppliers and service industries.  provide sectors to develop globally.  the new foreign direct investment in these sectors is in southeastern europe. serbia is becoming interesting for the investment. according to the data of national bank of serbia, since 2005 serbia has received about 13 billion of euros in direct investments. this is shown in table 3. as seen from figure 1, due to different, mostly political impacts, the investment trend was not always increasing. fig. 1 trend of direct foreign investments in serbia for the period 2005-2013 economic aspect of electronic circuit design and manufacturing in republic of serbia 371 table 3 serbia, foreign direct investment, net in the period 2005-2013, by country (in thousands of euros), country 2005. 2006. 2007. 2008. 2009. 2010. 2011. 2012. 2013. austria 168 864 409 815 848 627 330.567 234 149 145 850 154 693 55 275 40 646 norway 24 1 296 061 2 326 4 025 -526 1 567 953 3 451 3 535 greece 183 137 672 010 237 108 33 338 46 724 24 450 9 958 -296 053 29 057 germany 154 868 645 370 50 516 59 572 40 101 32 921 76 591 43 444 48 391 italy 14 759 49 087 111 504 333 665 167 386 42 296 128 068 81 709 43 912 the netherlands 80 387 -176 560 -24 199 336 711 172 267 200 100 240 840 1 386 131 094 slovenia 149 854 154 529 64 033 70 659 34 290 80 859 -108 387 52 560 24 480 the russian federation 11 722 12 713 1 700 7 903 419 751 6 993 74 187 18 503 45 295 luxembourg 88 331 4 839 185 226 48 576 6 002 6 739 812 829 64 435 22 604 switzerland 45 922 -4 223 70 458 82 319 62 883 50 643 47 742 78 389 49 012 hungary 24 613 179 260 22 901 21 891 17 787 15 488 67 591 504 45 686 france 34 816 79 087 61 458 53 810 7 150 17 089 113 652 14 304 -1 080 croatia 30 356 17 446 26 802 100 428 19 938 37 928 4 918 118 959 -5 548 united kingdom 51 444 77 977 -21 054 10 122 51 842 53 344 -6 174 39 541 32 848 montenegro 0 10 466 152 631 54 078 -3 608 -64 947 5 621 -8 747 102 usa 16 067 -20 593 23 536 35 624 12 583 54 779 25 633 28 051 16 759 bulgaria 0 651 42 034 34 350 14 605 1 291 9 745 793 29 654 7 587 slovakia 21 578 15 959 2 320 935 24 512 32 531 -4 830 -13 449 2 661 belgium 10 306 4 160 17 276 12 000 2 366 3 536 5 .006 1 672 43 659 israel 11 588 3 681 19 397 494 52 1 703 223 1 042 2 041 latvia 5 208 8 178 2 645 482 1 065 80 1 715 3 093 7 396 liechtenstein -32 839 -14 595 -1 916 3 375 174 814 9 867 429 854 cyprus 56 697 -300 383 99 901 1 795 26 348 44 953 42 581 39 776 8 682 bosnia and herzegovina 3 599 -13 582 -622 496 -47 327 340 -22 000 -9 800 143 5 559 others 118 317 169 871 455 780 255 755 27 605 82 665 132 637 -115 344 163 304 total 1 250 268 3 322 606 1 820 831 1 824 413 1 372 473 860 125 1 826 908 241 869 768 534 (source: national bank of serbia 2014) nevertheless, one should have in mind that foreign companies that are mostly oriented in electrical and electronic devices manufacturing and information technologies (it), such as: bosch, yura, panasonic, siemens, intel, telenor, cisco, sap, mobilcom austria, leoni, oracle, seavus, schneider electric, invested in serbia (siepa, 2014). this may sound promising for the future of this branch of industry. the drop of the direct investment does not have to appear worrying. it is reasonable to conclude that after establishing the productivity and quality, those companies in serbia could earn for themselves. considering global serbian industry, electronic industry holds a good, second position, being one of the largest exporters with 844.7 mil. euros in 2013. (electronic machines, systems and devices). on the other hand, import of the same goods in 2013. was about 654.8 mil. euros, putting this sector at the fourth place of import significance (siepa, 2014). to design and produce an integrated electronic circuit (ic), that is a chip, many steps must be followed. they are shown in figure 2 (ernst, 2009). each one of these steps can be quite difficult. 372 m. lj. milić, i. b. marković, j. b. milojković product planning and market analysis system specification and application specification design at behavioral level design at rtl level design at gate level design at circuit level design at physical level verification post-layout manufacturing packaging testing cost speed quality flexibility advantages in serbia advantages in developped countries ic design flow (in narow sense) material equipment machines defining standards cad support licences fig. 2 ic design flow serbia is still not ready to start a project that can perform the entire flow. we simply are still not ready for it. it requires huge investments in infrastructure for material preparation facilities, for manufacturing and for testing floor facilities. on the other hand, a relatively cheap workforce, in the neighborhood of highly developed european countries, can be a plus. in comparison to other neighboring countries, serbia has favorable geographic position, stimulates the creation of new jobs, and tax rate on profit is among the lowest in europe (serbian chamber of commerce, 2009). according to the data obtained by the institute of economics (economics institute, belgrade), serbia is ranked third in terms of favorable conditions for production and seventh in terms of service. also, political risk is less than it had been in the first half of the decade and investments and financial capital are far safer in serbia now. the key problem in those investments is that we do not have a long-term vision for the development. also such sophisticated industry requires enough qualified experts. our chance in this design flow can be found in those phases that do not require production facilities. development of such activities is a good start. for that, one will need an expert, a computer and a place to work. stages of the design where we can find our place are marked yellow in figure 4. they include mostly brainwork, experts’ engagement, computers and software. our advantage here is speed, quality, flexibility and costs. all those steps essentially represent the design in its narrow sense. economic aspect of electronic circuit design and manufacturing in republic of serbia 373 as a logical continuation of this, a good idea would be the investment in knowledge, not in facilities. our country has several education centers that are capable of producing suchpersonnel . most of them are university centers (belgrade, novi sad, niš), and they have a long history of educating similar experts. most of them are working for large international companies in electronics and it sector. historically, there is a good correlation between the investments in it and electronic sector, and a progress of the society. according to the eu, only during the ten-year investment in the it and electronic sector in certain countries, the competitiveness and productivity of their companies raised as much as 50 percent. being at 15 percent would be a drastic increase in our case. the country has the capacity and potential of this industry and should wisely exploit that. we cannot ignore the growth in the electronic and it industry each year. such trend will surely continue, because this technology penetrated every pore of social life and work. this increases the need for it and electronic solutions. because of such estimates, serbia has to popularize this sector among young people in the sense of applicable knowledge. they have to be assured that those professions are not meant for some geniuses, but are like any other studies. one has to work and learn just a little bit harder than others. 2. costs of electronic circuit design and manufacturing the cost of product and its design are not correlated just during the product development. we can observe life cycle of an electronic product, like it is shown in figure 3. (litovski, 2000). it begins with the extraction of raw materials (minerals, fossil fuels, air, chemicals). these materials are processed and prepared for further application. after this step, one can plan design technology, design constraints, design process and the manufacturing of the ic. further activities entail shipment of product to the customer or to the market. tasks to be solved here involve time and manner of transportation, or the storage. delivered products should now be installed and used. during its operating cycle, the device requires energy and maintenance, and also involves cleaning, and spare parts replacements. materials preparation design and fabrication of the product product distribution operating and maintenence separation, recycling, reuage and disposal p ro d u ct l if e c y c le in fo rm a tio n f lo w fig. 3 product life cycle and the information flow 374 m. lj. milić, i. b. marković, j. b. milojković the last phase of product life cycle could also be very interesting. it can end for two reasons: because the product is not needed any more (where we expect that new product with improved features will appear in the market), or because its repair costs are so high that repairing does not pay off. it is usual that the largest part of such a system can operate well and be reusable, at least like a spare parts source for the reparation of similar system. to enable this, a proper separation of the system parts should be conducted. one should also have in mind that many electronic systems that have no faults, can be resold. in such a way older technologies are shipped to undeveloped parts and countries. this activity is particularly common in car and computer industry, and telecommunications. the reuse of components can be very significant in estimating the life cycle of the electronic component. it is usually said that such a component can have one or more incarnations. the reused component is recycled. material can also be a result of recycling. it is worth to recycle materials only if it is cheaper than buying new, raw materials. based on these facts, we can conclude that the life cycle of a single product is very complex, and that the job of a designer or a manufacturer does not end the moment when the product leaves the production plant. the designer has to consider all the phases of product life cycle. this is particularly important, since most developed countries nowadays, have low obligations for the manufacturers that require separation, re-use, recycling and disposal of their old devices. the designer has to solve those problems and implement them in the most efficient way possible. to have a better clue about the costs of ic design, its flow will be described first. we will here discus about one special type of integrated circuits i.e. chips, which are called asics (application specific integrated circuits). the cost-effective mass-production is achievable only for this type of electronic circuits. every asic-based product realization procedure begins with a specification phase (lee, 2005). market and/or technology requirements determine these specifications. almost every asic contains several major blocks. sometimes it is cheaper to buy a design for a certain block than to design in from scratch. next phase requires analysis of tradeoff and make-versus-buy decisions for each major design block. purchasing blocks from an intellectual-property (ip) provider, usually involves some additional costs: for purchasing the ip, the per-chip/per-design royalties, and the cost of verifying the ip (lee, 2005). now the design of the asic in the narrow sense can begin. during this, new parts of the design are developed. every block needs verification. it is reasonable to use only the correctly designed parts. all these blocks are now integrated, that is placed and connected together on the same piece of silicon. the global verification repeats again at this stage. after being verified, the design is now used to create gdsii files (graphic database system), that can be used for asic’s manufacturing machines. the manufacturing phase follows. using the designer’s gdsii files special software generates masks and the actual manufacturing of the chip can begin. during this phase the obtained silicon dies are packed into packages and then tested. chips are now prepared for assembling into corresponding devices or packed for market. creating a cost list is a very complex task, since each step in the process can impose costs in other design or manufacturing phases. for example, a simple concept like low number of pins or low-power design (everything has to be paid) affects final product cost in several ways. to place silicon die in the package does not cost much. nevertheless, if the chip has too many pins, then connecting them to the package can be a problem. machines that do that will have more problems due to the smaller connection points (bonds) on the http://chipdesignmag.com/display.php?articleid=178 http://chipdesignmag.com/display.php?articleid=178 economic aspect of electronic circuit design and manufacturing in republic of serbia 375 package and on the die. this will affect yield (and costs), since more defective devices will appear. further problems may appear because more pins require more power. consuming more power causes more heat. the increased chip temperature requires proper cooling with a heat-sink or a fan, and this increases the total cost of the system. all expenses of the ic design and manufacturing could be classified into two groups: fixed expenses, and proportional expenses. fixed expensesentail : time and costs of the design, costs of masks production, other fixed expenses such as rent and others. proportional expenses, on the other hand,entail : costs of the required materials (silicon, cooper, acids …), packaging, testing, and they are proportional to the size of the chip series, as well as to the size of the chip. the increase of the fixed expenses is affected by the increase of the design expenses. designers are becoming mre expensive because they require appropriate education, and working and living environment. also during the design, certain investments must be made in new hardware and software. if we consider proportional expenses, we can notice that technology development enables smaller electronic devices. figure 4, shows how the cost of a single integrated transistor (which is the essential part of every modern electronic device), is falling during years (electronics we srch, 2014; moore, 1998). fig. 4 transistor pricing history by moor’s law nevertheless, this drop did not reflect on the reduction of proportional chip costs, since modern devices are much more complex, and require much more transistors. those systems require more sophisticated and more expensive methods, tools and instruments for validation and testing. list of items that contribute to cost so far can also be classified as follows: costs inside the die:  one-time or fixed charges  ip-procurement costs  engineering-design costs 376 m. lj. milić, i. b. marković, j. b. milojković  verification costs  mask charges  other nres. non-recurring engineering (nre) refers to the one-time cost to research, develop, design and test a new product.  per-chip costs  ip royalties  die cost  bad-die cost (defects) outside the die:  one-time or fixed charges  cad-tool licensing  generation and setup of test programs  load boards, probe cards, and other test nres  generation of documentation  market timing costs  per-chip costs  package cost  assembly cost  test cost one more topic that arises from the experience in asic design is unsuccessful project. during the late 1990s, the main aim was to create a correct chip without the need for redesign and re-fabrication – i.e. no spin. this used to be accomplished quite often. chips nowadays are far more complex. consequently the spin rate is higher. the expenses for one spin may vary drastically. they can be minimal requiring only small changes, or may involve a complete redesign. many companies even plan a certain number of spins in their overall costs and schedules (lee, 2005). besides the engineering, verification, manufacturing, packaging and testing costs for the new spin, additional factor to consider include the market timing costs because of a product delay. one of the most important designers’ ways to avoid or reduce number of spins is the project verification. verification should be performed frequently during each phase of the design. if everything is correct, we can go further with the project development. doing so may appear like prolonging the design, but generally, can save a lot of money. verification can be performed using large collection of tools and teams of experts. in case of a spin, a trade off analysis must be conducted between the cost and time of additional verification (tools, people, and time needs), and the cost of additional spins. one of the most important phases of the circuit design is its testing. the aim of electronic circuit design is to give a fault free product. the absence of faults is determined by testing. if we find products i.e. electronic devices, produced by different manufacturers that perform the same function and cost drastically differently, we can be sure that the costlier product underwent a very serious testing procedure. cheaper product did not go through that activity and the manufacturer would probably not guarantee about its long-lasting functionality. this means that testing is a very expensive activity. it does not add any new functionality to the electronic circuit, device or system, but it shows a value that is already in the product. industrial testing of large scale chip series represents go/no-go test. the result of testing a circuit is one small piece of information: yes, it works, or no, it doesn't work. it is just enough to make sure that the circuit operates well. if not, it is discarded. in the laboratory http://chipdesignmag.com/display.php?articleid=178 economic aspect of electronic circuit design and manufacturing in republic of serbia 377 environment, when prototypes are checked, testing requires very sophisticated tools and electronic instruments. nowadays chips work at speed of little ghz. testing equipment for them should be more advanced with much better features than the device to be tested. it means that we would need spectrum analyzers that can work on few tens of ghz. this fact is quite enough for one to conclude how expensive those testers are. on the other hand, testing systems must be so fine and tiny and precise to explore the insight of all chips where parts are small as molecules. the probers should be made of very expensive, high conductive materials that could ensure very strong and at the same time easily separable connection to the chip internal testing points. testing requires engineers, time for conducting and special equipment. engineers have to make the fastest and the most efficient testing method and procedure possible. it means that in the mass production, if the defect exists, it should be detected in the fastest way. the most possible defects must be detected first. without any further observation, such faulty chips are discarded. testing a device with few millions of transistors in it for a very short time is an important requirement. for example, if we want to test one digital device, there are many combinations of input signals that should be applied at its inputs. after stimulating the device, we are expecting to obtain response. this response is compared with the fault free one, and the device is classified as the faulty or faults free. for the circuit that has 10 inputs, number of possible input combinations is 2 10 . if one combination testing last 1ms, the time to check all combinations is 1.024 seconds. for the circuit with 15 inputs, this would last almost 33 seconds. for a series of million devices, this would last about a year. let us just mention that today’s chips contain a few tens or hundreds of inputs. the calculation or the conclusion about the size and complexity of one classic test engineer’s problem is left to the reader. one more aspect of testing economics represents the cancelation of test. how large can its cost be ? there is one rule for test engineers that describes canceling the test. it is called 10x1 (litovski, 2000). this is shown in figure 5. the figure describes cost of the test at different levels of design abstraction. there are three levels of abstraction displayed. the lowest one is the level of component. testing the component costs a certain amount of money. if we skip testing the component and build it into the printed board, then testing the board to find the defective component would cost approximately 10 times more than testing a single component. similar story stands for placing a printed circuit board with a defective component into the system. cost to test such a system and detect a faulty device cost 100 more than the initial cost. in the end we can conclude that giving up testing does not pay off, in any case. 1 10 100 testing costs per defect level of circuit complexitycomponent testing pcb testing system testing fig. 5 rule 10 x 1 378 m. lj. milić, i. b. marković, j. b. milojković at the end of the ic design cost discussion, we should analyze the costs of the electronic circuit design itself. when analyzing the expenses, one should have in mind the entire life cycle of the product. modern designers are highly educated and highly responsible persons. independently from the cost of their work, the cost of their education is extremely high. the work on the design and the product preparation, represent the largest part of the design cost. although the price of hardware resources is dropping every day, the expenses for computer equipment required for ic design, do not decrease so fast. namely, the complexity of the project raises every day, and also the demand for the improved hardware. constant investment in a new hardware represents a significant part of the design cost. on the other hand, software design tools' cost also grows. new technology requires new hardware and new software, while new hardware and software require new training and education for the designers. everything costs a lot. modern and professional working place for ic's design can cost hundreds of dollars. to justify those costs, very specific and efficient designers are required. taking into account testing (that is prepared during the circuit design), and other aspect related to the life cycle of the product, the software that can support such a complexity is very demanding and requires experts from different fields. the design team is then created from a group of experts, and it increases the price of the design. the largest design cost, as well as the cost of a product corresponds to unsuccessful project. a mistake in the design can have very bad consequences on the development of the company or can, in the end, financially destroy it. conclusion in this paper we have tried to analyze all economic aspects of electronic design and manufacturing. in the period since 2000 in serbia quite a lot has been achieved in the field of establishing macroeconomic stability, trade liberalization and the creation of some stimulative legislation of interest to foreign investors. however, the initiatedeconomic reforms adopting new legislation and efforts to segment the promotion of investment potentials are just the first step in creating an overall environment necessary for intensive fdi. in addition, one should have in mind that political risks are still very high. the obvious lack of local entrepreneurial knowledge (international marketing, quality and standards), economically and politically responsive orientation in the direction of encouraging fdi inflows may be a significant factor in the export recovery. generally speaking, the key interest is that the serbian economy enter those foreign investors who intend to serve with our sites and third markets, and to purchase inputs in the domestic market to encourage the modernization of local productive capacity and competition among domestic producers. all this together should result in an increase in efficiency and overall global competitiveness of the serbian economy. we can conclude that electronic technologies are, in fact, high technologies for poor nations. to encourage ic design in serbia investments in knowledge are required. afterwards, we only need a computer and space and everything else is in our heads. this sector of economy is what we can and need to cultivate, promote and use for the benefit of us all. the job of ic designer is a great opportunity after graduation, while salary is far above the average in serbia. it is the opportunity to earn much more if young people are diligent and willing to learn constantly. at the end, generally speaking, this sector may be an efficient shortcut for faster development of underdeveloped countries like ours. economic aspect of electronic circuit design and manufacturing in republic of serbia 379 references 1. litovski, v. (2000), “projektovanje elektronskih kola”, niš, dgip: nova jugoslavija – vranje 2. marković, i. 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(1999), “the emerging knowledge-based economy”, ieee spectrum, vol. 36, no, 5, pp. 60-65. 8. osborne, c. (2014.), gartner: worldwide pc, mobile device market to grow in 2014. (online at www.zdnet.com) 9. serbia investment and export promotion agency – siepa (2014.) “investirajte u srbiji”, (online at http://siepa.gov.rs/sr/files) 10. ernst, d., (2009.), a new geography of knowledge in the electronics industry – asia’s role in glebal innovation networks”, east-west center, honolulu, hawai. 11. serbian chamber of commerce (2009.), serbia attracts foreign investments (online at http://promoney.rs/maj2009/privredna_komora_srbije.pdf) 12. economics institute, belgrade, (online at www.ecinst.org.rs) 13. lee, j.m. (aug/sept 2005.), “ic economics 101”, chip design magazine (online: www.chipdesignmag.com). 14. electronics.wesrch.com 15. moore, g. e. (1998.),“ cramming more components onto integrated circuits“, proceedings of the ieee, vol. 86, no. 1, pp: 82-55. ekonomski aspekt projektovanja i proizvodnje elektronskih kola u srbiji gotovo svaka aktivnost u procesu projektovanja elektronskog sistema je usko povezana sa tehničkim, ali i drugim naučnim oblastima. najvažniji aspekt projektovanja elektronskih proizvoda za njihov budući opstanak na tržištu jeste svakako ekonomski. strane direktne investicije u velikoj meri mogu uticati na r&d u oblasti elektronske industrije. činjenica da industrija elektronskih kola utiče na sve oblasti društvenog razvoja, zahteva uspostavljanje korelacije izmeďu projektovanja i proizvodnje elektronskih kola i ekonomije uopšte. u ovom radu biće učinjen pokušaj analize perspektive srpske elektronske industrije na globalnom tržištu elektronskih kola uzimajući u obzir troškove njihovog razvoja i proizvodnje. ključne reči: efekti sdi, elektronska kola, ic dizajn, testiranje elektonskih kola, it. http://siepa.gov.rs/sr/files http://promoney.rs/maj2009/privredna_komora_srbije.pdf http://www.ecinst.org.rs/ http://www.chipdesignmag.com/ facta universitatis series: economics and organization vol. 16, n o 3, 2019, pp. 315 326 https://doi.org/10.22190/fueo1903315s © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper some aspects of sustainable development of tourism 1 udc 338.48:502.131.1 vukašin šušić, dejan ţ. đorđević university of niš, faculty of economics, niš, serbia abstract: this paper analyzes the basis of the concept of sustainable development and refers to the optimal level of space use for tourist purposes. in doing so, a special attention is mostly paid to negative impacts of tourism on space, i.e. the necessity of spatial limitation of tourism development in order to preserve and protect natural and created resources. an intensive and uncontrolled development of tourism in the second half of the 20th and the beginning of the 21st century caused the degradation of the environment, the destruction of ecosystems and other social and cultural conflicts in the tourist area. for these reasons, it is necessary to align the planning of the future development of tourism with the principles of sustainable development by using different indicators. the main goal of this paper is to analyze various indicators of sustainable development that determine the possibility of using space in tourism, as well as sustainable tourism development. when selecting the indicators of future development, certain criteria must be taken into consideration, such as the criterion of relevance, feasibility (availability), credibility, and so on. the essence of use of the indicators is to determine the optimal number of potential visitors and facilities in the tourist area, without significantly affecting the environment, reducing the quality of tourist experience (sensation) or jeopardizing the sense of identity, lifestyle and activities of the domicile population. key words: sustainable development, tourist area, carrying capacity, indicators, the limit of acceptable changes jel classification: q01, q56, z32 received march 11, 2019 / revised april 26, 2019 / accepted may 13, 2019 corresponding author: dejan ţ. đorċević university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: ekngeo@gmail.com 316 v. šušić, d.ţ. đorđević introduction intensive tourism flows at the end of the 20th and the beginning of the 21st century left noticeable negative consequences on the surroundings and natural environment. negative consequences are especially evident in tourist destinations where significant tourist movements and high tourist seasons are present during a certain part of the year. the best example are the coastal destinations in the mediterranean, where the concentration of tourists is high during the summer tourist season, especially in the period from july to august. a similar situation occurs in the winter months in some mountain destinations such as the alps. exactly as a consequence of the negative impact of tourism on the surroundings, the tourist value of not only natural, but also anthropogenic resources is reduced. in this way, the tourist area loses the attractiveness and importance of destination for vacation, recreation and satisfaction of other tourist needs. due to unplanned construction, air and water pollution and increased noise, tourist destinations with intensive tourism turnover start to resemble cities and increasingly take on the appearance of city agglomeration, which reduces the difference between emitting and receptive areas. 1. sustainable tourism and environment bearing in mind that in the 21st century a further increase in tourist turnover has continued, and the relationship between the environment and tourism becomes more and more complex, it is clear that the use and protection of the tourist area, as a basic tourist resource in the context of sustainable economic development, is gaining its importance. in order to realize the goals of sustainable tourism and enable their implementation on a wider scale, it is necessary to abide by basic principles that represent the framework and practical guide for practical implementation. the modern concept of sustainability does not only take into account the traditional economic aspect, but also some quantitative indicators that measure social (socio-cultural) and environmental impact. three basic principles are usually emphasized, based on three pillars of sustainability: economic, ecological and socio-cultural sustainability. this measuring approach of corporate sustainability performance in literature is called the triple bottom line (tbl) ((tourism working group, 2013). namely, sustainable tourism implies the level of tourism activity that can be sustained in the long term, because it rests on the benefits of the socio-cultural, economic and natural environment of the area in which it is taking place. therefore, sustainable tourism is defined as a form of tourism that ―finds a balance between economic prosperity, environmental protection and social equity‖ (stoddard et al., 2012). apart from these three pillars, the principles of sustainability, the literature also distinguishes the transverse pillar that supports economic, socio-cultural and ecological pillars through management, infrastructure, etc. (tourism working group, 2013). with appearance of the globalization process, besides the immediate ecological, economic and socio-cultural benefits, the geopolitical dimension of sustainable tourism is increasingly included, which contributes to world peace and understanding among people (weaver, 2010). tourism has a significant role in sustainable development of environment for two reasons. the first is that tourism, as a sector with the most dynamic development, has a significant impact on economies of many countries and destinations in the world. the second is related to the tourist activity that creates a special relationship between consumers (visitors), environment and local community, or domicile population (tourism working some aspects of sustainable development of tourism 317 group, 2013). at the beginning of the 90s, the debate on sustainable tourism became more complete, encompassing not only the environmental issue, but also the socio-cultural, economic and geopolitical dimensions of this problem. in contemporary literature, problems related to the definition of sustainable development and sustainable tourism, are increasingly emphasized. namely, there is a big difference between sustainable tourism, where the emphasis is on the consumer and on the market conditions, in order to maintain tourism industry, and sustainable development, where the emphasis is placed on the development of tourism as means of achieving broader social and environmental goals (holden, 2008, sneddon et al., 2006). therefore, the goals of sustainable tourism will not always coincide with goals of sustainable development. sustainable tourism should imply a balance between the environmental, social and economic aspects of tourism and the need to maintain sustainability in all segments of tourism. according to wto, principles of sustainable tourism development are applicable to all forms of tourism, including mass tourism and specific segments of tourism, as well as all types of tourist destinations. from the above, it follows that sustainable tourism is not a particular form of tourism; on the contrary, all forms of tourism can strive for sustainable development (unep and unwto, 2005). sustainable tourism refers to "tourism that fully respects current and future economic, social and environmental impacts that will not endanger the environment, the needs of visitors, economy and local community" (unep and wto, 2005, page 11). sustainable tourism should meet the needs of current participants in tourism, at the same time preserving and increasing the potential for using tourist resources in the future, without compromising their rights of future generations to meet their needs. it can be said that sustainable development of tourist destination implies a right to tourism and freedom of tourist flows, a satisfaction of economic, social and aesthetic needs, while maintaining the characteristics of natural, social environment and cultural-historical heritage. accordingly, sustainable tourism should (unep and wto, 2005, p. -12):  ensure optimum utilization of environmental resources, which are a key element of tourism development, maintaining important ecological processes and helping to preserve natural heritage and biodiversity;  respect the socio-cultural authenticity of tourist destinations, protect their modern cultural heritage and traditional values and contribute to understanding and tolerance between cultures;  provide sustainable long-term business by generating socio-economic benefits that are fairly distributed to all stakeholders, including stable employment, income generation and social housing for host community, contributing to poverty reduction in domicile population. the following are the basic goals for the development of sustainable tourism (fennel, 1999, p. 14):  developing greater awareness and understanding of the impact of tourism on environment and economy;  promoting equality and development;  improving standard of living of local communities;  increasing the quality of experience for visitors;  maintaining the quality of the environment of which the aforementioned goals depend. sustainable tourism should enable people to enjoy and acquire knowledge about the natural, historical and cultural values of a given area, while preserving the integrity of a 318 v. šušić, d.ţ. đorđević destination and fostering economic development and well-being of the local community. in other words, sustainable tourism does not have a goal to prevent the development of tourism, but to enable its development in a way so that tourists visit attractions and meet tourist needs without destroying the attributes that have attracted them. 2. instruments of sustainable tourism development policy the relationship between the environment and tourism has become increasingly complex, and sustainable use and protection of space, as a basic tourist resource, is becoming more and more important. in order to prevent conflicts in relation to tourism – tourist area, it is necessary to integrate environmental protection planning and tourism management into a unique spatial planning process for tourism development (wall & mathison, 2006). adequate planning and management of sustainable tourism development in tourist destinations involves the use of various methods and techniques. apart from tourism policy instruments and planning and other incentives, more radical changes and behavior towards the surrounding environment can be achieved by repressive measures, such as taxes, fees, etc. (budeanu, 2007). there is a wide range of instruments that can be used to achieve sustainable development in tourism. of course, legislation is and will be irreplaceable in defining the legal framework in which tourism entities can operate, as well as in establishing basic standards and procedures for sustainable development. environmental instruments have been increasingly used by governments and state administration to emphasize the importance of preserving surrounding environment. however, voluntary proactive approaches are certainly the best way to ensure long-term commitment and improvement of sustainable tourism development (holden, 2008, p. 203). nowadays, various means and techniques are used to assess and measure different aspects of sustainable tourism development. first of all, they include (mowforth & munt, 2003, p.116):  creation of protected areas (national parks, wildlife areas, biosphere reserves, etc.);  regulation of tourism economy (legislation of states, regulations and norms of professional associations, etc.);  technique of visitors’ management (spatial distribution of tourists, directing the flows of visitors, etc.);  environmental impact assessment (balanced planning of tourism development, mathematical models, geographic information systems, etc.);  determination of the carrying capacity;  meeting-participation techniques (meetings, review of public attitudes, etc.);  ethical codes (for tourists, for tourist economy, for the local government, etc.);  sustainable development indicators. these quantitative and qualitative indicators aim to limit the use of tourist resources in a deliberate and justified way and limit tourism development to a border (threshold) that does not endanger the surrounding environment and optimal tourism development. formation of protected areas refers to the designation of certain areas protected by natural resources. the establishment of protected areas allows for the preservation of a type of biophysical process or condition. the regulation of the tourism industry is an important tool for implementing the concept of sustainable tourism and is guided by legal measures, norms, rules, social responsibility, etc. determining the capacity of the bearer means an analysis of the physical, ecological, social bearing capacity, environmental capacity, and so on. sustainable some aspects of sustainable development of tourism 319 tourism indicators include the use of resources, the degree of pollution, waste, local participation, tourist facilities, diversity of natural and cultural life, etc. (mowforth & munt, 2003). also, environmental protection and sustainable development tools include visitor management techniques, ethical codes related to tourists, local economy, domicile population, etc. and precisely, the main goal of the paper is to analyze the role of some measures and indicators that significantly determine the upper limit of possible use of space in tourism and sustainable tourism development. 3. indicators of sustainable development in tourism sustainable development indicators are the youngest assets among sustainable development instruments whose use began after the world summit in rio in 1992. according to the world tourism organization (unwto, 1996), "indicators measure or evaluate certain information, with which the decision makers (administrative bodies) reduce possibility of unconsciously making bad business decisions." it is recommended that the indicators be used successively over a period of time to determine evolutionary changes important for tourism development and management. there are three different aspects that can be measured: ―changes in tourism structure and internal factors, changes in external factors that affect tourism and tourism impacts‖ (tourism working group, 2013, p. 7). sustainable tourism indicators mark the presence and scope of a particular current phenomenon, tendency of future development, identification of risks or the need for action. in fact, indicators are sets of information selected to measure changes important for tourism development and management. when selecting indicators of future development, certain criteria must be taken into account, such as the relevance, feasibility, reliability, precision and comparability criterion (manning, 1999). relevance means that a particular indicator provides adequate information and a response to a particular outcome. feasibility (availability) refers to the ways and possibilities of collecting relevant data or information. credibility of information and its reliability for the user depends on the accuracy of information provided by the data provider, which enables the creation of indicators of sustainable tourism. accuracy implies clarity and comprehensibility of data and information to the user regarding their knowledge and skills about the indicator itself. comparability is a criterion that indicates changes over time and the possibility of comparing spatial units of a different hierarchical rank (locality, tourist center, region, destination, etc.) (unwto, 2004). the factors influencing the selection of indicators and determining the management of a particular destination include: access to sustainable development (minimal or comprehensive), indicator measurements, available financial, human and other resources, interests of key subjects of tourism development in a given destination, public support and political influence – butler, 1996). bearing in mind that tourism is a complex system; the selection of the indicators of sustainable development is determined by the type of destination and it is in accordance with the capacity of the tourist area for the development of certain forms of tourism. the difficulty in using indicators of sustainable tourism most commonly is a consequence of bad interpretation of the concept of sustainable development, by different actors in the tourism system. this problem is initiated by the absence of stronger social responsibility, which is the result of incompatibility between needs and objectives of science and political institutions (tanguay, et al., 2011). for politicians, indicators of sustainable tourism should point to internal 320 v. šušić, d.ţ. đorđević and external factors that affect the structure of tourism sector. they should point out the benefits and tourism influence in a specific area and identify the priority tourism activities (unwto, 2004). for tourism operators, the process of defining indicators is an effective means of obtaining information on the status and values of natural and anthropogenic resources. in 2004, wto outlined 748 indicators classified into 29 base groups of indicators that can be applied to all types of destinations. however, a complete list of indicators is optional and can be reduced. in development of tourism strategies, depending on the characteristics of a destination, indicators recommended by wto were used to a different extent. for example, in the development of tourism development strategy of the balearic islands, where tourism is the main sector of economy, 50 indicators were used, in the canary islands nine, and in the caribbean 20 indicators, etc. (tanguay, et al., 2011). so, today the number of indicators is reduced due to more often chosen criteria and it uses those that best emphasize the dimensions and issues of sustainable tourism development. in 2013, the european commission launched the european tourism indicators system (etis) ―with the aim to help destinations track and measure sustainable tourism development, using commonly comparable approach and indicators‖ (european commission, 2013). so, the etis (european tourism indicator system) is a tool for managing, informing and monitoring development, especially for tourism destinations. it is designed as a ―process for collecting and analyzing data with the overall objective of assessing impact of tourism on the destination‖ (european commission, 2016, p. 10). collecting data and information on a wide range of issues related to the local economy, community and environment helps determine a degree and directions of development of a tourist destination. feasibility and practicality of the european tourism indicator system (etis) at the destination level was tested during a two-year period through two pilot phases. more than 100 destinations throughout europe ―have been implemented and tested by etis and provided feedback to the commission about their experience‖ (european commission, 2016, p. 10). the european tourism indicator system has defined 43 basic indicators covering basic aspects of sustainability monitoring and providing basis for an effective destination management. basic indicators enable monitoring of development of sustainable tourism in a certain period of time, as well as a comparison of degree of sustainability of tourism between destinations. these indicators are classified into four sections of indicators (thematic areas). these thematic areas include indicators that best reflect sustainable development of tourism in a destination (european union, 2016, pp. 21-22): 1. management indicators emphasize the role of public policy and businesses, as well as consumer satisfaction on sustainable development of tourism destinations; 2. economic indicators point to the economic effects of business in tourism, tourist company performance, quantity and quality of employees, supply chains (percentage participation of local companies in production of food, beverages and other products and services, etc.); 3. social and cultural indicators reflect social impact of tourism, health and safety in a destination, gender equality, accessibility of tourist facilities to disabled people, preservation and protection of cultural heritage and local identity; 4. environmental impact indicators focus on elements that are crucial for sustainability of the environment in a destination: the impact of traffic, climate change, solid waste management, water consumption and method of wastewater treatment, use of energy, landscape and biodiversity protection, etc. some aspects of sustainable development of tourism 321 in addition to basic ones, additional indicators can be used to measure sustainable development. additional indicators complement basic information and customize evaluation systems to specific needs or destination category, e.g. coastal, mountainous, urban, rural, island, urban areas and others. however, the highest number of additional indicators of the european tourism indicator system (etis) is dedicated to the economic sphere (e.g. percentage of destination with recognizable strategy and development control and the evaluation of sustainable tourism), social sphere (equality and accessibility of tourist facilities to all categories of tourists etc.) and cultural aspects of sustainable tourism (e.g. whether a destination is a part of the cultural road certified by the council of europe; the influence of other cultures on culture and the identity of domicile population, etc.) (european union, 2016). at the beginning of the xxi century, in numerous strategies for sustainable tourism development, the most commonly used indicators were: water consumption in tourism, the total number of tourists in the destination, the average stay of tourists in the destination, occupancy rate, the level of satisfaction of tourists, the level of satisfaction of local population, the existence of adequate tourist development plans, the relationship between culture of tourists and the local population and other (tanguay, et al., 2011). most of the indicators used are at the same time the elements of the carrying capacity of the tourist destination. the difficult application of quantitative indicators has led to the use of alternative approaches aimed at identifying potential problems and determining the levels of acceptable changes in the tourist area (lec) or to assess the environmental impact (eia), i.e. to identify the environmental impact of tourism development on the surrounding environment (mowforth, munt, 2003; holden, 2008). 3.1. carrying capacity as an indicator of sustainable development the concept of carrying capacity was used within the framework of recreational studies of the 1960s, while the subject of greater interest in tourism development planners started in the 1980s of the last century. however, even in 1966, a study, under the patronage of the united nations, was conducted and it was an attempt to apply the carrying capacity of the tourist destination. the study has defined the number of tourists who can stay in different destinations in donegal (the republic of ireland) without compromising the physical environment (butler, 1996). optimal use of tourist attractions, as the key elements of tourism development, implies the preservation of ecological processes, natural resources and biodiversity, as well as cultural and historical heritage. in this respect, a number of conditions must be ―fulfilled to enable tourism to become sustainable, as social and economic development within the available capacity of ecosystems and socio-cultural thresholds‖ (united nations environment program, 2011). the carrying capacity refers to the maximum use of any tourist space without causing the negative effects on the resources of the environment, without reducing the satisfaction of visitors nor adversely affecting the society, economy and culture of the destination (holden, 2008). it is most often determined on the basis of the chosen development scenario of tourism development, respecting the given limitations. therefore, the optimization of the use of environmental components implies determining the carrying capacity of the tourist destination, i.e. the zoning of tourist areas according to the quantity and quality of certain components of the environment (dulĉić & petrić, 2001). according to the world tourism 322 v. šušić, d.ţ. đorđević organization (wto) the term carrying capacity implies, ―the maximum number of tourists who visit a tourist destination simultaneously, which does not lead to a significant disruption of the physical, economic and socio-cultural environment, as well as a significant decrease in the quality of tourists satisfaction‖ (pap / rac 1997). the carrying capacity refers to the maximum use of the destination, provided that the resources are not threatened, that the satisfaction of the visitors is not reduced, and that there is no negative impact on the society, economy and culture of the local community. based on these definitions, it is obvious that there are different elements of the carrying capacity. in literature, at least three types of threshold levels (thresholds) are distinguished as relevant to tourism:  physical (ecological) bearing capacity;  economic bearing capacity;  social support capacity. these carrying capacities have boundary levels above which saturation levels are considered to be exceeded, which leads to a decrease in the quality of individual components or the total space for the development of individual forms of tourism (holden, 2008). the physical carrying capacity indicates how many visitors and objects can be accommodated in a particular area without significant disturbance of the surrounding environment. in doing so, it is necessary to define the size and capacities of each individual tourist object and the distribution of various contents and accordingly plan and manage the development of tourism. it is also necessary to determine the maximum use of natural resources, the manner of functioning of municipal facilities, the manner of waste management, the adequate availability of other facilities and services to the community that are taken to public health and safety, housing, etc. (laboratory of the university of the aegean, 2001). for example, for coastal destinations, this refers to the depth of space that is activated in a particular destination. namely, today it is not enough for tourists to be offered the sun, the sea and the sand, but much more. so, the beach is not the only limit that determines the carrying capacity of the coastal destination. when it comes to cultural and historical monuments, physical carrying capacity signifies the level of use for tourist purposes, without damaging buildings (authors group, 2005). social-bearing capacity is used as a generic term that includes relationships and tolerance between domicile population on one side, and the quality of visitors’ experience, on the other side. the sociological aspect of the carrying capacity is widely understood and implies the possibility of maintaining the social and cultural specificities of the local community, despite the development of tourism and the acceptance of communication with people of different cultural, value, ethnic and other characteristics. economic (economic-political) bearing capacity is a set of tourism's impacts on local economic structures and activities, including a competition with other sectors. it also includes the institutional issues of local tourism management. the components of this carrying capacity are (laboratory of the university of the aegean, 2001, p. 14):  degree of specialization in tourism;  transfer of labor from other sectors to tourism;  tourism revenues and distribution issues at the local level;  level of employment in tourism in relation to the available potential of human resources of a destination. accordingly, the economic bearing capacity implies the development of tourism and related activities, without suppressing other activities that are necessary for the life of the some aspects of sustainable development of tourism 323 local population, or a sharp increase in the price of products and services on which the existence of the population of the tourist destination depends. the levels of carrying capacity are interconnected, and overrun of the limit level of a type of load capacity over a given period, does not necessarily have a detrimental effect on the limit level of another type of capacity. for example, increasing the number of mountaineers in a mountainous destination can endanger the plant world and disturb the ecological balance, while ensuring that the quality of visitors' satisfaction is not compromised. however, if the increase in the number of mountaineers continues to increase, the environmental damage will be proportionally increased. in the end, the level of ecological damage will lead to overcoming the level of burden, which will reduce the level of satisfaction of mountaineers in the mountainous destination (holden, 2008). each spatial entity has its specificities, the complexity of ecosystems, different attractions, conflict zones, infrastructure elements, recreational and cultural contents, different number and structure of the population, protected areas, etc. it is also necessary to determine the optimal standards for tourists, their activities and built objects in assessing the carrying capacity. for the planning of tourism destination development, the most useful is the establishment of standards relating to the maximum capacity of a space expressed in units of area per user or in certain cases (such as driving a canoe along the river, biking along the track, walking and hiking along the trail, etc.) in linear units of length per user. for example, when determining the standards for beaches, it is necessary to perform a complete analysis with the evaluation of both the quality of the environment and the quality of the tourist experience. the subjective perceptions of tourists are the biggest problem in the assessment of the carrying capacity, since often the opinions of tourists about quality differ from the attitudes of the local population or tourist organizations and companies (authors group, 2005). the calculation of the carrying capacity based on standard norms has its drawbacks because it starts from the assumption that the tourist space is a homogeneous spatial unit. however, the tourist area is heterogeneous and consists of several spatial units characterized by a different degree of ecological sensitivity, and, therefore, their carrying capacities are different (joviĉić, 2008). consequently, the calculation of the carrying capacities of larger spatial units must be the result or the sum of the individual carrying capacities of the spatial units of a lower hierarchical rank. in other words, general standards are difficult to apply to all parts of the tourist area without respect for their particularity, different purpose and intensity of use. additionally, it should be considered that the spatial distribution of tourists and tourist flows is not even, but tourists mostly concentrate on certain attractive points (šušić, 2017). a special attention is paid to the seasonal character of tourism, so the carrying capacity should be determined in relation to the maximum concentration of demand when the destination is facing the greatest burden. in addition, one of the deficiencies in the calculation of the carrying capacity is that, in particular, the ecological threshold or threshold of the tolerance of the ecological system is omitted; the threshold of tolerance of the local population, as well as the threshold of the tolerance of tourists and their tourist experience. 3.2. concept of limits of acceptable change (lac) due to difficulties related to the quantification and determination of the level of load capacity of tourist area, an alternative approach has been increasingly applied, aiming at identifying potential problems rather than determining the optimal number of tourists in a 324 v. šušić, d.ţ. đorđević destination (wto, unep, 2005). in that sense, "limits of acceptable change" (lac), also known as the limits of acceptable use, have been applied increasingly. the concept of limits of acceptable change, i.e. the lac system, as well as the level of supporting capacity, has its origins in the management of protected areas and planning of recreational activities (mccool, 1996, p. 1). lac "represents a way of managing a destination that enables the identification of specific indicators of quality and impact of tourism on environment, as well as the definition of thresholds for the protection of tourist area" (cab international 2001). this lac system does not determine the number of tourists that can be accommodated in a given space, but it analyzes acceptable ecological, economic and social conditions, as well as overall potential for tourism development in a given destination. the system, therefore, relies on the identification of desired economic, social and ecological conditions of the destination. lac is a nine-step technical process — from identifying issues and problems as the first, to carrying out an action and monitoring the situation as the final step. the most important steps are (wto, unep, 2005, p. 76):  identification of impacts that limit development or use;  identification of usable indicators related to these impacts;  identifying a range of values of these indicators that are considered to be acceptable or unacceptable (based on evidence, professional consultation, etc.).  maintaining monitoring process to ensure that a research remains within the acceptable range.  taking steps to adjust usage control levels without exceeding the limit. thus, the mechanism of lac system encompasses the application of a series of indicators that point to the environmental conditions of a particular area by which we can carry out a standard estimation and determine the rate of change. typically, the indicators should relate to the state of natural resources, economic criteria, and the experience of the local people and tourists in a particular destination. for example: the levels of water and air pollution, as well as the levels of noise can be controlled; furthermore, the percentage of labor force in tourism sector, the rate of crime and traffic accidents associated with tourism, as well as the level of tourist satisfaction can be estimated. these indicators show the impact that tourism has on a particular destination, and on the quality of life of the local population (holden, 2008, p. 191). conclusion the application of the concept of sustainable development in tourism implies the use of a wide range of measures, resources and instruments. in addition to the legislation that defines the legal framework in which tourism entities can operate, there are other means and instruments that determine the upper boundaries of the load/use of the tourist area. the most significant quantitative and qualitative indicators, which consciously and justifiably restrict the use of tourist resources and limit tourism development to the boundary (threshold) that does not jeopardize the surrounding environment and optimal tourism development, are different indicators of sustainable development. choosing and evaluating relevant indicators of sustainable development in tourism is a very demanding process. some aspects of sustainable development of tourism 325 taking into account that tourism is a complex system, there are numerous indicators that determine the opportunities and constraints of tourism development in a particular tourist destination. it should be pointed out that in the estimation of tourism development opportunities in destinations, a wide variety of indicators can be used. these indicators can be divided into four groups: management, economic, socio-cultural and ecological. sustainable development indicators aim to identify the conditions in which sustainable tourism and harmonious social and economic development can be developed within the available ecosystem support capacity and socio-cultural thresholds. the carrying capacity represents a conscious limitation of the level of exploitation of space, i.e. tourism potentials to the border that provides minimal negative ecological, social, economic, psychological and other consequences for the tourist destination. for these reasons, a reasonable restriction on the exploitation of tourism potential is the most effective way of actively protecting the tourist area. although the theoretical concept is clear, due to the different approaches to determining the average standard of the surface belonging to the user of the space, the calculation of the optimal carrying capacity of a particular spatial unit is considerably more difficult. in addition, the calculation of the bearing capacity of the space must be the result or the sum of the individual carrier capacities of the spatial units of the lower hierarchical rank. in other words, in calculating the carrying capacity of the destination, the characteristics, purpose and intensity of the use of its smaller parts must be respected. also, it should be taken into consideration that the spatial distribution of tourists and tourist flows is not even, but tourists mostly concentrate on certain attractive points. in other words, when determining the carrying capacity, one should not rely on unique criteria, but create them for certain parts of the destination. the evolution of the technique of carrying capacity is represented by the concepts of the "acceptable boundary" (lac) and ―environmental impact assessment‖ (eia) concepts. references budeanu, a. 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(2003). tourism and sustainabilitynew tourism in the third world. london and new jork: routledge. sneddon, c., howarth, r.b. & norgaard, r.b. (2006). sustainable development in a post-brundtland world. ecological economics 57, www.elsevier.com/locate/ecoleconit stoddard, j.e., pollard, c.e. & evans, m r. (2012). the triple bottom line: a framework for sustainable tourism development. international journal of hospitality & tourism administration, 13 (3), 233-258. doi: 10.1080/15256480.2012.698173. šušić, v. (2017). turistička geografija [tourism geography]. niš: ekonomski fakultet niš. tanguay, g.a., rajaonson, j. & therrien, m.c. (2011). sustainable tourism indicators: selection criteria for policy implementation and scientific recognition, scientific series. montreal: cirano tourism working group (twg), project number: twg 03 11a, (2013), sustainable development of tourism destinations, asia-pacific economic cooperation, europaxis unep and unwto (2005). making tourism more sustainable. a guide for policy makers. united nations environment programme and world tourism organization. unwto (1996). what managers need to know: a practical guide to the development and use of indicators of sustainable tourism. madrid: unwto. unwto (2004). indicators of sustainable development for tourism destinations: a guidebook. madrid: unwto. united nations environment programme (2011). version -02.11.2011, investing in energy and resource efficiency, world tourism organization. wall, g. & mathison, a. (2006). tourism: change, impacts and opportunities. edinburg: pearson education limited. weawer d. (2006). sustainable tourism: theory and practice. oxford: elsevier ltd. weaver, d. (2010). geopolitical dimensions of sustainable tourism. tourism recreation research, 35 (1), 47–53. neki aspekti odrţivog razvoja turizma u radu se analiziraju osnove koncepta održivog razvoja i ukazuje na optimalan nivo korišćenja prostora u turističke svrhe. pri tome se posebna pažnja poklanja pretežno negativnim uticajima turizma na prostor, odnosno neophodnosti prostornog ograničenja razvoja turizma radi očuvanja i zaštite prirodnih i stvorenih resursa. intenzivan i nekotrolisan razvoj turizma u drugoj polovini xx i početkom xxi veka uticao je na degradaciju životne sredine, uništavanje ekosistema i do različitih društvenih i kulturnih konflikata u turističkom prostoru. iz tih razloga planiranje budućeg razvoja turizma potrebno je, uz korišćenje različitih indikatora, uskladiti sa načelima održivog razvoja. kod izbora indikatora budućeg razvoja moraju se uzimati u obzir određeni kriterijumi, kao što su kriterijum relevantnosti, izvodljivosti (dostupnosti), verodostojnosti i dr. suština korišćenja indikatora je da se utvrdi optimalan broj potencijalnih posetilaca i objekata u turističkom prostoru, a da se pri tome bitnije ne naruši životna sredina, smanji kvalitet doživljaja turista i ne ugrozi osećaj identiteta, stila života i aktivnosti domicilnog stanovništva. kljuĉne reĉi: održivi razvoj, turistički prostor, noseći kapacitet, indikatori, granica prihvatljivih promena facta universitatis series: economics and organization vol. 16, n o 4, 2019, pp. 415 427 https://doi.org/10.22190/fueo1904415v © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the relation between multinational companies and the republic of serbia: income taxation context 1 udc 336.226.14(497.11) stefan vržina, nenad janković university of kragujevac, faculty of economics, the republic of serbia abstract. host countries, especially developing countries, often grant tax incentives in order to attract foreign capital of multinational companies (mncs), expecting positive effects of foreign direct investments on their economic development. also, there is an opinion dominant in the literature that mncs have enough power to achieve considerable tax incentives in negotiations with host country. considering that one mnc was granted considerable tax incentives from the republic of serbia (rs), the paper examines whether subsidiaries of mncs have more favorable tax treatment of recorded income than domestic companies in the rs. statistical analysis outcomes show that subsidiaries of mncs do not have significantly lower income tax burden than domestic companies suggesting that tax incentives granted to mncs from the rs are an exception rather than a rule. in addition, research showed that subsidiaries of mncs primarily use tax incentives that are equally available to domestic companies, such as tax incentives for investment in fixed assets. research results are robust to changes of income tax burden measures. key words: multinational companies, domestic companies, host countries, income tax, tax incentives, the republic of serbia jel classification: f21, f23, h25, h26 introduction in order to attract foreign direct investments (fdis), many countries offer substantial incentives. in particular, this relates to developing and less-developed countries. de mello (1997) lists tax incentives (tax rebates and tax exemptions), financial incentives received june 11, 2019 / revised september 24, 2019 / accepted october 02, 2019 corresponding author: sefan vrţina university of kragujevac, faculty of economics, liceja kneţevnine srbije 3, 34000 kragujevac, serbia e-mail: stefan.vrzina@kg.ac.rs 416 s. vrţina, n. janković (subsidized loans and grants) and non-financial incentives (infrastructure provision) as most important types of incentives. although prior research in developing and less-developed countries (beyer, 2002; cleeve, 2008; klemm & van parys, 2012) only partially finds positive impact of tax incentives on fdis inflow, governments of these countries still offer important tax incentives to foreign investors. in this regard, rajan (2004) points out at “fiscal war” between these countries in pursuit for fdis. multinational companies (mncs) providing important share of fdis with their investments into developing countries rapidly grew in the last few decades (buthe & milner, 2008). the relation between mncs and host countries (countries that attract fdis) may vary from negative and confrontational to positive and cooperative. prior research (sanyal & guvenli, 2000; luo, 2001) finds that cooperative relation between mnc and host country is a significant determinant of mnc performance in host country. motivation for the research is found in special tax incentives granted to the largest subsidiary of mncs in the republic of serbia (rs). it is worth noting that this subsidiary contributed a lot to recovery of serbian automotive industry (kocić et al., 2017). on the other hand, this subsidiary enjoys important tax incentives from the rs. in addition, prior research in this area is scarce since the aggregate data on tax incentives granted from the rs is not publicly available (radenković, 2016, p. 74). research subject of this paper is the relation between mncs and the rs with focus on income tax incentives granted by the rs. income tax is chosen since foreign investors in serbia value income tax incentives more than any other tax incentive (domazet et al., 2018). research objective is to examine whether mncs are granted special income tax incentives by the rs, through comparison of income tax burden of subsidiaries of mncs and domestic companies. for the purposes of this paper, mnc is defined as a company incorporated in one country with subsidiaries in at least two foreign countries, while domestic company is defined as a company owned by individual residents of the rs. income tax burden is measured by two effective income tax rates: current and cash effective income tax rates. in line with defined research subject and objective, the following null and alternative research hypotheses are tested in the paper: h0: mnc subsidiaries do not have lower effective income tax rates than domestic companies in the rs. h1: mnc subsidiaries have lower effective income tax rates than domestic companies in the rs. research contributes to the existing, primarily foreign, research on the relation between mncs and host countries. to authors' knowledge, this is the first research of this type in the rs. research results can be of interest for owners and management of mncs when deciding on investment in the rs, as well as for fiscal policymakers when assessing the fairness of income tax system of the rs. besides introduction and conclusion, the paper consists of three sections. the first section gives an overview on sources of power of mncs that provide them a more powerful position compared to host countries. in the second section, the power of mncs in the rs is analyzed, while research methodology and results are given in the third section. the relation between multinational companies and the republic of serbia: income taxation context 417 1. sources of power of multinational companies mncs have one of the key roles in shaping modern economics. they influence the international trade and government policies worldwide, thus influencing economic development of countries (macleod & lewis, 2004). rondinelli (2002) argues that directors and associations of mncs have a substantial influence on social, economic and environmental policy of many countries. due to their size (as measured by total assets or revenue), mncs are often more powerful than host countries, in particular small and less-developed countries. mncs such as exxonmobil, general electric, general motors, ford, toyota and walmart record annual revenue higher than gross national product (rondinelli, 2002) or public revenue (global justice now, 2016) of most countries. 1 position of mncs is often determined by relative power of mnc and host country. tarzi (1991) lists three basic sources of power of mncs:  a large share of total stock of investment, production and sales in the host country;  domination in key industries of the host country and  monopoly or oligopoly power in highly concentrated industries (e.g. petroleum or chemicals) of the host country. position of mncs is also influenced by relative bargaining power of mnc and host country. ramamurti (2001) argues that both mncs and host countries have many sources of bargaining power since they have many benefits to offer each other. due to advanced technology, product differentiation and large capital, mncs may foster competition and export of the host country. on the other hand, the power of host countries is based on granting access to home market, national resources, local labor and a variety of incentives. important source of mncs power comes from support of the parent country. boddewyn (2016) stresses that many mncs headquartered in emerging countries are state-owned or subsidized. in addition, alden & davies (2006) argue that mncs headquartered in china have a large parent country support (including tax incentives) in order to become key global market players. the power of mncs is larger as they contribute more to the economic development of host country. mncs may be important source of export and export competitiveness of host country, particularly if they are engaged in production (rather than trade or financial) sector of economy (estrin & uvalić, 2016). since mncs may strengthen macroeconomics of the (primarily developing and lessdeveloped) host country, they can negotiate many benefits with the local government. blomstrom et al. (2003) argue that many countries lowered barriers for fdis inflow, expecting higher employment, export and technological development as a result. on the other hand, jensen (2003) concludes that host country citizens often bear substantial costs of incentives granted to mncs. bitzenis et al. (2009) treat taxes as important barrier for investment of mncs into transition economies. in this regard, vogiatzoglou (2018) finds that many eastern european countries have lowered the tax rates to attract foreign investors. due to their 1 it is also possible to find opposite opinion. de grauwe & camerman (2003) use value added instead of total assets or revenue to measure mncs size and compare it to the gdp (a macroeconomic value added measure). measuring the value added as a sum of pre-tax income, labor and depreciation costs, they conclude that mncs are indeed much smaller (i.e. less powerful) than previously argued. 418 s. vrţina, n. janković power, mncs can negotiate additional tax incentives, thus having a lower tax burden than other companies. countries with preferential tax system (tax havens) increase the power of mncs (ruggie, 2018). mncs often invest in host countries through countries with preferential tax system in order to shift income recorded in host country to other countries (parent country or tax haven) with minimal tax paid. on the other hand, mncs may abuse dominant position in host country. mncs often arrange aggressive transfer pricing system (related-party transactions valuation system) to minimize income tax expense. most of the countries are not powerful enough to sanction such mncs behavior – some of the rare examples are penalties paid by glaxosmithkline (gujarathi, 2007) and apple (barrera & bustamante, 2018) following the decisions of united states tax authorities and european commission, respectively. siegfried (1972) developed a theory (known as political power hypothesis) of negative relation between company size and effective tax burden. the theory suggests that larger and more powerful companies are able to lobby national tax authorities to reduce tax expense. larger companies also have more resources to invest in tax advising to avoid taxes. abundant empirical research (guha, 2007; richardson & lanis, 2007; hsieh, 2012) confirmed political power hypothesis, at least partially. 2. power of multinational companies in the republic of serbia as a leading fdi provider, mncs considerably influence economy of the rs. kastratović (2016) argues that fdis may positively influence economic growth and development of the rs, while popov (2010) points out at necessity of fdis to achieve economic stability of the rs. fig. 1 unemployment rate and current account deficit as a percent of gdp in the rs between 2001 and 2017 source: authors; based on world bank (data.worldbank.org/country/serbia) and unctad (unctadstat.unctad.org) data. the relation between multinational companies and the republic of serbia: income taxation context 419 mncs also have an important share in employment of the rs since significant portion of labor is employed in serbian subsidiaries of mncs. boljanović & hadţić (2017) emphasize the importance of fdis for export, export competitiveness and productivity of the rs, while đorđević (2015) argues that mncs may be a solution for unemployment and balance-of-payments deficit problems. however, the impact of fdis on key macroeconomic indicators of the rs is still unclear, partially due to the global economic crisis. figure 1 presents unemployment and current account deficit of the rs between 2001 and 2017, showing that these indicators have not changed considerably. year 2001 is chosen as a starting year since the foreign capital inflows in the rs intensified after 2000 when serbia opened the economy to the world. unemployment rate has been reduced in 2007 and 2008, partially as a result of high fdi inflows in 2006. in addition, unemployment rate continuously declines since 2012. đorđević (2015) argues that fdis did not significantly impact unemployment since they are dominantly realized as privatizations, not greenfield investments. on the other hand, current account deficit in balance-of-payments has been considerably increased in 2007 and 2008, primarily as a result of global economic crisis. it is also worth noting that the rs has surplus in services trade and high deficit in merchandise trade. observing period between 2008 and 2017, business info group (2018) finds 13 subsidiaries of mncs among the 15 largest exporters in the rs. jeremić et al. (2015) find high concentration of serbian export, dominated by a small number of foreign companies. on the other hand, among the 12 largest net exporters in the rs there are only seven mnc subsidiaries, indicating significant import activities of subsidiaries of mncs in the rs. therefore, it is necessary to be careful when assessing impact of mncs on reduction of balance-of-payments deficit. ilić et al. (2018) find that mncs have privatized many serbian companies and increased their competitiveness, efficiency and profitability. mncs had important role in privatization of both real and financial sector companies (kekić, 2005) and also had important share in greenfield investments (domanović & stojadinović jovanović, 2017). global justice now (2016) analyzed revenues of mncs and countries and listed 199 companies with annual revenue higher than public revenue of the rs. in this regard, these companies might be considered as more powerful than the rs. however, it should be noted that many of these companies do not have a subsidiary in the rs. in general, mncs income in the rs has the same tax treatment as income of other companies. statutory income tax rate in the rs is 15% and it can be considered as relatively low. gravelle (2009) argues that mncs management often treats countries with statutory income tax rate lower than 20% as countries with preferential tax system (though assessment of income tax burden should not include only statutory income tax rate, but also the rules for taxable income calculation, tax exemptions, incentives and credits). mncs can also benefit from the investment in the rs through many double tax treaties that the rs signed with other countries. an impact of mncs on the rs can be perceived through example of the largest mnc subsidiary in the rs, operating in automotive industry. two thirds of the subsidiary‟s capital is owned by mnc, while one third belongs to the rs. according to the business info group (2018), it is the largest exporter and net exporter in the rs, thus considerably shaping the rs economy. founded in 2008, the subsidiary negotiated important tax incentives from the rs, disclosed in their annual financial reports: 420 s. vrţina, n. janković a company has a right on different incentives and tax exemptions. some of them include: refund of social contributions paid for each employee, ten-year income tax exemption starting from the first year in which taxable income is recorded, exemption of local taxes (property tax, urban plan implementation tax, trademark presentation tax etc.) regarding income tax, this subsidiary makes significant tax savings. table 1 presents income statement part related to income tax of this subsidiary, based on the business registers agency of the rs (www.apr.gov.rs) data. table 1 income statement part related to income tax of the studied subsidiary between 2010 and 2017 position amount (in 000 serbian dinars) 2010 2011 2012 2013 pre-tax income 548,137 -5,698,875 -1,863,164 1,166,176 current income tax expense 0 0 0 0 deferred income tax expense (revenue) (7,428) (14,451) (1,640,802) 34,875 net income 555,565 -5,684,424 -222,362 1,131,301 position amount (in 000 serbian dinars) 2014 2015 2016 2017 pre-tax income 2,346,403 2,352,261 2,105,405 2,295,657 current income tax expense 0 0 0 0 deferred income tax expense (revenue) (118,955) (31,379) (17,297) 164,379 net income 2,465,358 2,383,640 2,122,702 2,131,278 source: authors; based on the business registers agency of the rs (www.apr.gov.rs) data. despite substantial tax incentives granted to studied subsidiary, it should be noted that the rs was not the only balkan investment option for this mnc (trifunović et al., 2009). as a result, estrin & uvalić (2016) argue that such incentives were necessary to motivate this investor to invest in the rs, indicating that the investment without incentives was not the most profitable option for foreign investor. 3. empirical research 3.1. research methodology and sample development empirical research is conducted on the basis of financial data of 100 companies: 50 subsidiaries of mncs and 50 domestic companies. research captured the period between 2014 and 2017. in order to test sensitivity of the research results, two income tax burden measures are used – current effective income tax rate (etr1) and cash effective income tax rate (etr2). according to global justice now (2016) data, there are 20 sampled subsidiaries of mncs whose annual revenue is higher than public revenue of the rs. additional 11 subsidiaries are sampled from the business info group (2018) lists: a hundred companies with the highest operating revenue and a hundred companies with the highest net income in the rs between 2008 and 2017. the remaining 19 companies are randomly selected. on the other hand, a sample comprises 31 domestic companies appearing in two mentioned business info group (2018) lists. the remaining 19 companies are randomly selected. in the relation between multinational companies and the republic of serbia: income taxation context 421 order to ensure reliability of the data, only companies with audited statutory financial reports for 2017 are sampled. as of 1 st january 2019, 14 sampled subsidiaries are directly owned by dutch entities of mncs. since the netherlands are considered as the largest conduit country in profit shifting to tax havens (weyzig, 2013), the research supports ruggie (2018) arguing that mncs tend to organize their foreign investments through entities in such countries. sampling 100 companies across four-year period, an initial sample comprises 400 observations. however, there are 34 observations withdrawn due to pre-tax loss in order to avoid negative effective income tax rates. therefore, final sample comprises 366 observations. financial data used in the research have been retrieved from statutory financial reports published on the website of the business registers agency of the rs (www.apr.gov.rs). statistical data processing has been conducted in spss (statistical package for social sciences) and eviews. regarding statistical methods, tests of equality of independent groups are conducted in the paper. in order to control the impact of other company-specific variables, multiple regression analysis is also conducted. through regression analysis, the impact of ownership type (mnc ownership or domestic ownership, own) on effective income tax rates (etr1 and etr2) is examined. in line with prior research (guha, 2007; richardson & lanis, 2007; hsieh, 2012), the following control variables are used in the paper: size (size), leverage (lev), profitability (prof) and capital intensity (capit) of companies. definitions of employed variables are given in table 2. table 2 variables definition variable label formula etr1 (current income tax expense / pre-tax income) х 100 etr2 (income tax paid / pre-tax income) х 100 own 0 if mnc ownership; 1 if domestic ownership size natural logarithm of total assets (in 000 serbian dinars) lev total liabilities / total assets prof (pre-tax income / total assets) х 100 capit fixed assets / total assets in line with defined variables, it is possible to formulate the following regression model: etri,t = α + β1owni,t + β2sizei,t + β3levi,t + β4profi,t + β5capiti,t + εi,t (1) where etr refers to etr1 and etr2. 3.2. research results 3.2.1. descriptive statistics table 3 shows descriptive statistics. on the average, effective income tax rates are lower than statutory income tax rate of 15%, though with some three-digit extreme values. lev is in eight observations (each refers to subsidiaries of mncs) higher than one, indicating losses above owners‟ capital. it is interesting to note that two observations with highest prof regard the same company engaged in betting industry. 422 s. vrţina, n. janković table 3 descriptive statistics variable mean minimum median maximum standard deviation panel a. descriptive statistics at the whole sample level etr1 12.183% 0.000% 11.786% 113.076% 12.278% etr2 14.874% 0.000% 9.628% 405.458% 29.623% own value 0 – 171 observations; value 1 – 195 observations size 15.152 12.022 15.094 19.807 1.245 lev 0.521 0.053 0.526 4.353 0.338 prof 10.254% 0.024% 8.080% 83.330% 10.185% capit 0.394 0.004 0.399 0.823 0.227 panel b. etr1 by the ownership type mnc subsidiaries 12.970% 0.000% 11.628% 113.076% 15.656% domestic companies 11.493% 0.000% 11.839% 68.426% 8.235% panel c. etr2 by the ownership type mnc subsidiaries 16.677% 0.000% 4.694% 405.458% 40.488% domestic companies 13.292% 0.000% 11.567% 103.647% 14.462% regarding etr1 and etr2, mean and median offer different conclusions. mean results indicate that subsidiaries of mncs have higher income tax burden, supporting the null hypothesis. however, median results indicate opposite results, supporting the alternative hypothesis. it is interesting to note that there are three subsidiaries of mncs and two domestic companies having a null current income tax expense despite recorded pre-tax income in each observed year. one of the subsidiaries, already mentioned in the second section of the paper, has special tax exemptions though it has a right to use investment tax incentive. other two subsidiaries use foreign dividend tax credit and investment tax incentive. two domestic companies also use investment tax incentive to lower their etr1 to 0%. 3.2.2. statistical tests table 4 shows the results of independent samples t-tests examining significance of difference between subsidiaries of mncs and domestic companies in etr1 and etr2. table 4 results of independent samples t-tests levene‟s test for equality of variances t-test for equality of means f sig. t df sig. (2-tailed) etr1 equal variances assumed 23.864 0.000 1.149 364 0.251 equal variances not assumed 1.107 249.614 0.269 etr2 equal variances assumed 14.267 0.000 1.091 364 0.276 equal variances not assumed 1.037 207.888 0.301 although subsidiaries of mncs have higher mean etr1 and etr2, and lower median etr1 and etr2, independent samples t-tests suggest that these differences are not statistically significant. since levene‟s test p-value is 0.000, it is more appropriate to rely on “equal variances not assumed” results. the relation between multinational companies and the republic of serbia: income taxation context 423 it should be noted that independent samples t-tests examine only the impact of ownership type on effective income tax rates without accounting for potential impact of other variables that influence effective income tax rates. therefore, multiple regression analysis is employed in order to control the impact of ownership type on effective income tax rates for variability in company size, leverage, profitability and capital intensity. 3.2.3. correlation analysis table 5 shows correlation matrix with pearson‟s coefficients reported. results show that effective income tax rates are strongly positively correlated, while ownership type does not exhibit significant correlation with either etr1 or etr2. table 5 pearson‟s correlation matrix etr1 etr2 own size lev prof capit etr1 1.000 etr2 *** 0.733 1.000 own -0.060 -0.057 1.000 size *** -0.331 *** -0.176 0.054 1.000 lev 0.010 -0.041 ** -0.126 ** -0.107 1.000 prof * -0.095 *** -0.141 -0.036 * -0.101 *** -0.147 1.000 capit *** -0.397 *** -0.208 *** 0.210 *** -0.382 *** -0.143 -0.066 1.000 note: statistically significant at 10% ( * ), 5% ( ** ) and 1% ( *** ) level. capital intensity is a variable that has the strongest correlation with both etr1 and etr2, though this correlation is only of medium magnitude. on the other hand, there is no strong correlation among independent variables, so multicollinearity problems are not expected. 3.2.4. regression analysis table 6 shows multiple regression estimates. since two effective income tax rate measures are used, there are two regression models to be reported. table reports ordinary table 6 regression analysis estimates dependent: etr1 dependent: etr2 ols random-effects ols random-effects intercept *** 56.743 (7.527) *** 58.245 (5.556) *** 85.181 (4.342) *** 86.250 (4.086) own 0.155 (0.132) 0.530 (0.315) -1.977 (-0.646) -1.828 (-0.553) size *** -2.249 (-4.502) *** -2.241 (-3.229) ** -3.265 (-2.511) ** -3.280 (-2.344) lev * -3.031 (-1.737) ** -4.084 (-2.016) ** -9.901 (-2.180) ** -9.992 (-2.146) prof *** -0.183 (-3.195) *** -0.297 (-4.564) *** -0.538 (-3.611) *** -0.614 (-3.973) capit *** -18.023 (-6.449) *** -18.721 (-4.893) *** -23.104 (-3.177) *** -23.529 (-3.014) adjusted r 2 0.210 0.140 0.081 0.075 f-value *** 20.431 *** 12.849 *** 7.450 *** 6.930 note: beta coefficients in front of the parentheses, t-statistics in the parentheses; statistically significant at 10% ( * ), 5% ( ** ) and 1% ( *** ) level. 424 s. vrţina, n. janković least squares (ols) and random-effects panel regression estimates. breusch-pagan lagrange multiplier tests suggest that random-effects (ols) analysis is more appropriate in first (second) reported model. results of these tests are reported in table 7. it should also be noted that fixed-effects regression method cannot be employed in this research due to the near singular matrix problem since each company has the same own value (0 or 1) in each observed year. therefore, hausman test is not conducted. table 7 breusch-pagan lagrange multiplier tests dependent variable cross-section test hypothesis time both etr1 65.583 (0.000) 1.431 (0.232) 67.014 (0.000) etr2 2.137 (0.144) 0.966 (0.326) 3.104 (0.078) note: p-values in parentheses. according to the adjusted r 2 values, presented models poorly explain variations of etr1 and etr2. ols and random-effects regression estimates are highly consistent. they support the independent samples t-tests findings indicating that there is no significant difference between subsidiaries of mncs and domestic companies in either etr1 or etr2. own is the only variable insignificant in any regression model. regression results are robust to change of effective income tax rate measure. it is necessary to point out that effective income tax rates of mnc subsidiaries may be lowered due to different tax incentives, not only the special tax incentives granted to them. for example, income tax burden can be considerably reduced using tax losses carryforward as tax losses can be carried forward in five-year period. in addition, the rs offers tax incentive for investment in fixed assets in ten-year period. transfer pricing and tax consolidation rules enable further reduction of effective income tax rates. among other independent variables, larger companies have both etr1 and etr2 lower, supporting political power hypothesis. more leveraged companies also have lower effective income tax rates. in addition, more profitable companies have lower income tax burden as they have more resources to invest in tax avoidance activities. companies with higher share of fixed assets in total assets have lower income tax burden that can be partially explained with investment tax incentives. on the one hand, it is known that one mnc was granted important tax incentives from the rs but, on the other hand, there is no significant difference in either etr1 or etr2 between subsidiaries of mncs and domestic companies. therefore, the research suggests that special income tax incentives granted to mncs from the serbian government are rarity, rather than a rule. it is indicative that such incentives are given only to foreign investors of strategic importance for economic development of the rs. developing countries often treat automotive industry as a key factor of economic and technological development (jan & hsiao, 2004). in addition, automotive industry significantly contributes to the gross domestic product and employment, particularly in industrial countries (irandoust, 1999). therefore, it is not surprising that an automotive industry mnc has been given special tax incentives in the rs. absence of special tax incentives does not mean that mncs do not enjoy other types of incentives in the rs. for example, the rs made considerable financial incentives (i.e. the relation between multinational companies and the republic of serbia: income taxation context 425 grants) available to attract foreign capital. these financial incentives are regulated by special legal act – regulation on determining the criteria for granting the incentives with a view to attract foreign direct investment (the official gazette of the rs, no. 1/2019). 4. conclusion research in this paper captured 50 subsidiaries of mncs and 50 domestic companies to examine whether mncs enjoy special tax incentives granted from the rs, i.e. whether mncs have more favorable income tax treatment than other companies in the rs. in this regard, two effective income tax rate measures are used: etr1 (current effective income tax rate) and etr2 (cash effective income tax rate). in general, research results indicate that subsidiaries of mncs do not have preferential income tax treatment. results are robust to change in effective income tax rate measure. etr1 and etr2 mean results indicate that subsidiaries have higher income tax burden, while etr1 and etr2 median results suggest the opposite. however, these differences are not statistically significant. it can be concluded that special tax incentives given to mncs are rarity, rather than a rule. they are granted only to foreign investors of strategic importance for the rs economy, such as an automotive mnc analyzed in the second section of the paper. in addition, it is noticeable that subsidiaries of mncs in the rs lower their income tax burden with mechanisms that are also available to domestic companies, such as investment tax incentive. therefore, there is not enough evidence to reject null research hypothesis. research results have certain limitations. it is possible that results would be different if sample size or sampling period were changed. as there are important cross-country differences in tax systems and attitudes on fdis importance, research results might be different in other countries. it is also necessary to point out that mncs can avoid taxes through related-party transactions, not only through the host country support. employed effective income tax rates do not capture effects of tax avoidance through such transactions. future research should include more companies and more host countries, primarily in south eastern europe, in order to compare results. also, future research should tend to find additional determinants of effective income tax rates since employed independent variables poorly explain variations of effective income tax rates. future research should also include 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(2013). tax treaty shopping: structural determinants of foreign direct investment routed through the netherlands. international tax and public finance, 20 (6), 910-937, doi: 10.1007/s10797012-9250-z odnos multinacionalnih kompanija i republike srbije: kontekst poreza na dobitak zemlje domaćini, posebno zemlje u razvoju, neretko obezbeđuju poreske podsticaje kako bi privukle strani kapital multinacionalnih kompanija (mnk), očekujući pozitivne efekte stranih direktnih investicija na ekonomski razvoj zemlje. takođe, u literaturi je dominirajuće mišljenje da mnk imaju dovoljno moći da, u pregovorima sa zemljom domaćinom, ostvare značajne poreske podsticaje. s obzirom na to da je jedna mnk dobila značajne poreske podsticaje od republike srbije (rs), u radu je ispitano da li filijale mnk imaju povoljniji poreski tretman dobitka u odnosu na domaće kompanije u rs. rezultati statističke analize pokazuju da filijale mnk nemaju značajno niže opterećenje porezom na dobitak u odnosu na domaće kompanije, sugerišući da su poreski podsticaji koje dobijaju mnk od rs pre izuzetak, nego pravilo. istraživanje je, takođe, pokazalo da filijale mnk primarno koriste poreske podsticaje koji su podjednako dostupni i domaćim kompanijama, kao što su poreski podsticaji po osnovu ulaganja u osnovna sredstva. rezultati istraživanja su robusni na promene merila opterećenja porezom na dobitak. ključne reči: multinacionalne kompanije, domaće kompanije, zemlje domaćini, porez na dobitak, poreski podsticaji, srbija. facta universitatis series: economics and organization vol. 16, n o 3, 2019, pp. 239 254 https://doi.org/10.22190/fueo1903239d © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper improving performance of vat system in developing eu countries: estimating the determinants of the ratio c-efficiency in the period 1997-2017 1 udc 336.226.322 marina đorđević, jadranka đurović todorović, milica ristić* university of niš, faculty of economics, niš, serbia abstract. indirect taxes have a significant place in developing eu countries’ tax systems. the article sums up works by different scientists, dealing with the impact of vat efficiency determinants. the purpose of this study is to investigate the determinants of vat collection efficiency in the eu developing countries. the study relies on relevant data in transparent international statistical databases, covering the period from 1997 to 2017. the main research question in this paper is: does rise in value added tax rate negatively affect vat collection efficiency in the eu developing countries. accordingly, one of the independent variables included in the survey is standard annual vat rate. in addition to standard vat rate, as a determinant of vat collection efficiency, we analyze: economic growth rate, export of goods, export of services, wages and salaries, household consumption. the hypotheses set are analyzed using correlation and regression analyses. empirical results show a positive effect of economic growth rate, export of goods, and the negative effect of two variables: standard vat rate and household consumption. the two observed variables, export of services and wages and salaries, do not show a statistically significant effect. the results obtained using appropriate statistical tools serve as guidelines to macroeconomic policy makers to generate higher tax revenues from vat. by analyzing the c-efficiency determinant, we design a relevant development strategy approach for economically underdeveloped eu countries. key words: value-added tax (vat), performance of vat, c-efficiency ratio, developing countries jel classification: h2, h21, o52 received april 24, 2019 / accepted june 17, 2019 * phd student at university of niš, faculty of economics, serbia corresponding author: marina đorđević university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: marina.dj@ptt.rs 240 m. đorđević, j. đurović todorović, m. ristić introduction value added tax is, according to many theorists, the most important tax revenue in developing countries (bird, 1987; cnossen, 1988; gilbert, 1995; alan, 1999; ebrill et al., 2002; minh le, 2003; emran & stiglitz, 2004; grandcolas, 2005; hillman, 2009; keen, 2013; đurović todorović, đorđević & ristić, 2019; bikas & anduskaite, 2013; izedonmi & okunbor, 2014; hajdúchová, sedliačiková & viszlai 2015; andrejovská & mihoková, 2015). a well-known british economist, owens (2011), states that value added tax (vat) today “accounts for one-fifth of the total tax revenue”. apodictically, vat is a tax whose lucrative character has led to its application in more than 150 countries around the world. research shows that vat is the most profitable tax form in developing countries (đurović todorović, đorđević & ristić, 2019, p. 234), and, for this reason, the importance of vat is highlighted in these countries’ tax systems. developing countries can collect significantly higher tax revenues by indirect taxes, compared to direct taxes. restrictions on the financing of public spending by direct taxes correspond to the level of their development. however, it often happens that developing countries do not collect sufficient funds by indirect taxes either. this is mainly the result of global economic and financial crises, which in most cases end with fiscal implications. in order to cover their fiscal deficits, developing countries either turn to borrowing or increase tax rates. the lack of tax revenues can also be noticed in situations where “the government does not redistribute tax revenue and when it has to increase revenues to finance public goods” (stiglitz, 2002, p. 484). as vat has the largest share in indirect taxes, developing countries provide for their goods by increasing standard vat rate. “increasing standard vat rate was one of the basic ways to tackle the problem of insufficient public revenues recorded before the 2008 crisis” (keen, 2013, p. 423). therefore, both developed and developing countries increased their standard vat rate. most of the countries did not see alternative ways to increase vat revenues. the captious question that arose in academic circles was: is rise in standard vat rate the most effective solution to generate higher tax revenues? the polygon for these surveys was mainly found in developing countries, and the responses, which resulted from empirical research, were generally negative. increasing standard rate is the simplest solution, but it is not feasible in all circumstances. increased standard rates in developing countries, which already have the highest rates, trigger the problem of tax avoidance and rising tax evasion. this list of negative effects resulting from high vat rates does not end here in countries where this is the main source of revenue. rise in tax evasion creates an unfavorable business environment, as well as a field for gray economy. a more efficient option to increase vat revenue is to improve vat performance. “improving performance involves expansion of the tax base, limited use of reduced rates and exemptions, more productive tax administration, better compliance of legislation and practice” (owens, 2011a, p. 8). in order to ensure optimum tax revenues, vat performance, i.e. vat collection efficiency, is the subject of numerous theoretical, empirical, and experimental studies today. given that economic development of underdeveloped countries is determined by a welldesigned vat system, it is very important that vat collection efficiency is at a satisfactory level. “the development of tools that explain the differences in vat performance has over the past few years received considerable practical attention. the need for conceptual development of these tools is the result of a tendency to increase vat revenues without compromising other policy objectives” (keen, 2013a). the aim of this paper is to improving performance of vat system in developing eu countries... 241 investigate factors that influence vat collection efficiency, which will be one of the options for increasing tax revenues. the starting point is the fact that studies dealing with vat collection efficiency factors are scarce. we focus on the underdeveloped countries of the european union, because these countries “experienced significant government changes during economic transformation” (bayar, 2016, p. 6). the main objective of this study is to investigate factors that influenced vat collection efficiency during the period 1997-2017. we focus on greece and hungary, which were among the first countries to introduce the vat system in the 1980s, then estonia, slovakia, the czech republic, poland, romania, and bulgaria, countries that introduced the vat to join the eu in the 1990s, as well as latvia, lithuania, and slovenia, which have recently incorporated vat. in particular, we want to answer the following questions. first, which empirical link exists between analyzed independent variables, gdp growth rate, standard vat rate, export of goods, export of services, wages and salaries, household consumption, and vat collection efficiency in underdeveloped eu countries? what factors determine vat collection efficiency and the way to generate higher tax revenues? we also want to show negative effects of higher standard rates on vat collection efficiency. section ii provides an overview of existing literature on determinants of vat collection efficiency. section three presents empirical methodology and model evaluation. finally, section iv gives conclusion. 1. factors affecting vat collection efficiency: literature review consumption taxes, especially value added tax, first gained academic attention in 1980s. numerous studies speak of the role of value added tax and its obvious administrative advantages in national development (bird, 1987). however, despite the importance of increasing the revenue coming from this form of taxation, studies on the factors that determine vat collection efficiency are scarce. “the importance of value added tax in the economy is recognized, but this tax form is mainly analyzed only in terms of tax rate, tax relief, and tax threshold” (bikas & andruskiate, 2013, p. 41). some authors emphasize the great impact of vat collection efficiency on revenue collection (keen & lockwood, 2010), but, at the same time, there is a relatively small number of empirical studies that examine determinants of vat collection efficiency. the first theorists who investigated vat collection efficiency were agha and haughton (1996). the purpose of their study was to, through a cross-country analysis, investigate determinants that affect vat compliance. they pay special attention to multiple tax rates, as well as to high tax rates. observing the example of the oecd countries, using the 1987 data, the authors note that vat collection efficiency is determined by standard rate level, number of rates, administration, and the period of vat application in a country. vat collection efficiency would be enhanced by a lower standard vat rate, smaller number of tax rates, longer application period, and better tax administration. bogetić and hassan (1993) investigate the basic determinants of vat revenue, analyzing the statistics of 34 countries. their research involves 20 countries with a single rate and 14 countries using multiple rates. theorists, among other things, give an answer to the question whether there is a statistically significant difference in vat performance between countries with a single vat rate and countries with a multiple vat rate. the results of their regression model show that key variables that affect the performance of vat revenue are: rate, tax base, and rate dispersion. the determinant, whose character 242 m. đorđević, j. đurović todorović, m. ristić the authors emphasize, is vat rate. according to their estimator model, countries with tax systems involving a single vat rate may have higher vat revenues. they point out that their results are crucial in creating a tax policy in developing countries planning to introduce a single tax rate in their tax systems. agha and haughton (1996a) analyze vat collection efficiency determinants, using the 1987 statistics of 17 oecd countries. the authors conceive the index of compliance, regressed against determinants. they pay particular attention to what happens if the country introduces multiple rates, as well as to the effects of high vat rates. the results of the regression analysis show that efficiency can be improved with a lower vat rate, fewer rates, smaller population, more learning time, and greater spending on administration. ebrill et al. (2002) investigate the basic factors behind the relatively high level of cefficiency and conclude that a high level of trade share, high literacy rates, and the time period of vat application are crucial for vat revenues. aizenman and jinjarak (2005) investigate the connection between several factors and vat collection efficiency. they base their research on statistical data in the 1970-1999 period. the survey covers the statistics of 44 countries and uses panel regression. the analysis includes estonia, greece, hungary, and poland. the authors examine the following explanatory variables: real gdp per capita, share of agriculture, trade development and level of urbanization, measures of political instability and the degree of political regulation. the estimator models their research uses are the fixed effects model and the ols model. they find a strong link between trade development, political regime sustainability, and vat collection efficiency. hybka (2009) analyzes the relationship between vat collection efficiency and estimated factors in the european union countries, with focus on poland. the author points out that polish vat collection efficiency is influenced by changes in terms of vat system harmonization with the eu, economic growth rate trends, and changes in domestic demand. in poland, hybka concludes, vat collection efficiency is also influenced by standard rate level. based on the vat structure in lithuania, bikas and rashkauskas (2011) investigate factors that affect vat collection efficiency. their analysis, based on quarterly statistical data, encompasses the period 1995-2009 and contains the appropriate regression model. independent variables included in the model are: standard vat rate, difference between standard vat rate and reduced vat rate (excluding zero rate), and unemployment. the results of regression analysis show a positive and statistically significant effect of standard rate as well as the difference between standard rate and reduced vat rate on vat collection efficiency. also, the results show a negative and statistically significant effect of unemployment on vat collection efficiency. đurović todorovic and đorđević (2013), based on the 2009 c-efficiency analysis in 14 countries, conclude that the average value of the c-efficiency ratio depends on the reduced rates, exemptions, level of tax evasion, and inefficient tax administration. tagkalakis (2014) analyzes factors that influence vat collection efficiency in greece. he focuses on vat collection efficiency determinants using quarterly data on vat revenue, private consumption, and gdp (2000: q1-2012: q3). in addition, the regression model includes the following dummy variables: elections in greece and situation after implementing measures to improve administration revenues and combat tax evasion, which greece had to implement during the eu-imf monitoring (since may 2010). the main goal is to investigate vat collection efficiency in good and bad economic conditions. the dependent variable, cefficiency ratio, is expressed by the following equation: vat consumption c efficiency = improving performance of vat system in developing eu countries... 243 (vat revenue / private consumption) / standard tax rate * 100. the results of the regression analysis carried out using ols technique show a positive and statistically significant relationship between the analyzed variables. the author finds that the growth of real gdp growth rate by 1% increases vat collection efficiency on average by 0.63 percentage points. the author concludes that when there are poor economic conditions in the country, vat collection efficiency is at a much lower level. additionally, research points to another factor that can reduce vat collection efficiency, namely the ability to combat tax evasion. deterioration in these abilities in one country implicitly reduces vat collection efficiency. sancak et al. (2010) carry out a panel data analysis of vat c-efficiency determinants, using data from the eu countries in the period 1995-2008. they divide their analysis into three data sets, including, among others, the countries whose estimator model we are exploring. the first data set contains annual data on 32 eu countries during the period 1995-2008; the second data set consists of the annual data of 84 developed and developing countries and encompasses the same time period; the third data set includes quarterly data on 37 developed and developing countries during the period 1999-2009. using correlation and regression analysis, they find a strong positive correlation between revenue and output gap. the results of their regression analysis show that “shifts in consumption patterns towards goods and services with lower vat rates and higher tax evasion during economic expansions are key channels through which the output gap affects vat c-efficiency”. during the period of expansion, households tend to get the goods they need, and these goods are in most economies taxed at minimum rates or are not taxed. a good example is the baltic countries, estonia, latvia, and lithuania, which faced the biggest impact of the global economic crisis. they also find that vat c-efficiency is positively correlated with institutionally regulated administration and is in a negative correlation with the overall tax burden in one economy. sokolovska and sokolovskyi (2015) study vat collection efficiency, analyzing tax collection efficiency around the world. they investigate the dependence between cefficiency and the level of gray economy and corruption in countries. numerous studies point to basic factors that affect vat collection efficiency, excluding the group of countries studied in this paper. antić (2014) investigates vat efficiency in bosnia and herzegovina. bosnia and herzegovina is also a developing country that faced a sharp decline in vat collection efficiency at the onset of the global economic crisis. since this developing country had high c-efficiency, the decline in this ratio during periods of crisis has raised many questions in academic circles. the author decomposes c-efficiency in bosnia and herzegovina to prove that the vat design cannot provide a high level of vat collection efficiency. the research results show that deviations from the vat law, debt growth, and tax evasion have the biggest impact on gap growth. analogously, the author concludes that high vat rates deepen the crisis and cannot improve vat collection. hodzic and celebi (2017) investigate vat collection efficiency in 28 eu countries, with a particular focus on turkey during the 2009-2013 period, giving a comparative picture of cefficiency in turkey and other eu countries. based on the vat revenues in various countries and different levels of c-efficiency, they conclude that turkey needs greater stability and efficiency of the vat collection system. grandcolas (2005) analyzes cefficiency in 15 pacific countries (papua new guinea, jamaica, trinidad, mauritius, fiji, cyprus, malta, iceland, barbados, vanuatu, samoa, tonga, cook islands, niue). the author presents c-efficiency ratio as a share of vat revenues in gdp to standard rate. the author includes a c-efficiency ratio in his study to explore the experience of countries that 244 m. đorđević, j. đurović todorović, m. ristić abandoned the vat system. a special research focus is on malta, grenada, and ghana. he concludes that the vat system works if there is a strong obligation of political authorities and a detailed plan and resources for vat implementation. bird and gendron (2006) investigate vat collection efficiency in 24 countries (argentina, barbados, bolivia, brazil, canada, chile, colombia, costa rica, dominican republic, ecuador, el salvador, guatemala, haiti, honduras, jamaica, mexico, nicaragua, panama, paraguay, peru, suriname, trinidad and tobago, uruguay, venezuela), assessing c-efficiency as the most reliable indicator of vat collection efficiency. the most important explanatory variables that influence vat collection efficiency are, according to these authors, urbanization and real gdp per capita. finally, we also pay attention to the latest research in this field. sarmento (2016) investigates the crucial factors that affect vat revenue. in this way, the author highlights the importance of vat collection efficiency. his research relies on panel data analysis of 27 countries, in the timeframe 1998-2011. sermento explores the countries of the european union and finds that eu governments in most cases rely on increasing tax rates in order to raise a higher amount of tax revenues. the author divides all independent variables into several groups: 1) vat rates, 2) economic variables, 3) efficiency of administration, using the c-efficiency ratio, 4) legal and institutional environment. the research results show that the efficiency of tax administration (the c-efficiency ratio) is a key determinant in collecting vat revenues. ueda (2017) analyzes japan in addition to eu countries. ueda explores the impact of compliance and policy gaps following the example of the eu and japan over the period 2000-2014, and finds strong causality of both gaps, compliance gap and policy gap. the focus of this study is on the fluctuations of c-efficiency, resulting from changes in final consumption and standard rate. 2. c-efficiency ratio as an indicator of vat efficiency there are several indicators of vat collection efficiency. a retrospective presentation of vat collection efficiency formula is found in a survey conducted by sokolovska and sokolovskyi (2015a). the authors sum up all previous studies of the relevant vat collection efficiency indicator. đurović todorović and đorđević (2013a) also point to some of the measures of vat collection efficiency. one of the ways in which vat collection efficiency can be considered is based on the share of vat revenue in the gdp of a country. however, this indicator does not show if vat collection efficiency is unsatisfactory. the more subtle indicator is the traditional efficiency measure. the traditional measure of vat collection efficiency, efficiency ratio, is presented in the following formula. (1) where vat revenue is tax revenue generated from vat; gdp – gross domestic product; sr – standard vat rate. ebrill et al. (2002a) point to the shortcomings of this indicator. in their opinion, traditional efficiency measure tends to increase vat collection efficiency in one country. the main disadvantage of the “traditional” indicator is in the numerator. vat collection efficiency can be increased, because numerator includes production, while vat is a tax form that explicitly applies to consumption. improving performance of vat system in developing eu countries... 245 a significant diagnostic tool, which will include only consumption in the numerator, instead of production, is a c-efficiency ratio. the basic formula to calculate c-efficiency, according to keen (2013b), can be presented as follows: (2) numerator v represents realized vat revenues; while can be calculated as follows: ( ) (3) represents theoretical vat revenue; is a standard vat rate2; fc represents final consumption (keen 2013c, p. 427). 3 “this ratio measures the difference between the actually collected revenue and the amount of vat revenues that could theoretically be collected if the standard rate was applied to the entire tax base” (đurović todorović & đorđević, 2013b, p. 92). if vat gap is higher, this indicates that the potential of this tax form is unused. however, in spite of the authors’ consent that this ratio is a relevant indicator of efficiency, the ratio analysis must contain a certain level of reserve. sancak et al. (2010a) find that deterioration (improvement) of ratio is often conditioned by changes in consumption patterns or changes in tax evasion during expansion. consequently, it is necessary, in the course of the crisis, to include effects of capital consequences in the analyses. sokolovska and sokolovsky (2015b) also speak about the negative link between tax evasion and this ratio, suggesting that a large part of the evaded revenues is used for consumption, which ultimately reflects on this ratio. with a certain level of reserve, and taking into consideration c-efficiency defects that are difficult to measure, we will explore factors that determine vat collection efficiency based on c-efficiency. 2.1. measurement of c-efficiency ratio in eu developing countries the european idea of greater economic integration got a new concept on may 1, 2004, when 8 former centrally planned economies from central and eastern europe – the czech republic, poland, hungary, slovakia, slovenia, lithuania, latvia, and estonia – become members of the european union (njegić et al., 2017). the vat implementation in the eu’s developing countries is related to their simplified tax systems” (andrejovska & mihokova, 2015, p. 488). such reforms have made it possible for developing countries to open their economies. in previous years, vat has become the basic source of revenue in all eu member states (european commission, 2019). “according to various analyses, vat is the best form of consumption tax” (bird & gendron, 2006a, p. 2). as such, vat has, over the past twenty years, reached “share in total tax revenues of almost 65%” (owens, 2011b, p. 8). however, one captious question that arises here is whether the vat system is well designed in all countries where the vat is implemented, i.e. whether the vat collection efficiency is at a satisfactory level. the following graph shows the trend of c-efficiency in the period 1997-2017 in the observed developing countries of the eu. 2 in our study, the annual vat standard rate of each country is used in the calculation of vat. 3 according to keen (2013), final consumption involves: consumption by households, the government, and nonprofit serving households (npish). 246 m. đorđević, j. đurović todorović, m. ristić fig. 1. the c-efficiency trend in the observed countries in the period 1997-2017 source: eurostat; european commission; own calculations. “empirical studies show the connection between vat collection efficiency in one country and the level of its development” (minh le, 2003, p. 2). based on the trends of the relevant indicator, vat collection efficiency in developing countries is different. the highest vat collection efficiency in the last analyzed year is in croatia (0.80) and the lowest in greece (0.41). croatia has recorded growth in c-efficiency over the past few years, which is in line with the country’s gdp growth rate in the same period. at the same time, a country that is famous for the negative gdp growth rates and the growing public debt is undoubtedly greece. judging by such circumstances in the country, a logical conclusion is the low value of c-efficiency ratio. in bulgaria, one can notice a very cyclical trend of c-efficiency ratio. if we look at bulgaria’s tax policy, tax rate changes can be one of the important factors of these cyclical trends (european commission, 2019). the growth trend of the efficiency indicator in the czech republic can also be observed in line with the standard vat rate trend. in the years that followed the reduction in the rate, the c-efficiency ratio showed positive discrepancy. large cyclical changes can be seen in romania and hungary, which may be associated with frequent changes in the standard and reduced vat rates in these countries. in addition, the global economic crisis of 2008 left the consequences on fiscal and financial stability in romania (oprea, 2013, pp. 176-177; popa, 2014). a sharp fall in c-efficiency can, therefore, be related to the consequences described in oprea et al. (2013a). improving performance of vat system in developing eu countries... 247 when it comes to lithuania, vat revenue has been falling since 2001. the reason for the reduction of vat revenues in the national budget of lithuania can be explained by the situation at that time, and is related to the harmonization of taxes, in accordance with eu legal acts. harmonization implied changes in vat rates (tariff), and “vat revenues largely depend on the number of taxes applied, the amount, and the tax base to which the reduced rates are applied” (bikas, 2011). period from 2004-2008 is considered to be a period of economic growth in lithuania, when consumption grew, and so did the value of c-efficiency (bikas, 2011a). “estonia, latvia, and lithuania are the countries that experienced the greatest impact of the global economic crisis during 2008-09” (sancak et al., 2010b, p.4), and what explicitly followed in these countries was the fall in vat collection efficiency. vat collection efficiency in poland was the highest in 2007, which is in line with the growth of poland’s gdp. when it comes to slovenia, we note that the c-efficiency ratio in 2009 was significantly lower than in the previously analyzed years. this drop can be associated with the negative gdp growth rate in the country, which was very low in 2009 (-7.8%). effects of changes in tax policy are also evident in slovakia. the reduction of the vat rate (2003, 2004) was accompanied by an increase in the ratio value, while increase in the vat rate (2011) came with the fall in the ratio value. 2.2. implications of standard vat rate on the ratio “increasing the standard vat rate is one of the easiest ways to increase tax revenue, especially when governments in developing countries are trying to find ways to finance large fiscal deficits” (owens, 2011c, p. 8). the graph shows the standard vat rate trend in the analyzed eu countries in the 1997-2017 timeframe. graph 2 and graph 1 show that, in most countries, rise in the standard vat rate is followed by the falling trend of c-efficiency. greece has had the most changes in tax policy, fig. 2 standard vat rate trends in the observed countries (in %), 1997-2017. source: eurostat; european commission; authors’ calculations. 248 m. đorđević, j. đurović todorović, m. ristić with explicitly the lowest ratio value in the analyzed period (1997-2016). the highest standard vat rate, not only in the analyzed countries, but also in the eu, is in hungary (27%). table 1 the introduction of the vat system in the developing eu countries and current standard rate (in %) country year of vat introduction standard rate (in %) bulgaria 1994 20 czech republic 1993 21 estonia 1991 20 greece 1987 24 croatia 1998 25 latvia 1995 21 hungary 1988 27 poland 1993 23 romania 1993 19 slovakia 1993 20 slovenia 1999 22 lithuania 1994 21 source: european commission, 2019. table 1 shows the years of vat introduction into the tax system of the countries analyzed, as well as the vat rate in 2017. the lowest vat rate is applied in romania. “only two eu countries have changed the tax rate in 2017: greece (from 23% to 24%) and romania (from 20% to 19%)” (european commission, 2019). the answer to the question of whether the standard rate is an important determinant of vat collection efficiency is analyzed in the following section. 3. data, econometric methodology and empirical analysis the research sample of our statistical data includes 12 developing countries, members of the european union: bulgaria, czech republic, estonia, greece, croatia, latvia, hungary, poland, romania, slovakia, slovenia, lithuania. statistical data consists of annual data for the period from 1997 to 2017. we investigate the impact of 6 indicators on vat collection efficiency in eu transition economies. dependent variables whose impact will be assessed are: gdp growth rate, standard vat rate, export of goods, export of services, wages and salaries, and household consumption. the dependent variable, vat collection efficiency, will be expressed using formulas for calculating c-efficiency, (2) and (3). 3.1. data the aim of this paper is to evaluate the basic determinants of vat collection efficiency. to calculate dependent variables, we collect data on realized annual vat revenues, final consumption expressed in millions of euros, and data on the annual standard vat rate trend in each country. explanatory variables used in the econometric analysis are given in the following table. improving performance of vat system in developing eu countries... 249 table 2 review of explanatory variables independent variables symbol/abbereviation calculation source gross domestic product gdpgrowth annual growth rate eurostat standard vat rate vatrate annual rate of each country european commission taxation and customs union export of goods eg percentage share of gdp eurostat export of services es percentage share of gdp eurostat wages and salaries ws percentage share of gdp eurostat household consumption c percentage share of gdp eurostat source: author’s illustration. combining time series and comparative data decreases the possibility of multicollinearity (jovičić & dragutinović mitrović, 2011, p. 217). this creates the basis to conduct panel data analysis of 12 eu countries for the period 1997-2017, using statase (release 13). before selecting the model to be evaluated, a correlation analysis is conducted, to point to the possibility of a multicollinearity problem. the correlation analysis ranges from -1 to +1, and the value of the coefficient determines the strength of the correlation (bhattacherjee, 2012, p. 123). the correlation matrix is presented in table 3. table 3 correlation matrix of the used variables c-efficiency ratio gdp growth vatrate eg es ws c c-efficiency ratio 1.0000 gdp growth 0.1504 (0.0197) 1.0000 vatrate -0.1457 (0.0240) -0.2804 (0.0000) 1.0000 eg 0.2054 (0.0014) 0.0173 (0.7899) 0.0437 (0.5502) 1.0000 es 0.4446 (0.0000) 0.0096 (0.8825) -0.0514 (0.4280) -0.0451 (0.4866) 1.0000 ws 0.3477 (0.0000) -0.0559 (0.3945) 0.0733 (0.2642) 0.1472 (0.0243) 0.3454 (0.0000) 1.0000 c -0.2880 (0.0000) -0.0085 (0.8954) -0.1261 (0.0510) -0.6129 (0.0000) -0.2374 (0.0002) -0.3446 (0.0000) 1.0000 note: p-value in (). source: authors’ calculations. based on table 3, we conclude that there is a significant degree of agreement between individual indicators and c-efficiency. the results show direction and strength of linear correlation between the analyzed variables. the results of the correlation analysis point to an agreement between the c-efficiency ratio and the gdp growth rate (gdpgrowth). the pearson’s coefficient points to a positive correlation (0.1504) at a significance level of 5% (p <0.05). there is a positive correlation between c-efficiency and the export of goods (eg) (pearson’s correlation coefficient is 0.2054, at a significance level of 5% (p <0.05). also, there is a positive correlation between c-efficiency and export of services (es) (pearson’s correlation coefficient is 0.4446, at a significance level of 1% (p <0.001). 250 m. đorđević, j. đurović todorović, m. ristić analogously, the positive correlation exists between c-efficiency and the wages and salaries (ws) ratio (p <0.001). a negative correlation exists between c-efficiency and consumption based on the pearson’s coefficient (-0.2880), at the level of statistical significance of 1% (p <0.001), as well as between c-efficiency and the standard vat rate (pearson’s coefficient of correlation is 0.1457, at the significance level of 5% (p <0.05). 3.2. econometric methodology and empirical analysis since the correlation analysis indicates that there are significant interdependencies between the analyzed variables, we select the appropriate model. before we interpret the results of regression analysis, we show which model best suits the analyzed data. there are several types of appropriate panel models: the pooled regression model (pooled), the fixed effect model (fem), and the random effect model (rem). these model types are determined by their parameters. the pooled model is a model with constant regression parameters. the fixed model is a model with regression constant variability. third, but not in order of significance, is the random model, which does not indicate the variability of a constant in any dimension. in order to obtain the relevant results of the panel analysis, we carry out research using strongly balanced data. the first step in the panel analysis of time series involves testing individual and time effects using the f-test (jovičić & dragutinović mitrović, 2011a, p. 243). the f test is a tool by which we choose between two models: the pooled or the fem model. in the event that the zero hypothesis cannot be rejected, we use the pooled model. however, the pooled model will not explain the differences between the observed units, in particular, the differences that exist between the countries. in the event that the zero hypothesis is rejected, the constant is not the same for all observation units, but varies. in such a situation, we apply a fixed-effects model (fem), to determine differences between countries. a breusch-pagan lm test is used to decide between the pooled or rem models. in order to determine whether the variability relates only to a constant or also to a regression parameter with an independent variable, we apply the breusch-pagan lm test (jovičić & dragutinović mitrović, 2011, p. 247). in the event that the zero hypothesis cannot be rejected, the pooled, or a model with constant regression parameters, should be applied. if the zero hypothesis is rejected, we apply the rem model. it is possible that the results of the conducted tests indicate that both the fem and rem models can be relevant for the interpretation of the regression analysis. in that case, it is necessary to continue the testing using the hausman test. the hausman test will examine which alternative is the best, i.e. what differences exist in the assessment of the fixed and random effect models. if the zero hypothesis is rejected, it is inevitable that the fixed effect model should be applied. on the other hand, we apply the random effect model (rem). the research results are shown in table 4. the model results are the fem model results, showing that the average value of the coefficient varies between countries. table 4 results of the test for choosing the suitable model f-test h0: pooled, h1: fem breusch-pagan lm h0: pooled, h1: rem hausman h0: rem, h1: fem model 5.01 (0.0000) 4.29 0.0191 29.01 (0.0001) note: p values in (). source: authors’ calculations. improving performance of vat system in developing eu countries... 251 the results obtained by the regression analysis are presented in table 5. the model explains 46.17% of changes in the c-efficiency ratio and is statistically significant at a significance level of 1%. table 5 results of regression analysis independent variable ratio c efficiency dependent variable constant 1.325429 [4.80] (0.000) gdpgrowth 0.0040728 [2.29] (0,023) vatrate -0.008913 [-1.69] (0.093) eg 0.0016631 [2.51] (0.013) c -0.0126943 [-3.95] (0.000) note: t statistic in [], p values in (). source: authors’ calculations. the results of the estimated fixed effect regression model (fem) show that the coefficients of the observed independent variables, which can be seen in table 5, are statistically significant in explaining the c-efficiency ratio. if the gross domestic product growth rate increases by 1%, the c-efficiency ratio will increase by an average of 0.40728%, ceteris paribus (p <0.05). if the exports of goods as a percentage of gdp increases by 1%, the cefficiency ratio will increase by an average of 0.16631%, ceteris paribus (p <0.05). the other two explanatory variables have a statistically significant negative effect on the c-efficiency ratio. if the standard vat rate increases by 1%, the c-efficiency ratio will decrease by an average of 0.8913%, ceteris paribus (p <0.10). if household consumption as a percentage of gdp increases by 1%, the c-efficiency ratio will decrease by an average of 1.26943%, ceteris paribus (p <0.001). independent variables, wages and salaries and export of services, expressed as a percentage of gdp, do not show a statistically significant impact. conclusion the regression analysis has highlighted the following statistically significant factors for increasing the vat collection efficiency in developing countries: gdp growth rate, standard vat rate, export of goods as a percentage of gdp, and household consumption as a percentage of gdp. given that authors do not fully agree on the importance of different vat collection efficiency determinants, this paper has investigated the impact of explanatory variables on vat revenues in economically underdeveloped countries over the period 1997-2017. the subject of our analysis has been explanatory variables, which are in correlation with the analyzed indicator of vat collection efficiency. 252 m. đorđević, j. đurović todorović, m. ristić “the limitations that accompany this research are tax evasion and various tax exemptions, which differ between countries” (aizenman & jinjarak, 2005, p. 14). as an indicator of vat collection efficiency, we have determined the c-efficiency ratio. this ratio, using the appropriate variables, best illustrates whether vat collection in one country is at a satisfactory level. since c-efficiency is obtained using the standard vat rate, the same variable has been one of our explanatory variables. by incorporating the standard vat rate in the analysis, we answered one of the research questions set: is the increase in the standard vat rate an efficient way to achieve optimal tax revenues? the aim of our research was to point out the negative effects of a high standard rate and to explore relevant factors for increasing vat revenue through c-efficiency analysis. the results of the regression model explicitly show the negative impact of the standard vat rate on c-efficiency. the standard vat rate and c-efficiency are in a negative correlation. in this sense, the paper highlights consequences of inadequately conceived tax policy for the economic growth of the underdeveloped countries of the european union. if authorities increase tax rates, this explicitly leads to reduction in vat collection efficiency, and, ultimately, reduced tax revenues in the budget. the correlation analysis has established an empirical link between the analyzed independent variables and vat collection efficiency. the vat collection efficiency in developing countries is affected by gdp growth rates. accordingly, in line with gdp growth, c-efficiency will be at a higher level, i.e. vat collection efficiency will be higher. there is a negative and statistically significant effect of household consumption on c-efficiency. specifically, an increase in household consumption decreases c-efficiency. excessive increase in consumption can create indications of the existence of tax evasion. sokolovska and sokolovskyi (2015) indicate that a large part of evaded revenues are used for consumption, and this in the end has reflections on c-efficiency. furthermore, this can be explained by the negative correlation between household consumption and economic growth rate. export of goods positively affects vat collection efficiency. increase in export increases vat collection efficiency. the two variables we observed did not show a statistically significant effect on vat collection efficiency: export of services and wages and salaries. we hope that answers to the questions set will be guidelines for governments in shaping tax policies. the study of vat collection efficiency factors has added up to empirical research in the field of the most profitable consumption tax in developing countries, and gave an overview of the existing literature on the observed problem. references agha, a. & haughton, j. (1996). designing vat systems: some efficiency considerations, the review of economics and statistics, 78 (2), 303-308. aizeman, j. & jinjarak, y. (2008). the collection efficiency of the value added tax: theory and international evidence, the journal of international trade and economic development, 17 (3), 391-410. andrejovska, a. & mihokova, l. (2015). developments of vat rates in eu countries in the context of harmonization and fiscal consolidation, acta universitatis agriculturae et silviculturae mendelianae brunensis, 63 (2), 487-498. antić, d. (2014). efficiency of a single rate and broad based vat system: the case of bosnia and herzegovina, financial theory and practice, 38 (3), 303-335. bank of greece (2012). „governor’s annual report for 2012“. annex to chapter ix: tax policy changes, april. bătrâncea, l. & nichita, a. (2015). which is the best government? colligating tax compliance and citizens’ insights regarding authorities’ actions, transylvanian review of administrative sciences, no. 44 e/2015, 5-22. improving performance of vat system in developing eu countries... 253 bhattacherjee, a. (2012). social science research: principles, methods, and practices. textbooks collection. tampa, florida: university of south florida, scholar commons. bikas, e. & andruskaite, e. (2013). factors affecting value added tax revenue, european scientific journal, special edition no. 1, 41-49. bikas, e. & rashkauskas, j. (2011). value added tax dimension: the case of lithuania, ekonomika, 90 (1), 22-38. bird, r. & gendron, p.p. (2006). is vat the best way to impose a general consumption tax in developing countries?, international studies program (working paper, 06-18), georgia: georgia state university. bird, r. & zolt, e. (2015). fiscal contracting in latin america, world development, 67 (2015), 323-335. bird, r. 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(2015). value-added tax impact on the state budget expenditures and incomes, procedia economics and finance, 34 (2015), 676-681. hodzic, s. & celebi, h. (2017). value added tax and its efficiency: eu-28 and turkey, utms journal of economics, 8 (2), 79-90. hybka, m. (2009). vat collection efficiency in poland before and after accession to the european union-a comparative analysis, ekonomika, 2009 (85). izedonmi, f.i.o. & okunbor, j.a. (2014). the roles of value added tax in the economic growth of nigeria. british journal of economics, management and trade, 12 (4), 1999-2007. jovičić, m. & dragutinović mitrović, r. (2011). ekonometrijski metodi i modeli [econometric methods and models]. beograd: ekonomski fakultet. keen, m. & lockwood, b. (2010). the value added tax: its causes and consequences. journal of development economics, 92 (2), 138-151. keen, m. & smith, s. (2007). vat fraud and evasion: what do we know and what can be done?. (imf working paper, wp/07/31), washington: international monetary fund. keen, m. (2007). vat attacks!, (imf working paper, wp/07/142), washington: international monetary fund. keen, m. (2013). the anatomy of the vat. national tax journal, 66 (2), 423-446. klun, m. (2003). administrative costs of taxation in a transition country: the case of slovenia. finance a úvûr, 53 (1-2), 75-84. le, m.t. (2003). value added taxation: mechanism, design, and policy issues, paper prepared for the world bank course on practical issues of tax policy in developing countries, washington d.c., 28 april. oprea, f., mehdian, s. & stoica, o. (2013). fiscal and financial stability in romania-an overview. transylvanian review of administrative sciences, no. 40 e/2013, 159-182. owens, j. (2011). improving performance of vat systems. world commerce review, 5 (3), september 2011. popa, m. (2014). taxes fees and obligations in romania – main components of companies fiscal costs. procedia social and behavioral sciences, 109 (2014), 150-154. sancak, c., velloso, r. & xing, j. (2010). tax revenue response to the business cycle (imf working paper 10/71), washington: international monetary fund. 254 m. đorđević, j. đurović todorović, m. ristić sermento, j. (2016). the determinants of value added tax revenues in the european union. european journal of management studies, 21 (2), 79-99. sokolovska, o. & sokolovskyi, d. (2015). vat efficiency in the countries worldwide. research institute of financial law, state fiscal service of ukraine, mpra paper no. 66422. south africa-technical assistance report (2015). revenue administration gap analysis program-the value added tax gap (imf country report no. 15/180). washington: international monetary fund. tagkalakis, a. (2014). the determinants of vat revenue efficiency: recent evidence from greece. bank of greece working paper, 181. ueda, j. (2017). the evolution of potential vat revenues and c-efficiency in advanced economies (imf working paper, wp/17/158). washington: international monetary fund. yessegat, w.a. (2008). value added tax administration in ethiopia. ejournal of tax research, 6 (2), 145-168. poboljšanje performansi poreza na dodatu vrednost u zemljama u razvoju evropske unije: procena determinanti racia c-efikasnosti u periodu 1997-2017 indirektni porezi zauzimaju značajno mesto u poreskim sistemima zemalja u razvoju eu. članak subsumira radove različitih naučnika, koji se bave uticajem determinant na efikasnost pdv-a. svrha ovog istraživanja je da istraži determinante efikasnosti pdv-a u zemljama u razvoju koje su članice evropske unije. glavno istraživačko pitanje u ovom radu je: da li povećanje stope poreza na dodatu vrednost negativno utiče na efikasnost pdv-a u zemljama u razvoju eu. u skladu sa tim, jednu od nezavisnih varijabli, koju smo uključili u istraživanje, predstavlja standardna godišnja stopa pdv-a. pored standardne stope pdv-a, kao determinante efikasnosti pdv-a, analizirali smo: stopu privrednog rasta, izvoz dobara, izvoz usluga, plate i nadnice, potrošnju domaćinstva. postavljene hipoteze analizirane su korelacionom i regresionom analizom. istraživanje je sprovedeno korišćenjem relevantnih podataka iz transparentnih internacionalnih statističkih baza, u periodu od 1997-2017. empirijski rezultati su pokazali pozitivan efekat stope privrednog rasta, izvoza dobara i negativan efekat dve varijable: standardne stope pdv-a i potrošnje domaćinstva. dve posmatrane varijable, izvoz usluga i plate i naknade, nisu pokazale statistički značajan efekat. na osnovu rezultata regresionog modela, date su smernice kreatorima makroekonomske politike u cilju ostvarivanja većih poreskih prihoda od pdv-a i ekonomskog razvoja analiziranih zemalja. ključne reči: porez na dodatu vrednost (pdv), performance pdv-a, racio c-efikasnosti, zemlje u razvoju facta universitatis series: economics and organization vol. 16, n o 4, 2019, pp. 443 459 https://doi.org/10.22190/fueo1904443m © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication causality between exchange rates and foreign exchange reserves: serbian case 1 udc 339.743(497.11) ivana marjanović 1 , milan marković 2 1 university of niš, faculty of economics, niš, serbia 2 university of niš, innovation center, niš, serbia abstract. the aim of this paper is to determine the relationship between the exchange rate (nominal and real) and foreign exchange reserves based on monthly data for the period from september 2006 to april 2019, using unit root tests and cointegration tests that take into account the possibility of structural break existence. the results of the causality test indicate that there is a long-term relationship between the nominal exchange rate and foreign exchange reserves. on the other hand, the existence of a long-term relationship between the real exchange rate and the foreign exchange reserves has not been confirmed, but there is a short-term causality, that is, the real exchange rate granger-causes foreign exchange reserves. key words: exchange rate, foreign exchange reserves, unit root tests, cointegration tests, granger causality, vector error correction model jel classification: c22, e44, f31 1. introduction exchange rate is one of the most important determinants of the economic policy of each country. although in the literature the most frequent is the fixed and floating exchange rate, there are several regimes of exchange rates between them. the republic of serbia has opted for such a regime, which implies free formation of the exchange rate on the foreign exchange market, but with certain interventions of the national bank of serbia. it is a regime of managed floating exchange rate. in this regime there is monetary independence, so that the central bank can influence external shocks by spending foreign received july 14, 2019 / revised october 22, 2019 / accepted october 26, 2019 corresponding author: ivana marjanović university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: ivana.veselinovic@eknfak.ni.ac.rs 444 i. marjanović, m. marković currency reserves. the national bank of serbia has the task of intervening in the foreign exchange market mainly to prevent excessive daily oscillations of the nominal exchange rate. this is to prevent possible speculative attacks since there is a higher degree of uncertainty due to a change in the exchange rate. if there is pressure on the foreign exchange market, which conditioned on the excessive growth of the exchange rate on a daily basis, the central bank will initiate the sale of foreign exchange, while, if the appreciation pressures are expected, the central bank will in that case buy foreign currency on the foreign exchange market. such a policy allows for a certain degree of flexibility for the central bank and does not imply directing or holding a foreign exchange rate in certain oscillation zones. in addition to maintaining the stability of the foreign exchange rate of the dinar against the euro, the national bank of serbia (national bank of serbia, 2019) is used for: the settlement of the obligations of the republic of serbia towards foreign creditors, maintaining the stability of the banking system and financing deficit in foreign trade. for forecasting the future movements in the exchange rates and foreign exchange reserves, and timely undertaking of corrective actions, it is desirable to determine the type and direction of their interdependence. therefore, the objective of this paper is to investigate the relationship between the exchange rates (real and nominal) and foreign exchange reserves in the republic of serbia. however, when analysing economic time series, stationarity issues should be taken into consideration. analysis of time series that do not meet the requirement of stationarity can lead to biased results and wrong conclusions about the results of statistical testing. therefore, with the intention of proper establishment of the dependency among the time series, they should first be reduced to stationary ones. however, if the structural break is present, traditional test may be biased, therefore, it is necessary to account for the possible structural break while conducting unit root tests and cointegration tests. for that reason, in order to assess interdependence between foreign exchange reserves and exchange rate unit root tests and cointegration tests that allow for a structural break will be applied. the paper is structured as follows: the second section discusses the theoretical background and provides a brief review of previous research regarding the relation of foreign exchange reserves and exchange rates. the third section describes the econometric methodology used for the analysis. the data set and empirical results are presented in the fourth section. lastly, concluding remarks are provided. 2. theoretical background in the first decade of the 21 st century, there was a significant increase in the amount of foreign exchange reserves held by central banks (gantt, 2010). the stockpiling of reserves is the practice of many countries and the question is whether such policy is justified. on the one hand, holding high volume of reserves is costly, while on the other hand, the cost of holding reserves is insignificant relative to the economic consequences of a crisis (aizenman & marion, 2003). nowak et al. (2004) state two main benefits rising from a high level of reserves: i) reduction of the likelihood of currency crises or a “sudden stop” (an unexpected reluctance by international creditors to renew their credit lines at times of market uncertainty); ii) lower external borrowing costs. causality between exchange rates and foreign exchange reserves: serbian case 445 the motivation for the enhanced increase in the level of foreign exchange reserves in emerging economies in recent years was twofold. on the one hand, increasing security in the event of a currency crisis, while on the other hand it reflects the tendency of policy makers to prevent the appreciation of the exchange rate and maintain the competitiveness of their economies (krusković & maričić, 2015). however, central banks do not have the ability to mount up reserves indeterminately. disproportionate reserve stockpiling involves substantial sterilization costs, due to the negative spread between the interest earned on reserves and the interest paid on the country’s public debt, which enlarges with reserve accumulation (gosselin & parent, 2005). regarding the optimal level of foreign exchange reserves heller (1966) claims that it should be determined in the way that will make a balance between the costs of macroeconomic adjustment that may arise in the situation of a deficiency of reserves with the opportunity cost of holding reserves. there is a universal view that the reserve requirements must be kept at an optimum level. however, this level can be determined in several ways. it is mostly a level that does not exceed the value of six-month imports of goods and services, or not lower than the value of the quarterly import. a surplus or shortfall in these resources can cause some repercussions on the national economy and make it more difficult for economic policy makers. firstly, the low level of foreign exchange reserves is a serious problem. they are limited, and the transition below their minimum can lead to a reduction in the credit rating and the ability to borrow in the foreign market, and in the event of a serious shortfall, currency crises can occur. however, even a higher level is not a problem to be underestimated, especially when the country is burdened with price instability problems. in the absence of reserves, balance of payment deficits would have to be rectified through (aizenman et al., 2012): a reduction in aggregate expenditures, imposition of macroeconomic adjustment costs, and a change in relative prices or “expenditure switching”. edwards (1983) claims, based on the examination of previous studies, that demand for international reserves is a function of the scale of the country (measured by its total imports or total income), the variability of its payments, its degree of openness and the opportunity cost of holding reserves. the reserves are kept to finance international transactions, and also as a buffer stock to deal with unanticipated payment difficulties. if the aspect of international transaction financing is considered, the level of optimal reserves depends on the variability of international transactions. as reserves serve as buffered, whose role is to offset fluctuations in international transactions, it is expected that the optimal reserve stock is positively dependent on the magnitude of these fluctuations (frenkel & jovanovic, 1981). flood and marion (2002) state that are three trends in the international economy that may possibly have a significant influence on reserve holdings: 1) increasing capital mobility; 2) increasing frequency and intensity of currency and financial crises; and 3) increasing number of countries reporting a switch to flexible exchange rates. a vast number of research has addressed the role of reserves and their relation to the exchange rate. aizenman and riera-crichton (2008) indicated that international reserves soften the influence of terms of trade shocks on the exchange rate, and that this effect is important for developing but not for industrial countries. nowak et al. (2004) investigated whether higher volume of reserves may decrease the volatility of the real exchange rate independently of the impact of the selected exchange rate regime or of the role of foreign exchange intervention, and provided the evidence of a negative non-linear effect of reserves on the short-term volatility of the real effective exchange rate, for a sample of 446 i. marjanović, m. marković emerging market countries. adler et al. (2019) examined the effect of foreign exchange intervention on the level of the exchange rate using an instrumental-variable panel approach and discovered that intervention affects the exchange rate in a meaningful way from a macroeconomic perspective. viola et al. (2019) state that countries that adopt inflation targeting and a floating exchange rate typically intervene in the foreign exchange market through various mechanisms, both sterilized and non-sterilized, wherein one of the most common that lead a central bank to intervene in the foreign exchange market is recomposing reserves and smoothing out long-term exchange rate movements. volatility of exchange rate may cause difficulties in international trade and investment decisions. engel and hakkio (1993) identified changes in expectations due to new information, the volatility of market fundamentals and speculative movements as main determinants of exchange rate volatility. frömmel et al. (2011) state that with the intention to influence on the exchange rate changes the central bank can essentially use two instruments: foreign exchange interventions and interest rate changes. several authors have examined the usefulness of foreign exchange interventions (dominguez, & frankel, 1990; ito, 2002; fatum, & hutchison, 2003; neely, 2005; basu, 2012). additionally, there is evidence of reduction of volatility due to foreign exchange interventions (abenoja, 2003; viola et al., 2019). serbia has been applying a managed-float exchange rate regime, and the inflation targeting regime has been in place since 2009. under the inflation-targeting and managedfloat framework, market forces are allowed to determine the value of the currency which reflect demand and supply for that currency in the foreign exchange markets (bouraoui & phisuthtiwatcharavong, 2015). the joint movements in eur/rsd exchange rate and foreign exchange interventions of the national bank of serbia are presented in figure 1. fig. 1 movements in eur/rsd exchange rate and nbs foreign exchange interventions (on a daily basis) source: authors presentation based on the data of the national bank of serbia, 2019b. regarding factors that determine the level of foreign exchange reserves, in addition to the balance of payments, an important determinant of foreign exchange reserves is the applied exchange rate regime. it depends on the movement of a set of macroeconomic causality between exchange rates and foreign exchange reserves: serbian case 447 variables over time (inflation, certain transmission channels, euroization of the economy, labour flexibility). economies with internal problems and high inflation rates are generally opting for the fixed exchange rate regime, while countries that have a balance of payments problem choose a floating exchange rate. in a fixed exchange rate regime, the central bank is obliged to defend the established level of the exchange rate. the sustainability of this regime depends on the value of available foreign exchange reserves. with the floating exchange rate regime, there is no obligation on the central bank to maintain a certain level of the exchange rate, and the degree and number of foreign exchange interventions is lower. foreign exchange reserves in this case fluctuate less, but since in this exchange rate regime it is possible for currency crises to emerge due to the formed negative expectations of market entities, their level will depend on the successful conduct of economic policy. the level and movement of foreign exchange reserves is shown in figure 2. fig. 2 evolution of foreign exchange reserves of the national bank of serbia in the period from september 2005 to april 2019 source: authors’ presentation based on the data of the national bank of serbia, 2019a. the level of the exchange rate in the regime of floating exchange rate is formed on the basis of supply and demand in the foreign exchange market. certainly, foreign trade flows (exports and imports of goods and services) are the most significant factors in exchange rate formation. next, inflation is one of the important factors, as is the inflow and outflow of remittances from abroad. in addition, capital transactions (foreign direct investment, portfolio investment) have a strong impact, primarily in developing countries. finally, one of the factors is the intervention of monetary authorities in order to mitigate smaller or larger fluctuations in the foreign exchange market, in regimes other than purely floating exchange rates. other factors include interest rate, national income, investor expectations, and the state of the world economy. on the other hand, the causal relationship between the exchange rate and the foreign exchange reserves is not a common topic of research, and there are only a few studies that have dealt with the examination of the short-term and long-term relationship between the stated variables. 448 i. marjanović, m. marković gokhale and raju (2013) have investigated causality among exchange rate and foreign exchange reserves in india using a time series data during the period between 1980 and 2010. their intention was to determine the influence of foreign exchange reserves on the exchange rate using the unit root test, johansson cointegration test and vector auto regression (var). the results of their study indicate that there is no long and short-term relation between exchange rate and foreign exchange reserves. bearing in mind that india has managed floating exchange rate system they conclude that foreign exchange reserve accumulation in india could have been carried out with the aim of providing an adequate response to the possible currency crisis rather than a tool for regulating the exchange rate. kim (2003) has developed the structural var model to inspect together the effects of foreign exchange intervention and conventional monetary policy on the exchange rate. the results of the study specify that foreign exchange intervention has considerable influence on the exchange rate and responds to stabilize the exchange rate. bayat et al. (2014) have analysed exchange rates and foreign exchange reserves in turkey using nonlinear and frequency domain causality approach during the period from january 2003 until january 2014. their findings reveal that there is a nonlinear cointegration between analysed variable and that causality is running from nominal and real exchange rate to foreign exchange reserves. kasman and ayhan (2008) have examined the association between exchange rates and foreign exchange reserves in turkey, on the basis of monthly data during the period from january 1982 until november 2005 using unit root and cointegration tests, which allow for structural breaks. their results reveal the existence of a long-run relationship between foreign exchange reserves and exchange rates and that the both long and short-run causality is running from foreign exchange reserves to real effective exchange rate. concerning the relationship between nominal exchange rate and foreign exchange reserves, the results indicate that in the long-run nominal exchange rate granger cause foreign exchange reserves. regarding methodology used in the studies related to the exchange rate relation to some other variables, few studies took into account possible structural break during the period of the analysis (dropsy, 1996; baum et al., 1999; granger et al. 2000; kočenda, 2005; akinboade & makina, 2006; rapach & strauss, 2008; byrne & nagayasu, 2010; chowdhury, 2012; you & sarantis, 2012; mensi et al., 2015; ahmad & aworinde, 2016; ojede & lam, 2017; salisu et al., 2019). failure to consider a possible structural break can lead to inadequate conclusions and, consequently, to the wrong recommendations. therefore, in this paper the tests that take into account possible structural break will be applied to assess interdependence between foreign exchange reserves and exchange rate. we expect that the results will indicate that there is causality between the analysed variables, directed from the foreign exchange reserves towards the exchange rate. for that purpose, the following hypotheses were developed: h1: there is no long-run relationship between the real exchange rate and foreign exchange reserves; h2: there is no long-run relationship between the nominal exchange rate and foreign exchange reserves; h3: there is no short-run relationship between the real exchange rate and foreign exchange reserves; h4: there is no short-run relationship between the nominal exchange rate and foreign exchange reserves. causality between exchange rates and foreign exchange reserves: serbian case 449 3. methodology in order to examine the existence and nature of the relationship between the exchange rate and the foreign exchange reserves, a three-step methodology proposed by kasman and ayhan (2008) will be applied. in the first step, using the zivot-andrews unit root test the level of integration of time series in situations where there is an indefinite structural breakdown will be examined. the second step of the analysis is dedicated to examining the existence of cointegration in a situation where there is an unsteadiness in long-term relations using gregory and hansen cointegration test. in the final step, causality is tested using a granger causality test. 3.1. unit root test the traditional unit root tests, such as adf unit root test, may lead to invalid conclusions in situations where there is a structural break. such assumptions are firstly stated by perron (1989). he has created a unit root test which takes into the consideration possibility of a single external structural break (umit, 2016). yet, the flaw of the proposed test is that it requires the moment of structural break to be predefined and in situations where that moment is not accurately determined, the wrong results may occur. bearing in mind the shortcomings of the perron’s test, zivot and andrews (1992) have developed a test that takes into account the existence of a single structural break which can be designated internally. the zivot and andrews test detects endogenously the moment of the particular most important structural break in each time series tested (waheed et al. 2006). the critical values in zivot and andrews test diverge from the ones provided by perron (glynn et al. 2007). the null hypothesis of a unit root with a break is rejected if the computed t statistics exceed the critical values of zivot and andrews test in absolute terms. there are three models of zivot and andrews test (waheed et al. 2006):  model a: allows a one-time shift in the series level;  model b: allows for a one-time shift in the slope of the trend function;  model c: represents a combination of previous models. 3.2. cointegration tests economic time series most often has a stochastic trend, that is, it moves unpredictably over time. the term of cointegration relates to non-stationary time series, among which there is such a linear combination that is stationary (kovačić, 1995). in other words, the term cointegration indicates the stationarity of a linear combination of separately nonstationary time series. from an economic point of view, two time series will be cointegrated if there is a long-term equilibrium relationship between them. cointegration was first investigated in works by granger (1983), granger and weiss (1983) and engle and granger (1987). these works provide an adequate basis for analysing long-term and short-term economic relationships. the conventional cointegration test examines the null hypothesis of no cointegration through examining the null of a unit root in the residuals, and if the null of a unit root is not accepted, the null of no cointegration is also not accepted (phillips & ouliaris, 1990). however, most of the conventional cointegration tests, such as engle and granger test and johansen test, do not consider the possibility of structural breaks in the long-run relationship, 450 i. marjanović, m. marković meaning that such test presumes that the cointegrating vectors do not fluctuate over time (ndoricimpa, 2013). in order to address these shortcomings of conventional tests, gregory and hansen (1996) have developed cointegration test that takes into account the possibility of a single structural break that can be considered as an extension of the engle and granger twostep test (liu & wan, 2012). gregory and hansen (1996) propose four different models in order to account for the single endogenous break (ndoricimpa, 2013):  model 1: level shift – the structural break influences only on the intercept;  model 2: level shift with trend – the structural break influences only the intercept but the model encompasses a trend.  model 3: regime shift – the structural break influences the intercept and the slope coefficient, jointly.  model 4: regime shift with trend – the structural break influences the intercept, the slope coefficient and the trend function. 3.3. causality test the presence of cointegration shows the existence of a long-run relationship between variables. on the other hand, the absence of the cointegration between two time series in the long run, does not mean that there is no short-run causal interrelationship (lodha, 2017). short-run interrelationship can be inspected by performing the granger causality test. in the literature, one can find the definition of granger's causality stating that x causes y in granger's sense if the present value of the variable y can be predicted with greater accuracy using the past values of the variable x, and not only the past values of the variable y, with other conditions unchanged (watson & teelucksingh, 2002). granger causality test was originally developed to identify the impact of one time series on the other. granger causality test is based on two basic principles (granger, 1969):  the cause occurs before the effect;  cause creates unique changes to the effect, that is, the causal series contains unique information about the time series which it affects, which are not available otherwise. the causality test application is determined by the fact whether there is cointegration between variables or not (kasman & ayhan, 2008). if there is a cointegration then a vector error correction model (vecm) should be applied to determine the long and the short-run relationship between variables, and if there is no cointegration, the vector autoregression model (var) should be used. 4. data and analysis the time series data for the nominal exchange rate and foreign exchange reserves for the period from september 2005 until april 2019 were collected from the national bank of serbia database in order to examine the existence and nature of the relationship between the exchange rate (nominal and real) and foreign exchange reserves. the real exchange rate is obtained using the equation: * eu ser p rer ner p  , (1) causality between exchange rates and foreign exchange reserves: serbian case 451 where ner signifies the nominal exchange rate, peu and pser symbolize consumer price indexes in the eu and serbia, respectively. the first step in the analysis is to test the stationary of time series and to determine the order of integration in the case of nonstationary series. for that purpose, the augmented dickey–fuller unit root test (adf) has been applied and the results are presented in the table 1. according to the obtained value of test statistics it can be determined that all analysed time series are not level stationary. on the other hand, their first differences are stationary. table 1 calculated adf statistics nominal exchange rate real exchange rate foreign exchange reserves no trend trend no trend trend no trend trend level -1.538 -1.337 -3.104 -3.117 -2.864 -3.355 first difference -13.496 -13.607 -12.908 -12.865 -11.330 -11.312 source: authors’ calculation note: optimal number of lags revealed based on aic; critical values are (mackinnon, 1991): -3.493 (99%) and -4.023 (99%) with no trend and with trend, in that order however, the existence of structural break reduces the power of the adf test (kasman & ayhan, 2008). therefore, to detect potential structural break the zivot and andrews test has been applied and the obtained results are presented in table 2. the results endorse results obtained by adf test. hence, all time series are i (1). one of the research assumptions is that the periods of the identified structural break will coincide with the periods of the financial and economic crises in the republic of serbia. since the third model which includes both, the single shift in the intercept and the trend, is the most restrictive, this model is tested first, and if there the null is rejected, then other two models are tested. the results of the zivot-andrews unit root test indicate that nominal exchange rate, real exchange rate and foreign exchange reserves show that the estimated break occurred in the february 2012, december 2008 and may 2009, respectively, which is consistent with the stated assumption. this is also consistent with the assumption that the structural breaks occur due to political or economic factors related to the specific country. table 2 zivot-andrews unit root test nominal exchange rate real exchange rate foreign exchange reserves break point 2012m2 2008m12 2009m5 minimum t-statistic -4.150 -4.639 -4.768 lags 3 3 3 source: authors’ calculation note: optimal number of lags obtained based on aic; critical values are: 1%: -5.57, 5%: -5.08, 10%: -4.82 the structural breaks detected in the december 2008 and may 2009 were caused by instability due to the effects of the global economic and financial crisis. firstly, the negative effects of the crisis were transferred from abroad which has resulted in the occurrence of deflation, leading to an increase in the real exchange rate. secondly, after several months 452 i. marjanović, m. marković the recovery started in terms of transferring positive effects from abroad, which improved the current account balance and suddenly increased foreign exchange reserves. the structural break in february 2012 had a different character and was caused by internal economic problems (first of all, inflation). since the unit root test have revealed that all analysed time series are i (1), it is necessary to perform further analysis in terms of cointegration testing. the cointegration testing will be conducted in two steps. in the first step conventional engle-granger cointegration test (engle & granger, 1987) will be applied which does not take into account structural break. the obtained results are presented in table 3 and indicate that the null hypothesis of no cointegration cannot be rejected at the 1% level. therefore, analysed time series in all models are not cointegrated. table 3 engle–granger cointegration test models adf lags fer=+ner+ -3.963 3 ner=+fer+ -3.383 3 fer=+rer+ -2.206 3 rer=+fer+ -3.745 3 source: authors’ calculation note: critical values are: -3.970 (99%), -3.377 (95%), -3.073 (90%) kasman and ayhan (2008) state that in the situation when conventional cointegration tests fail to reject the null hypothesis of no cointegration and gregory-hansen procedure rejects the null, it indicates the presence of the structural shift in the long-run co-movements between analysed time series. therefore, in the second step, a gregory-hansen test was applied in order to consider possible structural shift during examination of the cointegration existence (gregory & hansen, 1996). the results are presented in the table 4. first panel examines the relationship between foreign exchange reserves and nominal exchange rate, where foreign exchange reserves represent dependent variable. the first and the second model detect the presence of cointegration, which is not discovered by the conventional cointegration test. second panel investigates the relationship between nominal exchange rate and foreign exchange reserves, where the nominal exchange rate is the dependent variable. the test results of the model that allows for regime switch do not support the results obtained by conventional cointegration test of no cointegration. therefore, there is a long-run relationship between nominal exchange rate and foreign exchange reserves. third panel inspects the association between foreign exchange reserves and real exchange rate, where foreign exchange reserves represent dependent variable. the results indicate the existence of a long-run relationship between analysed variables. fourth panel inspects the association between the real exchange rate and foreign exchange reserves, where the real exchange rate is the dependent variable. the results for all models support the results obtained by the conventional cointegration test of no cointegration. causality between exchange rates and foreign exchange reserves: serbian case 453 table 4 gregory-hansen cointegration test models adf bp zt bp z bp lags panel a: fer=+ner+ level -4.50 *** 2010m3 -4.89 ** 2009m9 -36.38 *** 2009m9 3 trend -5.17 ** 2009m8 -5.56 * 2009m9 -44.55 *** 2009m9 3 regime -4.71 *** 2014m2 -4.95 *** 2009m8 -37.68 2009m8 3 regime trend -4.95 2009m8 -5.25 2009m9 -44.13 2009m9 0 panel b: ner=+fer+ level -4.24 2012m11 -3.32 2012m9 -17.65 2012m9 3 trend -3.86 2009m8 -3.85 2009m8 -27.74 2009m8 0 regime -4.82 *** 2014m1 -4.71 *** 2014m3 -23.64 2014m3 3 regime trend -4.21 2017m1 -3.89 2009m9 -28.18 2009m9 3 panel c: fer=+rer+ level -5.03 ** 2009m8 -5.36 * 2009m9 -44.02 ** 2009m9 0 trend -4.98 *** 2009m8 -5.34 ** 2009m9 -43.44 *** 2009m9 0 regime -5.04 ** 2009m8 -5.31 ** 2009m9 -44.71 *** 2009m9 0 regime trend -4.93 2009m8 -5.15 2009m8 42.99 2009m8 0 panel d: rer=+fer+ level -4.43 2009m6 -3.93 2009m8 -28.23 2009m8 3 trend -4.88 2009m6 -4.31 2009m8 -33.17 2009m8 3 regime -4.30 2017m5 -3.89 2009m8 -28.03 2009m8 3 regime trend -4.97 2009m2 -4.39 2008m12 -34.66 2008m12 3 source: authors’ calculation note: ⁎ , ⁎⁎ and ⁎⁎⁎ indicate significance at 1%, 5% and 10%, in that order the gregory-hansen cointegration test results disclose that different model assumptions reveal different time points of structural break. yet, most of the break points have been detected in the second half of 2009. in that period, the basic macroeconomic indicators specify the recovery of the republic of serbia from the global economic crisis and transition into a state of macroeconomic stability. hence, it may be considered that the recovery from the global economic crisis made the long-term mechanism between serbian foreign exchange reserves and exchange rates fundamentally change. in order to determine the causality in the presence of cointegration, it is necessary to apply vecm, which encompasses an error correction term in order to describe the shortrun deviancies of series from their long-run equilibrium path. on the other hand, when cointegration is not present a var model can be applied in order to determine granger causality between variables. moreover, there is a need to identify the number of lags to be included in the model, with the aim of adjusting to the vecm model. lütkepohl (2005) states that hannan– quinn information criterion (hqic) and schwarz’s bayesian information criterion (sbic) give consistent estimations of the true lag length, compared to final prediction error (fpe) and akaike's information criterion (aic) which overestimate the true lag length in the infinite sample. however, there is no notation what can be considered as a finite sample, therefore, since most of the studies apply aic in the optimal lag selection, the authors will utilize that information criterion in the further course of the analysis. 454 i. marjanović, m. marković for the model that examines the relationship between foreign exchange reserves and nominal exchange rate, where foreign exchange reserves represent dependant variable, the results of vecm are presented in table 5. table 5 vector error-correction model: long and short-run causality between foreign exchange reserves and nominal exchange rate coef. std.err. z p>|z| 95% conf. interval ectt-1 -.085 .037 -2.33 0.020 -.158 -.013 fert-1 .076 .081 0.94 0.348 -.083 .235 fert-2 -.052 .081 -0.64 0.522 -.212 .108 nert-1 -.115 .122 -0.95 0.344 -.353 .123 nert-2 -.442 .121 -3.65 0.000 -.680 -.205 constant .003 .002 1.12 0.265 -.002 .007 source: authors’ calculation note: ectt-1 – lagged error correction term, fert-1 first lagged difference of foreign exchange reserves value, fert-2 second lagged difference of foreign exchange reserves value, nert-1 first lagged difference of nominal exchange rate value, nert-2 second lagged difference of nominal exchange rate value the validity of the model is confirmed by the lagged error correction term (ectt-1), since it meets two necessary conditions: it is significant and has a negative sign. hence, in the long-run nominal exchange rate granger-cause foreign exchange reserves. the error correction term suggests that the adjustment of foreign exchange reserves to changes in the nominal exchange rate is slow, since the value of ectt-1 is relatively small (-0.085). the short-run influence can be evaluated based on the coefficients of lagged differenced terms. it can be noticed that the value of the nominal exchange rate is significantly influenced only by the nert-2 variable, meaning that past values of nominal exchange rate (two month prior the estimation) have statistically significant influence on the current value of nominal exchange rate. regarding the model that examines the relationship between the nominal exchange rate and foreign exchange reserves, where nominal exchange rate represents dependant variable, the results of vecm are presented in table 6. the lagged error correction term table 6 vector error-correction model: long and short-run causality between nominal exchange rate and foreign exchange reserves coef. std.err. z p>|z| 95% conf. interval ectt-1 -.0389 0.147 -2.64 0.008 -.0678 -.010 nert-1 -.109 .082 -1.32 0.185 -.271 .052 nert-2 .084 .082 1.02 0.308 -.077 .245 fert-1 -.055 .055 -1.00 0.316 -.163 .053 fert-2 .021 .055 0.38 0.703 -.087 .129 constant .004 .002 2.13 0.033 .0003 .007 source: authors’ calculation note: ectt-1 – lagged error correction term, fert-1 first lagged difference of foreign exchange reserves value, fert-2 second lagged difference of foreign exchange reserves value, nert-1 first lagged difference of nominal exchange rate value, nert-2 second lagged difference of nominal exchange rate value causality between exchange rates and foreign exchange reserves: serbian case 455 in this model is significant at the 1% level with a negative sign, signifying that in the long-run, foreign exchange reserves granger-cause the nominal exchange rate. however, since the value of the error correction term is rather small (−0.0389), the adjustment of nominal exchange rate to the changes in foreign exchange reserves is relatively slow. based on the values of the lagged differenced terms, it can be concluded that there is no statistically significant influence of past values of nominal exchange rate nor foreign exchange reserves on the current value of the nominal exchange rate. concerning the model which examines the long-run relationship between foreign exchange reserves (as dependant variable) and the real exchange rate, the error correction term is negative -0.0002634, but statistically insignificant (p value is 0.952), meaning that there is no long-run relationship between variables in this model. therefore, their short-run relation will be examined using a granger causality test. also, since the cointegration tests have not discovered cointegration between the real exchange rate (as a dependant) and foreign exchange reserves, their short-run relation will also be tested using a granger causality test. table 7 granger causality test dependent variable independent variable fer rer rer 1.1523 (0.3188) fer 4.5834 (0.0118) source: authors’ calculation note: p-value in parenthesis the f-statistics indicates that there is a short-run causality running from real exchange rate towards foreign exchange reserves. on the other hand, foreign exchange reserves do not granger-cause real exchange rate. therefore, concerning the relationship between foreign exchange reserves and the real exchange rate, there is no long-run interdependence, and first hypothesis cannot be rejected. regarding their short-run dynamics, the granger-causality test has detected causality in one direction, from real exchange rate towards foreign exchange reserves. hence, the third hypothesis is rejected. relating to the relationship between foreign exchange reserves and nominal exchange rate there is evidence of long-run interdependence, meaning that the second hypothesis is rejected. however, the values of the coefficients of lagged differenced terms indicate that there is no short-run causality between these variables. hence, the fourth hypothesis cannot be rejected. despite expectations, based on the previous literature review, that exchange rate fluctuations are caused by the movement of foreign exchange reserves, the results indicate that, in the case of the republic of serbia, there is no causality in this direction, but rather there is a causality directed from the exchange rate (real exchange rate in shortterm and nominal exchange rate in the long-term) to foreign exchange reserves. as there is a significant long-term relationship between foreign exchange reserves and the nominal exchange rate, the accumulation of foreign exchange reserves is more than 456 i. marjanović, m. marković necessary to mitigate the negative effects of future crises on the exchange rate and for the sustainability of the managed exchange rate regime. the stockpiling of foreign exchange reserves may also reflect the aspirations to improve serbia's credit rating in order to attract foreign direct investment and portfolio investments. low inflation, which is a long standing result of the implementation of the inflation targeting strategy, as well as the improvement of the economic and fiscal situation, are domestic factors that, on the other hand, will enable a stable exchange rate and preserve an adequate level of foreign exchange reserves in the event of potential external shocks, thereby increasing resilience to future currency crisis. 5. conclusion the aim of this paper was to provide a comprehensive analysis of the co-movement between the exchange rates (real and nominal) and foreign exchange reserves. most of the conventional cointegration approaches disregard the possibility of structural break, which could result in mistaken conclusion. therefore, the research methodology took into account the possible structural break, in order to avoid biased results. the paper focused on the long and the short-run relationship between exchange rate and foreign exchange reserves. the results revealed that all analyzed variables were nonstationary at level, but stationary at first difference, and that there was a single structural break in the series, which coincides with the periods of financial and economic crises in the republic of serbia. conventional cointegration test (engle-granger test) have not detected cointegration between analyzed variables. however, gregory-hansen test, which allows for a single shift in the series, has detected the existence of cointegration. the causality tests have proven the existence of a long-run interdependence between foreign exchange reserves and nominal exchange rate. conversely, there was no evidence of long-run interdependence between foreign exchange reserves and the real exchange rate. yet, the results of granger-causality test indicated that there was unidirectional short-run causality, from real exchange rate towards foreign exchange reserves. this causality indicates that the prediction of the future values of foreign exchange reserves would be better if the past values of real exchange rate are also considered. this paper contributes to the literature on the interdependence between exchange rates and foreign exchange reserves in the developing countries, on an example of the republic of serbia. however, the research faces some limitations. the first limitation concerns the methodology applied. the results of the analysis are affected by the applied lag length, and since there are various methods for determination of the lag length, it is possible that the application of different information criterion would indicate different lag length which could result in different conclusions. the second limitation concerns the scope of the study, since there may be some other macroeconomic variables whose influence was not taken into consideration. in order to respond to these limitations, research can be extended in various directions. firstly, some new macroeconomic variables can be introduced into the analysis. secondly, it is possible to examine the impact of lag length determined by different information 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(2002). further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. journal of business & economic statistics, 20 (1), 25–44. https://doi.org/10.2307/1391541 uzročnost između deviznih kurseva i deviznih rezervi: primer srbije cilj ovog rada jeste utvrđivanje odnosa između deviznog kursa (nominalnog i realnog) i deviznih rezervi na osnovu mesečnih podataka za period od septembra 2006 do aprila 2019. godine, primenom testova jediničnog korena i testova kointegracije koji uzimaju u obzir mogućnost postojanja strukturnog loma. rezultati testa uzročnosti ukazuju da postoji dugoročna veza između nominalnog deviznog kursa i deviznih rezervi. sa druge strane, nije utvrđeno postojanje dugoročne veze između realnog deviznog kursa i deviznih rezervi, ali da postoji kratkoročna uzročnost, odnosno da realni devizni kurs granger-uzrokuje devizne rezerve. ključne reči: devizni kurs, devizne rezerve, testovi jediničnog korena, testovi kointegracije, granger uzročnost, vektorski model sa korekcijom greške https://doi.org/10.1016/j.ribaf.2018.08.002 facta universitatis series: economics and organization vol. 15, n o 4, 2018, pp. 295 304 https://doi.org/10.22190/fueo1804295s © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper human and social capital as factors of inequalities in economic development of eu countries 1 udc 005.96:330.34(4-672eu) 330.342:330.34(4-672eu) iwona skrodzka university of bialystok, faculty of economics and management, bialystok, poland abstract. the importance of human and social capital in the processes of growth and economic development has been broadly discussed in the literature. there are many theoretical models of economic growth considering human or social capital. however, there is still a shortage of empirical studies concerning the dependencies between these phenomena. the purpose of this study is to examine the role which human and social capital play in the processes of economic development in the european union countries. empirical analysis concerns the year 2015. owing to the fact that neither of these categories is measurable, the research uses the soft modelling method. it allows users to examine links between variables which are not directly observable (latent variables). the conducted research has demonstrated that human capital as well as social capital had a statistically significant, positive impact on the economic development of the eu countries. the obtained results also made it possible to create the rankings of the examined countries according to their stocks of human and social capital and the level of economic development. key words: human capital, social capital, economic development, soft modelling, european union jel classification: c59, e24, o11, z13 1. introduction the importance of human and social capital in the processes of growth and economic development has been broadly discussed in the literature (benhabib & spiegel, 1994; received july 16, 2018 / accepted september 18, 2018 corresponding author: iwona skrodzka faculty of economics and management, bialystok, ul. warszawska 63, 15-062 bialystok, poland e-mail: i.skrodzka@uwb.edu.pl 296 i. skrodzka bourdieu, 1986; coleman, 1988, 1990; lucas, 1988; mankiw et al., 1992; putnam et al., 1993; romer, 1989). moreover, the significance of human and social capital for the processes of socio-economic development is appreciated by many international institutions conducting research in this field. the most important projects include: “social capital initiative” (world bank), “the well-being of nations: the role of human and social capital” (oecd) as well as “the contribution of social capital in the social economy to local economic development in western europe” (european commission). the concepts of human and social capital were developed as a response to the difficulties in explaining cross-country inequalities in economic growth. the production factors considered earlier: physical capital and labour did not sufficiently explain the differences between the rate of economic growth or levels of development in individual countries. therefore, researchers began investigating human, social, cultural, political, and psychological factors. in the literature there are many theoretical models of economic growth considering human or social capital. however, there is still a shortage of empirical studies concerning the dependencies between these phenomena. the purpose of the paper is to analyze the impact of human and social capital on the level of economic development of the eu countries. in this study the following definitions were adopted:  human capital is defined as embodied in inhabitants stock of unobserved characteristics such as: education, stock of knowledge, health. it is increased through investment and it is an important factor of economic development (skrodzka, 2015).  social capital includes the institutions, the relationships, the attitudes and values that govern interactions among people and contribute to economic and social development (oecd, 2001). this paper proposes the following research hypotheses: h1a: human capital is positively associated with the level of economic development of the eu countries. h1b: social capital is positively associated with the level of economic development of the eu countries. because of the multi-dimensional and intangible character of the studied phenomena, a soft-modelling method was applied. the obtained results allowed the author to realise the research objective and verify the proposed research hypotheses. 2. research method the soft modelling method was developed by h. wold (1980; 1982). the soft model consists of two sub-models: an internal one (structural model) and an external one (measurement model). the internal sub-model depicts the relationships between the latent variables on the basis of the assumed theoretical description. the external sub-model defines latent variables by means of observable variables (indicators). indicators allow for direct observation of latent variables and are selected according to the assumed theory or the intuition of the researcher (rogowski, 1990). a latent variable can either be defined (with the use of indicators) inductively: the approach is based on the assumption that the indicators make up latent variables (formative indicators), or deductively: when it is assumed that indicators reflect the respective theoretical notions (reflective indicators). under the deductive approach, the latent variable, as a theoretical notion, is a point of departure for a search of empirical data (the variable is primary to a given indicator). in the inductive approach, it is the indicators that are running human and social capital as factors of inequalities in economic development of eu countries 297 primary to the latent variable which they comprise. both the approaches use latent variables that are estimated as the weighted sums of their indicators. however, depending on the definition, indicators should be characterized by different statistical properties – no correlation in the case of inductive definition and high correlation in the deductive one. the estimation of the parameters of the soft model is performed by means of the partial least squares method (pls method). the description of the method can be found in: (lohmoller, 1988) or (westland, 2015). the quality of the model is assessed with the use of determination coefficients (r 2 ), established for each equation. the significance of the parameters is checked by means of the standard deviations calculated with the tukey's cut method (“2s” rule: a parameter significantly differs from zero if double standard deviation does not exceed the value of the estimator of this parameter). besides, in the case of the external sub-model, the estimators of factor loadings can be treated as the degree in which the indicators match the latent variable that they define. the prognostic property of the model can be evaluated by means of the stone-geisser test, which measures the accuracy of the forecast obtained as a result of the model's application as compared with a trivial forecast. the test statistics take values from the range <–∞,1>. in the ideal model, the value of the test equals 1 (the forecasts are perfectly accurate in comparison with trivial forecasts). when the value of the test equals zero, the quality of the model's forecast and the trivial forecast tend to be virtually identical. negative values indicate a low quality of the model (its weak predictive usefulness compared with a trivial forecast). using the partial least squares method, it is possible to obtain the estimated values of latent variables, which can be regarded as the values of synthetic measures. they can be employed for linear ordering of the examined objects (rogowski, 1990). 3. specification of soft model the model which was used for realization of the research objective contained the following equation   021 schced (1) where ed – the level of economic development, hc – human capital, sc – social capital, 0, 1, 2 – structural parameters of the model,  – random component. the latent variables were defined by means of observable variables on the basis of the deductive approach, i.e. the latent variable, as a theoretical concept, serves as a starting point to identify empirical data. the indicators for the model were selected based on criteria of substantive and statistical nature. the statistical data came from the eurostat, oecd and world bank databases. using the available domestic and international literature, primary sets of indicators of the variables hc, sc and ed were developed. the selection of the research period (2015) was determined by the availability of statistical data. the developed database was checked in terms of missing data. data shortages were overcome by using naive prognosis, consisting in replacing the lacking values by the value for the previous year. from the statistical point of view, the following considerations were taken into account: variability of indicator values (coefficient of variation above 10%) and analysis of the quality of the estimated model (ex post analysis). the indicators which passed substantive and statistical verification are presented in table 1. 298 i. skrodzka table 1 indicators of latent variables symbol of indicator description of indicator source type 2 human capital hc1 percentage of population aged 15-64 having completed tertiary education (%). e stimulant hc2 percentage of population aged 25-64 participating in education and training (%). e stimulant hc3 percentage of employees aged 15-64 having completed tertiary education (%). e stimulant hc4 percentage of employees aged 25-64 participating in education and training (%). e stimulant hc5 graduates at doctoral level per 1000 of population aged 25-34 (person). e stimulant hc6 young people neither in employment nor in education and training (% of population aged 15 to 29). e destimulant hc7 underachievement in reading, mathematics or science (% of 15-year-old students) oecd destimulant hc8 percentage of population declaring their health status as very good and good (%). e stimulant hc9 death rate due to chronic diseases (number per 100 000 persons aged under 65) e destimulant hc10 infant mortality rate (person). wb destimulant social capital sc1 participation in voluntary activities (% of people aged 16 and over). e stimulant sc2 active citizens (% of people aged 16 and over) 3 . e stimulant sc3 frequency of getting together with relatives and friends – every week (% people aged 16 and over). e stimulant sc4 public-private co-publications (per million population). e stimulant sc5 international scientific co-publications (per million population). e stimulant sc6 communication via social media – daily (% of people aged 16 and over). e stimulant the level of economic development ed1 gross domestic product per capita (in pps). e stimulant ed2 gross value added per employee (in pps). e stimulant ed3 agriculture, value added (% of gdp). wb destimulant ed4 r&d expenditure in the public sector (% of gdp). e stimulant ed5 r&d expenditure in the business sector (% of gdp). e stimulant ed6 employment rate in age group 20-64 (%). e stimulant source: author’s own elaboration a schematic diagram of the soft model, taking into consideration both the internal and external relationships is presented in figure 1 4 . 2 stimulant of latent variable – the higher the value of an indicator, the higher the level of the latent variable. destimulant of latent variable – the higher the value of an indicator, the lower the level of the latent variable. 3 active citizenship in the 2015 ad-hoc module is understood as participation in activities related to political groups, associations or parties, including attending any of their meetings or signing a petition. 4 the solid line represents internal model relationship, while the broken line – external model relationships. running human and social capital as factors of inequalities in economic development of eu countries 299 ed hc ed3 ed4 ed5 ed6 sc3 sc4 sc5 sc6 sc2 sc1 ed1 ed2 sc hc4 hc6 hc7 hc10 hc2 hc1 hc3 hc5 hc8 hc9 fig. 1 diagram of internal and external relationships in soft model source: author’s own elaboration. the model was estimated by means of the pls method, which involves simultaneous estimation of the external model parameters (weights and factor loadings) and the internal model parameters (structural parameters). the estimation was conducted using the pls software. the software was developed by j. rogowski, professor at the department of economics and management at university of bialystok, and is available free of charge. 4. results of estimation the results of the estimation of the external model are presented in table 2. each weight represents the relative share of a given indicator's value in the estimated value of a latent variable. factor loadings are coefficients of correlation between indicators and latent variables, thus indicating the degree and direction in which the variability of an indicator reflects the variability of a latent variable. the ordering of indicators according to weight is performed when a latent variable is defined inductively. in the deductive approach, which was applied in this research, it is the factor loadings that are interpreted. the following interpretation of the ij factor loading was assumed: – |ij| < 0.2 – no correlation, – 0.2 ≤ |ij | < 0.4 – weak correlation, – 0.4 ≤ |ij | < 0.7 – moderate correlation, – 0.7 ≤ |ij | < 0.9 – strong correlation, – |ij | ≥ 0.9 – very strong correlation. in terms of the signs of the estimated parameters, the results are consistent with the expectations. stimulants have positive estimations of weights and factor loadings and destimulants (hc5, hc6, hc9, hc10, ed3) have negative ones. moreover, all the parameters are statistically significant, in accordance with the “2s” principle (see table 2, columns “standard deviation”). 300 i. skrodzka table 2 estimations of external relationships parameters in the soft model symbol of indicator weight standard deviation factor loading standard deviation hc1 0.1269 0.0040 0.6946 0.0072 hc2 0.1838 0.0018 0.8995 0.0017 hc3 0.0704 0.0054 0.4889 0.0101 hc4 0.1819 0.0009 0.8911 0.0021 hc5 0.1408 0.0049 0.6470 0.0051 hc6 -0.1854 0.0098 -0.7085 0.0112 hc7 -0.1555 0.0089 -0.6939 0.0111 hc8 0.0962 0.0075 0.4036 0.0152 hc9 -0.1586 0.0102 -0.6999 0.0114 hc10 -0.1230 0.0025 -0.5683 0.0025 sc1 0.2699 0.0066 0.8740 0.0044 sc2 0.1897 0.0042 0.7035 0.0033 sc3 0.1673 0.0053 0.7773 0.0044 sc4 0.2065 0.0066 0.8365 0.0028 sc5 0.2442 0.0022 0.9403 0.0010 sc6 0.1491 0.0108 0.6588 0.0084 ed1 0.2246 0.0085 0.8169 0.0246 ed2 0.1993 0.0009 0.7308 0.0274 ed3 -0.2387 0.0109 -0.8622 0.0306 ed4 0.2202 0.0267 0.6944 0.0728 ed5 0.2500 0.0294 0.7499 0.0309 ed6 0.1894 0.0396 0.6584 0.0645 source: author’s own elaboration indicators reflecting education and training (hc2, hc4 and hc6) were the most important for hc variable. the sc variable was most strongly reflected by indicators related to scientific co-operation (sc4 and sc5) as well as voluntary activities (sc1). the ed variable was strongly correlated with four of the six indicators (ed3, ed1and ed5). the outcomes of the internal model estimation are illustrated by the following equation 2 (0.1173) (0.1173) (0.1173) ˆ 0.3938 0.5200 2.1105 r 0.81 ed hc sc      . (2) the brackets contain standard deviations calculated by means of the tukey's test. the structural parameters are statistically significant (“2s” rule). the value of the coefficient of determination r 2 justifies the conclusion that, to a very high extent, the independent variables hc and sc determine the variability of the dependent variable ed. the values of the stone-geisser test, which verifies the soft model in terms of its predictive usefulness (see table 3) are positive, which proves the model's high prognostic quality. table 3 values of the stone-geisser test symbol of indicator value of s-g test ed1 0.3831 ed2 0.2888 ed3 0.4663 ed4 0.3437 ed5 0.4786 ed6 0.2721 general 0.3072 source: author’s own elaboration running human and social capital as factors of inequalities in economic development of eu countries 301 the estimations of the internal model parameters indicate a positive and statistically significant impact of human capital as well as social capital on the level of economic development of eu countries in 2015. this means that those countries which reported higher stocks of human capital also had a higher level of economic development. moreover countries with higher stocks of social capital also had a higher level of economic development. therefore, there are no grounds to reject the h1a and h1b hypotheses that were formulated in the study. furthermore the impact of social capital on economic development was stronger than the impact of human capital. based on the synthetic measures of the variables hc, sc and sg, which were obtained during modelling, three rankings of the studied countries were created: a ranking of human capital, a ranking of social capital and a ranking of the level of economic development. the results are shown in table 4. table 4 rankings of the eu countries according to hc, sc and ed in 2015 country hc sc ed austria 7 6 5 belgium 14 7 9 bulgaria 27 27 27 croatia 26 22 26 cyprus 16 15 22 czech republic 15 20 12 denmark 1 2 3 estonia 12 13 13 finland 3 4 8 france 9 10 11 germany 11 11 4 greece 23 16 25 hungary 25 23 23 ireland 8 9 6 italy 21 17 18 latvia 24 26 24 lithuania 18 24 19 luxembourg 5 5 1 malta 19 18 17 netherlands 4 3 7 poland 20 25 21 portugal 17 19 16 romania 28 28 28 slovakia 22 21 15 slovenia 10 12 14 spain 13 14 20 sweden 2 1 2 united kingdom 6 8 10 source: author’s own elaboration the next step consisted in dividing the countries into typological groups. the boundaries of the groups were established with the use of the arithmetical mean values and standard deviation of the synthetic variable zi (equalling 0 and 1 for each of the latent variables, respectively). the ranges assumed the following forms: group i (very high level of latent 302 i. skrodzka variable): zi ≥ 1, group ii (high level of latent variable): 0 < zi ≤ 1, group iii (low level of latent variable): -1 < zi ≤ 0, group iv (very low level of latent variable): zi ≤ -1. the results of grouping are presented in figures 2, 3 and 4. fig. 2 the eu countries according to hc in 2015 source: author’s own elaboration. fig. 3 the eu countries according to sc in 2015 source: author’s own elaboration. i group ii group iii group iv group i group ii group iii group iv group running human and social capital as factors of inequalities in economic development of eu countries 303 fig. 4 the eu countries according to ed in 2015 source: author’s own elaboration. 5. conclusions the conducted research has demonstrated that human capital as well as social capital had a statistically significant, positive impact on the economic development of the eu countries. the obtained results also made it possible to create the rankings of the examined countries according to their stocks of human and social capital and the level of economic development. denmark and sweden ranked high in all the six categories, whereas romania and bulgaria came at the bottom of the rankings. the division into typological groups showed the differentiation of the eu countries in terms of human and social capital and the level of economic development. very high stocks of human capital were observed in the following countries: denmark, sweden, finland, the netherlands. four countries were characterised by very low stocks of human capital: hungary, croatia, bulgaria and romania. six countries were qualified for the group of economies at very high stocks of social capital: sweden, denmark, the netherlands, finland, luxemburg and austria. low stocks of social capital were reported for poland, latvia, bulgaria and romania. five countries made up the group with a very high level of economic development: luxembourg, sweden, denmark, germany and austria. a very low level of economic development was recorded in: latvia, greece, croatia, bulgaria and romania. acknowledgement: some parts of the paper have been presented at the second international scientific conference on economics and management – eman 2018. i group ii group iii group iv group 304 i. 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(eds.), systems under indirect observation: causality, structure, prediction (pp. 1-54). amsterdam: north holland. ljudski i društveni kapital kao faktori nejednakosti u ekonomskom razvoju zemalja eu o značaju ljudskog i društvenog kapitala u procesima rasta i ekonomskog razvoja se široko raspravljalo u literaturi. postoji mnogo teoretskih modela ekonomskog rasta koji uključuju ljudski ili društveni kapital. međutim, i dalje postoji nedostatak empirijskih studija koje proučavaju zavisnosti između ovih pojava. svrha ove studije je da ispita ulogu koju ljudski i društveni kapital igra u procesima ekonomskog razvoja u zemljama evropske unije. empirijska analiza se odnosi na 2015. godinu. zbog činjenice da nijedna od ovih kategorija nije merljiva, istraživanje koristi metod mekog modeliranja, koji omogu ava korisnicima da ispitaju veze između varijabli koje se ne mogu direktno posmatrati (latentne varijable). sprovedeno istraživanje je pokazalo da ljudski kapital kao i društveni kapital imaju statistički značajan, pozitivan uticaj na ekonomski razvoj zemalja eu. dobijeni rezultati su takođe omogu ili rangiranje ispitanih zemalja u skladu sa njihovim zalihama ljudskog i društvenog kapitala i nivoom ekonomskog razvoja. ključne reči: ljudski kapital, društveni kapital, ekonomski razvoj, meko modeliranje, evropska unija plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 3, 2016, pp. 247 260 preliminary communication measuring market concentration in mobile telecommunications market in serbia1 udc 621.395.721.5:339.1(497.11) bojan krstić 1 , vladimir radivojević 2 , tanja stanišić 3 1 faculty of economics, university of niš, serbia 2 serbian armed forces, ministry of defense, serbia 3 faculty of hotel management and tourism in vrnjačka banja, university of kragujevac, serbia abstract. mobile telecommunications markets across the world are characterized by a modest number of suppliers and a large number of subscribers. nevertheless, the degree of market concentration varies from country to country. the purpose of this paper is to establish a methodological framework for measuring and analysing market concentration in the mobile telecommunications market in serbia. the degree of market concentration is calculated using the annual data for the period 2009-2014. the research is made by applying a set of statistical-mathematical methods for measuring market concentration, comparative analysis and descriptive statistics. the analysis finds that mobile telecommunications market in serbia is highly concentrated and that the degree of concentration exceeds the average of european union member states. the study is useful to serbian authorities such as commission for the protection of competition and regulatory agency for electronic communications and postal services, providing significant findings of structural features of the mobile telecommunications market in serbia. key words: market concentration, mobile telecommunications market, serbia introduction the telecommunications sector is one of the most vital industries and a significant factor of economic growth in many countries. the importance of this sector arises from its high technological intensity and the necessity of telecommunications infrastructure for the development of other sectors of the economy. this causal relation between the telecommunications industry and almost all other sectors of the economy emphasizes the 1received june 10, 2016 / accepted august 16, 2016 corresponding author: vladimir radivojević serbian armed forces, ministry of defense, 11000 belgrade, serbia e-mail: vladimir.radivojevic@ymail.com 248 b. krstić, v. radivojević, t. stanišić need for a permanent monitoring of the current situation and the dynamics in the telecommunications sector. such monitoring has become particularly important in the last twenty years, which are characterized by large and rapid changes in the field of information technologies. the mobile telecommunications industry is one of the most important and the most dynamic fields of telecommunications sector. for the economy, mobile telecommunications are the necessity tool for the modernization and improvement of competitiveness. for the society, they represent a tool for better access to information and for improving the quality of life. from a broader perspective, mobile telecommunications industry through new methods of communication and social dialogue contributes to the development of democracy and the reduction of social and geographical discrimination. these are the reasons for continued growth of the demand for mobile services in last two decades. in line with global trends, mobile telecommunications industry in serbia is an important factor of growth, innovation and competitiveness of other industries. it is also the biggest revenue generator of the telecommunications sector in serbia. due to such important role in the development of other industries, prices and quality of mobile telecommunications services have a significant impact on the efficiency of economy and social welfare. as well as in other industries, prices and quality of services in the market are determined by the intensity of competition between market participants, i.e. mobile network operators (mnos) in this case. one of the most commonly used indicators of the intensity of competition is market concentration, which is also used in this paper. the purpose of this research is to provide an adequate methodological framework which can be applied in measuring and analysing market concentration in the mobile telecommunications market in serbia. using annual data for the period from 2009 to 2014, the paper estimates the degree of market concentration as an indicator of the intensity of competition between mnos in serbia. the research findings are useful to serbian competition authority and regulatory agency for telecommunications, but also represent a good basis for analysis of the behaviour of market participants. the first section provides a theoretical background and literature review. previous empirical research on the competition in mobile telecommunication markets is shown in section two. section three presents a research methodology and hypothesis. research results are discussed in section four. the final section provides conclusions. 1. theoretical background and literature review – measuring market concentration numerous theoretical and empirical studies have shown that market concentration is an important indicator of market performance, which is mainly used at the beginning of market analysis. precisely, measuring market concentration is recognized as an appropriate starting point for valuation of competition intensity in the market. the causal relationship between market concentration and market performance (market power) is based on the traditional approach in industrial organization known as the structureconduct-performance (scp) paradigm. due to the fact that behaviour is difficult or even impossible to observe directly, the focus of the scp paradigm is on identifying structure variables that are observable and measurable and that are related with market power (church, measuring market concentration in mobile telecommunications market in serbia 249 ware, 2000). one of the most commonly used variables for this purpose is market share, which is applied for measuring market concentration. “the importance of market share has been recognized in the classical and neoclassical literatures, and market share is deeply established in business practice as a compelling focus for company motives and strategies” (shepherd, 1997, p. 72). measuring market concentration is based on the calculation of the indicators of market concentration, which use market share as a variable. the importance of indicators of market concentration arises from their ability to describe structural performances of the market (bikker, haaf, 2002). there is a set of those indicators that are used in market analysis (see marfels, 1971; ferguson, ferguson, 1994; lipczynski, wilson, goddard, 2009; pisanie, 2013). for the purposes of this paper, the following indicators of market concentration are theoretically elaborated below and applied in the empirical research: the n-firm concentration ratio, the herfindahl-hirschman index, the entropy index, the relative entropy index, the hall-tideman index, the rosenbluth index, the hannah-kay index, the comprehensive concentration index, the gini coefficient and the lorenz curve. a) the n-firm concentration ratio the degree of concentration measured over this indicator shows the cumulative market share of n leading companies in the relevant market. in other words, the concentration ratio represents the sum of market shares n leading enterprises, that shows what part of the entire sales revenue in the market realize selected group of n economic entities. as such, it is very easy to calculate and understand. mathematically expressed as follows (bikker, haaf, 2002, p. 6): 1 2 3 1 ... n n n i i cr s s s s s         (1) where si represents market share of the company i within the observed group of n companies. the lower value of the concentration ratio indicates that the market share of n leading enterprises is small, because a large number of small firms operate in the observed market. on the contrary, the higher value of concentration ratio indicates a higher proportion of observed group in total sales in the relevant market. the boundaries between the higher forms of concentration are not strictly defined, but depend on the market that is analyzed. b) the herfindahl-hirschman index one of the most accurate and, consequently, the most commonly used indicators in the analysis of market concentration is the herfindahl-hirschman index. this is a summary indicator, which is defined as the sum of the squares of the market share of all firms in the relevant market. the herfindahl-hirschman index (hhi) can be mathematically expressed by the following expression (davis, garcés, 2010, p. 288): 2 1 ( ) n i i hhi s    (2) where si is the market share of companies within the observed group of n companies. 250 b. krstić, v. radivojević, t. stanišić this indicator has at least two advantages over the previously described concentration ratio. first, it belongs to a group of summary indicators, and, therefore, provides more precise information than concentration ratio, because it takes into account the market share of all firms in the market. second, due to the procedure of squaring market shares, companies with larger values of market share have special importance (higher weight). antimonopoly legislation of the european union (eu) and united states (us) use hhi to classify the market in one of the following three categories (european commission, 2004; u.s. department of justice, federal trade commission, 2010): (1) unconcentrated (eu: hhi below 0.10; us: hhi below 0.15); (2) moderately concentrated (eu: hhi between 0.10 and 0.20; us: hhi between 0.15 and 0.25) and (3) highly concentrated (eu: hhi above 0.20; us: hhi above 0.25). c) the lorenz curve and the gini coefficient lorenz curve is a tool for graphically displaying the degree of market concentration and detection of inequality in market share distribution. the essence is reflected in designing concentration curve (lorenz curve) in the coordinate system with diagonal intersection (angle of 45°), which starts from the coordinate start point and ends in the upper right corner (figure 1). the abscissa shows the number of companies lined by market share value from the smallest to the largest, and the ordinate shows the total (cumulative) market share. fig. 1 lorenz curve for market with n participants source: lorenz, 1905 the diagonal intersection in the coordinate system represents perfect equality of market share distribution. on the other hand, the curve of perfect inequality, which corresponds to pure monopoly, would be identical in shape and size to the bottom horizontal (abscissa) and the right vertical line (a line that is parallel to the ordinate). the gini coefficient is a numerical indicator of market concentration, which is based on the lorenz curve. its value describes the position and the curvature of the lorenz curve, by putting in ratio an area bounded by the curve of perfect equality and the lorenz curve (area a in the figure 1) with the entire area under the curve of perfect equality (area a+b). due to difficulties of measurement surface of irregular geometric shapes which can be formed by lorenz curve, measuring market concentration in mobile telecommunications market in serbia 251 another ratio for the gini coefficient calculation was developed (lipczynski et al., 2009, p. 205): 1 1 1 1 0, 5( 1) n n i n i n i i q gc n q                    (3) where n represents the rank of companies lined from the largest to the smallest, n is the total number of observed companies, аnd qi is total sale of company i. d) the entropy index and the relative entropy index unlike the hhi, which ignores companies whose market share is less than 1%, entropy index gives relatively greater importance to small enterprises. it also belongs to a group of summary indicators. it is equal to the sum of the market share multiplied by the logarithm of their reciprocal values. it can be mathematically represented as follows (lipczynski et al., 2009, p. 202): 1 1 log n i i i ei s s   (4) where si is the market share of the company i expressed in decimal numbers. the value of entropy index is not limited as most of other concentration indicators [0,1], but ranges from zero to log n. a value of zero corresponds to the market with only one participant, and value of log n represents the market with companies of comparable size. since the maximum value of the entropy index depends on the number of companies in the relevant market, this indicator does not allow the comparison of degrees of concentration in markets with different number of participants. with the aim to eliminate this disadvantage, the relative entropy index (rei) is introduced. it represents the quotient of the measured entropy index and its upper limit value (logarithm of the number of companies in the relevant market), which can be expressed as the following form (lipczynski et al., 2009, p. 203): log ei rei n  (5) the value of rei ranges from 0 to 1. value of 0 corresponds to pure monopoly, while the value of 1 represents a market in which companies have identical market shares. this indicator allows comparison of markets with different number of participants. e) the hall-tideman index and the rosenbluth index the hall-tideman index and the rosenbluth index are almost identical indicators of market concentration, which emphasize the importance of the absolute number of companies in the relevant market. the main reason for this arises from the creators of the theory of these indicators that the entry of new competitors in a particular market is largely determined by the number of market participants. in other words, they assumed that market entry is relatively easy if it operates with a large number of small firms and it is relatively difficult if it operates with a 252 b. krstić, v. radivojević, t. stanišić small number of large firms. the hall-tideman index is calculated using the formula (bikker, haaf, 2002, p. 10): 1 1 (2 1) n i i hti is    (6) where si is the market share of company i, and i represents the rank of that company, whereby the company with the largest market share has the rank i = 1, and company with the smallest market share has rank i = n. the rosenbluth index is calculated using the formula (bikker, haaf, 2002, p. 10): 1 1 (2 1) n i i hti js    (7) where si is the market share of company i, and j represents the rank of that company, whereby the company with the largest market share has the rank j = n, and company with the smallest market share has rank j = 1. f) the hannah-kay index the hannah-kay index is based on the hhi, so the characteristics of these two indicators are very similar. the hannah-kay index (hki) is the sum of market shares of all companies in the market graded with exponent α. it is calculated by the following formula (lipczynski et al., 2009, p. 201): 1 ( ) ( ) n i i hki s      (8) where si is the market share of the company i, whereby α > 0, α ≠ 1. the value of the exponent α is arbitrarily determined and has great influence on the result. the low value of the exponent α (α < 2) emphasizes the impact of small enterprises; and high values of this parameter (α > 2) emphasize the impact of large enterprises on the market concentration degree. g) the comprehensive concentration index (the horvath index) the comprehensive concentration index, which is also called the horvath index, originates from the need to explore the problem of market concentration versus market share dispersion (horvath, 1970). in other words, horvat has developed a new indicator on the criticism of the indices that have been used, and which are mainly based on measuring equality in the dispersion of market share. in order to eliminate these deficiencies, horvat has developed a comprehensive concentration index, which is calculated using the formula (horvath, 1970, p. 446): 2 1 2 ( ) (2 ) n i i i cci s s s     (9) where s1 is the market share of the largest company within the observed group of n companies. measuring market concentration in mobile telecommunications market in serbia 253 the share of the largest company stands out from the sum of the squares of the market share of all other firms in the relevant market and multiplier which represents a proportionate share of these companies. the horvath index value ranges from 0 to 1. in a market with a large number of approximately equal participants value of the index tends to 0, while the value of 1 corresponds to market of pure monopoly. 2. empirical research on the competition in mobile telecommunications markets there are numerous empirical studies on the state of competition in the mobile telecommunications markets worldwide. from a large body of these studies, it is possible to identify a set of different variables through which the state of competition in the mobile telecommunications market could be evaluated. dörrenbacher (2000) proposes turnover and operating income, curwen and whalley (2006) estimate internationalization according to the number of subscribers and countries in which the mobile operator is present, while grzybowski (2008) compares the competitiveness of mobile industry across the eu through countryspecific price elasticity and conjectural variations. early empirical studies on mobile telecommunications market have predominantly analyzed the state of competition in duopolistic market structures. due to the fact that many countries such as the united states, the united kingdom and sweden had only two mnos for a long time, researchers’ attention onto duopolistic structures was expected. for instance, parker and röller (1997) analyze duopolistic competition in the us mobile telecommunications industry in the period 1984-1988 and show that the prices are significantly above competitive levels. similar as parker and röller (1997), busse (2000) finds that tacitly collude between two mnos in the us market could increase prices in the range from 7% to 10%. also, conclusions about stable, high prices in duopolistic market structure as a consequence of tacit collusion are reached by stoetzer and tewes (1996) in the german market and valletti and cave (1998) in the uk market. later studies pay close attention to the internationalization of the mobile telecommunications industry and the progress of market concentration. for example, gerpott and jakopin (2005) analyze internationalization data of 14 european mnos in the period 1997-2003. they found that subscriber-based market share of these 14 operators amounted to 80.2% across 27 european countries in 2003. they also found that the average foreign revenue share increased from 11.4% in 1997 to 46.2% in 2003. whalley and curwen (2012) analyze incumbency and market share of mnos in 49 european countries including serbia. the analysis shows that in most european countries the incumbent remains to be the largest operator measured by subscribers-based market share. these authors also found that many european markets were highly concentrated in 2010, which was the main barrier to new entrants. finally, sung (2014) explores market concentration of mobile telecommunications market in 24 oecd member states in the period 1998-2011. the results of the study of the whole sample period indicate a positive relationship between market concentration, prices and profits: more concentrated market allows higher prices and profits. such research results suggest market concentration as a useful indicator of market performance. 254 b. krstić, v. radivojević, t. stanišić 3. research methodology and hypothesis the purpose of this research is to measure and analyze the degree of market concentration of mobile telecommunications market in serbia in the period 2009-2014. in accordance with the purpose of research, the authors tested the following hypotheses: h1: mobile telecommunications market in serbia is characterized by a high degree of concentration. h2: the degree of market concentration has a downward trend in the observed period. h3: the degree of market concentration in serbia is higher than the average degree of market concentration in eu member states. measuring market concentration is based on data retrieved from the official periodical publication of regulatory agency for electronic communications and postal services of the republic of serbia published in 2015 (pregled tržišta telekomunikacija i poštanskih usluga u republici srbiji u 2014. godini, regulatorna agencija za elektronske komunikacije i poštanske usluge r. srbije – ratel, 2015) for serbian market and on data retrieved from mariniello and salemi (2015) for eu member states. in order to test the basic hypothesis, following research methods are used in the paper: a set of statistical-mathematical methods for measuring market concentration, comparative analysis and descriptive statistics. 4. research results and discussion mobile telecommunications services in the republic of serbia in the period 20092014 were provided by three mnos: telekom srbija a.d. – mobilna telefonija srbije mts, telenor d.o.o. and vip mobile d.o.o. all three operators are licensed for public mobile telecommunications services in accordance with gsm/gsm1800 and umts/imt2000 standards. telekom srbija a.d. – mobilna telefonija srbije mts is majority owned by the republic of serbia. the company started to provide mobile telecommunications services in august 1998, through a network based on the gsm standards. mobilna telefonija srbije had 4,062 base stations in serbia at the end of 2014. beside serbian market, mobilna telefonija srbije is through subsidiary companies present as a mno in the republic of srpska and montenegro. norwegian company telenor d.o.o. is a part of the telenor group, which operates in 13 countries in europe (including hungary, montenegro and bulgaria) and asia, and in another 17 countries around the world through ownership stake in vimpelcom. telenor has operated in the serbian market since july 2006, after it bought mobi63 company. there were 3,398 telenor’s base stations in serbia in 2014. austrian vip mobile d.o.o. is the owner of third license for mobile telecommunications network and services in serbia since december 2006. vip mobile is a member of telekom austria group, which is present in eight countries in europe, including croatia, bulgaria and macedonia. vip mobile had 2,966 base stations in serbia at the end of 2014. according to ratel (2015), the total number of mobile phone users in serbia has been growing steadily in recent years. the number of users in 2014 exceeds the total population and amounts to 9,344,977, i.e. the penetration in observed year is 130.76%. postpaid users accounted for 47% and prepaid users 53% of the total number of subscribers in 2014. measuring market concentration in mobile telecommunications market in serbia 255 figure 2 shows the market share of mnos in serbia according to total number of subscribers in the period 2009-2014. 0 10 20 30 40 50 60 2009 2010 2011 2012 2013 2014 telekom mts telenor vip mobile fig. 2 market share of mnos in serbia according to total number of subscribers; 2009-2014 source: ratel, 2015, p. 68 the relative positions of the operators in the observed period has not changed (figure 2). according to total number of subscribers, mobilna telefonija srbije has the largest market share in the entire period. telenor held second position, while vip mobile has the lowest market share in every observed year. nevertheless, data from figure 2 show that the divergence between the market share of operators in the period 2009-2014 decreased continuously, i.e. that distribution of total number of subscribers was becoming more and more equable from year to year. measuring the concentration of mobile telecommunications market in this paper is based on market share indicator. although it is possible to calculate market concentration according to the number of subscribers, the authors have chosen revenue as more appropriate indicator of market conditions. this indicator is computed as the quotient of the revenue earned by the participant and total revenue of all participants in the observed market. total realized revenue (in millions of euros) and market share of mnos in serbia in the period 2009-2014 are presented in table 1. table 1 total realized revenue (in millions of euros) and market share of mnos in serbia; 2009-2014 year indicator telekom srbija a.d. (mts) telenor d.o.o. vip mobile d.o.o. total 2009 revenue 419.15 334.82 72.75 826.74 market share 0.507 0.405 0.088 1 2010 revenue 336.14 326.14 106.92 769.2 market share 0.437 0.424 0.139 1 2011 revenue 328.52 369.16 149.02 846.7 market share 0.388 0.436 0.176 1 2012 revenue 323.85 360.4 165.75 850 market share 0.381 0.424 0.195 1 2013 revenue 324.75 359.86 193.1 877.7 market share 0.37 0.41 0.22 1 2014 revenue 311.67 341.32 193.95 846.94 market share 0.368 0.403 0.229 1 source: author’s calculation based on data of ratel, 2015, p. 63 and p. 68 256 b. krstić, v. radivojević, t. stanišić telekom srbija mts had the largest market share in 2009 and 2010, but telenor has taken a leading position in 2011 (table 1). as well as in the case of number of subscribers, vip mobile has the lowest market share in the entire period. nevertheless, market share should not be the only indicator of competitive conditions in the analysis of market concentration. considering that fact, the authors use all indicators of market concentration elaborated in theoretical background in the analysis of mobile telecommunications market. the values of concentration indicators of the mobile telecommunications market in serbia in the period 2009-2014 are presented in table 2 and figure 3. table 2 the values of concentration indicators of the mobile telecommunications market in serbia; 2009-2014 concentration indicator range 2009 2010 2011 2012 2013 2014 concentration ratio of two largest firms 0 < crn < 1 0.91 0.86 0.82 0.81 0.78 0.77 herfindahl-hirschman index 1/n < hhi < 1 0.43 0.39 0.37 0.36 0.35 0.35 entropy index 0 < ei < log n 0.92 1.00 1.04 1.05 1.07 1.07 relative entropy index 0 < rei < 1 0.84 0.91 0.94 0.96 0.97 0.98 hall-tideman index 0 < hti < 1 0.46 0.42 0.40 0.39 0.38 0.38 rosenbluth index 0 < ri < 1 0.26 0.28 0.28 0.29 0.30 0.30 hannah-kay index (α = 2,5) 1/s1 < hki < n 0.29 0.25 0.23 0.22 0.21 0.21 comprehensive concentration index 0 < cci < 1 0.78 0.76 0.74 0.73 0.72 0.72 gini coefficient 0 < gc < 1 0.21 0.15 0.11 0.09 0.07 0.07 concentration ratio of two largest firms 0 < crn < 1 0.91 0.86 0.82 0.81 0.78 0.77 source: author’s calculation the results of all indicators of market concentration presented in table 2 confirm the existence of a relatively stable oligopolistic market structure in the mobile telecommunications market in serbia in the period 2009-2014. according to the market classification system of eu and us which is based on the value of hhi (see theoretical background of this paper), the mobile telecommunications market in serbia is classified in the group of highly concentrated markets. it is particularly important to note that the degree of market concentration significantly exceeds the lower limit of the high concentration zone (eu: hhi above 0.20; us: hhi above 0.25). the value of hhi of mobile telecommunications market is in the range from 0.35 to 0.43. the highest degree of market concentration is recorded in 2009, and the lowest in 2014. trend of constant decline of market concentration degree from 2009 to 2014 indicates a permanent increase of competition intensity in the mobile telecommunications market in serbia. the values of the concentration ratio of two largest firms, the entropy index, the relative entropy index, the hall-tideman index, the rosenbluth index, the hannah-kay index, the comprehensive concentration index and the gini coefficient presented in table 2 point out to the same conclusion as well as in the case of hhi. analysis of these values shows that the highest degree of market concentration is recorded in 2009, and the lowest in 2014, but also that there is a trend of constant decline of market concentration degree from 2009 to 2014. measuring market concentration in mobile telecommunications market in serbia 257 a) b) fig. 3 the lorenz curve of the mobile telecommunications market in serbia: (a) 2009; (b) 2014 source: author’s presentation comparison of the lorenz curve position in 2009 and in 2014 (figure 3) also indicates significant decrease of market concentration degree from 2009 to 2014, i.e. significant approaching of the lorenz curve to the diagonal intersection in the coordinate system which represents perfect equality of market share distribution. table 3 shows the results of descriptive statistics for values of concentration indicators of the mobile telecommunications market in serbia in the period 2009-2014. table 3 results of descriptive statistics for values of concentration indicators of the mobile telecommunications market in serbia; 2009-2014 concentration indicator n minimum maximum mean standard deviation coefficient of variation concentration ratio of two largest firms 6 0.77 0.91 0.8250 0.0524 0.0636 herfindahl-hirschman index 6 0.35 0.43 0.3750 0.0308 0.0822 entropy index 6 0.92 1.07 1.0250 0.0575 0.0561 relative entropy index 6 0.84 0.98 0.9333 0.0520 0.0557 hall-tideman index 6 0.38 0.46 0.4050 0.0308 0.0761 rosenbluth index 6 0.26 0.30 0.2850 0.0152 0.0532 hannah-kay index (α = 2,5) 6 0.21 0.29 0.2350 0.0308 0.1312 comprehensive concentration index 6 0.72 0.78 0.7417 0.0240 0.0324 gini coefficient 6 0.07 0.21 0.1167 0.0547 0.4684 concentration ratio of two largest firms 6 0.77 0.91 0.8250 0.0524 0.0636 source: author’s calculation (spss 22) the values of all indicators of market concentration except the gini coefficient do not deviate from the mean a lot (table 2 and table 3). in such circumstances standard deviation and coefficient of variation is low. that points out that there is low heterogeneity and variability of values of concentration indicators. however, coefficient of variation of the gini coefficient 258 b. krstić, v. radivojević, t. stanišić amounts 0.4684. such value of coefficient of variation indicates moderate variability of the gini coefficient values in the observed period. results of descriptive statistics presented in table 3 confirm that there was a relatively stable oligopolistic market structure in the mobile telecommunications market in serbia in the period 2009-2014, with a moderate change of the gini coefficient value and small changes of values of all other concentration indicators. in order to examine the degree of market concentration of mobile telecommunications market in serbia in comparative perspective, table 4 presents subscriber-based hhi value of the mobile telecommunications market and the number of mnos in serbia and eu member states in 2014. table 4 subscriber-based hhi value of mobile telecommunications market and the number of mnos in serbia and eu member states; 2014 range subscriber-based hhi value and the number of mnos hhi < 0.3000 poland 0.2562 (4); united kingdom 0.2771 (4); italy: 0.2854 (4) 0.3000 < hhi > 0.3500 france: 0.3122 (4); romania: 0.3155 (4); spain: 0.3179 (4); sweden: 0.3213 (4); germany: 0.3362 (3); finland: 0.3449 (3); lithuania: 0.3459 (3); denmark: 0.3475 (4); czech r.: 0.3482 (3) 0.3500 < hhi > 0.4000 netherlands: 0.3500 (3); belgium: 0.3507 (3); hungary: 0.3539 (3); slovakia: 0.3540 (3); austria: 0.3542 (3); estonia: 0.3567 (3); bulgaria: 0.3572 (3); serbia: 0.3579 (3); ireland: 0.3657 (3); latvia: 0.3682 (3); portugal: 0.3822 (3); greece: 0.3749 (3); croatia: 0.3954 (3) hhi > 0.4000 luxembourg: 0.4155 (4); slovenia: 0.4438 (3) note: the number of mnos for every country is shown in the brackets next to hhi value. countries are listed according to hhi value: from the lowest to the highest. malta and cyprus are not included. source: author’s calculation based on data of mariniello, salemi, 2015, p. 4 for eu member states and on data of ratel, 2015, p. 68 for serbia mobile telecommunications market in serbia is positioned in a group of eu markets whose value of hhi is in the range between 0.3500 and 0.4000 (table 4). serbia is ranked at 20 th place, i.e. serbian hhi (0.3579) is higher than the hhi of 19 eu member states and lower than the hhi of 7 eu member states. also, the hhi value of serbian market is higher than the average hhi value of eu member states (0.3473). all countries from table 4 have 3 or 4 mnos. there are 9 countries with 4 operators and 18 countries with 3 operators. serbia is in a group of countries with 3 operators. obviously, countries with 4 operators such as poland, united kingdom, italy and others have a lower hhi compared to the countries with 3 operators such as serbia. however, that is not a strict rule in this analysis. for example, luxembourg with 4 operators has much higher hhi value (0.4155) than serbia (0.3579) and all other countries excluding slovenia which has the highest hhi value (0.4438). conclusion empirical research of the mobile telecommunications market in serbia in the period 2009-2014 proposes verification of all hypotheses. the analysis finds a high degree of concentration of supply in the market, but also the existence of oligopolistic market structure measuring market concentration in mobile telecommunications market in serbia 259 which is characterized by a replacement between two mnos on the leading position by revenue-based market share in the observed period (confirmed h1). the values of all indicators of market concentration show that the highest degree of market concentration is reached in 2009, and the lowest in 2014, but also that there is a trend of constant decline of market concentration degree from 2009 to 2014 (confirmed h2). the downward trend of market concentration indicates a permanent increase of competition intensity in the mobile telecommunications market in serbia. results of descriptive statistics substantiate a relatively stable oligopoly with a moderate change of the gini coefficient value and small changes of values of all other indicators of market concentration. it is also obtained that the degree of market concentration of the mobile telecommunications market in serbia expressed in subscriber-based hhi value is higher than the average degree of market concentration in eu member states in 2014 (confirmed h3). according to hhi value, serbia is ranked at 20 th place among the 26 eu countries, and it belongs to the group of 18 countries with 3 mnos. the conclusions of the paper can contribute to better understanding of the application of indicators of market concentration in qualitative analysis of competitive conditions in the market. the limitations of the study arise from the shortcomings of indicators of market concentration, i.e. its properties such as referring only to certain companies (n-firm concentration ratio) or measuring only equality in the total market share distribution (gini coefficient and lorenz curve). because of these shortcomings, but also because of the purpose of indicators of market concentration, the findings of this research must be seen as a first step in the qualitative analysis of competitive conditions in the mobile telecommunications market in serbia. it is necessary to apply an additional set of methods and models to reach the final conclusions on the competition intensity between market participants and their behaviour. references bikker, j., haaf, к. 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(2012) incumbency and market share within european mobile telecommunications networks, telecommunications policy, volume 36 (3): 222-236. merenje trţišne koncentracije na trţištu mobilnih telekomunikacija u srbiji tržišta mobilnih telekomunikacija širom sveta karakteriše skorman broj ponuđača i veliki broj pretplatnika. ipak, stepen tržišne koncentracije varira od zemlje do zemlje. svrha ovog rada jeste utvrđivanje metodološkog okvira za merenje i analiziranje tržišne koncentracije na tržištu mobilnih telekomunikacija u srbiji. stepen tržišne koncentracije je izračunat korišćenjem godišnjih podataka za period 2009-2014. godina. istraživanje se vrši primenom skupa statističko-matematičkih metoda za merenje tržišne koncentracije, komparativne analize i deskriptivne statistike. analiza otkriva da je tržište mobilnih telekomunikacija u srbiji visoko koncentrisano i da stepen koncentracije premašuje prosek zemalja članica evropske unije. rad je koristan državnim organima srbije, kao što su komisija za zaštitu konkurencije i regulatorna agencija za elektronske komunikacije i poštansku delatnost, jer pruža značajne rezultate strukturnih karakteristika mobilnog telekomunikacionog tržišta u srbiji. ključne reči: tržišna koncentracija, tržište mobilnih telekomunikacija, srbija http://www.ratel.rs/upload/documents/pregled_trzista/rate-pregled-trzista-za-2014-web.pdf facta universitatis series: economics and organization vol. 13, n o 2, 2016, pp. 205 215 measures of agricultural policy in the republic of serbia with emphasis on the situation in nisava district1 udc 338.43(497.11) zoran simonović, branko mihailović, jonel subić institute of agricultural economics, belgrade, serbia abstract. the authors give a brief overview of the situation in the implementation of agricultural policy in serbia. they introduce us to support measures which are an important factor for maintaining agricultural production. serbia is obliged to harmonize its agricultural policy with the common agricultural policy of the european union cap. this process of harmonization needs to be done now that the republic of serbia has become a candidate country for eu membership. in the current economic conditions, the survival of farms is threatened. a key problem is the ownership structure of farms in serbia, which are located in small areas of land. this also represents agreat fragmentation of land. it is necessary to carry out procedures of land consolidation and land redistribution in order to achieve agglomeration, which would result in an increase in the quantity and quality of agricultural production. at the end, the authors provide a study on the state of implementation of agrarian policy in the nisava district. the aim of the research is to analyze the results of the use of agricultural policy measures. key words: agricultural policy, the republic of serbia, agrarian budget subsidies. introduction the market support includes pricing, support and subsidy funds to support the farms, storage of wheat and direct payments to producers (premium for wheat, industrial crops, hops and milk, direct payment to producers of wheat, soybeans certified seed incentive, bonus and livestock breeding queen bees, encouragement raising perennial plants in fruit growing, viticulture and the production of hops, lemon balm incentive to raise the basic planting material, recovery of fuel and fertilizer). the government subsidies are assets used for compensation of producers to achieve cost-effective production done in the previous period. these funds are primarily used for further investments in raw materials and working capital. subsidies are non-refundable 1received may 13, 2016 / revised june 9, 2016 / accepted june 15, 2016 corresponding author: zoran simonović institute of agricultural economics, volgina str. 15, 11060 belgrade, serbia e-mail: zoki@medianis.net 206 z. simonović, b. mihailović, j. subić and free resources. the funds that are not subsidies means that the agricultural system can use them at their own discretion. the state is the one that determines the production in a given year, and the wider social interest. also state determines the amount of compensation per unit of production date and in accordance with these subsidies pays to producers for the actual production. in this way the government through subsidies and premiums artificially creates positive financial effects in certain industries. (vasiljević z., 2008, 76.) the countries encourage producers of the following year to found the same product through subsidies. 1. the funds from the agricultural budget if we look at what the contribution of agriculture to the formation of gross domestic product is, we can point out that the share of the agricultural budget in the budget of the republic of serbia in all these years has been relatively small, and in 2009, 2010 and 2011 was extremely low (table 1). in the period from 2004 until today, with the introduction of a registered farms system, the three crucial years for the farm subsidies can be ascertained. in 2004, the largest real agricultural budget funds were granted to only 38,000, or 4.8% of the total number of farms in serbia. in 2008, the subsidy program was applied per hectare and livestock that had more character than social development policy, and used by around 418,000 registered farms, or 53.7% of the total number of individual farms. (simonović z., 2014, 177). table 1 agricultural budget in the period 2004-2015 year republic of serbia year total expenditures and expenditures for the purchase of non-financial and financial assets budget of the ministry of agriculture, forestry and water management the funds from the budget participation in % of total expenditure rs 2004 362.045.252.000 18.059.553.000 4,99% 2005 400.767.778.000 16.269.962.000 4,06% 2006 505.820.602.000 23.593.481.000 4,66% 2007 595.517.786.100 21.410.029.000 3,60% 2008 695.959.075.793 27.634.337.342 3,97% 2009 719.854.143.000 15.964.071.000 2,22% 2010 825.884.941.052 20.572.438.000 2,69% 2011 818.344.423.000 22.033.208.000 2,45% 2012 940.157.524.000 36.600.000.000 3,90% 2013 1.067.880.560.900 39.349.382.000 3,68% 2014 1.110.120.984.547 39.358.511.000 3,54% 2015 1.082.988.184.000 41.433.438.000 3,82% source: ministry of finance and economy of the republic of serbia and calculation of the authors. in 2009, small agricultural budget subsidies were available for only 84,000 registered farms, or 10.8% of the total number of family farms. a smaller part of this small group of users consists of a subsidy for 20,000 registered farms in the so-called marginal areas. the second, larger part of this group of users of drastically reduced subsidies are only registered farms whose owners or holders of the so-called household accepted the obligation to pay measures agricultural policy in the republic of serbia with emphasis on the situation in nisava district 207 contributions for pension and disability and health insurance as well as farmers. in the period since 2012, there has been a slight increase in the agricultural budget by 1% compared to the previous period. it is estimated that about 400,000 households located on the edge of existence and the question of how to design production in the next production year. the number of land owners to experience their fate in the coming years is difficult to predict. this situation poses a great risk for the country that fails to amortize the transitional impacts in agriculture and the countryside. it brings about the creation of new vulnerable groups of farmers that will continue to rely on social funds because they no longer have their working capital. in practice, this means that those who have a debt, but have spent dedicated funds or had an unfavorable climatic year, with the growth of the euro will not be able to repay the loans that have already been reprogrammed one or more times. 2. types of subsidies the subsidies and incentives in the serbian agriculture system include the following measures:  premiums for certain agricultural products.  pay for the use of biological growth factors and other production costs. in this sense, the premiums for certain agricultural products branch continue the following segments that are subsidized:  the production of fresh milk.  for breeding calves.  for fattened cattle.  for the production of basic crops. in order to encourage greater use of biological growth factors of agricultural production, fuller utilization of specific regional agro ecological resources and reducing total input costs in agricultural production vertical, it is necessary to provide grants for production inputs, namely:  for high-quality varietal seed wheat and soybeans,  seeds of forage crops (leguminoze, grass and grass mixture)  for high-quality varietal seed potatoes,  for high-quality planting material of fruit crops and virus-free spools of certain varieties of grape. the payment of subsidies of 14,000 dinars (in 2009 of 12,000 dinars) per hectare of arable land covers around 750,000 ha (in 2009, about 620,000 ha) in about 63,000 households. in this way the production of 23% (in 2009 20%) of arable land in serbia was supported. the exact number of farms enrolled in the registry is not known as well as the exact number of farms that have achieved direct support per hectare due to the apparent lack of transparency of the ministry. support for the market price of wheat was done in 2004 by purchasing of administrative prices for the purpose of forming strategic commodity reserves of the republic directorate for commodity reserves. (popović v., katić b., 43). subsidizing grain storage was planned in the amount of 750 dinars per ton of stored wheat at authorized storekeeper to surrender the quantity of generation of 2005, but up to 4 tons per hectare. (official gazette of the republic of serbia no. 60/05, 71/05.) in 2006, 208 z. simonović, b. mihailović, j. subić subsidies were related only to the storage of wheat to natural persons who are registered holdings, provided that the wheat storing is done in case of legal entity or the entrepreneur whose business is storing wheat. milk producers in all the previous years were entitled to the premium which has to some extent improved their economic situation. manufacturers of cow, sheep and goat milk were entitled to the premium provided that they meet the prescribed quality of milk that is produced in the republic of serbia and that it is handed over to the milk producer located in the territory of the republic of serbia. the premium is granted according to the latest regulation for legal entities which have a share of at least 90% of the state capital and private persons who are holders of domestic commercial individual farms. (official gazette of rs, no. 7/10.) the eu member states, unlike serbian producers of raw milk, are mainly owners or participate in the property's dairy industry. the state of serbia has never recognized its mistakes in the privatization of the food industry which includes the dairy industry. in 2004, the premium of 800 million liters of cow's milk was 4 to 4.4 dinars per liter, that is 0.05 euros per liter, while in 2009 the premium for milk and coverage premium liters was significantly reduced (price premium is around 414 million liters a premium of 1.0 + 1.0 din of extra class) while in 2010 premiums amounted to 1.5 dinars / liter. after the revised budget for 2010 and providing an additional 650 million dinars, the ministry of agriculture announced increase in milk premiums in the fourth quarter. also the inclusion of legal persons in the support system for milk production was announced. in the case of state subsidies in dairy production, in particular premium per liter of milk, we can see how little attention is paid in serbia to subsidizing milk production. subsidies on milk production are the lowest in serbia with 1.4 eurocents, while in bosnia and herzegovina they amount to 11 euro cents, while in croatia they are 12 euro cents per liter. (veljković, b., vico, g., koprivica, 2009). the measures to protect the milk production were high in 2004, and in subsequent years measures were inadequate and non-permanent. during this period, however, there have been desirable structural changes in this branch of agriculture, among other things because the largest owner of industrial milk (salford) was tasked to improve this production among its suppliers, primarily in the quality of milking and increase the volume of production per head, reduce number of suppliers but also maximize its own profit in order to facilitate sales. it turned out that such a policy created by the majority owner does not coincide with the interests of the state. (simonović z., 2014, 180). since 2001, the bonus has been awarded to breeding cattle and milk premiums. in 2007, they were given incentives for fattening cattle. in 2008, the support for the production of pork and fattening breeds procurement for the expansion of livestock and meat production in cattle farming was abolished. support for the production of pork, beef and poultry meat is completely missing as this production is mainly oriented to the domestic market with the occasional import. subsidies for cattle in 2004 (along with support for investments in the production and processing of milk and meat from 800 million dinars), amounted to about 37% of the total budget for agriculture, and in 2009 only about 7 % of budget dedicated to agriculture was allocated for livestock. the subsidizing purchases or breeding quality cows of certain types of livestock have been practiced over a longer period of time. this facilitates the acquisition of livestock breeders or breeding this kind of cattle. lately particular attention is paid to autochthonous species of animals and in particular to the following types: podolian cattle, busha, domestic buffalo, measures agricultural policy in the republic of serbia with emphasis on the situation in nisava district 209 domestic mountain horse, nonius, balkan donkey, pigs mangulica (white and red strain), мoravka, resavka stranded wire (pirot, krivovir, bardoka, lipski, vlach vitoroga, karakachan) ĉokansko tsigai, balkan goat, poultry kaporka, banat and svrljig chicken. (official gazette of rs, no. 15/10). the incentives that are allocated for beekeeping have been present in serbia for several years. the right to these incentives is held by natural person’s holders of farms. (official gazette of rs, no. 25/10). the result of the current policy of the state in the livestock sector of serbia, is a very low share of animal husbandry in total agricultural production value of only 30.7% (in vojvodina only 24%), while the share of animal husbandry in the total value of agricultural production in most eu countries is over 60% . the central serbia has 0.33 and vojvodina only 0.25 of conditional heads of cattle per hectare. the most extensive eu country is greece with 0.38 livestock units per hectare and the most productive the netherlands with 0.98 livestock units per hectare. this is best illustrated by the extensive nature of agriculture of serbia as a whole. the aim of incentives for planting new orchards, vineyards and plantations of hops is to improve fruit and grape production in serbia. unfavorable situation in orchards and vineyards is characterized by the presence of unsuitable varieties and plant diseases in orchards, as well as reducing the area under vineyards. the incentive measures should contribute to increasing the production, productivity and competitiveness. latest decree regulates the conditions and manner of use of incentives to raise production orchards of fruit trees and berries except the production of vineyards and hops. (official gazette of rs, no. 24/10). it is not known why the ministry of agriculture in 2010 did not plan funds to support the purchase of grapevine and special needs fruit seedlings due to changes in production structures in this direction and to increase the area under orchards, although there is a regulation. the same is the case with support for implementation of the law on public warehouses. the program of distribution and use of funds for subsidies in agriculture, forestry and water resources is intended for reimbursement of mineral fertilizer and fuel (diesel fuel, bio diesel and euro diesel). the mineral fertilizers and fuels in terms of the last regulation refer to raw materials. (official gazette of rs, no. 7/10). the government of serbia, through the relevant ministry of agriculture, has provided interest subsidies for short-term loans to nearly 9,000 farms in the status of natural persons whereby the potential of 11 banks placed 3,345.000.000 dinars (32 million euros) in shortterm loans. (official gazette of rs, no. 33/11 and 38/11). the credit support is designed to encourage agricultural production, the development of farming, horticulture, viticulture and vegetable production, the development of animal husbandry, for investments in agricultural machinery, credit support for investment in agricultural facilities and others. these measures are a good trend because the credit activity was relocated to commercial banks. on the other hand, the access to credit is not enabled to the majority of households that have a need for it. if one takes into account the average investment in raw materials in the production of wheat, this measure covers the investment for only about 90,000 hectares of wheat, indicating a very small value of these loans. 210 z. simonović, b. mihailović, j. subić 3. stages in the implementation of agrarian policy of serbia systemic and structural reforms of the agricultural sector in the republic of serbia started after 2000. since then, agricultural and rural policy in serbia has gone through several stages. in the period 2001-2003, the scarce resources in the budget intended for agriculture did not provide enough space for more radical reforms. in support measures, significant support was given for prices for certain "strategic products" (premiums for oilseeds, sugar beet, wheat, etc.). the average share of the agricultural budget in the national budget during this period was 3.13%. in the period 2004-2006, there have been significantly diverted obligations and mechanisms for the implementation of measures of agricultural and rural policy. a system of direct payments, then, support system, investment in rural development, which enabled: favorable loans in relation to the market, renting farmland and encouraging the registration of farms. the average share of the agricultural budget in the national budget during this period was 4.57%. the period 2007-2009 was dominated by the system of direct payments per hectare of sowing areas, or per head of cattle, and continued to support investment in rural development and modernization of agriculture, the use of subsidized loans. the average share of the agricultural budget in the national budget during this period was 3.26%. in 2010, the dominant model was that of direct payments and in comparison with the previous period,measureswere to a large extent focused on the implementation of rural development policy. the average share of the agricultural budget in the national budget during this period was 2.26%. for 2011, the most important elements in the reform processwere: market liberalization, support for the development of agriculture by encouraging family farms and improving living conditions in rural areas, adjusting the foreign trade policy by neccesarry development of agriculture and processing industry, the gradual harmonization in accordance with the rules and principles of the wto, the introduction of technological innovations in the production process, strengthening production capacity and professionalization of services in agriculture, strengthening institutional support sector modernization and reform of existing laboratories and veterinary inspection services. the average share of the agricultural budget in the national budget in 2011 amounted to 2.45%. in the year 2012 the most important elements of agricultural policy in the reform processwere: continued support for the development of agriculture by encouraging family farms and improving living conditions in rural areas, adjusting the foreign trade policy by necessarrydevelopment of agriculture and processing industry, the gradual harmonization in accordance with the rules and principles of the wto, strengthening production capacity and professionalization of services in agriculture, strengthening institutional support to the sector by increasing the number of employees in professional advisory services in the field, as well as the modernization of existing laboratories, inspection and veterinary services. the system of incentives for the first time included both natural and legal persons. it was envisaged that the design of agricultural policy for 2013 would be based on the full recovery of agriculture, the national program for agriculture was established, with its financial consolidation and affirmation of intensive production structure. all this was supposed to be implemented from the support of the agricultural budget, which in 2012 amounted to 30.6 billion and represented only 2.4 percent of the total budget of the republic of serbia for the year 2012. measures agricultural policy in the republic of serbia with emphasis on the situation in nisava district 211 according to the aforementioned draft law, for the purpose of the implementation of activities in the field of their competence, the budget in the amount of 39,349,382,000 dinars has been placed at the disposal of the ministry of agriculture, forestry and water managementof, which makes 3.68% of the total national budget. if you include the allocation of additional revenue, the total budget amounts to 40,179,382,000 dinars, or 3.78% of the national budget. funds intended for subsidies in agriculture amounted to 32,802,298,000 dinars, and were distributed in accordance with the law on incentives in agriculture and rural development (draft) for agricultural production in 2013. the incentives for agriculture are in line with the applicable law on agriculture and rural development of the republic of serbia (official gazette of rs, no. 41/09). in 2013, the measures envisaged direct and structural incentives, but missed the market and institutional incentives. in 2014 the strategy of agriculture and rural development was written. the strategy is a fundamental and long-term strategic document that defines the objectives, priorities and frameworks of political and institutional reforms in the field of agriculture and rural development. in addition, this document defines a framework of budgetary support (total and by pillars rate), which clearly reflects the commitment of the new development strategy. this document will establish the foundations of a new agricultural policy, defined in accordance with the principles of modern management of public policies and in line with the clear commitment of the ministry of agriculture and environmental protection for the gradual takeover of the european model of agriculture support. all this means that this document defines the status of agriculture, which should be: economically profitable, market-oriented and attractive for farmers and agricultural companies that are engaged in this activity for purely economic profit reasons, leaving the other competent authorities to deal with social policy at the village and for a period not shorter than 10 years (following the law on agriculture and rural development from 2009). we believe that in 2015 there came in some way a missed opportunity to increase agricultural production at a rate of about two percent. it had been possible with the use of appropriate agricultural policy measures, primarily by increasing the agricultural budget funds, the fund for developments banks the fund for the development of agriculture in the model with the agrobank, funds for the development of republics and provinces and local governments, business banking and other domestic and foreign financial institutions. distribution and use of funds of the national budget for 2016 should be regulated by the law on budget of the republic of serbia for the year 2016. 4. results of the agrarian policy in the nisava district in order to show the status of the application of agricultural policy in the nisava district we have done the research. the aim of the research is to analyze the results of the application of the concept of the usage of agricultural policy in the transition process. for this survey prepared a special questionnaire. according to the state from 2012, the nisava district has 31,709 farms. the poll surveyed 159 owners of farms, or 0.5% of the total number of farms in the nisava district. the author filled a good number of questionnaires himself on the field while completing, he led a discussion with the persons surveyed and became acquainted with the state instruments of labor, buildings, orchards, etc. that is to say, that in addition to polling methods, there were somewhat present interview methods too (interview as a method of direct observation and insight into the farm). 212 z. simonović, b. mihailović, j. subić 5. issues related to the implementation of agricultural policy as shown in table 2, it can be concluded that one-third of the respondents have very little or no knowledge of any of the measures of the ministry of agriculture and incentive funds that are committed to agricultural production. table 2 awareness of agricultural holdings on granting incentives answers of respondents no poll participation in % a lot of is known 36 22,64 moderate 67 42,14 little 48 30,19 it is not known 8 5,03 in total n=159 159 100,0 source: calculation of the authors based on survey almost half of the respondents used the support programs of the ministry of agriculture. table 3 users of the measures of the ministry of agriculture in 2012 answers of respondents no poll participation in % yes 69 43,40 no 88 55,35 no answer 2 1,26 in total n=159 159 100,0 source: calculation of the authors based on survey the percentage structure only applies to users of agricultural policy measures which are less than 50% of respondents. as can be seen, the number of those satisfied is different. table 4 are you satisfied with the support you receive from the ministry? answers of respondents no poll participation in % yes 20 12,58 no 17 10,69 indifferent 32 20,13 no answer 90 56,60 in total n=159 159 100,0 source: calculation of the authors based on survey more than half of the holdings owners think that the state has bad attitude towards farmers. measures agricultural policy in the republic of serbia with emphasis on the situation in nisava district 213 table 5 awareness of agricultural holdings on granting incentives answers of respondents no poll participation in % very bad 35 22,15 bad 57 36,08 neither good nor bad 48 30,38 satisfactory 17 10,76 good 1 0,63 in total n=159 159 100,0 source: calculation of the authors based on survey over 90% of respondents included suggestions on the questionnaire. table 6 do you have any suggestions or proposals to the ministry of agriculture in the future direction and encouragement of agriculture? answers of respondents participation in % wrote 91,82 did not write 8,18 in total n=159 100,0 source: calculation of the authors based on survey cognitive process takes place mainly through television and newspapers, although the internet is also not negligible , or even all three sources of information. table 7 how are you coming to the knowledge of the measures of the ministry of agriculture? answers of respondents no poll participation in % press 7 4,49 tv 35 22,44 internet 12 7,69 press and internet 45 28,85 tv and internet 20 12,82 press and internet 1 0.64 all three sources 36 23,08 in total n=159 159 100,0 source: calculation of the authors based on survey reformed agricultural policy with the implementation of technical technological and ecological standards in the agricultural sector of a country should be able to form the current models of agricultural producers and entrepreneurs, which would be equal to the agrarian entrepreneurs in the european union. conclusion in the early nineties a series of documents were adopted, intending to reform agricultural policy. agricultural policy in serbia, on the basis of these documents, was designed on the principle of the market economy. defined as a set of long-term directions and goals of 214 z. simonović, b. mihailović, j. subić agricultural development, structural, ownership and organizational change, the mechanism of stabilization and market management introduced the institution of the agricultural budget, and defined the role of commodity reserves in the system of market economy and so on. it is defined by society's attitude towards the agricultural farms as businesses. it was stressed that agricultural farms were the basic operators of agricultural development. it completed the delimitation size of their holdings and opened the process of their transformation into commodity producers, and begun the process of creating large farms. at the beginning of the 21st century there has been a changing agricultural policy and its adaptation to european standards. unfortunately, these changes are not accompanied by the appropriate agrarian legislation, serious investment and finance. a frequent problem is the phenomenon of dissatisfaction with the increasing number of agricultural stakeholders, institutions, and many other subjects. the concept of sustainable agriculture has not been reached yet. this brings about the fact that the reform of agricultural policy has not yet yielded some results. one gets the impression that the main feature of the reform of agricultural policy in the period from 2000 to 2015 was its unpredictability and inconsistency. serbia is currently in the implementation phase of the process of harmonization of schemes and incentives to the requirements of the eu agriculture and the wto. these requirements relate to the reduction in payments under the volume of production, such as the premium for milk, and reduction of export subsidies. on the other hand, serbia used the pre-accession period for the retention of certain measures, which directly affects the growth of productivity and the reduction of untreated surface (subsidizing inputs). achievements of this harmonization are generally not sufficiently visible, bearing in mind that the level of overall support in serbia is much lower than the corresponding one in the eu. finally, if serbia wants to increase productivity and foster the growth of the agricultural sector, they need to align the goals of their agricultural policy with the objectives of the cap. primarily, it is necessary to harmonize domestic legislation with eu legislation. given that it is not enough just to have adequate legislation, the next step is the formation of effective institutions and the provision of financial resources for the implementation of measures and programs cap. the key problems of the possession structure of households in serbia are that they have a small area of land and fragmentation of plot. it is necessary to carry out procedures of land consolidation and land redistribution in order to achieve agglomeration, which would result in an increase in the quantity and quality of agricultural production. acknowledgement: this paper is a part of the research at the project no. iii 46006 sustainable agriculture and rural development in the function of accomplishment of strategic goals of the republic of serbia within the danube region, financed by the ministry of education, science and technological development of the republic of serbia, for the project period 2011-2014. references 1. antil, r., dutta, s.(1999) nagotiated transfer pricing and divisional vs. firm –wide performance ecaluation, the accounting review, volume 74 (1): 87-104. 2. cvijanović, d., simonović, z., mihailović, b. (2011): “the common agricultural policy in the function of organic production development in eu“, european union food sector after the last enlargements – conclusion for the future cap, multi-annual programme: competitiveness of the polish food economy under the conditions of globalization and european integration, no 6.1. warsaw 2011, isbn 978-837658-134-7, pp. 67-68. measures agricultural policy in the republic of serbia with emphasis on the situation in nisava district 215 3. malinić s. the modern acconting system – the answer to the challenges of the environment, entreprise and management, 40 godina raĉunovodstva i korporativnih finansija: 1-11, zlatibor, aaas, beograd. 4. novićević, b., antić, lj. (2009), upravljaĉko raĉunovodstvo, niš, ekonomski fakultet. 5. official gazette of rs, no. 38/11. 6. pejanović, r., tica, n., & zekić, v. (2006): tranzicija (poljo)privrede republike srbije dometi, efekti i ograniĉenja. ekonomika, volume 52(5-6), 30-36. 7. pejanović r., njegovan z., tica n. (2007): „tranzicija ruralni razvoj i agrarna politika“, poljoprivredni fakultet, novi sad. 8. popović v., katić b. (2007): „nivo i struktura interne podrške poljoprivredi srbije u procesu pristupanja sto i eu“, institut za ekonomiku poljoprivrede, beograd, 43. 9. regulation on subsidizing the production and storage of wheat harvested in 2005, official gazette of the republic of serbia no. 60/05, 71/05. 10. regulation on conditions and manner of use of the premium for milk for 2010, official gazette of rs, no. 7/10. 11. regulation on establishing a program for the allocation and use of incentives for conservation and sustainable use of genetic resources of farm animals for 2010, official gazette of rs, no. 15/10. 12. regulation on conditions and manner of use of incentives for the purchase of new swarms of bees and quality breeding queen for 2010, official gazette of rs, no. 25/10. 13. regulation on the use of incentive funds for raising awareness production orchards of fruit trees, vines and hops for 2010, official gazette of rs, no. 24/10. 14. regulation on conditions and manner of using the funds for subsidizing raw materials for agricultural and farming production in 2010, official gazette of rs, no. 7/10. 15. regulation on stimulating agricultural production through credit support through subsidization of interest rates in 2011, official gazette of rs, no. 33/11 and 38/11. 16. simonović z. hamović v., mihailović b.: (2012). „zadaci agrarne politike u harmonizaciji i pružanju interne podrške poljoprivredi srbije“, str. 547-556, international scientific conference: harmonizacija zakonodavstva republike srbije sa pravom evropske unije ii, institut za meċunarodnu politiku i privredu, institut za uporedno pravo, hans seidel stiftung. 17. simonović z., jeloĉnik m., subić j.: (2013): „tax policy in serbian agriculture“, journal economics of agriculture, volume lx, issue 3/2013, pp. 637-651. 18. simonović z., (2014): „upravljanje agrarom srbije u tranziciji“, institut za ekonomiku poljoprivrede, beograd, 177. 19. strategija poljoprivrede i ruralnog razvoja republike srbije za period 2014-2020, službeni glasnik rs", br. 85/14. 20. vasiljević a., (2008): „finansijski menadžment u poljoprivredi“, mediterranean publishing, novi sad, 76. 21. veljković, b., vico, g., & koprivica, (2009). r. srbija u spoljnotrgovinskoj razmeni mleka i mle;nih proizvoda sa bih i hrvatskom. prvi nauĉni simpozijum agronoma sa meċunarodnim uĉešćem agrosym jahorina 9-10 decembra, zbornik radova br.1, 168-175. 22. zekić s., lovre k. (2004): „transformacioni procesi u poljoprivredi zemalja jugoistoĉne evrope“, anali ekonomskog fakulteta u subotici, broj 12, subotica. primena mera agrarne politike u republici srbiji sa osvrtom na stanje u nišavskom okrugu autori u radu daju kratak prikaz stanja u primeni agrarne politike u srbiji. upoznaju nas sa merama podrške koje predstavljaju važan faktor za održavanje poljoprivredne proizvodnje. srbija se nalazi u obavezi da harmonizuje svoju agrarnu politiku sa zajedničkom agrarnom politikom zap evropske unije. taj postupak harmonizacije je potrebno uraditi sada kada je republika srbija postala zemlja kandidat za članstvo u eu. u postojećim uslovima privređivanja opstanak poljoprivrednih gazdinstava je ugrožen. ključni problem predstavlja posedovna struktura gazdinstava u srbiji koja se nalaze na malim površinama zemljišta. takođe je zastupljena i velika usitnjenost parcela. neophodno je sprovesti postupke komasacije i arondacije u cilju ukrupnjavanja poseda, što bi rezultiralo povećanjem kvantiteta i kvaliteta poljoprivredne proizvodnje.na kraju rada autori daju istraživanje o stanju primene agrarne politike u nišavskom okrugu. cilj istraživanja је da se sagledaju rezultati korišćenja mera agrarnе politike. kljuĉne reĉi: agrarna politika, republika srbija, agrarni budžet, subvencije. facta universitatis series: economics and organization vol. 16, n o 3, 2019, pp. 255 268 https://doi.org/10.22190/fueo1903255t © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper the impact of automated trading systems on financial market stability 1 udc 339:336.76 violeta todorović, aleksandra pešterac, nenad tomić university of kragujevac, faculty of economics, kragujevac, serbia abstract. the way in which financial markets operate has substantially been changed by the development of information technology. automation of trading systems in financial markets represents the last phase of depersonalizing activities previously done by traders. automated trading development enabled computers to determine the moment and the way of executing sales orders. computers still do not make autonomous decisions regarding the choice of instruments to be traded or trading criteria. they implement the strategy a trader has decided on, choosing a favorable moment. this reduces the impact of human emotions on decision making and enables overcoming possible problems which arise due to neglect or lack of concentration. high-frequency trading enables the execution of algorithmic operations at a high speed. the main goal of the paper is to determine advantages and dangers produced by automated stock trading. key words: automated trading system, financial markets, high-frequency trading jel classification: g10, o33 introduction the rapid development of computer technology and the importance of its application in contemporary business operations have positioned financial sector as one of the leading in applying modern technology. in order to increase efficiency and ensure continuity in conducting financial transactions, financial markets have succeeded in making the best use of technological development. unlike previous ways of performing stock trading and visible trade that used to happen on conventional stock exchange markets with the received february 20, 2019 / revised may 20, 2019 / accepted may 29, 2019 corresponding author: aleksandra pešterac university of kragujevac, faculty of economics, liceja kneževnine srbije 3, 34000 kragujevac, serbia e-mail: apesterac@kg.ac.rs 256 v. todorović, a. pešterac, n. tomić physical presence of traders, a series of consecutive purchasing or sale operations on stock exchanges is carried out today via electronic systems. further development of these systems has contributed to the creation of electronic networks, thus providing continuity in the work at the global level through the improvement of information flows. human activity is replaced by automated trading systems which use predetermined parameters to make autonomous decisions on the execution of trading. in the past decade, the participation of automated trading systems in the total trading volume tripled. over time, these systems have become an indispensable part of the markets where sophisticated technology is used to manage all levels of the value chain. given the increasing importance of automated trading systems for financial markets, the paper seeks to provide updated basic information about these systems by precisely defining terms, strategies and trading software, as well as by presenting empirical researches. the subject of the paper is the influence of automated trading systems use on trading process. the main goal of the paper is to determine advantages and risks caused by automated stock trading. the first part of the paper analyses the long-term trend of reducing the share of manual work in financial markets which resulted in the development of systems that autonomously enter and execute orders. the second part presents the basic characteristics of automated trading systems. the focus of the third part of the paper will be on trading strategies and software methods. the last part will include the analysis of empirical data and earlier research on the effects of automated stock trading. 1. trade depersonalization in financial markets the beginning of stock exchanges was marked by highly intense manual work of traders. trade was carried out at trading venues through direct communication of traders, and demanded direct handling of financial instruments. for many years, regulations were the only improved aspect, while trading mechanisms remained unchanged. the main shortcomings of the conventional form of trading on the floor are low level of transparency, need for the participation of numerous staff, paperwork overload and slow supply-demand matching (stoll, 2006, pp. 167). therefore, as a rule, the innovation of trading was aimed at increasing the speed and quality of the information flow and abuse prevention. communication between traders used to be done directly at a trading venue. requiring permanent physical presence of traders, direct communication was considered to be inadequate. traders often neither had the opportunity to check the information they arrived at, nor could they do the analysis and/or calculation of the current situation. instead, they had to make decision as soon as possible so as not to miss the opportunity. the absence of a timely reaction could cause huge losses or lead to a loss of potential earnings. such circumstances created good opportunities for fraud caused by communicating incomplete or false information. the introduction of the phone as a channel of communication provided traders with the opportunity to retreat into their own offices. the collection and verification of information was facilitated, which created the ability to perform an analytical forecast during the process of trade. however, an obvious limitation of the telephone use was a bilateral communication with other participants. if a the impact of automated trading systems on financial market stability 257 trader wanted to be the first to contact another trader by telephone, he/she would have to find the right order among the offered ones. the first computers in financial markets provided traders with the ability to instantly obtain information on the movement of financial instrument prices and order matching. in this way, investors were given the convenience of quickly selecting the most favorable financial transaction both at the national and international financial markets (jakšić, 2016, pp. 51). communication became multilateral, since it enabled a trader to communicate simultaneously with all participants. informing is one of the key functions for ensuring efficient stock trading. brokerage houses must have a quick and easy access to all relevant information concerning the quality of financial instruments, price movements and trading volume. since stock exchange is not primarily concerned with information flow but rather presents a system of organized and safe trading, the aforementioned can be taken as a progress in stock exchange operations, as far as its function is communicating information (dugalić & štimac, 2011, pp. 122). in some earlier times, all information had to be retrieved, sorted and processed manually by employees. computer systems have enabled the automation of this process, through accelerated information gathering, separating relevant from irrelevant information and its processing. by developing fix protocol in 1992, a standardized basis for pre-trade communication and trade execution was created. due to the processes of immobilization and decentralization, shares have ceased to be physically transferred in a trading process. immobilization of shares refers to their keeping in one place trusted by all participants a central depository. shares are no longer transferred physically from a seller to a buyer during the trade; instead, the bookkeeping transfer of ownership is made. in this way, trading costs are reduced, the possibility of creating liquidity and credit risks is diminished, and the time required for the completion of the entire process is shortened. in addition, immobilization prevented the risk of losing or stealing financial instruments (kanzaki, 1981, pp. 115). the following step in handling stock is dematerialization during which immobilized instruments completely lose their physical form. shares lose their physical form and become electronic records on the owner’s account at the central depository. stock trading started to take the form of mechanisms of cashless transactions, where, instead of regulating debtor-creditor relations, ownership relations are regulated (vuksanović, 2009, p. 225). the final outcome was the reduction of the needed number of employees in stock companies, faster distribution of information and easier order matching. a number of computer softwares were developed for the purpose of analyzing the performed transactions and predicting future trends. however, regardless of the logistic support provided by the use of ict, the decisions on trading were still made by traders. innovation of the activities that have played a logistic role in the trading process has created the conditions for changing the approach to the process of trading. the possibility of a very fast distribution of information and its incorporation into predictions put once again the speed of reaction into the focus of the problem. traders realized that, if properly programmed, computer systems, being deprived of deconcentration and hesitation, were able to eliminate the problem of slow reaction. 258 v. todorović, a. pešterac, n. tomić 2. automated trading systems managing trading orders without direct human intervention has become a daily routine in global financial markets. the roles of traders have been taken over by computer algorithms, which automatically make decisions about offers, send orders and manage them (kaya, 2016). having noted a favorable opportunity at the market, automated trading systems supported by appropriate software packages independently carry out transactions of buying and selling a certain currency pair, shares or commodities. despite the positive effects attributed to them, venkataraman (2001) maintains that it is impossible to completely replace some of the benefits of human intervention in trade market. he emphasizes that the choice of a trading mechanism should involve the creation of a compromise solution between higher operating costs and potentially better order execution in the presence of a floor broker. the process of trading in the financial market has been altered forever by the use of computer technology. computers can now independently carry out all the activities or give signals for buying or selling, while the decisions are made by the trader. there are differences between electronic, algorithmic and high-frequency trading. within electronic trading, a person makes decisions about the purchase, but he/she does not send the orders personally or by telephone, but via the electronic system. algorithmic trading involves computer execution of sales transactions, in which computers use the parameters of a predefined algorithm to make a decision on a trading instrument, moment and quantity (sajter, 2013, pp. 322). in algorithmic trading, computer algorithms not only distribute orders, but also make decisions about the moment and amount of their execution (aldridge, 2013, pp. 10-11). one of the first attempts to define high-frequency trading in europe was done by the european securities markets authority. this organization points out that high-frequency trading involves trading in a very short period of time with low price differences where the dominant focus is on highly liquid instruments, and the ultimate goal is to close all open positions at the end of a business day (gregoriou, 2015, pp. 159). the main advantage of high-frequency trading is that they can spot price discrepancy and execute a trade much faster than traders with limited cognitive abilities (das & kadapakkam, 2018, pp. 4). the term high-frequency trading does not have a generally accepted or legal definition. however, an optional definition of high-frequency trading was offered at the 2012 meeting of the technical advisory committee for automated and high frequency trading (cftc) (miller & shorter, 2016, pp. 1):  decision-making algorithm (initiating, generating, directing or executing orders) for each individual transaction, with no human intervention;  low latency technology, designed to minimize response times and make trading closer;  technology that establishes a fast connection, i.e. communication with the market in order to enter orders and transfer a large number of messages about orders, quotes or cancellation of order execution. algorithmic trading can comprise trading in shares, bonds, currencies, and goods (kissell, 2014, pp. 1). with the help of advanced and complex mathematical models for making decisions in automated systems, strict rules determine the optimal time for an order execution, which can be changed or cancelled during realization, causing the least the impact of automated trading systems on financial market stability 259 possible impact on the price of shares (dubey, chauhan, & syamala, 2017, pp. 2). apart from being more efficient and capable of performing complex calculations and processing a large amount of information and data, computers are also extremely suitable for rapid reaction to changes in market conditions. this is a necessary feature for real-time trading in a turbulent environment which characterizes today’s financial markets. high investments in the construction of computer networks and appropriate data transfer technologies have made it possible to measure the duration of order execution in milliseconds (zook & grote, 2016, pp. 4). the last 20 years recorded a remarkable growth achieved by automated trading systems, which is evidenced by the fact that a half of the overall trading in global stock markets is done through these systems (zook & grote, 2016, pp. 1). kirilenko and lo (2013) point to three key changes in financial market operations that opened the door to the rapid development of automated trading systems. the first change relates to financial system structure, which has become increasingly complex over time. globalization and economic growth have led to an increase in the number of market participants, different forms of financial transactions, changes in the level and distribution of risks, etc. with an ever increasing complexity of the financial system, the development of computer technologies in this field was considered necessary. quantitative modeling of financial markets has created a strong theoretical basis underlying automated trading. the third change relates to the already mentioned integration of computer technology into financial system operations and its impact on the collection and organization of data and communication. 3. automatic trading strategies and softwares financial market traders have different goals and priorities, different amounts of available assets, and different risk tolerance. due to all this, their trading strategies also vary. a trading strategy is a predefined set of rules that are strictly applied during trading. the basic set of rules should precisely describe the conditions to be met in order to open the position of buying or selling, the way of determining the amount traded and the conditions under which positions are closed (ilić, 2010 a). based on the observed parameters, an automatic trading system checks whether the conditions for opening or closing the position are fulfilled and, if so, sends orders for trading. the three key components of each trading strategy are: entering and leaving trading, risk management and positioning (ilić & brtka, 2011). trading strategies depend on the ability to recognize the opportunity for trading and the speed of responding to an order (lakić, 2014, pp. 8). the formation of a trading strategy consists of the following steps: formulation, trading rules specification and software package development, preliminary testing (simulation with historical data), parameter optimization (selection of optimal trading strategy, maximum profit, lowest risk, etc.), performance appraisal, implementation of a strategy in realistic conditions, monitoring trading performance (comparison of real results with simulation results), evaluation of strategies and recommendations for further improvements (ilić & brtka, 2011). a key part of each trading strategy is to determine favorable moments for the start and end of trading. if trading is activated too early or too late, losses could be made, or in a 260 v. todorović, a. pešterac, n. tomić better case, less profit could be achieved than in a situation where trading would be activated at the optimal moment (ilić, 2010 b). the strategy for opening a trading consists of a trend-following strategy, which helps to open a trading in the direction of market price movements and counter-trend strategy, which opens a trading when direction changes are expected, i.e. trading opens in the opposite direction from the current trend of market prices. trend-following strategy is based on making decisions about buying or selling solely by observing market trend (fong, si, & tai, 2012, pp. 11378). the trend is determined at the very beginning of a workday, where further trade during the day automatically proceeds according to a predetermined strategy, regardless of whether there are changes in market trends. unlike the input strategy, the output strategy determines the moment when the positions should be closed. a position closing could be aimed at making a profit, or at protecting traders from excessive losses when a price moves in an opposite direction from the expected one. the reasons for closing positions can be situations when prices reach a certain level, if the desired result of a combination of selected technical indicators is reached, or if the level of profit is not reached after a certain period of time (ilić, 2010 b). in addition, algorithms can also be used for speculative purposes, i.e. in situations of taking over the market risk in order to achieve greater profit. these algorithms are mainly based on momentum strategy, relative value strategy and microstructure strategy (lakić, 2014, pp. 11). in their papers, the authors (mackenzie, beunza, millo, & pardo-guerra, 2012; zook & grote, 2016) name numerous high-frequency trading strategies, including market maker strategies, as well as different arbitrage strategies statistical arbitrage, cross-market arbitrage, etc. the optimization of parameters implemented in a trading strategy is undertaken in order to increase profit and reduce risk. when optimizing an input automated trading strategy, it is necessary to determine favorable parameters of technical indicators for increasing profitable trading percentage, while the optimization of an output strategy regulates the level of profit or loss in individual trading and attempts to find the ratio of parameters for achieving the best results (ilić & brtka, 2011). different trading strategies also have different risk levels, so even the most efficient trading strategies have a certain percentage of loss. risk management means maintaining the risk within the expected limits which are acceptable in relation to the balance on the account. the main objective of risk management is to limit losses, in a way that there is always a sufficient amount of funds to continue trading, even after a series of trades that ended with a loss (ilić, 2010a). high-frequency traders can be classified depending on the trading strategy they implement. the use of aggressive trading strategies is associated with traders who primarily trade by placing market orders, while, on the other hand, the implementation of trade through the limit order indicates traders who opt for passive trading strategies (lakić, 2014, pp. 15). traders use aggressive strategies to retain their position, while their trading is focused on tracking the latest price trend (they buy when prices rise and sell when prices fall). passive strategies are applied by traders who often change their positions in a short period of time (sales are followed by purchases, and vice versa). the relationship between human participants who designed trading strategies and computers which executed trading orders deepened and evolved into software trading systems (zook & grote, 2016, pp. 5). the handling of trading orders is automated with the help of a software with implemented trading strategies. the development of the impact of automated trading systems on financial market stability 261 automated trading software begins with a trading plan, i.e. it is necessary to formulate how the trading strategy should function and what is expected from such a strategy. parameters having been optimized and satisfactory results confirmed by detailed testing, the systems for automatic trading, i.e. softwares and their strategies can be used in practical trading. this procedure is shown in figure 1. fig. 1 the structure of the real-time automated trading software source: ilić, v. (2010 b). the structure of software for automated trading on foreign exchange market. automated trading softwares allow one to track a large number of parameters and at the same time make it easy to decide in real time. they can fully take control of trading activities (opening and closing positions and determining the amount of deposits). at the stage of using software strategies, the user should not interfere with the decisions made by the algorithmic strategy, but his task is to monitor the fulfillment of the planned results and the movement of the level of risk. in the case when software does not achieve desired results, it is necessary to correct the trading model and to return the strategy to the stage of optimization and efficiency testing. automated trading software strictly adheres to the given strategies. in this way, the influence of human emotions on decision making is reduced and it is possible to overcome problems that may arise from neglect or lack of concentration (ilić, 2010 a). no yes yes yes yes no no no input strategy output strategy 262 v. todorović, a. pešterac, n. tomić 4. empirical evidence related to automated trading systems automated trading systems have created a number of new challenges and opportunities for both investors and their regulators. since traders have been given the opportunity to better adapt their bids to new market information over the past few years, the share of high-frequency trading in the overall stock trading turnover has grown sharply, while market liquidity has been constantly improving (jones, 2013, pp. 2). diagram 1 shows the changing trend of high-frequency trading share in the overall volume of stock trading in the usa financial market. diagram 1 share of high-frequency trading in the overall stock trading turnover source: https://www.theatlas.com/charts/hj3prah_7 during the observed period of time, a significant increase in the volume of automated trading was recorded. the share of high-frequency trading in the overall stock trading in the usa financial market increased from around 25% in 2006 to over 60% in 2009. with the onset of the global economic crisis, a further trend of increasing the share of highfrequency trade stopped. from 2010 onwards, a steady decline and stagnation was noted in high-frequency trading. the share of these systems in post-crisis years was around 50%. these data gain on significance when compared with the total annual number of trades presented in table 1. it can be seen that in the period 2004-2008, where the relative participation of high-frequency trading increased, a significant increase in the overall volume of trade was marked. in post-crisis years, the stagnation is followed by a fall in the total annual trade volume. the reasons for reducing high-frequency trading can be found in: a) a smaller amount of revenue and profit that was appropriated as the cost of technological infrastructure increased; b) the existence of intense competition within the industry and c) the growth of alternative trading platforms (kaya, 2016). https://www.theatlas.com/charts/hj3prah_7 the impact of automated trading systems on financial market stability 263 table 1 total annual trading volume in the usa financial market (in millions) year trading year trading year trading year trading 2002 24,678 2007 48,957 2011 48,820 2015 40,866 2003 20,405 2008 53,889 2012 45,390 2016 34,795 2004 20,629 2009 51,001 2013 42,371 2017 34,844 2005 38,372 2010 44,794 2014 40,944 2018 34,691 source: https://www.itg.com/trading-volume/year/ the application of automated trading systems to an increasing number of markets is owed to some of their key features. the speed of order execution as one of main features has been increasing significantly from year to year (jones, 2013; carrion, 2013; dubey, chauhan, & syamala, 2017). in addition to this, the key advantage is considered to be real-time decision making, along with the observation of a large number of parameters. companies using high-frequency systems trade hundreds or thousands of times a day for their own account, where holding periods are measured in minutes or seconds. a recent research conducted by indian authors (dubey, chauhan, & syamala, 2017) confirms that in the first five years of the automated trading system implementation in 2009, due to the high speed of transfer, the volume of trading in financial markets increased by 60%. the motive for high-frequency trading implementation is to generate revenue. however, traders who do not possess the technological infrastructure necessary to implement these systems face the high costs of introducing new equipment (kearns, kulesz and nevmyvak, 2010, pp. 14). riordan & storkenmaier (2011) observed technological changes on the german stock market in 2007, trying to find out whether this type of change has affected two important aspects of market quality liquidity and price. the results confirmed that the time between order entering and verification was shortened by technological upgrade from about 50 to 10 milliseconds, whereby the reduced time provided greater liquidity on the market. most researches in the field of automated trading systems examine and confirm the existence of a positive impact of these systems on the quality of the market. most often, they point to effects that contribute to increasing market efficiency faster processing of information, timely decision-making, higher profits (frino, prodromou, wang, westerholm, & zheng, 2017) greater information efficiency in stock markets around the world (das & kadapakkam, 2018), etc. however, the benefits of high-frequency systems should not be taken for granted. though considered to be a positive aspect, speed might be unfavorable for other investors, which can lead to the emergence of adverse selection that reduces market quality (jones, 2013, p. 1). on the other hand, jovanovic & menkveld (2016) dispute these claims, stating that the implementation of high-frequency systems into financial markets reduces adverse selection by 23%, with a 17% increase recorded in trade volume. also, many regulatory barriers (each country has its own regulatory regime), as well as difficulties in identifying participants’ identities, since most global stock exchanges function on the principle of voluntary disclosure of participants’ identity, provide the possibility of placing anonymous orders (comerton-forde, putniņš, & tang, 2011, pp. 3). the regulatory policy of the automated trading system of the australian stock exchange (seats) stands out from others in that it enables direct participants to identify the traders’ identity at all times (berkman & koch, 2008, pp. 234). in this way, automated systems adopt one of the characteristics of the conventional trading method, i.e. significantly facilitated identification of a trader, which can reduce the risk of unfavorable selection when trading. https://www.itg.com/trading-volume/year/ 264 v. todorović, a. pešterac, n. tomić in conditions of market disturbance and instability, there is an increase in the speed at which high-frequency systems exhaust the best prices for buying and selling leading to a change in trading volume, which may lead to a phase corresponding to some form of flash crash. this term refers to dramatic changes in prices on stock exchanges in a short period of time. one such event from the recent past was flash crash in 2010, in which dow jones dropped by almost 1,000 points within 10 minutes, which was followed by the recovery of most of the losses in just 30 seconds (lakić, 2014, pp. 9). this event led to a fall in the price of a large number of shares in the market, some of which lost their entire value, while the value of others rose more than a factor of 1000 (braun, fiegen, wagner, krause, & guhr, 2018, pp. 2). flash crash has raised a number of important issues related to the structure and stability of the usa financial markets. many experts (kirilenko, kyle, samadi, & tuzun, t., 2011; akansu, 2017; braun, fiegen, wagner, krause, & guhr, 2018) attributed instability to excessive use of computers and high-frequency trading systems. however, the key question is whether these systems really made the market fragile and unstable. in fact, on flash crash day, the high-frequency trading system stabilized the prices at the very beginning, but the inflow of a large number of orders that overflowed the system disabled the liquidation of positions, which, due to the withdrawal of the high-frequency algorithms liquidity, further led to the acceleration of the subsequent crash. this is supported by the fact that almost two-thirds of the total trading volume on that day was submitted via high-frequency trading systems (figure 2), and that in almost two minutes the critical fall of the dow jones index millions of shares were traded in each second (lakic, 2014 , page 9). the largest number of canceled orders at these moments was recorded at high frequency traders (figure 3). fig. 2 trading activity fig. 3 cancellation ratio source: bellia, m., christensen, k., kolokolov, a., pelizzon, l., & renò, r. (2018). high-frequency trading during flash crashes: walk of fame or hall of shame? the impact of automated trading systems on financial market stability 265 the initiation of facebook’s initial public offering in may 2012 makes another example of market vulnerability caused by the use of high-frequency trading systems. the opening of facebook on the stock market attracted a large number of investors, which was not supposed to be a problem for nasdaq, because this over-the-counter market is characterized by the ability to process large amounts of orders. however, the huge demand for facebook shares, which was placed using the orders of high-frequency system, made nasdaq computers slow down. instead of the usual 0.04 milliseconds to calculate the price, computers took almost a hundred times more, i.e. 5 milliseconds to carry out the same operation (zook & grote, 2016, pp. 12). an unanticipated problem with nasdaq’s initial public offering system led to a 30-minute delay in opening facebook positions, which is a serious lag in today’s market environment characterized by hyperactivity (kirilenko & lo, 2013, pp. 63). despite the fact that after the initial delay, the trading of facebook shares continued at a usual rate, short-term software problems on nasdaq led to losses that cost investors and their brokerage houses tens of millions of dollars (jones, 2013, pp. 41). the rise of automated trading was followed by instabilities that made the financial markets more vulnerable than before. technological concerns in the years following 2012 have led to the emergence of less dramatic market crashes, localized within the change of the value of one share. most commonly, these market crashes are called ultrafast extreme events, since a significant increase or decrease in stock prices happens within milliseconds (braun, fiegen, wagner, krause, & guhr, 2018, pp. 1). there is a controversy in the attitudes held by experts on the reasons of mini flash crash emergence. most often, the focus of their attention is still on high-frequency trading systems. however, market manipulation and unbalanced liquidity, on the one hand, and large orders, on the other, are also marked as possible triggers. consequently, the regulators seek to gather all necessary information from the market in order to create adequate provisions in the field of automated trading systems, which will reduce the risk of endangering the integrity of the capital market. conclusion the prospects for further development of financial markets and financial institutions rely heavily on future investments in information technology. one of the results of the previous investments in the development of technology is automated trading systems. at the very beginning of this paper, the theoretical analysis pointed out the superiority of these systems over conventional stock trading. some of the benefits of these systems would be making decisions based on algorithms and executing orders in a virtual space between computers, with no need for immediate human intervention. the new era of trading enabled more efficient order execution, which ultimately resulted in improved characteristics of stock portfolio. speed, real-time software decision making, automatic order execution and reduced transaction costs for traders have made global financial markets open to these systems. on the other hand, such a rapid expansion of automatic trading has seriously affected the stability of financial markets on several occasions. the evidence is provided by empirical research on the events such as flash crash, as well as the delay of the initial public offering of facebook shares. in both cases, the risks 266 v. todorović, a. pešterac, n. tomić associated with high-frequency trading such as inaccurate computer interpretation, lack of capacity, programming error or targeted manipulation seem to be the main instigators of market instability. the analysis shows that these events were one of the triggers for reducing high-frequency trading volume in the last few years. altogether, although golden age is far behind, the conclusion is that risks can be avoided by introducing new appropriate measures of regulation and international standards, so that in the years to come, society can take advantage of the positive sides of these systems. it should be noted that technological innovations are essential for the development and improvement of the market. in this regard, the positive influence that automated trading systems have on the quality of the market is indisputable and it is proven by earlier empirical researches. the contribution of these systems should not be called into question even if the circumstances when these systems can destabilize the market in the short term are taken into account. the market crashes pointed to the weaknesses of automated trading systems. studying detected weaknesses should serve regulators, since further progress and evolution of automated trading systems necessarily require to be accompanied by appropriate regulatory measures. theoretical and empirical considerations presented in the paper contribute to the creation of new knowledge in the field of contemporary stock trading in global financial markets. by pointing out the key characteristics of automated trading systems, with an overview of the challenges of their implementation in practice, the paper has filled the existing gap in the research literature in serbia. having in mind the fact that the practical application of these systems was most often observed for the usa capital market, the recommendation for further research would be to include the financial markets of europe and asia into analysis. references akansu, n.a. 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(2016). the microgeographies of global finance: high-frequency trading and the construction of information inequality. environment and planning a: economy and space, 49(1), 121– 140. doi:10.1177/0308518x16667298 https://www.theatlas.com/charts/hj3prah_7 (accessed on: 23 th january 2019) 268 v. todorović, a. pešterac, n. tomić uticaj automatizovanih trgovinskih sistema na stabilnost finansijskih trţišta razvoj informacionih tehnologija je suštinski promenio način funkcionisanja finansijskih tržišta. automatizacija trgovinskih sistema na finansijskim tržištima predstavlja poslednji čin depersonalizacije aktivnosti koje su ranije obavljali trgovci. razvojem algoritamskog trgovanja, računarima je potpuno prepušteno određivanje trenutka i načina izvršenja kupoprodajnih naloga. računari i dalje ne donose autonomno odluke u pogledu izbora instrumenata koji će biti predmet trgovine, ili kriterijuma po kojima će se trgovati. oni implementiraju strategiju za koju se trgovac odlučio, birajući povoljan trenutak. na ovaj način se smanjuje uticaj ljudskih emocija na donošenje odluka i omogućavaju prevazilaženje problema koji mogu nastati usled nepažnje ili nedostatka koncentracije. visoko-frekventna trgovina omogućava izvođenje algoritamskih operacija velikom brzinom. osnovni cilj rada je utvrđivanje prednosti i opasnosti koje produkuje algoritamsko trgovanje hartijama od vrednosti. ključne reči: automatizovani trgovinski sistemi, finansijska tržišta, visoko-frekventna trgovina plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 3, 2014, pp. 225 235 creative accounting and cash flows reporting  udc 336.146; 657.631.6 tadija đukić 1 , miloš pavlović 2 1 university of niš, faculty of economics, niš, serbia 2 university of priština, faculty of economics, kosovska mitrovica, serbia abstract. financial reporting system has been developed to provide reliable information for its users. however, regardless of how much is striving that financial reporting system provides quality information, yet there are certain circumstances that can lead to misleading financial statements. the occurrence of irregularities is affected by the following factors: complex economic reality, the accounting policies and estimates, participants in the process of financial statements preparation and presentation, specific processes within the recognition and measurement of specific positions in financial statements etc. creative accounting is performed transformation of the financial statements of what is really and what the subject want to show using the existing rules and/or ignoring some of them. it can affect the amount of reported profit, the amount of reported net assets and the amount of reported net cash flows from operating activities. in this paper, the term creative accounting will be used for labeling of accounting acts made in order to present the desired and not the real picture of cash flows from operating activities. key words: financial reporting, creative accounting, cash flows, operating activities. introduction in the last few decades there are many scandals about fraud and collapse of big companies such as enron, worldcom, healthsouth and many other less known, which were, according to their financial statements, operating very successfully. as more of these scandals is revealed the distrust in the financial statements and financial reporting and accounting in general is growing more and more. all this leads us to the question: is it possible to rely on the financial statements and to make right business decisions based on them?; whether they are and to what degree the information in financial statements are correct?; do the companies do as they show their business in their reports? this calls into received september 5, 2014 / accepted december 17, 2014 corresponding author: tadija đukić faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 649  e-mail: tadija.djukic@eknfak.ni.ac.rs 226 t. đukić, m. pavlović question one of the basic objectives of financial reporting – providing the necessary information for stakeholders. also, the question remains what is and what is not allowed in financial reporting. whether accountants use their resourcefulness too much in preparing financial reports and with such actions overused choices that are allowed by the accounting regulations and whether the information contained in that reports are characterized by intelligibility, relevance, reliability and comparability as the primary characteristics of accounting information. each act in the financial accounting that was undertaken in order to create a different image from the real can be classified as creative accounting. there are not clearly defined boundaries of approved and disapproved and not clearly defined when some act in creative accounting made by the accountant exceeds the flexibility of accounting regulations and turns into a criminal act. creative accounting is applicable to all financial statements. however, the subject of this paper will be a cash flow statement as the subject of creative accounting. what has recently evident is the growing importance of indicators based on cash flow compared to the other traditional indicators. the cash has become a central issue for the managers and the main indicator of business performance. that’s why in literature we often meet with sayings such as: cash is a king, cash is the fuel that runs the company, cash is the bloodstream of the company…which shows the importance of this resource for the company in the modern business environment. today, in business world, the company with less degree of profitability and higher degree of liquidity is more respected then the company with reverse performance. all this, led to the fact that accountants pay more attention to the cash flow reporting and in this field attempt to show the company’s operations better than they are. steps in the reporting of cash flow and creative accounting at all, are possible to be taken in terms of accounting standards, by using their flexibility or beyond them. however, regardless of whether it is permissible or impermissible acts of creative accounting, a common characteristic is to blur the true picture of the business and thus may lead decision makers and other users of financial statements misleading. in this paper we will highlight the importance of cash flows reporting, define creative accounting as a phenomenon and explain some of possible manipulation with cash flows as a result of creativity in the process of financial reporting. 1. cash flows financial reporting cash is one of the key elements of the assets of each company, and cash flows are considered as a bloodstream of the company. lately, the analysts give the advantage to the cash flow analysis rather than profit analysis. cash flow calculation includes cash items that are excluded from the profit (capital investment, working capital, new loans, repayments of loans from past period…), while profit on the other hand involves more revenues and expenses from the period, independently of cash inflows or outflows. according to many authors, the cash flow is superior performance measure than profit because of several reasons (djuričin, lončar, 2010): 1. cash flow more accurately shows the performance than profit („cash flow is a fact, profit is an opinion“). 2. cash flow shows a lower degree of volatility in comparison to the profits that is liable to jumps and falls. creative accounting and cash flows reporting 227 3. cash flow partiality to the liquidity is more appreciated than profit partiality to profitability. 4. cash flow is more comprehensive measure that reflects a company performance, since, under the same other conditions, includes the investment and financing. accordingly, statement of cash flows is a more appropriate measure of business performance than the income statement. the income statement includes the effects of activities on accrual basis expressing them as the difference between revenues and expenses allocated to the relevant accounting period. because of more or less income and inflows mismatching and expenditures and outflows for a specific period, usually the result (profit/loss) reported in the income statement (the relation: incomes – expenditures) does not match the result determined on a cash basis reported in the statement of cash flows (the relation: inflows – outflows). because of that, in practice are often situations that companies despite the high net profit reported in the income statement have decreasing of cash balance and problems with current liquidity maintaining. all this indicates that for successful cash flow management it is necessary to “adjust” the result determined on an accrual basis (the income statement) so that approximates the net cash inflows from sales activities (stančić, 2006). in accordance with ias 7 – statement of cash flows, cash inflows and outflows during the accounting period are exercised by: operating, financing and investing activities. these three groups of activities include a variety of sources and uses of cash, and are shown in the statement of cash flows. cash flows from operating activities are result of primary activities of the company and that are the income-generating activities resulting from the regular business activities of the company. operating cash flows are related to the following activities: sale of goods, services on the market, payments to suppliers for materials, goods and services, payments of various costs (production and non-production services, payment of salaries and other operating expenses), payments for other liabilities (taxes and contributions...)… because the operating activities include all activities from the main activity of the company, the sustainability of total cash flows directly depends of the sustainability of cash flows from operating activities. realized cash flows from operating activities indicate (djukić, 2005):  a level of company’s success in generating net cash flows from operating activities.  trends in net cash flows from operating activities during the period.  main reasons for the positive or negative net cash flows from operating activities. the investing activities are related to the evaluation and selection of investments whose lifetime is longer than one operating year, or investments whose effects are expected in the long period of time. cash flows from investing activities are related to following activities: purchase of property, plant and equipment, sale of intangible assets, investments in long-term financial instruments (stocks, bonds), as well as the sale of securities in the financial market. transactions from financing activities are those that a company receives from shareholders and creditors. these activities as a result have the change of the size and structure of companies funding – the relationship between own and borrowed capital. cash inflows and outflows arising from these three activities are presented in the statement of cash flows as one of the basic financial statements. statement of cash flows explains how the amount of cash as an item in the balance sheet at the beginning of the period became another cash amount shown in the balance sheet at the end of the reporting 228 t. đukić, m. pavlović period, and what is, in the reporting period, contributed to that (libby, libby, daniel, 2011). accordingly, the statement of cash flows provides users with the following information (pavlović, bogdanović, 2013):  where from does the cash come during the reporting period.  how cash is used during the reporting period and  what are the changes in cash on the end compared to the beginning of the period. cash flows reporting is regulated by the international accounting standards (ias), and especially ias 7 – statement of cash flows. within these there are rules defined for preparation and presentation of this report, but however there is left a space to accountants to maneuver within the prescribed rules and thus affect the final image of the company’s business. 2. definition of creative accounting in the modern business environment which is primarily characterized by turbulence, dynamism and every day survival risk increasing for even most successful companies in the market, management is under constant pressure to achieve defined strategic corporate objectives and therefore make a good impression in the eyes of the owner. in order to protect themselves and to make a good impression as managers, even in the situations when it is not possible to make a good result, managers can dare to certain illegitimate actions. more precisely, if management do not achieve the good financial performance of the business that do not meet the expectations of the owners, they can use some accounting procedures in order to improve final appearance of financial reports and amounts in financial statements and to present them different from the real situation. according to this, we can make a distinction between pure and creative accounting. the term „pure accounting“ means accounting in real financial reporting and preparation and presentation of financial statements in accordance with the prescribed framework for financial reporting, i.e. reports that do not contain significant material errors and irregularities, which objectively and fairly reflect the asset and profitable position of the company. it is the accounting that is legal and legitimate. by contrast, „creative accounting“ means the intentional taking of measures aimed at the preparation of financial statements that don’t show the right material and yield strength of the company. it can be said that there has always existed certain adroitness (creativity) of accountants in preparing financial statements, but that it had never had this big size and that the consequences were not so much visible as it is the case in recent years. in the professional literature from this area, there are different definitions of creative accounting such as:  creative accounting involves the shaping of financial statements using the right choices and other actions permitted by the accounting regulative (amat, gowthorpe, 2004).  creative accounting includes all the accounting practices that intentionally deviate from the standards in order to present desired and not real picture of the yield and financial strength of the company (škarić-jovanović, 2007).  creative accounting includes a gain control and manipulation in connection with the classification of either the balance sheet or in the income statement (škarić-jovanović, 2011).  the american institute of certified public accountants (aicpa) defines false financial reporting as intentional inaccuracy or omission of amounts or disclosures in creative accounting and cash flows reporting 229 financial statements in order to deceive the users of financial report. this can include: manipulation, falsification or modification of the accounting records and accompanying documents, which are used in financial statements preparation; inaccurate (false) representations or deliberate omission of significant events or transactions from financial report and intentional misapplication of the accounting standards and rules (stefanović, 2000).  creative accounting is the biggest scam after the trojan horse (dmitrović-šaponja, 2007).  creative accounting is the process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the financial reports (amat, dowds, 1999). according to most authors, the most complete definition of creative accounting is one which says that: “creative accounting includes any and all actions, including the aggressive choice and application of accounting standards, false financial reporting and all other steps taken to manipulate the data in the financial statements” (mulford, comiskey, 2002). from the above definitions it is evident that creative financial reporting seriously derogates the usability of the financial statements, whether in terms of direct use of information which it contains, or in term of information basis for a serious analysis of the performance of a company. the financial statements preparation respecting ias is not a guarantee that they will accurately reflect the financial position and performance of the company, because it is possible to make steps of creative accounting even in the boundaries of ias. the image of the company can be blurred further if steps of creative accounting are taken out of boundaries of ias. accordingly, it can be concluded that in terms of financial statements, measures of creative accounting undesirable because that financial reports don’t provide a clear picture of the company, and therefore don’t allow users making correct business decisions. with measures of creative accounting, management of the company may affect the level of reported profit, the amount of reported net assets and the amount of reported cash from operating activities. in this paper, the term creative accounting will be used for marking of accounting practices that purposely deviate from the standards in order to present to the external users desired and not real picture about the cash flows from operating activities of the company. 3. cash flows creative reporting creative reporting of cash flows is relating to any step in order to create a different image than the actual cash flows, and in that way providing the wrong signal about the ability of the company to generate sustainable cash flows (mulford, comiskey, 2005). when we say sustainable cash flows, it is thought on cash flows from operating activities that is repeating from year to year. if there is some inflows of cash in only one year and in next year there is not we are not talking about sustainable cash flows. so, the main characteristics of sustainable cash flows are that they are cash flows from operating activities and are repeating from each operating year. according to that, in order to be successful, a company needs to achieve positive net cash flows from operating activities in the amount that is not less than in the amount in previous year. 230 t. đukić, m. pavlović all activities in the field of cash flows creating accounting are focused on increasing net cash flows from operating activities. achieving such result is possible in two ways: 1. by taking measures of creative accounting that are according ias – within the limits prescribed by ias and/or 2. by taking a measures of creative accounting that are beyond limits prescribed by ias. as it is already said, sustainable cash flows are directly depended on the cash flows from operating activities. ias are clear in defining the cash flows from operating activities. within these, there are considerable flexibility in their calculation and reporting. some accountants are showing a willingness to take advantage or ias flexibility in order to increase the presented amount of cash flows from operating activities. despite the fact that these activities increase net cash flows from operating activities they do not increase sustainable cash flows since it is mainly a one-time increase. in practice, there are many examples of cash flows reclassifying that artificially increase the net cash flows from operating activities by decreasing net cash flows from financing or investing activities. below we listed some of them. 3.1. operating vs. investing activities according to ias 7 (paragraph 16), cash flows from investing activities includes cash outflows incurred to obtain the resources to participate in the creation of future earnings and cash flows and the cash invested in securities. many accountants and managers, with techniques and methods of creative accounting in accordance with ias, are trying to increase the net cash flows from operating activities by reducing net cash flows from investing activities. there are three possibilities for that allowed by ias regulations and may concern: 1. investments held for trading. 2. operating costs capitalization and 3. acquisitions. according to the ias, investments in debt or equity securities can be classified like: 1. investments held for trading. 2. investments held to maturity. 3. investments available for sale. investments held for trading are in the function of exploitation of short-term price fluctuations of these securities and on this basis profit generating. holding periods are very short, sometimes shorter than one day. debt securities held to maturity are investments for which is the company’s intention to hold them to maturity in order to cash it on the day of maturity with interest accrued. investments that don’t belong to previous two groups are classified as investments available for sale. depending on the time that elapses from the time of their acquisition to the date of sale investments available for sale can be classified as long-term or short-term investment. the way of investment classification is in connection with classification of cash flows appeared from their buying or selling. when investments are classified in the group of those held to maturity or available for sale, the cash outflows/inflows for their purchase/sale are classified as cash flows from investing activities. unlike them, the cash flows of investments which are classified in the group of those held for trading belong to the group of cash flows from operating activities. creative accounting and cash flows reporting 231 there are not strict rules for investment classification. that flexibility gives to the accountant’s opportunity, if necessary, to rearrange cash flows by activity. if we invest in buying short-term securities, the cash outflows for that transaction belong to a group of investing activities. however, when we bought them, we can move them to a group of investments held for trading. with that action, after selling such securities, cash inflows from selling it belongs to a group of operating activities. with such transaction, we decreased net cash flow from investing activities (at the moment of their buying) and increased net cash flows from operating activities (at the moment of their selling). the situation would be different if we have company whose main activities are trading with securities, like some financial institution (bank, insurance company…). only in that case it is naturally to classify such activities as operating, but if it is not the case we shouldn’t do such classification, primarily, because it is not sustainable cash flow and will appear only once (when the transaction of selling is done). ias provides a choice on certain operating costs in terms of whether it will be capitalized or will be reported as expenses at the moment of their occurrence. when they are considered as expenses, they reduce net income and net cash flows from operating activities. however, by capitalization, they are presented as outflows within investment activities and do not affect the cash flows from operating activities. costs of period are, in some cases in order to show better result (profit), capitalized, included into the value of an item of fixed assets and don’t represent an expense of the period. they will be shown as expense at the moment when that item of fixed assets is amortized, so it will be written of gradually in a series of future periods. the most commonly used cases are:  capitalization of expenses for advertising campaign according to the ias 38 – intangible assets advertising costs are very high, especially for new products marketing and they are particularly high in the early stage of product launch. in this stage the income from that product is on a very low level, so the companies, in order to show a better result, push expenses from the current period into future periods by capitalization of these costs.  capitalization of research and development costs – these costs also make expense of the period, but in some cases they are capitalized (according to the ias 38).  capitalization of costs incurred directly before the factory opening – costs of establishing are not capitalized, but in many cases this practice is recorded (ias 16 – property, plant and equipment).  capitalization of maintenance and repair costs – these are typical operating costs required for the normal functioning of the assets to which they relate, but in certain cases, in order to improve the business result and performance, they are being attributed to an item of fixed assets (according to the ias 16).  capitalization of interest on loans taken for purchase of fixed assets in accordance with ias 23 – borrowing costs, the capitalization of interest on loans that are taken for purchase of fixed assets is permissible procedure. capitalization of interest leads to higher net cash flows from operating activities because the amounts of capitalized interest increases the cost value of the fixed asset, and lower net cash flows from investing activities. this procedure should be disclosed in the notes to the financial statements. the company worldcom is an example of creative accounting that did capitalization of expenses that are typical expenses of the period. in this way the company has falsely 232 t. đukić, m. pavlović increased net income and net cash flows from operating activities of approximately 3,8 billion us dollars. the company healthsouth capitalized costs of sponsoring hockey team in pennsylvania and the cost of advertising in newspapers. contrary, in period from 1997 to 1999 the microsoft company didn’t capitalize the costs of development, although it is allowed. microsoft treated that costs as the costs of the period which resulted in lower financial result than it was in reality. the motivation for such an action was attention to reduce monopoly. typical examples of the expenses that are capitalized are costs of software development. in accordance with ias 38 – intangible assets, capitalization of additional costs is required when it reaches technological feasibility. however, it is questionable if and when is that level reached, and therefore there is a great freedom in determining that moment and the moment when the additional costs would be capitalized. by its recognition at the time of occurrence, the costs of software development affect net income and net cash flows from operating activities. but, when they are capitalized they are cash outflows from investing activities and do not affect the cash flows from operating activities, which positively affects the net cash flows from operating activities. the level when technological feasibility is reached is the level where the additional amortization of capitalized costs of software development from the previous period is approximately equal to the new capitalized costs in the current period. it means that the effects from that capitalization are about zero. however, analysts do not need to worry so much about the effects on earning of companies, but concerns should be directed to the policy of capitalization. even when the effects on earnings of capitalization are zero, cash outflows are still treating as outflows from investing activities that is continuously increasing net cash flow from operating activities. the effects of capitalization on the cash flows from operating activities are particularly noticeable when the company is changing its policy of capitalization. acquisition of the company is a business action in which one company – buyer company takes other company – target company and after that the target company is doing business within the main company. when a buyer company did such transaction, from that moment, the results of the target company are included in financial reports of the buyer company. thus, the acquisition could be in the service of increasing profit and net cash flows from operating activities. increasing of net cash flows from operating activities from acquisition is not sustainable, it is only one-time transaction. working capital increased through accounts such as receivable, inventories, accruals… reduce net cash flow from operating activities. when the specified working capital decreases the result is increasing of net cash flow from operating activities. according to ias 7 (paragraph 39), cash flows from working capital got from acquisition, are presenting separately and classifying as investing activities. however, the liquidation of working capital, and in the case where it comes from acquisition, is presenting like additional cash flows from operating activities. 3.1. operating vs. financing activities cash flows from financing activities is consisted of cash inflows and outflows from the issue of shares and other securities, debt repayment, purchase of own shares, payment of dividends… as the cash flows for investing activities, cash flows from financial activities are not sustainable cash flows as it is the case with cash flows from operating activities. creative accounting and cash flows reporting 233 ias flexibility can be used to increase the inflows of operating activities by decreasing the inflows of financing activities. within the ias, there are three ways for such activities: 1. current account overdrafts classifying as operating inflows and not as financial. 2. receivables selling. 3. supplier’s credit. within ias 7 (paragraph 8) states: bank borrowings are generally considered to be financing activities. however, in some countries it is allowed that bank overdrafts repayable on demand are integral part of company’s cash management. in these cases, allowed bank overdrafts are included as a component of cash and cash equivalents. the characteristics of such arrangements are that the bank balance often fluctuates from positive to negative (in the amount of allowed overdraft). having this flexibility, many companies, by using allowed overdrafts, increase their cash inflows from operating activities. sale of receivables is another option available to the accountants to increase net cash flows from operating activities by decreasing net cash flows from financing activities. reducing the amount of receivables and increased cash inflow will increase net cash flow from operating activities. the company has legitimate right to use factoring in other to collect its receivables, however when receivables are putted as collateral for a loan, all proceeds on the basis of them should be threaded as financing activities. according to some authors, sales of receivables and operating cash flows are two entirely different things. sales of receivables are just cheap sources of financing, and as such should belong to cash flows from financing activities. (sender, 2002). supplier’s credit is a form of financing that is, in accordance to ias, presenting as cash flows from operating activities. increasing inflows from operating activities, on the one hand, results in an increase in liabilities to a supplier on the other. extension of time for payment, liabilities to a supplier can be an effective means to increase working capital. however, additional amounts of cash, achieved in this way, are not sustainable. it will be repeated next year only if there is a further extension of time for payment (if it is 45 days in the current year, next year it should be more than 45 days). conclusion it is evident that the creativity of accountants in presenting the results of the company occurred even before the occurrence of the creative accounting as a term. but the creativity of accountants today is much greater than in the past. as a result of that creativity, we have increasingly undermining the credibility of financial statements and the accounting profession. the importance of information provided by statement of cash flows to its users only increased the need for creativity in this field of reporting. the importance of cash flows from operating activities compared to the cash flows from financing and investing activities led accountants to distort the true picture of the cash flows and to make steps in increasing net cash flows from operating activities, by decreasing net cash flows from investing and financing activities. such cash flows are not sustainable and it is obvious that accountants with those actions want to present some distorted picture of cash flows. most of these measures (often all) gives only one-time increase in net cash flows from operating activities, and do not improve sustainability. 234 t. đukić, m. pavlović acknowledgement. this paper is part of the results of the research on project iii 47023 supported by the ministry of education, science and technological development of the republic of serbia references 1. amat, o., blake, j., dowds, j. (1999) the ethics of creative accounting, economic working paper, journal of economic literature, dostupno na linku: http://www.econ.upf.edu/docs/papers/downloads/ 349.pdf (05.04.2014). 2. amat, o., gowthorpe, c. (2004) creative accounting: nature, incidence and ethical issues, journal of economic literature, upf working paper no 49, dostupno na linku: http://www.econ.upf.edu/docs/ papers/downloads/749.pdf (12.04.2014). 3. djukić, t. (2005) bilans tokova gotovine kao instrument upravljanja likvidnošću preduzeća, doktrorska diseertacija, ekonomski fakultet niš. 4. dmitrović-šaponja, lj. (2007) izazovi računovodstva u korporativnom okruženju, 11. kongres srrrs: mjesto i uloga računovodstva, revizije i finansija u novom korporativnom okruženju: 97-117, banja vrućica, srrrs, banja luka. 5. đukić, t., pavlović, m. (2014) kvalitet finansijskog izveštavanja u republici srbiji, ekonomske teme, vol 52 (1): 101-116. 6. đuričin, d., lončar, d. (2010), menadžment pomoću projekata, beograd, cid ekonomskog fakultata. 7. elliott, b, elliott, j. (2011) financial accounting and reporting, 14 th edition, pearson education limited. 8. johnes, j. m. (2011), creative accounting, fraud and international accounting scandals, john willey & sons ltd. 9. kimmel, p., weygandt, j., kieso, d. (2011) financial accounting: tools for business decision making, 6th ed., john wiley & sons inc. 10. libby, r, libby, a. p., daniel, s. g. (2011) financial accounting, 7th edition, mcgraw-hill. 11. mulford, c. w. comiskey, e. e. (2005) creative cash flow reporting: uncovering sustainable financial performance, john wiley & sons inc. 12. mulford, w.c. and e. comiskey (2002) the financial numbers game – detecting creative accounting practices, new york; 13. pavlović, m., bogdanović, j. (2013) izveštavanje o tokovima gotovine, škola biznisa, br. 3-4/2013:129-147. 14. sender, h. (2002) cash flow? it isn’t always what it seems, wall street journal, may 7, 2002: p. c1 15. škarić jovanović, k. (2007) kreativno računovodstvo – motivi, instrumenti i posledice, 11. kongres srrrs: mjesto i uloga računovodstva, revizije i finansija u novom korporativnom okruženju: 51-70, banja vrućica, srrrs, banja luka. 16. škarić jovanović, k. (2011) finansijski izveštaji kao instrument prevara, 6. kongres računovodja i revizora crne gore: finansijsko izveštavanje u funkciji unapredjenja poslovnog ambijenta u crnoj gori: 209-232, , bečići, isrcg, podgorica. 17. stančić, p. (2006) izveštaj o tokovima gotovine, računovodstvo, vol,50, br. 3-4/2006: 4-13. 18. stefanović, r., sprečavanje i otkrivanje lažnog finansijskog izveštavanja, računovodstvo 11/2000: 3-11. 19. www.accounting-degree.org/scandals/ (10.04.2014). kreativno računovodstvo i finansijsko izveštavanje o tokovima gotovine sistem finansijskog izveštavanja je razvijen tako da obezbedi pouzdane informacije za njegove korisnike. medjutim, bez obzira na to koliko se teži da sistem finansijskog izveštavanja obezbedi kvalitetne informacije, uvek postoje odredjene okolnosti tj. slabe tačke koje mogu dovesti do neispravnih finansijskih izveštaja. na pojavu nepravilnosti utiču sledeći faktori: složena ekonomska stvarnost, računovodstvene politike i procene, lanac učesnika u procesu sastavljanja i prezentacije finansijskih izveštaja i specifični procesi u okviru priznavanja i merenja pozicija u finansijkim izveštajima. creative accounting and cash flows reporting 235 kreativnim računovodstvom se vrši transformacija finansijskih izveštaja od onoga što je stvarno u ono što subjekt želi prikazati koristeći postojeća pravila i/ili ignorišući neka od njih. kreativnim računovodstvom može se uticati na visinu iskazane dobiti, visinu iskazane neto imvine i visinu iskazane neto gotovine iz poslovnih aktivnosti. u ovom radu termin kreativno računovdstvo će biti korišćen, za označavanje svih računovodstvenih praksi koje namerno odstupaju od standarda da bi eksternim korisnicima bila prezentirana željena a ne stvarna slika o novčanim tokovima iz poslovne aktivnosti preduzeća. ključne reči: finansijsko izveštavanje, kreativno računovdstvo, novčani tokovi, poslovna aktivnost. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 2, 2014, pp. 85 99 review paper the effects of eu enlargement in empirical models  udc 168.52:339.92(4-672eu) ivan b. marković faculty of economics, university of niš, serbia abstract. the literature devoted to the eu often points out its hybrid side, which is in the process of constant transformation. the process is comprehensive, in the economic, political, military and safety domain. this complex task is not timed, because it is considered a process and not a one-time act. the original idea that social changes have evolutive development and need time to become quality changes is not abandoned. although today's eu environment is drastically changed compared to the late fifties of the last century, the main reasons for a country to join the eu have remained virtually the same. all of these reasons basically refer to the same aspirations of potential candidate countries for membership: economic, political, safety, cultural and others. possession of an appropriate macroeconomic model and relatively useful statistical data is a conditio sine qua non of a successful analysis of the benefit and the cost of joining the eu. key words: accession process, eu, accession effects, cecchini report, empirical models of accession. introduction the last wave of enlargement, when in 2004, 2007, and 2013, 13 new countries, mostly underdeveloped compared to the old member states, were received in the eu brought about institutional, political, and economic consequences which the enlarged eu had to face. the accession of these countries to the eu took place between the two extremes. one extreme of the accession itself brings gains and long-term progress. at the other extreme of the country joining the eu, there can be only harm, and not benefit. both approaches are based on an estimate, which is not based on facts, analysis or historical experiences of economic integration. today, there is a well-developed analytical apparatus that can determine with enough precision the benefits and costs that a country which wants to have access to certain economic integration can expect. however, there are opinions that the models are often a mere „smoke screen” that allows  received april 21, 2014 / accepted june 25, 2014 corresponding author: ivan b. marković faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 658  e-mail: ivan.markovic@eknfak.ni.ac.rs i. b. marković 86 you to prove what you want. thereby, the used analytic economic policy and overall policy warns that measures should be taken to increase the positive and reduce the negative effects of accession integration. it is very difficult to quantify the overall effects of accession, but most studies argue that, in the long term, the new member states have huge benefits. with the expansion of 2004 and 2007, the forecasts emphasized the profit of 10 billion euros, 300,000 new jobs and increased gross domestic product by 0.2 %. the effects of costs are one-time and part such that they will act at all times after the entry of new members into the union. the emergence of some of the costs is considered economically favorable (for example, reduction of subsidies or closure of non-competitive firms), but in the socio-political sense these are undoubtedly short-term cost. some authors believe that the bodies of the union and the governments of potential new members continue to hide the cost and only glorify benefits. in this way, the actual impression that a new member will only have after entering is that of benefit, which of course is impossible. the practice of highlighting the benefits and suppressing the costs is very reminiscent of the „propaganda for happiness”, which are used by the governments of communist countries. due to the fact that the union has stimulated scientific papers in favor of extension and discouraged critical works, does not mean much to the conclusion that most of the literature considers extension to the eu and new member states good. regardless of these views, it is obvious that the new members have to pay a price for entry into the union. this price, however, is not the same for all; moreover, it can be drastically different from country to country. as far as trade is concerned, spectacular changes were not expected other than those that occurred after the removal of tariffs and other barriers in the nineties of the xx century. the main effects of enlargement on agriculture could be summed up in the expected significant growth in productivity of the agro-industrial complex in the candidate countries, whereby a large number of workers tended to drop in agricultural production. on the other hand, the effects on agriculture in the member states were very small due to the small share of this sector in the structure of gdp and employment. 1. the motives of a country to join the eu one of the main reasons for joining the european integration is, of course, economic. economic cooperation presupposes the elimination of discrimination on the one hand and the establishment of harmonized or common policies on the other. obviously, the benefits are comprised of access to a larger single market, which has enabled a number of benefits: improving competitiveness, productivity, promotion of scientific and technological cooperation, greater mobility of factors of production, the use of economies of scale, economic and monetary stability, and the use of eu structural funds. in practical terms, there is improvement of not only internal properties of the given economy, but also their relative position in the „world”market. closely related to economic are political reasons. it is known that the establishment of a common political heritage underlined the objective of closer connectivity. after the fall of communism in eastern europe has weakened the political motivation of the eu in terms of contrast and polarization system to eastern european block. it is still, according to some authors, reflected in the preservation of high standards of social amenities and cultural specificities of the eu (michelmann, 2004). the effects of eu enlargement in empirical models  87 for these reasons, the methods of „inputs” and „outputs” should define the ways in which a country can access the eu as a sort of exclusive club, and the ways in which it could possibly leave this club. under conditions of „cold war” and the deep division of europe, there were not practical reasons to clearly define the „input „and” output”. namely, instead of the exit there is effective protection of the right of veto. but in a situation where a deep and fundamental change in the whole of europe was performed, and global institutions, associations and organizations (un, wto, imf, world bank, nato, etc.) began redefining its role, it is essential to have a clearly defined „input” and „output” option. in such conditions of global change, the input option has become interesting for the remaining members of efta, as well as for all the countries in central and south-eastern europe. interestingly, the exit option has not been used, except in one case, when greenland left i.e. its special status was regulated. given that most of the efta countries have joined the eu (except switzerland, norway, iceland and liechtenstein), the western balkans countries appear to be the most important group of candidate countries for full membership in the eu. due to the proximity, economic importance and policy driven by deeper integration, the eu has taken on the role of creators of political and economic relations between these countries in order to accelerate the process of their (re)integration into the world economy. the accession process was also started in 2000 with the signing of the stabilization and association agreement, under whose influence were also developed and function economic institutions, policies and performance of the western balkans. some authors refer to these countries, which have started the process of systemic socioeconomic transformation or transition, as „the new european democracies”. it should be noted that the association does not necessarily lead to eu membership. according to h. p. ipsen (ipsen, 1992) joining is a long-term relationship of a state that stands outside the union with the eu, which remains intact in terms of their organs and internal structure. so, part or limited membership cannot be achieved by joining. what is most commonly achieved by joining is a fuller participation of associated countries in the objectives of the union, so that the relationship goes beyond the framework of conventional international trade agreements. this practically means that the eu and associated states become equal partners, whose cooperation is institutionalized at a higher level of mutual relations. regarding the establishment and content of relations joining, there are special rules. they are associated to the sets in the „middle” position between full membership and the usual contractual partnerships. however, it is possible to properly define three conditions for joining the eu, which are related to the geographic, political and economic dimensions. the existence of these conditions can be partly inferred from the treaty of rome, partly on the basis of content agreements with certain countries that the eu has made so far. unlike joining, where there are virtually no geographical restrictions, full membership is „reserved” for european countries. even though it was a clear criterion, it seems it is not realized to full extent. greenland, for example, is thousands of miles away from europe and closer to the united states. malta may geographically belong to europe and africa, but culturally, historically and politically it is a part of europe. at least there is clarity in eastern europe, where some believe poland, slovakia, hungary are the borders of europe, while others believe it is the urals. а special case is that of israel, whose population comes mainly from europe, whose economic and political system is consistent with west-european, although the country is geographically located in asia. i. b. marković 88 economic conditions include, above all, a market economy with a dominant private property as a form of property rights, the economy open to the world, a certain degree of competitiveness, and even a certain level of social welfare. in the initial stages of the expansion of the eu, a number of authors (correctly) pointed out an assumption related to the eu enlargement policy. in fact, it is often the prevalent opinion that only the high and middle-income countries are eligible candidates for full membership. it is inconceivable that a poor country emerges as a serious candidate. although at first glance this approach can be estimated as wrong, it is not for at least two reasons. the first relates to the conditions of accession and the other is tied directly to the level of economic development of the candidate. for the explanation of the first reason, it should be noted that during this period the terms that candidate countries must meet in order to become full members have not yet been precisely defined. in terms of ad hoc acceptance and conclusion of europe agreements (early nineties) and it was not possible to draw any concrete and more accurate conclusions. unlike the treaty of accession, „europe treaties” or „europe agreements” went much further in terms of objectives and content covered. they depart from the wishes of the contracting parties to full membership in the eu, establish gradually assume the obligations of eu treaties by the associated countries (in the provisions on the free market, and mutual assistance) and provide technical and financial support of the eu reform process taking place in the accession countries. their name, „europe agreements”, was chosen for these reasons. enlargement policy always followed a policy of deepening economic integration. it seems that the fall of the berlin wall „came” earlier than the deepening „favored”. european agreements served to successfully bridge the gap between the eu wishes to receive all eastern european countries under its wing and its actual ability to do so, given the demanding phase transformation integration in the monetary, economic, and political union. also, unlike in the countries admitted to full membership, in economically underdeveloped countries the possibility of joining the eu in principle was always open (in accordance with the treaty establishing the eec and the eu). in such cases, any deviation from accepted principles of equitable distribution of rights and obligations is possible, in order to meet the needs of protection of young industries of the developing countries. according to most authors, the essence of the european agreements is the same. it edited the economic, political and financial relations between the contracting parties. these relationships have been set up to european agreements from other association agreement which differ in purpose. the goal was obviously associated with membership in the eu countries. this practically means that the purpose of the agreement was to prepare the european associated countries to join the eu, and to allow them to gradually assume the obligations deriving from the establishment of the single market. however, it should again be emphasized that the european agreements do not automatically lead to membership. after the expiry of the transitional period of ten years, they extend no further time limit. entering of the accession countries to the eu implies, therefore, a positive assessment of the union that they managed to complete, in the transition period, the economic, legal and political preparations for full membership. in any case, this requires separate negotiations for whose commencement no deadline is scheduled. the basic elements of the content of the european agreement are:  trade liberalization without entering the customs union. however, the principle of free trade is not included in the so-called sensitive products, which normally account for about 50% of exports of associated countries, the effects of eu enlargement in empirical models  89  in the case of agricultural products of associated countries, the agreement made a somewhat easier access to the eu market,  associated countries are obliged to harmonize their legislation with the eu,  there is an obligation of the eu accession countries to provide technical and financial assistance to implement reforms,  freedom payments should be achieved within five years, and the free movement of capital in the double extended period of time,  industrial cooperation aims to encourage the modernization and restructuring of the industry in the associated countries. especially since these countries were required to create a climate conducive to private investment. in contrast to the agreement on cooperation that just require countries to make modifications to certain institutions (and in some cases not even that), the negotiations on the membership explicitly seek possession of „desirable traits” to a particular degree. this is done for two reasons. first, to ensure the compatibility of economic, political and legal systems of the countries acceding to those in the eu. second, the acceding countries may not function properly after joining the eu. the single market, for example, requires a high degree of competitiveness of firms and sectors of the economy, and if it were not the case with the state of the new eu, there would be difficulties, both in the new associated country and the eu as a whole. earlier eec and now the eu have always insisted that, for them it was not just words on connecting economic, but also political character. political terms should encompass functioning democracy, separation of powers, a multiparty political system, the rule of law, respect for human and minority rights and the like. in addition to meeting some of the general conditions specified on both sides there must be a willingness to join the eu. it is important to note that the mentioned conditions for the admission and access to the eu are necessary, but not sufficient. in addition to meeting the formal requirements by potential candidates for membership or accession, the eu bodies, notably the council and the commission, estimate other content-items and their possible suitability for membership. due to the continuous expansion, what is practically gained is the impression that the eu can only go in that direction, but not to be reduced. if the eu is a community that promises its members and provides a profit (no matter what it may contain), then under certain conditions, it must have (predicted) the exit option as well. it is unlikely that the individual states could make use of an exit option for pure exhibitionism or because of some small differences, because they would be playing with their great interests. „put out” would actually be an effective opportunity for those countries that believe that some common decisions violated their vital interests. it seems that the „exit option” was also a kind of safeguard clause for minorities by the majority and to measure the ultimate protection. the nature of the game in terms of „inputs“ and „outputs” of the eu depends on the behavior of specific players. obviously, the austrian entry into the eu represented a strong argument in favor of a future receipt of several other countries, with which austria has strong economic, political and historical ties (such as slovenia, the czech republic and slovakia). also, the entry of the scandinavian countries (finland, denmark, and sweden especially) was a strong pressure for the eu enlargement to the baltic countries (latvia, estonia and lithuania). we should not forget that these are small countries that are geographically located on the border of russia, as every economic and political arrangement gives strategic importance. on the other hand, the possible withdrawal of germany from the eu would bring into question not only the initiated expansion of the i. b. marković 90 eu to the east, but also the survival of the eu as a whole. on the basis of the above examples, it can be concluded that, although the formal rules of the game (in the sense that it is equally applicable for each country), the presence or absence of certain states, or key players, could represent an important suggestion, both in terms of further development of the game, and in terms of external eu preferences. in contrast to the seventies of the last century, when the eu in terms of degree of integration and the number of member states was much more modest, today (and tomorrow) a lot of difficult tasks and obstacles can be put in front of the numerous eu newcomers. the conditions and procedure for signing the association agreement, starting with the european agreement, to the special stabilization and association for balkan countries, have so far been repeatedly changed. it is known that the last twelve new member states underwent an extremely expensive and almost „traumatic” period of adjustment, especially in the economic sphere, that their membership requirements were seriously considered. a major problem in the process of joining the eu is the circumstance that the fulfillment of each of the set of criteria has economic, social and political costs that the countries, at least at that moment, are not able to accept. 2. help econometrics in measuring the effects of accession the first theoretically and empirically based approach to evaluate the economic effects of integration, dating back to the 60s of the last century, is a sort of ex post evaluation. the basis of these attempts has been the so-called partial equilibrium models. one of the more successful is the balassa coefficient (1975) which included the effects of market growth (increase of productivity, reduction of operating costs, increase of competitiveness, economies of scale), and evaluated the effects on gdp growth and investment. also, it is important to mention smith and venables’ research (1988) regarding the assessment of the effects of the single market. the authors focused on the ten industries, given the scenario assessment of future effects of integration (the ex ante evaluation). however, what most authors observed are severe restrictions on access to partial equilibrium. for these reasons, this method gave way to models of general equilibrium (computable general equilibrium cge) or macro models. numerical values in cge models are based on credible assumptions and macro-alone rely on econometrically-estimated equations. now it was possible to examine the interdependence of the various sectors and assess the overall effects and redistributive effects on the economy as a whole. in 1992 gasiorek, for example, developed the work of smith and venables (1988) and turned it into the general equilibrium model calculating the long-term effects of european integration. in later works, the author has expanded the circle of countries studied to include spain and portugal, in addition to the earlier „european six”, great britain, greece, ireland and denmark. with respect to the macroeconomic effects, well-known is the cecchini report (1988) compiled for the european institutions, assessing the micro and macro effects of the formation of a single market in 1992. 2.1 cecchini report the focus of the milan summit (in 1985) has been the creation of a single market that would contribute to the liberalization of world trade, offering new opportunities for trading partners of the community. increased competition on the community market, which the effects of eu enlargement in empirical models  91 prevents the removal of internal barriers, would have an impact on companies from countries outside the community. the decisions were made concrete in the form of the single european act (sea), and the program for the completion of the internal market in the eu became known as the program in 1992. adopting the white paper on the single market planned the removal of physical, technical and fiscal barriers in order to achieve the ec single market. the sea came into force in july, 1987 when the amendments to the treaty of rome were introduced, and were related to the reduction of the number of questions that were asked for unanimous decision-making. as a consequence, it was not possible to dispose certain proposals for years because one or two member states objected to them. the program was initiated in 1992 because of the belief that it would lead to significant economic benefits for the countries and peoples of the community. in an attempt to quantify these benefits, the commission apointed paolo cecchini to chair the committee of experts. his report, published in 1988, was based on research and industrials 11,000 econometric model provided a more realistic prediction of functioning of the single market. in fact, the introduction of the single market is expected to remove barriers to reduce production costs, and on that basis, lead to a fall in prices, which would only accelerate wider competition. lowering the price to stimulate demand, and thus, indirectly, offer or production. its increase is expected to result in further cost reductions due to increased scale of production. the cecchini report predicted that profit from the removal of trade barriers would be 0.2-0.3% of the gdp of the community, that the profit arising from the removal of barriers to production (firms entering foreign markets) would be 2.0-2.4% of gdp and that the effects of the increase resulting from economies of scale would amount to 2.1-3.7% of gdp, which meant that the total expected profit amounted to 4.3-6.4%. table 1 shows the expected results of operation of the single market on some of the main macroeconomic indicators in the eu. it is obvious that the largest gains were expected from the liberalization of financial services and the effects on the supply side. most of these effects came as responses from the business sector to more competition, ranging from the use of more efficient techniques to economies of scale. table 1. examined medium-term macroeconomic consequences of market integration in the eu process nature of implications removal tariff formalities public procurement procedure the liberalization of financial services the effects on the supply side the average value the range change in gdp (%) 0.4 0.5 1.5 2.1 4.5 3.2  5.7 change in consumer prices -1.0 -1.4 -1.4 -2.3 -6.1 -4.5  -7.7 change in employment (000) 200 350 400 850 1,800 1,3002,300 the change in the budget balance (% of gdp) 0.2 0.3 1.1 0.6 2.2 1.5  3.0 the change in the balance of payments (% of gdp) 0.2 0.1 0.3 0.4 1.0 0.7  1.3 cecchini, p. (1988), the european challenge: 1992, bruxelles: european commission. i. b. marković 92 it is evident, too, that the macroeconomic effects of eu integration were pretty good, starting with the gdp growth of 4.5%, decrease in the price level of about 6%, and the creation of an additional 2 million new jobs. of course, the market integration needs to be completed, requiring several years to make these numbers become a reality. the cecchini report suggested that greater profit can be realized based on the balance in the budget and balance of payments of the member countries. improving the balance of the budgets of the member states to only 0.7% of community gdp, would increase gdp by about 7%, with about 5 million new jobs, without increasing inflation. it was considered that positive economic developments in the eu had a positive impact on global economic trends, as they acted in the direction of encouraging competition, lower inflation, stimulating demand and supply. the analysis of the data in table 1 provides answers to a limited number of questions. the report provides insight only into the benefits that followed the unification of markets without indulging in the cost analysis, on the other hand. for this reason, it was necessary to supplement the cost-benefit analysis of forecasted costs of the single market. however, follow-up costs were very difficult, both because of the comparability of the same, and the changes in the competence of the community. the percentage of expenditure in relation to the total income of the eu has, of course, grown with the increasing competence of the community/union. in 1970 it amounted to 0.74% of the total income of the eu member states, in 1980 it was 0.80%, in 1990 it was 0.96%, and in 1995 it reached 24.1%. out of the total eu expenditure, the expenditure on agriculture accounted for nearly half (49.3%), the structural funds 30.5%, the administration of the union 4.8%, the external activities of the union 6.3%, research 3.6%, internal politics 2.1%, development fund 2.9% and eccs 0.5%. the eu expenditure normally represents about 2.5% of total government spending of the eu member states. comparing the prices of public goods by the community/union offers and expenditures shows that the integration brings profit. it was also higher due to the fact that the expenditure on agriculture and structural adjustment virtually seized the cost of the community/union, as they returned the economies of the member states. reliance on the mechanism of economies of scale often leads to a merger in larger firms (mergers and acquisitions), and the high competitiveness must be maintained through imports and foreign direct investment. it is one of the reasons why seeking to enter the eu market is relatively easy. if it were not so, then the industry and other activities would rapidly internalize and exhaust the effects of economies of scale and develop the so-called x inefficiency. x inefficiency refers to a situation in which the total costs of the company are not reduced, although production is not a result of the maximum relative to the deployed resources. thus, if a common market is not open, competition and efficiency would decline, and that would cause the anticipated benefits never to occur. it just says what the importance of a liberal approach to solving economic and political problems was. although the eec and later the eu itself contained both liberal and regulatory elements in the development of its institutions, for decades, it seemed that the regulatory approaches have the advantage. integration has mainly been followed in attempts to accomplish through legislation a greater degree of harmonization of conditions and the homogenization of the economy, which was wrong. harmonization took place through harmonization of laws and other regulations, through imposing similar or the same standards, and even through attempts to standardize prices. it was a tragic mistake, and the effects of eu enlargement in empirical models  93 luckily made just in case of the standardization of agricultural products. over time, the more liberal approach has taken precedence. the reasons for the change are likely to be numerous, and they are both internal and external. researchers and decision-making bodies in the eu noted that it was not easy to reach a consensus, even on such seemingly trivial matters, such as what is ice cream, and what is yogurt. for these reasons, the eu institutions, increasingly began to rely on connections based on differences, i.e. the competitive regulation. this practically means that the eu body is increasingly limited in defining the rules of the game, and that is therefore left to the actors to decide on how to utilize this space. generally speaking, today, liberal policies are not routing their liberal rivals, but they have taken the initiative and signatures. persistence in this regard was not only important for the concept, but also for the success or failure of the entire eu. a clear indication that the eu continues to present a strong regulatory power was the strong pressure for homogenization of labor legislation. there was a lot of debate about the cecchini report later. skeptics have pointed out that the removal of a large number of small barriers to trade, when the effects of the economy are already used, has a negligible impact on the volume of trade, so that the overall positive effects were smaller than the report predicted. critics of other species have complained that the report did not take into account the dynamic effects (which is true, because it referred to one-time effects) and therefore underestimated the overall positive effects by three to four times. this assessment is excessive, as it were, and some are skeptical about the assessment of the overall effects of integration. at that time, nontariff barriers amounted to about 17% of the total cost, it is suggested that there may be significant effects on the basis of economies of scale. in addition, a lot of service sectors such as finance, communications and information before the creation of the single market were very well protected from competitors. hence, the fall in price will very likely have significant effects on the supply side. however, it is interesting that none of these critics disputed the fact that positive effects exist. after all, the debate about the effects of the eu has continued after its formation. in october 1996, the commission prepared a progress report, which showed that during the first three and a half years, gdp grew between 1.1% and 1.5%, the investment was 2.7% higher and that created 900,000 new jobs. inflation is also significantly reduced, but there were a few„black holes”, mainly because some member states did not adequately implement the single market act (this was particularly the case with regard to public supply). the inability to agree on a common system of vat collection meant that manufacturers still have to face the enormous paperwork, and that there was no progress in the harmonization of taxes certainly seemed restrictive on trade flows. in march 1997, mario monti, the former eu commissioner for the internal market, demanded vigorous action to create a single market until the scheduled start of monetary union on 1 january 1999. although the goals were not fully achieved, there was a significant progress in the field of taxation, intellectual property and prevention of piracy and counterfeiting, as well as in the field of financial services by adopting a general framework of legislative measures. at the summit in lisbon in 2000 and stockholm in 2001 when they were supposed to solve issues of financial barriers, create conditions for a more efficient labor market and, finally transform the eu into the most competitive region in the world, these problems were only partially remedied. generally speaking, the single market, today, essentially, has a few gaps which a resolution is expected to mend in the near future. the cecchini report with the mentioned disadvantages is a good starting point for the design model to measure the effects of eu accession. arguments in favor of such an i. b. marković 94 assertion lie in the gradual research model. the assessment of the effects of accession should start by reviewing business activities, analysis of trade barriers and sectoral studies. the second step would be carried out through the analysis of the model of supply and demand, with a focus on the collection of direct and indirect effects multiplier. the third, but not least is the analysis of the effects of economies of scale, after which would follow the study’s overall competitiveness of the economy. the basic criticism of the cecchini report (a static assessment of the economic effects and too optimistic estimates of the positive effects of integration) is largely corrected by the emergence of new models for the evaluation of the integration process. 3. models of cost-benefit analyses after the cecchini report in order to remedy the lack of the basic cecchini report (a too static assessment of the economic effects of integration), in 1989, baldwin transformed the cecchini report into a dynamic model with short-term and long-term effects of integration. the analysis showed that the medium-and long-term gains from the integration were almost twice higher than in the cecchini report, where the effects were evaluated between 2.5% and 6.5% growth in gdp assuming the single european act in 1992. haaland and norman (1992), on the other hand, presented a simultaneous study in which the core of the research were the economic effects of alternative scenarios, starting from regional enlargement of the european union and efta countries without this increase. the conclusion was that there are positive effects for all participating countries of the enlargement process, and for the members of the ec and efta. in another paper, haaland and norman (1995) calculated the effects of the reallocation of resources (inflows and outflows of capital), with the conclusion that the efta countries would benefit from the goods and services sector, and encounter a loss in the capital movements sector. using a general equilibrium model, keuschningg and kohler did extensive research from 1994 to 1996 when they calculated the effects of the integration on the budget (for austria, sweden, finland and norway). the profit for the new member states in terms of gdp ranged from 0.5 to 1.4% of gdp. in their next survey (1999), the same authors investigated in more detail the effects of integration on austria, starting with the theory of various scenarios of economic policy and the results of quantitative simulations. in addition to specifying the theoretical and empirical research in the field of cost-benefit analysis, they developed a simultaneous macro econometric model. it involved modeling certain parameters aggregate supply and aggregate demand, labor market, the household sector, investment, government and foreign trade. the main conclusion was that eu accession would have a positive global impact on gdp growth (about 1%), welfare, foreign trade, competitiveness, available capital, employment and the fall in prices, but also some negative effects on certain sectors. the first studies that are directly related to the assessment of the effects of eu enlargement in central and eastern europe, are often associated with the names of hamilton,winters, baldwin, breuss and schebeck. using the so-called gravity model, hamilton and winters (1992) were able to calculate in various works the long-term potential of trade between geographically close countries. the basic idea of the model was that the volume of foreign trade between the two countries is directly correlated to their size and distance. in practical terms, it is important to intensify cooperation with the the effects of eu enlargement in empirical models  95 countries geographically close to the eu countries (such as austria, germany, and italy) and, to a large extent, increase the volume of foreign trade, even by four times. brown (1997) using a kind of general equilibrium models (michigan model of world production and trade) calculated the effects of eu enlargement for three new member countries: poland, the czech republic and hungary. according to brown, the gain for the new member states ranged from 3.8% to 7.3% of gdp, while for the eu itself the extended benefit from these countries was entirely symbolic from 0.1% to 0.2%. the co-author work by francois, portres and baldwin (1997) developed the first detailed scenario of the effects of enlargement of the eu, both for member states and candidate countries. interestingly, they used a simultaneous macroeconomic general equilibrium model which did not take into account the cost of adapting the new members and the adoption of the acquis. a very reserved attitude towards these cost categories was, according to the authors, a consequence of the inability of their real quantification. also, in the development of two parallel scenarios conservative (pessimistic) and the less conservative (moderate) were used both the assumptions to reduce the cost of foreign trade on the basis of integration (from 5% to 15%) and reduction of the risk premium (from 0% to 15%). the study included a total of ten candidate countries for full membership (with the exception of malta, cyprus and turkey), and the following types of effects: the effects of trade liberalization, the effects of reducing the risk premium and budget effects. the gains for the new members were estimated to be 1.5% to 1.8% of gdp, while for the „old” member states about 0.2% of gdp. in the framework of this model especially analyzed were the effects of the participation of five countries called visegrad group (poland, the czech republic, slovakia, hungary and slovenia) in the eu funds after switching to full membership. on the basis of the current data, it was estimated that the average gdp growth in these countries would be 5%, the gain from the cohesion fund should be around 26 billion euro, from the structural funds around 12.8 billion euro, from cap 5-30 billion euro. total net gains for the new member states, with the deduction of about 23 bn euro under the mandatory annual allocation of 1% of gdp in member states to the eu budget, according to these estimates would amount to about 50 billion euro! it is obvious that these data are overly optimistic, perhaps even unrealistic. for these reasons, the true picture of net profit based on the integration can be obtained only by adjusting the (exclusive) costs of adaptation and implementation of the acquis. a series of empirical studies were carried out by schebeck and breuss (1999) who used a similar simultaneous macroeconomic model. the focus of their interest was to quantify the effects of eu enlargement for the period to 2010 primarily for the austrian economy, but also for the candidates. the main conclusions of their study are:  the costs of eu enlargement would move about 80 billion euros, of which 12 billion for the cap, 40 billion for structural policies (which are also used for the candidates), 6 billion for administrative costs and another 22 billion euros for the other five candidate countries (groups of helsinki). this amount is about 4% of gdp in the first five candidate countries and about 0.2% of the gdp of the european union;  gdp growth in austria to 2010 was 1.3% higher than in the case of no extension after 2004. it was expected that 27,000 new jobs would open, price would fall by 1%, the reduction of the budget deficit to 0.4% and increase in current account surplus of 1.6% of gdp; i. b. marković 96  analyzed and direct trade effects, the impact on fdi, as well as the overall macroeconomic parameters (gdp, current account balance, budget, unemployment, consumption). one of the most comprehensive studies of the economic effects of the eu enlargement up to june, 2001 is entitled the economic impact of enlargement. it was presented to mark the ten-year development of the 10 countries in transition (the candidates for full membership at that time), with special emphasis on the macroeconomic effects, effects on labor migration and effects on agriculture. the mentioned model in this research was used later by some researchers to assess the clustering effects of eu enlargement as well. the goal to be achieved was to define a possible way a form of behavior of costs and benefits over a period of enlargement and immediately afterwards so that these effects follow a qualitative way. it was observed that when the effects of a candidate are almost always positive, they are accelerated in the aftermath of the full membership, and there is a slower rate in the period before accession and after reaching eu standards. in the second group of countries (eu), the benefits were greater than the cost of the pre-accession phase, and after reaching the eu standards (when costs are significantly declined), while expenses grew very shortly after the enlargement. so, for all candidates who see their future as full members of the eu, it is essential to have the knowledge of the effects that membership brings to a country. in order to facilitate their identification, a general classification was made to direct that can be directly calculated and imply a precise quantitative determination, and indirect that are primarily related to sectoral effects, the effects of resource allocation and redistributive effects of income and wealth. therefore, the main direct effects would be: 1. the effect of trade creation, which involves changes in domestic demand due to the elimination of tariffs and non-tariff barriers and lowering import prices (trade costs reduction) in the country that is approaching integration, which intensify trade between the member countries of integration; 2. the trade diversion effect means slowing foreign trade flows to countries outside the european integration, or changing direction of foreign trade to countries within the integration at the expense of countries outside the european integration; 3. the effect on the balance of payments which is directly dependent on the previous two effects, because they mostly affect the improvement or deterioration of the balance of payments; 4. the budget effect (government revenue effect) implies a change in budget revenues due to the reduction or elimination of customs duties and other barriers, leading to lower revenue per unit value of imports, but to higher total revenues from growth in the volume of trade, expansion and revenue base. this effect is often also called the transfer because it includes all funds (structural and cohesion) and resources (based on cap and pre-accession assistance) that go to the candidate countries from the eu budget. the aforementioned transfers significantly affect the growth of investment, employment, income, and finally, gdp of the new member states; 5. the effect of the growth of the welfare and living standards of consumers (welfare effect) is achievable due to lower import prices and limit monopoly pricing strategy and market segmentation. the effects of eu enlargement in empirical models  97 on the other hand, the indirect effects of integration are: 1. sectoral effects, which include the impact on production, employment and trade volumes by sectors; 2. effects on resource allocation and redistribution of income; 3. effects of the terms of trade are determined by changing the purchasing power of the country's exports, which is approaching integration, due to changes in export and import prices of products; 4. effects on improving the international competitive position of a country becoming a full member of the european union are defined on the basis of more privileged to cheaper factors of production and, therefore, more competitive (with lower costs and prices) production; 5. effects of commercial rents, which arise due to differences between higher domestic and lower import prices; 6. negative effects caused by adjustment costs, on the basis of:  shaping the institution in accordance with eu requirements,  application of rules deriving from the acquis, the most important being those in the field of standardization, agriculture, transport, energy, environment,  falling production and rising unemployment (in the first years of membership), and the creation of so-called negative effect due to the manufacturing of opening up to foreign competion, and  adequate social programs for workers who lose their jobs. 7. indirect political benefits in the form of:  use geo-strategic advantages due to eu membership,  support of stability, democracy and the rule of law,  the increase in international security, and  growth of fdi and gdp due to the reduction of political risk (the risk premium effect). conclusion enlargement is one of the most powerful tools of eu policy. the attractiveness of the eu has helped to transform the countries of central and eastern europe into modern, well-functioning democracies. it has inspired far-reaching reforms in the candidate countries and potential candidates. all european citizens benefit from having neighbors that are stable democracies and prosperous market economies. enlargement is a process that is carefully managed and that helps the transformation of the countries involved, extending peace, stability, prosperity, democracy, human rights and the rule of law across europe. euro optimists are happy to point out the above mentioned facts when they want to show the benefits of joining the eu. and benefits alone. the costs are somewhat hidden behind the view that the country's accession to the eu has virtually no alternative. for this reason, almost all the countries that joined the eu as a major foreign policy priority emphasized membership in the eu. models to provide the most realistic picture of the benefits and costs of membership in the eu are reluctantly used for the purpose of economic analysis. if we were to give a general assessment of the effects of integration and success of their quantification, it could be said that the possession of appropriate macroeconomic i. b. marković 98 model and relatively usable statistics conditio sine qua non of successful analysis. the eu15 is, for example, all the time, preparation and application of expansion strongly dominated by the view that it is used in light of cost and is useful for the expansion of the eu15. authors who have to prove it generally use very complex models, which may not be reliable (because the reality is unpredictable and complex). that is possibly a useful extension for eu15, but it does not mean that it is harmful for 10 or 13 new countries. the models are, according to some authors, often a mere „smoke screen” that allows you to prove what you want. the actual effects of the expansion can be anticipated, but their accurate quantification is hardly possible. it is not surprising, because in the process such complicated calculations are too complex to be accurately performed. in order to develop high quality studies of comparative analysis of the costs and benefits of accession, of great benefit may be the experience of the newcomer countries in terms of costs incurred and estimated earnings. only in this way would it be possible to apply the appropriate mathematical and econometric technologies that successfully presented the real economic assessment of the effects of european integration. references 1. a. smith and a. venables, (1988), the costs of non-europe an assessment based on a formal model of imperfect competition and economies of scale. 2. baldwin, r., j. francois and r. portes (1997), the costs and benefits of eastern enlargement: the impact on the eu and central europe", economic policy, vol. 12, issue 24: 125-176. 3. baldwin, r., (1989), measuring 1992's medium-term dynamic effects, nber working papers 3166, national bureau of economic research, inc. 4. brown, drusilla k., alan v. deardorff, simeon djankov, and robert m. stern (1997), an economic assessment of the integration of czechoslovakia, hungary, and poland into the european union, in stanley w. black, ed., europe's economy looks east: implications for germany and the european union new york: cambridge university press. 5. checcini, p., (1986), the european challenge: 1992, bruxelles, european commission. 6. fritz breuss& fritz schebeck, (1998), costs and benefits of the eu's eastern enlargement for austria, wifo monatsberichte (monthly reports), wifo, vol. 71(11): 741-750. 7. gasiorek michael, alasdair smith, anthony venables (1992), 1992: trade and welfare a general equilibrium model, trade flows and trade policy after "1992" edited by l. alan winters, cambridge university press. 8. group of experts (2000), preparing for eu enlargement: devolution in the first wave candidate countries, european communities, brussels. 9. haaland, jan i. and victor d. norman (1992), global production effectsof european integration. expanding membership of the european union, cambridge university press, 10. h.p. ipsen (1992), enth.: la justice constitutionnelle comme élément de construction de l'ordre juridique européen / louis favoreu. die europäische integration in der deutschen rechtswissenschaft, the autonomy of community law, kluwer law international. 11. hamilton, c.b. & winters, l.a., (1992), opening up international trade in eastern europe, papers 511, stockholm international economic studies. 12. ivan markovi? (2009), evropskaunija za i protiv, ekonomski fakultet, niš. 13. keuschnigg, christian & kohler, wilhelm, (1995), dynamic effects of tariff liberalization: an intertemporal cge approach, review of international economics, wiley blackwell, vol. 3(1): 20-35. 14. michelmann, h. j. (2004), european integration: theories and approaches, lanhman: university press of america. 15. redmond, j. and rosenthal, g.g. (2012), the expanding european union: past, present, future, boulder:lynnerienner. 16. victoria curzon, alice landau, richard whitman (1999), the enlargement of the european union: issues and strategies, routledge, london. the effects of eu enlargement in empirical models  99 efekti proširenja eu u empirijskim modelima literatura posvećena eu često ističe njenu hibridnu stranu koja se nalazi u procesu stalne transformacije. proces je sveobuhvatan, u ekonomskom, političkom i vojno-bezbedonosnom domenu. ovaj kompleksan zadatak nije vremenski ograničen jer je shvaćen kao proces, a ne jednokratni čin. nije napuštena prvobitna ideja da se društvene promene evolutivno razvijaju i da traže vreme za prelazak u kvalitet. iako je današnje okruženje eu veoma promenjeno u odnosu na ono iz kasnih pedesetih godina prošlog veka, osnovni razlozi da bi neka zemlja pristupila uniji su ostali praktično isti. svi oni u svojoj osnovi imaju iste težnje potencijalnih zemalja kandidata za članstvo: političke, ekonomske, kulturne, bezbedonosne i dr. posedovanje odgovarajućeg makroekonomskog modela i relativno upotrebljivih statističkih podataka predstavlja conditio sine qua non uspešne analize odnosa koristi i troškova pristupanja eu. ključne reči: proces pristupanja, eu, efekti pristupanja, čekini izveštaj, empirijski modeli pristupanja. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 1, 2016, pp. 31 44 expected utility theory under extreme risks  udc 005.311.6:330.131.7 jelena stanković, evica petrović university of niš, faculty of economics, serbia abstract. expected utility theory provides a framework for modeling choice of a rational individual, whose goal is to maximize expected utility to the preferences towards risk. however, extreme risks, such as, for example, a stock market crash or a natural disaster, significantly affect the function of the probability distribution of outcomes by adding the weight to the tails of the distribution. in such cases, the application of the theory of decision-making is extremely sensitive to assumptions on the probability distribution function. therefore, this paper will provide a review of models of decision-making in terms of expected utility theory under extreme risk. key words: expected utility, extreme risk, decision-making introduction the classical economic analysis of investment decision-making in the presence of risky and uncertain outcomes is based on the expected utility theory. this theory offers a framework for modeling a rational individual’s choice whose goal is the maximum expected utility with regard to the given preferences towards risks. assuming that a decision maker is characterized by a constant risk aversion, preferences may be described by the power utility function. on the other hand, investment outcomes modeling in the presence of risks are based on the probability theory, whereas the risk is perceived through the shape and symmetry of the expected outcomes probability distribution from the considered investment alternatives. it is most frequently assumed that the outcomes represent a random process, which can be described by a normal distribution. however, extremely risky situations, such as the stock market crash or natural disasters, have a significant effect on the function of the outcomes probability distribution, emphasizing the tails of distribution. in such cases, the application of the power utility function in estimating the expected utility may imply either no decisions or completely impossible decisions, which leads to the conclusion that the received march 23, 2016 / accepted april 10, 2016 corresponding author: jelena stanković faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: jelenas@eknfak.ni.ac.rs 32 j. stanković, e. petrović application of the decision theory is extremely susceptible to the assumptions regarding the probability distribution functions (geweke, 2001). disregarding the size of the sample, i.e. the information set used for statistical analyses and outcome modeling, an individual cannot on certain occasions make a difference between different expected outcome distributions, which may lead to divergent rational decisions. yet, if the information on the type of distribution is known beforehand, this fact may cause a different behavior in the conditions of extreme risks which need not be affected by a subsequently formed information set. on the other hand, research has shown that a group of efficient investment alternatives is determined by the shape and symmetry of the expected outcome distribution, which may cause the shift of efficacy boundaries. therefore, the widely accepted markowitz’s method of optimization (markowitz, 1952) may be modified in various ways so as to include the anomalies of financial time series – heavy-tailed and asymmetric distribution and more sophisticated measures of extreme risks. economic implications of the incompatibility of the expected utility theory and the statistical theory in the decision-making process have become rather evident, regarding the fact that the applied models of optimization do not only determine the decisions of individual and institutional investors, but also of regulatory bodies. namely, the cost-benefit analysis is dominant, and in some cases obligatory analytical tool for assessing the net economic value of a new regulatory acts and measures on environment protection in the usa. utility measurement represents an especially sensitive part of this analysis which requires a careful examination of numerous factors that define the social behavior in the conditions of ecological catastrophes (carey, 2014; sunstein, 2005). therefore, some of the most important deficiencies of the expected utility theory under extreme risk will be presented in this paper. the framework of expected utility theory under risk and uncertainty will be presented in the first part of this paper. determinants of the extreme risks will be analyzed in the second part, while its influence on the expected utility theory will be presented in the third part of the paper. in the fourth part authors will review possible adjustments of the utility function and their implications on the decision-making process. 1. expected utility concept under risk and uncertainty the normative theory of decision-making determines a series of principles on which the behavior of a rational individual is based – that of a decision maker. an individual’s desire to lessen or avoid losses, that is to enlarge their wins (either material, emotional or any other) is implied in that individual’s goals, while maximizing the personal welfare or benefit is the guiding principle in making a choice among different alternatives (pavličić, 2014: 13). the rational choice theory is based on the model comprising two components: (1) a group of alternatives which are possible to realize, under different conditions, and (2) individuals’ preferences that reflect their goals. in the situations of certainty, decisionmakers make choices in a very simple and routine way even when confronted with a large number of alternatives. however, new situations characterized by risky outcomes and uncertainty may cause the change of possible alternatives so that, out of a possible subgroup of alternatives, the alternative corresponding to an individual’s preferences is chosen. the fundamental study on the theory of rational choice by von neumann and morgenstern (1947) defined the framework and postulates of the rational choice. the expected utility theory under extreme risks 33 expected utility theory defines the personal utility measurement in risky situations by the utility function, in which the relation of (strict) preference ≥ is defined in the final set of alternatives x and has the following characteristics:  (completeness) for any two alternatives x, y  x it is true that x  y or y  x or x ~ y, where ~ stands for indifference;  (transitivity) for any three alternatives x, y, z  x if x  y and y  z then x  z;  (continuity) for any three alternatives x, y, z  x so that x  y  z which means that there exists a certain probability р such that [0,1] ~[ : ; 1 : ]p y p x p z    , which proves that minor changes in preferences will not change the order of preferences till the tipping point;  (independence) for any three options x, y, z  x there is a probability [0,1]p  , so that if x  y then zppyzppx )1()1(  , i.e. the preferences depend on the possibility of achieving a different outcome. if ≥ relation of the (strict) preference is determined by the set x, the function u: x→r for which it is true that: )()( yuxuyx  (1) is called the utility function of the preference relation. this function is defined for all values of x > 0 and is also valid for u'(x) > 0 and u''(x) < 0, so that von neumann and morgenstern regard the problem of decision-making as the problem of maximizing an individual’s expected utility e(u(x)) defined as follows:    rx xdxuxue )()())(( (2) where x denotes possible outcomes of the alternatives x: r → r n , and µ stands for the probability measurement of the considered outcomes which defines the distribution of the outcome probabilities in the real number set 1 . an individual’s attitude towards a risk, which is expressed as an absolute risk aversion (arrow, 1951) in the following way: )(/)()( xuxuxa  (3) within the expected utility theory, determines the form of the utility function which is presupposed to be an individual’s choice. assuming that an individual with some initial wealth w considers possible outcomes of a decision reflected in the change of the level of the initial wealth, shown as: w+ε1 with the probability р and w + ε2 with the probability 1р, then the expected utility е(u(w + εi)), i=1,2, may be determined in the following way: 1 2 ( ( )) ( ) (1 ) ( ) i e u w pu w p u w        (4) 1 the mathematical aspect of the decision-making issue and the axiomatic approach to the preference relation is detailed in a paper by fishburn, p. (1999) preference structure and their numerical representation. theoretical computer science, 217, 359-383. 34 j. stanković, e. petrović in case decisions do not affect the change in wealth, then the expected utility е(u(w + εi)) will be equal to the “fair” wealth utility u(w), which may be regarded as the certainty equivalent and which may be determined in the following way: 1 2 ( ) ( (1 ) )u w u w p p     (5) where e(εi) = pε1 + (1 + p)ε2 = 0, and the individual with such an attitude towards a risk is considered to be indifferent to risks. in common cases, when an individual is not prone to risk taking, the utility function curve is concave (fig. 1 on the left), which means that u(w) > е(u(w + εi)) is true, whereas in the opposite case (fig. 1 on the right), the curve may be convex – when an individual is inclined to taking risks. fig. 1 utility function: concave (left) and convex (right) theoretical and empirical research has shown that the most frequent forms of the investors’ utility functions are quadratic function, power function and exponential function (campbell & viceira, 2001:19) 2 , and they can be determined by the following formulas: 1. quadratic utility function 2 ( )u w aw bw  2. exponential utility function ( ) exp( )u w w   3. power utility function 1 1 ( ) 1 w u w       however, the mathematical foundation of the expected utility depends considerably on the characteristic of independence, which implies the probability linearity. one of the most famous paradoxes which disproves the characteristic of independence in practice is allais’s paradox (allais & hagen, 1979). this paradox can be observed in the following experiment: the supposition is that there are three possible lottery wins: the first prize – 500,000,000$, the second prize – 100,000,000$ and the third prize – 0$, and that there are two possible scenarios. the first scenario offers the possibility of choosing one of the two lotteries: lottery а with the following probability of wins а = (0, 1, 0) and lottery b with the following possible outcomes and their probabilities respectively b = (0.1; 0.89; 0.01). the second 2 a survey of various investors’ utility functions and a relation of utility and aversion towards risks is to be found in a paper by petrović, e., radović, o., stanković, j. (2013) the impact of risk aversion on individual investors investment decision-making process, strategic management, volume 18 (1): 3-14 and avdalović, v., petrović, e., stanković, j. (2016) rizik i osiguranje, ekonomski fakultet, niš. expected utility theory under extreme risks 35 scenario presupposes two lotteries, as well, but the probability of their wins are as follows: а' = (0; 0.11; 0.89) and b' = (0.1; 0; 0.90). starting from the characteristics of the preference function in the expected utility concept, it means that if decision makers prefer a instead of b in the first scenario, then they will prefer a' rather than b' in the second one. however, the largest number of respondents chose lottery a in the first scenario and lottery b' in the second one (kahneman & tversky, 1979), which proves the fact that the independence characteristic is “incompatible with the preference for security in the neighborhood of certainty” (allais, 2008: 4). “far from certainty” individuals behave rationally, after all, and estimate the expected utility of the outcome in accordance with the expected utility theory (andreoni & sprenger, 2010), so that this paradox may be misunderstood. besides this well-known criticism, there is a number of new critical papers that are based on the behavioral economy and that emphasize the fact that a strict application of the optimization method of the expected utility may create some intuitively unacceptable conclusions in certain cases (rabin, 2000). such anomalies become significant when the expected utility theory is applied to making decisions concerning society as a whole, since they are expressed through the ethical acceptability of decisions on the community level. 2. determinants of extreme risks contemporary eco-social systems are exposed to a great number of correlated risks which represent a potential hazard for the survival of the whole global system. despite the fact that risks could be categorized in different ways, the particularity of extreme risks is reflected in their frequency and intensity. thus, extreme risks or catastrophes are all risky situations with a low probability of occurrence and enormous and unforeseen consequences (posner, 2004). regarding the fact that the quality and amount of available information on the causes and effects of particular risks limits the possibility of risk predictions, the prospects of generally accepted scientific methods to describe and foresee the expected effects of these risks have been challenged. with no consensus on the issue of the loss threshold, which determines whether a risk is extreme or not, all the risks whose consequences surpass some normal experience of any social system are grouped in this category. macro catastrophes are, for example, considered to be all the events whose consequences include at least one of the following: (1) death of more than 1,000 people or disease/injury of more than 5,000 people; (2) interruption of usual daily activities on a particular territory lasting longer than one week; (3) destruction of property and infrastructure whose damage is more than 10 billion us dollars; (4) direct and indirect loss worth at least 1% gdp (coburn et al, 2014). the extreme risk intensity is determined by a system vulnerability and exposure to a particular risk and it affects both the eco-social system as a whole and the economic and financial subsystem. it thus represents dynamic and changeable determinants of extreme risks whose impact on the system’s capacity to depreciate a particular risk may change in time and space. the concept of vulnerability is an analytical tool which determines the level of sensitivity of physical and social systems to damage and weakness, as well as a normative framework for defining the activities aimed at a wealth increase by a risk reduction (adger, 2006). vulnerability may be defined as a probability that a system, subsystem or their component parts may suffer a loss due to a risk exposure (turner et al., 2003). depending on the field of 36 j. stanković, e. petrović research, vulnerability may be defined in various ways; however, it is usually understood as the function of exposure, sensitivity and adaptive capacity, which may be quantifiably presented in the following formula (metzger, leemans & schroter, 2005: 255): )),,,(),,,,(),,,,((),,,( tsxesactsxesstsxeseftsxesv  (6) in which the symbols denote the following: v – vulnerability, e – exposure, s – sensitivity, ac – adaptive capacity, while es stands for the products and services of eco-systems used by sectors or a particular part of the system x in the context of the scenario s in the period of time t. since the potential impact (pi) of a risk is the function of exposure (e) and sensitivity (s), as presented in the following equation: )),,,(),,,,((),,,( tsxesstsxeseftsxespi  (7) then, vulnerability (v) may be shown as the function of the potential impact (pi) and adaptive capacity (ac) in the following way: )),,,(),,,,((),,,( tsxesactsxespiftsxesv  (8) this simplified version of vulnerability displays and reveals the relation between various elements of the concept, but this concept operationalization is quite complex. namely, when estimating the system vulnerability, three basic characteristics of the concept have to be considered (o’brien, sygna & haugen, 2004: 3-4): (1) since the risks affecting ecosystems and their subsystems are different, it may be stated that vulnerability represents an inherently differential concept; (2) vulnerability being scale-dependent, the vulnerabilities of an individual, state, region, community and social group are all observed differently; (3) vulnerability is a dynamic concept since it may change over time depending on the system structure transformations and its functions. considering the fact that it is a multidimensional concept, the vulnerability of an ecosystem may be observed from ecological, economic and social aspects. moreover, current efforts to measure vulnerability tend to be exante and are aimed at disaster risk reduction unlike the ex-post assessment and management of risk and vulnerability which main objection is recovery after the disaster. the fact is that a rapid technological and economic advancement in the second half of the 20 th century has changed the frequency and intensity of known risks while simultaneously creating new ones. considering the fact that the characteristics of catastrophes are prone to change in space and time, the extreme risks classification has become a complicated task. risks of catastrophes may be roughly divided into natural and human-induced hazards (table 1). natural hazards may be caused by atmospheric, geological, hydrological, seismological or any other natural dangers, as well as other external dangers out of the ecosystem of the planet earth. the range of human-induced hazards is wider so that the number of human-induced catastrophes has been significantly greater than the number of natural disasters in the past decades. the interdependence of the ecosystem elements has conditioned the correlation of the extreme hazards’ causes and consequences so that the difference between these categories of risks is not so clear. the scientific studies usually define catastrophic risks, which may endanger the functioning of the system, as natural catastrophes caused by earthquakes, hurricanes, volcanic eruptions, etc. however, a lot of catastrophes that affect the eco-social expected utility theory under extreme risks 37 table 1 types of catastrophic risks to the ecosystem natural human-induced  natural catastrophes  (earthquakes, storms, tsunami, floods, volcanic eruptions)  climatic catastrophes (drought, extremely low or high temperatures)  ecological catastrophes (rise in the sea level, fires, pollution, atmospheric changes, changes in the ocean ecosystem)  external risks (meteor impact, solar storms)  epidemics (epidemic of human diseases, epidemic of animal diseases, epidemic of plant diseases)  financial shocks (price bubble of assets, financial irregularities, bank run, public debt, banking crises, stock market crash)  trade dispute (strikes, sanctions, nationalization, war rate, cartel pressures)  geopolitical conflicts (conventional wars, nuclear wars, civil wars, political influences by the external powers)  political violence (terrorism, separatism, organized crime, civil unrests, assassinations)  technological catastrophes (nuclear catastrophes, industrial accidents, infrastructure collapse, technological accidents, internet threats)  humanitarian catastrophes (famine, drinking water shortage, refugee crisis, collapse of social programmers system) source: coburn et al. (2014) system may be ascribed to human activity, such as: famine, resources shortage, wars, climatic changes and epidemics, financial instability and economic crises (helbing, 2012). it is the governments that play the key role in such situations since they have to establish and develop the system resistance and protection from catastrophic risks, whereas the decisions on prospective measures imply an economic analysis of benefits and costs, as well. besides the already mentioned particularities of manifestations of these hazards, such decisions are also determined by the risk aversion of decision-makers. the way in which social and political institutions influence the preferences of individuals and the way in which individual preferences are aggregated in a social choice represent the crucial components of the decision-making process which often exceed the framework of the expected utility theory. therefore, what follows is a survey of the basic flaws of this concept in the presence of extreme risks, as well as the consequences of decision-making. 3. expected utility concept under extreme risks regarding the intensity of risks, individuals, institutions and creators of macroeconomic politics are very frequently confronted with different options and alternatives in the presence of extreme risks in various spheres of social life (such as finances, insurance, traffic safety measures, health protection politics, measures for avoiding and overcoming the consequences of economic crises, nuclear and climatic catastrophes). the combination of the probability 38 j. stanković, e. petrović distribution of possible heavy-tailed outcomes and the power utility function of a decision-maker does not only imply a limitless expected utility but also a limitless expected marginal utility, which would mean that an individual should postpone any kind of consumption at present in order to avoid potential catastrophic damages in the future (ikefuji et al, 2010). this phenomenon is called “tyranny of catastrophic risk” and occurs when the utility function is not limited from below, i.e.   )(lim 0 wu w , which can be shown in a simplified model (buchholz & schymura, 2012: 3-6) as follows: supposing the investment alternative in question had only two outcomes, the optimistic scenario outcome being w + ε1 = 1, and the pessimistic scenario outcome varying and, in the worst possible situation, which is the low loss limit, equaled 0, i.e. 1 > w + ε2 ≥ 0. the outcome in which w + ε2 = 0 represents the case of absolute catastrophe, that is a total wealth loss, while the set of outcomes, whose values are in the range between 0 and w+ε1, are the situations in which a part of wealth is to be lost in case of risks. if the probability of the optimistic scenario realization is denoted as р, then the probability of pessimistic scenarios realization is 1р, i.e. in case of w+ε2 it can be marked as р2. the probability of the outcome w+ε2, whose value is either 0 or inclining to 0, is also very small, e.g. р2 = 10 -6 . the economic intuition would require that these risks be considered when deciding, but with acceptable limits, since a rational investor would not want to lose the more probable earnings for the sake of the protection from the risks extremely unlikely to occur. otherwise, “the tyranny of catastrophic risks” may completely terminate normal activities. if the same situation is observed on the level of society supposing that a decision-maker negates the possibility of the optimistic scenario realization by giving priority to pessimistic scenario avoidance, society will, due to an increased level of protection from catastrophic risks, miss the chances to enlarge the wealth and well-being of individuals. since the decision-makers’ preferences concerning risks are different and determined by the utility function, it may be assumed that the decision will depend on the utility function characteristics. supposing the individual’s preferences towards risks might be described by the utility function u(xi), which is defined for all outcomes as xi (xi = w + εi), xi > 0 and for which it is true that u'(xi) > 0 and u''(xi) < 0. observing the set of investment alternatives with the outcomes xi, i =1,2,…, k + 1, and a discreet probability distribution of the outcome xi, it may be concluded that the expected outcome of the considered alternatives is p = ((x1, p1);…,(xk+1, pk+1)), while the expected utility, which may be regarded as the certainty equivalent, mu(px) represents a sum of the expected utility of all the outcomes pondered by appropriate probabilities. the expected utility of such an outcome may be presented in the following way:     1 1 )())(( k i iixu xuppmu (9) the state k + 1 represents the state of an expected catastrophic risk whose probability of occurrence pk+1 may vary, but is inclined to zero. in order to focus only on the influence of various levels of probability pk+1 on the assessment of investment alternatives, we will suppose that the potential probabilities of the states in which catastrophic damages ip , i =1,2,…, k are constant. if the probability pk+1 is known, then the probability of the outcome realization is xi, i =1,2,…, k, ikki pppp )1()( 11   . for any combination of potential probabilities ),...,( 1 kpp expected utility theory under extreme risks 39 and outcomes ),...,( 1 k xx in “normal” situations, i.e. the situations in which catastrophic risks are highly unlikely to occur, the expected outcome of the alternative with a potentially catastrophic outcome may be determined in the following way: 1 1 ( , ) x k k p x p    1 1 1 1 1 1 (( , ( );...;( , ( );( , ))) k k k k k k x p p x p p x p     . if pk+1= 0, such an alternative may be identified with the alternative with an expected catastrophic outcome )),();...;,(( 11 kkg pxpxp  . in general, every project p = (xk+1, pk+1) represents a combinations of a catastrophic outcome and an anticipated pg. therefore, it can be concluded that “the tyranny of the catastrophic risks” is valid for the given utility function u(xi) if for any pg there exists a series of alternatives with potentially catastrophic outcomes (px (n) )n∈n in which 0lim )( 1    n k n p and 0)(lim )(   n xu n pm . in other words, it is possible that the expected outcome utility of the considered alternative is inclining to zero even when the probability of the catastrophic risk is inconsiderably small. in that situation, the catastrophic risk, regardless of the probability of its occurrence and expected outcome, largely influences the estimation of the alternative. this phenomenon occurs whenever the utility function u(xi) is not limited from below, which means that it cannot be claimed that the expected utility theory necessarily underestimates the low probability outcomes, but that it is basically dependent upon the utility function type. the utility function limitation depends on the level of risk aversion, while a sufficient level of risk aversion determines the value of the relative risk aversion coefficient xa(x) ≥ 1 for every x > 0. on the other hand, if the utility function u(xi) is limited from below, then each series of alternatives with potentially catastrophic outcomes (px (n) )n∈n, for which 0lim )( 1    n k n p and 0)(lim )(   n xu n pm , has an expected utility convergent to the expected utility without the catastrophic risk 1 1 ( ) k i ii p u x   , if the catastrophic damage )( 1 n k x  is limited from above. both cases prove that the expected utility theory cannot be valid in the presence of extreme risks because it will either induce the extreme risks dominance or completely negate their existence. a proper treatment of these hazards should include the fact that the price individuals and society are prepared to pay in order to avoid catastrophic consequences is limited, regardless of the risk impact and consequences irreversibility (ikefuji et al., 2010). the aforementioned assertions indicate that the expected utility model should be modified so as to avoid all the weaknesses of the model concerning the supposed probability distribution of outcomes and utility function forms. 4. decision-making under extreme risks the expected utility theory has been criticized and modified by a great number of authors. the supposition that decision-makers are familiar with the probability distribution of the realization of considered alternatives has been particularly discussed as a serious flaw. regarding the fact that in most cases investors are not given an opportunity to choose from the options with objective probabilities, one of the most influential versions of this theory is, in fact, the theory of the subjective expected utility (savage, 1972). the concept of decisionmaking is based on the utility function, but the objective probabilities are replaced by the subjective ones, i.e. the preference relation is characterized by the following: ordering of the options, sure-thing principle, weak comparative probability, non-degeneracy, continuity in low-probability events and uniform monotony (al-najjar & de castro, 2010). similarly to the previous theory, this theory was not empirically validated. a simple experiment, which 40 j. stanković, e. petrović proves that individuals prefer games (lottery) with known (objective) outcome probabilities, implies the ambiguity aversion on the part of a decision-maker, known as ellsberg’s paradox (ellsberg, 1961; keynes, 1921). this paradox was discovered while conducting the following experiment: bowl a contains randomly placed 50 red and 50 black balls, and bowl b contains 100 balls, placed at random, as well, but with no information on the exact number of red and black balls in it. the prize goes to anyone who accidentally picks up the ball of the previously specified color. the majority of the experiment participants preferred to pick up from bowl a regardless of the given color, which directly disproves the postulates of the theory of the subjective expected utility. namely, if a respondent is required to pick up a red ball and they choose to do that from bowl a, it lowers the probability of picking up a red ball from bowl b by ½. on the other hand, following the same logic, it means that the probability of picking up a black ball from bowl b is higher by ½, since the sum of probabilities of both outcomes has to equal 1. anyway, the experiment results indicate that the ambiguity aversion is a very powerful and robust phenomenon. different non-expected utility theories have explained the choice of investors by altering or completely omitting a questionable feature of independence, i.e. the principle of a rational choice certainty. the most famous ones are: generalized expected utility theory (machina, 1982), weighted expected utility theory (fishburn, 1983), rank-dependent utility theory (quiggin, 1982), prospect theory (kahneman & tversky, 1979), cumulative prospect theory (kahneman & taversky, 1992), regret theory (loomes & sugden, 1987), dual utility theory (yaari, 1987), and many others (starmer, 2000). the issue of extreme risks is discussed in the theory of rank-dependent utility, which supposes that individuals rank their options according to the cumulative distribution function, not according to the subjective probabilities. maintaining all the aforementioned features of the preference relation of the rational investors and being based on the rank of the probable outcomes of the options хi in the rising order, this theory offers the solution of maximizing for the following targeted investors’ functions 0 ( ( )) ( ( )) ( )i i i i i g x e u x u x dx x       (10) where (xi) denotes the probability that the outcome хi will be lower than a value р, while the g(·) function of ranking probability of possible outcomes is such that g(0) = 0 and g(1) = 1. contemporary attempts at improving the expected utility theory are basically concerned with the decision-making optimization in the cases of climatic changes. weitzman’s research on extreme climatic changes (weitzman, 2009) presumes the presence of a lower limit of consumption determined by the parameter of the statistical value of life. he proves that the expected discount rate approaches infinity, but he also states that it is very difficult to determine the value of this parameter. ikefuji et al. (2010) define sufficient and necessary conditions for the expected utility model in the presence of extreme risks by considering various utility functions. not setting any limits to the probability distribution, they conclude that the generally accepted power utility function should not be considered in the process of deciding if there exists a non-negligible risk model. the exponential function and pareto function of utility are more acceptable instead. despite possible improvements, the concept of expected utility predicts average reactions to the pondered average risk, where the point of pondering is the risk probability expected utility theory under extreme risks 41 (chichilnisky, 2011: 5). the prospect theory explains that individuals overestimate the potential losses in reality, while simultaneously underestimating potential wins in the presence of risks, and this asymmetry cannot be explained by the theoretical wealth function nor by the generally accepted risk aversion function (kahneman & tversky, 1979). the decision-maker’s behavior, whose choice is conditioned by both risk aversion and possible outcome ranks, is explained by the cumulative prospect theory (kahneman & tversky, 1992) and it may be formally shown as the problem of maximizing of the following function 0 0 ( ( )) ( ( )) ( ( )) ( ) ( )i i i i i i i i i g x g x e u x u x dx u x dx x x                (11) although this theory offers a certain level of flexibility in modeling the decisionmaking process in relation to the expected utility theory, the function g (·), и (·), g + (·) and и + (·) is extremely difficult to identify. being in an extremely risky situation, an individual does not think rationally since the decision-makers are prone to overestimating the probability of extreme outcomes. research has shown that deciding under the pressure of extreme emotions results in extreme and simplified reactions, such as “fight or run”, not in ranking the alternatives on the basis of their probability, as described by the theory of expected utility. therefore, it may be proved that ranking alternatives according to von neumann and morgnestern in the presence of extreme risks is insensitive to the low probability outcomes (chichilnisky, 2011), i.e. it follows: ))(())((:),(,0))(())(( yuexueyxyuexue  (12) each х' and у' are such that х' = х and у' = у, except in case of  )(: ara . if the ranking of alternatives is focused on the outcomes with a low frequency of repetition, then this kind of ranking is insensitive to the outcomes with a high repetition frequency (chichilnisky, 2011), i.e. it follows: ))(())((:),(,0))(())(( yuexueyxmmmyuexue  (13) each х' and у' are such that х' = х and у' = у, except in case of mara  )(: . with the purpose of treating “average” outcomes and the outcomes with an extreme level of probability in the same way, chichilnisky (1996, 2009, 2011) proposes new axioms of the preference relation, such as: linearity and continuity, sensitivity to low probability outcomes and to frequent outcomes, and she formulates the decision-making problem as the maximizing of the following function:    rx iiii xuxdxuxue ))(()1()()())(( (14) for λ ∈ (0,1) and the final additive function φ, φ: l → r, in which l represents a set of alternatives l = l∞(r). the first part of the formula (14) corresponds to the expected utility function, where frequent outcomes are ranked, while the second part of the function is determined by the probability measure which ranks low probability outcomes, i.e. the measure with heavy 42 j. stanković, e. petrović tails. thus, the catastrophic risks are ranked more properly, while the function is sensitive to both low and high frequency outcomes. this approach offers various results in relation to the classical expected utility theory, but all the aforementioned models have not yet been applied in the investment theory and practice (grechuk & zabarankin, 2014). conclusion the consequences of the financial markets instability, as well as higher vulnerability and exposure of socio-economic systems to catastrophic risks induced by either natural causes or human activity cannot be ignored in the models of decision-making optimization. although the economics of heavy-tailed distributed risks raises difficult conceptual issues that cause the costbenefit analysis to appear more subjective, its application should not be evaded. economic analysis in these circumstances should consider probability distribution of such events, interaction between uncertainty and temporal dimension and model of human behavior. preferences of decision makers, which integrate all challenges of the analysis, are usually modeled within expected utility framework. although the relevance of catastrophic risks cannot be neglected, it is also necessary to consider the fact that the price of their reduction that individuals and/or society are ready to pay is limited. classical optimization models include mainly average risks, which makes them inadequate in the presence of extreme risks. the concept of the expected utility theory may be thus seriously challenged because of the phenomenon of “the tyranny of catastrophic risks”. if a certain utility function is not limited from below, then even a minimum probability of the catastrophic damage may induce a complete dominance of the catastrophic risk. the price of preventing catastrophes being very high, these decisions lead to a complete decline of consumption or investment, at the moment of making a decision in order to prevent a possible absolute loss. an alternative solution within the concept of the expected utility theory is that the utility function be limited from below, which may also have extreme consequences. namely, extreme risks which are characterized by a low level of probability may be completely dismissed in the process of decision-making and thus inadequately considered, which may be also regarded as 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(1987) the dual theory of choice under risk, econometrica, volume 55(1): 95-115. url: http://www.jstor.org/stable/1911158 teorija očekivane korisnosti u uslovima ekstremnih rizika teorija očekivane korisnosti pruža okvir za modeliranje izbora racionalnog pojedinca čiji je cilj maksimiranje očekivane korisnosti uz date preferencije prema riziku. međutim, ekstremni rizici, kao što su, na primer, krah berze ili elementarna nepogoda, značajno utiču na funkciju raspodele verovatnoće ishoda dodajući težinu repovima raspodele. u takvim slučajevima, primena teorije odlučivanja zasnovanoj na očekivanoj korisnosti je izuzetno osetljiva na pretpostavke o funkciji raspodele verovatnoće. stoga će u ovom radu biti dat pregled modela odlučivanja u okviru teorije očekivane korisnosti u uslovima ekstremnih rizika. ključne reči: očekivana korisnost, ekstremni rizik, odlučivanje http://www.pnas.org/content/100/14/8074.full http://link.springer.com/article/10.1007/bf00122574 http://www.mitpressjournals.org/doi/pdf/10.1162/rest.91.1.1 http://www.jstor.org/stable/1911158 facta universitatis series: economics and organization vol. 16, n o 3, 2019, pp. 283 297 https://doi.org/10.22190/fueo1903283s © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper specificity of performance measurement in the ministry of defense and the serbian armed forces 1 udc 65.015.25:335(497.11) tatjana stevanović 1 , ljilja antić 1 , aleksandar savić 2* 1 university of niš, faculty of economics, serbia 2 serbian armed forces, 3rd land force brigade, 31st infantry battalion, zaječar, serbia abstract. the purpose of this paper is to investigate the specific characteristics of performance measurement on the example of the ministry of defense and the serbian armed forces. the calculation of financial and non-financial performance measures of the ministry of defense and the serbian armed forces contributes to constant improvement or maximization of their ability to provide goods and services through the effective and efficient acquisition and use of different types of resources. the research was conducted using the data on selected financial and nonfinancial performances from the 31st infantry battalion reports in the period from 2012 to 2018. in order to confirm the hypothesis, the method of analysis, the synthesis method and the correlation analysis method were used. the empirical results of this study show that there is a high degree of interdependence between the financial management and control systems, on the one hand, and increased training of people and more adequate maintenance of motor vehicles, weapons and combat techniques, on the other. the main contribution of this paper is to emphasize the importance of performance measurement in the ministry of defense and the serbian armed forces and their contribution to creating a certain level of socialwelfare. key words: performance measurement, financial and nonfinancial performance, ministry of defense, serbian armed forces jel classification: m41 received may 09, 2019 / revised june 29, 2019 /accepted july 08, 2019 * phd student at university of niš, faculty of economics, serbia corresponding author: tatjana stevanović university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: tatjana.stevanovic@eknfak.ni.ac.rs 284 t. stevanović, lj. antić, a. savić 1. introduction the main goals of public sector organizations are to maximize the scope of public services provided from available resources and to use resources according to purpose, while respecting the quality of meeting the wider needs of the society and achieving maximum profits and certain surpluses. full coverage of costs, minimizing subventions, as well as maximizing the amount of funds available for postrelated goals are also the significant goals of these organizations. difficulties in determining the optimal level of spending contribute to increasing the importance of budgetary control, i.e. controlling the costeffectiveness in relation to the permitted budget of a public organization. the developed performance measurement system requires the budgeting systems based on achieved performances. an adequate implementation of the budgeting system is very important as a support when defining the planned goals, that is, the control of the execution of the budget, because this is the assumption of an adequate allocation of resources in the following period. all public goods in one country have a major impact on its economic development, political stability, and the quality of life of its citizens. for the above reasons, there is a constant tendency towards increasing the rationality in spending budgetary funds, improving the efficiency of providing and raising the quality of public services (webb, 2010). the purpose of measuring the performance of the ministry of defense and the serbian armed forces is determined by the needs of the entity that uses this information. in general, information about the performance of the ministry of defense and the serbian armed forces can be used for two basic purposes: making economic decisions and meeting the requirements for public accountability. evaluation of the performance of the ministry of defense can be carried out at different levels, that is at the level of an individual organization in the ministry of defense, at the level of a certain type of activity or program or at the level of the ministry as a whole. otherwise, performance evaluation is an activity carried out in all organizations that have the character of a reporting entity. very often, the purpose of evaluating performance is conditioned by the level at which the observed organization is located. for example, at the level of a single reporting entity or user of resource in the ministry of defense, such as the military security or the military intelligence agency the purpose of evaluating performance can be improving various aspects of the performance of the entity, evaluating the influence of the appropriate management on the performance of the entity, demonstrating public responsibility or allocating resources. evaluating the performance of the ministry of defense and the serbian armed forces is a complex system, primarily because of the primary goal the production of services and goods, which in their nature are public goods, and in that way contribute to the creation of a certain level of social well-being. because of this particular goal of functioning, military security intelligence organizations are accountable to the community, not to the amount of profit realized, such as for profit organizations, but for the efficient and effective using the collective resources entrusted to them. in accordance with the laid goal, this paper, besides to the introductory considerations, consists of the several parts. in the second part of the article, attention is dedicated to the role, the importance, and the management of performance of the ministry of defense in the security sector of the republic of serbia. third part of paper provides an insight into the research methodology and the initial research hypothesis. the research results and their discussion is given in the fourth part of the paper. finally, concluding observations are made in the last part of the paper. specificity of performance measurement in the ministry of defense and the serbian armed forces 285 2. the theorethical context of research 2.1. the role of the ministry of defense in the security sector the ministry of defense participates in the security sector through its agencies the military security agencies (msa) and the military intelligence agencies (mia). these are military services, which are organized as administrative authorities within the ministry of defense. their competencies and tasks are derived from their role in the defense system and the security sector. the military security agency (msa) is formed within the ministry of defense and performs general security and counter-intelligence tasks. within the framework of general public procurement tasks, the tasks of the msa are the following: to analyze security risks that disturb normal functioning; to plan, organize and control the way of securing facilities and assets as well as the measures in implementation of certain activities; to apply and control the application of security measures; to perform security checks; to issue security certificates (permits and approvals); to carry out activities in the field of industrial safety; to provide information and network systems; to provide data leakage through cryptographic protection; to provide security protection to other entities and perform other general security tasks (zakon o vojnobezbednosnoj agenciji i vojnoobaveštajnoj agenciji, 2013). within its counter-intelligence tasks, the msa: monitors, analyzes and prevents the disintegration of intelligence, prevents intelligence by foreign bodies or bodies from collecting data against the ministry of defense and the army of serbia; exposes and eliminates domestic and foreign, as well internal and external terrorism and extremism; investigates and analyzes crimes, crimes against humanity and other goods protected by international law. in addition to the above-mentioned work related to organized crime, the cases of abuse of office, money laundering, as well as acceptance of bribes and bribery are also discovered and investigated by the msa. the military intelligence agency (mia) is also formed within the ministry of defense and its jurisdictions are the following: to collect and check data and information and than to process, analyze, evaluate and deliver them to the competent authorities; to exchange information and data with other organizations and services of the republic of serbia, as well as with foreign organizations of other countries; to keep the collected data and information and protect them from unauthorized discovery, giving, using, losing or destroying, in accordance with the law and bylaws; to plan to train their own persons for realization of tasks and activities as well as for protection of objects and documents; to protect persons who are sent to work abroad by the ministry; to take care of the equipment and the means used in the work, without any unauthorized access; to acquire, develop and use information systems, communication systems and data transmission systems, as well as means for the protection of information; to organize training of members of the mia or organize specialized courses, perform research, form archives and publish own editions; to plan, organize and conduct internal control of the work of mia members; to request from the competent security services security checks of legal and natural persons when it is necessary for the performance of tasks within the jurisdiction of the mia; to plan equipping and procuring things for their own needs; to perform other tasks within his/her jurisdiction (zakon o vojnobezbednosnoj agenciji i vojnoobaveštajnoj agenciji, 2013). the act on internal organization and systematization of both the msa and the mia as well as the way in which they operate is a state secret. members of the msa and the mia are professional members of the serbian armed forces, civil servants and attorneys. 286 t. stevanović, lj. antić, a. savić the military intelligence and intelligence agencies have groups for financial, logistical, it and other support, which perform different tasks within their scope of work. 2.2. the place and the role of the fourth level of beneficiaries in the ministry of defense and the serbian armed forces the ministry of defense, more precisely the administrative bodies within the ministry of defense that have the status of direct beneficiaries of the budget funds (military intelligence agency, military intelligence agency and the defense inspectorate) and institutions, units and commands of the army of serbia, are considered to be users of the budget funds of the republic of serbia. the fourth level of funds users in the army of serbia is a battalion, which can be infantry, mechanized, engineering, logistic and others. the battalion is the basic united tactical unit, permanent formations. in peace, the battalion exists within the brigade of the land forces, air force and airborne defense, or the training command, and, in the war, it performs tasks individually and in the composition of more units or temporary composition. figure 1 shows the organizational structure of the general staff of the serbian armed forces. it consists of the aforementioned three units of the serbian armed forces, which consist of brigade units. the brigades further consist of battalions, while the battalions consist of company, company of lines and lines from the department. fig. 1 organizational structure of the general staff of the serbian armed forces source: andrejić, m., milenkov, m. (2010). osnovi logistike. beograd: vojna akademija, p. 349. the battalion represents the basic modular, tactically acceptable, existentially capable unit, with a solid capability to perform tasks and survive on a modern battlefield. it combines combat forces, forces for financial, logistical, it and other support and combat support forces. infantry battalions are organized in such a way that, if necessary, they can receive the mark of another type of battalion with certain formative adjustments. the battalion is intended for performing various combat operations on the front, in its own background general staff of the serbian army training command air command and air defense the brigade's command, base the battalion, divisional and escadrille command commanders of company-batteries, lines and departments command of the land army specificity of performance measurement in the ministry of defense and the serbian armed forces 287 and on temporarily occupied territory. also, the battalion can perform other tasks within the defined missions of the army. the financial service of the ministry of defense and the serbian armed forces is organized by the rulebook on financial operations in the ministry of defense and the serbian armed forces in five levels of planning, depending on the level of units, from the central level (organizational unit of the ministry of defense in charge of the budget and finances) to the fourth level (units of the army of serbia rank of the battalion command), whereby the organizational units of the financial service, scope, competencies and job descriptions are defined. the financial service of the ministry of defense and the serbian armed forces is organized at the following levels (pravilnik o finansijskom poslovanju u ministarstvu odbrane i vojsci srbije, 2017): 1. the central level organizational unit of the ministry of defense in charge of budget and finance, 2. the first level departments and sections for finance in the administrative bodies within the ministry of defense, the sectors of the ministry of defense, the secretariat of the ministry of defense and the general staff of the serbian armed forces, 3. the second level departments, groups or independent executives for finances in the administrations of the ministry of defense and the serbian armed forces and their equal composition and finance units in the commands of operational units, 4. the third level sections for finances in brigade commands and their uniforms, 5. the fourth level groups or independent executives for finances in battalion commands divisions and their uniform composition. the fourth level user in theoretical sense is a group, that is, an independent executive for finances in the battalion commands divisions and their equal composition, to whom the superior command allocates funds that are further disposed of in accordance with the needs of the given unit. the financial service authority of the users of the fourth level funds is obliged to dispose of the funds in a legal, economical, effective and efficient way and record it in the appropriate business books. the financial service is responsible for the analysis of executing the financial plan and inventory in accordance with this rulebook. the financial service prepares the proposal of a financial plan, keeps books of accounts, prepares financial statements, performs control of accounting documents and manages funds in accordance with the provisions of the financial regulations and the orders of the authorizing officer. the material accountancy is managed by the beneficiary of the fourth level of the organization of the financial service, which has been assigned the status of the holder of the material accountancy maintenance and the unique identification number of the holder of the material accountancy maintenance. material bookkeeping is conducted separately for the unit to which the accounting code was assigned and for a self-contained unit of war (pravilnik o materijalnom poslovanju u ministarstvu odbrane i vojsci srbije, 2017). 2.3. the characteristics of performance management process in the ministry of defense and the serbian armed forces the traditional form of budgeting in public sector shows the tendency to move towards budgeting based on results, i.e. achieved performance (poister, 2003). performance-based budgeting systems demand a more advanced performance measurement model that, in addition to the input criteria, includes some more difficult measurable performance indicators of the quality of services provided, as well as effectiveness and efficiency measures. 288 t. stevanović, lj. antić, a. savić the importance of the ministry of defense as part of the non-profit public sector is great in modern conditions, especially in the developed countries. a large number of people are employed in this sector, so it has a great contribution to increasing the employment of a country. also, the development of this sector is relevant for the development of commercial sector and, consequently, for the overall economic development of the country. performance management in the ministry of defense does not differ significantly from performance management in commercial enterprises and includes performance planning, performance measurement, performance analysis and reporting, and, finally, performance enhancement actions. the process of performance planning is done through strategic and operational planning. achieving the appropriate coordination of a military security agency with an external environment implies the implementation of strategic planning. the key is to identify the most important strategic issues and problems that the agency will face for a long time, and to develop a strategy for their effective solutions. strategic plans define the strategic goals from which operational goals are performed, i.e. through business plans (budgets) the strategic goals are concretized and timed to dynamist and operational (berman, 2007). measuring performance of the ministry of defense carries certain specifics, since the results arising from the mission often are not measurable by financial traditional performance measure. namely, in the ministry of defense non-financial performance criteria are much more relevant. in most cases, the underlying reason is that the product or service is difficult to measure and intangible. in this connection, it is necessary to include a system of financial and non-financial performance measures, which is not based on profit, as in the case of profit organizations, but on meeting the needs of the organization (antony & govindarajan, 2007). thus, the system of criteria for measure performance of military security agencies should be conceived in the light of four main dimensions: the coherence of goals and means for their realization, the coherence of the source (the volume of resources) and their spending, the achievement of the balance of meeting the interests of current and future generations of users and the sustainability of the agencies (brujin, 2007). performance analysis is done according to the same methodological principles as in organizations that are profit-oriented. the system of monitoring and analyzing business performance of the ministry of defense is conceived and operational at regular time intervals based on the chosen performance criteria system. adequate tracking and monitoring for appropriate time periods (monthly, quarterly, six month, yearly) creates an information basis that will serve for analysis in the succession of the period. the performance data are accumulated and the corresponding time series of data are formed. on the basis of these, it is possible to identify the current state and trend of performance (growth, decline or stagnation), or it is possible to compare the achieved performance in different periods. in order for the ministry of defense and the serbian armed forces to successfully carry out their missions in the security sector, they must first of all be operatively capable. operational capability and its development, in line with resource constraints, are aligned with the funds set for the defense system (doktrina vojske srbije, 2010). in this regard, financial and non-financial performance measures are formed. evaluating the financial performance of public and non-profit oriented organizations is a far more complex, more challenging and more difficult task than evaluating the financial performance of profit orientied and private sector entities (barton, 2004). the primary source of differences between public and private sector organizations, which makes the evaluation of financial performance of public organizations more complex, is found in their primary goals specificity of performance measurement in the ministry of defense and the serbian armed forces 289 (united states government accountability office, 2008). the primary goal of private and profit oriented organizations is to make a profit and thus create value for investors, or increase their well-being. therefore, exploiting the opportunity for gain this goal is the main driving force behind the private organizations management in the process of making economic decisions, which is primarily responsible to investors. the primary goal of the public organizations, and also the ministry of defense in the security sector, is the production of services and goods, which are in their nature public goods, for the benefit of all those who make up a certain community (and thus create value for all its members) and thus achieving a certain level of social well-being. due to this particular goal, public organizations are accountable to the community not for the amount of gain, but for the effective and efficient use of collective resources entrusted to them (popper & wilson, 2003). therefore, in order to evaluate the financial performance of the ministry of defense, which prepares and presents its financial statements according to accounting requirements based on an accrual basis, it should be used the financial analysis tools that are used by private organizations, but with the necessary degree of critical thinking that respects all the differences between public and private sector (barton, 2004). the methods of traditional financial analysis are studied and quantified the relationship between the specific and interlinked positions of the financial statements (wilson & kattelus, 2002) in order to systematically determine the financial position and financial performance of the ministry of defense in the current, but also in future reporting periods. the indicators of financial positions are classified into following groups: liquidity indicators, indicators of asset utilization efficiency, financial structure indicators, profitability indicators, and market value indicators. the indicators from the first three groups are, to a certain extent and under certain assumptions, applicable to all individual and economic organizations of the public sector, while the latter two (profitability and market value indicators) are relevant only for public enterprises (stevanović, 2013). given that the ministry of defense in the security sector consists of a military security and military intelligence agency, as well as they by classification are not public companies, we will only monitor the first three indicators in the future, as financial measures of the performance of the ministry of defense in the security sector. 2.4. the analysis of relevant financial and non-financial performance measures of the ministry of defense and the serbian armed forces according to the general definition, liquidity is the ability of the ministry of defense to pay off all its maturing obligations unconditionally, at a certain point and in the required amount, while still possessing craft assets that enable it to smoothly continue its activities and not impair its ability. the purpose of calculating any measure of liquidity is to obtain a general impression of the degree of short-term creditors protection. the quantification of these liquidity measures, when available with relevant data from the financial statements, is a simple process. however, the lack of standardized indicators in the public sector is objectively conditioned by the fact that the ministry of defense is significantly different in relation to other public organizations, and that the organizations within it differ considerably from one another in terms of the height and structure of working capital, amount, structure and deadlines the maturity of short-term liabilities, as well as in terms of the type of activity conditioned by the period of time during which working capital must inevitably have to be available. therefore, the calculated liquidity 290 t. stevanović, lj. antić, a. savić measures should always be used in the context of the relative share of working capital in total assets and the relative share of short-term liabilities in total liabilities. in addition, each of these measures is static size, that is, it is calculated on a database that is relevant at a certain point in time (the reporting day). this disadvantage can be reduced in several ways: comparing with historical achievements and assessments, using a statistical methodology, whether there are characteristic trends and deviations from them (trend analysis), comparing with other organizations that have the same or similar characteristics and analysis of origin, time schedule and amount of cash inflows and outflows. basically, investing in any form of organized activity, there is always the assumption that the invested resources will be efficiently used, is that certain investments will have as much activity as possible (or that a certain volume of activities will be achieved with the lower investment) (flynn , 2007). the financial indicators of the activity include all the relative relationships between income and expenses, from one and single and total investments in business assets, on the other hand, which are called turnover coefficients of business assets. the financial information presented in the financial statements of the ministry of defense and in the notes to the financial statements enables the calculation of the purposeful indicators of the efficiency of using trusted resources. as well as indicators of liquidity, all activity indicators are static measures. therefore, in order to better understand the efficiency of resource use, it is necessary to compare the current indicators of activities with historical achievements using the statistical methodology, and to determine if there are characteristic trends and deviations from them (trend analysis), as well as to make comparisons with other organizations that have the same or similar characteristics. the financial structure of the ministry of defense (msa and mia) is determined by the structure of the sources from which its activities are financed as well as the relationship between the approved and spent funds. all the data necessary for calculating the financial structure indicators are on the side of the liabilities in the statement of financial position. in order to examine the development of a financial structure, its deterioration or improvement, it is necessary to compare the current indicators of the financial structure with historical data. the ministry of defense, by comparing these indicators with the same kind of indicators for organizations with the same or similar characteristics, in addition to gaining insight into the state of its financial position in relation to it similar, may possibly use this information for negotiations aimed at improving its financing. calculation and analysis of the financial structure indicators based on the information from the financial performance report are also important because they are based on the solvency, is the ability to settle liabilities within the defined deadline. the calculation of the financial performance indicators of the ministry of defense is not only an objective but a means to examine the current situation and trends and to find ways to constantly improve or maximize its organizational capacity, or to constantly improve or maximize its ability to provide goods and services through effective and efficient acquisition and use different types of resources. the financial information presented in the financial statements enables the calculation and use of financial performance indicators of the ministry of defense in the security sector. in addition to financial performance measures, the use of non-financial performance measures is extremely important to provide a complete picture of the ministry of defense in the security sector on the results achieved. one of the key reasons for boosting and monitoring non-financial performance measures, in addition to improving financial performance measures, is the clearer articulation of the goals of the ministry of defense and their linking to the strategy (novićević et al., 2006). in specificity of performance measurement in the ministry of defense and the serbian armed forces 291 particular, in controlling the achievement of strategic goals, it is extremely important to apply certain non-financial performance measures of public (social) responsibility (myhrea et al., 2013). performance of social responsibility is the driving force of financial performance, and in the final and reputation (image) in the public. then, financial performance is the driving force behind the performance of social responsibility. finally, the interactive relationship between the performance of social responsibility, financial performance and reputation of the organization is emphasized (krstić, 2006). the right choice of non-financial criteria of the ministry of defense in the security sector, closely linked to the strategy, i.e. the criteria for monitoring the implementation and success of the strategy, and can be considered through nine areas (pravilnik o elementima i kriterijumima za ocenu stanja, operativnih i funkcionalnih sposobnosti vojske srbije, 2019): human resources management, intelligence scouting, operations, logistics, planning and development, telecommunications and information technology, training activities, financial jobs and military-political affairs. in order for the ministry of defense to define adequate behavior in each of the nine areas, it is necessary to identify the list of criteria. it is important to emphasize that achieving adequate behavior in each area depends on several factors: financial conditions, size of organization, location, legal system, management, etc. on the basis of the formed areas, non-financial measures of the performance of the ministry of defense in the security sector were defined. thus, within the field of human resource management, the following are distinguished: performance measures related to personnel, such as resolving the situation in the service and other relationships in the service of professional members of the vs or keeping records of personal data of members of the vs; educational performance measures, such as the realization of selection activities and sending members of the vs to schooling and upgrading, or keeping a database of personnel that is sent for education and training; performance measures related to psychological activity, such as the improvement of psychological activity in the serbian army or the provision of psychological support to command. in the field of intelligence scouting, measures of intelligence security of the army of serbia, as well as measures of cooperation and data exchange, are set out. the field of operational affairs refers to the planning of work (preparation of annual and monthly plans for the work of the general staff of the army of serbia, the general staff of the serbian armed forces and commands-institutions), deployment, order and internal service (deployment and order in the military complex, facility and camp room, and reporting services, on-call services), and control (implementation of control and reporting). the scope of logistical activities consists of a number of sub standards and their performance measures, such as: operational logistical operations (development of guidelines for logistical planning, planning and management of displacement of material reserves, planning and organization of fire protection, planning and organization of occupational safety and health ), supply (planning, organization and monitoring of the filling of units of the serbian armed forces with moving things), maintenance (monitoring of the state of correctness of exploitation and weather resources and development of maintenance plans), saber planning and organizing of dispatching services for transport and transportation, planning and organizing of food, water supply, dressing, service activities, health care (planning, organization and control of care for injuries and illnesses, planning, organization and control of veterinary protection of animals), infrastructure (maintenance of military real estate, handling and overhaul of teps). 292 t. stevanović, lj. antić, a. savić the planning and development area includes amendments to the book formations and instructions for the internal organization of work, based on the decision of the minister of defense, the drafting, updating and keeping of the army of serbia mobilization plan, control of preparations for mobilization in institutions, units and commands. information and telecommunications technology deals with telecommunication-information security (planning, organization and functioning of telecommunication-information security and military transportation), information protection, official correspondence and office operations. training activities are related to training planning (training assessment, risk assessment and resource protection, defining training goals, specification of training tasks), training (preparation for training, pre-training, protection during training), evaluation of training (evaluation of individual training, evaluation of collective training, control of the functioning of the training system in the ministry of defense), training means (insight into the state of the means of training, development of training assets). the field of financial affairs includes the organization of financial and material operations, the implementation of a financial plan, analysis and reporting on the financial operations execution. finally, the area of military-police affairs concerns the protection of the most important military facilities, certain persons, documents and weapons, and general security measures within the jurisdiction of the military police (security protection of classified information, planning and organization of security measures arising from normative documents and orders of the superiors and their command). 3. research methodology and hypothesis managing the financial and non-financial performance of the ministry of defense and the army of serbia has a powerful effect on the defense system in the republic of serbia. analysis of business performance aims to determine the extent to which unlawful spending of budget funds allocated to the ministry of defense and the serbian armed forces has been used, as well as their use in accordance with the principles of economy, efficiency and effectiveness. in this section we will look at performance management in the 31st infantry battalion. the basic hypotheses from which the research begins include the following: h1: missing and damage to movable objects in the 31st infantry battalion arise with the higher spending of approved funds, which is seen as a value measure for the number of tasks performed. h2: filling with moving assets in the 31st infantry battalion depends on the total number of units available. h3: financial management and control system (fmc) contributes to increasing human training and more adequate maintenance of motor vehicles, weapons and combat techniques. in order to confirm the above hypotheses, the correlation analysis method was used, using the pirson coefficient of correlation. correlation coefficient is a measure that shows how much of a certain size is related. the information base for the realization of this research is data on selected financial and non-financial performances from available reports in the period from 2012 to 2018 (see table 1). specificity of performance measurement in the ministry of defense and the serbian armed forces 293 table 1 selected financial and non-financial indicators of business performance, in the 31 st infantry battalion in the observed period, 2012-2018 2012. 2013. 2014. 2015. 2016. 2017. 2018. selected financial indicators consumption of approved funds in (1000) rsd 9,476 18,254 23,466 66,701 2,049 9,788 32,458 the amount of defects and damages in (1000) rsd 68 2,345 0 457 1.977 845 158 selected nonfinancial indicators percentage of keeping a large number of people in relation to the following 72.4 64.8 61.6 54.4 53.7 49.6 48.5 percentage of filling with mobile means 94 96 93 97 96 98 98 percentage of establishment of the fmc system (financial management and control) 67.4 69.2 72.4 72.7 73.2 75.6 78.3 percentage of defective motor vehicles 23 25 17.5 17 16 16 14.5 percentage of employee training attendance 85.5 90 87.5 92 93.5 93 94 source: authors systematization according to the internal annual reports of the 31 st infantry battalion (2012,2013, 2014, 2015, 2016, 2017, 2018). 4. research results and discussion the pirson coefficient of correlation is used in cases where there is a linear connection between the variables of the observed model and an unintended normal distribution. the value of the pirson coefficient of correlation ranges from +1 (the perfect positive correlation) to -1 (the perfect negative correlation). it is denoted by a small letter r and accounted with the following formula: √ table 2 correlation coefficient of financial performance measures financial performance measures consumption of approved financial assets in rsd amount of deficiencies and damages in rsd consumption of approved financial assets in rsd 1 -0,36 amount of deficiencies and damages in rsd -0,36 1 source: authors own calculations the correlation coefficient between the financial indicators, i.e. between the expenditure of the approved financial assets and the amount of deficiencies and damages is -0.36, which means that the connection is relatively weak and that it is negative. the negative correlation in this case means that the greater the cost of the approved financial means, the less the amount of defects and damages. from the observed hypothesis 1, this should not be so, since any unit in the serbian armed forces executes a large number of tasks and activities at the expense of the approved financial resources, and therefore it is exposed to the greater impact of defects and damage. based on the results obtained, it is necessary to observe the relationship of these dimensions in the following period, and focus more attention on the proper use, maintenance and maintenance of movable assets, i.e. motor vehicles, weapons, combat techniques and other. 294 t. stevanović, lj. antić, a. savić table 3 correlation coefficient between a significant number of people in relation to the following and fillings with moving means non-financial performance measures percentage of keeping a large number of people in relation to the next percentage of filling with mobile assets percentage of keeping a large number of people in relation to the next 1 -0.78 percentage of filling with mobile assets -0.78 1 source: authors own calculations as can be seen in table 3, the coefficient of correlation between the percentage of the state of the human condition relative to the next and the percentage of filling with mobile means is -0.78, which tells us that this is a medium strong correlation and that it is negative, which means that a larger number of people are the smaller the percentage of filling with mobile means. from the obtained results, it can be concluded that the unit has the necessary resources, since the percentage is over 90%, but that year after year there is a reduction in the number of jobs or employment, which leads to a decrease in operational capacity. from this it follows that hypothesis 2 is disproved and this leads to the fact that certain funds are put out of use, given the reduced number of people, and makes it difficult for members of that unit to carry out tasks. in the upcoming period, it is necessary to intensify the improvement of working conditions in order to increase the employment rate according to the prescribed unit formation. table 4 correlation coefficient between the establishment of the fmc system, the correctness of motor vehicles and the presence of employee training non-formal performance measures percentage of establishment of the fmc system (financial management and control) percentage of defective motor vehicles percentage of employee training attendance percentage of establishment of the fmc system (financial management and control) 1 -0.86 0.83 percentage of defective motor vehicles -0.86 1 -0.59 percentage of employee training attendance 0.83 -0.59 1 source: authors own calculations the multi-correlation coefficient between the non-financial performance measures in table 4 is 0.82, which means that there is a high degree of direct agreement between them. partial correlation coefficients show that there is a strong inverse relationship between the percentage of the establishment of the fmc system and the percentage of defective motor vehicles, as well as between the percentage of the establishment of the fmc system and the percentage of the presence of employee training, while the medium strong inversion is between the percentage of defective motor vehicles and the percentage of the attendance of employee training. financial management and control encompasses the entire system of financial and other controls and is implemented by activities, specificity of performance measurement in the ministry of defense and the serbian armed forces 295 procedures and policies whose task is to provide reasonable security that the unit will achieve the set goals through: business operations in accordance with contracts, internal acts and regulations, integrity and reality of business and financial reports, economical, effective and efficient use of funds and protection of funds and data (strategija razvoja interne finansijske kontrole u javnom sektoru u republici srbiji, 2009). the higher the percentage of the establishment of the fmc system, the smaller the percentage of defective motor vehicles, the higher the percentage of the attendance of employees. the 31st infantry battalion seeks to encourage the training of employees and the increased presence of employees through the fmc system. this is for the purpose of proper handling of assets and knowledge of their own duties, in order to reduce damage and defects caused by inadequate handling and use of motor vehicles, weapons, combat techniques, and more. this hypothesis 3 is confirmed, however, there is still room for improvement of these nonfinancial performance measures, since the correlation coefficient is 0.82. 5. conclusion the performance of the ministry of defense in the security sector has a significant impact on the long-term stability of the country's financial system. strategic plans identify the most important strategic issues and problems over a longer period, and they are contained in a strategy which enables their effective realization. the strategic goals and plans are concretized and dynamited through adequate business plans. since the results arising from the mission mostly are not measurable solely by financial expression, measuring performance of the ministry of defense carries certain specifics. it is conceptualized and operational at regular time intervals, based on the chosen performance measurement system and it is linked to a system of monitoring and analysis of business performance of the ministry of defense. the management process is rounded off by determining the program of measures and activities for continuous improvement of the performance of the ministry of defense and the serbian armed forces. the information presented in the financial statements enables evaluation of the performance of the ministry of defense and the serbian armed forces. in addition to providing an assessment of the compliance of actual payments and collection with the appropriate amounts envisaged in the budget financial plan, the financial statements allow the determination of liquidity, asset efficiency and financial structure indicators. measurement of non-financial performance of the ministry of defense and the serbian armed forces can be considered through nine areas: human resources management, intelligence scouting, operational tasks, logistics, planning and development, telecommunications and it affairs, training activities, financial affairs and military policing. based on the establishment and control of non-financial performance measures, it is possible to clearly define the objectives of the ministry of defense and their link with the strategy. the calculation of the indicators of financial and non-financial performance of the ministry of defense and the serbian armed forces is a means of reviewing the current situation and trends and finding ways to constantly improve or maximize their ability to provide goods and services through the effective and efficient acquisition and using different types of resources. this claim is confirmed by the results of the research, which created the basis for the following conclusions. 296 t. stevanović, lj. antić, a. savić in case of higher spending of approved funds, a greater number of tasks and activities are carried out, which is why the units of the serbian armed forces themselves are exposed to the greater impact of defects and damage. therefore, more attention should be paid to the proper use, storage and maintenance of movable assets, i.e. motor vehicles, weapons, combat techniques, and more. the unit monitored has the necessary resources, given that the percentage is over 90%, but there is a decrease in employment each year, which leads to a decrease in operational capacity. from this it follows that certain funds are put out of use, and makes it difficult for members of that unit to execute tasks. therefore, in the forthcoming period, it is necessary to work on improving the working conditions in order to increase the employment rate, in accordance with the prescribed unit formation. a higher percentage of the establishment of the financial management and control system reduces the percentage of defective motor vehicles, and increases the percentage of employees' training attendance. the 31st infantry battalion seeks to encourage the training of employees through the fmc system in order to properly manage assets and knowledge of their own duties, and to reduce damage to motor vehicles, weapons, combat techniques and other. the system of managing and measuring performance of the ministry of defense and the serbian armed forces is a dynamic system that requires continuous work on its improvement and practical implementation and raising awareness of employees. this is because it will produce real effects when applied from the highest management levels to the lowest executive level. benefits of this system are numerous, but only when its creation is based on rational bases and when it is looked at in an adequate manner by all employees. from all of the above, it follows that through the system of management and measurement of the performance of the ministry of defense and the serbian armed forces, the effects of the decisions made are being monitored and it allows for 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(2013). službeni glasnik republike srbije, 88/2009, 55/2012 – odluka us, 17/2013. specifičnost merenja performansi u ministarstvu odbrane i vojsci srbije svrha ovog rada je da istraži specifičnosti merenja performansi na primeru ministarstva odbrane i vojske srbije. izračunavanje pokazatelja finansijskih i nefinansijskih performansi ministarstva odbrane i vojske srbije doprinosi konstantnom unapređenju ili maksimiranju njihovih sposobnosti da obezbeđuju dobra i usluge putem efektivnog i efikasnog pribavljanja i korišćenja različitih vrsta resursa. istraživanje je sprovedeno korišćenjem podataka o odabranim finansijskim i nefinansijskim performansama iz izveštaja 31. pešadijskog bataljona u periodu od 2012. do 2018. godine. za potvrdu hipoteza korišćena je metoda analize, metoda sinteze i metoda korelacione analize. empirijski rezultati ovog istraživanja pokazuju da postoji visok stepen međuzavisnosti između sistema finansijskog upravljanja i kontrole, sa jedne strane, i povećane obuke ljudi i adekvatnijeg održavanja motornih vozila, oružja i borbenih tehnika, sa druge strane. glavni doprinos ovog rada sastoji se u isticanju značaja merenja performansi u ministarstvu odbrane i vojsci srbije i njihovog doprinosa stvaranju određenog nivoa društvenog blagostanja. ključne reči: merenje performansi, finansijske i nefinansijske performanse, ministarstvo odbrane, vojska srbije facta universitatis series: economics and organization vol. 16, n o 1, 2019, pp. 59 73 https://doi.org/10.22190/fueo1901059g © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper contemporary data analysis techniques for online reputation management in hospitality and tourism  udc 338.48:004.738.5 olivera grljević, zita bošnjak, saša bošnjak university of novi sad, faculty of economics in subotica, serbia abstract. knowing what attracts or deters tourists to/from a tourist visit and what products to offer them and to pay special attention to is crucial for good economic results. such knowledge can be obtained by analysis of online comments and reviews that tourists leave on travel websites (such as booking, tripadvisor, trivago, etc.). this paper describes the value which information about opinions and emotions hidden in online reviews has for managers who receive it, especially the knowledge of (dis)satisfaction of users with certain aspects of the tourist offer. uncovered knowledge from online reviews provides a chance to take advantage of the strong points, and correct the shortcomings through timely corrective measures and actions. contemporary approaches and methods of analyzing online reviews and the opportunities for development they provide in the tourism industry are described through a case study conducted over a subset of 20491 hotel reviews from tripadvisor. we have conducted sentiment analysis of reviews with the goal of building an automated model which will successfully distinguish positive from negative reviews. logistic regression classifier has the best performance, in 90% of reviews it has correctly classified positive reviews and in 83% negative. we have illustrated how association rules can help management to uncover relationships between concepts under discussion in negative and positive reviews. key words: online reputation management, е-word-of-mouth, online reviews, automated classification, sentiment analysis, association rules jel classification: c55, z3 z32 received december 17, 2018 / accepted february 18, 2019 corresponding author: olivera grljević faculty of economics subotica, segedinski put 9-11, 24000 subotica, serbia e-mail: oliverag@ef.uns.ac.rs 60 o. grljević, z. bošnjak, s. bošnjak 1. introduction serbian tourism potentials have not been sufficiently exploited, but with adequate professional effort and willingness to grab the opportunities, the republic of serbia can successfully break into the map of important world tourism destinations. the first and the fundamental step in the formation of the desired set of competitive tourism products is valorizing the market potential of existing tourism products. in order to find out which tourism products are the most competitive and which tourism offers are in line with the expectations and demands of potential users, it is necessary to know the preferences and opinions of the users. nowadays we have numerous tourism websites, where users state their opinion in the form of text reviews and/or ratings. subjects of reviews and ratings in the field of tourism and hospitality are entities related to travel, stay, and services provided. these freely given comments are sources of useful information about tourism entities for prospective users, who use them when deciding on a particular tourism destination, as well as for tourism organizations and hotels’ management that can adapt their offer to the requirements and expectations of users (hu, 2004; tripp, 2011; bing, 2016). the number of reviewing websites and user generated contents grows every day. according to the statista 1 portal, 600 million reviews and opinions were posted by 2017 only on tripadvisor website, while marked increase from year to year amounts to approximately 135 million reviews. this amount of user generated content cannot be efficiently processed manually. the methods of semantic analysis and machine learning techniques for opinion mining and sentiment analysis can be used for automated classification of positive from negative reviews (i.e. for determining the sentiment polarity of a review) and for identifying dimensions through which tourists value an offer or a service (pang, 2002; dave, 2003; pang, 2008; medhat, 2014). good reviews, conveying positive attitude, can attract new tourists, while bad ones, conveying negative emotions, can damage the reputation of the organization, so it is important that tourism organizations constantly monitor the online activities of their guests and promptly respond to expressed problems, concerns or dissatisfaction (lei, 2015). particular attention should be given to negative comments, as they can indicate the deficiencies in the service provision and users' expectations fulfillment (racherla, 2013), so that tourism organizations can correct them and better position themselves by focusing on their users’ needs and preferences, expressed in online comments. the next chapter first describes the background on different approaches and levels of the analysis of sentiment of user generated contents. secondly, an overview on sentiment analysis research in the hospitality and tourism industry was given. chapter 3 sheds light on the relation between sentiment analysis and online reputation management in tourism and hospitality. chapter 4 describes the case study of sentiment analysis over the dataset from tripadvisor. through series of experiments in which different methods of sentiment analysis were applied, we investigated how successfully these methods performed the classification of online reviews into the positive and the negative class. also, generating association rules over positive and negative class of reviews we indicate their helpfulness for management, as well as their potential to uncover relationships between concepts under discussion in negative and positive reviews. in the conclusion, the results of the conducted study, the benefits of the proposed approach in the field of tourism and hotel management and the directions for further research are highlighted. 1 https://www.statista.com/statistics/684862/tripadvisor-number-of-reviews/ contemporary data analysis techniques for online reutation management in hospitality and tourism 61 2. related work consumer behavior has changed significantly as offline sources of information about products and services are replaced by electronic word of mouth marketing (ewom) (gruen et al, 2006). as the authors of the paper (litvin, 2008) define it, ewom refers to all informal communication with consumers, particularly related to the usage or characteristics of goods and services, through internet-based technology. generally in e-commerce customers have shown to believe the opinion of other people more and to trust them more than promotional campaigns of a company (pitt, 2002; berthon et al, 2012), and they put equal trust in online reviews and personal recommendations of friends (park, 2007; gligorijevic, 2012). similar behavior is observed within tourism and hospitality sector. customers have more trust in websites with reviews than in professional guides and travel agencies and perceive social media as more credible and trustworthy than traditional marketing communications (leung, et al, 2013). as pointed in (dijkmans, et al., 2015), service companies are more susceptible to the influence of social media due to the nature of their products. services are intangible, non-standardized and must be consumed in order to be evaluated, which increases the possibility of discrepancies between customer expectations, their perceptions and the services themselves, and consequently can lead to more frequent complaints on social media. to turn publicly available reviews into competitive advantage and a tool for online reputation management, a company, particularly in service industry, should apply techniques of sentiment analysis over such data. opinion expressed through reviews comprises entity, an aspect of entity, sentiment expression on particular aspect of entity, opinion holder, and time when opinion is expressed, (liu, 2012). the author also defines sentiment as positive, negative, or neutral, which is expressed with different intensities (e.g., 1-5 stars mostly used on reviewing sites). sentiment analysis studies such opinion which expresses or points to a positive or negative sentiment. unlike facts, opinions and feelings are highly subjective. for this reason, it is necessary to analyze the set of opinions of different people instead of a single opinion that expresses the subjective view of the individual (grljević, 2016). thus sentiment analysis can aggregate the overall public opinion using summarization techniques, and characterize variations in affections over a certain period of time. in the following part of this section, we discuss approaches to sentiment analysis (section 2.1) and applications of sentiment analysis in the tourism and hospitality sector (section 2.2). 2.1. approaches to sentiment analysis reviewing websites represent a major data source for sentiment analysis and opinion mining. these websites provide numerical ratings (star or lickert type scale) and/or textual reviews. analyses based on a numerical rating system cannot uncover nuanced opinions that are often expressed in textual content. only text reviews provide the understanding of expressed consumers’ opinions (puri, 2017). in strict numerical ratings they are generally lost. however, numerical ratings can be used as indicators of sentiment (pang et al, 2002; racherla et al, 2013; dave, 2003; turney, 2002). there are two approaches to sentiment analysis of text reviews (aye & aung, 2018). the lexicon-based approach compares individual words from the sentences with the sentiment words listed in lexicons in order to determine whether the words used in a review convey any sentiment (positive or negative) or not. the authors in (hu & liu, 2004) regarded a 62 o. grljević, z. bošnjak, s. bošnjak sentence as positive/negative if there was a majority of positive/negative opinion words in the review. in the case where there was the same number of positive and negative opinion words in the sentence, they predicted the orientation using the average orientation of the closest opinion words for a feature in an opinion sentence or the orientation of the previous opinion sentence. in (turney, 2002), the semantic orientation of a phrase that contains adjectives or adverbs was calculated as “the mutual information between the given phrase and the word "excellent" minus the mutual information between the given phrase and the word "poor"”. the machine learning approach uses unsupervised or supervised learning. the first compares each word of the text with positively or negatively valued word selected for a cluster centre. the sentiment orientation of a review is then predicted by the average semantic orientation of the words in the review. various supervised machine learning algorithms could be used for sentiment classification. in such a case, it is necessary to provide several thousand examples of labeled text for the training of the classification algorithm. the associated labels could be: “positive”, “negative”, or “neutral”, but depending on the purpose of the analysis, some additional labels could be used, such as the sentiment target (hu, 2004). sentiment analysis can be performed at the document level (pang & vaithyanathan, 2002; dave et al, 2003; bibi, 2017), sentence level (dos santos & gatti, 2014) or word level (kim & hovy, 2004). the document-level classification takes into account the whole document (i.e. reviews), and starts from the premise that a document discusses only one topic. having in mind that the feedback mechanism of online reviews provided after service consumption plays critical role in the online sale of the hospitality and tourism industry (schuckert & law, 2014), the document-level classification often does not provide enough detail about the prevailing consumer opinion on the various aspects of the entity being monitored (medhat, 2014). since each tourism product should be evaluated based on its own characteristics, for hospitality and tourism industry the aspect-oriented sentiment analysis is more suitable (tjahyanto & sisephaputra, 2017; marrese-taylor et al, 2013; bucur, 2015). an aspect-oriented analysis deals with the classification of sentiment at the sentence (hu & liu, 2004; broß, 2013; pontiki et al, 2016), or phrase level according to various aspects of the tourism product (li et al, 2018). aspects usually correspond to arbitrary topics considered important or representative of the text that is being analyzed. the third level of sentiment analysis involves classifying a word or phrase according to the polarity of the sentiment (zhang et al, 2014; agarwal et al, 2009; ikeda et al, 2008). the polarity of sentiment, also referred to as sentiment orientation, points to positive or negative expression of sentiment. almost all previous work in sentiment analysis is based on single, positive/negative category or scale such as star ratings. such a one-dimensional scale does not accurately reflect the complexity of human emotions and sentiments. sentiment analysis is often performed on text labelled on more fine-grained sentiment scale, such as ekman’s six basic emotions joy, sadness, anger, fear, disgust, and surprise (holzman & pottenger, 2003; alm et al, 2005; strapparava & mihalcea, 2007; mohammad, 2012), plutchik’s scale which is based on ekman’s with addition of trust and anticipation (brooks et al., 2013; mohammad, 2012a; suttles & ide, 2013). the bag-of-words representation that is often used in current baseline methods cannot properly capture more complex linguistic phenomena in sentiment analysis. the method contemporary data analysis techniques for online reutation management in hospitality and tourism 63 described in (nakagawa et al, 2010) uses many manually constructed domain-specific resources (sentiment lexica, parsers, polarity-shifting rules), which, on one hand, increase precision of the model in the given domain, while, on the other hand, limit their applicability to a broader range of tasks and languages. in (socher et al, 2011), authors introduce the model that, instead of using a bag-of-words representation, exploits the hierarchical structure and uses compositional semantics to understand sentiment. the system can be trained both on unlabeled domain data and on supervised sentiment data and does not require any language-specific sentiment lexica, parsers, etc. rather than limiting sentiment to a positive/negative scale, the authors predicted a multidimensional distribution over several complex, interconnected sentiments. visual contents such as photos and videos, represent the next boundary to be explored with cutting-edge technological tools. deep learning techniques recently developed in natural language processing and, especially, computer image processing appears to be an ideal tool for many of the problems related to user-generated contents on the internet. long and short term memory networks, a popular module in deep learning architectures, provides an effective way of sequentially composing the semantic understandings in texts (ma et al, 2018). 2.2 research on sentiment analysis in tourism and hospitality sector and impact on a business the positive relationship between customer rating and online sales of hotels is noted in (öğüt & onur, 2012). according to the findings, a 1% increase in online customer rating increased sales per room up to 2.68% in hotels in paris and up to 2.62% in hotels in london. the authors also identified correlation between customer ratings and prices. higher customer ratings also resulted in higher prices of the hotels and prices of high star hotels were more sensitive to online customer ratings. xie et al (2017) have shown that overall rating, and ratings of attributes such as purchase value, location and cleanliness, variation and volume of consumer reviews, and the number of management responses are significantly associated with hotel performance. this study showed that providing timely and lengthy responses enhances future financial performance, whereas providing responses by hotel executives and responses that simply repeat topics in the online review lowers future financial performance. lee and song (2010) suggested that company responses that include an apology, compensation, or corrective action may help restore the company's positive image. the results showed that informational factors, such as vividness 2 and consensus 3 , facilitated consumers’ attribution to companies’ responsibility for the negative events, and subsequently led to changing their evaluation of the company. in addition, the authors found that corporate response strategy to online complaints should be different from the conventional response strategies. in (sparks, 2016), an experimental approach to test the effect of providing or not providing a response to a negative online review is conducted. it was shown that four variables: the source of the response (guest service agent or general manager), the 2 vividness refers to information capacity to attract and hold attention to excite imagination. 3 when people encounter negative information about products or services, they often consider other individuals’ reactions to the information prior to judging themselves what the causes of the problem are. 64 o. grljević, z. bošnjak, s. bošnjak communication style (professional or colloquial), the efficiency of the response (fast, moderate, or slow), and the action frame of the response (corrective action was taken in the past or is promised to be taken in the future), influences the potential customers' trust and concern regarding the hotel. previous ewom tourism studies assume a direct relationship between online consumer content, online reviews and tourism performance with empirical studies adopting a bi-variate methodology. the study of phillips (2015) used artificial neural networks, which went beyond linear and bi-variate investigations, and provided evidence to suggest that online reviews together with traditional hotel characteristics should be considered as salient determinants of hotel performance. 3. reputation management by sentiment analysis travel-related entities and services are the subject of online reviews and/or ratings provided by tourists after their travel experience. in order to study the textual content of the reviews and identify various dimensions on which consumers made an evaluation and to determine the polarity of expressed opinions or emotions, these reviews should be processed, and relevant information summarized for companies. automated sentiment analysis requires either a dataset with clearly marked examples of positive and negative reviews or sentiment dictionaries, both provided in advance. these resources are unavailable or scares for under-researched languages, such as serbian, or even for the english language in case of under-research domains. when datasets or sentiment dictionaries are unavailable, numerical ratings (star ratings, thumbs up, thumbs down) obtained from a reviewing website are a starting point in sentiment analysis, as they can be used to determine the sentiment orientation of a review (pang et al, 2002; racherla et al, 2013; dave, 2003; turney, 2002). in the paper (grljević & bošnjak, 2018) the authors described a method for determining the sentiment polarity of online reviews with assigned numerical rating of 3 on the one-to-five scale, as this category of review is identified as “mixed” category and the source of ambiguity of sentiment. the presented method implies similarity check in terms of vocabulary and writing style among this “mixed” category of reviews (reviews that convey both positive and negative sentiment and should not be mistaken for neutral reviews), and positive reviews (with numerical ranks 4 or 5), or negative reviews (with ranks 1 or 2). once a dataset with clearly marked learning examples of positive and negative reviews is prepared, the consecutive sentiment analysis could be conducted. as pointed out in (grljević & bošnjak, 2018) automated sentiment analysis models can aggregate overall satisfaction or dissatisfaction of customers by summarizing positive and negative online comments. although both positive and negative reviews enhance consumer awareness of hotels, positive reviews tend to improve overall attitude towards the hotels, and this considerably affects lesser-known hotels (öğüt & onur, 2012). the automated sentiment analysis can help hotel managers to improve their services. it provides summarized feedback on how their hotel is seen by customers, what services they liked or disliked (bucur, 2015). they represent a useful tool for benchmark and analysis of public opinion towards the key competition through analysis of online reputation of competition, and public stance towards their key products, brands, or services. by implementing sentiment analysis models, any business can monitor variations in public opinion through time. gaining a better understanding of the associations within contemporary data analysis techniques for online reutation management in hospitality and tourism 65 the various attributes of the properties, and traveler reviews in general, may lead to an improvement of the services provided and a decrease in the postings of negative reviews. another interesting behavior of consumers is revealed in the analysis of online reviews in (racherla et al, 2013). even when consumers have given very low ratings to a certain property, they have not completely given up on the property, so they are willing to return to it in the future. according to the authors’ findings, among consumers who give low ratings to the property, approximately 9% are willing to give a second chance if service providers are willing to take the negative feedback into consideration and ensure that service delivery is significantly improved. consequently, managers must develop strategies that improve consumers’ perceptions of their responsiveness, i.e. willingness to take under consideration the reviews, both positive and negative, and enhance their service. appropriate company response strategies to online complaints are necessary to protect or improve the company’s reputation. “no action” strategies may risk allowing negative information about the company to stand unchallenged, which in turn may damage the company’s reputation (davidow, 2003). having employees dedicated to responding to online reviews requires substantial human and financial resources. understanding how such investment leads to financial outcomes can provide strong justification for investment in offering management responses (xie et al, 2017). 4. case study on application of sentiment analysis in the hospitality and tourism industry sentiment analysis is basically a classification task. user generated contents are classified acording to the expressed sentiment usually into the positive or the negative class (grljević & bošnjak, 2018). in the case study described in this section, the input set of 20491 reviews collected from the tripadvisor website (alam, 2016) 4 was used for the analysis. the input set was divided into the training and the test set, in 75:25 ratio. besides the textual comments on hotels, the reviewers provided the numerical ratings on the one-tofive likert type scale, which expressed their overall satisfaction. rank 1 denoted the lower satisfaction, while rank 5 denoted the reviews with the largest degree of satisfaction. since reviews in the dataset were not labelled with sentiment polarity, we used these numerical ratings to denote polarity of each review, as explained in details in (gljević & bošnjak, 2018). reviews ranked by marks 1 and 2 were labeled as examples of hotel reviews with negative sentiment. reviews ranked by marks 4 and 5 were labeled as examples of hotel reviews with positive sentiment. labeling of reviews ranked by mark 3 was calculated based on sentiment score. the sentiment score of a review was calculated as the sum of z-scores for similarities of words in the review with the frequent single words, bigrams and trigrams observed in the positive or negative category of reviews (gljević & bošnjak, 2018). we experimented with different supervised classification algorithms with the goal of building a model that will successfully distinguish positive from negative reviews. as suggested in the papers (jurafsky, 2018; yang, 2018; medhat, 2014), we used well established algorithms for sentiment analysis: logistic regression (lr), naïve bayes (nb), support vector machines (svm), random forest (rf), and xtreme gradiant boosting (xgb). the performance of classifiers was measured over test data using accuracy 4 accessible at://zenodo.org/record/1219899/#.w9cbtxszapp https://www.sciencedirect.com/science/article/pii/s074756321000049x#bib18 66 o. grljević, z. bošnjak, s. bošnjak (indicator of overall success rate), precision (the ratio of correctly classified reviews into the positive class and the total number of entities of this class), and recall (percentage of positive reviews correctly classified as positive) as basic measures, and f1-measure (harmonic mean of precision and recall) and precision-recall curve (pr tradeoff between precision and recall for different threshold) as compound measures. evaluation measures are presented in more detail in papers (ballabio et al, 2017; berrar, 2019; visa & salembier, 2014). figure 1 illustrates performance measures (precision, recall, and f-measure) for each classifier. fig. 1 evaluation of classifiers the results indicate that the svm classifier, with 66.52% correctly classified positive reviews is the least appropriate for classification of collected reviews. furthermore, the svm algorithm successfully classified only 11% of negative reviews. nb achieved the best accuracy (88.54%). the f1-measures have shown that nb and lr resulted in best classification models, as they had, at the levels of 91% and 90% respectively, correctly classified positive reviews, and with somewhat lower levels, but over 83%, had correctly classified the negative reviews. the use of pr curve is particularly advised in case of largely skewed class distribution, which is the case with our dataset, as positive reviews are more frequent in the dataset than negative ones (80.61% of positive reviews and 19.39% of negative reviews). the analysis of pr curve indicate that lr model has the overall best performance. experiments and results are presented in more detail in (grljević & bošnjak, 2018). when a satisfactory classification model is built, a model which successfully distinguishes positive from negative reviews, different visualization and summarization techniques can be applied over the results. these techniques facilitate the decision making process and identification of the favorable and bottleneck aspects of the business and, consequently, help management to undertake corrective actions. also, sentiment analysis model can be combined with other machine learning techniques to uncover additional knowledge. in this paper we illustrate application of association rules to generate a network showing the relationships between terms which occur in the positive and negative category of reviews. visualization of resulting associations could help managers to contemporary data analysis techniques for online reutation management in hospitality and tourism 67 understand relationships between concepts under discussion in negative and positive reviews. associative rules represent a data mining technique that is successfully used in determining consumer behavior by identifying rules that indicate frequent data, correlations, and data dependencies. the evaluation of the resulting association rules is based on the following parameters: support (the significance of the rules), confidence (the reliability of the rules or degree of confidence), gain (the difference between confidence and the support of consequent), lift (or interest measures the degree of dependence between the item sets), and conviction (both the support of the antecedent and the support of the consequent of the rule are taken into account) (jimenez et al, 2010). we used rapidminer 5 tool to conduct association rule mining over a set of positive reviews and a set of negative reviews. each association is labelled with name (rule 1, rule 2, etc.) and values of support and confidence are associated to each rule, respectively. association rules over positive category of reviews are presented in figure 2. we have generated 147 association rules. due to a large amount of data, we have visualized only rules with higher values for lift measure, i.e. more interesting rules. concepts discussed in positive reviews revolve around hotel, room, staff, or location. based on presented relationships in figure 2, we can see that people evaluate positively mostly expected aspects, such as great location, great service, friendly or helpful staff, or clean rooms. fig. 2 relationships between terms which occur in positive reviews 5 rapidminer https://rapidminer.com/ 68 o. grljević, z. bošnjak, s. bošnjak since negative reviews convey sources of dissatisfaction of consumers we look more closely to the resulting association rules over negative category of reviews. we have generated 89 association rules with a 55% confidence. based on the results, some concepts which travelers discuss in negative reviews differ from the concepts in positive reviews. mostly these concepts revolve around the overall stay in the hotel and the food, while the hotel and room are discussed in a different manner in negative compared to positive reviews. figure 3 illustrates rules with mentions of room and hotel. while in positive reviews travelers put emphasis on the hotel, in negative review the emphasis is on room. the presented results point to the following sources of dissatisfaction among travelers: unclean bathroom, check-in process, problems with staff or room-service, no water, cleanliness, or the fact that the room was not ready upon traveler arrival (to obtain this conclusion we have inspected in more detail reviews containing the word told, in most cases travelers were told upon arrival that the room was not ready). a positive evaluation of food stretches through negative reviews (with support 0.189 and confidence level of 58.3%). among the analyzed reviews, if travelers mention beach, they will also mention food. this rule has confidence of 70.5%. if we observe this vice versa, if a review contains a mention of food, we can say with 59.3% confidence that there will be a mention of beach as well. fig. 3 relationships between terms which occur in negative reviews contemporary data analysis techniques for online reutation management in hospitality and tourism 69 the results of experiments led to the conclusion that all selected algorithms, except the svm, are adequate for sentiment analysis of collected reviews in the hospitality and tourism sector. however, they have also highlighted that on the same data it is possible to obtain different results and therefore good analytic skills are necessary in order to conduct a large number of experiments with diversified classification algorithms, model parameters, and performance measures. although we have not conducted aspect-based sentiment analysis, the application of association rules over positive and negative category of reviews and their visualization revealed useful insights regarding the preferences of travelers. 5. conclusion user-generated contents on the web, in the form of reviews and/or ratings, convey consumers’ opinions and feelings towards products, services or other entities. prospective online customers use this freely provided data in their decision making process. with expansion of reviewing websites, online reviews are the third influencing factor on purchase decisions after coupons and discounts (yang et al, 2015). textual comments provide fine-grained information about the service provider’s reputation that is likely to engender a buyer’s trust in the service provider’s competence and credibility. consequently, companies should monitor the online activities and sentiment of their customers and promptly respond to customer comments and problems. this is even more emphasized in the hospitality and tourism industry that provides subjective services, heterogeneous in nature, where no “try before you buy” or “return if not satisfied” features exist so the perceived risk for the consumers is even higher. with such a strong impact on purchasing decisions online reviews affect online sales as well, and they should be treated as a strategic tool in hospitality and tourism management, particularly in promotion, online sales, and management of online reputation (schuckert & law, 2014). due to the constant growth of the number of websites with tourists’ reviews and the sheer amount of feedback information on their expectations, preferences, (dis)satisfaction, etc., automated techniques are needed to process all the reviews in order to gain full insight in tourists’ sentiment. opinion mining and sentiment analysis enable tourism organizations to assess the influence of aggregated good or bad comments on the accommodation choices, to acquire the information on guests’ perception of the tourism and the business related entities (such as the staff, comfort of rooms, intensity of noise, quality of food or other aspects of the tourism offer). such insights are vital for leveraging the services and the organization of the business. the case study we have conducted has shown that not all methods that we have at our disposal are suitable for sentiment analysis, while some of the developed automated approaches are more adequate than others. skillful analysts could, by means of classification algorithms (lr, nb, rf, xgb, svm) and association rules, reveal emotions, criticism, (dis)satisfaction in user generated reviews and present them to the management, who could act accordingly for online reputation improvement. in the past several years, our understanding of the impacts of online reviews has developed to a great extent, due to technical advancements in our capacity to process and analyze new forms of data in increasingly 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(2014). explicit factor models for explainable recommendation based on phrase-level sentiment analysis. in proceedings of the 37th international acm sigir conference on research &amp; development in information retrieval, 83-92. savremene tehnike analize podataka za menadžment onlajn reputacije u hotelijerstvu i turizmu saznanja o tome šta privlači a šta odvraća turiste od turističke posete i na koje proizvode obratiti posebnu pažnju, te koje proizvode ponuditi je od presudne važnosti za ostvarivanje dobrih ekonomskih rezultata. do saznanja ove vrste možemo doći analizom onlajn komentara i recenzija koje savremeni turisti ostavljaju nakon turističkog iskustva na veb sajtovim (kao što su booking.com, tripadvisor, trivago, i dr.). u radu je opisan značaj onlajn recenzija za menadžment, koji putem njih dobija informaciju o mišljenjima i emocijama korisnika njihovih turističkih usluga, a pogotovu o (ne)zadovoljstvu određenim aspektima ponude, te se pruža mogućnost da iskoriste uočene prednosti, a https://www.sciencedirect.com/science/article/pii/s0261517715300121#%21 contemporary data analysis techniques for online reutation management in hospitality and tourism 73 isprave nedostatke preduzimanjem pravovremenih korektivnih mera i akcija. kroz studiju slučaja nad 20491 recenzijom sa tripadvisor-a su opisani savremeni pristupi i metode za analizu korisnički generisanog sadržaja i mogućnosti za unapređenje koje one donose u domenu hotelijerstva i turizma. realizovana je sentiment analiza nad prikupljenim onlajn recenzijama sa ciljem izgradnje automatizovanog modela koji uspešno pravi razliku između pozitivnih i negativnih recenzija. klasifikacioni model zasnovan na logističkoj regresiji ispoljava najbolje performanse. u 90% slučajeva uspešno klasifikuje pozitivne recenzije, dok u 83% slučajeva uspešno klasifikuje negativne. pored primene sentiment analize, ilustrovana je upotreba asocijativnih pravila kao pomoć menadžmentu u otkrivanju relacija između koncepata o kojima posetioci diskutuju unutar pozitivnih, odnosno negativnih recenzija. ključne reči: menadžment onlajn reputacijom, e-marketing “od usta do usta”, onlajn recenzije, automatizovana klasifiacija, sentiment analiza, asocijativna pravila plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 2, 2016, pp. 161 175 corporate governance mechanisms effectiveness: the case of transition countries1 udc 334.725:005 verica m. babić 1 , jelena d. nikolić 1 , milena s. stanisavljević 2 1 faculty of economics, university of kragujevac, kragujevac, serbia 2 faculty of technical science, university of kragujevac, ĉaĉak, serbia abstract. ever since ownership and management were separated, corporate governance emerged as an essential institution of market economy. based on this statement, several corporate governance mechanisms have been extensively researched. developed and transition countries, according to the differences that determine the corporate governance model, which refer to the historical and cultural heritage of countries, socio-economic conditions, legal/institutional framework and ownership structure, apply various corporate control mechanisms. since market institutions are missing in transition countries, and institutional framework is insufficiently developed, these countries must develop appropriate corporate governance model, as well as corporate governance mechanisms. due to these mentioned features, the research topic is to analyze effectiveness of corporate governance mechanisms in selected transition countries with common socio-economic environment. special attention is given to the problems of corporate governance mechanisms improvement and possibilities of overcoming them. key words: transition countries, privatization, corporate governance mechanisms, ownership concentration, board of directors introduction the main problem of corporate governance is how to ensure that managers run firms for the benefit of shareholders and therefore prevent the appearance of agency conflicts between owners (principal) and managers (agents). in above mentioned, corporations in developed, market countries are constantly devoted to improving corporate governance mechanisms. the role of corporate governance mechanisms is related to the process of harmonization of interests between owners and managers, as well as the process of effective strategic decision-making. accordingly, development of appropriate corporate governance mechanisms is a relevant question, both for developed and transition countries, which are facing specific problems of corporate governance that occur as 1received april 6, 2016 / accepted june 2, 2016 corresponding author: verica m. babić faculty of economics, university of kragujevac, đure pucara 3, 34 000 kragujevac, serbia e-mail: vbabic@kg.ac.rs 162 v. babić, j. nikolić, m. stanisavljević consequence of ownership and managerial transformation. developed and transition countries, according to the differences that determine the corporate governance model, and those are referred to the historical and cultural heritage of countries, socio-economic conditions, legal/institutional framework and ownership structure implement various control mechanisms of managers. transition countries are faced with numerous problems, disabling the application of corporate governance mechanisms of developed economies: undefined property rights, expropriation of the rights of minority shareholders, violation of contracts, underdeveloped stock markets, inconsistent and/or inefficient application of the legislation. these problems arise from the process of transition towards market economy, especially as a result of the privatization and changes in ownership structure. however, it is not supported by an effective change in the formal institutional framework and the adoption of a set of laws concerning the following: governance of the companies, property rights, economic transactions, bankruptcy of the firms. also, the development of the stock markets is related to the privatization and represents the means of property redistribution. therefore, a common characteristic of transition countries is undeveloped market, with low level of liquidity, which results in inability of applying the external corporate governance mechanisms through market for corporate control. since market institutions are missing in transition countries, and institutional framework is insufficiently developed, these countries must develop appropriate corporate governance model, as well as corporate governance mechanisms. due to these mentioned differences, the research topic is to analyze effectiveness of corporate governance mechanisms in transition countries, in accordance with the implemented corporate governance model. the research aim is to determine the similarities and differences between corporate governance mechanisms in transition countries of central and eastern europe, as well as to point out the possible ways of improvement of their effectiveness. according to research topic, the hypothesis is as follows: ownership concentration is the key corporate governance mechanism in transition countries due to undeveloped institutional framework and undeveloped market for corporate control. the qualitative research methodology is applied in this research and the comparative method of scientific analysis. the methods of analysis and synthesis are used to make conclusions by the process of generalization, i.e. to theoretically verify the research hypothesis. at the first section, the key characteristics and significance of corporate governance in transition countries are described. the second section analyses the corporate governance mechanisms that are applied in selected transition countries with common socio-economic environment: czech republic, slovakia, poland, hungary, slovenia, croatia and serbia. special attention is given to the problems of corporate governance mechanisms improvement and possibilities of overcoming them at the third section. 1. role of corporate governance in transition countries corporate governance could be defined as a set of relationships between a board of directors, shareholders and other stakeholders. it also provides “the structure through which the objectives of the company are set, and the means of attaining those objectives, and monitoring performance, are determined‟‟ [33]. on the other hand, it has also been interpreted as „„the manner in which suppliers of corporate funds ensure appropriate returns to their investment‟‟[38], but it has also been emphasized that a country‟s corporate governance mechanisms effectiveness: the case of transition countries 163 political/institutional as well as regulatory framework determines the quality of its corporate governance practices [36]. based on the understanding of the concept of corporate governance and the view that corporate governance development in market and transition countries is characterized by a completely different context, analysis of corporate governance significance in post-communist countries should be adapted to the specifics of the process of transition to a market economy [34]. in fact, research in the area of corporate governance system of transition economies is based on identifying the common characteristics of post-communist countries. it is the consequence of the effort to promote the idea that the monetary model of reforms can be applied in all transition countries. therefore, all countries can apply the same "recipes for healing", and inability of government to implement this policy caused the failure of the reforms [26]. however, experience of transition countries indicates that transition to the new market system is much more complicated. the process of building the market economy cannot be conducted according to corporate governance model of developed countries, since available time, resources and initial assumptions fundamentally differ. also, modifications of the current system cannot be applied, since transition countries have specific economic system in which the residuals of old communist system and the beginnings of new market system exist in parallel. in addition, transition processes occur in the whole spectrum of economic, cultural and social diversity determining the potentials of changes in some countries. within the transition to market economy, privatization as the most important aspect of post-communist reforms resulted in the need for development of corporate governance system. at the beginning of the transition process, privatization of state-owned firms was regarded as the crucial element of reform at a microeconomic level [18]. in the transition countries, privatization involved selling the bulk of firms in the previously state-owned industrial sector. privatization is considered to be a mechanism which may eradicate inefficiency of state property and influence the change in industrial structure in national and regional economy. this viewpoint arises from the fact that privatization led to significant changes in ownership structure, as well as to the creation of the new corporate sector. the new corporate sector consists of “instant corporations” formed as the result of mass privatization, without the simultaneous development of legal and institutional structures necessary to operate in a competitive market economy [6]. privatization has become a world-wide economic phenomenon where governments usually adopted the path in order to raise revenue, improve economic efficiency and develop their national stock market. privatization has been viewed by most of economic actors as an inevitable step of the reforms required for economic development [31]. all transition countries have implemented the privatization as the process of transfer of control from the state to the private sector, using the specific models and methods. privatization could be done in different ways: privatization by sale, voucher privatization and insider privatization [32]. privatization by sale results in concentrated ownership, because it means sale of majority share block of the company to domestic or foreign investors (strategic partners). voucher privatization means distribution of shares which leads to highly dispersed ownership. insider privatization means that managers or employees are purchasing the shares. however, privatization in the transition countries has posed a number of practical problems. implemented privatization resulted in very different ownership structures and caused the development of different corporate governance mechanisms. it can be 164 v. babić, j. nikolić, m. stanisavljević concluded that implemented privatization in transition countries resulted in separation of ownership and control, led to ownership concentration, as well as to very different ownership structures. the majority shareholder (i.e., controlling owner) is often associated with a business group [44]. nevertheless, within the process of privatization in some transition countries, business groups have been created, instead of forming the autonomous companies. transactions between privatized companies are carried out not by the market, but through direct business arrangements, the relations with the banks as well as the complex structure of mutual ownership and interdependence. this business group (i.e., business network) emerged as a natural consequence of socialism, and it is stimulated by the interests of the existing management structure. also, undeveloped financial market favors the creation of business networks. in such circumstances, the role and the significance of corporate governance were marginalized. hence, the problems of separated ownership and control are increasing, which negatively influences the performance of companies. we can conclude that the above-mentioned corporate governance problem represents one of the most relevant components of corporate long term success, and caused the development of different corporate governance mechanisms. since management is separated from those who provide capital, it is responsible for using the resources effectively in order to achieve strategic goals. assurance that management will act in that way is important for successful achievement of economic performance of the organization as well as for its ability to attract long-term, stable and inexpensive source of funding. fundamental task of corporate governance is to provide mechanisms which will ensure managerial responsibility towards shareholders for appropriate use of their resources. shareholders have available governance mechanisms to help bring the interests of managers in line with their own. these mechanisms can be classified as internal and external mechanisms: ownership concentration and board of directors are internal, and market for corporate control and legal protection are external mechanisms [5]. consistent with that classification, in transition countries ownership concentration and board of directors should be the most important corporate governance mechanisms. ownership concentration has the advantages due to better control of management actions, since major owners have the power and initiative to supervise managers. owners with higher share of stocks are motivated to perform monitoring and dismiss unsuccessful managers, therefore reducing conflicts between owners as principals and managers as agents [32]. this attitude is based on the fact that corporate sector consists of corporations which were created as a consequence of mass privatization, which was not followed by simultaneous development of legal and institutional infrastructure necessary for market economy functioning. also, the board as internal mechanism of corporate governance represents the link between individuals that provide the capital (owners) and individuals exploiting that capital in order to create value (managers). the board has a role to monitor and control managers, in order to protect the owners‟ best interests. composition, size and board roles are different depending on the board models. generally, there are two board models: onetier and two-tier boards. in contemporary studies, two-tier boards were generally recommended. this statement is based on separation of management and supervisory board. the central feature of internal corporate governance lies in the division of management and control by a two-tier structure. while the role of the management board is the running of the business, the role of the supervisory board is primarily the appointment, supervision, and removal of members of the management board [22]. the one-tier board model entrusts both management and control to the unitary board, who are vested with universal powers. corporate governance mechanisms effectiveness: the case of transition countries 165 in addition to internal mechanisms of corporate governance, market for corporate control serves as an external mechanism that is typically activated when internal mechanisms for controlling managerial opportunism have failed [15]. in line with these arguments, studies of corporate governance mechanisms in transition countries require to identify some additional specified criteria, as well as some of common denominators in order to set universal assumptions and conclusions, as well as to conduct comparative research. 2. corporate governance mechanisms: the evidence of transition countries consistent with above classification of corporate governance mechanisms and specific characteristics of transition countries, the experiences of selected transition countries czech republic, slovakia, poland, hungary, slovenia and croatia (as members of eu), and serbia (as candidate for membership), are analyzed. one of the key features of transition from former planned economies to market economies was the privatization process, which was influenced by integration with the european union and pressured by international financial institutions. the privatization was conducted in different ways, which resulted in differences in corporate governance, ownership structures and other corporate governance mechanisms. czech republic in czech republic voucher privatization was carried out, where 40-80% of firm‟s equity was available for auction through vouchers, while remaining shares were distributed to employees (a small percentage) and state [1]. privatization through vouchers resulted in the creation of investment privatization funds, which led to ownership concentration, because ipfs obtained 70% of all available vouchers. in order to overcome legal obstacles, ipfs transformed themselves into holding companies, which finally led to ownership concentration. institutional investors and industrial firms with foreign ownership are the most common owners, but the state still has a meaningful share with 12,7% shareholding [1]. foreign investors have on average 58,6% of shares [1, 34]. the biggest owner has on average 60,6% of shares, while three biggest shareowners have around 76% of shares [1]. although ownership concentration is a strong control mechanism of manager‟s opportunistic behavior, it has negative effect in sense of expropriation of minority owners‟ rights. that is confirmed with the rank of the czech republic, which was at 50 th position by protection of minority shareowners‟ rights by the global competitiveness report of the world economic forum in 2015 [42]. regarding the board of directors as internal control mechanism, two-tier board is applied [27], which consists of managerial and supervisory board. managerial board and supervisory board have at least three members, but employees have a representative at the supervisory board (one third of the members is elected by the employees). candidates for employee representative are nominated by works council or trade unions, or in case of state-owned companies by electoral regulations established by employer in agreement with trade unions [14]. czech republic was at 34 th position by board effectiveness in 2015 [42]. market for corporate control as external mechanism is not fully developed and it is not often used as control mechanism. still, czech republic was at 3 rd place among the countries of central and southeastern europe by the number of mergers and acquisitions in 2015 (185 completed transactions), where strategic investors participated in almost 83% in these transactions [17], which shows that there are efforts and tendencies towards 166 v. babić, j. nikolić, m. stanisavljević more efficient development of market for corporate control. comparing the number of transactions in 2011 to 2015, there is an increase in the number of transactions by 20,9% [39]. even though the market for corporate control remains undeveloped, there is another limitation for improvement of corporate governance. the legal system is not efficient, which is confirmed with the results from the global competitiveness report which show that czech republic is at 90 th position by the efficiency of legal framework [42]. the efficiency of legal framework needs to be at much higher level in order to insure adequately protected property, minority rights and prevent managerial opportunism. slovakia in slovakia privatization was carried out through small-scale privatization, which was almost finished in late 1992, and large-scale privatization, which had two different stages. firstly, there were two waves of voucher privatization, and then direct sales which was used in privatization of nearly 80% of companies [41], which resulted in ownership concentration. dominant owners became individual investors, insiders and foreign investors [4]. the state holds on average 18% of shares [23]. the share of biggest shareowner is on average 39,4% [10]. slovakia was at 92 nd position by protection of minority shareowners rights by the global competitiveness report of the world economic forum in 2015 [42], which is worse than czech republic and should be improved. the two-tier board is dominant in slovakia. the managerial board consists only of executive directors, while the supervisory board consists only of non-executive directors. the supervisory board consists of at least three members. if the company has more than 50 employees, one third of the supervisory board members is elected by the employees [30], whilst in state-owned companies, employee representatives have one half in the supervisory board [14]. the employee representatives are nominated by the trade unions and employees. slovakia was at 73 rd position by board effectiveness in 2015 [42]. the market for corporate control is undeveloped, and cannot be used as an effective control mechanism for managers. slovakia is at 6 th place among countries in central and southeastern europe by the number of mergers and acquisitions. the number of mergers and acquisitions in 2015 was 65, where strategic partners participated with almost 86% in these transactions [17]. comparing the number of transactions in 2011 to 2015, there is an increase in the number of transactions by 41,3% [39]. the increase in number of mergers and transaction shows the growing importance of this control mechanism. slovakia was ranked as 138 th by the efficiency of legal framework in 2015 [42]. very low rank by the efficiency of legal framework suggests that implementation of legal framework is still a significant problem for improving corporate governance. poland in poland, mass privatization was carried out by transferring majority share blocks to national investment funds (nif) (60% of shares), while the rest of shares was transferred to employees (15%) and treasury (25%) [28]. vouchers, which represented one share of nif each, were distributed to citizens, who became indirect companies‟ owners. with withdrawal of nif, their shares were being sold to domestic and foreign investors. privatization resulted in concentrated ownership [9]. the state has in average 4% of share ownership [1]. meaningful stake in ownership have individual investors and industrial firms [1]. foreign investors have on average 21,9% of shares [1, 34]. the corporate governance mechanisms effectiveness: the case of transition countries 167 majority shareowner has on average 43% of shares [2], while three biggest shareowners have 50% of shares [1]. poland was at 63 rd position by protection of minority shareowners rights by the global competitiveness report of the world economic forum in 2015 [42]. the ownership concentration is very high, which implies that the minority owners‟ rights could be threatened, which is confirmed by low rank of protection of their rights. the second internal mechanism of corporate control is managerial board. management is conducted by two-tier board [9], which consists of managerial and supervisory board. the employees elect around one third of the of supervisory board members, depending on the size of supervisory board [21], two members on a board of six, three where the board has seven to 10 members, and four where the board has more than 10 members. in stateowned companies employees have 2/5 representatives in supervisory board, and employees have one representative in managerial board when the company have more than 500 employees [14]. poland was at 66 th position by board effectiveness in 2015 [42]. still, czech republic has better position by board effectiveness. the importance of the market for corporate control is reduced, even though the activity at this market is high in this part of europe. the number of mergers and acquisitions in 2015 in poland was 278, which was the second highest number in central and southeastern europe. strategic partners participated with almost 74% in these transactions [17]. comparing the number of transactions in 2011 to 2015, there is a decline in the number of transactions by 46% [39]. poland was ranked as 70 th by the efficiency of legal framework in 2015 [42]. the position of poland is better than previously analyzed countries, but still needs to be improved in order to improve corporate governance. hungary in hungary, privatization was conducted through direct sale to strategic partners or financial institutions [27]. privatization resulted in very little employees‟ ownership, very little dispersed ownership and high concentrated ownership, where majority of shares were held by foreign investors [11]. one majority owner has on average 54,2% of shares, while three biggest shareholders have on average 71,5% of shares, where foreign investors participated in ownership with 70,6% [1, 34]. the state owns on average 2,4% shares [1]. hungary was at 90 th position by protection of minority shareowners rights by the global competitiveness report of the world economic forum in 2015 [42]. czech republic and poland have better protection of minority owners‟ rights, but the ownership concentration in hungary is higher. regulatory reforms have been introduced, but the enforcement is still lagging behind. regarding other internal mechanism of corporate control, by company act iv (2006), companies may apply one-tier or two-tier board. in case of one-tier board, the board has 5 to 11 members, whilst independent members have the majority. in case of two-tier board, there is managerial and supervisory board. minority shareholders have the right to appoint one member of supervisory board. employees choose one third of the members of supervisory board. the representatives are nominated by works council who has a duty to ask trade union for opinion [14]. hungary was at 112 th position by board effectiveness in 2015 [42]. very low board effectiveness and low protection of minority rights are significant problems for improvement of corporate governance. market for corporate control is not significantly used as a mechanism for disciplining managers, as the activity on this market is reduced. hungary takes 4 th position in central and southeastern europe by the number of mergers and acquisitions in 2015 (130 168 v. babić, j. nikolić, m. stanisavljević transactions), where strategic partners participated with almost 62% in these transactions [17]. comparing the number of transactions in 2011 to 2015, there is a decline in the number of transactions by 5,2% [38]. hungary was ranked as 96 th by the efficiency of legal framework in 2015 [42]. efficiency of legal framework needs to be improved in order to insure better protection of minority owners‟ rights and investors‟ property, as the foreign investors are the biggest shareowners and concentration of ownership is very high. slovenia slovenian privatization was conducted through transfer of 40% of shares to state funds‟ ownership, and the rest of shares were privatized through selling shares to insiders (employees and managers) and private investors [25]. insider privatization was conducted in 90% of companies. state and investment funds were the primary share owners, who would sell the shares to private investors. privatization resulted in relatively concentrated ownership. the biggest shareowner has 35% of shares, and the five biggest shareowners control on average 66,2 % of shares [24]. the most important shareowners are domestic companies, insiders (employees) and investment funds [25]. the state controls on average 12,4% of shares [24]. slovenia was at 121 st position by protection of minority shareowners rights by the global competitiveness report of the world economic forum in 2015 [42]. comparing to previously analyzed countries, slovenia has the lowest rank by this indicator. companies have the choice to apply one-tier or two-tier board [16]. public companies apply two-tier board of directors. in those companies employees appoint one third to one half of the members of supervisory board. if company has more than 500 employees, employees have the possibility to appoint one member of managerial board. the representatives are appointed by works council [14]. slovenia was at 110 th position by board effectiveness in 2015 [42]. the market for corporate control is not active, and the slovenia was at 9 th position in central and southeastern europe in 2015 by the number of mergers and acquisitions. in 2015 in slovenia 38 mergers and acquisition were conducted and the participation of strategic investors was 79% [17]. comparing the number of transactions in 2011 to 2015, there is a decline in the number of transactions by 9,6% [39]. slovenia was ranked as 115 th by the efficiency of legal framework in 2015 [42]. companies often follow the regulatory obligations and recommendations but implementation in practice is absent, so there is a very low result on efficiency of legal framework. croatia privatization in croatia was conducted through two phases. firstly, the goal was to terminate social ownership and to transfer it to private or state ownership, primarily through insider privatization. in the second phase, voucher privatization was conducted [40], which finally resulted in highly concentrated ownership. the majority owner has on average 51% of shares [37]. three biggest owners have on average 80% of shares in listed companies [29]. among owners with the largest share were nonfinancial companies, state and its institutions. the average ownership of the state among public listed companies is 10,8% [29]. croatia was at 111 th position by protection of minority shareowners rights by the global competitiveness report of the world economic forum in 2015 [42]. low protection of minority owners‟ rights is common problem when ownership is concentrated, like in case of croatia. corporate governance mechanisms effectiveness: the case of transition countries 169 since 2007 two systems are being applied: one-tier and two-tier board. two-tier board was applied by 98,9% listed companies in 2010 [37]. the average number of managerial board members is 2, but in 47% of companies there is only one member. the average number of supervisory board members is five. employees have one representative in the board, and he/she is appointed by works council or by trade union [14]. croatia was at 95 th position by board effectiveness in 2015 [42]. market for corporate control is not developed and is inefficient for corporate control. croatia was at 11 th position by the number of mergers and acquisitions in central and southeastern europe in 2015 with 27 conducted transactions, which is much less than previous year, even though the strategic investors participated with 96% in these transactions [17]. comparing the number of transactions in 2011 to 2015, there is a decline in the number of transactions by 59,7% [39]. numerous changes have been conducted in the company law and corporate governance in croatia during two last decades, mostly as a result of the need of harmonization with the eu practice. still, croatia was ranked as 137 th by the efficiency of legal framework in 2015 [42]. as croatia has very low position by the efficiency of legal framework it is necessary to improve legal system and its efficiency, in order to improve corporate governance and its mechanisms. serbia privatization in serbia was conducted through three models [7]. firstly, insider privatization resulted in relatively dispersed ownership. then, free distribution of shares in line with selling shares with discount was done, which resulted in ownership concentration. and finally, the privatization was conducted through sale to strategic partners, which led to ownership concentration in the hands of one or small group of shareowners [32]. ownership is highly concentrated in serbia, because one biggest shareowner owns on average 65,26% of shares. this conclusion is based on the analysis of the ownership structure of 2037 companies listed in database of the central securities depository and clearing house. the state and its institutions own on average 37,04% of shares. other companies own on average 66,24% of shares, while individual investors own on average 44,31% of shares. high ownership concentration increases likelihood of the expropriation of minority shareowners, so the legal and regulatory reforms are essential. in line with this argument, serbia was at 138 th position by protection of minority shareowners rights in 2015 [42]. this result is the lowest of all analyzed countries. according to company law from 2011, a company may apply one-tier or two-tier board. in practice, two-tier boards are more applied. at one-tier board, assembly and managerial board are the managing bodies. at two-tier board, assembly, the managing bodies are supervisory and managerial board. managerial board has majority of independent members, while supervisory board has at least three members and they have to be independent. employees usually do not have a representative in the boards. serbia was at 111 th position by board effectiveness in 2015 [42]. market for corporate control is not developed. serbia was at 8 th place among central and southeastern europe countries by the number of mergers and acquisitions in 2015, with 45 mergers and acquisition conducted, which is less than previous year. the participation of strategic investors was 93% [17]. comparing the number of transactions in 2011 (67 transactions) to 2015 (45 transactions), there is a decline in the number of transactions by 32,8% [39]. inactive market for corporate control cannot be used for disciplining managers. therefore, serbia was ranked as 125 th by the efficiency of legal 170 v. babić, j. nikolić, m. stanisavljević framework in 2015 [42]. poor law enforcement is one of the main obstacles for protection of minority owners‟ rights, investors‟ property protection, for prevention of managerial opportunism and improvement of corporate governance. numerous changes are conducted, mainly in accordance with the directions of eu and oecd recommendations, codes are defined, but implementation is lacking. comparison of corporate governance mechanisms analyzed in transition countries is given in table 1. table 1 comparison of corporate governance mechanisms in transition countries 2 oc – ownership concentration 3 ranking by global competitiveness index 4 ranking by global competitiveness index 5 ranking by global competitiveness index indicators czech republic slovakia poland hungary slovenia croatia serbia ownership structure as corporate governance mechanism ownership dispersion vs. concentration oc 2 oc oc oc oc oc oc dominant owner‟s identity institutional investors and industrial firms individual investors, insiders and foreign investors individual investors and industrial firms foreign investors domestic companies, insiders and investment funds nonfinanc. companies, state and its institutions domestic and foreign companies and state share of the biggest owner 60,6% 39,4% 43% 54,2% 35% 51% 65,26% share of state ownership 12,7% 18% 4% 2,4% 12,4% 10,8% 37,04% board as corporate governance mechanism board model two-tier two-tier two-tier one-tier and two-tier one-tier and two-tier one-tier and two-tier one-tier and twotier proportion/ number of employee representatives in the board 1/3 of board members 1/3 – 1/2 of board members 1/3 – 2/5 of board members 1/3 of board members 1/3 1/2 of board members 1 board member / board effectiveness 3 34 73 66 112 110 95 111 market for corporate control as corporate governance mechanism ranking by the number of m&a in cse in 2015 3 6 2 4 9 11 8 number of m&a in 2015 comparing to 2011 153 185 higher by 20,9% 46 65 higher by 41,3% 516 278 lower by 46% 137 130 lower by 5,2% 42 38 lower by 9,6% 67 27 lower by 59,7% 67 45 lower by 32,8% legal framework as corporate governance mechanism ranking by protection of minority shareowners rights 4 50 92 63 90 121 111 138 ranking of efficiency of legal framework 5 90 138 70 96 115 137 125 source: authors corporate governance mechanisms effectiveness: the case of transition countries 171 3. improvement of the corporate governance mechanisms effectiveness in transition countries starting with the corporate governance mechanisms analysis in transition countries, it can be concluded that the processes of property and managerial transformation created a specific environment for development of corporate governance mechanisms. there are four key features. the first feature is slow process of property and managerial transformation and absence of market of corporate control. therefore, the process of privatization and restructuring, and developing a suitable system of corporate governance model for transition countries are the key elements to replace the missing market institutions. achieving the ownership transformation and strengthening the role of the owners are essential conditions for improving corporate governance. possibility for policy intervention is related to control and ownership disclosure and transparency. the second feature refers to the problem of insufficient effectiveness of boards of directors as an important internal control mechanism of managers. boards of directors have been used as an instrument of political control over the ceo‟s work. hence, the different modalities of ceo‟s domination over board appeared in practice. the use of power varied depending on the political forces, managerial and leadership skills of directors, but still the boards of directors had a role of executive political power. thus, boards of directors are not effective because the owner controls the board and can fire or hire its members. the possibility for boards of directors as corporate governance mechanisms enforcement is: voting transparency; introduce cumulative voting as well as train the board of directors [12]. the third feature is related to ownership concentration as the primary corporate control mechanism. concentrated ownership is dominant in transition countries for two reasons [44]. firstly, ownership dispersion means that the majority owner has to share relevant information with external investors, and they may have risk aversion, because they want to protect strategic information from the outsiders, especially when it relates to company‟s competencies. sharing information requires trust between different parties, which is rare in transition countries because of the inadequate institutional framework. secondly, concentrated ownership exists because that is the only possible way to prevent managerial opportunistic behavior in the conditions of undeveloped market institutions. this stand is based on the hypothesis of preference of control and on the results of numerous empirical studies which confirm that higher ownership concentration enables better monitoring and restricts opportunistic managerial behavior [32]. active monitoring by majority owners can increase the quality of managerial decisions, prevent exaggerated diversification, as well as prevent exceeding compensations. therefore, when ownership is concentrated in the hands of the majority owners, the control of managerial behavior is increased and principal-agent conflict is mitigated. ownership concentration improves corporate performance, lowering the agency costs of dispersed ownership. however, ownership concentration may lead to principal-principal conflict between majority and minority owners [20], which occurs when majority owners gain private benefits at the expense of minority owners [13]. principal-principal conflict represents the fourth, most important feature. the dominant shareholder may tend to abuse minority investors particularly under conditions of poor institutional order [35]. in transition countries there is no adequate legal protection of minority shareowners‟ rights, because this problem has additional weight. possibility for policy intervention is related to reinforcing laws that protect minority shareholders whilst maintaining the incentive to hold controlling blocks [8]. 172 v. babić, j. nikolić, m. stanisavljević accordingly, codes of best corporate governance practice developed in many countries play an important role in the process of setting standards for corporate behavior and boosting activism of minority investors. despite different national legal regimes, the set of guidelines proposed in the codes of best practice remains similar. principles of corporate governance usually refer to the equal treatment of shareholders with emphasis on the protection of minority shareholders, corporate transparency, board functioning, procedures of voting, and electing shareholders representatives. as a result, codes and the formulated rules of corporate governance build public pressure on dominant shareholders as well as provide rating of companies according to their compliance with corporate governance [3]. starting from listed futures, the required assumption of improvement of corporate governance mechanisms effectiveness is finalization of the process of ownership transformation, development of institutional framework and creating market economy institutions necessary for economic growth. implementation of appropriate institutional rules and establishment of market institutions increase the responsibility of managers for company performance. in order to effectively allocate resources, investors must have the ability to control those who use these resources. effectiveness of corporate governance mechanisms is increased when the owners have clearly defined power which will allow them to control and when they have good access to information which prevents information asymmetry. in addition, minority owners should be protected from expropriation of majority owners through effective legal system. conclusions privatization and restructuring, as the two main aspects of post-communist reforms, led to growing interest for corporate governance research in transition countries. these processes present the key factors for transition success as well. privatization is crucial, since it creates effective owners, enables more effective use of resources, and confirms dominance of market mechanisms. in addition, privatization was designed to eliminate the constraints on the independent managerial decision-making process imposed by state ownership. nevertheless, real privatization effects were not in accordance with expectations. this was caused by unbalanced development of macroeconomic and microeconomic instruments in the first stages of transition process. in fact, in transition countries the focus was on achievement of macroeconomic stability in order to create an appropriate environment for privatization process. then, it is necessary to implement microeconomic changes that correspond to macroeconomic policy of transition countries. accordingly, corporate governance is a powerful instrument of microeconomic policy and effective way of transition to market economy. corporate governance system has the key role in the process of economic regeneration in transition countries. therefore, it improves the performance of enterprises by aligning conflicts of interest, and by reducing opportunistic behavior. the above-mentioned is achieved by improving effectiveness of corporate governance mechanisms, because all transition countries faced specific problems that result from the process of the ownership and management transformation. primarily, the inefficiency of corporate governance mechanisms in the selected countries might be due to: weak minority investor protection, along with entrenched positions of managers, who remain in control despite that privatization had transferred ownership to outsiders, undeveloped capital markets as well as ineffective boards corporate governance mechanisms effectiveness: the case of transition countries 173 of directors. the inefficient corporate governance in the selected countries can also be explained with the weaker legal systems. consistent with above arguments, the key corporate governance mechanism is ownership concentration, which confirmed initial research hypothesis. our analysis showed that selected countries are characterized by similar majority owner‟s identity and weak protection of minority shareholders‟ rights, too. therefore the enforcement of corporate governance mechanisms is needed. all transition countries have made significant progress in developing corporate governance mechanisms and are moving towards adopting the oecd principles on voluntary or statutory basis. also, the necessary assumption of improving the effectiveness of corporate governance mechanisms is development of institutional framework suitable for market economies. we emphasize the necessity of higher legal protection of minority owners‟ interests in order to prevent expropriation of their interests. in contrast, ownership concentration results in negative effects that can jeopardize the corporate control benefits. therefore, large shareholders have both the incentives and the means to restrain the strategic independence of managers. in the transition environment, managerial strategic independence, or their ability to make good decisions without restrictions imposed by new owners of privatized firms, may become particularly important. in addition, board of directors is another governance instrument that can affect the decision-making process, shaping the extent of managers‟ strategic independence. strategy research particularly emphasizes the importance of the strategic board role when the firm faces a highly uncertain environment of economic transition. board members associated with foreign investors also improve monitoring role of the board, and mitigate moral hazard costs related to managerial decision-making autonomy [19]. accordingly, the enhancement of board effectiveness is one of the main conditions to improve corporate governance in transition countries. on the way to joining the european union, these conclusions are especially 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http://web.b.ebscohost.com.proxy.kobson.nb.rs:2048/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjqrqe3tlek63nn5kx95 http://web.b.ebscohost.com.proxy.kobson.nb.rs:2048/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjqrqe3tlek63nn5kx95 http://web.b.ebscohost.com.proxy.kobson.nb.rs:2048/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjqrqe3tlek63nn5kx95 http://web.b.ebscohost.com.proxy.kobson.nb.rs:2048/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjqrqe3tlek63nn5kx95 http://web.b.ebscohost.com.proxy.kobson.nb.rs:2048/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjqrqe3tlek63nn5kx95 http://web.b.ebscohost.com.proxy.kobson.nb.rs:2048/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjqrqe3tlek63nn5kx95 http://web.b.ebscohost.com.proxy.kobson.nb.rs:2048/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjqrqe3tlek63nn5kx95 http://web.b.ebscohost.com.proxy.kobson.nb.rs:2048/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjqrqe3tlek63nn5kx95 facta universitatis series: economics and organization vol. 17, n o 1, 2020, pp. 57 68 https://doi.org/10.22190/fueo191006005b © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper board structure and bank performance: evidence from serbian banking sector 1 udc 336.7(497.11) verica babić, jelena nikolić, marijana simić university of kragujevac, faculty of economics, serbia abstract. traditional perspective relying on agency theory is based on the assumption that the board structure, as an internal corporate governance mechanism, determines board effectiveness and, therefore, financial performance. board size, board composition and leadership structure are distinguished as relevant variables of the board structure. since the results of previous empirical studies are often contradictory, examining the correlation between board structural characteristics and corporate performance is a relevant research question, particularly in banking sector. in order to improve effectiveness of internal corporate governance mechanism, and consequently bank performance, the main research objective is to identify the impact of the board size and the board composition on bank performance in the republic of serbia using the camels model. we analyze this relation using ordinary least squares regression analysis on balanced panel data-set of 54 observations. the paper contributes to recent research efforts by making conclusions on the effects of board structure on bank performance, in order to define recommendations for improving performance in banking sector. key words: board of directors, board structure, performances, camels, banking sector, republic of serbia jel classification: g21, l21, o16 introduction starting from the distinction between financial and non-financial sector (de haan & vlahu, 2016), banks as financial institutions have a unique role in financial mediation and take an important position within the payment system (flannery, 1998). insufficient transparency, information asymmetry, complexity of bank business (levine, 2004), high received october 6, 2019 / accepted january 13, 2020 corresponding author: marijana simić university of kragujevac, faculty of economics, liceja kneževnine srbije 3, 34000 kragujevac, serbia e-mail: msimic@kg.ac.rs 58 v. babić, j. nikolić, m. simić debt ratio, as well as the problems of liquidity and solvency indicate the wide range of problems which banks have been facing, and which consequently reflects on the growth and development of economy (macey & o’hara, 2003). in accordance with the above stated, the good practice of corporate governance and effective corporate control mechanisms represent necessary assumptions for the improvement of bank performances, by which negative effects of financial crisis and turbulent economic ambient can be mitigated (beltratti & stulz, 2012; erkens et al., 2012; jackowicz & kowalewski, 2012). thus, the development of good practice of corporate governance represents one of the key challenges for the creator of economic policy since the choice of corporate governance model depends on economic, social, technologic and political factors (orazalin et al., 2016). in accordance with the above mentioned, in transition economies, the selection of appropriate corporate governance model, as well as the effectiveness of corporate control mechanisms represent an important research field. the board of directors (i.e. board) as internal mechanism of corporate control has a significant role, due to which the research of board effectiveness is of special importance for the improvement of bank performance. according to the traditional research perspective, board size, board composition and board leadership structure represent relevant structural characteristics. since structural characteristics determine board effectiveness, and consequently bank performances as well, the examination of relationship among these variables is a relevant research issue. however, the results of empirical studies are often contradictory, due to which general conclusions on the influence of board structural characteristics on bank performances cannot be derived. in the previous empirical studies, two research directions can be singled out. the first research direction confirms negative influence (e.g. staikouras et al., 2007; pathan, 2009; stanĉić et al., 2014), while the second research direction confirms positive influence of board structure on bank performances (e.g. aebi et al., 2012; adams & mehran, 2012; minton et al., 2011), which implies the need for further research in this field. since in the republic of serbia the empirical studies in the field of corporate governance, i.e. corporate control mechanisms are rare and sporadic, the need for the research of the influence of board structure on bank performance is even greater. in order to overcome this research gap, the pilot research based on the sample which included 18 of total of 27 banks was conducted as a starting basis for future research. the contribution of the conducted research is reflected in making conclusion that can be guidelines for the development of good practice of corporate governance in banking sector, particularly in the process of nomination and selection of board members. 1. literature review 1.1. board structure in banking sector the roles of the board of directors can be observed through the perspective of different theories of corporate governance (e.g. agency theory, stakeholder theory, stewardship theory, resource dependence theory). according to the agency theory as the representative of conflict theories (babić et al., 2011), the separation of ownership from control leads to the conflict of interest between the owners as principals and managers as agents. starting from the identified agency problem (kostyuk, 2011), and for the purpose of mitigation of the principal–agent conflict and the prevention of managerial opportunism, fama and jensen (1983) emphasize that monitoring and control of managerial decisions are a basic board structure and bank performance: evidence from banking serbian sector 59 role of the board of directors. moreover, the board of directors has the responsibility to make decisions that refer to the choice and the substitution of managers, formulation of compensation package, as well as the control of management team (jadah & adzis, 2016). in line with the development of consensus theories (stakeholder theory, stewardship theory, resource dependence theory), the relevance of strategic board role (babić et al., 2011) and directors’ active participation in making strategic decisions is implied, highlighting the protection of interest, not only of shareholders, but also of other stakeholders. the board of directors has the responsibility that can be observed through the strategic decision making process and the initiation, evaluation and implementation of strategic decisions (barrosocastro, perinan, & dominguez, 2017). the strategic participation of the board members considers their role in strategy formulation and implementation process, and not only in evaluating and approving the strategy (pugliese, bezemer, zattoni, huse, van den bosch, & volberda, 2009). according to the relevance of the control and strategic board role for improving performance, board effectiveness is an important area of research. having in mind that board effectiveness represents the degree in which the activities encompassed by defined roles are successfully realized, it is possible to separate the two research perspectives: traditional and behavioral (babić et al., 2012). according to the traditional perspective, board size, board composition and the leadership structure analyzed through the duality in ceo position and chairperson are singled out as relevant variables of board structure (jensen, 1993). board size represents the total number of board members, who have the right to vote (ongore et al., 2014). it is often stated that the optimal size of bank board of directors implies the appointment of between 16 and 18 members, while the percentage of independent board members is in the range of 70% and 85%, which is also larger than the average percentage of independent board members in non-financial corporations (60%–70%) (de andres et al., 2012). apart from board size, an important structural characteristic is board composition (carteret al., 2003) which represents the relationship between the number of non-executive, independent directors and the total number of directors (aebi et al., 2012; erkens et al., 2012). in order to determine optimal number of independent directors, it is necessary to define primarily the criteria that determine members’ independency. it is considered that a director, as a board member, is connected to a certain bank if he is: (1) a dominant owner; (2) a bank employee; (3) an employee in any company or company branch that is above certain bank on the ownership tree; (4) an employee in other company in which dominant shareholder has at least 10% of voice rights, regardless whether this company is on the same ownership tree; (5) a politician or employee in the government agency, when the dominant stakeholder is government; or (6) a company worker that is in the same country, where dominant stakeholder is from, when dominant stakeholder is a foreign citizen. on the other hand, directors that do not satisfy any of the mentioned criteria, are considered to be independent members (stanĉić et al., 2014). the leadership structure can be defined as the duality of ceo position and chairperson. the key dilemma is whether the positions should be unified or separated, or whether the ceo and chairperson’s roles should be combined in one person or not (babić et al., 2012). in fact, two opposite opinions can be singled out. firstly, the separation of the positions of ceo and chairperson implies the reduction of agency expenses. on the other hand, the unification of the positions is described in terms of the power concentrated in one person’s hands that allows ceo to control the information that is available to the other board members. 60 v. babić, j. nikolić, m. simić 1.2. bank performance the measurement of financial performances of banks is of great significance for both internal and external users, among which are managers, depositors, creditors, investors, employees and regulators, since their expectations and interests are often different. the bank has to reach a short-term maximization of profit, which is often measured by the rate of return on equity (roe), the rate of return on assets (roa) or by the net interest margin (nim). however, as in the case of non-financial corporations, the main objective is long-term profitability, which is usually measured by earnings per share (eps) or by market price per share (mps) (belkhir, 2009; orazalin et al., 2016). most of the studies carried out in emerging countries are focused on the monitoring of traditional accounting measures of bank performances, such as return on assets (roa) and return on equity (roe). furthermore, in order to determine the relation between corporate governance and performances, tobin’s q and other market measures of bank performances are used as relevant indicators. starting from the fact that the capital market in serbia is insufficiently developed and non-efficient, as the information from the market is often unreliable, the problems with calculating mentioned indicators are the main reason for rare use of market performance indicators. due to previous empirical results and limitations, it is necessary to include bank-specific performance indicators, such as the growth of assets, liquidity, and the quality of governance and capital adequacy (capad). respecting the mentioned characteristics of banking sector, the internal methods of measuring performances are developed, such as the analysis of financial ratios, data envelopment analysis (dea) and camels model (desta, 2016). camels model, as one of the most famous models, is based on the evaluation of capital standards, quality of assets, management, earning capacity, liquidity and sensitivity to market risk of bank institutions. the acronym camels is derived on the basis of the name of components that are used as specific financial indicators: capital adequacy, assets quality, management efficiency, earning capacity, liquidity and sensitivity to market risk (dang, 2011; desta, 2016; vunjak et al., 2012). first of all, the implementation of this methodology considers the calculation of corresponding ratio indicators using the data published in the financial reports, such as balance sheet, income statement, and balance of cash flows. on the basis of conducted analysis, interested parties are expected to undertake necessary reactive and proactive measures towards providing bank prosperity as well as the efficiency of banking sector. 1.3. board structure and bank performance in numerous empirical studies, the correlation between board structural characteristics and bank performances is articulated in opposing ways, due to the fact that it is not possible to make a general conclusion on the intensity and direction of identified impact. in addition, the research results in transitional countries have shown bigger heterogeneity. in the case of correlation between board size and bank performance, the results of empirical studies are contradictory. certain researches show that the increase of the number of board members implies more effective board role, i.e. service and control role (jadah & adzis, 2016). moreover, it is confirmed that larger number of board members can have positive influence on the performance of analyzed banks (adams & mehran, 2012; aebi et al., 2012). however, a larger number of board members lead to the problems of coordination and communication within organization (cerbioni & parbonetti, 2007; bushman et al., 2004). board structure and bank performance: evidence from banking serbian sector 61 lipton and lorsch (1992) indicate that the board with more than 10 members can face the problem in expressing opinion and attitudes; that is why the innovation capability is limited. in addition, the process of making decisions in case of large boards is often less efficient, which affects their ability of identifying and exploitation of new business opportunity (bantel & jackson, 1989). consequently, larger number of board members is negatively related to corporate performance (lipton & lorsch, 1992; jensen, 1993; yermack, 1996; eisenberg et al., 1998). according to the above mentioned, the following hypothesis is defined: h1. the board size negatively affects bank performances. the empirical research results related to the effects of board composition on bank performances are mixed. one group of empirical studies is based on the stewardship theory, according to which managers act in the interest of owners, due to which it is desirable for the boards to be composed of large number of internal, executive directors. since board effectiveness is observed through the degree of fulfillment of strategic board role, dominant participation of internal, executive directors make available the large amount of relevant information, knowledge and skills necessary for making strategic decisions (babić et al., 2011). consequently, the assumptions about the number of independent members are different depending on the perceived board role. although, starting from the opinion that independent directors perform effective and objective control of managers which contributes to the reduction of agency costs (borokhovich et al., 1996; singh & davidson, 2003), positive influence of independent board composition on bank performances is supposed (daily &dalton, 1992; shungu et al., 2014; jadah & adzis, 2016). according to the above mentioned, the following hypothesis is defined: h2. the number of independent directors positively affects bank performances. 2. methodology 2.1. research model and variables for the purpose of empirical testing of previous hypothesis, the research model has been developed (figure 1) and both independent and dependent research variables have been defined. fig. 1 research model source: authors 62 v. babić, j. nikolić, m. simić starting from the presented research model, board size measured through the number of directors and board composition, observed through the number of independent directors as the key structural characteristics that determine board effectiveness, represent independent variables. according to the law on banks, the duality of ceo position and chairperson is not possible so the leadership structure is not incorporated in the research model (table 1). table 1 independent variables variables acronym operationalization board size bds total number of board members board composition bdc number of independent directors divided by total number of directors source: authors in order to carry out the analysis of bank performances as dependent variables, the information from the bank financial reports has been collected. pursuant to collected information the appropriate camels indicators have been calculated. for each of the mentioned components of camels models, at least one indicator has been calculated. the review of indicators, and their calculation is given in table 2. table 2 dependent variables camels label variables acronym calculation capital capital reserve ratio capad total capital divided by total assets asset annual asset growth ratio growth (total assets in year 2 – total assets in 1)/total asset in y1 management operating expenses ratio orc/a operating expenses divided by total assets earning return on equity roe earnings after tax divided by total equity of the bank return on assets roa earnings after tax divided by total assets of the bank liquidity total loans ratio liq1 total loans divided by total assets loan to deposit ratio liq2 total loans divided by total deposits sensitivity to market risk market risk sensitivity coefficient smr securities divided by total assets source: orazalin, n., mahmood, m., & jung lee, k. (2016). corporate governance, financial crises and bank performance: lessons from top russian banks. corporate governance: the international journal of business in society, 16(5), 798-814; vunjak, n., davidović, m., & stefanović, m. (2012). uticaj globalne finansijske krize na performanse bankarskog sektora srbije. teme, 36(3), 1279-1298. 2.2. sample empirical research is carried out on the sample of 18 banks in the republic of serbia. the sample size is relevant, bearing in mind frequent change of the financial market structure which results in numerous mergers and acquisitions. consequently, the number of banks that actively operate in the republic of serbia is constantly changing. furthermore, it board structure and bank performance: evidence from banking serbian sector 63 is important to emphasize that the participation of foreign banks in this sector significantly increased in the previous period. based on this view, monitoring board structure and measuring financial bank performance is limited, especially in case of collecting data for longer period of time. since the stated variables are observed in three-year time interval from 2015 to 2017, the total number of observations is 54, which represents good starting basis for implemented pilot testing. pursuant to the provisions of the law on banks, banks are obliged to publish annual statements on business as well, apart from regular financial statements at quarterly and annual level. thus, for the purpose of testing defined hypotheses, the data published in previously mentioned reports are used, while the data on board structure are collected on the basis of information that is collected at the web site of the national bank of serbia. 3. results and discussion the research results are shown via descriptive statistics, correlation matrix and regression panel model. all the descriptive statistics are reported in table 3. on the basis of these results, it can be concluded that the average board size of analyzed banks is approximately 6 members in the observed time period, while the percentage of independent board members is in the interval from 37,1% to 41,2%. as regards the bank performance indicators, the least average value refers to profitability indicators, i.e. in return rate on total assets. the heterogeneity of analyzed variables, identified on the basis of standard deviation, is the lowest in the case of board composition (0,077; 0,079; 0,091; respectively). table 3 descriptive statistics (2015-2017) bds bdc capad growth orc/a roa roe liq1 liq2 smr mean 2015. 6,333 0,409 0,226 0,038 0,050 -0,015 0,025 0,617 0,880 0,156 2016. 6,222 0,412 0,248 0,066 0,050 -0,004 0,017 0,621 0,816 0,177 2017. 6,111 0,371 0,263 0,175 0,043 0,113 0,119 0,634 0,813 0,167 standard deviation 2015. 1,328 0,077 0,149 0,105 0,021 0,067 0,158 0,154 0,311 0,122 2016. 1,555 0,079 0,121 0,097 0,025 0,053 0,178 0,153 0,221 0,140 2017. 1,451 0,091 0,119 0,354 0,019 0,097 0,202 0,136 0,267 0,121 source: authors based on the application of pearson correlation coefficient, the correlation analysis has been carried out. according to the results shown in table 6, it is possible to conclude that between certain variables the significant correlation has been identified. significant values are between 0,259 and 0,423, which imply weak to moderate correlation intensity. the largest correlation intensity is established between board size and coefficient that measures the sensitivity to market risk, while other significant values of pearson coefficient are negative. 64 v. babić, j. nikolić, m. simić table 4 correlation analysis: pearson correlation coefficient 1 2 3 4 5 6 7 8 9 10 1 1 2 0,677 ** 1 3 0,128 0,032 1 4 -0,135 -0,155 0,029 1 5 0,124 0,081 0,272 * -0,059 1 6 -0,067 0,287 * -0,298 * 0,001 -0,308 * 1 7 -0,269 * -0,149 -0,036 0,081 -0,254 0,319 * 1 8 -0,411 ** -0,128 -0,395 ** 0,003 -0,029 0,246 0,406 ** 1 9 -0,368 ** 0,023 * -0,434 ** -0,109 -0,026 0,107 0,302 * 0,876 ** 1 10 0,423 ** 0,150 0,360 ** 0,025 -0,136 -0,074 -0,274 * -0,912 ** -0,851 ** 1 source: authors note: 1bds, 2bdc, 3capad, 4growth, 5orc/a, 6roa, 7roe, 8liq1, 9liq2, 10smr for the purpose of testing defined hypotheses, the regression panel analysis has been carried out. in order to develop adequate regression panel model, as well as to determine whether individual effects in random effects model are fixed or stochastic, hausman’s specification test has been used. since this value is above the level of 0,1, the conclusion is drawn that individual effects are stochastic, according to which the appropriate random-effects model is created. table 5 panel regression analysis (cross-section random effects) variables roa liq1 liq2 smr bds 0.012275 -0.037299 ** -0.100815 *** -0.032872 ** bdc 0.058034 ** 0.022156 0.105507 ** -0.012109 r 2 0.117449 0.086598 0.154116 0.093348 adjusted r 2 0.082839 0.050779 0.120944 0.057793 f-statistic 3.393500 ** 2.417618 * 4.645977 ** 2.625443 * agenda: *** p < 0.01; ** p < 0.05. * p < 0.1. source: authors according to the presented values of  coefficient, that reflects the direction and intensity of the impact of independent on dependent variable, it can be concluded that the analyzed structural board characteristics have the influence on certain bank performances. regarding the influence of board size on bank performances, negative effect on liquidity indicators has been found (liq1, liq2) and sensitivity to market risk (smr). the obtained result is in accordance with the previous empirical studies that were carried out by eisenberg, sundgren and wells (1998), yermack (1996) and staikouras et al. (2007). according to the presented results, the improvement of bank performances can be reached through defining standards that refer to decreasing board size. the conclusion can be drawn that the increase of board size leads to the decrease of board effectiveness and causes problems in communication and coordination which, consequently, limits bank ability to deal with market risks. although most of empirical studies do not confirm significant influence of independent board on bank performances, the results presented in this paper have implied the existence of positive influence of the number of independent board members. in particular, positive significant influence of mentioned structural board characteristic has been confirmed on the board structure and bank performance: evidence from banking serbian sector 65 return of assets (roa), which is in accordance with the results of previous empirical studies, that were carried out by de andres and vallelado (2008) and staikouras et al. (2007). furthermore, similar result was also found in the case of liquidity analysis. thus, board composition represents relevant question in the area of corporate governance in banking sector. in general, it can be highlighted that independent board members are more objective, especially when it comes to control board role. 4. limitations and directions for future research apart from the significant implications of our studies in terms of improving board effectiveness, the carried research has a few limitations. the first limitation refers to the sample size. the data used for the analysis have been obtained on the basis of information that banks publish in their business reports, as well as publically available financial statements at the website of the national bank of serbia. initially, the sample covered 27 banks in total, according to the latest data available at the website of the national bank of serbia. however, in order to create research model, it was necessary to collect data on board structure and performances in time interval from 2015 to 2017. due to the problem of nontransparency of data and noncompliance, as well as to the growing trend of mergers and acquisitions, the sample covered 18 banks that actively operate in the observed period. the second potential limitation refers to the period from 2015 to 2017 comprising 54 bank-year observations. period from 2015 to 2017 may be short, regarding the nature of the observed dependent and independent variables. however, longer period has caused the decrease of the number of banks included in the sample. consequently, the number of observations in regression model would be decreased as well, due to limited data transparency on bank performance in the available reports. the third limitation represents the choice of dependent variables, i.e. bank performance indicators. although the wide specter of bank performance indicators has been incorporated, not all regression models are of adequate validity, due to which only the results that are statistically significant have been presented in the paper. however, from this point of view, the application of camels model has certain advantages. basic advantage is reflected in using specific bank performance indicators, as well as the fact that rare empirical research has been based on the mentioned model, due to which obtained results represent useful framework for future research. possible direction of future research refers to the increase of observation number. larger number of observations refers to the inclusion of other banks within financial sector, as well as the expanding of time period within which the empirical research would be carried out. since human and social capital of board members affects the board effectiveness, the comprehensive research of board effectiveness based on the analysis of behavioral characteristics of board members, as well as their competences should be conducted. 5. conclusions the improvement of the effectiveness of corporate governance mechanisms has an important role not only in financial, but also in the entire economic system of one country. in banking sector, regulatory framework and board of directors are stated as the 66 v. babić, j. nikolić, m. simić main mechanisms of corporate governance. an effective regulatory and institutional framework represents one of the key preconditions of economic growth and improvement of corporate governance mechanisms, especially when it comes to transitional economies. furthermore, pursuant to the provisions of the law on banks, the board of directors is entitled responsibility for bank governance. in order to provide an effective board, it is necessary to identify the factors that determine the board roles, and consequently bank performances, as well. in accordance with the mentioned, two hypotheses have been set out in the paper. the first hypothesis refers to the study of influence of board size on bank performances, measured through camels model indicators. the reported results have shown that in the case of analyzed banks, board size has negative effect to bank performances, such as liquidity and sensitivity to market risk, whereby the mentioned structural characteristic has no significant influence on other observed bank performance indicators. the other hypothesis is set out in order to establish whether there is positive, statistically significant influence of the number of independent directors on the analyzed bank performances. regarding to our findings, it is emphasized that independent board affects positively bank performances, such as profitability and liquidity, while in the case of other bank performance indicators this characteristic has no significant influence. consequently, the hypotheses h1 and h2 are partially accepted. therefore, it is possible to conclude that board structure represents an important determinant of bank performances. however, in the cases when significant influence of this independent variable on the observed dependent ones is not identified, it is necessary to identify the factors which influence optimal capital adequacy, assets quality, as well as the improvement of management efficiency. this is why it is necessary to continue with the research in this area that should include behavioral characteristics of board members as well as the competences of board members. the contribution of the carried research reflects in filling out the identified gap, in order to provide the insight into the factors that determine bank performances. namely, limited empirical studies on the influence of structural characteristics of board on bank performances using camels model. since camels model provides comprehensive insight into the bank performances, the improvement in relation to the previous research is precisely reflected in the manner of measuring bank performances. furthermore, the obtained results can be used for the improvement of corporate governance practice 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(1996). higher market valuation of companies with a small board of directors. journal of financial economics, 40(2), 185-211. struktura upravnog odbora i performanse banaka: evidencija iz bankarskog sektora republike srbije tradicionalna perspektiva, zasnovana na agencijskog teoriji, počiva na pretpostavci da struktura upravnog odbora, kao internog mehanizma korporativnog upravljanja, determiniše njegovu efektivnost, a posledično i finansijske performanse korporacija. veličina upravnog odbora, kompozicija i liderska struktura se izdvajaju kao relevantne varijable strukture odbora. budući da su rezultati prethodnih empirijskih studija neretko oprečni, utvrđivanje međuzavisnosti između strukturnih karakteristika i poslovnih performansi je relevantno istraživačko pitanje, posebno u slučaju bankarskog sektora. kako bi se unapredila efektivnost internih mehanizama korporativnog upravljanja, a posledično, i performansi banaka, glavni cilj istraživanja je identifikacija uticaja veličine i kompozicije upravnog odbora na performanse banaka u republici srbiji, upotrebom camels modela. analizirali smo međuzavisnost koristeći regresioni balansirani panel model, baziran na metodu najmanjih kvadrata, pri čemu je ukupan broj opservacija 54. doprinos rada se ogleda u izvođenju zaključaka o efektima strukture upravnog odbora na finansijske performanse, kao osnove za definisanje preporuka za unapređenje finansijskih performansi u bankarskom sektoru. kljuĉne reĉi: upravni odbor, struktura upravnog odbora, performanse, camels, bankarski sektor, republika srbija facta universitatis series: economics and organization vol. 15, n o 4, 2018, pp. 363 378 https://doi.org/10.22190/fueo1804363d © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper job satisfaction articles comparison upon selected criteria 1 udc 005.32:331.101.32 dragana došenović university of banja luka, faculty of economics, bosnia and herzegovina abstract. although the concept of job satisfaction has been explored and analyzed in numerous studies, it can be noticed that this concept has been studied in various ways. for this reason, the subject of research in this paper is a set of different scientific articles with topic related to job satisfaction. as the basic aim of this paper is to gain insight into the concept of job satisfaction, a research was carried out on a convenience sample of scientific articles. the results show that authors use different approaches when defining, studying and evaluating job satisfaction in their research. as a result, different methodologies, job satisfaction factors and scales designed for the assessment of job satisfaction can be found in existing literature. key words: job satisfaction, job satisfaction factors, the assessment of job satisfaction, job satisfaction scales jel classification: m5, d23, j28 introduction when it comes to management activities, it can be said that human resource management is of great importance for organizational success. human resources have become a significant source of competitiveness and success (garrido et al., 2005) and human resource management has become increasingly important in modern organizations (gustainienė & endriulaitienė, 2009). human resource management is a part of the organizational science which studies all aspects of employment in organizations. it also represents an important managerial received july 05, 2018 / revised october 19, 2018 / accepted october 26, 2018 corresponding author: dragana došenović university of banja luka, faculty of economics, majke jugovića 4, 78000 banja luka, republic of srpska, bosnia and herzegovina e-mail: dragana.dosenovic@ef.unibl.org 364 d. došenović function that has been facing special challenges in recent years due to globalization, rapid technological change, change in demographic structure, etc. (bogićević milikić, 2006). several meanings of this concept can be found in scientific and professional literature, which results in different definitions. according to one of the broadly accepted definitions, human resource management refers to policies, practices and systems that affect the behavior of employees, their attitudes and work performance (noe et al., 2011). therefore, employees, their knowledge, skills, abilities, behaviors and specific relationships are the subject of human resource management in organizations. compared to the narrow economic concept of the manpower the idea that employees should be considered broader originates from the first half of the last century. the thesis that an increase in employee satisfaction increases their efficiency was developed in the 1940s. since then, human resource management has been intensively developing and changing as a scientific discipline. since there is no unique attitude about activities that are part of this function, different classifications of human resource management activities can be found in existing literature. however, most of these definitions include the following activities in the domain of human resources: job analysis, human resource planning, recruitment and selection, training and development, performance evaluation and rewarding, labor relations, health and safety protection, as well as managing the process of employee turnover (bogićević milikić, 2006). organizations are forced to focus on creating added value through human capital in today's business conditions. if employees are adequately managed, they can become a very important source of competitive advantage. in order to achieve organizational goals, it is necessary to create a quality work environment in which employees will be satisfied with their job. when it comes to job satisfaction, it can be said that a single definition of this concept does not exist. in broad terms, job satisfaction refers to the degree to which people love their jobs (spector, 1997), and includes positive or negative attitudes that individuals have toward their work (greenberg, 2011). job satisfaction refers to the combination of cognitive and affective responses to different perceptions of what employees want to receive compared to what they actually receive (cranny et al., 1992). it is actually an attitude that includes certain assumptions and beliefs about job (cognitive component), feelings toward job (affective component), and job evaluation itself (evaluation component). scientists use this concept to show a combination of employees' feelings about different aspects of job, such as: the nature of work itself, the level of salary, opportunities for promotion and satisfaction with associates (schermerhorn et al., 2005). the importance of studying job satisfaction stems from two important reasons. first, job satisfaction is associated with increased productivity and organizational commitment, less absence and fluctuation, as well as increased organizational efficiency (ellickson & logsdon, 2001). benefits that employees receive affect their effort, skills, creativity and productivity (wright & davis, 2003). organizational interest in job satisfaction is also motivated by humanitarian interests or understanding that employees deserve to be treated with respect and have their mental and physical well-being at the maximum level (spector, 1997; ellickson & logsdon, 2001). another important conclusion is that low level of job satisfaction has negative consequences, such as withdrawal, cost increases, profit reduction, and, consequently, customer dissatisfaction (zeffane et al., 2008). dissatisfied workers can develop problematic behaviors that negatively affect their productivity and performance and affect other employees around them (spector, 1997). low level of job satisfaction can be an important job satisfaction articles comparison upon selected criteria 365 indicator of the counterproductive behavior and can lead to behavior such as absenteeism (spector, 1985) and intended fluctuation (spector, 1985; dupre & day, 2007). numerous studies over several decades have tried to determine and classify factors affecting job satisfaction. previous research has identified a number of factors that can be grouped into two categories: (1) demographic factors and (2) environmental factors. demographic factors include personal attributes and employee characteristics such as gender, age, education level, marital status and others, while environmental factors relate to work-related characteristics, such as salaries, promotions, controls, etc. (zeffane, 1994; reiner & zhao, 1999; ellickson & logsdon, 2001). it is said that job satisfaction is one of the most important attitudes that employees have in relation to their job (schneider, 1985). a great number of theoreticians, practitioners and researchers deal with this topic all around the world. they study human resource activities and many other factors that affect job satisfaction among employees. for this reason, this paper is focused on job satisfaction articles, with special focus on comparison upon selected criteria. the subject of this paper is the analysis of scientific articles that study job satisfaction. the main objectives of this type of analysis are (1) to gain a basic insight into the research topic, (2) to discover more details about the research problem, (3) to identify the theoretical framework for the observed problem and (4) to collect information for more complex research that will be carried out in the future (saunders et al., 2009; neuman, 2014). the basic scientific methods used in this paper are: sampling method, content analysis, classification method and comparative method. these methods were selected as the most appropriate methods regarding the subject of research, its theoretical character, as well as the previously stated goals and the purpose of the paper. in addition to the introduction, conclusion and literature, this paper consists of four parts. theoretical framework is given in the introduction of the paper where basic concepts of the research problem are summarized. the first part of the paper refers to methodological basics of conducted analysis, while the second part includes research results. limitations of the research are listed in the third part, while recommendations for the future research are given in the fourth part. basic conclusions are given at the end of the paper. 1. methodology as the purpose of this paper is to obtain a basic insight into the problem of job satisfaction, this paper will analyze several scientific articles, using a convenience sample. this sample is one of the most commonly used samples in the research. it belongs to a group of samples obtained by deliberate choice of researchers. suitability or availability is the basic criterion for selecting units into the sample (battaglia, 2008). a convenience sample can be very useful in surveys. information obtained from this type of sample can be used to discover the way in which the subject of the research is observed, as the initial basis for definition of hypothesis about specific research problems or for identifying shortcomings in research instruments (salkind, 2010). however, due to the fact that a convenience sample belongs to a group of samples that are not based on the probability 366 d. došenović theory, one should keep in mind its basic advantages and disadvantages when using it (daniel, 2012). in order to improve the value of a convenience sample, researchers can pay special attention to the criteria for selecting units in the sample in accordance with the subject of their research (wegner, 2013). for this reason, the criteria used in the selection of articles for the analysis in this paper are also defined: 1) among other factors, the subject of research has to include job satisfaction, 2) job satisfaction should be stated in the theoretical basis of the articles, 3) each article should focus on different research subjects from the same/different countries, 4) the sample should only include articles published in two journals with the thompson-reuters social science citation index: human resource management and human resource management journal. determining the first criterion was motivated by the desire that reviewed articles analyze direct relationship between job satisfaction and other factors in organization, in order to explore possible ways for the study and assessment of job satisfaction. the criterion related to the theoretical basis was derived from the fact that defined research subject should relate to job satisfaction, while the third criterion is defined in order to provide diverse information from countries that have different status in the international economy, which are at different levels of economic development and belong to different cultures. focusing attention on one group of countries cannot provide generalizations regarding given problems (lopez-duarte et al., 2015). the fourth criterion was designed to ensure that only high-quality articles were analyzed, given the rigorous review procedures and the selection that these journals use. since the observed journals are intended for academic and business researchers, theoreticians, consultants and managers involved in human resource issues, they are very suitable for job satisfaction analysis. for this reason, only articles published in the above-mentioned journals will be selected in the sample. the procedure for selecting a sample of articles was done using the google scholar internet browser and internet pages of the listed journals. ten articles that met the four stated criteria were selected. the list of articles selected for the analysis in this paper, as well as their basic bibliographic information is given in table 1. in order to ensure the comparability of the articles and set the basis for the synthesis of their results, several factors have been defined. the factors identified and compared in each article are: 1) methodology and techniques of data collection; 2) subjects of research; 3) response rate; 4) independent variables; 5) dependent variables; 6) controlling variables; 7) description, validity, results and the source of job satisfaction scales; 8) limitations and recommendations for further research. job satisfaction articles comparison upon selected criteria 367 table 1 list of selected articles bibliographic data 1. alfes, k., shantz, a. & van baalen, s. (2016). reducing perceptions of overqualification and its impact on job satisfaction: the dual roles of interpersonal relationships at work. human resource management journal, 26(1), 84-101. 2. brunetto, y., teo, s., shacklock, k. & farr-wharton, r. (2012). emotional intelligence, job satisfaction, well-being and engagement: explaining organizational commitment and turnover intentions in policing. human resource management journal, 22(4), 428-441. 3. buonocore, f. & russo, m. (2013). reducing the effects of work-family conflict on job satisfaction: the kind of commitment matters. human resource management journal, 23(1), 91-108. 4. flickinger, m., allscher, m. & fiedler, m. (2016). the mediating role od leader-member exchange: a study of job satisfaction and turnover intentions in temporary work. human resource management journal, 26(1), 46-62. 5. gittell, j.h., weinberg, d.b., pfefferle, s. & bishop, c. (2008). impact of relational coordination on job satisfaction and quality outcomes: a study of nursing homes. human resource management journal, 18(2), 154-170. 6. holman, d. (2002). employee wellbeing in call centres. human resource management journal, 12(4), 35-50. 7. huang, q. & gamble, j. (2015). social expectations, gender and job satisfaction: front line employees in china’s retail sector. human resource management journal, 25(3), 331-347. 8. holland, p., pyman, a., cooper, b. & teicher, j. (2011). employee voice and job satisfaction in australia: the centrality of direct voice. human resource management, 50(1), 95-111. 9. mayfield, j., mayfield, m. & kopf, j. (1998). the effects of leader motivating language on subordinate performance and satisfaction. human resource management, 37(3), 235-248. 10. baumgartner, m., dwertmann, d., boehm, s. & bruch, h. (2015). job satisfaction of employees with disabilities: the role of perceived structural flexibility. human resource management, 54(2), 323-343. source: author these factors were selected on recommendations about elements that every detailed literature review based on the analysis of previous empirical studies should contain (saunders et al., 2009; bryman, 2012; creswell, 2013). 2. results of the analysis results are presented in three separate sections. the first part deals with the methodological aspects of analyzed articles and includes methodology and techniques of data collection, research subjects and response rates. the second part consists of conceptual aspects of analyzed articles and within it independent, dependent and control variables are identified, while scales for the assessment of job satisfaction are identified and described within the third part. 368 d. došenović 2.1. methodological aspects of analyzed articles a comparative overview of methodological aspects is presented in table 2. table 2 comparative overview of methodological aspects author(s) and year methodology and techniques research subjects response rate alfes, shantz & van baalen, 2016 quantitative, email survey planned sample: 472 workers surveyed: 183 workers employed in 2 organizations in the netherlands 38,77% brunetto, teo, shacklock & farrwharton, 2012 quantitative, survey distributed directly to respondents planned sample: 750 workers surveyed: 193 police officers of the state police departments, australia 26% buonocore & russo, 2013 quantitative, survey distributed directly to respondents planned sample: 197 workers surveyed: 171 nurses working in state hospitals and private clinics located in the campania region, italy 86,8% flickinger, allscher & fiedler, 2016 quantitative, email survey surveyed: 593 workers employed by the employment agency, germany gittell, weinberg, pfefferle & bishop, 2008 quantitative, email survey planned sample: 255 workers surveyed: 252 nursing assistants in 15 nursing homes 99% holman, 2002 qualitativequantitative, email survey, interview planned sample: 705 workers surveyed: 557 customer service representatives employed in 3 different call centers in banks, great britain 79% huang & gamble, 2015 quantitative, email survey planned sample: 2200 workers surveyed: 1838 workers from 22 stores owned by multinational retailers from great britain and japan and local stores in 8 chinese cities 84% holland, pyman, cooper & teicher, 2011 quantitative, telephone and email survey surveyed: 1022 workers who work more than 10 hours a week, australia, mayfield, mayfield & kopf, 1998 quantitative, email survey planned sample: 450 workers surveyed: 164 medical workers (151 nurses and 13 supervisors) employed by a large state-owned health care company located in the southeastern part of the united states 44% baumgartner, dwertmann, boehm & bruch, 2015 quantitative, email survey planned sample: 7530 workers surveyed: 4141 workers employed in 110 companies from different industrial sectors, germany 55% source: author regarding the methodological approach, most studies have a quantitative character while qualitative and mixed qualitative-quantitative studies are rare (holman, 2002). in accordance with the nature of the research, authors use different methodological techniques and job satisfaction articles comparison upon selected criteria 369 instruments, most often using an email survey (alfes et al., 2016; gittell et al., 2008; holman, 2002; huang & gamble, 2015; holland et al., 2011; mayfield et al, 1998; baumgartner et al., 2015; flickinger et al., 2016). in two studies, the survey was distributed directly to respondents (brunetto et al., 2012; buonocore & russo, 2013), while the survey by phone was used once (holland et al., 2011). in addition to the survey, an in-depth interview was used in one study (holman, 2002). research subjects had a different character. job satisfaction was studied in various industrial sectors and countries (flickinger et al., 2016; holland et al., 2011; baumgartner et al., 2015). a number of studies are focused on particular groups of workers such as police (brunetto et al., 2012), medical staff (buonocore & russo, 2013; gittell et al., 2008; mayfield et al., 1998), traders (huang & gamble, 2015) and call center workers (holman, 2002), while on the other hand, some studies are focused exclusively on workers from a particular organization (alfes et al., 2016; mayfield et al., 1998) or workers employed by a particular employment agency (flickinger et al., 2016). the response rate was set as an indicator of the quality of analyzed articles and their research instruments. the response rate ranged from 26% to 99%, depending on the country where the empirical research was conducted. in two studies, the response rate was not indicated (flickinger et al., 2016; holland et al., 2011). when it comes to observed methodological aspects, it can be noticed that the most frequent mentioned research limitations are related to the sample and subjects of the research. thus, the most common limitation is the fact that generalizations are not possible and that further research is required, preferably of longitudinal nature, on larger samples or samples that will emerge from different countries. 2.2. conceptual aspects of analyzed articles a comparative overview of conceptual aspects related to independent, dependent and controlling variables is given in table 3. the first thing that can be noticed from the given table is that different authors use different operationalizations of dependent, independent and controllable variables. the choice of independent variables depends primarily on research objectives, so different authors choose different independent variables in their research. the number of independent variables listed in the previous table illustrates the complexity of the job satisfaction concept. although most authors agree that a number of independent variables (different internal and external factors) must be taken into account when researching job satisfaction, there is a disagreement about the most important factors that should be examined and about the best way for their operationalization. while it is quite justified for different authors to have different approach regarding the way they want to express job satisfaction (through some subjective categories or through some objective categories), in order to obtain a complete picture, the major problem for anyone who analyzes these studies is the absence of standardization in the determinants of job satisfaction. thus, different independent variables were identified and different classifications of factors influencing job satisfaction were found in each of the studies. also, it can be noticed that most authors mainly analyze the influence of various factors on job satisfaction, while a certain number of authors analyze the impact of job satisfaction on certain categories and observes job satisfaction as an independent variable (brunetto et al., 2012; flickinger et al., 2016). 370 d. došenović table 3 a comparative overview of conceptual aspects author(s) and year independent variables dependent variables control variables alfes, shantz & van baalen, 2016 leader – member exchange, team cohesiveness, perceptions of overqualification. job satisfaction. age, working time, contract type, organisation. brunetto, teo, shacklock & farr-wharton, 2012 emotional intelligence, well-being, employee engagement, affective commitment, job satisfaction. turnover intentions. age, gender, buonocore & russo, 2013 time-based conflict, strain-based conflict, behavior-based conflict, affective commitment, normative commitment, continuance commitment. job satisfaction. gender, tenure, presence of dual-earner couples, number of children, family responsibilities, work schedule, position with high level of responsibility, number of working hours per week. flickinger, allscher & fiedler, 2016 type of contract, quality of leader – member exchange, job satisfaction. turnover intentions. volition, age, tenure, decision making, hierarchical level, firm size, industry. gittell, weinberg, pfefferle & bishop, 2008 relational coordination between employees. resident quality of life, job satisfaction. age, work experience, gender. holman, 2002 job design, monitoring, human resource practices, team leader support. anxiety, depression, intrinsic job satisfaction, extrinsic job satisfaction. age, tenure, working time, gender. huang & gamble, 2015 gender, pay, training, working time, workload, interaction with customers. job satisfaction. age, marital status, education, children, ownership, hierarchical level. holland, pyman, cooper & teicher, 2011 employee voice arrangements, direct voice, united voice. job satisfaction. age, gender, organizational size, industry, working time, occupation, gross weekly wage, tenure, union membership. mayfield, mayfield & kopf, 1998 superiors’ use of motivating language, perlocutionary language, illocutionary language, locutionary language. performance, job satisfaction. baumgartner, dwertmann, boehm & bruch, 2015 disability, formalization, centralization. job satisfaction. organization, organizational size, industry, organizational unit, hierarchical level, tenure, education, gender, age. source: author job satisfaction articles comparison upon selected criteria 371 the second observation concerns the dependent variable. in most analyzed articles, job satisfaction is the only one dependent variable, while in some studies authors observe the influence of various factors on job satisfaction and other variables, such as: quality of life (gittell et al., 2008), anxiety and depression (holman, 2002) and performance (mayfield et al., 1998). job satisfaction can sometimes be viewed both as intrinsic and extrinsic satisfaction (holman, 2002). in cases where job satisfaction appears as an independent variable, the authors observed its impact on turnover intentions (brunetto et al., 2012; flickinger et al., 2016). regarding control variables used in the analyzed articles, it can be seen that the influence of age (8 articles), gender (6), type of contract (6), hierarchical level (5), tenure (5), working time (4) and company size (3) is observed in most studies. in a smaller number of studies, the influence of control variables such as: number of children (2), education (2), industry (2), union (2), salary (1), ownership (1), occupation (1), marital status (1), schedule at work (1) and family responsibility (1) is observed. in one study, authors did not use control variables (mayfield et al., 1998). if conceptual aspects are observed, it can be noted that the most frequently mentioned limitation refers to a number of variables, with the recommendation that a greater number of variables should be included in future research, with different authors referring to different types of variables. some of them think that it is necessary to include a larger number of independent variables, others consider necessary to include more dependent variables, while the third advocates for more independent and dependent variables. however, insisting on the inclusion of new variables will not be productive if different measurement instruments continue to be used. 2.3. a comparative overview of the scales used for the assessment of job satisfaction the third part of the analysis refers to a comparative overview of scales used for the assessment of job satisfaction. a comparison of the basic characteristics of used scales was made on the basis of the criteria proposed in literature, which include: a description of the scales, validity, results and source (bearden et al., 2011). the results of the analysis are presented in table 4. when looking at the scales used in analyzed articles, it can be noticed that different authors identify different aspects, factors or determinants of job satisfaction. for this reason, job satisfaction scales are created as scales with one item or as multiple item scales. thus, authors used scales that consist of 36 items related to different job factors (buonocore & russo, 2013), scales with eight or seven items (holman, 2002), six items (huang & gamble, 2015), five items (flickinger et al., 2016, baumgartner et al., 2015), four items (brunetto et al., 2012; mayfield et al., 1998), three items (alfes et al., 2016), as well as single-item scales (gittell et al., 2008; holland et al., 2011). 372 d. došenović table 4 a comparative overview of scales used for the assessment of job satisfaction author(s) and year description of the scale validity result source alfes, shantz & van baalen, 2016 3 items: all in all, i am satisfied with my job. generally, i like working here. when everything is taken into account, i am satisfied with my current job. 7-point likert-type scale: 1 strongly disagree; 7 strongly agree cronbach's alpha 0.91 mean: 6.07 standard deviation: 0.98 takeuchi, r., chen, g. & lepak, d.p. (2009). through the looking glass of a social system. cross-level effects of high-performance work systems on employees’ attitudes. personnel psychology, 62(1), 1–29. brunetto, teo, shacklock & farrwharton, 2012 4 items: i feel that my job is valuable, i think that i do something worthwhile at my job, i think my job is interesting, i think that my job is fulfilling. 6-point likert-type scale: 1 – strongly disagree; 6 – strongly agree. cronbach's alpha 0.89 mean: 4.40 standard deviation: 0.87 johlke, m.c. & duhan, d.f. (2000). supervisor communication practices and service employee job outcomes. journal of service research, 3(2), 154–165. buonocore & russo, 2013 36 items: how satisfied or dissatisfied employees are with a number of work factors, including: salaries, promotions, relationships with colleagues and supervisors, the nature of the work, etc. 6-point likert-type scale: 1 – strongly disagree; 6 – strongly agree. cronbach's alpha 0.84 mean: 2.61 standard deviation: 0.45 spector, p.e. (1985). measurement of human service staff satisfaction: development of the job satisfaction survey. american journal of community psychology, 13(6), 693–713. flickinger, allscher & fiedler, 2016 5 items: work, supervision, pay, promotion, co-workers. 7-point likert-type scale: 1 – disagree strongly; 7 – agree strongly. cronbach's alpha 0.90 mean: 4.62 standard deviation: 1.27 smith, p., kendall, l. & hulin, c. (1969). the measurement of satisfaction in work and retirement, chicago: rand-mcnally. gittell, weinberg, pfefferle & bishop, 2008 1 item: overall, how satisfied are you with your job? 5-point likert-type scale: 1 – very satisfied; 5 – very dissatisfied. authors believe that scales with one item can provide the best global assessment of job satisfaction mean and standard deviation are not mentioned. scarpello, v. & campbell, j.p. (1983). job satisfaction: are the parts all there? personnel psychology, 36(3), 577– 600. job satisfaction articles comparison upon selected criteria 373 holman, 2002 intrinsic job satisfaction 7 items: the extent to which individuals were satisfied with features integral to the work itself. extrinsic job satisfaction 8 items: the extent to which individuals were satisfied with features external to the work itself. 5-point likert-type scale: 1 – not at all; 5 – a great deal. intrinsic job satisfaction cronbach's alpha 0.88 extrinsic job satisfaction cronbach's alpha 0.80 intrinsic job satisfaction: mean: 3.98 standard deviation: 1.13 extrinsic job satisfaction: mean: 4.76 standard deviation: 0.79 warr, p.b., cook, j.d. & wall, t d. (1979). scales for the measurement of some work attitudes and aspects of psychological well-being. journal of occupational psychology, 52(2), 285-294. huang & gamble, 2015 6 items: achievement, initiative, influence, training, salary, job itself. 5-point likert-type scale: 1 – strongly disagree; 5 – strongly agree. cronbach's alpha 0.72 mean: 3.16 standard deviation: 0.487 jones, m., jones, j., latreille, p. & sloane, p. (2009). training, job satisfaction and workplace performance in britain: evidence from wers 2004. labour (committee on canadian labour history), 23(1), 139–175. holland, pyman, cooper & teicher, 2011 1 item: overall, i am satisfied with my job. 5-point likert-type scale: 1 – strongly disagree; 5 – strongly agree. authors believe that scales with one item can provide the best global assessment of job satisfaction mean and standard deviation are not mentioned. saari, l.m. & judge, t.a. (2004). employee attitudes and job satisfaction. human resource management, 43(4), 395–407. spector, p.e. (1997). job satisfaction: application, assessment, cause, and consequences. thousand oaks: sage publications. mayfield, mayfield & kopf, 1998 4 items: how much of the time they feel satisfied with their job, how well they like their job, how they feel about changing their job, how they think they compare with other people. 7-point likert-type scale: 1 – strongly disagree; 7 – strongly agree. cronbach's alpha 0.71 mean: 4.19 standard deviation: 0.84 hoppock, r. (1935). job satisfaction. new york: harper row. baumgartner, dwertmann, boehm & bruch, 2015 5 items: work, coworkers, supervision, promotion, pay. 7-point likert-type scale: 1 – very dissatisfied; 7 – very satisfied. cronbach's alpha 0.82 mean: 5.09 standard deviation: 1.18 smith, p.c., kendall, l.m. & hulin, c.l. (1969). the measurement of satisfaction in work and retirement. chicago: rand mcnally. source: author 374 d. došenović from the previous table, it can be seen that all authors of the analyzed articles consider that likert-type scale should be used for evaluation of defined items. the aim of this type of scale is to examine the attitude of respondents towards the subject of research, which can be ranged from an absolutely positive to an absolutely negative attitude. likerttype scales with seven points are considered as the most suitable for the assessment of job satisfaction (alfes et al., 2016; flickinger et al., 2016; mayfield et al., 1998; baumgartner et al., 2015), as well as five-point scales (gittell et al., 2008; holman, 2002; huang & gamble, 2015; holland et al., 2011), while six-point scales are less represented (brunetto et al., 2012; buonocore & russo, 2013). cronbach's alpha was used to measure the internal conformity and reliability of the data collected in most of the analyzed studies. cronbach's alpha was used as a measure for assessing the degree of non-contradiction between the variables in multiple measurements (carmines & zeller, 1979; devellis, 2003). the calculated reference value of cronbach's alpha in two conducted studies was ≥ 0.90 (alfes et al., 2016; flickinger et al., 2016), and in accordance with defined criteria, job satisfaction scales used in these studies can be assessed as wholes that possess excellent internal consent and reliability. the cronbach's alpha had a value of 0.9 > α ≥ 0.8 in four studies (buonocore & russo, 2013; holman, 2002; baumgartner et al., 2015; brunetto et al., 2012) and the data collected in these studies can be evaluated as good, while the values of the cronbach's alpha in the remaining two studies were 0.8> α ≥ 0.7 (huang & gamble, 2015; mayfield et al., 1998), where the collected data were evaluated as acceptable and reliable. in contrast to the above-mentioned studies with multi-dimensional scales, authors who use scales with one item believe that the direct question can best measure job satisfaction and provide the best global assessment of job satisfaction (gittell et al., 2008; holland et al., 2011). the descriptive statistics from table 4 refer to the mean and the standard deviation. based on the analysis of these results, it can be concluded that the arithmetic mean has a value above the neutral medium in most studies, which means that respondents had a positive attitude towards job satisfaction. a more detailed insight into the respondents' responses could be obtained if the answers of respondents were sorted according to individual attitudes, which is not shown in analyzed articles. the characteristic of all analyzed articles is the replication of scales from other articles and from previous studies. this can be justified by the fact that the scales used in previous research have already been proven as reliable and valid instruments for the assessment of job satisfaction. based on the analysis of the scales used by the authors of the analyzed articles, it can be concluded that the three-item scale (alfes et al., 2016), whose reference value for the cronbach's alpha was 0.91, was the best instrument for the assessment of job satisfaction. also, five-item scales (flickinger et al., 2016; baumgartner et al., 2015) had high reference values for cronbach's alpha. in the first study cronbach's alpha was 0.90, and in the second study it was 0.82. these are seven-point likert-type scales, which can be taken as a recommendation for future research dealing with this subject. however, since other scales used in the analyzed articles had an acceptable or good level of reliability, they can be also used in future research. this conclusion is not surprising, since it was created as a result of the analysis carried out on units selected from quality journals that apply rigorous procedures for selection and reviews of scientific articles. job satisfaction articles comparison upon selected criteria 375 in general, from the basic findings of analyzed articles, it is not possible to derive universally applicable premises that must be followed when modeling job satisfaction. in accordance with different research objectives, research designs, conceptualizations, research subjects and applied measurement instruments, various authors come up with different results, which also leads to differences in their conclusions. however, this conclusion is not limited to the articles analyzed in this paper, and according to the findings of more extensive and more complex literature analyzes, this is characteristic of job satisfaction studies in general. in this sense, there are three basic criticisms directed to the authors dealing with this issue. the first two concern the choice of variables that are studied and the definition of their relationships that have no basis in some previous research, and therefore do not represent replications of previous studies that would lead to generalizations. the third criticism concerns measuring instruments. when using similar variables different authors measure them differently, which makes it more difficult to improve the existing level of knowledge in this field. 3. limitations of the research although several conclusions can be drawn from the results of the conducted research, it is necessary to consider some basic limitations in their interpretation. the first limitation is related to the sample size. this research was conducted on a small sample which includes ten scientific articles. due to the number of previous studies on the job satisfaction concept, it would be useful to include more articles in further research. another limitation is related to the journals from which analyzed articles were selected. although selected journals use rigorous review procedures and selection criteria and publish only high-quality articles, research results and conclusions can be enriched by including articles from various journals. 4. recommendations for the future research based on the results of the analysis, a number of recommendations can be defined. recommendations that should be followed if someone wants to achieve valuable results for theory and practice are: 1) despite a growing number of studies that examine job satisfaction from different aspects, particular attention can be paid to satisfaction factors that would be defined and classified on the basis of unique criteria and individual countries in order to obtain comparative data on job satisfaction; 2) in order to avoid partiality in research, it would be desirable to conduct unified studies of most factors and their influence on job satisfaction, as well as to study the impact of job satisfaction on other factors, which would provide a comprehensive picture of the observed causation; 3) a careful measurement of the investigated phenomenon, replication and aggregation of some of the existing standardized measurement scales, whose reliability and validity has already been examined, could significantly enhance the entire research design of the job satisfaction problem; 376 d. došenović 4) in addition to independent and dependent variables, a greater number of control variables could be included in research due to the complexity of job satisfaction concept and specific role that such variables have in quantitative research design, which would further clarify the investigated relationships. conclusion the subject of this paper was the analysis of scientific articles related to the concept of job satisfaction in order to obtain a basic insight into the given topic, to discover more detailed information about the subject of research and to gather necessary information for the future more complex research of the descriptive-causal character. the articles included in the analysis were selected by a convenience sample and special attention was paid to their methodological and conceptual aspects, as well as to the analysis of scales used to evaluate job satisfaction. based on the results, several basic conclusions can be made. first, regarding the methodological aspects of analyzed articles, it can be noticed that most studies about job satisfaction use a quantitative methodology while qualitative and mixed qualitativequantitative studies are rare. in accordance with the nature of the research, authors use different methodological techniques and instruments, most often using an email survey. when it comes to research subjects, it can be concluded that job satisfaction is being studied in various industrial sectors and countries where most studies are focused on specific groups of workers, workers from a particular organization or workers employed by a particular employment agency. the response rate is quite high in the observed type of research and depends on the country where the empirical research is conducted. second, regarding the conceptual aspects job satisfaction articles, it can be noticed that authors observe job satisfaction in two ways, as an independent or as a dependent variable, where different authors use different operationalizations of dependent, independent and controllable variables in their studies. as a result, numerous causes and consequences of job satisfaction can be found in the existing literature. also, authors usually use a large number of different control variables in their research. finally, when it comes to job satisfaction scales, it can be noticed that different authors identify different aspects, factors or determinants of job satisfaction. for this reason, job satisfaction scales are created as scales with one item or as multiple item scales where most authors consider that likert-type scale should be used for evaluation of defined items. also, characteristic of job satisfaction articles is the replication of scales from previous studies which is justified by the fact that the scales used in previous research have already been proven as reliable and valid instruments for the assessment of job satisfaction. references alfes, k., shantz, a. & van baalen, s. 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(2013). applied business statistics: methods and excel-based applications. claremont, south africa: juta academic. wright, b.e. & davis, b.s. (2003). job satisfaction in the public sector: the role of the work environment. american review of public administration, 33 (1), 70-90. zeffane, r., ibrahim, m.e. & al mehairi, r. (2008). exploring the differential impact of job satisfaction on employee attendance and conduct: the case of a utility company in the united arab emirates. employee relations, 30 (3), 237-250. skale za ocjenjivanje zadovoljstva poslom – analiza odabranih naučnih članaka iako je koncept zadovoljstva poslom istražen i analiziran u brojnim studijama, može se uočiti da je ovaj koncept proučavan na različite načine. upravo iz ovog razloga, predmet istraživanja u ovom radu predstavlja skup različitih naučnih članaka u kojima se analizira zadovoljstvo poslom. kako je osnovni cilj ovog rada sticanje uvida u koncept zadovoljstva poslom, istraživanje je sprovedeno na prigodnom uzorku naučnih članaka. rezultati istraživanja pokazuju da autori u svojim istraživanjima koriste različite pristupe za definisanje, proučavanje i ocenjivanje zadovoljstva poslom. kao rezultat, u postojećoj literaturi mogu se pronaći različite metodologije, faktori zadovoljstva poslom i skale koje su dizajnirane za ocenjivanje nivoa zadovoljstva poslom. ključne reči: zadovoljstvo poslom, faktori zadovoljstva poslom, ocenjivanje zadovoljstva poslom, skale zadovoljstva poslom facta universitatis series: economics and organization vol. 16, n o 2, 2019, pp. 161 169 https://doi.org/10.22190/fueo1902161m © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper analysis of variations in profitability and indebtedness of agricultural companies in ap vojvodina 1 udc 334.7:63(497.11) vera mirović, branimir kalaš, kristina mijić university of novi sad, faculty of economics in subotica, serbia abstract. the measurement of agricultural companies in terms of profitability and indebtedness enables a real determination of the role and position of these companies in the agricultural sector in ap vojvodina. the aim of the paper is to show the presence or absence of significant difference in the performance level of agricultural companies from the aspect of profitability and indebtedness. agricultural companies in ap vojvodina were more profitable and more indebted in the period before 2013 compared to the period after 2013. the results show that there is a significant difference in profitability level of agricultural companies in ap vojvodina between the period before 2013 and after 2013. using the manova test, significant values for return on assets (roa), return on equity (roe) and net income per employee have been identified. on the other hand, results reflect there is no significant difference in the indebtedness level of agricultural companies in ap vojvodina between the period before 2013 and after 2013. key words: agricultural companies, performance, profitability, indebtedness, manova jel classification: c13, q14 1. introduction theoretical background agriculture can be qualified as a specific sector which represents an essential segment in implementing the strategic vision of the serbian economic development (petrovićranđelović et al. 2010). agriculture in the republic of serbia has economic, social and political relevance and has a significant share in making the gross domestic product (daku et al. 2005). it employs a large number of people (kuzman et al. 2017). received january 23, 2019 / accepted march 05, 2019 corresponding author: branimir kalaš university of novi sad, faculty of economics in subotica, segedinski put 9-11, 24000 subotica, serbia e-mail: branimir.kalas@ef.uns.ac.rs 162 v. mirović, b. kalaš, k. mijić the field of agriculture and the continuity and stability of agricultural production have an immeasurable relevance on the development of the entire economy (pjanić et al. 2018). mijić et al. (2016) emphasize the agro-economy sector as the bearer of economic development in serbia. the specificity of business in the agricultural sector is reflected in the seasonal character of activity, the slow capital turnover and high production costs (jakšić et al. 2011). due to the natural prerequisites for growth and development of agricultural production, agricultural companies in ap vojvodina, besides satisfying domestic needs, also carry out business activity through the export of their products. the market conditions, economic crisis, the relatively low consumer power of population impose a constant need for analysis and improvement of business performance of agricultural companies in order to ensure their survival and development on the market (kalaš et al. 2017). the importance of the agricultural sector in ap vojvodina is manifested in the fact that this region includes 35% of the agricultural area of the republic of serbia (andrašić et al. 2018). successful economic business, as well as permanent profit creation, is a requirement of long-term sustainability of agricultural companies (jakšić et al. 2016). profitability shows the earning power and business success of a company (kimmel et al. 2012). asiri (2015) and vučković (2016) determined roa and roe as the most important factors of profitability. jakšić et al. (2016) analyzed the profitability of milk production companies and milk processing companies in serbia for the 2010-2013 period. using the manova test, they identified that there are no significant changes in the level of profitability during the observed period. on the other hand, indebtedness can have a positive or negative effect on company success in terms of profitability. namely, company indebtedness indicates the structure of property resources and their safety from the aspect of financial (in)dependence (mirović et al. 2018). it means that a higher share of own resources makes a wider space and greater financial dependence. however, indebtedness at an optimum level can have a positive influence on company performance. companies need to balance the ratio of profitability and indebtedness and establish an effective nexus between these indicators. in the case of greater indebtedness, račić et al. (2011) noticed that companies are forced to decrease financial leverage that causes a considerable fall in profitability. the subject of research is the performance of agricultural companies in ap vojvodina from 2006 to 2015. the paper includes four segments. the first segment shows theoretical background and similar research about variance analysis of key performance such as profitability, liquidity and indebtedness. after that, there is a trend analysis of the observed indicators of profitability and indebtedness in the ten year period which enables identification of their mean values and standard deviations. the fourth segment of the paper focuses on the multivariate analysis of variance with the aim to determine a potential significance in the profitability and indebtedness level of agricultural companies. 2. descriptive analysis of profitability and indebtedness this segment of the paper reflects the trend of profitability indicators such as return on assets, return on equity, revenue per employee and net income per employee as well as liabilities capital ratio and interest coverage coefficient for the ten year period 2006-2015. analysis of variations in profitability and indebtedness of agricultural companies in ap vojvodina 163 fig. 1 profitability of agricultural companies in ap vojvodina source: author's calculation based on figure 1, the analysis of return on assets (roa) and return on equity (roe) shows an increase from 2006 to 2012 while the observed indicators decreased after that period. agricultural companies recorded the highest value of roa (6.47%) and roe (12.7%) in 2012, while the lowest level of profitability was in 2006 when their values were under 0.5%. fig. 2 revenue and net income per employee of agricultural companies in ap vojvodina source: author's calculation figure 2 shows the value of revenue and net income per employee of agricultural companies in ap vojvodina from 2006 to 2015. 164 v. mirović, b. kalaš, k. mijić there is an increased tendency of revenue per employee and net income per employee from 2006 to 2013 and after that, this indicator declined to the end of the observed period. the highest values of these indicators were recorded in 2013 (revenue per employee) and 2010 (net income per employee). on the other hand, the minimum values of revenue per employee and net income per employee were recorded at the beginning of the analyzed period. fig. 3 indebtedness of agricultural companies in ap vojvodina source: author's calculation after profitability analysis of agricultural companies in ap vojvodina, figure 3 shows their indebtedness from the aspect of liabilities and capital ratio and interest coverage coefficient. at the beginning of the analyzed period, indicators show increase until 2008, while their values were lower in 2009. after that, the maximum value of liabilities and capital ratio (1.98) was recorded, while in 2011 interest coverage coefficient had the greatest value of 7.97. looking at the last three years, the average values of these indicators were 1.39 and 6.1, where agricultural companies achieved less indebtedness in the last year compared to the previous year. it means the declined value of liabilities and capital ratio and increased value of interest coverage coefficient of these companies in the analyzed period. 3. methodology the aim of this paper is to find out a potentially significant difference in the profitability and indebtedness level of agricultural companies in ap vojvodina. the authors used return on assets, return on equity, revenue per employee and net income per employee as main profitability indicators, as well as liabilities and capital ratio and interest coverage coefficient in terms of indebtedness. analysis of variations in profitability and indebtedness of agricultural companies in ap vojvodina 165 table 1 review of observed variables variable notation calculation unit return on assets roa net income/total assets % return on equity roe net income/capital % revenue per employee ipe sales revenue/number of employees % net income per employee nrpe net income/number of employees % liabilities and capital ratio lcr total liabilities/capital % interest coverage coefficient icc operating income/interest expense % source: authors the analysis of variation in the performance of agricultural companies should indicate if there are significant fluctuations in profitability and indebtedness level that the companies achieved in the observed period. considering that more than one indicator describe profitability and indebtedness and to investigate the difference over the period, research includes a multivariate analysis of variance or variance analysis with more factors. 4. results this segment provides descriptive information for the observed variables, as well as a multivariate analysis of variance in order to identify a potentially significant difference in profitability and indebtedness level of agricultural companies. table 2 descriptive statistics of profitability variable period mean value standard deviation roa before 2013 0,052 0,120 after 2013 0,026 0,064 total 0,039 0,097 roe before 2013 0,110 0,138 after 2013 0,062 0,071 total 0,086 0,113 revenue per employee before 2013 12.646,050 21.972,565 after 2013 10.220,640 9.155,874 total 11.452,90 16.937,281 net income per employee before 2013 1.076,84 2.741,611 after 2013 445,62 1.357,285 total 766.32 2.192.330 source: author's calculation the results of profitability in the period before and after 2013 indicate that agricultural companies achieved better performance before 2013. for example, the average roa was 5.2% in the first period while in the period after 2013 it was 2.6%. similarly, agricultural companies reached a higher level of roe before 2013, when it was 11%, while after 2013, the value of this indicator declined to 6.2%. mean values of roa and roe are 3.9% and 8.6% where the standard deviation is higher at the second indicator which implies a greater 166 v. mirović, b. kalaš, k. mijić difference between the minimum and the maximum value of roe. further, revenue and net income per employee was higher before 2013, whereas these variables decreased in the next period by 2,425,410 rsd and 631,22 rsd. table 3 multivariate analysis results profitability effect value f hypothesis df error df sig. period pillai's trace 0.057 3.659 4.000 243.000 0.006 wilks' lambda 0.943 3.659 4.000 243.000 0.006 hotelling's trace 0.060 3.659 4.000 243.000 0.006 roy's largest root 0.060 3.659 4.000 243.000 0.006 source: author's calculation considering that obtained value of pillai's trace 0.006 is lower than 0.05, it can be concluded that there is a significant difference in the profitability level of agricultural companies in ap vojvodina between the periods before and after 2013. table 4 test of between-subject effects for profitability source profitability type iii sum of squares df f sig. period roa 0.043 1 4.522 0.034 roe 0.144 1 11.677 0.001 revenue per employee 364,627,045.838 1 1.272 0.260 net income per employee 24,696,670.321 1 5.226 0.023 source: author's calculation the obtained significance results for roa, roe and net income per employee are less than 0.05 which means that there is a significant difference in these indicators realized by agricultural companies in ap vojvodina in the period before and after 2013. on the other hand, variations of income per employee are not significant in the analyzed period. as a cause of the resulting changes in the profitability level, it can also be requested in external factors or changes in the legal regulations and criteria for the classification of companies by size starting from 2013. this significantly influenced the change in company size and transition of a certain number of companies from the category of large to medium-sized companies as well as medium-sized to small companies. the decrease in the number of large and medium-sized companies also involves spilling activity and success of this companies group into a group of micro and small agricultural companies. table 5 descriptive statistics of indebtedness variable period mean value standard deviation liabilities and capital ratio before 2013 1.83 2.899 after 2013 1.45 2.012 total 1.64 2.502 interest coverage coefficient before 2013 5.360 26.278 after 2013 9.498 42.059 total 7.404 34.965 source: author's calculation analysis of variations in profitability and indebtedness of agricultural companies in ap vojvodina 167 the results of indebtedness in the period before and after 2013 show that agricultural companies had a higher value of liabilities and capital ratio before 2013. the mean value of this indicator was 1.83 which is higher by 0.38 compared to the period after 2013. on the other hand, average interest coverage coefficient was 9.498 after 2013 which is higher by 4.138 compared to the period before 2013. standard deviation is higher at interest coverage coefficient which means there is a greater difference between the minimum and the maximum value of this indicator. table 6 multivariate analysis results indebtedness effect value f hypothesis df error df sig. period pillai's trace 0.008 1.013 2.000 246.000 0.365 wilks' lambda 0.992 1.013 2.000 246.000 0.365 hotelling's trace 0.008 1.013 2.000 246.000 0.365 roy's largest root 0.008 1.013 2.000 246.000 0.365 source: author's calculation bearing in mind that obtained value of pillai's trace 0.365 is higher than 0.05, it can be noticed that there is no significant difference in the indebtedness level of agricultural companies in ap vojvodina between the periods before and after 2013. table 7 test of between-subject effects for indebtedness source debt type iii sum of squares df f sig. period liabilities and capital ratio 8.681 1 1.390 0.240 interest coverage coefficient 1,065.991 1 0.871 0.351 source: author's calculation the results in table 7 show that significance level of liabilities and capital ratio and interest coverage coefficient is above 0.05 which implies that there are no significant differences in the indebtedness level of agricultural companies in ap vojvodina in the period before and after 2013. 5. conclusion in order to test the stability in the level of agricultural companies’ performance in ap vojvodina, the paper has tested potential significant variations in the level of profitability and indebtedness of these companies. research results show that agricultural companies were more profitable and more indebted in the period before 2013 compared to the period after 2013. furthermore, it has been determined that there is a significant difference in profitability level of agricultural companies in ap vojvodina between the period 2013 and after 2013. precisely, the obtained significance results are identified for roa, roe and net income per employee, which values were less than 0.05 which implies that there is a significant difference in these indicators realized by agricultural companies in ap vojvodina in the analyzed period. since 2013, there has been a change in the classification 168 v. mirović, b. kalaš, k. mijić of companies by size which implies a decrease in the number of medium-sized and large companies and increase in the number of micro and small companies. according to this, part of income and result that were achieved by medium-sized and large agricultural companies by 2013 has spilt into income and result of micro and small companies since 2013. on the other hand, the results of the manova show that there is no significant difference in indebtedness of agricultural companies in ap vojvodina between the period before 2013 and after 2013. acknowledgement: the paper is a result of work on the project "sustainability and improvement of agricultural companies performance in ap vojvodina" short-term project of special interest for sustainable development in ap vojvodina in 2017. references andrašić, j., mijić, k., mirović, v. & kalaš, b. (2018). the modelling factors of agricultural companies performances. custos e@gronegocio on line, 14 (4), 223-240. asiri, b. (2015). how investors perceive financial ratios at different growth opportunities and financial leverages. journal of business studies quarterly, 6 (3), 1-12. daku, l., norton, g., taylor, d. & qenani-petrela, e. (2005). agricultural extension in south-eastern europe: issues of transition and sustainability. the journal of agricultural education and extension, 11 (1-4), 49-61. jakšić, d., vuković, b. & mijić, k. (2011). analysis of the financial position of agricultural companies in the republic of serbia. economics of agriculture, 58 (1), 81-90. jakšić, d., mijić, k., zekić, s. & poljašević, j. (2015). comparative profitability analysis of milk production to milk processing companies in serbia. custos e@gronegocio on line, 11 (3), 206-226. jakšić, d., ristić, m., mijić, k. & zekić, s. 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(2016). causes of different profitability of agricultural sector. economics of agriculture, 63 (1), 123-141. analysis of variations in profitability and indebtedness of agricultural companies in ap vojvodina 169 analiza varijacija u profitabilnosti i zaduženosti poljoprivrednih preduzeća u ap vojvodini merenje poljoprivrednih preduzeća u smislu profitabilnosti i zaduženosti omogućava realno utvrđivanje uloge i pozicije ovih preduzeća u poljoprivrednom sektoru ap vojvodine. cilj ovog rada je da prikaže prisustvo ili odsustvo značajne razlike u nivou performansi poljoprivrednih preduzeća sa aspekta profitabilnosti i zaduženosti. poljoprivredna preduzeća u ap vojvodini bila su profitabilnija i zaduženija u periodu pre 2013. godine u odnosu na period nakon 2013. godine. rezultati pokazuju da postoji značajna razlika u nivou profitaibilnosti poljoprivrednih preduzeća u ap vojvodini između perioda pre i posle 2013. godine. koristeći manova test, utvrđena je značajnost kod povrata na imovinu, povrata na kapitala i neto rezultata po zaposlenom. s druge strane, rezultati pokazuju da ne postoji značajna razlika u nivou zaduženosti poljoprivrednih preduzeća u ap vojvodini između perioda pre i posle 2013. godine. ključne reči: poljoprivredna preduzeća, performanse, profitabilnost, zaduženost, manova plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 3, 2014, pp. 261 279 multi-criteria methods and models for decision making in public procurement  udc 658.71 ivana veselinović university of niš, faculty of economics, niš, serbia abstract. selection of the best supplier in the public procurement process is a typical example of a multi-criteria decision making problem. the purpose of this paper is to present possible approaches for weights determination in order to facilitate decision making in the public procurement process. considering the fact that criteria weights can affect the final ranking of the alternatives it is very important to access the process of weights assigning with seriousness and responsibility. adequately estimated weights reduce the possibility of abuse and fraud in the public procurement system. determination of weights is done based on a subjective approach (analytic hierarchy process). key words: supplier selection, analytic hierarchy process, multi-criteria decision making, public procurement, criteria weights. introduction one of the main features of modern business is the need to make a large number of decisions that are depending on a number of different criteria. the process of public procurement involves selection of the best supplier in the public procurement. one of the most important questions for local and national governments is providing public facilities for their citizens in the time and in the amount they require. on the other hand, there is a question of choosing the right provider of those facilities, given the fact that there are a lot of private firms that are willing to offer their services. procurer faces with the situation which demands that he makes a compromise between the available resources and the quality of required goods or services. therefore, procurer usually considers only the price of the required goods and services, without paying any attention on the other aspects of the subject of procurement. however, selection of the offer based only on the criteria of received september 9, 2014 / accepted december 17, 2014 corresponding author: ivana veselinović, phd. student faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: ivana.veselinovic@eknfak.ni.ac.rs 262 i. veselinović the lowest price is not always the best possible solution, there are a lot of other criteria that should be taken into consideration. the quality of this process affects on the final efficiency of the organization. application of multi-attribute decision making methods can be considered as a means to support decision making in public procurement. the question of weights determination in public procurement is very important. procurer can favor a certain bidder by giving a high weight to a criterion that only that competitor can satisfy. having in mind that public procurements are financed by the money of the tax payers that kind of situation can lead to unsatisfactory choice which will not fulfill the requires of the citizens. this is why the application of scientific methods is important in the weight determination process in public procurements. the basic premise of this paper is that the choice of the best offer is difficult in conditions where there are a number of criteria that can be used to assess them. the use of exact scientific methods for determination of the relative significance of each of the criteria and their use for ranking the offers can facilitate the decision making process. this paper will first emphasized the importance of the public procurement system, a brief overview of legislation in this area and the potential for misuse of public procurement will be presented. furthermore we will explain the basic concepts of multi-criteria decision making and the way of forming the multi-criteria model. one of the key problems of multi-criteria decision making is to determine the relative significance or weights of different criteria. the process of determining the relative significance of attributes consists in defining and assigning weighting factor to each individual criterion. then on an empirical example the calculation of weights using the ahp method as the subjective methods for determining the value of weights is shown. the subject of the analysis will be public procurement carried out by local authorities, and the ultimate goal is to determine relevant criteria and weights for this type of procurement. the main objective of this paper is to show the importance of the procurement process for the organization and the possibilities and advantages of multi-criteria analysis methods for the selection of the best offer. 1. background in the contemporary business conditions the selection of the best supplier becomes the problem from whose solution depend the business performance. adequately organized tender procedure should simplify the selection of the best supplier. the organization of public procurement procedure and the selection of the supplier are prescribed by the law on public procurement. since the private sector does not have its own rules, the entities in the private sector also apply the guidelines given by the law on public procurement. the problem of supplier selection has multi-criteria nature since it is characterized with number of criteria that should be examined. therefore, it has been a subject of many different papers, books and case studies. a lot of authors have been dealing with the problem of public procurement. the main problem of procurement selection is related to objectivity of the selection process. hence, the application of multi-attribute decision making methods is proposed. cheung et al (2001) propose the use of an analytical hierarchy process for procurement selection. they have developed a selection method that uses multi-attribute utility technology and multi-criteria methods and models for decision making in public procurement 263 the analytical hierarchy process. application of a model for supplier evaluation based on the analytical hierarchy process can also be found in [11]. haq and kannan (2006) suggest a structured model for evaluating vendor selection using the analytical hierarchy process and fuzzy analytical hierarchy process. according to [20] fuzzy analytic hierarchy process can be used in selecting the best supplier firm, and it can satisfy the determined criteria to the greatest extent. benyoucef and canbolat (2007) propose the use of fuzzy ahp-based supplier selection, while hsieha et al (2004) suggest fuzzy multi-criteria decision making approach for planning and design tenders selection. contractor selection can be also performed by using the analytic network process [6]. however, great weakness of every model for procurement selection is disagreement among the experts about the importance of the criteria. chan et al (2001) present the possibility of application of delphi method in selection of procurement. according to them, the application of delphi method leads to an objective opinion. vendor selection can also be performed by integrated fuzzy multi-criteria decision making method [36]. dulmin and mininno (2003) suggest the use of a multi-criteria decision aid method for supplier selection. other authors propose the use of outranking methods in support of supplier selection [12]. they show that an outranking approach can be applied as a decision making tool for initial purchasing decisions. de boer, labrob and morlacchi (2001) give an extended review of decision methods for supplier selection support. other authors propose the use of topsis method combined with intuitionistic fuzzy set in selection of an appropriate supplier [5]. few authors have shown that application of mathematical techniques (such as multi-objective programming or goal programming) is suitable for the solution of this decision problem [38]. since these mathematical techniques have problems in inclusion of qualitative factors which are very important in supplier selection ghodsypour and o'brien (1998) suggest an integration of the analytical hierarchy process and linear programming. 2. public procurement definition and importance the public procurement system is an area of public finances, which attracts a lot of attention of contemporary society. through the effective functioning of this system fair and efficient allocation of public resources is carried out and the optimal quantity of goods is financed by public funds. it is necessary to have an adequate legal framework which will act as a prevention and which will inhibit the occurrence of corruption mechanisms. according to the law on public procurement of the republic of serbia, which came into force on january 6, 2013 and is applicable from april 1, 2013, the term public procurement is defined as the procurement of goods, services or works by the purchaser in the manner and under the conditions prescribed by this law. bearing in mind that a prerequisite for the use of eu pre-accession funds, and other forms of international assistance is the existence of a regulated public procurement system, which includes effective monitoring and control of the probity of the public procurement system, it can be concluded that international aspects of public procurement is also very important. 264 i. veselinović free competition, legal certainty and transparency in public procurements reduce overall business risk in republic of serbia, making it more attractive for foreign investors and companies, which ultimately have an impact on the dynamics of its economic development. public procurements, through which the state determines what shall be bought, how and at what cost, are the key instrument through which the government achieve some of its strategic objectives, such as economic development, stimulation of employment and others [30]. for the achievement of this strategic role of public procurements, it is essential that the public procurement system is successful in carrying out its functions. 2.1. the role of the state in the public procurement system regulation the only way possible to ensure achievement of objectives stated in the law and other regulations relating to public procurements is an economical and efficient use of public funds, which will result in prevention of corruption in public procurements. republic of serbia until the 2002 did not have a law which has regulated public procurements area uniquely and comprehensively for all supplies made by public authorities and organizations, institutions and public companies. far-reaching consequences of such a situation where the procurement of goods whose technology was outdated, and largely obsolete in developed countries, lack of interest of quality foreign bidders to offer their products and services in these circumstances, due to the lack of precise rules that would ensure healthy competition, and equality of all bidders and public in the process of choosing the best among them. in order to eliminate the negative consequences that may arise due to inadequate regulation of public procurements, the republic of serbia in may 2002 passed the first law on public procurement (published in the official gazette of the republic of serbia, no. 39/02) after more than a year of implementation of this law certain deficiencies were identified in practice which led to dysfunction of purchasers, due to their commitment to carry out public procurement procedure under strictly defined rules even in the cases where that was not justified. in this regard, in the 2004 the law on amendments and supplements to the law on public procurement was passed (published in the official gazette of the republic of serbia, no. 55/04). with these changes, basic concept of the law was not violated. according to the first empirical indicators of long-term application of the law on public procurement proper and consistent application of the basic principles underlying the implementation of public procurement was not fully ensured. to improve the regulation of the public procurement system, a new law was adopted on december 2008 (published in the official gazette of the republic of serbia, no. 116). further improvement in this area has led to the adoption of the new public procurement law (published in the official gazette of the republic of serbia, no. 124/2012) the goal of the normative regulation of an area is not to limit the area and to stop its development, but to provide a legislative framework for it to develop simultaneously with the development of these areas in neighboring countries and in other countries of democratic orientation. only good legislative framework can provide unhindered exchange of goods and services, development and networking of the markets, the inflow of foreign capital, improvement of economic relations with other countries and the improvement of economic, and therefore the overall development of our society. multi-criteria methods and models for decision making in public procurement 265 2.2. corruption mechanisms according to the corruption perception index (cpi), published by the international non-governmental organization "transparency international", republic of serbia in the 2013 was located at 72nd place out of 177 countries. as one of the main generators of corruption, the same report states the area of public procurement. corruption in public procurement causes a loss of public funds, and also affects that the acquired goods, services and works do not suit the needs of the customer regarding to their characteristics, quality and delivery times. inadequately implemented public procurement can enlarge the costs of purchaser on the one hand, while on the other hand, the quality of services provided to the citizens can be lower than expected. various abuses may appear within the planning, implementation of the public procurement and realization of the contract. in this sense, different corruption mechanisms can be identified [37]:  purchase of unnecessary items (in content, quantity or quality)  deliberate determination of unrealistic estimated value  illicit fragmentation of procurement in order to apply the procedure of procurement of low value  the formation of the procurement subject so that it can be provided only by a particular bidder  frequent and unjustified use of exceptions  conflict of interest  discriminatory conditions for the participation of bidders  discriminatory technical specifications  discriminatory criteria for the selection of the best bid 3. methods and models of multi-criteria decision analysis the problem of making adequate decisions is the essence of every business and it affects the success and longevity of the business. the decision implies a choice between several different alternatives. in situations where the decision maker is faced with a choice between alternatives that can be evaluated on the basis of a single criterion issue boils down to a simple choice of alternative that is consistent with the objectives of the decision makers. however, in a situation where the decision maker is faced with the problem of choosing between different alternatives which are evaluated based on multiple criteria decision maker cannot make a simple comparison of alternatives. in order to perform the best choice the application of multi-criteria decision making is necessary. 3.1. basic concepts of multi-criteria decision making and the formulation of multi-criteria model multi-criteria decision making refers to the determination of the best alternative in the conditions where there is a larger number of, usually, mutually conflicting criteria. the real problems have some common characteristics, namely [10]:  a large number of criteria  conflict among the criteria 266 i. veselinović  not comparable units of measurement  projection or selection. solutions of this type of problem are either projection of the best action (alternative) or a selection of the best action from a set of predefined finite action. methods of multi-criteria analysis are focused on the problem of choosing between one of m alternatives ai (i = 1, 2, ..., m) based on the n criteria xj (j = 1, 2, ..., n). each of the alternatives is the vector ai= (xi1, xi2, ..., xij, ..., xim). a common way of representing the problem of multi-criteria analysis is matrix form [18]. alternatives in the model form set with a finite number of elements. alternatives should be tested, evaluated, priorities should be established, and finally a choice should be made. the criteria in the model are represented by the corresponding function, and their importance is shown by the corresponding weights. depending on the type of the extreme value of the criterion function, there are two types of criteria. the first group of criteria consists of those criteria where the interest of decision makers is to achieve the maximum value of the criterion function. the second group includes criteria where the interest of decision makers is to achieve the minimum value of the criterion function. the importance of the criteria in the model directly depends on the preferences of decision makers, more precisely, of the weights which are assigned to a specific criterion by the decision maker. attributes are the relevant characteristics of each of the alternatives and they represent the means for evaluating achieved level of each of the criteria. 3.2. methods of multi-criteria analysis multi-criteria analysis methods are suitable for solving a large number of real problems of a different nature. some of the most popular methods used for troubleshooting multi attribute decision making include the analytic hierarchy process (ahp) method, electre method, promethee method, topsis method, the simple additive weighting (saw) and many others. examples of practical applications of these methods in the field of quantitative finance are given in table 1-4 [28]. categorization was done according to the data which zopounidis (1999) introduced in his work "multicriteria decision aid in financial management." table 1 application of multi-criteria analysis methods for the assessment of credit risk and the risk of bankruptcy approach method study multi-attribute utility theory ahp srinivasan and kim (1987) srinivasan and ruparel (1990) jablonsky (1993) comparison of alternatives electre dimitras et al. (1995) bergeron et al. (1996) khalil et al. (2000) multi-criteria methods and models for decision making in public procurement 267 table 2 application of multi-criteria analysis methods in the portfolio selection and portfolio management approach method study multi-attribute utility theory ahp saaty et al. (1980) comparison of alternatives electre martel et al. (1988, 1991) szala (1990) khoury et al. (1993) hurson and zopounidis (1995, 1997) hurson and ricci (1998) comparison of alternatives promethee khoury and martel (1990) martel et al. (1991) hababou and martel (1998) table 3 application of multi-criteria analysis method for assessing corporate performance approach method study multi-attribute utility theory ahp lee et al. (1995) babic and plazibat (1998) comparison of alternatives electre promethee colson and mbangala (1998) mareschal and mertens (1990, 1992, 1993) mareschal and brans (1991) pardalos et al. (1997) babic and plazibat (1998) colson and mbangala (1998) zmitri et al. (1998) baourakis et al. (2002) table 4 application of multi-criteria analysis method for investment assessment approach method study multi-attribute utility theory ahp kivijarvi and tuominen (1992) comparison of alternatives electre danila (1980) buchanan et al. (1999) comparison of alternatives promethee ribarovic and mladineo (1987) vranes et al. (1996) examples of practical applications of topsis method are given in table 5. categorization was done according to the data which behzadian et al. (2012) introduced in their work “a stateof-art survey of topsis applications”. 268 i. veselinović table 5 application of topsis method area of application study supply chain management and logistics alimoradi, yussuf, and zulkifli (2011) cheng, ye, and yang (2009) yang, bonsall, and wang (2011) awasthi, chauhan, and omrani (2011) design, construction and manufacturing athanasopoulos, riba, and athanasopoulou (2009) chang and chen (2010) lu, yang, and wang (2011) li et al. (2009) marketing khademi-zare, zarei, sadeghieh, and saleh owlia (2010) secme et al. (2009) yu, guo, guo, and huang (2011) human resources management boran et al. (2011) chen, li, and liu (2011) wang, liu, and zhang (2005) health and safety ekmekçioglu, kaya, and kahraman (2010) krohling and campanharo (2011) wang, fan, and wang (2010) energetics azzam and mousa (2010) opricovic and tzeng (2007) yan et al. (2011) water management srđevic, medeiros, and faria (2004) dai et al. (2010) afshar et al. (2011) simple additive weighting method has a wide range of applications. most of the composite indicators are calculated by applying this method (e.g., gci, the global competitiveness index). some well-known examples of the application of simple additive weighting method involve application of saw method in the selection of staff [1], then for the selection of the best location of health facilities [21], as well as the application of saw method in choosing the best location of factory plant [8]. 4. significance of weights many methods for solving multi-attribute decision making problems require a clearly defined and expressed weights. however, in practice it is often difficult to determine the relative importance of the criteria, given the fact that the weights do not have clear economic significance, but they influence on the final result. not all attributes have equal importance. the role of the weights is to reflect the relative importance of each of the attributes in relation to other attributes. one of the key problems of multi-criteria decision making is the determination of the relative significance of various criteria. the process of determining the relative significance of the attribute consists in defining and assigning a weight to each individual criterion. particular weight should be as accurate as possible in order to show the contribution of each criterion to the overall result. assigning weights in multi-criteria decision making is a critical phase of the entire multi-criteria methods and models for decision making in public procurement 269 decision making process. it is clear that the obtained result depends on the relative significance which has been assigned to each of the criteria. therefore, evaluation and awarding of weights plays a key role in the multi-attribute decision making process weights should be in accordance with the purpose of analysis. further, the weights themselves are useful information for those who control the implementation of a specific project which is evaluated using the multi-attribute decision making methods, since they quantitatively show preferences of decision makers. one example may be the introduction of the malcolm baldrige national quality award in the united states. this award was introduced in order to stimulate american companies to improve quality and productivity. the relative importance of customer satisfaction is much higher than the weights of the other categories, which reflect the orientation of the ministry of trade to consumers [17]. 5. approaches to the weights determination the impact of a particular criterion cj (j = 1,..., n) on the final decision may have a different intensity, so it is necessary to determine the weights of each criterion, wj. there are several approaches for determining the relative significance of the attribute. regardless of the applied approach, the value of the weights must be normalized, i.e., the sum of weight coefficients must be equal to one. in this regard, there are three approaches for determination of the relative significance of attributes: 1) the subjective approach 2) the objective approach 3) the combined approach, which combines the two previous approaches a) the subjective approach to the weights determination subjective methods for determining the weights are based on the evaluation of experts. their experience and knowledge are the most valuable information on contemplated criteria. weights obtained from the subjective approach reflect the subjective judgment or intuition of the decision maker. therefore, the results obtained by using weights established by this approach can be affected by the lack of knowledge or experience of the decision maker. among the most famous subjective approaches are: 1) the delphi method 2) the analytic hierarchy process method (ahp method) 3) additive normalization method 1) delphi method delphi method is one of the basic methods of forecasting and is the best known and most widely used method of expert evaluation. with this method direct discussion and confrontation of people and opinions is avoided, and that was something that made the classical method of obtaining the joint prediction from the expert group on the open meeting biased. the starting point of the method is the definition of the problem for which the forecast is required. after defining the problem, formation a group of experts who will participate 270 i. veselinović in the forecasting is the next step. contacts with experts are carried out through the series of questionnaires. through questionnaires forecasts and all the necessary information are required from them, while the anonymity of the experts and the obtained forecast is guaranteed. the first series of questionnaires which is being submitted to experts contain the necessary information, and they are asked to give their prediction that must be supported by appropriate arguments. based on the obtained forecast, average forecast is being calculated, which represents the average of the individual forecasts, and also forecast variation around the mean value is determined, which is a measure of forecast accuracy. the second series of questionnaires sent to experts contain calculated average forecast, a measure of precision of forecasts and extreme forecasts with their reasons. experts are then asked to reconsider their initial forecast, to do the correction if they want and to provide an opinion on the extreme forecasts, together with appropriate arguments. for processing the results table 6 is used [24]. table 6 table for processing the results obtained by delphi method criteria experts mean value standard deviation coefficient of variation e1 e2 ... en c1 c2 ... cn the process is being repeated until the mean value of the i+1 st circle does not show a slight deviation from the mean values of weight obtained in i th circle (usually no more than 5 rounds) or until the mean value of the coefficient of variation drops to a satisfactory level [24]. 2) the analytic hierarchy process method this method was developed by thomas saaty in the early seventies of the last century. ahp is a tool in the analysis of decision making, created in order to assist decision makers in solving complex problems involving a larger number of decision makers and a number of criteria. ahp is based on the concept of balance, which is used to determine the relative significance of the overall set of attributes, activities or criteria, and applies to analyzed decision problem [10]. “ahp allows the decision-maker to structure complicated problems in the form of a decision hierarchy” [2]. the hierarchy is structured in three levels: criteria, alternatives and goals. bearing that in mind, the process starts from the lowest level in the hierarchy, and therefore the first step focuses on determination of relative importance of criteria. main objective is to determine how much each of the criteria contributes to the goal. next step consists in measuring the level of achievement of each criterion for alternatives. finally, in the third step, the significance of the alternatives for the goal can be determined. the relative importance of alternatives demonstrates the relative importance of the criteria in achieving the goal of the hierarchy [23]. multi-criteria methods and models for decision making in public procurement 271 determination of criteria weights is based on using pair-wise comparison of the criteria and calculation of weights by using a specific method of prioritization. the decision maker compares each criterion with the other and determines the level of preference for each pair of criteria. the process of creating the model requires four stages [18]: 1. problem structuring 2. data collection 3. evaluation of the weights 4. determination of the problem solution in the first stage the decomposition of decision making problem is carried out into a series of a hierarchy, where each level represents a smaller number of comparable attributes. in other words, the problem is viewed as a hierarchy where at the top is the goal of the problem, while the lower levels consist of attributes on the basis of which decisions are made. the lowest hierarchical level is composed of the range of alternatives from which the best is selected, i.e. m alternatives whose comparison is performed. the second phase of the ahp method involves collecting data and their measurement. then, the comparison of the two pairs of attribute at a given level of the hierarchy, relative to an attribute of the higher level is performed. the essence of the comparisons by couples is to determine which of the two observed attributes better in relation to a given criterion. obtained results from the corresponding comparison matrix. in the third phase corresponding weights are calculated. this phase gives a unique normalized eigenvectors of weights of all attributes at each level of the hierarchy. the process of weights determination will be shown through empirical research. the final step involves the determination of the final, overall priority vector at the level of the criteria. the relative importance of each criterion is expressed through weights. on the other hand, at the level of an alternative it is possible to determine the rank of alternatives for each of the monitored criteria. 3) additive normalization method first step of this method consists of normalization of the columns. normalization of columns is done by dividing each element of the column of the decision making matrix by the sum of that column. then the obtained normalized values of elements are summed and divided by the number of elements in column. the method is simple and is often used in practice, although it may lead to a distortion of priorities in some specific cases. b) an objective approach to weights determination taking into account the fact that the weights of criteria can significantly affect the outcome of the decision making process, it is clear that special attention must be paid to the objectivity of criteria. the methods of objective approach to weights determination focus on the analysis of decision making matrix. in the objective approach to the weights determination criteria are viewed as sources of information and the relative importance of the criteria reflects the amount of information contained in each of them. 272 i. veselinović the most known objective methods are: 1) entropy method 2)statistical methods 1) entropy method determination of objective weights of criteria according to the method of entropy is based on the measurement of indeterminacy of information contained in the decision matrix. determination of criteria weights wj is carried out in four steps [22]. in the first step, the normalization of criterion values aij is performed. obtained elements create normalized decision matrix. in the second step the value of entropy is determined. the amount of information contained in the normalized decision matrix and emitted by each criterion cj can be measured as the value of entropy ej [31]. in the third step, the degree of diversification dj is determined. the greater the diversification of the initial criterion values aij of alternative ai for a given criterion cj, the value of dj for the given criteria is larger, and it can be concluded that the importance of criteria cj for a given decision making problem is higher [25]. if all the values of the degree of diversification for a particular criterion are the same, observed criterion can be omitted because it does not give new information to decision makers [39]. in the fourth step the relative weights of the criteria can be obtained by the simple additive normalization. the method can be regarded as an objective because it generates criteria weights directly from the value of criterion for each alternative and it eliminates the problem of subjectivity, incompetence or lack of decision makers. 2) statistical methods for the weights determination we can use a number of statistical methods. two of them will be explain in detail. a) method critic (criteria importance through intercriteria correlation) is a method for the determination of objective weights of criteria that includes intensity of contrast and conflict contained in the structure of the decision problem. to determine the contrast of criteria the standard deviation of normalized criterion values in columns is used, as well as the correlation coefficients of all pairs of columns. objective weights obtained in this way represent the amount of information contained in the decision matrix and provide unbiased information that decision maker uses in solving decision-making problems. b) chi-square test is used to calculate whether there is a statistically significant correlation between the frequencies of the two attribute characteristics or between the obtained (observed) frequencies and the frequencies expected in a particular hypothesis. chi-square is suitable in cases where the data have quantitative and qualitative nature. chi-square test may include the following modalities:  the tests of goodness of fit which examines the difference between the distribution of obtained and expected frequency  the test of independence or test of equality (or difference) determines whether the examined independent samples belong to the same or are taken from different sets  the test of homogeneity which is used to test the correlation between the two characteristics of a set. two independent samples are taken from one set, and the correlation between the two characteristics is tested. determination of the intensity of multi-criteria methods and models for decision making in public procurement 273 the bonds between observed characteristics is done by calculating the coefficient of contingency. the value of pearson's coefficient of contingency is positive and is located in the interval [0, 1]. 6. the results of empirical research in this section the advantages of the usage of multi-criteria decision making methods in public procurements will be presented. 6.1. research methodology the basic premise of this paper is that the choice of the best offer is difficult in conditions where there are a number of criteria that can be used to assess them. the use of exact scientific methods for determination of the relative significance of each of the criteria and their use for ranking the offers can facilitate the decision making process. therefore, the basic hypothesis (ho) in this paper is that there is no difference in the perception of the decision makers of the importance of the criteria when the weights are determined using the exact scientific methods in relation to the empirical method. in order to prove that, a subjective method will be applied on the available data. results will show that the use of the scientifically determined weights reduces the possibility of corruption in public procurements. also, the use of the scientifically determined weights can provides higher welfare because procurer can obtain the object of the procurement that completely fulfills the requests of the citizens. the main objective of this section of the paper is determination of criteria weights on the basis of subjective approach. for that purpose the ahp method will be used. 6.2. application of analytic hierarchy process for weights determination calculation of subjective preferences of decision maker will be performed based on data obtained from the public procurement office of the city of nis. information about public procurements in the period from 2011 until 2013 shall be used. the purpose of the analysis is to assign weights to criteria relevant for the evaluation of the bids. in the given period public procurement office of the city of nis used empirical weights for bids ranking. they have performed two types of public procurement, one was based on the criterion of the lowest price, and other was most economically advantageous tender criterion. the offered price was the dominant criterion in this period. in 2011 lowest price criterion was applied in 162 tenders, in 2012 for 178 tenders and in 2013 for 130 tenders while other criteria were neglected. the most economically advantageous tender criterion was applied in 40 tenders-6 tenders in 2013, 16 tenders in 2012 and 18 tenders in 2011. in addition to the price, in this type of tenders other non-price criteria were also considered for the evaluation of the bids. depending on the type of procurement different non-price criteria were applied. the list of all non-price criteria is given in the table 7. 274 i. veselinović table 7 non-price criteria used for the evaluation of public procurements in the period from 2011 until 2013 criterion number of tenders in which the stated criterion was applied 2011 2012 2013 deadline for works execution 4 2 deadline for construction works 1 references 5 1 1 terms of payment 4 delivery time 9 3 deadline for payment 9 3 the conditions and terms of payment 1 1 economic characteristics 1 technical characteristics 1 quality of processing and manufacturing 1 2 esthetic and functional characteristics 1 2 number of gas stations in the city of nis 2 1 1 number of gas stations along the highway belgrade-nis 2 1 1 loan period 2 1 effective interest rate 2 1 in the further course of the research a specific public procurement related to a fuel supply for official vehicles shall be analyzed. in order to do that, a questionnaire was sent to the person responsible for the public procurements in the public procurement office of the city of nis. the questionnaire contained three criteria: offered price, number of gas stations in the city of nis and number of gas stations along the highway belgrade-nis, that were supposed to be evaluated from 1 to 5. the following ratings were received: table 8 criteria rating criterion rating offered price 5 number of gas stations in the city of nis 4 number of gas stations along the highway belgrade-nis 2 based on the obtained ratings the comparison of criteria was performed. comparison of importance of the particular criteria regarding to the target was carried out based on the saaty scale. the obtained values were entered into the comparison matrix. table 9 comparison matrix offered price number of gas stations in the city of nis number of gas stations along the highway belgrade-nis offered price 1.000 3.000 9.000 number of gas stations in the city of nis 0.333 1.000 6.000 number of gas stations along the highway belgrade-nis 0.111 0.167 1.000 multi-criteria methods and models for decision making in public procurement 275 to determine the vector of eigenvalues of the comparison matrix of comparison, a normalization of previously obtained values was performed. normalization was performed by the following formula: 1 , , 1, 2, 3 ij ij m ij i a w i j a     the value of criteria weights was obtained by applying the formula: 3 1    n j ij j w w , i, j=1, 2, 3 based on the obtained results it is possible to determine the weights of each criterion. table 10 criteria weights criterion weights offered price 0.658 number of gas stations in the city of nis 0.282 number of gas stations along the highway belgrade-nis 0.060 in order to calculate the consistency ratio (cr), the measure of consistency was calculated first. to calculate the consistency measures mmult function in microsoft excel, ms office package was applied. the obtained results are given in table 11. table 11 calculation of the vector of priorities and consistency measure offered price number of gas stations in the city of nis number of gas stations along the highway belgrade-nis wj consistency measure (λ) offered price 0.692 0.720 0.563 0.658 3.103 number of gas stations in the city of nis 0.231 0.240 0.375 0.282 3.051 number of gas stations along the highway belgrade-nis 0.077 0.040 0.063 .060 3.009 based on the calculated consistency measure the calculation of consistency index is performed. consistency ratio is the ratio between consistency measure λmax = 3.103 and random index (ri). random index depends on the number of rows in the decision matrix, and its values are given in table 12. table 12 random index value 1 2 3 4 5 6 7 8 9 10 0.00 0.00 0.580 0.900 1.120 1.240 1.320 1.410 1.450 1.490 276 i. veselinović if the consistency ratio is less than 0.10 result is accurate enough, and there is no need for further adjustment. if the level of consistency ratio is greater than 0.10 result should be re-analyze. table 13 consistency ratio ci 0.051 ri (n=3) 0.580 cr=ci/ri 0.088 6.3. comparative analysis a comparative analysis of the results of different approaches is aimed to assess the differences in the weights determined by different approaches. also, the initial hypothesis assumes that there is a difference in the preferences of decision makers about the importance of the criteria when they are expressed through empirical weights and those preferences generated using the scientific method. the public procurement office of the city of nis had previously established certain weights based on experience. when it comes to the purchase of fuel for official vehicles, this procurement is evaluated by three criteria whose weights are given in table 14. table 14 empirical weights criterion weights offered price 0.700 number of gas stations in the city of nis 0.200 number of gas stations along the highway belgrade-nis 0.100 in the further course of the analysis t-test will be applied to determine whether there are statistically significant differences between the empirically determined weights and weights determined by ahp method. the results are shown in table 15. table 15 overview of the weights determined by different approaches and p-value empirical approach ahp approach p-value interpretation 0.7000 0.6583 0.0572 by conventional criteria, this difference is considered to be not quite statistically significant. 0.2000 0.2819 0.0067 by conventional criteria, this difference is considered to be very statistically significant. 0.1000 0.0598 0.0653 by conventional criteria, this difference is considered to be not quite statistically significant. for this purpose the graphpad software was used. the results show that there is no statistically significant difference between the empirical weights and weights determined by ahp method regarding to the first and third criteria, i.e. in these cases the p-value is greater than 0.05. regarding the second criterion, p-value is less than 0.05, and it can be concluded that there is a statistically significant difference between empirical weights and weights obtained by ahp method. multi-criteria methods and models for decision making in public procurement 277 conclusion adequate legislation and the use of multi-criteria analysis methods in evaluating public procurements can greatly facilitate the process of decision making and reduce the abuse of the public procurement system, which is especially important considering the fact that the abuse of this system leads to inefficient allocation of public funds. the efficiency of the public procurement system leads to an increase in welfare due to the fact that public funds are used in a quantity that is sufficient to provide the required quantity and quality of the subject of procurement. therefore, in this paper we have tried to prove that for an adequate, efficient and consistent decision making in the public procurement application of multi-criteria analysis methods is essential. assigning criteria weights is an important step in the decision making process. this is because the value of weights largely determines the final decision of the decision maker. in this paper we have tried to prove that for a consistent and good decision making one of the most important issues that should be considered is determination of the appropriate weights. the first part of the paper defined the main terms in the public procurement system, gave a short review of the legislation in this area in the republic of serbia, and also showed potential corruption mechanisms which could arise in the public procurement system. the second part of this paper was committed to the methods and models of multi-criteria decision analysis, basic concepts of multi-criteria decision making and the formation multicriteria model. short review of some of the most important multi-criteria decision making methods was shown at the end of this section. the third part of this paper demonstrated the importance of the criteria weights and presented some of the basic approaches which could be used for weights determination. in addition, these approaches were classified into three groups, the subjective and objective approach, while the combined approach is actually a combination of subjective and objective approaches. some of the most important subjective approaches such as delphi method, ahp method, and the additive normalization method were shown, and also some of the wellknown objective methods such as the method of entropy and statistical methods. in the fourth part of the paper the results of an empirical study were presented. an overview of all possible criteria that public procurement office of the city of nis used in the period from 2011 to 2013 was given. then, based on the score obtained from the person responsible for public procurements in the public procurement office of the city of nis the determination of weights was performed by the ahp method. based on the obtained results it can be concluded that the initial hypothesis is not proven, i.e. there is a difference in the perception of the decision makers of the importance of the criteria when the weights are determined using the exact scientific methods in relation to the empirical method. acknowledgement. the paper is a part of the research done within the projects 41010 and 44007, funded by the ministry of education, 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(2002) multi-criteria decision aid in financial decision-making: methodologies and literature review, journal of multi-criteria decision analysis, special issue: mcda methodologies in finance, volume 11 (4-5): 167-186. višekriterijumski metodi i modeli odlučivanja u javnim nabavkama izbor najboljeg ponuđača u procesu javne nabavke predstavlja tipičan primer višekriterijumskog problema odlučivanja. osnovna svrha ovog rada jeste prezentovanje mogućih pristupa za izračunavanje pondera u cilju olakšavanja postupka donošenja odluka u procesu javne nabavke. imajući u vidu činjenicu da težinski koeficijenti kriterijuma mogu da utiču na konačni redosled alternative, veoma je važno ozbiljno i odgovorno pristupiti procesu određivanja pondera. adekvatno određeni težinski koeficijenti smanjuju mogućnost pojave zloupotreba i prevara u sistemu javnih nabavki. određivanje pondera u radu je izvršeno na bazi subjektivnog pristupa (analitički hijerarhijski proces). ključne reči: izbor ponuđača, analitički hijerarhijski proces, višekriterijumsko odlučivanje, javne nabavke, težinski koeficijenti. http://www.parlament.gov.rs/upload/archive/files/cir/pdf/zakoni/2012/4113-12.pdf http://www.parlament.gov.rs/upload/archive/files/cir/pdf/zakoni/2012/4113-12.pdf http://www.ujn.gov.rs/sr.html http://hdl.handle.net/10202/185 http://www.ujn.gov.rs/sr.html facta universitatis series: economics and organization vol. 12, n o 3, 2015, pp. 237 248 social responsibility as a factor of successful management of enterprises in serbia: a case study  udc 005.35 sanja marković 1 , vuk miletić 2 1 polytechnic school of vocational studies zvečan, serbia 2 university union "nikola tesla" belgrade, faculty of construction management, serbia abstract. a business operation of an enterprise in a socially responsible manner becomes a crucial topic and imperative of contemporary business operations and management of the enterprises, given that the business is conducted in the environment that must be taken into account. corporate social responsibility imposes as the necessity-inevitability of modern business operation and therefore managers are expected to harmonize social responsibility strategy with all key values, business mission and global strategy of an enterprise. the goal of this paper is, therefore, to present that the enterprises will have a greater positive impact on their working, business and natural environment if social responsibility is more involved in the strategy of the enterprise. the paper presents the result of conducted research in the following enterprises: lola “fot” lešak, šg “ibar”leposavić and rif “kopaonik” leposavić that we came to applying the pearson linear correlation coefficient and procedure of a single-factor analysis of variance (anova) with tukey post hoc test. key words: social responsibility, management, managers, working environment, business environment, natural environment. introduction the concept of social responsibility, as relates to business operations of an enterprise, refers to the duties and obligations of the enterprise to operate with assets that do not harm interest groups and environment and the introduction of changes in operations and utilization of resources. the primary responsibility of the management of the enterprise is efficient and effective accomplishment of enterprise’s goals production of goods and/or services with profit maximization. however, contemporary conditions dictate that equal importance should be given to more powerful and more present demands from different social groups that emphasize that managers of the enterprises must accept responsibility for the consequences received april 1, 2015 / accepted october 27, 2015 corresponding author: vuk miletić university union "nikola tesla", faculty of construction management, belgrade, serbia tel: +381 63 424987  e-mail: vukmiletic88@hotmail.com 238 s. marković, v. miletić of the decisions they make. in this way, the enterprises will show that with their decisions and actions they care for overall wellbeing of the society. modern business conditions require from the companies to adapt rapidly to market demands and to respond appropriately to changes that constantly emerge. adaptations to numerous and various changes that are conditioned by technological, economic, political and social factors are among the priority tasks of the enterprises. recent changes regarding the environmental demands also affect the changes in the enterprises themselves; primarily, changes in operations and utilization of resources that will be in accordance with demands and signals from the environment. what is expected from modern enterprises is therefore not easy: new way of managing the enterprise in which social responsibility will present a key activity and a component of successful business. 1. social responsibility as a factor of successful management of enterprises: theoretical basis corporate social responsibility began to develop during the 60s and 70s of the last century when there arose the awareness of issues such as equal opportunities for all, racial equality, safety and health in the workplace. all these issues have prompted the public to thoroughly reexamine the business practices. according to william clay ford, former president of the management board and managing director of ford car factory, there is a difference between a good company and a big company. good company offers excellent products and services. big company also offers excellent products and services, but it is trying to improve the world (kotler, lee, 2005, p. 3). the development of technology has facilitated the development of useful products for man and society, which satisfies different needs. however, it is important to stop blaming the technology. technology does not make decisions. people make decisions. it is not technology that separates; people do. technology is for mankind. the real question is whether the man is for or against the mankind (riderstrale, nordstrom, 2003, p. 39). there is a great number of definitions in literature regarding the corporate social responsibility, which supports the relevance of this subject in different time periods. the most widely accepted and the most cited definition is the one given by european commission in the most important document on the subject of corporate social responsibility, known as the green paper. the commission defines corporate social responsibility as a set of activities aimed at fulfillment of legal obligations defined by law and agreements, and activities by which enterprise fulfills obligations that do not originate from formal-legal framework, such as investment in the development of human capital, the environment and the improvement of relations with stakeholders (green paper, 2001). according to kotler and n. lee, corporate social responsibility is a commitment to improving the wellbeing of the community through discretionary business practices and contributions to the account of resources of the corporation (kotler, lee, 2005, p. 3). a key element of this definition is the word discretionary. namely, this is not about the business activities stipulated by law or inherently moral or ethical, and thus expected. this is about the voluntarily commitment of an enterprise and its decision to implement such business practices and give contributions. according to krkac (krkač, 2007, p. 224) social responsibility is an obligation of anyone who does business with the goal of maximizing profit and thus maximizing the positive social responsibility as a factor of successful management of enterprises in serbia: a case study 239 impact of its operations on society, and minimizing the negative impacts. in accordance with this definition is the definition of thompson, strickland and gambl, that corporate social responsibility is the duty of an enterprise to manage its affairs in a manner that avoids harming the other stakeholders and the environment, and to take into account in its decisions and actions the overall wellbeing of the society (thompson, strickland, gamble, 2008, p. 312). enterprises where social responsibility is an integral part of their strategies are most likely to overcome the challenges that the future holds (moller, 1997, p. 56). one thing is certain, the corporate social responsibility is a concept that mostly provides long-term results, and it is particularly important to emphasize the selection of those managers-leaders who can anticipate the changes in the mood of the key stakeholders and act in accordance with them (wether, chandler, 2006, p. 38). in brief, the management, especially top management, must take care of the health of the corporation, and this includes balancing the many contradictory demands of stakeholders (freeman, 2007, p. 355). strategic leadership represents an individual ability to anticipate, predict, remain flexible, think ahead and seek with others to accomplish changes that will affect not only the enterprise in which they operate, but also the wider community (christiansen, 1997, p. 141). from this, we can conclude that the management of the enterprise does not have an easy task since there is no universal approach to linking the strategy and business conduct with social responsibility, especially if we take into account the fact that there are different options of corporate social responsibility available. designing of the strategy of the corporate social responsibility includes (thompson, strickland, gamble, 2008, p. 302): efforts to apply ethical strategies and compliance with ethical principles in the management of operations simply because unethical strategies and unethical behavior are not compatible with the concept of socially responsible business conduct. charity contributions, donations of money and time of the employees of the enterprise that will be engaged in the activities of the community, supporting a variety of valuable organizational activities, actions for improvement of lives of people that are in need. actions to protect and improve environment, especially for minimizing or elimination of all adverse effects on the environment arising from business activities of the enterprise. this implies that companies should use the best technologies available. actions to create working environment that improves the quality of life of personnel and that make the enterprise an excellent place to work. this includes diverse and interesting work tasks, programs for development and rapid career progression, flexible working hours for single parents, the opportunity to work at home, equal salaries for both genders, etc. actions to create workforce that is diverse in terms of gender, race, origin and other aspects that people bring to workplace. it is logical that the management of the enterprise will harmonize the strategy of social responsibility with its key values, mission and general strategy. new dimensions of the enterprise management include upgrading of the quality of business operation that has been changing during the time following the major changes in society, economy, technology and science. namely, modern concept of understanding the quality does not imply only its technological basis, but the concept of the quality is transfered from production to the level of executive leadership, where, considered in the long term, it 240 s. marković, v. miletić obtains the characteristics of upgrading of business quality of the enterprise as a whole (đorđević, ćoćkalo, 2007, p. 20). the quality of business includes three dimensions, figure 1: market (customer satisfaction, convenience for use, market position, competitive advantage), business (increase of efficiency, cost reduction, increase of productivity, profit increase, long-term sustainability), social (health care, protection of the environment, preservation of natural resources, costumer protection). fig. 1 aspects of business quality source: (heleta 1995, p. 33) at the current level of business development, enterprises must accept business based on responsibility that understands taking responsibility for their role in society. in the past, it was sufficient that enterprise satisfiy basic economic goals, that is, profit, as the basis for achieving the goals of growth and development. however, if enterprises today want to have prosperity on the market they must also perform noneconomic functions that are related to the satisfaction of general social interests. 2. methodological framework and hypotheses based on the research objective we set in the introductory section of this paper, we defined the hypothesis that state: h1: the enterprises shall accomplish higher positive impact on their working, business and natural environment if social responsibility has a greater stake in the strategy of the enterprise; we will prove/disprove this with the assistance of the following auxiliary hypothesis: marketing aspect product quality customer satisfaction convenience for use market positioning competitive advantage successful company social aspect quality of life health protection environment protection preservation of natural resources customer protection business aspect quality of business processes efficiency increase cost reduction increase of productivity profit increase long-term sustainability social responsibility as a factor of successful management of enterprises in serbia: a case study 241 h1: there is correlation between the concern for employees and their motivation, productivity and attracting talented individuals from labor market. h2: there is correlation between the concern for customers/business partners and relations with business partners, loyalty of existing and attracting of new customers. h3: there is correlation between the involvement of the enterprise in the development of the local community and relationship with local community. h4: there is correlation between the concern for the environment and business expenses. h5: if social responsibility is an important segment of the strategy at the level of the enterprise, the enterprises will be more socially responsible. in order to examine this hypothesis, the research was conducted in the enterprises lola “fot” – lešak, šg “ibar” – leposavić and rif “kopaonik” – leposavić using the method of questionnaire, on total sample of 109 respondents-managers at all levels of management. as the basis for creation of the questionnaire, we mostly used: the work of porter and kramer (porter, kramer, 2002, p. 6), book by thompson, a.a., strickland, a.j., gamble, j.e. strategic management (thompson, strickland, gamble, 2008, p. 301-306) and questionnaire of inter consulting organization that conducted research on the concept of corporate social responsibility in serbia in cooperation with the united nations industrial development organization (unido) (interconsulting, 2010). entering and processing data from the survey was conducted by using microsoft office excel. data obtained by the conducted research were processed in the statistical package spss. when processing the data the following statistical procedures were applied:  the pearson linear correlation coefficient, and  single-factor analysis of variance (anova) with tukey post hoc test. 3. the impact of social responsibility on working, business and natural environment in the enterprises: lola “fot” – lešak, šg “ibar” – leposavić i rif “kopaonik” – leposavić: research results and discussion lola “fot” – lešak-is a branch of a large complex of lola factories of forgings l.l.c, beograd-lešak (serbian business registers agency-lola factory forgings, 2014). predominant activity of this enterprise is the production of forged and pressed products based on steel and non-ferrous metals. woodland šg “ibar” leposavić (business registers agency-srbijašume, 2014) is a part of publicly-owned enterprise for forest management “srbijašume” (which includes the function of two forest management: leposavić and zubin potok), whose current activity is the silviculture and other forestry activities. rif “kopaonik” – leposavić is an organizational unit of trepča (business registers agencytrepča, 2014), large deposits of lead-zinc mine in serbia, which includes western, southwestern and southern parts of kopaonik and is among the largest in europe. since the financial data of enterprises were not included in the study, the number of employees, according to the accounting act (“official gazette of rs”, no. 62/2013 of 16/07/2013. effective from 24.07.2013., article 6. paragraph 1), was the only criterion for the classification of enterprises: micro (10 employees), small (50 employees), middle (250 employees) and large (over 250 employees). taking into account this conclusion, in this study were included two middle enterprises lola “fot” – lešak with 189 employees and šg “ibar” – leposavić with 108 employees and a large enterprise: rif “kopaonik” – leposavić with 634 employees. this sample included 114 respondents-managers who work in mentioned enterprises presented in table 1, but due to incomplete data, five questionnaires were excluded from further study. 242 s. marković, v. miletić table 1 position of respondents-managers in the enterprises enterprise top management middle management operative management total number of respondents in the enterprises lola “fot” lešak 2 6 13 21 šg “ibar” leposavić 2 6 7 15 rif “kopaonik” leposavić 4 14 55 73 total number of respondents according to the levels of management 8 26 75 109 source: authors there were 23 respondents-managers from the enterprise lola “fot” – lešak: 2 top management, 7 middle management and 14 operative management, except that 2 (1-middle, and 1 operative)have been excluded from the study because of incomplete data in the questionnaire. 15 respondents-managers were from the enterprise šg “ibar” – leposavić: 2 top management, 6 middle management and 7 operative management, and all were included in the study. from the enterprise rif “kopaonik” – leposavić there were 76 respondents-managers: 4 top management, 15 middle management and 57 operative management, who participated this study, and 3 (1-middle and 2-operative management) were not included in the study due to incomplete data in the questionnaire. the structure of top, middle and operative management by half at the total sample is shown in table 2. table 2 the structure of top, middle and operative management by half at the total sample enterprise males top management middle management operative management lola “fot” – lešak 2 5 11 šg “ibar” – leposavić 2 4 4 rif “kopaonik” – leposavić 3 10 38 total number of respondents 7 19 53 enterprise females top management middle management top management lola “fot” – lešak 0 2 3 šg “ibar” – leposavić 0 2 3 rif “kopaonik” – leposavić 1 5 19 total number of respondents 1 9 25 as we can see, when it comes to gender equality, in surveyed enterprises and at the levels of management, top management, middle management and operative management, pursuant to article 14 of the law on gender equality (“official gazette of rs”, no. 104/2009) according to which: “if the representation of the less represented gender in each organizational unit, in managerial positions and in the management bodies and supervisions is less that 30%, public authorities are obliged to implement affirmative measures in accordance with the law on civil servants and law on public administration”, we can notice the following: social responsibility as a factor of successful management of enterprises in serbia: a case study 243  in the enterprise lola “fot” – lešak from totally 23 managers, 18 males and 5 females (at levels: top management-2 males and 0 females; middle management-5 males and 2 females; operative management-11 males and 3 females), implies that the law on gender equality has not been complied with, which prescribes minimum 30% of representation of less represented gender. in particular, out of 23 managers, in accordance to legal minimum (30%) there should be 16 males and 7 females, table 2.  in the enterprise šg “ibar” – leposavić with totally 15 managers, with 10 males and 5 females (at levels: top management-2 males and 0 females; middle management-4 males and 2 females; operative management-4 males and 3 females), implies that the legal minimum of 30% was completely met, table 2.  in the enterprise rif “kopaonik” – leposavić with totally 76 managers, with 51 males and 25 females (at levels: top management-3 males and 1 female; middle management-10 males and 5 females; operative management-38 males and 19 females), shows that this enterprise also has met the legal minimum of 30%, both at global management level and at individual levels of management, table 2. this indicates that the majority of enterprises are increasingly establishing gender equality as envisaged and guaranteed by the constitution of the republic of serbia, the law on gender equality (in a much higher percentage than the minimum provided by the law), the generally accepted international rules ratified by international treaties.  in order to accomplish the research goal, the respondents-mangers were asked on the scale from 1 to 5 (from 1-irrelevant-unimportant to 5-very important) to evaluate to which extent their enterprises, lola “fot” – lešak serbian business registers agency-lola factory forgings, 2014), šg “ibar” – leposavić (serbian business registers agency-lola factory forgings, 2014-srbijašume, 2014) and rif “kopaonik” – leposavić (serbian business registers agency-lola factory forgings, 2014trepča, 2014), take care of employees, customers/business partners, local community in which they operate and environment protection. with this research, we examined whether there is a correlation between taking care of employees () and their motivation, productivity and recruiting talented people from labor market. statements used for the evaluation of this area are: providing training and promoting employees; guaranteed salaries for work performed, encouraging good communication between employees and management and supporting the employees in balancing work and personal obligations. correlation of these variables is examined using the pearson linear correlation coefficient. results are presented in table 3. table 3 results of correlation between taking care of employees and motivation, productivity and recruiting talented people from labor market variable 1 2 3 4 care for employees  motivation of employees ,376 **  productivity ,398 ** ,595 **  recruitment of talented people from labor market ,438 ** ,471 ** ,371 **  **p < .01 source: authors 244 s. marković, v. miletić results in table 3 show that there is a significant correlation between examined variables. namely, respondents-managers at all levels of management in all three enterprises are of the opinion that care for employees influences the motivation of the employees, their productivity as well as the recruitment of the talented people from the labor market. the first auxiliary hypothesis is accepted. for business operations of all three enterprises involved in this research the care for customers/business partners is certainly important. using the pearson linear correlation coefficient we examined whether there is a correlation and to which extent the care for customers/business partners influences the relationship with business community, loyalty of existing and attraction of new customers. the statements used for the evaluation of this area are: monitors the quality and safety of products and/or services, regularly monitors the customers satisfaction, guarantees the best value of the product and/or services in terms of quality and price, and is ready to respond to customers complains results are presented in table 4. table 4 results of correlation between care for customers/business partners and relationship with business partners, loyalty of existing and attraction of new customers variables 1 2 3 4 care for customers/business partners  relationship with business partners ,355 **  loyalty of existing customers ,340 ** ,600 **  loyalty of existing and attraction of new customers ,332 ** ,529 ** ,798 **  **p < .01 source: authors results in table 4 show that there is a significant correlation between examined variables. namely, respondents-managers at all levels of management in all three enterprises are of the opinion that care for customers/business partners contributes to better and more successful relationship with business partners, loyalty of existing and attraction of new customers. the second auxiliary hypothesis is accepted. the important segment of business operations of all three enterprises: lola “fot” – lešak, šg “ibar” – leposavić and rif “kopaonik” – leposavić certainly is the connection with local community where they operate. table 5 presents the correlation between the involvement of listed enterprises in the development of local community () and relationship with local community. the statements used for the evaluation of this area are: the management of the enterprise and employees are involved in charity activities of local community, provides financial support for the development of sports, supports cultural activities and supports the development of health care in local community. results show that this correlation is statistically significant. this implies that involvement of listed enterprises in the development of local community significantly influences the successful and positive relationship with the local community. the third auxiliary hypothesis is accepted. table 5 results of correlation between the involvement of the enterprises in the development of local community and relationship with the local community variables relationship with the local community local community ,302** **p < .01 source: authors social responsibility as a factor of successful management of enterprises in serbia: a case study 245 table 6 shows the correlation between the environment protection (and operating costs. statements used for the evaluation of this area are: recycling, utilization of ecologically acceptable, recycled materials in the making of product and its release, that is, during the activity when it comes to providing of services, our enterprise takes care of all aspects of environment protection such as rational use of energy, prevention of the formation of waste materials and proper disposal of waste material and in the transport and logistics sector our enterprise takes care of the emission of hazardous gasses/substances from the vehicles we use and we discuss with our suppliers and partners whether they use optimal transportation routes and means (for example, in order to reduce co2 emission)) results show that this correlation is statistically significant, that is, enterprises achieve economic and environmental effects by taking care of environment protection. the fourth auxiliary hypothesis is accepted. table 6 correlation between environment protection and operating costs of the enterprise variables operating costs environment protection ,396** **p < .01 source: authors the research results show that respondents-managers at all levels of management in the enterprises, lola “fot” – lešak, šg “ibar” – leposavić and rif “kopaonik” – leposavić, consider that care for employees, customers/business partners, local community and the environment has positive impact on the entire business of the enterprise. in order to determine whether there is a difference in attitudes of respondents-managers when it comes to the areas of corporate social responsibility: care for customers, existing and potentially newly employed persons, local community, the environment, included in this research, we conducted the procedure of a single-factor analysis of variance (anova) with tukey post hoc test. results are presented in table 7. table 7 results of top, middle and operative management on total sample regarding the different areas of corporate social responsibility levels of management f top management middle management operative management care for customers/business partners 21,00 a 21,48 a 21,69 a 0,15 care for existing and potentially newly employed persons 26,29 a 27,93 a 28,16 a 0,35 involvement in the development of the local community 22,57 a 25,33 a 25,20 a 0,57 the environment protection 19,29 a 18,63 a 20,17 a 1,06 mean values with different exponent (a and b) in lines significantly differ at the level 0.05 source: authors results in table 7 show that there were no statistically important differences in attitudes between the top, middle and operative management when it comes to different areas of corporate social responsibility. thus, the greater the responsibility and care for employees, customers/business partners, local community and the environment, the larger positive influence on working, business and natural environment of the enterprise. 246 s. marković, v. miletić in accordance with these findings of the research is also the result that respondentsmanagers in all three enterprises, lola “fot” – lešak, šg “ibar” – leposavić and rif “kopaonik” – leposavić, consider that social responsibility of the enterprise is important as the part of the strategy at the level of the enterprise in which they are employed, chart 1, by which the fifth auxiliary hypothesis is accepted. chart 1 social responsibility as a part of the strategy of the enterprise expressed in % source: authors chart 1 shows that in the enterprise lola “fot” – lešak 47,62% of managers responded that social responsibility of the enterprise is very important as the part of the strategy at the enterprise level, and 52,38% of managers believe that social responsibility of the enterprise is important as a part of the strategy at the enterprise level. in the enterprise šg “ibar” – leposavić, 46,67% of the managers believe that the social responsibility of the enterprise is very important as the part of the strategy at the enterprise level, 46,67% of the mangers believe that the social responsibility of the enterprise is important as a part of the strategy at the enterprise level, and only 6,67% believe that the social responsibility of the enterprise is of average importance as a part of the strategy at the enterprise level. in the enterprise rif “kopaonik” – leposavić, more than half of mangers, 57,53%, believe that social responsibility of the enterprise is very important as a part of the strategy at the enterprise level, 36,99% of managers believe that social responsibility of the enterprise is important as a part of the strategy at the enterprise level, and only 4,11% believe that social responsibility of the enterprise is of average importance as a part of the strategy at the enterprise level. negligible is the number of managers, only 1,37% from the total number, who believe that social responsibility is not important as a part of the strategy at the enterprise level. based on these results, we can conclude that the main hypothesis, which was the basis of this paper, is the following: the enterprises will accomplish higher positive impact on their working, business and natural environment if social responsibility has a greater stake in the strategy of the enterprise, which is proven by verifying the auxiliary hypothesis. the results of the research show that respondents-managers at all levels of management consider that integration of activities of social responsibility into the business operations of the enterprise can lead to achievement of efficiency and effectiveness in accomplishment of sustainable business goals. attitudes of respondents-managers indicate that the business of the enterprise in socially responsible manner brings direct benefits for financial results. social responsibility as a factor of successful management of enterprises in serbia: a case study 247 namely, providing the training and promotion of employees, guaranteed salaries for performed work, flexible working hours-in terms of balancing work and personal obligations, have positive impact on motivation and productivity of the employees, which contributes to increase of successful business performance. investing in the development of educational institutions and scholarships for students contributes not only to improvement of educational structure of the population, but also reciprocally contributes to increase of business success owing to the offer of skilled labor. investing in the development of sports, culture, health care… contributes to the increase of the quality of life in the community and at the same time has positive impact on the creation of enterprise’s brand and increasing sale of products and/or services. the recycling of waste, utilization of recycled materials, the rational exploitation of natural resources (air, water, soil, oil, ores, metals...) simultaneously lead to achievement of ecological and economic benefits for the enterprises contributing to stronger financial results and greater profitability. conclusion modern business conditions require from the enterprise to adapt rapidly to market needs and to respond efficiently and effectively to pressures, changes and chances that occasionally occur. recent changes in terms of environment demands affect the changes in the enterprises, primarily the changes in working methods and utilization of resources that will comply with the requirements and signals that come from the environment. if they want to continue to exist on the market, the enterprises must take more explicit and more proactive role in the society. in the business practice of the serbian economy in recent years positive developments in the field of corporate social responsibility are noticeable. using the pearson liner correlation coefficient we obtained the results that show that mangers at all levels of management consider that care for interest-influential groups: employees, customers/business partners, local community and the environment has positive impact on working, business and natural environment of the enterprise. in support of this fact is the research conducted in the enterprises: lola “fot” – lešak, šg “ibar” – leposavić and rif “kopaonik” – leposavić, where social responsibility as a part of the strategy of the enterprise presents a factor of successful management of enterprises and therefore the crucial factor of competitive capacity, growth and development of the enterprise, society in whole and improvement of the quality of life of the entire community. therefore, only those enterprises that operate in the socially responsible manner will be successful, and above all, highly positioned by all interest-influencing groups and especially the two that are crucial for their continued existence-customers and employees. acknowledgement: the authors 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http://www.nbs.rs/ export/sites/default/internet/latinica/20/zakoni/rac_racunovodstvo.pdf (25.12.2014). 18. službeni glasnik rs (2009), zakon o ravnopravnosti polova, br. 104/2009, од 16.12.2009, član 14, http://www.paragraf.rs/propisi/zakon_o_ravnopravnosti_polova.html (25.12.2014). društvena odgovornost kao faktor uspešnog upravljanja preduzećima u srbiji: studija sluĉaja poslovanje preduzeća na društveno odgovoran način postaje ključna tema i imperativ savremenog poslovanja i upravljanja preduzećima, s obzirom da se poslovanje odvija u okruženju o kome se mora voditi računa. društveno odgovorno poslovanje se nameće kao neophodnost-neminovnost savremenog poslovanja pa se zbog toga od menadžera očekuje da usklade strategiju društvene odgovornosti sa svojim ključnim vrednostima, poslovnom misijom i opštom strategijom preduzeća. zbog toga je cilj ovog rada da pokažemo da će preduzeća imati veći pozitivan uticaj na svoje radno, poslovno i prirodno okruženje ukoliko društvena odgovornost ima većeg udela u strategiji preduzeća. u radu je prikazan rezultat sprovedenog istraživanja u preduzećima: lola “fot” – lešak, šg “ibar” – leposavić i rif “kopaonik” – leposavić do kojeg smo došli primenom koeficijenta pirsonove linearne korelacije i postupka jednofaktorske analize varijanse (anova) sa tukey post hoc testom. ključne reči: društvena odgovornost, upravljanje, menadžeri, radno okruženje, poslovno okruženje, prirodno okruženje file:///c:/users/user/downloads/doc-01-9_en.pdf http://www.fsg.org/portals/0/uploads/documents/pdf/competitive_advantage.pdf http://csr-net.org/limesurvey/index.php?sid=85655&lang=sr http://pretraga2.apr.gov.rs/enterprisepublicsearch/details/enterprisebusinessname/1026958?code=e823ace994ffce96af796cb45c4a215b3dd63bb9 http://pretraga2.apr.gov.rs/enterprisepublicsearch/details/enterprisebusinessname/1026958?code=e823ace994ffce96af796cb45c4a215b3dd63bb9 http://pretraga2.apr.gov.rs/enterprisepublicsearch/details/enterprisebusinessname/1026958?code=e823ace994ffce96af796cb45c4a215b3dd63bb9 http://pretraga2.apr.gov.rs/enterprisepublicsearch/details%20/enterprisebusinessname/1022849?code=56143712c6763dee04b03e8b486efe75204a26d2 http://pretraga2.apr.gov.rs/enterprisepublicsearch/details%20/enterprisebusinessname/1022849?code=56143712c6763dee04b03e8b486efe75204a26d2 http://pretraga2.apr.gov.rs/enterprisepublicsearch/%20details/enterprisebusinessname/1102458?code=5e48000e4e44b64d10c8cd8a3fa24ed0cf204e8a http://pretraga2.apr.gov.rs/enterprisepublicsearch/%20details/enterprisebusinessname/1102458?code=5e48000e4e44b64d10c8cd8a3fa24ed0cf204e8a facta universitatis series: economics and organization vol. 12, n o 2, 2015, pp. 129 142 competitiveness and developmental trends of the new industrial policy of the republic of serbia  udc 338.45.01(497.11) ivana kostadinović, zorana kostić, ivana ilić faculty of economics, university of niš, serbia abstract. the achieved level of economic development determines the degree of industrial development in one country. the aim of this paper is to identify the key determinants of the new industrial policy of serbia, in the context of european integration processes. the same is based on the analysis of strategic documents of serbia and the european union, governing the industrial development for the period up to 2020. particular attention is paid to the monitoring of developmental dynamics and trends in improving industrial competitiveness. it has been noted that the achieved level of industrialization defines the industrial competitiveness of a national economy. serbia needs an efficient, industrially competitive economic structure that will be able to meet the growing demands and challenges of the market. only a properly designed and consistently applied industrial policy can follow the european developments in the future. key words: new industrial policy, the european integration process, the competitive industrial performance index (cip), the development and competitiveness of the industry. introduction plenty of theoretical insights and empirical examples have confirmed that the achieved level of economic development to a large extent determines the degree of industrial development. industrial policy is part of a broader economic policy, which specifies the place and determines the importance of industry in generating economic growth and development of a country. in order to achieve the strategic goals of a country, a high level of coordination and integration of the industrial policy with other relevant policies is required. adequate implementation of appropriate industrial policy is a necessity and a need of all economic systems in order to overcome developmental limitations, on the road from the comparative advantages to the strategic objectives. received march 12, 2015 / accepted october 5, 2015 corresponding author: ivana kostadinović faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: ivana.kostadinovic@eknfak.ni.ac.rs 130 i. kostadinović, z. kostić, i. ilić industrialization is a central strategy for achieving the economic transformation of underdeveloped countries. based on empirical data and general theoretical knowledge, large disparities have been observed in the industrial development across countries. convergence between the industrially most competitive countries and less developed countries is in stagnation. on the one hand, middle-income countries are trying to achieve industrial progress in the sustainable environment. industrialized countries, on the other hand, tend to overcome the consequences of the economic crisis and point to the dangers of de-industrialization through “industrial renaissance”. serbia belongs to the group of industrially developing countries. the analysis of the economic results, achieved in the previous period, shows that the serbian industry has not contributed to economic growth to the expected extent, despite the available industrial capacities. the causes that led to this state of affairs should be sought both in economic and in non-economic spheres. in order to create a new, more efficient economic structure, it is necessary to reduce developmental limitations to a minimum. in this regard, the purpose of long-term and continuous adjustment of sectoral policies to the concept of accelerating economic growth requires the transformation of consumer-oriented demand into pro-investment demand, thereby putting the emphasis on tradables. it is essential to point out the necessity of selecting a pro-investment and export-oriented development path. selecting the correct development orientation is not simple, as it requires recognition of all specific features of our country and appreciation of the strategic documents of the european union. the first part of this paper will provide foundations of industrial policy. the second part will include detailed analysis of the situation, objectives, and measures of the new industrial policy of serbia. strategic developmental directions of serbian industry until 2020 and changing trends will be shown in the third part of the paper. the fourth part will focus on the competitive industrial performance index, viewed in the context of industrial development indicators. 1. foundations of industrial policy in the aftermath of the 2008 global economic crisis, a number of public interventions have been initiated, in order to ensure economic recovery, job creation, and foster muchneeded transitional sustainability. the package of stimulus initiatives differed among countries affected by the global economic crisis, but each of them contained the two key pillars: the massive investment plans in respect of infrastructure, which reflects the classic remedy for the economic crisis, and industrial policy (aggarwa & evenett, 2012). industrial policy is an important instrument of the private sector and economic development based on the production of new goods with new technologies and the transfer of resources from traditional activities to these new ones. besides, it is a central instrument for improving economic transformation. theorists have come up with a number of definitions of the concept of industrial policy and its scope, depending on the viewing angle. unctad (the united nations conference on trade and development) defines industrial policy as “a concerted, focused, and conscious effort on the part of the government to encourage and promote a specific industry or sector with an array of policy tools”. the world bank sees the industrial policy as “government efforts to alter the industrial structure to promote productivity-based growth”. pack and saggi give a more detailed definition, stating competitiveness and developmental trends of the new industrial policy of the republic of serbia 131 that it is any type of selective intervention or government policy that attempts to alter the structure of production towards sectors that are expected to offer better prospects for economic growth than would occur in the absence of such intervention, i.e. in the market equilibrium the most famous advocate of industrial policy, rodrick, implies that it can be viewed as a means of coordination for stimulating socially profitable investment (rodrick, 2013). industrial policy represents a conscious action of the state in setting goals and establishing instruments to achieve these goals in the field of industry. the main objective of industrial policy is the development of the economy and determining the place and role of industry in this development. the effects of industrial policy are reflected in the realization of the objectives (gligorijević, 2008). generally, industrial policy can be defined as any policy affecting the industrial activity of a country. regardless of which definition is considered, it is clear that the main objective of the industrial policy is raising productivity, profitability, and international competitiveness of national industries, through the construction of an optimal industrial structure (jurčić, 2013). according to a number of theorists, governments should be directly involved in the establishment of national industrial objectives, and be held accountable for achieving goals. specifically, governments are the ones that should determine which industries would be most likely to be competitive in the future global economy, and focus on them in setting industrial policy objectives. 2. analysis of the situation, objectives, and measures of the new industrial policy of the republic of serbia 1. on the way to full membership in the european union, serbia is faced with a task of harmonization of industrial policy with the principles of the eu and its member states. the development of industrial policy in the european union and serbia is regulated by the long-term strategic documents, which lay down the main goals and priorities of further development, incentive measures, and development policy. our country has adopted the strategy and policy of the industrial development of the republic of serbia for the period 2011-2020. the strategy is aligned with the industrial policy of the european union and the goals of the new european strategy, europe 2020. this strategy is a general document that directs the further course of the serbian industry, with proposed measures to improve the current situation. the potential that serbia has needs to be used effectively, through the application of the well-structured strategy. accordingly, the objectives and priorities of future development are designed within the framework of the above-mentioned document, which validates the concept of sustainable development and seeks to strengthen the role of industry in the economy and society. the objectives of the serbian strategy should be aligned with the objectives of the industrial policy of the european union, presented in the lisbon strategy, which was defined in 2000 and revised in 2005 and 2008. future trends in the serbian industry are heading towards sustainable and dynamic development that fits the needs of the markets of the european union, and is able to withstand the pressures of competition originating from other european union member states. in order to make the industry more competitive, serbian strategy provides for essential strategic goals and directions that should be followed in the future. the primary objective is to increase the competitiveness of the industry, and make the overall industrial 132 i. kostadinović, z. kostić, i. ilić policy proactively oriented towards export competitiveness of industrial products and services with high added value, based on knowledge, innovation, research and development (strategy and policy of the industrial development of the republic of serbia 20112020, p. 29). 2. in accordance with the intended orientation of industrial policy, the strategy presents the following strategic objectives: a dynamic and sustainable industrial growth and development, the proactive role of the state, improving the investment environment, strengthening competitiveness, accelerating the development of entrepreneurship, increase and restructuring of exports, reform of the education system in accordance with the needs of the economy, active and dynamic cooperation between science and industry, fostering innovation, reform of the labor market and employment policy, balancing stabilization, development and social role of the state, the development of regional industrial centers and regional business infrastructure, improving energy efficiency, and environmental protection (strategy and policy of the industrial development of the republic of serbia 20112020, p. 52). indicators of dynamic and sustainable industrial growth and development are higher living standard, as well as the reduction of unemployment and poverty. the proactive role of the state, as one of the goals of the strategy, is reflected in the institutional establishment, with emphasis on knowledge and skills for finding the optimal solution for the development of the industry. to improve the investment environment, it is necessary to attract more foreign direct investments, and invest them in development of small and medium-sized enterprises, which will take the workforce of existing unsuccessful companies. in order to strengthen the competitiveness, it is necessary to carry out the transition and reform processes that will enhance the development potential of the country. faster development of entrepreneurship is only possible through the support for the establishment of new enterprises, employment, and human resource development. in order to increase and restructure exports, special attention must be given to: increasing the competitiveness of products of serbian industry, their placement on the eu market, and restructuring of exports towards high technology branches. based on the data given in table 1, it can be seen that the high-tech industry is the sector with the highest projected growth rates in serbia until 2020, which, in 2008, accounted for 7.5% of gross value added. however, one should not ignore the fact that the low-technology-intensive sector has dominant share in the structure of the serbian industry, which accounts for over 50% of gross value added of the republic of serbia. the average projected growth rate of lowtechnology-intensive industrial sector by 2020 is 6%. to make responses of the economy as efficient as possible, a reform of the education system is essential. the reform of the education system involves compliance with the current and future needs of the labor market. industrial policy objectives should involve active and dynamic cooperation between science and industry, relating to innovation in all fields. in order for this goal to be achievable, it is necessary to produce a long-term program of technological development that will be compatible with the strategic development priorities, the real situation, and perspectives of technological development in serbia. encouraging innovation is important for increasing industrial growth and employment, as well as for the creation of new industrial products with added value. in this respect, there are investments in new products, which may stand for competitive products on the market, competitiveness and developmental trends of the new industrial policy of the republic of serbia 133 and ultimately improve the industrial growth. the reform of the labor market and employment policies should be implemented to reduce the fiscal burden of work, maintain a responsible policy of minimum wage, and increase the proportion of funds for active labor market programs in gdp. strategic documents governing the industrial development for the period up to 2020 map out a harmonized relationship between stabilization, development, and social role of the state, because the privatization and restructuring of the industry, which should be done in the future, involve significant social costs. for the purpose of better regional development and reducing regional differences that have been present for several decades, it is necessary to develop regional industrial centers and regional business infrastructure. the economic competitiveness and energy efficiency are closely related. in accordance with this, energy efficiency can be improved through the most rational use of energy. environmental protection, as the goal of the strategy of industrial development, emphasizes that efforts should be directed towards cleaner modes of production and reducing environmental pollution. table 1 projected share of sectors and fields in gross value added and projected growth rates subsectors share in gross value added growth rates 2008-2020 2008 2020 low-tech 50.7 43 6% food 29.9 24.4 1% textile 4.9 5.2 8% medium-low-tech 25.4 22 6% coke and petroleum products 0.3 0.4 8% rubber and plastics 6.0 5.5 5% other minerals 6.0 5.6 6% metal 13.1 10.5 5% medium-high-tech 16.4 23 10% chemical 7.7 10 10% machines and equipment 5.0 7 8% means of transport 3.8 6 11% high-tech 7.5 12 12% electronics 7.5 12 12% source: serbian post-crisis economic growth and development model 2011-2020 (2010). foundation for the advancement of economics – faculty of economics, macroeconomic analyses and trends and konjunktur-barometer – economic institute, usaid. belgrade, p.29. the overall objective, which is presented within a new policy of industrial development, is the strengthening of the competitiveness of the national industry, as well as ensuring its growth and development. the achievement of this objective is possible through general measures and instruments of economic policy, reducing the barriers that hinder the successful operation, and orientation towards new knowledge, technology, and innovation. 3. to achieve the set objectives, specific measures and activities need to be strictly followed and enforced. the set of related actions are the result of the current phase of development of the serbian market economy, and obligations that country has on the basis of international agreements, membership in the world trade organization, and the 134 i. kostadinović, z. kostić, i. ilić stabilization and association agreement with the european union (strategy and policy of the industrial development of the republic of serbia 20112020, p. 66). a number of measures should be aimed at improving the competitiveness of serbian industry, with particular emphasis on the processing industry, with respect to its current capacities and circumstances in the environment. accordingly, the task of industrial policy is to contribute to the efficient functioning of the market, with possible direct intervention in the event of deficiencies, and creating a favorable business environment. special emphasis in the concept of a new industrial policy has been placed on the horizontal incentive measures that emphasize equal chances for the success of all enterprises, whose success is rewarded by the market which is the driving force of the modern processing. the strategy and policy development of the industrial development of the republic of serbia 2011-2020 highlights the following measures and activities, aimed at: 1) building the institutional framework and the business environment; 2) strengthening competitiveness and productivity; 3) development of entrepreneurship, i.e. the sector of small and medium-sized enterprises; 4) effective restructuring and privatization; 5) strengthening the competitiveness of certain sectors by using horizontal and vertical measures. given the situation in the industrial sector, it is necessary to make reforms, in order to strengthen its competitiveness. the new serbian policy of industrial development for the period 2011 – 2020 provides for reforms within specific industrial policy goals, set for the future. the changes are aimed at achieving a higher level of competitiveness and strengthening the economy of serbia, primarily industry. dynamic and competitive development of serbia requires a reform of education in the first place, because the highly educated people are the basis of higher phase of sustainable development. the emphasis is placed on the transformation of vocational education, concerning the identification of professional competences acquired earlier. certainly, it is necessary to increase investment in education, which ultimately refers to investment, which, besides creating human capital, contributes to the development of society. continuing the started modernization, reform of the education and training system is a primary task for our country, in order to provide quality workforce, able to work with new technologies and ready to respond to new market conditions. the problem that arises with the education of the people is non-compliance with labor market needs. instead of giving subsidies to foreign investors for each new job, it is much better to invest that money in the continuous education of the workforce. in addition, education should be oriented towards the market structures of the future, which is the way to successfully attract foreign investors. the main competitive advantage of serbia lies in the knowledge, and may be used only through the reform of education. the education reform process is based on the establishment of a system of social partnership, the improvement of educational institutions, providing quality systems in education, and research system in the education. in terms of technological development, serbia is characterized by backwardness, which refers not only to the highly developed countries, but also to the level of technology that the serbian industry had in the late 20 th century. industrial policy and strategy for the period up to 2020 focus on three strategic priorities, which are instruments of technological policy of recovery of serbian industry. their implementation is organized in the form of phases, and refers to revitalization, re-engineering, and development. revitalization is the instrument, competitiveness and developmental trends of the new industrial policy of the republic of serbia 135 which should in the short term (2011-2015) activate the current technological resources and bring them to the normal state, with a focus on quantitative aspects. at this stage, the state has a key role in implementing and launching initiatives. the next phase, reengineering, refers to the technological reconstruction of industry in the period from 2013 to 2020, through technological modernization and introduction of high-tech content. development expansion (2018-2030), as the last stage in the technological development of the serbian industry, seeks to alter the technological profile of the industry, by building new high-tech sector and increasing the innovative potential. the initiator of industrial development in the future is innovation, which is the most important factor of industrial competitiveness. in addition, innovation is the driver of economic growth, which is imperative for serbia in the future. innovative policy aims to reach a greater number of scientific discoveries that the industrial sector will transform into commercial products. research and development policy is part of the innovative policy, which should enable the transformation of scientific research into new technologies and innovations. in serbia, the situation in this respect is very bad, which requires greater investment in knowledge and innovation, greater number of companies engaged in research and development, and better programs that encourage investment in science and technology. allocation of only 0.3% of gdp for science is very low, and new industrial policy emphasizes that the level of budgetary allocations from gdp by 2015 should reach 1%. reforms in the context of information and communication technology, which are the initial spark of economic growth on a world scale, are related to the digitalization of telecommunications infrastructure, enabling the widespread availability of the internet, encouraging the development of web economy, and a higher level of development of electronic communication. in order to achieve the planned changes, of primary importance is the training of a scarce number of professionals in this area, expansive development of egovernment, health care, and a host of other activities that are closely associated with better functioning of information and communication technologies. all this is aimed at modernizing and increasing the competitiveness of the industry, as information and communication technologies are the means to achieve them. strategy and policy of the industrial development of the republic of serbia from 2011 to 2020 provides for the changes in terms of competition, i.e. promoting economic openness, by strengthening ties with foreign countries. although foreign trade is expanding, a trade deficit still exists, which can be overcome only by export growth, which is one of the main goals of serbian industrial policy. to increase exports, it is necessary to remove or reduce barriers and ensure membership in the world trade organization, which would help serbia increase its export volume. membership in the world trade organization is a crucial goal for serbia this year. in addition to increasing exports, the focus should also be on the attraction of foreign investments, which is highlighted by the industrial policy by 2020. for their attraction, the status of candidate for membership in the european union is of particular importance, which serbia achieved in 2012. in addition, it is noted that serbia lacks relatively strong companies, which will be future carriers of economic growth, employment, and driving force of economic development, so that efforts should be directed towards their establishment. when it comes to regional development, the transformation should focus on institution building, the construction of regional economic infrastructure, recognition of the strategic planning of regional development, endogenous regional development, and regional integration in the european union (strategy and policy of the industrial development of the republic of serbia 2011-2020, p. 109). 136 i. kostadinović, z. kostić, i. ilić environmental protection is an important objective of industrial policy if one takes into account the environmental degradation that comes from industrial production. pollution is present in the air, water and soil, and there is also hazardous waste from industrial production. in this regard, the focus should be on cleaner industrial production, reducing pollution and environmental pressures, along with the development of infrastructure systems to support industrial development. 3. analysis of the strategic directions of industrial development of the republic of serbia until 2020 the presented scenario of future industrial growth for the period up to 2020 is characterized by a shift in relation to the transitional period, and a host of ambitious, but achievable goals. the most important agents of industrial growth for the coming period have been identified, which primarily relate to the dynamic growth of investment, the growth of industrial employment, and export-oriented industries. the model of industrial growth takes into account some of the important changes in the environment. first of all, this refers to growing macroeconomic risks, the struggle with recession, falling exports, rising unemployment, and instability in the international economic relations. future industrial growth, in addition to the obstacles encountered in the environment, also faces a number of inherited internal problems and challenges. first, the recovery of the industry and upcoming changes face falling employment, resulting in a drop in earnings, which ultimately leads to social problems and political upheavals, which indicates the orientation towards achieving short-term goals. second, the industrial infrastructure is underdeveloped in all respects. the third problem is the long-standing inflation, which greatly complicates the betterment of the industry. last but not least, there is the problem of deficit in the budget and the current balance of payment, and the growth of the foreign debt, which is a major threat to economic stability and growth. the new industrial growth model points to two milestones, reflected in the focus on industrial growth, innovation, and exports, and accelerated process of reform and european integration (strategy and policy of the industrial development of the republic of serbia 20112020, p. 131). the next period of industrial growth of serbia must be pro-innovation-oriented and export-oriented, whereby the focus should be on the growth of investment, rather than expenditure growth. what is more, serbia needs to be more committed to european integration, in order to become a member of the european union as soon as possible, and thus acquire the right to use the economic benefits provided by this community. the predicted average growth of gdp per annum by 2020 will amount to 5.8%, internal demand to 7.7%, while the productivity will experience a cumulative increase by 50% and employment by 17% (strategy and policy of the industrial development of the republic of serbia 20112020, p. 132). the increase in gross domestic product over time should be conditioned by the dynamics of investment. better results of economic development can be expected only with the recovery of industry and construction, i.e. when their combined share in gdp reaches the level of 25.5%. the key parameters of the new model of economic growth from 2011 to 2020 are (strategy and policy of the industrial development of the republic of serbia 20112020, p. 133): competitiveness and developmental trends of the new industrial policy of the republic of serbia 137 1) increasing the share of fixed investment to 25% in 2015 and 28% in 2020; 2) reducing the share of government expenditure in gdp from 20.5% in 2009 to 12.4% in 2020; 3) increasing the share of exports of goods and services in gdp from 27.6% in 2009 to 65% in 2020; 4) a significant reduction in the deficit of current transactions in the balance of payments from 7.1% in 2010 to 3.3% of gdp in 2020. table 2 average growth rates of target variables of industrial policy in the period 2011-2020 target variables average growth rate 2011-2020 (%) gdp 5.8 investment 9.7 internal final demand 4.7 expenditure 3.5 export of goods 14.2 processing industry 7.3 construction 9.7 employment in processing industry – total growth 18 source: strategy and policy of the industrial development of the republic of serbia 20112020 the amount of budget expenditure allocated for industrial policy by 2020 should be about 1% of gross domestic product. this practically means that around 527 million euros should be allocated for industrial policy in 2020, or about 1% of gdp. in order to use it in an efficient manner, it is necessary to design the dynamics of spending, compliant with the guidelines of the (new) industrial policy (serbian post-crisis economic growth and development model 2011-2020 (2010). foundation for the advancement of economics – faculty of economics, macroeconomic analyses and trends and konjunkturbarometer – economic institute, usaid. belgrade. p.31). the new model puts particular emphasis on the inflow of foreign direct investment, which serves as the basis of important structural changes and economic recovery, primarily in the field of industry. within a macroeconomic model of economic growth and development, three assumptions overlap. they point to the recovery of the industry, which is based on investment and exports, the necessity of joining the european union, as well as the risk that originates from large external debt burden. accordingly, in order to achieve sustainable economic growth, it is necessary to redirect the economy from exports and expenditure to imports and investment. the inflow of foreign direct investment in the serbian processing industry between 2004 and 2010 was 25.4% of the total foreign direct investment. the most attractive areas for foreign investments in processing industries were the food and beverages industry and the industry of chemicals and chemical products. based on the inflow of foreign direct investments in processing companies, there were positive effects, i.e. productivity growth. the production of cement, lime and plaster, and the production of tobacco were the most productive fields, and in these fields, foreign ownership is the most prominent. this is supported by the fact that 31% (strategy and policy of the industrial development of the republic of serbia 20112020, p. 139) of the capital value of companies in the processing industry in serbia is in foreign ownership. 138 i. kostadinović, z. kostić, i. ilić according to the projections of the industrial growth model for the coming period, the inflow of foreign direct investments should amount to 5.8% of gdp per year, while the share of processing industry in total inflow should exceed 40%. for the sake of attracting foreign investors, serbia widely uses tools (tax exemption, subsidy for each new job, free sites), which are not popular in economics. our strongest argument for attracting foreign investors is educated workforce, offered at a low price. the current structure of foreign direct investment is incongruous in serbia, and causes a structural imbalance. foreign investments are mostly focused on the financial sector (banks, insurance companies, and other financial intermediaries), real estate, and retail chains. on the other hand, in developed countries, investment in industry and infrastructure prevails, where investment in the industry accounts for about 40% (reindustrialization strategy of serbia: a draft version, 2012) of foreign direct investment. furthermore, the growth of industrial production has been projected at 6.9% annually, and increase in the share of processing industry in total industrial production should be at the rate of 7.3% per annum. by achieving anticipated growth rates, the share of industry in gdp of 17.6% in 2011 will increase to 19.1% in 2020, while the trend in the processing industry will also rise from 13% to 14.7%. therefore, the processing industry should amount to 20% of gdp in 2020. within the processing industry, the highest average annual growth rates for the next period are projected in high-technology field. in addition to these fields, it is expected that the automotive, as well as pharmaceutical industry, will have high annual growth rates. according to currently available data, serbia is experiencing the decline in industrial production by 4.3% compared to last year (statistical office of the republic of serbia ) . the holder of future industrial growth and economic sustainability is employment. in recent years, employment has significantly lagged behind economic growth, due to transition, restructuring, and institutional and structural constraints. with the advent of the global economic crisis, unemployment has deepened, and in 2010 unemployment rate reached a level of over 20%. currently, according to data from the statistical office of the republic of serbia, the unemployment rate is 21.2%, and the expectations of the international monetary fund are that by the end of the year it will reach 21.8%. serbia is facing a difficult task, given such a high unemployment rate, and the desire to join the european union, which sees a substantial obstacle to serbian accession in the unemployment rate. changes in employment policy are necessary so that serbia could meet expectations for entry into the union. projections of the sectoral structure of employment reflect the equal importance of the quantitative increase in employment and changes in the sectoral structure, which, simultaneously observed, suggests the improvement of its quality. the analysis of the current sectoral structure of employment shows that employment in serbian agriculture is high, and that employment in the industry is low, compared with countries with similar levels of economic activity. the transition to a new model of development means, among other things, the revitalization of industrial employment (serbian postcrisis economic growth and development model 2011-2020, 2010, p. 93-94). judging by projections of industrial employment by 2020, it should increase by a quarter, while the share of employees in the industry in total employment should reach 26.4%. given the growth of the processing industry by 2020, the projected number of employees should amount to nearly 500,000, an increase of 13% compared to 2009 (strategy and policy of the industrial development of the republic of serbia 20112020, p. 137). competitiveness and developmental trends of the new industrial policy of the republic of serbia 139 for export-oriented industrial growth, important goals for the period up to 2020 are achieving an average annual growth rate of exports of goods and services of 13.5%, increasing the share of tradable sectors in gdp formation by export growth, reducing the trade deficit to 12%, and changing the structure of exports in terms of increasing the share of tradable goods with higher share of value added. as the most important objective among other objectives, there is an increase in export competitiveness. the effort in the coming period is to bring the share of exports of goods to the level of 47.1% of the gross domestic product of serbia. serbia’s foreign trade partners in the field of export will not change significantly but the number of partners from the eu should increase. strengthening serbian exports is only possible if transnational companies are encouraged to invest or assist in technological reconstruction of large production capacities. regarding the export of the products of processing industry, it is projected that it should account for about 94.1% of total exports of goods, which will result in reducing the trade deficit. within the processing industry, export is focused on the automotive industry, followed by the food and chemical industries. the automotive industry is expected to account for more than one-fifth of total export growth of the processing industry by 2020. 4. the indicator of industrial development according to unido methodology – the competitive industrial performance index the united nations industrial development organization (unido) is a specialized organization of the united nations that promotes industrial development, poverty reduction, globalization, and environmental sustainability. as an organization that puts special emphasis on inclusive and sustainable industrial development, it is responsible for the promotion and improvement of industrial development in developing countries and transition economies. serbia joined this organization in 2000, which had 171 member countries on 1 january 2014 (unido, www.unido.org). the competitive industrial performance index (cip) has become a major diagnostic tool adopted by unido for benchmarking and measuring industrial competitiveness of countries. the cip index can also be used as an analytical tool for designing policies and assessing the effectiveness of the chosen policy. despite being a composite index, the cip index provides a possibility of analysis of the relative performance of countries over time, through different sub-indicators which are included in the index structure. therefore, national economies can compare their industrial structure, technological level of development, and achieved export performance (competitive industrial performance report 2012/2013, 2013). “the cip index provides complex analysis and follows the developmental trend of competitiveness of one industry. it provides a comparative analysis with other industries, based on absolute and relative indicators and dimensions of competitiveness. based on its comparison and trends, it is possible to draw conclusions about the state and prospects of the industrial development, which can be a basis for defining economic, industrial, and trade policies, and concrete measures within them” (mićić, 2014). according to unido methodology, the cip index consists of eight sub-indicators, grouped into three dimensions of industrial competitiveness. the first dimension relates to a country’s ability to produce and export the product. indicators of this dimension are the value added per capita (mvapc) and exports per capita (mkspc). the second 140 i. kostadinović, z. kostić, i. ilić dimension refers to the level of technological development and technological upgrading. this dimension is observed through two composite sub-indicators: a) the intensity of industrialization (indint) and b) the quality of exports (mxqual). the intensity of industrialization is calculated as a linear aggregation of the share of medium and high technology in the production of value added in total value added produced, and is calculated as: (mhvash + mvash)/2. the quality of the country’s exports is obtained as linear aggregation of the share of medium and high-tech manufactured products in total manufactured exports, and is calculated as follows: (mhxsh + mxsh)/2. finally, the third dimension of competitiveness includes the impact of the country in world production, both in terms of its share in world manufacturing value added (imvmva), and in terms of the impact of the country on the world trade (imvmt). the cip index is a composite index, derived as geometric aggregation of these six sub-indicators that have equal relative importance. what characterizes this index and makes it different from other competitiveness indices is the fact that it provides a unique comparative analysis of industrial performance (industrial benchmarking performance) and ranking on the basis of quantitative indicators and a selected number of indicators that are used as a measure of industrial performance. comparisons and rankings are available at both global and regional level. the analysis included 135 countries in 2010. based on empirical data and general theoretical knowledge, large disparities were observed in the development of industries around the world. according to unido methodology, the countries were classified according to the level of industrial development into five categories: top (most advanced), upper middle, middle, lower middle, and bottom (undeveloped). table 3 overview of the values of cip ranking/index of south east european countries source: the industrial competitiveness of nations-looking back, forging ahead, competitive industrial performance report 2012/2013 (2013). the united nations industrial development organization, vienna. based on the data presented in table 3, it can be seen that serbia occupies the 76 th place in the world according to the level of industrial development, which puts us in the upper-middle category of countries. compared to neighboring countries, we can say that only bosnia and herzegovina, fyr macedonia, and albania have a lower level of competitiveness and developmental trends of the new industrial policy of the republic of serbia 141 industrial development, measured by the cip index. this unenviable data indicates that, in the coming period, serbia must focus its efforts on improving industrial development and competitiveness. concluding remarks and recommendations industrial policy, as part of the general economic policy of a country, plays a key role in the development of the economy. from the theoretical point of view, there are good reasons to believe that industrial policy can play an important role in promoting development. as the foundation of economic and social development, a country’s industrial policy is a benchmark for the regional, educational, technological, financial, monetary, and other policies. the outcome of industrial policy depends on the mindset of the policy makers, attitude of international institutions, as well as compliance with the conditions of development that are present in a country. the implementation of industrial policy and the achievement of its objectives require the networking of companies and cooperation between the private and public sector due to the trends of globalization and technological changes. the primary objective of the industrial policy of serbia is to improve, i.e. increase the competitiveness of this sector. serbia has proactive industrial policy, based on exportoriented competitiveness. the comparative advantage of serbia lies in labor-intensive industries, and focus should be placed on the development of the knowledge economy, which should be part of the future competitive advantage of our country. besides, much greater investment in research and development is needed, because only innovation can stimulate industrial development, and thus indirectly affect the increase in exports of products of high-tech intensive industries to the world market. in particular, the focus should be on the processing industry, because orientation towards the service sector is not a favorable option for further long-term stable and sustainable development of the country. acknowledgement: the paper is a part of the research done within the project no: 179066, ministry of education, science and technological development of the republic of serbia. references 1. aggarwal,v.k, evenett, s.j., (2012). industrial policy choice during the crisis era, oxf. rev. econ. policy, no: 28 (2). 2. gligorijević, ž., (2008). ekonomika industrije, faculty of economics, niš. 3. jurčić, lj., (2013). industrijska politika u globalnim procesima. acta economica, no: 18. 4. mićić, v., (2014). konkurentnost i izvoz industrije srbije u uslovima ekonomske krize, stanje i perspective ekonomsko-finansijskih odnosa srbije sa inostranstvom, scientific association of economists of serbia with the academy of economic studies and the faculty of economics in belgrade, belgrade. 5. reindustrialization strategy of serbia: a draft version (2012). the national council for economic recovery 6. pack, h., saggi, k., (2006). the case for industrial policy: a critical survey. development research group of the world bank. 7. serbian post-crisis economic growth and development model 2011-2020. (2010). foundation for the advancement of economics – faculty of economics, macroeconomic analyses and trends and konjunkturbarometer – economic institute, usaid. belgrade. 8. rodrik, d., (2013). structural change, fundamentals and growth: an overview. institute for advanced study 142 i. kostadinović, z. kostić, i. ilić 9. strategy and policy of the industrial development of the republic of serbia 20112020. (2011). ministry of economy and regional development, republic institute for development. 10. the industrial competitiveness of nations-looking back, forging ahead, competitive industrial performance report 2012/2013. (2013). united nations industrial development organization, vienna. 11. unctad – united nations conference on trade and development. (1998). http://unctad.org/en/docs/ c2emd10r1.en.pdf (12.12.2014.) 12. unido – united nations industrial development organization, http://www.unido.org. 13. statistical office of the republic of serbia, 14. http://webrzs.stat.gov.rs/website/public/pageview.aspx?pkey=67 (20.12.2014.) konkurentnost i razvojni tokovi nove industrijske politike republike srbije dostignuti nivo privrednog razvoja determiniše stepen razvoja industrije u jednoj zemlji. cilj ovog rada je sagledavanje ključnih odrednica nove industrijske politike srbije u kontekstu evropskih integracionih procesa. isti se bazira na analizi strateških dokumenata srbije i evropske unije kojima se uređuje razvoj industrije za period do 2020. godine. posebna pažnja u radu posvećena je praćenju razvojne dinamike i uočavanju tendencija u unapređenju industrijske konkurentnosti. uočeno je, da dostignuti nivo industrijalizacije opredeljuje industrijsku konkurentnost jedne nacionalne ekonomije. srbiji je potrebna efikasna, industrijski konkurentna privredna struktura koja će biti u stanju da odgovori sve većim zahtevima i izazovima na tržištu. samo adekvatno koncepirana i dosledno primenjena industrijska politika može pratiti evropske razvojne tokove u budućem periodu. ključne reči: nova industrijska politika, evropski integracioni procesi, the competitive industrial performance index (cip), razvoj i konkurentnost industrije http://unctad.org/en/docs/c2emd10r1.en.pdf http://unctad.org/en/docs/c2emd10r1.en.pdf http://webrzs.stat.gov.rs/website/public/pageview.aspx?pkey=67 plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 2, 2014, pp. 149 162 review paper the influence of national culture on certain types of organizational culture  udc 316.722: 005.32 gordana nikčević faculty of economics, university of montenegro abstract. national culture, among other factors, largely determines organizational behavior. the paper relates to influence of national culture on certain types of organizational behavior such as: motivation, organizational changes and communication process. introductory section emphasizes the importance of proper understanding of the relationship between national and organizational culture, especially emphasizing the role of cultural factors that largely determine organizational behavior in modern conditions. the author first provides an overview of different perspectives in defining national culture. to explain the influence of national culture on certain forms of organizational behavior, the author uses hofstede dimensions of national cultures. in that context, the author analyzes the influence of national culture on motivation and organizational changes. various forms of communication that represent the consequence of different cultural influences are anylyzed further in the article. final section of the paper provides conclusions about influence of national culture on motivation, organizational changes and communication process. key words: national culture, organization, management, organizational behavior. introduction in recent decades, a trend of more intensive research of national culture and its influence on certain forms of organizational behavior is emphasized. emphasizing the importance of national culture in the functioning of organizations implies a standpoint according to which it is necessary, for design of management systems and techniques, to take into account the cultural context in which they will apply. in theory of organization and management, the opinion that there are universal principles of management, regardless of the above mentioned cultural differences prevailed for a long time. contrary  received january 21, 2014 / accepted june 25, 2014 corresponding author: gordana nikĉević faculty of economics, university of montenegro, jovana tomaševića 37, 81000 podgorica, montenegro tel: +382 78 113 325  e-mail: gogan@t-com.me g. nikĉević 150 to earlier prevailing belief in theories and researches that there are universal principles of management and organization applicable regardless of cultural differences, in recent decades there has been more awareness of the great importance of cultural factors that largely determine design and functioning of modern organizations. each organization has its own culture, which is predominantly influenced by the national culture of the society in which it was created. national culture determines values of organizational culture of companies that operate within its framework, and has significant influence on organizational culture and organizational behavior (hofstede 1980, 2001; trompenaars, hampden-turner, 1998). some authors argue that national culture influences the style of thinking of managers of different nationalities and cultures, which is particularly evident when they work together. thus, for example, certain cultures foster the right to freedom of speech, while other cultures consider that such right should be subordinated to interests of sthe ociety as a whole, etc. (brooks, 2006: 271-295). nowadays, companies are faced with multiple challenges. companies need to provide heterogenous workforce, that belongs to different cultural and ethnic groups, to work together to achieve common goals, thereby treating each individual regardless of its culture and identity. in order to achieve that, the organization must be aware of the importance that culture and approach the issue of cultural differences in a proactive manner. only those organizations that employ people from different cultures can respond quickly and creatively to global society challenges. in addition, cultural differences can be neither neglected nor ignored. if ignored or if there is no awareness of them, it may cost the organization dearly. regardless of different standpoints regarding national culture, there is a general agreement on its crucial influence on the success of the organization, except that some factors may be affected more and some less. since we live in time of changes, these changes also include changes in manner of business operations. today's companies, if want to be successful, must adapt to the environment through a process of organizational changes. communication can contribute to the success of an organization in a way that ensures it to be proactive, not just reactive, to have relevant and consistent influence on the environment, to be adaptable and future-oriented and, as such, to be ready to accept diversity in opinion and behavior. in this process, motivation should play a very important role. therefore, the main objective of this paper is to point out the importance that national culture has on certain (the above mentioned) types of organizational behavior through analyzes of influence of national culture on motivation, communication process and organizational changes in the company, i.e. to show that national culture is the factor that dominantly determines certain types of organizational behavior. 1. definition of national culture national culture has many definitions. one of the most influential and multidisciplinary definition of culture is the one of kroeber, an anthropologist and sociologist, according to whom the culture represents „transmitted and created content and patterns of values, ideas, and other symbolic-meaningful systems as factors in the shaping of human behavior and the artifacts produced through behavior (kroeber, parsons, 1958: 583). definition of geertz, an anthropologist, also deserves attention „culture is an historically transmitted pattern of meanings embodied in symbols, a system of inherited conceptions expressed in symbolic forms by means of which men communicate, perpetuate, and develop their the influence of national culture on certain types of organizational culture 151 knowledge about and their attitudes toward life“ (gerc, 1998:122). certainly, the most widely quoted definition in the literature is the definition of a dutch researcher geert hofstede, who contributed the most to the development of the study of cultural influences on organizations. according to hofstede „national culture represents mental programming: different patterns of thinking, feeling and potential acting, which were learned throughout (one's) lifetime“ (hofstede, 2001: 25). for ease of understanding of national culture while respecting definitions of previous authors, for the purpose of this paper we will use a definition according to which „national culture represents a system of assumptions, values, norms, and attitudes, manifested through symbols which the members of an organization have developed and adopted through mutual experience and which help them determine the meaning of the world around them and how to behave in it“ (janićijević, 2013: 547). as with the organizational culture, as a result of the above mentioned definition, the national culture's content are: assumptions, values, norms, attitudes and symbols. however, in contrast to organizational culture in which norms, attitudes and symbols play a crucial role since they were created in it and according to which an organization functions, national culture is a little different. given that national culture lies deep into its members' subconsciousness, assumptions and values have greater importance while norms, attitudes and symbols are of less importance. norms, attitudes and symbols result from proizilaze assumptions and values, but do not have such importance for national culture. stories, anecdotes, and nonverbal behavior in both the family and society have a large role in transmission of values and assumptions. national culture assumptions and values develop at a young age and are very difficult to change. this definition implies that national culture assumptions and values are created through long-term experience and through interaction of society members, by solving problems the society is facing with and repeting successful solutions. in fact, as with the organizational culture, certain rules of understanding the world and behaving within it are created. these rules are transformed over time in values to be pursued, as well as assumptions about what is the nature of reality and relationships within it. it follows from the definition that the content of culture, i.e. assumptions, values, norms and attitudes significantly determine the manner in which members of certain nation perceive and interpret the world around them and the way they behave in it. since they share the same assumptions, values, norms and attitudes, the members of an ethnic community will interpret events that surround them in the same manner. as they move in the environment of their compatriots, who adopted the same assumptions and values in the same manner, they will be hard to believe that this is the only and right way of thinking and behaving in the world. however, as it is a larger social group, the power of typical national cultural pattern and homogeneity of thinking and behavior of members of a national culture is lower than in organizational culture. certainly, the national cultural pattern exists, and it will sometimes stronger and sometimes weaker, direct the members of a nation to interpret the world around them and to behave in it in the same way. g. nikĉević 152 2. hofstede‟s study of national cultures and particular determinants of organizational behavior 2.1. national culture dimensions in the seventies of the last century geert hofstede started a study that aimed to identify and measure dimensions of cultures. in other words, hofstede wanted to measure national culture by comparing the attitudes and values of the members of different national cultures. the data for his original empirical study came from 116.000 questionnaires filled in by ibm employees in 40 countries and three regions. thus, the dimensions of national culture of a society are as follows (hofstede, 2001: 98): 1. hierarchical distance, i.e. power distance – describes the extent to which the society accepts unequality among people; 2. individualism versus collectivism – represents the degree to which individuals in the society rather act as individuals, not as group's members; 3. masculinity versus femininity – explains whether the society prefers value of "masculinity" or "femininity“ value; 4. uncertainty avoidance – deals with a society's tolerance for uncertainty and ambiguity. 5. later, hofstede added a fifth dimension „long term orientation versus short term orientation‟ or confucian dynamism. 1. power distance represents „the extent“ to which the less powerful members of organizations and institutions accept and expect that power is distributed unequally. hierarchical levels correspond to certain hierarchical relationships that represent the epitome of power in terms of subordination of the subordinates. if there is complexity of activities within an organization, a multihierarchical structure with an appropriate division of labor and grouping of activities is required. power distance is a qualitative experience of management span. the span of management usually varies from level to level. in large organizations a limited span of management increases the number of levels in hierarchical structure, which as a result has the effect of increasing the number of intermediaries in the transmission of information and reducing the effectiveness. power distance also determines the appropriate leadership styles. in organizations with high power distance the superior does not share its power with its subordinates, nor consults them in decision-making process. organizations with low power distance are characterized by involvement of employees in formal decision-making process. the authority of the manager applies only in those areas related to its scope and in which he is a competent one, while initiative, creativity, independence of thought are expected from the subordinates. 2. „individualism stands for a society in which the ties between individuals are loose: everyone is expected to look after her/himself and her/his immediate family. collectivism stands for a society in which people from birth onwards are integrated into strong, cohesive in-groups, which continue protecting them in exchange for unquestioning loyalty“ (hofstede, 2001:225). individualism and collectivism are significantly different. individualism assumes that there is a free will of people, so that they can change things and influence their own destiny. employees meet the pre-determined plan and do not tend to changes.collectivism the influence of national culture on certain types of organizational culture 153 implies the existence of a stronger social structure in which the collective is responsible for the destiny of an individual. the emphasis is given to involvement of an individual in an organization that is primarily moral, so the individual also feels emotional attachment to the organization. 3. „masculinity versus femininity: masculinity stands for a society in which social gender roles are clearly distinct: men are supposed to be tough, assertive and focused on material success; women are supposed to be modest, tender and concerned with the quality of life. femininity stands for a society in which social gender roles overlap: both men and women are supposed to be modest, tender and concerned with the quality of life“ (hofstede, 2001: 297). 4. uncertainty avoidance represents „the extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations“ (hofstede, 2001:161). the main problem in this case is the extent to which a society tries to control uncertainty. however, in the same way that human society uses technology, law, religion in order to tackle with uncertainty, so the organizations use technology, rules and rituals thus reducing internal uncertainty caused by unpredictable behavior of its members. 5. long-term versus short-term orientation relates to the extent to which culture affects its members to accept delayed satisfaction of their material, social and emotional needs. namely, „long-term orientation stands for the fostering of virtues oriented towards future rewards, in particular perseverance and thrift. its opposite pole, short-term orientation stands for the fostering of virtues related to the past and present in particular, respect for tradition, preservation of "face", and fulfilling social obligations“ (hofstede, 2001: 359). in the long-term orientation cultures loyalty to the organization represents a special value. they give priority to values of learning, integrity, adaptability, responsibility and self-discipline, while leisure does not matter. short-term orientation cultures put emphasis on freedom, rights, independence and leisure. regarding specified dimensions, hofstede believes that our opinions about organizations are most affected by hierarchical power distance and uncertainty avoidance. hierarchical power distance gives us the answer to the question "who has the power to decide", and uncertainty avoidance, "which rules and procedures will be respected in order to achieve the desired goals within the organization." these two dimensions affect the process of planning and control in organizations. namely, the higher a person is on the hierarchical scale, the less formal are processes of planning and control, i.e. higher level of uncertainty avoidance requires more detailed planning and control. according to hofstede, there are no universal principles of management and operations that would be equally applicable to all organizations, but these principles are the result of different theories that have the characteristics of the culture in which they arose. „each country or region has unique features that no model can include ” (hofstede et. al., 2001). the above mentioned dimensions of national culture will be used for explanation of the impact of national culture on motivation and organizational changes. 2.2. influence of culture on motivation and organizations there are a number of theories that deal with the relationship between culture and motivation which differ in the manner of origin, level of emporia support, practical g. nikĉević 154 usability and the like. however, what is common to all theories is that most of them originated in the united states (robbins, 2001: 175). we will mention only some of the motivation theories where some differences in employees' motives may be noticed, which are mainly the consequence of different national cultures. alderfer's theory analyzes needs and motives that drive people in organizations in different cultures (janicijevic, 1997: 227). thus, for example. basic needs (physiological and safety) are important in cultures with high uncertainty avoidance. cultures with strong individualism, i.e. "masculine" values and low power distance value independence and individual efficiency. cultures with so-called „feminine“ values, collectivism and high power distance satisfy their existential needs through belonging and loyalty to collective. likewise, connection needs (belonging, respect of others) are crucial in cultures characterized by high uncertainty avoidance and high power distance, collectivism and "feminine values“. development needs (self-esteem and self-actualization) are the most important in cultures where "masculine" values, individualism, low power distance and uncertainty avoidance prevail (janićijević, 1997: 227-230) the theory of frederick herzberg also deserves atention. according to this theory, and confirmed by numerous studies, the desire for interesting work is important almost to all workers, regardless of their national culture. for instance, the desire for interesting work seems important to almost all workers, regardless of their national culture. in a study of seven countries, employees in belgium, britain, israel and the united states ranked “interesting workk” number one among 11 work goals. and this factor was ranked either second or third in japan, the netherlands and germany (robbins, coulter, 2005: 408). likewise, in some east asia cultures motivation for the achievement is not individual but group-oriented. for japan a group achievement motive is precisely the key "driving force" in organizations. individual achievement is neither valued nor rewarded. on the contrary, in the u.s. individual achievements are much more valued and respected, and individuals who stand out from others are rewarded. hofstede believes that the influence of cultural values on motivation can be best explained by crossing two dimensions of national culture which are uncertainty avoidance and "masculine values". in that sense, anglo-american culture and cultures of the united states, great britain and their former colonies have low uncertainty avoidance and strong masculine values. in these countries, motivation is based on personal, i.e. individual success, expressed in the form of wealth and honor. cultures with low risk avoidance and feminine values are present in northern european countries and the netherlands. motivation in these countries is based on success and interaction between people, while success here is partly measured by "quality" of human relations and living conditions. (hofstede, 2001: 386) high uncertainty avoidance and emphasized "feminine" values are typical for france, spain, portugal and the former yugoslavia. motivation in those countries reflects in safety needs and needs for belonging. individual wealth and success are less important than mutual solidarity and group cohesion. in countries with high uncertainty avoidance and emphasized "masculine values" (japan, german-speaking countries, greece) motivation essentially has personal, individual safety based on wealth and especially on the hard work. furthermore, differences in motivation between people exist when people work for extrinsic money rewards and for the positive regard and support of their colleagues. in more communitarian cultures, this second source of motivation may be so strong that high performers prefer to share the fruits of their efforts the influence of national culture on certain types of organizational culture 155 with colleagues than to take extra money for themselves as individuals. (trompenaars, hampden-turner, 1998: 63) regardless of the fact that most contemporary motivation theories are considered culturally limited, the results of some studies (gelfand, erez, aykan, 2007: 482) however show universality of certain motifves, such as the pursuit of personal efficacy, need for control, achievements and the like. however, specific factors that cause these motifves differ from culture to culture. individualized feedback influences beliefs about personal effectiveness in individualistic cultures, whereas group feedback has the same effect in collectivistic cultures. similarly, although the need for control is universal, personal culture is important in individualistic cultures, and collectivistic in collectivistic cultures. although there are beliefs that the achievement motive is more strongly present in individualistic than in collectivistic cultures the more is present a standpoint that it is about existence of different meanings of this term in different cultures. collectivists believe that positive results represent the outcome of collective effort, not just individual. erez and earley believe that there are certain universal principles of motivation acceptable in different cultures. content domain of human needs and motivations is universal. needs for personal advancement, efficiency and consistency are universal human characteristics. what is different in cultures is the need to emphasize different needs, as well as means to meet them. certainly, when it comes to relationship between national culture and motivation the analysis of influence of certain cultural dimension to this process in organizations dominates.there is often aspiration to explain influence of culture to motivation through two-dimensional matrix. all explanations are interesting and stimulating, but ignore the fact that national cultures represent the wholes that cannot be reduced solely to individual dimensions. this requires application of a systemic or holistic approach that observes national cultures as wholes that cannot be reduced to its individual dimensions. 2.3. national culture and organizational change many authors indicate that understanding of certain activities in organizations varies between national cultures. national culture significantly influences the process of changes management in an organization. the nature of this influence can be seen through the following questions (robbins, 2001): do people believe that change is possible? if change is possible, what is the time period in which it can be implemented? is resistance to change greater in some cultures than in others? does culture affect implementation of the change planned? do successful change agents do different things in different cultures? do people believe that change is possible? cultures differ in the extent to which its members believe that they have the ability to control their environment. in cultures where the prevailing belief is that the environment can be controlled, individuals will have a positive attitude towards changes (example for those cultures are the u.s. or canada). in other cultures (for example, iran or saudi arabia), people are considered subordinate to their environment and are likely to take a more passive attitude towards changes. when it comes to time in which it is possible to perform the change, certain differences occur. namely, in long-term oriented cultures (e.g. japan) patience in awaiting positive results of planned changes has already been expressed. in short-term oriented cultures g. nikĉević 156 (e.g. the u.s.), fast improvements will be expected and change programs accepted that promise quick results. the fifth dimension of hofstede's model, long-term versus shortterm orientation represents this aspect the best. is resistance to change greater in certain cultures than in others? resistance to change will undoubtedly be influenced by the extent to which a certain culture relies on tradition. national culture of italy is often cited as an example of the frequent reliance on the past, while the culture of the united states is believed to be focused on the present. accordingly, resistance to change should be significantly higher in the first than in the second culture. regarding the influence of culture on the manner of implementation of planned changes, power distance is a dimension of culture that influences the above mentioned process. in cultures with high power distance (philippines, venezuela) changes will be autocratically imposed by top management layers in an organization. on the contrary, low power distance in certain culture presumes greater participation of all employees in implementation of organizational changes (e.g. cultures of denmark and israel). do successful change agents resort to various "techniques" of implementation of changes in different cultures? the answer to this question is affirmative. members of cultures with emphasized power distance prefer that initiators of changes receive support from the top of the organization, in order to accept innovations themselves. furthermore, the higher is uncertainty avoidance in the culture change agents are forced to, as far as possible, develop innovations within existing rules and procedures ( robbins, 2001: 562). when it comes to specific process of managing changes in organizations, the management of an organization, consciously or unconsciously over time develop its own approach to change management. of course, this process is largely influenced by implicit assumptions, beliefs and values of managers that they adopt from national culture to which they belong. "the main determinants of the approach to change management in organizations are character and changes leadership style. in other words, the approach to change management is determined by commitment to a particular type of change and a certain style of leadership change“(janićijević, 2008: 361) when it comes to this subject, the question about the type of changes that will be applied in a particular organization and changes leadership style deserves special attention. as for the type of changes, despite the fact that all organizations go through everyday, incremental and partial changes, a gap between the organization and its environment is created over time. in this regard, in order to overcome the aforementioned gap, the need to carry out a comprehensive, radical and intensive changes (the so-called discontinuous changes) arises. managers are expected to opt for a particular type of change. this choice is largely determined also by cultural factors. when it comes to choosing between continuous and discontinuous changes, the importance of two dimensions of national culture is primarily emphasized. uncertainty avoidance and power distance. "continual changes require low degree of uncertainty avoidance in the national culture, as these are incremental and partial, but everyday changes. the organization can be continuously changed only if members of such organization accept the fact that changes are inevitable and permanently present. we can expect such assumptions only in cultures with low uncertainty avoidance. in cultures with high uncertainty avoidance members of organization are not willing to accept everyday and frequent changes. they prefer the stability which inevitably leads their organization more frequent and faster to disharmony with the environment, thus causing the need for radical, transformational the influence of national culture on certain types of organizational culture 157 changes. therefore, in cultures with high uncertainty avoidance, the management of an organization will be prone to discontinuous changes. it seems paradoxical that a high degree of uncertainty avoidance leads to radical changes, revolutionary and comprehensive changes that bring a far greater degree of uncertainty than continuous changes. this is because members of organization in cultures with high uncertainty avoidance tend to eliminate the immediate sources of uncertainties in front of them. they will postpone changes as long as possible, and when it is not possible any more they will inevitably resort to radical changes. for members of cultures with high uncertainty avoidance, it is acceptable to face with rare and shorter periods of high uncertainty, than with low but constant uncertainty of evolutionary change“ (janićijević, 2008:362). in addition to uncertainty avoidance, power distance can affect the choice between continuous and discontinuous changes. namely, continuous changes are implemented through numerous smaller "adjustments" at all levels of the organization and because of that their initiation and management is under the competence of the lower levels managers. this implies a relatively even distribution of power and authority and decentralization of organization for which one of the cultural prerequisites is low power distance. on the other hand, radical, revolutionary and comprehensive (discontinuous) changes mean concentration of power in the person of a strong leader at the top of the organization, which is most common in cultures with high power distance. accordingly, the conclusion is that discontinuous changes will be more accepted and have chances for success in organizations of culture with high power distance and stronger uncertainty avoidance, in contrast to cultures characterized by low risk avoidance and less emphasized power distance which favors implementation of continuous changes. of course, it has been mentioned earlier that all organizations are faced with and with both types of changes irrespective of dimensions of national cultures in which they function. both, the aforementioned dimensions, influence predominant selection of the type of change and certainty of the success of such a choice (janićijević, 2008: 363). style of leadership in organizational changes is also substantially influenced by national culture. the main leadership styles are directive and participative. it is clear that dimension of power distance mostly affects the choice of organizational changes leadership style. in cultures with emphasized power distance unequal distribution of power in organizations is accepted and considered justified. so, the leaders are expected to reach all important decisions, including decisions about the type and manner of implementation of changes. directive leadership style (top-down approach) is appropriate for such a cultural orientation. on the other hand, national cultures characterized by low power distance imply an active role of employees in decision-making. it also refers to the process of organizational changes in which participative leadership style (bottom-up approach) is more likely to be successful and accepted by employees. dimension of uncertainty avoidance also has similar impact on the choice of leadership style in organizational changes. mentioned orientation implies reluctance of subordinates to changes and risks which they inevitably bring. when an organization is faced with inevitability of change, the more likely are inertia and passivity of employees and giving up to a directive leadership style by managers. members of cultures with low uncertainty avoidance do not feel jeopardized in unclear and uncertain situations that accompany the process of change and, therefore, they actively participate in designing and implementation of changes. dimension of individualism / collectivism also affects organizational change leadership style. in individualistic cultures where interest of the individual is primary, the choice of participatory leadership is more likely to be g. nikĉević 158 accepted. on the other hand, collective interests have the primacy in collectivist cultures, which is primarily provided for by relying on leaders‟ decisions, which also applies to decisions on manner of implementation of changes, including the choice of directive leadership style as the most appropriate (janićijević, 2008: 363-364). so, there is no doubt that national cultures differ when it comes to accepting changes. some cultures are changing slowly and actively oppose to changes, primarily because of their preference for traditional behavior. other cultures accept the changes, but sometimes a considerable number of their members tries to re-establish traditional values and behavior and sees change as a threat. finally, some cultures are ambivalent with respect to the changes and at the same time accept them, resist them and fear them. it is important for managers to understand sources of resistance to changes so they can anticipate and reduce them. tradition, customs, limited resources, fear of losing power and influence and fear of the unknown, are forms of resistance to change that can be found in all societies (francesco, gold, 1998: 207). 3. influence of national culture on communication process „we must never assume that we are fully aware of what we communicate to someone else .... culture hides more than it reveals. years of study have convinced me that the real job is not to understand foreign culture but to understand our own. i am also convinced that all that one ever gets from studying foreign culture is a token understanding“ (hall, 1976: 36-38). from the above we may conclude that the american anthropologist edward hall sees the whole culture as one of communication forms. the relationship between communication and culture is reciprocal, complex and bidirectional. in 1959 hall still considered that culture is communication and communication is culture (1990: 10). he believes that communication acts as a transmitter of culture and thus influences its structure. likewise, culture is manifested through communication, because people communicate according to the dictates of their culture. however, communication affects culture and vice versa. rephrase that, it is difficult to say what is the voice, and what is echo. this dualism exists because people "learn" about their culture through communication, which represents reflection of their own culture. power of the link that connects communication and culture can be seen from the following questions: for some castes in india rats are sacred animals, whereas in europe and the u.s. people are destroying these rodents. why? some people shake hands when introduced to a stranger, while others greet each other by bowing. why? the general answer to all these questions is the same: culture. therefore, hall explains all these differences as high and low-context culture (samovar, porter 2007: 22). depending on the manner of communication in cultures, hall differs high and lowcontext cultures. the context is information that surrounds certain event which is also associated with that event. cultures of the world can be divided into cultures with high and low-context. a high-context (hc) communication or message is one in which most of the information is either in the physical context or is internalized in the person, while very little is in the coded, explicit, transmitted part of the message. a low-context (lc) communication is just the opposite; i.e., the mass of information is vested in the explicit the influence of national culture on certain types of organizational culture 159 code. „japanese, arabs and mediterranean peoples, who have extensive information networks among family, friends, colleagues and clients and who are involved in close personal relations are high-context. as a result, for most normal transactions in family life they do not require, nor do they expect, much indepth background information. this is because they keep themselves informed about everything having to do with the people who are important in their lives. low-context people include americans, germans, swiss, scandinavians and other northern europeans. they compartmentalize their personal relationships, their work, and many aspects of day-to-day life. consequently, each time they interact with others they need detailed background information. the french are much higher on the context scale than either the germans or the americans. this difference can affect virtually every situation and every relationship in which the members of these two opposite traditions find themselves“ (hall, 1990:6). edward hall clearly emphasized differences in the manner of communication in certain cultures explaining high and low-context cultures. in this regard, hall defined concepts of both high-context and low-context culture. low-context cultures rely on what is explicitly said or written in order to understand the message, while high-context cultures rely more on interpretation of elements that are external to the text. characteristics of high-context cultures are as follows:  relationships between people are long-lasting and individuals feel strong interest for others;  because of a strong communication with the help of a "common code" (the context) in routine situations such a communication is cost-effective, fast and successful. high-context cultures include that context in communication. for example, the japanese often bypass the main topic in communication, assuming that an intelligent man will be able to discover the topic of conversation from the context that communicate;  people in top positions are personally liable for actions of their subordinates, which further evaluates mutual loyalty between superiors and subordinates;  agreements are often rather verbal than written. this may mean that the written agreement is only "the best assumption", because after signing the contract in japan people may seek for further changes. even many contracts contain a provision that it can be renegotiated if circumstances change;  "insiders" and "outsiders" are clearly separated. the outsiders are, in the first place, people who are not members of the family, clan, organization and finally strangers (i.e.other cultures' members);  cultural patterns are deeply rooted and slowly changed. on the contrary, low-context cultures are characterized by the following:  relationships between individuals are relatively short and excessively expresed relatedness with others is not esteemed;  communication messages must be clear and one can less rely on context and nonverbal communication in the process of communication;  the authority is distributed through the whole bureaucratic mechanism and relations of personal responsibility are rarely established;  agreements are often written rather than oral. low-context cultures consider contracts as final and legally binding; g. nikĉević 160  "insiders" and "outsiders" are less clearly distinguished, which means that strangers easilyadapt to such a culture;  cultural patterns are rapidly changing (mead, 1998:27). therefore, people in different cultures communicate in different ways. today there are more than 200 different languages and over 3000 different language versions. not even one-half of the world is considered linguistically homogeneous. in some countries, there are several hundred different language versions (eg. indonesia). some languages, almost identical, are differently used in different countries, some words will be pronounced or written differently and even have different meaning (examples are british english and american english or german and austrian german). when it comes to verbal communication two people can speak the same language (for example, people from the u.s. and england), and in fact do not understand each other. language therefore is understood as a way of thinking, the system of values of a society. learning language means learning culture (rakita, 2003). in addition to verbal, non-verbal communication is very significant particularly in certain cultures. various studies show that impression we leave on others when communicating depends on what we say which is only 7%, how we pronounce it 38% and the most of our body language -55%. according to some estimates, 70-80% of communication is of non-verbal character. it implies that gestures, i.e. movements of head, arms, shoulders, look, how we use our eyes, voice, and even clothing. every country has its code of conduct and interpretation of certain gestures, which represent reflection of itsculture. in this sense, the east uses non-verbal communication more than west. also in this regard, experts distinguish between two types of culture: the culture of close and culture of distanced contact in communication. cultures of close contact are characteristic for the middle east, indonesia, latin america, southern and eastern europe and are characterized by a high degree of intimacy (closeness), while cultures of distanced contact are typical for north america, northern europe and some asian countries. it is also interesting that with the russians, arabs, french and latino americans kiss on the cheek or holding hands in the street is a common occurrence. for some other people, for example, the anglo-saxons and asians it would be very inappropriate. in japan and korea other gestures are used when greeting and showing respect they bow to each other and the depth of the bow depends on respect for the person you are bowing to. arabs often watch their interlocutors in the eyes, because they believe that the eyes are the mirror of the soul, and that is very important to know the soul of the one you do business with. however, in contrast, japanese children are taught in school not to look their teachers in the eyes but to direct their gaze at the region of their teacher's adam's apple or tie knot (rakita, 2003). concluding observations therefore, the general conclusion is that the national culture determines the rules of company's business operations in a social context. when it comes to analyzing the influence on the motivation process it would be the best to apply those motivational techniques and procedures that are the most appropriate for a given national culture. it is important that manager techniques and procedures coincide with the values of national cultures of organization's members. in addition, it is the influence of national culture on certain types of organizational culture 161 very important to know and understand your own cultural values. it is interesting that different authors distinguish different dimensions of national cultures that affect the most motivation process in organizations. in this regard, hofstede distinguishes uncertainty avoidance and "masculine/feminine values“. all dimensions act as a whole that cannot be reduced to influence of one or two, or all four of them individually observed. this confirms the need of applied systemic, i.e. holistic analysis of cultural influence on motivation in organizations. thus, in analyzing national culture influence on motivational process it cannot be simply reduced to its two dimensions. in analyzing the influence of national culture on organizational changes, the position on cultural limitation of most of the theories and techniques of organization and management is particularly evident. for example, the theory that explains this influence may not always be fully in line with cultural orientation of countries of its origin. in this sense, is necessary to introduce professional and humanistic values of researchers' professional culture that could explain the above mentioned discrepancy. furthermore, in addition to influence of national culture on the process of organizational change, other factors that influence those processes may not be neglected. namely, organizations pass through continuous and discontinuous changes. therefore, the standpoint that the organizations are forced, due to some cultural dimensions, to apply specified type of change is not correct. what can be declared with certainty is that there is a high likelihood that, because of different dimensions of culture, some changes will have a greater chance of being accepted and more successful than others. it is important to note the disharmony between the culture and planned changes and to find ways to overcome such disharmony. when it comes to the process of communication, organizations are nowday increasingly faced with new contacts, people and organizations from other countries. to be successful in working with people from other cultures, managers must be aware of cultural differences and similarities between a country of origin and a country in which they will do their business. the way of negotiation in some countries is largely determined by characteristics of national cultures of certain countries. temperament, attitudes and way of thinking, moral and spiritual principles and other values shape behavior, and also the manner of communication among members of different countries. they also need to understand implications of diversity and to possess necessary communication skills to be able to decide in accordance with cultural specificities of the environment. the knowledge of corporate culture characteristics and the way of negotiating is an essential prerequisite for achieving successful business. only in this way is it always and everywhere possible to achieve a successful business relationship, without occurence of any misunderstandings and bad emotions. references 1. brooks, i. (2006), organizational behavior: individuals, groups and organization, (3rd ed.), new jersey, prentice-hall. 2. erez, m, earley, p.c. (1993), culture, self-identity and work, new york, oxford university press. 3. francesco, a m, gold, b.a.(1998), international organizational behavior: text, reading, cases, and skills, new jersey, prentice hall. 4. gelfand, m., erez, m., aycan, z. (2007), cross-cultural organizational behavior, annual review of psychology, vol. 58, pp. 47-514. 5. gerc, k. (1998), tumaĉenje kultura, beograd, ĉigoja štampa. 6. hall, e.t. (1976), nemi jezik, beograd, bigz. g. nikĉević 162 7. hall, e.t., hall, m.r. (1990), understanding cultural differences, yarmouth, ma, intercultural press, inc. 8. hofstede, g. (1980), culture‟s consequences – international differences in work-related values, newbury park, california, sage publications. 9. hofstede, g.(2001), culture's consequences: comparing values, behaviors, institutions, and organizations across nations. thousand oaks, california, sage publications. 10. janićijević, n. (1997), organizaciona kultura, novi sad, ulixes. 11. janićijević, n. (2008), organizaciono ponasanje, beograd, data status. 12. janićijević, n. (2013), organizaciona kultura i menadžment, beograd, ekonomski fakultet. 13. kroeber, a l., parsons, t. (1958), the concepts of culture and of social system. american sociological review, vol.23, no.5, pp. 582-583 14. mead, r.(1998), international management: cross-cultural dimensions, (2nd ed), london, blackwell business. 15. rakita, b. (2003), medjunarodni marketing, beograd, ekonomski fakultet. 16. robbins, s. p., coulter, m. (2005), menadžment, beograd, data satus. 17. robbins, s.p.(2001), organizational behavior, (9th ed), london, prentice-hall international. 18. samovar, l., porter, r. (2007), communication between cultures, belmont, ca, thomson wadsworth. 19. trompenaars, f., hampden turner, c. (1998), riding the waves of culture: understanding cultural diversity in global business, new york, mc graw-hill. uticaj nacionalne kulture na pojedine oblike organizacionog ponašanja nacionalna kultura, pored ostalih faktora, velikim delom određuje organizaciono ponašanje. rad se odnosi na uticaj nacionalne kulture na pojedine oblike organizacionog ponašanja i to: motivaciju, organizacione promene i proces komunikacije. u uvodnom dijelu autor naglasava značaj pravilnog razumijevanja odnosa nacionalne i organizacione kulture, ističući ulogu kulturnih cinilaca koji u velikoj meri određuju ponašanje organizacija u savremenim uslovima. autor u radu najpre daje prikaz različitih perspektiva u definisanju nacionalne kulture. za objašnjenje uticaja nacionalne kulture na pojedine oblike organizacionog ponasanja, autor koristi hofstedeove dimenzije nacionalnih kultura. u kontekstu toga analizira uticaj nacionalne kulture na motivaciju i organizacione promene. u daljem delu teksta analizirani su različiti oblici komunikacije koji su posledica različitih kulturnih uticaja. u završnom delu rada dati su zaključci o oticaju nacionalne kulture na motivaciju, organizacione promene i proces komunikacije. kljuĉne reĉi: nacionalna kultura, organizacija, menadžment, organizaciono ponašanje. facta universitatis series: economics and organization vol. 15, n o 4, 2018, pp. 331 348 https://doi.org/10.22190/fueo1804331s © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper marketing culture in financial services with specific reference to retail banking in india 1 udc 658.8:336(540) ravi shanker indian institute of foreign trade, new delhi, india abstract. service industry is fast becoming the key to a nation’s success and its importance in the world economy is tremendous. in india too, the service industry boom has powered the growth of the economy. service industry is different and hence poses special management challenges. there are some unusual variables that affect the performance of these organizations. the ‘marketing culture’ of the organization is one such factor. the paper relates to it in the context of the banking sector in india. post liberalization, the banking industry became highly competitive as the number of banking institutions increased multifold. currently there are 87 banks in india (21 public sector banks, 21 private sector banks, and 45 foreign financial intermediaries and banks) competing with each other. it has also been observed that one of the variables on the basis of which the banks compete is providing superior customer contacts, which is possible through customer centric employees and the marketing culture that exist in the banking organization. marketing culture refers to the pattern of shared values and beliefs that help individuals understand the marketing function and provide them with norms for behavior in the firm. the orientation and culture towards marketing within the organization is the highest imperative. the paper is based on primary research being undertaken on three banks selected from each category mentioned above. a questionnaire was developed with the help of which the marketing culture of a service firm was assessed. the questionnaire uses 34 items measuring six dimensions of marketing culture, as identified by leading researchers. these six dimensions are service quality, internal communication, innovativeness, organization, inter-personal relationships and selling tasks. the paper has used parametric approach to analyze and understand the attitude of the employees of each of the banks towards the dimensions identified. the inter-relationships among the six dimensions for each of the banks have also been studied. weights have been assigned to the six dimensions and the responses have been assessed accordingly. the results of received july 27, 2018 / accepted september 7, 2018 corresponding author: ravi shanker indian institute of foreign trade, iift bhawan b-21, qutab institutional area, new delhi 110 016, india e-mail: profravishanker@gmail.com 332 r. shanker the analysis clearly show the foreign banks score the highest on the imc index and the nationalized banks the lowest. key words: marketing culture, service quality, internal communication, innovativeness, inter-personal relationships and selling tasks jel classification: m31, g21 introduction the review of classical marketing concepts to contemporary marketing theories clarifies the misunderstandings regarding marketing. the confusion about marketing gets complex if you look at the variety of definitions of marketing where each one relates to a limited scope of marketing and gives a holistic view of complete marketing function. marketing has a deep rooted meaning which goes beyond the 4 ps, advertising and selling products. in essence, marketing is a way of organizing the activities of the enterprise that includes the tools and techniques for identifying, anticipating and satisfying customer requirements, maintaining marketing orientation and organizational culture etc. therefore, in this chapter an attempt is made to segregate the selected definitions of marketing so as to arrive at a clearer understanding of marketing which will be useful as the background to explore the status and relevance of the marketing culture in the service sector. 1. understanding marketing 1.1. marketing as a process marketing as a phenomenon can be looked upon through various approaches. marketing has been described differently as, a philosophy, an orientation and a whole set of culture. in the academic establishment in 1985, the american marketing association (ama) redefined marketing as “the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchange and satisfy individual and organizational activities.” (lusch, 2007, p. 264). this definition suggests that the marketing process relates to planning and executing the conception, pricing, distribution and promotion of goods, services and ideas but the scope of marketing is restricted to 4ps. recognizing the shifts, the american marketing association (2004) redefined marketing as an organizational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders (gundlach, 2007). and as approved by the same association in 2013, “marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners and society at large” (ama, 2013). the latter definition is the modernization of the previous one which does not take into consideration what the customer would want marketing to be. marketing culture in financial services with specific reference to retail banking in india 333 1.2. marketing as a philosophy the marketing concept as an essential philosophy directing marketing in practice still prevails. m.j. baker introduced marketing as a business philosophy. according to baker (1974), marketing requires the firm to do what it has always set out to do combine the resources at its disposal in the manner which will enable it to achieve its long run profit goals. this definition suggests that marketing is not an activity but it is a cognitive way of thinking or a state of mind of doing business and a firm should base all its activities on the needs and wants of customers in the selected target segments or markets. in order to fully operationalize the marketing philosophy of business, anderson suggested that „marketing‟ must negotiate with top management and the other functional areas to implement its strategies. this coalition perspective suggests that marketing must take an active role in promoting its strategic options by demonstrating the survival value of the consumer orientation to other internal coalitions to have coordinated approaches for making the most effective use of the resources and the budgets. kotler (2003) identified six alternative philosophies for an organization to conduct business according to their orientation about going to marketplace and doing marketing activities, which are production concept, product concept, selling concept, marketing concept, societal marketing concept which states that the philosophy is that an organization must determine the needs and wants of the target markets and create, communicate and deliver more effectively and efficiently in a way that maintains and improves the well-being of the society and the consumers in that society. to express such a concept or philosophy, paul mazur (1947) defined marketing as “the delivery of a standard of living” and total marketing which is a recent buzzword combining customer orientation, relationship marketing, crm etc. this itself is or may lead to a market-oriented view where an organization‟s activities are geared to the processes of product, technology and production which already exist and it is entirely different from the production concept (grönroos, 1989). 1.3. marketing as an orientation kotler (2003) has also described numerous changes in the business orientation over time. while a strong association between marketing orientation development and company performance has been established, the understanding of the marketing orientation remains unclear since some studies have suggested a philosophical nature for marketing orientation and other studies have concluded that marketing orientation represents a behavioral notion. exploitation of only a very few companies can ascertain the indulgence in the implication of marketing orientation whereas a big chunk of mainstream companies normally fail to create and make use of the marketing orientation concept (hooley et al., 1990). “market orientation” (or market-oriented behavior) is a popular term used by marketing practitioners as an indicator of the extent to which an organization implements the “marketing concept” (jaworski & kohli, 1993). gronroos (1989, pp. 52-60) proposed his definition of marketing according to the customer's view of the marketing function, and suggested that marketing is to establish develop and commercialize long-term customer relationships, so that the objectives of the parties involved are met. this is done by mutual exchange and keeping in mind the needs of customers. thus, marketing as an orientation focuses on the customer orientation and planning which has the customer at the focal point and each department of any organization shall work for. 334 r. shanker 2. the marketing culture the construct of market orientation is believed to be a result of the implementation of the marketing concept (kohli & jaworski, 1990; narver & slater, 1990). sometimes the behavioural point of view (kirca et al., 2005) and cultural perspective, the other times, (homburg & pflesser, 2000) are reflected with regard to this. although some studies considered market orientation as a facet of organizational culture (homburg & pflesser, 2000), or as a culture within the firm (deshpande & webster, 1989; narver and slater, 1990), some researchers observed it as an altogether different construct (farley et al., 2008). strategic development of a customer orientation within firms is one of the growing concerns interrogating its linkage with organizational culture. thus, in the past few years, a few researchers have begun an analysis of the relationship between the culture of organization and the marketing of services (parasuraman, 1987) giving rise to the concept of marketing culture. scholars have begun to recognize the importance of organizational culture in the management of the marketing function. growing concern for issues of implementation in marketing strategy and the development of a customer orientation within organizations is also raising questions specifically to the organizational culture. when behavioural actions of organisational members unite, it forms a culture in the workplace (gregory, 1983). marketing culture provides unwritten policies and guidelines to employees and behavioral norms for conduct within an organization and portray the same in its interaction with the other parties viz. customers, government, etc. it constitutes that part of a firm‟s overall culture which refers to the pattern of shared values and beliefs to help employees understand and “feel” the marketing function and consequently execute efficient marketing activities. the validation of certain “do‟s and don‟ts” can be done on the grounds of an established culture (harrison, 1972). in other words, the marketing culture of a service firm refers to the way marketing “things” are being undertaken by the service employees. there are enough examples where we can compare the marketing culture of a government sector hospital and a private sector hospital, or airlines or a bank. 2.1. internal marketing culture as a part of organizational culture despite of the thin empirical literature of culture, the same is conceptualized by various studies (beyer & trite, 1987; kilmann & saxton, 1983; thompson & wildavsky, 1986). lately, the academicians and marketers have been paying huge attention to the significance of a firm‟s marketing culture (parasuraman, 1987; schneider & bowen, 1985). many popular scholarly studies like deal & kennedy, 1982; peters & waterman, 1982; schein, 1985 contain researches related to the construct of culture, or more specifically, organization culture in the years gone by. it was in the year 1976 that the concept of internal marketing culture was first proposed as a necessity and a pre-requisite for providing satisfactory and high quality services by berry et al. (1976); berry, 1984. since 1980, the study of organizational culture is considered to be “one of the most fascinating and yet elusive topics for management researchers” (harris & ogbonna, 2002, p. 31). o‟reilly (1989) is of the opinion that when employees‟ expectations and customers‟ requirement fit well in an organization, there exists an organizational culture. it has been defined as “the pattern of shared values and beliefs that help individuals understand organizational functioning and thus provide them with norms for behaviour in the organization” (deshpande & webster, 1989, p. 4). thus organizational culture focuses attention on informal, marketing culture in financial services with specific reference to retail banking in india 335 hidden forces within a firm – forces that exert tremendous influence on the behavior and productivity of its employees, perhaps more so than formal, written policies or guidelines. webster (1993) has recently described marketing culture as a comprehensive construct made up of varied facets which involves the significance of service quality, interpersonal relationships, the selling task, organization, internal communications, and innovativeness. thus, marketing culture is one that concentrates on implementing the most recent innovations relevant to that particular industry. yet, another might focus on the continuous monitoring and improving of the quality of established practices. implication of a strong marketing culture and the decision regarding establishment of its extent (i.e. to upgrade service quality, to innovate, etc.) should be evaluated on the basis of various factors like probable return. 2.2. corporate culture and organizational performance this has been understood that human element has a significant influence on the successful execution of marketing plans, since their formulation and implementation depend on individuals in the firm. so there exists something which is helpful in attaining a better performance for an organization that is referred to as organizational culture. marketing as organizational culture emphasizes the understanding of the values and beliefs of the employees and developing a marketing culture, which creates the behavior of employees providing superior value to the customers and enables attaining excellent business performance. culture is the significant solution when it comes to the decision of strategic direction of firms (smircich, 1983). a new challenge to service marketers is cultivating and sustaining a service culture which correlates marketing culture and successful marketing of services positively (berry, l.l. et al., 1989). many researchers have attempted to find a connection between the adoption rate of marketing orientation and company performance (e.g. narver & slater, 1990; cadogan & diamantopoulos, 1995; anttila et al., 1995) but the understanding of marketing orientation is still not clear. the concept of marketing effectiveness has also been extensively discussed because of its strong association with many valuable organizational outcomes, such as stable, long-term growth, enhanced customer satisfaction, a competitive advantage, and a strong marketing orientation (kotler, 1977; norborn et al., 1990). the corporate literature indicates positive linkage between market orientation and performance of service delivered (jaworski & kohli, 1993, p. 96; slater & narver, 1994, p. 95; 2000). as the external and social environment is crucial to the working of a firm, culture also has a direct impact on its productivity (schneider & reichers, 1983). thus, the underlying principle behind studying marketing culture and orientation is that it can affect the commitment and performance of an organization (lok & crawford, 2004). this industry-specific research attempts to assess and measure the marketing culture within the retail banking industry in india, and to provide top management of these banks with the suggestions which may be required for improving the banks‟ selling effectiveness with proper marketing orientation. the reasons for choosing this sector and the three banks in particular have been discussed in detail in the report. the paper further gives an elaborative literature on the marketing culture in the banking sector. 336 r. shanker 3. marketing culture in service sector due to the unique and „handle with care‟ characteristics of services (i.e. intangibility, inseparability of production and consumption, perishability, and variability), the nature of the culture of a service firm is particularly significant requiring specific attention for better performance (webster, 1995). thus, marketing is not only a part of some dedicated department for the marketing activities, but rather staff and support functions are an elementary part of it. in most of the organizations, employees have something to do with marketing especially when they come in direct contact with the representatives of customers (gummesson, 1987) like in the banking sector. 3.1. banking sector evolution in india the banking history in india has undergone a long journey and also achieved a new stature with the dynamic timeframe where banking practices have shifted from traditional britishers‟ era to the reforms period, nationalization to privatization of banks and the arrival of foreign banks to india. post the recent set of reforms such as demonetization, various industries in india, especially the banking industry, are ripe with challenges and changes. one of the major challenges that the indian banking industry has been facing is minimizing the inconvenience caused to the end customers. the role of the employees in banking services is considered very crucial for production as well as delivery of the service. generally, these services are made and sold at the same time, where customers also participate simultaneously in the process. another reason explaining the significant role of employees is that the services of banks are of standardized nature through which customers can get basic services from all banks (o‟reilly, 2003). customers‟ needs are ever changing, they demand higher level of services. here lies the competition and the marketing culture can be used as a differentiating tool. that is the reason banks are changing their ways of dealing with their clients from a transaction focus to a relationship focus strategy with the aim of long-term customer retention through more enduring relationships. this requires employees who are highly qualified, motivated, and empowered (zeithaml et al., 2006). effective interactions between employees and customers mean that both parties have a strong impact on the service performance (luk, 1997). service quality is implicitly considered as a component of the interactions between employee-customer (parasuraman et al., 1988). this trait must be incorporated in the sales culture of the banks. the reports of national skill development corporation of india and the mckinsey and company (2010) exhibit the importance of human resources as the important success factor for indian banks (maji & hazarika, 2016). the indian banking industry has changed dramatically over the years. a huge growth in savings due to the rising income levels is a major factor affecting the banking sector. the access to banking services has also improved over time due to untiring government efforts to encourage technology in banking and increase expansion in unbanked and non-metropolitan regions. in recent years, the indian banking industry has witnessed the introduction of innovative banking models like payments and small finance banks. the digital payments system in india has evolved the most with india‟s immediate payment service (imps) being the only system at level 5 in the faster payments innovation index (fpii). marketing culture in financial services with specific reference to retail banking in india 337 3.2. competition in indian banks throughout the world, the banking industry is going through the fast paced environment where banks have to be competitive and resourceful for their very existence (devlin & ennew, 1997). as the savings of society are taken care of by the banking sector, it is predominantly significant to have competition amongst banks. also, banking competition aids the growth of national economy by managing cost inefficiencies and welfare gains (jayaratne & strahan, 1996). regulatory authorities encourage banking competition, and central banks take necessary actions to enhance the economic conditions of nation by altering competitive levels time to time (kapsis, 2012). also, such competition leads to a reduction in operating costs and, hence, eradicating inefficiencies in the banking industry. with the outset of the banking sector reforms in india post 1991, the relationship between competition and efficiency in the indian banking sector is crucial as well as feasible to investigate in indian markets (arrawatia et al., 2015). literature draws attention towards the increased competition in the banking sector during the last decade (arrawatia & misra, 2012, maji & hazarika, 2018). the advent of banking reforms represented indian banks, especially public sector banks (psbs), to the rigorous domestic and international competition. in the fierce competitive environment, the survival of indian banks particularly psbs has become critical because only the efficient banks with favorable culture can withstand the external forces and maintain decent market share (kumar & gulati, 2008). 3.3. current position of public sector banks the three segments of banks‟ ownership in india viz. public sector banks, private sector banks, and foreign banks have diversified cultures, regulations, operating conditions. psbs in india have a vast spread country-wide accounting for almost 80 per cent of the total banking business share (cafral, 2014). their role in india‟s economic and social development is massive and well accepted. they have strong presence at rural and semi-urban areas and provide employment at large scale. in contrast, private sector banks are less laborintensive with limited number of branches. but adoption of modern technology and the customer-oriented approach make them more profitable. on the other hand, foreign banks are equipped with even better technology, and risk management skills limiting their operations in major urban centers (kumar & gulati, 2008). all this has changed the competitive landscape and banking practices of the indian banking sector ultimately declining the market share of psbs in terms of total assets, investments, advances, deposits of the indian banking industry (mohan et.al, 2005; mohan, 2005). in spite of the whole scenario, psbs still act as catalysts for socio-economic growth in the country which makes them dominating players in the indian banking sector, although their market share has decreased in the deregulatory establishment making policy makers concerned about the retention of their position. 3.3. perception of banks a survey was carried out by rediffusion y&r in 2014 where a sample of 4000 chief wage earners was taken. the survey was aimed at the perceptions the chief wage earners had about the three categories of banking institutions which helped in their positioning. 338 r. shanker the survey did not cover co-operative and rural banks. the findings were quite revealing as there were very clear demarcations. the public sector banks were considered as rich in heritage, authentic, traditional and socially responsible. private sector banks were seen as chic, stylish, trendy, customer-centric and more approachable. other multi-national foreign banks were perceived as high performance, up-to-date, progressive and caring more for money than for customers. 4. research objectives this paper aims to provide insight into the marketing culture in the indian banking industry with reference to internal marketing across the private sector, public sector and foreign banks. it intends to identify the various constituents, dimensions and parameters of internal marketing in services sector organizations. this paper further intends to give suggestions for improvement of marketing culture in the banks. 5. methodology 5.1. research settings retail banking industry in india has been selected for the purpose of the research. following the recent set of reforms such as demonetization, various industries in india, especially the banking industry are ripe with challenges and changes. the role of marketing in financial services industry in general and retail banking in particular is immense and growing and hence an orientation and culture towards marketing within the organization is the highest imperative. with 87 banks competing in a relatively limited and almost saturated market, commercial banks‟ competitiveness is based on their abilities to provide customers with high quality of service. thus, banks have to build a strong sales culture among their employees and improve the quality of their services including customer services. within the industry three kinds of banks have been chosen using the convenience sampling viz. foreign banks operating in india, indian private banks and indian public sector banks. the three banks selected belong to different categories of the industry having different set of customer profiles and success patterns in the past. commercial banks in india have a vital role in the socio-economic development process. 5.2. sample design a sample of 150 employees and managers was involved in the survey. a structured and self-administered survey in the form of a detailed questionnaire was used, targeting managers and employees of the chosen banks operating in india to assess their marketing culture. a parametric approach was applied on the responses and the data set was checked with normality and descriptive data analysis. the marketing culture index was devised using the weighted average method. marketing culture in financial services with specific reference to retail banking in india 339 5.3. measurement scales the majority of scales used to measure the constructs were drawn from karatepe et al. (2005) in the field with fewer adaptations to a financial organizational context. 6. analysis and interpretation 6.1. marketing culture assessment a leading researcher has designed a paradigm for developing measures of marketing constructs. a questionnaire has been developed with the help of which the marketing culture of a service firm can be assessed. this questionnaire makes use of 34 items measuring six dimensions of marketing culture, as identified by leading researchers. the six dimensions used to assess the marketing culture of service firms are:  service quality: this shall involve the assessment of exceptional service; commitment of top management to providing quality service; systematic, regular measurement and monitoring of employees‟ performance; employees‟ focus on customer needs, desires and attitudes; the belief of the employees that their behavior reflects the firm‟s; the ability of the employees to meet the firm‟s expectations; employee‟s communication skills; employees‟ attention to detail in their work.  internal communication: this shall involve the assessment of the firm having an approved set of policies and procedures which is made available to every employee; that supervisors clearly state their expectations; that each employee understands the mission and general objectives of the firm; the encouragement of front-line service personnel to become involved in standard setting; the firm focusing efforts on training and motivating employees.  innovativeness: this shall involve the assessment of the employees to be receptive to ideas for change; the firm keeping up with technological advances; the receptiveness of the company to change.  organization: this shall involve the assessment of each employee to be well organized; for careful planning to be each employee‟s daily routine; for employees to prioritize work; for employees‟ work area to be well organized; each employee to manage time well.  interpersonal relationships: this shall involve the assessment of the company to be considerate of employee‟s feelings; for the firm to treat each employee as an important part of the organization; for employees to feel comfortable in giving opinions to higher management; that managers/supervisors have an “open-door” policy; management‟s interaction with front-line employees.  selling task: this shall involve the assessment of the firm‟s emphasis on hiring the right people; the firm providing skill-based training and product knowledge to frontline service providers; the encouragement of creative approaches to selling; the firm‟s recognition of high achievers in selling; employees to enjoy pursuing new accounts; the firm to reward employees; better than competing firms, with incentives to sell; employees to aggressively pursue new business. for assessing each of these six dimensions there are some questions, which need to be probed. the response to these questions in the questionnaire is recorded on a six-point scale, 340 r. shanker consisting of the options: necessary (6), very important (5), important (4), somewhat important (3), of little importance (2), no importance (1). this six point scale relates either to the importance of the item or the extent to which the firm possesses that attribute. 150 employees of the three banks (50 employees of each of the three banks) were asked to respond to the above questionnaire. 6.1.1. analysis of marketing culture it is very important to analyze which aspects of marketing culture are particularly strong in a bank and which aspects need specific improvement. 6 dimensions have been used to assess the culture of a bank. each of these 6 dimensions is measured by some variables the number of which varies. table 1 number of variables under each dimensions of marketing culture dimension no. of variables i service quality 8 ii internal communication 6 iii innovativeness 3 iv organization 5 v interpersonal relationships 5 vi selling task 7 total 34 source: osman m. karatepe et al. (2005) 6.1.2. comparison among banks the responses to the questionnaire were measured on a scale of 1 to 6 ranging from „not important‟ to „necessary‟. the score for each variable under a particular dimension was added to get the total for each dimension for each respondent. these figures were then added to get the total score by all respondents for each of the 6 dimensions. the total score for each dimension was then divided by the number of respondents to arrive at the average score for each dimension. this average score cannot be used for inter-dimension comparison in a bank (because of the different number of variables used to assess each dimension), but can definitely be used to compare the banks with respect to each dimension. table 2 comparison on marketing culture variable of three categories of banks foreign banks private sector banks public sector banks service quality 36.76 28.60 17.80 internal communication 28.80 20.20 15.88 innovativeness 22.36 13.12 8.52 organization 26.28 17.12 14.48 interpersonal relationships 26.32 15.48 16.96 selling task 31.28 23.04 20.00 marketing culture in financial services with specific reference to retail banking in india 341 6.1.3. comparison among dimensions the average scores and their method of calculation have been mentioned clearly in the paragraph above. subsequently, these average scores were divided by the number of variables that were used to assess the respective dimensions (mentioned at the beginning of this chapter). this brings out the figure for „average score per variable‟ for each of the dimensions. these figures can be used to compare each dimension within a bank. the process has been repeated for all the banks separately. table 3 average score of foreign banks on six variables average score per variable rank service quality 4.595 v internal communication 4.800 iv innovativeness 5.453 i organization 5.256 iii interpersonal relationships 5.264 ii selling task 4.469 vi table 4 average score of private banks on six variables average score per variable rank service quality 3.575 ii internal communication 3.367 iv innovativeness 4.373 i organization 3.424 iii interpersonal relationships 3.096 vi selling task 3.291 v table 5 average score of public sector banks on six variables average score per variable rank service quality 2.225 vi internal communication 2.647 v innovativeness 2.840 iv organization 2.896 ii interpersonal relationships 3.392 i selling task 2.857 iii 6.2. marketing culture assessment the marketing cultures of private sector banks and public sector banks have been assessed through the analysis of data collected through the questionnaire. however, to get a better comparison of the marketing cultures of the two banks, an index has been developed to numerically assess the six dimensions measuring the marketing culture. the dimensions have been given a score between 1 and 6 with 1 being the lowest and 6 being the highest. the scores for each dimension given by the respondents were averaged to get a composite score for each dimension, to be used as weights for the 6 dimensions. 342 r. shanker the weights assigned are as follows: i ii iii iv v vi weight 4.92 3.31 3.88 3.56 4.15 4.57 mci for the two banks is calculated as shown below. table 6 mci – foreign banks average score weight weighted score i 36.76 4.92 180.8592 ii 28.80 3.31 95.3280 iii 22.36 3.88 86.7568 iv 26.28 3.56 93.5568 v 26.32 4.15 109.2280 vi 31.28 4.57 142.9496 total 24.39 708.6784 table 7 mci – private sector banks average score weight weighted score i 28.60 4.92 140.7120 ii 20.20 3.31 66.8620 iii 13.12 3.88 50.9056 iv 17.12 3.56 60.9472 v 15.48 4.15 64.2420 vi 23.04 4.57 105.2928 total 24.39 488.9616 table 8 mci – public sector banks average score weight weighted score i 17.80 4.92 87.5760 ii 15.88 3.31 52.5628 iii 8.52 3.88 33.0576 iv 14.48 3.56 51.5488 v 16.96 4.15 70.3840 vi 20.00 4.57 91.4000 total 24.39 386.5292 weighted average = 708.6784/24.39 = 29.06 weighted average = 488.9616/24.39 = 20.05 weighted average = 386.5292/24.39 = 15.85 marketing culture in financial services with specific reference to retail banking in india 343 findings the results of the above analysis show that foreign banks score the highest across all six dimensions. this bank is the leader in „marketing culture‟ among the three banks surveyed by a huge margin. private sector banks follow foreign banks keenly and manage to score more than public sector banks in five out of the six dimensions. the only exception where public sector banks have a score greater than private sector banks are in terms of „interpersonal relationships‟. this reflects that public sector banks‟ employees consider the feeling of organization treating each employee as more important. the results of comparison of the dimensions for public sector banks are different from the other two banks. the most important dimension rated by public sector banks‟ respondents is „interpersonal relationships‟. „organization‟ and „selling task‟, which are very close to one another, follow interpersonal relationships as highly rated dimensions among the respondents. „service quality‟ has been rated the lowest by public sector banks‟ respondents. for private sector banks‟ respondents „innovativeness‟ has also emerged as the most important aspect among the six dimensions measuring marketing culture. however, this is followed by „service quality‟, which the respondents have found to be as crucial for the success of the bank. „organization‟, „interpersonal relationships‟, „selling task‟ and „internal communications‟ follow the above trends and are all close to each other in terms of significance given by the respondents. among foreign banks‟ respondents „innovativeness‟ is rated very high showing the attitude of the employees as being fresh and open to ideas of change. this is followed by „organization‟ and „interpersonal relationships‟, which are considered as more or less equally important. thus, the empirical findings upon the seven dimensions of marketing culture indicated that the overall employees‟ perception of the sales culture in the surveyed banks is moderate. however, the sales culture in the non-indian banks is stronger than that in the indian banks. foreign banks are found to be the leader in terms of „marketing culture‟. they are competitively followed by private sector banks. three kinds of marketing cultures were found: the strong (the high flyers); the medium (the brisk runners); and the weak (the slow walkers). limitations the number of respondents for each category of the banks is 50 in total. the sample size if increased will add more credibility to the results and can bring out fresher insights. only three banks have been selected for this research, belonging to different categories in the banking industry in india. a higher number of banks can be chosen to better understand the marketing culture in the industry. the respondents for each bank are from two or three branches of the banks in delhi. a wider distribution of the respondents from different branches and different geographical regions of the country can help in assessing differences in culture among various regional divides. conclusion on a basic level, human systems need some “glue”, some central theme or themes around which behavior can coalesce. in the absence of such a thematic element, employees 344 r. shanker cannot know when, toward what, and how to direct their energies. organizational culture provides this thematic coherence. the culture of a firm has been found to be important in many other ways. for example, some researchers mention its importance as a form of control of participants. it also might be a critical key used by strategic managers to direct the course of their organizations. some researchers feel that a firm‟s culture has as much or more influence on corporate effectiveness as the formal structure of jobs, authority, and technical and financial procedures. organizational culture affects employees‟ behavior, a firm‟s ability to meet their needs and demands, and the way the firm copes with the external environment. it establishes the rationale for “dos and don‟ts” of behavior. the quality of services which are offered to the banks‟ end customers is dependent on the quality of service provided in the bank's internal work environment. moreover, the attitude and behavior of employees have a substantial effect on the quality of service provided to the customers. thus, it has become imperative for top management to administer and rely on marketing culture and effectiveness indexes in their service provider firms. the paper reinforces the importance of sound marketing culture to the indian banking sector. the meaning and importance of organization culture, marketing culture and their relevance to firms in general and service firms in particular studied through review of previous researches and manifested empirically. this paper is the first of its kind to study marketing culture dynamics in the context of indian retail banking industry. the empirical findings upon the seven dimensions of marketing culture indicated that the overall employees‟ perception of the sales culture in the surveyed banks is moderate. however, the sales culture in the non-indian banks was stronger than that in the indian banks. recommendations the findings of the study have useful implications for policy formulation. based on the analysis, the following suggestions can be made in order to thrive for a better marketing culture in the banks. due to high customer interaction in this sector, it is very important for the employees of the bank to believe that their behavior reflects that of the bank. as the opinions formed by customers go a long way in making or breaking relationships, utmost care should be taken to ensure customers are totally satisfied. employees work area premises should be well organized as an important part of the dimension „organization‟. the employees at foreign banks can do better in this regard. the commitment of top management to provide quality of service management‟s sharing of financial information with all employees will go a long way in motivating employees to do better, as they would be able to see and assess the results of their enhanced performance. the executives involved in selling and other front line employees who interact with the customers in various roles are the core team for any bank. hence it becomes all the more important to involve these front-line executives in standard setting for delivery of better service. the freedom of work and a healthy competitive environment go a long way in enhancing the performance of employees. therefore, it is emphasized that supervisors have an open door policy. directing efforts in this regard can help private sector banks scale new heights. marketing culture in financial services with specific reference to retail banking in india 345 as far as public sector banks are concerned, systematic, regular measurement and monitoring of employees‟ performance should be stressed more as it would lead to a competitive environment where employees would definitely strive harder. over the years, public sector banks enjoying monopoly, have dominated the banking industry but with the ushering in of stiff competition employees‟ behavior sets banks apart and ahead. for this it is required that the bank starts placing due importance on employees‟ communication skills. in the shifting paradigms, the bar is being constantly raised. competition is immense and technology is the key differentiating factor. in such a scenario public sector banks need to be geared up to accept and adapt to changes in practices like development of work force, strong and relevant human resource policies, skill-based training and product knowledge to frontline service providers, etc. as mentioned above, the selling task at public sector banks needs a major revamp. the attitude of the bank is not aggressive. it waits for the customers to reach out to them. it should be fashioned the opposite way. the attitude of employees needs to be changed drastically in this respect. encouragement of creative approaches to selling is dearly required. working in a tough competitive environment, indian banks should focus on enhancing operational efficiency for reducing risk, which ultimately enhances the stability in the banking system (maji & hazarika, 2014). directions for future research servqual (a research model for service quality research) is most valuable when it is used periodically to track service quality trends, and when it is used in conjunction with other forms of service quality measurement. one potential application of servqual is to determine the relative importance of the five dimensions in influencing customers‟ overall quality perceptions. it can also help in assessing consumer expectations about and perception of service quality and pinpointing areas requiring 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(2006). services marketing: integrating customer focus across the firm. 4 th edition, singapore: mcgraw-hill. websites referred www.private sector banksbank.com www.foreign national banks-india.com www.indiainfoline.com www.statebankofindia.com www.ama.org www.cafral.org 348 r. shanker marketinška kultura i finansijske usluge u kontekstu retail bankarstva u indiji industrija usluga brzo postaje ključ uspeha nacije i njen značaj u svetskoj ekonomiji je ogroman. u indiji takođe, nagli razvoj industrije usluga je podstakao rast ekonomije. industrija usluga je drugačija i stoga postavlja posebne izazove upravljanja. postoje neke neobične varijable koje utiču na performanse ovih organizacija. marketinška kultura organizacije je jedan od takvih faktora. rad se bavi ovom temom u kontekstu bankarskog sektora u indiji. nakon liberalizacije, bankarska industrija je postala visoko konkurentna jer se broj bankarskih institucija višestruko povećao. trenutno u indiji ima 87 banaka (21 banka u javnom vlasništvu, 21 banka u privatnom vlasništvu i 45 stranih finansijskih posrednika i banaka) koje su međusobna konkurencija. takođe je primećeno da je jedna od varijabli u nadmetanju banaka ostvarivanje superiorne saradnje sa klijentima, što je moguće kroz zaposlene koji su usmereni na kupce i marketinšku kulturu koja postoji u bankarskoj organizaciji. marketinška kultura se odnosi na obrazac zajedničkih vrednosti i uverenja koji pomažu pojedincima da razumeju ulogu marketinga i pruže im norme ponašanja u firmi. marketinška orijentacija i kultura u okviru organizacije predstavljaju najviši imperativ. rad je zasnovan na primarnom istraživanju koje je obuhvatilo tri banke koje su odabrane iz svake od gore pomenutih kategorija. zrađen je upitnik pomoću koga je procenjena marketinška kultura uslužnih banaka. upitnik koristi 34 stavke kojima se meri šest dimenzija marketinške kulture koje su identifikovali vodeći istraživači. ovih šest dimenzija čine kvalitet usluge, interna komunikacija, inovativnost, organizacija, međusobni odnosi i zadaci prodaje. u radu je korišćen parametarski pristup za analizu i razumevanje stava zaposlenih u svakoj od banaka po pitanju identifikovanih dimenzija. takođe su proučavani međusobni odnosi ovih šest dimenzija za svaku od banaka. svakoj od šest dimenzija je dodeljena težina i odgovori su ocenjeni u skladu sa tim. rezultati analize jasno pokazuju da strane banke imaju najviši indeks marketinške kulture, a nacionalizovane banke najniži. ključne reči: marketinška kultura, kvalitet usluga, interna komunikacija, inovativnost, međuljudski odnosi i zadaci prodaje facta universitatis series: economics and organization vol. 18, no 2, 2021, pp. 117 134 https://doi.org/10.22190/fueo210402010d © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper analysis of limitations of iso standards implementation from the external stakeholders’ point of view1 udc 006.83 edisa dreković*, marija radosavljević, melisa bejtović* university of niš, faculty of economics, serbia abstract. the purpose of this paper is to identify key limitations of the implementation of iso 9001:2015 standard, their correlations, as well as the connection with the problems that companies face. the paper in literature review used the research papers of other researchers related to the limitations of the implementation of iso standards. in order to realize the purpose of the research, empirical research was conducted. the research was realized by the method of a survey questionnaire, on the sample of 12 respondents, experts of consulting companies for the implementation of standards and lead auditors of accredited certification bodies for the implementation of iso standards in serbia. using this approach based on external source ensures a certain level of objectivity. also, the experience of the respondents based on the implementation of a process approach and certification of various organizations provides the necessary credibility and quality of the research itself. the paper identifies 12 limitations of implementation iso 9001. the results of the research show that non-material limitations are the dominant obstacle to the implementation of iso 9001:2015. also, those limitations are positively correlated with each other, so they can cause multiple problems for companies in fulfilling the requirements of iso standards. key words: process approach, iso 9001, limitations, problems, solutions, empirical research. jel classification: l15, m11 received april 02, 2021 / accepted may 14, 2021 * phd student at university of niš, faculty of economics corresponding author: marija radosavljević university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: marija.radosavljevic@eknfak.ni.ac.rs 118 e. dreković, m. radosavljević, m. bejatović introduction process approach is a necessary condition for successful business of a modern company. efficient and effective business process management ultimately ensures the creation of added value (for the company and its owners, users of products and services, employees, suppliers and all other stakeholders), increases competitive advantage, reduces business costs, improves product and service quality. business process management is the core of quality management. in order to talk about quality of business processes in general, it is necessary to consider the standards that define quality. globally, currently widely accepted quality management system is based on iso 9001:2015 standard. all iso 9001:2015 requirements are generic and can be applied in any organization, regardless of its type or size, or the products and services that organization provides. according to the latest iso report for 2019 (published in september 2020, on the website www.iso.org), the total number of valid certificates at the global level shows that 883521 organizations are certified according to the iso 9001:2015 standard, the second most important is iso 14001 standard. graph 1 number of iso 9001 certificates issued for period of 10 years globally. source: committee survey results before 2018 (iso.org) the chart of issued iso 9001 certificates at the global level over a period of 10 years (graph 1) shows a significant process of desertification according to iso 9001:2015, after the last revision of this standard. the international organization for standardization explained the decrease in the number of certificates issued by the insufficient participation of certification bodies in annual reporting. the countries with the most issued iso 9001:2015 certificates according to the iso 2019 report are: china, italy, germany, india, japan, spain, great britain, france, usa and brazil. in these 10 countries, 69% of iso 9001:2015 certificates have been issued globally. when the subject of comparison are those european countries that have the most certified organizations according to iso 9001:2015, the following can be noticed: in analysis of limiations of iso standards implementation from the external stakeholders’ point of view 119 italy, the most issued certificates are in the field of services, wholesale and retail trade, construction, basic metal & fabricated metal products. germany has the most certified organizations in basic metal & fabricated metal products, electrical and mechanical industry, trade, education and information technology. in spain, these are construction, services, manufacturing, education and information technology. the uk has the most certified companies in basic metal & fabricated metal products, construction, trade and service industries. as far as serbia is concerned, the leading activities are wholesale and retail trade, construction, manufacturing, services, education and information technology. it can be seen from the same database that serbia had a loss of certificates in 2012 by 15%, while in 2017 the loss of certificates was 27%. in the last two years, there has been a slight growth of certified organizations. graph 2 number of iso 9001 certificates issued in serbia source: committee survey results before 2018 (iso.org), committee 09. iso survey of certifications to management system standards full results comparing serbia to the countries in the region that have a certification system according to iso 9001:2015, it can be noticed that serbia does not differ significantly in the number of certificates issued, nor in the trend of certification. there are numerous and diverse reasons why companies are abandoning the certification of quality systems according to iso 9001:2015. the reasons are undoubtedly related to the reasons for implementation and the limitations that companies encounter during implementation, which are not completely eliminated, but are only emphasized and complicated through the implementation. literature review during the implementation of the management system according to the requirements of the iso 9001:2015 standard, organizations face certain limitations. these limitations have been studied by many authors. the theoretical part of the paper is based on the https://isotc.iso.org/livelink/livelink?func=ll&objid=18808772&objaction=browse&viewtype=1 https://isotc.iso.org/livelink/livelink?func=ll&objid=18808772&objaction=browse&viewtype=1 120 e. dreković, m. radosavljević, m. bejatović analysis of the limitations of enterprises in general, because the literature concerning specific limitations in smes is not particularly available. talib and rahman (2015) identified the following three groups of key barriers to tqm in the services sector and their impact on the implementation of iso 9001: 1. „barriers based on managerial issues the most significant are the following: lack of top-management commitment, lack of coordination between departments, no benchmarking, poor planning, lack of communication, 2. barriers based on people-oriented issues lack of proper training and education, human resources barrier, employee resistance to change, inadequate use of empowerment and teamwork, 3. barriers based on organizational issues high turnover and absenteeism at the management level creates afflictions and nuisances in many organizations, attitude of employees towards quality, the lack of a continuous improvement culture.“ othman et al. (2019) identified and ranked tqm management factors influencing the successful completion and sustainable construction of projects based on the index of relative importance (rii) and the correlation between clients, consultants and contractors in the malaysian construction industry. these factors are: 1. “management commitment, 2. employee related, 3. customer related, 4. organizational culture, 5. communication related, 6. strategic planning, 7. teamwork, 8. continuous improvement.” bounabri et al. (2018) in an empirical study on barriers to iso 9001 implementation moroccan organizations, which included 115 companies, gave the following restrictions in implementation iso 9001: 1. “resistance to change, 2. poor interdependence between departments, 3. lack of top management commitment, 4. dominance of bureaucracy, 5. lack of internal communication among staff and between staff and top management, 6. insufficient requirements diffusion to all organizational levels, 7. lack of trainings, 8. difficulty in changing culture, 9. difficulty in process identification and management.” according to a survey conducted by gul polat et al., (2011) on a sample of 80 turkish construction companies, the following limitations for iso 9001 successful implementation are identified: 1. “lack of top management commitment, 2. lack of top management support, 3. lack of top management leadership, 4. difficulties in mapping processes and developing standardized procedures, 5. difficulties in taking corrective and preventive actions, 6. difficulties in employing statistical quality control techniques in construction process, 7. lack of workforce qualified in quality management implementations, 8. lack of effective teams / team building skills, analysis of limiations of iso standards implementation from the external stakeholders’ point of view 121 9. difficulties in including quality measures, continuously monitoring and controlling construction processes, 10. need for employing skilled workforce, 11. difficulties in developing quality information systems in construction process, 12. difficulties in quantifying cost of poor quality, 13. increases in paperwork, 14. difficulties in finding workers, who can claim to be experts in both construction and quality, 15. need for conducting continuous training programs for employees, 16. difficulties in quantifying cost of quality, 17. high cost of developing and utilizing a quality management system, 18. incompatibility of standardized quality management systems with the construction industry.” sadikoglu and olcay (2014) identified the following limitations on the implementation of iso 9001 on a sample of 150 turkish companies: 1. “lack of employee involvement, 2. inadequacy of the firm structure and lack of the resources, 3. illiteracy and unawareness among the employees, 4. constraints of the industry/market, 5. inaccuracy and assessment difficulty in the process planning, 6. inadequacy in the leadership comprehension, 7. lack of understanding the importance of continuous improvement, 8. discrepancies among customers’ expectations, 9. difficulty in the tqm structure, 10. lack of the suppliers’ support.” sanchez-lizarraga et al., (2020), on a sample of 172 organizations in exploratory analysis in the manufacturing sector in mexico identified implementations barriers for iso 9001 standard: 1. “not demanded by the customers, 2. high investment, 3. the company manages a better qms than iso 9001, 4. unnecessary for the industry, 5. bureaucratic paper work, 6. other reasons.“ almeida et al., (2018) the authors of an empirical study of brazilian companies in the automotive supply chain, on a sample of 47 suppliers, identified the following implementation barriers for iso 9001: 1. “top management commitment, 2. team commitment, 3. training, 4. responsibilities and authorities defined, 5. schedule for implementation, 6. quality culture, 7. resources’ availability, 8. integration between departments, 9. un-bureaucratic management system, 10. people awareness regarding the iso 9001 significance.” 122 e. dreković, m. radosavljević, m. bejatović bounabri et al., (2018) gave a wide overview of the barriers that authors dealing with this issue in different countries have defined as shown in table 1. table 1 systematic review of iso 9001 implementation barriers source: adapted according to implementation in moroccan organizations: empirical study, noussaiba bounabri, ahmed amine el oumri, elmadani saad, latifa zerrouk, amina ibnlfassi, journal of industrial engineering and management, page 38 sfakianaki and kakouris (2020) explored barriers to iso 9001 certification for smes in the greek food and beverage industry (f&b) and concluded that the most common are bureaucracy, lack of senior management guidance, time and resource requirements, and employee response. authors research method country and sample identified barriers burcher, lee & waddell (2010) questionnaire 129 australian and 175 british companies three main difficulties were identified for an organization when implementing quality initiatives in australia: ▪ communication ▪ organizational inertia ▪ commitment. while in britain, commitment was singled out as the most significant factor kumar & balakrishnan (2011) questionnaire 100 contractors from uae ▪ leadership related issues ▪ strategy related issues ▪ quality system related issues ▪ society oriented gaps al-najjar & jawad (2011) questionnaire survey 42 companies in iraq ▪ top management commitment ▪ employee resistance ▪ difficulty of performing internal audits ▪ requirements of the standards are unrealistic willar (2012) questionnaire survey 77 companies in indonesia ▪ iso 9001 being a matter of fulfilling audit requirements ▪ misleading qms purposes ▪ lack of a well-design reward system mosadeghrad (2014) literature review 54 empirical studies wordwide ▪ insufficient education and training ▪ lack of employees’ involvement ▪ lack of top management support ▪ inadequate resources ▪ deficient leadership ▪ lack of a quality-oriented culture ▪ poor communication ▪ lack of a plan for change ▪ employee resistance jayasundara & rajini (2014) questionnaire survey 10 iso 9001 well experienced professionals, in sri lanka ▪ lack of top management involvement during the implementation process’ ▪ unwillingness of employees to change work systems ▪ weak interdepartmental relations ▪ employee resistance talib & rahman (2015) literature review general ▪ lack of communication ▪ lack of top-management commitment ▪ employee’s resistance to change ▪ lack of coordination between departments analysis of limiations of iso standards implementation from the external stakeholders’ point of view 123 very important implementation barriers for iso 9001 are lack of involvement of top management, insufficient personnel qualifications, and employees’ resistance to change, lack of knowledge and skills to implement tqm, and limited financial resources (sampaio et al., 2014; sfakianaki and kakouris, 2020; berrouiguet 2013). also the most frequent obstacles to iso 9001 certification referred to in the literature are the cost of the qms certification process, adaptation to the standard during implementation, employee resistance to change, qualification of human resources, employees’ available time, the quantity of documentation required, top management involvement, compatibility of the standard with the activity sector (ferreira & candido, 2021). willar et.al, (2015) identified issues of management attitude and purpose as barriers that may affect effective qms implementation. the involvement of top management and the active participation of all employees are key factors for certification renewal, in the absence of which the company may not be able to renew its certificate (sampaio et al., 2014). the critical barriers for the successful implementation of tqm also can be inappropriate planning of tqm implementation program, lack of financial support, lack of employee training, lack of empowerment of employees, lack of sufficient physical resources (talapatra & uddin, 2019). the basis for the successful implementation of iso standards is a supportive environment (supportive leadership, culture, and structure), and the main obstacles are related to management and leadership. in this context, strategic problems are significant barriers to tqm implementation and have the most negative impact on its success. these are strategic barriers, structural barriers, human resource barriers, contextual barriers, and procedural barriers (mosadeghrad, 2014). the environment where iso standards are applied largely defines the key barriers to implementation. this is especially the case with an ethically poor business environment. therefore, the barriers such as the lack of quality support, poor tqm knowledge and tqm awareness, poor information sharing, temporary workers, overdependence on contract document, poor data collection measurement, undefined tqm roles and responsibilities, award to lowest bidder tendency, poor business environment, and corruption are common (dilawo & salimi, 2019). looking at the health services sector, in addition to barriers that occur in other sme sectors, there are other obstacles: high employee turnover, resistance to change among employees, bureaucracy and hierarchical structure, professional autonomy, tensions between managers and professionals, and difficulties in evaluating health processes and outcomes (alsughayir 2014; mosadeghrad 2013). some authors consider barriers to be difficulties and divide them into difficulties related to employees, difficulties associated with structuring the quality management system, integration difficulties, and difficulties arising from planning (anholon et al.,2018). based on the literature review, it can be said that certain research is based on case studies, while others involved sample based statistical analysis. also, most of the research concerns the survey of companies, more precisely their representatives, but there are also surveys that are based on the examination or experts. in any case, a systematic review of the literature is a useful tool to formulate initial hypotheses and trace research directions. the literature review is the basis for the development of a survey questionnaire for the implementation of the empirical part of the research. https://www.emerald.com/insight/search?q=subrata%20talapatra https://www.emerald.com/insight/search?q=subrata%20talapatra https://www.emerald.com/insight/search?q=md.%20kutub%20uddin https://www.emerald.com/insight/search?q=ali%20mohammad%20mosadeghrad https://www.emerald.com/insight/search?q=richard%20stuart%20dilawo https://www.emerald.com/insight/search?q=zahra%20salimi https://www.emerald.com/insight/search?q=ali%20mohammad%20mosadeghrad https://www.emerald.com/insight/search?q=ali%20mohammad%20mosadeghrad 124 e. dreković, m. radosavljević, m. bejatović research methodology although it is evident that the implementation of process approach and the establishment of appropriate management systems, aimed at improving quality, has a positive impact on business performance, the trend of desertification and a significant list of limitations in the implementation of management systems according to iso 9001:2015 indicate the need for more detailed analysis, especially for small and medium enterprises (smes). in this sense, the purpose of the paper is to identify key limitations, their correlations, as well as the connection between limitations and problems that companies face. in order to realize the purpose of the research, empirical research was conducted. research related to the implementation of process approach to ensure business excellence has a major limitation that is reflected in the subjectivity of the respondents, regardless of the research method used. especially since the respondents are mostly from the managerial structure of the company (top managers, quality managers). using an approach based on external source ensures a certain level of objectivity. also, the experience of the respondents based on the implementation of a process approach and certification of various organizations provides necessary credibility and quality of the research itself. the research was realized by the survey questionnaire method on a sample of 12 respondents, including consulting companies’ experts for the implementation of standards and lead auditors of accredited certification bodies for the implementation of iso standards in serbia, according to the accreditation body of serbia (ats). in order to achieve the purpose of the research, the paper tested several hypotheses: h1: non-material limitations compared to material have a greater impact on the success of the implementation of iso 9001 standards, h2: most of the limitations faced by organizations in the implementation of iso 9001 standards are positively correlated with each other, h3: limitations in the implementation of iso 9001 lead to problems in fulfilling the requirements of the iso 9001 standard. analyzing the literature review, the limitations of implementing iso 9001 standards in organizations can be classified as: 1. lack of commitment of top management to the management system based on the processes and requirements of iso 9001:2015, 2. unclearly defined company strategies and goals, 3. non-involvement of employees who are the bearers of the process in defining strategies and goals (centralized decision-making), 4. resistance to change, 5. inadequate internal communication between employees, also between employees and managers, 6. lack of innovation and continuous learning, 7. insufficient professional knowledge of the process bearers, 8. lack of human resources management (hrm), 9. lack of finance for implementation and certification according to the requirements of iso 9001:2015, 10. lack of adequate information system, 11. inadequate customers and suppliers' databases, 12. insufficient capabilities and skills of those employees who are key to quality (creativity, teamwork, critical thinking, emotional intelligence, negotiation, ability to solve complex problems). analysis of limiations of iso standards implementation from the external stakeholders’ point of view 125 these limitations represent a key segment of the survey questionnaire for experts. certainly, for the purpose of complete analysis and testing of all hypotheses, a questionnaire included the questions that refer to the problem in fulfilling the requirements of the iso 9001 standard, as well as questions concerning the capability of employees and ways of solving problems. other questions that were part of the questionnaire were presented through the analysis of research results. to test the hypothesis, the collected data have been analyzed using the statistical analysis methods. in doing so, the following methods have been applied: descriptive statistics and correlation analysis, hierarchical cluster analysis. research results the research was conducted in the period from december 22nd 2020 to february 11th 2021. questionnaires were sent to the addresses of 30 consulting companies for the implementation and evaluation of iso 9001:2015. the feedback was received from 12 consultants and lead auditors, which means that the response rate was 40%. the questionnaire is divided into general questions, the main questions of identifying limitations, the problems that limitations cause and the solutions. graph 3 companies by size that were subject to implementation and certification according to the requirements of iso standards source: author’s calculation according to the answers, all respondents participated in the implementation of iso 9001 standards and integrated management systems. 88% of them participated in the implementation of iso / iec27001, followed by iso14001 and 77% of iso 45001. 33% of them participated in the implementation of iso 20000-1 and iso 28000. respondents applied the iso 9001 standard in small enterprises in serbia 52%, 28% were medium, 20% large enterprises. thus, the answers of the respondents mainly refer to their experiences in the implementation of iso 9001 standards in the sme sector in serbia, which is the subject of this paper. in the survey of experts, answers were sought that refer only to the sme 126 e. dreković, m. radosavljević, m. bejatović sector. the questionnaire defined 12 limitations for the implementation of iso 9001. the limitations are classified into two groups, non-material and material. the only material limitation relates to the lack of finance for implementation and certification according to the requirements of iso 9001:2015. non-material limitations are defined as: 1. limitations of human capital lack of commitment of top management to the management system based on processes and requirements of iso 9001: 2015, unclear defined company strategy and goals, insufficient professional knowledge of the process holder, 2. limitations of structural capital lack of human resource management (hrm), lack of adequate information system, inadequate customers and suppliers’ database, 3. limitations concerning organizational culture non-involvement of employees who are the bearers of the process in defining strategies and goals (centralized decision-making), resistance to change, inadequate internal communication between employees and between employees and managers, lack of innovation and continuous learning, 4. limitation of insufficient capabilities and skills of those employees who are key to quality (creativity, teamwork, critical thinking, emotional intelligence, negotiation, ability to solve complex problems). table 2 descriptive statistics: limitations n minimum maximum mean std. deviation o1 12 1.00 5.00 4.0833 1.24011 o2 12 2.00 5.00 3.6667 .77850 o3 12 2.00 5.00 3.5000 1.08711 o4 12 1.00 5.00 2.2500 1.21543 o5 12 1.00 5.00 2.6667 1.23091 o6 12 1.00 4.00 2.6667 1.15470 o7 12 3.00 5.00 4.2500 .75378 o8 12 3.00 5.00 4.1667 .57735 o9 12 2.00 5.00 3.1667 .93744 o10 12 2.00 5.00 3.7500 1.21543 o11 12 1.00 4.00 3.0833 .79296 o12 12 1.00 3.00 2.1667 .71774 source: author’s calculation descriptive statistics analysis from table 2 shows that the highest average mean by respondents was assigned to the following limitations: non-involvement of employees who are process bearers in defining strategies and goals (centralized decision making) o7 (mean 4.2500), resistance to change o8 (mean 4.1667), lack of commitment of top management to the management system based on processes and requirements iso 9001:2015 o1 (mean 4,0833). the low value of the standard deviation in these three defined limitations shows that the answers of the respondents do not differ significantly from each other. this actually points to the conclusion that respondents agreed that organizational culture is a key limitation for the application of iso 9001 in enterprises. group of limitations related to analysis of limiations of iso standards implementation from the external stakeholders’ point of view 127 intellectual capital (human, structural) average score 3.1389 with a larger difference in the answers of respondents (average standard deviation 1.1178) compared to a group of limitations related to organizational culture (mean 3.833, std. deviation 0.871). when it comes to the limitations of human and structural capital and their impact on the implementation of iso 9001 in smes, according to the results, human capital is a larger limitation (mean 3,7501, std. deviation 1,03524) compared to structural capital (mean 2, 5278, std. deviation 1,2003). limitation of insufficient capabilities and skills of those employees who are key to quality (creativity, teamwork, critical thinking, emotional intelligence, negotiation, ability to solve complex problems) o11 is according to the answers of respondents with a mean of 3.0833, std. deviation 0.79296 are proved to be a significant limiting factor in the implementation of iso standards, immediately after the inadequate organizational culture and lack of intellectual capital. limitation o12 according to the data in table 2 with a mean of 2.1667 with a small difference in the respondents' answers (std. deviation 0.71774) shows that financial capital is the factor that least affects the implementation of iso standards. thus, the statement defined in hypothesis h1 is confirmed. respondents were asked to evaluate the capabilities of employees that most affect the success of the implementation of iso 9001 in the company, and the results are presented in table 3. table 3 descriptive statistics – employees' capabilities n minimum maximum mean std. deviation sz1 12 2.00 5.00 3.2500 1.13818 sz2 12 2.00 4.00 3.4167 .90034 sz3 12 1.00 5.00 3.4167 1.31137 sz4 12 2.00 5.00 4.0000 .95346 sz5 12 2.00 5.00 4.3333 .98473 sz6 12 1.00 5.00 3.2500 1.28806 sz7 12 3.00 5.00 4.2500 .86603 sz8 12 1.00 5.00 2.9167 1.08362 sz9 12 2.00 4.00 3.1667 .93744 sz10 12 3.00 5.00 4.0833 .51493 source: author’s calculation the most evaluated capability is cooperation with others sz5 (4.3333 respondents' answers do not differ significantly), then logical reasoning and decision-making sz7, then cognitive flexibility sz10, communication skills sz4. the least important for the success of the implementation by respondents were negotiating sz9 (3.1667) and service orientation sz8 (2.9167). since organizations are complex holistic systems, the problems they face are mutually correlated. in that sense, a correlation analysis of the observed limitations of the implementation of the iso series standards was performed. regarding the correlation between limitations, the correlation analysis shows that the o1 limitation, defined as the lack of commitment of top management to the management system based on processes and requirements of iso 9001:2015, is positively correlated with the o7, limitation noninvolvement of employees in the process (centralized decision making). this actually indicates that if the responsibility does not come from the top of the organization and if 128 e. dreković, m. radosavljević, m. bejatović authorizations and responsibilities are not fully defined and assigned to all levels of management, quality has no chance. also, a correlation coefficient of 0.621 clearly indicates that lack or inadequate use of human capital personified in lack of commitment top management of qms and the lack of financial capital personified in the lack of finance for implementation and certification according to the requirements of iso 9001:2015 may actually threaten the success of the implementation of this standard in the sme sector in serbia. a correlation coefficient of 0.586 for o2 shows a positive correlation between the limitation of unclearly defined company strategy and goals and the limitation of noninvolvement of employees who are the bearers of the process in defining strategies and goals (centralized decision-making). table 4 correlation between limitations o1 o2 o3 o4 o5 o6 o7 o8 o9 o10 o11 o12 o1 cc 1.000 .356 -.308 -.199 -.080 -.483 .585* .285 .302 -.503 -.446 .621* sig. .256 .329 .536 .806 .112 .046 .368 .341 .095 .146 .031 n 12 12 12 12 12 12 12 12 12 12 12 12 o2 cc .356 1.000 .120 .174 .093 .246 .586* -.260 .340 -.125 -.090 .524 sig. .256 .711 .590 .773 .442 .045 .414 .280 .699 .781 .080 n 12 12 12 12 12 12 12 12 12 12 12 12 o3 cc -.308 .120 1.000 .509 .536 .573 .398 .302 .208 .557 .253 -.236 sig. .329 .711 .091 .072 .052 .200 .340 .516 .060 .427 .460 n 12 12 12 12 12 12 12 12 12 12 12 12 o4 cc -.199 .174 .509 1.000 .577* .341 .252 .274 .206 .699* .183 -.074 sig. .536 .590 .091 .050 .279 .429 .390 .521 .011 .569 .819 n 12 12 12 12 12 12 12 12 12 12 12 12 o5 cc -.080 .093 .536 .577* 1.000 .596* .305 .244 .273 .734** .052 -.181 sig. .806 .773 .072 .050 .041 .335 .444 .391 .007 .873 .574 n 12 12 12 12 12 12 12 12 12 12 12 12 o6 cc -.483 .246 .573 .341 .596* 1.000 .071 -.157 -.092 .647* .341 -.143 sig. .112 .442 .052 .279 .041 .827 .625 .776 .023 .278 .657 n 12 12 12 12 12 12 12 12 12 12 12 12 o7 cc .585* .586* .398 .252 .305 .071 1.000 .336 .358 -.022 -.368 .173 sig. .046 .045 .200 .429 .335 .827 .286 .253 .946 .240 .590 n 12 12 12 12 12 12 12 12 12 12 12 12 o8 cc .285 -.260 .302 .274 .244 -.157 .336 1.000 .496 .031 -.121 .188 sig. .368 .414 .340 .390 .444 .625 .286 .101 .923 .707 .558 n 12 12 12 12 12 12 12 12 12 12 12 12 o9 cc .302 .340 .208 .206 .273 -.092 .358 .496 1.000 .070 .239 .370 sig. .341 .280 .516 .521 .391 .776 .253 .101 .828 .455 .237 n 12 12 12 12 12 12 12 12 12 12 12 12 o10 cc -.503 -.125 .557 .699* .734** .647* -.022 .031 .070 1.000 .445 -.449 sig. .095 .699 .060 .011 .007 .023 .946 .923 .828 .147 .143 n 12 12 12 12 12 12 12 12 12 12 12 12 o11 cc -.446 -.090 .253 .183 .052 .341 -.368 -.121 .239 .445 1.000 -.060 sig. .146 .781 .427 .569 .873 .278 .240 .707 .455 .147 .854 n 12 12 12 12 12 12 12 12 12 12 12 12 o12 cc .621* .524 -.236 -.074 -.181 -.143 .173 .188 .370 -.449 -.060 1.000 sig. .031 .080 .460 .819 .574 .657 .590 .558 .237 .143 .854 n 12 12 12 12 12 12 12 12 12 12 12 12 source: author’s calculation if the employees who are the bearers of the process are not involved in defining strategies and goals, then they will be unclear to them, and the inability to identify with the defined will negatively affect the efficiency of implementation of both strategies and analysis of limiations of iso standards implementation from the external stakeholders’ point of view 129 goals. limitation lack of adequate information system o5 has the highest positive correlation (0.734) with limitation of o10 lack of innovation and continuous learning, and then with o6 inadequate database of customers and suppliers. significant association with the limitation lack of innovation and lifelong learning (o10). the greatest correlation with other limitations is shown by the o10 limitation, the correlation coefficient with (o40,699, o5-0,734, o6-0,647), which actually suggests that organizations, when they want to increase their innovation and provide their employees with competitive knowledge and skills through continuous learning, go mostly in two directions. one is the provision of adequate databases and an adequate information system and the other is the efficient management of employees through professional hrm and adequate training. the lack of this significantly limits the implementation of iso 9001 standards in smes. based on the above, it can be stated that the second hypothesis should be accepted, i.e., that most of the limitations that organizations face in the implementation of iso 9001 standards are positively correlated with each other. dendrogram1 relationship between groups of the limitations source: author’s calculation based on the model of hierarchical cluster analysis, the dendrogram shows the relationship between the limitations as follows: o7, o8, o2 and o1 are closely related, a slightly lower degree of connection is present in the limitations o9, o11, o3 and o10. there is also a significant correlation between the o5 and o6 limitations, while the o4 and o12 limitations are poorly interconnected and almost independent of the other limitations. hierarchical cluster analysis showed that the lack of management commitment to the management system based on iso 9001:2015 processes and requirements and centralized 130 e. dreković, m. radosavljević, m. bejatović decision-making result in unclear strategy and goals and employees due to non-involvement in defining them show resistance to any changes, including the implementation of iso 9001. variables: insufficient knowledge of the process holder, inadequate internal communication, lack of innovation and continuous learning, and insufficient developed skills of employees key to quality within a cluster, show the importance of a strategic approach that includes hrm which will provide employees with the necessary knowledge and skills and improve interpersonal communication. despite the fact that the limitation of the non-existence of hrm was assessed with almost the lowest average score by the respondents, cluster analysis and correlation analysis show the need for professional human resource management in companies. the identification of limitations is important due to their connection to problems in fulfilling the requirements of iso standards. the problems are defined according to the key requirements of iso 9001:2015, and their connection with the limitations provides an answer to the question which requirements due to the number and type of limitations can be difficult to fulfil. respondents were asked to link problems to the limitations previously defined in the questionnaire. respondents were able to cite several different limitations as the cause for each problem. graph 4 problems in the implementation of iso standards and the limitations that cause them source: author’s calculation the results of this comparative analysis are the following: pr 1 the problem of leadership and commitment of top management to qms (problem in defining business policy, quality policy, strategy, quality goals and planning their realization, there is no focus on the user) is mostly influenced by intellectual capital constraints and organizational culture. due to these limitations, it is difficult for a company to meet all the requirements related to leadership in standards. analysis of limiations of iso standards implementation from the external stakeholders’ point of view 131 pr 2 the problem in process design and determining process owners (how to define them and who will manage the process, the problem in defining what documented information is needed) arises mostly due to limitations: non-involvement of employees who are process holders in defining strategies and goals (centralized decision making), inadequate internal communication between employees, also between employee and manager , lack of top management commitment to the management system based on iso 9001: 2015 processes and requirements, insufficiently developed skills of those employees who are key to quality. pr3 the problem of performance evaluation, identification of kpis processes and their measurement, monitoring and analysis, arises equally due to: lack of top management commitment to the management system based on processes and requirements iso 9001: 2015, non-involvement of employees in defining strategies and goals (centralized decision making), and insufficient professional knowledge of the process holder in the first place. and then there are the poorly defined company strategies and goals and the lack of innovation and continuous learning. pr4 the problem of understanding the organization and its context, identifying stakeholders and their requirements, as well as keeping this information up to date is conditioned by the limitations of human capital and organizational culture. pr5 the problem in planning and managing the implementation of operational activities, design and development of products and services and management of outsource processes, products and services is caused by research results mostly due to insufficient capabilities and skills of those employees who are key to quality (creativity, teamwork, critical thinking, emotional intelligence, negotiation, ability to solve complex problems). after this cause, the lack of top management commitment to the management system based on the processes and requirements of iso 9001: 2015, centralized decision-making and inadequate internal communication between employees, also between employees and managers equally affected the emergence of this problem. pr6 -the problem in determining responsibilities and authorities for employees and process managers is primarily due to the commitment of management to qms, and then unclearly defined strategies and goals and inadequate communication between employees and employees and managers. pr7 the problem of consistency in the implementation of the process approach (management of documented information and their changes, review by management, internal checks, identification of risks and opportunities, taking measures and control of their implementation) is a consequence of lack of top management commitment to management process based on iso 9001: 2015, inadequate communication between employees, and between employees and managers, to a lesser extent also insufficient capabilities and skills of those employees who are key to quality. based on the above, it can be concluded that the third hypothesis should be accepted, i.e., that the limitations in the implementation of iso 9001 lead to problems in fulfilling the requirements of iso standards. when it comes to the way of solving problems, respondents were given the opportunity to express their agreement or disagreement with the proposed solutions. for each of the proposed solutions, the results of the descriptive statistic analysis show high average score without significant differences in the answers of the respondents. 132 e. dreković, m. radosavljević, m. bejatović table 5. descriptive statistics solutions n minimum maximum mean std. deviation r1 12 1.00 5.00 4.3333 1.23091 r2 12 2.00 5.00 3.8333 .93744 r3 12 3.00 5.00 4.3333 .65134 r4 12 3.00 5.00 4.7500 .62158 r5 12 4.00 5.00 4.5833 .51493 r6 12 3.00 5.00 4.3333 .77850 r7 12 2.00 5.00 3.9167 .90034 r8 12 1.00 5.00 4.1667 1.19342 r9 12 1.00 5.00 3.8333 1.11464 r10 12 2.00 5.00 4.1667 .93744 r11 12 4.00 5.00 4.4167 .51493 r12 12 3.00 5.00 4.0833 .66856 r13 12 3.00 5.00 3.9167 .66856 source: author’s calculation the most important solutions to the defined problems are identified as: r4 defining area of implementation of qms and defined processes and their owners, ensuring management commitment and customer focus (mean 4.7500, std. deviation 0.62158), r5 providing full involvement of process owners in formulating all necessary documented information, updating them, defining kpis (mean 4.5833, std. deviation 0.51493), r11 continuous review of documented information through internal checks, with defining corrective measures, control of their implementation (mean 4.4167, std. deviation 0.51493). as the least important solutions were evaluated r2 adequately defined quality goals and ways of achieving them, and r9 adequately defined quality policy and communication through the organization. conclusion during the implementation and maintenance of quality management systems according to the requirements of iso 9001:2015, organizations face many limitations, which if not eliminated during implementation, can only become more complicated and can lead to decertification. the results of the research show that non-material limitations are the dominant obstacle to the implementation of iso 9001:2015. also, they are positively correlated with each other and together they can cause problems for companies in fulfilling the requirements of iso standards. the analysis showed that most problems in fulfilling the requirements of the standard (such as requirements related to leadership, understanding the organization and its context, as well as determining responsibilities and authorities for employees and managers), were actually caused by two human capital limitations (lack of top management commitment and poorly defined strategy and goals). when fulfilling the requirements for process design and determining the process owner, the most problems are caused by centralized decision-making and insufficiently developed skills of employees key to quality and commitment to quality management, which indicates the importance of strategic approach in process design and the need to establish process orientation. problems can be most effectively solved by clearly defining the area of implementation of quality analysis of limiations of iso standards implementation from the external stakeholders’ point of view 133 management systems, defining processes and their owners, ensuring management commitment, ensuring full involvement of process owners in formulating all necessary documented information, updating them, defining kpis for each process. continuous review of documented information through internal checks, with the definition of corrective measures, and control of their implementation ensure the elimination of problems and fulfilling the requirements of the standard. although the financial limitation is often cited as an excuse by company managers, the results of this research show the opposite. in this regard, future research should be devoted to a more detailed analysis of the limitations of a non-material nature. also, based on the results of the research, managers are suggested to provide the top management training concerning the requirements of the standard at the very beginning of the implementation in order to provide the necessary support for quality management systems. in addition, full involvement of process owners in defining quality strategies and objectives, process design and definition of documented procedures and performances of the processes, as well as their ongoing training to build capacity and capabilities to effectively implement quality management systems should be ensured. in this way, interpersonal communication will be improved and the resistance of employees to change reduced. references anholon, r., simon rampasso, i., cooper ordonez, r. e., silva, d.d., 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(2019). the total quality management (tqm) journey of malaysian building contractors. ain shams engineering journal, 11(3), 697-704. https://www.emerald.com/insight/search?q=richard%20stuart%20dilawo https://www.emerald.com/insight/search?q=zahra%20salimi https://www.emerald.com/insight/publication/issn/0265-671x https://www.emerald.com/insight/search?q=ali%20mohammad%20mosadeghrad https://www.emerald.com/insight/publication/issn/1754-2731 https://www.emerald.com/insight/search?q=ali%20mohammad%20mosadeghrad https://www.emerald.com/insight/publication/issn/0952-6862 https://www.emerald.com/insight/publication/issn/0952-6862 134 e. dreković, m. radosavljević, m. bejatović polat, g., damci, a., & tatar, y. (2011). barriers and benefits of total quality management in the construction industry: evidence from the turkish contractors. in 7th research/expert conference with international participations”quality 2011“, neum, b&h, june 1-4, 2011. sadikoglu, e., & olcay, h. (2014). the effects of total quality management practices on performance and the reasons of and the barriers to tqm practices in turkey. advances in decision sciences, 17. sampaio, p. a., saraiva, p. m., & gomes, a. c. r. (2014). iso 9001 european scoreboard: an instrument to measure macroquality. total quality management & business excellence, 25(3-4), 309-318. talapatra, s., & uddin, m. k. (2019). prioritizing the barriers of tqm implementation from the perspective of garment sector in developing countries. benchmarking: an international journal, 26(7), 2205-2224. talib, f., & rahman, z. (2015).identification and prioritization of barriers to total quality management implementation in service industry. the tqm journal, 27(5), 591-615. willar, d., coffey, v., & trigunarsyah, b. (2015). examining the implementation of iso 9001 in indonesian construction companies. the tqm journal, 27(1), 94-107. analiza ograničenja implementacije standarda serije iso sa stanovišta eksternih stejkholdera svrha ovog rada je da se identifikuju ključna ograničenja primene standarda iso 9001: 2015, njihove korelacije, kao i povezanost sa problemima sa kojima se kompanije susreću. u radu u pregledu literature korišćeni su istraživački radovi drugih istraživača koji se odnose na ograničenja primene iso standarda. u cilju obezbeđenja svrhe istraživanja, sprovedeno je empirijsko istraživanje. istraživanje je realizovano metodom anketnog upitnika, na uzorku od 12 ispitanika, konsultanata konsultantskih kompanija za primenu standarda i vodećih ocenjivača akreditovanih sertifikacionih tela za primenu iso standarda u srbiji. korištenje ovog pristupa zasnovanog na eksternim izvorima osigurava određeni nivo objektivnosti. takođe, iskustvo ispitanika u primeni procesnog pristupa i sertifikaciji različitih organizacija daje potreban kredibilitet i kvalitet samom istraživanju. u radu je identifikovano 12 ograničenja primene iso 9001. rezultati istraživanja pokazuju da su nematerijalna ograničenja dominantna prepreka primeni iso 9001:2015. ta su ograničenja pozitivno međusobno povezana, tako da kompanijama mogu stvoriti višestruke probleme u ispunjavanju zahteva iso standarda. ključne reči: procesni pristup, iso 9001, ograničenja, problemi, rešenja, empirijsko istraživanje. https://www.emerald.com/insight/search?q=subrata%20talapatra https://www.emerald.com/insight/publication/issn/1463-5771 facta universitatis series: economics and organization vol. 16, n o 2, 2019, pp. 129 144 https://doi.org/10.22190/fueo1902129o © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper underwriting performance shocks in the non-life nigerian insurance industry and macroeconomic risks: a vector auto regressive approach 1 udc 368.03(662.2) akinwunmi kunle onafalujo lagos state university, department of insurance, lagos state, nigeria abstract. insurance company’s performance can be stymied by internal and external risks. industry reports show 23 companies out of the 55 operating companies (about 42%) in nigeria recorded net operating losses in 2015. macroeconomic risks are external and may be quite significant in providing an (un)favourable environment for performance of the industry particularly in a developing economy like nigeria. reflecting on the contribution of insurance to the nigerian economy which shows an abysmally low penetration, averaging below one percent of gdp when compared to african peers such as south africa at 13% and kenya above two percent; it is of essence to investigate how these risks affect its performance which by implication could adversely affect insurance penetration. dynamic least square regression technique was employed to study the dynamics of macroeconomic risks (gdp, inflation rate, and interest rate) on underwriting performance over the period 1981-2015. weighed against theoretical underpinnings and other studies particularly in western economies, the study has evidence that interest and inflation rate shock adversely underwriting performance. also, real gdp does not have positive shock on premium growth and loss ratio. monetary policy should address inflation, and interest rates if the underwriting performance shocks in the non-life sector are to be mitigated in nigeria. in the long term, government should focus on how to improve income per capita and reduce income inequality and dependency ratio so as to connect insurance consumption to real gdp growth. key words: macroeconomic risks, underwriting performance shocks, profitability jel classification: e44, g22 received september 10, 2018 / revised march 22, 2019 / accepted april 15, 2019 corresponding author: akinwunmi kunle onafalujo lagos state university, department of insurance, lagos, nigeria e-mail: onafalujo@yahoo.com 130 a.k. onafalujo introduction financial performance of insurance companies is difficult to understand in view of the provisions for solvency and intangible nature of the output (berger, cummins & weiss, 1997). these difficulties are predicated on their performance being stymied significantly by competition, internal and external risks (ayele, 2012). the internal risks are company‟s specific factors and external riss are macroeconomic factors. the importance of macroeconomic risks is rooted in strategic financial management reasoning which attributes their factors as the leading indicators for setting business strategies because it affects all industries but in different ways (brigham & ehrhardt, 2014). this can be reflected in underwriting shocks which may have arisen from consumption shocks that make the series of performance to be non-stationary at level (lee, hsu & lee, 2010). market failure can thus be precipitated in a turbulent economy. nigeria‟s economy is ranked as one of the most volatile in the 1960-2000 periods (world bank, 2003). in 2015, industry reports show 23 companies out of the 55 operating companies (about 42%) in nigeria recorded losses (nweke, 2017). however, on aggregate underwriting premium had grown from n234.1 million in 1981 to 187.4 billion in 2013 (nigeria insurance association, (nia), 2011; 2013; 2015 and cbn statistical bulletin, 2015). the non-life sector also known as general insurance contributed more to insurance penetration in nigeria in terms of the volume of business done. it accounted for 82.4% in 2004 moving up to 84.3% in 2007 but precipitously declining from 2008 after the insurance and pension reforms to 69.98% in 2013 (nia, 2014). since, nigeria has been described as an attractive business destination, it is therefore important for the insurance industry which according to; outreville, 1990; ward & zurbruegg, 2000; brainard, & schwartz,, 2008; outreville 2013, contributes significantly to economic growth vide financial intermediation and strengthening of risk taking ability (charumathi, 2012) to understand underwriting or consumption shocks. from micro-economic theory, profitability of an industry influences growth through competitive models (pervan, arneric & curak, 2013). also, intense competition can influence performance negatively (chidambaran, pugel & saunders, 1997; kaplan & celik, 2008; goddard, liu, molyneux & wilson, 2011). whittington (1980) cited in hardwick & adams (2002) stated that “higher profits provides the means (greater availability of finance through retained profits or capital market) and the incentive (a high rate of return) from investments.” lee (2014) buttressed this opinion on the persuasion that stakeholders‟ interests are stimulated on perceived profitability; or in other economic measures like pricing (chidambaran, pugel & saunders, 1997). insurance business competes by growing premiums (kozak, 2011); and reducing loss propensity while ensuring asset growth through investment activities (shiu, 2004). these activities could receive shocks from macroeconomic risks such as inflation and interest rates, and changes in gdp (pervan & pavic, 2010; kozak, 2011). thus, in conformance to the foregoing, performance shocks in the industry arising from macroeconomic risks must be understood, particularly in a turbulent economy like nigeria. in figure one, 1981-2013, claims were almost stable; premium grew slowly and moved more rapidly following recapitalization in 2005; but asset growth was rather explosive significantly after the recapitalization, but then what was the role of macroeconomics risks. underwriting performance shocks in the non-life nigerian insurance industry and macroeconomic risks 131 fig. 1 trend graph of claims, premium and total assest 1981-2014 of the nigeria insurance industry obtained from cbn statistical bulletin (2015) source: author’s graphical estimation while many previous studies had focused on profitability and performance in manufacturing (see ito & fukao, 2010; seelanatha, 2011) and banking mainly in advance economies (williams, 2003; athanasoglous brissimis,& delis. 2008; vejzagic & zarafat, 2014), there were few emerging studies on the structure of performance in the insurance sector. most of the researchers combined internal and external factors in their works but this paper adds to deeper understanding of performance shocks of double digit inflation rate, high interest rate with different exchange rate regimes in a fast growing african economy. the study hypothesizes that macroeconomic risks significantly introduce shocks to the underwriting performance of non-life nigerian insurers measured by growth of premiums and loss ratio. understanding how macroeconomic risks affect performance in a turbulent economy will improve the knowledge base of investors and policy makers and reduce the fears of policyholders about the industry and in particular the existence of possible underwriting cycles (doherty & garven, 1995). 1. conceptual framework and empirical literature the understanding of external risks‟ (referred to as environmental factors in strategic management) influence on industries is important in strategic financial management because they provide the leading indicators for setting business strategies (levy, 2002; brigham & ehrhardt, 2014). indeed, business cycles can be initiated by macroeconomic risks (inflation, interest and gdp growth rates) and a whole industry may experience performance shocks precedent to it (weiss, 2007). shocks are major underwriting losses or gains in underwriting performance (shuford, 2004). the way it affects insurance 132 a.k. onafalujo industry reflects in swings in losses or premium growth (underwriting performance indicators) (doherty & garven, 1995); and had formed a pigeon which has piqued insurance researchers (weiss, 2007). in recent times, the interest of researchers has been more tuned to the insurance sector as the role of insurance expands within the economic space and the claim that it is less exposed to systemic risk when compared with banks (baluch, mutenga & parsons, 2011). extensive studies have also been carried out on determinants of profitability as a financial performance in the insurance sector but more on internal than external factors. the studies on the link with macroeconomic factors focused more on causal relationship between economic growth and insurance development (ward & zurbruegg, 2000; brainard, 2008; han, li, moshirian & tian, 2010); chang & lee, 2012; outreville 2012); with lesser attention to how external factors affect performance or profitability of insurers. the researches on the relationship between profitability and firm specific factors both in the life and non-life sectors had mixed outcomes. in pakistan and india, an inverse relationship between loss ratio and profitability was detected (malik, 2011). choi (2010) in us confirmed size, leverage, reinsurance and liquidity are relevant to profitability. the others investigated both firm specific factors and macroeconomic variables in a single model with no clear definitive findings. cheng and huang (2001) cited in lee (2014) established the existence of relationship between macroeconomic factors performance of insurers. shiu (2004) did a panel analysis on the uk non-life companies 1986-1999 and found liquidity, underwriting profits, unexpected inflation and interest rate were significant determinants of performance. similarly, curak, pepur, and poposki, (2011) investigated determinants of profitability of composite companies in croatia in a six-year period and reported that size, underwriting profit, inflation and equity returns were significant to return on equity. datu (2016) in the philippines found a negative relationship between inflation and profitability. suffice to say that there were lesser investigations strictly looking at how macroeconomic factors affect profitability in the non-life insurance sector. performance had been measured more in the studies as discussed earlier by return on assets or return on equity as indicators of profitability (cheng and huang (2001) cited in lee, 2014; datu, 2016). in kohers and greene (1977), performance was measured by risk-adjusted return. along the same line fairley (1979); cummins (1991) determined performance from underwriting return which combined premium and loss expenses. although, studies carried out in these advanced economies also suggested the existence of underwriting cycles during which cash-flow underwriting occurs to stabilize underwriting shocks (weiss, 2007). these findings give some insights that research is necessary to understand the extent to which macroeconomic factors constitute risks or shocks to underwriting performance. this is crucial to the nigerian turbulent economic environment where insurance penetration is one of the worst in the world. researches on the nigerian frontier were fixated on single variables relationship with profitability and only tangential to underwriting performance. the few studies on insurance profitability were by agiobenebo and ezirim (2002) who investigated the impact of financial intermediation on profitability of insurance companies in nigeria and established a positive link; ahmed (2016) also found that size influences the profitability of nigerian insurers. this study fills the gap in the investigation of performance in the insurance industry related to premium growth and changes in losses that could arise from external shocks. underwriting performance shocks in the non-life nigerian insurance industry and macroeconomic risks 133 1.1. theoretical framing of performance in the non –life sector and macroeconomic risks theoretically, fischer‟s 1971 seminal model links nominal interest to be a function of expected inflation rate. implying inflation and interest rate changes should impact economic functions in the same direction. the relationship of inflation and interest rates to performance is indicated in the theoretical estimation of insurance premium. this is computed from discounted losses plus expenses and profit (referred to as risk charge) functionally expressed in (doherty & garven, 1995; weiss 2007) as: r ofittexpensesiiel tc   1 pr)()( , (1) where p is premium, εl is expected losses, ic is claims inflation, i is expected inflation, r is interest rate and tt is the technology. the model reveals the fundamental principle of insurance operations (tosetti, behar, fromenteau & menart (2001) and also shows the relationship between premium, expected losses, interest rate, inflation and profitability for the insurance business model. based on this insurance concept, pricing of premium is positively related to inflation and inversely related to interest rate. this is also demonstrated by fairley (1979) in the capital asset pricing model for insurance where underwriting return or premium was shown to have inverse relationship to interest rate (see cummins, 1991 for financial models on insurance). but in a ratetariff non-life insurance regime like nigeria, discounting is irrelevant; and the behavior of customers to both variables might be unclear (shiu, 2004). interest rate risk interest rate risk occurs due to changes in the interest rate (shiu, 2004). the interest rate impacts the non-life sector in three ways: first, it affects the abilities of insurance companies to undertake cash flow underwriting as postulated in underwriting cycle theory. this suggests mixed outcomes, such that when interest rates are high, insurance companies undercut prices which gradually may result in higher risk taking and consequently result in higher loss ratios. secondly, it correlates positively with the level of investment yield (wen & born, 2005); using increased investment income to subsidize underwriting (d‟arcy, 1988; wen & born, 2005; weiss, 2007) can in the opposite direction result in increased premium and hence lower loss ratios. thirdly, given the timing difference differential between the receipt of premium and payment of claims, a positive relationship is expected between interest rate and loss ratios as well as premium growth rate (myers & cohn, 1987; cummins, 1991). shiu (2004) discussed this relationship in terms of duration of assets and liabilities producing different outcomes on performance of insurance companies. altogether, the underwriting and investment strategies might determine how interest rate impacts loss ratiosthat is, losses might increase at a faster rate than premiums or otherwise. thus the shocks to underwriting performance of insurers from interest is not clearly defined but needs investigation and seems specific to each business environment (shiu, 2004). 134 a.k. onafalujo inflation risk the theoretical foundation of inflation is on the occurrence of „rise in the general level of prices‟ accompanied by dire consequences such as decline in purchasing power (algrim and d‟arcy, 2012). since fisher‟s (1971) theory predicts a positive relationship between nominal interest rate and inflation rate, it is expected that average investment yield of insurance companies will increase in a double digit inflation like nigeria. however, inflation has another but countervailing influence in insurance business because losses depend on how much influence it has on claims amount inflation and its frequency (shiu, 2004); and on the other hand consumption of insurance (ma &pope, 2003). the aggregate effect will depend on how much cash-flow underwriting is used to improve consumption of insurance due to drop in purchasing power. several studies also found an inverse relationship between inflation and performance (pervan & pavic, 2010). gross domestic product (gdp) premium growth implies a continuous increase in demand for insurance and positive performance of the insurance industry (outreville, 1990; 2012). shocks are fluctuations that are adverse to the profitability/performance and indeed ability to innovate underwriting strategies (bates & atkins, 2007). previous researches on demand for insurance have consistently established theoretically that a growing economy will boost insurance demand (outreville, 1990; brown, chung & frees, 2000; ma & pope, 2003; liedtke, 2007; outreville, 2012). on this premise, positive changes in gdp are expected to have positive shocks that are stable in the long run on performance of insurance companies, and vice visa (pervan & pavic, 2010). as earlier said, previous researches were more oriented towards examining the influence of insurance on economy but have theoretically also implied that a growing economy will boost insurance demand. implicitly, the relationship with loss ratios depends on underwriting strategy but is expectedly inverse and positive for premium growth. 2. materials and methods annual data on claims, gross premium, inflation rate, interest rate and gdp was obtained from cbn statistical bulletin (cbn, 2015). additional data on insurance industry 2011-2014 was obtained from nigeria insurance association (2015). specifically, the model followed jawadi, bruneau & sghaier, (2009), who used the annual data of five most developed insurance markets: the uk, the usa, canada, japan and france for non-linear cointegration study between premiums and financial markets in different years. since the study investigated performance shocks, var was considered an efficient technique in line with previous studies on volatility. model specification this study follows the methodological approach of chen and hamwi (2000), however with distinct modification. given that y is a column vector, which includes premium growth rate, loss ratio (claims divided by premium), inflation, interest rate, and gdp growth rate. if all these variables are i (1), i defines the following stationary vector autoregressive var (1) specifications. underwriting performance shocks in the non-life nigerian insurance industry and macroeconomic risks 135 , int , inf , t t t t t y lor gdp (2) or , int , inf , t t t t t y pgr gdp (3) ( ) ; ~ (0, t t t t y l z z vwn  (4) for equation three to be stable,  (l) = 1  1l < 1 that is, the sum of all the roots in the var polynomial are in absolute term less than 1. if the system is stable, we can calculate the response of each of the variables included in y to the structural shocks as follows. restate equation 3 as 1 1 1 ( ) t t y z l        (5) extend equation 4 to an infinitely moving average of the following form. 0 1 2 t 1 2 y ( ) ( ) ( ) t t t l z l z l z        (6) re-represent equation 5 to have 2 t 1 2 y t t t z z z       (7) state a reduced form of equation 7 as t ay t z (8) 1 t y t a z   (9) let 1 b a   to have 2 t 1 2 y t t t bz bz bz       (10) to compute the response of each of the variables included in y is to differentiate equation 9 each successive time horizon (j=0,1,2…). that is: t j t y z j b     (11) t t y z b    in period zero (12) in period one ahead t 1 t y z b    (13) in period two ahead 2t 2 t y z b    (14) it continues until it gets to the last period of the horizon. note that if the system is stable, the shocks would disappear and become zero. 136 a.k. onafalujo 3. results prior to estimation, i attempted to check the level of integration using break point unit root test under augmented dickey fuller (adf) method. noting the presence of trend, i de-trended by taking the log of each series of interest. table one reports the unit root test results on loss ratio (llr), premium growth rate (lpmr), economic growth rate (lgr), inflation (linf), and interest (lintr). stationarity tests were conducted on the transformed data. table 1 unit root test results descriptor adf-stat 5% critical value p-value linf -5.77 -4.44 <0.01 lgr -4.88 -4.44 0.01 lintr -5.08 -4.44 <0.01 llr -6.22 -4.44 <0.01 lpmr -6.04 -4.44 <0.01 source: author’s summarization from e-view window 10 the adf statistics in absolute terms appear asymptotically larger than the critical value at 5 percent, and all the corresponding p values are very small, approximately less than 1 percent. in this context, the null of a unit root exhibiting the variables is refuted. by implication, all the variables of interest are i(0) and employing a var technique is appropriate. thus, tables 2 and 3 give the estimated results. however, while table 2 is based on the relation between loss ratio and selected macroeconomic variables, table 3 is on the relation between premium growth rate and macroeconomic factors. table 2 loss ratio-macroeconomic variable relation in vector autoregressive exogenous (varx) framework regressor coefficient std error t-value p-value llr(1) -0.448746 0.198386 -2.261986 0.0266 llr(2) -0.167022 0.174765 -0.955695 0.3423 llr(3) -0.025823 0.176156 -0.146594 0.8838 lgr(1) 0.003389 0.076294 0.044426 0.9647 lgr(2) 0.148393 0.071423 2.077652 0.0411 lgr(3) 0.117209 0.079814 1.468527 0.1461 linf(1) -0.078751 0.127373 -0.618272 0.5382 linf(2) 0.001926 0.127094 0.015155 0.9879 llnf(3) -0.185062 0.118014 -1.568139 0.1210 lintr(1) -0.183392 0.384732 -0.476674 0.6350 lintr(2) -0.312161 0.397127 -0.786047 0.4343 lintr(3) -0.113307 0.368815 -0.307220 0.7595 lpmr 1.841904 0.901517 2.043116 0.0445 source: author’s summarization from e-view window 10 underwriting performance shocks in the non-life nigerian insurance industry and macroeconomic risks 137 the results in table 2 are highly sublime with four findings. firstly, premium growth rate is significantly positively related to loss ratio. to be precise, a 1 percent increase in premium growth rate increases loss ratio by 1.84 units, implying that loss is increasing at a slower rate as premium increases. secondly, economic growth rate at different lags influences loss ratio positively particularly at lag two. conversely and thirdly, historical loss ratios are negatively related to current loss ratio and also, fourthly inflation and interest rate are inverse determinants of loss ratio except in lag 2. the study established here that an increase in interest rate and inflation induces a decline in loss ratio. that is, premium increases at a faster rate than claims; at any time inflation and interest rates rise or claim rarely increases while premium grows particularly if there is cash-flow underwriting. however, it can be deduced from the first and second findings that due to the differential time between premium and claim payment; claims inflation may later rise and outpace premium growth table 3-premium growth rate-macroeconomic variable relation in varx framework regressor coefficient std error t-value p-value lpmr(1) 0.446809 0.220572 2.025701 0.0463 lpmr(2) 0.157281 0.225426 0.697707 0.4875 lpmr(3) 0.037354 0.222799 0.167662 0.8673 lgr(1) -0.004232 0.015079 -0.28036 0.7838 lgr(2) 0.010742 0.018147 0.591955 0.5556 lgr(3) -0.011871 0.014638 -0.810925 0.4204 linf(1) -0.002635 0.025214 -0.104334 0.9172 linf(2) -0.023127 0.025208 -0.917270 0.3619 llnf(3) 0.020945 0.024184 0.866094 0.3892 lintr(1) 0.008411 0.076949 0.109312 0.9132 lintr(2) -0.019963 0.081085 -0.246133 0.8062 lintr(3) -0.006831 0.071822 -0.095092 0.9245 llr 0.068373 0.042031 1.626633 0.1081 source: author’s summarization from e-view window 10 it is structurally important to find that premium growth rate has positive impact on loss ratio, just as loss ratio influences premium growth rate positively; that is, underwriting performance is consistently making losses grow at faster pace than premium. it is also discovered that previous premium growth rates are negatively connected to current growth rate of premium. with exemption to lag 2 in the case of gdp growth rate, lags 3 and 1 negatively influence premium growth rate. inflation rate adversely affects premium growth rate while interest rate also negatively influences premium growth rate at lags 2 and 3; although they are not significant. this simply means that there is sufficient evidence to support that macroeconomic factors in nigeria are risks or shocks to premium growth rate and indeed underwriting performance of the insurance industry. this adds another theoretical concept that premium will not grow at the same rate with economic growth and could even be inverse. now the central issues are to address how loss ratio and premium growth rate individually respond to the shocks of the macroeconomic variables. the impulse response function graph is drafted to explain this issue; the graphs are presented in figures 2 and 3. 138 a.k. onafalujo -.05 .00 .05 .10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 response of llr to llr -.05 .00 .05 .10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 response of llr to lgr -.05 .00 .05 .10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 response of llr to linf -.05 .00 .05 .10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 response of llr to lintr response to cholesky one s.d. (d.f. adjusted) innovations fig. 2 response of loss ratio to macroeconomic shocks source: author’s assessment from figure two, the response of loss ratio to its own shocks is initially very high; it declines immediately, and rises again. however, it does not prolong for a long time. hence, loss ratio does not respond to its shocks for a long period before coming to rest. the response of loss ratio to the shocks of gdp growth rate rises in the short run and falls in the long run to the negative region. there are few cases it comes to rest; but it however continues to infinity. the response of loss ratio to inflation initially falls into the negative underwriting performance shocks in the non-life nigerian insurance industry and macroeconomic risks 139 region, dwindling over time, and then prolong but rarely getting into the positive region perpetually. in addition, the response of loss ratio to interest rate falls initially into negative, but it does not persist for a long time. implicitly, loss ratio responds negatively to shocks from inflation and interest rate. but gdp growth shows short run positive shock to loss ratio. this corroborates the findings under the varx framework. .00 .01 .02 .03 1 2 3 4 5 6 7 8 9 10 response of lpmr to lpmr .00 .01 .02 .03 1 2 3 4 5 6 7 8 9 10 response of lpmr to lgr .00 .01 .02 .03 1 2 3 4 5 6 7 8 9 10 response of lpmr to linf .00 .01 .02 .03 1 2 3 4 5 6 7 8 9 10 response of lpmr to lintr response to cholesky one s.d. (d.f. adjusted) innovations fig. 3 response of premium growth rate to macroeconomic shocks source: authors estimation 140 a.k. onafalujo as shown in figure 3 above, the response of premium growth rate to its shocks rises at first but falls immediately after. in fact, it falls persistently over time without coming to rest. for the shocks of economic growth rate, premium growth rate initially had negative response, and after a while it became positive, later it becomes negative again, and prolongs perpetually. so also, the response of premium growth rate was negative to the shocks of inflation continues indefinitely. this means premium growth rate responded to the shocks or changes in inflation for a long time negatively. indeed, the response does not come to rest. to the contrary, the response of premium growth rate to the shocks of interest rate fails to persist for a long time, because it comes to rest abruptly. therefore, premium growth rate responds to interest rate shocks for a short time. conclusion and recommendations the empirical literature reviewed showed mixed results on the relationship between premium growth rate and loss ratio as underwriting performance indicators and macroeconomic factors. in jawadi, bruneau & sghaier, (2009), only the french insurance industry had strong linkage between interest rate and premium growth, the us industry showed mean reversion between the two variables while in japan, they only had significance with stock market returns. this was explained by the regulations and habits of the insurers in investment practices. for this study, loss ratio and premium growth rates are used as underwriting performance variables. it is interesting to find out that inflation and interest rates are negatively related to loss ratio which implies that premium grows faster than claims inflation and possibly there is value adjustment in insurance consumption in times of inflation with concomitant increase in claims. on interest rates, it suggests possibility of cash flow underwriting may occur through rate-cutting and high risk taking in periods of high interest rate resulting in higher volume of premium. furthermore, rates are regulated in the non-life sector in nigeria, therefore systematic price discounting is less relevant and unethical rate-cutting may be quite prevalent in times of high interest rate giving a positive shock to loss ratio. however, there is strong evidence that premium growth rate is adversely affected by inflation rate for long periods but less significantly to shocks from interest rates. this could arise from sharp reduction in purchasing power while possible cash flow underwriting is really non-existent in periods of high interest rate; more so that pricing is fixed by tariff. it is of note that premium growth is not influenced by real economic growth which is fundamental departure to most studies. this underscores the low insurance penetration in the nigerian non-life sector despite economic growth in the prevailing period. previous premium has no influence on future performance the overall implication is that the industry competes more on premium rate –cutting during periods of high interest income while loss distributions respond less to inflationary shocks through claims inflation. altogether, this suggests poor underwriting strategies during these periods because insurance consumption is shocked by inflation risk and less affected by interest rate suggesting weak investment strategies. also, it is quite revealing and surprising that historical premium growth rate had no shocking influence on future growth rate unlike other developed economies (jawadi, bruneau & sghaier, 2009) which may also attest to poor salesmanship and underwriting strategy. much more surprising is underwriting performance shocks in the non-life nigerian insurance industry and macroeconomic risks 141 that gdp growth rate does not influence premium growth rate as found in research. this may be attributable to possible non-transmission of economic growth to income of the people. this calls for greater research for developing economies. the nigeria insurance industry has huge growth potentials but is subject to performance shocks from macroeconomic risks that veer away from theoretical underpinnings as evidenced in this study. in consequence, the policy makers should consider that the performance of the insurance sector to grow premiums and reduce loss ratios depends on the active management of interest and inflation rates since they adversely affect the underwriting performance. very surprisingly, real gdp growth rate has not influenced the growth and performance of the industry. the government has to devise an economic blueprint to increase the level of per capita income, reduce dependency ratio and income inequality to connect gdp growth to the insurance industry. the regulators should consider rate deregulation in the non-life sector to enable proper pricing which may possibly incentivize increased demand of insurance through competitive underwriting strategy. nigerian insurance companies should proactively develop products that can compete on managing claims using innovative underwriting strategy since loss ratio and premium growth are quite vulnerable to macroeconomic shocks in nigeria. references agiobenebo, t.j. & ezirim, b.c. 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(1980). the profitability and size of united kingdom companies 196074. the journal of industrial economics, 28, 335-35. world bank (2003), nigeria policy options for growth and stability, report no. 26215-nga, washington dc: the world bank. uticaj naglih promena na poslovanje osiguravajućih društava iz sektora neživotnog osiguranja u nigeriji i makroekonomski rizici – vektorski autoregresioni pristup poslovanje osiguravaju eg društva može biti otežano internim i eksternim rizicima. izveštaji pokazuju da su 23 od 55 kompanija koje posluju u nigeriji (oko 42%) zabeležile neto operativne gubitke u 2015. godini. makroekonomski rizici su eksterni i mogu biti veoma značajni u obezbeđivanju (ne)povoljnog okruženja za razvoj industrije, posebno u ekonomija kao što je nigerija. kada se ima u vidu doprinos osiguranja nigerijskoj ekonomiji, koje pokazuje neuobičajeno nisku penetraciju, prosečno ispod jednog procenta bdp-a, u poređenju sa afričkim državama kao što su južnoafrička republika sa 13% i kenija iznad dva procenta; od suštinske je važnosti istražiti kako ovi rizici mogu uticati na prodor osiguranja. dinamička regresija najmanjih kvadrata je koriš ena za proučavanje dinamike makroekonomskih rizika (bdp, stopa inflacije i kamatne stope) na rezultate poslovanja osiguravaju ih društava u periodu 1981-2015. u odnosu na teorijske osnove i druge studije naročito u zapadnim 144 a.k. onafalujo ekonomijama, studija ima dokaze da nagle promene u stopi kamate i inflacije negativno utiču na poslovanje osiguravaju eg društva. takođe, realni bdp nema pozitivan uticaj na rast premija i racio šteta. monetarna politika bi trebalo da se bavi inflacijom i kamatnim stopama kako bi se u nigeriji ublažili šokovi u poslovanju osiguravaju ih društava u sektoru neživotnog osiguranja. dugoročno, vlada bi trebalo da se fokusira na pove anje dohotka po glavi stanovnika i smanjenje nejednakosti dohotka i racia zavisnosti kako bi se potrošnja osiguranja povezala sa realnim rastom bdp-a. ključne reči: makroekonomski rizici, nagle promene u osiguranju, profitabilnost 10476 facta universitatis series: economics and organization vol. 19, no 2, 2022, pp. 83 94 https://doi.org/10.22190/fueo220210007s © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper qualitative features of women’s entrepreneurial activity in the republic of serbia: the sectoral distribution perspective1 udc 005.961:005.914.3 334.722-055.2 danijela stošić panić university of niš, faculty of economics, republic of serbia orcid id: danijela stošić panić https://orcid.org/0000-0001-5969-6768 abstract. although growing in volume, women’s entrepreneurship is still significantly underrepresented relative to the entrepreneurial activities of men. moreover, in most of the contexts, quantitative performance of female entrepreneurs are worse, compared to the ones achieved by their male counterparts. though certainly important, knowing only the quantitative performance of female entrepreneurs is not enough for improving their competitiveness and socio-economic status. quantitative performance are the results of certain qualitative features of women’s entrepreneurial activities, which are often neglected in the public discourse. the aim of the study is to provide an overview of the sectoral structure of women’s entrepreneurship from the less studied contexts, such serbian environment is. working with data provided by the statistical office of the republic of serbia, the study empirically tests and supports the hypotheses that there are differences in the sectoral distribution of female and male entrepreneurs in the republic of serbia, with serbian female entrepreneurs being overrepresented in the services sector. moreover, the results show women’s observed participation in the services sector is significantly higher than the one which would be expected given the sectoral structure of the general population of entrepreneurs. the paper discusses its theoretical and practical contributions as well. key words: gender, entrepreneurship, business sector, serbia jel classification: l26, j16 received february 10, 2022 / revised april 02, 2022 / accepted april 13, 2022 corresponding author: danijela stošić panić faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, republic of serbia | e-mail: danijela.stosic@eknfak.ni.ac.rs https://orcid.org/0000-0001-5969-6768 mailto:danijela.stosic@eknfak.ni.ac.rs 84 d. stošić panić introduction because of the importance it has for the improvement of economic position of women, but also for the general socio-economic progress of a society (brush. bruin, & welter, 2009; carbera & mauricio, 2017; de vita, mari, & poggesi, 2013; moreira, marques, braga, ratten, 2019; sajjad, kaleem, chani & ahmed, 2020; terjesen & amoros, 2010), the entrepreneurial activity of women becomes a phenomenon interesting for both the academics and practitioners (foss, henry, ahl, & mikalsen, 2019; mitchelmore & rowley, 2013). female entrepreneurs are “one of the fastest growing entrepreneurial population” with specific characteristics, which is why they have become a separate branch of research (foss et al., 2019; ahl, 2006). economic empowerment of women and their entrepreneurial activity, as one of the ways to achieve this goal, are one of the indicators of the development of a particular society (sarfaraz, faghih, & majd, 2014). although growing in volume and socio-economic contribution, women's entrepreneurial activity is less pronounced compared to the men's (salis & flegl, 2021; vracheva & stoyneva, 2020). based on this fact, it is emphasized that women’s entrepreneurship is a necessary, but underused source of economic growth (kamberidou, 2020; tsuchiya, 2010; vossenberg, 2013). not only is the entrepreneurial activity of women less pronounced, but also those women who are entrepreneurs perform worse, comparatively in relation to their male counterparts (bardasi, sabarwal, & terrell, 2011; brixiova, kangoye, & said, 2020; klapper & parker, 2010; watson, 2002). moreover, in addition to less favorable quantitatively measured performances, there is also an unfavorable qualitative structure of women's entrepreneurial activity. for example, women are more often pushed into the entrepreneurship by necessity such as job scarcity (chen, lee, & alymkulova, 2021; elam et al., 2021), and they are overrepresented in the more competitive and less lucrative service sector (mitchelmore & rowley, 2013; terjesen, 2016; zhao & yang, 2021). this poorer qualitative structure of women's entrepreneurial activity is considered as one of the determinants of the lower performance of their entrepreneurial ventures. although women’s entrepreneurship is on its way to be empirically revealed, most of the studies are conducted in the developed world, with anglo-saxon countries dominating the field (carbera & mauricio, 2017; henry, foss, & ahl, 2016). the data from other contexts are missing, thus creating the research gap worth of filling. female’s entrepreneurial activity is under-researched field in serbia as well. as for the data on the structural composition of the women’s entrepreneurship in serbia, the existing data are at best based on descriptive statistics, without identifying statistical differences in the structure of serbian entrepreneurial activity by gender and by sector. given the importance of the qualitative structure of the entrepreneurial activity for business success of women entrepreneurs, on the one hand, and the lack of statistically based conclusions on the structure of women’s entrepreneurship in the republic of serbia, on the other hand, the aim of this study is to statistically test the hypotheses about female entrepreneurs’ overrepresentation in serbian service sector. the remainder of the paper is structured as follows. the first section of the paper provides an overview of the literature on the basis of which hypotheses are defined. the methodological aspects of the study are explained within the second section of the paper, after which the results are presented and discussed. the paper ends with concluding remarks. qualitative features of women’s entrepreneurial activity in the republic of serbia: the sectoral ... 85 literature review in serbia, gender inequalities in entrepreneurship are a reflection of the general gender inequality that is present in the political, economic and wider social inclusion of women. out of the total number of companies and entrepreneurs in the republic of serbia, on average in only 28% of cases women are businesses’ owners or founders. women are every third entrepreneur in the republic of serbia (31% women vs. 69% men) and they own every fourth company (24% owners vs. 76% owners) (statistical office of the republic of serbia, 2020b)2. entrepreneurial gender-gap which exists in the republic of serbia is consistent with global pattern of women’s presence in the entrepreneurship. gender structure of the entrepreneurial activity on a global level is in favor of men, both within the early entrepreneurial activity and within the established businesses (gem, 2022). along with the usual factors that determine the worse position of women in the labor market, such as inadequate women's human and social capital, it is also acknowledged that social norms, values and gender stereotypes are of great importance for less pronounced entrepreneurial activity of women. thus, for example, cuberes, priyanka and teignier (2019) find that the entrepreneurial gender-gap is wider in the countries of eastern and southeastern europe (former communist countries, including serbia) partly because of the values towards women in these societies which are typically lower than in the rest of the european countries. in addition to their lower participation, women-owned and managed businesses perform comparatively worse, as measured by traditional economic and financial measures. women-owned businesses are smaller, generate less income and profit, close more often, are predominantly focused on small, local markets, and have limited potential for growth (harrison, leitch, & mcadam, 2020; kamberidou, 2013; parker, 2009; vossenberg, 2013). within the strategic, institutional and regulatory framework in the republic of serbia, entrepreneurship is recognized as a way to improve women's economic participation and achieve gender equality (government of the republic of serbia, 2015; 2021a; 2021b). however, at the same time, economic policy does not seem to respect the specific position of women. thus, for example, the gender perspective is not sufficiently incorporated into the official economic policy and measures to support entrepreneurial activity. this conclusion is derived from the fact that there are almost no specific measures to support women entrepreneurs. an analysis of the support programs which are already implemented (for an overview of the programs see: avlijaš, vladisavljević, & popović pantić, 2012) leads to the conclusion that none of them is specifically developed for the needs of women, nor that any of them proactively promotes women's entrepreneurial activity in more productive or lucrative sectors. a similar conclusion can be reached by looking at the list and content of current programs to support entrepreneurial activity, which shows that out of total of 36 programs, only one is specifically developed to support women's entrepreneurial activity (for a list of this programs see: the entrepreneurship portal). finally, gender analyzes of the entrepreneurship programs (naled & un women, 2019) confirm that there are no clearly targeted and continuous efforts and measures to support the inclusion of women in growing, innovative, profitable or future economies such as green and circular economy. generally, it can be concluded that current support measures are only keeping the status 2 the law of the republic of serbia distinguishes between entrepreneurs who are considered to be natural persons and companies which are treated as legal entities. 86 d. stošić panić quo situation, and that, in some cases, they also further deepen the gender-based gap and segregation in the entrepreneurial activity in the republic of serbia. therefore, data on the intensity of women's entrepreneurial activity are necessary, but not sufficient to achieve the goals in the field of economic empowerment of women. the qualitative structure of the entrepreneurial activity, which is in fact a framework for achieving the quantitative results, is often neglected in the public discourse. the point is that in addition to affirming, promoting and supporting the scope of entrepreneurial activity, the diversification of women's entrepreneurial activity towards higher added value activities must be supported. when this qualitative aspect is neglected, it should come as no surprise that the national strategy for gender equality for the period 20212030 (government of the republic of serbia, 2021a) officially admits that measures to improve women's entrepreneurial activity and their economic empowerment have poor results and have not contributed to the closure of the economic gender gap in serbia. this is a clear call to provide scientifically generated knowledge of the serbian women’s entrepreneurial activity features, which will be an impulse for evidence-based policy within this domain. the present study is answering this call. it is often pointed out that entrepreneurship is one of the ways to economically empower women. however, some research finds that, on average, self-employed women earn less than those employed for salary, as well as compared to self-employed men (klapper & parker, 2010). these data raise the question as to whether promoting entrepreneurial activity without respecting its structure is really a way to close the gender gap in the socioeconomic position of women. entrepreneurship does not seem to be a panacea for gender equality (lechmann & schnabel, 2012). it is necessary to shape women's entrepreneurial activity in such a way that it becomes a sustainable economic activity that supports the goals of gender equality. this kind of activity would have the potential to generate jobs, increase income and lead to economic and social transformation. in addition to the quantitative aspect of research and support for women entrepreneurs, it is very important to firstly understand and then to improve the qualitative structure of women's entrepreneurial activity. although the performance of women entrepreneurs is on average worse than the performance of their male counterparts, it is possible that this gender gap would disappear when business sector is introduced as a control variable. the main argument is that the quantitative performance of women’s entrepreneurial activity should not be discussed and evaluated irrespective of its qualitative features. and what is the qualitative structure of women’s entrepreneurship? the majority of serbian women entrepreneurs are necessity entrepreneurs. moreover, according to data from the global entrepreneurship monitor’s (gem) report on global entrepreneurial activity of women (allen, elam, langowitz, & dean, 2008), out of 41 countries assessed, serbia is ranked first in terms of the relationship between opportunitydriven and necessity entrepreneurs, in favor of the later3. the potential of the so-called necessity entrepreneurship to contribute to economic growth and personal well-being of entrepreneurs is extremely limited (acs & varga, 2005). women entrepreneurs are overrepresented in the lowgrowth and performance industries with a domination of retail and personal services industries (aidis, 2016; anna, chandler, jansen, & mero, 2000; braches & elliot, 2017; brixiova, kangoye, & said, 3 unfortunately, this is the last gem report presenting data for the republic of serbia. qualitative features of women’s entrepreneurial activity in the republic of serbia: the sectoral ... 87 2020; gawel, & mroczek-dabrowska, 2021; henry et al., 2016; lerener & almor, 2002; terjesen, 2016;). this horizontal gender-based occupational segregation is manifested as the fact that women entrepreneurs are engaged in activities with lower entry barriers and, thus, in activities in which the intensity of competition is more pronounced (vossenberg, 2013). these are mainly service and consumer product activities characterized by lower capital investment (kamberidou, 2020; loscocco & robinson, 1991; vossenberg, 2013). according to the so-called gender queuing theory, women entrepreneurs choose activities that were once dominated by men who leave them due to the reduction of their attractiveness, which then opens the space for women to enter (bird & sapp, 2004). thus, women entrepreneurs mostly realize their entrepreneurial activity in peripheral economic niches in which men entrepreneurs are not interested (anna et al., 2000; loscocco & robinson, 1991). as a result, women entrepreneurs are more represented in activities with lower profit potential and more pronounced competition; activities such as trade and services (birley, 1989; bowen & hisrich, 1986; brixiova & kangoye, 2020; buttner, 1993; coleman, 2000; gawel & mroczek-dabrowska, 2021; kamberidou, 2020; hisrich & brush, 1984; manolova, brush, edelman, & elam, 2020; orser & hogarth-scott, 2002; robichaud, zinger, & lebrasseur, 2007; rodríguez & santos, 2009; tsuchiya, 2010; verheul & thurik, 2001). based on the previous, the following hypotheses are developed. h1a. distribution of female and male entrepreneurs differs across serbian business sectors. h1b. serbian female entrepreneurs are overrepresented in the services sector. methodology 2.1. data and variables serbian official statistical reports (labor force survey and report on women and men in serbia) are used as source of data on structure of serbian entrepreneurs by their gender and sectoral involvement. both of the used documents are reporting data for 2019. although there is more or less an agreement that an entrepreneur is a person who identifies, evaluates and exploits business opportunities (shane & venkataraman, 2000), the things are not so clear when it comes to operationalization of an entrepreneur as a research variable. moreover, they become more complicated when the term entrepreneur is used to mark different things, depending on whether it is used for research, legal, tax or some other purpose (hughes, 2005). nevertheless, the owners of micro, small and medium sized enterprises as well as the self-employed persons, are most commonly proxies for entrepreneurs in the studies on entrepreneurship (foreman-peck, 2005; parker, 2009; spencer & gomez, 2004). the problem of choosing the measure for the entrepreneur variable, researchers often solve by choosing the one for which they have available data (parker, 2009). as the availability of data determines the existence of the study itself, present study uses serbian official statistical documents, as the most complete and accurate source of data on the subject. serbian labor force survey recognizes self-employment as one of the employment statuses (salaried employees and helping household members, being the other two forms). therefore, the self-employed persons are considered to be entrepreneurs for the purpose of this study. ‘’self-employed are persons who work independently in their own company, institution, private shop or on agricultural property, as well as persons who 88 d. stošić panić perform independent professional activity or some other work for own account’’ (statistical office of the republic of serbia, 2020a, p. 64). in the used data sources, employment is measured in the following sectors: agriculture, industry, construction, and services. 2.2. methods as the sectoral distribution of the entrepreneurs is a categorical variable, the chisquare test of independence was used to explore whether any statistically significant difference exists in sectoral distribution of serbian female and male entrepreneurs. moreover, the chi-square goodness of fit test is used to assess whether the observed sectoral distribution within the population of female entrepreneurs corresponds to the one which would be expected based on the sectoral structure of the total entrepreneurial population. in other words, this test was used to assess whether there is an overrepresentation of women entrepreneurs in certain sectors. results and discussion a chi-square test of independence was performed to examine the relation between gender and the sector of the self-employed persons in serbia. table 1 summarizes results on sectoral distribution of self-employed women and men in serbia. table 1 self-employed in serbia, by sectors and gender females males total a g ri c u lt u re count 61 203 264 % within sector 23.1% 76.9% 100.0% % within gender 30.3% 43.8% 39.7% % of total 9.2% 30.5% 39.7% in d u st ry count 10 36 46 % within sector 21.7% 78.3% 100.0% % within gender 5.0% 7.8% 6.9% % of total 1.5% 5.4% 6.9% c o n st ru c ti o n count 0 38 38 % within sector 0.0% 100.0% 100.0% % within gender 0.0% 8.2% 5.7% % of total 0.0% 5.7% 5.7% s e rv ic e s count 130 187 317 % within sector 41.0% 59.0% 100.0% % within gender 64.7% 40.3% 47.7% % of total 19.5% 28.1% 47.7% count 201 464 665 % of total 30.2% 69.8% 100.0% source: author’s calculations based on data available in serbian statistical office, 2020a, 2020b the results show significant relation between these variables, x2 (3, n = 665) = 41.857, p = .000. table 2 presents the results of the chi-square goodness of fit test of the difference between the observed and the expected sectoral distribution of female and male entrepreneurs. qualitative features of women’s entrepreneurial activity in the republic of serbia: the sectoral ... 89 table 2 observed and expected frequencies of self-employed in serbia, by sectors and gender observed expected residual f e m a le s agriculture 61 84.6 -23.6 industry 10 14.4 -4.4 services 130 101.9 28.1 m a le s agriculture 203 184.2 18.8 industry 36 31.4 4.6 construction 38 26.5 11.5 services 187 221.9 -34.9 source: author’s calculations based on data available in serbian statistical office, 2020a, 2020b as it can be noticed, female entrepreneurs are overrepresented in the services and underrepresented in all other sectors (x2 (2, n = 201) = 15.679 p = .000). the opposite is true for their male counterparts (x2 (3, n = 464) = 13.052, p = .005). clearly, results support both of the hypotheses about the sectoral structure of the entrepreneurial activity of women and men in the republic of serbia. there are evident and statistically significant differences in the sectoral distribution of female and male entrepreneurs. though the services sector absorbs the majority of the entrepreneurs in general (47.7%), the sectoral structure of male entrepreneurs is more evenly distributed. while two thirds of female entrepreneurs are engaged in the services sector (64.7%), less than half of the male entrepreneurs (40.3%) are doing business in this sector. moreover, results show that when compared to the sectoral distribution which could be expected on the basis of the distribution of the entire population of entrepreneurs, the sectoral distribution of female entrepreneurs significantly differs. the observed participation of the female entrepreneurs is significantly lower than the one which could be expected in the agriculture and the industry sector, while it is significantly higher in the services sector. quite the opposite is true for the group of male entrepreneurs. female entrepreneurs are overrepresented in the services sector, and this is one of the most common observations of entrepreneurship scholars (mitchelmore & rowley, 2013; sullivan & meek, 2012). thus, the results of the present study complement the ones presented by other scholars researching or reviewing results from other national contexts (for example: agussani, 2020; bruni, gherardi, & poggio, 2004; byrne, fattoum, & diaz garcia, 2019; ghouse, mcelwee, & durrah, 2019; kumar, 2015; mitchelmore & rowley, 2013) and they are somewhat proof of the existence of the female-type of business activities in serbia as well. this unfavorable sectoral distribution of the female entrepreneurs can lead to the conclusion that women are not less capable and less productive by default, but that they are predominantly represented in less profitable business sectors with strong competition. and the results confirm that they are dominantly engaged exactly in this kind of sector. the unfavorable qualitative structure of women's entrepreneurial activity is indicated by the existence of gender-based segregation in the entrepreneurial activity. thus, women are predominantly and disproportionately represented in the services sector. moreover, not just that they are overrepresented in the competitive service sector, but the majority of them own and manage micro-enterprises (babović, 2012). and exactly these types of businesses are most vulnerable in terms of survival and value generation for stakeholders. this is one more argument in favor of the gender queuing theory. as reskin and roos (1990) postulate, there are two types of queues in the labor market: the labor queues and the job queues. while the former means that employers rank potential 90 d. stošić panić employees, the latter is referring to ranking of jobs by the employees. men become less interested for occupations in which rewards decline, relative to some other occupations which require similar qualification. occupations with declining rewards then become more open for women to step in. financial rewards in an occupation are not the only criterion men use to rank a job in a queue. a job will become worse ranked by men when its financial rewards are reduced, but also when it becomes less secure, prestigious and when it offers less mobility opportunities. as a consequence, some occupations become extensively male-dominated which enforces or reinforces gender-based stereotypes regarding the occupations which are (in)appropriate for women. as less attractive, most service industries are not a priority choice for men. these activities then offer more space for women entrepreneurs to enter. also, this choice of women entrepreneurs is further intensified by the existing gender stereotypes that push women into the service-oriented activities which are considered to be more appropriate for them. conclusion the results of the present study support both of the hypotheses referring to the sectoral distribution of women entrepreneurs. there is a statistically significant difference in the sectoral structure of women’s and men’s entrepreneurship in serbia, with women entrepreneurs being relatively more engaged in the services sector. moreover, women’s observed participation in the services sector is significantly higher than the one which would be expected given the sectoral structure of the general population of entrepreneurs. this paper contributes to the theory and practice in several important ways. first, the present study is answering the call to explore not only the quantitative performance of women entrepreneurs, but the qualitative aspects of their activities as well. the study supports the argument of the less favorable qualitative structure of female entrepreneurial activity. thus, it strengthens the notion of the need for women's entrepreneurial activity to be researched and evaluated holistically, quantitatively and qualitatively. as it is the case in the wage employment sector, the less attractive industries are left by male entrepreneurs to be entered by their female counterparts. therefore, the overrepresentation of women entrepreneurs in the services industries can be understood within the gender queuing theory perspective. moreover, the study brings evidence on women’s entrepreneurship from less researched context such as serbia. this complements the existing body of knowledge and helps in getting the full perspective of the phenomenon of women’s entrepreneurship. second, the study’s results enrich the knowledge on women’s entrepreneurship in serbia. despite its growing importance, women's entrepreneurial activity is still insufficiently researched, especially in underdeveloped and developing countries. research on women's entrepreneurial activity in developing countries is most often conducted on small and unrepresentative samples (de vita et al., 2013). this situation should not be surprising, given that researchers on this issue in their countries are often pioneers who do not have gendersensitive official statistics to support their research (brush & cooper, 2012). unfortunately, serbia is no exception on all these issues. despite the growing political and media interest in women's entrepreneurial activity in serbia, it is still a research niche. thus, for example, the analysis of papers identified by searching in relevant index databases (wos, scopus and scindeks) leads to the conclusion that there are not more than 50 papers dealing with the female entrepreneurship in serbia. moreover, the identified papers are mainly based on the qualitative features of women’s entrepreneurial activity in the republic of serbia: the sectoral ... 91 analysis of data which were collected in small, unrepresentative samples, and most of the papers are descriptive in nature. third, the study provides much-needed data for evidence-based policies to support women’s entrepreneurial activities in serbia. it statistically proves that differences in sectoral representation of female and male entrepreneurs in the republic of serbia not only exist, but are also significant. thus, in order to ensure that women's entrepreneurial activity really contributes to the improvement of their economic and social position and to the achievement of other gender equality goals it is obviously necessary to define measures to improve the sectoral distribution of women entrepreneurs. though needed, a detailed discussion of policy implications and entrepreneurial support measures is out of this paper’s focus. policy measures should tackle structural shortcomings of the entrepreneurial ecosystem so that women can provide resources needed for their entrepreneurial engagement, such as financial capital, knowledge and networks (coleman & robb, 2018). on a more general level and in line with dennis’s (2011) policy framework, it can be argued that it is necessary to act systematically and extensively in order to improve both the numbers and the qualitative features of women’s entrepreneurship in serbia. in other words, it is important to create affirmative and supportive both the institutional and the cultural environment for women’s entrepreneurship. references acs, z., & varga, a. 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dostupni u zvaničnoj statistici republike srbije, studija empirijski testira i potvrđuje hipoteze o tome da postoje razlike u sektorskoj distribuciji preduzetnika i preduzetnica u republici srbiji, pri čemu su preduzetnice natprosečno zastupljene u sektoru usluga. takođe, rezultati ukazuju na to da je učešće preduzetnica u ovom sektoru je statistički značajno veće u odnosu na njihovo relativno učešće koje se očekuje na bazi sektorske distribucije preduzetnika generalno. u radu se daje prikaz i njegovog teorijskog i praktičnog doprinosa. ključne reči: rod, preduzetništvo, sektor poslovanja, srbija https://doi.org/10.1007/s11365-010-0143-2 https://doi.org/10.1023/a:1011178629240 http://www.pravno-informacioni-sistem.rs/slglasnikportal/eli/rep/sgrs/vlada/strategija/%0b2015/35/1/reg http://www.pravno-informacioni-sistem.rs/slglasnikportal/eli/rep/sgrs/vlada/strategija/%0b2015/35/1/reg https://www.minljmpdd.gov.rs/doc/konsultacije/090821/polazne-osnove-za-predlog-strategije-o-rr.pdf https://www.minljmpdd.gov.rs/doc/konsultacije/090821/polazne-osnove-za-predlog-strategije-o-rr.pdf https://www.nsz.gov.rs/live/digitalassets/15/15855_strategija_zaposljavanja_u_rs_2021-2026.pdf https://doi.org/10.1108/ijebr-03-2020-0144 https://doi.org/10.1177/104225870202600306 https://publikacije.stat.gov.rs/g2021/pdf/g20215671.pdf https://doi.org/10.1177%2f1042258720980705 https://publikacije.stat.gov.rs/g2021/pdf/g20216001.pdf facta universitatis series: economics and organization vol. 18, no 3, 2021, pp. 299 311 https://doi.org/10.22190/fueo210505021m © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper interrelationship between work and private life of employees conflict or balance?1 udc 331.191.32 milica mladenović1, bojan krstić2 1metropolitan university belgrade, faculty of management, serbia 2university of niš, faculty of economics, serbia orcid id: milica mladenović https://orcid.org/0000-0003-3210-0316 bojan krstić https://orcid.org/0000-0003-4597-6819 abstract. contemporary companies consider work-life balance a crucial topic. higher work pressure, longer working hours and more families with both working parents have made balancing work and private life even more difficult. the paper addresses this interrelation and highlights two research questions regarding the type of relationship (positive or negative) that exists between work and private life of employees. these questions are answered based on the analysis of various previously conducted empirical research studies. findings reveal both negative and positive interrelationship between employees' work and private life. the contributions and conclusions of this paper can be extremely relevant for a company to comprehend how important the creation of work-life balance initiatives is for increasing job satisfaction of its managers and other employees, as well as for developing the reputation of a desirable employer. key words: work-life conflict, work-life balance, job satisfaction jel classification: o15 introduction due to changes in recent socio-demographic trends, such as a larger number of women entering the work field, more challenging work demands, faster lifestyles and increased need for elderly care (mladenović & krstić, 2021b), it can be concluded that work and private life should not be viewed as two segregated parts of an employee's life, but rather as received may 05, 2021 / revised july 08, 2021 / revised july 21, 2021 / accepted august 08, 2021 corresponding author: milica mladenović metropolitan university belgrade, faculty of management, bulevar svetog cara konstantina 80a, 18116 niš, serbia | e-mail: milica.mladenovic@metropolitan.ac.rs https://orcid.org/0000-0003-3210-0316 https://orcid.org/0000-0003-4597-6819 mailto:milica.mladenovic@metropolitan.ac.rs 300 m. mladenović, b. krstić parts of life which both require as much time, energy and devotion (hein, 2005). since work and private life have become equally important for employees of both genders (vandello et al., 2013), an interconnection or overlap of these two life spheres can be noticed, as presented in figure 1, with events in each sphere affecting the other one (lingard & francis, 2005). socio-demographic changes: increasing number of working women families with both working parents equal value of work-life balance for men and women faster lifestyles work sphere demands: long working hours increased workload family sphere demands: child care household responsibilities o v e r l a p equal value of work/life balance for both genders fig. 1 overlapping-spheres model of employees' work and private life source: adapted from: liu, j. y. & low, s. p. (2011). work-family conflicts experienced by project managers in chinese construction industry. international journal of project management, 29, 117-128. since both male and female employees are faced with limited resources, such as energy, time and attention, they are constantly assigning these limited resources to work and family activities, which together with long working hours and demanding jobs can cause imbalance between work and private life of employees (korabik et al., 2008). on the other hand, spending a sufficient amount of time on work as well as on private life responsibilities so that an individual is satisfied with both of these life spheres represents work-life balance (mladenović, 2020). experiencing lower levels of conflict and establishing work-life balance can significantly increase job satisfaction of employees (naithani, 2010). companies should manage work-life balance of their employees with a holistic approach, making it an integral part of their strategy and activities (lukić & lazarević, 2018). the aim of this paper is to emphasize the importance of both work and private life of employees, and also shed light on the interrelationship between these two life spheres. in the first part of the paper, a theoretical background on the terms of work-life conflict and work-life balance is given. afterwards, results of various previously conducted research worldwide are presented in order to address the two research questions defined in the paper, concerning the type of interrelationship existing between work and private life of employees. finally, the contribution of the paper can be seen in helping companies notice and understand the importance of establishing work-life balance of their employees, especially in the long run. interrelationship between work and private life of employees conflict or balance 301 1. literature review 1.1. different theoretical types and forms of conflict between work and private life of employees conflict between work and private life can be viewed as "role overload" i.e. "simultaneous pressures" of employees' work and private life roles, where fulfilling each of the roles impedes fulfilling the other one (greenhaus et al., 2000). similarly, high role overload means having too many tasks and demands to fulfill in either role while having inadequate amount of time for that (frone et al., 1992). moreover, work-life conflict can be defined as an "inter-role conflict" or "push and pull" between pressures of employees' work responsibilities and private obligations (burke & greenglass, 1999). hobson et al. (2001) considered work-life conflict to be a situation when employees fail to fulfill private life responsibilities because of work. similarly, life-work conflict occurs when employees do not fulfill their work requirements due to private life obligations (netemeyer et al., 2004). however, this should be happening repeatedly and in a longer time period for it to be considered a role conflict, i.e. singular cases cannot immediately be named work-life conflict. there are two types of work-life conflict: namely, conflict from work interfering with private life, and conflict from private life interfering with work (greenhaus et al., 2000). furthermore, each type of conflict can have three forms as follows: conflict based on time, conflict based on strain, and conflict based on behavior (nadeem, 2009). table 1 shows that any characteristic of employees' work or private life that has an effect on their time, strain or behavior in either life sphere, may become a source of work-life conflict. table 1 types and forms of conflict between work and private life sources of wlc* based on time: sources of lwc* based on time: long working hours inflexible work schedule extensive overtime work extensive shiftwork extensive commute young children large families spouse's working hours sources of wlc* based on strain: sources of lwc* based on strain: low leader support stress in work communication low spouse support at home spose's extremely different job position sources of wlc* based on behavior: sources of lwc* based on behavior: demonstrating authority not expressing emotions being warm and open expressing emotions * wlc work-life conflict, lwc life-work conflict source: adapted from: greenhaus, j. h., callanan, g. a. & godshalk, v. m. (2000). career management. fort worth, tx: harcourt college publishers. conflict from work interfering with private life (work-life conflict hereinafter: wlc) represents an "inter-role conflict" where work pressures influence employees' private lives (netemeyer et al., 1996). similarly, frone et al. (1992) view wlc as work responsibilities preventing employees from fulfilling their family obligations. spending an extensive amount of time on work reduces the time left for private obligations. this so-called wlc based on time can be created by different sources such as 302 m. mladenović, b. krstić long working hours, inflexible work schedule, extensive overtime work, shiftwork or commute (greenhaus et al., 2000). different types of work challenges, such as low leader support or stress in work communication, may cause tension or frustration, becoming sources of wlc based on strain (jones & butler, 1980). certain behaviors developed at work, such as demonstrating authority and not expressing emotions, may not be suitable or desirable at home, therefore becoming sources of wlc based on behavior (greenhaus et al., 2000). if people cannot switch their work behavior to adjust to the expectations of their role at home, they will often feel conflict between these two roles (schein, 1973). conflict from private life interfering with work (life-work conflict hereinafter: lwc), on the contrary, represents an "inter-role conflict" where pressures in employees' private lives affect fulfilling their work obligations (netemeyer et al., 1996). spending time on private obligations, such as child care or household responsibilities, reduces the time available for work obligations (voydanoff, 2007). this so-called lwc based on time can be developed by different sources, such as having a lot of children, especially young ones, or having a spouse with incompatible working hours (greenhaus & kopelman, 1981). family demands, such as low spouse support in household responsibilities or spouse's extremely different job position, can lead to various strain symptoms such as stress or frustration, becoming sources of lwc based on strain (greenhaus et al., 2000). certain behaviors adopted at home, such as being warm and emotional, may not be desirable or suitable at work, therefore becoming sources of lwc based on behavior (voydanoff, 2007). managers often feel "caught" between expected expression of emotions and openness at home, and expected demonstration of authority at work (bartolome, 1972). 1.2. theoretical concept of balance between work and private life of employees as opposed to wlc, work-life balance (hereinafter: wlb) represents a positive condition of equilibrium, with employees feeling their work and private life as equally balanced (lockwood, 2003). in other words, establishing wlb requires creating enough "weight" by focusing on work, while developing a positive "counterweight" by doing personal life activities (mladenović, 2020). greenhaus & powell (2006) view wlb as mutual support of employees' work and private life in the sense that experiences in either life sphere of employees contribute to achieving success in the other one, thus making work and private life allies instead of enemies (friedman & greenhaus, 2000). companies can implement some of the following human resources policies to decrease wlc and improve wlb of employees: flexible working hours, part-time work, support of the managers, stress management programs, counseling programs, parental leave, on-site or subsidized child care, health insurance or fitness programs (lankeshwara & wijesekara, 2015). an interesting view of wlb was presented by frame and hartog (2003), who considered it as the feeling of being able and free to use "flexible work initiatives" for balancing their work activities and private interests (e.g. family, hobby or travel), rather than focusing only on their job. however, this view puts emphasis solely on wlb initiatives, rather than considering interrelationship between work and private life of employees conflict or balance 303 additional factors, such as organizational culture, that can contribute to establishing wlb (cerović & aleksić, 2005). a different point of view could be considering wlb programs as a marketing or human resources tool for more successful recruitment and/or retention of employees (frame & hartog, 2003). these programs can indeed be a significant element of the company's differentiation on the labor market (ivanović-đukić & đorđević, 2005). that way, being perceived as innovative for offering wlb programs not only can enable a company to attract more quality employees, but it can also allow the company to develop and emphasize a reputation of a desirable employer (lazăr et al., 2010). the most effective solution would certainly be offering these programs together with excellent basic job characteristics, such as salary, bonuses, and adequate job position. in the process of employer branding, companies should also strive to increase the level of satisfaction, commitment, motivation, and loyalty of their existing employees (lukić et al., 2019). 2. methodology of research in order to discover the relationship (and possible interrelationship) between employees' work and private life, two questions for research and discussion are defined: 1. are work and private life of employees negatively (inter)related i.e. is there wlc? 2. are work and private life of employees positively (inter)related i.e. is there wlb? these questions are addressed using document analysis method, which is a qualitative research method used to evaluate, identify, analyze, interpret and comprehensively synthesize the research results previously conducted by relevant authors, in order to provide background information, historical insight, and a deeper understanding of a particular research topic (bowen, 2009). extensive literature reviewed and analyzed in this paper includes various scientific papers, journals, books, and publications containing empirical evidence from relevant and comprehensive previously conducted work-life studies and surveys on managers and other employees in various industries and countries, which were written in english or serbian language, and available online by using the search terms "work-life relationship" as key words. document analysis identified two main theoretical concepts regarding the interrelationship between work and private life of employees. these are the concept of work-life conflict (carlson et al., 2000; liu & low, 2011; hussain & mujtaba, 2012; lankeshwara & wijesekara, 2015; oosthuizen et al., 2016; agha et al., 2017; kim & kim, 2017; pejičić & ranđelović, 2019; lydeka & tauraite, 2020; marič et al., 2021), and the concept of work-life balance (grzywacz et al., 2002; lambert & haley-lock, 2004; moore, 2007; haar et al., 2014; golubović & golubović, 2015; adikaram & jayatilake, 2016; fernandez-crehuet et al., 2016; stojanović-aleksić & bošković, 2017; marič & žnidaršič, 2018; yusuf, 2018; dilmaghani & tabvuma, 2019; apraku et al., 2020). both of these work-life concepts (conflict and balance) are further researched and analyzed in order to discover their types and forms. since more research has been conducted on the organizational than on the individual level of measuring wlc and wlb, with no universally recognized and accepted measurement methodology (krasulja et al., 2015), the importance of further research and methodology development should be stressed. 304 m. mladenović, b. krstić 3. results and discussion 3.1. negative (inter)relationship between work and private life of employees: research results similarities can be noticed between the early and the contemporary papers published on the topic of work-life conflict, in the sense that striving to succeed in their careers and/or the desire to form a family have been influencing work and private lives of employees both in the past and at present, which can be noted in the following examples from previous research. a study by korman et al. (1981) found that managers who achieved high career success experienced greater wlc since it required extensive commitment to work demands, leaving less time available for private life. furthermore, greenhaus & kopelman (1981) found that spouses of people who worked in management positions experienced greater lwc based on strain than spouses of people in non-management positions. frone et al. (1992) determined a "bidirectional relationship" or interrelationship between work and private life, i.e. the possibility of both of these life spheres interfering with each other. another conclusion of this research was that work obligations had a higher likelihood of affecting private life than vice versa. moreover, parasuraman et al. (1996) discovered increased work overload to cause greater wlc. having a large amount of demands from supervisors or other colleagues could lead to wlc, usually expressed as stress, dissatisfaction or even depression. research by adams et al. (1996) showed that employees with young children and fulltime-employed spouses experienced greater lwc based on time, compared to those whose spouses were unemployed or on paid leave. additional research was conducted by frone et al. (1997), where 372 married employees with or without children answered questions regarding role overload, time commitment, role conflict and performance in both their work and private lives. this research showed that work overload (i.e. having too many work demands) was significantly negatively related to work performance (i.e. the level of fulfilling work responsibilities). on the other hand, parental overload (i.e. having too many children demands) did not significantly affect private life performance (i.e. the level of fulfilling private responsibilities). in a survey by wallace (1997), lawyers believed that work pressure led to their work interfering with their private lives in a negative way, creating wlc based on strain. carlson et al. (2000) measured wlc by including the three forms of conflict, as well as both directions of conflict, which is presented in table 2. as in most cases, this type of research can be conducted by respondents completing questionnaires i.e. by rating certain statements on a 5-point likert scale (mladenović & krstić, 2021a). employees may often consider long working hours as an indicator of their commitment and productivity, which then makes them prioritize work over family, leading to a potential wlc based on time, in the long run (moore, 2007). sometimes companies themselves can convey an indirect message to their employees that the duration of their working hours is an indicator of their work commitment (korabik et al., 2008). the results of a study on project managers in the construction industry in china conducted by liu & low (2011) showed that the participants experienced significantly greater wlc than lwc based on time and strain, while at the same time experiencing the same wlc and lwc based on behavior. interrelationship between work and private life of employees conflict or balance 305 table 2 typical statements in the work-life conflict questionnaire conflict type statement wlc based on time spending a lot of time on completing work obligations oftentimes leads to me missing activities with my family. wlc based on strain i oftentimes feel so emotionally drained or tired from work that i cannot partake in activities with my family members. wlc based on behavior behavior that is useful at work would be counterproductive at home. lwc based on time spending a lot of time on fulfilling private life demands oftentimes prevents me from devoting enough time to work obligations. lwc based on strain i oftentimes think about private matters and family stress, which makes it harder for me to focus on work. lwc based on behavior behavior that is useful at home may be ineffective at work. * wlc work-life conflict, lwc life-work conflict source: adapted from: carlson, d. s., kacmar, k. m. & williams, l. j. (2000). construction and initial validation of a multidimensional measure of work-family conflict. journal of vocational behavior, 56 (2), 249. survey on employees of the national database and registration authority (nadra) in pakistan showed high wlc, however with no significant difference regarding genders (hussain & mujtaba, 2012). on the other hand, surprising results of this research showed a significantly positive effect of wlc on employee performance. these authors considered wlc, while remaining at a "functional level", as a positive driving force that could create the necessary motivation and increase employee performance. after reaching a certain "threshold level", wlc would eventually cause employee performance to decrease. the research sample of lankeshwara & wijesekara (2015) consisted of 120 non-executive employees of ceylon electricity board (ceb) office in sri lanka, who completed questionnaires on wlc. their research concluded that both wlc and lwc negatively impacted job satisfaction, with a stronger influence of wlc. a study by oosthuizen et al. (2016) included 79 employees of an it company in south africa. regarding ethnicity, white employees experienced significantly higher levels of job satisfaction than black employees. on the other hand, black employees felt significantly higher wlc than white employees. a survey conducted by agha et al. (2017) on 625 teachers from both private colleges and public universities in oman showed that both wlc and lwc had a negative relationship with teachers' job satisfaction. research by kim & kim (2017), including only female employees in korea, discovered that married women with children experienced higher lwc than single women without children. a study by pejičić & ranđelović (2019) researched the influence of interpersonal relationships, both at work and at home, on wlc of 644 married employees with children in serbia. research results discovered a positive interrelationship between the quality of communication at home (with family members), and the quality of interpersonal relationships at work (with colleagues and superiors), which together led to lower wlc of employees. a survey by lydeka & tauraite (2020) assessed wlc of 406 male and female employees in lithuania by comparing the allocation of time between their work and private lives. the main conclusion of this study was that both men and women prioritized work over their private lives. however, the results of this research also showed significant differences in time allocation between men and women, with men spending relatively more time on leisure and travel, compared to women who spent relatively more time on child care and housework. 306 m. mladenović, b. krstić additional conclusions of this study include a weak positive correlation between monthly salary and average time allocated to work, as well as a weak negative correlation between monthly salary and average time allocated to private life. recearch by marič et al. (2021), focusing on the relationship between wlc and job satisfaction of high education lecturers from serbia, croatia, slovenia, the czech republic, austria, and germany, did not show significant differences in wlc between these countries. however, the results showed that lower levels of wlc led to higher job satisfaction of high education lecturers. 3.2. positive (inter)relationship between work and private life of employees: research results in addition to work-life conflict, a positive effect of work and private lives of employees on each other has also been discovered in early papers and has been discussed up until now, which can be noticed in the following research examples. sieber (1974) claimed that success in either work or private life could sometimes compensate for stress or failure in the other life sphere. moreover, positive experiences in one role, such as learning new communication skills, establishing new contacts or acquiring high levels of energy, can transfer and produce positive outcomes in the other role (marks, 1977). in a survey conducted on 163 full-time employees, adams et al. (1996) found that conflict and support could simultaneously be present in work and private life of employees. their results also showed that support of supervisors and/or spouses in the form of advice or practical help could reduce wlc of employees. furthermore, establishing healthy wlb with the contribution of supportive managers could have a significant positive impact on job satisfaction of employees (hussain & mujtaba, 2012). frone et al. (1997) developed an "integrative model of work-life interface", which included factors of wlb as so-called "feedback loops" that connected work and private lives of employees in the form of social support by supervisors, colleagues or family members this support can mean different things, from finding the time to talk and help the person feel better when upset, to sharing work tasks, household or child care responsibilities, thus reducing work or parental overload. tompson and werner (1997) considered wlc and wlb as "opposite ends of the same continuum", with their research results showing substantially higher average wlb scores than the average wlc scores, suggesting that employees generally perceived the relationship between their work and private lives as mutual balance. moreover, 23% of female managers reported that self-confidence and multitasking ability in their personal lives also positively impacted their managerial effectiveness (ruderman et al., 2002). grzywacz et al. (2002) measured wlb in both directions, similarly to measuring wlc, where respondents completed questionnaires with statements rated on a 5-point likert scale, which can be seen in table 3. this research discovered a generally stronger positive influence of private life on work (life-work balance hereinafter: lwb) than vice versa, i.e. wlb of employees. research on accessibility of wlb programs throughout the companies' organizational structure discovered that employees in the lower hierarchical levels of the companies were excluded i.e. they were either entirely or to a large extend not offered these programs (lambert and haley-lock, 2004). interrelationship between work and private life of employees conflict or balance 307 table 3 typical statements in the work-life balance questionnaire balance type statement wlb* achieving work success makes me cheerful and enthusiastic about handling my private life obligations. lwb* feeling loved and supported by family members increases my work confidence. * wlb work-life balance, lwb life-work balance source: adapted from: grzywacz, j. g., almeida, d. m. & mcdonald, d. a. (2002). work-family spillover and daily reports of work and family stress in the adult labor force. family relations, 51, 28-36. two-year-long research on managers and other employees in an anglo-german automobile company was conducted by moore (2007) in the form of participant observation and in-depth interviews of employees in management and coordination functions, as well as shop floor workers, with moore (2007) spending three months working as a "temporary employee" at the company's factory. the company was offering its managers different programs and tools such as the "wheel of life" in order to inspire them to recognize the significance of establishing wlb. this research showed that although most of company's wlb programs targeted managers, other employees were more successful in establishing wlb (by using shift work) since the uk managerial culture supported long working hours as a sign of productivity and commitment (moore, 2007). a study by haar et al. (2014), investigating wlb of 1416 employees from china, malaysia, new zealand, france, spain, and italy, found that wlb was positively related to job satisfaction in all six countries. research by golubović & golubović (2015) on employees in serbia showed a significantly higher influence of work on their private lives than vice versa, with women experiencing more difficulties in establishing wlb than men. a study conducted in 26 european countries by fernandez-crehuet et al. (2016) found a higher level of wlb in northern and central european countries, such as denmark, sweden, or germany, compared to southern and western european countries, such as italy, greece, or bulgaria. a survey by adikaram & jayatilake (2016) analyzed wlb factors, such as working hours, work pressure, and wlb programs. research results discovered a positive influence of wlb on job satisfaction of employees in the private banking sector in sri lanka. companies in the service sector in serbia have demonstrated very modest results in offering wlb programs, as well as in measuring job satisfaction of their managers and other employees (stojanović-aleksić & bošković, 2017). a study conducted by marič & žnidaršič (2018) researched how gender, age, and academic rank affected wlb among high education lecturers from serbia, croatia, slovenia, the czech republic, austria, and germany. research results showed a positive correlation between academic rank and wlb, but no significant difference in wlb as to gender or age. in addition, a survey conducted on 200 employees in the business process outsourcing sector in india showed no significant difference in the level of established wlb between male and female employees (yusuf, 2018). dilmaghani & tabvuma (2019) researched wlb of employees in ten major industries and they found that women working in the trading industry experienced higher wlb than men in this occupation, whereas women in management positions felt lower wlb than men in the same positions. 308 m. mladenović, b. krstić moreover, a survey conducted on 150 employees of small and medium companies in the construction industry showed a positive relationship between their wlb and company productivity (apraku et al., 2020). conclusion families with both working parents, who are juggling between their job demands and household responsibilities, can often experience lower work performance and job satisfaction, which usually results in conflict between their work and private lives. employees nowadays aspire to become able to successfully balance these two life spheres. numerous research results presented in this paper lead to confirming both research questions imposed in the paper. in other words, the document analysis of the presented research results has shown that both conflict and balance can exist as the type of relationship between employees' work and private life. since research suggests that both work and private life roles of employees can affect each other positively or negatively, both wlb and wlc can be considered "bidirectional". the contribution of this paper can be reflected in emphasizing that decreasing conflict and establishing balance between work and private life can significantly contribute to improving employee job satisfaction. since companies have come to realize that offering wlb programs to their employees and managers could benefit the company by positioning it as a "top" employer on the market, human resource management of companies should focus on developing these programs in order to address this strategic issue in today's business world. the limitations of this paper may be noticed due to the fact that the document research results included in the paper were from different industries and countries, making space for future empirical research in a specific country and industry in order to be able to reach a generalized conclusion in terms of research results. references adams, g. a., king, l. a., & king, d. w. 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(2018). a comparative study of work-life balance and job satisfaction of the employees working in business process outsourcing sector. ira international journal of management & social sciences, 10(2), 87-93. https://www.doi.org/10.21013/jmss.v10.n2.p3 odnos između posla i privatnog života zaposlenih konflikt ili usklađenost? u savremenim preduzećima, usklađenost posla i privatnog života smatra se krucijalnom temom. veći radni pritisak, duže radno vreme i veći broj porodica sa oba zaposlena roditelja dodatno su otežali usklađivanje posla i privatnog života. u radu se definišu dva istraživačka pitanja vezana za pozitivni ili negativni tip odnosa između posla i privatnog života zaposlenih. na ova pitanja su dati odgovori na osnovu analize različitih prethodno sprovedenih empirijskih istraživanja. rezultati istraživanja otkrivaju kako negativan tako i pozitivan međusobni odnos između posla i privatnog života zaposlenih. zaključci ovog rada mogu biti izuzetno relevantni za preduzeće kako bi se shvatila važnost primene praksi za usklađivanje posla i privatnog života za povećanje zadovoljstva poslom svojih menadžera i ostalih zaposlenih, kao i za razvijanje reputacije poželjnog poslodavca. ključne reči: konflikt između posla i privatnog života, usklađenost posla i privatnog života, zadovoljstvo poslom https://www.doi.org/10.1037/h0037128 https://www.doi.org/10.2307/2094422 https://www.doi.org/10.1177/014920639702300405 https://www.doi.org/10.1177/014920639702300405 https://www.doi.org/10.1111/josi.12016 https://www.doi.org/10.1111/josi.12016 https://www.doi.org/10.1006/jvbe.1996.1573 https://www.doi.org/10.21013/jmss.v10.n2.p3 facta universitatis series: economics and organization vol. 15, n o 4, 2018, pp. 319 329 https://doi.org/10.22190/fueo1804319ј © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the effects of volatility spillover on the largest global financial market segments 1 udc 336.76 irena janković university of belgrade, faculty of economics, belgrade, serbia abstract. the aim of the paper is to present and analyse indicators of financial connectedness and volatility spillover on important segments of the global financial market – the stock market, bond market, cds market, and foreign exchange market. total, net, and directional measures of volatility spillover are presented and analysed, indicating the level of connectedness of countries’ particular market segments and the level of volatility spillover in periods of crisis and stability. key words: financial connectedness, generalised var, volatility spillovers, global financial market segments jel classification: g01, g15, c32, e44 1. introduction financial connectedness is an important characteristic of global financial markets. its level and behaviour are very significant for financial risk measurement and management. volatility spillover effects have a direct effect on the market and credit risk, with possible pronounced systemic consequences, particularly in crisis periods. throughout history, the crises have tended to occur at regular intervals and have often had similar consequences (reinhart & rogoff, 2008). during crises, volatility usually increases and spills over into other markets and asset classes. thus, it is important to measure and record volatility spillovers for at least two reasons: to get early warning signals of upcoming crises and/or to follow the duration of the ongoing one. diebold and yilmaz (2012) propose volatility spillover measures based on forecast error variance decompositions from vector autoregressions (vars). var variance decompositions present how much of the h-step-ahead forecast error variance of a variable i is due to received september 10, 2018 / accepted october 31, 2018 corresponding author: irena janković university of belgrade, faculty of economics, 11000 belgrade, kamenička 6, serbia e-mail: irenaj@ekof.bg.ac.rs 320 i. janković innovations in another variable j (sims, 1980). spillover measures based on variance decompositions are interesting because they could provide an answer to the question of how much of a variable’s i future uncertainty is due to shocks occurring at variable j. in addition, they allow for spillover at different time horizons. the proposed indicators can be used to measure and track volatility spillover across asset classes, portfolios, and markets, both within and between countries. they propose total and directional spillover measures. the total volatility spillover measure shows spillover from (to) each market i, to (from) all other markets, added across i. directional spillovers offer a more detailed picture of volatility spillover from (to) a particular market. besides investigating spillovers across identical asset classes in various countries, or the same asset class within one country across different industry sectors, of even more profound interest is the spillover effect among different asset classes. volatility spillover between different asset classes is especially interesting when investigating different crisis periods. in the last global crisis the spillover happened from credit markets to equity markets, with further effects on bond and commodity markets. the transmission of volatility shocks has significant effects on portfolio choices and asset allocation. 2. literature review the main econometric methods for estimation of volatility spillovers are the garchbased and var-based models. diebold and yilmaz (2009) developed a var-based volatility spillover measure which was later modified and improved. based on the generalised vector autoregressive framework in which forecast-error variance decompositions are invariant to the variable ordering, diebold and yilmaz (2012) propose measures of total and directional volatility spillovers. they estimate daily volatility spillovers across the us stock, bond, foreign exchange, and commodity markets over a ten year period from january 1999 to january 2010, and show that although significant volatility fluctuations were present in all four markets, cross-market volatility spillovers were limited until the global financial crisis. as the crisis intensified, so did the volatility spillovers, with particularly important spillovers from the stock market to other markets after the collapse of lehman brothers in september 2008. many studies have used diebold and yilmaz’s procedure to estimate volatility spillovers. duncan and kabundi (2013) use and extend the spillover methodology. they analyse domestic and foreign sources of volatility spillover for south african bonds, commodities, currencies, and equities. based on the data for the period 1996–2010, they investigate bidirectional spillovers between domestic assets and volatility coming from shocks in the global financial market. they find that spillovers increased during both domestic and foreign crises, and that domestic spillovers significantly exceeded foreign spillovers. their findings suggest a high level of systemic risk that was mostly related to internal factors. the main transmitters of spillovers were shocks in commodity and equity markets. alter and beyer (2012) extend diebold and yilmaz’s methodology and develop measures of the strength of spillover effects. they quantify spillovers between sovereign credit markets and banks in the euro area. spillovers are estimated based on daily cds spread changes. they take into account interdependencies between sovereign and bank cds spreads and assess the systemic effect of an unexpected shock to the creditworthiness of a particular sovereign or country-specific bank index on other sovereign or bank cdss in the effects of volatility spillover on the largest global financial market segments 321 the period october 2009–july 2012. their contagion index measures the average potential spillover among sovereigns, among banks, from sovereigns to banks, and from banks to sovereigns. the results show growing interdependency between banks and sovereigns, which represents a potential source of systemic risk and contagion. antonakakis and vergos (2013) explore sovereign yield spread spillovers between the eurozone core and periphery countries in the periods of global and sovereign debt crisis in europe. they calculate the spillover indices of diebold and yilmaz (2012) and conclude that bond yield spread shocks coming from the periphery eurozone countries to the core eurozone countries have an effect on the core countries that is three times stronger than vice versa. they stress the increased vulnerability of the eurozone from shocks originating predominantly in the periphery countries. louzis’ (2015) study examines volatility spillovers between the eurozone money, stock, foreign exchange, and bond markets. their empirical results, based on the data for the period 2000–2012, suggest a high level of total volatility spillover. the stock markets across the eurozone are identified as the main transmitters of volatility spillover, while for the most part the core countries transmit volatility spillovers to the periphery. the money, fx, and bond markets are receivers of spillovers, with the exception of greek bonds, which transmitted spillovers during the greek sovereign debt crisis in 2011–2012. 3. methodology overview diebold and yilmaz initially based their total spillover measure on a simple var framework (with possible order-dependent results due to the cholesky factor orthogonalisation) and progressed to directional measures (diebold & yilmaz, 2009). the methodology to calculate the directional volatility spillover measures is based on the generalized var, in which forecast-error variance decompositions are invariant to the variable ordering (diebold & yilmaz, 2012). the proposed methodology is based on variance decomposition on an n-variable var(p). the starting point is a covariance stationary n-variable var(p), ∑ + , where ( ) is a vector of independently and identically distributed disturbances. the moving average presentation is ∑ , where the matrices of coefficients complies with recursion +...+ , where is a identity matrix and for . the moving average coefficients are very important for understanding the dynamics of the system. the variance decompositions allow the division of each variable’s forecast error variance into parts that are attributable to different system shocks. in addition, they allow assessing the part of the h-step ahead of error variance in forecasting that is due to schocks in , where , for each i. in order to calculate variance decompositions, orthogonal innovations are required, whereas var innovations are generally contemporaneously correlated. identification schemes based on the cholesky factorisation achieve orthogonality, but the variance decompositions then depend on the ordering of the variables. hence, the generalized var framework of koop, pesaran, and potter (1996) and pesaran and shin (1980), kpps, is followed here, which produces variance decompositions that are invariant to ordering. instead of the attempt to orthogonalise shocks, the generalised approach allows for correlated shocks but accounts appropriately for the correlation using the historically observed distribution of the errors. since shocks to each variable are not orthogonalised, the sum of the contributions to the variance of the forecast error does not have to be equal to one. 322 i. janković 3.1. variance shares own variance shares are the fractions of the h-step-ahead error variances in forecasting that are due to shocks to , for i = 1,2,…,n. on the other hand, cross variance shares or spillovers are fractions of the h-step-ahead error variances in forecasting that are due to shocks to , for i,j = 1,2,…,n, such that . kpps h-step-ahead forecast error variance decompositions are denoted by ( ), and for h=1,2,…, as follows (1) where is the variance matrix for error vector , is the standard deviation of the error term for the jth equation, and is the selection vector having 1 as the ith element and 0 otherwise. since the sum of elements in each row of the variance decomposition table is not equal to 1, as previously stated, in order to be able to use the decomposition matrix in the calculation of the spillover measure, each element of the variance decomposition matrix is normalised by the row sum: (2) where ∑ ̃ ( ) and ∑ ̃ ( ) . 3.2. total volatility spillover measure total volatility spillover index is based on volatility contributions from the kpps variance decomposition: (3) this index measures the contribution of volatility shock spillovers across asset classes to the total forecast error variance (diebold & yilmaz, 2012, p.59). 3.3. directional volatility spillover measures generalized var enables comprehending in more detail the direction of the volatility spillovers across different asset classes. directional indices are calculated based on normalised elements of the generalised variance decomposition matrix. directional volatility spillovers received by market i from all other markets j are presented as: (4)       211 ' 0 1 ' ' h0 σ σ h jj i h jhg ij h i h jh e a e h e a a e                1 g ijg ij n g ijj h h h              , 1, , 1, , 1 100 100 n ng g ij iji j i j i j i jg n g iji j h h s h nh                        1, 1, , 1 100 100 n ng g ij ijj j i j j ig i n g iji j h h s h nh                 the effects of volatility spillover on the largest global financial market segments 323 directional volatility spillovers transmitted by market i to all other markets j is denoted in a similar way: (5) directional measures represent a decomposition of total spillover to spillovers coming from (or to) a specific source. 3.4. net volatility spillover measures net volatility spillover from market i to all other markets j can be calculated as: (6) it is the difference between volatility shocks transferred to and received from all other markets. it provides information about how much, in net terms, each market contributes to the volatility of other markets. 3.5. net pairwise volatility spillover measures finally, net pairwise volatility spillovers are defined as: (7) the net pairwise volatility spillover between markets i and j is the difference between the gross volatility shocks transmitted from market i to market j and those transmitted from market j to market i. 4. spillover indices for main global financial market segments in this part of the paper, volatility spillover indices are presented and analysed for important global market segments: the equity market, bond market, cds market, and fx market. 2 figure 1 represents the volatility spillover index methodology applied to 45 countries’ stock market index returns for the period 8 th june 2004 to 17 th august 2018. 2 the calculation of all spillover indices presented is based on generalised variance decompositions (with a 10-day forecast horizon) from a var(3) model.         1, 1, , 1 100 100 n ng g ij ijj j i j j ig i n g iji j h h s h nh                      g g gi i is h s h s h                 , 1 , 1 100 100 g g g g ji ij ji ijg ij n ng g ik jki k j k h h h h s h nh h                           324 i. janković fig. 1 global stock markets – volatility spillover index source: author’s presentation based on data from diebold-yilmaz database, http://financialconnectedness.org/research.html global equity volatility spillover index movement for the analysed period indicates significant changes in volatility spillover dynamics, with a profound increase in the three crisis sub-periods: the global financial crisis, the debt crisis in the eurozone, and brexit. the increase in volatility spillovers in the crisis periods to over 80 index points confirms the shock effects that have already happened in the global stock market and provides a basis for using the spillover index as a warning signal of the upcoming crisis episodes. figure 2 represents volatility spillover index methodology applied to 10-year government bond return volatilities in 12 major economies over the period 8 th august 2000 to 16 th may 2018. fig. 2 bond markets – volatility spillover index source: author’s presentation based on data from diebold-yilmaz database, http://financialconnectedness.org/research.html the effects of volatility spillover on the largest global financial market segments 325 the volatility spillover index for bonds markets shows an expected increase in the 2007–2008 crisis period, but less than for the stock market. interestingly, in the sovereign debt crisis in the eurozone the volatility spillover index in bond markets increased initially, and then soon after 2011 decreased to a historically low level. this may be explained by the fact that the monetary policy in the eurozone changed significantly after the crisis started and its expansionary orientation reduced interest rates to an extremely low level, even into the negative zone for the strongest economies. thus, the initial spillover of shocks was stopped. figure 3 represents volatility spillover index methodology applied to return volatilities of the usd exchange rate against 28 currencies over the period 13 th october 2000 to 17 th august 2018. fig. 3 fx markets – volatility spillover index source: author’s presentation based on data from diebold-yilmaz database, http://financialconnectedness.org/research.html during the previously considered three crisis periods the total volatility spillover index for the fx market showed a similar pattern to the equity volatility behaviour, indicating significant changes in the volatility spillover dynamics, which again reached maximum levels in the crisis periods. figure 4 represents volatility spillover index methodology applied to the credit default swap returns for 5-year government bonds in 26 countries over the period from 1 st september 2009 to 22 th december 2017. 326 i. janković fig. 4 cds markets – volatility spillover index source: author’s presentation based on data from diebold-yilmaz database, http://financialconnectedness.org/research.html the cds spreads volatility index has the highest level of all four investigated asset classes, with the strongest increases during the eurozone crisis and brexit. the increases in the index show a rising spillover of volatility shocks and default risk, with a possible contagion effect among markets. the next table summarises volatility spillover indicators by providing minimum, maximum, and average values of the index for the presented periods and asset classes. the maximum spillover index is recorded for the cds and equity markets, followed by the bond and fx markets. table 1 comparative analysis of volatility spillover for main global market segments min max average stock market 41.26 80.98 62.76 bond market 33.96 77.05 60.21 fx market 32.33 73.46 56.20 cds market 57.75 89.88 75.22 source: author’s calculation based on data from diebold-yilmaz database, http://financialconnectedness.org/research.html when referring to the dataset indicating volatility shock spillover from all other markets to a particular market, the countries whose markets receive most volatility shocks from others in times of distress include france, the netherlands, germany, belgium, italy, the uk, and spain, followed by other developed and more open countries in economic and financial terms. at the bottom of the list are mostly developing and less integrated countries (fig. 5). the effects of volatility spillover on the largest global financial market segments 327 fig. 5 average directional volatility spillover from all other stock markets to a particular market source: author’s calculation and presentation based on data from diebold-yilmaz database, http://financialconnectedness.org/research.html a similar result is found for the second directional spillover measure, indicating the spillover from a particular market to all other markets. more developed and integrated markets face greater spillover effects, especially in times of crisis when contagion effects are pronounced (fig. 6). fig. 6 average directional volatility spillover to other stock markets from a particular market source: author’s calculation and presentation based on data from diebold-yilmaz database, http://financialconnectedness.org/research.html 328 i. janković the following chart presents the net directional volatility spillover index across different markets. positive values of the index indicate countries where volatility spillover is initiated. a negative value of the index indicates when a country is the net receiver of shocks. fig. 7 average net directional volatility spillover across markets source: author’s calculation and presentation based on data from diebold-yilmaz database, http://financialconnectedness.org/research.html from this illustration it is obvious that more integrated countries in economic, trade, and financial terms are net transmitters of shocks, while less integrated, developed, and developing countries are net receivers. 4. conclusion the aim of the paper was to analyse volatility spillovers. total, net, and directional volatility spillover measures were presented and analysed for four main global financial market segments – stocks, bonds, fx, and cds. the analysis indicates that spillovers were strongest during distress periods – the global and sovereign debt crisis and brexit. the transmission of the shocks was most pronounced in the cds market, followed by equities, bonds, and fx. directional and net directional measures indicate that developed and more open and connected countries are predominant transmitters of shocks, while less developed and less integrated markets are net receivers of volatility spillovers and potential contagion. in addition, adequate preventive and in-time economic policy actions are able to stop or mitigate volatility shock transmission and negative network contagion effects. the effects of volatility spillover on the largest global financial market segments 329 references alter, a. & beyer, a. (2012). the dynamics of spillover effects during the european sovereign debt turmoil. (cfs working paper, no. 2012/13), frankfurt a. m: goethe university, center for financial studies (cfs). retrieved from: http://nbn-resolving.de/urn:nbn:de:hebis:30:3-266587. accessed on: 20 september 2018. antonakakis, n. & vergos, k. (2013). sovereign bond yield spillovers in the euro zone during the financial and debt crisis. journal of international financial markets, institutions and money, 26, 258–272. diebold, f.x. & yilmaz, k. (2009). measuring financial asset return and volatility spillovers, with application to global equity markets. economic journal, 119, 158–171. diebold, f.x. & yilmaz, k. (2012). better to give than to receive: forecast-based measurement of volatility spillovers. international journal of forecasting, 28(1), 57–66. duncan, a.s. & kabundi, a. 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(1980). macroeconomics and reality. econometrica, 48, 1–48. https://onlinelibrary.wiley.com/doi/epdf/10.1002/jae.2585 http://financialconnectedness.org/research.html efekti prelivanja volatilnosti na najvećim segmentima globalnog finansijskog tržišta cilj ovoga rada jeste predstavljanje i analiza mera finansijske povezanosti i prelivanja volatilnosti na važnim segmentima globalnog finansijskog tržišta – tržištu akcija, tržištu obveznica, cds tržištu i deviznom tržištu. prezentovane su i analizirane ukupna, neto i mera koja pokazuje smer prelivanja volatilnosti ukazujući na nivo povezanosti konkretnog tržišnog segmenta među zemljama kao i na nivo prelivanja volatilnosti u kriznim nasuprot stabilnim periodima. ključne reči: finansijska povezanost, opšti var, prelivanja volatilnosti, segmenti globalnog finansijskog tržišta facta universitatis series: economics and organization vol. 12, n o 2, 2015, pp. 109 120 environmental aspects of the process of globalization – negative implications and crisis  udc 502:055.44 ivana ilić, petar hafner faculty of economics, university of niš, serbia abstract. growing environmental problems of modern age capture attention of the global society. man, as a major factor in the process of disturbing the optimal environmental balance, is considered to be the most responsible for the emergence of the environmental crisis that manifests itself in all spheres of life. due to a growing number of environmental problems that require urgent attention, it is necessary to increase awareness of the problems that surround us. in the future, it is necessary to develop environmental (“green”) economy, rationalize consumption, and instill a higher level of environmental awareness into future generations, in order to reduce environmental problems to a minimum level. it should be borne in mind that the environmental dimension is the underlying component of sustainable development of modern mankind. in line with this, the environmental performance index (epi) methodology has been developed. on the basis of this methodology and the presentation of ranking of countries according to the environmental performance, the work analyzes the state of environmental development in serbia and neighboring countries. key words: globalization, environmental problems, environmental crisis, environmental performance index (epi). introduction in the last few decades, environmental problems have become a global problem of mankind in terms of their existence and influence, as well as social and economic forces that produce them. definition of the term globalization is multifunctional and has different meanings, depending on the context in which it needs to be understood. globalization is a complex process whose pace and direction are determined by a number of factors, while its economic, social, and environmental manifestations leave significant and lasting impact. one context (environmental definition) refers to the understanding of globalization as a process of manifestation of widespread environmental crises, caused by received january 16, 2015 / accepted october 5, 2015 corresponding author: ivana ilić faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: ivanica1404@yahoo.com 110 i. ilić, p. hafner global environmental pollution. the environmental crisis that occurred during the last decades of the twentieth century imposed the need for rearrangement of human activities and a serious warning to the basic foundations of the survival of man on earth. more serious consequences of the environmental crisis resulted in the formal emergence of the concept of sustainable development, which rests on the harmonious relationship of natural resources, economic development, and the environment, in order to protect the health of present generations and preserve the economic wealth of the planet for future generations. the concept is actually formed by hybridization of social development and environmental problems. the idea of developing the concept of sustainability stems from the problematic relationship between society and its natural environment. the concept itself is based on unification of three key dimensions, environmental, economic, and social. although there is no generally accepted definition of sustainable development, there is awareness and the need for denoting the concept of sustainability, as well as its origin. simply put, it is a development that is sustainable, that does not lead to exhaustion or complete disappearance of natural resources, or to endangerment of universal human rights of any of us on the planet. sustainable development is one of the most important ideas and goals of our time. globalizing mankind, in a sense, becomes “the global society”, faced with real global problems. among these issues, an important place belongs to the disruption of the environmental balance of the planet earth, which threatens the survival of human life on it, to the extent that one can speak of a global environmental crisis. end of xx and the beginning of xxi century were marked by three interrelated processes: globalization, the development of science and technology, and the global environmental crisis. the consequence of rapid development of science and technology in thus-far unimaginable proportions is the emergence of the global environmental crisis. expansive development has contributed to improving the living conditions of the human species, but, on the other hand, has had negative consequences for the environment and quality of life. the consequences that globalization has on the environment are disastrous and should by no means be neglected. environmental consequences that are difficult to eradicate in the long term cause a number of other consequences. the work starts with the traditional and time-proven opinion that globalization threatens the environment, and places an emphasis on the environmental consequences of globalization, as important obstacles to further economic and social development. by focusing on the environmental performance index (epi), the paper will analyze the position of serbia in relation to neighboring countries. 1. global environmental impact the global aspect of environmental way of thinking has become the focus of attention, because environmental problems usually occur on a global scale, caused by the progress of science and technology. the environmental problems rise in importance mainly due to increased economic integration. what is more, globalization has brought significant conceptual change in the way of thinking about the environment. many of us now see environmental problems as problems of international significance, not only as a national interest in terms of protection of the oceans and the atmosphere from warming. the environment is considered “common heritage of mankind”, and environmental issues are increasingly the subject of international efforts due to their cross-border effects, as environmental aspects of the process of globalization – negative implications and crisis 111 well as the inability of only one or a few nations to solve these problems alone (basler, 2011). when globalization is considered in the context of ecological issues, environmental issues, and modern environmental crises, four interrelated contexts should be mentioned. the process of globalization is seen as a process of manifestation of environmental crises on a large scale, and the problems resulting from the global economic crisis are now very far from the national and regional frameworks. the development of civilization has certainly caused the gradual emergence of global warming and climate change on earth. second, the process of globalization can be seen in the context of developing environmental awareness of environmental issues and developing environmental movements. in the last decades of the twentieth century and early twenty-first century, the opinion that it is not possible to solve the emerging environmental problems by restricting them to a local area or through local action has become engraved in people’s minds. environmental movements around the world have been among the first social movements with the so-called “mondial” character. some environmentalists have even suggested the creation of a “world environmental organization” for the sake of easier coordination of international environmental policies. when perceiving environmental problems from an ecological point of view, sociological meaning of the term globalization, as the socio-historical process, cannot be avoided. in this regard, it should be noted that globalization takes place in all areas of life, primarily in the economic, political, cultural, and psychological sphere (smrečnik, 2002). from an environmental perspective, the observed process of globalization causes severe consequences for the environment. in this regard, there are two prevailing standpoints. the first standpoint is that the process of globalization creates assumptions and possibilities for solving environmental problems present at the global level. in contrast to this view, there is the opinion that the process of globalization itself causes deep environmental crises, as it is characterized by the absolute dominance of the sociopolitical and economic model of the western highly developed countries, thus creating a global society with pronounced social inequality (smrečnik, 2002). globalization caused international trade growth and accelerated financial flows, as well as greater cooperation among countries and innovations in science and technology. however, it also contributed to environmental degradation. the main causes of environmental problems, in terms of environmental protection and sustainable development, are: industrial production, growth of energy production, development of traffic, uncontrolled exploitation of natural resources, development of technics and technology, and chemical contamination of agriculture. with the development of society and the increasing population, due to which the demand for products necessary for life increases, it has become necessary to shift to the industrial mode of production. industrial production certainly has positive sides, in terms of increased production, but, on the other hand, it endangers environment through the emission of harmful gases into the air, water, and soil. the negative effects of industrialization are also manifested through the devastation of plants, destruction of animals, and deterioration of human health. violation of the environment through depletion of raw materials and excessive accumulation of waste of all kinds that the nature cannot decompose are the characteristics of industrial production. virtually all energy sources have an impact on the environment and its pollution. energy production, in addition to occupation and changes in the use of land rich in coal deposits, affects the level and regime of the ground water and waterways, reduces the 112 i. ilić, p. hafner land available for agricultural production, pollutes the air with dust, changes land relief and climate. in addition to the visible negative consequences that increased energy production has on nature, there are other effects that are not noticeable, but that still affect the health of humans and animals. the main pollutants resulting from the increased energy production are: flue gases, fly ash, slag, and waste water. globalization, as a planetary process (siriner et al., 2011), has led to the development of traffic, thus bringing another cause of environmental degradation. increasingly developed transport infrastructure has brought a series of environmental problems, in terms of increased air pollution, noise levels, taking up space, and uncontrolled release of harmful and hazardous substances. the consequences of climate change are common in areas with the developed road traffic. specifically, road traffic is largely dependent on oil, which has a share of 14% in emissions of harmful gases into the atmosphere, which directly affects human health (jovanović et al., 2012). all the above causes are the main drivers of the uncontrolled use of resources, which directly affects the reduction of environmental quality and causes significant environmental problems. excessive depletion of these resources diminishes their ability to regenerate naturally, brings ecosystem disturbances, and threatens disappearance of resources, which would call into question the survival of the world. globalization has had far-reaching consequences for our way of life. this is due to faster access to technologies, improved communication networks, and innovation. the development of technics and technology leads to industry concentration, which negatively affects the environment in the way that has been described. the application of modern technology greatly contributes to global warming and increased emission of harmful gases. the problem of global warming is of an ecological nature and affects many vital functions of the planet earth. rapid development of technics and technology generates increasing disorder in the world, in terms of serious environmental problems. in order to achieve higher agricultural production and protect against various parasites, chemical contamination of agriculture occurs. furthermore, the use of chemicals to destroy weeds and other noxious plants disturbs the balance in the ecosystem. toxic waste from this process pollutes the environment and damages plants. the products obtained after the application of chemicals in agriculture are considered to be harmful to human health. the positive impact of the process of globalization on the environment exists to some extent, but the key negative impacts of globalization are by far greater. among the significant positive impacts of globalization on the environment, the progress in the use of resources, increased environmental awareness, and the development of environmental technology are worth mentioning. improved use of resources and preservation of the environment are achieved by promoting growth through sustainable development, improving education and income. an example of this is the activity of the world bank in 1990, when it helped mexico reduce the number of unhealthy ozone days (world bank, 1990). due to the impact of globalization, many multinational companies have focused on the creation of technology that reduces the impact of humans on the environment. therefore, they created “green” technology, exemplified by the hybrid car and a new “green” apple mac. unfortunately, the negative impacts of globalization on the environment outweigh the positive ones. the main negative impact is reflected in the export-oriented environmental destruction. excessive use of natural resources due to increased demand, and the removal of the ecosystem due to population growth have a major detrimental impact on the environmental aspects of the process of globalization – negative implications and crisis 113 environment. unplanned deforestation causes loss of biodiversity on the planet. in australia, about 90% of native forest trees is exported, thus destroying the natural heritage of this part of the world. throughout the process of civilization and globalization, about one-half of the forests that once covered the earth disappeared (world wide fund for nature europe). a very important and far-reaching negative effect of globalization is manifested in global warming and climate change. global warming is brought by greenhouse effect, caused by growing industrialization of developing countries and heavy reliance on fossil fuels. the carbon released into the atmosphere in this way causes global warming, which results in ice and glacier melting and consequent sea level rise, which, in turn, has a wide impact on biodiversity and weather system. due to the above, according to the oecd, average global temperature has risen by 0.6 degrees celsius since the late nineteenth century (see graph 1). graph 1 preview changes in average global temperatures in the period up to 2050. souce:oecd (2013) what is the impact of globalisation on the environment?, page 57 global warming is particularly caused by increase in transport, i.e. harmful exhaust emissions from vehicles. according to the office for national statistics, the share of traffic-borne gas emissions in the greenhouse effect has increased by 47% since 1990 (office for national statistics). from an environmental point of view, the negative effects of globalization are higher, compared to the positive effects. the positive impact is only reflected in increased awareness of environmental issues and encouraging of multinational companies to take steps to protect the environment. negative impacts are mainly based on export-oriented destruction, as well as on carbon and harmful gases emissions. 114 i. ilić, p. hafner 2. environmental crisis as the global crisis of humanity the negative effects of globalization and contemporary implications of social development are certainly the main causes of environmental crises. the fact that the ecological crisis is global in character and that its consequences are catastrophic for the earth is indisputable. most simply put, the environmental crisis refers to the global “attack” on ecosystems, that is, the man’s immoral behavior towards nature. the manifestation of the environmental crisis is complex, which means that it appears as a structural and civilizational crisis of the modern era (malešević, 2004). the attitude of man to nature has resulted in the devastation of forest resources, exploitation of immeasurable amount of ores and minerals, and extinction of certain animal and plant species. increased consumption of electricity for industrial purposes at the global level has doubled in less than a decade. most researchers believe that with this pace of energy consumption, civilization cannot survive long. what is more, according to the most optimistic estimates, oil, as the non-renewable energy source, will disappear by the end of the xxi century (malešević, 2004). assessing the social causes of the environmental crisis requires a lot of effort, but it is certain that they are crucial for the emergence and escalation of the crisis. because of the consequences of globalization, nature socializes and society modernizes in the technical sense. key to the enigma of the environmental crisis should be primarily searched in the sphere of the social system, because it is basically a social crisis. the reason for this fact lies in the fact that man is the only creature that can destroy their own survival through careless attitude towards nature. in line with this is davies’s opinion that economics describes the way in which humans interact with the environment in the production and reproduction of their lives. this relationship indicates that there is no environmental issue independent of economic relations (davies, 2006). maximum and inadequate exploitation of nature and the environment is especially typical of an industrial society. future postindustrial society must raise awareness and turn more towards the preservation of nature and its revival, as well as diminish the gap that has been growing between the nature and society for ages. to achieve the optimal balance between the environment and economic activity, it is necessary to reduce production, rationalize consumption, and instill a higher level of environmental awareness in future generations. there is an opinion that the environmental crisis is not accidental, but that it is immanent in essential characteristics of industrial civilization. the system of values of industrial civilization is most blamed because it focuses primarily on profit, while morality is ignored. because of this belief that this system of values imposes, the significant destruction of nature occurs. therefore, it is necessary to focus on a radical change of values in the future (lomborg, 2009). all economic activities affect the environment, whether done intentionally or unintentionally. most of these activities usually lead to damage to the ecosystem or only pollute the environment. mechanisms of economic growth can affect the environment by pollution and over-exploitation of natural resources, degradation and loss of wildlife habitat, and climate change. in addition, excessive consumption leads to degradation and increased exploitation of natural resources. economic and environmental goals are often contradictory, and it is necessary to make a choice between them because their simultaneous realization is unlikely. environmental aspects of the process of globalization – negative implications and crisis 115 environmental problems are increasingly present due to man’s growing use of the environment in everyday activities. in order to preserve environment for the future generations, environmental protection requires slowing the uncontrolled exploitation of natural resources and lower level of pollution which results from expansive economic growth. therefore, it is necessary to limit the economic growth in a short period of time and bring many activities in line with the rules of environmental protection, so as not to be brought to the brink of survival. literature hosts conflicting opinions regarding the slowdown of economic growth for the sake of preserving the environment. some theorists lobby for slower economic growth in order to protect the environment. in contrast, others say that the free market and technological progress are the best tools for solving environmental problems and lifting people out of poverty. in accordance with the concept of sustainable development, the focus should be on optimal use of natural resources that come from the environment for the sake of its preservation and further ability to use its resources in economic activities. the man, as one of the pillars of origin of the environmental crisis, is expected to rationally and responsibly manage natural resources, and, while still not too late, stop destruction and protect the natural environment from damage. the concept that is closely associated with the environmental crisis refers to environmental awareness, which needs to be developed to prevent the emergence of the environmental crisis. environmental awareness is immanent in social consciousness, and has its social essence, so that it cannot be exhausted only in criticism, no matter how progressive, nor can it be merely reduced to the awareness of the environment. it is actually a spiritual dimension of environmental culture, which includes knowledge and habits, adopted values, attitudes and beliefs, acceptance of norms about what is in the natural and social environment healthy and of high quality, how health is taken care of and what threatens it, in which way can the awareness and quality of life be improved in existing conditions (koković, 2010). furthermore, it is important to develop applied ecology on the basis of agreed environmental policies. it should be noted here that environmental policy relies on three basic attitudes, or groupings, based on current development. the first attitude sees current environmental policy as insufficient to successfully solve the existing dangers. it is mainly negatively evaluated. according to the second attitude, current environmental policy has mostly met all important expectations despite the permanent criticism of minor problems and failures. third believe that environmental problems are exaggerated and that everything comes down to unnecessary environmental hysteria. different currents and positions are found within these attitudes, among which are: moralists, biologists, socialists, rationalists, capitalists, and realists. 3. the environmental performance index for the purposes of reviewing the situation of the environment around the world, the environmental performance index (epi) was developed in 2006, whose forerunner was the environmental sustainability index (esi), developed in 1999. the environmental performance index assesses the environmental performance of the country, by observing indicators that reflect the state of the environment. the main objective of epi methodology is to “draw attention to how far countries have gone in achieving the objectives of environmental policy” (environmental performance index, 2010). epi index assesses the social and economic driving forces, pressures on the environment, the state of the environment and impact on human health and ecosystems. 116 i. ilić, p. hafner in general, the epi index is a powerful tool for managing a particular country and the world as a whole, with reference to the concept of sustainable development. the environmental performance index strives to meet the needs of the governments to monitor the achieved environmental performance, and offers a method for assessing the effectiveness of environmental policies. it is especially designed to help policy makers to: 1) notice the current problems and identify priorities in environmental protection; 2) control the pollution of natural resources; 3) discover the most successful areas of environmental policy, and, where it is necessary, stop the ineffective efforts (environmental performance index, 2008). the epi methodology was developed through collaboration of the world economic forum with the yale university and columbia university. the data used for calculating the values of the epi index has been obtained from the governments of countries, and it includes statements regarding environmental performance indicators. fig 1 the structure according to the epi report from 2014. souce: 2014 environmental performance index full report, page 18 the environmental performance index reflects the environmental performance ranking of the countries around the world, based on 10 categories, i.e. areas of environmental policy, and environmental aspects of the process of globalization – negative implications and crisis 117 25 performance indicators, grouped into two key components. these are: environmental “health” (perceived influence of environmental conditions on the health of humans) and ecosystem vitality (the health of ecosystems and natural resource management). each of the indicators included in the epi index structure is directed towards long-term sustainability of public health or ecosystems. the last report on the environmental performance shows a modified structure of the epi index, which considers 9 environmental policy areas and 20 indicators (see figure 1). the number of areas is reduced by one, because two previously separate areas, the effect of air pollution on human health and the effect of air pollution on ecosystems, are observed together. now this is one area, designated as air quality. the environmental component “health” includes health impact, air quality, and water and sanitation as the most important areas of environmental policy. within the components of the ecosystem vitality, the following environmental policy areas are analyzed: climate and energy, biodiversity and habitat, fishing, forestry, agriculture, and water resources. epi methodology, which is used for ranking the countries with respect to the environmental performance, has been applied in the analysis of the position of serbia in relation to neighboring countries. for research purposes, the data concerning the ranking of the country has been taken from the reports for 2010, 2012, and 2014. it is important to note that serbia and montenegro were observed together in the reports for 2010 and 2012. the report from 2010 covered 163 countries around the world, where serbia and montenegro occupied the 29th position. in that year, in respect of neighboring countries, only albania was better than us, occupying the 23rd position. hungary was in the 33rd position, croatia in the 35th, romania in the 45th, followed by slovenia (55th) and bulgaria (65th). the lowest positions in the group of surveyed countries were occupied by macedonia (73rd) and bosnia and herzegovina (98th). in the report for 2012, it is characteristic that serbia and montenegro went backward in the rankings, occupying 103rd position out of 132 countries in the rankings. the same trend could be observed in the case of romania (88th) and bosnia and herzegovina (124th). in contrast, all other countries in the region advanced in the rankings and occupied much better positions in relation to 2010. table 1 preview rank the countries selected according to epi methodology for the period from 2010 to 2014 country year / the number of countries 2010 /163 2012 / 132 2014 / 178 albania 23 15 67 bosnia and herzegovina 98 124 107 bulgaria 65 53 41 croatia 35 20 45 hungary 33 45 28 macedonia 73 97 89 montenegro / / 62 romania 45 88 86 slovenia 55 28 15 serbia 29 103 31 source: author presentation according to the report from yale university according to the latest report from 2014, which shows the ranking of 178 countries, it can be seen that serbia recorded progress (31st), returning to approximately the same 118 i. ilić, p. hafner position in which it was together with montenegro in 2010. from this year, serbia and montenegro are observed separately, so that montenegro was for the first time independently ranked, occupying the 62nd position. the highest ranked among the analyzed countries in this year was slovenia (15th), followed by hungary (28th). the rest of the countries progressed in the ranking. only croatia and albania occupied the lower positions in relation to 2012 (see table 1). by analyzing the movement of positions in the rankings, only bulgaria and slovenia had an upward trend during the years observed in the study. oscillatory movement in the ranking was characteristic for all other countries in the group of selected countries in the covered time period. conclusion globalization is a global process, and its effects will broaden and deepen over time. in addition to a large number of implications that it leaves behind, it can be said that the most difficult are the ones that threaten the survival of society and the environment. economic activities are precisely the ones that contribute the most to environmental degradation, and they are directly correlated. given the high degree of correlation between them, the economic activities must be sustainable, in order for the man to survive while respecting strong moral reasons, environmental regulations, and economic arguments. the concept of sustainable development should be widely accepted as a condition of survival and overall future progress. failure to comply with the concept of sustainability leads to inefficient economic development, in terms of wastage of resources and energy, i.e. the tendency of long-term deterioration in the input-output ratio on a global scale. the economic and environmental objectives are often contradictory, and it is necessary to make a choice, because their simultaneous realization is unlikely. the link between environment and economic development is very complex, and there is no possibility of independence of economic from environmental issues. environmental problems, based on their scope and significance, are the most complex negative consequence of globalization. the expansion of environmental problems and involvement of the growing part of environment creates an environmental crisis, which is greatly affected by technological development. manifestation of environmental crisis through various degrees of pollution, vulnerability, and degradation of environment is essential and burning problem of civilization, whose solution determines the future. in addition to the environmental crisis, environmental problems lead to the emergence of social crisis. the environmental crisis as such jeopardizes the natural and the human community, so that the requirements for the preservation of healthy living and working environment appear as a high moral social norm. as an initial solution for combating the negative consequences of the globalization process, it is necessary to develop environmental awareness of all people, starting with the youngest, who are the future leaders of life on earth. expansion of environmental awareness results from the development of a growing number of environmental movements in the world and in our country. legislative solutions should be reflected in the introduction of stringent environmental standards and environmental taxes that will ultimately discourage nonenvironmental behavior. the focus should be on the implementation of environmentally friendly technologies that can be applied in the production process, and imposing requirements for adherence to strict environmental standardization in carrying out economic activities. in addition to these solutions, strategic solutions are needed as environmental aspects of the process of globalization – negative implications and crisis 119 well, in terms of adherence to sustainable development strategy, based on the concept of sustainable development and smooth economic, environmental, and social prosperity. interventionist role of the state is vital for the creation and implementation of required environmental principles and standards in doing business. the future is definitely in the green economy, which will be able to reconcile the problems posed by globalization and the environment. perhaps the current environmentally shaken trajectory of human development can be changed, but it requires globalization of efficient social and political actions for the purpose of sustainability. acknowledgement: the paper is a part of the research done within the project no: 179066, ministry of education,science and technological development of the republic of serbia. references 1. baslar, k., (2011), the concept of the common heritage of mankind in international law , kluwer law, the netherlands 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(2002), social ecology basic themes and theoretical perspective, faculty of security studies, belgrade 14. oecd, (2013), what is the impact of globalisation on the environment?, http://www.google.rs/ url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=2&ved=0ccmqfjab&url=http%3a%2f%2fwww.oe cd-ilibrary.org%2fwhat-is-the-impact-of-globalisation-on-the environment_5k483kcrnr6j.pdf%3fitemid%3 d%2fcontent%2fchapter%2f9789264111905-8en&ei=qpfxvpb2ekj7ygozm4dyca&usg=afqjcneau9 uwqeyyupzocddz37pddd9glq&sig2=rffqjbhnnhhtaisottbz0g&bvm=bv.80185997,d.d2s (14.11.2014.) 15. office for national statistics (ons), www.ons.gov.uk/ons/taxonomy/index.html?nscl=environment (10.11.2014.) 16. world bank (wb), www.wds.worldbank.org/external/default/wdscontentserver/wdsp/ib/2010/01/ 05/000333037_20100105001113/rendered/pdf/524580pub0low0101official0use0only1.pdf (20.10.2014.) 17. world wide fund for nature europe (wwf) ,www.wwf.eu (22.10.2014.) ekološki aspekti procesa globalizacije – negativne implikacije i kriza nadolazeći ekološki problemi današnjice sve više zaokupljuju pažnju globalnog društva. čovek kao glavni činilac remećenja optimalne ravnoteže životne sredine smatra se najodgovornijim za nastanak ekološke krize koja se ispoljavam u svim sferama života. kako postoji sve veći broj ekoloških problema koji zahtevaju hitno rešavanje, neophodno je povećanje svesti o problemima koji nas okružuju. ubuduće je potrebno razvijati ekološku („zelenu“) ekonomiju, racionalizovati 120 i. ilić, p. hafner potrošnju, i usaditi viši nivo ekološke svesti nadolazećim generacijama kako bi ekološki problemi bili svedeni na minimalni nivo.treba imatu u vidu da je ekološka dimenzija noseća komponenta održivog razvoja savremenog čovečanstva. u skladu sa time, razvijena je metodologija indeksa ekoloških performansi – epi (the environmental performance index). po osnovu ove metodologije i izražavanja ranga zemlje prema ekološkim performansama u radu je izvršena analiza stanja ekološke razvijenosti u srbiji i zemljama u okruženju. ključne reči: globalizacija, ekološki problemi, ekološka kriza, indeks ekoloških performansi (epi) plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 2, 2014, pp. 175 189 review paper value at risk measuring and extreme value theory: evidence from montenegro  udc 330.131.7(497.16) julija cerović faculty of economics, university of montenegro abstract. the concept of value at risk (var) is a measure that is increasingly used for estimation of the maximum loss of financial position at a given time for a given probability. the aim of this manuscript is to show the most recent approaches for quantifying market risk. in particular, the manuscript investigates whether extreme value theory outperforms econometric calculation of var in emerging stock markets such as montenegrin market. the paper is motivated by the desire that necessary attention is given to risks in montenegro. daily return of highly volatile stock epcg (elektroprivreda crne gore) from montenegrin stock exchange is analysed for the period from january, 2004 – june, 2013. the sample of this structure and time dimension has not been discussed in empirical literature. therefore, it is necessary to use the experience of the developed world's financial institutions which have studious approach to risk management, as well as the latest theoretical knowledge. key words: extreme value theory, value at risk, fat tails, garch model, peak over threshold, generalized pareto distribution introduction the risk from extreme events is present in all fields of risk management. methodology used for the assessment of financial markets participants’ rate of exposition to risk, gives the estimation of value at risk. value at risk (value-at-risk, or abbreviated var) is the maximum loss of financial position over a given time period at a given confidence interval. it includes all types of financial risk and the application in the analysis of market risk is to be presented in this manuscript. it is intended to show the latest approaches to quantification of market risk in this paper, in a theoretical and practical context. the aim of this manuscript is to present the  received january 21, 2014 / accepted june 25, 2014 corresponding author: julija cerović faculty of economics, university of montenegro, jovana tomaševića 37, 81000 podgorica, montenegro tel: +382 78 113 324  e-mail: julija@ac.me j. cerović 176 estimation of var based on the analysis of specificities of financial time series, and to give empirical results of measuring value at risk in montenegrin financial market that is still developing. these include econometric evaluation, riskmetrics methodology, quantile estimation and estimation based on extreme value theory. econometric evaluation is derived from garch model, while riskmetrics methodology uses igarch model. there is a general opinion in literature data that there is no universal model giving the best estimation and forecast of var. numerous papers observing the application of different approaches in developed financial markets confirm this – caporin (2003), christoffersen, et al. (2001), angelidis, et al. (2004), wong, et al. (2002), alexander and leigh (1997), harimantzis, et al. (2006), peters (2001), embrechts, et al. (1999), mcneil, et al. (2000), guermat and harris (2002), so and yu (2006). on the other hand, there are very few papers observing the comparison of var models in developing financial markets. gençay and selçuk (2004) analized parameter models and quantile estimation of var of stock exchange indices in developing central and eastern european countries. these results show that generalized pareto distribution and extreme value theory are basic tools in risk management in developing countries. živković (2007) observed different approaches to var measuring on the example of new members and candidate countries for eu membership (bulgaria, romania, croatia and turkey). the conclusion of this research is that application of var models is not successful enough in financial markets of these countries because the returns show the existence of heavy tails, asymmetry and heteroscedasticity. further researches followed in 2009, where živković and aktan analized var models of the returns of turkish and croatian stock-exchange indices with the onset of global financial crisis. it was concluded in this paper that extreme value theory and hybrid historical simulation are the best, while other models underestimate the level of risk. anđelić, djoković and radišić (2010) observed slovenian, croatian, serbian and hungarian markets and concluded that under stable market conditions, the analized models give good forecasts of var estimations with 5% level of significance, while under the conditions of market volatility analized models give good estimations of var parameters with 1% level of significance. nikolić-đorić and đorić (2011) observed the movement of stock-exchange index in serbian financial market and concluded that garch models combined with extreme value theory – peaks over threshold method, decrease the mean value of var, as well as that given models are better than riskmetrics method and igarch model. also, mladenović, miletić and miletić (2012), based on analysis of stock-exchange indices in central and eastern european countries (bulgaria, czech republic, hungary, croatia, romania and serbia), came to conclusion that the methodology of extreme value theory is slightly better than garch model regarding the calculation of var, but general suggestion is to use both approaches for better measuring of market risk. the purpose of this paper is to compare performance of econometric models, quantile estimation and extreme value theory in evaluting value-at-risk in montenegrin stock exchange over long period that includes years of financial crisis. results will be interesting given the recession period is included, and are relevant on micro and macroeconomic level. in particular, the manuscript investigates whether extreme value theory can outperform econometric calculation of var in emerging stock markets, and, in particular, montenegrin stock market has not been discussed in empirical literature. now we are going to observe a portfolio of some risky assets and determine portfolio value as vt at a moment in time t. let us assume that we want to determine the level of value at risk measuring and extreme value theory: evidence from montenegro 177 risk over the period [t,t+h]. we mark the random variable of portfolio loss as ( ) ( ) t h t h t l v v v h        . cummulative function of loss distribution is marked as fl where ( ) ( ) l f x p l x  . in this case, var at significance level α (α  (0,1) most often α = 0.01 or α = 0.05, i.e. 1% and 5%) is actually an α-quantile of distribution function fl and represents the smallest real number satisfying the inequation )(xfl , i.e.: inf( ( ) ). l var x f x   (1) expected shortfall (es) is a measure closely related to var and practically often indicated as a measure overcoming conceptual disadventages of var. for loss l, with its expected absolute value being definite, expected shortfall at significance level α is defined as 1 1 ( ) , 1 u l es q f du      (2) where qu(fl) is the quantile function of distribution function fl. it is obvious that measure es depends only on loss distribution, and es  var. therefore, this measure represents expected return value in case a marginal value (usually var) is exceeded. 1. methodologies of var the type of value at risk estimation can be: 1. quantile estimation (historical simulation), 2. econometric evaluation (garch models) and 3. estimation based on extreme value theory. 1.1. garch model generalized autoregressive conditional heteroscedasticity (garch) model, introduced by bollersev (1986) and taylor (1986), represents the generalization of autoregressive conditional heteroscedasticity model – arch, developed by engle in 1982. log returns, usually expressed in percents, are marked as rt. innovation at moment t is ttt ra  . then, the model can be presented as follows (tsay, 2010): 0 1 1 p q t i t i t j t j i j t t t r r a a a                 (3) 2 2 2 0 1 1 . u t i t i j t j i j a               (4) parameters of equation (3) representing autoregressive moving-average model (arma) of orders p and q, arma (p,q), are marked as 0 1 1, ,..., , ,...,p q     . the random member of the model, at, is the function of t series of independent and identically distributed random variables having a normal or t-distribution with zero mean and variance equal to 1. by the second equation in the model (4), conditional variance j. cerović 178 of returns rt is modeled, 2 2 1 (( ( )) ) t t t t e r e r     , where t1 is available data set with moment t-1 inclusive. in other words, conditional variance (volatility) is expected squared deviation of observations from the mean given the available data set. parameters 0 1 1 , ,..., , ,..., u      of conditional variance equation satisfy the conditions 0 0,  1,..., 0,u   1,..., 0,   max( , ) 1 ( ) 1 u i i i       . if the series t is a random variable with standardized normal distribution, i.e. t : n(0,1) then conditional distribution of random variable rh+1 for available data with the moment h inclusive, also has a normal distribution with mean ˆ (1) h r and variance 2ˆ (1) h  . then, 5%-quantile of conditional distribution, representing the estimation of var at 95% confidence level and for forecast horizon 1 step ahead, is computed as: ˆ ˆ(1) 1, 65 (1). h h r  (5) if random variable t has student’s t distribution, with υ degrees of freedom, then the 5%-quantile of conditional distribution is computed as follows: (1 ) ˆ ˆ(1) (1), 2 h h t p r        (6) where (1 )t p  is the corresponding critical value of (1  p) quantile from t distribution with υ degrees of freedom. garch(1,1) model has the following form: 0 1 1 , : (0,1) p q t i t i t j t j i j t t t t r r a a a n                  (7) 2 2 2 0 1 1 1 1 . t t t a          (8) if the model garch(1,1) satisfies the parameters sum 1 + 1 = 1, then the model describes the process of unlimited growth of conditional variability. such a model is known as integrated garch model – igarch(1,1). it is in the basis of var estimation, representing the standard approach to risk measuring – riskmetrics. this methodology was developed by company j. p. morgan (longerstaey, 1995), and it implies that conditional distribution of the series of log daily returns is 2 1 : ( , ) t t t t r n     , where t is conditional mean, and t 2 is conditional variance of series rt. the following relations are valid for them: 2 2 2 1 1 0, (1 ) , 0 1. t t t t r             (9) volatility forecast for one period ahead in time shows that 2 2 2 1 (1 ) . t t t r       the previous relation indicates that 2 1 ( ) t i t t var r      for i  1, and therefore, 2 2 1 [ ] t t k k    . if the significance level is 5%, portfolio risk according to riskmetrics methodology is computed using formula 1,65t+1, i.e. daily var value of the portfolio is 1 1, 65 . t var value of financial position     (10) value at risk measuring and extreme value theory: evidence from montenegro 179 1.2. quantile estimation (historical simulation) historical simulation begins from the assumption that return distribution in the forecast period is the same as in the sampling period. thus, the given return values of the sample are arranged according to size into a growing series in the form (1) (2) ( ) ... n r r r   with the first minimal and last maximal value. let us assume that returns are independent and identically distributed random variables with constant distribution whose probability density function is f(x), and corresponding function of cumulative distribution f(x). let xp be p-quantile of the function f(x). if f(xp)  0, then the statistic r(l), where l = np, 0 < p <1, has approximately normal distribution with mean value xp and variance 2 (1 ) / [ ( )] p p p n f x , i.e. ( ) 2 (1 ) : ( , ), . ( ) l p p p p r n x l np nf x   (11) 1.3. extreme value theory – peak over threshold method (pot) the extreme value theory is a very good methodological frame for the research of the trend of distribution tail. if we consider the problem of sample maximum, we come to the main mathematical problem which is in the basis of the extreme value theory. let x1, x2,... be the series of independent, non-degenerate random variables having an even distribution, with the common distribution function f. let us observe the maximum values of variables (m1 = x1) 1 max( ,..., ), n n m x x (12) where 2n  . for the joint limiting distribution function of maxima mn, based on the character of their independence, it is: 1 1 1 ( ) ( ,..., ) ( ) ( ) ( ). n n n n n i i i p m x p x x x x p x x f x f x            (13) we will mark the right end of distribution f with sup( : ( ) 1). f x x r f x   (14) then, for every f x x , ( ) ( ) 0, , n n p m x f x n    (15) and, if f x   , for f x x ( ) ( ) 1. n n p m x f x   (16) therefore, distribution function, as n  , becomes degenerate. in order to obtain non-degenerate marginal distribution, it is necessary to carry out normalization (de haan & ferreira, 2006). the problem comes to the determination of real constants an > 0 and bn, so the variable (mn  bn) / an has non-degenerate marginal distribution, as n , i.e. lim ( ) ( ) n n n n f a x b g x    . g represents the non-degenerate distribution function and such distributions are called extreme value distributions. j. cerović 180 let the real constants be an and bn (an > 0), so for every n applies lim {( ) / } lim ( ) ( ), n n n n n n n n p m b a x f a x b g x        (17) for non-degenerate distribution function g(x). if this condition applies, it is said that f is in the domain of attraction of maxima from g, i.e. ( )f d g . extreme value distribution includes three parameters  shape parameter, n location parameter, and n > 0 is scale parameter. they can be assessed in two ways: using parametric or non-parametric methods. traditional approach – block maxima method largely dissipates data because only maximum values from great blocks are used. this is reported as the biggest disadvantage of this model, so in practice it is increasingly being replaced with the method based on peaks over threshold, where all data representing extremes are used, in the context of exceeding some high level. the given method is to be exposed as follows. if we mark a certain threshold as u, and we observe the series of daily log returns rt, then if i th excess happens on the i th day, this model is focused on the data (ti, rti  u). the basic theory of this new approach observes conditional distribution from r = x + u which is for r  x + u given that threshold is exceeded, r > u: ( ) ( ) ( ) ( ) . ( ) 1 ( ) p u r x u p r x u p r u p r x u r u p r u p r u                (18) the main distribution used for the modeling of excess over the threshold is generalized pareto distribution, defined in the following way: 1/ , ( ) 1 (1 ) , 0, ( ) ( ) 1 exp( ), 0, ( ) u x u g x x u                     (19) where  (u) > 0 and 0x  for 0  , and 0 ( ) /x u    when  < 0. therefore, we conclude that conditional distribution from r, if r > u, approximates well with generalized pareto distribution with parameters  and  (u) =  +  (u  ). parameter  (u) is called scale parameter, and  is shape parameter. generalized pareto distribution has a very significant feature. if the excess distribution from r with the given threshold u0 is generalized pareto distribution with shape parameter  and scale parameter  (u0), then for arbitrary threshold u > u0, the given excess distribution for threshold u is also generalized pareto distribution with shape parameter  and scale parameter 0 0 ( ) ( ) ( )u u u u     . when the parameter  = 0, then generalized pareto distribution is exponential distribution. therefore, it is suggested to carry out a graphic examination of the tail behaviour using qq plot. if  = 0, then the graph of the excess is linear. peaks over thresholds model has a problem regarding the choice of an adequate threshold. this is how the given problem is usually solved in practice. value at risk measuring and extreme value theory: evidence from montenegro 181 for the given high threshold u0, let the excess r  u0 follow generalized pareto distribution with parameters  and  (u0), where 0 <  <1. then, the mean excess over the threshold u0: 0 0 0 ( ) ( ) . 1 u e r u r u       (20) the mean excess function in the mark e(u) is defined, for every 0uu  , as: 0 0 ( ) ( ) ( ) ( ) . 1 u u u e u e r u r u           (21) therefore, for the given value , the mean excess function is the linear function of excess u  u0. hence, for the determination of the given threshold u0, a simple graphic model is used, forming the empirical mean excess function as 1 1 ( ) ( ), u i n t t iu e u r u n    (22) where nu is the number of returns exceeding the threshold u, and rt i are the values of given returns. threshold u is chosen so the empirical mean excess function is approximately linear for r > u. for the given probability p in the upper tail, (1-p)-quantile of log return rt is {1 [ ln(1 )] } 0, ln[ ln(1 )] 0. d p var d p                     (23) var evaluation is much more stable using the peaks over thresholds method because with the traditional approach, var is very sensitive to changes in the size of blocks n. the measure of expected shortfall, as an expected loss if var is exceeded, then can be defined as ( ) ( ), q q q q q es e r r var var e r var r var      (24) i.e. ( ) . 1 1 q q var u u es          (25) 2. empirical results the purpose of empirical analysis is the evaluation of risk measures for daily returns, for one stock in montenegrin stock market. the best way is to choose a stock having showed a pronounced volatility in the previous period, able to illustrate advantages and disadvantages of each model. for these reasons, a stock of elektroprivreda crne gore (epcg) was chosen, illustrating models of var calculation. time series of logarithmic returns of epcg’s stock, were observed on daily basis in the period from 9 th january of j. cerović 182 2004 until 18 th june of 2013 (2338 data in total). log daily returns (or continuously compounded returns), represent the difference between logarithmic levels of prices in two successive days. it can also be expressed in percents, when these differences are multiplied by 100. the data are taken from the website of montenegro berza ad podgorica, retrieved from http://www.montenegroberza.com. empirical results are obtained using program package r. daily return of the epcg stock is stationary (fig. 1). its empirical distribution differs from normal distribution, which is indicated by the skewness and curtosis, as well as the joint indicator of normality – jarque-bera test-statistic (jb). these descriptive statistics are shown in table 1. the value in parenthesis next to the value of test-statistic is the corresponding p-value. table 1 basic descriptive statistics of daily return for epcg variance skewness curtosis jb box-ljung (m=8) box-ljung (at 2 ) 23.96 0.6 19.88 38709.92 (<2.2e-16) 101.76 (<2.2e-16) 1032.92 (<2.2e-16) the given return series is not too asymmetric, which can be seen from the skewness indicator, but the high curtosis indicates that the it is above normal, i.e. there are “heavy tails” – tails are heavier than those in normal distribution. jarque-bera (jb) normality test shows that the hypothesis of normality of returns can be abandoned even when the level of significance is 1%. jb test-statistic has an asymptotic  2 distribution with two degrees of freedom. the next in table 1. is box-ljung test-statistic (box-ljung). it is used for the determination of autocorrelation of order m between squared data and has asymptotic  2 distribution with m degrees of freedom. null hypothesis in this test implies that the first m autocorrelation coefficients of squared data are zero and it is abondoned here. value m is chosen in several ways and in practice the best form is m  ln(t), where t is the number of data of the observed variable (tsay, 2010). in our case, for m this value is 8. fig. 1 daily return of epcg stock 0 500 1000 1500 2000 -0 .4 0 .2 index e p c g time e p c g 1 2004 2006 2008 2010 2012 -0 .4 0 .2 value at risk measuring and extreme value theory: evidence from montenegro 183 fig. 2 autocorrelation functions (acf) and partial autocorrelations for epcg series to determine the existence of time-changing variability, the same box-ljung teststatistic is used, but for squared residual series (mcleod and li, 1983, tsay 2010). return residual is defined as the difference between return level and mean of the return, i.e. . t t t a r   for the return of epcg, first the serial correlation was determined according to box-ljung test-statistic for the return data, and the same statistic for squared residuals also shows high volatility. as daily return rate of epcg stocks has an unstable variance, its dynamic is evaluated using garch model. based on the specification analysis – sample functions of autocorrelation and partial correlation (fig. 2) – it is estimated that the best model is arma(1,3). volatility movement is well described by model garch(1,1). jointly estimated arma(1,3)-garch(1,1) model is: 1 1 2 3 2 2 2 1 1 0.000016929 0.99696 0,87183 0.17137 0.051543 , 0.00018531 0.17587 0.74366 . t t t t t t t t t r r a a a a a                  all model coefficients are already significant at significance level 1%, except free members in both equations, which are significant at level 10%. the tests of residual normality, autocorrelation and conditional heteroscedasticity are given in table 2. therefore, it can be observed that the chosen model, which was the best of all econometric models (not all parameters were significant within other models), describes volatility really well. however, garch model did not remove autocorrelation successfully, which can be seen from box-ljung test. autocorrelation was reduced enough, which can be concluded based on the autocorrelation of standardized residuals function, figure 3. 0 5 10 15 20 25 30 0 .0 0 .8 lag a c f series epcg 0 5 10 15 20 25 30 -0 .1 0 lag p a rt ia l a c f series epcg j. cerović 184 fig. 3 autocorrelation of standardized residuals function of model arma(1,3)-garch(1,1) table 2 tests of arma(1,3)-garch(1,1) models: test-statistic and p-value jb box-ljung q(10) box-ljung (at 2 ) lm arch test 75584.7 (0) 37.75 (4,2e-05) 4.2146 (0.937) 5.46 (0.94) table 3. forecasts levels of return and volatility (conditional standard deviations) for one day time horizon, which are used for the assessment of var. the assessments are computed for level of confidence 95% and 99%. interpretation of the obtained result for var is as follows: if one possesses some value of epcg stocks (for example, 1000€), then the possible loss for the owner of stocks for a one-day period does not exceed 7.483% of the value (74.83 €) with probability 95%. with the 99% probability, the estimation of the maximum loss is 10.65% of the value (106.5 €). table 3 econometric evaluation of var for a one-day period (epcg return) return forecast forecast of conditional st. dev. var (95%) var (99%) -0.00092457 0.04619341 7.483% 10.65% riskmetrics method for the calculation of var assumes that conditional mean value is zero and that return volatility follows igarch(1,1) model. the adjusted model is 2 2 2 1 1 , , 0.041657 (1 0.041657) , t t t t t t t t r a a a           where t is standard gaussian series of white noise. q statistic for squared standardized residuals is rather low (0.0005967), but not statistically significant. according to the adjusted model, volatility forecast for one period in advance is ˆ (1) 0.04951,  so 95% quantile of conditional distribution is 1.65 0.04951 0.0816915.  var for 95% probability, one period in advance, for the position of, for example, 1000 €, will be 0 5 10 15 20 25 30 0 .0 0 .2 0 .4 0 .6 0 .8 1 .0 lag a c f series stresi value at risk measuring and extreme value theory: evidence from montenegro 185 1000€ 0.0816915 81.6915€.var    according to the same principle, 99% quantile is 2.326 0.04951 0.11516026,  so var, for the given probability is approximately 115.16€. quantile assessment of var is obtained as empirical 99% quantile, with the value of daily return for epcg is 14.64244%, which means if we possess 1000 € worth epcg stocks, the loss in one-day period does not exceed 146.4244 €, with 99% probability. the measure of expected shortfall for the same probability is 23.19685%, which means that if var is exceeded, for the same possession of 1000€ worth epcg stocks, the loss expected in one-day period is 231.97 €. with confidence level 95%, var amounts to 5.395%, and the measure of expected shortfall is 11.69%. the following is the evaluation of var based on the new approach of extreme value theory – peaks over threshold method. negative logarithmic returns of epcg stocks are observed, and according to literature for the series of stable returns, we usually choose 2.5% for threshold u. fig. 4 shows, based on q-q plot, that the given returns derogate from normal distribution, so it is concluded that coefficient   0. also, the graph of mean excess function is linear up to threshold level 3%. fig. 4 q-q plot of excess over 2.5% threshold and mean excess function plot table 4 result assessments of two-dimensional poisson model of epcg daily negative log returns 1 threshold exceeding n n n 3% 213 0.271 (0.084) 0.02 (0.0056) -0.0383 (0.012) 2.5% 251 0.31 (0.078) 0.017 (0.04) -0.03058 (0.008) 2% 315 0.437 (0.072) 0.0109 (0.002) -0.015 (0.0045) 1 standard assessment errors are given in parentheses. the set of extreme events exceeding the 2.5% threshold has 251 data. based on this data set, the distribution of maximal negative logarithmic returns for epcg stocks is 0.1 0.2 0.3 0.4 0 3 6 negative daily epcg log returns ordered data e x p o n e n ti a l q u a n ti le s -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0 .0 0 .3 threshold m e a n e x c e s s mean excess plot j. cerović 186 modeled. table 4 contains the estimation of parameters ,  and  for the given data set, with the variation of threshold from 2% to 3%. given parameters are used for the calculation of var and the adequacy of the given model can be based on plots which can be seen in fig. 5. the four plots show good accomodation of generalized pareto distribution to the data. q-q plot (lower right graph) shows slight derogations from the straight line, which is also confirmed by tail probability assessment on the logarithmic scale (lower left graph), leading to conclusion that the modelling is appropriate. peaks over threshold method gives results for var and expected shortfall, summed up in table 5. it is concluded that parameter results are more stable compared to econometric modeling (garch model and riskmetrics), which shows parameter estimation variations depending on the choice of type of garch model (garch(1,1) or igarch(1,1)). it is evident here that results of var and expected shortfall differ less depending on different values of threshold excess, and with the same probability assessment. general conclusion is that this approach is superior to the econometric evaluation of var. fig. 5 plots of generalized pareto distribution adjustment to epcg daily negative log returns table 5 assessments of results of var and expected shortfall based on peaks over thresholds method threshold p-value var expected shortfall 2.5% 0.05 0.05490012=5.49% 0.1185879=11.86% 0.01 0.14661115=14.66% 0.2514971=25.15% 0.001 0.389812=38.98% 0.603948=60.39% 2% 0.05 0.0526414=5.26% 0.1246470=12.46% 0.01 0.1473389=14.73% 0.2927310=29.27% 0.001 0.4724329=47.24% 0.8697588=86.98% 3% 0.05 0.05526823=5.53% 0.1179026=11.79% 0.01 0.14737246=14.74% 0.2443104=24.43% 0.001 0.37328683=37.33% 0.5543650=55.44% 0.05 0.10 0.20 0.50 0 .0 0 .2 0 .4 0 .6 0 .8 1 .0 x (on log scale) f u (x -u ) 0.05 0.10 0.20 0.50 2 e -0 4 1 e -0 3 5 e -0 3 5 e -0 2 x (on log scale) 1 -f (x ) (o n l o g s c a le ) 0 50 100 150 200 250 0 1 2 3 4 5 ordering r e s id u a ls 0 1 2 3 4 5 0 1 2 3 4 5 6 ordered data e x p o n e n ti a l q u a n ti le s value at risk measuring and extreme value theory: evidence from montenegro 187 further, in order to compare the results, value at risk obtained using different calculation methods can be summed. if we possess 1000€ worth epcg stocks, with 5% level of significance, meaning there is 95% probability the loss would be lower or the same as var for the following trading day, the parameter value is: 1) 74.83€ applying arma(1,3)-garch(1,1) model; 2) 81.6915€ applying riskmetrics method; 3) 53.95€ by quantile estimation, and 4) 54.9€ applying peaks over threshold method (threshold is 2.5%). the corresponding parameter values with 1% probability are: 1) 106.5€ applying arma(1,3)-garch(1,1) model; 2) 115.16€ applying riskmetrics method; 3) 146.4244€ by quantile estimation, and 4) 146.6€ applying peaks over threshold method (threshold is 2.5%). due to different treatment in the estimation of statistic distribution tail behavior, there are different results obtained as well. the result of econometric assessment (armagarch models and riskmetrics), in case all assumptions for its applications are accomplished, depends on the chosen model. therefore, it is necessary, as we have shown on the example, that a detailed analysis of the specification of potential models is the first phase in the performance of value at risk evaluation. it can be concluded that econometric estimation proved to be unstable, as they are on the upper bound at 5% significance level, and at 1% significance level they are on the lower bound of possible var movement interval. further, the choice of tail distribution probability also has an important role in the calculation of var. the value of the observed sample of 2338 data may be considered big enough for empirical quantiles with 99% and 95% probability for giving good parameter estimation. for both levels of significance, quantile value at risk evaluation is very close to the assessment of the new approach of extreme value theory. we note that these two assessments at 1% significance level are on the upper bound of the possible var parameter range. also, within the latter approach (table 5), we can see that using a very low 0.1% probability, less reliable var evaluation are obtained. therefore, that significance level was not used in other approaches. conclusion results of empirical analysis have multiple benefits. they show that the assessments of value at risk based on extreme value theory are better than econometric evaluations. it is obvious that econometric evaluations proved to be very unstable at the assessment of value at risk. results showed that at 5% significance level, given evaluations are on the upper bound, and at 1% significance level, they are on the lower bound of possible value at risk movements. therefore, it is not possible to say they either underestimate or overestimate the given parameter, but the estimation significantly changes depending on the level of confidence. taking these results into account, a suggestion can be given to financial institutions to quantify risk using several methods: peaks over thresholds method (the latest approach of extreme value theory), historical evaluation (quantile) – for large samples, and riskmetrics method (containing econometric method). for the purpose of simplicity, risk estimation can be focused on these three methods as they have been proven to be the best j. cerović 188 regarding the range within which real value of var parameter can move. as it was said earlier, the real value of this parameter cannot be observed, so it is difficult to single out one estimation method as the best one. furthermore, these results refer to montenegrin stock market, that is small emerging economy and the results obtained in the analysis should be limited on emerging economies and financial markets that are still developing. these markets are characterized by a greater influence of internal trade and high volatility compared to developed countries, so evaluation of var with standard methods that assume a normal distribution is much more difficult. also, the observation period for measuring value at risk includes period of financial crisis, so that fact should be taken into account because of possible derogation of parameter results. references 1. danielsson, j., de vries, c.g. (1997). value at risk and extreme returns. working paper, london school of economics, london, uk. 2. de haan, l., ferreira, a. (2006). extreme value theory: an introduction. springer science+business media llc. 3. de haan, l., resnick, i.s., rootz_en, h., de vries, c.g. (1989). extremal behavior of solutions to a stochastic diference equation with applications to arch process. stochastic processes and their applications 32, 213±224. 4. embrechts, p., klüppelberg, c., mikosch, t. (1997). modelling extremal events for insurance and finance. springer, berlin. 5. embrechts, p., resnick, s.i., samorodnitsky, g. (1998). living on the edge. risk 11, 96±100. 6. gençay, r., selçuk, f. (2004). extreme value theory and value-at-risk: relative performance in emerging markets. international journal of forecasting 20, 287–303. 7. gençay, r., selçuk, f., ulugülyağcı, a. (2003). high volatility, thick tails and extreme value theory in value-atrisk estimations. insurance: mathematics and economics. 8. manganelli, s., engle, r.f. (2001). value at risk models in finance. european central bank, working paper no. 75. 9. mcneil, a.j. (1998). calculating quantile risk measures for financial return series using extreme value theory. working paper, eth, zürich, switzerland. 10. mcneil, a. j., & frey, r. (2000). estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach. journal of empirical finance, 7, 271– 300. 11. mcneil, a.j. (1999). extreme value theory for risk managers. working paper, eth, zürich, switzerland. 12. miletić, m., miletić, s. (2013). measuring value at risk on emerging markets: empirical evidence from serbian stock exchange. facta universitatis, series: economics and organization, vol. 10, no. 1. pp. 25-37. 13. mladenović, z., mladenović p. (2007). ocena parametra vrednosti pri riziku: ekonometrijska analiza i pristup teorije ekstremnih vrednosti. ekonomski anali br. 171. 14. montenegroberza ad podgorica, www.montenegroberza.com (18.06.2013) 15. reiss, r.-d., thomas, m. (2007). statistical analysis of extreme values. birkhäuser, basle, switzerland. 16. tsay, ruey s. (2010). analysis of financial time series, third edition. john wiley & sons, inc. http://www.montenegroberza.com/ value at risk measuring and extreme value theory: evidence from montenegro 189 merenje parametra vrednosti pri riziku i teorija ekstremnih vrednosti: dokaz na primeru crne gore koncept vrednosti pri riziku je mera koja se sve više koristi za ocenu maksimalnog gubitka finansijske pozicije u određenom vremenskom periodu za datu verovatnoću. cilj ovog rada je da pokaže najnovije pristupe merenja tržišnog rizika. konkretno, rad ispituje da li je teorija ekstremnih vrednosti bolja od ekonometrijskog računanja var-a na berzanskim tržištima koja su u razvoju kao što je crnogorsko. rad je motivisan željom da se riziku u crnoj gori posveti potrebna pažnja. analiziran je dnevni prinos izraženo volatilne akcije epcg (elektroprivreda crne gore) sa montenegroberze u periodu od januara 2004 do juna 2013. ovakav uzorak i njegova vremenska dimenzija do sada nije razmatrana empirijski u literaturi. stoga, neophodno je iskoristiti iskustva razvijenih svetskih finansijskih institucija koje studiozno pristupaju upravljanju rizikom, kao i najnovijih teorijskih znanja. ključne reči: teorija ekstremnih vrednosti, vrednost pri riziku, teški repovi, garch model, prekoračenje iznad datog praga, generalizovana pareto raspodela. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 2, 2014, pp. 133 147 review paper analysis of serbian innovation potential in the period 2009-2012  udc 330.341.1(497.11)”2009/2012” slobodan cvetanovic 1 , danijela despotovic 2 , vladimir nedic 3 , vojislav ilic 4 1 faculty of economics, university of nis, serbia 2 faculty of economics, university of kragujevac, serbia 3 faculty of phil. and arts, university of kragujevac, serbia 4 teacher training faculty, university of belgrade, serbia abstract. in this paper a review of significance of country’s innovation potential for its economic growth and development is displayed first. afterwards, positions and values of the global innovation index for the top 25 most innovative economies, for serbia and for selected countries from its surroundings, for the period from 2009 to 2012 have been displayed. in order to classify selected countries into two or more groups, based on their similarity according to innovation performances, cluster analysis is conducted. the relations between innovation inputs and innovation outputs have been studied on the example of selected groups of countries (the group of european innovative leaders and serbia with neighboring countries) through the correlation analysis. key words: innovation, innovation inputs, innovation outputs, innovation efficiency. introductory notes a larger share of new products, services and processes is one of the key assumptions of generating economic growth and improving competitiveness of the country, regardless of the level of its economic development. growth in innovation potential, on one hand and improving its competitiveness, on the other hand, is the long term requirement for economic and social progress of all countries regardless of the level of economic development (cvetanovic, mladenovic, nikolic, 2011). the score of the achieved level of innovation of countries is based on a larger number of data. this study used data from the global innovation index report 2011, 2012.  received april 22, 2014 / accepted june 25, 2014 corresponding author: slobodan cvetanovic faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 642  e-mail: slobodan.cvetanovic@eknfak.ni.ac.rs s. cvetanovic, d. despotovic, v. nedic, v. ilic 134 the objectives of this research are: a) an explication of the most important theoretical basis on which the concept of innovation potential of the national economy rests, b) review of the metrics of the innovative potential of the economy global innovation index, c) an empirical analysis of the level and dynamics of the improvement of innovation potential in the economy of serbia in comparison to 25 most innovative economies in the world and to its surrounding countries in 2009-2012 period. for an explanation of the main pillars for the concept of innovation potential of the economy, as well as to reflect on the global innovation index metrics in addition to the descriptive approach, graphics explication of the phenomena studied was used. on the other hand, as dominant analytical tools for empirical analysis of the achieved levels and dynamics to improve the innovative potential of selected countries, quantitative tools of correlations and cluster analysis were used. 1. theoretical fundametals for concept of innovation potential of the economy the explication of the supporting theoretical pillars of the concept of the innovation potential of the economy is not an easy task. it is our opinion that it is not possible to understand the importance of innovation potential for the development of modern economy properly without understanding the messages of three teachings that occupy a significant place in the development of economic science and designing of economic policies of advanced countries over the last twenty or more years. that being said, we have in mind: a) the emergence of new theories or endogenous development, whose holdings are represented by endogenous growth models of paul romer (romer, 1986, 1987, 1990), b) recognition of the concept of national innovation system by christopher freemen (freeman, 1987) and c) learning about creating competitive advantage of nations by michael porter (porter, 1990). the unifying thread of these three teachings, which is defined in the context of the title of this work, the highest possible analytical importance has the position in which the improving innovation of the economy is at the epicenter of explanation of the physiology of macroeconomic phenomena such as the economic growth and the competitiveness of countries (cvetanovic & sredojevic, 2012). endogenous growth explanations emphasize the existence of positive correlation between the dynamics of the improvement in innovation potential of the country and the quality of the country's key macroeconomic performances. also, it founds incentives for innovation in the appropriate institutional arrangements as the innovators are not able to realize the benefits of their results in an unfavorable institutional environment, which inhibits the growth of its innovative potential (jones, 1998). endogenous growth (romer, 1994) theory has not yet become a full conceptual approach to research key factors in the economic prosperity of individual countries. for its creation and promotion we credit a number of economic theorists. consciously risking going into unjustified neglect of contribution of a large number of researchers to the explanation of complex mechanisms for generating growth, in this paper, a new theory of growth is associated with model presentation for the growth of the american nobel laureate paul romer from the period 1986 -1990 (romer, 1986, 1987, 1990). in addition, romer's theoretical opus about the key drivers of economic growth is divided into two parts; endogenous growth models based on externalities (romer, 1986, 1987) and growth models, the basis of which are research and development activities (romer, 1990). analysis of serbian innovation potential in the period 2009-2012 135 growth models based on externalities (jones, 1995) start from the premise by which innovation in the broadest context of the economy as a whole allow expression of increasing returns, which is completely contrary to the assumption of perfect competition (romer, 1986). in the absence of perfect competition, knowledge cannot be perfectly protected with patent or trade secret. the knowledge that each individual company creates by "learning by doing" becomes instantly available and free to all interested parties for their use. so the company can see that it "leaks" new knowledge, but it has benefited from the knowledge that "leaks" to others. this means that at time t there is same level of knowledge for all firms, i.e. the same for the whole economy. this level can be represented by the equation: at = ckt b, for b> 0, where at is the level of technology (innovation potential of the economy), kt capital (physical) b the elasticity of at for the change in kt, and c is a constant. the equation at =ckt b indicates that the level of technology (innovation potential size of the economy) depends on the accumulation of capital at time t. thus, the total stock of knowledge j is an increasing function of investment and determined by the actions of economic agents, which makes a complex of technological change endogenous. since the companies are unaware of the production of knowledge, it is always considered that the level of technology at as a given size and, at the same time, a factor which can be used at no additional cost (valdés, 1999). previous explicit model was not entirely satisfactory, primarily because of the circumstances that the complex technology (innovation) in the treatment of it was accidental result of the economic activities of the company (sener & sarıdogan, 2011). specifically, in it the companies maximize profits, investing in capital by process of learning by doing and knowledge spillover effects (cohen & levinthal, 1990), increasing the general level of knowledge regardless of the fact there is no explicit intention to do it. however, in real life, the facts are that the new knowledge is in the minimum percentage the result of accidental activities, while it is dominantly a result of work of companies who deal with innovation activities in an organized way, while trying to realize monopoly rents (mcelroy, 2003; teece, 2003). thus, the implicit assumption by which new knowledge is available to everyone for free, as well as the assumption according to which there is perfect competition; make the largest structural defects of this model. romer associated improvement in the innovation potential of the national economy with an undeniable need for innovators to use commercial valuation of their solutions in order to make profit (romer, 1986). growth in romer's model is based on research and development and driven by innovation, and results from investment decisions of companies that maximize profits (romer, 1990, 1994). romer recognizes that the technology is different from all other goods, because it is uncompetitive in nature and only partially exclusive good. a good level of competitiveness of any good is exclusively its technological feature. competitively good is used by one company or one person which understandably means it is not to be used by anyone else. in contrast, non-competitive good is available to all without any restrictions. unlike competitive features, exclusivity of a good is a function of both technology and the legal system. good is considered exclusive, when its owner can prevent others from using it. conventional economic goods are distinguished by features of competitiveness and exclusion. public goods are uncompetitive and non-exclusive. precisely because they are non-exclusive, the supply of public goods cannot provide security to private individuals, and they cannot be traded in the market. for the theory of growth there is an interesting group of goods that are not competitive, but also partially exclusive, and technology is such kind of good. there are three basic assumptions on which romer build his model s. cvetanovic, d. despotovic, v. nedic, v. ilic 136 based on the importance of research and development activities in 1990: a) technological change (innovation) is a key determinant of economic growth, b) innovations are mainly the result of deliberate actions taken by individuals to respond to market incentives and, finally, innovations are by their characteristics different from other economic goods. these three assumptions directly lead to the conclusion that the equilibrium is not possible in conditions of perfect competition, but there must be a monopolistic competition. in fact, if all inputs were paid according to marginal product, the company would have losses arising from the additional expenses associated with previous investments in research and development of new products or new processes. in the model of economic growth of roberta solow this problem is abstracted due to the fact that the complex technological change (innovation) is treated as an exogenous character variable (solow, 1956). however, this model is consistent with the premise on which technological change (innovation) is a key determinant of economic growth and at the same time it is a non-competitive good. however, the model is not consistent with the real fact that technology is the result of planned and organized activities of economic actors to maximize cash benefits. national innovation system comprises of a network of public and private institutions whose activities and interactions determine the emergence, import, continuous improvement, and the general diffusion of new technologies (freeman & soete, 1997). the concept connects institutions and determinants of quality of innovation processes in the country (etzkowitz, et al., 1998). the attribute "national" includes many categories in which the state has a certain impact. in short, the national innovation system is the totality of relationships between organizations and relations involved in the production and diffusion of scientific and technological knowledge (innovation) in the manufacturing process and the society at large is the territory bounded by national borders (freeman, 2002; lundvall et al., 2002). in the simplest form, the national innovation system model describes the mutual relationship of the elements of which it is composed, the private sector, whose role is reflected in the use of technologies developed as a result of its own research, market winning of innovations, support of the country in the creation of new theoretical and applied knowledge as well as the creation of infrastructure and institutional conditions conducive to the development of innovation activities in private companies. in a word, the national innovation system should be understood as form of an organization of economy and society, which, in conditions of turbulent changes in the environment, ensures sustainable development of the national economy (peters, 2006). the idea of the concept of national innovation systems in rudimentary form can be found in the works of german economist friedrich list (peters, 2006). list identified a number of significant determinants of investment such as industrial production, institutions, import foreign technology, education and training. list's main concern was, as some of the authors say, how germany can overcome its economic backwardness in relation to england, which was then the world's leading industrial nation, and how the economy will catch up and surpass england (freeman & soete, 1997). as a reminder, the paper argued for the protection of young industries and appropriateness of the policies able to accelerate and facilitate the industrialization and economic growth. most of these policies were concerned with teachings about innovation and economic effects of their specific application. the most important characteristic of this strategy was its devotion to the proactive role of the state. list realized the importance of understanding the interdependence of innovation and economic development, concluding that in order to improve the innovation potential of germany, the government should outline and implement a analysis of serbian innovation potential in the period 2009-2012 137 long-term policy support for the development of science, technology and industrial production. there are large differences in innovation potentials of the countries that have similar production resources in the standard sense of the word, which again has to do with the key performance of their national innovation systems (lebel, 2008). talking about innovation in this light, there is a regard to the use and continuous improvement of existing solutions, as well as the intense process of gaining new knowledge. in both cases, primarily referring to the knowledge that exists within and outside the company, but as far as this other form; we have in mind the knowledge that exists in the country in which the company operates. a number of authors believe that the concept of national innovation systems primarily emphasizes the importance of tacit knowledge in generating technological innovations (simoneti, 2001). otherwise, under the assumption that knowledge is codified explicitly and unambiguously, the company could simply buy it like any other factor of production. however, tacit knowledge means that the company must maintain numerous contacts with other firms, as well as with a number of different organizations in order to gain access to knowledge and especially to make it effective in use. national innovation systems are formed under the influence of many different factors for each of the analyzed countries, including its size, the availability of natural and human resources, the characteristics of the historical development of public institutions and the dominant forms of entrepreneurial activity (figure 1). these factors determine to a significant degree the level and dynamics of the innovative potential of improving the national economy (smith, 2010). fig. 1 national innovation system source: modified according to (oecd, managing national systems of innovation, 1999) s. cvetanovic, d. despotovic, v. nedic, v. ilic 138 michael porter's key determination is that innovations initiate and support competition. the main determinants of competitiveness of individual countries are: a) conditions relating to the factors that determine the dynamics of production and forms of manifestation profiling the competitive struggle in certain areas of business (capital, level of technology, infrastructure, skilled workforce, available information, etc), b) conditions related to internal demand for goods and/or services of given production areas, c) the presence of related competitive industries in the country and d) conditions in the country that determine how the company is set up, organized and lead, as well as the nature of domestic competition (porter, 1990). fig. 2 porter's diamond of national competitiveness source: modified according to (porter, 1990) in the view of porter, the success is achieved by those countries in which the process of interaction of all the factors of national competitive advantage is most dynamic. significant improvement of innovation in the economy is not possible, if one of these determinants of the diamond of national competitiveness does not make its full contribution. 2. metrics of global innovation index in this paper, innovativeness of the economy is quantified based on data from global innovation index (2011, 2012). global innovation index is based on two sub-indices: innovation inputs and innovation outputs. innovation inputs consist of five pillars that display elements, i.e. potentials for innovative activities of national economy: (1) institutions, (2) human capacity, (3) infrastructure (4) market sophistication, and (5) business sophistication. innovation outputs consist of two pillars that show the actual results of innovation: (6) scientific outputs and (7) creative outputs. each pillar is divided into sub pillars and each sub-pillar consists of individual indicators (see figure 3). using the model shown in figure 3, the country will be measured in accordance with its innovation inputs and outputs, which together determine the overall value of gii and place the country on a ranking list made under the criteria of innovation. analysis of serbian innovation potential in the period 2009-2012 139 fig. 3 metrics of global innovation index source: modified according to (the global innovation index, 2012) input parameters determine benefits of the environment in which economic actors operate to create and effectively use various types of innovation in the economy. outputs are the results of the proof of innovation inputs: patents, trademarks, copyrights, creative products, workers in the areas of knowledge-based services, the share of exports of hightech products in total exports, etc. 3. innovation leaders, serbia and neighboring countries figure 4 shows place in the rankings according to the criteria of innovation in the period 2009-2012 (top 25 most innovative economies in the world). figure 5 shows place in the rankings according to the criteria of innovation in the period 2009-2012 (serbia and selected countries in europe). there has been a major qualitative shift for serbia in the criterion of global innovation index in 2012 compared to previous years. in fact, from 101st place in 2010 (and 92nd place in 2009) serbia was ranked 46 th according to this criterion in 2012, surpassing greece, a long-time member of the european union. however, even under the condition that there is no doubt about the statistics incompatibility in the data on the basis of which the global innovation index is composed, the fact is that the surrounding countries, hungary, slovenia, bulgaria, croatia, are significantly ahead of serbia according to the criterion of global innovation index in 2012. from the countries bordering serbia only bosnia and herzegovina and macedonia are behind it in the global innovation index (cvetanovic, despotovic, nedic, 2012). s. cvetanovic, d. despotovic, v. nedic, v. ilic 140 fig. 4 rankings of the top 25 most innovative economies in the world source: the diagram is based on the database from (the global innovation index, 2011, 2012). fig 5. rankings of serbia and selected countries source: the diagram is based on the database from (the global innovation index, 2011, 2012) the question timely arises as to what extent innovation input size determines the value of innovation output. depending on the answer to such a question we can provide useful information to policymakers in which direction it is most appropriate to work on incentives and other government measures to improve innovation of the economy. in order to get the answer to the question of dependencies in values that make innovation inputs and innovation output components, we will use the statistical analysis of a very well known, so called xy diagram. this is a common way to show the connection (direction and degree of quantitative variation agreement) between two variables. figure 6 shows the scatter diagram of the relationship between the variables of innovation inputs and outputs. analysis of serbian innovation potential in the period 2009-2012 141 fig. 6 scatter diagram for the relationship of innovation input and innovation output (data on a sample of 125 countries, in 2011) source: the diagram is based on the database from (the global innovation index, 2011, 2012) a graphical representation of data pairs of innovation inputs and innovation outputs shows a strong correlation between the variations of the observed variables. customizing the linear form of interdependence and analysis of components in the specified model also suggests previously stated, perceived visual statement. in fact, linear regression function has the following form: y = 2.678 + 0.766 x, with statistics of r 2 = 0.714 and r = 0.845.the value of the coefficient of determination indicates the presence of 71.4% variation in variable innovation output is explained by variations in innovation inputs, while the remaining 28.6% is a result of the influence of other factors not included in this model. strong correlation is confirmed by the correlation coefficient 0.845. testing the hypothesis of linear interdependence of variables over the corresponding regression coefficient obtains the value of the test statistics at 17.527. with probability 0.05 level of significance of the test and the test threshold at 1.9794, we also conclude that there is a statistically significant linear correlation between the variables of innovation inputs and innovation outputs. figure 7 scatter diagram shows the relationship between the variables of global innovation index and innovation efficiency index. fig. 7 scatter diagram for the relationship of global innovation index and innovation efficiency index (data on a sample of 125 countries, in 2011) source: the diagram is based on the database from (the global innovation index, 2011, 2012) a graphical representation of data pairs for the global innovation index and innovation efficiency index shows a very weak correlation between the variations of the s. cvetanovic, d. despotovic, v. nedic, v. ilic 142 observed variables. customizing the linear form of interdependence and analysis of components in the specified model also suggests previously stated, perceived visual statement. in fact, linear regression function has the following form: y = 0.546 +0.004 x, with statistics of r 2 = 0.102 and r = 0.319.the value of the coefficient of determination indicates that only 10.2% of the variation in variable innovation efficiency index is explained by variations of the global innovation index, while the remaining 89.8% is a result of the influence of other factors not included in this model. weak correlation is confirmed by the correlation coefficient 0.319. testing the hypothesis of linear interdependence of variables through appropriate regression coefficient obtains value of the test statistics at 3.237. with probability level of significance of the test at 0.05 and the test threshold at 1.9794, we also conclude that there is a statistically significant linear correlation between the variables global innovation index and innovation efficiency index. 4. cluster analysis by cluster analysis, the observed set of elements is divided into subsets, so that the elements that are similar in some sense are grouped in the same cluster. in this case the method used was agglomerative hierarchical clustering. figure 8 shows the dendrogram of the cluster analysis conducted between clusters for which we used data for the global innovation index, innovation index of efficiency, input and output sub-index with the corresponding pillars of the global innovation index 2012. x axis gives the diversity level between the countries analyzed. in the process of grouping selected european innovation leaders according to the degree of efficiency innovative bottom-up agglomerative hierarchical clustering method was used. in the initial step, each country is treated as a separate cluster. their merging in pairs of clusters is based on the similarity in terms of the observed values of the variables which is the result of all subsequent clustering iterations until all observed entities are consolidated within one cluster. if we take diversity level of 600 as a possible cross-section in dendrogram, three clusters of the observed countries are clearly identified. the largest group consists of 8 countries, or 53% of the total number of observed countries. the second group includes norway, austria and france. the third group relates to luxembourg and ireland. if we consider the world's innovation leader and take the cross section at diversity level of 1250, it is possible to clearly identify two dominant clusters in the presented dendrogram. a striking feature of the first cluster is that its two sub cluster elements are created at a much higher level of diversity than is the case with countries that belong to another cluster. the countries included in the cluster are characterized by a much higher degree of variations in level of innovation effectiveness than is the case with countries within the other cluster. also, in comparison with clusters that are formed for european leaders, the grouping for the world's leaders in clearly segregated clusters was achieved at a much higher level of diversity, which suggests the expressive degree of variability in the innovative effectiveness worldwide. figure 9 shows the dendrogram of the cluster analysis implemented for serbia and selected group of 11 european countries, the diversity is given on the y axis. diversity is determined on the basis of data for gii, sub-indices of innovation inputs and innovation outputs and the corresponding pillars. analysis of serbian innovation potential in the period 2009-2012 143 fig. 8 the dendrogram of the cluster analysis conducted for the european and global innovation leaders source: the diagram is based on the database from (the global innovation index, 2012) fig. 9 dendrogram of the cluster analysis implemented for serbia and selected group of countries source: the diagram is based on the database from (the global innovation index, 2012) cluster analysis applied to serbia and a selected group of countries follows a similar trend for grouping as countries in the category of european innovation leaders. on the dendrogram presented, it can be seen that from the innovative aspect of the degree of efficiency, at the first singapore ireland luxembourg hong kong switzerland sweden denmark canada netherlands usa uk japan iceland new zealand germany korea finland israel norway australia hungary france estonia austria belgium 0 500 1000 1500 2000 2500 3000 dissimilarity france austria norwey ireland luxembourg sweden switzerland finland iceland germany netherlands denmark uk 0 500 1000 1500 dissimilarity s. cvetanovic, d. despotovic, v. nedic, v. ilic 144 level of grouping, serbia is most similar to greece and then to croatia, poland, bulgaria and romania. on the other hand, there is the biggest difference compared to hungary and slovenia. overall, at the diversity level of 900 we can identify two clusters, i.e. hungary and slovenia on one side against all other countries covered by the analysis. 5. comparative analysis of innovation for serbia and neighboring countries in 2012 in figure 10 in the given diagrams, we analyzed serbia's position in relation to the surrounding by gii and sub-indices of gii. fig. 10 innovation input sub-index, innovation output sub-index and global innovation index, serbia and neighbors in order to obtain a more realistic picture of the relationship between innovation inputs and outputs we will investigate the correlation. graphical representation of data pairs of variables innovation input and innovation output for the selected group of countries indicates a weak (negligible) correlation among the variations of the observed variables. adaptation of the linear form of correlation and analysis of specified model components also suggests previously stated, visually perceived statement. in fact, the function of the linear regression has the following form: y = -14.3 +1.048 *x, with the statistics r2 = 0.319 and r= 0.565. value of determination coefficient shows that 31.9 % of total variations of innovation output variable is explained by the variations of innovation input variable, while the remaining 68.1% represents the result of the influence of the other factors which are not included in this model. a weak correlation is also confirmed by the correlation coefficient 0.565. its value indicates the existence of low grade, direct (straight line extending from the lower left to upper right corner of a graph) linear correlation among the observed variables in countries included in the sample. the slope of the line b1 = 1.048 indicates that the growth of innovation input variable for one unit of its measurement leads to growth of innovation output for 1.048. testing of the hypothesis of linear independence of observed variables over the analysis of serbian innovation potential in the period 2009-2012 145 corresponding regression coefficient gave the value of the statistics test of 1.6788. with a probability level of significance of the test 0.05 and test threshold 2.4469, it can also be concluded that there is no statistically significant linear correlation between the observed variables innovation input and innovation output. fig. 11 scatter diagram for the connection between global innovation index and innovation efficiency index (data on a sample of eight countries) fig. 12 scatter diagram for the connection between global innovation index and innovation efficiency (data on a sample of thirteen eu countries) graphical representation of data pairs of variables innovation input and innovation output for the selected group of countries indicates a potentially significant correlation among the variations of the observed variables. adaptation of the linear form of correlation and analysis of specified model components also suggests previously stated, visually perceived statement. in fact, the function of the linear regression has the following form: 15.49 + 0.557 *x, with the statistics r 2 = 0.473 and r= 0.7. value of determination coefficient shows that 47.3% of total variations of innovation output variable is explained by the variations of innovation input variable, while the remaining 52.7% represents the result of the influence of the other factors which are not included in this model. a potentially significant correlation is also confirmed by the correlation coefficient 0.7. its value indicates the existence of high grade, direct (straight line extending s. cvetanovic, d. despotovic, v. nedic, v. ilic 146 from the lower left to upper right corner of a graph) linear correlation among the observed variables in countries included in the sample. the slope of the line b1 = 0.557 indicates that the growth of innovation input variable for one unit of its measurement leads to growth of innovation output for 0.557. testing of the hypothesis of linear independence of observed variables over the corresponding regression coefficient gave the value of the statistics test of 3.1474. with a probability level of significance of the test 0.05 and test threshold 2.201, it can also be concluded that there is statistically significant linear correlation between the observed variables innovation input and innovation output. thus, given the values obtained with the proposed model, it can be concluded that the model is valid for statistical inference, and implementation of correct predictions and projections of y. conclusion if observed world-wide, global innovation index data analysis shows significant difference between the economies, even when they have similar general economic development. that could be the consequence of countries' implementation of various distinctive strategies. however, it is obvious that there is a significant correlation between innovation inputs and innovation outputs, if they are observed globally, while this correlation cannot be identified in the relation between global innovation index and innovation efficiency index (ifi). serbia and surrounding countries have innovation performance quality at a much lower level compared to other eu countries. one of the reasons for delayed transition of serbian economy is its low innovativeness. in considering the relationship between innovation input and innovation output index for serbia and a select group of countries, it was found that there was no statistically significant effect of innovation input on innovation results. considering the relationship between innovation input index and innovation output index for reference european countries revealed a potentially significant direct linear correlation, and statistically important impact (linear correlation) of inputs to innovation results. possible reason for this correlation disbalance within two observed groups of countries is that gii metrics is primarily appointed to the countries with high-profile national innovation system. however, serbia is the only country from the observed group of neighbouring countries which has a very similar subindex of innovation inputs and outputs, and because of this is on the first place in a group by innovation efficiency index. unfortunately, it is our opinion that this is an echo of innovation inputs from the time of yugoslavia, and that, in order to give recommendation and priorities for serbian innovation system’s further development, more serious focus on gii paremeters is necessary. this requires further research after implementation of given metrics in following period of time. references 1. cvetanović, s. mladenović, i. nikolić, м. (2011). ―theoretical basis of the concept of the innovative capacity of economy‖ (in serbian: teorijske osnove koncepta inovacionog kapaciteta privrede), ekonomika, niš, no 4, str. 14-23. 2. cohen, w. m., & levinthal, d. a. (1990). absorptive capacity: a new perspective on learning and innovation. administrative science quarterly, 128-152. analysis of serbian innovation potential in the period 2009-2012 147 3. cvetanović, s. despotović, d. nedić, v. (2012). ―comparative analaysis of serbian business sophistication and neghboring countries‖, industrija, no 4. pp. 89-106. 4. cvetanović, s., sredojević, d. (2012). ―the concept of national innovation systems and economic competitiveness‖, (in serbian: koncept nacionalnog invoacionog sistema i konkurentnost privrede), ekonomske teme, ekonomski fakultet, niš, no 2. str. 167-185. 5. etzkowitz, h., webster, a., & healey, p. (eds.). (1998). capitalizing knowledge: new intersections of industry and academia. suny press. 6. freeman, c. 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(2003). the new knowledge management: complexity, learning, and sustainable innovation. routledge. 14. oecd, (1999). managing national systems of innovation. paris: oecd. 15. peters, s. (2006). national systems of innovation, creating high-technology industries, palgrave, macmillan; pp. 18-24. 16. porter, m. (1990). the competitive advantage of nations, london, macmilan. 17. romer, p. (1990). ―endogenous technological change―, journal of political economy; 98 (5):78 -102. 18. romer, p. (1987). ―growth based on increasing returns due to specialization‖, american economic review, 77 (2): 56-63. 19. romer, p. (1986). ―increasing returns and long-run growth‖, journal of political economy, 94 (5): 1002-1037. 20. romer, p. m. (1994). the origins of endogenous growth. the journal of economic perspectives, 8(1), 3-22. 21. sener, s., sarıdogan, e. (2011). the effects of science-technology-innovation on competitiveness and economic growth. procedia social and behavioral sciences, volume 24, pages 815-828 22. simoneti, r. (2001). ―governing european technology and innovation‖ in tomson, g. (ed) the europian economy, sage publacions, london. 23. smith, d. (2010). exploring innovation, mcgraw-hill, p. 288. 24. solow, r. (1956). ―a contribution to the theory of economic growth‖, quarterly journal of economics; 70 (1): 65–94. 25. teece, d. j. (2003). capturing value from knowledge assets: the new economy, markets for know-how and intangible assets. essays on technology management and policy, 47-75. 26. the global innovation index. (2011). insead. 27. the global innovation index. (2012). insead. 28. valdés, b. (1999). economic growth: theory, empirics and policy, cheltenham, edward elgar. analiza inovacionog potencijala srbije u periodu 2009-2012. godine u ovom radu prvo je prikazan pregled značaja inovacionog potencijala zemlje za njen ekonomski rast i razvoj. nakon toga su prikazane pozicije i vrednosti globalnog indeksa inovativnosti za 25 najinovativnijih ekonomija sveta, za srbiju i za odabrane zemlje iz njenog neposrednog okruženja, za period od 2009 do 2012. u cilju klasifikacije odabranih zemalja u dve ili više grupa, na osnovu njihove sličnosti prema inovacionim performansama, izvršena je klaster analiza. odnosi između inovacionih ulaza i inovacionih izlaza su prikazani na primeru odabranih grupa zemalja (grupa evropskih inovativnih lidera sa jedne i srbije i njenih susednih zemalja sa druge strane ) putem korelacione analize. ključne reči: inovativnost, inovacioni ulazi, unovacioni izlazi, inovaciona efikasnost. facta universitatis series: economics and organization vol. 16, n o 2, 2019, pp. 145 159 https://doi.org/10.22190/fueo1902145r © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper domestic and foreign financing sources impact on the economic development of the republic of serbia 1 udc 330.34:336(497.11) goran radisavlјević 1 , goran milovanović 2 , saša bjeletić 3 1 municipality of sokobanja, republic of serbia 2 university of niš, faculty of economics niš, republic of serbia 3 unaffiliated researcher, bor, republic of serbia abstract. the aim of the paper is to analyze the effects of selected sources of financing on the economic development of the republic of serbia in the period from 2012 to 2016 on the basis of systematized statistical data. first, the theoretical framework of domestic and foreign sources of financing and the impacts of these sources on economic development are presented from the perspective of contemporary theory. this is followed by the analysis of the impact of domestic sources of financing (domestic savings, state and private sector) on the economic development of the republic of serbia. finally, the paper examines the relevance of foreign direct investment (fdi) for encouraging restructuring, competitiveness, growth, and development of the economy of the republic of serbia. keywords: domestic sources, foreign sources, fdi, gdp, economic development jel classification: f21, p45, r42 introduction economic development includes a series of quantitatively rather different, socioeconomic changes characteristic of the continuous transformation of the economy and society. in a nutshell, economic development includes changes in the volume of production and complex transformations in the composition and structure of the economy (cvetanović, 2005, p. 8). in addition to the growth in the volume of national production, economic development includes complex structural, institutional, organizational and technological received january 01, 2019 / revised april 23, 2019 / accepted may 03, 2019 corresponding author: goran milovanović university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: goran.milovanovic@eknfak.ni.ac.rs 146 g. radisavljević, g. milovanović, s.bjeletić changes in the economy, which enable the increased production to be achieved on the national or foreign markets. financing economic development is a central issue in the financial system of all countries. the development of the financial system and the establishment of appropriate financial mechanisms are necessary for the effective engagement of domestic and foreign sources of financing and their allocation to profitable projects driving the economic development. the analysis of the sources of economic development financing in the republic of serbia should be considered in the context of the financial position of certain institutional economic sectors. the main institutional sectors in each national economy, including that of the republic of serbia, are 1) the household sector, 2) the government sector, 3) the business sector and 4) the foreign sector. 1. the impact of domestic and foreign sources of financing on economic development theoretical frameworks domestic savings, as a key source of economic development financing, are voluntary refraining from spending in the present to increase consumption in the future. walt rostow points out that the key condition for certain national economies to overcome the state of underdevelopment is the savings rate between 10 and 15 percent (rostow, 1963). due to the significant role of profit in shaping the business sector savings and thus the overall national savings, some economists emphasize that profit plays a key role in financing economic development. because of this role, profits are often subject to justifiable disputes (lewis, 1966, pp. 120-121). as a rule, industrialized countries base their development on investments resulting from domestic savings. on the contrary, in most developing countries, the biggest problem of financing economic development is insufficient domestic savings. the result are too low investments in production capital that are necessary for the rapid economic development of developing countries (samuelson & nordhaus, 1992, p. 698). today all countries have open economies, to a greater or lesser extent. therefore, when considering the financing of economic development, it is necessary to analyze not only domestic but also foreign sources of financing. foreign capital, as an additional source of financing, is imposed in underdeveloped economies as a condition of changing their structure and adapting to the world market requirements (todorović, 1998, pp. 15-16). arnold and javorick have proven that foreign ownership leads to a significant improvement in the productivity of purchased companies (arnold & javorcik, 2009, pp. 42-53). based on an analysis of the functioning of the central and eastern europe economies, which have had a significant inflow of fdi from the early 1990s, hagemeyer and tyrowicz concluded that foreign companies in these countries showed superior performances compared to domestic companies (hagemeyer & tyrowicz, 2012, pp. 195-233). moura and forte point out that governments play a key role in creating conditions for the positive effects of fdis or reducing their negative effects on the economic growth and development of recipient countries (moura & forte, 2010). in the case of a lack of domestic sources of financing, fdis are the most desirable source of financing economic development. domestic and foreign financing sources impact on the economic development of the republic of serbia 147 2. domestic sources of financing economic development in the republic of serbia domestic accumulation is a key factor in economic development. in the history of national economies development, there is almost no case of development without relying on own accumulation. the republic of serbia is among the countries with very low domestic accumulation. nevertheless, household savings, as well as public and private sector savings, significantly affect its economic development. 2.1. household savings as a source of financing the economic development of the republic of serbia domestic savings are the most important source of investment financing in almost all countries. the level of domestic savings differs in developed countries, developing countries and countries in transition. in developed countries, domestic savings are covered by real accumulation (production of commodities), whose structure is most often dominated by products of high technological performances. these countries have a network of developed financial institutions and currencies that are mostly convertible. developing countries and countries in transition are characterized by extremely low domestic savings, which is not covered by real accumulation, due to the inflation effect. domestic currencies are generally not convertible, while the financial market is underdeveloped. this is also the situation in the republic of serbia. this is indicated by the changes in the structure and dynamics of the savings of its population in the period from 2006 to 2016 presented in table 1. household savings were steadily increasing in the observed period, both in dinar and foreign currency deposits. unfortunately, high savings were not used adequately for investments, but for cash loans. table 1 savings of the republic of serbia population (in rsd 000 000) in the period 2006 to 2016 year dinar savings foreign currency savings total savings short-term long-term total short-term long-term total 2006 6,909 642 7,551 241,207 46,454 260,661 268,212 2007 9,688 1,078 10,766 326,557 55,044 381,601 392,367 2008 9,729 846 10,575 363,529 51,041 414,570 425,145 2009 11,612 787 12,400 500,586 65,591 566,177 578,577 2010 9,658 3,702 13,360 614,314 117,755 732,066 745,428 2011 16,351 3,004 19,355 570,836 204,802 775,637 794,992 2012 16,257 1,374 17,630 731,381 178,469 909,849 927,479 2013 30,867 2,804 33,672 740,639 193,201 933,840 967,512 2014 34,424 3,634 38,058 777,830 220,471 998,302 1,036,359 2015 34,521 10,843 45,364 700,668 313,603 1,014,271 1,059,635 2016 143,115 7,251 50,366 861,426 209,529 1,070,955 1,121,321 source: nbs (april 2017). statistički bilten, beograd: nbs, p. 59. the data given in table 2 show that in the period from 2012 to 2016, the republic of serbia achieved the average gdp growth of 0.7 percent, which is close to the average level of the eurozone countries (table 2), and out of all the bordering countries, it topped 148 g. radisavljević, g. milovanović, s.bjeletić only croatia. the economic growth of the republic of serbia amounted to 2.8 percent in 2016 and was lower than the economic growth of albania, bulgaria, croatia, and romania. also, the economic activity in the countries of the region accelerated in the period from 2015 to 2016 compared to the period from 2012 to 2014. table 2 gdp growth in the republic of serbia, the countries of the region, the eu and the eurozone in the period 2012 to 2016 country 2012 2013 2014 2015 2016 average growth in the period from 2012 to 2016 republic of serbia -1.0 2.6 -1.8 0.8 2.8 0.7 albania 1.4 1.1 1.8 2.6 3.5 2.1 b&h -0.9 2.4 1.1 3.0 2.0 1.5 bulgaria 0.0 0.9 1.3 3.6 3.4 1.8 croatia -2.2 -1.1 -0.5 1.6 2.9 0.1 hungary -1.6 2.1 4.0 3.1 2.0 1.9 fyr macedonia -0.5 2.9 3.6 3.8 2.4 2.4 montenegro -2.7 2.9 1.8 3.4 2.5 1.6 romania 0.6 3.5 3.1 3.9 4.8 3.2 eu -0.5 0.2 1.7 2.2 1.9 1.1 eurozone -0.9 -0.3 1.2 2.0 1.8 0.8 source: worldbank.org/indicator/ny.gdp.mktp.kd.zg?locations=ba-bg-hr-hu-mk-mero-eu&view=chart in order to make up for historical lagging behind the european countries, the republic of serbia needs to achieve an average annual gdp growth of 4 to 5 percent over the longer term. one of the key conditions for such growth is to increase the share of investments in gdp from the current level of 18 to 19 percent to around 25 percent. another important condition is to increase domestic savings, which would generate sufficient funds to finance investments. during the 1990s, when savings in the republic of serbia were particularly low due to the sanctions, there was a decrease in production. the problem of disinvestment and capital reduction from 40 to 45 percent was also reported. the lack of savings and investments particularly hit the industry, the activity in which there should be strong technical progress and where, without new investments, technology quickly becomes obsolete. the experience of a large number of countries shows that it is necessary to allocate from 15 to 17 percent of the gdp value each year to compensate for the capital consumption (as a result of its use or flow of time) and maintain production and consumption at the same level in the future. when during the 1950s and 1960s yugoslavia achieved high economic growth rates, savings and investments accounted for over 30 percent of gdp. in some asian countries with high economic growth rates, savings account for between 30 and 40 percent of their gdp. in terms of the amount of savings, china particularly stands out with nearly 50% of gdp saved or invested in the domestic economy but also in the economies of many countries around the world, (arsić, et al., 2017, p. 5). gross domestic savings in the republic of serbia amounted to 10.7 percent of gdp in 2016, which is significantly higher than in the previous years of the observed period (table 3). unfortunately, this amount of gross domestic saving was not enough to finance the investments necessary for maintaining a constant level of production. domestic and foreign financing sources impact on the economic development of the republic of serbia 149 table 3 selected economic indicators of the republic of serbia in the period 2006 to 2016 year gdp in bln. $ growth of gdp in % gross investments in bln. $, current prices gross investme nt, % of gdp fdi share in gross investments in % gross domestic saving in bln. $, current prices gross domestic saving, % of gdp 2006 30.6 4.9 7.7 25.0 55.6 1.4 4.7 2007 40.3 5.9 11.7 29.1 37.7 1.9 4.8 2008 49.3 5.4 14.9 30.3 27.1 2.6 5.3 2009 42.6 -3.1 8.3 19.4 35.4 1.5 3.5 2010 39.5 0.6 7.3 18.5 23.2 1.4 3.5 2011 46.5 1.4 9.3 20.1 52.8 2.2 4.7 2012 40.7 -1.0 8.6 21.0 14.9 1.8 4.3 2013 45.5 2.6 8.0 17.6 25.6 3.2 6.9 2014 44.2 -1.8 7.7 17.5 25.9 2.9 6.6 2015 37.2 0.8 7.0 18.8 36.2 3.4 9.1 2016 37.7 2.8 6.8 18.1 30.4 4.0 10.7 source: worldbank.org/indicator/ne.gdi.totl.zs?locations=rs in the same year, the share of gross domestic saving in the countries of the region ranged from 1.5% to 29.4% of gdp (chart 1). the republic of serbia surpassed only albania and montenegro. numerous theoretical and empirical studies show that in the long run, it is necessary to dominantly finance a country’s investments from own funds. this means that the republic of serbia needs to increase domestic investment funds from about 10 percent (current level) to around 25 percent of gdp. the experience of bulgaria, romania, and macedonia shows that this is possible. these countries are at a similar level of development and invest almost a quarter of gdp in investments. chart 1 the share of gross domestic saving in gdp (in percent) in the republic of serbia and the countries of the region in 2016 source: worldbank.org/indicator/ny.gds.totl.zs 150 g. radisavljević, g. milovanović, s.bjeletić total investments in fixed funds, which are the direct determinant of the economic growth in the republic of serbia, are relatively low. their share in the republic of serbia gdp in the period from 2006 to 2016 was, on average, less than 20% (table 4). table 4 investments of the republic of serbia in fixed funds in the period 2006 to 2016 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 total investments in fixed funds (in mill. euros) 457.4 594.7 684.2 566.2 570.1 626.7 758.7 668.4 652.0 715.5 748.5 share of total investments in fixed funds (as % of gdp) 22.3 25.3 24.9 19.7 18.6 18.4 21.2 17.2 16.7 17.7 17.8 source: ministarstvo finansija republike srbije (februar 2017). bilten javnih finansija, 150. beograd: ministarstvo finansija, pp. 18-19. 2.2. public sector as a source of financing the economic development of the republic of serbia one of the important sources of financing economic development is public savings. there are two main sources of public savings: 1) budget surplus and 2) savings of public enterprises. a state can invest the surplus in the so-called "state cash register" (budget surplus) on the capital market annually thus improving the efficiency of the allocation of investment funds, but also the dynamics of economic growth and development. neither high deficit nor high surplus is good, especially in less developed countries. a surplus in the budget means that the state has taken more money from the citizens and the economy through taxes than it had to. the state can increase the surplus by increasing public revenues. the growth of public revenues can be achieved by raising the existing tax rates or expanding the tax base. additional taxes can increase public savings, but their effect may be far more pronounced on reducing private savings. it all depends on whether the marginal propensity to save is higher in the state or in the private sector. if the marginal propensity to save is higher in the private sector, it follows that the increase in taxes leading to the growth in public savings would lead to a more pronounced decrease in private and total national savings. public enterprises generally operate less successfully than private enterprises, so their savings are very modest (cvetanović, mladenović, 2015, pp. 241-242). public sector investments in the republic of serbia can be divided into 1) public investments and 2) investments of public and state enterprises. public investments positively affect gdp and represent the highest quality form of public spending (most stimulating to gdp growth). they stimulate economic growth not only in the short term, but also in the medium term, as they improve the quality of the country's infrastructure (petrović, brčerević, & minić, 2017, p. 13). the data in the following table indicate the continued growth of the republic of serbia budget deficit in the period from 2006 to 2014, except in 2007, when the budget was in surplus. in 2015 and 2016, there was a sharp decrease in the budget deficit resulting from the implementation of fiscal consolidation measures. domestic and foreign financing sources impact on the economic development of the republic of serbia 151 table 5 public finances of the republic of serbia year budget revenues budget expenses budget surplus-deficit 2006 494,139.2 522,861.3 -28,722.1 2007 579,454.2 578,818.6 635.6 2008 651,272.8 698,771.1 -47,498.3 2009 655,995.0 748,640.0 -92,645.0 2010 712,225.1 815,148.5 -102,923.4 2011 744,761.2 880,567.2 -135,806.0 2012 788,505.0 1,001,630.5 -213,125.5 2013 812,080.7 1,012,997.9 -200,917.2 2014 881,083.3 1,127,944.7 -246,861.4 2015 947,837.8 1,062,758.7 -114,920.9 2016 1,041,920.5 1,049,867.6 -7,947.1 source: ministarstvo finansija republike srbije (februar 2017). bilten javnih finansija, 150. pp. 55-56. despite the fact that the increase in public investments is a country's best anti-recession policy, in the period from 2013 to 2015 their share in the republic of serbia gdp averaged about 2.5 percent, which is about 44 percent less than the average of the countries of central and eastern europe. in 2016, public investments in the republic of serbia increased to 3.3 percent of gdp, but they are still below the average of the central and eastern european countries and countries of the region. in the coming years, the republic of serbia should increase the share of public investments from 2016 (3.3 percent of gdp) by about 1-1.5 percent of gdp to approach the average of the countries of central and eastern europe and the countries of the region. if public investments reached the level of 5 percent of gdp and were maintained at that level in the period from 5 to 10 years, the state of public infrastructure in the republic of serbia would be improved appreciably. chart 2 relative share of public investments in gdp in the period 2013-2015 in the republic of serbia, countries of central and eastern europe and countries of the region source: rast u srbiji 2015-2017 ž g : savet republike srbije, p. 14. 152 g. radisavljević, g. milovanović, s.bjeletić long-term mismanagement of public and state-owned enterprises led to them creating large losses and debts, instead of stimulating economic growth and accelerating economic development through their profit-making investments. a bad example in terms of investment is eps the largest public enterprise in the republic of serbia. by 2015, this enterprise invested significantly less than the amount of depreciation, which was insufficient for it to maintain its business. such a practice has also led to a slowdown in economic growth in the coming years. table 6 investments and depreciation of eps in the period 2013-2016 (in 000,000 rsd) 2013 2014 2015 2016 investments 17,556 24,210 25,184 49,901 depreciation 37,354 38,775 39,592 44,390 investment gap (investments depreciation) -19,798 -14,564 -14,408 5,511 source: the table was created by the authors based on: eps (2016). finansijski izveštaj od 2013 do 2016. beograd: eps the results of the 2016 financial statement show that eps' investments were greater than depreciation by about 11 percent, while in 2015 they were by about 36 percent lower than depreciation. in 2016, investments were about 50% higher than in 2015, indicating that production capacity could increase, which would lead to a reduction in imports of electricity and therefore in foreign trade deficit. the estimates of experts in this field indicate that at least 1% of gdp is a lack of investment in the republic of serbia due to unsuccessful operations and insufficient investment of public and state enterprises (petrović, brčerević, & minić, 2017). because of this, very important levers for increasing investments and accelerating economic growth and development in the republic of serbia include: 1) urgent public enterprise reform, and 2) resolving the fate of failed public enterprises through privatization or bankruptcy. by increasing public investments, reforming public enterprises and privatizing state-owned enterprises could increase the share of total investments in the republic of serbia from current 18 percent to 20-21 percent of gdp. this would be a significant step towards bringing the share of total investments in the republic of serbia closer to the desired level of 25 percent of gdp (petrović, brčerević, & minić, 2017, p. 15). however, it is desirable for most investments to be generated by the private sector. domestic and foreign private entrepreneurs on one part and the state on the other should invest over 20 percent and 4 to 5 percent of gdp, respectively. “government investment is now about 3% of gdp, while domestic investment is 10% of gdp and, together with foreign investment, accounts for around 15% of gdp” (milovanović, radisavljević, đukić, 2018, p. 37-38). it is evident that government and private investments in the republic of serbia are now insufficient to achieve a high rate of economic growth. increasing private investments to around 15 percent of gdp, as well as increasing investments in infrastructure, are key to accelerating the economic growth of the republic of serbia. domestic and foreign financing sources impact on the economic development of the republic of serbia 153 2.3. the role of private sector in financing the economic development of the republic of serbia the main source for long-term financing of investments in the world, and so in the republic of serbia, is domestic private savings. the role of the state is very important for encouraging private investments and it is reduced primarily to the improvement of the investment environment, which in the republic of serbia, despite significant improvements, has been assessed by the relevant international institutions as insufficiently competitive. thus, on the doing business list of the world bank for 2017 including 190 economies, the republic of serbia economy was ranked 47 th , which is quite an improvement compared to the previous few years (http://www.doingbusiness.org/~/media/wbg/doingbusiness/ documents/annual-reports/english/db17-report.pdf). the list of the world economic forum, which is more comprehensive than the world bank’s list, shows that the republic of serbia was ranked 78th out of 137 countries for the 2017/2018 period and improved its position by 12 places compared to the 2016/2017 report, when it was ranked 90 th out of 138 ranked countries (http://www3.weforum.org/docs/ gcr2017-2018/05fullreport/theglobalcompetitivenessreport2017%e2%80%932018.pdf). by the corruption perceptions index of transparency international, the republic of serbia was found in the 72 nd position in 2016 (https://www.transparency.org/news/feature/ corruption_perceptions_index_2016). it follows that in all observed lists, the republic of serbia is poorly ranked in terms of the efficiency of institutions and the commodity market, financial market development, business sophistication, legal protection of proprietary rights, the fulfillment of contracts, the efficiency of issuing court rulings and the perception of corruption. poor economic environment affects the low investment of domestic, small and mediumsized enterprises and entrepreneurs to the greatest extent, while foreign and large domestic enterprises find it easier to invest in the republic of serbia. favoring foreign investment capital and marginalizing potential domestic sources of financing have influenced the level of their investments. in the myriad of approved subsidies, 75% of the value is assigned to foreign investors, although domestic ones are more numerous individually, but with far smaller amounts. due to this type of ignoring, some of the biggest serbian entrepreneurs are investing excess capital in neighboring countries. for example, delta holding, which generated around 10 percent of gdp from 2009 to 2010, is now investing actively in slovenia, the republic of srpska, bulgaria, and albania. mk group is investing its capital in slovenia and montenegro and announcing withdrawal from the republic of serbia. vuk hamović, the coowner of the eft group, which generates almost 98 percent of its revenues in the eu and the region, has invested a large sum of money in the stanari thermal power plant in the republic of srpska. branislav grujić, the co-owner of psp farman, has moved almost all of his business from the republic of serbia to places around the world (brkić, 2017, p. 30). in order for entrepreneurs to be stimulated and have more benefits from investments, the republic of serbia must adopt an entrepreneurship development strategy that will direct and accelerate the development of entrepreneurship through legislation. 154 g. radisavljević, g. milovanović, s.bjeletić 3. foreign sector as a source of financing the economic development of the republic of serbia foreign sector (all entities from economic or social life coming from other countries) generates two types of sources of financing for the economic development of the republic of serbia: 1) private and 2) public. due to the low level of per capita income and low savings rates, developing countries are unable to provide the necessary funds to finance domestic savings investments. therefore, they are forced to obtain part of the funds necessary for financing economic development from foreign sources. funds engaged from abroad can be an adequate supplement to domestic savings and a driving force for exiting the so-called vicious circle of underdevelopment. the key issue in analyzing the purposefulness of engaging foreign savings to finance economic development is the efficiency of using someone else’s resources. in case of failed investments, not only will the income to repay foreign savings not be generated, but a loss will be created that absorbs part of the domestic savings for its coverage. therefore, financing failed investments by engaging foreign savings leads to problems in repayment of debts and to a reduction in the rate of economic growth (cvetanović, mladenović, 2015, p. 268). even when domestic savings are sufficient to finance economic development, foreign savings are not absolutely unnecessary. in the event that the observed country does not dispose of enough foreign funds, this deficit will condition the slowdown in economic growth, so that part of the domestic savings will be unused as well. therefore, foreign capital not only stimulates domestic savings if insufficient, but also allows the import of goods necessary for economic growth and development (cvetanović & mladenović, 2015, p. 268). the following table gives an overview of foreign sources of financing of the republic of serbia in the period from 2007 to 2016. it is evident that the fdis in 2011 reached a record of 3.3 billion euros. they represent a significant contribution to the expansion of investment activities in the republic of serbia. the inflow of portfolio investments in 2013 amounted to 1.9 billion euros. in the period from 2014 to 2016, there was a significant decrease in portfolio investments, and in 2015 and 2016 their inflow even had a negative balance. table 6 overview of foreign sources of financing in the republic of serbia in the period from 2007 to 2016 (in eur 000,000) type of foreign sources 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 net fdi 2,528 2,486 2,068 1,133 3,320 753 1,298 1,236 1,804 1,861 net portfolio investments 678 -91 -49 67 1,600 1,676 1,883 369 -289 -916 other investments 2,884 2,516 2,626 -549 197 -214 -855 -1,703 -141 -448 in total: 6,090 4,911 4,645 651 5,117 2,215 2,326 -98 1,374 497 note: net outflow (-), net inflow (+) source: ministarstvo finansija republike srbije (april 2017). bilten javnih finansija, 152. beograd: ministarstvo finansija, p. 28; statistika platnog bilansa republike srbije 2007-2016. available at: www.nbs.rs/internet/cirilica/80/platni_bilans.html based on the analysis of the total volume of fdis in the five largest sectors/industries in the period from 2010 to 2016, it can be concluded that on average 52.4% of fdis were domestic and foreign financing sources impact on the economic development of the republic of serbia 155 realized in the service sector/industry. most of the fdis were used for the purchase of assets of private, state-owned and social enterprises and banks in the process of tender and auction privatization. in 2007 and 2008, the greatest investments were recorded in the financial intermediation (about 40 percent of investments), and in the first half of 2009 in industries such as ore exploitation and stone exploitation. analyzing the fdi inflows into the service sector/industry, we may observe a trend of significant reduction from 2010 to 2016 from 61.4 percent in 2010 to 41.3 percent in 2016. there is also a noticeable increase in fdi in the processing industry and construction, from 38.6 percent in 2010 to 58.7 percent in 2016 (table 7). table 7 structure of fdi inflows to the republic of serbia by sectors/industries in the period from 2010 to 2016 (in 000.000 euros and percent) sector/industry 2010. 2011. 2012. 2013. 2014. 2015. 2016. average processing industry 329,0 631,0 521,0 679,0 535,0 721,0 712,0 590,0 financial intermediation 2 424,0 840,0 291,0 141,0 358,0 484,0 423,0 423,0 wholesale and retail 133,0 1.019,0 194,0 300,0 225,0 208,0 188,0 324,0 construction 35,0 92,0 19,0 67,0 163,0 264,0 259,0 129,0 traffic, storage and communications 21,0 66,0 17,0 71,0 -9,0 68,0 73,0 44,0 total five largest sectors / industries 942,0 2.648,0 1.042,0 1.258,0 1.272,0 1.745,0 1.655,0 1.510,0 total fdi inflow 1.278,0 3.544,0 1.009,0 1.548,0 1.500,0 2.114,0 2.080,0 1.868,0 share in total net inflow of fdi 73,7 74,7 103,0 81,3 84,8 82,5 79,6 80,8 source: statistika platnog bilansa, strana direktna ulaganja, neto obaveze, po delatnostima, 2010-2016. available at: www.nbs.rs/internet/cirilica/80/platni_bilans.html by observing the average share of the service sector and the average share of the manufacturing sector in the cumulative average of the five largest sectors, we may note that service sectors account for 52.4 percent while manufacturing sectors account for 47.6 percent. the data in table 7 show that service sectors/industries (financial intermediation, wholesale and retail, transport, storage and communications) have the largest share in gdp creation while manufacturing sectors (processing industry and construction) show significant progress in the creation of gdp. the republic of serbia has not built the systemic capacity for economic growth yet, as the reforms were implemented in one step forward, two steps back. in the political, social and especially economic systems, there are serious built-in inhibitors of economic growth. the estimates by the world bank, the imf, the european commission, and rating companies indicate which reforms the republic of serbia has to implement to create key preconditions for further growth of its economy. table 8 shows the percentage share of net fdi in gdp in the ten selected countries. “in the period from 2013 to 2015, the relative share of net fdi in gdp in the republic of serbia was low, compared to most of the countries observed. the reasons are the 2 the industry which by the classification of activities belongs to the sector "financial and insurance activities" and "financial services, except insurance and pension funds". 156 g. radisavljević, g. milovanović, s.bjeletić following: unstable political situation, frequent elections, government reconstruction, and high budget deficit and public debt. all this gave investors an indication of an unstable environment. during 2015 and 2016, there was a slight increase in the relative share of net fdi in gdp” (milovanović, radisavljević, đukić, 2018, p. 39), which points to a positive prospect for future gdp growth and increase in the export potential of the republic of serbia. table 8 relative share of net fdi in gdp in selected countries 2012 2013 2014 2015 2016 average in the period from 2012 to 2016 albania 7.5 9.8 8.7 8.7 9.2 8.8 b&h 2.3 1.7 2.8 1.8 1.6 2.0 bulgaria 3.3 3.6 3.6 5.5 2.4 3.7 montenegro 15.2 10.0 10.8 17.4 5.4 11.8 czech republic 4.5 3.5 3.9 0.9 3.4 3.2 croatia 2.6 1.6 6.9 0.3 1.9 2.7 macedonia 3.5 3.7 0.5 3.0 5.3 3.2 hungary 8.3 -2.8 9.3 -4.4 -7.3 0.6 republic of slovakia 1.9 1.0 -0.4 1.3 4.0 1.6 republic of serbia 2.4 3.8 3.7 5.4 5.5 4.2 average 5.2 3.6 5.0 3.1 3.1 4.2 source: milovanović, radisavljević, đukić, 2018, p. 40. if we look at the average share of net fdi in gdp for selected countries by years, we will see that it peaked in 2012 (5.2 percent). in 2013, this share dropped to 3.6 percent to grow again in 2014 to 5 percent. in 2015 and 2016, the share of net fdi in gdp again dropped to 3.1 percent, while the aggregate average for the share of net fdi in gdp for selected countries was 4.2 percent (table 8). although the republic of serbia has accomplished a solid result in the fdis inflow so far, the fact is that they have not significantly contributed to stopping the deindustrialization process. it turned out that fdis were crucial for the transfer of new technologies and productivity growth, which resulted in higher quality and higher export volumes. the export of the republic of serbia, primarily the export of products from newly established companies, “has increased significantly to countries from which large fdi inflows came, such as italy and germany” (milovanović, radisavljević, đukić, 2018, p. 38). fdis had a significant impact on the exports of the countries of central and eastern europe as well as their integration into the world economy and the transfer of modern technology. during the initial transition phase, the largest cumulative inflow of fdi was recorded in countries such as the czech republic, hungary, slovakia, and poland. it is the fdi that came to these countries that affected the restructuring, i.e. the reorientation of production from low-level finished products such as clothing and furniture to automotive and it components for further production (nikolić, 2017, p. 134). in the republic of serbia, since the global economic crisis, the focus has shifted to implementing fdis in the processing industry. tax incentives for the employment of new workers and the free infrastructure necessary for the operation of companies in the form domestic and foreign financing sources impact on the economic development of the republic of serbia 157 of technological parks have been granted. “it is encouraging that the share of fdi in industry in recent years was almost two fifths on average, which is twice the average for the first decade of the 21st century” (milovanović, radisavljević, đukić, 2018, p. 39). it is encouraging that the share of fdis in the industry in recent years has on average been almost two fifths, which is twice the average for the first decade of the 21 st century. the practice so far has shown that fdis positively affect economic development only if the recipient country has a complementary industry, as the impact of multinational companies, as the largest fdi generators, on economic development is mainly made through cooperation with local producers. if a foreign company comes, with another foreign company as the supplier, and a third foreign company as the distributor, then there is no real effect on the economic development of the host country. the development effects of fdis are only possible when there is a connection with local businesses and when there is a "spillover effect" of technology and knowledge (nikolić, 2017, p. 134). economists point out that an established annual fdi inflow of at least 1.6 billion euros is required for stable and long-term growth of the economy of the republic of serbia. in order to achieve this, the republic of serbia must create a motivating and predictable business environment entailing a normal situation where investors come from the world, motivated to work well and earn. over the past two decades, there have often been controversies about the impact of state subsidies on attracting fdis to the republic of serbia. previous experience has shown that most of the poor countries used state subsidies in their development. it is logical that the republic of serbia too must give subsidies so as not to be removed from the investment map and that these subsidies must bring foreign investors that will provide more jobs, better wages, higher exports, higher production and better filling of the state budget. a country that relies heavily on subsidies clearly shows that it is trying to make up the weaknesses that exist in its economic environment. it is true that some investors will come for subsidies. however, more investors would come if conditions for investment were better, if the state functioned better, and if there were financial discipline and highly educated workforce. then we could talk about attracting better quality fdis. for if a company comes only for incentives, then it means that it is not among the best-ranked ones. interesting are ibm data in the global location trends 2016 annual report, according to which the republic of serbia is a good place to invest in, but that assessment would be much more convincing when certain companies invest without taking state subsidies. conclusion developed countries have a favorable savings structure as their domestic currency is convertible and there is no difference between savings in domestic and savings in foreign currencies. in developed countries, monetary savings are covered by real accumulation. in these countries, household savings is the main source of economic development. unlike developed countries, developing countries are characterized by extremely low savings, where cash savings are not covered by real accumulation. household savings in these countries are insufficient to finance their economic development. by analyzing the impact of domestic and foreign sources of financing on the economic development of the republic of serbia, we have come to the conclusion that domestic 158 g. radisavljević, g. milovanović, s.bjeletić sources of financing are more desirable than foreign ones. if it wants to count on high growth rates, the republic of serbia has to increase domestic savings in the coming period in order to increase total investments from around 18 percent of gdp to 25 percent of gdp. in order to accelerate economic growth, it is necessary to increase domestic private investment from the current 10 percent to 15 percent of gdp; remove administrative barriers to domestic investors and treat them equally with other investors; continue to build the infrastructure. the economic development of the republic of serbia would be even more intense if domestic investors were given the chance to invest and get incentives just like foreign investors. the results show that both public and private investments in the republic of serbia are significantly less than they should be. if it wants to achieve high economic growth rates, the republic of serbia needs to increase public investments from the current 3-3.5 percent to 4-5 percent of gdp. due to a deficiency in domestic accumulation, the republic of serbia needs foreign capital in the form of fdis. fdis now reach around 5 percent of gdp, which is a solid result. higher fdi inflows could lead to the repatriation of profits and balance of payments issues. the state needs to improve macroeconomic stability so that enterprises can borrow under favorable conditions and generate high profits, from which they could invest in their development. for the lasting stability of the economy, it is crucial to eliminate great fiscal and foreign trade deficits as they can lead to a debt crisis. when they feel the hint of the debt crisis, entrepreneurs usually postpone or permanently give up on investments. under such conditions, they are aware of the fact that they cannot count on state support and that they can lose capital and go bankrupt. references arnold, j.m. & javorcik, b.s. 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(1998). uvoz kapitala i privredni razvoj [imports of capital and economic development]. beograd: zadužbina andrejević. www.worldbank.org/indicator/ne.gdi.totl.zs?locations=rs. accessed on: 25 november 2018. www.worldbank.org/indicator/ny.gdp.mktp.kd.zg?locations=ba-bg-hr-hu-mk-me-roeu&view=chart. accessed on: 28 december 2018. www.worldbank.org/indicator/ny.gds.totl.zs. accessed on: 29 december 2018. uticaj domaćih i stranih izvora finansiranja na privredni razvoj republike srbije cilј rada je da se na bazi sistematizovanih statistickih podataka analiziraju uticaji odabranih izvora finansiranja na privredni razvoj republike srbije u periodu od 2012. do 2016. godine. najpre se, iz ugla savremene teorije, prezentuju teorijski okviru domaćih i stranih izvora finansiranja i uticaji ovih izvora na privredni razvoj. sledi analiza uticaja domaćih izvora finansiranja (domaća štednja, državni i privatni sektor) na privredni razvoj republike srbije. na kraju se analizira relevantnost stranih direktnih investicija (sdi) za podsticanje restrukturiranja, konkurentnosti, rasta i razvoj privrede republike srbije. klјučne reči: domaći izvori, strani izvori, sdi, bdp, privredni razvoj facta universitatis series: economics and organization vol. 16, n o 4, 2019, pp. 377 387 https://doi.org/10.22190/fueo1904377m © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper creative activities valuation using a topsis – based decision support algorithm 1 udc 338.48 emilia madudova 1 , zuzana palencikova 2 1 university of žilina, faculty of operation and economics of transport and communications, department of communications, slovak republic 2 constantine the philosopher university in nitra, faculty of central european studies, department of tourism, slovak republic abstract. the main goal of the paper is the creative activities valuation using a topsis based decision support algorithm. as defined by cutler & carmichael (2010) tourist experience remains in memory, preceded by motivations and expectations and result in satisfaction or dissatisfaction. the creative tourism is not well developed in the slovak republic yet, and there is no theoretical evidence what kind of creative tourism activities the tourists are most interested in. as the results show, tourists very strongly prefer creative tourism activities connected to education. the results also show that tourists do not connect creative activities with tourist destinations, which should result in a more involved supply side in the future, with the support of the local economy and sustainability, including the crafts, art and local culture. key words: creative tourism, tourism, tourism development, competitiveness topsis jel classification: l83, z32, z19 1. introduction products and services are no longer enough to generate economic prosperity. therefore, “organizations use the experience as a management tool for differentiation” (pine & gilmore, 1998). experiences are “subjective, highly personal and intangible phenomena” (billing & o'dell, 2010), hence, difficult to define and to grasp their essence. the tourist received july 15, 2019 / revised august 28, 2019 / accepted september 03, 2019 corresponding author: emilia madudova university of žilina, faculty of operation and economics of transport and communications, department of communications, univerzitná 8215/1 010 26 žilina, slovak republic e-mail: emilia.madudova@fpedas.uniza.sk 378 e. madudova, z. palencikova experience “remains in the memory, preceded by motivations and expectations, and results in satisfaction or dissatisfaction” (cutler & carmichael, 2010). the research of coelho et al. (2018) shows, that “the experiences seem to arouse a set of emotions and not just an isolated one. furthermore, memorable experiences have resulted primarily in positive emotions, to the inward (reward, freedom) or outward (joy, happiness, enthusiasm, liveliness)”. figure 1 illustrates the kind of emotions arising from memorable tourism experiences. fig. 1 representation of the types of emotions of memorable travel experiences source: coelho et al. 2018 tan et al (2013) consider experience as “a process that tourists need to go through to achieve creativity”. they integrate six categories of experiences into four themes: „consciousness/awareness‟, „creativity‟, „needs‟, and „learning and interacting‟, as shown in figure 2. “the first three are named „inner reflection‟s as the reflexive process happens to the inner-self; and the final theme is named „outer interactions, because tourists are interacting with outside factors, such as the environment, people, and product/service/ experience. in addition, „consciousness/awareness‟ is a prerequisite of creative experience, and the tourists must have a sense of this (whether individual, social, cultural or environmental)” in order to have a creative experience, as this differentiates these from other experiences. the findings show that „outer interactions‟ and „inner reflections‟ together construct the model of „creative experience‟. this is consistent with the view that „self-actualization, learning, creativity, and needs operate in a synergistic cycle‟ (burleson, 2005), as well as hanifl‟s idea that people are creating, designing, selecting and reflecting upon their creative experiences (2015). in order to understand the origins of creative tourism, one needs “first to look at the rise of culture as a form of tourism consumption” (richards, 2013; carvalho et al., 2019; csapó 2012). the characteristics of tourism's current consumption demonstrate that it has increasingly acquired a diverse, multidimensional and (micro) segmented character, creative activities valuation using a topsis – based decision support algorithm 379 corresponding to broader use of culture (jelincic, 2009). “understanding the role of creativity in the tourism industry, and how it contributes to creative experiences, is both challenging and complex. creativity can be seen in multiple dimensions: everyday creativity, artistic creativity, and intellectual creativity” (ivcevic & mayer, 2009). tourists stand to benefit from stretching their capabilities and learning new skills, possibilities which work pressures in the home environment often leave little time for. people increasingly feel a need to distinguish themselves in a homogenized world and are becoming more curious about the relative process (richards & raymond 2000). fig. 2 a model of creative experience source: tan et al. 2013 creative tourism stands for the acquisition of certain skills during holidays, which becomes a part of the culture and community of a target country. unesco´s creative cities network (2006) understands “creative tourism as travel directed toward an engaged and authentic experience, with participative learning in the arts, heritage, or special character of a place” in connection with residents. “tourists develop their creative potential and become closer to the local community through informal participation in interactive seminars and acquisition of experience” (raymond, 2007). “creative tourism is a trip directly oriented towards participation and acquisition of authentic experience, gaining certain knowledge in the field of arts, heritage and particular kind of locations where immediate communication with the local community is possible, which would allow creating a „live‟ culture” (maisel, 2009). 380 e. madudova, z. palencikova “creative tourism can be seen in numerous situations where visitors, service providers, and the local community exchange ideas and skills and influence each other in a synergetic way. in this sense, creative tourism can be (richards & marques 2012):  a means of involving tourists in the creative life of the destination,  a creative means of using existing resources,  a means of strengthening identity and distinctiveness,  a form of self-expression/discovery,  a form of edutainment –self-realization and education,  a source of „atmosphere” for places,  a source of recreating and reviving places.” even though creativity is seen as the base of creative tourism, the creative factors of creative tourism systems remain unexplored. furthermore, the current definitions of creative tourism are all supply-led, such as by tourism boards, service providers, and various industry practitioners, without considering the tourists‟ viewpoint although tourists are seen as co-creators of the experiences. as kaufman & baer (2012) ask, who decides what is creative? however, according to tan et al. (2013) all creativity assessments are “expert-based, and may not be applicable for ordinary people, especially the research studies often examine artistic creative dimensions that are unreachable by lay people, such as tourists, who just want to enjoy something that is original or authentic in common life settings and related interactions.” nature of creative supply is synergetic and it lies in the offer of creative activities by “locals” (service providers, creative communities) through which visitors can develop their creative potential and locals can improve their position on the market place (hrubalova & palencikova, 2017). “although tourists are playing active roles in co-creating their experiences while on vacation, industry practitioners still take the lead when it comes to designing and providing such activities” (raymond, 2007), with few studies considering what tourists actually want in this context. for example, maitland (2008) studies the roles of tourists and residents in creative cities, while maisel (2009) acknowledges that many tourists desire experiences that are small, intimate and on a human scale. the original concept of richards & raymonds creative tourism (2000) with an emphasis on creative learning through attending courses and workshops while on holiday has shifted to the current concept of co-creation as co-makers between the visitors and the locals, to “living like local” experience integrating all aspects of tourist consumption at creative places/destinations (palencikova, 2018). there is a need for more analysis of creative tourism in the slovak republic, which draws on the tourists perspective, especially with regard to what kind of activities do tourists prefer and consequently, which of the activities will they go for. the paper also explores the assumption of maisel (2009) that creative activity should be directly oriented towards authentic experience, knowledge connected with the location/region and the local community. 2. methodology the scope of the research was to evaluate the interest of slovak tourists for creative tourism activities, to identify their selection criteria, using a topsis based algorithm. a creative activities valuation using a topsis – based decision support algorithm 381 questionnaire has been applied as the data collection instrument. data from respondents were collected during the spring season 2019 (from january to may) in various tourist regions in slovakia. the direct inquiry was carried out on a sample of 315 respondents from all the regions of the slovak republic, aged 15-75. the respondents were to mark the category (specification) connected with creative tourism activity related to importance. (table 3). topsis is a bipolar comparison of each alternative under consideration with both the positive ideal (pis) and the negative ideal (nis) solutions. the distances to these two solutions are calculated for each alternative and then the aggregated criterion is built that combines these two factors and describes the quality of each alternative, assuming that the chosen alternative should have the shortest distance to the ideal solution and the farthest distance to the negative ideal one (wachowicz, 2011). in order to calculate the weights for the different criteria, the ahp (analytic hierarchy process), introduced by thomas saaty (1996) has been applied. in this ahp, the pairwise comparison matrix a is built. the matrix a is an m x m real matrix, where m is the number of evaluation criteria considered. relative importance between two criteria are measured according to a numerical scale from 1to 9. (table 1) the pairwise comparison was evaluated according to our survey (inquiry) results. the direct inquiry was carried out on a sample of 315 respondents from the slovak republic, aged 15-75 from all the regions of the slovak republic. the respondents were to mark the category (specification) connected with creative tourism activity related to importance. (table 3). table 1 ahp criteria evaluation value _sij interpretation 1 i and j are equally important 3 i is slightly more important than j 5 i is more important than j 7 i is strongly more important than j 9 i is absolutely more important than j source: authors each entry sij of the matrix a represents the importance of the i-th criterion relative to the j-th criterion. if sij >1, then the i-th criterion is more important than the j-th, where sii = 1, i = 1, 2, 3 ..., k and sji = 1/ sij. finally, the criteria weight vector vi (that is an m-dimensional column vector) is built in three partial steps. (1) – (3), 1 k i ij j s s   (1) where k in number of criteria, sij – is criteria, 1 / ( ) k i i r s (2) 1 i i k ii r v r    (3) where, j = 1, 2, ..., k. 382 e. madudova, z. palencikova the topsis algorithm consists of six subsequent steps: 1. building the normalized decision matrix r=(rij), , 2 1 ij i j k iji y r y    (4) where i = 1,2,3...k, j = 1,2,3...k. 2. computing the weighted normalized decision matrix. each j-th column of r matrix multiply by vj weight and calculate weighted normalized decision matrix w. 3. determinig the positive ideal hj and negative ideal dj solutions, where hj = max wij , j = 1,2,3..., k and dj = min wij, j = 1,2,3..., k. 4. calculating the separation measures (distance) for each alternative i and the best condition dj + and distance from the target alternative i to the worst condition. dj , the euclidean distance is used: 2 1 | | k i ij jj d w h     , for i = 1, 2, ..., k (5) 2 1 | | k i ij jj d w d     , for i = 1, 2, ..., k (6) 5. determining the relative closeness of each alternative to the ideal solution: i i i i d c d d      , for i = 1, 2, ..., k (7) 6. ranking the alternatives in descending order using ci. 3. results this section presents a numerical case study of creative tourism activities classification in the slovak republic to demonstrate the proposed creative activity selection algorithm. activities related to creative tourism in the slovak republic were divided into several categories. the main categories are events, courses, and workshops. the more detailed specification of activities is described in table 2. table 2 creative tourism activities category activity events with the theme of traditional crafts and folk art a1 courses of traditional crafts and folk art a2 gastronomic events with the theme of cooking local dishes and meals a3 cooking courses of cooking local dishes and meals a4 events associated with demonstrations of authentic folklore a5 scenic art courses a6 visual art courses a7 workshops designed for children a8 courses of recycling and production of organic products (eco-friendly products) a9 source: authors creative activities valuation using a topsis – based decision support algorithm 383 in order to compare selected activities, it is necessary to identify the criteria (table 3), most characterizing the creative tourism activities. as described in the methodology, in contemplation of calculating the weights for the different criteria, the analytic hierarchy process with pairwise comparison was applied. in criteria evaluating, the results of the survey (more described in the methodology) were taken into account. conforming to research (inquiry) results, respondents strongly favored creative tourism activity connected to education. based on the results, the creative tourism activity should be funny and relaxing, authentic, unique and challenging. destination, respectively linking to a particular location is not a key factor in the choice of creative tourism activity for respondents. table 3 creative tourism activity selection criteria criterion description criterion name category survey  educate,  learn to unfold skills and techniques,  acquire or develop new skills. education k1 very strongly preferred  be funny fun and relaxation k2 strongly preferred  referring to the location,  a better understanding of the local culture,  become closer to the local community. linked to destination k3 weakly preferred  be unique and extraordinary,  enable to get an authentic experience. authentic and unique k4 strongly preferred  challenging and unusual. challenge k5 strongly preferred source: authors in the next step, the pairwise comparison matrix was built (table 4). relative importance between two criteria was measured according to a numerical scale from 1 to 9 and according to survey results. each criterion was evaluated according to survey results (methodology). table 4 pairwise comparison of creative tourism activities criterion k1 k2 k3 k4 k5 si ri vi k1 1 9 9 9 9 6.561 5.78 0.60 k2 0.111 1 3 5 3 4.995 1.38 0.15 k3 0.111 1 1 7 1 0.777 0.95 0.10 k4 0.111 1 1 1 3 0.333 0.80 0.08 k5 0.111 1 1 1 1 0.111 0.64 0.07 ∑ 9.55 1 source: authors results of a pairwise comparison evaluated according to survey results present value vi in a column of table 4. conforming to (table 3) and the vi weights, the greatest weight is the education creative tourism activity, resp. creative tourism activity is linked with education (in survey very strongly preferred as well), subsequently the funny and relaxation activities, authentic and unique activities and challenging activities (in survey results strongly preferred). these activities are approximately of the same weight vi (table 4). 384 e. madudova, z. palencikova weighted normalized decision matrix w is presented in table 5. table 5 presents the ideal hj solutions, which present the highest values of each criterion and dj solutions, which present the lowest values of each criterion. the resulting values ci are shown in table 6. table 5 weighted normalized decision matrix w source: authors table 6 relative closeness of each alternative to the ideal solution activity di+ dici a1 0.795 0.077 0.088 a2 0.077 0.259 0.771 a3 0.797 0.045 0.053 a4 0.089 0.257 0.743 a5 0.793 0.089 0.101 a6 0.114 0.247 0.684 a7 0.077 0.259 0.771 a8 0.095 0.253 0.727 a9 0.100 0.251 0.715 source: authors multi-criterion analysis using the topsis method, evaluate five criteria. these criteria were ranked according to the topsis method (table 7). the best ranked creative tourism activities are courses, then events and least attractive events. table 7 tourism creative activities results source: authors activity k1 k2 k3 k4 k5 a1 0 0.061 0 0.046 0 a2 0.245 0.061 0.05 0 0.029 a3 0 0 0 0.046 0 a4 0.245 0.061 0 0 0.029 a5 0 0.061 0.05 0.046 0 a6 0.245 0 0 0 0.029 a7 0.245 0.061 0.05 0 0.029 a8 0.245 0.061 0 0 0.029 a9 0.245 0 0.05 0 0.029 vi 0.60 0.15 0.10 0.08 0.07 hj 0.245 0.061 0.05 0.08 0.029 dj 0 0 0 0 0 ranking activity activity description ci 1. a2, a7 courses of traditional crafts and folk art visual art courses 0.771 2. a4 cooking courses of cooking local dishes and meals 0.743 3. a8 workshops designed for children 0.727 4. a9 courses of recycling and production of organic products (eco-friendly products) 0.715 5. a6 scenic art courses 0.684 6. a5 events associated with demonstrations of authentic folklore 0.101 7. a1 events with the theme of traditional crafts and folk art 0.088 8. a3 gastronomic events with the theme of cooking local dishes and meals 0.053 creative activities valuation using a topsis – based decision support algorithm 385 4. conclusion and discussion the paper evaluates selected creative tourism activities in the slovak republic using topsis methodology considering evaluation criteria. these creative tourism activities were evaluated according to the realized survey, where respondents figured out the most important criteria, which met the requirement of creative tourism activity. the research results show that creative tourism activities should be primarily educational. strongly important for respondents are activities that are funny, relaxing, authentic and unique and challenging. respondents did not confirm the need to link creative tourism activities to a destination. these results confirm the importance of support to creative tourism activities that are linked to education, for example courses of traditional crafts and folk art, unconventional cooking courses, scenic art courses and visual art courses (table 7) in the slovak republic. to the contrary, creative tourism activities should “allow tourists to learn more about the local skills, expertise, traditions and unique qualities of the places they visit” (richards & wilson, 2006), so it is a challenge for the supply side (in slovak destinations) to provide courses connected with local culture, heritage and local people and improve local development through creative tourism´s development opportunities. table 8 evaluates the creative tourism activities in relation to the theoretical background more described in the introduction. activities targeting different kinds of courses also meet the conditions (tan et al. 2013) of creative experiences as consciousness, motivation, creativity, and learning. table 8 creative tourism activities evaluation in relation to the theory activity tourism experience influence  cooking courses of cooking local dishes and meals  workshops designed for children  courses of recycling and production of organic products (eco-friendly products)  reward  refreshment  happiness  liveness  enthusiasm  liveness  involving tourists in the creative life  means of strengthening identity and distinctiveness  form of edutainment  source of recreating and reviving the domestic culture  scenic art courses  visual art courses  freedom  nostalgia  enthusiasm  excitement  involving tourists in the creative life  form of self-expression/discovery  form of edutainment  events associated with demonstrations of authentic folklore (folk art)  gastronomic events with the theme of cooking local dishes and meals  recognition  refreshment  creative means of using existing resources  means of strengthening identity and distinctiveness  a source of „atmosphere for the place“  source of recreating and reviving the domestic culture source: authors the global tourism market has been experiencing immense changes in the last decade, mainly due to the globalization and technological advances both in terms of demand and supply. changes are creating a lot of new opportunities as well as challenges for all tourism stakeholders (palencikova, 2018). 386 e. madudova, z. palencikova by knowing which activities attract tourists the most, tourists can maximize their creative experience by searching for what they want from the range of creative tourism experiences on offer. the paper also describes the key elements that can increase the level of creativity in the creative experience process, and the most important criteria for the demand side that creative activities should fulfill. since there are relatively few studies examining these issues in the slovak republic, the current research aims to address these gaps in the current literature. in order to understand the origins of creative tourism demand, in the slovak republic we looked at the tourism consumption. creative tourism is not largely expanded in the slovak republic. there is a good tourism development in the slovak republic, but edification, resp. propagation of creative tourism must be improved; both in terms of demand (information dissemination) and supply (information dissemination, activities that attract tourists) as well. as research shows, to ensure the competitiveness of the slovak republic in the creative tourism market on the supply side, the slovak creative tourism industry needs to focus mainly on courses and workshops (courses of traditional crafts and folk art, visual art courses, cooking courses of cooking local dishes and meals) and not focus only on events. tourists tend to benefit from learning new skills; the activities of the creative tourism should be directly oriented towards authentic experience, knowledge dissemination, connected with the local community, but not necessarily connected with location or destination. in the future research, authors will focus on concrete courses, workshops, and activities that attract and interest tourists in concrete tourist regions. future research on creative tourism development should also involve opinions of destination management organizations, that represent the "orgware" of creative tourism supply and in-depth interviews with their managers. furthermore, understanding the preferences of creative tourists and specifics of creative supply in various tourist regions within slovakia may serve to achieve greater acceptance of creative tourism as a new 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(2011). application of topsis methodology to the scoring of negotiation issues measured on the ordinal scale. giglioteka nauki, 6, 238-260. retrieved from: http://yadda.icm.edu.pl/yadda/element/ bwmeta1.element.ekon-element-000171230805. accessed on: 28 june 2019 evaluacija kreativnih aktivnosti na osnovu topsiszasnovanog algoritma za podršku odlukama glavni cilj ovog rada je evaluacija kreativnih aktivnosti uz pomoć algoritma za podršku odlukama zasnovanom na topis metodi. kao što su cutler & carmichael (2010) definisali, turistička iskustva ostaju u sećanjima, prethode im motivacija i očekivanja a rezultiraju u zadovoljstvu ili nezadovoljstvu. kreativni turizam još uvek nije dovoljno razvijen u republici slovačkoj, i nema teoretskih dokaza za vrstu aktivnosti u kreativnom turizmu za koje bi turisti bili najzainteresovaniji. kako rezultati pokazuju, turisti preferiraju one aktivnosti kreativnog turizmna koje su povezane sa obrazovanjem. rezultati takođe pokazuju da turisti ne povezuju kreativne aktivnosti sa turističkim destinacijama, što bi trebalo da rezultira u boljoj ponudi u budućnosti, uz podršku lokqalne ekomonije i održivosti, uključujući zanatstvo, umetnost i lokalanu kulturu. ključne reči: kreativni turizam, turistički razvoj, konkurentnost, topsis facta universitatis series: economics and organization vol. 16, n o 3, 2019, pp. 327 335 https://doi.org/10.22190/fueo1903327g © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper the scope and structure of the incentives in agriculture and rural development in the republic of serbia 1 udc 338.43:336.14(497.11) biljana grujić, svetlana roljević nikolić, zoran simonović institute of agricultural economics, belgrade, republic of serbia abstract. the aim of the paper is to point out the scope and structure of the incentives from the agricultural budget of the republic, as well as from the ipa fund which are intended for the agricultural and rural development sector in serbia. a brief overview of the chronology of harmonization of national legislation in the field of agricultural production with european rules is given as well as the plan for realization of ipard funds for the period 2014-2020 and a review of incentives from the agricultural budget for the period 2016-2019. eur 175 million from the eu budget and eur 55 million from the national budget are allocated for supporting the agriculture and rural development sector of serbia within the ipard measures. the largest amount of funds within the ipard measures is planned for investments in the physical assets of agricultural holdings (43%). somewhat less contribution is scheduled for the investments in processing and marketing in agricultural holdings (37%). the leftover measures include only 19% of the planned funds intended to support agricultural holdings within the ipard assistance program. on the other hand, an analysis of the incentive structure from the republic's agrarian budget indicates that the largest share has direct payments of over 50%, while the rural development measures are averagely financed with 12.3%.. key words: agriculture, financing, ipard, the agrarian budget jel classification: f30, h25, h61 received may 27, 2019 / accepted july 10, 2019 corresponding author: biljana grujić institute of agricultural economics belgrade, volgina str. 15, 11060 belgrade, serbia e-mail: biljana_g@iep.bg.ac.rs 328 b. grujić, s. roljević nikolić, z. simonović 1. introduction the republic of serbia is recognizable as an agricultural country because this activity, to a certain extent, contributes to economic development, and it is in the state's interest to continue with further development of this field. according to the statistical office of the republic of serbia (sors), the contribution of the agriculture, forestry and fishing sector to the creation of gross domestic product (gdp) was 6% in 2017. however, in the same year, observed by activity, the agriculture, forestry and fishing sector recorded a real decline of 11.2% of gross value added (sors, 2018) . the favorable natural conditions and climatic factors distinguish the agriculture of serbia as the primary activity. financial support to the agricultural producers in this paper was considered at two levels: 1. funds of the ipard (instrument for pre–accession in rural development) program; 2. agrarian budget funds. agricultural producers of serbia are at the disposal funds of the so-called ipard program. since serbia acquired the eu candidate status at the beginning of 2012 and accredited the agency for agrarian payments, it was granted the right to use eu funds under the fifth ipa component known as ipard. the pre-accession support measure is intended for the agriculture and rural development, and larger part of the funds are provided by the eu. the first call for applications for ipard funds was announced at the beginning of 2018, and the interest of farmers for financial resources is growing increasingly. the payment of ipard funds is designed through the contribution of the eu and the national contribution expressed in percentages. the largest percentage contribution of the eu funds is scheduled for measure 5 – leader approach and amounts to 90%, while the remaining 10% will be provided by the republic of serbia. as the republic of serbia recognized the importance of agriculture, it was decided that each year grants from the agricultural budget are paid to agricultural producers. the right to subsidies is achieved as individuals as legal persons and entrepreneurs in the sector of plant and animals production only if they implement all the requirements prevised by the tender. the agrarian budget is adopted annually and is an integral part of the republic budget. from 2016 to 2019, the agrarian budget increased by 15.1%, or by rsd 164.2 bln. during 2016, the agrarian budget had a share of 3.73%, and already in 2019 of 4.14% in the total budget of the republic, which is the highest value of participation in the four-year period. ivanović et. al. (2012) consider that the accession of the republic of serbia to the european union (eu) could bring benefits arising from membership and that the future development of serbian agriculture must be focused on financing agricultural holdings. although agriculture is important for serbia, it is not sufficiently developed. prodanović et. al. (2018) quote some reasons why serbia's agriculture can not be rated as developed: a reduction in livestock funds, fragmentation of parcels, yields below the european average, lack of financial resources for new investments, reduction of rural population, small investments in new equipment and machinery, insufficient insurance coverage in agriculture etc. accordingly, it is necessary to turn to the newer sources of financing of agriculture that come from both the eu budget and the national budget. certainly, the state has recognized the importance of agriculture for the country and continuously increases the funds that it pays from the agrarian budget in the form of subsidies. it also provides a contribution from the national budget when it comes to the payment of funds for the ipard program, all for the purpose of developing and improving rural life. the scope and structure of the incentives in agriculture and rural development in the republic of serbia 329 2. the material and method of work the subject of the research is an analysis of the scope and structure of incentives for agriculture and rural development from the two most important sources of financing: the agricultural budget of the republic of serbia and the ipa fund. the research used and analyzed available data sources to which the descriptive statistics methods were applied with the interpretation of the acquired indicators. 3. the eu support to agricultural development of the republic of serbia serbia has the opportunity to use pre-accession agrarian funds if it reformes and adjusts its agricultural policy to the eu agricultural policy (grujić, 2017). consequently, it is very important that national agrarian policy is aligned with cap (common agricultural policy), which means establishing cooperation with institutions. popović and grujić (2015) consider that harmonization with institutions must be achieved both horizontally and vertically, and harmonization of legislation is mandatory especially in the field of production of health-safety food. the first ideas and changes in the field of agricultural production in the republic of serbia started only just in 2000, and the chronology of harmonization in the last fifteen years has been as follows:  the agricultural development strategy of serbia was adopted in 2005;  the law on agriculture and rural development, which adapts the development policy of serbia to development policy within the eu member states, was adopted in 2009;  in 2010, the national program for agriculture for the period 2010-2013 was adopted;  during 2014, the strategy for agriculture and rural development of the republic of serbia for the period 2014-2024 was adopted. the goals of the long-term development of the serbian agrarian sector are in line with the goals and principles of the development of agrarian sector in the eu. the instrument for pre-accession assistance (ipa) contains incentive measures designed for both countries that have not acquired candidate status and countries that have obtained the status of candidates for the eu membership. in other words, ipa funds are a form of preparation for joining the eu. the ipa instrument consists of five components (pejović et. al., 2011): 1. institution building and support for transition, 2. support for cross-border cooperation, 3. support for the regional development, 4. support for the development of human resources and 5. support for agriculture and rural development (ipard – instrument for preaccession in rural development). countries that have not obtained the status of candidate for the eu membership have the right to support which is made by the first two components. countries that have obtained the status of a candidate for the eu membership, such as serbia since march 1, 2012, are eligible for financial support and on the basis of the remaining three components. the ipard program for serbia is the eu pre-accession assistance program for increasing the productivity and competitiveness of the agrarian sector (production and 330 b. grujić, s. roljević nikolić, z. simonović processing of agricultural products). also, the ipard program enables the achievement of eu standards in the field of food production, which primarily refers to harmonization with veterinary, ecological and food safety standards of the eu. assistance from the ipa fund for ipard measures for serbia includes the participation of funds from the eu budget and the national budget. in the period 20142020 almost eur 230 million are available for farmers, of which eur 175 million comes from the eu budget, and the remaining eur 55 million from the national budget (ipard program for 2014-2020). an overview of the financial plan for the payment of ipard funds from the eu and the national budget for individual measures for the period 2014-2020 is given in table 1. table 1 financial plan for ipard payments, 2014-2020 measures total public aid (eur) eu contribution (eur) eu contribution (%) national contribution (eur) national contribution (%) investments in physical assets of agricultural holdings 101,386,667 76,040,000 75 25,346,667 25 investments in physical assets concerning processing and marketing of agricultural and fishery products 87,346,667 65,510,000 75 21,836,667 25 agri-environment-climate and organic farming measure 10,294,118 8,750,000 85 1,544,118 15 implementation of local development strategies – leader approach 5,833,333 5,250,000 90 583,333 10 farm diversification and business development 20,000,000 15,000,000 75 5,000,000 25 technical assistance 5,235,295 4,450,000 85 785,295 15 total 230,096,080 175,000,000 55,096,080 source: ipard programme for 2014-2020, republic of serbia the table shows that it is planned that 76.1% of payments for ipard funds is going to be realized from the eu budget, and the remaining 23.9% from the national budget of the republic of serbia. the highest rate of the eu contribution was recorded in the measure "implementing local rural development strategies leader approach" reaching 90%. observing the structure of payments from the eu budget for the above measures, it is obvious that the largest percentage of funds in the seven-year period is allocated for investments in the physical assets of agricultural holdings with a share of 43% or eur 76 million. litlle less contribution is scheduled for investments in processing and marketing in agricultural holdings with a share of 37% or eur 65.5 million. the remaining measures make up only 19% of the planned funds intended to support agricultural holdings under the ipard assistance program. according to the latest valid ipard program for 2014-2020, the implementation of the ipard program will be implemented in three phases. the first phase consists of investment support measures, and the order is as follows: 1. investments in the physical assets of agricultural holdings (measure 1); 2. investments in the physical property related to the processing and marketing of agricultural products and fishing products (measure 3). the scope and structure of the incentives in agriculture and rural development in the republic of serbia 331 the second phase consists of measures for supporting the diversification of agricultural holdings and business development (measure 7), as well as technical assistance (measure 9). the third phase consists of measures that are under preparation and include leader approach (measure 5) and agri-environment-climate measures and measures of organic production (measure 4). for measures 4, 5 and 9, the procedural framework is under preparation, and the conditions for competition, the required tender documentation, and the maximum values that would be available to agricultural producers until 2020 are still unknown. ipard funds will be paid for measure 1 and measure 3, in 2019, which means that the realization of the program has been started with measures of support for investments. the call for ipard incentives in 2019 suggests the implementation of measure 7 and measure 9, which is expected to be announced in the last quarter of 2019. the ipard program also defines the maximum funds available to agricultural producers, published in ipard program for 2014-2020. when it comes to measure 1, the user can receive maximum eur 1 million of support. at measure 3, users have a maximum of eur 2 million of support, and for measure 7 only eur 400,000. conclusions from the ipard monitoring committee meeting held in may 2019 point to a high response from farmers to apply for funds are significantly higher than expected (http://www.minpolj.gov.rs/odziv-poljoprivrednika-za-ipard-program-veci-od-ocekivanog/). 4. incentives to agricultural producers from the agrarian budget of the republic of serbia agriculture of the republic of serbia in the period 1994-1996 is financed from the primary issue of the central bank. since 1996, our country's agriculture has been financed from the so-called agrarian budget which is an integral part of the budget of the republic (radović g., 2009). many experts dealt with agrarian policy models and expressed their views on the problems of financing the agrarian sector. pejanović and radović (2011) consider that with the start of payment of subsidies to agricultural producers in 2004, and not to processors of milk, the focus in agrarian policy was shifted from a policy of income incentives to investments incentive policy. according to other authors, there are claims that the agrarian budget regressed agricultural production and rural development, and did not finance it (jovanović and lakićević, 2012). this procedure is in the opposite with the method of funding that is represented in the european union (eu). the authors state that in the eu (from 25 member states) at the end of 2006, average subsidies per capita were eur 127, and in the republic of serbia, eur 17-20. in the same year, subsidies in the eu amounted to eur 360/ha, and in our country eur 32/ha. the participation of the agrarian budget in the total budget of the republic of serbia will be analyzed further in the paper. the obtained percentages in the period 2016-2019 point to inadequate allocations of the republic budget for agricultural development (table 2). besides, article 4 of the law on incentives in agriculture and rural development (official gazette of rs, no. 10/13, 142/14, 103/15 and 101/16) clearly states that "the budget of the ministry cannot be less than 5 % of the budget of the republic of serbia for a certain year ". however, we conclude that the agrarian budget in the period 2016-2019 is not even close to the defined legal minimum. 332 b. grujić, s. roljević nikolić, z. simonović table 2 share of agricultural in total budget of rs in the 2016-2019 period (in billion rsd) year budget of rs agricultural budget of rs share (in %) 2016 1,085.3 40.5 3.73 2017 1,123.2 43.8 3.90 2018 1,179.2 44.1 3.74 2019 1,249.5 51.8 4.14 source: law on the budget of rs for annual years and authors calculating the table review shows that the share of the agrarian in the total budget ranged from 3.73% in 2016 to 4.14% in 2019. also, table 2 shows that only in 2019 the participation of the agrarian budget is planned to be higher than 4%, which is also the highest value of participation for the observed period. in other words, the average annual share of the agrarian budget in the observed four-year period was about 3.9%. the law on incentives in agriculture and rural development in article 3 defines four types of incentive measures: 1. direct payments involving subsidies for the following purposes: milk premium, basic incentives in plant production 2 , incentives for quality breeding and fattening cattle, bee hives, as well as storage costs in public warehouses; 2. incentives with measures of rural development and include support: investment in improving competitiveness, preserving and improving the environment and natural resources, programs that contribute to income diversification and improvement of quality of life, local rural development strategies, and creation and transfer of knowledge; 3. special incentives which are distributed for: implementation of breeding programs, promotional activities, production of planting material and certification and clone selection; 4. credit support that involves facilitating access to the use of agricultural loans through subsidizing a part of interest on loans from commercial banks. regulations on the distribution of incentives in agriculture and rural development, which are issued annually, must be in accordance with article 4 of the law on incentives in agriculture and rural development and article 8 of the law on the budget of the republic of serbia. the purpose of the decree on the allocation of funds is to specify the extent, type and maximum amount of incentives per year in agriculture and rural development. graph 1 shows the structure of the incentives scheduled by the republic's agrarian budget in the period 2016-2019. in the structure of planned annual incentives, direct payments are dominant with over 50%. however, in the analyzed period, the share of this measure is gradually decreasing also in 2019, compared to 2016, it makes 60.1% of planned funds. considering the planned absolute values, their increase is evident, with the allocation of rsd 16,968.7 million, in 2016 and rsd 17,220.3 million in 2019. this inversely proportional share of planned funds for direct payments can be justified by the fact that the total value of the planned funds grows more dynamically than the funds allocated for payment on the basis of a concrete measure increase. 2 since 2019, incentive funds for fuel regression have been returned, which were abolished in 2016 the scope and structure of the incentives in agriculture and rural development in the republic of serbia 333 graph. 1 structure of incentives in agricultural budget of rs (2016-2019, in %) source: regulation on the distribution of incentives in agriculture and rural development for annual years and authors calculating the allocations for rural development in the four-year period were increased by 7.2 p.p. the regulation on the distribution of incentives for 2019 foresees that rural development measures amount to 16.5% or rsd 4,727.5 million of planned funds, while in 2016 they amounted to rsd 1,839.3 million or 9.3%. in contrast to the direct payment measures, the share of the mentioned funds for payment was adjusted in proportion to the increase or decrease of the scheduled total funds. the most significant increase in the share of planned incentives for agricultural producers was observed in ipard funds. in 2019, the scheduled funds for the payment are rsd 6,073.5 million and they are larger by about 21 p.p. compared to 2016. the share of ipard funds in 2019 is 21.2% of planned incentives. as a reminder, in 2016, the planned funds for ipard measures were an integral part of the measures for rural development, accounting for only 0.5% of incentive funds or rsd 100 million. since 2017, they are presented as a separate measure in the regulation on the distribution of incentives for ipard funds. the scheduled funds for credit support and special incentives in 2019 are only 2.2% of the total planned funds. for credit support in 2019, 1.4% was allocated in total planned funds (rsd 400 million), which is significantly less than in 2016 when it was 3% (rsd 600 million). for the payment of special incentives in 2019, rsd 230 million or 0.8% of total planned incentive funds are allocated. however, in 2016 the value of these funds was somewhat higher at rsd 232.6 million and amounted to 1.2% of planned funds. the data about the use of incentives for agriculture and rural development are also given by the census of agriculture 2012, conducted by the statistical office of the republic of serbia (sors). out of the total number of agricultural holdings listed (631,552), 179,775 or 28.5% used incentive funds for agriculture and rural development in the period 2010-2012. according to this source, the structure of agricultural holdings in the territory of the republic according to the type of used incentives is as follows:  94% of agricultural holdings used subsidies for agricultural production;  1.8% of agricultural holdings used only subsidized credits;  only 0.8% of farmers used incentives for rural development. the obtained calculations of the authors show that the agricultural producers are familiar with the national measures prescribed by the ministry of agriculture and applied each year for the measures that are available to them, provided they contribute to their further development. 334 b. grujić, s. roljević nikolić, z. simonović 5. conclusion current measures of agrarian policy can contribute to further modernization of agricultural production, which would directly influence the improvement of the living standard of agricultural producers. bearing in mind the incentives for ipard measures that can be applied for according to the appropriate plan also in 2019, the number of requests is expected to be significantly higher, as funding will be provided for measures that were not current during 2018. support to agricultural producers from the agricultural budget of the republic contributes to increasing competitiveness, marketability and sustainability of production. since 1994, serbia's agricultural policy has been constantly changing and adapting to the growing needs of farmers. in order to ensure further development of agriculture, continuous financing of agriculture is required primarily from the national budget funds. it is suggested that the scheduled funds for ipard and national measures could provide the improvement of economic position of agricultural producers. considering the fact that some of the reasons why serbia's agriculture cannot develop faster are mentioned, the authors think that one of the ways to eliminate them would be increased awareness and education of farmers about changes that accompany both agricultural production and the processing and financing sector. acknowledgement: this paper is a part of the research of the project no. 46006 „sustainable agriculture and rural development in the function of accomplishment of strategic goals of the republic of serbia within the danube region“, and the project no. 179028 „rural work market and rural economics of serbia diversification of income and decrease of rural poverty“ financed by the ministry of education, science and technological development of the republic of serbia (2011-2019). references grujić, b. (2017). finansiranje poljoprivrede republike srbije od tradicionalnih ka novim modelima [financing of agriculture of the republic of serbia from traditional to new models]. doktorska disertacija, univerzitet džon nezbit, fakultet za poslovne studije, beograd ivanović, l., subić, j. & jeločnik, m. (2012). financing of development and improvement of agriculture in lajkovac municipality [finansiranje razvoja i unapređenja poljoprivrede na teritoriji opštine lajkovac]. ekonomika, 3/2012, 130 135. jovanović, g. & lakićević, d. 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(2009). support of the state with regard to financing agriculture [podrška države u funkciji finansiranja polјoprivrede]. agroeconomica, 41-42/2009, 69-79. republički zavod za statistiku (2013): popis poljoprivrede 2012 [census of agriculture], popisni podaci (nivo naselja) (http://popispoljoprivrede.stat.rs/?page_id=6221, accessed: 20.12.2015.) statistical office of the republic of serbia (2018). statistical release no. 271, from 01.10.2018, belgrade (http://publikacije.stat.gov.rs/g2018/pdfe/g20181271.pdf, accessed: 20.05.2019) obim i struktura podsticaja poljoprivredi i ruralnom razvoju u republici srbiji cilj rada je da ukaže na obim i strukturu podsticaja iz agrarnog budžeta republike, kao i iz ipa fonda koji su namenjeni sektoru poljoprivrede i ruralnog razvoja u srbiji. dat je kratak prikaz hronologije usklađivanja nacionalnog zakonodavstva u domenu poljoprivredne proizvodnje sa evropskim pravilima, plan realizacije ipard sredstava za period 2014-2020. godine, kao i pregled podsticaja iz agrarnog budžeta u periodu 2016-2019. godine. za podršku sektoru poljoprivrede i ruralnog razvoja srbije u okviru ipard mera, iz budžeta eu namenjeno je 175 mil. eur, a 55 mil. eur iz nacionalnog budžeta. najviše sredstava u okviru ipard mera planirano je za investicije u fizičku imovinu poljoprivrednih gazdinstava (43%). nešto manji doprinos predviđen je za investicije u preradu i marketing na poljoprivrednim gazdinstvima (37%). preostale mere čine svega 19% planiranih sredstava predviđenih za podršku poljoprivrednim gazdinstvima u okviru ipard programa pomoći. sa druge strane, analiza strukture podsticaja iz agrarnog budžeta republike ukazuje da najveće učešće imaju mere direktnih plaćanja sa preko 50%, dok su mere ruralnog razvoja prosečno finansirane sa 12.3%. ključne reči: poljoprivreda, finansiranje, ipard, agrarni budžet facta universitatis series: economics and organization vol. 16, n o 2, 2019, pp. 171 182 https://doi.org/10.22190/fueo1902171s © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper innovation as driver of modern retail 1 udc 330.341.1:339.37 svetlana sokolov mladenović, vanja vukojević* university of niš, faculty of economics, serbia abstract. the main objective of the paper is to point to the importance of innovation for modern retail. it relies on the fact that retail, as well as total trade, is an innovationintensive economic sector, and that innovation is a critical factor in creating and maintaining a long-term competitive advantage. using the desk research method, the paper takes a conceptually wide approach to understanding the meaning and proliferation of innovation in retail. special emphasis is on the development and application of technological innovation. the hypothesis about the importance of innovation for modern retail development is tested using the example of 250 largest retail chains, with a focus on walmart, as the leading retail chain. based on this, the main features of the application and importance of leading innovation in retail are particularly highlighted. key words: retail, innovation, technological innovation, walmart jel classification: l81, o30 introduction the view that dominates in the scientific and professional community is that trade, as well as retail, is an innovation-intensive economic sector. this is understandable, given the fact that trade, especially retail, is a highly competitive economic sector, and that, in today’s conditions of intense changes, it is not enough to satisfy the customer needs only. retailers always need to go one step ahead of their customers, using product bundles to overcome customer expectations and wishes. at the same time, modern customers are highly sophisticated, well-informed, and constantly connected to the internet, well aware of market flows and monitoring the price/quality ratio. under these circumstances, received february 25, 2019 / revised april 28, 2019 / accepted may 17, 2019 corresponding author: svetlana sokolov mladenović *phd student at university of niš, faculty of economics university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: svetlana.sokolov@eknfak.ni.ac.rs 172 s. sokolov mladenović, v. vukojević innovation becomes a business imperative for modern retail chains. therefore, modern retailing is characterized by the broad usage of mobile and contactless technology (pantano & priporas, 2016), which exerts additional pressure on retailers to redefine their business schemes. retail is gradually shifting from the classical to the multi-channel business strategy phase involving the use of multiple channels, such as classic shops, social networks, mobile and web applications, and virtual reality (ailawadi & farris, 2017; grewal et al., 2017). this environment has made shopping more convenient for customers, but also faced retailers with the challenge of effectively managing innovation. altogether, this has increased research interest in the evolution and application of innovation in trade and retail. it is exactly the aim of this paper to enable a more complete and a fuller understanding of invention and its application in the retail sector, as considerably as the pronounced proliferation of innovation in modern retail. although authors generally agree that innovation is the application of novel thoughts that stimulate economic performance, this term attracts enormous research attention, with studies largely depending on the innovation context. based on the above, the paper summarizes the results of previous research related to innovation in retail. furthermore, it thoroughly analyses technological innovation in retail. the final part of the paper analyses the global power of retail based on innovation. it analyses the trend of sales volume and other key indicators of the 250 world’s largest retail chains in the last five years. in the walmart case, the paper considers the impact of innovation on the development of modern retail. research and available data show that walmart has been the world’s leading retail chain for almost two decades, and that it is imperative for it to be constantly innovative. thus, using desk research and the method of description, analysis, and synthesis, the paper tests the hypothesis on the importance and role of innovation in modern retail. 1. theoretical and methodological approach to studying innovation innovation has been in the focus of interest among numerous researchers for many years. schumpeter (1912) defines innovation as a set of new ideas that depend on the introduction of new goods, new production methods, new markets, new sources of supply, and new organizations in any economic sector. this definition shows that innovation is a certain entrepreneurial process aimed at allocating available resources to new use. further research generally sees innovation as a radical technological change, resulting in radical changes in costs, measured by the intensity of research and development (solow, 1957; romer, 1990). the very characteristics and effects of innovation vary in different economic sectors, due to differences in institutional structure, research and development policies, or managerial perceptions of costs or demand for innovation. thus, innovation becomes the main driver of national economic well-being, which is why a large number of countries are engaged in the race for a global innovation advantage. in addition, a large number of researchers relate innovation to technological change, while some researchers relate it to research and development activities (zaltman et al., 1973; rogers, 1995). however, innovation means much more. in regards to the organization for economic cooperation and development (oecd) (2010), innovation is the application of a new or highly redefined product (good or service), or process, a new marketing method, or a new business practice organizational method, workplace organization or external relation. the definition emphasizes that innovation must, to a certain extent, contain a innovation as driver of modern retail 173 novelty, be it related to an enterprise, market, or the economy as a whole, whereby it is necessary to create a sustainable business concept. in the context of defining innovation, the definition given by general electric (ec) (2018) is very useful: “to innovate ... means to challenge and change the status quo in order to improve the customer experience and ensure new forms of value”. john kao (2007) gives a similar definition, saying that innovation is the transformation of the existing into the desired conditions. innovation itself has traditionally been observed in a technical context and included the creation of new or improved consumer goods. however, innovation in services, and, therefore, trade and retail, is becoming increasingly important, given that services account for more than 75% of most european economies. for this reason, understanding innovation as a purely scientific and technical product implies a wider context to include the application of information technology, the emergence of new business models, and the creation of a new customer experience or approach to service delivery. this creates the possibility of changing almost all service sectors, from retail, logistics and catering to health care, professional and financial services. no matter how defined, innovation is very important because it stimulates economic growth, new jobs, improves life quality and national competitiveness. therefore, innovation is becoming an increasingly important concept in economies characterized by globalization, rapid technological change, customer preferences, dominance of knowledge, and need for quality information. in such conditions, innovation has a direct impact on the economic development of the entire society, so innovation and innovativeness become key competitiveness factors. therefore, in order for innovation to be successful, it needs to add value, i.e. bring higher benefits in relation to investment in its development. the optimal combination of a wellformulated innovative strategy, system, and business environment is fundamental to the success of any innovation (afuah, 2003). knowledge is the prime factor in the development of innovation. at the same time, modern economy increasingly depends on knowledge, information, and specific skills, which increases the share of high-tech knowledge-based products. in such circumstances, the success of innovation depends on various organizational, economic, social, and other forms of knowledge. based on the above, the conclusion is that the ability to innovate is unequivocally related to the competitiveness of both individual enterprises and entire economies. in modern business conditions, failure to innovate, especially in developed economies, creates unsuccessful companies, the loss of national export competitiveness, and, finally, structural economic crisis. as schumpeter (1912) elaborates: “in capitalist reality, it is not competitive price that counts, but competitiveness arising from new goods, new technology, that is what affects not only the profit margin of the enterprise, but also its survival”. it is precisely this struggle for innovation advantage that affects the economic survival of enterprises and national economies. more than ever, economies need innovation to become competitive on a global scale (dumitrasco, 2018). this is especially noticeable in the case of developing economies, which, without innovation, have difficulty in dealing with low income and low salaries. their ability to take the lead in process innovation (production automation and higher production with fewer workers) and value chain improvement to develop products and services with a higher new value are particularly critical, which less developed economies cannot do. furthermore, in order for big economies to succeed they must innovate, not only in new start-up companies, but also in the entire range of small and medium-sized 174 s. sokolov mladenović, v. vukojević businesses. in doing so, large economies will be able to reduce their trade deficit and at the same time create better paid jobs. finally, a healthy trading sector allows economies to avoid high debts arising from trade, which future generations will definitely have to pay by spending less than they produce. 2. growing importance of innovation in retail the growing market globalization and the growing trade and retail internationalization have resulted in the increasingly intense competition in the retail and the total trade sector. the means of competing are becoming more and more diverse, where innovation and innovativeness take a significant place. for this reason, there is a need for a more comprehensive understanding of the meaning and proliferation of innovation in retail. 2.1. meaning and proliferation of innovation in retail innovation in services, and, thus, in retail, is less tangible than innovation in production, and, hence, it is more difficult to define and measure it. although studies offer different approaches to defining retail innovation (evangelista, 2000; miozzo & soete, 2001; michel et al., 2008), authors generally agree that retail innovation is insufficiently explored and understood (sokolov mladenović & ćuzović, 2017). previous research results in the field of trade and retail innovation show that innovation in retail is conditioned by customer behaviour and demands or the expected results (hristov & reynolds, 2016). thus, innovation conditioned by customer behaviour and demands relates to organizational changes in enterprises that have a measurable impact, such as:  innovation as a means of variety and maturation (e.g. new supply chain, development of a common product model with suppliers),  innovation as part of a strategy (e.g. corporate strategy, innovation). innovation conditioned by the result or outcome relates to new products, services, or mode of operation, and can be:  innovation in the range of products or services,  innovation related to the reformulation or improvement of business practices. innovation observed in this way should be incremental and continuous and implemented over a longer period of time. no matter what kind of innovation it is, it should be a futuristic vision translated into an aggregate of realistic activities that will be cooperatively realized. all of this should ultimately lead to growth, operational efficiency, and the improvement of service quality for customers (pantano et al., 2017). for this purpose, the retail innovation matrix can serve as a useful tool (figure 1). innovation as driver of modern retail 175 offer/customer related support related organisation related strategic e.g. the development of a new “big box” fashion store concept for retail parks e.g. a transition from a 3.000 to a new 12.000 sq. ft. store footprint e.g. unveiling retail's first carbon neutral eco-store e.g. the introduction of a new it suit of business applications for crm and supply chain management e.g. new distribution centre, fully automated in line with a fast fashion business model of buying in six-week cycles e.g. external innovation networks linking up venture capital firms with business start-ups working with the retailer on innovation projects e.g. an accelerated npd initiative providing 52 annual product themes operational e.g. extending the organic range of products from 300 to 1.000 skus e.g. in-store “retrofitting” of car components; satellite navigation, indirect vision mirrors e.g. developing a new own label portioned coffee capsules system e.g. experimenting with electronic shelf-edge labelling, for automatic refreshing of prices throughout the store e.g. new delivery model of route planning optimisation e.g. the introduction of “corporate merchandising guidelines” to maintain clear brand positioning e.g. “best welcome initiative” for new employees joining the retailer fig. 1 a retail innovation matrix source: hristov & reynolds, 2016. the presented retail innovation matrix can serve as a useful tool for retail chains when making innovation planning decisions or for visualizing and assessing a set of innovation activities at different decision levels. observed in terms of technological innovation, this process is presented in figure 2. fig. 2 innovation introduction process in retailing source: pantano et al., 2017. 176 s. sokolov mladenović, v. vukojević however, customers themselves have the final say about the success of retail innovation. numerous studies on customer acceptance of innovation show that they are willing to accept and use innovative systems if they offer benefits in terms of better shopping experience, higher satisfaction, and, ultimately, loyalty (kohler et al., 2011; ku & tai, 2013; pantano & di pietro, 2012). table 1 shows the most common types of innovation introduced by retailers, the number of retailers introducing it, the amount of investment, and the type of retailers. table 1 innovation diffusion in retail industry technology number of adopters amount of investment typology of adopters digital signage medium medium (mainly in hardware) fashion industry (i.e. luxury brands) self-service technologies high medium (mainly in hardware) groceries and department stores mobile apps high low (mainly in software) both small-medium retailers and large retailers, both luxury brands and low cost ones, etc. ubiquitous stores low low (mainly in software) small and frequently ad-hoc enterprises source: pantano, 2014. table 1 shows that different retailers adopt innovation with varying intensity. an analysis of previous studies gives an insight into how different retailers achieve different success with the introduction of innovation (table 2). table 2 summary of findings from cross-retailer analysis. retailers innovation level of exploitation role of innovation fashion digital signage medium informative (providing consumers information) groceries and (large) department stores self-service technology high providing new services for consumers (large) department stores self-service technology and mobile apps high providing new services for consumers ad-hoc new retailers ubiquitous computing low creating new services for consumers, reducing the number of employees, managing data on market trends source: pantano, 2014. thus, table 2 summarizes the analyses of actual diffusion of innovation among different retailers. innovation as driver of modern retail 177 2.2. technological innovation and smart technology in retail previous analyses, as well as the actual situation in retail, show that innovation developed and adopted in retail is technology-related. in today’s industry 4.0 development conditions, adopting smart technology in retail is more and more pronounced. the growing diffusion of information and communication technology has significantly transformed and is still transforming retail and total trade, creating new customer shopping experience. the performance of world’s leading retail chains shows that they are already making great use of smart technology (inman & nikolova, 2017; renko & druzijanic, 2014). smart technology in retail is an interactive system that provides customer services through a network of smart or intelligent devices that can integrate in real time in order to collect data, communicate, interact, and obtain customer feedback (roy et al., 2018). smart technology can be integrated into existing retail systems, presenting products in store windows or aisles and allowing customers to, for example, try out clothes, order products, and also connect with social networks. thus, smart technology is an outbreak in the application of information and communication technology in retail. since physical and digital purchasing dimensions are integrated, it creates a unique individual-customer-tailored shopping experience. moreover, the use of smart technology (smart mobile phones, tablets), that was a trend among younger people, is now widespread among almost all age groups. in this way, customers now have the opportunity to get a service with a high degree of efficiency, resulting in customer expectations of targeted, more sophisticated, and equally efficient services from retailers. on the other hand, retail chains widely accept this concept, and many of them emphasize the notion of smart technology as part of their business mission and vision. at the same time, they are aware of all the opportunities smart technology offers, becoming one of the key goals in the modern retail environment, be it offline or online. thus, studies predict that investment in smart technology will reach 6,2 billion dollars by the end of 2025, with retail sales taking a significant place. however, the opportunities smart technology offers are much greater than its introduction or use, so this phenomenon opens up numerous challenges and opportunities for retail chains. it is, therefore, necessary that they evaluate the real value and the changes smart technology brings. thus, in a recent survey, anderson and bolton (2015) highlight the importance of applying smart technology in retail, such as sensors and radio frequency identification (rfid), for the needs of collecting different data. sensors allow collecting data on the number of customers entering the retail facility, as well as a lot of complex data such as demographic or behavioural data during shopping. according to the survey, the implementation of smart technology in retail requires modification of business activities and processes. using smart technology, a retailer develops a partnership with their customers. at the same time, within its sales facilities, this way, it is easier to understand and cover customer intentions and needs, as well as their expectations of smart technology. building a good shopping experience is an imperative of modern retailers, while, on the other hand, it attracts enormous academic attention. 178 s. sokolov mladenović, v. vukojević 3. global power of innovation-based retail the world’s largest retail chains yearly record positive business results. their business reports, as well as their mission and vision, show that innovation, especially technological, is a business imperative. reports of 250 largest retail chains, published annually by the consulting firm deloitte touche, prove this. the latest report shows the top ten retail chains in the world and their business performance (table 3). table 3 top 10 retail chains, 2017. rank name of company country of origin fy2017 retail revenue (us$) fy2017 retail revenue growth fy2017 net profit margin fy2017 return on assets fy20122017 retail revenue cagr countries of operation % retail revenue from foreign operations 1 wal-mart stores, inc. us 500,343 3.0% 2.1% 5.1% 1.3% 29 23.9% 2 costco wholesale corporation us 129,025 8.7% 2.1% 7.5% 5.4% 12 27.2% 3 the kroger co. us 118,982 3.2% 1.5% 5.1% 4.2% 1 0.0% 4 amazon.com, inc. us 118,573 25.3% 1.7% 2.3% 18.0% 14 36.8% 5 schwarz group germany 111,766 7.4% 7.5% 30 58.9% 6 the home depot, inc. us 100,904 6.7% 8.6% 19.4% 6.2% 4 8.4% 7 walgreens boots alliance, inc. us 99,115 2.1% 3.5% 6.2% 6.7% 10 11.9% 8 aldi einkauf gmbh & co. ohg germany 98,287 7.7% 7.2% 18 65.1% 9 cvs health corporation us 79,398 -2.1% 4.5% 3 0.8% 10 tesco plc uk 73,961 2.8% 1.5% 1.9% -2.4% 8 20.7% top 10 1,430,353 6.1% 2.0% 5.5% 3.7% 12.9 25.1% top 250 4,530,059 5.7% 2.3% 5.0% 3.3% 9.5 23.6% source: global power of retailing, 2019. the table above shows that the top ten retailers had 31,6% of the share of revenue in total sales revenue generated by the 250 largest retailers in the world in the fiscal year 2017, which is by 0,9% more than in the previous year (2016). the first three retail chains retained their position in relation to the previous fiscal year, while amazon improved its position by two places, taking fourth place, with the highest growth in sales revenue (25,3%). amazon’s improved position can also be explained by the trends announced in earlier reports on the development of the largest retail chains. for example, factors such as digital transformation of trade, implementation of smart technology, and the concept of mobile trade, as well as the implementation of multi or omnidirectional channel strategy, are highlighted as the drivers of modern retail. all this points to the fact that innovation is a business imperative of contemporary retail chains, which is the starting hypothesis of this paper. generally speaking, in fiscal 2017, 250 retail chains saw a significant increase in sales revenue. in the total amount, sales revenues in 2017 amounted to 4,53 trillion dollars, which is by 2,72% more than in the previous year. innovation as driver of modern retail 179 walmart retained its position as the world’s largest retailer, with a sales growth of 3,0% in 2017. additionally, this company has been in the leading position among retail chains for many years, which is also reflected in retail revenue trends (figure 3). the question arises as to the secret of walmart’s success and the role of innovation in that process. 460000 465000 470000 475000 480000 485000 490000 495000 500000 505000 2013 2014 2015 2016 2017 retail revenue in mil. us$ fig. 3 walmart’s retail revenue, 2013-2017 source: authors’ calculation based on walmart annual report (2018) numerous studies consider walmart the most innovative retailer in the world. with more than 4700 stores across the united states and many more around the world, walmart dominates as a classic seller of “brick and mortar”. more and more companies focus on digital retail space by investing in significant e-commerce services as well as technological initiatives. implementation of innovation is visible in all segments of walmart’s business. in connection with this, there is also the official website https://blog.walmart.com/topics/ innovation, where one can see the achieved degree of innovation, or different types of innovation that the company applies in its business. some of them relate to the use of smartphones in order to improve business efficiency, the application of virtual reality in the purchasing process, specific applications simplifying customer shopping experience, and the like. from the use of new mobile applications for customers and employees to robots in stores, walmart uses technological innovation to outperform competition in the best possible way. it is especially noteworthy that walmart has intensified its innovation activity over the past two years, since it invested in the development of e-commerce and new technology to increase efficiency and improve working conditions, ultimately leading to higher sales volume and lower operating costs. in this innovation group, the following is worth noting: 1. upgrading existing mobile applications refers to the improvement of existing applications that customers use to purchase products via smartphones. the new mobile application, in addition to the existing benefits for customers, provides an integrated walmart retail store map, showing product location and services offered. in this way, the company implements the multi-channel retail strategy. 2. list of products for purchase – this relates to the established customer practice to have a paper list of products before making large purchases. walmart’s mobile application introduces a new list feature that allows users to choose more easily products they plan to 180 s. sokolov mladenović, v. vukojević buy. since the lists are integrated into new store maps, each product can be precisely located in the store. 3. robots – they are used to fill shelves, find and return lost products and track stock levels, which is the most demanding task in any sales facility. robots “walk” in sales facilities collecting different information, checking that the price has been updated, and the labels on the shelves are correct. once a day, robots examine the general commodity departments, thus improving stock management precision, reducing staff fluctuation, and improving user experience. they are currently used in only 50 stores with the plan to use it in a large number of stores. 4. virtual reality – besides being used by customers, walmart has enabled its use to improve employee training programs, creating a video game where simulated experiences are used to accomplish job-related tasks and achieve specific rewards. 5. automation – it includes the process of unloading goods and sorting them in sales facilities. currently it is applied in 30 sales facilities, with the plan to apply it as many stores as possible. the aforementioned types of innovation are only a part of the innovative technology walmart applies in its business. as its business reports point out, intensive application of innovation makes it easier for it to “fight” the competition. what is visible is the company’s leading position in the list of the largest retail chains in the last twenty years and the epithet of the most innovative retailer. conclusion innovation is one of the key factors in creating and maintaining long-term competitive advantages in different economic sectors. trade, especially retail, is considered an innovation-intensive economic sector. the novelties technological revolution brings have found their place in trade and retail. innovation in retail refers to changes of the existing into something new and different. in doing so, understanding innovation can be approached from different perspectives, i.e. the multidisciplinary approach to the understanding of innovation is dominant. in line with these facts, the paper first pointed to the fact that the term innovation has always attracted the attention of theoreticians and practitioners, i.e. innovation is a permanent topic. in today’s conditions, innovation is not just a research topic, but an integral part of the business strategy. this is especially evident in the case of modern retail, where innovation takes a very important place. in addition, there is noticeable proliferation of innovation and the inescapable role of information-communication and smart technology in retail. the paper placed a special emphasis on technological innovation and the use of smart technology in retail. the hypothesis on the importance of innovation in modern retail was tested using the example of 250 largest retail chains, which year after year show a tendency of growth in operating revenues and other business performance indicators. the subject of the special analysis was walmart, which has a leading position in the list of the largest retail chains in the last twenty years. bearing in mind the various types of innovation that this company applies and which were analysed, it can rightly be said that walmart is the most innovative retailer. therefore, innovation is condition sine qua non in modern retail. innovation as driver of 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(1973). innovations and organizations. new york: john wiley & sons, inc. inovacije kao pokretači savremene maloprodaje osnovni cilj rada jeste da ukaže na značaj inovacija za savremenu maloprodaju. polazi se od činjenice da je maloprodaja, kao i ukupna trgovina, inovaciono-intenzivan sektor privrede i da su inovacije kritičan faktor kreiranja i održavanja dugoročne konkurentske prednosti. metodom kabinetskog istraživanja, u radu se koristi konceptualno širok pristup razumevanju značenja i proliferacije inovacija u maloprodaji. poseban akcenat stavljen je na razvoj i primenu tehnoloških inovacija. hipoteza o značaju inovacija za razvoj savremene maloprodaje testira se na primeru 250 najvećih maloprodajnih lanaca, s fokusom na walmart, vodeći maloprodajni lanac. na bazi ovoga, posebno su istaknuta glavna obeležja primene i značaja vodećih inovacija u maloprodaji. ključne reči: maloprodaja, inovacije, tehnološke inovacije, walmart facta universitatis series: economics and organization vol. 17, n o 1, 2020, pp. 17 26 https://doi.org/10.22190/fueo191016002s © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper effects of applying different risk measures on the optimal portfolio selection: the case of the belgrade stock exchange 1 udc 336.76(497.11) jelena z. stanković, evica petrović, ksenija denčić-mihajlov university of niš, faculty of economics, niš, serbia abstract. despite its wide use in practice, modern portfolio theory and markowitz’s approach to optimization, which is based on quadratic programming and the first two moments of the probability distribution of returns as major parameters, was faced with criticism. therefore, standard mean-variance approach had been modified by applying more appropriate risk measures in optimization algorithm. the aim of this paper is to indicate efficiency of these models as well as justification of their usage in managing stocks portfolio on the belgrade stock exchange. key words: portfolio optimization, alternative risk measures, belgrade stock exchange jel classification: g32, g11, o16. 1. introduction portfolio optimization represents one of the most important aspects of making investment decisions, based on the possibility of a successful assessment of the relationship between return and risk. for decades, in the selection of financial assets and the formulation of an optimal portfolio strategy investors have been dominantly using the mean-variance (mv) model (markowitz, 1952), which forms the basis of modern portfolio theory. simplified starting assumptions regarding investors’ preferences and return distribution, make it possible to form an optimization model, which, according to markowitz’s approach, is based only on the expected return and risk. however, none of the conditions of this model are sustainable in reality. normal probability distribution is not an adequate model of empirical distribution of returns, characterized by asymmetry and heavy tails, so received october 16, 2019 / accepted january 21, 2020 corresponding author: jelena z. stanković university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: jelenas@eknfak.ni.ac.rs 18 j. z. stanković, e. petrović, k. denĉić-mihajlov that in situations where there is a significant deviation from the expected value, the measures of central tendency and dispersion are no longer sufficient parameters to describe the distribution of returns or to optimize the portfolio. in the mid-1990s, the mv model began to be critically observed and innovated to respond to investors’ demands. most of the criticisms relate to the parameters of the return distribution the mean, as a measure of expected return, and the standard deviation, as a measure of risk, and their role in portfolio optimization. due to the fact that the normal distribution does not have empirical significance in modeling financial series from contemporary markets, in many cases it has been observed that the form of distribution significantly influences portfolio performance as well as the criteria for selecting financial assets (lamm, 2003). technological development, especially the development of digital technologies, has transformed many industries and enlarged the number of available investment options. in cases where a large number of financial instruments are being considered, high dimensionality can prevent the precise evaluation of a complex correlation structure and risk. under the radically changed risk-return trade-off, investors’ risk aversion and investment conditions, the application of markowitz’s model in the optimization can result in the allocation of financial resources to suboptimal investment alternatives. one of the possible ways to improve the mv model is to incorporate various risk measures into the portfolio optimization model (konno et al., 2002; chang et al., 2009). new technologies allow designing improved computational frameworks and decision algorithms for portfolio optimization. modern research shows that optimization models that involve extreme risks and encompass the entire return distribution would provide more adequate solutions to the problem, especially in emerging markets (stevenson, 2001; gilmore et al., 2005). therefore, the aim of this paper is to point out the shortcomings of the mv model in the optimization of the securities portfolio of the belgrade stock exchange by comparing the performance of the optimal portfolios obtained by using different risk measures. the measures used to evaluate portfolio risk in this study are the measures most commonly used in research, as described in the second part of this paper. the method of their calculation and implementation in the optimization algorithms is explained in the third part of the paper, while a comparative analysis of the results of portfolio optimization by applying different risk measures is presented in the fourth part. concluding remarks and further directions for research are presented in the fifth part of the paper. 2. literature review the effects of portfolio diversification on emerging markets can be highlighted as the most significant feature of financial globalization (mensi et al., 2017). emerging and frontier markets are usually considered separately from developed ones because of their specificities depth and width, legal and institutional infrastructure. these new capital markets of transition countries in europe, south america, asia, the middle east and africa offer investors unusually high returns, comparing to developed markets, but also higher level of volatility (bekaert & harvey, 2017). the peculiarities of the functioning of these markets make it impossible to establish a strong correlation with other world markets, preserving them from the impact of global trends (berger et al., 2011). therefore, after the financial crisis, the economic importance of emerging markets significantly increased and the share of emerging market companies’ stocks in the msci all country world index effects of applying different risk measures on the optimal portfolio selection: the case of the belgrade... 19 reached 14% (melas, 2019). nevertheless, investments in the frontier and emerging markets are fraught with numerous risks, which cannot be adequately measured by the application of classic risk assessment models. moreover, in post-crisis period modeling of market risk is heavily re-examined, due to the fact that existing risk management models and practices have not provided a reliable framework for measuring and managing risk (ball, 2009; hansen, 2013). despite numerous empirical studies conducted from the 1950s till now, there is no fundamental theory that offers a generally accepted statistical model based on some theoretical return distribution that takes into account all the observed characteristics of financial time series, such as: volatility clustering, autoregression and return asymmetry, and heavy tails and their properties (stojanov et al., 2011). therefore, it is necessary that the methodology for quantifying risk is based on a model that captures the stated properties of financial time series and, accordingly, an appropriate measure of risk. research shows that investors prefer securities whose distribution is positively asymmetric if the expected return and standard deviation are constant for all considered securities (guidolin & timmermann, 2008; xiong & idzorek, 2011). this characteristic of investors is particularly evident when referring to risk managers in mutual funds and insurance companies (zuluaga & cox, 2010). in accordance with investors’ preferences, it is necessary to apply an appropriate risk assessment model, since an inadequate model for risk assessment in portfolio analysis can lead to the application of wrong diversification and risk hedging strategies (lee, 2011). the appearance of new financial instruments, the different types of investors and the circumstances under which investment is made in the capital markets, has conditioned the consideration of an alternative risk measures to the variance (hoe et al., 2010; zhang and guo, 2018). implementation of these measures enabled simplification of portfolio optimization algorithms, since the optimal portfolio can be determined by using linear programming. in order to overcome the disadvantages of variance as a measure of risk, konno and yamazaki (1991) proposed a new portfolio optimization model that captures risk with the measure of mean absolute deviation. this model can be used to select assets from a large set of available investment alternatives and, unlike the markowitz’s model, it does not require calculation of the covariance matrix. however, despite the fact that variance and mean absolute deviation are adequate risk measures in a large number of cases (byrne and lee, 2004), investors’ preferences towards positive deviations from expected returns cannot be incorporated in these models (lamm, 2003). by applying downside risk measures in the securities selection model, especially when investing in emerging markets, these deficiencies can be eliminated (stevenson, 2001; estrada, 2006). one of the commonly used downside risk measures, introduced by markowitz (1959) into portfolio analysis, is semivariance. the semivariance is often considered as more appropriate investors’ risk measure than the variance. however, computational issues have affected academics and practitioners to use preferably mv approach (estrada, 2008). the other widely used downside risk measure is the semi-absolute deviation proposed by speranza (1993). although, it can be shown that, under certain assumptions, the semi-absolute deviation is equal to one half of the absolute deviation, as well as equivalent to the variance (chiodi et al., 2003), from a computational point of view, implementation of the semi-absolute deviation in the portfolio optimization model makes its evaluation simplified (liu and qin, 2012). in recent years, due to finance and insurance regulation, value at risk (var) and conditional value at risk (cvar) have been used in financial and risk management. the 20 j. z. stanković, e. petrović, k. denĉić-mihajlov problem of the choice between var and cvar in portfolio optimization is affected by the differences in mathematical properties of these risk measures, stability of statistical estimation and complexity of optimization procedures (sarykalin et al., 2008). practical applications indicate that the minimization of cvar usually leads to near optimal solutions in var terms, so it can be concluded that portfolios characterized by low cvar should have low var as well. however, cvar as a coherent measure of risk can be used in solving optimization problems of large portfolios and a large number of scenarios with linear programming (krokhmal et al., 2002). the previous researches on the portfolio optimization conducted on the serbian and neighboring capital markets, in which markowitz’s model in portfolio selection was applied, identified numerous limiting factors, such as market illiquidity, low turnovers, high oscillations of returns, as well as positive correlation among the returns (zaimović and delalić, 2010; koĉović et al., 2015; radović et al., 2018). therefore, the main contribution of this paper is to investigate the effects of different risk measures implementation on optimal portfolio selection model on the belgrade stock exchange. 3. data and methodological framework in order to form a portfolio that will provide investors on the belgrade stock exchange a better performance comparing to the market portfolio, optimization algorithms are applied to a group of stocks – constituents of the market indexes belex15 and belexline baskets. the value of belexline and belex15 indexes are determined by the prices of the most liquid stocks which are continuously being traded on the regulated market of the belgrade stock exchange. an adequate evaluation of the basic characteristics of financial time series requires certain duration of the series, which reduces the number of available stocks to 29. taking into consideration the required conditions which the companies issuing the stocks need to meet in order to be included in these lists, the starting point in this study is the assumption that they are the most liquid securities on the belgrade stock exchange. the data used in this study were taken from the website of the belgrade stock exchange (www.belex.rs). the series of values of the indexes, as well as of individual stocks, include records from january 1 st , 2008 to december 31 st , 2018, which in total includes 2775 trading days. optimization algorithms are executed using 29 assets observation, each of which with the 2524 in-sample trading data and tested in out-sample period of 250 trading data in the last year. in the models we use the logarithmic returns of the selected stocks’ values. the distributions of such returns deviate significantly from the normal distribution, while the stocks’ returns have been positively correlated (stanković et al., 2015). if it is assumed that investor considers investing financial means in i, i = 1, 2, 3, …, n different securities, which returns in the time period t, t = 1, 2, 3, … t are ri(t), the expected return of the investment portfolio e(rp) can be determined using the following formula: ∑ (1) where e(ri) represents the expected return of i security measured by the mean value in the observed period ( ̄), while wi is a share of the i security in the investment portfolio. to determine the optimal portfolio, we use different criteria. if we assume that investors are risk-averse, they will select securities in such a manner to provide the maximum return for an acceptable level of risk or to minimize risk for a given level of return. portfolio risk effects of applying different risk measures on the optimal portfolio selection: the case of the belgrade... 21 assessment includes evaluation of correlation between securities in the portfolio, which determine the level of diversification. the maximum reduction of risk is achieved by a combination of securities, whose returns are perfectly negatively correlated. the degree and magnitude of changes in securities’ return may be measured using covariance between the securities’ returns. the risk of the portfolio, according to mv model, is measured using variance, and can be determined as follows: ∑ ∑ (2) where presents expected risk on investment in i security measured as a dispersion of the returns around the expected returns e(ri), while is covariance between the securities’ returns. as an alternative measure to variance, absolute deviation (ad) is used. the main advantage of applying ad in portfolio optimization is simplicity of its computing, because the assessment of risk in this manner can be made without the need to calculate covariance matrix. moreover, when the securities are highly correlated, such as the securities in the observed sample, it is unnecessary to determine the covariance matrix. assuming that there are t different scenarios, i.e. t observations, ad can be calculated as follows: ∑ |∑ | (3) where represents the measurement of central tendency and in this study, it is the mean of the return of the observed sample. since investors are more sensitive to the returns’ decline than to the potential returns’ increase, they will follow “safety-first” rule, meaning that they will select assets with the lowest probability of loss below a certain or disaster level. downside risk measures enable investors to assess the risk below average or expected return, thereby not assuming that assets’ return distribution follow the normal probability distribution. lower semivariance (lsv) is a statistical measure, which represents the squared deviation of the values lower than the mean, and can be calculated in the following manner (boasson et al., 2011): ∑ ∑ , (4) accordingly, lower semi absolute deviation (lsad) is a statistical measure, which shows the absolute deviations of the values from the mean, and can be calculated using the following formula: ∑ |∑ | , (5) computational setting of value at risk (var) as a risk measure was presented within modern portfolio theory (holton, 2002). today var is a standardized risk measure, which is applied in the risk assessment and capital adequacy of both financial and nonfinancial institutions. the var model is determined by two main parameters: confidence interval α, α ∈ (0,1) and holding period h within the var is assessed. for the given confidence interval α and holding period h, varα can be defined as the least number l, such that in the future period it will not be greater than expected loss l with probability 1-α. according to the probability theory, var is a lower quantile of return distribution (mcneil et al., 2002), that in the case of a portfolio can be summarized as follows: 22 j. z. stanković, e. petrović, k. denĉić-mihajlov (6) however, var as a risk measure is not subadditive. moreover, var does not provide information regarding the value of the loss that exceeds the value of var. implementation of this measure in optimization problem and risk management, contrary to the expectations, does not contribute to risk reduction and investors’ utility maximization rather recommending the positions with higher risk exposure, due to which investors suffer grater losses under the terms of significant volatility (basak & shapiro, 2001, yamai & yoshiba, 2002). the drawbacks of var can be mitigated by conditional value at risk (cvar) which is a conditional expectation that gives the expected loss beyond the var. correspondingly to var model, computational setting of cvar model is determined by two main parameters: confidence interval α, α ∈ (0,1) and holding period h within the risk is assessed. for the given confidence interval α and holding period h, cvarα can be defined as a mean value of α-quantile of empirical distribution of l, and, according to the formula (6), it can be quantified in the following manner: | (7) portfolio optimization model under the assumption that investors tend to minimize the risk of the portfolio (lp) is defined using the above described measures of risk and in general can be summarized as follows: (8) subject to: ∑ (9) ∑ (10) the set constraints should enable comparison with market portfolio approximated by the market indexes belex15 and belexline. detailed explanation of applied optimization algorithms can be found, for example, in the studies of byrne and lee (2004), krokhmal et al. (2002) and liu and qin (2012). 4. results and discussion optimizing allocation of financial means on the belgrade stock exchange using various measures of risk presented in this study results in five different investment portfolios, which achieve better performance compared to market portfolios in the out-sample period (table 1). the effects of these investments are measured by total return, total risk and the sharpe ratio. although none of the obtained portfolios can be considered effective in terms of sharpe ratio, all have higher sharpe ratio than belex15 and belexline index, with significantly higher returns and almost identical risk, but higher risk comparing to market portfolios, at a level of approximately 15%. implementation of the standard mv approach in portfolio optimization lead to portfolio that consists of 27 stocks and it enables investors to achieve 3.30% return within holding period of 250 days. investors should invest in a similar number of stocks according to msv model (26) and mvar model (23) in order to realize 2% higher return comparing to market portfolio. however, transaction costs and belgrade stock effects of applying different risk measures on the optimal portfolio selection: the case of the belgrade... 23 market illiquidity may reduce the possibilities to invest in stocks according to these models of optimization. on the other hand, the use of ad and sad measures of risk in the portfolio optimization model resulted in portfolios, whose structures make smaller number of shares (5) and significantly better performances in comparison to other alternatives. the optimal portfolios determined by using msad and mad models realize identical sharpe ratio (0.81124) and return of 12.87%. table 1 optimal portfolios performances optimizaton method no. of stocks sharpe ratio holding period return holding period variance mean – variance (mv) 27 0.21258 3.30% 15.54% mean – semi variance (msv) 26 0.13973 2.19% 15.64% mean – absolute deviation (mad) 5 0.81124 12.87% 15.87% mean – semi absolute deviation (msad) 5 0.81124 12.87% 15.87% mean – value at risk (mvar) 23 0.17024 2.68% 15.71% belex15 11 0.02759 0.25% 9.00% belexline 21 -0.65957 -4.50% 6.83% source: authors’ calculation in order to compare the structure of obtained portfolios we estimate similarity index. portfolio similarity index, as a measure of similarity of portfolios’ structures, includes both similarity in terms of portfolios’ compositions, as well as similarity between the weights attached to common assets in two portfolios. the similarity in portfolio composition is measured by the portfolio overlap index that is calculated as the share of common stocks in two portfolios in the average number of stocks in observed portfolios. however, portfolios even of exactly the same composition may differ in the weights attached to common assets. therefore, portfolio weight index is assessed by summing the minimum weight attached to each asset that overlaps two portfolios. following byrne and lee (2004) the portfolio similarity index is calculated by multiplying the portfolio overlap index by portfolio weight index and the results of portfolio similarity analysis are presented in table 2. table 2 portfolios similarity indexes mv msv mad msad mvar mv 100.00% msv 92.68% 100.00% mad 17.72% 18.65% 100.00% msad 17.72% 18.65% 99.22% 100.00% mvar 84.68% 87.81% 20.77% 20.77% 100.00% source: authors’ calculation comparing the structures of optimal portfolios achieved by using different risk measures in optimization algorithms, it can be concluded that the structures are significantly different. portfolios obtained by implementing msv model is the most similar to mv portfolio with 92.68% of similarity. the structure of mvar optimal portfolio is different in 15.32% from mv portfolio. on the other hand, mad as well as msad optimal portfolios show the least similarity with mv portfolio with a value of similarity index of 17.72%. considering the fact that mean values of the selected stocks’ returns are mostly negative 24 j. z. stanković, e. petrović, k. denĉić-mihajlov with insignificant deviations from zero, the structures of the mad and msad optimal portfolios are almost identical. however, these portfolios provide the best performances and, despite the investment conditions on the serbian capital market, are realizable to investors. 5. conclusion modern portfolio theory was the common framework for the development of many theories and concepts in finance that are still widely used, but also the subject of constant criticism. the assumption that most certainly brings into question the appearance of this theory is the probability distribution of returns on financial assets, and thus the basic parameters of the optimization model. financial time series show numerous anomalies in comparison with the normal distribution, which require consideration of additional parameters necessary for the adequate assessment of return and risk. the emergence of new financial instruments, as well as different types of investors, have made it necessary to consider the effects of extreme risks in the portfolio optimization models. considering the statistical parameters of return distributions, investors will prefer to allocate their funds in the financial assets, whose return distribution is positively asymmetrical, while they will be averse toward the financial assets, whose return distribution is long tailed. in such terms, the variance as a commonly used measure of risk in portfolio optimization models should be replaced by the downside risk measures. the need to incorporate alternative risk measures in portfolio optimization algorithms is even more pronounced on the emerging capital markets, such as the belgrade stock exchange, considering the statistical characteristics of the financial time series. the contribution of this research results is substantial, taking into consideration that portfolio specialists working at the serbian capital 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(2010). improving skewness of mean-variance portfolios. north american actuarial journal, 14(1), 59-67. 26 j. z. stanković, e. petrović, k. denĉić-mihajlov efekti primene različitih mera rizika na izbor optimalnog portfolija: slučaj beogradske berze savremena portfolio teorija i markovicev pristup optimizaciji, koji se zasniva na kvadratnom programiranju i čiji su osnovni parametri prva dva momenta raspodele verovatnoće prinosa, uprkos širokoj primeni u praksi, suočila se sa brojnim kritikama. stoga su razvijeni modeli, koji na adekvatniji način inkorporiraju rizik u model optimizacije. cilj ovog rada je da ukaže na efikasnost ovako formiranih modela optimizacije i opravdanost njihove primene u upravljanju portfoliom hartija od vrednosti na beogradskoj berzi. kljuĉne reĉi: optimizacija portfolija, alternativne mere rizika, beogradska berza. facta universitatis series: economics and organization vol. 16, n o 4, 2019, pp. 337 348 https://doi.org/10.22190/fueo1904337s © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper financial and economic models for educational services in the context of ukraine and the eu standard harmonization 1 udc 364.2:37]:33(477:4-672eu) liudmyla shulgina 1 , małgorzata okręglicka 2 1 national technical university of ukraine “igor sikorsky kyiv polytechnic institute”, ukraine 2 czestochowa university of technology, poland abstract. the article is focused on the need for a systematic approach to the harmonization of ukrainian and the eu standards and the proposal to develop standards for training specialists in the relevant field in compliance with the standards on the level of qualifications and working conditions of teachers. the conflict between human rights for spiritual and physical development and the lack of opportunities for respecting these rights has been identified. it is proposed to resolve the specified conflict by introducing financial support for entrants. the starting positions of the formation of financial and economic models for providing/obtaining educational services have been outlined. the bases for the implementation of these models are: the strategy of innovative education development; the infrastructure for providing information support for decision-making; as well as the system of criteria for determining the appropriateness of the model selection. regarding the feasibility of introducing financial and economic models for providing/obtaining educational services in ukraine, what has been discussed, among others are: public, business, credit, selfand combined financing. the criteria for the selection expediency and the application of each model are justified. key words: financial and economic model, educational services, state financing, business financing, credit financing, self-financing, combined financing. jel classification: a23, i22, p46 received june 30, 2019 / accepted august 06, 2019 corresponding author: małgorzata okręglicka czestochowa university of technology, generała jana henryka dąbrowskiego 69, 42-201 częstochowa, poland e-mail: m.okreglicka@wp.pl 338 l. shulgina, m. okręglicka 1. introduction each stage in the socio-economic development of civilization has certain characteristics and the understanding of life quality standards. “the increasing importance given to education in a country leads to the contribution to both an improvement in the economy and socio-cultural structure and an increase in the quality of services provided to citizens by the government” (goksu & goksu, 2015; havierniková et al., 2017). in the authors‟ opinion, modern conditions of the functioning of ukrainian society are primarily defined as “a market”. this determines all the aspects of their life, including traditionally non-commercial areas, among which there are health care, church, education etc. the forms of market relations in these areas, which predominate in ukraine nowadays, are perceived ambiguously and require consideration/evaluation from at least two points of view. the proponents of the first point of view argue that in order to meet any need (including treatment, education, etc.), it is necessary to form the appropriate material basis. thus, the commercialization of these areas is quite logical, since there is an objective need to cover the costs of providing the material basis for the provision of the service. at the same time, the opponents of this point of view emphasize that this refers primarily to the area of an individual‟s spiritual needs satisfaction (in learning and self-development) and the physical needs of people (as living organisms). this area cannot be put in line with other branches of the national economy. in addition, the right to meet these needs is enshrined in the constitution of ukraine: “article 23. everyone has the right for free development of their personality, if this does not violate the rights and freedoms of other people, and has responsibilities to the society, which provides free and comprehensive development of their personality” (the constitution of ukraine, 1996). the word “provides” has been written in bold to point out the main idea of article 23: the state undertakes measures to ensure the recognition of these rights or it entrusts these functions to some of its representatives. consequently, we have a conflict between human rights for spiritual and physical development and the lack of real opportunities to respect these rights. simultaneously, we should not ignore the fact that the specified conflict is actual for the significant part of ukrainian citizens who are gifted and interested in self-development and education. unfortunately, no research has been carried out yet to establish socio-economic, scientific, technical and other losses of the state because of the „population‟s underdevelopment' due to their insolvency. it is understood that these losses are substantial for the economically active population, not only young but also middle-aged and senior citizens. first of all, these are the losses at the personal level, which subsequently accumulate into the losses of the family, enterprise, region, country. the specified economic losses should be added to the whole of social losses at all levels, including the „purchase‟ of educational services by consumers who do not have the necessary level of knowledge for higher education but become students and get a diploma in the future only due to their solvency. all of the above issues are considered a set of significant negative factors of a permanently low quality of life for a large part of the population for a long time. it is the problem extremely difficult to solve, the symptoms of which are observed at all levels of the socio-economic, cultural-political etc. subsystems of the ukrainian national system. in other words, the statement by k. nemeshayev (znamienitaia fraza, 2002) “cadres decide everything!” (which was later picked up by other well-known figures and cynically used in their own, not always decent, agendas) continues to be underestimated. indeed, in the independent ukraine, a systematic approach to the formation and development of a financial and economic models of educational services in the context of ukraine... 339 harmonious personality has not yet been designed. personality in which the harmonious combination of not only internal physical and mental health but also the love for a healthy social and natural habitat as well as (being not less important!) the ability and willingness to preserve, protect and improve it were presented. such a person should be the foundation of civil society, because they are highly educated, focused on true humanitarian values and high living standards and, therefore, it is difficult and even impossible to manipulate them. hence our belief in the validity of the following theses: there is a close connection between the problems of low quality of life and the lack of a systematic approach to the formation of a harmonious person; both of these problems are complex and urgent to be solved; in the system of a harmonious personality development, higher education is only one of the subsystems of education at different levels; proceeding from the previous thesis, all work on improving the form and content of higher education as a subsystem (including the process of educational standards harmonization) must take into consideration the fact of interdependence between the components of the whole system. on the basis of the systematic approach to the appropriate standards for an improvement in the quality of life through the formation of a harmonious person, in the authors‟ opinion, it is expedient to do the work in the following sequence: firstly, to study the important factors of the aforementioned conflict between human rights for spiritual and physical development and the lack of opportunities for their recognition; secondly, based on the findings of the study, to develop possible ways of leveling this conflict especially by working out the feasible financial and economic models for providing/ obtaining educational services in ukraine. 2. literature review while the business transformation was generally successful, the education and research suffered from the lack of financial resources, a higher age structure of academics and often complex legislation (ivanicka& tomlain, 2015). this is why, “many countries have already initiated the collaboration of educational units in order to compare their own higher education systems with others and to find common solutions” (çekerol & öztürk, 2012). it is emphasized that “major transformations in european higher education systems were believed to be necessary for europe to become a knowledge economy” (aydarova, 2014). the bologna process and its consequences “herald perhaps the most far-reaching reforms in european higher education in this century” (mitchell & mitchell, 2014). it has become a symbol of globalization in the educational area (yergebekov & temirbekova, 2012). still, “there are doubts on the overall effects of standardization of countries with a completely different social-educational system which could not fully fit into the standard principles, because of different values and patterns” (alimehmeti & hysa, 2012). in addition, there is “limited knowledge of the extent to which the bp actually is leading to a converging process of national higher education policies” (kehm & teichler, 2007; heinze & knill, 2008). the analysis of the scientific publications devoted to the issue has shown that some preconditions were important to solve the aforementioned problem in ukraine. among other factors, the first should be the participation of ukraine in the bologna process the country joined in 2005 and became one of the 48 european member countries. the purpose of the bologna process is to create and develop a european scientific and educational space (rashkevich, 2014). on this path, a lot has already been 340 l. shulgina, m. okręglicka done to bring the national system of higher education in line with the european one. this includes the development of lifelong learning strategies, definition of educational degree and its duration, educational program improvement and bringing them closer to the requirements of the labor market, implementation of the ects system, dissemination of innovative teaching methods, etc. (prickodchenko, 2012; severova, 2015; todorescu et al., 2012). secondly, in ukraine the processes of harmonization of domestic standards with european ones in all areas of life, including education, have been intensified since the signing of association agreement between ukraine and the european union. the significant progress in the chosen path is evidenced by the growth in academic mobility volumes in 2014-2019. however, there is a negative point in this trend (which is undoubtedly progressive for ukraine) – the directions of student and teacher migration clearly indicate that ukraine has ended up on the periphery of educational space, and not only of the european one (association agreement, 2015). the authors consider the aforementioned preconditions, to a large extent, to be forming a favorable environment in order to achieve the objective set. however, in addition to them, there are sufficient deterrent factors. these are the following: imbalance of the educational system in terms of preparing specialists the national economy really needs and at the same time excessive attention to „fancy‟ specialties; discrepancy between the level of remuneration of education staff and the social significance of their work; the absence of state regulatory mechanisms (including financial ones) that would motivate talented students and teachers to develop as effectively as possible and, subsequently, to stay in ukraine. it should be added that, in the current process of harmonization of the eu and ukrainian educational standards, the attention is focused exclusively on the content of curricula in the preparation of individual specialties. however, other elements of the education system are not taken into account, i.e. on the one hand, different levels of education (from preschool to third-degree education), while on the other hand, different circumstances of the process of providing/obtaining educational services (in particular, the procedures accompanying this process; methods of training and selection criteria for teachers; interconnections with other contractors of the labor market; the possibilities of using different methods of financing in education, etc.). as the aforementioned (and far from complete!) list of actual preconditions for the appearance of the conflict under investigation evidenced, a systematical approach should be used to solve it. the above will be illustrated with a short example. therefore, the authors believe that the development of standards for training specialists in a particular specialty (forming the content of educational services) should be coordinated with the development of standards for the level of qualifications and working conditions of teachers (providing quality provision of educational services according to the previous standard to students). 3. methodology of the research the purpose of this article is to outline the essence and conditions for the implementation of financial and economic models for providing/obtaining educational services in the context of the ukrainian and eu standard harmonization process, provided by the authors. financial and economic models of educational services in the context of ukraine... 341 the information database of the study consisted of the following sources: the constitution of ukraine, the law of ukraine on education, the law of ukraine on higher education, data from official websites of the ministries of education of ukraine and azerbaijan, informational portals of columbia, spain, france, iran, germany, cyprus, czech republic, scientific publications of ukrainian and foreign scientists, results of indepth interviews conducted by the authors with representatives of the listed countries. in the course of the research, both general scientific and specific marketing methods were used. in order to compare current financial-economic models of granting/receiving educational services in different countries, a desk analysis of secondary information obtained from the above sources was used. in order to find out the attitude of consumers of educational services towards existing models, as well as to test the proposed models, the primary information was collected and analyzed by the students of ukraine and all the countries listed above. 4. research results the authors have analyzed the methods of solving the outlined problem in postsoviet countries (law of ukraine on education, 2017; law of ukraine on higher education, 2019; law of the republic of azerbaijan, 2009); western europe (education in poland, 2019; learning in france, 2019; romanovskyi, 2015); asia (tackmasby, 2014), north and south america (education and science, 2019; higher education in canada, 2019), generalized the world experience in the financing of providing/obtaining educational services and formulated several conclusions:  in all the countries covered by the study, both types of educational institutions operate – public and private;  private institutions are usually more prestigious, since they have the financial capacity to form a better material and technical base, to organize comfortable conditions for studying and teaching, to attract the best lecturers and, accordingly, provide the most up-to-date educational technologies;  countries pay significant attention to the successful implementation of the national development strategy, while having a well-developed system of grants and scholarships to support talented youth, academics and scientists;  in most countries (from the studied sample), the level of payment for education is comparable to the amount of possible material compensation (in the form of a grant, assistance, etc.) as well as to average wages, which guarantees a decent standard of living. in addition, the surveys of representatives from different countries have demonstrated that there is not a perfect funding system yet for providing/obtaining educational services in any of them. however, “there is the lack of consensus on how higher education should be financed” (long, 2019). an important problem for all the studied educational systems remains the complexity of determining the cost of education, calculation of the volume in order to meet the social needs for specialists (which also should affect the cost of education), etc. however, practically, in each of the studied foreign systems, there are separate attributes, which are useful to be tested and adapted to the education system of ukraine. the authors have formulated the initial points for the formation of financial and economic models for providing/obtaining educational services in ukraine, based on the 342 l. shulgina, m. okręglicka results of the study in ukraine on the factors both favorable and unfavorable for the development of a harmonious personality, as well as taking into account the peculiarities of the process of ukrainian and the eu standards harmonization:  it is necessary to create appropriate financial and economic conditions for free and comprehensive development of every citizen of ukraine as a consumer of educational services, including in terms of the implementation of the “lifelong education” strategy;  it is necessary to ensure multivariate financial and economic models (fem) for the provision/acquisition of education to create the conditions for simultaneous implementation of different models and the possibility of their free selection for potential customers, given significant variety of needs of educational service users;  the development and implementation of fem should contribute to the growth in the efficiency, on the one hand, of the higher education sector in terms of strategic (long-term) and tactical (short-term) measurements but, on the other hand, at all possible levels (state, university, teacher, student). the initial points formulated by the authors emphasize that the development of fem today is an extremely important and urgent task, the solution of which determines the successful implementation of the national development strategy of ukraine and hence the promising position of the state on the geopolitical map of the world. there is no need to prove the close relationship between the competitiveness of the worker, the company and the country; as well as the fact that the aforementioned indicator, in turn, depends on the conditions (including financial-economic) providing opportunities to constantly work on increasing its level. the last one (the need for constant improvement) is a challenge to the rapid pace of development of all areas of life. these require continuous education, i.e. lifelong education. thus, in the process of developing fem, it is necessary to take into account the fact that segments of customers of educational services are significantly diversified today (on the basis of the branch, income of applicants, age, type of training). this, of course, affects the differences in their needs and, therefore, requires different methods to satisfy them. it is not less important to understand that the choice of fem for providing/obtaining educational services in the country, their content and relationships can be considered as a kind of indicator of the actually chosen strategic development course of the state, the level of social orientation of its political and economic systems, state of democratization of the society, etc. proceeding from the above, the authors believe that, for ukraine, it is expedient to have a harmonized combination of the following fem for providing/obtaining educational services: 1. public financing – identification of the most talented entrants, training them using public funds through special training programs using incentive programs for further career and career prospects (the expediency of the model is guaranteed by the needs of the state). this is due to the fact that the financing of higher education is deeply embedded into the political system of the country (teichler, 2018). 2. business financing – training of specialists, which requires representatives of certain industries at their expense and in close cooperation with them. this involves the coordination of training and apprenticeship programs, teaching certain subjects by practitioners, internship of teachers and traineeships by students, employment of graduates (the feasibility of the model is guaranteed by the needs of the business). financial and economic models of educational services in the context of ukraine... 343 3. credit financing – obtaining a loan for studying (from the future employer, an independent sponsor, the state, etc.) – this model is possible in ukraine today only if the state guarantees the financial security of both the lender and the borrower. however, palacios (2014, p. 208) argues that this form of financing creates lower risk than one might think. he points out that “students are likely to have less information about their future prospects than their lenders”. 4. self-financing – training at own expense (the expediency of the model is guaranteed by the educational institution and the state, on the basis of the database on the needs for specialists). it is clear that the introduction of these models in the territory of the country requires the development of appropriate ideological (conceptual), marketing and legal support, in which (among other things) the following components should be included: 1) the strategy for innovative development of education; 2) the procedure of forming the infrastructure for providing information support for decision-making; 3) the criteria for determining the appropriateness of choosing one or more fem for providing/obtaining educational services; 4) the list and sequence of amendments made to the legislative framework, the purpose of which is to ensure the efficient functioning of each model, as well as obtaining additional opportunities for financing educational services. an important task which needs to be solved in the context of the implementation of the proposed fem for providing/obtaining educational services is to determine the criteria for the expediency of the selection of one or more models. the authors believe that the first of these – public financing – should have the following criteria: 1) the state need for specialists (accurate and reliable information provided by the above information-support decision-making system); 2) assessment of the applicant's success, and 3) the amount of material support necessary to provide the applicant with the appropriate quality of life. the authors emphasize in particular that, unlike the current state funding, firstly, the objective should be to promote the training of the most talented students; secondly, it should be formed on the basis of the scientifically grounded data on the state‟s need for specialists; and thirdly, it should foresee the volumes that guarantee a high level of motivation of the scholarship holders. while anticipating the opponents‟ disagreement with the stated approach and their main argument – significant expenditures of the state budget on the implementation of the proposed programs, the authors want to note that all countries, now classified as developed, began their rapid development precisely from an increase in target expenditures on education and science. the state which does not finance its own intellectual resources – loses them. this is confirmed by a massive outflow of „intellectuals‟ from ukraine to the countries where the financial and economic conditions correspond to the emigrants‟ idea about payment relevant to their contribution and prospects for growth. business financing – the choice of this model is based on the following criteria: 1) high achievements in a particular industry or activity (for example, top positions in contests or competitions on the chosen subject, scientific and technological development that may be of interest to business representatives, etc.); 344 l. shulgina, m. okręglicka 2) positive references from employers interested in the continuation of cooperation with the candidate (for example, after successful testing, internship or practice); 3) the forecasted employer‟s need for hiring a qualified specialist (i.e. the expected vacancy for the future employee after their higher education graduation); 4) solvency of the creditor company (i.e. their ability to finance scholarship training and their needs for providing the necessary standard of living). the described model may have variations, depending on whether the funds for scholarship should be returned to the lending company after the work is started or not. the option of partial financing is also possible by scholarships being obtained already during the period of studying under the conditions of a flexible schedule of work, parttime work, while fulfilling creative tasks at weekends or carrying out theoretical work in the framework of educational tasks. therefore, the business financing model can be very beneficial for both businesses and scholarships holders. business, at relatively low costs, will receive the in-depth analysis of activities, access to the latest techniques, verified suggestions for improving performance indicators – all of this will be received while performing tasks in the course of subjects, research work of scientific circles, tasks within the framework of research work of departments, courses and diploma projects. at the same time, in the contract, it is expedient to provide for the possibility of adjusting the subject of these types of work to update them in accordance with the situational or prospective needs of the enterprise. the most important advantages of the scholarship in this model are: guaranteed employment (which is an extremely important achievement nowadays, especially given increasing competition in the labor market); obtaining experience in carrying out practical tasks, even in the course of studying; obtaining the education according to the program, which is thoroughly worked out and agreed upon by representatives of educational institutions and business; an in-depth study of peculiarities of the company's operations and the future place of work; provided that the creditor's tasks are effectively performed, – acceleration in career growth on the basis of the mutually beneficial cooperation. the next fem – credit financing – is quite common in many countries, however, is still not represented in ukraine, mainly because of peculiarities of the domestic financial and credit systems. according to the authors‟ firm belief, the formation of transparent and reliable legal conditions for the implementation of this model is an urgent task for the country nowadays. however, it should be reminded at once: in all investigated lending systems operating in foreign countries, students receive an interest-free loan or a minimum interest rate (2-5%). its repayment begins only after getting a job and lasts (in most cases) for 20-30 years. the above indicates that credit financing is especially attractive for most citizens, since the percentage of the most talented (who may qualify for public financing) is usually insignificant as well as the share of winners of competitions (with high chances to get business financing). the main advantages of credit financing are the following: 1) the lack of obligations of the recipient to creditors regarding future employment in the precisely defined directions (compared to the previous two fem), and 2) the opportunity to focus exclusively on studying. these can be important criteria for students who are still in search of and definitively not determined by the future area of activities or a specific place of work. financial and economic models of educational services in the context of ukraine... 345 the fourth one from the list of fem proposed by the authors is self-financing. the more common name in ukraine is studying under the contract form. self-financing is one of the two models presented in the market of education services of the state nowadays. the expediency of learning at the expense of students‟ own funds is supported, however, with some adjustments. first, the solvency of the applicant cannot be the only criterion for enrollment in the students' ranks. it is not a secret that while working in a competitive environment, higher education institutions are trying to improve their financial position precisely at the expense of „contractors‟. some of them really have a quite sufficient level of preparation for higher education. however, among them, there are those who satisfy purely „material interest‟ of universities. in practice, this is manifested in reducing the level of quality requirements for cross-border controls; in the replication of masters‟ articles, course projects, diplomas, etc., which are questionable in terms of the indicator of „scientific depth and, in general, in leveling the concept of „higher education‟ or „science‟ as well. in the authors‟ opinion, the number of seats for the first two categories described above, for ukraine, may be changed and should be determined on the basis of the information-support decision-making system proposed by the authors. however, the principle of selection the authors consider valuable is to apply all fem (including selffinancing) only to representatives who have got the right to study at universities. secondly, the conclusion of the contract for self-financing should take place only after the applicant is familiarized with the following data: 1) the current need for specialists, 2) the forecast for a decrease (or an increase) in this demand, taking into account the already existing number of students / listeners studying in the specific course, 3) as well as the dynamics of prospective vacancies. in other words, the data of the information-supported decision-making system should be open not only for employees of the education system but also entrants, which should facilitate the adoption of a balanced and well-founded decision on the direction of education. thirdly, the upper and lower boundaries of the cost of studying, with regional and sectoral differentiation should be legally established. fourthly, following the experience of poland, a clear list of services universities cannot claim any fees for should be clearly defined. it is clear that this also applies to all of the above fem. in the opinion of the authors, the following should be included in this list: any services that have already been taken into account in determining the cost; using the library fund; access to the multimedia library; obtaining statements (references) from universities; consultations within the framework of paid study schedule, etc. combined financing is an additional opportunity to improve the material conditions of education, if there is a need and there are appropriate grounds to do so. foreign experience indicates the multiplicity of possible sources of combined financing. one of such sources is the presidential scholarship in azerbaijan, which is granted for special achievements in studying at the submission of the rector, and the amount of which is quite substantial – azn 750 ($ 850), especially when compared to regular scholarships for students ($30-75). there is a similar scholarship in poland, the state scholarship or grant in canada (osap scholarship), in germany, cyprus, etc. the authors will emphasize that these scholarships are intended for students for special achievements, regardless of the initial financial conditions of their studying. 346 l. shulgina, m. okręglicka another important source used virtually in all the analyzed countries is the university scholarship fund which is distributed by the rector together with student and postgraduate government bodies according to the criteria for achievements in education and social status (social scholarships). some countries (france, iran, czech republic, etc.) partially compensate for the amount needed to rent an accommodation, as well as scholarship for people with special needs. 5. conclusions “education and training are central objectives of lisbon agenda for growth and jobs and they are essential for their continuation to 2020” (lung et al., 2012). the literature emphasizes significant economic and non-economic public and private benefits for higher education. however, the general trend in the higher education system is that policymakers are trying to prove the necessity of shifting expenditures on heis from governments to students (erfort et al., 2016). the solution to the existing conflict in ukraine between human rights for spiritual and physical development and inadequate opportunities for their recognition is possible under the condition of the formation of the multi-vectored and multileveled educational system. the processes of ukrainian and eu standards harmonization are the factor favorable for the implementation of necessary reforms, including education. however, for this purpose, the standards for training specialists (outlining the content of educational services) should be developed in coordination with the standards for training and working conditions of teachers (which guarantee the quality and conditions for providing educational services to students). the necessary consistency between the two groups of standards will be ensured through the creation of the appropriate ideological (conceptual), marketing and legal basis, which should consist of the following components: 1) the strategy for innovative development of education; 2) the procedure of forming the infrastructure for providing information support for decision-making; 3) the criteria for determining the appropriateness of choosing one or more fem for providing/obtaining educational services; 4) the list and sequence of amendments made to the legislative framework, the purpose of which is to ensure the effective functioning of each model, as well as obtaining additional opportunities for financing educational services. in order to eliminate the barriers of the applicants‟ insolvency, it is proposed to implement a harmonized combination of several financial and economic models for providing/obtaining educational services. public financing is offered to the most talented entrants, for whom special training and motivational programs should be developed. business financing is the training of specialists at business costs in close cooperation with sponsors. credit financing is quite widespread in the world model and satisfactory for ukraine provided that the state guarantees the financial security of both the lender and the borrower. self-financing is an advanced model of the current contract-based training. combined financing is a combination of the proposed models, taking into account the specific conditions for the specific recipient. financial and economic models of educational services in the context of ukraine... 347 given the differentiation of segments of educational service consumers, each of the listed models should be available for the relevant segment. in order to provide a reasonable choice of the model, the criteria for the feasibility of their application are proposed. the authors consider the promising direction of the research to develop the necessary set of standards harmonized with the eu ones for the effective implementation of the proposed financial and economic models. references alimehmeti, g. & hysa, x. 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(2002). vypusk gazety segodnia, 31 (1079), retrieved from: https://www.segodnya.ua/oldarchive/c2256713004f33f5c2256b5a003e447a. html accessed on: 26 june 2019. finansijski i ekonomski modeli obrazovnih servisa u kontekstu harmonizacije ukrajine i eu standarda članak se fokusira na potrebu za sistematskim pristupom ka harmonizaciji standarda izmeďu ukrajine i eu i na predlog da se razviju standardi za obuku eksperata u relevantnim oblastima u skladu sa standardima na nivou kvalifikacija i uslova rada nastavnika. prepoznat je konflikt izmeďu ljudskog prava na fizički i duhovni razvoj i nedostatka uslova da se ta prava ostvare. predloženo je da se navedeni konflikt razreši uvoďenjem finansijke podrške kandidatima. navedene su početne pozicije za formiranje finansijskih i ekonomskih modela za pružanje/korišćenje obrazovnih usluga. osnove za implementaciju ovih modela jesu strategija inovativnog razvoja obrazovanja; infrastruktura za pružanje informacione podrške donošenju odluka; kao i sistem krriterijuma za odreďivanje odabira odgovarajućeg modela. posmatrajući izvodljivost uvoďenja finansijskih i ekonomskih modela za pružanje/korišćenje obrazovnih usluga u ukrajini ramatrani su, izmeďu ostalog: državno, biznis, kreditno, samoi kombinovano finansiranje. razmatrani su i kriterijumi za srsishodnost odabira i primene svakog od modela. ključne reči: finansijski i ekonomski model, obrazovne usluge, državno finansiranje, biznis finansiranje, kreditno finansiranje, samofinansiranje, kombinovano finansiranje. facta universitatis series: economics and organization vol. 16, n o 3, 2019, pp. 269 282 https://doi.org/10.22190/fueo1903269j © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper relationship between ease of doing business indicators and the foreign direct investment inflows in the republic of serbia 1 udc 339.727.22(497.11) marko janaćković 1 *, marija petrović-ranđelović 2 1 higher business school of professional studies, leskovac, serbia 2 university of niš, faculty of economics, serbia abstract. the importance of ease of doing business indicators as determinants of fdi inflows has attracted attention in establishing their connections. the aim of the research is to examine the relationship between the ease of doing business indicators and foreign direct investment (fdi) inflows. dynamic and correlation analysis are applied in the consideration of the interdependence of doing business indicators, starting business, construction permits, getting electricity, registering property, getting credit, paying taxes, trading across borders, enforcing contracts, and resolving insolvency, with fdi inflows. the obtained results show that resolving insolvency and construction permits have the highest degree of agreement with fdi, while the negative agreement with fdi trends is shown by getting electricity, registering property, getting credit, and enforcing contracts. the main results of this research are useful for economic policy makers because they provide a good basis for formulating the strategy of improving the business environment in the republic of serbia. key words: fdi inflows, doing business indicators, republic of serbia jel classification: f21, f23 received march 11, 2019 / revised april 19, 2019 / accepted may 17, 2019 * phd student at university of niš, faculty of economics, serbia corresponding author: marija petrović-ranđelović university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: mrjpetrovic76@gmail.com 270 m. janaćković, m. petrović-ranđelović 1. introduction foreign direct investment (fdi) is widely considered in numerous surveys from different perspectives. in general, if countries are at a similar level of economic development, those who attract more fdi are considered more competitive. considering the growing importance of fdi for the economies of countries, the importance of analyzing the costs and benefits of such investment is emphasized. in this way, multinational companies not only maximize benefits, but can also minimize their costs. higher economic growth based on fdi is achieved through numerous benefits at different levels. fdi benefits are associated with technology transfer, better use of available resources, and the introduction of new processes, international trade integration, and plant development. given that fdi is identified as positive for the country's development, it is important to explore the characteristics and policies of countries to attract fdi. with policies attracting fdi inflows, the host country can improve the business environment. leaders require trade promotion, and creation of a long-term relationship that will distinguish fdi from one-time import-export contracts. in order to promote confidence in the market, it is proposed that governments define business rules, ensure presence and demonstrate loyalty to the private sector. governments strive to improve policies, conditions and legislation, and introduce laws to create a simple and secure environment for business and attract fdi. these improvements are measured by the doing business indicators of the world bank. doing business is an annual survey, including a large number of “ease of doing business” indicators, to assess and rank countries based on their quality to attract fdi. therefore, ease of doing business represents an economic ranking based on the assessment of the ease of doing business in a particular economy. the higher ranking indicates that the regulatory environment is more suitable for the start-up and the functioning of a local company. better economic governance (banking and finance, fiscal burden, monetary policy), less government participation in the economy, less government intervention, higher levels of political freedom, and the absence of wage and price controls contribute to higher fdi inflows. the first part of the paper provides a literature overview of the world bank‟s doing business indicators. the second part is devoted to the connections of doing business indicators with fdi inflows, while the third part presents methodology of the research and hypotheses. the fourth part gives the results of the research. 2. ease of doing business since 2006, the world bank has adopted an approach to rank nearly 200 countries based on their business environment and “ease of doing business” in these economies. the essence of the approach is reflected in the importance of the prosperity of the private sector in the promotion of growth and development. in general, the main idea is that simpler business start-up encourages an increase in the number of investors, which affects the increase in the number of jobs. the world bank's analysis points to the link between a good business environment and promotion of competitiveness, innovation and expansion (world bank, 2013). the business environment is also linked to the institutional environment in the country. if the country has strong institutions, it becomes more attractive for foreign direct investment, bearing in mind that the cost of transactions is reduced by increasing the efficiency of the host country market. relationship between ease of doing business indicators and foreign direct investment inflows... 271 the world bank‟s doing business report is based on certain criteria for evaluation and ranking of business simplicity. doing business indexes analyse areas, which are made up of several indicators (variables) representing qualitative measures. indices are divided into following areas: starting a business, working with building permits, registering ownership, obtaining a loan, investor protection level, paying taxes, cross-border trade, respecting contracts, closing a business (or resolving insolvency), hiring workers, and obtaining electricity. they do not include certain business norms such as: macroeconomic stability, corruption, working skills of the population, security level, specific legislation for foreign investment, or infrastructure quality. in the further text it is shown how doing business in general, and above-mentioned criteria individually, are related to growth and development indicators. starting a business. the decision of an investor regarding whether to start a particular business is determined significantly by the simplicity of starting a business. a large number of empirical research studies highlight and confirm that entry barriers prevent development, while empowering forms that would lose part of the market share if someone applies more efficient technology (north & thomas, 1973). higher initial costs are a barrier to creating an enterprise, and higher costs of starting up operations affect an entrepreneur's withdrawal from creating a company. in this case, they become employees, not employers, which affects the reduced number of potential jobs. the entry barriers discourage companies from entering, which is primarily the case with small businesses (klapper et al., 2006). numerous procedures for starting a business, as well as higher start-up capital, reduce the scope of business activities. higher capital affects the reduction in the level of entrepreneurship, and shorter time to register a company affects the increase in the number of enterprises in those industries with rising demands on the world markets. reduced costs, shorter time and simplification of procedures in starting up operations affect the increase in the number of registered companies. in a number of studies, the connection of entry barriers for businesses and determinants of growth is emphasized. a link between lower entry barriers and precise regulation and improvement of productivity factors was established. it was concluded that several entry barriers affect the lower overall productivity factor (moscoso, boedo & mukoyama, 2012). a negative link between input costs and productivity factors is identified, and that easy entry allows adaptation and faster spread of the best technology, leading to a faster growth of productivity factors. getting a loan. the influence of finance is significant for growth and development (schumpeter, 1912). on the other hand, certain authors point out that financial development is not significant for growth (lucas, 1988). based on a survey conducted by king & levine (1993), it is concluded that there is a positive link between financial development and gdp growth per capita and capital accumulation. in addition, it is emphasized that there is a need to have programs that will allow better access to loans for enterprises, that is, the availability of loans not necessarily follows the increase in economic activity. financial development positively influences growth by providing businesses with easier access to credit. in addition, credit-worthy companies grow faster in financially more developed countries. financial development positively influences growth by reducing credit constraints, while it is noticed that financial development manages credit constraints to a significantly greater extent for smaller companies. implementation of contracts and good institutions. in order to simplify business, growth and development, it is necessary to establish efficient mechanisms for implementation of 272 m. janaćković, m. petrović-ranđelović contracts and good institutions. this facilitates access to credit, improves trade and reduces the informal sector (world bank, 2013). particular attention is paid to the importance of institutions and management to growth and development, in terms of the importance of good institutions for promoting economic growth (djankov et al., 2003). three foundations of efficient market created by good institutions are: protection of property rights, implementation of contracts and collective action (dixit, 2009). through the protection of property rights, investments are made by individuals, who will later collect the fruits of their investments. implementation of contracts is aimed at individuals participating in mutual benefit transactions. institutions with better enforcement mechanisms prevent one party from doing fraud transactions causing losses to the other party. certain research indicates how implementation or compliance with the contract affects the development and simplicity of business (dixit, 2009). the model suggests that in countries that have problems in implementing contracts, investors and contracting parties are in the “prisoner's dilemma” situation. high costs of implementing a contract may affect one party's failure to fulfil its obligations, which adds additional caution to investors when defining projects. in addition to this, an additional model emphasizing that problems of contract realizations cause higher macroeconomic volatility is created. developed legal institutions simplify the growth of enterprises by allowing them to gain simpler access to long-term financing. the countries with effective implementation of contracts have developed banks, and weak implementation of the law relates to a smaller financial market. the quality of institutions is the most important determinant of access to loans at the country level. effective compliance with contracts and good institutions also improves a trade. effective compliance with contracts promotes comparative advantages in terms of goods for which production contractual relationships with third parties are necessary. limited compliance with contracts and weak institutions are associated with the size of “grey” economies and foreign direct investment. the survey was conducted on the basis of data from 4000 companies from 40 countries, showing that a higher level of legal system reduces the size of the informal sector (dabla-norris et al., 2008). quintin (2008) defines the model describing how to reduce the size of the informal economy by improving compliance with contractual obligations on formal funding. in addition, the rule of law significantly increases the level of foreign direct investment, i.e. countries where the ways of registering assets are simpler are more attractive to fdi. investor protection. the issue of investor protection is significant for minority owners of a company. if an investor protection is weak, investors will not invest in a corporation unless they are the majority owners. in this way, the market is prevented from financing the growth of enterprises (world bank, 2013). in general, investor protection promotes economic growth and risk taking with regard to large investments. better investor protection positively impacts companies in terms of risk taking and positively affects growth. investor protection can also affect growth through financial markets, where poor investor protection is associated with the smaller financial market. poor investor protection can lead to higher costs of external financing. like investor protection, ownership protection, also encourages investments. when ownership protection is secured, investors are convinced to benefit from their investments. a positive link exists between the quality of institutions, such as the ownership protection (property rights) and investment, and growth. the existence of a positive link between the quality of property rights and the reinvestment of a company's profit initiates a positive link between property rights and growth. relationship between ease of doing business indicators and foreign direct investment inflows... 273 property rights promote economic growth through better allocation of resources. the impact of property rights on growth is generally viewed as providing an initiative for investors to invest. besley & ghatak (2009) identified four channels in which the property rights affect economic activity and growth, which include: 1) minimizing the risk of expropriation, 2) reducing the costs of protection, 3) property rights in the realization of trade gains, and 4) support of property rights to other transactions, and in particular regarding the loan claiming the guarantee. the link between property rights and growth is complex, which points out the analysis of data panels from 91 countries in the period from 1980 to 2005 (bose et al., 2012). there is a positive link between property rights and growth in the countries in which financial institutions are developed, while in the developing countries there is an optimal level of property rights. below and above this basic level lower growth will be achieved. on the other hand, the bidirectional causality between property rights and growth is identified, in the sense that ownership of land is the basis for the development of large enterprises, while the growth of companies improves property rights. strong property rights have a positive effect on wealth and capital formation, that is, property rights positively affect investment and growth. paying taxes. based on the analysis of the world bank, it was found that the tax administration is one of the first 11 business constraints, while taxes are among the top 5 basic business constraints (world bank, 2013). research focuses on the relationship between tax rates and development indicators. the conclusion was made that high tax rates adversely affect total investments, reduce fdi, reduce entrepreneurial activity and increase the informal sector. higher tax rates may be associated with lower growth, and there is a negative link between tax rates and tax evasion. the tax administration is also an important aspect of taxation for ease of doing business and its impact on growth and development. bird (1989) points out that tax administration should have the same or even greater significance than the tax structure of the tax system reform. the tax system of a particular country should be such that it works effectively and efficiently surrounded by the institutional weaknesses of a country. cross-border trade. the trade aims to allow manufacturers to expand their product market and to purchase inputs at the best prices. this is impossible to achieve if business is done exclusively on the domestic market. certain studies have shown that in some african countries, due to inefficient trading procedures, revenue losses are almost 5% of gdp (world bank, 2013). trading costs are higher in developing countries. inefficiency in trade, especially in developing countries, imposes reforms in certain areas. developed countries and developing countries differ in terms of the necessary reforms. the richer countries have to implement information and communication technology reforms, while developing countries need infrastructure and regulatory reforms. simpler movement of goods through better infrastructure and institutions will have the greatest effects on improving trade for developing countries. trade performance is most affected by the availability of information regarding trade, simplification and harmonization of documents, simplification of procedures and automation of processes. other indicators. in addition to the specific components, ease of doing business is analysed also, in general, and its relationship with growth and development indicators (mendoza et al., 2014). for example, bayraktar (2013) considers the link between fdi and business simplicity indicators as one potential source of fdi change in the period from 2004 to 2010. the results show that countries with better business outcomes attract more fdis. 274 m. janaćković, m. petrović-ranđelović when considering developing countries, improvements in the „ease of doing business“ indicators can have a partial impact on determining higher fdi flows in these countries. this study also shows that there is a steady increase in the share of fdi flows in developing countries while falling in developed countries. in addition, the difference in the growth rate of developed and developing countries is a factor that can explain the change in fdi flows from developed countries to developing countries. the results further show that doing business indicators are almost unchanged in developed countries, while rapidly change their values in developing countries. there are significant improvements in starting a business, closing down businesses and protecting investors. piwon & ramírez (2010) considered whether the business indicators affected the fdi, and indicate that there is a positive link between the government's actions to increase fdi flows. using the regression model, it is concluded that increasing the doing business rank by one place contributes to an increase in investments of over $44 million. similar research indicates that starting a business, registering assets, obtaining loans, working on building permits, protecting investors, crossing borders and executing contracts are indicators that are directly and significantly related to fdi in asian economies (shahadan et al., 2014). the survey also showed that the closure of businesses or the resolution of insolvency are not desirable for total net fdi, but also that they do not have a significant impact on their attractiveness. on the one hand, net fdis are in a positive correlation with the indicators of obtaining loans and investor protection, on the other hand, they have a slight negative correlation with indicators related to closing a business or resolving insolvency. a positive and significant effect on the flow of fdi has an indicator of asset registration, bearing in mind that ownership rights are the essence of providing investment, productivity and growth. the results of the analysis suggest that property owners who are registered can invest more easily, as well as having a greater chance of getting a loan when they use the property as a basis for a mortgage. 3. ease of doing business and its impact on fdi inflows in order to improve the attractiveness of the developing country for fdi, an assessment of the importance of openness, infrastructure availability and sound economic and political conditions was carried out (sekkat et al., 2007). based on the results of the research, it was concluded that these factors are particularly significant in south asia, africa and the middle east, and that the impact of these factors is higher on fdi in the manufacturing sector in relation to total fdi. in addition, the impact of infrastructure on fdi was examined and pointed to the significant positive impact of infrastructure, in the short and long term, on fdi inflows (rehman et al., 2011). the results showed that in the short term, 1% increase of the infrastructure influences the increase of the fdi by 1.03%, while in the long run, the same percentage of infrastructure increase contributes to the increase of the fdi inflows by 1.31%. the survey also shows that the size of the market has a positive relationship, and the course has a significant negative impact on the infrastructure, in the short and long term. better doing business ranking contributes to the higher fdi inflows, and it suggests that there is a more attractive investment climate in a country. fdi inflows are higher in countries with better doing business indicators, and economies that provide a good regulatory environment for domestic companies seek to provide the same for foreign companies. relationship between ease of doing business indicators and foreign direct investment inflows... 275 therefore, doing business set of indicators can be treated as the international instrument for changing behaviours, not only for the purpose of motivating national investors, but also for attracting foreign investors. the fact is that the attraction does not have to be linked to a high level of fdi. doing business indicators are compared with other known data on fdi inflows related to functioning of foreign business entities under the direct control of the government. the way that doing business indicators affect fdi is analyzed if the country's change in fdi inflow level is compared to doing business indicators‟ values for that year. fostering fdi inflows is also affected by macroeconomic factors such as human capital, high per capita income, which cannot be influenced by the government. the working framework includes desirable legislation, an open business culture for foreigners, and valuable national institutions. the main indicators of fdi are: the size of the market, the growth of the market and the level of education of the domestic workforce, whereby the appropriate working framework for fdi is not sufficient for investment attraction. in order to enable the fdi inflow, it is necessary that the country has a certain positive location and good institutions. the research identifies two groups of descriptive factors in terms of fdi inflows: gravity factors (legislation, closeness, market size) and factor endowments (labour force, capital) (shahadan et al., 2014). most of the fdi inflows are explained by gravity factors, but policy and institutional environment are also significant. companies are expected to invest in those countries where governments are less likely to control their operational tasks. this means free capital movement, lower corporate taxes, less corruption, and possibility to hold majority ownership in a local subsidy. if government defines a lot of legal procedures, there is an increase in costs for the enterprise, which finds a way to reduce fdi flows to that country. in addition to being an fdi source of external capital, they significantly contribute to economic growth and development. key determinants of fdi are market-based: gdp per capita, gross domestic product, natural resources, production costs, level of corruption and infrastructure. in addition, a significant feature is the provision of the working framework, an economic system created by the government on a long-term basis, to allow foreign investment based on the attractiveness with respect to other countries. based on the world bank policy research, it is suggested that, while elements in certain determinants of doing business ranking are associated with increased fdi inflows, the ranking for an average country has a significant signalling effect for investors. in addition, it has not been shown that a significant improvement in the doing business ranking (or “country reform”) influences a higher inflow of fdi, given that in developing countries, the relationship is not significant (world bank, 2011). a survey of six asian countries (afghanistan, pakistan, iran, india, sri lanka and bangladesh) considered the index of business simplicity as part of the working framework for describing fdi inflows (shahadan et al., 2014). the link between the doing business indicators for the net fdi inflow in the period 2004-2013 was considered. indicators aim to point to the level of quality of institutions in a country. the results of the survey demonstrate the importance of the link between the doing business indicators and the fdi inflow, and that doing business indicators reflect a general investment climate that is significant only for small and medium-sized domestic enterprises. the research also indicates that there is a direct link between fdi and actions taken by the government. the impact of institutional performances on fdi is not easy to measure. institutional factor is significant, especially for developing economies, where weak institutions create poor 276 m. janaćković, m. petrović-ranđelović infrastructure, which leads to a fall in profitability, and consequently to a decrease in fdi. the degree of institutional development is the essence of attracting fdi, based on a reduction in transaction costs of establishing local operations (bevan & estrin, 2004). the authors point out that countries with better developed institutions in the market economy have a higher fdi inflow, as well as countries with more advanced private sector development and greater privatization. the results also show that countries with more developed and more effective legal systems also have a higher inflow of fdi, and there is some evidence that the liberalization of domestic and international markets has a significant positive impact on fdi inflows. the importance of the quality of institutions is indisputable for multinational corporations, that is, the good quality of institutions creates a friendly environment and this is the main factor for attracting fdi. wei (2000) concludes that there are three main factors in the quality of institutions, both regulatory and legal systems and legislation. they are key determinants of attracting fdi inflows, and have to be focused on attracting fdi inflows. the corruption factor has been identified as negative for the fdi inflow. 4. research methodology and hypotheses in this paper, the key variables are fdi inflows and doing business indicators. the fdi dataset was used from the basis of the world bank and measured using fdi inflows (in% of gdp), and doing business indicators were determined on the basis of the world bank‟s doing business reports. data refer to the period 2010-2017 for the republic of serbia. dependent variable is fdi inflows expressed in % of gdp. doing business indicators are used for the purpose of research as independent variables. the index of ease of doing business, as a composite index, is the non-weighted average of the value of each of these indicators. the value of this index ranges from 0 to 100. based on the index values, an appropriate rank is assigned to a given country on a global list. the aim of the paper is to analyze the link between the doing business indicators and the fdi inflows, and to define possible directions of improving the business environment in the republic of serbia. in accordance with the goal of the research, the following hypothesis is defined and tested: h1: there is interdependence between the ease of doing business index (and its components) and the fdi inflows. in order to analyze the relationship between the doing business indicators and the fdi inflows, dynamic and correlation analysis will be applied. dynamic analysis will look at the trend of indicators values in the period 2010-2017, while the correlation analysis will assess the interdependence of fdi inflow and the value of the ease of doing business index. the correlation analysis is based on spearman‟s correlation coefficient (a nonparametric indicator of variation between variables). the values of this coefficient range from -1 to +1, with a coefficient greater than zero, indicating a direct or positive correlation between the variables, and a value less than zero on an inverse or negative relationship between the variables. a stronger correlation between the variables is achieved if the correlation coefficient is absolutely closer to 1, while the linear connection is weaker if the value is closer to zero. relationship between ease of doing business indicators and foreign direct investment inflows... 277 5. research results and discussion in relation to the aforementioned methodology and defined research hypotheses, the following variables will be included in the analysis: fdi foreign direct investment, in percentage of gdp edbease of doing business, indicator score x1 starting a business, indicator score x2 dealing with construction permits, indicator score x3 getting electricity, indicator score x4 registering property, indicator score x5 getting credit, indicator score x6 – protecting minority investors x7 paying taxes, indicator score x8 trading across borders, indicator score x9 enforcing contracts, indicator score x10 resolving insolvency, indicator score in order to get data for the entire observed period, harmonization of methodologies was performed. table 1 shows the scores of indicators used in the analysis. the protecting minority investors indicator is excluded from further analysis, because it does not show changes in scores during the observed period. table 1 scores of indicators fdi ease of doing business x1 x2 x3 x4 x5 x6 x7 x8 x9 x10 2010 4.291 57.57 87.15 19.27 75.63 62.26 75.00 46.67 53.38 69.5 59.51 27.35 2011 10.61 58.30 86.67 19.27 75.74 65.65 75.00 46.67 52.43 70.26 59.51 31.77 2012 3.132 59.60 86.69 19.27 75.86 78.36 81.25 46.67 52.43 70.52 58.61 26.31 2013 4.525 60.55 88.80 20.80 76.00 78.38 81.25 46.67 52.43 71.24 58.61 31.36 2014 4.523 60.57 88.86 20.80 75.99 78.36 81.25 46.67 52.44 72.48 57.59 31.24 2015 6.311 59.77 89.03 21.19 76.20 71.64 81.25 46.67 50.36 72.13 57.59 31.29 2016 6.148 62.20 89.06 30.49 72.39 71.96 81.25 46.67 63.33 72.13 57.59 31.62 2017 6.948 65.33 91.80 45.86 69.93 76.63 81.25 46.67 67.35 72.13 55.29 32.24 source: https://www.worldbank.org/ table 2 relative changes of indicators year x1 x2 x3 x4 x5 x7 x8 x9 x10 2011 -0.55% 0.00% 0.15% 5.44% 0.00% -1.78% 1.09% 0.00% 16.16% 2012 0.02% 0.00% 0.16% 19.36% 8.33% 0.00% 0.37% -1.51% -17.19% 2013 2.43% 7.94% 0.18% 0.03% 0.00% 0.00% 1.02% 0.00% 19.19% 2014 0.07% 0.00% -0.01% -0.03% 0.00% 0.02% 1.74% -1.74% -0.38% 2015 0.19% 1.88% 0.28% -8.58% 0.00% -3.97% -0.48% 0.00% 0.16% 2016 0.03% 43.89% -5.00% 0.45% 0.00% 25.75% 0.00% 0.00% 1.05% 2017 3.08% 50.41% -3.40% 6.49% 0.00% 6.35% 0.00% -3.99% 1.96% average 0.75% 14.87% -1.09% 3.31% 1.19% 3.77% 0.53% -1.03% 2.99% 2017/2010 5.34% 137.99% -7.54% 23.08% 8.33% 26.17% 3.78% -7.09% 17.88% source: author‟s calculation 278 m. janaćković, m. petrović-ranđelović the construction permits indicator shows the highest average annual change. the value of this indicator increases by an average of 14.87% in the observed period, although in the three observed years there were no changes regarding this indicator. the score of this indicator increased by 137.99% in 2017 compared to 2010. the only indicators that have recorded a decline in scores (by about 7%) are getting electricity and enforcing contract. table 3 relative changes of fdi and ease of doing business 2010-2017 relative change of fdi relative change of ease of doing business 2010 2011 147.26% 1.27% 2012 -70.48% 2.23% 2013 44.48% 1.59% 2014 -0.04% 0.03% 2015 39.53% -1.33% 2016 -2.58% 4.08% 2017 13.01% 5.03% average 24.45% 1.84% relative change 2017/2010 61.92% 13.48% source: author‟s calculation during the observed period, the fdi inflows increased by 24.45% annually, and the fdi inflow in 2017 is 61.92% higher compared to 2010. the ease of doing business indicator had much lower intensity dynamics, the average annual change amounted to 1.84%, while the score of this indicator in the latest year in relation to the first year increased by 13.48%. fig. 1 graphical presentation of the changes of indicators during the observed period source: author‟s presentation relationship between ease of doing business indicators and foreign direct investment inflows... 279 the dynamics of fdi is characterized by higher oscillations during the analyzed period. both observed phenomena, fdi inflows and ease of doing business indicators, are characterized by a positive tendency in the period beyond 2015. table 4 presents calculated values of spearman‟s correlation coefficients. the spirman‟s correlation coefficient is a non-parametric indicator of the variation between two variables. it‟s values range from -1 to +1, with coefficient values greater than zero, indicating a positive relationship between variables, while values less than zero refer to the existence of a negative relationship between the observed variables. based on the values of the spearman‟s rho coefficients in table 4, it can be noted that there is a strong correlation between the resolving insolvency indicator and fdi (0.905). in addition, there is a direct interdependence between fdi and the indicators dealing with construction permits (0.454), starting a business (0.286), trading across borders (0.171) and paying taxes (0.024). coefficient values less than zero indicate negative correlation between foreign direct investment and registering property (-0.311), getting credit (-0.126), getting electricity (-0.19), as well as enforcing contracts (-0.259) indicators. table 4 matrix of correlation coefficients coefficients fdi edb x1 x2 x3 x4 x5 x7 x8 x9 x10 fdi rs 1.000 .286 .286 .454 -.190 -.311 -.126 .024 .171 -.259 .905 ** sig. (2-tailed) . .493 .493 .258 .651 .453 .766 .954 .686 .535 .002 edb rs 1.000 .857 ** .896 ** -.262 .515 .756 * .512 .830 * -.902 ** .524 sig. (2-tailed) . .007 .003 .531 .192 .030 .194 .011 .002 .183 x1 rs 1.000 .970 ** -.262 .156 .630 .512 .756 * -.914 ** .429 sig. (2-tailed) . .000 .531 .713 .094 .194 .030 .001 .289 x2 rs 1.000 -.233 .204 .650 .428 .755 * -.911 ** .589 sig. (2-tailed) . .578 .628 .081 .291 .030 .002 .124 x3 rs 1.000 .323 .252 -.878 ** .146 .136 -.429 sig. (2-tailed) . .435 .547 .004 .729 .748 .289 x4 rs 1.000 .760 * -.074 .454 -.354 -.096 sig. (2-tailed) . .028 .862 .258 .389 .821 x5 rs 1.000 .000 .775 * -.784 * .000 sig. (2-tailed) . 1.000 .024 .021 1.000 x7 rs 1.000 .175 -.367 .342 sig. (2-tailed) . .679 .371 .408 x8 rs 1.000 -.886 ** .220 sig. (2-tailed) . .003 .601 x9 rs 1.000 -.358 sig. (2-tailed) . .384 x10 rs 1.000 sig. (2-tailed) . source: author‟s calculation 280 m. janaćković, m. petrović-ranđelović table 5 correlation coefficients between fdi and all other indicators indicator correlation coefficient sig. (2-tailed) ease of doing business 0.286 0.493 starting a business 0.286 0.493 dealing with construction permits 0.454 0.258 getting electricity -0.19 0.651 registering property -0.311 0.453 getting credit -0.126 0.766 paying taxes 0.024 0.954 trading across borders 0.171 0.686 enforcing contracts -0.259 0.535 resolving insolvency .905** 0.002 source: author‟s calculation the highest level of agreement with fdi is indicated by the indicator resolving insolvency (0.905), with a significance level of 0.002, which indicates that this agreement is statistically significant. further, there is a compliance between the fdi inflows and the construction permits indicator (0.454). fdi inflows are indirectly correlated with the indicators: getting electricity (-0.19), registering property (-0.311), getting credit (0.126), and enforcing contracts (-0.259). for the getting electricity and enforcing contracts, indicators are clear as their score decreases during the observed period. the score of the getting credit indicator is slightly constant, so this value is obtained (there are no oscillations in the movement), so it is almost impossible to determine the relationship. fig. 2 graphical presentation of indicator changes source: author‟s presentation relationship between ease of doing business indicators and foreign direct investment inflows... 281 5. conclusion the paper examines the interdependence of the indicators of starting business, construction permits, getting electricity, registering property, getting credit, paying taxes, trading across, enforcing contracts, resolving insolvency and the fdi inflows (in percentage of gdp) in the republic of serbia during the period 2010-2017. during the observed period, the highest level of agreement with fdi is indicated by the indicator resolving insolvency (correlation coefficient is 0.905), while the following indicators have a statistically significant correlation with the fdi inflows: construction permits, starting business, paying taxes, and trading across borders. fdi inflows are negatively correlated with the indicators getting electricity, registering property, getting credit, and enforcing contracts (-0.19, -0.311, -0.126, and -0.259, respectively). the results of the survey indicate that the resolving insolvency and construction permits indicators occupy a particularly important place among the ease of doing business indicators, which indicates that there is a direct link between the fdi inflows and the quality of the regulations defined by doing business indicators. this can serve as a basis for government activities towards improving the quality of the business environment in order to attract as many fdi projects as possible. references bayraktar, n. 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(2013). doing business 2014: understanding regulations for small and medium-size enterprises. washington: the world bank. world bank, https://www.worldbank.org/, accessed on: 25.12.2018. veza između indikatora lakoće poslovanja i priliva stranih direktnih investicija u republici srbiji značaj indikatora lakoće poslovanja kao determinante fdi priliva je privukao pažnju u utvrđivanju njihovih veza. cilj istraživanja je da se ispita veza između indikatora lakoće poslovanja i priliva stranih direktnih investicija (sdi). dinamička i korelaciona analiza su primenjene u sagledavanju međuzavisnosti indikatora lakoće poslovanja: pokretanje poslovanja, izdavanje građevinskih dozvola, uvođenje električne energije, registrovanje imovine, dobijanje kredita, plaćanje poreza, prekogranična trgovina, sprovođenje ugovora, rešavanje nesolventnosti i priliva sdi. dobijeni rezultati pokazuju da indikatori rešavanje nesolventnosti i izdavanje građevinskih dozvola imaju najveći stepen slaganja sa sdi, dok negativno slaganje sa kretanjem sdi pokazuju indikatori uvođenje električne energije, registrovanje imovine, dobijanje kredita i sprovođenje ugovora. glavni rezultati ovog istraživanja su korisni kreatorima ekonomske politike jer pružaju dobru osnovu za formulisanje strategije unapređenja poslovnog ambijenta u republici srbiji. ključne reči: sdi priliv, indikatori lakoće poslovanja, republika srbija https://www.worldbank.org/ plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 3, 2016, pp. 301 312 preliminary communication the new job positions for working with big data technologies and their placement in companies worldwide: evidence from empirical research1 udc 005.72:004 jelena lukić parallel d.o.o, belgrade, serbia abstract. the question regarding the impact of modern technologies on organizational design has become an important and attractive issue in the theory and practice of management and organization again with the development of big data technologies. those technologies represent new technologies, techniques, tools, knowledge, skills and methods for collecting, processing and analyzing data with new attributes (quantity, structure, speed). on the one hand, big data technologies are the factor from environment that confronts the companies with large quantities of data from variety of sources, while on the other hand those technologies represent the resource of organization which allows the companies that use them to make value on the basis of collected data. one of the first changes that comes with the implementation of big data technologies in company is establishment of new job positions because companies must have employees with new knowledge and skills. the aim of this paper is to identify, through empirical research, the new job positions for working with big data technologies, required knowledge and skills of those employees and how they are placed in the company. key words: big data, organizational design, t shaped professionals, hard and soft knowledge and skills introduction the quantity of data which are generated with modern technologies is constantly growing. everyday, people create about 2.5 quintillion bytes of data while estimation is that by 2020 the amount of data will reach 45 zettabytes (philips, 2013; heisterberg & verma, 2014). those large quantities of data from variety of sources available in real time are named as big data and they stimulated development of new technologies and techniques 1received june 14, 2016 / revised july 27, 2016 / accepted august 18, 2016 corresponding author: jelena lukić parallel d.o.o. gramšijeva 3a, 11070 new belgrade, serbia e-mail: jelena.jl.lukic@gmail.com 302 j. lukić which can handle them. big data, as currently the most attractive development form of information and communication technologies, represents new technologies, techniques and tools for working with data which have new attributes (quantity, structure, speed) (berman, 2013), but also and even more importantly, new knowledge, skills and methods for collecting, processing, analyzing and transforming raw data into valuable information and decisions (el-darwiche et al., 2014). many theorists and practitioners point out that large quantities of data, variety of data sources and possibilities for their collection and processing in real time represent new development phase in digital era so-called big data era (brown, chui & manyika, 2011; kudyba & kwatinetz, 2014; berner, graupner & maedche, 2014), while big data technologies are named to be disruptive technologies that lead to fundamental transformation of how companies gain and sustain competitive advantage (nerney, 2013). on the one hand, big data technologies are the factor from environment that confronts the companies with large quantities of data from variety of sources, while on the other hand those technologies represent the resource of organization which allows the companies that use them to make value on the basis of collected data. observed through history, managers have been finding the greatest support for changing organizational design in technology (huber, 1990). even in the context of contigency approach it was point out that besides the size and environment of organization, technology is very important determinant of organizational structure (woodward, 1965; thompson, 1967; perrow, 1967). information and communication technology (ict) and its impact on organizations have been the subject of many researches and their findings show that ict has impact on each parameter of organizational structure (specialization of work, formalization, coordination, grouping of units, chain of command, decentralization) (daft & lengel, 1986; desanctis & jackson 1994; dewett & jones, 2001; daft, 2009). furthermore, ict is named to be the major catalyst for creation of novel organizational forms (metaorganization, network, virtual, cellular, innovative form organization, ambidextrous, hypertext, inverted organization) whose main characteristics are speed and flexibility (petković & lukić, 2014). the question regarding the impact of modern technologies on organizational design is raised one more time with the development of big data technologies. jay galbraith believed that those technologies will be a „capability that is designed into all of our organizations” (galbraith, 2014, p. 2). the key question is not whether companies need to implement big data technologies, but rather what is the right way to implement them, which consequently opens numerous questions regarding organizational design. one of the first changes that comes with the implementation of new technologies in company is change in job positions because companies must have the employees with new knowledge and skills (clegg, 2003). each company which implements new technologies must have employees who are competent for their use (harreld, 1998). for that reason, the aim of this paper is to answer on the following questions: (1) what are the new job positions in companies that use big data technologies? (2) what knowledge and skills must employees who work with big data technologies have? and (3) in which way are those employees placed in a company? 1. implications of big data technologies on employees organizations are open social systems that process information in order to interpret the external environment and accomplish internal tasks (daft & lengel, 1986). ever since the new job positions for working with big data technologies and their placement in companies worldwide 303 the appearance of organization, decision makers have striven to get regular and reliable information for variety of purposes – control and coordination of activities, planning future moves, innovating (khandwalla, 1977). at the beginning of the 21 st century, technology progress leads to possibilities to collect and analyze large quantities of data from variety of sources in real time. those data stimulated development of new technologies and techniques which can handle them, so-called big data. as companies are operating in a highly competitive environment and must be able to quickly adapt to the constantly changing conditions (janaćković, milovanović & milovanović, 2016), big data technologies can be of great importance to them. those technologies enable companies to uncover new insights about customers, products, operations and to improve their overall activities. but, organizations must prepare themselves for using big data technologies in the right way. many definitions about big data are focused only on new technologies and tools for working with data with new attributes, leaving organizational components in shadow (lukić, 2015). implementation of big data technologies is just one, the first step which is needed in order to make value on the basis of the collected data. there is a need for much broader purview about other components which are necessary for effective use of big data. having in mind that technology encompasses the combination of skills, knowledge, abilities, techniques, computers, tools, and other equipment that employees use to convert or change raw materials into valuable goods and services (jones, 2012), the aim of this paper is to point out to the employees which are needed for the effective use of big data technologies. employees must be competent to use big data technologies in a way that will create value for the company on the basis of collected data. they must know what questions to ask, how to handle colected data, how to analyze them and how to use them as a basis for decision making (lukić, 2015). the article „data scientist: the sexiest job of the 21 st century” pointed out to the need for professionals who will have a high level of knowledge and skills about how to create value of all available data (davenport & patil, 2012). certain authors stress that technology was never a scarce resource but rather employees who will create value by applying that technology (gurbaxani, 2003). a recent study of mckinsey global institute forecasts a significant shortfall in the big data skills in the united states: of 140.000 to 190.000 people with deep analytical skills and about 1,5 million of managers and analyst for big data (manyika et al., 2011). 2. research design and sample description the the aim of this research was to identify the new job positions for working with big data technologies which are established in companies, required knowledge and skills of those employees and how those employees are placed in the company. in that sense, three hypotheses should be tested: hypothesis 1: companies that use big data technologies have established new job positions. hypothesis 2: employees who work with big data tehnologies have multidisciplinary knowledge and skills. hypothesis 3: there are changes in organizational structure in companies that use big data technologies. 304 j. lukić the empirical research was conducted by using specially designed online questionnaire which consists of questions about:  general information about companies (size, age, industry, location) and respondents (age, gender, education, experience with big data, managerial level);  the new job positions which are established in companies for working with big data technologies;  necessary knowledge and skills of employees who work with big data technologies;  how those employees are placed in company. the companies that use big data technologies in their work were the target population for empirical research, while the target respondents were employees who work with big data technologies and are in some of the managerial positions (top, middle or operational level). accompanying letter and link to the questionnaire were sent to the e-mail addresses of the companies for which there exist public available information that they use big data technologies. beside that, kind request was sent to companies which are engaged in the implemenation of big data technology to forward the questionnaire to their clients (companies in which they implemented big data technologies). also, the sample was formed by using the snowball technique whose key characteristic is that the process of table 1 general information about companies: age, size, industry and location variable answer frequency percentage age of the companies to 5 years 41 19,2 from 6 to 15 years 43 20,1 above 15 years 126 58,9 total valid responses 210 98,1 missing responses 4 1,9 total 214 100,0 size (regarding the number of employees) micro and small companies 41 19,2 middle companies 43 20,1 large companies 126 58,9 total valid responses 210 98,1 missing responses 4 1,9 total 214 100,0 industry banking and finance; insurance 59 27,6 production; transport and logistics; whosesale and retail 39 18,2 ict; telecommunications 80 37,4 consulting 35 16,4 total valid responses 213 99,5 missing responses 1 0,5 total 214 100,0 location europe 74 34,6 asia 24 11,2 north and south america 33 15,4 australia and oceania 7 3,3 africa 3 1,4 more continents 69 32,2 total valid responses 210 98,1 missing responses 4 1,9 total 214 100,0 the new job positions for working with big data technologies and their placement in companies worldwide 305 collecting answers begins with a pre-defined list of subjects that meet the necessary criteria, and then each of the participants gave the proposal of other subjects which also meet the required criteria (black, 1999). the process of collecting answers from the questionnaire lasted from the 3 rd of march until the 03 rd of may 2016. after two months, the relevant answers were collected from 214 companies. general information about companies that participated in research is presented in table 1. the largest number of companies exist for more than 15 years (126), while among them there are 29 companies which exist for more than one century. the average age of companies which participated in research is 44 years. measured with the number of employees, the largest number of companies (126) belong to category of large companies, while among them 74 companies have above 10000 of employees. the results show that big data technologies are used in companies from different industries. the largest number of companies are working in table 2 general information about respondents: age, gender, education, experience with big data technologies and managerial level variable answer frequency percentage age less than 26 years 18 8,4 from 26 to 35 years 93 43,5 from 36 to 45 years 60 28,0 from 46 to 55 years 21 9,8 above 55 years 6 2,8 total valid responses 198 92,5 missing responses 16 7,5 total 214 100,0 gender male 187 87,4 female 24 11,2 total valid responses 211 98,6 missing responses 3 1,4 total 214 100,0 education primary school 0 0,0 secondary school 5 2,4 bachelor or master degree 166 77,6 phd degree 43 20,1 total valid responses 214 100,0 missing responses 0 0,0 total 214 100,0 experience with big data technologies to 3 years 107 50,0 from 4 to 6 years 66 30,8 above 6 years 39 18,2 total valid responses 212 99.1 missing responses 2 0,9 total 214 100,0 managerial level top level 29 13,6 middle level 51 23,8 operational level 132 61,7 total valid responses 212 99,1 missing responses 2 0,9 total 214 100,0 306 j. lukić ict and telecommunication industry (80) and after that in banking, finance and insurance (59). companies are from almost all continents, but the largest number of companies are from europe (74) or they operate on more than one continent (69). general information about respondents is presented in table 2. the average age of respondents is 36 years, while the oldest respondent is 64 years and the youngest 23. the largest number of respondents are those who are between 26 and 35 years old (43,5%), and after them the respondents who are from 36 to 45 years (28%). regarding the gender, the most respondents are male (87,4%) which is not surprising having in mind the research topic and the fact that males are still dominant in the field of big data. also, it is not surprising that regarding education, the largest number of respondents have bachelor or master degrees (77,6%) while 20,1% of respondents have phd degrees. only 2,4% of respondents have secondary school. average working experience with big data technologies is almost 5 years, 50% of respondents have less than 4 years of experience, 30,8% of respondents have between 4 and 6 years of experience, while the smallest number of respondents have more than 6 years of experience with big data (18,2%). the largest number of respondents are on operational managerial positions (61,7%). 3. research findings and discussion the new job positions for working with big data technologies. respondents were asked to select all the new job positions which are established in their companies due to the implementation of big data technologies. they also had the possibility to write positions which are not considered in the questionnaire but are established due to the implementation of big data technologies. the results are shown in table 3. table 3 the new job positions established in companies for working with big data technologies job positions for big data technologies number of responses data scientist 154 data engineer 146 big data architect 132 predictive analytics developer 98 head of big data and analytics 97 hadoop developer 93 data strategist 69 digital marketing expert 58 chief data officer 57 social media expert 50 chief analytics officer 48 data explorer 43 data governance and ethics professional 38 data steward 35 chief digital officer 33 company uses the services of external consultants for big data technologies 33 data hygienist 17 the new job positions for working with big data technologies and their placement in companies worldwide 307 the results show that three most frequent job positions established in companies for working with big data technologies are: data scientist, data engineer and big data architect. data scientists are employees who must have the abilities to identify all hidden patterns in any given dataset by asking the right questions, while data engineers are those employees who enable data scientists to do their jobs in the most effective way. data engineers collect, process and serve data to data scientists for further analysis. big data architects are the connection between data scientist and data engineer and their main responsibility is to build the overall big data environment in organization. there are also new job positions on top managerial level (new c-level roles): chief digital officer, chief data officer, chief analytics officer. those positions are focused on collection, processing and management of data in order to create value for the company. results show that some of the companies use the services of external consultants for big data technologies in order to apply those technologies in the most effective way. engagement of external consultants is very important for companies, especially for those which are on the beggining of implementation of big data technologies and do not have enough knowledge and experience how to best use them. results from empirical research confirm hypothesis 1 that companies that use big data technologies have established new job positions. the importance of hard and soft knowledge and skills for working with big data technologies. after we have identified the new job positions established in companies that use big data technologies, the goal was to analyze the key knowledge and skills which employees must have in order to succesfully work with big data. by reviewing the literature, we point out that those employees must have both – hard and soft knowledge and skills (lukić, 2013) and we prepare a list of the most frequently stated knowledge and skills in both groups. the respondents were asked to select the knowledge and skills they consider important for working with big data technologies. results are presented in table 4. table 4 knowledge and skills which are important for working with big data knowledge and skills number of responses hard knowledge and skills mathematics 156 statistics 188 analytics 188 programming 195 information systems and technologies 151 soft knowledge and skills business acumen 140 communication skills 139 teamwork 135 creativity 157 results show that respondents consider both important hard and soft knowledge and skills for working with big data technologies. regarding hard knowledge and skills the most frequently answered options are programming, statistics and analytics, while the most frequently answered options regarding soft knowledge and skills are creativity, business acumen and communication skills. in 1991 guest stated that for future work with ict, employees must be „t shaped professionals” who have large (expert) knowledge from one field (vertical line of letter t) while at the same time must have the knowledge and skills from other 308 j. lukić disciplines and fields (horizontal line of letter t) (guest, 1991). in big data era this is becoming reality because, as results show, the respondents truly believe that hard but also soft knowledge and skills are very important for working with big data technologies. in that sense, hypothesis 2 that employees who work with big data tehnologies have multidisciplinary knowledge and skills is confirmed. the placement of employees who work with big data technologies in company. regarding empirical results about the new job positions established in companies that use big data technologies, it is clear that there is a need for new organizational structure. by reviewing the existing literature, it was discovered that big data technologies have impacted on grouping of organizational units in companies. the goal of empirical research was to identify how companies place those employees who work with big data technologies. grossman and siegel identified three most frequent models for allocation of employees who work with big data technologies – centralized, decentralized and hybrid (combination of centralized and decentralized model) (grossman & siegel, 2014). but in the pilot research, through interviews with experts who work in companies that use big data technologies, we identified that besides those three models there are situations when new employees are placed in existing organizational department responsible for ict. therefore, the respondents were asked to select one of the following options which is true for their company regarding the placement of employees that work with big data:  a specific organizational unit with employees who work with big data technologies has been established in our company (centralized).  employees who work with big data technologies are located in each business function which has the need for their support (decentralized).  some employees who work with big data technologies are located in specifically established organizational unit, and the other employees are in different organizational units (hybrid).  employees who work with big data technologies are placed in an existing part of the company which is responsible for information technologies and systems (existing ict department – no change). results regarding the placement of employees who work with big data technologies are presented in table 5 and fig. 1. table 5 the model of placement of employees who work with big data technologies variable answer frequency percentage the allocation of employees who work with big data in companies centralized 93 43,5 decentralized 25 11,7 hybrid 43 20,1 existing ict department 46 21,5 total valid responses 207 96,7 missing responses 7 3,3 total 214 100,0 the new job positions for working with big data technologies and their placement in companies worldwide 309 fig. 1 the model of placement of employees who work with big data technologies according to results, in the largest number of companies, the employees who work with big data technologies are placed in specific organizational unit which has been established for that purpose – centralized (43,50%), while the smalest number of companies place those employees in each organizational part which has the need for their knowledge and skills – decentralized (11,70%). almost equal number of companies place employees who work with big data technologies using the hybrid model some of the employees are centralized and others decentralized (20,10%), or place them in existing part of the organization responsible for ict (21,50%). results from empirical research confirm hypothesis 3 that there are changes in organizational structure in companies that use big data technologies. in order to further determine and analyze the impact of big data technologies on placement of employees who work with big data, the respondents who answered that in their company is established specific organizational unit for employees who work with big data, were kindly asked to write the name of it. collected answers were analyzed using the free online word cloud generator and tag cloud generator http://www.wordclouds.com/ [accessed 01 june 2016] which, among other things, creates a picture with the most frequent words (fig. 2). fig. 2 word cloud with the most frequent words that respondents wrote regarding the name of new organizational unit established for employees who work with big data http://www.wordclouds.com/ 310 j. lukić the most frequent names for new organizational units in which are placed employees who work with big data technologies are: big data, big data center, big data office, big data and analytics, big data team, business intelligence and big data, and data analytics. conclusion the question regarding the impact of modern technologies on organizational design is raised one more time due to the development of big data technologies. one of the first changes that comes with the implementation of big data technologies is establishment of new job positions because companies must have employees who are competent for their use. for that reason, the aim of this paper was to identify the new job positions for working with big data technologies, required knowledge and skills of those employees and how they are placed in the company. empirical research was conducted by using the specially designed online questionnaire for that purpose. after two months, relevant answers were collected from 214 companies worldwide that use big data technologies. analysis of collected answers confirmed all imposed hypotheses. firstly, the research results showed that there are new job positions in companies that use big data technologies. the most frequent job positions for working with big data technologies are data scientist, data engineer and big data architect, but there are also new positions in top managerial level (new c-level roles): chief digital officer, chief data officer and chief analytics officer. secondly, results showed that employees who work with big data technologies must be t shaped professionals with both hard and soft knowledge and skills. it is not enough for those employees to have only hard knowledge and skills like programming, statistics, analytics, they also must have soft knowledge and skills like creativity, business acumen and communication skills. thirdly, analysis of research results showed that companies in the most frequent cases establish new organizational unit and place there employees who work with big data technologies. the importance of this research lies in the fact that any modern company which implements new technologies must be focused on its most important resources – employees, because the destiny of implemented technologies is in their hands. the results of empirical research may be of value to companies which want to implement big data technologies but also to new candidates who want to work with big data, because thay can see what are the most frequent job positions in companies and what knowledge and skills are considered valuable. empirical research was accompanied by some limitations that should be considered. the first limitation of the research is that the population was not known in advance there is no list of all companies that use big data technologies. therefore, the question of representativeness of the sample is opened, and consequently the possibility of generalization of conclusions. also, the possibility to conduct a longitudinal study on the level of the whole sample in order to examine the impact of big data technologies on job positions, knowledge and skills of employees over time is limited. during analysis of results from conducted empirical research, some proposals for future research appeared. one of the directions for future research might be to investigate the impact of big data technologies on new job positions, necessary knowledge and skills through the verification of the hypotheses on a sample of different structure of employees – those wo are not in managerial positions. also, it would be very interesting to explore the impact of these technologies on establishment and functioning of multidisciplinary teams that the new job positions for working with big data technologies and their placement in companies worldwide 311 include employees who work with big data technologies and other employees from different organizational units. acknowledgement: this research is part of the research done for phd thesis „the impact of big data technologies on organizational design of the company” at the faculty of economics, university of belgrade. references berman, j. 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(1965). industrial organization: theory and practice. london: oxford university press. free online word cloud generator and tag cloud generator, retrieved from: http://www.wordclouds.com/ accessed on: 01 june 2016. nove radne pozicije za rad sa velikim obimom podataka i njihovo mesto u kompanijama širom sveta: rezultati empirijskog istraživanja zahvaljujući razvoju tehnologija za rad sa velikim obimom podataka, uticaj tehnologije na organizacioni dizajn je ponovo postalo važno i aktuelno pitanje u teoriji i praksi menadžmenta i organizacije. tehnologije za rad sa velikim obimom podataka predstavljaju nove tehnologije, tehnike, alate, znanja, veštine i metode za prikupljanje, obradu i analiziranje podataka koji imaju nove osobine (količinu, strukturu, brzinu). sa jedne strane, ove tehnologije predstavljaju faktor okruženja i suočavaju kompanije sa podacima koji imaju nove osobine, dok sa druge strane predstavljaju resurs organizacije koji omogućava kompanijama koje ih primenjuju da kreiraju vrednost na osnovu raspoloživih podataka. jedna od prvih promena koja se dešava u kompanijama koje implementiraju tehnologije za rad sa velikim obimom podataka jeste pojava novih radnih pozicija jer su kompanijama potrebni zaposleni sa novim znanjima i veštinama. cilj rada jeste da kroz empirijsko istraživanje identifikuje nove radne pozicije u kompanijama koje primenjuju tehnologije za rad sa velikim obimom podataka, potrebna znanja i veštine koje ti zaposleni moraju imati, kao i način njihovog raspoređivanja u kompanijama. ključne reči: veliki podaci, organizacioni dizajn, t oblikovani stručnjaci, čvrsta i meka znanja i veštine http://data-informed.com/mckinsey-report-big-data-at-center-of-disruptive-technologies/ http://www.wordclouds.com/ facta universitatis series: economics and organization vol. 16, n o 2, 2019, pp. 197 213 https://doi.org/10.22190/fueo1902197s review paper intersectoral linkages and their contribution to economic growth in the republic of serbia1 udc 330.35(497.11) jelena stanojević 1 , bojan krstić 2 1 university of niš, faculty of sciences and mathematics, serbia 2 university of niš, faculty of economics, serbia abstract. the high level of interconnection between economic sectors, namely agriculture, manufacturing and the service sector, imposes the need to understand intersectoral structural changes and transfer of resources between sectors in order to perceive their contribution to economic development. based on the rich information base compiled by data from various national and international statistic sources, intersectoral structural changes in the republic of serbia as one of the transition economies are analysed from different aspects. the paper deals primarily with the share of economic sectors in the gross domestic product. further, it points to the participation of economic sectors in overall employment, but also in international trade. the research goal is to analyze the structural changes in the serbian economy, identify the direction of resource transfer between sectors, as well as their contribution to the economic development measured by different indicators. key words: intersectoral linkages, structural changes, economic growth, republic of serbia. jel classification: e01, o11, o40 received december 14, 2018 / revised april 29, 2019 / accepted may 03, 2019 corresponding author: jelena stanojević university of niš, faculty of sciences and mathematics, višegradska 33, 18000 niš, serbia e-mail: jelenastanojevic83@yahoo.com 198 j. stanojević, b. krstić 1. introduction the economic growth of developed countries is characterized by the reallocation of resources from agriculture to non-agricultural activities, accompanied by further shifts from manufacturing to the service sector. in general, several important phases of these changes can be distinguished (adelman, 1999, pp. 103-134). in the first stage of development, a large part of the active workforce is related to agriculture. along with the progress, there is a movement of the labour force from agriculture to the manufacturing and service sector. the service sector also advances simultaneously with manufacturing due to its multiple interconnection, primarily in the domain of transport, distribution and finance. therefore, both sectors show an increase in relative importance in relation to agriculture. however, over a certain period of economic development, the participation of manufacturing in the total employment is stabilized, while on the other hand the service sector continues to expand at the expense of the agricultural sector. in the final stage of development, the economy reaches its peak. during this phase, the service sector continues to progress, but now at the expense of manufacturing whose relative significance is decreasing. if the service sector continues to grow and there is no increase in the total active labour force, this increase is possible only with a significant reduction of employment in manufacturing as well (kenneth et al., 1992, pр. 2). the economic justification for such long-term movement between sectors can be found both on the supply and demand side. firstly, the relative importance of agriculture should be considered. on the supply side, a large increase in productivity leading to an increase in agricultural production is a result of a mechanization development, improved transport, greater use of fertilizers and pesticides, as well as the overall advancement of scientific knowledge and techniques of agricultural management. however, productivity growth is not accompanied by a steady increase in demand for agricultural products (johnston, 1990, pp. 1109-1123). the growth in income per capita usually goes hand in hand with a decrease in the income elasticity for demand of food, which ends up with the creation of surplus products. as a result, there is a decline in agricultural product prices, profitability and farmers' earnings, and the movement of workers from agriculture due to lack of work or inadequate salaries (kenneth et al., 1992, pр. 5). on the other hand, an increase in the relative importance of the service sector can be also explained by factors on the supply and demand side (hayami and godo, 2005, p. 32). the original explanations focused on the demand side. high income elasticity of demand for services at a high level of income per capita indicates the prosperity of the economy where more revenue is allocated and spent on services. however, only a small part of the employment growth in the service sector can be justified by the demand for services. interestingly, the rise in some of the services is closely linked to the rising demand for both agricultural and manufacturing products (e.g. travel, entertainment, etc.) (kenneth et al., 1992, pр. 5). certain movements within the economy of the republic of serbia (further: serbia or rs) as one of the transition economies also indicate a change in sectors’ relative importance. the structure of the serbian economy has been constantly evolving in response to ever-changing domestic and international conditions. serbia has had a period of rapid structural changes with a changing external environment, but also an intersectoral linkages and their contribution to economic growth in the republic of serbia 199 internal environment with regards to the changed demographics. while the external environment has special significance in the secondary sector, the main factors of the structural changes in the agricultural sector are internal (although often with an international dimension). unlike the agricultural sector, the service sector in serbia has been unstoppable in the previous period. also, manufacturing shifted to the production of knowledge-based products in order to put emphasis on design and other value-added components. computerization and information technology have replaced thousands of office workers who have sought work in other service activities. in economic theory is widely accepted the existence of interrelation between economic growth and structural changes, whether measured by the employment share of economic sectors or through their participation in the realized domestic or international value (dietrich, 2009). therefore, the paper primarily focuses on intersectoral structural changes. after examining the theoretical framework of the concept of structural changes, intersectoral structural changes in the serbian economy are elaborated from the aspect of sectors’ share in gross domestic product, employment and international trade. 2. theoretical framework: the conceptual basis of structural changes in the economy structural changes, their theoretical perception and analysis of the factors that have caused them, have attracted the attention of prominent economists in the past (krstić et al., 2015, pp. 31-44). however, despite the rich research base in this field, there are certain doubts in the literature regarding interpretation of the concept of structural changes. namely, the term “structural change” has not always been used in this form bearing in mind that economists dealt with its analysis, but using a different terminology (quatraro, 2012, pp. 37-38). structural changes, analyzed in that period as structural transformations, were one of the main topics in the classical economy. neoclassical economists have not considered structural changes as an important factor of economic development, but only as the automatic result of market development. while neoclassical economists have not attached great importance to this problem, classical economists have considered structural changes from the perspective of moving labour from agriculture as a traditional activity, to manufacturing and services as modern activities (memedovic & lapadre, 2010, p. 4). one of the most prominent representatives of the classical economy, adam smith, emphasized in his work "wealth of nations" (1776) that agriculture is mainly specializing in poorer countries, where the nature of tasks being performed determines the division of labour and thus limits production efficiency. on the other hand, richer countries specialize in manufacturing, bearing in mind that manufacturing activities provide the ability to perform a variety of tasks and thereby increase productivity. at the same time, smith under structural changes implied carrying out production activities within organizations, and not just a sectoral composition of the economic system (quatraro, 2012, p. 37). 200 j. stanojević, b. krstić apart from adam smith, also simon kuznec (1930), artur burns (1934) and alan fisher (1939) greatly contributed to the study of structural changes. important empirical evidence can be found in their works about the rise and fall of certain economic sectors, but above all the manufacturing sector. they also provided an explanation of factors that have led to changes in industrial leadership in different countries. bearing that in mind, kuznec considered structural changes to be one of the important factors of development, although it meant only sectoral changes in employment and production. from this perspective, the economic development of countries and regions is strictly defined by performance of the leading sectors (krstić et al., 2015, pp. 31-44). classical economists, primarily kuznec, burns and fischer, have provided an interpretation of structural changes starting from the three-sector model of the economy. in doing so, the economy can be divided into three major economic aggregates: the primary sector that includes agriculture, fishery and forestry; a secondary sector that includes the production of capital and consumption goods through the combination of capital, labour and intermediate goods; and a tertiary sector that involves the provision of various services. the replacement of the contribution of three main sectors to the overall development of the economy represents the backbone of the classical model (krstić et al., 2015, pp. 31-44). kuznec, as one of the initiators of the empirical analysis of structural changes, has laid the foundations of the so-called theory of slowdown in development. the initial assumption of this theory is the uneven growth rates, as well as the interweaving of cross-sectoral and international dimensions. starting from this, the achieved level of development of each country depends to a great extent and is determined by the dominant sector of the economy. therefore, a contribution of kuznets and his theory of slowdown in development is pointing out important structural transformations (changes) of the economy as one of the crucial features of modern economic growth. at the same time, fundamental assumptions of structural changes are a change in the focus of the economy from agriculture to manufacturing and from manufacturing to services, as well as changes in the scale of production units and a shift towards other forms of organization of economic entities other than their own enterprises (quatraro, 2012, p. 42). however, other economists who offered some interpretations of structural changes were also distinguished. for instance, according to robinson and sirkin, structural changes are a set of changes in production and demand, trade, and the use of factors reflected in the income per capita increase (ark, 1995, p. 1). further, maklup (1963) puts emphasis on the distribution of factors of production between the economic sectors, territories, various products, occupations, etc. and under structural changes he first of all takes into account different arrangements of production activities in the economy (quatraro, 2012, p. 37). "although the concept of structural changes can be defined in different ways, it most often refers to long-term and lasting changes in the sectoral composition of the state or region during the economic development process. more specifically, structural changes are associated with the modification of a relative importance of different sectors over time, measured by their participation in production and employment" (krstić et al., 2015, pp. 31-44). intersectoral linkages and their contribution to economic growth in the republic of serbia 201 the concept of structural changes is difficult to be uniquely defined due to the complexity of the phenomenon. also, there is a low possibility of finding a universal method of their measurement. however, it is generally accepted that structural changes can be measured by reallocating capital and labour between sectors and regions, depending on the level being analyzed. changes in the sector, in markets of goods and services, and in the nature of production processes should also be taken into account (raiser et al., 2003). therefore, structural changes can be identified and monitored having in mind different levels. they occur, above all, in the conditions when companies respond to changes in relative input and output prices, but also to challenges arising from the emergence of new technology and knowledge. however, in the case of the same or similar effects of structural changes to all economic actors within the sector, it is considered that they occur at a sectoral level. structural changes can also be manifested between sectors as well as within them. nevertheless, the most intense are those that occur at the macroeconomic level, causing changes of varying intensity in all sectors. consequently, three levels of structural change can be distinguished (downes & stoeckel, 2006, p. 12): 1. at the enterprise level implementation of modern technology, new management methods, modern production practices, response to changes in relative labour costs, capital and other factors of production; 2. at the sector level certain structures of companies are favourable under the pressure of competition, but changes occur in the operating environment along with the change in input prices; 3. between sectors changes in domestic demand, but also in global terms lead to conditional changes in consumption patterns (usually as a result of demographic changes, the application of modern technology, etc.), the change in the comparative advantage of the economic sectors determines the outcome of the market game. the key to successful adaptation to structural change is adaptability, flexibility and competitiveness (which leads to innovation and adaptation). these characteristics are associated with a high level of productivity, rising revenue and a low inflation rate in the country. for this reason, macroeconomic policy makers seek to maintain a macroeconomic environment with low interest and unemployment rates. a good macroeconomic and microeconomic policy should be strongly mutually complementary (downes & stoeckel, 2006, p. 5). 3. researc results and discussion 3.1. the share of economic sectors in the gross domestic product of the republic of serbia gross domestic product (gdp) in the last fifty years has been the most often used indicator of economic progress of a country and welfare of its population. this indicator shows how efficiently the economy functions by compressing the total value of state economic activities in only one number (mankiw, 2002, p. 53). 202 j. stanojević, b. krstić "gdp represents the market value of all finished goods and services produced within a country over a given period of time" (mankiw, 2001, p. 208). it can be calculated by summarizing the “value of personal consumption expenditure (consumption of households for goods and services), government expenditure (public expenditures for the provision of goods and services for the future) and net exports (difference in value between government exports and imports)” (mankiw, 2001, p. 208). according to the degree of development, measured by gdp per capita, national economies can be classified into three groups: factor-driven, efficiency-driven, and innovation-driven (table 1). table 1 different levels of the economic development level 1: factor driven transition from level 1 to level 2 level 2: efficiency driven transition from level 2 to level 3 level 3: innovation driven gdp per capita <2000 2000-2999 3000-8999 9000-17000 >17000 subindex “basic factors” 60% 40-60% 40% 20-40% 20% subindex “efficiency factors” 35% 35-50% 50% 50% 50% subindex “innovation and sophistication factors” 5% 5-10% 10% 10-30% 30% source: wef. (2016-2017). global competitiveness report. geneva: world economic forum, р. 38 the economy is driven by factors of production in the first stage of economic development. countries at this level of development compete with the engagement of the basic factors of production, primarily human and natural resources. companies base their competitiveness on low prices and sale of mainly basic products, achieving low productivity and low wages. as the economy becomes more competitive, it increases productivity and earnings of workers. national economies are moving towards a stage of development that is efficiency driven. at this stage, the production process and product quality should be improved since earnings of workers grow, but prices of products cannot be increased. competitiveness at this level is focused on higher education, efficient financial market and market of goods and services, etc. innovation driven economy as the highest level of a country development encourages companies to produce innovative and distinguished products that will contribute to the overall competitiveness. at this stage of development, in addition to the previously mentioned factors of development, the crucial roles in the economy development belong to intangible forms of capital, such as research and development, science, education, innovation, competencies, etc. hovewer, the outcome of these fields largely depends on sufficient level of investment, proving that the financial capital is still of high importance at this level of economy development (frane, 2014, pp. 1-2). intersectoral linkages and their contribution to economic growth in the republic of serbia 203 table 2 shows data for gross domestic product of serbia in rsd, usd, and eur in the period 2000-2015. based on table 2, gdp per capita of serbia in 2015 amounted to 5,235 usd representing half of the value in efficiency driven stage (3000-8999 usd). accordingly, serbia has to increase gdp in order to qualify for the transition to a higher stage. table 2 gdp of the republic of serbia in rsd, eur, usd, in the period 2000-2015 total mil. rsd total mil. eur per capita, eur total mil. usd per capita, usd 2000 1,989,783.5 25,717.0 3,421.5 23,593.5 3,139.0 2001 2,089,127.7 12,928.5 1,723.0 11,581.1 1,543.4 2002 2,237,785.6 16,213.8 2,161.8 15,277.3 2,037.0 2003 2,336,593.1 17,486.8 2,337.6 19,755.1 2,640.9 2004 2,547,973.3 19,128.0 2,563.0 23,776.4 3,185.8 2005 2,689,141.9 20,407.6 2,742.7 25,361.2 3,408.4 2006 2,821,026.8 23,610.0 3,185.6 29,603.7 3,994.3 2007 2,987,150.3 28,784.6 3,899.5 39,385.4 5,335.6 2008 3,147,461.2 33,417.9 4,546.5 48,856.6 6,647.0 2009 3,049,387.2 29,967.0 4,093.4 41,658.7 5,690.5 2010 3,067,210.2 29,766.3 4,082.0 39,370.4 5,400.0 2011 3,110,196.1 33,423.8 4,619.0 46,463.7 6,421.0 2012 3,078,619.2 31,683.1 4,400.0 40,675.9 5,648.0 2013 3,157,793.1 34,262.9 4,781.0 45,512.1 6,351.0 2014 3,908,469.6 33,186.0 4,672.0 44,143.1 6,190.0 2015 4,043,467.8 33,491.0 4,720.0 37,145.7 5,235.0 source: statistical office of the republic of serbia (2005-2016). statistical yearbook. in table 3, the gross value added and gross domestic product of serbia from 2000 to 2014 are given. based on the provided information, all occupations in the analysed period achieved a rise in absolute values in dinars. however, the highest increase is recorded in wholesale and retail sale trade, information and communication, and financial activities. the total gross value added of serbia in 2014 compared to 2000 increased by 37%, while gross domestic product has been increased by 56%. table 4 shows the gross domestic product of serbia, overall and per economic sectors, in absolute and relative values in the period 2000-2014. the share of primary sector in gross value added in the analyzed period is around 10%, the share of secondary sector is around 30%, and the share of tertiary sector is around 60% in gross value added. 204 j. stanojević, b. krstić тable 3 gross value added per occupation and gross domestic product of serbia, in the period 2000-2014, constant price 2010 2000 2001 2002 2003 2004 2005 2006 2007 agriculture, forestry and fishing 223,897 262,560 24,460 227,688 271,093 257,961 257,784 237,455 mining 24,947 19,126 30,479 34,597 35,570 36,075 39,242 36,671 manufacturing 428,713 387,339 364,526 368,014 381,653 381,491 388,732 425,533 electricity, gas and steam supply 64,114 64,895 63,808 72,909 77,755 78,702 82,495 86,613 water supply and waste water management 31,771 28,423 26,601 29,592 29,878 32,163 32,372 33,275 construction 82,317 73,650 94,209 116,470 131,611 130,504 150,964 151,241 wholesale and retail trade, repair of motor vehicles 118,037 109,030 132,120 153,236 183,923 251,227 275,581 315,113 traffic and storage 79,191 84,031 86,908 92,967 101,493 106,350 123,313 137,448 accomodation and food services 34,993 30,267 28,607 32,415 32,957 36,178 40,991 38,787 information and communication 54,840 55,318 64,871 74,040 75,572 85,530 97,398 118,189 financial and insurance activities 39,007 31,950 35,104 37,547 43,375 51,885 67,912 82,070 real estate 244,580 247,891 252,198 251,607 253,149 268,004 269,579 271,238 professional, scientific, innovation and technical activities 89,662 61,312 58,976 54,666 69,689 72,644 82,097 95,664 administrative and support service activities 30,888 23,515 21,574 24,625 22,543 31,715 32,265 33,702 public administration and mandatory social security 93,211 93,637 96,120 104,565 111,350 111,027 105,566 105,977 education 81,028 83,212 90,742 100,238 100,752 93,896 8,925 97,152 health and social protection 164,235 165,002 178,192 164,812 169,413 175,978 156,892 158,930 art, entertainment and recreation 23,318 18,806 24,231 30,803 36,064 32,362 31,324 29,915 other service activities 36,245 32,520 38,565 38,274 46,854 48,444 53,431 48,025 household activities as an employer / / 1,166 1,362 1,491 2,151 2,185 3,049 gross value added (gva) 1,912,735 1,876,382 1,923,646 2,000,511 2,171,702 2,276,854 2,379,219 2,506,273 taxes on products 147,686 261,878 354,700 371,379 418,854 450,830 480,273 515,771 subsidies on products 26,730 30,953 30,271 28,764 34,246 33,173 34,284 32,793 gross domestic products (gdp) 1,989,784 2,089,128 2,237,786 2,336,593 2,547,973 2,689,142 2,821,027 2,987,150 2008 2009 2010 2011 2012 2013 2014 agriculture, forestry and fishing 258,115 245,814 261,510 263,993 218,348 264,004 269,181 mining 37,896 33,855 39,964 46,237 49,087 49,712 38,116 manufacturing 439,706 419,839 418,466 426,237 458,870 484,882 474,874 electricity, gas and steam supply 85,958 91,421 87,245 90,458 88,180 99,638 70,955 water supply and waste water management 31,046 31,149 35,131 36,638 36,750 36,444 36,888 construction 171,052 149,069 145,484 154,069 138,927 133,558 131,578 wholesale and retail trade, repair of motor vehicles 327,182 298,331 289,462 290,567 292,955 297,416 299,518 traffic and storage 134,762 128,540 137,687 137,323 126,694 136,261 140,031 accomodation and food services 35,580 35,365 34,540 31,628 35,458 32,588 31,819 information and communication 129,482 125,571 129,593 132,926 136,597 136,420 131,160 financial and insurance activities 97,543 100,035 101,894 100,304 92,250 83,509 81,150 real estate 282,176 283,885 284,579 285,981 288,791 291,778 287,948 professional, scientific, innovation and technical activities 102,704 91,859 89,343 92,882 95,942 94,535 95,733 administrative and support service activities 38,973 41,775 44,350 43,507 45,773 43,814 43,803 public administration and mandatory social security 106,881 111,454 111,198 112,532 117,736 120,492 118,847 education 102,826 104,851 105,363 106,982 108,776 110,275 111,204 health and social protection 164,889 166,001 164,644 169,502 169,618 169,977 171,120 art, entertainment and recreation 30,527 29,824 30,113 27,906 30,130 29,530 29,897 other service activities 48,722 46,103 44,108 42,578 41,058 39,195 40,243 household activities as an employer 3,023 2,670 2,692 2,532 2,517 2,531 2,724 gross value added (gva) 2,627,770 2,537,137 2,557,364 2,594,783 2,574,024 2,658,472 2,604,582 taxes on products 554,878 544,112 543,004 549,024 531,759 530,515 526,543 subsidies on products 34,235 31,869 33,158 33,611 27,497 32,727 32,790 gross domestic products (gdp) 3,147,461 3,049,387 3,067,210 3,110,196 3,078,619 3,157,793 3,099,964 source: statistical office of the republic of serbia (2005 -2016). statistical yearbook. intersectoral linkages and their contribution to economic growth in the republic of serbia 205 table 4 gross domestic product per economic sectors in serbia, in the period 2000-2014 (constant price 2010, mil. rsd) year gross domestic product agriculture manufacturing service sector mil. rsd % of total gdp mil. rsd % of total gdp mil. rsd % of total gdp 2000 1,944,993.2 223,896.7 12% 631,862.1 32% 1,089,234.4 56% 2001 1,872,481.1 262,559.7 14% 573,432.7 31% 1,036,488.7 55% 2002 1,933,596.9 244,600.1 13% 579,622.9 30% 1,109,373.9 57% 2003 2,010,427.1 227,687.6 11% 621,582.8 31% 1,161,156.7 58% 2004 2,176,180.5 271,092.8 12% 656,466.0 30% 1,248,621.7 57% 2005 2,284,289.5 257,961.1 11% 658,934.8 29% 1,367,393.6 60% 2006 2,379,372.7 257,784.0 11% 693,804.0 29% 1,427,784.7 60% 2007 2,506,045.2 237,455.2 9% 733,332.8 29% 1,535,257.2 61% 2008 2,629,041.7 258,115.2 10% 765,657.3 29% 1,605,269.2 61% 2009 2,537,409.2 245,813.6 10% 725,332.8 29% 1,566,262.8 62% 2010 2,557,364.2 261,510.4 10% 726,288.7 28% 1,569,565.1 61% 2011 2,594,782.3 263,993.0 10% 753,640.3 29% 1,577,149.0 61% 2012 2,574,454.6 218,348.1 8% 771,813.4 30% 1,584,293.1 62% 2013 2,656,558.9 264,003.6 10% 804,233.8 30% 1,588,321.5 60% 2014 2,604,582.4 269,181.0 10% 752,411.0 29% 1,585,197.0 61% source: statistical office of the republic of serbia (2005-2016). statistical yearbook. based on the previous table, the tertiary sector has increased its relative importance over years measured by its share in gdp, from 56% in 2000 to 61-62% at the end of analyzed period. the primary sector achieved the biggest share in gdp in 2001 (14%) and the smallest in 2012 (8%), while secondary sector showed very small fluctuations in the share of gdp from 32% in 2000 to 28% in 2010. 3.2. the share of economic sectors in the overall employment of the republic of serbia in the last two centuries, drastic changes have been occurring in employment and productivity between the economic sectors. history has shown that economies changed from predominantly agricultural, via manufacturing, to service-focused economies. the economic development of industrialized countries has led to the transformation of society. in countries striving for industrialization, agriculture has served as a source of resources that can be invested in economic development activities. among other things, gradually there was a migration of the agricultural population to manufacturing and service sector, and then at a higher level of development from manufacturing into the service sector. table 5 shows the movement of overall employment in serbia in the period from 2002 to 2014, as well as in all economic activities (agriculture, manufacturing, and service activities). the number of employees in serbia is in constant decline, from 1.6 million in 2002 to 1.3 million in 2014. observed by sectors in the analyzed period, the employees in agriculture registered a decline in the share of total employment in serbia from 4.82% to 2.36%. the relative share of manufacturing in serbian total employment also drops, from 44.13% in 2002 to 32.23% in 2014. unlike the primary and secondary sectors, 206 j. stanojević, b. krstić the participation of the tertiary sector in the overall employment of serbia increased in the observed period from 52.29% to 65.41%, thus representing a dominant share. тable 5 employees per sector in serbia, in the period 2002-2014 year number of employees agriculture manufacturing service sector absolute relative absolute relative absolute relative 2002 1,676,835 80,888 4.82% 739,932 44.13% 856,044 51.05% 2003 1,611,632 74,445 4.62% 694,420 43.09% 842,771 52.29% 2004 1,580,140 70,073 4.43% 650,518 41.17% 859,555 54.40% 2005 1,546,471 65,058 4.21% 624,120 40.36% 857,295 55.44% 2006 1,471,750 59,395 4.04% 578,809 39.33% 833,548 56.64% 2007 1,432,851 55,145 3.85% 543,154 37.91% 834,555 58.24% 2008 1,428,457 49,528 3.47% 522,026 36.54% 856,905 59.99% 2009 1,396,792 46,129 3.30% 486,468 34.83% 864,198 61.87% 2010 1,354,637 37,392 2.76% 459,006 33.88% 858,242 63.36% 2011 1,342,892 34,815 2.59% 449,963 33.51% 858,113 63.90% 2012 1,341,114 33,002 2.46% 443,726 33.09% 864,385 64.45% 2013 1,338,082 33,715 2.44% 438,990 32.81% 866,378 64.75% 2014  1,323,831 31,288 2.36% 426,670 32.23% 865,871 65.41% source: statistical office of the republic of serbia (2005-2016). statistical yearbook. according to the data of the statistical office of the rs, employment in serbia in 2015 amounted to 2.574.200, being higher for 0.6% compared to the previous year. however, registered employment in 2016 amounted to 2.009.784 (statistical office of the republic of serbia, 2017). conducted analysis indicates that structural changes in the serbian economy have contributed to the reduction of agricultural and manufacturing relative importance and increased relative importance of the service sector, measured by their participation in gross domestic product and overall employment. salaries of employees in serbia at the economy and sector level recorded slight fluctuations in their nominal and real values in the previous period. in 2015, the average earnings of employees in serbia registered a nominal decline of 0.5% and a real fall of 2.4%. however, "the highest increase in wages was recorded in the following sectors: other service activities (nominal growth of 10.1% and real 8.0%), arts, entertainment and recreation (nominal growth of 8.4% and real growth of 6.4 %) and health and social protection (nominal growth of 6.4% and real growth of 4.4%). on the other hand, the largest negative changes were identified in the sectors: agriculture, forestry and fisheries (nominal decline of 10.2% and real growth of 11.9%), mining (nominal decrease of 7.1% and real growth of 8.8% ) and manufacturing (nominal decline of 6.8% and real of 8.5%)" (statistical office of the rs, 2016, pp. 57-58).  a new methodology for monitoring registered employment of serbia is being applied since 2015, combining data from the two official statistical sources. the new definition of registered employment is in line with the standards of the european union. also, the methodology of the labour force survey was changed in 2015. the system of grading, increased sample size, continuous research and new method of data collection capi (computer assisted personal interviewing) have been changed. accordingly, taking into account the changes in the methodology, the data from 2015 are not included in the analysis. intersectoral linkages and their contribution to economic growth in the republic of serbia 207 the average gross and net salaries in serbia in the period from 2003 to 2015 are given in table 6 and table 7. тable 6 average gross salaries in serbia, per occupation, 2003-2015 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 republic of serbia, total 16,612 20,555 25,140 31,745 38,744 45,674 44,147 47,450 52,733 57,430 60,708 61,426 61,145 agriculture, forestry and water management 13,129 15,569 20,301 25,951 29,680 37,204 38,421 38,304 43,857 49,948 51,916 51,522 52,435 agriculture, hunting and services 12,217 14,026 18,195 23,297 26,256 33,615 35,449 36,603 42,703 48,882 50,635 49,712 51,737 forestry 17,506 23,883 28,790 35,500 41,773 46,854 45,593 47,952 50,969 55,402 58,505 59,253 57,528 water management 20,479 26,050 34,020 42,238 48,655 55,946 53,683 / / / / / / fishing 15,378 17,840 24,085 23,724 21,699 29,113 27,147 32,818 34,506 44,102 44,107 48,289 38,819 mining and quarrying 22,091 26,352 30,745 38,992 48,978 55,835 61,226 69,582 80,605 89,521 96,051 97,900 99,521 manufacturing 12,996 16,065 20,366 25,830 30,620 36,540 35,166 40,101 45,269 49,236 51,742 53,094 56,471 production of electricity, gas and water 23,778 29,426 35,590 42,488 53,128 57,886 62,227 61,000 69,909 75,934 79,231 73,156 79,850 construction 15,175 18,443 22,389 28,219 34,944 42,271 37,897 40,985 45,796 48,159 49,492 51,778 57,023 wholesale and retail trade, repair 13,704 17,444 22,621 28,926 34,685 42,367 32,746 35,560 39,010 42,598 45,677 45,801 46,969 hotels and restaurants 11,689 14,037 17,665 21,516 25,844 30,234 24,895 25,851 28,588 31,303 33,044 33,620 36,449 traffic, storage and connection 20,113 24,561 29,737 36,029 41,568 48,758 51,350 58,090 65,185 72,086 77,563 83,897 86,839 financial intermediation 34,601 43,870 56,348 70,864 82,041 91,023 94,568 96,920 99,978 105,414 109,47 0 105,479 107,340 real estate, renting 20,251 24,730 32,076 37,039 47,154 52,116 46,840 51,326 56,246 61,378 65,571 66,981 68,079 public administration and social security 22,742 27,207 33,210 40,542 47,728 54,273 55,363 58,330 65,427 71,200 75,098 74,738 67,151 education 18,243 21,688 27,265 33,166 40,286 48,299 49,958 50,141 53,273 56,906 59,573 59,961 55,860 health and social work 18,817 23,064 26,792 32,790 42,900 48,864 50,444 50,503 54,691 57,803 60,569 60,359 56,307 other communal and social services 19,707 24,191 28,846 33,866 38,641 44,281 42,267 41,807 42,846 47,258 50,637 43,371 45,899 source: statistical office of the republic of serbia (2005-2016). statistical yearbook. based on table 6, gross salaries in agriculture in 2003 amounted only to 76% of the average gross salaries in serbia. with mild oscillations in other analyzed years, in 2014 they make up 85% of average gross salaries in serbia. within the primary sector, the lowest gross salaries are recorded in the activities of agriculture, hunting and services, which are at the same time the lowest or one of the lowest gross salaries in comparison to all other activities in serbia. the largest gross salaries in the whole observed period were recorded within the financial intermediation, which are almost twice than average for serbia. observed by sectors, both secondary and tertiary sectors on average achieve higher gross salaries than the national average. however, at the beginning of the analyzed period (2003), the tertiary sector recorded gross salaries for 20% higher than the national average, and the secondary 11%. at the end of the analyzed period, in 2015, a larger difference compared to the national average is recorded in the secondary sector (20%), and smaller in the tertiary (4%). 208 j. stanojević, b. krstić тable 7 average gross salaries in serbia, per occupation, 2003-2015 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 republic of serbia, total 11,500 14,108 17,443 21,707 27,759 32,746 31,733 34,142 37,976 41,377 43,932 44,530 44,432 agriculture, forestry and water management 9,076 10,658 13,835 17,683 21,244 26,696 27,582 27,591 31,545 35,970 37,404 37,212 37,908 agriculture, hunting and services 8,437 9,592 12,396 15,875 18,823 24,179 25,497 26,380 30,733 35,238 36,491 35,934 37,398 forestry 12,162 16,400 19,619 24,189 29,823 33,488 32,627 34,000 36,558 39,734 42,073 42,653 41,596 water management 14,177 17,907 23,243 28,778 34,616 39,809 38,275 / / / / / / fishing 10,659 12,214 16,341 16,137 15,592 20,921 19,569 23,692 24,944 31,838 31,990 35,016 28,145 mining and quarrying 15,373 18,113 20,989 26,739 34,818 39,729 43,650 49,630 57,436 63,726 68,338 69,660 71,077 manufacturing 8,990 11,034 13,945 17,710 22,066 26,391 25,539 29,057 32,785 35,748 37,706 38,735 41,148 production of electricity, gas and water 16,486 20,186 24,369 28,994 37,867 41,222 44,239 43,500 49,893 54,176 64,554 57,873 57,133 construction 10,472 12,597 15,235 19,195 24,869 30,178 27,175 29,459 32,950 34,713 35,747 37,493 41,744 wholesale and retail trade, repair 9,474 11,953 15,498 19,863 24,934 30,561 23,757 25,830 28,475 31,078 33,614 33,827 34,606 hotels and restaurants 7,991 9,498 12,000 14,678 18,614 21,800 18,176 18,899 20,902 22,832 24,362 24,885 26,781 traffic, storage and connection 13,911 16,854 20,341 24,724 29,821 35,046 36,880 41,676 46,878 51,696 56,674 62,250 64,714 financial intermediation 24,157 30,347 38,852 48,896 58,951 65,419 67,899 70,045 71,938 76,195 79,168 76,432 77,840 real estate, renting 14,052 17,028 22,007 25,387 33,888 37,531 33,851 37,041 40,581 44,395 47,675 48,768 50,796 public administration and social security 15,767 18,673 22,633 27,630 34,055 38,730 39,494 41,675 46,728 50,824 53,826 53,413 48,161 education 12,574 14,826 18,550 22,583 28,781 34,451 35,666 35,867 38,152 40,764 42,757 43,031 40,217 health and social work 13,063 15,868 18,328 22,334 30,654 34,878 36,030 36,149 39,220 41,456 43,620 43,445 40,649 other communal and social services 13,635 16,616 19,693 23,099 27,648 31,674 30,335 30,127 31,749 34,184 44,173 36,990 35,866 source: statistical office of the republic of serbia (2005 -2016). statistical yearbook. on the other hand, table 7 shows net earnings in all activities in serbia. the ratio of net salaries is the same as for gross salaries. therefore, in agriculture only around 80% of average net salaries in serbia are realized. they also represent the lowest earnings in relation to other activities. both the secondary and tertiary sector as a whole realize their net earnings at the sector level above the national average. as with gross salaries, at the beginning of the analyzed period, the tertiary sector as a whole has higher average salaries compared to the secondary (20% compared to 11%), while this ratio changes at the end of the analyzed period in favor of the secondary (18% compared to 4%). intersectoral linkages and their contribution to economic growth in the republic of serbia 209 3.3. the share of economic sectors in international trade of the republic of serbia commercial liberalization, both at regional and global level, has created a global environment suitable for the growth and expansion of world trade. new technologies, such as computers, telecommunications and other media, have contributed to the integration of the world market. as the most traditional form of international business activity, international trade involves the exchange of goods and services across national borders. it allows businesses and distributors to search for goods, services, or parts of products in other countries. foreign trade is an important indicator of economic development of the country and it brings many benefits to both exporting and importing countries. while exporting countries earn by exporting surplus of their products, importing countries have access to better products and thus affect the living standard of the population. the main determinants of exports are the presence of entrepreneurial spirit, access to marketing, transport and other services, exchange rate, but also the state trade policy and policies of the exchange rate. on the other hand, imports are mostly influenced by income per capita, prices of imports, exchange rate, public policies related to trade and exchange rate and availability of foreign currencies (seyoum, 2009, pp. 9-10). there are numerous reasons in favor of international trade, such as cost efficiency, the use of advanced technology, new production methods, specialization, improvement of living standards, etc. international trade also allows businesses to access resources that are not available in their countries. however, in addition to providing consumers with a wide range of different products, international trade increases revenue and employment. by encouraging the development of agriculture, manufacturing and service sectors, foreign trade offers greater employment opportunities in these sectors. also, foreign trade stimulates market competition and thus leads to the improvement of production technology, production process and product quality. the ultimate benefit is realized by consumers who receive quality and varied products at affordable prices. tables 8 and 9 show the values of serbian exports and imports in millions of dinars for the period from 2003 to 2015. therefore, based on the values from the tables, the absolute value of serbian exports and imports in the observed period is growing both in total and by sectors. in the first half of the analyzed period (from 2003 to 2009), the value of imports is about twice higher than the value of exports, while in the second half of the analyzed period (from 2010 to 2015) the value of exports and imports is approximating. within the primary sector, agriculture, hunting and services account for almost 95% of foreign trade, while the rest is farming, forestry and fisheries. in table 10 relative values of exports and imports in the primary, secondary and tertiary sectors of serbia are given. 210 j. stanojević, b. krstić intersectoral linkages and their contribution to economic growth in the republic of serbia 211 тable 10 share of agriculture, manufacturing and services in serbian exports and imports, for the period 2003-2015 year agriculture manufacturing service sector nonaligned export import export import export import export import 2003 2.55% 0.60% 60.33% 34.72% 24.35% 37.29% 12.77% 27.38% 2004 3.71% 2.73% 95.51% 96.60% 0.10% 0.01% 0.68% 0.66% 2005 4.57% 2.63% 95.04% 97.03% 0.19% 0.01% 0.21% 0.29% 2006 4.78% 2.49% 95.16% 97.39% 0.02% 0.01% 0.03% 0.11% 2007 4.05% 1.95% 95.91% 79.57% 0.01% 0.01% 0.03% 18.47% 2008 3.59% 2.08% 96.43% 44.43% 0.95% 0.01% 0.02% 20.48% 2009 6.44% 2.49% 92.46% 77.62% 0.07% 0.55% 0.03% 19.34% 2010 7.42% 3.01% 91.76% 90.51% 0.79% 0.75% 0.02% 5.73% 2011 8.00% 2.92% 91.27% 91.92% 0.71% 0.37% 0.02% 4.79% 2012 8.58% 3.05% 90.64% 90.07% 0.77% 0.36% 0.01% 6.52% 2013 5.92% 2.89% 93.83% 90.45% 0.48% 0.39% 0.01% 6.26% 2014 6.65% 3.07% 92.72% 89.52% 0.61% 0.36% 0.01% 7.05% 2015 7.07% 3.33% 92.36% 88.09% 0.56% 0.32% 0.01% 8.26% source: statistical office of the republic of serbia (2005-2016). statistical yearbook. the share of agriculture in the total export of serbia increased from 2.55% in 2003 to 7.07% in 2015 (table 10). also, agriculture has slightly increased its share in total imports (3.33% in 2015 compared to 0.60% in 2003). manufacturing is constantly registering a significant share in exports (on average 90%) and in imports (on average 85%) of serbia. the service sector, on the other hand, has an extremely low share in total exports and imports throughout the analyzed period. with a relative share in exports and imports of around 1%, the tertiary sector has the least share in serbian exports and imports compared to primary and secondary sectors. 4. conclusion structural changes can be considered as a result of a process in which economies, both national and global, but also sectors and regions, show their ability to survive in conditions of fierce competition and respond to new market challenges. structural changes, above all, represent a change in the relative importance of the economic sectors over a certain period of time, measured by their participation in the national product and overall employment. there is a whole set of factors that lead to a change at different levels. bearing this in mind, there is no single and unique factor that causes structural changes, but they are most often the result of a combination of determinants. in the long term, structural changes show a strong correlation with changes in the competitiveness of the economy and therefore its development, as well as changes in economic results at the micro and macro level. there is a constant process of economic restructuring as a result of technological and social changes, combined with competitive and comparative advantages, constantly changing the sectoral and spatial dynamics of economic activity in the global economy. the rapid economic development, in general, is driven by structural changes in the economy, as well as structural changes in its 212 j. stanojević, b. krstić various sectors. these fundamental changes are characterized by shifting resources from primary production, such as agriculture and mining, to manufacturing, and within manufacturing from those based on natural resources to those more sophisticated, more intense in terms of skills and technology, and further towards the tertiary sector. intersectoral structural changes in serbia were examined in the paper on this base. as of the sector’s share in the gross domestic product, the tertiary sector accounts for about 60% of gdp in the analyzed period, followed by a secondary sector with around 30% and a primary sector that records the share of around 10%. when it comes to the share of sectors in the overall employment in serbia, the conducted analysis shows that the dominant share in the total employment has a tertiary sector with over 60%, followed by a secondary sector with over 30% and a primary sector that participates with less than 5% in overall employment. therefore, it can be concluded based on the results that the tertiary sector has the biggest contribution to the economic growth of serbia, then secondary sector and the least contribution has the primary sector. however, the share of sectors in the exports and import values indicates slightly different results. namely, almost all exports and imports in serbia relate to the secondary sector which participates with about 90%. the primary sector accounts for less than 10% in exports and imports, and the tertiary sector records a negligible share in exports and imports of around 1%. acknowledgement: the paper is a part of the research done within the project 179066, funded by the ministry of education, science and technological development of the republic of serbia. references adelman, i. 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(1990). structural change and the recognition of diversity. american journal of agricultural economics, 72, 1109-1123. kenneth, d., caroline, j. & lynk, e.l. (1992). industrial organization: competition, growth and structural change. london: routledge. крстић, б., станојевић, ј., станишић, т. (2015). глобализација и њене импликације као једног од најзначајнијих фактора структурних промена globalization and its implications as one of the most important drivers of structural changes. друштвени и технолошки развој у ери глобализације серда 2015 (стр. 31-44). бијељина: слобомир п универзитет. memedovic, o. & lapadre, l. (2010). structural change in the world economy: main features and trends. vienna: united nations industrial development. mankiw, g. (2002). principles of economics. south-western cengage learning. mankiw, g. (2001). principles of macroeconomics. south-western cengage learning. raiser, m. schaffer, m. & schuchhardt, j. (2003). benchmarking structural change in transition. european bank for reconstruction and development. quatraro, f. (2012). the economics of structural change in knowledge. valbonne: routledge. intersectoral linkages and their contribution to economic growth in the republic of serbia 213 seyoum, b. (2009). export-import theory, practices, and procedures. london: routledge. statistical office of the republic of serbia. (2018). retrieved: www.stat.gov.rs. statistical office of the republic of serbia. (2005-2016). the statistical yearbook wef. (2016-2017). global competitiveness report. geneva: world economic forum. međusektorske veze i njihov doprinos ekonomskom rastu u republici srbiji visok nivo međusobne povezanosti privrednih sektora, odnosno agrarnog, industrijskog i sektora usluga, ukazuje na potrebu razumevanja međusektorskih strukturnih promena i transfera resursa između sektora, a u cilju sagledavanja njihovog doprinosa ekonomskom razvoju. međusektorske strukturne promene republike srbije, kao jedne od tranzicionih privreda, analiziraju se sa različitih aspekata na osnovu bogate informacione osnove koju čine podaci iz domaćih i međunarodnih statističkih izvora. u radu se, pre svega, sagledava učešće privrednih sektora u bruto domaćem proizvodu. zatim se ukazuje na udeo privrednih sektora u ukupnoj zaposlenosti, ali i u međunarodnoj trgovini. cilj istraživanja jeste da se analiziraju strukturne promene u privredi republike srbije, identifikuje pravac transfera resursa između sektora, kao i utvrdi njihov doprinos ekonomskom razvoju mereno različitim indikatorima. ključne reči: međusektorske veze, strukturne promene, ekonomski rast, republika srbija. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 2, 2016, pp. 145 159 modeling monthly inflation in the republic of serbia, measured by consumer price index1 udc 336.748.12(497.11) zorana kostić, vinko lepojević, vesna janković-milić faculty of economics, university of niš, serbia abstract. this paper presents a framework for the practical modeling of inflation, as one of the key economic indicators. empirical research of monthly inflation trends in the republic of serbia was done covering the period from january 2007 to december 2015. the seasonally adjusted arima model and holt-winters smoothing were used for determining the future values of the consumer price index, which has been a measure of inflation in the republic of serbia since january 2009. the main objective of the study is to create a model that will be used for analytical and forecasting purposes. the specific objective is the comparative analysis of accuracy of these two methods (holt-winters and arima) in determining the future value of the consumer price index. the work relies on the theoretical results of dual relationship between ar (p) and ma (q) processes in determining the future values of consumer price index. key words: consumer price index, inflation, forecasting, holt-winters smoothing method, arima introduction price stability, i.e. stabilization of inflation within the target boundaries, as the first priority of monetary policy, is the basis for sustainable economic growth and rising employment. the paper will, through interpenetration of econometrics and time series analysis, present a framework for the practical modeling of inflation, as one of the key economic phenomena. economic analyses attach great importance to the monitoring and forecasting of movements in the value of consumer price index (cpi), which has been used as a measure of inflation in the republic of serbia since january 2009. however, its calculation and publishing has been done since january 2007. considering the fact that forecasting time series should be performed for a short period with the purpose of higher reliability, the paper determines the future values of the monthly inflation rate for the second half of 2015. 1received april 1, 2016 / revised may 17, 2016/ accepted june 2, 2016 corresponding author: zorana kostić, phd student faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: zoksinis@gmail.com 146 z. kostić, v. lepojević, v.janković-milic the main objective of forecasting the monthly inflation rate is to determine its future value. the paper uses two seasonally adjusted methods: holt-winters smoothing and arima. special attention is given to box-jenkins arima modeling methodology. this is because a number of empirical studies conducted in the late 20th and early 21st century show that, in the short term, arima models have extremely high inflation forecasting ability. forming an effective seasonally adjusted model of great forecasting power relies on interdependence of observations, aimed at determining the future values of consumer price index based on its past values. in addition to introduction and conclusion, the structure of the work consists of four parts. the first part presents inflation targeting by the national bank of serbia. the second part of the paper presents the methodology used for the empirical research of the movements of consumer price index in the republic of serbia during the period from january 2007 to december 2015. research results and discussion form the basis of the third part of the work. this part particularly presents the results of holt-winters method and the obtained arima model. 1. the target inflation rate of the national bank of serbia the transition to inflation targeting in january 2009 marked the inflation targeting as the primary objective of serbian monetary policy. in august 2015, the national bank of serbia determined the headline inflation target, as measured by the annual percentage change in the consumer price index for the period from january 2017 to december 2018 in the amount of 4.0%, with permitted fluctuations around that level in the range of ± 1.5 p.p. this decision indicates that the process of price convergence has not been completed and that the exit of the national economy from recession could accelerate it. table 1 inflation target 2009. 8.0% ± 2.0 pp 2010. 6.0% ± 2.0 pp 2011. 4.5% ± 1.5 pp 2012-2018. 4.0% ± 1.5 pp source: national bank of serbia the main reason why inflation target in developing countries is higher than in developed countries (where price stability is usually quantified as the inflation rate from 2.0% to 2.5%) lies in the process of price convergence. the convergence of price levels in serbia to the level of prices in the european union is not finished. the crisis and the fall in domestic demand are the main reasons why the price level in serbia is lower compared to the price level in the european union, in relation to the situation five years ago. in fact, domestic prices in 2014 accounted for 52.8% of the average price level in the european union, and in 2009, for 55.8%. inflation in previous years ranged more broadly than it was defined by the limits of the target tolerance band. such inflation trend was primarily influenced by the lack of a medium-term framework for the adjustment of regulated prices, with clearly defined rules and dynamics of adjustment, as well as the instability on the market of agricultural products, due to structural problems and lack of adequate systemic measures in agricultural modeling monthly inflation in the republic of serbia, measured by consumer price index 147 policy. the market of agricultural products has become more liberal in the meantime (customs duties and levies on imports of most agricultural products were abolished), so that the price oscillations on this market decreased. however, the medium-term plan of adjustment of regulated prices is still not defined, which could affect the increased fluctuation of inflation in the coming years. the priority of monetary policy in the coming period is to reduce inflation fluctuations in order to stabilize it within the limits of the target tolerance band. stabilizing inflation within the target boundaries would bring price stability, which is the basis for sustainable economic growth and rising employment. the aim of medium-term inflation projections is to show the projected inflation trends in the coming period, the main determinants of those trends, and the risks of its realization. the inflation projection is shown in the form of ranges and central tendencies. the projection assumption is that the monetary policy measures actively keep medium-term inflation within the target tolerance band, which is, in the present context of monetary policy, its main role (the national bank of serbia, 2015). according to the projections of the national bank of serbia, year-on-year inflation will in 2016 move around the lower limit of the target tolerance, with the possible entry into the target band at the end of this year or early next year. in the second half of 2016, its gradual approximation to 4.0% target can be expected. the most important inflation factors will be regulated prices (higher prices of electricity and low price of cigarettes). in contrast, global prices of primary products (oil and agricultural products), low aggregate demand, low inflation on a global scale, as well as restrictive fiscal policy will continue to have disinflation effect. risks to the realization of inflation projections relate to developments on a global scale, the movement in prices of primary products, and the deviation from the assumed growth of regulated prices (the national bank of serbia, 2015). graph 1 projected inflation (year-on-year rates, in %) source: national bank of serbia shortand medium-term inflation expectations have stabilized within the target band, i.e. economic entities expect that year-on-year inflation in july 2016 and july 2017 will be within the target tolerance band. the stability of inflation expectations is a key prerequisite for the stabilization of inflation and increased efficiency of monetary policy. 148 z. kostić, v. lepojević, v.janković-milic 2. research methodology the forecasting of monthly inflation rate in the republic of serbia relies on the official data of the ministry of finance on a monthly growth of consumer price index for the period january 2007 – june 2015. the analysis focuses on the price changes in the current month compared to the previous month, based on a total of 102 periods. bearing in mind the complexity of the forecasting process, the paper will test two methods that are most commonly used in the economic analyses of time series. integrated approach that includes several methods can be used for determining the future values of consumer price index. the modeling relies on the use of eviews7 software. the paper will first rely on descriptive statistics to obtain information on the key features of the time series and frequency distribution of consumer price index monthly growth in the period from january 2007 to june 2015. what follows is the holt-winters method of forecasting. seasonally adjusted models that use different parameter values are created, and their comparison performed. to determine the accuracy of forecasts obtained by this method, mean absolute error and root mean squared error are used. taking into account the data specifics, the additive model is presented, which, together with the multiplicative model, presents two main models of holt-winters forecasting method. the additive model is the type of forecast where the expected seasonal increase in the amount of the observed phenomenon for a certain period of time is added to the annual mean. in addition, considerable attention is paid to box-jenkins methodology, for the purpose of forecasting the movement of the monthly inflation rate in the republic of serbia for the next six months. box-jenkins methodology is the three-stage process of constructing a model that includes: identification, estimation, and checking the adequacy of the model. construction of the model can be considered an iterative process which ends when a satisfactory model is found, consistent with the statistical criteria of model adequacy. after examining 25 different models, one linear, seasonally adjusted arima model will be proposed, which is supposed to be able to provide good results in forecasting future trends in consumer price index in serbia. the obtained models can be used for analytical and forecasting purposes. 3. research results and discussion forecasting the inflation rate in the republic of serbia relies on the data on a monthly growth of consumer price index in the period from january 2007 to june 2015. the analysis focuses on changes in prices in the current month compared to the previous month, based on a total of 102 periods (observations). graphical presentation of time series can point to the key characteristics of time series and frequency distribution. the observed series does not exhibit a pronounced trend, but fluctuations around a constant level. in respect of this time series, there is a greater intensity and degree of fluctuation and slow decline in the monthly consumer price index. base series flow represents a pattern of its behavior over time. the existence of a large variability in the time series, i.e. the expressed local fluctuations around the base flow, imposes the need for time series smoothing. modeling monthly inflation in the republic of serbia, measured by consumer price index 149 3.1. the seasonally adjusted holt-winters forecasting method holt-winters method is used for the forecasting of future values in situations when the time series data has trend and seasonal character. considering the fact that the trend points to a development tendency, one must distinguish between linear, exponential, and damped trend. the linear trend means that the time series increases (decreases) in equal absolute amounts from period to period, i.e. that the phenomenon exhibits approximately the same absolute change in the same time periods. at the same time, exponential trend means that the time series increases (decreases) in the same relative amounts from period to period. the damped trend is a combination of linear and exponential trend, where, in the first period, there is an increase (decrease) in absolute amount, and in each subsequent period relative changes occur by the exponential trend principle. monthly seasonal variation of time series means that the data varies around the monthly average by a certain rule. in this regard, seasonality can be defined as a time series tendency to exhibit behavior that repeats every s periods. seasonal index for a period shows how much the period deviates from the annual average. to calculate this amount, at least one full data season is needed. two main models within holt-winters method are additive and multiplicative model. additive forecasting model is the type of forecast where the expected seasonal increase in the amount of the observed phenomenon for a certain period of time is added to the annual mean. multiplicative model involves the relative change of the observed variable which is higher if the absolute amount of the observed variable is higher, and vice versa. in parts of the time series which exhibit an additive character, the series shows stable seasonal fluctuations regardless of the overall trend level of a time series. in the case of multiplicative model, the level of seasonal fluctuations varies depending on the overall level of the series. additive seasonal model is used when the time series data exhibits additive sensitivity. this model is applicable in time series where the amplitude with the seasonal character is independent of the average series level. additive version of this method may be described by the following formula: ( ) ( ) j = s + 1, s + 2, ..., where α, β, and γ ∈ [0,1] are smoothing parameters, lj is the smoothing level in time j, bj is the change in time j; sj is the seasonal smoothing in time j; s is the number of periods in the season; fj+1 is one step ahead of the forecasted value. initial values are calculated using the following formula: , j =1,2,...,s. 150 z. kostić, v. lepojević, v.janković-milic multiplicative seasonal model is used when data has multiplicative seasonality. this model can be represented by the following formulas: ( ) ( ) j = s + 1, s + 2, .... the initial values of the model are calculated using the same formula as in the additive version of the model, except for the seasonal variable: , j = 1, 2, ..., s to calculate the initial value of b, data for the first two seasons was needed. due to the complexity of the basic versions of the two above-mentioned models of holt-winters method, their simplified versions are used in practice. simplified versions can also be used in the analysis of the volatility of the monthly consumer price index. if data in the time series has no clear trend, one can use a simplified version of holt-winters method (without variable b). simplified additive model can be described as follows: ( ) j = s + 1, s + 2, ..., the initial values of ls and sj in the simplified model are calculated using the abovementioned formulas. simplified multiplicative model can be defined as follows: ( ) ( ) j = s + 1, s + 2, .... the initial values of ls and sj are calculated in the same way as in the original multiplicative model. for the prediction of accuracy of each model, mean absolute error (mae) and root mean squared error (rmse) will be used. modeling monthly inflation in the republic of serbia, measured by consumer price index 151 table 2 additive model of seasonally adjusted holt winters method parametars: alpha 0.8000 beta 0.5000 gamma 0.0000 sum of squared residuals 87.65239 root mean squared error 0.927004 end of period levels mean 0.329324 trend 0.216787 seasonals: 2014m07 -1.050794 2014m08 0.158036 2014m09 0.341865 2014m10 0.213194 2014m11 -0.040476 2014m12 -0.669147 2015m01 0.271230 2015m02 -0.057440 2015m03 0.263889 2015m04 0.222718 2015m05 0.531548 2015m06 -0.184623 in this paper, special focus is on calculating the seasonally adjusted holt smoothing. in the course of analysis, additive model is created, with the following parameters: α = 0.8 β = 0.5 γ = 0.0, proven as the best for the needs of forecasting. the forecasted value is calculated as the sum of the mean value of time series, trend component, and seasonal component for the corresponding period. graph 2 the monthly inflation rate in the period january 2007 – december 2015, with smoothed and seasonally adjusted values for six months in advance 152 z. kostić, v. lepojević, v.janković-milic applying the holt-winters smoothing to the time series with 102 observations (january 2007 – june 2015) results in the forecasted values of the monthly inflation rate for six periods in advance (second half of 2015). according to this model, the projected values are -0.504682, 2.873196, -0.945262, -0.554167, -0.338253, -0.391247, respectively (graph 3). bearing in mind the empirical indicators and high volatility of political and economic cycles in serbia, which reduces the forecasting power of the model, the results obtained can be considered efficient. 3.2. forecasting using arima model numerous empirical studies conducted in the late 20th and early 21st century show that, in the long run, aggregate structural models provide efficient forecasts, but that, in the short term, arima models have an extremely high ability to forecast inflation. so, meyera aidan, kenny geoff & terry quinn (1998) use arima models for forecasting inflation in ireland, and the same are used by toshitaka sekine (2001) in japan, salam, a. muhammad, shazia salam and mete feridun (2006) in pakistan, kalezić, cerović, and božović (2007) in montenegro, nastić (2011) in bosnia and herzegovina. by analyzing stochastic characteristics of time series, arima models explain the movement of the variables in time, based on historical data and stochastic errors from the previous period. this part of the work presents linear, seasonally adjusted arima model, which is supposed to be able to provide good results in forecasting future trends in the consumer price index in serbia. analysis relies on monthly data on the movement of the consumer price index in the period from january 2007 to june 2015, so that the series includes 102 observations. box-jenkins methodology is applied for forecasting trends in monthly inflation rate in the republic of serbia for the second half of 2015 (next six months). box-jenkins is a powerful method for mathematical modeling of stochastic processes. it is a methodology for identifying and estimating models that include autoregressive models (ar) and moving average models (ma) for the purpose of forecasting. the main advantage of box-jenkins methodology lies in obtaining large data on the analyzed empirical time series using a small number of parameters. it is suitable for modeling of both stationary and non-stationary time series with or without seasonal component. through the application of theoretical results, the dual relationship between the ar (p) and ma (q) processes in inflation modeling is examined. basically, box-jenkins methodology is the three-stage process of constructing a model that includes: identification, estimation, and checking the adequacy of the model. construction of the model can be considered an iterative process which ends when a satisfactory model that is consistent with the statistical model adequacy criteria is found. the resulting model can be used for analytical or forecasting purposes. seasonal character of the time series is a common phenomenon in economic research, where the number of time periods, s, repeats over time. in the specific case, s is 12 and represents the number of months. in order to solve the problem of the seasonal character of inflation, arima process is generalized and seasonally adjusted. seasonal autoregressive integrated moving average (sarima) model is created as well, which includes trend, seasonal component, and short-time adjustment. it is derived from the standard box-jenkins model. seasonal arima models include seasonal and non-seasonal factors in the multiplicative model according to the following formula: modeling monthly inflation in the republic of serbia, measured by consumer price index 153 arima (p,d,q)*(p,d,q)s where: p – non-seasonal component of autoregressive model (ar) d – non-seasonal differentiation q – non-seasonal component of moving average model (ma) p – seasonal component of autoregressive model (ar) d – seasonal differentiation q – seasonal component of moving average model (ma) s – number of periods during the year box-jenkins methodology comprises three sequential phases: 1. model identification; 2. estimation of model parameters; 3. diagnostics and projection of the selected models. the next part of the paper will present the results obtained during the research within each phase of the applied methodology. 3.2.1. model identification the first stage involves establishing the necessity of transformation for the purpose of stabilizing the variance and determining the differentiation order, then the inclusion of a determinant into the model when d is greater than 1, and the selection of the appropriate order of arima model, i.e. values p and q. the model is marked as arima (p, d, q) where p and q represent the number of ar and ma model lags, respectively, while d indicates the level of stationarity of the time series. based on the graphic presentation of the series, the appropriate transformation is selected. the values of autocorrelation and partial autocorrelation are used to determine the order of differentiation, required in order to achieve a stationary time series. slow and almost linear decrease of autocorrelation function is an indicator of non-stationarity. in addition to this visual determination, the need for differentiation can be determined on the basis of the statistical testing of the presence of one or more unit roots. accepting the null hypothesis of the existence of unit root indicates non-stationarity of the time series. basic characteristics of stationary stochastic processes are: constancy of the mean (series level), constancy of variance, and covariance dependence only on the time interval. after prospective transformation and determining the order of differentiation, p and q values are identified on the basis of autocorrelation and partial autocorrelation functions, and/or on the basis of information estimation criteria (akaike aic, schwarz-bayesian sbc, hannan-quinn). these tests measure how well the model describes the data. relatively the best model is the one with the lowest value of those indicators. thus, one can conclude that the model identification is based on observing the autocorrelation and partial autocorrelation functions of the time series at the level of differentiation at which the stationarity condition is fulfilled. we used a graphic illustration of autocorrelation and partial autocorrelation to figure out if the data is stationary or not. with regard to the value of the original data, it can be concluded that series transformation and differentiation is not necessary. this is because stationarity is achieved, as the basic precondition for the creation of arima model. stationarity is reflected in the fact that the series has a constant variance and the mean value in time. 154 z. kostić, v. lepojević, v.janković-milic testing the stationarity is done through augmented dickey-fuller unit root test (adf) and phillips-perron unit root test (pp). the obtained values of adf and pp tests are 7.623649 and 7.686779, respectively, and they are greater than the critical values at the error level of 5%. this points to the rejection of the null hypothesis and the existence of the necessary stationarity. table 3 augmented dickey-fuller unit root test and phillips-perron unit root test t-statistic prob.* augmented dickey-fuller test statistic -7.623649 0.0000 test critical values: 1% level -3.496346 5% level -2.890327 10% level -2.582196 *mackinnon (1996) one-sided p-values. adj. t-stat prob.* phillips-perron test statistic -7.686779 0.0000 test critical values: 1% level -3.496346 5% level -2.890327 10% level -2.582196 *mackinnon (1996) one-sided p-values. based on these tests, it can be concluded that it is a stationary time series (which has a constant variance and the mean value in time), which fulfills the basic prerequisite for the creation of arima model. thus, the series does not need additional transformation, because it is stationary, so that the alternative hypothesis on the absence of unit root is ultimately accepted. during the analysis, 25 models with different combinations of ar and ma variables are tested. akaike info criterion (aic) and schwarz criterion are used for choosing one model, characterized as the best for forecasting. the minimum values of the selected criteria suggest the selection of arima model (1,0,3) for forecasting the future movement of the monthly inflation rate in the republic of serbia. this points to the next stage of the iterative process of time series model construction. table 4 akaike info criterion and schwarz criterion p/q 1 2 3 4 5 akaike 1 1,906045 1,949938 1,859961 2,050456 2,019729 schwarz 2,044856 2,089749 1,999772 2,190267 2,159540 akaike 2 2,161159 2,241530 2,035048 2,176829 2,099177 schwarz 2,301916 2,382288 2,175805 2,317587 2,239935 akaike 3 1,915258 1,967084 2,126526 1,4266659 2,041952 schwarz 2,056977 2,108802 2,268245 2,008377 2,183691 akaike 4 2,000221 2,078368 2,041140 2,037075 1,994555 schwarz 2,142916 2,221062 2,183834 2,179710 2,137350 akaike 5 1,943178 2,019091 2,008594 2,061410 2,040090 schwarz 2,086863 2,162777 2,152279 2,205095 2,181378 modeling monthly inflation in the republic of serbia, measured by consumer price index 155 3.2.2. model parameter estimation the task of time series analysis is to find a model which describes the stationary time series of the consumer price index. estimation phase, i.e. model parameter estimation, is the second, most extensive phase. the analyzed model is, after diagnostics, reduced to one model, which will be used to forecast future values of the monthly inflation rate in the republic of serbia. model parameter estimation is performed by ordinary least squares method (ols). the quality of diagnostics and behavior of residuals are crucial in choosing the most efficient models for forecasting. in order to obtain a more efficient arima model, special attention is paid to the selection of autoregressive variables (lags of dependent variable) and moving average (lags of residual value). the models are estimated in terms of: the coefficient of determination (r2), the value of durbin-watson statistic, and f statistical significance. during the study, 25 models with different combinations of ar and ma variables are tested. the most acceptable model is ar(1) sar(12) ma(3) sma(12), i.e. (1,0,3)*(12,0,12)12 with the following parameters: model: ar(1) sar(12) ma(3) sma(12) model residuals have white noise characteristics, i.e. are not correlated and move randomly, thereby creating the conditions for obtaining high-quality forecasts outside the sample. table 5 statistics of the chosen model variable coefficient std. error t-statistic prob. c 0.377193 0.154000 2.449300 0.0164 ar(1) 0.255164 0.105091 2.428034 0.0173 sar(12) 0.694280 0.064620 10.74410 0.0000 ma(1) 0.145197 0.070204 2.068198 0.0417 sma(12) -0.884930 0.034824 -25.41169 0.0000 r-squared 0.479024 mean dependent var 0.546067 adjusted r-squared 0.454216 s.d. dependent var 0.807783 s.e. of regression 0.596767 akaike info criterion 1.859961 sum squared resid 29.91503 schwarz criterion 1.999772 log likelihood -77.76828 hannan-quinn criter. 1.916315 f-statistic 19.30896 durbin-watson stat 1.960864 prob(f-statistic) 0.000000 3.2.3. diagnostics and projection of the selected model there are several criteria to be fulfilled by a good model. these are: cost-effectiveness, identifiability, consistency with data, consistency with theory, eligibility of data, forecasting efficiency, and comprehensiveness (kovačić, 1995, pp. 158-159). the model diagnostics stage assesses the validity of the chosen model, based on its compatibility with the real data and the quality of its forecasting power. 156 z. kostić, v. lepojević, v.janković-milic using a histogram of probability and correlogram (q-statistics correlogram and residual root correlogram), we found that the selected model has a normal distribution of residuals, whose value of autocorrelation and partial autocorrelation points to random movement of residuals. justification of the accepted model is also proven by key parameters obtained during the model diagnostics phase – the coefficient of determination (r2), the value of durbin-watson statistic, and f statistical significance. table 6 heteroskedasticity test – white test f-statistic 1.426302 prob. f(20,68) 0.1408 obs*r-squared 26.30189 prob. chi-square (20) 0.1561 scaled explained 27.40062 prob. chi-square (20) 0.1244 another indicator supporting the model is the heteroskedasticity test (white test), whose value (26.301) is less than the critical value of χ2 (0.05, 20), which amounts to 31,410 (table 6). on the basis of this, the claim on homoscedasticity of model variance is accepted. for the purpose of forecasting the future values, the original number of observations is modified by the length of the forecasting horizon. in view of the tendency for forecasting the movement of the monthly inflation rate for six months in advance (julydecember 2015), the following graph is obtained, which incorporates three scenarios of future trends of the monthly inflation rate. graph 3 projected values of the monthly inflation rate until the end of 2015 optimistic and pessimistic scenarios are defined as ± two standard errors of the real movement of the consumer price index. graph 4 shows the movements of monthly inflation rate from january 2007 to december 2015. it shows both actual and projected values of the monthly inflation rate for the period july-december 2015. modeling monthly inflation in the republic of serbia, measured by consumer price index 157 graph 4 actual and projected values of the monthly inflation rate part of the graph showing the projected values shows that the monthly rate of inflation will have cyclical character. first, one can see a downward trend, with quick upward trend towards the end of the year. table 7 projected values according to the chosen model july 2015 0.543769 august 2015 0.328622 september 2015 0.377211 october 2015 0.288579 november 2015 0.522074 december 2015 0.507158 the selected model has been used to forecast the movement of the monthly inflation rate for the period july-december 2015. based on actual and projected data, the average annual inflation rate in 2015 has been calculated, which amounts to 0.58%. finally, the analysis has resulted in the projected values of monthly inflation developments by the end of 2015, which can be seen in table 7. conclusion application of theoretical results has given practical framework for modeling inflation, as one of the key economic indicators of a country. empirical research into the developments of consumer price index, which measures inflation in the republic of serbia, has been done for the period january 2007 – december 2015. using seasonally adjusted arima models and holt smoothing method has resulted in the future values of the consumer price index. the comparative analysis of accuracy of the two methods (holt-winters method and arima) in determining future values of the observed indicator has been performed. in 158 z. kostić, v. lepojević, v.janković-milic the course of the research, a total of 30 models have been tested in respect of both methods. a comparative analysis of the model has been reduced to the calculation of mean absolute error and root mean squared error. the results of seasonally adjusted holt smoothing have been presented, and the additive model chosen, with parameters α = 0.8 β = 0.5 γ = 0.0, estimated as the best for forecasting future levels of consumer price index. based on akaike info criterion (aic) and schwarz criterion, a single arima model has been selected, proven as the best for the needs of forecasting. arima model has been estimated in terms of the following diagnostics parameters: coefficient of determination (r2), the value of durbin-watson statistic, f statistical significance, and residuals. the most acceptable model turned out to be ar(1) sar(12) ma(3) sma(12), i.e. (1,0,3)*(12,0,12)12. residuals of the selected model have characteristics of white noise, i.e. are not correlated and move randomly, thereby creating the conditions for obtaining high-quality forecasts outside the sample as well. therefore, one can conclude that the selected model can be used for further analytical and forecasting purposes. based on the above, it can be concluded that the selected models have a sufficient level of reliability and that the results obtained are a fairly reliable indicator of the monthly inflation rate movements in serbia. it is undisputed that the efficiency and predictive power of the obtained models will be tested in the future. at the same time, one should not ignore that the great volatility of the political and economic cycles in developing countries, such as serbia, reduces the predictive power and ability to construct an efficient model. acknowledgement: the paper is a part of the research done within the project no:179066, ministry of education, science and technological development of the republic of serbia.. references 1. baldigara, t., mamula, m., (2015). modelling international tourism demand using seasonal arima models, tourism and hospitality management, vol 21, no. 1.pp.19-31. 2. dobre, i., alexandru, a.a. 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(2011). exchange-rates forecasting: exponential smoothing techniques and arima models. university of ordea. 7. fiscal strategy for 2014 with projections for 2015 and 2016. government of the republic of serbia. http://www.mfin.gov.rs/pages/article.php?id=9886 (9.11.2015.) 8. janković-milić, v., lepojević, v. and đorđević, v.,(2011) adaptive filtering method in business forecasting, međunarodna naučna konferencija: problems of competitiveness of contemporary economies, ekonomski fakultet niš, 2011, str. 485-492 9. johnson, l. a., montgomery, d. c., & gardiner, j. s. (1990). forecasting and timeseries analysis. mcgraw-hill, inc, 2nd edition. jorion, p. (1995). predicting volatility in the foreign exchange market. journal of finance, 50, 507−528. 10. kalezić, z., cerović, s., božović, b. (2007) prognoziranje inflacije: empirijsko istraživanje kretanja indeksa cijena na malo u srnoj gori za 2007. godinu – primjena arima modela, centralna banka crne gore, sektor za istraživanja i statistiku, podgorica. 11. kovačić, j. z. (1995). analiza vremenskih serija. univerzitet u beogradu, ekonomski fakultet. modeling monthly inflation in the republic of serbia, measured by consumer price index 159 12. lepojević, v. and anđelković-pešić, m.,(2011) forecasting electricity consumption by using holtwinters and seasonal regression models, facta universitatis, series: economics and organization vol. 8, no 4, 2011, pp. 421 431 13. lepojević, v., janković-milić, v., „prognoziranje mesečne inflacije u srbiji primenom eksponencijalnog i holtwintersovog izravnanja“, unapređenje konkurentske prednosti javnog i privatnog sektora umrežavanjem kompetencija u procesu evropskih integracija srbije, ekonomski fakultet u nišu, 2011., 435-442. 14. maddala, g.s. (1992). introduction to econometrics. new york: macmillan publishing company. 15. mahmoud, k. okasha, deaa m.m abu shanab, (2014). forecasting monthly water production in gaza city using a seasonal arima model, scholars journal of physics, mathematics and statistics, 1(2): 61-70 16. meyera, a. et al. 1998. “forecasting irish inflation using arima models”, central bank of ireland technical paper 3/rt/98. 17. national bank of serbia (2015). izveštaj o inflaciji. beograd. 18. nastić, n. (2012) empirijsko istraživanje cijena u bih 2006-2010. i prognoza inflacije za 2011. godinu – primjena arima modela, zbornik radova ekonomskog fakulteta u istočnom sarajevu, 6, str. 91-104. doi: 10.7251/zrefis1206091n 19. prorok, v., paunović (2015) predviđanje kretanja tržišnog indeksa belexline na bazi arima modela, synthesis-international scientific conference of it and business-related research, стр. 432436. doi: 10.15308/synthesis-2015-432-436 20. quang, t. t., zhihua, m. hengchao, li., li, h., quang k. t. (2015). a multiplicative seasonal arima/garch model in evn traffic prediction, international journal of communications, network and system sciences, 8, 43-49. 21. salam, a.m et al. 2006. “forecasting inflation in developing nations: the case of pakistan ”, international research journal of finance and economics, no. 3. 22. stock, j.h. and watson, m.w. 1999. “forecasting inflation”, journal of monetary economics 44, pp. 293–335. 23. wooldridge, j. m. (2005). introductory econometrics: a modern approach fifth edition, south-western cengage learning. 24. ministry of trade, tourism, and telecommunications of the republic of serbia (2015). kupovna moć stanovništva. potrošačka korpa. beograd. 25. ministry of finance of the republic of serbia, treasury administration. http://www.trezor.gov.rs/ (20.12.2015.) 26. statistical office of the republic of serbia. http://webrzs.stat.gov.rs/website/ (20.12.2015.) modeliranje mesečne stope inflacije u republici srbiji merene indeksom potrošačkih cena u radu je predstavljen okvir za praktično modeliranje inflacije kao jednog od ključnih ekonomskih pokazatelja. empirijsko istraživanje kretanja mesečne stope inflacije u republici srbiji urađeno je za period januar 2007decembar 2015. godine. korišćenjem sezonski prilagođenog arima modela, i metoda holtovog izravnanja utvrđene su buduće vrednosti indeksa potrošačkih cena koji je mera inflacije u republici srbiji od januara 2009.godine. osnovni cilj rada je kreiranje modela koji će se koristiti u analitičke i prognostičke svrhe. uz to, sprecifični cilj je uporedna analiza preciznosti dva metoda (holt-winters metod i arima) u određivanju buduće vrednosti indeksa portošačkih cena. u radu su primenjeni teorijski rezultati dualne veze između ar (p) i ma(q) procesa u određivanju buduće vrednosti indeksa potrošačkih cena. ključne reči: indeks potrošačkih cena, inflacija, prognoziranje, holt-winters-ov metod izravnaanja, arima facta universitatis series: economics and organization vol. 17, n o 1, 2020, pp. 1 16 https://doi.org/10.22190/fueo190927001c © 2020 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper supporting immigration for an enhanced agricultural sustainable development within the european union 1 udc 314.742(4-672eu) 338.43: 502.131.1(4-672eu) mirela cristea 1 , graţiela georgiana noja 2 , constantin stefan ponea 3 1 university of craiova, faculty of economics and business administration, craiova, romania 2 west university of timişoara, faculty of economics and business administration, east european center for research in economics and business, timişoara, romania 3 spiru haret university, faculty of legal, economic and administrative sciences, craiova, romania abstract. given the amplitude of migration in europe and its potential to encourage or hinder the agricultural development, the general objective of this paper is to assess this possible potential on the long term, within a sustainable development frame of reference. along these lines, we have built up several scenarios that focus on the agricultural results attained by ten eu member states mainly targeted by immigrants, throughout the 20202025 period (sustainable development extrapolation). we have elaborated a set of indicators and within a panel in order to implement the spatial analysis and structural equation modelling (sem), as methodological endeavour. the results obtained, verified by testing four hypotheses, show that a positive tendency in terms of increased government agri-innovation support is revealed on the long run, through the economic (labour) migration. our findings outline that conclusive results of labour immigration could reverse generating unbalances in the agricultural sector. thus, the need to develop accurate tailored policies is more than necessary by acknowledging the complex problems of the rural areas and those of international migration, as well as the major discrepancies among countries and stronger socio-economic interconnections. key words: agriculture sector, international migration, european integration, sustainable development, econometric modelling jel classification: j61, q10, c31 received september 27, 2019 / accepted october 30, 2019 corresponding author: mirela cristea university of craiova, faculty of economics and business administration, a.i.cuza street, no. 3, postal code 200585, craiova, romania e-mail: mirelas.cristea@gmail.com 2 m. cristea, g. g. noja, c. s. ponea 1. introduction around the world, agriculture represents an important sector, especially by considering its development potential (37% agricultural land out of the total land area in 2014, according to the world bank, 2017). still, “due to its dependence on natural factors” (arisoy et al., 2017, p. 234), agriculture generates annual fluctuations of producers’ income, due to the specific uncertainties (cristea et al., 2008). this fact, in the long run, “leads to the migration of farmers” (arisoy et al., 2017, p. 246), thus inducing complex implications upon the agriculture’s results. the global updated statistics reveal the magnitude of international migration, from which a high share of migrants are rural people, “revealed by the fact that around 40 percent of international remittances are sent to rural areas” (fao, 2017a, p. 98). a series of migration research (e.g. card et al., 2010; krause et al., 2016), and especially those focused on the brexit implications after the june 2016 decision (e.g. kierzenkowski et al., 2016), have mainly analysed its effects by considering various factors. however, the overall implications of migration, in europe, on the agriculture field have been less analysed by specialists, although this sector has a considerable potential, mainly through the agricultural land. at the same time, there are a number of studies that have studied the impact of migration upon agriculture in north america (e.g. barkley, 1990; martin, 1993), latin america (e.g. balan, 1983; aide & grau, 2004) and asia (e.g, sunam, 2017). in europe, however, there are few studies taking into account the migration implications upon the agricultural sector and most of these have outcomes for a particular country, such as albania (miluka et al., 2010). in a previous research into this field, we have investigated (cristea & noja, 2019) these complex implications at the level of the main targeted ten european union (eu) countries, for the period 2000-2016. based on this framework, the general objective of this research is to forecast the implications of immigration upon the agriculture field on the long term (2020-2025 period), within the sustainable development goals (sdgs), for ten european union member states (ms) mainly targeted by immigrants (namely germany, france, the uk, austria, sweden, italy, spain, belgium, denmark and finland). thus, this research represents a further enhancement of that made by cristea and noja (2019), on the fore of sustainable development. the sdgs are applied to all 193 countries of united nations (un), globally, without any distinction for “developed” or “developing” states. the sdgs are also centralized by the european union (eu) statistical office (eurostat database) for each country, both ms, and non-eu countries. the next section of the paper comprises a synthesis of literature review, summarizing the main findings on migrants’ implications upon the agricultural sector in different economies, along with the current situation of migration flows and main agricultural outcomes in the eu. further are presented the data and the methodology applied, followed by main results, discussions and concluding remarks in the final stage of our research. supporting immigration for an enhanced european union agricultural sustainable development 3 2. the literature review 2.1. main findings of previous researches there are several studies, which analyse the agriculture under the impact of the migration process around the world; still, in europe, these potential implications did not represent a prevailing subject for researchers. thus, for the north america region, barkley (1990) applied aggregate data for migration in the united states of america (usa) and „a two-sector model of occupational choice” (barkley, 1990, p. 567) for the labour outputs in agriculture. he highlighted the importance of accurate policies for increasing the farms’ income, with a further impact on the employment levels in agriculture. martin (1993) studied the impacts of trade and migration upon agriculture in mexico under the north american free trade agreement (nafta). he pointed out that this kind of agreement between usa and mexico would generate annual increase of migration from mexico towards usa on the short-term by 100,000 persons. for the long-term, nafta is a keystone for reducing emigration from mexico by enhancing the economic growth and better job creation in mexico. the author found that the policies on the labour market of the hosting countries (e.g. usa), and also the regulation on the migrants’ countries (e.g. mexican land reforms, privatization, and deregulation) would influence the migration process. for latin america, balan (1983) investigated internal migration in relation with the social structure of agriculture for a period of 100 years, which, in the last stage, “led to the declining importance of peasant production and the increasing importance of wage labour” (balan, 1983, p. 151). studying migration in latin american on the background of globalization, aide and grau (2004) have drawn up into attention the need for “social programs on preparing rural migrants for an urban environment and promoting ecosystem recovery in the marginal agriculture” (aide & grau, 2004, p. 1915). they underlined the impact of the urbanization process determined by rural-urban migration on the agricultural field, especially, on ecosystem conservation. for asia, sunam (2017) highlighted the fact that for some researchers and policymakers the path to prosperity would be the non-agrarian sectors, while others consider land of major importance, especially, in poverty decreasing. he criticizes the narrow framework of their analysis, which overtakes the “strong linkages between agriculture, migration and rural labour, but also stay silent on how rural people interpret changes or continuities in their livelihoods” (sunam, 2017, p. 67). working in the agricultural area, “is associated with low and insecure incomes, poor occupational safety and health conditions, gender inequality in pay and opportunities, and limited access to social protection” (fao, 2017a, p. 100). also, barone and mocetti (2011) attest that low-skilled migration tends to grow participation among native women to labour market, thus generating the increase of productivity and output in the agricultural sector. therefore, boswell (2016) underlines the necessity for better “training and education policies (almps)” for natives (e.g. british labour force) since a significant reduction of labour will generate damaging effects, including in the agricultural sector. card et al. (2010) identified and evaluated another variable, “the passive labour market policies (plmps)”, with major effects over the labour market, which refer mainly to: keeping the income for “the unemployment period through unemployment benefits; the earlier retirement which 4 m. cristea, g. g. noja, c. s. ponea facilitate total or partial retirement of elder workers with decreased possibilities in finding a job” (cristea & noja, 2019, p. 120). regarding migration, since most policy-makers from developing countries tried to diminish it, or even to ignore it, they recommend to sustain migration, “becoming aware of its potential”, by following priorities: “reducing the costs and risks faced by migrants; ensuring that entitlements to state services are portable; facilitating remittances; improving accountability and transparency in labour markets; and raising awareness of labourers’ rights” (wiggins & deshingkar, 2007, p. 3). in europe, the brexit decision (being in process of finalization at the end of october 2019) will have a significant impact upon migration flows. a possible diminishing of migration inflows could generate negative effects (especially for the uk), particularly for low-salary fields, mainly targeted by migrants, such as manufacturing, care jobs, food processing (rienzo & vargas-silva, 2012). 2.2. current situation of agriculture and international migration within the eu in 2015, within eu-28, the total utilized agricultural area was of 43% of eu land area, and comprised the following components: arable land, 59.74% of the total utilized area; permanent grassland, 33.36%; permanent crops, 6.55%; “other agricultural land such as kitchen gardens (small areas of total utilized agricultural area)” (european commission, 2018). the highest share of the total utilized agricultural area (figure 1a) is owned by france (16.06% of the eu-28), spain (13.18%), the uk (9.46%), germany (9.23%), poland (7.94%), romania (7.64%) and italy (6.98%) (european commission, 2018). the same countries accounted for the most significant arable land within the eu, in the following order: france, spain, germany, poland, romania, italy and the uk (figure 1b). a) b) fig 1 utilized agricultural area (a) and arable land (b) in eu, 2015 source: authors’ processed in stata, eurostat data however, although the share of agricultural land in the eu is quite high (above the average worldwide level of 37%) with considerable potential alongside farms and fisheries, supporting immigration for an enhanced european union agricultural sustainable development 5 the agriculture’s share in eu’s gdp is very low, representing an average of 2.32% in 2016, compared to 4.26% in all eu ms, respectively 4%, globally (world bank, 2017). thus, we can notice that, on the one hand, among the countries with high agricultural potential there are mostly developed countries (france, spain, the uk, germany, italy), even though the share of agriculture in these countries’ gdp is not significant (1% of gdp for the uk and germany, 2% for france and italy, and 3% for spain) (world bank, 2017). on the other hand, poland and romania have a large share of agricultural area among eu-28 (ranks 5 and 6), being the most important agricultural producers from the eu-28 (marcu et al., 2015; done et al., 2012). furthermore, these two countries face large emigration flows, with important negative spillovers “on the size and structure of the labour force” (noja et al., 2018, p. 3), particularly in agriculture. moreover, the highest contribution of agriculture to gdp among the eu countries is for: bulgaria (5%), croatia, greece, hungary, latvia, romania and slovak republic (4% of gdp in each country). these countries are mainly emigration or labour-exporting countries so as the migration process reflects negatively in terms of long-term economic development. nowadays, agriculture represents “the world’s biggest employer and largest economic sector for many countries. yet rural people – who produce 80 percent of our food – make up four-fifths of the global poor” (fao, 2017b, p. 5). thus, if at the global level, the employees in agriculture registered a share of 26.7% (866.3 millions) in the total number of employees in 2016 (3240 millions), for eu-28 this share was 4.3% in 2016 (9,771 thousand employees out of 226,716 thousand overall) found in a decreasing trend from 7.9% in 2000 (ilo, 2017). by comparing eastern with western europe, the largest share of agricultural workers can be found in eastern europe with 9.4% of total employees, compared to 2.1% in western europe (figure 2). fig 2 shares of employment in agriculture in eu-28, 2016 source: own process data offered by the international labor organization (ilo) regarding the international migration situation, in 2015, large shares of international migrants were accounted for by europe (over 31%), followed by asia (up to 31%) (un desa, 2015). the total number of migrants in europe (over 76 million people) has increased with almost 4 million people compared to 2014, representing 31.25% from the total stock of migrants at the worldwide level (over 243 million persons) (un desa, 2015). the highest share of migrants’ stock in europe is in western europe (35.96%), followed by eastern 6 m. cristea, g. g. noja, c. s. ponea europe (25.85%), encompassing mostly rural people, “revealed by the fact that around 40 percent of international remittances are sent to rural areas” (fao, 2017a, p. 98). the most targeted 10 eu countries by migrants in 2015 were: “germany (12 million migrants stock), the uk (8.5 million), france (7.8 million), spain (5.9 million), italy (5.8 million), sweden (1.6 million), austria (1.5 million), belgium (1.4 million), denmark (572 thousands), finland (315 thousands)” (noja et al., 2018, p. 4). bilaterally, the main migrant sending economies are in fact developing countries, with an important rural field into the economy and a high share of agricultural employees looking for cross-border low-skilled jobs (e.g. poland, with 3.6 million of migrants, romania, almost 3 million). the inflow trend in 2016 compared to 2015 increases into the following eu-10 countries: germany (by 30%), france (by 4%), spain (by 18%), sweden (by 26%), austria (by 3%), belgium (by 7%) and finland (by 8%). the decreasing is registered into the uk (by -6%), italy (by -21%), and denmark (by -5%) (oecd, 2017). at the end of 2016, the refugees’ situation registered “a total of 22.5 million displaced people, being considered the highest on record, although the annual rate of growth has slowed since 2012” (oecd, 2017, p. 31). large shares of asylum seekers in europe were registered by germany and italy, “germany remained the top recipient, with over 720,000 applications, followed by the united states (262,000) and italy (123,000)” (oecd, 2017, p. 32). thus, we can see a double trend in international migration, one regarding the labour mobility (migrants searching for better jobs), and the other, the flow of refugees and asylum applicants (called “humanitarian migration”). on these credentials reflecting the migration amplitude and agriculture potential in europe, along with the brexit phenomenon and attaining the sdgs by all countries, we further investigate our general and specific research objectives. 3. data and methodology 3.1. data used in our investigation, we analyse the data on the long term (2020-2025), within a sustainable development frame of reference, especially after the brexit negotiation deadline (october 2019). thus, we take into account the following dimensions for our data (variables), most of them included into the sdgs: reducing poverty (sdg1, ”no poverty”), highly connected with the agricultural sector; well-being (sdg3) through the life expectancy at birth; quality of education (sdg4), by educational attainment for tertiary education; decent work (sdg8) for which we measure labour market indicators, such as employment and unemployment rate, the labour market policies (almps and plmps respectively); industry innovation implications (sdg9), by the research and development (rd) expenses for the business enterprise sector; income and living conditions, measured through net earnings. these dimensions are included into 3 categories of data, representing: a) the main agricultural outcomes; b) the immigration situation; c) sdgs presented above and other representative indicators for the international activity, namely: foreign direct investment (fdi) (unctad, 2017), and kof index of globalization (kof) (eth swiss federal institute of technology zurich, 2017). thus, for the agricultural outcomes, we’ve considered the following data: “value added by kind of economic activity (va_agri), including agriculture, hunting, forestry, supporting immigration for an enhanced european union agricultural sustainable development 7 fishing” (unctad, 2017); “agricultural factor income per annual work unit (agri_awu); government support to agricultural rd (gov_agri)” (european commission, 2018); “merchandise trade matrix food group (x_food); merchandise trade matrix agricultural raw materials (x_agri_rm)” (unctad, 2017). the immigration situation is measured by “flows of immigrants and foreign population (imig)” (european commission, 2018; oecd, 2017), and “flows of asylum applicants” (asyl) (unhcr, 2017). for sdgs attainment (european commission, 2018), we include in our research the following indicators: “at-risk-of-poverty rate” (pov); “life expectancy at birth” (le); “educational level reflected through the educational attainment for tertiary education” (edu_t); “employment rate” (er); “unemployment rate of foreign population” (ur_f); “the active labour market policies” (almps) and “the passive labour market policies” (plmps); “rd expenditures for the business enterprise sector” (berd); “annual net earnings of a twoearner married couple with two children” (earn). the panel includes ten eu countries having highest immigration flows, analysed during 2020-2025 in order to reveal the long run effects (sustainable development), as extrapolation series based on statistical data for 2000-2016. fig 3 agri_awu trends in eu-10 migrant receiving countries, during 2005-2015 source: authors’ process of eurostat data va_agri, in 2015, is at the highest level in italy and spain (unctad, 2017). agri_awu appraises the productivity for the agriculture field, by counting “the income generated by farming, which is used to remunerate borrowed or rented factors of production (capital, wages and land rents) as well as own production factors (own labour, capital and land)” (european commission, 2018). annual work unit (awu) represents “full-time equivalent employment (corresponding to the number of full-time equivalent jobs), i.e. as total hours worked divided by the average annual number of hours worked in full-time jobs within the economic territory” (european commission, 2018). agri_awu has registered extremely high levels in denmark, especially after the global economic crisis in 2009, reaching a peak of 60,716 euro in 2012, well above the ones accounted by the other countries considered. however, denmark currently faces major problems in this respect since agri_awu has fallen severely starting with 2014 (figure 3). relatively constant high levels are registered in france, belgium and sweden during the entire time period. 8 m. cristea, g. g. noja, c. s. ponea gov_agri data have registered a major increase in germany after 2004, this country following an upward path afterwards, well above the one accounted by the other eu countries considered. at the same time, spain has made important efforts to support rd in agriculture, with important positive output during 2004-2008 period. however, after the global crisis in 2008-2009 this support has significantly diminished, even though it is still above the one performed by most eu economies (fig 4). france registered important contribution in rd for agriculture in 2016, and the uk saw a visible decrease in the amounts allocated for rd in agriculture. fig 4 gov_agri in eu-10 migrant receiving countries during 2004-2016 source: authors’ process of eurostat data x_food and x_agri_rm capture “the international trade performance of the agricultural field” (cristea & noja, 2019, p. 117) in selected countries and reveal the importance of this sector for eu-10 economies. these two indicators highlight the dominant position for spain (food) and austria (raw materials) (unctad, 2017). 3.2. methodology applied into research based on our general objective and by reviewing the current state of the literature on agricultural results under the immigration impact, we have set out the following research hypotheses (h):  h1. there is a strong relationship between va_agri and imig/asyl;  h2. there is a strong relationship between agri_awu and imig/asyl;  h3. imig and asyl induce increased gov_agri;  h4. imig and asyl improve x_food and x_agri_rm. first, we have applied the standardisation procedure on our data, for a proper equivalence among eu-10 ms, and to remove the fluctuation and associated disparities within the panel, according to the eq. (1) (oecd, 2005): “ sd meanx y i i   , (1) where: yi represents the composite indicators, xi is the crude value of the indicator; and sd, the standard deviation”. supporting immigration for an enhanced european union agricultural sustainable development 9 to forecast the variables during 2020-2025 we have applied the linear extrapolation, based on statistical time series for 2000-2016. “the extrapolation formula used is described by eq. (2). ( ) ( ),1 1 2 1 2 1 x x y x y y y x x      , (2) where: x1, y1 and x2, y2 are the two endpoints of a linear graph; and x represents the point of which value is to be extrapolated” (noja et al., 2018, p. 6). then, we have applied particular macro-econometric models in order to appraise the effects lead by immigration flows upon receiving economies’ agricultural results, namely, spatial analysis models (lag and error), eq. (3a) and (3b) (viton, 2010).  “spatial lag models: ,y wy x u    (3a)  spatial error models: ,y x u  ,u pwu   (3b) where: w is the inverse distance weights matrix”. the standard macro-econometric model for va_agri as dependent variable is built up as “a baseline panel regression model, but reconfigured through the spatial procedures” (eq. 4a) for lag model, and eq. 4b for error model): ,___ __ 9876 543210 ititititit ititititititit uofdiifdiearntedu almpsberderasylimigagriwvaagriva     (4a) .__ __ 98 76543210 itititit itititititititit wuofdiifdi earntedualmpsberderasylimigagriva     (4b) the final stage of our methodology consists in applying the structural equations modelling (sem). sem reveals the integrated analysis of immigration interlinkages (direct, indirect and total) with agriculture field. the general representation of sem is shown into “equation system (5). m tnt x mn c nt x m c mt y mm b t y m b tnt x n c t xc mt y m b t yb tnt x n c t xc mt y m b t yb              ... 1 .... 11 ............ 22 ... 1212 .... 221 11 ... 1111 .... 211 (5) where: t is the number of time periods; bij represents the yij endogenous variable’s parameters; cij are the xij exogenous variable’s parameters, i=1, …, m; j=1, …, n” (noja et al., 2018, p. 8). 4. results and discussions 4.1. variables extrapolation figure 5 reveals the 2025 timeline forecast of the agricultural indicators included in our analysis (the sustainable development frame) for eu-10 countries. thus, va_agri is at the highest level in the uk and belgium for 2025 (figure 5a). these forecasts shed initial 10 m. cristea, g. g. noja, c. s. ponea lights on the importance of agriculture for the uk’s economy after the major challenges encountered within the brexit context. relatively constant high levels for agri_awu are registered in france and belgium (the same tendency as in 2015) (figure 5b). considering gov_agri, the uk saw a visible decrease in the amounts allocated for rd in agriculture due to brexit (figure 5c). high levels of rd in agriculture will be registered by france and germany. x_food will tend to increase in germany and spain (figure 5d). x_agri_rm of the uk will tend to decrease considerably until 2025 (figure 5e). va_agri (a) agri_awu (b) gov_agri (c) x_food (d) x_agri_rm (e) fig 5 agriculture outcomes forecast in 2025 for eu-10 ms source: authors’ process in stata 4.2. spatial analysis models spatial results (table 1) show that the immigration process requires a particular attention from policy makers across europe, since our estimations for the 2020-2025 period reveal that the positive outcomes of imig could reverse leading to unbalances even in the agricultural sector (the statistically significant estimated coefficient is – 0.0569). this is also the case of humanitarian migration (asyl), since the results point out that increased inflows of asyl tend to rather induce negative spillovers upon the va_agri (the estimated coefficients are -0.111 and –0.131). the uncertainty brought after 2020 reflects negatively also considering fdi inwards, which generate a slight diminishing in the agricultural results. negative impacts are also registered for the almps, and edu_t, similar with those obtained for the period 2000 supporting immigration for an enhanced european union agricultural sustainable development 11 2016 (cristea & noja, 2019). in contrast, beneficial results can be registered in case of fdi outwards, with positive impacts on the agriculture’s productivity, thus raising the contribution of agriculture to gdp. positive effects will be registered in terms of er and earn. moreover, the results highlight the significance of berd in growing the va_agri (the estimated coefficients are positive and extremely significant at a threshold of 1%). table 1 spatial lag and error models (robust and bootstrap) for va_agri, 2020-2025 variables (1) (2) (3) (4) spatial_lag (robust) spatial_lag (bootstrap) spatial_error (robust) spatial_error (bootstrap) imig_st -0.0354 -0.0354 -0.0569 * -0.0569 * (0.0244) (0.0310) (0.0242) (0.0275) asyl_st -0.111 *** -0.111 *** -0.131 *** -0.131 *** (0.0164) (0.0168) (0.0155) (0.0174) er_st 0.273 ** 0.273 * 0.286 ** 0.286 * (0.0839) (0.135) (0.0875) (0.114) berd_st 0.337 *** 0.337 * 0.362 *** 0.362 ** (0.0904) (0.148) (0.0941) (0.126) almps_st -0.182 *** -0.182 *** -0.219 *** -0.219 *** (0.0249) (0.0178) (0.0167) (0.0230) edu_t_st -0.0870 *** -0.0870 ** -0.0919 *** -0.0919 *** (0.0182) (0.0296) (0.0192) (0.0248) earn_st 0.0923 *** 0.0923 * 0.102 *** 0.102 ** (0.0258) (0.0407) (0.0285) (0.0326) fdi_i_st -0.0600 ** -0.0600 * -0.0550 ** -0.0550 * (0.0197) (0.0250) (0.0212) (0.0277) fdi_o_st 0.0139 0.0139 0.0163 0.0163 (0.0329) (0.0368) (0.0344) (0.0435) _cons 0.431 0.431 0.0426 0.0426 (0.236) (0.299) (0.143) (0.157) rho _cons 0.603 * 0.603 ** (0.304) (0.227) sigma _cons 0.220 *** 0.220 *** 0.223 *** 0.223 *** (0.0241) (0.0203) (0.0253) (0.0242) lambda _cons 0.562 0.562 (0.381) (0.719) test parameters chi2(10)= 141.29 p=0.0000 chi2(10)= 602.05 p=0.0000 chi2(10)= 675.34 p=0.0000 chi2(10)= 753.39 p=0.0000 lm 1.899 (0.168) 1.899 (0.168) 0.949 (0.330) 0.949 (0.330) wald test of rho/ lambda 3.936 (0.047) 3.936 (0.047) 2.174 (0.140) 2.174 (0.140) acceptable range for rho: -3.509 < rho < 1.000; acceptable range for lambda: -3.509 < lambda < 1.000 moran’s i imig i=0.429; p=0.000; asyl i=0.241; p=0.000; va_agri=0.254; p=0.000 n 60 60 60 60 note: standard errors in parentheses; * p < 0.05, ** p < 0.01, *** p < 0.001 source: authors’ research in stata 12 m. cristea, g. g. noja, c. s. ponea these aspects were also underlined by kierzenkowski et al. (2016), jirasek (2017) and cristea and noja (2019), which proved that a reorient to innovation strategies combined with supporting the international trade activity, could overcome the potential difficulties registered after the brexit. the spatial lag models show that the positive evolution based on increased gov_agri, x_food and x_agri_rm is registered on the long-term (table 2), but only under the influence of imig. for asyl, the negative coefficients highlight the significance of “accurate strategies, policies and targeted measures to be applied by the major receiving countries to manage with growth immigration inflows and to properly cope with the refugee crisis in europe” (cristea & noja, 2019, p. 118). the immigrants can be well integrated into receiving countries and can therefore increase the agricultural and overall outcomes, as reflected by our estimations, given an accurate harmonized strategy applied at the european level. table 2 results of spatial lag models, 2020-2025 variables (1) (2) (3) (4) agri_awu_st gov_agri_st x_food_st x_agri_rm_st imig_st 0.0458 0.311 *** 0.486 *** 0.280 *** (0.0349) (0.0275) (0.0294) (0.0461) asyl_st -0.379 *** -0.0835 *** -0.0288 * -0.0335 ** (0.0408) (0.0110) (0.0127) (0.0120) er_st 0.0606 -0.531 *** -0.410 *** -0.0639 (0.148) (0.0855) (0.0806) (0.0745) berd_e_st 0.483 ** 0.709 *** -0.0630 0.213 ** (0.148) (0.0757) (0.0746) (0.0647) almps_st -1.144 *** 0.115 *** 0.321 *** -0.190 *** (0.102) (0.0283) (0.0191) (0.0371) edu_t_st -0.0359 -0.131 *** -0.127 *** 0.0305 * (0.0261) (0.0160) (0.0159) (0.0135) earn_st -0.171 ** -0.0612 ** -0.374 *** -0.323 *** (0.0640) (0.0226) (0.0285) (0.0513) fdi_i_st 0.296 *** 0.102 *** -0.110 *** 0.0420 ** (0.0404) (0.0189) (0.0160) (0.0134) fdi_o_st -0.203 *** -0.371 *** 0.352 *** -0.0504 ** (0.0507) (0.0282) (0.0219) (0.0166) _cons 2.089 *** 1.031 *** 1.162 *** 0.278 ** (0.201) (0.0986) (0.114) (0.107) rho _cons -0.0122 0.899 *** -0.135 0.116 (0.260) (0.0992) (0.132) (0.426) sigma _cons 0.465 *** 0.253 *** 0.202 *** 0.197 *** (0.0383) (0.0244) (0.0226) (0.0197) n 60 60 60 60 note: standard errors in parentheses; * p < 0.05, ** p < 0.01, *** p < 0.001 source: authors’ research in stata based on spatial lag models, we can say that: h1. there is a strong relationship between va_agri and imig/ asyl is partially fulfilled (only for asyl); h2. there is a strong relationship between agri_awu and imig/ asyl is partially fulfilled (only for asyl); supporting immigration for an enhanced european union agricultural sustainable development 13 h3. imig and asyl induce increased gov_agri is partially fulfilled (only for imig); h4. imig and asyl improve x_food and x_agri_rm is partially fulfilled (only for imig). 4.3. sem models considering sem, we have verified wald tests for equations, compared likelihood ratios (lr) outcomes (lr test for model versus saturated and baseline versus saturated) and information criteria (akaike’s, bayesian). thus, we have obtained 5 models (va_agri, agri_awu, gov_agri, x_food and x_agri_rm) with conclusive results for 2020-2025 (figure 6). (a) va_agri (b) agri_awu earn 6.7 2.1 edu_tert 16 2.5 ur_f 1.7 -.26 imig -.38 1 5.6 kof_t 1.9 -1.8 asyl 11 2 23 pov_r 2.1 -.77 le 3 2.8 er .044 3 .73 va_agri -.91 4 .63 almp 3.5 .19 plmp 3.5 -1 .32 -.11 -.74 -.57 -1.6 1.1 -2.3 .22 -.0043 .29 -.13 -.18 earn 6.7 2.1 edu_tert 16 2.5 ur_f 1.7 -.26 imig -.38 1 5.6 kof_t 1.9 -1.8 asyl 11 2 23 pov_r 2.1 -.77 le 3 2.8 er .044 3 .73 agri_awu -.15 4 2.5 almp 3.5 .19 plmp 3.5 -1 .32 -.11 -.74 -.57 -1.6 1.1 -2.3 .22 -.0043 .29 -.13 -.71 (c) gov_agri (d) x_food earn 6.7 2.1 edu_tert 16 2.5 ur_f 1.7 -.26 imig -.38 1 5.6 kof_t 1.9 -1.8 asyl 11 2 23 pov_r 2.1 -.77 le 3 2.8 er .044 3 .73 gov_agri .17 4 2.4 almp 3.5 .19 plmp 3.5 -1 .32 -.11 -.74 -.57 -1.6 1.1 -2.3 .22 -.0043 .29 -.13 .11 earn 6.7 2.1 edu_tert 16 2.5 ur_f 1.7 -.26 imig -.38 1 5.6 kof_t 1.9 -1.8 asyl 11 2 23 pov_r 2.1 -.77 le 3 2.8 er .044 3 .73 x_food .42 4 1.2 almp 3.5 .19 plmp 3.5 -1 .32 -.11 -.74 -.57 -1.6 1.1 -2.3 .22 -.0043 .29 -.13 -.22 (e) x_agri_rm earn 6.7 2.1 edu_tert 16 2.5 ur_f 1.7 -.26 imig -.38 1 5.6 kof_t 1.9 -1.8 asyl 11 2 23 pov_r 2.1 -.77 le 3 2.8 er .044 3 .73 x_agri_rm -.097 4 1.2 almp 3.5 .19 plmp 3.5 -1 .32 -.11 -.74 -.57 -1.6 1.1 -2.3 .22 -.0043 .29 -.13 -.24 fig 6 sem models, eu-10 ms, 2020-2025 source: authors’ process in stata 14 m. cristea, g. g. noja, c. s. ponea thus, in the 2020-2025 sample, we acknowledge that the extrapolation procedure is subject to increasing uncertainty and the results obtained must be interpreted with caution. still, also in this case, the major determinants of the migration decision are the employment opportunities for the foreign population, and the living standards at destination reflected here particularly through the earnings levels (0.32 estimated coefficient associated with the earn variable). the results are opposite to rienzo and vargas-silva (2012), which revealed a reversed connection between migration flows and migrant’s earnings (especially for the uk), but also to cristea and noja (2019), revealing negative implications for the period 2000-2016. moreover, the total employment rate (er) increases significantly under the labour immigration effects (extremely statistically significant estimated coefficients for the imig variable, 0.22; while the asyl coefficients are negative, but statistically insignificant). the further impact of all these implications upon the agricultural sector for the 10-eu ms is positive only in terms of increased gov_agri, opposite to those obtained for the period 2000-2016 (cristea & noja, 2019). however, the estimations reveal that there is evidence to attest that an unfavourable implication on agricultural productivity (agri_awu has a negative estimated coefficient of -0.71 *** that is extremely statistically significant) at on this sectors’ contribution to gdp (va_agri estimated coefficient is 0.18 * significant at the 0.05 level), if the immigration process is not properly managed in the brexit framework (deadline negotiations 2019). moreover, there are also negative effects upon the international trade activity deployed in the agricultural sector as reflected through a reduction both in x_food (-0.22 less statistically significant) and x_agri_rm (-0.24 * significant at the 0.05 level) in the light of new trade agreements established after the brexit. thus, considering the sem models, h1, h2, h3 are fulfilled, and h4 is rejected. 5. conclusions the results obtained, verified by testing 4 hypotheses (through both econometric modelling procedures applied, spatial analysis and sem, respectively), highlight: a strong direct linkage between the value added by the agricultural sector and the immigration flows (mainly humanitarian migration) (h1); instead, the productivity in the agricultural sector (measured through the agricultural factor income per awu) is affected (negatively) only by humanitarian migration, labour migration having no statistical significance (low intensity) (h2); immigration flows (economic migration) induce increased governmental efforts focused on research and development to sustain the agricultural sector (h3); immigration flows (economic migration) improve the international trade outcomes for the agricultural sector (basic food and raw materials) (h4). thus, the need to develop policies for building a new europe is more than necessary by acknowledging the complex problems of the rural areas and those of international migration, especially on the background of brexit decision, characterized by the redemption of major discrepancies and stronger socio-economic connections. acknowledgement: a part of this research was presented at the international conference on economics, business and economic thought (ebet), the bucharest university of economic studies, 20 – 21 april 2018, bucharest, romania. supporting immigration for an enhanced european union agricultural sustainable development 15 references aide, m. t., & grau, r. h. 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(2017). unctadstat, retrieved from: http://unctadstat.unctad.org/en/, accessed on: 16 january 2019. un refugee agency (unhcr) (2017). figures at a glance 2017, retrieved from: http://www.unhcr.org/ figures-at-a-glance.html, accessed on: 12 january 2019. viton p. a. (2010). notes on spatial econometric models. city and regional planning, 870, 9-10. wiggins s., & deshingkar p. (2007). rural employment and migration: in search of decent work. agris: international information system for the agricultural science and technology, retrieved from: http://agris.fao.org/agris-search/search.do?recordid=gb2013203036, accessed on: 22 january 2019. world bank (2017). 3.2. world development indicators, agricultural inputs, retrieved from: http://wdi. worldbank.org/table/3.2, accessed on: 12 january 2019. podrška imigraciji za poboljšanje poljoprivrednog održivog razvoja unutar evropske unije uzevši u obzir veličinu migracija u evropi i njihov potencijal da poboljšaju ili unazade poljoprivredni razvoj, opšti cilj ovog rada je da proceni njihove potencijalne dugoročne posledice, u okviru referentnog okvira održivog razvoja. s tim u vezi, razradili smo nekoliko scenarija koji se fokusiraju na poljoprivredni razvoj deset zemalja-članica eu sa najvećim prilivom imigranata, u period 2020-2025 (ekstrapolacija održivog razvoja). razradili smo set pokazatelja da bismo implementirali prostornu analizu i modeliranje strukturalnih jednačina (sem), kao metodološki napor. dobijeni rezultati, verifikovani tertiranjem četiri hipoteze, pokazuju da se na duge staze otkriva pozitivna tendencija u smislu povećane državne podrške agri-inovacijama, kroz ekomomsku migraciju (migraciju radne snage). naši nalazi u glavnim crtama daju da bi konačni rezultati migracije radne snage mogli da promene stvaranje disbalansa u poljoprivrednom sektoru. stoga, potreba da se razviju precizne prilagođene politike je više nego potrebna, time što će se prepoznati kompleksni problem ruralnih oblast ii međunarodnih migracija, kao i velike razlike među zemljama i veća socio-ekonomska povezanost. ključne reči: sector poljoprivrede, međunarodne migracije, evopske integracije, održivi razvoj, ekonomski modelling facta universitatis series: economics and organization vol. 16, n o 1, 2019, pp. 75 88 https://doi.org/10.22190/fueo1901075p © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper economic thought of friedrich list, gunnar myrdal and john maynard keynes, and its applicability in transition economies 1 udc 330.1:330.342 jadranka petrović* faculty of economics, university of banja luka, republic of srpska, bosnia and herzegovina abstract. the neo-liberal policies of privatization, trade and capital markets liberalization, deregulation and minimizing the role of the state have led in transition balkan countries to deindustrialization, gdp stagnation and high unemployment, having for its consequence a dramatic depopulation. this refers us to the need for searching for different, successful development policies in the past. the aim of the paper is to explore the economic thought of three great economists, the critics of classical and neoclassical economics, who have had an important influence on economic theory and policy in the past: german economist and politician friedrich list, the founder of german historical school, who was considered to be the main ideologist of capitalist development of germany; swedish nobel prize winner gunnar myrdal, who had a major role in the creation of the swedish model of welfare state; and famous british economist john maynard keynes who greatly influenced the prosperity of western economies in the decades after the second world war. the research results show that current problems of transition economies could find many solutions in the ideas of list, myrdal and keynes. key words: economic development, economic policies, transition economies, friedrich list, gunnar myrdal, john maynard keynes jel classification: b31, o10 received october 01, 2018 / revised november 12, 2018 / accepted november 23, 2018 corresponding author: jadranka petrović * phd candidate at university of banja luka, faculty of economics university of banja luka, faculty of economics, majke jugovića 4, 78000 banja luka, republic of srpska, bosnia and herzegovina e-mail: jpetrovic.bl@gmail.com 76 j. petrović introduction the neo-liberal policies of privatization, trade and capital markets liberalization, deregulation and minimization of the role of the state have led in transition countries to the collapse of large economic systems, a number of bankruptcies and liquidations of enterprises and, consequently, to deindustrialization, leading to a high unemployment rate and a decline in the population standard of living. deindustrialization, gdp stagnation and high unemployment have for its consequence a dramatic depopulation, by negative natural increase as well as by the emigration into industrially developed countries. such consequences indicate to the need for searching for different, successful development policies and models. the subject of this research is the economic thought of three influential economists, the critics of the classical and neoclassical economics, who played an important role in economic theory and practice in the past: german economist and politician friedrich list (1789-1846), the founder of german historical school, who was considered to be the main ideologist of capitalist development of germany; swedish nobel prize winner karl gunnar myrdal (1898-1987), who had a major role in the creation of the swedish model of welfare state, and famous british economist john maynard keynes (1883-1946), who greatly influenced the prosperity of western economies in the decades after the second world war. the hypothesis of this research is that the economic thought and ideas of list, myrdal and keynes could give the solutions to some of the problems of balkan transition countries. research methods used in the research are the analysis of empirical macroeconomic data, as well as the historical method of exploring development theories in the past, in order to broaden perspective and to escape the pressure of dominant interests, prejudices and ideologies (myrdal, 1973). the research paper is structured as follows. after the introduction, an overview of the consequences of neoliberal policies in bosnia and herzegovina and the republic of srpska was provided. in the next part the economic thought of friedrich list, karl gunnar myrdal and john maynard keynes has been explored, with the emphasis on their views on the role of the state in economic development. the conclusions are presented at the end of the paper. 1. the consequences of neoliberal policies in transition countries an example of bosnia and herzegovina the transition model introduced in bosnia and herzegovina (bih) after the civil war (1992-1995) was based on the so-called washington consensus (zupĉević & ĉaušević, 2009), and the key imperatives of neoliberalism: privatization, trade and capital liberalization, deregulation and minimization of the state role. the result of the neoliberal policies in bih is visible through the trend of some basic macroeconomic indicators presented in the following figures. figure 1 shows the trend of the real gdp growth rate in bosnia and herzegovina in the period from 2004 to 2016. economic thought of friedrich list, gunnar myrdal and john maynard keynes... 77 6.31 4.26 5.41 5.85 5.43 -3.0 0.96 -0.83 2.35 1.15 3.07 3.5 0.87 -4 -2 0 2 4 6 8 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 year g d p g r o w th r a te fig. 1 real gdp growth rates in bosnia and herzegovina source: author, based on bih agency for statistics data figure 2 shows the trend of inflation (deflation) rate in bosnia and herzegovina in the period from 2004 to 2016. 0.3 3.6 6.1 1.5 7.4 -0.4 3.7 2.1 -0.1 -1.1-1.0 -0.9 2.1 -2 0 2 4 6 8 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 year in fl a ti o n ( d e fl a ti o n ) ra te fig. 2 inflation (deflation) rates in bosnia and herzegovina source: author, based on bih agency for statistics data the average real gdp growth rate in the period 2004-2008 was 5.5%, while the average annual inflation rate was 3.78%. after 2008, the average annual real gdp growth rate significantly dropped to only 1.1% in the period 2009-2016, while the average annual inflation rate was 0.55% per annum. the price stability was followed by the stagnation of 78 j. petrović economic activities. in the last four years of the observed period (2013-2016), there was a deflation, ranging from -0.1% in 2013 to -1.1% in 2016. according to bosnia and herzegovina central bank (2016), one of the main causes of deflation, measured by the consumer price index, was the pressure of low import prices of agricultural and other food products, given the high trade deficit of these categories. at the same time, domestic arable land is largely unused. for example, in the republic of srpska, there has been a visible trend in the reduction of sown areas since 2008, which reached its minimum in years 2014 and 2015. these two years, excluding 1996 as the first postwar period, represent the minimum of the 20-year period (1996-2015), with 51.9% and 53.1% sown areas of the total arable land. the export-import ratio of agricultural products in 2015 amounted to only 25.7%, despite exceptionally favorable natural conditions for the development of agriculture (statistical yearbook of the republic of srpska, 2016). industrial production in bosnia and herzegovina stagnates. average growth of industrial production in the period 2009-2015 was only 1.03% per year (bih central bank, 2016). figure 3 shows that unemployment in bosnia and herzegovina is extremely high and it stagnated at the level 27.5%-28% in the period 2011-2015. 29.2 36.4 27.6 28.0 27.5 27.5 27.7 0 10 20 30 40 2009 2010 2011 2012 2013 2014 2015 year u n e m p lo y m e n t ra te fig 3 unemployment rate in bosnia and herzegovina source: author, based on bih agency for statistics data figure 4 demonstrates that bosnia and herzegovina external debt grew in the observed period from 3,96 billion km in 2007 to 8,36 billion km in 2016, which means that it more than doubled in the observed period. economic thought of friedrich list, gunnar myrdal and john maynard keynes... 79 3.96 4.24 5.23 6.29 6.66 7.16 7.41 8.22 8.41 8.36 0 2 4 6 8 10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 year b h e x te rn a l d e b t (i n k m b il li o n ) fig 4. external debt of bosnia and herzegovina source: author, based on bih ministry of finance and treasury data the number of inhabitants in bosnia and herzegovina is constantly decreasing. a particularly alarming situation is in the republic of srpska, where, based on the negative natural increase of the population, 53,295 inhabitants were lost in the period 2002-2016, representing 4.6% of the estimated population in the republic of srpska in 2016, as shown in figure 5. 2, 00 2 1, 97 1 26 5 -6 44 -2 ,4 54 -3 ,4 80 -4 ,0 36 3, 17 2 -4 ,0 97 -5 ,7 02 -6,000 -4,000 -2,000 0 2,000 4,000 6,000 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14 20 16 ye ar n a tu ra l in c re a s e fig. 5 natural increase of population in the republic of srpska source: author, based on the republic of srpska agency for statistics data 80 j. petrović also, the emigration from the republic of srpska is dramatic. in the period 2009-2015 the statistical office of the republic of srpska estimated the population at approximately 1.42-1.43 million inhabitants. for example, the estimation for 2013 was 1,425,549 inhabitants. however, the results of the population census in bih conducted in october 2013 showed that in the republic of srpska in 2013 there were 1,171,179 inhabitants, i.e. 254,370 or 18% less than estimated. the official data on demographic changes of statistical agencies in bosnia and herzegovina do not include external but only internal migrations. however, it is clear that economic stagnation, high unemployment, especially of young people, and low standard of living, contribute to the rapid trend of emigration, which contributes to the reduction of the population in bih (bih central bank annual report, 2016). republic of serbia faces similar dramatic demographic and economic situation, as shown in the research of mitrović & bošković (2017). described negative consequences of implemented policies refer us to the need for searching for different, successful development theories and policies. in the following sections we will explore the economic thought of three influential economists, who played an important role in economic theory and practice in the past: friedrich list, karl gunnar myrdal and john maynard keynes, with the aim to find some ideas and policies that could be applicable to current situation and problems of balkan transition countries. 2. friedrich list (1789-1846) and german historical school german economist and politician friedrich list is considered to be the main ideologist of capitalist development in germany (šoškić, 1986). his ideas have been implemented in the policy of german chancellor otto von bismarck (1815 1898) (chang, 2003). given the later development and success of german economy, it is worth paying attention to his views. in the first half of the 19th century, germany was divided into 39 different states, economically and politically isolated from one another. at the same time, however, british surpluses of products (as the most developed economy of that time), found a way to the german markets at extremely low prices, which jeopardized the interests of german manufacturers and traders. in 1819, friedrich list became the leader of the general association of german manufacturers and traders and the soul of the movement for economic unity and uniform customs of german states (ekelund & hébert, 1997). list‘s main work, published in 1841, is called the "national system of political economy". according to list, the ultimate goal of economic activity should be national development and strengthening of economic power, that is, the industrial development of germany. in his analysis of national systems of political economy, list applied a method that examines the historical stages of the economic development, i.e., the idea that the economy must go through several stages before reaching a mature state: ―the savage state, the pastoral state, the agricultural state, the agricultural and manufacturing state, and finally, the agricultural, manufacturing, and commercial state‖ (list, 1856, p. 72). list considered that only the economies in the fourth stage, i.e. ―agriculturalmanufacturing‖, need economic protection, until they reach the final stage. according to list, germany and the united states of that time were at that stage of economic development. however, after arriving at the final stage, free trade again becomes justified, because ―…a economic thought of friedrich list, gunnar myrdal and john maynard keynes... 81 nation having reached a manufacturing supremacy can keep her manufacturers and tradesmen from inaction, recoil and idleness, only by the free importation of food and raw materials, and by the competition of foreign industry" (list, 1856, p. 276). according to list's classification and its evidence, only great britain at that time reached the final stage of economic development. while the nations of europe and america struggled to reach this peak, cheap imports of british goods hampered the development of domestic production. list considered that there can be no equal international competition as long as all nations do not reach the final stage in their development (ekelund & hébert, 1997). according to list, in order to become an equal partner to england and to develop its industry, germany needs a single customs area and protective duties to foreign countries: ―each country should at once take possession of its own markets for its own industry, at least, as to the objects of general consumption....― (list, 1856, p. 280). his writings are rich in examples from history and experience that show that economic protection is the only way to strengthen the emerging nation. dedicating the first part of his book to the overview of the economic development of individual nations (italy, the netherlands, england, spain, portugal, france, germany, russia, the united states), list points out that england also developed its industry due to protective measures of its economic policy, import prohibitions or high customs, that protected the english industry and maritime navigation from foreign competition (list, 1856, p. 110-129). list criticizes the classical economists and their derivation of the principles they assume are valid for all nations and all time, and in unrecognizing of the diversity of conditions that exist in different countries, and so in germany of that time (ekelund & hébert, 1997). according to list, the classical school has three essential defects: 1) cosmopolitism, which does not take into account national interests; 2) materialism, which regards only the exchangeable value of things, taking account neither of the moral nor of the political interests of the nation, and 3) unorganized individualism (list, 1856, p. 262). for list, the economy is subordinated to politics. thus, it is not enough for a statesman to know that free exchange of goods will increase wealth, as it has been shown by classical economists, but he must know the consequences of such activity for his own country. according to list, the economic liberalism in the international field, advocated by british classics, can be useful only between two nations that are at the same level of industrial development (šoškić, 1986). list, therefore, claimed that the free trade that expels either domestic industry, or its population is undesirable and says: ―…nations have even lost their independence, and their political existence, because their commercial policy had not aided the development and the consolidation of their nationality‖ (list, 1856, p. 61). list considered that the theory of free trade had the role of a trojan horse in economy: ―… to create fears lets our nationality be in danger of perishing by an error of theory, like a sick man, who by conforming to a printed prescription died of an error of the prescription: to arouse suspicion that this boasted theory has attained its large growth only for the trojan-horse purpose of concealing arms and soldiers, and inducing us to take down, with our own hands, the walls which protect us‖ (list, 1856, p. 62). contrary to the free trade theory, list considered the system of import customs as a tool to help the economic development of the nation regulating its foreign trade, but the nation must constantly follow the principle of industrial education of the country, i.e. of industrial progress (list, 1856). list believed that the american experience of that era confirmed his views on protectionism. american protectionists, especially alexander hamilton and henry carey, supported him (ekelund & hébert, 1997). 82 j. petrović list considered the industry to be a social force that creates and improves capital and labor, i.e. gives current production, but also gives momentum and direction to future production. that is why list recommended the introduction of the industry into underdeveloped countries even at the cost of temporary loss in the present. according to list, it is important for every nation to develop both agriculture and industry, as well as trade, because the nation that is engaged only in agriculture, in free trade with production and trade nations will lose a significant part of its production power and natural resources, which must remain unused and unemployed. also, its intellectual and political culture, as well as its means of defense, will thus be limited (list, 1856). list‘s originality in economic theory and methods consists of its systemic use of historical comparison as a means of proving the validity of economic assumptions. he expanded the dynamic structure of the classical concept of economic growth, representing economic development as a sequence of historical stages. thus, list provided a methodological gathering point for the economists of the german historical school. list is considered to be the predecessor of this school, whose representatives are wilhelm roscher, karl knies, bruno hildebrand, and gustav schmoller. 3. karl gunnar myrdal (1898-1987) swedish economist karl gunnar myrdal, winner of the nobel memorial prize for economics in 1934 for his early work in monetary theory, made a major contribution in the field of macroeconomic theory, development economics, international economics, economic methodology as well as social and economic policy. gunnar myrdal and his wife, alva myrdal, who won the nobel peace prize in 1982, played a major role in the creation of the swedish welfare state model through their research, ideas and political engagement. gunnar myrdal was a critic of the ruling neoclassical economy and the advocate of the so-called institutional approach. in his work entitled "the political element in the development of economic theory" of 1930, myrdal criticized the logical consistency of neoclassical theory, stating that it was based on unsatisfactory assumptions that relate to individual preferences based on utilitarian moral philosophy and rationalistic psychology, which were abandoned at the beginning of the 20th century in other social sciences. myrdal also criticized the neoclassical theory of equilibrium and, contrary to it, he considered that, in the normal case, there was no such tendency towards automatic selfstabilization in the social system (panico & rizza, 2009). myrdal also points out to the presence of ideological elements in the formation of economic analysis and in the formulation of theoretical interpretations. for the most significant factor affecting the objectivity of economics as a science, myrdal considers the forces in society that put pressure on economists to so direct their work that they come to conclusions in line with dominant interests and prejudices (myrdal, 1973). myrdal advocates state intervention, that is, policies that will be able to integrate the interests of different groups and regions, and generate a harmony of individual interests. according to him, the market forces, if left to themselves, would have led to disharmony, and not to the harmony of natural law and economic equilibrium, as neoclassicists considered (panico & rizza, 2009). by giving the institutions a central role in his analysis, myrdal's approach emphasized the role and significance of non-economic factors in development. he has understood the economic thought of friedrich list, gunnar myrdal and john maynard keynes... 83 interdependence between economic and non-economic factors, and he criticized the neglect of non-economic factors by most economists (ibid). myrdal advocated an attitude of economics as a social theory. according to him, economic theory will have to deal with all the relevant factors if it wants to be realistic. that means that general economic analysis will have to become social theory (panico & riza, 2009). in that sense, social and political factors such as national cohesion, religions and ideologies, health and education, economic, social and political leadership can contribute in an important way to the development process and the growth of the economy. what is important is that intense relations and connections are established among the individuals and the institutions to make it possible to identify common problems and formulate strategies for their solution. the economies are seen as ‗social organisms‘ that, through experience, can acquire a greater ability to solve increasingly complex collective problems (ibid). noting the problem of the downward trend in population in sweden in the 1930s, gunnar myrdal and his wife, alva myrdal, in 1934 wrote a book titled the "crisis in the population question", in which they discussed declining birth rates in sweden, the problems it brings, and suggest the possible solutions. the book was very influential in the debate that led to the reform of income redistribution aimed at the welfare of families with children, in the field of housing, nutrition, health and education, in order to stop the decline in the number of inhabitants, which was the main motive for the social democratic reforms in sweden (myrdal, 1973). it has been recognized that the declining trend in population in sweden will lead to a slowdown in economic development, as it will mean a tendency towards a depressed state of production, employment, and, consequently, consumption. the idea was to design a population policy, where "…a large part of the economic burden of bringing up children must be passed on from the individual family to society as a whole; i.e., the burdens must be borne by the citizens as taxpayers regardless of their having children or not‖ (myrdal, 1938, p. 207). thus, the general method of population policy was the transfer of income from individuals and families without children to families with children. the goal was a considerable relief of the economic burdens of raising children, and thus to reduce the economic motive for childlessness (myrdal, 1938). myrdal considers these measures as "investing" in the human capital of the nation: ―…we say that we are just as much and even more interested in the physical, intellectual, and moral quality of the population than in its quantity... a very great increase in the quality of the future generation could be secured if we only could provide families having children with better housing, nutrition, health care, education, and similar aids to sound development‖ (myrdal, 1938, p. 208) in 1935, the government appointed the royal commission on the swedish population problem which elaborated plans for a number of social reforms that were primarily aimed at raising the standard of the care and welfare of children. myrdal considered these reforms of income redistribution aimed at the well-being of families with children as an investment in economic development, that is, as laying the foundations for a more stable and faster economic growth. myrdal advocated the implementation of the welfare state concept, where the state plays a key role in protecting and promoting the economic and social well-being of the population. according to myrdal in the most advanced welfare states the stress is on the "socialization of consumption", i.e. on interventions in distribution, unlike the old socialist policy for socialization of large-scale industry and finance (myrdal,1973). 84 j. petrović another issue of myrdal's divergence with the neoclassical theory is the theory of free international trade. myrdal believes that the theory of free international trade is inadequate, and that a free international trade can only exist between equal partners. in contrast to the established economic theory, myrdal is of the opinion that unhampered international trade and capital movements will generally tend to create inequality, and will do so the more strongly when great inequalities are already established, as long as matters are left to the free unfolding of the market forces (ibid). for myrdal, the inherited theory of international trade has never succeeded in explaining the reality of underdevelopment and the need for development in poor countries: „while international inequality has been steadily increasing for a century or more, this imposing structure of abstract reasoning was directed rather toward showing that international trade initiates a tendency toward a gradual equalization of factor returns among different countries. this tendency, however, can operate only under assumptions that are grossly unrealistic‖ (myrdal 1973, p. 124). myrdal believes that, in addition to inadequate theory, the commercial policies of developed countries generally discriminate against the export interests of underdeveloped countries in many different ways (ibid). the works and ideas of myrdal, besides their great influence on the swedish model of welfare state, had a strong influence on other countries, such as south korea and its president, general park chung hee, under whose leadership in the period 1961-1979 south korea experienced remarkable development and transformed itself from "a patient of asia" into a strong economy (brazinsky, 2005). 4. john maynard keynes (1883-1946) and keynesianism john maynard keynes, a british economist, politician and mathematician, is one of the most important economists of the 20th century. keynes' work "the general theory of employment, interest and money" published in 1936 is considered to be a turning point in the development of the economic thought, which is referred to as a "keynesian revolution". in his famous work, keynes proves that the free market mechanism does not spontaneously establish an economic equilibrium, and that it does not lead to full employment of the factors of production, but, on the contrary, it leads to disequilibrium that is manifested in high unemployment, in crises and economic cycles. keynes argues that the cause is the disturbed relationship between savings and investment. according to him, in conditions of an unregulated market, savings tend to grow, and investment tends to fall (milaković, 2013). keynes concludes that the problem of insufficient investment can be solved by the state investment. keynes considered that the state should use its power of progressive taxation and spending, as a direct injection of public investment, in order to influence the business cycle. the state must be ready to ensure the conditions of full employment (ekelund & hébert, 1997). keynes disputes the ideas of a classical economy that the market mechanism ensures full employment of production factors, and advocates state intervention. he himself says that his "general theory" is a transition away from english classical tradition (keynes, 1936, p. 6). according to keynes, the classical economy is an idealized model (ekelund and hébert, 1997). he believes that classical economists neglected what was valuable in their predecessors, i.e. mercantilists, who reached the fragments of practical wisdom, which "the unrealistic abstractions of ricardo first forgot and then obliterated. there was wisdom in their intense preoccupation with keeping down the rate of interest by means of economic thought of friedrich list, gunnar myrdal and john maynard keynes... 85 usury laws…, by maintaining the domestic stock of money and by discouraging rises in the wage-unit; and in their readiness in the last resort to restore the stock of money by devaluation, if it had become plainly deficient through an unavoidable foreign drain, a rise in the wage-unit, or any other cause‖ (keynes, 1936, p. 211-212). keynes, therefore, finds his role models in mercantilists. he states that in the first quarter of the 20th century there was no economist who would argue that the protection of domestic markets might increase domestic employment. keynes quotes his own words from 1923 when, as a faithful pupil of the classical school, he had no doubt what he was taught: ―if there is one thing that protection can not do, it is to cure unemployment… the claim to cure unemployment involves the protectionist fallacy in its grossest and crudest form‖ (keynes, 1923 cited in keynes, 1936, p. 208). he states that the students of that time were brought up to believe that the mercantilist theory was little better than nonsense, and that the domination of the classical school was absolutely overwhelming and complete (keynes, 1936). keynes, therefore, considers the theoretical foundations of free trade as inadequate: ―thus, the weight of my criticism is directed against the inadequacy of the theoretical foundations of the laissez-faire doctrine upon which i was brought up and which for many years i taught;—against the notion that the rate of interest and the volume of investment are self-adjusting at the optimum level, so that preoccupation with the balance of trade is a waste of time. for we, the faculty of economists, prove to have been guilty of presumptuous error in treating as a puerile obsession what for centuries has been a prime object of practical statecraft‖ (keynes, 1936, p. 211). keynes is of the opinion that the interest rate and volume of investments are not self-adjusting at the optimum level. on the contrary, he considers state interventions as necessary, in the form of the autonomous interest rate policy and the national investment program that are directed to an optimum level of domestic employment. it was just the implementation of these policies in western economies after the second world war, in the 1950s and 1960s, which have led to significant economic growth in this period, also called the "golden age of capitalism". keynes considered that the central controls necessary to ensure full employment should involve a large extension of the traditional functions of government (keynes, 1936). keynes and keynesianism performed a real revolution, both in economic theory and in economic policy. for the 25 years after world war ii (1945-1970), keynesianism constituted the dominant paradigm for understanding the economy. this was the era in which modern tools of monetary policy (control of interest rates) and fiscal policy (control of government spending and taxes) were developed. it was also a period of strong unions and the development of institutions of social protection (palley, 2004). during the 1970s, the influence of keynesianism as the ruling economic theory and policy began to decline, and the so-called "neoliberalism‖ emerged. the decline of keynesianism is explained in different ways. it is believed that one of the causes was the problem with the inflation in the usa, linked to the vietnam war (ended in 1975), which the united states financed mainly through deficit, which led to high rates of increase in quantity of money (ekelund & hébert, 1997). also, it is considered that the oil crisis of the 1970s and a large increase in oil prices have caused stagflation, i.e. the simultaneous occurrence of inflation and stagnation in the united states and other developed economies and there appears a suspicion in the effectiveness of keynesianism, which was rapidly abandoned in the practice of some of the most developed western countries (reaganomics in the us and thatcherism in the united kingdom) (milaković, 2013). the abandonment of 86 j. petrović keynesianism is also explained by the ideological reasons, by the emergence of the cold war and by the liberal theories as the cold war weapons: ―the cold war, therefore, provided fertile ground for popularizing an economic rhetoric that spoke of ―natural‖ free markets independent of governments and in which government regulation reduces wellbeing‖ (palley, 2004, p. 3). according to milaković (2013, p. 9): "since then, the factors of the crisis that are shaking the world today are beginning to accumulate. all that time, the economic theory was dominated by ideology over science". the outbreak of the global financial crisis 2007-2008 caused a re-rise of keynes' thought (giles at al., 2008). conclusion the failure of neo-liberal economic policies in the balkan transition countries indicates to the need for searching for different, successful development policies and models. the aim of this paper was to explore the economic thought of three great economists, who played an important role in economic theory and practice: friedrich list, karl gunnar myrdal and john maynard keynes, and try to find the ideas and policies that could be applicable in transition economies. all three of these influential economists were critics of the classical and neo-classical economics. they considered as unsatisfactory the assumptions on which they relied, and thus, also, the derived theory from those assumptions. list, myrdal and keynes look on the economy from the point of view of the nation and of the national development and they consider the role of the state in the economy as very important, contrary to cosmopolitism and minimization of the role of the state of classical and neo-classical school. keynes and myrdal criticize the theory of equilibrium, and believe that the free market mechanism does not spontaneously establish economic equilibrium, but instead it leads to imbalances in the economy and the whole society. they advocate the state interventionism, i.e. the central controls that will, unlike individual interests, have for its goal the interest of the society as a system, and to correct imbalances by conscious interventions. contrary to belief that free trade is the key to global prosperity, which is considered central in the neo-liberal discourse of globalization (chang, 2003), list, myrdal and keynes consider the theoretical basis of the free trade doctrine on the international level as inadequate. according to list and myrdal, economic liberalism at international level can only be beneficial between the economies of the equal level of development. according to list, the free trade between unequal economies squeezes out domestic industry and domestic population of less developed partner (ekelund & hébert, 1997). myrdal also considers that free international trade and capital movements tend to create inequalities and if there are already inequalities in the development of countries, free trade will make these inequalities even greater (myrdal, 1973). also, contrary to the classical economy, keynes considers that the interest rate and the volume of investments are not self-adjusting at the optimal level, so that the intervention in the form of the interest rate policy and the policy of a national investment program aimed at the optimal level of domestic employment is necessary. he also points to the importance of a positive trade balance (keynes, 1936, p. 211, 217). list and keynes emphasize the importance of economic thought of friedrich list, gunnar myrdal and john maynard keynes... 87 economic protection, i.e. foreign trade policy aimed at protecting domestic production, hence domestic employment. the research showed that, contrary to neo-liberal economic policy, list, myrdal and keynes considered the role of the state in economic development as very important. list puts emphasis on economic protection, i.e. the united national customs area and protective customs barriers, with the goal to develop domestic production. facing the population problem in sweden of that time, and having in mind the importance of human factor for functioning and development of economy and society, myrdal puts emphasis on the state policies of redistributing income in favor of families with children, in order to create human potential and to improve health and education of the population, as an investment in human capital of the nation, as laying the foundations for a more stable and faster economic growth. facing the problem of large unemployment in the 1930s, keynes puts the emphasis on state policies that will increase domestic investment and, consequently, domestic employment. today balkan transition economies face similar problems of weak and insufficient domestic production, enormous unemployment (of all available resources: human resources, land and capital) and dramatic depopulation. the research confirmed the hypothesis that the economic thought and ideas of list, myrdal and keynes can offer solutions to some of the current problems of balkan transition countries. some of their ideas and policies that could be applicable in transition economies include: myrdal‘s active state population policy of redistributing income in favor of families with children, in order to stop and reverse dramatic depopulation, keynes‘ government intervention in the form of the interest rate policy and the policy of a national investment program aimed at the optimal level of domestic employment, as well as list‘s and keynes‘ foreign trade policies of temporary economic protection of strategic economic sectors in order to increase weak and insufficient domestic production and domestic employment. successful implementation of list‘s, myrdal‘s and keynes‘ economic thought and ideas in the past, having for their result a positive impact on lives of millions of people, refers us to the need of deeper research of their works and ideas. references agency for statistics of bosnia and herzegovina (2017), bih gross domestic product 2005-2015 (esa 2010), sarajevo brazinsky, g. (2005). from pupil to model: south korea and american development policy during the early park chung hee era. diplomatic history, 29 (1), 83-115. centralna banka bosne i hercegovine (2016). godišnji izvještaj za 2015. godinu[bih central bank annual report for 2015], sarajevo chang, h. j. (2003). kicking away the ladder: the “real” history of free trade. foreign policy in focus, silver city, nm, interhemispheric resource center. retrieved from: http://www.fpif.org/papers/ 03trade/index.html ekelund, b. r., & hébert, f. r. (1997). povijest ekonomske teorije i metode [history of economic theory and method], mate, zagreb giles, c., atkins, r., & guha., k. (2008). the undeniable shift to keynes. financial times. 29 december 2008, http://www.ft.com/cms/s/0/8a3d8122-d5da-11dd-a9cc-000077b07658.html#axzz3qcftntht keynes, j.m. (1936). the general theory of employment, interest, and money. retrieved from: http://etext.library.adelaide.edu.au/k/k44g/k44g.htmlhttp://etext.library.adelaide.edu.au/k/k44g/k44g.html list, f. (1856). national system of political economy, philadelphia, j.b. lippincott & co. retrieved from: https://ia800303.us.archive.org/34/items/nationalsystemof00list/nationalsystemof00list.pdf http://www.fpif.org/papers/03trade/index.html http://www.fpif.org/papers/03trade/index.html http://www.ft.com/cms/s/0/c4cf37f4-d611-11dd-a9cc-000077b07658.html https://ia800303.us.archive.org/34/items/nationalsystemof00list/nationalsystemof00list.pdf 88 j. petrović milaković, n. (2013). finansijsko-ekonomska kriza zahtijeva temeljno preispitivanje ekonomije i kao nauke i kao prakse [financial-economic crises requires questioning the economics as a science as well as a practice]. financing, 01/2013. ministarstvo finansija i trezora bih (2016). informacija o stanju javne zaduženosti bih na dan 30.06.2016. godine [information on bih public debt on june 30, 2016], sarajevo mitrović, p. & bošković, g. (2017). economic crisis and current problems of serbian family. facta universitatis. series: economics and organization, 14 (1), 57 – 69. myrdal, g. (1938). population problems and policies. the annals of the american academy of political and social science, pp 200-215. myrdal, g. (1973). against the stream critical essays on economics, palgrave macmillan palley, t. (2004). from keynesianism to neoliberalism: shifting paradigms in economics. retrieved from: http://www.thomaspalley.com/docs/articles/selected/neo-liberalism%20-%20chapter.pdf panico, c. & rizza, m. o. (2009). myrdal, growth processes and equilibrium theories. in geography, structural change and economic development: theory and empirics. cheltenham, elgar, 183-202. republiĉki zavod za statistiku republike srpske (2016). statistički godišnjak republike srpske 2016 [statistical yearbook of the republic of srpska 2016], banja luka šoškić, b. (1986). razvoj i osnove savremene ekonomske misli [development of contemporary economic thought], savremena administracija i institut za ekonomska istraživanja, beograd zupĉević, m., & ĉaušević, f. (2009). case study: bosnia and herzegovina, centre for developing area studies – mcgill university and the world bank, sarajevo ekonomska misao fridriha lista, gunara mirdala i džona mejnarda kejnza i njena primjenljivost na zemlje u tranziciji neoliberalne politike privatizacije, liberalizacije trgovine i tržišta kapitala, deregulacije i minimalizovanja uloge države dovele su u zemljama u tranziciji do deindustrijalizacije, opadanja ili stagnacije bdp-a i visoke nezaposlenosti, koji za posljedicu imaju dramatičnu depopulaciju, što navodi na potrebu traganja za drugačijim, uspješnim razvojnim politikama u prošlosti. cilj rada je istražiti ekonomsku misao tri velikana ekonomske misli, kritičara klasične i neoklasične škole, koji su imali veliku ulogu u ekonomskoj teoriji i praksi: njemačkog ekonomiste i političara fridriha lista, začetnika njemačke istorijske škole u ekonomiji, koji se smatra glavnim ideologom kapitalističkog razvitka njemačke; švedskog nobelovca gunara mirdala, koji je imao značajnu ulogu u stvaranju švedskog modela države blagostanja, i poznatog britanskog ekonomiste džona mejnarda kejnza, koji je svojim idejama i političkim angažmanom umnogome uticao na prosperitet zapadnih ekonomija u decenijama nakon drugog svjetskog rata. rezultati istraživanja su pokazali da današnji problemi tranzicionih ekonomija mogu naći mnoga rješenja u idejama lista, mirdala i kejnza. kljuĉne reĉi: ekonomski razvoj, ekonomske politike, tranzicione ekonomije, fridrih list, gunar mirdal, džon mejnard kejnz http://www.thomaspalley.com/docs/articles/selected/neo-liberalism%20-%20chapter.pdf facta universitatis series: economics and organization vol. 15, n o 4, 2018, pp. 379 392 https://doi.org/10.22190/fueo1804379r © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication internalizing environmental externalities in cement industry: case study for the republic of serbia and selected neighboring countries 1 udc 691.54:061.5(497.11) snežana radukić, dušan perović * university of niš, faculty of economics, niš, serbia abstract. the paper provided detailed analysis and calculations of external costs in cement industry of the republic of serbia and neighboring countries for period of 20102016. internalization of externalities represents a huge challenge for every policy maker in environmental area that has the obligation to calculate the impact of economy on the environment. in fact, many parts of economy have far greater impact on environment than it can be expected and that is one of the reasons for including external costs in total costs of companies. cement industry is among industries that emit pollutant particles in the air and cause serious environmental problems to local communities. the principal idea of paper is to evaluate external costs of cement production plants in republic of serbia, bulgaria, hungary and romania, so in the end rightful solutions can be provided in order to neutralize or minimize environmental impact of cement factories. for this kind of analysis, ecosense le (light edition) software was used. analysis of external costs in cement industry will help in expansion of knowledge about internalizing environmental externalities in analyzed countries, where lack of similar studies does not help in solving the problem of environmental externalities in these countries. key words: environmental externalities, the republic of serbia, cement industry, sustainable development, internalization of externalities, external costs. jel classification: q51, q52, q53. received july 28, 2018 / revised november 02, 2018 / accepted november 05, 2018 corresponding author: dušan perović * phd student at university of niš, faculty of economics faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: dulep89@gmail.com 380 s. radukić, d. perović introduction pollution can be defined as a product of certain economic activities with harmful effects to the environment. although it is harmful, it is also inevitable, since it appears during the production of goods and services with economic value. therefore, efficiency principle is important and producers should go for gaining higher utility from production process with minimizing production effects on the environment. for every kind of pollution, utility should be calculated in order to start with appropriate actions for solving pollution problems. before considering any actions, producers and creators of environmental policies should ask themselves two questions. “first, what level of pollution is acceptable from social stance, since every society emits some kind of pollution? second, how can we control and reduce pollution to acceptable level?” (harris, 2009, p. 357) since there is no production without any kind of pollution, external costs should be recognized by market and become vital part of every market analysis. most of the economic subjects refuse to include external costs in their balances due to increase of overall costs and possible legal consequences to their businesses. for all producers, the main goal is to gain profit and so they give advantage to economic activities instead of environmental activities. sometimes optimal economic level of quality is not the best one from environmental aspect, which means economic optimum is not same as environmental optimum. “for instance, from environmental aspect optimal can be total elimination of pollution, while from economic aspect optimal is that point where marginal costs from reducing pollution equal marginal utilities from reducing pollution” (bošković & radukić, 2011, p.73)for reaching the right decision about optimal model, producers and policy makers should consider using internalization of externalities, since it is one of the most effective and efficient ways to evaluate impact on the environment. external costs have origin from different kind of industries such as car industry, chemical industry, tobacco industry, textile and rubber industry. these industries produce huge external costs that are usually not included in total costs of companies. in some countries external costs are up to 5% of country’s gdp, which only indicates that external costs are not treated in a proper manner (hinšt, 2007). higher amount of emitted pollutant particles not just cause increase in external environmental costs of many countries, but also cause many environmental problems that countries have to deal with. industry has joint responsibility with traffic and intensive use of non-renewable resources for the high rate of pollution. problem lies in irresponsible behavior of industries that do not pay attention to environmental issues and continue with use of old technologies that pollute the environment. additionally, absence of appropriate framework for pollution management is an obstacle for many industries that want to change approach towards the environment (lucas & noordewier, 2016). cement industry represents a vital part of every national economy, but it is also source of environmental pollution in many countries. all countries with cement industry face this problem, with some of them taking precautions, while some do not do anything at all. for developing countries cement industry can become a serious burden, if they do not recognize any environmental impact and react immediately. in areas such as western balkans problem is not just in providing solutions but also in calculating external costs, since methodology for calculating external costs is still not well developed in western balkans. using the ecosense le software, the authors will try to calculate external environmental costs in cement industry internalizing environmental externalities in cement industry... 381 of western balkan countries and provide adequate solutions for reducing pollution that comes from cement industry. beside introduction and conclusion, the paper has three more chapters. the first chapter brings brief literature review about internalization of externalities with special emphasizes on internalization in cement industry. in the second chapter, data about cement industry of serbia and neighboring countries will be presented with methodology that will be used for conducting research. the third chapter gives detailed analysis of external environmental costs in cement industry of analyzed countries with providing and testing several more scenarios for analyzed countries. 1. literature review over last three decades, the interest for externalities has started to grow with every new market failure. in the beginning, most of the authors were focused on economic and social aspect of externalities, but later the focus of interest switched to environmental externalities. although many authors knew about the term externality, studies and research about externalities have started to spread by the end of the 20 th century when group of authors laid the foundations for expanding externality theory (dasgupta & heal, 1979; dasgupta & maler, 1991; gupta & prakash, 1992; bergstorm, 1993; gupta & prakash, 1993). authors have gone deeper into externality theory by marking off specific characteristics of externalities and defining the path for internalizing externalities. meanwhile, authors have started to get interest in external environmental costs and they provided some detailed studies about environmental externalities (koomey & krause, 1997). by calculating external costs, conditions for redesigning many polluting industries were created. studies for environmental externalities cover different areas such as traffic, industry, utility services, foreign direct investments and climate changes (fahlen & ahlgron, 2010; sanga & muntagana, 2016; štreimikene, 2017; wang & li, 2018). in all these areas the authors have first found the source of problem; then they calculated external costs and in the end provided solutions for environmental externalities. since environmental externalities represent a global problem, many individuals and institutions from around the world have started to deal with it and they have given their contribution in solving environmental externality problem. with spreading the number of global researches, potential solutions to environmental externalities increased with choosing right ones for appropriate situations. also, many companies have shown interest in solving environmental externalities, so they have started to change their business plans and strategies in order to become more eco– friendly. changing business habits of companies requires huge changes in management and planning, so there were numerous studies with intention of helping companies to reorganize their businesses (fierro et al., 2008; libecap, 2014; lucas & noordewier, 2016). these studies helped some companies to change their views towards the environmental issues and to become active participants in changing global environmental awareness. by switching to environmental issues, the door was opened for studies that consider environmental accounting as a crucial part of environmental management in public and private companies (fahlen & ahlgren, 2010; adler & volta, 2016; eidelwein et al. , 2018). the goal of introducing environmental accounting was to simplify procedures for discovering possible environmental externalities and to help organizations with planning future environmental 382 s. radukić, d. perović strategies. another goal was to build open access for all stakeholders to be more familiar with organizations’ activities in environmental area. although internalization of externalities was introduced with very positive intensions, group of authors opposed this by proclaiming internalization as „ insufficient for solving externality problem“ (van den bergh & grazi, 2010; bithas, 2011; berta & bertrand, 2014; weitzman, 2015). authors found that in the real world where externalities exist, their internalization cannot lead to the sustainability due to specific form of externalities. environmental externalities are a big problem for solving, since they appear under different conditions and produce effects that sometimes are not measurable. cement industry is one of the most important industries, since many other industries use cement as a raw material for their own productions. for a very long time, global cement industry has been growing constantly, which certainly had some effects on both economy and environment. some studies showed that global cement industry had significant share in global carbon dioxide (co2) emissions (benhelal et al. , 2013; barros et al. , 2014). authors showed that 5–7% of global co2 emissions were caused by cement plants. also, for producing one tone of cement, the plant emits about 900 kg of co2 to the atmosphere. this is one of the reasons why some cement plants have started to change their technologies and production processes (ishak & hashim, 2015; kajaste & hurme, 2016). some cement plants were obliged by law to start with investments into sustainable technologies or to face with penalties for their activities. this brought to allocation of technologies from developed to developing countries where cement companies have continued with their production process. on the other hand, in some areas like china, eu and switzerland, the cement industry has a totally new image – more sustainable (branger & qurion, 2015.; zhang et al. , 2015; jibran et al. , 2017). in these areas, cement industry represents a good example of implementing sustainable technologies for achieving not just better economic results, but also for improving environmental performances on micro and macro level. many cement plants can still produce the same amount of cement without harming the environment. 2. research data, methodology and hypotheses the subject of analysis is cement industry and cement plants that operate in serbia, bulgaria, hungary and romania. cement industry in these countries has a very long tradition and roots leading back to the middle of the xix century. at this area 20 cement plants run their business and they experienced many transformations from their founding until today. these cement plans changed their technologies, markets, owners but their primary task never changed and it was the production of cement. as for cement production, it is similar like in the rest of the world and includes the following phases: extraction of raw materials, preparation of raw materials (including grinding and mixing), warehousing of meal, baking of raw material meal, maturing of clinker, milling of clinker into cement, warehousing of cement, packing and dispatch activities. like in the rest of the world, cement plants in serbia and selected neighboring countries produce hydraulic cement, which is later being used in construction industry, but also in mining and energetic sector. technologies in cement plants followed changes in global cement industry with delayed effects that had impact on short run activities of cement plants in serbia and selected neighboring countries. internalizing environmental externalities in cement industry... 383 graph 1 cement production in serbia and selected neighboring countries 2010-2016 (in thousand tones) source: statistical offices of bulgaria, hungary, romania and serbia based on graph 1, the cement production in analyzed countries had expressed fluctuations in 2010-2016 timeline. among the analyzed countries romania has the highest cement production (8,03 million tons), although from 2010 to 2016 the cement production in romania was reduced for 0,86%. other countries have significantly smaller production than romania and the most of them have decline in cement production. among these countries serbia had the highest decline in analyzed period (43,66%). table 1 total emmisions of nox, so2 and pm10 in cement industry of serbia and selected neigboring countries (in tons) 2010 2011 2012 2013 2014 2015 2016 nox 10637 10456 10579 10397 10178 9939 9925 so2 10,29 9,88 9,93 9,55 9,79 9,43 10,25 pm10 96 97 100 83 88 89 93 source: sustainable reports of analyzed cement plants environmental issue has become one of the most important areas for many cement plants due to their impact on the environment. like their competitors around the world, cement plants in serbia and selected neighboring countries emit particles that can harm environment very seriously. based on the table 1, the emission of nitrate oxides (nox) is very high and it was the highest in 2010, when it reached 10.637 tons. since 2012, the emissions of nox have started to decline, but they are still very high at the end of 2016. as for the others, air is polluted most by the particulate matter (pm10), which from 2012 began to decline, while emissions of sulfur dioxide (so2) are also emitted from analyzed cement plants but they have the lowest emissions. table 2 total emmisions of nox, so2 and pm10 in cement industry of serbia (in tons) 2010 2011 2012 2013 2014 2015 2016 nox 1923 1873 2104 1909 1753 1664 1739 so2 1,78 1,39 1,32 1,12 1,40 1,23 2,09 pm10 13 10 9 9 8 9 14 source: sustainable reports of analyzed cement plants 384 s. radukić, d. perović based on table 2 every kind of analyzed polluting particles increased from 2010 to 2016, with the exception of nox. all cement plants in serbia passed through several changes in organizing and production activities and some of them even changed owners which all had impact on production and amount of polluting emissions. table 3 total emmisions of nox, so2 and pm10 in cement industry of bulgaria (in tons) 2010 2011 2012 2013 2014 2015 2016 nox 2236 2117 2009 2123 2085 1968 1909 so2 1,88 1,97 2,05 2,01 1,99 1,91 1,86 pm10 16 18 20 19 15 14 13 source: sustainable reports of analyzed cement plants bulgarian cement plants had a reduction in emissions of polluting particles in analyzed period (table 3). significant reductions were in emissions of nox which was mainly due to the strict control of environmental bodies of eu. on the other hand, bulgarian cement plants have reduced their emissions by taking participation in european union emission trading scheme which allowed companies from bulgaria to take their places recently. table 4 total emmisions of nox, so2 and pm10 in cement industry of hungary (in tons) 2010 2011 2012 2013 2014 2015 2016 nox 1957 1903 1876 1831 1822 1807 1795 so2 1,65 1,60 1,56 1,52 1,55 1,49 1,47 pm10 19 17 17 15 16 14 13 source: sustainable reports of analyzed cement plants hungarian cement plants had a significant reduce in cement production from 2010 to 2016, which had impact on emissions of polluting particles. based on table 4, it can be seen that emissions of nox, so2 and pm10 in cement industry of hungary were reduced. at the same time all of cement plants in hungary have started to use technologies that improve environmental performance of places where plants are located. these technologies are based on capturing emissions of polluting particles, improving the efficiency of resources and creating conditions of establishing circular economy principles inside cement plants in order to minimize waste and polluting effects. table 5 total emmisions of nox, so2 and pm10 in cement industry of romania (in tons) 2010 2011 2012 2013 2014 2015 2016 nox 4521 4563 4590 4534 4518 4500 4482 so2 4,98 4,92 4,97 4,90 4,85 4,80 4,83 pm10 48 52 54 50 49 51 53 source: sustainable reports of analyzed cement plants among all analyzed countries romania is the biggest producer of cement, which had an impact on increasing the level of pollution caused directly from cement plants in romania. based on table 5 only pm10 emissions increased, while the emissions of other polluting particles were reduced. in total, romanian cement plants give crucial contribution to overall internalizing environmental externalities in cement industry... 385 emissions of polluting particles among the analyzed countries and if one needs to start somewhere with measures for improving environmental performance, it must be in romania. although romania places huge efforts in reducing the overall impact of cement plants emissions, several obstacles stand in the way. first of all, romanian cement is one of the most demanded ones in the world and it is one of the leading export products of romania. second, although law authorities try to reduce the level of emissions by implementing laws, on the other hand plants owners invest very little in innovative and clean technologies which can additionally help in improving environmental conditions. third, romanian participation in carbon trading markets and schemes is low and so it must be improved in the following years in order to reduce total emissions. after overcoming these obstacles romanian cement industry can make huge efforts in reducing overall emissions of polluting particles in romania. cement plants are important parts of western balkans national economies, but on the other hand they have strong impact on the environment, which is not measured through external environment costs. by emitting polluting particles in the air, cement plants can cause serious diseases or harm fertile land and in the end they can avoid legal consequences if there is no appropriate environmental legislature. every implementation of environmental legislature should be followed by internalization of external environmental costs in order to provide efficient and effective penalty system for all subjects that pollute environment. internalization of environmental externalities is also a basis for introducing some economic instruments in environmental area that will be more focused on solving environmental problems than on increasing budget of the state (magdalinović – kalinović & radukić, 2016). internalization of external environmental costs should be the first step in optimizing economic and environmental goals through choosing right social and business model for the whole society that is facing some sustainability difficulties (radukić et al. 2014). basic methodology for estimating external costs in cement industry of western balkans has been taken over from the european commission project externe – external cost of energy, methodology 2005 update, developed by the institute of energy economics and rational use of energy (ier), university of stuttgart. the developed methodology has been called impact pathway approach (ipa) and it starts with activities of polluters and it is finished with monetary amount of damage. in the middle of this approach are emissions of the polluters, immissions and expected impact on health or on environment. for purpose of the project, the university in stuttgart developed the software ecosenseweb v1.3 that carefully followed defined methodology (preiss & klotz, 2008). this software integrates atmospheric pollution dispersion models with receptor databases (population, land–use, infrastructure and ecosystem) for whole europe. based on the level of emissions, software determines spatial distribution of emissions, expected negative consequences to health and environment and estimated monetary amount of damage. ecosenseweb v1.3 was primarily designed for estimating external environmental costs in electricity production, but it has been modified to support other industries that have impact on environment. ecosenseweb v1.3 contains all relevant data and models for estimating distribution of pollution in air, water or land with simulating atmospheric pollution dispersion for any kind of pollution in europe. for simulating different models and scenarios primary sources of pollution are being used (in radius 10 x 10 km from the source of pollution) through gaussian model of local dispersion. typical primary sources of pollution in cement industry are nox, so2, pm10 and they are all considered in analysis for western balkans. 386 s. radukić, d. perović ecosenseweb v1.3 can also estimate pollution impact on health, agricultural areas, land, water, biodiversity and infrastructure since it contains data about receptors in all administrative regions of europe. database contains data about population, agricultural crops, list of material goods, meteorological, ecosystem and land–use data. for estimating external environmental costs population density and ecosystem structure are considered. for estimating pollution impact on people’s health ecosenseweb v1.3 uses concentrate– response function (crf) that can lead to answers about primary pollution sources impact on people’s health. the highest shares in external costs is taken by the costs that are the consequences of harmful impact of pollution on people’s health, and they represent an important part of analysis. although ecosense le cannot provide detailed analysis like ecosenseweb v1.3, it can help in estimating external environmental costs that were caused by pollution. for the purpose of this research the following hypotheses have been tested: h1: every significant increase in cement production brings higher external environmental costs for cement plants in serbia and selected neighboring countries. h2: costs of health impact have the highest share in external environmental costs of cement plants in serbia and selected neighboring countries. for testing the hypotheses, the software ecosense le was used. this software is a reduced version of ecosenseweb v1.3 which is available to students and scientific workers for scientific purpose only. for calculating external costs of cement plants, input of the emissions of polluting particles is required (in this case nox, so2, pm10). after inputting values of emissions ecosense le will calculate the exact value of external costs in the required place through available gis and database.. for this research, the input data are values of polluting particles in sustainability report of analyzed cement plants, while ecosense le will provide additional data like impact on health, agricultural lands and ecosystem. in order to see the impact on health, agricultural lands and ecosystem ecosense le provides several interesting variables through their monetary value. these variables are: costs of mortality, costs of reducing yields of agricultural crops or costs of damaging biodiversity. costs of mortality include costs that caused mortality on some territory. these costs include costs of medicaments and medical care and other accompanying costs for persons that were infected by pollution and had to look for rightful treatment. costs of reducing yields of agricultural crops include all costs that lead to reducing quality of agricultural land from infecting the land to treating it and to potential loss of agricultural workers. costs of damaging biodiversity include all costs that were accompanied by changing conditions in biodiversity due to increased pollutions. changes in number of plant or animal species, reducing green surfaces and trees, producing disasters like acid rains are included in costs of damaging biodiversity and they must all be taken very seriously. 3. findings and discussion the central part of research is oriented towards the estimation of external environmental costs, but there are other elements of research that should be explained. first, disability– adjusted life year (daly) represents value that quantifies the burden of disease from mortality and morbidity. it shows the number of years lost due to illness, disability or early death and it also express number of “healthy” years that population lost due to pollution. second, potentially disappeared fraction (pdf) expresses total area that is under the impact internalizing environmental externalities in cement industry... 387 of pollution, but sometimes pdf can have even wider impact although calculations say something else. table 6 estimation of external environmental costs in cement industry of serbia for 2010 – 2016 2010 2011 2012 2013 2014 2015 2016 health impact dalys(mortality) 166,60 162,23 182,21 165,32 151,85 144,13 150,72 dalys(morbidity) 69,23 67,41 75,70 68,69 63,08 59,89 62,63 dalys(total) 235,83 229,64 257,92 234,01 214,93 204,02 213,35 monetary value (in millions of €) 19,71 19,20 21,56 19,56 17,97 17,06 17,84 impact on crops and materials crop loss (in hundreds of €) 782,63 762,29 856,31 776,95 713,46 677,23 707,75 material loss (in hundreds of €) 247,54 240,99 270,63 245,52 225,59 214,10 224,02 impact on ecosystem pdfs (in millions of m2) 7,28 7,10 7,97 7,24 6,64 6,31 6,59 monetary value (in millions of €) 4,30 4,18 4,70 4,27 3,92 3,72 3,89 total costs (in millions of €) 25,05 24,39 27,40 24,86 22,83 21,67 22,66 source: authors’ calculations based on table 6 several trends can be seen. until 2012 all values have been declining, but in 2012 they all reached higher values. for instance, total daly was 257,92, health impact costs were 21,56 million €, crop losses were 856,31 hundred €, while total external environmental costs were 27,40 million €. from 2012 all external environmental costs have started to decline and in 2015 they were at minimum (21,67 million €). in 2016 all costs have started to grow again, which will bring new environmental problems. in the analyzed period the overall external environmental costs for serbian cement plants were 168,86 million €. by comparing production of cement and total external costs average costs per ton can be pulled out. in the case of serbia these average external costs in the analyzed period were 0,07 €/t. table 7 estimation of external environmental costs in cement industry of bulgaria for 2010 – 2016 2010 2011 2012 2013 2014 2015 2016 health impact dalys (mortality) 109,41 103,60 98,32 103,89 102,03 96,31 93,42 dalys (morbidity) 36,47 34,54 32,79 34,64 34,00 32,10 31,13 dalys (total) 145,88 138,14 131,11 138,53 136,03 128,41 124,55 monetary value (in millions of €) 11,95 11,32 10,74 11,35 11,15 10,52 10,21 impact on crops and materials crop loss (in hundreds of €) 1.980,50 1,875,10 1,779,42 1,880,41 1,846,76 1,743,13 1,690,67 material loss (in hundreds of €) 195,15 184,80 175,41 185,33 182,01 171,81 166,66 impact on ecosystem pdfs (in millions of m 2 ) 1,16 1,09 1,04 1,10 1,08 1,02 0,99 monetary value (in millions of €) 0,68 0,64 0,61 0,65 0,64 0,60 0,58 total costs (in millions of €) 14,81 14,03 13,31 14,07 13,81 13,04 12,65 source: authors’ calculations 388 s. radukić, d. perović table 7 shows that bulgarian cement plants had a decline in external environmental costs until 2013, when they increased to 14,07 million €. from 2013 external environmental costs have started to fall again and in 2016 they were 12,65 million €. as in the case of serbian cement plants, health impact costs were very high, but here crop loss costs were significantly higher than in serbia and in 2013 they reached 1,88 million €. it is also interesting that although total external environmental costs are lower than in serbia, they are very high since they have covered less area than in case of serbian cement plants. total external environmental costs for analyzed period are 95,72 million €. as for the average external costs per produced ton of cement, they were 0,14 €/t. table 8 estimation of external environmental costs in cement industry of hungary for 2010 – 2016 2010 2011 2012 2013 2014 2015 2016 health impact dalys (mortality) 189,95 185,68 183,05 178,66 177,78 176,31 175,14 dalys (morbidity) 79,16 76,96 75,87 74,03 73,67 73,06 72,57 dalys (total) 270,11 262,64 258,92 252,69 251,45 249,37 247,71 monetary value (in millions of €) 22,48 21,86 21,55 21,03 20,93 20,75 20,61 impact on crops and materials crop loss (in hundreds of €) 1.739,37 1.691,38 1.667,38 1.627,39 1.619,39 1.606,05 1.595,39 material loss (in hundreds of €) 348,28 338,67 333,86 325,85 324,26 321,57 319,43 impact on ecosystem pdfs (in millions of m 2 ) 4,56 4,43 4,37 4,26 4,24 4,20 4,18 monetary value (in millions of €) 2,69 2,61 2,58 2,52 2,50 2,48 2,47 total costs (in millions of €) 27,26 26,50 26,13 25,50 25,37 25,16 24,99 source: authors’ calculations unlike cement plants in serbia and bulgaria, hungarian cement plants have only downward trend for all analyzed values. health impact costs are very high in hungary and they are even higher than in serbia and bulgaria. crop loss costs were 1,7 million € in 2010, while in 2016 they were 1,5, which means that crop loss costs were reduced for 9,02%. external environmental costs were the highest in 2010 (27,26 million €), but in next six years they were reduced for 9,08% and they were 24,99 million € in 2016. total external environmental costs for hungarian cement plants in analyzed period were 180,91 million €, which is higher than in serbia and bulgaria. average external costs per ton of produced cement in hungary are 0,07 €/t, which is the same as in serbia and less than in bulgaria. cement industry of romania has the highest production among the analyzed countries, but it also has huge impact on the environment. based on table 9, two trends of environmental impact can be seen. until 2012 cement production grew in romania, but also external environmental costs. among analyzed countries romania had the highest costs from health impact (31,53 million € in 2012) and crop loss (3,13 million € in 2012). from 2012 all external costs have started to decline and in 2016 they were 36,75 million €. total external environmental costs for romanian cement plants in analyzed period were 259,98 million €, which is higher than in other analyzed countries. compared to other analyzed countries, romania has the highest external costs per ton of produced cement and the average costs in analyzed period were 0,21 €/t. internalizing environmental externalities in cement industry... 389 table 9 estimation of external environmental costs in cement industry of romania for 2010 – 2016 2010 2011 2012 2013 2014 2015 2016 health impact dalys (mortality) 279,54 282,13 283,80 280,34 279,35 278,23 277,12 dalys (morbidity) 103,72 104,71 105,35 104,03 103,66 103,27 102,87 dalys (total) 383,26 386,84 389,15 384,37 383,01 381,50 379,99 monetary value (in millions of €) 31,05 31,34 31,53 31,14 31,03 30,91 30,79 impact on crops and materials crop loss (in hundreds of €) 3.114,03 3.134,52 3.164,55 3.122,98 3.111,96 3.099,56 3.087,17 material loss (in hundreds of €) 598,89 604,41 607,99 600,57 598,44 596,05 593,68 impact on ecosystem pdfs (in millions of m 2 ) 3,90 3,93 3,96 3,91 3,90 3,88 3,87 monetary value (in millions of €) 2,30 2,32 2,33 2,31 2,30 2,29 2,28 total costs (in millions of €) 37,07 37,41 37,64 37,17 37,04 36,90 36,75 source: authors’ calculations conclusion and recommendations cement industry has an important role in every national economy and it is also the case with serbia, bulgaria, hungary and romania. in the last two decades cement plants in serbia and selected neighboring countries were facing severe challenges that had impact on business environment of cement plants. all cement plants were forced to change the way they operate their businesses in order to stay competitive and avoid possible shut down. although cement plants have modified and upgraded their business activities, they still have to make huge effort in solving environmental problems that they are causing. the analysis for 2010 – 2016 showed that cement plants in serbia and neighboring countries caused total external environmental costs of 705,47 million € from emission of polluted particles. cement plants in romania and serbia cause the highest pollution and therefore these countries have the highest external environmental costs. serbia had an increase in cement production in 2012 and in 2016, bulgaria had an increase in 2013, while romania had an increase in 2011 and 2012, which were all followed by increase in external environmental costs. therefore, h1 hypothesis can be accepted. as for the h2 hypothesis, it can also be accepted since health impact costs are very high in all analyzed countries and they have the highest share in total external environmental costs of all countries. high health impact costs also show how risky cement production can be to the health of nearby population and it also reduces “healthy” years of population through daly. crop loss costs are also much higher in all analyzed countries and they can have serious effects on devastating quality agriculture lands which can only bring new problems to local population. measuring external environmental costs can help in providing appropriate solutions to environmental challenges that many areas are facing. by knowing the exact costs, appropriate planning and measures can be provided in order to improve environmental performances of area that is contaminated with pollution. cement plants should think about investing into new technologies that do not pollute environment and that will help in 390 s. radukić, d. perović improving business performances. this means that cement plants should think more about sustainable strategies that will bring benefits to them. cement plants should also invest in environmental education of workers or hire environmental professionals that will take care about environmental activities. also, it is important that there is good cooperation between cement plants, local population and legal authorities. legislature must define laws with strict penalty policy that will force polluters to behave more sustainably and pay more attention to environmental issues. providing appropriate software for tracking pollution will be a step forward. this software can be used by health or agriculture institutions to see the level of pollution, count external costs and inform legal authorities about polluters’ activities. cement plants can think about emissions market that already exists in europe and trade with emissions, which will help in reducing pollution, but this can also help cement plants to get additional assets for improving their businesses through sustainable funding programs since they can be recognized as 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(2015). evaluating co-benefits of energy efficiency and air pollution abatement in china’s cement industry. applied energy 147, 192-213. 392 s. radukić, d. perović internalizovanje ekoloških eksternalija u industriji cementa: studija slučaja za republiku srbiju i odabrane susedne zemlje u radu je izvršena analiza, ali i kalkulacija eksternih troškova u industriji cementa u republici srbiji i susednim zemljama za period 2010 – 2016. internalizovanje eksternalija predstavlja veliki izazov za sve donosioce odluka, a naročito za one u oblasti zaštite životne sredine koji su u obavezi da na adekvatan način procene uticaj ekonomskih aktivnosti na životnu sredinu. u suštini, mnogi segmenti ekonomije imaju daleko veći uticaj na životnu sredinu, nego što se to može zamisliti i zato je neophodno da eksterni troškovi postanu sastavni deo ukupnih troškova preduzeća koja zagađuju životnu srednu. industrija cementa spada u red industrija koje emitiju štetne emisije zagađujućih materija u vazduh čime znatno smanjuju kvalitet vazduha i stvaraju problem lokalnom stanovništvu. osnovna ideja rada je da se procene ekološki eksterni troškovi u industriji cementa republike srbije, bugarske, mađarske i rumunije kako bi se ponudila adekvatna rešenja za neutralizovanje ili minimizaciju uticaja cementnih pogona na životnu sredinu. za potrebe istraživanja korišćen je softver specijalizovan za zagađenja u industriji pod nazivom ecosense le (light edition). analiza eksternih troškova u industriji cementa doprineće širenju znanja o ekološkim eksternalijama u industriji cementa, što će naročito biti od značaja za analizirane zemlje u kojima nedostatak sličnih istraživanja u velikoj meri otežava process rešavanja ekoloških eksternalija. ključne reči: ekološke eksternalije, republika srbija, industrija cementa, održivi razvoj, internalizovanje eksternalija, eksterni troškovi plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 3, 2016, pp. 233 246 review paper managing the expatriation process1 udc 005.96:334.726 nadica figar university of niš, faculty of economics, niš, serbia abstract. the present paper stresses the fact that the expatriation process is extremely important for companies that intend to internationalize their operations, as well as for companies that have already internationalized their operations. this is owing to the fact that expatriation is a continuous process, whether viewed in its narrow or broad sense. furthermore, the most successful approach to expatriation is the holistic approach which entails an active role of the company in the preparation for expatriation, expatriation, and repatriation. this is further confirmed by the presented practices of selected companies. key words: expatriates, self-initiated expatriates, host country, home country, expatriation, cultural shock introduction the labor market always contained mobile individuals, prepared to accept an appropriate position outside their home country. these individuals go under the joint name expatriates (exs). joseph campbell called their movement ”the hero‟s journey” (hudson et al., 2006, 307), because they were heroes that adventurously embarked into the unknown in order to perfect their trade and acquire broader knowledge. with the onset of multinational companies (mnc), there appeared a need for the employees of the parent company to leave for foreign subsidiaries and spend the required amount of time there in order to complete certain tasks. as they mostly moved from the u.s. overseas, these heroes were named overseas expatriates (oexs). soon, the term overseas became inadequate, as the mobile individuals also started moving within the same continent; consequently, the employees who moved to foreign subsidiaries to perform their tasks were called foreign expatriates (fexs) (doherty et al., 2013, 101). 1received june 6, 2016 / accepted july 27, 2016 corresponding author: nadica figar faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: nadica.figar@eknfak.ni.ac.rs 234 n. figar as over time the world became divided into developed, developing, and underdeveloped countries, individuals from underdeveloped and developing countries started making independent decisions to move in order to seek temporary employment outside their home countries: sometimes on their own, sometimes through an appropriate intermediary organization. they are called self-initiated expatriates (sies) (doherty et al., 2013, 98). at first, this was unqualified labor force, „imported‟ by the developed countries (usually through employment agencies). in the socialist federal republic of yugoslavia (sfrj), the period of intensive „export‟ of unqualified workers lasted from 1965 to 1975. later, and especially today, sies are highly competent professionals of non-managerial tiers (engineers of electronics, doctors, but also construction workers, hairdressers, etc.). this is why the term independent internationally mobile professionals (iimps) was introduced (doherty et al. 2013, 98). volunteer overseas workers (vows) are individuals who voluntarily leave for another country through the mediation of an appropriate organization, for the purpose of aiding in the completion of certain humanitarian tasks (fee, gray, 2011, 530). their effort is altruistic; however, they acquire experience and informal knowledge, which can help them become expatriates. regardless of the name, it is a fact that globalization is creating a global labor force market, and individuals in that market go under the joint name globally mobile workers (doherty et al., 2013, 100). for a company that is making its business international, or has already made it international, it is important to understand the motives of the globally mobile workers, the space where they will perform their task (the host country), and the time required to complete the task. the goal of the present paper is to show companies that, in addition to the internal, there is also an external market for recruiting professionals to perform tasks overseas, because the chosen recruitment strategy determines the duration of the expatriation process, expenditure related to expatriation, expatriates‟ success in competing their tasks, and, finally, return obtained from expatriates (roi). this is further supported by the provided examples of practices in some companies. the paper includes the following sections: introduction, five sections (structure of internationally mobile workers; structure of the expatriation process; essence and types of cultural shock; expatriates‟ personal traits; and expatriation practices in some companies), and conclusion. 1. the structure of internationally mobile workers literature discusses several types of internationally mobile workers, and these include the following:  expatriates (exs),  self-initiated expatriates (sies),  international volunteers (ivos), and  refugees. expatriates. multinational companies (mncs) represent a typical form of business internationalization, since the parent company establishes subsidiaries in foreign countries. moreover, parent companies hire the local labor force in their foreign subsidiaries, while the managers are from the parent company‟s home country. this is why the earliest literature defined the expatriate (exs) as “a male on middle-to senior-level managers from large mncs managing the expatriation process 235 in the developed country (usually the u.s.) sent on assignment or sojourn to another country for a period of 2-3 years” (brewster et al., 2014, 1922). since the subsidiaries on other continents (overseas) were established by american companies, these managers were called overseas expatriates (oexs). practice showed that in order for assignments in a subsidiary to be completed, in addition to managers other professionals also needed to be sent (e.g. technical staff), so the term expatriate also started to include “expensive people employed in key positions” (brewster et al., 2014, 1921), sent by the company to perform assignments in the host country. since they are sent to perform specific assignments, they are called assignments expatriates (aexs) (vaiman et al., 2015, 283). the number of such employees is continually increasing (fee, gray, 2011, 68), even during the crisis that started in 2008 (brewster et al., 2014, 1921). therefore, expatriates are the employees sent by the company to the host countries to perform a specific assignment, upon the completion of which they return to the home country. the place (the host country) is determined by the company, and it can entail the following: a stay in the host country and the return to home country upon task completion, a continual stay in multiple host countries and the return to home country, and the rotation between subsidiaries in host countries throughout the employment. the greater the number of foreign subsidiaries a company has, the greater the number of such expatriates, and the greater the company‟s obligations in managing expatriates. the time for completing the assignment is also determined by the company, and it can vary (e.g. 6-18 months, 1-5 years), but the stay in the host country is always temporary. only the expatriates who are rotating between subsidiaries in host countries throughout their employment have permanent residence outside their home country. motivations can be viewed from both the perspective of the company and the perspective of expatriates, although contemporary literature also introduces the motives of the family and countries (both home and host countries) (brewster et al., 2014). company motives can include the transfer of knowledge to subsidiaries in foreign countries and organizational development through expatriates‟ acquisition of global competencies. expatriates’ motives can be individual career development, higher salary and career development of family members. with young expatriates the most salient motives are personal and business-related, i.e. the pursuit of adventure, desire to meet new cultures and form new friendships, and career development. company motives and expatriates‟ motives need to be compatible, since that is the only way for the expatriation process to be successful. compulsory relocation of expatriates and insufficient company support in the adjustment phase leads to failure on both personal and organizational level. self-initiated expatriates. individuals can independently move to foreign countries in pursuit of temporary or permanent employment. that can include unqualified labor force, but also highly competent professionals (doctors, engineers, etc.). they also represent a form of expatriates, and are referenced in various ways in literature: self-initiated expatriates (sies), employees with overseas experience (eoes), or self-selecting expatriates (sses) (cerdin, selmer, 2014, 1281-1301). the most frequent terms is sies – an independent move to a foreign country in pursuit of temporary or permanent employment. this is not a novel phenomenon, since even in medieval times craftsmen from many countries (e.g. france, germany, etc.) would spend years traveling the world in order to perfect their skills. in 2013, the united nations organization recorded 232 million of international migrants, one fifth 236 n. figar of whom were highly skilled. it is believed that tens, even hundreds of thousands of sies are residing in the oecd countries (vaiman et al., 2015, 281). in recent years the literature is showing a trend for differentiating between selfinitiated expatriates (sies) and expatriates (exs). relying only on the literature from the previous five years, j.l.cerdin and j. selmer (2014, 1284) provided a comprehensive overview of definitions concerning the essence of sies, which includes the following:  “… sies are internationally mobile individuals who move to a foreign country for indeterminate time periods, rather through the mediation of specialized agencies than through an organizationally assigned expatriation” (arris, 2013, 79);  “sies come from developed countries, and they have the following traits: they have a strategic approach to career development, their knowledge and skills are transferable across countries, they approach the idea of international mobility as desirable (rather than necessary), and they are easily accustomed and integrated into the host country” (arris, 2012, 237);  sies are “individuals not supported by any organization, so it is less likely that they will accomplish their goal in developing their career during expatriation” (andersen, bergdolt, margenfeld, 2012, 12);  “an sie is defined as an employee who migrates voluntarily to a foreign country on his or her own initiative, seeks actively a new employment and is hired by a foreign organization under a local host-country contract” (andersen, biemann, 2012, 105);  sies have the following features: individuals make a decision about moving to a foreign country, the decision about their employment is made by the host-country organization, personal and professional goals are the most dominant, individuals are governed by their personal biographies (gender, age, education, career stage, etc.), they finance the move alone, and they arrange the expatriation phase on their own (andersen, gutschin, 2012, 185). based on the overview of definitions of the essence of sies, the same authors (cerdin and slemer, 2014, 1290) outline four conceptual criteria that an individual should meet in order to be an sie, and these are the following: self-initiated international relocation, regular employment, intention of a temporary stay (3-5 years), and skilled/professional qualifications. all four criteria must be met, and failure to meet even one of them does not qualify an individual to be an sie. instead of the term self-initiated expatriates (sies), inkson et al. (2013, 352) introduced the term overseas experienced individuals, and they differ from expatriates in their initiative, goals, financing, and career type.  an expatriate receives the initiative for performing the assignment in the host country from the company, while sies leave on their own initiative (through the mediation or without any mediation of an appropriate organization from the home country, in coordination with the employment organization form the host country, or in coordination with the company from the host country). sies‟ stay in the host country is normally legally regulated.  the goal for expatriates‟ migration is determined by the company and it can include: the performance of a specific assignment, knowledge transfer to the subsidiary in the foreign country, and organizational development of the company. the main goal for sies is employment and individual development, and if they are leaving with their families, then they also take into account the goals of their family members. managing the expatriation process 237  expatriates’ careers are planned by the company in accordance with its business strategy, while sies plan their careers by themselves. therefore, they can perfect their knowledge and skills, earn money, and come back to their home country where they can start their own business. if they stay in the host country, sies can be a good base for recruiting expatriates. refugees (rfs). bearing in mind that sies leave their home country voluntarily, j-l. cerdin and j. selmer (2014, 1291) distinguish them from refugees, as refugees go to a foreign country out of necessity: for political and economic reasons, in a disorganized fashion, without any financial support, with the basic goal to survive and find a country where they could lead a better life. they do not plan the development of their career at all, although there are highly-competent professionals among them. international volunteers is also a term found in literature on expatriates. international volunteers (ivos) traditionally refer to individuals going to a foreign country driven by humanitarian reasons, under the auspice of an organization, and their main goal is altruistic satisfaction (fee, gray, 2011, 530). they differ from expatriates in that they are mostly engaged in humanitarian activities and they are not permanently employed in the organizations that hire them. however, contemporary practice has shown that, in addition to altruistic satisfaction, ivos also have other goals, the achievement of which can help them become expatriates. through volunteering, they acquire valuable global knowledge and skills, like cross-cultural communication skills and knowledge of the global business operations. additionally, they are in a position to acquire the big five personality characteristics that are better than those of exs and sies, so they do not require any time for adjustment. the big five personality characteristics include the following: extroversion, agreeableness, conscientiousness, emotional stability, and openness, and these are the characteristics that render them a high-quality base for both recruiting expatriates, and becoming serious competitors to expatriates. owing to the fact that they have already undergone the adjustment, they possess positive affectiveness, which, unlike negative affectiveness, leads to faster work adjustment, better work performance, higher work effectiveness, and higher job satisfaction (selmer, lauring, 2013, 569-570). expatriates are a very expensive human resource and they are considered cheaper only compared to the company president. therefore, each company needs to take care of the return from investments in expatriates (roi), i.e. of the expected task performance with expected costs (mcnulty, tharenoy, 2004, 71). costs can be determined much easier and with higher accuracy than the benefits provided by expatriates, and they are made up from the sum of direct and indirect costs. the amount of the compensation package alone (pay, bonus, and premiums) revolves in the neighborhood of $300,000 and $1,000,000 per year (toh, denisi, 2003, 611), while indirect costs (accommodation costs, allowance for the education of children, allowance for unemployed spouses, etc.) are even higher. additionally, each company fears hidden costs that expatriates can incur, like, for example, damaging the organization‟s image and disrupting relationships with host country nationals (mcnulty, tharenoy, 2004, 71-72). that is why companies with internationalized operations should familiarize themselves with the structure and characteristics of the internationally mobile workforce. in this way, the classic practice of recruiting expatriates can spread onto the recruitment from the ranks of sies and ivos, thereby facilitating and making the expatriation process cheaper, increasing work performance, and increasing the roi in the expatriates. 238 n. figar 2. structure of the expatriation process expatriation can be a short or long process, depending on whether it is viewed in the narrower or broader sense. in the narrow sense, the expatriation process consists of a single phase, which many authors label as the phase of international adjustment (oberg, 1960; adler, 1975; torbiorn, 1982; selmer, 1999). in the wider sense, the expatriation process is called the expatriation cycle and it includes three phases: the phase of preparation for expatriation, the expatriation phase, and the repatriation phase. the present paper will be dealing with the expatriation process in the narrow sense. bearing in mind that expatriation is a complex process, even if viewed in the narrow sense, some authors (selmer, 1999, 516) discuss expatriation as a process comprised of multiple successive stages (selmer, 1999, 516). k. oberg (selmer, 1999, 516) refers to expatriation in the narrow sense as the international adjustment process. this process includes four phases, metaphorically labeled:  honeymoon,  crisis,  recovery, and  adjustment. honeymoon is the first phase of the international adjustment process which an expatriate enters with positive expectations and without the assumption that there will be any difficulties in performing the task in the host country. positive expectations give way to positive affectiveness, which is in turn expected to lead to job satisfaction and satisfactory work performance. however, an expatriate is soon faced with reality, which often does not match his expectations, so that sooner or later he enters the crisis phase. it is the phase in which positive affectivenes is weakening, and there is a smaller or greater extent of negative affectiveness. first the job satisfaction decreases, followed by a decrease in satisfaction with work and life environment. consequently, this leads to a reduction in work performance. this is a very critical period for both an expatriate and for the company that sent him to perform the task. an expatriate needs to be aware of the fact that he is working and living in a different environment of the host country, and needs to stay emotionally stable in order to be able to adapt to it. the parent company from the home country also needs to accept his work results, although below average, i.e. it needs to have understanding for his adjustment process, especially if it has not prepared him enough for the expatriation process. the crisis will either pass, or the expatriate will return to the home country. some data suggests that 10-20% of american expatriates return to the u.s. because they are unable to adjust, while the return rate increases up to 70% if they do not have the support of the headquarter company (black, gregersen, 1999). if the crisis is overcome, the expatriate enters the recovery phase. recovery shows an improvement in expatriate‟s affectiveness, in his satisfaction with his job, coworkers, and work performance. the shorter the crisis phase, and the milder the crisis, the quicker and smoother will the recovery phase be. however, an expatriate requires support from the home country and co-workers in the host country during this phase as well. in other words, the company headquarters in the home country must never forget about their expatriates. it is only the fourth phase in this expatriation process that represents the phase of complete adjustment. an expatriate shows expected performance and he is completely satisfied with both his work and external environment. he establishes good cooperation managing the expatriation process 239 with his co-workers, he is happy with his job and work results. additionally, he has been able to create social networks in his external environment: with other expatriates, with friends living abroad, and with local nationals. based on the three dimension of adjustment to the host country, j. selmer (1999) distinguishes three stages in the adjustment phase:  adjustment to work,  adjustment to interacting with the host nationals, and  adjustment to the general non-work environment. this structure shows that his classification matches that of the classification of the adjustment phase in oberg (selmer, 1999, 516). black and stephens wrote as early as 1989 (selmer, 1999, 530) about the process (not the phase) of adjustment, which included three types of adjustment:  general adjustment (food, healthcare in factory of the host country, entertainment, general living conditions, cost of living, shopping, housing conditions),  work adjustment (performance standards and expectations, supervisory responsibilities and specific job responsibilities), and  interaction adjustment (interacting with host nationals outside of work, interacting with host country nationals on a day-to-day basis, speaking with host country nationals and socializing with host country nationals). torbiorn (selmer, 1999, 516-517) also discusses the adjustment process and distinguishes it into three phases with the following figurative labels:  the tourist phase,  the culture shock phase,  the conformist phase, and  the assimilation phase. the tourist phase is marked by euphoria that appears as soon as an expatriate arrives in the foreign country. he is overwhelmed by the new environment, just like a tourist visiting a foreign country. he notices only elements that are impressive and he is completely unaware of what actually awaits him. in brief, he is superficial about everything: coming to the host country, the house he will be living in, the equipment in the office he will be working in, immediate co-workers, etc. the more the home country company was involved in organizing his move from the home country and his stay in the host country, the longer the tourist phase will last. the culture shock phase is the phase of facing the real life, both in the subsidiary in the host country and outside the office. an expatriate becomes aware that he is not on holiday, but sent to perform a task under different conditions (work, cultural, social, life, etc.) for a longer period. therefore, the euphoria phase is followed by the mental stress phase that causes crisis with the expatriate. support from co-workers to adjust to the new work and local conditions, support from the headquarter company through tolerating lower performance that expected, support of expatriate‟s friends and family, are extremely important, firstly, for the expatriate to remain in the host country, and secondly, to overcome the cultural shock as soon as possible. once the cultural shock has been overcome, an expatriate enters the conformist phase. this is the phase of gradual or even progressive recovery. the expatriate realizes that he was sent to perform a professional assignment, that he needs to complete that assignment 240 n. figar with co-workers from a different culture, that his everyday life is linked to novel conditions and that he needs to fulfill the expectations of the headquarter company, as well as the expectations of his family and friends. the assimilation phase entails that an expatriate has adjusted to both work and life conditions: he is satisfied with his work and co-workers, his is satisfied with his life outside work and he is recording expected performance. he can reach this phase early if he enjoys the support of previously listed entities, but also if he realizes that, no matter the label of the phase, adjustment does not entail only complete assimilation into the host country culture, but also cultural learning. cultural learning, as a model of cross-cultural exposure, implies that an expatriate‟s main task is not complete adjustment to the new culture but learning its important characteristics, i.e. selective use of attitudes and values of another culture and incorporating them into his own behavior, just like people learn new languages and add the acquired knowledge to their knowledge of their mother tongue (l. andersen, according to: selmer, 1999, 519). if the mentioned phases of the expatriation process are plotted on a graph, a characteristic ‘u’ shape emerges, which gave way to the term u-curve. u-curve “shows changes over time in the degree of adjustment to the foreign environment” (selmer, 1999, 517). the bottom of the curve, which shows the state of cultural shock, is considered the most critical phase. it is the culmination of crisis in the expatriation process (for oberg in the crisis phase; for torbiorn in the culture shock phase). the creator of this term is the anthropologist k. oberg, and he defines it as “distress felt by sojourns where they loose all of their family marks and symbols of social interaction” (selmer, 1999, 517). the majority of researchers, as well as the creator of the term, see the cultural shock as a normal occurrence in the process of adaptation to another culture. furthermore, when an expatriate returns to the home country he also goes through a cultural shock, because he needs to readjust himself to his own culture. in that case, the culture shock curve includes two connected „u‟ shapes, thus becoming a uu-curve. this curve is considered when the expatriation process is discussed in the broader sense, so the first u-curve represents expatriation, while the second u-curve represents repatriation. however, the literature does not discuss a continuous u-curve, although this is what it essentially represents, but the w-curve. all expatriation phases are more easily overcome if expatriates socialize with the nationals – at work with their co-workers, and outside of work with the locals (maurer, li, 2006; toh, denisi, 2003). empirical research conducted in 2010 (the expat explorer survey) shows that expatriates are unaware of this fact, as 58% of them were more likely to go out with expatriate friends from the home country than with friends who are local nationals (van bakel et al., 2014, 2051). this situation is called the expatriate bubble syndrome and it needs to be overcome as soon as possible in order to make the expatriation process as „painless‟ and as efficient as possible. 3. essence and types of cultural shock culture can be defined in various ways, and one of the most comprehensive and most applied definitions is that it represents “the accumulated sum of knowledge, experiences, beliefs, values, relations, opinions, hierarchies, religion, [etc.]” (milovanović, 2015, 2). all of these elements constitute national culture, and an expatriate needs to temporarily managing the expatriation process 241 „renounce‟ the home country culture and „embrace‟ the host country culture. g. hofstede grouped all elements of a national culture into five dimensions, a classification widely accepted both in literature and in practice, and it includes the following dimensions (milovanović, 2015, 17-24):  power distance (high and low),  uncertainty avoidance or readiness for uncertainty,  individualism vs. collectivism,  feminine vs. masculine values, and  long-term vs. short-term orientation. starting from these dimensions, hofstede, as well as other authors, ranked some countries based on the character of their national cultures. it is known that the us occupies the first place in individualism, japan in masculine responsibility, greece in uncertainty avoidance; hong kong is in the second place in long-term orientation, etc. such lists can help companies to decide on a country where they will move part of their business, in the sense that they can choose a host country whose culture is the most similar to that of the home country. this will, in turn, allow the expatriation process to be quicker, more economical, and more effective. the crisis phase will, in this case, be very short, the cultural shock weak, and the recovery and adjustment phases also shorter than compared to business internationalization to a country where the dimensions of national cultures are completely different. the cultural shock is very important in the expatriation process, so it is defined from two aspects:  from the aspect of the form of business and  from the aspect of factors that condition it. from the aspect of the form of business, the creator of the term himself, k. oberg (1960), listed six forms of manifestation of a cultural shock: 1. anxiety, which stems from the effort to achieve the necessary psychological adaptation, 2. the feeling of loss, which stems from the separation from family, friends, colleagues from the home country, status in the home country, and everything that an expatriate owned in the home country – his house, car, etc., 3. the feeling of being rejected by the co-workers and local nationals in the host country, 4. confusion in relation to expectations, values, emotions, and self-identity, 5. disgust and indignation upon becoming aware of the cultural difference, and 6. the feeling of being unable to fit into the environment of the host country, which poses as the true „bottom‟ of the u-curve, and sometimes even the end of the expatriation process, since an expatriate in such a position returns to the home country. k. juffer analyzed 35 definitions of the cultural shock (selmer, 1999, 517-518) and established several basic factors leading to the cultural shock. so, according to this author, the cultural shock is caused by: 1. confrontation with the new environment or the new situation, 2. ineffective intercultural or interpersonal communication, 3. dangers posed for the emotional or physical state of an individual, 4. need to modify behavior in the new environment, 5. need to acquire and develop experience. 242 n. figar the introduction of the learning model instead of the assimilation (integration) model (anderson, 1994; according to selmer, 1999, 518-519), facilitates the overcoming of the cultural shock “as the main task of an expatriate is not integration into a new culture, but learning its important characteristics” (ibid. 519). 4. expatriates‟ personal characteristics regardless of which expatriation model is adopted, the literature discusses the big five personality characteristics (caligiuri 2000, 67-75), which every expatriate needs to possess:  extroversion,  agreeableness,  conscientiousness,  emotional stability, and  openness or intellect. extroversion is a “necessity to learn the work and non-work social culture in the host country” (caligiuri, 2000, 73), and individuals who possess this characteristic achieve greater performance and preservation. agreeableness is the ability to form reciprocal social networks through extroversion (caliguiri, 2000, 73). conscientiousness expresses a high degree of dedication to work. emotional stability is an adaptive mechanism enabling humans to live with stress in the environment (caliguiri, 2000, 74). openness or intellect refers to the fact that “perceiving, attending and acting upon differences in others is crucial for solving problems of survival and reproduction” (caliguiri, 2000, 74-75). van bakel et al. (2014, 2050-2067) point out that expatriates must possess intercultural competencies, for which also other terms are used, like: cross-cultural competencies, intercultural communication competencies, and cultural intelligence (ibid. 2051). intercultural competence entails “the knowledge, motivation, and skills to interact effectively and appropriately with members of different cultures” (ibid. 2051). furthermore, the authors recommend the multicultural personality questionnaire (mpq) as an instrument for assessing intercultural competence. the questionnaire contains the following five characteristics (van bakel et al., 2014, 2051-2055):  open-mindedness,  cultural empathy,  social initiative,  emotional stability, and  flexibility. open-mindedness is defined as openness to others and assuming an open position towards different opinions and cultural norms. cultural empathy or sensitivity represents an ability to be involved in the feelings of individuals from different cultures. social initiative entails the ability to communicate effectively and establish interpersonal relationships. emotional stability is “the ability to reveal little anxious emotions in intercultural communication” (van bakel et al., 2014, 2054). flexibility is the ability to adjust to novel circumstances and situations. l. andersen (selmer, 1999, 518) classifies potential expatriates into three groups, depending on their ability to adjust themselves to the host country: managing the expatriation process 243 1. “going native” are individuals who quickly abandon their former identity, and in every way and every aspect imitate the nationals in the host country. 2. “fight” are those individuals capable of adjustment even in extremely novel conditions compared to those in the home country. 3. “flight” are those individuals who are unable to adapt to the conditions in one of the foreign countries. the afore presented classification shows that the most suitable individuals for recruitment as future expatriates are “going natives”, followed by “fights”, while “flights” are the least suitable. 5. expatriation practices of some companies in practice, phases or stages of the expatriation process are not as clearly defined as literature presents them. since it is a complex and difficult process, great attention is dedicated to the preparation for expatriation, as this facilitates the process itself. in some companies the expatriation process also includes the repatriation phase. the following examples show different practices utilized by companies. john huntsman, jr., vice president of a large chemical company the huntsman corporation, developed a simple, informal method over a five-year-period, for evaluating the ability of his employees to work in the subsidiaries in the foreign country, and this method has proven to be very successful. during his business trips abroad he would bring along the employees whose abilities he wished to evaluate. he would then monitor their behavior at the subsidiary, at restaurants, in shops, in the street, i.e. at every place where a future expatriate is expected to find himself. additionally, he also monitored the behavior of the future expatriate in the company in the home country during the visits of business partners from abroad (black, gregersen, 1999, 58). this represents a financially economical method for recruiting expatriates, but a huge “time consumer,” as it requires long time periods for monitoring the behavior of potential expatriates. it is suitable for those companies which manage the expatriation process continually. lg group, a large korean conglomerate applies a formal method for recruiting expatriates, and it is suitable for companies that manage expatriates continually. at the beginning of the managerial career, potential subsidiary managers are given a questionnaire containing 100 questions they are required to answer. lg group purchased the questionnaire from an organization that specializes in the recruitment of expatriates, and the questionnaire was obtained at a price of $500 per person. based on the obtained responses, it is possible to evaluate employees‟ cross-cultural skills and their ability to perform tasks in the global environment. therefore, in addition to cultural intelligence, the ability to think globally is also highly valued. after the questionnaires have been processed, a small number of potential managers expatriates is selected, with whom interviews are conducted regarding their actual plans for performing tasks in the host country. after the interview, a plan for career development of the selected expatriates is prepared and efforts are dedicated to the improvement of some of their skills. therefore, it is not surprising that 97% of managers expatriates in this company fulfill the expectations of the company headquarters (black, gregersen, 1999, 58). 244 n. figar colgate-palmolive company sells approximately 70% of their production at foreign markets and aims to increase that share. it uses the so-called cheap expatriates recruitment strategy, as it recruits them from the student population in countries where it holds subsidiaries, as well as from the ranks of its younger employees. graduate students receive scholarships under the condition that they need to stay at the company‟s subsidiary in the country where they are receiving their education. this way the cultural adjustment phase is avoided, because the students have already adjusted themselves to the host country culture. younger employees at the company usually do not have families so it is easier for them to accept a stay abroad. they are more economical for the company, as they do not require any allowances necessary for expatriates with families (e.g. higher accommodation costs, child education allowance, unemployed spouse allowance, etc.). they are also not interested solely in their careers, but also in meeting new cultures, making friends abroad, and travel, so it is easier for them to overcome the cultural adjustment phase. using their affinity towards travel and readiness for frequent changes of the environment, the company recruits them for a stay at individual subsidiaries in the duration from 6 to 18 months, after which they rotate across other subsidiaries in the foreign country (black, gregersen, 1999, 60). honda of america manufacturing developed a holistic approach for the recruitment of expatriates, the application of which resulted in the expatriate replacement rate of only 5% (black, gregersen, 1999, 63). the approach is labeled holistic because it includes all phases of the expatriate cycle. managers expatriates are recruited either for the development of a new car model, or for improving the relationships with suppliers. company top management provides a list of potential candidates for expatriates. the evaluation of their abilities and their selection is entrusted to a specialized organization. it is interesting that this organization also takes care of the repatriation process: e.g. six months prior to the return to the home country expatriates know what their responsibilities will be when they come back, and during the assignment of duties the new competencies that they acquired during their stay in the host country are taken into consideration also. the most successful expatriation practice is that which includes the preparations for expatriation, expatriation, and repatriation. this entails a holistic approach to expatriation, and to the process of expatriation in the wider sense (the expatriation cycle). conclusion modern conditions require companies to internationalize their business. it is no longer only important for growth and development, but it is important for the very survival. additionally, internationalization requires professionals of various profiles, not only managers. they can be recruited from either the internal market, or the external market of internationally mobile workers. the internal market is made up from company employees in the home country (potential expatriates – exs), while the external market is made up form self-initiated expatriates (sies) and international volunteers (ivos). the notion of the expatriation cycle is introduced, and it consists of multiple phases, as well as expatriation as one of the three phases of the expatriation cycle. an expatriate goes through different substages of the expatriation process, ranging from euphoria, through crisis and recovery, to complete adaptation. these form the so-called u-curve, where the most critical bottom of the u-curve corresponds to the cultural shock. unless managing the expatriation process 245 an expatriate overcomes the cultural shock, the expatriation process ends, and he returns to the home country. this is why it is of paramount importance that companies organize a preparation for expatriation, as well as to provide a continual support to the expatriate during the completion of his assignment in the host country. however, in addition to applying didactic and experiential methods for preparation, it is necessary to also evaluate the personal characteristics of potential expatriates. these are called the big five personality characteristics, and they include the following: extroversion, agreeableness, conscientiousness, emotional stability, and openness (intellect). they express individuals‟ cultural intelligence, and those who possess them are considered adequate candidates for expatriates. sies and ivos can acquire the afore mentioned characteristics while working in foreign countries, and, therefore, pose as a more economical base for the recruitment of expatriates. still, companies should not forget that sies and ivos take time to adjust to the organizational culture of the company. in conclusion, only the holistic approach to expatriation can give way to successful expatriation, which entails the preparation for expatriation, expatriation, and repatriation, i.e. the 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(2014). impact of a local host on the intercultural ccompetence of expatriates. the international journal of human resource management. vol. 25 (4): 2050-2067. wasserman, n. (2008). the founder′s dilemma. harvard business review. february. upravljanje procesom ekspatrijacije u ovom radu se ističe da je proces ekspatrijacije veoma značajan za kompanije koje nameravaju da se internacionalizuju, ali i za one koje su internacionalizovane. jer, ekspatrijacija je kontinuiran proces, bilo da se posmatra u užem, bilo u širem smislu. najuspešniji je holistički pristup ekspatrijaciji, a to znači aktivnu ulogu kompanije u pripremi za ekspatrijaciju, ekspatrijaciju i repatrijaciju. praksa navedenih kompanija to potvrđuje. ključne reči: ekspatrijate, ekspatrijate na svoju inicijativu, strana zemlja, domaća zemlja, ekspatrijacija, kulturološki šok. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 2, 2016, pp. 131 143 the role of monetary and macroprudential policies in pursuit of financial stability1 udc 338.23:336.74 mirjana jemović, srđan marinković faculty of economics, university of niš, serbia abstract. during the recent financial crisis, there have been significant real and fiscal implications that have renewed concerns of the regulatory agencies for financial stability. the stability of the financial system implies its resistance, which must be set up in advance and installed along the entire lifetime of financial institutions. the authors of this study have firstly presented the concept and conceptual questions of financial stability, and secondly, they have perceived the role of relevant policies in preserving financial stability. special emphasis is given to the role of monetary and macroprudential policies and their conditionality in the realization of the same objective. since the policy of preserving financial stability is a particularly sensitive area within the european union (eu), this paper has summed up the current framework for financial stability, as well as the efforts towards the creation of the banking union. key words: crisis, financial stability, macroprudential policy, monetary policy, banking union introduction due to the frequent banking crisis in the last decades of the past century, the issue of financial stability has become more than a popular topic. bearing in mind that the stability of the financial system is seen as a precondition for the stability of the economic system, achieving and maintaining the stability of the financial system is set as an explicit goal of a growing number of central banks (cb). in order to be realized, this kind of objective requires to be clearly defined, and its significance and position in relation to the primary objective of the central bank, which is price stability, should be pointed out. in this respect, the first part of the paper deals with the concept and the basic conceptual issues 1received april 10, 2016 / accepted june 13, 2016 corresponding author: mirjana jemović faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbi e-mail: mirjana.jemovic@eknfak.ni.ac.rs 132 m. jemović, s. marinković related to financial stability. along with the actualization of the issues of pursuing financial stability, in a growing number of countries, special bodies for macroprudential issues are being formed, in all of which, the role of the cb is crucial. the extent to which the field of monetary and macroprudential policies will overlap, largely depends on the achieved level of development of the macroprudential framework in a particular country. in this regard, the second part of the paper suggests possible approaches to the role of the monetary policy in maintaining financial stability. in the last part of the paper, the policy of maintaining financial stability is narrowed down to the eu, where special attention is paid to the analysis of the role of the european central bank (ecb) in preserving monetary and financial stability. 1. financial stability – the term and conceptual issues along with the financial deregulation that marked the last decades of the past century, the incidence of financial crisis has suddenly increased. among them, the banking crisis emerged as the dominant form of financial crisis. in 1995, there were even 13 systemic banking crisis. the real and fiscal implications of the crisis were the reason for setting financial stability as an increasingly important objective for the economic policy formulation. this can be confirmed by the fact that almost all central banks and several international financial institutions have begun to publish reports on financial stability and financial stability has become the responsibility of many institutions. actualization of issues of preserving financial stability has been related to several trends and changes in financial systems over the last few decades. due to the deregulation of the financial regulations, the environment for intensive development of the financial sector was created, which was why the volume of financial transactions exceeded the volume of transactions in the real sector several times. the enormous growth in the financial services sector is evident on several grounds: its dominant share in the gross domestic product (gdp), the size of financial assets, the number of employees and average wages in this sector (scharfstein & greenwood, 2013). these changes are indicated by the term financialization, which basically means the separation of the real and the financial sector, whereas the financial sector becomes an end in itself. the consequences of financialization are the growing transfer of income from the real to financial sector, an increasing income inequality and the growing influence of financial incentive used to manage companies. in such circumstances, the prices of certain financial assets are determined on the basis of monitoring the prices of other financial assets, without any connection to the current situation and trends in the real sector of the economy. this kind of the financial sector growth is encouraged by a number of financial innovations, and above all, by the rapid development of financial institutions in the shadow banking. this sector includes financial institutions that, similarly to banks, perform maturity transformation of the banking resources, but they cannot mobilize the insured deposits and do not have the same system of protection that applies to banks. structured investment vehicles, money market funds and the government-sponsored entities like fannie mae and freddie mac can be included here. these institutions, during the recent financial crisis allowed loans to a wide circle of beneficiaries at much more favorable terms than those offered by the banks (palley, 2007). although it was designed to improve the standard of living, this kind of model that offered mortgage loans led to the over-indebtedness of households, bearing in mind the the role of monetary and macroprudential policies in pursuit of financial stability 133 fact that the most common users of housing loans were entities with low and middle income (low and average salaries). in addition, the participation of the shadow banking sector in the credit intermediation burdened this procedure with a larger number of stages and made it impossible for participants to adequately assess the counterparty risk. as this sector did not enjoy the benefits of the safety net, during the recent financial crisis, it became the subject of assault and it generated a significant risk to financial stability. the development of the new financial activities and institutions, internationalization and homogenization of financial activities led to the formation of financial conglomerates, which united banks and non-banking institutions (jovanić, 2006). the more important relationship of institutions within and between financial systems, as well as a significant number of mergers and acquisitions in the financial sector, left the creators of the economic and financial policies without adequate instruments and tools to preserve global financial stability. in finance, not every efficiency drop needs to be followed by an immediate intervention. on the other hand, it is most certainly desirable in situations when the inefficiency of the market represents a threat to financial stability. however, the concept of an adequate framework for financial stability does not aim to prevent all possible risks in business, and there are several reasons why this is so. first, it is unrealistic to expect that all financial institutions will be able to manage the risks they face in their operations. second, it is not desirable to create and enforce mechanisms that are too protective, considering that those mechanisms suppress innovation of institutions. in this sense, achieving and maintaining financial stability needs to be harmonized with other, perhaps even more important goals, such as economic efficiency. this means that finance should not be an end in itself , but also should support the efficient allocation of resources in the real sector of the economy. for this reason, policymakers need to establish a balance between stability and efficiency of the financial system. looking at the characteristics of the us financial system which is a marketoriented, it is pointed out that the efficiency of the financial system is achieved at the expense of financial stability, which was confirmed during the latest financial crisis. in this sense, it is important to identify potential threats to financial stability at an early stage. setting up the concept of an adequate framework for maintaining and strengthening financial stability requires defining relevant concepts, such as financial systems, financial stability and systemic risk. in the broadest sense, the financial system is composed of three separate, but closely related components: financial institutions, financial markets and financial infrastructure. the financial system is considered stable if it enhances (rather than worsens) economic performance and is resistant to internal and external shocks (schinasi, 2004). there are several important implications of defining financial stability in this way. firstly, the assessment of the performance of the financial system shows the extent to which the financial system facilitates the allocation of economic resources, savings and investment processes, and ultimately economic growth. however, this is a two-way relationship, meaning that the real sector of the economy can have a positive or negative impact on the financial system, which has to be taken into consideration when designing a framework for evaluating and improving financial stability. secondly, it should be noted that the disorder and instability in any of the components of the financial system do not pose a threat to financial stability, unless it leads to negative implications for the real sector of the economy. from the point of view of financial stability, shutting down less efficient markets and financial institutions is even desirable. as in schumpeter (1934) business cycles, where the adoption of new technologies has both its constructive and destructive implications, the 134 m. jemović, s. marinković specific situation of instability can be occasionally tolerated if that will contribute to the long-term efficiency of the financial system. third, not only does financial stability exist when the financial system adequately performs its role in mobilizing and allocating financial surpluses, transforming and managing risks, but also when the payment system functions efficiently. this means that the money, both the central bank money, and its close substitutes, properly serves its purposes as a means of payment, billing unit and a value keeper. since this part represents a vital part of monetary stability, the financial and monetary stability overlap to a large extent. fourth, financial stability means the absence of the financial crisis and the ability of the financial system to manage the imbalances before they become a threat to financial stability. and last but not least, financial stability can be seen as a phenomenon in time reflecting different status combinations of the constituent parts of the financial system. one of the implications of observing financial stability in this way is that maintaining financial stability does not necessarily require that every part of the financial system operates continuously with maximum performance. the continuum concept becomes relevant in the analysis of the financial system, because the uncertainty and risk are constantly present, dynamic (intertemporal and innovative) and they consist of many interconnected elements (infrastructure, institutions and markets). financial stability is a fundamental precondition for the development of any economy, and that is why regulatory agencies continuously monitor the risks that threaten financial stability. this includes a two-dimensional approach where risks are monitored both at the level of individual financial institutions and at the level of the overall financial system. this kind of approach is used so that the problems that individual institutions are facing can be avoided before they become problems for the whole system. systemic risk is often defined as a risk of disruption in providing financial services that can seriously harm the real economy. in this sense, it is very important to define policies for its management on time. the policies for managing systemic risk must include both of its dimensions, structural and cyclical. the structural dimension of the systemic risk results from the external effects produced by the components of the financial system affecting financial stability. in this respect, the policies for managing this dimension of systemic risk include establishing higher capital requirements for systemically important financial institutions, introducing a stable margin system (hair-cuts) as well as mechanisms for strengthening the resilience of the market infrastructures (caruana, 2010). the cyclical dimension of the systemic risk indicates the progressive accumulation of risk over time, whereby the stakeholders tend to over-invest in the beginning, whereas the down phase leads to strengthening of the uncertainty in the market, price drop of financial assets, the reduction of financial leverage, a sharp decrease in liquidity, and to financial crisis after all (cardarelli, elekdag, & lall, 2009). measures to manage the cyclical dimension of systemic risk are prudential in their nature, and involve the introduction of countercyclical and sectoral protective layers of capital, limitation of the leverage level, as well as the introduction of standards for liquidity risk management (bank for international settlements, 2010). the recent financial crisis pointed out to the importance of having an adequate regulatory framework for preserving and strengthening the stability of financial institutions. its basic goals are to prevent and resolve systemic problems, in a situation when prevention fails to yield results. this is the concept of financial safety net, which includes a number of institutions, rules and procedures that are activated to protect stability of the system of financial intermediation (marinkovic, 2004, p. 14). since the banks are the dominant financial institutions in most of the financial systems, this framework is largely adapted to them. the the role of monetary and macroprudential policies in pursuit of financial stability 135 regulatory framework is set along the entire lifetime of financial institutions and includes both ex ante components regulation and supervision, and ex post components the lender of last resort, deposit insurance and the policy of restructuring and exiting of banks from the market. though important in the different stages of the bank's operations, the stability of the banking sector can only be achieved by the synergetic effect of all components. ex ante components of the security infrastructure define policies for the efficient and stable functioning of the banking and overall financial system, whereas ex post components’ role is to stop further expansion of the crisis and to intervene with the institutions threatened with bankruptcy. the deposit insurance system aims to maintain the confidence of depositors in times of crisis, while in the stable conditions generally takes over the duties of restructuring banking institutions. deposit insurance becomes important once a bank is declared insolvent and its primary task is to protect the depositors first, while the lender of last resort becomes important at the moment when the bank has already exhausted all the previous sources of liquidity, and then its focus is primarily on the protection of banks. the abovementioned components are directed, as we can see, towards the realization of different, not entirely consistent objectives, and that is why there is an institutional division of responsibilities and the presence of numerous institutions: prudential authorities (regulators and supervisors), deposit insurance agencies, the agency for restructuring, monetary and fiscal authorities. the central bank has a significant role in pursuing financial stability, which is perfectly consistent with its role in implementing the monetary policy. in this regard, in the following part of the paper, we will try to look at what is the role of monetary policy in maintaining financial stability, in terms of coordination, and not mutual exclusion of monetary and macroprudential policy. 2. different approaches to the role of monetary policy in maintaining financial stability there are several reasons why we can claim that cb has a natural and not assigned role in preserving financial stability. first, the emergence and development of central banks was mainly related to their role in preserving financial stability. the federal reserve system was the first one responsible for preserving financial stability, and it was only later when it became responsible for monetary stability as well. being a supreme monetary financial authority, a regulator and a supervisor in most of the financial systems, the central bank has all the necessary competence and experience to have the lead role in achieving and maintaining financial stability. the central bank issues legal tender and supplies the banking sector with the necessary amount of liquid assets. in addition, it is responsible for the payment system and its efficient functioning. the introduction of a real-time gross payment helped preventing the spreading of bankruptcy from one institution to another through the payment system. given that banks are the main channel for the transmission of monetary policy, stable and sound operation of banks is a necessary precondition for the effective implementation of monetary policy (bank for international settlements, 2003). once financial instability occurs, monetary instability is likely to follow, which is another thing that goes in favor for the central bank to be responsible for both aspects of stability. monetary policy, although primarily aimed at the preservation of price stability, must consider the impact of its measures on financial stability. during the recent financial crisis, it was monetary policy that was used as the first anti-crisis instrument that used its expansionary course of action to increase the liquidity in the system. the policy of low 136 m. jemović, s. marinković interest rates and the implementation of a number of unconventional monetary policy measures had had assets of central banks increased many times, due to which, further financial stability had become directly conditioned by fiscal policy. however, a significant state support for the banking sector arranged during the recent financial crisis, raised the question of fiscal sustainability of many national economies, thus illuminating the relationship between financial sector stability and the level of public debt and budget deficit. due to the lack of adequate macroprudential regime in a number of countries, both monetary and fiscal policy played a significant role in calming the financial crisis. of course, monetary and fiscal policy should primarily be responsible for the basic objectives of their policies, which is the reason why macroprudential policy should be further improved. monetary and macroprudential policies are singled out as a countercyclical policies the former is concerned with price stability, and the latter with the stability of the financial system. microprudential policy is concerned with the stability of individual banks. it is necessary to bear in mind that sometimes it is very difficult to separate microprudential policy from macroprudential one, given that macroprudential policy is largely implemented by means of instruments of microprudential policy. the connection of those policies have caused the european central bank (ecb) to expand the field and deadline for monetary analysis, in order to adequately comprehend the implications of the financial system stability on price stability, which is set aside as a complementary measure to the use of macroprudential instruments aimed at limiting ups and downs on the credit market in recent decades. in this sense, the following question arises: "is it necessary to expand the jurisdiction of the functions of monetary regulation, so that it can be responsible for pursuing and strengthening financial stability?". three views have risen from this question: a) modified jackson hole consensus, b) leaning against the wind vindicated c) financial stability is price stability (smets, 2013, p. 125). table 1. potential views to the role of monetary policy in maintaining financial stability modified jackson hole consensus leaning against the wind windicated financial stability is price stability monetary policy framework largerly unchanged. limited effects on credit and risk taking. blunt instrument to deal with imbalances. financial stability as secondary objective: lengthening of horizon. affects risk-taking. „gets in all of the cracks“ twin objectives on equal footing. unblocks balance sheet impairments; avoids financial imbalances in upturns macro prudential policy granular and effective cannot fully address financial cycle; arbitrage indistinguishable from monetary policy interaction limited interaction and easy separation of objectives and instruments. financial fragility affects monetary transmission and price stability financial stability and price stability are intimately interlinked issues coordination? lender of last resort? coordination? overburden money policy? time inconsistency problems? models svensson; collard, dellas, diba and loisel (2012) borio; woodford (2012) brunnermeier and sannikov (2012) source: (smets, 2013, p. 134) the role of monetary and macroprudential policies in pursuit of financial stability 137 the first view advocates the responsibility of monetary policy solely to price stability, while financial stability is the sole responsibility of macroprudential policy. the course of leading monetary policy will not lead to the formation of the boom and bust cycle, and a short-term interest rate is not a suitable instrument for managing these imbalances. the application of higher prudential requirements conditions banks to internalize the risk, and these effects cannot be achieved by the measures of monetary policy, that are focused on the loan volume, rather than on the loan structure. this approach does not assume a connection between interest rates and macroprudential policy instruments, and it is not rare for these policies to move in completely opposite directions during the business cycle: on the one hand, the introduction of additional prudential requirements, and on the other, the reduction of interest rates in order to avoid the effects of prudential policy on the loan volume. the second view does not support a narrow focus of monetary policy, noting that it is the focus of a number of central banks to preserve price stability in the short term the one that has prevented their aggressive engagement in preserving financial stability. given that the banking sector is the main channel for the transmission of monetary policy, its stability has important implications for price stability. in order to comprehend the impact of financial imbalances in the implementation of monetary policy, the cb must expand its scope of action. representatives of this approach point out that monetary policy can significantly contribute to the maintenance of financial stability with its tools and instruments, without compromising the price stability. the coordination of monetary and macroprudential policies in the field of preserving financial stability is quite justified, given that both have an impact on real economic variables. in addition, the fact that monetary policy can take over the macroprudential role at a certain point is justified by the fact that the monetary policy decisions are more frequent than those of macroprudential policy (galati & moessner, 2011). the third view advocates equal treatment of price and financial stability, emphasizing that they are so closely connected that it is practically impossible to distinguish between them. the task of the monetary policy is to support the sector in crisis with its standard and non-standard tools and instruments, as it did in the case of the price of mortgage instruments during the recent crisis, by buying mortgage securities, and thus helped overindebted household sector. this approach, therefore, advocates the important role of monetary policy in the field of preserving financial stability, especially in the case when the fiscal policy measures do not achieve the desired effects. the abovementioned views clearly have different implications for the institutional set-up for the monetary and financial stability policy, although each of them highlights the interrelatedness of monetary and financial stability. to what extent monetary policy should take an active role in the field of preserving financial stability largely depends on the extent to which it can manage the growing instability in the system by using its standard tools and instruments, as well as to what extent it can channel the risk that financial institutions take by using short-term interest rates. it should be borne in mind that the impact of monetary policy is not sector-oriented but it affects all financial institutions, even those that operate in the shadow banking, and that are difficult to comprehend with measures of supervision and regulatory activities. however, in a situation where an excessive growth of credit activity is linked to a specific market or institution, regulatory and supervisory measures are considered adequate. in such conditions, the standard instrumentation of monetary policy does not work, causing the central bank to introduce a number of non-standard monetary policy instruments. in fact, numerous non-standard monetary policy measures (changes in the policy of mandatory 138 m. jemović, s. marinković reserves or adjusting the value of the collateral in the system in operations conducted by the central bank) can be characterized as macroprudential policy instruments. in this case, the question is whether cb should use non-standard measures to lean against boom periods (smets, 2013, p. 140) assigning macroprudential mandate to the central bank, in addition to its primary responsibility for price stability, is justifiable. this ensures better coordination and exchange of information necessary for the preservation of price and financial stability. then, the central bank has the expertise in macroeconomic affairs and supervision of financial institutions and other segments of the financial system. finally, as a lender of last resort, it grants loans for liquidity to banks, thus reducing the likelihood of the outbreak of the crisis. however, this kind of engagement of the central bank may quite distance it from its primary objective, which is the pursuit of price stability, because it has to take the role of a distributor and the role of a quasi-fiscal actor. this draws its political responsibility and ultimately it may compromise its independence. as an additional problem, dynamic (time) inconsistency is highlighted, given that the central bank can be easily found in the position to put a larger quantum resources into the system than necessary to preserve the long-term price stability. such risks can be controlled by the division of goals, instruments and responsibilities of macroprudential and monetary policy, which is especially important if both of these roles are performed by the same institution, i.e.the central bank. in order to solve the problem of time inconsistency, the central bank, being a part of monetary regulation must take care primarily of price stability, while pursuing financial stability remains the primary responsibility of macroprudential, and not monetary policy. there are numerous ways in which the central bank fulfills its macroprudential role. in some countries (e.g. the united kingdom), the central bank has a clear mandate for macroprudential and microprudential policies. in other countries, the central bank has a significant share in the structure of the committee vote on macroprudential issues (as in the case of the european systemic risk board, esrb). in the us, the federal reserve system is one of the 10 authorities that have the right to vote in the financial stability oversight council (fsoc), and are responsible for the regulation of systemic banking and nonbanking financial institutions. the role of macroprudential policy in preserving and strengthening financial stability largely depends on the effectiveness of its instruments, and it should be taken into consideration that there is no widely accepted list of macroprudential instruments. on the contrary, they are adapted to the specific intermediate target, which may be stopping excessive credit growth and leverage, maturity mismatches, direct and indirect exposures, etc. these instruments proved to be very useful in combating the cyclicality of the financial system during the recent financial crisis. however, the lack of international coordination of these measures can be the basis for regulatory arbitrage, thus reducing their effectiveness in combating systemic risk significantly. this problem is particularly acute in the area of european monetary union (emu), given the supranational monetary policy and national policy of financial stability. the role of monetary and macroprudential policies in pursuit of financial stability 139 3. the role of monetary and macroprudential policies in preserving financial stability in the european union on the territory of the european union, the division of responsibilities over the basic functions of cb was carried out so that ecb took over responsibility for the implementation of monetary policy in the eurozone countries, while the functions of supervision and the lender of last resort remained under the jurisdiction of the national central banks and supervisory authority. the ecb is in total control of the function of monetary regulation within which it defines and implements monetary policy, taking care of price stability within the emu. however, the ecb does not have official jurisdiction in matters of regulation and supervision, and it is included here only indirectly, through the european system of central banks, as much as the central bank of a particular national economy is at the same time a regulator as well. despite possible limitations and the lack of direct involvement of the ecb in the field of regulation and supervision of credit institutions, its role in this segment cannot be ignored, especially when it comes to its macroprudential role. macroprudential role of the ecb is even more relevant in the context of monetary union, where its duty is to express the differences between the financial systems of comparable countries which have the same level of economic development (božina & štajfer, 2009). within a monetary union, macroprudential policy is defined at the national level and the national central banks have the ability to define macroprudential policy instruments tailored to the specific sources of instability in the financial system. that is how they act countercyclically by using macroprudential policies, given that the monetary policy is within the competence of the ecb and that they have no ability to influence interest rates (galati & moessner, 2011). fig. 1 the new institutional framework of the european monetary union source: (smets, 2013, p. 122) as we can see in the figure, monetary and macroprudential policies are used as countercyclical policies, whereby monetary policy is focused on price stability and macroprudential policy on financial stability. on the other hand, microprudential policy takes care of the stability of the individual financial institutions, i.e.banks. it is necessary to examine how monetary and macroprudential policy co-operate since they have different objectives and use different instruments. in the previous section, we have pointed out to a significant 140 m. jemović, s. marinković relationship these objectives have, which is the reason why the ecb in its monetary strategy opted out for a broader approach and perceiving the impact of financial stability on price stability. in this way, it has made a balance between its business area and macro and micro prudential policies. the ecb has a limited capacity in the field of preserving financial stability given the limited fiscal mandate, which prevents it from stepping forward as the lender of last resort for credit institutions. this is a significant difference compared to the fed and the central bank of england, which have the capacity to come forward in the role of the lender of last resort. moreover, the fed has the final say in the supervision over the other regulatory bodies, which is not the case in the eurosystem, where the national central banks decide in case of bankruptcy of an institution. the lack of uniform measures, and procedures that supervisors in the eu apply, caused the convergence of supervisory practices. in order to achieve a higher level of integration and coordination between national supervisory authorities, the european commission in late 2008 organized a group of experts (de larosière group) under the direction of jacques larosière, whose task was to build new infrastructure functions of supervision of the financial services sector (the de larosière group , 2009). the reform divided supervision in two levels: supervision at the macro level, assigned to the european systemic risk board (european systemic risk board, esrb) and supervision at the micro level, assigned to the european system of financial supervisors (european system of financial supervision, esfs), consisting of national supervisors and three new european supervisory authorities: (european supervisory authorities, esas) banking (the european banking authority, eba); securities and markets (the european securities and markets authority, esma) and insurance companies and pension funds (the european insurance and occupational pensions authority, eiopa). european systemic risk board has been established in order to coordinate macroprudential policies, as a supranational consultative body whose main task is to send esfs early signals about the possible existence of systemic risk and the need for the intensive supervision. the way micro-supervision is organized is that every financial services sector is regulated by a separate body. there are national regulators for all three sectors separately at the bottom of the european supervisory infrastructure. as it can be noted, here we have a vertical model of supervision where each sector is regulated by a separate body. with the new institutional framework, the ecb has taken a key role in the european systemic risk board as a macro-supervisor, whereas micro-supervision has remained within the competence of national supervisors of the member states. in addition, an authority for macroprudential issues at the national level has been formed at the central bank or at the supervisory authority. in this way, a jurisdiction in macroprudential policies has been divided between those newly formed authorities and ecb. in such macroprudential framework, the ecb has the right to define more severe requirements for macroprudential instruments in comparison to those already defined by national supervisors (freystatter, 2015). this role of the ecb in the macroprudential sphere is partly limited. namely, it only refers to macroprudential instruments that have been already defined at the national level, and which are at the same time part of the ecb; its power is asymmetrical, given that there is no possibility to prescribe more lenient requirements, and a problem of coordination can occur, considering that ecb shares its responsibility with national authorities. the new institutional framework of the macroprudential policy in the eurozone cannot be fully identified with leaning-against-the-wind approach. national macroprudential the role of monetary and macroprudential policies in pursuit of financial stability 141 authorities are the first ones responsible for maintaining financial stability, and they are trying to use monetary policy as little as possible for the purposes of preserving financial stability. however, underdevelopment and lack of experience in using macroprudential instruments have caused that monetary policy does take its stake in preserving financial stability. the financial crisis in the eurozone has clearly shown that in countries that share single currency, there is a need to centralize the rules governing banks, especially due to the extreme relationship of countries and their banking systems. banking union emerged as a possible solution to this problem. in june 2012 there was an initiative for the establishment of a banking union, which would centralize supervision (the single supervisory mechanism, ssm), restructuring policy (the single resolution mechanism, srm) and deposit insurance (the european deposit insurance scheme, edis). the first two pillars of the banking union, ssm and the srm have already been established, and the proposal for the third pillar was accepted for consideration in november 2015. banking union is based on the single rule book to ensure equal conditions for business institutions and the functioning of the regulatory authorities, avoid national regulatory authorities being bias, as well as problems of coordination and cooperation, and at the same time, preventing the spillover of problems from one country to another (gaspar & schinas, 2010). also, this helps preventing the problems that occur in the banking sector to affect the public finances of the national economy, given that with the new approaches, socialization of bank losses is forbidden. banking union is required for the emu member countries, (19 countries currently), while other non-emu countries can join the banking union if they wish. of course, this implies that all three pillars of the banking union must be fully accepted. conclusion financial stability is a precondition for the development of any economy, causing regulatory authorities to monitor the risks that threaten financial stability on an ongoing basis. this includes a two-dimensional approach in which risks are monitored, both at the level of individual financial institutions and at the level of the overall financial system. the central bank has a significant role in preserving financial stability, which is perfectly consistent with its role in implementing the monetary policy. in this sense, the question is: what is the role of the monetary policy in maintaining financial stability? during the recent financial crisis, due to the absence or insufficient development of macroprudential frameworks in many countries, monetary and fiscal policies took an important role in mitigating the financial crisis. however, this kind of engagement of the central bank may quite distance it from its primary objective, which is the pursuit of price stability, because it has to take the role of a distributor and the role of a quasi-fiscal actor. this affects its political responsibility and ultimately may compromise its independence. as an additional problem, time inconsistency can be highlighted, given that the central bank may get itself in a position to put a larger quantum of resources into the system than it is necessary in order to preserve the long-term price stability. such risks can be controlled by the division of goals, instruments and responsibilities of macroprudential and monetary policies, which is especially important if both of these roles are performed by the same institution, the central bank in this case. in order to solve the problem of time inconsistency, being a part of monetary regulation, central bank must take care of price stability first, whereas, maintaining the financial stability is a primary responsibility of macroprudential, and not monetary policy. 142 m. jemović, s. marinković defining the relationship between monetary and macroprudential policy is particularly specific to the area of emu, given that monetary policy is defined at supranational level, whereas macroprudential policy is defined at both supranational and national levels. with the new institutional framework, the ecb has taken a key role in the european systemic risk board as a macro-supervisor, while national supervisors of the member states have jurisdiction over micro-supervision. in addition, there is a formation of the body for macroprudential issues at the national level, either at the central bank or at the supervisory authority. in this way, the jurisdiction of macroprudential policy is divided between the established bodies and ecb. the primary responsibility for maintaining financial stability belongs to the national macroprudential authorities that are trying to use monetary policy as little as possible as a means of preserving financial stability. however, insufficient development and lack of experience in using macroprudential instruments have caused monetary policy to take its stake in preserving financial stability. the financial and debt crisis in the eurozone has clearly shown that in countries that share the single currency, it is necessary to centralize the rules governing the operations of banks, especially due to the exceptional relationship among countries and their banking systems. for these reasons, in june 2012, an initiative for the establishment of a banking union was launched, within which two pillars have been formed so far single supervisory mechanism and single resolution mechanism, while the third pillar the european deposit insurance scheme was accepted for consideration in november 2015. acknowledgement: the paper is an outcome of the projects oi 179015 funded by the ministry of education, science and technological development of the republic of serbia. references 1. bank for international settlements. 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(2010). financial stability and policy cooperation. working papers, 1. 9. greenwood, r., & scharfstein, d. (2013). the growth of finance. journal of economic perspectives, 27(3):3-28. 10. jovanić, t. (2006). kontrola bankarske grupe na konsolidovanoj osnovi:ovlašćenja nadzornog organa sa aspekta prudencione kontrole i saradnja regulatornih tela. bankarstvo,(5-6):20-30. 11. marinković, s. (2004). infrastruktura sigurnosti finansijskog sistema: predlog reforme. bankarstvo, (56):14-26. 12. palley, t. (2007). financialization: what it is and why it matters. working paper, 525. 13. schumpeter j. (1934). the theory of economic development. harvard university press. 14. schinasi, g. (2004). definining financial stability. imf working paper, 187. 15. smets, f. (2013). financial stability and monetary policy: how closely interlinked? penning-och valutapolitik, 3:121-160. 16. the de larosière group. (2009). brussels. preuzeto sa http://ec.europa.eu/internal_market/finances/ docs/de_larosiere_report_en.pdf. the role of monetary and macroprudential policies in pursuit of financial stability 143 uloga monetarne i makroprudencijalne politike u očuvanju finansijske stabilnosti značajne realne i fiskalne implikacije nedavne finansijske krize obnovile su zabrinutost regulatornih organa za finansijsku stabilnost. stabilnost finansijskog sistema podrazumeva njegovu otpornost koja mora biti unapred osmišljena i postavljena duž celog životnog veka finansijskih institucija. autori su u radu najpre izložili pojam i konceptualna pitanja finansijske stabilnosti, a potom sagledali ulogu relevantnih politika za očuvanje finansijske stabilnosti. poseban akcenat dat je ulozi monetarne i makroprudencijalne politike i njihovoj uslovljenosti u realizaciji istog cilja. s obzirom da je politika očuvanja finansijske stabilnosti posebno osetljivo područje unutar evropske unije (eu), u radu je ukratko izložen trenutni okvir za očuvanje finansijske stabilnosti, kao i napori ka stvaranju bankarske unije. ključne reči: kriza, finansijska stabilnost, makroprudencijalna politika, monetarna politika, bankarska unija plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 2, 2014, pp. 101 115 review paper new organizational forms supported by the information and communication technology: the case of serbian ict industry  udc 004(497.11) mirjana petković, jelena lukić  faculty of economics, university of belgrade, serbia abstract. in today’s business environment which is constantly changing, organizations are faced with the imperative to build their competitive advantage through reshaping existing resources and capabilities and through creating new ones. therefore, organizational design has been imposed as an important factor in the business success of the modern company. there are many examples that traditional organizational forms have experienced transformation: they have moved from organizational forms toward new organizational forms. it has also turned out that the basic support for this transition was the introduction of the information and communication technology (ict) in companies’ operations. consequently, ict companies, as the most advanced companies, have become the leaders in introducing the new organizational forms in their functioning and facilitate introduction of new organizational forms in other organizations. in this sense, the aim of this paper is to present new organizational forms based on ict and, on the example of the ict industry in serbia, to show how ict supports their implementation. special attention will be put on the advantages which new organization forms generate in terms of flexibility and integration of creative potentials, but some disadvantages will be analyzed as well. key words: organizational forms, new organizational forms, information and communication technologies. introduction organizational design, which is expected to be the support to the organizational efficiency and effectiveness, has become a strategic organizational resource and managerial tool which enables organizations to do the right things in the right way in given circumstances  received april 29, 2014 / accepted june 25, 2014 corresponding author: mirjana petković faculty of economics, kamenička 6, 11000 belgrade, serbia tel: +381 11 30 21 151  e-mail: mirjana.ekof@ekof.bg.ac.rs  phd candidate m. petković, j. lukić 102 concerning their current financial and human resources. until the eighties of the 20 th century, organizations were building their success on the organizational design which was based on the principles of bureaucracy (specialization, standardization, formalization, centralization). these principles, however, were appropriate only for the conditions of mass production, mass markets and homogeneous environments. today, business environment has changed significantly compared to the previous one. managers are faced with the challenge to design the organization which will be flexible enough, innovative and integrated. all these features are at the same time features that will ensure long-term competitiveness of the organizations. managers today are mostly aware that organizations cannot be successful if they run the business using old routines. they realize that in order to make their companies competitive they often have to adapt or change previous competitive strategies and then to change or adapt the organizational form. it turned out the last one has become one of the most important topics in the management literature since many authors saw changing the organizational forms as a tool for the improvement of organizational efficiency and effectiveness (romanelli, 1991; schreyögg and sydow, 2010). the major catalyst for creation and implementation of novel organizational forms (nault, 1998), which are named „new organizational forms” in literature (daft and lewin, 1993), was the information and communication technology (ict). although the ict has many influences on organizational operations, in terms of organizational design it also enables substantial changes, both in internal and external organizational forms. there is large evidence that new internal forms of organization and work processes can lead to higher performances and raised organizational competitiveness because of the reduction of hierarchical levels, enhanced employees’ creativity etc. in terms of new interorganizational forms ict enhanced the existing and establish new cooperation forms between enterprises (networking) which facilitate access to global markets. knowing these facts it could be said that ict at the same time is the factor and the component of organizational design. new organizational forms (nof), generally speaking, were created on the basis of the previous ones and redesigned with hard and soft elements in the way that adds value and eliminates their disadvantages and limitations for use in new conditions. with the nof, organizational design has become not only the factor for high performance and competitive advantage, but also a strategic resource that companies cannot purchase on the market or copy from others (miles and scaringella, 2012). having in mind the importance of ict for creating new organizational forms, this paper will deal with the analysis of these forms. special attention will be placed on their advantages which could be used for enhancing organizational performances, but we will point out some of their potential disadvantages, too. starting from such defined task, we will deal with two related issues: new organizational forms and information and communication technology. this paper will also deal with the analysis of the serbian information and communication technology industry (ict) which represents the highly competitive export-oriented industry in serbia and very attractive industry for young talents. employees in this sector have understood best that competition is no longer based on traditional resources, combining raw materials, labor and capital, but that the competitive advantage is based on knowledge. by using this example we will try to answer two questions: (1) is it possible to improve competitiveness of companies in serbia by using information and communication technology, (2) what new forms of organizational design should be used in order to improve competitiveness of the company? new organizational forms supported by the information and communication technology  103 1. environmental challenges that organizational design must respond to business environment has changed significantly compared to the environment from a few decades ago, challenging management of organizations to design the organization to be flexible, innovative and integrated. the view on the influence of the environment on organizational designing can be divided into three periods (anand and daft, 2007). the first period, until the 1970s, was based on the premise that an ideal organization must be independent with clearly established boundaries between its own skills and capabilities and suppliers, customers and competitors. this approach led to organizations in which employees were arranged by functions, or divisions and specialized for certain jobs, with vertical hierarchy and a chain of command. when the increasingly complex environment began to point to shortcomings of traditional organizational structures: coordination between functional parts was difficult, vertically established authority did not provide effective value creation for customers, the second period of organizational design started in the 1980s. this period is characterized by redrawing the boundaries of the organization with the aim to improve coordination and communication. along with these changes, the capacity of information processing increased because of the availability of personal computers and further development of information and communication technology which brought us to the third period of organization designing in the mid1990s. managers have become aware that organizations can no longer effectively perform all the tasks necessary to make products and services on their own, which caused a shift in the approach to design and a change of organizational models. the concept „boundaryless organization“ was promoted; it is based on breaking down the barriers imposed by traditional models: vertical barriers between different organizational levels, horizontal barriers between functions that can cause the effect of functional silos, external barriers between companies and external stakeholders and geographical barriers between nations, markets and cultures. all these barriers lead to extensive separation of people and business processes, which is reflected in increased costs, slow business processes and reduced innovation (ashkenas et al. 1995). organizations have recognized the superiority of tearing these barriers down while achieving all the benefits of traditional organizational structures such as specialization and efficiency, that characterize the functional organization, while adapting to the customers and markets, which is a characteristic of divisional organization (miles and snow, 1992). in contrast to organizations that were oriented to the size, defined roles, specialization and control, boundaryless organizations are characterized by speed, flexibility, integration and innovation (ashkenas et al., 1995), and the ability to form a model based on the context that corresponds to the solution of given problems (baker, 1992). all this makes them a more adaptable organizational structure. the important lesson for all contemporary organizations can be summarized in the statement that it is important to cooperate, not only with suppliers and buyers, but also with competition. generally speaking, the trend of interorganizational linkage was created by the need of constant innovation, improvement and adaptation of outputs to market demands and expectations of consumers. although specialization and focusing of organizations on certain activities of the value chain have results such as higher productivity, high quality and lower costs which are basic leverage for organizational competitiveness (porter, 1985) in the globalized market there is a low possibility that a single organization could achieve these results independently. consequently, in recent times managers have found m. petković, j. lukić 104 the solution in partnerships, or in interorganisational collaboration. those new forms of cooperation also have concrete goals on the input side as well as on the side of outputs. the inputs which are brought by partner-members are specific resources that members have in possession such as: space, technology, people, knowledge, skills, markets, etc. basically outputs are the reason why collaborations are made, and they can be: innovations, productivity, quality, learning, new technology, new markets, new higher standards of employees and citizens. in other words, we can say that interorganizational relations are the efficient strategy for concentration of resources in order to improve competitiveness of members and life standards of citizens (delgado, 2010). in that way, contemporary organizations recognized that the new strategy for successful business operations in the globalized market could be interorganisational relations. this strategy became a challenge as well as a trigger for the development of internal capacity of organizations for continued growth and development. many organizations went through the process of internal redesigning in order to get rid of some activities and operations in the value chain, which they were not competent and had no competitive resources for. the canceling of such activities caused the reduction of the number of employees and changes in organizational forms. on one hand, a new source of growth and development of the organization has been found in interorganisational relations and, on the other, they caused size-reduction to the optimal level to make organizations more efficient. 2. new organizational forms developed in the information era: literature review if the environment and the challenges it imposed caused changes in organizational design, then the progress of ict is the key factor to support those changes and facilitate the introduction of new organizational forms (child and mcgrath, 2001). but in order to understand how ict can do this, adequate understanding of what ict represents is necessary. from a technological point of view, one group of scientists argues that information and communication technology is any form of information systems based on computers (orlikowski and gash, 1994), while others think that information and communication technology is represented by computers, e-mail, voice mail, video conferencing, databases and other electronic devices for storing, analyzing, and transmission of information in an organization (ott et al. 2011). from a business perspective we accepted the definition that information and communication technology includes three key resources that, when used together, can be a source of competitive advantage of organizations (ross et al. 1996, p. 33): 1) human resources, 2) technology, and 3) the relationship between ict and management. consequently, according to this view, possession of ict is not a source of competitive advantage per se. the key of organizational functioning and success is its ability to attract and retain human resources (pfeffer and salancik, 1978), and to establish the appropriate relationship between ict and management in order to implement technology in the right way. in other words, the differentia specifica of the organization stems from a combination of organizational assets and skills which, when applied to welldesigned business processes, leads to high value for consumers (mccormack and johnson 2001). this uniqueness is established within organization, within internal organizational structures, systems and processes and it is strongly influenced by internal factors, new organizational forms supported by the information and communication technology  105 particularly leadership that drives employees and it has a big impact on productivity, innovation and efficiency of work processes. it is without doubt that ict has led to new forms of organizational design which removed the barriers imposed by traditional models and form new structures for specific situations (baker, 1992). those new forms could emerge since ict is not simply a tool for automating existing processes, but more importantly ict influenced all structural elements of organizational design and changed their appearance (dedrick, gurbaxani, and kraemer, 2003, p.1) allowing organizations to experiment to discover new and better practices (baldwin, 2012). consequently, new design models emerged which brings new abilities for the 21 st century organizations. in the following text we are going to show nine organizational forms which are most frequently mentioned in contemporary literature and represented in practice: metaorganization, network, virtual, cellular, innovative form organization, platform-ecosystem organizational form, ambidextrous, hypertext, and inverted organization. meta-organizations. new organizational forms, enabled by the development of the internet and related ict technologies, include more organizations and more individuals (gulati, phanish and tushman, 2012), thus, they turned from independent to metaorganizations and represent new foundations on which business strategy is implemented (marciniak, 2013). meta-organizations are those organizations whose members, whether they are organizations or individuals, function independently and legitimately in order to achieve system goals. although meta-organization has not established a formal authority in a contractual relationship, it can have the significant informal authority based on experience, reputation, expertise or control over key resources or technology (gulati, phanish and tushman, 2012). meta-organizations are largely represented in the ict industry, in which the leading companies like microsoft, apple, google, sap and cisco include groups of developers and globally dispersed small and big companies that are characterized by intense flow and exchange of information. network organizations can be defined as a strategic response to environmental pressures that provide incentives to disaggregate business functions to specialist partners (cravens, piercy and shipp, 1996). compared with traditional organizations, network organizations have few essential differences which make them superior organizational forms (miles and snow, 1992, p. 55): 1) unlike traditional organizations that were basically structured with a tendency to internally and independently produce all the goods and services (everything under one roof), network organizations use the assets of several organizations located along the value chain, 2) network organizations rely on market mechanisms through exchange of information, cooperation; they customize products and services according to demands and needs of customers and for that they have significant help from information and communication technology, 3) it is expected that members of network organizations not only meet their contractual obligations, but also to voluntarily work together to improve final products and services, and, because of that, organizations acquire characteristics similar to japanese keiretsu joint cooperation of manufacturers, suppliers, retailers and financial companies. one manifestation of network organizational form is virtual organization which represents a temporary network of independent companies (suppliers, customers, even rivals) linked by information and communication technology to share knowledge, skills, costs and access to one another’s markets (byrne, 1993). the basis of the virtual organization functioning is free and fast gathering, processing, flow of information and mass collaboration, m. petković, j. lukić 106 so without the current capabilities of information and communication technology the virtual organizational form would be very difficult, if not impossible to use. virtual working addresses the need to break with old, bureaucratic ways of working, and to allow rapid innovation, product development (jackson, 1999), fluid state that promotes learning, reflexiveness and growth (allcorn, 1997). as distributed, fluid organization form mediated by various forms of ict, virtual organization has several implications for management because it represents the opposite of the principals of hierarchy: it has no stability, no clear boundaries of authority and accountability, bureaucracy, and no vertical chain of command (petković and aleksić mirić, 2011). cellular organization is made up of cells that possess fundamental functions and can operate alone, but also interact with other cells in order to combine the knowledge to spread innovation and strive for new product and service opportunities (miles et. al., 1997). each cell is responsible to the larger organization, while the customers of a particular cell can be outside clients or other cells in the organization. collaboration among cells increases the potential for bringing employees from different disciplines together for short periods of time who would not otherwise have the opportunity to become engaged in the activity (zammuto et al. 2007). innovative form organization (i form organization). organization’s innovation success comes from opening up its innovation processes to external sources of knowledge and creativity (chesbrough, 2006). the i form organization enables companies to compete effectively by focusing them on their core business activities, outsourcing non-core activities to external providers (miles et al. 2009) and pursuing rapid and continuous innovation through sharing knowledge, experiences and innovative concepts at relatively low cost with advances in ict (snow et al. 2008). it becomes apparent that along the entire value chain, suppliers and distributors might have valuable ideas for product improvements or new market opportunities, so knowledge sharing across these actors is recognized as a mutually beneficial process. the main challenge for organizations is to create trust among organizations as the expectation that other party will fulfill obligations, behave predictably and negotiate fairly (perrone, zaheer and mcevily, 2003). platform-ecosystem organizational form. numerous companies that focus on providing online services and rely on affiliated third parties to provide complementary products and technologies form platform-ecosystem organizational form (yonatany, 2013). platforms, as the common components used across a product family (boudreau, 2010) can be improved by the third parties (evans, hagiu and schmalensee, 2006) when they are used for construction of complementary products and services. this organizational form is very useful in ict enabled industries where the actions and outcomes of a technology entrepreneur are deeply interconnected with the actions and outcomes by others. ambidextrous organization. organizational ambidexterity is the ability to pursue exploitative (efficiency, selection, control, extending existing skills and capabilities) and explorative (search, experimentation, research and development) activities simultaneously (jensen, van den boshc, and volberda, 2006). at first, tushman and o’reilly (1996) analyzed structural ambidexterity by recognizing the presence of separate structures in organizations to achieve the desired balance between exploration and exploitation, while latest research introduced the notion of contextual organizational ambidexterity and analyzed the role of the behavioral context in achieving the balance (gibson and birkinshaw, 2004). information and communication technology has proven itself as a factor that can promote the balance of exploration and exploitation activities (rothaermel new organizational forms supported by the information and communication technology  107 and alexandre, 2009) and ambidexterity in the development of new products and services according to its primary role: transaction, organizing and processing of knowledge, facilitation of coordination, people networks and collaboration (revilla, prieto and rodriguez, 2011). hypertext organization. the need for combining the efficiency and stability of a hierarchical bureaucratic organization with the flexibility of the flat, cross-functional task-force organization has led to new organizational form which, according to nonaka and takeuchi (1995), needs to be designed and managed as a multilayer, hypertext organization. organization knowledge is created and supported by information flowing through three layers: 1) the business-system layer, organized as a hierarchy, for routine operations; 2) the project-team layer where multiple project teams are engaged in knowledge creating activities and 3) the knowledge-base layer which does not exist as an organizational entity, but it is incorporated in corporate vision, organizational culture and technology (nonaka and takeuchi, 1995). inverted organization was proposed to facilitate employees contacts with the customers according to the fact that the vast majority of jobs are now service oriented and that the success of organization lies in intellectual capabilities. former line managers evolve into staff people by removing barriers, expediting resources, conducting studies and acting as consultants, instead of giving orders. what matters is expertise of the professionals, because they work alone to customize products and services for individual customer according to their knowledge and experience (quinn, anderson, and finkelstein, 1996). ict has reduced the need for hierarchy to manage information flows and coordinate activities because information is becoming available to all employees allowing them to organize around the work itself (zammuto et al. 2007). if we examine these new organizational forms, we can notice some of the similar characteristics: 1) development of networks, cooperative relations with all actors in the value chain, association with other organizations; 2) trend towards flatter hierarchical structures within organizations and more cooperative management style; 3) development of a creative, responsive, adaptive, flexible organization; 4) focus on knowledge diversity within partners and facilitation of knowledge sharing and creation, 5) reducing organization to an optimum (rightsizing), focusing on core competencies and outsourcing other responsibilities to other parties. reviewing the literature we have found a multitude of new terms of nof arising from the different perspectives of observations on new organizational forms. a key problem is a lack of clear criteria by which we can distinguish one form from another, as well as the answer to the question whether nof refers to time or to context. empirical work has been fragmented, the literature relies on single case studies (dunford et al. 2007), and there is no unifying theory to interpret empirical findings (pettigrew et al. 2003). what is undoubtedly so is the fact that nof can be characterized as a hybrid forms of hierarchy in which decision rights are delegated to lower levels with support of ict. these are their basic characteristics that distinguish them from the basic organizational forms. in that sense, the degree of delegation of authority and independence of employees are the main criteria by which we can observe variations of nof. m. petković, j. lukić 108 3. characteristics of new organizational forms: advantages and disadvantages given the analysis of literature review, it is important to be able to consider several important characteristics of new organizational forms: first, all forms, without exception are non-original hybrid structures derived from the basic bureaucratic models. second, the development of these forms was inevitable because bureaucratic models are rigid, with strong internal and external boundaries and as such have no potential to quickly respond to changes in environment and interorganizational linkages. thirdly, nof are flat structures with open internal and external boundaries, with intensive communication, movement of people, information and knowledge sharing. fourth, nof are fully supported by information and communication technology, it can be argued that many of them are possible only in the information age (networks, hypertext, platform-ecosystem). fifth, nof are very fluid structures. from the presented characteristics of new organizational forms, we can evaluate their advantages over bureaucratic forms of organization, but at the same time we can observe their disadvantages, as shown in table 1. table 1 advantages and disadvantages of nof advantages disadvantages flexible structure small number of hierarchical levels internally and externally open systems highly informationized organization learning organization employees have a high degree of freedom for creativity and change strive for innovation structure fluidity may produce conflicts lack of formalization can reduce individual performance lack of bureaucratic rules and procedures may reduce the reliability of output informal authority in some cultures do not give the expected results potential distrust among individuals source: authors it is clear that new organizational forms cannot function alone and independently from basic forms, and they are actually enhanced bureaucracy, with the aim to achieve the required flexibility, collaboration and transfer of resources (information, knowledge, experts). but, new organizational forms are not simply bureaucracy dressed in a new and refined disguise, they are carefully designed and controlled by a decentralized principle of power (maravelias, 2003, p. 562). in practice, it is very hard to find the organization with a clear model of some of the new organizational forms. usually, organizations are dual structures with bureaucracy in basis which ensures stability, and some enhanced structure of new organizational form in order to achieve the flexibility of the system. our research also indicates these findings, which will be shown in the continuation of this paper. new organizational forms supported by the information and communication technology  109 4. research design the goal and the object of the research. the field research was conducted with an ambition to get answers to the starting research questions: (1) is it possible to improve competitiveness of companies in serbia by using information and communication technology, (2) what new forms of organizational design should be used in order to improve competitiveness of the company? the object of research, the companies in the ict industry, was not selected randomly; on the contrary, the ict industry is a promoter of informatization of society and organizations, it implements and maintains ict infrastructure in other organizations, and according to literature, it forefronts in the implementation of new forms of organizational design (powell, 1996), which provides great connectivity and cooperation opportunities in this industry (miles et al., 2010). the importance of research. the global crisis is reflected in serbian economy through high unemployment, rising foreign debt, inflation, poor living standard. on the other hand, there are some bright points, such as export of software and ict services: in 2007, the software export amounted to 62 million euros; in 2011, it was up to 166 million, while in 2012 it exceeded 200 million euros (www.pks.rs) and in daily jargon it can be heard that serbia is the country of farmers and ict specialists (www.rtv.rs). ict industry has been recognized by the state as a significant segment for further development of the serbian economy and the government has adopted several policies and strategies. the strategy for development and support of the information technology industry is the most important institutional support that should encourage and support the industry in four segments: start-up, outsourcing, development and export of original software products, development centers of large multinational companies (službeni glasnik rs 72/12). the design of the research. the research was conducted by using the questionnaire technique for data collection: the questionnaire was sent to 40 domestic ict companies, members of ict clusters, which both develop and use information and communication technologies. the questionnaire consists of 20 questions designed in order to indicate: 1) the key characteristics of local ict companies: size, age of the company, number of employees, the opportunities for flexible working hours and working from home; 2) the demographic characteristics of employees in ict companies: age, gender and educational structure; 3) the manner in which employees perform their tasks and activities, share knowledge and information, communicate; 4) the degree of formalization and centralization, 5) cooperation with other organizations and clients, 6) established organizational form. the collected data from the questionnaire was analyzed and interpreted by the description method. also, we used the method of analysis and interpretation of data from secondary sources: official statistics, the ministry of foreign and internal trade and telecommunications, the directorate for digital agenda, ict associations, media and, also, an observation method as the authors had the opportunity to spend some time in one of the ict companies. 5. discussion of research findings age, size and human resources. the surveyed companies have been working 5 to 25 years and measured by the number of permanent staff, they belong to the groups of small (58%) and micro companies (42%). the surveyed ict companies are young if we consider the age structure, since most of the employees (over 80%) are young and younger middle aged workforce that is highly educated most employees (over 90%) m. petković, j. lukić 110 have a university degree. because of the lack of functional knowledge, ict companies pay much attention to training and development: 75% of the surveyed companies responded that they organize internal and external staff training. it can be concluded that serbian ict industry is aware that the 21st century is a century of knowledge and that the human capital is at the top of the list of factors necessary for implementation of business strategies. the described situation goes hand in hand with flexible organizational design and modern organizational forms that with ict support could improve the competitiveness of these companies. communication. serbian ict companies, as supposed, predominantly use electronic means of communication which is very important because most of the surveyed companies allow their employees to work from home (58%), while all companies offer flexible working hours. compared with traditional communication that was placed in the relation superior-subordinate, ict strengthens the intensity and flow of information within the organization in all directions, vertically, horizontally and laterally (hiltz et al., 1986). by rapid increase in the quantity of information and the speed of their transfer from one location to another, ict significantly reduced communication costs (henderson and venkatraman, 1993). well-developed internal and external electronic communication networks in organizations support new organizational forms (child and mcgrath, 2010). it would not be able to imagine interorganizational relationships, networks, multinetworks, virtual teams, and other nof without electronic communication. formalization and specialization. tasks and operations of surveyed companies are heterogeneous, and include sales, working with information technology, management, administration. results showed that domestic ict companies do not have a large number of written rules and procedures, there is no detailed specified job description, so the employees have freedom to perform their tasks in the best possible way at the given moment. however, the companies have an orientation and directing program for new members, as well as written documentation of employees’ performance. in performing daily tasks, the surveyed companies use ict in vat payment, payment of contributions for employees, for sending documentation to public administration, for collecting the necessary forms and information, which results in achieving significant savings in time. informatization of the organization enables the general specialization and low level of division of labor among employees, which brings great benefits for both employees and employers: first ones do not perform monotonous work, and the others have the opportunity to have the job done with a smaller number of employees with broader specialization. however, it would be no good to go to the extreme, since the benefits could turn into disadvantages. responsiveness and agility. the employees of serbian ict companies customize their products and services to meet the needs of customers, so they have a sufficiently broad specialization, which allows them to act flexibly. three quarters of the surveyed ict companies strive to keep customers, involving them fully in the process of creating products and services, and establishing long-term relationships with them through technical maintenance of implemented products and through expert support. when work process is organized by projects, employees with expertise get a certain level of autonomy, expertise-based power that may affect the development of new products. organizational form. the project organization through semi-autonomous project teams is typical for the companies in the ict industry, so in domestic companies we could recognize the hybrid model with features of inverted bureaucracy. in the inverted new organizational forms supported by the information and communication technology  111 organization, experts can independently design and implement the whole project solution for a client, and managers become only support (quinn, anderson and finkelstein, 1996). employees in serbian ict companies are dealing with complex tasks that require teamwork and interdisciplinary knowledge, as their clients are companies from different backgrounds, and as each customer has specific requirements for the solutions they need. at the same time, the parallel existence of few project groups and the engagement of an employee in several projects may cause problems with planning priorities, coordination and control. in order to take advantage of the small semi-autonomous units and project teams, a good combination and cooperation of formal and informal leadership, interweaving of formal and informal authority and coexistence of bureaucracy and adhocracy must exist in those companies. the ict industry in serbia is a leader in establishing interorganizational relations. in this way, these companies have contributed to the affirmation of a cluster, which is seen in serbia as a way of connecting big and small employers, entrepreneurs, universities, institutes, government agencies and associations, with the aim to improve the competitiveness of the national economy (porter, 1998). the literature on nof recognizes a cluster as a meta-organization that it essentially is, because the structure of the cluster is extremely fluid, it has no professionalized leadership and formal authority (west and lakhani, 2008). business and development strategies of ict companies rely not only on efficient internal organization, but also on establishing interorganizational relations with other organizations and companies. ict companies, as modern organizations, have realized that both vendors and distributors are good sources of technical and market knowledge that could be used for further growth and development of production and services. organizational form of serbian companies in the ict industry helps us to be more objective towards linear logic that prevails today in the literature on nof, in which fluidity and flexibility of the organization are over-emphasized and exaggerated. after spending some time within those companies, it can be seen that the reality is very different from the concept offered by some researchers of nof. the actual situation inside the companies indicates that the nonlinear logic in new conditions is more applicable than the linear concept (schreyögg and sydow, 2010). serbian ict industry currently has the following clusters: vojvodina ict cluster voict, nis cluster of advanced technologies nicat, ictnetwork serbia cluster ict net, which integrate companies in this industry, scientific-research institutes and supporting institutions (www.klasteri.mfp.gov.rs and www.ni-cat.org). those clusters began their strategic partnership in 2012, in order to jointly improve the business environment and achieve growth faster than the average, innovation and productivity, to encourage the development of new businesses. financial data for 2010 show that one of the highest turnover is made by the member of two ict clusters (ict net with around 87 million euros and vojvodina ict with 44 million euros). also, cluster members help domestic companies to exit in new markets and increase their visibility using ict. the biggest exporters among clusters are the members of vojvodina ict cluster (20 million euros) and the third place is occupied by ict net (around 10 million euros) (mijačić, 2011, p. 32). programming and computer services dominate in the structure of export of computer and information services, followed by embedded systems and system integration. newly established networks allow benefits to all members of the chain, through the construction of a multi-network (clustering of clusters) (miles et al. 2010). because clusters are geographic concentrations of linked companies, institutions and other entities m. petković, j. lukić 112 important for competition in a particular area, the clusters in serbia are important for balanced regional development. for this reason, the clusters are also established outside of belgrade, such as the newest one in kragujevac, in the business innovation centre (bic), that brought together companies dealing with information and communication technologies from šumadija and pomoravlje, should get the full support from the government and become the business model for connecting young talents in the ict industry (politika, 22 may 2013, p. 14). balanced regional development is also supported by the fact that comtrade’ software development center was opened in kragujevac, which employes 200 it engineers, with promise that there will be 200 employees more until june of 2014 with government support (politika, 19 february 2014). comtrade, as a specialized company for ict solutions, has 16 companies in 11 countries and it largely cooperates with universities, schools and other successful companies. clusters in serbian ict industry will continue to expand because, besides the experts there is supportive macroeconomic and organizational environment and the increased awareness of all those who have interest in improving the competitiveness of serbian economy: companies, small entrepreneurs, researchers and government. conclusion in this paper we presented the new organizational forms that have emerged in response to the challenge of changes in the environment characterized by the appearance of multi-competition. these new organizational forms marked the end of the twentieth and beginning of the xxi century. a literature review showed that their implementation was possible only thanks to advances in information and communication technology. in other words, the complexity of the new intraand interorganizational forms, that have been given new manifestations and characteristics, would not be possible if the ict industry has not progressed in the meantime. thanks to that fact the organizations and management who make decisions on the choice of organizational design were offered new tools to manage multi-business, employees and interorganizational relations. this paper also pointed out that new forms of organizational design are very complex and often complicated to understand, but enable decisions to be made in places where knowledge and specialized expertise are located (operational level). at the same time, the new forms of organizational design enable top management to have control over the processes which take place in the operations and to successfully coordinate them. the research conducted in serbian ict industry confirmed to a large degree our initial view that nof and ict are in close interdependence. we believe this is an appropriate strategic choice especially in today’s business environment where interorganizational relations are highly globalized or where they are established in the form of clusters, which is the case of serbian ict sector. we also believe that interdependence of nof and ict is the strategic choice which provide modern organizations with successful business and competitiveness in the long term. the main message that we tried to convey by this paper is that sustainable competitiveness in terms of multi-competition cannot be achieved in the old way and that ict today allows organizations to use competent employees positioned in a new way in organizing scheme to achieve efficiency and effectiveness simultaneously. new organizational forms supported by the information and communication technology  113 references 1. anand, n., daft, r. 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tranziciji bila uvođenje informaciono-komunikacione tehnologije (ikt) u poslovne operacije kompanija. posledično, ikt kompanije kao najnaprednije kompanije, postale su lideri u uvođenju novih organizacionih formi i ubrzale njihovo uvođenje i u druge kompanije. u tom smislu, cilj ovog rada je da predstavi nove organizacione forme bazirane na ikt, a zatim da na primeru ikt industrije srbije pokaže kako je ikt podržala njihovu implementaciju. posebna pažnja biće posvećena prednostima koje nove organizacione forme generišu u pogledu fleksibilnosti organizacija i integracije kreativnih potencijala, ali će, takođe, određena pažnja biti posvećena i nekim od njihovih nedostataka. ključne reči: organizacione forme, nove organizacione forme, informaciono-komunikaciona tehnologija. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 2, 2016, pp. 187 203 impact of innovation on employment and income of small and medium-sized enterprises in the republic of serbia1 udc 330.341:334.63/.64 dušan cvetanović 1 , miroljub nikolić 2 , slobodan pokrajac 3 1 faculty of economics, university of niš, serbia 2 ministry of economy, department for regional development and strategic analyses of the economy, belgrade, serbia 3 faculty of mechanical engineering – university of belgrade, serbia abstract. small and medium-sized enterprises are the “driving force” of modern economies because of the contribution which is reflected in employment, increased exports, dynamics of competition, etc. new and existing innovative smes increase overall productivity and competitiveness of the economy, squeezing out less efficient enterprises with lower productivity. by constructing an appropriate econometric model, this paper shows that the income of smes significantly depends only on the number of employees in a particular enterprise, not on innovation and the number of employees in research and development areas. the results obtained prove that innovative smes do not create more jobs and do not generate higher income compared to non-innovative smes in the republic of serbia. key words: innovation, small and medium-sized enterprises, innovative small and medium-sized enterprises introductory remarks in most countries, small and medium-sized sector means small and medium-sized enterprises (sme) of up to 250 or 500 employees, depending on the country and upper limit for individual economic activities. according to the legal status, the sme sector consists of individually-owned enterprises, partner enterprises, as well as small family businesses. these enterprises include owners and workers employed, as well as people engaged in handicraft business or other small business activities. 1received march 23, 2016 / accepted may 30, 2016 corresponding author: dušan cvetanović, phd student faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: dusan.cvetanovic@ymail.com 188 d. cvetanović, m. nikolić, s. pokrajac small and medium-sized enterprises are, according to the new definition of the european commission, enterprises with less than 250 employees, an annual turnover of up to 50 million euros, or a balance sheet total of no more than 43 million euros, where the ownership, i.e. control share by other enterprises or multiple enterprises does not exceed 25% (european commission, 2005, 14). in the republic of serbia, enterprises are, based on size, classified pursuant to the law on accounting, which was adopted in 2013 (official gazette of rs, no. 062/2013). under this law, enterprises (legal entities) are classified into micro, small, medium-sized, and large, depending on the average number of employees, operating income, and average value of business assets determined as of the regular annual financial report for the business year. newly established legal entities are classified on the basis of data in financial statements for the business year in which they are established and the number of months in business, and this data is used for the current and the next financial year. even before the adoption of the law on accounting, statistical monitoring of smes was adapted to the european commission’s recommendations in terms of definition and statistical monitoring of small and medium-sized enterprises. in an effort to harmonize its work with international recommendations and standards, statistical office of the republic of serbia in 2005 started monitoring and publishing basic macroeconomic indicators of enterprises (number of enterprises, number of employees, turnover and gross value added, number of enterprises engaged in export and export value, number of enterprises engaged in import and import value, etc.) according to their size. statistical monitoring of enterprises is adjusted to the methodology of the system of national accounts (sna). the monitoring encompasses non-financial sector of the economy, with the data obtained from administrative data sources – annual statements of enterprises (processed by the bra) and customs records. the results of the processing of individual annual financial statements (account settlement) for enterprises on the territory of the republic of serbia (without kosovo and metohija) are given from the point of division into micro, small, medium-sized, and large enterprises. the division of enterprises according to the size is done in accordance with international recommendations, based only on the number of employees, in the following way: 0 to 9 employees characterize micro enterprises, 10 to 49 employees characterize small enterprises, 50 to 249 employees characterize medium-sized enterprises, while enterprises with more than 250 employees are large enterprises. innovative enterprise can be defined in several ways. according to the basic definition, innovative enterprise is the one that implements at least one innovative activity, whereas the product or process innovator is an enterprise that implements either product innovation or process innovation (http://epp.eurostat. 15 june 2013). innovative enterprises are those that have introduced innovation during the observed period, where innovation does not have to achieve commercial success. innovative enterprises can be divided into those that develop innovation mainly independently or in collaboration with other enterprises or public research organizations, as well as enterprises that innovate mainly by taking innovation (for example, new equipment) developed by other enterprises. innovative enterprises may also vary according to the types of innovation implemented. accordingly, there are innovative smes that implement new products or processes, new marketing methods, or organizational changes (unesco, 2009, 28). innovation-active enterprises are characterized by taking innovative activities in the reporting period, including current and abandoned innovation activities. in other words, impact of innovation on employment and income of small and medium-sized enterprises in serbia 189 enterprises taking innovative activities in the reporting period, regardless of whether the activity resulted in the implementation of innovation, are considered innovation-active enterprises. potentially innovative enterprises are innovation-active enterprises, which made innovation efforts, but did not achieve innovation results (vanhaverbeke, west, 2006, 47). this is a key element in innovation policies whose aim is to encourage, facilitate, and assist businesses to be innovative. there are also other ways of defining and classifying innovative enterprises depending on research needs. differentiating enterprises based on innovation could be used to determine the percentage of enterprises (by size, sector, country, or otherwise) representing each of the four types of innovation, or the percentage of enterprises that have implemented combined innovation, such as product innovation and marketing innovation or process innovation and organizational innovation. classification by innovative status can also include other information, such as information about the creators of innovation. this can help in determining which enterprises independently develop innovation, which in cooperation with other enterprises and/or research organizations, and which assume almost an innovative solution. the development of knowledge-based economy, changes in business environment, acceleration of the globalization process, creation of a single world market, and global competition are phenomena that enhance the role and importance of smes in the innovation process and the development of modern economy. small and medium-sized enterprises are the driving force of the knowledge economy given their multiple contribution to growth, technological development, rising employment, competitiveness, and export. through successful innovation activities, smes increase income, create new customer needs (new market niches) and better meet the existing ones, develop new technological and nontechnological innovation, connect with each other and work together, thereby reducing the advantage of large enterprises that results from the quantity of available resources and opportunities to achieve economies of scale. the ability of smes to innovate is of great importance because innovation provides sustainable competitive advantage. innovativeness of smes enables and encourages growth of both enterprises at the micro level and the industry in which economies at the macro level operate. a large number of studies show that the size of an enterprise contributes little to the research intensity and innovation effort and that, in certain industries, small and mediumsized enterprises have an advantage in innovative development. this is confirmed by the fact that of the 70 most important inventions in the twentieth century, more than half comes from individual inventors, whose innovative entrepreneurial spirit has created products such as personal computers, jet engine, helicopter, color photography, pen, radar, missiles, cellophane, ddt, streptomycin, biosynthetic insulin, etc. (group of authors, 2002, 31). furthermore, 46 of 58 major inventions in america and western europe in the twentieth century belong to individuals and small businesses. in the united states, according to the national science foundation of the united states, small enterprises are 2.5 times more innovative and 24 times more efficient in their innovation activities than large enterprises (in enterprises with up to 500 employees, each dollar invested in scientific research activities gives 24 times more new inventions than in large enterprises with more than 10,000 employees), while innovation is commercialized one year faster, with 25% lower costs (wipo, 2008, 7). a large number of small and medium-sized enterprises are characterized by efficient innovation abilities, which allow them to improve business and acquire better position on 190 d. cvetanović, m. nikolić, s. pokrajac the market. in order to survive and develop, small and medium-sized enterprises need to implement and improve their innovation activities, so that they could be successful in the creation and application of new knowledge and innovation. the capacity of enterprises to successfully innovate determines the scope and type of their competitive advantage. innovation capacity of enterprises is not the same for all smes, as it depends on numerous factors (nikolic, despotovic & cvetanovic, 2015). capacity of smes to innovate largely depends on the area in which they operate, business environment, opportunities for sharing knowledge and information, innovative cooperation, orientation of owners (managers), availability of professional, skilled, and innovation-oriented staff, capacity to manage innovation processes, access to existing technology, availability of financial resources, availability and development of infrastructure (technical facilities, training centers, etc.), regulatory framework for innovation (subsidies, tax system and tax relief, protection of intellectual property rights, standards, etc.), existence of networks, alliances, clusters, and other supporting infrastructure. in order to monitor the level of innovation in the eu, eurostat, in cooperation with relevant statistical organizations of the member countries, collects information on innovation in the eu, in order to meet the needs of development policy makers and the scientific community. the obtained data allows decision-making on the need and ways to help and encourage innovation, and helps in taking a variety of initiatives and programs, such as innovation union or the european research area, in the context of the european development strategy, europe 2020. statistical monitoring of innovation for the needs of eurostat, i.e. european commission, is based on community innovation survey (cis) 2 , which is implemented in all eu member states, candidate countries for accession to the eu (iceland, serbia, and turkey), and norway. this survey statistically monitors activities of enterprises in the field of product/service innovation, process innovation, organizational innovation, and marketing innovation. legal basis for conducting surveys and collecting data on innovation activities of enterprises is the directive 1450/2004, issued on august 13th 2004 (1608/2003/ec), which elaborates decisions relating to the implementation and development of statistics to monitor innovation. study of innovation activities of enterprises also relies on ad hoc modules, which focus on internal and external skills and methods to stimulate new ideas and creativity. the results highlight the differences between innovative and non-innovative enterprises. in addition, these studies provide information on enterprises that acquire specific knowledge from the environment, as well as information on enterprises that mainly rely on internal capacities (for example, in the fields such as multimedia, web design, market research, mathematics, etc.). the obtained data also shows methods that have proven to be successful for stimulating creativity: brainstorming sessions, multi-disciplinary and/or inter-functional work teams, courses and trainings, job rotation or financial and nonfinancial incentives for employees, and others. since the survey of innovation activities of enterprises, conducted for eurostat, also contains data related to innovative enterprises in serbia, the following part will provide a comparative overview of the results of innovation activities of enterprises from eu member states and candidate countries (including serbia), judged by several innovation aspects, using the latest available data related to the reporting period from 2008 to 2010 2 community innovation survey impact of innovation on employment and income of small and medium-sized enterprises in serbia 191 (nikolic, cvetanovic & despotovic, 2015). the greatest attention is paid to the position of serbia in relation to the average of the eu and neighboring countries (hungary, slovenia, croatia, romania, and bulgaria). the subject of research presented in this paper is the relationship between innovative small and medium-sized enterprises in the republic of serbia and their employment and the generated income. the research covers the period from 2004 to 2014. the goal of the research is to gain the answers to the following questions: a) do innovative smes in serbia create more jobs in comparison to non-innovative enterprises, and b) do they generate higher income compared to non-innovative smes. answers are obtained through the appropriate econometric model, using specific statistical data on innovation activities of smes in serbia, obtained from the community innovation survey. the subject and goal of the research determine the paper structure. the first part deals with the development of the sme sector in the republic of serbia, with emphasis on technological intensity of the sector. the second part looks at the sources of the data used in the study. the third section presents the research results. 1. the development and technological intensity of small and medium-sized enterprises in serbia in the modern economy, smes are considered the drivers of economic growth and employment growth. the achieved level of development and the importance of small and medium-sized enterprises are usually measured by three main indicators: number of enterprises, number of employees, and gva. a typical enterprise in serbia employs on average 3.6 workers, which shows that serbian economy is dominated by small business entities (entrepreneurs and micro enterprises). in terms of employment, as in previous years, smes employ over two thirds of workers in the economy. due to higher capital intensity, growth of enterprise size increases its share in the creation of added value. although small and medium-sized enterprises in 2014 accounted for 56% in the creation of total value added, their importance in terms of employment was lower. the three basic indicators of sme business have different trends, especially during the economic crisis (after 2008). trend in the number of smes in the observed ten-year period (from 2004 to 2014) differs from the trend in employment and gross value added. in times of crisis, out of the three observed indicators, only the number of smes had a positive growth trend (though at a significantly slower pace), while the other two indicators (employment and gva) recorded stagnant or declining trends (fig. 1). after three years of constant decline (2004 to 2006), the number of smes recorded constant growth (2007 to 2011), with the largest growth achieved in 2007. the next three years recorded a cyclical trend in the number of smes. first, 2012 and 2013 recorded a slight fall in the number of smes, followed by slightly higher growth in 2014. in 2014, as compared to 2004, the number of smes increased by 39,134 enterprises, i.e. by 13.7%. such trend in the number of smes was primarily affected by the number of entrepreneurs, micro, and small enterprises, while the number of medium-sized enterprises after 2008 constantly decreased. the number of small businesses constantly increased in the period 192 d. cvetanović, m. nikolić, s. pokrajac from 2004 to 2008, then, in the next three years, their number decreased, and again recorded an upward trend. a similar trend was also observed in respect of micro enterprises, which, from 2006, recorded constant growth, which slowed down in 2014. 90 100 110 120 130 140 150 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 number of enterprises employment gve 2 0 0 4 = 1 0 0 fig. 1 trend in the number of enterprises, employment, and gross value added of smes in serbia in the period from 2004 to 2014 (2004 = 100) source: authors, based on the data of the statistical office of the republic of serbia in times of crisis, the number of entrepreneurs and micro enterprises constantly increased, contrary to the changes in the number of other enterprises, judging by size. the constant increase in the number of entrepreneurs and micro enterprises was the result of several factors. specifically, most of these enterprises came from the service sector, where crisis had a lower impact. however, it hit production activities stronger, particularly those fields, i.e. export-oriented production enterprises that export a large part of its products to foreign markets. due to reduced foreign demand, export-oriented enterprises had to reduce both the volume and value of exports, which had a direct impact on their number and performance. furthermore, lower dependency of these enterprises on financial market conditions (financing, loans, obtaining guarantees, and the like) affecting mainly larger enterprises proved to be good, because the financial market crisis had a much lower spillover effect on their operations. in addition, closing, i.e. extinguishing of a large number of micro enterprises and entrepreneurial businesses was offset by the opening of new (the so-called start-up) businesses. the number of newly established enterprises in times of crisis was largely influenced by various government (primarily financial) incentives, through which the state sought to increase the establishment of new enterprises, and thus mitigate the negative effects of the crisis (primarily unemployment growth). furthermore, it is a well-known fact that economic crisis, i.e. economic downturn, leads to faster growth of newly established enterprises, because economic depression improves conditions for the launch of new, primarily micro enterprises (due to depreciated input prices, lower real estate prices, cheaper labour, etc.), and the growth in the number of potential entrepreneurs, who mostly come from the group of redundant (dismissed) workers in large enterprises or other enterprises closed due to the crisis (the so-called necessity entrepreneurs), or those who are dissatisfied with current conditions in large enterprises and decide to start their own business (the so-called opportunity entrepreneurs). impact of innovation on employment and income of small and medium-sized enterprises in serbia 193 in the reporting period, the number of large enterprises had a constant declining trend (opposite to smes), so that the number of large enterprises in 2014, compared to 2004, decreased by 275 enterprises, i.e. 35.8%. the opposite trend in the number of smes and large enterprises resulted in a decrease in the average enterprise size in the economy (in 2004, the average enterprise in serbia had 4.8 workers, while in 2011, that number decreased to 3.6 workers). the share of sme employees in total employment in the period from 2004 to 2008 had an increasing trend (from 54.7% in 2004 to 67.2% in 2008), while the period of crisis recorded the opposite trend. in the period from 2008 to 2014, the share of smes in total employment gradually decreased, so that, in 2014, it amounted to 64.8%. however, despite the reduction in the time of crisis, the share of sme employees in 2014 was by 10 percentage points higher, compared to 2004. the largest increase in employment in entrepreneurial businesses was recorded in 2005 and 2006, while in the next two years the number of employees in these businesses stagnated. the onset of crisis in 2008 strongly hit these businesses, so that employment in the next three years recorded a significant decline, while in the period from 2011 to 2014 employment in entrepreneurial businesses stagnated. despite the fall in the period of crisis and stagnation thereafter, employment in entrepreneurial businesses in 2014 was still higher compared to 2004. similar trends were recorded in other enterprises (growth of employment in the years before the crisis, decline in conditions of crisis, and stagnation after the crisis). in 2014, as compared to 2013, only entrepreneurial businesses increased employment, while micro, small, medium-sized, and large enterprises decreased employment (fig. 2). 60 70 80 90 100 110 120 130 140 150 160 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 entrepreneurs micro small medium smes large 2 0 0 4 = 1 0 0 fig. 2 change in employment by enterprise size in serbia in the period from 2004 to 2014 (2004 = 100) source: authors, based on the data of the statistical office of the republic of serbia less pronounced employment trend in relation to other indicators, especially gva, can be explained by various factors. first, changes in employment are generally less pronounced, compared to other indicators which measure business activity of the company, because due to the existence of collective agreements, high cost of training of new workers, and the like, employment does not completely go in line with economic conditions. at the same time, in the years of crisis, especially in 2010 and 2011, various measures to support the operations of enterprises played an important role in mitigating 194 d. cvetanović, m. nikolić, s. pokrajac the crisis. the key element in the anti-crisis support programs was the maintenance of employment, i.e. keeping of employment at the highest possible level, so that the state approved a variety of subsidies in order for enterprises to maintain the same level of employment, thereby reducing the pressure that enterprises had related to the dismissal of workers because of the sharp drop in demand. effects of state aid were significantly more pronounced in large enterprises than in smes, but were completely absent in entrepreneurial businesses. however, despite state aid, unemployment in serbia is extremely high and represents a major development, social, and community problem. the current policy of encouraging new employment (for example, by financial incentives to large enterprises to hire new workers – up to 10 thousand euros per employee) has proved to be expensive and insufficiently effective mechanism. therefore, the solution to high unemployment should be sought in encouraging smes, because only they have the capacity to significantly hire new workers and thus mitigate or completely solve the long-term problem of unemployment in the economy. the research of employment in small and medium-sized enterprises may be supplemented by an analysis of the volume and trends of the gross wages paid to employees by enterprises for the work performed. in most economies, wages of workers in smes are on average lower than wages in large enterprises. this rule also applies to serbia. this can best be seen when comparing the average gross wage per employee in enterprises of various sizes. in 2014, the average wage in sme was 23.2% lower than the average wage in large enterprises, and, within smes, the highest average was achieved by those employed in medium-sized enterprises. observed by sectors, the highest average wages were in the sectors of information and communication, professional, scientific, and technical activities, and state administration and compulsory social insurance, which employed only 10% of all employees in smes. the lowest average wages were in sectors: accommodation and food services, education, manufacturing industry, and construction. the difference in wages in smes and large enterprises is the result of a greater presence of large enterprises in capital-intensive sectors. it is known that employees in sectors with relatively large capital and more complex manufacturing processes have higher wages. another reason which, in the present conditions, leads to a nominal difference in the average wages between smes and large enterprises is the phenomenon of underreporting of total wages (most often in entrepreneurial businesses and small enterprises), in order to reduce the tax base. in practice, this means that employers pay wages to employees in two ways. the first is the legal way, which involves the payment of the minimum prescribed wage or slightly above it (this portion of the wage is taxed and statistically recorded), and the second portion of the wage is paid outside of legal flows (in cash), which is not subject to taxation and statistical recording. the difference in wages between large enterprises and smes also occurs due to uneven protection of employees, i.e. weak unionisation of workers in smes and better trade union protection of workers in large enterprises, especially in large state-owned or privatized socially owned enterprises. gross value added is a good indicator of business efficiency of enterprises. in the period from 2004 to 2009, real gva of enterprises in serbia was constantly growing. as gva grew faster in smes in relation to large enterprises during this period, the share of smes in creating gva of the economy constantly increased. after 2009, the trend was completely opposite, since there was a constant decline in the total gva, and the decline in the share of smes in creating gva of the non-financial sector of the economy (fig. 3). impact of innovation on employment and income of small and medium-sized enterprises in serbia 195 0 500 1.000 1.500 2.000 2.500 3.000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 entrepreneurs micro small medium large fig. 3 the value of gva according to the size of enterprises in serbia in the period from 2004 to 2014 in millions of dinars (constant prices from 2014) source: authors, based on the data of the statistical office of the republic of serbia analysis of movement of real gva growth rate indicates that entrepreneurial businesses lag behind other enterprises, and a negative growth of real gva from 2007. in other enterprises, slowdown in the annual real growth of gva was observed in 2008, and in 2009, the decline was recorded in all enterprises (the largest fall was in micro and small enterprises). in 2010, the decline continued with entrepreneurial businesses and mediumsized enterprises, whereas micro, small, and large enterprises achieved growth of real gva. in 2011, the negative trends from 2009 repeated, but at a much lower level. negative trends were recorded in the next three years as well, except that particularly negative trends were recorded in 2013, when the real annual fall in gva was the largest in all enterprises. innovation, research and development, and knowledge are considered important drivers of productivity, growth, and competitiveness, whereby small and medium-sized enterprises are attached the key role in the creation of knowledge. accordingly, the focus is on the activity of smes in high-tech knowledge-intensive manufacturing and service industries, and their participation in these sectors compared to large enterprises. this is especially important in times of crisis, when it is necessary to restart the development of the economy, because innovative smes can play a key role in reviving the economy and achieving significant long-term growth. in 2014, high technology sectors (ht and hkis) employed 30,485 workers, which makes 4.0% of total employment in the non-financial sector of the economy (fig. 4). although the total number of employees in 2014 in the high-tech sector decreased by 299 employees (1.0%), compared to 2009, its share in total employment increased because employment in the economy decreased at a higher rate (12.7%). 196 d. cvetanović, m. nikolić, s. pokrajac -12,7 -2,7 -13,6 -35,9 -12,7 18,9 -6,4 66,8 -7,0 -24,8 -11,2 117,6 7,2 68,5 7,6 17,3 1,6 82,9 -60 -40 -20 0 20 40 60 80 100 120 smes total smes ht sectors smes manufacturing smes ht smes services smes hkis employment gve productivity fig. 4 real growth in employment, gva, and productivity in the period 2009-2014 source: authors, based on the data of the statistical office of the republic of serbia the increase in employment in 2014 (by 496 employees – 1.7%), compared to 2013, which is contrary to the movement of the average of the economy and other sectors, demonstrates the importance of high-tech sectors in terms of employment. the significance is even greater because the level of wages in these sectors is significantly above average than most other sectors in the economy, which increases the purchasing power of employees in these enterprises and, consequently, the market demand. -0,9 1,7 -1,0 -5,4 -0,6 4,0 -12,7 -1,0 -13,6 -35,9 -12,7 18,9 -40,0 -30,0 -20,0 -10,0 0,0 10,0 20,0 s m e s t o ta l s m e s h t s e c to r s s m e s m a n u fa c tu r in g s m e s h t s m e s s e r v ic e s s m e s h k is 2013/14 2009/14 fig. 5 change in employment in smes in the period 2009-2014 source: authors, based on the data of the statistical office of the republic of serbia impact of innovation on employment and income of small and medium-sized enterprises in serbia 197 the slower decline in employment in the high technology sector in the period 20092014, and growth in 2014, compared to 2013, indicates a lower elasticity of employment in high technology sectors in relation to the rest of the economy (fig. 6). this can be explained by the higher complexity of jobs and more sophisticated knowledge of employees in high technology sectors, so that each fluctuation (replacement or dismissal) of employees causes higher costs for the enterprise compared to enterprises from other parts of the economy. 3,5 4,5 4,1 4,0 3,3 5,6 3,0 3,5 4,0 4,5 5,0 5,5 6,0 smes ht sectors/smes total smes ht/smes manufacturing smes hkis/smes services % 2009 2014 decreaseincrease fig. 6 change in the structure of employment in the period 2009-2014 source: authors, based on the data of the statistical office of the republic of serbia viewed by the structure of high-tech sectors, there is a big difference between employment trends in ht smes and hkis smes. unlike ht smes, which constantly decreased employment in the observed period (2009-2014), and where the employment decline was more pronounced than in other sectors of the manufacturing industry (the share of ht smes in the manufacturing industry decreased in 2014, compared to 2009, by 1.2 percentage points), employment in hkis smes increased all the time, so that employment growth in 2014, compared to 2009, was 18.9%. employment growth in hkis smes was contrary to the employment in smes in most other service industries, so that employment share of hkis smes in employment in smes in the service sector of the economy increased by 1.5 percentage points. employment growth in hkis smes confirms the greater development and market power of high-tech smes in knowledge-intensive service industries in relation to production high-tech smes in serbia. small and medium-sized enterprises in the field of high technology in 2014 generated 8.0% (82.7 billion dinars) of the total value added of smes, which is by 3.5 percentage points more than in 2009. unlike gva trends in all smes, which saw a real drop in gva in 2014, compared to 2009, gva in the high technology sme sector constantly increased, so that in 2014, compared to 2009, it increased by 66.8% (33.1 billion dinars). the constant growth of gva of smes in the high-tech sector can be explained by the high competitiveness of smes that managed to retain the existing customers and expand the market through competitive business. 198 d. cvetanović, m. nikolić, s. pokrajac products and services that are created in the high-tech sector generally have higher quality, meet the specific needs of customers, are more exclusive, and can be sold at higher prices. movement of gva in serbia is largely in opposition to the movement of gva in most eu countries, where, in times of crisis, gva in high technology sectors decreased more than gva created in the rest of the economy (edgett, 1993). the reason for the decrease in gva in these countries is explained by higher income elasticity of demand for high-tech products and services in relation to products and services from other sectors of the economy. in 2010, berthou and emlinger showed that the sale of high quality products was more sensitive to changes in income per capita than the sale of lowquality products (dess et al. 2007, 92). esposito et al. indicate that the decline in revenue during the crisis, both in the eu and globally, disproportionately affected products and manufacturers from high-tech sectors (esposito & vicarelli, 2011, 92). these authors also expect that after the crisis the trend will reverse, which implies faster growth in the sale of high-tech products. 3,8 32,9 3,7 5,4 1,3 39,9 -6,4 66,8 -7,0 -24,8 -11,2 117,6 -40,0 -20,0 0,0 20,0 40,0 60,0 80,0 100,0 120,0 s m e s t o ta l s m e s h t s e c to r s s m e s m a n u fa c tu r in g s m e s h t s m e s s e r v ic e s s m e s h k is 2013/14 2009/14 fig. 7 trends in gva in the period 2009-2014, in % source: authors, based on the data of the statistical office of the republic of serbia similar to the employment trends, there is a significant difference in the movement of gva in the high technology sector between ht smes and hkis smes. in the observed three-year period, gva in hkis smes constantly grew (contrary to trends in other service sectors), so that the share of gva generated by hkis smes in the total gva in the service sector increased. in high-tech manufacturing smes, situation is the opposite, because the decline in gva in ht smes was higher than the decline in gva in other manufacturing sectors, so that the share of gva generated by ht smes in the manufacturing industry decreased. impact of innovation on employment and income of small and medium-sized enterprises in serbia 199 4,5 6,4 5,1 8,0 5,2 12,5 2,0 4,0 6,0 8,0 10,0 12,0 14,0 smes ht sectors/smes total smes ht/smes manufacturing smes hkis/smes services % 2009 2014 decreaseincrease fig. 8 change in the structure of gva in the period 2009-2014 source: authors, based on the data of the statistical office of the republic of serbia 2. data used in the study most of the world research in this field is based on data obtained from the community innovation survey (cis), as the method of data collection, coverage of observed units, and the data obtained allow various econometric and statistical studies (mairesse & mohnen, 2010). in this way, researchers have the opportunity to explore the starting hypotheses and establish various aspects of sme innovation in the modern economy. accordingly, the basis for econometric research in this paper is the specifically collected statistical data on innovation activities of smes in serbia, obtained from the community innovation survey. econometric analysis was conducted using the eviews 7 software package, based on data from community innovation survey (cis), which the statistical office of the republic of serbia conducted in 2008 and 2010 (the reference year is 2010). the survey included a sample of 3,500 small and medium-sized enterprises from serbia, reaching to the level of regions, in proportion to the number of smes, selected from a set of 12,141 active enterprises with 10 and more employees registered in the statistical business register. the survey of small and medium-sized enterprises focused on a sample stratified by the size of a business entity (small: from 10 to 49 employees; medium-sized: from 50 to 249 employees) and by activity (groups of activities under kd08 – groups of activities were selected according to the eurostat recommendations). realization of the sample was 71.37% (about 15% of the selected business entities were blocked or bankrupt, and about 14% of businesses did not respond to the survey). the obtained results were weighted and calculated at the population level of the enterprise. data collection was based on web questionnaire (51%), survey via e-mail (12%), and printed questionnaire, which was distributed and collected by mail (37%). 200 d. cvetanović, m. nikolić, s. pokrajac the survey on innovation activities of enterprises is the main source of data for measuring innovation, designed to collect information on innovation activities, various aspects of organizational and marketing innovation within the enterprise, as well as on various aspects of the innovation process. the survey recorded the activities of enterprises in terms of product/service innovation, process innovation, organizational innovation, and marketing innovation. the aim of the research was to gain a comprehensive understanding of the real attitude of business policy of enterprises towards innovative activities, in terms of awareness of the needs and effects of innovation in an enterprise, the existing capacities in the enterprise, as well as of factors that hinder or slow down this type of activity. the data obtained shows the type, volume, and quality of innovation activities in enterprises: new or significantly improved products and services, implementation of new or significantly improved processes, logistics, and ways of distribution and promotion (statistical office of the republic of serbia, 2009, 2). the data obtained allows users to understand the process of innovation, sources of information, organization of work, cooperation among enterprises, relationships with the environment, the objectives pursued by enterprises, and other aspects related to innovation activities of enterprises. the enterprise can simultaneously have more than one type of innovative activity over the observed period. in the survey, the enterprise is viewed as a unit, whereas an innovative activity is seen as a phenomenon (multiplied number). the survey saw innovation as based on the application of a new or significantly improved product (goods or service) or process, a new marketing method, or a new organizational business method, organized work and relations with the environment. such innovation activities can be developed by the innovating enterprise itself, along with other enterprises, by another enterprise, or can represent adaptation or application of the processes originally developed by other enterprises or institutions. simple resale of new products and services purchased from other enterprises is not considered innovation. innovation should be new at least for the observed enterprise. in some cases, innovative enterprises may cooperate with other entities in the business environment, and partners for cooperation may be found in other countries. 3. research results 3 the research focused attention on the examination of the links between innovativeness of smes, on the one hand, and employment and income, as important enterprise performance indicators, on the other hand. the basic assumption is that innovative smes recruit more workers and have better production processes through which they are able to, with less investment of labour and capital, achieve higher income. accordingly, the following research hypotheses were defined: h0: innovative small and medium-sized enterprises create more new jobs and generate higher income; h1: innovative small and medium-sized enterprises do not create many new jobs and do not generate higher income. 3 the obtained results of econometric research should be interpreted with caution, since the data series of only two years is short for this kind of research, which reduces the possibility of reliable and solid conclusion, but is a good basis for future research. impact of innovation on employment and income of small and medium-sized enterprises in serbia 201 to analyse these hypotheses, the following two equations were used: emp = c + c1 inov + c2 erd + c3 inc + ɛ (1) inc = c + c1 emp + c2 erd + c3 inov + ɛ. (2) emp – number of employees in the surveyed small and medium-sized enterprises; inov – dummy variable for innovation (in the event that the enterprise declared itself as a non-innovator, it takes the value of 0, and if the enterprise declared itself as an innovator, it takes the value of 1); erd – number of employees in research and development in the surveyed small and medium-sized enterprises; inc – generated income of the surveyed enterprises. the first equation proves the first part of the hypothesis, based on which innovative small and medium-sized enterprises create more jobs. the obtained result shows that the number of employees in small and medium-sized enterprises is statistically significantly affected by the number of research and development employees within the enterprise and income of the enterprise, but not its innovation activity (table 1). table 1 employees in the surveyed small and medium-sized enterprises dependent variable: emp method: least squares date: 25/02/16 time: 17:52 sample (adjusted): 1,794 included observations: 790 after adjustments variable coefficient std. error t-statistic prob. c 89.60895 29.11450 3.077812 0.0022 inov -16.80740 22.17116 -0.758075 0.4486 erd 26.41740 1.185967 22.27499 0.0000 inc 2.05e-06 7.75e-07 2.647385 0.0083 r-squared 0.397535 mean dependent var 256.4342 adjusted r-squared 0.395235 s.d. dependent var 957.1531 s.e. of regression 744.3455 akaike info criterion 16.06794 sum squared resid 4.35e+08 schwarz criterion 16.09159 log likelihood -6342.836 hannan-quinn criter. 16.07703 f-statistic 172.8800 durbin-watson stat 1.912994 prob(f-statistic) 0.000000 based on the results of the second equation, it can be concluded that the income of small and medium-sized enterprises statistically significantly depends only on the number of employees in a particular enterprise, not on innovation and the number of employees in research and development (table 2). 202 d. cvetanović, m. nikolić, s. pokrajac table 2 the income of the surveyed small and medium-sized enterprises dependent variable: inc method: least squares date: 25/02/16 time: 21:37 sample (adjusted): 1,794 included observations: 790 after adjustments variable coefficient std. error t-statistic prob. c 2439354. 1339918. 1.820525 0.0691 emp 4309.823 1627.955 2.647385 0.0083 erd 27054.43 69434.32 0.389641 0.6969 inov -581395.8 1016572. -0.571918 0.5675 r-squared 0.017733 mean dependent var 3463872. adjusted r-squared 0.013984 s.d. dependent var 34364798 s.e. of regression 34123676 akaike info criterion 37.53393 sum squared resid 9.15e+17 schwarz criterion 37.55759 log likelihood -14821.90 hannan-quinn criter. 37.54302 f-statistic 4.729916 durbin-watson stat 2.024413 prob (f-statistic) 0.002809 based on these results, h0 hypothesis cannot be accepted, but h1 hypothesis can, based on which innovative smes do not create more jobs and do not generate higher income, compared to non-innovative small and medium-sized enterprises in the republic of serbia. conclusion income of smes statistically significantly depends only on the number of employees in a particular enterprise, not on innovation and the number of employees in research and development departments. the results obtained prove that innovative smes do not create more jobs and do not generate higher income, compared to non-innovative small and medium-sized enterprises in the republic of serbia. innovative smes do not create more jobs. the obtained result shows that the number of employees in small and medium-sized enterprises is significantly affected by the number of employees in the research and development within the enterprise and enterprise income, but not its innovation activity. references 1. group of authors, (2002), analysis of the development of small and medium-sized enterprises and entrepreneurship in serbia, republic institute for development, republic agency for the development of smee, belgrade. 2. edgett, s., (1993), developing new financial services within uk building societies, international journal of bank marketing, vol. 11, no. 3. 3. european commission, (2005), the new sme definition user guide and model declaration, enterprise and industry publications. 4. dess, g., lumpkin, t, eisner, a., (2007), strategijski menadžment, data status, beograd. impact of innovation on employment and income of small and medium-sized enterprises in serbia 203 5. esposito, p., vicarelli, c., (2011), explaining the performance of italian exports during the crisis: (medium) quality matters, luiss lab of european economics, working paper no. 95. 6. mairesse, j., mohnen, p., (2010), using innovation surveys for econometric analysis, working paper series, unu-merit working papers, issn 1871-9872 united nations university. 7. nikolic, m., cvetanovic, d., & despotovic, d. (2015). innovativeness of small and medium-sized enterprisesin the republic of serbia and countries of the european union, marketing, 46(3), 197-207. 8. nikolic, m., despotovic, d., & cvetanovic, d. (2015). barriers to innovation in smes in the republic of serbia. ekonomika, 61(4), 89. 9. statistical office of the republic of serbia, (2009), innovative activities of enterprises 2008-2010, working document, belgrade. 10. official gazette of rs, no. 062/2013 11. law on accounting, official gazette of rs, no 062/2013 12. http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/innovation_statistics, 15 june 2013 13. unesco, measuring innovation, (2009), training workshop on science, technology and innovation indicators, ppt, cairo, egypt, 28-30, http://www.uis.unesco.org/sitecollectiondocuments/measuring%20innovation.ppt. 14. vanhaverbeke, w., west, j. (eds.), (2006), open innovation: researching a new paradigm. oxford: 1-12. 15. wipo, (2008), recommendations for strengthening the role of small and medium-sized innovation enterprises in countries of the commonwealth of independent states, prepared by the division for certain countries in europe and asia, tool_6 uticaj inovacija na zapoljšavanje i prihod malih i srednjih preduzeća u republici srbiji mala i srednja preduzeća su "pokretačka snaga" savremenih privreda zbog doprinosa koji se ogleda u zapošljavanju, povećanju izvoza, dinamiziranju konkurencije, itd. nova i postojeća inovativna msp doprinose povećanju ukupne produktivnosti i konkurentnosti privrede, istiskujući manje efikasna preduzeća sa nižom produktivnošću. u radu je putem konstruiranja odgovarajućeg ekonometrijskog modela dokazano da prihod msp statistički značajno zavisi samo od broja zaposlenih u konkretnom preduzeću, ne i od inovativnosti i broja zaposlenih u istraživanju i razvoju. na osnovu dobijenih rezultata dokzano je da inovativna msp ne kreiraju više novih radnih mesta i ne stvaraju veći prihod u odnosu na neinovativna mala i srednja preduzeća u republici srbiji. ključne reči: inovacije, mala i srednja preduzeća, inovativna mala srednja preduzeća plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 11, n o 3, 2014, pp. 237 249 synergistic effects of internal audit and lean-six sigma concept on business process improvement  udc 657.6+005.6 milica đorďević, bojana novićević čečević university of niš, faculty of economics, niš, serbia abstract. faced with a series of challenges within the environment in which they operate, companies are more than ever aware of the fact that efforts aimed at improving business processes are some of the basic conditions, not only of growth and development, but also of the survival of the company. only in this way can the opportunities for achieving different dimensions of competitiveness be created (in terms of costs, quality, delivery reliability, speed of monitoring the changes in demand, introduction of new products, etc.). business process improvement can be implemented with the support of a number of concepts, among them being lean-six sigma. however, the great potential in this regard also lies in internal audit. in this regard, this paper will first discuss the essence and assumptions underlying the internal audit and lean-six sigma concept, and then review the possibilities of their integration in order to achieve better results. key words: internal audit, lean-six sigma, process improvement. introduction contemporary environment in which the companies conduct their business activity is characterized by constant and very rapid changes in all segments. in addition to its dynamic character, the environment is becoming increasingly complex, with increased number of components, their internal complexity, and the interaction among them. under such circumstances, successful business can be realized only by those companies which continually adapt to these changes, not only through the creation of new business systems, but also through the continuous improvement of their existing business processes. therefore, the guarantee of success presupposes the achievement of higher levels of effectiveness and efficiency of business processes, i.e. the achievement of desired results through the right way of the performance of business processes. received august 28, 2014 / accepted december 17, 2014 corresponding author: milica đorċević faculty of economics, university of nis, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 663  e-mail: milica.djordjevic@eknfak.ni.ac.rs 238 m. đorđević, b. novićević ĉeĉević approaches to business process improvement, which have been developed in practice, are numerous and their starting points are different. among other things, internal audit and lean-six sigma concept, which stand for the subject of this paper, have completely different assumptions and methodology for business process improvement. however, despite the significant effects of business process improvement experienced by a number of companies that have implemented some of these approaches, practice has given birth to the idea of their integration. therefore, in addition to the focus on business process improvement in the company, this could produce significant positive effects on the implementation of the very approaches. 1. internal audit and lean six sigma – contemporary approaches to business process improvement the necessity of continuous business process improvement conditioned the practical development of different methodologies, techniques, tools, and programs. some of the most famous are jit and tqm system [more on that in 3]. moreover, internal audit and lean-six sigma emerged as very useful approaches. although these approaches have a different starting point, the methodology, the focus and the effects, the fact is that their contribution to the business process improvement is extremely high. the remainder of this paper will briefly reflect on the essence of these approaches. 1.1. internal audit the development of internal audit is associated with the development of accounting, when its primary purpose was to reduce errors in bookkeeping, prevent fraud, and misappropriation of assets. however, with the development of companies and the separation of the management from the ownership, its scope of activity, powers, and responsibilities have continuously evolved [5, 126-127]. so, today, internal audit provides the major contribution to the achievement of companies’ goals and implementation of strategies for the achievement of these goals [9, 138]. besides providing assurance that the information contained in the books accurately reflects the facts, internal audit evaluates the policies, procedures, use of authority, management quality, effectiveness of methods, special problems, and other phases of operations [6, 4]. therefore, in addition to the financial audit (which aims to verify the reliability of accounting and financial statements), internal audit covers the so-called operational audit, which involves evaluation of business processes in general. operational audit has the 3e characteristics, as it involves “a systematic process of evaluating an organization’s effectiveness, efficiency and economy of operations under management’s control, and reporting to appropriate persons the results of the evaluation along with recommendations for improvements” [17]. in accordance with this definition, operational audit involves the use of logical, systematized, and organized set of procedures, aimed at determining whether the policies and procedures that the companies apply can produce optimal levels of efficiency, effectiveness, and economy of business processes. in this regard, its scope involves: synergistic effects of internal audit and lean-six sigma concept on business process improvement 239  the assessment of whether the business practice (procedure) is suitable, not just the consideration of the extent to which the procedures are carried out, and  the monitoring and evaluation of the procedures that are not related to accounting, financial, and administrative affairs, as well as the procedures used to conduct operations in the field of production and services [2, 291]. therefore, the operational audit focuses on the future, because its purpose is the improvement of business processes that are carried out every day in the company. it assists all members of the company’s management in carrying out their responsibilities, as well as employees at all levels to keep their work and the work of the whole company within the pre-defined limits. internal auditors perform the assessment in relation to who, how, when, where, and how efficient and effective execution of business processes is achieved. this is primarily achieved through various analyses and assessment of the existing organizational structure, internal control system, the flow of the work process, the management performance, and the like. the result of the operational audit is the report whose content may vary from the identification of potential “weak” points where there is a need for improvement, making recommendations regarding that improvement, the general recommendations regarding the use of the company’s resources, recommendations regarding the training of the staff, reconstruction of the organization, the ways for the achievement of greater efficiency of the internal control systems, improvement of communication, information system, etc., all with the aim of achieving long-term benefits. 1.2. lean-six sigma business concept lean six sigma business concept is a combination of lean and six-sigma concepts, as the two most important processes of improvement of the companies’ performance, which have been developed in practice. combining these procedures results in significant business process improvement, as it involves pooling their advantages with the aim of identification and solving problems in the execution of business processes. in this way, lean-six sigma provides an opportunity for better and faster work. the perception of the impact of lean-six sigma concept in business process improvement involves, above all, understanding of the essence of lean and six-sigma concepts separately. lean concept presupposes a philosophy of management that is focused on the elimination of all forms of business process defects. considering that it was developed at the company toyota during the nineteen-fifties, with the aim of connecting all elements of the production process in a continuous stream, the most important and most obvious results of the lean concept appear in the process of production (reducing time losses, reducing the binding of assets in various forms of inventories, savings in space, human resources, machines, etc.). for these reasons, lean terminology was at first related to the production only. indeed, by constant striving for perfection, the establishment of the value stream, search for non-value-added activities and attempts at their elimination, lean manufacturing represents the revolution in the production process of the company [4, 244]. however, in order for the lean to have a full effect, the whole enterprise must adapt to the philosophy of continuous production process improvement and elimination of unnecessary costs. for these reasons, it is necessary that all employees in the company 240 m. đorđević, b. novićević ĉeĉević understand the core of the concept, and to direct their efforts to its adequate implementation. in such situations, the focus is on the lean company that is market-oriented, integrated and flexible, with high level of internal and external coordination of business activities, and the frequency of rapid flow of material resources and information, as well as a comprehensive approach to performance management [12, 145-146]. lean business involves an integrated approach to efficient value creation by connecting all processes in the company in a continuous flow, while eliminating nonvalue-added activities, reorganization of work through teams, and constant striving for improvement. in addition, such a comprehensive business system that strives for the acceleration of all processes involves the application of the key principles of lean concepts, namely:  recognition of waste, i.e. all processes that do not lead to value creation  standardization of processes – defining precise and detailed procedures, which reduces variation,  creating a “value stream”, thus eliminating non-value-added activities, reducing defects, interruptions, eliminating waste, etc.,  pull system – performing only the necessary processes and only at the moment when there is a need for them,  quality at the source – detection of errors in their very creation,  continuous improvement – striving for perfection by constant elimination of waste [16, 313]. therefore, increasing efficiency, which is necessarily associated with the speed and quality of the process implementation, is the main driver of lean concept. using different instruments and techniques in business processes leads to the achievement of the main goals of implementation of lean concept, which are reflected in the elimination of waste, continuous flow of production, high quality, optimizing the time of process implementation, optimizing human resources, assets, and productivity. the six sigma concept is based on a detailed analysis of the processes that are focused on creating and delivering value to the end customer, in order to monitor and identify the errors and their causes, as well as on the application of appropriate techniques and tools for eliminating errors and improving quality. six sigma can be defined as „as a business process that allows companies to drastically improve their bottom line by designing and monitoring everyday business activities in ways that minimise waste and resources while increasing customer satisfaction by some of its proponents” [magnusson et al., according to: 11, 693]. six sigma involves the use of data and statistical analysis tools for determining average process performance and output quality variations [14, 14]. the concept is based on the hypothesis that the data on the process performance can be represented by normal distribution. by determining deviations of actual process indicators from the normal distribution curve, the quality of the process is evaluated (unit of deviation, in statistical terms, is sigma). certainly, the lower the value of sigma, the lower the waste and the narrower the distribution curve, i.e., if the process performance is within the established limits of deviation, it is considered that the level of quality of the processes is high. synergistic effects of internal audit and lean-six sigma concept on business process improvement 241 implementation of six sigma concept implies the five-phase methodology, known as dmaic (define, measure, analyze, improve, control). the essence of this methodology lies in the preliminary definition of the problem to be addressed, with the aim of bringing the business process performance to the predefined level or within the allowed level of deviation. the next phase involves the use of appropriate metrics, with the aim of quantifying or determining the limits (values) of deviations from the satisfactory level. this sets the basis for the third phase, i.e. the development of analytical tools for their deeper consideration and identification of the causes of deviations. well-conducted first three stages allow for the proper implementation of the fourth stage, i.e. arrival at the solution focused on removing deviations by influencing key factors identified in the analysis. at the end of this methodology, the focus is on the establishment of control and monitoring of the results from previous phases, all with the aim of maintaining improvement and preventing the recurrence of observed errors. by rigorous, focused, and effective implementation of proven high quality principles and techniques [15], six sigma contributes to the raising of the level of product quality and customer satisfaction, reducing the number of defects and shortening the production cycle, thereby simultaneously ensuring productivity growth and ultimately increasing profitability and profit. based on the foregoing, it can be said that lean and six sigma are certainly concepts that provide the basis for the business process improvement in the company. however, bearing in mind that six sigma focuses more on the quality of the processes, rather than the speed of their performance, whereas lean concept is primarily focused on the speed of process realization, their integration into the new so-called lean-six sigma concept leads to significant benefits. therefore, the lean six sigma concept involves the application of a phased approach dmaic. in this process, when the optimal “value stream” is determined, lean idea focuses on the identification and determination of additional value, and then six sigma tools are used to help identify and reduce variation. in this way, lean six sigma provides a disciplined approach to problem solving, which accelerates the implementation of already existing ideas, introduces the standard methods into practice, and brings measurable results. after consideration of the essence of the internal audit, lean, and six-sigma concept, the presentation of the comparative review of their approach to business process improvement would be significant (table 1). the table above clearly shows that internal audit, lean, and six sigma concepts have different starting points in the business process improvement, that they apply different methodology, and achieve different effects. also, each of these approaches to business process improvement has certain shortcomings, which calls for the need and the perception of opportunities for their integration, in order to achieve synergistic effects. 242 m. đorđević, b. novićević ĉeĉević table 1 comparative review of internal audit, lean, and six sigma program operational audit lean six sigma theory adding value remove waste reduce variation application guidelines 1. plan 2. perform 3. analyze 4. recommend 5. follow-up 1. identify value 2. identify value stream 3. flow 4. pull 5. perfection 1. define 2. measure 3. analyze 4. improve 5. control focus cross functional business processes flow focused problem focused assumptions assessment of organization risk, capability and performance. waste removal will improve business performance. many small improvements are better than systems analysis. a problem exits. figures and numbers are valued. system output improves if variation in all processes is reduced primary effects meeting organizational goals. reduced flow time uniform process output secondary effects identify poor work practices in order to improve them. assist in the evaluation of quality control procedures adopted. evaluate implementation processes. improving the efficiency and effectiveness of operations and increasing customer satisfaction. less variation. uniform output. less inventory. new accounting system. flow-performans measure for the managers. improve quality. less waste. fast throughput. less inventory. fluctuation – performance measures for managers. improved quality. criticism operational auditors more expert in the field of audit than in the field of business. statistical or system analysis not valued. system interaction not considered. processes improved independently. source: [11, 696] synergistic effects of internal audit and lean-six sigma concept on business process improvement 243 2. direct impact of internal audit on the functioning of lean-six sigma business concept today, after acknowledging the experiences of a number of multinational companies, there is no doubt that lean six sigma is a proven and complete concept that, in addition to being aimed at speeding up and improving the quality of business process implementation, at the same time implies the constant improvement of business activities. it is believed that lean six sigma is the perfect concept, as its improvement is not expected from some external experts, but from adequately trained and competent persons who are part of the team that implements lean six sigma concept, monitors the defined processes and their implementation, and sees room for their improvement on the basis of adequate analyses. however, the fact is that it is a relatively complex concept, whose planning, introduction to business, and application can be very costly and even risky if not adequately managed and controlled. the reasons for this standpoint are the following:  there may be constraints in project management – implementation of lean six sigma concept involves proper setting of goals, planning, and implementation of different activities. sometimes there may be gaps, especially if the team whose responsibility is the implementation of the concept performs the work along with their regular duties.  poor budget controls – focus on the benefits of applying lean six sigma principles ignores the analysis and control of costs that can be very high.  limited supporting documentation – although it is always necessary to provide documentation which confirms the implementation and results of the application of the concept, the requirements in this respect are not as rigorous, which is why only minimal supporting documentation is often provided.  failures to coordinate six sigma efforts– the implementation of six sigma concept often involves hiring a team of experts from various fields, who carry out their responsibilities in this process in parallel with the everyday job for which they are responsible. such a situation may be the cause of a number of errors in the coordination of activities, which is why it is appropriate to provide a multidisciplinary management program [10, 718]. bearing all this in mind, the assessment of the application of lean six sigma concept becomes necessary, especially in the beginning, when the companies are aware that its satisfactory introduction and implementation will require a lot of time and effort. in this regard, the significant contribution is provided by internal, i.e. operational audit, as its integral part, which controls and assesses the implementation of the entire lean six sigma concept. its aim is to assess the efficiency, effectiveness, and frugality of implementation of lean six sigma concept, and point out any flaws or omissions that need to be overcome. more specifically, operational audit procedures determine deviations of what “is”, i.e. what has been achieved, from what “should be”, i.e. what has been predefined. in this sense, the essence of the assessment of the application of lean six sigma concept can be illustrated as follows (figure 1). 244 m. đorđević, b. novićević ĉeĉević fig. 1 impact of operational audit on increasing customer s’ satisfaction source: [13] therefore, operational audit identifies points of nonconformity of implementation with predefined procedures, reports to the management of the company thereof, which is expected to perform corrective actions with the aim of increasing effectiveness and efficiency, which undoubtedly should lead to increased customer satisfaction. its significance in the present context lies in the fact that:  it provides assistance in the evaluation of the mode of application and quality of implementation of lean-six sigma procedures adopted by the company,  it provides assistance in identifying poorly managed procedures,  it provides valuable suggestions which create room for improvement,  it contributes to increased levels of customer satisfaction, and so on. certainly, operational audit has highly developed techniques and tools. however, in assessing the application of lean-six sigma concept, special attention must be paid to the adequacy of internal audit procedures that need to be carried out, bearing in mind that lean-six sigma concept is a very sensitive area. it involves:  adequate planning and distribution of audit activities (defining a clear goal of review and assessment, confirming the planned operational audit activities with the management and staff responsible for implementing lean six sigma concept, etc.);  assessment and understanding of the lean six sigma oriented company (consideration of recent achievements and ongoing projects, consideration of the number and responsibilities of staff involved in the implementation of this concept, review and assessment of the budget allocated to the implementation of lean six sigma concept, determination of the reasons for any deviations, evaluation of the effectiveness of the supporting lean six sigma systems, communication process, etc.);  review and assessment of the lean six sigma project management process (review of procedures relating to the concept development, planning, and management, determination of whether the appropriate goals of the concept are established and adequate monitoring, review of the documentation related to the concept implementation through the sampling system, determination of the adequacy of procedures for reporting on the progress and results of the application of the concept, etc.); synergistic effects of internal audit and lean-six sigma concept on business process improvement 245  confirming the consistent application of dmaic methodology in one of the completed projects;  assessment of the adequacy and completeness of the application of the concept (where possible, consideration of the focus of realization of the concept on: improving the use of resources, increase of revenue and profit, improving customer relations and service, new product introduction and process improvement, assessing the results and the level of achieved improvement of the specific project through the method of random sample, etc);  identification of whether the communication tools are adequate and whether they provide timely communication of the results of the concept application to interested parties [10, 720]. what is in this place particularly important to emphasize is the fact that the implementation of the above audit procedures should not jeopardize the continuity of implementing lean sixsigma concepts – in terms of its suspension during the audit. in addition, it is a basic condition for ensuring the independence of the audit that, in fact, is its essence. also, audit can achieve the full potential in the process of improving the implementation of lean six sigma concept if it fully knows its essence and characteristics. the focus here is on the fact that internal auditors need to be able to identify and focus on high-risk areas of application of the concept and be able to test the established system of performance measures (in the sense whether the performance measurement system is adequate, whether the measures are in line with the strategic objectives of the concept, whether the performance measures are accurately determined, how the reporting on actual performance is done, etc.). also, internal auditors should compare the realized performance with the best practice or internally established standards, because in this way it is possible to isolate areas where the implementation of lean six sigma concept has flaws, or identify better ways to perform activities in the tradition of other companies [18, 8-10]. it certainly carries with it certain challenges that internal auditors should face: possession of knowledge, skills, and experience in various fields in which the lean six sigma concept is applied. 3. feedback effect of lean-six sigma business concept on internal audit by identifying and eliminating non-value-added activities, and then by focusing on quality improvement of the business processes, lean six sigma concept finds its application and contributes to improving not only the production process, but also those processes that are focused on providing services, those in the financial sector, and others. hence the idea of using this concept, i.e. the incorporation of lean six sigma methodology in internal audit with a view to its improvement seems fully justified. certainly, it is a fact that each application of internal audit has its own peculiarities and differs from others, which is why certain principles of lean six sigma concept can not be strictly embedded and applied in all processes of internal audit [10, 719]. however, the basic principles of lean six sigma concept, which are reflected in the ongoing monitoring of activities and the elimination of errors and shortcomings, are certainly the most important and applicable in internal audit. these activities undoubtedly contribute to the overall quality of the internal audit. 246 m. đorđević, b. novićević ĉeĉević the possibility of incorporating dmaic methodology in internal audit is shown in table 2. table 2 five steps of successful internal audit lean six sigma phase corresponding internal audit phase define planning measure performance analyze analysis improve (redesign) recommendations control follow-up souce: [1, 40] as already mentioned, the first phase of lean six sigma concept involves defining the problem or problematic process and key factors of the process that needs to addressed – measure, analyze, improve, and control them. the first phase of internal audit – its planning – should be approached in a similar way. adequate planning of internal audit should contribute to a proper decision on the implementation of the priorities of the internal audit, and then to the determination of the goals to be achieved. in addition, the internal audit plan should be based on knowledge of the specifics of the company’s operations, and it has to support its development strategy. for these reasons, for the proper implementation of the first phase of lean six sigma concept, as well as for internal audit planning, it is advisable to develop a map of the process. process mapping provides better detection, understanding, and evaluation of potential defects and problems. important goals to be achieved at this stage are: [1, 40]  creating project documentation – the focus is on the formal documentation which defines the purpose of the internal audit activities and its scope, which involves the identification of key activities and areas in the company to be included in the audit, and their prioritizing according to certain criteria. also, it is important to clearly define the number and qualifications of people who will be involved, to define their powers and responsibilities, to assess the request for resources, and so on.  providing support to the company’s management – in this regard, the company’s management perceives the process of internal audit as important for business process improvement. only in this way, the management will accept the recommendations of the internal audit, focused on removing the shortcomings in processes, and make further efforts to overcome barriers to further improvements.  define project outcomes – outcomes that are expected from the implementation of the recommendations of the internal audit must be determined and measurable. they can be expressed in increased production of a number of units, cost saving, and the like. measurement is the second phase, which involves a number of financial and operational analyses to quantify deviations from preset standards of business process performance. for instance, when assessing the effectiveness of internal control systems and the application of appropriate metrics, internal audit can determine the values of the various risks that companies face every day and that internal control should address. risk value that ranges from 0 to 5 is determined by the probability of its occurrence and degree synergistic effects of internal audit and lean-six sigma concept on business process improvement 247 of impact on business operations. although the risk can virtually never be completely eliminated or reduced to zero, the risk value corresponding to zero is set as a standard to strive for. it follows that the risks of high value, which deviate a lot from zero (the probability of their occurrence and the impact is huge), point out the weakness of internal control in their identification and management. the next phase involves the analysis, i.e. study of the obtained results, all with the aim of finding the causes of deviations and assessing their impact on process performance. internal auditors perform tests that enable them to better understand the condition of the existing system. thus, by testing attributes, in this case, control, the internal auditor identifies areas of internal control systems that are not functioning as planned, or are not in accordance with prescribed policies, procedures, rules, and regulations. also, by the implementation of quantitative (core) tests, internal auditor is able to determine the effects, i.e. the impact of part of the system of internal control that is not adequately projected at the quality of output. in doing so, the various instruments of data presentation, analysis, and surveys may be used, provided that the commonly applied instruments in the context of lean six sigma are: cause-and-effect diagram, “5 whys” technique, and the pareto principle. after careful implementation of the phases of measurement and analysis, based on the results obtained, in the fourth phase, the auditor should be able to identify opportunities for process improvement and provide recommendations for eliminating deviations (errors, omissions, etc.). these recommendations are contained in the report of the internal auditor and “call for action to correct existing conditions or improve operations and may suggest approaches to correcting or enhancing performance as a guide for management in achieving desired results” (practice advisory 2410-1). recommendations can provide the general course of action and specific suggestions regarding business performance, or may suggest further investigation or conducting special examination. also, it is very important that the report recommendations are ranked according to their importance, as it will enable the company’s management that is responsible for taking corrective actions to identify the most important recommendations that should be implemented first. in any case, lean six sigma orientation implies that the recommendations of the internal auditors are those that involve the minimum cost of their implementation. in addition, shortening the lead time, as the target of the lean concept, points to the fact that the internal auditor’s recommendations should focus on the possible elimination of certain steps in the process, while preserving its integrity. the last phase, the phase of control, is carried out with the aim of maintaining changes in the inputs of the process, in order to maintain and improve the outputs that have been achieved in this regard. corresponding phase of internal audit in this stage is the followup, where “internal auditors evaluate the adequacy, effectiveness, and timeliness of actions taken by management on reported observations and recommendations” (practice advisory 2500.a1-1). in doing so, the auditors can in various ways collect and analyze data that indicate the acceptance and implementation of recommendations by the management: interviewing staff responsible for implementing the recommendations, review of supporting documentation, conducting tests to determine the effectiveness of the actions taken, and the like [7]. applying lean six sigma principles in the process of internal audit is undoubtedly of great importance for raising its effectiveness, as it allows it to acquire better insight and 248 m. đorđević, b. novićević ĉeĉević understanding of the processes in the company, as well as identify opportunities for improvement. this importance has been recognized by the institute of internal auditors, an international association that has the strongest impact on the permanent development of theory and practice of internal auditing. in this regard, the institute has initiated the organization of various courses and trainings, with the purpose of presenting the basis of lean six sigma methodology and instruments that can be used in planning and performing the audit. the aim of the trainings is to explain the relationship of lean six sigma methodology and internal auditing standards, connect the dmaic methodology with the five stages of internal auditing, highlight the need and importance of the process mapping in the company, explain the purpose and method of application of the various instruments of analysis, and the like (www.theiia.org). participants have the opportunity to put their knowledge and skills through a variety of case studies and exercises, thus becoming able to integrate techniques and tools of lean six sigma concept into the specific audit activities. conclusion internal audit, lean, and six sigma undoubtedly represent some of the most important approaches to business process improvement of modern companies. specifically, focusing on the overall business process, i.e. its efficiency, effectiveness, and frugality, internal audit assesses risks, identifies weaknesses in the process, and makes recommendations for its improvement. in this way, it contributes to the realization of the company’s goals, by adding value and long-term benefits. on the other hand, the lean concept is based on the principle of creating more value for customers with less work, focusing on the process flow, i.e. its shortening, by eliminating non-value-added activities. six sigma involves a detailed analysis of the process, identification of flaws, and making proposals for their elimination. in this way, by using different instruments, six sigma contributes to continuous quality improvement of all processes. moreover, the companies’ need to shorten the flow of the process by applying lean concept is at the same time accompanied by the need to improve its quality, which is why the practice has developed lean six sigma concept. benefits that companies can achieve by applying lean six sigma concept are certainly conditioned by the manner and quality of introduction, planning, and implementation of this concept. through the control and assessment of lean-six sigma concept, internal audit can provide maximum support, reflected in the identification of possible areas where the application of the concept is not compatible with pre-defined procedures, and the provision of valuable suggestions which create space for business process improvement. on the other hand, internal audit can provide the maximum effect only if it is properly planned and executed. in this sense, there are possibilities of integrating lean six sigma concept in the entire internal audit process. by applying methodologies, techniques, and tools of lean six sigma concepts, internal auditors gain better and deeper understanding of the business processes in the company, where they get the opportunity to provide adequate recommendations for continuous improvement. by recognizing and exploiting the potential of internal audit and lean-six sigma concept, as well as their integration, many companies today experience significant improvement of their processes, which consequently contributes to the achievement of competitive advantage and overall business performance. synergistic effects of internal audit and lean-six sigma concept on business process improvement 249 acknowledgement. this paper is part of the results of the research on project iii 47023 supported by the ministry of education, science and technological development of the republic of serbia references 1. aghili, s., (2009) 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youngberg, p., (2011) internal audit leads the way to performance improvement, crowe horwath llp. sinergijksi efekti interne revizije i lean-six sigma koncepta na unapređenje poslovnih procesa suočena sa nizom izazova iz okruženja u kojem posluju, preduzeća su više nego ikad svesna činjenice da napori usmereni na unapređenje poslovnih procesa predstavljaju jedan od osnovnih uslova, ne samo rasta i razvoja, već i opstanka preduzeća. jedino na taj način stvaraju se mogućnosti za postizanje konkurentnosti po različitim dimenzijama (u troškovima, kvalitetu, pouzdanosti isporuke, brzini praćenja promene u tražnji, uvođenje novih proizvoda i sl.). unapređenje poslovnih procesa je moguće realizovati uz podršku brojnih koncepata među kojima se posebno ističe lean-six sigma. međutim, veoma veliki potencijal u tom smislu poseduje i interna revizija. s tim u vezi, u radu će najpre biti reči o suštini i pretpostavkama na kojima se temelje interna revizija i lean-six sigma koncept, a zatim će se sagledati mogućnosti njihovog intergrisanja sa ciljem postizanja boljih rezultata. kljuĉne reĉi: interna revizija, lean-six sigma, unapređenje poslovnih procesa. http://www.international.gc.ca/ http://www.theiia.org/ facta universitatis series: economics and organization vol. 16, n o 1, 2019, pp. 49 58 https://doi.org/10.22190/fueo1901049s © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd preliminary communication the role of human capital in entrepreneurial innovativeness: evidence from serbia 1 udc 005.961:005.914.3]:005.336.4(497.11) marijana simić, marko slavković university of kragujevac, faculty of economics, serbia abstract. many studies in previous years indicate that human capital is a key element in explaining economic activity. human capital refers to the knowledge, skills and abilities of employees and it is the most important part of the intangible assets of a company. in fact, the phenomenon of human capital is insufficiently examined in the context of entrepreneurial venture. therefore, the purpose of this paper is to determine the role of human capital in achieving entrepreneurial innovativeness, while the relevant determinants of human capital are formal and non-formal education, lifelong learning, previous experience, and entrepreneurial self-efficacy. so, the main goal of this paper is to reveal the existence and nature of relationship between human capital and innovativeness of entrepreneurial firms in the republic of serbia, not older than 5 years. the results of the conducted statistical analyzes indicate that the defined hypotheses are partially confirmed. actually, some of the human capital’s determinants have a statistically relevant influence on the innovativeness of the observed entrepreneurial firms. the relevance of these results is justified by the fact that the information obtained through research, can be used to implement a more efficient and effective human resources management system in entrepreneurial ventures. key words: human capital, start up, entrepreneur, entrepreneurial innovativeness, serbia jel classification: m21, d22, o32 introduction in today’s business environment, entrepreneurship appears as a significant lever of economic restructuring, its fundamental development resource, and entrepreneurs are classified as initiators and bearers of innovative changes (oecd, 1998). according to received november 22, 2018 / revised february 06, 2019 / accepted february 12, 2019 corresponding author: marijana simić faculty of economics kragujevac, liceja kneževnine srbije 3, 34000 kragujevac, serbia e-mail: marijana.simic.2004@gmail.com 50 m. simić, m. slavković schumpeter, entrepreneurs’ primary task is creative destruction, as they constantly provoke the status quo in search of a potential business opportunity. the basis of identifying business opportunities, as the initial phase of the entrepreneurial process, is in the creation of changes, the emergence of new firms, products, or services. accordingly, innovation is classified as a specific entrepreneurial tool, the means by which changes become a possibility for performing various production or service activities (drucker, 1996). innovation is often associated with human capital, which is also the case in explaining the entrepreneurial process, the way of doing business, and the problem of survival of entrepreneurial firms. the entrepreneur faces a particular challenge of securing a superior position on the market in relation to large, established enterprises. in the sea of rivals, the primary condition of survival is the formulation and implementation of a strategy that will lead to superior or average business performance. it is certain that the necessary prerequisite for survival is the exploitation of intangible assets, that is, human capital, in order to generate a unique competitive advantage (scarborough & zimmerer, 2003). people and their resources, such as knowledge, skills, and abilities (hayton, 2005), are an important source of innovation and strategic renewal (bontis, 1998). accordingly, entrepreneurs are expected to respond quickly, use their competences, creativity, and other intangible resources, and ensure the construction and implementation of simple, transparent, and certainly innovative solutions (sanchez-gutierrez et al., 2016), in order to create greater value for the customer. the purpose of this paper is to identify the impact of human capital determinants on the innovativeness of entrepreneurial firms. the research was conducted to answer the following question: do entrepreneurs' education, previous experience and self-efficacy have a statistically significant impact on the innovativeness of new ventures in the republic of serbia? therefore, the primary data was collected from owner/managers of entrepreneurial firms in the republic of serbia, not older than 5 years. this article consists of several sections. after introductory remarks, the following section is devoted to a brief review of literature in two directions: first, it refers to a review of contemporary trends in entrepreneurship and entrepreneurial innovation, with particular reference to linking given phenomena to the human resources management system; second, it is devoted to explaining the phenomenon of human capital and its basic dimensions, which at the same time represent the basic criteria of the value of human capital. thereafter, an insight into the research methodology is given, which includes a sample structure, as well as variables incorporated within a given research model. the next section is dedicated to presenting research results. finally, a discussion of the results of statistical analysis was provided, as well as concluding observations. 1. literature review 1.1. entrepreneurship and entrepreneurial innovativeness entrepreneurship, as a scientific area, is about the identification of ways in which to discover and exploit opportunities for creating future products and services (shane & venkataraman, 2000). the key to the success of modern entrepreneurs rests on their vigilance and readiness to identify the opportunity to secure market position. innovation forms the basis of the perceived entrepreneurial opportunity and the entrepreneurial process itself (covin & miles, 1999; schumpeter, 1942). the role of human capital in entrepreneurial innovativeness: evidence from serbia 51 research in the field of entrepreneurship emphasizes that the achievement motivation is often the main cause of the individual's determination to be excused in "entrepreneurial waters," which is at the same time one of the key indicators of the difference between entrepreneurs and non-entrepreneurs (poon et al., 2016). in addition to identified uncertainties, entrepreneurs face wide range of threats and challenges such as: insufficient availability of financial resources, lack of managerial skills, insufficiently competent employees, lack of relevant knowledge and skills, outdated production technology, poor infrastructure, rigid tax system, lack of state support, and institutional ineffectiveness (khalique et al., 2015). the initial step in understanding the entrepreneurial process is recognizing the entrepreneur as the main actor of the entire process and his/her characteristics and behaviour as relevant factors of the new venture success. the basic characteristics that classify an individual as an entrepreneur are: motivation to discover, evaluate and exploit entrepreneurial opportunities; (2) readiness to show initiative and creativity; (3) readiness to organize and transform resources; (4) accepting risk and failure (poon, et al., 2016). in addition, knowledge, skills and abilities are emphasized, whether they are born or acquired, because they represent halfway to the establishment of an entrepreneurial venture, which in the end can result in its success (matricano, 2016). the context in which there are new ventures can possibly be divided into two perspectives: the discovery and creation perspective (jones and barnir, 2019). in line with the challenges within the discovery perspective, entrepreneurs are required to know the resources they have and have them appropriately used in order to effectively exploit the identified opportunity. to overcome obstacles along the way, entrepreneurs are expected to find and employ human resources that possess the specific skills and abilities necessary for a new venture (alvarez and barney, 2007). on the other hand, within the perspective of creation, general knowledge is more relevant in relation to specific knowledge and skills of individuals. namely, entrepreneurs are committed to invent and develop products and services that are not known to companies within the given industry. in this way they support the building of innovative capacities, and due to the growing degree of risk and uncertainty, the need for individuals with general knowledge and skills from different fields is realized (jones and barnir, 2019). 1.2. human capital knowledge and skills result from investing in human capital (becker, 1964), but also form part of the innovation process. in a broader sense, innovativeness means a system of organized and purposeful activities aimed at creating change, while the result of this process is innovation (janošević & dženopoljac, 2016). the essence of innovation is the implementation of changes, which is why entrepreneurs are expected to explore the sources of innovation, changes, and symptoms that signal a chance for the realization of successful innovation (drucker, 1996). the importance of implementing the mentioned changes of existing activities through innovation is reflected in the fact that the entrepreneur in this way strives to achieve competitive advantage and improve business performance. plenty of evidence points to the importance of human capital, as personal entrepreneurial assets, when recognizing and developing a business opportunity (davidsson & honig, 2003; shane, 2000; shepherd & detienne, 2005). based on theoretical assumptions, it can be concluded that individuals with more or higher quality human capital achieve better performance (becker, 1964). in line with these findings, what follows below is the analysis of the forms of human capital as an important determinant of entrepreneurial activity, as well as an overview of previous research on their impact on the performance of entrepreneurial firms. 52 m. simić, m. slavković 1.2.1. education education includes the accumulation of explicit knowledge, skills, and values (becker, 1964), or a wide range of cognitive and non-cognitive elements, which define the outcomes of entrepreneurial activity (davidsson & honig, 2003). the importance of acquiring knowledge, abilities, and skills is reflected in the context of the discovery and exploitation of business opportunities. analytical skills, understanding of market conditions, and general and specific knowledge can contribute to the building of self-confidence and easier overcoming of problems in the early stage of development of new ventures, as well as more efficient entrepreneurial activity (parker, 2009). therefore, it is evident that a higher level of formal education positively affects the likelihood of starting an entrepreneurial venture (cooper et al., 1994; rotefoss & kolvereid, 2005), and, thus, facilitates the process of performing entrepreneurial activity. the results of the research carried out in this field (peña, 2002) show that most firms that record growth in sales, employees, and profits have entrepreneurs with university education, who show particular interest in business education programs. from the perspective of general human capital, organizational performance of new ventures can be enhanced if the entrepreneur and key employees have a higher level of education. approximately, the higher level of education implies the accumulation of relevant knowledge and skills, among which, above all, problem-solving skills, as well as the appropriate combination of commitment, motivation, and discipline stand out. the field of education defines the degree of innovativeness and flexibility, as the basic preconditions for the establishment and survival of entrepreneurial ventures. in accordance with the given theoretical assumptions, the following hypothesis is defined: h1: entrepreneurs' education has a statistically significant impact on the new venture innovativeness. 1.2.2. previous experience experience as a way of informal acquisition of knowledge and skills can be an important determinant that increases the likelihood of starting entrepreneurial activity (sena et al., 2012). experience involves storing a large amount of information in the individual’s memory, which can later be used to create something new. each individual has a unique combination of available information, which is an essential reason why some ideas occur to some people, and to others do not. consequently, more experience, which an individual has in a particular field, is more likely to identify a new business opportunity (davidsson & honig, 2003). empirical research provides some kind of evidence of the impact of experience on various aspects of entrepreneurial activity. stuart and abetti (1990) emphasize that previous experience is an important determinant of the initial success of new technical ventures. the analysis of success factors leads to the conclusion that not only the nature of the experience, but also its heterogeneity, including relevant knowledge and skills in different functional areas and past ownership experience, are relevant indicators of entrepreneurial success (cooper et al., 1994). moreover, experience in activities that are important for managing the venture, such as leadership experience, prolongs the market life of a firm (rotefoss & kolvereid, 2005). in addition, there is evidence that firms established by entrepreneurs with longer work experience have more employees (bosma et al., 2004). in accordance with the given theoretical and empirical evidence, it is possible to formulate the following hypothesis: h2: entrepreneurs' previous experience has a statistically significant impact on the new venture innovativeness. the role of human capital in entrepreneurial innovativeness: evidence from serbia 53 1.2.3. entrepreneurial self-efficacy self-efficacy implies a subjective self-assessment of one’s own abilities to achieve the set goals and a certain level of performance. this type of self-perception is based on the subjective experience of personal competencies in the realization of different goals, rather than on real knowledge and skills (bandura, 1977). in the field of entrepreneurship, the concept of self-efficacy has a significant impact when deciding to set up a new venture. the perceived self-efficacy in performing a specific task is an important determinant in the analysis of career choice. individuals who have been successful in different situations in the past are more likely to positively perceive their own abilities, resulting in the so-called high general self-efficacy. although there is no explicit evidence that the general self-efficacy of entrepreneurs affects new venture performance, it is suggested that self-efficacy significantly defines the entrepreneur’s intentions and activities (boyd & vozikis, 1994). in addition, according to empirical results, it is possible to make the following conclusion: (1) self-efficacy is a relevant determinant in determining the difference between entrepreneurs and non-entrepreneurs (chen et al., 1998), (2) there is a positive link between the perception of entrepreneurs’ personal competencies and new venture performance (chandler & jansen, 1992), and (3) the level of self-efficacy also identifies the opportunities for new venture growth (baum & locke, 2004). the evaluation of self-efficacy not only determines the choice of individual activities, but also the level of persistence and tendency for innovative behaviour. where there are barriers on the path to achieving goals, individuals with a high level of self-efficacy make more efforts to overcome the perceived obstacles, rather than individuals with a low degree of self-efficacy. consequently, the level of entrepreneurial self-efficacy determines their willingness to take the challenge of introducing new products and manage risky projects (poon et al., 2016). given the above, it is possible to set the following hypothesis: h3: entrepreneurial self-efficacy has a statistically significant impact on the new venture innovativeness. 2. research methodology in order to examine a role of human capital determinants and their impact on the innovativeness of entrepreneurial firms, the original research was carried out. in this particular study, a convenience sample was applied. the sample consisted of entrepreneurs who have started their business in the previous 5 years. according to evidence of the business registers agency 310 active entrepreneurial firms are identified. 121 respondents were willing to fulfil the questionnaire and this gives response rate of 39%. as for the structure of the sample, the largest number of entrepreneurial firms belonged to the service sector (51%), followed by ventures in the trade sector (29%), and the rest was within the production sector (20%). the size of the business was determined by the number of employees in the entrepreneurial firm. since the world economic literature describes entrepreneurial firm as an approximation to a new and small firm, the data collected during research fully corresponds to the above assumptions. in particular, out of the total number of firms included in the sample, as many as 89% had 2 to 9 employees, and only 11% had 10 or more employees. the collection of primary data relied on a questionnaire as the survey instrument. the questionnaire was composed of questions defined in the form of statements, which measure 54 m. simić, m. slavković the degree of respondents’ agreement with the given statements (table 1). to measure the agreement, a summarized 5-point likert scale was used, ranging from 1 “i completely disagree” to 5 “i completely agree”. the education variable is measured by using 7 items. example items are “knowledge acquired through formal education is useful for daily work in your company.”, “you have attended some kind of training that is relevant to performing your company's basic and other activities.” and “through formal and informal connections with experts outside the firm you acquire new knowledge and information important for your business.” previous experience variable is measured by using the respondent’s subjective perceptions. the respondents were asked to evaluate their previous experience by using 5 items. example items are “you have previous ownership experience which contributes to your current business.”, “you have previous managerial experience which contributes to your current business.” and “you have previous experience in running a team (projects etc.) that contributes to the successful realization of work tasks.” self-efficacy variable is measured as a human capital determinant by using 10 items. example items are “you believe that you are able to develop a new product/service.”, “you believe that you are ready to work in crisis situations.” and “you are sure that you can achieve your goals.” entrepreneurial innovativeness as a dependent variable is measured by using 10 items. example items are “in the process of solving the problem, you are always ready to apply alternative solutions.”, “trying to view the identified problem from different angles.” and “when performing work tasks, you often apply new, unusual and innovative solutions.” the measured determinants of human capital represented independent variables in the paper and can be classified as follows: education, previous experience, and self-efficacy. part of the questionnaire relating to human capital determinants was compiled on the basis of a survey conducted by davidsson, p. and honig, b. (2003), bosma, n., van praag, m., thurik, r. and de wit, g. (2004) and moon, y. j. and kym. h. g. (2006). the part of the questionnaire measuring the innovativeness of entrepreneurial firms was based on the work by wach, d., stephan, u. and gorgievski, m. (2015), who analyzed business performance in 185 german entrepreneurial ventures, and the work by dess, g. g., lumpkin, g. t. and covin, j. g. (1997), who analysed strategic aspects of the entrepreneurial venture, with a focus on business performance. statistical data processing was performed with the computer support of the statistical package for social sciences ibm spss statistics, version 23. in order to determine statistical significance, the confidence levels ά=0.01, ά=0.05 ά=0.1were used. 3. research results the reliability and consistency of the statements was measured using the cronbach’s alpha coefficient, where the values of this coefficient above 0.7 indicate high reliability and consistency (devellis, 2003). the value of cronbach’s alpha ranged from 0,800 to 0,923, indicating a very high level of internal consistency of statements. in addition to the reliability analysis carried out, aggregate indicators, such as arithmetic mean and standard deviation, were calculated. the values of arithmetic mean indicate respondents’ favourable attitudes regarding the observed determinants of human capital and the innovativeness of new ventures. entrepreneurs best rated the innovativeness indicator (mean = 3.8545), and they considered that the most important determinant of human capital the role of human capital in entrepreneurial innovativeness: evidence from serbia 55 was self-efficacy (mean = 4.2355), while the highest standard deviation from the arithmetic mean was recorded with variable previous experience (0.86048). table 1 descriptive statistical analysis variables cronbach’s alpha arithmetic mean standard deviation education 0.828 3.8477 0.78457 previous experience 0.800 3.4595 0.86048 self-efficacy 0.917 4.2355 0.64716 innovativeness 0.923 3.8545 0.72641 source: authors’ research in order to test the hypotheses, a regression model was created, examining the nature and strength of the relationship between human capital determinants and innovativeness. if the characteristics of this regression model are observed, it is noted that the model is of good quality, since the value of r 2 is 0,663, meaning that changes in the values of innovativeness of new ventures are explained in 66.3% of cases by changes in the values of independent variables. the presented results of the multiple regression analysis (table 2) show that education and entrepreneurial self-efficacy have a significant impact on innovativeness. however, previous experience has no statistically relevant influence on the analyzed dependent variable. the variance inflation factor is, in this case, also greater than 5, which indicates that multicollinearity is not a problem. table 2 results of multiple regression analysis (dependent variable: innovativeness) independent variables β t sig. education 0.444 5.467 0.000 *** previous experience -0.040 -0.659 0.511 self-efficacy 0.453 5.791 0.000 *** note: *** the value is significant at p < 0.01. ** the value is significant at p < 0.05. * the value is significant at p < 0.1. r 2 = 0,663; f = 76.682 *** (p < 0.01). source: authors’ research 4. discussion and conclusion substantial changes that occurred during the scientific and technological revolution, that is, in the post-industrial society, metaphorically called “knowledge era”, put emphasis on the evaluation of intangible resources, or human capital. human capital, as the most important part of intangible assets of an enterprise, encompasses a wide range of intangible resources, such as knowledge, skills, abilities, and other personal attributes of the individual. the entrepreneur, as the main actor of the entrepreneurial process, has a kind of combination of intangible resources, accumulated knowledge, skills, and abilities. since at the beginning of a new venture the entrepreneur usually faces the problem of the lack and limitation of financial and material resources, the main advantage over the existing rivals on the market lies in their human capital. by using available resources, the entrepreneur seeks to create innovation, in the form of better, more reliable, and more attractive products and services, which provide greater value for the customer. 56 m. simić, m. slavković in accordance with the above assumptions, there are three hypotheses in the paper. the first hypothesis seeks to point to the necessity of having a relevant level and degree of education in order to achieve a greater degree of innovativeness in the performance of entrepreneurial activity. the results of the conducted statistical analyses show that, in case of analyzed new ventures, the educational profile of the entrepreneur has a statistically significant positive influence on innovativeness. accordingly, we fail to reject the first research hypothesis, as confirmed by robson, p.j.a., akuetteh, c.k., westhead, p. & wright, m. (2012). the second hypothesis was set in order to determine the impact of the entrepreneur’s previous experience on the innovativeness of the new venture. despite the given theoretical indications, which clearly indicate the importance of previous experience for the establishment and survival of the entrepreneurial venture, research has shown that there is no statistically significant influence of the entrepreneur’s experience on the level of innovativeness of the new venture. therefore, the second hypothesis has been rejected. however, the third hypothesis, formulated in order to determine the influence of entrepreneurial self-efficacy on the innovativeness of the venture, failed to be rejected, so the results of the research indicate the existence of statistically relevant impact of the entrepreneurial self-efficacy on the innovativeness of the new venture, as confirmed by poon, m.l., ainuddin, r.a. & haji junit, s. (2016). the general conclusion is that certain human capital determinants affect the innovativeness of the new venture. education, as a human capital determinant, has an important statistical impact on innovativeness, which emphasizes the relevance of building an adequate education system, as an essential factor for tracing the path to the development of entrepreneurial activity. although the self-employment option is often referred to as the continuation of an individual’s previous work, the research results suggest that previous experience gained has no statistically significant impact on innovativeness of the new venture. in fact, the reason for making an individual decision to delve into “entrepreneurial waters” is usually the need for independence and financial stability, and not the quantity and quality of previously acquired knowledge and information about the activity within which an individual wants to demonstrate their entrepreneurial abilities. such a trend in our country results in a high rate of unsuccessful entrepreneurial firms, which is why it is important to apply a systematic approach when launching new ventures and implementing innovative solutions, primarily by encompassing previous experience as an important criterion for the selection of activity within which the venture is set up. the last but not the least important determinant of human capital, entrepreneurial selfefficacy, implies subjective assessment of personal abilities and thus constitutes an important determinant of innovativeness of the new venture. this result is completely expected, since greater belief in one’s own abilities defines not only the readiness of an individual to try an entrepreneurial activity, but also the overall tendency for innovative behaviour. thus, the belief in one’s own abilities is the key to entrepreneurial success, which generates additional energy for overcoming obstacles in the initial and later phases of the entrepreneurial process. at the national economy level, the results emphasise the importance of developing an adequate education system, which through the development of human capital improves the innovation of individuals. bearing in mind the fact that innovation is a key source for the creation of a new venture, the design of entrepreneurial-oriented education system at the macro level can affects the readiness of an individual to include in "entrepreneurial waters," which encourages the construction of an entrepreneurial culture. at the micro level, the implications of the obtained results are reflected in the fact that besides the level and field of education, it is important to invest the role of human capital in entrepreneurial innovativeness: evidence from serbia 57 in different training programs, which stimulates the development of business skills, resulting in a greater degree of self-efficacy. human resources management, through training policies and training programs, can influence the development of individuals by increasing their potential for innovation and entrepreneurial behaviour. since self-efficacy is an important determinant of entrepreneurial activity, as well as the assumption of building innovative capacities within the entrepreneurial venture, this creates a precipitous ground for establishing future new ventures. acknowledgement: this paper is part of an interdisciplinary research project (number 41010), financed by the ministry of education, science and technological development of the republic serbia. references alvarez, s.a., & barney, j.b. 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(2015). more than money: developing an integrative multi-factorial measure of entrepreneurial success. international small business journal, 34 (8), 1098-1121. uloga ljudskog kapitala u preduzetničkoj inovativnosti: evidencija iz srbije brojni su dokazi koji ukazuju da je ljudski kapital ključni element u objašnjavanju ekonomske aktivnosti. ljudski kapital se odnosi na znanje, veštine i sposobnosti zaposlenih i predstavlja najvažniji deo nematerijalne imovine preduzeća. identifikovani jaz u prethodnim empirijskim studijama je osnovni cilj ovog rada. naime, fenomen ljudskog kapitala nije dovoljno istraživan u kontekstu preduzetničkog poduhvata. stoga je cilj ovog rada da utvrdi ulogu ljudskog kapitala u postizanju preduzetničke inovativnosti, pri čemu su relevantne komponente ljudskog kapitala formalno i neformalno obrazovanje, celoživotno učenje, prethodno iskustvo i preduzetnička samo-efikasnost. dakle, glavni cilj je utvrđivanje uticaja komponenti ljudskog kapitala na inovativnost preduzetničkih firmi u republici srbiji, koje nisu starije od 5 godina. rezultati sprovedenih statističkih analiza ukazuju da su hipoteze delimično potvrđene. zapravo, neke od komponenti ljudskog kapitala imaju statistički značajan uticaj na inovativnost posmatranih preduzetničkih firmi. relevantnost ovih rezultata opravdana je činjenicom da se informacije dobijene istraživanjima mogu koristiti za implementaciju efikasnijeg i efikasnijeg sistema upravljanja ljudskim resursima u preduzetničkim poduhvatima. ključne reči: ljudski kapital, preduzetnički poduhvati, preduzetnik, preduzetnička inovativnost, srbija facta universitatis series: economics and organization vol. 18, no 5, 2021, pp. 421 434 https://doi.org/10.22190/fueo210622030g © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper internal reporting on process optimization measures: combination of economic and environmental aspects1 udc 657.6 rudolf grünbichler1, barbara petschacher2,3, rené kollmann4, alexander passer4, stefan grbenic1 1graz university of technology, institute of business economics and industrial sociology, graz, austria 2austrian centre of industrial biotechnology, graz, austria 3graz university of technology, institute of biotechnology and biochemical engineering, nawi graz, graz, austria 4graz university of technology, institute of technology and testing of construction materials, working group sustainable construction, graz, austria orcid id: rudolf grünbichler https://orcid.org/0000-0002-5872-5771 barbara petschacher https://orcid.org/0000-0003-2472-484x rené kollmann https://orcid.org/0000-0003-1747-6729 alexander passer https://orcid.org/0000-0001-8773-8507 stefan grbenic https://orcid.org/0000-0003-1245-5929 abstract. optimizing the cost situation is part of everyday business in a company. the research field of controlling has developed many instruments and methods for calculating potential savings and communicating them to the decision-makers. in the future, in order for companies to operate more sustainably it is necessary to weigh up optimization measures from an economic and environmental point of view. this paper proposes to supplement controlling reports with a matrix opposing economic and environmental impacts by individual optimization measures. this reporting method should assist decision-makers in the selection of optimization measures, taking into account economic and environmental aspects. lca and lcc based evaluation of a biotechnological process step for glycoside production served as a case study. an example for impact presentation of switching to a sustainable electricity mix is shown. received june 22, 2021 / revised november 25, 2021 / accepted november 29, 2021 corresponding author: rudolf grünbichler graz university of technology, institute of business economics and industrial sociology, kopernikusgasse 24/ii, 8010 graz, austria | e-mail: rudolf.gruenbichler@tugraz.at http://orcid.org/0000-0002-5872-5771 https://orcid.org/0000-0003-2472-484x https://orcid.org/0000-0001-8773-8507 https://orcid.org/0000-0003-1245-5929 mailto:rudolf.gruenbichler@tugraz.at 422 r. grünbichler, b. petschacher, r. kollmann, a. passer, s. grbenic key words: reporting, process improvement, lca, lcc, lca/lcc combination, economic and environmental performance, sustainability, carbafin jel classification: d24, l65, q51 1. introduction the controlling department supports the management and prepares decision-making basis for the improvement of the company. one focus is on the optimization of costs. potential cost savings are identified and strategies for implementation are proposed. this also includes the optimization of processes in order to raise cost saving potentials. in the last two decades, and in view of global warming, there has been an increasing focus on environmental concerns and the reduction of pollutant emissions (keoleian & menerey 2012; anastas & eghbali 2010). these aspects need reflection in parallel to cost aspects in environmentally conscious manufacturing and future decision-making support by controlling departments. life cycle costing (lcc) is an instrument with which the total costs of a product can be recorded, evaluated and optimised over its entire life cycle. this makes it possible to identify potential cost savings even before a product is launched on the market and while it is still in the product development phase. on the other hand, there is the instrument of environmental life cycle assessment (lca), which enables a systematic analysis of the environmental impacts of products throughout their entire life cycle. the greatest opportunity for reducing the environmental impact of a new product in intervening in the life cycle of a product as early as the design phase (fitzgerald et al., 2005). the practical problem that arises here is that economic and environmental optimization are usually regarded as conflicting objectives of a company (e.g. söllner 1998). in order to avoid one-sided cost optimization at the expense of the environment, essential agreements on climate protection have already been reached, among others, with the regulations of the kyoto protocol and then the successor agreement, the paris agreement. these agreements emphasize that companies from industrialized countries in particular must make their contribution to achieving the climate goals. as stated by dascalu, caraiani & lungu (2008), the design of environmental policy thus has an influence on the costs of companies for climate protection. increased efforts in implementing environmental protection measures elevate the need for evaluation of possible process optimizations from economic and environmental perspective. often efforts in environmental protection are expected to rise costs. however, process optimization measures taken based on environmental assessment results can as well lead to cost reductions, a fact which might not be anchored well in managers’ mindsets yet. the research question for this paper is derived from this conflicting situation: how can suggestions for improvement be presented to management so that they can make a decision to implement them taking into account both the economic and environmental situation? we here demonstrate an easy-to-understand communication method for effects of suggested improvements taking into account results from lcc and lca. the method is showcased on first results from lcc and lca evaluation of optimization of a biotechnological process for glycoside production. the process optimization and evaluation was done in the framework of the eu h2020 financed carbafin project. this paper consists of five sections, with this section being the first. the second section reviews literature described approaches taken to combine life cycle costing (lcc) internal reporting on process optimization measures: combination of economic and environmental ... 423 and life cycle assessment (lca). the third section presents the research methodology of this study including the approach to economic and environmental analysis. combined lcc and lca result presentation is shown for an application example in the fourth section. the fifth section contains the conclusion with the main results, limitations of this study and suggestions for further research. 2. approaches for lca and lcc combination in lca the environmental impact of products or processes over their life cycle is evaluated. lca methodology is described in standards iso 14040:2006 and iso 14044:2006 and together with lcc and slca as part of the unep/setac approach towards a life cycle sustainability assessment (valdivia et al. 2013). lca is now widely applied in many sectors (e.g. de soete et al. 2017; obrecht et al. 2020; moretti et. al. 2021; kumar & verma 2021). many approaches to lcas have been established, as fazeni, lindorfer & prammer (2014) describe in their paper. however, they explicitly emphasize that the connection to lcc is only very sporadic and that there is a need for further research to combine these approaches, which is still valid today. for example, ouattara et al. (2012) propose in their paper combined mathematical, economic, and environmental optimization strategies for process design. however, this method might be considered as too complex for everyday application in controlling reports. approaches to optimizing technical, environmental and economic aspects have already been described for individual areas. ribeiro et al. (2008) use a methodology to compare a set of candidate materials and identify the "best material domains" by aggregating the three dimensions (technical, economic and environmental). these "best material domains" are presented in a diagram. this enables a global comparison of candidate materials to support a decision on the selection of the best material according to different business scenarios and corporate strategies. the focus of their work is on the selection of the best materials, taking into account these three dimensions. more recent literature shows that in some cases optimization is one-sided with a focus on cost optimization and that a more comprehensive optimization of all areas is required (e.g. patel, zhang & kumar 2015). current literature demonstrates that a comprehensive approach to process optimization from a technical, environmental and economic perspective is attracting more and more attention (vaskan, pachon & gnansounou 2017; cavaignac, ferreira & guardani 2021). ögmundarson et al. (2020) propose a framework for the optimisation of biochemical processes, which includes the environmental and economic components in the evaluation. their framework uses a set of quantitative indicators from lca and techno-economic assessment (tea). as a result of the preceding lca analyses, the total sustainability costs per given functional unit are calculated. this value reflects the human health costs, ecosystem quality costs and natural resources costs and can finally be combined with the techno-economic costs to a single monetary output value. this single output value for a combined lca and lcc analysis contributes to the above mentioned easy-to-understand communication. however, the authors acknowledge the challenges related to subjective value choices in the monetization of human and environmental health which involve moral questions. for a broad overview on integrating life cycle assessment and life cycle cost we refer to franca et al. (2021). pesonen & horn (2013) name two main issues in the context of lca from a management perspective that require further work: (1) approaches to speed up the resource-intensive 424 r. grünbichler, b. petschacher, r. kollmann, a. passer, s. grbenic inventory and assessment process, and (2) easy-to-understand communication of the results. in their study, they aim to contribute to these needs for faster and cost-effective ways to develop strategies that incorporate the life cycle perspective. luthin, backes & traverso (2021) also address the combined assessment of lcc and lca in a recent study developed at the same time and simultaneously to this paper. visual solutions for comparison of lca and lcc results for complete production scenarios for aluminum in three different countries were presented. 3. methodology and research question the main purpose of this paper is suggesting a communication method for expected effects of process improvement proposals, taking into account economic and environmental aspects. the focus is on internal reporting to the management in order to assist a wellfounded decision on process improvements to be carried out. we focus on a suggestion for reporting of single improvement proposals taking into account results from prospective lcc and lca. since this is an optimization taking into account two dimensions, the bundle of individual measures can be represented in a diagram as a portfolio (matrix) with two axes. the portfolio theory has long been known (markowitz 1952) and has already been applied in many business management issues (e.g. baum, coenenberg & günther 2006). the application of such matrices has already been taken up in the literature, but mostly in connection with specific business areas (e.g. simoes et al 2016). as a general basis for process improvement proposals, a 4-quadrant model is here suggested that shows economic and environmental implications for the implementation of improvement measures and can be integrated into controlling reports. while costs anyway are represented by a single monetary value, we use the sustainable process index (spi) as aggregated single output value for environmental burdens. further details are given below. the proposed reporting method serves as a guide for strategy recommendations, as it clearly shows which proposed measures are associated with savings in both economic and environmental terms, which have negative impacts in both categories, and which lead to a trade-off between environmental and economic aspects and therefore require special consideration. on the basis of a technical improvement proposal catalogue, the effects on the economic and environmental side can thus be easily examined. 3.1. case study: biocatalytic process for glycoside production the here suggested combined lca and lcc result presentation is show-cased on a unit operation “biocatalytic synthesis of a glycoside” of an existing biotechnological process. this approach emphasizes the value of the suggested method for controlling reports based on realistic numbers on the effect of electricity supply switch. while not relevant for showcasing the suggested presentation method, for completeness a short description of the process is given here. the economic and environmental process evaluation is a first partial result of the research project carbafin, which is funded by the european union h2020 program. carbafin develops biocatalytic processes for the production of glycosides. glycosides are chemicals that contain at least one sugar moiety attached by a glycosidic bond to a core molecule. a model product is 2-glucosylglycerol which finds application as moisturizer in cosmetic industries. main raw materials for the biocatalytic synthesis are sucrose and glycerol. with the help of the biocatalyst the glucose subunit from sucrose is transferred to glycerol. fructose is a side product. the project aims internal reporting on process optimization measures: combination of economic and environmental ... 425 to evaluate implementation on an industrial scale. the approach in this multidisciplinary research project is designed in the sense of a single-case study (yin 2011; yin 2017) with the inclusion of several methods. the processes are optimized technologically as well as from an economic and environmental point of view. a full fletched combined lca and lcc study on the carbafin processes is intended to be published later. 3.2. economic approach to process optimization the procedure for creating a life cycle model was based on the standard literature on life cycle costing (e.g. coenenberg et al. 2016; ewert & wagenhofer 2014). first of all, a distinction is made between the data gathering phase and the data processing phase. the evaluation of the case study process was done in a cradle to gate setting. based on the process steps specified by the company, all cost types were first identified with the quantity inputs. in addition, the prices per unit of measure were collected. the data collection represented an elaborate process. first, the rough data was collected with the help of a questionnaire sent to the company. missing data and inconsistencies were clarified and followed up in telephone calls and internet research. in parallel, a life cycle cost model (e.g. zehbold 1996) was developed in microsoft excel. a life cycle of 10 years was defined in consultation with the cooperation partner. the reason for the chosen timeframe is that after this period of time the plants have to be replaced. the collected data was then incorporated into the model. operational expenditures were planned in detail for the first year. since the annual production volume is assumed to remain constant for the life cycle, there is only an inflation due to inflation adjustments, which was considered separately for each cost type. in the case of capital expenditures, replacement investments were planned for individual parts of the production plant. the model data can be used to determine various information for optimization proposals. hotspot analysis is used to reveal the process steps that are expensive in the process. furthermore, those cost types were identified which account for the highest proportionate costs over the entire process. this information is used to make suggestions for optimizing the use of raw materials and the process itself. for each feasible optimization measure, the costs before optimization were compared with the costs after optimization to determine a percentage cost difference on the total costs per step or process. 3.3. environmental approach to process optimization lca is now a widely used methodology for the environmental sustainability evaluation for a product, process or service. lca is an analytical tool to provide solid, comprehensive and quantifiable information about the environmental performance of products, processes or human activity throughout its entire life cycle (audsley et al. 1997). the methodology is standardized by the international standardisation organisation (iso) in the 14040 and 14044 series of iso standards (iso 2006) providing a general framework for conducting a life cycle assessment. an lca is subdivided in four main phases as presented in figure 1. goal and scope definition; life cycle inventory analysis; life cycle impact assessment; and life cycle interpretation. results will depend on the selected evaluation methodology, data quality as well as the defined system boundaries. although no environmental evaluation is telling the “ultimate truth”, lca can point out relevant environmental aspects and is regarded a useful tool for decision making. 426 r. grünbichler, b. petschacher, r. kollmann, a. passer, s. grbenic fig. 1 performing lca is standardized source: isonorm 14040 and 14044 in short, for the case study process the main phases were handled as follows: goal and scope definition the goal of the study was internal evaluation of process options and development in the project. the case study evaluation was performed on a biotechnical process as implemented in a german manufacturing plant. the here shown example of change in electricity from conventional mix to a sustainable mix is only one first obvious option for improvement, in later project phases more options will be identified. the lca was done in a cradle to gate manner. functional unit was the yearly mass of glycoside product which is sold to b2b customers. life cycle inventory (lci) inventory analysis included primary data from the manufacturer as well as secondary data for raw materials and energy provision (ecoinvent database). energy demand in the plant was partly calculated based on physical equations. the inventory items used are identical to the ones used for lcc except that no impact by personnel is taken into account while lcc data includes wages. the below shown results refer to the inventory of one single process unit operation, the biocatalytic synthesis step (fermentation of the biocatalyst is not included in this step). life cycle impact assessment methodology – sustainable process index (spi) as lcia methodology the sustainable process index (spi) method was used. the spi calculates the environmental footprint as the cumulative area which is necessary to implant the entire life cycle of an industrial process, product or service in the biosphere in a strongly sustainable way. the spi takes into account all relevant environmental impacts including all resulting emissions for the upstream chain to the end of life. material and energy flows that are taken from and released to the ecosphere are compared with the natural flows (narodoslawsky & krotscheck 1995; narodoslawsky & stoeglehner 2010; shahzad et al. internal reporting on process optimization measures: combination of economic and environmental ... 427 2014). the total area atot for embedding of human activities sustainably into the ecosphere is calculated. areas comprising the overall footprint are shown in detail in figure 2. fig. 2 anthropogenicvs. natural lifecycles spi calculation, material and energy flows of a process. “the more humans exceed these natural renewal rates, the larger the environmental footprint.” source: adapted from spionweb, ©strateco og (spionweb 2013-2019; strateco 2021) the spi method is available for application free of charge by the spionweb software tool and methodology is described there in detail as well (http://spionweb.tugraz.at/ and https://spionweb.tugraz.at/en/spi). with this tool product life cycles are described as process chains that can be updated and further developed. as results the user gets the spi footprint of a product or process as cumulated square meter number. co2 life cycle emissions and gwp of the whole life cycle (neugebauer et al. 2015) can be calculated as well but were not used in this study. in comparison to other lcia methods which evaluate environmental impacts in several more impact categories, the spi delivers with the cumulative area of the footprint a single aggregated impact value which allows graphical representation together with costs in a single two-dimensional plot. interpretation for interpretation of the results a visualisation in combination with lcc results is used in order to guide decision on whether to implement a suggested process change or not. while in the here presented case of electricity supply change the result is clear, in http://spionweb.tugraz.at/ https://spionweb.tugraz.at/en/spi 428 r. grünbichler, b. petschacher, r. kollmann, a. passer, s. grbenic other cases changes in and trade-offs between environmental and economic impact will be more subtle. a sensitivity analysis of single parameters and a careful quality assessment of used data then is essential. 4. results in order to be able to communicate the effects of individual improvement measures to management, the economic and environmental impact reduction potentials or increases are presented in a matrix as a percentage of the total costs or the total footprint before the improvement. when the entire bundle of measures is presented, the result is a portfolio of measures that provides the decision maker with information on which measures have which economic and environmental impacts. fig. 3 optimization matrix with implications for the implementation of process improvements figure 3 shows a matrix with the implications for implementing improvement suggestions. the origin with 0% describes the original costs and emissions before any process improvement. in the following, improvement measures are analyzed. these can be technical process improvements or changes in raw material or energy supply that have an impact on costs and the environmental footprint. in an iterative process, the feasibility is checked and the impact on the costs and the footprint is presented. the processes shown in the diagram are schematic. cost or environmental footprint can increase or decrease compared to the reference process. internal reporting on process optimization measures: combination of economic and environmental ... 429 the individual potential process improvements are entered in the chart. four directions emerge: costs can rise or fall and emissions can rise or fall. there are therefore two clear implications. the improvement proposal should be implemented in any case if costs and emissions can be reduced (implication 1). the measure should not be implemented if costs and emissions increase (implication 2). the quadrants top left and bottom right represent a need for discussion within the company and must be decided on a situational basis (implication 3). often, the suggestions for improvement will be located in the upper left quadrant, when measures to improve the environmental footprint lead to an increase in costs (e.g. switching from petro-based packaging materials to sustainable degradable materials). case study (biotechnological glycoside production) the lcc and lca was performed for a biotechnological glycoside production process of a cooperating company partner. the life cycle cost model was developed in an iterative process, with repeated consultations with the cooperation company on ongoing minor process changes, resource requirements and resource evaluation. fig. 4 economic process hotspot analyses showcased for lcc analysis of a biotechnological glycoside production process after modeling the data, they were evaluated. for this purpose, the operating expenses of all years were discounted to t=0 with the cost of equity of the company. the selffinanced capital expenditures were also evaluated. no aftercare costs are incurred in the company at the end of the product life cycle, as the product does not incur disposal costs. the costs for dismantling as well as disposal of the plant are negligible in the company. on the basis of this information, it was possible to obtain an initial overview (figure 4) of where the highest expenses are to be expected, so that suggestions for process improvement can be made. lca was as well conducted based on the same boundaries and inventory as used for lcc analysis. within the process step with highest costs and environmental footprint impacts of single inventory items are presented as percentage share of total cost or environmental footprint (figure 5). 430 r. grünbichler, b. petschacher, r. kollmann, a. passer, s. grbenic fig. 5 main contributors to economic and environmental burden of the biocatalytic synthesis unit operation in biotechnological glycoside production (biocatalyst fermentation was treated as separate process unit and is not included here) from an economic point of view, the highest cost items are of particular interest. however, the evaluation of the optimization potentials was also carried out under environmental aspects, so that not only the effects of a cost optimization, but also a sustainable optimization was considered (janz & westkämper 2007). for example, it was revealed that the electricity had previously been purchased from a fossil-fuel power generator. the environmental footprint was therefore high. the following example of visualizing combined economic and environmental evaluation results clearly shows that the optimization measure "switch to green electricity" has a low economic but high (positive) environmental impact. fig. 6 presentation of the change in costs and sustainable process index (spi) for the optimization measure of electricity switching from conventional to sustainable supplier mix for the biocatalytic synthesis step in glycoside production. internal reporting on process optimization measures: combination of economic and environmental ... 431 figure 6 shows an application example for a recommendation to reduce the environmental footprint. switching the electricity supply for the process from conventional electricity to green electricity results in a reduction of the overall environmental footprint of the hot spot process step “biocatalytic synthesis” by 7% (from 20% in the reference process to 13% in the process switched to green electricity). this measure is accompanied by higher electricity costs. green electricity is 30% more expensive than conventional one in our example. when looking at electricity prices alone this might be interpreted as a too high increase to implement. however, a combined presentation of impact on total costs as well as total environmental burden makes clear, that increase in total cost by 0.2% is marginable and should be considered for implementation when aiming at more environmentally friendly processes. for the application in companies, optimisation means that each improvement proposal, which was mentioned in an improvement plan, must be examined with regard to the change in the cost and environmental impact situation and it must be assessed individually for each measure whether it should be implemented or not. in practice, a representation method for suggested measures which allows easy visual capture of the impacts will be highly advantageous for this decision process. 5. conclusion this paper presents a procedure how to assist optimization of processes taking into account the environmental and economical perspective. the focus is on a practical approach to how technical improvement proposals can be presented. the 4-quadrant matrix can be used to show visually and transparently how changes in the process affect the environmental footprint as well as cost. the starting point is the original process, which represents the origin in the presented graph. the respective technically feasible changes are evaluated by the controlling department and the induced change in total footprint and cost is displayed in the diagram. this provides management with an easy to capture basis for deciding whether the proposed measures should be implemented in the company. a theoretical limitation of the method can be seen in the nature of the spi calculation method used for environmental impact evaluation. although this has the advantage that a single value, namely an increase or decrease in overall environmental footprint represented as an area value, is calculated, a differentiation of impacts in single impact categories (such as climate change, eutrophication, water depletion etc.) is disregarded. in the case of the lcc-model, the validity of future income and expenditure in particular causes problems. with an assumed long life cycle, the future figures are fraught with uncertainty. this affects the extrapolation with the existing indices. furthermore, suitable indices do not exist for all cost types in order to make the price adjustments. the practical limitations are that the information for the valuation of the individual measures is usually difficult to obtain. in the above mentioned project, for example, it became apparent that the primary data for cost and life cycle inventory could only be obtained with great difficulty and effort of industrial partners. a careful assessment of the data quality should therefore accompany impact evaluation and could in future be included in the here described method for presentation of economic and environmental optimization potential. 432 r. grünbichler, b. petschacher, r. kollmann, a. passer, s. grbenic acknowledgements the carbafin project has received funding from the european union's horizon 2020 research and innovation program under grant agreement no 761030 (carbafin). results and statements presented in this paper reflect only the author's view, the commission is not responsible for any use that may be made of the information the paper contains. the authors also thank the company bitop ag, dortmund (germany) for good collaboration in the carabfin project and for providing primary company data for lca and lcc analysis. in particular we thank dr. steven koenig for his valuable engagement in process data recording and collection and gratefully acknowledge the support by dr. markus neumann and co-ceo 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findings were consistent to notice that there is considerable involvement of various factors to influence employee engagement. findings were even more attractive for hr decisionmakers to keep up their workforce productively engaged all the time. according to saks (2006), there was considerable interest by practitioners and academics in the area of employee engagement. with the emergence of globalization and intensified competition, organizations have started the search for intellectual capital. firms have started to consider employees as their biggest asset available for their organization. employees’ knowledge, skills, abilities, and talents are given utmost importance in keeping organizations from being outdated. in some organizations, human resource management practices are bundled together to offer high-performance work practices for better productivity. the relationship between employer and employee plays a major role in determining the fate of organizations. smooth relationship between superior and subordinate will create a congenial atmosphere in the organization. care, compassion, warmth, and support exhibited by the boss will certainly enhance the overall employee productivity of the organization. to know to what extent employees are engaged in work is identified by information sharing practices among employees of the organization. employee performance is also one of the factors that influences both individual and organizational effectiveness. hence, under this study the researcher evaluated the relationship between communication among employers and employees and its effect on the task performance of the employees. employee productivity outcomes are primarily measured in relevance to information sharing practices among the employees. organizations have to ensure that employers should behave empathetically towards their followers in performing given tasks. empathetic leadership behavior promotes industrial harmony, peace, fair information sharing practices, and promotes employee engagement and career development opportunities. in this era of industry 4.0 organizations are looking forward to utilize latest technological advancements available in the form of hr analytics, additive manufacturing, 3d printing, iot, augmented reality. with the incorporation of such technologies, the higher level of employee engagement and task performance can be achieved. in this era of human intelligence, human capital is bypassing financial capital and it is possible with the usage of latest developments in the technology for the firms to be able to achieve greater heights. but the question that needs to be addressed is to what extent these latest developments could support building stronger relationships and establishing better engagement practices. in this world of complexity, organizations are due, in incorporating emotional intelligence and developing organizational citizenship behavior among employees, to change behavior of employees from destructive to constructive. this study certainly throws light on employer-employee relationship and assesses its impact on employee engagement and task performance working in food processing units. the main aim of the study is to assess the effect of employer-employee relationship on employee engagement and task performance. effect of employer-employee relationship on employee engagement and task performance ... 113 2. objectives of the study to evaluate the association between employer-employee relationship and employee engagement, to know the association between employer-employee relationship and task performance, to identify the relationship between employee engagement and task performance, to evaluate the association between profile factors and variables considered understudy. 3. review of literature 3.1. definition of employee engagement (baumruk, 2004; richman, 2006; & shaw, k. 2005) “employee engagement is a submission of ones’ intellectual capital and emotional capabilities for the wellbeing of the organization”. according to frank et.al., (2004) employees in their organizations are bound by certain discretionary efforts. truss et.al., (2006) simply put, engagement has been defined as 'passion for work,' an emotional state that encompasses the various dimensions of engagement. it measures the value that an employee could deliver at their workplace through the usage of their skills and updated talents. he is the first person to link engagement with behavior skills. employee engagement will certainly create a sense of belonging among the employees to establish a better organizational culture. rich et al. (2017) define engagement as the mix of cognitive abilities, physical, and emotions used to achieve desired results at the workplace. according to rothbard (2001) engagement is attained by identifying two dominant components: (1) attention, and (2) absorption; the later refers to getting captivated in one’s role and the former refers to being attended to absorb and digest his role. engagement is considered to be a dominant component of the workplace of effective organizations (fairfield et al., 2009). concerning familiarity owning by employee engagement in the sphere of, organizations, recent surveys pointed out that having no engagement in the workplace is a considerable issue now. according to maslach & leiter (1997), “engagement is categorized by (1) energy, (2) involvement, and (3) efficacy, which are the direct opposites of the three burnout dimensions”. 3.1.1. cause and effect of employee engagement earnings per share (eps) are linked with employee engagement, as one can see a hike in eps with the result in improvement in employee engagement (ott, 2007). “employee engagement is associated with organizational performance indicators like overall profitability, customer satisfaction, brand loyalty, employee retention, safety, productivity, sales” (coffman, 2000). strong motivation and psychological boost up are possible with the practice of employee engagement (ashforth & humphrey, 1995). it was inferred by saks (2006) that researchers tend to agree that the concerns of employee engagement are positive and it certainly motivates employees to achieve organizational objectives. to what extent the employees are engaged, depends on the facilities provided by the organization. as it was confirmed by harter et.al., (2002), engagement is strongly associated with business objectives. they concluded that “…employee satisfaction and engagement are related to meaningful business outcomes at a magnitude that is important to many organizations”. 114 r. k. guntuku, s. boini, k. mukherjee, r. s. kummeta 3.2. employer-employee relation relationship among employers and employees should be managed effectively to enhance the overall effectiveness of the organization. good relations promote better scope to perform and bad relations reflect adverse conditions and thus result in poor performance. the employer-employee relationship is one of the dominant management practices and is achieved only through mutual understanding and sharing among both parties. it is one of the governing factors having the potential to decide the fate of organization (wilkinson et al, 2014; sparrow & makram, 2015; keeble-ramsay & armitage, 2014; persson & wasieleski, 2015). it was proven by many of the researchers that the majority of the goals are achieved only due to effective relationships between employer-employee, but it is a double-edged sword, which can exhibit both positive and negative sides. employer-employee relationship will promote enough happiness among employees and thus lead to success (valizade, et.al., 2016). in contrast, weak relationships drive employees toward poor performance. though employers play a major role in making decisions, employees are more influenced during the times of critical matters to be discussed and their presence is given utmost importance: this sort of mechanism is called employer-employee relationship management (marchington & wilkinson 2008). industrial harmony is the gateway to organizational performance. it is attained through the implementation of better information-sharing practices among leaders and followers. savolainen, (2000) noticed that the employer-employee relationship is identified as a key performance area in achieving organizational success. furthermore, sadri & lees (2001) expressed that there is a great amount of need for organizations to encourage and embrace a positive organizational climate and thus lead to establishing a positive relationship between employers and employees. employer-employee relation is considered to be a central nervous system of any organization as it runs on activities like clash and collaboration. “the achievement of organizational objectives depends upon employment relations” (dawson, 1995). evidence from the study of limerick (1992) suggests “that individual empowering should be consistent in the event of strategic change”. 3.3. task performance it is all about individual behaviour towards their respective roles in relevance to the goals of the organization. task performance is related to the job in which an employee exhibits behaviours about satisfying his boss. with the increase in competition and the need for versatile skill requirements, study on task performance has received considerable attention. according to boroman & motowidlo (1993), classifications were made for job performance, one is based on role, and the second one is on behaviour suitable to perform the job and another one is an extra-role performance which is not directly related to the job but it has its effect on organizational performance. they categorized these two types as task performance and contextual performance. the job description consists of roles and responsibilities to be played by an employee and his work performance is measured against their roles. effect of employer-employee relationship on employee engagement and task performance ... 115 3.4. drivers of task performance there are many drivers noticed by eminent researchers, according to waldman and spangler (1989), leaders’ behaviour, experience, job security, ability, pay increase, performance feedback, and group process are the major causing variables for task performance. in the words of jalil et. al., (2015), individual characteristics play a major role in measuring work performance and employees need to be motivated to achieve desired results in their roles. employees need a sound organizational culture for better performance. mutual understanding, sharing a bit of mind, providing career development opportunities, emotional intelligence, and empathetically sound behaviour are some of the cultural inputs useful to embrace task performance (mensah & tawiah 2016). these organizations should create an atmosphere of mutual sharing and there will be continuous improvement in organizational outcomes (shahzad, 2014) leadership style plays a vital role in acquiring desired results of employees. the leader’s behaviour towards followers and information sharing practices applied by leaders to intensify their growth opportunities will have an effect on employee job performance, (mulki et al., 2014). employees may derive pleasure from completing given tasks on time. it gives them immense pleasure in satisfying themselves with their roles and responsibilities defined by employers. completing a job in the given time results in employee job satisfaction, which is another factor to be considered to deliver better job performance. there are many ways that an individual could be satisfied with his job, utilizing financial and nonfinancial measures. (kappagoda et. al., 2012). 3.5. food processing units in telangana state of india the food processing industry offers massive opportunities with attractive and stimulating growth prospects. in india, the food and grocery retail market constitutes 65% of the total market. the government of india is coming up with huge potential offers for potential entrepreneurs. currently, the food processing industry in telangana processes ~25% of agri & allied output by value and adds 12.5% in value; telangana state is known for the production of lemon, grapes, turmeric, soybean, and sweet orange. the government of telangana state is promoting venture capital funds to promote entrepreneurial skills in the area of food processing units. all food processing units are eligible for a grant of rs. 5 lakhs for participating in the telangana agri profile. the government has sanctioned 4 mega food hubs. hence, there is a great need to encourage this sector. there are around 10 major players belonging to food and confectionary units in the hyderabad region of telangana state, where the survey is conducted. ravi food products limited and anand food products limited are the two units considered for the study. 4. research methodology 4.1. research hypotheses although there has been considerable research done in the area of employee engagement, still it seems that studies on factors influencing engagement only acquired scant attention. according to a study by arimie (2020), “employee engagement is a by-product of employeremployee relations and the quality of the relationship, which plays a vital role to evaluate the level of engagement and satisfaction of employees”. 116 r. k. guntuku, s. boini, k. mukherjee, r. s. kummeta the strong relationship between employers and employees can encourage employee engagement. employee engagement and job satisfaction are driven by employer-employee relations. shaheen et al., (2017) revealed that employer-employee relation targets to what extent employees are engaged in their jobs. cleland et.al., (2008) reported that “the white paper of the ixia consultancy revealed that employees believed that they feel more satisfied and engaged when the relationship with their managers is based on respect and dignity”. findings from the report by kenexa (2008), inferred that the attitude and behaviour of leaders towards employees will certainly decide the level of engagement. managers who respect, appreciate, inspire, motivate and develop stimuli in them and create a wonderful organizational climate for their employees are more likely to get engagement. the employee-employee relationship is positively related to employee performance to produce better results. organizations are successful when there is peace and harmonious relationship among superiors and subordinates, such an atmosphere reduces friction among them. therefore, it can be predicted that the employer-employee relationship may have an association with employee engagement and task performance. based on the argument, the following hypotheses are formulated. h1: employer-employee relationship is positively correlated with employee engagement. h2: employer-employee relationship is positively correlated with task performance. h3: gender is associated with the employee-employer relationship h4: gender is associated with the employee engagement h5: gender is associated with task performance h6: age is associated with the employer-employer relationship h7: age is associated with employee engagement h8: age is associated with task performance 4.2. research study in this study, the researcher examined the influence of the employer-employee relationship on employee engagement and task performance of the employees working in dukes – ravi foods pvt limited and anand foods pvt limited located in hyderabad, india. the very purpose of this study is to test the relationships among the dependent and independent variables considered under this study and to ensure that the findings are useful to the sector considered under this study. correlation is one of the statistical techniques employed to explore the relationship between the employer-employee relationship (independent variable) and employee engagement and task performance (dependent variables). this study is conducted in a food processing unit belonging to the manufacturing sector. for this purpose, data is collected from superiors and subordinates belonging to various departments, working in the food processing unit in hyderabad city, india. 220 employees belong to managerial and nonmanagerial positions working for both ravi foods pvt limited and anand foods pvt limited. we have distributed the questionnaire to 117 employees through convenient sampling. some of the respondents have not filled out the research instrument in the required manner, after considering the viability of the filled questionnaires. the sample size is taken as 100. the employer-employee relationship is an hr practice considered as an independent variable in this research study. employee engagement and task performance are dependent variables. standard constructs are used in this study to measure these variables. the questionnaire was categorized into four parts, demographic profile factors, employeremployee relationship, employee engagement, and task performance. in this study, a effect of employer-employee relationship on employee engagement and task performance ... 117 questionnaire with four constructs is framed using a likert scale of measurement ranging from 5 to 1. table 1 reliability variable cronbach’s alpha no of items employee engagement .840 5 task performance .860 8 employer-employer relation .824 8 source: authors’ calculation to measure task performance, a construct developed by (goodman, s. a., & svyantek, d. j. 1999) was used in this study. there are 8 items in this construct. the reliability test gave us a cronbach’s alpha value of 0.86. the employee engagement measure scale consists of 5 items with cronbach’s alpha value of 0.84. employeremployee relationship scale consists of 8 items with a cronbach’s alpha value of 0.824. 5. results the researcher examined the level of the employer-employee relationship, employee engagement, and task performance of the superiors and subordinates belonging to various departments. table 2 the result of descriptive statistics analysis source: authors’ calculation task performance engagement employer-employee relation mean 26.93 mean 16.26 mean 22.22 standard error 0.250355 standard error 0.230336 standard error 0.313204 median 27 median 16 median 22 mode 28 mode 17 mode 22 standard deviation 2.503553 standard deviation 2.303357 standard deviation 3.132044 sample variance 6.267778 sample variance 5.305455 sample variance 9.809697 kurtosis 6.19061 kurtosis 1.234942 kurtosis 9.607728 skewness 1.342175 skewness 0.560513 skewness 1.85112 range 18 range 13 range 25 minimum 22 minimum 12 minimum 15 *maximum 40 *maximum 25 *maximum 40 sum 2693 sum 1626 sum 2222 count 100 count 100 count 100 confidence level(95.0%) 0.496759 confidence level(95.0%) 0.457036 confidence level(95.0%) 0.621465 118 r. k. guntuku, s. boini, k. mukherjee, r. s. kummeta there are 8 items in construct task performance. hence, the total score value (maximum) is 40. there are 5 items in construct employee engagement. hence total score value (maximum) is 25. there are 8 items in construct employer-employee relation. hence, the total score value (maximum) is 40. the researcher examined the above table to draw an inference that employeremployee relationship practices are moderate in this firm as the mean value is (22.12) against to maximum value of 40. the level of employee engagement is good in this firm having a mean value of 16.22 against the maximum of 25. task performance is moderate in this firm as the mean value is 26.85 against the maximum of (40). table 3 result of correlation 1 2 3 1.employer-employee relationship 1 2.task performance -0.0328** 1 3. engagement 0.189413** 0.267687** 1 **p<0.05 *p< 0.01 source: authors’ calculation in this study, the following parameters were used to determine the practical effect size of the inter correlation coefficient values as suggested by cohen (1992) and supported by osteen and bright (2012): coefficient values around .10 or below were considered small; those around .30 were considered moderate; and those around .50 were considered large in terms of practical significance the coefficient of correlation is an indication of the strength of the linear relationship between two variables. from the above table, it is inferred that the variables employeremployee relationship and employee engagement are positively correlated as the coefficient of correlation value (r=0.18) which is greater than zero at 5% significance level. hence, it signifies that the relationship between the employer-employee relationship and employee engagement is small and positive. it is concluded that employees at the food processing units are engaged in work due to rapport and smooth relationship between the employers and employees. the variables employer-employee relationship and task performance are negatively correlated (r=-0.0328). the correlation between the variables engagement and task performance is moderate (r=0.267). hence, it is concluded that the employees in food processing units are performing tasks due to the fact that the employees are engaged in the work. table 4 the result of regression analysis adj. r2 = 0.034 f=2.7495 sig f = 0.06 (b)coefficients standard error t stat p-value employee engagement 0.293841705 0.127549909 2.303739047 0.023371686 task performance 0.141155713 0.127066735 -1.110878566 0.269366678 source: authors’ calculation from table 4 it is inferred that employee engagement is the most influencing factor and is caused by good employer-employee relationship practices. (b=0.29, p< 0.05). task effect of employer-employee relationship on employee engagement and task performance ... 119 performance is not showing a significant impact on the employer-employee relationship as (b=0.141. p>0.05). hence, it is noticed that employee engagement is caused by the employer-employee relationship. the level of employee engagement is highly influenced by the ongoing relationship between leaders and followers. table 5 result of anova: gender and employer-employee relationship groups count sum average variance 10 25 2.5 2.944444 1 12 74 6.166667 25.42424 source of variation ss df ms f p-value f crit between groups 73.33333 1 73.33333 4.790419 0.040653 4.351244 within groups 306.1667 20 15.30833 total 379.50003 21 source: authors’ calculation from the above table 5, it is noticed that p=0.04; p < 0.05. hence, there exists a relationship between gender and employer and employee relationship. here, the employer and employee relationship is a variable that is influenced by gender. hence, gender determines the level of relationship existing between employers and employees. table 6 the result of anova: gender and task performance groups count sum average variance 9 25 2.777778 3.444444 1 10 74 7.4 23.15556 source of variation ss df ms f p-value f crit between groups 101.2023 1 101.2023 7.291372 0.015167 4.451322 within groups 235.9556 17 13.87974 total 337.1579 18 source: authors’ calculation from the above table 6, it is noticed that p=0.015; p < 0.05. hence, there exists a significant relationship between gender and task performance. it is interpreted that task performance is achieved by the involvement of gender. the amount of work being performed by an individual in an organization is certainly influenced by male or female workers. table 7 the result of anova: gender and employee engagement groups count sum average variance 7 25 3.571429 3.285714 5 10 70 7 19.55556 source of variation ss df ms f p-value f crit between groups 48.40336 1 48.40336 3.709747 0.073263 4.543077 within groups 195.7143 15 13.04762 total 244.1176 16 source: authors’ calculation 120 r. k. guntuku, s. boini, k. mukherjee, r. s. kummeta from the above table, it is noticed that p = 0.07. as p-value is higher than 0.05, there exists no relationship between gender and employee engagement. we can interpret that the level of employee engagement is not influenced by gender. table 8 the result of anova: age and employer-employee relationship groups count sum average variance 1 11 62 5.636364 25.65455 11 28 2.545455 1.472727 2 5 2.5 0.5 3 4 1.333333 0.333333 source of variation ss df ms f p-value f crit between groups 75.56061 3 25.18687 2.126337 0.124545 3.027998 within groups 272.4394 23 11.84519 total 348 26 source: authors’ calculation from the above table, it is noticed that p=0.12; p > 0.05. hence, there exists no relationship between age and the employer-employee relationship. age is not an influencing factor in building relationships between employers and employees. table 9 the result of anova age and task performance groups count sum average variance 9 63 7 12 9 28 3.111111 2.861111 4 5 1.25 0.25 1 3 3 1 0 source of variation ss df ms f p-value f crit between groups 145.3211 3 48.44037 8.502651 0.000687 3.072467 within groups 119.6389 21 5. total 264.96 24 source: authors’ calculation from the above table, it is noticed that p=0.006, where p < 0.05. hence, there exists relationship between age and task performance. the effectiveness of the task to be performed by the employees is influenced by the age of the employees working in the organization. table 10 the result of anova: age and employee engagement groups count sum average variance 4 7 59 8.428571 15.61905 10 28 2.8 3.288889 1 4 4 1 0 2 4 2 0 source of variation ss df ms f p-value f crit between groups 195.2944 3 65.09814 10.03018 0.000353 3.12735 within groups 123.3143 19 6.490226 total 318.6087 22 source: authors’ calculation effect of employer-employee relationship on employee engagement and task performance ... 121 from the above table, it is noticed that p=0003, where, p < 0.05. hence, there exists a relationship between age and employee engagement. to what extent employees are engaged in the work assigned is determined by the age of the employees. 6. discussion from the above results, it is inferred that there exists a relationship between the employer-employee relationship and employee engagement. hence, h1 is accepted. from the findings, it is concluded that the relationship between employers and employees plays a predominant role in ascertaining the level of employee engagement. similar findings are noticed from the work of joel arimie, chukuyem (2020), “employee engagement is a by-product of employer-employee relations and the quality of the relationship and is one of the most critical factors that drive engagement and satisfaction of employees”. a smooth relationship between leader and follower will establish a congenial atmosphere in an organization. it strengthens the companionship among the employers and employees and cements relationship to achieve desired results task performance does not have association with the employer-employee relationship. hence, h2 is rejected. hence, the employer-employee relationship is not associated with task performance. gender is associated with the employer-employee relationship. hence, h3 is accepted. similar findings were noticed in the study of ilostat, (2020) that there is parity in gender in terms of works force. according to woetzel et al. (2018) “there is a huge amount of gender discrimination in achieving organizational leadership”. gender is not associated with employee engagement. hence, h4 is rejected. a similar finding was identified from the study of banihani et al. (2013) that it is easier for men to get engaged in work than women. gender is having a relationship with task performance. hence, h5 is accepted. according to the study by green et al. (2009), “there is a significant gender-based difference in performance on various dimensions”. age is not associated with the employer-employee relationship. hence, h6 is rejected. age is associated with employee engagement. hence, h7 is accepted. similar findings are withdrawn from the study of douglas & robers (2020) that senior employees of age above 50 are more engaged than employees of age less than 50. age is associated with task performance. hence, h8 is accepted. it is inferred that age is an influencing factor of task performance. according to the survey conducted by converso (2018), age is negatively associated with task performance. 7. implications of the study from the above discussions, it is observed that employees working in food processing units are productively engaged due to effective relationship and companionship among employers and employees. whereas task fulfillment and performance delivered by employees is in no way connected to the employer and employee relationship. hence, it is a need of the hour for decision-makers to train their managerial staff in the lines of behavioral attributes like emotional intelligence, empathetic leadership, and counseling employees through sharing a bit of mind, and changing employees’ behavior from destructive to 122 r. k. guntuku, s. boini, k. mukherjee, r. s. kummeta constructive. such valuable inputs necessarily create strong bondage between leaders and followers. it is advised for the food industry to make sure that the firms have to focus more on imparting training programs to employees on the above-mentioned attributes. profile factors like age and gender considered in this study are certainly showing an influence on achieving employee engagement and task performance. 8. direction for future research future scholars will go on many different paths as a result of this work. employee engagement and task performance were the main variables of interest in this study in connection with the employer-employee relationship in food processing units. exploring how the employer-employee relationship is influenced by other variables practiced in the food processing company, on the other hand, could be productive for decision-makers in making decisions pertaining to appraising the performance of the employees and in designing a road map to grab career development opportunities. it would be worth emulating to conduct a study about the impact of the employee-employer relationship on lowered turnover intentions, job satisfaction, organizational citizenship behavior, dedication, job involvement, work-life balance, workplace bullying, and stress, for example. the goal of the study was to show a direct link between the employer-employee relationship and each dependent variable. further research would be more beneficial if it could include independent variables such as employee empowerment, pressure to perform, job clarity, and so on, as well as dependent variables. references arimie, c. j. 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(2018). the power of parity: advancing women’s equality in asia pacific. mckinsey & company. retrieved from: https://www.mckinsey.com/featured-insights/gender-equality/the-power-ofparity-advancing-womens-equality-in-asia-pacific efekti odnosa poslodavac-zaposleni na angažman zaposlenih i radni učinak ranija istraživanja su pokazala da organizaciona produktivnost zavisi od primene hr praksi. kompanije rastu tako što prihvataju prakse koje su orijentisane ka visokim performansama. svrha ovog rada je se vidi kako odnos poslodavac-zaposleni utiče na nagažman zaposlenih i radni učinak u fabrikama za preradu hrane u hajderabadu. jedna od najčešćih hr praksi je odnos poslodavaczaposleni, što je ključno u odreživanju niovoa angažmana zaposlenih. radni učinak se odnosi na sposobnost zaposlenog da obavi zadatke, i na njega utiče odnos poslodavac-zaposleni. da bi izmerio uticaj odnosa izmežu poslodavaca i zaposlenih na angažman zaposlenih i njihov radni učinak, autor je obavio istraživanje u dve fabrike za preradu hrane u hajderbadu, indija. da bi se istražila veza između zavisnih varijabili “angažman zaposlenih” i “radni učinak” i nezavisne varijabile “odnos poslodavaczaposleni”, stvorene su hipoteze. kao instrument istraživanja, učesnicima je podeljen upitnik, a informacije su sakupljene na uzorku od 100 ljudi. zaključeno je da je odnos poslodavac-zaposleni u velikoj meri povezan sa angažmanom zaposlenih i ima negativnu korelaciju sa radnim učinkom. pol ispitanika je povezan sa sve tri varijabile kao i sa faktorom profila. angažman zaposlenih je povezan sa starošću ispitanika, dok je radni učinak negativno povezan sa odnosom poslodavac-zaposleni. korišćeni su statistički instrumenti poput deskriptivne statistike, korelacije i anova testova. ključne reči: odnos poslodavac-zaposleni. angažman zaposlenih, radni učinak https://doi.org/10.1016/j.hrmr.2015.04.002 https://doi.org/10.1111/1748-8583.12113 https://doi.org/10.1207/s15327043hup0201_2 https://doi.org/10.1080/09585192.2014.868713 https://www.mckinsey.com/featured-insights/gender-equality/the-power-of-parity-advancing-womens-equality-in-asia-pacific https://www.mckinsey.com/featured-insights/gender-equality/the-power-of-parity-advancing-womens-equality-in-asia-pacific facta universitatis series: economics and organization vol. 18, no 3, 2021, pp. 289 298 https://doi.org/10.22190/fueo210611020s © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the impact of the pandemic covid-19 on hospitality industry and tourism workers1 udc 338.48:[616.98:578.834 dana-maria stoicea (ignătescu) university of craiova, doctoral school of economics, craiova, romania orcid id: dana-maria stoicea (ignătescu) n/a abstract. the contemporary coronavirus pandemic (covid-19) has led the world to a severe socio-economic crisis and psychological distress. it has distressed the economy, but the services sector, especially the hospitality industry, is seriously affected by it. this study investigates how this virus influences organizational confidence, job satisfaction, and increases employees' sense of insecurity and perceptions of being unemployed. we performed a comparative analysis of the main indicators in tourism in 2020 compared to the same period of 2019, referring to the data recorded internationally. also, the research aimed to identify how much the hospitality sector is affected by the crisis produced by the covid-19 pandemic. the results specify that perceived job insecurity interposes the fear of the economic crisis. key words: covid-19 fear, perceived job insecurity, hospitality industry, unemployment jel classification: z3, l83, l88. 1. introduction the covid-19 pandemic crisis "has severely impacted the good health and wellbeing of people around the world. on these unforeseen challenges, decision makers reconfigure advanced resilient policies and strategies for the labor markets" (cristea et al., 2020). "the world is always facing challenges due to technological advances, natural disasters and demographic factors. however, coronavirus has emerged as the biggest challenge of the decade" (khan et al., 2021). received june 11, 2021 / revised july 02, 2021 / accepted july 05, 2021 corresponding author: dana-maria stoicea (ignătescu) university of craiova, faculty of economics and business administration, 13, a.i. cuza street, craiova, 200585, romania | e-mail: danaignatescu@gmail.com mailto:danaignatescu@gmail.com 290 d-m. stoicea (ignătescu) "covid-19, believed to be from wuhan, china, has infected more than 136 million people in 188 countries and killed more than 2,900,000" (kang et al., 2021). they mentioned that, "taking into consideration the relatively high mortality of covid-19 in comparison to other influenza-like diseases and the ease of its human-to-human transmission, the world health organisation has labeled covid-19 a pandemic". "a lot of countries have declared a temporary suspension of public / private outdoor activities and closed down key businesses" (kang et al., 2021). "tourism, as a global spread of viruses" (browne et al., 2016) "was one of the first industries directly affected by global pandemic measures" (nicola et al., 2020). covid-19 is not as contagious as measles, nor as likely to kill a person as ebola, but people can be contagious a few days before symptoms (bai et al., 2020). a global recession, economic recessions and declining industry performance are "just some of the consequences of this global emergency" (khan et al., 2021). "prudential regulations in the financial area are needed in order to provide solutions for the cyclical side of this systemic risk, and could also limit the possibility of over-liquidity builtup" (tănasie, 2011). the growing number of cases "created panic, stress and nervousness among people, then they had to face psychological problems, panic attacks and the understanding that there is no known cure for this disease" (ahorsu et al., 2020). škare (2021) said that, "since the beginning of the covid-19 crisis in china, the impact of the pandemic on the travel tourism industry has been significantly underestimated". even now, "the decision political factors and practitioners from the tourism sector do not have a full understanding of the scenarios and effects of the crisis, that will have an unprecedented impact on the tourism industry" (škare et al., 2021). "between the problems that may occur in conection with the tourism stakeholders we can mention distrust for the government or insufficient support of the government, inclusion of politics, too much administration or bureaucracy" (ionescu et al., 2019), exceeding influence of the essential interest and influential groups, "insufficient inclusion of individual interest groups, insufficient awareness on the need to participate, lack of guidance and wrongly defined priorities goals and conduction strategies" (ionescu et al., 2019). previous studies have considered that the fear of loosing jobs and the financial insecurity, as being the most substantial cosequences of the gouvernmental politics. in the private sector, "the fear of job insecurity is a permanent threat, but it has nevertheless gained more attention during this pandemic. the fear of being fired from the ongoing jobs is greater than being infected" (khan et al., 2021). according to world travel and tourism council (wttc, 2020), "over 50 million jobs related to tourism/hospitality are currently at risk". while many services for example administration, education, training, and libraries can be administered from home, most staff in sales-related industries cannot operate remotely, (for example flight attendants, reception workers, etc). "wttc also estimates daily loss of one million jobs in the travel tourism sector due to the widespread impact of the coronavirus pandemic" (škare et al., 2021). to date, the research "has focused on the high levels of depression, anxiety, insomnia and stress related symptoms of the workers in the health department during the current pandemic" (pappa et al., 2020), but "few studies have taken into consideration the welfare of tourism and hospitality, of the affiliated staff and their concerns at work" (kang et al., 2021). because this field is under-researched, this study seeks to "fill the gap and open new horizons for managers" (khan et al., 2021). specifically, in this research we investigate "how perceived job insecurity meditates on the relationship between fear of economic crisis, unemployment, and mental health" (khan et al., 2021). the impact of the pandemic covid-19 on hospitality industry and tourism workers 291 the main goal of the research is to add to the literature of the hospitality sector, as it is a sector that has received little attention from researchers, and furthermore it is a sector that is confronting significant repercussions through this pandemic. in the first part of the paper we approached the theoretical aspects of the literature, and in the second part we made a presentation of the research methodology. the results highlighted the fact that an extremely large number of people around the world lost their jobs due to the coronavirus pandemic, and the incomes of those in the hospitality sector have considerably decreased in 2020, compared to 2019. 2. literature review firoiu and the contributors (2019) mention that "the tourism sector is considered to be a very important field for the global economy and tourism is an essential growth and prosperity factor for all areas, generated positive, direct and indirect effects on the local and regional economy". "with a strong dynamic and a high share of the contribution to the global gdp, tourism generates unlimited development opportunities, but also the freedom to travel, therefore being an open system, with extraordinary benefits for society, economy and environment" (firoiu et al., 2019). tănasie and fratoștițeanu (2009) said that the "tourism is an essential component for both economic development and poverty reduction in developing countries". "in this sector, the part time jobs are preferred in a greater extent than in others and there are applied flexible methods to the work force employment (the hiring during the week-end, on the occasion of certain events, holidays or for certain activities-guides, instructors,etc)" (gruescu et al., 2009). hu (2021) mentioned that "covid-19 pandemics affected many aspects of the global society, including where they spend their holidays". tourism is very sensitive to changes in safety and health. it is mentioned in the literature that tourism companies are often unprepared for crisis situations, and during an economic crisis, the approach of the tourism industry "in terms of crisis management depends on the level of economic development of the country, the availability of financial resources and capabilities government officials and industry employees" (hu et al., 2021). the financially strong and the most efficient companies on the market survive a crisis. "in the last decade, much research has focused on the study of mechanisms for an efficient crisis and the post-crisis management of the tourism industry, both at the level of cities and regions" (rutynsky & kushniruk, 2020). "currently, many front-line employees face an extremely high level of work-related stress and anxiety due to covid-19" (kang et al., 2021). the covid-19 epidemic clearly poses a significant threat to the entire industry, to those employed in it and to those who wish to continue traveling (wttc, 2020). the prolonged economic crisis is leading to financial difficulties among people who work or try to find a job. these problems "cause psychological distress and fear of losing a job among employees" (khan et al., 2021). "the economical crisis has a significant impact on labour" (shoss mindy &tahira, 2012). "unprecedented global travel restrictions and the compulsoriness to stay at home cause the worst disruption of the global economy since world war ii" (gossling et al., 2020). "travelers can carry microbes and their genetic material, they can be victims or carriers of viruses and travel restrictions, in particular urban isolation, would be the only strategy to combat epidemics in the future" (chen & wilson, 2008). "given the uncertainty 292 d-m. stoicea (ignătescu) caused by the covid-19 epidemic, it is particularly important to adopt strategies to improve the safety of tourists in the post-pandemic context and to strengthen public confidence" (chen et al., 2020). gursoy and chi (2020) said that "almost all restaurants were asked to limit operations to take-out and restrictions on travel and residence orders issued by the authorities have led to a sharp decline in hotel occupancy and revenue". however, the reopening process has begun "slowly, and authorities have begun to relax restrictions, such as allowing restaurants to reopen at low capacity, with strict guidelines on social distancing, and gradually reducing restrictions on domestic and international travel" (gursoy & chi, 2020). "preliminary findings from a longitudinal study by the editorial team of the journal of hospitality marketing and management suggest that reopening restaurants and easing travel restrictions will not bring customers back" (gursoy & chi, 2020). in accordance with gursoy (2020), "a large proportion of the customers (50%) are not willing to dine at a restaurant immediately". the same goes for hotel accommodation. "most of the customers are not willing to travel to a destination and to stay at a hotel anytime soon" (gursoy & chi, 2020). perceived unemployment is a susceptible issue for employees. "if employees perceive that other organizations are firing their employees because of the prevailing situation, they become even more sensitive" (khan et al., 2021). a worker who perceives unemployment would think that it is "difficult and sometimes impossible to find a job with the established skills he has" (giorgi et al., 2015). "low-income families are more affected by this fear, leading to various mental health and health problems" (devries & wilkerson, 2003). in terms of demand, the "crisis will bring a reduction in disposable income, with a consequent reduction in the ability of tourists to pay" (baker et al., 2020). on the other hand, uncertainty due to the pandemics determined tourists to postpone the decision to purchase until the last minute. travel contracts concluded months in advance have decreased due to the high risk of cancellation, "as this move towards last-minute acquisitions is determined by the uncertainty of the situation" (toubes et al., 2021). "consumer demands and their buying behaviour have changed radically and, as a result, companies have had to innovate their marketing strategies in order to survive" (toubest et al., 2021). the tourist voucher is used by some destinations as a new product to stimulate the consumption of local customers. "tourist vouchers are based on discount voucher models for purchases in hotels and other tourist accommodation units, restaurants and the tourism industry in general, with the aim of revitalizing one of the sectors most affected by the crisis" (rutynskyi & kushniruk, 2020). the stress at work because "workplace stress can lead to negative outcomes for employees, companies and organizations, workplace stress is an important factor in many academic and business studies" (kang et al., 2021). similar results have been "found in the hospitality industry, where stress at work decreases satisfaction with reception staff" (kim et al., 2014). studies investigating the regarded level of stress in tourism / hospitality of employees in the course of the covid-19 pandemic remain limited. several studies refer to the number of researches conducted on the vaccine for covid-19. however, "almost no study shows how employees suffered mentally because of this pandemic and employees were directly affected as the operation of the companies changed" (khan et al., 2021). supply chains have been broken due to unavailability of raw materials and travel restrictions. when "production and sales were adversely affected, organizations had to reduce the impact of the pandemic covid-19 on hospitality industry and tourism workers 293 costs, and therefore layoffs were one of the cost-cutting strategies" (khan et al., 2021). the reduction in the "workforce involved employees who were laid off and created a sense of job uncertainty among the remaining employees" (kim, 2003). 3. research materials and methods the current study considers an epidemic that continues to unfold while this study is ongoing. the situation is unique and not much is known about this ongoing and growing disaster. qualitative and quantitative research methods vary in several ways, both in terms of data collection and explanation. while qualitative research focuses on the depth and quality of the data collected, quantitative research keeps the number and volume of data collected in the first place. in this paper we used a mix of research methods to investigate the impact of the covid-19 pandemic on the hospitality sector and tourism employees. the research begins with a description of the contemporary crisis. 3.1. suppliers of touristic products "the services sector is severely affected by the covid-19 pandemic, especially the hospitality industry, based on the accommodation, food and beverage segments" (khan et al, 2021). the authors pointed out that "one way to control the spread of covid-19 was blocking, being the main reason for the cancellation of economic activities". they said that "the hospitality industry was also affected by this, as domestic and international flights were stopped and there was no tourism, business travel, meetings and no flight crew to stay at airport hotels". in addition, "hotel operations (restaurants, conferences, seminars and banquets) have also been restricted, severely affecting economic and financial performance" (khan et al., 2021). person-fitcher and liu (2021) said that "before the crisis, compared to operational risks, companies in tourism supply chains were interconnected in a complex model which led from one type of risk to another". in addition, in this crisis, multiple skills are considered a potential solution to reduce layoffs and retain employees for a long time. "this reflects the need for managers to recognize the importance of employees who have more jobs and who want to be full-time in the hotel and tourism industry" (persson-fitcher & liu, 2021). kaushal and srivastava (2021) stated that tourism service providers conducting "multi-skilled training for their employees before the crisis will reduce the corporate risk of losing a large number of employees" and the pressure of unemployment on employees during a crisis. during the crisis, first of all, from mid-march 2020, operators lost much of their revenue, which made people worried about their financial stability and their ability to restore services. "many tour operators may require direct or indirect government support" (persson-fitcher & liu, 2021). managers in the hospitality industry should consider "wearing mandatory masks until a sustained solution is obtained, for example, the most considered solution in addition to the covid-19 vaccine" (kaushal & srivastava, 2021). in a similar vein, gössling and contributors (2020) demonstrate that "a regional reset is equally likely to strengthen selfish regionalism based on pre-existing power dynamics and growth-oriented development and to lead to regional reorientation towards sustainable practices". they also describe how the potential of the current transformational momentum is likely "to be removed in many regions, as governments pursue urgent job growth to 294 d-m. stoicea (ignătescu) alleviate rising unemployment". hall, scott and gössling conclude with a classical expression: the changes brought to tourism as a "result of covid-19 will be unequal in space and time, so that, although it is possible to see a new regionalism, it will probably be a mosaic of old and new approaches to tourism" (brouder et al., 2020). 3.2. aspects of the financial crisis in the hospitality sector the most recent wttc records (2021) show: ▪ "the travel and tourism sector suffered a loss of almost usd 4.5 trillion, reaching usd 4. 7 trillion in 2020" (wttc, 2021); ▪ "the contribution to gdp decreased by 49.1% compared to 2019, compared to a decrease of 3.7% of the gdp of the global economy in 2020" (wttc, 2021); ▪ in 2019, the travel and tourism sector accounted for 10.4% of global gdp, falling to 5. 5% due to ongoing mobility restrictions; ▪ "in 2020, 62 million jobs were lost, representing a decrease of 18.5%, leaving only 272 million employees in the entire sector globally, compared to 334 million in 2019"; ▪ "domestic visitors expenses decreased by 45%, while international visitors expenses decreased by 64.9%, without precedent" (wttc, 2021). fig. 1 the evolution of the contribution of tourism to gdp and jobs in 2020 source: world tourism organisation according to unwto (2021), "in 2020, 62 million jobs were lost, representing a percentage of 18.5% less than in 2019". given that many companies and employees in the tourism sector have lost or will lose their jobs due to the covid-19 pandemic, these companies have worked together to provide financial support to these employees by launching emergency funds, as well as partnerships for temporary jobs. for example, accor has launched its all heartist fund, allocating 70 million euros to help affected employees and partners. the impact of the pandemic covid-19 on hospitality industry and tourism workers 295 fig. 2 the tourism contribution to gdp in 2020, compared to 2019 (%) source: world tourism organisation from the graph above it can be seen that there has been a decrease in the tourism contribution to gdp in 2020 compared to 2019 due to the covid-19 pandemic. "in 2019, the tourism sector contributed 10.4% to global gdp, falling to 5.5% due to ongoing restrictions on mobility" (wttc, 2020). 2020 2019 0% 20% 40% 60% 80% 100% domestic tourists' expenses international tourists` expenses 2020 2019 fig. 3 the evolution of tourists' spending in 2020, compared to 2019 (%) source: world tourism organisation from this chart it is easy to see that there were decreases in international tourists` expenses in 2020 compared to 2019. "expenditure of domestic visitors fell by 45%, while expenses by international tourists fell by 64.9%, unprecedented" (wttc, 2020). fig. 4 changes in 2020 regarding the tourism contribution to gdp and jobs in tourism. source: eir2020-infographic-map-regional. png (3509×1923) (wttc. org) https://wttc.org/portals/0/images/eir2020-infographic-map-regional.png?ver=2021-04-06-170812-653 296 d-m. stoicea (ignătescu) globally, the asia-pacific region recorded the largest decline in the tourism contribution to gdp in 2020 compared to 2019, with a loss of $ 1.645 billion and a reduction of 34.1 million jobs in tourism. in europe, the tourism contribution to gdp registered a downward trend in 2020 and a decrease of 3.6 million in jobs in tourism in 2020, compared to 2019. 4. conclusions the global crisis of the covid-19 pandemic has triggered an unprecedented decline in tourism business. particularly vulnerable were the small and medium-sized companies that did not have strong financial resources and needed to sacrifice operating profits for the survival of businesses. travel restrictions imposed by the covid-19 pandemic have suppressed the tourism sector, a key player in the economy. "while the hospitality industry is slowly recovering, the crisis caused by covid-19 continues to have a profound impact on the way businesses in the hospitality sector operate" (gursoy & chi, 2020). "these enterprises are expected to make substantial changes to their business operations in the context of the covid-19 pandemic to ensure the health and safety of employees and customers" (gössling et al., 2020). "the extended assumptions for 2021-2024 indicate a return in the second half of 2021" (who, 2021) almost all foreign experts anticipate a continuing crisis in the tourism and hospitality sector until 2023 or even 2024 and a growth in the cost of long-term travel services. the crisis in the tourism sector has led to "a 50% drop in revenue for hotels and restaurants, a 70% drop for tour operators and agencies and a 90% drop for cruise operators and airlines" (ec. europa. eu), as the tourist retail received the main pelt. travel agencies also had great opportunities to adapt to changing business strategies, one of which was the deep digitalization of the industry. "the use of digital technology in the context of the pandemic has thus fulfilled a social function, allowing both employees and customers not to feel isolated from the outside world" (sheresheva et al., 2021). tourist movements may be limited to those who are immune or not. for the relaunch of tourism, most countries in the world accept tourists who have been vaccinated and present proof of vaccination, those who are tested and present a negative result of the pcr test or those who have been naturally immunized and they have already gone through the disease. it is desired to return to normal as soon as possible, so that workers in the hospitality industry can feed their families and reduce the unemployment rate in their case. adaptation is on everyone s mind, as is survival. changes in strategy and policy will have to wait until operational adjustments are made. everything that is happening now is experimental. the important questions of the value of tourism will most likely dominate the tourism industry discourse in the future, as the consensus as to what tourism post covid-19 will look like will still be up for discussion for some time to come. given the evolving nature of the situation, it is too early to estimate the impact of the covid-19 on the hospitality industry and tourism employees. future research directions: 1. continuing the research carried out on the impact of the covid-19 pandemic on the hotel industry and tourism workers. 2. widening the research horizon in order to diversify the chosen topic from a spatiotemporal point of view (for example, conducting similar research, but referring to a specific country). the impact of the pandemic covid-19 on hospitality industry and tourism workers 297 acknowledgement: this work was supported by the grant pocu380/6/13/123990, co-financed by the european social fund within the sectorial operational program human capital 2014 – 2020. references ahorsu, d.k., lin, c.-y., imani, v., saffari, m., griffiths, m., & pakpour, a. h. 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(2020). coronavirus pandemic and tourism: dynamic stochastic general equilibrium modeling of infectious disease outbreak. annals of tourism research, 83, 102913. https://doi.org/10.1016/ j.annals.2020.102913 world health organization. who coronavirus disease (covid-19) dashboard. available online: https://covid19.who.int/?gclid=cjwkcajw8df2bra3eiwavfzwaljxv9_ihvupsmnyxrkekgxu3ubtakq e1-q-jzvdd5le_gqtddb6qhocqhsqavd_bwe world travel & tourism council. coronavirus puts up to 50 million travel and tourism jobs at risk says wttc. available online: https://wttc.org/news-article/coronavirus-puts-up-to-50-million-travel-andtourism-jobs-at-risk-says-wttc world travel & tourism council. travel & tourism economic impact | world travel & tourism council (wttc) uticaj pandemije kovid-19 na radnike u industriji ugostiteljstva i turizma trenutna pandemija koronavirusa (covid-19) dovela je svet u jaku socio-ekonomsku krizu i psihološki stres. negativno je uticala na ekonomiju, ali sektor uskuga, a naročito ugostiteljstva je najviše pogođen njome. ovaj rad istražuje kako ovaj virus utiče na organizaciono samopouzdanje, zadovoljstvo poslom, i povećani osećaj nesigurnosti zaposlenih i strah od gubitka posla. izvršili smo komparativnu analizu glavnih indikatora u turizmu u 2020. godini u poređenju sa istim periodom u 2019, uzimajući u obzir međunarodno zabeležene podatke. isto tako, istraživanje ima za cilj da utverdi koliko je sektor ugostiteljstva pogođen krizom koju je izazvala pandemija kovid19. rezulktati ukazuju da percipirana nesigurnost posla interpolira strah od ekonomske krize. ključne reči: kovid-19 strah, percipirana nesigurnost posla, industrija ugostiteljstva, nezaposlenost https://doi.org/10.3390/joitmc7010030 https://doi.org/10.1016/j.ijsu.2020.04.018 https://doi.org/10.1016/j.bbi.2020.05.026 https://doi.org/10.1016/j.bbi.2020.05.026 https://doi.org/10.3390/su13020906 http://dx.doi.org/10.21511/ppm.18(2).2020.17 http://dx.doi.org/10.21511/ppm.18(2).2020.17 https://doi.org/10.3390/su13073756 https://doi.org/10.3390/su13073756 https://doi.org/10.1016/j.techfore.2020.120469 https://doi.org/10.1016/j.techfore.2020.120469 https://doi.org/10.3390/jtaer16050075 https://doi.org/10.1016/j.annals.2020.102913 https://doi.org/10.1016/j.annals.2020.102913 https://covid19.who.int/?gclid=cjwkcajw8df2bra3eiwavfzwaljxv9_ihvupsmnyxrkekgxu3ubtakqe1-q-jzvdd5le_gqtddb6qhocqhsqavd_bwe https://covid19.who.int/?gclid=cjwkcajw8df2bra3eiwavfzwaljxv9_ihvupsmnyxrkekgxu3ubtakqe1-q-jzvdd5le_gqtddb6qhocqhsqavd_bwe https://wttc.org/news-article/coronavirus-puts-up-to-50-million-travel-and-tourism-jobs-at-risk-says-wttc https://wttc.org/news-article/coronavirus-puts-up-to-50-million-travel-and-tourism-jobs-at-risk-says-wttc https://wttc.org/research/economic-impact facta universitatis series: economics and organization vol. 12, n o 2, 2015, pp. 157 170 corporate liquidity management: implications and determinants  udc 658.14.011.1 ksenija denčič-mihajlov, marina malenović * university of niš, faculty of economics, serbia abstract. corporate liquidity is influenced by many factors which derive both from the company itself, as well as from the company’s environment. this paper focuses on the internal determinants of corporate liquidity. the aim of this paper is to show which company performance indicators are the main determinants of the liquidity of selected companies in serbia, croatia and montenegro, and whether these determinants are specific only to the companies in this region. the companies that make the sample are non-financial companies whose shares are parts of regional capital market indices belex15, crobex10 and monex20. the values of the liquidity indicators of these companies indicate solid liquidity. the most important determinants of corporate liquidity are firm size, leverage and capital structure. the results show that the dominant motive of holding liquid assets in our sample is precaution, which indicates the way the crisis has affected the business operation of the analyzed companies. key words: liquidity indicators, determinants, post-crisis period, market index. introduction companies are imposed by creditors’ requirements to maintain financial solvency. a more liquid company gives them greater assurances that their liabilities will be met in full and on time. therefore, companies have to establish and hold liquidity reserves in the form of cash or marketable parts of the assets at a level that guarantees liquidity. holding liquidity reserves means that some parts of assets are disconnected from operating activities, and the explicit cost of that is the loss of yield that could be achieved in the case that the liquidity reserve is directly involved in operating activities. the essence of liquidity management stems from the fact that the company’s maturing liabilities, under normal circumstances, may be paid only in cash. the cash required for the payment can be provided in through purchase of products, services, or other parts of marketable assets, as well as from sources outside the company. in this context, the liquidity of the company received march 13, 2015 / accepted october 5, 2015 corresponding author: marina malenović, * phd student faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: marinavujicic@rocketmail.com 158 k. denĉiĉ-mihajlov, m. malenović is usually identified with the convertibility of certain parts of the asset into cash. cash represents the absolute liquid asset. in the literature it is stated that it is "the asset over assets", because it is the criterion by which the liquidity of all other parts of the asset is determined. the liquidity of any asset reflects the ease and speed of its conversion into cash without significant transaction costs and loss in value. to what extent will a particular kind of asset be liquid depends on the characteristics of this asset (type and divisibility), the conditions on the market, price stability, costs of sales, etc. liquidity can be analyzed using liquidity ratios, which represents the static analysis of liquidity, or by using cash-flow analysis, which is a dynamic analysis of liquidity. in this paper, liquidity is measured by the ratios that give answer to the question whether the company has sufficient cash and marketable assets to meet its matured liabilities. these indicators are current ratio, quick ratio (acid-test) as well as the value of net working capital. the objective of this paper is twofold: firstly, to assess liquidity of the leading domestic companies and companies from two neighboring countries, and secondly, to estimate the main determinants of firms' liquidity in the period immediately after the global economic crisis. the paper is structured as follows. in the next section, we summarize theoretical determinants of corporate liquidity. based on the available literature, and in accordance with the business conditions of companies from the sample, hypotheses for research are set. in section 3 we present and characterize the data and construct variables used in our empirical analysis. in sections 4 and 5, estimation results of determinants of liquidity for serbian, croatian and montenegrin companies are presented respectively. in the final section, we summarize results and give a conclusion. 1. theoretical aspects of corporate liquidity determinants the optimal amount of liquid assets of a company is determined by the trade-off between the low yield on liquid assets and the benefit of minimizing the need for costly external financing. determinants of corporate liquidity can be considered as micro and macro determinants, given that the level of the company’s liquidity is affected not only by the factors that come from the company itself, but also by the macroeconomic conditions. this paper focuses on the micro determinants of liquidity. these determinants relate to the performances of the company, the management decisions, structure of assets, model of financing, capital structure, etc. further on in this text, hypotheses for research are set up in the form of the expected influence of each of the potential determinants of liquidity on company's liquidity. company's liquidity is affected by firm size. regarding this determinant of corporate liquidity, there are authors who have come to the conclusion that there is an inverse relationship between it and corporate liquidity, but there are also those who have concluded the opposite. the first conclusion stems from the fact that large companies have a variety of investment opportunities instead of holding cash. on the other hand, a positive correlation can be explained so that the majority of large companies have cash on hand in order to avoid liquidating their assets. the study conducted on a sample of french companies (saddour, 2006: 15) shows that positive correlation existed in companies at the maturity stage of the life cycle, whereas the opposite referred to growing companies. corporate liquidity management: implications and determinants 159 ferreira and vilela (2004) in a study on a sample of 400 companies from the countries of the european monetary union conclude that larger firms hold less liquid assets (ferreira, vilela, 2004: 317). therefore, the first hypothesis in this research is that firm size and liquidity of a company are in an inverse relationship. the total debt of companies proved to be a significant determinant of the liquidity in the research conducted on a sample of dutch non-financial companies (bruinshoofd, kool, 2002: 14). higher indebtedness of the company increases moral hazard and marginal costs of borrowing. it increases the uncertainty of access to financial markets in the future. to measure the level of liabilities in this paper, the total debt will be put in relation to total assets. this measure of indebtedness showed an inverse correlation with liquidity (ferreira, vilela, 2004: 309). the second hypothesis is set that companies that have a higher ratio of total debt to total assets have lower liquidity. companies that have a large amount of short-term debts will hold more liquid assets due to uncertainty of refinancing (bruinshoofd, kool, 2002: 4). in our sample in the third part of the paper we examine whether companies that have a higher amount of short-term debts have a higher value of the liquidity ratios. the indebtedness ratio of the company, which presents the share of borrowed sources of financing in long-term sources of financing, is used as one of the measures of indebtedness. it is expected that this ratio is negatively correlated with liquidity. as company's indebtedness ratio grows, the costs of investing in liquidity also grow, so liquidity reduces. in addition, some authors argue that firms with better access to debt market can use borrowing instead of holding liquid assets. companies that are more likely to fall into financial problems are expected to have a lower liquidity level (kim, mauer, sherman, 1998: 348). in connection with the foregoing, we examine the following hypothesis: companies with higher indebtedness ratio are less liquid. the maturity structure of the debt can be represented as a share of short-term debt in total debt. companies that have a larger share of short-term debt in total debt should be more liquid. this effect comes from the uncertainty of refinancing, that informationally affects the increase in the costs of external financing and companies in this situation should hold more liquid assets (bruinshoofd, kool, 2002: 14). the study conducted on a sample of companies in portugal showed that companies with more long-term debt hold less liquid assets, which is consistent with previous observations (pastor, 2010: 44). thus, we hypothesize the following: for any amount of the total debt, shorter average maturity of the debt, or more short-term debt in total debt, increase liquidity. as a potential determinant of liquidity, this paper also examines the capital structure. the ratio of capital structure represents the relationship of long-term debt and own capital. this determinant indicates the risk of financing of the company. more long-term debt in relation to its own capital increases the risk for investors. also, we analyze two indicators, that show the share of long-term debt and own capital in total long-term sources of financing. in line with the previous analyzes of the determinants of liquidity related to indebtedness, it is expected that the companies, that are dominantly financed by borrowed funds, have lower liquidity ratios. hypothesis for research is that there is a positive correlation between the share of own capital in the capital structure and liquidity of a company. 160 k. denĉiĉ-mihajlov, m. malenović if a company finances its operations from external sources, the permanent interest expenses appear. those expenses should be covered from operating profit. as a potential determinant of liquidity the interest coverage ratio should be examined. due to the fact that in the countries in which companies in the sample operate, interest rates are relatively high, the amount of this financial expense and its covering can significantly influence company’s profit and probably liquidity. therefore, we set the following hypothesis: a higher interest coverage ratio leads to greater liquidity of the company. to analyze the solvency of companies, we use the equity to fixed asset ratio. the available literature does not deal with this determinant, but in this article we examine its potential effect on liquidity. we hypothesize the following: a more solvent company is more liquid. the profitability of the company should be associated with liquidity and more profitable companies should be more liquid. company's profit is a source of cash flow. however, the profit achieved in one year does not automatically mean more cash. despite this fact, those companies that have a higher profit are more likely to be more liquid (benjamin, samuel, 2012: 124). the research conducted in nigeria shows a positive relationship between profitability and liquidity (lawrencia, sunday, samuel, 2012: 54). the rate of return on equity and the rate of return on total assets are taken as indicators of profitability. the hypothesis that we investigate is that companies which record higher rates of return have more liquid assets. another variable whose impact on liquidity is considered in this paper is operating profit margin or commercial margin, which puts in ratio operating profit and sales revenue. it is expected that higher rate of operating profit leads to greater liquidity of a company. this assumption was confirmed in the study of the determinants of liquidity of small medium-sized enterprises in the us (faulkender, 2002: 27). therefore, there is a positive correlation between operating profit margin and liquidity of a company. the last potential determinant of liquidity is the ownership concentration, measured by the percentage of capital that is held by three largest shareholders of the company. the concentration of ownership may have a positive impact on performances and liquidity of the company, when the management of the company is better coordinated, due to less dispersion of ownership. however, capital concentrated in a small number of owners may also lead to the situation where these large shareholders actually lead the company and that the lack of professional management worsens the financial situation of the company. a research done in switzerland shows that companies with less concentrated ownership hold more liquid assets (jani, hoesli, bender, 2004: 19). the study in pakistan confirms the view that less liquid funds are run by companies with a high concentration of ownership, because the problem of asymmetric information is less expressed (anjum, malik, 2013: 100). accordingly, we examine the hypothesis that the concentration of capital and liquidity of a company are in an inverse relationship. 2. data and variable definition the sample used for empirical research of determinants of liquidity consists of nonfinancial companies, whose shares are parts of belgrade stock exchange index belex15, zagreb stock exchange index crobex10 and montenegro stock exchange index monex20. the data from belgrade stock exchange have been analyzed for twelve corporate liquidity management: implications and determinants 161 companies, the data from croatian stock exchange are taken for nine companies and the data from montenegrin stock exchange cover eighteen companies. for all calculations we used the officially published financial reports of the companies. the research covers a three-year period from 2010 to 2012, the period immediately after the global economic crisis, which has certainly had an impact on the liquidity and financial positions and results of companies in the sample. therefore, it was particularly interesting to estimate the liquidity of the leading companies in the chosen countries and to see whether and how their liquidity changed during the period. a relatively small size of the sample and short period of analysis, appear as limiting factors for the data analysis. however, given the previously mentioned characteristics of the sample, that it covered the most successful companies in these national economies and that the period after the crisis is considered, this research gains its importance. in the next part of the paper, we firstly consider indicators of the liquidity of companies in the sample, then we explain the variables that are used as potential determinants of liquidity and we analyze the determinants of liquidity separately for companies from belex15, crobex10 and monex20. in order to analyze the determinants of liquidity, a simple linear regression model is used. 2.1. liquidity ratios of analyzed companies in the observed period the domestic companies from the sample recorded current ratio from 0.64 up to 11.89. this ratio is mainly stable for all companies, with a small decline in 2012. if we look at the rigorous quick ratio of these companies during the same period, we see that the value of this ratio ranges from 0.49 to 10.10. in the observed period the companies whose shares are in the crobex10 recorded a current ratio of 0.89 to 6.08. the analysis of data on more stringent and better liquidity ratio, quick ratio, shows that its value ranges from 0.30 to 5.93. also, two companies from the sample recorded a negative amount of net working capital. the companies from montenegrin stock exchange recorded a current ratio of 0.24 to 5.88. a more precise measure of liquidity, quick ratio gets values from 0.03 to 5.94. eight of the eighteen companies have negative net working capital in two years at least. these liquidity ratios derived from high current liabilities of the company. current ratios and quick ratios for all companies from the sample are given in table 1. the data on liquidity indicators of companies from the sample show that there are large fluctuations in the level of liquidity and there occurs a challenge to examine what factors influence these fluctuations. for comparison of liquidity of serbian, croatian and montenegrin companies, the median for liquidity ratios for all three groups of companies is calculated. the results are given in table 2. we point out that the companies from serbia and croatia have significantly more favorable liquidity than the companies from montenegro. the median of current ratio for companies in the belex 15 is slightly lower than the median for companies from crobex10, where the median of quick ratio for both groups of companies is above 2, which is a relatively good indicator. given that the observed period is a period of crisis in business, these results are somewhat surprising. however, these are mostly large companies, which take special care of their liquidity out of precaution. 162 k. denĉiĉ-mihajlov, m. malenović table 1 current ratio and quick ratio of the companies whose shares are parts of indices belex15, crobex10 i monex20 for the period from 2010 to 2012 se company current ratio quick ratio 2010 2011 2012 2010 2011 2012 b nis a.d., novi sad 1.05 1.79 1.69 0.49 1.07 0.98 b energoprojekt holding a.d., beograd 3.90 4.45 2.89 3.90 4.45 2.64 b aerodrom nikola tesla a.d., beograd 9.72 10.46 6.94 9.43 10.10 6.64 b soja protein a.d. , beĉej 2.40 3.15 1.99 1.26 1.55 1.02 b imlek a.d. , beograd 1.42 1.47 0.64 1.11 1.12 0.54 b metalac a.d. , gornji milanovac 2.67 1.94 2.24 2.66 1.92 2.22 b galenika fitofarmacija a.d. , zemun 10.32 11.89 5.33 5.22 7.23 2.91 b messer tehnogas a.d. , beograd 4.98 4.58 6.87 4.50 4.15 6.31 b jedinstvo a.d. , sevojno 2.13 1.69 1.65 1.95 1.42 1.40 b alfa plam a.d. , vranje 5.47 5.28 5.18 3.68 3.41 3.70 b goša montaža a.d. , velika plana 1.51 1.51 2.27 1.28 1.37 2.09 b veterinarski zavod subotica a.d, subotica 1.84 2.72 2.28 1.17 1.92 1.76 z adris grupa d.d. 4.26 4.17 5.51 3.59 3.56 4.72 z atlantic grupa d.d. 1.40 1.97 1.84 0.96 1.34 1.26 z ericsson nikola tesla d.d. 6.08 6.07 2.48 5.87 5.93 2.40 z ht d.d. 3.22 3.30 3.42 3.09 3.20 3.32 z ina d.d. 0.89 1.03 0.82 0.52 0.54 0.43 z konĉar elektroindustrija d.d. 2.72 2.57 2.87 2.09 1.96 2.20 z valamar adria holding d.d. 1.15 1.04 1.66 1.12 1.00 1.61 z ledo d.d. 3.01 3.52 1.57 2.27 2.69 1.34 z podravka d.d. 1.15 1.70 1.70 0.73 1.05 1.07 z petrokemija d.d. 0.90 1.11 0.98 0.30 0.42 0.43 m crnogorski telekom ad podgorica 2.08 2.58 2.95 1.99 2.50 2.86 m elektropriveda crne gore ad nikšić 3.34 2.04 1.95 3.02 1.78 1.71 m 13. jul plantaže ad podgorica 2.14 2.01 3.31 0.72 0.67 1.11 m jugopetrol ad kotor 4.07 4.68 5.41 2.89 2.52 2.82 m crnogorski elektroprenosni sistem ad 2.12 5.88 4.84 1.87 5.68 4.69 m kontejnerski terminali i generalni tereti 1.01 0.83 0.74 0.81 0.56 0.54 m htp budvanska rivijera 1.40 1.07 0.71 1.34 0.92 0.61 m luka bar ad bar 1.33 1.86 1.95 1.30 1.82 1.90 m rudnik uglja ad pljevlja 0.42 0.31 0.35 0.29 0.22 0.26 m solana bajo sekulić ad u steĉaju ulcinj 0.55 0.49 0.46 0.44 0.39 0.37 m zetatrans ad podgorica 4.90 3.40 4.16 4.84 3.36 4.13 m institut simo milošević ad igalo 0.99 0.83 0.44 0.97 0.78 0.42 m kombinat aluminijuma ad podgorica 0.46 0.08 0.06 0.20 0.03 0.03 m jadransko brodogradilište ad bijela 0.48 0.51 0.67 0.22 0.15 0.42 m htp ulcinjska rivijera ad ulcinj 1.87 0.54 0.30 1.71 0.41 0.24 m barska plovidba ad bar 3.84 2.32 1.33 3.48 1.84 1.07 m cmc ad podgorica 2.99 3.71 6.11 2.97 3.10 5.94 m lutrija crne gore ad podgorica 0.24 0.40 0.58 0.08 0.23 0.39 legend: b – belgrade stock exchange, z – zagreb stock exchange, m – montenegro stock exchange source: the indicators are calculated based on the data from the published financial statements. for a full assessment of the liquidity of these companies, the average indebtedness of these groups of companies is also taken into consideration, and the median ratio of total debt to total assets is calculated for all three groups of companies, which is also given in corporate liquidity management: implications and determinants 163 table 2. the result shows that these companies are not very indebted, which may be associated with the period of research, given that lending by banks decreased due to the crisis. table 2 median current ratio and quick ratio and total debt to total asset ratio for the period from 2010 to 2012 median current ratio median quick ratio median total debt to total asset ratio belex15 companies 2.54 2.02 22% crobex10 companies 2.65 2.15 28% monex20 companies 1.36 1.02 13% source: calculated based on the data about liquidity indicators from table 1. 2.2. definition of potential determinants of liquidity as potential determinants of liquidity, we research operating income, total assets, fixed assets, inventories, short-term debt, indebtedness ratio, capital structure ratio, longterm debt to long-term sources ratio, the share of equity in the long-term sources, the ratio of total debt to total assets, the maturity structure of debt, interest coverage ratio, equity to fixed asset ratio, rate of return on equity, rate of return on total assets, operating profit margin and ownership concentration. potential determinants of liquidity, together with their expected relationship with the company’s liquidity, are given in table 3. table 3 potential determinants of liquidity potential determinant measure expected relationship company size operating income total assets fixed asset positive indebtedness ratio of borrowed sources to long term sources short-term debt total debt to total assets negative positive negative maturity structure of debt share of short-term debt in total debt negative covering of interests ratio of operating income to interest expenses positive capital structure/solvency ratio of own capital to long-term sources equity to fixed asset ratio positive profitability rate of return on equity rate of return on total assets operating profit margin (ratio of operating profit and sales revenue) positive ownership concentration percentage of capital held by three largest shareholders of the company negative 164 k. denĉiĉ-mihajlov, m. malenović 3. the analysis of determinants of corporate liquidity in serbia using simple linear regression method, we find that the most significant determinants of liquidity measured by the current ratio for the serbian companies are operating income, fixed assets, short-term debt, equity to fixed asset ratio, the ratio of total debt to total assets and rate of return on total assets. table 4 shows the regression coefficients and their statistical significance. operating income, fixed assets, equity to fixed asset ratio, ratio of total debt to total assets have a positive impact on the current ratio. a negative relationship exists between current ratio and the rate of return on total assets and short-term debts. table 4 determinants of liquidity measured by current ratio for companies whose shares are part of belex15 determinant of current ratio regression coefficient significance operating income (ln) .602 *** .000 fixed asset (ln) 1.518 *** .000 short-term debt (ln) -1.854 *** .000 equity to fixed asset ratio 1.078 *** .000 rate of return on total assets -.154 * .077 total debt to total assets ratio .444 *** .006 * significance level 0.1 ** significance level 0.05 *** significance level 0.01 the first two determinants represent the size of the company. thus, we can conclude that the larger a company, the more liquid assets it has, which is contrary to the set hypothesis. however, theoretical considerations allow this conclusion, because large companies can hold more liquid assets, in order to be not forced to liquidate their assets. a larger amount of short-term debt means lower liquidity of the company. however, looking at the total debt in relation to total assets, we came to the opposite conclusion. companies with a higher indebtedness ratio have higher liquidity ratio. the reason could be that companies that have a large amount of long-term debt, due to fears that they could fall into trouble if it was necessary to borrow further, hold more of their assets in the form of liquid assets. the regression coefficient of profitability ratios indicates that more profitable companies have lower liquidity, which at first seems as an illogical conclusion. however, profitable companies have less concern about debt, and therefore they are able to hold less liquid assets as a precaution. equity to fixed asset ratio is an indicator of the solvency of the company and conclusion from the research is consistent with expectations that the more solvent a company is, the more liquid it is. it is known that a rigorous quick ratio is a better indicator of liquidity. this research shows that highly significant correlations with quick ratio have two variables, total debt to total assets ratio and equity to fixed asset ratio. indebtedness indicator, ratio of total debt to total assets shows an opposite effect on quick ratio compared to the current ratio. the negative regression coefficient indicates that firms that are more indebted have a lower ratio. this is the consequence of a high share of stocks in liquid assets of the companies in the sample. it is also shown that solvency of companies affects the quick ratio in the same way as the current ratio. the higher value of this ratio indicates greater liquidity of the company. if the company is able to meet their long-term obligations, the corporate liquidity management: implications and determinants 165 company will be able to settle short term obligations too. other variables that showed statistically significant correlations with quick ratio, but at a lower level of statistical significance are total assets, fixed asset and debt ratio. firm size presented by total assets and fixed asset shows a positive correlation with liquidity of the company. table 5 determinants of liquidity measured by quick ratio for companies from belex15 determinants of quick ratio regression coefficient significance total assets (ln) .179 * .098 fixed asset (ln) .255 * .089 equity to fixed asset ratio .357 *** .001 total debt to total assets ratio -.777 *** .000 * significance level 0.1 ** significance level 0.05 *** significance level 0.01 the third measure of liquidity is net working capital. as the most important determinant of net working capital regression analysis highlights the indebtedness ratio, which represents the share of borrowed sources in long-term sources. the more longterm funding company provides by borrowing, liquidity measured by net working capital is lower. high correlation with net working capital indicates also variable that measures size of the company, fixed asset. the negative relationship that arises here shows that companies with higher value of fixed assets have less net working capital. table 6 determinants of liquidity measured by net working capital for companies from belex15 determinants of net working capital regression coefficient significance fixed asset (ln) -.309* .086 indebtedness ratio -.414** .023 * significance level 0.1 ** significance level 0.05 *** significance level 0.01 summarizing the results of regression analysis for companies whose shares are part of belex15, the conclusion is that a company's liquidity depends primarily on the firm size, its indebtedness, solvency and profitability. 4. the analysis of the determinants of corporate liquidity in croatia in analyzing data of the companies constituting crobex10, regression model set as main determinants of liquidity measured by current ratio the following: operating income, fixed asset, total assets, short term debt, the share of equity in the long-term sources, total debt to total assets ratio and operating profit margin. regression coefficients and levels of significance for these determinants are given in table 7. when it comes to the determinant which presents the size of company, the conclusion is that when a company has greater total assets, it is more liquid. this conclusion coincides with the conclusion gained through analysis of serbian companies. however, contrary to the conclusion obtained analyzing companies from the belgrade stock exchange, the operating income and fixed asset indicate a negative correlation with liquidity of companies, but their regression coefficients are significantly lower than the 166 k. denĉiĉ-mihajlov, m. malenović coefficient for total assets. thus, the final conclusion is that larger firms are more liquid. next determinant of liquidity, operating profit margin, shows negative correlation with the current ratio of croatian companies. companies that do business better can borrow at more favorable terms so they can hold less liquid assets. the capital structure indicator, as a share of equity in the long-term sources, shows a positive correlation with current ratio. table 7 determinants of liquidity measured by current ratio for companies from crobex10 determinants of current ratio regression coefficient significance operating income (ln) -.180 ** .024 fixed asset (ln) -.658 *** .001 total assets (ln) 2.921 *** .000 short-term debt (ln) -2.245 *** .000 share of equity in the long-term sources .510 *** .000 total debt to total assets ratio .433 *** .000 operating profit margin -.353 *** .000 * significance level 0.1 ** significance level 0.05 *** significance level 0.01 the variables that are shown to be significant determinants of liquidity measured by quick ratio are total assets, short-term debt, the share of equity in the long-term sources, the ratio of total debt to total assets, equity to fixed asset ratio and rate of return on equity (table 8). regarding quick ratio, the analysis shows that the size of the company (measured by total assets) is positively correlated to liquidity. with respect to debt indicators, two determinants, short-term debt and the ratio of total debt to total assets, have negative relationship with liquidity, which is an expected result. capital structure, measured as a share of equity in the long-term sources has a positive impact on the quick ratio. companies with higher share of own capital in the long-term financing sources are more liquid, although this relationship is at lower level of statistical significance. also, companies with fixed asset covered by a higher amount of own capital are more liquid. the last determinant relates to profitability, and it is the rate of return on equity. companies with a higher rate of return on net assets are characterized by lower liquidity. a similar situation has already been discussed. more successful companies can, due to their sound financial position, hold less of their assets in the form of liquid assets. table 8 determinants of liquidity measured by quick ratio for companies from crobex10 determinants of quick ratio regression coefficient significance total assets (ln) 1.209 *** .000 short-term debt (ln) -1.351 *** .000 share of equity in the long-term sources .185 * .076 total debt to total assets ratio -.225 ** .011 equity to fixed asset ratio .375 *** .000 rate of return on equity -.215 *** .000 * significance level 0.1 ** significance level 0.05 *** significance level 0.01 corporate liquidity management: implications and determinants 167 the analysis of potential determinants of net working capital of croatian companies established following significant determinants: short-term debt, the ratio of capital structure, rate of return on equity and capital concentration (table 9). short-term debt is expected determinant and correlation is negative, which is consistent with the influence of this determinant on other measures of liquidity. with a lower level of statistical significance, the ratio of capital structure affects net working capital so that a larger amount of longterm debt as opposed to their own sources leads to greater liquidity. that means that these companies are likely to hold more liquid assets as a precaution. the negative regression coefficient indicates that higher concentration of capital decreases company's liquidity. much capital concentrated in a small number of owners has a negative impact on company's liquidity. it is possible that these large shareholders play a crucial role in leading the company and that they are prone to investment, rather than holding assets in the form of liquid assets. table 9 determinants of liquidity measured by net working capital for companies from crobex10 determinant of net working capital regression coefficient significance short-term debt (ln) -.270 ** .024 ratio of capital structure .217 * .051 rate of return on equity .691 *** .000 ownership concentration -.427 *** .001 * significance level 0.1 ** significance level 0.05 *** significance level 0.01 summarizing the results of regression analysis for companies whose shares are in the crobex10, the conclusion is that the company's liquidity primarily depends on the size of the company, its indebtedness, capital structure, solvency, profitability and concentration of ownership. 5. the analysis of the determinants of corporate liquidity in montenegro the third group of companies included in this research is represented by the companies whose shares are the part of the index of the montenegro stock exchange monex20. the findings of the regression analysis of the determinants of liquidity measured by the current ratio point out to the following determinants: indebtedness ratio, the ratio of total debt to total assets, interest coverage ratio and equity to fixed asset ratio. the results of the analysis are shown in table 10. among the indebtedness indicators, a higher value of the regression coefficient and a higher level of significance has the ratio of total debt to total assets. it shows that the more indebted company is more liquid, which was also proven it the analysis of previous companies. for the first time, interest coverage ratio appears in the analysis as a determinant of liquidity. this indicator is positively related to the current ratio. more liquid is a company in which every monetary unit of interest expense is covered with greater amount of operating profit. finally, the equity to fixed asset ratio, as in the previous analyses, is positively associated with the current ratio. 168 k. denĉiĉ-mihajlov, m. malenović table 10 determinants of liquidity measured by current ratio for companies from monex20 determinant of current ratio regression coefficient significance indebtedness ratio -.217 * .062 total debt to total assets ratio .953 *** .000 interest coverage ratio .151 * .093 equity to fixed asset ratio 1.491 *** .000 * significance level 0.1 ** significance level 0.05 *** significance level 0.01 quick ratio of montenegrin companies is determined by equity to fixed asset ratio and ownership concentration. equity to fixed asset ratio affects the rigorous ratio in the same way as in the previous analyses. between them there is a positive relationship and this is an expected result. concentration of ownership as a determinant of liquidity appeared already on the sample of croatian companies, but with the opposite impact. this relationship is positive, indicating that most of the capital in the hands of a small number of shareholders helps better coordination of management of the company, and this has a positive impact on the company's operations and liquidity. table 11 determinants of liquidity measured by quick ratio for companies from monex20 determinants of quick ratio regression coefficient significance equity to fixed asset ratio .626 *** .000 ownership concentration .248 ** .021 * significance level 0.1 **significance level 0.05 ***significance level 0.01 the remaining analysis of the determinants is the analysis of determinants of net working capital of montenegrin companies. the regression model indicates three determinants of liquidity: fixed asset, debt ratio and equity to fixed asset ratio. the results show that their relation to the net working capital is exactly as expected. more liquid companies have higher amounts of fixed asset. indebtedness indicator is negatively connected with net working capital. solvency indicator shows that firms that are more solvent are at the same time more liquid. table 12 determinants of liquidity measured by net working capital for companies from monex20 determinant of net working capital regression coefficient significance fixed asset (ln) .430 *** .000 indebtedness ratio -.259 ** .017 equity to fixed asset ratio .809 *** .000 * significance level 0.1 ** significance level 0.05 *** significance level 0.01 summarizing the results of regression analysis for companies whose shares are part of monex20, we conclude that the liquidity of the company depends on the size of the company, debt ratio, solvency, interest coverage ratio and concentration of ownership. corporate liquidity management: implications and determinants 169 conclusion the paper analyzes the micro determinants of corporate liquidity by using a sample of 40 companies operating in the real sector whose shares are parts of the stock market indexes of three stock exchanges belgrade, zagreb and montenegro stock exchange. on the basis of obtained liquidity ratios in the sample, we can conclude that the companies whose shares are part of belex15 and the crobex10 have better liquidity ratios compared to montenegrin companies, which have shown unsatisfactory liquidity, but also less indebtedness. the analysis of the determinants of liquidity of companies in our sample indicates similar determinants of liquidity of the companies from serbia, croatia and montenegro. these variables are also emphasized in other empirical studies of the determinants of liquidity on both developed and undeveloped capital markets. firm size has proved to be an important determinant and in our sample relation with liquidity is positive larger companies have higher liquidity, which is contrary to the first hypothesis. in analyzed markets, companies cannot still count on the fact that they will always be able to borrow conveniently due to the many risks they face, especially political risks. in the period after the global economic crisis, at the time of instability of financial markets, large companies, wherever they are located, must be mindful of their liquidity, instead of believing that they can borrow easily. indebtedness of the company, as a determinant of liquidity, gave different results depending on the chosen measure of how much the company was indebted. however, more variables pointed to the fact that companies out of precaution hold more liquid assets. profitability has proved to be a significant determinant in croatian companies, while in the serbian and montenegrin case showed no great importance. finally, we would like to address some limitations inherent to this study. in the first place, there are limitation concerning the sample size and the analyzed period. in this respect, future research should comprise a more comprehensive set of explanatory variables (including cash-flow indicators), should be based on a larger and comprehensive database and should include the period after 2012, which will allow a deeper analyses of the impact of post-crisis market conditions on company liquidity management. references 1. anjum, s., malik, q. (2013) determinants of corporate liquidity an analysis of cash holdings, iosr journal of business and management (iosr-jbm), vol.7 (2): 94-100. 2. benjamin, y., samuel, k. (2012) working capital management and cash holdings f banks in ghana, european journal of business and management, vol.4 (13): 120-130. 3. bruinshoofd, a., kool, c. (2002) the determinants of corporate liquidity in the netherlands, department of economics – maastricht university, maastricht, the netherlands. 4. faulkender, m. (2002) cash holding among small business? working paper, kellogg school of management, northwestern university. 5. ferreira, m.a., & vilela, a.s. (2004) why do firms hold cash? evidence from emu countries, european financial management, 10(2): 295-319. 6. harford j., mansi, s., maxvwell, w. (2008) corporate governance and firm cash holding in the us, journal of financial economic, vol.87: 535-555. 7. harris, m., raviv, a. (1990) capital structure and the informational role of debt, the journal of finance, vol.45 (2): 321-349. 8. jani, e., hoesli, m., bender, a. (2004) corporate cash holding s and agency conflicts, working paper. 9. kim, c., mauer, d., sherman, a., (1998) the determinants of corporate liquidity: theory and evidence, journal of financial and quantitative analysis, vol.33 (3): 335-359. 170 k. denĉiĉ-mihajlov, m. malenović 10. lawrencia, o., sunday, e., samuel, k. (2012) cash holding and firm characteristics: evidence from nigerian emerging market, journal of business, economics and finance, vol.1 (2): 45-58. 11. pastor, c. (2010). why do sme hold cash? evidence from portugal, dissertation presented at faculdade de economia da universidade de coimbra, portugal. 12. saddour, k. (2006) the determinants and the value of cash holdings: evidence from french firms, cereg: 1-33. 13. belgrade stock exchange, www.belex.rs (25.01.2014). 14. the zagreb stock exchange, www.zse.hr (5.02.2014). 15. montenegro stock exchange, www.montenegroberza.com (12.03.2014). upravljanje likvidnošću preduzeća: implikacije i determinante na likvidnost preduzeća utiču brojni faktori, koji potiču kako iz samog preduzeća, tako i iz okruženja. ovaj rad bavi se internim determinantama likvidnosti preduzeća. cilj rada je da pokaže od kojih pokazatelja poslovanja preduzeća zavisi likvidnost preduzeća u srbiji, hrvatskoj i crnoj gori i da li su te determinante specifične za preduzeća na ovim prostorima. preduzeća koja čine uzorak su nefinansijska preduzeća čije su akcije u sastavu berzanskih indeksa berzi u regionu belex15, crobex10 i monex20. vrednosti pokazatelja likvidnosti ovih preduzeća upućuju na solidnu likvidnost. najznačajnije determinante likvidnosti su veličina preduzeća, zaduženost i struktura kapitala rezultati pokazuju da je dominantan motiv držanja likvidnih sredstava u našem uzorku predostrožnost,što pokazuje na koji način je kriza uticala na analizirana preudzeća. kljuĉne reĉi: pokazatelji likvidnosti, determinante, post-krizni period, tržišni indeks facta universitatis series: economics and organization vol. 15, n o 4, 2018, pp. 305 317 https://doi.org/10.22190/fueo1804305a © 2018 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper non-financial background of success around global financial crisis – evidence from eastern europe 1 udc 338.124.4:330.526.33(4-11) gyorgy andor, tamas toth eotvos lorand university, institute of business economics, budapest, hungary abstract. the research is about the relationship between the non-financial firm characteristics and the financial progress around the global financial crisis in 2008-2009. non-financial firm characteristics data of 218 non-listed central and eastern european companies come from a survey in 2006 which focused on the capital budgeting practices and other characteristics of firms – such as presence of western management culture, firm size, and extent of management ownership. the most important financial indicators are followed up reflecting these firms’ financial progresses – sales, profit before tax, net income, earnings before interest and taxes, total assets, equity, debt, return on equity, return on assets and number of employees – from 2005 to 2012. to analyse firms’ sensitivity to the 2008-2009 global financial crisis, differences of financial indicators between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods are examined by the non-financial indicators. our results confirm that 1) firms using any accounting-based capital budgeting methods are less sensitive to the financial crisis; 2) small firms are more exposed to a volatile business environment than larger ones; and 3) firms with higher level of management ownership perform better in time of crisis than firms with lower level of management ownership. key words: capital budgeting practice; financial performance; central and eastern europe; global financial crisis jel classification: g31; g39; f23 received july 31, 2018 / revised october 19, 2018 / accepted november 05, 2018 corresponding author: gyorgy andor eotvos lorand university, institute of business economics, budapest, 1053 budapest, szép utca 2, hungary e-mail: andor@gti.elte.hu 306 g. andor, t. toth 1. introduction this paper focuses on the relationship between the financial success of firms around the 2008-2009 global financial crisis and their non-financial characteristics – such as the type of the applied capital budgeting methods, the presence of western management culture, the firm size, and the extent of management ownership – in the central and eastern european (cee) region. despite the fact that the theoretical background of capital budgeting is well-known and corporate finance courses have standard curriculum in it all over the world, we know much less about how companies apply those methods in practice. furthermore, we know even less about how the use of these methods influences the financial performance of companies. and finally, it is also particularly interesting whether non-financial characteristics of firms determine the performance of companies, especially in an emerging economic environment around the time of a crisis. another study from the same authors, andor and toth (2018), deals with the progress of financial indicators in general, however not with the impact of the financial crisis in 2008-2009. in this paper, the main research question is whether there are any differences in responsiveness to the crisis among firms using different capital budgeting techniques. further questions related to financial sensitivity of companies are whether there is any impact of size, ownership and western management culture on responsiveness to crises among firms. we have detailed data for several financial management features of 400 firms in ten cee countries from andor et al. (2015); those surveys were made around 2008. in this research, a narrower dataset of 218 companies is used with companies from nine cee countries – bulgaria, croatia, the czech republic, hungary, latvia, lithuania, poland, romania and slovakia. using the amadeus database of bureau van dijk, their most important financial indicators are followed up from 2005 to 2012. after having created general management and capital budgeting indicators (applied capital budgeting method, firm size, extent of executive ownership, and role of western management culture) from the 2006 surveys, the statistical relationships between the firm characteristics indicators and the extent of changes in financial progress due to the 2008-2009 global financial crisis are analysed. the rest of the paper proceeds as follows: after reviewing the relevant literature, section 3 shows the dataset and the methodology used, while section 4 discusses the results of the analyses. general conclusions are presented in section 5. 2. theoretical background values of companies, of course, are determined by their investment choices. thus, the method by which companies choose their investment projects must have a crucial role. according to the general textbook approach, the discounted cash-flow (dcf) method is the proper one to maximize the value of the firm or the shareholder value of the firm. the basic concept of the dcf approach is that companies have to invest in projects which have positive expected profit, taking into consideration all costs, also including the cost of capital used by the projects. that is, the dcf approach treats the problem of time value of money. non-financial background of success around global financial crisis evidence from eastern europe 307 however, dcf is not the only method widely used by companies in practice. two other generally widespread approaches must be considered: the accounting-based (ab) method and the (simple, not discounted) payback period (pp) method. both of them ignore the time value of money which is the most relevant inaccuracy of those methods (ross et al. 2010). on the other hand, ab and pp approaches have certain advantages, for so many firms apply them. in case of a loan agreement when solvency can be measured more safely by accounting based cash-flow plans, an ab method can be a better choice; and the payback method can be a more useful way of analysis when a company faces limited financial resources. nevertheless, the general absence of the dcf approach obviously seems to be a capital budgeting analysis mistake. our research hypothesis is, therefore, that companies using the dcf approach have better financial performance, especially during hard times, during financial crises. we know more and more about what capital budgeting methods companies are using around the world (graham and harvey (2001), brounen et al. (2004), arnold and hatzopoulos (2000), holmén and pramborg (2009), daunfeldt and hartwig (2014), liljeblom and vaihekoski (2004), hermes et al. (2007), truong et al. (2008), maquieira et al. (2012), mendes-da-silva and saito (2014), correia and cramer (2008), singh et al. (2012), kester et al. (1999), hernadi and ormos (2012), andor et al. (2015)). using the output of these articles as inputs to our analyses and using the time series of the financial data series of the companies concerned, we can compare business performance with different methods. (as there were limited number of listed companies among the companies involved in the study of andor et al. (2015) (i.e. 1% of the listed companies in the population and in the sample), the business performance can only be described by the development of accounting data instead of market price data.) there is no clear evidence whether better performing companies are more likely to apply sophisticated capital budgeting practices than less well performing companies in difficult economic and financial circumstances. this study contributes to this field by answering the question in the case of firms in the cee region: are there any differences in responsiveness to crises among firms using different capital budgeting techniques? small firm effect, i.e., smaller firms outperforming larger companies, is a well-known phenomenon among listed companies. one of the potential explanations is that smaller companies have a greater amount of growth opportunities than larger companies do. another explanation is that small companies‟ business progresses tend to be more volatile, which can lead to lower prices and larger returns. e.g., fama and french (1993) and ferguson and shockley (2003) show that the size effect can be confirmed for listed firms as a phenomenon reflecting a credit risk premium. the analysis of non-listed firms‟ financial progress may improve our understanding of the effects of size. the ownership structure can also affect the financial progress of a firm. in the field of corporate governance, agency theory is well-known. the theory says that firms with widespread ownership structure face the problem that the company may deviate from value maximizing decisions because of the opportunistic behaviour of management (andor and toth, 2018). in the cee region, considering its post-communist past, an exciting question might be the following: is there a relationship between western or local management culture and financial performance? it is conceivable that firms with a local management culture can adapt better to the local characteristics of the environment than firms with a western 308 g. andor, t. toth management culture? on the other hand, rules and approaches of western culture can lead to better financial performance even in a changing environment without strong capitalist roots. the impact of western management culture in less developed countries, particularly countries in the cee region, is an area that has not been well studied. wade and parkhe (2012) found that a majority of joint foreign-local ventures in hungary adopted the values, practices, and systems of their western partners without clear advantages. a related study by von weltzien hoivik (2007) examined how culture has influenced the chinese managers‟ perception of some western management instruments, such as codes of ethics. the paper concluded that western management systems and tools do not necessarily function equally well in chinese culture unless they are reassessed and adapted. this study can contribute to the current body of knowledge by answering the following question: do companies with a western management culture outperform companies with a local management culture around financial crisis? 3. data and methodology 3.1. sample firms the sample firms are drawn from the 400 firms examined by andor et al. (2015). the examined population consists of those companies that have at least 25 employees and were stratified by country and company size. the 400 companies‟ data were obtained by random sampling in the subgroups. for additional financial data we use the amadeus database of bureau van dijk, which covers all firms in europe. the amadeus database includes standardized annual accounts (consolidated and unconsolidated), financial ratios, sectoral activities and ownership data (amadeus, 2015). we use unconsolidated data. from the 400 firms those were dropped that did not have complete dataset on sales, ebit, total assets, equity, debt, roe, roa or on the number of employees in the amadeus dataset for the period from 2005 to 2012. the drop rate did not differ significantly (by kruskal-wallis test) in the subgroups. the remaining 218 firms have their seats in 9 countries: 12 in bulgaria, 13 in croatia, 36 in czech republic, 14 in hungary, 4 in latvia, 10 in lithuania, 77 in poland, 38 in romania, and 14 in slovakia. this sample size offers 5% margin of error with a 90% confidence level. to answer the research questions, we formed subgroups by company characteristics, like the used capital budgeting method, the role of the western management culture, company size, and the extent of executive ownership. then we analysed if there is a significant difference between the financial data of the subgroups in the preand post-crisis period. we consider that, although the data of company characteristics were measured around 2008, these data are quite static, as they reflect the company‟s decisions in the long run, and their change requires the active and compelling participation of owners and management. 3.2. financial indicators the created financial indicators are based on the amadeus dataset from 2005 to 2012. 4 years are chosen before and after the financial crisis. each financial indicator is calculated as an average of a firm‟s 4-4 years annual changes in the underlying accounting data. to non-financial background of success around global financial crisis evidence from eastern europe 309 analyse firms‟ sensitivity to crises, the differences of the financial indicators were calculated between the pre-crisis (2005-2008) and post-crisis (2009-2012) period. figure 1 shows the timing aspects of the study. 2005 2006 2007 2008 2009 2010 2011 2012 survey of firms’ characteristics financial crisis yearly financial performance data fig. 1 timing of the research. the following financial indicators are defined:  „δsales%‟: the geometric average of the changes in a firm‟s annual time series of sales growth – difference between the pre-crisis (2005-2008) and post-crisis (20092012) periods.  „δebit%‟: the standardized slope coefficient of a regression line fitted to a firm‟s annual ebit series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods.  „δroe‟: the arithmetic average of a firm‟s annual roe time series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods.  „δroa‟: the arithmetic average of a firm‟s annual rao time series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods.  „δequity%‟: the geometric average of the annual changes in a firm‟s equity series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods.  „δdebt%‟: the geometric average of the annual changes in a firm‟s debt series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods.  „δassets%‟: the geometric average of the annual changes in a firm‟s total assets series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods.  „δd/a‟: the arithmetic average of a firm‟s annual debt to assets ratio series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods.  „δd/a%‟: the arithmetic average of the annual changes in a firm‟s debt to assets ratio series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods.  „δe/a‟: the arithmetic average of a firm‟s annual equity to assets ratio series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods.  „δe/a%‟: the arithmetic average of the annual changes in a firm‟s equity to assets ratio series – difference between the pre-crisis (2005-2008) and post-crisis (20092012) periods.  „δemp%‟: the geometric average of the annual changes in a firm‟s annual number of employees‟ time series – difference between the pre-crisis (2005-2008) and post-crisis (2009-2012) periods. 310 g. andor, t. toth 3.3. capital budgeting practice indicators the original survey questionnaire used by andor et al. (2015) contained several questions about different capital budgeting techniques. in this research, consolidated categories were made focusing only on dcf and ab techniques. four categories were created, which are mutually exclusive and contain all firms. the definitions of the binary variables are the same as in andor and toth (2018):  „no formal technique‟: it is 0 if the company did not use any formal capital budgeting analysis, otherwise it is 1.  „frequent users of ab‟ (ab): if a firm used frequently (always or almost always) any kind of accounting-based methods (ab) only, such as accounting rate of return (arr), return on investment (roi), return on assets (rao), simple earnings multiples, etc., it is 1, otherwise it is 0. the simple payback period (pp) was also in this category, since this method does not utilize a discounting technique.  „frequent users of dcf‟ (dcf): firms were asked whether they frequently (always or almost always) use any kind of discounted cash flow (dcf) technique such as net present value (npv) or its variants, such as adjusted present value method (apv), equity cash flow method (ecf), free cash flow method (fcf), internal rate of return (irr), profitability index (pi), etc. the discounted payback period (dpp) was also considered a type of dcf method. the variable is 1 if the firm answered yes (and do not use always or almost always ab methods), otherwise it is 0.  „frequent users of ab and dcf‟ (ab&dcf): this variable is 1 if the firm reported using both ab and dcf technique for their investment decisions, otherwise it is 0. 3.3. western management culture indicator to examine the role of the western management culture, the following binary variable is created:  „western management culture‟: this is 1 if the company reported dominance of a foreign management culture that was rooted in western culture such as western europe, usa, or canada; otherwise it is 0. (the original survey question was: “which country’s management culture dominates in your firm (besides the local one)?”) 3.4. other indicators the general management indicators are the company size, and the extent of executive ownership. the created binary variables for those are the following:  „small size‟: this is 1 if a firm‟s number of employees is smaller than 250 (and with sales revenue and/or total assets below 50 million euros); otherwise it is 0.  „low percentage of ownership‟: this is 1 if the management owns less than 10% of the company; otherwise it is 0. 3.5. statistical tests the standard method for testing the difference between two means is the two-sample t-test. however, we reject the null hypothesis by anderson-darling test that the financial performance indicators‟ distributions are normal at 10% significance level in all cases. table 1 shows the descriptive statistics of financial indicators. non-financial background of success around global financial crisis evidence from eastern europe 311 table 1 descriptive statistic of financial indicators. variable mean stdev min q1 median q3 max skewness kurtosis δsales% -0.129 0.237 -1.093 -0.233 -0.098 -0.001 0.902 -0.48 3.83 δebit% -1.484 0.761 -0.098 -0.701 -0.020 0.418 1.467 1.47 -0.05 δroe -0.098 0.272 -1.646 -0.190 -0.045 0.015 1.172 -1.06 9.39 δroa -0.035 0.083 -0.551 -0.068 -0.014 0.008 0.212 -1.62 6.94 δequity% -0.167 0.365 -2.291 -0.272 -0.125 0.015 1.294 -1.81 10.56 δdebt% -0.136 0.357 -1.569 -0.313 -0.108 0.082 1.204 -0.35 2.79 δassets% -0.130 0.221 -1.156 -0.250 -0.093 -0.006 0.870 -0.71 4.94 δ(d/a)% -0.022 0.126 -0.375 -0.093 -0.025 0.051 0.363 0.14 0.86 δ(e/a)% 0.022 0.126 -0.362 -0.051 0.025 0.093 0.375 -0.14 0.86 δemp% -0.056 0.187 -1.109 -0.137 -0.021 0.014 0.612 -0.93 7.24 since the indicators are not normally distributed, the mann-whitney u-test can be used to compare the populations represented by the subsamples. all of the test‟s assumptions hold in all cases: the variables are measured on a continuous scale; the subgroups and the data in the subgroups are independent; and none of the variables is normally distributed. 4. results 4.1. capital budgeting practice – did companies applying theoretically better capital budgeting methods have more positive/negative sensitivity to the financial crisis in 2008? table 2 shows the descriptive statistics of the changes of financial progress variables around the crisis in groups of firms using different capital budgeting techniques. the pvalues of pairwise mann-whitney u-tests are calculated between the financial progress changes results of firms using „no formal‟ and using any sophisticated capital budgeting practices. only those panels which contain significant results are shown. indicators reflecting sensitivity in table 3 show interesting results. it seems that the ab user firms‟ growth rate of sales (δsales%), total assets (δassets%) and debts (δdebt%) are less sensitive to an economic crisis than those of the ad-hoc firms‟ are. these differences are significant for the entire population only between ab and ad-hoc companies. the results support the intuitive expectation that firms with more stable sales growth rates can access credits easier, because stable sales growth rates lead to less risky credit metrics. conversely, it is also a reasonable explanation that the advantages of easy credit access motivate the management to focus on stable accounting indicators. it is a surprising result that the „ab&dcf‟ companies‟ δroa indicators show significant sensitivity as opposed to ad-hoc firms. although firms using purely ab or dcf method show a less sensitive picture in the sample than mixed firms and more sensitive than ad-hoc firms, still, the mann-whitney‟s h0 cannot be rejected in either case. there are two possible explanations for the outstanding sensitivity of mixed firms. combining two fundamentally different methods weakens the responsiveness of a firm because the potentially contradictory recommendations of different methods in a crisis situation further complicate the decision making process. on the other hand, it is conceivable that sensitive companies with volatile financial performance try to apply more diverse, more sophisticated methods to reduce the 312 g. andor, t. toth risk of deficient decisions. additional research is needed to clarify which one is the relevant answer. table 2 descriptive statistics of changes of financial variables around the crisis in 2008-2009 grouped by capital budgeting practice indicators, and p-values of mann-whitney u-tests between financial progress results of firms using „no formal‟ and using other capital budgeting practices sets, from 2005 to 2012. variable n mean stdev min q1 median q3 max p-value panel b: δsales% no formal 45 -0.17 0.28 -0.83 -0.31 -0.09 -0.01 0.69 ab 52 -0.07 0.15 -0.66 -0.14 -0.07 0.00 0.25 0.055 * dcf 29 -0.14 0.20 -0.88 -0.18 -0.12 -0.04 0.18 0.903 ab&dcf 92 -0.14 0.26 -1.09 -0.25 -0.12 0.00 0.90 0.903 panel e: δroa no formal 45 -0.024 0.072 -0.292 -0.040 -0.005 0.010 0.100 ab 52 -0.038 0.103 -0.551 -0.078 -0.011 0.011 0.144 0.472 dcf 29 -0.019 0.070 -0.183 -0.044 -0.010 0.015 0.118 0.748 ab&dcf 92 -0.043 0.079 -0.241 -0.082 -0.022 0.004 0.212 0.064 * panel f: δassets% no formal 45 -0.156 0.161 -0.477 -0.296 -0.138 -0.035 0.070 ab 52 -0.084 0.187 -0.675 -0.174 -0.067 0.017 0.498 0.051 * dcf 29 -0.119 0.176 -0.535 -0.181 -0.088 -0.022 0.264 0.324 ab&dcf 92 -0.147 0.270 -1.156 -0.282 -0.095 0.025 0.870 0.424 panel g: δdebt% no formal 45 -0.192 0.303 -1.055 -0.353 -0.140 0.039 0.256 ab 52 -0.067 0.256 -0.734 -0.208 -0.079 0.115 0.588 0.095 * dcf 29 -0.128 0.238 -0.760 -0.256 -0.141 0.078 0.260 0.485 ab&dcf 92 -0.150 0.448 -1.569 -0.452 -0.125 0.113 1.204 0.600 the last column shows p-values of pairwise mann-whitney u tests calculated between the „no formal technique‟ and the referred capital budgeting practice indicator. * , ** , *** means: the h0 (there‟s no difference in medians) can be rejected at the 10, 5, 1 percent significance level, respectively. it should be mentioned that in the whole research there is only one significant difference between the financial indicators of ab and dcf firms. in the case of δsales% the p-value of the mann-whitney test between ab (-0.07) and dcf (-0.12) is 0.082. the explanation for this difference might be that firms with stable sales growth rate (and with moderate growth opportunities) tend to base their decision-making processes on accounting indicators, because a less volatile environment determines their long-term performance, and ab indicators emphasize short-term efficiency over long-term performance. besides, the research cannot prove any significant difference between companies using financial indicators of the ab and dcf. as the dataset is from the cee region where the dcf methods are used less often and the ab methods are used more often than in other regions of the world (see e.g. andor et al., 2015), further research is needed to clarify whether this is a regional characteristic, or it is the case in general. non-financial background of success around global financial crisis evidence from eastern europe 313 4.2. western management culture – did companies with western management culture have more positive/negative sensitivity to the financial crisis in 2008? table 3 shows the descriptive statistics of the financial indicators grouped by western or local management culture. only the equity and assets growth (δequity%, δassets%) of firms with western management culture shows significantly less sensitivity to the crisis as opposed to companies with local style culture. table 3 descriptive statistics of financial indicators separated by the type of management culture (2005-2012). variable wes. mean stdev min q1 median q3 max p-value δsales% 1 -0.131 0.210 -1.093 -0.235 -0.109 -0.001 0.390 0.651 0 -0.128 0.261 -0.880 -0.211 -0.086 -0.002 0.903 δebit% 1 -0.071 0.724 -1.475 -0.644 -0.001 0.359 1.467 0.669 0 -0.122 0.795 -1.484 -0.791 -0.023 0.593 1.134 δroe 1 -0.099 0.306 -1.646 -0.198 -0.046 0.033 1.172 0.778 0 -0.097 0.240 -1.232 -0.177 -0.043 0.008 0.977 δroa 1 -0.027 0.081 -0.241 -0.073 -0.011 0.017 0.212 0.217 0 -0.041 0.085 -0.551 -0.064 -0.017 0.003 0.144 δequity% 1 -0.122 0.310 -1.346 -0.247 -0.106 0.055 0.935 0.097 * 0 -0.207 0.406 -2.291 -0.294 -0.146 -0.010 1.294 δdebt% 1 -0.128 0.406 -1.569 -0.284 -0.097 0.061 1.204 0.755 0 -0.143 0.308 -1.055 -0.317 -0.113 0.095 0.702 δassets% 1 -0.111 0.232 -1.156 -0.205 -0.079 0.023 0.870 0.097 * 0 -0.148 0.209 -1.109 -0.276 -0.106 -0.030 0.498 δ(d/a)% 1 -0.030 0.123 -0.346 -0.104 -0.028 0.046 0.327 0.416 0 -0.016 0.130 -0.375 -0.082 -0.015 0.056 0.363 δ(e/a)% 1 0.030 0.123 -0.327 -0.046 0.028 0.104 0.346 0.416 0 0.016 0.130 -0.363 -0.056 0.015 0.082 0.375 δemp% 1 -0.027 0.081 -0.241 -0.073 -0.011 0.017 0.212 0.217 0 -0.041 0.085 -0.551 -0.064 -0.017 0.003 0.144 w. cult.=1: western management culture, n=103; w. cult.=0: local management culture, n=115. the last column shows the p-values of mann-whitney u tests. * , ** , *** means: the h0 (there‟s no difference in medians) can be rejected at the 10, 5, 1 percent significance level, respectively. to conclude the above, the δassets% and δequity% paths of the firms with western management culture are less sensitive to a crisis than those of the firms with local management culture. although we did not find significant differences in any other financial indicators, the sample data suggest that firms with western management culture tend to preserve operational efficiency, and try to decrease financial leverage in time of crisis. 4.3. size and executive ownership table 4 shows the descriptive statistics of the financial indicators separated by the size of the firm. the p-values are the results of pairwise mann-whitney u tests. 314 g. andor, t. toth table 4 descriptive statistics of financial indicators separated by firm size (2005-2012). variable size mean stdev min q1 median q3 max p-value δsales% 1 -0.169 0.220 -0.827 -0.275 -0.130 -0.034 0.390 0.093 * 0 -0.118 0.242 -1.093 -0.212 -0.086 0.004 0.903 δebit% 1 -0.340 0.763 -1.484 -1.061 -0.297 0.086 1.467 0.006 *** 0 -0.028 0.748 -1.475 -0.682 0.021 0.487 1.429 δroe 1 -0.149 0.156 -0.523 -0.253 -0.124 -0.035 0.252 0.001 *** 0 -0.084 0.296 -1.646 -0.153 -0.025 0.027 1.172 δroa 1 -0.054 0.069 -0.292 -0.090 -0.028 -0.011 0.041 0.005 *** 0 -0.029 0.086 -0.551 -0.062 -0.008 0.012 0.212 δequity% 1 -0.209 0.247 -0.787 -0.377 -0.212 -0.072 0.697 0.004 *** 0 -0.154 0.393 -2.291 -0.243 -0.084 0.029 1.294 δdebt% 1 -0.115 0.356 -1.055 -0.193 -0.098 0.099 0.940 0.470 0 -0.142 0.358 -1.569 -0.320 -0.109 0.068 1.204 δassets% 1 -0.150 0.244 -0.795 -0.280 -0.125 -0.040 0.870 0.146 0 -0.125 0.214 -1.156 -0.224 -0.085 0.010 0.498 δ(d/a)% 1 -0.039 0.125 -0.316 -0.111 -0.057 0.025 0.334 0.190 0 -0.018 0.127 -0.375 -0.086 -0.019 0.056 0.363 δ(e/a)% 1 0.039 0.125 -0.334 -0.025 0.057 0.111 0.316 0.190 0 0.018 0.127 -0.363 -0.056 0.019 0.086 0.375 δemp% 1 -0.054 0.069 -0.292 -0.090 -0.028 -0.011 0.041 0.005 *** 0 -0.029 0.086 -0.551 -0.062 -0.008 0.012 0.212 size=1: small firms, n=49; size=0: large and medium firms, n=169. the last column shows the p-values of mann-whitney u tests. * , ** , *** means: the h0 (there‟s no difference in medians) can be rejected at the 10, 5, 1 percent significance level, respectively. the difference of sales growth in preand post-crisis period (δsales%) is -13% in small companies, while -8.6% in large firms. the difference of ebit growth (δebit%) in preand post-crisis period is -29.7% in small companies, while 2.1% in large firms. it seems that size effect not affects operational efficiency, but small firms‟ sales and ebit growth are more sensitive to a crisis than those of the large firms. the difference of roe and rao in preand post-crisis period (δroe and δroa) is significantly higher in small firms, which suggests that small firms are more exposed to a volatile business environment. small firms seem to use mainly equity instead of loans to react to the changes of the economic environment. table 5 shows the descriptive statistics of financial indicators grouped by the extent of management ownership. the negative difference of sales, roe, roa, equity, and total assets growth in the preand post-crisis period is significantly higher in those firms where the percentage of the management ownership is high. this suggests that firms with high percentage of management ownership performs better in a volatile market environment than firms with low percentage of management ownership and where the management uses the owners‟ equity to finance daily operations. non-financial background of success around global financial crisis evidence from eastern europe 315 table 5 descriptive statistics of financial indicators separated by the extent of management ownership (2005-2012). variable own. mean stdev min q1 median q3 max p-value δsales% 1 -0.117 0.239 -1.093 -0.213 -0.089 0.005 0.903 0.015 ** 0 -0.219 0.209 -0.808 -0.329 -0.140 -0.063 -0.004 δebit% 1 -0.041 0.760 -1.475 -0.683 0.012 0.496 1.467 0.002 *** 0 -0.520 0.636 -1.484 -1.101 -0.433 -0.043 1.091 δroe 1 -0.091 0.283 -1.646 -0.178 -0.036 0.020 1.172 0.011 ** 0 -0.155 0.166 -0.462 -0.266 -0.167 -0.041 0.252 δroa 1 -0.032 0.084 -0.551 -0.063 -0.011 0.010 0.212 0.053 ** 0 -0.056 0.074 -0.292 -0.088 -0.036 -0.010 0.041 δequity% 1 -0.153 0.381 -2.291 -0.246 -0.102 0.026 1.294 0.001 *** 0 -0.268 0.189 -0.723 -0.387 -0.276 -0.122 0.067 δdebt% 1 -0.127 0.353 -1.569 -0.297 -0.106 0.078 1.204 0.579 0 -0.201 0.388 -1.055 -0.535 -0.146 0.094 0.388 δassets% 1 -0.117 0.218 -1.156 -0.203 -0.080 0.007 0.870 0.012 ** 0 -0.226 0.218 -0.795 -0.370 -0.191 -0.061 0.158 δ(d/a)% 1 -0.020 0.128 -0.375 -0.089 -0.025 0.054 0.363 0.532 0 -0.040 0.113 -0.314 -0.144 -0.028 0.036 0.163 δ(e/a)% 1 0.020 0.128 -0.363 -0.054 0.025 0.089 0.375 0.532 0 0.040 0.113 -0.163 -0.036 0.028 0.144 0.314 δemp% 1 -0.032 0.084 -0.551 -0.063 -0.011 0.010 0.212 0.053 * 0 -0.056 0.074 -0.292 -0.088 -0.036 -0.010 0.041 ownership=1: low management ownership, n=192; ownership=0: high management ownership, n=26. the last column shows the p-values of mann-whitney u tests. * , ** , *** means: the h0 (there‟s no difference in medians) can be rejected at the 10, 5, 1 percent significance level, respectively. 5. conclusions the research provides evidence on the relation between firms‟ non-financial characteristics and financial performance around the financial crisis in 2008-2009 – carried out in 218 firms in the central and eastern european region. the results confirm that firms using any accounting-based capital budgeting methods were less sensitive to the financial crisis. however, firms using both ab and dcf methods did not have any advantage against ad-hoc firms. there are two possible explanations. combining two fundamentally different methods weakens the responsiveness of a firm because the potentially contradictory recommendations of different methods in a crisis situation further complicates the decision making process. on the other hand, it is conceivable that sensitive companies with volatile financial performance try to apply more diverse, more sophisticated methods to reduce the risk of deficient decisions. additional research is needed to clarify which one of the above is the relevant answer. the results show that small firms are more exposed to a volatile business environment than larger ones. this supports the theory of small firm effect. however, this result applies to non-listed companies, while the small firm effect can be interpreted in the research field of capital asset pricing model. exploring the exact context requires further research, though. 316 g. andor, t. toth finally, the results confirm that firms with high percentage of management ownership perform better in time of crisis than firms with low percentage of management ownership. this result 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(2008). cost of capital estimation and capital budgeting practice in australia. australian journal of management, 33, 1-6. http://www.eman-conference.org/ non-financial background of success around global financial crisis evidence from eastern europe 317 wade m.d. & parkhe, a. (2012). hungarian-western partnerships: a grounded theoretical model of integration processes and outcomes. journal of international business studies, 33 (3), 423-455. weber, t.a. (2014). on the (non-) equivalence of irr and npv. journal of mathematical economics, 52, 25-39. von weltzien hoivik, h. (2007). east meets west: tacit messages about business ethics in stories told by chinese managers. journal of business ethics, 74 (4), 457-469. ne-finansijski osnov uspeha u vreme globalne finansijske krize – primeri iz istočne evrope istraživanje se bavi odnosom između ne-finansijskih karakteristika firmi i finansijskim napretkom u vreme globalne finansijske krize 2008-2009. podaci o ne-finanskijskim karakteristikama 218 firmi koje se ne kotiraju na berzi iz srednje i istočne evrope dobijeni sun a osnovu ankete sprovedene u 2006. godini, koja se fokusirala na prakse budžetskog finansiranja i druge karakteristike firmi – kao što su prisustvo zapadnjačkog modela upravljanja, veličina firme i stepen vasništva menadžmenta. prate se ajvažniji finansijski indikatori koji odražavaju finansijski napredak ovih firmi –prodaja, dobit pre oporezivanja, neto prihod, dobit pre kamate i poreza, ukupna aktiva, kapital, dug, povrat na kapital, prinos na aktivu i broj zaposlenih – od 2005. do 2012. da bi se analizirala osetljivosat firme na globalnu finansijksu krizu 2008-2009, istraživane su razlike između perioda pre krize (2005-2008) i posle nje (2009-2012) uz pomoć ne-finansijskih indikatora. naši rezultati potvrđuju da 1) firme koje koriste bilo koju metodu računovodstveno-zasnovanog kapitalnog budžetiranja su manje osetljive na finansijsku krizu; 2) male firme su izloženije nestalnom poslovnom okruženju od velikih; 3) firme sa većim nivoom upravljanja vlasništvom imaju bolje performance u vremenu krize od onih sa nižim nivoom upravljanja vlasništvo. ključne reči: praksa kapitalnog budžetiranja; finansijske performance; srednja i istočna evropa; globalna finansijska kriza plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, n o 1, 2015, pp. 15 26 cost reduction strategy – process and effects  udc 657.479.3 nadica figar, vladimir ivanović faculty of economics, university of niš, serbia abstract. the strategy of cost leadership, although always current, acquires special importance in the time of crisis. cost reduction, savings program, savings measures, etc. are used as synonyms for this strategy; finally, all of these express the need to reduce costs for an enterprise. enterprises make the cost reduction program which includes mandatory stages of reduction, reduction tools and the most appropriate strategies. the choice of tools depends on the chosen strategy, but the stages cannot be skipped or omitted within the strategies. firstly, the present paper presents five stages through which the cost reduction program must pass, then a set of tools that can be used for reduction, and the differencies between cost reduction strategy and program of layoffs. key words: cost reduction strategy, stages in cost reduction, tools for cost reduction, program of layoffs, corporative culture. introduction carrying out any activity in an enterprise requires spending certain resources. that is why spending represents the basic mechanism that enables an epterprise to function. spending is also a process in which there is a transmition of the resource value to the effects, while employees create new value which is added to these effects. this way, spending represents a form of resource investment in the creation of enterprise results, so it is the determinant, the driver and the consequence of the functioning of an enterprise (figar, 2007). the importance of spending the resources of an enterprise to achieve strategic and operational business performances imposes challenges to continually look for ways to reduce costs in an enterprise. the constant progress of technology, increasing competition in the global market, new needs of the customers that need to be met quickly, as well as the striving of an enterprise to achieve its profit function are just some of the triggers that motivate every modern enterprise to seriously analyze its costs. the analysis reveals the types of costs that should be reduced, and consequently, appropriate strategies are being defined and implemented.  received january 10, 2015 / accepted april 10, 2015 corresponding author: nadica figar faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: nadica.figar@eknfak.ni.ac.rs 16 n. figar, v. ivanović the management of modern enterprises no longer sets as the target the fixed percentage of cost reduction, but also allows managers at lower management levels to use their creativity and research in order to come up with a number of options for reducing costs (kerr, pauwels, 2014, 4). the concept of a continuous search for new ways to reduce costs needs to be constantly promoted at all organizational levels of an enterprise, which indicates that the enterprise has a strategic approach to this issue. this involves a series of corresponding changes in corporate culture that lead to a proactive cost reduction by an enterprise, and not only in situations when faced with difficulties in the business. representatives of the consulting firm bain & company inc. have come to a conclusion that "... businesses with successful programs of continuous cost reduction typically achieve half of the increase in annual profits directly from cost reduction" (ioma, 2006, 3). in addition to this, additional benefits for enterprises that have cost discipline are reflected in the opportunity of faster stabilization of their business activities in crisis situations, as well as in more certain prospects for rapid adjustment to challenging situations typical in the modern market (ioma, 2006, 3). there are a large number of customers with low payment capabilities all over the world. about 2.47 billion individuals or 43% of the population in developing countries live on less than two u.s. dollars per day; furthermore, one billion people will be living on less than $ 1.25 per day in 2015, according to the un 2012 mdg report and world bank estimations (mendes, 2014, 39). this means that with the same or fewer resources an enterprise should produce both more and cheaper products in order to meet the demand of this segment of customers from the bottom of the purchasing power pyramid. therefore, the implementation of cost reduction strategies has a continuous importance. cost reduction can be achieved either by performing the existing activities in the value chain cheaper, or by restructuring the value chain (porter, 2014). performing the existing activities with fewer resources represents the use of internal reserves, while restructuring the value chain requires radical changes, which is the longer way. both of these actions are achieved by implementing different strategies which give priority to the reduction of different types of costs. labour costs are almost always the first target in every cost reduction, so, in practice, the cost reduction program is often perceived as the release of employees. this paper deals with both cost reduction strategy as a process and the effects of that process. first, possible reasons for avoiding the creation and implementation of the costs reduction strategy are listed, and then the necessity of establishing the cost-sensitive discipline in all enterprises is pointed out. this is achieved through five stages. stages have a regular flow and no stage can be omitted or skipped. however, the behavior of different enterprises can be different at the same stage, same type of costs, so the effects can be different as well. the case studies for two companies, mentioned in this paper, confirm the previously stated facts, and all this can serve to the managers in enterprises in the republic of serbia as an example for the selection of a positive practice. 1. cost reduction strategy as a process a cost reduction strategy must be integrated into the overall business strategy of an enterprise. this is the only way employees are going to see a complete picture of the overall benefits which their individual activity regarding cost reduction is going to bring, as well as the total investment that needs to be made in order to create and implement this cost reduction strategy – process and effects 17 strategy. the program from which all this can be considered should be made by the enterprise management that should also be the driving force of the program implementation and an example of saving the resources in carrying out its activities. however, the enterprise management is often inclined to postpone the cost reduction strategy for a future business moment. the reasons for this behavior can be numerous: the current profit, too much effort, tradition, and increasing the number of employees (payne, 1953, 72).  existing profit. a current profitable business may cause managers to oppose the creation and implementation of cost reduction programs. however, this attitude can cost an enterprise, given that competition is constantly advancing. this can lead to a situation in which an enterprise cannot cope with the competitors in the near future.  excessive effort. creation and implementation of cost reduction require changes. naturally, the change causes the fear of failure with the management and other employees. therefore, at one point, the whole enterprise is "under pressure". that is why employees, generally, tend to avoid such a situation, justifying their attitude by the fact that they are exposed to great stress for the sake of small savings on individual resources. this attitude is wrong. long-term perspective requires enterprises to make sure that costs savings are an integral part of the overall philosophy and culture of the firm and that it must be accepted by all employees.  tradition. over time, the enterprise establishes a certain practice of problem solving. this practice grows up into unwritten rules which the employees blindly adhere to, regardless of the nature of the problem they are facing. every problematic situation has its own nature and requires a separate approach, which requires additional investment of energy and time. since many employees, including the management, are not always ready for this, tradition may appear as a serious blockage to the cost reduction program in an enterprise.  increase in the number of employees. there is often an attitude in an enterprise that the creation and implementation of cost reduction programs should increase the number of employees. as a result, management rather relies on consulting services. as cost reduction is a continuous process, chosing this option is wrong. employees are the ones who know best where and how to save, so they should be motivated and further educated or just directed. in the long run, hiring consultants can create overdependence on them, as well as a false picture of the costs of an enterprise. despite the previously mentioned resistance that may arise, modern enterprises manage costs proactively and foster the appropriate cost discipline, the so-called costsensitive discipline. the constant challenges of competition influence an enterprise to think in the long run, and continuously develop cost reduction strategy. accordingly, the cost reduction strategy in the modern enterprise can be conducted over the next five stages (mccormick, 2013, 47): 1. cost estimations, 2. adjusting to enterprise’s global business strategy, 3. selection of tools for cost reduction, 4. cost reduction strategy implementation and 5. measuring the effects and costs of the cost reduction strategy. 18 n. figar, v. ivanović 1.1. cost estimation cost estimation is the initial step in the process of cost reduction. at this stage it is necessary that management, based on the current market and financial situation, makes a proper assessment of the types and amount of costs that need to be reduced. this is one of the key moments in the process of cost reduction, because it determines the strategic direction in which an enterprise is going to focus its activities. the first and, as it seems, the most logical step that each management needs to take is to collect adequate information on the current state of costs in an enterprise. payne (1953, 73) recommends starting with the direct costs of production, including, first of all, the labor costs. furthermore, the management needs to collect the data on indirect labor costs, which, in modern enterprises, make a much larger amount and a larger share in the total costs. the main challenge for managers is to achieve a reduction in labor costs, preferably without releasing valuable employees who have been with the enterprise for many years. it is particularly important that the employees do not experience the cost reduction program in an enterprise as a "program of layoffs", because this can create a huge resistance that will negatively influence the implementation of the cost reduction program. if the dismissal of a part of employees turns out to be an inevitable move in order to reduce costs, an enterprise should carefully consider the right moment to implement it. it would be suitable to carry out the release during a so-called "quiet" period the period when there are no seasonal fluctuations in the production volume, no drastic changes in the structure of production, etc. the procedure of collecting information in an enterprise is not an easy task. some information is not easy to acquire, so, in this case, there is the need to find adequate ways to make it as relevant and as objective as possible. it is not important to just collect formation it is more important to use it properly. this is the moment when creative skills of managers come into play. creative use of the collected information on the type and amount of costs is the only reliable method. it is not recommended to apply the method of data usage that has already been implemented by an enterprise of a similar size and business activity, because chances to gain a competitive advantage, in this situation, are poor. 1.2. adjusting to enterprise’s global business strategy a cost reduction strategy must be adequatlly adapted to the global business strategy of an enterprise, that is, it must be integrated into a global strategy. this necessity arises from the fact that enterprises focus on different markets, different consumer segments, and different sources of resources and so on. cost reduction team leaders form a cost reduction program very carefully trying to adapt to the global business strategy of an enterprise. of course, the strategy of an enterprise can change due to a variety of market conditions. an enterprise which notices the decline in sales and profit, must take appropriate steps to eliminate this. one of the steps surely must be the reduction of costs, because the only cost-competitive firm can have a comparative advantage in relation to its market rivals. so, with the change of the global enterprise business strategy, cost reduction strategy must change as well. if the existing conditions require so, the focus of cost reduction programs must be redirected where it is needed the most. therefore, a cost reduction strategy must possess the appropriate degree of flexibility in accordance with the changes in the global business strategy of an enterprise. cost reduction strategy – process and effects 19 1.3. tools for cost reduction the area of cost reduction is constantly attracting the attention of experts. one of the researches (the e&y & ima, 2003) has been conducted at the request of the modern competitive economy that puts increasing pressure on enterprises to maximize their financial performance. in order to achieve this goal, enterprises must be dedicated to continuous cost reduction. the research covered a sample of 23,000 managers (members of ima) who received an e-mail with a link to a questionnaire that should be filled in. nearly 2,000 respondents answered by filling in the questionnaires. the main objectives of the research were (the e&y & ima, 2003, 1-2): 1. investigation of the fundamental changes in the role of management accounting, 2. analysis of the existing tools and consideration of introducing new tools and methods for cost management, 3. the impact of new technologies to replace the existing technology of management accounting and 4. examining factors that influence the adoption of new tools and methods in enterprises. table 1 usage of tools for cost management (ioma, 2006, 12) management accounting tool use under consideration rejected planning: budgeting tools operational budgeting 76% 16% 8% abm/standard budgeting 65% 23% 12% capital budgeting 62% 24% 14% decision support tools quantitative techniques 76% 17% 7% breakeven alaysis 62% 23% 13% internal transfer pricing 57% 23% 20% supply chain costing 31% 43% 26% value chain analysis 27% 47% 26% product costing analysis tools traditional costing 76% 15% 9% overhead allocations 70% 20% 10% multidimensional costing 35% 39% 26% target costing 27% 40% 33% life-cycle costing 32% 37% 41% theory of constraint 32% 41% 37% performance evaluation tools benchmarking 53% 36% 11% balanced scorecard 43% 40% 17% value-based management 27% 41% 32% the largest portion of the previouslly mentioned e&y & ima research is dedicated to the systematization of tools used in procedures to reduce costs in enterprises. table 1 best illustrates the intensity of the use of certain tools that are classified into the appropriate groups, where the major usage of tools considers its use in at least 60% of the surveyed enterprises. 20 n. figar, v. ivanović by analyzing the previous table, conclusions on the use of certain tools can be drawn:  most of the companies use operational, standard, and capital budgeting;  only two (quantitative techniques and graph profitability) of the five tools used in decision-making meet the requirement of being used by the majority, because they exceed the limit of 60%. one tool, transfer prices, does not exceed the limit of 60%, while the remaining two tools from this group are used irregularly, and more than 25% of the enterprises have refused their use;  with tools for analyzing the cost price, it can be immediately concluded that the majority of enterprises use the traditional costing and the allocation of overhead costs;  there is an interesting trend with the performance evaluation tools where no tool exceeds the limit of 60% (using the benchmarking of 53% can be characterized as a default considering the current trends in the market and striving to implement best practices, while surprisingly low use of the balanced scorecard suggests that non-financial performance measures are ignored by the companies). based on the research conducted in the e&y & ima overview (2003, 3-5), the corresponding results are published and they can be interpreted as a valuable analysis of the current state of the economies in the participant’s countries (from all over the world), but also as a basis for future improvements in management accounting, with special emphasis on cost management. this research revealed that:  cost management plays a key role in achieving the strategic objectives;  the priority for research participants, who are also the decision makers in their companies, is the existence of "effective" cost information;  despite the needs for information about costs, numerous factors that influence the reduced cost transparency have been established;  a large number of participants who responded to the questionnaire did not take into account the possibility of introducing new tools to manage costs;  despite the introduction of new tools to manage costs, many of the research participants still widely use the old techniques to manage costs;  managers who were participants in research require the quantification of proposals for the introduction of new tools to manage costs. 1.4. implementation of cost reduction strategy apart from the existence of good ideas and suggestions for cost reduction, their adequate implementation is also very important. a very important factor that requires special attention is the resistance to the implementation of the strategy by the employees and unions. modern enterprises, which successfully implement cost reduction strategies, use the approach which makes them different from the enterprises that cannot implement it well. these are the so-called sustainable transformation of costs which imply (guarraia, saenz, fallas, 2012):  setting the goals created on the basis of external data, and not on the basis of internal benchmarking;  adaptation of the cost reduction strategy to the global business strategy of an enterprise;  introduction of appropriate measures; cost reduction strategy – process and effects 21  focusing not only on the individual organizational units of an enterprise, but also on the so-called "stitches" of an enterprise;  the resistance of employees and trade unions.  setting the goals created on the basis of external data and not on the basis of internal benchmarking. when determining to what extent the costs should be reduced, many managers fall into the trap and determine the percentage of cost reduction according to what is possible to achieve internally. in making this decision, managers rarely take into account market trends depending on which the target cost reduction should be determined. the importance of what has been previously stated is reflected in situations where there are new competitors in the market (e.g. competition from china), or new trends. this is the moment when an enterprise finds out that it cannot cope with the new competitors and new market opportunities relying on the reduction determined by internal benchmarking;  adaptation of cost reduction strategy to the global business strategy of an enterprise. any company that does not address the issue of cost management in a timely fashion risks finding itself in a very difficult situation in the future. therefore, cost-disciplined companies are seeking to proactively manage costs, and for that purpose exercise the adaptation of their cost reduction strategies to the global business strategy of the company. this proactive approach allows them to, following the market trends, achieve a high degree of flexibility in cost reduction, and sustainable competitive advantage;  the introduction of appropriate measures. the necessity of introducing adequate measures is derived from the current practice of many enterprises that, while realizing cost reduction programs, attention is directed to only one part of the expenditure items from the income statement. specifically, during the measurement of the cost reduction percentage enterprises rely only on the costs of "visible" resources and, thus, fail to cover the costs of "invisible" resources, i.e. calculate with an incomplete "rump" cost price. usage of the appropriate tools for managing also the costs of the “invisible” resources, could help solve this problem;  focusing not only on the individual organizational units of an enterprise, but also on the so-called "stitches" of an enterprise. this recommendation appears as a consequence of the complexity of the enterprise’s organizational structure. organizational units can record all the costs related to them, but the question is what happens to costs which are located on the border ("stitch") between two organizational units? it is a frequent occurrence that no one pays attention to these costs, because nobody knows exactly who they belong to, or none of the organizational units want to accept them. but it is exactly with such kind of costs that lies the possibility of significant savings. k. coyne, s. coyne and e. coyne (2010, 80) argue that with the reduction of these costs an enterprise can reach 30% or more in savings. in order to achieve this, it is necessary to establish control over "costs on the stitches" through greater coordination of activities among the organizational units, and their better communication with the suppliers;  overcoming the resistance of employees and trade unions. as initially stated, the barriers to successful implementation of the cost reduction strategy can be the resistance of employees and trade unions. employee’s resistance is the resistance to change and a tendency to carry out the work activities in a customary manner. any proposal which leads to a change is unwelcome and it is being rejected. the 22 n. figar, v. ivanović lack of cooperation by the employees can slow down and complicate the realization of a cost reduction program to a large extent, and the management is forced to implement the intended changes slowly and carefully in such workplaces. at first, there should be fairly simple operations that can be learnt quickly and easily and with a quality supervisor – a supervisor who can influence employees with his knowledge and charisma to accept new changes. also, the introduction of changes in order to reduce costs can cause a strong union resistance. enterprises manage to overcome this situation by persuading the employees individually, and the employees exert direct pressure on the unions. this way, an enterprise indirectly removes the resistance of the unions in the introduction of cost reduction programs. 1.5. measuring the effects and costs of cost reduction strategy enterprises that traditionally rely solely on the determination of the cost reduction percentage may not be able to recognize the impact of cost reduction on the efficiency of the enterprise. intelligent and sustainable cost reduction program includes an in-depth analysis of the business areas critical to the survival and success of an enterprise in which the reduction of costs is to be performed. such a “smart” cost reduction strategy in areas that are crucial for an enterprise allows for the potential initiatives for cost reduction to be classified as (kerr, pauwels, 2014, 1-3): 1. clear wins, 2. worth the trade-off and 3. the last resort.  clear wins. partially based on the name, it can be concluded that this is about actions which clearly bring cost reduction in the right places. that way, direct influences are made on the growth of both efficiency and effectiveness. usually, clear profits are achieved by the approach to solving a particular problem, and while solving this problem one comes to ideas for cost reduction which are the right move and carry significant results.  worth the trade-off. the point of trade-off is in relation between costs and benefits. namely, the initiatives for program research, which should bring benefits, have the task to analyze the costs of such programs. in case where all programs do not deliver anticipated benefits, the only ones left in the portfolio are those which represent the cost-benefit optimization.  the last resort. a large number of initiatives to reduce costs can be undertaken, but many of them can have adverse effects on business activities in other parts of the enterprise. an enterprise should apply this method of cost reduction exceptionally. in addition to the previously mentioned benefits, certain direct benefits that the cost reduction strategy entails should also be stated. these are (ioma, 2006, 4):  elimination of waste and duplication of resources,  implementation of the best programs and practices of cost reduction,  introduction of modern technology in order to increase effectiveness,  creation of virtual operations on the internet by following modern it trends. implementing the cost reduction strategy requires an investment of adequate resources. the main question raised here is in what time the cost savings should cover the invested capital. practice shows that this should be a short period of time, usually one year. this is cost reduction strategy – process and effects 23 because it is not always necessary to purchase new equipment, hire a consulting firm, etc. in order to achieve significant savings. sometimes it is only necessary to make certain corrections, adjustments in activities, to realize the planned savings. in any case, the management should stick to the economic principle here achieve maximum effect with the minimum investments. 2. cost reduction strategy and program of layoffs the first question which arises with the cost reduction strategy is: what types of costs should be reduced? when restructuring an enterprise, labor costs are, mostly, the first on the list to be reduced, and that is why the cost reduction strategy is often wrongly equated with the program of layoff. such an understanding is supported with the applied forms of restructuring, such as:  release of redundant employees,  movement of business activities to countries with cheap or cheaper labour,  migration of employees due to the change in the job location and  strategic approach.  release of redundant employees is performed directly and indirectly. redundant employees are released directly, and indirectly there are the elimination of production lines, closure of plants, factories and subsidiaries. both direct and indirect ways lead to a labour cost decrease, but severance pays are increasing. finally, an enterprise sees a solution in better functioning with decreased number of employees.  movement of business activities to countries with cheap or cheaper labour has long been known as a strategy of cost reduction through the reduction of labor costs. today, especially important are the regions with low labor cost of engineering stuff. low-cost engineer regions are china, the czech republic, india and vietnam, medium-cost engineer regions are south korea, hungary, poland and thailand. low labor costs mean that the salaries of engineers are only 10-20% of the salary of engineers in the united states, and the mean cost of labor to the wage to 20-50% of the salary costs of engineers in the united states (eppinger, 2006, p. 24). of course, care has been taken about the running costs of other categories of employees, and finally the so-called “smart” combination is made. south korea can be an example of a successful country in creating smart combinations: uses low-cost engineering in china, limited amounts of higher-cost engineering in the u.s. or europe for accessing to the latest technologies and markets, but has retained much of the engineering process at home (in south korea) (eppinger, 2006, p. 26). the ultimate goal is the production and provision of services at low cost.  migration of employees due to the change in the job location has, until recently, been considered the traditional approach, because the workforce was moving from rural to urban areas, from underdeveloped to developed areas, from the periphery to the center. today, employees are migrating for a job, because the present location requires fewer employees or the business activity at the location is completely extinguished. employers are offering two alternatives: either not to leave the current location and remain jobless or to move to locations where, currently, there is a job, 24 n. figar, v. ivanović but this kind of migration does not guarantee a permanent employment. the migration is an alternative that causes not only economic, but also emotional problems: the separation of families, inadequate housing at the other location, commuting, etc. the end result may be either higher cost of an enterprise or "voluntarily" job leave.  strategic approach is a holistic approach. it sees an enterprise as a whole, and cost as the total cost of an enterprise (not just by types of resources and organizational units). this is the only one of the above stated approaches that clearly shows that the cost reduction strategy is a much broader concept than the program of layoff, but it does not necessarily have to contain it. employees are the most valuable resource of an enterprise who create and use other resources, so their release should be the last step in the process of cost reduction and only if it is inevitable. however, different enterprises behave differently, as shown by the two case studies below. the company merck & co., based in new jersey, is the world’s leading manufacturer of drugs, and has been in the business for 120 years. the revenue of the company started to fall in 2004, so in 2005 the company implemented a restructuring program that was supposed to reduce the overall costs, thereby increasing its efficiency and competitiveness. in order to achieve these objectives, five manufacturing plants and two clinical sites, as well as other property, were sold or closed. nevertheless, the costs increased in 2006 and 2007. the "patch area" for further reduction was research and development costs, because for the period 2005-2008 these costs increased by about 20%. that is why in the new program from 2008 the key point was to reduce the number of employees in order to reduce company costs. the number of senior and middle managers was reduced by 25%, and the key employees, researchers, were not spared from layoffs either. the layoff was focused on older workers who had been working for the company for more than 10 years. some researchers employed on individual projects in montreal were offered to move to other locations. those who did not accept the relocation were dismissed. also, if the project was not successful at the second location, they had to suffer the termination of the department and staying out of work (pharma cost cutting strategies case study, 2009). as a result of the program implementation, research and development costs in 2008 decreased slightly compared to 2007, but were almost twice as high compared to 2000; the sales revenue decreased slightly compared to 2007, but it was at the level of revenue in 2000. therefore, moving jobs to new locations, migration of employees because of the change in the job location, and firing employees based on the principle first in fist out did not reduce the costs of r&d significantly. this proves that the years of experience and acquired skills of employees in the company are not worthless assets. the opposite example is the german car manufacturer bmw with its headquarters in munich. at the same time when the company merck & co had a problem of high costs, in 2007, bmw was faced with the problem of declining productivity and the aging workforce in its factories in the united states, germany, and austria. but this company noted that this was a long term problem and applied a strategic approach to its solving. the forecasts showed that this company was going to be faced with the average age of the plant's workers of 47 in 2017, instead of 39 in 2007. especially as the nation's aging is a global phenomenon: in the united states it is expected that people over 65-years-old will make up 16.6% of the population in 2020, in germany 21.6%, and in japan 26.2%, while this will also affect its factories in these countries. it is a fact that the healthcare costs for employees older than 65 are up to three times higher compared to the employees cost reduction strategy – process and effects 25 between the ages of 30 and 50, and the productivity is also lower (bauer, mauermann, 2010). that leads to cost increase, instead of a cost reduction, so the company found itself in a situation to choose among a traditional and a modern approach to cost reduction:  traditional, according to which older employees should be released or forced to retire, and  modern, according to which older employees should be retained by adjusting the work to their physical abilities. based on the forecasts and the facts it was necessary to create a cost reduction program that would allow the retention of older employees, the increase of their productivity, and reduction of the labor costs and overall operating costs. the company decided to adopt the modern approach and created a program which contains (bauer, mauermann, 2010, 100):  healthcare program,  enhancing workers′ skills and the improvement workplace environment,  instituting part-time policies, and  the change in the management processes. although the annual increase of productivity by 7% has been projected, the program caused resistance among younger employees and the unemployed. however, the management did not give up the implementation of the program:  70 small changes in the design and equipment that improved ergonomics were implemented at various workstations,  ergonomically optimal job rotation, so that employees would be equally burdened,  exercise breaks during working hours were introduced,  the equipment was purchased (glasses, chairs, etc.) to facilitate the work of older employees. the company invested about 40,000 euros in the program, and the annual productivity increase of 7% was expected, as well as the increase in output from 500 to 530 units per shift, and absenteeism reduction from 7% to 2% in all bmw factories, not only in germany. the creation of the specific organizational culture in bmw contributed to the treatment of the experience of employees as a valuable resource of the company, and despite the initial resistance, all employees took part in the creation of such culture (bauer, mauermann, 2010):  top management had the task to spot the problems at the factory level,  the production managers ran an experiment,  the line workers created the solution. conclusion each enterprise should strive for structuring the most profitable portfolio of customers. such a portfolio is usually composed of customers with different purchasing power. report and the estimation of the world bank show that there is a large segment of buyers with a low purchasing power, whose needs can be met only with cheaper production. that is why cost reduction has a large importance in this. the cost reduction strategy should be comprehensive i.e. it needs to refer to the reduction of all types of costs and everywhere, not only to the reduction of labor costs as it is usually practiced. 26 n. figar, v. ivanović the example of bmw shows that the investment in older employees can be beneficial while the example of the company merck & co. shows that the retention of only young employees does not bring satisfactory results. that is why enterprises should create a climate that does not equate the program of layoffs with the cost reduction strategy. this is especially important because equating the cost reduction strategy and the layoff programs is largely present in the republic of serbia. references 1. attuel-mendes, l. (2014) crowdfunding platformy to erodicate poverty through the creation of a global hub, cost management, 28 (2): 38-47. 2. baily, m. n., bosworth, b. p. (2014) us manufacturing : understanding its past and its potential future, journal of economic perspectives, 28 (1): 3-26. 3. bauer, n., mauermann, h. (2010) how bmw is defusing demographic time bomb, harvard business review, march 2010: 99-102. 4. coyne, k. p., coyne, s. t., coyne, e. j. (2010) when you′ve got to cut costs, harvard business review, may 2010: 74-82. 5. eppinger, s. d., chitkara, a. r. (2006) the new practice of global product development, mit sloan management review, 47 (4): 22-30. 6. figar, n. (2007) troškovi preduzeća, petrograf, niš. 7. guarraia, p., saenz, h., fallas, e. (2012) sustained cost transformation: delivering savings that stick, bain & company, inc.,: http://www.bain.com/images/bain_brief_sustained_cost_transformation_ deliver_savings_that_stick.pdf (21.08.2014.). 8. helper, s., henderson, r. (2014) management practices, relational contracts, and the decline of general motors, journal of economic perspectives, 28 (1): 49-72. 9. institute of management and administration (ioma) (2006) cost reduction and control best practices, john willey and sons, inc., new jersey. 10. kerr, m., pauwels, v. (2014) cost-cutting with no regrets, bain & company, inc., http://www.bain.com/ images/bain_brief_cost-cutting_with_no_regrets.pdf (21.08.2014.). 11. mccormick, t. (2013) strategic cost reduction tactics, accountancy ireland, 45 (5): 46-47. 12. payne, b. (1953) a program for cost reduction, harvard business review, 31 (5): 71-82. 13. pharma cost cutting strategies case study (2009) pharma cost cutting strategies case study: cutting r&d costs through staff reductions, development alliances & offshore outsourcing, 1-9. 14. porter, m. e. (2014) konkurentska prednost, masmedia, zagreb. 15. the ernst & young and ima (institute of management accountants) (2003) 2003 survey of management accounting – the state of management accounting: http://www.imanet.org/pdfs/public/ general/2003surveyofmgtaccting%20ey.pdf (21.08.2014.). strategija redukcije troškova proces i efekti strategija troškovnog liderstva, iako uvek aktuelna, poseban značaj dobija za vreme krize. redukcija troškova, program štednje, mere štednje i sl. koriste se kao sinonimi za ovu strategiju, a svi u konačnom izražavaju potrebu za smanjenjem troškova preduzeća. preduzeća sačinjavaju program redukcije troškova, koji sadrži obavezne etape u redukciji, alate za redukciju i najadekvatnije strategije. izbor alata zavisi od izabrane strategije, ali se etape ne mogu preskakati, niti izostavljati ni kod jedne strategije. u ovom radu je prikazano pet etapa kroz koje mora proći program redukcije troškova, zatim set alata koji se mogu koristiti za redukciju i razlika između strategije redukcije troškova i programa otpuštanja. ključne reči: strategija redukcije troškova, etape u redukcij troškova, alati za redukciju troškova, program otpuštanja, korporativna kultura. facta universitatis series: economics and organization vol. 12, n o 4, 2015, pp. 269 278 maximizing sales under conditions of nonlenarity  udc 519.853:658.8 nina petkovic, milan bozinovic faculty of management zajecar faculty of economics, kosovska mitrovica – department of mathematics abstract. this paper deals with the problem of maximizing the sales of a particular product when the revenue function is nonlinear in dependence of the demand for that product. this type of problem is usually solved by the nonlinear programming method which has been sufficiently described in mathematical theory; however, its use is not that simple. solving functions of more than two variables is rather complicated and requires an appropriate mathematical model as well as suitable software for computer solving of the given problem, which sometimes involves team work. key words: nonlinear programming, kuhn-tucker conditions, revenue function, demand introduction problems in nonlinear programming appear when the objective function, that is, a corresponding system of constraints, is defined by nonlinear dependencies. unfortunately, there is no universal solution to these problems, as there is for linear models, the majority of which are solved, for example, by the simplex method. moreover, the lp model is a special case of the general nlp model and a number of different methods and procedures have been developed for its solving. in most cases, all of them depend on the type of nonlinearity that exists in the specific nlp problem, which means that a large number of these problems have not been solved yet. this is exactly the reason why we have chosen to describe the most important terms, mathematical models and procedures for solving these types of problems in this paper. a. formulating nlp problems the general task of nonlinear programming on which we will focus our attention here is the following: minimize the function f(x), ie .find min f(x) with constrains –inequalities: received november 24, 2015 / accepted december 29, 2015 corresponding author: nina petkovic faculty of management zajecar, serbia e-mail: nina.petkovic@fmz.edu.rs 270 n. petkovic, m. bozinovic ( ) 0 i g x  1,... ,i m whereby f, g1,...gm functions are defined in r n , and x  r n . as with the lp problem, the task is to find the vector x = 1 ( ,..., ) t n n x x r which satisfies the given constraints and is, at the same time, consistent with the minimum value of function f(x). this function is called the objective function, and every condition gi (x)  0 i = 1,...,m, refers to its constraints. vector x  r n which satisfies all constraints is called feasible solution or feasible point. a set of all feasible solutions makes a feasible region or a feasible set s  r n . so, the problem in nonlinear programming is finding the feasible solution x * , whereby f(x * )  f(x) for each feasible solution x. a vector x * is called optimal or a solution of the nlp problem. the nlp problem, of course, may be defined as function maximizing f(x) or defining max f(x) with constrains – inequalities in the following form: ( ) 0, i g x  1,..., .i m in special cases when the objective function is linear and all the constraints are in the form of linear equations, inequations or their combination, the problem discussed above will become a linear programming problem, i.e. the standard maximum and minimum problems or some combination of the two. b. kuhn-tucker optimization condition as already mentioned the results of nonlinear programming theory in mathematics are well-known and described. they are of course used in this paper on the example we had studied and which is related to an increase in the demand of a company. therefore, it may be useful to give a brief description of these results so that we can understand all the procedures applied in the problem solving process. the analysis of the functions that are a result of the direct and lagrangian dual problem (well-known in the nlp theory) leads to a set of facts which primarily offer the needed and sufficient optimization conditions for the solution of both problems. the application of lagrangian principle is based on the famous kuhn-tucker theorems which occupy an important place in the convex programming theory and as such will be in the center of our attention. assume that x is a nonempty open set from r n , and that f, g1, ..., gm are formerly defined real n-dimensional functions. now let us consider again the problem of function minimization f(x) under the following conditions x  x and gi(x)  0, i = 1,...m. to accomplish this, let us fix an arbitrary permissible point x0 x, and present it as follows 0 { ( ) 0}. i i i g x  assume now that functions f and gi are differentiable at xo, and vectors gi(xo). for i  i linearly independent. maximizing sales under conditions of nonlenarity 271 function f(x) which is differentiable at xo, can have only one vector – gradient 1 2 ( ) ( ) ( ) ( ) , ,... t o o o o n f x f x f x f x x x x             , whereby ( ) ,o i f x x   i = 1,...,n are partial derivatives of f(x) at xo. at this point we introduce theorem 1.1. (kuhn-tucker theorems necessary conditions). suppose that x0 x is the local optimum of the given optimization problem, then there are numbers u1, u2,... um that lead to the following 0 0 1 ( ) ( ) 0 m i i i f x u g x      (1) whereby 0 ( ) 0 i i u g x  and 0 i u  for each i=1,……,m.  fig. 1 geometric interpretation of kuhn-tucker optimization conditions the geometric interpretation of kuhn-tucker optimization conditions are shown in figure 1. the arbitrary vector as a linear combination is as follows: 0 ( ), i i i i u g x   0,iu  and must lie in the cone defined by the gradient vectors gi(x) which define the constraints at x0. so, equation (1) leads to the following: 0 0 ( ) ( ), i i i i f x u g x     , (2) 272 n. petkovic, m. bozinovic so vector f (x0) belongs to the cone defined by the gradient vectors of active constraints gi(x) at x0 if it meets kuhn-tucker optimization conditions. here, as elsewhere, the numbers u1,...um  0... are called lagrangian parameters or multipliers, while the following equations 0 ( ) 0 i i u g x  , 1,...i m , (3) are called complementary elasticity conditions. kuhn-tucker conditions may be expressed by forming a vector: 0 0 ( ) ( ) 0 t f x u g x     0 ( ) 0 t u g x   0u  whereby g (x0) is the n x m matrix in which i-column equals the gradient gi (x0), and u = (u1,...,um) t is m-dimensional vector of the lagrangian multipliers. however, in practice the vector coefficient is usually calculated as follows: 0, , i i i i u i i     whereby i > 0, are solutions for a system of linear equations (2). obviously, this linear system is equivalent to the system (1); therefore, on the basis of the linear independence of vectors gi (x0), i  i, we can conclude that its solution i, i  i is unique. theorem 1.2. (sufficiency of kuhn-tucker conditions) suppose that f and gi, i  i are convex and differentiable at x0  r n . if kuhn-tucker conditions are satisfied at the same point, ie. there are ui, i  i such that (1) is true, then x0 is a solution to the global minimization nlp problem. theorem 1.3. (arrow ethoven) suppose that the given nonlinear program is as follows: max ( )f x  under the condition ( ) i i g x r ( 1, 2,... )i m 0x  and the following conditions are satisfied: (a) the objective function f(x) is differentiable and quasi-concave in the non-negative orthant. (b) all constraint functions gi (x) are differentiable and quasi-convex in the non-negative orthant. (c) the point x satisfies kuhn-tucker maximization conditions. (d) one of the following conditions is satisfied: d1. ( ) j f x at least for one variable xj. d2. ( ) 0 j f x  for a variable xj that takes on positive value without any loss in constraints. d3. not all n derivatives of function ( ) j f x are equal to zero, while function f(x) is twice more differentiable in the neighborhood of x , i.e. all second order partial derivatives are at x . d4. f(x) is a concave function then x has maximum of  = f(x).  maximizing sales under conditions of nonlenarity 273 c. sales maximization the objective of a typical micro-analysis of businesses primarily means profit maximization. however, the management may consider maximizing sales revenue a more important business objective than maximizing profit (this also depends on different organizational structures the management deals with). total revenue pu is one of the most important parameters that describe company’s competitiveness in an industry. one of the criteria of the company’s success and good management is whether the company increases its sales revenue or not. in that way and due to business results, profit as a parameter directly affects the system of rewards, i.e. the salaries of all employees including the salaries of the management. in other words, sales maximization is certainly an alternative goal of any organization, given that the company’s management, in order to avoid shareholders’ dissatisfaction, continually takes care that the total income level does not go below the defined minimum, i.e., 0 min ( ) u d x  (4) in that case the problem that the company’s management has to deal with is maximizing the total revenue function pu = pu(x) considering the following constrains condition 0 ( ) ( ) u u u d p x t x    (5) whereby du(x) is total income, pu(x) is total revenue; tu(x) refers to total expenses and x to production volume or demand. this condition can also be shown as follows: max ( ) u u p p x under the condition 0 ( ) ( ) , u u t x p x    0 ( 0)  0x the question of whether kuhn-tucker conditions can be applied to this model or not primarily depends on the following two things: whether function pu(x) is differentiable and concave, and whether function tu(x) is differentiable and convex. if this is so, the constraints function du = tu(x)  pu(x) is also differentiable and convex, which means that kuhn-tucker necessary conditions can be applied. of course, it is unlikely that we could draw more general conclusions based on assumptions about concavity, that is, convexity of quasiconcave function pu(x) and  quasiconvex function tu(x). if we do consider such assumptions, then constraints function du = tu(x)  pu(x) is the sum of two quasiconvex functions, while, at the same time, we cannot claim that the function itself is quasiconvex. if this be the case, then constraints function du(x) can be transformed into quasiconvex, which further allows the application of sufficient conditions for extreme values. under these conditions we use  to denote the lagrangian: 0 ( ) ( ( ) ( )) u u u p x y t x p x      kuhn-tucker conditions are composed of boundary conditions: ' ' ' ( ) ( ) ( ) 0 u u u p x yt x yp x x       274 n. petkovic, m. bozinovic 0 ( ) ( ) 0 u u t x p x y          (6) 0x in the case of pu(0) = 0 and tu(0) > 0, i.e. that production is equal to zero, x = 0, then the following will be the case: 0 (0) 0 u t y         which shows that the second boundary condition is not fulfilled. instead, we have to assume that x > 0, the condition which is absolutely in accordance with the fact that the production level that is equal to zero cannot be an element of the optimal solution set [x1, x2]. due to the non-negativity condition x > 0, we can say that  / x = 0, which means that the first weak inequation (6) has to be fulfilled as an equation. the solution of that equation refers to the rule according to which we can define production as the one which maximizes sales with the following constraints: ' ' ( ) ( ) 1 u u y p x t x y    (7) where y can be equal to or greater than zero, i.e. y  0, if y = 0, this rule boils down to pu' (x) = 0 while the company will tend to achieve production whose marginal revenue is as a follows: ' ( ) ( ) 0 g u p x p x  since the company would make maximum profit possible under these circumstances this would be output under ideal conditions. however, bearing in mind our assumptions, such an extreme situation is not possible because demand, xi which makes possible the aforementioned conditions is outside the set of possible solutions, i.e., xi  [x1, x2]. in that case we have to assume that y > 0; however, this further means that  / y = 0 on the basis of which we can conclude that profit constraints hold with equality while the company tries to make at least minimum income 0. assume that y > 0, this is the case when the output level maximizes sales, or in other words when marginal revenue is less than marginal cost, i.e. ' ' ( ) ( ) u u p x t x because 1 1 y y   (8) which would generally lead to higher output levels than the profit maximization rule, i.e., pu'(x) = tu'(x), the case when marginal revenue is equal to marginal cost. the particular problem we are dealing with here is the possibility of increasing sales of, i.e., demand for ariel, the washing powder, sold at maxi supermarket in zajecar, (belgian international food retailer delhaize group). the gained discrete data set shows nonlinear dependence among the parameters we were interested in. therefore, we opted for nonlinear programming in order to solve the optimization problem – in this particular case, maximum sales. the paper further lists research methodology including the problem solution. since revenue function pu(x) is unknown as well as total expenses tu(x) and total income du(x) functions, the first step is to compute these functions on the basis of statistical discrete data set, i.e. the empirical data we gained after having conducted a survey in the above maximizing sales under conditions of nonlenarity 275 mentioned company. the approximation method was used to compute functions as shown in table 1. table 1 discrete data set table 1 shows the survey results carried out at maxi supermarket in zajecar, (delhaize group). what we did was to monitor the sales of the washing powder ariel in the period of 30 days. in the very table, x stands for demand and refers to kg 10 2 and functions pu(x) and tu(x) stands for rsd 10 2 . fig. 2 graph of approximate functions of total revenue, expenses and income 276 n. petkovic, m. bozinovic on the basis of the empirical data we gathered during the research, and which are shown in table 1 where the approximation method is used 1 , see [6], we can now compute the necessary functions; i.e. total revenue 2 ( ) 1, 0005 89, 988 u p x x x   (9) total expenses 2 ( ) 3 10 150 u t x x x   (10) and total income du(x) = pu(x)  tu(x) all shown in figure 2. now, we can apply the described kuhn-tucker optimization conditions to sales maximization, which as a consequence has an increase in the total revenue. the optimization problem that arises here is how to maximize the following: max ( ) u u p p x under the condition 0 ( ) ( ) u u t x p x    , 0 0x also, total income du(x) cannot be less than 5010 2 i.e., one of the constraints conditions is the following: 0 50  if we apply kuhn-tucker conditions, our starting point is the following: ' '( ) '( ) 0 u u u p yt x yp x x       (11) 0 ( ) ( ) 0 u u t x p x y          (12) then, after the application of function differentiation rules in (9) and (10), and appropriate replacing in (11) and (12), we can arrange the inequations and finally get the following:  2, 001 89, 988 8, 001 79, 988 0x y x x         (13) 2 4, 005 79, 988 200 0x x y        (14) now, if we assume that x = 0 in (14), we have that 200  0 which is contradictory. therefore, condition 0x generates the following relation: 0 0x x      (15) which further leads to the following: 2, 001 89,988 (8, 001 79,988) 0x y x     (16) 1 the approximation method is discussed in (6), operational research, with original software solutions, methods, which enable the computer application of this method. maximizing sales under conditions of nonlenarity 277 furthermore, condition y = 0 generates the following: 2, 001 89,988 0x   (17) from which we calculate x, i.e. 44,9715x  if value x is now used in (14), we will have the following: 4693, 57 0 y      which is contradictory to condition  / y  0 . therefore, if we assume that y > 0 we will have the following equation: 2 0 4, 005 79, 988 200 0x x y         (18) the following roots are calculated by solving the quadratic equation (18): 1 2, 9296x  2 17, 0649x  (19) let us now check whether the solutions we arrived at, the roots x1 and x2 satisfy the kuhn-tucker conditions. if we replace root x1 in equation (15), i.e. in (16), we will have that y = 1,488, i.e. y < 0, which is contradictory to the previously given condition y > 0. thus, we can conclude that root x1 in equation (18) does not satisfy the kuhn-tucker conditions. if we apply the same procedure with the other root x2 in equation (18), we get that y > 0, which satisfies the kuhn-tucker conditions, in this case in relation to the demand. on the other hand, the total income function du is as follows 2 ( ) 4, 0005 79,988 150 u d x x x    (20) if this function’s differentiation gives a derivative equal to zero, we have the following: ' 8, 0001 79, 988 0 u d x    (21) by solving this equation (21), we get the following values for x: 9,9984x  22) the solution given at (22) stands for the demand or output volume whereby the total income du is maximized in relation to the product (washing powder). furthermore, if we compare the root x2 of the equation (18) with x, i.e. x2 > x, we can conclude that x2 = 17,0649 and that is the value that maximizes the total revenue function under the condition that the minimum value of the total income is as follows: 2 0 min 50 10 u d    . conclusion thus, the problem is solved and we also confirm our hypothesis on the possibility of sales increase, i.e., that there are certain situations, depending on the market conditions, when it is possible to increase sales of a product at the expense of decreasing the total income. 278 n. petkovic, m. bozinovic the case we illustrated also shows that the major idea in nlp numerical solving when there are two variables is this: zero is to be taken as the value of each variable, which significantly simplifies boundary conditions since a number of members vanish in the process and therefore the mathematical model is rather simplified. if it is possible in this way to find appropriate non-negative values of the lagrangian multipliers that satisfy all the boundary conditions in inequations, the solution which equals zero is the optimal one. however, if some of the inequations are disturbed, that will indicate that one variable or more are positive. for each positive value of the variable it is possible to loosen the conditions by changing the inequation into the equation. solving that equation will lead either to a solution or to a contradiction. if we end up with a contradiction, we will have to search for new ideas and repeat the process all over again. it is also worth mentioning that if there are functions of more than two variables in nonlinear models, the very process of optimization problem solving becomes more complicated; therefore, it is necessary in such cases to write a suitable software since it will be more appropriate to use a computer for solving problems of this type. this, in most cases, especially when we deal with complex problems, requires teamwork. references 1. alpha chiang,1984, fundamental methods of mathematical economics, mcgraw-hill 2. anderson j.: 2004, discrete mathematics with combinatorics, pearson education inc., prentice hall, new jersey 3. bazaraa m., shetty c.m. 1979, nonlinear programming – theory and algorithms, john wiley and sons, new york 4. bertsekas d.p. 2004, nonlinear programming, athena scientific; 5. bozinovic m., stojanovic v., 2005, matematicke metode i modeli u ekonomiji preduzeca (mathematical methods and models in the economics of an enterprise), graduate school of economics, leposavic; 6. bozinovic m., 2012, operaciona istrazivanja (operational research), the faculty of economics of kosovska mitrovica 7. bozinovic m., 2005, matematika za ekonomiste (mathematical economics), graduate school of economics, leposavic; 8. boyd s., vandenberghe l., 2006, convex optimization, cambridge university press, cambridge; 9. charnes a., cooper w., henderson a., 1960, an introduction to linear programming; john wiley & sons, new york; 10. cvetkovic d., simic s., 2002, odabrana poglavlja iz diskretne matematike (chosen chapters from discrete mathematics), akademska misao, belgrade; 11. milovanovic g., stanimirovic p., 2002, simbolicka implementacija nelinearne optimizacije (symbolic implementation of nonlinear implementation), nis. maksimiziranje prodaje u uslovima nelinearnosti u ovom radu razmatramo problem maksimiziranja prodaje određenog artikla u slučaju kada je funkcija prihoda nelinearna u zavisnosti od tražnje određenog proizvoda. ovakav zadatak se u principu rešava metodom nelinearnog programiranja, koja je u matematičkoj teoriji dovoljno opisana, ali njena primena nije tako jednostavna. u slučaju funkcija sa više od dve promenljive rešavanje ovakvih zadataka je veoma komplikovano i zahteva konstrukciju odgovarajućeg matematičkog modela, kao i pisanje softvera, kojim bi se postavljeni zadatak rešio na računaru, što ponekad zahteva timski rad. ključne reči: nelinearno programiranje, kuhn-tucker-ovi uslovi, funkcija prihoda, tražnja. 10120 facta universitatis series: economics and organization vol. 19, no 1, 2022, pp. 69 81 https://doi.org/10.22190/fueo211025006m © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper selection of suppliers in the supply chain1 udc 658.78 goran milovanović, jovana milenović* university of niš, faculty of economics, republic of serbia orcid id: goran milovanović https://orcid.org/0000-0003-0091-2774 jovana milenović https://orcid.org/0000-0001-9718-0383 abstract. in recent decades, procurement has been defined as an integrated strategic business activity that aims to create high added value based on the focus company’s relationship in the supply chain with its suppliers. the selection of suppliers in the supply chain is a complex task that should be performed in a cost-effective manner, taking into account the numerous requirements of business practice. the optimal supplier choice affects not only the product quality but also the formation of its price. the right choice of suppliers leads to timely, continuous and quality production. the decision on the choice of a supplier is a multi-criteria problem. a large number of models and techniques are used to make such a decision. the paper develops a framework to support decision-making and criteria-based prioritization of suppliers. the aim of this paper is to present the elements and specifics of the application of the analytic hierarchy process as one of the multicriteria decision-making techniques and spicelogic ration will software package as well as their relevance for supplier selection. in addition, based on the analyzed literature, the paper indicates the criteria used when choosing a supplier. the obtained results show that supplier 1 is the most important among the analyzed suppliers. the application of the spicelogic software package is justified, as the proposed package provides a platform for manufacturers to better understand the capabilities that sustainable suppliers must have in order to continue working with them and successfully manage the supply chain. key words: supplier selection, supply chain, ahp method, software package. jel classification: c02, c44, m11 received october 25, 2021 / revised march 06, 2022 / revised march 21, 2022 / accepted march 25, 2022 * phd student at university of niš, faculty of economics corresponding author: jovana milenović university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, republic of serbia | e-mail: milenovicjovana@gmail.com https://orcid.org/0000-0003-0091-2774 https://orcid.org/0000-0001-9718-0383 mailto:milenovicjovana@gmail.com 70 g. milovanović, j. milenović introduction one makes decisions every day, either out of habit (whether to drink coffee and go to lectures this morning or continue to sleep) or with the investment of great effort, time and money. numerous and complex decisions lead to good business results. making such decisions comes with uncertainty, which can have a decisive impact on the competitiveness and profitability of companies and their supply chains. making adequate decisions requires a wide range of real information, the availability of which is variable to managers. today, there are a large number of scientific papers in which the conditions for calculating weight coefficients and supplier ranking are presented. the knowledge gained from these works can help company managers establish an adequate system for managing information, materials and services, from the supplier through the retailer to the end customer. in a large number of companies, the costs of raw materials and work-in-progress amount to 60-70% of the total cost of products. supplier selection is one of the key management activities in the supply chain environment. it is important to establish long-term relationships with suppliers for continuous quality improvement, but also the reduction of procurement costs. accordingly, business entities strive to find and establish relationships with suppliers who are financially stable, deliver goods on time, have high-quality goods that they sell at appropriate prices, because only an agile and optimal supply chain can lead to improved performance and profit on a turbulent market. however, this is not an easy task, so decision-makers use different criteria when selecting and evaluating suppliers, which they then assign weight factors that will affect the overall supplier performance. today, a large number of software packages have been developed that are used for decision-making. the aim of this paper is to select suppliers in the supply chain using secondary data and appropriate methods, but also to obtain recommendations on the reliability of the use of new software methods to increase productivity and efficiency of supply chain management. the structuring of decision-making problems and the evaluation of selected criteria is realized within the analytic hierarchy process (ahp). after that, the model is tested using the previously mentioned software in order to confirm the obtained results and perform a sensitivity analysis. the structure of the paper consists of three parts, conceptually and logically connected. the first part of the paper gives an overview of literature pointing to the importance of selecting suppliers in the supply chain. the methodology for applying the ahp method and the spicelogic rational will software package, which allows supplier selection, is given in the second part of the paper. the final part presents the results, recommendations and limitations of the model used. 1. literature review the company’s procurement activities affect its competitiveness and productivity. this activity is the most important part of the supply chain. procurement managers evaluate supplier performance to retain those that meet company requirements. the selection of inadequate suppliers can cause operational and financial problems while by selecting adequate suppliers, the company reduces costs and solves quality problems. as the company’s procurement function accounts for “between 40% and 60% of final product sales, reducing these costs will increase the efficiency and profitability of the company” (grzybowska & gajdzik, 2014). for this reason, identifying relevant criteria selection of suppliers in the supply chain 71 for selecting suppliers is a key activity in supply chain management. the existence of suppliers who provide timely inputs of appropriate quality and who incur lower costs guarantees successful and long-term cooperation with the company (hanlin & hanlin, 2012). by researching the academic literature, we come across different approaches when choosing the criteria for selecting suppliers. dickson (1996) was the first to define the supplier selection criteria from the selected set. this author was the first to create a study on supplier evaluation in which he defined 23 criteria which he divided into four groups according to the degree of significance. the first group consists of criteria that are of high importance, and they are: quality, delivery, history of performance and guarantees and receivables policies. production facilities and capacities, price, technical capabilities, financial capacity, procedural compliance, communication system, reputation and position in the industry, desire for work, management and organization and operational control are another group of criteria that are of high importance (dickson, 1996). criteria of medium importance are: repair service, impression of the supplier, ability to pack, records of labor relations, geographical location, number of completed jobs and training material, and they form the third group. dickson attaches little importance to the fourth group of criteria, which consists of mutual arrangements. pal et al. (2013) note that the following criteria are used when selecting suppliers (pal et al., 2013): price, quality, delivery, past business performance, warranty and receivables policy, production facilities and capacities, technical capability, financial capacity, reputation and industry position, desire for work, repair service, supplier access, packing ability, employment records, geographical location, amount of past loans and mutual arrangements. shukla (2016) points out that when choosing a supplier, one should rely on the criteria such as: cost, quality, delivery, reliability and flexibility. these criteria significantly affect business performance. further selection and performance of each supplier implies that the baseline criteria are divided into sub-criteria. shukla points out that the cost criterion affects the production flow. the goal is to create maximum benefit for the company during the procurement. the continuous improvement program, customer satisfaction, certificates and the percentage of timely deliveries describe the quality criteria. poor quality negatively affects the company and can cause an increase in product return rates due to customer dissatisfaction. delivery is especially important for products with a short life cycle. that is why product delivery time, from the place of origin to the destination, is crucial. delivery includes: place of delivery, delivery time, total delivery time of the order and trade restrictions. a sense of trust, the political situation, price fluctuations and guarantee policies make for reliability. the feeling of trust varies from supplier to supplier and can be measured by quality and timely delivery. the last criterion that shukla states is flexibility. flexibility in the supply chain allows a company to cope with environmental uncertainties, changing demand and a new environment. therefore, the capacity, availability of stocks, exchange of information, components of negotiations and adjustment of suppliers should be checked. growing trends in outsourcing and environmental and social protection require companies to integrate criteria that include economic, environmental and social elements in their supply chain activities (ghayebloo et al., 2015). zimmer et al. (2016) analyze 143 articles published in the period from 1997 to 2014 and identify the following ten best economic, environmental and social criteria: “economic criteria are: quality; flexibility; price; delivery term; relationship; cost; technical capacity; logistical costs; reverse logistics; rejection rate; environmental criteria are: environmental management system; resource consumption; ecological design; recycling; ecological impact control; energy consumption; reuse; air emissions and environmental code of conduct. the 72 g. milovanović, j. milenović third group includes social criteria: stakeholder engagement; staff training; commitment in social management; commitment to health and safety management; stakeholder relations; code of social conduct; donations for sustainable projects; rights of interested parties; safety practices and annual number of accidents.” in addition to these, gahona-flores (2021) points out that they are highly valued as ecological criteria for health and environmental management (gahona-flores, 2021). integrating selection criteria allows companies to move towards sustainable development. there should be a positive relationship between sustainable supplier selection and supply chain, as this is the right path leading to sustainable supply chain management (seuring & muller, 2008). due to the discrepancy between sustainability regulations and legislation and the organizational goals of the company, the sustainable selection of suppliers becomes a complicated decision (zimmer et al., 2016). therefore, research should be conducted in order to select the best suppliers or suppliers who can meet the requirements manufacturers set as criteria for the sustainability of supply chain management. different methods of multi-criteria analysis can be used when ranking suppliers based on the selected criteria. govindan et al. (2015) review literature and recommend the analytic hierarchy process, also suggesting combining the ahp method with other methods in order to better solve the problems that may arise. handfield et al. (2002) use the ahp method to assess suppliers and environmental performance. in addition to the standard ahp method and other mathematical measures, lee et al. (2009) apply fuzzy logic involving ahp. chan & kumar (2007) show that cost and price are the most important criteria when selecting suppliers using the ahp-fuzzy method. kumar et al. (2018) use the ahp method in their study and take into account costs, ability to deliver, product quality, performance and reputation of the firm when choosing a supplier. based on the analyzed literature, it can be clearly seen that the choice of criteria for the selection of suppliers is important and has a decisive influence on the company efficiency. the choice of criteria depends on the activity and the company status. also, we can conclude that criteria such as quality, cost and delivery time are still of high importance for the selection of suppliers. in addition to these criteria, in the twentieth century, the communication system, method of payment, logistics capacity, supplier audit, etc. are gaining in importance, because the daily company goals require the use of integrated approaches that involve a number of factors and criteria. if there are critical areas, it is necessary to conduct a more detailed analysis and assess the capabilities of suppliers. 2. research methodology analytic hierarchy process (ahp) is one of the best-known methods of multicriteria decision-making used to determine the relative importance of a set of attributes, activities, or criteria. the creator of this method is thomas saaty. it allows for a comparison of alternatives based on decision assessment, taking into account the importance of the criteria. the ahp method belongs to the class of methods for soft optimization. ahp is often used in solving various problems. vaidya and kumar (2006) give a good overview of ahp applications. in addition to the possibility for decision-makers to structure the problem in a clear and simple way, the ahp method also allows the inclusion of objective and subjective consideration when making decisions (forman, 1983). the process of using the ahp method consists of four phases (suknović & čupić, 2003, p. 175): selection of suppliers in the supply chain 73 1. structuring the problem. 2. data collection. 3. estimation of relative weights. 4. determining the solution to the problem. the first phase consists of decomposing any complex decision problem into a series of hierarchies, where each level represents a smaller number of attributes (suknović & čupić, 2003). the attributes are then decomposed into another set of elements corresponding to the next level. so, at the top of the structure is the goal, and at the lower levels are the criteria and sub-criteria. the alternatives to be assessed are at the lowest level (a1, a2 and a3). the comparison of each pair for each criterion is presented in figure 1. if there are n elements for comparison then the total number of n (n-1) / 2 estimates needs to be made, because each alternative in relation to itself is represented by the number 1 and those units are set diagonally, and values below the diagonal represent reciprocity. all participants should be involved in defining the hierarchy, because there are different views of the problem, which may be more useful than the ones we originally posed (clark, 1985). in our example, we will compare three alternatives (suppliers) based on seven criteria. so, we have a total of 21 comparisons (7*(7-1)/2). fig. 1 hierarchical structure of decision problems source: adapted from: srđević, b. & jandrić, z. (2000). analitički hijererarhijski proces u strateškom gazdovanju šumama. novi sad: j.p. „srbija šume“, šumsko gazdinstvo "novi sad". the second phase refers to data collection and comparison of pairs of alternatives. the decision-maker assigns relative grades in pairs of attributes of one hierarchical level for all levels of the entire hierarchy attributes (suknović & čupić, 2003). in order to perform a relative weight estimation in which the comparison matrix is translated into eigenvalue problems, the best known saaty nine-point scale is used to obtain normalized and unique weight vectors for all attributes at each level of the hierarchy (kousalya et al., 2012). level of preference 1 shows that two alternatives are completely equal, while the absolute advantage of one over the other alternative exists when we assign the number 9 to the pair. thus, the decision-maker can express his opinion on each pair of elements as: equal importance, slightly higher importance in relation to the other, greater importance, significantly greater importance and absolutely greater importance of one element in relation to another. descriptive grades are converted into numerical values: 1, 3, 5, and 7, while the numbers 2, 4, 6 and 8 are between them and are used to more accurately express the limit values in case the decision-maker hesitates between two levels. 74 g. milovanović, j. milenović in the third phase, we determine the relative significance of the criteria, form a matrix a of dimension nxn (criterion level) and mxn (alternative level), where the elements aii=1 (elements of the main diagonal), while the elements aji are reciprocal values aij for i are different j, i,j = 1,2, … ,n. in order to be able to obtain our own vectors at this stage, it is necessary to (despodov et al., 2011): ▪ compare the criteria in pairs. ▪ find the sum of all the elements in each column. ▪ divide the elements of each column by the sum of that column we obtained in the previous step. ▪ find the sum of all elements in each row and then determine the mean value of each row (divide the sum by the number of criteria). the column consisting of the mean values thus obtained represents the normalized eigenvector. in this way, the participation or importance of each criterion in the model is obtained. determining the problem is actually finding a composite normalized vector (fourth phase). when determining the vector of order of values in the criteria in the model, it is necessary to determine the importance of alternatives in the model. after evaluating the alternatives according to individual criteria, we perform an overall synthesis of the problem in which we need to multiply its participation within the criteria with the relative weight of the criteria for all criteria, and then add the obtained values for each alternative separately. by adding these values, the total shares are obtained, i.e. weights for each alternative, thus determining the composite normalized vector. the ranking of alternatives is done on the basis of the values of total weights so that the highest rank is given to the alternative with the highest total weight. therefore, in this case, we conduct an evaluation of alternatives based on all criteria. each alternative gains its value. finally, each pair comparison should pass a consistency test. satty suggests that the consistency index be calculated as follows: ci = (max − n) / (n − 1). the obtained index can be compared with randomly selected indices (ri) and we get the consistency ratio (cr). a cr value less than or equal to 0.1 is considered significantly consistent. in addition to the standard method of application, the ahp methodology can be implemented using software packages. software packages as decision support systems aim to help managers apply analytical methods to make an adequate decision. they enable very easy interpretation, visualization and interactivity of different solution scenarios. there are various software solutions (expert choice, super decisions…). we decided to implement spicelogic rational will. this software solution is based on the ahp model. it is very easy to use. the program allows us to choose whether to maximize or minimize the criterion (drop-down menu). we repeat the process until we enter the desired number of criteria. when we do not use quantitative data but express a subjective comparison in pairs, the “subjective” option should be chosen. we compare pairs using a scale. we respect a consistency relationship that measures inconsistency between pairs. it shows us how much we “violate” the rule of transitivity. when this rule is applied or when we are 100% consistent in our preferences, the deviation will be 0. the higher the number, the greater the deviation. according to satty, as we mentioned, the consistency ratio (cr) should be less than or equal to 10%. if it exceeds this value, the software warns us that the number turns red and then we have to revise the comparison. based on the explained methodology, preference should be given to the spicelogic software package due to: time savings when comparing criteria, easier modification of entered data, and more detailed sensitivity analysis. selection of suppliers in the supply chain 75 3. results and discussion the procurement process plays an important role in the operations of manufacturing and service companies. companies order and buy different categories of raw materials, work-inprogress and finished products. procurement must be efficient, because it significantly affects the profitability and competitive position of the company. proper selection of suppliers affects the efficiency of procurement and is a multi-criteria problem that includes quantitative and qualitative criteria. when choosing the right supplier, it is important to establish a balance between tangible and intangible criteria. companies evaluate potential suppliers using a number of criteria, to which they assign different weighting factors whose values ultimately affect the overall performance of the supplier. in this paper, we base the selection of suppliers in the supply chain on the ahp method, the results of which we test using the spicelogic rational will software package. we collect data for the research from various secondary sources, but primarily from published publications in the automotive industry (data by hruška et al., 2014). we present the first phase of the ahp method in the second chapter (figure 1). in this way, we decompose the decision-making problem in the form of a hierarchical structure. at the top of the hierarchy, we have a decision on the choice of supplier that represents the goal. the next level refers to the criteria, while at the lowest level of the hierarchy there are alternatives (in our case three suppliers) that are evaluated in relation to the defined criteria and goal. the mentioned authors reach the data with the help of research conducted in the automotive industry and rank suppliers based on nine criteria, while for this paper we selected seven criteria: price, product quality, payment deadline, delivery time, storage space, transport and audit of suppliers (table 1). table 1 supplier selection criteria mark criterion k1 price k2 product quality k3 payment deadline k4 delivery time k5 storage space k6 transport k7 supplier audit source: adapted from: hruška, r., průša, p. & babić, d. (2014). the use of ahp method for selection of supplier. transport, 29(2), p. 200. after the defined hierarchical structure, a comparison of pairs of criteria follows (third phase). if, when comparing, one criterion is assigned a higher number than the other, it means that we prefer the first criterion. the comparison of pairs is presented in the form of a square matrix using a comparison scale that provides information on the preferences of the criteria. we synthesize the information to show a general preference (we actually get a vector of the eigenvalues of the matrix). the eigenvector vector of the matrix is shown in table 2. 76 g. milovanović, j. milenović table 2 matrix eigenvalue vector k1 k2 k3 k4 k5 k6 k7 k1 1 2 3 3 3 4 3 k2 1/2 1 2 3 3 4 5 k3 1/3 1/2 1 2 2 3 4 k4 1/3 1/5 1/2 1 3 2 3 k5 1/3 1/3 1/2 1/4 1 3 3 k6 1/4 1/4 1/3 1/2 1/3 1 2 k7 1/3 1/5 1/4 1/3 1/3 1/2 1 sum 3.07 4.48 9.08 8.58 15.33 14.83 21.00 source: adapted from: hruška, r., pruša, p. & babić, d. (2014). the use of ahp method for selection of supplier. transport, 29(2), p. 200. then we divide each element of the matrix by the obtained sum of the column in which it is located and perform summation by rows of the table, and after that we calculate the average value by alternative to get to the normalized sum of rows. the obtained average value represents the average preference (weight coefficient) of one alternative over the others. based on the calculation, we arrive at the weighting coefficients: w1= 0.29 (price); w2= 0.24 (product quality); w3= 0.13 (payment deadline); w4= 0.13 (delivery time); w5= 0.07 (storage space); w6= 0.09 (transport) i w7= 0.05 (supplier audit). we calculate the maximum eigenvalue of the comparison matrix, i.e. λmax by multiplying the matrix of comparison results by the priority vector, i.e. the values from table 2 are multiplied by the weighting coefficients (multiplication is performed in accordance with the rule of multiplication of the matrix and vector). the resulting vector is now divided by the values of the weighting coefficients to determine λmax. in our example, λmax is 7.57 (λmax = (7.83+7.73+7.85+7.57+7.46+7.84+6.75)/7=7.57) in order to determine the consistency index (ci), we must first determine the degree of consistency (cr) based on the saaty table (1980). the random index for the 7x7 matrix is 1.32 (the value is below 0.1, which shows us that we meet consistency criterion and there is no need for data review). after fulfilling the conditions of consistency in the criteria, we continue the procedure of applying the ahp method when comparing suppliers (for each of the criteria) in order to multiply their weight coefficients and weight coefficients of the criteria to reach the weighted amount based on which we rank suppliers (fourth phase). by the priority order of alternatives (supplier 1, supplier 2 and supplier 3) as a lower-level element, i.e. in relation to the criteria, we can see the relative importance of the given criterion for each of the alternatives when making the final decision on the selection of suppliers in the supply chain. we conclude that supplier 1 meets the criteria (has the highest value of the weighted amount), and the management should opt for it. selection of suppliers in the supply chain 77 table 3 ranking of alternatives alternative weighted amount ranking supplier 1 0.473652 1 supplier 2 0.424006 2 supplier 3 0.102341 3 source: authors’ calculation the spicelogic software package suggests supplier 1 as a recommendation for the selection of suppliers in the supply chain based on the entered values, because its total priority is 59.16%, followed by supplier 2 with an overall priority of 49.53% and finally supplier 3 with 49.07%. the presentation is given in the form of a bar graph and a radar panel. fig. 2 solutions obtained using the spicelogic rational will software package source: authors’ calculation using spicelogic rational will software package the final decision on the choice of supplier should not be made before conducting a sensitivity analysis. sensitivity analysis allows us to understand how “firm” our decision is. the software package provides one-way sensitivity analysis and as a result displays a graph of the change in the value of the variable that affects the value of the option. based on the sensitivity analysis (sensitivity index = 100 ks % (measures the distance that a variable needs to influence a decision). as the value of the weight of the comparison side changes from its total possible value, so will the total value of the other side decrease) in this example, this decision was influenced by the following criteria, which were compared according to the index of importance (from highest to lowest importance): payment deadline, product quality and price (figure 3). the product quality criterion has a sensitivity index of 31.63%. the higher the index, the higher the sensitivity. if the sensitivity index is zero, the variable is insensitive in that decision context. 78 g. milovanović, j. milenović fig. 3 sensitivity analysis source: authors’ calculation using spicelogic rational will software package making rational decisions requires analyzing the data, which requires time and makes the method unsuitable for quick decision making. rapid changes on the market require rapid decision-making, so this model can be used mainly in making long-term decisions, rather than short-term or operational ones. disadvantages when using the software package can occur when management cannot define and assess the problem. in that case, the decision-maker does not have relevant information that would be of help to him, so he uses his experience and instinct when making decisions, and then subjectivity comes to stage. rational decision-making requires management to have relevant information in the supplier evaluation phase. in addition to the time constraint, the limiting factors may be: lack of financial resources, misinterpretation of data, and insufficient knowledge of the application of software tools. selection of suppliers in the supply chain 79 conclusion evaluation and selection of suppliers in the supply chain are activities that companies face on a daily basis. businesses are often unable to make adequate decisions and therefore have to use appropriate methods and software packages. analytic hierarchy process is a system that has proven to be a very reliable basis for decision-making because it allows users to rank potential alternatives based on subjective assessments of criteria. in this paper, we present the gradual application of the ahp method when selecting suppliers in the supply chain. the only thing we can point out as a disadvantage in its application is the definition of decision criteria and assessment of their relative weights. this is so because with other multi-criteria analysis methods the importance of the criteria is determined by the decision-maker, and here we have a comparison of pairs that represent human decisions based on experiences from previous research. only after the comparison is a decision made. globalization of business, shortened product life cycle, constant growth of competition, but also the penetrating and increasingly present development of information and communication technologies have led to the development of the ahp method. the ahp method has gained in importance with the development of quality software. different software packages solve multi-criteria ranking and enable the use of sensitivity analysis. in this paper, we perform a multi-criteria selection of suppliers in the supply chain using the ahp method, but also the software package, in order to examine the importance and usability of computer tools. we analyzed three suppliers based on seven criteria and came to the following results: ▪ the criterion with the greatest importance for the company is the criterion k1 price with a score of 0.29, while the least attention when making decisions is paid to supplier audit (k6) 0.05. using spicelogic rational will software, the three most important criteria are defined in the following order: payment deadline, product quality and price. sensitivity analysis shows that there are changes (differences) in the weight of the criteria, but this did not affect the overall ranking when it comes to the position of the best alternative. we can conclude that the existence of a slight inconsistency in the weight of the criteria does not affect the overall system and the final decision. ▪ by comparing suppliers based on each of the criteria, we conclude that the ahp method and the spicelogic rational will software solution give the same results. recommendation for the selection of suppliers in the supply chain according to the software package is supplier 1 (59.16%), then supplier 2 (49.53%) and finally supplier 3 (49.07%). based on all the above, we conclude that the company is free to choose supplier 1 as the optimal 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https://bsrdjevic.tripod.com/download/1-4.pdf https://doi.org/10.1016/j.ejor.2004.04.028 https://doi.org/10.1080/00207543.2015.1079340 selection of suppliers in the supply chain 81 izbor dobavljača u lancu snabdevanja poslednjih decenija, funkcija nabavke definiše se kao integrisana strateška poslovna funkcija koja ima za cilj stvaranje visoke dodatne vrednosti zasnovane na odnosu fokusne kompanije u lancu snabdevanja sa svojim dobavljačima. izbor dobavljača u lancu snabdevanja je složen zadatak koji treba izvršiti na troškovno efikasan način i uz uvažavanje brojnih zahteva poslovne prakse. optimalan izbor dobavljača utiče ne samo na kvalitet proizvoda već i na formiranje njegove cene. pravilnim izborom dobavljača postići će se pravovremena, kontinuirana i kvalitetna proizvodnja. odluka o izboru dobavljača predstavlja višekriterijumski problem. za donošenje takve odluke koristi se veliki broj modela i tehnika. rad se bavi razvojem okvira za podršku prilikom odlučivanja i određivanja prioriteta dobavljača na osnovu kriterijuma. cilj rada je da prikaže elemente i specifičnosti primene analitičkog hijerarhijskog procesa kao jedne od tehnika donošenja odluka sa više kriterijuma i softverskog paketa spicelogic ration will kao i njihovu relevantnost za izbor dobavljača. pored toga, rad na osnovu analizirane literature ukazuje na kriterijume koji se koriste prilikom izbora dobavljača. dobijeni rezultati su pokazali da je dobavljač 1 najvažniji među analiziranim dobavljačima. primena softverskog paketa spicelogic je opravdana, jer predloženi paket pruža platformu za proizvođača da bolje razume sposobnosti koje održivi dobavljači moraju da poseduju kako bi nastavili saradnju sa njima i uspešno upravljali lancem snabdevanja. ključne reči: izbor dobavljača, lanac snabdevanja, ahp metod, softverski paket. 11105 facta universitatis series: economics and organization vol. 19, no 4, 2022, pp. 273 283 https://doi.org/10.22190/fueo220915019s © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper carbon accounting in the public sector – challenges, approaches and perspectives for municipalities1 udc 551.58:504.7]:657 maja stojanović-blab1, milena lutter2*, daniel blab2 1city of regensburg, internal audit department, germany 2university of regensburg, faculty of business, economics, and management information systems, germany orcid id: maja stojanović-blab https://orcid.org/0000-0002-1389-5080 milena lutter n/a daniel blab n/a abstract. nowadays, combating climate change and its effects due to the anthropogenic greenhouse effect is one of the central challenges for society and politics in order to prevent further increase of greenhouse gases in the atmosphere and thus become climate neutral. an indispensable prerequisite for the selection, implementation and monitoring of the effectiveness of measures to reduce greenhouse gas emissions is the measurement and accounting of emissions through the implementation of a carbon accounting system. compared to companies, the topic of carbon accounting at the municipality level has so far received less public attention. therefore, this paper deals with the specific challenges, the approaches and the perspectives of municipal carbon accounting. key words: carbon accounting, greenhouse gas emissions, municipalities, climate changes jel classification: h83, q56 received september 15, 2022 / accepted november 14, 2022 * university of regensburg, graduate of the master of science, germany corresponding author: maja stojanović-blab city of regensburg, internal audit department, von-der-than-straße 13a, 93047 regensburg, germany | e-mail: stojanovic.maja@regensburg.de https://orcid.org/0000-0002-1389-5080 mailto:stojanovic.maja@regensburg.de 274 m. stojanović-blab, m. lutter, d. blab 1. introduction sustainability and sustainable development in general, as well climate protection in particular, are among the dominant issues of the 21st century. according to one of the oldest and most common definitions of sustainability, „sustainable development aims to ensure that the needs of the present are met without risking that future generations will not be able to meet their own needs” (un, 1987, chapter i 3 no. 27, p 15). the importance of the issue and its broad scope imply that sustainable development should be approached internationally. in september 2015, the united nations (un) member states adopted the agenda 2030 (un, 2015a). at the heart of the agenda are the 17 sustainable development goals (sdgs), which are further divided into 169 sub-goals (lorson & haustein, 2022). the municipality level is explicitly considered in the sdgs, with sdg 11 stating that cities and settlements should be made inclusive, safe, resilient and sustainable. measures for climate protection can be found in sdg 13 (koch et al., 2019). the main cause of climate changes is the human-induced greenhouse effect: human activities, such as the burning of fossil fuels, cause an increase in greenhouse gases in the atmosphere, leading to a steady global warming and ultimately to the problems of rising sea levels, increasing frequency of extreme weather, droughts and generally negative consequences for biodiversity and ecosystems. the un framework convention on climate change (unfccc) is considered to be the origin of international climate policy (un, 1992, unfccc). it was signed by 154 countries at the united nations conference on environment and development in rio de janeiro in 1992. by ratifying the convention, the industrialized countries undertake to continuously account for their greenhouse gases (ghg) and to report annually in an inventory, the national emissions inventory. this is because the key to limiting climate changes lies in reducing ghg emissions to the point of complete ghg neutrality. ghg neutrality or climate neutrality describes the state in which no net contribution to the concentration of greenhouse gases in the atmosphere is made, i.e. any emissions are either avoided or compensated. if this consideration refers only to the specific greenhouse gas co2, this is referred to as co2 neutrality (butler et al., 2015). in addition, a climate conference (conference of the parties, cop) has been held annually since 1992. a groundbreaking conference took place in kyoto in 1997 (cop3) with the adoption of the kyoto protocol (un, 1998). this set limits on ghg emissions for the first time. at the 2015 conference in paris (cop21), the paris agreement (un, 2015b) was reached, replacing the kyoto protocol, which expired in 2020, and committing its participants to limit global warming to well below 2°c and preferably to 1.5°c above pre-industrial levels. in december 2019, the european green new deal (european commission, 2019) was unveiled, making europe the first continent to become ghg neutral by 2050. increasingly, science and politics are warning that current efforts in the climate crisis fall far short of what is needed to curb the human-induced rise in temperature. this is clear from the current sixth assessment report of the intergovernmental panel on climate change (ipcc), in which the ipcc assesses the global residual co2 budget from the beginning of 2020 at around 400 gigatons, compliance with which will enable the 1.5 °c target to be achieved with a probability of 67% (ipcc, 2021). carbon accounting in the public sector – challenges, approaches and perspektives for municipalities 275 2. fundamentals of carbon accounting as an indispensable prerequisite for ghg mitigation measures, carbon accounting leads to a ghg balance sheet or inventory through the measurement and reporting of emissions (brohé, 2016). in this context, the term carbon footprint is often used. the fundamental issue here is which greenhouse gases are to be recorded. natural and anthropogenic greenhouse gases account for less than 1% of the components of the atmosphere, since their main components, measured by volume fraction, are nitrogen at 78.08% and oxygen at 20.94% (bridgman, 2005). important natural greenhouse gases are hydrogen, carbon dioxide (co2), methane (ch4), ozone and nitrous oxide (n2o). in addition, there are fluorinated greenhouse gases, so-called f-gases, which are exclusively caused by humans (brohé, 2016). hydrogen or ozone occur in large quantities, but unlike the other greenhouse gases, they play only a minor role in the anthropogenic greenhouse effect. the political targets for greenhouse gas reduction are based on the kyoto protocol of 1997. this initially anchored six greenhouse gases to be documented: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons (hfcs/hfcs), perfluorocarbons (hfcs/pfcs) and sulfur hexafluoride (sf6) (chang & bellassen, 2015). at the 18th un climate change conference in doha in 2012, the harmful gas nitrogen trifluoride (nf3) was added to the list for the upcoming second period of the kyoto protocol (un, 2012). consequently, the accounting should, as far as possible, not only take into account co2 or carbon compounds, as the term "carbon accounting" might suggest, but also the other relevant greenhouse gases. in order to determine a total quantity of ghg emissions, the values of all greenhouse gases considered in the balance must first be converted into a common unit (brohé, 2016): since co2 has the greatest significance for the anthropogenic greenhouse effect, this gas is used as the reference value. all greenhouse gases are converted into co2 equivalents (co2e) according to their relative global warming potential (gwp). the gwpn is the ratio of the contribution of a specific gas to the greenhouse effect over a given period n to the corresponding contribution of co2. current calculations of co2 equivalents are regularly based on the determined gwp of the ipcc. ch4, for example, has a gwp100 of 28 and thus 28 times the effect of co2 over the period of 100 years (uba, 2020). in detail, the calculation is technically complex and offers room for discussion at many points. for example, in order to prepare a ghg balance, the so-called inventory boundaries must be defined in order to delimit for which subsystem, for which geographical area and for which time period the effects are to be recorded. the issues of completeness and responsible allocation of ghg emissions are also much discussed, with two different approaches to accounting. according to production-based accounting (territorial accounting), all emissions that are emitted within the spatial boundary of a considered territory are included in the balance. emissions from the export of locally produced goods are included, while emissions related to imported goods are excluded (peters, 2008). in contrast, consumption-based accounting includes all emissions caused by all consumption within the territory under consideration, even if they are emitted outside the territory. the choice of methodology undoubtedly has important implications for the level of ghg emissions identified (hoornweg et al., 2011). territorial accounting is the predominant approach in practice and is also the subject of national emissions inventories to be prepared under the unfccc, which follow the ipcc accounting rules (ipcc, 2006). 276 m. stojanović-blab, m. lutter, d. blab 3. the role of municipalities in climate change due to increasing urbanization and the associated energy consumption and co2 emissions, municipalities are contributing their share to climate change. at the same time, the negative effects of climate change are directly felt in cities through extreme weather events, such as flooding caused by heavy rainfall, water shortages, heat waves, or changes in the microclimate and the creation of heat islands (cutter et al., 2012; wbgu, 2016). this proximity to the problem also results in proximity to the solution, providing good reasons for climate protection efforts and ultimately for carbon accounting in municipalities. through politically close contact with citizens, municipalities can mediate between different interests, promote citizen participation and increase the acceptance of measures (difu, 2018). to take advantage of opportunities to share information and scale activities, municipalities can also form networks internationally; among the largest are the climate alliance, with 1,915 members from 27 mostly european countries (climate alliance, 2022), and the global covenant of mayors for climate & energy (gcom), with approximately 12,500 cities (gcom, 2022) representing over one billion people, nearly one-eighth of the world's population. 3.1. approaches to the design of carbon accounting at the municipal level with the growth of climate protection as a separate municipal area of responsibility, the first local energy supply concepts were developed in the 1980s and 1990s, specifically including measures for the economical use of energy (blümling, 2000; müschen, 1998). internationally, there was no leading carbon accounting standard at the municipal level for a long time. instead, many independent attempts existed to design a suitable approach, which meant that the comparability of ghg balances suffered (for example hillman & ramaswami, 2010; sovacool & brown, 2010). it should be noted that the ghg accounting of municipalities is not limited to the activities of the central administrative unit or the accounting of municipal enterprises, but includes all activities in the geographical area of a municipality. in the following, an international standard for ghg accounting will be presented. 3.2. global protocol for community-scale greenhouse gas inventories since 2014, the global protocol for community-scale greenhouse gas inventories (gpc) has been an internationally recognized and practiced accounting standard, revised in 2021 as version 1.1. it is an adaptation of the ghg protocol corporate standard developed for companies to the community level. it was developed by three organizations, the world resource institute (wri), the c40 cities climate leadership group and iclei local governments for sustainability, in cooperation. the gpc standard aims to provide assistance in preparing a comprehensive ghg balance sheet to support municipal climate protection planning. the gpc standard consists of three parts and a likewise three-part appendix with supplementary information. part 1 describes the basic requirements for accounting, in addition to an introduction to the development and purpose of the gpc. part 2 contains the specific guidelines for calculating ghg emissions, since for the majority of activities emissions cannot be measured directly and therefore must be estimated using activity data and emission factors (e.g., using the ipcc's emission factor database (efdb)). carbon accounting in the public sector – challenges, approaches and perspektives for municipalities 277 finally, part 3 deals with ghg emissions mitigation goal setting and monitoring the implementation of these goals. furthermore, it deals with the management of the quality of ghg balances and the possible verification. 3.2.1. accounting in accordance with the gpc standard a city's ghg inventory should follow the general accounting principles of relevance, completeness, consistency, transparency, and accuracy (wri et al., 2021). inventory boundaries are derived from the geographic area (e.g., administrative sphere of influence or actual city boundary), time period (e.g., one year), the seven kyoto protocol ghgs to be covered, and emission sources. emission sources are categorized into the six sectors of stationary energy, transportation, waste, industrial processes and product use (ippu), agriculture, forestry and other land use (afolu), and other scope 3 emissions; additional subsectors are possible. in addition to the categorization, emissions are divided into three scopes (wri et al., 2021), see also figure 1: ▪ scope 1 emissions are emissions emitted within the city boundary, allowing aggregation at the regional or national level without double counting. ▪ scope 2 emissions result from the use of electricity, heating, water vapor, and cooling within the city boundary, with emissions from generation originating outside the city boundary. ▪ scope 3 emissions occur outside the city boundary, but as a result of activities within the city boundary. the inclusion of scope 3 emissions in the ghg balance is largely optional due to the difficulty of obtaining and preparing data. scope 3 emissions are also referred to as upstream emissions, or gray emissions, which occur during the extraction, production, and transportation of energy sources or products and services consumed by city residents (hoornweg et al., 2011). the decision on the scope of included scope 3 emissions has an enormous impact on the total amount of emissions accounted for, as this category is mostly the largest item. in one study of eight u.s. cities, the inclusion of the scope 3 category increased total ghg emissions by fig. 1 relationship between inventory boundaries and scopes in the gpc standard source: wri et al., 2021, p. 36. 278 m. stojanović-blab, m. lutter, d. blab 47% on average (hillman & ramaswami, 2010). in terms of accounting approaches, the scope 1 category clearly corresponds to a pure territorial accounting according to production-based accounting, while the other two scope 2 and 3 categories follow the consumption-based accounting perspective (hoornweg et al., 2011). the gpc standard basically distinguishes between two different but complementary frameworks, the scopes framework and the city-induced framework (wri et al., 2021). the former intends to report all emissions from activities within the city boundary by categorizing emissions by scopes. the latter allows accounting entities to choose between reporting according to levels known as basic and those known as basic+. these represent a different scope and level of detail, as each includes only certain scope 1-3 emissions from selected categories (wri et al., 2021). figure 2 shows the sources and scopes covered by the gpc. 3.2.2. stationary energy scope 1 includes emissions from the combustion of fuels in buildings and industry and fugitive emissions from the extraction, conversion, and transport of fossil primary energy sources. scope 2 emissions from this sector result from the consumption of energy from the regional or national grid. scope 3 includes emissions from proportional losses in the transmission and distribution of energy (wri et al., 2021). the stationary energy sector contains a total of nine subsectors, such as residential, commercial/public buildings, parts of manufacturing, parts of the energy industry, parts of agriculture/forestry/fisheries, fugitive emissions from the processing of coal, and those from the processing of oil and natural gas (wri et al., 2021). there is an additional residual category for unspecified emission sources. emissions from energy production in the city, which is fed into the grid from there, represent a special case. these emissions are only taken into account when forming a sum of all scope 1 emissions. however, they are neglected when determining scope 2 emissions in order to avoid double counting (wri et al., 2021). for the building subsectors, there is guidance on dealing with mixed-use buildings (wri et al., 2021). manufacturing industries include emissions from the combustion of energy sources in stationary facilities or off-road transportation within the industrial site. if possible, they can be further subcategorized by industry. for this subsector in particular, the standard provides several examples to distinguish it from other sectors (wri et. al., 2021). in the energy industry, three activities are distinguished: the production of primary energy sources, their subsequent processing and transformation, and ultimately the production of energy that is fed into the grid. separate discussion is given here to cogeneration, trigeneration, energy production from waste, and bioenergy (wri et al., 2021). in the agricultural sector, for example, emissions are generated during the use of agricultural machinery and generators (wri et al., 2021). fugitive emissions occur during the extraction, conversion, and transportation of fossil fuels. these processes are broken down separately for coal and for oil and natural gas (wri et al., 2021). carbon accounting in the public sector – challenges, approaches and perspektives for municipalities 279 fig. 2 sources and scopes covered by the gpc source: wri et al., 2021, p. 41. scope 1 emissions from fuel combustion are obtained by multiplying the emission factor of an energy carrier by its consumption, which represents activity data (wri et al., 2021). energy consumption is determined using factors that indicate the average locationspecific energy production (location-based method). for activity data of scope 2 energy 280 m. stojanović-blab, m. lutter, d. blab use emissions, utilities or surveys can provide actual consumption values. otherwise, national data modeled or scaled via building types provide relief (wri et al., 2021). scope 3 emissions are calculated by multiplying those scope 2 energy consumptions by a loss factor (wri et al., 2021). 3.2.3. transportation the classification of emission sources in the transport sector is complicated by the fact that traffic often crosses borders. basically, scope 1 includes emissions from fuel combustion of all passenger and freight transport within the city boundary. scope 2 includes emissions from electricity consumption for electric vehicles at intra-city charging stations. scope 3 includes the shares of emissions from cross-border trips that are outside the city boundary, as well as any emissions from a port or airport. similar to the stationary energy sector, scope 3 also includes emissions from the proportionate losses in the transmission and distribution of energy that are attributable to electric vehicles (wri et al., 2021). the five types of transportation – road, rail, water, air, and off-road – make up the subsectors of the transportation sector (wri et al., 2021). for each of the five transport types, very detailed information is provided in the standard. for the calculation of road transport emissions, for example, there are four methods to choose from (wri et al., 2021). the first method works top-down and uses total intraurban fuel sales as a measure of transportation activity (fuel sales method). the other three methods are bottom-up oriented. they are based on the so-called asif model (activity, mode share, intensity, fuel). according to this model, emissions are calculated by multiplying the mileage by the fuel consumption and the emission factor. for the second method, the number and length of all trips must be known. then, all intra-urban and 50% of the cross-border trips are accounted for (induced activity method). the third method corresponds to a classical territorial balance and thus includes all transport activities within the city boundary (territorial method). the fourth method includes all transport activities of residents and is therefore comparable to a consumer balance (resident activity method). transport activity data can be obtained from surveys, by modeling, by asking the relevant institutions or by scaling regional and national data (wri et al., 2021). 4. summary and outlook for further challenges the paper concludes that at the municipal level, the characteristics of the institution of the municipality as well as the specific purpose of the ghg balance must be in the foreground. this is because a municipal ghg balance mainly forms the control and decision-making basis for the implementation of measures to achieve climate and emission targets. priority must therefore be given to recording scope 1 and 2 emissions as correctly and accurately as possible. only when these necessary prerequisites have been met can and should municipal carbon accounting be expanded to include scope 3 and consumptionbased emissions. in addition to selecting suitable accounting approaches for a ghg inventory, municipalities face further challenges. it is often not possible to obtain all the necessary data at the municipal level in a sufficiently disaggregated form. the primary goal is always to achieve the highest possible data quality, which increases the fewer estimates carbon accounting in the public sector – challenges, approaches and perspektives for municipalities 281 and scalings have to be made. to achieve a high proportion of primary data, intensive cooperation with various local institutions and authorities is necessary (difu, 2018). another key aspect for municipalities is the question of financing. municipalities have limited financial resources for the accounting of ghg emissions and the subsequent implementation of mitigation measures. this also applies, for example, to the hiring and training of personnel. although financing is undoubtedly a major challenge, it must be borne in mind that any damage caused by failure to take climate protection measures will be associated with significantly higher costs in the future (gouldson et al., 2015, p. 5: “overall, local climate protection measures pay off and lead to considerable savings in the long run”). the sluggish development of municipal carbon accounting is also due to the lack of binding reduction targets and the lack of obligation. as an aspect of climate protection, carbon accounting fits into the catalog of tasks of a municipality as a voluntary selfgoverning task (kern et al., 2005). related to the challenge of financing, it competes with investments in other voluntary tasks, such as culture and sports. consequently, in municipalities, a limited additional benefit faces potentially enormous additional costs, creating an incentive problem for carbon accounting (cochran, 2015). consequently, the fact that climate protection, carbon accounting and the widespread diffusion of climateneutral alternatives are associated with economic benefits and other additional benefits, such as improved air quality, ecosystem protection or noise abatement, which increase the quality of life for the municipality's citizens, is all the more important. in order to work towards a targeted reduction of emissions, the carbon accounting system should be integrated into a holistic carbon management cycle. after the analysis of the actual state, which in this case is done by the municipal carbon accounting and the resulting ghg balance, the five classic stages of the management cycle follow: goal setting, planning, decision, realization and control (lorson & haustein, 2022). to increase transparency regarding ghg emissions and achieved reduction targets, the ghg balance can be embedded in voluntary sustainability reporting. in this way, a municipality's sustainability efforts could be presented in a bundled way and accounted for as 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(2011). carbon footprinting for climate change management in cities. carbon management, 2(1), 49-60. https://doi.org/10.4155/cmt.10.41 računovodstveno obuhvatanje emisija ugljen dioksida u javnom sektoru – izazovi, pristupi i perspektive na nivou grada/opštine u današnje vreme borba protiv klimatskih promena i njenih efekata zbog antropogenog efekta staklene bašte jedan je od centralnih izazova za društvo i politiku u cilju sprečavanja daljeg povećanja emisija ugljen dioksida u atmosferi i ostvarenja klimatske neutralnosti. neizostavni preduslov za izbor, implementaciju i praćenje efikasnosti mera za smanjenje emisije gasova sa efektom staklene bašte je merenje i obračun emisija kroz implementaciju računovodstvenog sistema obuhvatanja tih emisija. u poređenju sa preduzećima, tema računovodstvenog obuhvatanja emisija ugljen dioksida na nivou jednog grada ili opštine do sada je privukla manju pažnju javnosti. stoga se ovaj rad bavi specifičnim izazovima, pristupima i perspektivama računovodstvenog obuhvatanja emisija ugljen dioksida na nivou jedne opštine. ključne reči: računovodstveno obuhvatanje emisija ugljen dioksida, emisije gasova sa efektom staklene baste, grad/opština, klimatske promene https://doi.org/10.4155/cmt.10.41 facta universitatis series: economics and organization vol. 16, n o 1, 2019, pp. 89 101 https://doi.org/10.22190/fueo1901089j © 2019 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper the role of audit and credit rating agencies in the assessment of company creditworthiness with special focus on banks  udc 657.6:347.734 mirjana jemović, milica đorđević, jelena radojičić unversity of niš, faculty of economics, niš, serbia abstract. audit and credit rating agencies have a significant responsibility in assessing company creditworthiness and giving opinions on the client’s ability to continue business in the future, most often the next fiscal year. responsibility is even greater when it comes to banks and their creditworthiness. the financial crisis of 2007 and the bankruptcy of a number of banks and other financial institutions imposed a need to seek accountability for the “delayed” reaction of regulatory bodies and significant fiscal consequences of the crisis. the aim of the paper is to evaluate the efficiency of credit rating agencies and external audit in assessing the creditworthiness of companies and banks, not for the purpose of finding their individual responsibilities, but to look at possible coordinated and joint actions to prevent future crisis events. key words: credit rating agencies, external audit, creditworthiness, financial crisis jel classification: g21, g24, g28, m42, m48 introduction investors make investment decisions based on information they have about company creditworthiness. for these reasons, companies listed on the stock market are obliged to report on their operations by publishing their financial statements. in order to reduce information asymmetry between issuers of securities and investors, numerous bodies and agencies assess company creditworthiness. a special emphasis in this paper is given to the role and importance of external audit and credit rating agencies in assessing possible company bankruptcy. the auditor’s task is, among other things, to assess whether there is a realistic prospect that the company will continue its business in the following period, at least in the received september 10, 2018 / revised january 16, 2019 / accepted january 28, 2019 corresponding author: mirjana jemović faculty of economics niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: mirjana.jemovic@eknfak.ni.ac.rs 90 m. jemović, m. đorđević, j. radojiĉić next fiscal year, and present the so-called going concern opinion (gco). at the same time, credit rating agencies give opinions on the company ability to settle its liabilities to creditors in a timely and complete manner. the financial crisis of 2008 raised the issue of the responsibility of auditors and credit rating agencies for initiating and spreading the crisis by giving optimistic estimates of company creditworthiness immediately before their bankruptcy. in this regard, the paper aims to assess the role of audit and credit rating agencies in assessing company creditworthiness, with special focus on banks. the structure of the paper, in addition to introduction and conclusion, consists of four parts. the first part presents alternative approaches to the assessment of company and bank creditworthiness. the second and third sections consider the role of audit and credit rating agencies in anticipating bankruptcy of companies and banks, while the final part of the paper analyzes the impact of the global financial crisis on the redefining role of credit rating agencies and audit in assessing the company creditworthiness, with the aim of their cooperation, rather than isolated activities in the future. 1. approaches to the assessment of company and bank creditworthiness assessing creditworthiness of companies in general, and banks in particular, is a very sensitive task. basically, it implies assessing the ability of a particular entity to continuously perform the activities for which it was founded. as such, it involves an analysis of various aspects of company operations, taking into account its liquidity, efficiency, and solvency. among them, the most important aspect of the analysis when deciding on the continuity of business activities is the assessment of company solvency. solvency is especially important with banks, given that these are institutions that finance most of their activities (80%-90%) using other people’s resources. in addition to being a condition for bank establishment, solvency also represents the criterion for intervention in the banking sector. as this involves bank restructuring measures or its exit from the market through bankruptcy/liquidation procedure, the following question arises: what are the threshold conditions, as the basis for intervention of the relevant regulatory body? solvency can be determined in different ways. thus, we distinguish “liquidity test”, based on the cash flow test, according to which the company is insolvent in a situation when it is unable to settle its due liabilities (equity insolvency), and balance sheet insolvency, according to which the company is insolvent when its liabilities exceed assets, i.e. in case of negative net value. the first test rather corresponds to what is commonly called “illiquidity” and it is not relevant to banks since they can quickly overcome the shortterm deficit of funds, while the second test entails a delayed reaction by the regulatory authority and implies the initiation of a bankruptcy or liquidation procedure. as the supervisory authorities are in charge of controlling and monitoring bank operations, it is their duty, in a situation when they see the tendency of bank capital reduction, on the one hand, and the deterioration of the quality of assets, on the other hand, to propose appropriate bank restructuring measures. therefore, the bank is insolvent when the supervisor says it is insolvent (hupkes, 2005). here we are talking about the so-called regulatory insolvency, which allows the intervention of the regulatory authority much before the net value of the bank’s assets reaches a negative value (ĉihak & nier, 2012). previous arguments indicate that the supervisor is responsible for identifying the optimal moment for bank intervention. the question is what is the point, i.e. threshold to the role of audit and credit rating agencies in the assesment of company creditworthiness... 91 be crossed, which requires the restructuring of the institution? this threshold should be set so that the position of the institution is significantly compromised, but that it is still solvent, i.e. that it has a positive net value. this is extremely important given that postponing bank restructuring may result in narrowing the choice of effective options for restructuring the institution, which ultimately increases the costs of this process. depending on how the intervention “threshold” is defined, we distinguish a hard and soft approach, the first being based on a predefined rule for intervention, and the second implying a greater degree of discretion. the first approach generally involves quantitative determination of the intervention threshold. thus, the us federal deposit insurance corporation (fdic) defines intervention threshold by determining the lower limit of capital adequacy ratio of 2%. the second approach, however, implies a qualitative determination of the intervention threshold (e.g. violation of laws, failure to comply with prudential or regulatory thresholds, supervisory orders, etc.), and is based on the regulatory authority’s assessment of the bank’s ability to further perform the activities for which it was licensed (ĉihak & nier, 2012). such an approach is applied in the uk. when choosing an appropriate approach, it should be kept in mind that a rule-based approach reduces the possibility of regulatory hesitation and increases transparency, while discretionary approach provides an opportunity to see banking failures from a broader perspective and provides a more complete assessment of the institution’s situation. discretion is particularly suitable for quick action in a situation where the financial institution’s state of affairs is rapidly deteriorating, for example, for losing access to key market segments of the source of funds, which in quantitative thresholds may not be adequately valued. for these reasons, these approaches are often combined. bank closure, although sometimes the only solution, leaves many negative consequences. specifically, the reduced supply of banking services within a national economy ultimately has a negative impact on the overall economic development of the country. for these reasons, the competent regulatory authority should at any time assess whether a better solution is the restructuring of a financial institution in order to keep it going (going concern), or its closure through liquidation/bankruptcy (gone concern). in giving such assessments, external audit and credit rating agencies play an important role, which will be discussed below. 2. the role of audit in predicting company bankruptcy financial statements that show the financial and income position of the company are at the same time one of the ways of expressing the management responsibility (farhana, et al., 2017, p.33). with this in mind, the use of creative accounting techniques to project a good company image, all with the aim of attracting new investment, is not a novelty in accounting practice. therefore, audit of financial statements, aimed at assessing whether financial statements are, in all essential matters, drawn up in accordance with the identified financial reporting framework, is of particular importance, as it affects the decision on whether to rely on them in the analysis. by reducing the information asymmetry between agents that supply and demand for capital, audit improves investors’ awareness about the risk of investing in a specific company (kondić & poljašljević, 2015), and it is not uncommon to hear that auditors stand for significant truth creators whose objective communication of the company situation enables the making of rational investment decisions (sikka, 2009). 92 m. jemović, m. đorđević, j. radojiĉić certainly, audit contribution to the successful capital market is conditioned by the adequacy of the audit process itself (george-silviu, melinda-timea, 2015). in addition to a detailed and independent review of financial statements, one of the most relevant judgments of auditors that can influence the capital market (blay, et al., 2011) is auditor’s assessment and expression of an opinion on the client’s ability to continue their business in the foreseeable future (in practice defined as the next fiscal year). first, auditors need to evaluate whether managers prepared financial statements based on the principle which all accounting standards rely on – the principle of business continuity, and then to obtain audit evidence in order to conclude that there are material uncertainties about the entity’s capability to continue business on a principle of continuity. the auditor’s opinion in which the client’s business continuity is endangered can be considered a very serious warning that the company will experience bankruptcy. within the scope of the audit process, assessing the client’s business continuity assumption is a very complex, difficult, and two-phase process. first, the auditor needs to identify possible problems related to the client’s business continuity (which reflects their competence), and then report on this problem (which is a reflection of their independence). the auditor’s ability to identify problems is conditioned by the possession of an adequate experience, a significant focus on the assessment of business continuity, increased public pressure, focus on future events, ownership of resources, etc. regarding the issue of disclosure of identified problems, the auditor will report if they face a high level of independence, if they want to avoid possible litigation and have an aversion to reputational risk. bearing in mind these factors, but also the fact that they cannot anticipate future events with certainty, the auditor can make two types of errors:  type i error – when the auditor doubts the company business continuity, and the company continues to operate, and  type ii error – when the auditor issues an unmodified opinion without drawing attention to the matter, and the client goes bankrupt or faces liquidation next year. the consequences of auditors’ errors are significant. in the case of a type i error, the auditor is at risk of losing further cooperation with the client, while the company may be harmed in terms of declining reputation on the capital market, losing investors, etc. on the other hand, the type ii error consequences are reflected in the loss of auditor reputation and the client’s decision to file a lawsuit. nevertheless, lai (2009) argues that the consequences of the type ii error are much more serious and far-reaching. this is supported by the fact that auditors issued an unmodified opinion on the financial statements of companies that were at the center of financial scandals 1 . this aroused considerable big suspicion about auditing profession because many thought that the collapse of those companies could have been avoided if auditors had not been wrong and had given warnings about the bad state of the companies that later went bankrupt. in addition to these scandals, auditors were also criticized in 2008 for failing to warn of the upcoming bank collapse that marked the onset of the financial crisis. in this sense, financial scandals and then the crisis suggested the existence of “possible problems in achieving greater independence of auditors and the need to improve audit procedures, especially with regard to auditing the business continuity assumption” (socol1, 2010, p. 291). therefore, the international auditing and assurance 1 examples of large audit failures relate to enron and world com. as a result of accounting frauds, these companies were bankrupt, while arthur andersen audit firm previously issued a positive opinion on the financial statements. the role of audit and credit rating agencies in the assesment of company creditworthiness... 93 standards board (iaasb) carried out several revisions of the 570 standard – the business continuity principle (the last revision was carried out in 2015), and issued reports that paid more attention to and gave a new description of the responsibilities of auditors and management in relation to this assumption. in this regard, the company management is obliged to evaluate the company ability to continue its operations based on the business continuity principle (ias 1), while the auditor should evaluate the management’s assessment of the company ability to continue its business. in the course of this evaluation, the auditor should include the same period that the management has observed and consider whether the management’s assessment covers all the relevant information that the auditor has come to during the audit. in addition, the auditor’s objectives are to (isa 570, par. 9):  obtain sufficient and adequate audit evidence and make conclusion on the appropriateness of applying the accounting principle of business continuity,  make conclusion as to the material uncertainty in relation to events or conditions that may cast significant doubt on the ability of the entity to continue its business, and  make a report in accordance with the conclusion. in assessing the company’s ability to continue its business, auditors use different techniques. the most common are the so-called accounting-based valuation models that use statistical methods to predict company bankruptcy, mostly relying on data contained in the client’s financial statements, i.e. the analysis of traditional financial statements. thus, during the 1970sand 1980s, altman’s model, the ohlson model, and the zmijewski model were developed. later, information technology enabled the development of advanced techniques such as data mining, intelligent modelling techniques, and neural networks. factors that affect the auditor’s opinion to draw attention to the threat of business continuity are numerous. carson et al. (2013) summarize the results of numerous studies, and, apart from auditor characteristics (independence from the client, professional relationship with the client, high judgment ability, etc.), all the factors on the client’s side are divided into the following:  business difficulties that are evident from financial statements: low profitability, high leverage, low liquidity, high level of indebtedness, and drawing attention to business continuity in previous audits,  business difficulties identified on the basis of (1) market variables (lower industry-adjusted returns and higher return volatility); and (2) management plans to issue equity and plans to borrow,  large negative accruals reflecting the weak financial conditions in the company,  high quality of corporate governance: a higher level of independence of the audit committee and higher expertise in corporate governance also imply greater auditor protection from the cancellation of further engagement after doubts as to business continuity,  the carrying amounts of assets in financial statements are high relative to their expected realizable values in the event of bankruptcy. depending on the evaluation of the management’s assessment of the company's ability to continue business, as well as the established facts and circumstances in the company, the auditor issues an appropriate opinion (table 1). 94 m. jemović, m. đorđević, j. radojiĉić table 1 the connection between going concern assumption and the auditor’s opinion the management’s uses of going concern assumption material uncertainty (whether the events or conditions constitute a material uncertainty) the adequacy of related disclosures in the financial statements auditors’ opinion appropriate does not exist adequate unmodified opinion appropriate exists adequate unmodified opinion (but have to include an emphasis of matter paragraph in the auditor’s report) appropriate exists disclosures are not made qualified opinion or adverse opinion inappropriate exists unimportant adverse opinion inappropriate material uncertainties are significant to the financial statements as a whole unimportant disclaimer of opinion source: adapted after isa 570 investors and other users believe in the credibility of the audit opinion. however, the fact is that giving opinions about business continuity is very challenging for auditors because it involves the prior implementation of very complex activities while preserving independence. in that sense, the research subject by numerous authors is the prediction ability of audit opinions regarding the client’s business continuity. kondić and poljašević (2015) summarize the results of these studies and conclude that the prediction role of the audit opinion is relatively limited, but still with a significant positive effect on the financial stability of the company and its position on the capital market. more specifically, the inclusion of an emphasis of matter paragraph on business continuity provides valuable information to investors on the risks that they may encounter in investing in a particular company. in order to get the audit opinion that is reliable and with greater predictive power, the place and role of credit rating agencies are increasingly analyzed in this process. more specifically, auditors and credit rating agencies focus on the same task, assessing the company’s creditworthiness, so it is very important to note possible ways of their cooperation. 3. the role of credit rating agencies in the assessment of company and bank creditworthiness the main role of credit rating agencies is to give an opinion on the ability of a specific entity (company, state, local self-government) to timely and fully settle its obligations towards creditors. in a word, the rating agency’s task is to give an opinion on the legal entity’s overall credit risk (issuer credit rating), assessing the ability and willingness of a particular public or private entity to settle its obligations, or regarding a financial instrument (issue credit rating), assessing the credit risk of a particular security. in the second case, the rating agency first assigns a rating to a company that issues securities, and then rates a particular security. here, the sovereign credit rating is especially the role of audit and credit rating agencies in the assesment of company creditworthiness... 95 important, bearing in mind that government securities are a benchmark in determining the return on securities of other entities. the assigned credit rating can be changed over time, in case certain factors from internal and external environment in which the borrower operates are not looked at during the initial credit rating analysis, and may affect its ability to settle its obligations. the basis for the existence of these institutions lies in the information asymmetry that exists between issuers of securities, on the one hand, and investors, on the other. this problem was initially not so apparent as there were state and local government bonds on the market. however, the offer of an increasing number and types of securities, primarily private ones, imposed the need for investors to base their decisions on agencies’ ratings. this information has become an indispensable element in making investment decisions, primarily of smaller investors who were not able to come to information about the company creditworthiness in some other way. credit rating agencies are relatively young institutions that first appeared on the us market at the beginning of the 20 th century, when there was an increased need to finance the railway construction. in the short term, by the end of the 20 th century, rating agencies experienced explosive growth, given the growing number of ratings assigned. among them, three credit rating agencies took the highest market share (as much as 95%), s & p, moody’s, and fitch, respectively. in addition, the us securities and exchange commission (sec) began the practice of nationally recognized statistical rating organizations (nrsros), which further concentrated the rating agency market. the widespread use of agency ratings also came out of simplicity of interpreting the ratings, where one symbol sublimates the total entity or security credit risk (kožul, 2012). the first four letters of the alphabet (a-d) are used to denote the credit rating of a particular security, where the classification is done according to the degree of risk in two grades: investment and speculative (table 2). within the defined grades, ratings are hierarchically set, from the highest to the lowest. table 2 s & p, fitch and moody’s ratings rating s&p/fitch moody’s investment grade aaa aaa aa aa a a bbb baa speculative grade bb ba b b ccc caa cc ca c c d source: standard&poor’s, 2018 (www.spratings.com); moody’s, 2018 (https://www.moodys.com/pages/amr002002.aspx); fitch, 2018 (https://www.fitchratings.com/site/definitions) regulatory authorities at the international and national level strengthened the position of credit rating agencies, by adopting regulations that limit the investment activity of certain financial institutions exclusively to securities with high credit ratings. for 96 m. jemović, m. đorđević, j. radojiĉić example, contractual savings institutions (insurance companies and pension funds) have a strictly defined investment policy characterized by elements of prudence and security of investment, which means investing in securities with small but secure return, i.e. in securities with high credit rating (jovanović, 2013, p. 255). similar rules are embedded in banking laws, in the sense that banks can invest exclusively in securities with investment rating. ratings have significant implications on the stock market, in the sense that stock prices rise in conditions of credit rating growth, and vice versa in the event of a downturn. the significance of credit rating agencies and their ratings was especially evident with the securitization of mortgage loans and the emergence of derivative securities. in recent years, ratings have also been used as an instrument for the supervision and regulation of entities and institutions operating on the financial market (pavković & vedriš, 2011). the rating agencies themselves are, on the other hand, poorly regulated. in order to facilitate issuers’ access to the capital market and allow for more favorable indebtedness, rating agencies made “settlements” with issuers, which resulted in higher rating of their securities. as compensation, credit rating agency received a fee from the issuer higher than that paid by investors (issuer pays vs. subscriber pays). this type of compensation was especially apparent with the appearance of structural products, i.e. securities issued in the process of securitization of mortgage loans. the situation in which the rated firms actually pay for rating raised suspicion as to the independence of rating agencies and the objectivity of the ratings given. in addition, market globalization brought higher ratings to global companies compared to the sovereign, which put pressure on the rating agency to give sovereigns a more favorable rating (kožul, 2012). providing advisory services by rating agencies is another reason for questioning the independence of rating agencies. a system in which investors as primary rating users are in a more unfavorable situation than issuers, and where issuers actually “order and buy” ratings, has created the basis for numerous abuses by credit rating agencies. the first case of such abuse was recorded with enron, which was assigned investment rating immediately before its bankruptcy. a similar situation took place during the financial crisis of 2008, in the case of lehman brothers. specifically, the rating agency assigned this institution an investment rating, and as an argument for such a rating stated the open willingness of the fed to provide liquidity support to this institution. although the investment bank does not have the exclusive right to use a discount counter or any other financial safety net, such an intervention is often considered justifiable in the case of too big or too systemic to fail institution. in addition, errors were made in the rating of structural products (derivative mortgage securities) of this investment bank. the existence of insurance and external and internal guarantees, in particular the presence of numerous participants in the process of securitization of mortgage loans, concealed the risk that investors may be exposed to by purchasing such securities. bankruptcy of this investment bank only a few months after the favourable rating has given opened polemics about the accuracy and reliability of ratings. investors that invested considerable amounts into securitized securities of this investment bank found themselves in the position of impossibility to sell these securities. bearing in mind that audit companies made a mistake in giving gco to enron, a question arose as to who was responsible for not seeing bankruptcy on time in the latest financial crisis: credit rating agencies or audit firms. the role of audit and credit rating agencies in the assesment of company creditworthiness... 97 4. global financial crisis and reviewing the role of credit rating agencies and audit in the assessment of company creditworthiness the relationship between credit rating agencies and audit was particularly pronounced with the recent financial crisis, which led to the constant search for a “culprit” for the untimely signalling of the bankruptcy of a number of companies in the financial sector. bearing in mind that credit rating agencies and auditors, based on the information they possess, try to assess the company’s ability to continue operations, their approaches are quite different. credit rating agencies focus primarily on credit risk, while auditors focus on assessing the reliability and accuracy of financial statements as a whole. in addition, all companies listed on the stock market are by law subject to audit, while such an obligation does not exist in the case of credit rating agencies. nevertheless, investors appreciate agency ratings much more than a set of accounting variables (cha, et al., 2016). bearing in mind that credit rating agencies do not aim to evaluate the viability of a particular investment, but the ability of a particular entity to settle the debt, such an assessment could be a significant input to the auditor in giving the gco. on the other hand, prior to assessing the company creditworthiness, rating agencies most often state as a condition that the company has been subject to audit in the previous three years. this is because financial statements are more and more difficult to understand and often contain incorrect and unreliable data (mrvić, et al., 2016). despite numerous criticism of credit rating agencies, they were not subject to special regulations until the recent financial crisis. the pressure of investment public on the sec in 2003 and 2006 resulted in only a slight increase in the number of nrsros 2 . the more conservative auditor approach in relation to credit rating agencies, as well as the huge dissatisfaction of investment public with the work of these agencies, led in 2010 to the new law that puts special emphasis on the protection of users of financial services, which, in the domain of rating agencies, means protection of investors. the emphasis is not only on the establishment of an adequate supervision and regulation system of rating agencies, but also mechanisms of their self-regulation, greater transparency of the rating process, and the methodologies they use in assessing the creditworthiness of securities and issuers (pavković & vedriš, 2011). a special body for the regulation and supervision of credit rating agencies (european securities and markets authority) has even been established in europe. in spite of numerous efforts to increase transparency and better regulate the work of rating agencies, the ratings they give should be taken only as a reference point, rather than as a direction for a future investment decision. in the context of improving the efficiency of credit rating agencies and auditors in assessing the company creditworthiness, there are more and more proposals towards the development of cooperation between rating agencies and auditors. integration of ratings into the audit review system would give an objective assessment of company creditworthiness, especially those that are approaching bankruptcy. credit rating agencies and auditors provide important information to investors and potentially function as substitutes (lammers, 2013). however, in addition to high informative potential, they are also characterized by imprecision in predicting future. for example, inadequate credit ratings played a significant role in the development of the global financial crisis (mulligan, 2009; ozerturk, 2014). while the assumption about the safety of 2 since 2008, there are 10 nrsros. 98 m. jemović, m. đorđević, j. radojiĉić banks was based on public sector guarantees, assumption about the safety of unregulated financial institutions relied on guarantees provided by the private sector in the form of a credit rating (adrian & ashcraft, 2012). the obligations of these institutions were secured with high liquid assets with an aaa rating. the task of rating agencies was to guarantee objective credit rating of banks and financial instruments, but they were in conflict of interest because issuers paid for credit ratings (de grauwe, 2009). rating agencies increased profits on the basis of the growth of the securities market in the process of securitization of sub-prime mortgage loans. at the same time, they encouraged the growth of this market by giving high ratings to these instruments, for which investors perceived them as low-risk investment (adrian & ashcraft, 2012). the agencies based their ratings on the assumption that securities generated in the process of securitization were low-risk due to diversification achieved by grouping loans from different regions, protection coming from subordinate tranches, and credit enhancements by additional guarantees of their recovery (wilmarth, 2009). resecuritization led to the emergence of an additional market for securities from securitization, thus increasing the complexity of financial instruments. this process was followed by credit rating inflation (blundell-wignall, et al., 2012). for example, investors rated mezzanine tranches of financial instruments created on the basis of subprime mortgages as too risky in relation to the yield they brought, and resecuritization transformed them into instruments that received the aaa rating (wilmarth, 2009). the advent of the financial crisis created a problem of non-performance of securities with high credit rating created in the process of securitization of bad mortgage loans. another criticism related to credit rating agencies refers to their sensitivity with credit rating revision. the timeliness of credit rating change and credit rating stability are two opposing goals, the balance of which is a challenge for rating agencies. changes in the credit rating may indicate a possible company bankruptcy in the future, but agencies are sometimes characterized by a delay in understanding the right situation in terms of changing the creditworthiness of companies. the reasons behind the lag in adjusting the rating to change in the company’s financial position may be different: the rating agencies’ inability to get timely information, inadequate methodology, periodicity of rating change, etc. rating agencies can also conduct a policy of issuing stable ratings to focus on the longterm perspective of companies’ creditworthiness rather than on temporary and transient changes in credit risk (altman & rijken, 2004). one of the reasons for the delay in rating revision is the rating agencies’ efforts to meet clients’ expectations regarding rating stability, as rating changes require frequent and costly adjustments in their portfolios (loffler, 2005). this would require investors to trade in securities often, which would expose them to higher transaction costs. on the other hand, in times of crisis, the timely credit rating adjustment to changes in companies’ credit risk is gaining importance for investors. the problem of delays in the credit rating revision was confirmed during the global financial crisis. the rating agencies assigned high credit ratings to aig and lehman brothers just before their collapse. despite the criticism of rating agencies, the problems that put them at the heart of the global financial crisis, such as investor over-reliance on credit ratings, insufficient supervision, lack of accountability and inadequate methodology used by rating agencies, continue to be present in the post-crisis period (partnoy, 2017). the global financial crisis has led to the review of audit practice so that criticism did not go past auditors. some criticism relates to the impossibility of signaling financial the role of audit and credit rating agencies in the assesment of company creditworthiness... 99 risks and the lack of gco disclosure in the case of banks (harris, 2011). also, the financial crisis has shown that some banks were in trouble and had to be saved or went bankrupt in the short term after receiving an unqualified audit report. this was the case, for example, with lehman brothers (date of audit report 28 th january 2008), bear stearns (date of audit report 28 th january 2008), barclays (date of audit report 7 th march 2008), royal bank of scotland (27 th february 2008), ubs (date of audit report 6 th march 2008), and others (sikka, 2009). this raises the question of the role, objectivity, and independence of the auditor’s opinion for the financial institutions sector. from the point of view of information about the anticipation of company bankruptcy, one can also observe the relationship between the auditor’s opinion and credit rating. comparing credit ratings and auditor’s opinions available before company bankruptcy gives the opportunity to investigate who has greater success in predicting and signaling bankruptcy. there is a small number of studies in literature dealing with this issue. empirical research carried out by cha, hwang and yeo (2016) in 100 korean companies in the period from 2007 to 2014 shows that the audit system is more conservative, and, therefore, more successful in signaling bankruptcy, while rating agencies are characterized by excessive optimism due to less responsibility to issue corporate ratings. since1990s , auditors have been facing tightening regulations and greater responsibility when doing business. the possibility of initiating a lawsuit against the auditor for damages in providing audit services to third parties such as investors brought high lawsuit costs to largest audit firms (about 15% of revenue) in 2007 (center for audit quality, 2008). efforts to improve the quality of audit were particularly intensified after the accounting scandal with enron and subprime mortgage crisis. feldmann and read (2013) find that the gco disclosure is related to the company’s credit rating, and that, after the gco disclosure, credit rating falls. this indicates a higher informative value of the auditor’s opinion than the rating agency. notwithstanding the criticisms made to auditors and rating agencies, credit ratings as well as auditor’s opinions play an important role in preserving the efficiency of capital markets (dodd-frank act, 2010, section 931, par. 1). credit ratings, as the assessment of companies’ creditworthiness, affect their costs and their financial structure (baber, 2014). auditors do not give opinion on credit ratings, but report on the company ability to continue to operate, which may have a negative impact on stock returns (kausar, et al., 2009). that is why, during the post-crisis period, proposals appeared to decrease the difference between credit rating agencies and auditors in such a way that rating agencies include the auditor’s opinion in the credit rating revision, while the auditor’s opinion would include a credit rating. hu (2011) even explores the potential benefits of the convergence of rating agencies and auditors and the merging of their functions into one activity or a strategic alliance (gc rating or audit rating). conclusion the assessment of company creditworthiness in general, and banks in particular, is a very complex task and requires an analysis of different business aspects. what are the real prospects for the company to continue its business, most often in the next fiscal year, is the subject of evaluation by numerous agencies, institutions, and bodies. the paper analyzes in particular the role of external audit and rating agencies in making such an assessment. 100 m. jemović, m. đorđević, j. radojiĉić the task of an auditor is to give an opinion on the client’s business continuity based on the evaluation of the management’s assessment of the company’s ability to continue its operations, as well as the established facts and circumstances regarding the company. credit rating agency, on the other hand, gives an opinion on the credit risk of a legal entity or a financial instrument. the auditors and rating agencies’ focus on company creditworthiness makes room for their cooperation, which would give the audit opinion more reliability and greater predictive power, and ratings would be more realistic. integration of ratings into the audit system would bring an objective assessment of companies’ creditworthiness, especially those that are approaching bankruptcy. the relationship between credit rating agencies and audit was particularly pronounced during the recent financial crisis, during which auditors stepped forward with a more conservative approach than was the case with rating agencies. for these 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(2009). the dark side of universal banking: financial conglomerates and the origins of the subprime financial crisis. connecticut law review, 41 (4), 963-1050. uloga revizije i rejting agencija u oceni boniteta kompanija uz poseban osvrt na banke revizija i rejting agencije imaju značajnu odgovornost pri oceni boniteta kompanija i davanju mišljenja po pitanju sposobnosti klijenta da nastavi svoje poslovanje u budućem periodu, najčešće narednoj poslovnoj godini. odgovornost je utoliko veća kada su u pitanju banke i njihov bonitet. finansijska kriza iz 2007. godine i bankrotstvo brojnih banaka i drugih finansijskih institucija nametnula je potrebu traženja odgovornosti za “zakasnelu” reakciju regulatornih organa i značajne fiskalne posledice krize. rad ima za cilj da oceni efikasnost rada rejting agencija i eksterne revizije u oceni boniteta kompanija i banaka, ne u cilju pronalaženja njihove pojedinačne odgovornosti, već sagledavanja moguće koordinirane i zajedničke akcije u sprečavanju budućih kriznih događaja. kljuĉne reĉi: rejting agencije, eksterna revizija, bonitet, finansijska kriza 10395 facta universitatis series: economics and organization vol. 19, no 1, 2022, pp. 39 52 https://doi.org/10.22190/fueo220105004b © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper covid-19 pandemic and nigeria’s international liquidity: impact analysis1 udc 616.98:578.834]:339.721(669) abdurrauf babalola al-hikmah university, department of economics, ilorin, nigeria orcid id: abdurrauf babalola https://orcid.org/0000-0001-8389-6639 abstract. covid-19 pandemic woes have caught across almost every international activity in the world today, which makes many economies to be in a cross-road whether the covid-19 pandemic is the cause of these woes or not. in this regard, this study investigated the effect of the covid-19 pandemic on international liquidity in nigeria. covid-19 pandemic was proxied by covid-19 new cases and new deaths of the pandemic in nigeria and a dummy which represented the period of the pandemic, and as such, stood in as the explanatory variables in the study, while international liquidity was put as the dependent variable. daily data sets were sourced from national centre for disease control in nigeria and the central bank of nigeria statistical bulletin between february and october 2020, employing auto-regressive distributed lag (ardl) technique. findings of the study revealed that, in the short run, the covid-19 pandemic period had a significant impact on nigeria's international liquidity. however, the covid-19 new cases and new deaths could not have any significant impact on the international liquidity. moreover, none of the covid-19 pandemic variables could have any long-run impact on the international liquidity in nigeria. the study, therefore, suggests that nigerians should know that the depletion of its foreign reserve is not due to policy deficiency but to the covid-19 pandemic. also, the government should try to improve quality exports that will be demanded by foreign countries irrespective of any pandemic. keywords: covid-19 pandemic, dummy variable, international liquidity, time series jel classification: f38, f42, i11, i15, i18 received january 05, 2022 / revised march 01, 2022 / accepted march 08, 2022 corresponding author: abdurrauf babalola department of economics, al-hikmah university, adewole estate, adeta road, 240281 ilorin, kwara state, nigeria | e-mail: abdclement@yahoo.com https://orcid.org/0000-0001-8389-6639 mailto:abdclement@yahoo.com 40 a. babalola 1. introduction the woes that have befallen the world as a result of the corona virus are an unanticipated and unprojected challenge, and this health challenge has spread to almost all sectors of the world economy. with the declaration of the world health organisation (who) on march 11th, 2020, that covid-19 has become a global pandemic, the issue has shaken the world economy as a whole. to curb the spread of this pandemic, most governments have put in place policies to reduce or regulate the spread. apart from the use of sanitary materials, which to some extent, has encouraged a quantum level of productive capacity in the pandemic-demanded goods such as face-masks, hand sanitizers, covid-19 test kits among others, it has, however, drastically paralyzed the demand for a major international product, crude oil, due to the total lockdown experienced in most nations of the world, in which nigeria is not left out. the advanced economies were hit by the effect of the pandemic which resulted in the total and partial closure of many sectors that fed their external reserves with the appreciable quantity of foreign currencies. even though they remain the main producers and providers of these covid-19 test kits, which brought lots of foreign patronages and hence were expected to boost their economy to some extent, they still cry out as the pandemic bit hard on their economy. the question now is that what will be the fate of the developing economies like nigeria, in which this challenge has depleted her major source of foreign reserve? moreover, the developing country has not developed to the extent of exporting covid-19 test materials to the international market. nigeria's economy at the start of the pandemic has been very fragile as it depends solely on the demand and price of oil in the international market and the nation's budget is based. oil is the main source of improvement in its international liquidity popularly known as external reserve. the price of brent crude oil was $26 per barrel at the beginning of april 2020, whereas, the budget is based on $57 a barrel, showing a negative gap of $31. this has an adverse consequence on the reserve (onyekwena & ekeruche, 2020). quoting from a report by the international monetary fund (imf), "nigeria has been severely hit by the spread of covid-19 and the associated sharp decline in oil prices. government policy is responding to both these developments. a range of measures has been implemented to contain the spread of the virus, including the closure of international airports, public and private schools, universities, stores, and markets, and the suspension of public gatherings. a "lockdown" was declared in lagos, abuja, and ogun states. work at home is also encouraged in several states and government institutions while isolation centres are being expanded in lagos state. testing capacity is increasing as national center for disease control (ncdc) now deploys digital platforms for people to get results sooner. the president ordered the release of inmates in correctional facilities to decongest prisons. on may 4th, phase 1 of the three-phase economic re-opening commenced following a full lockdown that had been placed since march 30th. phase 1 moved to phase 2 on june 2nd allowing most offices and schools to reopen. however, a comprehensive list of restrictions remains in place, including a nighttime curfew, a ban on non-essential inter-state passenger travel, the partial and controlled interstate movement of goods and services, and mandatory use of face masks or coverings in public. on september 4th, nigeria transitioned into phase 3. night curfew has been reduced to 12am – 4am. groups of up to 50 people are allowed to attend parties and gatherings. more opening hours were allowed for parks and gardens but clubs and bars remained shut. schools around the country reopened around october 12th, 2020" (imf, 2020). covid-19 pandemic and nigeria’s international liquidity: impact analysis 41 based on the background of the covid-19 pandemic in the world and nigeria specifically concerning the economic sector, the broad objective of this study is to investigate the impact of the covid-19 pandemic on nigeria's international liquidity. specifically, the objectives are: i. to examine the impact of covid-19 cases on international liquidity in nigeria. ii. to determine the effect of the period of covid-19 on nigeria’s international liquidity. iii. to examine the impact of new deaths as a result of covid-19 on nigeria’s international liquidity. the rest of the study is organized in sections: section two presents the relevant literature underpin; section three showcases the methodology; section four presents the research findings, and section five concludes and proffers recommendations. 2. review of relevant literature cevik and mutlu (2022) examined the actions taken by different central banks to support various businesses in their respective economies. their findings indicated that these banks made liquidity to be abundant by keeping a very low-interest rate. also, quantitative easing was applied during the period of the covid-19 pandemic. a swap agreement was also implemented to facilitate the access of economies to dollars and euros. the resultant response was the flow of credit into the real economy which boosted the employment rate, reduced the market volatility, and reduced the supply of dollars pressure. papyrakis (2022) also studied the impact, drivers and responses of covid-19 on international development. according to him, the pandemic has reshaped the debates and processes in international development. the crisis has generated a quantum of challenges for developing nations, many of which could not conveniently cope with the situation of high demand for health care which calls for an immediate decision and made a prompt relief to affected economic development outcomes such as climate change, water, education, poverty and migration, among others. nikolova (2021) reviewed the role of foreign reserves in the covid-19 pandemic period in central banks of governments. simple bar chart methods were employed to compare pre-covid with the present situation, sourcing data from the bank for international settlements and the international monetary fund databases. the finding revealed that the foreign exchange reserves are necessary for the central banks and governments, especially in times of crisis and in pandemics, since the reserves are used as a source of last resort for intervention and rescue of the domestic economy. marques et al. (2021) studied the foreign intervention and capital flow management measures from a multilateral view. they realized that more caution is warranted in the use of this policy when there are spillovers in a multilateral review from an individual country's view. also, multilateral cooperation could be more helpful when considering foreign intervention which will also affect the international liquidity of a country. dong and xia (2020) examined the impact of covid-19 on the balance of payments and foreign reserves in china. the emergence of the pandemic resulted in an expansion in the nation’s balance of payment. moreover, capital inflows and the international liquidity of the country increased appreciably. adenomon and maijamaa (2020) studied the impact of covid-19 on the nigerian stock exchange from january to april 2020 employing quadratic and exponential autoregressive 42 a. babalola conditional heteroskedasticity. the findings indicated a loss in stock returns and high volatility in stock returns during the covid-19 period in nigeria. jacob et al. (2020) presented in their study that the covid-19 pandemic affected higher institutions in nigeria through the lockdown of schools, reduction of international education, disruption of the academic calendar of higher institutions, cancellation of local and international conferences, creation of teaching and learning gap, loss of human resources in the educational institutions, and cut in the budget of higher education. the submission of ozili (2020) was that nigeria had the highest number of covid-19 cases in west africa and the third highest cases in africa between march and april 2020. fernandes (2020) studied the impact of the covid-19 pandemic on industry and countries and stated that in the case of this crisis, the economic impact of the crisis varied between 3.5% and 6% and that this impact would depend on the weight of tourism and dependence of countries on foreign trade. odhiambo et al. (2020) used a discrete markov chain analysis to determine that covid-19 affects all sectors of the kenyan economy. ohia et al. (2020) foresaw that the consequence of covid-19 would be severe in africa since the health systems in countries in africa are quite fragile. they claimed that the current national health systems of nigeria could not be able to manage the growing number of infected patients who require admission into intensive care units. other studies on empirical literature are the work of olapegba et al. (2020); chinazzi et al., 2020; haleem et al., 2020; chen et al., 2020; fornaro and wolf, (2020) and most recently van der hoeven and vos (2022) who examined the various methods carried out in some developing countries using the international financial and fiscal system reforms. they have all contributed to the literature as a whole but could not empirically investigate the impact of covid-19 on international liquidity, let alone on the nigerian economy. this is the contribution to knowledge that the paper intends. 3. methodology 3.1. model specification to achieve the set broad objective of this study, the impact of covid-19 was disaggregated into covid-19 new cases, new deaths as a result of covid-19, and the period of covid-19. this study adapted the model of dineri and cutcu (2020) which specified that covid-19 new cases, new death cases, and the period of the covid-19 pandemic stood as the explanatory variables while international liquidity was put as the dependent variable, thus specified as: 𝐼𝑙 = 𝑓(𝐶𝑛𝑐 , 𝐶𝑛𝑑 , 𝐶𝑝) (1) where, il is the international liquidity of the nigerian economy, cnc stands for covid-19 new cases, cnd is covid-19 new deaths and cp is covid-19 period of attaching. in this regard, the econometric model becomes 𝐼𝑙 = 𝛼0 + 𝛼1𝐶𝑛𝑐 + 𝛼2𝐶𝑛𝑑 + 𝛼3𝐶𝑝 + 𝜀𝑡 (2) where 𝜀𝑡represents the disturbance error term at present time, which represents all other factors that affect international liquidity outside the model. since variables have different measurements, it becomes imperative to take the log of international liquidity to make equation 2 a semi-log model, thus, covid-19 pandemic and nigeria’s international liquidity: impact analysis 43 𝑙𝐼𝑙 = 𝛼0 + 𝛼1𝐶𝑛𝑐 + 𝛼2𝐶𝑛𝑑 + 𝛼3𝐶𝑝 + 𝜀𝑡 (3) hence, equation 3 was employed in the analysis. in measuring the effect of this pandemic, three variables were used. they are the daily data of the total number of covid-19 new cases (cnc) and covid-19 new deaths (cnd) which were gotten from the national centre for disease control (ncdc). a dummy variable (cp) was put up for the period of this attack. as usual, the period of the covid-19 attaches represented 1 while a period of no pandemic represented 0. these were the main variables that represented the pandemic period. the external reserve measured in united states dollars was employed to cater for international liquidity and it was sourced from the central bank of nigeria (2020) online database assessed in november 2020. 3.2. estimation procedure after taking the natural log of the dependent variable, il, a trend analysis was taken, and then the descriptive and correlation statistics. a pre-estimation technique using unitroots of augmented dicky fuller, phillip peron and kpss was employed which informed the study of the autoregressive distributive lag (ardl) model. finally, a post-estimation test was carried out. 4. research findings 4.1. trend analysis the graph of the trend of international liquidity and covid-19 cases in nigeria is shown in figure 1 below; the y-axis shows the number of cases while the x-axis shows the month and year. from the graph, the first covid-19 case was recorded in march while the first death was recorded in april. the highest daily case number was recorded in july before we start experiencing a fall in the number of daily reported cases. 0 100 200 300 400 500 600 700 800 2 /2 8 /2 0 2 0 2 0 2 0 -0 9 -0 3 3 /1 9 /2 0 2 0 3 /2 9 /2 0 2 0 2 0 2 0 -0 8 -0 4 4 /1 8 /2 0 2 0 4 /2 8 /2 0 2 0 2 0 2 0 -0 8 -0 5 5 /1 8 /2 0 2 0 5 /2 8 /2 0 2 0 2 0 2 0 -0 7 -0 6 6 /1 7 /2 0 2 0 6 /2 7 /2 0 2 0 2 0 2 0 -0 7 -0 7 7 /1 7 /2 0 2 0 7 /2 7 /2 0 2 0 2 0 2 0 -0 6 -0 8 8 /1 6 /2 0 2 0 8 /2 6 /2 0 2 0 2 0 2 0 -0 5 -0 9 9 /1 5 /2 0 2 0 9 /2 5 /2 0 2 0 2 0 2 0 -0 5 -1 0 1 0 /1 5 /2 0 2 0 1 0 /2 5 /2 0 2 0 lil cnc cnd cp trend of international liquidity and covid-19 n u m b e r o f c a s e s month and year 0 100 200 300 400 500 600 700 800 2 /2 8 /2 0 2 0 2 0 2 0 -0 9 -0 3 3 /1 9 /2 0 2 0 3 /2 9 /2 0 2 0 2 0 2 0 -0 8 -0 4 4 /1 8 /2 0 2 0 4 /2 8 /2 0 2 0 2 0 2 0 -0 8 -0 5 5 /1 8 /2 0 2 0 5 /2 8 /2 0 2 0 2 0 2 0 -0 7 -0 6 6 /1 7 /2 0 2 0 6 /2 7 /2 0 2 0 2 0 2 0 -0 7 -0 7 7 /1 7 /2 0 2 0 7 /2 7 /2 0 2 0 2 0 2 0 -0 6 -0 8 8 /1 6 /2 0 2 0 8 /2 6 /2 0 2 0 2 0 2 0 -0 5 -0 9 9 /1 5 /2 0 2 0 9 /2 5 /2 0 2 0 2 0 2 0 -0 5 -1 0 1 0 /1 5 /2 0 2 0 1 0 /2 5 /2 0 2 0 lil cnc cnd cp trend of international liquidity and covid-19 n u m b e r o f c a s e s month and year 0 100 200 300 400 500 600 700 800 2 /2 8 /2 0 2 0 2 0 2 0 -0 9 -0 3 3 /1 9 /2 0 2 0 3 /2 9 /2 0 2 0 2 0 2 0 -0 8 -0 4 4 /1 8 /2 0 2 0 4 /2 8 /2 0 2 0 2 0 2 0 -0 8 -0 5 5 /1 8 /2 0 2 0 5 /2 8 /2 0 2 0 2 0 2 0 -0 7 -0 6 6 /1 7 /2 0 2 0 6 /2 7 /2 0 2 0 2 0 2 0 -0 7 -0 7 7 /1 7 /2 0 2 0 7 /2 7 /2 0 2 0 2 0 2 0 -0 6 -0 8 8 /1 6 /2 0 2 0 8 /2 6 /2 0 2 0 2 0 2 0 -0 5 -0 9 9 /1 5 /2 0 2 0 9 /2 5 /2 0 2 0 2 0 2 0 -0 5 -1 0 1 0 /1 5 /2 0 2 0 1 0 /2 5 /2 0 2 0 lil cnc cnd cp trend of international liquidity and covid-19 n u m b e r o f c a s e s month and year fig. 1 trend of international liquidity and covid-19 cases in nigeria source: author’s extraction from e-view 9 44 a. babalola 4.2. result of descriptive statistics table 1 showcases the descriptive statistics of the dataset with 247 observations. the table shows that international liquidity (lil) was logged in other to reduce its volatility while covid19 cases (cnc), have the highest mean followed by international liquidity (lil), covid-19 deaths (𝐶𝑛𝑑), and covid-19 period (𝐶𝑝) respectively. skewness is the measure of the asymmetry of the data around its mean, cnc and 𝐶𝑛𝑑 are positively skewed while lil and 𝐶𝑝 are negatively skewed. the standard deviation shows the rate of the volatility of the dataset, the high figures of covid19 cases (cnc), is as a result of the fact that the logarithm is not taken while lil has a low figure because its log was taken. the kurtosis shows that only cnc is less than 3 i.e. platykurtic distribution meaning the distribution is flat relative to normal. the implication of this is that it has a lower likelihood of extreme events compared to a normal distribution (greene, 2002). while the other three variables are peaked i.e. leptokurtic distribution because they are more than 3. the jarquebera shows the normality distribution of data. the small jacque-bera probability as shown in the table means rejection of the null hypothesis. table 1 descriptive statistics lil cnc cnd cp mean 24.29632 254.4696 4.631579 0.874494 median 24.30400 196.0000 3.000000 1.000000 maximum 24.32331 790.0000 31.00000 1.000000 minimum 24.23481 0.000000 0.000000 0.000000 std. dev. 0.025422 211.4025 5.290532 0.331965 skewness -1.523617 0.602856 1.458866 -2.260810 kurtosis 4.405047 2.237743 5.403502 6.111260 jarque-bera 115.8820 20.94126 147.0677 310.0363 probability 0.000000 0.000028 0.000000 0.000000 sum 6001.190 62854.00 1144.000 216.0000 sum sq. dev. 0.158987 10993992 6885.474 27.10931 observations 247 247 247 247 source: authors extract gotten from e-view 9 4.3. result of pairwise correlation matrix table 2 shows the correlation matrix and the probability of the relationship between the variables. 𝐶𝑛𝑐, 𝐶𝑛𝑑 and 𝐶𝑝 all show a positive relationship with lil and they are all significant at a 1% level of significance. table 2 correlation matrix correlation probability lil cnc cnd cp lil 1.000 ---- cnc 0.4462 0.000 1.000 ---- cnd 0.3260 0.000 0.5926 0.000 1.000 ---- cp 0.1496 0.018 0.4494 0.000 0.3277 0.000 1.000 ---- source: author’s extraction from e-view 9 covid-19 pandemic and nigeria’s international liquidity: impact analysis 45 being more particular about the explanatory variables, their coefficients (0.59, 0.45 and 0.33) are far from the 0.8 benchmarks of high correlation (asteriou & hall, 2011; gujarati & porter, 2009). this indicates that the model is not having any issue with multicollinearity. table 2(b) variance inflation factor (vif) coefficient uncentered centred variable variance vif vif c 1.38e-05 6.763498 na cc 8.21e-11 4.237576 1.802569 cd 1.18e-07 2.750085 1.588567 cp 2.11e-05 8.832204 1.305929 source: author’s extraction from e-views 9 table 2(b) further explains the status of the explanatory variables to ascertain the presence of multicollinearity. from the table, the centred vif values for the three explanatory variables show that there is an absence of multicollinearity in the variables as the values are less than the usual threshold of 10 (asteriou & hall, 2011; greene, 2002). 4.4. result of unit root tests the augmented dickey-fuller (adf), phillip peron (pp) and kwiatkowski-phillipsschmidt-shin (kpss) are the three unit-root tests used in the study (phillips & perron, 1988) (gujarati & porter, 2009). the adf and kpss tests show that lil and cnc, are stationary at 1st difference while the others are stationary at level. the pp test, however, shows a little difference that all the variables are stationary at level except lil which is stationary at 1st difference. table 3(a) adf variables at level probability at 1st difference probability remark lil -2.155552 0.2234 -15.58850 0.0000*** 1(1) cnc -1.816755 0.3718 -17.64468 0.0000*** 1(1) cnd -3.274341 0.0172 1(0) cp -2.924887 0.0440 1(0) source: author’s extraction from e-view 9 table 3(b) pp variables at level probability at 1st difference probability remark lil -2.211812 0.2027 -15.58850 0.0000*** 1(1) cnc -2.702500 0.0750 1(0) cnd -10.41699 0.0000*** 1(0) cp -2.998643 0.0364 1(0) source: author’s extraction from e-view 9 46 a. babalola since two of the tests have supported the stationarity of the variables at level and 1st difference, we conclude that the order of integration is mixed and this is the justification for employing the ardl analysis (alogoskoufis & smith, 1991; asteriou & hall, 2011) table 3(c) kpss variables at level probability (5%) critical value at 1st difference probability remark lil 0.7165 0.4630 0.4465 0.4630 1(1) cnc 0.5957 0.4630 0.2003 0.4630 1(1) cnd 0.0729 0.4630 1(0) cp 0.2273 0.4630 1(0) source: authors extraction from e-view 9 4.5. result of model selection criteria figure 2 shows the result of the model selection criteria using the akaike information criteria top 20 of the model. it is clear from the figure that ardl (1,0,0,1) is the best model and was chosen because it has the lowest aic of 41.2998. 41.296 41.300 41.304 41.308 41.312 41.316 41.320 a r d l (1 , 0 , 0 , 1 ) a r d l (1 , 0 , 0 , 3 ) a r d l (1 , 0 , 0 , 2 ) a r d l (2 , 0 , 0 , 1 ) a r d l (1 , 0 , 1 , 1 ) a r d l (1 , 1 , 0 , 1 ) a r d l (1 , 0 , 0 , 4 ) a r d l (1 , 0 , 1 , 3 ) a r d l (2 , 0 , 0 , 3 ) a r d l (1 , 1 , 0 , 3 ) a r d l (1 , 0 , 2 , 1 ) a r d l (3 , 0 , 0 , 1 ) a r d l (1 , 0 , 1 , 2 ) a r d l (2 , 0 , 0 , 2 ) a r d l (1 , 1 , 0 , 2 ) a r d l (1 , 2 , 0 , 1 ) a r d l (2 , 0 , 1 , 1 ) a r d l (2 , 1 , 0 , 1 ) a r d l (1 , 1 , 1 , 1 ) a r d l (1 , 0 , 2 , 3 ) akaike information criteria (top 20 models) fig. 2 graph of selected model criteria source: author’s extraction from e-view 9 4.6. result of ardl coefficients in table 4, the result of impact analysis in the short run using the ardl model is showcased. the coefficient of 𝐶𝑛𝑐 (4666.010) and 𝐶𝑛𝑑 (4020291.) show that covid-19 cases and covid -19 deaths have a positive impact on international liquidity. the impacts are covid-19 pandemic and nigeria’s international liquidity: impact analysis 47 insignificant at 1%, 5%, or 10% levels. although international liquidity (lil) shows a positive and significant relationship with itself in the previous period. the coefficient of 𝐶𝑝 (-5.27e+08) shows that the covid-19 period has a negative impact on international liquidity and its impact is significant at a 1% level of significance. it is also shown that the 𝐶𝑝coefficient in the previous period positively impacted international liquidity and its impact is significant at a 1% level of significance. the r2 shows that about 93% of the variation in international liquidity is explained by the explanatory variables. this means that 7% of the variation responsible for international liquidity is outside the model. the r2 adjusted shows about 93% variations which are very close to the r2 indicating that there is no redundant variable in the model. the f-statistics (683.1887) and prob. (f-statistic) (0.000000) show that the goodness of fit is significant at a 1% level of significance. the durbin-watson stat (2.000879) is approximately 2 which shows the goodness of fit. table 4 ardl coefficient variable coefficient std. error t-statistic prob.* lil(-1) 0.950031 0.018552 51.21009 0.0000 cnc 4666.010 97639.94 0.047788 0.9619 cnd 4020291. 3468199. 1.159187 0.2475 cp -5.27e+08 1.36e+08 -3.869932 0.0001 cp(-1) 5.92e+08 1.35e+08 4.389676 0.0000 c 1.71e+09 6.56e+08 2.601883 0.0098 r-squared 0.934353 adjusted r-squared 0.932986 f-statistic 683.1887 prob(f-statistic) 0.000000 durbin-watson stat 2.000879 source: authors extract gotten from e-view 9 4.7. result of ardl bound test table 5 showcases the bound test which is required to ascertain if the explanatory variables (covid-19: cnc, cnd, and cp) can affect the dependent variable (international liquidity) in the long run. from the table, the f-statistic value (2.383703) is lower than the i0 bound, so the null hypothesis of no co-integration could not be rejected. table 5 ardl bound test test statistic value k f-statistic 2.383703 3 critical value bounds significance i0 bound i1 bound 10% 2.72 3.77 5% 3.23 4.35 2.5% 3.69 4.89 1% 4.29 5.61 source: authors extract gotten from e-view 9 this is an indication that the model does not have any long-run relationship. hence, we only estimated the short-run model which is the ardl coefficients as presented and interpreted in table 4. 48 a. babalola 4.8. result of diagnostic tests table 6 presents the result of residual diagnostic tests of serial correlation using the brusch-godfrey lm test, the heteroskedasticity using the arch test, and linearity using the ramsey reset test. table 6 diagnostic test tests statistics probability values breusch-godfrey serial correlation lm test 0.0077 0.9923 heteroskedasticity test: arch 0.0091 0.9240 linearity testramsey reset test 0.1181 0.7312 source: authors extract gotten from e-view 9 their respective probability results are all more than 5% meaning that we accept the null hypotheses that, there are no issues of serial correlation, heteroskedasticity, and specification error. -60 -40 -20 0 20 40 60 50 75 100 125 150 175 200 225 cusum 5% significance fig. 3 graph of recursive estimate testcusum source: authors extract gotten from e-view 9 figure 3 showcases the stability test result using the cumulative sum test. from the result, the blue line is within the red lines, and so, we accept the null hypothesis (which is desirable) that the coefficients of the regression are changing systematically and therefore, stable. covid-19 pandemic and nigeria’s international liquidity: impact analysis 49 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 50 75 100 125 150 175 200 225 cusum of squares 5% significance fig. 4 graph of recursive estimate testcusum square source: authors extract gotten from e-view 9 figure 4 presents the stability test result using the cumulative sum of square test. from the result, the blue line is crossing the red line, and so, we reject the null hypothesis (which is not desirable) that the coefficients of the regression are not changing suddenly and therefore, based on this test, are not stable. going by the words of turner (2010), "if the break is in the intercept of the regression equation then the cusum test has higher power. however, if the structural change involves a slope coefficient or the variance of the error term, then the cusumsq test has higher power. this may help to explain why the two tests often produce contradictory findings", our regression (ardl) has an intercept and so the cusum is higher and better preferred to cusum squares, thus, we conclude that the coefficients of the regression are stable. 4.9. discussion of results and implications of findings this empirical article employed ardl techniques which were based on the information given by the adf and pp unit root tests to investigate the impact of the covid-19 pandemic on international liquidity in nigeria. the first objective was to examine the impact of covid-19 new cases on international liquidity in nigeria. though there was an average positive correlation between the new cases and international liquidity, the result of the ardl cointegration test revealed that, in the short run, covid-19 new cases did not have a significant impact on international liquidity in nigeria. there was no long-run relationship as revealed by the bound test result. hence, the null hypothesis of no significance could not be rejected. other factors like oil prices would have been responsible for the effect aside from new cases during this period. the second specific objective was to evaluate the effect of new deaths as a result of covid-19 on international liquidity in nigeria. also, the results of ardl analysis indicated that new deaths as a result of the covid-19 pandemic did not have a significant effect on nigeria's international liquidity within the period under consideration. thus, the null hypothesis could not be rejected in this regard. this finding is in contrast with the 50 a. babalola findings of dineri and cutcu (2020), and odhiambo, weke, and ngare (2020), though fernande's (2020) finding could still be referred to, that, the impact of the covid-19 pandemic on industry and economies would depend on the weight of tourism and dependence of countries on foreign trade. the third objective was to examine the impact of the period of the covid-19 pandemic on international liquidity in nigeria. findings of the study discovered that, in both the short run and long run, the period of the covid-19 pandemic has a very significant impact on international liquidity. this result is in line with our a priori expectation and not different from the study of dineri and cutcu (2020) on the exchange rate in the turkish economy, though they did not use the period as one of their predictors. hence, we reject the null hypothesis and accept that period of the covid-19 pandemic has a significant impact on nigeria's international liquidity. moreover, from the results, the predictors in the model were able to explain about 93% of the variation in international liquidity in nigeria within this period of interest. this applies to real nigeria's situation since there are still many major contributors to international liquidity like the export of crude oil and other goods that generally have a direct positive impact. import of goods like used cars, mostly covid-19 test kits and health care facilities deplete negatively and worsen the international liquidity status of the country. in essence, the high rate of import stretches the naira exchange rate, in which, for the country to remain within the ambit of the desired exchange rate, the external reserve will have to suffer, mainly due to the covid-19 pandemic which energized other variables in the negative. expectedly, as the pandemic rounds off, the international liquidity will keep increasing and moving back to its original point. 6. conclusion and recommendations this study investigated the impact of the covid-19 pandemic on international liquidity in nigeria. covid-19 pandemic was proxied by covid-19 new cases and new death of the pandemic in nigeria and a dummy that represented the period of the pandemic, and as such, stood as the explanatory variable while international liquidity was put as the dependent variable in the study. daily data sets were sourced between february and october 2020, employing auto-regressive distributed lag (ardl) technique. the findings of the study revealed that there was an average correlation between the variables of the pandemic and international liquidity. in the short run, the covid-19 pandemic period had a significant impact on nigeria's international liquidity. however, the covid-19 new cases and new deaths could not have any significant impact on the international liquidity. moreover, none of the covid-19 pandemic variables could have any long-run impact on the international liquidity in nigeria. diagnostic tests revealed that there were no issues of serial correlation, heteroskedasticity, or specification error. also, the result divulged that the coefficients of the regression were stable. it is upon the findings of this study that the following recommendations are made: ▪ nigerians should know that the depletion of their foreign reserve is not due to policy deficiency but due to the covid-19 pandemic. ▪ also, the government should try to improve quality exports that will be demanded by foreign countries irrespective of the pandemic. covid-19 pandemic and nigeria’s international liquidity: impact analysis 51 references adenomon, m. o., & maijamaa, b. 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https://ideas.repec.org/a/taf/apeclt/v17y2010i11p1049-1053.html https://ideas.repec.org/s/taf/apeclt.html https://ideas.repec.org/s/taf/apeclt.html https://doi.org/10.1080/00036840902817474 https://doi.org/10.1007/978-3-030-82339-9_2 52 a. babalola pandemija covid-19 i međunarodna likvidnost nigerije: analiza uticaja problemi povezani sa pandemijom kovida 19 su zahvatili skoro svaku međunarodnu aktivnost u svetu danas, što mnoge ekonomije tera da se zapitaju da li je uzrok tih problema sama pandemija ili ne. u tom smislu, ovaj rad istražuje uticaj pandemije kovid 19 na međunarodnu likvidnost u nigeriji. pandemija kovid 19 se merila brojem novih slučajeva i novih smrti i veštačkom varijablom koja je predstavljala period trajanja pandemije, i kao takva stajala kao objašnjavajuća varijabla u studiji, dok je međunarodna likvidnost bila zavisna varijabla. dnevni skup podataka dobijen je od statističkih biltena nacionalnog centra za kontrolu bolesti i centralne banke nigerije od februara do oktobra 2020, uz korišćenje adrl tehnike. rezultati studije ukazuju da je, kratkoročno, period kovid-19 pandemije imao značajnog uticaja na međunarodnu likvidnost nigerije. međutim, novi slučajevi kovida 19 i nove smrti nisu imale značajnog uticaja na međunarodnu likvidnost. štaviše, nijedna od varijabli pandemije kovida 19 nije mogla da ima značajnijeg uticaja na međunarodnu likvidnost nigerije. studija, dakle, ukacije da nigerijci treba da znaju da smanjenje njihovih deviznih rezervi nije nastalo usled loše politike nego pandemije kovida 19. takođe, vlada bi trebalo da pokuša da poveća izvoz kvalitetnih proizvoda koje će strane zemlje zahtevati bez obzira na pandemije. ključne reči: pandemija kovid-19, veštačka varijabla, međunarodna likvidnost, vremenska serija facta universitatis series: economics and organization vol. 12, n o 4, 2015, pp. 259 268 analysis of possibilities for improving serbian companies’ business activity  udc 005.7(497.11) vuk miletić, slavko božilović union university „nikola tesla“ the faculty of construction management, belgrade, serbia abstract. the subject of this paper is the quality improvement analysis for serbian companies in global conditions of livelihood and key factors for accomplishing competitive market leadership. serbian economy by analysis cannot be competitive without the fulfillment of the most important condition which is competitive products that meet modern world market requirements. to meet the requirements, it is necessary for serbian companies to change their way of thinking and implement world achievements in organisation and management areas. serbian companies that continuously apply current methods and management techniques have significantly higher chances to strengthen their competitive capability on the international market. they are securing a stable market position with a perspective for market rise. this paper is trying to find the significance of the mentioned relations in the conditions of relatively insufficient application of new technology and management of knowledge in transitional economies like serbia by using theory performance and analysis. the ultimate business goal for serbian companies is to reach business excellence and world class products. key words: management, competitiveness, business, quality, analysis jel classification: m21, o12, r11. introduction business in enterprises today is carried out in global market conditions in which competitiveness is imposed as an imperative of their survival, growth and development. accomplishing business excellence and world class products and services is the foundation goal of business for all enterprises, including serbian companies. received december 12, 2015 / accepted december 29, 2015 corresponding author: vuk miletić union university „nikola tesla“ the faculty of construction management, belgrade, serbia e-mail: vukmiletic88@hotmail.com 260 v. miletić, s. božilović in that sense managers of serbian enterprises need to be pointed out for their multiyear, breathless focus on operative excellence, changes, restructuring and lowering the costs of business. if desired results are not achieved, primarily raising the level of competitiveness, the approach to business is expected to be changed. it is necessary to change the way of thinking in the way that success, operational excellence and cost efficiency are not the key to all business problems like it was thought earlier. the focus needs to be changed to reaching the highest possible growth and highest business profit. managers need to be determined to use maximum potential of their companies to succeed in the global fight for world market ranking. the success of serbian enterprises’ business missions are conditioned by the capabilities of management and leadership. management and leadership departments need to recognise requests and possibilities of aimed markets and they need to be flexible in reacting to competitors’ actions. reintegration is a complex and responsible task. it is a process in which they need to be qualified for successful competition in the international marketplace. aggravating circumstances that stand in the way of serbian companies to become included in the paths of international economies are the economic crisis and long-standing absence from the global market, which are the consequences caused by international isolation of serbia the invisible wall of sanctions. in those conditions, there were inadequate treatments from foreign markets in planned strategy of growth and development of serbian enterprises (djordjevic, 2014). company managements did not dedicate themselves to the analysis of international competition, because they were looking at the global plan from a distance. radical changes of business functions need to be accepted to create good conditions for the international serbian enterprise scene. they need to be included in european integrations processes. the changes imply a complete market transformation, accepting new ideas and fast reactions from foreign impulses and adjusting to changes. the changed conditions of livelihood demand new approaches to organisation management studies today as well as different approaches in business practise. there are different models of business and managing enterprises. the new premise which is founded on purview of contemporary management defaults its full state of operation. management needs to cover the whole process of business, as well as focus on the results and performance in the whole economy chain. new conditions of business impose many challenges for management which are noticeably different from the usual ones. taking into account the faster pace of changes, there is an increase of the number of companies that are located on the wrong side of the chart. also, there is an increasing number of companies that are tangled in net value and economy systems in which they only have partial control. there is a fast decrease of strategy lifetime. the internet is changing the focus of manufacturer and consumer negotiating strength. irregularities in business in synergy with destructive effects of new technology is significantly removing the barriers for entering different industries. global livelihood conditions and lower communication costs are making the way to new industrial branches for strong pricing and for the new competitors on the market. for an organisation to succeed in business, it needs to establish, maintain and develop competitive market leadership and it needs to be ready to learn constantly. enterprises have to monitor changes not only on the market but also in science to reach the desired business excellence. next to general market signs and information that relate to user requests and the level of their satisfaction, special attention needs to be dedicated to analysis of possibilities for improving serbian companies’ business activity 261 competition analysis. profitable activities attract competitive companies. enterprises are forced to research not only direct competitors but those who are the best in their areas. all employees need to be involved because competitive advantage is very important for profitability and for company survival. this paper analyses international business environment quality and the competitiveness of national economy in the conditions of global changes in the area of business market. the point is that the foundation of corporative analysis is identified by the activities for business quality improvement for national enterprises and their commitment for competitive functioning in the world market. 1. international competitive surroundings the end of the 20th century marked the turning point in which enterprises from all over the world had to start thinking globally (kotler and gary, 1996). changes are present in the environment. globalisation and modern technologies are key forces that design the new level of links in world economy. that strong link between development of global market and technological development is a necessity. technology and knowledge development provides spreading of ideas, knowledge, flows of goods and capital worldwide. the planet becomes a unique market in that way that many industries and enterprises see their growth perspective and developments only in world margins. the processes of economy integrations become predominant. for manufacturers in some countries, globalisation means that they get their resources from other countries as well as exporting their product to other countries as often as possible. their competitiveness is based on key skills of organisation and individuals that constantly improve their knowledge. successful organisation is a gathering of all individuals. strategy creation is started by collecting objective and quality information from the market by enterprises using their experience and knowledge. learning from other findings and from the best in the group must be implemented in the concept of managing quality regardless of the model of quality. to achieve desired business success, next to general market indicators, it is necessary to provide information related to user requests and the level of their satisfaction as well as information about competitors (hamel and breen, 2007). technology gives fast, reliable and cheap transfer of information worldwide, regarding informing relevant company management about the changes in the surroundings. changes in the area of market operations on the global level directly influence the process of managing an enterprise while the increase and intensifying of the competitive fight is the key result of the globalisation process. it is very hard to get and maintain competitive market advantage in that kind of surroundings (porter, 2007). competitive advantage comes from the value that a company is able to make for their buyers, which exceeds the costs of its creation. to get the business to expand, open new markets, and establish realistic competitive long-term goals, enterprise business quality excellence is an imperative. all manager efforts must go towards reaching that goal. a new organisation needs to focus on new (unconquered) market segments. they need to focus their energy on them, satisfy their needs and exploit them in the market. the numbers and diversity of technological and other changes that already happened in the business environment by the end of the last and the beginning of this century have 262 v. miletić, s. božilović influenced companies to give close attention to studying the environment. strategic variants that would help them form, preserve and develop competitive advantage in international marketing. every state and economy in transition must contain international orientation in management to bring down all barriers. by introducing new technologies, they are turning to strategies that are aimed at buyers and users making competitiveness stronger than ever before (maksimovic, 2012). the appearance of newly industrialised countries that are becoming global competitors (china, india and brazil) and then changing the order of countries in the sense that china and the usa have informally taken over from the first economies of the world by 2014, has changed the model of competitive relations which dominated near the end of the last and the beginning of this century. fast market globalisation, the rise of newly industrialised countries, and especially the effects of the world economic crisis were making new competitive relations on the world market. that means that global competitive relationships are changed and established on different foundations. developed west economies have lots of problems in overcoming negative effects of the economic crisis. markets that are uprising, like china, have become dominant in the world economic growth. most markets in the world are in the mature phase and satiated except for the markets of the newly industrialised countries like china and india. it is in these countries today, china primarily, that the rates of economic growth are significant while the rates in most other countries are small (most countries are below 2%). china today is the fastest growing economy in the world. a great number of newly industrialised countries like india, indonesia, turkey, the republic of south africa, mexico, and so on, are seriously starting to take part of the most developed world market countries of the world. considering the effects of global economic crisis in the next years and the inevitable phenomenon of modern economy inflation, it is to be expected that most countries of the world would have low rates of economic growth. the distribution of economic resources is very unequal countries with most world capital at their disposal belong to the group g7 (8). the economy growth prognosis is not optimistic. competitive expenses of management and business oriented environment are encouraging investments and creating security in every economy. that environment is needed for serbian economic subjects to attract foreign investments and rise the level of competitiveness. according to the conference of united nations trade and development unctad (2013) report, the direction of investment activities shows that for the first time, in 2012, countries in development and economies in transition had more success at attracting foreign direct investments from developed countries. from the global perspective stagnation from foreign investments were 1.65 billion us dollars in 2011 to nearly 1.35 billion us dollars in 2012, after 1.14 billion us dollars in 2009 (and that was 23% less than in the pre-crisis period 20052007). according to “foreign direct investment report for 2013” (“the fdi report 2013“) the number of sdi projects has plummeted by 16.38% in 2012, while in 2011 a growth of 8.54% was noted compared to 2010. a small amount of direct foreign investments is explained by slower economic growth in china. that led companies to lower capital intensive investments. according to this report, europe sdi fell by more than 20% and that was most felt in germany. poland and spain recorded a growth of influx by foreign investments. according to unictad, smaller influx increase of sdi is expected in 2014 when the level of sdi could reach 1.6 billion us dollars and 1.8 billion us dollars in analysis of possibilities for improving serbian companies’ business activity 263 2015. certain risks still remain. the weakness of the global financial system, lower growth in the eu and significant political insecurities in areas that are key for investor trust (http://blog.vip.org.rs/?p=304). global competitive relations are even more burdened by negative operation effects of the world economic crisis. notable investments have only attracted developing countries in latin america (chile, mexico) and southeast asia in which china exceeded 120 billion us dollars. hong kong attracted 75 billion us dollars and singapore 57 billion us dollars. foreign direct investments on the market of india have fallen by 27.4% in 2010. the influx to africa was lowered by 14.4%. best hosts for sdi between 2013 and 2015 were again china and the usa, then india, indonesia, brazil, germany. there is no exit from the current economic crisis for now. maintainable growth of foreign direct investments will demand solving the debt crisis in europe, safety policy in the usa and greater political stability in the middle east and parts of africa. there is little probability that there will be growth in foreign direct investments before the end of 2015. the world is functioning in conditions of economic depression. the only defence from economic collapse is understanding its logic. the globalising world is faced with noticeable different opinions. globalising market is opening perspective to unimaginable wealth. at the same time it is increasing its vulnerability and danger from new fears between those who are a part of globalised world and those who are not. that leads to political restlessness and war confrontation. all functioning aspects come to the fore that encourage competitive enterprise value. business is done on a global plan and it is increasing the intensity of competition. reaching business excellence is the result of functioning from all business functions. 2. competitive analysis of serbian enterprises’ business activity it is known that without question, most serbian enterprises today are not competitive enough on the global market. serbian economy is located on a notably lower level of development in relation to the one that was 20 years ago. it is exposed to far stronger competitive pressure than before. low level of competitiveness is found as a consequence of low business productivity and insufficient application of new technology and knowledge (miletic, 2009). the situation is similar in large number of enterprises that come from countries in transition. it was observed that serbian enterprises were not competitive on the international market during the 80s and the beginning of the 90s. those enterprises that in monopolised national market conditions somehow got through to the international market made results thanks to overwhelming costs by unproductive business on home consumer. the low level of serbian enterprise capability has once again stood out in the works of global economic crisis. according to the new list of 2014 world economic forum, serbia occupies 94th place out of 144 countries that were analysed. that is a leap by seven places, considering that four countries were not analysed. serbia was in the 101st place in 2013. in 2012 and 2011 it occupied 95th place, which means that there was a fall in the level of competitiveness. an interesting fact is that serbia found itself in company with argentina this year (104th place). greece, which was equal last year (96th place), had now strengthen its competitiveness (91st place). as far as surrounding countries are concerned, bulgaria is 62nd, hungary 63rd, romania 76th and albania 95th. the position of other countries in the surroundings is shown in table 1. 264 v. miletić, s. božilović table 1 rank of some balkan countries according to competitiveness in 2008-2013 country 1) place in 2009 2) place in 2010 3) place in 2011 4) place in 2012 5) place in 2013 6) place in 2014 montenegro 62 49 60 72 67 67 slovenia 37 45 57 56 62 70 croatia 72 77 76 81 75 77 fyrom 84 79 79 80 73 63 serbia 93 96 95 95 101 94 bosnia and herzegovina 109 102 100 88 87 n.a. albania 96 88 78 89 95 97 greece 71 83 90 96 91 81 1) report included 133 countries; 2) report included 139 countries; 3) report included 142 countries; 4) report included 144 countries; 5) report included 148 countries; 6) report included 144 countries. source: wef 2007-2013 low business productivity, very little investment in research activities and inappropriate use of business quality improvement concept stood out before all other factors as key reasons for serbian companies’ uncompetitiveness on the global market (trbovic, 2011). low quality, small number of products that were adjusted to international standards, series of small quantities, unattractive design and packaging, old technologies and high prices of products are the main reasons why serbian products cannot compete with global market leaders’ products and newly industrialised world companies. national companies are doing business with very old equipment. according to serbian chamber of commerce, the average age of equipment is 29.5 years. serbia is lagging behind the european union in technology by at least 20 years. for example, the average age of machines and equipment in austria is 8.5 years. this country has similar natural, social and population characteristics when compared to serbia, so it is good for comparison. compared to this country, serbia is lagging behind by 21 years (web 21). without new equipment and the reindustrialisation of economy serbian enterprises can hardly make goods that meet european standards (table 2). table 2 age of equipement and machines in serbian industry by economy branches. economy branche average age textile industry 35.17 years mechanics industry 34.67 years construction industry 30.51 years chemical industry 28.67 years food industry 27.17 years pharmaceutical industry 21 years soruce: serbian chamber of commerce, economist no 619-620, 12 april 2012 emg belgrade page 12-13. referent analysis by the serbian centre for economic research show that state administrative offices are effective at work for 3 hours and 45 minutes a day. field work is 25 minutes longer. productivity is 42% of the european average. the reason for that is bad work organisation and lack of knowledge and new technologies. the consequences are uncompetitiveness, low number of jobs and consumer decline. innovative activities of enterprise subjects in the republic of serbia were researched by the statistical office of the republic of serbia. it was published for the period from analysis of possibilities for improving serbian companies’ business activity 265 2010 to 2012, and the sample included 3,984 enterprises. from all of the subjects, 48.1% contributed to one form of innovation. also, the research showed that the surveyed serbian enterprises (regardless of the size of the enterprise) mostly aimed at organisation innovations (28.8%). there were process innovations and marketing innovations with 25.98%. increasing the level of innovativeness is by all means a necessary precondition for successfully acquiring long term business success, profitability and competitiveness. out of all serbian enterprises that are conducting business in the international market, the biggest number have an international certificate. according to 2012 iso data, there were 3,650 international quality standard certificates. enterprises that have some of the international certificates mainly belong to the group of large and medium enterprises. the application of international quality standards when it comes to small enterprises’ business activities is very unsatisfactory. it is often the case that serbian enterprises that export goods have some of standards and certificates which shows the fact that very few of them are capable for exporting. the key argument for the low application of quality systems for national enterprises is the low material situation. the republic of serbia is trying to create a qualitative surface for improving business environment with the goal of increasing competitive strength. the competitiveness sector is supporting the institutions in charge of strategic document manufacturing that are meant for raising the level of competitiveness. it is taking part in preparation and conducting of european union projects and programs. by operative support and coordination it is helping competitive clusters by suggestions and analysis of activities for development and uprising of business conditions. 3. activities agenda for quality improvement of serbian enterprises global environment influence is creating the need for enterprises to create competitive and innovative products and services. without fulfilment of the most important condition which is competitive products that satisfy technical and security demands of international market, serbian enterprises cannot be competitive. their business orientation has to take note of strategic management and the conditions present on the global market. it is necessary not only to adjust to current changes in the given business environment, but to surpass internal barriers of organisation growth. by doing that, management and leadership will recognize the requests of targeted markets and will react flexibly to competitors’ actions. the success of the whole business mission of the enterprise will depend of it. the openness to changes and adjustments will become the source of successful management and it will enable enterprises to function competitively. it will require:  observing and introducing changes in the organisational structure  changes in production and market strategies  changes in enterprise growth strategies and management  business connections for increasing enterprise competitiveness  successful use of knowledge and employee training (yukl, 1998). competitive international market battle is happening in quality products and pricing domain. all enterprises that want to gain a higher level of business on a global level must control and improve quality. a large number of different factors and activities on different levels are affecting competitiveness. management has the task to identify and conduct activities that will prepare the enterprise for the highest rank in the competitive battle (fitzpatrick and burke, 2003; prabalad and ramaswamy, 2004). 266 v. miletić, s. božilović research results that analysed serbian enterprise managers’ attitudes towards implementation of modern methods and management techniques show key interferences in development of competitiveness (miletic, 2009). a few of them stood out:  old equipment and technology 23.4%  lack of financial capital 21.3%  lack of knowledge – 22.1% dominant missing factors for development of competitiveness of serbian enterprises, according to managers, are:  continuous improvement of knowledge for managers and employees  activities related to adjusting the process of projects and manufacturing within the requests of international market -15.3% when talking about essential factors that have an effect on improving business quality of serbian enterprises, the surveyed managers stressed  the need to improve employees 28.2%  increasing the level of business quality 19.7%  using modern methods and management techniques 12.1% the mentioned elements and limits are choosing the business ambient for the process of organisation managing. other, not less important, factors need to be mentioned. factors that are shown by the results. those factors are fulfilling the problematic picture of business quality improvement for serbian enterprises. problems in question are related to:  devastating effects of the world economic crisis  long term insufficient financial resources  slow adoption of the modern achievements in the area of management. it should be emphasized that efforts are made to overcome the negative characteristics of serbian social and economic reality by finishing reforms in multiple sectors and by affirming new systems of values and business quality. serbian enterprise managers are aware of the fact that improving employees is inevitable and that it is necessary to use modern methods and techniques of management. quality systems must be improved especially. it is urgent because quality, price, technological level and safety is the basis of products. serbian companies can achieve much more if they work together, like a group of connected companies, service providers and organisations that matter to their business within suitable clusters. globalisation of business for small and medium enterprises which are dominant in serbian economy represent a very important strategy. the request for enterprise networking is a necessity because the increase of productivity and creating innovations is needed for survival on the global dynamic market. the problem of competitiveness improvement is basically a question of using modern methods and management techniques in which the concept of quality management has the central part. extensive use of quality improvement concept is representing the most important factor of competitiveness improvement for serbian enterprises, especially the wide use of series iso 9000. without a doubt, management standards and their use represent tools with the biggest use. the appropriate use of knowledge represents the most important way for competitiveness improvement of home business subjects. most of them are not adopting modern management trends fast enough. on the other side, new conditions of economy require new approach to business. inadequate methods and management techniques have to be abandoned and modern empirical and practical achievements have to be used. alongside with continuous education of analysis of possibilities for improving serbian companies’ business activity 267 managers and employees. new organisation construction needs to be put to special attention. for a company to reach market success, it is necessary for it to have maintainable competitive advantage. it needs to be seen in a form of lower costs and different products. with continuous innovation strategy, long term product security and high quality services. changed business conditions require the use of integrated management systems as the key direction for improving competitiveness of serbian enterprises. wider and more adequate use of international management standards that build integrated management systems in small and medium enterprise groups (bozilovic and miletic, 2014). different systems of management (quality management system, environmental protection system, health and safety systems, secure information system, food safety regulation system) can be integrated to the level that suits the most to the organisation with minimising duplicates at the same time. any management system that serbian enterprise uses with the aim of improving the level of business quality always has its specific elements and requests. by use of adequate specifications and resists, management system integration can achieve tangible advantages on the market related to promoting competitiveness and improved focus on business quality. conclusion the world economic crisis whose end is in sight, has changed the conditions of business that especially relate to resource management and market competition. business quality improvement is the foundation for improving all factors that show serbian competitive ability in international borders. competitive advantage cannot be achieved and maintained in a way that was before the crisis. signposts of expected development in the competitive domain and managing an organisation are seen through rising of the innovation level, flexibility and business productivity. without fulfillment of these conditions that require substantial funds and an envious level of knowledge for realisation it is not possible to speak of quality functioning for serbian enterprises. those are the determinants that set the competitiveness of functioning by the serbian economy in international economic relations and securing integration of its companies in the international business environment. enterprises that actively and continuously apply modern methods and management techniques have a realistically higher chance of strengthening their competitive ability on the global market and take a stable market position with a perspective for future market growth. serbian enterprises have to look for successful market development through clear creation of own growth strategy and by successfully implementing methods and techniques of management that support competitiveness. rising the level of serbian enterprise competitiveness is under direct influence of the quality management concept for integrated management systems. better use of knowledge in organisation, development of institutions in business environment and development of legal regulations are the key ways to act so as to add to the development of competitiveness of national business subjects. it is very hard to have a precise evaluation of key positions and limits that define the ambient in which the process of enterprise management is happening in relation to using modern techniques of management based on the analysis of local manager attitudes. results show that the essential problem is the lack of funds, effects of the world crisis and the lack of knowledge. as the level of business quality is rising, their integration in the 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(3) http://www.palo.rs/privreda-energija/srpske-masine-pola-veka-stare/633463/ . analiza mogućnosti unapredjenja poslovanja srpskih preduzeća osnovni predmet ovog rada je analiza mogućnosti unapređenja kvaliteta poslovanja srpskih preduzeća u globalnim uslovima privređivanja, kao ključnog faktora za postizanje konkurentske prednosti na tržištu. sve analize ukazuju da spska privreda ne može biti konkurentna bez ispunjenja najvažnijeg uslova, a to su konkurentni proizvodi koji zadovoljavaju sve zahteve savremenog svetskog tržišta. da bi domaća preduzeća postala konkurentna u međunarod¬nim okvirima, neophodno je da promene način razmišljanja i implementiraju svetska dostignuća u oblasti organizacije i menadžmenta. srpske kompanije koje aktivno i kontinuirano primenjuju savremene metode i tehnike menadžmenta imaju znatno veće šanse da ojačaju svoju konkurentsku sposobnost na međunarodnom tržištu i da osiguraju stabilnu tržišnu poziciju sa perspektivama za očekivani tržišni rast. ovaj rad pokušava teorijskim izvođenjima i analizama da utvrdi signifikantnost navedenih relacija u uslovima relativno nedovoljne primene novih tehnologija i menadžment znanja u tranzicionim ekonomijama kao što je srbija. dostizanje poslovne izvrsnosti i svetske klase proizvoda i usluga jeste krajnji cilj poslovanja srpskih preduzeća. ključne reči: menadžment, konkurentnost, poslovanje, kvalitet, analiza. 10200 facta universitatis series: economics and organization vol. 19, no 1, 2022, pp. 13 26 https://doi.org/10.22190/fueo211118002v © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the impact of human capital value on human capital efficiency and business performance1 udc 005.336.4:65.015.25 nemanja veselinović1*, bojan krstić1, tamara rađenović2 1university of niš, faculty of economics, republic of serbia 2university of niš, faculty of occupational safety, republic of serbia orcid id: nemanja veselinović https://orcid.org/0000-0001-7254-3870 bojan krstić https://orcid.org/0000-0003-4597-6819 tamara rađenović https://orcid.org/0000-0003-1632-7772 abstract. in the knowledge economy era, human capital is a part of intellectual capital and a significant factor in enterprise competitiveness. the importance of human capital is often diminished due to the accounting expression of investments in human resources in the income statement as a cost (expenditure) component. this paper points to the fact that the cost of human resources is an investment that affects the growth of the business performance of an enterprise. hence, the aim of this paper is to examine the impact of human capital value on human capital efficiency and business performance indicators, such as sales revenue (sr), earnings before interest and taxes (ebit), and ebit margin (ebitm). to examine this impact, empirical research is conducted on a sample of 24 companies with the highest brand value for the period 2012-2019. the regression analysis results show that sales revenue and ebit grow by 0.77% and 1.1% respectively as human capital value grows by 1%. additionally, findings reveal that the growth of the human capital value negatively affects the values of human capital efficiency indicators and ebit margin in the sample of examined enterprises. keywords: human capital value, human capital measurement, efficiency jel classification: m21 received november 18, 2021 / revised march 01, 2022 / accepted march 10, 2022 corresponding author: tamara rađenović *phd student at university of niš, faculty of economics university of niš, faculty of occupational safety, čarnojevića 10a, 18000 niš, republic of serbia e-mail: tamara.radjenovic@znrfak.ni.ac.rs https://orcid.org/0000-0001-7254-3870 https://orcid.org/0000-0003-4597-6819 https://orcid.org/0000-0003-1632-7772 mailto:tamara.radjenovic@znrfak.ni.ac.rs 14 n. veselinović, b. krstić, t. rađenović 1. introduction in the knowledge-based economy, contemporary enterprises that possess a high share of intellectual resources in total assets are focused on the efficient management of intangible assets with the aim to improve economic efficiency, effectiveness, and competitive advantage (debrulle & maes, 2014). nowadays, to build sustainable and profitable enterprises, the management of those enterprises should use human competencies, skills, and talents, which are considered valuable intangible assets (wright et al., 2001). human capital is a term that refers to human resources and is a part of intellectual capital together with structural and relational capital (bontis & fitz-enz, 2002; vejchayanon, 2005; phillips, 2005; jovanović et al., 2021). intellectual capital is an outstanding source of establishing and maintaining a competitive advantage in the contemporary competitive environment in the information or digital era (krstić, 2007). managers decide to invest in intellectual capital components (structural, relational, and human capital) in order to boost the value and performance of the enterprise. managers have a responsibility to devote more time and effort to measuring and managing human and other intellectual resources in order to improve human capital efficiency, which contributes to the total economic efficiency of an enterprise. the purpose of this paper is reflected in the recommendations to managers to change their attitude toward investing in employees and turn to improving the knowledge, skills, and abilities of employees, due to the significant impact of human capital on the business performance of enterprises. 2. human capital: cost vs. investment in human resources? human capital research has grown in popularity over time. human capital research has an interdisciplinary trait because the formation of human capital eventuates simultaneously under the influence of external factors, such as investments, information, education, healthcare, and internal factors, such as specific capabilities, creativity, and self-education. people have different levels of education, knowledge, skills, and talents, as well as job expectations. more educated and better-trained employees in any workplace can deliver a higher value for their employers (mcconnell et al., 2009, p. 85). education and training, according to schultz (1960), represent an investment in human capital. in the knowledge economy era, the importance of human resources has outweighed the importance of physical and financial resources. investing in a worker's education and training is analogous to investing in capital goods. such wise investments increase work productivity and profit and are associated with considerable start-up expenses. back in 1960, schultz coined the phrase "human capital". it refers to its economic value further defined by human potentials that may be improved via suitable investments. becker (1993, p. 412) broadened the definition of efficient human capital by adding a person's health and behavior. higher wages of more educated employees are viewed as superior in terms of returns on investments in the employees' promotion (schultz, 1960; becker, 1962). according to bowen (1977, p. 507), human capital is comprised of people's accumulated knowledge and skills, utilized for the creation of customer-friendly goods and services. even then, human capital was recognized in science. however, the measurement of its value is still complex due to the specific intangible nature of human capital. the intangible aspect of human resources, which contains knowledge, skills, abilities, and other characteristics of employees, is represented by human capital. human capital focuses on the knowledge, skills, and abilities of employees that create value for the enterprise. the impact of human capital value on human capital efficiency and business performance 15 consequently, employees can successfully perform work tasks and achieve the business goals of the enterprise (edvinsson & malone, 1997). human resources management generally and exclusively deals with work done by all employees and managers, regardless of whether they contribute to value creation or not. mayo (2000) states that human capital management treats people as an asset (capital), while human resources management treats people as an expense. the necessity to create and implement an integrated and strategic approach to people management is something that both approaches have in common. on the other hand, meyer et al. (2009) report a large number of differences between human resource and human capital management. three approaches to defining human capital were recognized by chen and lin (2004). the transaction cost theory is the first method by which enterprises can hire new employees from within or outside the organization. since both choices involve expenses, businesses will always select the less expensive option, representing the most efficient method. the second approach is the resource-based view of the firm, in which the human competencies that are vital and provide a competitive advantage must be fostered within the organization. the human capital theory is the third approach, in which enterprises decide whether or not to invest in human capital by weighing anticipated future benefits. hendricks and schoellman (2017) developed a process model for human capital cost management that considered the stages of the investment process for human capital formation and renewal. kassouf (2017) proposes integrating investment and cost techniques to display staff costs by employing the reflection method in human capital cost accounting related to stages of reproduction. lagakos et al. (2018) established an organizational methodology for human resource accounting as an accounting category for businesses. in actual practice, there are two main methods of human capital accounting and assessment: the asset model (novas et al., 2017) and the utility model (hilorme et al., 2019). according to stiles & kulvisaechana (2003, p. 15), on the onehand, human capital measurement is necessary to quantify the impact of human capital interventions and highlight areas for further upgrading. on the other hand, measurement is a complex topic in this field. in this field, return on investment (roi), is still seen as a useful metric and its use is increasing worldwide (phillips, 2005). as stated by guest (1997), some consulting companies assess human capital investment using financial metrics, production and/or products and service metrics, such as units produced, customer satisfaction, number of mistakes, and time metrics like lateness and absence. according to mayo (2012), human capital must be quantified by workforce analytics, consisting of labor turnover rate, absenteeism, staff rotation and vacancies, job type, grade, gender, ethnic origin, and views of human capital: temporary, subcontract, and consultant resources. while enterprises in the industrial economy depended primarily on tangible assets to create value, intangibles have become increasingly essential in the growing knowledge economy. many conceptual frameworks have been developed to measure intellectual performance in the knowledge economy (abeysekera & guthrie, 2004). the discrepancy between the market value and the book value, as defined by brooking (1997), is typically explored in three components: internal (structural) component, external (relational) component, and human component that facilitates interaction between internal and external components in order to create value. human capital, as described by stewart (1998) as the skills, abilities, and competencies of individuals and groups, is not viewed as a legal entity owned by businesses. as a result, it may also refer to the knowledge of employees that they take with them when they depart the enterprise (meritum, 2002). 16 n. veselinović, b. krstić, t. rađenović in general, there are two types of human capital measurement: monetary measurement, which expresses the value of human capital (hc) in monetary terms, and non-monetary measurement, which includes the usage of likert-type scales (chen & lin, 2004), as well other non-financial indicators of human performance. according to guest (1997), to quantify human capital, an enterprise must assess the attitude and behavior of employees, internal and external performance indicators, for example, product and service quality, productivity, sales, and other financial performance. additionally, thomas et al. (2013) presented a technique for measuring human capital – three kinds of measurement, and utilizing human capital dashboards for monitoring. the first kind of measurement includes collecting and measuring all possible data on headcounts, turnover, promotions, and other data from the hr information system. the second one includes the simplification of measurement by emphasizing a few key indicators, substantially enhanced data quality, data from human resource information system (hris), and other hr databases (e.g. recruiting, payroll). the third one includes operational data integrations, which include information from non-hr sources like finance, marketing, and quality control, as well as derived metrics like revenue per employee, the value created per employee, etc. human capital encompasses the economic worth of human performances such as education level, the training volume, intellect, skills, talents, health, etc. (jovanović, 2018, veselinović et al., 2020). given that all investments and costs for workers (salaries, nonmonetary benefits, education, training, etc.) may be represented as total investment in human resources, more precisely, the value of human capital, the human capital (hc) formula is the following (krstić & bonić, 2016): 𝐻𝑐 = 𝑃𝑒 + 𝑆𝑖 (1) pe denotes personal expenses, whereas si denotes the total amount of stimulating incentives. furthermore, pe includes employee or management salaries (net salary + payroll taxes), as well as costs for human resource development, such as education, training, and other costs (veselinović et al., 2020). the literature mentions numerous approaches to assessing human capital, such as cost, income, and market approach (merriman, 2017). the cost approach is founded on the economic concept of substitution, which correlates the worth of human capital to the cost of creating a comparable substitute workforce. the income approach uses the economic principle of anticipating future benefits of employees and considers it as human capital. according to the economic concept of substitution, the market approach calculates the value of human capital based on the selling price of equivalent assets. given that there are available and transparent internal data (financial statements) on investment in employees (excluding training costs), the cost approach can be applied in the research model of this study, as total investments in managers and other employees can be estimated. on the other hand, the income approach is difficult to apply due to the lack of other necessary data and the influence of other factors that affect the income of an enterprise, especially other intellectual assets. since the market approach relies on the economic principles of competition and equilibrium, and since in our sample there are companies from different industries and markets, it was impossible to apply this approach. the impact of human capital value on human capital efficiency and business performance 17 3. human capital efficiency measurement human capital efficiency measurement includes traditional and modern measurement models (veselinović et al., 2020). the traditional human capital measurement model includes: a) human capital efficiency indicators (i.e. labor productivity indicators) as nonfinancial and financial measures and b) many non-financial performance indicators of people in a business organization. labor productivity is an efficiency measure of how well an enterprise uses its human capital or the labor of its workers, measured by the number of provided products (q) and services by them. a basic indicator of labor productivity is defined as the ability to accomplish a particular output volume (q) with the lowest possible labor inputs (l) (krstić & sekulić, 2020): 𝑃 = 𝑄 𝐿 (2) this is a non-financial indicator of labor productivity. multidimensionality and complexity of q and l, as an element of productivity measure, lead to methodological challenges in measuring the labor productivity indicators. in addition, the production volume (q) might be expressed in monetary (financial) terms, such as sales revenue, revenue, expenses, accounting profit (earnings), economic value added (eva), and net cash flow. with this in mind, both nonfinancial (natural) and financial indicators of labor productivity measurement can be analyzed. the financial aspect of measuring labor productivity implies that categories defined in monetary terms are used, and data from the balance sheet and income statement are used as a data source (veselinović et al., 2020). the rationale for this is to overcome the limitations of non-financial indicators of labor productivity measurement. regarding the financial aspect of labor productivity measurement, there are different financial indicators (veselinović et al., 2020) or ratios: ▪ operating revenue (ro) per employee; ▪ sales revenue (sr) per employee; ▪ expenses (e) per employee; ▪ earnings before interest and taxes (ebit) per employee; ▪ operating profit (po) per employee; ▪ net profit (pn) or net profit attributable to shareholders per employee; ▪ economic value added (eva) per employee or human economic value added (heva); ▪ net cash flow (cf) per employee. efficiency is defined as the ratio of achieved outputs to inputs (kucharková et al., 2015). human capital efficiency is evaluated as the quotient of an economic results volume (output) and human capital value (input). human capital efficiency (hce) is described by borowski (2015) as the rate of efficiency in the use of human capital, which indicates human capital relevance in terms of added value to the organization. the modern human capital efficiency measurement model includes several human capital efficiency indicators. some of them are human capital market value – hcmv (drábek et al., 2017; lindenberg & ross, 1981), human capital value added – hcva (fitzenz, 2000; drábek et al., 2017), human capital return on investment – hcroi (fitz-enz, 2000; drábek et al., 2017), and efficiency in the use of human capital – ehc (krstić & bonić, 2016) (see table 1). within the labor productivity indicators, there are indicators of productivity (efficiency) of human capital that use labor consumption, costs, or the number of employees in their denominator. on the other hand, modern indicators of human capital efficiency include 18 n. veselinović, b. krstić, t. rađenović additional categories of costs that represent investments in human capital: benefits, incentives, training costs, etc. in modern indicators of human capital efficiency, the main focus is on people who represent capital and create value for the enterprise. table 1 human capital efficiency indicators indicator definition and formula human capital market value drábek et al. (2017, p. 123) define human capital market value (hcmv) as the net market value of an enterprise per employee. the following formula is used to calculate the market value of human capital (drábek et al., 2017, p. 123; lindenberg & ross, 1981): 𝐻𝐶𝑀𝑉 = 𝑀𝑐 ∶ 𝐴𝑠 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 . market capitalization is denoted by mc, while total assets are denoted by as on the balance sheet. human capital value added human capital value added (hcva) is a metric for determining human capital productivity that explains productivity in terms of profitability (fitz-enz, 2000, p. 50). the full-time equivalent in value added (drábek et al., 2017, p. 123) represents the economic efficiency of human capital in an enterprise. the human capital value added is computed as follows (fitz-enz, 2000, p. 50): 𝐻𝐶𝑉𝐴 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 – (𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 – 𝑃𝑎𝑦 𝑎𝑛𝑑 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠) 𝐹𝑢𝑙𝑙−𝑡𝑖𝑚𝑒 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 or hcva = ebit + hc number of employees human capital return on investment drábek et al. (2017, p. 123) define human capital return on investment (hcroi) as an indicator illustrating the link between human capital and profitability. this metric shows the profit generated from the money spent on employee salaries and benefits as a return on investment in human capital (fitz-enz, 2000, p. 50). the return on investment in human capital is computed as follows (fitz-enz, 2000, p. 50): hcroi = revenue – (expenses – pay and benefits) pay and benefits or hcroi = ebit + hc hc efficiency in the use of human capital efficiency in the use of human capital (ehc) is a measure of productive human capital usage in an enterprise (krstić & bonić, 2016). this indicator is calculated in the following way (krstić & bonić, 2016): 𝐸𝐻𝐶 = 𝐼𝐶𝑉𝐴 𝐻𝐶 . this indicator is calculated by adjusting earnings before interest and taxes (ebit). the amount of newly generated value per monetary unit spent on visible intellectual capital is the intellectual capital value added (icva) (dženopoljac, 2013, p. 134). the following is how icva is obtained (krstić & bonić, 2016): 𝐼𝐶𝑉𝐴 = 𝐸𝐵𝐼𝑇 + 𝐷𝑓𝑎 + 𝐴𝑚𝑖𝑎 + 𝐼𝑚𝑙 + 𝑃𝑒 or 𝐼𝐶𝑉𝐴 = 𝐸𝐵𝐼𝑇𝐷𝐴 + 𝑃𝑒 dfa stands for depreciation of fixed or long-term assets, whereas amia stands for amortization of intangible assets having a defined lifespan. a reduction in the value of intangible assets having an indeterminate lifespan is referred to as iml (goodwill). earnings before interest, taxes, depreciation and amortization are referred to as ebitda. source: authors’ presentation 4. conceptual framework and methodology of empirical research data used in this empirical research are from the financial statements of 24 companies covering the period 2012-2019. due to the global coronavirus (covid-19) pandemic, 2020 is not included in the research. the sample includes the following companies: accenture, amazon, american express, apple, cisco, citi, coca cola, disney, ebay, general electric, the impact of human capital value on human capital efficiency and business performance 19 honda, hsbc, ibm, intel, jp morgan, mcdonald’s, microsoft, nike, oracle, philips, samsung, sap, toyota, ups. the sample includes companies that are on the top 50 interbrand list of the most valuable brands. one of the essential criteria for the selection of companies is their ranking on the list for the entire analyzed period 2012-2019. by applying this criterion and observing the brand’s value at the global level in the analyzed period, the sample is reduced to 36 companies and 36 brands, respectively. finally, the final sample includes 24 brands because we had to exclude 12 brands from the analysis due to the unavailability of financial data. the aim of the research is to determine the impact of the human capital value on the human capital efficiency of an enterprise. human capital (hc) represents an independent variable in our model and the sum of investments in human resources. given the unavailability of data on investment in the training and development of employees, the human capital value contains the salaries of employees and managers and the total amount of stimulating incentives. on the otherhand, we have 9 dependent variables, which include various business performance and efficiency (productivity) indicators: ▪ sales revenue (sr); ▪ sales revenue per employee (p0); ▪ earnings before interest and taxes (ebit); ▪ earnings before interest and taxes per employee (p1); ▪ earnings before interest and taxes margin (ebitm); ▪ human capital market value (hcmv); ▪ human capital value added (hcva); ▪ human capital return on investment (hcroi); ▪ efficiency in the use of human capital (ehc). sales revenue (sr) and earnings before interest and taxes (ebit) were chosen as dependent variables because we wanted to see the impact of the value of human capital on the results achieved without the influence of financial and tax factors that can significantly change the research results. in addition, we wanted to observe the impact of the value of human capital on the productivity (p0, p1) and profitability (ebitm) indicators associated with them. we have included in the study all modern indicators of human capital efficiency that are in the literature, except for the human capital cost factor (hccf), because its value in our research coincides with the value of human capital. in order to explore the impact of key variables and verify the defined hypotheses, secondary data were used, collected from the websites and annual financial statements (the balance sheet, income statement, cash flow statement, statement of changes in equity, notes to the financial statements) of selected companies for the period 2012-2019. based on one independent and 9 dependent variables, the following hypotheses were formulated: h1: the increase of human capital (hc) has an impact on the decrease of sales revenue per employee indicator (p0). h2: the increase of human capital (hc) has an impact on the decrease of earnings before interest and tax per employee indicator (p1). h3: the increase of human capital (hc) has an impact on the decrease of human capital market value (hcmv). h4: the increase of human capital (hc) has an impact on the decrease of human capital value added (hcva). h5: the increase of human capital (hc) has an impact on the decrease of human capital return on investment (hcroi). 20 n. veselinović, b. krstić, t. rađenović h6: the increase of human capital (hc) has an impact on the decrease of the efficiency in the use of human capital (ehc). h7: the increase of human capital (hc) has an impact on the increase of sales revenue (sr). h8: the increase of human capital (hc) has an impact on the increase of earnings before interest and tax (ebit). h9: the increase of human capital (hc) has an impact on the decrease of ebit margin.2 fig. 1 the conceptual framework source: authors’ presentation with the purpose to test the validity of hypotheses, correlation and regression analysis methods were used in this empirical research. we have in total 192 observations in the sample. 2 earnings before interest and taxes margin (ebitm) measures the earning potential from the operating activities of an enterprise (krstić & sekulić, 2020). the operating activities are the primary source of cash flow for the enterprise, and a rise in ebitm from one quarter to the next is considered an indication of a strong, expanding business. the ebit margin is a measure of the managerial ability and operational efficiency of the enterprise. it assesses the capacity of the enterprise to convert revenues into profit before interest and taxes. it is a metric for comparing a competitive position of the enterprise to that of others in the same industry. the following formula is used to calculate the ebit margin (krstić & sekulić, 2020): ebitm = ebit : sr. the impact of human capital value on human capital efficiency and business performance 21 5. results of empirical research 5.1. results of descriptive statistics the descriptive statistics are presented in table 2. the average human capital (hc) in the analysed companies is 15,400 million $. the minimum value of 1,716 million $ is recorded in ebay in 2013, while the maximum value of 109,111 million $ is recorded in amazon in 2019. the average sales revenue (sr) in the analyzed companies is 79,709 million $, while the minimum value of 8,257 million $ is recorded in ebay in 2013 and the maximum value of 280,522 million $ is recorded in amazon in 2019. the average value of human capital return on investment (hcroi) in the analyzed companies is 2.4469, while the minimum value of 0.74 is recorded in general electric in 2018 and the maximum value of 10.94 is recorded in apple in 2012. the average value of efficiency in the use of human capital (ehc) in the analyzed companies is 2.9159, while the minimum value of 0.87 is recorded in general electric in 2018 and the maximum value of 11.53 in apple in 2012. table 2 descriptive statistics variable mean std. dev. minimum maximum hc 15,400.45 14,641.91 1,716.16 109,111.60 p0 0.4822 0.3760 0.06 2.12 p1 0.1014 0.1160 -0.05 0.73 hcmv 0.0000162 0.0000231 0.0000002 0.001589 hcva 0.1859 0.1301 0.03 0.8 hcroi 2.4469 1.5593 0.74 10.94 ehc 2.9159 2.0260 0.87 11.53 sr 79,709.89 64,417.66 8,257 280,522 ebit 14,698.78 13,967.04 -12,999 71,230 ebitm 0.2076 0.1127 -0.11 0.51 source: authors’ calculations 5.2. results of correlation analysis correlation analysis is performed to investigate the relationship between variables and the results are presented in table 3. according to the results, there is a positive correlation between hc and sr, hc and hcva, and hc and ebit. results show that the positive correlation between hc and ebit is moderate and statistically significant (0.2605), while the correlation between hc and hcva is low and insignificant (0.1106). the strongest positive correlation is between hc and sr (0.5304). the correlation between hc and other variables is negative and statistically significant. a strong negative correlation exists between hc and hcroi (-0.5258), hcmv (-0.5238), and ehc (-0.5165). a moderate negative correlation is present between hc and p1 indicator (-0.2201), while a low negative correlation exists between hc and p0 indicator (-0.1768), and ebitm (-0.1513). 22 n. veselinović, b. krstić, t. rađenović table 3 correlations hc p0 p1 hcmv hcva hcroi ehc sr ebit ebitm hc 1 p0 -0.1768* 1 p1 -0.2201* 0.6882* 1 hcmv -0.5238* 0.2532* 0.3251* 1 hcva 0.1106 0.6820* 0.8232* 0.3634* hcroi -0.5258* 0.4569* 0.6915* 0.1972* 0.2789* 1 ehc -0.5165* 0.4977* 0.6558* 0.1687** 0.2400* 0.9788* 1 sr 0.5304* 0.4853* 0.1544** -0.4924* 0.2039* 0.1477** 0.1983* 1 ebit 0.2605* 0.3355* 0.6068* -0.3182* 0.3937* 0.6401* 0.6157* 0.6193* 1 ebitm -0.1513** -0.0457 0.5991* 0.1699** 0.3725* 0.6206* 0.5464* -0.2105* 0.5522* 1 note: * correlation is significant at the 0.01 level (2-tailed), ** correlation is significant at the 0.05 level (2-tailed) source: authors’ calculations 5.3. results of regression analysis the results of diagnostic tests (table 4) reveal that the random effect model (rem) is appropriate for fitting data in eight models, while the fixed effect model (fem) is appropriate for model 8, and regression results are presented in table 5. table 4 diagnostic tests model f-test breusch-pagan lm hausman h0: pooled, h1: fem h0: pooled, h1: rem h0: rem, h1: fem model 1 (ln hc → p0) 213.67 (0.0000) 622.14 (0.0000) 0.10 (0.7531) model 2 (ln hc → p1) 115.67 (0.0000) 583.84 (0.0000) 0.15 (0.6962) model 3 (ln hc → hcmv) 28.02 (0.0000) 392.76 (0.0000) 0.09 (0.7587) model 4 (ln hc → hcva) 97.89 (0.0000) 562.09 (0.0000) 2.66 (0.1027) model 5 (ln hc → hcroi) 53.23 (0.0000) 496.63 (0.0000) 1.15 (0.2843) model 6 (ln hc → ehc) 82.79 (0.0000) 553.25 (0.0000) 0.19 (0.6648) model 7 (ln hc → ln sr) 250.32 (0.0000) 622.26 (0.0000) 2.52 (0.1123) model 8 (ln hc → ln ebit) 42.48 (0.0000) 439.20 (0.0000) 10.00 (0.0016) model 9 (ln hc → ebitm) 31.16 (0.0000) 412.55 (0.0000) 0.17 (0.6818) note: p values are given in ( ) source: authors’ calculations all models presented in table 5 analyze the impact of human capital (hc) on the human capital efficiency indicators and business performance (sales revenue, ebit, and ebit margin). the models revealed a statistically significant impact of hc on the human capital efficiency indicators and business performance (sales revenue, ebit, and ebit margin). the impact of human capital value on human capital efficiency and business performance 23 the impact on the human capital efficiency indicators and ebit margin is negative, while the impact on sales revenue and ebit is positive. table 5 regression results p0 p1 hcmv hcva hcroi ehc ln sr ln ebit ebitm constant 1.4331 [5.10] (0.000) 0.4144 [3.75] (0.000) 0.0002 [6.10] (0.000) 0.6224 [4.64] (0.000) 11.8642 [6.46] (0.000) 13.2838 [6.47] (0.000) 3.7939 [7.98] (0.000) -1.0055 [-0.66] (0.510) 0.5712 [3.61] (0.000) ln hc -0.1021 [-3.52] (0.000) -0.0336 [-2.90] (0.004) -0.00002 [-5.58] (0.000) -0.0468 [-3.32] (0.001) -1.0108 [-5.20] (0.000) -1.1128 [-5.14] (0.000) 0.7720 [15.82] (0.000) 1.0965 [6.71] (0.000) -0.0390 [-2.32] (0.020) θ 0.9331 0.9090 0.8152 0.9008 0.8657 0.8925 0.9380 0.8247 ρ 0.9653 0.9374 0.7795 0.9264 0.8719 0.9144 0.9701 0.7978 r2 0.0667 0.0457 0.1064 0.0756 0.1300 0.1214 0.5959 0.8618 0.0250 �̅�2 0.8418 f (fem); wald (rem) 12.40 (0.0004) 8.43 (0.0037) 31.11 (0.0004) 11.02 (0.0009) 27.00 (0.0000) 26.45 (0.0000) 250.38 (0.0000) 44.99 (0.0000) 5.39 (0.0203) note: p values in ( ), z values in [ ] for rem models, and t values in [ ] for fem model source: authors’ calculations model 1 analyses the impact of hc on sales revenues per employee (p0) and obtained results show a negative and statistically significant impact. if hc increases by 1%, the sales revenue per employee decreases by $1,021. the estimated model is statistically significant, as confirmed by the wald statistics. the individual specific error can explain 96.53% of the entire composite error variance. model 2 analyses the impact of hc on earnings before interest and taxes per employee (p1) and obtained results show a negative and statistically significant impact. if hc increases by 1%, the earnings before interest and tax per employee indicator decreases by $336. the estimated model is statistically significant, as confirmed by the wald statistics. the individual specific error can explain 93.74% of the entire composite error variance. model 3 analyses the impact of hc on human capital market value (hcmv) and obtained results show a negative and statistically significant impact. if hc increases by 1%, the human capital market value decreases by 0.0000002. the estimated model is statistically significant, as confirmed by the wald statistics. the individual specific error can explain 77.95% of the entire composite error variance. model 4 analyses the impact of hc on human capital value added (hcva) and obtained results show a negative and statistically significant impact. if hc increases by 1%, the human capital value added decreases by 0.000468. the estimated model is statistically significant, as confirmed by the wald statistics. the individual specific error can explain 92.64% of the entire composite error variance. model 5 analyses the impact of hc on human capital return on investment (hcroi) and obtained results show a negative and statistically significant impact. if hc increases by 1%, the human capital return on investment decreases by 0.0101. the estimated model is statistically significant as confirmed, by the wald statistics. the individual specific error can explain 87.19% of the entire composite error variance. 24 n. veselinović, b. krstić, t. rađenović model 6 analyses the impact of hc on the efficiency of the use of human capital (ehc), and obtained results show a negative and statistically significant impact. if hc increases by 1%, the efficiency of the use of human capital decreases by 0.0111. the estimated model is statistically significant, as confirmed by the wald statistics. the individual specific error can explain 91.44% of the entire composite error variance. model 7 analyses the impact of hc on the sales revenues (sr) and obtained results show a positive and statistically significant impact. if hc increases by 1%, the sales revenue increases by 0.77%. the estimated model is statistically significant, as confirmed by the wald statistics. the individual specific error can explain 97.01% of the entire composite error variance. model 8 analyses the impact of hc on earnings before interest and taxes (ebit), and obtained results show a positive and statistically significant impact. if hc increases by 1%, the earnings before interest and taxes increase by 1.1%. the estimated model explains 86.18% change in ebit and is statistically significant, as confirmed by the f test. model 9, finally, analyses the impact of hc on the ebit margin (ebitm) and obtained results show a negative and statistically significant impact. if hc increases by 1%, the ebit margin decreases by 0.0004. the estimated model is statistically significant, as confirmed by the wald statistics. the individual specific error can explain 79.78% of the entire composite error variance. 6. discussion and conclusion based on the results of the empirical research in this paper, it can be concluded that human capital has a significant statistically positive impact on sales revenues and ebit and a significant statistically negative impact on other efficiency and productivity indicators. hence, this implies that all the hypotheses are confirmed. the value of human capital in the era of the knowledge economy has an impact on the business results of enterprises in terms of increasing sales revenue and earnings before interest and taxes. this indicates that additional investment in human resources would lead to higher revenue. since investments in human resources are treated as costs in the income statement, managers often refuse to increase salaries and incentives for employees because they are afraid of increased costs and reduced profits (earnings). on the other hand, they often reduce business costs at the expense of employees, in terms of reducing salaries and benefits. financial reporting standards should find an adequate solution for recording intangible assets, especially human capital. human resources entail costs that represent investments with a specific rate of return, which is reflected in the increase in revenue. by looking at the impact of the human capital value on the human capital efficiency indicators and ebit margin, the logical conclusion can be driven, verified through conducted empirical research, that such an impact is caused by the structure of formulas that have in their denominator either the number of employees or human capital value. since the human capital value includes the costs of salaries, benefits, incentives, employee training, etc., it will have a negative impact on the human capital efficiency 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(2001). human resources and the resource based view of the firm. journal of management, 27(6), 701-721. https://doi.org/10.1177/014920630102700607 uticaj vrednosti ljudskog kapitala na efikasnost ljudskog kapitala i poslovne performanse u eri ekonomije znanja ljudski kapital je deo intelektualnog kapitala i glavni faktor razvoja preduzeća. značaj ljudskog kapitala se često umanjuje zbog računovodstvenog izražavanja ulaganja u ljudske resurse u bilansu uspeha kao troškovne komponente. ovaj rad ukazuje na činjenicu da troškovi za ljudske resurse predstavljaju investicije koje utiču na rast poslovnih perfomansi preduzeća. otuda, cilj ovog rada je da se istraži uticaj vrednosti ljudskog kapitala na efikasnost ljudskog kapitala i neke poslovne performanse, kao što je prihod od prodaje, dobit pre odbitka kamata i poreza, i marža dobiti pre odbitka kamata i poreza. da bi se ispitao ovaj uticaj, sprovedeno je empirijsko istraživanje na uzorku od 24 preduzeća s najvećom vrednošću brenda za period 2012 2019. rezultati regresione analize pokazuju da prihod od prodaje i ebit rastu za 0,77%, odnosno 1,1% s rastom vrednosti ljudskog kapitala za 1%. takođe, rezultati pokazuju da rast vrednosti ljudskog kapitala negativno utiče na vrednosti pokazatelja efikasnosti ljudskog kapitala i marže dobitka pre odbitka kamata i poreza u istraživačkom uzorku preduzeća. ključne reči: vrednost ljudskog kapitala, merenje ljudskog kapitala, efikasnost https://doi.org/10.1108/jic-08-2016-0079 https://doi.org/10.1086/258393 https://doi.org/10.1177/014920630102700607 10502 facta universitatis series: economics and organization vol. 19, no 2, 2022, pp. 95 110 https://doi.org/10.22190/fueo220217008l © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the impact of demographic differences on employee satisfaction with benefits and perks: evidence from serbian financial sector1 udc 005.32:331.101.32 anđela lazarević1, ivana marinović matović2 1university of niš, faculty of mechanical engineering, republic of serbia 2puc parking service – niš, republic of serbia orcid id: anđela lazarević https://orcid.org/0000-0003-3071-5157 ivana marinović matović https://orcid.org/0000-0002-8273-4096 abstract. after the downfall of socialist regimes, human resource management systems in transition countries like serbia were transformed, establishing entirely new employee compensation system. in this paper, the most common benefits and perks in the serbian financial sector, as well as their significance for the employee satisfaction are explored, with the focus on the effectiveness of its structure. the investigation of differences in impact of benefits and perks on employee satisfaction is performed with respect to gender, education, age, and job position of the respondents. the empirical research is conducted by a survey questionnaire. results suggest that there are no differences in employee satisfaction between respondents of different genders, and education, while partial differences in employee satisfaction are confirmed with respect to age, and job position. the results indicate that benefits and perks in serbian financial sector should be better structured, and provide guidelines for the investigation of more favorable total compensation package. key words: benefits, perks, employee satisfaction, compensation packages, human resource management jel classification: c830, c60, j33 received february 17, 2022 / revised may 04, 2022 / accepted may 12, 2022 corresponding author: anđela lazarević faculty of mechanical engineering, university of niš, aleksandra medvedeva 14, 18000 niš, republic of serbia | e-mail: andjela.lazarevic@gmail.com https://orcid.org/0000-0003-3071-5157 https://orcid.org/0000-0002-8273-4096 mailto:andjela.lazarevic@gmail.com 96 a. lazarević, i. marinović matović 1. introduction it is a long way from early industrial employment conditions to the contemporary compensation packages aimed to remunerate any work or task in today’s work environment. in addition to employers evaluating their employees, employees are increasingly able to value their employers. this is why engaging and adequately structured compensation packages are important for business organization, to attract and retain employees, which are the key to competitive, profitable and sustainable business (bessette, 2014). salary is generally a basic component of the overall compensation package, but not enough to motivate and retain key employees (rowland, 2011; marescaux et al., 2013). benefits and perks, in addition to salary and short and long-term incentives, are the basic components of the employee’s compensation system in developed economies. benefits and perks do not represent a reward for the results achieved; they are a reward for affiliation to the organization (ellig, 2014; armstrong, 2009). benefits have multiple functions in the organization. benefits are reflection of social justice, and the value that employees achieve based on their contribution to the organization. benefits encourage competition between organizations and contribute to attracting and retaining employees (herman, 2019; carter, 2008; zhou et al., 2009). they provide control over the costs of compensation system in the organization and improve the organizational reputation due to the care of employees. benefits include, but are not limited to, pension and health insurance, life insurance, a company car, as well as certain special benefits. certain benefits are a legal obligation, such as social insurance, unemployment insurance and compulsory health insurance. there are benefits that provide a balance of work and private life (holiday pay, paid leave on various grounds), as well as other allowances of a material nature, paid dental services, transportation costs, mobile phones, and similar allowances (armstrong, 2009; lee et al., 2006; zhou et al., 2009). depending on the business organization, certain benefits can be offered to both employees and their family members. perks are assigned to managerial or other specific positions in the organization. they represent additional benefits that do not exist in the benefit program for all employees. perks are determined depending on the position in the organizational hierarchical structure, and to a certain extent they are viewed as power symbols. the following perks can usually be found in the compensation package: company car, financial advisor (for the purpose of private investments and tax savings), voluntary privately funded pension or health insurance for management. perks can vary between business organizations, may include paid vacation at resorts, paid meals at expensive restaurants, personal use of a company vehicle, paid childcare, professional associations’ and clubs’ membership, and other perks provided by business organizations for their managers. these perks have significant material value, and managers achieve significant benefits through them. some authors believe that rewarding managers with perks facilitates and improves their work and encourages productivity (pržulj, 2011; rajan & wulf, 2006). many countries of central and eastern europe faced the rapid development of the socialist government and society after the world war ii and this trend managed to last for almost 50 years, depending on the country. this significantly affected the way of life in those countries, as well as all segments of social, cultural, political, and economic development. that is why the fall of berlin wall and the collapse of soviet union were the trigger for a sudden downfall of socialist regimes in central and eastern europe countries. some countries recovered faster and implemented substantial economic reforms, while others still lag behind in these reforms the impact of demographic differences on employee satisfaction with benefits and perks ... 97 (svejnar & uvalic, 2012). serbia unfortunately belongs to those transition countries that had to learn to adapt to new circumstances the hard way, due to the civil war, international sanctions, hyperinflation, nato bombing and many other misfortunate events that were interrelated. the compensation practices in serbia, as in other central and eastern european countries, are being transformed, while serbia faced with changed labor market developments, new management techniques, and various structure of compensation packages, including benefits, as one of the reward components (marelli & signorelli, 2010; lewis, 2005; festing & sahakiants, 2013). however, this topic is usually addressed by lawyers and theorists interested in regulative framework and possibilities of various compensation structures (draskovic & andrejevic, 2021). in the present study, the impact of certain components of the compensation system on employee satisfaction was examined, to provide new insights into how particular benefits and perks affect satisfaction in the workplace, depending on gender, education, age, and job position of employees. despite the interest in this field from scientific and professional public increased in recent years (radovanovic, 2021), in particular the deeper study of benefits and perks, as compensation components, is missing (festing & sahakiants, 2013; morley et al., 2012). there are important limitations in the literature regarding the most desired benefits and perks, depending on employees’ gender, education, age, and job position. the present study copes with this gap in knowledge, which may benefit the development of tailored benefits and perks for certain subgroups of employees, with the emphasis on their gender, educational, age or job differences. based on the defined research problem of current study, employee satisfaction was determined as a dependent variable. the research was based on the subjective perception of employees that a particular benefit or perk affects their satisfaction in the workplace. in the current study, the influence of different demographic characteristics on employee satisfaction as a dependent variable was analyzed. demographic characteristics of respondents (gender, education, age, and job position) were independent variables. the research was based on the assumption that the observed demographic characteristics affect employee satisfaction with particular benefits and perks, as common components of compensation. the current study makes constructive contributions by giving recommendations to the business community, decision makers and other actors in the financial sector, to consider different aspects of employee satisfaction when implementing benefits and perks in compensation packages. 2. literature review despite the lack of the scientific literature dealing with the specifics of the serbian employee compensation policies, there have been numerous studies done by scholars in the academic world regarding the relationship between compensation and motivation, as well as the relationship between the motivation and achieved business performances in general (adeoye, 2019). mansor et al. (2012) in their study explored the relationship between employee satisfaction and motivation with different compensation components (salary, insurance benefits). they found significant positive correlation, proving that compensation is a predictor of high work motivation and job satisfaction. this was confirmed by islam & saha (2001) research, studying the satisfaction of bank employees in bangladesh, and jehanzeb et al. (2012). danish & usman (2010) confirmed that the strongest factor motivating employees is an adequate compensation model, and shafiq & 98 a. lazarević, i. marinović matović naseem (2011) concluded that a poorly designed compensation model leads to dissatisfaction and low employee motivation. there are no significant differences in employee motivation and satisfaction depending on gender (vlosky, 2009), but the impact of compensation on job satisfaction and motivation is more pronounced in older employees (douglas et al., 1991). the impact of benefits on employee satisfaction and motivation is significant and positive (uppal, 2005). benz (2005) came to the same conclusion, emphasizing the special importance of benefits. benefits that guarantee employees flexibility through various forms of work, have a strong motivational impact on talented members of the business organization (hitka et al., 2015; schlechter et al., 2015). in contrast to the previous, munap et al. (2013) and mabaso & dlamini (2017) concluded that the benefits offered by the organization are not able to fully motivate employees. according to another study, benefits have an ambivalent effect; they have neither a positive nor a negative influence on employee satisfaction and their work engagement (slavic et al., 2019). nthebe et al. (2016) in their study investigated the relationship between benefits, motivation and work efficiency. the analysis confirmed that the correlation between benefits and work motivation is strong and positive, which significantly affects the growth of efficiency at work. muse & wadsworth (2012) studied the relationship between non-traditional benefits and employee motivation. the conclusions of their research confirmed the strong motivational effect of these benefits, and the positive impact on employee work motivation. benefits that provide security to employees significantly increase work motivation (hulkko-nyman et al., 2012). muse & wadsworth (2012) studied the motivation with benefits depending on respondents’ gender, and found that the differences were not statistically significant. nemeckova (2017) found in her research that benefits have an impact on employee motivation and their work results, although not directly, because many employees consider certain benefits to be guaranteed. some benefits have a constant significant impact on employee motivation, primarily various forms of education and professional development. khan (2012) suggested a greater impact of individual benefits on motivation, while training and development and motivation are closely related, and have a strong positive impact on business performance. ozkeser (2019) confirmed a positive association between employee training and development and their motivation. niehaus (2008) confirmed that benefits, in the form of pension insurance, as a component of compensation package, has a positive impact on employee productivity. this opinion is prevalent in research also by other authors. the positive impact of benefits in the form of pension insurance on employee satisfaction and motivation is confirmed in the works of kozarevic et al. (2014), while pension insurance schemes motivate employees to improve work results (dugguh & iliya, 2018). contrary to the above claims, fashagba & adeyele (2011) believe that pension insurance has little impact on employee motivation and their perception of work. the impact of benefits on employee satisfaction and their work engagement is somewhat limited (kulikowski & sedlak, 2020). however, gender differences are important for defining the optimal compensation model, primarily because certain benefits (tangible, intangible, or combined) may affect employee performance differently, depending on gender (sittenthaler & mohnen, 2020). galanaki (2020) also confirms the greater importance of benefits for female employees. benefits significantly affect the satisfaction of female employees, and this is especially pronounced in crisis conditions. during a recession, if the share of benefits in compensation packages decreases, it significantly affects female employees, so organizations have to adequately allocate certain components of compensation in crisis conditions (galanaki, 2020). the impact of demographic differences on employee satisfaction with benefits and perks ... 99 in the republic of serbia, different types of benefits are available to employees, depending on the business organization, length of employment, job position, and other factors. in general, all employees have access to legally guaranteed benefits, pension and health insurance, maternity leave, and others that are binding on employers. the most frequently used benefit is maternity leave, which is used by employees in 77.8% of business organizations (berber, 2015). research study from 2012 confirmed that the benefits and perks for employees, especially in managerial positions, include: professional training and development, flexible working hours, mobile phone, laptop and company car for private use, as well as paid additional health insurance, for interventions not covered by compulsory health insurance. additional perks may include private pension insurance, life insurance, membership in professional associations (marinović matović, 2012). a 2018 study confirmed that 38% of business organizations include various categories of intangible benefits in compensation packages (berber & slavic, 2018). basic, statutory benefits include pension and health insurance, while additional benefits are provided by the business organization, from its own resources. based on the literature review, the following hypotheses are developed, explored and analyzed based on the adopted methodology: h1. there are gender differences in employee satisfaction with benefits and perks h2. there are educational differences in employee satisfaction with benefits and perks h3. there are age differences in employee satisfaction with benefits and perks h4. there are job differences in employee satisfaction with benefits and perks h5. education is the most desirable benefit, regardless of employee demographics 3. methodology empirical research for this study was carried out with the aim to explore the significance of benefits and perks for the employee satisfaction. this research was conducted in serbian financial sector by a survey questionnaire. demographic characteristics, such as gender, level of education, age and current job position, were explored through the first part of the questionnaire. the second part of the questionnaire was focused on the effect of common benefits and perks on employee satisfaction. this part of questionnaire was structured based on the authors’ experience coupled with the literature investigations, especially considerations of nemeckova, who identified benefits that are the most often present in financial sector in central and eastern european countries (nemeckova, 2017). following benefits/perks were investigated: paid education and language courses, cell phone, notebook, professional stays and traineeships, pension insurance, health insurance, life insurance, legal services, and other benefits/perks. to assess their effect, respondents were asked to rank each benefit/perk by its importance, assigning a certain number of points per each item, whereby the benefit that strongest satisfied them was assigned with the maximum number of points (9), next benefit by its influence was assigned with 8 points, and the benefit with the weakest effect on their satisfaction was given 1 point. this made it possible to determine the significance of each benefit or perk for the respondents. the survey was conducted in period of 3 months, from october 2020 till december 2020. questionnaires were distributed to financial organizations being active at the territory of serbia, addressing their employees. serbian financial sector consists of following organizations: banks, insurance companies, investment and voluntary pension 100 a. lazarević, i. marinović matović funds, broker-dealer and leasing companies, as well as other legal entities that are engaged in financial activities (law on banks, 2005). empirical study was carried out on the entire territory of the republic of serbia. the target population consisted of employees of organizations that provide financial services, including monetary intermediation, insurance services, reinsurance, pension funds and subsidiary activities in the financial services field. the research did not include employees in other organizations of the financial sector, dealing with the following activities: activities of holding companies, activities of trust funds (trusts), investment funds, and similar financial entities. based on available data of the republic bureau of statistics, the target population of the research could not be determined precisely, since it included the number of employees in the entire sector of financial and insurance activities, while the current study covered only part of organizations operating in this sector (republic bureau of statistics, 2021). prior to processing and data analysis, testing of distribution was performed. kolmogorovsmirnov and shapiro-wilk normality tests revealed the significance level >0.05 for all observed variables, which means that sample population wasn’t normally distributed. before testing the defined hypotheses, the sample size validity, and the statistical power of the research were analyzed. the sample power was calculated post-hoc, using g*power (faul et al., 2009), whose values indicate good (>0.95), sufficient (0.95–0.85), and weak (<0.85) statistical power. calculated power of two-tailed independent t-test (wilcoxon-mann-whitney test) for between-subjects, assuming an effect size of 0.5, and an alpha error of 0.05, with sample size group 1 of 80 respondents (male), and sample size group 2 of 101 respondents (female), was 86.99% (for the whole sample). the calculated power for research sample, based on education, was 62.53%. calculated power of kruskal-wallis test, assuming an effect size of 0.25, and an alpha error of 0.05, with total sample size of 181 respondents, divided into 3 groups, was 85.67%, and for the four groups (based on job position), calculated power was 80.64%. in order to test the research hypotheses, and explore the potential gender and educational differences in employee satisfaction with benefits and perks, a nonparametric mann-whitney u test was used. mann-whitney u test compares differences between two independent groups, requiring the ordinal or continuous dependent variable, without normally distributed values. regarding education, employees were divided in two groups. the first group consisted of employees who had high school degree; the second group was the ones who had graduated from university. further, the importance of particular benefits and perks for employee satisfaction was tested, depending on their age and job position. age and job position differences were analysed with non-parametric kruskal-wallis test, a nonparametric test that is used to explore the differences between two or more groups, requiring a continuous or ordinal dependent variable. the age range included employees belonging to three age groups: ≤33 (young and new hires), 34-50 (prime-aged employees), and ≥51 (mature employees). concerning job position, employees were divided in four groups: ordinary (job position of common occurrence), specialist (professional who uses specialized knowledge within a particular subject area), middle management (management positions underneath the top management and above the non-management employees), and top management (seniorlevel executives, those positions that hold the most responsibility). the defined subject of research and the hypotheses were methodologically processed by standard statistical tests, with the analysis performed using the statistical package spss (ibm spss statistics 22 software). the statistical power analysis was performed with the use of g*power 3.1. the impact of demographic differences on employee satisfaction with benefits and perks ... 101 4. results and discussion the research involved 181 employees engaged in various operational and managerial positions in the serbian financial sector. descriptive statistics of the selected sample are shown in table 1. table 1 descriptive statistics of the examined sample (n=181) variable characteristics frequency percent cumulative percent gender male 80 44.2% 44.2% female 101 55.8% 100.0% education level high school 29 16.0% 16.0% university 152 84.0% 100.0% age ≤33 13 7.2% 7.2% 34-50 60 33.1% 40.3% ≥51 108 59.7% 100.0% job position ordinary 40 22.1% 22.1% specialist 71 39.2% 61.3% middle management 64 35.4% 96.7% top management 6 3.3% 100.0% source: authors' calculation this research of the most frequently applied benefits and perks in the serbian financial sector in 2020 has shown that benefits are the basic components of the compensation package in serbia, as it is a case in many developed economies, according to ellig (2014). the results also show a various structure of benefits and perks in the republic of serbia, which confirmed the findings of festing & sahakiants (2013), regarding the different structure of compensation packages in transitional countries. the investigation of differences in impact of benefits and perks on employee satisfaction was performed by invesigating respondents by gender, education, age and job position. descriptive statistics of gender differences are shown in figure 1, while the desctiptive statistics of educational differences are shown in figure 2. as shown in figure 1, both female and male employees ranked „paid education & language courses” as the most desirable benefit. also, “paid education & language courses” are in the first place in figure 2, which represents the results with respect to employee education. to analyze gender and educational differences in employee satisfaction with benefits and perks, non-parametric mann-whitney test was utilized. the results indicate that there was a slight difference in mean ranks, where female employees are favoring following benefits: paid education & language courses, notebook, pension insurance, health insurance and life insurance. regarding male employees, they give priority to: cell phone, professional stays & traineeships and legal services. mann-whitney test for educational differences indicates that employees with high-school education give priority to following benefits: paid education & language courses, pension insurance, health insurance, life insurance and legal services. university educated employees are more satisfied with cell phone, notebook and professional stays & traineeships. mean ranks are slightly different between these two subgroups of employees. according to mann-whitney test, both gender and educational differences in employee satisfaction with benefits/perks are not statistically significant (p>0.05), so hypothesis h1 and h2 are rejected. this suggests that there are no differences in employee 102 a. lazarević, i. marinović matović satisfaction with benefits/perks between respondents of different genders and education. a similar concluson was drawn from the study of muse & wadsworth (2012), who did not find statistically significant gender differences in employee satisfaction with benefits. result regarding educational differences should be accepted as conditional, given the low statistical power (62.53%), caused by the small size of the sub-sample “employees with high school”. fig. 1 most desirable benefits and perks depending on gender source: authors’ calculations fig. 2 most desirable benefits and perks depending on education source: authors’ calculations the impact of demographic differences on employee satisfaction with benefits and perks ... 103 building on these conclusions, an analysis was performed to assess the most desirable benefits and perks of financial sector employees, depending on their age. results are presented in figure 3. fi g. 3 most desirable benefits and perks depending on age source: authors’ calculations as shown in figure 3, many similarities exist between employees in group “≤33” and employees in group “≥51”. these two subgroups of employees rank “paid education & language courses”, “notebook” and “cell phone” among the top three benefits. all subgroups of employees agree that “paid education & language courses” are among the most desirable benefits. this benefit generally takes the first place in all age groups. only employees aged 34-50 in the serbian financial sector ranked this benefit in second place, just behind “health insurance”. differences between respondents of various ages are most evident in relation to the age group “34-50”. kruskal-wallis test was utilized to analyze age differences in employee satisfaction with benefits and perks. the results are given in table 2. results of kruskal-wallis test indicate that there is a statistically significant age difference in employee satisfaction with benefit “notebook” (p=0.007). test results do not show any other statistically significant age difference, regarding employee satisfaction with other benefits. current research results partially confirmed hypothesis h3. while there are differences in employee satisfaction with benefit “notebook” between employees in various age groups, results imply that there are no significant differences regarding other observed benefits. 104 a. lazarević, i. marinović matović table 2 age differences in employee satisfaction with benefits/perks variable mean rank ≤33 mean rank 34-50 mean rank ≥51 chi-square asymp. sig. (2-tailed) paid education & language courses 92.35 79.74 97.09 4.478 0.107 cell phone 106.12 81.08 94.69 3.966 0.138 notebook 93.42 74.05 100.13 9.858 0.007 professional stays & traineeships 91.88 96.83 87.65 1.236 0.539 pension insurance 71.12 102.78 86.85 5.677 0.059 health insurance 76.77 102.92 86.09 5.111 0.078 life insurance 96.23 89.38 91.27 0.194 0.907 legal services 94.54 88.03 92.22 0.325 0.850 other 81.58 93.93 90.50 0.672 0.714 source: authors' calculation respondents with different job positions were also analyzed in order to determine the similarities or differences between benefit preferences of financial sector employees. the results are shown in figure 4, while job differences in employee satisfaction with benefits and perks were analyzed with non-parametric kruskal-wallis test (table 3). fig. 4 most desirable benefits and perks depending on job position source: authors’ calculations the impact of demographic differences on employee satisfaction with benefits and perks ... 105 table 3 job position differences in employee satisfaction with benefits/perks variable mean rank ordinary mean rank specialist mean rank middle mgmt mean rank top mgmt chi-square as.sig. (2-tailed) paid education & language courses 74.25 88.44 103.25 102.33 8.489 0.037 cell phone 87.48 91.26 96.79 49.67 4.947 0.176 notebook 84.76 89.44 101.04 44.00 8.032 0.045 professional stays & traineeships 101.10 100.20 78.63 46.83 11.971 0.007 pension insurance 98.05 88.55 85.80 128.50 4.660 0.198 health insurance 92.95 91.04 86.34 127.33 3.517 0.319 life insurance 95.19 94.09 84.03 100.83 1.885 0.597 legal services 91.51 88.08 88.88 144.83 6.968 0.073 other 96.75 93.80 88.65 44.67 5.987 0.112 source: authors' calculation results of kruskal-wallis test indicate that there was a slight difference in mean ranks. employees at ordinary job positions are favoring professional stays & traineeships. middle management gives priority to the following benefits: paid education & language courses, notebook and cell phone. regarding top management, their most preferred benefits are: legal services, pension insurance, health insurance and life insurance. according to kruskal-wallis test there are statistically significant job differences in employee satisfaction with following benefits/perks: paid education & language courses (p=0.037), notebook (p=0.045), and professional stays & traineeships (p=0.007). hypothesis h4 is partially confirmed. there are significant job differences in employee satisfaction with some benefits/perks between respondents at different job positions. result regarding job position differences could be accepted, given the statistical power 80.64%, since it is considered that 80% power level is enough to detect effects (cohen, 1992). furthur on, the lack of differences can be explained by less employee interest in this compensation component, since benefits and perks are common in financial sector. for example, in contemporary business environment, which implies a high degree of digitalization, notebook and cell phone are a necessary work tool, not a perk. also, most banks, insurance companies and financial organizations in serbia provide private health and pension insurance, and continuous professional development for their employees, so these benefits have become common and expected. the results confirm the findings of armstrong (2009) who believes that benefits and perks are not a reward for the achieved result, but a reward for belonging to the company. in serbian financial sector most of the researched benefits and perks are taken for granted, which may explain why they do not have a strong effect on employee satistaction. the benefits received by financial sector employees have been traditionally present for many years, and as a result they do not have a significant impact on employee satistaction and work engagement. these results are also confirmed by muse & wadsworth (2012), whose study found that only nontraditional benefits have an impact on employee motivation. to further investigate satisfaction effect of benefits and perks, current research assumed that education is the most desirable benefit, regardless of employee demographics. to address this assumption, each benefit and perk was assigned a certain number of points by respondents. the most desired benefit/perk was awarded with the maximum number of points (9), and the least desired with 1 point. benefit preference was ranked, 106 a. lazarević, i. marinović matović comparing the number of points of each with the total number of points awarded to all benefits/perks. the result of the analysis is shown in table 4. table 4 most desired benefits and perks in serbian financial sector variable min max m sd total points percent paid education & language courses 1 9 6.44 2.617 1,166 13.8% cell phone 1 9 5.25 2.447 950 11.2% notebook 1 9 5.52 2.215 1,000 11.8% professional stays & traineeships 1 9 3.77 2.129 683 8.1% pension insurance 1 9 4.99 2.405 904 10.7% health insurance 1 9 5.56 2.127 1,006 11.9% life insurance 1 9 4.54 2.453 822 9.7% legal services 1 9 3.35 2.430 606 7.2% other 1 9 7.23 2.416 1,309 15.5% source: authors' calculation the research results showed that “paid education & language courses” is the most significant benefit for employees in the financial sector in the republic of serbia, regardless of gender, education, age, and job position (covering 13.8% of the total points). employees in the age group “34-50”, and employees at ordinary job positions, rank “paid education & language courses” in second place; top managers in third place, while the highest significance of this benefit was noted in all other observed subgroups. as the analysis of research results determined “paid education & language courses” as the most significant benefit, hypothesis h5 is confirmed. education is the most desirable benefit in the financial sector in the republic of serbia, regardless of employee demographics, according to current study. the results of current research are consistent with previous research of khan (2012), nemeckova (2017), and ozkeser (2019), who all confirmed strong positive impact of educational benefits on employee satisfaction. the current research results also show that “pension insurance” is a highly ranked benefit, of high significance for all employees, regardless of their gender, education, age, and job position. this result was also supported by niehaus (2008), kozarevic et al. (2014), and dugguh & iliya (2018). on the contrary, fashagba & adeyele (2011) in their study confirmed that pension insurance does not satisfy employees or motivate them to improve their work results. 5. conclusion this article contributes to the limited literature on benefits and perks, as well as their significance for employees in serbia. moreover, it adds to the knowledge on how structure and importance of benefits and perks differ, depending on employee demographics. this study demonstrates differences and similarities in the most commonly present benefits and perks, by performing a comparative analysis between employees of different gender, education, age, and job position. this investigation provided useful information about employee satisfaction and motivational effects of the existing compensation packages structure, and direction for its future improvements. the impact of demographic differences on employee satisfaction with benefits and perks ... 107 statistical data analysis uncovered five important conclusions. first, the analysis suggested that there are no differences in employee satisfaction with benefits/perks between respondents of different genders. second, results imply that there are no differences in employee satisfaction with benefits/perks between respondents, depending on their education level. again, the conclusion regarding educational differences should be accepted as conditional, given the established low statistical power. third, the current research confirmed statistically significant age difference in employee satisfaction with benefit “notebook”, and no other statistically significant differences, regarding employee satisfaction with other benefits. forth, the current research proved that there are significant differences in employee satisfaction with benefits/perks between respondents of different job positions. fifth key finding of current analysis is that education is the most desirable benefit in serbian financial sector, regardless of employee demographics. in many national economies, the policy of additional benefits and perks, within the overall compensation package, has become highly relevant and attempts to deliver surplus value to employees. simultaneously, there should be a straightforward analysis of the employee satisfaction and motivational effect of each of the applied benefits. the contribution of this research is reflected in the fact that it provides decision makers with the clear insight necessary to understand how certain benefits affect employee satisfaction, or indirectly how they affect the improvement of business performances. research study has several limitations. based on the research results and research limitations, several possible directions for future research could be conceptualized, which would significantly complement the knowledge regarding the contribution of benefits to employee satisfaction. one limitation is that research singled out only certain benefits, which the respondents could rank. however, the study indicated that benefits packages in serbia are probably taken for granted, and that more benefits components should be included in this research. future studies should expand the list of observed benefits, and thus analyze the significance of those not covered by this study. repeated research, using the same methodology in some future period, could confirm the reasons for the different importance of benefits, and thus provide key stakeholders a valid basis for improving the compensation system. the representativeness of sample, according to certain characteristics, is the next limitation. certain subgroups of respondents had an uneven share in the total observed sample. the age subgroup “≤33” participated with only 7.2% in the total sample, while “top management” with only 3.3%, which is insufficient for drawing general conclusions regarding the employee satisfaction and motivational impact of benefits and perks on these subgroups of employees. the recommendation for future studies is to balance all subgroups of respondents, which would increase the statistical power of the research. references adeoye a. o. 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https://tigerprints.clemson.edu/joe/vol47/iss2/2 https://doi.org/10.5539/ijbm.v4n11p177 110 a. lazarević, i. marinović matović uticaj demografskih razlika na zadovoljstvo zaposlenih beneficijama i privilegijama: primer finansijskog sektora srbije nakon pada socijalističkog režima, sistemi upravljanja ljudskim resursima u zemljama u tranziciji, kao što je srbija, transformisani su, uspostavljajući potpuno novi sistem nagrađivanja zaposlenih. u ovom radu istražene su najčešće beneficije i posebne pogodnosti u finansijskom sektoru srbije, sa fokusom na efektivnost njihove strukture. istraživanje razlika između uticaja beneficija i posebnih pogodnosti na zadovoljstvo zaposlenih je sprovedeno u odnosu na pol, obrazovanje, starost i radno mesto zaposlenih. empirijsko istraživanje je sprovedeno anketnim upitnikom. rezultati ukazuju da ne postoje razlike u zadovoljstvu između ispitanika različitog pola i obrazovanja, dok su potvrđene delimične razlike između ispitanika kada se uzme u obzir njihova starost i radno mesto. rezultati ukazuju da bi beneficije i posebne pogodnosti u finansijskom sektoru srbije trebalo bolje strukturirati, i daju smernice za istraživanje povoljnijih ukupnih paketa kompenzacije. ključne reči: beneficije, posebne pogodnosti, zadovoljstvo zaposlenih, kompenzacioni paketi, upravljanje ljudskim resursima facta universitatis series: economics and organization vol. 12, n o 3, 2015, pp. 199 208 analysis of machiavellian behavior of students in the republic of serbia  udc 371.212:378.4]:321.01 ivana simić 1 , ivana marinović matović 2 , nebojša stojković 1 1 university of niš, faculty of economics, serbia 2 hypo alpe-adria bank ad beograd, serbia abstract. using the "mach iv scale", this paper analyses the level of machiavellian behavior among the student population in the republic of serbia. the obtained results were compared with the outcome of similar studies conducted in the united states and indonesia. results indicated that machiavellianism level, manifested among the student population in the republic of serbia, is higher than machiavellianism level manifested among students in the united states and indonesia. the mixed results of this study point to the conclusion that economic development of a certain country (expressed by gdp per capita) could not be a base for reliable conclusion regarding the potential expression level of machiavellian behavior of state’s population. these results can be useful for managers, in general, and for managers in the republic of serbia, particularly, in the process of recruiting and selecting new candidates, and in the course of delegating tasks to existing members of the organization. key words: machiavellianism, economic development, students, management. introduction machiavellianism, as a personality dimension, reflects the level of unscrupulousness, contained in an individual’s strong effort to achieve personal interests. the term “machiavellian” was coined by the florentine philosopher and statesman niccolo machiavelli (1469-1527). in his book “the prince”, 1 niccolo machiavelli offered a set of rules necessary for acquiring and retaining power (makijaveli, 2009). according to machiavelli, one of the primary methods for obtaining and maintaining power is to manipulate others with absolute disregard of emotions and moral principles. in accordance with that, machiavellians are, actually, portrayed as very rational individuals who are able to be ruthless, cunning, deceitful, unscrupulous, manipulative, received september 23, 2015 / accepted october 27, 2015 corresponding author: ivana simić faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: ivana.simic@eknfak.ni.ac.rs 1 first published in 1515. 200 i. simić, i. marinović matović, n. stojković cynical and amoral, when it is necessary to achieve a goal (yunus, shabudin, rahim, hamzah, 2012, 3071). these individuals are able to act extremely unemotionally and unethically, and disregard feelings, rights and needs of others. machiavellians are also described as individuals with the tendency to manipulate and exploit others (paal, bereczkei, 2007, 543). they are individuals who seek success and are prepared to use all available means for it. as a personality dimension, machiavellianism was first described in detail, and incorporated into the concept, thanks to the efforts of richard christie and florence geis (dahling, kuyumcu, librizzi, 2012, 183). in 1960, these two researchers developed “mach iv scale” as an instrument for gauging individuals’ machiavellian personality. to date “mach iv scale” has been used in numerous studies devoted to extensive research of the machiavellian personality type, in different situations and among different populations. 1. machiavellian behavior in organizations individuals who tend to machiavellian behavior can be found in a diverse ambient frames (e.g., family, school, university, place of work, a group of friends, etc.), as well as among different populations of people (children, pupils, students, employees, family members, etc.). from the perspective of modern organizations and their managers, particularly important question is expression of machiavellian behavior among employees, members of the organization. this is because the expression of machiavellian behavior generally has a negative impact on various aspects of organizational functioning. as a form of cunning, aggressive, unemotional, unethical and manipulative tactics, machiavellianism, besides other things, can be a driver of various deviant behaviors of organizational members. some of the most common are: lying, stealing, gossip, sabotage, the decline in satisfaction level of organizational members, the increase of stress level (dahling, kuyumcu, librizzi, 2012, 184-188), violation of organizational climate of trust, the decline in civic behavior level of organizational members (backer, o’hair, 2007, 248), strengthening of political behavior within organizations (drory, gluskinos, 1980, 82), etc. at last, all of the above can have a negative impact on the organizational functioning and performances achieved. therefore, modern managers are expected to be able to recognize the machiavellian behavior, among existing and potential organizational members, as well as to find appropriate mechanisms and thwart the undesirable behavior form, or reduce it to a minimum. in favor of this, the great benefit to managers may be a knowledge obtained within organizational behavior, as a scientific field that studies the human behavior in organizational environment, as well as knowledge in the fields of psychology and personality psychology (as a science bases of organizational behavior). for this reason, the results of numerous studies devoted to examining the expression level of machiavellian behavior (backer, o’hair, 2007; drory, gluskinos, 1980; gemmill, heisler, 1972; hunt, chonko, 1984; kessler, bandelli, spector, borman, nelson, penney, 2010; kiazad, restubog, zagencyk, kiewith, tang, 2010; sparks, 1994; walter, anderson, martin, 2005) are of great importance. among the numerous studies, there are many which were carried out on student population (christie, geis, 1970; harmon, webster, hammond, 2008; mostafa, 2007; webster, harmon, 2002). the quality of researches dealing with machiavellianism level expressed among student population is contained in a few moments. first of all, original instrument for finding the extent of machiavellianism (the “mach iv analysis of machiavellian behavior of students in the republic of serbia 201 scale”), was developed among the student population. although that instrument was successfully used in various studies among other populations (e.g., children, employees, managers, leaders), the highest degree of “mach iv” instrument reliability was found in the studies which included respondents aged 18 25 (moss, 2003, 27). a student population age is generally within that specified range. furthermore, from the viewpoint of certain parameters (e.g. age, level of previous education, professional interest) student population can be regarded as a relatively homogeneous group. that could facilitate certain conclusions during the research. also, even though the human personality is in constant process of evolving and changing (robbins, judge, 2014, 139), the certain personality traits can be seen as long-term predispositions of human behavior (luthans, 2010, 132). it appears that the identified machiavellian disposition of respondents (in this case students), to the expression (or not) of machiavellian behavior, could be a relatively stable indicator of future behavior patterns of respondents throughout their lives. in this context, it could be concluded that the existence or non-existence of machiavellian behavior among the student population (observed within corresponding national and cultural ambient), could be useful to managers of those organizations who operate within that specific national ambient. such information might assist managers to predict the machiavellian behavior tendencies among future organizational members. 2. research purpose machiavellian behavior has numerous negative multidimensional effects. also, no research has been done in the republic of serbia investigating the machiavellianism among students. these were some of the authors’ motives to undertake such a research. the initial point of this research, and its implementation support, were previous studies dealing with machiavellianism personality traits among the student population. these studies were conducted in the united states during the sixties of the 20th century and the first decade of the 21st century, as well as in indonesia during the first decade of the 21st century. they were carried out by christie r., geis f., webster r. l., harmon h. a. and hammond k. l. (christie, geis, 1970; harmon, webster, hammond, 2008; webster, harmon, 2002). the results have led to a certain hypothesis, whose applicability was tested in this research. the research, conducted in the 1960s, was carried out among population of 1782 students from several parts of the united states with different economic development level. authors, christie r. and geis f., published the research findings in 1970 (christie, geis, 1970). their study offered evidence that, in general, the level of machiavellianism expressed among students from less developed and less industrialized areas is lower, compared to the machiavellianism level expressed among their colleagues coming from developed and more industrialized states. in 2002, the authors webster r. l. and harmon h. a. published similar conclusions of their study, presenting the results of machiavellianism investigation among the united states’ student population. webster r. l. and harmon h. a. have, furthermore, compared their results with the previously published study of christie r. and geis f. the results of webster’s and harmon’s research indicated that machiavellianism of the united states’ students in early 21st century (in 2002) was higher, compared to machiavellianism of students (also from the united states territory) determined in the ninety-sixties. these results also supported the claims that rise in the economic development level leads to the rise of machiavellian behavior among society members (christie, geis, 1970). 202 i. simić, i. marinović matović, n. stojković then, webster r. l. and harmon h. a, along with kevin hammond, compared the machiavellian behavior of the united states’ student population (results obtained from webster’s and harmon’s study published in 2002) with the machiavellian behavior of their indonesian colleagues. the results of this study, which were published in 2008, also emphasized that higher industrial and development level of the united states, compared to indonesia, has led to a higher machiavellianism behavior level of the united states’ students, opposed to the machiavellianism behavior level of students from indonesia. following the above mentioned studies, during the school year 2011/2012, the similar research was undertaken among the student population in the first year of study at the faculty of economics in niš, in the republic of serbia. previous researches published by christie r., geis f., webster r. l., harmon h. a. and hammond k., marked the state’s economic development level as one of the most important factors determining the machiavellianism level of the states’ population. the economic development level may be defined by different indicators. however, gross domestic product (gdp) is one of the most commonly used. gdp is the total market value of the total officially recognized final goods and services produced within a country in a given period of time, usually one year. the total gdp divided by total state population equals a gdp per capita. official world bank data on gdp per capita level (in u.s. $) in the republic of serbia in 2012 (when this research was conducted), as well as in the past few years, are shown in table 1. for the comparison purpose, table 1 also contains the official world bank data on gdp per capita level, in 2012 and the past few years, in indonesia and the united states. table 1 gdp per capita (in u.s. $) 2008 2009 2010 2011 2012 serbia 6.701 5.821 5.412 6.423 5.659 indonezia 2.178 2.272 3.137 3.663 3.718 u.s. 48.401 47.002 48.374 49.781 51.457 source: the world bank, (2013), http://data.worldbank.org/indicator/ny.gdp.pcap.ca?page=2 the data presented in table 1 clearly indicate that the republic of serbia is slightly more developed country than indonesia, but less developed than the united states. comparison was done on the basis of economic development level, represented via gdp per capita. additionally, as shown in table 1, both, the united states and indonesia, had rise in gdp per capita in 2012, compared to 2011, while the republic of serbia in this period recorded a decline of the same indicator. in addition to the above relative level of economic development of the republic of serbia, indonesia and the united states, is the fact that the international monetary fund (imf) ranked all world states, using the economic development level, in appropriate groups. these are (imf weo database, 2013): major advanced economies (g7); advanced economies; other advanced economies excluding g7 and euro area; newly industrialized asian economies; euro area; european union; central and eastern europe; latin america and caribbean; commonwealth of independent states; middle east and north africa; emerging and developing economies; asean – 5; developing asia; subsaharan africa. while the united states is simultaneously in the first and second specified http://data.worldbank.org/indicator/ny.gdp.pcap.ca?page=2 analysis of machiavellian behavior of students in the republic of serbia 203 group of countries ("major advanced economies g7" and "advanced economies"), indonesia and the republic of serbia are classified into eleventh group of countries ("emerging and developing economies"). according to the research claims made by christie r., geis f., webster r. l., harmon h. a. and hammond k. l., it could be expected, that machiavellianism level among the student population in the republic of serbia, will be higher than machiavellianism level among students in indonesia, and lower than machiavellianism level identified in the united states in the beginning of the 21 century. against this background, the following hypotheses were tested in the paper:  h1: due to lower economic development level of the republic of serbia compared to the united states, machiavellianism level expressed among the student population in the republic of serbia (in 2012) is lower than machiavellianism level expressed among the student population in the united states (in 2002);  h2: due to higher economic development level of the republic of serbia compared to indonesia, machiavellianism level expressed among the student population in the republic of serbia (in 2012) is higher than machiavellianism level expressed among the student population in indonesia (in 2008). 3. method sample and procedure. for the purpose of collecting data, to assess machiavellian behavior expression level among students (future organizational members) in the republic of serbia, during school year 2011/2012, the survey was conducted at the faculty of economics in niš. with prior permission of the dean of the faculty, and with the approval of students, the first author of this paper conducted a survey among students. the survey was conducted after regular school hours. it occurred in two groups and lasted 45 minutes. the survey initially included 250 students of the first year of undergraduate study. total number of 250 questionnaires was distributed among students, of which 21 (or 8.4%) were unusable, due to random answering, or blank questionnaires were returned. therefore, 229 questionnaires were finally answered and included in the analysis (n = 229), which is 91.6%. among these, 75 participants (32.75%) were male, while 154 (67.25%) were female. regarding the age of the participants, their ages ranged from 19 22, while the average age of all participants was 19.8 (m = 19.8; sd = 0.72). general information about the participant profile is presented in table 2. тable 2 general information about participants description number % m sd sample total number of respondents 250 number of usable questionnaires 229 91.6 number of unusable questionnaires 21 8.4 sex male 75 32.75 female 154 67.25 age 19.8 0.72 204 i. simić, i. marinović matović, n. stojković the republic of serbia, in which the survey presented in this paper was conducted, occupies the central part of the balkan peninsula. serbia is organized into 5 distinct regions: the belgrade region, vojvodina region, region of šumadija and western serbia, region of southern and eastern serbia and kosovo and metohija region (vlada republike srbije – teritorijalna organizacija, 2004). students belonging to southern and eastern serbia region, mainly are attending the faculty, where the research was conducted. this is the least developed region in the republic of serbia (aktuelna razvojna kretanja, 2012). instruments. as an instrument for data collecting, “mach iv scale”, developed by christie r. and geis f., was used. it is an instrument comprising the twenty statements, whose assessment has been done by 7-point likert scale (from 1 strongly disagree, to 7 strongly agree). consistent with previous research, a constant of 20 was added to the calculation, so that scores ranged from 40 points (low machiavellian level) to 160 points (high machiavellian level). a score of 100 points represents the neutral machiavellian level. coefficient alpha in this sample was 0.62, indicating its satisfactory reliability. the serbian version of this questionnaire was created through translation and backtranslation technique (brislin, 1970, 193). the first author of this paper translated the english version of the questionnaire into serbian. then, the serbian version of the questionnaire was translated back into english by a bilingual expert, to verify its credibility. 4. results survey results of machiavellian behavior among the student population in the republic of serbia, are presented by gender, in table 3. table 3 machiavellianism among students (by gender) sex sample size mean value standard deviation male 75 95.83 10.09 female 154 92.95 10.24 measured by the seven-level likert scale according to which higher numbers indicate higher levels of machiavellianism the results were compared with the findings published by webster r., harmon h. a. and hammond k., during 2002 and 2008, and presented in table 4. table 4 machiavellianism in the republic of serbia, the u.s. and indonesia (data for the u.s. and indonesia taken from webster, harmon, 2008, 440) sample size mean standard deviation all male female all male female all male female u.s. 240 107 133 92.02 93.48 90.84 10.13 9.50 10.50 serbia 229 75 154 93.89 95.83 92.95 10.26 10.09 10.24 indonesia 262 106 156 83.49 81.40 84.90 9.83 9.50 9.83 measured by the seven-level likert scale according to which higher numbers indicate higher levels of machiavellianism analysis of machiavellian behavior of students in the republic of serbia 205 the results presented in table 4 indicate that machiavellianism level among the student population in the republic of serbia is higher than among students in the united states and indonesia. according to these findings, hypothesis h1 was rejected, while hypothesis h2 was confirmed. 5. discussion in general, results indicate that machiavellian orientation of the student population in the republic of serbia is much higher than initially expected. according to the results of this study, comparative data on the economic development level of a certain country (expressed by gdp per capita), could not be base for reliable conclusion regarding the potential machiavellian behavior expression among the state’s population. however, one should bear in mind the fact that, the particular study investigated the machiavellian behavior among students in the republic of serbia during 2012 (m = 93.89; sd = 10.26) and these results were compared with the machiavellian behavior among the united states’ students (m = 92.02; sd = 10.13) identified a decade ago. in modern, highly dynamic business environment, with increasing complexity, when the world is developing at unforeseen speed, the period of a decade cannot be overlooked. although we have no official information regarding machiavellianism level among the united states’ student population in 2012, the fact that machiavellianism level is increasing along with the development, could lead us to a conclusion that machiavellianism level today, is probably higher than in 2002 (when it was identified by webster r. l. and harmon h. a). this can be considered as one of the major limitations of our study. however, the world bank official data indicate that gdp per capita in the united states in 2001 (u.s. $ 35.012) (the world bank, 2013), when the research of machiavellianism among the population of students in the united states was performed, was well above gdp per capita in the republic of serbia in the 2012 (u.s. $ 5.659) (the world bank, 2013), when the research of machiavellianism among the population of students in the republic of serbia was performed. with regard to above statements, it should be noted that many factors, besides economic, encourage intensive expression of machiavellian behavior in a particular national environment. regarding to the situation in the republic of serbia, in addition to usual machiavellian drivers, certainly there are many other factors with negative implications on expression of machiavellian behavior. as main factors we could mention: accumulated economic, social and political problems faces by the republic of serbia for decades, armed conflict during the nineties of the 20th century, illegal privatizations, high level of corruption and crime, general decline in society morals, high unemployment level, extensive poverty, “gray” economy, absence of strong corporate and social responsibility and ethical behavior of organizations and their members. the generation of students, who participated in the survey, has grown up in an environment shaped by listed circumstances. the moral structure of the society has a particularly important influence on expression of the machiavellian behavior of its members. if we start from the statements of ferrell o. c. and skinner s. j. who claim that low machiavellianism level is strongly related to high business ethics (ferrell, skinner, 1988, 108) and the statement quoted by jay a. who indicated that corporations and states are, in essence, identical organisms (mcguire, hutchings, 2006, 198), it seems logical to conclude that society with high moral and ethical 206 i. simić, i. marinović matović, n. stojković principles should have lower level of machiavellianism. and vice versa, decline in moral of the society, would lead to a decline in individuals’ moral, and influence high machiavellian tendencies. this would be the key insights for the modern managers in general, as well as for managers in the republic of serbia. the presented results of the survey, regarding machiavellianism level among student population in the republic of serbia, were higher than expected. this should be a signal and support to managers in the republic of serbia to work harder for the purpose of efficient management of machiavellian behavior among future organizational members, today’s students. conclusion the expression level of machiavellian behavior in the respective national environment is determined by a heterogeneous set of factors. although the factors of economic nature should not be neglected (primarily the economic development level as the most important), certainly there are many other factors, of so-called situational character, with corresponding influence on expression of machiavellian behavior among subjects belonging to the particular national environment. the research findings of this paper have some limitations: respondents were students of only one faculty in the republic of serbia; only students of the first year of undergraduate study were survey participants; the research was conducted in the school year 2011/2012, and the results were compared with the results of a similar survey conducted in the united states (in 2002) and indonesia (in 2008). despite these limitations, the mixed results of this study point to the conclusion that the economic development level of a certain country (expressed by gdp per capita), could not be a base for reliable conclusion regarding the potential expression level of the machiavellian behavior of the state’s population. in this respect, managers in general, as well as managers in the republic of serbia, are advised to apply different sets of mechanisms belonging to human resource management and organizational behavior scientific disciplines, with the purpose of successful routing of expression level of the machiavellianism behavior within organizations. among other things, managers are suggested to test applicants’ personality traits during recruitment, independently or together with experts, primarily psychologists. this testing, among other things, should include checking of candidates’ machiavellian behavior expression tendencies. acknowledgement: the paper is a part of the research done within the project 179081, financed by the ministry of education and science of the republic of serbia. references 1. aktuelna razvojna kretanja. 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(2005). how subordinates' machiavellianism and motives relate to satisfaction with superiors. communication quarterly, 53: 57-70. 25. webster, r. l, harmon, h. a. (2002). comparing levels of machiavellianism of today's college students with college students of the 1960s. teaching business ethics, 6: 435-445. 26. yunus, o. m., shabudin, a. b., rahim, a. r. a., hamzah, n. h. (2012). understanding business people: their personality and work values orientation. international conference on business and economic research (3rd icber 2012), proceeding, 12-13 march, 2012, bandung, indonesia, 3070-3080. http://dahling.faculty.tcnj.edu/dahling,%20kuyumcu,%20&%20librizzi%202012%25chapter.pdf http://www.imf.org/external/ns/cs.aspx?id=28 http://goliath.ecnext.com/coms2/gi_0199-6450330/a-study-of-machiavellian-orientation.htm http://data.worldbank.org/indicator/ny.gdp.pcap.cd?page=2 http://www.srbija.sr.gov.yu/pages/article.php?id=45625 208 i. simić, i. marinović matović, n. stojković analiza makijavelističkog ponašanja studenata u republici srbiji primenom “mach iv scale”, u radu se ispituje nivo ispoljavanja forme makijavlističkog ponašanja među populacijom studenata u republici srbiji. dobijeni rezultati su komparirani sa rezultatima sličnih studija sprovednih u sad i indoneziji. rezultati su pokazali da je nivo makijavelizma koji je ispoljen među populacijom studenata u republici srbiji, viši u odnosu na nivo makijavelizma koji je ispoljen među studentima i u sad i u indoneziji. dobijeni mešoviti rezultati ukazuju i na to da stepen ekonomskog razvoja jedne države (izražen kroz dbp per capita), ne može poslužiti kao pouzdana osnova za zaključke o potencijalnom stepenu ispoljavanja forme makijavelističkog ponašanja među stanovništvom te države. ovi rezultati mogu poslužiti menadžerima uopšte, kao i menadžerima organizacija u republici srbiji prilikom regrutovanja i selekcije novih kandidata, kao i prilikom delegiranja zadataka postojećim članovima organizacije. ključne reči: makijavelizam, ekonomski razvoj, studenti, menadžment facta universitatis series: economics and organization vol. 18, no 3, 2021, pp. 275 288 https://doi.org/10.22190/fueo210517019z © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper risk perception and attitudes in albania: an exploratory study1 udc 005.334(496.5) albi zylfo1, elona pojani1,2 1otp bank, tirana, albania 2university of tirana, department of finance, albania orcid id: albi zylfo n/a elona pojani https://orcid.org/0000-0001-9854-2382 abstract. this paper analyses risk perception and attitudes toward risk in albanian society. it principally focuses on how age affects risk tolerance, even though also gender impact is taken into account. to particular interest is the shift in risk perception of the individuals before and after the fall of communism. the authors have embraced an exploratory research, using qualitative data from interviews. by considering two groups of participants, those older than 35 and younger than 35, the paper makes distinctions between risk attitude of both groups. in addition, the differences in responses between genders have been analyzed. the paper draws conclusions on the role of age and gender in relation to risk perception by aligning it with main conclusions of academic literature on these aspects. it further discusses the role of the social environment before and after the fall of communism and its effect on the risk tolerance profile of albanians. key words: risk perception, albania, age effect, gender effect, financial risk, life-style risk jel classification: d81 received may 17, 2021 / revised july 17, 2021 accepted july 21, 2021 corresponding author: elona pojani university of tirana, faculty of economics, department of finance, str. “arben broci”, tirana, albania | e-mail: elonapojani@feut.edu.al https://orcid.org/0000-0002-7774-5153 https://orcid.org/0000-0001-9854-2382 mailto:elonapojani@feut.edu.al 276 a. zylfo, e. pojani 1. introduction research on risk attitude has sought to study how different factors affect risk perception and risk tolerance level of individuals. demographic factors, such as gender, social status, age, and the social environment role have been particularly addressed in such literature. findings define how these demographic factors affect the attitude of individuals toward risk. especially economic risk attitude has been analyzed, as a particular aspect of the risk profile of individuals. while quantitative analysis has been on the spotlight of research in the area, most recent literature has been using qualitative tools to investigate the reasons of such differences. albania is a post-communist country situated in eastern europe. its communist past has much affected the population safety culture. while the country is experiencing rapid development, the roots of its history are still affecting the way people make decisions, and their risk attitude in general. research on risk attitude has been very limited in albania. to the extent of the authors’ knowledge, only two complete studies have touched upon this topic. in a study of the impact of culture and emotion on individuals’ financial behaviour, grabova (2013) concluded that social norms and tradition affect the way people use money. employing a qualitative study, based on a q-methodology, she argues that different regions of albania, characterized by various cultures, have a different relationship to money. people from the northern area of shkodra are more imprudent, while people living in the southern area of korça are much more conservative when considering expenses and family budgets. while studying how albanians organize their personal finance, leka (2008) also finds similar differences between regions in albania. this paper embraces a qualitative approach for offering an exploratory study of the main factors that affect risk perception and attitudes toward risk in albanian society. it focuses in particular on how age and gender affect risk tolerance. while the aim is not to make statistical implications, the results of the study can help orientate future research toward qualitative analysis of the relationship between our identified factors and risk attitude. three types of risk are considered: financial risk, health risk, and decision-making risk. the first part of the paper offers a brief overview of the literature of risk behavior. the second part presents the study methodology and the final section discusses the research findings. 2. literature review risk is an inevitable part of an individual’s life. each decision he or she makes, even when it is not connected with economic benefits, carries a risk. the complexity of risky situations is also associated with the complexity of people's behaviours when confronted with them. in some situations, people might not understand what the consequences of a particular risk are, while in other cases, they are aware of the consequences but do not take any action to minimize the risks. this is a clear expression of contradictory behaviour, as is related to the concept of risk perception. two factors have been attributed to the way people perceive risk. the first is fear (olsen, 2014; slovic et al., 1985). the second is related to the conditions and characteristics of the society we live in, such as living in a particular cultural setting (guiso et al., 2006), or living under the impact of discrimination events or violation of justice (olsen, 2014). further, olsen (2014) argues that risk perceptions are multi attribute, environmentally influenced and personally oriented. risk perception and attitudes in albania: an exploratory study 277 economic risk attitude and risky behaviour are two aspects thoroughly addressed in risk research. some researchers have treated the two categories separately from one another, implying that an individual can show risky behaviour (like driving fast), while being very cautious in regard to his economic decision. zhong et al. (2008) for example, while studying the heritability of economic risk attitude in their experimental research, did not relate it to the other risk profile elements of the participants. other authors, while observing financial behaviour in relation to other risky behaviour of the participants, argue that the distinction of the two concepts is not so clear (dohmen et al., 2011; martins et al., 2004; worthy et al., 2010). even earlier, jackson et al. (1972) have studied risk tolerance in four dimensions: financial risk tolerance, physical risk tolerance, social risk tolerance and finally ethical risk tolerance, arguing that between these levels there is some consistency. some people are always upset and worried, no matter what kind of hazards they face, while others are usually more relaxed and this is reflected in the way they make their financial decisions or other decisions. moreover, studies that have measured the correlations between different risk ratings, have found that if there is a correlation, this usually has been positive and strong (callan & johnson, 2003; sjöberg 2000). in terms of demographic factors, main influencers of risk tolerance have been found to be gender, marital status, age, wealth and education. gender effects are the ones that have been thoroughly studied in literature and it has been generally universally accepted that that females are more risk averse than males (barsky et al., 1997; donkers et al., 2001; grable, 2000; grable & joo, 2004, guiso & paiella, 2005; guiso et al., 2002; sung & hanna, 1997; yao & hanna, 2005). research has usually been controversial in regards to the relationship between age and risk tolerance. many researchers have found a negative relationship between risk tolerance and age (see for example grable & lytton, 1998; morin & suarez, 1983; yao et al., 2011). however, in their empirical study on the effects of financial and demographic variables on risk tolerance, sung & hanna (1997), find no significant relationship between age and risk tolerance. grable (2000) found a positive relationship between age and risk tolerance, arguing that as people age their finances become more stable, making them willing to take more risk. interestingly, hallahan et al. (2004) found an inverse, although nonlinear structure in the relationship between risk tolerance and age. in attempt to explore the full effect of age to risk tolerance, yao et al., (2011) have decomposed the age effect into three components: “age effect” which is related to the process of getting old; “the generation effect” which is affected by socioeconomic environments that influence different generations and do not change with age; and the “period effect” which is related to those socioeconomic environments that influence individuals of all ages over time. they find that the main influencers of the relationship between age and risk tolerance are aging and period effects. other demographic factors studied in the literature are income, marital status, and education. income and wealth are two related factors that are believed to have a positive relationship on the preferred level of risk (see bernheim et al., 2001; diaz-serrano & o'neil, 2004; grable & lytton, 1998; schooley & worden, 1996; shaw, 1996). however, other researchers argue the opposite, finding that wealthy people may be more conservative with their money than low income people, which might see more risky investment as a way to get richer (see for example bowman, 1982). in relation to marital status, literature finds that unmarried people are less risk tolerant than married individuals, except when substantial risk tolerance is considered, in which case there is no difference in risk tolerance between married and unmarried people (hallahan et al., 2004; yao & hanna, 2005). finally, education makes 278 a. zylfo, e. pojani people more tolerant to risk. the rationale is that education increases a person’s capacity to evaluate risks inherent to the investment process and therefore endow them with a higher financial risk tolerance (baker & haslem, 1974; haliassos & bertaut, 1995; sung & hanna, 1997). the methods used in the foregoing studies vary widely. scholarly debates are ongoing as to which methodology is the most appropriate to study risk. many researchers have employed surveys based on secondary data, such as census or consumer finances surveys, to access risky behaviour (bajtelsmit et al., 1999; hallanah et al., 2004; hariharan et al., 2000; sung and hanna, 1997; yao and hanna, 2005; yao et al., 2011). when quantitative surveys are used, risk tolerance level is assessed by modelling the responses of participants, who are asked to agree or disagree on particular statements related to risk perception or to make decisions based on hypothetic situations (diacon, 2004; grable & joo, 2004; olsen 2012; zhong et al., 2009). however, this approach has been criticized because frequently questions are not well understood by respondents and because what people self-report is not always reliable (e.g., what people do in reality does not necessarily match what they say they will do in the artificial context of a study). other researchers have attempted the experimental strategy, where the decision making of participants in financial markets have been accessed, and accordingly their risk profile has been compiled (barr & packard, 2002; binswanger, 1980; eckel & grossman, 2008; holt & laury, 2002; schubert et al., 1999). experimental strategy enables the researcher to observe actual behaviour of participants in real situations, and consequently judge about their real level of risk tolerance. however, experimental strategy often compromises the external validity of the research, due to the sampling constrains, and ethical issues involved (gliner et al., 2009; saunders et al., 2002). finally, most recent research has employed qualitative methods, such as interviews and focus groups in order to provide a more fine-grained analysis of risk perception and attitudes (barsky et al., 1997; diaz-serrano & o'neil, 2004; donkers et al., 2001; guiso & paiella, 2005; guiso et al., 2002). this shift is especially due to the rise of the field of behavioural finance. researchers have argued that quantitative data and quantitative analysis alone are insufficient to determine the underlying reasons of individual’s decisions in financial markets, and more thorough analysis is paramount to determine the way financial decisions are made. while the constraints in data quality, time, personnel, and other resources may not allow the use of a quantitative approach, often, qualitative methods are rather embraced in order to give a stronger meaning to the collected data (coleman and marks, 1999), by identifying themes and patterns within the data (gliner et al., 2009; saunders et al., 2002). in a study on risk behaviour among adolescents, qualitative methods were chosen for preventing response bias, which was often a problem when surveys with closed questions were used (rodham et al., 2006). in other studies, the qualitative method is used to confirm the quantitative findings (simões et al., 2008). studies that use mixed methods combine the findings from both qualitative and quantitative analysis, in order to achieve the understanding of social processes and individual behaviours (grappendorf et al., 2008; wagner et al., 2012). however, ultimately, the choice of method is based on several combined factors, including data availability, complexity of the issue, and requirements of the analysis (han & weng, 2011). in summary, while the literature in this field is rich, new research is constantly being produced. generalization and universal truths have not been produced yet. different settings, cultural environments and situations lead to different conclusions. these reasons, along with a lack of domestic research, motivated this exploratory study in albania. risk perception and attitudes in albania: an exploratory study 279 3. data and method the research for this study was conducted in tirana, the capital of albania in 2016. semi-structured personal interviews were the main data collection tool. respondents were purposefully selected based on their age and gender, by inviting each one of them for an interview, with the aim to address the main question of the study. the emphasis was on observing and taking notes on the gender effect and the generation effect on risk attitude, as defined by yao et al. (2011). albania is a post-communist country with two distinct generational worldviews. gender roles tend to be patriarchal and traditional (vullnetari & king, 2015). for about half a century the albanian economy was centralized, organized with deeply bureaucratic structures where decision-making was subject only to traditional methods. taking risk was a bold decision, as the consequences of failure could be fatal. given this, any economic structure tended to see only certain short-term and not optimal benefits. individuals who were in charge of decision-making preferred to avoid risk to protect themselves. in addition, the term risk was often misused or misunderstood. this was also due to the lack of information and knowledge in the risk field. the post-1990s society was exposed to a large amount of information and choices; however, it seems that the sense of danger still remains an integral part of the psychosis of the past. even the explanation of the term risk in the albanian dictionary is not related to economics or decision making. specifically, in the dictionary of today's albanian language, “luck” or “fate” are defined as synonyms for risk (dictionary of today's albanian language, 2016). the term “danger” was and is still usually used instead of the term risk, creating the psychosis that risk is something to be avoided in any case because it can cause harm. under such circumstances, economic decision-making and risk-taking have been and still are deeply culturally oriented. in light of these observations, this research builds upon the motivation to improve risk literacy in albanian literature in the field. forty interviewees participated in the study, 20 men and 20 women, 20 of which were over 35 and the rest in their 20ies. respondent’s answers were analysed both for the whole group and for two subgroup sets, namely: women and men, and individuals over 35 and under 35. the breakdown point was set at 35 in order to distinguish between those participants who received most of their education during the communist era (pre-1990s) and the transition period (1990-2000) and those who were raised and educated after 2000. the interview questions aimed at investigating the tolerance towards financial risk, health risk and life-style risk. the questionnaire included 22 pre-defined question and follow-up questions as needed to extract the necessary information from the interviewees. most questions were open-ended questions but a few rating questions using a likert scale were included as well. the interviews were collected in a period of 3 months. each interview was conducted in albanian, lasted approximately 20-30 min and the data was recorded using an electronic device and later transcript for further analysis. the interview was structured in three parts. the first part addressed general question related to the interviewee demographic profile and education choices. demographic variables collected included age and gender, household type and size, and employment status. the second part of the interview investigated financial choices of the participant, such as saving modes, preferred investment alternatives, as well as self-reporting on economic risk tolerance. the third part of the interview addressed mostly personal aspects of everyday decision 280 a. zylfo, e. pojani making of the individuals. these included travel choices, health care, life style, family connections, touristic choices, as well as choice of romantic partners. table 1 summarizes the conceptual framework of investigating on risk profiles, according to which the interview questions were conceived. table 1 conceptualization of risk profiles and interview questions risk component subcomponents financial risk predisposition to save choice of investment involvement in political and economic activities health risk choice of transport means nutrition choice medication choice frequency of health check-ups decision-making risk (life-choices) choice of education choice of place to live and lifestyle choice of partner source: the authors under this conceptual framework, the following hypotheses were defined: h1: age significantly affects risk tolerance of the people in post-communist countries (or more specifically, in albania). h2: gender significantly affects risk tolerance of the people in post-communist countries (or more specifically, in albania). these main hypotheses were further decomposed into more specific sub-hypotheses: h1a: age significantly affects the attitude towards financial risk of the people in postcommunist countries (or more specifically, in albania). h1b: age significantly affects the attitude towards health risk of the people in postcommunist countries (or more specifically, in albania). h1c: age significantly affects the attitude towards decision-making risk of people in the post-communist countries (or more specifically, in albania). h2a: gender significantly affects the attitude towards financial risk of the people in post-communist countries (or more specifically, in albania). h2b: gender significantly affects the attitude towards health risk of the people in post-communist countries (or more specifically, in albania). h2c: gender significantly affects the attitude towards decision-making risk of people in the post-communist countries (or more specifically, in albania). the interview produced mainly qualitative data. the aim was to identify the main themes and patterns among respondents’ answers, which can confirm the validity of the drawn hypothesis. for qualitative data, the analysis was conducted manually: first summaries of interviews were produced, key words were defined and the main patterns of responses were identified. a small sample of respondents was purposefully selected to achieve this goal. advanced statistical testing was not possible and is not the aim of the study. however, through the likert rating questions, some quantitative data were also analysed. based on the rating questions addressed through the interview, the interdependence or interaction between the risk risk perception and attitudes in albania: an exploratory study 281 subcomponents have been investigated for the whole sample (table 7). moreover, mean values of likers scale valuations are calculated and reported for each risk subcomponents (tables 2 through 6). the consistency between financial risk behaviour and risky behaviour was assessed. the study results discuss the consistency in these risk categories based on answers given by respondents. in addition, the factors, which cause differences in relation to risk perception per each category, are analysed. in particular, gender and age have been emphasized as possible causes of such differences. 4. findings and discussion 4.1. financial risk the interview responses show that men tend to be keener on risky investments, unlike women, who prefer forms of investments with a moderate level of risk. men would rather invest on starting a new business, while women are prone to saving their money in a bank or investing in a pension fund. this is consistent with the findings of the literature on the gender effect ((barsky et al., 1997; donkers et al., 2001; grable, 2000; grable & joo, 2004, guiso & paiella, 2005; guiso et al., 2002; sung & hanna, 1997; yao & hanna, 2005). risk perceptions vary by age too. people under 35 state that they prefer to save money to face unexpected expenses, but they seem to have only a moderate tendency to save. study participants in this age group who save the most are those whose expenses are covered by their family. people over 35 have an entirely different attitude toward savings. they see these as a vital component of their future. they tend to save money not only to cover the cost of their purchases in the short or medium-term, but also for a “nest egg for old age”. this observation is in line with that part of literature that find a negative relationship between risk and age (grable & lytton, 1998; morin & suarez, 1983; yao et al., 2011), arguing that millennials are generally considered the “rent generation”, more interested in traveling and having fun, rather than saving and settling down. however, some inconsistencies in the arguments of respondents are observed from the analysis of qualitative data. younger are usually more risk tolerant, as they have time to recover from a bad financial choice. at the same time, as their finances are neither stable nor substantial, people of this age group declare to be more prudent in their spending, aiming at consolidating their savings before starting to embrace risky financial decisions. older people show both behaviours as well, for different reasons. they are cautious when considering financial choices, as they need to feel secure in case they face sudden adversity, such as illness. on the other hand, given that their finances are consolidated, they find some level of risk acceptable. these observations are in line with that part of literature that has not established a clear relationship between age and risk tolerance (sung & hanna, 1997). the main inverse relationship between risk attitude and age in our study can be further explored when considering circumstantial factors. older respondents do not have the appropriate information or knowledge related to different types of investments, given the fact that financial markets are underdeveloped in albania, and this group received their main education during communism and transition area, when financial education was not a solid part of school curricula. in addition, they seek investments that require less energy to undertake (time, innovation, market studies, etc.), thus choosing safer forms of investments (bank deposits, treasury bonds, etc.). 282 a. zylfo, e. pojani some descriptive statistics on respondents answers in relation to the investment choice of respondents are shown in table 2. as can be seen from the table, the average values show that the trend is towards safer forms of investment. creating a new business, appears to be appealing, but the average value demonstrates mostly indifference rather than approval on this type of investment. meanwhile, the most controversial form of investment, also the most risky one, represented by gambling, is mostly discarded by respondents. the triangulation of these data, with the qualitative one has highlighted two problems related to risk perception. firstly, we observed that, even though some interviewees are oriented toward risky forms of investments, such as establishing a new business, their level of knowledge on entrepreneurship and portfolio management is questionable. this is especially true for the group-age over 35 – a generation who has received little financial education during their schooling. these observations contrast the findings of studies set in other countries and may make albania’s case special. secondly, we concluded that saving money in a bank is the preferred form of investment. this can be the result of either the limited options that the financial market offers in albania, or a risk aversion attitude among most respondents. table 2 descriptive statistics on evaluation about the preferred type of investment type of investment mean value of likert scale1 investment fund in a second level bank 4.3 investment in a new business 3.64 gambling 1.15 notes: 1the respondents were asked to rank the different investments choices based on a likert scale, where 1 is the value showing disregard to the respective investment option and 5 high interest in the investment option. source: the authors 4.2. health risk this aspect of risk behaviour is crucial, because it analyses choices people make in relation to their wellbeing. some descriptive statistics in relation to the main subcomponents of this risk category are shown in tables 3 and 4. table 3 descriptive statistics on evaluation about safety attitude in travel safety measures mean value of likert scale1 speed limit 4.23 vehicle safety 4.57 cost of travel 4.06 notes: 1the respondents were asked to rank the most important factors related to the choice of a travel mean. the factors are evaluated on a likert scale, where 1 is the value showing disregard of the factor, while 5 demonstrates a high relevance of the factor. source: the authors in relation to the first group of factors related to safety attitude in travel, responses show that individuals pay attention to the speed of travel, but vehicle safety is considered the most important. this means that despite the preference to shorten the arrival time to a certain destination, the importance of the safety of the means of transport dominates. the qualitative analysis of open-ended questions show that some individuals admit to having travelled by risk perception and attitudes in albania: an exploratory study 283 unsafe means in order to reach their destination faster. the cost of transportation is important, but also conditioned by the safety of the trip. table 4 descriptive statistics on evaluation about the factors that affect decisions about the health factors mean value of likert scale1 cost of medical visit 4.23 time spent in queues 3.38 precaution about health 4.85 notes: 1the respondents were asked to rank the most important factors related to their willingness to undertake medical check-ups. the factors are evaluated on a likert scale, where 1 is the value showing disregard of the factor, while 5 demonstrates a high relevance of the factor. source: the authors the second group of answers related to decisions people take about their health in general, show very interesting patterns. for instance, a dual behaviour is observed. on the one hand, respondents pay attention to the concept of health, but on the other hand they are not willing to take concrete action to ensure its protection. this fact is well supported by the results of the qualitative data. whether due to the high cost of visits or to some extent the time required to commit to health problems, individuals are reluctant to undergo medical examinations at set time intervals. although it is important for them to treat the symptoms from the beginning, it does not seem that in practice this factor is given due importance. discussing gender differences, in line with the literature, we observe that women are generally more interested in taking care of their health compared to men. this is more visible when it comes to nutrition, medical care and medicine usage. however, the fact that someone is interested in wellbeing and a healthy lifestyle does not necessarily mean that they make an effort to achieve those goals. both male and female respondents tend to neglect medical check-ups. in most cases, this is due to a low level of trust in the health care system in albania. however, this can also be a sign of a risky behaviour, which, interestingly, contradicts the financial risk behaviour discussed earlier. thus, while the interviewees are mostly risk adverse when it comes to financial choices, they are more risk tolerant when deciding about their health and self-care. this has a lot to do also with some aspects of albanian culture towards safety in general. albanians are reactive rather than pro-active when it comes to planning and this is reflected in many behaviours they show in different situation. for example, there is a very low culture of insurance in the country, even though communities are often faced with disaster events, like flooding, fires, landslides, etc., which leave many damages both in property and wellbeing. usually individuals make decisions after a situation has occurred, rather than taking measures before to mitigate the consequences. this behaviour is consistent with the observations in relation to the way they treat their health issues, as our data show. some differences are also observed between age groups. the inverse relationship between age and risk attitude, discussed by some authors (grable & lytton, 1998; morin & suarez, 1983; yao et al., 2011), is observed about the health factors. the data reveal a low concern about health-related risks among younger ages. self-medicating is common in this group. in contrast, older people tend to show a moderate level of interest in health. they perceive health risks as important and as having a potentially large impact in their lives. in addition, they claim that they undergo medical check-ups more frequently. the 284 a. zylfo, e. pojani findings suggest a more rational relationship between age and risky behaviour, i.e. younger participants are more imprudent than older participants are, because they are in better health and have a lifetime ahead of them. 4.3. life choices risk the mean values of the likers scale evaluation for two categories of life choices components (education and choice of residency) are shown in tables 5 and 6. table 5 descriptive statistics on evaluation about the factors that affect education choices factors mean value of likert scale1 future income 4.49 future career 4.21 possibility to find a job 4.76 job stability 4.62 notes: 1the respondents were asked to rank the most important factors when considering education options. the factors are evaluated on a likert scale, where 1 is the value showing disregard of the factor, while 5 demonstrates a high relevance of the factor. source: the authors table 6 descriptive statistics on evaluation about the factors that affect the choice of residency (living in a foreign country) factors mean value of likert scale1 economic stability 4.81 family connections 4.7 better chances for employment 4.62 cultural and ethnic diversity 3.19 better education options 4.6 better conditions after retirement 3.72 notes: 1the respondents were asked to rank the most important factors when considering the decision live in a foreign country. the factors are evaluated on a likert scale, where 1 is the value showing disregard of the factor, while 5 demonstrates a high relevance of the factor. source: the authors this category of risks was more difficult to analyse and interpret, as the factors were much more complex. focusing on the choice of education profile, we see that this decision is greatly influenced by the consequences or benefits that it is expected to bring to the life of the individual. this is shown by the high levels of mean values which represent a very strong perception of these factors. table 6 shows the high impact of several factors when a decision to live abroad is considered. the qualitative data gave more inputs on the responses of the participants. from a gender perspective, we notice that men are more likely to make impulsive life choices compared to women. they state that they are ready for new experiences, even if they lack information on the risks and benefits involved. women, on the other hand, are not prepared to make decisions without having a considerable level of certainty. this again is in line with the literature findings on the differences in risk attitude between men and women. the study reveals important differences between age groups. in relation to the choice of a life partner for example, the following behaviours were observed. the younger risk perception and attitudes in albania: an exploratory study 285 generation claims that romantic love is the most important factor in choosing a life partner, whereas the older generation reports to have considered other factors when choosing their life partner, such as family background, education level, and social status. other differences are evident too. the members of the new generation appear eager to try new experiences (e.g., new travel destinations or places to live) and claim to adapt more easily to a new lifestyle. meanwhile, older people feel insecure when they face new circumstances in their lives. this finding must be understood in the context of albania’s brutal communist history and turbulent post-communist transition, which have left people traumatized and unwilling to experience further change. concluding this analysis, table 7 presents the values of correlations between the average values of the likert scale for each subcomponent of risk considered. although there is some correlation between risks sub-components, most values are close to 0. however, some extreme values leave room for interpretation. the most meaningful value is the correlation between the factors that create perceptions of health and safety risks (r = 0.42) and the factors that create perceptions of the risks associated with lifestyle and safety (r = 0.41). these links are understandable due to the common risks associated with these subcomponents, i.e., the risks associated with lifestyle will necessarily be reflected in health or safety hazards. table 7 variables that affect risk subcomponent education lifestyle investment choice safety health education 1 lifestyle -0.11 1 investment choice 0.08 0.25 1 safety 0.21 0.41 0.30 1 health 0.29 0.06 0.34 0.42 1 conclusions albanian culture, despite emphasizing negative connotations attached to risk, has not deprived individuals of seeking it. this shows that to some extent individuals come to understand the true philosophy of risk and are capable of expanding their decisionmaking alternatives in such a way as to manage the consequences of wrong choices. lack of information and limited financial education are factors that have a deterrent effect on individual's decision making, as uncertainty is perceived as a risk even though it may not actually be related to it. this study presents an exploratory analysis of different components of risk attitude, namely financial risk attitude, health risk attitude and life-style risk attitude, in a postcommunist country context, aiming to observe the effect of age and gender to risk attitude. in albania, economic and financial risks are often perceived merely as loss. this is confirmed by the persistent preference for safe forms of investments, rather than risky but more profitable activities. this is mostly due to the lack of financial education. the study showed that people tend to be more risk adverse when it comes to making choices that offer a high level of satisfaction to them. in these situations, the negative perception of risk is minimized. it should not be excluded though that such approaches may be fictitious or random. 286 a. zylfo, e. pojani our study shows that, in the gender perspective, the tendency observed is that men are more risk tolerant than women. this observation is further confirmed by the fact that women are allegedly more cautious about their decisions and carefully analyse each situation. in the age-group perspective, greater freedom to take risks is observed in individuals of age 20-36. the older group of interviewees exhibited more moderate risktaking behaviours. however, even this conclusion should be carefully considered in light of all other factors analysed in this study, which do not necessarily have to do with risk adverse behaviours, but nevertheless guide the process of decision-making. following its exploratory approach, the study serves as a starting point for future indepth analyses using quantitative and qualitative methods. we deem the study as an important step in the development of risk literature about albania for two main reasons. first, the topic is not very much addressed in albanian literature. studies on the perception and ability to take risks are limited, so this study, modestly, aims to shed some light on people's relationship with risk and to improve literacy in the risk field. secondly, we consider the employment of a qualitative methodology as a strength of the study. the use of semi-structured interview allows more flexibility and higher ability to explore themes and to define patterns on individuals' perception of risk. however, the study has its limitations. first, the lack in previous studies leads to a limited bibliographic basis. consequently, this has prevented us in presenting the overall context of the issue. second, the methodology used has its shortcomings. this can be evidenced in two aspects. firstly, people during interviews may tend to display protective behaviour, by not expressing their true attitude, but hindering it with casual opinions, which do not completely reflect what they perceive. we have tried to prevent this issue by working upon trust and confidence with the participants. secondly, as touched upon above, the qualitative study is limited to the extent of an exploratory analysis. the results cannot be generalized. however, the generalization of results was not our purpose. the main goal was to define the themes and patterns which can be used in designing future quantitative research in the field. the results of our study can serve as a basis for further research in the scientific fields of neuroeconomics and neurofinance in albanian context. interdisciplinary research is better suited to 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(2011). decomposing the age effect on risk tolerance. the journal of socioeconomics, 40(6), 879-887. https://doi.org/10.1016/j.socec.2011.08.023 zhong, s., chew, s. h., set, e., zhang, j., xue, h., sham, p. c., ebstein, r. p., & israel, s. (2008). the heritability of attitude toward economic risk. twin research and human genetics, 12(1), 103–107. https://doi.org/10.1375/twin.12.1.103 percepcija rizika i stavovi o riziku u albaniji: istraživačka studija ovaj rad analizira precepciju rizika i stavove prema riziku u albanskom društvu. pre svega se fokusira na to kako uzrast utiče na toleranciju rizika, iako se i pol uzima u obriz. od naročitog je interesa promena u precepciji rizika kod pojedinaca pre i nakon pada komunizma. autori su se odlučili za istraživanje koristeći kvalitativne podatke dobijene intervjuima. razmatrajući dve grupe učesnika, starije od 35 i mlađe od 35, rad pravi razliku među stavovioma ka riziku obe ove grupe. osim toga, razlika u odgovorima među polovima je analizirana. rad donosi zaključke o ulozi pola i starosti u odnosu na percepciju rizika koji su u skladu sa glavnim zaključcima akademske literature na tu temu. dalje razmatra ulogu socijalnog okruženja pre i nakon pada komunizma i njegov uticaj na toleranciju rizika među albancima. ključne reči: percepcija rizika, albanija, uticaj uzrasta, uticaj pola, finansijski rizik, rizik načina života https://doi.org/10.1111/0272-4332.00001 https://doi.org/10.1111/0272-4332.00001 https://doi.org/10.2139/ssrn.2234 https://doi.org/10.1080/0966369x.2015.1013447 https://doi.org/10.1016/j.drugpo.2011.05.009 https://doi.org/10.1016/j.socec.2011.08.023 https://doi.org/10.1375/twin.12.1.103 facta universitatis series: economics and organization vol. 18, no 4, special issue, 2021, pp. 341 356 https://doi.org/10.22190/fueo210609024j © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper sustainable finance and banking: a challenge for regulators and a risk management system1 udc 336+336.71 mirjana jemović, jelena radojičić university of niš, faculty of economics, serbia orcid id: mirjana jemović https://orcid.org/0000-0002-5212-182x jelena radojičić https://orcid.org/0000-0003-3444-0138 abstract. the key position of banks in the financial sector, as well as their indisputable role in financing economic development, have conditioned the need to consider their impact on the environment. the implementation of the concept of sustainability in banking has conditioned the transformation of banks in the direction of their greater corporate eco-efficiency and the development of banking products and services that contribute to sustainable development. sustainable finance for banks is a source of new opportunities, but on the other hand, banks are more and more concerned about their exposure to environmental risk. recognizing the impact of environmental risks on banks’ operations, central banks and supervisors are taking a number of initiatives to reduce the negative impact of these risks on banks’ operations, and, thus, financial stability. the paper aims to point out the challenges that sustainable banking has posed to regulators and the risk management system. key words: sustainable banking, environmental risks, regulation jel classification: g21, g28, q56 introduction preservation of health and protection of natural resources have created the need to balance the relationship between ecology, economic development and natural resources, which has resulted in the promotion of the concept of sustainable development. this concept should make it possible to meet the needs of present generations without compromising the received june 09, 2021 / accepted july 14, 2021 corresponding author: mirjana jemović university of niš, faculty of economics, trg kralja aleksandra ujedinitelja 11, 18000 niš, serbia e-mail: mirjana.jemovic@eknfak.ni.ac.rs https://orcid.org/0000-0002-5212-182x https://orcid.org/0000-0003-3444-0138 mailto:mirjana.jemovic@eknfak.ni.ac.rs 342 m. jemović, j. radojičić needs of future generations (united nations general assembly, 1987). as such, it includes three dimensions: economic, social and environmental, and emphasizes that economic and social progress is possible only with the simultaneous care of the environment. the importance of the concept of sustainable development is recognized at the global level, where the leading g-20 countries and influential international organizations (world trade organization, g-20 group, united nations, etc.) identify sustainable development and environmental protection as priorities. the role of banks in this process is indisputable, bearing in mind that they are key players on the financial market in most financial systems. the integration of sustainability into business strategy, decision-making processes, business activities, risk management processes, as well as bank reporting systems, contributes to the sustainable development of the financial and overall economic system. the paper aims to look at the role of banks in achieving sustainable development goals, as well as the effects that environmental risks have on banks. the structure of the paper consists of three parts. the first will point out the alternative approaches of banks in the application of the concept of sustainability, both through the improvement of their internal processes and through the offer of “green” banking products. the impact of risks arising from the environment on banking operations and banking reporting specifics will be analyzed in the second part of the paper. in the last part of the paper, the challenges posed by environmental risk management to regulators, supervisors and banks themselves as regulated entities will be considered, as well as the efforts of supranational regulatory bodies to establish coordination of activities and measures in this field. 1. finance and banking towards sustainable development modern economic systems must be accompanied by a functional ecological system. that is why environmental protection is an important precondition for doing business in any economic activity. given the key role of banks in financing the economic activities of most financial systems, their role in achieving sustainable development goals is crucial. however, banks have begun to see the impact of their activities on the environment quite late, classifying themselves in the group of “clean” industries. in addition, they did not show initiative to influence the change of client behavior in the part of their responsibility towards environmental protection. such an attitude was especially present in european banks. u.s. banks have shown a more proactive approach to environmental liability, especially since the enactment of the comprehensive environmental response, compensation and liability act (cercla) in 1980, which provided for the obligation of banks to bear the costs of environmental pollution of their customers. the special emphasis in american banks was on credit risks. european banks, on the other hand, initially had no direct environmental responsibility. their more proactive approach began only during the 1990s, and was focused on the development of new environmentally friendly products (jeucken & bouma, 2001, pp. 24-26). after that, the number of banks that apply environmental standards is constantly increasing. 1.1. institutional framework of sustainable finance and banking international organizations, agencies and institutions adopt programs and initiatives that provide guidelines to corporations and governments to integrate economic, social and environmental aspects. although most of the initiatives appear in the form of sustainable finance and banking: a challenge for regulators and a risk management system 343 recommendations and principles and are not fundamentally binding in nature, there is a positive relationship between states, corporations, financial institutions and investors. the first major initiative, the united nations framework convention on climate change (unfccc), emerged during the 1992 world summit in rio de janeiro, setting the framework for international cooperation in the fight against climate change and global warming. with the same goal, the kyoto protocol was adopted in japan in 1997, which, unlike the convention, is binding. its application, solely in developed countries, has not contributed to the achievement of the set goal. for these reasons, an agreement on climate change management was adopted in paris in 2015, which became legally binding for all countries. with the first initiatives in the field of environmental protection, financial institutions have shown interest in engaging in this field. in their activities in the field of environmental protection and broader social responsibility, banks and other financial institutions have joined numerous initiatives, programs, agreements, among which the most important are shown in figure1. fig. 1 the evolution of sustainable finance source: unep fi (2021) the united nations environment program finance initiative (unep fi) was launched in 1992 in order to establish a long-term partnership between unep and the international financial sector (banks, insurance companies and investors) from over 60 countries. the initiative envisages that environmental protection be an integral part of business activities and services of financial institutions, as well as that investment policy be directed towards environmentally sustainable projects. the positive attitude of financial institutions towards this initiative is evidenced by the fact that the initiative was supported by 13 banks, and that today more than 350 institutions – banks, insurance companies and investors, as well as more than 100 so-called supporting institutions, which contribute to sustainable financing within the financial system, support it. along with unep fi, the sustainable stock exchanges initiative (ssei) was launched in 2012, making an effort to establish a global platform for reviewing the stock market’s contribution to sustainable development goals. today, this initiative includes 106 stock exchanges listing 53,399 companies with a total market capitalization of 88,343,273 million us $ (sustainable stock exchange initiative, 2021). in order to assess the contribution of stock exchanges to the goals of sustainable development, a database on the activities of stock exchanges in this field was formed, whereby the assessment is performed from the point of view of certain criteria, presented in table 1. table 1 criteria for the sustainable stock exchange database criteria criteria fulfilment stock exchange has a sustainable partner yes no reporting about sustainability yes no esg criteria as a listing rule yes no has written esg guidelines yes no offers training regarding esg yes no has sustainability-related index yes no has listing platform for sustainable bonds and sme yes no source: sustainable stock exchange initiative, 2021 344 m. jemović, j. radojičić sustainability information is an integral part of individual stock market reports. having in mind the mentioned criteria, it should be noted that some stock exchanges managed to meet all the criteria (china – hong kong exchanges and clearing limited; india – bombay stock exchange; indonesia – indonesia stock exchange; luxembourg – bourse de luxembourg; peru – bolsa de valores de lima) listing 9,144 companies with a market capitalization of 6,743,309 million us $. in addition, the number of stock exchanges undertaking an increasing number of activities in the field of sustainability is constantly increasing, which is clearly shown in the following presentation (fig.2). fig. 2 growth of stock exchange sustainability activities source: sse initiative and the world federation of exchanges (2019, p.10) the development of the dow jones sustainability indices (djsi) speaks in favor of the importance of environmental issues and raising the awareness of companies and numerous organizations about the need to incorporate them into their business. created in 1999, this index includes companies from as many as 61 industries around the world that have achieved the best esg results. the assessment includes a number of criteria, such as corporate governance, customer relations, environmental policies, working conditions and social initiatives. by type of construction, this index is weighted by free-float market capitalization. djsi includes more than 3,500 international groups and, as such, is a good indicator for investors who prefer a “sustainable” investment portfolio (s&p dow jones indices: dow jones sustainability indices methodology, 2021). in addition to djsi, as many as 45 stock exchanges have developed their sustainability indices, which confirms the growing importance of sustainable finance for achieving sustainable development goals. among the numerous un initiatives in the field of environmental responsibility and sustainable development, the principles for responsible investment (pri) stand out, which were adopted in 2006. six principles have been formulated, the basis of which is to consider the impact of environmental and social factors on the investment process, and to incorporate the concept of sustainability into investment decision-making and investment processes. since its establishment, the number of organizations that have signed these principles has been constantly growing (over 2,300). in addition, the equatorial principles adopted in 2003 are important, as a framework for environmental and social risk management, which can occur in project financing (weber & acheta, 2016). the primary task of this sustainable finance and banking: a challenge for regulators and a risk management system 345 framework is to provide minimum standards for due diligence and risk monitoring to enable the financing of only those projects that do not pose a risk to the environment and society. these principles have been adopted by 116 financial institutions in 37 countries, which otherwise finance most projects. having in mind the positive institutional framework for the engagement of banks and other financial institutions in the field of achieving sustainable development goals, we will consider the approaches by which banks adopt the principles of sustainable development, the risks they face in this process, as well as the directions of further development of banks in conditions of their heightened environmental responsibilities. 1.2. banks’ environmental responsibility approaches modern economic systems must be accompanied by a functional ecological system. that is why environmental protection is an important precondition for doing business in any economic activity. given the key role of banks in financing the economic activities of most financial systems, their role in achieving sustainable development goals is crucial. in this context, the responsibility of banks towards environmental protection has a dual nature: 1) internal, which implies the transformation of banks in the direction of their greater corporate eco-efficiency; and 2) external, which implies the development of banking products and services that contribute to sustainable development. eco-efficiency of banks: banks belong to relatively clean industries. however, having in mind that this is a sector with a significant share in gross domestic product, its consumption of paper, energy, water is not negligible. analyses conducted by banks in an attempt to “measure” the impact of banks on the environment, confirmed the significant impact of energy consumed by banks. in that sense, greater corporate eco-efficiency of banks implies efficient use of resources, introduction of new technologies, improvement of business processes, in order to ultimately achieve a positive impact of banks on the environment. for these reasons, many banks and other financial institutions have started using renewable energy sources (such as solar energy), use water and means of transport more rationally, reduce the use of paper, etc. (jeucken & bouma, 2001, pp. 29-30). in addition to the positive impact on the environment, this practice contributes to cost efficiency, long-term performance growth and improving the bank’s image (nizam et al., 2019). development of “green” banking products and services: although not considered direct polluters, banks indirectly bear part of the responsibility for environmental pollution when they place money with clients engaged in activities that have a direct impact on environmental pollution. by approving green banking products and financing environmentally sustainable projects, banks contribute to their own clients becoming part of the “sustainability chain”. although the implementation of the concept of sustainability is not binding, the banking sector provides significant support to the implementation of the concept of sustainability and raising awareness of the importance of environmental protection. an increasing number of banks are adopting the concept of green banking, and strive to provide products and services to customers who take into account the consequences of their actions on the environment. this is not a one-way impact, given that the environmental practice of users of banking services ultimately affects the banking business. the impact of environmental risks on client operations, through approved bank loans and other bank products, affects the bank’s operations. 346 m. jemović, j. radojičić the practice of “greening” banking products and services began first in the payment system, primarily in the payment card segment. given that card payment has an upward trend, the contribution to the goals of sustainable development through this banking product is significant. specifically, during the transaction, a certain percentage (0.1-0.5%) of the value of each purchase or transaction is transferred to non-governmental organizations for environmental protection or a special environmental fund. prominent examples are: the world nature card created by the swedish bank föreningssparbanken and the wwf visa affinity card created by the royal bank of canada, where as much as 0.5% of the transaction value is transferred to the account of the ngo for animal and environmental protection (the world wide fund for nature, wwf); hsbc visa card, where 0.1% of the purchase amount is transferred to the hsbc green roof for schools program with each purchase; the environmental defense platinum mastercard created by the american bank citigroup, etc. (jeucken, 2001). in the area of savings accounts, directing funds to environmental funds is still the practice of individual banks. thus, the vsb panda certificate stands out, within which the fortis group pays a fixed amount to wwf after the certificate is sold. in addition, asn bank and the triodos bank in the netherlands use raised funds on savings accounts for placements in sustainable projects. in addition, investment funds specializing in investment in sustainable projects are formed, aimed at protecting the environment in general (environmental growth fund), or a specific segment of sustainability, e.g. sustainable energy (wind fund, solar investment fund). when it comes to loans, an increasing number of banks offer loans that put the environmental dimension in the forefront. these are “green” car and mortgage loans, loans for energy efficiency, loans for small and medium enterprises that invest in sustainable development. in order to motivate customers to buy cars with high fuel efficiency, this type of loan is offered at lower interest rates compared to those for buying conventional cars. in addition, a lower interest rate is charged when taking a loan for the purchase of energy efficient real estate, as well as for the reconstruction and adaptation of homes. in addition to lower loan prices, clients reduce housing costs, achieve higher energy efficiency of the home, save energy, etc. previous banking products are intended primarily for households. in addition, banks seek to offer “green” banking products to the corporate sector. in order to encourage investments of small and medium enterprises in sustainable projects, banks form their own funds to approve loans on more favorable terms to companies that invest in sustainable projects. in the european union, this process is supported by the european investment fund, and the number of banks that can participate in this program is limited. for priority projects, the fund participates with as much as 50 percent in the total approved loan. in addition to lending, banks, through the investment banking segment, provide advisory and securities placement services to organizations that consider the effects of their business on the environment. in the area of advisory services, banks specialize in providing information to clients on sustainable projects, sustainable technologies, tax and legislative framework governing this matter. to this end, banks issue a number of brochures and reports with useful guidance on various aspects of adopting the concept of environmental responsibility. in addition, banks transfer part of the risk to investors through the mechanism of securitization of “green” loans. this process is known as eco-securitization. a prominent example is forest bond, created to finance the large and complex reconstruction of the panama canal, on the basis of which a twenty-five-year bond was created, whose buyers are entities that use this waterway. catastrophe bonds (cat bonds), created to protect insurance companies from catastrophic sustainable finance and banking: a challenge for regulators and a risk management system 347 risks, by transferring them to investors, with the support of investment banks, also stand out (unep fi, 2007). in addition, specific financial derivatives have been created, primarily to protect companies from risks that may be caused by adverse weather conditions. 2. environmental risks in banking various internal and external factors are putting pressure on banks to increase their role in environmental risk management and environmentally sustainable development. banks are in a position to play a significant role in promoting sustainability, as bank loans continue to be the dominant source of funding for non-financial companies. for example, in the eu, the share of bank loans in the total debt of these companies was 82% (ebf, 2017, p. 7). 2.1. integration of sustainability into banks’ lending activity sustainable finance for banks is a source of new opportunities, but on the other hand, banks are more and more concerned about their exposure to environmental risk. the ey/institute of international finance (iif) risk survey indicates that not only regulators are aware of growing environmental risks, but also that banks consider them to be key risks they will face in the coming years (ey/iif 2019, p. 8). banks have begun to integrate sustainability into risk management processes, green banking product design, and long-term strategies (bgln, 2020, p. 1), but the integration of sustainability has been hampered by a lack of appropriate standards, relevant indicators, and the sharing of best practices (bgln, 2020, p. 6). to overcome these limitations, the importance of regulators which could help coordinate and exchange information has been recognized. this is indicated by the establishment of the network of central banks and supervisors for greening the financial system, which now consists of 89 members representing central banks from countries around the world. when integrating sustainability in the activity of banks, two approaches are distinguished: (a) a risk-based approach and (b) a values-based approach. table 2 integration of sustainability sustainable finance typology bank loans sustainable finance 1.0 exclusion sustainable finance 2.0 esg integration sustainable finance 3.0 impact lending, microfinance source: schoenmaker & schramade (2019, p. 30) as seen in table 2, the risk-based approach involves excluding loan applications from companies involved in environmentally risky activities, and then including the esg principle in the lending decision-making process. a step further in the integration of sustainability is a value-based approach that includes mission, strategy, publicly available information on esg activities, impact of products and services etc. natural disasters and climate change bring high costs, the impact of which can undermine financial stability of both individual banks and the financial system as a whole 348 m. jemović, j. radojičić (ngfs 2020a, p.4). integration of sustainability into lending activity can reduce the credit risk to which banks are exposed (weber et al., 2015). some empirical research found that banks with higher share of green loans to the total loan portfolio have lower non-performing loan ratio (npl) (cui et al., 2018). the implementation of the concept of sustainability in lending activity should contribute to greater resilience of banks, but there is a danger that banks that base lending decisions on detailed environmental analysis may be at a disadvantage compared to non-banking competitors that provide alternative sources of financing. research by the european banking authority shows that banks incorporate sustainability into their broader business strategy (around 95% of banks) (coleton et al., 2020, p.11) and they see climate risk as a potential material risk (around 60% of banks) (coleton et al., 2020, p.20). the majority of surveyed banks (77%) take into account the direct and indirect impact of activities that they finance (coleton et al., 2020, p. 14). direct impact that a bank has on the environment and society stems from its use of natural resources in doing business, while its indirect impact comes from its lending activity and projects it finances. although they believe that risk management is a key mechanism for shifting capital from unsustainable activities to more sustainable investment, they do not see sustainability as something at the very core of risk management, which is a paradox that leaves room for regulators and supervisors (coleton et al., 2020, p. 16). in order to understand the drivers, practices and challenges of sustainable investment and financing, the oecd secretariat interviewed risk managers from the largest oecd banks (oecd, 2020). according to the answers received, the leading driver of the integration of the esg into the lending practice was the demand from investors (oecd, p. 121). otherwise, investors are putting pressure on banks to get involved in managing and reporting on esg risks. the oecd survey showed that almost all major banks have environmental and social policies and that most policies cover the practice of corporate lending (oecd, 2020, p. 126) and “screen their lending portfolios against specific esg risks”, but it was noticed that there are differences in the degree of implementation of esg due diligence and that more attention is paid to environmental risks for project financing transactions (oecd, 2020, p.127). 2.2. types of environmental risks for the bank on the one hand, the exposure of banking clients to environmental risks is a source of opportunities for banks because it creates demand for products such as bank guarantees, green loans or environmental insurance products (jeucken, 2001, p. 120). on the other hand, environmental risks for a bank are mainly the result of the environmental risks to which its borrower is exposed (jeucken, 2001, p. 120). the term “environmental risks” encompasses environmental-related risks and climaterelated risks. environment-related risks include risks arising from a bank’s exposure “to activities that could potentially cause or be affected by environmental degradation” (ngsf, 2020b, p. 4) (such as soil, air and water pollution, deforestation, etc.) climate-related risks refer to the risks posed by banks’ exposure to “physical or transitional risks caused by or related to climate change” (ngsf, 2020b, p. 4). sustainable finance and banking: a challenge for regulators and a risk management system 349 table 3 sources of environmental risks physical risks climate-related financial risks on the banking sector extreme weather events (e.g., winter storms, heat waves, floods) ▪ higher expected default by climate vulnerable sectors (e.g., agriculture and tourism) ▪ lower property values in coastal areas ▪ downgrade of credit ratings of borrowers including sovereigns due to extreme weather events ▪ relocation of headquarters and data centers ecosystem pollution sea-level rise water scarcity deforestation/desertification transition risks climate-related financial risks on the banking sector public policy change (e.g., carbon pricing, pollution control regulations, resource conservation regulations) ▪ declining collateral value ▪ stranded assets ▪ higher expected default by carbon intensive sectors ▪ higher transaction costs due to weakened macroeconomic conditions ▪ higher reputational risks by investing in carbonintensive sectors technological changes (e.g. clean energy technologies, energy saving technologies) shifting sentiment (e.g., changes in consumer preference for certain products, changes in investor sentiment on certain asset classes) disruptive business models (new ways to run businesses that can rapidly gain market shares from traditional businesses) source: ngfs, (2020b, p.5); park & kim, (2020, p. 7) the sources of environmental risks are diverse, so these risks can be divided into two groups: physical risks that arise from weather-related events and transition risks that arise from the transition to a lower-carbon economy, as shown in table 3. the borrower’s failure to address environmental issues effectively may jeopardize its business, as well as the bank that finances it. the bank may have to deal with: (a) delays in loan repayment or loan write-offs, (b) loss of collateral value on liquidation, and (c) loss of reputation and impairment of the brand. 2.3. transformations of environmental risk into credit risk banks may be exposed to credit risk due to the compromised ability of the client to repay the loan. a bank is exposed to credit risk when a borrower is unwilling and/or unable to meet its contractual obligations due to environmental factors. here, it is important to assess the client’s financial ability to finance its environmental risks and to invest in preventive environmental management (jeucken, 2001,p. 129). legal problems in the field of environmental protection faced by the borrower may jeopardize the continuity of its business. problems in obtaining and retaining environmental permits (emission/discharge permits) or the need for the company to invest additional funds to obtain permits or comply with the regulations may have a negative impact on the business continuity of the company and its financial position. this may reduce the repayment capacity of the loan or lead to the termination of the bank’s credit relationship with such a borrower. it is important for the bank to be aware of the client’s liability for damage to the environment (environmental accidents or regulatory fines for violating the environmental permit or its expiration) as well as the client’s financial capacity and reserves to cover these risks. there may also be the borrower’s liability for environmental damage that will occur elsewhere in the production chain, i.e. the so-called “sticky 350 m. jemović, j. radojičić liability” (for example for substances embedded in a product) with which banks must be familiar (jeucken, 2001, p. 125). as shown in table 3, one form of environmental risk is transition risk resulting from adaptation to a low-carbon economy and climate change, including changes in environmental policies and regulations, changes in technology, and changes in public mood and social preferences. this type of risk can affect the value of banks’ loan portfolios or the value of financial assets in the affected sectors. for example, changes in the field of competition and consumer demand can lead to the loss of a part of the borrower’s market and jeopardize its loan repayment capacity. more environmentally responsible competitors and their products pose a risk to a company that does not have such environmentally friendly producers. consumers themselves may also demand more environmentally friendly products or production processes, and a problem may arise if the borrower is unable to meet the resulting changes in consumer demand and expectations. physical risks do not originate from the borrower’s company and include several sources of risks: extreme weather events, climate change and environmental accidents that may lead to serious water and land pollution (ngfs, 2000b, p.5). for example, extreme weather events may disrupt business activity of -borrower and thus affect the ability to repay the loan, climate change and soil or water pollution can cause excessive costs for agriculture. the materialization of environmental risk for the bank may also occur due to the fall in the value of the borrower’s collateral. security is an important factor in bank lending. the role of collateral can be played by the registered assets of the borrowing company (land or buildings) or inventories. environmental factors can negatively affect the value of a particular asset of a borrower that is pledged as collateral (ngf, 2020). for example, the value of pledged land may fall due to pollution, a high-value machine that pollutes the environment may be worthless when sold, the value of pledged stock may fall due to lack of demand in the case of environmentally unacceptable products and the like. mortgaging gives the bank the right to sell the mortgaged real estate if the borrower does not fulfill its obligations to the bank. in the event that a bank becomes the owner of a pledged real estate, it may be exposed to the risk of not only a decline in value but also the occurrence of negative collateral value. the bank is exposed to liability risk arising from the client’s legal obligations. this includes fines, costs for resolving third party claims for damages due to negligence in the client’s environmental risk management and pollution clean-up. for example, a bank may be liable as the owner when contaminated land that is collateral has to be rehabilitated and cleared before sale (tarna, 2001, p. 159160). 2.4. negative impact of environmental risk on the bank’s reputation the bank is exposed to reputational risk due to potentially negative publicity associated with the borrower’s poor environmental practices. with the increase of environmental awareness and attention focused on the issue of protection of the environment, the impact of environmental risk on the bank’s reputation has become important because it affects not only specific loans but the entire loan portfolio and all other areas of the bank’s business. similarly, negative publicity that a bank gains on a particular local market can damage its reputation and negatively affect its business as a whole. however, this type of environmental risk is difficult to assess financially. negative publicity damages the brand values and the image of the financial institution in the media, the public, the financial and business sustainable finance and banking: a challenge for regulators and a risk management system 351 community. the main negative consequence of damaged reputation is the abandonment of the bank by existing clients and the inability to acquire new clients. environmental risks to a bank’s reputation are more pronounced in project financing (case, 1999, p. 146), in cases of large infrastructure investments (such as roads and railways) and new technologies (jeucken, 2001, p. 139). the negative public attention that is focused on companies and projects that pollute the environment does not bypass the institutions that finance them. non-governmental organizations (ngos) closely monitor banks in this regard. according to the organization that globally monitors the activities of ngos, the number of campaigns aimed at banks that provide financial support to environmentally unacceptable projects is significantly increasing (oecd, 2020, p. 122). the ngos campaigns (naming and shaming bad practices, inviting target bank clients to close accounts en masse, and similar campaigns) target the banks financing fossil fuel projects and supporting fossil fuel companies through corporate lending, issuing of bonds and share and bond holdings (schücking et al., 2011). this imposes the need for the bank to seriously examine potential borrowers or projects from the aspect of environmental risks. it should be borne in mind (jeucken, 2001, p. 142): (a) that simply linking the bank to the detrimental impacts of the company or project on the environment is sufficient to create reputational risk (the degree of bank participation in the project is generally irrelevant, it can be only advisory services), (b) that there are geographical and cultural differences due to which the local population does not see the project as harmful to the environment, but clients in developed countries consider it environmentally unacceptable, which can damage the bank's reputation (e.g. the positive economic effects of the project are emphasized in developing countries), (c) that, while an isolated problem can be forgotten, a number of problems can seriously damage a bank's reputation, (d) that the larger projects are more likely to have adverse impact on the environment and/or to attract the attention of ngos and (e) that project funders may underestimate risk when it is not measurable. 2.5. environmental risk assessment banks strive to manage environmental risks. this includes linking the risk and the probability of negative impacts and the consequences of the occurrence of a risky event. environmental risk becomes uncertainty when its probability and cost cannot be predicted and calculated. the bank assumes those risks for which the probability of loss can be predicted with a certain degree of certainty. determining the exposure of banking institutions to environmental risk is not always easy. credit exposure to “brown assets” is easier to determine (for example, exposure to key players in the fossil fuel industry) but it is far more complex to assess exposure to climate change (bgln, 2020, p. 6-7)). to reduce environmental risk exposure, banks must understand the potential environmental risks and their implications for the potential borrower’s business. this requires proactive identification, assessment and management of environmental risks before they become significant or result in a negative outcome for the borrower and make it impossible to meet its financial obligations to the bank. risk identification refers to the strategic assessment of environmental factors that may result in financial risks (ngsf, 2020b, p. 11). the extent of the bank’s exposure to these risks is then determined (e.g. 10% of the loan is exposed to risks). risk assessment refers to “estimating the probability and magnitude of financial losses that may arise from these risks” (ngsf, 2020b, p. 12). banks can mitigate environmental risks by 352 m. jemović, j. radojičić taking risk reduction actions such as refusing a loan application from companies involved in environmentally risky activities, adjusting the interest rate or maturity of the loan to environmental risk or inserting specific clauses in loan agreements (jeucken, 2001, p. 119). for an effective environmental risk assessment, it is necessary for the bank to have information on the environmental sensitivity of the companies it finances. the bank may use its own resources or external expertise. some of the possible sources of information on companies’ environmental risk exposure are (jeucken, 2001, p. 145): (a) standardized lists of questions (regarding compliance, own esg initiatives, records of previous incidents, etc.) (b) information obtained from specialized agencies (credit rating agencies are integrating esg consideration into credit rating (beeching et, al., p. 5) (c) direct contact with a potential borrower for risk assessment, (d) environmental reports, (e) permits and other government sources, (f) policy documents issued by the government; (g) past experience or experience of other banks, etc. one of the methods for analyzing environmental risks in banks is the assessment of possible environmental scenarios. scenario analysis could be used to determine the financial impact of climate-related risks (transition and physical risks) on banks (ngfs, 2020b, p. 3). scenario analysis may include the following steps (repetto & austin, 2001, p. 281): (a) defining the sector, (b) identifying prominent future environmental issues for the sector, (c) identifying scenarios, (d) assigning probabilities to the scenarios, (e) assessing the exposure of individual companies, (f) assessing the financial impact of the scenario and (g) constructing an overall measure of the expected impact and risk. since various sectors may be more or less sensitive to the environment, many banks begin an environmental risk assessment with an analysis of the sector in which a particular company operates. sectors differ in terms of environmental sensitivity. environmental sensitivity means “that products from the production process itself and the emissions of the production process can be regarded as actually or potentially threatening for the environment” (jeucken, 2001, p. 120) particularly environmentally sensitive sectors include agriculture, fishing, mining and the like. environmental risks are especially pronounced when looking at individual industries. environmentally sensitive industries include oil refineries, metal production, textile industry, livestock, etc. banks are exposed to greater risk when investing in companies operating in environmentally sensitive industries. environmental risks to which a bank is exposed also depend on the size of the company it lends to. these risks are more pronounced when it comes to small and medium-sized enterprises that approach environmental issues ad hoc, do not have specialized knowledge for solving problems in the field of environmental protection and only strive to comply with their regulations. large companies have a greater opportunity to hire or train staff to deal with environmental issues, approach environmental issues systematically, have specialized knowledge of relevant legislation or technological and organizational solutions that they can use to innovate products that meet society’s sustainability requirements (jeucken, 2001, p. 122) 3. regulatory approaches for environmental risk management in banking recognizing the impact of environmental risks on banking operations, central banks and supervisors are taking a number of initiatives to reduce the negative impact of these risks on banking operations, and, thus, financial stability. at the international level, in 2017, the network for greening the financial system (ngfs) was formed as a group of sustainable finance and banking: a challenge for regulators and a risk management system 353 central banks and supervisors, within which experiences are exchanged and non-binding principles are adopted to guide banks towards financing sustainable projects. in february 2020, the basel committee formed a high-level task force on climate-related financial risks (tfcr), in order to monitor the risks that climate change may have for banks. in the initial stages of its work, the tfcr organized a forum for the exchange of regulatory and supervisory practices of member states in the field of climate change risk management. most participants supported the need to include these risks in the monitoring list, bearing in mind that they may have negative implications for banking operations. however, monitoring and managing these risks are significantly hampered by the lack of a unified methodology for measuring and calculating their impact on the stability of the banking sector, which makes it difficult to compare banks within the same, but also between different banking systems. at this stage, most countries are raising awareness of the importance of taking these risks into account, but a prudential framework for including these risks in the capital adequacy calculation has not yet been established. although the focus of regulatory and supervisory bodies, as well as supranational organizations, after the outbreak of the covid-19 pandemic shifted to considering the impact of the pandemic on financial stability, the pandemic reaffirmed the importance of implementing esg principles in banking operations. tfcr coordinates its work with the network for greening the financial system (ngfs), the financial stability board and other international organizations that set standards in this area, all with the aim of global coordination of issues related to environmental risks, especially those which are related to climate change and global warming. in addition to initiatives at the supranational and national level, there are also initiatives at the level of individual banks. specifically, an increasing number of banks include these risks in risk management systems, developing special instruments and methods for their coverage and measurement. an increasing number of banks report these risks in their reports, although they are not required to do so by the current regulatory framework. most countries seek to develop approaches to measuring and managing the risks posed by climate change and other environmental impacts, as well as to look at the mechanisms by which the effects of these risks affect banking operations. in this regard, most countries believe that the existing prudential framework should be adapted to include environmental risks in the list of risks, while a minority believe that these risks should be integrated into the existing risk classification within the appropriate risk group (e.g. credit risk, operational risk etc.). for example, banks are expected to consider environmental risks when assessing the creditworthiness of borrowers, both in the phases of the loan approval process and later during the monitoring of the loan portfolio. the prudential regulation authority (pra) requires banks to consider this risk when calculating the capital adequacy ratio. given that pillar 2 of the basel framework provides for the possibility of internal assessment of capital adequacy, banks are left with the possibility to cover risks that are not fully covered by pillar 1, which creates a basis for including environmental risks, especially climate change. in addition, in order to strengthen the market discipline of banks in this field, under pillar 3, it is possible to provide for the obligation to publish relevant information on banks’ exposure to environmental and social risks, especially in the case of large banks (bcbs, 2020). 354 m. jemović, j. radojičić conclusion banks introduce the concept of social responsibility into their operations and implement numerous projects that significantly contribute to the community. banks create green banking products and services and act as sources of financing for green projects. in addition, in the current environment, banks are working to raise awareness of the importance of sustainability and environmental protection both among their employees and in the community in which they operate. a comprehensive approach to environmental management involves establishing an internal environmental system (online services, reducing energy consumption, raising employee awareness, etc.), managing environmental risks associated with lending operations (credit portfolio environmental risk assessment) and promoting sustainable financing through creating green banking products and services. in general, companies are increasingly being judged on the basis of their attitude towards the environment – customers today are undoubtedly better informed, more environmentally conscious and more sensitive. there are social expectations that the banking sector should also be more careful about environmental risks. in addition to economic indicators, banks are introducing sustainability as an important criterion for business cooperation with companies. increased environmental risk may result in impaired ability of the borrower to repay a loan. banks are therefore intensifying the inclusion of the sustainability element when deciding on loan approvals and developing procedures for assessing the risks associated with environmental damage that can be caused by loan beneficiaries. however, banks face ongoing challenges in the process of integrating sustainability into risk management frameworks due to the new and complex nature of risk, lack of historical data, lack of appropriate standards and relevant indicators for measuring environmental risk. the development of an adequate framework for measuring and monitoring environmental risk would contribute to the public declaration of banks as socially responsible institutions not only for marketing purposes, but also accompanied by appropriate actions in the field of sustainability. sustainable banking includes environmental risk management and credit support to businesses that make positive impact on the environment. the transformation of banking from traditional, predominantly profit-oriented, to sustainable banking implies the creation of sustainable values for the banks themselves, but also for society as a whole. references bcbs (2020). climate-related financial risks: a survey on current initiatives. bank for international settlements. bgln (2020). sustainability and purpose in banking, bank governance leadership network viewpoints. retrieved from https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/banking-and-capital-markets/ey bgln-viewpoints-sustainability-and-purpose.pdf beeching, a., nuzzo, c. & adams, t. 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(1999). reporting on the environment: current practice in the financial services sector, in: jj bouma, mha jeucken and l ki, sustainble banking – the greening of finance, pp. 280 – 294, greenleaf, sheffield. unep fi (2007). green financial products & services: current trends and future opportunities in north america. retrieved from https://www.unepfi.org/fileadmin/documents/greenprods_01.pdf unep fi (2021). retrieved from: https://www.unepfi.org/news/25th-anniversary/timeline/ united nations general assembly (1987). report of the world commission on environment and development: our common future. oslo, norway: united nations general assembly, development and international cooperation: environment. weber, o., & acheta, e. (2016). the equator principles: do they make banks more sustainable?. inquiry working paper, 05. weber, o., hoque, a., & islam, m. a. (2015). incorporating environmental criteria into credit risk management in bangladeshi banks. journal of sustainable finance & investment, 5(1-2), 1-15. 356 m. jemović, j. radojičić održive finansije i bankarstvo: izazov za regulatore i sistem upravljanja rizicima ključna pozicija banaka u finansijskom sektoru, kao i njihova nesporna uloga u finansiranju privrednog razvoja uslovili su potrebu sagledavanja njihovog uticaja na životnu sredinu. implementacija koncepta održivosti u bankarsko poslovanje uslovila je transformaciju banaka u pravcu njihove veće korporativne eko-efikasnosti i razvoja bankarskih proizvoda i usluga koji doprinose održivom razvoju. održive finansije za banke predstavljaju izvor novih mogućnosti, ali sa druge strane raste zabrinutost banaka zbog izloženosti ekološkom riziku. prepoznajući uticaj ekoloških rizika na poslovanje banaka, centralne banke i organi supervizije preduzimaju brojne incijative kako bi umanjili negativan uticaj tih rizika na poslovanje banaka, a time i finansijsku stabilnost. rad ima za cilj da ukaže na izazove koje je održivo bankarstvo stavilo pred regulatore i sistem upravljanja rizicima. ključne reči: održivo bankarstvo, ekološki rizici, regulacija plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 3, 2016, pp. 325 334 preliminary communication selling of enterprises in serbia as a form of foreign investment1 udc 330.342(497.11) mlađan dimitrijević student center kragujevac, serbia abstract. in a global economy, foreign direct investments are the most important form of international business activities. statistical analysis based on bilateral flows of foreign direct investments as well as the specific features of the countries, confirmed the importance of the "gravity" variables in attracting foreign investments. therefore, the author of this article attempts to further elaborate on what determines the interdependence of business decisions on investment location and incentives for investment. the fact is that many postcommunist countries have decided to embark on a radical journey to transform the economy, often with very rapid and bad privatizations of companies. this "economic shock therapy" has largely resulted in the reduction of gdp, a significant reduction in living standards and many other categories. in other words, the concept of development of the countries in transition is focused on the establishment of an attractive environment for capital imports, although the scope and structure of these investments in most cases leads to deindustrialization, which, along with privatization of banks has contributed to the process of excessive consumption of the population, with the highest spending oriented towards imports, increasing foreign trade deficit. key words: transition, privatization, foreign direct investments, multinational corporations, gravitational variables introduction generally accepted attitude in developing countries is that foreign investments are the only "right path" leading to the "promised" prosperity only if the "structural adjustment of the economy" has been enforced. the research conducted in slovenia after the year 2000 on the impact of foreign investments on the national economy has shown that (rojec, 2002, 31): 1received june 17, 2016 / revised august 18, 2016 / accepted september 5, 2016 corresponding author: mlađan dimitrijević student center kragujevac, radoja domanovića 12, 34000 kragujevac, serbia e-mail: macilija70@yahoo.com 326 m. dimitrijević  the arrival of foreign investors changes the quality of production,  the changes in the organizational structure are necessary,  that a permanent education of personnel is mandatory, especially management structures at all levels,  it application is logical, as well as applying international standards of financial and accounting reporting,  for solving redundancy problems "soft" methods are commonly used (early retirement, training to start their own business and so on)  product development programs and programs for developing environmental procedures are necessary but are now rare in countries in transition. today, when all countries have more or less liberalized their national policies, attracting foreign investments is not an easy task. especially since we know that only targeting can determine the type of investment that the country specifically needs, and then the circle of those who can use certain incentives for investment in the particular country. nevertheless, it is evident by all indications that the most of the foreign direct investments are realized in developed countries, which is logical given that multinational companies originate from these countries. according to available data, in 2007 the united states had regained the position of the largest single host country for foreign direct investments in the world. japan has, for the first time since 1989, recorded a negative net inflow in 2007, while china and hong kong remain the leading destinations among asian countries (begović et al., 2008). in 2014, however, global foreign direct investment inflows decreased compared to the previous year, due to the instability of the world economy, geopolitical uncertainty, a major disinvestment in the us, and are estimated at 1.260 billion dollars. in developed countries, they were reduced by 14% and are estimated at about 511 billion dollars, in the eu they had reached 267 billion dollars, which is only a third of the level they have been at in 2007. as the countries in transition, on the one hand, with more or less success finalized the privatization process of state and socially-owned enterprises, and on the other there has been a decrease of global flows of foreign direct investments, there is a concern in these countries about how to get out of the vicious circle of poverty since they do not possess their own start-up capital. in the republic of serbia, as a country in transition, the bulk of fdi inflows came exactly from privatization-acquisition of existing companies. in many cases it turned out that privatization has not yielded the expected results. in particular, customer-investors did not realize their contractual obligations, primarily in respect of investment and social programs, and additional investments in the expansion of their own businesses were rare. some justified the failure by too ambitiously set plans of the new owners, the wrong assessment of the current situation in the acquired firms, as well as their position in the market. it has also been argued that foreign direct investments are "subtle forms of occupation" (chives, 2013) because:  they exploit low-wage workforce,  they intake a part of the social accumulation,  outflow of funds is realized from payments of dividends by multinational companies, as well as from use of royalty payments, management fees and transfer prices,  growth and development of the domestic economy is prevented by the strong foreign competition,  key segments of the economy are taken over from foreign investors who thus become more important and more powerful factor in society. selling of enterprises in serbia as a form of foreign investment 327 to support these views, the germidis research realized on a sample of 65 multinational companies in 12 developing countries is cited, and has shown that there is almost no transfer of new technology to local firms (findly, 1978, 1-16), while aitken and harrison have demonstrated in the case of firms from venezuela that foreign direct investments lead to a decline in labor productivity (lui, 2004; 177). therefore, it is difficult to find a foreign investment for which it can be said that it is a useful and developmental investment. as opposed to these claims others state the facts that although the inflow of foreign capital in countries such as poland, hungary, czech republic, slovenia, the baltic states, has led to a significant foreign trade and balance of payments deficit, the strategy of attracting foreign investment proved to be successful after all, because these countries have reduced their deficits over time, and exports have finally started to grow faster than imports. also, with the use of foreign investments, south korea, taiwan and singapore have built a strong national economy. in fundly's opinion, the capital that a foreign company invests in the recipient country has a capital role of promoter of advancing technology and allows local companies to improve their business, work more efficiently, and the level of its technical equipment is growing. therefore, all foreign investment should not be generalized and classified only in "exploitative investment corpus", or the best options for growth and development. this article deals with the influence of investment funds generated from the sale of state and socially-owned companies in serbia on the development of the national economy of serbia and with factors for stimulating investment environment. the basic hypothesis is that foreign direct investments in serbia after 2000 have not yielded adequate results because the inflow of those investments came mainly through the privatization process. there is also an elaboration on the elements that determine the link between business decisions on investment location and tax incentives. it is emphasized that a tax incentive in itself does not determine investment decisions even though such claims are often found in practice. on the contrary, this article attempts to demonstrate that often, if not always, tax incentives are inefficient and insufficient reason for the arrival of investors. 1. interdependence between revenues from privatization and efficiency of foreign investments in serbia the history of foreign investments is not something new because their origins are linked to the beginning of the development of international cooperation. throughout history, foreign investments have only changed shapes (greenfield, cross-border acquisitions, crossborder mergers, brownfield investment, joint venture investments) and goals. the existence of numerous definitions points out that the approach to their definition and essence was different. thus, in the early works, international capital flows are explained as a process of interest rates arbitration. works that are based on the neoclassical paradigm interpret foreign direct investments as a consequence of the existence of differences in the marginal returns of capital flows between countries (frenkel et al., 2004 and hosseini, 2005). the first major contribution to the understanding of foreign direct investment as a result of cross-border business activity of multinational corporations was given by helpman (1984). further improvements of this conception were made by both krugman and helpman (1986), who concluded that the foreign direct investments, as a form of vertical business connections, are the result of differences in relative factor proportions between countries. 328 m. dimitrijević starting from the fact that the institutional holders of investment and financial activities in the global market are multinational companies, whose revenue is measured by trillions of dollars, which employ between ten and one hundred thousand workers. the international monetary fund defines foreign direct investments as a form of foreign investments that reflects the goal of an entity from one national economy to realize an abiding interest (long-term relationship and a significant degree of influence on the management) at the company whose headquarters are in another national economy (lipsey, 2001, 94). there is no doubt that an increase in profits in the long term is declared to be the primary motive for the foreign investor, depending on the profitability of each branch and its interaction within the system. today, in addition to profits other motives stand out. thus the motive of acquiring resources and market share gains steps down to make room for increasing the efficiency and the acquisition of strategic assets. the motif problem is further complicated if we take into account the attractiveness of countries for receiving foreign investment, which is in functional dependence on the orientation of investors towards the market, resources, or efficiency increase. the orientation on the search for a market puts the focus on market size and gross domestic product per capita, market growth, access to regional and global markets, consumer preferences and the like. the resource attractiveness, in turn, is determined by the availability of raw materials, qualified workforce and its low prices, innovation and infrastructure. if the increase in efficiency is required, most valued are the cost price of material and human resources, the country's membership in regional integration, various benefits offered by some governments (investment allowances, social benefits) and the like. as the underdeveloped countries are largely unequal partners as importers of capital and foreign investors, their interests are divergent. specifically, underdeveloped countries are economically inferior and insufficiently strong to resist the various demands and blackmails from the investors, and therefore have a subordinate role, without a significant impact in international relations, with a lack of vision and development programs, with a weak economy and a lack of domestic capital accumulation. in pursuit of change and ambition to improve the state of the economy and society in general, managements of these countries often make mistakes and introduce foreign investors indiscriminately. thus the investors with programs of low technological intensity, and often with bad references enter the country. the more significant inflow of foreign investments in serbia begins after 2000, while the highest net inflow of these funds (eur 4,499 million) was achieved in 2006. after that there is a gradual decrease (in 2014 only 1.500 million eur or almost three times less than the maximum amount achieved). according to unctad's report on investments in the world for 2014, if 1995 is taken as the base, to serbia from then until 2014 poured 29.27 billion of foreign direct investment, while the total outflow from serbia was 2.56 billion. as noted above, however, inflows of foreign investments in serbia are primarily a result of privatization. in the period 2002-2015 2,372 companies in serbia were sold and a total revenue of 2,580.20 million was achieved (table 1). on average, 169 companies per year were sold during this period, and the average value per sales amounted to eur 1.09 million. the largest number of companies were sold on auction (63.91%) and then on the capital markets (32.67%). the average value of a single auction sales totaled 0.5643 million. the average number of employees per firm sold was 140, and the value of the investments per firm sold 0.4399 million. the largest number of employees was in companies that were sold on the capital market, 42.73% of the total employees in these companies, and the biggest part of investments (81.14%) was realized in companies that were sold by tender. selling of enterprises in serbia as a form of foreign investment 329 table 1 number of sales companies and income earned on that basis in serbia year number of sales companies revenue from sales of enterprise mil. eur tenders auction cap mar total tenders auction cap mar total 2002 11 151 48 210 200.7 34.90 83.00 318.60 2003 17 515 107 639 595.7 177.30 67.80 840.80 2004 6 181 45 232 11.20 88.30 52.20 151.70 2005 9 156 147 312 67.20 139.00 125.20 331.40 2006 13 155 102 270 50.20 97.20 70.10 217.50 2007 7 164 119 290 27.30 178.20 162.10 367.60 2008 12 131 103 246 33.50 98.00 84.80 216.30 2009 3 44 40 87 3.40 33.70 10.50 47.60 2010 2 16 13 31 0.50 6.60 11.60 18.70 2011 1 1 12 14 0.90 0.10 17.00 18.00 2012 2 11 13 2.20 13.30 15.50 2013 7 7 14.90 14.90 2014 6 6 6.80 6.80 2015 15 15 14.80 14.80 total 81 1.516 775 2.372 990.6 855.50 734.10 2,580.20 source: public finance bulletin no. 138/2016, ministry of finance of the republic of serbia although serbia has allocated the generous direct subsidies since 2006, fdi inflow was not satisfactory. in fact, until 2008, a total of eur 289.9 million was granted in incentives, of which three-quarters were allocated to foreign investors. according to the size of subsidies serbia has for some time been at the top of the cee. total subsidies in serbia in 2014 reached 3 to 3.54% of gdp, while in eu countries they are under the 1.5% of gdp (belgrade chamber of commerce, 2015). as the value of these incentives is fiscally unsustainable it cannot be a model for attracting foreign investments to serbia in the future. given the observed trend of investments using the methods of correlation analysis, we examined the interdependence of the variations of the number of enterprises sold, number of employees, revenues from the sale of investments and tax revenues. the degree of linear quantitative agreement between the analyzed variables was evaluated by pearson coefficient of linear correlation, which can be calculated using the following formula:         2222 )()( yynxxn yxxyn r (1) the results show that the correlation between the observed variables is direct, or positive (table 2). the high value of the correlation coefficient, which in most cases is close to one, indicates a strong linear relationship between all quantities. however, based on the correlation it cannot be concluded whether there is a causal relationship between the observed variables. despite significant correlation implied by the high value of the pearson coefficient, granger co-integration test has not shown that there is a causal relationship between the observed time series. 330 m. dimitrijević table 2 the value of the correlation coefficient and determination between variables indices value pearson correlation coefficient tax revenues 0,9637 pearson correlation coefficient customs tax revenues 0,5394 the coefficient of determination tax revenues 0,0275 the coefficient of determination of customs tax revenues 0,2910 pearson correlation coefficient number of companies sold workers 0,9674 pearson's correlation coefficient of income from the sale of investment companies 0,8153 source: author's calculation using statistical data of the ministry of finance of the republic of serbia given the fact that the observed correlation between the analyzed variables cannot be used to explain the causal connection, but it is a clearly visible linear trend of values of specified quantities in the observed period, for the regression model, which can be summarized as follows: 0 1i i y x  (2) we will use time as an explanatory variable in order to model and then predict the movement of the same quantities in the future (2016 and 2017). the equation of the straight line described by the formula 2 is completely determined by two coefficients: β0 showing segment on the y axis, and β1, which shows the tangent of the angle formed by a line and a positive end of x axis. the value of the coefficient is determined using the method of least squares. the linear regression models described above, despite the lack of long time series show remarkable degree of accuracy. in the case of regression model for predicting tax revenues, customs duties and corporate income tax determination, coefficient takes values of less than 0.8, which means that the model explains from 2.75% to 29.10% of the variability of the dependent variable. the average absolute percentage error of the values obtained by the model and real values, indicates an error that is greater than 30%, which is why in the future research it will be necessary to consider the modification of the proposed model or the use of non-linear models. 2. factors that determine the attractiveness of the location for investment when observing the geographical structure of foreign investments or participation of major investors according to their country of origin, the largest foreign investors in serbia are from eu countries, around 72%, and asia around 8% in 2014, except in year 2009, when russia invested the most by purchasing 51% of nis shares (table 3). serbia is not characterized only by fluctuations in the volume of foreign investments but also by their oscillations in the branch structure. the foreign investments mainly came to the so-called non-tradable goods sector, and it is known that economic growth is more sustainable as sector of tradable goods is more powerful. for instance, during the entire period from 2000 to 2014, the share of the secondary sector in total realized foreign investments in serbia was higher than 50%. in 2014, 48% of the investments was channeled into the energy sector, 20% to the production and 7% to trade. selling of enterprises in serbia as a form of foreign investment 331 table 3 the structure of fdi in serbia to the countries investors come from no country 2005 2007 2009 2011 2012 2013 1 austria 13.51% 46.61% 17.06% 8.47% 22.85% 5.29% 2 norway 0.002% 0.13% -0.04% 0.05% 1.43% 0.46% 3 greece 14.65% 13.02% 3.40% 0.55% 122.40% 3.78% 4 germany 12.39% 2.77% 2.92% 4.19% 17.96% 6.30% 5 italy 1.18% 6.12% 12.20% 7.01% 33.78% 5.71% 6 netherlands 6.43% -1.33% 12.55% 13.18% 0.57% 17.06% 7 slovenia 11.99% 3.52% 2.50% -5.93% 21.73% 3.19% 8 russian federation 0.94% 0.09% 30.58% 4.06% 7.65% 5.89% 9 luxembourg 7.06% 10.17% 0.44% 44.49% 26.64% 2.94% 10 switzerland 3.67% 3.87% 4.58% 2.61% 32.41% 6.38% 11 hungary 1.97% 1.26% 1.30% 3.70% 0.21% 5.94% 12 france 2.78% 3.38% 0.52% 6.22% 5.91% -0.14% 13 croatia 2.43% 1.47% 1.45% 0.27% 49.18% -0.72% 14 united kingdom 4.11% -1.16% 3.78% -0.34% 16.35% 4.27% 15 montenegro 0.00% 8.38% -0.26% 0.31% -3.62% 0.01% 16 sad 1.29% 1.29% 0.92% 1.40% 11.60% 2.18% 17 bulgaria 0.05% 1.89% 0.09% 0.04% 12.26% 0.99% 18 slovakia 1.73% 0.13% 1.79% -0.26% -5.56% 0.35% 19 belgium 0.82% 0.95% 0.17% 0.27% 0.69% 5.68% 20 israel 0.93% 1.07% 0.00% 0.01% 0.43% 0.27% 21 latvia 0.42% 0.15% 0.08% 0.09% 1.28% 0.96% 22 liechtenstein -2.63% -0.11% 0.01% 0.54% -0.18% 0.11% 23 cyprus 4.53% 5.49% 1.92% 2.33% 16.45% 1.13% 24 b&h 0.29% -34.19% 0.02% -0.54% 0.06% 0.72% 25 other 9.46% 25.03% 2.01% 7.26% -47.69% 21.25% total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% in serbia, as in other countries, there are developed areas (city of belgrade and the area of ap vojvodina) which attract much more foreign investments. the rule is that regions that have a larger population, higher value of gdp per capita, higher economic growth, and a higher concentration of enterprises have greater success in the inflow of foreign investments. lorentowicz (2006) proved in her research that the geographical position of regions in poland has an important role in selecting the location for foreign investments. it has been established that the central position of the regions in poland is suitable for horizontal foreign direct investments, and areas close to national borders for vertical foreign investments, and that the western border is more suitable for vertical foreign direct investments than the eastern border. she highlighted the fact that european integration has made the eastern polish regions more promising in attracting export-oriented foreign direct investment because it is the eu "gateway to the east" for foreign companies. study done by guimaraes, figueiredo & woodward (2000) investigates the determinants of fdi location in urban areas of portugal (guimaraes et al., 2000, 115-135). researchers are of the opinion that the higher cost of labor will attract foreign investors instead of discouraging them, because, according to them, higher wages mean more skilled and qualified workforce. in contrast to this, the research done by hilber & voic (2007) states 332 m. dimitrijević the opposite, that there is no evidence that any difference in wages has any influence on the location decisions of fdi. barrios, gorg & strobl (2003) found that the choice of location of sdi is affected by the proximity to other firms in the same industry and urban diversity of other manufacturing activities. unfavourable infrastructure has a negative influence on the choice of location. crozet, mayer & mucchielli in their research on the location choice of fdi in france (period from 1985 to 1995) have dealt with investment incentives for investing in certain regions (crozet et al., 2004, 27-57). they proved that investment incentives in the least developed and underdeveloped regions, as well as various grants related to eu regional policy have an insignificant positive impact. the location selection of fdi is positively correlated with domestic demand, while the big distance from home country has a negative impact on the attractiveness of certain regions for foreign investors. this statement is confirmed by the procher’s (2009) research. the following data supports previous research on the attractiveness of belgrade for foreign direct investments in serbia. with an area of 3,234 km², and the estimated number of 1.669.552 inhabitants in 2013, the belgrade region produces 39.9% of serbia's gdp, or 926.000 rsd per capita. in 2013 the average number of employees in belgrade was 562.992, and in 2014 559.231. the number of unemployed was 108.706 on average in 2013, while in 2014 this number decreased to 107.041. according to available data, in 2015 the average number of unemployed amounted to 111.584 people. in the structure of unemployed people the majority has secondary and university education. in 2014, the average net salary in belgrade amounted to 55,429 dinars. in 2013, in the belgrade region there were 41.772 companies with 418.110 employees, which achieved 3.907 billion dinars of operating income, or 22.502 undertakings generated 194 billion dinars of net income. on the other hand, 15.356 commercial companies suffered a 210 billion dinars net loss. the cumulated loss amounted to 1.426 billion dinars. 18.847 companies had a loss up to the amount of the capital, while 12.937 enterprises had a loss above the capital. in the belgrade region in 2013 there were 3.318 entrepreneurs with 7.577 employees, who generated 31 billion dinars operating income, or 2.442 entrepreneurs have achieved 1.073 billion dinars of net income. on the other hand, 757 entrepreneurs suffered 331 million dinars net loss. the cumulated loss amounted to 1.1 billion dinars. 655 companies had a loss up to the amount of the capital, while 774 companies had a loss above the capital. in 2015, in the belgrade region 52.646 companies and 56.353 entrepreneurs were active. according to data from ipo, in 2012, total payments for investments in belgrade amounted to 2.37 billion euros, of which investors gave 1.56 billion euros from their own funds, 12.2 million euros came from joint funds of domestic and foreign co-investors, 555 million euros came from credit sources and 287 million euros from other 15 sources. according to the criteria of sources of funds, 20% of funds came from foreign and 11% from domestic sources. from the total amount of funds for investment in fixed assets in 2012 in the belgrade region, 90% was for realized works and purchases in 2012 and 10% was for the settlement of liabilities from previous years and the advances made in 2012. of total investments, majority was related to construction works (40%), the domestic equipment with the installation (28%), and to imported equipment with the installation (22%). 516,8 million euros were invested in the construction of new capacities, which makes 22.46% of new investments, 1.278 million euros were invested in the reconstruction, modernization, upgrading and expansion, which accounts for 65.29% of total new investments, and 505.2 million euros were selling of enterprises in serbia as a form of foreign investment 333 invested in the maintenance of existing facilities, which makes 22,25%. when we look at the structure of investments in new fixed assets by the type of construction and by municipalities, we can notice that novi beograd is in the lead, and participates in the amount of total new capacity with 10%, while in the value of the reconstruction the largest single share have: novi beograd (13%), zvezdara (11.24%) and palilula (9.17%). of the total funds, the relatively smallest amount was invested in maintenance, which corresponds to the long-term trend of devastation of fixed capital economy. tax incentives to maximize profit: a) corporate income tax ten-year exemption from corporate income tax for investments over a billion dinars and 100 newly employed workers, b) reduced amount of taxes and contributions to net earnings of new employees until june 30, 2016. conclusion raising the overall level of investment in production-oriented sectors of the economy is a challenge for serbia. as the investments have mainly entered the sector of nontradables, it is necessary to focus on attracting investments which would, by encouraging production, consequently lead to the substitution of imports, increased exports, and have the final impact on correcting the situation in foreign trade balance. in other words, for sustainable and stable economic growth and development, serbia requires a healthy economy. with respect to the criteria of usefulness, we also need acceptable foreign direct investments to the extent that our economy can deliver to other countries. references alegría, r. (2006). „countries, regions and multinational firms: location determinants in the european union”, ersa: paper provided by european regional science association in its series ersa conference papers with number ersa 06. barrios, s., gorg, h. & strobl, e. (2003). „multinationals’ location choice, agglomeration economies and public incentives“, core discussion paper no. 17. retrieved from: http://ideas.repec.org/p/cor/louvco/ 2003017.html, accessed on: 02.05.2016. begović, b., mijatović, b., paunović, m. & popović, d. (2008). grinfild strane direktne investicije u srbiji, beograd: vip mobile. coughlin, c. c. & segev, e. (2000). „location determinants of new foreign-owned manufacturing plants“, paper provided by federal reserve bank of st. louis in its series working papers with number 1997-018, journal of regional science 40. crozet, m., mayer, t. & mucchielli, j. l. (2004). „how do firms agglomerate? a study of fdi in france“, regional science and urban economics 34/1. frenkel, m., funke, k. & stadtmann, g., (2004). “a panel analysis of bilateral fdi flows to emerging economies”. economic systems, 28(3). fundly, r. (1978). „relative backwardness, direct foreign investment, and the transfer technology: a simple dynamic model“, quarterly journal of economics, n o 92. guimaraes, p., figueiredo, o. & woodward, d. (2000). „aglomeration and the location of foreign direct investment in portugal“, journal of urban economics, 47/1. helpman, e. & krugman, p. r. (1986). market structure and foreign trade: increasing returns, imperfect competition and the international economy. cambridge: mit press. helpman, e. (1984). „a simple theory of international trade with multinational corporations“. journal of political economy, 92(3). hosseini, h., 2005. „an economic theory of fdi: a behavioural economics and historical approach“. journal of socio-economics, 34(4). 334 m. dimitrijević lipsey, e. r. (2001). „foreign direct investment and the operations of multinational firms-concepts, history and data“. in: choi, e. kwan & harrigan, j. (eds.) handbook of international trade. london: blackwell. lui z., (2004) „foreign direct investment and technology spillovers: theory and evidence“. journal of development economics, n o 85. rojec, m. (2002). „slovenia as a locatioon for inward foreign direct investment“. u: putting the policy frameworks in place: expiriences from slovenia and south east europe, stability pact: the investment compact for south east europe. prodaja preduzeća u srbiji kao oblik stranih ulaganja u globalnoj ekonomiji strane direktne investicije predstavljaju najznačajniji oblik meďunarodnih poslovnih aktivnosti. statistička analiza zasnovana na bilateralnim tokovima stranih direktnih investicija kao i specifičnim obeležjima zemalja, potvrdila je važnost „gravitacionih“ varijabli za privlačenje stranih ulaganja. zato autor u članku pokušava da detaljnije elaborira šta odreďuje meďuzavisnost poslovne odluke o lociranju investicionog poduhvata i podsticaja za ulaganje. činjenica je i da su mnoge postsocijalističke države odlučile da krenu na radikalan način u transformaciju privrede, često uz veoma brze i loše privatizacije preduzeća. ovakva, „šok terapija privrede“ je većinom rezultirala u smanjenju gdp, značajnom smanjenju životnog standarda graďana i mnogih drugih kategorija. drugim rečima, koncepcija razvoja zemalja u tranziciji je usmerena na formiranje atraktivne klime za uvoz kapitala, iako obim i struktura ovih investicija u većini slučajeva vodi ka deindustrijalizaciji, koja je uz privatizaciju banaka pomogla procesu prekomerne potrošnje stanovništva, pri čemu se trošenje najviše orijentiše ka uvozu, povećavajući spoljnotrgovinski deficit. ključne reči: tranzicija, privatizacija, strane direktne strane investicije, multinacionalne korporacije, gravitacione varijable lj. pjerotić, m. rađenović, a. tripković markovića universitatis facta universitatis series: economics and organization vol. 13, n o 1, 2016, pp. 87 100 stakeholder cooperation in montenegrin tourism destinations – current state and constraints udc 338.48(497.1) ljiljana pjerotić, miško rađenović, ana tripković marković faculty of business and tourism, budva, montenegro1 abstract. for the sustainable development of tourism destinations, there is a need for a coordinated effort between all interest groups (tourism stakeholders from the public, private and civil sectors) through systematically developed and implemented management plans at all levels, especially at the local destination level, where tourism activities take place, tourists interact with service providers and with communities, and where tourism’s positive and negative impacts are most felt. the paper deals with the problem of managing a tourism destination from the perspective of harmonizing stakeholders’ interests. it explores destination management in the montenegrin tourism destinations, namely the level of stakeholders’ cooperation at the local destination level. an empirical research was carried out on the sample of 19 local tourist organizations in montenegro. the findings and implications of the research are given in the paper. based on the stakeholder theory, the research tries to verify that the level of destination management development depends on the level of stakeholder's cooperation. the results revealed that cooperation between the many and varied tourism stakeholders in the montenegrin tourism destinations is not yet sufficiently developed, as they face a number of issues such as the lack of planning documents, insufficiently developed communication channels and variety of often opposing interests. nevertheless, there are indications based on the recently conducted research reported in this paper, that there is a strong positive correlation between the level of stakeholder's cooperation and the state of destination tourism planning, marketing activities, monitoring and continuous education. key words: tourism destination, tourism destination management, stakeholder cooperation. introduction in recent years, the problem of managing a tourism destination has attracted the attention of many scientists (sautter and leisen, 1999; buhalis, 2000; presenza, sheehan and ritchie, 2005; sainaghi, 2006). one thing that is common for their work is pointing received january 19, 2016 / accepted april 03, 2016 corresponding author: ljiljana pjerotić faculty of business and tourism, zgrada „akademija znanja“, 85310 budva, montenegro e-mail: lpjerotic@ t-com.me 88 lj. pjerotić, m. rađenović, a. tripković marković out the complexity of a tourism destination as a management unit that is mostly associated with the relationship between different groups of stakeholders in the destination and because of the need for stakeholders to be encouraged to cooperate instead of compete, as well as to unite resources in order to create a system of integral management, directing and delivering of an offer. the complexity of managing tourism development at a tourism destination is due to the fact that many organizations, such as, for example, food vendors, shops and petrol stations, do not understand their role in the process, they are not recognized as part of the tourism industry, even though they have great benefits from tourism development, and are often not sufficiently interested in participating in planning of tourism development. apart from that, a highly fragmented structure of products and services in tourism is faced with customers who perceive the whole set of offers as a unique product or experience. therefore, cooperation between stakeholders is being set as one of the key functions in establishing efficient management of tourism destination development, that is, achieving the desired vision of development. this cooperation is especially necessary for accomplishing the tasks for improving a product, improving infrastructure, human resources and marketing. another fact can be added to the mentioned, that the very concept of sustainable development is unattainable without cooperation and agreement of stakeholders on a number of issues related to the consideration of long-term tourism destination development. additionally, management complexity can be confirmed by the fact that alignment of interests between different groups of stakeholders is difficult as these interests can be conflicting, as well as the fact that visions of development often vary. each stakeholder group has its own attitudes regarding tourism destination development, therefore it is necessary to coordinate interchange of opinions among them and involve them at an early stage of tourism development planning process through various consultative meetings. in the process of coordination among stakeholders, we should bear in mind very different objectives that certain stakeholder groups define in tourism development planning. some authors (liu, 2003; bramwell and sharman, 1999) point out that the key element for ensuring the sustainable development of tourism is overcoming subordination among stakeholders (tourists, local communities, public and private tourism sector, local, regional and national governance structures), which can be accomplished through coordinating and balancing their interests and establishing strategic development plans that would respect these interests. complexity of the different stakeholder groups interests and attitudes harmonization process demands the existence of the leader organization that coordinates activities aimed at tourism destination development. therefore, one of the tasks for the leader organization for tourism destination management is recognizing interests of all stakeholders involved in tourism destination development, and creating a policy that would allow all stakeholders to recognize frameworks for implementing their individual goals. in countries with developed tourism, the attempts to find optimal forms of tourism destination management are made. public organizations for tourism destination management (as part of the state structures), which have been at the top of the hierarchy in the tourism development controlling process for a long time, are slowly accepting the need to disperse tourism destination management among the various partners, creating a stakeholder network that facilitates the establishment of functional relations between stakeholders, while balancing their interests. this process should take place much more quickly in countries in transition, because in these countries tourism, whose significance was not recognized previously, can represent a driving force of overall development. however, it is questionable to what extent stakeholder cooperation in montenegrin tourism destinations – current state and constraints 89 stakeholders have experience in networking and constructive partnerships, especially at the institutional level. therefore, management of stakeholders is one of the important aspects in understanding the process of tourism destination management. 1. stakeholder theory in management literature, the stakeholder theory appears in 1984. freeman's book “strategic management: a stakeholder approach” defines a stakeholder as ,,any group or individual who has influence or is influenced by the organization's objectives” (byrd, 2007, p. 7). byrd notes that in 1995. donaldson and preston redefined this stating that “in order for a group or individual to be a stakeholder, it should have a legitimate interest in the organization” (byrd, 2007, p. 7). the emergence of the stakeholder theory in tourism literature is strongly associated with the new concept of sustainable tourism. many authors state that achieving sustainability requires involvement of different groups of stakeholders that should firstly be identified, as it is essential to determine who should be involved in tourism development and what their roles in it are (bramwell and sharman, 1999). since stakeholder groups are very different, in the stakeholder management theory, diverse and different types appear. the basic classification is into primary and secondary, depending on the extent to which and how they affect the business of an organization or how much benefit or cost they create. primary stakeholders are groups ,,without whose participation organizations cannot survive”, and secondary ,,those who are not involved in the transaction and are not essential to its existence, but they are influenced by it” (sheehan and ritchie 2005, p. 714). numerous authors have dealt with reviewing the stakeholder theory, that is, the need for cooperation between various groups who “create” and develop tourism at a tourism destination. perspectives of considerations were different, and some of the most often mentioned issues, so far, are:  problems of planning at a tourism destination and stakeholder involvement (yuksel, bramwell and yuksel, 1999; sautter and leisen, 1999; bramwell and sharman, 1999)  the question of desirability of joint marketing (robson and robson, 1996) or the issue of joint activities in the field of promotion (blain, levy and ritchie, 2005)  consideration of the stakeholder theory in achieving sustainable development of a tourism destination (timur and getz, 2002). the most challenging part of stakeholder integration in tourism destination management is their involvement in planning, and afterwards in plans’ implementation. sautter and leisen (1999, p. 315) support tourism planners use of stakeholder theory and suggest that the first step in implementing stakeholder management is to have a full appreciation of all the persons or groups who have interests in the planning process, delivery and outcomes of the tourism service. including sautter and leisen (1999), there is now an increasing number of researches and professionals that are advocating the inclusion of stakeholders in the planning process. when it comes to the participation of stakeholders in tourism planning, bramwell and sharman (bramwell and sharman, 1999, p. 411) have identified three key issues: the representativeness of representatives of all relevant stakeholder groups (the extent to which the range of stakeholders participating is representative of all relevant stakeholders), the intensity of cooperation and the degree of consensus reached between them. 90 lj. pjerotić, m. rađenović, a. tripković marković the importance of planning, and especially the definition of a common vision of tourism, has been recognized by scientists and experts. however, although scientists emphasized the importance of creating a common vision for tourism planning (ritchie and crouch, 2000), tools and conditions that are needed to improve the sharing of visions between stakeholders have not yet been identified. because of that, many destinations, because of the lack of a sense of "corporate identity", have difficulty in realizing common goals and visions. 2. stakeholder cooperation the need for creating a network of stakeholders in order to accomplish successful tourism development is not of the newest date and it was pointed out in detail by murphy in 1985 and 1988 (murphy, 1985; murphy, 1988. quoted in: potts and harrill, 1998). as we have already mentioned, when we talk about organizations within industry, the stakeholder approach was represented by freeman and many other authors. the benefits of creating a network of stakeholders are numerous, and here we would like to point out some of them that are of special importance for tourism:  formulating common policy of tourism development and strategy for achieving set goals of development  creating plan documents as instruments for strategy implementation, especially planning the creation of common integrated tourism product  common promotion of a tourism product  knowledge interchange, esspecialy in the area of market research  organizing seminars for training employees in the tourism sector  overcoming issues that are the results of competition and creating a relationship of complementarity. practical realization of cooperation between stakeholders often displays many problems, which are the result of the differences in understanding of their relative power in the decision making process. this is particulary present in countries that are experiencing transition, where the main role in creating the policy of social and economical development are played by political structures, which represent the point of view that their „elite“ position possesses full justification in the fact that they are elected representatives of people, that by being elecetd they gained legitimacy to make key decisions on directions of development. this standpoint of political structures is not distinctive only for countries in transition, although it is more obvious, but is still present in many developed countries and is displayed through the illusion of collaborative planning. this means that many decisions in the public sector are previously prepared, consultations with other stakeholders are conducted only formally, without real readiness for cooperation in the already conceptualized documents (hall, 1994). the process of cooperation between stakeholders is not simple and often faces many obstacles, among which are the following:  formally accepting the policy of openness in the process of collaboration certain stakeholders do not want to honestly share information with other stakeholders, believing that it could jeopardize their position, especially if they used to have elite position for a longer period of time in creating directions of tourism destination development, stakeholder cooperation in montenegrin tourism destinations – current state and constraints 91  in meetings that are organized during the process of collaboration, certain lobby groups could be represented in a great number and, using their criticism, they could disable other stakeholders, whose participation is also legitimus, to explain their suggestions,  key stakeholders sometimes believe that representatives of the public are not competent enough, or disinterested, to decide on tourism development directions, therefore they do not support their participation in the collaboration process,  a disbalance in the decision making process is often stimulated by a strong hierarchical structure of stakeholders in a destination, which is a result of dividing a level of their influence on tourism development and attitudes of elite stakeholders that were determined in advance, with little readiness to change these attitudes,  the lack of sufficient knowledge on the importance of conservation of natural and cultural resources for sustainable development of tourism by certain stakeholders and their primary interest in economic benefits of tourism, can lead to decisions that will have a negative impact on the natural and cultural environment,  engaging an expert team outside of the destination that is not familiar enough with the specifics of the tourism destination, especially the attitudes of local residents, and forms the first version of the document on directions of development of the tourism destination without sufficient consultation, can affect other stakeholders not to take part in the creation of the final version of the document. the process of cooperation characterized by inclusiveness, transparency, sharing of knowledge, willingness to build consensus, continuous process of monitoring the success of implementation of selected strategies and performing corrections has a good chance of leading to faster development of tourism at the destination level, with benefits for many stakeholders. doing so, things that must be taken into account are the interests of local community, and the need to preserve natural and cultural assets. the success of managing the development of a tourism destination today is primarily measured through the harmonious development of a destination in the economic, social, cultural and other respects, the awareness of local population about the importance of tourism, all of which, while respecting traditional values of tourism destinations and local communities. this can be achieved only by adjusting activities and partnership with all subjects in the tourism destination, especially key stakeholders from all three sectors: public, private and civil society. the public sector represents the public interest and also undertakes activities that benefit all stakeholders. it does not create profit, but spends the funds raised through taxes and fees in order to implement policies and projects that benefit the entire society. the public sector affects the development of tourism in a destination in different ways, and thus it affects development sustainability as, for example, through legislation and regulation, fiscal policy, spatial planning, building control, environmental infrastructure, active involvement in the development of tourism, prescribed standards, control over the number of tourists by highlighting specific areas of special importance, etc. also, the public sector function within the tourism industry is to increase tourist satisfaction, enhance economic and business success, protect existing assets and preserve community integration. the private sector includes all providers of products and services in a destination. middleton (middleton and hawkins, 1998, p. 107) points out that some participants in tourism destinations do not recognize that they are part of a "team", but also that the private sector has 92 lj. pjerotić, m. rađenović, a. tripković marković an advantage over the public sector when it comes to sustainable development, because it has practical, concrete commercial knowledge, it is familiar with the customers and the market as well as with the inherent management skills. however, the private sector is often criticized because it is more focused on short-term creation of profit rather than on the long-term sustainability, it exploits environment rather than preserve it, it is often influenced by major international companies (tour operators, hotel chains) that are also not interested in the destination but more in creating profits, for not doing enough to raise awareness of tourists of the need for sustainability, that is, not doing enough to educate tourists about the need to preserve a destination and finally that they use "sustainable tourism" to get publicity or a possible reduction of certain costs. when it comes to managing sustainable development of tourism, the role of local people should be particularly emphasized. since the eighties, the comprehension of the fact that local community is not just a passive recipient of tourists has been growing. according to jamal and getz (1995), local population, the public and private sector share the resources of the local community. therefore, the community should be involved in tourism destination management, particularly in planning, because development can not be imposed "from outside", but should be accepted by those who live and work in the area. for the successful implementation of the plan documents, it is necessary to have the support of the local community and it is therefore necessary to have local involvement of the key destination stakeholders (tosun, 2000, p. 616). this process can face many problems: the difficulties of population understanding the complex process of planning and decision making, the problem of ensuring balanced representation of different viewpoints, the lack of interest in some segments of the population, increasing costs, extending the process of adopting the strategy, etc. residents of a tourism destinations are the key participant in tourism development, because of their attitude towards tourists and attitudes towards tourism they significantly affect the satisfaction of tourists by interacting with them. 3. research of stakeholder cooperation at tourism destinations in montenegro most of the discussions on the subject of tourism destination management are mostly theoretical or they come down to the experience of certain destinations, therefore it is difficult to generalize the results. there is very little empirical evidence that would support the claim that the effective cooperation leads to better planning and implementation of tourism development. therefore, the aim of this paper is to examine, based on the results of the research, the actual level of stakeholder cooperation in montenegro tourism destinations, as well as the effects of this cooperation on the management process of tourism development. 3.1. defining the research sample in order to test the hypothesis that the stakeholder cooperation is a basic prerequisite for efficient management of tourism destination, a survey was conducted on the state of governance and stakeholders' cooperation in tourism destinations in montenegro. the research on the state of development of tourism destinations is carried out on a population consisting of directors of tourist organizations in montenegro, as it was considered that the tourist organizations have the most comprehensive insight into the management of tourism destinations and the degree of cooperation of all stakeholders of tourism stakeholder cooperation in montenegrin tourism destinations – current state and constraints 93 development at the destination level, as well as insight into factors that limit this cooperation. the system of tourist organizations in montenegro consists of a total of 19 tourist organizations. we collected a total of 17 questionnaires, representing a rate of return of 89.5%, which makes the sample representative. the research on the perceived stakeholder cooperation was conducted on a set of 19 destinations where tourist organizations are present. respondents in destinations were representatives/directors of tourist organizations, marketing directors at a company/hotel, the mayor or a secretary of the municipality, a director of a travel agency and local residents. 130 questionnaires in total were sent out and 110 questionnaires were collected, representing a return rate of 84.62%. the research, therefore, covered the chosen representatives of the following groups of stakeholders: tourist organizations and municipalities as representatives for the public sector, hoteliers and travel agencies as well as the private sector representatives, and local residents. 3.2. research methods the research instrument was a structured questionnaire used to ask respondents to indicate on a numerical scale of five values to grade the state of stakeholder cooperation in tourism destination according to management instruments. destination management instruments were tourism development planning (development plan, marketing plan and promotion plan), promotion and distribution, measuring the performance (tourist traffic, guest satisfaction, competitive analysis, benchmarking analysis), education for the purpose of destination management. the quality of cooperation was evaluated according to the areas of cooperation, which include cooperation in the process of planning, product development, promotion and distribution, performance monitoring, as well as cooperation in the adoption of new knowledge through education. the final goal of the research was to determine the relationship between stakeholder cooperation and application of instruments for managing the development of destinations. to test the correlation of cooperation between destination stakeholders (independent variable) and management tools (dependent variable), the spearman rank correlation coefficient was used. the research results were processed by the program for data analysis spss (statistical package for the social sciences). the statistical method used for data processing was correlation analysis. the objective correlation analysis was to determine the strength and direction of the correlation between stakeholder cooperation and tourism destination management instruments. in order to test differences in stakeholders' cooperation between different regions, the kruskal-wallis test was used, which is a non-parametric analysis of mean rank. we tested the normality of distribution of variables using the shapiro-wilk test, which showed that the variables have a normal distribution (p value less than 0.05). significance level (p) for all statistical tests was 0.05, so the value of p is less than 0.05 which was considered to be an indicator of statistical significance. 3.3. research results stakeholder cooperation is considered to be a basic prerequisite for efficient management of a tourism destination and its sustainable development (carey and gountas, 1997; swarbrooke, 1999; bramwell and sharman, 1999; bramwell and lane, 2000; buhalis, 2000; dredge, 2006). research has shown that it is insufficiently developed in tourism destinations 94 lj. pjerotić, m. rađenović, a. tripković marković in montenegro. in fact, respondents generally rated the state of stakeholder cooperation in tourism destination development with the average grade of 3.06. furthermore, the quality of cooperation was evaluated by fields of cooperation, that is, management instruments on a numerical five values scale (1  bad, 5  excellent). table 1 mean grade values of stakeholder cooperation state n arithmetic mean standard deviation overall condition of cooperation 110 3.06 0.937 field of cooperation planning 110 2.88 1.182 product development 110 3.12 0.963 promotion and distribution 110 3.59 1.088 measuring the performance 110 3.18 0.856 education 110 3.41 1.148 source: authors' calculation the mean value of all the grades is in the range of 2.88 to 3.59. cooperation in the field of promotion and distribution is the best rated (mean grade 3.59), while the worstrated field of cooperation is planning (mean grade 2.88). relatively low rating of cooperation in the field of performance monitoring (table 1) indicates that there is little exchange of information between participants in the destination management that would allow better monitoring the effects of activities undertaken at a tourism destination. table 2 constraints rank for better stakeholder cooperation constraints number of respondents median upper quartile mod lack of planning documents 110 3 4 1 under-developed channels of communication 110 3 4 2 various interests 110 2 3 3 absence of formal forms of cooperation 110 4 5 4 absence of a „leader“ / coordinator of activities 110 3 5 5 source: authors’ calculation the cooperation between tourism stakeholders can be improved by understanding the factors/constraints that are crucial for a successful stakeholder cooperation. therefore, the main limitations for better cooperation were pointed out by relevance (table 2). respondents ranked the listed constraints from 1 to 5 (1  most important, 5  least important). the results show that respondents see causes of poor cooperation primarily in the lack of planning documents for tourism development (mod 1), under-developed channels of communication (mod 2), then, various interests (mod 3), the absence of formal forms of cooperation (mod 4) and finally, as the least important, the absence of a „leader“ or coordinator of activities (mod 5). stakeholder cooperation in montenegrin tourism destinations – current state and constraints 95 fig. 1 mean grades of stakeholder cooperation state by regions analyzed by region (figure 1), the state of cooperation is similary rated as on the general level, with a somewhat better rate in the coastal region (mean grade 3.33) and slightly lower in the north region (average grade 2.71). observed through certain fields of cooperation, in the area of acquiring new knowledge (figure 1), it was the best rated in central region (average grade 3.75), while in the coastal region cooperation in all other areas was rated slightly better than in the other regions (figure 1). when it comes to major constraints for better cooperation, the situation on the regional level is similar to the general picture. the kruskal-wallis test was used to study the statistical significance of the differences in cooperation between tourism destination stakeholders by regions. table 3 difference in stakeholders' cooperation in tourism destinations by region (kruskal-wallis test) cooperation k-w p overall cooperation 2.009 0.366 fields of cooperation planning 1.197 0.550 product development 4.970 0.083 promotion and distribution 1.334 0.513 measuring the performance 6.578 0.037 education 1.125 0.570 source: authors' calculation the kruskal-wallis test (table 3) showed that there was no statistically significant difference between the regions in stakeholders' cooperation when the state of cooperation between tourism destination stakeholders is generally ranked (p = 0.366). also, focusing on the fields of cooperation, that is, planning (p = 0.550), product development (p = 0.083), promotion (p = 0.513) and adoption of new knowledge (p = 0.570), there was no statistically significant difference between the regions. only when it comes to cooperation in the field of measuring the performance, the kruskal-wallis test showed statistically 96 lj. pjerotić, m. rađenović, a. tripković marković significant difference between regions (p = 0.037). the greatest difference between regions was noted in this area. in order to determine whether the level of development of tourism destination management instruments depends on the level of cooperation between stakeholders, with the data obtained by the research, further statistical analysis was conducted. using the spearman coefficient of correlation (rs), it was tested whether there is a statistically significant correlation between the rated stakeholder cooperation and evaluated development of tourism destination management instruments. table 4 correlation between stakeholder cooperation and management instruments management instruments rs p planning 0.534 0.027 promotion 0.555 0.021 education 0.598 0.011 measuring the performance 0.484 0.049 source: authors' calculation as it is evident from table 4, there was a statistically significant correlation between stakeholder cooperation with all tourism destination management instruments, starting from education (training), where this correlation is the most clearly expressed, through promotion, strategic planning, up to performance monitoring. 3.4. interpretation of results cooperation between stakeholders is considered to be a basic prerequisite for efficient management of a tourism destination and its sustainable development. research has shown that it is insufficiently developed in tourism destinations in montenegro. in fact, the respondents generally rated the state of stakeholders' cooperation in the area of tourism development in tourism destination with an average grade of 3.06. observed by management instruments, the best rated is cooperation in the field of promotion and distribution (mean grade of 3.59), which is confirmed by other studies on this subject that indicated that cooperation is developed the most in the field of tourism destination marketing (wto, 2000, p. 12), while the worst-rated cooperation is in the field of planning (mean grade 2.88). a relatively low rating of cooperation in the field of measuring performance (mean grade 3.18) indicates that there is little exchange of information between participants in torism destination management that would allow better monitoring of the effects made by activities undertaken at a tourism destination. also, cooperation in the product development field (mean grade of 3.12) was evaluated as insufficiently developed, which means that many creators of a partial tourism product are still not aware of the fact that achievement of the general objectives set for the integrated tourist product, as well as the final toourists' choice of products at a touristm destination, depend on their active partnership. the lack of cooperation between key development entities hinders the creation of a comprehensive destination value chain, and thus creates important preconditions for offering a wide range of quality experience, which negatively affects the market competitiveness of the integrated tourist product, and therefore the tourism destination as well. stakeholder cooperation in montenegrin tourism destinations – current state and constraints 97 cooperation between tourism destination stakeholders in the field of planning was the lowest rated (mean grade 2.88). stakeholders' cooperation is in theory recognized as a key factor for the implementation of plans (bramwell and sharman, 1999; sautter and leisen, 1999; yuksel, bramwell and yuksel, 1999; timur and getz, 2008). for the activities related to preparation of tourism development in a tourism destination is essential the stakeholder approach, which will allow a synergy effect through cooperation between the public and private sector in development and implementation of plans, which is also a key for the success of plans' implementation. the basic principle in managing the development of tourism at the destination level should be for all stakeholders that are influenced by decisions about directions of development of tourism to have influence and to be involved in the decision-making process (gray, 1985. quoted in raffay, 2007, p. 84), due to the principles of social fairness, and because of their potential synergy effects in the implementation of adopted tourism development strategies. tourism destination plans are, largely, related to the stakeholders who are "outside" of the tourist organization that makes plans. therefore, a plan of tourism destination might seem to some tourism destination stakeholders as if it is comming from the "outside". in such a situation they may feel excluded from the planning process and consider that the plan was, in some way, imposed on them. the solution for this issue is usually in a participatory planning process that includes all stakeholders which decisions about the directions of tourism development have an impact on, which improves acceptance of the plan and increases chances for proper implementation. however, poor cooperation between stakeholders is not highly ranked in the group that listed limitations for plans implementation in montenegrin tourism destinations because it is in the "shadow" of financial and human resources limitations, but it is visible in the area of tourism development implementation. this is expected, given that realization of this type of plans requires cooperation of all tourism destination stakeholders, and not only of those directly linked to the development of tourism, and on the other hand, requires a comprehensive and long-term consideration of the whole problem of the future development of tourism. poor cooperation between stakeholders is also noted when it comes to implementation of a marketing plan, though it was expected, it is not highly rated. when it comes to the promotional activities plan, no tourist organization indicated poor cooperation as a constraint for the implementation, which is also not surprising given that it is a more of an operational activitiy and a sort of activity where it is easier to organize and conduct cooperation between stakeholders. also, cooperation on promotion activities is very concrete and "tangible" (eg. joint appearances at fairs, joint organization of study tours for journalists etc.), benefits of this cooperation are clear and visible in the short term, which has a positive and stimulating effect on cooperation (boranić, tomljenović and ĉorak, 2011, p. 26). the research results show that respondents see the causes of poor cooperation primarily in the lack of planning documents for tourism development, underdeveloped communication channels, then a variety of interests, the absence of formal forms of cooperation and, ultimately, the absence of a leader or coordinator of activities. the problem that has been recognized in the channels of communication and the diversity of interests confirms the findings of the literature review in which various authors warn about the same problems and constraints faced by developed tourism destinations, as well as the question of how to ensure better connectivity, communication and trust between the different groups of stakeholders in tourism destinations. one of the tasks for leading tourism destination 98 lj. pjerotić, m. rađenović, a. tripković marković management organization is to recognize interests of all stakeholders involved in tourism development on destination level and through creating tourism development policy, in determining goals of tourism development that will enable all stakeholders to recognize a framework for the realization of their own individual goals. testing the differences between the three regions in montenegro showed that there was no statistically significant difference between the regions in rating stakeholder cooperation in general and by fields of cooperation, except in the area of measuring performance. generally, it can be said that cooperation between tourism destination stakeholders in montenegro does not vary by region. the results also showed that there is a positive and statistically significant correlation between stakeholder cooperation and management instruments, which confirms that efficiency of tourism destination management depends on the level of stakeholder cooperation at a tourism destination. this confirms the findings of literature review in which various authors suggest that successful tourism destination management requires cooperation among stakeholders. conclusion the results of this empirical research have confirmed that for more rational, socially responsible and commercially acceptable destination development, the stakeholder approach to sustainable destination management is necessary. this approach should include involvement of different public, private and civil stakeholders as their cooperation is a precondition for efficient management of sustainable tourism development. the stakeholder approach to sustainable destination management is particularly suitable because of the multisectoral character of tourism. it is therefore an imperative to develop cooperation between the public and private sector, whereby a destination management organization should have a coordinating role among stakeholders from both sectors. although the tourist organizations system represents a good basis for the tourism development, local tourist organizations in montenegro, along with the existing structure and jurisdictions, given their long-standing commitment to the promotion and organization of events, are not yet ready to assume the role of leading organizations in destination management. a great number of tourist organizations have poor financial and human resources and consequently, low functional activity. therefore, for more rational, socially responsible and commercially acceptable directing destination development it is necessary to improve the organization of managing the development of tourist destinations in montenegro. it is necessary to capacitate the existing system of tourist organizations for effective destination management through a partnership between the public and private sector, based on the destination management organization model. otherwise, a tourist destination in montenegro will be faced with the problem of quality and sustainable tourism development and building its image. stakeholder cooperation in montenegrin tourism destinations – current state and constraints 99 references 1. blain, c, levy, e.s., ritchie j. r. b. 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(1999) stakeholder interviews and tourism planning at pamukkale, turkey, tourism management, volume 20 (3): 351-360. http://www.academia.edu/1009194 100 lj. pjerotić, m. rađenović, a. tripković marković stejkholderska saradnja u crnogorskim turističkim destinacijama – stanje i ograničenja za održivi razvoj turističkih destinacija potreban je koordiniran napor svih destinacijskih stejkholdera (turističkih aktera iz javnog, privatnog i civilnog sektora), sistematski razvoj i implementiranje planova upravljanja na svim nivoima, posebno na nivou turističke destinacije gde se odvijaju turističke aktivnosti, gde su turisti u interakciji sa pružaocima usluga i sa zajednicom, i gde se najviše osećaju pozitivni i negativni uticaji turizma. rad se bavi pitanjem upravljanja turističkom destinacijom čija složenost proizilazi iz velikog broja destinacijskih stejkholdera čije je interese potrebno uskladiti. sprovedeno je empirijsko istraživanje kako bi se utvrdilo stanje upravljanja, a posebno nivo stejkholderske saradnje u crnogorskim turističkim destinacijama. zaključci i implikacije istraživanja su dati u radu. na osnovu teorije stejkholdera istraživanjem se testira da li nivo saradnje između destinacijskih stejkholdera utiče na efikasnost upravljanja turističkom destinacijom. rezultati su pokazali da saradnja između brojnih i raznovrsnih grupa stejkholdera u crnogorskim turističkim destinacijama još uvek nije dovoljno razvijena, jer se suočava sa brojnim ograničenjima od kojih se najviše ističu nedostatak planskih dokumenata, nedovoljno razvijeni kanali komunikacije i različiti ili čak suprotstavljeni interesi stejkholdera. ipak, rezultati istraživanja predstavljeni u ovom radu ukazuju da postoji jaka pozitivna korelacija između nivoa stejkholderske saradnje i stanja upravljanja razvojem turističkih destinacija. kljuĉne reĉi: turistička destinacija, destinacijski menadžment, stejkholderska saradnja. 11453 facta universitatis series: economics and organization vol. 20, no 1, 2023, pp. 1 14 https://doi.org/10.22190/fueo230108002m © 2023 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper impact of learning orientation on company performance: mediating role of innovativeness1 udc 005.336.5:65.015.25]:005.591.6 marija mirić, jelena nikolić, dejana zlatanović university of kragujevac, faculty of economics, kragujevac, republic of serbia orcid id: marija mirić https://orcid.org/0000-0003-4303-8546 jelena nikolić https://orcid.org/0000-0002-8429-0652 dejana zlatanović https://orcid.org/0000-0001-6071-955x abstract. ensuring a workforce is up to date on the latest trends in a rapidly changing business environment is one of the main challenges facing modern companies. to achieve long-term profitability and encourage innovation, they tend to constantly improve employees’ knowledge and skills. this paper aims to identify the impact of learning orientation on company performance and to test the mediating role of innovativeness in this relationship. the empirical research was conducted on a sample of 79 companies in different industries in the republic of serbia. descriptive statistical analysis, correlation, and regression analysis were applied to the data collected. the research results indicate that learning orientation significantly and positively affects performance and innovativeness in serbian companies. in addition, the findings show that firm innovativeness partially mediates the relationship between learning orientation and performance, i.e., learning orientation leads to better company performance through increased innovation in all business aspects. the paper contributes to identifying practical implications for managers, pointing out the importance of creating a learning environment and employees´ innovative behaviour as a basis for achieving better business outcomes. therefore, managers should be responsive in terms of their human resources, providing them with opportunities to acquire new knowledge and skills and develop innovative ideas. key words: organizational learning, learning orientation, innovativeness, company performance jel classification: d83, l25, o31 received january 08, 2023 / revised march 02, 2023 / accepted march 06, 2023 corresponding author: jelena nikolić university of kragujevac, faculty of economics, liceja kneževine srbije 3, 34000 kragujevac, republic of serbia | e-mail: jnikolic@kg.ac.rs https://orcid.org/0000-0003-4303-8546 https://orcid.org/0000-0002-8429-0652 https://orcid.org/0000-0001-6071-955x mailto:jnikolic@kg.ac.rs 2 m. mirić, j. nikolić, d. zlatanović 1. introduction facing the challenges of growing competition, companies strive to implement activities that will bring the required flexibility and improve performance in all business aspects. the focus is on adapting and responding appropriately to the highly volatile corporate environment. in order to overcome the risk that comes from the outside, employees at all levels need to acquire new knowledge and develop specific skills and abilities. the expanded knowledge base that the company has is expected to improve employee performance and innovative actions in terms of product or service development and management processes. as a result, the overall company performance grows and its competitive market position improves. learning orientation is the supporting pillar of the modern paradigm of human resource management and the foundation of sustainable business success. it represents the readiness of the organization to generate learning (ratten, 2007) and reflects the organization’s perspective on the value of learning (suliyanto & rahab, 2012). in order to provide a quality workforce, capable of carrying out current and future jobs and developing innovative ideas, employees are encouraged to continuously improve their knowledge and skills. learning provides a number of long-term benefits to businesses. in addition to enabling greater adaptability to the market (šlogar, 2022), learning orientation also contributes to the development of innovation, which has a positive impact on company performance (keskin, 2006). recent research conducted by yang et al. (2022) has shown that learning orientation positively affects new venture performance through innovation capability. therefore, this concept is the key to organizational success (phorncharoen, 2020; zlatanović, 2020). companies dedicated to learning increase their ability to innovate (garcia–morales et al., 2007), and the benefits offered by the development of innovativeness are multiple. while innovation is the backbone of overall social and economic progress from the perspective of the national economy and an effective strategic tool in overcoming the development backwardness of transition economies, innovation's significance at the organizational level is reflected in the long-term enhancement of company performance (shapiro et al., 2015). research of learning orientation, innovativeness, and company performance is motivated by the close interrelationships of these three concepts, established in the studies by calantone et al. (2002), keskin (2006), rahab (2012) and zayed & alawad (2017). the research subject in this paper is learning orientation and its impact on company performance in the republic of serbia. the paper also deals with innovativeness, i.e. its potential mediating effects in a relationship between the previously mentioned variables. accordingly, the paper seeks to identify the impact of learning orientation on innovativeness and performance, as well as to examine the mediating role of innovativeness in this relationship. although there are studies in the current literature that evaluate the link between these three concepts, to the best of the authors’ knowledge, no previous research has addressed the mediating function of innovation in the observed relation. in this respect, our study aims to close the indicated research gap. the paper structure includes 5 logically connected parts. the introduction is followed by the literature review and hypotheses development highlighting the main theoretical features of the relationships between learning orientation, innovativeness, and company performance. then, the research model is developed and the applied methodology is presented. the fourth unit represents the results of empirical research and their discussion. finally, the main conclusions, theoretical and practical implications, as well as research limitations are identified. impact of learning orientation on company performance: mediating role of innovativeness 3 2. literature review and hypotheses development learning orientation is a critical aspect in organizational performance (phorncharoen, 2020) and a source of competitive advantage (farell, 2000), which is why it should become a business priority (suliyanto & rahab, 2011). it represents a critical component of organizational learning and is defined as “the organization’s attitude towards the necessity of learning” (ratten, 2007). prediction of the environment and adaptation to market changes are among the most important features of learning-oriented companies (calantone et al., 2002), which indicates the importance of this concept in achieving the necessary business flexibility. companies that are more learning–oriented are more likely to interact with third–party knowledge providers (kumar et al., 2020), making them more prone to innovative activities. learning orientation is a construct that implies the managers’ “attitude to consider learning as a key organizational resource”, understand the need to eliminate old thinking patterns, as well as the need for new learning (vega martinez et al., 2020). it is a complex, multidimensional notion that involves “a commitment to learning, shared vision, open–mindedness, and intra–organizational knowledge sharing” (phorncharoen, 2020). commitment to learning is “the degree to which an organization values and promotes learning”, while a shared vision implies a unique direction and organizational focus on learning (calantone et al., 2002). open-mindedness presents a reflection of the company’s willingness to abandon the current routine and adopt new knowledge (li et al., 2010), while intra-organizational knowledge sharing is defined as a synergistic process of cooperation in which people share existing and interactively create new knowledge (boland & tenkasi, 1995, as cited in ro et al., 2021). garcia–morales et al. (2007) point out that knowledge sharing and the resulting organizational learning can improve company performance. in addition, knowledge is recognized as one of the key internal factors in creating innovative companies, and innovation itself is the result of knowledge sharing (zlatanović, 2020). although these are related concepts, organizational learning is not synonymous with a learning orientation. specifically, organizational learning is a broader concept, and learning orientation is one of its dimensions. in this sense, frank et al. (2012) make a distinction between these two concepts. in their opinion, organizational learning is a complex process that can be split into two basic forms of learning: 1) adaptive, gradual learning, where organizations respond to shifts in circumstances and make adjustments through active learning, and 2) generative learning, as higher-order learning, which changes the “worldview” through re-examination and change of organizational processes. adaptive and generative learning are two complementary processes (salim & sulaiman, 2011). learning orientation is linked to the second dimension of organizational learning and is considered to be its indirect assessment (santos–viande et al., 2005). thus, in our study, we regarded a learning orientation to be an essential component of organizational learning. organizational learning and learning orientation, as an integral part of it, are the foundation of innovative activities (garcia–moralez et al., 2007), with the potential to achieve superior company performance. furthermore, in the study conducted by al– shami et al. (2022), learning orientation positively correlates with innovation performance. learning orientation occupies an important place in contemporary management literature, as it provides numerous positive outputs. previous studies identify a strong positive effect of learning orientation on business performance (farrell, 2000). aziz and 4 m. mirić, j. nikolić, d. zlatanović omar (2013) stated that knowledge sharing and shared vision, as relevant dimensions of learning orientation, are crucial determinants of improving business performance in smes. frank et al. (2012) also show that a significant degree of learning orientation leads to better performance in small and medium enterprises. besides, learning orientation is positively correlated with business performance in companies that provide accounting services (martinette et al., 2014). in addition, vij and farooq (2014) show that a knowledge-sharing orientation has a positive impact on a company’s business performance in the manufacturing and service sectors. based on the above, the first research hypothesis reads: h1: learning orientation has a statistically significant positive effect on company performance. one of the results of the learning process that creates new knowledge within the organization is innovativeness (frank et al., 2012). it is the subject of research in a number of disciplines (salim & sulaiman, 2011) and represents the capacity of an organization to develop and/or incorporate new products, procedures, and business models (nybakk, 2012). porter (1990) explains innovation as a tool for achieving competitive advantage and points to the need for a broader understanding of this concept, which includes new technologies and new ways of carrying out activities (cited in zlatanović, 2020). the results of previous research show that new knowledge and skills, acquired through learning, contribute to the ability to innovate, which in turn improves competitiveness and company performance (salim & sulaiman, 2011). chenuos & maru (2015) recognize lifelong learning as one of the values necessary to achieve organizational innovation. suliyanto and rahab (2012) find that learning orientation has positive effects on company innovativeness. both learning orientation and innovation are influenced by a variety of factors. nikolić et al. (2022) have shown that foreign–owned businesses are more innovative and learning–oriented. according to hurley & hult (1998), calantone et al., (2002), and nybakk (2012), learning orientation is considered a major predictor of innovativeness, which in turn improves company performance. organizational innovativeness directly depends on the knowledge base that the company has, which is increased by organizational learning (cohen & levinthal, 1990, as cited in garcia–morales et al., 2007). a recent study of a sample of small and medium–sized enterprises has found a significant positive effect of learning orientation on innovativeness (phorncharoen, 2020). according to šlogar (2022), company innovativeness is significantly and positively influenced by learning orientation. as previous research suggests, the higher the degree of learning orientation, the greater the company’s innovativeness (calantone et al., 2002). in a study conducted by aziz and omar (2013), knowledge sharing and shared vision have positive significant effects on the ability to innovate. internally focused learning and marketoriented learning, as dimensions of learning orientation, prove to be statistically significant predictors of product innovation in a study by dulger et al. (2014), with internally focused learning significantly and positively explaining technological innovation. in addition, oktavio et al. (2019) find that learning orientation has positive effects on the innovativeness of newly established hotel companies. in addition, the positive effects of learning orientation on hotel innovativeness are proven in the werlang & rossetto (2019) study. the above findings are the basis for the formulation of the second research hypothesis: h2: learning orientation has a statistically significant positive effect on company innovativeness. differences in the level of organizational learning and innovativeness determine the differences in company performance. corporate performance is a multidimensional impact of learning orientation on company performance: mediating role of innovativeness 5 concept that can relate to individual sectors – marketing, manufacturing, and finance (sohn et al., 2007) or to aggregate indicators such as growth and profit (babić et al., 2020), which can be measured by objective and subjective indicators (atalay et al., 2013). they reflect the ability of a business organization to realize its long-term goals (zayed & alawad, 2017). previous research has established a link between learning orientation, innovativeness, and company performance, analyzing both the direct and indirect effects of these variables. suliyanto and rahab (2012) explain that learning orientation indirectly improves company performance, through variables that mediate between these two variables. they show that innovativeness has a positive impact on performance. positive relations of learning orientation, innovativeness, and performance have also been proven in the malaysian it (information, communication, and telecommunications) industry (salim & sulaiman, 2011). in a sample of spanish firms, garcia–morales et al. (2007) show that organizational learning directly affects performance, but also indirectly, through organizational innovation. in a study conducted by farell (2000), companies in australia benefit from a learning orientation in terms of their performance. a positive significant link between learning orientation, innovativeness, and company performance is established in a study conducted by calantone et al. (2002). in a study conducted by nybakk (2012), learning orientation does not have a direct effect on the financial performance of companies, but it significantly affects them through innovativeness; therefore, innovativeness has a full mediating effect in a given relationship. according to dulger et al. (2014), organizational innovativeness is a partial mediator in the relationship between learning orientation and company performance. the relations between learning orientation, innovativeness, and company performance are also the subject of research conducted by rhee et al. (2010). in a sample of 333 technologyinnovative small businesses, they show that learning orientation has a positive effect on innovativeness, and that innovativeness consequently leads to better performance. based on the above, the third research hypothesis reads: h3: innovativeness has a mediating effect in the relationship between learning orientation and company performance. figure 1 illustrates the research model. fig. 1 research model source: authors 3. methodology empirical research uses quantitative methodology. primary data is collected by the survey method, and the questionnaire is designed in four segments. the first subscale consists of 7 items that measure learning orientation (li et al., 2010; werlang & rossetto, h1 h2 h3 innovativeness learning orientation performance 6 m. mirić, j. nikolić, d. zlatanović 2019; nikolić et al., 2022), such as employee learning is viewed as an investment rather than an expense and learning is seen as essential to a company's survival. the second part of the questionnaire measures innovativeness through 7 items, formulated based on research conducted by gunday et al. (2011), atalay et al. (2013), and werlang & rosseto (2019). the examples of items are: the company supports proactiveness when it comes to producing new goods and/or services or the company encourages new approaches to problem-solving. the company performance is measured by the last 10 items, which are adapted from the research by vij & bedi (2016), psomas et al. (2017), and payal et al. (2019), for example, the company has higher profitability compared to the previous period and the trend of sales growth in relation to the previous time period is noticeable. items that measure performance concern both financial and non-financial performance. the respondents express their agreement with the stated items on a five-point likert scale. data analysis is performed using the techniques of the statistical package for social sciences (spss) 26.0. after the sample structure is analyzed, the following analyses are implemented to determine mediating effects: reliability analysis, descriptive statistics, correlation analysis, and simple and multiple linear regression to determine mediating effects. the questionnaire is distributed to companies in person and electronically. we used the convenience sampling method and the research sample included 79 companies operating on the territory of the republic of serbia. from each company, one manager completed the questionnaire. the sample structure is shown in table 1. table 1 sample structure variables frequency % activity production 39 49.4 services 40 50.6 majority ownership domestic 46 58.2 foreign 33 41.8 ownership type state 5 6.3 private 74 93.7 gender men 34 43 women 45 57 age less than 25 2 2.5 26 – 35 27 34.2 36 – 45 33 41.8 46 – 55 14 17.7 over 55 3 3.8 position employee 2 2.5 operations manager 16 20.3 middle (tactical) manager 48 60.8 top manager 13 16.5 length of service less than 3 years 22 27.8 3 – 5 years 26 32.9 over 5 years 31 39.2 education high school 8 10.1 college 7 8.9 bachelor 39 49.4 master 23 29.1 phd 2 2.5 source: authors impact of learning orientation on company performance: mediating role of innovativeness 7 the share of production and service companies in the sample is almost equal, with 33 companies being foreign-owned. the majority of businesses belong to the private sector. according to the obtained results, the largest number of respondents work in the position of middle manager (60.8%). the frequency analysis according to the length of service with the current employer shows that the largest number of respondents work in the company for more than 5 years (39.2%), followed by respondents with between 3 and 5 years of service (32.9%). most of the given sample is university educated. 4. research results and discussion the reliability analysis of the measurement scale is performed, the results of which are shown in table 2. reliability analysis shows that cronbach’s alpha coefficient for all three subscales is higher than the minimum recommended value (0.7), and a conclusion can be drawn about the high internal consistency of items and the reliability of the analyzed variables. table 2 results of reliability analysis variables cronbach's alpha coefficient learning orientation 0.952 innovativeness 0.955 performance 0.960 source: authors descriptive statistics analyzes mean values and standard deviations for all individual items. respondents show the highest degree of agreement with items i have access to the information i need to do my job effectively and efficiently (m=3.72), and the organization launches new products and/or services (m=3.71). the largest standard deviation is with items the company introduces innovations in human resource management area (sd=1.60) and the company encourages new approaches to problem–solving (sd=1.60). the greatest homogeneity of responses is with items the quality of products/services is better than in the previous period, which measures the performance of the company (sd=1.27). table 3 correlation matrix variables 1 2 3 learning orientation 1 0.894** 0.796** innovativeness 0.894** 1 0.801** performance 0.796** 0.801** 1 ** correlation is significant at the level of 0.01. source: authors table 3 presents the results of the correlation analysis. the strongest link is between learning orientation and innovativeness (r = 0.894). according to the pearson coefficient, there is a very strong correlation between all variables. all values shown are significant at 0.01. 8 m. mirić, j. nikolić, d. zlatanović for the purposes of hypothesis testing, the mediation regression procedure was applied. to test the mediation effect, according to baron & kenny (1986), the following prerequisites must be met: in the first step, it is necessary to confirm the significant direct influence of the independent variable on the dependent one; another simple linear regression examines whether independent, i.e. the predictor variable affects the potential mediator, while in the next step, it is necessary to prove that mediator significantly influences the dependent variable. by confirming these assumptions, the conditions for the final testing of the mediator effect are obtained, and in the final step, the joint influence of the independent variable and the potential mediator on the dependent variable is tested using multiple linear regression. finally, in order to establish a mediator effect, the potential mediator must be a statistically significant predictor of the dependent variable, while the influence of the independent variable decreases (partial mediator effect) or ceases to be statistically significant (full mediator effect). table 4 simple linear regression variables dependent variable: performance dependent variable: innovativeness β sig. r2 β sig. r2 learning orientation 0.796 0.000** 0.629 0.894 0.000** 0.798 innovativeness 0.801 0.000** 0.642 ** p < 0.01 source: authors table 4 shows the results of a simple linear regression that tests the impact of learning orientation on performance and company innovativeness. the results show that learning orientation has a significant positive impact on company performance (p<0.01). the coefficient of determination is 0.629, which means that 62.9% of the performance variability is explained by the observed independent variable. learning orientation also has a significant positive effect on company innovativeness (p<0.01) with the coefficient of the determination being 0.798 and showing that learning orientation determines innovativeness in 79.8% of cases. in the third phase, it was found that innovativeness had a positive significant influence on company performance (p<0.01), which met all the requirements for evaluating the mediator effect. table 5 multiple linear regression variable dependent variable: performance β sig. r2 vif learning orientation 0.397 0.008** 0.666 4.960 innovativeness 0.447 0.003** ** p < 0.01 source: authors table 5 presents the results of multiple linear regression. in order to check the justification of regression analysis, multicollinearity was checked. as the value of the variance inflation factor (vif) is less than 5, multicollinearity is not a problem in this regression model. the joint impact of learning orientation and innovativeness on enterprise performance was tested. the results showed that 66.6% of the performance variability is explained by the observed impact of learning orientation on company performance: mediating role of innovativeness 9 independent variables. learning orientation and innovativeness have a significant positive impact on performance, but the inclusion of innovativeness in the regression model significantly reduces the impact of learning orientation. based on this, it is concluded that there is a partial mediation effect of innovativeness in the relationship between learning orientation and enterprise performance. thus, the conducted analysis shows a significant positive impact of learning orientation on company performance, which confirms hypothesis h1. such a result is consistent with the results obtained by farell (2000), frank et al. (2012), and vij & farooq (2014). the obtained result is partially compatible with the research of aziz & omar (2013), and marinette (2014) and testifies to the predictive power of learning orientation in predicting company performance. at the same time, the generated result is in contrast with to the research of oktavio et al. (2019) and werlang & rossetto (2019). the research also confirms the h2 hypothesis, according to which learning orientation has a significant positive effect on company innovativeness. the same result is reached by calantone et al. (2002), suliyanto & rahab (2012), oktavio et al. (2019), phorncharoen (2020), and šlogar (2022).this finding implies that learning orientation leads to increased innovation activities such as developing new products or services, management methods, marketing strategies, or innovating human resource management and information systems. the obtained result partially corresponds to the research conducted by aziz and omar (2013) and dulger et al. (2014). the research also confirms the partial mediating influence of innovativeness on a relationship between learning orientation and company performance, which is partly in line with the findings of garcia–morales et al. (2007) and nybakk (2012). this result shows that innovation mediates the relationship between learning orientation and company performance, i.e. learning orientation affects the performance of the company through innovativeness. in other words, the causal relationship of the observed variables depends on the degree of innovativeness. 5. conclusions this research has shown that learning orientation is a predictor of company performance and innovativeness in the republic of serbia. in addition, the research confirms the mediating effect of innovativeness in a relationship between learning orientation and company performance. the paper provides a certain theoretical contribution to the existing literature. first, it clarifies complex connections between learning orientation, innovativeness, and company performance. examining the mediating role of innovativeness, the paper explains the mechanism by which learning orientation is transformed into performance improvement. the conducted research determines the extent to which company innovativeness changes the strength of the correlation between learning orientation and performance. the paper also gives some practical implications to company managers. the importance of creating an internal environment that encourages learning is emphasized, as well as the importance of implementing innovative practices, in order to improve the overall company performance. managers need to take a proactive approach to human resource management and provide opportunities for employees to acquire new knowledge and create innovative ideas. this is particularly important due to the fact that the degree of the company′s innovativeness can be increased through a focus on learning, which will consequently improve company performance. 10 m. mirić, j. nikolić, d. zlatanović the conducted research has certain limitations, from which the directions of future research arise. the first limitation refers to the small number of respondents, which is why the analysis should be repeated on a larger sample. as the research is limited to companies operating in the republic of serbia, the conclusions cannot be generalized for those operating in a different social, cultural and legal context. therefore, it would be useful to apply the same research model to a sample of companies in other countries. future research may also examine the individual effects of the dimensions of learning orientation on enterprise performance, as well as the individual mediating influences of the types of innovativeness in a given relationship. references al–shami, s. a., alsuwaidi, a. k. m. s., & akmal, s. 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https://doi.org/10.1590/0104-530x3641-19 https://doi.org/10.3389/fpsyg.2022.818844 https://doi.org/10.13140/rg.2.2.27824.05125 12 m. mirić, j. nikolić, d. zlatanović uticaj orijentacije na učenje na performanse kompanija: medijatorska uloga inovativnosti prilagođavanje zaposlenih najnovijim trendovima u dinamičnom poslovnom okruženju jedan je od glavnih izazova sa kojima se susreću savremene kompanije. da bi obezbedile dugoročnu profitabilnost i podstakle inovacije, one nastoje da konstantno unapređuju znanja i veštine zaposlenih. cilj istraživanja u radu je identifikovati uticaj orijentacije na učenje na performanse kompanija, kao i medijatorsku ulogu inovativnosti u navedenoj relaciji. empirijsko istraživanje sprovedeno je na uzorku od 79 kompanija iz različitih delatnosti u republici srbiji. za potrebe analize podataka primenjene su deskriptivna statistika, korelacija, kao i prosta i višestruka regresija. dobijeni rezultati su pokazali da orijentacija na učenje ima značajan pozitivan uticaj na performanse i inovativnost kompanija u republici srbiji. dodatno, inovativnost ostvaruje parcijalni medijatorski efekat u odnosu orijentacije na učenje i performansi kompanija. navedeno pokazuje da orijentacija na učenje vodi ka boljim performansama kroz povećane inovacije u svim aspektima poslovanja. doprinos rada se ogleda u praktičnim implikacijama za menadžere, naglašavajući važnost kreiranja okruženja koje podstiče inovacije i inovativno ponašanje zaposlenih kao osnove za postizanje boljih poslovnih rezultata. stoga, menadžeri treba proaktivno da pristupe upravljanju ljudskim resursima, pružajući im mogućnosti da steknu nova znanja i veštine i razviju inovativne ideje. ključne reči: organizaciono učenje, orijentacija na učenje, inovativnost, performanse kompanija impact of learning orientation on company performance: mediating role of innovativeness 13 questionnaire dear sir/madam, we welcome you to participate in a survey being performed for research interests. this questionnaire is intended to evaluate the links between learning orientation, innovativeness, and corporate performance levels. the information in this survey will be accessible only to the researchers. we also guarantee that the information gathered through surveys will only be used for scientific and research purposes. the respondent's personal name is not necessary because the questionnaire is anonymous, and all information will be kept strictly confidential. the questionnaire has two main sections: in the first one, you should rate the items linked to learning orientation, innovativeness, and performance for the company you work for. items are required to be rated on a scale ranging from 1 to 5, respecting the following: 1 – i disagree completely; 2 – i disagree mostly; 3 – i slightly agree; 4 – i mostly agree; 5 – i agree completely. learning orientation employee learning is viewed as an investment rather than an expense. 1 2 3 4 5 one of the company's main principles is employee learning. 1 2 3 4 5 learning is seen as essential to a company's survival. 1 2 3 4 5 management in the organization agrees with the idea that the company's capacity for learning is essential to its competitiveness. 1 2 3 4 5 staff members agree that learning is an important aspect in developing either products or services. 1 2 3 4 5 the organization has enough resources to undertake learning initiatives. 1 2 3 4 5 i have access to the information i need to do my job effectively and efficiently. 1 2 3 4 5 innovativeness the company supports proactiveness when it comes to producing new goods and/or services 1 2 3 4 5 the organization launches new products and/or services. 1 2 3 4 5 the organization employs contemporary management techniques. 1 2 3 4 5 the organization develops new strategies in the marketing field. 1 2 3 4 5 the company introduces innovations in human resource management area. 1 2 3 4 5 the company introduces innovations in information systems. 1 2 3 4 5 the company encourages new approaches to problem–solving. 1 2 3 4 5 14 m. mirić, j. nikolić, d. zlatanović performance the trend of sales growth in relation to the previous time period is noticeable. 1 2 3 4 5 the company has higher profitability compared to the previous period 1 2 3 4 5 in comparison to the prior time period, the company is more innovative. 1 2 3 4 5 product/service quality has improved during the prior period. 1 2 3 4 5 the organization is capable of responding promptly and efficiently to technological advances. 1 2 3 4 5 the company is able to adapt swiftly and effectively to market dynamics. 1 2 3 4 5 consumer satisfaction has increased from the prior period. 1 2 3 4 5 employee satisfaction has increased from the prior period. 1 2 3 4 5 the organization is capable of retaining critical staff. 1 2 3 4 5 the company is highly reputable in the market. 1 2 3 4 5 gender: • men • women age: • less than 25 • 26 – 35 • 36 – 45 • 46 – 55 • over 55 education: • high school • college • bachelor • master • phd position: • employee • operations manager • middle (tactical) manager • top manager length of service: • less than 3 years • 3 – 5 years • over 5 years activity: • production • services majority ownership: • domestic • foreign ownership type: • state • private 11241 facta universitatis series: economics and organization vol. 20, no 1, 2023, pp. 39 52 https://doi.org/10.22190/fueo221028004b © 2023 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the impact of corporate income tax on fdi inflow in emerging eu economies1 udc 336.226.14:339.727.22(4-672eu) marina beljić, olgica glavaški, jovica pejčić university of novi sad, faculty of economics in subotica, republic of serbia orcid id: marina beljić https://orcid.org/0000-0003-2657-2421 olgica glavaški https://orcid.org/0000-0001-6628-2301 jovica pejčić https://orcid.org/0000-0001-9146-6719 abstract. after global financial crisis, intensive tax policies adjustments were applied in emerging european union (eu) economies, for the sake of tax competitiveness. in order to ensure that aim, emerging eu economies most often choose the policy of tax reduction and particularly lowering corporate income tax rate. this paper deals with the impact of corporate income taxes on foreign direct investment (fdi) inflow in selected emerging eu economies (czech republic, hungary, lithuania, latvia, poland, slovakia, slovenia) between two crises (global financial and pandemic), namely, over the period 2010-2019. using classical panel data models (fixed effects and random effects model), the research shows that it is expected that corporate income taxes reduction provides fdi inflow. observing the relationship between other factors (corruption index, competitiveness index and short-term interest rate) and fdi inflows, positive relations are confirmed. panel-corrected standard errors (pcse) estimator, implemented as robustness check, confirmed the results and conclusions based on fe model. however, negative relationship between corporate income taxes and fdi in the case of pcse model is only verified in case of hungary and latvia, indicating tax competitiveness existence. key words: corporate income tax, fdi, emerging eu economies, panel analysis, pcse method. jel classification: c33, h25, f21. received october 28, 2022 / accepted december 05, 2022 corresponding author: marina beljić university of novi sad, faculty of economics in subotica, segedinski put 9-11, 24000 subotica, republic of serbia | e-mail: marina.beljic@ef.edu.ac.rs https://orcid.org/0000-0003-2657-2421 https://orcid.org/0000-0001-6628-2301 https://orcid.org/0000-0001-9146-6719 mailto:marina.beljic@ef.edu.ac.rs 40 m. beljić, o. glavaški, j. pejčić 1. introduction while some forms of global networks have existed for a long time, the recent technological advances transformed our world into a global village. globalization is an omnipresent term and process, key for thinking about economic interdependencies and connections. ergo, that means freer movement of people, goods, services and capital. easier crossing of the border for factors of production, especially capital mobility, imposed a market competition of world proportions. capital mobility emphasized the term of ‘tax competitiveness’, since it manifests the multinational companies’ decisions of resources allocation (devereux et al. 2002). taxes influence companies’ decisions about the location, establishment, and expansion of their business (desaia et al. 2004). thus, the tax system can have a key role in the economic development of a country (budryte, 2005). many economic policy makers emphasized the importance of tax policies as a key factor for the smooth functioning of the economy (blechová, 2016) and decisions on investment localization. namely, one of the components of gross domestic product (gdp), and thus a generator of economic growth, are investments (ercegovac & beker pucar, 2021a). capital owners have been directing their investments towards economies with favourable business conditions. significant number of economic researchers pointed out that corporate income tax is one of the key determinants for choosing the location in which to invest. in the context of eu member states, economies have retained the right to fiscal sovereignty, which obviously gave them the opportunity to create unified tax policies. although, to some extent, there is a tendency within the eu to harmonize tax policies, or at least bring them closer. hence, tax policy-making has still been left on a national level. therefore, without the influence of eu institutions, member state governments decide on tax rates and tax bases. eu economies retained the freedom to participate in the market struggle and to adjust tax policies for the sake of tax competitiveness. specific interest in this paper is oriented towards different tax strategies chosen by emerging eu economies in the period between the two crises, the financial crisis and the crisis caused by the covid-19, and their effects on the decision in relation to investments localization. the aim of this paper is to examine the relationship between the statutory corporate tax rate and the inflow of foreign direct investment (fdi) in selected emerging eu economies (the czech republic, hungary, lithuania, latvia, poland, slovakia, slovenia) using available empirical data. many authors dealt with this relationship in a theoretical context, but few have just demonstrated the impact of the corporate income tax rate on the decision to allocate investment in emerging eu economies. furthermore, as the corporate income tax rate is not the only factor that determines investors, it was important to consider the impact of short-term interest rates on capital inflows. moreover, this paper examines the impact of the competitiveness of emerging economies, and the presence of corruption in the public sector, which may be determining for the investment decision. therefore, the main hypotheses of this paper are: h1: in selected emerging eu economies, there is a negative relationship between fdi and corporate income tax rate in the period 2010-2019. h2: the positive relations between corruption index, competitiveness index, shortterm interest rate and fdi inflows exist in seven emerging eu economies in the period 2010-2019. the impact of corporate income tax on fdi inflow in emerging eu economies 41 the paper is structured as follows: after the introduction section, section 2 reviews existing evidence in the empirical literature, section 3 analyzes investments and factors that influence the decision on the location of investments in emerging eu economies. section 4 presents used methods and data, while section 5 discusses estimation results, and final section outlines concluding remarks. 2. literature review vast literature deals with papers that examine tax role in economic policy of the emerging eu economies. aničić et al. (2015) in their research pointed out that tax systems should provide international competitiveness of the country. budryte (2005) noted that in contemporary world, surviving market struggle is truly challenging. wulfgramm et al. (2016) emphasized that in majority of countries tax policy is one of the central issues, therefore tax systems are subject of constant theoretical and political examinations (aničić et al. 2012). moreover, tax policy is one of the main determinants of fdi inflow (janeba, 1993). namely, tax competitiveness ensures smooth functioning of the economy (blechová, 2016). furthermore, in case of ireland, by lowering corporate income tax rates significant amount of fdi was attracted, and thus achieved an economic boom (stewart, 2011). that is in line with desaia et al. (2004) who indicated that taxes determine owners’ decisions on the localization of their capital and business. hence, economies with lower rates attract more investments than the economies with higher rates due to the capital mobility (devereux et al. 2002). spill-over effect and tax avoidance schemes (hong & smart 2007) are inevitable since the tax system burdens taxpayers too much. consequently, investors’ profits are reduced by higher taxes (bellak & leibrecht, 2005). however, as keightley & sherlock (2014) explained, tax competitiveness could be achieved without compromising public revenues by simultaneously lowering corporate income tax rates while expanding the tax base (de mooij & nicodème, 2008). the tax system is based on the trade-off between efficiency and equality (aničić et al. 2015), depending on the country’s preferences. the tax system may be more inclined to increase economic growth, i.e. reduce inequality. in fact, the structure of the tax system reflects the importance of taxes in an economy. the structure of taxes is influenced by the following factors: economic development, level of market development, education of the population, structure of the working age population, size of government, pension system, as well as social policy. tax policy must be carefully designed; otherwise, it could have negative effects on the economy. if the tax system burdens taxpayers too much, tax evasion is inevitable (hong & smart, 2007). in addition to the above, the tax system of open economies certainly affects the competitiveness of the economy. the tax system, i.e. tax rates, could be a generator or a negative factor for the fdi inflow, and consequently the level of employment (janeba, 1993). investor profits are reduced by increasing tax rates (bellak & leibrecht, 2005), since it increases the cost of labor and reduces disposable profit after tax (aničić et al. 2012). this paper also draws on the literature that analyzes tax systems of the eu economies. within the eu, toward elimination of harmful competition between members, there are tendencies for tax harmonization (gropp & kostial, 2001). glavaški & beker pucar (2020) pointed out that strengthening the fiscal framework is necessary due to the shortcomings of unfinished eu project that were visible after global financial crisis. 42 m. beljić, o. glavaški, j. pejčić however, tax harmonization is not favourable for all economies equally, since in core eu countries elasticity of investment movements in relation to tax changes is lower than in peripheral eu countries (gropp & kostial, 2000). according to baldwin & krugman (2002), that could be explained as tax harmonization failure. thus, sørensen (2004) in his paper discussed whether more conventional corporate tax harmonization should still be a long-term policy goal for the eu. the large number of studies also researched the impact of fdi inflows, since it is often seen as one of the factors that increases the economic growth of the country (hunady & orviska, 2014). fdi had essential role for the emerging eu economies (andrašić et al. 2018). the emerging eu economies went through successful transitions thanks to capital inflow in multinational companies (bevan & estrin, 2004; walkenhorst, 2004). thus, presence of foreign capital has several beneficial impacts on economy, including: (i) competitiveness and technology improvements, (ii) unemployment reduction, (iii) better position on the international market, (iv) rise in exports, and (v) foreign currency inflow (oecd, 2008; denisia, 2010; ercegovac & beker pucar, 2021b). although, the global economic environment has significantly changed after the financial crisis (zubair et al. 2020), some business factors such as: the corruption index, competitiveness index (dunning & zhang, 2008), and the short-term interest rate (talpos & vancu, 2009) still notably affect investment localization decisions (dunning, 1992). the idea of this paper is to fill the gap that exists in the literature regarding corporate income tax impact on fdi localization decision in emerging eu economies using fixed vs. random-effects model estimator and panel-corrected standard errors (pcse) estimator, given the obvious scarcity of scientific papers dealing with this topic after the global crisis. 3. sovereignty of tax policy background and fdi tax policy is one of the central issues of every state (wulfgramm et al. 2016), because taxes represent the most significant public revenue. by creating tax policies, the state is able to collect money from taxpayers, on various bases. in addition, taxes are a significant determinant of economic growth. however, state’s tax system depends on the goals which have to be achieved, such as: reducing the fiscal deficit, increasing investment or achieving certain social goals. although taxes are only one of the key factors influencing the fdi inflow, the growing impact of globalization has conditioned the national governments of almost all member states of eu to reform tax systems (budryte, 2005). in order to survive the market struggle, emerging eu economies have been particularly active in reversing their tax systems. corporate income tax distinguishes as the most important tax form that determines the fdi inflow. namely, the corporate tax rate level determines the country’s tax competitiveness level, thus lower rates make the country more attractive for investment. keightley & sherlock (2014) explained that tax competitiveness could be achieved without compromising public revenues, according to de mooij & nicodème (2008) the solution is lowering corporate income tax rates while expanding the tax base. the race for tax competitiveness was causing problems within the eu. especially as glavaški & beker pucar (2020) pointed out the global recession has highlighted all the shortcomings of the unfinished eu project. namely, lowering tax rates generates various problems within the eu single market with regard to the free movement of people, goods, services and capital, of which the movement of capital is crucial. different tax rates the impact of corporate income tax on fdi inflow in emerging eu economies 43 within the single market lead to the “migration” of capital from member states with higher tax rates to member states with lower rates, significantly affecting economic growth and unemployment rate. for that reason, the eu has insisted for the last two decades on establishing tax harmonization (gropp & kostial, 2001; devereux et al. 2002), in order to discourage the transfer of multinational company’s capital from one country to another. however, the harmonization success is questionable. since national governments have disagreed on the corporate income tax rate, the room for capital movement was left. this is explained in the paper by baldwin & krugman (2002), who pointed out that tax harmonization cannot suit all economies equally. there is a wellfounded fear that if it occurs, tax harmonization will harm at least one economy. the reason for this is in the different elasticities of investment between core countries and peripheral countries (gropp & kostial, 2000). therefore, sørensen (2004) in his paper implied that the eu should not insist on harmonization, but to remain at the level of reducing the cost of tax liabilities, which would result in more efficient redistribution. that could be confirmed by empirical data analysis based on corporate income tax rates in selected eu economies, and potential effects on investments localization decisions. in this paper the selected economies are seven emerging eu economies, including czech republic, hungary, lithuania, latvia, poland, slovakia, and slovenia. estonia as a part of baltic countries is omitted due to data gap. empirical data related to emerging eu economies show that corporate income tax rates are lower than the eurozone average in the period from 2010 to 2019 and ranged between 24.4% and 23% (figure 1). furthermore, most of the observed emerging eu economies had followed the corporate income tax rates reduction which occurred in ireland and was followed by economic boom. namely, one of the most important reasons for ireland’s success has been recorded by lowering the corporate income tax rate to 12.5%. tax competitiveness has been achieved, which attracted fdi and led to an economic boom. however, despite the fact that ireland recorded a significant inflow of fdi, only hungary lowered the corporate income tax rate to 9% in 2017, positioning itself as the country with the lowest corporate income tax rate in the eu. poland and the czech republic recorded an unchanged tax rate of 19% in the observed period, while slovenia had changes in tax rates in the observed period from the initial 20% in 2010, to 19% as recorded in 2019 (figure 1). when it comes to the baltic countries, lithuania and latvia had the same rate of 15% until 2018, afterwards, latvia adjusted the rate upwards (to 20%). the economy with the highest rate in 2019 is slovakia, which recorded an increase in the corporate income tax rate in 2012 from 19% to 23%, and then decreased in 2016 to 21% that remained unchanged until the end of the observed period (figure 1). on the other hand, fdi movements recorded more fluctuations in comparison to tax rate changes in the emerging eu economies. since fdi was recognized as a generator of the economy (hunady & orviska, 2014), fdi was targeted as a crucial factor for the emerging eu economies in the 1990s (andrašić et al. 2018). if historical aspect was taken into account, most of the selected emerging economies of the eu were former countries of the soviet union and yugoslavia. thus, economic organization of those countries was based on planned economy and state or public ownership. namely, new socio-political circumstances in the context of disintegration of ex countries, forced former socialist countries to turn to the liberal capitalism (eu accession in 2004), where laissez faire rules apply and capital is privately owned. the foreign capital inflow and the presence of multinational companies have played a crucial role in the successful transition and adaptation to new frameworks (bevan & estrin, 44 m. beljić, o. glavaški, j. pejčić 2004; gerschewski, 2013). the foreign capital inflow is generally recognized as the most important component of fdi, since, fdi brings with it new technologies (stanišić, 2008) and knowledge (ercegovac & beker pucar, 2021a). furthermore, fdi enable productivity growth, thus boosting the overall economy of the inflowing economy (oecd, 2008; ercegovac & beker pucar, 2022). fig. 1 corporate income tax rates in selected emerging economies of the eu, ireland and the eurozone, in the period 2010-2019 source: authors’ presentation based on data from trading economics. the 2008 world financial crisis fundamentally changed the investment priorities (zaubir et al. 2020). therefore, it is important to identify the most important determinants that influence the decision to localize investments. corporate income tax was recognized as a crucial factor for the inflow of fdi, often inducing economic policy makers to lower tax rates. however, in addition to the corporate income tax rate, there are some other factors that play a significant role when it comes to fdi. hence, the business environment significantly determines the attractiveness of host country as an investment location (dunning, 1992; dunning & zhang, 2008). as can be seen in figure 2, almost all selected emerging eu economies in the observed period recorded a tendency to increase the fdi inflow. poland has the absolute largest investments inflow, followed by the czech republic, while slovenia, lithuania and latvia are at the back of the selected emerging eu economies, observing the absolute amounts. however, in those economies the fdi did not record significant oscillations. hungary is an economy that has recorded more drastic changes in the fdi inflow in the observed period. the first decline was recorded in 2013, followed by growth in 2014. however, another sharp decline in the fdi inflow was recorded, and even the withdrawal of existing fdi (in 2015 and 2016). the slowdown in fdi that was noticed in 2013 may be linked to a number of measures with potential detrimental impacts on the business environment (european commission, 2015). from 2017 to 2019, there was a constant increase in the inflow of fdi in hungary, which is, among other things, a consequence of lower income tax rates (correction in 2017 to 9%). the impact of corporate income tax on fdi inflow in emerging eu economies 45 fig. 2 inflow of fdi in selected emerging eu economies in the period 2010-2019 source: authors’ presentation on oecd database. according to the fact that the descriptive analysis points to the causality in the movement of foreign direct investment towards corporate taxes differentials, the subject of the econometric analysis in the continuation of the paper will be the assessment of this connection using the panel model. 4. methods of estimation and data the analysis is based on panel data econometric framework, which allows the research on corporate income taxes and fdi across emerging eu countries and over the time. namely, the intention is to analyze the negative relationship between corporate income taxes and fdi inflow (hypothesis 1), as well as influence of other factors that affect fdi (hypothesis 2). the sample contains the data on 7 emerging eu economies observed in the period between two global crises, 2010-2019. this period is selected in order to avoid structural breaks in the sample, as well as to analyze intensive adjustment of tax policies in emerging eu economies after global financial crisis. initially, classical panel data models are used in this paper, allowing for some (restricted) heterogeneity in slope coefficients by inclusion of dummy variables. namely, we implemented fixed effects and random effects specifications with time and/or individual effects. however, classical panel models could be limited if the model contains cross-section dependence, autocorrelation or heteroscedasticity. therefore, panel-corrected standard errors estimator recommended by beck and katz (1995) is used in order to encompasses heteroscedastic, autocorrelated and/or contemporaneously correlated disturbances. the general form of the empirical panel data equation can be written as follows: 46 m. beljić, o. glavaški, j. pejčić yit = b0 + b1xit + b2di + i + t + uit (1) where 𝑦𝑖𝑡 is foreign direct investments of country i in the year t. 𝑋𝑖𝑡 contains determinants of foreign direct investments which vary over i and t, while 𝐷𝑖 is dummy variable for groups of economies i, or it is used to encompass outliers in the empirical data. individual effects are represented by 𝜇𝑖, along with time effects 𝜆𝑡, and stochastic disturbance term 𝑢𝑖𝑡 . dependent variable, yit, foreign direct investment inflow (fdi_init) is measured in absolute amount in millions of dollars with inward perspective. fdi statistics cover all cross-border transactions and positions between enterprises which are in a fdi relationship: (a) direct investment positions (stock), (b) direct investment income flows, and (c) direct investment financial flows. following the main results in the empirical studies, a set of potential explanatory determinants, xit, are employed: corporate income taxes, macroeconomic stabilization variables, business environment variables, and dummy variables representing outliers. the most important independent variable is corporate income taxes variables, citit, showing the effects of tax competition between economies on investments localization decisions. it is expected that reduction of corporate income taxes provides fdi inflow, and vice versa. the effects of macroeconomic stabilization are represented by economic variables: gdp growth (growit) and short-term (st_irit) or long-term interest rates (lt_irit). gdp growth should have positive influence on fdi, as well as influence of interest rate on fdi. mentioned variables are defined using data from oecd statistics. business environment is encompassed in the model by introduction of competition indexes (comp) and corruption indexes (corr). the competitiveness of the economy is measured by a competitiveness index consisting of 98 variables. the variables are organized into twelve pillars: (1) institutions, (2) infrastructure, (3) adoption of ict, (4) macroeconomic stability, (5) health, (6) workforce skills, (7) product market, (8) labor market, (9) financial system, (10) market size, (11) business dynamics and (12) ability to innovate. positive relationship in the model between competitiveness index and fdi is expected, since that improving of business environment could attract investments. another factor in the business environment that influences the decision of investments localization is the existence of corruption in the public sector. the decision is made by looking at the corruption index, which according to the degree of corruption shows that 0 means corruption at the highest level and 100 means economy without corruption. thus, company owners gravitate towards countries that are more competitive compared to the rest of the world and where the presence of corruption is reduced to a minimum. mentioned variables are defined using data from trading economics. finally, dummy variable is defined for latvia (dummyl), since latvia is the economy with the lowest corporate income taxes in the group of emerging eu economies, which means that expected sign in the regression is minus. dummy variable is defined to take value 1 for latvia, and 0 otherwise. another dummy variable is defined to capture outliers identified in the case of hungary (dummyh) in the years 2015 and 2016, due to negative values of fdi inflows. namely, negative fdi positions are the result of situation in which loans from the affiliate to its parent exceed equity capital and the loans given by the parent to the affiliate. therefore, dummy variable is defined to take value 1 for the years 2015 and 2016 in hungary, and 0 otherwise. consequently, the baseline model, derived from theoretical framework to test hypothesis 1 and 2 and used variables, could be specified as: 𝑓𝑑𝑖_𝑖𝑛𝑖𝑡 = 𝑏0 + 𝑏1𝑐𝑖𝑡𝑖𝑡 + 𝑏2𝑆𝑇_𝑖𝑟𝑖𝑡 + 𝑏3 𝑔𝑟𝑜𝑤𝑖𝑡 + 𝑏4 𝑐𝑜𝑚𝑝𝑖𝑡 + 𝑏5𝑐𝑜𝑟𝑟𝑖𝑡 + 𝑏6𝑑𝑢𝑚𝑚𝑦𝐻𝑖 + 𝑏7𝑑𝑢𝑚𝑚𝑦𝐿𝑖 + 𝜇𝑖 + 𝜆𝑡 + 𝑢𝑖𝑡 (2) the impact of corporate income tax on fdi inflow in emerging eu economies 47 5. testing the impact of corporate income taxes and other determinants on fdi localization the procedure performed in order to estimate the impact of corporate income taxes on fdi inflow (hypothesis 1), as well as other significant factors, consists from the following empirical steps. since that sample included period between two global crises 2010-2019 for 7 emerging eu economies, we firstly tested cross-sectional dependence (csd) in the panel. results of pesaran cd test are presented in table 1, and imply null hypothesis, h0: cross-sectional independence, against the alternative hypothesis, h1: cross-sectional dependence between panels. pesaran cd test showed that null hypothesis of cross-section independency has to be rejected for all analyzed variables. detected dependence is expected due to the fact that all economies in the sample are members of eu, which links strong institutional framework. analyzed emerging eu economies became eu members in 2004, and cross-section dependence is therefore expected due to specific institutional design of eu. namely, those economies share the common market, common agricultural policy, customs union, tax harmonization, and finally, some of them are part of the monetary union (lithuania, latvia, slovakia, and slovenia). those common policies inevitably lead to connections, spill-over effects and dependencies between emerging eu countries (josifidis et al. 2018). table 1 pesaran cd test pesaran cd test cd-test p-value corr. aps. (corr.) fdi_in 2.43 0.015 0.168 0.241 cit 2.73 0.006 0.189 0.508 comp 14.49 0.000 1.000 1.000 corr 5.06 0.000 0.349 0.533 st_ir 9.85 0.000 0.680 0.680 lt_ir 12.68 0.000 0.875 0.875 grow 3.89 0.000 0.268 0.429 source: authors’ calculations. due to test results of cross-section dependence, second generation panel unit root test is used – pesaran cips test (2007) which allows for cross-section dependence in the form of a single unobserved common factor. pesaran cips is based on null hypothesis, h0: non-stationarity of variable, against alternative hypothesis h1: stationarity of variables. the results of the pesaran cips for variables in the level and at the first differences in the model with constant are shown in table 2. panel unit root tests fail to reject null hypothesis at 5% significance level, meaning that variables fdi_in, cit, comp, corr, are non-stationary in the levels. therefore, in the next step the stationarity of first differences is tested, and results showed that those variables are stationary in first differences. on the other hand, variables grow and st_ir are stationary in the levels. detected problem of nonstationarity is solved using transformation of non-stationary variables, in terms of first differences. 48 m. beljić, o. glavaški, j. pejčić table 2 pesaran cips test pesaran cips test ho: i(1) h1: i(0) l a g s level of variables first difference v a ri a b l e s level of variables first difference 𝑍(t)-stat. pvalues 𝑍(t)stat. pvalues 𝑍(t)stat. pvalues 𝑍(t)stat. pvalues fdi_in 0 -0.907 0.182 -3.627 0.000 corr -0.838 0.201 -5.120 0.000 1 1.026 0.848 -1.513 0.000 -0.127 0.450 -7.220 0.000 2 8.427 1.000 8.427 0.000 8.427 1.000 cit 0 2.716 0.997 -4.227 0.000 comp -1.808 0.035 -6.695 0.000 1 1.765 0.961 4.950 0.000 0.670 0.749 -10.490 0.000 2 7.247 1.000 8.427 0.000 8.427 1.000 0 -3.057 0.001 -2.571 0.005 grow 1 -1.717 0.043 st_ir -1.822 0.034 2 -1.622 0.056 -1.700 0.039 source: authors’ calculation. initially, all potential explanatory variables were included in the classic panel model, and econometric procedure ‘from general to specific’ is used to eliminate insignificant regressors. table 3 represents only significant variables in the model: corporate income taxes, macroeconomic stabilization variables, business environment variables and dummy variables representing outliers. those variables are significant in explaining fdi inflow in fixed-effects model, while corporate income taxes were not significant in the randomeffects model. results of the hausman test indicated that efficient model is the one estimated using fixed-effects specification. it is expected that the reduction of corporate income taxes provides fdi inflow, which is confirmed in fixed-effects model by negative sign of cit variable. short-term interest rate (sir) affects fdi positively, promoting investments inflow, which is in line with analyses of dupor (2000) who showed that rising interest rates stimulate foreign investors to invest in an economy. business environmental variables showed that higher level of corruption index (corr) and higher competition index (comp) are important parameters for decision-making on investment. outliers in data are captured by dummy variables for latvia (dummyl), since latvia is the economy with the lowest corporate income taxes in the group of emerging eu economies. dummy variable (dummyh) is defined to capture outliers identified in the case of hungary in the years 2015 and 2016 in context of negative values of fdi inflow; namely, values indicated that investment outflows exceeded inflows. variable dummyh is significant in the model, showing that reduction of taxes influenced inversely on fdi, namely fdi increased in hungary. results represented in table 3 are related to the research hypothesis 1. this finding might be interpreted as acceptance of the hypothesis that negative link between corporate income tax rates and fdi inflows exists. positive link between other factors (corruption index, competitiveness index and short-term interest rate) and fdi inflows is confirmed in seven emerging eu economies in the period 2010-2019; therefore, hypothesis 2 is accepted. the impact of corporate income tax on fdi inflow in emerging eu economies 49 table 3 fixed vs. random-effects model estimator for emerging eu economies in the period 2010-2019 fixed-effect model random-effects model dependent variable: fdi_in coef. std. error p>(t) coef. std. error p>(t) cit -844.65 242.28 0.001 13.384 192.321 0.945 st_ir 1805.56 359.75 0.000 1579.951 293.683 0.000 comp 38.982 14.73 0.010 38.022 18.447 0.039 corr 260.001 111.37 0.023 194.3103 86.487 0.025 cons 1894.91 5314.93 0.723 -8772.661 5221.214 0.093 dummyl -3006.191 1633.365 0.066 dummyh -13482.19 2769.959 0.000 -13186.46 2966.424 0.000 r2 0.34 0.46 wald chi2 7.62 0.0001 65.88 0.000 breusch-pagan test 48.13 0.000 mean vif 1.18 number of observations 70 70 source: authors’ calculations. 5.1 robustness check: pcse method due to detected problem of cross-section dependence and nonstationarity of variables, classical panel methods are limited. however, beck and katz (1995) recommended use of panel-corrected standard errors (pcse) estimator, which allows for heteroscedastisity, autocorrelation and contemporaneously correlation across panels. due to detected problem of autocorrelation (wooldridge test), heteroccedasticity (wald test), cross-section dependence (pesaran cd test), pcse estimator is implemented (table 4). problem of nonstationarity is solved using transformation of non-stationary variables, in terms of first differences. pcse estimator confirmed the results and conclusions based on fe model. fdi is positively affected by short-term interest rate, corruption and competition index, while negatively by dummy variables. in latvia, lowest corporate income tax rates in the sample indicated fdi inflow. in hungary negative fdi inflow is detected in 2015 and 2016, and further, hungary policymakers reacted with corporate income tax reduction in 2017 from 19% to 9%. although the pcse model confirmed that lower corporate tax rates in latvia and hungary imply higher fdi, variable cit is not significant, meaning that the same could not be generalized for the other 5 emerging eu economies in the sample. robust results represented in table 4 could be interpreted as partial acceptance of the hypothesis 1 that negative link between corporate income tax rates and fdi inflows exists in hungary and latvia. however, this result could not be generalized for all analyzed emerging eu economies. positive relation between other factors (corruption index, competitiveness index and short-term interest rate) and fdi inflows is confirmed using pcse method in seven emerging eu economies in the period 2010-2019; therefore, hypothesis 2 is fully accepted. 50 m. beljić, o. glavaški, j. pejčić table 4 pcse estimator for emerging eu economies in the period 2010-2019 panel-corrected standard errors (pcse) dependent variable: fdi_in coef. std. error p>(t) cit 13.3847 159.258 0.993 st_ir 157.951 370.611 0.000 comp 38.0224 14.429 0.008 corr 194.310 61.426 0.002 cons -8772.661 4600.807 0.057 dummyl -3006.191 750.678 0.000 dummyh -13186.46 3532.147 0.000 r2 0.51 number of observations 70 source: authors’ calculations. conclusions related to the robustness check using different methods of estimations are as follows: (1) pcse method is the most reliable method compared with fe and re methods; (2) negative relationship between corporate income taxes and fdi is confirmed in fe and pcse model, although in the case of pcse model only in case of hungary and latvia; (3) the magnitude of influence of explanatory variables on fdi inflow is slightly lower in pcse model compared with fe; (4) residuals are stationary and cross-section independent in pcse model. hence, it is concluded that pcse model is the most favourable one. 6. conclusions this paper analyzes the impact of changes in the corporate income tax rate on the investments localization decision in emerging eu economies. the results of classical panel models (fixed-effects and random-effects models) based on selected emerging eu economies (czech republic, hungary, lithuania, latvia, poland, slovakia, and slovenia) for the period between two crises, indicated negative link between corporate income tax rates and fdi inflows which is in line with economic investment theory (talpos & vancu, 2009). results of the hausman test showed that the model with fixed-effect (fe) is more efficient in comparison to the one with random-effect specification. therefore, this paper confirms that reduction of corporate income taxes, i.e. achieving tax competitiveness, provides fdi inflow. observing other factors, it is shown that short-term interest rate effects fdi positively (dupor, 2000) and business environmental variables indicated that higher level of corruption index and higher competition index are significant factors for decisionmaking on investment. furthermore, panel corrected standard errors (pcse) method is implemented, as robustness check, due to limitation of classical panel methods: problem of cross-section dependence and nonstationarity of variables. pcse confirmed conclusions based on fe model; however, negative relationship between corporate income tax and fdi inflow was only detected in case of hungary and latvia. between analysed emerging eu economies, latvia and hungary are at the same time economies with the highest score of tax competitiveness indexes, confirming that tax competitiveness exists in eu economies and that causes positive macroeconomic effects by foreign direct investment attraction. the impact of corporate income tax on fdi inflow in emerging eu economies 51 acknowledgements: the research is funded by the provincial secretariat for higher education and scientific research, autonomous province of vojvodina, republic of serbia within the project: coordination of economic policies in the function of european integration, number 142-4512650/2021-01/2. the first draft of this paper was presented at 6th international scientific conference economics & management (eman): how to cope with disrupted times, 24 march 2022, ljubljana, slovenia. references andrašić, j., mirović, v., & kalaš, b. 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(2020). does the financial crisis change the effect of financing on investment? evidence from private smes. journal of business research, 110, 456-463. https://doi.org/10.1016/j.jbusres.2020.01.063 uticaj poreza na dobitak preduzeća na priliv sdi u ekonomijama eu u razvoju nakon globalne finansijske krize intenzivna prilagođavanja poreske politike primenjena su u ekonomijama evropske unije (eu) u razvoju, zarad poreske konkurentnosti. da bi ostvarile taj cilj, ekonomije eu u razvoju najčešće biraju politiku smanjenja poreza, a posebno snižavanja stope poreza na dobit preduzeća. ovaj rad se bavi uticajem poreza na dobit preduzeća na priliv stranih direktnih investicija (sdi) u odabranim ekonomijama eu u razvoju (češka, mađarska, litvanija, letonija, poljska, slovačka, slovenija) između dve krize (globalne finansijske i pandemijske), tj. , u periodu 20102019. koristeći klasične modele panel podataka (model fixed effects i random effects), istraživanje pokazuje da se očekuje da smanjenje poreza na dobit preduzeća obezbedi priliv sdi. posmatrajući odnos između ostalih faktora (indeks korupcije, indeks konkurentnosti i kratkoročne kamatne stope) i priliva sdi, pozitivni odnosi su potvrđeni. panel-korigovan estimator standardnih grešaka (pcse), implementiran kao provera robusnosti, potvrdio je rezultate i zaključke zasnovane na fe modelu. međutim, negativna veza između poreza na dobit preduzeća i sdi u slučaju pcse modela je verifikovana samo u slučaju mađarske i letonije, što ukazuje na postojanje poreske konkurentnosti. ključne reči: porez na dobit preduzeća, sdi, ekonomije eu u razvoju, panel analiza, pcse metoda. https://doi.org/10.1016/s2212-5671(14)00341-4 https://doi.org/10.1016/s2212-5671(14)00341-4 https://doi.org/10.1016/0047-2727(94)01424-m https://hdl.handle.net/1813/77587 https://doi.org/10.1023/b:itax.0000004778.63592.96 http://www.asecu.gr/seeje/issue10/stanisic.pdf https://www.tcd.ie/triss/assets/pdfs/iiis/iiisdp375.pdf https://doi.org/10.1080/1540496x.2004.11052564 https://doi.org/10.1057/978-1-137-51184-3 https://doi.org/10.1016/j.jbusres.2020.01.063 plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 4, 2016, pp. 335 350 doi: 10.22190/fueo1604335c original scientific paper social dimension of sustainable competitiveness of serbia and selected european countries1 udc 502.131.1:339.137.2(497.11+4) slobodan cvetanović 1 , danijela, z. despotović 2 , vladimir nedić 3 1 university of niš, faculty of economics, niš, serbia 2 university of kragujevac, faculty of economics, kragujevac, serbia 3 the school of applied engineering studies, kragujevac, serbia abstract. the central idea of sustainable competitiveness is the quest for a model of development that would balance economic prosperity, social sustainability and environmental management. this paper analyzes the social aspect of sustainable competitiveness with the aim of determining the relative position of the republic of serbia in relation to selected most competitive and least competitive european countries (according to the value of social sustainability–adjusted gci). the basic assumption is that improving sustainable competitiveness of countries must not be done in such a way that economic, social and environmental dimensions of competitiveness are treated as conflicting categories. based on the data of world economic forum, quantitative, qualitative and graphical analysis of the social dimension of sustainable competitiveness of serbia in relation to the six most competitive and six least competitive countries in europe (including serbia) are presented. using simple correlation and regression analysis, the interdependence of the global competitiveness index and the social sustainability pillar of observed countries is examined. key words: sustainable development, sustainable competitiveness, social dimension of sustainable competitiveness introduction in the current context of globalization, competitiveness constitutes a major economic objective frequently invoked by economic policy-makers worldwide (pérez-moreno et al., 2015). in economic theory, there are different views and definitions of competitiveness. a number of researchers insist on the distinction between competitiveness of enterprises and the 1received august 22, 2016 / accepted october 24, 2016 corresponding author: slobodan cvetanović university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: slobodan.cvetanovic@eknfak.ni.ac.rs 336 s. cvetanović, d.z. despotović, v. nedić competitiveness of countries. basically, what distinguishes the country’s competitiveness from the competitiveness of enterprises is the process of creating economic value in society. the economic value is created only by enterprises whereas the country can establish an environment that supports or hinders the activities of enterprises (stoneman, 1995). in this context, some economists reject the very logic of the use of the term competitiveness of the country (krugman, 1994). however, most economists agree in their assessment that the 21st century will be a period of global economic competition, thanks mainly to the growing importance of knowledge, education and innovation in the development of economy and society (dragicevic, 2012). in addition, clean technologies and ecoinnovations are key factors to maintain and/or improve economic competitiveness and secure environmental sustainability of different sectors and the economy as a whole (coenen & díaz lópez, 2010). in modern business conditions, special attention is paid to international competitiveness, regardless of whether the individual products, companies, industries or the national economies are considered. international competitiveness is a condition in which a country can, under free and fair market conditions, produce goods and services that meet the demands of the world market, while maintaining or increasing the real income of its citizens (hatzichronoglou, 1996). the study subject of competition oriented economic reality is the focus on successful enterprises, industries, countries or group of countries. in contrast, any theoretical understanding of this phenomenon is inevitably linked to reductions and simplifications. only a small number of differences among the participants, leading to differences in the studied countries, industries or companies, can be taken into account, while the far greater number of them must be disregarded. the most frequently used differences in explaining the causes of competitiveness lie in the various offers of factors of production such as labor and capital, unevenly available technologies, different possibilities for utilization of economies of scale, etc. conceptual term sustainable competitiveness involves treatment of the phenomenon of competitiveness in the light of the demand of the paradigm of sustainability, which is a research approach that links the requirements of economic development, environmental protection and the improvement of social life (filipovic & despotovic, 2014; cvetanovic et al., 2014). so, in order for sustainability to be achieved, it is important that these three components are given equal attention. however, until the end of the previous century, debates about sustainable competitiveness were dominated by environmental and economic dimensions. although the social sustainability was treated as one of three basic dimensions of development, it has not been recognized as an individual field of theoretical analysis, empirical verification and practical application until the last ten years (mirkov, 2012). contribution to the operational use of the concept of sustainability, especially with regard to the simultaneous treatment of its economic, social and environmental dimensions is an approach to measure the competitiveness of countries by world economic forum that started in 2011. the subject of this paper is the analysis of the social aspect of sustainable competitiveness. giving attention to the phenomenon of the social dimension of competitiveness, it should be noted that this is a new area of research (stiglitz et al., 2009; despotovic et al., 2015), and that there is not a large number of empirical analyses of this phenomenon in the literature. the problem that is being investigated in this paper may be reduced to the question: what is the social dimension of sustainable competitiveness of serbia and selected european countries 337 relative position of the republic of serbia according to the criteria of the social dimension of sustainable competitiveness in relation to the most competitive and least competitive european countries according to data of the world economic forum? with the aim of achieving an acceptable answer to this question, we compared indicators of the social dimension of sustainable competitiveness of serbia with corresponding indicators of six european countries that have the highest rank (denmark, netherlands, finland, germany, norway and switzerland) and five countries that have fallen to last positions (croatia, romania, greece, moldova and macedonia) according to the criterion of social sustainability– adjusted gci in europe in 2014. the relationship between the global competitiveness index (gci) and the social sustainability pillar of selected countries in 2014, was analyzed using simple linear correlation analysis. 1. sustainable competitiveness: the methodology of the world economic forum the global competitiveness report 2011-2012 (schwab & sala-i martin, 2011), in addition to gci also presents a sustainability-adjusted global competitiveness index sgci. this index is introduced in its preliminary version with emphasis on the analysis of social and environmental elements that maintain high levels of long-term economic competitiveness. the index includes mainly all the elements presented in the gci, which are important for understanding the competitiveness of countries in the short and long term (governance, education and health, infrastructure, the functioning of markets and innovation), but also a number of additional indicators (demography, social cohesion, environmental management). in this way, gci is a short-term and medium-term view of the future, while the sustainability– adjusted gci presents a long-term view (for 20 years) on the phenomenon of competitiveness of countries. such an approach makes it possible to highlight the link between competitiveness and sustainability (fig. 1). fig. 1 the analytical framework of the sustainability–adjusted gci (modified according to blanke, 2013, p. 52) 338 s. cvetanović, d.z. despotović, v. nedić the ultimate sustainability (according to the analytical framework) is the result of two indices of sustainability: social sustainability–adjusted gci and environmental sustainability– adjusted gci. for the pillar of social sustainability the three following conceptual elements are defined: access to essential needs, economic exclusion and social cohesion. for the pillar of environmental sustainability the following three conceptual elements are defined: environmental policy, the use of renewable resources and the degradation of the environment. presentation of the analytical framework in fig. 1 indicates that competitiveness alone does not necessarily lead to a sustainable level of prosperity. the realization of economic progress is essential for improving living standards. however, within this process the ability of countries to generate prosperity for its citizens in a sustainable manner is assessed. in other words, competitiveness is a necessary, but not a sufficient condition for social prosperity. hence, there is a need for measures of competitiveness that are tailored to the requirements of social and environmental sustainability. the methodology for measuring sustainable competitiveness index is based on the premise of a linear impact of socially sustainable and environmentally sustainable dimension of competitiveness. the result is a sustainability– adjusted gci as the average of social sustainability–adjusted gci and environmental sustainability–adjusted gci. social and environmental dimensions of sustainability are treated as independent adjustments for the performance of each country in the global competitiveness index. since there is no clear theoretical guidance for assigning weights to individual elements, indicators were given equal weight within each pillar. each pillar was transformed into an "adjustment coefficient" with a range of 0.8 to 1.2, which is then used to match the results of the global competitiveness index up or down within this range. this is manifested in a harmonized result that is maximum 20% lower or 20% higher than the basic value of the global competitiveness index. due to the fact that some of the aspects of sustainability are assessed within the pillars of social and environmental sustainability, the results reflect the overall performance of all aspects instead of a particular element. in a sense, this means that the poor performance in some aspects can be compensated by good results in other areas. instead of the 144 economies covered by gci, in the analysis of sustainable competitiveness of the world economic forum for 2012 a sub-sample of 79 countries was presented, and in 2013 it was expanded to 121 countries. the availability of data is a major challenge and limitation in this procedure, because for many of the used concepts, there are no measures or data are available only for a limited number of countries. 2. subject, research methodology and hypotheses this research is focused on the position of indicators of social sustainability of serbia in relation to the six most competitive and six least competitive countries in europe in 2014, as well as their impact on the competitiveness of the surveyed countries. the survey was conducted in the following four steps:  search and analysis of the reference framework is carried out and the data collected,  the data is then filtered, aggregated, and structured according to the needs of further analysis,  the position of serbia and the observed group of countries is shown tabularly and graphically according to: social dimension of sustainable competitiveness of serbia and selected european countries 339  three groups of parameters of social sustainability,  global ranking of index of sustainable competitiveness (sgci) as well as its social component,  sgci values and its social component  at the end statistical methods of linear correlations analysis of the based competitiveness (gci) and social components sgci (social sustainability pillar) are applied for all of surveyed countries. on the basis of analytical framework of sustainable competitiveness, the following hypothesis are stated:  h1: there is a significant difference in the achieved level of indicators of social sustainability between the six most competitive countries and the six least competitive countries in europe (including serbia),  h2: there is no significant difference in the achieved level of indicators of social sustainability between serbia and the six least competitive countries in europe, the hypothesis h1 is logical as the group of the most competitive countries comprise democratically organized societies with the oldest tradition of freedom and harmony. however, at first glance, this axiom is not necessarily true for all observed indicators (fig. 2), so that, this claim requires a more detailed analysis of the available data. the hypothesis h2 seems also logical because serbia geographically, economically but also in terms of the achieved level of democratic values of modern civil communities can join the group of the least competitive countries in europe. however, as with previous hypothesis, the accuracy of this statement for all observed indicators of the social component of sustainable competitiveness index cannot be accepted without detailed analysis. 3. a comparative analysis indicators of social sustainability this research is focused on the position of indicators of social sustainability of serbia in relation to the six most competitive and six least competitive countries in europe in 2014, as well as their impact on the competitiveness of the surveyed countries. using data on sustainable competitiveness in the global competitiveness report 2014-15 (bilbao-osorio et al., 2012), in this part of the paper a comparative survey of indicators of the social sustainability of the republic of serbia and selected most competitive (switzerland, norway, netherlands, germany, denmark, finland) and least competitive countries in europe (greece, macedonia, moldova, romania, croatia) is presented. for social sustainability, the forum identifies three conceptual elements (fig. 2). fig. 2 indicators of social sustainability (source: blanke (2013)) 340 s. cvetanović, d.z. despotović, v. nedić the first category depicts the population access to the basic necessities of life (table 1). it includes three indicators: access to sanitation facilities, access to drinking water of improved quality and access to health care services. this category is a measure of inclusion, as well as a measure to satisfy basic physical needs. the population that has poor access to water, food, shelter, health care and sanitation facilities cannot fully develop their creative potential. graphical visualization of analyzed variables is given in figures 3-5, where the observed characteristics by selected groups of countries are defined as the average of the results that countries in the studied groups achieved in the particular domain of social sustainability. table 1 access to basic necessities (source: bilbao-osorio et al. (2012)) country access to sanitation facilities 1 access to drinking water of improved quality 2 access to health care services 3 % % score (1-7) 1 denmark 100.00 100.00 6.39 2 finland 100.00 100.00 6.42 3 germany 100.00 100.00 6.32 4 netherlands 100.00 100.00 6.59 5 norway 100.00 100.00 6.73 6 switzerland 100.00 100.00 6.81 average 100.00 100.00 6.54 1 croatia 98.00 99.00 5.25 2 greece 99.00 100.00 4.69 3 macedonia, fyr 91.00 99.00 5.01 4 moldova 87.00 97.00 4.29 5 romania 72.00 88.00 3.95 6 serbia 97.00 99.00 3.99 average 90.67 97.00 4.53 1 percentage of total population using improved sanitation facilities 2 percentage of the population with access to improved drinking water quality 3 how accessible is healthcare in your country? [1 = limited only the privileged have access; 7 = universal all citizens have access to healthcare] fig. 3 comparison by elements of access to basic necessities social dimension of sustainable competitiveness of serbia and selected european countries 341 comparative survey in fig. 3 indicates the parameters about access to basic necessities within the expected relations. the least competitive countries as a group, slightly lagging behind in all observed performances in the field of access to basic necessities, with the biggest problem identified in access to health care (sustainable competitive countries in europe have a better result of this parameter for nearly 40%). furthermore, it is evident that serbia regarding the first two parameters is slightly ahead in relation to the average value within the group of least sustainable competitive european countries, while the parameter of access to health care is much worse than the average for this group. this indicates that in respect to the first two parameters, all european countries reached almost maximum availability, while for the much more sophisticated parameter of access to health care, there are still considerable differences among european countries. the second category is associated with the concept of perceived economic security (table 2). it evaluates the vulnerability of the population to economic exclusion. there are three indicators by means of which the vulnerability of the population is evaluated: vulnerable employment as a percentage of total employment, the extent of informal economy and security in the form of social safety net. vulnerable employment indicator measures the percentage of people who are self-employed in small enterprises or in small family firms, which cannot provide the level of income sufficient to meet the standards of living, and may prove to be an unstable measure, especially in times of economic hardship. the extent of the informal economy provides a picture of how well the workforce is integrated into the official structures. the workforce that is less integrated makes workers to be more vulnerable to concerns about job loss, aging, maternity, disability or illness. third, security in the form of social safety net is table 2 economic exclusion (source: bilbao-osorio et al. (2012)) country social safety net protection 1 extent of informal economy 2 vulnerable employment 3 score (1-7) score (1-7) % 1 denmark 6.05 5.71 5.60 2 finland 6.13 6.30 9.60 3 germany 5.67 5.45 6.80 4 netherlands 5.84 6.10 11.50 5 norway 6.14 6.20 5.20 6 switzerland 6.03 6.18 9.10 average 5.97 5.99 7.97 1 croatia 3.15 4.61 16.50 2 greece 3.41 4.18 29.70 3 macedonia, fyr 3.90 5.06 22.10 4 moldova 2.76 3.69 28.60 5 romania 3.84 3.86 31.50 6 serbia 2.83 4.35 26.40 average 3.32 4.29 25.80 1 in your country, does a formal social safety net provide protection from economic insecurity due to job loss or disability? [1 = not at all; 7 = fully] 2 how much economic activity in your country would you estimate to be undeclared or unregistered? [1 = most economic activity is undeclared or unregistered; 7 = most economic activity is declared or registered] 3 proportion of own-account and contributing family workers in total employment 342 s. cvetanović, d.z. despotović, v. nedić an additional measure of protection in times of financial and economic instability; it allows households to maintain their quality of life and overcome the crisis without falling into the poverty traps. safety protection also leads to a sense of financial security that allows individuals to undertake investment and entrepreneurial risk, acting on stimulating economic activity. fig. 4 comparison in the area of economic exclusion considering parameters describing vulnerability to economic exclusion, the group of the most sustainably competitive countries in europe has significantly and expected better score than the group of least sustainable competitive european countries (fig. 4). the difference in values of social safety net protection, and extent of informal economy is about 40% in favor of sustainably most competitive countries in europe. in the third parameter of vulnerable employment, the difference in favor of sustainably most competitive european countries is more disconcerting and on average reaches a ratio of 1 to 3.5 (individually exceed the ratio of 1 to 6). it is noticeable that croatia, considering the parameter vulnerable employment, moved closer to more successful half of the european countries, in contrast to moldova, which is for all three parameters almost at the end of the group of least sustainably competitive european countries. the third and last category estimates social cohesion (table 3 and fig. 5). the assessment includes three indicators: the gini coefficient, social mobility and youth unemployment. the gini coefficient is included in the index of social cohesion due to the fact that relative poverty may prevent families with low incomes to have access to the same opportunities as families with high incomes. for indicator of social mobility in the context of sustainable competitiveness, it is crucial that the next generations can improve their condition regardless of the socioeconomic status of their parents. from a purely economic perspective, the absence of such social mobility can be harmful to human capital development, as qualified individuals in a society that does not support them in progress, could decide to emigrate; if they stay, the economy in which they live will not improve their skills. in addition, the low expectations of the future regarding expressive unemployment and inequality, can also converge to encouraging political instability. thirdly, in the wider conceptual level, social mobility is a direct measure of the freedom of manifesting human development. finally, high youth unemployment can reduce social cohesion and cause significant economic and social costs, depreciating overall earnings social dimension of sustainable competitiveness of serbia and selected european countries 343 during the working life of unemployed workers, acting negatively on their health and putting at risk the health and educational success of children of unemployed parents. from an economic point of view, high youth unemployment reflects the failure of society to mobilize existing resources and build productive potential, which in turn acts on the reduction of demand, eroding business confidence and the prospects for investment and job creation. table 3 social cohesion (source: bilbao-osorio et al. (2012)) country gini index 1 social mobility 2 youth unemployment 3 % score (1-7) % 1 denmark 28.10 6.06 14.14 2 finland 25.90 6.39 18.96 3 germany 28.30 5.54 8.13 4 netherlands 25.40 5.90 9.48 5 norway 22.60 6.26 8.46 6 switzerland 28.70 6.35 8.44 average 26.50 6.08 11.27 1 croatia 30.50 3.67 43.05 2 greece 34.30 3.89 55.26 3 macedonia, fyr 43.56 4.14 53.91 4 moldova 33.03 3.39 13.09 5 romania 33.20 3.43 22.68 6 serbia 29.62 3.04 51.05 average 34.04 3.59 39.84 1 measure of income inequality [0 = perfect equality; 100 = perfect inequality] 2 to what extent do individuals in your country have the opportunity to improve their economic situation through their personal efforts regardless of the socioeconomic status of their parents? [1 = little opportunity exists to improve one’s economic situation; 7 = significant opportunity exists to improve one’s economic situation] 3 youth unemployment measured as the ratio of total unemployed youth to total labor force aged 15-24 fig. 5 comparison in the field of social cohesion 344 s. cvetanović, d.z. despotović, v. nedić social cohesion (fig. 5) is the third group of parameters by which the social dimension of competitiveness of countries is examined. available data illustrate the existence of a significant gap between the selected group of sustainable competitive and sustainable uncompetitive european countries. the most expressive difference is observed in the parameter of youth unemployment and in some countries it exceeds the ratio of 1:5 in favor of sustainable competitive countries. particularly worrying is the fact that considering this parameter, in addition to generally poor results in group of sustainable uncompetitive european countries, serbia has by far the worst position compared to all observed countries. a very similar situation is also observed for parameter of social mobility, where the difference in favor of sustainable competitive countries exceeds 40% and serbia ranks the penultimate place immediately after romania. the only parameter where serbia shows a stronger affiliation to the group of sustainable competitive european countries is the gini coefficient. according to this coefficient, serbia is by far the first in the group of sustainable uncompetitive european countries, and is even better than germany and switzerland from the group of the most sustainably competitive european countries. as far as the group average, there is a significant difference in favor of group of sustainable competitive countries, but it is not as drastic as in the two previous parameters of social cohesion. the aforementioned information, as well as graphical representations, unambiguously confirm the correctness of the hypothesis h1, because they show an evident gap between serbia and the group of least competitive european countries in relation to european leaders for all indicators of social component sgci. the hypothesis h2 is also proven in the sense that the values of almost all observed indicators for serbia are in the average range (±15%) for group of least competitive countries in europe. indicators that fall out of the average range of ±15% are youth unemployment rate, which is in serbia 22% weaker than the average for observed group of the least competitive countries. 4. comparative review of gci, sustainability-adjusted gci and the social sustainability– adjusted gci with the aim of coming up with an answer to the question of whether incorporating social sustainability requirements lowers the basic competitiveness (which is represented by gci), in this section the positions and values of following indices for serbia and two selected groups of european countries are compared: global competitiveness index, a sustainability– adjusted gci (gci adjusted to overall environmental and social dimension of competitiveness) and social sustainability– adjusted gci (gci suited only to the social dimension) (table 4). the data contained in table 4 clearly show that the most competitive economies are also highly ranked according to requirements of total and social sustainability. the distribution of the social sustainability– adjusted gci and sustainability– adjusted gci (environmentally and socially) for group of sustainable competitive european countries is shown in fig. 6. social dimension of sustainable competitiveness of serbia and selected european countries 345 table 4 rank and value of observed indices (source: bilbao-osorio et al. (2012)) country global competitiveness index (gci) sustainability-adjusted gci social sustainability– adjusted gci score (1-7) rаnk (out of 144) score (1-7) rаnk (out of 79) score (1-7) rаnk (out of 79) 1 denmark 5.33 12 5.91 10 6.14 7 2 finland 5.45 8 6.18 3 6.38 4 3 germany 5.53 4 6.18 4 6.36 5 4 netherlands 5.50 5 6.13 5 6.39 3 5 norway 5.41 11 6.28 2 6.43 2 6 switzerland 5.76 1 6.80 1 6.75 1 average 5.50 6.25 6.41 1 croatia 4.07 77 4.14 55 4.06 59 2 greece 4.02 81 3.97 62 3.85 68 3 macedonia, fyr 4.28 60 3.90 64 4.13 54 4 moldova 4.00 84 3.98 61 3.98 63 5 romania 4.32 53 4.17 53 4.13 53 6 serbia 3.89 94 3.77 73 3.68 76 average 4.10 3.99 3.97 fig. 6 the ranks of the observed indices for european socially most competitive countries countries such as switzerland and norway are leaders in ranking regarding both indicators. switzerland is ranked as first according to the sustainability– adjusted gci, has good performance in all aspects of sustainable competitiveness, and shows that there is no necessary relationship between the compensation of being socially sustainable and competitive enough. a slight misalignment of these aggregates is noticeable in some countries (denmark and netherlands have a significantly better social sustainability than the total, while finland and germany have a weaker social sustainability than the overall sustainability). fig. 7 illustrates the distribution of social sustainability– adjusted gci and sustainability– adjusted gci for the least competitive european countries. in some countries in this group, the imbalance of these values is more expressive than in the group of sustainably competitive countries (macedonia and greece, for example), while for some almost the same position for overall and socially sustainable competitiveness is noticeable (moldova and romania). it is interesting that there is a shift in all countries in this group (except for the macedonia) in favor of the social component in relation to the composite value i.e. the sustainability– adjusted gci. 346 s. cvetanović, d.z. despotović, v. nedić fig. 7 the ranks of the observed indices for serbia and european socially least competitive countries bearing in mind the fact that the social dimension of sustainability is becoming an increasingly important component of the competitiveness of countries, it seems useful to show its impact on the global competitiveness index. based on the fig. 8, it can be generally concluded that in terms of competitiveness, including the social dimensions of sustainability, for leader countries the competitiveness that is reflected in the social sustainability– adjusted gci increases, while for the least competitive countries already modest competitiveness reduces further (an exception is moldova). it is noticeable that serbia ranks the last according to the social sustainability– adjusted gci even in its immediate environment (fig. 8). fig. 8 the ranks of the observed indices for both groups of countries 5. interdependence of gci and social sustainability pillar typically, higher levels of competitiveness lead to higher levels of economic growth, and therefore to prosperous societies, increasing the well-being of the population that can consume more accessible goods and services. however, in some cases when the generated wealth does not reach some parts of the population, higher levels of competitiveness need social dimension of sustainable competitiveness of serbia and selected european countries 347 not necessarily lead to higher levels of social sustainability. the societies in which parts of the population cannot contribute to economic activity, or where income disparities are very high, are societies that probably do not benefit from the full potential of their resources and are more prone to social instabilities. in order to examine the character and significance of the relationship between the gci and social sustainability pillar, the scatter diagram and the best linear fit of the aforementioned variables for the 12 surveyed countries are presented in figure 9. fig. 9 interdependence of the observed variables selected countries in 2015 position of the selected leader and learner groups as a peripheral zone of entire population of european countries, shows an evident gap between them regarding both traditional economic competitiveness and socially sustainable competitiveness. in addition, not going into discussion about regression character of the mutual influence of the observed aggregate variables, it is evident that they have a strong correlation potential that should be explored, preferably in the context of the entire population of the european economy and in the longer time series. however, since the wef in its gci framework has not been monitoring the indicators of social and environmentally sustainable competitiveness until 2012-13, there is a significant constraint due to relatively small amount of available data, which narrows the usage of time lag analysis. what remains is the possibility of using additional sources for specific indicators of social sustainability pillar that are more or less available. conclusion research on the social dimension of the sustainable competitiveness of serbia and selected countries has shown that the least competitive european countries as a group are significantly lagging behind the most competitive countries in most indicators in the field of social sustainability. the most important differences are reflected in the measure of access to health care in the field of the first category of social indicators. the parameters of access to sanitation 348 s. cvetanović, d.z. despotović, v. nedić facilities and access to drinking water of improved quality are almost equalized with a very small shift in favor of sustainable competitive countries, while for the parameter of access to health care, the difference between groups is almost 45% in favor of group of sustainable competitive countries. this tells us that regarding the first two parameters, all the european countries have reached almost maximum availability, while for the much more sophisticated parameter relating to the availability of health care, there are still considerable differences between european countries. serbia, regarding the first two parameters, is slightly ahead in comparison to the average values for group of the least sustainable competitive countries in europe, while in the case of the parameter of access to health care, it has much worse score than the average of this group. in addition, there are also significant differences in the parameter of vulnerable employment in the field of second category of indicators of social sustainability. within the group of parameters depicting social vulnerability to economic exclusion, european leader countries are significantly and expectedly better ranked in relation to the least sustainable competitive european countries. for parameters of social safety net protection and extent of informal economy, the difference between the observed groups of countries is around 50% and 40% respectively, in favor of competitive economies. in the case of the third parameter of vulnerable employment, the difference in favor of sustainable competitive countries is more than alarming reaching a ratio of 1 to 3.2. serbia, according the all three parameters of social vulnerability, is ranked at the lower half of the group of the least sustainably competitive european countries. there are also great differences in values of parameter of youth unemployment in the third group of parameters of social cohesion. social cohesion is the third group of parameters and it also shows a significant gap between the most sustainable competitive and least sustainable competitive european countries. the most noticeable difference is shown in the parameter of youth unemployment where difference in some countries exceeds a ratio of 1 to 3.5. serbia is placed at by far the worst position compared to all countries. a very similar situation was also noticeable for the parameter of social mobility where differences in favor of leader countries exceed 40% and serbia ranks the last. the only parameter where serbia shows a stronger affiliation to european leaders, and not to the least competitive countries is the gini coefficient. according to this parameter, serbia is ranked better than all countries in this group, even very close to germany, switzerland and netherland from the group of sustainable leading european countries. based on the analysis of the positions and values of the global competitiveness index and the social sustainability– adjusted gci for serbia and selected european countries, the existence of a negative correlation between these variables is not noticed. in other words, there is no necessary relationship between the compensation of being sustainable and being competitive as defined by the world economic forum. on the contrary, many countries which are on the top of the rank list of competitiveness, are also the best in many aspects of social sustainability. in this context, it could be said that there is an analogy with sustainability exploration and sustainability exploitation (maletic et al., 2014), and conclusion in the same study is that for long-term success, the simultaneous pursuit is both desirable and necessary. the incorporation of the social dimension in the global competitiveness index deepens the lag of least competitive countries in relation to the most competitive european countries. it is noticeable that serbia was the last even among comparable economies, and especially pertaining the social component of sustainability. social dimension of sustainable competitiveness of serbia and selected european countries 349 the observed countries had noticeable differences in the values of the sustainability– adjusted gci compared with global competitiveness index. this fact suggests that the size of the global competitiveness 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(1995). handbook of the economics of innovation and technological change. blackwell handbooks in economics. 350 s. cvetanović, d.z. despotović, v. nedić socijalna dimenzija održive konkurentnosti srbije i selektovanih zemalja evrope centralna ideja održive konkurentnosti predstavlja traganje za modelom razvoja koji bi uravnotežio ekonomski prosperitet, socijalnu održivost i upravljanje životnom sredinom. rad je posvećen analizi socijalnog aspekta održive konkurentnosti sa ciljem da se sаglеdа relativna pоziciја republike srbiје u оdnоsu nа sеlеkоvаnе nајkоnkurеntnije i nајmаnjе kоnkurеntne zеmlje еvrоpе u 2014. godini. pošlo se od potrebe da se na neophodnost unapređenja održive konkurentnosti zemalja ne sme prilaziti na način koji ekonomsku, socijalnu i ekološku dimenziju konkurentnosti tretira kao oblasti u konfliktu. nа оsnоvu pоdаtаkа svеtskоg еkоnоmskоg fоrumа prеzеntоvаnа je kvаntitаtivnа, kvаlitаtivnа i grаfičkа аnаlizа sоciјаlne dimеnziјe оdrživе kоnkurеntnоsti srbije u odnosu na šest najkonkurentnijih i šest najmanje konkurentnih zemlja еvrоpе u 2014. gоdini na osnovu vrednosti indeksa socijalno održive konkurentnosti (social sustainability–adjusted gci). kоrišćеnjеm prоstе kоrеlаciоnе аnаlizе istrаžеnа је mеđuzаvisnоst glоbаlnоg indеksа kоnkurеntnоsti i stuba socijalne odrzivosti (social sustainability pillar) na primeru selektovanih zemаljа evrope u 2014. godini. ključne reči: оdrživi rаzvој, оdrživа kоnkurеntnоst, sоciјаlnа dimеnziја оdrživе kоnkurеntnоsti. 10826 facta universitatis series: economics and organization vol. 19, no 3, 2022, pp. 167 182 https://doi.org/10.22190/fueo220529013s © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper analysis of the impact of reporting on environmental performance indicators on the profitability of european companies1 udc 657.375: 658.1]:502.131.1(4) aleksandar savić1, ljiljana bonić2 1 university of defence, military academy, belgrade, republic of serbia 2 university of niš, faculty of economics, niš, republic of serbia orcid id: aleksandar savić https://orcid.org/0000-0002-9640-1583 ljiljana bonić https://orcid.org/0000-0003-3877-8400 abstract. the research in this paper is focused on the analysis of the environmental performance indicators reporting impact in the context of sustainable development on the profitability of companies. the research focuses on 60 companies in the energy sector in europe in the period 2012-2020. reports on sustainable development of companies available in the database of the global reporting initiative (gri) were used for the collection of data. the independent variables in this study are nine indicators of the environmental performance of sustainable development. the dependent variable is the profitability of the company, which is measured by the rate of return on total assets (roa). the method of multiple linear regression will be used to analyze the impact of reporting on environmental performance indicators of sustainable development on the profitability of energy companies in europe. empirical results of this research have shown that reporting on environmental performance indicators of sustainable development has a positive effect on company profitability indicators. key words: reporting, sustainable development, environmental performance and profitability. jel classification: q57 received may 29, 2022 / revised september 25, 2022 / accepted october 03, 2022 corresponding author: aleksandar savić university of defence, military academy, veljka lukica kurjaka 33, 11042 belgrade, republic of serbia | e-mail: aleksandar22071993@gmail.com https://orcid.org/0000-0002-9640-1583 https://orcid.org/0000-0003-3877-8400 mailto:aleksandar22071993@gmail.com 168 a. savić, lj. bonić 1. introduction the primary goal of any company is to make as much profit as possible. companies are often on the wrong path to profit maximization, as they try to reduce the cost of managing environmental performance and thus increase profits. however, ecological performance is important from the aspect of the living community, because it affects the environment and natural resources. environmental performance is important to consider at the company level, as it gains public trust. environmental performance reporting is one of the sustainable development activities carried out by companies in order to become more responsible and transparent. reporting on the performance of sustainable development is important for many parties, from ordinary people, stakeholders, government and others. sustainable development today is a term that is already well known and is used not only in the contextof environmental protection, but also in other spheres of human society. it is a prerequisite for the development of a society that takes care of maintaining the quality of life of future generations (ali, arafin, moktadir, rahman & zahan, 2018; carter & rogers, 2008; dubey et al., 2017). the european commission (2017) emphasizes the essence of sustainable development in a dignified life for all within the boundaries of the planet and economic performance, social sphere and environmental protection. sustainable development is based primarily on the balance between the three basic areas of life economic development, social development and environmental protection. it is known that employees have a negative impact on the company's ability to increase its profits at the expense of the environment (e.g. air pollution, increase in the quantity of polluted waters, etc.). the emergence of this negative awareness requires the company not only to be profit oriented, but to manage and report on the environmental performance of sustainable development. companies must take care to prevent and reduce negative impacts on the environment through corporate environmental practices (albertini, 2013; king & lenox, 2001). minimizing environmental damage caused by business activity and protecting the natural environment are the signals of a company's environmental performance and are receiving increasing attention from society, which requires companies to reduce negative impacts on the environment, contributing to sustainable development (féres & reynaud, 2012). various sustainability reporting initiatives are gaining increasing attention from stakeholders (escrig-olmedo, munoztorres, fernandez-izquierdo, & rivera-lirio, 2017; lai, melloni, & stacchezzini, 2016; mervelskemper & streit, 2017; perez-lopez, moreno-romero & barkemayer, 2015). the assessment that a company receives for reporting on the environmental performance of sustainable development is considered to be one of the factors influencing its profitability. the profitability of the company is an indicator worth the attention of stakeholders. the profitability of a company can be measured by a number of indicators that can be based on the concept of: a) accounting result, b) economic result or c) cash flow (krstić & bonić, 2017, 136-157). in this paper, the rate of return on total assets (roa) will be used to measure the profitability of companies. the value of this indicator indicates the profitability and earning power of the company, which is important for managers and investors. (gautama & harjati, 2014). weston and copeland (1992) define profitability to the extent that companies make a profit from sales and investment companies. if the company's profitability is good, then stakeholders consisting of creditors, suppliers and investors will also see the extent to which the company can operate from the company's sales and investments. the higher the level of profitability, the higher the market price of analysis of the impact of reporting on environmental performance indicators on the profitability ... 169 the company's shares, and the higher the value of the company. each company definitely wants the value of the company to continue to grow, because that means that the prosperity of shareholders is high. in addition to being seen by the growing prosperity of shareholders, a company can also be measured by how well it can make a profit. in addition to being an indicator of a company's ability to meet its obligations to investors, the company's profit is also an important component in creating corporate value that shows the company's capabilities in the future. due to the lack of literature on the environmental performance of sustainable development in europe, this research aims to examine the extent of the impact of reporting on environmental performance indicators of sustainable development on company profitability by applying multiple linear regression to data collected from the sustainable development report of european companies in the energy sector available in the organizations for standardization (global reporting initiative) database. the choice of ecological performance of sustainable development in this research is of a particular importance, because it opens the possibility for their measurement, comparison and examination in relation to other suitable variables. the analysis of this research includes data for a time period of 8 years (2012-2020), in order to provide some certainty that the results of the research are not influenced by events from a short period of time. the results of the research show that responsible, transparent and timely reporting on the environmental performance of sustainable development and regularly informing stakeholders about them positively affects the profitability of companies in europe. the results also indicate that the european companies are heterogeneous in terms of reporting on environmental performance and that there is room for improvement for individual companies in terms of reporting on non-financial sustainable development performance. in the context of achieving the set goal, the work starts from the theoretical consideration of previous research related to reporting on environmental performance on profitability, followed by a description of the methodology and a discussion of the research results, with an indication of potential opportunities for future research directions. 2. literature review there are numerous studies on the impact of environmental behavior and company performance on profitability indicators, using different samples and methodologies (horváthová, 2010; dixon-fowler et al., 2013; endrikat et al., 2014; friede et al., 2015). unfortunately, reaching a consensus on this topic is far away, since the previous research has obtained contradictory results regarding positive, negative or neutral nature of the relationship between environmental performance and profitability indicators (chavez et al., 2016; geng et al., 2017; wong et al., 2017; zhu et al., 2013). according to kuldove (2011), environmental protection can have a positive effect on economic performance if taken strategically. duque-grisales & aguilera-caracuel (2019) point out that innovative investments in the environment create new market opportunities for the company through new ecological technologies and processes and the development of ecological products and services. if we look at the problem from a purely financial point of view, then the basic strategic goal of the business is to provide the necessary profitability and increase the value of the company. thus, the application of the corporate strategy tailored to meet the principles of environmental performance of sustainable development should lead to the increased profitability of companies and create value for shareholders. 170 a. savić, lj. bonić could the entrepreneurship that meets the principles of environmental performance of sustainable development meet this goal? there is a debate on this issue in which we meet different views on the relationship between environmental performance of sustainable development and meeting business goals, where the dominant position is occupied by the company's ownership needs. the relationship between the environmental and financial performance of companies and the extent to which reporting on environmental performance indicators of sustainable development contributes to the growth of company profitability have become the subject of interest of many authors. some studies confirm a positive relationship (ameer & othman, 2012; barnett, 2007; kuldova, 2011; orliztki, schmidt & rines, 2003; porter & van der linde, 2011; tang et al., 2018), some confirm a negative relationship (barnett, 2007; kuldova, 2011; orliztki, schmidt & rines, 2003; driessen et al., 2013; liu, dai, & cheng, 2011; lee, cin, & lee, 2016), while others provide ambiguous results (lee & min, 2015; tang et al., 2018). one of the most important critics of the concept of socially responsible business in relation to the fulfillment of business goals is undoubtedly milton friedman (2009), according to whom the company is interested in the activity and the activity of the profession. ameer & othman (2012) point to a two-way link between reporting on the environmental performance of sustainable development and financial indicators. in their study, they have found significantly higher sales growth, higher property returns, pre-tax profits and cash flows from operating activities in a sample of 100 global companies performing environmental activities in selected industries compared to the companies that do not report these activities. equally, the issue of the impact of environmental management in the company and activities leading to environmental protection is given considerable attention. according to schaltegger & sinnestvedt (2002), there is no general automatic link that combines environmental performance with the economic performance of companies. this relationship is applied only in certain specific cases, when the environmental protection measures are a very significant motivation for the company to lead to continuous improvement of business activities. their main finding includes the fact that the relationship between environmental and economic performance varies depending on the level of achieved economic performance. wagner & schaltegger (2004) show the importance of formulating business strategy by the top management of the company in the analysis, in which they have dealt with the impact of business strategy on environmental protection and economic relations of the economy. companies with a formulated strategy in terms of creating value for owners show a positive relationship between environmental performance and company profitability. in their research, green et al. (2012) state that improving the overall financial performance of a company comes from investing in operational resource efficiency and marketing environmental benefits. in their study, environmental performance means reducing the level of environmental pollutants, such as reducing air, water and solid waste, reducing the consumption of hazardous, harmful and toxic materials and reducing the frequency of environmental accidents, which leads to improved operational performance and higher profitability (zhu et al, 2015). better operational performance reflects the ability to satisfy customers in terms of timely and fast delivery of high-quality products and services, business flexibility and elimination of waste in production processes (wong et al., 2017). tarmuji et al. (2016) point out that the higher the level of environmental performance reporting, the greater the possibility for companies to maximize their profits. purbawangsa & analysis of the impact of reporting on environmental performance indicators on the profitability ... 171 suprasto (2019) have investigated how a non-financial performance affects the rate of return on total assets employed (roa). they have showed that the annual variation of non-financial performance reporting improves the company's image and subsequently the financial performance as measured by roa. they have also proved that there is a strong relationship between a company's rating and its social responsibility ratings. the impact of non-financial performance reporting appears to be more significant for companies where clients are individuals rather than groups. they have found that a company's profitability affects its value. in accordance with this research, wardhany, hermuningsih & wiyono (2019) state that profitability has a positive impact on the value of companies. this is supported by the research results of sulistyo & yuliana (2019) who have found that there is a positive influence between profitability and company value. according to pasquini-descomps & sahut (2015), if a company approaches environmental policy, the measures it implements in this regard in accordance with the concept of sustainable development are closely related to economic performance. this policy may provoke different reactions from stakeholders. the viewpoint is that the application of environmental protection measures increases environmental performance, and that their impact on the company's business results leads to a drop in profitability. this decline is expected mainly due to rising costs. it is about: ▪ increasing investment costs in the field of environmental protection and minimizing the impact of business activities on the environment, ▪ increasing operating costs related to new production processes and environmentally friendly technologies, ▪ increasing the cost of acquiring inputs (limited material and energy resources, together with increasing environmental requirements for these inputs will lead to an increase in their price), ▪ increase costs at risk, because in connection with investing in the field of environmental protection, the company may lose income from other potential investment projects. furthermore, the impact of the implemented measures in the field of environment on productivity, product quality, sales development and company revenues is considered. on the other hand, measures and implemented investment activities in the field of environmental protection can also bring cost savings (savings in material and energy consumption, savings in waste management and savings in environmental protection). these measures can improve the efficiency of business processes, and at the same time, more environmentally friendly production processes can increase the value of the products. this opens up new market opportunities, as well as increased sales prices due to the increased product image and increased customer preference. therefore, all of the above positively affects the profitability and economic performance of the companies. 3. sample description and research methodology the subject of the paper is the research of indicators of environmental performance of sustainable development and the analysis of their impact on the profitability of companies. the starting point is made of the following research questions: are companies heterogeneous in terms of the degree of reporting on environmental performance indicators of sustainable development? 172 a. savić, lj. bonić do the environmental performance indicators of sustainable development affect the profitability indicators of companies? the research aims to determine the degree of impact of reporting on environmental performance indicators of sustainable development on the profitability of companies. in accordance with the aim of the research, the following hypotheses were formulated: h 1. companies are heterogeneous in terms of reporting on environmental performance indicators of sustainable development. h 2. environmental performance indicators of sustainable development significantly affect the profitability indicators of the companies. the research used the secondary data collected in the available sustainable development reports available in the database of the organization for standardization (global reporting initiative) in the period from 2012 to 2020. (https://www.globalreporting.org/database). this research uses a type of descriptive study because researchers want to prove that reporting on the environmental performance of sustainable development affects the profitability of companies. the level of intervention in this study, in which the researcher has not just collected data from two different time periods, is moderate. the horizon of this research is longitudinal, i.e. the data were collected in two or more different time frames and requirements. research can be conducted if the data from dependent and independent variables are collected in two or more time constraints to answer a research question (scott, 2010). the data collection uses dedicated sampling with certain criteria. dedicated sampling is the determination of samples by characteristics and criteria (sekaran, 2011). the criteria for sample selection in this study are as follows: reports on sustainable development of companies are available in the database of the organization for standardization (global reporting initiative) in the period from 2012 to 2020. the registered office of the company is located in europe companies operate within the energy sector sustainability reports of the companies contain financial data for the calculation of the dependent variable. the final sample consists of 60 energy sector companies presented in table 1. the independent variables in this study are indicators of nonfinancial performance of sustainable development (table 2). they were selected in accordance with: ▪ g4 guidelines for reporting on the sustainable development of the global reporting initiative (gri, 2016), ▪ oecd guidelines for the application of transfer pricing rules for multinational companies and tax administrations (oecd website), ▪ ten principles of the global compact in the field of human rights, labor rights, environment and anti-corruption policy (un global compact website), ▪ available database of sustainable development report of the company organization for standardization (global reporting initiative) ▪ data from the official websites of the companies, ▪ selected indicators of sustainable development proposed in the habilitation paper "the impact of the concept of sustainability on the financial performance of enterprises", author michael krechovska, professor at the faculty of economics, technical university of liberka (2017). https://www.globalreporting.org/database analysis of the impact of reporting on environmental performance indicators on the profitability ... 173 table 1 energy sector companies in europe that participated in the survey no company country no company country 1 aem russia 31 lm group denmark 2 areva france 32 lukoil russia 3 bg group england 33 lundin pet. sweden 4 bp england 34 marquard germany 5 cairn energy england 35 maurel france 6 calor gas ltd england 36 moesk russia 7 cepsa spain 37 mol gro. hungary 8 cgg france 38 motor oil greece 9 e2i energie sp italy 39 nexans france 10 edf polska poland 40 nis serbia 11 eesti energia estonia 41 nordex germany 12 enagas s.a spain 42 novatek russia 13 eph czech 43 оekostrom austria 14 engie france 44 okq8 scand. sweden 15 eni italy 45 omv austria 16 equinor asa norway 46 oulun ener. finland 17 erg gruppo italy 47 petrol slov. slovenia 18 fgc ues russia 48 petrom romania 19 fingrid oyj finland 49 prysmian gr. italy 20 fortum finland 50 rauman ene. finland 21 galp energia portugal 51 repsol spain 22 gasum finland 52 royal dutch netherlands 23 gazprom russia 53 saipem italy 24 gazprom neft russia 54 siemens spain 25 ina group croatia 55 sse england 26 inter rao russia 56 state atomic russia 27 jyväskylä en. finland 57 tauron poland 28 kmg inter. romania 58 terna en. greece 29 koncar croatia 59 verbund austria 30 landi renzo italy 60 zse slovakia table 2 environmental performance indicators of sustainable development label indicator е1 indirect energy consumption (in thousands of gj) е2 energy efficiency (in thousands of gj) е3 total water abstraction by source (in thousands of m ^ 3) е4 direct greenhouse gas emissions (in thousands of kg) е5 ozone depleting emissions (in thousands of kg kilogram) е6 other indirect greenhouse gas emissions (in thousands of kg) е7 measured amount of wastewater (in thousands of m ^ 3) е8 total weight of waste by type and method of disposal (in thousands of kg kilograms) е9 total number of significant pollution the dependent variable in this research is the profitability of the company. profitability is the company's ability to make a profit. the indicator of profitability in this paper is the rate of return on total assets (roa), which is defined as the ratio of ebit1 and total assets. 1 ebit (earnings before interest and takes) or earnings before interest and taxes. this is actually the operating profit (operating profit = ebitda depreciation) adjusted for possible non-operating items (± non-operating, 174 a. savić, lj. bonić ebit roa total assets = (1) this indicator provides an answer to the question of whether the company has used its funds efficiently (lee & faff, 2009). many recent studies have used roa to examine the link between sustainable development reporting and company profitability (duquegrisales & aguilera-caracuel, 2019; deng & cheng, 2019; lins et al., 2017). in order to process data, we have used measures of descriptive statistics (arithmetic mean, standard deviation, minimum and maximum) and measures of inferential statistics (correlation analysis and multiple linear regression method). data processing has been performed using the package for statistical data processing in social sciences spss (spss, version 21.0). the results are tabulated. 4. research results descriptive measures of the indicators of environmental performance of sustainable development are shown in table 3, in order to see the minimum and maximum values, arithmetic mean and standard deviation. the average indirect energy consumption (e1) in the analyzed sample is 67,622.35 thousand gj, the lowest energy consumption of 9.80 thousand gj has been recorded in the erg (gruppo erg) company, italy, in 2012 and 2013, while the highest consumption of 692,455.00 thousand gj recorded in the lundin petroleum company, sweden, in 2020. the average energy efficiency (e2) is 2,419.24 thousand gj, the lowest energy efficiency of 0.02 thousand gj has been registered in the erg (gruppo erg) company, italy, in 2012, while the highest energy efficiency of 31,623.00 thousand gj has been registered in gazprom neft, russia, in 2013. on average, the energy sector companies in europe capture 190,310.37 thousand m^3 of water by source (e3), with the least affected water by source at cairn energy united kingdom in 2012 being 2.98 thousand m^3, and the highest in the fortum company, finland, in 2020 being 2,160,020.00 thousand m^3. the average value of direct emissions of greenhouse gases (e4) is 3,471,035.83 thousand kg, while the lowest value of 156.40 thousand kg has been recorded in landi renzo, italy, in 2015, and the highest of 89,801,520.00 thousand kg in inter rao ues, russia. the average value of emissions that deplete the ozone layer (e5) is 2.33 thousand kg, while the lowest value of 0.00 thousand kg has been registered in the company fgc ues (federal grid company of the united energy system), russia, in the period 2012-2014. and the highest of 37.37 thousand kg in the cairn energy company, united kingdom. the average value of other indirect greenhouse gas emissions (e6) is 38,853.37 thousand kg, while the lowest value of 5.90 thousand kg is in the eesti energia company, estonia, in 2015, and the highest of 460,160.00 thousand kg in the inter rao ues company, russia. the average measured amount of wastewater (e7) in the companies of the energy sector in europe is 14,056.84 thousand m^3, with the lowest measured amount of i.e. extraordinary items): ebit = operating profit ± non-operating items. this type of profit excludes the effects of financial transactions and income tax and other taxes payable on profits analysis of the impact of reporting on environmental performance indicators on the profitability ... 175 wastewater recorded in the eesti energia company, estonia, 0.60 thousand m^3, and the highest in omv austria, 256,225.00 thousand m^3. the average weight of waste by type and method of disposal (e8) is 921,069.78 thousand kg, with the lowest weight of waste by type and method of disposal recorded in the koncar electrical engineering institute, croatia, 7.10 thousand kg, and the highest of 14,800,000.00 thousand kg in the jyväskylä energy company, finland. the average number of significant pollution (e9) is 4.29, with the lowest number recorded in enagas sa, spain, 0, and the highest in gazprom, russia, 8. in table 3, we can see that the average value of indicators of environmental performance of sustainable development of companies is relatively declining and that the value of the standard deviation, i.e. deviations between companies are relatively reduced, leading to the conclusion that the companies are working on development of management and reporting on environmental performance indicators of sustainable development, but not to a sufficient extent. table 3 descriptive measures of indicators of environmental performance of sustainable development indicators 2012. 2013. 2014. 2015. 2016. 2017. 2018. 2019. 2020. e1 min 9.80 9.80 10.00 10.90 11.43 11.47 12.01 12.88 12.90 max 678,181.00 507,851.00 532,784.00 473,156.00 657,900.00 660,053.00 687,511.00 690,888.00 692,455.00 m 75,177.95 63,506.40 61,282.29 54,670.94 65,509.69 65,742.31 73,271.36 74,361.85 75,078.32 sd 161,762.18 134,405.35 131,271.44 111,691.95 135,018.85 135,112.16 154,014.79 155,778.88 156,575.26 e2 min 0.02 0.05 0.05 0.06 0.03 0.07 0.08 0.10 0.12 max 29,152.00 31,623.00 28,384.00 22,858.00 26,700.00 27,020.00 27,460.00 27,504.00 27,540.00 m 2,318.27 2,385.50 2,385.73 2,343.00 2,509.09 2,456.20 2,438.61 2,458.53 2,478.26 sd 5,871.33 6,113.81 5,969.87 5,686.11 5,970.49 5,834.07 5,808.68 5,844.16 5,888.48 e3 min 2.98 11.86 35.78 8.82 9.16 9.12 9.13 9.42 9.58 max 2,125,500.0 2,126,000.0 2,120,000.0 2,145,000.0 2,075,000.0 2,090,000.0 2,140,000.0 2,148,900.0 2,160,020.0 m 196,179.98 194,344.70 194,632.34 189,561.37 190,219.18 188,684.66 186,056.18 186,306.96 186,807.92 sd 451,159.91 450,483.99 448,958.13 435,871.92 431,907.88 426,775.97 426,144.47 428,065.35 429,533.61 e4 min 165.12 160.12 158.66 156.84 158.14 162.36 160.08 165.12 160.12 max 89,777,205.0 89,801,520.0 89,706,102.0 89,534,858.0 88,238,279.0 84,558,776.0 81,256,217.0 89,777,205.0 89,801,520.0 m 3,588,523.5 3,533,265.9 3,428,474.6 3,462,106.6 3,397,381.3 3,386,247.6 3,321,533.1 3,588,523.5 3,533,265.9 sd 13,448,245.8 13,185,827.3 12,869,750.4 12,856,368.9 12,617,800.4 12,252,343.8 11,905,500.3 13,448,245.8 13,185,827.3 e5 min 0.00 0.00 0.00 0.02 0.01 0.01 0.01 0.00 0.00 max 18.17 20.05 37.37 35.20 37.20 37.04 36.87 18.17 20.05 m 2.00 2.32 2.67 2.42 2.43 2.40 2.40 2.00 2.32 sd 3.21 3.86 5.88 5.21 5.43 5.40 5.38 3.21 3.86 e6 min 9.70 8.80 8.50 5.90 6.40 6.45 6.55 6.58 7.05 max 460,160.00 448,902.00 452,000.00 401,253.00 443,700.00 356,800.00 335,800.00 335,961.00 336,008.00 m 42,083.47 41,206.57 41,137.22 38,878.18 40,958.43 37,116.13 35,932.14 36,100.24 36,267.94 sd 90,769.08 89,607.24 91,423.67 82,604.71 91,537.20 82,306.13 78,451.46 78,719.86 79,028.17 e7 min 1.10 0.80 0.80 0.60 1.00 1.01 1.20 1.25 1.28 max 180,025.00 175,950.00 198,200.00 215,200.00 256,225.00 236,400.00 241,700.00 246,352.00 246,500.00 m 12,502.39 12,329.71 12,839.24 13,031.31 15,046.49 14,905.51 15,200.91 15,289.33 15,366.70 sd 37,335.50 37,142.44 39,511.19 40,096.70 48,814.35 46,752.20 47,158.89 47,531.80 47,556.52 e8 min 9.10 9.90 8.60 7.10 7.50 8.90 8.70 9.10 9.90 max 13,500,000.0 14,800,000.0 14,800,000.0 13,000,000.0 13,600,000.0 13,700,000.0 13,800,000.0 13,500,000.0 14,800,000.0 m 883,739.16 913,842.58 925,504.10 919,533.13 918,400.65 952,729.06 978,297.58 883,739.16 913,842.58 sd 2,405,677.6 2,535,374.6 2,589,780.8 2,517,964.0 2,518,329.4 2,662,261.0 2,795,825.3 2,405,677.6 2,535,374.6 e9 min 0.00 0.00 0.00 0.00 1.00 1.00 1.00 0.00 0.00 max 8.00 7.00 7.00 8.00 8.00 8.00 8.00 8.00 7.00 m 3.70 3.77 4.20 4.62 4.75 4.97 5.18 3.70 3.77 sd 1.68 1.64 1.76 1.66 1.56 1.67 1.71 1.68 1.64 based on the conducted analysis, it has been determined that the companies are heterogeneous in terms of reporting on environmental performance indicators of sustainable development, which confirms hypothesis 1. 176 a. savić, lj. bonić the results obtained by the research have been statistically processed with an adequate selection of statistical methods, in order to provide an optimal model of perceiving the dependence and differences between the analyzed data obtained in the research. descriptive and inferential statistical analyses have been used in statistical processing. statistical data processing has been performed using the package for statistical data processing in the social sciences spss (spss, version 21.0). in order to test the second research hypothesis which predicts that reporting on environmental performance indicators of sustainable development significantly affects the indicators of profitability (rate of return on total assets roa), multiple linear regression has been applied. before applying multiple linear regression, it is important to determine the degree of agreement between the environmental performances in the sustainable development report. the results of the correlation analysis of environmental performance are shown in table 4. table 4 results of correlation analysis of environmental performance e1 e2 e3 e4 e5 e6 e7 e8 e9 e1 1 0.431 (0.000) -0.062 (0.049) -0.103 (0.016) -0.067 (0.021) -0.037 (0.094) 0.391 (0.000) 0.480 (0.000) -0.050 (0.012) e2 0.431 (0.000) 1 0.057 (0.087) -0.068 (0.012) 0.022 (0.005) 0.200 (0.000) 0.568 (0.000) 0.920 (0.000) 0.155 (0.000) e3 -0.062 (0.049) 0.057 (0.087) 1 0.251 (0.000) -0.066 (0.026) -0.033 (0.048) 0.168 (0.000) 0.042 (0.034) 0.886 (0.000) e4 -0.103 (0.016) -0.068 (0.112) 0.251 (0.000) 1 -0.076 (0.079) 0.496 (0.000) -0.041 (0.040) -0.071 (0.099) -0.210 (0.000) e5 -0.067 (0.021) 0.022 (0.005) -0.066 (0.026) -0.076 (0.079) 1 0.327 (0.000) 0.141 (0.001) 0.011 (0.001) -0.056 (0.091) e6 -0.037 (0.094) 0.200 (0.000) -0.033 (0.048) 0.496 (0.000) 0.327 (0.000) 1 0.338 (0.000) 0.174 (0.000) 0.045 (0.023) e7 0.391 (0.000) 0.586 (0.000) 0.168 (0.000) -0.041 (0.040) 0.141 (0.001) 0.338 (0.000) 1 0.556 (0.000) 0.215 (0.000) e8 0.480 (0.000) 0.920 (0.000) 0.042 (0.034) -0.071 (0.099) 0.011 (0.001) 0.174 (0.000) 0.556 (0.000) 1 0.102 (0.017) e9 -0.050 (0.012) 0.155 (0.000) 0.886 (0.000) 0.210 (0.000) -0.056 (0.091) 0.045 (0.023) 0.215 (0.000) 0.102 (0.017) 1 based on the results of the correlation analysis, it can be concluded that the highest degree of correlation exists between energy efficiency (e2) and the weight of waste by type and method of disposal (e8), followed by the correlation between the total water abstraction by source (e3) and the total number of significant pollutions (e9). a high degree of correlation exists between energy efficiency (e2) and the measured amount of wastewater (e7), as well as between the measured amount of wastewater (e7) and the weight of waste by type and method of disposal (e8). through the correlation analysis, it has been observed that there is an individual dependence between environmental performances in the sustainable development reports of the european companies, which means that the improvement of one environmental performance affects the improvement of other environmental performances. table 5 presents the values of the following indicators: pearson's coefficient of simple linear regression (r). it is 0.406 which shows a linear relationship between dependent and independent variables. since the correlation coefficient is positive, the relationship is analysis of the impact of reporting on environmental performance indicators on the profitability ... 177 positive, i.e. with the improvement of the environmental performance indicators of sustainable development, there is an improvement in the rate of return on total assets roa. the coefficient of determination (r2), which determines the percentage of variability of the dependent variable "roa rate of return on total assets", is explained by a model that includes independent variables "indicators of environmental performance of sustainable development". in this case, that percentage is 65%. f test (31.629) and p (0.000) represent the achieved significance level. as p <0.0005, which is less than the standard significance level of 0.05, we may conclude that the regression model is statistically significant. table 5 results of the impact of environmental performance indicators of sustainable development on the rate of return on total assets (roa) r r2 f-тест p 0.406 0.650 31.629 0.000 table 6 presents the values of the beta coefficients of the independent variable. the highest beta coefficient of the independent variable has the indicator "e4" (0.237), which means that the variable "e4" contributes the most to the prediction of the dependent variable "roa rate of return on total assets". this means that with greater control and informing stakeholders about the indicator of the value of direct greenhouse gas emissions, the company's profitability increases. after indicator "e4", the contribution of predicting the dependent variable "roa" is as follows: indicator "e3" (0.217), "e5" (0.128), "e7" (0.102), "e1" (-0.076), "e2" (0.070), “e8” (-0.053), “e9” (-0.042) and “e6” (0.027). in column p, we have estimated the statistical significance of each independent variable in the regression equation separately. we can see that for all independent variables p < 0.05 and that they are statistically significant in the model, except for the independent variable “e7” (0.067), which has no statistically significant contribution to the model, because p > 0.05. reporting on all environmental performance of sustainable development creates a good image of the company, which leads to greater interest of stakeholders and support of the surrounding community. community support is realized in a form of business licenses and provision of necessary resources to the company. table 6 results of the impact of individual indicators of environmental performance of sustainable development on the rate of return on total assets (roa) indicators unstadardized b beta p (constant) 0.364 0.088 e1 -1.162 -0.076 0.013 e2 -1.152 -0.070 0.017 e3 3.748 0.217 0.016 e4 5.752 0.237 0.000 e5 2.710 0.128 0.004 e6 0.438 0.027 0.043 e7 1.839 0.102 0.067 e8 -0.870 -0.053 0.017 e9 -0.715 -0.042 0.040 178 a. savić, lj. bonić the analysis has found that the indicators of environmental performance of sustainable development individually significantly affect the rate of return on total assets roa, except for the indicator "e7", which has no statistical significance. based on the conducted analysis, it can be concluded that hypothesis 2 is partially confirmed. this leads to the following statement: if the company is constantly working on implementing and expanding the environmental performance reporting system for the purpose of sustainable development, its profitability is not questioned, but significant profit growth is measured. with profit growth, the company is theoretically considered to be able to distribute higher dividends, which positively affects stock returns and increases in their value. relatively speaking, higher profitability means higher company value. high profitability is also one way for a company to achieve prosperity for its shareholders, as it leads to a high rate of return for investors. investors therefore constantly monitor the growth of profits, the growth of the company's value and its environmental performance, in order to make an investment decision. the results of this research are in accordance with purbawangsa & suprasto (2019), wardhany, hermuningsih & wiyono (2019) and sulistyo & yuliana (2019), who state that environmental performance positively affects the company's profitability, which positively affects its value. a high rate of return on total assets employed roa is one of the things that investors look at before providing equity funds to a company. if a company has high profitability, the company is considered to have good future prospects because it is considered capable of providing returns to its shareholders. 5. conclusion this study analyzes the impact of reporting on environmental performance indicators of sustainable development on the profitability of companies. analyzing the average values of indicators of environmental performance of sustainable development of companies, it can be concluded that due to the transience of time, the value has decreased relatively. however, the discrepancies between the values of environmental performance indicators have relatively decreased, leading to the conclusion that companies are working on the development of management and reporting on environmental performance indicators of sustainable development, but not to a sufficient extent. the analysis has found that the companies are heterogeneous in terms of reporting on environmental performance indicators of sustainable development. multiple linear regression has been used to examine the impact of reporting on sustainable development environmental performance indicators on profitability indicators (rate of return on total assets roa). since the pearson's coefficient of simple linear regression is 0,406, it can be said that with the improvement of the environmental performance indicators of sustainable development, there is an improvement in the rate of return on total assets roa. based on the results of the analysis of collected and processed data, it can be concluded that the indicators of environmental performance of sustainable development individually significantly affect the rate of return on total assets roa, except for indicators "measured wastewater (e7)", which has no statistical significance. the data sources used in this study are secondary data collected in the available sustainable development reports available in the database of the organization for standardization (global reporting initiative) in the period from 2012 to 2020. (https://www.globalreporting.org/database). the lack of a sample in this survey is limited https://www.globalreporting.org/database analysis of the impact of reporting on environmental performance indicators on the profitability ... 179 to energy sector companies, so the companies from other industries were not covered by this survey. the research showed that the reporting of the european energy sector companies on environmental performance indicators in the report on sustainable development contributes not only to socially responsible behavior, but also to increasing profitability. this is important for both managers and investors. with this reporting, managers can contribute to a more responsible impact of the company on the environment and increase profits. investors are interested in the company's ability to make a profit even before investing capital, because that will provide higher dividends. since the reporting on environmental performance indicators affects the company's profitability, it is important for investors to know whether the company's image is based on good environmental performance indicators and thus contribute to the community and the well-being of investors. future research on this topic can be extended to other geographical areas, and even conducted on a global scale, and other activities may be included in the research. also, the impact of other non-financial performance (e.g. social, economic, corporate governance performance, etc.) reported in the sustainability report on the profitability of companies can be observed. the independent variables in this study explain only the 65% dependent variable, and there are still 35% of variables outside the model that can explain the company’s profitability. in addition, it is possible to use other indicators of profitability, especially those based on the cash flow concept (e.g. cfroi, present value of future cash flows, cva) or economic profit (eva), which opens the possibility of research in volatile, crisis conditions or allows binding for certain capital markets. references albertini, e. 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savić, lj. bonić analiza uticaja izveštavanja o pokazateljima ekoloških performansi na profitabilnost evropskih kompanija istraživanje u ovom radu je usmereno na analizu uticaja izveštavanja o pokazateljima ekoloških performansi u kontekstu održivog razvoja na profitabilnost kompanija. istraživanje se fokusira na 60 kompanija energetskog sektora u evropi u periodu 2012-2020. godine. za prikupljanje podataka koristili su se izveštaji o održivom razvoju kompanija dostupnih u bazi podataka globalne inicijative za izveštavanje (global reporting intiative – gri). nezavisne varbijable u ovom istraživanju su devet pokazatelja ekoloških performansi održivog razvoja. zavisna varijabla je profitabilnost kompanija, koja se meri stopom prinosa na ukupno angažovana sredstva (roa). u analizi uticaja izveštavanja o pokazateljima ekoloških performansi u kontekstu održivog razvoja na profitabilnost kompanija energetskog sektora u evropi primenjena je metoda višestruke linearne regresije. empirijski rezultati ovog istraživanja su pokazali da izveštavanje o pokazateljima ekoloških performansi u cilju ostvarivanja održivog razvoja pozitivno utiče na pokazatelje profitabilnosti kompanija. ključne reči: izveštavanje, održivi razvoj, ekološke performanse i profitabilnost. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 1, 2016, pp. 101 115 measuring corruption – key issues, data sources and the most commonly used indicators1  udc 343.352 danilo luĉić 1 , nataša golubović 2 , marija džunić 2 1 schneider electric dms ns, novi sad, serbia 2 university of niš, faculty of economics, serbia abstract. corruption is a complex social phenomenon with multiple negative effects on the socio-economic efficiency. therefore, it is a subject of research in various social disciplines. in economic analysis, special attention is directed towards corruption measurement. despite numerous attempts, this issue has not been completely resolved. since corruption is a phenomenon that cannot be directly observed, its measurement is based on indirect signals and subjective perceptions. key problems in measuring corruption relate to the lack of objective data, estimation errors and the problems of establishing a clear link between the measurement results and effective anti-corruption policies. the aim of this paper is to highlight the basic methodological problems and limitations in measuring corruption and provide a theoretical overview of the existing research in this field. key words: corruption, measuring of corruption, perceptions, composite indicators. 1. introduction corruption is a complex social phenomenon that occurs in all countries, developed and developing, both in the public and private sector. it threatens the rule of law, undermines the principles underlying the market economy and endangers the stability of state institutions. the extent of corruption and its socio-economic effects have caused corruption to become the object of study of many scientific disciplines, with the purpose to reach precise conceptualizations of corruption, as well as determining potential ways of its measurement. corruption is one of those concepts that are difficult to define precisely because its manifestations depend on the social context in which corruption occurs. the definition of 1 received february 27, 2016 / accepted march 21, 2016 corresponding author: danilo luĉić schneider electric dms ns, narodnog fronta 25 a, b, c, d, 21000 novi sad, serbia e-mail: lucic.danilo@gmail.com  the paper is a part of a research project supported by republic of serbia ministry of education, science and technological development 102 d. luĉić, n. golubović, m. džunić corruption ranges from the broad terms of misuse of public power and moral decay to strict legal definitions of corruption as an act of bribery involving a public servant and a transfer of tangible resources. it has been studied as a problem of political, economic, cultural and moral underdevelopment. corruption is behavior that deviates from the formal rules of conduct governing the actions of someone in a position of public authority because of private-regarding motives such as wealth, power or status (khan, 1996). corruption is a transaction between private and public sector actors through which collective goods are illegitimately converted into private-regarding payoffs (heidenheimer et al., 1989). it is the sale by government officials of government property for personal gain (shleifer and vishny, 1993). corruption that can be generally defined as the use of public power for individual interest is a complex and multifaceted concept (aidt, 2003). this phenomenon has been seen either as a structural problem of politics or economics, or as a cultural and individual moral problem (andving, et al., 2000). corruption is an act in which the power of public office is used for personal gain in a manner that contravenes the rules of the game (jain, 2001). corruption is an extremely complex social behavior. many methods could be employed in analyzing corruption. even though there is no universal definition of corruption, the general opinion is that it affects the society negatively. the level of corruption in every country is determined by a combination of motives and opportunities for corruption. the motives are primarily determined by social norms that regulate individual behavior, while capabilities depend on the efficiency of the state in creating and implementing rules. in addition to conceptual imprecision, one of the core problems in studying the phenomenon of corruption is related to its measurement. considering that corruption cannot be directly observed or empirically investigated, measuring corruption is based on indirect observations and signals, which may indicate the countries or sectors of the economy where corruption is present (heller, 2009). measuring corruption is closely related to one of its implicit characteristics secrecy. bearing in mind that corruption is an illegal activity; the participants in these transactions have an incentive to keep them undiscovered. it is this feature of corruption that leads to serious doubts about the possibility of its measurement. how to measure something that is hidden?  also, there is the question of whether the measurement refers to the spread of corruption (frequency) or its intensity, measured by the total number of cases of corruption?  key challenges in measuring corruption refer to the lack of objective data, measurement (estimation) errors and the problems of establishing a link between the results of measurement and effective anti-corruption policies. the aim of this paper is to highlight the basic methodological problems and limitations in measuring corruption, as well as to justify the use of certain indicators of corruption.  “i often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the state of science, whatever the matter may be.” (william thompson, 1883)  while not disputing the need to separate these two categories, lambsdorff (2006) believes that there is a strong correlation between them. measuring corruption – key issues, data sources and the most commonly used indicators 103 2. on the importance of measuring corruption beside the existing difficulties in defining corruption, the problems related to its measurement have, for a relatively long time, impeded the comparative analysis of corruption, testing the hypotheses and building a solid and comprehensive theory. measuring corruption is important for several reasons. it helps to establish the extent of the problem, determine whether there are clear patterns in the development of corruption, identify the factors of corruption, and decide upon the necessary measures, or in which direction to focus our efforts in fighting against corruption. without knowing the types of corruption and areas where the problem is most prevalent, we cannot have adequate guidelines for the design of anti-corruption measures. measuring the level of corruption and its monitoring over time provides a basis for assessing the success of anti-corruption strategies. for this purpose, it is necessary to compare the types and levels of corruption before and after the implementation of measures. different approaches in the analysis entail different definitions of corruption. therefore, the measurement of corruption is an extremely complex and complicated process. huberts et al. (huberts et al., 2006: 265) summarized the complexity of this issue in one sentence: "we all agree that corruption is an important and complex phenomenon, and also agree that we cannot agree as to its content." the main reasons for the mentioned difficulties in measuring corruption stem from disagreements regarding the definition of corruption, the hidden nature of corruption and differences regarding which kind of data can serve as reliable indicators of corruption. any attempt to measure corruption across countries requires data that were collected on the basis of a unique definition or understanding of corruption. since corruption is a complex phenomenon which includes various activities, the question is whether a single indicator may cover different dimensions of corruption. it should be noted that significant progress has been achieved regarding the definition of corruption, as well as designing the questions in the questionnaires, in order to achieve full coverage of this complex social phenomenon. measuring corruption is also aggravated by the fact that corrupt practices often remain anonymous. in addition, in the case of corruption there often is no direct damage and the cost of these actions are dispersed to all members of the community. corrupt practices are carried out in secret, without any witnesses, and if there are no witnesses, nothing can be reported, highlights gorta (gorta, 2006: 204). in countries where corruption is endemic, the officials responsible for controlling corruption are themselves corrupt, which makes reporting corruption a risky endeavor. measuring corruption is further complicated by the fact that corruption is adapting to changed circumstances and takes on less visible forms. by focusing on the measurement of one dimension, we can easily miss changes in other dimensions of corruption. in the measurement of corruption, some authors prefer the use of "objective" indicators, such as information about the existence of anti-corruption laws or budget transparency, which do not measure corruption directly, but the opportunities for corruption (kaufmann, kraay, mastruzzi, 2006a). such studies are available for a relatively small number of countries and do not provide an adequate basis for a broader comparative analysis. others rely on "subjective" indicators, such as the perception of citizens and experts about the extent of corruption. it is very difficult to acquire objective indicators of the level of corruption. subjective indicators, which are based on the perception of the relevant actors, 104 d. luĉić, n. golubović, m. džunić are often criticized as unreliable and unclear. however, subjective perceptions are often the only available data we have about corruption, especially in terms of the high level of institutional distrust, when citizens believe that the key institutions of the system, such as the courts and the police, are corrupt and therefore do not report acts of corruption. 3. data sources for measuring corruption numerous international institutions (world economic forum, business international, and transparency international) have developed various mechanisms for measuring corruption, the results of which are used to study the impact of corruption on the quality of governance or economic growth and investment (kaufmann, kraay, zoido-lobatón, 1999a; mauro, 1995). the main problem of empirical research involving corruption is reflected in the lack of objective data. the most common sources of data are subjective estimates of the prevalence of corruption, mostly based on expert assessments, and surveys of the business community. according to the experts of the world bank (kaufmann, kraay, mastruzzi, 2006c) there are three ways in which corruption can be measured: 1) collecting information from relevant stakeholders, 2) monitoring and controlling the use of funds for financing projects by the world bank. 3) monitoring the institutional characteristics of certain countries. there is a difference between “objective” and “subjective” sources of information on corruption. the differences lie in the fact that subjective sources include questions based on the subjective attitudes of the respondents, such as: “in your opinion, is the government corrupt?” contrary to that, "objective" sources contain real facts, based on which precise answers can be obtained (bradburn, 1983). objective sources of information on corruption or any other phenomenon are those that leave no room for any kind of subjective assessments. the largest number of indicators of economic activity is based on objective data: gross domestic product, the savings rate, total investment, the surplus or deficit of the balance of payments. objective indicators are highly reliable because they are based on a unified methodology of data collection. this allows their comparability between countries and over time. one of the preconditions for the existence of such indicators is that the activities they measure are in accordance with the law. in this case, participants in such activities have no incentive to conceal them. the situation is different in the case of activities that violate the law. corruption is a hidden activity and its participants have no incentive to make it public. therefore, the measurement of corruption is largely based on a detailed analysis of subjective indicators of this phenomenon. the key question is what subjective assessments of corruption in a society are based on: perception or experience? subjective indicators can, therefore, be based either on perception or experience. since the surveys are the main source of data for creating subjective indicators, there is a whole range of problems related to the implementation of such surveys, whether in terms of public opinion (households) or the business community surveys. an alternative way of measuring corruption is expert assessment, which can be centralized or decentralized (by country). expert assessments, by definition, represent the perception of corruption, but it is assumed to be a perception of competent respondents. these assessments are based on the responses of experts on issues of corruption in particular countries. measuring corruption – key issues, data sources and the most commonly used indicators 105 similar to previous findings regarding the data sources underlying the indicators of corruption, berg (2001)  also classifies the indicators of corruption in two groups: objective and subjective measures. objective measures are based on credible information. they include current statistics on the number of suspects, arrested and prosecuted in corruptive actions. at first glance, it appears that the reliability of indicators based on personal experience in corrupt activities is higher compared to the indicators obtained on the basis of perception. however, the collection of data on personal experiences of corruption is accompanied by the following problems: the first problem lies in the fact that respondents may have never been in situations where corruption might have occurred. in this case, the negative responses misrepresent the assessment of the level or the prevalence of corruption and lead to biased conclusions. this problem is sometimes solved by creating a representative sample, choosing respondents for whom it is assumed that they could have attended the situations where corruption can occur. therefore, the respondents are more often representatives of the business community, while household surveys are used to a lesser extent. another issue with the use of personal experience of respondents for creating indicators of corruption stems from the fact that respondents are often not inclined to talk about their experiences of corruption, because it implies recognition of participation in illegal activities. for these reasons, in the creation of corruption indicators, respondents' perceptions are an indispensable input. furthermore, the question of the relationship between perception and experience arises. the perception of a particular phenomenon can be seen as a result of a process within which an individual processes and evaluates information acquired on the basis of direct or indirect experience. consequently, individuals’ views on corruption are the outcome of a complex assessment process, which depends primarily on the available information. the specificity of perception is reflected in the following: the more pronounced the perceptions of corruption, the greater the probability that corruption persists and develops in practice. if the corruption indicators rely too heavily on perceptions and not enough on experience, there is a risk of inadequate perception. the reason for this is that the perception of corruption can be affected by various factors. biased estimates of corruption perceptions in surveys can occur, for example, due to changes in the public opinion or political changes. the increase of optimism in society, for example, leads to perceived lower level of corruption, while the election campaign in which political parties accuse each other of corruption can cause citizens to perceive higher levels of corruption than the actual one.  it is obvious that there are a number of factors that affect the perception of corruption and lead to inaccurate and biased indicators. however, notwithstanding these problems, surveys represent a valuable source of data on corruption, not only about its prevalence and intensity, but also on its causes, mechanisms and consequences for participants. for this reason, the methodological problems should not be the cause for rejecting surveys as a method of obtaining data on corruption.  it should be kept in mind that certain data can reflect some other phenomena, such as the efficiency of the police or judiciary, and not necessarily corruption. also, official statistics may be subject to potential manipulations by political structures.  according to knack (2006), economic growth and prosperity can lead to underestimation of corruption by the citizens, while the recession may lead to its overestimation, which produces biased indicators of corruption. 106 d. luĉić, n. golubović, m. džunić most commonly used data on corruption, based on the survey as a means of collecting data, are collected by an international organization for fighting corruption, transparency international. the results of the research conducted in the period from 2012 to 2013, on a sample of 107 countries, show that in the last 12 months, during contact with public services, every fourth respondent (27%) paid a bribe. figure 1 shows the percentage of respondents who reported paying bribes in the past 12 months, across different regions: fig. 1 bribery across regions (in %). source: www.transparency.org as expected, the largest number of cases of paying bribes was recorded in the underdeveloped countries (middle east and north africa), as well as the new democracies. figure 2 shows the prevalence of bribery in particular public services. fig. 2 paying bribes for particular public services (in %). source: www.transparency.org in most countries, the police (31%) and the judiciary (24%) are considered the most corrupt public services. most respondents worldwide believe that their governments are inefficient in fighting corruption and that on this point the situation is constantly deteriorating. this assertion is supported by the fact that 12% of respondents believe that their government is efficient in fighting corruption, while 88% of respondents believes the opposite. http://www.transparency.org/ http://www.transparency.org/ measuring corruption – key issues, data sources and the most commonly used indicators 107 figure 3 shows the respondents' perceptions of corruption of individual institutions. in most countries, political parties as the main bearers of political activity in modern states, are highlighted as the most corrupt organizations (1 = "not corrupted”, 5 = "highly corrupted”). fig. 3 perceptions of corruption in institutions. source: www.transparency.org more than half of respondents (54%) believe that their countries are managed by individuals acting in their own interest and not in the interest of the society. figure 4 shows the responses to the question: how many public officials act in their own interest? fig. 4 to what extent is this country’s government run by a few big interests looking out for themselves? (in %). source: www.transparency.org a large number of respondents express willingness to fight corruption, and as the reason for not reporting corruption the respondents report the following: 15% of them do not know where to report acts of corruption, 35% are afraid of possible retaliation, 45% believe it is pointless to report corruption, while 5% cite other reasons. the data presented above represent an example of subjective data sources for measuring corruption. the indicators based on subjective sources are, on the one hand, useful for raising awareness about corruption and performing scientific analysis, but do not provide clear information about the extent of corruption and areas where it most often occurs. despite these shortcomings, research of corruption in contemporary literature is largely based on the perceptions and experiences of the respondents. http://www.transparency.org/ http://www.transparency.org/ 108 d. luĉić, n. golubović, m. džunić 4. the most commonly used indicators of corruption based on different techniques for data collection, two types of corruption indicators developed and evolved during time: original and composite indicators. original indicators are created on the basis of household surveys and experts’ opinions. table 1 mostly used corruption indicators indicator source coverage world bank investment climate assessment firm level survey 79 world countries world economic forum – competitiveness report firm level survey 80 world countries imd (institute for management development) firm level survey 49 world countries ebrd and world bank beeps firm level survey 24 transition countries gallup international on behalf of transparency international firm level survey 21 transition countries pricewaterhousecoopers opacity index firm level survey and expert opinions 34 world countries international crime victim survey household survey world values surveys household survey global corruption barometer (transparency international) household survey 62 world countries economist intelligence unit (eiu) expert opinions 115 world countries freedom house – nations in transit expert opinions 27 transition countries international country risk guide (icrg) expert opinions 140 world countries world market research centre (wmrc) expert opinions 122 world countries world bank country performance and institutional assessment (cpia) expert opinions 83 countries members of ida columbia university state capacity survey expert opinions 121 world countries indicators of corruption, most commonly used in empirical research, are composite (derived) indicators of corruption. these are indicators that are created by combining several original indicators. there are several reasons for measuring corruption using composite indicators (indexes) (knack, 2006): 1) first, there is a problem of coverage concerning the original indicators of corruption. while some indicators relate to forms of corruption faced by business people, others include forms of corruption faced by households. 2) second, the reason for creating composite indicators of corruption is related to reducing margins of errors in assessing corruption. the former practice of measuring corruption showed that the use of original indicators has been accompanied by a number of methodological problems. these problems lead to measurement errors, which caused corruption indicators to become biased. by combining several original indicators of corruption, their individual biases can be mutually neutralized. a measuring corruption – key issues, data sources and the most commonly used indicators 109 prerequisite for that is that the measurement errors of individual original indicators are mutually independent (the measurement errors are random).  if the measurement errors are correlated and depend on the same variables, the composite indicator will be biased. 3) third, the use of composite indicators of corruption is necessary in terms of the growing number of countries that are the subject of research, which increases the sample in empirical research. derived indicators are also called "second-generation" indicators (johnston, 2001), "composite indicators" (arndt and oman, 2006) or "aggregate indicators" (kaufmann, kraay, zoido-lobatón, 1999a). as johnston notes, this generation of indicators has been developed mainly due to criticism of the previous, original indicators. berg (2001) explains that, in general, a good indicator must meet the following requirements: 1) trustworthiness, which implies that the indicator must be objective and reflect a general rather than personal opinion of one or a few individuals; 2) validity, ie. indicator must measure the phenomena that affect the well-being of the society; 3) accuracy. if the index is prone to large measurement errors, it is bound to be less useful. in surveys, the typical way of improving accuracy is to increase the number of respondents; 4) precision, which is reflected in the fact that each participant understands the questions and that questions do not depend on personal standards. composite indicators have several advantages over the original indicators. kaufmann and kraay (2007) identified four key advantages of composite indicators: 1) providing a broad coverage at the country level. 2) providing a useful summary of a number of different individual indicators. 3) reducing the measurement error in the results caused by specificities of individual indicators. 4) enabling the calculation of explicit margin of errors. there are a number of composite indicators used to measure corruption, although some of them are rarely used, due to their complexity. some of them are:  country ratings (including levels of corruption) within business international corporation report; mauro (1995) was one of the first researchers who used data from bi for studying corruption.  political risk services publishes international country risk guide (icrg) which includes corruption index. tanzi and davoodi (1997) have described and used this index.  transparency international measures the level of corruption in different countries. lambsdorff (1998) describes the methodology for creating this index.  political and economic risk consultancy in hong kong publishes reports about corruption for 10-12 asian countries since 1993. lancaster and montinola (1997) provide brief explanation of this corruption indicator.  world economic forum has published the world competitiveness report since 1989.  if the measurement errors are random, with the increasing number of measurements, the mean value of the error tends to zero. 110 d. luĉić, n. golubović, m. džunić 5. corruption perception index (cpi) as a corruption indicator the most widely used indicator of corruption is the corruption perceptions index (cpi), published by the international ngo transparency international. a list of countries is created on the basis of this indicator that reflects the extent of corruption. it is a composite index, based on a number of independent surveys (18-20 different surveys carried out by independent institutions), which makes this index a more objective measure of corruption, compared to the measures obtained from individual sources. more specifically, the original sources are used as input data for the complex process of weighting results, resulting with relatively reliable comparisons between countries. table 2 data sources used for creating cpi index in 2014 1. african development bank governance ratings 2013 2. bertelsmann foundation sustainable governance indicators 2014 3. bertelsmann foundation transformation index 2014 4. economist intelligence unit country risk ratings 2014 5. freedom house nations in transit 2013 6. global insight country risk ratings 2014 7. imd world competitiveness yearbook 2014 8. political and economic risk consultancy asian intelligence 2014 9. political risk services international country risk guide 2014 10. world bank country policy and institutional assessment 2013 11. world economic forum executive opinion survey (eos) 2014 12. world justice project rule of law index 2014 the composite index is calculated as the arithmetic mean of the results of all the surveys in a country.  in other words, it is a simple mean of all standardized results. the number of data sources and the number of countries covered changes every year. fig. 5 the number of countries and the number of data sources for measuring corruption used in the cpi index. source: http://www.transparency.org/  serbia (ie. fry) was first included in the surveys in 2000 (a total of 90 countries) when it occupied the last place in europe (as the most corrupt state, with the cpi = 1.3). http://www.transparency.org/ measuring corruption – key issues, data sources and the most commonly used indicators 111 for a country to be included in measuring corruption with the cpi, it is necessary to carry out at least three surveys by at least three different institutions. also, the data must not be older than three years. cpi is one of the best measures of corruption because it uses a wide range of sources (wilhelm, 2002). since all the original indicators have their own system of assigning values, these values are firstly normalized in order to reach the scale at which a country without corruption, that is the least corrupt country is assigned the value of 10, while the most corrupt country is assigned the value of 0.  a composite indicator represents the arithmetic mean of all normalized values of the original indicators of corruption.  in addition to evaluating the mean (arithmetic average) of indicators for each country, cpi methodology provides a confidence interval, i.e. the interval in which, with a probability of 90%, the actual value of the composite indicator is placed.  although the ranking of the countries is performed on the basis of mean indicator values, it is recommended to take into account the confidence interval. the countries whose confidence intervals at least partially overlap receive the same rank. despite the changes in the procedures for creating cpi, the final value of this indicator for a country is a simple average of standardized results. 6. criticism of composite indicators of corruption given that the purpose of composite indicators is to precisely quantify the level phenomena which they refer to, they are often the subject of criticism, as well as constant attempts of improvement, in order to overcome deficiencies in measurement. most commonly emphasized disadvantages of composite indicators are: the creation of these indicators on the basis of perception data, imprecision and lack of objectivity in the interpretation of their values. kaufmann and kraay (2007) have identified two substantial drawbacks of composite indicators: 1) difficulties in interpretation of the summarized statistical results and changes in methodology and data sources. 2) the absence of a clear link between reforms implemented in specific areas and changes in indicator values and rankings for a particular country. one of the criticisms of composite indices concerns the data sources upon which they are computed, i.e. the fact that respondents are not able to compare the situation in their country with other countries. under the influence of various factors (culture, ethical standards, etc.), respondents in different countries tend to assess different grades to similar levels of corruption. also, due to the frequent changes in methodology and data sources, there is a problem of creating time series and comparability of data over time. critics of cpi as an indicator of corruption are mostly based on the changing number of countries involved in the ranking every year, which makes the ranking, i.e. the position of the country less important than the index value. in other words, the number of countries covered by these measurements changes each year, which may affect the rank of individual countries even if there has been no change in the level of corruption in that country  in 2012, the methodology has changed so that the countries are ranked on a scale of 0-100.  a detailed description of the methodology used to form the cpi can be found in: lambsdorff (2006b).  assuming positive correlation between original indicators of corruption, a larger dispersion of the values causes the higher standard error and therefore the wider confidence interval. 112 d. luĉić, n. golubović, m. džunić (compared to others). similarly, the data is relevant for three years, which means that the data become obsolete after the expiry of that period. in such circumstances, the assessment of corruption due to inertia remains the same, regardless of possible changes in the level of corruption, which reduces the reliability of the cpi. some of frequently mentioned disadvantages of composite indexes are: unclear specification of geographical areas covered by measurement, the absence of a clear link between corruption indicators and indicators of socio-economic development and ignoring differences between different types of corruption (administrative and political, petty and grand corruption). thompson and shah (2005) point out that there are many limitations in measuring corruption, due to various methodologies, reliability of data sources and problems in defining corruption. according to them, large standard errors of composite indices bring into question creation of any kind of meaningful rankings and comparability between countries and over time. they also point that it is unclear what cpi is measuring and averaging. the cpi cannot always predict where the corruption will occur. even in countries with high values of cpi (low levels of corruption), the firms may have problems with corruption. for example, the multinational company siemens had an experience with corruption in the ministry of defense of norway in connection with the delivery of equipment in 2001. the appearance of corruption in the public institution of the country with a low level of corruption was completely unexpected. also, one of the major problems with creating the index is reflected in the fact that the questionnaires used for data collection on corruption are mostly focused on those who take bribes, rather than those who pay bribes (andersson and heywood, 2009). paying bribes can be a form of proactive behavior of economic actors aimed at securing business contracts. generally speaking, the arguments against the use of the cpi as a measure of corruption are:  indicator value is determined only on the basis of perceptions about taking, but not giving bribes.  difficulty in comparing countries and data sources.  nonrepresentativeness of the sample.  imprecise and sometimes ignorant sources.  the narrow definition of corruption. the cpi index is based on perceptions of the respondents that are believed to be directly confronted with corruption, rather than on empirical indicators (such as the number of completed investigations or trials). in criticizing the cpi, it is specifically noted that its diagnostic value is additionally reduced by emphasizing the role of experts as a source for getting information. cpi reflects views of the experts and business people on trust in institutions, rather than the views of citizens (households). however, there are opinions that experts have limited insight into the prevalence of petty corruption, unlike ordinary people. therefore, it is pointed out that the experts’ perception of corruption differs from the views of citizens and households. despite numerous criticisms, the results of research conducted by transparency international in 2008 speak in favor of the cpi as a reliable measure of corruption, since there is a strong correlation between citizens’ experiences with corruption and the experts’ perception of corruption. figure 7 shows the correlation between the results obtained by the research based on the experiences of citizens with corruption in 2008, published in the global corruption measuring corruption – key issues, data sources and the most commonly used indicators 113 barometer report, and the results obtained on the basis of expert opinions published in the ti corruption perception index report for 2008: fig. 7 correlation between data on corruption experience and data on experts’ perception of corruption. source: http://www.transparency.org/ this study has confirmed that, in countries where business people, analysts and experts perceived a high level of corruption, a large percentage of the population had direct experience with corruption, too (bribery in the aim of providing public services). this confirms that the expert assessments are in accordance with citizens' experiences in terms of corruption, indicating the reliability of the cpi as a measure of corruption. therefore, the cpi is still the best known and most widely used index for measuring corruption around the world. the biggest success of transparency international is raising public awareness of the issue of corruption. in this sense, it is suggested that flaws in measuring influential social phenomena, such as corruption, cannot be compared to the benefits of informing the public about the necessity of solving this problem. conclusion despite the specified arguments against relying solely on the composite indices in measuring social phenomena, there is still a tendency within contemporary social research, to sublimate various sources of data about corruption into a single indicator that would allow comparison of the level of corruption between countries and over time. the criticism aimed at these indicators is a part of continued efforts for improving the process of measuring corruption. the intrinsic value of the cpi is reflected in the fact that it indicates the countries where reforms are necessary, even though it cannot accurately inform policy-makers about specific forms or areas where corruption occurs. specificity of measuring corruption, as a complex social phenomenon, is reflected in the need to collect various data from multiple sources. measuring corruption includes not only the level (intensity) of corruption in general, but also a precise quantification of the levels of particular types of corruption, the analysis of the mechanisms of corruption, as well as determining direct and indirect costs of corruption. in this sense, creating a unique http://www.transparency.org/ 114 d. luĉić, n. golubović, m. džunić indicator of corruption must be accompanied by efforts aimed at exploring different forms, types and mechanisms of corruption. the priority regarding improvements in measuring corruption should be standardization of indicators in time, in terms of coverage, questionnaires and samples used in the surveys, in order to create conditions for the analysis of time series and gain insight on changes of corruption over time, as well as the key factors of these changes. this 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(2002) international validation of the corruption perceptions index: implications for business ethics and entrepreneurship education, journal of business ethics 35(3):177-189. merenje korupcije – kljuĉni problemi, izvori podataka i najĉešće korišćeni indikatori korupcija predstavlja složenu društvenu pojavu sa višestrukim negativnim efektima na društvenoekonomsku efikasnost. iz tog razloga, korupcija je predmet istraživanja različitih društvenih nauka. u okviru ekonomske nauke, posebna pažnja usmerena je na merenje korupcije. uprkos brojnim pokušajima, ovo pitanje nije još uvek u potpunosti razjašnjeno. pošto korupciju nije moguće direktno meriti, merenje ove pojave zasniva se na indirektnim observacijama i subjektivnim percepcijama. ključni problemi u merenju korupcije odnose se na nedostatak objektivnih podataka, greške u merenjima i teškoće u uspostavljanju jasne veze između rezultata merenja i efektivnih politika borbe protiv korupcije. cilj ovog rada je da ukaže na osnovne metodološke probleme i ograničenja u merenju korupcije, kao i da pruži jedinstven teorijski pregled dosadašnjih istraživanja iz ove oblasti. kljuĉne reĉi: korupcija, merenje korupcije, percepcije, kompozitni indikatori. http://go.worldbank.org/i1rtmzyua0 http://www.transparency.org/ plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 1, 2017, pp. 31 41 doi: 10.22190/fueo1701031p original scientific paper money multiplier impact on inflation in republic of serbia1 udc 336.748.12(497.11) dušan perović * , marina đorđević faculty of economics, university of niš, serbia abstract. the essential research intention in this paper is oriented toward considering the nature of money multipliers and their impact on inflation in republic of serbia. the analysis of research data includes data during period of 1997-2015 in order to achieve more effective results. obtained results, after implementing adequate statistical procedures, emphasize the existence of negative and significant correlation between money multiplier m3 and inflation. since m3 represents basis for forming m3 multiplier, this implicates that wider range of assets in monetary aggregate m3 have greater impact on inflation than other two monetary aggregates. therefore, one of tasks for central banks should be higher control of m3 through m3 money multiplier analysis in order to prevent higher fluctuations in inflation rate. key words: money multiplier, core inflation, m1, m2, m3, monetary base, central bank jel classification: e41, e51, e58 introduction monetary stability represents one of crucial tasks for every central bank. dynamic and uncontrolled increase in money supply can create troubles for home economy, where all economic calculations must be revised again and all effects of current economic policy will not bring expected results. in conditions of increased inflation, concern investors are starting to pull out their assets and to look for other places where they can invest them. stable macroeconomic environment means a reasonably low inflation rate and small budget deficit that are conductive to sustained economic growth. on the other hand, high inflation reduces growth by reducing investment rate, but it also reduces productivity growth rate 1received october 08, 2016 / revised november 11, 2016 / accepted january 11, 2017 corresponding author: dušan perović * phd student faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: bokaperovic@yahoo.com 32 d. perović, m. đorđević (fischer, 1993). small economies have much bigger problem in dealing with inflation, since they do not possess adequate mechanisms that can effectively solve inflation problem. also, these countries are very vulnerable to changes at international markets that can lead to huge turnover in future economy growth. narrow money (m1), broad money (m2) and broader money (m3) represent basic parts of every country money supply. the analysis of these monetary aggregates can help central banks understand changes in money supply and demand better, and take right measures in direction of preventing possible monetary crisis. in the past, many monetary crises had strong impact on national economies and in the end they resulted in increased unemployment rate, inflation and recession. by putting monetary aggregates in proportion with monetary base or reserve money (b), proper money multiplier is obtained. this ratio helps in analyzing changes in money supply and demand, but also in monetary habits of population of certain countries. for each monetary aggregate there is a money multiplier that provides more information about changes in money supply and thus we have m1, m2 and m3 money multipliers. periods of financial instability have radically changed overall monetary environment. in a situation when larger banks cannot meet their obligations it is the first signal that something is not right. they could face with huge withdrawal of deposits which could have terrible consequences for the banking market. this can be seen through money multiplier change whose role in monetary system stability is very important. with lower amount of broad money, central bank must react in order to avoid deeper monetary crisis. after the outbreak of crisis in 2007, usa, eu and japan had dramatic decline in money multiplier. at the beginning this was the result of spontaneous financial disintermediation caused by the crisis, but in subsequent years this effect was magnified by prudential regulations (dabrowski, 2016, p.16). all three major banks have reacted with increase in base money, but also with partial increase of m1 and m3 aggregates from time to time. economic growth was still at very low level, but this helped countries escape from recession. the central research aim of paper is to determine the connection between money multiplier and inflation in serbia that was measured through core inflation since it includes many goods and products with non-regulated process. consequently, additional research objectives are set:  to identify the direction and strength of connection between money multipliers and core inflation in republic of serbia;  to identify the relations between money multipliers for each monetary aggregate; the research methodology involves the use of appropriate statistical procedures due to the characteristics of selected variables and number of observations in the sample. in this case linear regression, with the assistance of descriptive statistics, pearson r coefficient and beta (β) coefficient, the direction and strength of connection between the variables will be determined. also, it will be discovered whether all variables have statistically significant impact on basic inflation. taking into consideration the research methodology and period of analysis which involves many events that have had impact on changes in money multiplier and basic inflation (such as beginning of transition process, a few political instabilities, global economics crisis, floods etc.) following hypotheses will be tested: h1: there is a negative correlation between all money multipliers and core inflation. h2: there is a negative and statistically significant relationship between m1 and core inflation. h3: there is a negative and statistically significant relationship between m3 and core inflation. money multiplier impact on inflation in republic of serbia 33 the structure of the paper includes three more chapters besides introduction and conclusion. in the first chapter literature review will be presented where different authors discuss money multiplier and its impact on various indicators. the second chapter provides detailed analysis of money multiplier and basic inflation in serbia with strong emphasis on events that led to changes in monetary multiplier and basic inflation and their later impact on domestic economy. in the third chapter, money multiplier impact on basic inflation in serbia is analyzed with proper statistical procedures. that analysis will provide a few recommendations for better monetary stability in serbia. 1. literature review modern economies are fully aware of the connection between monetary and real sector. the sensitivity of monetary sector lies in fact that when money supply is not controlled properly and when wrong decisions are taken, it can cause big problems for domestic economies. sometimes low money supply can also be a problem because economies do not have adequate mechanisms to direct money supply to sectors where there exists real need for assets. money multiplier is one of the best ways to follow changes in money supply and it is also a subject of interest for many researchers. hossain (1993) developed a money multiplier model of the money supply for bangladesh using quarterly data from 1972-1993. using a component approach of the money multiplier, the author finds that only deposit-currency ratio equation is stable, but the narrow and broad money multiplier equations are found to be unstable. the author argues that the instability in the components of money multiplier makes it difficult for the monetary authority in bangladesh to effectively conduct monetary policy through monetary targeting. he suggested that the central bank should make an effort to stabilize the value of the money multiplier for effective monetary conduct. the connection between money multiplier and inflation rate in japan during 19852004 period was analyzed by ilda (2005). research showed that from 1991 to 2004 money multiplier constantly declined because of strong deflation expectations. on the other hand, low money multiplier also resulted in a cash ratio raise of the non-financial sector and the excess reserve possession of banks. in the years after 2000 money multiplier accelerated on a short term due to low deflation expectations. author also found that the validity of “the bad loan hypothesis” is very low as an explanation for the sharp fall of the money multiplier and that monetary policy was too tightening for implementing proper measures. in their research, polster and gottschling (1999) investigated the stability of the german money supply during 1991-1998 through money multiplier. study showed that m3 and bundesbank main operating instrument – the overnight rate have significant long-term relationship which indicates that changes in overnight rate can have strong impact on m3. however, the increasing money multiplier reflects the rising importance of influences on the german money supply which are not fully controllable by the bundesbank. controlling the money supply became very difficult during the 90s, but still some financial innovations that appeared after german unification were in position to guarantee price stability. hon chu (2006) examined the canadian experience with money multiplier during 1970-2004, where a zero reserve requirement regime has become fully effective since 1994. the findings showed that all money multipliers, except m1, under new regime have 34 d. perović, m. đorđević become less volatile than before. furthermore, short and long-term ex ante forecasts based on the holt-winters exponential smoothing model indicate that the money multipliers have apparently not become more unpredictable. overall, the findings do not lend strong support to the monetary control argument for reserve requirements. the long-term stability of money multiplier in india during 1978-1996 was tested by darbha (2002). most empirical studies have examined long-term stable relation between monetary aggregates and reserve money within the framework of cointegration and have interpreted their inability to reject the hypothesis of no cointegration as an indication of instability in money multiplier. contrary to all previous studies, author proved the existence of a stable, but time-varying long-term relationship between monetary aggregates (m1 and m3) and adjusted reserve money. the results also indicate that observed variation in parameters could be characterized by a discrete shift around 1989, generated possibly by discrete changes in the conduct monetary policy such as the removal of controls on interest rates in the interbank call money ceiling rates in inter-bank money markets or deregulation of deposit rates. money multiplier model for pakistan, using monthly data covering the period from 1972 to 2009, was tested by khan (2009). the results showed that money multiplier was non-stationary for entire period. cointegration between money supply and monetary base was also tested. the coefficients restrictions β0=0 and β1=1 are satisfied only in postliberalization period (1992-2009). this implies that the monetary authorities may control money supply by controlling the reserve monetary to achieve the price stability. the monetary authority used many mechanisms to control money supply growth by controlling the growth of base money to achieve the objective of price stability in short-term. the author recommended consideration of relationship between money supply and reserve money as a policy guide rather than the constancy of the money multiplier for the conduct of the monetary policy in short-term. downes et al (2006) examined the stability of money multiplier for six african countries using non stationary tests without and with structural breaks. they find that, when structural breaks are ignored, the null of unit root hypothesis is accepted while it is rejected when structural breaks are taken into consideration. in their study, adam and kessy (2010) discussed the stability and predictability of m2 multiplier in the context of a reserve money anchor for inflation in tanzania. analysis showed that m2 multiplier is stable over the long run so average broad money has grown one-for-one with reserve money. however, in a short run multiplier is not so constant. negative correlation between base money and the multiplier attenuates the impact of changes in base money on broad money so full pass-through should be taken around 24 months. the components of m2 multiplier are strongly seasonal, so monetary authorities must react on time to avoid huge variations in multiplier that can cause serious inflation growth. the stability of money multipliers in turkey for the period of 1990-2004 was investigated by saatcioglu (2006). the results showed that the processes that extend the basic money supply to the final monetary aggregates are unstable, decreasing the effectiveness of monetary policies implemented by the turkish central bank. in addition, the co-integration analyses showed that there are no long run relationships between the sub-components of money multipliers and money supply measures, indicating that traditional monetary theory prescriptions cannot be used to implement monetary policy in turkey. zhang and ruan (2013) have gone a step forward and analyzed the influence of electronic currency on money multiplier in china from 1993 to 2004. narrow money multiplier (m1) has negative correlation with cash deposit ratio (rc) which demonstrates the rapid development money multiplier impact on inflation in republic of serbia 35 and extensive use of e-money decreasing the cash deposit ratio and then enlarging money multiplier. the narrow money multiplier has positive correlation with e-money utilization ratio, which demonstrates the higher e-money utilization ratio causing the greater money multiplier. consequently, the rapid development and extensive use of electronic currency, to some extent, does have an impact on money multiplier. 2.money multiplier background in serbia the complexity of money multiplier lies in the fact that it is partially controlled by central banks. bearing in mind that central bank has high degree of control over reserve money, this practically means that money multiplier is stable and money stock can be precisely controlled (đurović – todorović & đorđević, 2010, p.137). otherwise, money multiplier can be unstable and unpredictable, which creates a hard task for central bank in order to control money supply. money multiplier can be presented through following formula: in presented formula m is money multiplier, m money stock or overall sum of monetary aggregates and b reserve money or monetary base. in normal conditions, money multiplier has a positive sign and value above one, but it is more often positive and just above zero. fewer variations between variables will make money multiplier more stable. another important element in the money multiplier model which has been analyzed by a number of researches is the direction of causality between m and b in implementing a reserve money program, to ensure that the growth rate of b is not an endogenous variable in such a way that causality runs from money supply to monetary base. this is the case, for example, when the monetary base is essentially influenced by currency to deposit ratio and the private sector portfolio decisions. money multiplier analysis must include determinants that cause certain behavior of banking and non-banking subjects, since they can provide better view into money supply structure (kožetinac, 2009., p.573). factors that determine money multiplier are (mishkin, 2004, p.378): 1. currency ratio (c), 2. excess reserve ratio (e), 3. required reserve ratio (r). an increase in c ratio means that depositors are converting some of their deposits into currency. checkable deposits undergo multiple expansion while currency does not. when checkable deposits are being converted into currency, there exists a switch where one of money supply components undergoes multiple expansion to one that does not. overall level of multiple expansion declines and so does its money multiplier. this way money multiplier is negatively related to c ratio. same as c ratio, e ratio also has negative correlation with money multiplier. when e ratio increases, this means that banking system has fewer reserves to support checkable deposits. in these conditions, banks will contract their loans which will cause a small decline in level of checkable deposits, but it will also cause a decline in money supply and money multiplier. if c ratio increases, the same level of reserves cannot support a large amount of checkable deposits because 36 d. perović, m. đorđević deposits will always be on higher level when required reserves start to grow. due to these circumstances banks will be pushed to contract their loans which will cause a decline in deposits and hence in the money supply. at the end, with less multiple deposit expansion, money multiplier will fall and so we have negative correlation between money multiplier and r ratio. for the theory to hold, the amount of reserves must be a binding constraint on lending and the central bank must directly determine the amount of the reserves (mcleay et al., 2014, p.15). this way banking reserves will have impact on money multiplier. this description of the relationship between monetary policy and money can be found in many introductory textbooks, where central banks determine the quantity of broad money via a “money multiplier” by actively varying the quantity of reserves (benes & kumhof, 2012). in that view central banks choose the quantity of reserves which are then “multiplied up” to a much greater change in bank deposits as banks increase lending and deposits. table 1 money multiplier values in serbia for 1997-2015 period m1 m2 m3 1997 1,01 1,35 1,74 1998 0,76 1,05 1,51 1999 0,90 1,13 1,51 2000 0,46 0,56 1,12 2001 0,70 0,82 1,51 2002 0,92 1,09 1,89 2003 0,86 1,08 2,12 2004 0,75 0,99 2,18 2005 0,58 0,77 1,85 2006 0,50 0,70 1,60 2007 0,57 0,89 2,06 2008 0,47 0,77 1,93 2009 0,48 0,82 2,26 2010 0,47 0,76 2,53 2011 0,48 0,80 2,48 2012 0,49 0,77 2,62 2013 0,60 0,85 2,67 2014 0,71 1,01 3,06 2015 0,77 1,08 3,07 source: calculation made by authors money multiplier values in serbia showed same direction of changes, with the exemption of m3 for some years. for most of analyzed period m1 and m2 multiplier values were under 1, which tells that monetary expansion was not so dynamic in a way of securing more funds that could at the end lead to higher money multiplier value. contrary to m1 and m3 multiplier in table 1 it can be seen that m3 multiplier volatility is far more stable than other two multipliers (although it includes more monetary variables). values for m3 multiplier are above 1 and in last two analyzed years are even above 3, which is a good result. for better understanding of money multiplier volatility, some facts must be added. cash versus deposit proportion is very useful in examining multiplier, where higher proportion of deposits can raise multiplier value. it is assumed that final proportion should be 70:30 or higher in favor of deposits, but this was not a case in serbia for a long time. money multiplier impact on inflation in republic of serbia 37 during the 1990s wars, hyperinflation, banking frauds and low economic activity spread the use of cash money leaving very little space for deposits. by the beginning of 2000s, things went better and with revitalized banking system, share of deposits started to grow. the outbreak of global crisis also was felt in serbia with low gdp growth and increased unemployment. central bank was forced to increase reserve requirements several times in order to prevent problems in banking system and this decision caused money multiplier fall. from 2012 money multipliers are on constant rise, but huge presence of gray economy blocks further increase of money multiplier, so this problem has to be solved. only in that way monetary expansion will speed up and banks can provide more assets for big investments. in the end, money multiplier will continue to grow and it will be at more stable level. graph 1 core inflation during 1997-2015 period for a better look at money multiplier determinants, core inflation is included in whole story. national bank of serbia (nbs) uses exclusion method for core inflation calculation. in this process from calculation are excluded all agriculture products, electricity, coal and natural gas, cigarettes, milk, medicines, postal services and all other products and services whose prices are under some kind of state regulation (maravić et al, 2009, p. 99). graph 1 shows that core inflation was very high during the first three years of analyzed period, but then inflation rate was reduced to more reasonable level with several fluctuations during the remaining period. comparing to money multiplier values, core inflation rate raised when money multiplier value declined.reversely, rate reduced when multiplier increased. linking core inflation with money multiplier, it should be mentioned that a large increase in the quantity of required reserves in the banking system should not be inflationary, since the central bank can adjust short-term interest rates independently of the level of reserves (keister & mcandrews, 2009). in developing countries, central banks need a lot of time to adjust their mechanisms in order to calculate the exact level of reserves that will not create higher inflation rate, so this work can request some detailed analysis. 3. methodology and results the research presented in this paper includes data about money multiplier and core inflation from 1997 to 2015. for the purpose of research, data were used from nbs publication statistical bulletin that is published on a monthly base. values for each money multiplier are calculated on the basis of each monetary aggregate and reserve money for every year. the methods that are used in order to conduct analysis are: descriptive statistics, correlation analysis and linear regression. 0 20 40 60 80 100 120 1997 2000 2003 2006 2009 2012 2015 38 d. perović, m. đorđević table 2 descriptive statistics n min max mean std. dev statistic statistic statistic statistic statistic m1 19 0,46 1,01 0,6568 0,17817 m2 19 0,56 1,35 0,9100 0,18980 m3 19 1,12 3,07 2,0908 0,54452 core inflation 19 1,60 112,12 18,4368 28,28367 valid n (listwise) 19 source: calculation made by authors since variables include period of 19 years, values for all variables in that period were analyzed. as for variables values, their ranges can be seen in table one and so we have range 0,46-1,01 for m1, 0,56-1,35 for m2 and 1,12-3,07 for m3. due to bigger content of variables, m3 multiplier has higher values than other two variables. core inflation has values in range from 1,60 to 112,12. among the variables, m3 and core inflation have the highest mean and standard deviation value. table 3 results of anova analysis model sum of squares df mean square f sig. regression 6656,517 3 2218,839 4,298 0,022 residual 7742,868 15 516,191 total 14399,384 18 source: calculation made by authors based on table 3 and the coefficient value p<,05 existence of statistically significance for this model and its variables is confirmed. this means that proper linear regression and correlation coefficient analysis can be implemented with different results for each variable. in this model core inflation is selected for dependable variable, while m1, m2 and m3 are undependable variables. table 4 correlation analysis m1 m2 m3 core inflation m1 pearson correlation 1 sig. (2-tailed) n 19 m2 pearson correlation 0,927 ** 1 sig. (2-tailed) 0,000 n 19 19 m3 pearson correlation -0,120 0,105 1 sig. (2-tailed) 0,625 0,659 n 19 19 19 core inflation pearson correlation -0,022 -0,210 -0,656 ** 1 sig. (2-tailed) 0,927 0,387 0,002 n 19 19 19 19 ** . correlation is significant at the level 0.01 (2-tailed) source: calculation made by authors money multiplier impact on inflation in republic of serbia 39 results illustrated in table 4 show that core inflation has negative correlation with all money multipliers. with this view the hypothesis h1 is confirmed, there is a negative correlation between all money multipliers and core inflation. here must be taken a note that although the negative correlation exists, only m3 has statistically significant relation with core inflation (0,002) and that relation is the strongest among variables (-0,656). this way the hypothesis h3 is confirmed also, because negative and statistically significant relation between m3 and core inflation really exists. on the other hand, h2 can be rejected, because although there is negative relation between m1 and core inflation, there is no statistical significance. it is also interesting that only m1 and m3 have strong and statistically significant relation (0,927) between themselves and not with m3 or core inflation. multipliers m1 and m2 have just a little difference between themselves, since m2 aggregate, in addition to m1 includes other dinar deposits, both shortand long-term. on the other hand, m3 aggregate includes shortand long-term foreign currency deposits beside m2, which makes a difference to other aggregates. this is why m1 and m2 multipliers are so close in their relations than m3 multiplier. table 5 coefficients table model unstand. coefficients stand. coefficients sig. 95% confidence interval for b collinearity statistics b std. error beta lower bound upper bound tolerance vif (constant) 107,656 31,766 0,004 39.949 175,383 m1 56,844 98,090 0,358 0,576 -152,229 265,917 0,094 10,651 m2 -72,024 91,927 -0,483 0,446 -267,961 123,914 0,094 10,651 m3 -29,194 12,136 -0,562 0,029 -55,061 -3,327 0,656 1,523 source: calculations made by authors to discover the true impact of money multipliers on core inflation, linear regression was used. with core inflation as dependable and money multipliers as independent variables, based on table 5 only m3 multiplier has statistically significant impact on core inflation. also, m3 multiplier is the only one that does not show multicollinearity. single increase in m3 multiplier by 1% will decrease core inflation for 0,562. this can be explained in a way that when multiplier starts to grow overall deposits start to grow, too. increased deposits do not have impact on core inflation on a short-term, but in future they will be activated for different kind of ventures so the final result will be increased core inflation rate. conclusion and recommendations money multiplier is a very important tool in monetary policy. with setting up the level of reserve requirements central banks want to send an effective message to market participants that they carry about domestic monetary stability. central bank role must be very strict, because modern way of business requests from banks to decide first what profitable opportunities for them are and then how to attract more deposits in order to lend money for clients. uncontrolled creation of money can cause big inflation problem, so central bank sometimes must use all available mechanisms to prevent money supply from becoming “overheat problem”. when central banks follow changes in money multiplier, it will be easier for them to react right on time and to slow down potential inflation increase. 40 d. perović, m. đorđević serbia was struggling with inflation for a very long time due to many circumstances. lack of banking deposits created problem for nbs, because in one moment it could not control overall money supply and demand, because people relied on using cash for their payments. things have changed through time and money multiplier became stable, which is a sign of monetary recovery. also, inflation rate has been low for several years and these changes have created good basis for future progress of domestic economy. next big task for central bank will be to create efficient mechanisms that will prevent huge amount of “hot money” from increasing inflation and to set up money multipliers on a level that cannot harm monetary stability of the country. in this study following research results were achieved:  by correlation analysis, hypothesis h1 was confirmed, which means that all money multipliers have negative correlation with core inflation with m3 multiplier as the only one that has statistically significant relation with core inflation.  analysis also showed that m1 multiplier has negative relation with core inflation, but since it is statistically significant, hypothesis h2 should be rejected.  correlation analysis and linear regression showed that m3 multiplier has negative and statistically significant relation with core inflation so hypothesis h3 is accepted. also, results of research are providing answers to all the objectives set in the introduction:  all money multipliers have negative correlation with core inflation.  among money multipliers m3 has the strongest (-0,656) and the only statistically significant one (0,002).  between m1 and m2 multiplier there exists very strong (0,927) and significant relation, which is not the case for the rest of relations with money multipliers. this study recommended that: 1. central bank should continue with tightening up the reserve requirements during period of crisis, but this should be also done in a period of dynamic growth so trap with “hot money” couldbe skipped. 2. government and authorities must work on reducing gray economy, since it can stir up more cash use, whichcan create inflation in the future. 3. interest rate must be regulated in such a way that it is neither too low nor too high in order to avoid inflation rate raise, but also to motivate market participants to be more active on the market. 4. currency swaps and exchange must be regulated in such a way that sudden changes in exchange rate do not harm total amount of money in a very serious way. 5. banking system must be more rational in a way that planning assets must come first and then directions for profitable projects. with additional regulation, banks will be stopped from investing funds into some dangerous projects that will lead them to bankruptcy and create bigger money supply that will become a problem for central bank to control. since m3 multiplier has the strongest impact on core inflation, in further research structure of m3 multiplier should be analyzed with more detail in order to see which component of single m3 aggregate has strong impact on core inflation. further research should also analyze money creation in serbia in context of attracting potential foreign investments and their possible impact on serbian monetary system. money multiplier impact on inflation in republic of serbia 41 references adam, c., kessy, p. 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(2013). the influence of electronic currency upon money multiplier by empirical analysis. management & engineering, 13, 51-56. uticaj monetarnog multiplikatora na inflaciju u republici srbiji osnovna istraživačka namera ovog rada usmerena je na analizu prirode monetarnog multiplikatora i njegov uticaj na inflaciju u republici srbiji. kako bi se postigli efektivniji rezultati u analizu su uključeni podaci za period 1997-2015. rezultati istraživanja do kojih se došlo primenom odgovarajućih statističkih postupaka naglašavaju postojanje negativne i statistički značajne korelacije između m3 monetarnog multiplikatora i inflacije. kako monetarni agregat m3 predstavlja osnovu za izračunavanje m3 monetarnog multiplikatora, ovo ukazuje na to da veći broj elemenata unutar m3 monetarnog agregata imaju daleko veći uticaj na inflaciju u odnosu na druga dva monetarna agregata. zato je neophodno da centralna banka posveti veću pažnju kontroli m3 monetarnog agregata i da prati promene unutar m3 monetarnog multiplikatora kako bi se sprečile veće fluktuacije u stopi inflacije. ključne reči: monetarni multiplikator, bazična inflacija, m1, m2, m3, monetarna baza, centralna banka. facta universitatis series: economics and organization vol. 18, no 4, special issue, 2021, pp. i ii © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd editorial sustainable finance, insurance and reporting aim to consider various environmental, social and governance issues that can impact both the sustainable growth of the company and sustainable development of the global financial system and the overall economy. sustainability is no longer just an issue managed by the social responsibility departments of individual companies; it became a part of the core business of entire industries. due to its strong influence, sustainable finance is assumed to play a central role in introducing sustainability standards across the board. at the same time, investors increasingly require a broader range of information that go beyond the framework of traditional financial reporting in order to link companies’ strategy, governance, environmental and social performances to their long-term competitive advantage and value creation. financial institutions, in particular insurance companies, have recognised the importance of sustainability and endeavour to integrate esg standards into their strategy, operations and risk management. this special issue of the journal facta universitates, series: economics and organization offers a selection of papers presented at the sufin conference held at the university of niš, may 24, 2021, organized within the jean monnet module sustainable finance and insurance: eu principles, practices and challenges (sufin), the erasmus+ programme of the european union coordinated by the university of niš (project reference: 611831-epp-12019-1-rs-eppjmo-module). the conference brought together academics from seven countries and eleven universities to discuss recent research on a broad array of topics on sustainable finance, insurance and reporting. from the papers submitted to the special issue of the conference, three guest editors in cooperation with editor-in-chief of the journal and a large panel of reviewers, selected 7 papers for publication. the first contribution to this issue, titled “insurance development and life quality in the european union countries. an empirical assessment”, written by mirela cristea, graţiela georgiana noja, doina drăgoi and leontina codruţa andriţoiu, addresses the relationship between the insurance sector degree of development and the quality of life. the authors indicate that significant differences between eu-27 member states require specific strategies and policies in order to enhance the wellbeing by insurance services and coverage. the next two papers dedicate specific attention to the implementation of the concept of sustainability in banking system. the sustainable banking has conditioned the transformation of banks in the direction of their greater corporate eco-efficiency and the development of banking products and services that contribute to sustainable development. recognizing the impact of environmental risks on banks’ operations, the authors of the paper entitled “sustainable finance and banking: a challenge for regulators and risk management system”, mirjana jemović and jelena radojičić, elaborate the main issues concerning banks’ exposure to environmental risk. consequently, as showed in the paper entitled “banks' corporate social responsibility (csr) disclosure and their role in the betterment of society in the republic of north macedonia”, written by marina trpeska, todor tocev, ivan dionisijev and bojan malchev, larger banks are prone to be responsible toward environment and society and report on their activity. ii editorial in the article “value-based management, long term sustainability and corporate social responsibility “, the author dejan malinić examines the compatibility of value-based management (vbm) with the requirements of other stakeholders and concludes that a broader concept of vbm further enhances the interest-based logic behind the corporations’ functioning, but at the same time enables the integration of the requirements related to sustainability and corporate social responsibility. the authors of the paper “moving from non-financial to sustainability reporting: analyzing the eu commission’s proposal for a corporate sustainability reporting directive (csrd)”, josef baumüller and stefan o. grbenic, have recognized reporting requirements as a core element of the eu commission’s ambitions to transform the european economy towards more sustainability. their analysis of the new directive proposal emphasizes that many of the new proposed requirements are excessive and raise fundamental questions concerning acceptable levels of administrative burden for companies as well as necessary conceptual fundaments for a reporting framework. the final two contributions discuss insufficiently explored issues that characterized current business operations. the authors of the paper titled “intangible assets impact on sustainable growth rate of enterprises in the republic of serbia”, amer rastić, tatjana stevanović and ljilja antić, reveal that intangible assets of the best performing companies in the republic of serbia positively influence the sustainable growth rate providing a reference point for future entrepreneurs on the way to intensive involvement of intangible assets in companies. considering digitalization and up-to-date global trends, the paper under the title “the pandemic waves’ impact on romanian e-market: a non-linear regression model”, co-authored by costin radu boldea and bogdan ion boldea, reveals the dynamic of the e-market, as the main channel of sales during the sars-cov2 crisis across europe, and propose a model for the prediction of the overall behaviour of online buyers. we would like to thank, first of all, the authors of the articles published in this issue of the journal. at the same time, we feel grateful to all the referees for their valuable help in selecting the papers and improving their quality. guest editors of the special issue: asst. prof. jelena z. stanković, phd prof. ksenija denčić-mihajlov, phd prof. evica petrović, phd and prof. dejan spasić, phd editor-in-chief university of niš, faculty of economics trg kralja aleksandra 11, 18000 niš, serbia facta universitatis series: economics and organization vol. 12, n o 4, 2015, pp. 279 295 application of xbrl-a in the function of improvement of quality of financial reporting in montenegro  udc 657.375(497.1) vladan martić university mediterranean, podgorica, montenegro abstract. after more than a century-long and successful history of providing accounting and audit services, the accounting profession is faced with numerous challenges and opportunities of the 21st century. in parallel with the development of new technologies, organizational solutions and establishment of financial reporting standards, a strong expansion of software tools for the exchange of business information has been evident in the last decade. at the end of the nineties of the last century the extensible business reporting language – xbrl appeared, which has been one of the most important technological innovations in financial reporting, collection and exchange of data since the invention of electronic spreadsheets. in this sense, the goal of this paper is to evaluate xbrl aimed at improving the quality of financial reporting, highlighting both positive and negative aspects of this standard for the exchange of business information. however, although the xbrl standard is globally accepted, and it has proved to be a kind of evergreen – which, according to many, promises a revolution in financial reporting and exchange of business information the fact is that the implementation of this standard has not yet become a reality in montenegro and the region. hence, one of the goals of this paper is to point out to the relationship of reciprocity between the application of the xbrl standard in accounting practice with the level of development of accounting regulations, training of professional accountants and the willingness of national standard establishers to accept the need for standardizing financial reporting with respect to the exchange of information. therefore, we have stated the above so that we could clearly indicate that it is a great scientific challenge to illuminate a new and still unexplored area for our conditions in terms of the application of modern methods of accounting theory and practice. in this context, it will be very interesting to focus on montenegro, which is moving towards euro-atlantic integration, and which has so far had the opportunity to face a number of received august 10, 2015 / accepted december 29, 2015 corresponding author: vladan martić, * phd candidate university mediterranean, podgorica, montenegro e-mail: vladan.martic@unimediteran.net 280 v. martić institutional and regulatory problems which have raised doubts in a way about the use value of financial reporting. key words: xbrl, financial reporting, internet, company, accounting standards, regulations, stakeholders, globalization. introduction dynamic changes personified by general globalization and development of information technologies, as well as the loss of confidence caused by the global financial crisis – have a significant impact on the role and characteristics of the accounting profession and the accounting information system in general. on the one hand, the expectations of the market, that is the stakeholders’ expectations for timely, more frequent, more transparent financial reporting appropriate to the requirements of today are increasing. there is no doubt that the transparent and quality financial reporting provides more secure access to investment funds, reduces uncertainty and risk, and enables the efficient allocation of capital. on the other hand, rapid changes in the information technology have led to a significant representation of ebusiness and so-called digital economy, which has also had an impact on the accounting profession and financial reporting. the conventional approach to financial reporting, which is mainly based on hard-paper copies of documents and a wide variety of incompatible formats for data exchange (pdf, xls, html, doc, ...), had been designed long before the emergence of the web and new technologies for the exchange of business information (cloud computing, xbrl etc.). in this sense, xbrl the international standard for the exchange of business information and data in an electronic form represents one of the innovations and challenges of a modern company. otherwise, efforts to establish the standard for the preparation and exchange of business information, sponsored by the american institute of certified public accountants aicpa, date from 1999 when the first meeting of the steering committee of xbrl organization was held. although not the first, but certainly one of the key implementations of xbrl as a global standard is the adoption of the standard by the security and exchange commission sec, which will undoubtedly represent a significant impulse and will greatly change the world of financial reporting. in this sense, the intention of the author of this paper was to point out the contemporary trends of the development of corporate business reporting through detailed elaboration of this issue and to show the necessities, characteristics and possibilities of the application of the xbrl standard, with special reference to the possibility of implementation in montenegro with the aim of improving the quality of financial reporting. in the context of what was mentioned above, we are going to implement the set objectives by dividing the paper in two parts, in addition to the introduction and concluding remarks. the first part of the paper will deal with the definition of a conceptual framework for xbrl, where the basic features, benefits, application, and components of this standard will be explained in order to create the fundamental preconditions for pointing out the need and usefulness of its introduction. the second part of the paper, which is a logical continuation of the first, deals with the practical dimension of the elaborated theoretical issues, where the guidelines will be provided in the domain of implementation of the xbrl model in the function of the improvement of quality of financial reporting in montenegro, with emphasis on the analysis of legal and professional accounting regulations as a precondition for successful application of the xbrl standard. application of xbrl-a in the function of improvement of quality of financial reporting in montenegro 281 1. background on xbrl although the term business reporting is encountered in the very name of xbrl, which is undoubtedly one of the main aspects of its function, it is clear that it has a much wider application. if reporting is viewed as a subset of the business information exchange, xbrl can be defined as:  the standard based on an open code, independent of any software manufacturer which offers a wide range of advantages in storing, handling and analysis of data;  the extension of xml intended for the electronic exchange of business information;  one of the most successful formats for metadata;  international non-profit consortium of more than 600 members professional federations, companies, regulatory agencies gathered on the jobs of creation, maintenance and promotion of a uniform standard for the exchange of information (xbrl.org);  the global agreement on the concept of exchange of business information and rules;  the mandate by the regulatory agencies worldwide;  a new way of distributing and modeling of business information in a form understandable for computer applications, which completely relocates business reporting onto the internet. it is obvious that these definitions explain xbrl from different aspects, including inevitably its technical side. however, for the purposes of this paper we will only deal with the business aspect of this standard, without ignoring the fact that this has been one of the most important technological innovations in financial reporting, collection and exchange of data since the invention of electronic spreadsheets. various resources that provide more technical details on xbrl are available (bergeon 2003; hoffman, c., r. egmond, 2012; www.xbrl.org). in this sense, xbrl can be defined as an open international standard, independent of the information platform, for timely, accurate, and efficient electronic data collection and storage, manipulation and exchange of financial and business statements and data. although it is primarily used in financial reporting today, it can equally be used in non-financial reporting and exchange of reporting and information contents on the broader, social and environmental aspect of company's operations. in fact, the xbrl standard is also used in the new stage of the evolution of corporate reporting integrated reporting, which, in addition to financial reporting, includes a specific form of non-financial reporting on sustainable development, sustainable business and corporate social responsibility (malinić, 2013). basically, the idea on which xbrl is based is very simple. instead of treating the data as the blocks of text, every single position in the statement receives an appropriate label (tag) that adds meaning and context to the data, which enables more effective manipulation, storage and sharing of computer applications through the web. tags are often compared and identified with bar codes on products which once completely redefined the trade process. namely, the xbrl is based on the mapping of each position in the financial document which is called the xbrl instance and which represents a unique form for various forms of digital accounting reports. the positions marked in such a way are precisely defined in the dictionaries, called the taxonomy (hoffman, 2010, 18). it is important to emphasize that taxonomies do not represent an integral part of the digital financial statement, but are databases on the basis of which multiple statements are created. they can be located on the web or within the company's intranet. in addition, 282 v. martić any business user can customize the taxonomy to their own needs by adding specific concepts and positions, or develop a new taxonomy on the basis of the existing one. it is known that the possibility of modifying and adapting taxonomies is one of the unique features of xbrl which is called scalability. this type of standardization and exchange of data significantly increases the flexibility and speed of data manipulation, and reduces the need to re-enter the data (rekeying) while preparing the statements for each user in the chain of reporting. just create one statement in xbrl, which can then be distributed via the web for multiple use (press statement, web site, submission to regulatory and tax authorities). 2. benefits and risks associated with xbrl before we look at individual benefits, which are reflected on all actors in the chain of business information exchange, if we would like to show the key benefits of xbrl in only one graph which recommend it for the implementation in a specific organization, it would look like this: graph 1 current versus xbrl-based information exchange model therefore, a comparative review points out the significant advantages of xbrl, which are reflected in the savings in costs and time through the automation of the processes that generate a lower added value and which are more susceptible to errors of human intervention (collection and re-entry of data, preparation of statements), compared to the processes of high added value. the application of xbrl completely redefines the accounting practice where a high level of analyses and consultancy services is increasingly required with the aim of providing adequate information support in decisionmaking, instead of the past fee-for-service approach. finally, xbrl has the potential to upgrade the one-size-fits-all approach in financial reporting with the á la carte choice of financial information. some of the benefits, as pointed out in various sources, are briefly reviewed below (see ales, 2008; barton, 2003; bergeon, 2003; watson, 2010; hawes, 2013; hoffman, 2010, malinić, 2013; martic, 2013). 2.1. benefits for users of information in the accounting literature, it is a common view that only the users of information enjoy the benefits of application of xbrl. in support of this view it is stated that opposed to the creators of information who perform demanding tasks of tagging or labeling xbrl information, the users enjoy the benefits of an easy access and manipulation with this application of xbrl-a in the function of improvement of quality of financial reporting in montenegro 283 information. while we are going to try to supplement the aforementioned positions on the following pages and to point out to the fact that xbrl offers advantages in the preparation of financial information and statements, there is no doubt that xbrl generates a range of benefits for the users (hoffman, 2010, bergeon, 2003; martić, 2013), including:  faster access to information. thanks to the differentiation of information from the applications offered by xbrl within its modular infrastructure, numerous processes are automated, so the access to information is faster. this is one of the reasons why the regulators and stock exchanges around the world are leaders in the implementation of xbrl.  information collection (breakdown). if you have ever collected information from two or more people who present that information in tables, then you have a very good understanding of the problems of data collection. different presentation formats make data collection very complex. even if we have the same software versions and use standardized tabular formats, unintentional errors and inconsistencies in communication may create problems during the exchange. on the other hand, the xbrl standard changes the options for the exchange offering a unique standard that provides efficient exchange of consistent information.  flexible information format. when you get a certain set of information, how many times have you wished to receive that information in another format? with xbrl, the reformatting of information is very easy. information can be automatically retrieved from the databases and taxonomies, exchanged in xbrl and then exported to another format of your choice.  information is not locked in one presentation format. this benefit actually stems from the previous one. namely, the flexibility, scalability and dynamism are basic characteristics of business information exchange through the xbrl standard.  the possibility of automated search of information. thanks to xbrl, the search of financial information can be much easier, because it uses a standard format in which structured information is presented. moreover, the application of xbrl includes standardized metadata so that analysts can analyze and compare companies more easily. 2.2. benefits from the aspect of information creators we have already emphasized that the advantages provided by xbrl to the users of information are more explicit compared to the advantages that this standard offers to the creators of information. considering the fact that the process of tagging of xbrl data is a labor-intensive task, however, we can point out a whole range of benefits (bergeon, 2003; watson, 2010; hawes, 2013; hoffman, 2010) regarding the creators of information:  lower costs of information production. essentially, preparation of financial statements through xbrl is based on the identification-tagging of each position in the statement, making in this way savings in costs and time through the automation of processes that are more susceptible to errors of human intervention and the need for the re-entry of data.  communication with customers on a constant basis. by using xbrl, the communication with users takes place virtually in real time on a constant basis, bearing in mind that the data are precisely defined within the taxonomies while labelling and presented in the standard based on open code available to all users.  enhanced functionality connecting the relevant sources to the documents ensures better preparation to the environment. policies, resources and other relevant contents are contextually available through a xbrl document. 284 v. martić  flexibility – xbrl greatly increases the flexibility and speed of data manipulation in its original form. thanks to the separation of the information from the presentation format, the creators of information are provided with significant flexibility regarding the manner in which the information will be presented.  built-in validators and standards one of the key advantages when creating information. the information is retreated from taxonomies that represent the standardized vocabularies of accounting principles. they also include built-in validators, which enable detecting the errors before they enter the system, which significantly increases the quality of data.  multi-language support. as the global standard, the xbrl neutralizes the language barriers enabling the expression of definitions in the language of your choice. therefore it is possible to display a series of statements in a language different from the language in which the statements have been prepared without any additional intervention. the xbrl community largely uses this possibility because in this way data consistency is ensured and invisible boundary represented by language barriers, which interferes with the free flow of information, is neutralized. stakeholders' analysis it is well known that the pluralism of interests and intertwining of the influence of stakeholders in the functioning of a company causes the existence of different company goals (malinić, 2008). without going deeper into the issue of relations between stakeholders, which is very complex and subtle, the analysis that we are going to conduct shows in which way the movement from a proprietary paper format to an electronic format affects them. first, the stakeholders adversely affected by this change are:  manufacturers and suppliers of paper;  software manufacturers (except for xbrl), since the xbrl standard is globally accepted and has quickly taken a dominant role in an era of software tools and techniques which we are constantly bombarded with by consulting companies and manufacturers of accounting software.  it departments can provide resistance to ensure the infrastructure and support to the system, which basically relies on the internet. this is primarily evident in organizations that have a policy of preventing the access to the internet. the main challenges are security issues and possible abuse by employees;  smaller accounting firms that do not have the staff trained in electronic reporting and it can also be adversely affected by the transition to xbrl. in contrast to the short list of stakeholders, the list of those who gain benefits from the application of xbrl is extensive. it includes various manufacturers of software, hardware and telecommunications equipment, then, state agencies, banks, end users, analysts, etc.  state agencies have more reasons to support the xbrl initiative, given the amount of data processed and the time necessary for processing. as we have mentioned several times, the application of xbrl increases the flexibility of data processing, and shortens the time needed for data collection.  large companies. as a result of the enron scandal, financial regulators have shortened the deadlines for submission of financial statements. in this regard, companies are under pressure to prepare reports with fewer errors as soon as possible. employees are required to devote more time to the analysis of data, rather than to its preparation. application of xbrl-a in the function of improvement of quality of financial reporting in montenegro 285  small businesses are becoming more visible in the market, and therefore can offer new services. once companies publish their statements in xbrl they become more visible on the web.  auditors an old joke among auditors says that the acronym cpa actually means cut, paste and attach. even in the era of computerization, auditors spend excessive time transferring data from the field in their own statements and estimates. moreover, auditors are faced with increasing regulatory burdens. therefore, they tend to spend less time on the manipulation and preparation of data than on the analyses.  when it comes to individual organizations, the degree of benefits obtained by xbrl depends to a large extent on their technological status. namely, computerized companies, which provide their employees with free internet access, and which have the staff trained in it, will make a more painless transition to the new reporting system. 2.4. risks associated with xbrl in addition to numerous advantages, we have to be aware of certain challenges that we face when adopting a new technology – standard, such as xbrl: early adoption of xbrl as a global standard has led to a lack of preparation and inadequacy in its application. the need and the necessity to meet the demands of the regulator as soon as possible, at a time when many of the xbrl software applications were not available, prevented the identification of appropriate adaptation solutions of the entire accounting information system. another feature is derived from the previous one, that is, a lot of regulators obliged the regulatory entities to use xbrl, while not providing any assistance in its implementation. it initially resulted in significant costs for business organizations, bearing in mind the need to engage consultants who would generate the xbrl filings for them. the fact that the standard is relatively "immature", as well as the software support on which it relies may cause certain problems in the compatibility of software applications, especially compared to earlier versions of the program. for example, if two different software manufacturers support xbrl with their applications, those applications may not be fully compatible (bergeon, 2003). customization of taxonomies so as to meet the specific demands of stakeholders, makes the problem of compatibility even greater. namely, the xbrl taxonomies are expandable and therefore can be too flexible, which may significantly jeopardize the transparency and compatibility of statements, and eliminate the many advantages that this standard offers (burnett, 2006). the existence of a number of "competing" standards and the fact that xbrl, like any other standard, has a limited life cycle and is likely to undergo numerous changes in the future. experience tells us that most of the new software tools, methods and techniques are just "fashionable topics" which gain but also immediately afterwards lose relevance. a whole range of factors, which are very difficult to predict, contribute to its relevance. since it is based on xml, it is considered that the implementation of xbrl is somewhat complicated and difficult, especially for accountants, regulators and business users. while the implementation of xbrl can be made in a relatively short period of time, it will probably be necessary for some time to maintain the previous accounting information system, which will undoubtedly require additional costs and lead to errors in submitting financial statements. 286 v. martić given that xbrl completely relocates the financial reporting onto the internet, the issues of security and protection of information are raised; although these issues are not in the domain of the standard itself. finally, the considerations made clearly show the advantages that the application of the xbrl standard brings to all participants in the chain of financial reporting and business organization, both in terms of preparation and use of information. it is perhaps justifiable to underline that perhaps the most important benefit of the implementation of xbrl is that it permanently eliminates the need to re-enter data when preparing the statement for each user in the chain of reporting. moreover, it is important to emphasize once again that xbrl is not a new accounting standard and that it does not require changes in existing accounting standards, nor does it require businesses to disclose additional information. but the practice shows that there are certain risks associated with the adoption and integration of xbrl, but the risks of ignoring the information revolution that has transformed virtually every form of business on the planet, are potentially greater. 3. major xbrl projects at the global level the previously made considerations have shown that xbrl is globally present (especially in the practice of market-developed countries), and that it represents a new phase in the evolution of financial reporting. the implementation of xbrl is likely to follow the direction as in the case of xml and html – that is, the standards are firstly adopted by supervisory and regulatory bodies, and then they are rapidly accepted by an increasing number of business users. in the context of a more current and deeper consideration, we will examine below in more detail some of the most important projects of the implementation of the xbrl standard which will allow us to look at how this standard is implemented and used, with a special emphasis on quantifying the potential benefits and savings.  u.s. security exchange commission. although not the first, but certainly one of the key implementations at the global level, is the adoption of the xbrl standard by the sec, which had closely monitored the past projects of the implementation of this standard and began with the introduction in 2005, when an experimental program was launched in which each company could test the standard. after the successful implementation of the pilot testing, the sec obliged all public companies to submit financial statements in the xbrl format. in june 2009, more than 500 major companies started with the submission of the statements in this format, followed by about 1,800 companies the next year and about 12,000 companies in the third year (securities and exchange commission, 2009). finally, in 2012, the sec obliged all public companies to submit financial statements in the xbrl format.  federal financial institutions examination council in 2003 ffiec launched the project of modernization of the system for data collection and management. the new system, known as the central data repository – cdr represents one of the first and largest implementation of the xbrl standard. in this respect, the survey results (federal financial institutions examination council, 2003), in terms of savings brought by the application of the xbrl standard, can be synthesized as shown in the following way:  savings of about 60% are achieved in the costs of data collecting and processing;  the data processing time has been significantly reduced (the processing time has been reduced from 60 to 2 days); application of xbrl-a in the function of improvement of quality of financial reporting in montenegro 287  productivity has been increased in the range of 10 to 33%;  data errors are completely eliminated (the previous system identified 18,000 errors annually); it can be noted that the results of the application of the xbrl standard through an open, collaborative approach have been impressive. the implementation of xbrl has had a positive impact on the increase of productivity, efficiency, accuracy and quality of data. the statements are available much more quickly, with the more efficient and more accurate process of data collection and validation. the new data collection system allowed the banks to identify and correct the errors before filing their financial statements. all this will undoubtedly encourage other regulatory agencies to implement this standard.  standard business reporting sbr. in 2007, in its project of the standard business reporting, the australian government funded the first phase of implementation of xbrl as a standard means of communication between the government and companies, as well as between government agencies. this project aims to simplify and automate the process of information exchange, i.e. by functioning in a way that companies do not have to submit the same information several times to different agencies. it is expected that this project will reduce the costs of companies by 25%, or more than one billion dollars per year (standard business reporting, 2012). how successful the standard business reporting project is, is best illustrated by the fact that it is gradually becoming a global approach in the implementation of xbrl at the level of state administration, and that similar projects have already been launched in many countries, such as the netherlands, new zealand and singapore. moreover, we believe that this project provides useful guidelines for the application of this standard at the level of state administration in montenegro and the region.  accounting and corporate regulatory authority as the national regulator seeks to provide a reliable regulatory environment for companies and public accountants. to successfully respond to the goals presented in this way, new demands and challenges of economic operations, the acra adopted the xbrl standard for corporate financial reporting in 2007. in the beginning, the most important goals of the project of implementation of xbrl focused on the improvement of financial reporting through value enhancement of information flow with the local and international business community. in order to facilitate the implementation of xbrl, the acra has created the of-line bizfinx application for electronic processing and recording of data, which allows users to prepare financial statements free of charge in accordance with changing regulatory requirements. in order to minimize the time required for data entry, the tool includes a feature that automatically maps the information in the financial statement. finally, from the end of october 2013, in accordance with the revised regulatory requirements, the acra obliged the companies to submit a complete set of financial statements in the xbrl format (accounting and corporate regulatory authority, 2013). although the project of the xbrl standard implementation in singapore cannot be considered as one of the most significant in global terms, both in terms of its relevance and scope, we believe that it provides useful guidelines for the application of this standard at the national level. this is primarily so, given the negligible costs for users in terms of compliance with regulatory requirements during the preparation, creation and validation of the xbrl statements. moreover, we believe that this project is an example 288 v. martić of the best practice of involving the public in decision-making and active approach of interested users when reviewing the regulatory requirements and introducing the new accounting and information solutions in the financial reporting system. 3.1. common features of xbrl projects we have seen that the first implementations of the xbrl standard were achieved in the field of financial arena, led by regulatory agencies, such as securities commissions, stock exchanges, tax and customs authorities, banking regulators, i.e., organizations that deal with large quantities of financial statements and information. today, the standard has been accepted by different business organizations, auditing and accounting firms, manufacturers of software for accounting and business reporting, as well as individual investors and analysts. although these are heterogeneous groups, it is possible to identify some basic trends in the development and implementation of xbrl:  with respect to the projects at the state level, each state has appropriate functions agencies that enable and encourage the implementation of xbrl within that state, such as the regulators of stock exchanges and securities, bank regulators, business registries, tax agencies and national statistical organizations;  the implementation of xbrl follows the direction as in the case of xml and html – that is, the standards are firstly adopted by supervisory and regulatory bodies, and then are rapidly accepted by an increasing number of business users. in this regard, the supervisory and regulatory agencies play an important role in the introduction and implementation of xbrl, given the huge number of businesses they control. when adopted by one regulator, the number of businesses which have implemented the standard exponentially increases;  at least one non-profit organization (microfinance information exchange-mix, 2003) has implemented the xbrl standard;  any significant shortcomings in the implementation of xbrl have not been observed so far;  stock exchanges and bank regulators are the two largest groups that have implemented xbrl;  the regions in the world where xbrl is growing fastest are the usa, japan, europe, china and australia. however, looking at the current situation and trends in the development of xbrl, we can see significant differences in the models of implementation of this standard in specified regions: in asia and the usa, xbrl is predominantly used in the capital markets. however, given the significant role of regulatory agencies, there is no doubt that the implementation of this standard will spread to private or unlisted companies, mutual funds, non-profit organizations, etc. while the capital markets in asia have adapted to the new reporting standards very quickly and with minimal costs, the sophisticated xbrl taxonomies and business rules are mainly developed in the united states. the united states implements a progressive and carefully documented approach in the implementation of xbrl. this is understandable, given that from the perspective of capital markets, the usa has much more technical and legal challenges to overcome than smaller countries. moreover, the financial and reporting concepts based on us gaap taxonomies are further aggregated by specific activities-industries, in contrast to the ifrs taxonomies that are more generic in terms of organization. while in the united states and asia the application of xbrl-a in the function of improvement of quality of financial reporting in montenegro 289 focus is more on the use of the xbrl standards in capital markets, europe is focused on the development of cross-border projects and applications that enable a consistent exchange of structured xbrl data for public and private enterprises (gilles, 2012). although the implementation of xbrl in south america is mostly on a voluntary basis for now, the increasing use of standards in the banking sectors and the capital markets will undoubtedly result in an increasing application. 4. implementation of xbrl in montenegro– challenges and opportunities the implementation of quality financial reporting, as well as the possibility of implementing the xbrl standard for the exchange of business information include the review and assessment of the entire accounting profession, especially when it comes to the regulatory environment and financial reporting, as well as the competence of accountants and their organizations for the implementation of global standards for the exchange of business information. the base created by such analysis is unavoidable when testing the hypotheses set at the beginning of the research, as it clearly presents our current position and all the strengths, weaknesses, opportunities and risks. therefore, the institutional framework of financial reporting in montenegro consists of legal, professional and internal accounting regulations. 4.2. statutory accounting regulations in the context of the implementation of xbrl there are several laws that adequately regulate the legal aspect of companies' accounting. accordingly, the current legislative accounting regulations in montenegro consist of the company law, the law on securities, the law on accounting and auditing and the by-laws adopted on the basis thereof, different regulations, rulebooks and the like. the financial statements of companies and other entities in montenegro would have to be standardized, internationally comparable and understandable to all the interested users. however, we will leave these issues aside for now in order to analyze the aforementioned legal solutions in a generic sense, in terms of whether they recognize and define the global trends in terms of standardization of transfer and exchange of business information. in other words, the question is raised of whether the existing law on accounting and auditing and bylaws created on the basis of thereof provide a favorable regulatory framework in this regard, or represent a limiting factor in the context of implementation of the xbrl standard. bearing in mind that the emphasis is on the analysis of the legislative accounting regulations regarding the submission, publication and exchange of financial statements, in the following lines we will give an overview of the legal basis for these elements of financial reporting. namely, the existing law on accounting and auditing which regulates the issues of preparation and submission of financial statements provides that: legal entities are obliged to submit financial statements in paper and electronic form, no later than 31 march of the current year for the previous year. although it requires the submission of statements in an electronic form, it does not specify the format they are submitted in. as a result, information is "locked" into onedimensional presentation formats (excel, word, web forms, scanned documents, hard copies, etc.), which prevents their effective exchange and leads to inconsistency. 290 v. martić moreover, the draft law on accounting has not brought novelties with respect to the submission of financial statements. in this sense, it is proposed, as well as in the existing law, that: the legal entity is obliged to submit the financial statements and the management report in paper and electronic form to the administrative body in charge of determination and collection of taxes (hereinafter: the tax administration) no later than 31 march of the current year for the previous year. to sum up, after reviewing the law on accounting and auditing and the proposed amendments, in the part referring to electronic reporting and submission of statements, it is obvious that the legislator and national standard establishers did not recognize the need for the standardization of financial reporting in terms of exchange of information. since a standardized means of communication between regulators and companies, as well as between regulatory agencies has not been established, the companies must submit the same information and statements several times to different agencies, which not only requires additional resources but also diverts time and resources away from primary business activities. although the appropriate regulatory agencies have launched a number of new approaches in electronic reporting with the aim of simplifying and automating the process of information exchange (tax administration of montenegro, 2014, the securities commission, 2012), it should be noted that there is still no uniform approach to the development of infrastructure including software systems and uniform databases that would be available to different agencies, reducing the total costs at the state level. finally, there is no doubt that the harmonization of the law on accounting and auditing with the european union directives is expected in the coming period. it is also an occasion to improve the conditions for the application of new digital standards in new legal regulations and achieve some positive developments concerning the adoption and implementation of xbrl. the conducted analysis of legal accounting regulations regarding the electronic reporting represents only an initial step, but at the same time provides a framework which is very important because of the use of other rights provided by these legal regulations. specifically, as the first step it should be anticipated and incorporated in legislation a possibility of submitting financial statements in a paper and electronic form or in prescribed forms or patterns that are formed through electronic messages, according to the xbrl standard, signed by a digital signature. 4.2. professional accounting regulations in the context of the implementation of xbrl professional accounting regulatory framework consists of a set of national and international accounting principles, standards and codes of ethics. the fact is that more and more countries and their regulatory authorities opt for a consistent application of international professional regulations in the area of financial reporting. hence, the commitments in the new legal accounting regulations of montenegro are based on the mandatory application of international accounting standards (ias) and international financial reporting standards (ifrs). this will certainly make it possible to move closer to the preparation of our accounting practice for the application, preparation and presentation of better quality financial statements, and contribute to a faster integration of our economy, creation of a more favorable investment environment and increasing business confidence. application of xbrl-a in the function of improvement of quality of financial reporting in montenegro 291 however, quality standards are not sufficient on their own. a major problem of their application remains. in this regard, numerous obstacles should be overcome, such as: the overcoming of different accounting traditions, improvement of the manner of the interpretation of standards, raising the level of education of professional accountants and their organizations. furthermore, in terms of professional accounting regulations in the context of implementation of xbrl in montenegro, it is necessary to point out to a few additional, also relevant requirements and moments. in the first place it is definitely the fact that, following the example of the world practice, the professional organizations would have a key role in the implementation of xbrl in montenegro, such as the state has an important role by adopting the relevant and quality statutory accounting regulations. however, it seems that a number of measures should be undertaken by the legislator regarding the development of institutional environment for the implementation of professional regulations, as well as the division of responsibilities of the bodies for its implementation. namely, the legislator has not made clear, nor has it clearly designated a professional organization member of the international federation of accountants, whose right and duty is to implement the international professional regulations, adopt the national regulations and monitor their implementation. this is the reason for the lack of a comprehensive professional supervision and control of professional accountants. moreover, the lack of application of software and information standards is evident which hinders the implementation of advanced technological solutions. in a sense, the current legal arrangements represent a step backwards in terms of standardization of accounting software that are designed and produced for the purposes of bookkeeping, compilation and exchange of financial statements. it has already been pointed out that the first yugoslav accounting standard dealing with accounting software was developed in early 1993, under the authority of article 4 of the law on accounting (official gazette, fry, no. 18/93), in relation to article 12 of the same law. on the basis of this law, the activities of standardization of accounting software were initiated, which led to a huge success in the process of design, production, application and quality of accounting software for the purposes of accounting coverage of data of different entities. all this indicates that the previous legal regulations were reformist regarding these issues, as the valid solutions do not recognize the need for standardization of accounting software, which is important in the further process of standardization of accounting and information system and implementation of the xbrl standard. hence, we believe that professional accounting organizations and regulatory bodies must undertake a number of activities in order to determine the framework for electronic bookkeeping and preparation of financial statements, regardless of the fact that the law makes no reference to it. after all, such solutions are increasingly represented in the countries with a developed information role of accounting. finally, it is also important to point out to the necessity of deregulation of legislative in favor of professional regulation, that is, the need to assign an important role to professional regulations in the regulation, which is not the case in montenegro, at least when it comes to standardization of accounting information systems. only in this way the legislative and administrative initiative is relieved and the professional solutions are enabled, without the influence of the current state economic policy. in this regard, one of the goals of this paper is focused on the direction of emphasizing the need for a clear commitment of the state that our financial reporting system moves towards the 292 v. martić standardization of financial reporting in terms of the exchange of business information, which would facilitate and improve financial reporting and also make a step forward towards global trends in the accounting industry. in addition to the aforementioned, for a fuller understanding of the perspective of the implementation of xbrl in montenegro, it is necessary to focus attention on a few additional issues, such as:  sluggishness of the accounting profession in terms of accepting positive innovations in accounting, beyond the official "principal“ accounting;  readiness of national standard establishers to accept the need for standardizing financial reporting with respect to the exchange of information  perhaps the issues of the general level of required specialist, accounting and broader knowledge in the field of information technology,  undeveloped management in our companies,  most of the companies in montenegro are small companies, to which xbrl will "remain invisible“ for some time. however, we believe that there is a need for the implementation of this standard even in small systems, which includes adequate argumentation that would result in additional research in this regard.  and finally, the lack of awareness of the importance of xbrl. although the responses to the challenges focused in such a way cannot be easy, this paper could serve as a reference document, which is not only intended for professional creators of accounting information and regulators responsible for the adoption and implementation of standards, but also for other professional readers who are trying to understand the characteristics of this global standard that has completely redefined the accounting profession. conclusion the considerations made about the possibility of implementation of the xbrl standard, aimed at improving the quality of financial reporting, leave a possibility to draw the following conclusions: 1. development of communication and information technologies has enabled the relocation of financial reporting onto the internet. as a result, today business information is available to everyone, in any place and at any time. for this purpose the international standard for the exchange of business information xbrl is predominantly used today. this paper clearly indicates the advantages brought by the application of this standard to all participants in the chain of financial reporting. 2. the introduction of xbrl as a future standard of the exchange of business information in montenegro would result in a number of business and social benefits, which have already been discussed. moreover, the implementation of the xbrl standard at the level of state administration, modeled on the sbr project, would provide a more efficient exchange of business information and statements, and would significantly prevent "locking" and dependence of the state administration bodies (and other users) on a single product or software manufacturer. however, when designing the research study, we encountered various challenges given that xbrl has not been implemented in montenegro so far. in this regard, we have looked at some of the most important implementations of xbrl globally, and clearly pointed to doubtless benefits brought by the application of this application of xbrl-a in the function of improvement of quality of financial reporting in montenegro 293 standard. by generalizing the data obtained by the historical comparative method, we pointed out the basic trends in the development and implementation of xbrl. 3. the conducted analysis of the institutional and regulatory framework has shown that the quality and availability of data are below the level of developed financial systems. our current legal provisions do not provide for the need for standardization of accounting software that are designed and produced for bookkeeping, preparation and exchange of financial statements. moreover, as regards the national level, it seems that one of the main challenges is the existence of more regulators with different levels of development and different standards regarding the submission of financial statements. in addition, our theoretical and technical literature in the field of accounting information system was not preoccupied with the issues of modern accounting information systems. however, as the implementation of xbrl becomes an unavoidable option, it is necessary to identify the critical factors resources at the national level that are available and which may represent a starting point for the introduction of the xbrl standard. the changes in the philosophy of management and accountants are necessary, as well as new knowledge and skills. this is especially so considering that we have indicated that the application of the latest accounting it developments necessitate developed institutional and human resources capacity, and adequate preparation of accounting and governance structures. 4. recognizing the mentioned limitations, we believe that xbrl can be successfully implemented in montenegro. to support this statement, we pointed out to numerous assumptions, including: the consolidation of the financial sector (particularly banking), establishment of macroeconomic stability, computerization, and so on. in the last few years much has been done in the field of computeriz ation and directing the state administration towards e-business and web services. in this sense, as regards the micro level, a large number of business organizations today use some form of information system that can underpin the introduction of xbrl. namely, today all major systems for business planning, such as sap, navision and others, have a built-in possibility of reporting through xbrl, which leads us to the conclusion that all major business systems in montenegro, which use some of the erps have a foundation for the implementation of xbrl at the level of business organization. understandably, it immediately raises the issue of small legal entities, which make up, just to remind ourselves, 98.70% in montenegro, (monstat, 2012), and which clearly have some specific features that affect the process of implementation. this applies in particular to differences regarding: the available resources (human and material), the speed of the implementation process, the system of project planning and management, information requirements in relation to the system and so on. however, the answer to this question is, as in the previous case, very easy. namely, different software manufacturers now offer very simple solutions that are based on the xbrl add-ons for the microsoft excel and word, which are now used by most businesses. understandably, in both cases these processes are preceded by the adoption and adaptation of relevant legal and professional accounting regulations in montenegro. all this leads to the conclusion that, taking into account the above restrictions, there is a basis for the introduction of the xbrl standard, both at the level of regulatory agencies and business organizations, while the possibility and speed of implementation largely depend on their technological status. namely, computerized companies, which enable free internet access to their employees, and which have the staff trained in it will make a more painless transition to the new reporting system. based on the results of research initiated 294 v. martić by the securities commission (http://www.monstat.org/userfiles/file/registri.pdf), it can be concluded that there will be a lot of work in this regard, since 30.70 % of the surveyed companies do not have a website, while out of those businesses that have a website only 42.30% post their documents on it. the fact that the surveyed companies pay little attention to communication via the internet is confirmed by the data relating to the existence and updating of the web pages. namely, 34.5% of companies have a bilingual site (our and a version in english), while, on the other hand, 32.5% have no version in english. 5. finally, it is necessary to add that, paradoxically, we find ourselves now in a fairly favourable situation because the underdeveloped systems can be adapted almost immediately to the latest standards and trends. the same is the case with the training of the personnel. references 1. accounting and corporate regulatory authority, (2013), available at www.acra.gov.sg/uploadedimages/ content/statistics/acra, (accessed 14. september 2015.). 2. alles m. special issue: xbrl and the future of disclosure. academic search complete, ipswich, ma, 2008. 3. barton, k.e. 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for financial report, available at www.pc.gov.au/inquiries/completed/coag-reporting/r,(accessed 10. september 2015.). http://www.acra.gov.sg/ http://www.nysscpa.org/committees/emergingtech/xbrl_2003.htm http://www.ffiec.gov/ http://www.scmn.me/index http://www.themix.org/sites/default/files/mix-xbrl/casestudy/2003 http://www.themix.org/sites/default/files/mix-xbrl/casestudy/2003 http://www.monstat.org/userfiles/file/registri.pdf http://www.tax.gov.me/taxisportal http://www.tax.gov.me/taxisportal http://www.sec.gov/rules/final/2009/33-9002 http://www.pc.gov.au/inquiries/completed/coag-reporting/r application of xbrl-a in the function of improvement of quality of financial reporting in montenegro 295 23. zakon o računovodstvu i reviziji, -"sl. list rcg", br. 69/05, "sl. list crne gore", br. 80/08, 32/11, (član 6b. stav 1. i 4). 24. zakon o računovodstvu sl. list. srj, br. 18/93. 25. zakon o privrednim društvima (“sl. list rcg” br. 06/02, 17/07, 80/08… 40/11). 26. xbrl international (2007), financial reporting taxonomies“ available at: www.xbrl.org/taxonomies, (accessed 26. september 2015.). primjena xbrl-a u funkciji unapređenja kvaliteta finansijskog izveštavanja u crnoj gori računovodstvena profesija, nakon više od vijeka duge i uspješne istorije pružanja računovodstvenih i revizorskih usluga, suočava se sa mnogobrojnim izazovima i mogućnostima u xxi vijeku. paralelno sa razvojem novih tehnologija, organizacionih rješenja i uspostavljanjem standarda finansijskog izvještavanja, u poslednjoj deceniji evidentna je snažna ekspanzija softverskih alata za razmjenu poslovnih informacija. krajem devedesetih godina prošlog vijeka, pojavio se extensible business reporting language – xbrl, koji predstavlja jednu od najznačajnijih tehnoloških inovacija u finansijskom izvještavanju, prikupljanju i razmjeni podataka još od pojave elektronskih tabelarnih prikaza. u tom smislu, cilj ovoga rada jeste da izvrši procjenu xbrl-a u funkciji unapređenja kvaliteta finansijskog izvještavanja, ističući kako pozitivne tako i negativne aspekte ovog standarda za razmjenu poslovnih informacija. no, iako je xbrl standard globalno prihvaćen, te se dokazao kao svojevrsni evergrin koji po mnogima obećava revoluciju u finansijskom izvještavanju i razmjeni poslovnih informacija činjenica je da implementacija ovog standarda još uvijek nije zaživjela u crnoj gori i u regionu. otuda, jedan od ciljeva ovog rada jeste i da ukaže na odnos uzajamnosti između primjene xbrl standarda u računovodstvenoj praksi sa nivoom razvijenosti računovodstvene regulative, edukacijom profesionalnih računovođa i spremnošću nacionalnih uspostavljača standarda da prihvate potrebu za standardizovanjem finansijskog izveštavanja u pogledu razmjene informacija. dakle, sve ovo smo naveli kako bismo jasno ukazali da se radi o velikom naučnom izazovu da se jedno novo i za naše uslove još uvijek neistraženo područje osvijetli sa aspekta primjene savremenih metoda računovodstvene teorije i prakse. u tom kontekstu će biti veoma interesantno fokusirati se na crnu goru, koja ide u pravcu evroatlanskih integracija, i koja je do sada imala prilike da se sretne sa brojnim institucionalnim i regulatornim problemima koji su na određeni način dovodili u sumnju upotrebnu vrijednost finansijskog izvještavanja. ključne riječi: xbrl, finansijsko izvještavanje, internet, preduzeće, računovodstveni standardi, regulativa, stejkholderi, globalizacija. http://www.xbrl.org/taxonomies facta universitatis series: economics and organization vol. 13, n o 4, 2016, pp. 401 414 doi: 10.22190/fueo1604401z preliminary communication benefit segmentation of outbound summer package tourists1 udc 338.48-12 bojan zečević, igor kovačević faculty of economics, university of belgrade, serbia abstract. this study assesses tourist preferences for summer package vacation benefits. the purpose of this paper is to classify summer package tourists based on preferred benefits they seek from their vacation. analysis of preferences for benefits sought is done by using the analytic hierarchy process (ahp). a sample of 850 respondents was interviewed by telephone in order to reveal their preferences. in order to reveal the grouping of tourists according to their preferred benefits, a two-step cluster analysis has been applied using the log-likelihood measure, while the number of clusters has been determined using schwarz's bayesian criterion. four segments have been identified based on the benefits sought: variety seekers, package-centrics, comfort seekers and safety seekers. this research showed that fuzzy ahp could be used not just for understanding of tourist preferences, but also as a base for segmentation. this is a first attempt to apply fuzzy ahp for that purpose in tourism. key words: tourist benefits, benefit segmentation, outbound package tourists introduction customer perceived value is a subjective construct (eggert & ulaga, 2002; zeithaml, 1988), defined as the perception of consumers about the difference between the benefits received from certain products and services and sacrifices that need to be invested in order to obtain and use the product or service (zeithaml, 1988), regardless of whether value is seen as unidimensional (cronin et al., 1997; zeithaml, 1988) or multidimensional construct. other group sees customer perceived value as a multidimensional construct (mayr & zins, 2012; sánchez-garcia et al. 2007; sinha & desarbo, 1998; sweeney & soutar, 2001), benefits and sacrifices are components of the value. therefore, benefits are the essence of the perceived value (cronin et al., 1997). 1received september 19, 2016 / accepted november 14, 2016 corresponding author: bojan zeĉević faculty of economics, university of belgrade, kameniĉka 6, 11000 belgrade, serbia e-mail: zecevic@ekof.bg.ac.rs 402 b. zeĉević, i. kovaĉević in order to attract visitors, tourism destinations and service providers have to understand the needs and preferences of their customers. knowing tourist preferences allows for the development of competitive offer and better product-market fit (j. s. chen & gursoy, 2001; kang, 2003; pike, 2006). there are a number of research articles dealing with tourist preferences (basala & klenosky, 2001; hede & kellett, 2011; june & smith, 1987; kim, 1996; koo et al. 1999; kruger & saayman, 2015; lehto et al. 2004; pike, 2006). when buying tourism products, customers are basically buying benefits. understanding benefits tourists seek is important for destinations and business alike so they can match their offer with tourists’ preferences (woodside, 1982). different tourists can seek and obtain different benefits from the same product (alford, 1998; koh et al., 2010). based on the importance they attach to different benefits they seek form their vacation, tourists make decisions on their travel. in this paper, serbian summer vacation outbound tourists using services of tour operators are segmented based on preferred benefits, using fuzzy ahp. 1. literature review 1.1. benefit segmentation destination and vacation attributes are causes of tourist benefits (evans & chon, 1989; goodrich, 1978; sarigöllü & huang, 2005). benefits tourists seek are an important factor of destination choice (lang et al. 1997; lehto et al. 2002) and also affect different tourist movement patterns within destinations (lau & mckercher, 2006). understanding benefits tourists seek is important for destinations and business alike so they can match their offer with tourists’ preferences (woodside, 1982). benefits can be both functionally and psychologically based (frochot & morrison, 2000), and refer to what is known as push and pull factors (crompton, 1979; dann, 1977). the first group of benefits is related to functional attributes of a vacation destination, such as nature, climate, culture and heritage, cleanliness, quality of hotels etc. the second group are socio-psychological benefits related to social interaction, strengthening family bonds, escape from everyday routine, novelty seeking etc. socio-psychological benefits sought by tourists are result of two related processes – escape from everyday routine and intrinsic rewards tourists seek from travel activities (iso-ahola, 1982; mannell & iso-ahola, 1987). while psychological benefits like seeking escape from stress and everyday routine, meeting new people, spending time with family push tourists to go on a vacation in general (crompton, 1979; kozak, 2002), it is pull factors (trip/vacation/ destination attributes) that set the grounds for realizing those benefits (uysal & jurowski, 1994). haley was the first to introduce the idea of benefit segmentation in 1968 (haley, 1968). he pointed out that the knowing the benefits that consumers seek from the purchase and consumption of a product or service is the best predictor of future buying behaviour, and that the benefits are true basis for the existence of market segments (haley, 1968, 1971), since customers differ regarding benefits they seek (haley, 1984). the benefit based segmentation implies the analysis of what consumers think about specific product attributes, and how much importance they attach to them (mohsen & dacko, 2013). benefits sought are one of the segmentation criteria that caused great interest of researchers in tourism (frochot, 2005; loker & perdue, 1992; palacio, 1997; benefit segmentation of outbound summer package tourists 403 shoemaker, 1994). frochot and morrison (2000, p.24) gave a detailed overview of key studies on benefit segmentation in travel and tourism, classifying them into four broad categories of benefit segmentation application: (1) destination marketing, (2) targeting specific markets, (3) attractions, events, and facilities, and (4) examining traveller decision making process. sarigöllü and huang (2005) classify previous studies on benefit segmentation in terms of how benefits were obtained through direct or indirect questioning, and by being destination specific or general. this study is based on direct questioning of tourists, and it is not destination specific. 1.2. tourist value chain the tourism industry is a complex one, which stems from the fact that the creation of tourism products are affected by many factors related to the tourist destinations and the services provided by different actors during the vacation (gunn, 1997, p.32). a destination is an amalgam of a number of individual products and services tourists are consuming by combining them according to their needs and preferences. (murphy et al. 2000), and value for tourists is made up of a large number of different services provided by different suppliers (voss et al. 2008). tourists perceive various individual services as parts of a single total experience (räikkönen & honkanen, 2013), which requires linking various services provided by different actors in a unique value creation framework (kashyap & bojanic, 2000). the concept of a value chain was introduced by porter (1985), in order to explain how different internal processes of the firm jointly contribute to the creation of customer value. value is created not only by the firm itself but also by different companies located across different areas or even countries (song et al. 2012). firms can both compete and cooperate (bendoly et al. 2004). tourism and hospitality businesses, although many of them competing with each other, have to and can cooperate on the destination level (leiper et al. 2011) in order to make destination more appealing to the tourists and create opportunities for better destination experience. tourism value chain is a system of provider-customer encounter points where service is delivered (romero & tejada, 2011), yılmaz and bititci (2006) have defined the value chain in a way that it covers all business systems involved in provision of services from the moment of the packaged vacation decision/purchase and performing necessary activities before travelling, to the return from the trip. that way the value chain is divided into four stages (p.343): win order stage, where tourists purchase package vacation from the tour-operator. individual tourists do not go through this stage. pre-delivery support covers activities tourists need for the realization of the vacation before going on vacation (handling visa requirements, giving the detailed information about the vacation etc.). these two stages are supported by the activities of tour-operators and outbound travel agents. the delivery stage is where different tourism suppliers deliver their services to tourists (transportation, accommodation, transfers, excursions etc.). post delivery support stage includes corrective measures based on the results of customer satisfaction measurement. all experiences customer has with any of the value chain members, is a part of his/her total experience delivered by the value chain (brathwaite, 1992).therefore, tourist benefits are realised along the value chain. 404 b. zeĉević, i. kovaĉević 2. methodology 2.1. fuzzy analytic hierarchy process assessment of the importance of the benefits is based on the hierarchy analytic process (ahp). ahp is an analytical method that was introduced by saaty (1977; 1980) and is regarded as a useful multi-attribute decision making tool in determining relative importance of certain variables (kumar et al., 2015; mulye, 1998). ahp is a method for relative measurement, useful in situations when there is a need for making a choice among a set of alternatives based on defined criteria. due to its inability to deal with imprecision and vaguenes of human reasoning (wang et al. 2014), a fuzzy ahp as an extension of traditional ahp has been developed, with van laarhoven and pedrycz (1983) being the first to propose a fuzzy ahp with triangular fuzzy numbers. fuzzy ahp is based on the fuzzy set theory (zadeh, 1965). a fuzzy set is a mathematical way for the representation of uncertainty in real-life problems. fuzzy numbers are a standard set of real numbers belonging to a limited interval of real numbers. triangular fuzzy numbers are defined in vector form with three parameters (l, m, u). the membership function of a triangular fuzzy number is represented in the following equation: ̃ { where the parameter m determines the maximal grade, while the parameters i and u at the lower and upper bounds. central to fuzzy logic are linguistic variables, which are variables whose values are words or sentences in a natural or artificial language (zadeh, 1975). in fuzzy ahp, the pairwise comparisons are performed through the linguistic variables. linguistic variables are represented by triangular numbers (table 1). table 1 definition and membership function of fuzzy number linguistic variable fuzzy number triangular fuzzy number (l, m, u) equal importance ̃ (1, 1, 3) little importance ̃ (1, 3, 5) strong importance ̃ (3, 5, 7) very strong importance ̃ (5, 7, 9) extreme importance ̃ (7, 9, 9) implementation of fuzzy ahp involves several steps: (1) building a hierarchy. (2) developing pairwise fuzzy comparison matrices. (3) testing consistency of respondents’ judgments using cr ratio (saaty, 1980). cr is calculated as a ratio between consistency index of the pairwise comparison matrix (ci) and consistency index of random matrix (ri), where ci, denoted ci = (λmax-n)/(n-1), gives information about consistency among pairwise comparison judgments, and ri is the average value of ci obtained from 500 random positive reciprocal pairwise comparison matrices generated using the saaty scale. if cr is less than 5% for a 3×3 matrix, less than 9% for a 4×4 matrix, and less than 10% for larger matrices, then the matrix is consistent (saaty, 1995). (4) calculating fuzzy benefit segmentation of outbound summer package tourists 405 weights. using algebraic operations for fuzzy numbers (zadeh, 1965), for each row the geometric mean ̃ (∏ ̃ ) is computed (buckley, 1985), and then fuzzy weights for each criterion are computed by ̃ ̃ ̃ ̃ ̃ , where and represent multiplication and addition of fuzzy numbers, respectevely. (5) in order to be compared and ranked, priorities have to be defuzzified. in this study they are deffuzified by using center of area method. this way the best crisp performance (bcp) value or best nonfuzzy performance (bnp) value (hsieh, lu, & tzeng, 2004; tzeng & teng, 1993) is calculated by [ ] (6) crisp values have to be normalized by equation xi (norm) = xi /  n i=1xi. (7) local priorities obtained at different hierarchy levels are aggregated into final, global priorities. a review of the literature revealed that ahp and fuzzy ahp have been applied in a number of tourism related studies. crouch (2010) used ahp to determine the relative importance of different attributes of the competitiveness on the overall competitiveness of the tourist destination. ahp is used in research related to determining the relative importance of natural attractions at destinations (deng et al. 2002), selection of a location for a theme park (moutinho & curry, 1994), in convention site selection (chen, 2006), and evaluation of hotel websites (akincilar & dagdeviren, 2014). fuzzy ahp has been applied in a selection of hotel location (chou et al., 2008), cruise port of call selection (wang et al., 2014) and the development of online attraction recommendation system for tourists (huang & bian, 2009). sheng-hshiung et al. (1997) evaluated importance of travel related risks perceived by taiwanese package tourists, and hsu et al. (2009) used fuzzy ahp for analysing incoming tourists' preferences for destination attributes and resulting preferences for 8 tourism destinations in taiwan. however, until now, fuzzy ahp model was not used in the analysis of the relative importance of the various benefits package tourists seek during the summer holidays, in order to reveal different market segments. to the best of our knowledge, this is the first attempt to apply fuzzy ahp for these purposes. 2.2. hierarchy and questionnaire design benefits sought by summer vacation package tourists are broken down into the hierarchical structure according to the phases in the value chain (fig. 1). in order to determine key benefits sought by outbound summer vacation package tourists, in-depth interviews with sales representatives of five biggest serbian tour operators have been made, in order to determine key attributes their clients are most deeply and in detail asking about when choosing vacation package. at the end, a list of 18 most frequently sought attributes/benefits that fit into package tourist value chain has been formed. when constructing hierarchy, a value chain model developed by yılmaz and bititci (2006) has been adopted, with an addition of a prepurchase travel related information benefits. these are comprised of travel information search benefits related to the various information needs (vogt & fesenmaier, 1998), as well as those related to the destination brand (chang, chen, & hsu, 2012). 406 b. zeĉević, i. kovaĉević fig. 1 hierarchy diagram of benefits sought by summer vacation tourists in the first part of the questionnaire the respondents were asked to answer on a fivepoint scale to what extent one variable is more important than another, using linguistic variables (table 1). the second part of the questionnaire contained socio-demographic questions. telephone interviewing has been used in order to get information from respondents. benefit segmentation of outbound summer package tourists 407 2.2. sample and data collection the survey was conducted in the republic of serbia on a sample of 850 respondents. the criterion of selection was the experience of travelling in the last three years within the package arrangement of tour operators. the necessity of compliance with this criterion was essential in order to be able to assess respondents’ importance of different benefits they expect from the package vacation. the study used stratified sample. the criterion for defining the strata was selected based on the official statistical division of serbia into four statistical regions šumadija and western serbia, belgrade, southern and eastern serbia, and vojvodina. in each geographic area two largest towns were selected. table 2 survey sample final sample the original sample % n=729 % n=850 sex male 37.2% 271 37.1% 297 female 62.8% 458 62.9% 503 age 18-24 14.5% 106 14.9% 119 25-29 17.8% 130 17.6% 141 30-39 19.9% 145 19.7% 158 40-49 19.1% 139 18.5% 148 50-59 16.6% 121 16.7% 134 60+ 12.1% 88 12.5% 100 personal monthly net income (in serbian dinars) no income 23.7% 173 24.2% 194 up to 30 000 16.5% 120 17% 136 30 001-50 000 22.5% 164 21.4% 171 over 50 000 14.7% 107 14.7% 118 doesn’t know/refuses to answer 22.6% 165 22.6% 181 monthly household net income per person (in serbian dinars) up to 20 000 17.8% 130 18.5% 148 20 001-30 000 16.6% 121 15.7% 126 30 001-50 000 18.8% 137 18.5% 148 over 50 000 11.8% 86 12.1% 97 doesn’t know/refuses to answer 35.0% 255 35.1% 281 place of residence belgrade 23.9% 172 23.64% 187 šumadija and western serbia 28.9% 208 29.3% 232 southern and eastern serbia 25.8% 186 25.8% 204 vojvodina 21.4% 154 21.2% 168 education incomplete primary / primary / 3 years secondary school 7.4% 54 8.1% 65 4 years secondary school 41.3% 301 41% 328 college 15.2% 111 16% 128 university diploma 36.1% 263 34.9% 279 408 b. zeĉević, i. kovaĉević the survey was conducted by telephone. contacts have been chosen randomly from the telekom serbia database. on average, every twentieth contact was eligible for the survey. reasons for ineligibility were: (1) not answering the phone; (2) refusal to participate in the survey; (3) unfulfilled criteria regarding previous package vacation experiences, and (4) not fitting in the necessary demographic profile. 3. results and discussion based on answers from respondents, a fuzzy comparison matrix has been formed. based on saaty’s threshold (saaty, 1995), respondents whose comparisons were inconsistent, were excluded from the further analysis. it was found that there were 121 respondents with 189 inconsistent responses. following the fuzzy ahp procedure, the overall ranking of the benefits summer package tourists seek, has been obtained based on their importance (table 3). in order to reveal the grouping of tourists according to their preferred benefits, a twostep cluster analysis has been applied using the log-likelihood measure (chiu et al., 2001; zhang et al., 1996). the number of clusters have been determined using schwarz's bayesian criterion (bic). with four clasters, bic has the lowest value (901,323) and the change in bic between adjacent number of clusters is smallest (0,293), while the ratio of distance measure is the biggest (1,412). table 4 shows the importance of benefits for each of the four segments identified. it is obvious that segments differ in preferred benefits they seek. moreover, there is no overlapping between segments in first 4 most preferred benefits the first segment (variety seekers) is comprised of tourists who prefer benefits emanating from destination attractions and activities. benefits they seek are related to natural resources (beautiful beaches and natural attractions), a rich cultural heritage, good choice of quality destination activities and recreation infrastructure. in other words, this segment seeks the diversity of destination experiences. also, this segment finds availability of information about the destination from different sources (tv, magazines, internet, friends etc.) very beneficial. the second segment (package-centrics) is made of tourists whose benefits sought center around activities of tour operators and travel agencies. characteristics of the tour program, the provision of tour leading/guiding services as well as the existence of financial incentives are essential to them, followed by the possibilities of visiting attractions and having other activities on the way to and from the destination, and quick and comfortable transportation to and from the destination. this segment represents the typical mass tourist, without interest for a deeper exploration of the destination. the third segment are comfort seekers whose most important benefits are those created in hotels the variety and quality of hotel food and beverages, the quality of services in accordance with the class of hotel / resort, the level of comfort of the hotel, the location of the hotel. in addition to the services provided in hotels, significant benefits are related to the transport services that facilitate travel quick and comfortable transportation to and from the destination. this segment, in essence, prefers maximum comfort on holiday. benefit segmentation of outbound summer package tourists 409 table 3 overall ranking of the importance of benefits goa l level 1 (criteria) weight level 2 (subcriteria) weight global weight rank t o u ri st s b e n e fi ts f ro m p a c k a g e d v a c a ti o n s benefits from travel related information c. i. = 0.093, c. r.= 0.010 0,115 information search benefits (information from friends, newspapers, magazines, internet, tv) 0,516 0,059 7 destination brand 0,484 0,056 8 benefits that are created through the business activities of travel agencies c. i. = 0.0095, c.r. =0.011 0,131 the information provided by the travel agency (advice, website, brochures) 0,307 0,040 17 the professionalism of sales staff (efficiency, courtesy, responsiveness) 0,361 0,047 15 possibilities of getting other important services (reservations, travel insurance etc.). 0,331 0,043 16 benefits related to the business activities of tour operators c.i. =0.0129, c.r. = 0.014 0,185 quality travel guide 0,291 0,054 10 the characteristics of the package program 0,353 0,065 3 financial incentives for the purchase of the package 0,354 0,066 2 benefits related to the transport of tourists c. i. = 0.073, c. r.= 0.018 0,102 quick and comfortable transportation to and from the destination 0,492 0,052 12 the possibility of visiting attractions and having other activities during the trip 0,508 0,050 13 benefits related to the destination attractions and activities c. i. = 0.089, c.r. =0.015 0,245 beautiful beaches/natural attractions 0,256 0,063 6 interesting cultural attractions 0,264 0,067 1 good choice of destination activities 0,259 0,064 5 recreation infrastructure 0,221 0,053 11 benefits created in hotels c.i.=0.036, c.r.=0.032 0,222 the level of comfort of the hotel 0,250 0,057 7 quality of services in accordance with the class of hotel / resort 0,219 0,049 14 the variety and quality of food and beverages in the hotel 0,287 0,065 4 the location of the hotel 0,244 0,054 9 410 b. zeĉević, i. kovaĉević table 4 ranking of benefits sought by segments of outbound summer vacation tourists benefits segment 1 variety seekers (n=167, 22.9%) segment 2 packagecentrics (n=154, 21.1%) segment 3 comfort seekers (n=145, 19.9%) segment 4 safety seekers (n=263, 36.1%) information search benefits 5 18 18 1 destination brand 7 15 17 2 the information provided by the travel agency (advice, website, brochures) 12 11 16 3 the professionalism of sales staff (efficiency, courtesy, responsiveness) 13 9 14 5 possibilities of getting other important services (reservations, travel insurance etc.). 11 12 15 4 quality travel guide 16 2 7 8 the characteristics of the package program 8 1 9 6 financial incentives for the purchase of the package 10 3 10 7 quick and comfortable transportation to and from the destination 15 5 3 12 the possibility of visiting attractions and having other activities on the way to and from the destination 14 4 6 10 beautiful beaches/natural attractions 4 13 8 11 interesting cultural attractions 1 14 11 15 good choice of destination activities 2 17 13 9 recreation infrastructure 3 16 12 16 the level of comfort of the hotel 18 10 5 18 quality of services in accordance with the class of hotel / resort 17 8 2 17 the variety and quality of food and beverages in the hotel 9 6 1 14 the location of the hotel 6 7 4 13 the fourth segment (safety seekers) are those to whom safety and risk mitigation are substantial. they highly value destination brand and all he pre-trip information they can get before going to buy the package vacation. in this respect, they also prefer the benefits that are created through the provision of services by travel agencies, and advisory services by their sales staff. they also look for getting other important services for a hassle-free vacation, like travel insurance. conclusion this research showed that fuzzy ahp could be used not just for understanding of tourist preferences, but also as a base for a segmentation. this is a first attempt to apply fuzzy ahp for that purpose in tourism. this study has shown that, as frochot & morrison (2000) argued, benefit segmentation could be used for development or modifying of vacation packages, and is in line with previous studies (calantone & johar, 1984; woodside & jacobs, 1985). also, segmentation benefit segmentation of outbound summer package tourists 411 based on benefits tourists seek could help destinations coordinate activities of actors along the destination value chain, as well as to create more efficient marketing campaigns. there are some limitations of this research, which has set the basis for future research. the choice of benefits included into ahp model is made based on deep interviews with tour operators' sales representatives. although they are in contact 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(1996). birch: an efficient data clustering method for very large databases. in acm sigmod record, vol. 25, no. 2 (pp. 103–114). new york: acm. http://doi.org/ 10.1145/235968.233324 segmentacija turista koji koriste letnje paket aranžmane za inostranstvo na osnovu koristi ova studija daje analizu preferencija turista za koristima proisteklim iz letnjih odmora putem paket aranžmana. svrha rada je da klasifikuje turist koji putuju na letnje odmore korišćenjem paket aranžmana, na temelju preferiranih koristi koje traže od svog putovanja. analiza preferiranih traženih koristi je urađena korišćenjem analitlčkog hijerarhijskog procesa (ahp). uzorak od 850 ispitanika je intervjuiran putem telefona kako bi se otkrille njihove preferencije. da bi se utvrdilo kako se turisti grupišu u segmente prema preferiranim koristima, primenjena je dvostepena klaster analiza korišćenjem mere funkcije verodostojnosti, a broj klastera je utvrdjen korišćenjem švarcbajezovog kriterijuma. identifikovana su četiri segmenta po osnovu traženih koristi: oni koji traže raznovrsnost, oni koji traže koristi fokusirane na sam paket, oni koji traže komfor i oni koji preferiraju sigurnost. ovo istraživanje je pokazalo da se fazi ahp može koristiti ne samo za razumevanje preferencija turista, nego i kao osnov za segmentaciju. ovo je prvi pokušaj primene fazi ahp za tu namenu u turizmu. kljuĉne reĉi: koristi za turiste, segmentacija po osnovu koristi, turisti koji koriste letnje paket aranžmane plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 1, 2017, pp. 71 82 doi: 10.22190/fueo1701071d review paper migration as a factor of changing the economic and demographic profile of the european union1 udc 314.7:314.18(4-672-4) dejan ž. đorđević 1 , danica šantić 2 1 university of niš, faculty of economics, niš, serbia 2 university of belgrade, faculty of geography, belgrade, serbia abstract. in the age of raising global migration flows and increased mobility of the labour force in the world, there is a need to understand the main determinants of this phenomenon and to direct the focus of migration research to the various challenges it brings. this is a very important theme, especially in europe, because 2014 and 2015 were the years of the highest number of immigrants, since wwii. migrants are economic migrants and refugees, but in unique term they are asylum seekers as they want to stay, live and work in eu countries. their population structure is quite different from that of eu population: they are young and in optimum reproductive and working age. is that going to change not only quantitative, but also qualitative characteristics of population living in eu countries which are facing population decline or stagnation, low fertility rate, ageing and lack of labor force? can we expect the redistribution of eu population due to intensive migration flows in certain countries, or a change in religious structure of the continent? those are the questions of great importance because the migration flows today are shaping the future of eu population. key words: migration, labour force, refugees, asylum seekers, economic migrants jel classification: j61, j19 introduction international migrations are an increasingly important element of contemporary demographic dynamics and due to its high volatility, it remains the most unpredictable element of population change (coleman, 2008). today, the world is facing mass migration flows, which are the most obvious indicator of globalization process. the voluntary and 1 received october 26, 2016 / revised february 24, 2017 / accepted february 27, 2017 corresponding author: dejan ţ. đorđević faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: ekngeo@gmail.com 72 d. ţ. đorđević, d. šantić irregular migrations are the main demographic factors that are shaping nations and states worldwide. more than 230 million people are international migrants, which represents 3% of total world population. but together with internal migrants that number reaches 1 billion people which means that every 7th person in the world changed their place of residence. more than 60 million people around the world in 2014 had been forced to flee their homes due to armed conflict, violence, environmental stress and were living in displacement within or outside of their home country. that is the largest number of displaced persons since wwii with 33 millions idps and 16 millions refugees. this includes 11 million people who were newly displaced during the year in comparison to 2013, the equivalent of 30.000 people a day (unhcr, 2015). europe is facing highest peacetime level of migration flows for centuries, both in absolute numbers and in relation to population size. it is the dominant factor of changing demographic characteristics determining the size, spatial distribution, rate of change, and composition of the most eu countries, and also affects the age-structure of their population (coleman, 2008). in this paper we will analyze the contemporary migration flows to eu, pointing out how the qualitative and quantitative characteristics of migrant population can affect the current demographic profile of eu. also, the diversity and importance of migration to and within eu with all its consequences to contemporary and future demographic development will be emphasized. 1. population dynamics of eu – main trends and characteristics on 1 january 2015, the population of the european union was estimated at 508.2 million which was 70% of population living in whole european continent. compared to the data from 1 january 2014 (506.9 million), that is the increase of 1,3 milion people. however, between 1960 and 2015 the population has increased by 100 million people. in the same period the share of the world’s population living in eu members states fell from 13,4 % to 7,1 %. in 2014 eu as a whole recorded a positive natural change of its population of 0.2 million or 0,4‰. that was two times higher than in 2013. the crude birth rate was 10.1‰ or in absolute terms 5.1 million births. the highest crude birth rates were recorded in ireland (14.4‰) while the lowest were registered in portugal (7.9‰). the crude death rate was 9.7 ‰ or 4,9 million deaths. the highest crude death rate was in bulgaria (15.1 ‰), while the lowest was in cyprus (6.2‰). the highest positive natural change of the population was registered in ireland (8.1‰), cyprus (4.7‰), france and luxembourg (both 4.0‰), united kingdom (3.2‰). among the eleven eu member states which registered a negative natural change in 2014, the largest were in bulgaria (-5.7‰), romania (-3.5‰), latvia and lithuania (both 3.4‰) and hungary (-3.3‰) (www. epp.eurostat.ec.europa.eu). graph 1 population change by component, eu 28, 1960-2013. (eurostat, 2015.) migration as a factor of changing the economic and demographic profile of the european union 73 the contribution of net migration to total population growth has exceeded the proportion of natural increase since 1992 and became the main determinant of population growth. compared to 2012, the natural change halved and net migration doubled. in terms of crude rates in 2012 net migration was 1.7 and a year later 3.4 ‰. it peaked in 2003 (95% of total population growth), decreased to 57% in 2009 and peaked again at 95% in 2013. conversely, the proportion of natural change in total population growth declined from 43% in 2009 to 5% in 2013. considering the previous data it is obvious that countries in the eastern part of eu are facing population decline from very low and sustained fertility levels and negative net migration, while in western part the number of population is growing because of the attractiveness and opportunities to migrants. in some countries of western europe immigration is driving up population growth. the examples are germany and italy, countries with total population increased in 2015, even in spite of negative natural change, meaning that the population growth was driven by net migration. on the other hand, the member states on the east recorded slow or reverse decline. in some countries in the east emigration predominates and accelerates the reduction of numbers arising from natural decrease (graph 2; coleman, 2008). 2. migration patterns in the eu – macro flow, micro motives the history of europe has been shaped by migration, either across continent, beyond it, or (increasingly) into europe (moses, 2011). since the age of great discoveries until the second half of the xx century, europe was continent of emigration, mainly into the new world, but also in colonies in asia and africa. that means that for most european countries, large scale of immigration is a more recent phenomenon (hall, 2000). in the second half of the xx century two main types of migration formed new, ethnically different population in advanced europe industrial countries: ’’guestworkers’’ and ’’colonial workers’’ (castles & miller, 2009, p. 97). the rapidly expanding economies of the west utilized the labour reserves of the less developed european periphery: mediterranean countries, with strong influx of labour force from turkey and north africa. also the former yugoslavia was a one of the major sources of guest workers, especially from the eastern part of serbia (šantić et al, 2016). on the other hand, migrants from former colonies were important for britain, france and the netherlands. in the period 1945-1973 the number of foreign workers in western europe doubled from 3 to 6% of the total labour force (hall, 2000). economic motivations for migration were predominant, but that led also to family reunion and formed very strong chain migrations, which caused the formation of new ethnic minorities. the fall of the berlin wall (1989), ending of the cold war (1991) together with process of globalization brought a new phase in european migration patterns. transformation in both north and south regions worldwide increased the pressure to migrate and generate new forms of mobility: decline of organized labour migration in western europe, family reunion of former foreign workers, transition of many countries of, so called, eu periphery to countries of immigration, shifts in the origin and forms of migration, emerging forced and irregular migration, increase in the international mobility of highly qualified persons (castles & miller, 2009). 74 d. ţ. đorđević, d. šantić since 1991, the migration component became the major factor in increasing the eu population and exceeded the value of the natural growth rates. political obstacles have ceased to exist and the people start to migrate from central and east europe toward the west. the enlargements of the european union eastwards in may 2004, january 2007 and july 2013 completed a geo-political shift in post-1989 europe that in terms of the migration and mobility of population poses the biggest demographic change in europe since the end of the wwii. migration issues played a significant role in the negotiations with new and future member states, greatly contributing to differentiation within the countries of central and eastern europe. (favell, 2008). the growing role of the eu in the field of migration has contributed to the strengthening and expansion of the migration system, concentrated around the countries of the union. significant shift in migration patterns in the first decade of xxi century can be explained by more restrictive migration policies, both at the level of the european union and within its member states. also, spreading economic recession and unemployment which started in 2008 caused significant drop in the scale of migration flows (graph 2). graph 2 net migration in europe, eu, russian federation and in other regions of europe (eurostat (2010), council of europe (2006), rosstat (2009), sobotka (2009)) the eu member states are very important destinations of immigrants. in the period 1985-2008 net migration gain was 22 million immigrants or one million per year on average, with a strong acceleration after 2000, which marked the beginning of a new era of the eu as a major immigration destination. immigration has become the main driver of population increase, because two-thirds of the eu population growth were attributable to migration. but, at the same time, european regions are very diverse in their immigration and emigration levels and trends, with many eastern european countries losing population due to emigration (sobotka, 2009). in 2013 3.4 million people immigrated, while 2.8 million migration as a factor of changing the economic and demographic profile of the european union 75 emigrants were reported to have left an eu-28 member state. in the most states a higher number of immigrants than emigrants was recorded. germany is the country with the largest absolute net migration among the member states, with 592.200 persons in 2012, followed by the uk (498.000), italy (350.000), france (327.400) and spain (304.100). states in which the amount of net migration is less than 10.000 are: croatia, malta, slovakia. the exceptions are bulgaria, poland, romania and three baltic republics: estonia, latvia and lithuania. in absolute numbers, spain, germany and the united kingdom received the largest number of migrants, which amounts to more than half of the total number of migrants in the european union. the biggest decline in the number of immigrants was recorded in italy (100.000 people), and, on the other hand, the largest increase recorded in germany (200.000 persons). in relation to the total population, luxembourg has the highest share of migrants, as much as 36%, which means that every third inhabitant of the country is immigrant (80% of all immigrants are from eu member states). in the same period, it recorded the highest rate of emigration: 21% (http://epp.eurostat.ec.europa.eu). the first decade of the twentieth century is characterized by large migration waves both from eu member states, and from other countries worldwide. among 3.4 million immigrants moving to and between the eu in 2013, 1.4 million citizens were from non-member countries, 1.2 million people with citizenship of a different eu member state from the one to which they immigrated. on 1 january 2014, the number of people living in the eu-28 who were citizens of non-member countries was 19.6 million (3.9% of the eu-28 population), while the number of people living in the eu-28 who had been born outside of the eu was 33.5 million, an estimated 6.6 % of the population were foreigners. it is important to emphasize that at the beginning of xxi century the number of foreigners living in eu-27 has increased by 10.2 million. people born outside the eu-28 outnumbered persons without the citizenship of a member state in all eu28 member states except the czech republic. in absolute terms, the highest numbers of non-nationals were in germany (7 million), united kingdom (5 million), italy (4.9 million), spain (4.7 million) and france (4.2 million). non-nationals in these five member states collectively represented 76% of the total number of non-nationals living in the eu-28, while the same five member states had a 63% of the eu’s population (www.eurostat.eu). but from where are people coming to eu? slightly more than half of the total number of immigrants originating from eu member states, in a first place from: romania (384.000 persons), poland (266.000) and bulgaria (98.000). it is obvious that there is a clear division, within the eu, in net migration between the ‘older’ members (15 eu countries as of 2003) and the ‘new’ member states (12 countries of which only two, cyprus and malta, do not belong to the post-communist societies). the eu-15 countries have been attractive for immigrants because of their economic development, which surpassed their small natural increase ever since 1989. in contrast, most of the ‘new’ member states have recorded both negative net migration (since the late 1980s) and negative natural population increase (since the mid-1990s), resulting in a continuous population decline. exceptions are czech republic, hungary and slovenia, who have recorded considerable immigration after 2000. considering the immigrants from non eu – 28, there were significant changes in the countries of origin. in the first decade of new millennium, most migrants were coming from morocco (157.000), followed by residents of china (97.000), india (91.000), albania (81.000) and ukraine (80.000). the largest number of moroccans immigrated to spain (94.000) and italy (37.000), while most chinese chose spain (27.000). the main destination for the people from india was the united kingdom (http://epp.eurostat.ec.europa.eu). but in the http://epp.eurostat.ec.europa.eu/ 76 d. ţ. đorđević, d. šantić last five years there have been considerable changes. due to the wars in mena region, population pressure in sub saharan africa and worsening the economic situation due to global economic crisis, southern europe became an example of a massive immigration fueling the strongest population increase in europe. refugees and economic migrants are coming fromsyria, afghanistan, iraq, iran, eritrea, somalia, and many other asian and african countries. the highest pressure of immigrants is in greece, italy and spain, countries at the external eu borders. those migrants usually represent the asylum seekers whose number in 2013 was 435.000, increasing to 626.000 in 2014 and over a million in 2015. among those who are seeking asylum in the eu-28 in 2014, the highest number were from syria (122.000), followed by afghanistan, eritrea and serbia (each accounting for between 31 and 41.000 asylum seekers). in 2015 the highest number of asylum seekers was from syria (180.000), then afghanistan (80.000), iraq (50.000), albania, pakistan, eritrea. most of those refugees went to germany, sweden and austria. the conflict in syria continues to be by far the biggest driver of the migration. but the ongoing violence in afghanistan, iraq, abuses in eritrea, as well as poverty in many other countries are also leading people to leave their countries. because of the rapid increase of refugees there is a rising tension in eu member states, especially the ones with the highest influx of asylum seekers. that is why the eu ministers voted to relocate 2 120.000 migrants from hungary, italy and greece over 2 years period: in germany 30.000 migrants, in britain 20.000, but within 5 years and directly from syria, in sweden 2.700. but many eu countries, especially at the east refuse that relocation plan because their governments think that migration is a burden to their economy (carrera & guild, 2015; http://epp.eurostat.ec.europa.eu). it is important to emphasize that given data of total immigrants residing in eu member states are underestimated, because they do not include undocumented immigrants. quantifying the size of undocumented migration is difficult as eu member states do not apply comparable internal apprehension practices, and comparison of country-specific migration. number of immigrants irregularly residing in the eu 15 countries are different: ranged between 1.8 and 3.3 million in 2008 (kovacheva & vogel, 2009), and 10.8 million (hoefer et al., 2010). that means between 7% and 28% of total migrants were unauthorized immigrants. 3. the impact of migrants on the eu economy the old member states have, for many years, been an attractive destination for both the residents of economically less stable eu countries, as well as for the inhabitants of the third world. the reasons why people migrate to the eu are different, but the european commission points out that, since 1995, job search has become the main reason for the migration to the eu. thus, higher earnings and better working conditions in the eu market are the main factor of modern migration within the eu (gallardo et al., 2016). when it comes to the impact of migrants on the economic changes within the eu, it is important to begin from the fact that the main driving force of migrants are economic 2 key to relocation plan: a) the size of the population (40%) as it reflects the capacity to absorb a certain number of refugees; b) total gdp52 (40%) as it reflects the absolute wealth of a country and is thus indicative for the capacity of an economy to absorb and integrate refugees; c) average number of spontaneous asylum applications and the number of resettled refugees per 1 million inhabitants over the period 2010-2014 (10%) as it reflects the efforts made by member states in the recent past; d) unemployment rate (10%) as an indicator reflecting the capacity to integrate refugees. migration as a factor of changing the economic and demographic profile of the european union 77 factors. even for refugees, who leave their home countries for mostly political reasons, the economic factor is important and difficult to separate. that this is actually so is shown in the data on tens and hundreds of thousands of middle eastern refugees, who chose germany, austria, sweden or france as their final destination, as opposed to those who remained in macedonia, serbia or another economically weaker eu country (bulgaria, romania, croatia). as noted, the impact of the influx of migrants to the eu demographic conditions is one of the key problems that pressures european countries. however, changes in the economies of these countries, which are directly caused by the rapid increase in population, are equally important for the understanding of the issue of migrant crisis. the population that comes in the highest percentage belongs to the younger age group (children and labour contingent), compared to the european population that is aging, the migrant population is on average younger by almost 20 years. although this primarily refers to refugees and not economic migrants, the impact on the european economy is no less drastic. although the main cause of this type of migration is war conflict, the age structure of migrants more or less remains the same. in both cases it is a young population, the only difference being the fact that the gender structure of refugees is more uniform, while in economic migrants they are mostly men. how significant the impact of migrants on the economy is, is best illustrated in the increase in the labor force of europe in the last decade, with a migrant share of 70%. the arrival of migrants is at the same time both desirable and undesirable for the economies of european countries. with the arrival of fresh labour force, vacancies are being filled, especially in the 3d job sector (dirty, dangerous, difficult) that the resident population of the eu countries does not want to perform. on the other hand, the high influx of skilled and highly educated migrants as cheap labor suppresses educated locals. of course, one must take into account that the influx of migrants affected the developed countries in such a way that, relatively soon after the second world war, they became economic empires. at that time, economic migrations corresponded to both emigrant and immigrant countries. this can be seen in the case of yugoslavia, where, in a relatively short period, during the 1960s, a surplus of unskilled labour force was reported, because the influx of the rural population from rural to urban areas was disproportionate to the economic development. all that excess labour was directed towards western europe, which at that time had the opposite problem. already in 1980s there occurred the saturation of the labor market in western european countries, but not when it comes to educated migrants. the process of "brain drain" became particularly strong during the civil war in yugoslavia, but continues even today with no less intensity. the eu member economies are affected not only by the fact that there is the increased inflow of unskilled labour, but also the fact that migrants come from areas with different cultures, customs and religious beliefs. precise parameters that might quantitatively show the impact of modern migration on economies of the eu countries can not be determined. what is possible to monitor is the number of migrants who reach the eu countries from countries threatened by war and poverty, and thus perform certain migrant impact assessment. for example, only in 2014 almost 285,000 migrants reached these countries, mostly syrians, eritreans and albanians (annual risk analysis, 2015). 78 d. ţ. đorđević, d. šantić 4. how immigrants are changing eu population structure? migration flows have important demographic and economic implications on the development of eu member states, primarily in transforming the main characteristics of their population for over a half of the century. those countries are characterized by a low levels of fertility (suf 1,5) which is in almost every country below replacement level (ireland is an exception). life expectancy is increasing and populations are aging, and fewer people in working age in future will have to support more elderly people (castles, miller, 2009). ageing society represents a major demographic challenge for many economies. falling fertility rates over several decades and a modest increase in the most recent decade, combined with the impact of the baby-boomer cohorts on the population structure causes greater gender imbalance within the eu-28 among older age groups (eurostat, 2014). immigration to eu member states is very heterogeneous in terms of the different recipients and countries of origin, ethnicity of migrants, as well as in terms of education. for instance, in spain 47% of the foreign born residents are coming from latin america, in france 40% of immigrants from north africa, in portugal, 45% of immigrants are from africa and 21% from latin america and in uk 29% of immigrants are coming from asia (dustmann, frattini, 2012). those immigrants, especially from non-eu states, have different demographic characteristics. foreign-born women tend to have more children. in 2008, 27% of foreignborn women lived in households with one dependent child, 19% with two dependent children, and 8% with more than two children (compared respectively to 24%, 16% and 4% of nativeborn women). it is important to mention the two different models of reproductive behavior: progressive within group of foreign-born women of muslim confession and regressive or stationary model of native, predominant christians. the higher levels of fertility among immigrants in future will cause the changes in both qualitative and quantitative characteristics, in the first place in number, age structure, religion. on the other hand, postponement of motherhood among nativeborn women may in part be attributed to increases in the average length of education of women, increased female employment rates, and changes in attitudes towards the position of women within society and the roles of men and women within families. (dustmann & frattini, 2012; eurostat, 2015). regarding gender distribution in 2013, there were slightly more men than women immigrants (53 % compared to47 %). the member state reporting the highest share of male immigrants was in slovenia (61 %) and the highest number of female immigrants was reported in ireland (52 %). in cyprus, for example, women outnumbered men among immigrants with filipino, sri lankan and vietnamese citizenship. on the other hand, in italy and spain women outnumbered men in the biggest group of immigrants (with romanian citizenship in the case of italy, and moroccan citizenship in the case of spain). in addition, among immigrants to italy, women outnumbered men among citizens of ukraine, moldavia, poland and russia, while in spain, the same applied for citizens of pakistan and senegal (graph3; eurostat, 2015). immigrants into eu member states in 2013 were, on average, much younger than the population already resident in the country of their destination. the median age of the eu28 population was 42 years. by contrast, the median age of immigrants to the eu-28 was 28 years. apart from poland, latvia, estonia, lithuania, romania, slovenia and france, the foreign-born population tends to be younger than the native population. the youngest foreign-born populations reside in iceland, ireland, finland and spain. migration as a factor of changing the economic and demographic profile of the european union 79 graph 3 the number of men and women immigrants, 2008-2014. (eurostat, 2015.) considering the levels of education there are certain regularities: ’’old’’ eu member states are receiving an influx of highly educated, talented or (in any case) ambitious east europeans, driven by the very positive selection mechanisms working in the european context (borjas 1999). east european migrants are in fact regional ‘free movers’ and, with the borders open, they are more likely to engage in temporary circular and transnational mobility flow of economic demand. on the opposite side are quite different migration trends connected with the post-colonial, guestworker and asylum immigration that has proven such a long-term permanent immigration and asylum-seeking (favell, 2008). the foreign-born population in the prime working age group of 25–54 tends to have a lower educational attainment than the native born population and they are marginally underrepresented at the high educational level and over-represented to a much greater extent at the low educational level. only in ireland the proportion of the foreign-born who are highly educated exceed 40%. several countries tend to attract immigrants with a lower level of education (portugal, greece, italy, spain and france), where 40% or more of the foreign-born population have a low level of education. those immigrants are predominantly positioned at the bottom of the wage distribution and they are employed in so called 3d jobs (dustmann & frattini, 2012; eurostat, 2015). across all countries, it seems that immigrants are economically disadvantaged, even if we compare them to natives with the same characteristics. the reason for this is that institutions in eu countries have not yet been sufficiently adapted to accommodate foreign born individuals and with no clear immigration policy or strategies about the long-term integration into economic and social structures. this might be more a problem for non-eu immigrants, as eu laws facilitate access of eu immigrants to labor markets of eu member states (dustmann & frattini, 2012). more recently, certain migrant worker policies have focused on attracting highly skilled or educated migrants. eu member states are looking for better type of immigrants: better educated and possessing skills that can be adopted to modern and fast developing technologies (bonifazi at all). this approach has been seen in several national programs (such as in denmark, germany, sweden and the united kingdom), and now forms the basis of the eu blue card scheme. student migration has become particularly important in some parts of the eu, with generally young adults migrating to take part in university courses and other educational opportunities (eurostat, 2015). 80 d. ţ. đorđević, d. šantić some predictions are that there will be lack of labor force in eu member states for 10% every year if there will be no migration influx. according to available projections, the proportion of the population of foreign origin in some european countries will increase from 5–15 % to 15–30 % by mid-century. such projections depend primarily on the assumptions about the level of international migration. eu will have in future an almost desperate structural need, in both demographic and labour force terms, for increased intraeuropean population movements. for the next 20-30 years, regardless of what happens to birth rates, this demand will persist; and if more countries come to very low birth rates and fertility levels, the situation will get worse. who will fill these 3d (‘dirty, dangerous and difficult’) jobs? eu authorities argue for their neighbors from the east, who are likely to be temporary rather than permanent, and are ethnically ‘similar’? (favell, 2008) the eu thus must be seen as a concentric, territorial project in regional integration that has used its external partner agreements to set up new mechanisms of managing regional migration flows, while closing doors to others (favell, 2008; rogers, 2000). the current context within which eu member states are drawing up their migration policies is complex and confusing. in recent years the eu has been actively trying to develop a common eu immigration policy because of the increasing number of irregular migrants entering europe. but on the otherhand, member states are simultaneously confronted with an ageing population that asks for policy responses to secure employment demands in the coming decades. by 2030 the labour shortage in europe is predicted to rise to 8.3 million workers. without migration, the eu's working age population will decline by 15 million this decade alone (2010-2020). to overcome these challenges, eu authorities have identified labour market integration of legal migrants and increasing the attractiveness of the eu as key priorities. conclusion some of the most rapid and radical changes in the history of european international migration have taken place over the last fifty years. new destinations, new regions and new flows emerged. european continent form predominantly emigrant turned to predominantly immigrant. economic transition, political changes and ethnic conflicts have affected the size and directions of the eu migration flows. restrictive immigration policies have produced the shift from the traditional migrant workers and their families to large flows of asylum seekers and undocumented migrants. as a result, different countries in europe today are home to very dissimilar immigrant populations, in terms of origin, ethnicity and education (bonifazi et al, 2008; dustmann & frattini, 2012). basic characteristics of the eu population are declining numbers, due to lower fertility rates below the replacement levels as well as an intensive process of population aging. estimates are that by 2040 the population of the continent will decline, mainly in romania, germany, bulgaria, lithuania for almost 1/5 of the total population (www.world populationreview). patterns of migration flows can change greatly over time, with the size and composition of migrant populations reflecting both their current and historical patterns. combined with the complexity and long-term nature of the migrant integration process, this can present challenges to policymakers who need good quality information on which to base decisions. migration as a factor of changing the economic and demographic profile of the european union 81 no one knows what will happen to asylum trends. one estimate puts the number of irregular migrants in the eu each year to 400.000. the probability is that wars and the economic crises will keep the asylum numbers high. but immediate attention in europe is likely to shift back to more conventional labour-shortage recruitment. there will be no return to the open door policy of the 1960s, but the eu economy will require an increase in selective primary immigration. the present xenophobia mainly spread with radical right-wing parties across eu member states calls for restriction of migration because the foreigners at the doorstep are a threat for the creation of common eu identity and free labour mobility (moses, 2011). there are initiatives for suspension of schengen agreement, new controls on the borders, introducing quota systems, rising divergence between christian and muslim immigrants and selectiveness by main types of migrants (mainly between refugees and economic migrants). nevertheless people are still coming to the eu member states changing their demographic structure, facing eu governments with new challenges of integration and creation of multicultural society, instead of deportations and xenophobia. references anex (2015). communication on the european agenda on migration annex. eurostat. bonifazi, c., okolski, m., schoorl, j. & simon, p. (2008). international migration in europe: new trends and new methods of analysis. imisco research: amsterdam university press. borjas, j. g. (1999). immigration and welfare magnets. journal of labor economics. 17(4), part 1, 607-637. carrera, s. & guild, e. (2015). can the new refugee relocation system work? perils in the dublin logic and flawed reception conditions in the eu no. 334. castles, s. & miller, m. (2009). the age of migration. international population movements in the modern world. 4th edition, palgrave, mac millan. coleman, d. (2008). the demographic effects of international migration in europe. oxford review of economic policy. 24(3), 452–476. dustmann, c. & frattini, t. (2012). immigration: the european experience (discussion paper no. 2012-01), norface migration. duvel, f. (2006). illegal immigration in europe beyond control?. palgrave macmillan. eurostat (2015). demographic report employment, short analytical web note 3/2015, social affairs & inclusion, population and social conditions. eurostat regional yearbook 2007. (2007). statistical books, luxemburg. eurostat. (2010). eurostat online statistical database. accessed 20 january 2015 at «http://epp.eurostat. ec.europa.eu/portal/page/portal/statistics/search_database». eurostat. (2015). population and population change statistics. retrieved from: http://ec.europa.eu/eurostat/ statistics-explained/index.php/population_and_population_change_statistics. accessed on: 24 june 2016. favell, a. (2008). the new face of east-west migration in europe. journal of ethnic and migration studies, taylor & francis (routledge), 34 (5), 701-716. frontex. (2015). annual risk analysis. european agency for the management of operational cooperation at the external borders of the member states of the european union, poland gallardo de luna, g., korneeva, e. & strielkowski w. (2016), integration of migrants in the eu: lessons and implications for the eu migration policies. journal of international studies, 9(2), 244-253 hall, b. (2000). immigration in the european union: problem or solution?. oecd observer, no 221-222. retrieved from: http://www.oecdobserver.org/news/archivestory.php/aid/337/ immigration_in_the_ european_union:_problem_or_solution_.html#sthash.sfs2hrd.dpuf. accessed on: 24 june 2016. hoefer, m. & baker, b. (2010). estimates of the unauthorized immigrant population residing in the united states: january 2009. office of immigration statistics, policy directorate, u.s. department of homeland security kovacheva, v. & dita v. (2009). the size of the irregular foreign resident population in the european union in 2002, 2005 and 2008: aggregated estimates, database on irregular migration, (working paper no. 4), hamburg: hwwi. 82 d. ţ. đorđević, d. šantić moses, j. w. (2011). migration in europe: in europe today, a twenty first century introduction. 4th edition, ed. tiersky r., jones e.rowman & littlefield publishers, uk. rogers, a. (2000). a european space for transnationalism? wptc-2k-07, school of geography oxford university mansfield road oxford. rosstat 2009., federal state statistics service, moscow. (2009). population projection for 2010-2030 and preliminary data on population trends in january-september 2009 (in russian). retrieved from: http://www.gks.ru/bgd/regl/b09_105/main.htm and http://www.gks.ru/bgd/free/b09_00/isswww.exe/ stg/d10/8-0.htm. accessed on: 11 june 2016. sobotka t. (2009). vienna yearbook of population research 217-233, data & trends. šantić d., kozlovs m., antić m. (2016). migrant remittances in serbia, a new approach, collection of paper of the 4 th international congres: ‘’migration in xxi century, causes and consequences’’, vol. 2, brčko, bih u.s. census bureau 2010. (2010). statistical abstract of the united states: 2010 (129th edition).washington, dc, us census bureau. retrieved from: http://www.census.gov/statab/www/. accessed on: 24 june 2016. unhcr (2015). engaging with idps, unhcr global appeal 2015 update. www. epp.eurostat.ec.europa.eu www.worldpopulationreview.com migracije kao faktor promene ekonomskog i demografskog profila evropske unije u vreme globalnog širenja migracionih tokova i povećane mobilnosti radne snage, postoji potreba da se razumeju glavne determinante ovog fenomena i da stavi akcenat na istraživanja migracija i izazove koje one donose. ovo je veoma važna tema, posebno u evropi, jer su 2014. i 2015., bile godine sa najvećim brojem imigranata, od drugog svetskog rata do danas. migranti mogu biti ekonomski migranti i izbeglice, ali univerzalni naziv je azilanti, jer oni žele da ostanu, žive i rade u zemljama eu. njihova struktura stanovništva se prilično razlikuje od strukture stanovništva eu: oni su mladi i u optimalnom reproduktivnom dobu i radno sposobni. da li će to promeniti ne samo kvantitativne, već i kvalitativne karakteristike stanovništva koje živi u zemljama eu, koja se suočava sa padom ili stagnacijom stanovništva, niskom stopom nataliteta, starenjem i nedostatkom radne snage? možemo li očekivati preraspodelu stanovništva eu zbog intenzivnog priliva migranata u određenim zemljama ili promene u verskoj strukturi kontinenta? to su pitanja od velikog značaja, jer migracioni tokovi današnjice oblikuju budućnost stanovništva eu. ključne reči: migracije, radna snaga, izbeglice, azilanti, ekonomski migranti plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 2, 2017, pp. 105 115 doi: 10.22190/fueo1702105m preliminary communication macroeconomic determinants of economic growth in serbia 1 udc 330.101.541:330.55(497.11) ivan milenković, branimir kalaš, jelena andrašić university of novi sad, faculty of economics subotica, serbia abstract. monetary policy is an important segment of the economic policy of each country where inflation and monetary aggregates represent its significant components. their movement reflects the trends in the volume of money and the price level which is of great relevance for the economic situation in the country. the aim of the paper is to manifest the impact of macroeconomic indicators on the real gross domestic product. in this paper, inflation (inf), monetary aggregate (m3), public expenditures (pe) and foreign direct investment (fdi) are used as independent variables, while the gross domestic product is determined as a dependent variable. the results showed that there is a positive relationship between gdp and inf, pe and fdi, but it is statistically not significant. on the other hand, m3 has a negative impact on gdp, it is statistically significant. using correlation matrix, a very high correlation between inf and pe was found, while the lowest correlation was recorded between gdp and inf. key words: gross domestic product, inflation, monetary aggregate, public expenditures, foreign direct investment, serbia jel classification: c10, e52, e60, h50 introduction theoretical background inflation represents one of the most important phenomena in the economy. since the 1970 inflation was not considered as a threat to the economy and phillips (1987) showed in his empirical study that inflation has a positive reaction to economic growth and it is negatively related to unemployment. snowdon and vane (2005) concluded that this world economic condition survived only until 1970. for this period, friedman (1976) defined 1received february 24, 2017 / revised april 19, 2017/ accepted april 26, 2017 corresponding author: branimir kalaš university of novi sad, faculty of economics subotica, serbia e-mail: branimir.kalas@ef.uns.ac.rs 106 i. milenković, b. kalaš, j. andrašić that countries with high rates of inflation had lower rates of growth and determined the fact that high level of inflation is negatively related to growth. further, friedman and schwartz (1963) argued that changes in money stock preceded changes in nominal income in the united states. the relationship between inflation and economic growth is one of the most popular macroeconomic issues among policy makers, central bankers, and macroeconomists (barro, 1995). there are many studies which researched linkage between inflation and economic growth (barro, 1995; ghosh and phillips, 1998; harris et al. 2001; khan and senhadji, 2001; gokal and hani, 2004; mubarik, 2005; lee and wong, 2005; saaed, 2007; munir and mansur, 2009; quartey, 2010; john et al. 2011; hasanov, 2011; hossain et al. 2012; kremer et al. 2012; antwi et al. 2013; shuaib et al. 2015; ibarra and trupkin, 2015; ruzima and veerachamy, 2016). ghosh and phillips (1998) found a statistically significant negative relationship between inflation and economic growth, but their results showed that there can be a positive relationship between these variables when the inflation rate is ranged between 2-3 percent or below. also, harris et al. (2001) determined negative relationship using panel data for oecd and apec countries from 1961-1997. gokal and hani (2004) used correlation matrix and granger causality test for fiji in the period 1970-2003 and found a weak negative correlation between inflation and economic growth and one-way causality which runs from growth to inflation. in his analysis, quartey (2010) used cointegration tests, error correction model and laffer curve on example of ghana and determined that inflation has a negative effect on economic growth and it is maximized when the inflation rate is at 22.2%. malik and chowdhury (2001) found a positive and statistically significant relationship between inflation and economic growth as well as that the sensitivity of growth to changes in inflation rates was smaller than that of inflation to changes in growth rates. on the other hand, dotsey and sarte (2000) studied the effects of inflation variability on economic growth for the united states and they found a negative relationship between these variables. also, lupu (2012) developed a model for the period 1990-2009 in romania where the two decades are analyzed separately. in the first period, high and volatile inflation was the main source of macroeconomic instability that led to the gdp decrease. from 2001 to 2009 romania had higher economic growth which it accompanied by a lower level of inflation. the same results, boyd and champ (2006) argued in their analysis where higher inflation leads to lower economic growth and lower inflation encourages economic growth. erbaykal and okuyan (2008) researched this relationship in turkey using quarterly time series data from 1987-2006. results of their analysis reflect no statistically significant long-term relationship and statistically significant short-term relationship. ihsan and anjum (2015) found that consumer price index and interest rate have a significant impact on gdp, where inflation rate has no significant impact on gdp. khan and senhadji (2001) found a statistically significant long-run negative relationship between consumer price index and real gross domestic product. polan and grauwe (2005) determined that positive reaction of real output on money supply growth could only be realised in the short run. in an analysis of 125 countries in the period 1980-2004, abott and de vita (2011) looked at this relationship in different exchange rate regimes. their results showed that developing countries with adopted flexible exchange rate have higher and significant costs of inflation on the economic growth compared to countries which use fixed or intermediate exchange rates. macroeconomic determinants of economic growth in serbia 107 furtula (2007) emphasizes that central banks use different monetary instruments to achieve the ultimate objectives of monetary policy. precisely their implementation or combination depending on their design, can be influenced by the amount of the money supply and thus provide an optimal economic development viewed from the standpoint of stability and economic growth. on the other hand, labus (2011) points out that the effects of monetary policy are reflected in the volume of money in circulation and in this sense monetary policy is politics of money. however, money supply and its growth rate is not the aim of monetary policy and not used for the assessment of its effects on production and level of prices and thus builds on the determination of monetary policy as a policy without money (beck and wieland, 2010). the concept of money supply should be positioned so that it is optimized for the national economy to function normally. in contemporary conditions, the term of money supply includes the sum of financial forms which are considered as money in the economy of one country while the monetary aggregates used as a generic term for the different groups of financial instruments, money, and other financial assets. monetary indicators are parameters that are affected by the central bank and they have the purpose of measuring the functioning of monetary policy (hadžić, barjaktarović, 2015). 1. data and analysis this segment of the paper reflects the movement of the annual growth rate of real gross domestic product and inflation and monetary aggregates as the main monetary indicators as well as government expenditures and foreign direct investment for the fifteen year period 2001-2015. before statistic analysis of this variables, it is necessary to show their movement and level of growth rates. fig. 1 the trend of gdp in serbia from 2001 to 2015 source: national bank of serbia based on figure 1, it can be concluded that serbia had high growth rates until 2008 after which there is a steep decline in 2009, when it stood at -3.8%. in the pre-crisis, this growth can be attributed to the inflow of foreign capital which is drawn through the process of privatization 108 i. milenković, b. kalaš, j. andrašić in serbia. however, after the slowdown of the global economy in 2008 and especially in 2009, there was a decline in the level of foreign direct investment in the world which is reflected on serbia. bearing in the mind that growth of serbian economy is dependent on foreign capital, serbia uses an aggressive policy of attracting foreign direct investment by providing subsidies. in this way, it has managed to attract no small number of investors, including the fiat and their components whose production and export directly reflected in the growth rate of the gross domestic product. at the end of 2015, serbia had a modest growth of 0.74% which is far from the level that is required for the dynamic growth of our economy. fig. 2 the trend of inflation in serbia from 2001 to 2015 source: national bank of serbia figure 2 reflects the annual growth rate of inflation in serbia for the period 20012015. at the beginning, the average inflation rate stood at over 80% and then the tenfold fall occurred in 2002 and 2003 when inflation was at the level of 2.71%. next, in the period 2004-2008, the growth of inflation was higher than the growth of the gdp which implies that prices in serbia increased faster than gross domestic product. this can especially be seen in 2005 when the inflation growth was three times higher than gdp growth or 16.25% compared to 5.54%. in 2011 a high inflation rate of 11.74%, was recorded, but in the coming years, inflation had slight decrease trend. however, looking at the previous two years and especially 2015, inflationary pressures remained low on the basis that the majority of domestic factors ,as well as on the basis of low prices of primary products (oil and agricultural commodity products) on the world market and generally low inflation in the international environment (national bank of serbia, 2015). in 2015, the economy had the lowest inflation rate of 1.39% which is over 98% less compared to the beginning of the observed period. macroeconomic determinants of economic growth in serbia 109 fig. 3 the trend of monetary aggregates in serbia from 2001 to 2015 source: ministry of finance looking at the movement of monetary aggregates in serbia, their growing tendency can be noted. what is noticeable that all indicators have recorded the highest growth rates in 2001 when there has been an increase of over 90% of m3 and more than 100% of m1 and m2 at the annual level. a similar trend was recorded in the next year where the growth of indicators ranged 50-60%. in the period 2003-2007, m3 increased faster than the previous two indicators and its average growth rate was 36.52% which is 14.4% more than m1 and 26.7% compared to m2. this can be attributed to positive growth rates of m3 during the whole observed period, unlike m1 and m2 which had negative growth rates. m1 had negative growth rates in 2008 and 2010 where it amounted to 3.3% and 2%, while on the other hand, m2 declined in 2010 and 2012 when rates were negative of 6% and 1.5%. however, in the last four years, m1 had the highest average growth rate of 14.75% compared to m2 and m3 whose average growth was around 7% and 9%. fig. 4 components of monetary aggregates in serbia from 2001 to 2015 source: ministry of finance 110 i. milenković, b. kalaš, j. andrašić following the previous figure, components of monetary aggregates for the same period were observed. first, as part of m1, both categories have growing trend during all years except 2010 and 2012, at cash in circulation and 2008 at transaction deposits which coincide with negative rates of m1. second, deposits in domestic currency and term deposits have a growing trend except in 2010 and 2012, which is identical with the declining trend of m2, but it is indicative that in 2013 a declining trend in this category was recorded although it did not affect the observed monetary aggregate. on the other hand, deposits in foreign currency recorded the constant growth which shows greater confidence in the foreign currency compared to domestic currency. also, in the last five years, the average growth of deposit in foreign currency amounted to 28.45% where in 2006 it recorded the highest growth rate of 44.41%. fig. 5 the trend of public expenditures in serbia from 2001 to 2015 source: international monetary fund it is necessary to reflect the share of public expenditures in gdp and their trend because this variable is included in the model. the average share of this indicator in gdp amounts to 42.61%. in 2001, it amounted to 33.81% in order for the next year there was an increase of 9.09%. a similar trend was recorded in 2006 and 2012. when the share increased by 2.92% and 3.74%. from 2012, public expenditures have a decreasing trend, where it was 44.74% in 2015. fig. 6 foreign direct investment in serbia from 2001 to 2015 source: trading economics macroeconomic determinants of economic growth in serbia 111 figure 6 manifests the level of foreign direct investments in serbia in the period 20012015. the highest level of fdi was recorded from 2006 to 2008 when the average level of foreign capital was 4.482 billion dollars. since 2008, foreign direct investments are reduced as a result of decreasing foreign investments at the global level, which can be attributed to the economic crisis in the us and eu. at the end of 2015, fdi was 2.347 billion dollars which is almost double less compared to the pre-crisis period. 2. methodology the aim of this paper is to find out the nexus between macroeconomic determinants and economic growth in serbia from 2001 to 2015. therefore, the research is focused on inflation (inf), monetary aggregate (m3), public expenditures (pe) and foreign direct investment (fdi) as independent variables on gross domestic product (gdp) which is dependent variable in the given model. table 1 review of observed variables variable notation calculation source real gross domestic product gdp growth rate national bank of serbia inflation inf consumer price index national bank of serbia monetary aggregate 3 m3 m2 + deposits in foreign currency bulletin public finances public expenditures pe % gross domestic product international monetary fund foreign direct investment fdi us $ billion trading economics source: authors based on table 1 it can be seen that real gross domestic product and inflation are calculated by growth rate and consumer price index, while calculation of monetary aggregates is created by the methodology of national bank of serbia. public expenditures and foreign direct investment are determined as a percentage of the gross domestic product by international monetary fund and trading economics. the model specification can be manifested: log gdpt = β0 + β1 (loginft) + β2 log (m3t) + β3 (log pet)+β3 (log fdit) … + et (1) where gdp  real gross domestic product, the dependent variable, and proxy for economic growth; inf  inflation, independent variable; m3  monetary aggregate, independent variable; pe  government expenditures, independent variable; fdi  foreign direct investment, independent variable; β  the constant term; βb  the coefficient of the independent variables; e  the error term of the equation. 112 i. milenković, b. kalaš, j. andrašić 3. results in the paper, descriptive statistics regression analysis and correlation of observed variables were used, to determine the level of independent variables impact and their relationship with gross domestic product as a dependent variable. authors used the data for the period 2001 to 2015, where their values are logarithmically presented. table 2 descriptive statistics of observed variables variable obs mean std. dev. min max gdp 15 3.107333 3.524641 -3.12 9.05 inf 15 .8942356 .4085159 .1430148 1.907089 m3 15 5.873867 .3946731 5.098346 6.300955 pe 15 1.628456 .0317917 1.529045 1.663795 fdi 15 9.260291 .3860589 8.249159 9.696185 source: author's calculation based on spss descriptive statistics reflects a number of observation and their mean, standard deviation, minimum and maximum values, while authors used their logarithmic values. table 2 shows that standard deviation is the highest at gdp, while pe had the smallest standard deviation. this means that these components have the highest and lowest variations in the observed group of variables. table 3 regression analysis of observed variables source ss df ms number of obs = 15 model 107.340372 4 26.835093 f( 4, 10) = 4.03 residual 66.5829194 10 6.65829194 prob > f = 0.0336 total 173.923291 14 12.4230922 r-squared = 0.6172 adj r-squared = 0.4640 root mse = 2.5804 dwstat = 2.632 gdp coef. std. err. t p>|t| [95% conf. interval] inf .9025162 2.813815 0.32 0.755 -5.367053 7.172086 m3 -9.186444 2.881479 -3.19 0.010 -15.60678 -2.766108 pe 11.41743 47.39382 0.24 0.814 -94.18258 117.0174 fdi 4.01959 2.576631 1.56 0.150 -1.7215 9.760681 _cons .444854 67.25855 0.01 0.995 -149.4165 150.3062 source: author's calculation based on spss based on data from table, r-square reflects that inf, m3, pe and fdi explain 61.72% of the variations in gdp. further, there is a positive effect of dependent variables inf, pe and fdi on gdp, but it is not statistically significant and a negative effect of dependent variable m3 on gdp, which is statistically significant. macroeconomic determinants of economic growth in serbia 113 table 4 variance inflation factor variable vif 1/vif pe 4.77 0.209490 inf 2.78 0.359936 m3 2.72 0.367730 fdi 2.08 0.480644 mean vif 3.09 source: author's calculation based on spss authors used vif to confirm that there is not a problem of multicollinearity between independent variables. according to data from table 4, it can be concluded that there is no problem of multicollinearity because the value of vif is less than the reference value of 10. table 5 correlations gdp inf m3 pe fdi gdp pearson correlation 1 .402 -.706 ** -.489 -.246 sig. (2-tailed) .137 .003 .064 .377 n 15 15 15 15 15 inf pearson correlation .402 1 -.562 * -.813 ** -.436 sig. (2-tailed) .137 .029 .000 .104 n 15 15 15 15 15 m3 pearson correlation -.706 ** -.562 * 1 .795 ** .693 ** sig. (2-tailed) .003 .029 .000 .004 n 15 15 15 15 15 pe pearson correlation -.489 -.813 ** .795 ** 1 .662 ** sig. (2-tailed) .064 .000 .000 .007 n 15 15 15 15 15 fdi pearson correlation -.246 -.436 .693 ** .662 ** 1 sig. (2-tailed) .377 .104 .004 .007 n 15 15 15 15 15 ** . correlation is significant at the 0.01 level (2-tailed). * . correlation is significant at the 0.05 level (2-tailed). based on data from table 5, there is a positive correlation between gdp and inf, where it is not statistically significant. on the other hand, there is a negative correlation between gdp and m3, pe and fdi, which is the nexus between gross domestic product and monetary aggregate statistically significant. comparing the highest and lowest correlation, it is important to emphasize the relationship between inf and pe where it is negative and statistically significant (-.813, p<0.05). also, it recorded the lowest correlation between gdp and inf, but it is not statistically significant (0.402, p>0.05). 114 i. milenković, b. kalaš, j. andrašić conclusion the paper showed that there is a positive correlation between gdp and inf, but their nexus is not statistically significant. also, a positive effect of pe and fdi on gdp is determined, but it is not statistically significant and a negative effect of m3 on gdp, which is statistically significant. the novelty is manifested in the fact that in serbia, there is a small number of studies which are focused on determining the relation between gdp and macroeconomic determinants such as m3, pe, and fdi in this way. based on results, monetary indicators inf and m3 have a different impact on gdp. when monetary indicator inf increase, there is an increase in real gdp, while the increase in monetary aggregate m3 causes a drop of gdp. although there is a high level of correlation between independent variables, there is no problem of multicollinearity and it is determined based on vif test. the results of correlation found that the highest degree of correlation was recorded between inf and pe, while the lowest degree of correlation represented in relation inf and gdp. further research could be directed to other countries in the region and thus reflect a similar or completely different trend in their movement and differences among them, if presented. references abbott, a., de vita, g. 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(2005). inflationary threshold effects in the relationship between financial development and economic growth: evidence from taiwan and japan, journal of economic development, 30 (1), 49-69. makroekonomske determinante ekonomskog rasta u srbiji monetarna politika je važan segment ekonomske politike svake zemlje gde inflacija i monetarni agregati predstavljaju značajne komponente. njihovo kretanje prikazuje trendove u količini novca i nivou cena koje su od velike važnosti za ekonomske prilike u zemlji. cilj rada je prikazati uticaj makroekonomskih indikatora na realni bruto domaći proizvod. u radu, inflacija (inf), monetarni agregat (m3), javni rashodi (pe) i strane direktne investicije (fdi) su korišćeni kao nezavisne varijable, dok je realni bruto domaći proizvod (gdp) određen kao zavisna varijabla. rezultati su pokazali da postoji pozitivan odnos između gdp i inf, pe i fdi, ali nije statistički značajan. s druge strane, m3 ima negativan uticaj na gdp i statistički je značajan. koristeći korelacionu matricu, utvrđena je vrlo visoka korelacija između inf i pe, dok je najniža korelacija zabeležena između gdp i inf. ključne reči: bruto domaći proizvod, inflacija, monetarni agregat, javni rashodi, strane direktne investicije, srbija https://www.nbs.rs/ facta universitatis series: economics and organization vol. 18, no 4, special issue, 2021, pp. 313 324 https://doi.org/10.22190/fueo210616022c © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper insurance development and life quality in the european union countries. an empirical assessment1 udc 368(4-672eu) mirela cristea1, graţiela georgiana noja2, doina drăgoi3, leontina codruţa andriţoiu3 1university of craiova, faculty of economics and business administration, craiova, romania 2west university of timişoara, faculty of economics and business administration, east european center for research in economics and business, timişoara, romania 3university of craiova, doctoral school of economics, faculty of economics and business, romania orcid id: mirela cristea https://orcid.org/0000-0002-6670-9798 graţiela georgiana noja https://orcid.org/0000-0002-9201-3057 doina drăgoi n/a leontina codruţa andriţoiu n/a abstract. the connection between insurance and economic development has been intensively addressed in the literature, but a comprehensive analysis including the dimensions of human capital/quality of life has been less considered. the general objective of this research is to assess the degree of development of the insurance sector in the interplay with the representative dimensions of quality of life, at the level of the european union (eu) member states (ms), and to propose strategies for narrowing the gap between countries. the data encloses representative indicators that reveal the size of the insurance market, on the one hand, and the dimensions of quality of life, on the other hand, at the level of 2019. the research methodology consists of cluster analysis with the ward method. the main results reveal that, at the level of all eu-27 member states, the size of the insurance market is interconnected with the quality of life, with significant differences between them, developing countries having modest results compared to developed countries. thereby, specific strategies and policies for these groups of countries are paramount, in order to enhance the wellbeing by insurance services and coverage. key words: insurance, quality of life, human development, cluster analysis, european union countries received june 16, 2021 / revised july 15 / accepted july 19, 2021 corresponding author: graţiela georgiana noja west university of timişoara, faculty of economics and business administration, east european center for research in economics and business, 16 j.h. pestalozzi street, 300115, timișoara, romania | e-mail: gratiela.noja@e-uvt.ro https://orcid.org/0000-0002-6670-9798 https://orcid.org/0000-0002-9201-3057 mailto:gratiela.noja@e-uvt.ro 314 m. cristea, g.g. noja, d. drăgoi, l.c. andriţoiu jel classification: g22, i31, o15 1. introduction the insurance sector represents a paramount field of a country’s economy, in terms of the income/turnover that it provides (called gross insurance premiums), the major investments of their assets in diversified areas (for life insurance class), but also the economic and social role played in covering the risks that can affect individuals and companies (the functions of preventing and compensating for damages) (cristea et al., 2014). therefore, insurance enhances the economic growth and sustainable development through the contribution at gross domestic product (gdp) creation, supporting capital markets, with manifold implications in people’s social life (cristea et al., 2009; hufeld et al., 2017). insurance encourages innovation, contributes to shaping a resilient society and plays a major role in addressing societal challenges, such as the effects of technological change, cyber risks or changing demographic trends. insurance can be considered a barometer of the economic and social well-being of a country’s population, which contributes to reducing the poverty and government spending, on the line of covering natural disasters (janzen et al., 2020). in perspective, the insurance market, especially in terms of the life insurance sector, in addition to its traditional role, brings a significant contribution to supporting the pension system, long-term investment and economic growth (oecd, 2020). the connection between insurance and economic development (measured, mainly, by gdp) has been intensively addressed in the literature, for different periods of time, at the level of regions, such as europe (haiss & sümegi, 2008; peleckienė et al., 2019), countries from the united states of america (usa), europe and asia (mohy ul din et al., 2017), the worldwide level (chang & lee, 2012), or specific fields and countries, like agriculture in serbia (piljan et al., 2018) or romania (cristea et al., 2014). at the individual level, insurance contributes to improving people’s quality of life by tackling the risks that may arise in their lives, by guaranteeing payments in case of insured risk, the risk of mortality and longevity, but also by the security, stability and financial protection offered through insurance agreements (kaigorodova & mustafina, 2014). the economic well-being of people is directly related to the insurance market through the products they develop and offer (european union, 2017). quality of life represents a multidimensional concept, which, in addition to the economic situation, living conditions and material resources necessary for people’s lives, also addresses social aspects of society as a whole, people’s lifestyle and perceptions. in addition to the economic issues (earnings), other sectors are also fundamental in determining the quality of life, such as the health care, living conditions, access to education, adequate financial products and the provision of social services (ayte et al., 2001; whelan & russell, 2004). on this groundwork, our general research objective is to assess the degree of development of the insurance sector in interconnection with the representative dimensions of the quality of life. the analysis is performed by homogeneous groups of countries, at the level of the european union (eu) member states (ms). it further aims to propose strategies for the insurance sector promotion, particularly for countries with downsized results. the novelty of our research lies in encompassing the dimensions of quality of life in the assessment of the insurance sector (which also includes human capital), different from previous studies that have focused on the degree of economic development, assessed by gdp. the data encloses representative indicators that reveal the size of the insurance market (namely, the insurance insurance development and life quality in the european union countries. an empirical assessment 315 penetration and insurance density degrees), on the one hand, and indicators that reveal the dimensions of the quality of life (namely, education index and life expectancy index the components of the human development index, alongside with gdp per capita, earnings, employment rate, poverty and inflation), on the other hand, at the level of 2019. the research methodology consists in applying cluster analysis through the ward method. besides the introduction, the structure of this paper comprises five sections, which follow: the main landmarks in the literature on the interconnections between insurance and the dimensions of quality of life/wellbeing; description of the data used in the research and the methodology applied; detailed presentation of the results obtained and assessment of the research hypothesis; main conclusions and recommendations. in order to substantiate the robustness of the results, at the end of our article, we inserted additional information summarized in the annex section. 2. literature review the connection between insurance and welfare has been studied in the literature, considering its various dimensions. thus, according to studies conducted since the ‘60s by hammond et al. (1967), it was shown that household income, education and occupation positively influence the demand on the insurance market. it was found that the higher the household income, the lower the investment in the insurance sector. life insurance is preferred and accessed by middle-income people. on the other hand, highand low-income families invest in the insurance system, while middle-income families do not (hammond et al., 1967). moreover, in this study, the negative relationship between education and the demand for life insurance is highlighted, a fact confirmed also by beck & webb (2003). nevertheless, positive interlinkages between life insurance and education for european (dragos et al., 2017), south-asian (sanjeew et al., 2019) and african countries were revealed when information and communication technology (ict) was included in the analysis (asongu, 2020). thus, expanding the ict applications will act as a favorable support for life insurance and education. same results were highlighted for the central pomerania (a region between germany and poland), when studied the main factors that promote life insurance (strzelecka et al., 2020). in the literature, the positive relationship between employment and the insurance market is recorded (lenten & rulli, 2006). income and life insurance for south-asian countries are inversely connected, by the side also of “urbanisation, life expectancy, dependency, and private health expenditure” (sanjeew et al., 2019, p. 109). life expectancy in relation to the insurance market, in the case of life insurance, is ambiguous due to the composition of the products offered which aim at mortality and savings. very few studies have found a correlation between these two concepts (beenstock, 1986; outreville, 1996). for example, an increased life expectancy of insured persons would lead to a longer life insurance payment period, which would mean income for insurance companies and the payment of a larger sum of money when the insured event occurs. the inflation rate can negatively influence the demand for health insurance by increasing the price of the insurance policy, which can discourage people from accessing this insurance product (babbel, 1979). the benefits and role of insurance in driving growth has long been officially recognized at the united nations conference on trade and development (unctad, 1964, p. 227), which stated that “a sound national insurance and reinsurance market is an essential characteristic of economic growth”. the results in the literature reveal the positive direct link between insurance and economic growth or national income (chang & lee, 2012; cristea et al., 2014; 316 m. cristea, g.g. noja, d. drăgoi, l.c. andriţoiu dragos et al., 2017; haiss & sümegi, 2008; mohy ul din et al., 2017; peleckienė et al., 2019; piljan et al., 2018). what manifests itself differently and influences the results obtained is materialized in the institutional regulatory framework (considering the worldwide governance indicators) specific to insurance markets from one country to another, but also culture and the degree of economic development (dragos et al., 2017). the recognized role of the insurance stabilizer gives households and companies that use insurance products a considerable reduction in their financial volatility. the insurance market also contributes to reducing and combating poverty, as well as social inclusion (janzen et al., 2020). the covid-19 pandemic has generated a deep recession in the insurance sector and gdp will be significantly influenced by its decline (babuna et al., 2020; shennaev & matiyazova, 2020). however, the insurance system, due to the fiscal and monetary policies adopted, has proved quite resilient, but we must not rule out possible vulnerabilities and uncertainties due to the impact of the covid-19 crisis. in conclusion, the results of numerous studies in the relevant literature show that the insurance sector has profound implications in a country's economy and in ensuring the economic well-being of the population. 3. data and research methodology in order to analyze the development degree of the insurance market in line with the quality of life in the eu member states, we selected indicators that reveal the two areas concerned, respectively, representative indicators of the insurance market and representative indicators of the quality of life. thus, the selected indicators that reveal the size of the insurance market are represented by: the insurance penetration degree for total insurance market (isrp) (% of gdp); and insurance density for total insurance market (isrd) (usd/capita). insurance penetration degree shows the share of gross written premiums (which represent insurance turnover) in gdp, over a year (insurance europe, 2021). when there is an increase in gross written premiums, the degree of insurance penetration could be reduced if gdp were to grow more than in the insurance sector. the density of insurance for the total market is calculated by reporting the value of gross written premiums to the number of inhabitants of that country (insurance europe, 2021). this indicator is a barometer that indicates the average expenditure made by each inhabitant of a country to purchase products of insurance companies (oecd, 2020). the representative indicators of quality of life are: the life expectancy index (le_i) and the education index (ed_i), as component elements of the human development index (hdi); gdp per capita (gdp_cap) (usd); poverty rate (pov) (%); employment rate for the age segment 20-64 years (empl_20_64) (%); the net earnings of a couple with two children (ern) (purchasing power parity, ppp); and inflation rate (infl) (%). data were collected for 2019 and extracted from the database of the swiss re institute (2020) (in terms of insurance market indicators), united nations development program unpd (2021) (for the education index and the life expectancy index, hdi components), world bank (2021) (for gdp per capita) and eurostat (european commission, 2021) (for the poverty rate, the employment rate for the 20-64 age group, the net earnings of a couple with two children and inflation rate). the data were then adjusted by logarithm to ensure their stationarity and adequate comparability across selection. insurance development and life quality in the european union countries. an empirical assessment 317 regarding the size of the insurance market in 2019 in the eu-27 ms, the most developed insurance markets are in the nordic countries denmark, and finland, in terms of the share of insurance in gdp (over 10% of gdp) (fig. 1, left), and denmark, ireland and luxembourg, as regards the insurance density (over 5,200 usd/capita) (fig. 1, right). the smallest dimensions of the insurance market are recorded in developing countries from central and eastern europe, namely, romania and lithuania, both for insurance penetration (below 2% of gdp) (fig. 1, left), and insurance density (below 200 usd/capita) (fig. 1, right). fig. 1 indicators of insurance market, eu-27, 2019: insurance penetration degree (left); insurance density (right) source: authors’ contribution in r, data extracted from swiss re institute database (2020). legend: at – austria; be – belgium; bg – bulgaria; cy – cyprus; cz czech republic; de – germany; dk – denmark; ee – estonia; es – spain; fi – finland; fr – france; gr – greece; hr – croatia; hu – hungary; ir – ireland; it – italy; li – lithuania; lu – luxembourg; lv – latvia; mt – malta; nl – netherlands; pl – poland; pt – portugal; ro – romania; sk slovak republic; sl – slovenia fig. 2 life quality indicators, eu-27, 2019: education index (left); life expectancy index (right) source: authors’ contribution in r, data extracted from unpd database (2021). legend: at – austria; be – belgium; bg – bulgaria; cy – cyprus; cz czech republic; de – germany; dk – denmark; ee – estonia; es – spain; fi – finland; fr – france; gr – greece; hr – croatia; hu – hungary; ir – ireland; it – italy; li – lithuania; lu – luxembourg; lv – latvia; mt – malta; nl – netherlands; pl – poland; pt – portugal; ro – romania; sk slovak republic; sl – slovenia 318 m. cristea, g.g. noja, d. drăgoi, l.c. andriţoiu life quality dimensions, represented by the education index and life expectancy index (fig. 2), entail high levels in germany, the netherlands, finland and ireland (over 0.922 index), as regards education (fig. 2, left), on the one side, and ireland, the netherlands, germany and sweden (over 0.945 index), as regards the life expectancy index (fig. 2, right), on the other side. the lowest degree of education and life expectancy, as main components of hdi, were registered in romania, portugal and bulgaria (below 0.779 index), for education index (fig. 2, left), and bulgaria, romania and croatia (below 0.851 index), for life expectancy index (fig. 2, right). the research methodology consists in applying the cluster analysis at eu-27 level. cluster analysis is a standard procedure used in the analysis of multivariate data, as an iterative process of optimization/interactive grouping of parameters (data) that have similar characteristics, those grouped in neighboring clusters with different characteristics, in order to identify the number of groups with similar characteristics (hanumanth & prasada, 2013; tan, steinbach & kumar, 2005; wierzchon & kłopotek, 2018). the cluster analysis is performed by applying the ward grouping method on the selected indicators, in order to evaluate the formation of groups (clusters) at the level of eu-27 ms and to make appropriate recommendations / policies for each group of states. the research hypothesis (h) is: “among the eu-27 ms, there are significant differences in terms of the development of the insurance market and the level of quality of life, with developing countries performing modestly compared to developed countries”. 4. results and discussions the correlation matrix of previously described indicators represents the first step performed in the cluster analysis (fig. 3). fig. 3 correlation matrix for the insurance market and quality of life, eu-27, 2019 source: authors’ contribution in stata insurance development and life quality in the european union countries. an empirical assessment 319 cluster analysis applied through the ward method indicated the formation of an optimal number of 4 clusters (fig. 4 and table 1). the optimal number of clusters was obtained by applying the stop rules on the collected data (calinski-harabasz and dudahart tests), resulting in pseudo-f statistics indicating the stopped grouping level. fig. 4. dendrogram of cluster analysis, eu-27, 2019 source: authors’ contribution in stata table 1 clusters associated with the insurance market and quality of life, eu-27, 2019 clusters (c) eu member states cluster modelling – ward method performance c1 finland, sweden, belgium, germany, france, luxembourg, netherlands, ireland, austria, denmark high (particularly in terms of isrp, isrd, gdp_cap, empl_20_64, ern, ed_i, le_i, pov, on the one hand, and infl, on the other hand – low to medium values) c2 portugal, slovenia, italy, spain, cyprus, malta medium high (in terms of all indicators, except of inflation rate that is lower to medium) c3 croatia, greece medium low (in terms of all indicators, except of pov that is the highest among the 4 clusters, and infl that is the lowest) c4 latvia, slovak republic, czech republic, bulgaria, romania, estonia, lithuania, hungary, poland low (in terms of all indicators, except of education index that is medium to high among the 4 clusters, and infl that is the highest) source: own process of panel data in stata the eu ms with the highest development degrees of the insurance market and quality of life in 2019 are enclosed in cluster 1, being represented by 10 countries from the old eu countries group, mainly, developed countries (table 1 and annex). these countries registered the highest development level of the insurance sector (insurance penetration and insurance density degrees), but also the highest level of quality of life, revealed by the gdp per capita, employment rate, earnings, education and life expectancy indexes, on the one hand, and low to medium values for poverty and inflation, on the other hand. 320 m. cristea, g.g. noja, d. drăgoi, l.c. andriţoiu medium to high levels of insurance related to quality of life are registered within 6 countries of the eu-27 in 2019, old (portugal, italy and spain) and new eu countries (slovenia, cyprus and malta), which were enclosed in cluster 2 (table 1 and annex). medium to low degrees of insurance development associated to quality of life are evidenced in 2 eu countries, namely croatia and greece (cluster 3), with the highest poverty rate. the eu ms with the lowest development of insurance field in relation to quality of life are the new eu countries, mainly developing countries (cluster 4), with the lowest gdp per capita and standard of living, revealed by life expectancy index (bulgaria and romania), education index (romania), and insurance market indicators (romania and lithuania). on the same line, similar results were revealed also by hammond et al. (1967), considering positive associations among insurance and education, but also by chang and lee (2012), haiss and sümegi (2008), peleckienė et al. (2019), piljan et al. (2018), dragos et al. (2017), when they analyzed the associations between insurance and economic development, alongside with some socio-economic factors like education or household income. the results show that our research hypothesis, (h): “among the eu-27 ms, there are significant differences in terms of the development of the insurance market and the level of quality of life, with developing countries performing modestly compared to developed countries”, is fulfilled. 5. conclusions based on these results, we can say that in all eu-27 member states, the size of the insurance market is interconnected with the quality of life, as the literature underpinnings also revealed, considering various socio-economic factors, such as education, income, poverty or economic development degree. at the same time, however, there are significant differences between the eu-27 countries, so that developing states register modest results, compared with the developed ones. as such, to stimulate the interdependence between insurance and quality of life, we recommend best practice models applied in countries with the highest performance as entailed by the cluster analysis, namely finland, sweden, belgium, germany, france, luxembourg, the netherlands, ireland, austria and denmark. thus, ireland and luxembourg, in addition to the highest level of economic development, highlighted by the gdp per capita, have an innovative financial sector, with a contribution of over 25% to the value added and over 10% of employment (commission european union, 2021). as intervention policies in the lower performing states, we recommend: promoting financial education from primary or lowersecondary educational level, oriented towards financial market products, in general, and on the insurance market, in particular; applying strategies to increase the number of years of participation in education of the population, aimed at both the population under 18 and the population over 18, through continuing education programs; high quality medical services, which contribute to increasing life expectancy, in particular the number of healthy years; reducing the poverty rate through government programs to support low-income people; correlating the skills offered through education with the labor market; extending the ict application that will support the life insurance and education, as asongu (2020) proved for african nations. insurance development and life quality in the european union countries. an empirical assessment 321 education has a key role to play in informing the public about the importance, role and use of insurance products, as well as in shaping risk awareness, as suggested by many scholars (asongu, 2020; dragos et al., 2017; hammond et al., 1967; sanjeew et al., 2019; strzelecka et al., 2020). failure to use insurance products and failure to insure risks by the population and companies such as accidents, diseases or natural disasters, would cause shocks in society with serious consequences that may persist over time, on economic growth and human development / quality of life. the limits of our research encompass the low availability of certain data for various groups of countries and over a longer time span. future research consists of an extension of the analysis for the insurance sector in interdependence with the human development index, as a composite indicator representative for economic development that includes the human factor and living standards, by groups of countries, developed and developing ones. references asongu, s. a. 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(2018). modern algorithms of cluster analysis. springer. https://www.emerald.com/insight/publication/issn/2059-6014 insurance development and life quality in the european union countries. an empirical assessment 323 razvoj osiguranja i kvalitet života u zemljama evropske unije. empirijska procena u literaturi se intenzivno govori o vezi između osiguranja i ekonomskog razvoja, ali sveobuhvatna analiza koja uključuje dimenzije ljudskog kapitala / kvaliteta života je manje razmatrana. opšti cilj ovog istraživanja je da se proceni stepen razvijenosti sektora osiguranja u interakciji sa reprezentativnim dimenzijama kvaliteta života na nivou država članica evropske unije (eu) i da se predlože strategije za smanjenje dispariteta između zemalja. podaci prikazuju reprezentativne pokazatelje koji otkrivaju veličinu tržišta osiguranja, s jedne strane, i dimenzije kvaliteta života, s druge strane, na nivou 2019. metodologija istraživanja sastoji se od klaster analize sa metodom ward-a. glavni rezultati otkrivaju da je na nivou svih država članica eu-27 veličina tržišta osiguranja povezana sa kvalitetom života, sa značajnim razlikama među njima, a zemlje u razvoju imaju skromne rezultate u poređenju sa razvijenim zemljama. stoga su posebne strategije i politike za ove grupe zemalja najvažnije, kako bi se poboljšalo blagostanje uslugama osiguranja i pokrićem. ključne reči: osiguranje, kvalitet života, humani razvoj, klaster analiza, zemlje evropske unije 324 m. cristea, g.g. noja, d. drăgoi, l.c. andriţoiu plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 4, 2016, pp. 439 455 doi: 10.22190/fueo1604439r personal income taxes dual taxation1 udc 336.215 miloš ranđelović 1* , dragana r. petković 2* , ljiljana prole 2* 1 university of john nesbit, faculty of management, belgrade, serbia 2 university of niš, faculty of economics, niš, serbia abstract. personal income tax is one of the most important tax forms in the tax systems of modern countries, very generous and flexible. personal income taxation can be organized as regular, synthetic or mixed taxing. in modern tax legislation there are alternative ways of personal income taxing, such as the double taxation system, proportional tax on income and negative income tax. fiscal reforms performed in serbia were often delayed due to numerous, sometimes non-economic reasons. the seriousness and necessity of a dynamic approach to the process of the tax system reforms in our country is still topical. in this respect, the aim of this paper is to highlight the advantages and disadvantages of the double tax system, as well as to point out the need to reform the personal income taxation in serbia. key words: double taxation, income tax, tax elements, fiscal reforms, standard and non-standard gains, horizontal and vertical taxing equity. introduction historically, the introduction of personal income tax (pit) was preceded by specific tax forms, in which the human personality alone was the basis for the introduction of tax obligation. the transition from personal taxes, through individual income taxing, to a synthetic income tax, as its most perfect form, was long and not easy at all. namely, the tax system in one country does not occur as a result of a predefined plan, based on scientific principles. it is the result of a compromise of different political forces, conditioned by the socioeconomic system, the level of economic development, the degree of openness of the economy, historical development and tradition, the need to find new sources for financing public expenditure, tax administration performance, the level of tax ethics and so on. research on the practices of many countries showed that in taxing personal incomes in the world there is a great diversity of solutions which has significantly increased in recent years, and 1received july 31, 2016 / revised september 13, 2016 / accepted october 8, 2016 * phd student corresponding author: dragana r. petković university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: draganapetkovic1983@gmail.com 440 m. ranđelović, d. r. petković, lj. prole that the real economic and social effects of the application of certain forms of taxation differ significantly from the predictions offered by economic theory. it is therefore necessary, before making decisions on the choice of a particular form of personal income taxation, to analyze in detail the advantages and disadvantages of each of them and to take into consideration not only theoretically expected implications of applying a specific tax form, but also the practical experience of countries that have implemented that model of taxation. the effects of income taxation are numerous and have to be observed in the light of defined objectives of fiscal policy. specifically, the following results of introducing the personal income tax are mentioned: the income effect, the substitution effect, the effects of stimulation, stabilization and redistribution. however, the introduction of personal income tax provokes many reactions of the taxpayer as, for example, the effort to avoid or reduce the imposed tax burden. bearing these facts in mind, it stands to reason that the pronounced trade-off relationship between generosity and efficiency is particularly emphasized in personal income taxation. the objective of this paper is to give a reasoned estimate of economic effects of the application of the dual model of income taxing in serbia. in this regard, the study will start with the theoretical approaches to the institute of income taxation arrangements, then the comparative analysis of the effects of using alternative models of personal income taxing will be made, the economic implications of their application will be determined, the existing personal income tax system in serbia will be analyzed and, finally, some recommendations will be suggested. pursuant to the objective, the structure of the paper was set. 1. the position of personal income tax in the tax systems of modern states and the assessment criteria of efficiency personal income tax occupies a significant place in the structure of modern tax systems, given that it collects more than 25% of public revenue on the average. in specific terms, this tax has gained in importance with the tax reforms of the 1960s. its share in the total revenues ranged slightly above 30% in many countries during the 80s of the xx century, but ten years later its participation percentage was again reduced to 25% to 27%. observed by individual countries, the share of this tax in total tax revenues exceeds 20% in countries such as italy, germany and norway, it is over 30% in australia, belgium, canada and iceland, while the absolute record holders are new zealand with 42% and denmark with almost 53% (howell, 2005, p.43). some countries, like canada and new zealand, had significant fluctuations during the year regarding the share of personal income tax in public revenues. this share changed from 22.6% in 1965 to 40.8% in 1990, or 34.6% in 2003 in canada, while the amplitudes were even more pronounced in new zealand, ranging from 39.4% in 1965 to 61.6% in 1980. the growth of the importance of personal income tax is the result of: changes in attitude toward indirect taxes, reduction of tax rates on personal income tax which caused positive reactions from the public, widening of the tax base, reducing the number of tax tranches and the abolition of many tax exemptions. at the beginning of the xxi century, the practice of developed market economies has still contained tax pluralism, which involves the use of a large number of tax forms as a rational combination of various taxes and other public revenues suitable for the achievement of fiscal and extra-fiscal targets (raičević, 2004, p.164). in this connection, it is easy to understand that the place and role of individual tax forms in an industrially developed country differ from the personal income taxes dual taxation 441 taxation systems in developing countries. thus, when we observe the share of taxes on personal income, corporate profits and capital gains in total tax revenues of austria, denmark, france and germany in the period 2005-2012, we may note that it oscillated between 39% to 50% of total tax revenues, while in belgium, norway, spain and england it ranged from 50% to 60% of total tax revenues (table 1 and chart 1). in moldova, the participation of these taxes in total tax revenue was symbolic and ranged from 1.65% in 2010 to 5.87% of total tax revenue in 2007. in some countries in the balkans (bosnia and herzegovina, serbia) it was within the interval from 3.6% to 17%. even in croatia, as the last country that joined the european union, the percentage share of these taxes is not much higher as it amounted to 12.10% in 2010 and 17.6% of total tax revenues in 2008. table 1 the share of income taxes in the total tax revenues (%) in some countries country code 2005 2006 2007 2008 2009 2010 2011 2012 austria aut 46.12 47.22 48.16 49.00 44.63 45.12 45.99 46.64 belgium bel 59.11 58.88 59.32 60.38 57.75 57.86 59.06 58.59 czech republic cze 42.01 39.61 40.40 40.61 34.65 34.07 32.94 33.40 denmark dnk 40.23 42.98 51.39 51.44 51.95 47.04 46.68 46.85 finland fin 36.40 36.09 38.03 37.00 29 .46 28.50 29.33 28.12 france fra 46.40 47.91 47.90 48.78 44.61 44.31 47.55 48.83 germany deu 39.84 41.74 41.58 41.80 38.82 38.03 38.62 40.11 italy ita 54.62 55.52 56.93 58.27 54.88 55.08 54.19 54.57 luxembourg lux 45.18 45.70 45.74 47.78 47.66 48.97 47.81 47.73 norway nor 56.22 57.65 55.65 60.09 53.69 55.07 57.77 57.50 poland pol 24.61 26.00 27.99 28.30 27.26 24.53 24.44 26.24 slovak republic svk 20.87 23.09 25.82 27.19 21.92 24.21 22.45 24.54 spain esp 61.18 63.22 68.68 66.25 64.37 52.48 58.50 67.57 sweden swe 25.59 27.12 25.17 17.74 14.75 17.07 15.82 14.64 switzerland che 34.23 35.82 36.95 40.70 40.62 38.41 39.70 .. great britain gbr 50.48 51.85 51.49 49.91 51.00 48.97 47.88 46.63 moldova mda 4.34 4.83 5.87 2.36 1.71 1.65 1.72 4.68 bosnia and herz. bih 3.61 3.86 5.99 4.98 10.50 12.52 12.73 13.01 croatia hrv 13.20 14.56 16.48 17.61 17.02 12.10 13.99 13.86 macedonia mkd 19.22 21.67 20.75 22.86 18.89 13.05 17.87 18.54 serbia srb .. .. 16.74 17.83 16.51 15.98 15.18 13.47 slovenia svn 28.36 33.13 29.95 33.82 27.96 22.26 24.79 23.81 source: http://data.worldbank.org/indicator/all in some european countries in balkan countries (ex-yu republics) chart 1 the share of (incomes taxes) in the total tax revenues in the period of 2005-2012 http://data.worldbank.org/indicator/all 442 m. ranđelović, d. r. petković, lj. prole positioning of personal income tax in the tax systems can be perceived not only as a participation in tax revenue, but also as its share in gross domestic product (gdp) of the country tax revenue yield. viewed from this perspective, personal income tax in the 1960s accounted for only 7% of gdp in the oecd countries. with the increase in the relative share of this tax form in the total tax revenue, its share in gdp increased as well. if we consider the participation of pit in gdp by groups of countries, we may see that the largest share of this tax in gdp is in the nordic countries (18%), north american countries have the share of about 12%, while the asia-pacific region is in the level of western european countries. regarding specific european countries (table 2, chart 2), we may notice that in the period of 2005 to 2012 the largest share of tax revenues in gdp was in cyprus, followed by denmark, belgium, norway, luxembourg and the united kingdom. table 2 average % share of personal income tax in gdp in some european countries in the period 2005-2012 (schneider & enste, 2003) countries code 2005 2006 2007 2008 2009 2010 2011 2012 austria aut 19.47 19.13 19.39 19.48 17.94 17.93 17.89 18.27 belgium bel 25.36 25.04 24.37 24.73 23.32 23.89 24.01 24.86 cyprus cyp 45.44 47.71 54.14 51.02 25.77 25.87 25.85 25.49 czech republic cze 14.25 13.47 14.01 13.62 12.45 12.92 13.07 13.45 denmark dnk 31.76 30.62 34.88 33.94 33.32 32.89 32.98 33.40 finland fin 21.63 21.22 20.88 20.33 18.68 18.41 19.83 20.00 france fra 21.73 21.86 21.22 20.99 19.30 20.68 20.60 21.39 germany deu 10.46 10.67 11.12 11.17 11.49 11.06 11.39 11.52 italy ita 20.34 21.80 22.10 21.60 22.12 21.88 21.63 22.37 luxembourg lux 25.68 24.61 25.04 24.90 25.62 25.23 24.68 25.53 norway nor 28.73 29.40 28.61 28.26 26.29 27.23 27.80 27.29 poland pol 16.65 17.27 18.15 18.28 16.12 16.46 16.69 15.98 slovak republic svk 14.59 13.65 13.88 13.25 12.24 12.21 12.48 12.17 spain esp 12.60 13.16 13.51 10.15 8.34 11.05 9.35 7.08 sweden swe 21.51 22.10 21.26 20.50 20.50 20.21 20.85 20.68 switzerland che 9.38 9.48 9.31 9.96 9.82 9.63 9.76 .. great britain gbr 25.76 26.46 26.24 27.30 24.45 25.18 25.79 25.29 source: http://data.worldbank.org/indicator/all chart 2 average % share of personal income tax in gdp in some european countries in the period 2005-2012 [3] by far the lowest pit share in gdp belongs to the group of developing countries, or transition countries as they are still called, which is less than 7% of gdp. thus, for http://data.worldbank.org/indicator/all personal income taxes dual taxation 443 example, in the period 2005-2012 in the balkan countries (of bosnia and herzegovina, macedonia, serbia) the share of tax revenues in gdp was around 20%, while in countries that joined the european union (croatia and slovenia) it was under 20% (table 3). in the same period, however, the share of personal income taxes in gdp of serbia ranged from 1.12% in 2013 to 3.10% in 2006 (table 4 and chart 2). table 3 the share of tax revenues in gdp (%) of former yugoslav republics country code 2005 2006 2007 2008 2009 2010 2011 2012 bosnia and herz. bih 20.47 22.23 21.86 20.74 19.33 20.07 20.67 20.87 croatia hrv 19.78 19.86 19.93 20.01 19.24 19.16 18.47 19.58 macedonia mkd 19.26 18.92 19.49 18.67 17.29 16.99 17.16 16.71 serbia srb . .. 22.83 22.41 21.20 21.44 20.20 19.72 slovenia svn 20.19 20.66 19.32 19.58 17.64 16.75 17.33 17.54 source: http://data.worldbank.org/indicator/all table 4 personal income tax share in the total income, tax revenue and gross domestic product in serbia year total income tax revenue gross domestic product 2005 11.32% 12.96% 2.89% 2006 12.88% 14.56% 3.10% 2007 10.83% 12.27% 2.66% 2008 11.47% 12.81% 2.72% 2009 10.87% 12.41% 2.48% 2010 10.55% 12.19% 2.45% 2011 9.44% 10.87% 2.06% 2012 5.89% 6.76% 1.30% 2013 5.34% 6.00% 1.12% 2014 5.09% 5.81% 1.16% the bulletin public finances no. 127 (2015), the ministry of finance of the republic of serbia as most of the revenues from personal income tax makes the tax on wages (about 76%), its movement predominantly influences the total revenue from personal income tax. the movement of tax revenue on earnings depends on changes in earnings and employment trends chart 2 personal income tax share in some income categories in the republic of serbia in the period of 2005-2014 http://data.worldbank.org/indicator/all 444 m. ranđelović, d. r. petković, lj. prole on the lower revenues after 2011. income tax earnings was mostly influenced by the growth of unemployment, low levels of earnings and changes to tax laws adopted at the end of may 2012, which, among other things, the non-taxable portion (census) raised to 11,000.0 dinars and the rate of tax on profits was reduced from 12% to 10%. it is widely accepted opinion that the employment rate is the most important macroeconomic factor affecting the yield of personal income taxation, while the influence of the value of property generating taxable income on the revenue yield is smaller. the list of factors affecting the revenue yield of personal income taxation is not exhausted by this. consequently, it is not possible to neglect the impacts of tax parameters such as: the height of tax rates, the level on which progression starts and the intensity of progression (if any), the level of non-taxable income, the number and extent of tax exemptions, etc. this is, also, the meaning of basic messages of the laffer curve (schneider & enste, 2003): there is one tax rate that maximizes the amount of tax revenue, any lower level of tax revenues can be achieved by using two different tax rates, high tax rates create a large tax wedge which discourages working efforts and savings, and hence investment. research conducted in sweden in 1981 showed that "revenue"-optimizing income tax rate amounts to 81%, while in the us it is in the range of 32.67% to 35.21%. [fullerton, (1980) & hsing, 1996) the research conducted in twelve countries of the oecd showed that eleven of the countries are located in the "normal" segment of the laffer curve when it comes to the income tax rate. in other words, the current marginal income tax rate in these countries is much lower (on average by 17 percentage points) than the revenueoptimal rate that is 57%, which suggests that the increase in tax revenues can be achieved by increasing the marginal tax rate. according to the same research, only sweden had the current marginal income tax rate higher by 7 percentage points compared to revenueoptimal tax rate [heijman & van ophem 2005). also, in certain studies the shape of the laffer curve and the amount of optimal income tax rate are defined as the function of the willingness of taxpayers to pay taxes, i.e. their tax ethics (heijman & van ophem 2005, p. 717). in this respect, the tax rate that provides maximum tax revenue can be represented by the following equation 1 1 1          (1)  tax rate that rejects maximum tax revenue; α – willingness of the taxpayer to pay the tax, i.e. the level of tax ethics the validity of these results is limited by the assumptions on which the research has been conceived. equally important criteria for evaluating the income tax system are horizontal and vertical equity, economic efficiency, implementation costs, and international competitiveness. horizontal equity implies that all citizens who earn the same income during the year, regardless of the source of its origin, pay the same taxes, and it can be achieved when the effective tax rates on all forms of income are equal. vertical equity means that citizens earning higher incomes allocate a higher percentage of their income to pay taxes, which is achieved by applying progressive rates in personal income taxation. but the number of tax rates that are personal income taxes dual taxation 445 applied in a number of countries is extremely high. according to available data of the world bank, in the period 2005-2014 bosnia and herzegovina applied 40 to 55 different tax rates, albania had 34 to 45, romania 14 to 113. the smallest number of tax rates in the same period was recorded in norway 4, sweden had 6, spain and portugal applied 8 rates. way back in the 1990s, the world bank argued in its recommendations that a good income taxing is based on a small number of taxation classes, no more than three (kesner&škreb, 2004, p. 142). nevertheless, there is a relatively high level of agreement on the horizontal fairness of personal income tax system, while the accordance about the vertical equity is much lower. a system of taxation is efficient if the introduction or increase of taxes does not lead to a decrease in the overall social welfare. therefore, it may be stated that the tax fulfills the prerequisite of economic efficiency if it does not change relative prices in the economy. otherwise, by causing changes in relative prices, it induces changes in the behavior of taxpayers (willingness of people to work, save, invest and take risks). in other words, the taxes in this way lead to a situation where limited resources are used less productively, that is, by affecting the amount of net income of natural persons or the amount of the total cost of the production factor unit involvement, the income tax influences the supply of production factors and their demand, causing a sub-optimal allocation of resources. moreover, the existence of different effective tax rates for different types of personal income means that taxes affect the profitability of different activities aimed at income generation. economists argue that taxes should be allocatively neutral as much as possible. the implementation of any taxation results in the emergence of costs related to the tax administration, as well as to taxpayers. the rule is that the costs of applying a tax are higher as the tax form is more complicated (complexity is a function of the application of a larger number of tax rates and the existence of numerous exemptions and deductions). therefore, when choosing between different variants of taxation, advantage should be given to the form whose application costs are lower. in the conditions of high international capital mobility, tax competition leads to a gradual convergence of tax rates and to the need to conduct harmonization of tax rules. however, there is no substantiated analysis of the actual effects of tax competition on capital inflows. some empirical studies have even shown that there is no strong correlation between public spending, taxation and capital mobility (ranđelović s., (2012) analiza alternativnih modela poreza na dohodak fizičkih lica-efekti primene u srbiji. ph.d. thesis, ekonomski fakultet, beograd). in addition, efforts to harmonize income taxation, even within the european union, have proved to be an "impossible mission", because income taxing impinges upon national sovereignty. therefore, a proposal for a directive which would apply only to the harmonization of taxes on personal income was submitted to the european community council at the end of 1979, and the same was withdrawn in 1980. the commission tried again in 1993/94 to undertake certain steps in this field, but the agreement was reduced to three principles and recommendations on tax treatment of non-residents. (ilić & popov, 2004, p. 118, p. 142-143). the consequence of the existence of a significant number of criteria by which financial system, and thereby personal income tax as well, are evaluated reflects in the absence of one form of taxation that is "superior", i.e. pareto optimal (better from all the others by at least one criterion, while not being worse under any of the criteria). the lack of a "superior" form of personal income taxation has resulted in a relatively high diversity of ways of taxing that income, from country to country, and in their continuous challenging and questioning, which has led to occasional, more or less radical changes in the method of personal income taxation. 446 m. ranđelović, d. r. petković, lj. prole 2. comparative presentation of alternative approaches to taxing personal incomes and the significance of double taxation modern tax legal theory distinguishes between three concepts of personal income taxation. however, an unmitigated theoretical model can rarely be found in practice. a system dominated by the features of one model is the most frequent. the emergence of alternative approaches to the personal income taxation may be explained in this sense (dual income tax, flat tax on income and negative income tax). dual income tax was created in order to mitigate the distortive impact of synthetic income taxing on savings and investment, to improve economic efficiency and retain the positive effects of taxation on income redistribution. the characteristics of dual income tax are disaggregation of the total income of a natural person to labor income and income from capital and their different tax treatment. the taxpayer realizes capital gain, as a funded income, on the basis of investing capital in certain funds or profitable ventures, while not actively participating in their creation and developments. it is, in fact, a special type of income to which taxpayers come by investing their capital in various forms of savings, through business activities of third persons without their work engagement, or by leasing. these revenues include interest, dividends, other forms of participation in the corporate capital gains and others. labor income, which taxpayers realize through their work efforts without the involvement of their own capital, as an income realized in cash and kind from employment, part of the revenue from self-employment, is unfunded income. the tax treatment of these revenues has been long debated in financial theory and practice. the view that funded income should be taxed more sharply than unfunded income has resulted from the mentioned characteristics. under the influence of the economics of supply, the tax laws of most countries equalized these two types of income and gave them the same tax treatment. in contemporary conditions, the attitude about funded and unfunded revenues was again changed, so that legislations today provide privileged tax treatment to funded income. thus, for example, denmark, sweden, finland, norway, germany, france, the usa, hungary, austria, slovenia, belgium and other countries have introduced certain elements of proportional in their synthetic income taxation. in particular, capital gains are taxed at a single proportional rate, which is in some cases equal to the lowest marginal tax rate on labor income or equal to the profit tax rate. income from employment is taxed at progressive rates. the tax on funded income is paid after deduction, and the final tax liability is determined in the end. however, from the aspect of horizontal equity, all sources of income should be equal and have the same tax rate. scandinavian countries were the first to carry out the dualization of personal income tax system in the late eighties and early nineties of the twentieth century. however, available data suggest that even in these countries this theoretical model is not fully implemented in practice. norway, as a country that was closest to this model, already exhibits certain deviations. finland and sweden, ignoring relatively minor differences between rates (caused by differences in local taxes), more or less conform to the basic requirements of the model, as shown in the table 5 (blažić, 2006 & blažić, 2010). contrary to the pro-dualization arguments, the opponents of this concept state critical arguments disadvantages, such as: lack of horizontal equity, allocative bias and stimulating impact on other types of tax arbitrage, lack of a pure form of dual taxation in any country, the problem of dividing the income of self-employed and the income of active owners of small corporations to the component of capital gain and the component of labor income. personal income taxes dual taxation 447 table 5 dual income taxation in scandinavian countries in 2010 elements norway finland sweden income tax %: capital gain labor income 28 28-40 28 22,55-27,5)–(46,25-51) 30 31,52.56,52 profit tax rate 28 26 26,3 alleviation/abolition of double taxation of dividends abolition for the normal % of profit quoted companies alleviation; unquoted mainly abolition no classical structure alleviation/abolition of double taxation of capital gains from shares abolition for the normal % of profit no no non-standard deductions of income tax extensive extensive limited the negative impact of high, rising marginal tax rates on economic efficiency, as well as the increasing mobility of the workforce and the growing inclination of taxpayers toward tax evasion in the conditions of sharp direct progression in taxing, brought about the creation of a system of income taxation with a unique tax rate (so-called flat income tax). in particular, the idea of a flat tax on income emerged in the tax theory primarily in order to reduce/ eliminate the double taxation of capital income. it is, in fact, the concept of expenditure tax, which occurs in two forms standard and alternative. the standard model of the expenditure concept implies taxing of only that part of income that is spent, allowing income tax to become equivalent to the consumption tax, and the alternative model of the expenditure concept includes only exemptions from capital income taxation. the standard model of the expenditure concept of income tax is not applied in any country, but many countries apply as an alternative some kind of consumption tax parallel to the income tax. therefore, in modern tax theory the flat income tax implies some form of an alternative expenditure concept. in this matter, there are large numbers of different models of taxation that are called flat tax, and that have two common denominators the application of a unique marginal tax rate and the elimination of almost all the deductions and tax credits other than personal deduction and possibly the deduction for dependent family members. advocates of the flat income tax point out, as the advantage of this model, its simplicity that is derived from the definitions of income, elimination of (non) standard deductions and proportional tax scale. in addition, it is considered that the flat income tax reduces the incentive for tax evasion and enhances the economic efficiency, given that the expansion of the tax base offers scope for lowering the tax rate. on the other hand, opponents of the flat income tax emphasize the lack of vertical equity as an important disadvantage of this model of taxation. however, from the very characteristics the flat income tax model, it may be concluded that the advantages and disadvantages cannot be universally related to each variant, but that the performances of the flat income tax depend on its design. the experiment with flat taxation started in 1994, when estonia introduced a flat tax rate on the incomes of natural persons and corporations. all incomes were taxed at a uniform rate of 26%, whereas progressive tax rates had been previously used, having ranged from 16-33% for the taxation of income of natural persons, and 35% for legal persons. the idea of a negative income tax was developed by milton friedman. the aim of negative taxation is to increase the income of an individual to the poverty line. namely, the amount of funds that an individual receives from the state by way of negative taxation depends only on the level of the individual's income. therefore, a person whose earnings fall below a defined level receives from the state a certain amount of money that should provide 448 m. ranđelović, d. r. petković, lj. prole at least the minimum resources necessary to meet basic existential needs. therefore, the negative tax may be viewed as a tax credit, although it is essentially a kind of tax expense because the funds intended for the budget do not flow into it. it may happen that in communities characterized by low levels of working and overall ethics people would choose to not work in order to get social assistance. negative taxation is represented in all countries of the world, because it enables reducing poverty and resolving many social problems. 3. the characteristics of the existing system of personal income taxing in serbia unlike the developed countries, developing countries have also not decided for one of the theoretically pure personal income tax models. they endeavored by modest shaping of one form of taxation to create new and healthier tax system structures that would comply with their "needs". however, the history of the development of their taxation system has shown that these reforms had their "victims" as well. the model of personal income tax in serbia is a kind of mixed model of taxation. it is based on a combination of cedular and annual personal income taxation. cedular taxation is performed by applying proportional rates, while the annual tax is paid at the end of the year on the total annual income that exceeds the amount prescribed by law, at a progressive rate. specifically, the base of the annual personal income tax is the difference between the taxable income and personal deductions, which amount to:  for a taxpayer: 40% of the average annual salary per employee, paid in the republic;  for a dependent family member: 15% of the average annual salary per employee paid in the republic, where the total amount of personal deductions cannot exceed 50% of the taxable income. if two or more family members are bound to pay annual personal income tax, only one taxpayer can realize the right to a deduction for dependents. the rate of annual personal income tax as the second element is as follows: 10% for the taxable income amounting up to six times average annual salary and 15% for the part of income exceeding six times average annual salary. these data can lead to the conclusion that the limit for tax-free annual income is set relatively high, due to which very small numbers of taxpayers pay annual income tax in serbia. it is evident from the legal provisions that, within the cedular component of taxation, income from various sources is taxed as incurred after deduction or upon decision by the tax authority. for this purpose, personal income is classified into six categories (table 6), whereby each type of income is taxed separately (against separately established rules). table 6 personal income tax rates in serbia income statutory tax rate standardized costs/deductions wages and salaries 10% 11.604 rsd revenue from self-employment 10% revenue from copyrights, rights related to copyright and industrial property rights 20% 34%, 43%, 50% revenue from yield on capital 15% exc. 20% capital gains 15% other revenues 20% 20% source: individual income tax law, official gazette of rs, nos. 24/01, 80/02, 31/09, 44/09, 18/10, 50/11, 91/11, 108/13, 57/14, 68/14 personal income taxes dual taxation 449 given the fact that under the cedular component of taxation incomes from different sources are taxed at three different statutory rates, it can be said that the current income tax system does not provide conditions for the realization of horizontal equity in taxation. it can also be said that proportional tax rates applied in cedular component of taxation are relatively low, as well as the non-taxable amount of earnings. however, according to available data, 56,300 employees have not received any salary for one year or even longer, 400,000 employees in serbia receive a minimum wage, which allows the employer to avoid paying taxes and contributions to the state, and about 200,000 employees earn less than the minimum wage. due to all this, the distribution of earnings is skewed to the left, i.e. it is not symmetrical. nevertheless, the tax on salaries of employees in the period 2005-2014 represented 49.02% to 87.06% of the total personal income tax in serbia (table 7 and chart 3). table 7 the share of taxes on salaries in the tax revenue and in personal income tax in the republic of serbia (in mm rsd) year total tax revenue personal income tax tax on salaries of employees 2005 390,283.20 50,573.50 44,028.20 2006 437,112.40 63,644.20 54,124.00 2007 511,261.50 62,744.20 48,849.60 2008 582,893.00 74,695.40 57,191.10 2009 574,644.10 71,308.00 58,310.30 2010 616,607.70 75,174.60 59,619.50 2011 646,597.70 70,284.70 53,723.30 2012 686,828.30 46,432.40 25,568.60 2013 723,389.60 43,376.60 23,629.30 2014 770,958.10 44,820.60 21,970.20 calculated on the basis of data from the bulletin public finances no. 127 (2015), the ministry of finance of the republic of serbia chart 3 the share of taxes on salaries in the tax revenue and in personal income tax in the republic of serbia based on the prior statements, it may well be said that the present tax system does not provide conditions for the realization of vertical equity in taxation, either. 450 m. ranđelović, d. r. petković, lj. prole the high fiscal burden on labor is the result of high rates of social security contributions, for which reason the total fiscal burden on salaries has a negative impact on the demand for labor. there is an opinion that the expected state of public finances in serbia would in due course require certain increase rather than reduction in fiscal burden. on the other hand, high unemployment (table 8) particularly of less skilled workforce implies the existence of the grounds in the reform of income taxes to reduce the fiscal burden on earnings that are significantly below average. table 8 number of unemployed persons in serbia in the period of 2005-2014 year number of employed persons seeking employment actively unemployed 2005 2.068.964 990.669 895.697 2006 2.025.627 1.011.139 916.257 2007 2.002.344 850.802 785.099 2008 1.999.476 794.000 727.621 2009 1.889.085 812.350 730.372 2010 1.795.774 802.840 729.520 2011 1.746.138 833.268 745.187 2012 1.727.048 870.186 761.486 2013 1.715.164 888.359 769.546 2014 1.697.686 867.948 741.906 the bulletin public finances no. 127 (2015), the ministry of finance of the republic of serbia although the fiscal burden on labor in serbia is relatively high, it constitutes neither a competitive advantage nor a disadvantage. as stated in the assessment of the effects of fiscal burden on labor demand it is estimated that in serbia there is no scope for increasing competitiveness by reducing the fiscal burden on labor. reduction of labor costs, aimed at improving international competitiveness, can also be achieved by the slower growth of real salaries as compared to productivity growth, by real depreciation of the national currency, and so on. in the conditions existing in serbia, it seems that these are more suitable mechanisms of improving competitiveness than the reduction of fiscal burden could be. the costs of applying personal income tax in serbia have not been estimated. based on comparisons with similar systems in the world, the conclusion may be drawn that they are moderate. the low level of costs is affected by the domination of taxes to be paid after deduction, a small number of taxpayers liable to annual taxing, modest relieves. on the other hand, a differentiated approach to different types of income and the existence of a number of exemptions from the general regime of taxation affect the growth of tax implementation costs. the revenue yield of personal income tax in serbia is relatively low. as already stated, the participation of income tax in serbia's gdp is very modest. by the year 2010 it amounted to about 3%, and after 2010 it was slightly above 1%, which is far lower than in the eu member states. low personal income tax revenue yield is the result of adverse effects of macroeconomic and taxation factors, the degree of collection, as well as the parameters of the tax itself. still widely spread shadow economy affects the low revenue yield from personal income tax. complete or partial unreported employment reduces the revenues from labor income taxation, while the use of various creative bookkeeping measures and similar reduces the revenue from taxation of the yield on capital. some types of income, such as the income from renting business or residential facilities by private individuals mostly go untaxed. personal income taxes dual taxation 451 to confirm or refute the above statements, some tests have been applied. the reliability of results of empirical analysis highly depends on the performances of the model against which the results are obtained and on the starting base. in other words, any economic model is necessarily an abstraction and simplification of reality, which can make empirical results unreliable as a basis for analyzing the effects of the tax reform. according to these findings, as well as the number of selected lags, which is a critical point of dicky-fuller test, it was concluded that the time series used for calculating the interdependence of variables that allow to draw conclusions about the serbian tax system were stationary (table 9). the author is aware of the fact that the application of other tests (kpss, pp, ers and m tests) shows different results for the same variables. the difference is also the consequence of the fact that two series do not have to be correlated in order to be cointegrated. (krstić et al., 2007 & mladenović & nojković, 2012) table 9 dicky-fuller stationarity test variable differentiation coefficient coefficient critical value significance level (p-value) conclusion ln(ttr) 0 -4.986 -0.774 0.000 the series is stationary ln(ttr) 1 -7.386 -0.744 < 0,0001 the series is stationary ln(pit) 0 -2.281 -0.774 0.421 the series is non-stationary ln(pit) 1 -4.395 -0.744 0.003 the series is stationary ln(tw) 0 -2.296 -0.774 0.412 the series is non-stationary ln(tw) 1 -3.870 -0.744 0.015 the series is stationary ln(pt) 0 -4.187 -0.774 0.006 the series is stationary ln(pt) 1 -6.112 -0.744 < 0,0001 the series is stationary ln(cit) 0 -4.085 -0.774 0.008 the series is stationary ln(cit) 1 -6.256 -0.744 < 0,0001 the series is stationary ln(anw) 0 -1.660 -0.774 0.744 the series is non-stationary ln(anw) 1 -8.059 -0.744 < 0,0001 the series is stationary ln(ps) 0 -0.927 -0.774 0.932 the series is non-stationary ln(ps) 1 -3.729 -0.744 0.021 the series is stationary ln(noe) 0 -0.567 -0.774 0.967 the series is non-stationary ln(noe) 1 -4.957 -0.744 0.000 the series is stationary ln(nou) 0 -4.659 -0.774 0.001 the series is stationary ln(nou) 1 -5.819 -0.744 < 0,0001 the series is stationary according to this test, the interdependencies of parameters characterizing personal income taxation in serbia were determined and presented in table 10 with appropriate conclusions. similar results were obtained by using excel functions, too. 452 m. ranđelović, d. r. petković, lj. prole table 10 interdependence of some categories indicating the state of the tax system of serbia pit-ttr: personal income tax & total tax revenue optimal lag granger causality f-test p-value conclusion aic 12 1.0939 0.374700 change of pit causes no change of ttr sc 2 8.9959 0.000203 change of pit causes change of ttr pit-tw: personal income tax & tax on wages optimal lag granger causality f-test p-value conclusion aic 12 0.6463 0.7973 change of pit causes no change of tw sc 1 10.1872 0.001706 change of pit causes change of tw pt-cit: profit tax & corporate income tax optimal lag granger causality f-test p-value conclusion aic 11 0.8044 0.6354 change of cit causes no change of pt sc 2 4.6469 0.01099 change of cit causes change of pt pit -pt: personal income tax & profit tax optimal lag granger causality f-test p-value conclusion aic 11 1.3796 0.1946 change of pit causes no change of pt sc 2 18.7701 5.19e-05 change of pit causes change of pt pit -noe: personal income tax & number of employed optimal lag granger causality f-test p-value conclusion aic 2 7.4236 0.000839 change of pit affects noe sc 2 pit -nou: personal income tax & number of unemployed optimal lag granger causality f-test p-value conclusion aic 12 1.0012 0.4544 change of pit does not affect nou sc 3 1.8798 0.1356 change of pit does not affect nou anwnoe: average net wage & number of employed optimal lag granger causality f-test p-value conclusion aic 12 2.194 0.0181 change of anw affects noe sc 3 5.5707 0.001202 change of anw affects noe anw nou: average net wage & number of unemployed optimal lag granger causality f-test p-value conclusion aic 12 1.7302 0.07278 change of anw does not affect nou sc 11 2.4097 0.01077 change of anw affects nou pspit: personal savings & personal income tax optimal lag granger causality f-test p-value conclusion aic 2 0.33 11 0.7187 change of pit does not affect ps sc 1 0.2949 0.5879 change of pit does not affect ps twps: tax on wages & personal savings optimal lag granger causality f-test p-value conclusion aic 1 0.6432 0.4238 change of tw does not affect ps sc 1 personal income taxes dual taxation 453 pursuant to the results, we can say that the performances of the existing personal income tax system in serbia indicate the existence of systemic deficiencies that can be remedied only by a fundamental reform of this tax form. namely, the tax reforms implemented so far in our country were aimed at simplifying the tax system, which was proved wrong in the tax practice. the transitional processes of the entire socio-economic system still bring "breakdowns" in morality and lifestyle, which has ultimately led to changes in values, attitudes and behavior. money is, today more than ever, given the role of a measure of value. we have witnessed a great economic stratification in our society, as well. the gap between rich and poor keeps widening. also, there is no dispute that many of the changes were positive and led to social progress. however, suppression of negative phenomena to acceptable limits is a condition without which the state cannot be recognized as a society governed by the rule of law. 4. possible directions for the reform of personal income taxation the desired tax system should be designed to ensure undisturbed functioning of the market, fairer distribution of the tax burden in the society and lower costs of taxation, to comply with the tax structure, to create conditions for attracting foreign investments, etc. cost-benefit ratio should normally provide an adequate solution to reach the desired model of taxation. the fact is that income tax reduces the income of the taxpayer, i.e. increases his budget constraint on factors of production, goods and services. on the other hand, the principle of fiscal strength suggests the use of horizontal and vertical equity of taxpayers. income is the best measure of fiscal strength, but the problem remains of how to cover the worldwide income of each taxpayer. each of the known personal income tax models provides an answer that is more or less satisfactory. practice has shown that the commitment of a country to a particular model of taxation does not mean that it is implemented in its pure theoretical form. the reality is that most frequently one tax model is chosen as the basis and then various elements of other models are incorporated into it. this attitude can be viewed as a consequence of the awareness that none of the theoretical models is superior with regard to the relevant criteria. consequently, if the personal income tax in serbia, as mixed, is replaced by the synthetic personal income tax, it would enable the application of ability-to-pay principle and, as it avoids a qualitative differentiation of certain revenue categories, it would bring about neutrality, which the cedular system lacks. but it opens up a range of questions such as: taxpayer as an individual or a family, to globalize all incomes or not, which progression to apply in taxation, and so on. also, empirical evidence from developed countries confirms that the synthetic tax does not succeed to achieve in practice its main objectives, such as the progressive taxation of the richest citizens. implementation of the global system includes the improvement of tax administration with particular emphasis on revenue collection and control. available data indicate that inspection services in serbia have increased their efficiency in recent years, but there are still problems such as: insufficient it equipment, inadequate equipment of inspectors in the field, lack of connection with other inspection services, insufficient number of employees, low salaries of inspectors, inadequate and outdated organization. 454 m. ranđelović, d. r. petković, lj. prole proportional personal income taxation is suitable for countries which do not have a modern and efficient tax administration, where tax ethics are low, but which are trying to attract as much foreign investment as possible by a simple tax system. from the standpoint of economic efficiency, it is most suitable as the income tax. namely, the existence of a single rate at which labor income is taxed introduces the smallest distortion in market prices. also, this form of taxation is superior with respect to most economic criteria (allocative neutrality, effects on the labor market, low cost of application, etc.). the introduction of high tax-free wage threshold would ensure its moderate progressiveness. by confronting the criteria for evaluating personal income tax with the current performances and development priorities of the serbian economy and the performances of its tax administration, it is estimated that a satisfactory solution for serbia at this stage of development is the proportional personal income tax, or some variant of synthetic or dual tax. in support of previous statements, there is the structure and method of taxing personal tax revenues. thus, the tax base for self-employment income taxation is largely underestimated and more than 50% of taxpayers from this group are taxed at a flat rate. it is necessary to significantly tighten the legally set criteria for approval of lump-sum taxation, especially when it comes to services that create considerable added value. the income of individual farmers is for the most part covered by a tax on cadastral income, so it is necessary to carry out the innovation of the system of taxing revenues from agriculture through the introduction of a tax on the estimated income of producers. in order to avoid double taxation of income from capital, one possible solution is subjecting dividends after deduction to the final tax, whose rate would be much lower than the current effective rate. the level of contributions for compulsory social insurance shows that the cumulative burden on gross wages was considerably reduced in 2012. bearing in mind the level of the deficit in the pension and disability insurance fund, but also the fact that, comparatively speaking, it is among the lowest in the region, it seems unrealistic to continue to reduce rates. the solution should be sought in the legalization of the shadow economy, the increase of the level of earnings through productivity improvement and so on. pit reform in serbia is not an easy task, given that this tax is aimed at much more accomplishments. references arsić, m., altiparmakov, n., ranđelović, s. (2010). mogući pravci reforme poreza na dohodak gradjana u srbiji, str. 39-61, poreska politika u srbiji-pogled unapred, usaid sejga projekat, beograd. blažić, h. 2006, usporedni porezni sustavi oporezivanje dohotka i dobiti, ekonomski fakultet sveučilišta u rijeci, rijeka, tp://www.efri.uniri.hr/kolegiji/dokumenti/h.blazic_usp_por_sustavi-knjiga.pdf, rujan 2010. blažić, h. (2010). ažurirane tablice/grafikoni za 2009. godinu knjige blažić h.: usporedni porezni sustavi oporezivanje dohotka i dobiti, http://www.efri.uniri.hr/kolegiji/dokumenti/azurirane%20tablice%202009.doc, rujan 2010. fullerton, d. (1980). on the possibility on and inverse relationship between tax rates and government revenues, “nber working paper”, no. 467. heijman, w., van ophem, j. (2005). willingness to pay tax – the laffer curve revisited for 12 oecd countries. the journal of socio-economics, 35. howell h. zee: (2005). personal income tax reform: concepts, issues, and comparative country developments, fiscal affairs department, imf working paper. hsing, y. (1996). estimating the laffer curve and policy implications. the journal of socio-economics, 25(3). personal income taxes dual taxation 455 ilić-popov g. (2004). poresko pravo evropske unije, službeni glasnik, beograd jeffrey, o. (2006.) fundamental tax reform: an international perspective, oecd’s centre for tax policy & administration, national tax journal. kesner-škreb m. (2004) porez na dohodak. finansijska teorija i praksa 28 (1). kovačić, z. (1995). analiza vremenskih serija, ekonomski fakultet, beograd. krstić, g., schneider f., arandarenko m., arsić m., radulović b., randjelović s., janković i. (2013). siva ekonomija u srbiji-novi nalazi i preporuke za reformu, usaid, fond za razvoj ekonomske nauke, raičević b. (2004) fiskalna ekonomija-zbornik radova, ekonomski fakultet, beograd. mladenović, z., nojković, a. (2012) primenjena analiza vremenskih serija, ekonomski fakultet, beograd. oecd: tax policy studies (2006), fundamantal reform of personal income tax no 13. raičević, b. (2004) fiskalna ekonomija-zbornik radova, ekonomski fakultet, beograd. ranđelović s. (2012). analiza alternativnih modela poreza na dohodak fizičkih lica-efekti primene u srbiji-doktorska disertacija, ekonomski fakultet, beograd schneider, f., enste, d. (2003). the shadow economy: an international survey, cambridge up, cambridge. sokol, n., (2008). analysis of tax competition impact on corporate taxation in the european union. ekonomska istraživanja, 21(4). sutter, m., weck-hanneman, h. (2003). taxation and the veil of ignorance. a real effort experiment on the laffer curve. public choice, no. 115. porez na dohodak – dvostruko oporezovanje porez na dohodak je jedan od najvažnijih poreskih oblika u poreskim sistemima savremenih zemalja, veoma velikodušan i fleksibilan. porez na dohodak građana može se organizovati kao redovno, sintetičko ili mešovito oporezivanje. u modernom poreskom zakonodavstvu postoje alternativni načini oporezivanja na dohodak fizičkih lica, kao što su dvostruko oporezivanje sistema, proporcionalno porezu na negativni porez na dohodak prihoda. fiskalne reforme izvršene u srbiji su često odložene zbog brojnih, ponekad ne ekonomskih razloga. ozbiljnost i neophodnost dinamičnog pristupa u procesu reformi poreskog sistema u našoj zemlji je i dalje aktuelan. u tom smislu, cilj ovog rada je da se ukaže na prednosti i nedostatke dvostrukog poreskog sistema, kao i da se ukaže na potrebu da se reformiše porez na dohodak građana u srbiji. ključne reči: dvostruko oporezivanje, poreza na dohodak, poreski elementi, fiskalne reforme, standard i nestandardni dobici, horizontalno i vertikalno oporezivanja kapitala. 10901 facta universitatis series: economics and organization vol. 19, no 4, 2022, pp. 253 271 https://doi.org/10.22190/fueo220707018j © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scentific paper the impact of r&d activity on the business performance of high-technology companies1 udc 330.341.1+001.894/.895]:65.011 ivana janjić1, bojan krstić2, sandra milanović1 1university of niš, innovation center, republic of serbia 2university of niš, faculty of economics, republic of serbia orcid id: ivana janjić https://orcid.org/0000-0003-3142-8467 bojan krstić https://orcid.org/0000-0003-4597-6819 sandra milanović https://orcid.org/0000-0002-0582-045x abstract. this paper aims to examine the influence of r&d activity on the business performance of high-technology companies. in order to provide an empirical investigation of the impact of r&d activity on the business performance of hightechnology companies, correlation and regression analyses have been utilized. this study discovered that investment in r&d has a positive influence on ebit, net earnings, ebitda, and total assets, while its influence on roa was confirmed to be statistically significant and negative. additionally, the influence of r&d intensity performance indicator (rdi) on roa as a short-term financial performance indicator was not confirmed. the study revealed that return on r&d investment (rordi) has a statistically significant and positive influence on roa in the current, observed year. the evaluation of the obtained results can be a basis for drawing more detailed conclusions, contributing to the future r&d strategy and existing literature, and emphasizing the importance of r&d investment for various business performances. the originality of this study is reflected in the comprehensive analysis of the influence of specific indicators of r&d activity, such as rordi, on the business performance of hightechnology companies. this paper is also beneficial because none of the existing studies have explored the impact of investment in r&d on ebitda. keywords: r&d activity, r&d investment, business performance, profitability jel classification: o32, o34, m41 received july 07, 2022 / revised october 28, 2022 / accepted november 07, 2022 corresponding author: sandra milanović university of niš, innovation centre, univerzitetski trg 2, 18000 niš, republic of serbia | e-mail: sandramilanovic89@yahoo.com https://orcid.org/0000-0003-3142-8467 https://orcid.org/0000-0003-4597-6819 https://orcid.org/0000-0002-0582-045x mailto:sandramilanovic89@yahoo.com 254 i. janjić, b. krstić, s. milanović introduction research and development (r&d) are vital activities for the economic growth of companies through enhanced technological innovation and efficiency. r&d has gotten a lot of attention recently from academic, commercial, and political circles (jung & kwak, 2018). due to the increasingly rapid technological progress, expansion of the globalization process, and intense rivalry (jovanović et al., 2021), r&d activities are a critical precondition for preserving a competitive edge and improving the profitability of a company. in the era of a knowledge-based economy, r&d investments are not only essential for the success and survival of the companies, but also for the construction of conditions necessary for the prosperity of the national economy (krstić & rađenović, 2018). the knowledge-based economy is propelled by investments in r&d and various kinds of innovations. r&d investment is a crucial factor in creating, maintaining, and strengthening the company's competitive advantage (janjić & rađenović, 2019). by conducting r&d activities, the company gets a chance to gain a competitive advantage, which will be reflected in the growth of profitability through the sale of new products and services and the introduction of efficient production methods, enabling entry into new markets or reducing production costs. on the other hand, companies do not always have adequate r&d capabilities (david et al., 2008). r&d investments are risky; hence the return on investment is unpredictable. every investment in r&d represents a risk for the company. it has been suggested that technological advancement is the engine that drives capitalism. firms that invest in r&d and innovate will prosper, while those that do not will stagnate (rzakhanov, 2004). the motive of the study is to investigate the impact of r&d activities and its indicators on certain business performances (earnings before interest and tax ebit, net earnings, earnings before interest and tax, depreciation and amortization – ebitda, total assets, and return on assets roa), which were not the focus of relevant literature. the rationale for exploring the influence of r&d activities on certain business performances is that r&d investments are very significant for strategic positions and financially challenged, therefore the management of any organization has to continuously monitor all potential future benefits and effects. r&d investments are not contributing to the achievement of economic results for the current period. however, over a longer period, r&d investments should have an impact through the visible development and growth of the portfolio company's resources, i.e. total assets. to implement the corporate strategy, the business unit strategy, and the r&d strategy, r&d investments must have an impact on profitability indicators in the future period. having in mind the beneficial effects of r&d expenditures on the company’s sustainable development, the purpose of this paper is to test the influence of r&d investment indicators on business indicators of high-tech companies that are leaders in r&d investments. therefore, this study focuses only on one industry (information and communications technology ict) and the most famous high-technology companies, such as apple (ict producers and services), intel (ict producers and services), microsoft (ict services), samsung (ict producers), cisco (ict producers and services), ibm (ict producers), oracle (ict services), philips (ict producers) and sap (ict services). the current study utilizes bivariate correlation and panel regression analysis to test the proposed hypotheses. the study focuses only on one industry or more precisely nine high-tech companies and the data from eight years. therefore, the overall results could be biased, but also very indicative of the theory and practice on this topic. the impact of r&d activity on the business performance of high-technology companies 255 the structure of this study is organized as follows. firstly, after the introduction, an overview of the relevant literature is given – the relevance of r&d activity for improving business performance and competitiveness, as well as the indicators of r&d activity. the theoretical aspect and the existing literature on the relationship between r&d activity and business performance are also presented. the second section presents the sample, researched variables, and methodology of research. the third section gives an overview of the results and their discussion. at the end of the paper, a summary of the conclusions is presented. 1. literature review 1.1. the relevance of r&d activity for improving business performance and competitiveness the term research and development refer to the activities that businesses engage in creating new products and services, which in turn have an impact on a company's financial and nonfinancial performance. the concept of r&d is divided into two parts. in general, research is conducted to achieve a new scientific advance, enhance knowledge and discover and invent new methods, systems, and products, whereas "development" is the process of translating the outcomes of research and other information into a commercial product, or an improved design or plan for a new product or service (zhao, 2002). in today’s world of fierce competition, companies have to recognize the dangers of imitation and the critical role of innovation and devote appropriate resources to r&d (guo et al., 2016), resulting in competitive strength and affecting profitability levels. due to the quick technological advancements and increasingly sophisticated consumer markets, companies are forced to consistently invest in r&d and innovation, which are regarded as the primary strategic factors for their success (marković et al., 2020). the degree of innovation of these companies can be identified based on the part of the realized sales revenues that are invested in r&d. for the competitive advantage of innovative companies, it is very important not only to invest significantly in r&d, but also to have the highest intensity of investment in r&d and realize the high efficiency of investment in r&d. to boost revenues, earnings, labour productivity, profitability, technical innovation, and competitiveness, every company aims to increase the effectiveness and efficiency of r&d investment (veselinović & veselinović, 2019). continuous growing investments in r&d lead to the efficiency of the use of these funds, which implies the creation and implementation of product and process innovations, which should contribute to the growth of the profitability of the companies. the significance of r&d arises from its capability to encourage a company's economic growth by resulting in the innovation of new technologies that can improve a company's competitive advantage and strengthen its position in the market. r&d is regarded as the foundation for developing new products, processes, and services, giving companies a competitive advantage in terms of product and service innovation, and allowing them to become market leaders (hall & oriani, 2006). companies can improve organisational knowledge and ability, the technical degree of accumulation, or develop new knowledge, by implementing r&d activities, which may ultimately affect business performance. investing in r&d yields a higher-than-average rate of return on r&d investment and gives a company a distinct and long-term competitive advantage (hsieh, et al., 2003). 256 i. janjić, b. krstić, s. milanović 1.2. indicators of r&d activity the majority of empirical research focuses on r&d investment and r&d intensity (rdi), as very important indicators of r&d activity. additionally, a significant measure of the realization of r&d activity is the achieved return on r&d investment (rordi). r&d investment, which is a crucial driver and cornerstone of sustainable and economic development in the twenty-first century, can have an impact on a company's viability and growth. r&d investments are vital for the long-term survival and success of every company. investment in r&d is regarded as a critical component of high-technology investment (karlheinz, 2005) and presents a significant source and basis of innovation (wang et al., 2013). r&d investments include the entire process of developing new products and services towards the stage of commercialization (wesley & wonglimpiyarat, 2020, p. 5). failure and irreversibility are unavoidable parts of the r&d investment process. beside that, the future rewards and shortterm effectiveness of r&d investments are usually unpredictable and uncertain. r&d intensity (rdi) has been of great interest to academics, policymakers, practitioners and corporations during the last few decades. furthermore, rdi is one of the most commonly used r&d indicators and in many studies, rdi represents the innovation levels of the companies and their sectors (sher & yang, 2005; gui-long et al., 2017; ameer & othman, 2020). rdi can be defined as an enterprise’s r&d expenditure divided by its sales revenue (ortega-argiles & brandsma, 2010). rdi is a critical factor for evaluating a company's technological efficiency and innovative activities (chao & kavadias, 2013), as well as rdi is acknowledged as a significant measure for identifying a firm's strategic use of r&d (lin et al., 2006). in semiconductor companies in taiwan, higher rdi has been demonstrated to be a predictor of enhanced business performance (sher & yang, 2005). the return on r&d investment (rordi) has been the subject of significant literature from both theoretical and empirical perspectives (lev & sougiannis, 1996; kothari et al., leone, 2002; anagnostopoulou & levis, 2008). investing in r&d does not always yield instant results and returns (petković et. al, 2021). the fact that certain inventions appear slowly and are short-lived, while others are long-lasting or utilised in future r&d, is a factor that contributes to a disparity between r&d investments and returns. companies that can turn the results of their innovative projects and creative initiatives into meaningful sales growth should expect future returns on their r&d investment (cohen et al., 2013). the importance of the rate of return on r&d investment (rordi) is represented in improving economic performance by increasing efficiency, developing and disseminating new knowledge and increasing the potential for economic growth. according to shah (2008), as r&d expenses increase, the volatility of returns also increases. the rate of return on r&d investment (rordi) can be analysed at many different levels of aggregation, including individual research projects, enterprises, industries and national economies. the profit in future consumption units generated by an increase in current r&d expenditure is known as the r&d social return rate. in the meantime, the private return rate is proportional to the increase in profits resulting from increased business innovation (benavente et al., 2006). the time-lag period has always been a significant factor to consider when examining r&d activities and processes. the required time to perform r&d activities causes a time lag; hence, r&d spending in the current period has not immediately impacted the financial performance of the company (rao et al., 2013). unlike other investments, r&d investment has a temporal lag and contributes to r&d results in the following periods. some researchers have discovered the existence of a lag period when evaluating the impact of r&d expenditure on the financial the impact of r&d activity on the business performance of high-technology companies 257 performance of a company. lee and lee (2007) used a time-lag model to assess the effects of explanatory variables such as r&d intensity and accounting profit rate ratio on corporate performance in 63 pharmaceutical companies from 2001 to 2006. they found that r&d intensity in the previous year had a beneficial impact on the current year's ordinary profit ratio, whereas r&d expenditures in the preceding two years had a negative impact. 1.3. the link between r&d activity and business performances in the era of scientific-technological and technical progress, firms that decide to distribute a higher level of investment in r&d are predicted to earn more and achieve higher levels of business performance than organizations that invest less in r&d (chao, 2011). r&d investments are critical since they show future growth potential in a company's performance. to generate and improve business performance in the future, many companies choose to invest in r&d as a valuable resource. therefore, this study investigates the link between the following: ▪ r&d investments, rdi and earnings as valuable business performances which reflect economic results i.e., the numerator of profitability ratio (roa); ▪ r&d investments and total assets i.e. denominator of profitability ratio (roa); ▪ r&d investments, rdi, return on r&d investment and profitability ratio (roa). alarcon and sanchez (2013) used a sample of more than 400 firms from 2000 to 2008, to investigate the impact of internal and external r&d expenditures on the business performance of agri-food firms. the results showed the positive influence of external r&d on business performance. jaisinghani (2016) examined the association between rdi and business performance. using dynamic panel data and a generalized method of moments, the results of conducted research revealed that rdi and business performance are positively correlated. according to the empirical results of jin and choi (2019), r&d investment and innovation activities have a considerable influence on corporate performance. guo et al. (2020) demonstrated that r&d expenditures improve and have a positive impact on business performance. 1.3.1. the link between r&d investments, rdi and earnings sougiannis (1994) examined whether r&d investments may be beneficial to the company. according to the findings, every dollar spent on r&d resulted in a two-dollar rise in earnings over seven years. the research on the companies that have technology-based growth companies listed on "neuer markt" leads to the conclusion that rdi has positive effects on sales growth (wöhrl et al., 2009). the growth of sales revenue in the current period, logically, can contribute to the earnings growth in the same period. some researchers found that in r&d-intensive companies, r&d contributes more to the subsequent operating earnings than physical assets (amir et al., 2007). ciftci and cready (2011) concluded that rdi increases operating earnings and stock returns. jui et al. (2013) investigated the link between r&d and the financial performance of taiwanese high-tech firms from 2000 to 2011. in their study, r&d expenditures raise the operating costs, which in turn, result in a decrease in operating earnings, despite increased net sales. kiraci et al. (2016) studied the influence of r&d expenditures on a firm's short and long-term profitability of 46 publicly traded manufacturing enterprises listed on the borsa istanbul from 1998 to 2012. their empirical evidence demonstrates a positive influence of r&d expenses on firms' operating earnings and net earnings in the long term. caglar and nisel (2017) state that marketing and 258 i. janjić, b. krstić, s. milanović r&d expenses in the manufacturing industry hurt earnings before interest and tax (ebit) and net earnings. xu et al. (2022) explored the effect of r&d input on the operating earnings of the wastewater companies listed on the shanghai and shenzen stock exchanges for the period from 2013 to 2020. the findings showed that r&d input has a positive and significant effect on company operating income. 1.3.2. the link between r&d investments and total assets the existing literature does not analyze the impact of r&d investments on total assets. total assets consist of current and long-term assets. these assets are material (physical and financial) and nonmaterial (intangible). this relationship between r&d investments and total assets is a very important research area, because r&d investments i.e., r&d cost (expense) that are realized over a certain period do not immediately increase total assets. r&d investments are "converted" into total assets, or capitalized, for varying numbers of years, depending on the industry. capitalizing expenses is beneficial as companies provide new assets. r&d investments i.e., r&d expense over a certain period should contribute to the growth of a portfolio of resources i.e. total assets. the total assets of the company in the current period are a function of capitalized r&d investments in previous years (abrahamas & sidhu, 1998). studies by sougiannis (1994) and ballester et al. (2003) stated that a period of 2 years is necessary for r&d investments to be capitalized. some researchers (awano et al., 2010) proved that r&d investments produce results after 4-7 years. the term r&d investment is used to point out the relevance of effectiveness and efficiency of r&d activity for increasing resources (assets) and value for shareholders. according to isaac et al. (2021), there is a statistically significant link between firms’ total assets and r&d investment decisions. zhou and zhang (2022) investigated the impact of r&d investment on stock performance in a sample of 61 automotive companies from 2011 to 2020. the results of regression analysis revealed that r&d investment has a positive effect on stock returns for companies with higher total assets. 1.3.3. the link between r&d investments, rdi, return on r&d investment and profitability since the 1970s and 1980s, various studies have been conducted to determine the relationship between r&d expenses and corporate profitability (branch, 1974; schoeffler, 1977; hirschey, 1982; roberts & hauptman, 1987; grabowski & mueller, 1988). several studies suggest that r&d spending has a consistent and favourable impact on a company's profitability (chan, 2001; roberts, 2001; shah, 2008; ehie, 2010; pindado, 2010). chen et al. (2005) discovered a link between r&d spending and roa and roe. many other academics have examined the impact of r&d spending on company profitability using various profitability measures – the return on assets (roa) and return on equity (roe) (yeh et al., 2010; vijayakumar & devi, 2011; delmar et al, 2013; vithessonthi et al., 2016) since it accurately reflects the company's positions. roa indicates the earnings generated by the company's total assets. roa presents a classic metric for determining a company's profitability and efficiency (helfert, 2000). roe shows how a company's profits correspond to its equity (yeh et al., 2010). the factors that determine profitability were investigated by nunes and serrasqueiro (2015). they analysed 187 companies in portugal from 2002 to 2009 and concluded that r&d spending has a large and beneficial impact on profitability. phuong and manh (2017) the impact of r&d activity on the business performance of high-technology companies 259 researched a sample of 359 listed firms on the hanoi stock exchange from 2012 to 2016. the regression analysis results showed that r&d spending, dividend pay-out ratio and firms' size are considerably and positively influenced by roa. according to archarungroj and hoshino (1999), an increase in rdi leads to an increase in profitability, and when profitability increases, corporations will spend additional dollars on implementing r&d activities, resulting in an increase in r&d expenditure. high-tech companies in g8 countries when tested only for an influence of rdi show that when rdi increases, roe, roa and profit margin decrease, while an influence of rdi and rdi squared has an inverted u-shaped relationship with roa and profit margin (bloemendaal, 2020). on the other hand, chen et al. (2019) state that rdi does not always have a positive relationship with a company's performance. in their study, roa is negatively correlated with rdi in the first period when investment in r&d was made, while the influence of rdi on roa is negative. these results can be attributed to the lagged effect of r&d investments in the semiconductor industry that come in the succeeding years. the results of the conducted research revealed that rdi has a negative impact on profitability (short-term financial performance) and a favourable effect on firm value (long-term financial performance). kounnou and kyrkilis (2020) concluded that the impact of rdi on profitability has no statistical relevance. sinha and mondal (2020) analysed 69 pharmaceutical companies in india from 2008 to 2017. the results of the conducted research reveal the negative and insignificant impact of the lagged value of rdi on roe. on the other hand, many studies indicate that the positive relationship of rdi on companies' profitability is the most commonly found in the longterm analysis, and the effect can be interpreted with the inversed u-shape. ozkan (2022) analysed 500 industrial firms in turkey for the period 2013-2019. according to his findings, r&d expenditures have a negative impact on the current year's financial performance measured by roe, roa and ros (return on sales) and this influence will turn positive after a year. cincera and veugelers (2014) conducted a study on a sample of 1000 firms that belong to the european union and non-eu for the period 2004-2009. the results revealed that the rate of return to r&d is positive for us young firms and statistically insignificant for average european firms in high technology-intensive sectors. rocha et al. (2019) researched the effect of innovative efforts on the financial performance of firms on a sample of 2000 enterprises covering 40 sectors in 46 countries. in comparison to less efficient enterprises, the most efficient organizations generate better returns with the same level of r&d investment. 2. methodology of research this paper aims to investigate the influence of r&d activity indicators on the profitability of high-tech companies. the research is based on the data of the following indicators: r&d investment; r&d intensity (rdi), return on r&d investment (rordi); earnings before interest and tax (ebit), net earnings; earnings before interest and tax, depreciation and amortization (ebitda); total assets, and return on assets (roa). 260 i. janjić, b. krstić, s. milanović therefore, the research model is presented in figure 1. fig. 1 research conceptual framework source: authors’ presentation in the following text, the computation process of researched variables is presented. the r&d intensity indicator is different in various industries and is more valuable in high-tech enterprises (milkovich et al., 1991). it is defined as expenditures in research and development divided by the company's sales. the following formula (savrul & incekara, 2015) is used to compute it: 𝑅&𝐷 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 𝑖𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 = 𝑅&𝐷 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 (1) return on r&d investment (rordi) indicates how much of the company's gross profit in the current year was obtained from the prior year's r&d spending. rordi is calculated using the formula below (christensen & van bever 2014): 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑅&𝐷 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡𝑡 𝑅&𝐷 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠𝑡−1 (2) return on assets (roa) is a traditional measure of company profitability. the profitability measure known as return on assets (roa) is calculated in three different ways (shapiro and balbirer, 2000; krstić & bonić, 2016; sardo & serrasqueiro, 2017): 𝑅𝑂𝐴1 = 𝑁𝑒𝑡 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑠 (3) and the impact of r&d activity on the business performance of high-technology companies 261 𝑅𝑂𝐴2 = 𝐸𝐵𝐼𝑇 𝐴𝑠 (4) where ebit denotes the earnings before interest and tax, as denotes total assets. ebit is calculated in the following way: 𝐸𝐵𝐼𝑇 = net earnings + income tax + other taxes ± net financial loss (earnings) (5) for the purpose of comparative analysis of a set of companies from different countries with different tax systems, as well as companies from different industries and different material and intellectual resources, it is desirable to use the term: 𝑅𝑂𝐴3 = 𝐸𝐵𝐼𝑇𝐷𝐴 𝐴𝑠 (6) where ebitda stands for earnings before interest and tax, depreciation and amortization. ebitda is calculated in the following way: 𝐸𝐵𝐼𝑇𝐷𝐴 = ebit + depreciation + amortization (7) ebitda is an analytically better indicator because it enables comparative analyses of companies operating in different countries and industries, with different internal financing policies and fiscal systems, as well as accounting policies for the depreciation of tangible and amortization of intangible assets. based on the previously given literature review, the following hypotheses are stated: hypothesis h1: the r&d investments have a positive impact on the ebit, net earnings and ebitda. hypothesis h2: the r&d investments have a positive impact on the total assets. hypothesis h3: the r&d investments, r&d intensity (rdi) and return on r&d investments (rordi) of the current year have a negative impact on the roa1, roa2, and roa3 as short-term financial performance indicators. in the research of this paper, data was obtained from the financial statements of the most famous high-technology companies, such as apple, intel, microsoft, samsung, cisco, ibm, oracle, philips, and sap. by studying the annual reports of named companies, secondary data was obtained from the websites of the companies and other publicly available databases to calculate research variables and conduct analysis. the analysed period covers the data from 2012 to 2019. due to the global covid-19 pandemic, 2020 is not included in the research. therefore, the analysis covers 72 observations. in the first seven models, r&d investment is an independent variable, while ebit, net earnings, ebitda, total assets, roa1, roa2 and roa3 are dependent variables. in the eighth-tenth model, the influence of rdi on roa1, roa2 and roa3 is assessed. the last three models examine the influence of return on r&d investment on roa1, roa2 and roa3 as the dependent variable. the proposed model was tested using the program stata (version 13.0). firstly, a descriptive statistic was calculated for the analysed variables. furthermore, all raw data were transferred in natural logarithm values. this procedure was undertaken in order to overcome the problem of incompatibility of research variables and to achieve normal distribution of data. 262 i. janjić, b. krstić, s. milanović secondly, correlation analysis was conducted to assess the extent and direction of the relationships between the researched variables. lastly, panel regression analysis was used to evaluate the influence of the independent variable on the dependent variable in seven research models. after the identification of a balanced dataset and the assumptions are met, the fixed-effect model (fem) and randomeffect model (rem) were tested. afterwards, the hausman test for every model was performed to select fem or rem. the hausman test had a significance cut-off point of p = 0.05. therefore, all values statistically significantly less than 0.05 indicate the selection of fem, otherwise, rem was interpreted. 3. results and discussion of empirical research table 1 presents the descriptive statistics of the researched sample. the data on r&d investments implies that the mean value of the variable is 8,573.263 (sd = 6,495.203). rdi varies between 0.022 and 0.219 with a mean value of 0.125 (sd = 0.050). rordi has a mean of 6.337 (sd = 3.801). average values of dependent variables are: ebit (mean = 20,709.346, sd = 17,944.585), ebitda (mean = 27,185.620, sd = 21,913.647), net earnings (mean = 15,862.457, sd = 14,378.361), total assets (mean = 139,496.622, sd = 87,895.407). lastly, average values of proxy indicators of roa are: roa1 (mean = 0.099, sd = 0.045), roa2 (mean = 0.131, sd = 0.053) and roa3 (mean = 0.173, sd = 0.060). table 1 descriptive statistics variable minimum maximum mean sd r&d investment (millions of $) 1,854.380 33,200.510 8,573.263 6,495.203 rdi .022 .219 .125 .050 rordi 2.332 28.268 6.337 3.801 ebit (millions of $) 646.039 71,230.000 20,709.346 17,944.585 ebitda (millions of $) 2,251.830 82,487.000 27,185.620 21,913.647 net earnings (millions of $) -39.000 59,531.000 15,862.457 14,378.361 total assets (millions of $) 28,613.550 375,319.000 139,496.622 87,895.407 roa1 -.001 .237 .099 .045 roa2 .017 .314 .131 .053 roa3 .053 .332 .173 .060 source: authors’ calculations table 2 presents the pair-wise correlations (pearson correlation) among all the analysed variables. the correlations between independent and dependent variables have medium to high practical effects. the investment in r&d is positively and significantly correlated with ebit (r = .532, p < .01), ebitda (r = .675, p < .01), net earnings (r = .519, p < .01), total asset (r = .702, p < .01). moreover, r&d investment is positively correlated with profitability indicators roa1 (r = .249, p < .01), roa2 (r = .251, p < .05) and roa3 (r = .387, p < .01). on the other hand, rdi is only statistically significantly and negatively correlated with roa1 (r = -.234) at the level of significance of 5%. rordi has a positive and significant relationship with roa1 (r = .612, p < .01), roa2 (r = .661, p < .01) and roa3 (r = .467, p < .01). the impact of r&d activity on the business performance of high-technology companies 263 table 2 bivariate correlation matrix variable 1 2 3 4 5 6 7 8 9 10 1. r&d inv. 1 2. rdi .173 1 3. rordi -.212 -.577** 1 4. ebit .532** -.431** .541** 1 5. ebitda .675** -.367** .432** .978** 1 6. net earnings .519** -.427** .517** .984** .962** 1 7. total assets .702** -.306** .290* .905** .938** .892** 1 8. roa1 .249** -.234* .612** .722** .672** .759** .496** 1 9. roa2 .251* -.227 .661** .748** .693** .728** .497** .930** 1 10. roa3 .387** -.122 .467** .638** .650** .606** .430** .811** .885** 1 note: significance at 5% is indicated by *, while significance at 1% is indicated by **. all significance tests are two-tailed. source: authors’ calculations in the following part, the research models are investigated by employing panel regression analysis of the data. firstly, the results of r&d investment influence are presented in table 3. table 3 panel regression results – r&d investment as a predictor independent variable research models model 1 model 2 model 3 model 4 model 5 model 6 model 7 lnebit lnnet income lnebitda lntotal assets roa1 roa2 roa3 fem fem fem rem fem fem fem constant 7.103 (0.000) 6.959 (0.000) 6.953 (0.000) 6.333 (0.000) .437 (0.003) .586 (0.019) .735 (0.014) lnr&d investment .274 (0.011) .255 (0.003) .328 (0.002) .601 (0.000) -.038 (0.012) -.051 (0.052) -.063 (0.043) hausman test 81.48 (0.000) 6.32 (0.012) 10.13 (0.001) 1.74 (0.187) 16.22 (0.000) 25.25 (0.000) 38.56 (0.000) f / χ2 10.66 (0.011) 17.09 (0.003) 20.41 (0.001) 30.7 (0.000) 10.4 (0.012) 5.2 (0.052) 5.75 (0.043) r2 0.086 0.013 0.258 0.593 0.120 0.184 0.187 note: p-value in the parentheses. source: authors’ calculations according to the previously defined methodological assumptions of the panel regression analysis, models 1-5 and 7 are statistically significant. on the other hand, model 6 did not meet the assumptions of statistical significance but it is indicative because its significance is at the level of 10%. model 1: in this model, the influence that investment in r&d has on ebit has been measured. it was hypothesized that the influence is positive. the hausman test indicates χ2 of 81.48 (p = 0.000) so the fem should be assessed. model fit is significant at the level of p < 0.05 (f = 10.66, p = 0.011). r2 indicates that the independent variable explains 8.6% of the variance of the dependent variable. independent variable: lnr&d investment has a positive effect (.274) on lnebit and its effect is statistically significant. 264 i. janjić, b. krstić, s. milanović model 2: in this model, the influence that investment in r&d has on net earnings has been measured. it was hypothesized that the influence is positive. the hausman test indicates χ2 of 6.32 (p = 0.012) so the fem should be assessed. model fit is significant at the level of p < 0.05 (f = 17.09, p = 0.003). r2 indicates that the independent variable explains only 1.3% of the variance of the dependent variable. independent variable: lnr&d investment has a positive effect (.255) on lnnetearnings and its effect is statistically significant. model 3: in this model, the influence that investment in r&d has on ebitda has been measured. it was hypothesized that the influence is positive. the hausman test indicates χ2 of 10.13 (p = 0.001) so the fem should be assessed. model fit is significant at the level of p < 0.05 (f = 20.41, p = 0.001). r2 indicates that the independent variable explains 25.8% of the variance of the dependent variable. independent variable: lnr&d investment has a positive effect (.328) on lnebitda and its effect is statistically significant. therefore, the research hypothesis h1 is supported. model 4: in this model, the influence that investment in r&d has on total assets has been measured. it was hypothesized that the influence is positive. the hausman test indicates χ2 of 1.74 (p = 0.187) so the rem should be assessed. model fit is significant at the level of p < 0.05 (χ2 = 30.7, p = 0.000). r2 indicates that the independent variable explains 59.3% of the variance of the dependent variable. independent variable: lnr&d investment has a positive effect (.601) on lntotalasset and its effect is statistically significant. therefore, the research hypothesis h2 is supported. the results of the first four models indicate that an increase in r&d investments would lead separately to an increase in ebit, net earnings, ebitda and total assets if other factors’ influence is constant. model 5: in this model, the influence that investment in r&d has on roa1 has been measured. it was hypothesized that the influence is negative. the hausman test indicates χ2 of 16.22 (p = 0.000) so the fem should be assessed. model fit is significant at the level of p < 0.05 (f = 10.4, p = 0.012). r2 indicates that the independent variable explains 12% of the variance of the dependent variable. independent variable: lnr&d investment has a negative effect (-.038) on roa1 and its effect is statistically significant. model 6: in this model, the influence that investment in r&d has on roa2 has been measured. it was hypothesized that the influence is negative. the hausman test indicates χ2 of 25.25 (p = 0.000) so the fem should be assessed. model fit is significant at the level of 10% (f = 5.2, p = 0.052). r2 indicates that the independent variable explains 18.4% of the variance of the dependent variable. independent variable: lnr&d investment has a negative effect (-.051) on roa2 and its effect is statistically significant at the 10% level. therefore, the results of this analysis are only indicative. model 7: in this model, the influence that investment in r&d has on roa3 has been measured. it was hypothesized that the influence is negative. the hausman test indicates χ2 of 38.56 (p = 0.000) so the fem should be assessed. model fit is significant at the level of p < 0.05 (f = 5.75, p = 0.043). r2 indicates that the independent variable explains 18.7% of the variance of the dependent variable. independent variable: lnr&d investment has a negative effect (-.063) on roa3 and its effect is statistically significant. therefore, the research hypothesis h3 is supported in this part of the analysis. if all other influential factors unchanged, an increase in r&d investment would lead to a decrease in roa1, roa2 and roa3. the impact of r&d activity on the business performance of high-technology companies 265 it should be noted that the panel analysis of the rdi effect on roa indicators revealed (models 8-10) a negative sign of influence but not statistically significant. therefore, the results of the analysis are not interpreted in the tables. furthermore, the research hypothesis h3 is not confirmed in this part of the analysis. the following table indicates the results of panel regression where the return on r&d is a predictive variable of roa1, roa2 and roa3. table 4 panel regression results – return on r&d investment (rordi) as a predictor independent variable research models model 11 model 12 model 13 roa1 roa2 roa3 rem rem rem constant .064 (0.000) .084 (0.000) .129 (0.000) return on r&d investments .001 (0.000) .007 (0.000) .007 (0.000) hausman test 1.03 (0.311) 0.40 (0.527) 0.01 (0.904) f / χ2 56.08 (0.000) 95.23 (0.000) 65.68 (0.000) r2 0.172 0.313 0.190 note: p-value in the parentheses. source: authors’ calculations model 11: in this model, the influence that returns on r&d investments have on roa1 has been measured. it was hypothesized that the influence is negative. the hausman test indicates χ2 of 1.03 (p = 0.311) so the rem should be assessed. model fit is significant at the level of p < 0.05 (χ2 = 56.08, p = 0.000). r2 indicates that the independent variable explains 17.2% of the variance of the dependent variable. independent variable: return on r&d investment has a positive effect (.001) on roa1 and its effect is statistically significant but very small. model 12: in this model, the influence that returns on investment in r&d have on roa2 has been measured. it was hypothesized that the influence is negative. the hausman test indicates χ2 of 0.40 (p = 0.527) so the rem should be assessed. model fit is significant at the level of p < 0.05 (χ2 = 95.23, p = 0.000). r2 indicates that the independent variable explains 31.3% of the variance of the dependent variable. the independent variable: return on r&d investment has a positive effect (.007) on roa2 and its effect is statistically significant but very small. model 13: in this model, the influence that investment in r&d has on roa3 has been measured. it was hypothesized that the influence is negative. the hausman test indicates χ2 of 0.01 (p = 0.904) so the rem should be assessed. model fit is significant at the level of p < 0.05 (χ2 = 65.68, p = 0.000). r2 indicates that the independent variable explains 19% of the variance of the dependent variable. the independent variable: return on r&d investment has a positive effect (.007) on roa3 and its effect is statistically significant but very small. based on the previous results, the research hypothesis h3 is only partially supported in this research. moreover, when the return on r&d investments would increase the roa1, roa2, and roa3, also, respectively, and under the condition that other factors’ influence is unchanged. 266 i. janjić, b. krstić, s. milanović conclusion in today's global marketplace, r&d is the core determinant of sustaining competition. r&d is increasingly being linked to a company's profitability, growth and competitiveness in the market. therefore, this paper’s aim was to examine and explain the influence of r&d activity on business performance in the example of high-technology companies. the leading indicators of r&d activity that are widely used in the previous research and consequently in current research are r&d investments, rdi and rordi. this research encompassed nine high-tech companies, their indicators of r&d activity and relevant business performances such as ebit, net earnings, ebitda, total assets and roa were examined and confronted in the analysis. considering the data of the eight years, the panel regression analysis in this study of the high-technology companies has revealed that r&d investments have a positive influence on ebit, net earnings, and ebitda. similarly, aytekin & özçalık (2018) detected a positive relationship between r&d investments and ebit. furthermore, the results of this study are in line with vanderpal (2015) who has found that r&d spending had a considerable and positive impact on net earnings. some researchers (sun et al., 2019) stated that higher r&d investments reduce ebitda. our results are, also, consistent with the findings of dyrnes & friestad (2020), who found that r&d was positively related to ebitda margin. in addition, conducted research confirms that r&d investments have a positive impact on total assets. there have been no comparable results or similar studies that have examined the association between r&d and total assets. moreover, there is a gap and lack of consensus in terms of the effect of r&d on total assets, thus, we explored this area that has not been investigated before. based on the obtained empirical results, this study reveals that the influence of r&d investments on short-term financial performance indicators (roa1, roa2, and roa3 in the current year) is negative. similar research conducted by su et al. (2021) implies that r&d investments are a long-term characteristic of roa and its influence on roa is negative in the first year, but with a 2 or 3-year lag effect, the sign of influence turns positive. additionally, the hypothesis in our study that rdi has a negative influence on three indicators of roa was not confirmed. contrary to our results, wang and chen (2022) revealed that there is a negative relationship between rdi and corporate performance (roa and roe). bloemendaal (2020) found mixed results in the literature on how rdi influences companies' roe and roa. moreover, his research indicates a negative correlation between rdi and profitability indicators of high-tech companies and the negative influence of rdi on the same indicators which supports the findings of our study. lastly, this study reveals that rordi has a statistically significant and positive influence on roa1, roa2, and roa3, but very small in scope. in addition, many studies (nandy, 2020; hazarika, 2021) have proven that a longer period is needed for r&d investments to start to pay off. by emphasizing the significance of r&d spending on corporate performance, the paper substantially contributes to the literature that investigates the influence of r&d activity on the companies’ profitability. the originality of this study is in this dimension of analysis – the impact of rordi on roa. the paper points out that not only investment in r&d has an impact on profitability indicators, but also return on investment in r&d (rordi) has an influence on the companies' roa. the influence of rordi on roa as a measure of the impact of r&d activity on the business performance of high-technology companies 267 short-term financial success has not been studied, and there are no clear and concrete specific empirical conclusions in the literature. our study will offer a unique and different viewpoint on the entire issue of estimating the impact of r&d expenditure on a company's profitability. the analysis of the relationship between r&d and roa3 is also novel because it uses ebitda to improve the analytical capability of this indicator. that sheds light on the new approach to accessing the influence of r&d on roa. through ebitda, it is possible to compare companies across different industries and countries. the effects of r&d investment on total assets have not been explored in the literature yet. this presents a substantial research challenge for the study and provides at the same time a new research perspective on the relevant literature. therefore, the paper makes a contribution to the contemporary literature on this topic. this research is beneficial and provides practical implications and recommendations, giving guidelines for decision-making to corporate managers, potential r&d investors as well as implementers of r&d strategies. the limitation of this study comes out from the size of the database and the number of analysed years. moreover, the shortcoming of this research study arises from the fact that it examines the influence of r&d indicators on a company's short-term profitability, without taking into consideration lagged effect of these predictors on dependent variables. lastly, the current study is focused only on one sector (ict), so the results could not be generalized to other sectors. the direction for future research is primarily reflected in extending the research period. therefore, this might give additional empirical background for this issue. the time-lag period has always been a significant factor to consider when examining r&d activities and processes. while r&d investments have a negative effect on roa indicators, the positive influence of return on r&d investment (rordi) on roa could be justified by the lag period. the consideration of the effect of the lagged value of r&d on performance is very logical, so the possible direction for future research stems from that investigators can conduct an analysis of time-lagged r&d on return on investment (roi). by expanding the number of analysed companies and introducing additional industries into analysis, and especially through a comparative analysis of different sectors in order to see the differences, future research on this topic will generate more generalised conclusions and grounded recommendations for practice. acknowledgement: 1. this paper is part of a project that has received funding from the european union’s horizon europe research and innovation programme under grant agreement no 101059994. 2. supported by the ministry of education, science and technological development of the republic of serbia (contract no. 451-03-68/2022-14/200371 and no. 451-03-68/2022-14/200100). references abrahams, t., & sidhu, b. 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(2022). the impact of research and development investment on stock performance of auto industry company in china. 4th international conference on research in business, management and finance, 04-06 february, london, united kingdom. uticaj ulaganja u istraživanje i razvoj na poslovne performanse visoko-tehnoloških kompanija cilj ovog rada je da se ispita uticaj aktivnosti i&r na poslovne performanse visoko tehnoloških kompanija. kako bi se izvršila empirijska analiza uticaja aktivnosti i&r na poslovne performanse visoko tehnoloških kompanija, korišćene su korelaciona i regresiona analiza. ova studija je otkrila da ulaganja u i&r imaju pozitivan uticaj na ebit, neto dobit, ebitda i ukupnu aktivu, dok je njihov uticaj na roa pozitivan i statistički značajan. pored toga, uticaj intenzivnosti i&r na roa kao kratkorčnog indikatora finansijskih performansi nije potvrđen. studija je otkrila da povraćaj ulaganja u i&r ima statistički značajan i pozitivan uticaj na roa u tekućoj, posmatranoj godini. evaluacija dobijenih rezultata može biti osnova za donošenje detaljnijih zaključaka, doprinoseći budućoj strategiji istraživanja i razvoja i postojećoj literaturi, naglašavajući značaj ulaganja u i&r za poslovne performanse preduzeća. originalnost ove studije ogleda se u sveobuhvatnoj analizi uticaja specifičnih indikatora aktivnosti i&r na poslovne performanse visoko tehnoloških kompanija. ovaj rad je takođe koristan zbog činjenice da nijedna od postojećih studija nije istraživala uticaj ulaganja u i&r na ebitda. ključne reči: aktivnosti i&r, ulaganja u i&r, poslovne performanse, profitabilnost https://doi.org/10.1016/j.omega.2011.12.011 https://doi.org/10.1016/10.1007/s11135-021-01238-z https://doi.org/10.1142/s0219877020500303 https://doi.org/10.1016/j.hitech.2009.02.006 https://doi.org/10.3390/w14060836 https://doi.org/10.1080/00036840701604487 https://doi.org/10.1111/1467-646x.00082 2438 facta universitatis series: economics and organization vol. 14, n o 2, 2017, pp. 175 187 doi: 10.22190/fueo1702175d preliminary communication ict enabled implementation of strategy empirical evidence from serbian customs service 1 udc 004:007]:339.543(497.11) sanja dalton * univeristy of belgrade, faculty of organizational sciences, belgrade, serbia abstract. in this paper ict enabled implementation of serbian customs service strategy is presented. the aim of the research is to measure and analyze the impact of ict on successful implementation of the organization’s strategy. the research was conducted by survey –questionnaires and personal interviews with the customs service senior management and top managers. the data was also collected by using secondary data (customs reports). the results show that the new computerized system has a positive impact on key performance indicators improvement that is the core goal of the strategy. key words: strategy, information and communication technology, strategic management jel classification: m10, m15, m16 introduction the customs administration of serbia operates on the basis on consecutive strategies implemented in connection with significant external challenges, such as accession of the republic of serbia to the european union. according to torma (2011), the main features of the european administrative space are a stable, competent, highly qualified and neutral civil service (civil servant). at present, economic, budgetary and technological conditions are becoming particularly important. the customs service is seeking to increase its effectiveness through the application of strategic management methods and supporting information technology. to some authors, “creating a technology plan is an opportunity for an organization to focus on its mission, goals and strategies” (podolsky, 2003, p. 5). rapid economic progress in the economy fosters innovations in public administrations. therefore, the economic and received december 26, 2016 / accepted march 28, 2017 corresponding author: sanja dalton, * candidate of ph.d in management. ms.c (mba) graduate the faculty of organizational sciences, belgrade, serbia e-mail: sanjadalton78@gmail.com 176 s. dalton technological conditions will affect the expectations of stakeholders consisting of clients, the budget, society, legislators, partners, suppliers, as well as management staff, customs officers and employees of the customs service, towards the customs service. according to cole (2006), understanding the external environment of business, economic, technological, social and political influences is crucial to strategic decision-makers. the business strategy of the serbian customs service through implementation of the new customs transit system (ncts) as a new ict system will enable and foster active international cooperation, in particular, with the european union and in bilateral contacts with neighboring states. for some authors, “organizations which want to maintain a competitive advantage have to be ready to adopt and adapt technological developments in administrative procedures to stay ahead” (cole, 2006, p. 31). this refers, in particular, combating customs and fiscal crime, the eu customs union, regional cooperation and the initiatives at the world customs organization. the strategy of the serbian customs administration through the implementation of the new ict system shall ensure: the mission the customs service, acting for the benefit of the republic of serbia and its society:  collects customs duties and taxes effectively,  actively supports business activities,  combat customs fraud effectively and protects markets and society. the mission reflects the role of the customs service in relation to its stakeholders and responds to their key needs. “all organizations exist to serve one or more interests outside themselves. most, in fact, have relationships, with range of interested parties or „stakeholders‟” (cole, 2006, p. 13). the vision using knowledge innovatively to provide better service in the digital lifestyle era through application of comprehensive approach to clients that enhance the quality of service provided with better exploitation of recourses, including it resources. the strategic objectives as an organization, the customs service aims at the highest possible levels of cooperation with the environment adjusting the needs of the direct beneficiaries of its services. according to cole (2006) objectives are the organizations operational targets and respond to changes in its stakeholders relationships. the strategic goals the formulation of the strategic goals stems from the current and future expectations of the strategic stakeholders of the customs service, clients, the budget and the society. “the overlapping area between strategy and operations is an important aspect of the relationship between the two dimensions of management activity. according to some authors, this overlap acts as a bridging stage between key decisions about strategy and their actual implementation throughout the operational units of the business” (cole, 2006, p. 10). this paper consists of five parts. the first part is the introduction to the research. the second part consists of the literature review regarding the strategic management in public organizations and implementation of ict based strategy of the organization. the third part is reserved for research methodology. the fourth part consists of results and the discussion on results of the research, that confirm the hypothesis that the implemented strategy based on ict improved the operational activities (kpis) of the service. finally, in the fifth part the conclusion of the research is presented. ict enabled implementation of strategy empirical evidence from serbian customs service 177 1. literature review 1.1. the concept of strategic management in public organizations to some authors, “one of the most important elements in managing a successful organization is having a sense of strategy” (bouman, 2003, p. 1). for lumpkin et al., (2007) strategic managers who apply proactive approach always look forward to the future in searching for new opportunities for growth and development of an organization. “strategic management in public organizations is about achieving success for the organization by achieving the stated purpose, goal and objectives promulgated by the top management. this is not the only measure of success, but it is fundamental one” (cole, 2006, p. 15). the mission, vision and strategy of a public organization play an important role in the expression of its identity, the position it takes on the issues it faces, and its future direction. “a vision that is made in vacuum, and that is not in compliance with the environmental threats or convenient opportunities, or with resources and capability of the organization itself, can ignore the real needs of an organization. thus, if the vision is not based on the reality, the employees will reject it. a corporate vision is a start position (the initial starting point) for setting up clear targets hierarchy. vision is mainly described as a final target that is “strongly inspiring, comprehensive and long-lasting” (lumpkin et al., 2007, p. 29). as an addition, a vision cannot be considered a magic remedy for an organization‟s diseases. an idealistic vision can make the employees enthusiastic, but the employees‟ enthusiasm could be easily smothered if they realize that the managers do not act in accordance with the vision (lumpkin et al., 2007). for lumpkin et al (2007), well formulated mission statement includes the concept of stakeholders‟ management, thus points out that organization must meet the needs of various groupings in order to survive and prosper. strategic goals of a public organization are used in order for mission statements to become operational. in other words, they give guidelines to a company how to fulfill its “higher targets” in the targets hierarchy that are vision and mission (chatterjee, 2005). the goals must meet a few criteria in order to be sensible. according to chatterjee (2005), the strategic goals must be: measurable (there must be at least one parameter that measures the level of advancement towards the desired goal), adequate (the goals must be in line with the vision and mission of the organization), realistic (the goals must be attractive but also feasible), time-wise determined (there must be a time frame for the realization of the goals). mission and vision must be in line with strategic goals of a public organization! for some authors, the key goals and aims of a public organization usually embrace the major units or functions at the organizations. these goals or aims are usually intended to provide for the medium term. on the other hand, objectives are the organization‟s operational targets, usually for period of one year or less and it responds to changes in its stakeholders relationships (cole, 2006). according to lumpkin et al (2007), strategic management has four key attributes: 1. oriented toward comprehensive goals of an organization, 2. includes various stakeholders, 3. encompasses both short-term and long-term perspectives, 4. encompasses a compromise between effectiveness and efficiency. strategic managers in public organizations nowadays mainly deal with three (interconnected) factors, such as: globalization, technology and intellectual capital. the second essence of the strategic management is analysis of the problem related to why some companies are more successful than the others (lu & beamish, 2004). for michael porter, the competition advantage could be realized only 178 s. dalton through operational effectiveness (gupta & govindarajan, 2001). according to some authors, majority of popular innovations that were introduced by managers during the last twenty years, such as: total quality, business process reengineering, just-in-time, benchmarking are related to operational effectiveness. operational effectiveness presumes that the actions are performed in a better way than the competitors. companies have to ensure means in order to focus on their innovative projects. by defining a “strategic envelope”, companies protect their innovative ideas to be directed toward uncertain projects. thus, companies have to not only define the type of innovation they are expecting, but also the expected results (lumpkin et al., 2007). according to stross (1997), there are four key attributes of strategic management: 1. firstly, strategic management is oriented toward overall targets and tasks of an organization. some authors consider this attribute “organization vs. individual rationality”. 2. strategic management implies taking the stakeholders into consideration during the decision-taking process. managers must take demands of numerous stakeholders into consideration during the decision-making. strategic management requires inclusion of short-term and long-term perspective. for some authors that is “creative tension” (macmilan et al., 2003). 3. strategic management includes recognition of necessary balance (trade-off) between effectiveness and efficiency. robert monks and nil minow, define corporative management as a link between different stakeholders who take part in directions and performances of a corporation (berkowitz, 2000). 1.2. ict based strategic management the strategy of an organization has been connected to the application of technologies (particularly new technologies) in a number of cases in organizations. one of the better known examples is the typology by miles et al, dividing companies in investigators, prospectors, defenders and reactors, among other things also on the basis of the relationship that a company has towards new technologies (1978). it is not only that the strategic orientation determines the priorities (e.g., human resources, technology, financial position, market positioning) towards whose improvement organizations will try to focus its operational efforts, but also the modalities of improvements and development of these aspects (čudanov, 2006). “the ict strategy considers more than just technology solutions, and demonstrates an understanding of the people, process, information and technology components required to deliver the business objectives” (deloitte, 2010, p. 5). both the ict strategy and the organization‟s business objectives are aligned. the ict strategy demonstrates a clear linkage from the business strategy through the related business requirements and the supporting ict requirements (deloitte, 2010). according to podolsky (2003), when an organization decides to implement new technology it is asking its employees and key stakeholders to adapt to new tools, processes, and policies that are likely to be very different from the ones they have grown accustomed to. to some authors, “communication is the most important element in managing organizational change” (podolsky, 2003, p. 255). some authors believe that “strategic sourcing is the dynamic delivery of internal and external business or it oriented resources and services ict enabled implementation of strategy empirical evidence from serbian customs service 179 to ensure that business objectives are met” (da rold et al., 2002, p. 5). according to da rold et al (2002, p. 222), “it strategy examines how it can support the objectives set by the business strategy”. it strategy overlaps and fuses with the business strategy. the objective of information gathering and processing, planning, coordination and control “just”in union matters at the super national level. this process will lead to convergence of national public administrations (schwarze, 2008). for some authors, creating a technology plan is an opportunity for an organization to focus on its mission, goals and strategies “a technology that focuses on mission is most likely to outline technology that facilitates improvements in the organization” (podolsky, 2003, p. 5). according to sabherwal and chan (2001), the strategic determination of the so called prospectors and analyzers require greater application of ict and strategy development of the it system that must be in line with the business strategy. in previous papers, especially in the researches that have been done by henderson and varkrataman (1993), the two-way connection between the general strategy of an organization and the strategy which is bound to the ict subsystem in an organization is obvious. “it is useful to start a strategy with a vision of icts role in enabling the delivery of policing. this must consist of a statement or a short list of the priorities. to some authors, new technologies are the ones of the most important paths toward corporation entrepreneurship “but the technologies change and the innovations that were exiting yesterday are already out of date today” (lumpkin et al, 2007, p. 434). hence, “this should align closely with the business objectives contained with the organization‟s business strategy and any other strategic plan” (deloitte, 2010, p. 6). the innovations are one of the most important sources where convenient business opportunities are being born. an innovation means use of new knowledge with an aim to transform organizational processes. the sources of new knowledge encompass the latest technology, results of experiments, results of creative researches or information about competitors. innovations are combinations of ideas and information that bring positive changes (lumpkin et al, 2007). the strategy determines the implementation of information and communication technologies. it is important to point out that it cannot be considered one way, because the implementation of ict has a retroactive impact on the strategy of an organization (čudanov, 2006). ict is increasingly used for strategic purposes. according to the research done by nelson oly ndubisi (2003), the strategic significance and impact of ict are also connected to a group of tasks that are mostly operational. simple, everyday tasks that are performed using is increase the value of the system. for some authors, formulation of a strategy of organization encompasses: formulation of strategy on organizational unit level, formulation of strategy on an organization/company level, formulation of international strategy and strategy of digital business. digital technologies change business processes and management within organizations. successful application of digital technologies can assist organizations to improve their position on the (global) market and to create an advantage by improving leadership strategy in cost management and strategy of business differentiation (lumpkin et al., 2007) “new technologies are the most important sources of new strategy ideas” (lumpkin et al., 2007, p. 436). 180 s. dalton 2. materials and methods 2.1. research methodology this research used quantitative and qualitative approach. patton (2002) has argued that a qualitative research methodology can help researchers approach fieldwork without being constrained by any predetermined categories of analysis. moreover, gay, mills and airasian (2009) explained that the strength of quantitative research is the opportunities that it provides researchers to interact and gather data directly from their research participants to understand a phenomenon from their perspectives. on the other hand, qualitative research carries the uniqueness because it does not give conclusion in advance. it is often regarded as a scientific methodology of management sciences research (taylor, 1998). 2.2. sample structure and size in the research, data were collected by having an insight into the secondary data (customs reports and interviews with the top management) and through a survey (questionnaire). in order to achieve the objectives of the research, 50 questionnaires were distributed among the managers of the customs houses in serbia, 25 for the experimental group and another 25 for the control group. in response 21 questionnaires were returned from the experimental group and 20 for the control group. the response rate was 82.2% for both groups. among all managers who were respondents, 41 of them or 100% were convenience and fixed sample. there were 21 customs house manager after the ntcs had been introduces (experimental group) and 20 customs house managers, before the ncts had been introduces (control group). according to some authors, the control group consists of elements that present exactly the same characteristics of the experimental group, except for the variable applied to the latter. this group of scientific control enables the experimental study of one variable at a time, and it is an essential part of the scientific method. in a controlled experiment, two identical experiments are carried out: in one of them, the treatment or tested factor (experimental group) is applied; whereas in the other group (control), the tested factor is not applied (kinser & robins, 2013). table 1 the structure of the samples variable number of respondents % experimental group control group the ncts yes no 21 20 21 20 51.2 48.8 51.2 48.8 n=41 2.3. instrument apart from the personal interviews, the questionnaire was designed on likert 5 rating scale (1=strongly disagree, 2= disagree, 3=neutral, 4= agree and 5=strongly agree). to test the impact of the variables the data were analyzed through spss. the survey ict enabled implementation of strategy empirical evidence from serbian customs service 181 included grades of the managers‟ attitudes measured by 5-point likert scale about the improvement of the kpis: quality of checks, collection of revenues, cost and expenditure management and reputation and competiveness. 2.4. data collection the required information for the research was collected through questionnaire, personal interviews with the top managers and on-line interviews with the customs houses managers. the data was also collected from the customs statistics and reports – secondary data. 2.5 methods the creation of diagrams is used in this research in order to analyze stakeholders analyzes – swot and strategy and strategic risk assessment rating (“3x3” risk matrix) based on the data collected by interview and by secondary data. descriptive statistics was used to measure the difference of the managers‟ perceptions of improvement of the kpis after the ncts had been introduced (the experimental group) and the managers who did not operate in line with the ncts (the control group), that is shown in the table 2. encompassed metrics were grouped into four clusters-kpis: quality of trans-border prevention, collection of revenue, cost and expenditure management and reputation and competiveness. for cole (2006), organizations must ensure that strategy and operations are articulated. table 2 ch managers‟ perception and measurement of the kpis experimental group control group m sd m sd kpi1 quality of trans-border prevention s1 quality of checks 4.70 0.470 4.38 0.498 s2 level of prevention of smuggling of goods 4.75 0.444 4.43 0.507 s3 level of prevention of false clearance (forged and stolen stamps) 4.70 0.470 4.19 0.402 s4 level of efficient targeting for inspection 4.80 0.410 4.38 0.498 kpi2 revenue collection improvement s5 collection of excise 4.70 0.470 4.38 0.498 s6 collection of customs duties 4.65 0.489 4.33 0.483 s7 collection of fines 4.85 0.366 4.48 0.512 kpi3 contribution to cost and expenditure management s8 facilitation of flow of goods/trucks 4.80 0.410 4.38 0.498 s9 efficient allocation of staff 4.65 0.489 4.14 0.359 s10 efficient allocation of technical resources 4.45 0.510 4.19 0.602 kpi4 contribution to overall reputation and competiveness s11 reputation among other customs administrations 4.65 0.489 4.24 0.539 s12 reputation in the eye of public 4.85 0.366 4.48 0.512 s13 competiveness with the neighboring corridors 4.70 0.470 4.38 0.499 182 s. dalton the independent sample t-test is used to confirm the existing difference between the experimental and the control group related to kpis, such as: quality of trans-border prevention, improvement of revenue collection, cost and expenditure management and overall reputation and competiveness (table 3). table 3 (significant) differences in the evaluations of kpis: experimental vs. control group p s1 quality of checks 0.042 s2 prevention of smuggling of goods 0.037 s3 prevention of false clearance (forged and stolen stamps) 0.001 s4 efficient targeting for inspection of goods 0.006 s5 collection of excise 0.042 s6 collection of customs duties 0.044 s7 collection of customs fines 0.011 s8 facilitation of flow of goods/trucks 0.006 s9 efficient allocation of staff 0.001 s10 efficient allocation of technical resources 0.145 s11 reputation among other customs administrations 0.015 s12 reputation in the eye of public 0.011 s13 competiveness with neighboring countries corridors 0.042 independent sample t-test significance level p<0.05 3. discussion according to the secondary data (an insight into the reports) and personal interviews with the top management, the research results show that the customs service conducts a swot and strategy analysis (as shown in the diagram 1) that follows the strategic risk assessment rating (as shown in the diagram 2). for cole (2007), the most important factor of external influences on public administrations apart from political, economic, and social is technology (especially technological advances). hence, public administrations apply pest analysis. according to the results of the research based on secondary data collected, the customs service deals with, according to cole (2007), indirect stakeholders (i.e., those not necessarily engaged in direct transactions, but nevertheless significantly affected by the services‟ activities: 1. the community (local, regional, national or international); 2. competitors (i.e., those organizations providing similar services); 3. the government (i.e., those charged with the management of the economy as a whole on behalf of the community). based on the analysis of the secondary data, the research results show that the customs service faces the external influences such as: 1. supra – national bodies, that are according to cole (2006) organizations which exert their influence outside that of national governments and sometimes overrule the latter, 2. government and the law customs service “ is affected by changes in indirect and direct taxation law, health and safety and environmental factors” (cole, 2006, p. 31). ict enabled implementation of strategy empirical evidence from serbian customs service 183 level of intervention low high power low power high a minimal effort b keep informed c keep satisfied d key players external internal chances threats strengths does this strength enable us tomake use of this chance does this strength enable us to avert from this threat weaknesses does this weakness hinder us from making use of this chance does this weakness hinder us from averting this threat fig. 1 stakeholders analysis – swot and strategy tolerability high likehood low low likehood high fig. 2 strategic risk assessment rating (“3x3” risk matrix) update strategy 184 s. dalton 3.1. evaluation of the kp1 quality of trans-border prevention the results of the descriptive statistics in this research show that the experimental group evaluated the statement related to efficient targeting of consignments for inspection with the mean of 4.80 and the standard deviation of 0.410 better than the prevention of smuggling of goods with the mean of 4.75 and the standard deviation of 0.444. the third ranked statements are quality of checks and prevention of false clearance (forged and stolen stamps), both with the mean of 4.70 and the standard deviations of 0.470. on the other hand, the control group evaluated the statement related to prevention of smuggling of goods with the mean of 4.43 and the standard deviation of 0.507 that is better than the quality of check and efficient targeting of consignments for inspection with the means of 4.38 and the standard deviations of 0.498, as well as prevention of false clearance (forged and stolen stamps) with the mean of 4.19 and the standard deviation of 0.402 (table 2). it can be concluded that the officers evaluated the statement related to the targeting of consignments for inspection as the best improved. the independent sample t-test results (table 3) also show that there is a significant difference in evaluation of quality of checks between the experimental and the control groups (p=0.042), prevention of smuggling of goods (p=0.037), prevention of false clearance (forged and stolen stamps) (p=0,001) and efficient targeting of consignments for inspection (p=0.006). 3.2. evaluation of the kpi2 – collection of revenues regarding the results of the descriptive statistics data analysis in this research shows that the experimental group evaluated collection of customs fines with the mean of 4.85 and the standard deviation of 0.366, that is better than collection of excise duties with the mean of 4.70 and the standard deviation of 0.470 and collection of customs duties with the mean of 4.65 and the standard deviation of 0.489. the control group also evaluated collection of fine with the mean of 4.48 and the standard deviation of 0.512 better than collection of excise with the mean of 4.38 and the standard deviation of 0.498 and collection of customs duties with the mean of 4.33 and the standard deviation of 0.483, meaning that, the officers evaluated a proportional and linear improvement of the performance related to the kpi of collection of revenue (table 2). according to the independent sample ttest analysis (table 3), there is a significant difference in evaluation of collection of excise duties (p=0.042), a significant difference in evaluation of collection of customs duties (p=0.044), as well as a significant difference in evaluation of collection of the customs fines (p=0.011), that can confirm our hypothesis that the ncts has a significant impact on the kpi related to collection of revenue. 3.3. evaluation of the kpi3 – cost and expenditure management the research results from the descriptive statistics data analysis show that the experimental group evaluated facilitation of the flow of goods/trucks with the best grades, with the mean of 4.80 and the standard deviation of 0.410. the second best ranged is efficient allocation of staff with the mean of 4.65 and the standard deviation of 0.489 which is better evaluated than the efficient allocation of resources with the mean of 4.45 and the standard deviation of 0.510. the control group evaluated facilitation of the flow of goods/trucks as the best ranged as well, with the mean of 4.38 and the standard ict enabled implementation of strategy empirical evidence from serbian customs service 185 deviation of 0.498. the second best ranged is efficient allocation of resources with the mean of 4.19 and the standard deviation of 0.602. the third best ranged is efficient allocation of staff, with the mean of 4.14 and the standard deviation of 0.359 (table 2). according to the independent sample ttest analysis, there is not a significant difference in evaluation facilitation of the flow of goods/trucks (p=0.006) and a significant difference in evaluation of allocation of staff (p=0.001), but there is not a significant difference in evaluation of efficient allocation of technical resources (p=0.145). thus, these evaluations partially confirm our hypothesis that the ncts has a significant impact on the kpi related to cost and expenditure management. 3.4. evaluation of the kpi4 – overall reputation and competitiveness the research results according to the descriptive statistics data analysis show that the experimental group evaluated the reputation in the eye of general public with the mean of 4.85 and the standard deviation of 0.366 better than the competitiveness with the neighboring corridors, with the mean of 4.70 and the standard deviation of 0.470 and the reputation among the other customs administrations, with the mean of 4.65 and the standard deviation of 0.489. the control group also evaluated the reputation in the eye of the general public as the best ranked, with the mean of 4.48 and the standard deviation of 0.512 better than the competitiveness with the neighboring corridors, with the mean of 4.38 and the standard deviation of 0.499 and reputation among other customs administrations, with the mean of 4.24 and the standard deviation of 0.539. according to the independent sample t test analysis (table 3), there is a significant difference in evaluation of reputation among other customs administrations (p=0.015), a significant difference in evaluation of reputation in the eye of general public (p=0.011) and a significant difference in evaluation of competitiveness with the neighboring corridors (p=0.042). thus, the evaluations confirmed our hypothesis that the ncts improved the kpi related to reputation and competition. conclusion establishment of open but well secured borders, better control of revenue collection and improvement of competitiveness and overall reputation are the main goals of the serbian customs administration. for cole (2006), the key goals or aims of the organization usually embrace the major units or functions of the organization. the research results showed that the establishment of ict enabled the implementation of the strategy of the customs administration top management and therefore improved the main kpis. some authors argue that the role of this new process is continuously developing of key operational processes, hence the achievement of target values of process kpis (komazec et al., 2014). talking about the needs of implementation of strategies within customs administrations, we can also refer to the phenomenon of globalization, to the significant increase of the number of the member states, to the energy and environmental problems and to the fight against terrorism (schwarze, 2008). to some authors, “organizations which want to maintain a competitive advantage have to be ready to adopt and adapt technological developments in administrative procedures to stay ahead” (cole, 2006, p. 31). ict enabled implementation of strategy of the customs service of serbia is primarily based on data exchange with the stakeholders, hence, the mission statement of the customs is technical 186 s. dalton collaboration (cole, 2006). on the basis of the aforementioned we can draw a conclusion that the creation of the area without borders, a single geographical area is the future of the european administrative space (torma, 2011). this research contributed to confirm the hypothesis that the introduction of ict system enabled the top management of the serbian customs service to implement the strategy and hence improve the operational results in general. the other benefit is that this is one of the first researches related to ict based strategy implementation of the cas. the disadvantages of this research are the fact that questionnaire method has several limitations, for example lackadaisical attitude of respondents, non-attendance and lack of cooperation. one more limitation of the research is the fact that it did not involve all the crossing points in serbia and possibly insufficient number of samples, which is reserved for some of oncoming related researches. references berkowitz, e.n. 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(2011). the european administrative space (eas). european integration studies, 9 (1), 149-161. implementacija strategije omogućena ikt-om empiriski dokaz iz carinske službe srbije u ovom radu predstavljena je implementacija strategije carinske službe srbije omogućena iktom. cilj istraživanja je merenje i analiza uticaja ikt-a na uspešnu implementaciju strtaegije organizacije. istraživanje je sprovedeno anketom – upitnici i lični intervjui sa višim rukovodstvom i generalnim direktorom. podaci su takođe prikupljeni uvidom u sekundarne podatke (carinski izveštaji). rezultati istraživanja pokazuju da novi kompjuterizovani sistem ima pozitivan uticaj na poboljšanje ključnih indikatora performansi (kpi), što predstavlja suštinski cilj strategije. ključne reči: strategija, informaciona i komunikaciona tehnologija, strategijski menadžment plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 1, 2017, pp. 1 15 doi: 10.22190/fueo1701001p preliminary communication can banking union help the viability of eurozone banking sector? some preliminary results1 udc 347.734:338.124.4 339.738(4-672eu) svetlana popović, irena janković faculty of economics, university of belgrade, serbia abstract. although financial integration and convergence of emu member countries reached a high level, the financial crisis that has developed into a banking and debt crisis has caused an intense process of fragmentation of financial markets along national borders. this significantly complicated the implementation of the single monetary policy and disrupted the monetary transmission mechanism. furthermore, in emu, the crisis was much more intense than in other economies, and was rapidly transmitted among member states. besides, the contagion spread quickly from banks to sovereigns and vice versa, creating a “vicious loop” between banks and governmental finances. this paper attempts to show that adequate, strong and politically independent supranational bank regulation and resolution is necessary for the viability of banking sector, but also the economies in european monetary union. it should restore the market confidence and harmonize the rules of the game in the single financial market. although the project is on its very beginning, there are some first encouraging results. key words: banking crisis, sovereign debt crisis, banking union, financial divergence jel classification: e42, e52, f42 1. the need for the banking union in european monetary union the specific regularities that precede or go in parallel with crisis throughout the history include the following: increase in private debt (domestic and external) before the crisis, banking and sovereign crises often joint occurrence and increase in public borrowing (reinhart & rogoff, 2010, p.1-2). 1received november 7, 2016 / revised january 16, 2017 / accepted february 2, 2017 corresponding author: svetlana popović faculty of economics, university of belgrade, kamenička 6, 11000 belgrade, serbia e-mail: ceca@ekof.bg.ac.rs 2 s. popović, i. janković domestic credit rises sharply before the crisis. household and consumption related debts in eurozone countries accumulated significantly before the crisis 2007-2008 due to low interest rates and the absence of the foreign exchange risk. during the expansion, the financial sector became richer and more influential. the overconfidence led to underestimation of future shocks that resulted in insufficient asset holdings or too much debt accumulation. decreased regulation and moral hazard behavior increased financial sector’s profitability at the expense of the society. (reinhart & rogoff, 2008). graph 1 loans to private sector as % of gdp for euro zone periphery source: authors’ presentation based on world bank’s data private debt based on domestic banking credit or foreign borrowing significantly increases before the banking crisis. with the increase of countries’ external debt (both private and public) the probability of sovereign and banking crises rises. what reinhart and rogoff (2010, p.20) presented for the sample of advanced economies is that average external debt/gdp ratio doubled in the period 1999-2009 leading to global financial crises starting with subprime crises in us in 2007. the similar debt accumulation happened in emerging markets in earlier 1981-1998 period and again from 2008 led by euro zone periphery countries. regarding the maturity structure, especially short-term debts escalate before the crisis. as has been confirmed in practice several times any short term borrowing to finance illiquid assets makes the debtor susceptible to crisis of confidence (diamond & dybvig, 1983). foreign capital inflows to emerging countries usually increase in the pre-crises years and then suddenly stop just before or during the crisis when foreign investors withdraw from those markets. the long history of crises shows that banking crises often occur before the sovereign debt crises, although the opposite influence is seen in recent history, too. the banking crisis in large financial centers causes banking crises in other countries and domestic banking crises then leads to sovereign debt crises. the reverse relationship, where public debt accumulation leads to domestic banking crises, is more often seen after 1950s. private debt surges explain this shift in influence. increase in the public debt affects the default probability of the sovereign. concerning the external debt accumulation (both private and public), it increases the chance of the banking crises (reinhart & rogoff, 2010). can banking union help the viability of eurozone banking sector? some preliminary results 3 one of the reasons for the increase of the public debt prior and during the sovereign debt crises may lie in the hidden debts and liabilities in implicit government guaranties to government agencies or private domestic borrowers. 2 the second reason may be the massive debt taking by sovereign from the private banks affected by the crisis. even without bailouts, since state revenues decrease, sovereign debt rises leading to rating downgrade and defaults. debts continue to increase even after the default as obligations continues to accumulate and at the same time the gdp contracts (reinhart et al., 2003). unfortunately, soon after the debt is restructured countries again start to re-leverage. in addition, when countries have significant amounts of debt denominated in foreign currency, banking crisis precedes the domestic currency crash. the decreasing value of domestic currency leads to insolvency of both private and sovereign debtors that have foreign currency debt on their balance sheets (janković and živković, 2014). the latest global financial and debt crisis in eurozone follows the explained patterns. cds premiums as indicators of the level of default risk show high positive correlation of 94% for sovereigns and banks as issuers. graph 2 cds indices for euro zone sovereigns and european banks, in basis points source: authors’ presentation based on data from http://us.spindices.com the contaminated assets held in bank balance sheets led to massive insolvencies. the government interventions resulted in deficit and debt accumulation. the hidden debts in euro area periphery have been revealed. commercial banks held significant amounts of government securities on their balance sheets, as the safest assets. financial and debt crisis and government defaults resulted in securities rating downgrade, significant risk premium and yield increase followed by sharp drop in securities’ prices. once secure and liquid assets held on the balance sheet suddenly became less liquid and almost worthless that in parallel with private debt defaults raised liquidity and solvency issues for banks preventing them to meet capital adequacy requirements. 2 e.g. case of fannie mae and freddie mac in us and greece in latest crises 4 s. popović, i. janković 1.2. impact of the crisis on the financial divergence in european monetary union the global and sovereign debt crises in europe revealed the shortcomings of the financial integration process. euro zone has never reached the unification level which exists in the us since monetary union was not followed by banking and fiscal union. the stability and growth pact failed in disciplining public sector and fiscal policy conduct. in addition, private sectors have accumulated significant debts that were financed through domestic banking sectors. the banks were, on the other hand,funded by european markets and financial institutions. the substitution of national currencies in circumstances when banking regulation remains the national responsibility, means that national governments continue to carry the risk of banking crisis the direct one (if bailing out affected banks) and indirect one (since gdp and tax revenues tend to remain low after the crisis). the national fiscal policies became the main countercyclical macroeconomic policies (lane, 2012, p.49-50). the private debt increased significantly in the first years of the emu in periphery countries of the euro area. although the public deficit in greece had greater role in debt accumulation, in spain, ireland and portugal private debt of the mostly non-financial sector had higher influence. excessive credit growth was funded by domestic and foreign banks that led to macroeconomic imbalances and mortgage market price bubbles. the local supervisors were in a sense permissive towards a national banking sector. the support provided was reflected in infrequent credit rating downgrades. shift of supervision on supranational level was needed to help the reduction of the captive behavior of regulators. the 1999-2007 was a period of good growth performances and stable financial environment that masked the accumulation of macroeconomic, financial and fiscal vulnerabilities of eurozone periphery. the increase in private debt and current account deficits was intensive in 2003-2007. the individual fiscal policies have not been tightened, due to poor risk management, and were less countercyclical in this period. with the startup of global financial crisis, markets reacted in 2008 bringing accumulated structural weaknesses of the eurozone members into light, triggering strong divergence process followed by market fragmentation and reversed capital flows towards the core countries. banks faced nonperforming loans increase and liquidity squeeze. graph 3 divergence of sovereign bond yields (in %) can banking union help the viability of eurozone banking sector? some preliminary results 5 source: authors’ presentation based on eurostat data during 2008-2009 debt markets remained calm. demand for sovereign debt securities was even increasing since banks needed safe collateral for borrowing from ecb. the combination of domestic recessions, banking crises and withdrawal of foreign investors made basis for the sovereign debt crisis. in late 2009, countries of the euro area periphery reported higher than expected budget deficit/gdp ratios followed by rising bank losses and consequent fiscal risks that had negative impact on sovereign bond prices and yields. markets reacted to rising credit risk and increased the yields to maturity on government debt securities while lowering their rating and prices. the negative repercussions occurred due to the high share of now less valuable sovereign debt securities in the banks’ balance sheets. in the member states with already weak sovereign the national banks were taking on a higher portion of public debt from 2009. it was particularly evident in the periphery where foreign investors were selling risky bonds and domestic banks were buying them. this process indicates an increasing fragmentation of the sovereign bond markets. core countries, like germany, have, on the contrary, experienced increase in sovereign bond holdings by non-residents due to the "flight to safety and quality" (merler & pisani-ferry, 2012). despite the increased loading with sovereign debt instruments, they remained a less significant share of banks’ total asset. it is important to notice that before 2007, public debt in euro area countries was mostly financed by foreign investors and not domestic financial sector. this relaxes the idea that public sector was the dominant driver of the macro imbalances. with an exception of greece the imbalances were mostly created on the side of the private sector expenditures that were financed by the financial sector (constâncio, 2012). the monetary transmission channel was significantly jeopardized and the ecb was forced to take on dual role of both monetary area regulator and sovereign debt market stabilizer. in addition, the behavior of reference money market rates indicated the reduced money market's volumes, in particular, to periphery countries. rates decrease over time but show significant volatility after the beginning of the crisis related to increasing sovereign debt risk. graph 4 reference money market rates (in %), jan 1999-july 2016 source: authors’ presentation based on ecb data 6 s. popović, i. janković both lending and deposit bank interest rates began to diverge across markets while the core countries started to withdraw liquidity from stressed countries back to headquarters. foreign bank subsidiaries lost in share of the total banking sector assets. as a consequence, the ecb monetary policy transmission process and its effect on interest rates' unification among member states became less effective. thus, for the effective conduct of the monetary policy it is essential to reduce the financial fragmentation and to restore the monetary transmission mechanism. that is possible only when the ecb gets a chance to refocus on its primary goals while the proper crisis resolution mechanism is introduced in parallel. the joint eu/imf programs were organized to provide a three year funding to vulnerable countries that have to implement fiscal austerity measures and structural reforms. the european financial stability facility (efsf) and european stability mechanism (esm) were formed to provide resources to affected members by issuing bonds on the basis of guarantees from all member states. in order to be able to affect the risk premiums related to a fear of euro area break-up ecb had to impose strict conditionality to adequate efsf or esm programs. the proposed scheme of outright monetary transactions (omt) is based on this rationale. on conditionality based bond market interventions were aimed at reduction of the euro area survival risk and to help debt crisis resolution. however the three year period was too short for significant structural adjustments. financial and debt crisis showed some systemic weaknesses in the design of emu bank regulation and resolution framework. they largely caused interdependence between the banking and sovereign crisis, which led to higher intensity of crisis in relation to other economies. that also made european monetary union more vulnerable to vicious circle of market expectations and deepening the crisis. when the crisis emerged, there was no supranational banking resolution framework. ecb did not have the role of the lender of last resort, and national governments where responsible for rescuing their national banking system. having in mind the size of bank balance sheet, that meant very high costs for national budgets, and led to investor doubts about capability of some governments to pay off their debts. that led to new bank losses, since the national banks have large amounts of their national debt. to increase the viability of emu banking sector and break a loop between banks and sovereigns, euro area countries need credible source of unconditional liquidity lender of last resort that is able to provide missing amount of liquidity whenever it is needed. besides, avoiding future market distortion requires both national and supra-national regulation changes. banking union moves the supervision of national and internationally important banks and the responsibility for rescuing them from national to european level. that should foster further financial convergence and financial integration, by unifying credit and deposit markets across europe. 2. the pillars of the banking union according to ecb (european central bank, 2016c) the intent of banking union is to have a more transparent, safer and unified banking sector and bank supervision in europe. common rules and standards of bank supervision, recovery and bank resolution should be consistently applied. all banks should be treated as domestic, in the sense that all bank activities, national and cross-border, are treated the same. the financial soundness of banks can banking union help the viability of eurozone banking sector? some preliminary results 7 should be independent from the country in which they are located. timely intervention should prevent the bank failures, but in the case when it is inevitable, bank resolution should be efficient and separated from the domestic government. banking union has two pillars: a single supervisory mechanism (ssm) and a single resolution mechanism (srm). a european deposit insurance scheme (edis) should be the third pillar, but it would be in full operational as of 2024. the goal of the single supervisory mechanism (ssm) that started on 4 th november 2013, is the foundation of single supervisory authority in europe that is independent from national political factors. it should decrease the moral hazard problem, by respecting the principle that not all the banks would be rescued, which means that principle “too big to fail” will not work anymore. before the crisis, european central bank had auxiliary role in the process of supervision. by establishing ssm, ecb got responsibility for supervising all banks in europe. it directly supervises all significant banks (banks with assets of more than 30 billion euro or at the least 20% of their home country gdparound 130 banks) (popovic, 2016, p.12). national supervisors are responsible for supervising less significant banks. they are accountable to the ecb, which can decide to directly supervise any of these banks, if needed. banks in euro zone have to follow the rules of basel iii, and increase the level and the structure of their capital. the implementation of these rules will be monitored by ssm. if in the process of day-to-day supervision, the deterioration of bank balance sheet is identified, ecb should react quickly to prevent the escalation of the problem. in the case when the bank failure is inevitable, bankruptcy procedures will be shorter. part of the single supervisory scheme is the comprehensive assessment procedure (ca) that will be carried out on the regular basis for all significant banks, but also when needed in the case of exceptional circumstances. it should ensure that banks have adequate level and structure of capital so that they can resist possible financial turmoils. banking union needs the third pillar, in order to have the common playground for all european banks and to ultimately prevent the interconnection between bank and sovereign crisis. the missing pillar is the european deposit insurance scheme (edis). its task is to preserve the deponents confidence in the banking system and thereby prevent the possibility of bank rush, by shifting the costs and risks of protecting depositors, in the case of local bank failures, to the banking union. this will enhance the resistance to possible financial crisis and prevent its fast spreading among member countries, by reducing the vulnerability of national deposit guarantee schemes to large local shocks. edis will be filled by bank contributions, and will be fully operational from 2024. 3. the first results of banking union banking union is a big step towards financial stability and integration in eurozone. this is a very new project, in its early stage. ecb became responsible for the supervision of systemic banks less than two years ago, srm became fully operational since january 2016, but no bank resolution yet has been done. (some italian banks seem to be the first candidates, but italy is trying to avoid bank resolution. it established the atlas fund as shareholder of last resort to evade resolution even for the banks that have failed to increase their capital level (merler 2016)). still some early conclusions on the effectiveness of implemented 8 s. popović, i. janković changes could be drawn. the next part of the paper analyses the impact of changes in the bank regulatory and supervisory framework in the emu (banking union), together with the measures taken by the ecb in the meantime (outright monetary transactions programme omt and the quantitative easing-qe-tltros), on the degree of financial integration in the euro zone and banks performances. ecb established two composite indexes of financial integration: the price and quantitybased fintec indicators. price based fintec is constructed on the basis of ten price dispersion indicators on money, bond, equity and banking markets covering the period from the first quarter of 1995, thus representing an comprehensive overview of financial integration in the euro area. ecb also publishes sub-indexes for listed markets. quantity based fintec is constructed on the basis of five quantity indicators, from the first quarter of 1999. those are intra-euro cross–border holdings expressed as a percentage of euro area total holdings (intra-euro area cross-border plus domestic quantities) (european central bank, 2015b, p.119). there are three sub-indices: interbank markets (includes money and banking markets), bond and equity markets. fintec ranges between 0 in the case of full fragmentation, to 1 in the case of full integration. graph 5 priceand quantity-based fintecs source: financial integration in europe, april 2015, ecb, p.9 movements of price-based fintec prove what was shown in the first part of the paper – based on individual indicators of financial integration that the level of financial integration in eurozone rose until the outbreak of financial crisis in the end of 2007. collapse of lehman brothers brought sharp drop in the level of indicator and sovereign debt crisis meant very high fragmentation of financial markets along national borders (in literature known as “balkanization” of the financial system) (xafa, 2015, p.3; smits, 2005, p.212). situation started to improve at the end of 2012, after ecb president mario draghi stated that ecb would do everything that was necessary to save the euro, which was followed by the introduction of omt program. that broke the spiral of market expectations and crisis deepening, and led to decreasing of sovereign spreads. relatively late introduction of these measures showed structural flaws in the design of the eurozone, due to which the functioning of the ecb as a lender of last resort was inefficient (popovic, 2016). eu summit decision to launch banking union enabled such ecb measures by providing an adequate can banking union help the viability of eurozone banking sector? some preliminary results 9 pledge for those actions that was missing before. omt, together with the start of banking union, led to new deepening of financial integration in euro zone, although pre-crisis level is still far away. this shows how fragile reached financial integration was and that thorough, full financial integration in euro zone cannot be achieved when financial stability architecture is national based (nouy, 2015). quantity-based fintec shows lower volatility than price-based fintec, but it also indicates significant influence of the debt crisis on the fragmentation of financial markets that started to decrease after omt and banking union announcement. the significance of omt and banking union announcement could be analyzed by comparing the level of financial stress before and after introducing those measures. the level of financial stress in euro area is represented in graph 6, by the composite indicator of systemic stressciss. ciss is a new indicator of contemporaneous stress in the financial system; it measures the current state of instability-the current level of frictions, stresses and strains in the financial system. its focus is on the systemic dimension of financial stress. the ciss is made up of 15 mostly market-based financial stress measures divided into five categories, the financial intermediaries sector, money markets, equity markets, bond markets and foreign exchange markets (holló et al., 2012, p.3). graph 6 composite indicator of systemic stressciss in euro area (pure number) source: ecb, statistical data warehouse until subprime crisis the level of systemic stress in eurozone was quite low, and then started to increase rapidly, reaching the peak after lehman brothers collapse in september 2008. during 2009 the level of financial stress started to mitigate. enhanced credit support measures of ecb had positive results, the situation on financial markets improved, money markets spreads decreased while capital markets revived. that is why ecb announced that its non-standard monetary policy measures are no longer necessary and will be gradually discontinued. unfortunately, immediately after tensions started to increase on some segments of financial marketsespecially sovereign debt market and caused new ecb interventions. from april to august 2011, conditions in the economy started to stabilize, so ecb raised its reference rate to 1.5% in order to neutralize risks to price stability. but since august a new wave of financial and debt crisis started, and the level of financial stress reached a new peak . this forced ecb to became a lender of last resort in the full senseto promise unconditional financial support to banks as much and 10 s. popović, i. janković as long as it is necessary. it introduced omt program and banking union project. graph 6 shows significant drop in the financial systemic risk level, after that. this was also the period of mild financial integration improvement. the major challenge for ecb now is a very low inflation rate. it had a constant decline since november 2011 from the level of 3%, until the january 2015, when it reached its lowest level of -0.6%. since then situation slightly improved, but the rate of inflation still fluctuates around 0 level. some (peripheral) member countries have quite high negative inflation rates (cyprus -1.9%, spain -1.1%, latvia -0.8% etc.), although inflation in some core members is also low or negative (luxemburg -0.6%, germany 0.0%, italy -0.3%, france 0.1%, etc.) (eurostat) 3 . there are opinions (clays, 2014, p.15) that ecb was too late with its quantitative easing measures. it waited until june 2014 to start with massive monetary expansion in order to stimulate the economy and raise inflation expectations. this was supposed to stimulate banks to ease credit conditions and offer more credits to companies and households. the effect of measures ecb appplied since 2012 on bank lending activity is shown on the graph 7. the amount of new bank loans to households started to decline since 2007 and loans to corporations since 2008, and there has been a significant drop in bank lending activity for years. graph 7 bank business volumes loans to corporations and households (new business) in the euro area source: authors calculations based on ecb, statistical data warehouse, 11.7.2016 bank lending started slightly to recover in 2012, when the sum of loans to households for house purchase started to increase. the amount of new consumer loans is in mild increase since 2013, and bank lending to corporations is in increase since 2014. banks eased terms and conditions on loans to enterprises and consumers, and ecb in its bank lending survey expects a continued net easing of credit standards on different loans (with the exception of housing loans). demand of enterprises for loans and credit lines is in increase since the first quarter of 2014, with the exception of the first quarter of 2015. the main contributing factors for loan demand were inventories and working capital, the general level of interest rates, mergers and acquisitions activities and fixed investment, especially as a result of developments in germany, italy and spain (european central 3 data for may 2016 can banking union help the viability of eurozone banking sector? some preliminary results 11 bank, 2016b, p.12). demand for housing loans is in increase in all large emu countries except in spain. banks had to tighten credit standards on housing loans due to the implementation of the eu mortgage credit directive, but terms and conditions are eased because of higher competition pressure. demand growth has surpassed bank expectations, and it is expected to increase further due to the low level of interest rates, and improved housing market prospects. net easing of credit standards for consumer loans and other credits for households was very mild, but banks expect it to continue due to competitive pressures and reduced risk perceptions. competitive pressures, banks’ cost of funds and reduced balance sheet constraints influenced significant ease of credit terms and conditions on new loans. the demand for consumer and other loans to households has an increasing trend in the majority of large emu countries. the demand growth is mostly the result of needs to finance the durable consumer goods and to a much lesser extent the result of increased consumer confidence. a sizeable challenge for the banks in europe is quite long period with low profitability. graph 8 shows some improvements in the last two years, but roe is still significant below pre-crisis level. besides, estimated cost of capital is now around 9% (constȃncio, 2016), and since 2008 there has been a negative gap between banks’ roe and the cost of equity, though ecb data show significant decrease in the last two years. graph 8 bank profitability in euro zone source: ecb, statistical data warehouse, 12.7.2016 there are also doubts if this profit recovery is sustainable. domestic demand and gdp are in increase since march 2013, but pre-crisis level have still not been reached. stock market developments at the global level and especially in the euro area are worrying. euro stoxx banks index shows significant fall in bank shares prices since the crisis emerged, but also during 2015 and 2016. according to angeloni (2016) that significantly underperforms general euro area stock index and a global index of developed countries’ banks. banks price-to-book ratios in the world are under pressure due to market skepticism regarding banks’ earnings prospects, but banks in euro area are also facing low profitability issues and adjustments to new regulations and new business model. constȃncio (2016) highlighted that bank profitability reflects some cyclical and structural problems. according to him, the key 12 s. popović, i. janković cyclical challenge is restoring bank profit in the environment of low nominal growth, low interest rates and flat yield curve. new tltro ii, which will be conducted from june 2016 to march 2017, are introduced to improve long-term funding conditions for banks in order to further ease private sector credit conditions and to stimulate bank lending to the real economy (european central bank 2016a). key structural challenges for european banks are: large amount of non-performing assets, excess capacity and the incomplete adjustment of business models. banks in the euro area have large amounts of non-performing assets. significant banks had, at the end of 2015 almost 950 billion euro of nonperforming loans (some 9% of emu gdp), and their average npl ratio is 7.1% (constȃncio, 2016). the share of nonperforming assets varies significantly across the euro area graph 9. graph 9 gross non-performing debt instruments (% of total gross debt instruments) source: ecb, statistical data warehouse, 12.7.2016 the worst situation is in greece, where there is very high (38%) and an increasing share of nonperforming debt instruments in the total amount of debt instruments (rising trend is marked with an arrow) and in cyprus (35%). nonperforming debt instruments are also very high in bank balance sheets in italy, portugal, ireland and slovenia, and in the first two countries that share is increasing. high burden of banks by large amounts of nonperforming assets diminishes their profitability, while that asset is not generating revenue. besides, those banks are high risk-averse and thus more reluctant (and less able) to lend. single supervisory mechanism created a task force to scrutinize banks with high levels of non-performing loans and create long-term strategy for banks to reduce their npls levels. positive shift is that in almost all countries and euro zone as a whole npls are decreasing, but negative point is low coverage ratioonly about 43% of npls are provisioned for (mullin, 2016). in some european countries, there is the overcapacity in bank sector. european banking system in general is characterized by low level of concentration. the herfindahlhirschman index in 2014 was lower than 750 (european central bank 2015a, p.25-26), although it had a significant increase since the crisis. there is a significant difference among countries. the lowest level of hhi is in larger economiesfrance, german and italy, where banking sectors are more fragmented and include strong savings and cooperative banks. in can banking union help the viability of eurozone banking sector? some preliminary results 13 smaller countries-such as in cyprus, estonia, finland, greece and lithuania banking sectors are more concentrated (the share of assets held by the five largest banks in greece is close to 95%). mergers and acquisitions, reduction of bank branches and employees per population is ongoing since the crisis emerged, and has helped to reduce banks’ cost-to-income ratios, but still in some countries ratio of bank branches per capita is very high. for instance, in 2014 in spain there were 70.2 commercial bank branches per 100,000 adults, in luxemburg 80.4; in italy 59.6; in portugal 53.6; while in finland there were 12.1, estonia 12.4; netherlands 14.2 and germany 14.5 branches per 100,000 adults (the world bank databank). obviously, in some countries there is a possibility for further consolidation that will diminish bank costs. conclusion the common monetary policy without a common fiscal and other economic policies caused a significant divergence of economic performances of emu member states. until the outbreak of the financial crisis, the common currency was hiding accumulated economic imbalances and financial markets have underestimated the potential risks. with the outbreak of the crisis, markets emphasized those differences, whose overvaluation jeopardized the solvency of some sovereigns and their banking sectors. the fiscal situation in the majority of euro area countries was healthier than in united states, great britain and japan, prior to the crisis, but financial markets have become concerned about sustainability of public debts in some emu countries. this is due to the lack of coordination of policies and externalities of common monetary policy, because of which the power of financial markets in the monetary union is much higher. member states are in the same position as developing countries. they issue debt in the currency over which they have no control. therefore, the inability to refinance their debts at reasonable interest rates, causes a stronger liquidity crisis to turn into a crisis of debt. since usually the largest investors in the national bonds are domestic banks, withdrawal of investors reduces the value of their portfolio. they are faced with the problem of funding and sovereign debt crisis turns into a domestic banking crisis. prevention of future crisis in monetary union involves improvement of policies coordination in the direction of taking joint actions and the elimination of externalities in monetary union. establishing banking union is considered to be the first real european reform since the common currency. single supervisory mechanism, independent from national political factors, should decrease the moral hazard problem, by directly supervising all significant european banks. capital requirements are stricter, and if in a process of day-to-day supervision, ecb identifies the deterioration of bank balance sheet, it should react promptly to prevent the escalation of the problem. single resolution mechanism is in charge for bank resolution, in the case when there are no other solutions, but with minimum use of public funds. this is especially significant in the case of nationally important banks. investors, expecting that sovereigns will cover the losses of such banks in the event of serious financial crisis, begin to suspect the sustainability of countries’ public finance. this creates the interconnection between banking and sovereign crisis. the third pillar of the banking union, european deposit insurance scheme, aiming to shift costs from protecting bank deponents to the banking union and thus preserving the confidence in banking system, is still missing. 14 s. popović, i. janković analysis in this paper showed some positive changes in the level of financial integration and bank performances in eurozone, after the introduction of banking union (together by measures taken by european central bank, at the same time). two new composite indexes of financial integration, the price-and quantity-based fintec indicators have an increasing trend, since 2012, indicating the rising level of financial integration. in the same period, the level of systemic stress in eurozone has a decreasing trend. restoring bank profitability is a serious challenge, in the situation of still quite unfavorable macroeconomic environment zero inflation rate, low nominal growth, low interest rates and flat yield curve. new bank loans to households and corporations have a mild increase, roa and roe also, but markets continue 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(2015). european banking union, three years on. the centre for international governance innovationcigi, canada. može li bankarska unija pomoći održivosti bankraskog sektora evrozone? preliminarni rezultati iako su finansijska konvergencija i integracija zemalja članica evropske monetarne unije dostigli visok nivo, finansijska kriza koja je prešla u bankarsku i dužničku krizu, uzrokovala je intenzivni proces podele finansijskih tržišta duž nacionalnih granica. to je značajno zakomplikovalo sprovođenje jedinstvene monetarne politike i poremetilo proces transmisije monetarne politike. kriza u emu je bila intenzivnija nego u drugim ekonomijama i brzo se širila među zemljama članicama. pored toga, kriza se prenela sa banaka na države i povratno sa država na banke, kreirajući začarani krug između banaka i javnih finansija. ovaj rad nastoji da pokaže da su adekvatna, stroga i politički nezavisna nadnacionalna supervizija banaka kao i proces rešavanja problema banaka koje su bankrotirale, neophodni za vitalnost bankarskog sektora, ali i ekonomija evropske monetarne unije. ona bi trebalo da povrati poverenje tržišta i ujednači pravila igre na jedinstvenom finansijskom tržištu. iako je ovaj projekat na samom početku, postoje neki prvi ohrabrujući rezultati. ključne reči: bankarska kriza, dužnička kriza, bankarska unija, finansijska divergencija http://us.spindices.com/ http://www.worldbank.org/ plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 3, 2017, pp. 265 279 https://doi.org/10.22190/fueo1703265r review paper heliant health information system as a support to electronic business of healthcare organizations in serbia 1 udc 004:614.2(497.11) žarko rađenović * , slavoljub milovanović, goran milovanović university of niš, faculty of economics, niš, serbia abstract. electronic business of healthcare organizations is a specific technological innovation when it comes to providing adequate healthcare services. the process of providing healthcare services in this case is supported by electronic health record, which is an integral part of health information systems. monitoring of the healthcare services providing process using tools of electronic health (e-health) in this paper, will be based on the software for graphical modelling, which will target key activities, participants and variables of the process, and make its mapping. this is because the analysis of electronic business processes of healthcare organizations reveals activities that can be cost-optimized for more efficient delivery of health services and faster response on the patient's condition. in this work, process analysis was conducted on the case of health information system heliant health, which is used in most public medical institutions of the republic of serbia. key words: electronic business, electronic health, electronic health record, process analysis, healthcare organizations jel classification: c63, i10, m15, p36 introduction research motivation for writing this paper is the problem of implementation, use and development of integrated health information systems in the republic of serbia. a special attention in this paper relates to heliant health, a health information system that is used in local healthcare centers, hospitals and most clinics on the territory of the republic of received march 8, 2017 / revised may 02, 2017/ revised june 23, 2017 / accepted july 05, 2017 corresponding author: žarko rađenović, * phd student at faculty of economics niš university of niš, faculty of economics, trg kralja aleksandra 11, serbia e-mail: zarkoradjenovic2@gmail.com 266 ž. rađenović, s. milovanović, g. milovanović serbia. its functioning will be analyzed in the light of compatibility with the international standard for health information systems health level sevenhl7, which provides basic guidelines for networking, communication and monitoring of the patient health condition, by all participants in the process of providing healthcare services, at the primary, secondary and tertiary level. one of the major research problems in this paper is analyzing the efficiency and interoperability of business processes, providing healthcare services. using one of the most popular norms of graphic process modelling business process modelling notation 2.0 (bpmn 2.0), with the addition of a gantt chart of all electronic activities providing healthcare services, we will analyze the functioning of the health information system (his) heliant health, used in the republic of serbia and its comparison with the hl7 concept. also, this paper deals with the analysis of the medical treatments at all levels of healthcare protection which is supported by electronic health record information as an important tool in the patient’s treatment. all of this aims to detect any distortion in the execution of the healthcare organizations business processes, and make recommendations for improvement and increasing efficiency in patient treatment, a better integration of health stuff and save time and resources providing healthcare services. one of the key problems related to heliant health, in the context of the standard hl7, is primarily the absence of network and disconnection of some of the participants in the process of providing healthcare services using electronic health records, which leads to delays in treatment and effective monitoring of the patient and timely response in case of urgent situations. the connection between participants in the process of providing healthcare at the primary, secondary and tertiary levels can be achieved by adjusting the heliant health process to hl7 standards. also, it is possible to implement changes to improve the process of providing healthcare services through the health heliant, in order to achieve compatibility with the hl7 standards. 1. methodology and literature review research methodology in order to obtain the appropriate results and answers of setting hypothesis of the paper will be based on bpmn modelling. specifically, using bpmn in this paper will be created the process of providing healthcare services at the primary, secondary and tertiary levels with the support of the electronic card based on the current situation in the republic of serbia, using heliant health health information system. also, through the process modelling will be given a proposal for improving the provision of healthcare services. on the other hand, using a gantt chart created on the basis of bpmn process, you should become familiar with the activities duration of providing healthcare services process and their percentage contribution to carry out the process of providing healthcare services supported by heliant health. on the basis of their (in)compatibility we will give proposals for improving the integration of the participants, in order to achieve the standard hl7 and provided even international cooperation in delivery of healthcare services, of course with the support of information from electronic medical record. in addition, the methodology used in this work will be explained in detail using bpmn tools. heliant health information system as a support to electronic business of healthcare organizations in serbia 267 electronic health as a growing research field in both the public and private health sector, as well as in e-business and it, shows the importance of developing a serviceoriented architecture of information systems associated with web. this resulted in the number of papers that aim to analyze e-business models of healthcare organization and bridge the gap between theory and practice. in order to understanding business objectives of healthcare organizations in their work alahmadi, soh and ullah, analyzed the entire flow of the providing healthcare services process and its main features (alahmadi et al., 2014). on the other hand, the laying of foundations, both in literature and in practice with regard to the development of e-health in recent years placed emanuele and koetter discovering opportunities and challenges for further evolution of e-health (emanuele  koetter, 2007). business process modelling and its management, in order to decrease operational and other costs and also human errors, make a significant progress in case of analizing electronic health data and improving healthcare services (becker, j.  janiesch, c., 2007). also, using workflow methodology with software tools, electronic health record systems and its features could be better monitored and controlled and contributes to more efficient e-business of healthcare organizations (alhaqbani, b.  fidge, c., 2007). 2. defining the model of process successful organization management, and especially increasing its efficiency in order to achieve the goals set, is possible only under the assumption of excellent knowledge of its internal composition and mode of operation. organizational operations are achieved through a series of related and goal oriented business processes. the complete definition of the business process in principle is never final, but it can be assumed that the business process is a set of related work steps for which it is possible to determine the duration and necessary resources. the organization efficiency can be increased by improving and restructuring its business processes. however, it is essential that all participants fully understand the business processes, which will be possible if the processes are described in a unique and accessible way. business processes and their connections may be described using various techniques. description by spoken language is certainly one way, but it can be imprecise, and communication capabilities could expose participants to different interpretations of spoken words. so, today's business processes are accurately described by a set of graphical symbols with precisely defined semantics and firm rules of their connection. modeling business processes is achieved by effectively controlling the quality of business processes performances in line with the business strategy. if an organization sets a high-quality monitoring system of business process, modeling will provide long-term profit. because of their dynamic presentation, simulation methods are now more attractive, so the software solutions, that are based on the graphic modelling, are increasingly integrated with the rolled programming language into executable language that can be displayed as a simulation. one of the most common graphic norms for modelling processes is bpmn 2.0 with the addition of the programming language execution (rojo et al., 2010). 268 ž. rađenović, s. milovanović, g. milovanović regardless of the modelling selection methods, it is necessary to know something about software solutions, which facilitate the business modelling, and not cause additional complications. it requires it personnel to perform modelling in accordance with the needs of companies, which includes additional investments that the company was not always willing to implement, because the results appear only after a certain time. these are investments with indirect economic impacts, where exploitation occurs after a certain period of using the investment. this study and research paper deals with the analysis of the medical treatments at all levels of healthcare protection which is supported by electronic medical records, in order to answer the question of business processes efficiency of healthcare organizations, as a specific business entities. according to the generic definition of the business process, it is a set of related activities and decisions, which is performed on external incentive to achieve a measurable objective of organization, takes time and consumes few resources as input, transforming them into specific products or services of interest to the customer or user. analyzing the definitions in some detail by showing the following parts (emanuele  koetter, 2007):  a set of related activities and decisions. it means that this is a deliberate set of actions and decisions (and not a conglomerate) that lead to achieving the objectives and satisfying the needs of some customers or users.  it runs on external incentive.  the organization does nothing nor consumes any resources if there is no requirement or incentive from a customer or user. in manufacturing organizations that incentive is customer orders, even though it may not always be immediate, but it can be planned (depending on the system of production management).  specific products or services. each output execution process must be individually identifiable (meaning that it cannot give any other process), and measurable. for example, process design and development (this can be a group of processes, but also the name of the organizational unit that performs them) is not a process, instead of that the process will be designed transformer.  value for customer. organization which exists in itself would have no sense, it only exists because of the customers or users of its products or services. however, in complex organizations whose activities are organized on the principle of the value chain (the value chain) customer or the user may not always be the external, but it may be some internal organizational units. it should be noted that this definition of the business process should not be taken formally. practice shows that a large effort around modelling is useless if at the beginning the processes that correspond to this definition are not recognized. 3. the role of electronic health record in the business of healthcare organizations the electronic health record (ehr) of an individual user/patient is a set of longitudinal data (continuously throughout life) essential for health, collected and pulled from electronic medical histories, and electronic patient records from different healthcare institutions, which could be shared between relevant health institutions and/or healthcare professionals for the purpose of health promotion, disease prevention, diagnosis, treatment heliant health information system as a support to electronic business of healthcare organizations in serbia 269 and rehabilitation of these patients. the main objective of the ehr establishment is to provide quality healthcare and increase overall efficiency, quality and safety of the system in order to provide benefits primarily for patients and healthcare workers accessing highquality data and provide information for the development strategy, better management and health policy. the purpose of the ehr is the integration of information systems of various medical institutions through the collection of personal data about health status of patients, and their electronic downloading from the place where services are provided. this enables better communication of health workers and awareness about relevant health information for a specific person, and therefore increases the possibility of successful treatment. implementation of information and communication technologies in healthcare systems is followed by the emergence of new terms and concepts and their use in different contexts, both in serbia and in all the countries in the world and in all languages. some of the most commonly used terms in serbia are "electronic health record", "electronic medical history", "electronic health records", "electronic health record" and other terms that, at first sight, are the same. the second term represents a group of so-called "unified electronic health records" (eng. "electronic health record"), which includes all the information about patients that were recorded continuously throughout their lives. it also includes information about medical services that have occurred in various health institutions according to the current patient state. the terms "electronic patient record" and "electronic medical histories of patients' indicate electronic records in healthcare organizations, analogous to writing (paper) documents, "cards" in primary healthcare and "medical histories" in hospitals. for this type of electronic records it is true that its emergence resulted from the introduction of ict in individual institutions, and they are primarily used by the healthcare workers who have direct contact with patients in the healthcare service. they primarily serve for medical procedures or processes of health promotion, disease prevention, diagnosis, treatment and rehabilitation with individual customers/patients (possibly with a small group of users/patients). taking all of the above mentioned into account, in the context of healthcare system in serbia, we can briefly say that "electronic patient record" (in the primary healthcare), or "electronic medical histories of patients" (in the secondary and tertiary healthcare) corresponds to the english term "electronic medical record emr" and contains information related to the work in individual practices of healthcare workers, or in a health institution or private practice (in accordance with the law on healthcare in the republic of serbia). compared to the medical records in written (paper) form, the electronic card and electronic medical history of the patient have the following advantages (kirchner et al., 2013):  easy identification and monitoring of patients in time for preventative checks, inspections or screening,  easy monitoring of certain essential characteristics and findings in patient state, such as blood pressure, sugar levels in blood, immunization (vaccination), etc.,  easy monitoring and evaluation of their own practice, as well as conducive, data and evidence-based, planning and implementation of quality improvement and safety practices of health workers and institutions. 270 ž. rađenović, s. milovanović, g. milovanović what is crucial for electronic medical histories (electronic cards) of patients is a very limited flow of health information and data, and the data of patients (sometimes crucial for health) remain within the limits of a health institution. what typically happens when it is necessary to transmit information to other healthcare professionals is that the necessary information is usually printed and also in writing, transfers to other health institutions. in terms of exchange and flow of information between different medical institutions, electronic medical history (cardboard) of patients does not differ much from medical records in paper form. 3.1. process analysis of heliant health activities using bpmn the process analysis of heliant health activities was done in order to clearly target all the activities carried out during the e-health in one organization which is normally used by the mentioned health information system. namely, it is evident that there is a medical procedure that must be respected and therefore e-commerce of healthcare organizations which provide healthcare services for patients (kelley  hurst, 2006). mapping the process of providing healthcare services electronically, in the case of cardio-vascular disease patients, clearly defines those activities that are essential for the smooth patient care and the sharing of information about their condition. of course, sharing information is followed by electronic medical records data in heliant health, as has been said, is the basis for determining the therapy and diagnosis of the patient. in order to clearly realize the possible "bottlenecks" in e-business of healthcare organizations and improve the efficiency and cost optimization, authors made a list of activities, their duration and the percentage contribution to the process execution for a hypothetical case of cardiovascular disease patients (table 1). it is necessary to emphasize that activity duration was determined using examples of good practice, in case of serbian healthcare services on primary, secondary and tertiary level of health protection, after some researches which are conducted by authors in serbian healthcare organizations. the compressed types of activities within the business process model (there are thirty-one) of treating a patient with the electronic health records support are:  calling call centre in order to make appointments,  scheduling an appointment with their chosen doctor,  assessing the state of urgency by the chosen doctor,  examination by the chosen doctor,  referral to additional diagnostic methods,  receiving the patient due to the urgency state out of the ordinary procedure,  patient’s hospitalization and their retention in the stationary treatment with possible further clinical intervention and consultative review. after that, it is possible to send the patient to a rehabilitation center or discharge after receiving treatment and return to the selected physician with the arrival of home healthcare and assistance,  setting up final diagnosis by the chosen doctor after interpretation of laboratory results and radiology results with the correction of existing therapies and determining the final therapies. heliant health information system as a support to electronic business of healthcare organizations in serbia 271 table 1 activities and their duration in heliant health activity name sequence of activities activity beginning activity duration (in days) cumulative activity the percentage share of activity in the overall activities calling the call center 01/10/17 1.00 1.00 0% appointments with the chosen doctor 01/10/17 1.00 2.00 1% assessment of the patient urgency state x1,x2 01/11/017 1.00 3.00 1% examination by the chosen doctor x1,x2 01/11/17 1.00 4.00 1% referral to other diagnostic methods x4 01/13/17 2.00 6.00 2% laboratory x5 01/15/17 2.00 8.00 3% radiology x5 01/17/17 2.00 10.00 3% emergency state and hospitalization outside the protocol x3 01/18/17 1.00 11.00 4% hospitalization x8 01/19/17 1.00 12.00 4% staying in hospital x9 01/21/17 3.00 15.00 5% carrying out appropriate therapy x4,x10 01/23/17 2.00 17.00 6% return to the chosen doctor x11 01/24/17 1.00 18.00 6% finally diagnosis by the chosen doctor x11,x12 01/19/17 1.00 19.00 7% other analyses in institute of public health x5 01/17/17 2.00 21.00 7% results interpretation x14 01/18/17 1.00 22.00 8% ending of examination and giving final therapy x15 01/20/17 2.00 24.00 8% determining last and final therapy x16,x4 01/21/17 1.00 25.00 9% referral of the patient to a specialist x14 01/19/17 2.00 27.00 9% examination by the specialist x18 01/20/17 1.00 28.00 10% final diagnosis by the specialist x19 01/21/17 1.00 29.00 10% inpatient treatment x19 01/23/17 2.00 31.00 11% implementation of the inpatient treatment x21 01/29/17 7.00 38.00 13% leaving the hospitalization process x22 02/07/17 10.00 48.00 17% approval of the medical commission for treatment at tertiary level x22 02/11/17 15.00 63.00 22% performing conciliar examination at the clinic x24 02/20/17 10.00 73.00 25% the implementation of treatment at the clinic x25 04/19/17 60.00 133.00 46% carrying out additional examination and appropriate therapy x26 04/25/17 7.00 140.00 48% referral to the rehabilitation center x27 07/24/17 90.00 230.00 79% activation of the department of home care after the completion of the intervention x27 06/24/17 60.00 290.00 97% return to the selected physician for further follow-up x27 05/02/17 8.00 298.00 100% source: authors 272 ž. rađenović, s. milovanović, g. milovanović to make the process of e-business health organizations supported by heliant health successful, it is necessary to map the current processes and activities and establish a clear categorization of participants in the process and its variables. the participants in the process of electronic healthcare services, supported by heliant health are: patient, nurse, attending physician (chosen doctor), specialist, laboratory, radiology, department of public health, medical board (commission), clinic, hospital, rehabilitation center, home healthcare (nursing at home). in this case the process variables of electronic healthcare services are informational units, which define and determine the direction of unwinding activity based on their type. the variables of heliant health in treating a patient from primary to tertiary healthcare, supported by electronic medical records, in case of a cardio-vascular disease include:  code of electronic health recordtype string.  patient nametype string.  laboratory resultstype integer: this results are usually in number format such as level of cholesterol, number of blood cells, level of diabetes etc.  radiology resultstype string.  assessment of medical commissiontype string.  results after the interventiontype string.  the urgency statestype boolean: authors choose boolean type for this variable because the state may be or maybe not be urgent, depending on the patient health condition at a specific moment.  working diagnosistype string.  work therapytype string.  the final diagnosistype string.  the final therapytype string.  discharge listtype string. the following section (figure 1) gives a graphical representation of the existing business processes of the patient treatment with the electronic health record support. before the presentation obtained by the process (before and after improvements), it is necessary to emphasize that this study respected all the principles in describing and graphical representation of the process through a bpmn (rojo et al., 2010):  the principle of abstraction a better understanding of the problem, it must be presented in a simplified form. the problem should be separated from the real environment and the background details which diminish its complexity should be ignored.  the principle of formality provides a methodical approach to the problem according to appropriate procedures. it introduces algorithms, rules and laws.  the principle of modularity the problem is divided into less complex parts, modules in order to understand them better.  the principle of hierarchy the problem is also divided into modules, which are classified according to their complexity, from the simplest to the most complex. heliant health information system as a support to electronic business of healthcare organizations in serbia 273 274 ž. rađenović, s. milovanović, g. milovanović fig. 1 current process of providing healthcare services supported by heliant health source: authors after mapping the process of providing healthcare services supported by electronic health record of heliant health information system, using bpmn, we composed gantt chart based on table 1 showing:  name (type) of activity which is provided by healthcare services through health information system.  the order in which activities take place and their relationship.  duration of activities and their potential overlapping.  cumulative realization showing the sum of the duration of these activities and the activities which follow.  the percentage share of each activity in the provision of healthcare services through the heliant health. gantt chart is the graphical display (figure 2), based on table 1 which documented current activities and their possible overlap in terms of the interdependence of these activities, as it has been seen which activities are "bottlenecks" of the process of providing healthcare services. specifically, the duration of each activity is perceived in this way and the way it "slows down" and "accelerates" the process of providing healthcare services using electronic medical records. this could reveal key activities, which could be merged into a larger activity, or completely eliminated from the process of providing healthcare services by heliant health information system as a support to electronic business of healthcare organizations in serbia 275 heliant health, in order to avoid decreased efficiency and interoperability of organization ehealth. fig. 2 gantt chart of activities in heliant health source: authors 3.2. suggestions for electronic business processes improvement supported by heliant health the enhanced version of the treatment process at all levels of healthcare (figure 3), supported by electronic health record, which indicates the potential drawbacks of the existing business processes, provides a graphical representation of the parts of improved processes or activities. the improvement of the performances of those activities, which lead to delays in the provision of healthcare services, comes to higher efficiency and interoperability of healthcare organizations. this version shows an improved process in which part of the patient treatment at all levels should remove the shortcomings. namely, according to the research, it proposed improvement treatment process in the following areas:  setting the final diagnosis.  determination of the results obtained after the treatment.  interpretation of laboratory results and other. 276 ž. rađenović, s. milovanović, g. milovanović the treatment process at all levels of healthcare (primary, secondary and tertiary) supported by the electronic health record increases the efficiency of healthcare organizations by:  reducing administrative costs, operating costs and the costs of treatment.  reducing the number of required operations in the case of intervention due to the deteriorating health condition of the patient and allowing the provision of adequate and timely therapy.  allowing a better insight into the history of the disease and better interaction between the chosen doctor and the patient. fig. 3 suggestions for improving the current process of healthcare services in heliant health source: authors the processes of development and implementation of electronic health records have a long-term strategic significance. once it reaches the full functionality, most health organizations and health workers and most of the population of healthcare will be included in the system of electronic health records. it provides primarily the availability of relevant and up-to-date health information to all stakeholders (emanuele  koetter, 2007). the benefits of the proposed improvement of health information system heliant health, supported by electronic medical records, may be the following:  health information system based on electronic medical records such as heliant health brings benefits in time savings. namely, healthcare stakeholders could schedule their heliant health information system as a support to electronic business of healthcare organizations in serbia 277 own appointments with healthcare staff in some healthcare organization. also, patients could arrange an on-line consultation using a video link.  patients could make a personal healthcare environment which gives them the possibility to share their own medical data with the healthcare provider. it gives them more control over their health condition, but also makes medical staff more efficient in case of faster determining the right treatment in real-time without mistakes.  medical staff could share information more securely with colleagues and less paperwork allows them to spend more time and pay more attention to patients’ condition and needs.  using reliable, high-quality, protected, comprehensive and easily accessible healthcare data brings better quality and safety of healthcare services (healthcare intelligence), management (management intelligence), reporting and evaluation in the health system (public health intelligence), business (business intelligence). conclusion the development of information systems and the growing trends in the industry of information technology have enabled their use in health organizations in order to increase the provision of healthcare services. during the development and implementation of information systems to support electronic healthcare is extremely important in order to choose the best alternative among the many that exist in the market. the correct choice of a health information system with respect to standards such as the hl 7 will provide not only the cost and operational efficiency, but also better communication among healthcare organizational units and a higher degree of interoperability, collaboration and coordination. in this way, information systems (with the multi-stakeholder approach) in healthcare organizations provide a higher level of services quality resulting from adequately collected and analyzed information of the patients’ health status. these principles are based on guidelines and concepts of the hl7 standard which also reflect its character. improving heliant health should be based on the recommendations of this standard to maximize the integration and interoperability of healthcare organizations. consequently, it can be said that based on research, compatibility between heliant health and the hl7 standard, using bpmn, and confirmation of the hypotheses and their validity, is proved. in this way, recommendations for process improvement in modelling are given, as well as guidelines for further integration of the participants through electronic health records, especially in communication between institutions and health personnel of primary and secondary healthcare. contribution to the improvement of existing provision of healthcare services supported by electronic medical records, based on previously conducted research, is reflected in reduction of administrative work and cost accounting. also, workflow methodology gives proposals for avoiding unsafe and unnecessary interventions and a faster reaction to some urgency states, using adequate therapy, by targeting inefficient activities of healthcare services. this new generation of information-intensive telemedicine services, with its innovative high-tech tools, embodied in health information systems, causes the setting up of health services to a higher evolutionary level, especially in terms of efficiency. the cost and qualitative components of health services achieve an enviable level of performance when it comes to electronic healthcare. on the other hand, the timely exchange of information in the virtual mode allows adequate treatment of the patient's disease, 278 ž. rađenović, s. milovanović, g. milovanović without a time delay. in this way, the costs of introducing digitization into a health organization (based on example of good practice) can be reduced to only 3% of the total cost. the adaptability of users of health information systems has been enhanced by continuous education and the development of skills and competencies for using electronic health software solutions. this way, e-health improves the safety of all participants in the process of providing health services, but also increases the precision in the healthcare decision-making process, using workflow methodology. improving the interoperability of a health organization and mobility of its members, using telemedicine services through an electronic health card leads to the strengthening of the stakeholders’ functional networking inside the health organization. consequently, through these workflow software tools, the focus is on long-term economic, and above all the health benefits of using some of the software alternatives. it mainly aims at high personalization, customization and patient-orientation of the electronic health business solutions. on the other hand, the structure of a concrete health organization defines the utilization of software solutions for the implementation of the e-health concept. functional and evolutionary-minded hardware and software applicative infrastructure contributes to the consistency of the e-health concept, which provides all users of the system with a "user friendly" attitude towards software solution, which ultimately leads to the provision of timely and quick medical services in real time. in this way, by selecting the appropriate software solution, the health organization makes opportunity for better healthcare, collects and analyzes large amounts of information and monitors patients’ medical histories. references alahmadi, a.h., soh, b. & ullah, a. (2014). improving of ehealth services and system requirements by modelling the health environment. journal of software, 9 (5), 57-71. alhaqbani, b. & fidge, c. (2007). access control requirements for processing electronic health records. in: the fifth international conference on business process management: enabling change and innovation. workshop on bpm in healthcare. (pp. 5365). brisbane: queensland university of technology. becker, j. & janiesch, c. (2007). restrictions in process design: a case study on workflows in healthcare. in: the fifth international conference on business process management: enabling change and innovation. workshop on bpm in healthcare. (pp. 517). brisbane: queensland university of technology. cida (1997). guide to gender-sensitive indicators. ministry of public works and government services canada dwivedi, a., bali, r., james, a., & naguib, r. (2001). work flow management systems: the healthcare technology of the future? in the 23rd annual international conference of the ieee engineering in medicine and biology society. (pp. 3887-3890). ec (2012). proposal for a regulation of the european parliament and of the council on the protection of individuals with regards to the processing of personal data and on the free movement of such data . ec: general data protection regulation. el-hassan, o., fiadeiro, j.l. & heckel, r. (2007). managing socio-technical interactions in healthcare systems. in: the fifth international conference on business process management: enabling change and innovation. workshop on bpm in healthcare. (pp. 2941). brisbane: queensland university of technology. emanuele, j. & koetter, l. (2007). workflow opportunities and challenges in healthcare. in: fischer, l. (eds.), bpm & workflow handbook (pp. 157-166). florida: future strategies inc. epsos (2012). final definition of functional services requirements – patient summary. european patient smart open services esterle, l. & mathieufritz, a. (2013). teleconsultation in geriatrics: impact on professional practice. international journal of medical informatics, 82 (8), 684695. heliant health information system as a support to electronic business of healthcare organizations in serbia 279 euro health group (2005). konceptualno modeliranje – koncept sistema ezd. (conceptual modelling concept system ehr) projekat: razvoj zdravstvenog informacionog sistema za osnovne zdravstvene i farmaceutske usluge. kelley, e. & j. hurst (2006). healthcare quality indicators project: conceptual framework paper. oecd health network papers, 23, paris: oecd publishing. doi: 10.1787/440134737301. kirchner, k., malessa, ch., herzberg, n., krumnow, s., habrecht, o., scheuerlein, h., bauschke, a. & settmacher, u. (2013). supporting liver transplantation by clinical pathway intelligence. transplant proc., 1981-2. mulyar, n., pesic, m, van der aalst, w.m.p. & peleg, m. (2007). declarative and procedural approaches for modelling clinical guidelines. in: the fifth international conference on business process management: enabling change and innovation. workshop on bpm in healthcare. (pp. 17-29). brisbane: queensland university of technology. mursaleena, i. (eds.) (2007). health systems assessment approach: a how-to manual. arlington: u.s. agency for international development. nhs (2011). the care record guarantee. our guarantee for nhs care records in england. national health service (nhs) in england. nigb (2011). access to health records by diagnostic staff: guidance for patients and healthcare professionals. national information governance board (nigb) for health and social care. rojo, mc., calahorra, l.  ruiz, f. (2010). bpmn in practice: experiences of business modeling in the department of pathology. diagnostic pathology, 43-47. doi:10.3233/978-1-61499-432-9-43. van hee, k., schonenberg, h., serebrenik, a., sidorova, n.  van der werf, j.m (2007). adaptive workflows for healthcare information systems. in: the fifth international conference on business process management: enabling change and innovation. workshop on bpm in healthcare. (pp. 4153). brisbane: queensland university of technology. informacioni sistem heliant health kao podrška elektronskom poslovanju zdravstvenih organizacija u srbiji elektronsko poslovanje zdravstvenih organizacija predstavlja svojevrsnu tehnološku inovaciju kada je u pitanju adekvatno pružanje usluge zdravstvene zaštite. proces pružanja usluga zdravstvene zaštite u ovom slučaju podržan je elektronskim zdravstvenim kartonom, koji predstavlja integralni deo zdravstvenih informacionih sistema. praćenje toka procesa pružanja zdravstvene usluge korišćenjem alata elektronskog zdravstva (ehealth) u ovom radu, baziraće se na primeni softvera za grafičko modeliranje koji će targetirati ključne aktivnosti, učesnike i varijable datog procesa, i izvršiti njegovo mapiranje. ovo zbog toga što se analizom procesa elektronskog poslovanja zdravstvenih organizacija otkrivaju one aktivnosti koje se mogu troškovno optimizovati u cilju efikasnijeg pružanja zdravstvene usluge i brže reakcije na stanje pacijenta. u ovom radu procesna analiza sprovedena je na primeru zdravstvenog informacionog sistema heliant health, koji se primenjuje u većini zdravstvenih ustanova javnog sektora republike srbije. ključne reči: elektronsko poslovanje, elektronsko zdravstvo, elektronski zdravstveni karton, procesna analiza, zdravstvene organizacije plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, no 4, 2015, pp. 323 332 examination of the performances of maximum likelihood method and bayesian approach in estimating sales level  udc 31:658.8 nataša papić-blagojević 1 , vinko lepojević 2 , sanja lončar 3 1 novi sad business school, novi sad, serbia 2 university of niš, faculty of economics, niš, serbia 3 novi sad business school, novi sad, serbia abstract. the method of maximum likelihood and bayesian method are widely used in data processing, not only in economics but also in other fields of research. in order to identify which approach has better performances, these methods are analyzed on the selected economic data. by comparing the estimated values obtained by applying the maximum likelihood method and bayesian method on the data that was obtained from the company calivita int., it was concluded that the bayesian inference with informative priors gives more accurate estimates. key words: method of maximum likelihood, bayesian method, estimation, prior, sales level introduction historically, classical statistics have had the main role in researches compared to bayesian methods, but in the near past, bayesian approach has become very popular in creating statistical models for solving problems in different research fields. bayesian inference is known as an analytical method that combines information obtained from the experiment with prior knowledge. contrary to the maximum-likelihood approach, the bayesian framework requires the explicit prescription of a prior probability distribution for the unknown signal parameters [15]. on the other side, the method of maximum likelihood, as a method of classical statistics, does not include any prior information that maybe exists from previous research. very often, researchers are faced with the problem that is common for one data set and they have to estimate parameters in the moment of taking data. received december 10, 2015 / accepted december 29, 2015 corresponding author: nataša papić-blagojević novi sad business school, novi sad, serbia e-mail: npapic.blagojevic@gmail.com 324 n. papić-blagojević, v.lepojević, s. lonĉar many supporters of classical statistics do not accept the use of subjective prior information in objective economic science. the debate about the role of prior information in statistics is still going on. actually, prior information is a controversial aspect of bayesian methods, but bayesians, as the final line of defence, have developed noninformative priors for many classes of model [9]. in order to get conclusions about the importance of prior information, the results of research with and without presence of prior information are compared in this paper. 1. literature review even though bayesian methods are powerful and can be used in a variety of analytic models, the strenuous programming and computational demands have discouraged many researchers from using them [19]. today, the use of bayesian methods in empirical researches is rapidly growing, because there is a lot of appropriate statistical software that can be successfully applied in different situations. according to the complexity, the models are very different, so the use of some is very simple and allows the researcher to easily reach the desired estimates and test statistics, while others require researchers to possess programming skills. the maximum likelihood method has broad and significant application in determining the statistical estimations with good characteristics. its application, as well as application of bayesian methods, is not only limited to economics, but it can be successfully implemented in psychology, medicine, biology, tourism, etc. lemmon, brown, stanger-hall and lemmon [11] study the effect of ambiguous data, or missing values for research in biology using the method of maximum likelihood and bayesian method. ward [18] in his paper compared bayesian and classical methods for estimation of ecological models, where the maximum likelihood criteria consistently favoured simpler population models when compared to bayesian criteria. on the other hand, flurry and shepard [6] studied the wide application of bayesian inference and likelihood methods in microeconomics, macroeconomics and financial econometrics. in doing so, they illustrate these methods on four problems in econometrics, producing rather generic methods. taken together, these methods imply that if we can simulate from an economic model we can carry out likelihood based inference using its simulations [6]. pitt, silva, giordani and kohn [13] are concerned with developing a methodology for bayesian inference for general time series state space models using markov chain monte carlo (mcmc) simulation with the likelihood estimation. fernández-villaverde and rubio-ramírez [5] showed how to undertake likelihood-based inference in dynamic macroeconomic models. they also describe how to use the output to estimate the structural parameters of the model, those characterizing preferences and technology, and to compare different economies. both tasks can be implemented from either a classical or a bayesian perspective. bayesian estimation may also be used for solving some problems that are commonly encountered in traditional statistics; for example, obtaining estimations for impossible parameters, identification of the model [8], and obtaining more precise parameters estimations [3]. also, bayesian methods are more plausible ways to analyze small sample data compared with the maximum likelihood method [19]. in this paper, the comparison of the maximum likelihood and bayesian method is made on the data that was obtained from examination of the performances of maximum likelihood method and bayesian approach... 325 the company calivita int. calculations were made for two types of prior information that can be applied in bayesian inference, informative and non-informative, and the results are compared with maximum likelihood estimates. 2. research methodology and results in order to make a comparison of the methods of classical and bayesian statistics, the data were obtained from the company calivita int. representative for the republic of serbia, fitco llc, novi sad. the selected data related to 252 products [12]. for research purposes, the products are sorted by: product name, product type, manufacturer, price and realized sales in the period from january to june 2014 and processed in statistical packages ibm spss and ibm spss amos version 21. ibm spss amos applies a general approach to data analysis known as structural equation modeling –sem. it is also known as the analysis of covariance structures or causal modeling. a sample of 252 products is considered as sufficient for successful research tests because bayesian statistics is not based on large samples [17]. many articles also show the advantages of bayesian statistics in terms of a small data set [19]; [10]. to perform the analysis, four variables were selected: product type, manufacturer, sales level in may and sales level in june. the variables sales level in may and sales level in june are defined as observed, endogenous variables. they are conditioned with two observed, exogenous variables: the product type and the manufacturer. figure 1 shows the model for selected data. fig. 1 structural model thus defined, the model indicates the need to test the impact of product types and manufacturers to sales level in may and june. at the same time, there is a need for examining the mutual influence and a correlation between the variables product type and the manufacturer. 2.1. research results obtained by method of maximum likelihood the application of proper statistical package has enabled the estimation of the collected data using method of maximum likelihood and bayesian method, and subsequently, drawing 326 n. papić-blagojević, v.lepojević, s. lonĉar conclusions by comparing the results of the research. table 1 represents the results obtained by applying maximum likelihood method on the selected data. table 1 maximum likelihood estimates regression weights: (group number 1 default model) estimate s.e. c.r. p label sl_may <-manuf -3.730 0.792 -4.709 *** sl_may <-prtype -0.941 1.502 -0.626 0.531 sl_june <-manuf -1.090 .465 -2.346 0.019 sl_june <-sl_may 0.730 .035 20.581 *** sl_june <-prtype -0.033 .845 -0.039 0.969 standardized regression weights: (group number 1 default model) estimate sl_may <--manuf -0.308 sl_may <--prtype -0.041 sl_june <--manuf -0.097 sl_june <--sl_may 0.784 sl_june <--prtype -0.002 means: (group number 1 default model) estimate s.e. c.r. p label prtype 6.996 0.142 49.276 *** manuf 6.246 0.269 23.200 *** intercepts: (group number 1 default model) estimate s.e. c.r. p label sl_may 69.800 10.095 6.914 *** sl_june 11.827 6.191 1.910 0.056 covariances: (group number 1 default model) estimate s.e. c.r. p label manuf <-> prtype 3.926 0.654 6.000 *** correlations: (group number 1 default model) estimate manuf <-> prtype 0.409 variances: (group number 1 default model) estimate s.e. c.r. p label manuf 18.193 1.624 11.203 *** prtype 5.060 0.452 11.203 *** e1 2386.501 213.029 11.203 *** e2 754.074 67.312 11.203 *** source: own calculations examination of the performances of maximum likelihood method and bayesian approach... 327 all values that are explained in table 1 also appear on graphs; first, after calculating standardized estimates (fig. 2) and second, after calculating unstandardized estimates (fig. 3). fig. 2 structural model with standardized estimates the value 0.41 is correlation value between product type and manufacturer. values 0.04; -0.31; -0.10; 0.00 (according to table 1 this value is -0.002) and 0.78 are standardized regression weights. if we calculate unstandardized estimation, the results will be as follows: fig. 3 structural model with unstandardized estimates the values from figure 3 presented in table 1 are sorted according to their meaning. it can be concluded, that the covariance between product type and manufacturer is estimated to be 3.93. right next to the covariance in the s.e.column is presented the estimated standard error of about 0.654. the estimate 3.93 indicates that the observation of approximately normally distributed random variables is centred around population covariance with a standard deviation of 0.654. the values of critical ratios are represented in the c.r. column. dividing the covariance estimate by the estimate of its standard error gives z = 3.926/0.654 = 6.000. in other words, the covariance estimate is 6 standard errors above zero. the probability of getting a critical ratio as large as 6 in absolute value is less than 0.001, so the covariance 328 n. papić-blagojević, v.lepojević, s. lonĉar between product type and manufacturer is significantly different from zero at the 0.001 level (two-tailed). the estimated covariance between product type and manufacturer (3.93) is the value that will be compared with the bayesian estimates. in our example, we used noninformative and informative priors in order to get more precise estimates. 2.2. research results obtained by bayesian method the bayesian paradigm is characterized by several advantages relative to the classical one, like the coherence of the whole paradigm, which is derived from the systematical applying of the bayes law, the concept of subjective probability, the general character of the bayesian methods which do not ask for special regularity conditions, the sounder definition of the concepts of confidence interval as well as testing [1]; [14]. for carrying out the research using bayesian estimation it is necessary to select the appropriate prior distribution. in many cases, chosen prior will contain very little information, so the conclusions will be based only on data. such information is called non-informative prior [12]. however, there is no prior distribution that is completely non-informative, even uniform distribution that ibm spss amos used as default for each parameter, because each prior distribution carries some information. the results obtained from the bayesian analysis will change if prior distribution changes. in an analysis conducted by the author, it will be seen that changing prior distribution affects the results of research in terms of improving their accuracy. 2.2.1. application of non-informative uniform prior in many cases, our prior beliefs are vague and thus difficult to translate into an informative prior. we therefore want to reflect our uncertainty about the model parameter(s) without substantially influencing the posterior parameter inference. the so-called non-informative priors, also called vague or diffuse priors, are employed to that end [16]. a non-informative prior might be used in the genuine absence of prior information, or if there is disagreement about the likely values of hypotheses or parameters. it may also be used in comparison with more informative priors as one aspect of a sensitivity analysis regarding posterior inferences according to the prior [2]. in literature, non-informative priors are also called objective priors and they are part of objective bayesian analysis [7]. in our example, initially selected prior distribution is uniform prior distribution and it has the character of non-informative distribution. the results for estimated covariance between product type and manufacturer with the applied uniform distribution are shown in table 2. table 2 bayesian estimates with non-informative prior mean s.e. s.d. c.s. covariances prtype<->manuf 4.036 0.005 0.683 1.000 source: own calculations examination of the performances of maximum likelihood method and bayesian approach... 329 if the prior distribution is uniform then the posterior mean will be close to the estimate obtained by method of maximum likelihood. it is confirmed in our example where the estimated posterior mean for covariance between product type and manufacturer is 4.036 and the estimated covariance obtained by the method of maximum likelihood is 3.926. in fig. 4 we can see that the posterior distribution is centered close to 4 that corresponds to the posterior mean (4.036). fig. 4 posterior distribution with non-informative prior in this way, it was confirmed that in the case where the prior information is diffuse or non-informative, the results of classical and bayesian statistics differ very little. in order to find more precise estimates in the next step we choose informative prior. 2.2.2. application of informative normal prior the prior that contains the most amount of certainty about the population parameter is an informative prior. informative priors contain strict numerical information that is crucial to the estimation of the model and can have a large impact on final estimates [17]. the problem with using an informative prior is that people might use different background information (or interpret it differently). thus, informative priors often seem subjective [4]. in order to prove previous claims, instead of initially selected uniform distribution, we now choose normal distribution as prior distribution. normal distribution has the character of informative prior distribution. the results for estimated covariance between product type and manufacturer with the applied normal distribution are shown in table 3. table 3 bayesian estimates with informative prior mean s.e. s.d. c.s. covariances prtype<->manuf 1.887 0 0.279 1.000 source: own calculations in fig. 5 we can see that the posterior distribution is now centered close to 1.9 that correspond to the posterior mean (1,887). 330 n. papić-blagojević, v.lepojević, s. lonĉar fig. 5 posterior distribution with informative prior if we want to make final conclusions, we should compare results of applied methods. first, it is necessary to compare the posterior standard deviation of bayesian statistics, (denoted s.d.) with a standard error of classical statistics (denoted s.e.) which is a useful measure of uncertainty. the value of s.d. is 0.279 and of s.e. is 0.654. lower value of s.d. indicates that the results of bayesian methods are more precise. second, we have to compare estimated covariance between product type and manufacturer. unlike the case where the uniform distribution was a prior and where the results were not much different compared to classical estimates, in the case where the normal distribution is chosen for a prior, the situation is changing. now, estimated posterior mean for covariance between product type and manufacturer is 1.887 and the estimated covariance obtained by the method of maximum likelihood is 3.926. so, we can conclude that we can get more accurate estimates if we use normal informative distribution as a prior distribution. conclusion for many years, classical statistics had objective advantage compared to bayesian approach. supporters of bayesian statistics did not have an opportunity to emphasize the possibility of applying bayesian methods in data processing, because there was a real inability to perform complex methods to handle large amounts of data. the emergence of adequate software solutions has enabled intensive application of bayesian methods in different research areas. comparative analysis of maximum likelihood method and bayesian method was obtained on 252 products and their sales level from january to june 2014. by using the statistical package ibm spss amos and constructing the structural model, the base for further analysis was made. the example has shown the importance of prior information in the bayesian estimation, and thereby confirmed that the bayesian approach is more complex because there is an obvious need for estimating a prior probability and examining its sensitivity. including normal prior distribution, as informative prior, it was concluded that the estimates obtained from bayesian approach represent an improvement of estimates obtained by classical method in terms of accuracy. examination of the performances of maximum likelihood method and bayesian approach... 331 references 1. caraiani, p. 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(2007) bayesian analysis of longitudinal data using growth curve models, international journal of behavioral development, 31 (4) , 374-383. 332 n. papić-blagojević, v.lepojević, s. lonĉar ispitivanje performansi metoda maksimalne verodostojnosti i bajesovog pristupa u ocenjivanju nivoa prodaje metod maksimalne verodostojnosti i bajesov metod nalaze široku primenu u obradi podataka, ne samo u oblasti ekonomije već i u drugim poljima istraživanja. cilj rada je da se kroz komparativnu analizu ova dva metoda na odabranim ekonomskim podacima identifikuje koji od pristupa ima bolje karakteristike u datim okolnostima. poređenjem ocenjenih vrednosti dobijenih primenom metoda maksimalne verodostojnosti i bajesovog metoda na podacima o ostvarenoj prodaji kompanije calivita int. izvedeni su zaključci o performansama oba pristupa. u radu je pokazano da odabirom informativnih apriornih informacija, bajesov pristup daje preciznije ocene u odnosu na rezultate dobijene primenom metoda maksimalne verodostojnosti. kljuĉne reĉi: metod maksimalne verodostojnosti, bajesov metod, ocenjivanje, apriorna informacija, nivo prodaje facta universitatis series: economics and organization vol. 18, no 4, special issue, 2021, pp. 383 396 https://doi.org/10.22190/fueo210617027r © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper intangible assets impact on sustainable growth rate of enterprises in the republic of serbia1 udc 330:004.7(497.11) amer rastić1*, tatjana stevanović2, ljilja antić2 1 business college of applied studies” prof. phd radomir bojković”, kruševac, serbia 2 university of niš, faculty of economics, niš, serbia orcid id: amer rastić n/a tatjana stevanović https://orcid.org/0000-0003-1270-7129 ljilja antić https://orcid.org/0000-0001-8796-4619 abstract. the digital economy unites a dual typology of resources in enterprises, which can be tangible and intangible. in the language of accounting, it is about tangible and intangible assets. due to the involvement of digital technologies in companies, intangible assets or intellectual capital became prominent. the sustainable growth of companies in serbia has great importance for both management and external stakeholders. the presented paper examines the impact of intangible assets, formatted with the vaic model, on the sustainable growth rate (sgr) of companies in serbia. the selected list of companies refers to the most profitable industry sector of the serbian economy, assessed according to the serbian business registers agency for 2018. in order to confirm the hypothesis, the synthesis method, the analysis method, and the correlation analysis method were used. there was a significant positive impact of intangible assets on the sustainable growth rate of enterprises and a negative impact of physical assets, which, however, is not statistically significant. since no research has been recorded in our country that sheds light on the correspondence between intangible assets and sgr, the study has a strong practical significance for this purpose. these results represent at the same time a reference point for our economy and for future entrepreneurs on the way to intensive involvement of intangible assets in companies. key words: intangible assets, digital economy, sustainable competitive advantage, sustainable growth rate jel classification: q56 received june 17, 2021 / revised september 27 / accepted november 21, 2021 corresponding author: amer rastić * phd student at university of niš, faculty of economics, serbia business college of applied studies „prof. phd radomir bojković“, topličina 12, 37000 kruševac, serbia | e-mail: amerstudent@hotmail.com https://orcid.org/0000-0003-1270-7129 https://orcid.org/0000-0001-8796-4619 mailto:amerstudent@hotmail.com 384 a. rastić, t. stevanović, lj. antić 1. introduction the role and importance of intangible assets strongly correspond to the emergence of the digital economy or industry 4.0. in other words, industry 4.0 is determined by the process of digitization and the connection of digital and physical objects (so-called cyberphysical systems). it was first promoted by the german government in 2012 (germ. industrie 4.0) as a progressive step in the digitalization of german society (see more cagle et al., 2020, p. 106; pozdnyakova et al., 2019, p. 12, 17; sukhodolov, 2019, pp. 310). industry 4.0 is characterized by extensive automation, robotization in the production and service sphere, increasing workforce efficiency and efficiency in companies in general, reducing the anthropological impact on the environment through the use of economical technology, and increasing demand for high intellectually capable workforce, especially in information technology (prokofyev et al., 2019, p. 95). current technology of the digital economy refers to big data, blockchain, cloud technology, internet of things (iot) or a network of various devices where data is an object of exchange, and artificial intelligence (ai), which refers to computer systems capable of performing tasks that require human intelligence. in addition, the digital economy involves virtual reality or computer-simulated environment technology and ubiquitous computing technology. ubiquitous computing is defined as connected computer systems in the environment in which we live and work, such as devices in smart houses (popkova & haabazoka, 2019, p. 8). however, employees still represent the main carriers of economic activities, whose knowledge converges towards digital knowledge (popkova & haabazoka, 2019, p. 7). this makes it clear that knowledge and information represent the starting point for creating the resources and values of today's economy. accordingly, the assets of business entities are increasingly knowledge-intensive (ghosh & mondal, 2009, p. 369). in other words, in the digital knowledge economy, economic value is mainly derived from intangible assets, to a much greater extent than from physical assets (chu et al., 2011, p. 249). this is particularly attributable to the european economic context (sardo & serrasqueiro, 2017, p. 771). it is, according to stewart, “something that cannot be touched, yet slowly makes you rich” or, according to sullivan, “knowledge that can be converted into profit” (ghosh & mondal, 2009, p. 370). the competitiveness of the company is therefore established in the patterns of intangible assets exploitation. sustainable competitive advantage is largely determined by a company's sustainable growth rate (sgr). sgr can be also associated with economic, environmental, and social initiatives to secure the future (xu et al., 2020, p. 2). the work is organized as follows. after the introduction, a review of the literature was presented, followed by a theoretical explanation of the relationship between intangible assets and sustainable enterprise growth rates, and research hypotheses were proposed. the next part is dedicated to the empirical analysis of the data, followed by a discussion of the obtained results. the final part of the paper includes concluding remarks. intangible assets imapct on sustainable growth rate of enterprises in the republic of serbia 385 2. literature review 2.1. intangible assets knowledge resources have rapidly become important in many disciplines such as accounting, economics, and strategic management (asiaei, jusoh & bontis, 2018, p. 294). the literature noted relatively early texts on the importance of intangible assets. swedish economist westerman (1768) points out that the swedish transport industry at that time lagged behind the main competitors due to lack of professional knowledge (serenko & bontis, 2013, p. 478). clear guidelines for the development of intangible assets were established by penrose as the founder of resource-based theory in 1959 (although the name resource-based theory is mentioned in 1984 in wernerfelt's work, "resource based view of the firm") in her work “the growth of the firm”. instead of perceiving companies as administrative units, penrose described the company as a resource base made available to managers. hence, it was concluded that competitive advantage is provided by ownership of certain key resources that are rare (pike, fernström & roos, 2005, p. 490). increased corporate investments in intangible assets include, in addition to investments in pure forms of intangible assets, the intangible enrichment of the value of manufactured products and provided services (mehta & madhani, 2008, p. 11). according to the methodology of resource-based theory, intangible assets are viewed as equal to physical and financial assets (gupta & raman, 2020, p. 51). for creating value that is a consequence of investments in intangible assets, and in order to achieve a competitive advantage of the company, extraction of the given value is also required. by extraction, or extraction of the value of intangible assets, is meant primarily its conversion into monetary value. thus, achieving a competitive advantage in the digital economy has been redefined by the impact of digital technology and market globalization. in the new circumstances, there is a vertical disintegration, accentuation of innovations, and intensive use of informatics technologies. in other words, this process has produced the accumulation of intangible assets reflected in innovations, employees, and organization (ciprian et al., 2012, p. 683). finally, it is pointed out that intangible assets represent the most potent position of assets that affect value creation (đuričin & janošević, 2009, p. 10). in the context of creating and using knowledge, companies in order to achieve a competitive advantage, focus on the following areas (adapted to novićević, antić & stevanović, 2006, p. 9): i. computer and communication technologies (ai, big data, iot, blockchain, cloud technology, virtual reality, versatile computing and 3d printing), ii. analytical methods (which involve intelligent analytical softwares). intangible assets, or in management terminology ”intellectual capital”, are in the literature, albeit unofficially, divided into three parts: human capital, structural capital, and relational capital (cabrilo & dahms, 2018, pp. 621–648; wang et al., 2016 pp. 1861–1885). gupta and raman (2020) emphasize that the term “intangible assets” is attributable to accounting, while the term “intellectual capital” is present in the science of human resources management. the term “knowledge resources” exists between economists in general (gupta & raman, 2020, p. 49). the separation of terms according to the field of study has been respected in academic texts (naidenova & parshakov, 2013, p. 640). according to bontis et. al., human capital is manifested as an individual stock of knowledge in an organization that results from employees (bontis et al., 2000., p. 87). also, 386 a. rastić, t. stevanović, lj. antić bontis et. al., indicate that human capital is the primary component of intangible assets as a value creator. the management of this capital is attractive in the sense of its conversion into a sustainable competitive advantage through increased business performance (bontis & fitzenz, 2002, pp. 225, 227). we also notice that these assets are profiled in economics textbooks as “key competencies” or as “core competencies” as the main strategic determinant for achieving a sustainable competitive advantage (michalisin et al., 1997, p. 374; novićević, antić & sekulić, 2006, p. 41). capital that supports infrastructure for employees is interpreted as structural capital (chowdhury, rana & azim, 2019, p. 787). structural capital refers to databases, software platforms, algorithms, codes, organizational structure, documentation, and business processes or "everything of knowledge that remains in the company, after the end of the working day" (bontis et al., 2000, p. 88). relational capital refers to the company's relations with consumers and suppliers, includes distribution channels, brand and everything that creates and maintains the company's intangible assets by involving the company in interaction with the external environment. it "includes knowledge materialized in all the relationships that a company develops with suppliers, trade associations or the government." (bontis et al., 2000, pp. 88-89). the question is, how to calculate intangible assets and how to quantify their impact? among many models that exist, the frequently cited model for calculating intangible assets is the vaic model (vaic is an abbreviation for value added intellectual coefficient). the model represents one of the most significant contributions in the valuation of intangible assets (gupta & raman, 2020, p. 50). the vaic model is based on the fact that the exploitation of physical and intangible assets creates added value (va). va implies the difference between output and input values. the output value, represents the value of total income, and the input value includes all costs except employee costs, which are treated as intangible assets of the enterprise (andriessen, 2004, p. 365). specifically, va can be determined as the sum of operating profit, investments in human resources, and depreciation costs (of fixed assets and intangible assets) (dzenopoljac et al., 2017, p. 888): va = operating profit + employee costs + depreciation (1) one of the weak points of the vaic model is the condition that the company that is involved in the calculation needs to have a positive profit. if there are losses, according to the vaic model it means that the company doesn’t create new added value (for more see chu et al., 2011, p. 252-253). capital employed (ce) refers to the value of net assets and includes physical and financial capital, or in other words, tangible capital. ce is used to start and maintain a business. tangible assets in this sense play a fundamental role in determining the value of a company (dzenopoljac et al., 2017, p. 888). capital employed efficiency (cee) is calculated as the ratio of balance sheet net assets and value-added va (dzenopoljac et al., 2017, p. 888): ce cee va = (2) hce (human capital efficiency) is calculated as ratio between va and investments in human resources (employee costs) (dzenopoljac et al., 2017., p. 888): intangible assets imapct on sustainable growth rate of enterprises in the republic of serbia 387 va hce hc = (3) structural capital efficiency (sce) is calculated as ratio between sc and va. for the calculation of sc, the value of hc is subtracted from va (dzenopoljac et al., 2017, p. 889): sc sce va = (4) sc = va – hc (5) dzenopoljac et. al. (2017) state that it is not difficult to notice that the sum of hce and sce represents the total efficiency of intangible assets (ice, intellectual capital efficiency). the rationalization of the model is based on the assumption that companies with a higher ice ratio exploit intangible assets more efficiently and, consequently, have a higher amount of intangible assets (dzenopoljac et al., 2017., p. 889). 2.2. sustainable growth rate of the company the sustainable growth rate of the company is a very important business and financial performance of the company, especially in situations of economic imbalance. otherwise, sgr refers to the maximum and consistent growth rate that a company can achieve without mobilizing additional funds in the form of borrowing. growth below a sustainable growth rate can affect the loss of a company's competitive advantage due to reduced business efficiency. growth above a sustainable growth rate involves additional borrowing by the company, which can worsen its financial health (stanić, 2015, p. 118). in other words, this represents a short-term expansion of sales growth because such a goal is ultimately unsustainable. accelerated growth overloads corporate resources and requires new borrowing in order to prevent corporate insolvency (xu et al., 2021). an increase in debt while maintaining the same level of insolvency can only be implemented if the increase in the percentage of debt in total sources is equivalent to the increase in the percentage of capital. the growth rate is therefore a complex long-term indicator that belongs to the business and financial performance of the company. any growth that deviates from a sustainable growth rate can be considered unsustainable growth (xu et al., 2021). the expression of sgr is clarified through several modalities, among which the most famous is the first, higgins model of sgr. in a more concise edition, according to higgins (1977), sgr is expressed as (arora, kumar & verma, 2018). sgr = roe (return on equity) x b (retention rate) (6) roe indicator is an indicator with a long tradition and is calculated as: shareholders' equity net profit roe = (7) 388 a. rastić, t. stevanović, lj. antić on the other hand, as we know, retention rate b indicates the number of funds remaining for the company to reinvest in business activities after the payment of dividends. it is calculated as: net profit payed dividends b net profit − = (8) 2.3. intangible assets and sgr studies have concluded that intangible assets are a key element in achieving competitive advantage (sardo & serrasqueiro, 2017; mention & bontis, 2013; zéghal & maaloul, 2010). in other words, intangible assets significantly correspond to the business and financial performance of the company. these studies, which involve researches of relationship between intangible assets and business-financial performance, shed light on the impact of intangible assets on short-term indicators of performance in companies. sgr, however, is an accounting measure that covers a longer period of time and business-financial expansion of the company. consequently, for the realization of sgr and, ultimately, sustainable competitive advantage, it is necessary for companies to create value by exploiting intangible assets. a study by xu, et. al. (2020) examined the impact of intangible assets on the sustainable growth rate of agricultural smart high-tech and non-high-tech enterprises in china. the results obtained suggest that human capital reflects the main impact on the sgr. in another study (xu et al., 2021), a sample based on chinese companies in the field of tourism, agriculture, and renewable energy industry was selected. the study concludes that physical and intangible assets reflect a positive impact on the sustainable growth of the company. in the context of intangible assets, the intensity of the positive impact is distributed primarily on human capital, then structural and to a lesser extent relational capital. a study that covers india’s evidence investigated the impact of intangible assets in india’s enterprises on their sustainable growth rates. the results of the study indicate a positive significant impact of all variables of intangible assets on a sustainable growth rate. intangible assets in this study are represented in a slightly modified edition. intangible assets in this study are constituted from physical capital, human capital, relational capital, innovation capital, and process capital (mukherjee & sen, 2019). a study from 2008, conducted in china, proved the positive significant impact of intangible assets (intellectual capital) on sgr, where, according to results of this study, “human capital is the root of the momentum of enterprise growth” (shui-ying & ying-yu, 2008). the study, which covers korea's evidence, also demonstrated the positive impact of intangible assets, more specifically human and relational capital, on the sustainable growth of manufacturing companies. the positive impact of physical assets on the sustainable growth of these companies has also been proven (xu & wang, 2018). investments in physical assets are inseparable from investments in intangible assets. in other words, it is necessary to involve physical assets in this consideration when we are trying to measure the impact of intangible assets on sustainable growth. although sgr has not been the subject of such studies, according to previous studies related to other business and financial performance, companies in serbia are still insufficiently exploiting intangible assets, materialized in innovation, employees and organization of the company, to achieve a sustainable competitive advantage (dženopoljac et. al., 2016). intangible assets imapct on sustainable growth rate of enterprises in the republic of serbia 389 2.4. proposed hypotheses according to the previous text, using the mathematical formats listed above, the impact of intangible assets on sgr can be explained through the main and auxiliary hypotheses: hypothesis h1. there is a positive impact of intangible assets on sgr; h1a. companies with a higher ice ratio have a higher rate of sustainable growth sgr; h1b. companies with a higher cee ratio have a higher rate of sustainable growth sgr. or if we draw an overview of these relations (figure 1): fig. 1 overview of hypothesis h1 source: authors own drawings finally, this research aims to find a valid conclusion about hypothesis 1. precisely, the aim is to verify how much the intangible assets of the company, formatted by the vaic model, are an influential predictor of the sustainable growth rate, formatted by higgins (1977), of the company. 3. methodology 3.1. data source to check the validity of hypothesis 1, it is necessary to select the data source and select a suitable sample. in obtaining a suitable sample of companies to test hypothesis 1, we were guided by the following prerequisites: ▪ sample needs to contain companies that reported significant net profit result during the observed period, that is, the leaders are in their branch; ▪ companies in the sample are knowledge-intensive with a relatively high share of balance sheet reported intangible assets, such as labor costs, development investments, and research and development costs; ▪ the financial statements of the selected companies in the sample were previously audited. considering these preconditions, the database for sample selection, which is published by the serbian business registers agency (sbra) in its annual publication for 2018, is suitable. these publications are reports of the “100 most companies” (serb. „izveštaj o sto naj privrednih društava“) which are issued for each year. at the time of making this research, we were not able to download the publication for 2019, and we used a list of companies in this publication published for 2018 including their financial statements for 2019. there is a database in the form of a list that involves companies that have achieved the highest 390 a. rastić, t. stevanović, lj. antić annual net profit for the period. with the elimination of companies that do not have complete financial statements for the period, a sample of 67 companies that achieved the highest net profit in 2018 is selected (table 1). table 1 selected list of companies 1. naftna industrija srbije, nis 23. farmina pet foods 45. delta agrar 2. telekom srbija 24. imlek 46. apatinska pivara 3. telenor, beograd 25. koteks viscofan 47. luxury tannery 4. javno preduzeće srbijagas 26. frikom 48. fabrika hartije 5. tigar tyres 27. jp elektroprivreda srbije 49. impol seval 6. jkp beogradske elektrane 28. crh srbija 50. jp srbijašume 7. coca-cola 29. agromarket 51. milan blagojević-namenska 8. philip morris 30. heineken srbija 52. pharmaswiss 9. sbb 31. titan cementara 53. phuket 10. hemofarm 32. karin komerc 54. marbo 11. matijević 33. sport vision 55. omv 12. real knitting 34. contitech fluid 56. atlantic grand 13. delhaize 35. ball 57. naftagas 14. jp jugoimport 36. almex 58. hd-win 15. elektromreža srbije 37. pink 59. zdravlje 16. tetra pak 38. peštan 60. elixir 17. jp pošta srbije 39. yugoroskaz 61. galenika 18. henkel srbija 40. rzd international 62. phiacademy 19. lafarge 41. direct media 63. forma ideale 20. mozzart 42. metalfer 64. knjaz miloš 21. bambi 43. soko štark 65. sport time balkans 22. messer tehnogas 44. drenik 66. mladost 67. auto čačak source: authors made a suitable list of companies according to sbra – the serbian business registers agency. (2020). sto naj... privrednih društava u 2018. godini [the top hundred enterprises in 2018]. retrieved from https://www.apr.gov.rs/upload/portals/0/gfi%202019/sto_naj/sto_naj_2018_16102019.pdf the sample includes financial statements (balance sheets and income statements) of these companies for the period 2015-2019. we collect relevant financial statements for this period manually inputting identification numbers or names of companies in the sbra (2020) search engine. companies that didn’t publish financial statements for the given period or realized negative operating profit were eliminated from the study. 3.2. construction of the regression model to test hypothesis h1, it is necessary to construct a regression model. constructing a regression model requires the involvement of a dependent variable and independent variables in a regression equation with a specific constellation of relationships between variables. the dependent variable refers to the sgr. the independent variables are formatted with the vaic model and refer to ice and cee. the construction of the regression model according to the equation looks like: sgri, t = β0 + β1icei, t + β2cee i, t + ε i, t (9) https://www.apr.gov.rs/upload/portals/0/gfi%202019/sto_naj/sto_naj_2018_16102019.pdf intangible assets imapct on sustainable growth rate of enterprises in the republic of serbia 391 more precisely, using the technique of multiple standard regression analysis based on specified regression model, it is possible to determine (adapted according to pallant, 2009, p. 147): ▪ how well the variables ice and cee can predict the outcome of the sgr in the sample; ▪ which variable (ice or cee) best predicts the sgr in the sample; ▪ after eliminating the impact of other variables, how much particularly, the selected intangible asset, can predict an outcome of the sgr enterprise. 3.3. research results 3.3.1. descriptive statistics and correlation analysis according to table 2, the average sgr value is 16.74. when we talk about intangible assets efficiency coefficient (ice), it is 4.24. however, this is higher than the efficiency coefficient of physical assets (cee), which is 0.84. this actually mildly shapes the initial impression in our analysis that intangible assets have a stronger impact on va creation. table 2 descriptive statistics mean std. deviation n sgr 16.742801 62.6553640 335 ice 4.2374 2.34498 335 cee .844540 1.5264232 335 source: authors own calculations as an integral element of the preliminary analysis, table 3. checks the normality of the distribution for the given variables. the values of the variables were found not to be normally distributed. further, this will shape our next analysis. table 3 normality test results tests of normality kolmogorov-smirnova shapiro-wilk statistic df sig. statistic df sig. sgr .307 335 .000 .344 335 .000 ice .159 335 .000 .766 335 .000 cee .305 335 .000 .384 335 .000 a. lilliefors significance correction source: authors own calculations correlation is a more suggestive technique, in that way, it doesn’t give definitive answers. it suggests the existence of a possible relationship between variables (barrow, m. 2009, p. 231). since the values of the variables are not normally distributed, the correlation analysis was performed based on the spearman coefficient (rs). table 4 contains correlation findings between presented variables in the regression model and reports the following: 392 a. rastić, t. stevanović, lj. antić ▪ a weak positive relationship between the ice coefficient and the dependent variable sgr was identified, where rs = 0.122 (p <0.05). in other words, this is the first indication that a higher ice coefficient also means a higher sgr; ▪ a medium-strong positive relationship between cee and sgr was identified, rs = 0.432 (p <0.05). this also indicates that the higher cee coefficient also means a higher sgr. table 4 normality test results correlations sgr ice cee spearman's rho sgr correlation coefficient 1.000 .122* .432** sig. (2-tailed) . .025 .000 n 335 335 335 ice correlation coefficient .122* 1.000 -.034 sig. (2-tailed) .025 . .533 n 335 335 335 cee correlation coefficient .432** -.034 1.000 sig. (2-tailed) .000 .533 . n 335 335 335 *. correlation is significant at the 0.05 level (2-tailed). **. correlation is significant at the 0.01 level (2-tailed). source: authors own calculations 3.3.2. analysis of the regression model the results of the regression analysis according to table 5. indicate that the model significantly affects the variability of the variable sgr. according to the amount of the adjusted coefficient of determination (adjusted r2) is 2.9%, this model explains 2.9% of the variability of sgr. in other words, regression model with the coefficients of intangible assets efficiency (ice) and invested capital efficiency (cee) explains 2.9 % of changes in sgr. table 5 explanatory power of the model model summaryb model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 .187a .035 .029 61.7301839 .035 6.043 2 332 .003 a. predictors: (constant), ice, cee b. dependent variable: sgr source: authors own calculations the explanatory power (2.9%) is not high. however, the model is statistically significant for p <0.05 (table 6). intangible assets imapct on sustainable growth rate of enterprises in the republic of serbia 393 table 6 statistical significance of the model anovaa model sum of squares df mean square f sig. 1 regression 46057.627 2 23028.814 6.043 .003b residual 1265124.382 332 3810.616 total 1311182.010 334 a. dependent variable: sgr b. predictors: (constant), ice, cee source: authors own calculations the next typical step in interpreting the results of regression analysis is to interpret whether the independent variables (ice, cee) in the model make an individual and isolated contribution to the change in sgr (table 7). table 7 individual contribution of independent variables (ice, cee) to sgr in the model coefficientsa model unstandardized coefficients standar dized coeffic ients t sig. 95.0% confidence interval for b correlations collinearity statistics b std. error beta lower bound upper bound zeroorder partial part toleran ce vif 1 (constant) .046 7.231 .006 .995 -14.177 14.270 ice 4.563 1.440 .171 3.168 .002 1.729 7.396 .171 .171 .171 1.000 1.000 cee -3.123 2.213 -.076 -1.411 .159 -7.476 1.230 -.077 -.077 -.076 1.000 1.000 a. dependent variable: sgr source: authors own calculations standardized beta coefficients for independent variables indicate their individual and isolated contribution to the dependent variable. in the given model, the standardized beta coefficient for ice is β1 = 0.171. in other words, intangible assets compressed in the ice reflect a significant positive impact on the sgr variable. the hypothesis 1a is confirmed. in other words, a higher ice also means a higher sgr. the impact of cee on sgr is negative, but not statistically significant. hypothesis 1b is not confirmed. in other words, a higher cee does not necessarily mean a higher sgr, but lower sgr. additionally, this relationship is negative, but this is not confirmed with statistical significance. finally, we can state that hypothesis h1 is partially confirmed, because ice reflects the positive impact on sgr and cee does not reflect a positive statistically significant impact on sgr. 3.3.3. useful implications of research results the results unequivocally indicate a statistically significant positive relationship between the efficiency of intangible assets usage (ice) and the sustainable growth rate sgr of companies. these findings are consistent with research that xu et al. (2021) conducted. however, the impact of cee on sgr is negative and not statistically significant, which is not consistent with research that xu et al. (2021) and xu & wang, 2018) conducted because they 394 a. rastić, t. stevanović, lj. antić proved positive impact of cee on sgr. the usefulness of these conclusions can be converted into instructions for business entities. management structures in companies are advised to be more aware of intangible assets and increase their investments, especially in human and structural capital (ice). as xu et. al. (2021, p. 11) stated, the sustainable growth of modern enterprises should rely more on intellectual capital than on capital employed. specifically to each company, managers should strengthen the logic of creating intangible assets like developing more employee supportive corporate culture and promoting r&d activities to build innovations. also, managers need to incorporate information technology through different initiatives. on the other side, because capital employed is synergistically connected with intellectual capital, managers should also improve the efficiency of cee in order to make an additional positive impact on sgr. additionally, managers should reduce the scale of liabilities in companies. to cover these processes, developed management accounting infrastructure is necessary for the assessment of the intangible assets exploitation efficiency. in this way, management is further referred for corrective actions in order to optimize these processes related to intangible assets. 3.3.4. limitations of the conducted research despite the best intention to proceed the research in the absence of certain limitations, the obtained results are acceptable having in mind certain limitations. the limitations, however, do not undermine the essentials to which the results of the analysis refer. the first limitation relates to sample size. we believe that with a larger sample in the analysis, results will more strongly emphasize found links between ice, cee, and sgr. second, the vaic model has its limitations, which are also involved in the given research. vaic model doesn’t cover relational capital, also, the vaic model doesn’t include r&d costs within structural capital (for more see chen, cheng & hwang, 2005, p. 162). third, intangible assets can be hardly represented by a simple sum of components due to their synergistic nature. 4. conclusion intangible assets strongly correspond to the digital economy and industry 4.0. and with the development of ai, big data, cloud computing, virtual reality, etc. thus, knowledge becomes the main source of value creation in companies. the sustainable competitive advantage of an enterprise is established on the patterns of intangible assets exploitation rather than on the exploitation of physical assets. sustainable competitive advantage is closely related to the sustainable growth rate of the company. the sustainable growth rate of a company is also associated with economic, environmental, and social initiatives in securing the future. in this paper, research was conducted which sheds light on the impact of intangible assets of 67 most profitable companies in serbia on their sustainable growth rate. results involves significant positive impact of intangible assets on the sustainable growth rate of the companies. the intangible assets impact is predominant in relation to the impact that reflects physical assets on the sustainable growth rate of the observed companies. this identification represents a contribution in relation to previous research conducted in relation to intangible assets. also, it represents an incentive for managers of companies in serbia to focus more intensively on intangible assets creation and exploitation. this is especially due to the evidence in this research that intangible assets provide a better sustainable growth rate for companies. intangible assets imapct on sustainable growth rate of enterprises in the republic of serbia 395 references andriessen, d. 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(2010). analysing value added as an indicator of intellectual capital and its consequences on company performance. journal of intellectual capital, 11(1), 39–60. https://doi.org/10.1108/14691931011013325 uticaj nematerijalne aktive na održivu stopu rasta preduzeća u republici srbiji digitalna ekonomija objedinjuje dvojaku tipologiju resursa u preduzećima, koji mogu biti materijalni i nematerijalni. jezikom računovodstva, reč je o materijalnoj i nematerijalnoj aktivi. usled involviranja digitalnih tehnologija u preduzećima do izražaja dolazi nematerijalna aktiva ili intelektualni kapital. održivi rast preduzeća u srbiji je od izuzetnog značaja kako za menadžment, tako i za eksterne interesente. u predstavljenom radu se ispituje uticaj nematerijalne aktive, formatirane vaic modelom, na održivu stopu rasta (eng. sustainable growth rate, u daljem tekstu sgr) preduzeća u srbiji. odabrana lista preduzeća odnosi se na najprofitabilniji sektor naše privrede ocenjen prema agenciji za privredne registre za 2018. godinu. u cilju potvrđivanja hipoteza, sintetički metod, metod analize i metod korelacije je upotrebljen. dokazan je značajan pozitivan uticaj nematerijalne aktive na održivu stopu rasta preduzeća i negativan uticaj fizičke aktive, koji međutim nije statistički značajan. budući da u našoj zemlji nije zabeleženo istraživanje koje rasvetljava korespondiranje nematerijalne aktive i sgr, studija u ovu svrhu ima snažan praktični značaj. navedeni rezultati predstavljaju ujedno i orijentacionu tačku našoj privredi i budućim preduzetnicima na putu ka intenzivnom involviranju nematerijalne aktive u preduzećima. ključne reči: nematerijalna aktiva, digitalna ekonomija, održiva konkurentska prednost, održiva stopa rasta https://doi.org/10.1108/jic-10-2016-0105 https://doi.org/10.1108/jic-10-2016-0105 http://pretraga3.apr.gov.rs/pretragaobveznikafi https://www.apr.gov.rs/upload/portals/0/gfi%202019/sto_naj/sto_naj_2018_16102019.pdf 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https://orcid.org/0000-0002-5889-4225 abstract. the assumption the paper is based on is that in modern economy it is not enough to provide economic performances which will satisfy the owners of the companies and provide product and services which will satisfy customers, considering the relationship between costs and quality. other two perspectives have to be included into the analysis, and they concern people-society issues and planet-environmental issues. this leads to the concept 3p that includes: profit, people and planet. according to this concept, one of the main challenges for the companies and supply chains they belong to will be to provide green product design, green lean processes and operations, as well as green supplying. for this reason, in this paper the authors analyse the green component of the sustainable competitiveness, with the objective to show the way from quality management (quality products and processes) and environmental protection through sustainable supply chain management with the accent on supply chain greening to economy competitiveness. key words: sustainable, competitiveness, quality management, standards, supply chain jel classification: q56, l14 received september 29, 2022 / revised november 09, 2022 / accepted november 14, 2022 * phd student at university of niš, faculty of economics corresponding author: melisa bejtović university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, republic of serbia | e-mail: melissa.softic@gmail.com https://orcid.org/0000-0002-7053-1830 https://orcid.org/0000-0002-5889-4225 mailto:melissa.softic@gmail.com 298 m. bejtović, a. anđelković, m. radosavljević 1. introduction: sustainable competitiveness as contemporary concept of economy development although competitiveness is important topic in developed, as well as in developing countries, their focus is different. while developed countries must continually improve their soft pillars like innovation, business sophistication, and social cohesion, developing countries must improve both hard and soft pillars. it is obvious that developing countries have to do more, including the fact that they have to identify institutions, policies and factors that make a nation productive in correlation with social and environmental development (herciu & ogrean, 2014).either way, the challenge of all countries in modern conditions definitely concerns sustainability with two main aspects: social and environmental. in general, the goal of any sustainable development strategy is to strive to balance the three key factors of sustainable development (vasiljev, 2011): economic development (economy and technology) with social balance and environmental protection (with the rational disposal of natural resources). in 1990, the european union adopted the concept of sustainable development, verified by the united nations at the second united nations conference on environment and development, held in rio de janeiro in 1992. the concept of sustainable development is institutionalized at a global level, which means that it can only be achieved in the integrated unity of economic, environmental, social, political and cultural components, that is, sustainability. one of the important issues raised at this conference was to highlight the crucial role of the economy in providing the conditions for achieving sustainable development. sustainable growth represents one, but very important component. it means that economic growth has to be based on green technologies (balkyte & tvaronavičiene, 2010). sustainable growth may be provided based on sustainable competitiveness of the economic entities it incorporates. in this sense, sustainable competitiveness goes beyond the economic results including some other elements which contribute to social and environmental results. in order to explain the significance of social and environmental aspects of competitiveness, aiginger, barenthaler-sieber & vogel (2013) showed the evolutionary way of competitiveness approach: from input-oriented evaluation to outcome-oriented evaluation (figure 1). fig. 1 towards a concept of competitiveness under new perspectives source: aiginger, barenthaler-sieber & vogel, 2013, p. 11. green quality and supply chain management as a factor of sustainable competitiveness 299 a typical definition of outcome competitiveness along these lines is offered by the european commission (2010): "the ability of an economy to provide its population with high and rising standards of living and high rates of employment on a sustainable basis" (according to aiginger, bärenthaler-sieber & vogel, 2013). from figure 1 it may be concluded that modern conditions for doing business are more demanding comparing to the quality era. actually, sustainable competitiveness assumes the upgrading of quality with social and environmental pillar. the importance of those two aspects of sustainability, social and environmental, is emphasized by introducing customized coefficients for the pillars included in global competitiveness index gci. each pillar can be converted into customized coefficients with a score of 0.8 to 1.2, which are used to adjust the gci results downwards or upwards. therefore, the result of sustainability adapted to gci ranges from + 20% in relation to the basic gci. the main idea of the research presented in this paper is to indicate connection between implementation of standards and sustainable competitiveness. precisely, if greening is present in managing quality and managing supply chain, then positive effects on sustainability have to appear (figure 2). fig. 2 the influence of greening on sustainable competitiveness achieving sustainable competitiveness is not only the challenge at the national, economy level, but also at a company level. in fact, sustainable competitiveness of economy and companies are connected. for that reason, the following paragraphs will explain the significance of sustainable competitiveness and then how it can be accomplished at enterprise and supply chain level through the component concerning environmental protection. 2. sustainability at supply chain level value creation is vital for companies that operate within the partnership. the goal of each partnership, as well as the supply chain, is profitability based on the fulfillment of consumers' demands by providing adequate value. value creation implies the provision of high quality products and services. however, besides achieving customer satisfaction in the supply chain, it is also very important to analyze a set of factors that affect the ability of the supply chain to add and create value. the ability to create value is much higher in the situation where there is a stable relationship between partners. the existence of quality products and processes green products and processes green supply chain environmental protection sustainable competitiveness economy competitiveness 300 m. bejtović, a. anđelković, m. radosavljević effective relationships among partners affects the return on investment as well as the increase in the gross margin (gibbs & humphries, 2009, p. 158). therefore, value creation in the supply chain is the result of the built relationships among partners, as well as the maintenance and improvement of these relationships. therefore, individual businesses compete no longer as solely autonomous entities, but rather as supply chains (lambert & cooper, 2000), which brings the researches one step forward towards supply chain sustainable competitiveness. implementation of sustainability concept at supply chain level is more difficult than implementation of the same concept at the level of country or individual company. because of a great number of partners and different individual objectives between them, it is necessary first to define one goal at the supply chain level in the context of environmental protection. however, problems in the implementation of sustainability concept come from the fact that one partner could be part of a few chains. in this regard, the possibility of implementation of the sustainability concept by those partners that are present in several chains is questionable. especially important is the environmental component of the sustainability. today, managers of supply chains use this green practice with the purpose of creating satisfaction from the environmental point of view. also, managers of supply chain use this practice as a strategic weapon for achieving sustainable competitive advantages (hosseini, 2016). sustainable supply chain management could be defined as management of cooperation between partners in supply chain and also management of material and information flows by taking into care economic, environmental and social requirements (seuring & muller, 2008). according to hassini et al. (2012) sustainable supply chain management represents management of process, operations, resources, and information through supply chain with the purpose of maximizing profitability of supply chain and social well-being and minimizing negative environmental impact (taticchi, tonelli & pasqualino, 2013). the process of implementing sustainable solutions in the supply chain is time-consuming and can generate numerous problems that effectively discourage business managers and entrepreneurs from continuing their efforts to implement environmentally-friendly solutions (zimon, tyan & sroufe, 2019, p. 232). for survival of today's supply chains it is not enough to provide just high economic performances. sustainable concept includes triple bottom line model. this model shows that supply chain must achieve great performances in each area: environmental, social and economic. figure 3 shows elements of triple bottom line model (rogers, 2011; carter & rogers, 2008). according to research (carter & rogers, 2008) and interviews with 35 managers from 28 companies it was found that there is a strong bond between those factors and sustainability concept. none of the interviewed managers suggested other factors that should be included into the analysis. sustainable supply chains must be focused on increasing productivity, but without environment contaminating and with respect to all key stakeholders. in that sense productivity could be achieved by doing more with less, or by reducing costs and resources (rogers, 2011). strategic direction of today's supply chains is building an appropriate sustainability which will provide lasting profitability. green quality and supply chain management as a factor of sustainable competitiveness 301 fig. 3 the sustainable supply chain source: rogers, 2011, p. 12 organizational culture is very important for providing sustainability at the supply chain level (lambert, cooper & pagh, 1998). it represents the set of attitudes, values and beliefs that are enacted on a day to day basis in an entire supply chain, or, more simply, the way things are done in the supply chain (epstein, buhovac & yuthas, 2010). in modern conditions supply chains have to create organizational culture that incorporates learning and innovation, and provides well defined infrastructure for improvement projects implementation, which means sharing common values and beliefs in order to reach desired quality level based on integration. sustainability concept has to be embedded into the organizational culture. transparency can be a factor of better coordination among partners through supply chain. common procedures and documentation with the information system at the level of supply chain could provide high degree of transparency and sustainability, by reducing number of transactions and transaction costs (rogers, 2011). sustainable supply chain transparency is the visibility and disclosure of sustainable supply chain information between actors within and outside the supply chain (schäfer, 2022). risk management at the company level includes a segment that seeks to eliminate, reduce or control risks (zsidisin & wagner, 2010, p. 3). supply chain risk management follows a fairly traditional risk management process, with focus on identifying and minimizing risk at the supply chain level rather than at the company level (ghadge, dani, chester & kalawsky, 2013). supply chain sustainability risk management, as a component of sustainable supply chain management, expands the scope of supply chain risk management by including supply chain risk factors associated with social and environmental aspects of sustainability (xu et al., 2019). 302 m. bejtović, a. anđelković, m. radosavljević 3. the influence of product/production quality on the environmental quality companies are increasingly faced with natural environmental challenges, more rigorous environmental regulations, and consumers who have awareness of the need to preserve the environment and environmentally friendly products. in this sense, there is an emphasized need to harmonize environmental regulations with eu regulations, to adjust the infrastructure of the company to environmental protection, to innovate technological processes, to rational natural resources management, and to introduce the environmental management system in order to ensure the survival in an increasingly demanding and competitive market. this implies that quality management system and environmental management system have to be connected and balanced. although some authors (aiginger, barenthaler-sieber & vogel, 2013) speak about the term outcome competitiveness, this does not mean that quality era is over. on the contrary, this new step forward puts even more attention to quality and standards for providing sustainable economic development. in fact, during the entire lifetime of the product, it is necessary to take into account ecological parameters, because if it is taken into the account at the stage of development what can happen during the process of their usage or their production in sense of endangering the environment, then the chances for minimizing or avoiding ecological problems are higher. this means that, in each company, special attention must be focused on potential pollution, related to the specifics characteristics products and technological processes. the design and quality of production process is closely related to product design and quality. the production process must not degrade the internal environment of the company, nor its external environment. finally, ecological approach must be present, not only in design and production, but also during the use and disposal of products. in the era of mass consumption, quality standards implementation was inspired by economies of scale and facilitated the creation of futures markets (daviron, 2002). today, quality standards are focused on production and process methods rather than on the final product (reardon et al., 2001). according to guasch, et al. (2007) patterns of trade have significantly changed in that way that an intense competition has eroded the profitability of low-cost manufactures, while, on the other hand, higher-quality markets have not been subject to falling profitability. this also confirms the relevance of quality for achieving sustainable competitive advantage. this brings into the analysis the question of quality standards. however, it is very important not to observe the certification as an end in itself, either for marketing or for internal reasons, since standards alone cannot produce sustainable improvements in organizational performance (guasch, et al., 2007, p. 103). rather, managers must use standards, procedures and tolls as means to implement quality management systems and to make quality become the way of doing business. implementation of quality management system usually assumes two steps: first, it starts with the implementation of quality standard iso 9001 and then iso 14001. the basic objective of the iso 9001 series is to define a unique system that provides the ability of the product supplier to always ensure the product meets the requirements of the market and the needs of the customer. advantages of implementing iso 9001 are not brought into question (poksinska, dahlgaard & eklund, 2003; feng, terziovski & samson, 2007; sampaio, saraiva & guimarães rodrigues, 2009). therefore, at the initiative of numerous international institutions (international chamber of commerce, world industrial environment council, british institute for standardization and green quality and supply chain management as a factor of sustainable competitiveness 303 others), the international organization for standardization, in 1994, brought a new set of standards, which deal with the elements of the environmental management system iso 14000. a series of environmental standards includes two basic areas, namely: arranging relationships in the field of environmental protection and determining the impact of the quality of products (services) on the environment and the criteria for their ecological development. in fact, this means that each organization must: reduce the negative impacts on the environment by its activities (yang, hong & modi, 2011), and achieve a continuous improvement in performance related to environmental protection. a benefit from the application of ecological standards is felt by the society as a whole, or, in other words, by every individual through healthier living conditions. benefits are also provided to organizations that want to show that they are better than competitors that they take care of environmental protection, of their customers, as well as employees and workers from their internal environment. therefore, the introduction and implementation of ecological standards is in the recent past, and in the future it will be even more emphasized, presented as an essential condition for the survival of companies on the global market. under the increasing pressure of international, non-governmental and environmental consumer movements and large-scale supply of all types of goods on the global market, countries with developed economies incorporate in their legislation an obligation to respect environmental protection standards. finally, it is important to note that both sets of standards, the standards iso 9001 and iso 14001 series, have gained worldwide reputation as the generic standards of the management system. this means that the same standard can apply to any activity and to any organization, small or large, regardless of whether it is production or service organization, in any sector, and regardless of whether the organization is private or state-owned. 4. practical implementation of green approach in the enterprises in serbia governments, community activists, non-governmental organizations (ngos), consumers and global competition, environmental organizations, as well as academic research community and supply chain actors are the key drivers of developing green working practice (carbone & moatti, 2008; wognum, bremmers, trienekens, van der vorst & bloemhof, 2011; hassini, surti & searcy, 2012). some companies implemented green practice to the extent required by law. some companies are example of superficial and non-compulsory green working practice, as companies from electronic industry with the motto think before you print (hassini, surti & searcy, 2012). in modern market conditions, the use of natural resources in production process is very important, especially for textile and clothing industry which are characterized by strong competition and short life cycle. there are well known examples of bad green practice and problems in global companies such as nike, levi strauss, benetton, adidas and c&a, with inhuman working conditions and environmental contamination (caniato et al., 2012, p. 661). some authors gave the green fashion name to the companies with implemented green approach (kogg, 2003; forman & jorgensen, 2004). according to the research conducted by carbone & moatti (2008) companies from automotive, metallurgy, chemicals, electronics are more concerned with green issues then 304 m. bejtović, a. anđelković, m. radosavljević companies from textile industry. for example, 84% of analysed companies from electronics industry, 87% from chemicals industry and 100% companies from metallurgy are interested in implementation of green approach in their supply chain, while 60% of analysed companies from textile industry are interested in this issue (carbone & moatti, 2008). in order to check the presence of quality management and environmental protection standards in practice of companies and supply chains the research was conducted in the republic of serbia, in 2021, on the sample comprising 124 companies. questionnaire included 25 questions, concerning quality and green issues at company and supply chain level. during the data collection, care was taken that the interviewed managers represent the companies that are partners in certain supply chains. in that way, it was ensured that managers respond to all questions in the questionnaire, including the ones that concern supply chain sustainability. among those questions, there were a few that concerned four perspectives of supply chain management sustainability, where interviewed managers were offered to suggest some new factors, which they consider important. however, there were no suggestions from managers. some of the research results are presented in the following paragraphs, with the intention to test the following hypotheses: h1 – there is no difference between significance of iso 9001 and iso 14001 for increasing company’s competitiveness, h2 – there is no dependence between company’s size and implementation of iso standards, h3 – there is positive correlation between perspectives of supply chain sustainability concept. in order to test the first hypothesis, managers’ marks about the significance of those standards for their business have been used. iso 9001 standards gained a little better marks (average mark 2.73, compared to 2.35). according to the research, 63.3% of the companies in the sample have implemented iso standards (series 9001), while only about 2/3 of them have both very important previously mentioned series of iso standards (9001 and 14001). in order to test the hypothesis that there is no dependence between company’s size and implementation of iso standards, χ2 test has been used. based on the test results (sig. equal 0.157 for iso 9001 and 0.234 for iso 14001), this hypothesis should be accepted, meaning that there is no dependence between the observed variables. most of the companies included in the sample, which are part of certain supply chains, went green and chose quality as a competitiveness strategy due to their partners’ requirements (more than 75%). this supports the fact that very small number of companies take care about cost of quality and cost of environmental protection and externalities. figure 4 shows presence of cost of quality evidence in the observed sample. fig. 4 costs of quality evidence in the sample source: authors green quality and supply chain management as a factor of sustainable competitiveness 305 the situation is not better when it is about externalities. only 23% of companies in the sample have data about their externalities, and about 36% actually had some kind of investment concerning environmental protection. in order to evaluate to which extent companies in serbia are oriented towards sustainability, factors from the four perspectives (transparency t, risk management r, strategy s, organizational culture c) were analysed. those perspectives include different number of factors (figure 3), precisely, five, five, three and four, respectively. for that reason, and in order to further analyse the collected data, analysis has been performed between factors included into one perspective and its average value correlation. table 1 correlation analysis results t r s c t correlation coefficient 1.000 .139 .114 .051 sig. (2-tailed) . .125 .209 .572 n 124 124 124 124 r correlation coefficient .139 1.000 .047 .038 sig. (2-tailed) .125 . .608 .678 n 124 124 124 124 s correlation coefficient .114 .047 1.000 .145 sig. (2-tailed) .209 .608 . .107 n 124 124 124 124 c correlation coefficient .051 .038 .145 1.000 sig. (2-tailed) .572 .678 .107 . n 124 124 124 124 source: authors according to the correlation coefficients (at least around 0.500) and significance (0.000) it has been concluded that average values for each perspective are valid for further analysis. as opposed to those correlations, based on the data from table 1 it may be noticed that there is no correlation between four perspectives of supply chain management sustainability in the observed companies. finally, when it comes to implementation of green concept at supply chain level, the situation is pretty much the same as stated in conclusions of some other authors. for example, as the strongest motive for greening the supply chain managers pointed regulatory constrains (64%) and requirement from partners – existing companies in the supply chain (56%). it is very disappointing that only 16% of interviewed managers stated that the companies they represent implemented green practice into their supply chains because they believe it is the only accepted way for doing business in modern conditions. this is very similar to the research results conducted by carbone and moatti (2008). for example, the main motive for designing green supply chain stemming comes from regulatory constraints (73% of the surveyed companies recognized this as a key motive) and improving the image of company and whole supply chain (60% of companies from analysed sample). 306 m. bejtović, a. anđelković, m. radosavljević 5. conclusion after cost and quality competitiveness comes another era in the economic life and its outcome -competitiveness, meaning that it is not enough just to achieve competitiveness and high economic performances, but also to take care about the human and environmental issues, since it is the only way to make achieved competitiveness sustainable. this applies at company level, as well as at the economy level. sustainable development at the macro level depends on efficient and effective use of limited resources. therefore, each country needs adequate tools for dealing with the problem of the implementation of green law, reducing the use of fossil energy, encouraging of recycling and reuse of waste. these problems are also real at a company level or at supply chain level, bearing in mind that today competitiveness exists between chains and significantly less between companies. for that reason, this paper presents steps and elements for supply chain sustainability concept implementation, with focus on environmental component of sustainability. green component of sustainability has roots in quality management. environmental issues have to be analysed and recognized even during product designing, but especially during production process. the production process must not degrade the internal environment of the company, but neither its external environment. finally, ecological approach must be present, not only in design and production, but also during the use and disposal of products. environmental protection has to be one of the objectives of supply chain management, too. ability of supply chains for greening concerns resource saving and waste reducing, and, based on that, providing competitive advantage. taking care of the environment at supply chain level is very important since it assumes integrating all process through production life cycle. according to the research results, quality and environmental issues are not very popular at companies and at supply chain level in serbia. compared to some results from the developed countries, it may be concluded that situation is not enviable in the companies in serbia. especially, when it is about sustainability concept at supply chain level, it seems that situation is chaotic, rather than balanced and oriented towards environmental protection and, further, sustainability. another worrying issue is the fact that interviewed managers have not suggested any other factor or element of sustainability that is specific for the environment in which they operate. this is, actually, the confirmation that sustainability still does not have the attention which it deserves in the republic of serbia, and which is necessary for achieving and keeping competitiveness. in this regard, future research must be focused on finding the best way to promote the concept of sustainability within the company and also at the level of supply chain, in order to develop awareness of the concept importance, and thus increase the interest of supply chain management for its implementation. however, the research results can only be conditionally accepted, since the significant limitation is the fact that is was conducted on the relatively small sample. for that reason, there was no statistical approval for conducting the analysis about implementation of standards concerning quality and environmental protection. green quality and supply chain management as a factor of sustainable competitiveness 307 references aiginger, k., bärenthaler-sieber, s. & vogel, j. 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barichello, 2020). therefore, through numerous studies, researchers have used different methods and data to investigate this connection. these authors used hofstede’s national culture index database as an open publication from the official website of geert hofstede, indicators provided by the world bank, or annual innovation data per country provided by the global innovation index released by cornell univercity, insead and the world intellectual property organization (činjarević & veselinović, 2017; espig et al., 2021), while the others used the global competitiveness index report provided by the world economic forum for the purpose of measuring national competitive capacity (handoyo, 2018), data of national culture support and the innovation index rate provided by the global entrepreneurship monitor (wu, 2007; song et al., 2020), etc. with regard to the adopted multidimensional models and typology of national culture presented in literature, it is noticeable that hofstede’s is one of the most commonly used and cited (song, park & kim, 2020). most findings show that national culture positively affects ieo, while the most desirable situation to boost ieo exists when there is low distance power, long-term orientation, femininity culture characteristics, high individualism, and a higher level of indulgence (espig et al., 2021). additionally, low power distance and low uncertainty avoidance are in most cases characteristics of european counties. the impact of individualism versus collectivism is more debatable, but generally in europe, entrepreneurs from more individualistic countries achieve better innovative results (strychalska-rudewich, 2016 p. 121). in highly individualistic societies, creativity is related to individual expression, individuals have the freedom to conduct an experiment and it refers to a high probability of success, entrepreneurial growth, as well as a higher level of ieo (strychalska-rudewich, 2016). papula et al. (2018), when referring to germany, austria, switzerland and the czech republic, highlight that cultural aspects have a strong positive impact on perceiving business partners as reliable, having trust in the benefits of mutual cooperation, presenting positive role models or encouragement of innovation. therefore, it is evident that previous studies conducted to explain how national culture affects innovation show discrepant results among authors (espig et al., 2021). however, there is no universal ieo model that can be applied to all strategies and policies, without translation across cultures (smale, 2016). in this study, we aim to fill the gap that exists in literature and which refers to the relationship between national culture and ieo, in the context of the see region. the present empirical research was created to extend our knowledge of factors which determine ieo. we examined the relationship between cultural dimensions and ieo, using global entrepreneurship monitor (gem) data. therefore, a combination of terminology proposed by hofstede and gem innovation index was used. the research questions were: do entrepreneurial attitudes of national culture contribute to the modelling of ieo? what factors of national culture are best associated with ieo? the relationship between national culture and innovative entrepreneurial orientation 3 the remainder of this paper has been organized as follows. the following section contains an overview of literature according to the set of hypothesis. this is followed by sections on data, methodology and empirical results. this paper ends with a discussion and conclusion, and notes the limitations and recommendations for future research. 2. literature review the majority of individuals from a particular country or group share certain cultural characteristics. national culture, as a value system peculiar to a specific group, society or country, configures individuals’ attitudes and behaviour to act in a specific way that may not be applicable in other societies (hofstede, 2001). in view of this definition, culture has been consider to affect not only social norms but also, in terms of economy, the level of entrepreneurial orientation (innovative orientation, international orientation, marketing orientation, etc.). innovative entrepreneurial orientation (ieo), as one of the most desirable individual characteristics, is a multifaceted construct which relates to an innovation-based strategic orientation (neely et al, 2001; norris & ciesielska, 2019). the term orientation is used to describe the overall approach that represents the competitive capabilities and strategic focus of entrepreneurs (human & naude, 2010). ieo pertains to entrepreneurial attitudes, capabilities and skills (stock & zacharias, 2011) such as competition-based understanding, organisational skills (jalilvand, 2017; zobel at al., 2017), and knowledge capabilities (dobni, 2010). ieo deals with exploring new ideas, novelties and other creative processes that may result in a formation of new products, services or processes. in addition, ieo is relevant for managers and executives and those in charge of making decisions and innovation management (norris & ciesielska, 2019). furthermore, a group of scholars states that ieo is a reflection of the uniqueness and a new entrepreneurial solution (lall & sahai, 2008). hofstede’s original work described national culture as a set of four dimensions. they are: power distance, individualism vs. collectivism, masculinity vs. femininity, and uncertainty avoidance, while hofstede’s revised national culture consists of long-term orientation and indulgence (hofstede, hofstede & minkov, 2010). power distance affects many organizational processes and outcomes (keltner, gruenfield & andderson, 2003). it refers to the degree in which individuals or societies accept inequalities as legitimate, unavoidable or functional (daniels & greguras, 2014). power distance affects the level of decision-making and formal hierarchy within organizations. individuals lower on the power distance do not perceive many distinctions based on hierarchical position, social strata or power, they believe that all people should have equal rights and equal opportunities to succeed. those with less power accept their place in the hierarchy, they trust their leaders, and are loyal to them (kirkman et al., 2009). as such, cultures or individuals higher on the power distance believe that individuals with authority should be respected and show difference; those with higher power are more likely to value status and prestige (jaw et al., 2007). at the individual level, power distance positively correlates with job satisfaction, perceptions of directive leadership, openness to experience, while lower power distance negatively correlates with team commitment, employee self-esteem, and perceptions of participative leadership (taras et al., 2010). some findings show a strong negative relationship between high power distance citizens and a lower level of ieo (činjarević & veselinović, 2017). high power distance societies may find it hard to encourage their people to participate in innovation 4 r. amidžić, b. leković, t. fazekaš, m. matić process as inequalities among people are expected, and social networking is limited between those from different strata (hofstede et al., 2010). however, people, in high power distance nations, belonging to the lower strata may feel little motivation to be innovatively oriented (rinne, steel & fairweather, 2011). individualism refers to societies where self-responsibility, accomplishment, independence of groups, and personal freedom are common dominant behaviours (handoyo, 2018). the main indicators for rewarding individuals in individualistic societies are their abilities and achievements such as innovations, important discoveries, and all actions that make an individual stand out. this dimension bears negatively on cooperation, valuing harmony and relations with superiors (gorodnichenko & rodnin, 2012). in contrast, a collectivistic society emphasis the individual as part of a group, and therefore collectivist national culture has norms, values and beliefs such as a group membership identity, loyalty to the group, and solidarity (handoyo, 2018). thus, according to hofstede’s explanation of collectivistic societies, citizens are encouraged to equally absorb knowledge value and information through media resources. in collectivistic cultures, individuals are more prone to not reveal their opinions, which often results in slowing down of innovation, while to the opposite, in individualistic cultures people tend to express their opinions (činjarević &veselinović, 2017). furthermore, some recent findings show that collectivism leads to higher economic efficiency while individualism results in higher ieo because of the social status of rewarding innovation. in other words, a higher innovation rate leads to a higher level of productivity and output in the long run versus collectivism that affects static economic efficiency (gorodnichenko & rodnin, 2012). dimensions of uncertainty avoidance express the degree to which individuals avoid uncertainty and ambiguity, and prefer a predictable future. strong uncertainty avoidance societies prefer to avoid risks associated with uncertainty by emphasizing formal rules, procedures, and other constructs designed to reduce ambiguity. societies with high uncertainty avoidance have rigid beliefs and behaviour which does not tolerate different ideas (espig et al., 2021). for example, some findings indicate that people are ambiguous because of an ambivalent perception of technology (shane, 1993). research that relates this dimension to ieo mostly found that uncertainty avoidance is common to individuals who are less willing to take a risk and engage in activities that might lead to innovation (činjarević &veselinović, 2017). furthermore, handoyo (2018) found that uncertainty avoidance indicates a weak association with national innovative capacity, given the explanation that the way that society behaves is rooted in the value of national culture and will determine national innovative capacity (p. 147). hofstede’s fourth cultural dimension, masculinity versus femininity, relates to the division of emotional roles between women and men. the characteristics of feminine societies refer to existing on a minimal emotional and social differentiation between gender roles. while the relationship between men and women should be modest and caring as well as that there should be a balance between family and work. femininity is a management manner characterized by a low level of conflict and emotional support to employees (papula, 2018). masculine value s refer to achievement, higher goals and hard work. a positive correlation has also been observed between masculinity and entrepreneurship (leković & petrović, 2020). in addition, in masculine societies, entrepreneurs enjoy a higher level of innovative orientation (papula, 2018). long-term orientation versus short-team orientation and indulgence versus restrained are, recently added, hofstede’s dimensions of national culture. long-term orientation has to the relationship between national culture and innovative entrepreneurial orientation 5 do with the tendency of a society to accept societal changes. societies that score low see societal change with suspicion, deal with the past and the present, and respect tradition. societies that score high might also be defined as pragmatic, and societies scoring low (shortterm) might be defined as normative (salis & flegl, 2021). indulgent society allows basic human drives related to enjoying life, while a restrained society suppresses their needs and has strict social norms (salis & flegl, 2021). recent findings have shown that longterm orientation and indulgence relates to ieo. these results contribute to innovation and competitiveness perspectives, in which the intrinsic values of a national culture can favour the development of innovation and raise the level of competitiveness of nations as well as organizations (prim et al., 2017, p. 1). based on the previous statements, we have developed our research hypothesis: h1 – explanatory variables of national culture predict the outcome of response variable ieo, thus, a significant relationship exists between national culture and ieo. furthermore, taking under consideration previous studies which investigated the construct of national culture and innovation, mostly in the context of european countries, we delved deeper and presumed the characteristics of a relationship between some national culture dimensions (refers to participants’ attitudes), and ieo. that is: h1.1 – there is a significant and positive relationship between equally absorbing knowledge value and information through media resources (referring to collectivistic societies), and ieo (according to the entrepreneurial statement that in their country, most people can see the stories in media about successful business). h1.2 – there is a significant but negative relationship between entrepreneurial attitudes confirming that successful entrepreneurs receive a high level of status and respect (refers to power distance), and the ieo. 3. methodology empirical research was conducted on data derived from the adult population survey (aps), gem database for the year 2017. the gem also includes the monitoring of entrepreneurial activities by using the indicator total early-stage entrepreneurial activity (tea) (gem, 2018). the tea implies: 1) entrepreneurs in the stage prior to commencing with work, 2) nascent entrepreneurs who have been settling their obligations and paying wages for at least three months, and 3) owning managers who have been paying wages in continuity for forty-two months (reynolds et al., 2004; wagner, 2004; stephan et al., 2015). for the purpose of this empirical research, we selected a research sample which involved entrepreneurs incorporated in bosnia & herzegovina, bulgaria, croatia, greece and slovenia. two criteria were used for selecting these five countries. firstly, the regional aspect and similar cultural features which were observed, and secondly, we selected gem participant countries from the see region for 2017. the research sample totalled 10,047 participants, with 60.1% belonging to a country marked as an efficiency driven country (bosnia & herzegovina, bulgaria, croatia), and 39.9% belonging to an innovative driven country (greece, slovenia). out of the research sample, 537 individuals were involved in the tea stage and entrepreneurial activities that included a new product market combination. the research model consisted of one dependent variable teayynpmc (tea new product market combination), which is one of the gem innovation indices; it measured the ieo by indicating the level of introduction of a new (innovative) product on a market by participants between the ages of 18-64. the model also consisted of six predictor 6 r. amidžić, b. leković, t. fazekaš, m. matić variables conducted to measure the level of the participants’ attitudes towards national culture. they were: 1) equalinc qi5. in my country, most people would prefer that everyone had a similar standard of living (according to gem methodology it refers to a similar standard of living rate, and shows the percentage of the 18-64 population who agree with the statement that in their country, everyone had a similar standard of living; 2) nbgoodc qi6. in my country, most people consider starting a new business a desirable career choice (it refers to entrepreneurship as a good career choice rate, and shows the percentage of the 18-64 population who agree with the statement that in their country, most people consider starting a business as a desirable career choice); 3) nbstatus qi7. in my country, those successful at starting a new business have a high level of status and respect (it refers to a high status to successful entrepreneurs rate, and shows the percentage of the 18-64 population who agree with the statement that in their country, successful entrepreneurs receive high status); 4) nbmedia qi8. in my country, you will often see stories in the public media and/or internet about successful new business choices (it refers to a media support rate and shows the percentage of the 18-64 population who agree with the statement that in their country, most people can see stories in media about successful businesses); 5) easystart qi9. in my country, it is easy to start a business choice (it refers to an entrepreneurial rate which shows the percentage of the 18-64 population who agree with the statement that in their country, most people easily made the choice of starting a new business), and 6) nbsocent qi10. in my country, you will often see a business that primarily aims to solve social problems (it refers to an entrepreneurial rate which measures the level of businesses that aim to solve social problems). 4. results in order to research the set of hypotheses, spss software was used for data analyses. a multiple linear regression analysis (mlr) is a statistical technique that uses several explanatory variables to predict the outcome of a response variable. mlr was used to predict the values of innovative entrepreneurial orientation, given a set of explanatory variables such as entrepreneurial attitudes about national culture. in this research, we also used mlr to determinate which variables are better predictors than others. we forced all variables into a linear regression model (method: enter). first, we tested the assumptions for mlr, and the multicollinearity. the results showed that none of the correlations appear to be large, while none of the correlations were higher than .80. table1 correlations matrix shows that multicollinearity is not presents between variables. table 1 correlations matrix variable 1 2 3 4 5 6 7 teayynpmc 1 equalinc 0.069 1 nbgoodc -0.07 .125** 1 nbstatus -.090* .108** .236** 1 nbmedia .079* .099** .170** .184** 1 easystart .080* .075** .105** .072** .166** 1 nbsocent -0.03 .103** .129** .099** .212** .163** 1 *correlation is significant at the 0.05 level **correlation is significant at the 0.01 level source: authors based on gem database the relationship between national culture and innovative entrepreneurial orientation 7 table 2 shows the mlr model summary and overall fit statistics. the r from our model is .201 with the coefficient of determinations r2=.040 which is relatively low. this suggests: 1) that there may be subgroups of participants from whom the effect size would be larger, and subgroups of participants for whom the effect size would be smaller; 2) depending on the field, small r2 can have scientific and theoretical significance too, which may be small, but reliable (vacha-haase & thompson, 2004; lecuna & chohen & chavez, 2016 p. 153). the value of durbin-watson statistic was d=1,805 which is between the critical values of 1.5<d<2.5. these results show that there is no first order linear auto-correlation in our data of the model, which is adequate and allows us to proceed with model analysis. table 2 model summary model r r square adjusted r square std. error of the estimate durbin-watson 1 .201 .040 .027 .417 1.805 source: authors based on gem database table 3 anova presents the f-test. the linear regressions f-test has the null hypothesis that the model explains zero variance in the response variable. while the ftest is significant and we can assume that the model explains the variance of innovative entrepreneurial orientation: f (6. 423) =2.958, p<.05. the anova table indicates that the model, as a whole, is a significant fit to the data. table 3 anova model sum of squares df mean square f sig. 1 regression 3.090 6 .515 2.958 .008 residual 73.654 423 .174 total 76.744 429 source: authors based on gem database according to table 4, we also see that: 1) vif values for all variables are less than 10, as they do not exceed 1.048 and 2) tolerance value is higher than .10. in addition to these, there are no multiple relations among the explanatory variables. table 4 coefficients model non-standard. coeff. stand. coeff. t sig. 95,0% confidence interval for b collinearity statistics b std. error beta lower bound upper bound toler. vif (const.) 1 .237 .054 4.431 .000 .132 .343 equalinc .075 .044 .082 1.719 .086 -.011 .161 .997 1.003 nbgoodc -.065 .043 -.074 -1.524 .128 -.149 .019 .955 1.048 nbstatus -.094 .043 -.108 -2.219 .027 -.178 -.011 .962 1.040 nbmedia .090 .041 .106 2.180 .030 .009 .171 .960 1.042 easystart .051 .050 .049 1.018 .309 -.047 .149 .982 1.018 nbsocent -.059 .046 -.062 -1.282 .201 -.149 .031 .967 1.034 source: authors based on gem database 8 r. amidžić, b. leković, t. fazekaš, m. matić following the results from the table above it is evident that explanatory variables nbstatus, and nbmedia, are statistically significant at the level, p<0.05, as well as being better predictors than others. the variable that represents high status to successful entrepreneurs rate, has a negative beta value coefficient (b=-0.094, p<0.05), while national media support rate has a positive coefficient (b=0.090, p<0.05). for explanatory variable nbmedia a greater percentage is associated with a higher level of ieo, while nbstatus is associated with a lower level of ieo. taking % of high status to successful entrepreneurs rate, we see that if we hold all other explanatory constant, for every 1% increase in the % of this rate, there is a decrease of 9% in the predicted value of ieo. furthermore, taking % of the national media support rate, we see that if we hold all other explanatory constant, for every 1% increase in the % of this rate there is an increase of 9% in the predicted value. other predictors of national culture indicate a weak association (equalinc, b=0.075, p<0.1), /or not significant, but they also add, to a lower extent, to the prediction model. the estimated regression equitation can be written as follows: nbsocenteasystartnbmedia nbstatusnbgoodcequalincteayynpmc 059.0051.009.0 094.0065.0075.0237.0 −++ −−+= (1) 5. discussion in line with our expectations, the results of the mlr analysis confirm that explanatory variables of national culture predict the outcome of response variable ieo, thus a significant relationship exists between national culture and ieo. considering the adjusted coefficient of determination we conclude that, altogether, explanatory variables can explain 4% of the innovative entrepreneurial orientation. we have made useful conclusions about the data even when there is a weak relationship, as some data sets have an inherently larger unexpected variation. moreover, the results of the pronounced model indicate that national culture, as a set of shared attitudes, values and practices that characterize organizations or groups, contributes to the ieo such as when introducing a new product on a markets. this finding is in line with previous studies that indicate the confirmation of this construct (strychalska-rudewich, 2016; papula et al., 2018; espig et al., 2021). therefore, our findings suggest a confirmation of h1. furthermore, in our analysis we went evenfurther and assumed a significant and positive relationship between equally absorbing knowledge value and information through media resources and ieo. our findings suggest confirmation of h1.1. the results are in agreement with hofstede’s explanation of collectivistic societies where citizens are encouraged to equally absorb knowledge value and information through media resources. this means that see countries have a mostly collectivistic environment which refers to the scores of individualistic preferences measured by hofstede’s culture compass. in addition, see countries mostly contribute to collectivistic societies, while, for example, hungary (80%), poland (60%) and slovakia (52%) are among mostly individualistic societies. a positive relationship between national media support and ieo can be explained in the context of early entrepreneurs who aim to achieve business success from the very start. those proactive and innovative oriented early-stage entrepreneurs receive valuable information through different social media, transforming it into essential knowledge that is valuable for their further development. this finding is in line with the argument that innovation depends on the flow of information sharing (papula et al., 2018). furthermore, our third hypothesis h1.2 has also the relationship between national culture and innovative entrepreneurial orientation 9 been confirmed. a significant but negative relationship exists between entrepreneurial attitudes related to the statement that successful entrepreneurs receive a high level of status and respect, and the ieo. the result suggests that a high level of status and respect refers to high power distance societies where a low level of innovation rate exists. this statement is in line with previous research results. in addition, high power distance may prevent the spread of innovative aspirations, while a low power distance society supports knowledge sharing and ideas (papula et al., 2018). for example, switzerland or sweden, as some of the most innovative countries, present one of the lowest levels of power distance according to the beliefs of their citizens that everyone should have equal right, decentralized power, open communication among hierarchical strata and consequently the exchange of innovation (espig et al., 2021). however, other research confirms that long-run, individualistic cultures with high power distance societies and low uncertainty avoidance have a greater predisposition to translate new ideas into innovations and achieve the benefits of economic prosperity (gorodnichenko & rodnin, 2012). also, the results of our research can be explained within the context of the research (see region) where a specific historical and economic influence exists since its citizens have faced periods of transitions and reforms. in addition, the entrepreneurs from the see region have been, for decades, operating within a restrictive economic system, so they are quite unprepared and distrustful of new challenges while government policies and institutional arrangements have an assignment to encourage entrepreneurs to act more innovatively. this is a question of time, so we have been witness to the establishment of a number of successful innovation oriented firms which established their business in the see region. 4. conclusion the total early-stage entrepreneurial activity in transitional countries of the see is significantly lower compared to highly developed european countries (ivanović-đukić et al., 2018). in addition, the levels of entrepreneurial activity differ between countries, even when speaking about countries which enjoy similar levels of economic development. this led us to propose that disparity is not only the output of variables of economic nature, but that other factors might affect it. in this research, we have focused on entrepreneurs’ attitudes about national culture and concluded that a significant relationship exists between dimensions of national culture and the level of innovative entrepreneurial orientation. our results suggest a series of implications both at the theoretical and the practical level. apart from the fact that only a limited number of authors have examined the role of national culture in innovation, observing it within the context of the see region, we have contributed to filling the gap in literature. our empirical research conducted on 537 participants from see countries provides empirical evidence that a relationship exists between national cultural dimensions and ieo. the results can be useful to practitioners because it provides empirical evidence supporting the following conclusion: firstly, our findings show that collectivistic culture as a dominant characteristic for nations and organizations in the see region seems to be positively connected to ieo, while a high power distance dimension seems to be negatively related to ieo. we found an explanation of these results in the specific entrepreneurial context of the see region. in addition, such results contribute to early-stage entrepreneurs from see countries that have a similar cultural and historical heritage that might not be prevalent in other societies. meaning that the results of 10 r. amidžić, b. leković, t. fazekaš, m. matić one study may not strictly apply to other countries or regions. thus, our findings are in line with some previous studies which explain the role of national culture in innovation (strychalska-rudewich, 2016; papula et al., 2018). moreover, the results of this research can be useful to entrepreneurs who are planning to start a business, as well as entrepreneurs in the early stages of entrepreneurial activity, i.e., when the company's resources (financial, human, etc.) are limited and when the company is most vulnerable. the entrepreneurial perception that a product can be developed and positioned on markets with greater support programs at the national level can strengthen the entrepreneurial spirit as well as entrepreneurial innovative orientation. lastly, it is necessary to consider some of the possible limitations of the study. the limitation lies in the fact that empirical results can be generalized only on early-stage entrepreneurs from bosnia & herzegovina, bulgaria, croatia, greece and slovenia. serbia, north macedonia and montenegro did not participate in the gem survey for the year 2017. also, adding more predicted variables of national culture to a regression model tends to increase the variability of ieo. a statistical analysis with time flow i.e., more than a year, would also be desirable. further research might examine how the other factors of national culture affect the level of ieo. it 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https://doi.org/10.1016/j.techsoc.2020.%0b101246 https://doi.org/10.1007/s11747-010-0225-2 https://doi.org/10.1515/joim-2016-0006 https://doi.org/10.1037/a0018938 https://psycnet.apa.org/doi/10.1037/0022-0167.51.4.473 https://doi.org/10.1504/wremsd.%0b2007.013607 https://doi.org/10.1504/wremsd.%0b2007.013607 https://doi.org/10.1016/j.technovation.2016.10.001 12 r. amidžić, b. leković, t. fazekaš, m. matić veza između nacionalne kulture i inovativne preduzetničke orijentacije: analiza za zemlje jugoistočne evrope cilj ovog rada je da istraži vezu između preduzetničkih statovova o nacionalnoj kulturi i inovativne preduzetničke orijentacije. empirijsko istraživanje uključuje višestruku linearnu regresiju, a podaci za istraživanje su selektovani iz baze podataka global entrepreneurship monitora. za potrebe istraživanja odabrali smo uzorak u kojem su učestvovali preduzetnici u ranoj fazi preduzetničke aktivnosti, iz sledećih zemalja: bosna i hercegovina, bugarska, hrvatska, grčka i slovenija. rezultati istraživanja potvrđuju vezu između dimenzija nacionalne kulture i inovacija. naime, podjednaka apsorpcija znanja i informisanje putem različitih medija doprinosi višem stepenu inovativne orijentacije preduzetnika, dok percepcija preduzetnika o prisustvu viših statusnih razlika je u negativnoj vezi sa stepenom inovativne preduzetničke orijentacije. rezultati istraživanja se mogu objasniti specifičnim preduzetničkim kontekstom regiona jugoistočne evrope. u radu smo istakli i preporuke za buduća istraživanja. ključne reči: nacionalna kultura, inovativna preduzetnička orijentacija, rana faza preduzetničke aktivnosti, jugoistočna evropa. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 1, 2016, pp. 73 86 interaction of social and intellectual capital key precondition for creation of new knowledge as organizational competitive advantage udc 316.472.4:005.336.4 radmila miković, dejan petrović, marko mihić, vladimir obradović faculty of organizational sciences, university of belgrade, serbia abstract. the primary aim of this paper is to present how new knowledge as organizational competitive advantage is created by natural interaction between social and intellectual capital. the paper first gives an overview of the key theoretical interpretations of social and intellectual capital and thereafter analyses how structural, cognitive and relational dimension of social capital, through exchanging and combining with existing intellectual capital, creates new intellectual capital. the key value of new intellectual capital lies in the fact that it belongs to the corpus of group or socially tacit knowledge which is the key precondition for creation of innovative business solutions. thus, new collective forms of knowledge enable the organization to make and maintain its advantage. therefore, it can be said that the process of generating intellectual capital through social capital is a value basis for creating new knowledge and organizational competitive advantage. key words: intellectual capital, social capital, knowledge, innovation, organizational advantage introduction for some experts, intellectual capital represents an invisible and unclear dimension, for others it is mainly an issue of measuring and accounting while some regard it as a strategic environment for creation of sustainable value of an organization. recent researches on intellectual capital point to the need to study this area beyond the framework of reporting on intellectual capital, to focus more on relational or networking dimensions, on social capital which enable the flow of knowledge among different actors and, thus, creation of value and future influence (edvinsson, 2013). this is one of the reasons why today relational capital, as one of the components of intellectual capital, is received december 1, 2015 / accepted april 03, 2016 corresponding author: radmila miković faculty of organizational sciences, university of belgrade, serbia e-mail: radmila.mikovic@eunet.rs 74 r. miković, d. petrović, m. mihić, v. obradović not considered from the perspective of customer relations only, but from all external actors. this is the reason why international integrated reporting council has proposed a new categorization where relational capital and social capital would be reported separately (martini, corvino, doni, & rigolini, 2014). the fact that intellectual capital based on social capital can be a model for successful business operation can be proved by the network-organized company apple, which is considered to be an example of innovative management of knowledge. for apple company, intellectual capital based on social capital is a manner of correctly directing assimilated knowledge in the company with the aim of generating innovative ideas and their development (edvinsson, 2013). however, the ability of an organization to create and share knowledge is a product of various factors including special conditions which organizations develop so as to transfer tacit knowledge, organizational principles that individual and functional expertise is organized, coordinated and communicated by and nature of the organization as a social community (kogut & zander, 1996). one of the manners for a company to use its developed system of knowledge with the aim of creating organizational advantage is to connect social and intellectual capital, that is, to use the structural, cognitive and relational dimension of social capital for combining and exchange of existing intellectual capital which, thereupon, new and innovative intellectual capital will develop from (nahapiet & ghoshal, 1998). this paper shall examine multidimensional forms of social and intellectual capital and how network resources of an organization enable it to use its social capital for generating intellectual capital which new knowledge and sustainable value for the organization would be developed from. this will, to some extent, also confirm the paradigm of intellectual capital as a future income-generating capacity of the organization, as an investment rather than an expense. finally it will point to the need of shifting the focus from the theory of company and transactional expenses to the concept of organizational advantage, when considering an organization. 1. social capital the term social capital first occurred in community studies emphasizing the importance of networks of strong personal connections which have developed over time and which represent the essence of trust, cooperation and collective action in such communities (jacobs, 1965). the concept started being implemented for researching a broad range of social and economic phenomena from human capital (coleman, 1988), economic performance of a company (baker, 1990), geographic regions (putnam, 1995), to nations (fukuyama, 1995). the key premise of the social capital concept is that networks are a value resource which enables to its members mutual recognition and long-term obligation which is the result of the feeling of gratitude, respect, friendship or institutionally guaranteed rights belonging to the members of the family, class or school (bordieu, 1986). although all authors agree that the relation is important for social activity, the consensus has still not been reached on a precise definition of social capital. thus, some authors limit the term only to the structure of the relations in the network (baker, 1990), while others, like putnam and bordieu also talk about potential resources that can be approached through the network. like physical capital, referring to physical assets, or human capital, interaction of social and intellectual capital – key precodintion for creation of new knowledge... 75 referring to ownership of people, social capital, according to putnam, refers to the relations between individuals-social networks, norms, reciprocity and trust developing from them (putnam, 2000). in line with this definition is the group of authors dealing with the correlation between intellectual and social capital, seeing social capital as a sum of present and potential resources which are incorporated in the network, available through the network and emerging form the network of relations of individuals or social units (nahapiet & ghoshal, 1998). 1.1. social capital theories scientists dealing with social networks mainly consider relations and connections to be the basic data for analyzing the social capital concept. thus, a network is defined as a set of relations which connect defined groups of individuals or social actors, where each individual is described from the perspective of relations that he/she creates with other individuals in the network and it is called “ego”, while the one he/she is connected to is called “alter” (knoke & kuklinski, 1982). the conceptualization of social capital has theoretically most often been systematized through the theory of weak ties, structural holes and social resources. weak ties theory focuses on the strength of social connections that an individual uses. the ties among individuals are usually strong, emotionally more intensive and frequent and include types of relations like friendships, advisory, business (granovetter, 1973). the information which any of the group members possesses will probably be shared soon among the group members or exchanged with the information another group member possesses. ties between groups are usually considered to be weaker; therefore the reach to the information which is outside the group is quite weak. however, granovetter believes that weak ties are actually a bridge between densely connected social groups and thus provide a source of unique information and resources. granovetter noticed that it is more likely to reach, for example, sources of vacancies related information through weak ties, than through strong ties. later researches by bridges and villemez (bridges & villemez, 1986) confirmed the benefits of weak ties. the structural holes theory does not focus on the characteristics of direct ties of “ego” but on the pattern of relations between “alters”, which are parts of the network of “ego”. structural hole exists between two alters which are not directly connected. according to the structural holes theory, for ego it is better to be connected to as many alters which are not mutually connected in the network of ego. according to burt’s theory, networks rich in structural holes have three benefits for an individual: unique and timely access to information, bigger negotiating capacity and, thus, control over resources and success, greater visibility and career opportunities which are present in the social system (burt, 1992). burt criticized the weak ties theory, emphasizing that the structural holes concept enables a more direct approach in bridging ties. although empirical researches have confirmed the structural holes theory, they also suggested a range of limitations. the social resources theory focuses on the nature of resources incorporated in the social network. lin and co-authors claim that it is not the weakness of ties that makes advantage, but the fact that those ties will probably lead to the resources that are necessary for ego to fulfill its instrumental aims (lin, ensel, & vaughn, 1981). alter which has characteristics or controls resources which are useful for fulfilling the aims of ego, can be considered a social resource. thus, for example, alter, which provides advice 76 r. miković, d. petrović, m. mihić, v. obradović and support related to career development, is a relevant social resource when it comes to the efforts of ego to fulfill his/her career goals. although the review of literature reveals some controversies, when it comes to conceptualization of social capital, their integration is possible (seibert, kraimer, & liden, 2001). the key precondition for integration is to recognize analytical difference between structural ownership of networks and the nature of social resources which are incorporated in the network so as to make a difference between their forms and contents. weak ties theory and structural holes theory focus on the structure of the network, while social resources theory focuses on the content. this makes that these theories do not exclude each other but create the precondition to jointly focus on the process of accumulating social capital and examine which network structure provides greater or smaller access to important social resources, conclude seibert, kraimer and liden. 1.2. forms of social capital gitell and vidal identified two types of social capital: the one which makes people who already know each other closer and the one that connects people or groups who did not previously know each other (gittel & vidal, 1998). putnam has named these two forms of social capital “bonding” and “bridging” (putnam r., 2000). he further explains these terms. bonding social capital refers to creation of a core within one organization; it embraces and creates strong ties between groups of people sharing common characteristics. actually it is about an inner need to create exclusive identities and homogeneity of the group, which makes people in the organization devoted to continual acting and often going beyond the limits given by job description. bridging social capital refers to connecting with the cores of other organizations; it creates strong ties with other groups and individuals outside its core social network. organizations which have high level of this type of social capital include people from different social groups. this ability of the organization to reach other influential people and groups which are out of its essential network makes the difference in the sense of an organization’s ability to generate greater and stronger support and trust for what it does. 1.3. dimensions of social capital the mentioned forms of social capital speak about resources which are rooted in relations, and confirm that social capital has different attributes. however, putnam in his papers stated that further work would be needed on explaining the dimensions of social capital. therefore, a group of authors examining the role of social capital in generating intellectual capital, distinguished three dimensions of social capital: structural, relational and cognitive (nahapiet & ghoshal, 1998). structural dimension refers to the social system and network of relations as a whole which explains general pattern of relations among actors, that is, how and who are relations established with (burt, 1992). the most important characteristics of this dimension are presence or absence of network ties among actors (wasserman & faust, 1994), network configuration which explains the pattern of ties in the sense of measuring through density, connectedness and hierarchy (tichy, tushman, & fombrun, 1979) and relevance which implies that a network created with one purpose can be also used for another (coleman, 1988). interaction of social and intellectual capital – key precodintion for creation of new knowledge... 77 relational dimension describes the nature of relations that people have developed over time through their interaction (granovetter, 1992) like respect and friendship and which influence their behavior. the most important characteristics of this dimension are trust (fukuyama, 1995), norms and sanctions (putnam r., 1993), commitments and expectations (burt, 1992), identity and identification (hakansson & snehota, 1995). cognitive dimension describes resources by which interpretation and systems of meaning are shared among network members (cicourel, 1973). the most important characteristics of this dimension are shared knowledge and codification (cicourel, 1973) and narratives (orr, 1990). although the literature review suggests that social capital has several theories, forms and dimensions, two elements in common can be noticed: some kind of social structure is created and activities of individuals who are a part of the structure are facilitated (coleman, 1990). this makes social capital a concept which encourages cooperative behaviour and thus creates new forms of associating and innovative organizations (putnam, 1993) which is of the key importance for understanding institutional dynamics, knowledge innovation and value creation. 2. intellectual capital the term intellectual capital today is most directly connected with the capacity of an organization to use its non-material resources in the best manner, so as to be competitive and market sustainable. today organizations operate in a dynamic environment characterized by constant market growth, innovated technology, strong competition, continual development of new products and services. this reality presses organization to become more capable of creating new knowledge which will then be incorporated into its organizational operation and enable innovation of new technologies, products and services. 2.1. interpretation of intellectual capital one of the best known classifications of intellectual capital, which was later modified by various contexts, was given by sveiby and he systematized it in three fields: human capital, structural or organizational capital and relational capital (sveiby, 1997). unlike human and structural capital, relational capital is completely oriented to external boundaries of the organization. however, a common component of all three categories is knowledge which is based within the organization through skills and knowledge of employees, but also the knowledge which is with clients, suppliers, cooperants from various sectors, and which is far more difficult to develop and codify than the knowledge rooted in human and structural capital of the organization (bontis, 1999). authors researching the role of social capital in generating intellectual capital, interpret intellectual capital in the context of knowledge and ability to gain knowledge in social collective such as organizations, intellectual community or internship. these authors think that intellectual capital is an important resource and a capacity to act on the basis of knowledge and ability to gain new knowledge (nahapiet & ghoshal, 1998). 78 r. miković, d. petrović, m. mihić, v. obradović 2.2. dimensions of intellectual capital literature which interprets intellectual capital in the context of knowledge recognizes practical, theoretical and experiential knowledge or procedural knowledge which refers to well-practiced skills and routines as well as declarative knowledge referring to development of facts and proposals (nahapiet & ghoshal, 1998). the most quoted and the most influential is the classification given by polanyi when interpreting knowledge as tacit and explicit, where the former refers to “know-how” and the latter to “know-what” (polanyi, 1967). thus it is suggested that knowledge is both an object and an action which enables improvement. anyhow, the extent to which it is possible to use knowledge depends on how much social or organizational knowledge differs from the knowledge of individuals, members of the community. for generating intellectual capital the perspective of social and contextual incorporated form of knowledge and learning is valuably more important than the simple aggregation of knowledge as a group of individuals (nahapiet & ghoshal, 1998). these two dimensions precisely, explicit/tacit and individual/social make the matrix form of the four elements of organizational intellectual capital: individual-explicit, individual-tacit, social-explicit and social-tacit (spender, 1996). individual-explicit refers to conscious knowledge in the form of facts, concepts and frameworks which are stored and taken from the memory of an individual; individualtacit refers to automatic knowledge which refers to theoretical and practical knowledge of people like artistic, sports or technical skills. availability of people with this kind of explicit knowledge and tacit skills is an important element of organizational intellectual capital and they can be a key factor of organizational success (cooke & yanow, 1993). the other two elements of organizational intellectual capital, social-explicit and socialtacit, belong to the corpus of shared knowledge and represent the most advanced form of knowledge which is why today companies have big investments in the development of knowledge and intellect distribution leverage (quinn, anderson, & finkelstain, 1996), because collective knowledge is considered to be the most important strategic type of organizational knowledge and a factor of its competitive advantage. 2.3. creation of intellectual capital since social, i.e. collective knowledge is the key element of intellectual capital, literature recognizes two key mechanisms for its creation: combining and knowledge exchange (moran & ghoshal, 1996). creation of social knowledge by combining of knowledge is based on two approaches. the first one suggests that the base of combining are incremental change, based on continual and gradual adaptation (schumpeter, 1934), and development based on existing knowledge as a dominant form of progression (kuhn, 1970). the second one suggests that it is about a more radical change like an innovation (schumpeter, 1934), double circle of learning (argyris & schon, 1978) and a paradigm change and revolution (kuhn, 1970). although of different nature, these two approaches do not exclude each other, because they both refer to creating new combinations, incrementally or radically, or by combining previously unlinkable elements, or to the creation of new modes of combining elements that were previously associated. the creation of social knowledge by exchange is essential when resources are in hands of different parties, having in mind that the creation of intellectual capital rests on interaction of social and intellectual capital – key precodintion for creation of new knowledge... 79 the process of combining knowledge and experiences of various actors. social interactions, joint team activities and collaboration are important mechanisms of development and obtaining knowledge (zucker, darby, brewer, & peng, 1996). however, in order to create social knowledge by processes of exchange or combining there are several conditions which should be met: access to collective forms of social knowledge, shared value of exchange and combination, motivation to participate in exchange and combination and capacity to combine and exchange (nahapiet & ghoshal, 1998). sharp development of internet technology imposes that in 2015 it is expected that more than 5 billion brains will be networked by cables, per every 1000 new cable connections there will be 80 new network working positions (edvinsson, 2013). this means that it is possible to expect that the access to creation of collective knowledge will be sudden rather than planned. nahapiet and ghosal suggest that parties involved in the process of exchange and combining, have to see interaction, exchange and combining as a value, even when it is not clear what the outcome will be and how it will happen. further, those that participate in the process of knowledge exchange and combining have to be motivated enough by feeling that their engagement in knowledge exchange and combining is worthwhile. on the contrary, a lack of motivation can prevent exchange of good practices within the company (szulanski, 1996). finally, the capacity of combining information or experiences, due to the capacity to recognize the value of new knowledge, to assimilate and use it, is a key factor of organizational learning and innovating (cohen & levinthal, 1990). 3. new knowledge as an outcome of social and intellectual capital interaction having in mind the social nature of intellectual capital, the previously explained theories and dimensions of social capital offer useful perspectives for understanding the creation of new intellectual capital, i.e. new knowledge. it is the structural, cognitive and relational dimensional forms of social capital that facilitate the development of new intellectual capital by influencing the conditions necessary for knowledge exchange and combining to happen (nahapiet & ghoshal, 1998). 3.1. influence of structural dimension of social capital on knowledge creation the structural dimension of social capital influences the development of new intellectual capital, i.e. new knowledge through network ties, network configuration and a suitable organization (nahapiet & ghoshal, 1998). network ties influence the access of different parties to knowledge exchange and combining as well as to recognizing the value of such an exchange. network ties create the possibility for one to obtain information before the people who have no network contacts, which is of great importance for commercially oriented research and development for which promptness might be an important success factor. although collecting information, according to coleman, represents an expense, social networks, which are sometimes often established for other reasons, provide information channels which decrease the amount of time and investments necessary for collecting information (nahapiet & ghoshal, 1998). network configuration i.e. its density, connectedness and hierarchy provide flexibility which is necessary for access to and exchange of information among network members (ibarra, 1992). it is especially important that the network has several contact points which 80 r. miković, d. petrović, m. mihić, v. obradović information will flow through as they obtain more diverse information at a lower rate than in the case of dense networks (burt, 1992). this aspect of diversity is very important because the creation of new intellectual capital is possible only when various kinds of knowledge merge from various sources and disciplines. on the other hand, weak ties certainly make the research easier, but they can also endanger the transfer of knowledge, especially if it is codified, when exchanging parties have different previous knowledge or when information is not sufficiently clear (nahapiet & ghoshal, 1998). finally, suitable organization based on social capital which is created in one context, including ties, norms and trust can often be used in other context also. literature tells that the transfer of trust from family and religious surrounding is possible for some business situations (fukuyama, 1995), that it is possible to incorporate the development of personal connections into business exchanges (coleman, 1990), that it is possible to integrate social capital of an individual into an organization (burt, 1992). this means that an organization created with one aim can be a source of valuable resources for other aims (putnam r., 1993). 3.2. influence of cognitive dimension of social capital on knowledge creation social capital scientists have recognized that innovations happen by combining different knowledges and experiences through communication (sagawa & jospin, 2009). to that end, it may be said that the cognitive dimension of social capital influences the development of new intellectual capital, i.e. new knowledge through shared language, vocabulary and narrative (nahapiet & ghoshal, 1998). shared language influences the conditions of combining and exchange in the way that it represents a means that people use to discuss and exchange information. so, the more different the language and codification, the further people are from accessing information. the language also influences the perception of people (pondy & mitroff, 1979). by codes sensory data are organized into perception categories which give the framework for observing and understanding the environment and conceptual benefit of exchange and combining (nahapiet & ghoshal, 1998). therefore experts recognize specific communication codes of groups as a value resource of an organization (kogut & zander, 1996). in addition to language and codes, social anthropology literature also claims that collective narratives like myths, stories, and metaphors are also powerful communication means of communities for creation, exchange and protection of various meanings, which is today recognized as narrative cognitive form as opposed to paradigm form which bases knowledge creation process on rational analyses and argumentation (nahapiet & ghoshal, 1998). narrative cognitive form makes the exchange of practices and tacit experience easier (orr, 1990) which enables discovering and development of enhanced practice. 3.3. influence of relational dimension of social capital on knowledge creation the relational dimension of social capital influences the development of new intellectual capital, i.e. new knowledge through network trust, norms, commitments and identification (nahapiet & ghoshal, 1998). the researches by gambetta, putnam and fukuyama show that in cases where relations are based on high level of trust, people are more willing to get involved in social exchanges generally and cooperants interactions specifically. trust is based on the belief in good intentions, wish for exchange, competence, capability, reliability and openness (ouchi, 1981). trust is closely connected with cooperation because collective trust can be a strong form interaction of social and intellectual capital – key precodintion for creation of new knowledge... 81 which group members can rely on when solving certain problems related to cooperation and coordination (kramer & goldman, 1995). trust is a precondition, indication, product and benefit of social capital as well as a direct road to other benefits (cohen & prusak, 2001), including reciprocity as an inevitable precondition for exchange and combining of knowledge. norms exist when socially defined rights of controlling activities belong not to the actor but to others (coleman, 1990). it is a kind of consensus within the social system, expectations which are binding and which can, if based on the principles of openness, team work and tolerance, create strong and convergent groups liable to the development of intellectual capital (janis, 1982). culture and social norms help in creating social capital (briggs, 2004), and then as its relational dimension motivate and ease access to different parties in combining and exchange of knowledge. commitments and expectations influence individuals and groups to undertake certain activities in the future, which may reflect on motivation to exchange and combine knowledge. personal, professional and formal commitments which develop among various individuals and organizations as units of a social system bring with themselves expectations about overtaking future commitments, which makes the approach of knowledge exchange and combining easier (nahapiet & ghoshal, 1998). identification is a process where individuals see themselves as other group members, which might be the consequence of group membership or of group functioning on the principle of representativeness (nahapiet & ghoshal, 1998). group identification does not only influence the growth of recognized chances of exchange, but it can also strengthen current frequency of cooperation (lewicki & bunker, 1996) which creates the chance for greater motivation and recognizing values of knowledge exchange and combining. 4. organizational competitive advantage as an effect of new knowledge social and intellectual capital today represent the base of the theory of organizational advantage which has occurred as a need to replace the theory of the business and transactional expenses which were based on marketing failure and decrease of transactional expenses. special abilities of an organization to create and transfer new knowledge are recognized as the key element causing organizational competitive advantage while the organization’s natural tendency to develop social capital and generate intellectual capital as something that shall explain the whole process. nahapiet and ghoshal claim that time, interaction, interrelation and the quality of being closed represent the essences of the natural tendency of an organization to develop its social and intellectual capital (nahapiet & ghoshal, 1998). literature also recognizes the importance of the said essences. to that end, time is considered as an important factor because all other forms of social capital depend on stability and continuity of the social structure. for example, both coleman and putnam claim that it is necessary that trust, norms, stability and durability of cooperation, as social capital elements, are being developed over time because durability and stability of social relations lead further to clear and visible mutual commitments (misztal, 1996). interrelation which later also implies coordination is recognized as the key attribute of business organization (barnard, 1938) and a stimulus for development of many organizational forms of capitals. because exchanges, or what putnam calls reciprocity, which result in positive outcome for the overall social system rather than for an individual within the system, enlarge cycle of 82 r. miković, d. petrović, m. mihić, v. obradović exchanges among members which increase social identification and encourage cooperation norms and undertaking risks. interactions are natural characteristic of social relations but they can be extinguished if they are not maintained. unlike other forms of capital, social capital grows the more it is used, because essentially the worth of networks can only grow with the creation of new connections (sobel, 2002). social communities naturally have their space for conversation, action and interaction so as to develop own language system which they will create new intellectual capital by. formal organizations connect their members in order to do their primary task, overlook activities, coordinate activities especially when it is necessary to have mutual adjustment to changes or innovation. closure is a characteristic of strong communities that have identities which clearly distinguish their members from non-members (bordieu, 1986). trust, identity, norms are consequences of the network being closed as well as the development of a unique language system supported by the isolation of community (boland & tenkasi, 1995). unlike the market which is an open system basing its usefulness on the freedom given to individuals, formal organizations impose closing of system by clear legal, financial and social boundaries (kogut & zander, 1996). pursuant to the above said, it can be concluded that social and intellectual capitals have their natural connection through the ability of social capital to influence the conditions which are necessary for exchanging, combining and generating new knowledge. also, intellectual capital generated once continues being generated through the need for new social interactions which will again enable exchange and combining and generation of new knowledge. this cyclic feedback of social and intellectual capital can be considered as a kind of organizational advantage leverage. although from one capital, social capital, a new one, intellectual capital, is created, essentially these two processes happen in parallel with reciprocal quality. the fact of both kinds of capital being founded in social activities and relations, makes their evolution very connected (nahapiet & ghoshal, 1998). their natural interaction seen in collective forms of knowledge is of strategic importance for an organization, because they represent shared tacit knowledge which is considered to be one of the characteristics of organizational competitive advantage. while these collective forms of knowledge enable organizations to build and keep their advantage, complex relations between social and intellectual capital enable organizations to build and keep their value. this is the reason why the process of intellectual capital generation through social capital should be considered a value basis for organizational competitive advantage. conclusion the analysis of the relevant literature has showed that the issue of the role of social capital in generating organization intellectual capital, in the form of new knowledge, belongs to the corpus of multidisciplinary researches, because its aspects can include social sciences like sociology, politics, economics, organizational psychology, organization development, organizational management as well as natural sciences like social physics. the paper has showed that the value chain of social capital theory is acute and that it enables the organization to fight the surrounding challenges, especially the lack of innovative knowledge. natural relatedness of social capital to intellectual capital and vice versa is the consequence of, above all, intellectual capital being rooted in social relations and structures of these relations. it further influences a value basis of organizational interaction of social and intellectual capital – key precodintion for creation of new knowledge... 83 advantage, due to the following reasons: a) interaction of social and intellectual capital enables that social capital decreases transactional expenses economizing on informational and coordination expenses; b) interaction of social and intellectual capital enables the creation of resources which are long-lasting, which cannot be traded with, or cannot be repeated like tacit social knowledge, mutual connection or social complexity. this leads to the conclusion that differences between organizations can be presented through the differences in capacities to create and use their social and intellectual capital. because of that, today the efforts of organizations and companies are more directed to investing in and enhancing strong personal and team relations, trust, norms and ties beyond own boundaries. the paper has also revealed that in the natural mutual relatedness of social and intellectual capital there is an abundance of new, unused possibilities which can be very important for future income-generating capacity of an organization. having in mind that the analysis of literature revealed that social capital enables the creation of intellectual capital, what can be anticipated is their mutual potential for nourishing, sharing and using intellectual resources on: a) personal level, which will reveal what an individual does not know, and how to compensate for that lack; b) organizational level, which will build trust and level collective capacity which will further enable enlargement of intellectual capital i.e., creation of group and institutional knowledge; c) social level, through social networks which can identify, recruit and nourish talents and improve the quality of life; d) global level, by shifting from capitalism 3.0 of milton friedman to capitalism 4.0 which will be based on new values and relations resting on the fusion of intellectual and social capital with the aim of finding talents as new connectors of alliances of intellectual capital that will multiply the effects of intellectual capital as opposed to human capital which is necessary to balance relational and structural capital (edvinsson, 2013). on the other hand, the paper also draws attention to the fact that, unlike with intellectual capital, there is no unique interpretation of social capital; therefore, in researches it is necessary to tailor the approach to social capital from the perspective of one or more parallel theoretically based definitions, dimensions, forms and elements. moreover, it is necessary to take into consideration some of the key problems which render the topic of social capital controversial, like questions whether social capital is group or individual capital, whether the group should be closed or dense, whether social capital should be seen as a structure defined by its function, whether it can be seen as a quantitative concept like financial, human or physical capital. finally, since the paper referred to the literature on the role of social capital in generating intellectual capital as a process that leads towards new knowledge and ultimately organizational competitive advantage, new needs were discovered which could be subjects of similar researches in the future. first, it would be very useful to also examine negative or restrictive influences of social capital in generating intellectual capital, which can be consequences of its natural elements like norms, closure, restrictive approach to various sources of ideas and information. second, since it is necessary to invest in social capital, especially in its relational dimension, it would be useful to establish what benefits can really be expected based on the invested means and whether they are worth investing at all. third, it would be useful to examine the relations between social capital dimensions as well as their mutual influence on creation and using intellectual capital so as to more thoroughly understand organizational advantage. finally, given that structures of social capital are of closed character and often conditioned by the type of grouping which can be of geographic, religious, class or other nature, future researches of social capital and its 84 r. miković, d. petrović, m. mihić, v. obradović correlation with intellectual capital should be directed to the specific entity that activities happen about and which social and intellectual capitals create around. this specifically means that it would be useful to conduct these researches on clearly defined types of organizations with limited resources because it is logical to expect that key elements, which are preconditions for generating and using intellectual capital, like norms, closure, trust, reciprocity etc. are not necessarily the same in nonprofit and public organizations or organizations operating in business sector. 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(1996). collaboration structures and information dilemmas in biotechnology. in r. kramer, & 53. t. tyler, trust in organizations: frontiers of theory and research (pp. 90-113). thousand oaks, ca: sage. 86 r. miković, d. petrović, m. mihić, v. obradović interakcija socijalnog i intelektualnog kapitala ključni preduslov za stvaranje novog znanja i organizacione konkurentske prednosti osnovni cilj rada je da prikaže na koji način se prirodnom interakcjiom socijalnog i intelektualnog kapitala stvara novo znanje i organizaciona konkurentska prednost. rad prvo daje prikaz ključnih teoretskih tumačenja socijalnog i intelektualnog kapitala a potom analizira kako strukturna, kognitivna i relaciona dimenzija socijalnog kapitala kroz razmenu i kombinovanje sa postojećim intelektualnim kapitalom stvara novi intelektualni kapital. osnovna vrednost novog intelektualni kapitala se ogleda u činjenici da on pripada korpusu grupnog ili socijalno tacitnog znanja koje je ključan preduslov za stvaranje inovativnih poslovnih rešenja. tako, ove nove kolektivne forme znanja omogućavaju organizacijama da izgrade i zadrže svoju prednost. zato se i može reći da je proces generisanja intelektualnog kapitala posredstvom socijalnog kapitala vrednosna osnova za stvaranje novog znanja i organizacione konkurentske prednosti. ključne reči: intelektualni kapital, socijalni kapital, znanje,inoviranje, organizaciona prednost plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, n o 4, 2015, pp. 311 321 analysis of the degree of application of electronic and mobile trade in airlines sector  udc 004.738.5:339]:656.7 marko gašić, vladan ivanović, goran perić higher school of professional studies оf blace, serbia abstract. in this paper, the authors study and analyze the degree of application of electronic and mobile commerce in the airlines sector, arguing that modern information and communication technologies provide a powerful tool for airlines and can significantly affect their operations, structure and strategy. in the airlines sector, the internet is considered to be the most important technological revolution, because upon its appearance the booking systems ceased to be passive computer archives and records and become active operating systems that transform the air traffic with immense speed. in the mid-80s, specific types of information systems appeared and these were global distribution systems which were designed for the distribution of tourism products, whose implementation on the website gave airlines access to electronic trading and enabled them to carry out the provision of services and conduct the sale of air tickets on the internet. however, the development of technology, the appearance of smart phones and numerous other factors today necessitate airlines to access mobile commerce and make their services available to smart phone users as well as on the website. key words: ict in airlines sector, online reservations of air tickets, mobile commerce in airlines sector, global distribution system. introduction airlines are among the first ones that realized the importance of investing in information technology due to the complexity of their business. these companies have played a major role in the initial development and diffusion of new technologies. in the air traffic, the internet is referred to as the most important modern revolution during which the booking systems cease to be passive computer archives and records and become active operating systems which transform air traffic with immense speed. the internet is the means (channel) through which information is transmitted and exchanged in the best and fastest way. it has completely changed the way of doing business received november 16, 2015 / accepted december 29, 2015 corresponding author: vladan ivanović higher school of professional studies оf blace, serbia e-mail: ivvladan@medianis.net 312 m. gašić, v. ivanović, g. perić and it has brought down geographical boundaries, language barriers and currency restrictions. it enables simple and fast communication, the transmission of large amounts of data over long distances, easy publishing and updating of multimedia documents and their continuous availability, digital delivery of goods and services, the creation of virtual organizations. through expanded use of the internet, airlines are able to reduce labor costs and eliminate commissions in some cases (adee, 2002). increasing demands of buyers of services in air traffic has led to radical changes in the distribution of airline services. before the internet boom, airlines were relying on the agents who were selling and booking air tickets in order to sell airline tickets, and now they are able to sell and distribute air tickets through their own websites using the computerized reservation systems. these customer requirements, as well as travel agencies, led to the development of the global distribution system that connects certain computerized reservation systems with airline companies and besides the main activity distribution of airline flights serve as distribution systems for hotels, rent-a-car companies and companies dealing with cruises. 1. electronic commerce in airlines sector the emergence of electronic commerce created fundamental changes in the way the work gets done. unlike traditional market, electronic market has a neutral intermediary role between the buyer and the seller. the electronic market is a virtual place where buyers and sellers meet in order to exchange goods and services. this market uses internet technologies and standards for the distribution of products and the performance of online transactions. traditional market is different from electronic market mainly because of the reduction of entry barriers and the ability to search and obtain information about products and services. electronic commerce can be defined in different ways. any definition of the concept helps to better explain and understand, and some of the definitions are: electronic commerce is digitally enabled commercial transactions between organizations and individuals (schneider, 2002). also, e-commerce, according to other authors, is defined as a new concept that is being developed and that includes the process of buying and selling or exchange of products, services and information via computer networks, including the internet (wen et al, 2001). e-commerce is the use of electronic communication and digital information processing technology in the business purpose for the creation, transformation and redefinition of relations in the value creation between organizations or between organizations and individuals (turban, 2000). electronic commerce is a trade activity performed using electronic technology, and includes the purchase and sale of products, services and information over the network (bjelic, 2000). electronic commerce is not limited to buying and selling products, but also covers all presales and post-sales activities along the supply chain (kim et al. 2002). based on the above, two general advantages of electronic commerce that directly affect the profitability of the business can be singled out: 1. the possibility of higher revenues based on the availability of a wider consumer base and increase of loyalty and repeat purchase of existing customers; 2. the reduction in costs is realized on the basis of electronic service delivery, including the reduction of personnel costs, transportation costs and material costs. analysis of the degree of application of electronic and mobile trade in airline sector 313 comprehensive and reasonable interpretation of the concept of e-commerce is presented using the following definitions: electronic commerce covers all types of commercial transactions which are electronically processed data (including text, sound and image) and transmission via communication networks such as the internet (andam, 2003). it is the flow of information between organizations, without human intervention, thus ensuring that the flow is continuous from the beginning to the end of each business transaction. the first central booking systems emerged in the last century during the 60s and represented then internal systems which allowed travel agencies direct access to information on available seats and prices, with the possibility of booking as well. central booking systems were a precursor to global distribution systems and modern online booking program. the growth of air traffic and the deregulation of air transport stimulates the expansion of crs on giant computer networks. crs have enabled companies to compete adjusting their schedule and price demand (bahalis and law, 2008). among the first investors in information technology was the airline american airlines, which introduced the sabre computer reservation system in 1962. computer reservation system (crs) is a computerized system used for collecting, storing and processing information, as well as managing transactions related to travel. in the mid-80s, crs develops into a comprehensive global distribution system (global distribution system, gds), which offers a wide range of tourism products and services (transparency of airline destinations, booking of hotels, rent a car, etc.) and provides mechanisms for communication between airlines and travel agencies (sismanidou et al., 2009). global distribution system is the information and communication system designed for the sale of services in the tourism industry that connects service providers in the tourism industry on one hand and sellers of these services (travel agencies) on the other hand as shown in figure 1. these systems have become electronic supermarkets that connect buyers and sellers, allow one to make a quick and easy reservation, enable sales of the requested services and thereby provide services with additional value (bahalis and law, 2008). gds consolidate information from many airlines, allowing travel agencies, companies and individuals to buy on a single electronic market. fig. 1 display of the global distribution system source: author the displayed image shows that gds connects multiple crs. this is the main computer that enables the processing instructions and transmits information directly to end users, travel agencies. gds offers information and reservations of all tourism products such as accommodation, rental cars, air traffic schedules, etc. the services of gds flights in the sector include: issuing tickets, providing information on timetables, prices, availability of places, the provision of the particular sites, online payment and others. 314 m. gašić, v. ivanović, g. perić the four leading gds are (sismanidou, palacios and tafur, 2009): amadeus, sabre, worldspan and galileo. there are a few smaller or regional gds, for example: sita sahara, infini (japan), axess (japan), tapas (korea), fantasia (south pacific), abacus (asia/pacific) and others that serve the interests of specific regions or countries. most airlines are included in some of the gds (fig. 2). fig. 2 display of the global distribution system source: njeguš, 2010. 1.1. amadeus amadeus has been jointly made in europe by lufthansa, air france, iberia and sas. it is interesting that jat yugoslav airlines had played an important role in the development of amadeus. our air company worked together with lufthansa on the development of amadeus during the 80s. this system, apart from air traffic, now includes hotels, cruises, rent-a-car services, and also rail traffic. official headquarters of amadeus is in madrid, its development base is in france, while the main servers are in erding near the munich airport. fig. 3 amadeus gds source: website amadeus many global airline companies, about 150 of them, use this system as their own reservation system and through it the sale of tickets of 440 airline companies is possible. the sales network that is connected to amadeus consists of approximately 100,000 analysis of the degree of application of electronic and mobile trade in airline sector 315 agencies, including many online agencies. amadeus is used in 195 countries worldwide. the largest online systems based on amadeus are opodo and expedia. 1.2. sabre the company sabre holding is an integrated reservation system that covers different areas of touristic activities. the members of sabre holding are:  travelocity,  sabre travel network,  getthere,  sabre airline solutions. nowadays, many major airline companies use this system as their own internal reservation system. besides american airlines, its users are: aeroflot, etihad, virgin america and virgin australia. tickets of around 400 airline companies are sold through sabre, while 44,000 travel agencies use it for sale. the largest and the most popular online agency that uses sabre is travelocity. sabre airline solutions allows airline companies to reduce costs, simplify operations, maximize profits and improve customer service. more than 200 airline companies worldwide use the intelligent support systems designed by sabre airline solutions. 1.3. global distribution systems in serbia in february 2014, the company air serbia implemented sabre sonic check-in system at nikola tesla airport in belgrade and in that way made a technological improvement of the system for the registration of passengers. this system brings the functionality in the system of the passengers' check-in on the flight and provides a new and efficient system of monitoring the departures on the home airfield. the visitors of the site air serbia can use this system to make a reservation of the flight, to check the booking, to inform themselves about the luggage, to review the status of the flight, to carry out rental cars and book accommodation as shown in fig. 4. fig. 4 the display of the sabre sonic check-in system at nikola tesla airport in belgrade source: website airserbia 316 m. gašić, v. ivanović, g. perić as it can be seen, the system offers the following services:  tickets issuing,  providing information on the flight schedule,  providing information about the price,  availability of seats,  reservation of a specific seat, etc. beside the company air serbia, what is interesting in our country is the application of global distribution systems by the agencies that sell air tickets, one of which is the agency – website superaviokarte.rs, which is shown in fig. 5. fig. 5 the display of the agency for the online sale of air tickets „super avio karte“ source: website superaviokarte this website acts as a mediator between airline companies and the buyers of airline tickets. the website browses around 500 airline compnies worldwide, provides information about airline tickets for the required route and the required time period, the cost and possibility of buying the same, as well as suggestions for other airline tickets to the same destination but for a different date at a much lower price, if the trip can be postponed to that date. the site offers a lot of other discounts and every day there is one super offer and much more. this agency achieves the following by applying global distribution systems:  unlimited offer of airplane tickets,  the ability to meet every demand of the passengers,  income from the commissions of the sold services,  simplified business,  up-to-date timetables and prices of services,  automatic tickets issuing,  increased productivity of the employees,  access to a huge amount of information,  savings in business costs, etc. analysis of the degree of application of electronic and mobile trade in airline sector 317 2. mobile trade as the future challenge in the airlines sector in addition to e-commerce, one of the following opportunities for airlines to reach new markets and win them and to keep down the costs of distribution can be achieved by using mobile technology, or by accessing electronic commerce. nowadays, the emergence of mobile technology, and corresponding access to the internet through mobile handsets, has provided many opportunities for customers in the form of immediate information access, online purchases, downloading services, and various educational and entertainment services (rose et al., 2011). m-commerce can serve as a unique tool in the aviation sector to improve services where they can create value and enhance business performance. different business processes can be improved and implemented the integration of mobile technology. the introduction of mobile devices as a choice of interfaces online allowed easier access to information and operations data entry, increased availability of employees in almost every moment, in cases of decision making and the like. business processes become more dynamic and practical, real-time. the growth in numbers of mobile device users was a result of the advances in mobile technologies (kim et al., 2008). mobile devices have increased the availability, frequency, and speed of communication (scharl et al., 2005). mobile commerce, known as m-commerce, has been defined by balasubramanian et al. (2002) as any business that occurs on the basis of anywhere and anytime. abu bakar and osman (2005) also defined m-commerce as exchange of goods and services via wireless mobile phones, whilst varshney and vetter (2002) see m-commerce as an e-commerce over wireless devices. gary and simon (2002) referred to m-commerce as any financial dealings done over mobile devices. in addition, alsultanny (2012) argued that mobile commerce, including airline ticket purchasing, hotel booking and reservation, and mobile banking, is a subset of electronic commerce. kim et al. (2005) suggested that airlines should see mobile commerce as a new and interactive method of business. thus, mobile commerce provides a direct channel for companies to communicate with their customers through mobile phone, anytime and anywhere. so companies have a new opportunity to provide new services to existing and potential customers via mobile devices. the main difference between m-commerce and e-commerce definitions is that mcommerce uses a wireless network to perform transactions, and precisely because of these unique characteristics it has massively attracted the attention of customers to e-markets (kim et al., 2008). siau et al. (2001) discussed the promises and challenges of mobile commerce and its impact on business environment, identifying four unique characteristics of mobile communication which differentiate it from e-commerce:  ubiquity. the use of a wireless device enables the user to receive information and to transact anywhere, anytime.  accessibility. a mobile device enables the user to communicate effectively at any time and place.  suitability. portability of a wireless device and its features with data storage for access to information.  localization. specific applications will allow the user to receive relevant information on which to act.  instant connectivity (3g ...). instant connectivity or "always on" is becoming more prevalent with the emergence of 3g networks, gprs or edge. the users of 3g services will benefit from easier and faster access to the internet. 318 m. gašić, v. ivanović, g. perić  personalization. the combination of localization and personalization will create a new channel to attract customers. personalization is a means to effectively meet customer needs, making interactions faster and easier, and increases customer satisfaction and likelihood.  sensitivity to time. access to information in real time.  security. depending on the specific device user, the device offers a certain level of security. companies must recognize mobile commerce as well as innovation, creating marketing opportunities and challenges. leung antipas (2001) believes that companies can improve business efficiency using mobile commerce i.e. distribution of information with staff remotely. sita research conducted in 2013 shows that 66%, of airlines in the next three years, are planning to make a significant investment in the provision of passenger information via mobile devices, as shown in fig. 6, and the improvement of existing and introduction of new sales channels in order to achieve greater self-service. fig. 6 airline investment in it over the coming three years. source: sita the research indicates that today, the dominant airline sales channel is through website which is channel for generating ancillary sales and it would develop as such; however, in the coming years, tremendous growth of mobile commerce is expected. currently 37% of ancillary sales is being realized through sites, while 2.4% via mobile phone. however, by 2017, the mobile channel is expected to contribute almost five times more, which represents 11.6% of the total ancillary sales (fig. 7). this goal is very ambitious, but there are many factors that go in this direction, and some of them are (sita):  a growing number of smartphone users  the passengers are already familiar with e-commerce, and mobile commerce is not a great leap for them.  the passengers carry their mobile phones during the flight and they provide them with significant opportunities before, after and during the flight. analysis of the degree of application of electronic and mobile trade in airline sector 319 fig. 7 the percentage of sale through new channels source: sita, adapted by the author the ambitions are that the airline companies make their services available for smart phones as well as on the website. by 2017, about 75% of the airline companies will have achieved that. within three years, about 70% of the airline companies will be using this technique to increase sales. the expectations are that the offer on the website gets personalized and adapted to mobile phone users. fig. 8 airlines usage of mobile commerce source: sita, adapted by the author the research shows that in the coming period, by 2017, mobile commerce will develop and its applications and services will be used more, which will affect the growth of this sales channel in the airlines sector (fig. 8). conclusion based on the conducted research and carried out analysis of air flights market, it can be concluded that successful business and development of all participants in air traffic is increasingly dependent on the successful application of modern information and communication technologies in the business. 320 m. gašić, v. ivanović, g. perić the degree of implementation of electronic commerce in the airlines sector is at a satisfactory level. the majority of airlines have automated their business in the area of reservations, ticketing, acceptance of passengers for the flight, providing information on the flight schedule, prices of services, etc. with the application of a global distribution system, all successful airlines have joined today the electronic commerce and thus become more competitive in the market, enabling the provision and sale of their services 24 hours 7 days a week and thus reduced their indirect costs and increased the income from sales. regarding the degree of the application of mobile commerce in the airlines sector, it can be said that it is at unsatisfactory level and that mobile commerce in the airlines sector is still in its infancy. with the development of new technologies and the growing demands of the users of air services, the imposed requirements in the upcoming period for airlines are to personalize and adapt their offers on the website for mobile phone users and in that way approach mobile commerce and increase their sales. mobile commerce in the airlines sector is becoming a tool of competitiveness, because the number of users of powerful mobile phones is growing. it is important to emphasize that the global distribution systems must follow the trends of development of information and communication technology and continuously expand the range of their services because it is the only way to survive in the future. references 1. abu bakar, f. and osman, s. (2005) towards the future of mobile commerce (m-commerce) in malaysia. proceedings of iadis: iadis international conference, web-based communities 2005, algarve, portugal. 2. adee, a. (2002) “internet users’ intention to purchase air travel online: an empirical investigation”, marketing intelligence & planning, 20(4), pp. 234-242. 3. alsultanny, y. (2012) opportunities and challenges of m-commerce in bahrain. journal of database marketing and customer strategy management, 19(1), 31-38. 4. andam, z. (2003) e-business and e-commerce, e-asean task force, manila, philippines. 5. balasubramanian, s., peterson, r.a., jarvenpaa, s.l., (2002) exploring the implications of m-commerce for markets and marketing. journal of the academy of marketing science, 30(4), 348–361. 6. bjelić, p. (2000) elektronsko trgovanje, institut za međunarodnu politiku i privredu, beograd. 7. buhalis, d. and law, r. 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(2005) diffusion and success factors of mobile marketing, electronic commerce research and applications, pp. 159-173. 24. schuster, a. (2002) “a delphi survey on electronic distribution channels for intermediaries in the tourism industry: the situation in german speaking countries,” in proceedings of the enter 2002 conference. springer verlag, wien, ny, pp.224–234. 25. siau, k., lim e-p shen z. (2001) mobile commerce: promises, challenges, and research agenda. journal of database management 12(3), pp. 4–13. 26. sismanidou, a., palacios, m. and tafur, j. (2009) progress in airline distribution systems: the threat of new entrants to incumbent players, journal of industrial engineering and management, 2(1), pp. 251-272. 27. turban e. (2000) electronic commerce – a managerial perspective, prentice hall, new jersey. 28. varshney, u. and vetter, r. (2002) mobile commerce: framework, applications and networking support. mobile networks and applications, 7, pp. 185-98. 29. website „airserbia“, http://www.airserbia.com/ (12.09.2015). 30. website „sabre“, http:// www.amadeus.com/ (13.09.2015). 31. website „super avio karte“, http://www.superaviokarte.rs/ (24.08.2015). 32. website „аmadeus“, http://www.sabreairlinesolutions.com/ (16.09.2015). 33. website„sita“,http://www.sita.aero/surveys-reports/industry-surveys-reports/airline-it-trends-survey2014 (26.01.2015.). 34. wen, ј., chen, h. and hwang, h. (2001) e-commerce web site design: strategies and models, information management & computer security, mcb university press, 9/1, 5-12. analiza stepena primene elektronske i mobilne trgovine u avio sektoru u ovom radu autori sagledavaju i analiziraju stepen primene elektronske i mobilne trgovine u avio sektoru, obrazlažući da savremene informaciono-komunikacione tehnologije pružaju snažan instrument za avio kompanije i mogu značajno uticati na njihovo poslovanje, strukturu i strategiju. internet se u avio sektoru smatra najvažnijom tehnološkom revolucijom, jer su njegovom pojavom rezervacioni sistemi prestali da budu pasivne kompjuterske arhive i evidencije i postali aktivni operativni sistemi koji neslućenom brzinom transformišu avio saobraćaj. sredinom 80’tih godina dolazi do pojave posebnih tipova informacionih sistema, globalnih distribucionih sistema, koji su namenjeni distribuciji turističkih proizvoda, čijom implementacijom na vebsajtu avio kompanije pristupaju elektronskoj trgovini, odnosno vrše pružanje usluga i obavljaju prodaju avio karatana internetu. međutim, razvoj tehnologije, pojava pametnih telefona i brojni drugi faktori danas nameću potrebu avio kompanijama da pristupite mobilnoj trgovini i učine svoje usluge dostupnim i korisnicima pametnih telefona kao i na vebsajtu. ključne reči: ict u avio sektoru, onlajn rezervacija avio karata, mobilna trgovina u avio sektoru, globalni distribucioni sistem. http://www.airserbia.com/ http://www.sita.aero/surveys-reports/industry-surveys-reports/airline-it-trends-survey-2014 http://www.sita.aero/surveys-reports/industry-surveys-reports/airline-it-trends-survey-2014 facta universitatis series: economics and organization vol. 12, n o 3, 2015, pp. 171 182 authenticity of economic phenomena in the context of increasing influence of psychologistic approach  udc 316.47:159.9.019.4]:330 dragan petrović, dragoslav kitanović university of niš, faculty of economics, serbia abstract. the subject of this paper is the relationship between the social and the psychological, with emphasis on the scientific basis of strengthening the influence of psychology on the understanding of the economic sphere of social life. in this regard, the paper gives a critical review of different concepts of economics as the science of behavior, i.e. its rootedness in the science of behavior. justification of efforts to make economics retain its traditional distance from psychology is supported by the idea of the necessary recognition of interactive relationships and unintended consequences of behavior of economic actors. at the same time, the scientific relevance of the notion that the study of economic phenomena should be approached from the aspect of their social autonomy, uniqueness, and specificity is substantiated by a set of epistemological and logical inconsistencies of views of one-way causality from the psychological to the social, thereby focusing the methodological starting point of modern economic theory in the direction of denying attempts to identify the individualistic with the psychologistic method. key words: psychologism, the science of behavior, methodological individualism, institutional individualism. introduction economic literature has, to a considerable extent, accepted the idea of economics as the science of behavior, and that the science dealing with the study of human behavior is important for its successful development. the supremacy of the psychological factors for the purposes of comprehension and explanation of economic phenomena, as well as the acceptance of the assumption that psychology is the basis of the overall philosophy and all social sciences, is generally described by the concept known as psychologism, while the term “psychological imperialism” is used primarily in terms of equivalent counterbalance received september 30, 2015 / accepted october 27, 2015 corresponding author: dragan petrović faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia tel: +381 18 528 652  e-mail: dragan.petrovic@eknfak.ni.ac.rs 172 d. petrović, d. kitanović to “economic imperialism”. one of the earliest known authors who advocated a strong influence of psychology was john stuart mill (1806-1873). in his opinion, the laws of society are nothing but actions and passions of human beings, i.e. the laws of individual human nature (mill, [1843] 1974, pp. 879, 907). contribution to the psychological determination of the subject of economics belongs to the definition provided by lionel robbins (robbins, 1962, p. 16), stating that “economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. as the economic science is currently still dominated by mainstream economics, which constantly confirms its scientific status and superiority over other forms of economic thinking (manić, 2009, p. 146), this understanding of the subject of economics strengthened the position of neoclassicism and made it retain the unchanged method and roots – methodological individualism, balance, and efficiency. contrary to this definition of economic science and its inherent view that the functioning of the economic system can be explained by focusing on the behavior of individuals as the starting point, there is an idea about economics as a science with its own subject, independent of any science of behavior. the focus here is on the affirmation and popularization of efforts aimed at preserving the traditional distance of economics from psychology, which bases its analytical framework on the correct understanding of the economic ontology. therefore, the aim of this paper is to reflect on the relevance of the standpoint, according to which economics can, under the impact of psychology, lose autonomy and specificity of its subject. this aim will be achieved by testing the hypothesis that there are problems in economics, which are not related to the sphere of behavior and cannot be reduced to the “action” of psychological laws in the economic sphere. in this regard, the research will focus on the issue of the concept of society and social phenomena, with special emphasis on logical and empirical sustainability of the view that the study of economic phenomena should be approached from the point of their social autonomy, uniqueness, and specificity. arguments about one-way causality between “the psychological” and “the social” will be confronted with the ideas about the dynamic wholeness and integrity of the economic system, and the related specificity of the subject of economics. to this end, emphasis will be placed on the affirmation of those theoretical approaches that challenge the beliefs on the equalization of the individualistic with the psychologistic method, taking into account the results of unintended effects of individual actions in the circumstances of the inextricable links between economic actors and their institutional environment. 1. the relationship between the social and the psychological generally speaking, there are two extreme views of the relations between social sciences and psychology. onthe one hand, there is a strong trend of strengthening the position of psychologism, which assumes that psychology is the basis of the overall philosophy and all social sciences. on the other hand, the dignity of the social sciences could be defended by the thesis that they are relatively independent of the psychological assumptions, and that psychology can be treated not as the basis of all the social sciences, but as one of the social sciences (popper, [1957]1961, p. 142). the first concept is based on the belief that psychologism rests on the idea of reductionism, according to which the “higher level” phenomena can be explained by the “lower level” phenomena, which ultimately means that all phenomena will be explained in authenticity of economic phenomena in the context of increasing influence of psychologistic approach 173 terms that are used in physics, in accordance with the table of reduction below (hudik, 2011, p. 149). social sciences ↑ psychology ↑ philosophy ↑ … ↑ chemistry ↑ many-particle physics ↑ particle physics fig. 1 table of reduction although the very nature of science strives towards unique knowledge, which is, in itself, a form of reductionist understanding of the phenomenon, it is clear that it is impossible to reach a level that means a reduction of all sciences to the level of physics (popper & eccles, 1983; kauffman, 2008). among the arguments used to contest reductionism in science, one has to emphasize the view that starts from the concept of downward causation (campbell, 1974). it refers to the existence of a causal effect in the sense that the “higher level” structure can influence the “lower level” elements, which, inter alia, disputes the existence of one-way causality from “the psychological” to “the social”, i.e. refutes the idea on reducing “the social” to “the psychological”. the second argument highlights the fact that social phenomena are not subject to individual choice, but that they occur as a result of interactions that take place between individuals, where each individual has limited power to influence them. accordingly, it can be concluded that psychology is irrelevant to social theory, since the interpretation of what one has chosen to do is not helpful in explaining the phenomena that no one chose and that are the consequences of interactive activities of a large number of individuals. based on the foregoing, it can be concluded that the problem of individual behavior is of a technical nature, bearing in mind primarily that it is a choice of means to achieve goals. in contrast, the problem of theoretical social science is not of a technical nature (neumann & morgenstern, 1953, p. 9), while not denying that individuals usually experience the achievement of their goals as a technical problem. a key challenge for the social sciences is that individuals, following different goals, fail to establish control over the final outcome of interactions. although individuals start economic activity in order to overcome the situation of insufficient satisfaction and maximize their usefulness, that process cannot be realized independently and in isolation. therefore, from the perspective of social sciences, the key problem is the one of coordination, not optimization. their task is to explain how coordination is achieved between mutually dependent individual goals and plans, which, among other things, implies the need to explain the functioning of spontaneous order. 174 d. petrović, d. kitanović the issue of explicative primacy can go in the opposite direction, when primacy is given to “the social” in relation to “the psychological”. at first glance, it is a form of antireductionism (golubović, 2011, p. 135), since the holistic understanding of the functioning of interactive relationships implies that the properties of a given system cannot be explained solely by the characteristics of its component parts. however, although the methodological holism enabled the creation of highly relevant concepts of a number of socio-economic phenomena (kitanović & petrović, 2008, p. 10), there is reason to fear that its uncritical use is nothing more than a kind of reductionism in economic research (hodgson, et al., 1994, p. 64). firstly, due to the lack of precision, the use of holistic concepts must be constantly controlled by using the methods of observation and, on this basis, respect for all the specificities and concrete instances in the development of social structures. otherwise, holism, separated from its empirical base, can easily become “loose” and uncontrolled speculation (wilber & harrison, 1978, p. 83). as another argument against the primacy of the social over the psychological, there is the fact that social collectives must always assume the existence of individuals, who can create and consciously reform institutions. at the same time, we have to assume that individuals follow certain rules of behavior, i.e. that the behavior of individuals is strongly influenced by the rules and events (dossi & nelson, 1994, p. 157). it turns out that the rigid position in defining the primary explanatory factor necessarily raises the question of “infinite regression”, which entails constant movement within a vicious circle, without any possibility to come out of it. in fact, from the perspective of extremely conceived holistic methodological procedure, individuals‟ goals can be explained by the action of institutions. however, is it possible to ignore the fact that these institutions emerged as a result of the synergistic effect of some previous individuals, whereby those previous individuals also acted under the guise of some “older” institutions, etc.? hence it follows that any determination on the issue of primacy – whether institutional or individual – is analogous to the question of what came first – the chicken or the egg (hodgson, 1988, p. 64). the problem of “infinite regression” in the context of debate on the primacy of the psychological or the social, in relation to the interpretation of the institutional changes, among other things, includes taking a stance on the character of human nature and psyche. specifically, institutional changes from the perspective of psychologism are caused by changes in human nature. this, however, brings to the fore the issue of the causes of changes in human nature itself. supporters of reductionism will look for the causes at the lower level, and may bring them in connection with the consequences of biological evolution. however, this answer seems rather implausible, given that evolution takes place too slow to “count on” relatively frequent institutional changes. at the same time, the idea that the human mind actually adapts to the functioning of the institutions is a serious problem facing the advocates of psychologism. in the event that such arguments are “declared” correct, then, as stated by hudík (2011, p. 149), it can be concluded that social phenomena are not the product of psychological laws, but that, on the contrary, they are the ones that shape the human mind. authenticity of economic phenomena in the context of increasing influence of psychologistic approach 175 2. psychologism and methodological individualism the intention of the supporters of psychologism was probably not motivated by advocating psychological determinism. their primary aspiration was more focused on the affirmation of methodological individualism as “zero” method, which is the necessary starting point for explaining the social phenomena. therefore, the question arises: if the concern of those who are engaged in social science (economics in particular) is inextricably linked with the observance of the principle of methodological individualism, does the rejection of psychologism simultaneously deny methodological individualism? in trying to answer this question, one can focus on the attitudes of popper and hayek, the distinguished supporters of methodological individualism. for popper (popper, [1957] 1961, pp. 136, 157), methodological individualism is “irrefutable doctrine” that we use in order to explain social phenomena starting from individuals, their goals, beliefs, attitudes, expectations, actions, and interactions. however, this kind of methodological position should be distinguished from the psychologism of john stuart mill, which was, according to popper, correct to the extent to which it opposed methodological collectivism, insisting that all social phenomena must be seen as something that stems from the decisions and actions of individuals. however, popper calls into question the point of psychologism that the choice of individualistic method actually comes down to the use of psychologistic method (udehn, 2002, p. 487), considering that the principle of methodological individualism does not necessarily imply the adoption of a psychological method. on the contrary, this principle can be combined with the view according to which social sciences are relatively independent from psychological assumptions (popper, [1957] 1961, p. 142). the reasons why he denies psychology as the basis of social science are associated with the following: (i) “human nature” varies considerably with social institutions, and (ii) social sciences mainly deal with unintended consequences of actions (hudík, 2011, p. 154). as the unintended consequences of individual actions (hayek, 1952) are mainly identified with the concept of spontaneous order, it is necessary to consider hayek‟s understanding of the social sciences. specifically, hayek was aware that social sciences are not sciences of behavior, but sciences of spontaneous order (or sciences of “unintended consequences” of behavior, as he sometimes called them) (ibid., p. 153). the error was, according to him, that the representatives of the social sciences often tolerated the notion that the goal of social sciences was to explain the conscious actions of individuals. this is, if achievable at all, the task of psychology. in the social sciences, conscious actions are just facts, and all they need to do about them, according to hayek, is to identify them and sort out how to respond to the task. the problems that they are trying to respond to occur to the extent to which the conscious actions of many individuals produce unintended results. in contrast, if social phenomena did not show a different “face” in relation to the one conceived by individuals, then there would be no room for theoretical social sciences, and there would only be problems of psychology (hayek, 1952, p. 39). however, in reality, there is a social order that is not designed or controlled by the human mind (kirzner, 1982), in which the individual wishes and intentions face the general market process that is more complex than any intended engineering of its participants (mises & hayek 1997, p. 12), so that the need for social sciences and their theoretical explanations should not be questioned. 176 d. petrović, d. kitanović 3. critique of psychologism the fact that the two leading proponents of methodological individualism are at the same time critics of psychologism, and that their anti-psychologism strengthened to such an extent that they can be understood as having left the positions of methodological individualism (udehn, 2002, p. 488), makes one think that there is a kind of “methodological conflict” between individualism and psychologism. clarification of the above-mentioned relationship first requires an answer to the question whether it is possible to look at economics as a science of behavior, completely independent of psychology, and then reflect on the relevance of opinion that the abandonment of the term “methodological individualism” actually means a break with psychologism. 3.1. economics as the science of behavior attempt to define economics as the science of behavior is inevitably accompanied by the question of whether in this case psychology loses exclusive scientific rights to be the only science suitable for substantially studying behavior. in support of the unsustainability of equalizing “the science of behavior” and psychology, some economists argue that their discipline is also the science of behavior, in a way independent of psychology. however, such a statement requires an answer to the question: what is the difference between psychology and economics; do psychology and economics stand for alternative theories of behavior and are they different conceptual systems? if we start from the fact that both of them claim to be “the science of behavior”, attention in this case can be directed at finding empirical evidence to refute the position of one or another science. by all accounts, economists‟ resistance to psychology would not be easy at all, and would probably, in the world of established relationships among different social sciences, look rather unconvincing. at the same time, any attempt of equalization of economics and psychology is doomed to failure from the very start. aspirations of economists to defend the dignity and the “leading” position of economics in the world of social sciences are confirmed by the phenomenon known as “economic imperialism”. the essential feature of the above-mentioned tendency, which marked the second half of the twentieth century in the field of social sciences, is reflected in the application of the economic approach in the process of analysis and explanation of phenomena that traditionally do not belong to the research subject of economics. the initial hypothesis is that the market laws do not apply only in the economic sphere of social life, but that they are basic guidelines of all other forms of social relationships and ties. it refers to raising the market to the level of universal human communication (petrović & stefanović, 2013, p. 234), which, among other things, moves some, for economic science, quite “exotic areas”, under the influence of market absolutisation, into the sphere of interest of economics and its research. on the other hand, a strong alternative to the above-mentioned tendency is the so-called “psychological imperialism”, which is based on the psychology conquest of the economic sphere of society, where the role of “colonized territories” is this time given to economics (glaeser, 2004). the above-mentioned role reversal may be meaningful from the standpoint of a warning that, if economics retains its traditional distance from psychology, the idea that it studies the behavior of economic actors must be abandoned (hudík, 2011, p. 148). denial of the view that economics is the science of behavior makes it independent of authenticity of economic phenomena in the context of increasing influence of psychologistic approach 177 psychology. on the other hand, any attempt to show economics in the light of the science of behavior means affirmation of the viewpoint according to which economicsis closely related to psychology. in any case, it cannot be said that these two disciplines are mutually irrelevant. 3.2. abandoning the term “methodological individualism” and affirmation of “institutional individualism” the critique of psychologism, among other things, can be based on the need for the denial of methodological individualism, which, from the perspective of its dominant interpretation, raises the issue of sustainability of aprioristic theory of human action. in fact, the dominant interpretation of methodological individualism is associated with atomism, i.e. atomistic social ontology (zwirn, 2007, p. 55). in support of this, one should reflect on lawson‟s opinion (1997, p. 159), whose arguments rest on the theory that, in modern economics, the ontology of social atomism prevails, with its epistemological manifestation, as a form of reductionism. supporters of methodological individualism consider it desirable to identify certain similarities and analogies regarding the functioning of the natural and economic systems. thus, for example, one might assume that economic actors, i.e. individuals who act in the economic sphere of social life, are equivalent to atoms. just like in physics, the hydrogen atom (h) is not defined in relation to the oxygen atom (o), the individual, along with their characteristics, is viewed independently from other individuals (although those other individuals, as a rule, form part of the social context). that means that individuals either have no relationship with each other, or if they have, their relationship has external character. in this regard, internal relations are not the subject of interest of the dominant interpretation of methodological individualism. this means that their constitution is determined independently of the respective context, and that they generate their own, separate, unchanging effects in relation to the initial conditions (lawson, 2003, p. 14). in contrast to the above-mentioned understanding, appreciation of ontological arguments suggests that the fact that an individual does represent a social being, which is normally involved in relationships with others, cannot be endlessly denied. this has resulted in increasingly louder attitudes that the idea of a completely isolated individual, liberated from social impacts, should be declared factually untenable (davis, 2003), and that, accordingly, the fiction that the society is comprised of a set of independent individuals, who realize their goals completely independently and on their own, should be left aside (coleman, 1990, p. 300). hayek offers almost the same vision of the place and role of the individual, in the process of explanation of the social whole, starting from the conceptual linking of certain parts. in fact, regardless of the fact that, in his analyses, he started from individuals who have a real existence only, he insisted on the result which occurs as an unintended consequence of individual actions, thus “provoking” the debate about whether and how “loyal” he is to methodological individualism. hence it is not surprising that some authors found inspiration for conceptual differentiation of methodological individualism from methodological atomism in his concept of spontaneous order. for instance, g. zwirn (2007, pp. 76-77) is without prejudice to hayek‟s commitment to methodological individualism, but he believes that he, with his concept of spontaneous order, actually rejected the idea of methodological atomism. the methodological atomism and the 178 d. petrović, d. kitanović related atomistic social ontology are diametrically opposite to hayek‟s view that the causal relationships in society generate spontaneous social order. hodgson brings the justification of the use of the term methodological individualism (hodgson, 2007, p. 220) in connection with the obvious confusion that reigns with the original interpretation of the methodological individualism in the sense that:  social phenomena should be explained by starting solely from individuals; or  social phenomena should be explained by starting from individuals and relationships between them. the first of these versions, as hodgson believes, has never been realized in practice. according to an individualistic approach, based on the understanding of individuals as isolated individuals, the whole cannot show the characteristics or quality if components do not have the respective characteristic or quality. characteristics of the system simply reflect the characteristics of component parts, which makes the emerging characteristics excluded. however, individualism has just been criticized for not taking into account the relationship between the actors and their influence on the occurrence of appropriate characteristics at the macro or system-wide level, which are not present at the level of individuals. in the case of another version, however, the issue of justification of the use of the term “methodological individualism” arises, since it recognizes the existence of interactive relationships between individuals. this allows the analysis to include important holistic elements, which, at the theoretical level, affirms the concepts such as institutional and structural individualism. notwithstanding the justification of identification of the individualistic with the psychologistic method (popper, [1945] 1960, p. 91), as an alternative to psychologism, popper proposes a methodology based on situational logic and institutionalism (udehn, 2002, p. 488). it is interesting that his idea that social institutions partly explain human activity may, inter alia, correspond to the widely accepted framework of game theory. specifically, although the game theory can be seen as a continuation of behavior theory, claims that the problems of interaction are different from the problems of individual behavior can lead to the conclusion that these are not only psychological determinants. the basis of such thinking does not lie in the individuals themselves, but in the roles and strategies that they can take. that is why the concept of balance is different from its standard interpretation, bearing in mind that the balance is not the result of “players‟” conscious choice, but that it is achieved through frequency of strategies implemented under the action of the entire population. this means that the balance is not achieved by the conscious adjustment of “players‟” actions, but that it is the result of spontaneous selfregulating process. all this, in fact, refers to the need for respecting the individualistic approach to the study of social phenomena, which, at the same time, does not symbolize the primacy of psychological factors. the conflict between individualism and institutionalism in popper‟s methodology led to a split of methodological individualism into two parts: psychological individualism by watkins and institutional individualism by agassi and jarvie. according to the advocates of psychological individualism, it is very problematic to assume that social science can be individualistic but not psychological, i.e. that the fact that it is individualistic does not mean that it is at the same time the science of behavior. in this regard, hudík (2011, p. 152) presents the view that popper and hayek did not provide convincing arguments about what such a science should look like. additional confusion was brought by the fact authenticity of economic phenomena in the context of increasing influence of psychologistic approach 179 that some supporters of the criticism of psychologism actually relied on the use of psychological formulations and specifications. among those who defended the so-called psychological variant of methodological individualism,watkins is particularly noteworthy. in his view (watkins, 1955, p. 58), methodological individualism is first based on the ontological assumption by which all social phenomena are created or induced by the actions of individuals. in parallel, equally important is the epistemological assumption that reminds us that people have a direct insight into the actions of individuals, but not the action of social entities. starting from the fact that all social phenomena, directly or indirectly, result from actions of individuals, this forces those who are engaged in their study to reduce them to a psychological term to be better explained (watkins, 1952, pp. 28-29). in this regard, his aims were directed to the explanation of social phenomena, not the definition of collective concepts (watkins, 1953, p. 729). unlike the original version of methodological individualism, institutional individualism explicitly includes social institutions in order to thoroughly clarify the phenomenology of individual behavior. among the authors who accept the importance of institutional influence for the formation of individual goals and objectives, one should certainly mention agassi (1960), jarvie (1972), and boland (1982). they are characterized by the fact that, regardless of some inconsistencies in the use of individualistic and institutionalistic categories and terms, they emphasize institutional individualism as opposed to psychological individualism. efforts to verify the significant impact of institutions on economic decision-making, among other things, raises the question of their introduction into the very subject of economics, even if theoretical economics is understood as the science of behavior. in this way, on the one hand, one recognizes the fact that the actors have a strong foothold in the existing institutional framework, which essentially shapes their motivation, economic calculus, and willingness to innovate (stefanović, 2012, p. 34). on the other hand, it may affect the segment of practical realization of economic research, in terms of the necessity of establishing rules and patterns of economic behavior in a society that is based on the interaction between individuals and social institutions (polanyi, 1957, p. 248). emphasizing the fact that individuals should be presented in the light of the rules of behavior that govern their actions (field, 1979), and respecting the unintended result of individual actions, reduces the chances of economic science to fall under the “dictatorship” of psychology. distancing in relation to understanding economic behavior built on the foundations of the glorification of action of psychological laws makes any intention aimed at the subjugation of economic science by psychology meaningless. on the other hand, only a clearly defined orientation of their scientific and research programs can contribute to creating conditions for an objective, comprehensive, and satisfactory explanation of economic behavior. finally, thoughtful understanding of the differences and similarities between economics and psychology raises the awareness of economists that, in the circumstances of the evident need for using the results of psychological research, they should never forget that economic phenomena are characterized by a significant degree of autonomy and uniqueness, which was a long time ago articulated through the implementation of the requests for the constitution of economics as an independent scientific discipline. 180 d. petrović, d. kitanović conclusion the view that economics is primarily the science of behavior prevails in economic literature. on the other hand, by nature and character of the research subject, psychology is a science that aims to maintain “exclusive right” to the status of the only one called upon to essentially deal with the study of behavior. in this regard, the question arises whether the definition of economics as the science of behavior necessarily goes in the direction of convergence with psychology, where the determination of the explicative primacy increasingly favors the advantages of “the psychological” in relation to “the social” and “the economic”. starting from the above-raised issues, the paper first offered arguments about the close connection between economics and psychology, particularly in the area of interest in the theory of behavior. then, the reasoning about the necessity of existence and maintenance of fundamental differences between their scientific and research programs was provided. in this sense, the focus was on the challenges of economics that do not relate to the problems of individual behavior and that cannot be reduced to the “action” of psychological laws in the economic sphere. criticism of psychologism was, for these reasons, not posited on denying the need for the study of the behavior in itself. instead, attention was focused on supporting the logical and empirical sustainability of the view, according to which the study of economic phenomena should be approached from the point of their social autonomy, uniqueness, and specificity. the above-mentioned characteristic of social and economic reality does not mean that it exists in itself, in the sense that it is the result of exogenous factors and that it develops regardless of activities carried out by individuals.the society is certainly the result of individual actions, which is why, inter alia, all theoretic explanations must come from individuals. however, although individuals act consciously, to satisfy their own interests, the result of their activities is a new quality, whose study is the task of economics, and which is not distinctive and recognizable in the individual behavior.therefore, the study of this qualitatively different order cannot be accessed from the standpoint of the psychology of individuals. in fact, it is necessary to offer a theoretical explanation of the social whole, which relies on the conceptual linking of individual components and interpretation of causal relationships in society. references 1. agassi, j. (1960), methodological individualism, british journal of sociology, volume 11(3): 244-70. 2. boland, l. (1982), the foundations of economic method, london, allen & unwin. 3. campbell, d.t. (1974), downward causation in hierarchically organized biological systems, in ayala f.j., & dobzhansky, t. (eds.), studies in the philosophy of biology: reduction and related problems, pp. 179-186. 4. coleman, j. (1990), foundations of social theory. cambridge. ma: harvard university press. 5. davis, j. (2003), the theory of the individual in economics: identity and value, london and new york: routledge. 6. dossi g., & nelson, r. (1994), an introduction to evolutionary theory in economics, journal of evolutionary economics, volume 4(3): 153-172. 7. field, a. j. (1979), on the explanation of rules using rational choice models, journal of economic issues, volume 13(1): 49-72. 8. glaeser, e. l. (2004), psychology and the market, american economic review, volume 94(2): 408-413. 9. golubović, n. (2011), društvena ekonomika – ekonomska aktivnost u društvenom okruženju, ekonomski fakultet, niš. authenticity of economic phenomena in the context of increasing influence of psychologistic approach 181 10. hayek, von f.a. (1952), the counter-revolution of science, studies on the abuse of reason, glencoe, illinois: the free press. 11. hodgson, g. (1988), economics and institutions: a manifesto for a modern institutional economics, cambridge: camridge university press. 12. hodgson, g. (2007), meanings of methodological individualism, journal of economic methodology, volume 14(2): 211-226. 13. hodgson, g., sammuels, w. j., & tool, r. m. (eds.) (1994), the elgar companion to institutional and evolutionary economics, l-z, aldershot: edward elgar. 14. hudík, m. (2011), why economics is not a science of behaviour, journal of economic methodology, volume 18(2): 147-162. 15. jarvie, i. c. (1972), concept and society. london: routledge & kegan paul 16. kauffman, s. (2008), reinventing the sacred: a new view of science, reason, and religion. basic books. 17. kirzner, i.m. (1982), „„spontaneous order‟ – a complex idea“, literature of liberty, v, 7–8. 18. kitanović, d., & petrović, d. (2008), methodological holism and the contemporary mainstream in economy, economic themes, volume 4: 1-13. 19. lawson, t. (1997), economics and reality, london: routledge. 20. lawson, t.(2003), reorienting economics, london: routledge. 21. manić, s. (2009), kontroverze o ekonomskoj metodologiji, admiral books, beograd. 22. mill, j. s ([1843] 1974), a system of logic ratiocinative and inductive. collected works, volume viiviii, toronto: university of toronto press, london: routledge and kegan paul. 23. mises von, l., & hayek von, f. a. (1997), o slobodnom tržištu, klasični eseji, mate, zagreb. 24. neumann von, j., & morgenstern, o. (1953), theory of games and economic behavior (3rd ed.), princeton: princeton university press. 25. petrović, d., & stefanović, z. (2013), economic science in the light of the economical theoretical imperialism development, in marinković, s., & s. rochhia (eds.), rethinking europe after the economic crisis, lessons for the european core and periphery, faculty of economics, university of niš, pp. 247-265. 26. polanyi, k. (1957), the economy as instituted process, in polanyi, k. et.al. (eds.), trade and market in the early empires, new york: free prees, pp. 243-270. 27. popper, r. k. ([1945] 1960), the open society and its enemies, volume 1: the spel of plato, vols. 2., hegel and marx. london: routledge & kegan paul. 28. popper, r. k. ([1957]1961), the poverty of historicism. london: routledge & kegan paul. 29. popper, r. k. & eccles, j. c. (1983), the self and its brain, london: routledge & kegan paul. 30. robbins, l. (1962), the nature and significance of economic science, london: macmillan. 31. stefanović, z. (2012), politička ekonomija globalizacije: modeli kapitalizma i institucionalna evolucija, ekonomski fakultet, niš. 32. udehn, l. (2002), the changing face of methodological individualism, annual review sociology, volume 28: 479-507. 33. watkins, j. (1953), ideal types and historical explanation, in feigl, h., & brodbeck, m. (eds.), readings in the philosophy of science. new york: appletoncentury-crofts, pp. 723-743. 34. watkins, j. (1955) methodological individualism: a reply, philosophy of science, volume 22 (1): 58–62. 35. watkins, j. (1952), ideal types and historical explanation, british journal for the philosophy of science, volume 3: 22–43. 36. wilber, c.k., & harrison, r. s. (1978), the methodological basis of institutional economics: pattern model, storytelling, and holism, journal of economic issues, volume 12(1): 61-89. 37. zwirn, g. (2007), methodological individualism or methodological atomism: the case of friedrich hayek, history of political economy, volume 39 (1): 48-80. 182 d. petrović, d. kitanović autentiĉnost ekonomskih pojava u kontekstu rastućeg uticaja psihologistiĉkog pristupa predmet ovog rada jeste odnos društvenog i psihološkog, s akcentom na naučnu zasnovanost jačanja uticaja psihologije na razumevanje ekonomske sfere društvenog života. u vezi s tim dat je kritički osvrt na različite koncepcije ekonomije kao nauke o ponašanju, odnosno njenoj ukorenjenosti u nauci o ponašanju. opravdanost nastojanja usmerenog na to da ekonomija zadrži svoju tradicionalnu udaljenost od psihologije podržana je idejom o neophodnom priznanju interaktivnih odnosa i nenameravanih posledica ponašanja ekonomskih aktera. pri tom je naučna relevantnost shvatanja po kome istraživanju ekonomskih pojava treba pristupiti s pozicije njihove društvene autonomnosti, posebnosti i specifičnosti argumentovana setom epistemoloških i logičkih nedoslednosti verovanja o jednosmernoj uzročnosti psihološkog ka društvenom, usmeravajući time metodološka polazišta savremene ekonomske teorije u pravcu osporavanja pokušaja poistovećivanja individualističkog sa psihologističkim metodom. ključne reči: psihologizam, nauka o ponašanju, metodološki individualizam, institucionalni individualizam 11507 facta universitatis series: economics and organization vol. 20, no 1, 2023, pp. 29 38 https://doi.org/10.22190/fueo230129001m © 2023 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper social inflation in mtpl insurance1 udc 336.748.12:368 368.1 stevcho mecheski, irina joldeska, elena koseska, antonio krstanoski, darko naumoski university "st. kliment ohridski" – bitola, faculty of tourism and hospitality – ohrid, north macedonia orcid id: stevcho mecheski https://orcid.org/0000-0002-2482-9951 irina joldeska https://orcid.org/0009-0006-6919-0430 elena koseska https://orcid.org/0000-0001-6237-6108 antonio krstanoski https://orcid.org/0000-0001-7014-3590 darko naumoski https://orcid.org/0000-0002-4360-0562 abstract. the insurance industry is facing the negative effects of inflation in the postpandemic period. in addition to economic inflation, the insurance industry also faces the phenomenon of social inflation, i.e. abnormal growth of claims caused by various social factors. in this paper, we examine whether insurance companies in the balkans face social inflation. we analyze the growth rate of motor third-party liability insurance claims in 11 countries of the region for the period 2011-2020, including a more detailed analysis of the insurance market in the republic of north macedonia. the results show that there is no systematic existence of social inflation, but occasional abnormal shifts are noticeable for certain countries in the region, especially eu countries, i.e. certain companies in the republic of north macedonia. in addition, we find that social inflation occurs in countries with a higher rule of law index, indicating that low institutional development and low trust in institutions potentially prevent the development of social inflation. the paper contributes to the current literature by analyzing the problem in an international context and in a new region, as well as producing recommendations for policy makers. key words: social inflation, balkans, motor third-party liability insurance jel classification: g22, g41 received january 29, 2023 / accepted february 14, 2023 corresponding author: irina joldeska university "st. kliment ohridski" – bitola, faculty of tourism and hospitality – ohrid, kej makedonija 95, 6000 ohrid, north macedonia | e-mail: irina.joldeska@uklo.edu.mk https://orcid.org/0000-0002-2482-9951 https://orcid.org/0009-0006-6919-0430 https://orcid.org/0000-0001-6237-6108 https://orcid.org/0000-0001-7014-3590 https://orcid.org/0000-0002-4360-0562 mailto:irina.joldeska@uklo.edu.mk 30 s. mecheski, i. joldeska, e. koseska, a. krstanoski, d. naumoski 1. introduction the acceleration of inflation in the post-pandemic period remains in the focus of central banks and policy makers due to the harmful effects of inflation on various economic sectors around the world. inflationary pressures also significantly affected the insurance sector through a reduction in the ability of policyholders to purchase insurance policies, growth in administrative and sales costs, growth in the amount of claims paid out, disruption of returns from invested assets, etc. (swiss re, 2010). in addition to economic inflation, the insurance sector can also be affected by the phenomenon of social inflation. social inflation is defined as all the influences through which the amount of claims of insurance companies grows faster than the general economic inflation. if this phenomenon exists in certain economies, it can significantly increase existing insurance prices, cause reduced supply and demand for insurance, as well as reduced capacity by increasing the number of exclusions in insurance contracts (heim, 2022). social inflation is an old phenomenon that occurs periodically, but recent literature emphasizes the existence of this problem, especially during and after the covid-19 crisis, focusing mainly on developed countries. (dunsavage, 2019; 2020a; 2020b; 2021; geneva association, 2020; heim, 2022; oh, 2021). however, social inflation can be a potential problem for insurance companies in less developed countries, i.e. the countries of the balkans and the republic of north macedonia. the insurance markets in the region are relatively underdeveloped with the dominant participation of the mandatory motor thirdparty liability insurance (mtpl). their institutional development is significantly lower than developed countries, while the low development of road infrastructure can contribute to a higher frequency of traffic accidents and higher mortality resulting in an abnormal growth of claims. therefore, the question arises: does social inflation exist in the region and in the republic of north macedonia? the purpose of this paper is to find out whether the insurance companies in the republic of north macedonia and in the countries of the balkans face the problem of social inflation and abnormal growth in the amount of claims. social inflation occurs most often in liability insurance, where there are opportunities for abnormal claims, especially in relation to nonmaterial claims. the insurance structure in the balkan countries is dominated by motor third-party liability insurance. therefore, the analysis of mtpl claims in the selected region is appropriate to detect the problem of social inflation. first, we analyze the aggregate level and annual growth rate of claims per premium unit in motor liability insurance for a selected set of 11 balkan countries by providing data from xprimm for the period 2011-2020. due to the potential problems in the analysis with aggregate claims, we focus on north macedonia and analyze the level and pace of growth of claims per individual company, providing data from the insurance supervision agency of the republic of north macedonia for the period 2018-2021. this paper makes a contribution in two domains. first of all, the paper analyzes the problem of social inflation in the balkan region for the first time. research so far has concentrated on developed countries, such as the united states, neglecting the potential for social inflation to develop in underdeveloped countries, especially in countries where motor liability insurance has a dominant share. in addition, the paper analyzes the problem covering several countries that differ in terms of economic, institutional and social development. that makes it possible to analyze the potential factors of social inflation that make certain insurance markets fertile ground for the development of social inflation. social inflation in mtpl insurance 31 finally, the paper also provides recommendations for policy makers in the insurance domain. the paper is organized in the following order. first, a definition of the phenomenon of social inflation and a review of the literature related to it is presented. in the following section, we explain the data collected, the sample, and the methods of analysis. in the penultimate section, we present the results of the analysis and potential explanations and discussions. finally, the last part is reserved for concluding observations and recommendations. 2. literature review the term social inflation is related to the ways in which insurance company costs, i.e. claims, rise faster than economic inflation, including changes in social preferences about who is best placed to absorb risk (geneva association, 2020). alternatively, social inflation has a more specific meaning, that is, it describes the rise in liability risks and costs associated with litigation (heim, 2022). similarly, oh (2021) defines social inflation as “surges in insurance rates due to societal factors such as the high value of court judgments and the expansion of liability.“2 in contrast to general economic inflation, which insurers can mitigate using different pricing models and loss reserves, social inflation can result from factors that are difficult to predict, such as increased costs from: increases in the number and amount of judgments; legal proceedings taking longer than reasonably expected; annulment of legal limitations for non-material claims, etc. although social inflation is an old-new phenomenon, most of the discussion focuses on developed countries, more specifically, the united states of america. dunsavage (2019) identifies the problem of "litigation funding"3 in florida where attorneys have no limit on commissions when representing insureds in claims settlement litigation. additionally, dunsavage (2020а; 2020b) highlights us claims movement trends according to data from the national association of insurance supervisors and discusses how the covid-19 crisis is fueling social inflation. also, dunsavage (2021) points out that motor third-party liability insurance, professional liability insurance, product liability insurance, and directors' and officers' liability insurance are the most affected insurance classes in terms of social inflation. furthermore, oh (2021) finds abnormal growth in the amount of judgments and settlements in the us for the period 2011-2019 and estimates the significant impact of social inflation on insurance prices in the long run. meanwhile, heim (2022) outlines the causes and consequences of social inflation with an emphatic reference to the problematic reform of the tort law framework in the united states. finally, the geneva association (2020) goes a step further and analyzes the problem of "litigation funding" and social inflation outside the us, but again including only a small set of developed and developing countries. the literature ignores the existence of social inflation in less developed countries, although the potential for its development exists, due to low rule of law and higher frequency of claims in motor third-party liability insurance. 2 in this context, the term “nuclear verdicts” is known. nuclear verdicts are court judgments or settlements that exceed a cumulative amount of $10 million (oh, 2021). these types of compensations are often much larger than the actual case and have significant effects, not only on the insurance company and policyholders, but often on the insurance industry as a whole in terms of risk-taking philosophy and approach to risk-taking. 3 litigation funding is the practice of third parties financing litigation in order to receive a certain percentage of the funds that the plaintiff would receive. 32 s. mecheski, i. joldeska, e. koseska, a. krstanoski, d. naumoski a theoretical model of social inflation is studied by oh (2021) and shows that a shock to the insurer’s loss distribution has a “double kick” effect on insurance supply through higher effective marginal cost and interaction of increased uncertainty with the capital requirement. it is more important to examine the impact of social inflation on insurance supply. firstly, the basis is to identify and to compare commercial and personal auto insurance prices before and after the famous tracy morgan settlement in 2015. this is widely known as the watershed moment for social inflation. after the comparison between commercial and personal auto lines was made it was concluded that corporate defendants are more exposed to social inflation risk than individual defendants (haran et al., 2016). heim (2022) noticed that social inflation seems to be a key driver of increased claims costs. with increased claims cost, come increased insurance prices. the newer phenomenon in insurance is social inflation, that revolves around the idea that insurance claims costs are rising faster than the normal rate of inflation. social inflation is a newer phenomenon in insurance that revolves around the idea that insurance claims costs are rising faster than the normal rate of inflation. possible drivers of this are expanded liability and evolving litigation strategies. according to this there is a variety of puzzling issues (oh, 2021). 3. data and methodology in order to answer the main question of this paper, that is, whether social inflation is a reality or a myth in the region and in the republic of north macedonia, we use data on the amount of gross premiums collected and the amount of claims paid in mtpl insurance in 11 countries from the balkans for the period 2011-2020 using xprimm's insurance industry databases and reports,4 and data on inflation movements for the same period and the same set of countries using the world bank database. 5 we expect claims growth to exceed average growth in the general price level if social inflation is a problem in the region. in addition, in order to analyze the potential drivers of social inflation, we extract data from the world bank database on the death rate caused by traffic accidents (per 100,000 inhabitants) and the rule of law index. higher traffic accident mortality should be correlated with abnormal growth in mtpl insurance claims, and that effect potentially depends on the country's institutional development. we only have data on the total amount of claims, the amount of which may decrease/increase due to a decrease/increase in the number of claims or a decrease/increase in the amount of individual claims. in that context, the increased amount of claims may be caused by a higher number of policies sold resulting in a higher number of claims, rather than by abnormal growth in the amount of claims. due to this shortcoming, first of all, we normalize the amount of claims with the amount of premiums and calculate the indicator, amount of claims paid per unit of premium in mtpl insurance. in addition, we calculate the annual growth of the same indicator for two equal periods, 2011-2015 and 2016-2020, and compare it with the average inflation for the same periods per individual country. if this indicator is significantly higher than the average inflation, then the problem of social inflation potentially exists. 4 data on premiums and claims are expressed in euros according to the current exchange rate. more about the data source at https://www.xprimm.com/about-us-42.htm 5 we use the platform databank (https://databank.worldbank.org/) from the world bank for extracting data for the selected indicators. https://www.xprimm.com/about-us-42.htm https://databank.worldbank.org/ social inflation in mtpl insurance 33 aggregate claims analysis at the country level can overlook individual movements within each insurance industry. therefore, we analyze the movements of the amount of claims at the company level in the republic of north macedonia for the period 2018-2021. we extract the data from the reports on the insurance industry of the insurance supervision agency of the republic of north macedonia. we normalize the amount of liquidated claims by the number of concluded mtpl insurance contracts for the current year. we compare the newly created indicator, amount of liquidated claims per insurance contract, with the predicted amount of liquidated claims per insurance contract under the assumption that the growth of claims follows the inflation rate in the republic of north macedonia (starting from 2018). if the real indicator exceeds the forecast, then this indicates that the company is facing social inflation, that is, the amount of claims per insurance contract is growing faster than the growth of the general level of prices. 4. analysis figure 1 shows the average amount of claims paid out per unit of premium and the death rate caused by a traffic accident in the eleven countries of the balkans ordered by the rule of law index. it is expected that average claim payout would be higher where the death 6 data on the death rate from traffic accidents is not available for kosovo 1244. fig. 1 average amount of claims paid per unit premium, average rule of law index and average mortality caused by traffic accidents (per 100,000 inhabitants) for the period 2011-20206 source: authors' calculations based on data from xprimm and the world bank 34 s. mecheski, i. joldeska, e. koseska, a. krstanoski, d. naumoski rate is higher. according to the data, the mortality rate is not too high in slovenia, hungary and romania, and yet the payment of claims per unit of premium is significant. for example, in slovenia, on premiums of €100,000, as much as €60,000 is paid for claims, although the death rate from traffic accidents is the lowest. in countries with a better rule of law, the payment of claims per unit of premium corresponds to the death rate from traffic accidents. on the other hand, in bosnia and herzegovina and albania there are no large claims payments per unit premium, while the mortality rate is significantly higher. the situation is similar with all non-eu countries in the sample, i.e. in countries with worse rule of law there is no significant relationship between the payment of claims per unit premium and the death rate from traffic accidents. based on these data, we can say that large payments of claims and the problem of social inflation are most likely present in more developed countries, that is, eu member states where there is a better rule of law. figure 2 shows the average annual growth of the amount of claims paid per unit premium in mtpl insurance for two equal periods, 2011-2015 and 2016-2020, which is compared with the average inflation for each of the countries examined, individually. from what is shown, we can notice that this indicator is significantly higher than the average inflation in romania (for the period 2016-2020), croatia (for the period 2011-2015) and slovenia (for the period 2011-2015). for the rest of the countries, the indicator is at the level of the growth of the general level of prices or a significant annual decline is observed fig. 2 average annual growth of the amount of claims paid per unit premium and average inflation for two five-year periods (2011-2015 and 2016-2020) source: authors' calculations based on data from xprimm and the world bank social inflation in mtpl insurance 35 for certain countries. if we look at the section on the republic of north macedonia, we will notice that for the first examined period (2011-2015) the average annual growth of the amount of claims paid per premium is decreasing instead of increasing according to the average inflation, while for the second period (2016-2020) that indicator is slightly higher than average inflation. from the graph, we can conclude that in general the eu countries where the examined indicator is significantly higher than the average inflation (romania, croatia and slovenia) are potentially facing the problem of social inflation, unlike the rest of the countries, mainly non-eu countries, where a lower growth rate of the amount of claims paid per unit premium can be observed compared to average inflation. lastly, figure 3 shows the indicator – the average amount of liquidated claims per mtpl insurance contract, for the last four years, at the level of companies in the republic of north macedonia (colored rectangles). we compare it with the predicted amount of liquidated claims per insurance contract, assuming that the growth of claims follows the inflation rate in the republic of north macedonia (red dots), in order to determine whether there is social inflation. as we can see from the graph itself, the insurance industry in the republic of north macedonia does not face such situation, when the amount of claims per insurance contract grows faster than the growth of the general level of prices, which fig. 3 amount of liquidated claims per insurance contract (rectangle) and simulated amount of liquidated claims per insurance contract (point) by companies in the republic of north macedonia (in 000 denars) source: authors' calculations based on data from the insurance supervision agency of the republic of north macedonia 36 s. mecheski, i. joldeska, e. koseska, a. krstanoski, d. naumoski indicates that there is no social inflation. the only exception are the insurance companies, eurosig and sava, which in the last two or three years have been facing an abnormal growth in the amount of claims. but despite that, we cannot say with certainty that there is a systematic occurrence of social inflation. in summary, the results show that the emergence of the phenomenon of social inflation depends on the regional and temporal context. countries that belong to the european union and that have a better rule of law potentially face abnormal growth in mtpl insurance claims depending on the death rate from traffic accidents. however, social inflation in these countries can occur in certain periods of time and is not a long-term phenomenon. on the other hand, countries that do not belong to the european union and that have a worse rule of law do not face the problem of social inflation. although the above may represent good news for insurance companies in these countries, the results may indicate a bigger problem in terms of citizens' trust in institutions and the education of policyholders related to the process, rights and obligations after the occurrence of damage from mtpl insurance. furthermore, non-eu countries have less competitive insurance markets with a concentration of market power in just a few companies. low institutional development supplemented by concentration of power in the insurance industry can prevent the proper functioning of the system and the fair fulfillment of the rights and obligations of policyholders and insurance companies. 5. conclusion and recommendations insurance companies are not immune to the negative effects of inflation in the postpandemic period. in addition, companies face an old-new type of inflation, so-called social inflation. social inflation includes all the influences through which the amount of insurance companies' claims grows faster than the general economic inflation the average rise in prices. this phenomenon in the long run may increase existing insurance prices, cause reduced supply and demand for insurance, as well as reduced capacity by increasing the number of exclusions in insurance contracts. the literature so far, analyzes this phenomenon in the usa and in some of the developed countries, but a similar analysis is missing for the balkan region where the insurance markets are relatively undeveloped and where the dominant share is taken by mtpl insurance, as the class of insurance most affected by social inflation. the purpose of this paper is to find out whether the insurance companies in the republic of north macedonia and in the countries of the balkans face the problem of social inflation and abnormal growth in the amount of claims. the results show that the emergence of the phenomenon of social inflation depends on the regional and temporal context. countries that belong to the european union and that have a better rule of law potentially face abnormal growth in motor third-party liability insurance claims depending on the death rate from traffic accidents. however, social inflation in these countries can occur in certain periods of time and is not a long-term phenomenon. on the other hand, countries that do not belong to the european union and that have a worse rule of law do not face the problem of social inflation. analyzing the macedonian motor liability insurance market, we do not find systematic evidence of the existence of social inflation and abnormal growth in the amount of claims. social inflation in mtpl insurance 37 this paper presents the first analysis of the phenomenon of social inflation for the countries of the balkans. in addition, we analyze the problem of social inflation in a specific and international context where there are differences in the institutional development of the selected countries. we discuss that social inflation is a problem of developed countries where there is a better rule of law and there is more trust in the institutions by the citizens. on the other hand, in less developed countries such as the republic of north macedonia, there is no solid evidence of the existence of an abnormal increase in claims. in that context, low institutional development and low trust in institutions potentially prevent the development of social inflation. in addition, highly concentrated insurance markets may prevent the development of social inflation. although the absence of social inflation in the region should be understood in a positive context, it can nevertheless hide a significant problem in terms of citizens' trust in institutions and the education of policyholders related to the process, rights and obligations after the occurrence of damage from mtpl insurance. based on the conclusions, we recommend to the regulatory bodies in the region to increase their efforts in educating the population about the rights and obligations of the insured persons after the occurrence of damages in mtpl insurance. in addition, we recommend that insurance companies and institutions should work towards protecting the interests of consumers in order to restore citizens' trust in institutions and the insurance industry as a whole. references dunsavage, j. (2019, november 8). florida’s aob crisis: a social-inflation microcosm. retrieved from https://www.iii.org/insuranceindustryblog/floridas-aob-crisis-a-social-inflation-microcosm/ dunsavage, j. (2020a, june 2). irc study: social inflation is real, and it hurts consumers, businesses. retrieved from https://www.iii.org/insuranceindustryblog/irc-study-social-inflation-is-real-and-it-hurts-consumersbusinesses/ dunsavage, j. (2020b, july 6). social inflation and covid-19. retrieved from https://www.iii.org/ insuranceindustryblog/social-inflationand-covid-19/ dunsavage, j. (2021, july 14). social inflation: eating the elephant in the room. retrieved from https://www.iii.org/insuranceindustryblog/social-inflationeating-the-elephantin-the-room/ geneva association. (2020). social inflation: navigating the evolving claims environment. the geneva association—international association for the study of insurance economics. zurich. retrieved from https://www.genevaassociation.org/sites/default/files/research-topics-documenttype/pdf_public/social_inflation_web_171220.pdf haran, u., teichman, d., & feldman, y. (2016). formal and social enforcement in response to individual versus corporate transgressions. journal of empirical legal studies, 13(4), 786-808. https://doi.org/10.1111/jels.12133 heim, n. (2022). social inflation: rising tides in the insurance markets. retrieved from https://scholars.indstate. edu/handle/10484/12529 oh, s. (2021). social inflation. ssrn. retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3685667 swiss re. (2010). sigma no. 4/2010: the impact of inflation on insurers. swiss re. zurich. retrieved from https://www.swissre.com/institute/research/sigma-research/sigma-2010-04.html socijalna inflacija u osiguranju od autoodgovornosti industrija osiguranja se suočava sa negativnim efektima inflacije u postpandemijskom periodu. pored ekonomske inflacije, industrija osiguranja se suočava i sa fenomenom socijalne inflacije, odnosno abnormalnog rasta šteta uzrokovanih različitim društvenim faktorima. u ovom radu ispitujemo da li se osiguravajuća društva na balkanu suočavaju sa socijalnom inflacijom. analiziramo stopu rasta šteta od autoodgovornosti u 11 zemalja regiona za period 2011-2020, uključujući i detaljniju analizu tržišta https://www.iii.org/insuranceindustryblog/floridas-aob-crisis-a-social-inflation-microcosm/ https://www.iii.org/insuranceindustryblog/irc-study-social-inflation-is-real-and-it-hurts-consumers-businesses/ https://www.iii.org/insuranceindustryblog/irc-study-social-inflation-is-real-and-it-hurts-consumers-businesses/ https://www.iii.org/insuranceindustryblog/social-inflationand-covid-19/ https://www.iii.org/insuranceindustryblog/social-inflationand-covid-19/ https://www.iii.org/insuranceindustryblog/social-inflationeating-the-elephantin-the-room/ https://www.genevaassociation.org/sites/default/files/research-topics-document-type/pdf_public/social_inflation_web_171220.pdf https://www.genevaassociation.org/sites/default/files/research-topics-document-type/pdf_public/social_inflation_web_171220.pdf https://doi.org/10.1111/jels.12133 https://scholars.indstate.edu/handle/10484/12529 https://scholars.indstate.edu/handle/10484/12529 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3685667 https://www.swissre.com/institute/research/sigma-research/sigma-2010-04.html 38 s. mecheski, i. joldeska, e. koseska, a. krstanoski, d. naumoski osiguranja u republici severnoj makedoniji. rezultati pokazuju da ne postoji sistematsko postojanje socijalne inflacije, ali su uočljivi povremeni abnormalni pomaci za pojedine zemlje u regionu, posebno zemlje eu, odnosno pojedine kompanije u republici severnoj makedoniji. pored toga, nalazimo da se socijalna inflacija javlja u zemljama sa višim indeksom vladavine prava, što ukazuje da niska institucionalna razvijenost i nisko poverenje u institucije potencijalno sprečavaju razvoj socijalne inflacije. rad doprinosi aktuelnoj literaturi analizirajući problem u međunarodnom kontekstu iu novom regionu, kao i dajući preporuke za kreatore politike. ključne reči: socijalna inflacija, balkan, osiguranje od autoodgovornost plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 4, 2016, pp. 379 386 doi: 10.22190/fueo1604379m preliminary communication profitability analysis of meat industry in serbia1 udc 061.5:637.5(497.11) kristina mijić, stanislav zekić, dejan jakšić university of novi sad, faculty of economics subotica, serbia abstract. in this paper, profitability analysis of meat processing industry in serbia was carried out for the period 2011-2015. meat processing industry is one of the profitable sectors in the republic of serbia, with an average rate of roa of 5.29. even though companies in meat processing industry achieve positive net income, profitability is below referent value. in order to investigate which internal factors have a significant influence on the profitability of meat processing industry, a panel data regression was realized. the results show that companies with high liquidity ratio and growth in sales achieve better roa. on the other hand, high debt ratio negatively influences the level of roa. furthermore, the results show that the size of the company, fixed assets ratio and rate of investment, do not have much influence on the profitability of meat processing industry. key words: meat industry, profitability, internal profitability factors. introduction – state and perspective of meat industry in serbia at the beginning of the global economic crisis, at the end of the first decade of the 21 st century, the serbian academic and professional community established agro-economy sector as the bearer of economic development. since it is clear that plant and animal production cannot be, due to the biological and economic constraints, all, the manufacturing sector is also placed as crucial for economic development. according to this, manufacturing sector, together with the agricultural production, presents an important agro-food system. the manufacturing sector, which is also known as agro-industry, includes also the manufacture of food, beverages, animal food and tobacco products. food production, according to its importance, stands out from this group. furthermore, processing of meat products also has an important place in this group. the importance of this sector, as well as the general processing sector, resulting from the conversion of raw materials into final products with greater value, which is, due to the relatively low level of finalization of serbian agricultural production, important for the entire agricultural sector in serbia. 1received september 26, 2016 / accepted november 14, 2016 corresponding author: kristina mijić university of novi sad, faculty of economics, segedinski put 9-11, 24000 subotica serbia e-mail: mijick@ef.uns.ac.rs 380 k. mijić, s. zekić, d. jakšić the meat industry is one of the major sectors, especially with significant increase of the added value of livestock production. the livestock is a generator of the intensity of agricultural production, and it can be a significant factor in the overall development of agroeconomy together with the developed sectors of processing livestock products. also, the development of the meat industry would have positive effects on the agricultural holdings engaged in livestock production, which is very important for the social stability in rural areas. furthermore, the development of the entire meat production chain will have a positive impact on the export performances of serbian agro-economy, observed through the export value per unit of labor engaged and / or arable land. the reason is that meat and meat products are included in the agricultural products with the highest added value. in the last ten years, in the period 2006-2015 the average annual production of meat in serbia was over 460 thousand tons. the biggest part of that includes the production of pork more than half of total meat production. in the second place is the production of beef and poultry, about 18% of each category. at the last place is the production of muttonabout 5%. during this period there has been a decline in the production of two most common categories of meat, which is especially pronounced in beef, while the production of pork has the stagnant tendencies. the increase was present in the production of mutton, and the production of poultry has similar characteristics. those tendencies are, of course, more or less in correlation with the movement of the number of certain categories of livestock units (statistical office of the republic of serbia). the general characteristic of the manufacturing industry in serbia is the low level of capacity utilization as a result of the political and economic environment of the former yugoslavia where the majority of the capacity was created. in previous decades, this industry has shared the fate of agricultural production, so that after stagnation during the eighties, there was a decline in the nineties of the last century, which was accompanied by a reduction in employment in this sector. in the period after 2000 in serbia, there was somegrowth of production in the manufacturing sector, but further employments reductions (gajić m., s. zekić, 2013). for meat production in serbia, it is characteristic that only some of the animals are slaughtered in slaughterhouses, about 50%, and this number varies depending on the type of livestock (the lowest is associated with sheep and the largest with poultry). the poultry industry represents the most industrialized livestock sector, among the whole of agriculture, so it is not surprising that in serbia over 60% of the livestock are slaughtered in slaughterhouses. for cattle and pigs, this percentage is much smaller at 44% and 33%, respectively. keeping sheep in serbia is characteristic of underdeveloped areas and small semi-subsistence farms, so the small share, about 5% of sheep which are slaughtered in slaughterhouses, is relatively expected (statistical office of the republic of serbia). a large proportion of slaughtering on farms is quite typical for the more developed eu countries, where it has the marginal character. in general, the most important factor in the economic viability of any manufacturing industry is the level of profitability that it achieves. long-term profitability enables the achievement of economic growth and development. furthermore, the identification of factors affecting the level of profitability is of great significance. these findings may represent useful information for companies operating in a particular sector, but also for the policies that should enable the propulsive development of certain economic sectors. in other words, the results of the study may represent strategic development guidelines, both for the individual production companies, as well as the entire sector. for this reason, the main goal of this paper is to analyze the factors of the profitability of the meat profitability analysis of meat indrustry in serbia 381 processing sector in the republic of serbia in the period 2011-2015. the first part of the research will give the answer to the question whether the meat processing sector is profitable. furthermore, the analysis of trend and fluctuations in profitability will be conducted. the second part of the paper will identify the internal factors of companies that significantly affect the level of profitability of meat processing sector. 1. describe data and methodology 1.1. profitability and profitability factors in order to analyze profitability and profitability factors, first, the profitability ratio as dependent variable and factors of profitability as independent variable are defined. the profitability variable as a dependent variable can be represented by several ratios, such as return on assets, return on equity etc. according to asiri (2015) the most relevant determinant in explaining the market value of enterprises is roa, so the profitability of meat processing industry is represented by roa. roa is defined as the firm`s book value of net profit after tax divided by total assets. on the other hand, as factors of profitability, or independent variables, were defined size, current ratio, leverage, fixed assets ratio, growth, and investment. the size of company can be measured by several proxies, such as natural logarithm of the assets, sales or employees. larger companies have the ability to generate higher income, have better access to capital markets (titman, wessels, 1998), and lower cost of borrowing (whited, 1992). according to this, it is expected that profitability and the size of company are positively related. the current ratio measures the ability of the company to pay short-term liabilities. the current ratio is calculated as a ratio of current assets to current liabilities (rodic, vukelic, andric, 2007). according to this, it is expected that greater firm ability to pay short-term liabilities is positively related to the profitability. leverage as a ratio of total debt to assets indicates the level of the company`s debt (rodic, vukelic, andric, 2007). higher debt can be negatively related to the profitability because high debt requires more resources to pay the debt. fixed assets to total assets ratio indicates the using of working capital and company`s ability to carry accounts receivable and maintain inventory. if the fixed assets ratio is 0.5 and higher, this will limit company`s ability to adequately react to increased demand. so, the higher fixed assets ratio is usually negatively related to the profitability (pratheepan, 2014). growth is calculated as the growth rate of sales in two consecutive periods. if the firm achieves greater growth in sales, that means it provides additional income for the current period. therefore it is expected that growth affects profitability positively (asimakopoulos et al. 2009, geroski et al. 1997). investment refers to increase in fixed assets, and it is calculated as the growth rate of gross fixed assets in two consecutive periods. it is expected that investment affects profitability positively since it expands production capacity, in order to improve sales and at the end to increase profit (asimakopoulos et al. 2009; guariglia, 2009). 382 k. mijić, s. zekić, d. jakšić table 1 profitability and profitability factors ratio calculation unit referent value profitability return on assets (roa) ni/taavg ratio >0.1 profitability factors size natural logarithm of s higher value preferred current ratio ca/cl ratio >2.0 leverage d/ta ratio =0.5 fixed assets to total assets ratio fa/ta ratio <0.5 growth (st – st-1) / st-1 ratio higher value preferred investment (fat – fat-1) / fat-1 ratio higher value preferred source: author’s illustration (based on asimakopoulos et al., 2009, rodić et al. 2007). where: ni – net income taavg – total assets (average) ca – current assets cl – current liabilities d – debt fa – fixed assets s – sales t – current period t  1 – previous period 1.2. data the data used in this study refer to a sample of serbian meat processing companies for the period 2011-2015. the data were collected from the database of official serbian business registers agency, and include a detailed balance sheet, income statement, and other data on serbian large and medium sized meat processing companies (official serbian business registers agency, 2016). the original set includes 16 enterprises. in order to construct balanced panel data and avoid effects of new enterprises, and enterprises that shut down during the period, our sample consists of the enterprises that operated during the whole period 2011-2015. furthermore, the missing or abnormal data were removed, so the final sample consists of 12 companies. table 2 shows descriptive statistics of the dependent and independent variables of profitability for meat processing companies for the period 2011-2015. table 2 descriptive statistics of profitability ratio and factors of profitability of meat industry in serbia variable observation mean std. dev. min max roa 60 0.0529 0.0439 0.0003 0.1796 size 60 14.9804 1.0974 13.0753 16.8203 current ratio 60 1.5557 0.6796 0.5544 3.4093 leverage 60 0.5572 0.2256 0.1899 0.9453 fixed assets to total assets ratio 60 0.5444 0.1137 0.3297 0.7578 growth 60 0.1207 0.1879 -0.3587 0.5359 investment 60 0.1452 0.2527 -0.3989 0.4018 source: author’s calculation profitability analysis of meat indrustry in serbia 383 meat processing companies in the republic of serbia achieve average positive profitability, but the level of profitability is below the referent value of 0.10. the following table shows the profitability and factors of profitability during the period 2011-2015. table 3 trend of profitability and profitability factors in the period 2011-2015 variable 2011 2012 2013 2014 2015 2011-2015 roa 0.0442 0.0555 0.0603 0.0554 0.0588 0.0529 size 14.6429 14.9315 14.8922 14.9943 14.9408 14.9804 current ratio 1.4036 1.3515 1.6782 1.6292 1.5098 1.5557 leverage 0.5643 0.5211 0.5831 0.5894 0.5382 0.5572 fixed assets to total assets ratio 0.5354 0.5027 0.5893 0.5563 0.5206 0.5444 growth 0.1221 0.1316 0.1563 0.1187 0.1488 0.1207 investment 0.1238 0.2437 0.0958 0.1589 0.1697 0.1452 source: author’s calculation the profitability of meat processing companies has characteristics of fluctuation. until 2013 profitability was in growth to 0.060. then, in 2014 the level of profitability has fallen down to 0.055, and in the 2015 profitability has a little growth to 0.058. if we compare the profitability in 2015 and 2011 it can be concluded that profitability level of meat processing companies raises for 30%. even though the profitability of meat processing companies is positive, they have a problem to achieve liquidity, because during the period 2011-2015 current ratio is below the 2 as referent value. the higher leverage than 0.5 indicates that the meat processing companies activities are financed more with debts than the capital. furthermore, the leverage is very different among meat processing companies. the lowest leverage is 0.19, while the highest leverage is 0.94. the companies with lower leverage have the ability to increase profitability with additional debt. on the other hand , companies with high debt ratio have a problem to solve the current debt. also, these companies do not have the ability to increase profit with additional debt. during the period 2011-2015, meat processing companies have growth in sales. sales growth is on average 0.14 each year. 1.2. hypothesis and methodology in order to investigate profitability factors of large and medium sized meat processing companies in the republic of serbia a panel data techniques were conducted. according to this, the following hypothesis is defined. h0: firm internal characteristics, such as size, current ratio, leverage, fixed assets to total assets ratio, growth, and investment of serbian meat processing companies have a significant impact on profitability. a major motivation for using panel data has been the ability to control for possibly correlated, time-invariant heterogeneity without observing it (williams, 2015). the two models, depending on the nature of the variables, are included into this estimation. if variables are constants over time, random effect model is better (hsiao, 2010). random effect model is given as (bruderl, 2005): 0 1it it it it y x v      (1) 384 k. mijić, s. zekić, d. jakšić it is assumed that the vi are random variables (random effects) and that cov (xit, vi) = 0. using a pooled-gls estimator provides the random effects estimator. the following transformation is required to estimate random effects model from the pooled regression (bruderl, 2005): if independent variables vary over time, then the use of fixed effects model is appropriate. 1it it it it y x v    (2) the answer to the question which model (fixed effects or random effects model) is appropriate will be realized by tests model validation such as bresuch-pagan larange multiplies test and hausman test. 2. results table 4 summarizes the results of panel data regression analysis when random effect and fixed effect estimation were used for meat processing companies. table 4 results of panel data regressions factors of roa results random effect fixed effect size 0.0041 0.0055 current ratio 0.0027 0.0021 leverage 0.0668 0.0676 fixed assets to total assets ratio 0.0656 0.0885 growth 0.0562 0.0618 investment 0.0039 0.0021 r sq. = 0.4864 r sq. = 0.4908 prob> chi 2 =0.004 prob> f=0.003 source: author’s calculation test and validation of the models were conducted before results interpretation. the selection of appropriate model between random effect and fixed effect is based on the hausman test. the hausman test result indicates the use of random effect model (p=0.9680 is greater than 0.05). table 5 result of hausman test test result conclusion hausman test – testing of random effect vs. fixed effect model chi 2 (7) = (bb)'[(v_bv_b)^( 1)](bb) = 1.36 prob>chi 2 = 0.9680 random effect model is appropriate. source: author’s calculation based on the result reported in table 5 the following factors have a significant influence on the profitability of meat processing companies in serbia: current ratio, leverage, and growth. on the other hand, independent variables such as size, fixed assets ratio, and investment are not significantly related to the profitability of meat processing industry. according to this findings, it can be concluded that hypothesis h1 is partially confirmed. profitability analysis of meat indrustry in serbia 385 the results indicate that current ratio and growth are positively related to the profitability. meat processing companies with the higher current ratio, have a better ability to pay short-term liabilities, and also achieve better profitability. this is in accordance with findings of other authors (barbosa and louri, 2005; kuntluru et al. 2008). sales growth, as expected, positively influences a firm’s profitability. the ability to increase the sales provides higher revenues as a positive component of net result. on the other hand, leverage is negatively related to the profitability. this means that meat processing companies with high debt ratio have a lower net result. higher debt negatively influences profitability because higher debt requires more resources to pay the debt. this finding is in accordance with the finding of asimakopoulos et al. (2009) and al-jafari and samman (2015). conclusion the research results show that the meat industry in serbia has been operating profitably, but the level of profitability was below the reference value in the period 20112015. although at this time there are fluctuations in the level of profitability, there is a positive trend, so in 2015 the level of profitability of this industry is about 20% higher than in 2011. the key factors that influence the level of profitability were identified: liquidity ratio and sales growth, with a positive impact, and the level of indebtedness that has a negative impact. there is a clear positive correlation between the growth and liquidity on the level of profitability, while the level of indebtedness, present in serbian meat industry cannot have a positive impact on profitability. the reason is that the companies in meat processing sector have a problem of high debt ratio. the results indicate that meat processing companies do not use additional debt in investment that will increase profitability ratio. debt ratio over referent value, and the situation that high debt ratio is negatively correlated to profitability, indicates that companies are more using additional borrowing to solve present debt and problems in business operations. in order to improve profitability ratio, meat processing companies first must reduce the level of indebtedness and start to use additional borrowing for adequate investment. on the other hand, the size of the company, the fixed assets ratio, and investment growth as factors of profitability are not significant variables for the companies in the meat processing industry in serbia. these results are not surprising when you take into account previously expressed fact of oversized manufacturing industry, and one of its parts which was created in the period of centrally planned economy. these results show that the growth in profitability in the meat industry will be significant with increasing capacity for utilization through sales growth. also, great caution is required with borrowing, which should be directed towards the growth of competitiveness in the domestic and international market. the question of competitiveness is a very important one due to the process of european integration. the reason is that the entire agro-food sector in serbia, including the meat industry, will be faced with a very high pressure by manufacturers from eu countries. 386 k. mijić, s. zekić, d. jakšić references asimakopoulos, i., samitas, a., papadogonas, t. 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(2015). panel data: very brief overview. retrieved from: https://www3.nd.edu/~rwilliam/stats2/ panel.pdf accessed on: may, 10 2016. analiza profitabilnosti mesne industrije u srbiji u radu je sprovedena analiza profitabinosti mesne prerađivačke industrije u srbiji u periodu 2011-2015. godina. mesna prerađivačka industrija je profitabilna, uz ostvarivanje prosečne stope profitabilnosti od 5.29. i pored konstantnog poslovanja sa dobitkom, preduzeća u okviru ovog sektora ne uspevaju da ostvare referentni nivo profitabilnosti. u cilju ispitivanja koji interni faktori utiču na profitabilnost preduzeća u mesnoj prerađivačkoj industriji, sprovedena je regresiona analiza na bazi panel podataka. rezultati ukazuju da preduzeća sa visokim raciom likvidnosti i pozitivnom stopom rasta prodaje ostvaruju bolju profitabilnost. sa druge strane, visok stepen zaduženosti je negativno povezan sa stepenom profitabilnosti preduzeća. dalje, rezultati su ukazali da veličina preduzeća, racio fiksne imovine i nivo investija ne predstavljau značajne faktore koji utiču na smer i intenzitet profiabilnosti mesne industrije u srbiji. ključne reči: mesna industrija, profitabilnost, interni faktori profitabilnosti. http://www2.sowi.uni-mannheim.de/lsssm/veranst/panelanalyse.pdf http://www2.sowi.uni-mannheim.de/lsssm/veranst/panelanalyse.pdf http://www.apr.gov.rs/ http://webrzs.stat.gov.rs/ https://www3.nd.edu/~rwilliam/stats2/panel.pdf https://www3.nd.edu/~rwilliam/stats2/panel.pdf plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 3, 2016, pp. 273 286 review paper value stream performance measurement and the lean business concept 1 udc 65.015.25 bojana novićević čečević, ljilja antić faculty of economics, university of niš, serbia abstract. lean business concept is characterized by providing value required by customers, prompt delivery of products, eliminating all forms of waste from production process as well as from all business processes in the company, etc. in order to achieve and maintain competitive advantage, it is appropriate to carefully consider and apply the basic principles of lean business concept and establish a value stream. value stream is a basis for creating value for the customers, on the one hand, and for the enterprise, on the other hand. in that context, it is necessary to choose a set of performance measures for assessment of the value stream success, which is named box score. key words: lean business concept, value stream, box score, performance measurement introduction in a business environment which requires speedy response to customer demands, a high level of product quality, a shortened wait time, and other similar aspects, existing business concepts show their inadequacy. in these contexts, contemporary enterprises which aim to deliver the demanded value to the customers while striving for excellence apply, among others, the lean business concept. the first emergence of this concept was in the production process, in order to extend to all other parts of enterprise and relationship with suppliers, after achieving many improvements. conceptual basis for management and performance measurement with application of lean business concept is a value stream. value stream includes all activities from the suppliers to the customers and is not only connected to the production process. performance measurement in the lean business concept is carried out at the value stream level. there are not any precisely defined set of measures which should be applied to the value steam level, but with the purpose of following its success and its compliance 1received july 14, 2016 / accepted september 23, 2016 corresponding author: bojana novićević ĉeĉević faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: bojana.novicevic@eknfak.ni.ac.rs 274 b. novićević ĉeĉević, lj. antić with the objective and the strategy of enterprise, the application of box score is suggested. box score is a three-dimensional display of key performance measures of the value stream, which includes operational performance measures, performance measures of capacity and financial performance measures as well as their mutual relations. in that context, the first part of the paper is directed at lean business concept and its basic principles that represent the key point for the successful business. establishing of the values stream as a conceptual basis of new business environment is shown in the second part of the paper. at the end, the paper concerns the three-dimensional system performance measurement box score. through monitoring of operational performance measures, and measures of capacity and financial performance, it provides the insight to a way and effectiveness of available resources of the enterprise and to the overall efficiency of enterprise management. 1. lean business concept the roots of the lean business concept began after world war ii, only to spread worldwide during the mid-1950s after the publication of the book, the machine that changed the world. the authors of the book presented a model that was led by toyota company. this model helped japan's industry experience economic and social rebirth and take a leading position in the production of automobiles. this model is named lean and it implies more results with less use of human resources, equipment, time, and space that are needed for the production of products that meet the needs of demanding consumers. lean business concept raises the awareness of the need to create and increase value through a determination of factors that influence the value and control of performed activities and provides an undisturbed and continuous flow of process which at the same time achieves a given efficiency. in this manner, a higher value is achieved for the enterprise through increasing of profit of the value stream, reduction of inventories, and waste of resources. also it brings greater value to the customers through increasing of the quality and functionality of the product, reduction of time of delivery and waiting for the product. in the initial stages of development, lean business concept focused only on operation improvement. at that level, the tendency was with the implementation of certain lean techniques and tools to improve efficiency and reduce cost in the production process. the goal was to eliminate resource loss, deliver demanded value, achieve defined performance, ensure better understanding of process, and facilitate the improvement of business processes and performance (salehi & yaghtin, 2015). during the nineteen-nineties, the focus of lean business concept was extend from operating to strategic level. at the strategic level the tendency was towards understanding of value which is provided to the customers in terms of product quality, cost, speed of delivery, etc. lean business concept was first implemented in the production process. its implementation enables a lot of positive improvement, and after that it is extended to all business processes and all activities. extended application of lean business concept led to forming of a lean enterprise. lean enterprise consists of a group of individuals which within legal norms perform their task or carry out functions in such a way that creates a synchronized company (womack & jones,1994). value stream performance measurement and the lean business concept 275 basic principles of lean business concept are (hilker & carsten, 2011):  specify value  the value stream  flow  pull system  perfection the value that is created within the enterprise is defined by the ultimate consumers. the ultimate customer defines the characteristics of the product that will meet their needs in the best way, and a manager of enterprise accepts that value as an objective which should be produced in order to meet the consumer demands and increase their loyalty. value defined in such a way should be communicated to all the employees involved in the creation and delivery of it. the second principle refers to the establishing of the value stream. value stream includes all activities that are necessary for creating the value for the customers. in the value stream are joined all the activities that are necessary to be performed from the moment of creating of idea of the product, through its production to the moment of delivery to the ultimate final customers. as the value stream represents the conceptual basis for managing in the new business environment, it will be dedicated a special attention in the second part of the paper. once the value is identified and the value stream is established, it is necessary to put the attention on the real object, i.e. the specific design, order and the product itself. in that context, the efforts of the management and executives would be on eliminating all the obstacles to the continuous flow of product products. at the end, management should inspect once again the overall flow of product in order to avoid duplication of the activities and eliminate unnecessary activities in the business. introduction of pull system is the fourth principle of lean business concept which is implemented in a contemporary enterprise. as the purpose of lean enterprise is the reduction of waste and the elimination of non-value added activities, introducing pull system is of great importance for that process. pull system is focused on the demands of customers and, in that context, it is tent to providing of the conditions to start with production of product at the time when the manager gains a signal from the market. the customers are those who determine when to begin with the production of required value. with the application of lean business concept the transformation process into lean enterprise and the process of the continuous improvement does not end. when one enterprise gains the attention of the customers, it wants to keep it by anticipating future needs of the customers and creating products which will meet their needs, and in that way build an image of being sensitive to customers and create an image on the market as a quicker producer of products better than those of their competitor (novićević et al., 2013). 2. value stream – conceptual basis of managing and measuring of performance value stream includes all the activities and tasks that are carried out in the enterprise with a purpose of creating the value for the customers (baggaley & maskell, 2003a). it is both the spot where the value is created for the customers and at the same time where waste and nonvalue activities occur. 276 b. novićević ĉeĉević, lj. antić establishing the value streams implies previously identifying the resources and tasks that are performed in the enterprise. in one value stream, there are products with similar characteristics that pass through similar production process, machines and use the same resources. production process is one part of the value stream, and it is necessary to distinguish between these two terms. if the value stream is identified with the production process, the managers will not be able to look at the overall flow of the product thought the enterprise and will not get a clear picture of the flow of the material, information and cash through the enterprise. lack of the clear picture of the product flow will lead to the inability to detect where the resources are consumed unreasonably and the waste appears, and therefore it would be impossible to make an improvement of business. the best way to identify all resources, works and tasks that are carried on in the enterprise is the physical inspection of the process. in that manner one can get an accurate picture of current functioning of the business process. the majority of the employees in the enterprise know only the activities and the tasks that they perform, so the development of the diagram of the entire process will be the key for establishing the overall process of the business. in addition to showing all the details of the process, the purpose of the allencompassing diagram is to provide understanding of material flow, identity of waiting and delay, the level of inventory and the other relevant information (maskell et al., 2012). for the enterprises that produce a small number of similar products, it is relatively easy to establish value stream. in some enterprises it is possible to establish a main value stream, and beside it, there exist some other products that cannot be included in the main value stream. in order to be an efficient enterprise and to successfully perform its activities it is desirable for there to exist three or four value streams. the most frequent value streams identified in the enterprise may be: the realization of orders, gaining new customers, new product development, process control, etc. in addition to the number of value streams in the enterprises, their size should be defined in terms of the number of employees that are participating in it, and the number of machines that are used. the desired outcome is that all the employees would be connected to some value stream. it is suggested that in one value stream participate between 25 and 150 people. this is due to the fact that too many employees in one value stream may move the focus of value stream from the improvement of activities, and too few people would not be enough for effectively carrying out of the activities. in order to realistically assign a cost to each value stream it is desirable for each value stream to have its own machine that is used only in it. this is according to the need of overcoming the cost allocation and finding adequate allocation keys. however, some enterprises have used large and complex machines that are shared among more than one value stream. from a long-term perspective, managers of that enterprise should find a way to avoid cost allocation, because that may have multiple benefits for the operation of the enterprises. value stream manager controls the value stream. value stream manager should have certain knowledge and skills, and should be attached to the enterprise and understand and establish a relationship between the objective of the value stream and strategic objective of the enterprise (tapping et al., 2002). furthermore, in order to improve the business process and achieve perfect quality it is preferred that value stream manager comprehends the essence of lean business concept and for that knowledge to be relayed to all employees. in addition to the value steam manager, and for the purpose of monitoring accomplished improvement, in each value stream there exist the continuous improvement team. the purpose of the continuous improvement team is the analysis of the performance of the value stream performance measurement and the lean business concept 277 specific values stream every week and the recommendation of the project of the performance improvement. the tool of the lean business concept which is very helpful for understanding the current processes in the enterprise and the establishing of the value stream is the value stream map. mapping the value stream involves monitoring the occurrence of products from suppliers to consumers. this process begins with a careful analysis and presentation of the current state of the business process. the result of mapping the value stream in the graph that visually shows the entire process of creating value in the enterprise with the documentation of time, waste and cost. value stream mapping helps managers of the enterprises to consider and better understand the functioning of the entire business process. value stream map is important for the following reasons (rother & shook, 2003; womack et al., 2003):  focus is on the customer,  allows timely presentation of the activities flow,  establishes a common language with a high level of standardization of symbols,  allows analysis of current values,  the flow of information and their impact on the launch of other activities, and  shows where certain activities add value, and where in the course are value losses. creation of the value stream in the enterprise is important for several reasons. establishing of the value stream allows enterprise to respond to the demand of the customer through the delivering of asked value and, thus, realize defined goals and achieve appropriate business result. also, the non-value activities are eliminated, defects are reduced, waste is eliminated, etc. the correctly established value stream will expose any potential delays and bottlenecks that may occur in the process of creating the value. based on that information, the managers may make the plan of correction activities for eliminating possible interruption in a timely manner. the correctly established value stream in the best way points to the flow of material, information, and cash throughout the enterprise. 3. threedimensional approach of performance measurement lean business concept is a kind of business philosophy that firstly had to be accepted from the top managers who will spread and implement it to the employees on the lower level of the organization. the implementation process of lean concept starts with a research and analysis of the existing way of working and based on that choosing of certain lean technique that may be applied in the specific business practice. in order to reach and maintain long term results, it is necessary that the lean business concept would be discreetly connected to the strategy of the enterprise, organization culture and the system of performance measurement. multiple useful tool for the monitoring of the implementation of strategy and managing of the enterprise which allows following the events through all levels and in all process and activities is the box score. box score includes financial information about business, nonfinancial information about operation measure and information about utilization of the capacity (debusk & debusk, 2013). performance measures that are entered in the box score are carefully selected and connected to the strategy of the enterprise in order to provide effective monitoring and maintaining the process of implementing of define business strategy. in that context, the box score represents an integrated system of performance measure of the value stream, and, as such, is an important source of the information for the employees in the enterprise (maskell et al., 2012): 278 b. novićević ĉeĉević, lj. antić  value stream managers use it to plan and evaluate the lean improvements,  members of the value stream use it for designing improvement programs that will have the biggest impact on the financial and operation result,  plant and division mangers use it to understand value stream improvement plans and to evaluate of the performance  other executive use it as a basis for simulating the potential impacts of the market trends and capital investment plans. through the monitoring of the performance measure that are contained in the box score, enterprises managers may obtain important information about the way of performing activities and operations in the value stream, the way of utilization of the recourses and the financial consequences. monitoring is provided due to the fact that box score, in addition to the information about current state, contains a required short term and long term future state as well as the potential changes. box score is a three-dimensional display of the value stream performance measure. operation performance is found in the first dimension, performance of the capacity utilization is found in the second dimension, and in the third dimension the financial performance is found. box score of an enterprise is shown in the table 1. table 1 box score report value stream performance measurement current state short term future state change long term future state o p e ra ti o n a l p e rf o rm a n c e m e a su re dock-to-dock time 20.5 days 4.5 days 16 days 4.5 days first time through 48% ftt 96% ftt 48% 96% ftt оn time shipment 90% 99% 9% 9% sales per person 24,389 25,346 957 35,906 average cost per unit 328.88 308.61 (20.27) 296.88 c a p a c it y u ti li sa ti o n productive capacity 19% 16% -3% 15% nonproductive capacity 59% 31% -28% 42% available capacity 22% 53% 31% 43% f in a n c ia l p e rf o rm a n c e m e a su re inventory value 58,502 13,997 44,505 13,997 value stream revenue 1,292,640 1,292,640 0 1,292,640 material cost 512,160 477,160 (35,000) 477,160 conversation cost 189,868 181,416 (8,450) 153,373 value stream profit 590,612 634,064 43,450 662,107 (adapted by: katko, s. n. (2014) the lean cfo, architect of the lean management system. ny: crc press. p. 4.) the positioning of capacity utilization performance measures between operational and financial performance measures in the box score is not accidental. this dimension of the box score is used for assessing the use of resources within the value stream and connecting the operational and financial performance measures. namely, when the operational performance measures are achieved through the appropriate lean improvements, capacity utilization performance measures also improve. capacity improvements are shown through the reduction of nonproductive capacity and through increasing the available capacity. in this way, value stream managers will be able to act proactively and to plan the use of available capacity to improve operations and increase profitability of the value stream. value stream performance measurement and the lean business concept 279 the first dimension of the box score is the operational performance measurement. operational performance measurement at the value stream level shows how successful value streams achieve their goals. some of the goals of the value stream may be: increasing of the output with existing resources, accelerating the flow, reducing the inventory level, achieving perfect quality, increasing productivity etc. there is not a defining set of the operational performance measurement for all the enterprises; the already selected set of the measures directly depends on the characteristics of the business of the enterprises. the most frequent performance measurement in the practice can be (stenzel, 2007):  dock-to-dock time,  first time through,  оn time shipment,  sales per person and  average cost per unit. the first operational performance measure is dock-to-dock time. dock-to-dock time measures the speed of conversion of raw material into finished product within the value stream, specifically, the time of the flow of material through the value stream. this measure presents the time it takes form the moment in which material entered the warehouse, the time it takes when the material is in the production process and the time when the material is on the inventory of work in progress and finished products (novićević et al., 2013). it is desirable for the dock-to-dock time to be as short as possible because that is the way in which the speed of material processing will be increased, the inventory level within the value stream will decrease, which in turn will cause the increasing of the value stream profitability. the calculation of this measure first implies calculation of the total quantity of material both in the inventory of work in progress and finished products, reported through the number of units that may be produced from that material. after that is calculated the average speed of delivery of finished product per hour within one week, which is calculated by dividing the number of units shipped within a week and the hours in the week. by dividing the total quantity of the material contained in all types of the inventory with an average speed of delivery finished product, the dock-to-dock time is gained. next performance measure within the box score is first time through (ftt). first time through shows the percentage of the product manufactured in the value stream that do not need any rework, repair, i.e. the percentage of the product that is produced immediately according to the required quality. this shows the number of the correct products in the value stream. this measure is particularly used by teams working on the continuous improvement time, because it directly exposes any problems in the business process, the cause of the existing problems and the way to overcome and resolve those problems. the amount of the first time through is obtained by multiplying all ftt indexes of the production cells within the value stream. individual ftt indexes are obtained by dividing the remainder of the total number of products with the number of produced products with no defects with the total number of produced products (gunduz, 2015). the third performance measure is on time shipment (mcvay et al., 2013). this measure indicates the percentage of orders delivered on time to the consumer and the level of control established in the value stream. if the percentage of orders delivered on time to the consumers is on a high level, the specific value stream is considered to be under an adequate control. however, if the company does not deliver products on time, managers have to reassess the process and determine if there are any specific delivery issues. there are two methods 280 b. novićević ĉeĉević, lj. antić to calculate this index (kennedy & maskell, 2006). the first and the stricter method, requires relating the number of products delivered on time and the total number of products. the milder method to calculate this performance measure is dividing the number of products delivered on time with the promised date and the total number of products. it is suggested to start with the milder method and switch to the stricter method when the value of this index exceeds 90 %. sales per person is measuring the productivity of the value stream. the productivity of the value stream should be increasing, because in that case the company produces and sells more products with the same resources. sales per person is calculated by dividing the income from selling products produced in one value stream with the number of employees in the same value stream (maskell et al., 2012). the last operative performance measure in box score is average cost per unit. average cost per unit of product is quotient of the total value stream costs in the given period and the number of products delivered to the consumers (stenzel, 2007). this performance measure supervises the functioning of the established stream value and valuates products in inventory. if the number of products in inventory is increasing and there is a bottleneck, the amount of this measure is high. however, if the number of products in inventory is decreasing, the amount of this measure is low. the usage of capacity performance measure is the second dimension of box score. in a lean company the resources are used for productive and nonproductive activities. when estimating whether an activity is productive or nonproductive, it should be observed from the point of the final consumer. productive activities are the activities that are necessary to produce and deliver the wanted value. these activities increase the value. and the consumers are willing to pay for them. nonproductive capacities are used to perform activities which do not increase the value, which produce spoilage, demand corrections of the products, etc. in order to obtain the amount of productive and nonproductive capacities, the present daily and monthly capacity of the company should be calculated. in order to obtain the daily capacity, the effective work hours should be divided with the duration of the longest operation in the process. the effective working hours mean the eight hours working time expressed in seconds. when the effective working hours are divided with the duration of the longest operation in process we get the number of products that can be produced daily in the value stream. the number of products multiplied with the number of days in the month gives us the monthly capacity, which is the number of products that can be produced monthly within the value stream. in order to obtain the productive time, monthly capacity of the value stream is multiplied with the time needed to perform productive tasks (lopez et al., 2013; maskell et al., 2007). time needed to perform nonproductive tasks multiplied with the daily capacity is nonproductive capacity. productive and nonproductive capacities are expressed in percentage in the relation with the total capacity. there is another performance measure of capacity, called free capacity (baggaley & maskell, 2003b; maskell et al., 2007). free capacity is the difference between the total capacity and the sum of productive and nonproductive capacity. one of the lean companies’ main goals is forming free capacities, and later using them to perform activities that increase the value. increasing productive capacities on account of nonproductive capacities is achieved by increasing the number of products produced in the value stream. in order to achieve that, time needed to perform the longest operation in the process should be reduced, and the existing bottlenecks should be removed. the managers of the value stream have tasks to reassess the capacity usage and, in cooperation with other executors, propose some corrective actions to shorten the longest operation in the process. value stream performance measurement and the lean business concept 281 it is possible to calculate measuring the capacity performance for the machines as well as for the employees in the value stream. in that sense, in order to manage capacity successfully, it is necessary to precisely determine the time needed to perform productive and nonproductive activities. these information are easily accessible, because all the data needed are already collected and registered in the map of the value stream. including data about value stream performance capacities into the management analyses will ensure the unhindered flow of the product, and the consequences of the continuous improvement will show their financial effects too. the final dimension of the box score refers to the financial performance measures. financial performance measures shown in the box score are: the value of the inventory, material costs, processing costs and the value stream profit. inventories in the lean company are at a low and stable level. therefore, the lean companies’ managers are exactly aware of the supplies amount needed in each production cell in the value stream. stable and lower level of the inventory creates the opportunity for using simple and easy methods for the valuation of the inventory, semi-products, and final products. when choosing the method for the inventory valuation one should pay attention to (maskell et al., 2012):  time of keeping the inventory  possibility for the visual control  possibility for the monitoring of inventory by computer and  difference between the mixture of the inventory and the selling mixture. if the time of inventory holding is shorter than 30 days, it is recommended to apply the method of the number of the inventory holding days or the method based on the number of units (stenzel, 2007). the application of the method of the number of days implies knowing the number of holding days of all kinds of the supplies. the total expense of the value stream is divided by the number of the days in the month, and then the obtained amount is multiplied with a number of the holding days of a particular kind of supplies. the number of the units method implies tracking the number of the units of a product that are produced in the values stream of one month. the value of the inventory in a lean business is small, so it is considered that it does not have a big effect on the value stream (debusk & debusk, 2012). in that sense, the value of the inventory is relocated from the traditional profit and loss report of a business and is used only for correcting the profit of the value stream. the value of the inventory shows the fair inventory value, i.e. the inventory value that is not burdened by the material expenses. it is important to state that this kind of presentation of the inventory value in the profit and loss report is in accordance with the generally accepted accounting principles (gaap) and international financial reporting standards (ifrs). this is due to the fact that the supplies are evaluated according to the real production costs of a product in a period in which the supplies are made, which are the prerequisites of the mentioned standards. the revenue, the material expenses, the processing expenses and the value stream profit as the elements of the box score are taken from the profit and loss report of the value stream. the profit and loss report of the value stream is based on the information obtained from the value stream expenses calculation (antić & novićević, 2013, 2015). the value stream expenses calculation represents the adequate informational basis for a lean business and lean business conditions, and its basic characteristics are (baggaley & maskell, 2003): 282 b. novićević ĉeĉević, lj. antić  focus on the value stream,  ease of use,  dedication to the performance measures of the value stream,  focus on the elimination of the calculation and allocation of the general expenses, and  clarity and intelligibility for all employees of the company. the material expenses presented in the profit and loss report of the value stream, i.e. in the box score, represent the amount of the materials provided for the value stream and multiplied by the purchase price of the appropriate kind of materials. the processing expenses of the value stream include: labor expenses, manufacturing support expenses, machine expenses, facility expenses and other value stream expenses. the labor costs represent the sum of the salaries of all employees who are included in the value stream itself. the labor costs of the lean businesses include the expenses that are traditionally considered direct and indirect labor costs. the manufacturing support expenses are the costs of the maintenance, the costs of the quality, the salary of the engineers and the supervisors, planning logistics, supply and the like. the amortization, spare parts costs and the repair costs are the machine expenses. despite the tendency to avoid allocation of the general traditional costs during the value stream expenses calculation, still, all facility expenses must be allocated for every value stream. this comes from the fact that expenses added to the value stream are only the expenses resulting from the activity done in the value stream, and not all the expenses. the allocation of the facility expenses is done based on the number of square meters used by the employees in the value stream. the value stream profit is calculated by deducting of the material expenses and the processing expenses from the earnings of the value stream. in this way, the value stream profit represents the real number that can be planned and controlled. the application of the three-dimensional system of measuring performances as box score is of the utmost importance for the success of the business. this above all since the measures contained in the box score are connected to each other and as such they allow measuring of the advancement of the business towards the defined goals. also, even though the financial results are not visible in the beginning, a long term measuring of the key aspects of business is possible to reach through a significant competition advantage. since they are the starting point in advancement of the operational performance measures, it is important for them to be aligned with the basic principles of lean business concept. in the following table a review of the connection of the operational performance measures and the lean business principles is given. using the resources in the right way in a company, productive capacities will be employed in a most efficient way, and the effect of their advancement will be visible through the shortening of the product delivery time, increase in the number of the products that do not need additional processing and treatment, reduction of time of keeping the materials, etc. in that sense, we can say that the performance measures of the capacity use are indirectly connected to the basic principles of lean business concept. presentation of the financial results through the profit and loss report of the value stream within the last dimension will provide the clarity and transparency of all presented data. value stream performance measurement and the lean business concept 283 table 2 operative performance measures and principles of lean business concept operations performance measurement what does it measure? lean principle dock-to-dock time the efficiency of value stream expressed in terms of sales amount performed by employees. sales amount is divided to the number of persons in value stream. increase value created by the same or less resources. first time through the sufficiency of value stream in delivering the product to the customer on the desired day or time. the sales by percentages delivered on the correct time control the whole process within value stream. оn time shipment the amount of inventory s throughout value stream expressed in terms of required day or time. total amount of inventory within value stream is divided into delivery rates of products. increase material flow rate throughout value stream. sales per person the sufficiency of value stream for always-perfect production and service. first time through products are calculated in every step of value stream process. always do standardized enterprise throughout flow stream process. average cost per unit total cost of value stream is divided into the number of manufactures delivered to the customer. always decrease resource amount necessary for producing and selling products (adjusted according to: gunduz, m. (2015) value stream performance measurement in lean manufacturing business.international business and management vol.10, no. 3 pp. 40-47.) conclusion after having been applied in toyota company, lean business concept attracted the attention of many managers from the west, who implemented it in their own companies. establishing the adequate value streams and assuring their continuity is just one of the ways to deliver the wanted value to the consumers. optimal functioning of the business can be managed if, by using numerous techniques, all forms of losses and activities that do not add to the value are removed. for lean business managers it is of high importance to follow the positive effects of the changes that are being made in the company. for tracking the achieved advancements the application of the box score is proposed. the box score is a three-dimensional approach to the performance measuring and as it is, it gives the insight into the movement of the key performances of the company, as well as the insight into their mutual causality. 284 b. novićević ĉeĉević, lj. antić the first dimension of the box score is related to the operational measures of performances such as: dock-to-dock time, first time through, оn time shipment, sales per person and average cost per unit. these operational measures of performances show the success in reaching the given goals in the value stream. the next dimension is related to the use of capacity. the use of capacity represents a strategically important dimension in the way of using the resources. financial performances are shown in the last dimension of the box score. the basis for showing the financial measures of performances is made of the cost calculations of the value stream. a clearer and more precise presentation of the data in the financial dimension is made easier by the way of tracking the changes and the achieved advancements. the effects of the advancements such as the reduction of the inventory and the losses, the reduction of the waste, the lead time, reduction of the overproduction and the like, are visible very soon. the listed advancements are the primary goal of the lean business concept. the reduction of the losses and the activities that do not add value are an important part of the advancement since by eliminating the loss, the expenses are reduced and free capacities are made. when the company has free capacities, the key role goes to the managers of the company whose mission is to employ these capacities in a way which will bring the increase of the value. on the way and the success in the employing of these capacities will depend the long-term success of the company. if there are free capacities and the products’ demand increases, the profit of the company can be increased by simply employing these capacities. in that case, the cost of materials will increase while the other expenses will stay at the same level. on the other hand, if the company does not have free capacities, and a big percentage goes to the non-productive capacities, the chances are that the company will lose a certain number of the consumers and will stay deprived of the profits. in that sense, the role of the box score does not refer to the following:  it is connected to the lean business principles and it starts the advancement of the value stream results,  it gives the review of the operational performances, which are the basis for the advancement of the business,  it gives the review of the capacity performances, that are tightly connected to the operational and financial performances, which, till this moment, did not get the needed attention,  it gives the review of the financial performances that are presented in the profit and loss report of the value stream,  it gives an insight into the results that should be accomplished and it presents the basis for the evaluation of the advancement,  it gives the basis for planning the strategic changes and capital investments. measuring of the performances is a constituent part for efficacy and success evaluation of the company. the business that works according to the lean principles must choose a set of measures within the box score which will present, in the best possible way, the key indicators and initiators of its activity. in that sense, the research of the authorwas , for the most part, oriented to the understanding of the theoretical aspect of the system of performance measures in the lean business. the research of this problem opened numerous questions and dilemmas related to the choice of the measures that would be presented in the box score, as well as a question of the possibilities of the practical application. value stream performance measurement and the lean business concept 285 acknowledgement: the paper is realized in the scope of the project no. 179066 „improving the competitiveness of the public and private sector by networking competences in the process of european integration of serbia “, funding by the ministry of education and science of the republic of serbia. references antić, lj. & novićević ĉeĉević, b. (2013). obraĉun troškova toka vrednosti i donošenje poslovnih odluka o korišćenju kapaciteta u lean preduzeću. tematski zbornik radova “nauka i svetska ekonomska kriza” (pp. 707 -722) niš: ekonomski fakultet. antić, lj. & novićević ĉeĉević, b. (2015). raĉunovodstvena informaciona podrška lean konceptu poslovanja. tematski zbornik radova „antikrizne politike i postkrizni procesi: izazov ekonomske nauke“ (pp. 571-585) niš: ekonomski fakultet. baggaley, b. & maskell, b. (2003a). value stream management for lean companies, part i. journal of cost management (march/april), 23-27. baggaley, b. & maskell, b. (2003b). value stream management for lean companies, part ii. journal of cost management (may/june), 24-30. buggaley, b. (2006). using strategic performance measurements to accelerate lean performance. cost management (jan/feb), 36-44. debusk, g. k. & debusk, c. (2012). the case for lean accounting: part i. cost management (may/june), 20-24. debusk, g. k. & debusk,c. 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(2015). action research innovation cycle: lean thinking as a transformational system.3th international conference on leadership, technology and innovation managemen,293-302. stenzel j. (2007). lean accounting, best practices for sustainable integration. new jersey: john wiley &son. tapping, d., luyster, t. & shuker, t. (2002). value stream management. new york:productivity press. womack, james, jones & daniel t. (2003). leant thinking, banish waste and create wealth in your corporation. uk: simon&schuster womack, p. & jones, d. (1994). from lean production to the lean enterprise. harvard business review, 93-103. http://www.imanet.org/docs/default-source/research/sma/accounting-for-the-lean-enterprise.pdf?sfvrsn=2 http://www.imanet.org/docs/default-source/research/sma/accounting-for-the-lean-enterprise.pdf?sfvrsn=2 286 b. novićević ĉeĉević, lj. antić merenje performansi tokova vrednosti i lean koncept poslovanja lean koncept poslovanja karakteriše se obezbeđivanjem zahtevane vrednosti od strane potrošača, brzom isporukom proizvoda, eliminisanjem svih oblika gubitaka kako iz proizvodnog tako i iz svi poslovnih procesa u preduzeću i slično. da bi se postigla i održala konkurentska prednost uputno je pažljivo razmotriti i primeniti osnovne principe lean koncepta poslovanja i uspostaviti tokove vrednosti. tok vrednosti predstavlja osnov kreiranja vrednosti za potrošače, s jedne i preduzeće, s druge strane. u tom smislu, potrebno je odabrati set mera performansi za ocenu uspešnosti tokova vrednosti, koji se naziva box score. kljuĉne reĉi: lean koncept poslovanja, tok vrednosti, box score, merenje performansi facta universitatis series: economics and organization vol. 13, n o 1, 2016, pp. 1 15 infrastructure as a competitiveness factor in the western balkan countries  udc 339.137.2(497-15) danijela despotović 1 , milorad filipović 2 , vojislav ilić 3 1 faculty of economics, university of kragujevac, serbia 2 faculty of economics, university of belgrade, serbia 3 oš mdt, kragujevac, serbia abstract. the concept of a country’s competitiveness has increasingly gained in importance recently, although it is still contested in theory. well developed and interconnected transport and energy infrastructures are the key drivers of economic growth and employment as well as important factors for attracting new investments and improving competitiveness. by using the gci (wef) dataset, the paper considers the global competitiveness of the six countries of the western balkans (croatia, bosnia and herzegovina, serbia, montenegro, albania and macedonia) for the period 2006-2014, with particular emphasis on the importance of the second gci pillar (infrastructure) for improving competitiveness in these countries. the paper demonstrates a weak trend in infrastructure development of the region and a lack of balance among the countries in terms of the observed indicators. hence there is a need for comprehensive infrastructure strategies in every individual country observed and also through joint regional approach to this problem. key words: country’s competitiveness, global competitiveness index, infrastructure, the western balkans introduction in theory there are diametrically opposed views on the relevance of the concept of competitiveness. because of the number and complexity of factors, as well as the very nature of the competitive processes, the concept of competitiveness is often very difficult to understand, and sometimes it is even confusing (snieška & bruneckienė, 2009). this is evidenced by the fact that some economic analysts believe that competitiveness has characteristics of ‘‘the natural law of modern capitalist economy’’ (kitson et al., 2004), received january 25, 2016/ accepted march 20, 2016 corresponding author: danijela despotović faculty of economics, university of kragujevac, djure pucara starog street 3, 34000 kragujevac, serbia e-mail: ddespotovic@kg.ac.rs 2 d. despotović, m. filipović, v. ilić while others think that definition of competitiveness refers to productivity which measures the value of goods and services per factor unit, produced in a particular territory (krugman, 1996 and ketels, 2003). we should distinguish between microeconomic and macroeconomic aspects of competitiveness. at a micro level, competitiveness is the ability of companies to compete, grow and be profitable (martin, 2006). so, micro-competitiveness refers to the ability of a company to consistently and profitably produce output that meets the requirements of an open market in terms of price, quality, etc. (the world competitiveness yearbook, 2000). a company that is more competitive than its rivals will have better chances to gain larger market share. in contrast, firms that are not competitive will be characterized by a drop in market share. eventually, due to a drop in competitiveness these firms might disappear from the market. unlike the competitiveness of enterprises, the concept of a country’s competitiveness (macro-competitiveness) is a controversial phenomenon theoretically. the competitiveness of a country is defined as the set of institutions, policies and factors that affects the national level of productivity (marginen, 2006). on the other hand, productivity growth is the level of progress that an economy can reach. productivity level also determines the rates of return on investments which are the fundamental drivers of economic development. in other words, a more competitive economy will probably grow faster in the future. there is a consensus that the progress in economic performance of a country does not have to come at the expense of another country (i.e. there are no winners and losers) and that productivity is the central problem of competitiveness. therefore, understanding, quantification and analysis of the competitiveness factors of a country become an important dimension of the development policy, which seeks to improve the quality of key macroeconomic performances. while it is obvious that theorists essentially associate a country’s competitiveness to its economic performance, the fact is that this phenomenon is increasingly considered in relation to the country’s position relative to other countries, rather than in relation to its accumulated wealth (nijkamp, & siedschlag, 2011). the paper provides a comparative analysis of the western balkans competitiveness with special emphasis on infrastructure 1 as a competitiveness factor. the initial assumption is that infrastructure development leads to productivity growth and higher living standards (agbelie, 2014; cvetanović, zlatković, cvetanović, 2012; filipović and njegovan, 2012; erber, 1995; gainova et al. 2013; kumar, 2001; vickerman, 1989). after all, in addition to human capital, physical capital and knowledge, the porter list of competitiveness factors contained national infrastructure as well (porter, 1998, 74-81). in addition to the introduction, conclusion and list of literature consulted, the paper consists of three parts. first of all, the paper describes methodology and explains metrics of a country’s competitiveness according to the wef’s gci framework. then the paper provides a comparative review of the western balkan countries competitiveness. finally, there is a special reference to the infrastructure component of competitiveness expressed by using selected indicators of the western balkans, which are crucial (in our opinion) for research defined in the paper. 1 the paper includes the republic of croatia as the western balkan country, although on 1 july 2013 croatia became a full-fledged member of the european union. infrastructure as a competitiveness factor in the western balkan countries 3 1. country’s competitiveness 1.1. the wef’s methodology there is still no unique methodology for measuring a country’s competitiveness. in practice there are several methodological tools for measuring competitiveness. however, only the world economic forum explicitly uses the term competitiveness in its index. the global competitiveness index is a composite index, which is formed as the weighted average of the twelve pillars’ values. each of these pillars is a composite index by itself, and is formed as the weighted average of three sub-indicator groups whose values are obtained from primary and secondary sources (figure 1). fig. 1 the gci structure source: modified according to the wef, 2014, p. 9 4 d. despotović, m. filipović, v. ilić institutions are determined by the legal and administrative framework within which individuals, firms and governments work together to generate wealth. the importance of sound institutions has become an even more obvious factor of competitiveness during the latest economic and financial crisis. infrastructure is very important for the efficient functioning of the economy and is an important factor in determining the location of certain economic activities in certain geographic areas. well-developed infrastructure minimizes the impact of spatial distance, integrating the national market and connecting it at low cost to markets in other countries and regions. in addition, the quality of infrastructure significantly affects the economic growth and reduces income inequality. macroeconomic environment is important to the business and therefore to the country’s competitiveness. a stable macroeconomic environment per se cannot increase the productivity of the nation, but an unstable macroeconomic environment is harmful to the functioning of the economy. health and primary education are vital to improving competitiveness. unhealthy workers will be less productive. poor health leads to increased costs to the company, because ill workers are often absent or work less efficiently. therefore, investment in health care is critical in economic and social terms. primary education increases the efficiency of workers. as a rule, workers with low levels of formal education are able to carry out only simple manual tasks and they find it much more difficult to adapt to more advanced production processes and techniques. in other words, the lack of primary education can become a constraint on the development of the company because it cannot make progress by producing more sophisticated and higher-quality products with existing human resources. higher education and training are particularly important for economies that want to develop more complex production processes, in technological terms. a modern global economy requires nurturing of well-educated workers who are able to carry out complex tasks and adapt quickly to the changing environment and the evolving needs of the production. goods market efficiency ensures efficient trade of goods, in accordance with the supply and demand conditions. healthy market competition, both domestic and foreign, is important for the market efficiency and hence for the productivity improvement process. labor market efficiency ensures that workers give their best in their jobs. labor markets must therefore have the flexibility to shift workers quickly from one economic activity to another. also, labor market must have the flexibility to allow for wage fluctuations without major social disturbances. financial market development implies that an efficient financial sector allocates resources to the most productive activities. a thorough and proper risk assessment is the key factor of a sound financial market. economic development implies the existence of sophisticated financial markets that enable private sector investments. technological readiness measures the agility with which an economy adopts existing technologies in order to improve productivity. whether the technology used has or has not been developed within national borders is irrelevant for a country’s ability to improve productivity. it is crucial that companies operating in the country have access to advanced technologies. infrastructure as a competitiveness factor in the western balkan countries 5 market size affects productivity. large markets allow companies to exploit the effects of the economies of scale. in the globalization era, international markets to some extent can be a substitute for domestic markets, especially in the case of small countries. empirical research shows that trade openness is positively associated with economic growth. business sophistication generates higher efficiency in the production of goods and services. business sophistication refers to two intertwined elements: the quality of a country’s overall business networks and the quality of individual firms’ operations and strategies. these factors are especially important for countries at higher stages of economic development when basic sources of productivity improvements have been exhausted. innovation can be the result of new technological and non-technological knowledge. non-technological innovations are closely related to practical knowledge, skills, and working conditions within the organization. although significant gains can be obtained by improving institutions, building infrastructure, reducing macroeconomic instability or improving human capital, all these factors eventually lead to diminishing returns. the same is true for the efficiency of the financial, goods and labor markets. in the long run, innovation can improve living standards to a great extent. 1.2. metrics the values of the 12 pillars of the global competitiveness index are derived from primary and secondary sources. primary data are obtained on the basis of standardized surveys (the survey) that are conducted every year in the covered countries. the survey captures the opinions of the highest-level executives in companies that constitute a representative sample. these data are called soft data. the number of companies included in the sample varies from country to country and depends primarily on the country’s size. the sample consists of smalland medium-sized enterprises and large companies. the wef’s guidelines precisely define each company’s share (by its size) in the sample. it is worth noting that each year a half of the sample consists of the companies from the previous year sample, while the other half is selected randomly from the defined sampling frame. retaining the elements from the previous year sample contributes to greater stability of the survey results and gives validity to numerous panel analyses. primary data from the survey are necessary for calculating those sub-indicators for which there are no secondary, quantitative datasets for all countries included in the wef’s rankings. the survey covers a wide range of issues related to the business conditions, legal regulations, market climate, political situation, etc. it is evident that only the survey can provide data for the abovementioned issues and many other issues that are important for creating a country’s international competitiveness profile. calculation of sub-indicators of competitiveness (such as the level of taxes, inflation rate, budget deficit, number of telephone lines, number of procedures for starting a business, etc.) uses data from internationally comparable datasets (e.g. datasets of the imf, the world bank, the wto, the un, etc.). these data are called hard data. all data, whether primary or secondary, are standardized on a 1-to-7 scale (1 – the worst score, 7 – the best score), which is also a range of possible values for all subindicators, pillars of competitiveness and even the gci. regarding the survey, there is no need to normalize most of the questions because the survey uses a balanced 7-point likert scale. contribution of the survey data to the gci calculation is approximately 70%, while the share of secondary data is approximately 30%. 6 d. despotović, m. filipović, v. ilić 1.3. stages of development the gci assumes that countries experience 3 stages of development. in the first stage, basic factors of competitiveness (well-functioning public and private institutions, well-developed infrastructure, stable macroeconomic environment and good, healthy workforce that has received at least a basic education) are important for growth and productivity. further, countries move into the second stage of development, when they develop more efficient production processes and increase product quality. at this stage, competitiveness growth is influenced by higher education and training, efficient goods market, well-functioning labor market, developed financial market, large domestic or foreign markets and the ability to harness the benefits of existing technologies. finally, countries move into the third stage where the growth of productivity and competitiveness is possible primarily due to innovations. knowledge-based economy is the dominant model of economy in the 21st century, while the global economy development is becoming innovation-driven. innovations and knowledge in the broadest sense are increasingly becoming development factors and hence competitiveness factors. the significance of the pillars within the group for an individual country depends on its development level. a relatively precise and simple criterion is used for grouping countries by their development levels. the criterion starts from the realized level of gdp per capita, denominated in us dollars. there are three basic and two transitional stages of economic development. the weights that are assigned to pillars groups that form the gci value depend on the stage of the country. for every development stage the key drivers of competitiveness are pillars from different groups. hence, in the composite gci value calculation, the participation rate of basic requirements is 40%, efficiency enhancers 50%, while innovation and sophistication factors participate with 10%. accordingly, the values of the pillars in the ‘‘efficiency enhancers’’ group, have proportionately the greatest influence on the total gci value calculation. by using the gci (wef) dataset, the paper considers the global competitiveness of six countries of the western balkans (croatia, bosnia and herzegovina, serbia, montenegro, albania and macedonia) (figure 2) with a special reference to the infrastructure component of competitiveness. fig. 2 the western balkans infrastructure as a competitiveness factor in the western balkan countries 7 five out of six analyzed countries of the western balkans are in the second stage of development, with the exception of croatia which is in transitional stage between the second and the third stage of economic development (despotovic, cvetanović & nedić, 2014). 2. comparative analysis of the western balkan countries competitiveness tables 1 and 2 provide data on the gci values and rankings of serbia and the western balkan countries for the period 2006-2014. according to the wef’s report 2014-2015, serbia is ranked as 94th out of the total of 144 countries according to gci value (3.90). macedonia recorded the highest gci value (4.26) in 2014-2015, while albania had the lowest value (3.84). historically, serbia achieved the highest gci value (3.90) on the eve of the first crisis wave in 2008, but in 2009 the gci value noticeably declined to 3.77. a mild recovery trend followed, and in 2014-2015 it returned to the pre-crisis level. table 1 the gci of the western balkan countries, 2006-2014 country edition of report gci value albania bosnia and herzegovina croatia macedonia, fyr montenegro serbia 2006-2007 3.56 3.82 4.16 3.81 / / 2007-2008 3.48 3.55 4.20 3.73 3.91 3.78 2008-2009 3.55 3.56 4.22 3.87 4.11 3.90 2009-2010 3.72 3.53 4.03 3.95 4.16 3.77 2010-2011 3.94 3.70 4.04 4.02 4.36 3.84 2011-2012 4.06 3.83 4.08 4.05 4.27 3.88 2012-2013 3.91 3.93 4.04 4.04 4.14 3.87 2013-2014 3.85 4.02 4.13 4.14 4.20 3.77 2014-2015 3.84 / 4.13 4.26 4.23 3.90 source: competitiveness dataset, wef (geiger, 2015). table 2 the ranking of the western balkan countries according to gci, 2006-2014 country edition of report gci rank number of country albania bosnia & herzegovina croatia macedonia, fyr montenegr o serbia 2006-2007 122 98 82 56 84 2007-2008 131 109 106 57 94 82 91 2008-2009 134 108 107 61 89 65 85 2009-2010 133 96 109 72 84 62 93 2010-2011 139 88 102 77 79 49 96 2011-2012 142 78 100 76 79 60 95 2012-2013 144 89 88 81 80 72 95 2013-2014 148 95 87 75 73 67 101 2014-2015 144 97 77 63 67 94 source: competitiveness dataset, wef (geiger, 2015). 8 d. despotović, m. filipović, v. ilić figure 3 is based on the data from table 1 and illustrates the gci trends for serbia and the western balkans in the period 2006-2014. fig. 3 the gci trend, 2006-2014 source: authors’ calculation based on competitiveness dataset. wef 2015 it is notable that in the observed period croatia and montenegro show the best scores according to the criterion of competitiveness. macedonia has the most favorable upward trend. albania and bosnia and herzegovina show excessive oscillation in the index values and consequently in the rankings. as an illustration, you can notice that in 2012 bosnia and herzegovina improved its competitiveness by 12 positions within a year. so this country was ranked higher than serbia on the wef’s list, for the first time since the beginning of the gci calculating and publishing. in 2009 albania also improved its global competitiveness by 12 positions, within a year (table 2). serbia shows the smallest oscillations in the index value and consequently in the ranking. regarding competitiveness, after mild increase in the gci values in 2010 and 2011, the trend has been stagnant since 2012. figure 3 shows that the highest level of convergence of the gci values for the selected countries group was reached in 2012-2013. the following 3d area chart (figure 4) shows the gci structure for the observed region of the western balkans as a whole, by main pillars of competitiveness for the period 20062014. it can be concluded from the figure that macroeconomic environment and technological readiness show significant divergence in the observed period. other relatively significant characteristics are: stable and high level of health and primary education pillar; alarmingly low value of innovation pillar (despite a slight improvement); infrastructure pillar showed a significant upward trend in the last decade, on a regional basis. infrastructure as a competitiveness factor in the western balkan countries 9 fig. 4 time series of the values of the gci pillars – the western balkans source: authors’ calculation based on competitiveness dataset. wef 2015 3. infrastructure as an element of the gci transport infrastructure and transport costs significantly affect the competitiveness of individual areas. among all infrastructure sectors, transport is the most important for increasing a country’s competitive ability to attract new investments (farhadi, 2015; cvetanović, zlatković, cvetanović, 2011). in this paper, evaluation of the infrastructure development levels in the observed countries is based on the comparative analysis of the values of 6 out of 9 indicators covered by the second gci pillar – infrastructure (from the sub-indices of the first stage – factor-driven stage – which are darkened in figure 5). these parameters are: 1) overall infrastructure, 2) roads infrastructure, 3) railroad infrastructure, 4) port infrastructure, 5) air transport infrastructure and 6) electricity supply infrastructure. well-developed transport and communication networks are important preconditions for less developed communities to have access to crucial economic activities (gavanas and pitsiava, 2011). efficient transport, including high-quality roads, railways, ports and air transport enable entrepreneurs to deliver their goods and services to the market safely and timely and enable workers to commute. the economy also depends on the continuous electricity supply so that companies can operate without disturbances. 10 d. despotović, m. filipović, v. ilić fig. 5 observed indicators of the second gci pillar – infrastructure source: modified according to the wef, 2014, p. 9 & p. 50 table 3 provides data on the value of infrastructure for the western balkan countries in the period 2006-2014. table 3 infrastructure country edition of report gci 2nd pillar: infrastructure (value 1-7) albania bosnia and herzegovina croatia macedonia, fyr montenegro serbia 2007-2008 2.05 2.26 3.95 2.90 2.79 2.72 2008-2009 2.22 2.20 3.98 2.90 2.72 2.68 2009-2010 2.84 2.18 4.26 3.05 3.00 2.75 2010-2011 3.46 3.16 4.63 3.45 3.85 3.39 2011-2012 3.87 3.24 4.73 3.66 4.01 3.67 2012-2013 3.48 3.44 4.65 3.65 4.06 3.78 2013-2014 3.33 3.67 4.66 3.63 4.04 3.51 2014-2015 3.52 4.72 3.73 4.10 3.93 source: competitiveness dataset, wef (geiger, 2015) infrastructure as a competitiveness factor in the western balkan countries 11 figure 6 illustrates the infrastructure trend. fig. 6 trend in infrastructure source: authors’ calculation based on competitiveness dataset. wef 2015 from the analysis of the presented data, it is possible to formulate the following conclusions:  firstly, all six countries of the western balkans reported significant improvement of infrastructure indicators in the period 2006-2014. surely, this is one of few pillars of competitiveness in which the analyzed countries had significant success.  secondly, according to the criterion of infrastructure development among the six observed countries, croatia is significantly ahead of other countries. in 2014 croatia was ranked 44th out of 144 analyzed countries (the value of the indicator of 4.72).  thirdly, albania had by far the highest intensity of infrastructure improvement (from 2.05 in 2007-2008 to 3.52 in 2014-2015). montenegro also made a substantial qualitative progress in this area (from 2.79 in 2007-2008 to 4.10 in 2014-2015).  fourthly, serbia demonstrated a significant increase in the value of infrastructure indicators in 2014. the realization of projects of road infrastructure in 2012 (construction of local and regional roads as well as finalization of construction and reconstruction of major bridges and overpasses in belgrade and on corridor 10) significantly affected the change in estimation of the competitiveness pillar which measures the quality of national infrastructure. 12 d. despotović, m. filipović, v. ilić after a summary review of trends in values of the composite pillar – infrastructure, in further research it is important to look at the trends in its individual components. therefore figure 7 shows trend in the average values of 6 observed indicators of the second pillar – infrastructure. fig. 7 the observed indicators of infrastructure source: competitiveness dataset, wef (geiger, 2015) based on figure 7, it is possible to formulate the following conclusions:  the observed indicators showed significant upward trends until 2011-2012, but since then all indicators have shown stagnant trends.  indicator – electricity supply infrastructure – shows the most impressive positive trend and absolute values, and this can be a significant competitive advantage of the region (although we believe it is an echo of former integrative processes, because with the exception of albania all other countries of the region were parts of the same federal state until the 1990s).  indicators – overall infrastructure and road infrastructure – also show noticeable positive trends. the worst situation by far is detected in railroad infrastructure, which shows low values and a stagnant trend as well. this is a major problem in the region because the railway is an important infrastructural prerequisite for economic development of the western balkans. after overview of trends in individual infrastructure indicators for the whole western balkan region, what follows is their overview by individual economies in the region for the last available year (figure 8). infrastructure as a competitiveness factor in the western balkan countries 13 fig. 8 indicators of infrastructure, by individual countries (latest available data) source: authors’ calculation based on competitiveness dataset. wef 2015 the results follow the previous discussion and show even greater imbalance for the most impressive indicator of the group – electricity supply infrastructure. the imbalance is the most noticeable in bosnia and herzegovina. other infrastructure indicators in this country are very weak, but on this indicator bosnia and herzegovina is by far the best in the group. we can also notice group imbalance for the weakest indicator – railroad infrastructure. regarding this indicator bosnia and herzegovina shows the best scores in the observed region (we mentioned before that in our opinion it was an echo effect of the former federal entity). generally, croatia shows the best scores on all other indicators (except the two mentioned above), while bosnia and herzegovina and serbia are at the very bottom. conclusion investments in infrastructure undoubtedly lead to higher productivity, increased economic output and improved national competitiveness. in addition to reduced transport costs and improved access to markets and raw materials, there are also benefits from better regional and global cooperation and improvement of the overall economic and social environment. these benefits represent a significant potential that can help countries to improve their comparative advantage. time series analysis of individual infrastructure indicators and composite pillar – infrastructure (one of the 12 pillars of the gci) showed significant variability at the level of the western balkan region and also at the level of individual economies in the 14 d. despotović, m. filipović, v. ilić observed group. general conclusion is that development of infrastructure indicators at the regional level is mutually uncoordinated and not as rapid as it should be. also there is a significant imbalance among these indicators. this reflects the lack of a regional strategy for infrastructure development as a necessary condition for further sustainable improvement of competitiveness of the observed region. for better understanding of infrastructure impact on competitiveness level of the national economy, further research should explore the relationship between infrastructure investment costs and economic growth rate measured (for instance) by gdp per capita (for instance). general imbalance of the infrastructure pillar as well as imbalance among individual indicators undermine further harmonization processes in the region and represent a huge obstacle to economic cooperation among countries in the region and to economic cooperation between the entire region and the european or global environments. references 1. agbelie, b. r. (2014) an empirical analysis of three econometric frameworks for evaluating economic impacts of transportation infrastructure expenditures across countries. transport policy, 35, 304-310. 2. cvetanović, s. zlatković, a., & cvetanović, d. (2011) putna infrastruktura kao komponenta fizičkog kapitala u modelima privrednog rasta, put i saobraćaj, 57(4):35-40. 3. cvetanović, s. zlatković, a., & cvetanović, d. (2012) investicije u opremu i puteve i ekonomska konvergencija zemalja, put i saobraćaj, 58(3): 21-28. 4. despotovic, d. z., cvetanović, s. ţ., & nedić, v. m. (2014) innovativeness and competitiveness of the western balkan countries and selected eu member states. industrija, 42(1), 27-45. 5. erber, g. (1995) public infrastructure, productivity and competitiveness: analysis of relative differences and impacts with regard to us and german industries (no. 115). diw discussion papers. 6. farhadi, m. (2015) transport infrastructure and long-run economic growth in oecd countries. transportation research part a: policy and practice, 74, 73-90. 7. filipović, m., & njegovan, z. (2012). supporting local economic development by infrastructure debt financing in the republic of serbia. spatium, (27), 8-11. 8. gainova, r. a., shaidullin, r. n., safiullin, l. n., & maratkanova, e. m. (2013). infrastructural component in maintenance of competitiveness of region. world applied sciences journal, 27(13), 97-101. 9. gavanas, n., & pitsiava, m. (2011). description of the new member states transport system in an era of convergence: development of an indicator system. spatium, (24), 37-44. 10. geiger, t. (2015) competitiveness dataset. world economic forum. retrieved july 26, 2015. (http://www3.weforum.org/docs/gcr2014-15/gci_dataset_2006-07-2014-15.xlsx) 11. ketels, h. (2006) michael porter’s competitiveness framework – recent learnings and new research priorities, journal of industry competition and trade, vol. 6. issue 2. pp. 115-136. 12. kitson, m. (2004) failure followed by success or success followed by failure? a re-examination of british economic growth since 1949, in floud, r. and johnson, p. (eds) the cambridge economic history of modern britain, vol. iii: structural change and growth, 27–56. cambridge university press, cambridge. 13. krugman, p. (1994) competitiveness: a dangerous obsession, foreign affairs, 1994, 73(2): 28-44. 14. kumar, n. (2001) infrastructure availability, foreign direct investment inflows and their exportorientation: a cross-country exploration. research and information system for developing countries, new delhi, 20. 15. marginean, s. (2006) competitiveness: from microeconomic foundations to national determinants, studies in business and economics, vol. 1. issue 1, pp. 29-35. 16. martin, r. (2004) a study on the factors of regional competitiveness, a draft final report for the european commission directorate-general regional policy, european commission. 17. nijkamp, p., & siedschlag, i. (2010) innovation, growth and competitiveness: dynamic regions in the knowledge-based world economy. springer science & business media. 18. porter, m. (1998) location, clusters, and the "new" microeconomics of competition. business economics vol. 33, no. 1 , pp. 7-13 infrastructure as a competitiveness factor in the western balkan countries 15 19. snieška, v. & bruneckienė, j. (2009) measurement of lithuanian regions by regional competitiveness index. engineering economics, no. 1 (61). 20. the world competitiveness yearbook. (2000). switzerland: i.m.d.international. 21. vickerman, r. w. (1989) measuring changes in regional competitiveness: the effects of international infrastructure investments. the annals of regional science, 23(4), 275-286. 22. wef (2014) the global competitiveness report 2014-2015. world economic forum, geneva. infrastruktura kao faktor konkurentnosti zemalja zapadnog balkana iako u teoriji još uvek osporavan, koncept konkurentnosti zemlje je kontinuirano dobijao na značaju tokom poslednjih godina. dobro razvijena i uzajamno povezana saobraćajna i energetska infrastruktura predstavlja ključni pokretač privrednog rasta i zaposlenosti kao i značajan faktor za privlačenje novih investicija i unapređenja konkurentnosti. u radu je koristeći podatke iz baze gci (wef), sagledavana globalna konkurentnost šest zemalja zapadnog balkana (hrvatska, bih, srbija, crna gora, albanija i makedonija) u periodu 2006-2014., sa posebnim osvrtom na značaj drugog stuba gci – infrastruktura za unapređenje konkurentnosti ovih zemalja. rad pokazuje nedovoljan trend razvoja infrastrukture regiona i neizbalansiranost među zemljama po posmatranim indikatorima. time se nameće potreba za sveobuhvatnim infrastrukturnim strategijama kako kod svih posmatranih zemalja pojedinačno tako i kroz zajednički regionalni pristup ovom problemu. ključne reči: konkurentnost zemlje, globalni indeks konkurentnosti, infrastruktura, zapadni balkan 10406 facta universitatis series: economics and organization vol. 19, no 2, 2022, pp. 139 154 https://doi.org/10.22190/fueo220108011a © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper the impact of liquidity management on financial performance of deposit money banks in west africa1 udc 658.153:005]:336.713(6) mayowa gabriel ajao, emmanuel nosagie iyekekpolor university of benin, faculty of management sciences, department of banking and finance, benin city, nigeria orcid id: mayowa gabriel ajao https://orcid.org/0000-0002-2063-6888 emmanuel nosagie iyekekpolor n/a abstract. this study investigates the effect of liquidity management on financial performance of deposit money banks (dmbs) by considering the banking sector of selected countries of the west african monetary zone (wamz). aggregate banking sector data for the four selected economies were used from 1991 to 2020. the panel data regression analysis is also adopted for the empirical analysis after a statistical evaluation of the datasets are performed. the results from the empirical analysis reveal that reducing the cash to deposit ratio is the most efficient liquidity management strategy that may deliver enhanced performance for the dmbs among the sampled countries. moreover, it was found that loans and advances to total assets have significant impact on financial performance of dmbs in west african countries. the ratio of loans and advances to total assets is limited to return on equity. there is also evidence that the ratio of loans and advances to deposit does not have a significant effect on financial performance of dmbs in west african countries. there is need for banks in the selected countries to monitor their deposit mobilization capacity since it has shown to have major implications on the liquidity management strategies in the banking sectors for the selected countries. key words: liquidity management, financial performance, deposit money bank and panel regression. jel classification: h62, l25, g21 received january 08, 2022 / revised april 21, 2022 / accepted april 29, 2022 corresponding author: mayowa gabriel ajao department of banking and finance, faculty of management sciences, university of benin, po box 16122 jhon street, benin 8007, nigeria | e-mail: ajao.mayowa@uniben.edu https://orcid.org/0000-0002-2063-6888 mailto:ajao.mayowa@uniben.edu 140 m. g. ajao, e.n. iyekekpolor 1. introduction the banking sector globally is a major player in the financial system of any country, and has undergone profound innovation and technical changes which have determined their growth, profitability and competitiveness in recent times. the profitable operations of banks are essential for the hitch free operation of the financial system of any country, (thevaruban, 2017). increasing profit at the expense of liquidity can cause serious problems for banks, hence, a trade-off between the two contradictory objectives of liquidity and profitability needs to be struck. liquidity management involves the planning and controlling of the demand and supply of the amount of liquid funds available to meet the banks’ immediate needs without distorting the banks’ regular operations and financial performance (agbada & osuji, 2013). the global financial crisis of 2008 made basel committee for bank supervision, as a financial body to advocate for the active management of liquidity (marozva, 2015). in order to prevent any loss of confidence and trust that may lead to a bank run, banks have ensured they generate enough profit to meet the financial obligation of their clients and depositors (idowu, essien & adegboyega, 2017). the relationship between funds liquidity profitability of dmbs is well documented in literature such as: agbada and osuji (2013), bassey and moses (2015), okaro and nwakoby (2016), marozva (2015). according to world bank (2006:25) “there is need to undertake deeper analysis of financial sector performance in sub-sahara africa; where performance has not been impressive, as this would provide more information on commercial banking system in the sub-region”. besides, the selected countries (nigeria, ghana, gambia and sierra leone) possess identical financial system frameworks based on the west african monetary zone (wamz), they also constitute the anglophone (english speaking) countries in that subregion. also, the banking sector in these countries in recent past (though at different time) experienced strategic restructuring (consolidation) of their financial system toward enhancing their performance and meeting their stakeholders’ needs. the practical contributions of this study cannot be overemphasized as it harps on the role of liquidity management on the financial performance of deposit taking institutions with specialized cross-country data set for the west african sub-region. most importantly, in measuring the liquidity management factors, the study includes both loans and advances-related (loan and advances to deposits [lad] and loan and advances to total assets [lna]) and other liquidity and cash-related factors (cash to total deposits [ctd] and liquid assets to total assets [lta]) as relevant in the analysis. thus, the study contributes to the literature on the liquidity-performance argument by providing an expanded set of factors in the empirical analysis. this study seeks to examine how the financial performance of banks in selected west african countries is influenced by various liquidity management factors using panel data regression analysis for the empirical analysis, after a statistical evaluation of the datasets was performed. hence, the null hypothesis of this study is specified as follows: ho: liquidity management does not have significant impact on the financial performance of deposit money banks in west africa. the other sections of this paper are in the following order: we review extant literatures in section two while the research methods adopted for the study were discussed in section three. the presentation and interpretation of data analysis was covered in section four while section five contains the summary of major findings, recommendations and conclusion. the impact of liquidity management on financial performance of deposit money banks in west africa141 2. literature review 2.1. conceptual review financial performance: financial performance explains the difference between banks’ operating expenses and income (bassey & moses, 2015). it explains how well a bank manages its assets, liabilities and earned revenues for the financial interest of its stakeholders: these outcomes are seen in the bank’s financial performance. the overall evaluation of dmbs in relation to financial performance greatly influences their continuous growth (bikker, 2008). every business needs continuous return on investment for long term growth and survival as argued by agbada and osuji (2013). liquidity: liquidity is the capacity to retire current financial obligations as they come due. it depends on the capacity of a company’s cash plus near cash assets to offset any awaiting current liabilities. bank’s liquidity can be described “as the ability of bank to offset its current primary cash commitments, as at when due”. for the operational activities of any deposit money bank to run smoothly, optimum liquidity must be maintained. it depends on the quantity of cash and near cash (quasi cash) to offset any awaiting current liabilities. the continuous process to maintain the availability of cash with little or no cost in line with the cash reserve requirement specified by the federal monetary authority is known as liquidity management. it is the quantity of liquid cash (or quasi cash) available to offset short term maturing deposits and contractual obligation. the inflows and outflows of liquidity in the economy by banks at a desired level without affecting profits generated in known as liquidity management (agbada & osuji 2013). it was argued by eljelly (2004) that when current assets and liabilities are planned and controlled in such a way that it eliminates default risk requirement and reducing investment in these assets is known as effective liquidity management. 2.2. liquidity management and bank performance one main goal of dmbs includes maximizing revenue because of their shareholders as well as the staff and management of the organization because profit maximization is a primary objective of any bank. the financial sector is the pillar and bedrock of any viable country, and this is the reason why bank failure should not be an option. to avoid bank failure, liquidity must be maximizing to meet current liabilities as they come due. a bank that over maximize liquidity, sacrifices liquidity and reduces the profit of the bank because the idle fund cannot generate investment returns. liquidity is one of the drivers of deposit money banks profitability, hence must be maintained to ensure the financial health of banks. a bank that maintains a high level of liquidity provides sufficient funds to lend, improve on the return on interest generated from operations as well as financial performance. but poor liquidity planning and control reduce the financial performance of dmbs. the overall financial performance of these dmbs is important for the smooth operation of the financial system of any country. therefore, liquidity management is important for a bank to sustain steady cash inflow so as to boost its financial performance for fair shareholders returns. bank customers are majorly interested in banks’ ability to meet their primary responsibility of paying deposits whenever withdrawal is made, which is usually done within short or no notice (bassey & moses, 2015). effective liquidity management helps the bank to have more operational funds in the short-run to satisfy the needs of its 142 m. g. ajao, e.n. iyekekpolor depositors, other creditors and loan customers, thereby maintaining public confidence and boosting economic activities. the concept of liquidity management has not been treated with kid gloves by banks management because it helps to determine the solvency or insolvency of the organization. figures in accounting are irrelevant except when they convey some important financial information, hence for liquidity management statistics to make sense to the financial analyst, it must be related to other variables; in this case banks quantitative performance can be used to make qualitative judgment. bank liquidity is commonly estimated by the current ratio, which is the ratio between the balance sheet current assets and liabilities. but excess liquidity is not good for the financial health of any bank because idle assets do not earn any return. when liquidity is related to financial performance, they are inversely related, meaning that as liquidity increases, there will be reduction in financial performance. hence the reason to sustain a maximum level of adequate cash that will maximize the profitability of the bank. 2.3. empirical review in nigeria, bassey and moses (2015) investigated the relationship between liquidity and performance of dmbs from 2010-2012. the panel data was estimated with ols techniques and the findings suggested that a statistically significant relationship exists amongst liquidity ratio and performance. in ghana, nkegbe and ustarz (2015) examined determinants of banks’ profitability in ghana from the period 2000 – 2010 using trend analysis with cross sectional data. the result revealed an inverse trend in banks profitability during the period covered by the study. song’e (2015) reveals a direct links between financial performance and liquidity variables, when a study was carried out to examine the linkage between liquidity and profitability of deposit taking saccos in nairobi county between the period 2010 – 2014. the secondary data collected from 27 deposit saccos was analysed with regression analysis. in nigeria, duruechi, ojiegbe and otiwu (2016) measured the effectiveness of liquidity management and banks performance from 1999-2014. time series data was analysed with some preliminary tests and diagnostic tests. the result revealed the presence of dual and long-term relationship between liquidity management and banks performance. okaro and nwakoby (2016) assessed how dmbs are affected by liquidity management from (2000-2015). the secondary data was analysed with the ols regression and the result revealed that an increase in liquidity ratio leads to decrease in banks’ profitability. dmbs should adopt other measures of meeting depositor’s demand at the expense of holding excess liquid cash. the shiftability theory and anticipated income theory are recommended here. salim and mohamed (2016) investigated the impact of liquidity management on financial performance in omani banking sector from 2010-2014. the study concluded that a significant relationship exists between the measures of liquidity and bank’s roa and roe. thevaruban (2017) investigated the factors influencing banks profitability in sri lanka from the year 2012 to 2016. the study employed multiple regression analysis and pearson correlation test to analyse the secondary data. the findings of the study established a significant relationship between liquidity and profitability of commercial banks in sri lanka. hence higher liquidity in dmbs enhances the availability of adequate funds to generate loans, thereby leading to higher financial performance. hasanovic and the impact of liquidity management on financial performance of deposit money banks in west africa143 latic (2017) identified determinants of excess liquidity in bosnia & herzegovina (b&h) banking sector from 2006 – 2015 using the generalised method of moment (gmm). the results suggested bank non-performance loans as an important factor of excess liquidity amongst internal factors. mucheru, shukla and kibachia (2017) revealed a positive relationship between cash management and financial performance of commercial banks when they determined the effect of liquidity management on the financial performance of commercial banks in rwanda from 2014 to 2016. the secondary data was analysed with multiple regression and it was concluded that excess liquidity will lead to reduction in banks’ income and profit. in nigeria, edem (2017) studied liquidity management and profitability of dmbs between the period 1986 and2011. the 24 dmbs operating in the country were the sample size, using linear regression. the analyzed results revealed a direct relationship between liquidity management and roa, and a significant relationship between liquidity management and performance of dmbs, hence optimum liquidity should be kept to maximize returns. idowu, essien and adegboyega (2017) examined liquidity management and banks performance in nigeria between the period 2006 and 2015, using a sample size of four dmbs. the study analyzed the data with pearson correlation coefficient with roa and roe as measures of performance and liquidity ratios as explanatory variables. the findings showed that bank liquidity has significant relationship on roe and roa. onyekwelu, chukwuani and onyeka (2016) appraised the effect of liquidity management on financial performance of deposit money banks in nigeria from 2007 to 2016. using multiple regression, the results show direct and significant relationship between liquidity and financial performance. shah, khan, shah and tahir (2018) investigated determinants of banks liquidity in pakistan from 2007-2016.the sample size was 23 banks operating in the country. panel regression technique was used to estimate the relevant data. the findings indicate that an insignificant relationship exists between liquidity and profitability. bayoud, sifouh, and chemlal (2018) examined the factors of financial moroccan banks performance between the period 2004 and2016. the fully modified ordinary least squares (fmols) method was used to analyze the co-integrated panel data. the findings show that a set of internal variables explain the financial performance of banks. wuave, yua and yua (2020) established that positive and significant relationship exists between liquidity and profitability of dmbs in nigeria from 2010 to 2018 when data was analyzed with panel regression analysis. adewusi and adeleke (2020) concluded that banks’ performance is significantly influenced by liquidity risk management in nigeria from 2013 to 2017 when pooled regression was used as analytical technique. sathyamoorthi, mapharing and dzimiri (2020) studied the effect of liquidity management on the profitability of banks in botswana from 2011 to 2019. the correlation and regression analyses show that liquidity management has significant positive influence on the profitability of botswana banks. hacini boulenfad and dahou (2021) study revealed that liquidity risk management has negative impact on saudi arabian banks’ performance (roe) from 2002 to 2019 with the use of panel data analysis technique. dahiyat, weshah and aldahiyate (2021) employed roa and eps as performance variables in their study of the impact of liquidity on the financial performance of jordanian manufacturing firms from 2010 to 2019. the study results show a statistically significant impact of liquidity on financial performance. 144 m. g. ajao, e.n. iyekekpolor from these empirical reviews, it is evident that most studies such as bassey and moses (2015), duruechi et al (2016), thevaruban (2017), onyekwelu et al (2016), sathyamoorthi et al (2020) and adewusi et al (2020) have examined liquidity management and financial performance of dmbs of an individual country. however, to the best of the researchers’ knowledge, no study has been done on a group of west african countries. hence this study differs from those above in that it specifically assesses the effect of liquidity management on financial performance of dmbs in selected west african countries for the period 1991 to 2020. 3. methodology the study adopts the casual and historical research designs. its causal nature is hinged on how to explore the cause and effect linkage between the liquidity management and profitability as specified in the models over a time scope of 1991-2020. the population and sample of this study constitute all dmbs in the gambia, ghana, nigeria and sierra leone from 1991-2020. the main source of the data was annual financial reports submitted to the selected countries central banks, hence aggregate and countrywide data for each country were adopted for this study. the sample consists of all dmbs (gambia [13], ghana [24], nigeria [20] and sierra leone [12]) that had been in operation from 1991 to 2020. 3.1. model specification in order to provide an analytical basis to test the empirical validation, this study will adopt one of the banks liquidity and performance model by bassey and moses (2015). the mathematical form of the mode is given as: roeit =  (crrit, ltait, ladit, ctdit, lnait) (1) where: roe, = return on equity of banks in period t crr, = current ratio i.e. current asset to current liability lta, = liquid assets to total assets ratio lad, = loans and advances to deposits ratio ctd, = cash to total deposit ration lna, = loan and advances to total assets ratio however, due to the nature of dmbs whose stock in trade is cash deposited by their customers, crr and ctd in the model above are essentially one and the same type of liquidity measure. thus crr will be removed from the model. also, to take cognizance of the heterogeneous nature of the banks to be included in this study, bank size (bsize) (measure as shareholders’ fund) will introduced into equation (1) above as control variable. from the foregoing, the mathematical model for this study is specified as: roe = (ctd, lta, lad, lna and bsz) (2) however, for the purpose of comparison, this study adopts two distinct measures of profitability “return on equity (roe) and return on asset (roa)”. hence, equation 2 is specified in its econometrics form using the two performance measures as: the impact of liquidity management on financial performance of deposit money banks in west africa145 roeit = 0 + 1ctdit + 2ltait + 3ladit + 4lnait + 5bszit + it. (3) roait = 0 + β1ctdit + β2ltait + β3ladit + β4lnait + β5bszit + uit (4) 0, 0 =constant term, 1 5 and β1 – β5 = coefficients to be estimated.  and u = error term. i, t = bank i, time t. the a priori expectation are given as: 1 & β1 < 0 ; 2 < 0 ; 3 & β3 > 0 ; 4 & β4 > 0 and 5 & 5 & β5 > 0. 3.2. data analysis techniques the analytical technique that was applied to estimate models (3 and 4) is the panel regression to minimize the effect of aggregation bias and estimate both time series and cross sectional data. other tests that were conducted are cross-section dependence test, unit root and co-integration tests for stationarity of data. 4. data analysis and interpretation 4.1. descriptive statistics table 1 descriptive statistics variable mean max. min. std. dev. skewness kurt. j-b prob roa 3.25 8.71 -1.04 2.03 0.43 2.89 3.73 0.15 roe 30.86 93.82 -8.67 20.35 0.77 3.21 10.14 0.01 lta 6.11 12.43 0.99 3.14 -0.08 1.87 6.51 0.04 lna 21.02 65.98 2.14 14.80 0.71 2.38 12.11 0.00 lad 52.13 88.98 20.94 16.22 0.14 1.99 5.46 0.07 ctd 38.35 87.86 1.74 25.52 0.09 2.06 4.61 0.10 bsize 19.81 43.40 2.50 10.55 0.23 2.14 4.75 0.09 source: authors’ computation e-view 10.0,2021. the summary statistics for the datasets are also reported in table 1. average roa is 3.25 percent while average roe is 30.86 percent. this implies that there is almost a ten-fold size of roe over that of roa among the banks in the wamz sub-region. average liquidity ratio (lta) is 6.11 percent, suggesting that only about 6 percent of assets among the banks is liquid. this is not an impressive level, and the regulators need to encourage the banking system to improve on liquidity in terms of asset size. the other measure of direct liquidity (ctd) however has an average ratio of 38.35, indicating that the ctd is high. the ldr is over 52 percent, which puts the banks at a higher risk when there are defaults. the standard deviations of the variables are low, indicating the reported mean values are all representative of the banking systems of the selected countries. figure 1 shows the correlation chart between the two dependent variables. it shows a very steep positive slope between the variables, indicating that profitability among the banks for the countries have similar characteristics in terms of direction of movement. when banks’ roa is rising, the roe is also simultaneously increasing. the shape of the chart appears to be a positive exponential curve, indicating that 146 m. g. ajao, e.n. iyekekpolor higher levels of increases in roa are linked to faster increases in roe and vice versa for the banking systems of the four countries. gambiagambia gambia gambia gambia gambia gambia gambia gambia gambiagambia gambia gambia gambia gambia gambia gambia gambia gambia gambia gambia gambia gambia gambiagambia gambia gambia gambia gambia gambia ghana ghana ghana ghana ghana ghana ghana ghana ghana ghana ghana ghana ghana ghana ghana ghanaghana ghana ghana ghana ghana ghana ghana ghana ghana ghana ghana ghana ghanaghananigeria nigeria nigeria nigeria nigeria nigeria nigeria nigeria nigeria nigerianigeria nigeria nigeria nigeria nigeria nigeria nigerianigeria nigeria nigeria nigeria nigerianigerianigeria nigeria nigeria nigerianigeria nigerianigeria sierra leone sierra leone sierra leonesierra leone sierra leone sierra leone sierra leone sierra leone sierra leone sierra leone sierra leone sierra leone sierra leone sierra leone sierra leone sierra leone sierra leonesierra leone sierra leone sierra leone sierra leonesierra leonesierra leone sierra leone sierra leonesierra leone sierra leone sierra leone sierra leone sierra leone 0 20 40 60 80 10 0 r o e -2 0 2 4 6 8 roa fig. 1 relationship between roa and roe source: authors’ computations, eview 10.0, 2021. 4.2. correlation analysis table 2 correlation matrix variable lta lna lad ctd lna -0.633 (0.000) lad -0.519 0.395 (0.000) (0.000) ctd 0.727 -0.445 -0.594 (0.000) (0.000) (0.000) bsize 0.514 -0.020 -0.397 0.437 (0.000) (0.842) (0.000) (0.000) source: authors’ computation, e-view 10.0, 2021. from the correlation matrix in table 2, it is seen that the relationships among the explanatory variables are strong in either direction. essentially, none of the correlation coefficients is too large to elicit multicollinearity problems in the estimation of the models in the study. a strong positive correlation is noted between lta and bsize, suggesting that the level of liquidity in the banking systems for the countries is positively related with cash to deposit ratio and the bank size. thus, banks with larger deposits are more liquid and bigger banks also exhibit higher levels of liquidity. on the other hand, lta is negatively related to lna and lad, indicating that banks with bigger loans and advances ratios tend to be limited in terms of liquidity. thus, the analysis shows that deposits and size matter for better liquidity systems, while loans tend to depreciate liquidity within the banks. this calls for better management of deposits and loans in order to ensure that liquidity is maintained among the banks in the countries. there is also a positive correlation between lna and lad and between bank size and ctd. this is to be expected since loan size and deposits appear to be attractive within the banking sectors of the selected countries. the impact of liquidity management on financial performance of deposit money banks in west africa147 4.3. stationarity tests table 3 stationarity tests results variable homogenous unit root process heterogeneous unit root process remarks intercept and trend llc ips adf-fisher i(0) i(1) i(0) i(1) i(0) i(1) roa -0.742 -6.914 -1.330 -8.030 13.471 66.67 stationary roe -0.379 -3.514 -0.504 -5.419 8.576 43.86 stationary ctd -0.899 -6.282 -0.654 -6.702 1.566 54.53 stationary lad -0.242 -6.616 -0.657 -6.453 2.525 52.70 stationary lna 0.993 -6.228 1.352 -6.890 7.431 57.25 stationary lta 0.626 -5.516 0.049 -7.239 6.763 59.95 stationary bsize -0.235 -5.708 0.612 -5.487 5.960 44.53 stationary note: ** and * indicate significant at 1% and 5 % levels respectively; ips = im, pesaran & shin; llc = levin, lin & chu source: estimated by the authors the stationarity properties of the data were examined using three distinct tests “levin, lin and chu (llc), im, pesaran and shin and the augmented dickey-fuller tests”. this is to enable us identify and understand the homogenous and heterogeneous characteristics of the cross sectional data. the tests results are presented in table 3 4.4. cointegration test table 4 panel cointegration tests results roa equation within-dimension between-dimension kao unweighted weighted statistic prob. statistic prob. statistic prob -3.37 (0.00) panel v-statistic -6.59 0.16 -9.57 0.12 panel rho-statistic 10.34 0.033 10.439 0.01 13.94 0.03 panel pp-statistic -20.89 0 -29.44 0 -42.5 0 panel adf-statistic -18.35 0 -23.38 0 -47.77 0 roe equation within-dimension between-dimension kao unweighted weighted -5.04 (0.00) statistic prob. statistic prob. statistic prob panel v-statistic -6.6 0.06 -9.95 0.16 panel rho-statistic 9.86 0.03 10.16 0.04 13.73 0.04 panel pp-statistic -23.1 0 -33.07 0 -44.41 0 panel adf-statistic -28.09 0 -35.48 0 -48.89 0 source: authors’ computations, eview 10.0, 2021. 148 m. g. ajao, e.n. iyekekpolor table 4 displays the results of the pedroni and kao panel co-integration tests. the coefficients of the ips and augmented dickey fuller test statistics are significant at the 5 percent level which is also supported by kao panel cointegration test. the kao residual cointegration test shown in table 4 shows that the null hypothesis of no co-integration can be rejected for each of the equations. thus, the cointegration tests results show that there are strong long run relationships among the variables in the study. the panel estimation framework can therefore be employed in the empirical analysis. table 5 hausman test for cross-section random effects model chi-sq. statistic chi-sq. d.f. prob. roa 5.34 6 0.5006 roe 7.89 6 0.667 source: authors’ computations, eview 10.0, 2021 for the traditional panel data analysis procedure there is need to select between the fixed effects or random effects models as the best representation of the relationships. from the test results in table 5, the chi-square statistic is not significant at any level, thereby rejecting the fixed-effects estimation technique. this implies we adopt the random effects for the estimation. table 6 liquidity management and bank performance variable dep variable = roa dep. variable = roe coefficient t-statistic prob. coefficient t-statistic prob. c 4.578 4.135 0.000 37.258 3.725 0.000 lta 0.139 2.357 0.037 1.002 1.025 0.308 ctd 0.016 2.048 0.043 0.301 3.230 0.002 lad -0.015 -1.265 0.209 0.032 0.263 0.793 lna -0.014 -0.866 0.389 0.190 3.302 0.001 bsize -0.088 -3.993 0.000 -1.012 -4.981 0.000 adj r-sq 0.230 0.348 f-stat 8.119 11.654 source: authors’ computations, eview 10.0, 2021 the random effect estimates for examining how financial performance are impacted by liquidity management of the banking systems among wamz countries is analyzed in this section. in the results shown in table 6, the adjusted r-squared values are 0.23 and 0.348, indicating that a significant proportion of the dependent variables were effectively explained in the models. more importantly, the significant f-test indicates that the dependent variable was significantly related to all independent variables and that bank performances are influenced by liquidity dynamics. the relevance and effectiveness of each of the explanatory variables in terms of influencing changes in performance indicators are evaluated by considering the coefficients of the explanatory variables in terms of signs and significance. in the results, the coefficient of lta is significant at the 5 percent level for the roa equation but fails the significance test in the roe equation. this indicates that liquidity ratio only matters for operational efficiency of the banks but not in explaining the direction of market the impact of liquidity management on financial performance of deposit money banks in west africa149 outcomes of the banks. the coefficient of lta in the roa equation is positive and shows that increase in the liquidity of the banks in relation to assets significantly boosts return on asset of the banks. thus, banks are essentially better off when they allow more of their asset base to be more liquid. this may effectively promote the capacity of banks to lend and perform core intermediary functions in the financial system. the coefficient of the other direct liquidity variable (ctd) is significant in both the roa and roe equations, suggesting that rising cash to deposit ratios effectively influences overall performances of the banking system among wamz countries. for the loan related variables, the results in table 6 show that the coefficient of lna (loan to asset ratio) fails the significance test in the roa equation but passes the test in the roe equation. this indicates that when loans increase in relation to assets in the banks, the return on equity improves. thus, shareholders’ funds are better managed by expanding loans in the banks in relation to assets. on the other hand, loans to deposit ratio (lad) fails the significance test for both roa and roe equations. this implies that loans do not expand financial performance among wamz banking sectors over time. the coefficient of bank size is negative in both equations and suggests that bigger banks tend to perform less among wamz countries. test of hypothesis: from the results in table 6, the coefficient of the direct liquidity variable cash to total deposit (ctd) is significant in both the roa and roe equations. we can sufficiently reject the null hypothesis that liquidity management does have significant impact on the financial performance of deposit money banks in west africa. diagnostic tests: the post-estimation tests are carried out to examine the significance of estimations conducted in this study. the “variance inflation factor (vif)” test was conducted to ascertain the existence of a linear relationship among the variables. the results of the vif are reported in table 7. theoretically, “variance inflation factors (vif)” ranges from 1 upwards. the results from table 7 show that all the variables have variance inflation ratio of less than 10 for each of the countries. this is a critical condition for observing the absence of multicollinearity in the estimates. the vif results complement those reported in the correlation matrix in table ii and suggest absence of multicollinearity in the models of the study. table 7 variance inflation factor (vif) test for multicollinearity statistics roa roe lna lta max |z| prob. max |z| prob. max |z| prob. max |z| prob. roa equation gambia 2.56 0.04 1.96 0.19 1.35 0.54 1.18 0.66 ghana 11.3 0.00 2.02 0.16 2.34 0.07 3.30 0.00 nigeria 1.00 0.79 1.54 0.41 0.62 0.95 6.25 0.00 sierra leone 0.25 1.00 2.44 0.06 1.76 0.28 3.50 0.00 roe equation gambia 1.32 0.56 1.2 0.65 1.35 0.54 4.03 0.01 ghana 1.83 0.24 1.84 0.24 2.01 0.17 1.08 0.32 nigeria 1.75 0.29 0.96 0.81 0.9 0.84 2.99 0.19 sierra leone 2.19 0.11 1.16 0.68 1.51 0.43 0.93 0.33 * probability approximation using studentized maximum modulus with parameter value 14 and infinite degrees of freedom source: authors’ computations, eview 10.0, 2021 150 m. g. ajao, e.n. iyekekpolor 0 2 4 6 8 10 12 -4 -3 -2 -1 0 1 2 3 4 5 series: standardized residuals sample 1990 2019 observations 120 mean -1.72e-16 median 0.064513 maximum 5.012296 minimum -4.425709 std. dev. 1.772098 skewness 0.252282 kurtosis 3.628799 jarque-bera 3.249869 probability 0.196925 fig. 2 normality test for roa equation 0 2 4 6 8 10 12 -40 -30 -20 -10 0 10 20 30 40 50 series: standardized residuals sample 1990 2019 observations 101 mean 2.63e-15 median 0.389718 maximum 51.46479 minimum -42.86992 std. dev. 15.86536 skewness 0.296985 kurtosis 3.710327 jarque-bera 3.608077 probability 0.164633 fig. 3 normality test for roe equation the tests of normality for the probability function of the estimated models are also conducted. figures 2 and 3 show the histogram plot of the errors or residuals in the estimates, which is used to measure the probability density of the residual estimates. clearly, the charts show that the distribution of the estimate errors or residuals is non-normal, given the bell-like shape of the diagram. this is also demonstrated by the j-b statistic values of 3.25 (pr = 0.196) for roa and 3.61 (pr = 0.164) for roe which both fail the significance tests. this therefore implies that even though the data sets were not normally distributed, the estimated equations pass the normality conditions for the residuals. this further improves on the robustness of the estimates in the study. 5.1. findings the results found in the empirical analysis of this study provide basic background for the evaluation of the roles of liquidity management patterns on bank performance. first, the study has shown that liquidity management of banks, in terms of cash management, generally plays strong roles in explaining performance of the banking sectors among the selected west african countries. apparently, efficient liquidity management patterns are likely to yield positive effects that both improves overall efficiency of the banks and also the impact of liquidity management on financial performance of deposit money banks in west africa151 boosts long term performance. this line of findings is also shown in previous studies by adewusi et al., (2020) and wuave et al., (2020). the role of liquidity in the performance of banks among the selected countries in the study has also been shown to essentially vary on the basis of the performance term. although previous studies have indicated that liquidity matters, in general terms, for the overall performance of banks among several african and developing country economies (ferrouhi, 2014; song’e, 2015), our study has demonstrated that this may not fully be the case for the west african countries. the findings from the study indicate that liquidity ratio does not explain the direction of market outcomes of the banks. thus, liquidity of banks for the wamz economies is more related to the immediate efficiency of banking activities. moreover, the cash to deposit ratio was found to significantly impact on return on equity among the west african dmbs. apparently, cash management that favours more liquid holdings against the pattern of deposits presents more facilities for the banks to maintain more efficient banking functions. rising cash holdings to deposits ratio aids in the servicing of net withdrawals from customer as well as facilitating other activities like customers drawing from their deposit (checking and savings) accounts (biswal & gopalakrishna, 2014; goel & kumar, 2016). this outcome confirms the work of bassey & moses (2015) and agbada & osuji (2013) who found that cash-dominated strategies significantly influence banks’ profitability. from the empirical analysis, there is evidence that the ratio of liquid assets to total assets does not have any meaningful effect on roe. this indicates that overload of cash in the system tends to weaken operational efficiency in the short run among the banks. indeed, indicating that increasing cash reserves in the short run will limit market performance of the banks in wamz (biswal & gopalakrishna, 2014). the results are also in agreement with previous findings concerning the role of liquid asset management in the banking system (kagoyire & shukla, 2016; wadike, abuba & wokoma, 2017). the study also found that the ratio of loans and advances to deposit does not have a significant impact on financial performance of dmbs in west africa. this is based on the insignificant effects of loans and advances to deposit ratio on return on equity in the study. this implies that the lending habits of the banks are essentially not efficient in terms of promoting their profit earnings. in this direction, loan strategies that focus on managing customers’ deposits will not yield ultimate performance outcomes. this outcome may be largely linked to the financial climate in many developing economies, where credit management involves more unique strategies for banks that seek to excel (alobari et al., 2018; olaoye & fajuyagbe, 2020). the ratio of loans and advances to total assets has significant impact on the financial performance of dmbs in west africa. the findings in this direction support the findings of sathyamoorthi et al. (2020) with significant and positive effect on roe. finally, there is also evidence in the study that shareholders’ funds are better managed by expanding loans in the banks in relation to assets. this outcome is feasible given that loan activitiy is a major segment of banking activities, among the banking systems of the wamz economies (bassey & moses, 2015; nkegbe & ustarz, 2015). the focus of shareholders is on building assets and critical aspects of the financial management of the firms. hence, they would always pursue activities that improve on loan management in terms of minimizing loan default and weak application of the loan systems for the banks. hence, return on equity, which is related to the stimulation of shareholder’s funds is more related to loan management strategies that are efficiently targeted in line with overall liquidity management of the banks. this finding is also in line with the outcomes of previous studies (taiwo et al., 2017; tuffour, owusu & ofori-boateng, 2018; kafidipe et al., 2021). 152 m. g. ajao, e.n. iyekekpolor 5.2. recommendations and conclusion the results obtained in the study provide effective background for policy directions. these policy recommendations from the study therefore include: the central monetary authority should seek to maintain cash balances that are optimal for the banking system. the action of the monetary authority to always tend to push the banks into more lending systems, need to be checked given that our study has shown that overt loan activities may hamper bank performance in the long run among the west african economies. in meeting short term cash requirements of customers, banks in the sub-region need to evolve innovative measures that do not put pressure on the cash reserve systems. for instance, rather than holding excessive liquidity, commercial banks may employ the system of borrowing and discounting bills. finally, management of the surplus funds (usually in form of cash) needs to improve and focus more on investing in short-term instruments on a seasonal basis. furthermore, when funding, sourcing by banks is concentrated in the wholesale markets, then the risks of liquidity shocks tend to be more concentrated both for individual banks and within the banking system. in the same vein, “heavy dependence on inter banking funding tends to expose banks to unmanageable risks once confidence weakens”. this study has shown that indeed, liquidity management that relates to loan and cash management is critical for ensuring improvements in performance for the banks in the sampled countries. it is shown that loans and other liquidity management is more strategic and efficient when deposits of the banks are taken into cognizance. this is because the managers realize that the interactions among lending, cash positions portend much risk to the banking sector which require constant consideration. it is also clear from the study that risks that require efficient liquidity management among the banking sectors of the selected countries are relatively high and appear to be rising. essentially, managing risk in banks is a crucial issue which requires expertise knowledge with strategic liquidity management solutions that can minimize its ravaging effects on the banking operations. there is also the need for banks in the selected countries to monitor their deposit mobilization capacity and asset base since these elements have been shown to have major implications on the liquidity management strategies in the banking sectors of the selected countries. the panel regression analysis used in this study is not without its limitations and one of such limitations comes from the possible over parameterization of the regressors which could weaken the significance of the model. however, this was addressed by using suitable lag length criteria to choose appropriate lag length for the study. but for further research in this topic, the use of advanced econometric methods and expanding the scope of the study to cover the sub-saharan african countries is recommended. references adewusi, d. g., & adeleke, k. o. 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(2020). effect of liquidity management on the financial preference of bank in nigeria. european journal of business and innovation research, 8(4), 30-44. uticaj upravljanja likvidnošću na finansijske performanse depozitnih banaka u zapadnoj africi ovaj rad istražuje efekte upravljanja likvidnošću na finansijske performanse depozitnih banaka novca baveći se bankovnim sektorom odabranih zemalja u okviru monetarne zone zapadne afrike (wamz). uzeti su zbirni podaci bankovnog sektora za četiri odabrane zamlje za period od 1991 do 2020. regresiona analiza panel podataka je takođe usvojena za empirijsku analizu nakon što je izvršena statistička procena skupova podataka. rezultati empirijske analize oktrivaju da je smanjenje razmere gotovine i depozita najefikasnija strategija upravljanja likvidnošću koja može da dovede do poboljšanja performansi banaka u proučavanim zemljama. štaviše, ustanovljeno je da krediti i plasmani u ukupnu aktivu imaju značajnog uticaja na finansijske performanse banaka u zapadnoafričkim zemljama. odnos kredita i avansa u ukupnoj aktivi ograničen je na prinos na kapital. ima dokaza i da odnos kredita i avansa za deposit nema značajnog uticaja na finansijske performanse depozitnih banaka u zapadnoafričkim zemljama. postoji potreba da banke u odabranim zemljama prate svoje kapacitete za mobilizaciju depozita jer se pokazalo da to ima značajnog uticaja na strategije upravljanja likvidnošću u bankovnom sektoru odabranih zemalja. ključne reči: upravljanje likvidnošću, finansijske performanse, depozitne banke novca i panel regresija https://journalofbusiness.org/index.php/%0bgjmbr/article/view/2368 https://journalofbusiness.org/index.php/%0bgjmbr/article/view/2368 https://dx.doi.org/10.3923/ijaef.2018.1.8 10842 facta universitatis series: economics and organization vol. 19, no 2, 2022, pp. 125 138 https://doi.org/10.22190/fueo220606010v © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd review paper the most influential organizational change management models from 1950 to 20201 udc 005.591”1950/2020” nikolina vrcelj1, darjan karabašević2 1association of economists and managers of the balkans, belgrade, serbia 2faculty of applied management, economics and finance – mef, belgrade, serbia orcid id: nikolina vrcelj https://orcid.org/0000-0002-6409-4005 darjan karabašević https://orcid.org/0000-0001-5308-2503 abstract. in the modern world economy, the survival of the organization increasingly depends on the ability of management to understand and manage change. the organization is constantly on the move and nothing should be considered static. many diverse factors affect change, and few are under the control of the organization. the task of management is to understand the nature of changes, accept them, and direct them. however, there is no generally accepted model in the field of organizational change management. many researchers and practitioners have failed to reach a consensus on which model is more effective for organizational change to be successful. this paper aims to identify the most influential organizational change models from 1950 to 2020. in order to identify them an analysis of 16 leading journals was carried out. the first 10 journals are listed on the financial times 50 list as the most influential in business and management and were selected for the analysis based on their relevance and scope (organizational change management). other 6 journals were selected for the analysis as they are published by the world's prestigious academic institutions and have a high impact on the field of organizational change. analysis of the journals in the period from 1950 to 2020 was performed, and 19 models of organizational change management that are relevant for this research were extracted. afterward, an examination of domestic literature was conducted. there, three additional referent models were identified using the keywords: "model" and "change" within the research of the cobib.sr database. the identified models of organizational change are then further analyzed and divided into three groups process models that focus on the actual steps or phases of the change 14 models, structural models that discuss the factors of change 5 models; and integrated ones that use a combination of the previous two approaches 3 models. received june 06, 2022 / revised august 22, 2022 / accepted august 27, 2022 corresponding author: nikolina vrcelj association of economists and managers of the balkans, ustanička 179/2, 11000 belgrade, republic of serbia | e-mail: vrcelj.nikolina@gmail.com https://orcid.org/0000-0002-6409-4005 https://orcid.org/0000-0001-5308-2503 mailto:vrcelj.nikolina@gmail.com 126 n. vrcelj, d. karabašević key words: organization, most influential organizational change management models, process change models, structural change models, integrated change models. jel classification: m10, o32 1. introduction in an increasingly turbulent and faster environment, change has become an imperative, a necessity and the key to success when it comes to increasing business efficiency and survival in the market. those who do not change lose and disappear. therefore, if an organization wants to beat the competition, then it must provide and accelerate the process of change, use it as a weapon and be able to manage the creativity of existing staff (eftimov & kamenjarska, 2021; vrcelj, vrcelj, & jagodić rusić, 2017; vrcelj, bučalina matić, & milanović, 2017). in order to fully explain the organizational change, three key issues need to be analyzed in more detail: why organizational change happens, what changes during organizational change, and how organizational change occurs. the answer to the first question requires finding out the causes of organizational change, the second it is necessary to discover the content of organizational change, and the third question it is necessary to explain the process of organizational change. namely, causes, content, and process are the three basic components of the model of organizational change. if the causes, content, and course of the process of organizational change are familiar, then organizational change can be fully understood and successfully managed (čuturić, 2005, p. 102; janićijević & babić, 1998, p. 37). definition of a model in dictionaries mainly includes the following keywords: imitation or what we compare something to. additional definitions often include terms such as a copy or representation of how something was built or how something looks. under the model in this research, we mean the presentation of the organization of the company and its structural elements. according to burke (1994, p. 55; 2011) theoretical organizational model can be useful because of several reasons. first, it helps to categorize the information we have when we look at the company and collect data on activities and behavior in the organization, we have millions of pieces of information at our disposal; for this reason, models are used to select and categorize information and reduce them to a framework that we can manage (for instance: 12 components of a company, instead of thousands). second, the organizational model serves to a better understanding of organizational processes and elements may reveal that serious organizational problems exist only in, e.g. four categories, and let us know in which parts of the organization we should operate. third, the model helps to interpret the data we have about the organization itself (if, among others, there are two organizational components in the model structure, and strategy and if it is known with certainty that they are correlated, we will be aware that changes in structure will affect strategy and vice versa). fourth, the model simplifies the language and communication in the company instead of saying: predisposition to behave in a certain way, we will say (organizational) culture. fifth, the model directs actions during organizational changes serves as a map for the implementation of change strategy (highlights priorities or consequences what comes next), etc. although the organizational model can be very useful for explaining how a company operates or its components, at least two limitations should be kept in mind. firstly, the model is good to the extent that all factors and relationships between them are well identified. secondly, if companies are observed only through theoretical organizational the most influential organizational change management models from 1950 to 2020 127 models, there is a high chance that some important aspects of organizational functioning will be overlooked (burke, 2011). there are many organizational models in modern theory, and some of the most famous authors of these models are mintzberg, mckinsey, morgan, kübler-ross, hussein, backhard & harris, bullock & batten, kotter, lewin, wilson, lawrence & lorsch, khandwall, inkson, poras & robertson, friedlander & brown, denning, greiner, burke & litwin, and others. many of them are based on leavitt’s model if they are structurally typological, or on lewin’s model if they are procedural in nature. 2. research background and methodology this research began with a review of foreign models of organizational change that were published/cited between 1950 and 2020 in at least two of the 16 selected journals. journals were selected in two ways: first, those listed on the financial times 50 (ft50) list from 20162 were analyzed as the most influential in business and management. the list includes 50 journals. based on the relevance and scope of the journal (organizational change management), 40 journals were eliminated, leaving only 10. they are given in the following table (table 1). table 1 selected journals from the ft50 (2016) list of the most influential in business and management position of the journal on the ft50 list, its name, and the publisher 1. 1 academy of management journal (academy of management) 2. 2. academy of management review (academy of management) 3. 9. harvard business review (harvard business school publishing) 4. 24. journal of management (sage) 5. 26. journal of management studies (wiley) 6. 32. management science (informs) 7. 37. organization science (informs) 8. 38. organization studies (sage) 9. 47. sloan management review (mit) 10. 49. strategic management journal (wiley) source: authors' processing according to the ft50 journal list (2016) on the other hand, influential journals in the field of organizational change, published by the world's leading academic institutions with high impact factors in the field of organizational change are given in the following table (table 2). in the second phase of the selection of journals, they are included in the analysis. the selection of journals to be analyzed reached number 16. in the next phase of the research, in order for the model of organizational change to be included in the analysis, it had to be published/cited in at least two journals out of 16 selected. in this way, a total of 19 different models of organizational change were identified. the data are shown in the following table (table 3). as can be seen, kotter's 1995 model is the most cited, and the 1980's 7s model is cited the least. 2 the list is being published every four years. due to the covid-19 pandemic, the list was not released in 2020. 128 n. vrcelj, d. karabašević table 2 influential journals in the field of organizational change journal name and the publisher 1. academy of management perspectives (amp) 2. california management review (uc berkeley) 3. journal of change management (taylor and francis group) 4. journal of organizational change management (emerald) 5. journal of organization behavior (john wiley and sons) 6. leadership & organization development journal (emerald) source: authors’ research in the last phase of the research on the identification of organizational change models, an analysis of domestic literature was performed by searching the cobib.sr database3. there, three additional reference models were identified using the keywords: "model" and "change" – janićijević-babić (1998), janićijević (2004) and cvijanović (2004). the process of identifying the most influential models of organizational change is best explained in the following figure (fig 1). the time distribution of the origin of 22 selected models (19 foreign models and three domestic models), which covers the period from 1950 to 2020, is shown in the following graph (graph 1). fig 2 time distribution of the occurrence of selected models of organizational change included in the analysis source: authors’ research 3 the mutual electronic catalog cobib.sr was formed from the local electronic catalogs of the national library of serbia, the library of the matica srpska, the university library "svetozar markovic" in belgrade and the yugoslav bibliographic information institute. the most influential organizational change management models from 1950 to 2020 129 fig. 1 methodology of selecting the reference models of organizational change for analysis source: authors’ processing 130 n. vrcelj, d. karabašević the most influential organizational change management models from 1950 to 2020 131 3. classification of organizational change management models the identified models of organizational change that will be further analyzed are divided into three groups. the first group consists of process models that focus on the actual steps or phases (determinant "how") of the process of organizational change 14 models. on the other hand, structural models discuss the factors of change in the organization (real factors, related to the determinant "what") 5 models; integrated ones help analyze and understand change using a combination of the previous two approaches 3 models. 3.1. process models of organizational change the process of change has always attracted the attention of researchers who sought to answer the question: what is the course of organizational change, what the stages in the process are, and what should be done to ensure that the process runs smoothly. there are numerous models of the flow of organizational change processes that differ, both in scope (the content of change) and in the nature of the changes themselves. thus, some flow patterns include only partial changes, while others involve radical and comprehensive changes. in doing so, a distinction is made between descriptive and prescriptive models of organizational change. descriptive models are oriented towards explaining the course of organizational change, as it really is, while prescriptive models try to prescribe what an effective process of organizational change should look like (janićijević & babić, 1998, p. 38). process models of change are viewed in an applicative, practically oriented way, i.e. they focus on the question of "how" the actual steps to be taken during the changes, their sequence, and the measures that follow them. the following representations of the models (table 4) follow the logic from simple to more complex and were selected using the previously explained methodology. many theorists have explained their understanding of organizational change through the concept of transition. according to burke (2011), these models illustrate the complexity of major organizational changes. also, transition models make it easier to realize the importance of understanding the multilevel organizational changes that can happen at the same time. three transitional models are presented in table 4 – lewin's change management model, beckhard & harris change process model, and bridges transition model. additional process models (seven-stage model of change by edgar huse, 7 stage model of change by ronald lippitt, bullock and batten's planned change model, kotter's 8-step change model, and others) are also classified and presented in more detail in table 4. 3.2. structural models of organizational change another general issue of organizational change relates to its content: what changes in the organizational change. from the review of concepts and programs of organizational change, it can be seen that the differences between them arose, among other things, because they had different content of organizational change. although different elements appear in different models of organization and organizational change, those that are unavoidable in almost all concepts can be singled out. the following table 5 is an overview of different models of organization that can serve as the components lists of the organization that are most often included in models of organizational change as their object (janićijević & babić, 1998). 132 n. vrcelj, d. karabašević table 4 process models of organizational change: classification model name reference transitional models lewin's change management model (1951) (burke, 2011; cawsey & deszca, 2007; ceranić, 2003; cone & unni, 2020; hussain et al., 2018; janićijević, 1993; jaško, 2000; mašić, 2012; špiler, 2012; stojković, 2006; zakić, 2007) beckhard & harris change process model (1987) (čudanov, tornjanski, & jaško, 2019; young, 2009; zakić, 2007) bridges transition model (1980) (burke, 2011; hemmeter, donovan, cobb, & asbury, 2015; miller, 2017) the seven-stage model of change by edgar huse (1980) (burnes, 1996; national organisation development and design directorate, 2006) 7 stage model of change by ronald lippitt (1958) (barrow, annamaraju, & toney-butler, 2021; kritsonis, 2004) bullock and batten's planned change model (1973) (bamford, 2006; cameron & green, 2012; karasvirta & teerikangas, 2022; kennedy, lewa, maingi, & mutuku, 2020; rosenbaum, more, & steane, 2018; ullah, 2021) kotter's 8-step change model (1995) (čuturić, 2005; henry et al., 2017; janićijević, 2002, 2004; kotter, 1995, 1998; kotter & ratgeber, 2007; passenheim, 2010; stojanović-aleksić, 2007; stojković, 2006; stouten, rousseau, & cremer, 2018; toor et al., 2022) judson 5-step change model (1991) (cheung, 2010; stouten et al., 2018) kanter et al. the challenge of organizational change (1992) (kanter, stein, & jick, 1992; stouten et al., 2018) galpin's change wheel (1996) (cheung, 2010; galpin, 1996; green-wilson, 2011) readiness for organizational change by achilles armenakis, hubert feild, and stanley harris (1999) (armenakis, harris, & feild, 2000) luecke's model of teamwork and change (2003) (luecke, 2003) janićijević-babić organizational change process model (1998) (čuturić, 2005; janićijević & babić, 1998) janićijević's model of organizational change management (2004) (janićijević, 2004; petković, janićijević, & bogićević-milikić, 2012) source: authors' research table 5 structural models of organizational change: classification model name reference leavitt diamond model (1965) (blumberg, cater-steel, rajaeian, & soar, 2019; burke, 1994; coffie, boaten, & asombala, 2018; čuturić, 2005; janićijević & babić, 1998) mckinsey 7-s model (1980) (čudanov, dulanović, & jevtić, 2005; javied, deutsch, & franke, 2019; manktelow & carlson, 2014, 2014; passenheim, 2010; recklies, 2014, 2014; waterman jr, peters, & phillips, 1980) weisbord's six-box model (1976) (burke, 1994; burke & litwin, 1992; javera, muhammad, & waseef, 2018; kontić, 2012; stahl, 1997; weisbord, 1976) burke & litwin model of organisational change (1992) (burke, 1994; burke & litwin, 1992; coruzzi, 2020; egitim, 2022; filej, skela-savič, vicic, & hudorovic, 2009; olivier, 2018) friedlander & brown model (1974) (cvijanović, 1992; friedlander & brown, 1974; janićijević, 1993; jaško, 2000; stojković, 2006) source: authors’ research the most influential organizational change management models from 1950 to 2020 133 presented structural models of organizational change are based on the theory of open systems, i.e. they provide an answer to the question of what should be influenced during change and to some extent how to implement a given organizational change. 3.3. integrated models of organizational change integrated models of organizational change are a combination of structural and process models and were created based on theory and practice. each of the authors of the following models (table 6) worked for some time as an organizational consultant, but they pursued an academic career also. table 6 integrated models of organizational change: classification model name reference nadler-tushman congruence model (1980) (burke, 1994; nadler & tushman, 1980; sabir, 2018; tushman & anderson, 1997; walton & nadler, 1994; zakić, 2007) denning’s model (1968) (cvijanović, 1992; denning, 1968) cvijanović’s model (2004) (cvijanović, 2004) source: authors’ research compared to the number of process models (14 are discussed in the paper) and structural models (the analysis included five of them), the theory of organizational change lacks more integrated models (only three have been identified and explained). this is because changes in previous decades have been viewed through the prism of processes or content, however, the modern age requires an integrated approach. 4. discussion theories of organizational change have mainly descriptive functions. they describe organizational changes and reveal their causes, course, and consequences. theories and perspectives of organizational change are of academic character and their basic mission is to expand knowledge and understanding of the phenomenon that is in their focus. based on theories of organizational change, individuals can understand change, but they are not able to lead it. theories and perspectives of organizational change are, for the most part, not practical enough. they are descriptive and seek to describe changes, and do not contain recommendations on how to report them. on the other hand, models of organizational change are of a practical nature. their mission is more prescriptive rather than descriptive, they seek to prescribe rather than describe the organizational change. the models contain practical knowledge in the form of recommendations on what needs to be done for the changes to take place effectively. process models of organizational change, initially with lewin’s since the middle of the previous century, are mostly sequential steps, stages, phases and are very useful for planning and managing the change process. sequential planning in a linear and causal sense can be very useful: if we do a, b will follow; if y occurs, it is probably due to x. thus, they help us understand the meaning and logic of complex and seemingly unrelated organizational behaviors. however, on the other hand, if this approach is taken literally, unplanned outcomes may follow. it is necessary to keep in mind that when organizational changes really happen, 134 n. vrcelj, d. karabašević they are always more complex, ambiguous, and more complicated than the models show. for this reason, the process of implementing organizational change is nonlinear and often unpredictable. as for structural models of organizational change, they can be helpful when it is necessary to conduct a quick and simple diagnosis in the company, but when a deeper and more complicated diagnosis of organizational condition and change is needed, only identified organizational elements are simply not enough. the first integrated model of organizational change, a pragmatic congruence model, such as the burke & litwin model, presents the organization as an open (input, transformation, output), dynamic and social system whose purpose of existence will be more effectively achieved if there is a match between organizational factors. when applying the model, special attention should be paid to the relationship between strategy and environment, more precisely, their coherence, as well as the concordance of organizational components (tasks, employees, formal structures, and informal structures and processes). the model serves as a great reminder to leaders that discord and chaos in one part of the company will be reflected in other parts of the organization because one of the most obvious reasons for the failure of organizational change is focusing on one part of the company and neglecting others. denning’s model mainly classifies different schools of organizational theory and does not provide ways to identify problems, as well as strategies for overcoming them during change. cvijanović's model perfectly articulates the impact of the environment on the company (internal and external), as well as the impact on employees. however, it does not answer the question of what is the content of the changes themselves, what are the vital organizational elements of the company, and how they are connected (such as the 7s model, the six box model, and the burke & litwin model). 5. conclusion the aim of this paper is achieved since 22 of the most influential organizational change models from 1950 to 2020 were identified. furthermore, these models are classified into three groups and further discussed. special focus in the paper is given to answering the question of why theoretical organizational change models are useful and what their limitations are. the outcomes of the study have important implications for the managers who lead the change since the models are based on certain theories and concepts of organizational change and translate them into good practice. also, in addition to theoretical knowledge in some models, there is a lot of working experience from their authors infused into them. these are usually experienced consultants who have participated in the real changes of a large number of companies. the best models of change combine theoretical knowledge with practical experience, they include activities that managers or agents of change need to undertake in order to successfully implement change. these activities are usually grouped by phases, steps, orders, wedges, strategies, etc. organizational change models identified in this study could be valuable in improving the actions and decisions required for the successful execution of organizational change projects. furthermore, the findings may enable managers to concentrate their efforts and resources on the critical issues that must be addressed in order for organizational change management to be successful. as a result, managers can improve the performance of organizational change initiatives by applying the findings of the study to design better strategies for improving the most influential organizational change management models from 1950 to 2020 135 change management maturity inside their businesses. finally, the findings of this study could be used to construct a new organizational change management model. there are certain limitations to this study that should be addressed in future research. despite conducting a thorough literature review with an emphasis on the most influential organizational change models published in reference journals, certain practical 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(2007). menadžment poslovnih procesa i organizacione promene: doktorska disertacija [management of business processes and organizational change: doctoral dissertation]. beograd: fakultet organizacionih nauka. 138 n. vrcelj, d. karabašević najuticajniji modeli upravljanja organizacionim promenama od 1950. do 2020. godine u savremenoj svetskoj ekonomiji, opstanak organizacije sve više zavisi od sposobnosti menadžmenta da razume i upravlja promenama. organizacija je stalno u pokretu i ništa ne treba smatrati statičnim. mnogi različiti faktori utiču na promene, a malo njih je pod kontrolom organizacije. zadatak menadžmenta je da razume prirodu promena, prihvati ih i usmerava. međutim, ne postoji opšteprihvaćen model u oblasti upravljanja organizacionim promenama. mnogi istraživači i praktičari nisu uspeli da postignu konsenzus o tome koji model je efikasniji da bi organizaciona promena bila uspešna. ovaj rad ima za cilj da identifikuje najuticajnije modele organizacionih promena od 1950. do 2020. godine. u cilju njihovog identifikovanja izvršena je analiza 16 vodećih časopisa. prvih 10 časopisa navedeno je na listi financial times 50 kao najuticajniji u poslovanju i menadžmentu i odabrani su za analizu na osnovu njihove relevantnosti i užeg naučnog područja (upravljanje organizacionim promenama). ostalih 6 časopisa odabrano je za analizu, jer ih izdaju prestižne svetske akademske institucije i imaju veliki uticaj na oblast organizacionih promena. urađena je analiza časopisa u periodu od 1950. do 2020. godine i izdvojeno je 19 modela upravljanja organizacionim promenama koji su relevantni za ovo istraživanje. potom je izvršen pregled domaće literature. tu su identifikovana tri dodatna referentna modela pomoću ključnih reči: „model“ i „promena“ u okviru pretraživanja baze podataka cobib.sr. identifikovani modeli organizacionih promena su zatim dalje analizirani i podeljeni u tri grupe – procesni modeli koji se fokusiraju na stvarne korake ili faze promene – 14 modela, strukturni modeli koji razmatraju faktore promene – 5 modela; i integrisani modeli koji koriste kombinaciju prethodna dva pristupa – 3 modela. ključne reči: organizacija, najuticajniji modeli upravljanja promenama u organizaciji, procesni modeli promena, strukturni modeli promena, integrisani modeli promena plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 4, 2016, pp. 365 377 doi: 10.22190/fueo1604365s preliminary communication factor analysis of total quality management adoption by smes in nigeria1 udc 005.6(662) ja’afaru garba sule 1 , elijah e. ogbadu 1 , akeem tunde nafiu 2 1 department of business administration, kogi state university, anyigba, nigeria 2 centre for pre-degree and diploma studies, kogi state university, anyigba, nigeria abstract. this study focused on total quality management (tqm) adoption by smes in nigeria. the study investigated and analyzed factors responsible for tqm adoption by smes in nigeria, its rate and success of the implementation and influence in competitive situation. cross-sectional survey method was adopted to achieve these objectives. 250 smes were selected from manufacturing, textile, agricultural, food processing and service industries for data gathering; making the population of 2548, from which the sample size of 346 was determined using taro yamane method. the study found that the adoption of total quality management by smes is subject to many factors, and that tqm practices significantly affect different performance outcomes. thus, the study concludes that tqm practice is another strategic option that can enhance viable performance outcome, and subsequently, competitive advantage of any smes at the marketplace. the study therefore recommends that sme owner-managers should invest substantial resources in adapting and implementing tqm in their operations so that success and viable performance outcome can be achieved. key words: total quality management, performance outcomes, competitive advantage, communication, continuous improvement programs introduction today, the changes in both local and global competition inform smes of the need to improve on their efficiencies. many researchers (zhang, waszink and winjgaard, 2000; antony, leung, knowles and gosh, 2002) investigated the imperatives of total quality management (tqm) as a better approach to enhancing efficiency and activeness in effective competition. tqm was viewed as an essential arm of operations management 1received september 15, 2016 / revised november 15, 2016 / accepted november 22, 2016 corresponding author: akeem tunde nafiu centre for pre-degree and diploma studies, kogi state university, anyigba, nigeria e-mail: tundenafiu01@gmail.com 366 j.g. sule, e.e. ogbadu, a.t. naifu practices that is result oriented, and heizer and render (2004) asserted that the adoption and implementation of a set of operations management practices is one of many ways to win the competition in the marketplace. for businesses that would want to meet and exceed the expectations of their customers both at home and abroad, quality management practices is the strategy tool (fening, 2012). global competitiveness is a reality and quality is key to winning in the marketplace (vokurka, 2001). recently, it has been observed that many small business owners now adopt total quality management to win customers’ patronage in nigeria. quality management is conceived to be a better approach to distinguishing their entrepreneurial activities in pursuit of a better pay-off in a competitive situation. mustaph, muda and hasan (2011) posited that quality is very important in business today especially with product recalls and investigations as to what went wrong. though, some sme owner-managers in nigeria believe that the scope of their business has a great implication on the success or failure of the adoption and implementation of tqm. few empirical studies (ramsey 1998; kuratko, goodale and hornsby, 2001) were conducted into finding out the rate and success of implementation of tqm in smes. findings from these studies proved that the rate and success of implementation of tqm in smes is heavily insignificant. studies in this regard are very scanty, but according to husband and mandal (1999), it appeared at the time of their study that smes have been very slow in implementing formal quality models, and where they have, the outcomes are inconclusive. interestingly, this still remains apparent in nigeria today. with great concern from their study, fening (2012) stressed that total quality management is seen as a tool to improve organizational performance in both large and small organizations and in any part of the world. the dimensions of the performance outcomes are financial performance, customer satisfaction, product/service quality performance and operational performance (jaca and psomas, 2015). though, various studies have been conducted to examine the impact of tqm on financial performance, there is still disagreement concerning the effectiveness of tqm (hansson and eriksson, 2002). for example, sadikoglu and olcay (2014) asserted that tqm practices improve the financial performance of the firms; as against the research position of ramsey (1998) and kuratko et al. (2001). the factors responsible for tqm adoption by smes in nigeria and the performance outcome of its implementation, in general, drive the focus of this study. therefore, the main aim of this study is to investigate and analyze factors responsible for tqm adoption by smes in nigeria. the study’s specific objectives are: 1. to investigate the rate and success of the implementation of tqm by smes in nigeria (in terms of customer preference, operation efficiency and product/service quality). 2. to investigate the influence of tqm practices on the competitive situation of smes in nigeria. 1. review of relevant literature 1.1. concept of total quality management (tqm) total quality management is an aged concept. according to jung and wang (2006), total quality management has received great attention in the last two decades. a literature review of the previous studies on tqm evolved that researchers and academicians have factor analysis of total quality management adoption by smes in nigeria 367 defined tqm practices in different ways although they are complementary to each other (prajogo and sohal, 2003). in this regard, sohal et al. (2010) identified five elements such as customer focus, management commitment, total participation, statistical quality control and systematic problem solving. understanding the first element, padhi (2016) stressed that total quality is a description of the culture, attitude and organization of a company that strives to provide customers with products and services that satisfy their needs. according to zairi (2009), tqm can be defined as the agreed company-wide and plant-wide operating work structure, documented in effective, integrated technical and managerial procedures, for guiding the coordinated actions of the people, the machines, and the information of the company and plant in the best and most practical ways to assure customer quality satisfaction and economical costs of quality. pfau (2007) stated that tqm is an approach for continuously improving the quality of goods and services delivered through the participation of all levels and functions of the organization. tobin (2004) views tqm as the totally integrated effort for gaining competitive advantage by continuously improving every facet of organizational culture. from the various view points of the authors, it could be depicted that tqm practice focuses on man, process and output; and these might have probably led authors into dimensioning tqm. 1.2. dimensions of total quality management price and gaskill (2005) identified three dimensions of tqm as: 1. the product and service dimension: the degree to which the customer is satisfied with the product or service supplied. this involves the product reliability, durability and conformity. 2. the people dimension: the degree to which the customer is satisfied with the relationship with the people in the supplying organizations; 3. the process dimension: the degree to which the supplier is satisfied with the internal work processes, which are used to develop the products and services supplied to the customers. today’s business world has posed various challenges to smes and this has often sprung up various researches into how customers can be better served. according to khurshid, kumar and waddell (2012), qm has emerged as an effective competitive tool amongst these organizations. 1.3. total quality management: the cost and success of its practices by smes in nigeria, it appears that the perception of sme owner-managers is that the cost of quality is tied up with the cost accrued to the production of a standard product. gharakhani et al. (2013) explained that the cost of quality is considered by both crosby and juran to be the primary tool for measuring quality. the cost implication of not adopting tqm is relevant for the explanation of little or no growth or entropy of some smes within the shortest period of start-up. in the same vein, khurshid et al. (2012) expressed that the costs associated with such issues are always significant and may result in the closure of businesses. logically, a firm with a defective or rejected product will experience hike in the average cost of redoing a quality product, and this affects the financial scale of the business. crosby referred to it as the price of nonconformance. 368 j.g. sule, e.e. ogbadu, a.t. naifu gharakhani et al. (2013) stated that the cost of prevention is less than the cost of correction. in addition, any compromise on quality by smes could also jeopardize the supply chain, resulting in raising costs because of poor quality (kumar, 2007). the cost of quality analysis will help sme owner-managers to focus on customer satisfaction, and therefore, enhance profitability and vibrant competitive position. according to fryer et al. (2007), the importance of tqm practices for implementation is to increase the success rate, reduce delivery time, and prevent disillusioned state with continuous improvement programs. however, sme owner-managers need to bear in mind that the success of tqm practice depends among other on the following: 1. a review in the operating policy and processes for effective quality management. 2. employee participation and commitment towards quality goal. 3. customer focus quality management task. 4. continuous improvement programs 5. effective communication and teamwork. similarly, ghobadain and gaellar (1997) recommend that for successful tqm implementation providing clear direction and recognition for employees, an effective communication system, a progressive training program and realistic targets should be included. however, gharakhani et al. (2013) summarized the theory of total quality as follows: 1. quality leads to lower costs as defects are reduced; 2. quality is made in the boardroom; it cannot be instilled into shop floor without the initiative and commitment of top management; 3. most defects are caused by the system, not the worker; 4. inspection is too late; aim to reduce defects during production and eliminate mass inspection; 5. eliminate numerical quotas, slogans, exhortation and targets for the workforce and promote sustained and continuous improvement of process and quality of output; 6. drive out fear of change from workers; institute a vigorous program of education, training, and retaining to help the workforce improve continuously and to increase their job security; 7. breakdown barriers between staff areas and abandon review systems that will destroy teamwork and create rivalry; 8. end the practice of awarding business on price tag alone; look for suppliers committed to quality and develop long term relationships with them. 1.4. tqm activities and small firm competitiveness according to anderson and mc adam (2004), the evolution of the business environment over the past four decades has resulted in a need for improvements in business practices. tqm is a philosophy that small firms can use to improve their competitiveness. khurshid et al. (2012) asserted that the business environment in which smes are operating demands quality at each operational step. quality aspect is one of the most essential parameters in global competition today. the demand for better quality of product by customers in market place has made many companies provide quality product and services in order to compete in the marketplace successfully. to meet the challenge of this global competition, small firms can also invest substantial resources in adopting and implementing total quality management (tqm) factor analysis of total quality management adoption by smes in nigeria 369 practices in their operations. khurshid et al. (2012) assumed that a rapid adoption of qm by enterprises has become an important determinant of success in the global market. for the adoption and implementation of tqm, smes stand the chance of winning the market and competitive advantage, and as well refurbishing their internal operating efficiencies. they need not only upgrade their critical operations and technologies, but are required to put some focus on qm issues as well (khurshid et al., 2012). a strategy of high quality leads to a sustainable competitive advantage, (porter, 1980). past studies have reported that the application of quality management practices in smes helps them to sharpen their market focus, use their material and human resources more efficiently and improve their competitive position in the market (ahire and golhar 1996). continuous improvement can enable small scale enterprises to meet the competitive pressures of the global economy head-on, and to develop strategies for making products that are both high in quality and commercially successful. khurshid et al. (2012) opined that it provides a foundation for the competitive pricing and ways of increasing profit margins. obviously, competitive advantage required that a small scale enterprise possess one or more of the following capabilities when compared with its competitors, such as lower prices, higher quality, higher dependability, and shorter delivery time. since small scale enterprises are faced with a competitive marketplace made up of these challenges, continuous improvement can be more than merely a formal or routine system of business management. such continuous improvement can establish capabilities that will enhance the organization’s overall performance (mentzer et al., 2000). total quality management can be a success or failure depending on how well it is planned, implemented, measured and encouraged. however, the success of tqm premises on the communication channels, cooperation and culture embraced by both the sme owners and the employees. 1.5. implementing total quality management the foundation problem with the workability of tqm is the weak status quo of ownermanagers’ knowledge and skills regarding quality techniques. sme owner-managers have the sole-responsibility of conveying the philosophies of tqm to their employees, and this requires distinctive managerial knowledge, skill and attitude (ksa). these among other factors remain essential ingredients of successful implementation of tqm. however, padhi (2016) opined that to be successful in implementing tqm, an organization must concentrate on the eight key elements such as ethics, integrity, trust, training, teamwork, leadership, recognition and communication. padhi divided these elements into four groups as follow: 1. foundation; which includes ethics, integrity and trust. 2. build bricks; which includes training, teamwork and leadership. 3. binding mortar; which includes communication 4. roof; which includes recognition. 370 j.g. sule, e.e. ogbadu, a.t. naifu fig. 1 elements of successful tqm implementation source: adopted from padhi (2016) the first step in managing quality is building a platform for individual display of competence based on ethics, integrity, trust and recognition. in the real sense, ethics focuses on what is right or wrong as a guiding principle; integrity indicates honesty, moral values, fairness, and adherence to the facts and sincerity (padhi, 2016); and trust allows decision making at appropriate levels in the organization, fosters individual risk-taking for continuous improvement and helps to ensure that measurements focus on improvement of process and are not used to content people (padhi, 2016). 2. research methods the objectives of this study stimulate the adoption of cross-sectional survey method. in their view, aldridge and levine (2001) believed that this survey design was useful due to its ability to predict behavior and assist researchers in collecting identical information concerning all the cases in a sample. in line with this, 250 smes were selected from manufacturing, textile, agricultural, food processing and service industries without considering the scale for data gathering. the population for this study was 2548. the study determined its sample size of 346 using taro yamane method as shown below: 2 )(1 en n n   where n = sample size; n = population of the study; e = error estimated at 5% (0.05). 2 )05.0(25481 2548  n = )0025.0(25481 2548  = 37.61 2548  = 37.7 2548 = 346 approximately factor analysis of total quality management adoption by smes in nigeria 371 fig. 2 graphical illustration of sample spread across trends from figure 2 above, it could be observed that the survey cut across smes that have existed within a timeframe considered being helpful to this study. for instance, ownermanagers of smes that have existed for at least five years were able to provide adequate data and information regarding the subject matter. alexander, davern and stevenson (2010) opined that five years is often used as a yardstick for survival by demographers (to permit greater balancing of statistical power of test). to ensure unbiased data gathering process, multi-stage sampling techniques was adopted and simple random sampling techniques to select its required sample. this whole process of gathering data was carried out in collaboration with twelve research assistants. the instrument used for this study consists of items with 4 & 5-point scale for each. 3. data presentation and analysis table 1 questionnaire administration 6.623re 4.93323re 100346min trievednot trieved isteredad percentagefrequencyirequestionna source: field survey, 2016 table 1 reveals that the total questionnaires administered was 346 (100%); 323 questionnaires (93.4%) were retrieved and 23 questionnaires (6.6%) were not retrieved. based on this, analysis was done on the number of questionnaires retrieved. 372 j.g. sule, e.e. ogbadu, a.t. naifu table 2 demographic characteristics of the respondents 100323total experience 100323total ionqualificatleducationa 100323total s ex 100323total age modemeanpercentagefrequencysvariabl 7.7254031 2.14463021 9.18612011 121.59191100 7.725& 5.1550/ 0.3097// 5.2892 973.1859 9.44145 1781.55178 0.1342&59 6.22735848 9.26874737 3.18593626 412.19622515 /         abovemsc bschnd diplomaondnce ssce fslc female male above e source: field survey, 2016 in table 2, it is revealed that 62 respondents (19.2%) fall within the age range of 15 to 25; 59 respondents (18.3%) fall within the age range of 26 to 36; 87 respondents (26.9%) fall within the age range of 37 to 47; 73 respondents (22.6%) fall within the age range of 48 to 58; and 42 respondents (13.0%) fall within the age range of 59 and above. the value of the mean for the frequency of these age group indicates that majority of the respondents are 41 year old. also, table 2 revealed that 178 respondents (55.1%) were male; and 145 respondents (44.9%) were female. the mode for this frequency of sex (168) indicates that majority of the respondents are male. in addition, the table revealed that 59 respondents (18.3%) hold first school leaving certificate; 92 respondents (28.5%) hold senior school certificate; 97 respondents (30.0%) hold national certificate (or its equivalent); 50 respondents (15.5%) hold higher national diploma/ bachelor of science certificate; and 25 respondents (7.7%) hold master of science (or its equivalent) and above. similarly also, the mode for this frequency of educational qualification (97) indicates that majority of the respondents have higher national certificate (or its equivalent). finally, the table reveals that 191 respondents (59.1%) have business experience of 0 to 10 years; 61 respondents factor analysis of total quality management adoption by smes in nigeria 373 (18.9%) have experience of 11 to 20 years; 46 respondents (14.2%) have experience of 21 to 30 years; and 25 respondents (7.7%) have experience of 31 to 40 years. likewise, the value of the mean for the frequency of experiences indicates that majority of the respondents have business experience of 12 years. table 3 factors responsible for tqm adoption by smes in nigeria source: field survey, 2016 table 3 above indicates that factors such as adequate resource availability with mean score of 2.7, technology advancement having a mean score 2.6, quality assurance knowledge with mean score 2.8, managerial planning with mean score of 2.8, communication channels with mean score of 2.8, communication channels with mean score of 2.6, and cooperation and business culture with mean score of 2.6 respectively were observed to be moderately responsible for tqm adoption by smes in nigeria. table 4 responses on rate and success of the implementation of tqm by smes in nigeria 050.3353.3)9.13(45)7.7(25)0.30(97)7.25(83)6.22(73/pr.5 050.3195.3)3.17(56)6.4(15)6.26(86)0.44(142)4.7(24pr.4 050.3279.3)5.11(37)9.26(87)5.15(50)6.14(47)6.31(102.3 050.3173.3)3.13(43)5.24(79)8.19(64)4.16(53)0.26(84.2 050.3344.3)8.19(64)1.7(23)3.18(59)5.28(92)3.26(85.1 (%)(%)(%)(%)(%) qualityserviceoduct timprovemenocess eperformancfinancial sharemarket onsatisfacticustomer pointcutoffs coremeanvlelemegevge frequencyquestion source: field survey, 2016 note: vge-very great extent; gegreat extent; memoderate extent; le-low extent; vle-very low extent; significant at 0.05 level; cut off point = mean + e table 4 shows the responses regarding the rate and success of the implementation of tqm by smes in nigeria. 85 respondents (26.3%) opined customer satisfaction to a very great extent; 92 respondents (28.5%) opined to a great extent; 59 respondents (18.3%) opined to a moderate extent; 23 respondents (7.1%) opined low extent; and 64 respondents (19.8%) opined very low extent. it is observed that the mean score of various factors vge ge le vle total tvge tge tle tvle total mean score remark adequate resource availability 106 83 54 80 323 424 249 108 80 861 2.7 moderately high technology advancement 79 85 96 63 323 316 255 192 63 826 2.6 moderately high quality assurance knowledge 112 91 74 46 323 448 273 148 46 915 2.8 moderately high managerial planning 126 75 56 66 323 504 225 112 66 907 2.8 moderately high communication channels 98 102 28 95 323 392 306 56 95 849 2.6 moderately high cooperation and business culture 107 80 36 100 323 428 240 72 100 840 2.6 moderately high 374 j.g. sule, e.e. ogbadu, a.t. naifu customer satisfaction is 3.344 which are greater than the cut-off point. however, this result shows a moderately high indicator of success. this implies that the implementation aspect of quality decision is strategically focused on capturing the interest and serving the demand of the customers satisfactorily without compromising their expectations to a reasonable extent. for question two, the table shows that 84 respondents (26.0%) are observed to have had market share to a very great extent; 53 respondents (16.4%) are observed to have had market share to a great extent; 64 respondents (19.8%) are observed to have had market share to a moderate extent; 79 respondents (24.5%) are observed to have had market share to a low extent; and 43 respondents (13.3%) are observed to have had market share to a very low extent. it is observed that the mean score of responses (regarding market share) is 3.173 which is slightly greater than the cut-off point. though, the mean score appears to be high; the result shows a weak indicator of success. this implies that market share of smes in nigeria is a less significant measure of their successful implementation of tqm. question three focused on financial performance as an indicator of success in the implementation of tqm by smes in nigeria, the table shows that 102 respondents (31.6%) agreed to a very great extent; 47 respondents (14.6%) agreed to a great extent; 50 respondents (15.5%) agreed to a moderate extent; 87 respondents (26.9%) opined low extent; and 37 respondents (11.5%) opined very low extent. the table depicts that the mean score of responses based on financial performance is 3.279 greater than the cut-off point. the mean score shows that financial performance is a moderate indicator of success. hence, financial performance of smes in nigeria is an evidence of moderate implementation of tqm. question four focused on process improvement as an indicator of success in the implementation of tqm by smes, the table shows that 24 respondents (7.4%) agreed to a very great extent; 142 respondents (44.0%) agreed to a great extent; 86 respondents (26.6%) agreed to a moderate extent; 15 respondents (4.6%) opined low extent; and 56 respondents (17.3%) opined very low extent. the mean score of these responses is 3.195; greater than the cut-off point. this shows that sme owner-managers have not given severe attention to process improvement recently. hence, process improvement of smes is weak indicator of successful implementation of tqm in nigeria. question five focused on product/service quality as an indicator of success in the implementation of tqm by smes, the table shows that 73 respondents (22.6%) have improved to a very great extent; 83 respondents (25.7%) have improved to a great extent; 97 respondents (30.0%) improved moderately; 25 respondents (7.7%) improved to a low extent; and 45 respondents (13.9%) improved to a very low extent. the mean score of these responses is 3.353; greater than the cut-off point. this shows that sme ownermanagers have given moderately severe attention to product/service quality improvement recently. hence, product/service quality improvement of smes is a moderate indicator of successful implementation of tqm in nigeria. however, rate and success of implementation is taken as the performance outcome of tqm adoption by smes in nigeria. the findings of this present study thus agree with the results of sadikoglu and olcay (2014) which revealed that different tqm practices significantly affect different performance outcomes. the findings above advance the studies of ramsey (1998) and kuratko et al. (2001) which proved that the rate and success factor analysis of total quality management adoption by smes in nigeria 375 of implementation of tqm in smes is heavily insignificant. it is lately discovered that tqm implementation has assumed a moderate success in smes. sme owners’ emotional attachment, communication, knowledge, skill, commitment and other efforts towards ensuring customer satisfaction, better market share, financial performance, process improvement and product/service quality are significant to moderate implementation of tqm in nigeria. conclusion and recommendations the adoption of total quality management by smes is subject to many factors such as adequate resource availability, technology advancement, quality assurance knowledge, managerial planning, communication channels, cooperation and business culture respectively. these factors appear to be moderately responsible for tqm adoption by smes in nigeria. the rate and success of implementation or the performance outcome of tqm adoption by smes in nigeria seem to have a positive relationship with tqm practice. it remains unnoticed to a very high degree that tqm has influence on smes’ performance outcome. the underlying fact is that different performance outcomes are subject to different tqm practices. the position of some studies with the reverse result that the rate and success of implementation of tqm in smes is heavily insignificant may be probably defective. the empirical verification proves that tqm implementation has assumed a moderate success in smes from nigeria with concomitant performance outcome. tqm is the continuous improvement of quality to meet expected outcomes. there is no way tqm can be left out of business success today, especially with product recalls and investigation problems and proffering solutions. thus, the practice of tqm is another strategic option that can enhance viable performance outcome, and subsequently, competitive advantage of any small firm at the marketplace. based on the findings of this study, it is recommended that: 1. sme owner-managers should invest substantial resources in adapting and implementing total quality management (tqm) in their operations so that success and viable performance outcome can be achieved. 2. sme owner-managers should select and use the most convenient tool of total quality management. 3. in the course of adoption of tqm, sme owner-managers should take into consideration factors such as adequate resource availability, technology advancement, adequate quality assurance knowledge, effective managerial planning, effective communication channels, cooperation and well designed business culture for organizational family affairs. references ahire, s.l. & golhar, d.y. 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(1980), competitive strategy. in d. gharakhani, h. rahmal, r.m. farrokhi and a. farahmandian (eds.), total quality management and organizational performance, american journal of industrial engineering, 1(3), 46-50. prajogo d.i. (2005), the comparative analysis of tqm practices and quality performance between manufacturing and service firms, international journal of service industry management. 1(6), 217-228. price, r.c. & gaskill, g.p. (2005), total quality management in research-philosophy and practice, total quality management-3: proceedings of 5th international conference, 77-87. rahman, s. (2001a). a comparative study of tqm practice and organizational performance of smes with and without iso 9000 certification, international journal of quality & reliability, 18(1), 35-49. ramsey, j. (1998). the value of iso 9000 certification to a small business, proceedings: second international and fifth national research conference on quality management, february, 145-156. sadikoglu, e. & olcay, h. (2014). the effects of total quality management practices on performance and the reasons of and the barriers to tqm practices in turkey. advances in decision science. 17. sohal, a.s., tay, g.s. & wirth, a. (2010), total quality control in the asian division of a multinational corporation, international journal of quality and reliability management, 6 (6): 60-74. tobin, l.m. (2004), the new quality landscape: tqm, international journal of systems management, 41(11), 10-14. vokurka, r. (2001). using the aldridge criteria for personal quality improvement. industrial management + data systems. 101(7), 363-369. zaire, m. (2009), total quality management for engineers, cambridge: woodhead. zhang, z. waszink, a. & winjgaard, j. (2000), an instrument for measuring tqm implementation for chinese manufacturing companies, international journal of quality and reliability management, 17(7), 730–755. https://www.isixsigma.com/methodology/total-quality-management-tqm/eight-elements-tqm/ https://www.isixsigma.com/methodology/total-quality-management-tqm/eight-elements-tqm/ factor analysis of total quality management adoption by smes in nigeria 377 analiza faktora usvajanja totalnog upravljanja kvalitetom (tqm) od strane malih i srednjih preduzeća u nigeriji ova studija fokusira se na usvajanje totalnog upravljanja kvalitetom (tqm) od strane malih i srednjih preduzeća u nigeriji. studija je ispitivala i analizirala faktore odgovorne za usvajanje tqm od strane malih i srednjih preduzeća u nigeriji, njihovu brzinu i uspeh u implementaciji i uticaj na situacije konkurentnosti. usvojen je metod istraživanja poprečnog preseka za postizanje ovih ciljeva. odabrano je 250 msp iz proizvodnih, tekstilnih, poljoprivrednih, prehrambenih i uslužnih delatnosti za prikupljanje podataka; ukupno 2548 ispitanika, od kojih je određena veličina uzorka od 346 korišćenjem taro yamane metoda. studija je pokazala da je usvajanje ukupnog upravljanja kvalitetom msp podložno mnogim faktorima, a da praksa tqm značajno utiče na različite ishode performansi. tako, studija zaključuje je da tqm praksa još jedna strateška opcija koja može poboljšati održiv ishod performansi, a kasnije konkurentsku prednost malih i srednjih preduzeća na tržištu. studija stoga preporučuje da bi vlasnici-menadžeri msp trebalo da ulože značajna sredstva u prilagođavanje i sprovođenje tqm u svom radu tako da se može postići uspeh i održivi ishod učinka. ključne reči: menadžment totalnim kvalitetom, ishodi performansi, konkurentska prednost, komunikacija, programi kontinuiranog poboljšanja 11289 facta universitatis series: economics and organization vol. 20, no 1, 2023, pp. 15 28 https://doi.org/10.22190/fueo221116003l © 2023 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper factors that affect employment decision of future healthcare professionals in serbia1 udc 331.5:616-051(497.11) snežana lazarević1, jelena lukić nikolić2 1college of sports and health, belgrade, republic of serbia 2modern business school, belgrade, republic of serbia orcid id: snežana lazarević https://orcid.org/0000-0003-2048-1684 jelena lukić nikolić https://orcid.org/0000-0003-0632-8974 abstract. rising trend of international mobility of healthcare workers, ageing population, new diseases and infections bring many challenges to the national healthcare system. consequently, it is necessary to pay special attention to the development of the healthcare system, as well as the attraction and retention of healthcare professionals. the aim of this paper is to examine and analyze the key factors that influence the decisionmaking process of future healthcare professionals regarding employment. 444 participants who are studying or have finished one of the accredited study programs in the republic of serbia in the field of medicine participated in the empirical research in the period from 2020 to 2022. the research results showed that three key factors that future healthcare professionals value when deciding on employment are: opportunities for career advancement, opportunities for personal growth and development, and a pleasant work environment. the fourth place was taken by an interesting, significant, and challenging job, while salary is in the fifth place. the optimal functioning of the healthcare system depends on the healthcare professionals, so the obtained results are valuable for leaders, managers, and decision makers in healthcare institutions. they are well-informed to adequately prepare employee value proposition not only for the attraction of healthcare workers, but also for their retention in the long run. key words: healthcare professionals, employment, recruitment, working conditions, career opportunities jel classification: j24, m50 received november 16, 2022 / revised march 08, 2023 / accepted march 15, 2023 corresponding author: jelena lukić nikolić modern business school, terazije 27, 11000 belgrade, republic of serbia | e-mail: jelena.jl.lukic@gmail.com https://orcid.org/0000-0003-2048-1684 https://orcid.org/0000-0003-0632-8974 mailto:jelena.jl.lukic@gmail.com 16 s. lazarević, j. lukić nikolić 1. introduction healthcare represents one of the most responsible activities of human society, with a dominant social function. the basic right of every human being is to receive adequate health services without distinction based on race, religion, economic and social status, as well as political orientation (world health organization, 2020). the imperative for growth and development of each individual and the entire society is health, which is viewed through the concept of physical, mental, and social well-being (strategija javnog zdravlja u r. srbiji 2018-2026, 2018). that is why one of the priority goals of every government is to preserve, improve and protect the health of the population, and to provide quality and affordable health services on the primary, secondary, and tertiary level. therefore, it is a great responsibility of the government to create a strategy for the development of the health system, to implement adequate health and social policies, as well as to introduce various measures that will ensure the improvement of health of individuals, families, and the entire society. the need for professional healthcare will be increasing in the future due to many factors, including: population ageing, new diseases, infections, and many other health and well-being challenges (cristea et al., 2020). bearers of the key values of each national healthcare system are healthcare employees and associates (fernandes et al., 2022). with professional approach and competent work, they direct activities towards treatment, care, prevention of diseases and risky forms of behavior. knowledge, skills, abilities, attitudes, values, and motivation of healthcare professionals represent the important potential in healthcare and play a significant role in achieving high quality services and general well-being of the population. the key drivers of quality healthcare are: education, employment, good working conditions, training, and retention of competent healthcare employees (lagarde et al., 2019; kitsios & kamariotou, 2021). the aim of this paper is to examine and analyze the key factors that influence decisionmaking process regarding employment of future healthcare professionals in serbia. the paper is organized as follows: the first chapter is focused on the key reasons for the migration of healthcare professionals, while the second chapter is devoted to the key motivational factors. the third chapter describes the research design, while the fourth one deals with the results of research findings and discussion. 2. the key reasons for migration of healthcare professionals in today's unstable conditions which are characterized by constant challenges globalization, economic crisis, decline in economic growth, global pandemics (covid19, sars, bird flu, anthrax...) and migrant crises, healthcare systems (especially in developing countries) are faced with numerous challenges. among the key challenges are how to strengthen already fragile healthcare systems, which policy and practice of motivating and retaining human resources to apply, and how to slow down the rate of migration. concerning fact according to the world health organization (2006) is that 57 countries are faced with critical health workplace shortage. furthermore, low birth rate, ageing population, and high migration rate affect labor availability (arandarenko, 2021). the trend of migration of medical professionals (especially nurses and technicians) from developing to developed countries has started since 2000 (brush, 2008). the most frequent factors that impact the migration of healthcare workers are: poorly equipped factors that affect employement decision of future healthcare professionals in serbia 17 working environment, lack of resources and tools for effective working, low salary, poor working conditions, limited educational and career opportunities (wiskow et al., 2010). economic, social, professional, personal, as well as political factors of migration dominate among healthcare workers (dywili et al., 2013; willis-shattuck et al., 2008). here is primarily referred to individual needs and desires for ensuring a better quality of life (higher salaries), personal safety, healthy environment, as well as better opportunities for training and professional career development (kingma, 2007). migrations are present among all healthcare workers. for example, while medical doctors are more likely to migrate because they expect benefits to their growth and development, medical students also migrate abroad due to the opportunity to accumulate diverse and valuable skills (world bank, 2020). in countries with limited employment opportunities, the departure of young people is often not seen as a problem, but as a solution to high unemployment rates (santric-milicevic et al., 2015). the european training education report states that „the serbia’s biggest export ‘product’ is labour“ (arandarenko, 2021, p. 5). the main reasons for leaving serbia are better opportunities and conditions for employment, working, and living (djurić & tiodorović, 2018). the study of world bank (2020) showed that the main reasons for migration of doctors and medical technicians from serbia to other countries are the inability to find work and low salaries. this trend of migration is especially present among young people who have just finished formal education. research conducted among 719 nursing graduates from 2012/2013 academic year in serbia showed that almost 70% indicated the intention to work abroad hoping for higher salaries, better working conditions, and higher quality of life (santric-milicevic et al., 2015). international mobility and uncontrolled migration flow of healthcare workers can threaten the national healthcare system and have consequences for the management of human resources and the processes of planning, recruitment, development, and retention. the lack of healthcare professionals additionally increases the level of workload and stress of those employees who remain, which can directly affect the decline in performance and the reduction of quality of provided healthcare service. research conducted in 2007 in clinical center nis in serbia in which 770 healthcare workers participated showed that more than two thirds of them are overloaded with work (nikić et al., 2008). the growing healthcare needs of the population, at the national and global level, require healthcare systems with a stable and strong infrastructure, and sustainable human resources (kingma, 2008). that is why it is necessary to pay special attention to the definition of the national strategy for development of the healthcare system and retention of healthcare professionals. retention of healthcare professionals is the key to successful functioning of healthcare institutions, and it leads to savings in costs needed for recruitment, hiring, socialization and orientation of new workers. 3. the key motivational factors for healthcare workers the number of authors examined what motivates people to become healthcare professionals in low and middle-income countries (uganda, sierra leone, cambodia, zimbabwe). the results showed that the most impactful are intrinsic motivational factors such as: „personal calling” (helping people in community, serving people, saving the lives of people), desire for status of professionals (feeling of pride when wearing uniforms) and high respect of community (witter et al., 2018). similar results 18 s. lazarević, j. lukić nikolić are obtained in a study in rural areas in vietnam where the key motivational factors for being healthcare workers were: respect from community, good interpersonal relations, and collaboration (thi hoai thu et al., 2015). furthermore, results from research conducted in northwest ethiopia showed that among main motivational factors for healthcare professionals are: leadership, support, participation in decision making, opportunities for professional development, appropriate work schedule, necessary equipment, and good communication channels (weldegebriel et al., 2016). healthcare professionals are mostly motivated with factors such as autonomy, supportive supervision, respect, good interpersonal relationships, and clear growth opportunities (veenstra et al., 2022). similar results are obtained in semi-structured interviews with doctors in spain – they are driven by intrinsic motivational factors such as helping others, providing quality service, dedication, and help (berdud et al., 2016). the study of kjellström et al. (2017) in five primary healthcare centers in sweden showed that work motivation for healthcare professionals is achieved due to clear goals, lateral collaboration, and systematic improvement of work quality. in czech republic are introduced special measures for recruitment and retention of healthcare workers: higher salary grades, benefits in public-health facilities, continuous programmes for professional development and growth, flexible working hours, and part-time contracts for people with children (wiskow et al., 2010). the results of research conducted in 22 public hospital clinics in warsaw, poland, showed that the main factors of job satisfaction among medical doctors are quality of work, status, respect, and autonomy (chmielewska et al., 2020). furthermore, research regarding healthcare workers in countries of the european union with the highest salaries showed that in most cases intrinsic motivators influenced the decision to go to work abroad. for example, in germany, nurses are leaving the country due to dissatisfaction with working conditions, low salaries, and inadequate professional recognition. on the other hand, doctors emigrate because of the high level of workload and stress, inadequate working conditions, and structured training after completing postgraduate studies (ognyanova et al., 2014). in serbia there is a declining trend in the number of healthcare professionals under 35 years who will replace retired healthcare workers. those young professionals are more mobile and willing to frequently change employers searching for better working conditions (milićević et al., 2018). research showed that for healthcare workers in serbia salary was not the most impactful factor for leaving the job (council on linkages between academia and public health practice, 2016). based on data from the report of the institute of public health of serbia from 2019, the satisfaction of employees in 324 health institutions has increased compared to previous years. in 2019, the percentage of satisfied employees was 46.8%, while the percentage of dissatisfied decreased to 19.7% (horozović & jaćović knežević, 2020). for years, healthcare professionals give the highest satisfaction ratings to professional factors such as: quality cooperation with colleagues, support from superiors, the ability to express one's own opinion and ideas, the relationship between patients and employees, available time for organization, and implementation of work. however, the factors that cause the greatest dissatisfaction among healthcare workers are: salaries, insufficient human resources and inadequate distribution of work among existing workers, lack of or exploited medical equipment, inadequate policy and practice of the reward system, disorganized work, and overload with administrative tasks. other researchers stated that the intention of healthcare workers to leave their current job is increased when they feel tension, stress, and pressure (tripković et al., 2021). results from research conducted in vojvodina among 719 factors that affect employement decision of future healthcare professionals in serbia 19 healthcare professionals showed that they are mostly satisfied with secure jobs, support from supervisors, independence at work, good work relationships, personal qualities of supervisors, and positive working atmosphere (grujičić et al., 2018). babić et al. (2014) showed that in the private and public sector, motivation among healthcare workers was positively related to relationship and support of colleagues. what is worrying is that almost one third of doctors and nurses employed in the public health sector plan to find a job in the private health sector or to move abroad for better career opportunities, professional development, recognition, better working conditions, modern equipment, work-life balance, and greater transparency (world bank, 2020). the situation is even more dramatic among younger health professionals. in 2014, about 80% of first-year and fifth-year medical students in serbia planned and intended to work abroad (world bank, 2020). 4. research design the healthcare institutions as employers need to be prepared for attraction and retention of future healthcare professionals. management of any healthcare institution has a responsibility to devote their time and effort to measuring and managing employees, with the key goal to improve human capital efficiency (veselinović et al., 2022). having in mind previously mentioned facts regarding healthcare professionals, the key research questions (rq) are: rq1: which factors affect decision-making process of future healthcare professionals regarding employment? rq2: are there differences regarding gender, volunteering and working experience of future healthcare professionals? in order to answer the imposed research questions in this paper desk-top and survey research were conducted. desk-top research was based on relevant literature review on this topic, as well as on contemporary trends regarding employment and healthcare professionals. survey research was conducted using a questionnaire which consisted of six questions. the first five questions were of demographic nature and related to age, gender, education, employment status, previous experience in volunteer activities and professional practices. the sixth question was formulated in the form of a five-point likert scale named „factors influencing the choice of employer”. the scale consisted of 11 factors for which respondents answered from 1 (not at all important) to 5 (extremely important) depending on the influence that these factors have on the decision of employment. those factors were selected regarding: economic value (salary, benefits paid parking, gym, private health insurance), professional value (career advancement opportunities, opportunities for personal development, an interesting, significant and challenging job, working with modern technologies), working conditions (pleasant working environment, easily accessible company location, working time flexibility), and reputation value (company reputation comments on social and professional networks, corporate social responsibility). given the fact that respondents are students belonging to the most networked generation that predominantly uses mobile phones, tablets and computers, the questionnaire was conducted online. in the period from june 2020 to may 2022, a total of 444 respondents, who are studying or have finished one of the accredited study programs in the republic of serbia in the field of medicine, filled the questionnaire. 20 s. lazarević, j. lukić nikolić the collected responses were analyzed using statistical package for social sciences spss 21.0. (armonk, ny: ibm corporation). normality of data distribution was tested by kolmogorov-smirnov test and by reviewing histograms, asymmetry (skewness), flatness (kurtosis), normal probability curve (normal q-q plot) and rectangular diagrams (boxplot). as the assumptions about the normality of data distribution for statistical analyses within the measurement scale were met, parametric statistical techniques were applied. a t-test of different groups was used to examine the differences between the two groups within the measurement scales, while anova (analysis of variance) was used to examine the differences between the three groups. in all tests comparing differences between groups, leven's test for assessing the homogeneity of variance was applied. in all cases, the homogeneity of variance was satisfied (p> 0.05). 5. research results and discussion students of vocational and academic medical studies in serbia born between 1995 and 2005 participated in the research. the largest number of respondents was born in 2000 (27.3%), followed by those born in 1999 (23%). regarding gender structure, female respondents were dominant (68.9%), while 31.1% of respondents were male. the largest number of respondents (91%) attended vocational or academic bachelor studies. a small number completed master studies (2.9%), while 5.9% of respondents were attending master's studies. out of the total number of respondents, the largest number was unemployed (67.6%), but there was a certain number of respondents who worked for less than a year (11.9%), then from 1 to 3 years (11.7%) and over 3 years (8.8%). regarding volunteer activities, it is interesting to highlight the fact that 63.3% of respondents volunteered, while 36.7% did not participate in those activities. the cronbach's alpha coefficient for the statements given in the likert scale „factors influencing the choice of employer” was 0.84 which indicates a high degree of reliability of the scale and justifies its application. table 1 shows descriptive statistics based on the values of arithmetic mean (m) and standard deviation (sd) for each of the offered factors that influence participants when choosing an employer. table 1 descriptive statistical analysis for the scale „factors influencing the choice of employer” factors m sd economic value salary amount 4.29 0.815 benefits (paid parking, gym, private health insurance) 3.80 1.074 professional value career advancement opportunities 4.68 0.689 opportunities for personal development (continuous improvement and acquisition of new knowledge and skills) 4.58 0.721 an interesting, significant, and challenging job 4.44 0.778 working with modern technology 3.71 1.071 working conditions pleasant working environment 4.54 0.725 easily accessible company location 3.71 1.044 working time flexibility 4.10 1.004 reputation value company reputation (comments on social and professional networks) 3.45 1.133 corporate social responsibility 4.03 1.011 source: authors’ calculation factors that affect employement decision of future healthcare professionals in serbia 21 the key factors that have the highest values of the arithmetic mean and the lowest values of the standard deviation are: career advancement opportunities (m=4.68; sd=0.69); opportunities for personal development (continuous improvement and acquisition of new knowledge and skills) (m=4.58; sd=0.72); and pleasant working environment (m=4.54; sd=0.73). furthermore, the arithmetic means greater than four were given to the factors related to: an interesting, significant, and challenging job (m=4.44; sd=0.78); salary amount (m=4.29; sd=0.82); working time flexibility (m=4.10; sd=1.00); and corporate social responsibility (m=4.03; sd=1.01). those results are not surprising having in mind the study of bratton et al. (2010) which stated that financial incentives are important but not enough for motivating the healthcare professionals. other research results also showed that opportunities for career development and personal growth are the most important motivational factors among healthcare workers (weldegebriel et al., 2016; chmielewska et al., 2020; veenstra et al., 2022). a comprehensive national study conducted in serbia in 2008 also found that nonfinancial aspects of job satisfaction (professional autonomy, opportunity to develop skills, collegiality, and support) are more important to medical professionals (doctors and nurses) than salary (kuburović, et al., 2016). in the following tables (from table 2 to table 5) research results are presented in numbers and percentages, for further and easier discussion and analysis. table 2 presents results regarding factors of economic value (salary and benefits paid parking, gym, private health insurance). table 2 reponses regarding the importance of economic value among future healthcare professionals factors option number % salary amount not at all important 5 1.1 low importance 4 0.9 neutral 59 13.3 very important 164 36.9 extremely important 209 47.1 missing response 3 0.7 benefits (paid parking, gym, private health insurance) not at all important 15 3.4 low importance 37 8.3 neutral 108 24.3 very important 146 32.9 extremely important 137 30.9 missing response 1 0.2 source: authors' calculation results showed that 84% of respondents answered that salary amount is very and extremely important factor when choosing an employer, while 63.8% answered that benefits such as paid parking, gym, private health insurance are very and extremely important. furthermore, 24.3% of respondents are neutral regarding benefits, while 13.3% are neutral regarding salary amount. table 3 presents results regarding development value (career advancement opportunities, opportunities for personal development, an interesting, significant, and challenging job, working with modern technology) for future healthcare professionals. 22 s. lazarević, j. lukić nikolić table 3 reponses regarding importance of professional value among future healthcare professionals factors option number % career advancement opportunities not at all important 4 0.9 low importance 5 1.1 neutral 18 4.1 very important 73 16.4 extremely important 343 77.3 missing response 1 0.2 opportunities for personal development not at all important 3 0.7 low importance 3 0.7 neutral 34 7.7 very important 95 21.4 extremely important 308 69.4 missing response 1 0.2 an interesting, significant and challenging job not at all important 3 0.7 low importance 6 1.4 neutral 43 9.7 very important 130 29.3 extremely important 260 58.6 missing response 2 0.5 working with modern technology not at all important 19 4.3 low importance 31 7.0 neutral 127 28.6 very important 145 32.7 extremely important 120 27.0 missing response 2 0.5 source: authors’ calculation more than 90% of respondents answered that for them it is very and extremely important to have career advancement opportunities (93.7%) and opportunities for personal development (90.8%). for 87.9% of respondents an interesting, significant, and challenging job is very and extremely important, while 59.7% highly valued working with modern technologies. other studies have also found that elements such as engaging work, the chance of career advancement, the desire to be respected, recognized, and appreciated by coworkers and the employer are among the crucial factors that motivate healthcare workers (gupta et al., 2021). additionally, some other research findings also showed that career development is a key determinant of motivation and happiness of healthcare professionals (muthuri et al., 2020). clear career plans are among the most important motivating factors for healthcare professionals. by acquiring new knowledge and skills, they can perform work in the best way possible, which consequently leads to the increase in their self-esteem and overall satisfaction (afolabi et al., 2018). for that reason, some institutions implemented career ladders – clear path of professional advancement when healthcare professionals demonstrate new skills, and increase their job responsibilities (vilendrer et al., 2022). working environment, available medical devices, tools, equipment, and resources influence the overall quality of healthcare system. if those elements are not satisfactory, that may lead to stress, burnout and high level of absenteeism and turnover among healthcare professionals (wiskow et al., 2010). factors that affect employement decision of future healthcare professionals in serbia 23 table 4 presents results regarding working conditions (pleasant working environment, possibility to work from home, easily accessible company location, working time flexibility) for future healthcare professionals. table 4 reponses regarding importance of working conditions for future healthcare professionals factors option number % pleasant working environment not at all important 2 0.5 low importance 5 1.1 neutral 34 7.7 very important 111 25.0 extremely important 290 65.3 missing response 2 0.5 easily accessible company location not at all important 9 2.0 low importance 48 10.8 neutral 127 28.6 very important 139 31.3 extremely important 120 27.0 missing response 1 0.2 working time flexibility not at all important 7 1.6 low importance 29 6.5 neutral 74 16.7 very important 136 30.6 extremely important 196 44.1 missing response 2 0.5 source: authors’ calculation the largest number of respondents answered that for them it is very and extremely important to have pleasant working environment (90.3%), working time flexibility (74.7%), and easily accessible company location (58.3%). those results are not surprising having in mind contemporary trends of modern workplace in which employees want to have unique experience as if they are the clients of the organization (mićić et al., 2022). they want to feel happy, satisfied and supported at work. many changes in lifestyles, work demands, as well as the larger number of women entering the labor market and increased need for elderly care fostered employees to appreciate the employers which give them the opportunity for flexible working time and work-life balance (mladenović & krstić, 2021). having in mind the growing problem of available parking spaces, it is not surprising why easily accessible company location is also important for respondents. that is the main reason why almost one third of respondents consider location as an important factor. table 5 presents results regarding reputation value (company reputation comments on social and professional networks, corporate social responsibility) for future healthcare professionals. 24 s. lazarević, j. lukić nikolić table 5 reponses regarding reputational value of employers for future healthcare professionals factors option number % company reputation comments on social and professional networks not at all important 30 6.8 low importance 54 12.2 neutral 129 29.1 very important 145 32.7 extremely important 85 19.1 missing response 1 0.2 corporate social responsibility not at all important 11 2.5 low importance 19 4.3 neutral 96 21.6 very important 136 30.6 extremely important 182 41.0 missing response 0 0.0 source: author's calculation regarding company reputation – comments on social and professional networks, 41.8% of respondents answered that for them this factor is very and extremely important, 29.1% had a neutral attitude, and 6.8% answered that this factor is not at all important, while 12.2% answered that it has low importance. on the other hand, corporate social responsibility is for 71.6% of respondents of very and extremely high importance, while 21.6% had a neutral attitude. employers e.g. healthcare institutions need to be oriented toward corporate social responsibility, because young generations put a special emphasis on this perspective. furthermore, healthcare institutions should focus their attention on the process of employer branding with the aim to attract, hire and retain healthcare professionals. important part of employer brand is their reputation in social and professional networks (lukić nikolić & lazarević, 2022). t-test and anova were used in further analysis in order to determine whether there are statistically significant differences between different characteristics of respondents regarding their gender (male and female respondents), volunteering activities (participated in volunteering and not participated) and length of working experience (work for less than a year, from 1 to 3 years and over 3 years). the results of the t-test did not show statistically significant differences between male and female respondents t (434) =-1.279; p=0.202; p< 0.01. furthermore, the results of the t-test did not show statistically significant differences between respondents who volunteered / performed internships and those who did not t(435) =-0.484; p=0.628; p< 0.01. additionally, the results of anova test did not show statistical differences regarding working experience of respondents f(df=4, n=432) = 1.726, p=0.143. the obtained results from statistical tests showed that gender, volunteering activities, and length of working experience do not affect the answers of respondents. consequently, employers e.g. healthcare institutions can prepare universal value proposition for future healthcare professionals in order to attract and retain them in the long run. human resource management policies and practices in healthcare institutions should be modified and adjusted according to these research findings. factors that affect employement decision of future healthcare professionals in serbia 25 6. conclusion the key aim of the paper was to examine which factors are the most important for future healthcare professionals when making the decision about employment. the results of conducted research in this paper showed that the main factors that future healthcare professionals value when deciding on employment are: opportunities for career advancement, personal growth and development, a pleasant work environment, an interesting and challenging job, as well as salary. the key scientific contribution of this paper is in explaining and analyzing the factors that influence the decision making of healthcare professionals regarding employment. obtained results are valuable for scientific community in order to understand the specifics of behavior and attitudes of healthcare professionals. furthermore, obtained results can be useful to extend and refine the theory of motivation and stress management. increased international mobility and uncontrolled migration flow of healthcare workers may increase the level of workload and stress of those employees who stayed in republic of serbia. consequently, there is need to modify and adjust human resources activities and practices in order to provide high quality of healthcare services. scientific contribution also lies in the fact that the need for professional healthcare will be increasing in the future due to population aging, new infections and diseases. retention of healthcare professionals is the key to successful functioning of healthcare institutions. regarding the applied contribution of the paper, there are several important facts for the healthcare system and human resource policies and practices. human resource management in healthcare faces numerous challenges in the processes of planning, recruiting, hiring, developing, retaining and releasing medical workers from healthcare institutions. therefore, it is important that managers, human resource experts and leaders of health institutions carefully analyze and determine the key motivational factors of healthcare workers. salary is not the primary motivational factor for future healthcare workers, as is often assumed and stated. future healthcare workers are more oriented toward the development of their career, opportunities for advancement, training, acquiring new knowledge, and working in a pleasant work environment. with these research findings, healthcare systems are well-informed to adequately prepare strategy and employee value proposition not only for the attraction of healthcare workers, but also for their retention in the long run. clear career plans, continuous education, training, and development of employees, as well as building a pleasant work environment must be at the top of the list of priorities in healthcare institutions. the conducted research is accompanied by certain limitations. one of the limitations of research is the sample which encompasses students who are just getting their education and preparing for work in healthcare. they still do not have (enough) working experience, so their answers are based on their expectations and perceptions. furthermore, this research has not examined some specific working 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http://www.pravno-informacioni-sistem.rs/slglasnikportal/eli/rep/sgrs/vlada/strategija/2018/61/1/reg https://doi.org/10.1186/s12960-015-0092-5 https://doi.org/10.3390/ijerph182010652 https://doi.org/10.1097/hmr.0000000000000284 https://doi.org/10.22190/fueo211118002v https://doi.org/10.1186/s12875-022-01712-z https://doi.org/10.2147/ppa.s90323 https://doi.org/10.1186/1472-6963-8-247 https://doi.org/10.1002/hpm.2485 https://apps.who.int/gb/bd/pdf_files/bd_49th-en.pdf#page=1 28 s. lazarević, j. lukić nikolić faktori koji utiču na odluku o zapošljavanju medicinskih stručnjaka u srbiji trend rastuće mobilnosti medicinskih stručnjaka, starenje populacije, pojava novih bolesti i infekcija donose brojne izazove pred nacionalne zdravstvene sisteme. iz tog razloga je potrebno posvetiti posebnu pažnju razvoju zdravstvenog sistema i privlačenju i zadržavanju medicinskih stručnjaka. cilj ovog rada je da ispita i analizira ključne faktore koji utiču na odluku budućih medicinskih stručnjaka o zapošljavanju. u periodu od 2020. do 2022. godine sprovedeno je empirijsko istraživanje u kojem su učestvovala 444 ispitanika koja studiraju ili su završila neki od akreditovanih medicinskih programa u republici srbiji. rezultati istraživanja su pokazali da su tri ključna faktora koja utiču na njihovu odluku o zapošljavanju: mogućnosti za razvoj karijere, mogućnosti i prilike za lični razvoj i prijatno radno okruženje. na četvrtom mestu se nalazi interesantan, značajan i izazovan posao, dok je na petom mestu visina zarade. optimalno funkcionisanje zdravstvenog sistema zavisi od sposobnosti zdravstvenih radnika, tako da dobijeni rezultati mogu biti od koristi liderima, menadžerima i donosiocima odluka u zdravstvenim ustanovama. oni imaju vredne i značajne informacije pomoću kojih mogu da definišu predlog vrednosti kojim će ne samo privući, već i dugoročno zadržati medicinske stručnjake. ključne reči: medicinski stručnjaci, zaposlenost, radni uslovi, karijerne mogućnosti plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 4, 2017, pp. 321 332 https://doi.org/10.22190/fueo1704321f preliminary communication econometric analysis for tourism demand function in egypt: a dynamic panel data approach 1 udc 338.482:303.4(620) waleed said soliman faragalla faculty of commerce, menoufia university, menoufia, egypt abstract. in this paper, the author investigates the tourism demand function using the dynamic panel data approach in the case of egypt. the panel data set covers the time period between 1995 and 2014. the individuals are 49 countries as origin countries for tourists, representing 92% of the total tourist arrivals to egypt. explanatory variables which affect the tourism demand function were taken into account: lag of dependent variable that leads to dynamic panel data approach, using diff-gmm estimator proposed by arellano and bond (1991); also, many other explanatory variables like gdp per capita, relative price index, distance, and dummy variable which represent the political situation. one of the important and significant conclusions of the paper is the significant effect of the lagged dependent variable (0.493), which may be explained as “word of mouth” to tourists’ decision when choosing the destination. key words: dynamic panel data, tourism demand, diff-gmm, egypt jel classification: c15, c 51, c33, z32 introduction the tourism in egypt has a significant role in egyptian economy, and the tourism development has a vital contribution in economic and social development. as the fastestgrowing and the largest industry in the world, according to world tourism organization, and the industry with the largest number of employees, it contributes to the increasing standard of living. thus, the state is interested in tourism development and ready to support it with large investments due to its impact on the gdp increase, taxes, capital investment and value added. furthermore, tourism is the most important source of welfare in many regions and countries. received october 11, 2016 / revised august 15, 2017 / accepted august 31, 2017 corresponding author: waleed said soliman faragalla faculty of commerce, menoufia university, menoufia, egypt * phd candidate at faculty of economics, university of belgrade, belgrade, serbia e-mail: waleedsaid17@gmail.com 322 w.s.s. faragalla according to the world tourism organization in 2004, the number of tourist arrivals to egypt was around 8.1 million, bringing around us$ 6.3 billion of gross domestic product. by 2010, both the number of arrivals and gdp nearly doubled, the number of arrivals increased to 14.73 million, and tourism contribution to gdp grew to us$ 13.63 billion. in addition, the contribution of the travel and tourism industry in total employment was about 1,744 million jobs. however, the political situation in egypt in 2013 clearly affected the number of tourist arrivals in egypt, leading to the decrease in the number of arrivals to 9.46 million, accounting for us$ 6.75 billion within gdp. this paper analyzes the relationship between the demand tourism in egypt and other economic variables which affect the demand tourism function, such as gross domestic production, the relative price between the host country and the origin countries, the distance between egypt and these countries. the paper will also cover non-traditional factors including geographical location, whether the countries have a common border, the number of world heritage sites, the time zone difference, and the political situation in egypt as dummy variables. many scientific papers investigated this relationship in many countries such as turkey, portugal, austria, germany and malaysia. however, this paper will be the first to investigate this relationship using the dynamic panel data model depending on gmm-diff approach in the case of egypt. the main contributions of this paper can be found in estimating the variables which are included in the tourism demand model in egypt using the suggested gmm –diff methodology. specifically, in the case of egypt tourism should be studied as the pivotal part of economy, since as a destination it is the place of the oldest civilization, with pleasant weather throughout the year. tourists come to egypt all year round: in the summer, the main destinations are cities like alexandria, hurghada, sharm el sheikh, and marsa matrouh, while in the winter, tourists can come to cities like luxor and aswan. throughout the year, historical places like the egyptian museum, the pyramids and the sphinx in cairo and giza are available for visits. egypt supports many types of tourism such as medical tourism, educational tourism (conferences), and religious tourism. also, there are many christian monasteries and islamic places and the safari in the beautiful area of st. catherine, mount moses in sinai, al-dakhlah and ai-kharg, where tourists can watch different animals and migrating birds. the purpose of this study is to empirically cover the weaknesses observed in the research of the demand function of tourism in egypt, especially by using dynamic panel data. more specifically, this paper is the first one to use the approach of studying the demand function of tourism using dynamic panel data models based on gmm –diff in egypt. additionally, the dynamic estimation approach is used to investigate the long-term tendencies of tourism movements in egypt. this paper investigates the effects of various factors on the dynamics of tourism demand in egypt. because of that, we use econometric methodology by applying generalized method of moment estimator (gmm-diff) on the dynamic panel data model. especially, there are few studies using dynamic panel data analysis in tourism in egypt. the importance of this study lies in the utilization of the panel data model from 1995 to 2014, which allows the estimation of the effect of different variables on the tourism demand in egypt, with more information from cross section data and time series analysis. although these approaches were applied in many different studies, the estimated elasticities change from one country to another and from period to period, depending on the explanatory variables. the paper is organized as follows: after the introduction, a literature review of empirical studies in the field of tourism is given in section 2. section 3 is dedicated to the econometric analysis for toursm demand function in egypt: a dynamic panel data approach 323 econometric estimation methods of dynamic panel data models, while section 4 contains the main estimation results. further discussion and conclusion are presented in section 5. 1. literature review during the last two decades, there was a growing empirical literature on tourism modeling focused on the determinants of the tourism demand and especially on prediction of the tourist demand. variables included in the tourism demand models differ from paper to paper. the dependent variable, the demand of tourism, is represented as the number of tourist arrivals, number of overnights, or the revenue of tourism from tourists (song and li, 2008). when it comes to independent variables, many of them were used in different analyses on the tourism demand model. most common variables are the lagged variable of dependent variable, average income per person in other countries, the cost of traveling, the government expenditure in tourism and marketing, and price of tourism (song and li, 2008). in (sara a. proença and elias soukiazis; 2005), the authors divided the independent variables in two groups: the first group incorporates demand factors such as real personal income and the relative price of tourism, while the second group represents supply factors such as the number of beds in hotels available for tourists, the infrastructure in the hosting country. various econometric techniques are used to estimate the tourism demand function. according to applied methods, the mentioned literature could be divided into three groups. the papers in the first group used the technique of cross section data and classical multiple regression (for example, witt and witt, 1995; lim, 1997 and 1999; crouch, 1994 and 1995). the second group of empirical studies used modern time series data technique and cointegration (for example, kulendran and witt, 2001; song et al. 2003; narayan, 2004; drivisekera, 2007; ouerfelli, 2008). finally, the third group of studies makes a combination between cross section data and time series data in tourism demand using panel data regressions and different estimation methods (generalized least squares method (gls) like naude and saayman (2005), generalized method of moment (gmm), etc.). the problem of biased estimates when the lagged dependent variable is one of the explanatory variables is considered by sequeira and nunes (2008). they investigate the effect of country risk on tourism demand using generalized method of moment (systemgmm) with dynamic panel approach, finding the significant statistical effect for variables of the natural logarithm of tourism specialization, as well as prices. in addition, teresa and martin (2007) investigate the determinants of tourist arrivals to the balearic islands for the period 1991–2003 from the 14 major origin countries using the panel data approach. the result of their model showed that the lagged dependent variable of the number of tourists is significant as well as the relative price, at 0.05 significance level; however, the variable gross domestic product was not significant. a different study, conducted by munoz (2007), estimates the impact of germany tourism demand in spain for the period 1991-2003, using the dynamic panel data. this study aimed to prove that lagged tourism arrivals present a positive effect in the long run. the result showed that the portuguese economy charges higher prices and these are associated with high quality products. the coefficient of government spending (govsp) is statistically significant at 1% level. government expenditures are important for attracting the tourists to a destination. the significance effect for lagged dependent variable at 0.05 significance level was also found. 324 w.s.s. faragalla building on the same idea, skrinjaric (2011) analyzes the tourism demand in croatia for the period from 1994 to 2009 for 19 partners. he utilizes a gmm-system, explaining that the variation in tourism demand depends on the icp and income per capita. in 2014, serra et al, studied a similar problem in portugal in the period between 2000 and 2011, covering seven regions in portugal. while recognizing the positive sign for the variables demonstrated in the research, the authors found the significance effect for the variable real per capita income of the sending country, as well as public investment ratio in the host country at 0.05 significance level. recently, zhang (2015) investigated the explanatory variables for the period 20092013 for the sample covering 40 countries using dynamic panel (gmm-system). the model shows that the jet fuel price has no significant impact on the number of inbound travelers, but the variable of the gross domestic product (gdp) is significant at 0.1 significance level. following the majority of the literature, we can also use the dynamic panel data specification and methods like arellano-bond first-step gmm estimator to investigate the determinants of tourist arrivals. 2. econometric methodology framework the difference and system generalized method-of-moments estimators, developed by holtz-eakin, newey, and rosen (1988); arellano and bond (1991); arellano and bover (1995); and blundell and bond (1998) are increasingly popular. those estimation methods can be used when independent variables are not strictly exogenous. namely, when they are correlated with past and possibly current realizations of the error term. system of equations in both first-differences and levels, where the instruments used in the levels equations are lagged first-differences of the series. these instruments are valid under restrictions on the initial conditions, to obtain a linear gmm estimator better suited to estimating autoregressive models with persistent panel data. there are many advantages of using gmm-diff such as efficiency, weighted by the inverse of the variance of the population moments, which, under suitable conditions, is the asymptotic variance of the sample moments. the second advantage is feasibility, meaning that making gmm practical requires a feasible estimator for the optimal weighting matrix. there is also a disadvantage of difference and system gmm is that they are complicated and so can easily generate invalid estimates. in this study, a dynamic panel data (gmm-diff) will be used. this estimator helps the researchers to solve the problems of serial correlation, heteroskedasticity and endogeneity for some explanatory variables. the gmm-system estimator is an alternative to the standard first differenced gmm estimator, suitable for estimating the dynamic model. arellano bond estimation starts with the difference gmm by transforming all regressors, usually by differencing. after that, it uses the generalized method of moments, thus called “difference gmm". forward orthogonal deviations transform, proposed by arellano and bover (1995) is sometimes performed instead of differencing. the arellano-bover/blundell-bond estimator augments arellano-bond by making an additional assumption. the gmm-diff estimator is consistent if there is no second-order serial correlation in the residuals. however, that first differences of instrumental variables are uncorrelated with the fixed effects; the dynamic panel data model is valid if the estimator is consistent and the instruments are valid. econometric analysis for toursm demand function in egypt: a dynamic panel data approach 325 there are also assumptions about the data generating process for the difference and system gmm estimators when we design panel analysis: the process and data may be in dynamic type, with current realizations of the dependent variable influenced by past ones (lagged dependent variable); some regressors may be endogenous, and/or predetermined (not strictly exogenous). the construction of the panel data model with lagged dependent variables as one of explanatory variables, the unobserved panel-level effects are correlated with the lagged dependent variables, thus making standard estimators inconsistent. arellano and bond (1991) derived and introduced consistent generalized method of moments (gmm) estimator for this model. moreover, this estimator is designed for datasets with many (n) and few (t). this method assumes that there is no autocorrelation, and requires the initial condition that the panel-level effects is uncorrelated with the first difference of the first observation of the dependent variable. special interest in statistical inference is post estimation procedure for the method (gmmsystem). firstly, the arellano–bond test for serial correlation in the first-differenced residuals should be applied (command in stata estatbond). the estimation by gmm-diff is valid only if there is no serial correlation in the idiosyncratic errors. if the arellano-bond test rejects the null hypothesis of no serial correlation in the first-differenced errors at order one, it does not imply that the model is miss specified. however, rejecting the null hypothesis at higher orders implies that the moment conditions are not valid. secondly, the sargan tests the overidentifying restrictions (command in stata estat sargan). the moment conditions used by gmm-diff can produce consistent estimates only if the moment conditions used are valid. although there is no method to test if the moment conditions from an exactly identified model are valid, one can test whether the overidentifying moment conditions are valid. 3. empirical analysis of tourist demand in egypt 3.1. econometric model and data the methodology of this paper will be dynamic panel data estimation methods, as often used in the previous empirical literature. this approach will be used to evaluate the demand function of tourism in egypt during the 20-year-period from 1995 to 2014 in relation with eighteen countries, which represent around 92% of the annual number of tourist arrivals in egypt: the russian federation, the united kingdom, germany, italy, saudi arabia, poland, the sudan, the united states of america, jordan, libya, canada, china, denmark, sweden, austria, belgium, france, and the netherlands. these countries have been chosen as the biggest contributors to the number of tourists who come to egypt yearly. there are many advantages of panel data analysis over the cross-section data or time series data alone: it enables higher degree of freedom, and higher variability which consequently decrease the multicollinearity between variables (hsiao, 2003). this makes the parameters more accurate and gives us the ability to control for omitted variable bias. using dynamic panel data approach instead of static regression is convenient, as the later one has many problems such as instability (witt and song, 2000). in this paper, the dependent variable will be the number of tourists based on the data from the formal statistical source, united nation world tourism organization (unwto). in this paper, variables will be as follows: 326 w.s.s. faragalla 3.2. variables: dependent variable: ntit number of tourists (ntit): this variable represents the number of tourists arriving to egypt from origin countries such as: the russian federation, the united kingdom, germany, italy, saudi arabia, poland, the sudan, the united states of america, jordan, libya, canada, china, denmark, sweden, austria, belgium, france, and the netherlands, during the period from 1995 to 2014, based on the data from the unwto. independent (explanatory) variables: 1. lagged number of tourists (ntit-1): this variable represents the number of tourists arriving to egypt from different countries (i) during the previous years (t-1). the expected sign for this variable is positive, due to the habit and preference of the tourists to go to the same place again. 2. gdp per capita (gdppcit) for sending countries: represents the gross domestic product per capita for each of the different countries (current us$), sourced from the world bank site, the expected sign for this variable is positive. 3. relative price index (pit): represents the relative price index between the hosting country and the sending countries, in precise the consumer price indexes in egypt and the sending countries. this variable is given by the ratio of the price index level of the receiving country (egypt) and the sending country, adjusted by the bilateral exchange rate. the source of that variable is calculated via formula based on the data from the world bank. the expected sign for this variable is negative. 4. distance (dit): the geographical distance between egypt and sending countries represent a significant proxy for the cost, paid by tourists to arrive to egypt. the distance will be measured by kilometers between cities, via website www.distancefromto.net. 5. dummy variables: reflect the political situation in egypt, presence of violence and terrorism. this variable is very important, as tourists tend to investigate the political situation before going to any hosting country. this variable takes value one when the situation in egypt is unstable. the variable is based on the political analysis literature in egypt, and it depends on the political situation between 2011 (january), when there was a revolution, and 2013 (june), when we got a new president. in this period, many of foreign embassies issued warnings for their host countries, advising against visiting egypt in this period, such as germany, france, italy and israel. thus, the dummy variable was divided to three variables for the years 2011, 2012, and 2013: when year2011 is dummy variable which takes unity (1) for the year 2011, zero otherwise, year2012 is dummy variable which takes unity (1) for the year 2012, zero otherwise. if egypt has a bad political security in year 2012 and takes zero for other years, year2013 is dummy variable which takes unity (1) for years 2013, zero otherwise. econometric analysis for toursm demand function in egypt: a dynamic panel data approach 327 non-traditional factors: these variables are non-traditional variables in previous models, incorporated in our model to explore their effect on the tourism demand function in egypt. there are some that have natural candidate which may have a significant impact on the tourism demand function. dummy variables will be used for each of these variables to check if there is significance relation on the tourism demand function or not. the source for these variables is available by world development indicators, for instance: 1. geographical location (gl), means countries have the same border. this variable represents the countries which have a common border with egypt, and the effect of the common border can be estimated in the model. gl is dummy variable which takes unity (1) if the sending country has the same border with egypt, zero otherwise. 2. number of world heritage sites (nhs): the variable tests the estimation of the difference of the world cultural and natural heritage sites in the sending countries and destination country, the tourists can prefer to visit the country with more cultural and natural heritage sites, they may be interested in discovering different and heritages abroad, the data of this variable available on unesco site (culiuc, 2014). nhsit= (cultural and natural heritage sites in sending countries) t – (cultural and natural heritage sites in egypt) t 3. time zone difference (tzd): the difference in time zone represents an important variable in tourism demand function, the tourism decreases in case of big difference between the sending and hosting countries. tzdi is the time difference in hours between the sending countries and hosting country (egypt). 4. common language (cl): similarly, to the trade, the common language plays an important role in increasing number of tourists, especially in communication between the countries. cl is dummy variable which takes unity (1) if the sending country has the same language as egypt, zero otherwise. the econometric panel data model of tourism demand in our empirical analysis contains the following explanatory variables: (1) the tourism demand estimated model is in the double-logarithmic form, as the most recommend form in previous empirical literature. witt and witt (1995) concluded that more than 75% of the empirical econometric models were designed in that functional form are easy for the interpretation of the coefficients through the demand elasticity. the parameter β1 indicates to what degree is the tourism demand in egypt affected by the number of previous tourist arrivals. thus, econometric model for estimation has the following form: (2) with i=1,2, …,20 and t= 1,2, ….,49. when: , is the fixed effects, , are country effect and time effect respectively. , which is the error term, should be serially uncorrelated with zero mean, 328 w.s.s. faragalla and independently distributed across individuals. it also has to be uncorrelated with the dependent variable for all t. because of the dynamic processing in the model, it will face a problem of correlation between the first explanatory variable (lagged dependent variable) and the error term. so that, if we used the fixed effect (ols) or random effects (gls), our estimated coefficient would not be efficient, and it would be biased estimator. to override this, generalized method of moment (gmm) estimation will be used to estimate dynamic panel data (arellano and bond, 1991), however assuming that there is no second-order autocorrelation in the errors. the main advantage of using gmm estimate lies in the control of the endogeneity through the lagged values of the levels of the endogenous, while the predetermined variables are instruments. the best solution for this problem is to use the first difference for the equation (2) to remove the individual effects followed by using the instrumental variables using instruments the values of the lagged two or more for dependent variable. this solution will offer consistent parameter but not efficient, provided by the first difference gmm method offered by arrelano and bond (arrelano and bond 1991, hsiao 2003). this method assumed that there is not second autocorrelation in error term, and the equation will be offered as following: the dynamic panel data model will be formulated as following: (3) with i=1,2, …,20 and t= 1,2, ….,20. and the same for all other variables, with method assuming that there is no second autocorrelation in error term, and sargan model of over identifying restrictions, as soon as we cannot reject the null hypotheses gives strength to the model. 4. empirical results 4.1. descriptive analysis the following section describes the characteristics of the number of tourists in egypt during the period from 1995 to 2014. the number of tourists increased continuously until its peak in 2010, at approximately 14.7 million tourists. after that, due to increasingly unstable political situation in egypt, a drop is visible in 2011 and 2013 to below 10 million arrivals. graph 1 total number of tourists 1995 -2014 source: united nation world tourism organization (unwto) econometric analysis for toursm demand function in egypt: a dynamic panel data approach 329 the following table represents the percentage of the total number of arrivals for each country, across the years 1995, 2000, 2005, and 2010. table 1 origin of the tourists in egypt 1995, 2000, 2005, 2010, and 2014 (in percentage of total number) year 1995 2000 2005 2010 2014 russian federation 3.51 3.30 9.03 19.39 31.78 united kingdom 9.08 6.52 9.73 9.88 9.17 germany 10.19 14.28 11.38 9.02 8.88 italy 8.21 13.66 9.56 7.77 4.05 saudi arabia 5.73 4.36 4.20 2.55 3.54 poland 0.54 1.04 1.79 4.03 3.07 sudan 1.47 0.96 1.32 1.29 1.89 united states of america 4.94 4.27 2.27 2.45 1.57 jordan 1.57 1.43 1.46 1.16 1.73 libya 5.01 2.77 4.37 3.06 2.14 canada 0.83 0.84 0.61 0.65 0.55 china 0.19 0.25 0.41 0.72 0.62 denmark 0.63 0.93 1.07 0.92 0.54 sweden 0.62 1.27 1.42 1.43 0.55 austria 1.10 1.81 1.59 1.63 1.32 belgium 1.43 1.94 1.79 1.33 0.75 france 3.90 6.90 5.75 4.07 1.47 netherlands 1.25 2.58 2.39 1.98 1.28 total percentage 60.19 69.11 70.16 73.33 74.89 source: united nation world tourism organization (unwto) the main aim of this work is to explore the international demand which represents 73% of all tourist arrivals, with a total of almost 15 million foreign tourists in 2010. the previous table represents the percentage of the number or the arrivals for each country, in five years. germany leads with the highest percentage in 1995, 2000, and 2005, which are 10%, 14%, and 11% respectively. however, the russian federation represents the highest percentage in 2010, and 2014 with 14% and 32% respectively. the listed countries jointly represent 70% of the total number of tourists in egypt in 2005, increasing to 75% in 2014. 4.2. econometric methodology the value of studying tourism demand models planning and policy has been discussed widely in many studies using the traditional regression model. however, those studies concentrated on static models which had many problems, including forecasting failures. in order to answer this problem, we will use generalized method of moment estimation (gmm), developed by arellano and bond (2002) and used to estimate dynamic panel data (in stata v.12). the lagged dependent was used as the explanatory variable, in order to capture the persistence effects of the tourist's habits and behavior. two main reasons for using the lag variables number of tourist arrivals in egypt are: firstly, uncertainty: there is strong certainty associated with visiting the country that you know and are familiar with it, contrary to visiting a country for the first time. secondly, “the word of mouth” or spreading 330 w.s.s. faragalla other people’s knowledge and experience about the beauty of a destination and comparativeness of the country, depending on many variables like the level of education, infrastructures, number of old heritage sites and many other variables. from that dynamic specification eq (3), the result will be as follows: table 2 estimation results for the linear and dynamic model (1995-2014) variables gmm diff estimator of arellano and bond constant -15.847 (0.254) ln_lagnt 0.493 (0.000) ln_gdppc 0. 533 (0.000) ln_distance 1.996 (0.247) ln_relativeprice -0.009 (0.483) year2011 -0.458 (0.000) year2012 -0.090 (0.017) year2013 -0.411 (0.000) tzd 0.254 (0.419) number of observation 882 wald hi2(8) 3054.22 (0.000) sargan chi (189) 94.11 (0.875) the bold numbers are significant at 0.05 significance level. the equation will be as following: number of observation =882, wald chi (8) test= 615.73, sargan = 94.11 (0.875). table 2 represents the estimated equation for the tourism demand function in egypt using dynamic panel data when the i (individuals) is defined as the number of countries from 1 to 49, and the t defined as the number of years from 1995 to 2014. based on the arellano and bond method we had the following estimated function: from the previous equation, the value of sargan test statistic has value 94.11 and p value 0.875, meaning that the test is not significant and the null hypothesis saying that the instruments used in this regression are correct can be accepted. furthermore, the coefficient of lagged dependent variable (ln nti, t-1) is significantly estimated in the equation. that means, it is the behavior and habit (word of mouth) for tourists to come to egypt, and this result supports using demand is a dynamic process, confirming the previous studies which also found positive effect for this variable (serra et al, 2014; rodríguez et al, 2015). the second explanatory variable is gdppca, also statistically significant with a positive sign, showing that there is a statistically significant relationship between the gross domestic product per capita in sending countries and the number of tourists from these countries, the relative price (pit), defined as the relative price index between the hosting country and the origin countries with respect to the exchange rate, also dummy variables are statistically significant, they represent the political situation in egypt in 2011, 2012 and 2013, there is negative significant relationship between the number of tourists and dummy variables which represent the years 2011, 2012 and 2013. in these years, there were two revolutions in egypt in the period between 2011 and 2013. however, other variables are not statistically significant. econometric analysis for toursm demand function in egypt: a dynamic panel data approach 331 conclusion and discussion the main aim of this paper is to identify and estimate the impact of the explanatory variables in the tourism demand function in egypt from other countries such as russia, germany, italy, the united kingdom, france, libya, saudi arabia, and israel, and other countries which contribute mostly to the total number of tourist arrivals representing 92% of the total number every year, by using dynamic panel data during the period from 1995 to 2014, by using stata v.12 depending on gmm-diff method which is presented by arellano and bond (1991) for analyzing dynamic panel data models. by comment for the estimated elasticity in our model, we obtained the positive sign for the lagged variable of the number of tourists, and gdppc in this country, and the values are lower than one and with the positive sign (0.493), and (0.533) respectively. however, we 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(2015). international arrivals to australia: determinants and the role of air transport policy. journal of air management, 44-45, 21-24 http://dx.doi.org/10.1016/j.jairtraman.2015.02.004. ekonometrijska analiza funkcije turističke potražnje u egiptu: dinamički model panel podataka u ovom radu autor istražuje funkciju turističke pittance koristeći dinamički model panel podataka na primeru egipta. panel podaci obuhvataju vremenski period između 1995. i 2014. godine, a pojedinci su 49 zemalja iz kojih dolaze turisti, što predstavlja 92% ukupnog broja turista u egiptu. uzete su u obzir neke objašnjavajuće varijable koje utiču na funkciju turističke potražnje: vremenski pomak zavisne varijable koja je bila razlog korišćenja dinamičkog modela panel podataka, upotrebom diff-gmm procenitelja koji su predložili arelano i bond (1991); kao i mnoge druge objašnjavajuće varijable kao što su bdp po glavi stanovnika, indeks cena, udaljenost, i “dami” varijable koje predstavljaju političku situaciju. jedan od važnih i značajnih zaključaka rada je veliki uticaj zavisne varijable sa vremenskim pomakom (0,0493), koja se može objasniti kao usmena preporuka turistima prilikom izbora destinacije. ključne reči: dinamički panel podaci, turistička potražnja, diff-gmm, egipat facta universitatis series: economics and organization vol. 12, n o 3, 2015, pp. 225 235 imperatives of strategy in human resource training of small and medium scale enterprises in nigeria  udc 005.96(669) akeem tunde nafiu 1 , folashade olufunke obaje 2 , salisu yakubu 1 1 centre for pre-degree and diploma studies, kogi state university, nigeria 2 department of accounting, kogi state university, nigeria abstract. this study focused on the imperatives of strategy in human resource training for small and medium scale enterprises in nigeria. this study aimed at investigating whether strategic human resource training can facilitate the achievement of smes growth objectives in nigeria. this study selected 18 micro-small and medium scale enterprises in nigeria, with the population of 232 (32 sme owners and 200 employees). the study determined its sample size through taro yamane sampling method, and used bowler’s proportional allocation formula to distribute samples to its varying universe. data and information were gathered through primary and secondary sources. this study analyzed the data collected with descriptive method and tested hypothesis with likert statistical method. the study revealed that strategic human resource training can facilitate the achievement of smes growth objectives in nigeria. thus, the study concluded that strategic human training programme can serve as the bedrock of success for smes, and can engineer knowledge, initiatives, innovativeness and confidence, competitiveness and the achievement of positive payoff. the study therefore recommends that sme owners should integrate effective strategy to human resource training such that growth objectives can be facilitated and achieved. key words: human resource training, strategy, growth objectives, business game, talent war. introduction recently, much attention has shifted to the management of human resources by many business firms including small and medium scale enterprises around the globe. according to chan (2009), human resource is critical to the success of business operations and future expansion; in other words, human resources are pertinent to small and medium firms to gain received june 16, 2015 / accepted october 27, 2015 corresponding author: akeem tunde nafiu faculty of management sciences, centre for pre-degree and diploma studies, kogi state university, nigeria e-mail: tundenafiu01@gmail.com 226 a. t. nafiu, f. o. obaje, s. yakubu competitive advantage and for long term survival, and thus a deeper understanding of managing human resource in the small firm is vital. this implies that human factors form the real stuff, brain box and distinctive capability of small and medium firms. one of the several issues raising phobia for sme owners in nigeria is how to train human factors distinctively. in alignment with this, cole (2005) alarmed that training and development of employees is an issue that has to be faced by every organization. it is not argued that smes contribute hugely to job creation, but developing human resources is a strategic issue. training and skills development is significantly lower in smes than in large enterprises – with smes involved in up to 50% less training than larger firms, (oecd, n.d.). few sme owners who practice human resource training did not incorporat strategy to training programmes and its benefits are far reaching. clearly, if smaller firms are to maximize their human resource potential, such organizational learning needs to be generated throughout the range of their hrm activities and clearly tied to broader strategic issues (beaver and hutchings, 2005). sme owners have contributed to the mediocrity of their businesses due to their myopic view regarding the business financial capacity and other limitations. indeed, the present business game poses threats to business firms that avoid the adoption of strategy in their human resource training. in this regard, iwarere (2009) alarmed that many businesses today are finding it difficult to realize their ultimate goals because of the effects of the competing firms that are eroding their market shares. incorporating strategy to human resource training has a payoff (competitive advantage or positive payoff where the strategy is winning) and can distinguish the business firm’s intellectual capacity. when outwitting strategy is combined with hr training system, competitive strength therefore increases, and success becomes more feasible; as the competitive position of other business firms becomes threatened and unstable. thus, the application of strategy to human resource training will make sme owners proactive and reactive where necessary. training, in all its forms, should be kept simple by ‘stopping the guessing’ and ‘starting the knowing’, with the need to reflect, rethink and respond, (o’regan et al., n.d.). vemić (2007) is right that organizational development is always conditioned by human knowledge and skills, but distinctive knowledge and skills of today make a good talent. for an organization to achieve its specified objectives, it must invest in training of its employees and also arrange their talents, skills and expertise, (faloye, 2003). thus, strategic human resource training is necessary for smes in the pursuance of objectives in nigeria. it is observed that there has been relatively little or no research conducted on the imperative of strategy in human resource training for smes growth objectives in nigeria. research objectives the main objective of the study is to investigate the imperatives of strategy in human resource training for small and medium scale enterprises in nigeria. thus, the specific objective of the study is to investigate the extent at which strategic human resource training can facilitate the achievement of smes growth objectives in nigeria. research hypotheses based on the objectives above, the study drew one testable hypothesis as stated below: h0: strategic human resource training cannot facilitate the achievement of smes growth objectives in nigeria. h1: strategic human resource training can facilitate the achievement of smes growth objectives in nigeria. imperatives of strategy in human resource training of small and medium scale enterprises in nigeria 227 1. literature review training is an integral part of the 21 st century business entities, not minding its size but the competitive situation in which it found itself. in a previous study, goldstein and ford (2002) stressed that training and development play an important role in the effectiveness of organizations and in the experiences of people in work. in order to ensure that our employees are equipped with the right kind of skills, knowledge and abilities to perform their assigned tasks, training and development play their crucial role towards the growth and success of our business, (niazi, 2011). the achievement of business goal is subject to how well necessary knowledge and skills are gathered and utilized. vemić (2007) added that knowledge that is not necessary is exactly what it is: unnecessary, and the efforts to obtain it are wasted efforts. according to manole et al (2011), training is focused on human potential development, and will help individuals to grow both professionally and also in terms of socio-cultural factor. basically, training and development of employees focus on how corporate goals can be achieved through organizational people, but the adoption of effective strategy makes it distinctive and competition oriented. in a recent study, nafiu et al. (2014) pinpointed that business games are increasingly becoming fierce, and avoidance of the application of strategy by the playing firms could be dangerous. thus, strategic human resource training is a longterm oriented distinctive approach to managing knowledge for corporate and competition purposes. shr training plays a pivotal role in distinguishing the giants firms from the small firms in a business game. meanwhile, it is not the financial capability that makes some firms distinguished, but their ability to engage in distinctive thinking to map out outwitting strategy. 1.1. human resource training’s strategic plans onah (2008) is of the view that training plan is a systematic statement of training intentions and the means by which they are to be achieved and measured. his view seems to focus on the short-term sequential training task to be undertaken, but when it is longterm oriented it becomes a strategic plan. however, human resource training strategic plan is a master plan stating how the knowledge and skills of organizational people will be acquired, and acculturated into the dynamic nature of business competition. human resource training strategic plan does capture the overall organization’s intents or functional intents, and must align with the corporate strategy. obisi (2011) posited that planned training consists of the following steps: i. identify and define training needs ii. define the learning required in terms of what skills and knowledge have to be learnt and what attitudes need to be changed. iii. define the objectives of the training iv. plan training programs to meet the needs and objectives by using right combination for training techniques and locations. v. decide who provides the training vi. evaluate training. vii. amend and extend training as necessary. 228 a. t. nafiu, f. o. obaje, s. yakubu 1.2. imperatives of strategic human resource training for smes the changing trends in the business environment demand flexible approaches such as consistent training of employees for diverse knowledge in response to the dynamism of the business world. though, beaver and hutchings (2005) argued that small businesses overwhelmingly use on-the-job training (ojt) because of its low cost and their preponderance to use ad-hoc training, where provided. it must be noted that different small and large business firms engage in similar training task with distinctive approaches. this is because competition in the business game requires doing training task better than others, and it entails the adoption of outwitting strategy. according to nafiu et al. (2014), survival of a small business firm is so threatened by the activities of other business firms today that there is emergent need for the integration of strategy to competitive situation. this conforms to the argument of jhingan (2006) that true competition consists of the life of constant struggle and rival against rival. the application of strategy in training activities has a distinguishing power, and nafiu et al. (2014) stated that a small business must not only develop a strategy, but an effective strategy. nevertheless, factors that often prone or force business firms to engage in training task, regardless of size and shape, can be divided into three: i. competitive situation: this involves the drive towards maintaining competitive position. ii. effectiveness and efficiency: this involves doing the right thing, and doing it appropriately. iii. dynamism of the business environment: this has to do with the changing nature of the business environment posing threats and opportunities for business firms. 1.3. the benefits of strategic human resource training and development according to goldstein and ford (2002), training has implications for productivity, health and safety at work and personal development. hence, the benefits of strategic human resource training and development may be dichotomized into two parts as follow: on the part of employees i. it gives employees an overview of the corporate strategy, and deep sense on how the corporate goals can be pursued. ii. it makes employees become distinguished talents and develops capability for any business firms. iii. employees may become conversant with handling strategic issues. iv. wastage resulting from trial and error becomes minimal v. it makes employees more flexible to cope with the dynamism of business games. vi. effectiveness and efficiency of employees in job performance become increasing. on the part of business firms i. it makes the business firm proactive on one hand and reactive on the other hand ii. it distinguishes the business firm and its employees from others in the business environment. iii. it enables the business firm’s employees to take initiatives and proffer solutions to operation problems iv. it improves competencies and performances of work teams. imperatives of strategy in human resource training of small and medium scale enterprises in nigeria 229 1.4. talent war and the place of strategic approach for smes in nigeria there is no better search for talent than investing or building the human capital at your disposal strategically. it is noticeable that small business owners often engage in spiritual warfare not only in competition, but also in the struggle for talents. the struggle for talent among smes in nigeria showcases nonchalant approach to business goals and contributory negligence to its mediocrity; and often translates into business entropy. the old thought of sme owners is that the use of strategy is constrained by its complexity, high cost, and time-consumption. beaver and hutchings (2005) pinpointed that these factors result in what can only be viewed as a lack of strategic management of human resources within the majority of smes. though, many business owners, managers and researchers believe that small businesses are limited by their resources to carry out the formulation and implementation of effective strategy (nafiu et al., 2014). some sme owners will engage themselves in some personal interrogations such as : i. does strategy really matter for small business firms’ talent hunt? ii. how do we analyze its cost-benefit? iii. what happens if the strategy fails? the market giants never fail even when their strategy fails. according to nafiu et al. (2014), effective strategy in itself can only serve as a road map and not as a guarantee for the achievement of a corporate goal. strategic hr training involves distinctive thinking and expertise in shaping employees’ knowledge and skills for competitive edge. thus, a strategically trained employee will possess a distinctive knowledge and skill that give smes competitive capacity and distinctive character. 2. research methodology the study used survey method. this study was conducted in nigeria, surveying some selected micro-small and medium scale enterprises. the study selected 18 micro-small and medium scale enterprises, totaling the population of 232 (32 sme owners and 200 employees). for this work, taro yamane (1964) sampling method was adopted to determine the sample size. the formula and calculation are shown below as: 2 1 ( ) n n n e   2 232 1 232(0.05) n   = 232 1 232(0.0025) = 232 1 0.58 = = 232 1.58 = 146.835 = 147 approximately where; n – the desired sample size n – the population size under study e – the limit of tolerable error assumed to be 0.05 1 – unity (always constant) in value bowler’s proportional allocation formula was adopted, as shown below, to allocate samples to the population. thus, the study used stratified random sampling technique which entailed grouping respondents into strata on the basis of common characteristics. 230 a. t. nafiu, f. o. obaje, s. yakubu the study therefore, applied simple random sampling technique to select the required sample size. 1 n = 1 ( )n n n where n = overall sample size; n1 = population of each group of potential respondents; n = the total population. sme owners= 147(32) 232 = 20 employees= 147(200) 232 = 127 this study used primary and secondary sources for gathering reliable data and information. the primary sources of data include the personal interview, observation and structured questionnaire. the secondary sources include text books, journals and the internet. this study analyzed the data collected with descriptive method and tested hypotheses with likert scaling statistical method. 3. data presentation, analysis and discussion of findings table 1 questionnaire administration single smeowners employees total frequency percentage questionnare 20 127 147 100.0 distributed 19 116 135 91.8 unreturned 1 11 12 8.2 source: field survey, 2015 table 1 shows that 147 questionnaires (100%) were administered; 135 questionnaires (91.8%) were returned; and 12 questionnaires (8.2%) were not returned. for the purpose of analysis, the total number of the questionnaires returned was worked upon. table 2 respondents’ marital status single smeowners employees total frequency percentage single 4 48 52 38.5 married 15 47 62 45.9 divorcee  17 17 12.6 widow(er)  4 4 3.0 total 19 116 135 100.0 source: field survey, 2015 table 2 depicted that 52 respondents (38.5%) were single; 62 respondents (45.9%) were married; 17 respondents (12.6%) were divorced; and 4 respondents (3.0%) were widowed. imperatives of strategy in human resource training of small and medium scale enterprises in nigeria 231 table 3 respondents’ qualifications single smeowners employees total frequency percentage ssce  7 7 5.2 ondince 2 25 27 20.0 hndib.sc 10 68 78 57.8 m.sc/mba 3 15 18 13.3 others 4 1 5 3.7 total 19 116 135 100.0 source: field survey, 2015 table 3 shows that 7 respondents (5.2%) were holders of ssce; 27 respondents (20.0%) were holders of ond/nce; 78 respondents (57.8%) were holders of hnd/b.sc; 18 respondents (13.3%) were holders of m.sc/mba; and 5 respondents (3.7%) held other certificates which are not specified. table 4 responses regarding the sme owners’ adoption of strategy to managing employees single smeowners employees total frequency percentage yes  17 17 12.6 no 19 99 118 87.4 not sure     total 19 116 135 100.0 source: field survey, 2015 table 4 shows that 17 respondents (12.6%) expressed that sme owners do adopt strategy in managing their employees in nigeria; and 118 respondents (87.4%) expressed that sme owners do not adopt strategy in managing their employees in nigeria. table 5 responses regarding the benefits of strategic human resource training program single smeowners employees total frequency percentage yes 14 62 76 56.3 no 3 9 12 8.9 not sure 2 45 47 34.8 total 19 116 135 100.0 source: field survey, 2015 table 5 shows that 76 respondents (56.3%) thought that strategic human resource training programme is beneficial to both employees and sme owners; 12 respondents (8.9%) thought that strategic human resource training programme cannot benefit both employees and sme owners; and 47 respondents (34.8%) were not certain whether or not strategic human resource training programme can benefit both employees and sme owners. 232 a. t. nafiu, f. o. obaje, s. yakubu table 6 responses regarding the extent at which strategic human resource training can facilitate the achievement of smes growth objectives in nigeria single smeowners employees total frequency percentage very great extent 5 59 64 47.4 great extent 6 31 37 27.4 moderate extent 11 14 10.4 low extent 5 8 13 9.6 very low extent 1 6 7 5.2 total 19 116 135 100 source: field survey, 2015 table 6 shows that 64 respondents (47.4%) opined that strategic human resource training can facilitate the achievement of smes growth objectives in nigeria to a very great extent; 37 respondents (27.4%) opined that strategic human resource training can facilitate the achievement of smes growth objectives in nigeria to a great extent; 14 respondents (10.4%) opined that strategic human resource training can facilitate the achievement of smes growth objectives in nigeria to a moderate extent; 13 respondents (9.6%) opined that strategic human resource training can facilitate the achievement of smes growth objectives in nigeria to a low extent; and 7 respondents (5.2%) opined that strategic human resource training can facilitate the achievement of smes growth objectives in nigeria to a very low extent. 3.1 test of hypothesis table 7 single frequency rating fx (f) (x) very great extent 64 5 320 great extent 37 4 148 moderate extent 14 3 42 low extent 13 2 26 very low extent 17 1 17 total 135 15 553 likert = 553 4.10 135 fx n    mean point of scale = 15 3.00 5 x n    cut-off point = mean + e = 3.00 + 0.05 = 3.05 decision since the calculated likert is greater than the cut-off point (that is, likert = 4.10 > cut-off point = 3.05), and the decision rule states that where the calculated likert is greater than the cut-off point, the statement is regarded as valid and effective. thus, the imperatives of strategy in human resource training of small and medium scale enterprises in nigeria 233 null hypothesis is rejected and the alternative hypothesis accepted. we therefore uphold that strategic human resource training can facilitate the achievement of smes growth objectives in nigeria. 3.2 discussion of findings the present study discovered that only few sme owners usually adopt strategy to managing their employees. this aligns with the findings of chan (2009) that staff training in small firms within the accommodation sector is commonly carried out in an unstructured and informal manner based on job instruction. the study observed that the enterprises of these few owners are apparently healthy and have future tendencies of growth compared to others who avoid strategy in managing their employees. this study also discovered that when strategy is applied to human resource training programme, both employees and sme owners stand to benefit a lot. though, it was also discovered that those respondents who do not appreciate the potentials of strategy are with little or no educational background, and run their enterprises without clear vision and mission. strategic human resource training programme may give employees distinctive prowess and enable distinctive organizational capacity in both competition and market control. this finding also serves as correction to the discovery of the study by vemić (2007) that employees view the training as an imposed obligation, rather than a way to maximize their potential and they do not realize that by improving their performances and innovation of their knowledge they may contribute to better business results of the organization they belong to. this present study also discovered that strategic human resource training can facilitate the achievement of smes growth objectives in nigeria. meanwhile, the study also discovered through interviews that strategic training programme is the bedrock of the success of most industrial tigers (giant firms) today, and can engineer knowledge, initiatives, innovativeness and confidence, competitiveness and the achievement of positive payoff. this simply indicates that three major factors (pessimism, illiteracy and lack of clear vision and mission) discourage sme owners in the adoption of strategy since the fact is known and been avoided. conclusion in today’s business environment, human resource training is a viable approach for competitive situation that is placing opportunities and threats before business firms regardless of their sizes. human resource training will establish a platform for smes to cope with environmental change through its people, especially when strategy is not lagging. many business firms today engage in business game to strive for success in different dimension. it is obvious that too many business firms pursue similar interests, which then intensifies the fierceness of competition. hence the adoptions of strategic approach by few sme owners to managing their employees. the application of strategic approach to human resources training program is apparently healthy and has future tendencies of growth compared to others who avoid strategy in managing their employees. furthermore, when strategy is applied to human resource training programme, both employees and sme owners stand to benefit a lot. this is because strategic human resource training programme 234 a. t. nafiu, f. o. obaje, s. yakubu anchors employees’ distinctive prowess and enables distinctive organizational capacity in both competition and market control. thus, strategic training programme can serve as the bedrock of success for smes, and can engineer knowledge, initiatives, innovativeness and confidence, competitiveness and the achievement of positive payoff. recommendations based on the aforementioned findings, the study therefore recommends that: i. sme owners should adopt effective strategy in managing their employees so that corporate goals can be achieved appropriately. ii. sme owners should also investigate into the success of giant firms’ training programmes and copy their strategies where necessary. iii. sme owners should establish a clear vision and mission, and possess at least average level of knowledge and skills as the baseline for understanding and formulating strategy. sme owners should integrate effective strategy to human 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(1964). statistics: introductory analysis. new york: harper and row publication. imperativi strategije u obrazovanju ljudskih resursa u malim i srednjim preduzećima u nigeriji ova studija se bavi imperativima strategije u obrazovanju ljudskih resursa u malim i srednjim preduzećima u nigeriji. ova studija ima za cilj da istraži da li strateška obuka ljudskih resursa može da olakša rast malih i srednjih preduzeća u nigeriji. studija je obuhvatila 18 mikro-malih i srednjih preduzeća u nigeriji, ukupne populacije 232 (32 vlasnika i 200 zaposlenih). studija je odredila veličinu uzorka preko metoda uzorka taro yamane, i koristila je boulerovu formulu proporcionalne alokacije da distribuira uzorke. podaci i informacije su sakupljani iz primarnih i sekundarnih izvora. ova studija je analizirala sakupljene podatke deskriptivnom metodom i testirala hipoteze likertovom statističkom metodom. studija je otkrila da strateška obuka ljudskih resursa može da olakša rast malih i srednjih preduzeća u nigeriji. na taj način, studija je zaključila da program strateške obuke ljudskih resursa može da služi kao temelj za uspeh malih i srednjih preduzeća, i može da pospeši znanje, inicijative, inovativnost i samopouzdanje, konkurentnost i postizanje pozitivne isplativosti. studija, prema tome, preporučuje vlasnicima malih i srednjih preduzeća da integrišu efikasnu strategiju u razvoj ljudskih resursa tako da se ciljevi razvoja mogu olakšati i dostići. ključne reči: obuka ljudskih resursa, strategija, ciljevi rasta, poslovna igra, rat talenata plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 1, 2017, pp. 43 56 doi: 10.22190/fueo1701043v preliminary communication the effect of media representation on the development of bancassurance in the republic of serbia1 udc 368.021.1:336.71(497.11) nevenka vojvodić-miljković * erste bank a.d. novi sad, branch niš, serbia abstract. the intense competition among banks, in terms of narrowing the interest margins, has led to an increase in administrative and marketing expenses and has limited the profit margins of traditional banking products. at the same time, there has been a change in the preferences of bank clients in terms of reduced interest in investing in the classic banking products of the deposits-saving character and an increasing interest in investing in various forms of life and voluntary pension insurance. accordingly, as well as with a number of other developments in the market for financial services in the last two decades, a connection between banks and insurance companies has been formed. this process is known as bancassurance. bancassurance in its simplest form represents the distribution of insurance products through the branch network of banks as a sales channel. for banks this is a way to increase customer loyalty, the diversity of offers and the source of additional income in the form of a reimbursement paid by the insurer. in bancassurance, insurance companies see a relatively inexpensive sales channel of insurance compared to traditional channels, which allows them better market positioning and easier access to a higher quantity of clients. the largest success that bancassurance has had, is with the sale of life insurance, keeping in mind the similarity with the traditional deposit banking products. past results of the implementation of bancassurance in the republic of serbia are insignificant in comparison to the value achieved on this basis in most eu countries. apart from the objective factors, such results are caused by the lack of information among the population about the possibilities of purchasing different types of financial services in one place (in a bank) and numerous benefits which such integrated purchasing offers. the success of bancassurance largely depends on the determination of the participants (banks and insurance companies) to present the sales channel through the joint appearance on the market, continuous advertisement in the media, especially those who have access to the widest part of the population. for that reason, special emphasis is given to the influence of media 1received october 29, 2016 / revised february 22, 2017 / accepted february 27, 2017 corresponding author: nevenka vojvodić-miljković erste bank a.d. novi sad, branch niš, 18000 niš, serbia * phd student faculty of economics university of niš, serbia e-mail: nevenka.vojvodic-miljkovic@erstebank.rs 44 n. vojvodić-miljković representation for the faster development of bancassurance, which would result in greater awareness and education of the population on that basis, which can later cause an increase in life and non-life insurance sales, given the size of the client basis and sales capacities of serbian commercial banks. key words: bancassurance, media representation, information jel classification: g21, g22 introduction the aim of the work is to assess the current level of development of bancassurance (sales channels of insurance through banks) in the republic of serbia based on the share of the premium generated by the sales channel of the total premium, the share of income from reimbursements and bank commissions on the basis of representation in insurance sales in total incomes from reimbursements and commissions of the serbian banking sector for the period 2008-2014 and its current media representation. the listed figures are negligible in comparison to the average value of subject categories in the member states of the european union. the basic hypothesis is based on the assumption that greater media coverage of bancassurance in serbia can contribute to its faster development. faster development of bancassurance, taking into account the size of the client base of serbian commercial banks, implies a further increase of signed contracts for insurance, especially life insurance contracts, given that it is usually signed through banks (according to the experiences of the eu member states), which generates multiple benefits that for customers, banks, insurance companies and the country as a whole. in accordance with the subject of research and the formulated hypothesis, the following methods appropriate for the research area are applied in this work, and those are:  method of description, whose purpose is to describe the current level of bancassurance development in republic of serbia,  desk research based on available domestic or foreign literature and data collected from various sources (public databases of financial institutions and associations of insurers) has been used with a goal to formulate a theoretical basis for the checking of the hypothesis,  the interview observation and analogy method are used to supplement the knowledge in the field of market research based on an anonymous survey-questionnaires (empirical data) on the impact of media representation on the further development of bancassurance in the republic of serbia. 1. bancassurance – terms and development in terms of more obvious competition on the insurance market, the changed attitude of customers and the development of technology, distribution channels for insurance products are of great importance for the successful operation of insurance companies (curak & jakočević, 2007). while adapting to the market conditions, insurance companies changed the traditional way of work by embracing new ways of marketing. bancassurance represents a package of the effect of media representation on the development of bancassurance in the republic of serbia 45 financial services that includes banking and insurance services at the same time and in the same place (babić-hodović, 2003, p. 59-63). it also represents a strategy by which banks and insurers work together, more or less in an integrated way on the markets of financial services, which includes the distribution of insurance products by banks (swiss reinsurance company, 2002, p. 3). compared to other channels, this channel generates lower costs of insurance sales, as it uses the existing sales and the client infrastructure of banks. in addition, through bancassurance banks can achieve a significant additional source of interest free income without major additional investments, which results in building long-term relationships with clients. main reasons for the expansion of bancassurance are profit and competition (avdalović & petrović 2016). it is estimated that bancassurance in continental europe already accounts for 20-30% in the profit of banks (agnus, 2002). the banks distribution of insurance is growing faster than through traditional distribution channels sales in developed countries but also in developing countries, first in life, and recently in non-life insurance. the beginnings of the modern development of the concept of bank insurance are linked to the legislative changes in france in 1984, which allowed banks access to the insurance market with permission to sell certain types of insurance through their sales networks. the current concept of bancassurance covers a wide range of detailed contractual relationships between banks and insurance companies and varies from country to country, depending on their demographic, economic and legal organization (kočović & šulejić 2006). for these reasons, there are a variety of models for the implementation of bancassurance and there is no standard model, even within one country. however, even though all of the models of bancassurance have not had identical success in their application, these types of insurance sales have attracted the attention of the sector for financial services in a short time. the reason for this is the recognition of bancassurance by banks and insurance companies as an attractive and simple way to increase profitability, which has gained importance especially in the aftermath of the global economic crisis (cristea & dracea & cîrciumaru 2010). 2. bancassurance in the republic of serbia the beginning of the development of bancassurance in the republic of serbia is linked to the legislation and the banking act (službeni glasnik no 107, 2016) being put into effect, which allows banks to conduct insurance representation services, as well as the decision on detailed conditions for granting approvals for banks to conduct insurance representations issued by the national bank of serbia, as the supervisory authority for the banking and insurance industry (službeni glasnik no 57, 2016). in the republic of serbia, there were 25 insurance companies operating in 2014. of that number 21 companies deal with insurance business, and only 4 companies deal with reinsurance business. within the sales network, in addition to the insurance companies and numerous legal and natural persons broker and insurance agents, another 19 banks participate, which received approval from the national bank of serbia for conducting activities of insurance representation (national bank of serbia – insurance sector reports, 2014). 46 n. vojvodić-miljković 2.1. the share of insurance premiums generated by bancassurance in the total premium in serbia for the period 2007 – 2014 based on the data collected from official records (website of the national bank of serbia), table 1 represent data relating to the premium of life, non-life insurance, total insurance premium, the share of life and non-life insurance in the total premium for the period from 2007 to 2014 in the republic of serbia. based on the data submitted by the national bank of serbia, administration for supervision of financial institutions, the department for supervision of the insurance business (24.06.2014, 22.09.2014, 10.12.2015) in the same tabular and graphical review the total premiums generated through bancassurance will be shown and its share in total insurance premium for the period from 2007 2014 in the republic of serbia. table 1 the total premiums of life and non-life insurance and the share of bank insurance premium in the total premium for the period 2007 – 2014 (in 000 rsd) years total premium life insurances total premium non-life insurances total premium of life and nonlife insurances premium gained through bancassurance the share of the bancassurance premium in the total premium 2007 4.939.508 39.840.510 44.780.018 14.460,18 0,03% 2008 6.347.035 45.839.596 52.186.631 101.660,13 0,20% 2009 7.881.193 45.653.453 53.534.646 302.754,57 0,57% 2010 9.352.714 47.168.218 56.520.932 658.194,30 1,164% 2011 9.992.706 47.321.292 57.313.998 1.019.105,86 1,778% 2012 11.855.400 49.608.308 61.463.708 1.318.448,44 2,145% 2013 14.065.458 49.976.051 64.041.509 2.076.588,68 3,242% 2014 16.005.074 53.399.931 69.405.005 2.617.896,32 3,771% source: author’s illustration (based on data: nbs – insurance sector reports, 2007-2014 and data submitted at the request of the author nbs the administration for supervision of financial institutions, 2014; 2015) the national bank of serbia does not disclose information on its official website relating to the amount of insurance premiums earned by bank insurance, as well as the income generated by the banking sector achieved on that basis, but they are received at the request of the author for the purposes of the research. therefore, the administration for supervision of financial institutions and the department for supervision of the insurance business pointed out to the author that the national bank of serbia keeps track only of the total insurance premium realizable through bancassurance, without special records of premium life and non-life insurance, which is generated through this channel. despite the significant number of banks (19), which are agents of the leading insurance companies in the republic of serbia, a large number of insurance agents licensed by bank employees, good conditions in terms of the developed commercial network of banks (branch network, counters and offices) and a large client base of serbian banks, we can conclude that the share of premiums generated through bancassurance in the total insurance premium is small in spite of the growth of premiums generated by this channel in the total premium from year to year. this further implies that the bancassurance in the republic of serbia is on a basic level of development compared to data on the participation of the sales channels in the total premium of life and non-life insurance in the member states of the european union and some countries that are not member states, but that are relevant for this research, which is represented in graphic 1 the effect of media representation on the development of bancassurance in the republic of serbia 47 and graphic 2 gross written premium (gwp), that is shown in % in graphic 1 and graphic 2, represents the total premium (direct and assumed) written by an insurer before deductions for reinsurance and ceding commissions. includes additional and/or return premiums. direct premiums written represents the premiums on all policies the company’s insurance subsidiaries have issued during the year. assumed premiums written represents the premiums that the insurance subsidiaries have received from an authorized state-mandated pool or under previous fronting facilities (insurance glossary, 2016) graph 1 sales channels for life insurance by country (% of gwp 2 ) – 2013 source: insurance europea, 2016, p. 30 graph 2 non-life insurance sales channels by country (% of gwp) – 2013 source: insurance europea, 2016, p. 31 2 gross written premium (gwp) is the total premium (direct and assumed) written by an insurer before deductions for reinsurance and ceding commissions. includes additional and/or return premiums, available on:https://www.irmi.com/online/insurance-glossary/terms/g/gross-written-premium-gwp.aspx direct premiums written represents the premiums on all policies the company’s insurance subsidiaries have issued during the year. assumed premiums written represents the premiums that the insurance subsidiaries have received from an authorized state-mandated pool or under previous fronting facilities. (from eig 8-k filed nov 14, 2007) available on: https://en.wikipedia.org/wiki/gross_premiums_written 48 n. vojvodić-miljković if only countries from the graphic 1 and graphic 2 were taken into consideration, it could be concluded that bancassurance is the most important distribution channel for selling life insurance. in the selling of life insurance banks have for years had a dominant share especially in portugal, spain, france, italy, belgium, and more recently in turkey (81.2%). in certain countries, this share is much smaller especially in germany, the uk, the netherlands and switzerland (insurance europa, 2016, p. 30). when it comes to non-life insurance, bancassurance has a smaller share of the total premium in non-life insurance on the market of the eu member states, considering that the agents and brokers are still the dominant sales channels for the sale of these types of insurances (insurance europea, 2016, p. 31). the prevailing attitude in banks states that the sale of non-life insurance can be realized only through cross-selling with banking products, not their own, given that bank employees do not have sufficient knowledge and experience for that kind of sale. besides, most bank managements are of the opinion that this type of sale generates less income from the sale of life insurance and frequent reports of realized damages, which requires additional administrative expenses. 2.2. the share of income from reimbursements and bank commissions on the basis of bancassurance in the total income of reimbursements and commissions from the banking sector of the republic of serbia for the period 2007-2014. data on the amount of income from commissions based on bancassurance (banks that are licensed by the nbs for performing insurance representation) and their share in the total revenue from reimbursements and commissions of the banking sector in the republic of serbia for the period 2007 to 2014 are shown in table 2. table 2 overview of the share of income from reimbursements and commissions from banks (insurance agents) on the basis of bancassurance in the total income from reimbursement and commission incomes of the banking sector in the republic of serbia for the period 2007 to 2014 (in 000 rsd) years bank commission on the basis of bancassurance total income of banks from reimbursements and commissions the share of bank incomes from reimbursements and commissions on the basis of bancassurance in total incomes from reimbursements and commissions 2007 806.4 34.430.000 0.002% 2008 12.748.20 39.780.000 0.03% 2009 64.322.50 42.080.000 0.15% 2010 199.113.85 42.930.000 0.46% 2011 335.594.66 46.790.000 0.72% 2012 415.248.88 48.240.000 0.86% 2013 581.849.15 47.180.000 1.23% 2014 643.347.69 47.420.000 1.35% source: author’s illustration (based on data: nbs – banking sector reports, 2007-2014 and data submitted at the request of the author nbs the administration for supervision of financial institutions, 2014; 2015) the effect of media representation on the development of bancassurance in the republic of serbia 49 it is evident that there is a low share of bank income from reimbursements and commissions on the basis of representation in the sale of insurance in comparison to the total income of the banking sector from reimbursements and commissions for the observed period, despite the significant growth dynamics of the revenues from year to year. in the future, commercial banks in serbia will lose primacy on the market for payments services, with the emergence of new providers for this service. for those reasons, banks will increasingly perform jobs that generate income of interest-free nature (from reimbursements and commissions), such as selling insurance. 3. media representation – a factor of faster development of bancassurance in the republic of serbia for the purpose of accelerating the development of bancassurance in the republic of serbia, it is necessary to increase its media representation, so that the general public could get a better insight of this kind of insurance selling. in this regard, defining and implementing the strategy of continuous joint marketing between banks and insurance companies, is a necessary condition for greater promotion of bancassurance. in addition to advertisements in daily newspapers and weekly magazines, on the radio, television and internet portals, it is also desirable to organise press conferences, broadcast reports, interviews and other forms of public appearances by representatives of banks and insurance companies on this issue (manoy, 2001). the content and scope of marketing activities is the subject of an agreement between the bank and the insurance company and is defined according to the targets set by the action plan (davis, 2007). in addition, it is necessary to mark and brand the counters in banks and places where employees work agents in insurance sales by:  sticking stickers on the front door of the counter hall,  placing hanging advertisements on the premises of the bank,  installing neon billboards on glass portals of the banks that will inform the customers of the bank that they can buy insurances of specific insurance companies in the bank,  setting up promotional material in front of each insurance company’s stand, such as flyers about the characteristics of insurance which the insurance company offers, bank flyers that provide information about the new bancassurance sales, brochures with the characteristics of the most frequently purchased types of life and non-life insurances in general, roll ups, posters, flags and others. in order to determine the influence of media representation on the further development of bancassurance in the republic of serbia, a survey was conducted on a sample of 500 respondents with different demographic characteristics with the aim to get a better representation of the population regarding the relevant subject. the data was collected by 50 organisational units of banks throughout the republic of serbia, from subotica to kursumlija. the results obtained by this survey the impact of the media representation on the development of bancassurance in the republic of serbia will be presented below. on the level of the entire sample, about 74% of the respondents were male an around 26% were female (table 3). when it comes to the age of the respondents, most of them belonged to the age group of 30-60 years (table 4). 50 n. vojvodić-miljković table 3 gender of the respondents frequency % valid % cumulative % male 372 74.4 74.4 74.4 female 128 25.6 25.6 100.0 total 500 100.0 100.0 table 4 age of the respondents frequency % valid % cumulative % up to 30 years 101 20.2 20.2 20.2 from 31-40 years 128 25.6 25.6 45.8 from 41-50 years 139 27.8 27.8 73.6 from 51-60 years 101 20.2 20.2 93.8 over 60 years 31 6.2 6.2 100.0 total 500 100.0 100.0 from the aspect of marital status, the highest percentage of respondents are married (76%), have 2 children (44%) and live in a household that consists of four members (33%), as shown in table 5, 6 and 7. table 5 marital status of the respondents frequency % valid % cumulative % single 85 17.0 17.0 17.0 married 379 75.8 75.8 92.8 divorced 36 7.2 7.2 100.0 total 500 100.0 100.0 table 6 number of children frequency % valid % cumulative % 1 112 22.4 22.4 22.4 2 220 44.0 44.0 66.4 3 130 26.0 26.0 92.4 4 36 7.2 7.2 99.6 5 2 0.4 0.4 100.0 total 500 100 table 7 number of household members frequency % valid % cumulative % 1 24 4.8 4.8 4.8 2 86 17.2 17.2 22.0 3 151 30.2 30.2 52.2 4 167 33.4 33.4 85.6 5 54 10.8 10.8 96.2 6 18 3.6 3.6 100.0 total 500 100.0 100.0 the effect of media representation on the development of bancassurance in the republic of serbia 51 according to the level of education, the most numerous were the respondents with secondary education (63%); respondents with college and university degrees were in about equal numbers, while the lowest number of respondents had an mba, phd or only primary education, as shown in table 8. table 8 level of education frequency % valid % cumulative % primary school 27 5.4 5.4 5.4 secondary school 313 62.6 62.6 68.0 college 78 15.6 15.6 83.6 university 74 14.8 14.8 98.4 mba 5 1.0 1.0 99.4 phd 3 0.6 0.6 100.0 total 500 100.0 100.0 when it comes to the distribution of the respondents by "total monthly income" the following data was recorded: most respondents have an income of between 20,000.00 and 40,000.00 rsd, respondents with a monthly income of up to 20,000.00 rsd and 40,000.00 to 60.000,00 rsd occurred in approximately equal numbers, while the lest number of respondents had incomes larger than 100,000.00 rsd, as shown in table 9. table 9 total monthly income frequency % valid % cumulative % up to 20000 103 20.6 20.6 22.9 from 21000 to 40000 193 38.6 38.6 59.2 from 41000 to 60000 114 22.8 22.8 82.0 from 61000 to 80000 43 8.6 8.6 90.6 from 81000 to 100000 31 6.2 6.2 96.8 over 100000 16 3.2 3.2 100.0 total 500 100.0 100.0 the smallest number of respondents stated that their knowledge on bancassurance is very low (4%) and very high (2%). most respondents, 82% stated that their knowledge, as well as the knowledge of others from their expertise, is very little or bad. only 12% of respondents said that their knowledge on bancassurance is high. however, if you take into account that bancassurance is a relatively new channels sale of insurance in the republic of serbia, further survey results may be considered valid, bearing in mind that 65% of respondents said they have a low, high and very high knowledge on bancassurance, which the representative sample represents (table 10). 52 n. vojvodić-miljković table 10 knowledge on bancassurance frequency % valid % cumulative % low 155 31.0 31.0 31.0 very low 20 4.0 4.0 35.0 little 255 51.0 51.0 86.0 high 60 12.0 12.0 98.0 very high 10 2.0 2.0 100.0 total 500 100.0 100.0 when it comes to the amount of advertisements of bancassurance in the media, the majority of respondents, 87% believe that it is insufficient, which is in accordance with the real situation (table 11). in 2014 in the republic of serbia, 19 banks concluded contracts on representing the insurance companies, and only 5 banks qualified for an advertising campaign about it, within the advertisement of basic bank products (table 12). table 11 media representation of bancassurance frequency % valid % cumulative % sufficient 64 12.8 12.8 12.8 insufficient 436 87.2 87.2 100.0 total 500 100.0 100.0 table 12 advertisements referring to bancassurance frequency % valid % cumulative % none 411 82.2 82.2 82.2 1-3 79 15.8 15.8 98.0 4-5 9 1.8 1.8 99.8 more than 5 1 0.2 0.2 100.0 total 500 100.0 100.0 most respondents (82%) did not know to name any advertisement relating to bancassurance. in addition to the clear perception that there is a lack of representation, a need for it is clearly visible form the results. table 13 continued advertising campaign relating to bancassurance frequency % valid % cumulative % yes 391 78.2 78.2 78.2 no 109 21.8 21.8 100.0 total 500 100.0 100.0 the largest percentage of respondents is of the opinion that the best way to advertise bancassurance is through its representation on the television, radio and internet portals at the same time (43%). a significantly smaller amount of respondents circled individually in separate intervals: tv advertising 23%, radio 17%, internet advertising 14%, while the remaining 3% chose another form of advertising (table 14). the effect of media representation on the development of bancassurance in the republic of serbia 53 table 14 choice of media frequency % valid % cumulative % tv. radio and internet 216 43.2 43.2 43.2 radio 83 16.6 16.6 59.8 tv 116 23.2 23.2 83.0 internet 71 14.2 14.2 97.2 newspaper 10 2.0 2.0 99.2 other forms of public representation 3 0.6 0.6 99.8 other (recommendation from an acquaintance and other) 1 0.2 0.2 100.0 total 500 100.0 100.0 a large number of respondents (63%) believe that there is a difference when purchasing insurance in a bank and directly in an insurance company (table 15). table 15 the review of respondents on the question: is there a difference when purchasing insurance in a bank and directly in an insurance company? frequency % valid % cumulative % yes 317 63,4 63,4 63,4 no 183 36,6 36,6 100,0 total 500 100,0 100,0 the majority of respondents (75%) think that the insurance is more expensive, the process of buying it is slower and so is the process of resolving damage claims in the bank (table 16). in addition, the factors which determine whether the insurance will be bought in a bank or an insurance company were: the cost of the product and the speed of solving the damages reported (75.4% of respondents named this factors, table 16). table 16 the existence of differences in purchasing insurance in a bank and in an insurance company frequency % valid % cumulative % price 151 47.6 47.6 47.6 expertise level of the staff 43 13.6 13.6 61.2 process speed 35 11.0 11.0 72.2 speed of resolving damage claims 88 27.8 27.8 100.0 total 317 100.0 100.0 based on these results, we can conclude that the knowledge on bancassurance as a distribution channel of insurance, as well as the media coverage of it is small, whereby the need for continuous informing and a need for a greater level of awareness of the population is perceived on that basis. keeping in mind the importance of bancassurance for all participants, but also the fact that insurance companies do not want to emphasis any features of the sales channels in particular in the media, a conclusion can be drawn that banks need to give special attention to advertising this insurance sales channel in the up-coming period, primarily through television, radio and internet portals. 54 n. vojvodić-miljković in order to further the development of bancassurance in the republic of serbia special attention should be paid to educating and informing the population about this sales channel. the author of this study believes that the education and publicity can be performed simultaneously. an example of this would be advertising campaigns which not only supply information about bancassurance, but also inform the population that there is no difference in purchasing insurance in a bank compared to a traditional distribution channel. the focus of this research was on the results of the general sample. the author believes that we could obtain certain differences in the analysis of the research results if we take into account gender, educational structure of the sample, as well as the place of residence, i.e. a difference of opinion of inhabitants of villages and towns, which could be the subject of an upcoming research. conclusion on the insurance market of the republic of serbia, bancassurance, as a channel of insurance distribution, is at the beginning of its development, which the total premium generated via this channel in the total insurance premium represents, as well as the share of revenues from reimbursements and bank commissions on the basis of bancassurance in the total income from reimbursements and commissions of the banking sector in the republic of serbia. for most banks, insurance agents, until recently the prevailing attitude was that bancassurance was a low profitable job, due to that; their management did not show greater interest in the development of this sales channel. however, a number of factors such as narrowing interest margins, increased credit risk, a large number of nonperforming loans, increased competition between the banks themselves and the banks and insurance companies in terms of deposits, which results in an increased risk of their outflows, have led to more and more commercial banks in the republic of serbia, as a way of ensuring long-term customer loyalty, they see this in the collaboration with the insurers. in addition, in modern conditions there is an emergence of new participants in the market for payment services where banks until recently had primacy. bearing in mind the factors above, banks are more interested in increasing interest-free incomes such as reimbursements and commissions paid to them by the partner-insurance company for parliamentary activity. insurance companies through bancassurance achieve easier access to more customers, better market positioning with lower distribution costs compared to traditional sales channels, which further implies greater competitiveness and profitability. based on the results of the survey about media representation of bank insurance, it can be concluded that the media coverage of this sales channel is insufficient, and it is clearly visible from the results that there is a need for it. the majority of respondents (about 80%) believe that in the case of continuous advertising campaigns and media representation, a greater awareness of the population about the possibility of buying insurance in banks would be achieved. bearing in mind the significance of bancassurance for all participants, but also the fact that the insurance companies do not have the practice of individual advertising of sales channels, but rather they focus on the advertising of the brand, banks, in the upcoming period, should pay more attention to media promotion of bancassurance. in this way, many of the benefits of this sales channel would be closer presented to the general the effect of media representation on the development of bancassurance in the republic of serbia 55 population and, above all, that bancassurance can fully meet the needs of a modern, more demanding customer, to whom, in an accelerated rhythm of life and business, the integrated purchases of various financial services suits, with the possibility of obtaining complex information in one place. references agnus h. 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(2011). osiguranje [insurance], ortomedics book, novi sad.350-351. službeni glasnik rs [official journal of republic of serbia], 107/2005. službeni glasnik rs [official journal of republic of serbia] 57/2006. swiss reinsurance company. (2002). bancassurance: a survey of competition between banking and insurance. sigma 2. uticaj medijske zastupljenosti na razvoj bankoosiguranja u republici srbiji intenzivna konkurencija među bankama, u uslovima smanjenja kamatnih marži, dovela je do povećanja administrativnih i marketinških troškova i ograničila profitne margine tradicionalnih bankarskih proizvoda. istovremeno, došlo je do promena u preferencijama klijenata banaka u pogledu smanjenog interesovanja za ulaganje sredstava u klasišne bankarske proizvode depozitnoštednog karaktera i povećanje intersovanja za investiranje u razne vidove životnih i dobrovoljnih penzionih osiguranja. u skladu sa tim, kao i brojnim drugim dešavanjima na tržištu finansijskih usluga u poslednje dve decenije, došlo je do je do povezivanja banaka i osiguravajućih kompanija. http://www.insuranceeurope.eu/sites/default/files/attachments/european%20insurance%20in%20figures%20-%202014%20data_0.pdf http://www.insuranceeurope.eu/sites/default/files/attachments/european%20insurance%20in%20figures%20-%202014%20data_0.pdf https://www.nbs.rs/internet/english/55/55_4/index.html 56 n. vojvodić-miljković taj proces je poznat kao bankoosiguranje (engl. bancaassurance). bankoosiguranje u svom najjednostavnijem obliku predstavlja distribuciju proizvoda osiguranja preko poslovne mreže banaka kao kanala prodaje. za banke je to način povećanja lojalnosti klijenata, raznovrsnosti ponude i izvor dodatnog prihoda u vidu naknade koje naplaćuju od osiguravača. osiguravajuće kompanije u bankoosiguranju vide relativno jeftin kanal prodaje osiguranja u odnosu na tradicionalne kanale, koji im omogućava bolje tržišno pozicioniranje i lakši pristup većem broju klijenata. primena bankoosiguranja je najveći uspeh zabeležila u prodaji životnih osiguranja, imajući u vidu sličnost sa tradicionalnim depozitnim bankarskim proizvodima. dosadašnji rezultati implementacije bankoosiguranja u republici srbiji su zanemarljivi u odnosu na dostignute vrednosti po ovom osnovu u većini zemalja eu. pored objektivnih faktora, takvi rezultati uzrokovani su i nedovoljnom informisanošću stanovništva o mogućnostima kupovine različitih vrsta finansijskih usluga na jednom mestu (u banci) i brojnim prednostima koje takva integrisana kupovina pruža. uspešnost primene bankoosiguranja u velikoj meri zavisi i od odlučnosti učesnika (banaka i osiguravajućih društava) da predstave taj prodajni kanal kroz zajednički nastup na tržištu, kontinuiranim oglašavanjem u medijima, posebno onim koji imaju pristup najširoj populaciji stanovništva. iz tog razloga, u radu je poseban akcenat dat uticaju medijske zastupljenosti na brži razvoj bankoosiguranja, koja bi za rezultat imala veću informisanost i edukaciju stanovništva po tom osnovu, što dalje može generisati povećanje prodaje životnih i neživotnih osiguranja, imajući u vidu veličinu klijenske baze i prodajne kapacitete srpskih poslovnih banaka. ključne reči: bankoosiguranje, medijska zastupljenost, informisanost 2754 facta universitatis series: economics and organization vol. 14, n o 2, 2017, pp. 155 162 doi: 10.22190/fueo1702155d preliminary communication application of the mincer earning function in analyzing gender pay gap in serbia 1 udc 331.5:305-055.2 stojanka dakić, mirko savić university of novi sad, faculty of economics, subotica abstract. better economic status of women in the labour market and reduction of gender pay gap is an important determinant of economic and social progress of the country. gender pay gap is one of the key indicators of women's access to economic opportunities and undoubtedly one of the most constant features of the labour market. failure to comply with the principle of equality and equal opportunities for women and men is considered a violation of basic human rights. as a result there are significant losses in the economy of countries such as loss of business and economic benefits, and insufficient use of available human resources. if there is no economic independence, all other measures taken to improve the position of women in society in general have much less success and influence. the aim of this paper is to determine whether there is a difference between men and women regarding wages. mincer earnings function according to which individuals' earnings are function of the achieved level of education and work experience, served as the basis for analysis of the factors that determine the formation of wages. for the analysis we have used data collected by the survey eu-silc in 2014 in serbia. regression model was built and confirmed the presence of the gender gap in earnings and the impact of gender on the formation of wages in the context that females earn less than males. due to the inadequacy of the available data, the height of the gender gap in earnings has not been determined, nor its decomposition done. key words: gender pay gap, labour market, regression model, eu-silc. jel classification: j01, j30, j71. received april 3, 2017 / accepted may 10, 2017 corresponding author: stojanka dakić faculty of economics, segedinski put 9-11, subotica, serbia e-mail: stojankad@ef.uns.ac.rs 156 s. dakić, m. savić introduction an important determinant of economic and social progress is a good economic status of women in the labour market and the reduction or complete closing of the gender gap in earnings. economic independence is the key precondition which offers the possibility for both genders to make their own choices and have control over their life, and the main way to achieve it is through the acquisition of earnings. work legislation in most market economies today guarantees equal remuneration for work of equal value, but nevertheless, the presence of the gender gap in wages is more than obvious and common. difference in earnings between men and women is one of the most common forms of discrimination in the labour market, in addition to discrimination in employment, professional advancement and others. according to samuelson and nordhaus (1992) the phenomenon of discrimination is explained by differences in earnings arising from personal characteristics such as gender, race or religious affiliation. gender pay gap is usually a result of breaking the principle of equal pay for work of equal value, which is under the presumption that the same work operated by different genders requires the same level of responsibility, expertise, experience and readiness in the intellectual and physical sense. convention no. 100, adopted in 1951 by the international labour organization (ilo) strictly stipulates the prohibition of all forms of discriminatory behaviour in the provision of remuneration for work in terms of gender. this convention has been ratified in 2006 by more than 160 countries worldwide. it established the obligation of every state to establish such system (through legislation and/or collective agreements) to prevent any attempt of different remuneration of women and men for work of equal value. this principle is considered one of the most important international principles in the effort to establish gender equality worldwide. 1. literature review the gender division of labour has a long tradition and contributes to the creation of the gap in earnings. theoretical analysis of the origin of the gender gap payment is based on a combination of several theories (theories of labour market segmentation, theory of human capital, theory of competition, the idea of a dual labour market etc.). according to blau and others (2000) there are three economic theories which can explain the causes of discrimination in the earnings. the first is the human capital theory that interprets differences in earnings as the differences in the level of education and level of experience of staff, then the theory of the reserve army of labour force and the theory of the division of the labour market on two sectors. according to figart (1999) discrimination is the cause of unexplained components contained in the difference in pay between men and women. members of neoclassicism have found explanation of the gender pay gap in low levels of investment in human capital. on the other hand, members of feminist economic orientation have the thesis that the difference in earnings between the genders is the result of a number of non-market and institutional factors, as well as the segmentation of the labour market. application of the mincer earning function in analysing gender pay gap in serbia 157 when it comes to the economic dimension of the gender gap expressed by differences in earnings, it can be said that the literature related to the western balkans is very scarce. there are only two studies that approach this problem from the aspect of comparative analysis between the countries of the western balkans, and also only a dozen studies that approach this problem from the aspect of the individual countries of the western balkans. there is also a paper which compares the gender gaps in earnings in serbia, macedonia and four other countries in the eastern europe and central asia (kazakhstan, moldova, tajikistan and ukraine) (blunch, 2010). blunch and sulla (2010) were focused on labour market transitions and wages in serbia. they have examined the incidence and nature of the gender earnings gap in serbia and five other former socialist countries from eastern europe and central asia. there is only a small number of studies in the area of the balkan countries with valuable results, partly due to the fact that most are based on scarce, low quality data. lack of sophisticated data and available official statistics is still the problem for demystification of gender gap in the region. gender gap in earnings is mainly expressed as a percentage of average female wage in the average male earnings. in case of serbia and other balkan countries, the average salary is not the best solution for the representation of the distribution because of its non-normality, for the most of the countries in the region that problem is solved by using the median as an indicator of earned wages. data relating to the labour market of serbia and the majority of the countries in the region indicate that most of the female labour force is concentrated in the so-called "traditional" industries and these are industries in which the gender pay gap is significantly higher than the mentioned average, which contributes to the assertion that "average" gender pay gap is not the best indicator of economic inequality between women and men. krstic and reilly (2000) applied the blinder-oaxaca decomposition model to the data of labour force survey for the period 1995-1998 and this paper is considered as one of the earliest papers which included one of the countries from western balkans (found at avlijaš et al., 2013). the study showed that the unadjusted gender pay gap (per hour) grew in this period (from 10.1% in 1995 to 14.8% in 1998), but this increase was not statistically significant. explained part of the gender gap had a negative sign, and recorded a decrease of 0.6 percentage points in 1995 and -1.2 per cent in 1998. in other words, it meant that working women have better performance compared to working men in the labour market. unexplained part of the gender gap has a positive sign and an upward trend, with 10.7% (1995) at 16.1% (1998). kecmanović and barrett (2011) analysed the gender pay gap based on data from the labour force survey serbia for the period 2001-2005. "basic" model included only the education, work experience and region as predictors, while "comprehensive" model in addition to basic predictors included the employment sector and type of ownership (found at avlijaš et al., 2013). the analysis also used blinder-oaxaca decomposition complemented by quantile regression. the analysis showed that the average unadjusted gap narrowed in 2005 to 5.4%, compared to 2001 when it stood at 14.4%. at this level (in 2005) it was lower than the average gender gap in others eastern and western economies. unexplained part of the gap also had a downward trend (from 17.2% in 2001 to 10.5% in 2005), indicating a reduced impact of discrimination during these years. explained part of the gender gap has decreased in the same period. in all observed years, explained part of the gender gap was smaller at the upper end of the wage distribution, while the unexplained part of the gap was greater, indicating the presence of the glass ceiling effect, and that women on the upper ends of the distribution of earnings, on 158 s. dakić, m. savić average, even more qualified than men, suffer the effects of discrimination when it comes to earnings. several articles used quantile regressions or rather mean regressions to investigate the gender wage differential in transition countries (adamchik and bedi, 2000; newell and reilly, 2001; falaris, 2004) and in particular on serbian labour market (krstić and reilly, 2000; lokshin and jovanovic, 2003; krstić et al. 2007; ognjenović, 2009). reva (2012) dealt with the analysis of women in the labour market of serbia (found at avlijaš et all, 2013). the basis of the analysis was limited to application of blinder-oaxaca decomposition on monthly wages in order to explain the position of women in terms of employment, unemployment and the gender wage gap. the paper used labour force survey data from april 2008 and october 2009. certainly the most comprehensive studies dealing with gender-based analysis of payments gap and comparative display between serbia, macedonia and montenegro, is the project "gender pay gap in the western balkans: located in serbia, montenegro and macedonia ", implemented in 2012, based on data from the labour force survey for the period 2008 to 2011. research team has measured the extent and characteristics of the gender gap payments for all three countries individually and performed a comparative analysis of trends observed gender pay gap between three countries. the analysis included the change of gender payment gap due to the economic crisis. blinder-oaxaca decomposition was applied to the mincer’s regression of wages, but also heckman’s model of selection that indicates the self-selection effects on childbearing payments gap. rokicka and ruzik (2010) in their works dealt with the analysis of the gender wage gap in the informal economy. the specificity of this sector, which is reflected in the absence of the prescribed minimum wages, working conditions and working hours, significantly and negatively influences the position of employed women. gander pay gap according to research by these authors was particularly evident at the bottom of the wage distribution. 2. the methodological framework of the research for the purposes of modelling, we have used using data collected through the survey on income and living conditions – eu-silc for 2014. this is the most relevant instrument to monitor poverty, inequality, social inclusion and living standards. eu-silc survey includes information on the territory of the republic of serbia as a whole and individually relevant data for each region at the nuts (nomenclature of territorial units for statistics) 2 level (belgrade, vojvodina region, region of šumadija and western serbia and the region of southern and eastern serbia). data relating to the region of kosovo and metochia were not available. the basic sample framework consists of all households and all persons on the territory of the republic of serbia, except persons living in collective households and homeless people. the survey included a stratified, rotating and panel sample without replacement. the sample stratification was done according to the type of settlement and the territory at the level of nuts 2. the questionnaire included data on admission and economic activities of all household members in the sample who were 15 or more years old until the date december 31th, 2013. in total there was 17187 persons: 8280 men and 8907 women. application of the mincer earning function in analysing gender pay gap in serbia 159 the mincer earnings function according to which individuals' earnings are the function of the achieved level of education and work experience, served as the basis for analysis of the factors that determine the formation of wages and verify the thesis that gender is a statistically significant variable affecting the variation in net earnings (logarithmic value) as the dependent variable. according to the theory of human capital, education is a process analogous to investment in physical capital. see mincer (1974), mincer, j., polachek, s. (1974), mincer, j., polachek, s. (1978), heckman et al. (2006), and lemieux (2006) for background information on the mincer earning function. form of earnings as a function of human capital is presented as follows: lny    s  x  x 2 u (1) y – monthly earning of an employee in their main job s – level of education x – years of experience in paid jobs u – random error of regression representing unexplained factors of earnings. in this way, presented form of earnings equation was extended with set of additional variables such as gender, ownership of companies in which the individual is employed, hours worked per week and the age of the employee (see table 1). the analysis included 1891 people and list of variables is presented in table 1. variables such as sectors of activity in which respondents work and occupation were excluded from the analysis because of incomplete data. table 1 list of variables used in the model name of variable coding dependent variable the logarithmic value of the net monthly salary of the employee independent variables gender female = 1 male = 0 age ratio highest education: secondary education secondary education = 1 else = 0 highest education: tertiary education tertiary education = 1 else = 0 years of working experience ratio person is employed by public sector public sector = 1 others = 0 person is employed by private sector private sector = 1 others = 0 hours of work during the week ratio source: authors. the survey data used in in this study were not adequate for determining the size of the gender gap in earnings because the large number of respondents did not provide the information about the wage size. therefore only the existence of gender pay gap could have been analysed. problems related to the collection of data relevant for insight into the gender differences on the labour market and insight into the existing structure of the 160 s. dakić, m. savić workforce is enormous obstacle for research endeavours dealing with this issue in most of the balkan countries. regression model was estimated by the method of least squares. individuals with extremely low or high earnings were excluded from the analysis. preliminary analysis was conducted in order to satisfy the assumptions of linearity and normality, and absence of autocorrelation, multicollinearity and heteroscedasticity. from the analysis are excluded variables such as tertiary education (none of the respondents who gave information on the monthly earnings belonged to this category), private property company in which the employee is subject and work experience variables measured in years (due to the demonstrated multicollinearity). 3. results the regression model which represents the influence of selected variables on formation of net earnings is presented in table 2. dependent variable: logarithm of net earnings table 2 regression model independent variables coefficient standardized coefficients (beta) p-value constant 4.315 0.000 gender -0.068 -0.21 0.000 age 0.001 0.10 0.000 secondary education 0.052 0.12 0.000 employed by the company in public ownership 0.085 0.26 0.000 hours worked per week 0.001 0.09 0.000 the mean value of the dependent variable 4.456 r 2 0.154 the standard deviation of the dependent variable 0.158 adjusted r 2 0.152 sum of squared residuals 40.142 f(6,1885) 68.826 the standard error of regression 0.146 p-value (f) 0.000 durbin-watson 1.768 source: author’s calculation. the coefficient of determination (r 2 ) whose role is to point out how much of the variance of the dependent variable (the logarithmic value of net earnings) explains the model is 0.154 or 15.4%. adjusted coefficient of determination (adjusted r square) is 0.152, or 15.2%. it provides the better assessment of the actual value of the coefficient of determination in the population. low coefficient of determination indicates the importance of other, non-economic factors. according to anova, the model is statistically significant (f(6,1885) = 68.826; p < 0.005). the highest standardized coefficient beta is related to the variable employed by the company in public ownership (0.26) and variable gender (-0.21), which means that these variables are the largest contributors to explanation of the variation in the dependent variable (the logarithmic value of net earnings), when subtracting the variance explained by other variables in the model. application of the mincer earning function in analysing gender pay gap in serbia 161 what is important to indicate is that the standardized regression coefficient on the variable gender is negative (-0.068), which indicates that the females earn less than males in serbia. all other statistically significant predictor variables included in the model have a positive sign, which brings us to the conclusion that they have positive influence on the dependent variable. conclusion regression analysis has confirmed the presence of the gender pay gap and the impact of gender on the formation of wages in the context that females earn less than males. due to the inadequacy of the available data and the inability to obtain relevant results, it was not possible to determine the height of gender gap in earnings, nor its decomposition. removing barriers in the way of closing the gender gap in the labour market and the establishment of equality between the genders is a perpetual struggle that requires above all a change of consciousness of public opinion and their attitudes. for better understanding of the nature of gender pay gap it is necessary to examine the connection that gander pay gap has with systemic discrimination. namely, it is necessary to explore whether the differences in the level of fees between genders for work of equal value, exist. if the statistics indicate the presence of differences in the amounts of wages for performing the same or two different jobs of equal value, the employer has to prove that this difference in fees is not due to gender discrimination. the fact is that the unadjusted gender gap in earnings in western balkan countries is lower than in western countries and it is a consequence of the low representation of women (especially those with low skills) in the labour market in these countries. in other words, the higher the gap in employment, the lower unadjusted wage gap, and vice versa, as a rule, the biggest gap in employment occurs among those with the lowest qualifications. when more women with low qualifications enter the labour market, we can expect that the unadjusted pay gap will increase. women with low qualifications are absent from the labour market due to significantly low opportunity costs. in other words, it is economically unprofitable for them to be employed when low salaries or in many cases minimum wage cannot adequately compensate for the cost of running the household. the reasons for low opportunity costs should be sought, and also the influence of remittances from foreign countries in many cases. the main obstacle for more comprehensive analysis of phenomena is the lack of reliable and representative data, not only in serbia but also in the other countries of the balkan region. references adamchik, v.a. & bedi, a.s. (2000). wage differentials between the public and the private sectors: evidence from an economy in transition. labour economics 7(2), 203-224. avlijaš, s., ivanović, n., vladisavljević, m., vujić, s. (2013).gender pay gap in western balkan countries: evidence from serbia, montenegro and macedonia. beograd: fren. blunch, n. h. (2010). the gender earnings gap revisited: a comparative study for serbia and five countries in eastern europe and central asia. background paper commissioned by the world bank’s poverty reduction and economic management unit, europe and central asia region department. blunch & sulla (2010). the financial crisis, labor market transitions and earnings growth: a gendered panel data analysis for serbia. background paper, poverty reduction and economic management unit, europe and central asia region department, washington, dc: world bank. 162 s. dakić, m. savić blau, f. d & kahn, l. m. (2000). gender differences in pay. journal of economic perspectives 14(4), 75-99. falaris, m.e. (2004). public and private sector wages in bulgaria. journal of comparative economics 32, 56–72. heckman, j. j., l. j. lochner, & p. e. todd (2006). earnings functions, rates of return and treatment effects: the mincer equation and beyond in handbook of the economics of education , ed. by e. a. hanushek and f. welch, new york: elsevier, 307–458. lemieux, t. (2006). the “mincer equation” thirty years after schooling, experience, and earnings, in jacob mincer: a pioneer of modern labor economics, ed. by s. grossbard, new york, ny: springer, chap. 11, 127–145. kecmanović, m. & barrett, g. (2011). the gender wage gap during serbia's transition. comparative economic studies 53, 695–720. krstić, g. & reilly, b. (2000). the gender pay gap in the federal republic of yugoslavia. economic thought 33, 191–213. krstić, g., litchfield, j. & reilly, b. (2007). an anatomy of male labour market earnings inequality in serbia 1996-2003. economic systems 31, 97-114. lokshin, m. & jovanović, b. (2003). wage differentials and state-private sector employment choice in yugoslavia. economics of transition 11, 463-491. newell, a. & reilly, b. (2001). the gender pay gap in the transition from communism: some empirical evidence. economic systems 25(4), 287-304. mincer, j. (1974). schooling, experience and earnings. new york: columbia university press. mincer, j. & polachek, s. (1974) family investments in human capital: earnings of women, journal of political economy, 82(2), pp. 76-108. mincer, j. & polachek, s. (1978) women’s earnings re-examined, the journal of human resources 13(1), pp.118-134. ognjenović, k. (2009). quantile regression analysis of female earnings in the private and public sectors in serbia: some evidence from survey data. belgrade: mimeo. reva, a. (2012). gender inequality in the labor market in serbia (poverty reduction and economic management unit, europe and central asia region department policy research working paper no. 6008). washington, dc: world bank. rokicka, m. & ruzik, a. (2010). the gender pay gap in informal employment in poland (case network studies and analyses no. 406). warsaw: center for social and economic research. retrieved march 30, 2012. from http://www.caseresearch.eu/sites/default/files/publications/30664403_cnsa_406_0.pdf primena minserove regresije zarada u analizi rodnog platnog jaza u srbiji značajna odrednica ekonomskog i društvenog progresa jeste dobar ekonomski status žena na tržištu rada i redukcija ili potpuno zatvaranje rodnog jaza u zaradama. rodni jaz u zaradama predstavlja jedan od najvažnijih indikatora koji ukazuje na stepen pristupa žena ekonomskim mogućnostima i njegovo prisustvo svrstava se u najpostojanije osobine tržišta rada. kršenje principa jednakosti i jednakih mogućnosti za žene i muškarce smatra se kršenjem osnovnih ljudskih prava pojedinca. kao rezultat toga proizilaze značajni gubici u ekonomiji zemalja poput poslovnih gubitaka i propuštene ekonomske dobiti uzrokovane nepotpunom iskorišćenošću raspoložive radne snage. ukoliko nema ekonomske samostalnosti, sve druge mere koje se preduzimaju radi poboljšanja položaja žena u društvu uopšte, imaju mnogo manje uspeha i uticaja. cilj ovog rada je da odredi da li su prisutne razlike u zaradama između muškaraca i žena. minserova jednačina zarada prema kojoj je zarada pojedinaca funkcija dostignutog nivoa obrazovanja i radnog iskustva, poslužila je kao polazna osnova za analizu faktora koji određuju formiranje zarada i proveru teze da je pol statistički značajna varijabla koja utiče na varijacije neto zarada kao zavisne promenljive. analiza je izvršena nad podacima prikupljenim putem ankete eusilc za područje srbije u 2014. godini. izgrađen je regresioni model koji je potvrdio prisustvo rodnog jaza u zaradama i uticaj pola na formiranje zarada u kontekstu da ženski pol zarađuje manje u odnosu na muški. usled neadekvatnosti raspoloživih podataka nije utvrđena visina rodnog jaza u zaradama, niti je vršena njegova dekompozicija. ključne reči: rodni jaz u zaradama, tržište rada, regresioni model, eu-silc. 2619 facta universitatis series: economics and organization vol. 14, n o 2, 2017, pp. 127 137 doi: 10.22190/fueo1702127r review paper intellectual capital as the source of competitive advantage: the resource-based view 1 udc 005.336.4:339.137.2 tamara rađenović, bojan krstić university of niš, faculty of economics, niš, serbia abstract. the concepts of intellectual capital and competitiveness are widely studied issues among researchers during the last few decades. intangible assets have been proved to be the fundamental source of value and competitiveness in modern enterprises. intellectual capital is a valuable invisible resource which drives firm’s growth and provides superior value for stakeholders. therefore, the aim of the paper is to examine the role the intellectual capital has in creating and sustaining competitive advantage of enterprises from the resource-based perspective. key words: intellectual capital, competitive advantage, knowledge economy, value creation, resource-based view jel classification: d83, l25, o34 introduction the first mention of the notion of intellectual capital in the 20 th century could be found in frederick taylor’s book (1911), in which he writes about knowledge, experience and skills of employees. intellectual capital, as a term, was originally associated with machlup (1962) who coined it in order to emphasize the importance of knowledge for the development of enterprises and growth of national economies. in the last few decades, intangible assets such as knowledge, patents and innovations have been identified as key sources of value creation and technological progress. these intangibles represent a main concern for the managers of modern knowledge enterprises and their stakeholders (garcíaayuso, 2003). in the knowledge economy, in order to be successful in the market, an enterprise has to be flexible and capable to adapt its resources and products according to the requirements of national and regional markets (krstić, 2007). received february 10, 2017 / accepted march 21, 2017 corresponding author: tamara rađenović university of niš, faculty of economics, niš, serbia e-mail: tamara.radjenovic@eknfak.ni.ac.rs 128 t. rađenović, b. krstić intellectual capital represents the area of interest and research for academics from different scientific fields. the economic literature that deals with the role of non-material resources in sustaining competitive advantages indicates significant variations in the use of terminology (intellectual resources, invisible assets, knowledge resources, knowledgebased capital, intangible resources, non-material assets, etc.). in contemporary conditions, the accounting theory and practice are faced with a declining importance of the information provided by the system of financial reporting. namely, there is a need for accounting information to be supplemented by non-financial information, which does not come from financial statements. there is a requirement that the accounting system should adequately disclose the so-called invisible assets or intellectual resources on the assets side on the balance sheet. therefore, the accountants underline the meaning of the term intangible assets, which actually represents the value of intellectual resources disclosed on the balance sheet. “skandia navigator”, as a framework for measuring and reporting on intellectual capital, was the first implementation of the concept of intellectual capital in business practice (edvinsson & malone, 1997). the motivation for measuring, monitoring and reporting of intellectual capital, at the end of 20 th and beginning of 21 st century, has arisen due to the fact that balance sheets have not taken into account in a proper manner the hidden value, embodied in the intangible (non-material) assets. namely, these balance sheets have not provided information about internally created intellectual assets that are fundamental for the future growth and development prospective of an enterprise. intellectual capital, at the microeconomic level, is composed of three essential components – human capital, relational capital and structural capital (steward, 1997). intellectual capital represents an allencompassing concept, which incorporates diverse non-material resources in the knowledge enterprises. these enterprises are intensive with knowledge-based resources. intellectual capital is the key factor of the sustainable competitive advantage of these enterprises. therefore, the aim of the paper is to examine the concept of intellectual capital, its diverse meanings and to highlight its role in creating and sustaining competitive advantage. the paper is organized as follows: first, the paper highlights the role of intellectual capital as knowledge-based resource and provides the systematic overview of noteworthy definitions of intellectual capital in the literature. further, the study focuses on the basic concepts of competitiveness theory, with the emphasis on the resource-based theory of the firm. after that, the research underlines the importance of intellectual capital as a fundamental resource for value creation for consumers, shareholders and other external stakeholders. finally, the conclusion is drawn from these evaluations. 1. intellectual capital as knowledge-based resource nowadays, in dynamic and knowledge driven economy in the information era, intellectual resources are, comparing to other firm’s resources, principal for achieving superior performance and competitive advantage (wiklund & shepherd, 2003). in order to achieve competitive advantage, a firm must create superior value for its customers comparing to its competitors, and the capacity to do this depends on its resources, capabilities and competences, which are the result of the long-lasting experience in the utilization of a certain resource portfolio (krstić & sekulić, 2016, p. 355). valuable resources of a firm are protected from imitation by knowledge barriers to a greater extent than intellectual property rights, since such resources incorporate values which are hardly reachable and whose connection with results is difficult to determine (miller & shamsie, 1996). knowledge-based resources are intellectual capital as the source of competitive advantage: the resource-based view 129 predominantly in the form of specific skills, such as technical, creative, coordinative and collaborative skills. those skills are primarily developed in individuals and afterwards transferred, shared and codified at the level of organizational groups, organizational units and organization as a system. utilization of knowledge-based resources creates value that can be manifested as human capital, innovations, patents etc. table 1 overview of noteworthy definitions of intellectual capital authors terms conceptual explanation itami (1987) invisible assets intangible assets comprise of invisible resources which incorporate a wide range of activities in the sphere of technology, consumer confidence, brand image, corporate culture, and managerial skills. hall (1992) intangible resources intangible assets represent the value drivers which transform productive resources into value-added assets. brooking (1996) intellectual capital intellectual capital is the aggregate of market assets, human-centered assets, intellectual property and infrastructure assets. edvinsson and malone (1997) intangible assets intangible assets do not have physical expression, but are significant for the firm’s value augmentation. sveiby (1997) intangible assets intangible assets consist of three dimensions: employee competence, internal and external structure. nahapiet and ghoshal (1998) intellectual capital intellectual capital is viewed as knowledge and learning capacity of an organization. brennan and connell (2000) intellectual capital intellectual capital is the difference between the market and the book value of the company, i.e. the knowledge-based equity of the company. sullivan (2000) intellectual capital intellectual capital is knowledge that can be converted into profit. viedma marti (2001) intellectual capital intellectual capital represents fundamental firm’s competences. lev (2001) intangible assets intangible assets are the entitlements to future benefits that do not have physical or financial manifestation. fasb (2001) intangible assets intangible assets represent the claims of future benefits. these claims are non-current and non-financial in nature. also, intangible assets do not have physical or financial expression. de pablos (2003) intellectual capital according to the broad definition of intellectual capital it represents a positive difference between market and book value of the firm. rastogi (2003) intellectual capital intellectual capital can be viewed as holistic capability of a firm to coordinate, organize and use all available knowledge with the aim to create value in the future. mouritsen et al. (2003) intellectual capital intellectual capital mobilizes employees, clients, information system, managerial processes and knowledge. iasb (2004) intangible assets intangible assets are identifiable non-monetary assets without physical manifestation, which firms use for production or supply of goods and services, rental to third persons or administrative purposes. andriessen (2004) intangible resources intangible resources are non-monetary resources without physical substance that produce future benefits for a firm. roos et al. (2005) intellectual capital intellectual capital can be defined as non-monetary and non-physical resources that are fully or partly controlled by the firm and that contribute to the firm’s value creation. marr and moustaghfir (2005) intellectual capital intellectual capital embraces any valuable intangible resource gained through experience and learning that can be used in the production of further wealth. choong (2008) intellectual capital intellectual capital is a non-monetary asset without physical substance, but it possesses value or it can generate future benefits. lerro et al. (2014) intellectual capital intellectual capital can be viewed as the set of knowledge assets held by an organization which significantly drives organizational innovation and value creation processes. lentjušenkova and inga (2016) intellectual capital intellectual capital is a firm’s assets which include the firm’s human capital, information and communication technologies, business procedures, and intangible assets that can be converted into material and immaterial value. 130 t. rađenović, b. krstić researchers in the area of intellectual capital have offered various definitions of intellectual capital (table 1). although extremely extensive, the term intellectual capital is interpreted rather precisely in the referring economic and management literature. accordingly, in the business practice of a firm, there is even intellectual or knowledge capital manager in the organizational system. his/her task is to initiate, monitor and coordinate knowledge management programs, as well as to enable organizations to maximize the shareholders’ value through investments in different knowledge resources. in fact, he/she manages intellectual capital and it is necessary to develop a methodological framework for the specific system of intellectual capital management (krstić, 2014). this framework consists of three subsystems: knowledge management, innovation management and intellectual property management. apart from this, the intellectual capital manager has a task to actuate employees to constant individual learning and thinking. furthermore, this person has to design and consistently implement an effective reward and motivation system for those employees contributing to the increase of knowledge resource. besides, an intellectual capital manager has a task to quantify the impact the intellectual capital management has on the efficiency performance of a firm. 2. resource-based theory and competitive advantage the resource-based theory of the firm (douma & schreuder, 1998, p. 159) has taken a significant place in the economic theory at the end of the 20 th century. it represents one segment of the competitiveness theory. within the competitiveness theory, besides the resource-based theory, important are the theory of dynamic capabilities and knowledge-based theory. common characteristic of these theories is that they put emphasis on the so-called internal determinants of a firm’s economic performance. namely, the resource-based theory of the firm starts with the premise that the success of a firm is predetermined by the adequate choice of resources and their combinations. however, the theory of dynamic capabilities acknowledges that the efficient usage of resources is not enough for the firm’s success, but certain capabilities (in production, procurement, sales, research and development, etc.) that are functionally specific are also needed (krstić, 2007, p. 349). this is in line with amit and schoemaker (1993) who argue that resources cannot contribute to the sustainable competitive advantage of a firm, but such role is attributed to the firm’s capabilities. these authors define firm’s capabilities as the capacity to use its resources in combination with information-based and firm-specific organizational process. capabilities are developed through complex interactions between the firm’s resources. teece et al. (1997) define dynamic capabilities as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (p. 516). therefore, dynamic capabilities reflect a firm’s capacity to attain unique and innovative forms of competitive advantage considering market positions and path dependencies. namely, leonard-barton (1992, p. 113) points out that the core capabilities represent a “knowledge set that distinguishes and provides a competitive advantage”. this knowledgebased view of a firm classifies four dimensions of the knowledge set: knowledge and skills of employees, technical systems, managerial systems and values and norms associated with the various types of embodied and embedded knowledge (leonard-barton, 1992). intellectual capital as the source of competitive advantage: the resource-based view 131 knowledge is an imperfectly imitable resource. hence, if a firm wants to increase its value it has to create new organizational knowledge embodied in the skills and competences of the employees. as, in the changing and fast growing environment, successful firms are those which constantly create new knowledge, disseminate it through organization and rapidly materialize in the form of innovative products. performances of resources and the dynamic capabilities of a firm determine the imitating or experimenting activities with resources, along with the cost assessment of these activities and lead to the new configuration of resources. the new configuration of resources resulting from the learning process of imitation and/or experimentation determines the future production quantity, as well as product and process innovations (zott, 2003). the resource-based theory of the firm views strategy as the instrument for the alignment of resources and capabilities of a firm with the external environment requirements. resourcebased view observes a firm as a unique set of its heterogeneous resources and capabilities. heterogeneity of the resources determines the heterogeneity of firms. namely, firms possess mutually different resources and do not use them equally successful, thus resulting in different performances of efficiency among different firms. firms aiming at enhancing their economic success, initiate enhancement of performances of the resources (for example, technological sophistication, training of employees, etc.). continuous actions of firms toward enhancing the performances of their resources, contribute to the relatively stable difference in resources among firms. contributions to the final shape of this theory have been put by numerous researchers. wernerfelt (1984, p. 172) in his work has viewed a firm as the “bundle of resources… which could be thought of as strength or weakness of a given firm”, such as: brands, internal technological knowledge, skilled employees, effective processes, etc. the resourcebased theory of a firm stresses that in the process of formulating the firm’s strategy, the basis is analysis of resources and capabilities comparing to competitors. according to this theory, external environment is not the key factor for the strategic action of a firm, but internal firm’s characteristics. complex competitive environment requires the full commitment of the firm’s management to conceptualization and realization of a resourcebased strategy. therefore, the focus will be on the role of intellectual capital, as invisible resource of a firm, in creating competitive advantage, from the resource-based perspective. the intention is to understand the characteristics of the intellectual resources that drive competitive advantage of a firm. 3. intellectual capital and competitive advantage: a resource-based view barney (1991) as founder and proponent of resource-based theory in the economy of the firm, i.e. resource-based view of competitive advantage, considers that a firm achieves competitive advantage due to the resources that have to be valuable, rare, imperfectly imitable and non-substitutable. the characteristics of intellectual capital, as a valuable knowledge-based resource, are (lin, 2013, pp. 54-55): a) “intellectual capital is valuable, rare, imperfectly imitable and non-substitutable; b) intellectual capital is communicable to others; and c) components of intellectual capital are both distinctive and comprehensive”. with the above mentioned characteristics, intellectual capital can be transformed in the competitive advantage of the firm. 132 t. rađenović, b. krstić a) barney (1991) points out that when companies possess the same type of resources, such resources cannot create competitive advantage. only when companies’ resources are valuable, rare, imperfectly imitable and non-substitutable, they become the source of competitiveness creation, improvement and sustainability. barney’s formulation from the resource-based perspective denotes a very broad definition of resources as all types of tangible and intangible assets, organizational processes, knowledge, capabilities and other potential sources of competitive advantage (lavie, 2006). intellectual capital, as a unique combination of a firm’s knowledge-outputs, is an extremely valuable resource, especially in contemporary knowledge economy. further, the intellectual capital of a firm, as specific combination of diverse intangibles, can and should be a rare resource. although every organization has elements of intellectual capital, the content, i.e. the mixture of intellectual capital elements are firm-specific in relation to its competitors. the intellectual capital of a firm cannot be easily imitable, due to the fact that every organization has its individual fundamental material (tangible) and non-material success factors such as: culture, strategy, system, skills, leaders and key employees. the established intellectual capital is a result of interdependence among these factors during a number of years of successful competition in a particular market. although competitors can compare and adopt best practices, intellectual capital is hard to imitate due to the complex process of its forming at key players in the market. therefore, the intellectual capital is non-substitutable, i.e. it cannot be easily substituted. although a company can allocate its business model to other locations (markets) with the same company’s setting and identical number of qualified employees, formed intellectual capital will not be the same in all locations, which makes it irreplaceable. hence, according to the views of resource-based theory, intellectual capital is a valuable resource that can create shareholder value and competitive advantage. b) intangible assets cannot be easily seen, felt or described. for managerial decision makers, who are to comprehend the value and importance of intellectual capital in realizing strategy and specific business model of a firm, intangible nature of intellectual capital makes it even more significant since it can be communicated to others – key stakeholders. on the organizational level, already determined components of human, structural and relational capital (krstić, 2014) make the concept of intellectual capital communicable to stakeholders. moreover, the best way for communicating the values of intellectual capital is through the realization of appropriate financial performances. from the resource-based view, firms are obtaining and sustaining competitive advantage through the development of valuable resources and capabilities. this means that resources and capabilities have to be efficiently used in order to achieve superior competitive potential (barney & wright, 1998; ray et al., 2004; sheehan & foss, 2007; andersén, 2011). intellectual capital is the observable result of management practices, techniques and tools. for example, implementing the intellectual capital concept in practice and emphasizing the value of structural capital (as the component of intellectual capital) by establishing a knowledge management system can improve the firm’s efficiency and effectiveness. besides, intellectual capital is a resource that can be used in everyday operations and help in converting and synergizing other firm’s material and non-material resources into its competitive advantage in the market. c) understanding of resources in the literature has always been multidimensional, since firms have different combinations and configurations of resources (zajac et al., 2000). as previously defined, the intellectual capital of a firm consists of human capital, structural capital and relational capital. in other words, intellectual capital is a multidimensional portfolio of resources. intellectual capital is recognizable because three capital components intellectual capital as the source of competitive advantage: the resource-based view 133 (human, structural and relational) represent different constructions of resources. also, intellectual capital is a comprehensive combination of resources as its capital components encompass people and leaders, structure and systems, as well as social relations. human capital is the fundamental resource of a firm, which includes knowledge, skills, experience, competence, attitude, commitment and individual characteristics of employees (bontis & fitz-enz, 2002; hitt & ireland, 2002). structural capital is codified knowledge owned by a firm and can be codified, reproduced and distributed among individuals and organizational units within a firm. structural capital (as a component of intellectual capital) involves efficient business processes, managerial philosophy, information technologies and systems, intellectual property, patents, design, brands, data bases, organizational structure, organizational culture, organizational routines and procedures, etc. relational capital represents knowledge embedded in the short or long-term relations a firm has with suppliers, consumers, strategic partners and other external entities, while building the reputation of a firm. the relevant literature points toward the following standards for the performance assessment of tangible and intellectual resources: durability, imitability, transferability. apart from these criteria, key resource performances are rareness and flexibility (krstić, 2009, p. 70). of extreme influence on the durability of intellectual resources are dynamic technological changes. in some circumstances, patents experience technologically aging before the termination of law protection (as a form of intellectual property). firm’s reputation, is also an example of the intangible resource which may express significant volatility over time. bearing in mind imitability, the firm should have incentive to produce distinctive (unique) intellectual resources. intellectual resources that are imperfectly imitable are patent technologies. a firm’s capability to sustain competitive advantage during certain period depends, among other things, on the speed by which competitors succeed to obtain certain intellectual resources that are necessary for imitation. transferability, i.e. availability of intellectual resources refers to consideration of time and effort necessary to obtain or create resources. intellectual resources which can be easily and rapidly obtained (bought), cannot secure sustainable competitive advantage over the relatively long period. generally, such resources can be quickly copied, since firm acquires them relatively easy (obtain, buy, create). some intellectual resources are not so easily obtainable, i.e. transferable among subjects. for example, such situation exists with specific intellectual resource – brand. usually, the brand is associated with the firm, and change of firm’s ownership can erode the value of the brand. in case when particular intellectual resource cannot be purchased, it is necessary to be produced, i.e. built in internal process of research and development. usually, superior strategic importance is given to the internally created intellectual resources compared to those intangible resources that can be obtained in the market via buying and selling transactions. rareness (uniqueness) of some intellectual resources should be protected. the best legal protection frameworks are through patenting. also, the competition for sustaining the uniqueness of resources is led by continuous investments in research and development projects. some rare resources are imperfectly imitable. that is especially the case with tacit knowledge, i.e. implicit knowledge of one number of employees or working groups, which manifests in individual competences that are not formally owned by the firm as an entity. in the knowledge-intensive organizations (based on the share of the value of other resources in the total value of assets in the balance sheet), especially with dynamic technology and short 134 t. rađenović, b. krstić life-cycle of products, tacit knowledge of some employees (experts, professionals) is a considerably unique resource. containing such a valuable resource in the firm is of extreme importance for its economic efficiency in the future. besides, the firm’s competitive advantage is determined by the flexibility of its intellectual resources. innovative capability of human resources in the firm is of great importance for its efficacy. some firms are better and more capable than others in innovating. innovation is important because of achieving and delivering superior value to consumers that will enable competitive advantage. also, with the strategy of continuing product innovation, competitors will have problems to adjust over a relatively long period of time. many companies are now being sold at a much higher price than their actual book value. the market valuation of companies increasingly relies on the so called intangible factors or invisible items. this approach reflects a huge gap between the market valuation and accounting valuation, causing further interest in a more effective and efficient economic use of intellectual resources/capital in knowledge enterprises. conclusion the value of a firm, products/services and shareholders’ value is achieved through combination of tangible and intangible resources. by investments in intellectual capital the knowledge resources are increasing, technology is improving, firms are more ready to undertake initiatives regarding the development of new products/services and are oriented toward the improvement of the relationships with the key stakeholders. in the contemporary economy, the success of the enterprise depends on its capabilities to recognize potential in the market and to find a way to use it. increasing competition in the 21 st century and the knowledge economy era puts forward as a necessity a more productive utilization of intangible resources in order to achieve success and survival in the market. developed economies base their competitiveness on knowledge, information, commercial innovations, intellectual capital strategies, and much less on physical resources and low-cost labor. the most important activity in the knowledge economy is not production of products and services anymore, but production of new knowledge (from the broader prospective intellectual resources), which is base for improved quality of products and services. highquality intellectual resources increase the products’ value for customers, the products can be sold at higher prices, thus leading to the higher income. intellectual resources enable innovations that are transformed into sales revenues. besides, intellectual resources enable creating intellectual assets in the form of intellectual property, and hence the utilization of such assets enables higher commercial effects arising for intellectual property (protected patents, designs, trademarks). for many enterprises are especially important incomes which they obtain by selling intellectual property through licenses for products, technologies, brands, etc. furthermore, intellectual capital (knowledge, competences etc.) enables efficient structure, better working environment and supporting organization culture, efficient business processes. namely, more efficient working processes lead to the realization of business and other activities at lower costs. intellectual resources, especially intellectual property in the form of patents, contribute to the income protection from erosion owing to eventual misuse from other enterprises. portfolio of intellectual property can be a tool for managing business negotiations during sales, joint ventures, mergers, etc., thus affecting intellectual capital as the source of competitive advantage: the resource-based view 135 indirectly future revenues. intellectual resources contribute to the revenues increase and cost reductions, thus leading to the increase of income and indirectly to the efficiency and profitability of an enterprise. acknowledgement: the paper is 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(2003). dynamic capabilities and the emergence of intraindustry differential firm performance: insights from a simulation study. strategic management journal, 24(2), 97-125. doi:10.1002/smj.288 intellectual capital as the source of competitive advantage: the resource-based view 137 intelektualni kapital kao izvor konkurentske prednosti: na resursima zasnovano gledište koncepti intelektualnog kapitala i konkurentnosti su dosta proučavani od strane istraživača tokom nekoliko poslednjih decenija. nematerijalna imovina se pokazala kao ključni izvor vrednosti i konkurentnosti u savremenim preduzećima. intelektualni kapital je vredan nevidljiv resurs koji doprinosi rastu preduzeća i većoj vrednosti za stejkholdere. u tom smislu, cilj rada je da ispita ulogu koju intelektualni kapital ima u kreiranju i održavanju konkurentske prednosti preduzeća iz resursne perspektive. ključne reči: intelektualni kapital, konkurentska prednost, ekonomija znanja, stvaranje vrednosti, na resursima zasnovano gledište facta universitatis series: economics and organization vol. 13, n o 1, 2016, pp. 17 29 entrepreneurship and economic development: a comparative analysis of developed and developing countries  udc005.961:005.914.3]:330.35 vinko lepojević, maja ivanović đukić, jelena mladenović university of niš, faculty of economics, niš, serbia abstract. the stimulation of economic development is one of the key tasks for macroeconomic policy makers. in recent decades, entrepreneurship has become an increasingly important generator of economic development. previous research shows that entrepreneurship is important for economic development, but contribution of entrepreneurship to economic development is diverse in countries with different degrees of development, due to the differences in characteristics of the macroeconomic environment, presence of different entrepreneurial activity forms and so on. this paper examines the impact of different types of entrepreneurship (oea, nea; hea) on economic growth through the comparative analysis of developed and developing countries. the aim of this study is to investigate the differences in economic effects of entrepreneurship based on opportunity and entrepreneurship based on necessity. furthermore, the article should propose measures for encouragement of economic development to macroeconomic policy makers. the analysis includes descriptive statistics, correlation and regression methods. the analysis was carried out by using spss software on a sample of 22 countries in three years. it has been shown that the contribution of entrepreneurship to economic development is higher in developed countries in comparison to developing countries. the reason for that fact is the domination of hea and oea entrepreneurship whose importance for gdp growth is higher in relation to the importance of nea which is predominant in developing countries. key words: economic growth, entrepreneurship, developed countries, developing countries. introduction economic growth is one of the most extensively examined macroeconomic phenomena. a great number of economists have tried to identify the generators of economic growth. at the beginning of the 20th century, large companies were considered key generators of economic received october 18, 2015 / accepted march 10, 2016 corresponding author: vinko lepojević faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: vinko.lepojevic@eknfak.ni.ac.rs 18 v. lepojević, m. ivanović đukić, j. mladenović growth because they took advantage of the economy of scale, so they were very efficient, and also generated huge profits and employed a large number of workers (burns, 2011, p. 516). therefore, in most developed economies, great attention has been paid to the development of large enterprises, while small and medium enterprises and entrepreneurs have been considered as remains of the past which have impeded economic growth (paunović, 2012). however, in the 1970s, many large companies were affected by serious economic problems. in conditions of intensified global competition, increase of market fragmentation, technological advances and other changes which increased the dynamism and uncertainty of the market, large companies were faced with many problems. it was determined that large organizational systems were inflexible, and very slow to adapt to new market conditions. on the other hand, smes were more successful in coping with new circumstances (sorin-george grigore and marinescu, 2014, p. 236-243). as a result, an increasing number of articles appeared pointing out the importance of smes, and politicians,such as ronald reagan in the us and margaret thatcher in the uk, began to pursue a policy that strongly encouraged the promotion of small business and entrepreneurship.as a consequence, rapid development of this sector began and it drove the economy and took a share in economic activities (cornelius, landströmand, persson, 2006, pp. 375-398). as a result of this situation, in practice and theory, a large number of works have appeared with the intention of explaining the increasingly important role of entrepreneurs in the economy and great importance of entrepreneurship for economic development. even though theory emphasizes that the contribution of entrepreneurship to economic growth is extremely large, there is no empirical evidence that these theoretical assumptions can be generalized and considered as generally accepted. numerous studies indicate that the impact of entrepreneurship on economic growth varies depending on the degree of development of a country. for developed countries, there is an extensive empirical evidence which confirms that entrepreneurship has a statistically significant contribution to economic growth, while this is not the case with developing countries and transition economies, where the evidence shows that entrepreneurship has a negative impact on economic development or that a connection between entrepreneurship and economic development is statistically insignificant (sabella, farraj, burgar, qaimary, 2014). many scientists explain the different impact of entrepreneurship on economic growth in developed and developing countries by characteristics of the macroeconomic environment in developing countries (compared with developed countries), by the presence of gray economy and informal entrepreneurship, etc. (sabella, farraj, bourgbarré, qaimary, 2014). also, certain studies suggest that the differences in impact of entrepreneurship on economic growth in developing countries may be caused, to some extent, by a different structure of entrepreneurial activity that is present in the above group of countries (valliere, peterson, 2009, p. 459-480; wong, ho, autio, 2005, p. 335-350). due to these and other unresolved dilemmas, the impact of entrepreneurship on economic growth in developing countries is still not completely clear and it is the subject of a large number of empirical studies. the subject of the article will also be a study of the impact of entrepreneurship on economic growth through a comparative analysis of developed and developing countries. the aim is to identify the types of entrepreneurial activities that have the greatest contribution to economic growth and to propose measures for encouraging their development. a review of literature which links entrepreneurship with economic growth will be given first in the paper. in the second part, the starting assumptions and described models for entrepreneurship and economic development: a comparative analysis of developed and developing countries 19 checking their validity will be presented. the third part is related to the methodology and presenting results. the results will be discussed in the fourth section. the conclusions and recommendations for policy makers will be presented in the last part of the paper. 1. previous research of the links between entrepreneurship and economic growth most modern economists have moved away from the previously dominant attitude that economic growth is based on a performance of large companies. nowadays, the prevailing belief is that economic growth relies largely on the activities of small and medium-sized enterprises, as well as on new business ventures and entrepreneurs. in this sense entrepreneurship is increasingly seen as a key mechanism for promotion of economic development which is explained by various arguments. so, some scientists emphasize that entrepreneurship contributes to the increase of economic stability and overall development through creation of new business opportunities, with offer of a variety of products to consumers, by increasing gross domestic product, alleviating poverty and ensuring long term prosperity for the whole society (stefanović, ateljević, ivanović-đukić, jankovićmilić, 2014). also, entrepreneurs increase their competitiveness and contribute to the national competitiveness improvement thanks to the frequent introduction of innovation and by copying practices of the most successful business systems (ĉuĉković, bartlett, 2007). for transition economies, the importance of entrepreneurship is even greater because it increases the level of competitiveness in the market (megginson, netter, 2011) and limits the market power of public enterprises (mcmillian, woodruff, 2002), which encourages the development of market economy. understanding the importance of entrepreneurship for economic growth has led to an enormous number of papers with different explanations of the role of entrepreneurs in economic development as well as the contribution of entrepreneurship to the improvement of economic performance. all of them can be grouped into the following units (wheat, jakopin, vukcevic, coric, 2014):  papers that assess and measure the contribution of entrepreneurship to economic growth (tang, koveos, 2004; valliere, peterson, 2009; wong, ho, autio, 2005). these papers include theoretical and empirical analyses of the effects of individual entrepreneurial activity on the living standard (or gdp growth), as well as increasing employment and providing general prosperity of the society in the long term.  papers which analyze business and organizational aspects of entrepreneurship, i.e. intrapreneurship impact on competitiveness improvement of individual organizations directly, and national competitiveness improvement indirectly. in these articles, it is explained how different forms of entrepreneurial activities within existing organizations can contribute to achieving their economic goals, increase the market share and increase their competitive advantage in the market (antonicic, histrich, 2003; barringer, bluedorn, 1999; birkinshaw, 2003).  papers where entrepreneurship is defined as a specific form of behavior and a set of behavioral features which allow individuals to recognize and exploit opportunities from the market. in these papers entrepreneurship is explained as a valuable resource. its presence in society can be an initiator and the driving force for economic development (covina, green, slevin, 2006). 20 v. lepojević, m. ivanović đukić, j. mladenović in this paper, the focus will be on the study of the role and importance of individual entrepreneurship for economic growth. one of the first economists who pointed out entrepreneurship as an important factor of economic growth was schumpeter (1934). for schumpeter, an entrepreneur is an agent capable of generating shocks in the economic cycle through the innovation process. schumpeter formulated the theory of economic development which is based on a process of creative destruction generated by entrepreneurial activity (urbano aparicio, 2015). also, rodrik (2003) noted the importance of entrepreneurship in encouraging development processes. he believed that growth and development were conditioned by endogenous factors, by entrepreneurial behavior, especially those based on knowledge, because it was able to generate employment and make diversification of national production (rodrik, 2003). theorists of economic development have even tried to incorporate entrepreneurship in growth models. for example, romer the founder of the theory of endogenous economic growth which emphasizes the accumulation of knowledge and creation of human capital as driving factors of growth introduces in his own growth model research and development as a sector which creates new kinds of capital goods (romer, 1990) and entrepreneurs as individuals capable of developing new goods from activities that lead to changes in the market (in terms of schumpeter creative destruction), improvement of a production, increasing of a labor productivity and economic growth (chamberlin, 1993).wennekers and thurik (wennekers, thurik, 1999) look at entrepreneurship as a specific form of human capital and an additional indirect variable that (it is derived from the "new" theory of economic growth) is a function of economic growth (suarez-villa, 2000). glaeser and colleagues (1999) take that entrepreneurship contributes to economic growth because it causes knowledge overflow. new knowledge may not be immediately widespread. overflow of knowledge is conditioned by limited geographical nearness and interactions between participants within the local innovation system (glaeser, kallal, sheinkmana, schleifer, 1999). audretch and keilbach add that the contribution of entrepreneurship to economic development allows faster commercialization of new technologies that leads to higher productivity and economic growth (audretch, keilbach, 2004). in addition to theoretical explanations of the importance of entrepreneurship for economic growth, there is a great deal of empirical research which examines the presence of a statistically significant relationship between these phenomena as well as the impact of entrepreneurship on economic growth by using quantitative methods. for example, a survey which analyzed the impact of entrepreneurship on economic growth was carried out in the uk. it was concluded that the reduction of economic activity in the 1960s and 1970s was conditioned by insufficient development of entrepreneurial activity. the institutional framework characterized by high tax rates, public monopolies and protected trade unions were identified as the key factors of decline of entrepreneurial activity and indirectly of economic growth of great britain in this period (wiener, 1981, 131). minniti and levesque (2006) talk about the crucial impact of entrepreneurs on growth and development, through application of innovation and imitation by using unused resources (minniti, levesque, 2006). on the other hand, there are studies which show that entrepreneurship can have negative effects on economic growth or that the connection between entrepreneurship and economic growth is not present in general. for example, a study by tang and koveos (tang, koveos, 2004) has shown that there is a negative correlation between entrepreneurship and economic growth. the analysis by sabella et al. (sabella, farraj, burgar, qaimary, 2014), conducted in palestine by using regression analysis, confirms that entrepreneurship has a positive effect on gdpgrowth rate, but this relationship is not statistically significant. entrepreneurship and economic development: a comparative analysis of developed and developing countries 21 the differences in the results of the mentioned studies are partially explained in the research by wong, ho and autio (2005).on the sample of 43 countries, they concluded that there are significant differences in the effects of entrepreneurship on economic growth in countries with different degrees of development. specifically, the contribution of entrepreneurship to economic growth in developing countries is much lower compared to developed countries. these differences are mainly caused by a different macroeconomic environment as well as a different structure of entrepreneurial activity. using regression analysis methods, they proved that the largest contribution to economic growth was made by fast-growing companies which were present in developed countries, while in developing countries there were almost none of those, and therefore the contribution of entrepreneurship to economic growth in developing countries was higher than in developing countries. they also proved dominance of enterprises based on necessity in developing countries, whose contribution to economic growth is almost insignificant. so, they proved that not all forms of entrepreneurship contribute to economic growth, but entrepreneurship based on high expectations and entrepreneurship based on capabilities do (wong, ho, autio, 2005). similar claims come from the analyses carried out by acs and colleagues (acs, audretsch, braunerhjelm, carlsson, 2012), audretsch (audretsch, 2007), audretsch and keilbach (audretsch, keilbach, 2005) and audretsch and associates (audretsch, bonte, keilbach, 2008), proving that entrepreneurship based on knowledge and innovation contributes to improvement of economic growth and development. also, aparicio, urban and audretsch (2015) used panel analysis which included 43 countries and concluded that there is a positive connection between entrepreneurship based on opportunities and economic growth. on the other hand, this study showed that entrepreneurial activities based on necessity can only resolve short-term problems while they cannot show a positive long-term effect on economic growth (aparicio, urbano, audretsch, 2015). so, the connection between entrepreneurship and economic growth has not been proven empirically. also, since there are a lot of different views and evidence, the impact of various forms of entrepreneurial activity on economic growth is not fully clear. because of that, this article will include empirical research of the links between different types of entrepreneurship and economic growth through a comparative analysis of developed and developing countries. 2. model and hypotheses the subject of this paper is to examine the effect of different types of entrepreneurial activity on the gdp growth rate as well as to examine the differences in the impact of entrepreneurship on economic performance in developed and developing countries. our initial assumptions are: h1: entrepreneurship contributes to economic growth, and this contribution is higher in developed countries compared to developing countries. h2: a rapidly growing company and entrepreneurship based on opportunities havethe largest contribution to economic growth, while the contribution of entrepreneurship nea is the smallest. in order to check the validity of these hypotheses, a regression model will be defined and the effect of different types of entrepreneurship on the gdp growth rate will be examined through a comparative analysis of developed and developing countries. 22 v. lepojević, m. ivanović đukić, j. mladenović a large number of previous empirical studies (valliere, peterson, 2009; wong, ho, autio, 2005) use some form of the cobb-douglas production function where growth is conditioned by the stock of capital and labor, as well as by the disembodied factor of productivity. according to this, the model has the following form: y ak l    (1) where y is output, k is value of production funds, l is size of the workforce as a measure of labor expenditure, a is efficacy parameter, α and β elasticity coefficients of output in relation to the cost of capital and labor (cvetanović, 2005, 150). apart from these factors which are based on the theory of exogenous growth, economic literature considers factors based on human capital (knowledge, entrepreneurship, etc.), in accordance with the theory of endogenous growth, which is going to be done in this paper. as an element of human capital component, different forms of entrepreneurial activity will be chosen. classification of entrepreneurial activity will be done on the basis of the research methodology of global entrepreneurship monitor (gem). gem identifies two basic types of entrepreneurial activity based on entrepreneurs’ motives for setting up a business: the necessity and identified opportunities. additionally, high expectations entrepreneurship will be added to the mentioned types of entrepreneurship, because a large number of previous researches points out that this form of entrepreneurship has the biggest contribution to economic growth (www.gemconsortium.org):  high expectations entrepreneurship (hea) is defined as a set of all start-ups and newly established companies (established in less than 42 months), which are expected to employ at least 20 employees for 5 years. these companies are known as "gazelles" or fast-growing companies and they are characterized by small size, high availability of unused resources and low availability of funding.  opportunity-based entrepreneurship (oea) includes all individuals who perceive business opportunities and start their own business as one of several possible business options. this definition includes a widespread group of entrepreneurs who use opportunities but do not expect high growth, which is the case with hea entrepreneurs. opportunity-based entrepreneurs expect much lower growth rate realization because of perceived limitations of the environment, either because of limited goals or motivations.  necessity-based entrepreneurship involves individuals who see entrepreneurship as their last anchor and start business due to lack of other business combinations or due to their dissatisfaction with current options. in the model presented later in this paper we will start from labor and capital as the main factors of economic growth, then we will add entrepreneurship as a form of human capital, which has a supportive role to growth and gives an endogenous dimension to the formulated model. these dimensions will act as independent variables while the gdp growth rate will be a dependent variable. for the purpose of examining the nature of relationship between gdp growth rates and the above independent variables, hierarchical regression will be used. multiple regression analysis is an area of multivariate analysis that has the greatest application. furthermore, multiple regression analysis is a method that is used when a research involves more than one independent variable and dependent variable is expressed in their function. in this context, only the dependent variable is taken as a random value, while independent variables are identified values. let us make an assumption that k appearances can be identified as independent variables and mark them with x1, x2,..., xk. with the help of the multiple linear entrepreneurship and economic development: a comparative analysis of developed and developing countries 23 regression model, the dependence between variables is approximated by linear function, so equation for arbitrary dependent variable in the set has the following form: 0 1 1 2 2 ... i k k i y xi xi xi          (2) where: yi  i  i value of dependent random variable, xi1, xi2,...,xiki  values of independent variables, 0, 1, 2,..., k  model parameters (regression coefficients), i  stochastic term or random error, k  number of independent variables. specifically, the model can be summarized as follows: 1 2 3 4 5 6o gdpg gcf fdi lf oef hea nea             (3) where the variables are: gdpg – gdp growth rate, gcf – gross capital formation, fdi – foreign direct investment, lf – labour force, oea – opportunity entrepreneurial activity, hea – high-expectation entrepreneurship and nea – necessity entrepreneurial activity. hierarchical multiple regression will be used in the analysis, where independent variables will be entered in the equation in a sequence which is chosen by researchers, everything on the theoretical knowledge basis. variables will be entered gradually and wewill also evaluate the contribution of each independent variable to dependent variable prediction, with effects removal of all previously entered variables at the same time. once all variables have been introduced, the next step is the assessment of the entire model's ability to predict dependent variable and relative contribution of each block of variables. basic macroeconomic indicators that are used in the analysis are: growth rate of gdp, gross domestic investment, foreign direct investment and labor, and the world bank website is the source forall of them, while the source of nea, oea, heavaluesis gem (global entrepreneurship monitor). the analysis covers 22 countries in a threeyear period, where 14 are developed countries, while 8 belong to the group of developing countries. countries are divided in to developing countries and developed countries based on the amount of gni per capita (breakpoint $ 12,000 us). missing values for some indicators are estimated on the basis of indicators for the previous year, or based on the value for the given indicator in similar countries in the region where the given country belongs. in this sense, we have conducted the analysis with a set of 66 combinations country-year. for statistical analysis, spss statistical software (version 17.0) is used. 24 v. lepojević, m. ivanović đukić, j. mladenović table 1 countries included in the analysis 3. results and discussion table 2 shows basic descriptive measures for all observed indicators for both groups of countries and it is possible to make a parallel between them. table 2 descriptive statistics developed countries developing countries min. max. mean s. dev. min. max. mean s. dev. gdpg -8.27 9.72 0.143 3.9113 -6.80 8.75 2.825 4.4744 gcf 14.97 32.88 22.92 4.2080 14.94 31.26 24.84 4.3419 fdi -2.4e10 3.4e11 58e9 8.9e10 -2.5e9 2.20e10 6.2e9 6.06e9 lf 186491 1.58e8 2.5e7 4.12e7 1.39e6 24.1e7 1.1e7 8.17e6 oea 41.00 76.00 59.07 9.0105 20.00 56.00 38.29 8.9708 hea 13.00 47.00 27.69 8.1972 14.00 61.00 29.37 10.606 nea 5.00 33.00 13.66 6.8348 14.00 46.00 34.29 7.5381 to compare the observed indicators values, we have used the t-test, and the results are given in table 3. by testing the significance of differences in the indicator values between these two groups of countries, we have concluded thatthere was a statistically significant difference (the risk of error of 0.05) between all of the indicators, except hea and gcf (in gcf this difference is significant at the level of 0.1, but it is not proven to be significant at the level of 0.05). countries developing countries serbia romania bosnia and herzegovina turkey columbia dominican republic venezuela south african republic developed countries belgium denmark finland france island israel italy japan netherlands norway slovenia spain uk usa entrepreneurship and economic development: a comparative analysis of developed and developing countries 25 table 3 testing differences between means of observed indicators for developed and developing countries t df sig. (2-tailed) gdpg -2.543 64 .013 gcf -1.759 64 .083 fdi 2.850 64 .006 lf 1.620 64 .041 oea 9.027 64 .000 hea -.721 64 .474 nea -11.360 64 .000 based on checking the conditions fulfillment for carrying out the regression analysis, we have concluded that there is nota serious deviation from the basic assumptions.by monitoring multicollinearity between variables, we have found a relatively weak correlation between parts of independent variables. we have removed all doubts about the existence of multicollinearity between variables by implementation of "collinearity diagnostics" for the variables in the spss procedure, through the values of tolerance and vif. checking other assumptions normality, linearity, homoscedasticity, independence of residuals and existence of atypical points, has led us to the conclusion that these assumptions have not been disturbed and that it is possible to carry out the desired procedure of hierarchical multiple regression. the only problem which is not resolved ina satisfactory manner is the size of the sample. in fact, there are different attitudes related to the size of the sample that is necessary for the results of multiple regression to be taken as valid. according to one (stevens, 1996, 72), the recommended sample size in social sciences is 15 units per one independent variable. on the other hand, some authors (tabachnick, fidell, 2007, 123) impose rigorous conditions, considering that the sample size must be greater than relations: 50 + 8m (where m is the number of independent variables), whichis not easy to meet. the volume of the data which we have used and which has been objectively imposed, has been below from the minimum listed under both approaches, so in this part we have not been able to meet this assumption completely. however, this has not diminished the validity of our results significantly. table 4 shows the results of hierarchical regression for the data we have used in the analysis. table 4 hierarchical regressions: dependent variable gdp growth rate developed countries developing countries unstandardized coefficients standardized coefficients sig. unstandardized coefficients standardized coefficients sig. b std. error beta std. error b beta (constant) -17.135 5.524 .004 -27.869 9.092 .007 gcf .530 .134 .571 .000 .648 .205 .629 .006 fdi 1.9e-11 .000 .452 .047 1.8e-10 .000 .252 .296 lf -3.5e-8 .000 -.373 .120 -2.6e-7 .000 -.484 .167 nea .009 .074 .021 .003 .203 .109 .408 .078 hea .094 .063 .196 .047 .178 .095 .421 .077 oea .127 .106 .223 .039 .104 .109 .175 .353 26 v. lepojević, m. ivanović đukić, j. mladenović as it is shown in table 4 (based on the value of standardized beta coefficients), the greatest impact on economic growth in developed countries, expressed by the gdp growth rate, is made by opportunity-based entrepreneurship (b = 0.223), followed by high expectation entrepreneurship (b = 0.196), while the lowest impact is made by necessitybased entrepreneurship (b = 0.021). the link between the mentioned indicators is direct and statistically significant. when it comes to developing countries, the greatest impact on the gdp growth rate is made by high expectations entrepreneurship (b = 0.421), followed by necessity-based entrepreneurship (b = 0.408), and the lowest opportunity-based entrepreneurship. however, none of these coefficients is statistically significant, so the results can be applied only to a selected group of countries for the reported period and a general conclusion could not be given for all underdeveloped countries. furthermore, we can note that in both groups of countries investments have a significant impact on economic growth. in developed countries, the impact of foreign investment and capital that is present in the country is equable, while in developing countries a much greater impact originates from domestic capital in comparison to foreign direct investments. each of these coefficients is statistically significant in such a way that conclusions can be generalized. in order to test the effect of the observed phenomena on economic growth, the representativeness of the models has been checked. the obtained results are shown in table 5. table 5 models representativeness developed countries developing countries r .648 .786 r square .420 .619 adjusted r square .321 .484 sig. 0.05 0.05 according to table 5, we have found out the presence of a high degree of quantitative compatibility between the dependent variable and independent variables, while the appropriate measure of explained variability of the dependent variable by changing independent variables is relatively high. namely, by using this model we have been able to explain 42% of the variability in the movement of gdp by changes of the independent variable (adjusted coefficient of determination takes value of 0.321) in developed countries. we have much better results in developing countries. the model has explained 61.9% of the variability of independent variables by changes in the dependent variable (corrected coefficient of determination is 0.484). the values of these coefficients are statistically significant. that means that entrepreneurship with capital and labor force represents a very important element of economic development. conclusion based on the above, it can be concluded that entrepreneurship represents an increasingly important driving force of economic development, but its contribution to economic development differs significantly in developing countries and developed countries. in developed countries, the contribution of entrepreneurship to economic growth is higher than in developing countries; also, the relationship between entrepreneurship and gdp growth entrepreneurship and economic development: a comparative analysis of developed and developing countries 27 rate in developed countries is statistically significant, but in developing countries, this is not the case. primarily, the structure of entrepreneurial activities affects the differences in the effects of entrepreneurship on economic growth. in developed countries, what is noticed is the dominance of opportunity-based entrepreneurship (oea) and hea that (as is proven by research) is the largest contributor to economic growth, while in developing countries, ndp is dominant. owners of fast-growing companies and entrepreneurs who initiated their work on the basis of identified opportunities on markets in developed countries use a higher level of national knowledge development as well as a high level of freedom from government’s influence to generate the output and achieve rapid growth in business. this is not the case in developing countries which are characterized by a limited access to capital, technological innovation, knowledge and other resources, which restrict business growth. also, the presence of gray economy is noticeable in developing countries, which creates unfair competition and hinders the development of entrepreneurial activity. the problem in developing countries is the fact that many residents are starting entrepreneurial activity due to personal employment and in order to provide themselves with some income. accordingly, they set up their enterprises even without economic feasibility. such enterprises usually have slow development and a small contribution to economic growth. therefore, based on the practices of developed countries, where statistically significant impact of entrepreneurship on economic growth has been proven, it can be suggested to macroeconomic policy makers in developing countries that the development of entrepreneurship in general should not be seen as a universal solution for the problem of economic development. in other words, we should work to encourage the development of entrepreneurship, although not any entrepreneurial activity, but primarily oea and hea entrepreneurship, because they have the greatest contribution to economic growth. we should also work on improving the environment which can 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(2005) entrepreneurship, innovation and economic growth: evidence from gem data, small business economics, volume 24: 335-350. 41. internet sajt global entrepreneurship monitor – gem, www.gemconsortium.org (13.06.2015.) 42. internet sajt word bank, www.worldbank.org (15.06.2015.) preduzetništvo i privredni razvoj: komparativna analiza razvijenih i zemalja u razvoju podsticanje privrednog razvoja predstavlja jedan od ključnih zadataka kreatora makroekonomske politike. poslednjih decenija sve značajniji pokretač privrednog razvoja postaje preduzetništvo. prethodna istraživanja pokazuju da je preduzetništvo značajno za privredni razvoj, ali da je doprinos preduzetništva privrednom razvoju drugačiji kod zemalja različitog stepena razvijenosti, usled razlika u karakteristikama makroekonomskog ambijenta, zastupljenosti različitih oblika preduzetničke aktivnosti i sl. u ovom radu je ispitivan uticaj različitih tipova preduzetništva (oea; nea; hea) na privredni rast kroz komparativnu analizu razvijenih i zemalja u razvoju. cilj rada je bio da se ispita da li postoje razlike u ekonomskim efektima preduzetništva zasnovanog na mogućnostima i preduzetništva zasnovanog na nužnosti i u skladu sa njima kreatorima makroekonomske politike predlože mere čija primena može podstaći privredni razvoj. za analizu su korišćene metode deskriptivne statistike, korelaciona i regresiona analiza. analiza je vršena upotrebom spss softvera na uzorku od 22 zemlje u trogodišnjem periodu. dokazano je da je doprinos preduzetništva privrednom razvoju veći u razvijenim zemljama u odnosu na zemlje u razvoju usled dominacije hea i oea preduzetništva čiji je značaj za stopu rasta gdp-a veći u odnosu na značaj nea koje je dominantno u zemljama u razvoju. kljuĉne reĉi: privredni rast, preduzetništvo, razvijene zemlje, zemlje u razvoju. http://www.worldbank.org/ 10374 facta universitatis series: economics and organization vol. 19, no 1, 2022, pp. 53 67 https://doi.org/10.22190/fueo211224005b © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd the challenges in auditing financial statements at fair value concept (fvc) in developing economies: the case of republic of serbia1 udc 657.6(497.11) ljiljana bonić1, vesna janković-milić1, bojan rupić2 1university of niš, faculty of economics, serbia, 2kapital revizija doo, novi sad, serbia orcid id: ljiljana bonić https://orcid.org/0000-0003-3877-8400 vesna janković-milić https://orcid.org/0000-0002-9645-8598 bojan rupić https://orcid.org/0000-0001-8789-4200 abstract. some balance sheet items are the result of judgments, including fair value estimates, so the relevant evidence is very complicated to collect by auditors, thus the risk of misstatements in financial statements is inevitably greater. the research objective of this paper is to: a) highlight the problems encountered by auditors from developing countries when auditing fv accounting estimates; b) identify the challenges that auditors from serbia face in auditing fv accounting estimates; c) consider the possibility of adequately responding to these audit challenges in serbia. the research confirmed that the problems of auditors in serbia in the audit of fv estimates are generated by inefficient capital markets, and that they are primarily in the field of fv assessment which are connected to the impossibility of applying the market model and higher volatility of fv financial statements, as well as those in the field of auditing techniques used in providing assurance on the objectivity of fv assessments in various business activities, which requires additional training of auditors. thus, the research confirmed the similarity of the problems in serbia with the problems in the auditing fv estimates in developing countries. key words: fair value concept, ifrs 13, financial statement audit, isa 540 jel classification: m41, m42, c10, c34 received december 24, 2021 / revised march 22, 2022 / accepted march 25, 2022 corresponding author: ljiljana bonić university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, republic of serbia e-mail: ljiljana.bonic@eknfak.ni.ac.rs https://orcid.org/0000-0003-3877-8400 https://orcid.org/0000-0002-9645-8598 https://orcid.org/0000-0001-8789-4200 mailto:ljiljana.bonic@eknfak.ni.ac.rs 54 lj. bonić, v. janković-milić, b. rupić 1. introduction the primary reason for introducing the fvc in accounting theory and practice was to bring financial statements close to the facts, although experience has shown that the application of fv and "creative accounting" opens room for manipulation of financial statements. the need to disclose assets at fair value arises as a result of the shortcomings of traditional accounting based on historical cost concept, which most often results in an underestimation of assets and financial results in the current period, but also due to the fact that the disclosure at fv allows for the recognition of unrealized income and gains, which enhances the picture of the company’s financial position and disclosed performance. this brings an additional dose of subjectivity to financial statements and the risk of material misstatements in financial statements becomes greater. numerous researches related to the specifics of auditing fv assessment in developing countries have stimulated research in this paper on the case of serbia, with the aim of identifying important challenges that auditors in serbia face in auditing fv assessments and consider the possibilities to respond to them. 2. literature review fvc in accounting is based on abandoning a centuries-old accounting model based on historical costs, conservatism, and the principle of income and expense causation. nevertheless, fv-based accounting came to light without actual evidence that its estimates are better than traditional practice. this was observed even before the great economic crisis of 2008, when some practical cases suggested that the application of fv accounting has the potential to lead to misleading results (stojilkovic, 2011, pp. 92-97). the enron case showed that fv estimates used were largely based on inputs known today as level 3 inputs. enron used the fv model based on discounting the value of long-term gas contracts and derivatives and thus recognized in the ledgers (non-existent) assets of 21 billion dollars, i.e. 31% of their total assets (haldeman, 2006, p. 5). at the same time, the fv was used to evaluate the managers’ performance and to reward them in the form of bonus payments (benston, 2006, p. 465). accounting estimates by fv have led auditors and audit standards makers to understand not only the assessment models and processes by which management defines model inputs, but also potential management misuse and probable errors in model application, market input identification and assumptions. auditors should also understand possible sources of audit errors in the audit of financial statements under the fv. also, auditors must acquire the knowledge and continuous training to audit fv estimates (carpentier, labelle, laurent, suret, 2008, p. 2). international audit standards makers, consciously or not, change the role of independent auditors who, from independent controllers of the truthfulness and objectivity of financial statements turn into subjective experts in fv assessment (haldeman, 2006, p. 8). numerous financial scandals in early 21st century, like fv estimation problems following the 2008 financial crisis caused a decline in confidence in corporate financial statements, especially fv-based ones, on financial markets in developed countries where these involve central financial institutions, while on underdeveloped financial markets (late transition countries) this problem is not so obvious (due to negligible volume of trade and absence of investors), but is still present. this also demonstrated the exceptional importance of auditing and its safeguarding role, as well as the unsustainable self-regulation of auditors. the challenges in auditing financial statements at fair value concept (fvc) in developing economies... 55 research on the challenges of auditing financial statements based on the fvc in countries with developed economies and financial markets has shown the following: ▪ conceptual accounting shift from historical cost to fv – due to the high dose of subjectivism in estimating fv, as well as thepotential for widespread investor deception, a large number of companies take a conservative approach and/or lack initiative to use the fv concept (haldeman, 2006, p. 11; cairns, massoudi, taplin, & tarca, 2009, p. 1); ▪ increased volatility (the occurrence of major changes in the value of assets and liabilities in the balance sheet and greater fluctuations in the financial result) is due to market instability, inaccuracies and errors in measuring fair value, combined with historical cost accounting in a hybrid reporting model, as well as the feedback effects of its procyclicality (malinić, 2009, pp. 319,321; pantelić, 2021, pp. 207.) ▪ auditors focus on testing subjective inputs (assumptions and estimation methods/ models) in fv measurement and assessing the adequacy of the measurement method used and the reasonableness of management's assumptions. this causes auditors to acquire knowledge regarding the fv estimate (joe, vandervelde, wu, 2014, p. 1; griffith and authors, 2012, p. 35; badertscher, burks, & easton, 2012, pp. 59,90; benston, 2006, pp. 465,484; doliya, singh. 2016, pp. 37, 48; yao, percy, hu, 2015, pp. 31,45; pantelić, 2021, pp. 205,207;); ▪ because auditors often lack the knowledge to evaluate fv accounting estimates, they rely on experts (estimators), and do not test the key assumptions and estimation methods used by the estimator. such experts need to be educated in order to adequately apply the fv concept (joe, vandervelde, wu, 2014, p. 7; griffith and authors, 2013, p. 35; peng, bewley, 2009, p. 13.); ▪ the need to increase the auditors’ awareness of the risks associated with the client's business in fv measurement (eilifsen, 2010, pp. 79, 93; dauber, 2009, p. 162); ▪ the need for special audit obligations in the case of fv accounting fraud (assessing the risks of material misstatement in financial statements, including the risks of criminal activity; gaining an understanding of the design and implementation of client's internal controls for the application of fv accounting in financial statements; conducting audit procedures designed to ensure that fv estimates are made in accordance with the current financial reporting framework, including disclosures in notes to financial statements) (zack, 2009, p. 203); ▪ three key challenges for fv auditing have been identified: unrealized gains and losses, market liquidity or illiquidity, and "distorted" cash flow distribution, with market liquidity being the biggest challenge for auditors (ryan, 2008, p. 1610); ▪ multiple listing of some companies (simultaneous listing on the stock exchanges in china, hong kong and the usa) results in different prices for the shares of the same company, necessitating complicated determination of fv (peng, bewley, 2009, pp. 26-27); ▪ high-quality internal audit minimizes the auditor's efforts in auditing fv estimates. (gremling and authors, 2004, p. 197). ▪ research on the challenges of auditing financial statements under the fv concept in developing countries and in underdeveloped and inactive financial markets has shown the following: ▪ in most cases, auditors support the fv concept in financial reporting, but note problems with the application of this concept in both accounting and auditing (bratten, gaynor, mcdaniel, montague, sierra, 2013, p. 11); ▪ auditors sometimes do not understand the key risk factors in fv models used by client management due to lack of knowledge of the methods and models used, resulting 56 lj. bonić, v. janković-milić, b. rupić in misinterpretation of key assumptions of the models used (carpentier, labelle, laurent, suret, 2008, p. 1); ▪ the need for greater involvement of experts in assessing fair value and their training (carpentier, labelle, laurent, & suret, 2008, p.1; kumarasiri, fisher, 2011, p. 82; okafor, ogiedu, 2012, pp. 420-421.); ▪ the existence of inactive markets for assets and liabilities subject to valuation, which complicates fv measurement on a market basis. (kumarasiri, fisher, 2011, p. 68; amanamah, owusu, 2016, p. 26;); ▪ difficulties regarding variations in fv measurement techniques in different industries (kumarasiri, fisher, 2011, p. 82); ▪ problems in the application of future events and assumptions in return-based fv estimation models (kumarasiri, fisher, 2011, p. 82). the application of the fv concept in financial reporting has greatly contributed to increased financial results, i.e. artificially increased profits and dividends in the financial statements of companies that have misapplied this method or due to inherent limitations in the application of this method in both developed and non-developed financial markets as well as countries that have experienced a market boom (siam, abdullatif, 2011; nguyen, 2019) or the financial market crisis (laux, leuz, 2009; procházka, 2011; badertscher, burks, & easton, 2012). this has created numerous challenges for auditors, who are expected to express relevant opinion in terms of high inherent risk, since fv valuation arises as a result of judgment. 3. key challenges in audit of financial statements at fvc in the republic of serbia specific economic conditions, as well as underdeveloped and under-active financial markets in serbia, cause specific audit of fv estimates in these areas. auditors face challenges posed by the effects of applying the fvc in a) evaluating fv estimates in serbia and b) selecting techniques and procedures in auditing fv financial statements. 3.1. challenges for serbian auditors in evaluating fv estimates the regulatory framework for financial reporting under the fvc in the republic of serbia is the law on accounting, as well as ifrs 13: fair value measurement and other international standards that indirectly relate to the valuation of fv assets and liabilities. the specificity of ifrs 13 application in financial reporting in serbia is conditioned by underdeveloped financial market, which causes problems in the selection of an adequate fv estimation method and the specific definition of levels in the hierarchy of inputs for fv determination. ifrs 13 provides that a company should apply valuation techniques in line with the circumstances with sufficient data available to measure fv and the maximum application of relevant observable inputs and the minimum use of non-observable inputs. the three most common valuation techniques used in fv estimation are (www.mfin.gov.rs): market access, cost approach and revenue approach ifrs 13 introduces, for the first time, fv hierarchy that classifies valuation inputs used to measure fv in three levels. in serbia, as a developing economy, active capital markets are underdeveloped, which complicates fv measurement based on market approach. this http://www.mfin.gov.rs/ the challenges in auditing financial statements at fair value concept (fvc) in developing economies... 57 also conditions the specific three-level hierarchy for estimating fv in serbia (rupić, bonić, 2015, p. 135): level 1, level 2 and level 3 inputs. level 1 inputs in serbia are inputs on active financial markets at quoted prices for the belgrade stock exchange listed and prime market stocks and bonds, the commodity exchange novi sad quoted prices of agricultural products, as well as inputs from publicly organized sales at the publicly available real estate prices and the catalog sale of motor vehicles of the serbian auto-moto association (negovanović, 2014, p. 182). the level 1 inputs in serbia are scarce, due to underdeveloped financial markets. perhaps the best illustration of the underdeveloped financial markets in the republic of serbia is the number of companies listed on the belgrade stock exchange “prime market”, being only four at the time of writing this paper: nis ad novi sad, airport nikola tesla ad belgrade, energoprojekt holding ad belgrade and fintel energija ad belgrade. in some cases, the inputs for fv measurement of assets or liabilities can be classified into categories within different levels of the fv hierarchy. in these cases, fv measurement is categorized as a whole at the same level of the fv hierarchy as is the lowest-level input that is significant for the entire measurement. assessing the significance of a particular input for the entire measurement requires judgment. the availability of relevant inputs and their relevant subjectivity may influence the choice of appropriate valuation techniques. however, the fv hierarchy prioritizes the inputs to the choice of valuation technique rather than the valuation techniques used to measure fv. level 2 inputs are inputs that are observable for an asset or liability directly or indirectly on the market. level 2 inputs include quoted prices for similar assets or liabilities on an active market, quoted prices for identical or similar assets or liabilities on markets that are not active. an example of level 2 inputs in serbia are inputs with market prices for company shares on a multilateral trading platform (mtp). level 3 inputs are unobservable inputs for an asset or liability, which should be applied to fv measurement if relevant observable inputs are not available. unobservable inputs should reflect the assumptions that market participants would use when determining the price of an asset or liability, including risk assumptions. risk assumptions include the risk inherent in a particular valuation technique applied to fv measurement, as well as the risk inherent in level 3 inputs. ifrs 13 provides that an entity should develop unobservable inputs using the best available information under the given conditions, which may include the entity's own data. an example of level 3 input in serbia may include fv estimate of the share for which there is no active market, nor quoted prices for similar entities that were subject to sale, so the application of the return method based on the present value of future cash flows projected by management is imposed as a logical choice. 3.2. challenges in auditing financial statements based on fvc in serbia regarding the selection of techniques and procedures in the audit of fv estimates the regulatory framework within which auditors operate in serbia is the audit law and isa 540: auditing accounting estimates, including fair value accounting estimates, and related disclosures. the fv estimation is intended to determine the exit price on the measurement date from the perspective of a market participant who has an asset or a liability (www.mfin.gov.rs). according to isa 540, an auditor should obtain sufficient and adequate audit evidence that the 58 lj. bonić, v. janković-milić, b. rupić accounting estimates are reasonable, including fv accounting estimates in financial statements, and related disclosures thereon. also, accounting estimates based on significant assumptions are characterized by a relatively high degree of uncertainty, which is especially true in the case of fv accounting estimates of non-publicly traded derivatives, as well as fv accounting estimates based on a specialized client-developed model or estimates based on assumptions that cannot be verified on the market. the challenges and problems auditors face in auditing fv financial statements in serbia are multiple. first of all, fv accounting is a much bigger challenge for auditing than historical cost accounting. auditors do not have sufficient skills in assessing fv estimates, which is partly due to the underdeveloped and inactive financial market in serbia. also, there are very few experts in serbia (real estate appraisers, actuaries and other specialists) who have the necessary knowledge and skills in applying the appropriate fv estimation techniques and international valuation standards that auditors could engage in the audit process. there are also difficulties with the application of variations in fv measurement techniques in different industries, as well as with the application of future events and assumptions in fv estimation models. assistance in addressing these challenges auditors in serbia face should come from audit professional organization – chamber of chartered certified auditors. the chamber should identify the main problems auditors encounter in auditing financial statements under the fvc and assist in resolving them, and provide auditors with additional professional training on the valuation of assets and liabilities under the fv in order to conduct a quality audit under this concept. 4. research hypothesis, phases and methodology the following hypotheses have emerged from the research of the challenges in audit of financial statements at fvc in serbia: main hypothesis (h): the underdeveloped and under-active financial market in serbia does not provide sufficient conditions for the application of all fv accounting (fva) techniques, and thus conditions specific challenges to audit of fva estimation. auxiliary hypotheses: (h1): auditors' awareness of the application of fvc in serbia is closely related to the understanding of ifrs 13 and isa 540; (h2): the dominant challenge in fva in serbia is the complexity of assessing fv estimates and the need to hire an expert (appraiser, actuary, expert) for fv estimation; (h3): auditors in serbia do not have sufficient technical knowledge of the techniques and procedures for auditing fva estimation. the stages in the research of the challenges in audit of financial statements at fvc in serbia are: phase 1 – selection of variables from the sample based on the criteria of their relevance for the application of the fvc in audit in the republic of serbia. phase two – applying descriptive statistics to consider homogeneity of respondents' responses to challenges in financial reporting and auditing at fvc in serbia. phase three – applying factor analysis of selected variables using the pca (principal component analysis) method to reduce the constraints of variables and create new latent variables that would play the role of independent variables in the regression analysis. the challenges in auditing financial statements at fair value concept (fvc) in developing economies... 59 phase four – applying multiple regression analysis to measure the impact of three independent variables on the dependent variable. the dependent variable implies that the belief about the reality of valuation under the fv in serbia is harder to come by, much like in other developing countries, compared to developed countries. the three independent variables are: ▪ auditor's awareness of the importance of fair value estimation issues. this variable contains 4 components: 1) auditors fully understand ias 39; 2) auditors fully understand ifrs 13; 3) ifrs 13 seeks to reduce the subjectivity of an accounting estimate that has an effect on the amounts in the financial statements; 4) auditors fully understand isa 540. ▪ challenges of auditors in evaluating accounting estimates under fv. this variable contains 5 components: 1) determining the fv of assets is significantly more complex than determining the historical cost of assets; 2) determining fv assets and liabilities is a time-consuming task; 3) most assets and liabilities subject to fv estimation in business practice in serbia are not subject to transactions on active markets; 4) fvc requires the auditor to continuously acquire additional knowledge regarding the specific assets and liabilities that are subject to fv estimation; 5) verification of fv measurement of assets and liabilities requires the involvement of an expert. ▪ challenges of auditors conditioned by the choice of techniques and procedures in auditing the financial statements under the fv. this variable contains 3 components: 1) auditors in serbia do not have sufficient technical knowledge on fv measurement; 2) techniques for determining fv may vary significantly from one industry to another; 3) auditors have effective procedures for verifying the accuracy of transactions and balances that are valued at cost, but these procedures are not very helpful in measuring fv. the methodology for researching the challenges in audit of financial statements at fvc in serbia includes: a) descriptive statistics, b) factor analysis and c) multiple regression analysis. 4. sample description and descriptive statistics of the variables selected the research used the primary source of data obtained through the survey method. the basic research tool used was the questionnaire. the questionnaire is a pre-prepared set of questions/statements to be answered by the respondents in the form of expressing agreement on a one-to-five scale (likert scale), where 1 indicates total disagreement with the statement (i totally disagree), 2 indicates disagreement with the statement (i don’t agree), 3 indicates indeterminacy (i neither agree nor disagree), 4 indicates agreement (i agree) and 5 indicates full agreement (i fully agree). the questionnaire is to a certain extent based on world experience, i.e. on previous research by kumarasiri and fisher (66-87). these authors conducted a survey in 2011 on the audit perception of fva in developing countries and concluded that auditors are generally in favor of applying fva, although they are aware of the specific issues and issues they face when performing audit. the questionnaire was sent to licensed certified auditors, members of the chamber of certified auditors from belgrade, who are auditing the financial statements in our country under the audit law. the aim of the survey is to collect information directly from the questionnaire from practitioners who, in their daily professional work, face the challenges posed by the application of fvc. 60 lj. bonić, v. janković-milić, b. rupić the survey was conducted in november and december 2014 by sending the questionnaire electronically to all 258 licensed certified auditors in serbia. the register of licensed certified auditors is publicly available on the chamber of chartered certified auditors website. due to the complexity of the subject matter and the purpose of the research, and in order to obtain as representative results as possible, the questionnaire was only sent to licensed certified auditors, not to all auditors in serbia. of the total number of licensed certified auditors in serbia, 86 auditors completed the questionnaire, or one third (33.33%), i.e. every third licensed certified auditor answered the questionnaire. the data collected was statistically processed using ibm spss statistics 20 software. regarding the age structure of the respondents, 40% of the respondents were between 26 and 40 years old, 32% of the respondents between 41 and 55 years of age, while auditors over 56 made up 28% of the respondents. the number of male and female respondents was almost the same (51% vs. 49%). regarding the position of certified auditor in the audit company, 47% of the respondents were audit partners, 45% audit managers and 8% auditors (senior and junior). another important parameter of the respondent structure in terms of sample representativeness and the relevance of research results relates to professional audit experience, where as many as two thirds of respondents (65%) had more than ten years of audit experience, 26% between six and ten years, and only 9% between one and five years. it is interesting to analyze the structure of the respondents from the point of view of the audit firm in which they are employed (the so-called “big four” (kpmg, price waterhouse coopers, deloitte & touche, ernst & young or other audit firms), with auditors working for the so-called “big four” audit firms making up 14% of the respondents, while the other 86% referred to auditors employed by other audit firms in serbia. according to publicly available data from chamber of chartered certified auditors for 2014, the “big four” auditors had 42 licensed certified auditors, which is 16% of the total number of licensed certified auditors in serbia. the share (percentage) of the total number of auditors working in large audit firms answering the questionnaire almost coincides with the proportion of “big four” auditors in the total population of licensed certified auditors in our country (14% vs. 16%). respondents' views, which are the research subject in this paper, are grouped into 3 areas: 1. justification for the fva application 2. auditors’ awareness of the issue of fv measurement 3. audit challenges regarding the fv accounting estimates and the selection of techniques and procedures in the audit of fv estimates. each of these areas gave a set of views that, in the author's view, was directly related to the research subject in this paper. the mean values of the degree of respondents’ agreement with the selected statements, as well as the variance in attitudes are given in the following table. the challenges in auditing financial statements at fair value concept (fvc) in developing economies... 61 table 1 descriptive statistics of selected variables (statements) group statement mean std. dev. justification of fva implementation in serbia the belief in fair value estimate reality is harder to come by in developing countries like serbia than in developed countries (var1) 4.35 0.682 auditors' awareness of fv measurement issues auditors fully understand ias 39: financial instruments: recognition and measurement (var2) 2.77 1.28 auditors fully understand ifrs 13: fair value measurement (var3) 3.42 0.99 ifrs 13: fair value measurement seeks to reduce subjectivity in an accounting estimate that has an effect on the amounts in the financial statements (var4) 3.72 0.85 auditors fully understand isa 540 audit of accounting estimates, including fair value accounting estimates and related disclosures (var5) 3.49 0.93 audit challenges regarding the evaluation of fv accounting estimates and the choice of techniques and procedures in auditing fv estimates auditors in the republic of serbia do not have sufficient technical knowledge to measure fair value (var6) 3.84 1.06 determining the fair value of assets is significantly more complex than determining the cost of assets (var7) 4.65 0.647 determining the fair value of assets and liabilities is a time consuming task (var8) 4.42 0.727 fair value techniques may vary significantly from industry to industry (var9) 4.37 0.81 most assets and liabilities that are subject to fair value measurement in our business practice are not subject to active market transactions (var10) 4.12 0.90 auditors have effective procedures for verifying the accuracy of transactions and balances that are valued at cost, but these procedures are of little use in measuring fair value (var11) 3.72 1.025 fair value requires the auditor to continuously acquire additional knowledge of the specific assets and liabilities that are being measured at fair value (var12) 4.37 0.87 verification of fair value measurement of assets and liabilities requires the involvement of an expert (var13) 4.09 0.94 source: authors' calculations judging by mean values, respondents expressed the highest degree of agreement with the statement determining the fair value of assets is significantly more complex than determining the cost of assets (4.65), while standard deviation of dispersions in the respondents' answers in this regard is the lowest (0.65). auditors expressed the lowest degree of agreement with the statement auditors fully understand ias 39: financial instruments: recognition and measurement (2.77), with their views being the most heterogeneous in this respect (standard deviation is 1.28). 62 lj. bonić, v. janković-milić, b. rupić 5. research results and discussion following descriptive statistics, factor analysis was applied to the data obtained from the survey. factor analysis is a method of multivariate analysis, which is used in research to reduce the number of variables while retaining the amount of information they carry. the factor analysis was first applied to the auditors’ awareness of the issue of fv measurement. after verifying that all the assumptions related to the application of factor analysis have been fulfilled, the principal component analysis (nicoletti et al. 2000) was applied to extract the factors. the purpose of applying factor analysis in this case was to create a new variable that will play the role of composite indicator by which respondents’ views of the 4 statements from this group will be expressed. the weights assigned to each of the statements in the composite indicator structure were based on the value of factor loadings (janković-milić, jovanović, 2019). factor loadings show the degree of agreement of the original variable (statement) with the newly formed composite indicator, while squared factor loadings show the degree of variability of the original variable explained by the newly created factor, i.e. composite indicator. in accordance with the structure of the variables involved, this indicator has been called auditors’ awareness of the issue of fv measurement (ci1). table 2 factor loadings and weights in the first composite indicator statement (variable) factor loadings weights var2 0.800 0.252 var3 0.856 0.269 var4 0.714 0.224 var5 0.812 0.255 source: authors' calculations based on the weight value (table 2), it can be observed that all four statements are generally equally represented in the ci1 structure. nonetheless, greater share (significance) of views related to the statement auditors fully understand ifrs 13: fair value measurement may be noted (weight = 0.269), while the least important views were with the statement ifrs 13: fair value measurement seeks to reduce subjectivity in an accounting estimate that has an effect on the amounts in the financial statements (weight = 0.224). factor analysis was also applied to the respondents' views of the audit challenges regarding the fv accounting estimates. the application of the principal component analysis in factor extraction in this case resulted in the extraction of two factors. table 3 factor loadings and weights in the second composite indicator statement factor weights 1 2 factor 1 factor 2 var6 0.679 0.324 var7 0.494 0.153 var8 0.820 0.254 var9 0.634 0.302 var10 0.493 0.153 var11 0.784 0.374 var12 0.680 0.211 var13 0.741 0.229 source: authors' calculations the challenges in auditing financial statements at fair value concept (fvc) in developing economies... 63 according to the values of factor loadings, the first factor in this factor analysis consists of the following statements: − determining fv assets is much more complex than determining the historical cost of assets; − determining fv assets and liabilities is a time-consuming task; − most assets and liabilities subject to fv estimation in serbia are not subject to transactions on active markets; − fvc requires the auditor to continuously acquire additional knowledge related to the specific assets and liabilities subject to the fv estimation; − verification of fv measurement of assets and liabilities requires the involvement of an expert. given the content of the above statements, a factor created may be called auditors’ challenges in evaluating fv accounting estimates (ci2). in this case, the weights, which show the importance of certain statements in the composite indicator structure, were calculated on the basis of factor loadings. according to the weight values, the most important in the structure of this indicator is the statement determination of fv assets and liabilities is a time-consuming task (0.254), while the equally low (weight = 0.153) importance goes to statements determination of fv assets is much more complex than determining the historical cost of assets and most assets and liabilities subject to fv estimation in serbia are not subject to transactions on active markets. the following statements are included in the structure of the second factor: − auditors in serbia do not have sufficient technical knowledge on fv measurement; − techniques for determining fv may vary significantly from one industry to another; − auditors have effective procedures for verifying the accuracy of transactions and balances that are valued at historical cost, but these procedures are of little use in measuring fv. the content of the statements included in the second factor suggests the name of the newly created composite indicator, i.e. auditors’ challenges conditioned by the choice of techniques and procedures in auditing financial statements under fv (ci3). according to the weight values, which indicate the relative importance of certain statements in the structure of this indicator, it can be concluded that the greatest relative importance in the structure of this indicator goes to the statement auditors have effective procedures for checking the accuracy of transactions and balances that are valued at historical cost, but these procedures are not of great use when measuring fv (0.374). the following statement, by importance, is that auditors in serbia do not have sufficient technical knowledge on fv measurement (0.324), while the least significant statement in the structure of this indicator fv is determination techniques may differ significantly from one industry to another with a weight of 0.302. multiple regression analysis was applied to examine the impact of respondents' views on the auditors’ awareness of the issue of fv measurement (ci1), audit challenges regarding the fv accounting estimates (ci2), and auditors’ challenges conditioned by the choice of techniques and procedures in auditing financial statements under fv (ci3) on the belief that fair value estimate reality is harder to come by in developing countries like serbia than in developed countries (var1). in the created multiple regression model, variables ci1, ci2 and ci3 were denoted as independent variables, while var1 had the role of a dependent variable. first, the assumptions for applying the regression analysis 64 lj. bonić, v. janković-milić, b. rupić were checked and it was concluded that there were no obstacles for the application of this method of statistical analysis. although the adjusted determination coefficient (0.127) points to the fact that the selected independent variables explain only 12.7% of the variability of the dependent variable, testing its significance leads to the conclusion that the estimated model is representative (sig. 0.003) (tabachnick, fidell, 2007. p. 147). table 4 anovab model sum of squares df mean square f sig. 1 regression 15.827 3 5.276 5.106 .003a residual 84.731 82 1.033 total 100.558 85 a. predictors: (constant), ci1, ci2, ci3. b. dependent variable: var1 the values of the regression model parameters were estimated using ordinary least squares. this method provides parameter estimates that are at the same time unbiased, consistent and efficient. table 5 regression coefficients variables unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) -1.477 1.250 -1.181 .241 ci1 .458 .148 .345 3.093 .003 ci2 .491 .200 .262 2.448 .017 ci3 .362 .171 .240 2.120 .037 dependent variable: var1 the standardized values of the regression coefficients indicate the importance of the independent variables in predicting the value of the dependent variable. according to these values, the highest relative importance in predicting the belief that fair value estimate reality is harder to come by in developing countries like serbia than in developed countries belongs to auditors’ awareness of the issue of fv measurement (0.345), while the views on auditors’ challenges regarding the fv accounting estimates and auditors’ challenges conditioned by the choice of techniques and procedures in the audit of financial statements by fv are of minor importance. based on the results of testing the significance of the regression coefficients, it can be concluded that the impact of all independent variables is statistically significant (sig. <0.05). 6. conclusion the survey showed that the respondents are most in agreement with the statement that the determination of fv assets and liabilities is much more complex than the determination of historical costs (mean value is 4.65) and their views on this statement are the most consistent (standard deviation is 0.65). the challenges in auditing financial statements at fair value concept (fvc) in developing economies... 65 based on the results of factor analysis: ▪ within the auditors' awareness of the issue of fv measurement, the auditor's views regarding the understanding ifrs 13: fair value measurement are of the greatest relative importance. auditors in the republic of serbia, as well as auditors in other developing countries, need more additional professional training to fully understand ifrs 13, compared to auditors in developed countries. ▪ in the structure of auditors' challenges in evaluating fv accounting estimates, the statement determining fv assets and liabilities is a time-consuming task is the most important. this also leads to more time (number of working hours) required to audit a company measuring assets and liabilities per fv. it should be borne in mind that the average fee for audit services in serbia has been declining in recent years, primarily due to the increased number of audit firms and licensed certified auditors, on the one hand, while on the other, the number of companies that are bound by statutory audits is more or less constant. due to the above, the possibilities of auditors in serbia for additional professional development in understanding the concept of fv and auditing in the circumstances of fv application, or hiring an expert to evaluate by fv, have been further reduced. the above calls into question the quality of the audit carried out under the conditions of fv application. ▪ within the auditors’ challenges conditioned by the choice of techniques and procedures in auditing financial statements under the fv, the most important statement is auditors have effective procedures for verifying the accuracy of transactions and balances that are measured at historical cost, but these procedures are of little use in measuring at fv. audit companies have a growing need to hire external experts in the field of permanent property valuation according to fv but their number in the republic of serbia is relatively small, especially when it comes to fv estimation of plants and equipment. based on the results of the regression analysis: the greatest relative importance in predicting the belief that fair value estimate reality is harder to come by in developing countries like serbia than in developed countries belongs to auditors’ awareness of the issue of fv measurement. the research showed that auditors in serbia face similar problems in auditing fv assessments as auditors in other developing countries, and that solving them requires additional training of auditors and an increased need for audit firms for assessment experts. an important factor 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(2009). fair value accounting fraud new global risks and detection techniques. hoboken, new jersey: john wiley & sons, inc. zakon o računovodstvu [serbian law on accounting], sl. glasnik rs, br. 62/2013, 30/2018 i 73/2019. zakon o reviziji [serbian law on auditing], sl. glasnik rs, br. 73/2019. izazovi u reviziji finansijskih izveštaja u uslovima koncepta fer vrednosti u ekonomijama u razvoju: slučaj republike srbije neke stavke bilansa stanja su rezultat prosuđivanja, uključujući procene fer vrednosti, tako da je revizorima veoma teško da prikupe relevantne dokaze, pa je rizik od pogrešnog prikazivanja u finansijskim izveštajima je neizbežno veći. cilj istraživanja u ovom radu je a) isticanje problema sa kojima se susreću revizori iz zemalja u razvoju prilikom revidiranja računovodstvenih procena fv; b) identifikovanje izazova sa kojima se susreću revizori iz srbije prilikom revidiranja računovodstvenih procena fv; c) sagledavanje mogućnosti adekvatnog odgovora na te izazove u reviziji u srbiji. istraživanje je pokazlo da su problemi revizora u srbiji u reviziji procena po fv generisani neefikasnim tržištima kapitala, i da se prvenstveno nalaze na polju procene fv što je povezano sa nemogućnošću primene tržišnog modela i pojačanom volatilnošću finansijskih izveštaja, kao i na polju revizorskih tehnika koje se koriste za pružanje uveravanja o objektivnosti procena fv u različitim delatnostima, što zahteva dodatne edukacije revizora. time je istraživanje potvrdilo sličnost porblema u srbiji sa problemima u reviziji fv procena u zemljama u razvoju. ključne reči: koncept fer vrednovanja, msfi 13, revizija finansijskih izveštaja, msr 540 https://doi.org/10.1108/jfra-01-2019-0002 http://pcaobus.org/ http://ssrn.com/abstract=1326004 https://doi.org/10.18267/j.pep.388 https://doi.org/10.%0b1515/ethemes-2015-0008 https://doi.org/10.%0b1515/ethemes-2015-0008 https://doi.org/10.2308/accr.2008.83.6.1605 https://doi.org/10.1016/j.jcae.2014.12.003 plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 4, 2016, pp. 427 438 doi: 10.22190/fueo1604427m economic effects and regulatory limits in implementation of environmental taxes1 udc 504.05/.06:336.2 marija magdalinović kalinović * , snežana radukić university of niš, faculty of economics, niš, serbia abstract. environmental protection presents one of the main goals of every socialresponsible economy. environmental taxes based on the principle “the polluter pays”, within the system of fiscal measures, present the basic instruments of environmental protection. the member states of the european union (eu) belong to a group of the leading countries in the implementation of environmental taxes. since the aim of the republic of serbia is to join eu, it is quite clear that in the future it will have to harmonize its normative acts with the eu legislation in the field of environmental protection. in the field of environmental protection in serbia, we still have the implementation of more regulatory-normative measures in relation to the implementation of economic measures. therefore, the comprehensive environmental tax reform is imminent. in the future, making the traditional tax rates green, presents the inevitability both in the system of regulatory and the system of institutional changes as well. in this paper, a brief review of the types of environmental taxes, which have already been implemented in eu has been given, as well as the current state in serbia concerning the implementation of valid regulations in this field. when the importance of revenue from taxes and compensations for the environmental protection are taken into account, then a more responsible approach is necessary in statistic monitoring, recording, as well as in the process of purposeful spending of collected funds. when these conditions have been fulfilled, we can talk about a serious analysis of the state and efficient implementation of environmental taxes in the field of environmental protection. key words: environmental taxes, internalization of external effects, environmental protection, the republic of serbia. 1received august 11, 2016 / revised august 18, 2016 / accepted november 14, 2016 corresponding author: marija magdalinović kalinović, * ph.d student university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: marijamk75@gmail.com 428 m. magdalinović kalinović, s. radukić introduction the interaction between a human and nature presents a dynamic process which is being changed in accordance with the civilization development. the biological existence of a human depends on healthy environment, so the existence of the ever-lasting tendency for his survival is quite clear. however, in accordance with economic, social, and global growth and the development of the society, the human requires, day by day, more natural and energetic resources, which leads firstly towards the excessive exploitation of natural resources, then secondly towards large-scale pollution and thirdly towards the destruction of the people’s health. for that reason, higher rationalization in terms of exploiting natural resources is needed. there is a great need to define more effective measures and instruments within the field of environmental protection, of course, in order to protect it from further deterioration. in the countries of eu, these environmental taxes have a very important role in the environmental protection. what is more, it is thought that it presents the only possible way for solving the problem of mass pollution and excessive exploitation of natural resources. as for these issues, the eu member-states are the leading ones, since it has always been known that the pollution of the environment has not only a national frame but it has become the international problem as well. environmental taxes present the instrument of internalization of the external effects. the basic goal of their implementation is the influence on the changes of economies entities behavior, that is, polluters. the implementation of taxes makes it possible to achieve the environmental goals in such a way that it eliminates the difference between the social and private costs. “the tax for each unit of emitted pollution must be equal to the marginal amount of the damage on the optimal level of pollution” (pesic, 2012, p. 104). the polluter is now forced to analyze not only their private costs, but also the total social costs (of the social damage) caused by their business activity. “the goal of optimizing the allocation of resources means linking the externality costs by internalization to the ones which cause them to a great extend. although the amount of externality costs can neither be exactly and precisely determined, nor all the causes, and since it is perfectly impossible to charge the externality costs of all found out causes, it is still possible the for the forces, which are alike the market ones, to engage in the service of environmental protection” (radukic, popovic, 2012, p. 51). in the positive effects of applying the environmental taxes could also be included the achievement of the so-called “double dividends”. it occurs as a result of applying the environmental taxes, as there is a possibility to decrease the tax liability of the labor force and to increase the taxation of “dirty” technologies. in that sense, the environmental tax reform has the positive effect not only in the field of environmental protection but it has a great economic importance. the eu member-states achieve their environmental goals by combining economic and regulatory measures and then, without any doubt the importance and significance of economic instruments must be emphasized. in order for serbia’s accession to the european union, the situational factors are being analyzed, the potentials, requirements which must be fulfilled in this field, as well as there is the necessity to carry out the tax reforms. in the paper, the types of environmental taxes in the eu member-states have been briefly described, their potential and efficiency, and then a short review of the existing situation in the republic of serbia is given. economic effects and regulatory limits in implementation of environmental taxes 429 1. types of environmental taxes in the european union in the practice of the eu member-states, the commonly used instruments in this field are: environmental taxes, transferrable permits and subventions. the system of transferrable permits enables a certain degree of pollution up to the determined level, and the price of the permits is being determined on the base of the assessment of the future damage by the pollution. the polluters, which do less pollution than the level determined by permits, could sell their permits to the polluters that emit higher pollution than is the level determined by permits. this flexibility, which appears on the permits market, will make it possible for the companies to achieve the financial assets by selling their permits and then to invest them into purchase of some ecological and more efficient technologies. however, “the system of transferrable permits is not suitable for use in case of pollution emissions, which are not uniformly distributed in the space. it means that the selling permits by the polluters that are dealing in the rural area (or poorly populated settlements) to polluters that are dealing in the urban area will cause significantly higher damages” (pesic, 2012, p. 112). by the subvention policy, the state tries to decrease pollution, so that “subvention should be equal to the difference between the marginal social benefit from the decreased pollution and the marginal private benefit of the company which causes pollution” (mojasevic, 2009, p. 205). “by the subvention policy, the allocative efficiency could be easily destroyed, as the total marginal social costs of production now include also the costs of subventions, and the company-polluter does not take into account the costs of subventions. the application of subventions does not lead to the decrease of economic activity. the consequence of all this, is the excessive production, that is, the excessive pollution” (mojasevic, 2009, p. 205). by strengthening the environmental consciousness in the seventies of the last century, the members-states of eu implemented the environmental taxes as the result of the defined principle “the polluter pays”. this principle, besides the other two the precautionary principle and the principle of including environmental policy into other polices of eu, was the foundation of the international environmental policy. the original implementation of these taxes, unfortunately, did not give the expected results because of the fact that their implementation in the beginning was considered to be the proper compensation for the pollution, that is, the permission for the pollution. however, with the increase of environmental tax rates and the definition of the responsibilities within the criminal-legal norm, these taxes become very important, especially in the scandinavian countries. the implementation of environmental taxes, as an instrument of environmental policy, requires the complementarity with the goals of other national policies (industry, agriculture, transport, employment, etc.). taxes, first of all, should have incentive, but not a conflict character. at the same time, the accomplishment of environmental and economic goals presents the basic condition while choosing the appropriate economic instrument in the field of environmental protection. although the environmental pollution has got a global character and it implies a broader international consensus within the union, the environmental taxes have got pronouncedly national feature and they are defined by the appropriate directions (for example, the direction on energy taxes). there are no supranational taxes within the union. although in the past there were these kinds of initiatives, primarily in the field of decreasing the emission of co2 and energy consumption, there are still no taxes that would have such a feature. however, when it is taken into account that the environmental 430 m. magdalinović kalinović, s. radukić protection and pollution overcome the national borders and occur as global problems, a necessary definition of this kind of a tax in near future could be expected. within the european union, there are the following environmental taxes (eurostat):  taxes on energy products, that are taxes on mineral oils, motor fuels, gasoline, diesel, heating oil, kerosene, petroleum, gas, electricity and taxes on gases that cause the greenhouse effect ;  taxes on transportation, that is, the tax on the registration and usage of motor vehicles, the tax on import and selling motor vehicles, car insurance, the tax on using roads – road toll, the tax on using other transportation means;  taxes on pollution referring to the air pollution (co2, nox, so2), taxes on pesticide and artificial fertilizers, tax on waste that endanger the environment (bacteria, rubber, plastic bags);  taxes on the resources including water treatment, usage of biological resources, exploitation of mineral raw materials (ores, oil, gas), exploitation of forests. in the european union, sweden represents the country which is the leading one in introducing and implementing environmental taxes. among the top leading countries today, besides sweden and denmark, are germany, finland, great britain, and the netherlands. the european union adopted in 2010 the strategy “europe 2020”, by which it defined the priorities and goals in the field of market economy which is to be accomplished in the forthcoming period. one of the stated goals in the field of sustainable development is the efficient usage of resources and environmental protection. within it, this strategy suggests the decrease of wage taxes, which would be compensated by higher taxes on dirty technologies, that is, by higher taxes on pollution. this is very important in the periods of high unemployment; this transfer of the tax burden from the labor force to the pollution would make it possible to achieve the so-called “double dividend”, which would lead, on the one hand, to the decreased pollution, and on the other hand , to the increase of the employment. the decrease of the tax burden of the labor would make it possible to open additional jobs as well as the additional employment. according to the latest announced data of european commission (environmental taxes in the eu, 2016) for the eu member-states the totally realized revenues on the base of environmental taxes, amounted to 343.6 billion euros in 2014. it is the increase of totally realized revenues according to this base, in relation to 2004, when it amounted to 282 billion euros. in the total environmental taxes, 76,5% goes to the revenue on the base of taxes on energy, then 19,9% goes to the revenue on the base of taxes on transportation and only 3,6% goes to the revenues on the base of the taxes on pollution and resources. the share of environmental taxes in the total revenues from taxes and contributions is different in each of these member-states of eu. in the totally realized revenues from the environmental taxes, the predominant position belongs to the energy taxes in most of member-states of eu. for example, in lithuania, czech republic, and luxemburg, the energy taxes in 2014 amounted to over 90% out of the totally paid environmental taxes. the revenues from the taxes on the base of transportation in 2014, had a significant share in the totally paid environmental taxes (about 40%) in ireland, denmark, malta, belgium, and austria, while the revenues from the taxes on pollution and resources in 2014, with the share of over 10% out of the totally paid environmental taxes, were realized in croatia, holland, estonia and slovenia. however, besides that total increase of fiscal revenues on the base of environmental taxes, their share in the total tax revenues was decreased from 6,8% in 2004 to 6,3% in economic effects and regulatory limits in implementation of environmental taxes 431 2014 (table 1). if we look at the period from 2004 to 2014, we can see that the share of these revenues was decreasing successively up to 2008, when it achieved the lowest level in the observed period (6,03%). the reasons for this kind of movement of this category of revenues are: the occurrence of economic crisis, decreased scope of production, transfer to the more advanced and cleaner technologies, rationalization of using the resources with the tendency to use the renewable resources. also, the share of these revenues in the total revenues is the indicator of the realization of the initiative for europe, which spends resources efficiently (еuropean commission, europe 2020). the basic goal of this strategy is that the share of these taxes in the total share achieves at least 10% up to 2020. table 1 share of environmental taxes in the total tax revenues (in %) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 еu (28 countries) 6.86 6.82 6.64 6.38 6.18 6.03 6.35 6.37 6.37 6.35 6.33 6.35 belgium 5.47 5.66 5.64 5.24 5.17 4.91 5.11 5.13 5.15 4.79 4.52 4.53 bulgaria 9.51 9.76 9.58 9.46 10.11 10.69 10.49 10.6 10.59 10.1 10.03 9.84 check republic 6.9 7.05 7.24 7.05 6.74 6.85 7.19 7.03 6.99 6.56 6.15 6.22 denmark 10.54 10.75 10.25 10.07 10.21 9.32 8.88 8.92 8.92 8.67 8.92 8.18 germany 6.88 6.72 6.53 6.29 5.81 5.68 5.95 5.81 5.83 5.59 5.38 5.24 estonia 6.11 6.73 7.58 7.17 7 7.37 8.42 8.82 8.65 8.61 8.09 8.28 ireland 7.86 8.28 8.35 7.7 7.94 7.93 8.06 8.79 8.74 8.38 8.5 8.17 greece 6.75 6.9 6.52 6.34 6.35 6.01 6.32 7.93 8.25 8.91 10 10.24 spain 6.04 5.73 5.4 5.08 4.86 5.06 5.39 5.22 5.05 4.87 5.77 5.5 france 4.69 4.91 4.68 4.53 4.4 4.33 4.45 4.48 4.45 4.41 4.47 4.47 croatia 11.12 10.95 10.62 10.23 9.95 9.34 9.26 10.11 9.38 8.87 9.58 10.51 italy 7.51 7.25 7.44 7.14 6.57 6.22 6.7 6.74 7.36 8.04 7.89 8.28 cyprus 12.01 12.32 10.58 9.63 8.7 8.69 8.76 8.67 8.68 8.13 8.63 9.01 latvia 8.31 8.93 9.07 7.79 6.86 6.67 8.48 8.75 8.9 8.59 8.6 9.26 lithuania 9.68 9.3 7.85 5.97 5.82 5.34 6.68 6.46 6.2 6.09 6.04 6.13 luxembourg 7.29 8.19 7.84 7.36 7.1 7.05 6.58 6.38 6.36 6.15 5.65 5.23 hungary 7.41 7.68 7.48 7.62 7 6.76 6.7 7.36 7.17 7.04 6.8 6.79 malta 10.72 9.44 9.74 9.99 10.85 10.18 9.78 9.32 9.53 8.81 8.26 8.51 holland 9.51 9.83 10.06 9.96 9.44 9.56 9.93 9.79 9.64 9.12 9.04 8.96 austria 6.36 6.37 6.31 6.03 5.86 5.7 5.76 5.72 5.91 5.78 5.63 5.63 poland 7.72 8.54 8.11 7.89 7.9 7.74 8.05 8.22 7.95 7.82 7.5 7.82 portugal 9.4 9.76 9.37 8.9 8.62 7.82 8.15 7.96 7.16 6.8 6.48 6.59 romania 8.4 8.59 7.15 6.76 7.05 6.32 7.1 8 6.88 7.08 7.47 8.76 slovenia 8.65 8.67 8.29 7.86 7.97 8.06 9.57 9.75 9.43 10.32 10.74 10.61 slovakia 7.36 7.77 7.48 7.64 7.11 6.91 6.67 6.52 6.36 6.12 5.72 5.76 finland 7.28 7.47 7.06 6.91 6.41 6.3 6.19 6.57 7.18 6.98 6.71 6.57 sweden 6.05 5.88 5.84 5.68 5.59 5.83 6.08 6 5.66 5.65 5.51 5.18 great britain 7.65 7.4 6.93 6.54 6.79 6.49 7.5 7.47 7.25 7.39 7.47 7.54 source: eurostat, shares of environmental and labour taxes in total rax revenues from taxes and social contributions. this level of collecting environmental taxes is considered to be insufficient so that there are constant initiatives that the existing tax system should be more stimulating in terms of the standpoint of the goals of environment protection as well as the economy growth and opening new jobs. the improvement of the environmental tax system implies the following: abolishing the distorting taxes and subventions; the change of the existing tax structure and the introduction of new environmental taxes. 432 m. magdalinović kalinović, s. radukić distorting taxes and subventions are especially present in the field of transport where some definite tax reliefs are given for using cars, which leads to the increase of traffic, that is, to the increase of pollution. here are also the subventions for air-companies, coal mines, etc. the change of the existing tax structure implies the fact that in the price of particular products is included the amount of environmental taxes with the tendency to extend it to all the products which pollute the environment. one more thing is true, too: the differentiation of taxation enables the implementation of lower tax rates on the products which are less harmful for the environment. the introduction of new environmental taxes should enable the redistribution of the tax burden between the labor and natural resources so that it presents the basic measure in accomplishing the goals of environmental policy. this measure should encourage the polluters to decrease the emitted pollution (ilic-popov, 2000). environmental protection presents one of key values in the european union, where its members have defined the clear policy and ambitious goals which should be fulfilled in terms of energy saving, decreased gas emission of the greenhouse and using the renewable energy sources up to 2020. however, besides all these efforts, the statistics shows that “the level of gas emission of the greenhouse is increasing so that in the period from 2010 to 2020, the existing projects point to the fact that it will reach the emission gas level of more than 2% than it was in 2005, that is, it will be only 6% lower than the emission of the level in 1990” (kosonen and nicodeme, 2009, p. 1). therefore, it is quite clear that the member-states could achieve the given goals in the field of environmental protection only by strong state intervention and commitment. it, first of all, refers to the changes of tax rates, the extent of the tax scope so that it would be possible to include in the tax base as many emitters of pollution as possible, but at the same time, enables the longer transiting period in order to help industry, that is economy, to adjust to the new system of taxation. 2. economic instruments of environmental protection in the republic of serbia taking into consideration the process of joining of the republic of serbia to the european union, it is clear that serbia will have to adjust its national legislation in this field to the legislation of the european union. although serbia, in the previous period of time, did important shifts in relation to the last period of time, in the coming years, a very intensive process of adjusting and adopting new laws will engage serbia, as well as in building up the necessary infrastructure in this field. up to the end of 2016 the opening of the negotiating chapter 27 “environment and climatic changes” with the european union is expected (government of the republic of serbia) financing environmental protection is one of the key issues in the process of adjusting the national legislation to the regulations of the european union. the introduction of the stable and effective system of financing is the basic pre-condition for preserving and improving of the environment. in serbia, a decentralized system of environmental financing has been developed, which implies the following: the budgetary resources funds; the budget of the autonomous province and units of local self-government ; the financial resources of some other international organizations, institutions and bodies; the local and foreign legal and physical persons; the funds of the european union; donations; grants; supports, etc. the environmental financing has been provided by the legally defined economic effects and regulatory limits in implementation of environmental taxes 433 principles “the user pays”, “the polluter pays“, as well as the principle of responsibility. the fact that presents the chief characteristic of the environmental financing is the insufficiency of financial resources. in addition to all these things, when we talk about the implementation of the economic instruments in the environmental protection, the revenues that have been collected from their implementation are often insignificantly small although there is a high degree of environmental pollution and degradation. the causes are manifold, but the common are stated as the inconsistency in implementing these instruments and high degree of tolerance when the matter is about polluters, that is, big companies, which have been in difficult economic position for years, that is, in the process of restructuring. economic instruments in the field of environmental protection are aimed at not only the collection of some public revenues but also at achieving a positive influence on the behavior of legal and physical persons on the whole, in terms of decreasing, that is, preventing pollution. the purpose of their implementation is the change of society behavior on the whole and making people aware of the consequences caused by pollution. therefore, the clear and efficient environmental policy requires good and clearly defined economic instruments. in serbia, the economic instruments in the field of environmental protection were introduced in 2004 on the base of the law on environmental protection. by a series of by-laws, their implementation has been defined. the economic instruments, which have been implemented, include the compensations and incentives. when we talk about compensations, there are several types (law on budget system and particular non-fiscal laws):  compensation for using natural resources,  compensation for environmental pollution,  compensation for environmental pollution in the regions of special state interest and  local self-government units compensation for protection and improvement of environment. the compensation for using natural resources is to be paid by the users of natural resources and they are to bear all the expenses for rehabilitation and recultivation of the degraded areas in accordance with the law. these compensations are obligatory for using mineral raw materials, water, forests, soil, hunting and fishing. the user of natural resources is obliged to pay this compensation. the compensation for environmental pollution is paid by the polluter and it is determined on the basis of the type of polluting for: the emissions from the particular sources of polluting, the emissions of the produced or dumped waste, as well as for the harmful substances contained in the raw materials, intermediate goods or a product. the government of the republic of serbia, by the direction on types of polluters, the standards for calculating the compensation for polluting the environment as well as obligors, on the base of the height and way for calculating and paying the compensation (2005), determines the criteria for the calculation of the compensation for polluting, the obligors, and finally, the height and way of calculating and paying the compensation. the assets obtained by collecting these compensations in the amount of 60% present the revenue of the budget of the republic of serbia and 40% presents the revenue of the units of local self-government. compensation for the produced or dumped waste is also determined on the annual level and depends on the type, quantity and features of the waste. the paying obligor is the producer, i.e. disposer of waste from the plant for which it has been issued the integrated permits. it is calculated per ton of waste annually. 434 m. magdalinović kalinović, s. radukić liable to pay the compensation for substances which damage the ozone layer, are the importers of these substances. this compensation is calculated per kilogram of the imported substance. compensation for environmental pollution in the areas of particular state interest declared by the government of the republic of serbia also presents the revenue of republic budget in the amount of 80% while 20% goes to the budgets of local selfgovernments. by the law on protecting nature (2009), nature is defined as the benefit of common interest and its protection has been arranged. by the law, there have been also defined the basic elements for calculating this compensation, and by the direction on closer criteria, the way of calculating and the procedure of paying the compensation for using the protected area (2010), are being given in the details of the elements and the way of calculating. the assets collected from the paid compensations are used especially for the improvement and development of the protected areas. responsible for paying these fees, is an entity who undertakes one of the following activities in the protected area (law on protecting nature, 2009):  mining, trading, hospitality, industry, civil engineering, traffic, transport, crafts, offering services;  using vehicles in the protected area;  using non-commercial facilities for holidays in these areas;  using services, facilities and other structures, as well as names, and logotype signs of the protected area;  visiting the protected areas, as well as visiting the structures on these areas. compensation for protecting and improving of environment is the compensation which the local self-government can prescribe within its jurisdiction on the base of: using the habitable and business premises, using the soil for performing activities, then for the activities that have an influence on environment, and the ones which are determined by the government, transportation of oil, oil derivatives and other dangerous substances on the territory of the unit of local self-government with the status of endangered environment. criteria for calculating and the highest amounts for these compensations are determined by the direction on criteria for determining the compensation for the protection and improvement of the environment and the highest amount of the compensation (2009). this compensation presents the source revenue of the units of local self-government. in 2014, the revenues from the compensation for the environmental protection amounted to 0,27% of the totally achieved gdp, that is, 10.610,52 million dinars and they were increased in relation to 2013, when they amounted to 7.962 million dinars (environmental protection agency 2015). the fund for environmental protection was founded by the law on fund for environmental protection (2009). the basic role of the fund was to provide the financial assets for stimulating and improving the environment, then the purposeful investment in the projects for environmental protection, as well as managing and mediating in the projects of energetic efficiency with the aim of sustained development and using renewable sources of energy. the revenue structure was also determined, which belonged to the fund and the units of local self-government depending on the type of the compensation. the basic economic instruments for providing the financial assets were: the compensation for environmental pollution, and the compensation for transportation of wild flora and fauna. the fund started working in 2009, and it ceased existing in september 2012, with the economic effects and regulatory limits in implementation of environmental taxes 435 explanation that there was no transparency in spending collected assets. when the fund stopped operating, all revenues, based on this principle, became the revenues of the fund of the republic of serbia. the foundation of a new budget, “green” one is anticipated by the changes of the law on environmental protection, precisely, till the end of 2016. 3. identified problems and weaknesses of the compensation system for environmental protection in the republic of serbia the compensations, defined on the basis of the national level by the law on environmental protection, are various and it can be said, with a double character. one group of compensations has got the character of classical compensations, when it is about using and exploiting natural resources, while the second group of compensations consists of compensations which have got the character of taxes (bisic, 2011). these corrective taxes present the additional tribute (tax) to the economic units, which, by their economic activities, cause the environmental pollution. the implementation of these instruments should provide a more rational exploitation of natural resources, the decreasing of activities and operations which cause the environmental pollution and purposeful usage of collected assets on this ground (bisic, 2011). compensations would primarily have the function of regulating the external effects and only then they are the function of budget revenues. this is of particular importance when we talk about negative external effects, when the producer does not bear the full production costs, but completely takes the revenue. in case that there is no adequate and efficient regulation, the scope of production is bigger from the socially-optimal level and with long-lasting consequences, such as the exhaustion of natural resources, excessive pollution, etc. accordingly, compensation as a price of use of a natural resource or service should ensure that the user bears the full costs of the use of these resources. the compensation for the pollution represents a typical environmental tax, but, on the other hand, the compensation for the promotion and protection of the environment is neither the compensation nor the tax. funds raised on this basis have exclusive fiscal nature and they are frequently used for undesignated purposes. income from compensation based on the exploitation of mineral resources for years has experienced an exceptionally small share of total revenue. the consequence of this situation is, above all, difficult economic situation of companies in the mining sector, which have been in the process of restructuring. therefore, when it is the matter of this type of compensation, it is not certain whether it is justified to apply it as a percentage of net revenue of the smelter (5%) or, to take it as an absolute outcome per ton of exploited mineral raw materials. therefore, well based and defined set of economic instruments has a great importance. onthe one hand, they should be defined in such a way so that they can affect the change of economic entity’s behavior, and on the other hand, to define them on such a level that will not affect its competitiveness. the basic aim of their implementation is, first of all, the change of social behavior of the entity in terms of decreasing pollution and not only being the source of fiscal revenues. it is clear that it is the matter of a very complex procedure for defining the height, criteria, basis, the obligor who pays, etc. however, the system of instruments should not be based only on compensations, taxes and penalties. it could be and must be considered through the introduction of economic incentives, such as the exemption from paying the compensation or the tax relief for those economic entities which invest in the decrease of pollution, that is, those which invest in 436 m. magdalinović kalinović, s. radukić cleaner technologies. in that sense, in the usa, since the middle of the twentieth century, the tax investment loans have been used as an instrument of the economic policy for raising the competitiveness of american economy. in other words, the incentive is given to the economic entities so that, for the given percentage of investing costs at the moment of purchasing the new equipment, they decrease the tax rate, and in that way obtain the subvention for investment. the definition of an obligor who pays the compensation and eco-taxes has a great importance. it is necessary to make a complete register of polluters, that is, the obligors who pay compensations, and not only to point out the existence of the obligation to pay compensations by big economic systems with integrated permits, who, because of a very difficult economic position, most commonly perform their responsibilities on this basis in an undisciplined manner. it is also true that the system of financing the environmental protection in serbia presents one of the basic problems in implementing environmental reforms. it is, in fact, a decentralized system, which relies, to a great extent, on the budget assets, the international financing support and subventions. the existing system of financing must be upgraded as the higher financial potential is a pre-condition of attaining the environmental goals. even such insufficient assets are mostly used inappropriately, that is, they are not used for the decrease of pollution. the lack of coordination and monitoring activities is present not only when it is the question of needs in this field, but also the determination of the occurred damages caused by pollution, then the lack of legal and institutional regulations (for example, foundation and then the termination of the eco-fund) etc. the fact is, we can hardly realize the real financing needs in the field of environmental protection, and that we are unable to determine the range of destroyed environment of both current and the pollution occurred in the previous period. 4. the suggestion of measures for improving the compensation system in the field of environmental protection in the republic of serbia the success in managing the policy of environmental protection implies clearly defined instruments for environmental protection. the ultimate solution could be the adoption of the law on environmental taxes which would include the current compensations, as the essential taxes, and in that way perform the more objective categorization (bisic, 2011). the combination of fiscal and non-fiscal instruments would present a good set of economic measures. measures and instruments of environmental policy cannot be separated from economic policy. every approach in solving the problem of externalities, no matter if it is the matter of private agreement or a state regulation and the policy of incentives (especially with the industrial pollution), has got its positive and negative characteristics. the effective system presents the combination of these two ways in solving this problem. when there is a large-scale industrial pollution, the systems with integrated permits, which are mostly the obligors of payment of compensations, usually do not perform their responsibilities due to the economic situation in which they are. this must be changed in terms of more disciplined and responsible paying of these compensations and taxes along with the implementation of the appropriate penalty system. the extension of the list of obligors, that is, the identification of all obligors no matter if they are legal or physical economic effects and regulatory limits in implementation of environmental taxes 437 persons who are the polluters of the environment, is the pre-condition for running good policy of environmental protection. the implementation of economic instruments should lead to the socially acceptable behavior of all entities and not have as its main goal the collection of budget assets. therefore, the growth of assets of eco-funds is not the goal by itself, but on the contrary, as a means of decreasing the pollution. a good set of economic instruments implies neither too high nor too low compensations and taxes, determined on the base of the most objective parameters of pollution (soil, water, air, human health, flora and fauna). conclusion the harmonization of serbian legislation with the eu regulations in the field of environmental protection is inevitable. in the forthcoming period, this process of adjustment will require a complete analysis of both positive and negative effects of environmental taxes. by the tax, the polluter is forced to internalize the negative external effects not only because of the respect of the principals of equity, but because of the principals of efficiency and proper allocation of resources. the implementation of these taxes should lead to the changes of behavior of all entities, and not be the basis for collecting budget assets. the existence and the growth of eco-funds are not goals in themselves, but the basic goal is the decrease of pollution when a long-term period of time is taken into consideration. the introduction of cleaner technologies is financially more required, especially for less developed countries and that is why their progress in developing the environmental reforms is slow. in order to make an objective assessment of the pollution range, as well as the needs in the field of environmental protection, it is necessary to develop a good system of registration of polluters, monitoring the damages caused by pollution, recording the statistical and financial records of the effects of polluting and the benefits from the investment in environmental infrastructure projects. the ecological-ethical principle implies the rational expenditure and management of the resources nowadays so that it would be possible to provide the principle of sustainable development in the future. this principle implies that 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service quality and customer’s value to enable them to enhance a viable competitive position in the business game. key words: game theory, competitive situation, players, payoff, small scale cafeteria jel classification: m19, d21, c70 1received february 26, 2017 / revised march 18, 2017 / revised may 17, 2017 / accepted june 20, 2017 corresponding author: akeem tunde nafiu kogi state university, department of business administration, ayigba, nigeria e-mail: tundenafiu01@gmail.com 204 d. j. aduku, j. j. orugun, a. t. nafiu introduction in the contemporary business world of today, competition is observed to be increasingly tough with a concomitant effect on business firms irrespective of sizes. competition is systematically avoided by many small business owners in nigeria based on the perception of threat, with little or no attention on opportunities resulting from rivalry. however, wikipedia (2014) viewed competition as the rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion. it is evident that competition also has potential positive payoff (which are many business firms’ desires) such as increasing profits, market share and sales volume. jhingan (2006) added that true competition consists of the life of constant struggle and rival against rival in pursuit of this payoff. factually, this means that business competition is not just fierce, but opportunity-filled, development oriented and beneficial to players. one obvious fact about competition is that it involves a game that reveals a firm’s strength and weaknesses; poses threats and exposes opportunities. in the past when business issues were addressed using the old-rule-of-thumb in nigeria, competition was viewed by business owners as an act of enmity. this 21 st century marks a period of change when few cafeteria owners in nigeria engaged themselves in a rethink against the conventional application of spiritual forces in competition. they saw the need for cooperation and competition rather than the existing mode of spiritual warfare in the business environment. this implies that cafeteria businesses in nigeria are obviously in the game of conflict and cooperation. this is in line with the basic division of games by backović, popović and stamenković (2016) in accordance with game theory as separation on both cooperative and non-cooperative games. firescu (2012) quoting franklin d. roosevelt expressed that ‘competition has been shown to be useful up to a certain point and no further, but cooperation, which is the thing we must strive for today, begins where competition leaves off.’ however, the assumption of game theory provides an insight into the problem of how to survive under a tough competitive situation posed by the rational and conservative behaviour of cafeteria owners in nigeria. backović et al. (2016) is of the position that a rational individual aspires to the best possible outcome (maximizing utility) in accordance with pre-defined rules. in times of uncertainty, according to lindstädt and müller (2009), the assumptions are that game theory is highly critical to success, for it offers perspectives on how players might act under various circumstances, as well as other kinds of valuable information for making decisions. therefore, game theory is considered as a guide that gives a format on how to compete effectively in the business game without losing everything. the main objective of this study is to examine the competitive situation and business game among small scale cafeterias in nigeria. the specific objectives of the study are: i. to investigate factors influencing the competitive situation among small scale cafeteria businesses in nigeria; and ii. to investigate the effect of the adoption of game theory on the overall performance of small scale cafeterias in the business game in nigeria. descriptive analysis of competition and the adoption of games theory in business game... 205 1. review of relevant literature 1.1. concept of business game every business environment possesses the attributes of the real business game (competition). thus, all business firms existing in this environment must engage in a strategic task not only to cope with the game, but to possess the necessary payoff. for a situation to be considered a game there must be at least two rational players who take into account one another’s actions when formulating their own strategies (quickmba.com). this makes the business game increasingly fierce among players; as each player adopts tiger-like strategy to either outwit others or to survive the turbulence. the target among players is one payoff which is favourable and achievable by adopting all available techniques and strategies. figure 1 below shows that cafeteria business owners pursue the same goal, and undertake virtually the same course of actions to get this goal achieved. this informs that no cafeteria will attain maturity without constant struggle as a result of conflicting interests. bergen (1962) posited that the theory of games is to analyze situations of conflicting interests. bergen also expressed that in some cases the theory will enable us to find a solution without resorting to arbitrary rules. the understanding of the nature of the business game gives elegant knowledge that is crucial to effective competitiveness and comparative advantage of one cafeteria over other competitors in the same business environment. this will prevent the business from being bitten hard or extinguished by the so-called industrial tigers. fig. 1 the nature of a business game in a game situation, each player spends time on the draw board to map out an edge-giving strategy against the opponents. thus, it becomes imperative for these players to engage in the strategic management process as depicted in figure one. consequently, these players will inevitably engage in a number of activities. some of which are: player 1 player 2 player 3 player 4 review of effective management review of corporate market leadership/ strategy of business resources culture & structure customers’ loyalty flexibility man, machine, money & material strategy change pricing, product quality, promotion &distribution environment scanning strategy formulation strategy implementation strategy evaluation payoff competitive advantage/superior performance 206 d. j. aduku, j. j. orugun, a. t. nafiu i. reviewing strategy (to enhance its flexibility), ii. managing resources effectively (such as man, machine, money and material), iii. reviewing corporate culture and structure (in alignment with strategy changes), iv. re-engineering the operation process (to enhance effective pricing strategy, product quality, promotion and distribution). the rationale behind these activities is that each of the players is aware of the payoff at the sharp end of the business game. a player has to win to possess a positive payoff and the other must lose with a negative payoff. 1.2. categories of games this paper divides games into two categories: i. games that involve the application of strategy (game of strategy); which requires a high level of distinctive prowess, roadmap and strength of a player to compete effectively. ii. games that involve luck (game of luck); which requires the awareness of uncontrollable outcome. playing this game involves the application of one’s whole mind and not a skill. apart from the categories of games highlighted above and that of backović et al. (2016), crossman (n.d) also identified different kinds of games that are studied using game theory as follows: i. zero-sum game: where the interest of the players are in direct conflict with one another. the winning player gets +1 (positive payoff) and the losing player gets -1 (negative payoff). therefore, +1-1=0. ii. non-zero sum game: where there is cooperation between the players and their interest are not conflicting directly in such a way that each player benefits from the game. iii. simultaneous move games: this involves putting the opponent in one’s shoes. that is, believing that the opponent is doing exactly the same thing one is doing (performing similar actions). iv. sequential move games: this involves following a sequential line of actions to compete effectively. here, players select course of actions in orderly manner. v. one-shot game: crossman expressed that the players are likely not to know much about each other and gave an example, such as tipping a waiter on your vacation. vi. repeated games: here, the same players have to compete repeatedly with one another. 1.3. game theory and its relevance to business game according to nik and nik (2008), the game theory has developed its application mainly in mathematics since its inception in 1944 by john von neumann and oskar morgenstern. in a step further, goluch (2012) elaborated that game theory is a study with the main purpose of finding an answer to the question: how to react in both conflict and cooperation situations, as well as combined ones. it is on this note that backović et al. (2016) may have considered the basic division of game theory on cooperative games and non-cooperative games. in game theory, a ‘game’ is a complete specification of the strategies each ‘player’ has, the order in which players choose strategies, the information players have, and how descriptive analysis of competition and the adoption of games theory in business game... 207 players value possible outcomes (‘utilities’) that result from strategy choices (camerer, 2003). game theory assumes that one has opponents, who are adjusting their strategies according to what they believe everybody else is doing (quickmba.com). backović et al. (2016) also closely observed and posited that it is strategy oriented, and that it explores the expected outcomes, or how the outcomes are reached among actions undertaken by the players. in addition, crossman (n.d.) stated clearly that the assumptions of game theorists are that: i. the payoffs are known and fixed ii. all players behave rationally iii. the rules of the game are common knowledge. it is no doubt that game theory is a solution tool for the problem of competitive situation. this fact is also supported by the relevance of game theory compiled from pinkasovitch (2014) as shown below: i. that from optimal marketing campaign strategies, ideal auction tactics and voting styles, game theory provides a hypothetical framework with material implications. ii. that game theory provides the base for rational decision making. this paper outlines other benefits that are accruable to the application of game theory as follows: i. game theory enables business owners or managers to be more proactive rather than being reactive in the business game, and also provides a reaction plan where necessary. ii. it offers business owners an understanding of the business game and a befitting strategy for such situations. iii. it is a solution tool for competitive situation considering the assumption that each player behaves rationally and conservatively. iv. through the adoption of game theory, a player is able to maximize gain and minimize loss. 1.4. factors influencing competitive situation among small scale cafeterias in nigeria a business firm as an entity has a long life cycle, separate from that of human’s life expectancy. it is not anticipated to cease in its operation except in a situation where there is necessity for its termination. igben (2007) rightly observed that a business is a going concern if it is capable of earning a reasonable net income (positive payoff) and there is no intention or threat from any source to curtail significantly its line of business in the foreseeable future. some cafeterias in nigeria have noticeably faced consequential entropy; while some others are at the verge of collapse. it is the consequence of the fierce business game that is ignorantly given little concern. the competitive situation must exist in the market. a competitive situation exists when two or more cafeteria owners are aware independently of a certain goal which may be expressed in specific terms; and they rival against one another to achieve it. it is observed that many factors (price variation of similar customer’s order among cafeterias, distinguished customers’ value, quality of service delivery and strategic location of business) are attributable to the competitive situation of cafeterias in the business game in nigeria. though, porter (1985) argued that five forces determine the intensity of the business game. these forces are captured in figure 2 below: 208 d. j. aduku, j. j. orugun, a. t. nafiu new entrants buyerssuppliers substitutes industry competitors intensity of rivalry threat of substitutes threat of new entrants bargaining power of suppliers bargaining power of buyers determinants of buyer power bargaining leverage • buyer concentration vs. firm concentration • buyer volume • buyer switching costs relative to firm switching costs • buyer information • ability to backward integrate • substitute products • pull-through price sensitivity • price/total purchases • product differences • brand identity • impact on quality/ performance • buyer profits • decision maker’s incentives determinants of substitution threat • relative price performance of substitutes • switching costs • buyer propensity to substitute rivalry determinants • industry growth • fixed (or storage) costs / value added • intermittent overcapacity • product differences • brand identity • switching costs • concentration and balance • informational complexity • diversity of competitors • corporate stakes • exit barriers entry barriers • economies of scale • proprietary product differences • brand identity • switching costs • capital requirements • access to distribution • absolute cost advantages proprietary learning curve access to necessary inputs proprietary low-cost product design • government policy • expected retaliation determinants of supplier power • differentiation of inputs • switching costs of suppliers and firms in the industry • presence of substitute inputs • supplier concentration • importance of volume to supplier • cost relative to total purchases in the industry • impact of inputs on cost or differentiation • threat of forward integration relative to threat of backward integration by firms in the industry fig. 2 porter's five forces source: porter, m. (1985). competitive advantage, new york: the free press. porter’s five forces may not perfectly match with the survey intent of this study, due to the nature of the target population and the scope of the study. firstly, variation in prices of similar customers’ orders is incredibly observed as determinants of the competitive situation among cafeterias in nigeria. it is believed that no single player has total control over prices in the market of many competitors. the observed rationale behind variation in prices of similar orders is that some cafeteria owners try to build new competitive advantages in order to get others off the track. they might have engaged in pricing strategy to outwit others in the business game. secondly, the quest for value addition and good customer experience has become topical in the scheme of things. customer’s value is a subject of competition that is eminent in every business game. according to zeithaml (1988), the term may mean low prices, receiving what is desired, receiving quality for what is paid, or receiving something in return for what is given. entrepreneurial firms focus their scarce resources on the dimensions of value (e.g., cost, use value, emotional value, social value) (smith and colgate, 2007) that matter to customers the most and market their capabilities in terms that their customers can associate with and are known to value. customers want benefit from the payment on the order they make; and they make preference of the cafeterias that can provide them with this. delivering value to customers is a central aspect of cafeteria business that owners must ensure. this is equally the reason shanker (2012) asserted that delivering customer value is not a one-off event, and firms must continuously strive to better understand and anticipate what their customers will value and then descriptive analysis of competition and the adoption of games theory in business game... 209 keep delivering it. to develop compelling customer’s value propositions according to shanker (2012), business owners need to keep in mind the following: i. there are two stages at which customers assess value; before and after they purchase a product or service. ii. value is perceived at various levels; therefore, value needs to be delivered at various levels. iii. understanding what customer’s value is; the first step in delivering customer value. thirdly, location is the strategy of geographical situation of a business firm in any business game. it would be agreed that location of the business is a strategic choice that must be made from varying alternatives. this strategic choice of location is costly, but has a long-run implication on the performance and survival of the business. it may be right to say that many cafeterias would have witnessed entropy in nigeria within five years of start-up as a result of making the wrong decision about business location. gerdeman (2012) posited that the strategic value of business location depends on three things. he quoted juan alcácer saying these things are: i. the strength of available resources, such as nearby supporting industries; ii. the company's ability to seek and retrieve knowledge in this setting; and iii. its capability to do something better than competitors. finally, relative standing (competitive advantage) has become an issue of concern to service based outputs the world over. surpassing customer’s expectation in service delivery and offerings takes the front burner. every customer desires quality service delivery at any cafeteria. for instance; well packaged food, convenience and delicious food in a clean setting are attributes of quality service. personalized service, good return policies, good relation-communication and ability to listen to customers’ complaints also make up effective quality service delivery. these must have been considered by bitner (1990) in his definition of service quality as the consumer’s overall impression of the relative inferiority, superiority of the organization and its services. amoako (2012) elaborated that, service quality is the key of survival to all servicing companies. in different view, parasuraman, zeithmal and berry (1985) see services quality as a function of the differences between expectation and performance along the quality dimensions. however, the desired service expectation for customer’s order usually involves employees’ commitment and the competence of the cafeteria owner-managers. in essence, desired service expectations seem to be the same for service providers within industry categories or subcategories that are viewed as similar by customers (amoako, 2012). in addition, the advent of smart phones poses a big threat to the survival of eateries because of increased awareness and exchange of valuable information via social media on improved service delivery and quality. the swing in consumers’ taste as a result of preference for african delicacies has heightened the patronage of cafeterias in nigeria. this study observed that cafeteria owners’ focus on the application of old-rule-ofthumb in lieu of result-driven strategies may not be efficient in addressing the competitive situation. a successful corporate strategy should modify these competitive forces in a way that improves the position of the organization (porter, 1985). 210 d. j. aduku, j. j. orugun, a. t. nafiu 2. research methodology the study used survey method. the study gathered its data and information through primary and secondary sources. the study was conducted on selected cafeteria businesses from ten areas in ogun state, nigeria. the population of the study was 124 (sango – 14, ifo – 27, ijoko – 12, owode – 11, ijako – 8, abeokuta – 21, imeko afon – 7, badagri – 9, ago iwoye – 10, ilepa – 5). the taro yamane sampling method was used for sample size determination, and bowler’s proportional allocation formula was used to enhance fair allocation of samples to the study universe. the study adopted cluster sampling techniques, and further used simple random sampling to select the required sample size. this study analyzed the data collected in table with the descriptive method, and applied the chi-square and anova statistical method. taro yamane formula: 2 )(1 en n n   where n = sample size; n = population of the study (124); error estimate at 5% (0.05); 1 = constant. 2 124 1 124(0.05) = 124 1 124(0.0025) = 124 1 0.31 = 124 1.31 = 94.656 = 95 bowler’s proportional allocation formula n nn n )1( 1 where n = overall sample size; n1 = population of metropolis; n = the total population n1= 124 )14(95 = 11 n2 = 124 )27(95 = 21 n3 = 124 )12(95 = 9 n4= 124 )11(95 = 8 n5= 124 )8(95 = 6 n6= 124 )21(95 = 16 n7= 124 )7(95 = 5 n8= 124 )9(95 = 7 n9= 124 )10(95 = 8 n10= 124 )5(95 = 4 fig. 3 proportional allocation of sample size source: field survey, 2016 descriptive analysis of competition and the adoption of games theory in business game... 211 the role of the researchers at the study area this study takes the period of almost two years. in the course of the study, the researchers lured the respondents into releasing facts by promising them confidentiality, and also a copy of the results of the survey. having observed the erroneous interpretation given to competition by most cafeteria business owners, the researchers intensified effort towards enlightening the respondents concerning the subject matter. this was done by way of exposing them to the fact that games are going on among cafeteria business owners unknowingly and that there is a need for them to comprehend the efficacy of game theory and its applicability. the researchers adopted the test and retest process to establish the reliability of the instrument. the researchers were then convinced that the instrument was reliable where the results were similar. 4. data presentation and analysis table 1 showing the demographic characteristics of respondents demography responses percentage (%) gender female male 79 16 83.2 16.8 total 95 100 academic qualification primary school certificate secondary school/nd certificate hnd/bsc & above 48 32 15 50.5 33.7 15.8 total 95 100 years of business existence up to 1 year 1-5 years 6-10 years more than 10 years 15 27 29 24 15.8 28.4 30.5 25.3 total 95 100 source: field survey, 2016 table 1 shows that 79 respondents (83.2%) were female; and 16 respondents (16.8%) were male. the implication of this is that female gender forms the major decision makers (players) and the majority in the ownership structure in this line of business when compared with their male counterpart. the table depicts that 48 respondents (50.5%) held primary school certificates; 32 respondents (33.7%) held secondary school/nd certificates; and 15 respondents (15.8%) held hnd/bsc certificate and above. the implication of this is that 50.5% have little knowledge and skills regarding the tools or approaches to handling competitive issues in their business environment. though, the 49.5% of respondents appear to have deep knowledge about the subject matter. 15 respondents (15.8%) expressed that their businesses are up to 1 year old; 27 respondents (28.4%) expressed that their businesses are within 1-5 years old; 29 respondents (30.5%) expressed that their businesses are within 6-10 years old; 24 respondents (25.3%) expressed that their businesses are more than 10 years old. the calculated average is 5.142, and this 212 d. j. aduku, j. j. orugun, a. t. nafiu implies that the majority of the respondents have at least 5 years of business experience that is helpful to this present study. table 2 describing factors influencing the competitive situation among small scale cafeterias in nigeria factor response frequency total n1 n2 n3 n4 n5 n6 n7 n8 n9 n10 price variation of orders ge 5 8 2 5 1 8 6 5 1 41 ae 3 6 2 1 3 3 1 1 20 le 3 7 5 2 2 5 5 3 2 34 total 11 21 9 8 6 16 5 7 8 4 95 mean score 3.182 2.048 1.667 2.375 1.833 2.188 0.833 2.857 2.250 1.750 2.074 cut-off point 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 value to customer ge 7 18 4 8 4 11 1 3 2 2 60 ae 3 2 1 2 1 4 3 2 18 le 1 1 4 2 3 3 3 17 total 11 21 9 8 6 16 5 7 8 4 95 mean score 2.545 1.952 2.000 3.000 2.333 2.500 1.600 2.429 1.875 2.500 2.453 cut-off point 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 quality of service delivery ge 2 7 3 6 4 7 3 3 7 42 ae 4 8 3 2 5 1 * 4 27 le 5 6 3 2 4 * * 1 21 total 11 21 9 8 6 16 5 7 8 4 90 mean score 1.728 2.047 2.000 2.750 2.333 2.188 2.200 1.286 2.750 2.000 2.333 cut-off point 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 availability of facilities ge 3 6 2 1 * 10 * 3 7 32 ae 2 12 1 5 4 1 2 2 1 1 31 le 6 3 6 2 * 5 1 2 3 28 total 11 21 9 8 6 16 5 7 8 4 91 mean score 1.727 2.143 1.556 1.875 1.333 2.313 1.000 2.143 2.875 1.250 2.044 cut-off point 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 2.050 * = missing data; gegreat extent; aeaverage extent; lelow extent; cut-off point = mean + e = 2.00 + 0.05 = 2.050 based on the data analysis in table 2 above, it is firstly observed that prices variation of customer’s order in sango (mean score= 3.182); owode (mean score = 2.375); abeokuta (mean score = 2.188); badagri (mean score= 2.857); and ago iwoye (mean score = 2.250) determine the level of competitive situation among small scale cafeteria businesses in these areas. in addition, competition (arising from price differentiation) among small scale cafeterias in sango appears to be very strong given the highest mean score of 3.182. generally, price variations of a particular customer’s order among small scale cafeteria seem to have a weak influence on their competitive situation (given that the mean score = 2.074 > cut-off point = 2.050). price variations of identical customer’s order among small scale cafeteria are accepted as a condition for the achievement of the desired payoff posed by business game in ogun state. thus, price variations of identical customer’s order influences competitive situation among small scale cafeterias in ogun state to a low extent. secondly, it could be observed that cafeteria owners in sango (mean score= 2.545); owode (mean score= 3.000); ijoko (mean score= 2.333); abeokuta (mean score= 2.500); descriptive analysis of competition and the adoption of games theory in business game... 213 badagri (mean score= 2.429); and ilepa (mean score= 2.500) give out appreciable customer value. it appears that the competitive situation in owode may be tough based on the great customer value given by the cafeteria owners in this area. in areas such as ifo (mean score= 1.952); ijoko (mean score= 2.000); imeko afon (mean score= 1.600); and ago-iwoye (mean score= 1.875), the customer value appears to be low. this may be as a result of lack of adequate knowledge about the significance of customers’ patronage and their retention in these areas. on the general note, empirical verification proves that customers’ value influence competitive situation in ogun state to a moderate extent (given that the overall mean score = 2.453 > the cut-off point = 2.050). this implies that cafeteria owners pay genuine attention to customer’s service, and ensure effective communication and relationship with their customers. thirdly, the table shows that cafeterias in owode (mean score= 2.750); ijako (mean score= 2.333); abeokuta (mean score= 2.188); imeko-afon (mean score= 2.200); and ago-iwoye (mean score= 2.750) embrace quality service delivery in their business environment. this implies that individual cafeteria owners know the benefit of providing distinguished service to customers in order to retain a reasonably large market share. though, it is observed that cafeterias (in sango, ifo, ijako and badagri) have very low concern for service quality in their business environment. the result from badagri (mean score= 1.286) may not be considered, given that colossal of data was missing. however, empirical investigation reveals that quality consideration of service delivery is a subject of competitive situation among cafeterias in ogun state, nigeria (given that the overall mean score = 2.233 > the cut-off point = 2.050). this implies that individual cafeteria owner’s drive towards delivering high quality services will often strengthen competitive situation in the business environment. this aligns with the assertion of crossman (n.d.) that all players behave rationally. meanwhile, the game theory assumes that all players engage in similar task to obtain just one payoff. with this understanding, porter (1985) emphasizes that a successful strategy needs to be formulated and implemented in a way that improves the position of the organization. finally, the table depicts that location of cafeterias in ifo (mean score= 2.143); abeokuta (mean score= 2.313); badagri (mean score= 2.143); and ago-iwoye (mean score= 2.875) is a strategic point embraced by owners in these areas. it appears that cafeteria owners in other areas are indifferent about situating their businesses in strategic geographical areas. empirical investigation reveals that locations of cafeterias in strategic places have little or no influence on the competitive situation in ogun state (given that the overall mean score = 2.044 < the cut-off point = 2.050). table 3 showing adoption of game theory and its effect on overall performance of small scale cafeteria in nigeria observation/expected frequency frequency n1 n2 n3 n4 n5 n6 n7 n8 n9 n10 total % yes exp. freq 3 6.72 10 12.82 4 5.49 7 4.88 6 3.66 9 9.77 4 3.05 4 4.27 7 4.88 4 2.44 58 61.1 no exp. freq 4 2.08 3 3.98 2 1.71 1.52 1.14 6 3.03 1 0.95 2 1.33 1.52 0.76 18 18.9 not sure exp. freq 4 2.20 8 4.20 3 1.80 1 1.60 1.20 1 3.20 1.00 1 1.40 1 1.60 0.80 19 20.0 total 11 21 9 8 6 16 5 7 8 4 95 100 source: field survey, 2016 214 d. j. aduku, j. j. orugun, a. t. nafiu e eo f ff x    2 2 )( = 31.032 at α = 0.05 level of significance with 18 degrees of freedom, the critical value for x 2 is 28.869. consequently, since the calculated x 2 of 31.032 is greater than the critical value x 2 of 28.869 (that is, x 2 > x 2 0.05). we therefore conclude that the adoption of game theory, in the business game, has an effect on the overall performance of small scale cafeterias in nigeria. this implies that game theory is efficacious as a solution tool for addressing the business game. this finding augments the assertion of the study by bergen (1962) that game theory has its purpose just to analyze such situations of conflicting interests. this is because the assumption of game theory will help owners to analyze the business game and determine an effective strategy to gain a desired pay-off. table 4 showing differences in the adoption of game theory by small scale cafeterias n1 n2 n3 n4 n5 n6 n7 n8 n9 n10 f-cal f-crit mean 2.091 1.905 1.889 1.250 1.000 1.500 1.200 1.571 1250 1.000 1.120 2.393 sd 0.831 0.944 0.927 0.707 0.001 0.632 0.447 0.787 0.707 0.001 sd  standard deviation; f-crit= 20.9 05.0 f table 4 shows the description and variance analysis of the effect of the adoption of game theory on the overall performance of small scale cafeterias. given the varying means, the result shows that mean of the effect of adoption by small scale among cafeterias in sango (2.091) is very evident, as it is above the critical point. the standard deviation (0.831) shows that there is little divergence in the effect of the adoption of game theory by this small scale among cafeterias in sango. this result implies that these small scale cafeterias now appreciate the assumption of game theory in their competitive business environment. it is also viewed from the table that though there are observed differences in the effect of the adoption of game theory among small scale cafeterias in other areas such as ifo (mean1.905, sd0.831), ijoko (mean1.889, sd0.927), owode (mean1.250, sd0.707), ijako (mean1.000, sd0.001), abeokuta (mean1.500, sd 0.632), imeko afon (mean1.200, sd0.447), badagri (mean1.571, sd0.787), ago iwoye (mean1250, sd0.707), ilepa (mean1.000, sd0.001); but it is not evident enough. the empirical result shows that there are no significant differences in the effect of the adoption of game theory by small scale cafeterias in the study areas. this may be as a result of little knowledge possessed regarding the adoption of game theory in these areas during the period of this present study. conclusion price and quality of service play a crucial role in the competitive situation among small scale cafeterias. price interrelates with quality of service rendered by cafeteria owners. this means that all cafeteria owners are aware that high quality attracts high price, ceteris paribus. thus, cafeteria owners pursue high quality-price or low quality-price approach to retain customers’ patronage. in addition, creating customer’s value is also an adopted approach by descriptive analysis of competition and the adoption of games theory in business game... 215 cafeteria owners to retain customers’ patronage. customer’s value captures price affordability of orders and receiving quality for what is paid. the rational behind establishing customers’ value is to enhance high sales and profitability. these factors account for the outlook of competitive situation among small scale cafeteria in ogun state, nigeria. the adoption of game theory, in the business game, has an effect on the overall performance of small scale cafeterias in nigeria. the bottom-line for evident effect of this adoption is the understanding of the game theory’s assumptions. for cafeteria owners to grow competitive advantage, game theory is considered an essential tool. the assumption of game theory will guide owners in analyzing the business game and determining the effective strategy to apply to gain a desired pay-off. based on the findings above, the study recommends that: i. cafeteria owner-managers should analyze the price-benefit of orders to enable them to establish their competitive position in the business game. this will also enhance better knowledge of what price to set to win the business game. ii. cafeteria owner-managers should intensify the effort in making appropriate decisions regarding the location of their cafeterias in lieu of commitment of intensive resources. iii. cafeteria owners should ensure high quality service delivery and establishment of customer’s value. competitive advantage can be enhanced where customer’s value and service quality are established. iv. cafeteria owners should adopt game theory to competitive situation in their business game. the assumption of game theory will guide owners in determining the effective strategy that is suitable for enhancing high performance of businesses in ogun state, nigeria. references amoako, p.m. (2012). the role employees play in service delivery to achieve customer satisfaction at the imperial perkin fast food restaurant. mba thesis, kwame nkrumah university of science and technology. andersen, m.l. and taylor, h.f. 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(1988). consumer perceptions of price, quality, and value: a means-end model and synthesis of evidence. journal of marketing, 52(3), 2-22. deskriptivna analiza konkurencije i usvajanja teorije igara u poslovnoj utakmici malih kafeterija u nigeriji ova studija fokusirala se na konkurentsku situaciju i poslovnu utakmicu malih kafeterija u nigeriji. stoga su istraživani faktori koji utiču na konkurentsku situaciju malih kafeterija u nigeriji i usvajanje teorije igara u poslovnoj utakmici, kao i njenog uticaja na ukupno poslovanje malih kafi a u igeriji. tudija je sprovedena na odabranim kafeterijima i deset oblasti u državi gun u nigeriji. ova studija analizirala je podatke prikupljene u tabeli deskriptivnom metodom i koristila chi-kvadrat test i anova statistički metod. nalazi pokazuju da cena, kvalitet usluge i vrednost za kupca utiču na konkurentsku situaciju u malim kafeterijama i da usvajanje teorije igara u poslovnoj utakmici utiče na ukupno poslovanje malih kafeterija u nigeriji. ipak, empirijski rezultat dokazuje da je uticaj be načajan. tudija je aključila da faktori (kao što su cena kvalitet usluga i vrednost za kupca) utiču na konkurentsku situaciju malih kafeterija u nigeriji, i da vlasnici kafeterija mogu pove ati konkurentsku prednost primenom pretpostavki teorije igara. zbog toga ova studija preporučuje da vlasnici-menadžeri kafeterija treba da obrate posebnu pažnju na cene, kvalitet usluge i vrednost za kupca što e – im omogu iti da poboljšaju održivu konkurentsku poziciju u poslovnoj utakmici. ključne reči: teorija igara konkurentna situacija igrači isplata male kafeterije http://www.mckinsey.com/insights https://timreview.ca/article/525 plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 1, 2017, pp. 57 69 doi: 10.22190/fueo1701057m review paper economic crisis and current problems of serbian family1 udc 338.124.4(497.11) predrag mitrović 1 , gorica bošković 2 1 unicredit bank, serbia jsc, serbia 2 faculty of economics, university of niš, serbia abstract. modern society and the world economy are highly contradicted to existing processes and relationships. it could be discerned in large social inequalities, in unfair and unequal opportunities of socio-economic development and in severe conflicts of different contrasting groups and interests. the problem of economic growth, especially of the smaller countries in development, is radicalized by unequal distribution of natural resources, economic and political power. at the moment in serbia the crisis is visible in almost every sector of society. unemployment is rising, just like crime rate, corruption and various forms of social pathology. the growing rate of violence and different forms of family abuse are spreading the sense of hopelessness. not only did the education become more expensive but also the employment availability and social success became inversely proportional to the acquired knowledge. every year the birth rate declines. all of these affect the young, who become discontent. being unable to identify themselves with their own country they start to accept the situation with resignation and social apathy. the number of those who leave serbia is increasing. the roots of very bad economic situation in serbia are planted in the inherited systemic problems which arose after the disintegration of yugoslavia and its markets, sanctions and aggression and destruction of economy and infrastructure by nato, but mostly and primarily is rooted in the acceptance and implementation of arguably detrimental doctrine shaped by the concept of neo-liberal model of economic policy. in this research paper, the authors, in order to minimize potential developmental risk and to maximize the biological survival of serbian population in future, state that neoliberal globalization begins with destruction of the family and ends with the destruction of the country itself. this hypothesis is confirmed by the current demographic and development trends in serbia. key words: economic crisis, neoliberal globalization, the state, the family, serbia. jel classification: j11 1 received november 21, 2016 / revised december 6, 2016 / accepted january 31, 2017 corresponding author: gorica bošković faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: gorica.boskovic@eknfak.ni.ac.rs 58 p. mitrović, g. bosković introduction the problems of current economic crisis, as of the one from 1929-1933, are rooted in matrix of neoliberal capitalism. individualism, free market, private property as the complete state’s withdrawal from the economic sphere plus the ignoring of the national distinctions, social responsibility, moral worth and ethic principles resulted in deep contradictions of existing processes and relations with high rate of social inequalities and clash of interests among different conflict groups. the neoliberal globalization decreases power of the sovereign state or the country and increases the power of multinational corporations and international organizations that consciously direct their activities towards destruction of the small countries’ economies and population. the neoliberal globalization decreases power of the sovereign state or the country and increases the power of multinational corporations and international organizations that consciously direct their activities towards destruction of the small countries’ economies and population. the destruction of the small countries’ economies, the increasing rate of unemployment, rising social tensions, moral worth degradation, marginalization of state and church institutions represent the fake picture, the illusion of freedom, democracy and globalised education and information. originated from this illusion the purpose-made primitive entertainment like the advertising campaigns of homosexuals, drug addicts and sects bring a destructive impact on traditional family, its roll and value. this generally reflects on the strength and stability of the country and its development survival perspective. the wealth of a small number of strong and powerful individuals is rising according to the rising poverty rate of most people. 1. neoliberalism in the core of economic crisis the development of global modern society is followed by rising of numerous problems, risks and dangers that can impact the humanity and its institutions. we witness here the contemporary era paradox: by developing new techniques, modern technologies and economies, always steering towards future of predictable security the humanity produced itself instruments and prerequisites for free and decent life but instead it lives degraded and helpless, in constant fear of terrorism, war, violence, economic crisis and ecologic catastrophes. concerning our insecurity in modern society i would quote ulrich beck “it does not decrease but it increases proportionally to the increase of the knowledge, research and expert rationality” (bek, 2001). which are the reasons, and what is in the core of such state? „nowadays humanity is in claws of manipulative global or mass culture based on the market principles and individual freedoms that promote a certain life style, form stereotypes and make illusion of an idyllic serene life where everything is within the reach of hand. in virtual pseudo-reality, in man, the consumer feelings are growing, which determine many aspects of life and his behaviour standards. people tend to became rich to gain profit so the primary ideal becomes money that controls the value system. too busy with satisfying his own hedonistic needs the individual becomes indifferent to other people’s sufferings and everything else that concerns one’s material interest and life standard. the individual lives in his own virtual world where the religion and any other system of value except economic crisis and current problems of serbian family 59 money value are absent, where the individual material benefit prevails over general benefit. in a world like that the individual does not have free time or space for family and friends. there is not a social cohesion and to the individual a general benefit loses its importance, he is not willing anymore to make sacrifices for others“ (dusanic, 2013, p.19), including his own children (added by authors). the modern society inequalities are deeply rooted in contradictory development of globalised world whose perspective and future development depends exclusively on control of availability of already limited resources like oil and fresh water resources or highly educated personnel and neutral media services. the most visible characteristic of modern society is inequality. world wealth is increasing as well as world population and it is unequally distributed on the planet. at the beginning of 2000 a world gdp (gross domestic product) was 3 billion dollars or something like $ 5.000 per head. still, in ethiopia it was barely $ 100 and in switzerland that has the highest gdp rate, was $ 38.000 per head. for the countries with low rate of domestic product (dp), ( under $ 750 per head) even for those with average rate of dp ( between $ 750 and $ 9.500 per head) is hard to achieve the standard of countries with very high rate of dp ( from $ 9.500 and more) (martin et al. 2006, p. 15). however for the last half of the century this gap is growing and as a consequence the middle class is disappearing. for example during the mid-seventies the number of high rate gdp countries was 8 times higher than of those with average gdp rate and 40 times higher than of those with low gdp rate (1:8:40). till 2000 the proportion has been significantly changed to 1:15:60, so the proportion points out that the countries with high gdp rate had their gdp rate 60 times higher than the ones with low gdp rate. according to milovanovic, at the moment, only 14 % of world population could be considered as middle class, barely 4 % as upper or rich class and 78 % is considered as low class on the edge of poverty (milovanovic, 2006). there is no need to explain further on these differences. just the fact that there is even a metaphysical chance to live 60 times better is enough to explain why the countries with low gdp rate or with low and middle life standards have high rate of migrations towards countries with high life standards. „side by side with global society development is developing “the global barbarity” (crime, terrorism, insider trading, prohibited substances trading, human trafficking, war and war threats, children and women exploitation, ecological problems, problems with moral norms). as the biggest consequence of globalisation and global society development is “impatience” of some politic and economic power centres. they wish to “speed-up” the process and to impose themselves as global society leaders, they want to take advantage of their starting positions and to create “monopoly” over globalisation. that causes completely realistic and expected reactions of those ones who suffer the most and who are in “outsider position” comparing to the main streams of globalisation (dusanic, 2013, p. 19). if the sovereign countries even try to give a resistance to “global trends” they will get sanctioned. they get both economic and military sanctions. the international laws are violated by isolated political decisions and the influence and authority of the united nations dissolves. democracy and human rights are misused. the big and financially powerful countries impose the political resolutions in small countries; they even establish the dictatorship regimes that mercilessly lead the society into totalitarianism. in future as the experts predict the international competition and apathy will increase. the same thing will happen with national, racial and religious discrimination. the aim of this possible scenario is to reach the complete domination of use and control over the 60 p. mitrović, g. bosković most important world resources, which will encourage the insecurity and fear of individual and social groups around the world. 2. socio-economic genocide of serbs the 20th century crisis in serbia that arose during the 1990s brought to disintegration of former yugoslavia and seriously wounded the production branches of serbian economy in transition. severe political and social problems, like disintegration of yugoslavia, sanctions, aggression, destruction of infrastructure enforced and introduced by nato, are in the roots of inequality in serbia today. the essence of these inequalities is nato’s, inconsiderate and negligent application of so called neoliberal economic policy, denial of the importance of country in defining of main development aims as of their application and control. soon after the october revolution of 2000 serbia faced the steep economic decadence that was systematically encouraged and inspired by imf. the imf used the same pattern as usual whenever it had access and possibility to impact the state’s political economy. the most important goal of the imf as always is protection of financial system stability and its capacity to repay the external debt. essentially the imf represents the creditors or creditor countries and protects their interests. the encouragement of liquidation of state-owned enterprises and withdrawal of the state from economic sphere is the safest way that leads to achievement of already mentioned goal, but that encourages introduction of neoliberal economic model. the economic development public officials instead of concentrating on the establishment of adequate institutional infrastructure and instead of creating and establishing the rules and optimal conditions for long term economic growth they, so called “the serbian experts in economy”, already familiar with the positive and negative experiences of neighbouring countries in transition, are putting the accent on stabilisation, liberalisation and privatisation. the stabilisation, liberalisation and privatisation are basic elements of the original washington consensus. with the revolutionary verve, and introduction not to say intrusion of democracy, started the implementation of neoliberal economic doctrine. the stabilisation is revised to “stable local currency” that reveals the unreal picture of strong serbian economy, and as overrated, it influences the price growth of domestic goods on international market, discourages the export of domestic products and stimulates the import of goods. an additional impact on domestic economy was the reduction of import duties for the foreign countries goods, and even the complete elimination of duties. a foreign capital without the verification of proofs of origin, from different suspicious funds and sources, right after the october changes in 2000 attacked the free serbian market. the funds hurled to serbia because the possibilities of money laundering and its value and asset growth were extremely diverse, without any duty towards the state or towards employees. it is worth to mention that the biggest four domestic banks were closed. it provided the opportunity for foreign countries banks to implement and present to inhabitants and local economy the offensive and aggressive credit policy. the state with its destroyed economy and people eager to have a better life both headed into debts. with high level of foreign currency cash inflow, and with numerous foreign credit lines withdrawals, with privatizations of state property, enterprises, banks, cellular network economic crisis and current problems of serbian family 61 operators, fresh water resources the foreign currency supply was growing and serbia finished with pegged exchange of “strong” local currency “dinar”. export oriented domestic enterprises and enormous state systems that employed thousands of people, started to have a huge financial loses and accordingly to shrink the production volume so people got fired, and with big financial problems they started to lose markets and even to close the companies. the potentates in order to save themselves from revolt of unsatisfied employees and their electoral apparatus they started without any control to pump in the endless financial assets, which end up “in bottomless pit”. a wrong implementation of stabilisation and liberalisation in serbia brought to domestic production suffocation and resulted in enormous increase of unemployment, big national debt, mass and uncontrolled privatisation of state property and resources. but a bigger problem was that the realized incomes were not used in the right purpose. instead of being used to solve the problem of unemployment and to encourage the economy development they were used for current government expenses. it is clear that the economic growth could not be encouraged by increased consumption, especially not by consumption of imported goods as it is case in serbia. the transitional processes in 2001 were applied in phases: privatisation, restructuration of economy, macroeconomic stabilisation, the liberalisation of unregulated export and cost trade, banking sector consolidation and privatisation, initial phase of joining the eu, numerous legal adaptations in every sector of economy and society, numerous tax system and public sector reforms, adaptation of fiscal and monetary policy improvement of banking system efficiency and financial markets development, development of partnership between especially the infrastructural private and public sectors, the regulation of labour market and relations between employer and employees, attempts in levelling down the grey economy and corruption. the introduced reforms generally should improve the credibility of serbia and increase its competitiveness. the same ones should decrease the risk rate of investment. since they were partially and unsystematically applied without any general control or revision and under the influence of strong political factors they just multiplied the negative development effects. in 2008 the global economic crisis, impacted additionally serbian already instable economy and its shaken social and economic activities. at first the crisis existence was negated, and then the optimistic evaluations predicted that the crisis will not hit serbia. crisis was even presented as a good chance for development. unfortunately the crisis effects were not positive at all. with variable intensity they hit the financial and other existing sectors, and negatively reflected in main economic development indicators. the economic recession in 2012 again stopped the recovery of the market. as the result the investment activities decreased, investment resources and capital decreased too, export development slowed down, inflation raised, unemployment increased, external and internal debt of the country increased, inflation weakened the value of local currency “dinar”. other negative effects could be seen in state’s constant need for augmentation of fiscal charges, and decreased motion of bank credit activities. the detailed analysis of the serbian business registers agency’s data published in june 2013 compared with financial data from 2011 and 2012 reveals chronic inefficiency of serbian economy (business registers agency, 2013). the public release of the business effectiveness of our economy states that there is no possibility for profit oriented economy in serbia. 62 p. mitrović, g. bosković a clear affirmation of this statement is a big problem of serbian economy which is incapable of dealing with pilled up business organizations losses from previous period. other indicators of risks and negative effects on future of serbian economy and its development are the data on country’s excessive indebtedness. under the constant increase of accumulated losses, the capital of serbian enterprises dissolves, in order to solve the problem they take credits. the fact is that the companies do not have their assets or capital that represent the difference between assets and duties. so the financing comes from borrowed resources either interest-bearing ones or suppliers’ investments or foreign country legal entities’ investments. another characteristic of already mentioned enterprises’ dealings is the constant increase of expenses which are followed by further accumulation of losses that will probably result in bankruptcy. a tendency of cumulative losses increase and unequal division of financial performances are easily notable in serbian economy. in 2012 the business organizations that ran deficit over the level of capital were in 25.338 of them which is 27,5% of the total number of business organizations (business registers agency, 2013, p. 13).total number of employed people in these companies is 154.293. taking all of this into consideration it is clear that in the nearest future a huge number of people will remain without work. (milicevic, 2013.) there are already too many destroyed enterprises, and too many people who remained without work. in 2010 the industrial production is for 11,4% lower then it was in 1998 during the political and economic sanctions, not to mention the period before the war for example if we compare the period of 2012 and period of 1989 it is lower for 46,7% (38,4%) (sojic, 2015). the absence of any government vision in creation of economic policy, the wrong application of models, suggested by international financial institutions whose politics is based on principles of “washington’s consensus”, brought serbia to the edge of collapse .these protagonists performed economic genocide over serbian economy, country itself and their own population. in his work “neoliberalism transition and crisis” professor jovan dusanic states that the economic doctrine based on washington consensus principles is applied especially supporting the interests of world oligarchy and big businesses with strong financial power, creating the possibility to design the politics, media, to direct the politic economy according to their own interests, without being publically criticized by the small and poor countries. in order to realize its own interests the world oligarchy tends to weaken the national security systems, government institutions and country sovereignty. it tries to replace them with international law and its institutions, and in this way destroys the national economic structures so they become dependent on transitional capital and its interests. the realization of its goal is easier if the country is involved in debts, and it supports a chaotic state of the society, degrades the authority of the state and its institutions, corrupts and demoralizes the national elite, forms many non-government organisations (most of them are financed from foreign country resources), degrades directly or indirectly the main national institutions like church, academy of sciences. it uses mass media to shape and control the public opinion and change the national history facts, and public opinion through the mass media. there are already chosen compradors that will in adequate moment take the country’s key positions, using different means they try to gain and keep as long as they can the strategic politic functions. we are also offered ready-made solutions economic crisis and current problems of serbian family 63 and independent economic advisors from foreign countries. the ideology of this policy is radical neoliberalism.“ (dušanic, 2013, p. 19). 3. socio-economic implications of traditional serbian family degradation a family is considered a social group or a sub-system of one wider social system (state, community, and nation). clearly it is a spot where global economic processes and trends are intertwining that put the family in difficult position full of temptations. modern society and liberal tendencies encourage the need for individual affirmation and ability demonstration. in modern society any person ambition is to have freedom and individuality within family and family relations. it is one of the most important challenges. the important question is how to achieve individual freedom, personal choice and free decision without endangering the position of other family members? patriarchal and traditional families are directly affected by that individuality, independence, and need for every family member personal respect. nowadays serbian families in order to obtain original function and expected roll are faced with numerous difficulties and problems. unfortunately the results of unaccomplished basic function are: dysfunctional matrimonial relations, growth of social pathology like violence, dehumanisation of family relations, family detached, lonely and insecure individuals. in the concept of any country general economic activities the important roll has labour market with its general state, characteristics and tendencies. labour market of the republic of serbia is pointing out high level of unemployment, hidden unemployment and insufficient mobility of manpower. unemployment is one of the greatest and most severe economic and social problems in serbia. it is a cause of poverty and social detachment. poverty affects the family in two ways; firstly due to the poverty they disintegrate quickly and secondly the young can not start their own families in time so they can not fulfil the expected functions like: getting married, giving birth, and giving proper education... as a consequence of modern liberal tendencies arises conclusion that implicates the correlation between already disturbed family relations and social relations. because of its negative effects father loses his authority, the same thing happens with teacher’s or other expert’s authority. it also affects the state and its institutions’ authority. the family relations analysis, as it is explained by political sociologist lj. despotovic, the traditional authority and father’s role in family weakens and dissolves. it makes a vacuum or even a gap in family organisation and its internal harmonious relations. father’s task since the very beginning was to provide for a child safe and secure environment within family. raised in healthy family with a strong father’s role of a social and moral norms bearer, the child is slowly introduced to social system with norms. in this way his proper emotional and intellectual development is supported and encouraged. a child needs a father with strong attitudes, with strong moral beliefs, that applies the norms but respects them too serving as an adequate roll model. anyhow today children have too many rights and they take the positions that do not belong to them. parents become insecure because the society and state with law obligations take away the current traditional and already established positions. the father’s authority nowadays is pretty shaken or even demolished because the institution of a family where once everybody relies on father is destroyed (despotovic, 2014). 64 p. mitrović, g. bosković the economic reasons also take a great part in it. with economic function loss, job loss, incapability of finding a new job in short period, father loses rolls of protector, husband and pedagogue. in such changed value system a father becomes demoralised and he ceases to be the roll model for his descendants and other family members. most of them became depressed and a lot of them committed suicide. some of them became alcohol, drug or even domestic violence addicts.they blamed their own family for their incapability of taking care of already mentioned one. the bigger problem is expansion of violence and aggressive behaviour. families are endangered both by violence within family and violence from their surrounding. the aggressive behaviour is notable among the spouses, or in relation parents towards children or even in relation children towards parents. high rate of family violence is deeply rooted in frustrations, demoralisation, fear, insecurity, difficulties. these are all brought on individual by society and then the individual consciously or unconsciously transmits them on a family. the conflicts are constantly rising between parents and children concerning individuality, freedom, and obligations or roll that they are supposed to have or expected to prove. unsatisfied with the situation within family, constant intellectual pressure make them search and find sanctuary in groups that are exact negation of a family. children and wife represent mirror which reflects man’s failure, and it should be destroyed. in modern society in general and in serbia too the insufficient tolerance within family, egoism, excessive demands for freedom and individuality, as postulates of liberalism, are the most common causes of increased number of divorces. for example in 2013 in serbia comparing with data from 2012, marriage and divorce statistics shows that the number of marriages raised for 5%, but number of divorces raised too for 11%. most of divorced marriages concern married couples with children 55% of them. after the divorce the custody of the dependants or children are usually entrusted to mother (statistical office of the republic of serbia, marriage and divorce statistics in the republic of serbia in the year of 2013, public announcement, 30/06/14). the published data of the usa organization that did the research named “fatherhood factor” show how boys and girls raised in broken families with divorced parents specially the ones without father, have two times more chances to end up in prison, and four times more chance to be in need for professional help for dealing with emotional and behavioural issues. in the usa in families where the father’s authority is marginalised and not important or not present grow up 43% of children; there are even 90% of children that run away from their homes; also 80% of the rapist and people with anger control issues come from such families; 71% of teenage girls that got pregnant are from those families too. the single parent families also bread 75% of adolescents that end up in rehab centres; 70% of juveniles that grew up without father are in correctional institutions and 85% of the young finish in penitentiary (u.s. fatherless statistics). the analysis of the population census data from 2011 the total number of population in serbia was 7.258.753 people (statistical office of the republic of serbia, 2012). the analysis warned about other serious problems like: decrease of the total number of population, clearly visible negative natural birth rate, migrations especially migrations of young and highly educated population. the ones that remain at least most of them are with bad health and emotional condition. all of these caused changes in demographic structure. only in the last few years precisely in the period from 2002 till 2011, the total economic crisis and current problems of serbian family 65 number of citizens in serbia decreased for 241.237 people which is 3,21% of total number of population. table 1 natural movement of the population of serbia, 2002 2013 y e a r p o p u la ti o n i n m id y e a r b ir th s d e a th s n a tu ra l in c re a se m a rr ia g e s d iv o rc e s b ir th s d e a th s n a tu ra l in c re a se m a rr ia g e s in fa n t d e a th s p e r 1 0 0 0 li v e b ir th s t o ta l in fa n ts per 1000 inhabitants 2002 2005 2006 2007 2008 2009 2010 2011 2012 2013 7.500.031 7.440.769 7.411.569 7.381.579 7.350.222 7.320.807 7.291.436 7.258.753 7.199.077 7.164.132 78.101 72.180 70.997 68.102 69.083 70.299 68.304 65.598 67.257 65.554 102.785 106.771 102.884 102.805 102.711 104.000 103.211 102.935 102.400 100.300 790 579 525 484 460 492 460 414 415 413 -24.684 -34.591 -31.887 -34.703 -33.628 -33.701 -34.907 -37.337 -35.143 -34.746 41.947 38.846 39.756 41.083 38.285 36.853 35.815 35.808 34.639 36.209 9.982 7.661 8.204 8.622 8.502 8.472 6.644 8.251 7.372 8.170 10,4 9,7 9,6 9,2 9,4 9,6 9,4 9,0 9,3 9,2 13,7 14,3 13,9 13,9 14,0 14,2 14,2 14,2 14,2 14,0 -3,3 -4,6 -4,3 -4,7 -4,6 -4,6 -4,8 -5,2 -4,9 -4,8 5,6 5,2 5,4 5,6 5,2 5,0 4,9 4,9 4,8 5,0 10,1 8,0 7,4 7,1 6,7 7,0 6,7 6,3 6,2 6,3 source: statistical office of the republic of serbia (2014). statistical yearbook of serbia, p. 36 by the vital statistics analysis in 2011 the natural birth rate was -5,2‰. the natural birth rate was 9‰, and the mortality rate was 14,2‰. these results state out that in serbia in 2011 were born 37.337 babies less then it is necessary for simple reproduction of the population ( statistical office of the republic of serbia, 2014, p. 36). the young do not decide easily to get married and have children. and even if they do decide, they will satisfy only with one child. the decrease of fertility rate is clearly visible if we compare the number of newly born babies and number of women capable of reproduction. thinking of numerous factors that affect the fertility, we can point out most important ones; like socio-economic, cultural factors, intertwined socio-psychological factors. yes it is clear that the fertility is a natural phenomenon but it is affected by all of previously mentioned factors. the total number of fertility rate is under the border line of simple reproduction. for the last ten years it decreased from 1,6 to 1,4 babies per woman, which demonstrates that an average household or average serbian family has 2,86 members. so serbia per a married couple doesn’t have even one whole child (statistical office of the republic of serbia, 2012, p. 25). in serbia rises a kind of paradox which is evident in number of abortions performed in public, state hospitals which are around 100.000 per year. not to mention the statistic number of abortions from private hospitals that is unavailable. anyway it is supposed to be somewhere around 200.000 abortions per year. on the other side there are many married couples that have problem with fertility and are looking for help in order to become parents. 66 p. mitrović, g. bosković in period from 2002 to 2011, the total number of population younger from 15 and older from 65 in percentage varied a lot. the percentage of the young (0-14) in 2002 decreased from 16,1% to 15% in 2011 while the percentage of the old (65 and over) rose from 16,6% in 2002 to 16,8% in 2011. the population quota for people from 14 to 64 rose from 67,3% in 2002 to 68,2% in 2011. during the same period the natural birth rate decreased from 10,4‰ to 9‰, meanwhile the number of fertile women decreased form 24,1% to 22,9%. mortality rate per each 1000 inhabitants rose from 13,7% to 14,2%. the leading causes of death are still cardiovascular and neoplasm diseases concerning both male and female. neonatal mortality decreased importantly from 10,1 to 6,3 dead babies per 1000 live born babies (republic institute for statistics, 2012, p. 25). in serbia many young couples do not even want to procreate and have their descendants. they are convinced that first they have to solve housing and any other problem. they run after their carriers, they wish to have economic independence. young women become much more egoistic, they do not even think of the new life that they should procreate. the average population age in period from 1953 to 2011 increased for 12, 2. an average male and female life span in serbia is prolonged for almost 2 years (from 69,7 years to 71,6 years concerning male population and from 75 years to 76,8 years concerning female population). observing the period from 2002 to 2011 we can notice that the participation of population younger than 20 decreased from 22,3% to 20,7% while the participation of population older than 60 rose from 22,7% to 23,7%. during the same period the average population age increased from 40,2 to 41,5 years. the average age of women in serbia is 42,9 years. it means that the average woman entered in fifth decade of her life. the total number of communities under observation is 145. even 85 of those municipalities are in the stadium of advanced old demographic age, and in 51 of them is noted the last stadium of ancient demographic age. that means that more than 93% of population there is demographically very old (development report, 2010, p. 66). ageing and migrations seriously endanger the rural areas in serbia. the number of working age population is decreasing and side by side is decreasing the capability of sustainable managing of natural resources. the extended volume of mostly aged and economically inactive population in serbia inevitably causes the increase in public consumption especially in areas of health and social insurance and retirement insurance of old individuals. the changes in age structure clearly reflect on the social structure of population because the number of retired people or elderly depending ratio is growing from year to year. in the context of basic economic and demographic characteristics of serbia we can find the information that for the last half century we have eight times more retired people and we can also find the information that the number of dependants makes a third of the total number of population. if this trend continues by the prognosis of the republic bureau of statistics by the 2041 serbia will have 5,5 million of inhabitants, which is relative indicator of 1,7 million or 23, 6% of inhabitants less then it is shown in the census records from 2011 and with much more unfavourable age structure (kupiszewski, et.al. 2012, p. 91). economic crisis and current problems of serbian family 67 table 2 the average age of the population, aging index and the life expectancy of live births in the republic of serbia source: statistical office of the republic of serbia (2012). demography, vital statistics. conclusion the global economic crisis clearly indicates that it is completely necessary to reanalyse the economic patterns and science in general. modern neoliberalism through a doctrine became an ideology, based on values of classic liberal capitalism that ignores any national individuality or characteristic, social responsibility, ethic norms and moral principles. such society organisation system where profit, capital and market are the most important and self-sufficient goals and man with once specified position in society that provided him self respect and security now is brutally degraded and treated as object, as product. the sense of injustice, poverty, social detachment, humiliation, being a cast off with no perspective, treated like product input, insecure and chronically frightened had a deep impact on people’s psychological stability and direct destruction of traditional family. neoliberal globalisation begins with destruction of the family and ends with destruction of complete sovereign country leaving the space for world oligarchy and transnational companies to control and use limited resources of the country like: raw materials, oil, fresh water, cultivated terrains, experts and highly educated personnel, neutral media services. the negative results of applied “transition” strategy, reflected in application of neoliberal economic model, are legal product of contradictions of any capitalistic production manner directed to profit gaining and unpaid work accumulation. that is one of the main reasons of contemporary dramatic situation in serbian economy and even demographic situation. in order to minimise the development potential risks and biologic survival risks in serbia we suggest and indicate the necessity of new economic model introduction. year the average age of the population ageing index life expectancy total male female total male female men children women children 1953 29.4 28.4 29.9 24.1 19.7 8.4 58.7 60.4 1961 30.5 29.6 31.4 28.7 24.4 33.3 62.4 64.9 1971 32.4 31.5 33.3 37.9 33.7 42.3 66.2 70.0 1981 33.7 32.8 34.6 39.7 34.3 45.4 67.8 72.6 1991 34.9 33.9 36.0 51.5 43.9 59.5 68.8 74.4 2002 40.2 39.0 41.5 99.1 84.2 114.8 69.7 75.0 2003 40.3 39.0 41.5 99.5 84.4 115.3 69.9 75.1 2004 40.4 39.1 41.7 100.4 84.9 116.6 69.9 75.4 2005 40.6 39.3 41.8 100.6 84.9 117.2 69.9 75.4 2006 40.7 39.4 42.0 101.4 85.4 118.2 70.6 75.9 2007 40.9 39.6 42.2 103.2 86.9 120.3 70.7 76.2 2008 41.1 39.7 42.4 105.9 89.3 123.4 71.1 76.3 2009 41.2 39.9 42.5 108.6 91.7 126.4 71.1 76.4 2010 41.4 40.0 42.7 111.4 94.2 129.6 71.4 76.6 2011 41.6 40.2 42.9 114.3 96.8 132.9 71.6 76.8 68 p. mitrović, g. bosković serbian modern society “a society of the irresponsible ones” in order to survive has to remember that man and his wellbeing are to be in the focus of economic activity, life promotion, giving birth, creation of healthy patriotism, unselfish love, primal freedom, individual’s valuable creativity. above everything the serbs must remember to respect and praise the holy orthodox church and original moral and traditional values. references bek, u., (2001). rizično društvo [risky society]. beograd: filip višnjić. business registers agency (2013). statement on the 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(2002). policy responses to low fertility and its consequences: a global survey. journal of population research, 19 (1), 1–24. despotović, lj., (2014). bez autoriteta ruši se porodica [the family is distroyed without authority]. www.novosti.rs/.../društvo.395.html:508089-bez-autoriteta-rusi-se-porodica accessed on: 17 november 2016. dušanić, j. (2013). neoliberalizam, tranzicija i kriza [neoliberalism, transition and crisis]. beograd: beogradska poslovna škola. glaze, l.e., & maruschak, l.m. (2010). parents in prison and their minor children. washington, d.c.: bureau of justice statistics. katić, n., (2011). civilizovani uterivač dugova [the civilised debt collector]. wordpress, 6. mart 2011. kupiszewski, m., kupiszewska, d., nikitović, v. 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(2015). izvod iz rada: industrija srbije (1990–2013) [industry of serbia (1990-2013) an excrept from the paper]: “kada je i kako propala industrija u srbiji“. http://www.vreme.com/cms/view.php?id= 1272264, accessed on: 16 november 2016. the republic of serbia, ministry of finance, (2010). development report. u.s. fatherless statistics, http://fatherhoodfactor.com/us-fatherless-statistics/ accessed on: 10 november 2016. undp. (2013). the rise of the south: human progress in a diverse world serbia hdi values and rank changes in the 2013. human development report. http://www.makroekonomija.org/0-dragovan-milicevic/gubici-iznad-visine-kapitala-privrede-srbije/ http://www.makroekonomija.org/0-dragovan-milicevic/gubici-iznad-visine-kapitala-privrede-srbije/ http://www.vreme.com/cms/view.php?id=1272264 http://www.vreme.com/cms/view.php?id=1272264 http://fatherhoodfactor.com/us-fatherless-statistics/ economic crisis and current problems of serbian family 69 ekonomska kriza i aktuelni problemi srpske porodice savremeno društvo i svetska privreda nalaze se u dubokim protivrečnostima postojećih procesa i odnosa, u velikim društvenim nejednakostima, sa neravnopravnim i nejednakim šansama za društveno-ekonomski razvoj, u izraženim sukobima različitih konfliktnih grupa i interesa. nejednakim rasporedom prirodnog bogatstva, ekonomske i političke moći, radikalizovan je problem privrednog rasta i razvoja, pre svega manjih zemalja i zemalja u razvoju. kriza je, danas, u srbiji vidljiva bezmalo u svakom segmentu društvenog života. nezaposlenost raste, baš kao i kriminal,korupcija i razni vidovi društvene patologije. nasilje je sve izraženije i opasnije, a širenjem osećaja besperspektivnosti, mnogobrojni vidovi bolesti zavisnosti sve su učestaliji. obrazovanje je sve skuplje i nedostupnije, a šanse za zaposlenje i društveni uspeh obrnuto proporcionalni stečenom znanju. iz godine u godinu natalitet opada. broj onih koji napuštaju srbiju je sve veći. koreni izrazito loše ekonomske situacije u srbiji ne nalaze se samo u nasleđenim sistemskim problemima, raspadu sfrj i njenog tržišta, sankcijama, agresiji i razaranju privrednih i infrastrukturnih objekata od strane nato pakta, već ponajviše i prevashodno u prihvatanju i bezpogovornom sprovođenju, po srbiju, pogubne ekonomske doktrine, uobličene u konceptu neoliberalnog modela ekonomske politike. u radu, autori, s ciljem minimiziranja potencijalnih razvojnih rizika i rizika biološkog opstanka stanovništva srbije u budućnosti, iznose stav da neoliberalna globalizacija počinje s rušenjem porodice, a završava sa rušenjem nacionalnih država. tu trdnju potvrdjuju aktuelna demografska i razvojna kretanja u srbiji. ključne reči: ekonomska kriza, neoliberalna globalizacija, država, porodica, srbija. plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 12, no 4, 2015, pp. 333 346 protection of competition in the oil and oil derivates market in the republic of serbia  udc 339.13:553.982]:339.137(497.11) milan veselinović 1* , snežana radukić 1 , jelena stanojević 2 1 university of niš, faculty of economics, niš, serbia 2 university of niš, faculty of science an mathematics, niš, serbia abstract. it is generally known that the market represents the overall relationship between supply and demand. the relations between these two are constantly intertwining and are constantly influenced by different factors. depending on their relationship as well as on factors specific to a particular economy, there are different market conditions, such as: monopoly, oligopoly, limited oligopoly, limited competition, perfect competition, etc. the liberalization of the domestic oil and oil derivatives market represents an open space for creating a high-quality competitive relationship. however, the course of strengthening the competitive relationship should be carried out considerably faster. market conditions and competitiveness are in practice determined by the concentration in the observed market. competition is in a particular relevant market expressed by a number of concentration indicators. thus, an important aspect of the analysis of competitiveness intensity in the domestic oil market is measuring the concentration of supply, which will be analyzed in this paper. it can be said that every market is characterized by a certain level of competitiveness among market participants, and through these competitive relationships, their market power permeates. the research uses concentration indicators to show the concentration in the domestic oil and oil derivatives market, its current features and also to analyze the potential of strengthening the competitive relationship in the future. key words: protection of competition, oil and oil derivatives market, concentration indicators, concentration received december 13, 2015 / accepted december 29, 2015 corresponding author: milan veselinović, * ph.d. candidate university of niš, faculty of economics, niš, serbia e-mail: milanruban@yahoo.com 334 m. veselinović, s. radukić, j. stanojević introduction oil and oil derivatives market in the republic of serbia is characterized by a certain level of competitiveness among oil companies. through concentration and competitive market relations, their market power spreads out. the theoretical approach to the study of market power primarily starts from the market structure form, and these forms are numerous. there are different market structures. most of the real market situations include elements, number of participants, conditions and monopoly dominance or perfect competitiveness. oligopoly is one of the market situations, which in terms of number of participants and conditions that rule upon it, lies between monopoly and perfect competitiveness. it is such a market situation where there are little or few sellers who sell similar or slightly different products. if a product offered by oligopolists is homogeneous, then it is a homogeneous oligopoly. if a product offered by oligopolists is inhomogeneous, then there is a heterogeneous oligopoly (zdravkovic, d., (2006); zdravković, stojanovic, b., đorđević, d., stojanovic i. (2004)). thus, oligopoly has been a very common market situation. for instance, in the domestic market, the following industries are adequate examples of oligopoly sugar industry, cement industry, tobacco industry, dairy industry and mobile phones industry. the oil market is also oligopoly. more specifically, as oil is homogeneous product, it is a homogenous oligopoly market. what is typical for this type of market is that companies that operate in this type of market in the long run generate huge profit, and often disable the entry of new competitors. concentration in this kind of market represents an indicator of the level on which the total sales is controlled by a small number of participants and the high level of competitiveness in combination with low concentration level represents a condition to be pursued. however, the concentration in the domestic oil market is not uniform, thus potential competitors are facing with economies of scale, large investments in facilities modernization, investments, effective pricing policy of the leading companies, institutional and political barriers and other similar things (horvath, 1970, 446). in addition to all this, one should bear in mind the experience of oligopolistic companies that can be manifested in their capability of considerably reducing the price of their products or overwhelming the market with their products, which can only discourage potential competitors. from the perspective of placing barriers, an oligopolistic market can act as a market monopoly, especially if there is a common interest and agreement among oligopolists in the long run. what is also interesting is the division of market oligopoly in terms of the distribution of the market share. that is how we have loose oligopoly, when four leading companies in the market have up to 40% market share, and tight oligopoly, the case when the four largest companies have 40 to 50% market share. arrangements can be strong or long-term and short-term or weak, respectively. in order for an agreement to be reached, it is desirable that companies have similar potential, demand conditions and costs (zdravkovic, d., (2006)). one kind of a strong agreement is a cartel. an adequate example of a tight oligopoly based on a cartel principle is the organization of the petroleum exporting countries (opec). in the contemporary market economy, competition law is used to sanction the secret of commercial cooperation, strong and weak agreements on a joint approach with the intention of achieving extra profits and violation of the principle of competitiveness at the protection of competition in the oil and oil derivates market in the republic of serbia 335 expense of business competitors and consumers themselves. these activities are hard to detect, investigate and punish, especially in corrupt countries. hidden and secret agreements are realized in the market by using different signals, for example, a competitor is signaling what price he prefers, and other companies follow him, in accordance with the previously established agreement. in the first part of this paper, the attention is paid to the variables on the basis of which the situation and changes in the domestic oil and oil derivatives market in the republic of serbia is monitored. this market is covered by oil companies. the second part of the paper deals with the application and presentation of metrics and also with the analysis of the concentration level in the domestic oil and oil derivatives market. the analysis of the concentration level has led to the interesting tendencies that occur in the observed market. 1. the turnover in the domestic oil and derivates market in a market economy in the world, there are many companies that make profit and generate income as a dominant company in oligopoly conditions. ibm, procter gamble, general electric, kodak, hewlett packard and other companies achieve a market share of over fifty percent by selling their products. a quite common example is that the percentage of sales of products of certain companies in a particular market ranges between 60 and 70 percent. in serbia, this kind of market structure is characteristic for oil and oil derivatives market, and the dominant company is petroleum industry of serbia (hereinafter nis), regarding retail sale. prior to application of measurement indicators, that is the indicators and analysis of the level of concentration, it is necessary to choose a variable based on which the situation and changes in the domestic market of oil companies will be monitored. data and information regarding turnover, production and costs of oil companies operating in the domestic oil and oil derivatives market is difficult to obtain. there are several reasons for this. first, data protection law provides the right and obligations of oil companies to hold as a secret a good deal of data and pass them only to the legally competent institutions. second, the non-transparency of the majority of legal and economic institutions also further complicate the collection and processing of necessary and available data. thus, availability of the relevant data of interest for the study of business efficiency, concentration, competitive relations and market power is reduced to a low level. objectively speaking, at that very moment, the most suitable variable is the total turnover of oil the company has achieved in the domestic retail market (excluding kosovo and metohia). for the purpose of identifying key trends in the oil market, an overview of the total turnover of fifteen oil companies operating on the territory of the republic of serbia for the period from 2010 to 2014. 336 m. veselinović, s. radukić, j. stanojević table 1 the total turnover of domestic oil companies during the period from 2010 to 2014 source: business registers agency from table 1 that depicts the annual retail turnover of the domestic oil companies, it is clear that nis has the highest turnover on annual basis. the average share in total turnover per year ranges between 54% and 60%, which is a really big market share. the total turnover during the observed period had been increasing at a rate of 18%, except for the last year when a slight drop of 2.5% was recorded. registered name 2010 2011 2012 2013 2014 доо еуро петрол суботица 3,908,874 5,464,054 6,027,370 5,635,528 554,234 доо за трговину и услуге гаспетрол панчево 1,254,885 1,424,032 1,467,994 1,239,017 128,335 петрол доо београд 945,557 1,438,410 2,107,860 4,760,596 4,554,469 еуро петрол транс доо суботица 226,891 243,212 233,656 244,419 234,971 нафтахем доо нови сад 7,684,361 11,066,679 17,677,041 14,511,628 14,525,764 еволуција 2004 доо београд 4,984,100 5,401,846 5,342,950 6,194,219 6,212,478 радун авиа доо нови сад 1,507,597 2,053,630 2,663,442 2,888,821 2,457,867 стандард гас доо нови сад 2,842,420 4,102,700 5,586,532 6,241,883 6,457,817 нафта ад београд 9,422,196 12,616,517 5,568,006 5,061,697 5,002,354 јп транснафта панчево 484,326 464,379 581,967 818,758 658,914 кнез петрол доо земун 18,820,128 31,281,957 40,369,705 37,597,349 38,958,899 лукоил србија ад београд 37,551,658 44,057,626 45,154,451 30,242,523 33,656,847 интермол доо београд мол доо 11,430,785 13,202,373 18,059,526 20,248,316 19,850,411 омв србија доо београд 31,169,935 34,897,696 38,108,709 30,937,667 28,969,747 нис ад нови сад 161,148,850 186,882,958 226,156,906 252,214,729 239,214,757 total turnover in domestic market 293,382,563 354,598,069 415,106,115 418,837,150 401,437,864 protection of competition in the oil and oil derivates market in the republic of serbia 337 table 2 percentage share of the first seven domestic oil companies in total in the period from 2010 to 2014 registered name/year 2010 2011 2012 2013 2014 нис ад нови сад 54.93 52.70 54.48 60.22 59.59 лукоил србија ад београд 12.80 12.42 10.88 7.22 8.38 омв србија доо београд 10.62 9.84 9.18 7.39 7.22 кнез петрол доо земун 6.41 8.82 9.73 8.98 9.70 интермол доо београд мол 3.90 3.72 4.35 4.83 4.94 нафта ад београд 3.21 3.56 1.34 1.21 1.25 јп транснафта панћево 0.17 0.13 0.14 0.20 0.16 source: business registers agency graph 1 percentage share of the first seven domestic oil companies in total in the period from 2010 to 2014 besides the presented data about the revenue growth, and revenue from sales, far more valuable information relates to the tendency of concentration of market power and it can be obtained by analyzing the data in table 2. although, it is evident that the domestic oil and oil derivatives market is oligopoly, the available and presented data indicate that the current market is moving away from theoretical and classical oligopoly. in the reported period, only one oil industry had a share of 54% to 60% of total retail trade, while the first five realized 87% of the turnover in the total turnover in the last five years. table 2 and graph 1 clearly show the turnover realized by large companies. they do this at the expense of smaller oil companies. although there is a tendency of association among private oil companies, growing market power of certain oil companies is more pronounced. 2. concetration indicators in the market and measures in economic theory and practice, there is a relatively widespread misconception that large market share automatically means great market power and violation of competitive relationships. this so-called traditional understanding links market power to market share, considering that profitable price increase is more likely to happen in companies with larger market share than in those who have less market share. the reason for this is the large market share of certain companies in the total turnover. concentration indicators 338 m. veselinović, s. radukić, j. stanojević show the share of every company's total turnover observed on the relevant market. on the basis of the market share of companies the relations among them are formed within a certain relevant market and the degree of concentration on the market is determined. this clearly shows the nature of the relationship of the observed companies. this is why concentration indicators are important. they describe the structure of a market and are often called structural indicators. as such, they are used during the implementation of the antitrust policy measures. the holders of the antitrust policy often rely on the calculated value of this indicator in order to make important decisions regarding the performance of certain companies in the relevant market. they enable the analysis of the current market conditions, taking into consideration the changes that occur in it. as such, we use them to predict and analyze future trends in the market. assessing the relevant market involves its defining both from the geographical aspect, and the aspect of the product that is sold in that market. thus, from the point of view of the participants industry in the particular market, we can distinguish between the relevant product market and the relevant geographic market. the relevant product market can be seen in a narrow and in a broader sense. the relevant product market in the narrow sense means a set of products or services for which the observed participant is specialized, for example production of euro-diesel in the domestic oil market. the relevant product market in the broader sense means a set of products or services for which the observed participant is less specialized, such as energy market in the republic of serbia, that is oil and oil derivatives market, liquefied petroleum gas, oil, and lubricants. furthermore, the relevant geographic market can be understood in a narrow and in a broader sense. if the narrower geographical area, say the territory of the city or region and wider is observed, then we are talking about the relevant geographic market in a narrow sense. if we observe the territory of a state, province or alliance of individual states, then the relevant geographic market in a broader sense is in question. the results of the market power of the company will be considered more precise if they are calculated for the relevant geographic market in a narrow sense, and vice versa. setting boundaries in terms of product and space means defining the framework within which a competition analysis will be performed based on the selected variables, and the relative market power will be estimated. by determining the relevant market, it becomes clear which companies are those that compete with each other in respect of certain products offered in a particular geographic market become known. in the economic theory and practice, there are different methods by the help of which, the relevant market can be defined, and in this paper, the relevant market is clearly framed and defined as the retail market of oil and oil derivatives in serbia. there are numerous concentration indicators that economists use to describe the degree of market restrictions in the most relevant way. the representation of the level of market restrictions depends on market participants and the distribution of market share, sales, incomes, region and other similar variables among them in one market. otherwise, there are a number of indicators that provide a relative image of market concentration within one agricultural branch. the most important are:  concentration ratio;  the herfindahl hirschman index of concentration;  the hannah kay index of domination;  index of domination; protection of competition in the oil and oil derivates market in the republic of serbia 339  the hall -tideman index (hti) and the rosenbluth index;  the comprehensive industrial concentration index;  gini coefficient;  lorenz curve;  uncertainty coefficient and others. taking into consideration the specificities of the of oil and oil derivatives market in the republic of serbia, the advantages and disadvantages of the statistical apparatus, as well as the data we have access to in order to assess concentration, it is necessary to affirm a few concentration indicators in order to determine the level of concentration in the market. this is supported by the fact that the analysis of the results of only one indicator does not indicate clearly the nature of the concentration of the retail market offers. for example, a significant disadvantage with concentration ratio represents an insight into the market shares of smaller companies that bypasses the calculation of this indicator, and certainly affects the industrial concentration. such restrictions are and can be bypassed only by applying the calculation of several concentration indicators. the combination of several concentration indicators creates a clearer image of concentration in a particular market because every concentration indicator is special, but it also complements other indicators with its characteristics. thus, in this paper, the analysis of the market concentration will be based on the use of several indicators of concentration. as seen before, the concentration ratio, the herfindahl-hirschman index of concentration, uncertainty coefficient and comprehensive concentration index have proved to be the most commonly used indicators. therefore, we will use in this paper the four abovementioned indicators. 2.1. concentration ratio index of shares of n companies or concentration ratio (concentration coefficient) represents an indicator that is calculated as the sum of the market shares of n largest companies in the market and as such it is very easy to understand (waldman, e., d., jensen, j., e. (2001)). it can be represented using the following formula in figure 1 (savic, 2000, 4): fig. 1 concentration ratio 1 n n i i cr s    (1) whereby si represents market share of the i company, which is obtained through form: fig. 2 market share of the i company 100 iq si q  (2) whereby qi represents the sales, that is the income of the i company, and q is the overall sales at the level of branches, retail trade revenue (see figure 2). the number of companies that will be included by using these indicators usually ranges between 4 and 10 (n=4-10), and this decision is up to specialized organs that are professionally engaged in monitoring the level of concentration, provided that this 340 m. veselinović, s. radukić, j. stanojević coefficient is used as an official indicator of the limited market. it is believed that taking a large number of companies in the analysis can reduce the analytical significance of this indicator by increasing the value of the index. what ensures the objectivity of this indicator is choosing a small number of companies which have the most impressive offers, thus affecting the conditions of competition mostly. most experts would agree with this, and because of that, companies whose size (income, sales, turnover) influences the concentration of branches are usually taken for the purpose of analysis. it is usual to take four companies cr4. cr4 as a concentration ratio has a value for which there are limits on the basis of which there is a classification of market structures. thus, this paper will cover the four oil companies that we believe influence the concentration in the market mostly. the value of this index ranges from 0 to 100. if its value is 0, then it indicates that it is a market with unlimited number of companies, where the participation of each of them is very small, almost zero. conversely, if its value is 100, it indicates a market monopoly, that is, a highly concentrated industry. in the united states and the european union limit value of this ratio is more or less different, but the value that is greater than 25 generally involves a high degree of concentration of supply, given that in the us, highly concentrated market has a value above 50. table 3 concentration ratio cr4 calculations based on data from table 1 and table 2 year cr4 ∆cr graph 2 concentration ratio cr4 2010 84.7 2011 83.7 -0.98 2012 84.2 0.47 2013 83.8 -0.46 2014 84.8 1.09 the calculation of the ratio has included only four companies. the practice shows that if the calculation took a larger number of oil companies, concentration ratio would have been inaccurate and it would have lost analytical significance. measured by the ratio in concentration, and by the standard both of the european union and the united states, the domestic oil and oil derivatives market is characterized by extremely high concentration. in theory, it is also known that if the value of the concentration ratios is greater than 25, then we are talking about an oligopolistic market. however, if its value is between 25 and 50 then it is a loose oligopoly, and if its value is greater than 50, a tight oligopoly is in question. as the value of the concentration ratios for the four companies is above 50, oil and oil derivatives market has the title of a tight oligopoly. table 3 and graph 2 showed protection of competition in the oil and oil derivates market in the republic of serbia 341 the value movement of cr4 in the domestic oil and oil derivatives market in the period from 2010 to 2014, whereas as the base for calculations, which were percentage market shares were taken from table 2 . all the indicators of concentration, both in this analysis and in general, have certain advantages and disadvantages. for this indicator, the main drawback is that it only shows the total market share of the 4 leading companies in the industry, but not the dispersion of participation among them, which is certainly a major drawback in the detailed consideration of the concentration in a particular market. so, if there are 4 companies in the industry, its value will be 100, the same as if there is only one company. obviously, when there are only 4 companies within a branch, cr4 will be set to 100, regardless of the layout of the market share of these four companies. so we can have cr4=100 for the market in which there are 4 equal sized companies (by revenue), and cr4=100 for the market when there is only one dominant company with a much larger market share than the other three. this is the reason why we will use several indicators in our analysis. 2.2. the herfindahl hirschman index of concentration the application of herfindahl-hirschman index of concentration (hereinafter hhi) provides a clearer analysis of the observed market compared to the previous indicator. this index complements the concentration ratio because it takes into account the difference in size of market share among companies. also, we consider all the companies operating within the industry into this calculation. herfindahl-hirschman index represents the sum of market shares of the companies weighted by their own market share: fig. 3 herfindahl-hirschman index of concentration 2 1 1 ( ) n n i i i i i hhi w s s      (3) whereby wi represents weighting factor and si represents market share of the i company every company is assigned a specific weight corresponding to its market share (wi = si). herfindahl-hirschman index is a convex function of market share, and is therefore very sensitive to inequality in the market share distribution (see figure 3). herfindahlhirschman index respects market share in the industry, except that it focuses on companies that have higher market share, thus the bigger the number of such companies, the higher the growth of this index. its value ranges from 0 to 100 or from 0 to 10,000. a more detailed concentration levels are given in table 4: table 4 the levels of market concentration the value of the herfindahl-hirschman index of concentration values of hhi degree of supply hhi < 1,000 (0.1) low concentration of supply 1,000 (0.10) < hhi < 1,800 (0.18) medium concentration of supply 1,800 (0.18) < hhi < 2,600 (0.26) high concentration of supply 2,600 (0.26) < hhi < 10,000 (1.00) very high concentration of supply hhi > 10,000 (1.00) monopoly source: market concentration, global trends and economics, annual report: econometric 2009 342 m. veselinović, s. radukić, j. stanojević table 5 and graph 3 illustrate the movement of hhi value in the domestic oil and oil derivatives market for the period from 2010 to 2014, whereby the percentage market share from the table 2 were taken as the basis for calculation, that is, the percentage market share of seven oil companies that stood out by their turnover. table 5 herfindahl-hirschman index calculations based on data from table 1 and table 2 year hhi/ххи ∆hhi/∆ххи graph 3 herfindahl-hirschman index 2010 3360.4 2011 3133.1 -227.28 2012 3286.1 153.02 2013 3838.5 552.31 2014 3793.4 -45.01 herfindahl-hirschman index of concentration of market supply of oil and oil derivatives in the republic of serbia (without data for kosovo) in the period from 2010 to 2014 ranged from 3360 to 3794. an offer concentrated like this indicates that from the theoretical aspect, oil and oil derivatives market is characterized by a high level of the limited market. based on its value, the domestic oil and oil derivatives market is classified as the market in which there is a very high supply concentration by the participants to the supply side. there is a gradual growth of this indicator, indicating the growth of concentration in the domestic oil market. the calculation base is taken from table 2 market share percentage and concentration coefficients are calculated from it. 2.3. uncertainty coefficient uncertainty coefficient belongs to the information theory, whose purpose is to evaluate the level of certainty of every decision, and can therefore be used to measure the certainty or uncertainty in different market structures. uncertainty coefficient focuses on the degree of instability that exists in some branches of agriculture. it is obtained through this form (see figure 4): fig. 4 uncertainty coefficient 1 1 log n i e ii e s s         (4) whereby the si stands for market share of i company expressed in relative numbers. if the value of the uncertainty coefficient is zero, then the market situation is monopoly. a company that is monopolistic actually owns the entire market offer and there are no substitutes for its product. if the value of the uncertainty coefficient is equal to the natural logarithm of an n number, where n is the number of companies (companies protection of competition in the oil and oil derivates market in the republic of serbia 343 of the same size) in the observed market, then its value indicates that it is a market with a perfect competition. the uncertainty coefficient can be decomposed as the uncertainty coefficient within different groups, but also between different groups (lipczynski, j., wilson j. and goddard j. (2009)). thus, in a situation when there is a group of companies of different sizes, different ownership structures, various industries etc., its practical application comes to the fore. uncertainty coefficient does not have an upper threshold value and it varies depending on the number of companies in the observed industry. table 6 uncertainty coefficient calculations based on data from table 1 and table 2 year ke ∆ke graph 4 uncertainty coefficient 2010 1.257 2011 1.298 0.034 2012 1.225 -0.067 2013 1.119 -0.105 2014 1.149 0.030 uncertainty coefficient of the domestic oil and oil derivatives market in 2010 amounted to 1.257, while in 2014 its value was much less, amounting only 1.149. from table 6 and figure 4, we can clearly see a slight drop, whereby a significant decline was recorded in 2013. gradually moving away from the coefficient upper limit (1.950) only indicates a further alienation of this market from perfect competition. if we take the value 0 to stand for the market monopoly, and the value 1.950 to stand for the perfect competition, then the value of 1.149 clearly indicates a tight oligopoly, as the values of the abovementioned indicators have also confirmed. 2.4. comprehensive concentration index this index is also known as horvath index (horvath, 1970). comprehensive concentration index was created as a result of criticism of discrete and cumulative indicators of concentration. some theorists have criticized this index for giving too much importance to large companies in the industry, while the latter was criticized for underestimating the importance of large companies and attributing the same importance to them as to small companies (gini coefficient). this index is calculated using this simple form: fig. 5 comprehensive concentration index 2 2 (2 ) n l j j j cci s s s     (5) whereby i=l and j = 2,3, .. n and n a number of companies in this branch, and si and sj represent market shares of the i and j companies (see figure 5). also, si represents the 344 m. veselinović, s. radukić, j. stanojević market share of the biggest company, and sj represents the market share of other companies. this index has primarily been focused on measuring imbalances in the distribution of market share, and is very similar to lorenz curve and gini coefficient and that is the reason why these two indicators are not used in this paper. table 6 comprehensive concentration index based on data from table 1 and table 2 year сси/сикг graph 5 comprehensive concentration index 2010 0.61430 2011 0.59449 2012 0.60533 2013 0.64299 2014 0.64240 table 7 and graph 5 represent the movement of index values relating to the relevant oil and oil derivatives market for the period from 2010 to 2014. apart from the fall recorded in 2011, the index recorded a gradual growth. as the value of this index ranges between 0 and 1, where 0 represents perfect competitiveness and 1 stands for monopoly, the obtained values in the table for the observed period suggest that the existence of a tight oligopoly in the relevant market will not be changed suddenly. the potential changes in the market would be appearing gradually and over a longer period of time. for the oil and oil derivatives market as a whole, all of the applied concentration indicators point to the existence of concentration to some extent. some of these indicators point to a strong concentration, while others at a moderate concentration. based on everything abovementioned, we can conclude that there is a tendency towards increasing concentration in the relevant oil and oil derivatives market, but there are no credible evidence that there is an agreement and monopolistic treaty among participants. conclusion the tendency to increase the concentration is the result of the increased commitment of oil companies for better business connections and better performance. situation in the domestic oil and oil derivatives market can be described as oligopoly and due to the certain market relations, it can be characterized as tight oligopoly. therefore, the results of this study suggest that there is an existence of concentration in the relevant market, thus there is a serious possibility for the formation of agreements and arrangements between competitors. commission for protection of competition is fully responsible for discovering these arrangements. namely, if in the near future, the flow of strengthening the concentration in the oil market continues or even becomes stronger, combined with the economic growth and living standards improvement, the abuse of a dominant position is likely to occur. the problem is further complicated taking into consideration all companies operating in the domestic oil and oil derivatives market. in the observed relevant market, there is an protection of competition in the oil and oil derivates market in the republic of serbia 345 oligopoly with the dominant firm where one company has a large market power when compared to their competitors in the market. as such, the practice has so far shown that there is a strong possibility that the company will abuse its market position towards suppliers, customers and competitors. this kind of situation in the domestic oil and oil derivatives market is subjected to the anti-monopoly policy of both domestic and foreign legislation. commission for protection of competition should pay special attention to the policy of the retail price formation. appropriate implementation of the regulation for forming prices in the oil and oil derivatives market is only possible under the watchful eye of the commission, because the chances of an agreed performance in the relevant market are really big, which is supported by indicators. in this context, we draw attention to the potential for the agreed performance and the agreed price. the oil company, which is without a doubt a leader in the domestic oil and oil derivatives market by all accounts is petroleum industry of serbia. however, nis has been a state oil company until recently, so it continues to behave as a company that pursues a responsible policy towards the state budget and society and has not yet misused its dominant position. if the agreement is reached, tight oligopolies will achieve maximum of the common benefit that is greater than the individual ones. by connecting several companies, a group of common interest arises and it exceeds all the individual interests. dominant companies, such as nis, have lower production costs. they possess advanced technology, quality management, have been present in the market for a long time and have strong support from the government. also, they have a superior product or service a product that customers are familiar with for a long period of time and for some specific reasons they are devoted to this product. by connecting multiple companies, a group of common interest arises and it surpasses individual interests. in order for a company to become a dominant one, it is necessary to have a market share of 40 percent or more. therefore, the boundary between the monopoly and oligopoly is very faint. the boundary is particularly poorly visible due to the fact that both with monopolists and the dominant firm, the demand curves and their elasticity are pretty similar, but also because of the imperceptibility of the competition of smaller companies. pursuant to article 47 of the law on protection of competition ("rs official gazette", no. 51/09) and the decision of the council of the commission adopted in april 2010, commission for protection of competition from april 2010 to september 2011 analyzed the overall situation of competition in the market. what was analyzed was import, processing, wholesale and retail trade in the domestic oil and oil derivatives market for the period 2008 to 2010. this analysis had a special significance because the impact of price movements of goods in the market in all economic areas in the republic of serbia was really big. alliance for the commission for protection of competition very quickly decided that in the future, an analysis of oil and oil derivatives market in the segment of retail trade and wholesale trade should be conducted for each preceding year. the results of continuous sectoral analysis gave statements, as follows: the report on the analysis of the market situation, processing, wholesale and retail for the period from 2008 to 2010; the report on the sectoral analysis of the market, wholesale and retail trade in oil derivatives in 2011; the report on the sectoral analysis of the market, wholesale and retail trade of oil derivatives in 2012 and the report on the sectoral analysis of the market, wholesale and retail trade of oil derivatives in 2013. this work, with its own results, clearly supports and complements certain results above mentioned. acknowledgement: the paper is a part of the research done within the project 44007 by ministry of education and science of the republic of serbia 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(2000), тржишне структуре у југословенској индустији, индустија бр. 1/4/-2000, економски институт; београд, стр. 4 17. zeigenfuss, d., (2000), measuring performance, internal auditor, vol. 57, issue 1: 18-27.. zaštita konkurencije na tržištu nafte i naftnih derivata republike srbije opšte je poznato da tržište predstavlja sveukupni odnos ponude i tražnje. odnosi ponude i tražnje se stalno prepliću i pod stalnim su uticajem različitih faktora.. u zavisnosti od njihovog odnosa i fakora karakterističnih za određenu ekonomiju javljaju se različita tržišna stanja: monopol, oligopol, ograničeni oligopol, ograničena konkurencija, savršena konkurencija itd. liberalizacijom domaćeg tržišta nafte i naftnih derivata otvoren je prostor za izgradnju kvalitetnih konkurentskih odnosa. međutim, tok jačanja konkurentnih odnosa bi trebao da se odvija znatno brže. tržišna stanja i konkurentnost u praksi su determinisana koncetracijom na posmatranom tržištu. konkurentnost između privrednih subjekata se na određenom relevantnom tržištu izražava brojnim pokazateljima koncetracije. prema tome, važan aspekt analize intenziteta konkurencije na domaćem tržištu nafte jeste merenje koncetracije ponude, a što će se u ovom radu i učiniti. može se slobodno reći da svako tržište karakteriše određeni nivo konkurentnosti između učesnika na tržištu, a kroz konkurentske odnose prožima se i njihova tržišna moć.u radu se pokazateljima koncetracije prikazuje kakva je koncetracija na domaćem tržištu nafte i naftnih derivata, kakve su njegove trenutne odlike i analizira potencijal jačanja konkurentnih odnosa u budućnosti. ključne reči: zaštita konkurencije, tržište nafte i naftnih derivata, pokazatelji koncentracije, koncetracija. facta universitatis series: economics and organization vol. 18, no 4, special issue, 2021, pp. 357 367 https://doi.org/10.22190/fueo210618025m © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper value-based management, long term sustainability and corporate social responsibility1 udc 005.52:330.133.1 dejan malinić university of belgrade, faculty of economics, belgrade, serbia orcid id: dejan malinić https://orcid.org/0000-0001-5525-1278 abstract. today’s companies, especially large multinationals, are supposed to be financially successful in accordance with the shareholders’ expectations, to operate in compliance with the requirements of sustainable development, taking into account the interests of future generations, as well as to act in a socially responsible manner, serving the interests of key stakeholders, including the interests of the community. in such circumstances, managers are expected to create enough value to satisfy all these interests. the adoption of value-based management (vbm) approach has contributed to a better understanding of shareholders and managers and the alignment of their interests. in this paper, we analyze the compatibility of vbm with the requirements of other stakeholders, including the requirements regarding sustainability and corporate social responsibility. in this context, it could be said that a broader concept of vbm further enhances the interestbased logic behind the corporations’ functioning, but at the same time it enables the integration of the requirements related to sustainability and corporate social responsibility. key words: value-based management, value creation, sustainability, corporate social responsibility, growth jel classification: m14, m40, g30, l21, q01 1. introduction in today’s world, the issues of sustainability and corporate social responsibility come to the fore more explicitly than ever before. global challenges such as climate change, received june 18, 2021 / revised august 06, 2021 / accepted august 14, 2021 corresponding author: dejan malinić university of belgrade, faculty of economics, kamenička 6, 11000 belgrade, serbia e-mail: dejan.malinic@ekof.bg.ac.rs https://orcid.org/0000-0001-5525-1278 mailto:dejan.malinic@ekof.bg.ac.rs 358 d. malinić environmental protection, depletion of natural resources, high social costs, occasional crises, including the latest covid-19 pandemic cause a major blow to economic activity. the magnitude of these problems, which affect companies, national economies and global economy, and the feeling of helplessness as a result of the failure to resolve them more efficiently are particularly troubling. in this paper, we address the issues of corporate sustainability (cs), corporate social responsibility (csr) and the concept of value-based management (vbm). corporate sustainability is a prerequisite for the survival and continuity of companies, corporate social responsibility actualizes the company as a socio-economic institution, while vbm approach is aimed at making the process of value creation more feasible. obviously, the importance of individual issues is not called into question. we rather seek to find out whether and how they could be interlinked in order to preserve the logic behind the corporate economy functioning, while simultaneously respecting the social responsibility. this is related to the reexamination of key corporate goals and their prioritization. the current global crisis caused by the covid-19 pandemic has further highlighted the topic of balancing the interests of various stakeholders. on the one hand, in the situation where social costs have increased significantly, the crisis has explicitly reinforced the importance of corporate social responsibility. on the other, when a strong focus is simultaneously placed on the company’s continuity and need for value creation, then sustainability becomes a matter of central importance. in such circumstances, balancing different interests undoubtedly becomes more complex, but we believe that the question of setting the priorities from a wide spectrum of goals turns out to be much clearer. the structure of the paper is suited to the intention to recognize the importance of the connection between value-based management, long term sustainability and corporate social responsibility. in the first part of the paper, the emphasis will be on valued-based management and valued based metrics, whereby vbm metrics will be seen as an instrument to help managers in making decisions that enable value creation. in the second part, there will be a broader interpretation of value-based management, which should show that value creation is not only in the interest of shareholders, but also the interest of other stakeholders. finally, in the third part of the paper, the focus will be on the reexamination of value-based management in the context of long-term sustainability and corporate social responsibility. 2. valued-based management and valued based metrics globalization of goods and services markets, internationalization and deregulation of capital markets, outstanding development of information technologies, higher standards of product and service quality and stricter regulatory requirements with respect to environmental protection have created major challenges in managing corporations. besides, if we take into account an increased role of institutional investors and threats of hostile takeovers, then it becomes obvious that managers are under tremendous pressure to maintain the competitive advantage of companies and their ability to generate expected returns. the awareness of the risks that in such circumstances managers may not act in the best interest of shareholders has paved the way for the concept of value-based management. vbm has its roots in the agency theory. the concept was created in response to the dysfunctional behavior of managers in situations where they, as agents, are in an informationally superior position in relation to shareholders. in these conditions, managers tend to pursue their own interests at the expense of shareholders’ interests. this situation first leads to the value-based management, long term sustainability and corporate social responsibility 359 agency problem, and then to agency costs that undermine a company’s performance and its market value. moreover, the managers and shareholders attitudes toward risk may be different, which may also provoke the behavior that is inconsistent with the best interest of shareholders (ameels et al., 2002, pp. 5-6). in this regard, vbm was created to alleviate the problem of aligning the goals and interests of shareholders and managers, encouraging managers to think and act in the interest of shareholders. we could agree with j. knight to vbm “instills a mind-set where everyone in the organization learns to prioritize decision based on their understanding of how those decisions contribute to corporate value” (young & o`byrne, 2001, p. 18). in this regard, “it aligns strategies, policies, performance, measures, rewards, organization, processes, people, and systems to deliver increased shareholder value” (black et al., 1988, p. 292). vbm has two distinctive characteristics. first, it is oriented to value creation, which represents a significant shift relative to the accounting approach and measures of a company’s performance. its application involves raising the bar significantly as regards the criterion which differentiates successful from underperforming companies. this threshold implies that, in addition to common expenses included in the income statement, the opportunity cost of equity, which is equal to the returns that would be generated by investing in companies with a comparable risk, should also be covered. second, a different perception of a company’s success reveals that vbm is primarily focused on shareholders’ interests, which basically means that the paramount goal of corporations is shareholder value maximization. therefore, managers need to demonstrate the ability to create shareholder value, which further implies that only under such conditions can they be entitled to bonuses and other privileges. vbm pyramid, which clearly points to the strategic importance of the shareholder value creation goal, is presented in figure 1. fig. 1 value-based management pyramid sources: ashworth, 2000, p. 42; knight, 1998, p. 3., in: holler, 2009, p. 19 360 d. malinić the fact that the shareholder value creation is positioned at the top of the pyramid suggests that it represents the primary goal of a company and a basis for the setting of value-based strategy. strategy formulation, its implementation and performance control require underpinning vbm metrics, so there is a need to set up value-based performance measurement. a logical prerequisite for the efficiency of vbm involves ensuring alignment and providing guidance for corporate processes, as well as coordinating operating decisions in such a manner that all activities are aimed at the accomplishment of value creation goal. all these activities together are transforming vbm into a corporate culture (holler, 2009, p. 19). this way of looking at the corporate purpose appears quite provocative because the company’s goals do not take into account the interests of other stakeholders. such an approach seems to overlook the fact that a corporation is actually a coalition of various constituencies which bring some inputs into that coalition with the intention of achieving their objectives. we hereby refer to managers and other employees, customers, suppliers, creditors, government and local community. the stakeholder theory extends the scope to other constituencies as well and, inter alia, draws attention to the risk that shareholder value creation might occur at the expense of other stakeholders. for example, the payment of too high dividends, excessive borrowing, the implementation of high-risk projects and similar activities may lead to shareholder value creation, but they may also expose creditors to a greater risk and jeopardize their interests. fraudulent reporting may lead to better shortterm performance, but the accumulation of hidden losses will certainly do great harm to investors who will lose dividends and invested capital, employees may lose their jobs, while the government may be deprived of tax revenues. a local community may suffer damage from the use of obsolete technology and the society from environmental pollution and high social costs. therefore, it is emphasized that a corporation has a more profound purpose than just making money for its shareholders. so, unlike vbm, which assesses a company’s success based on its ability to generate long-term returns to shareholders, the stakeholder theory evaluates a company’s performance based on its contribution to all stakeholders, including the community (wallace, 2003, p. 120). of course, defining the corporate purpose in this way, at least at first glance, sounds far better than insisting on the dominance of only one interest group (shareholders). the application of vbm concept also requires a suitable vbm metric. bearing in mind that vbm entails a different management philosophy which focuses on value maximization, its associated metric differs from traditional one, predominantly based on the use of accounting measures. the imperative of shareholder value creation calls for the calculation of the cost of capital that needs to be covered. the logic behind the creation of value added implies a need to cover not only interest expenses, but also the above-mentioned opportunity cost. on the other hand, incorporating the interests of all stakeholders and embracing the concept of social responsibility result in a necessity to complement shareholder value added measures with market value added measures. in this paper we only provide an overview of a wide range of available options (figure 2). the systematization of the presented measures is in accordance with the understanding of the company’s goals. accounting measures (stand-alone or combined with market measures) correspond to the beliefs that income is the primary goal of a company, measures of economic value added reflect the philosophy of creating shareholder value, measures of market value added enable the integration of the broader interests of different stakeholders, while the cash flow-based measures take part in each of the mentioned groups of measures. furthermore, we must keep in mind that these measures are necessary both in the stage of performance budgeting and in the stage of control of the achieved performance against targets. value-based management, long term sustainability and corporate social responsibility 361 fig. 2 performance measures systematization  see more about these indicators in: malinić et al., 2019, pp. 85-150. source: author however, some measures, such as eva, go beyond the scope of a simple “metric”. eva is not just a measure of a company’s performance. it plays a central role in a strategy formulation process (since managers are supposed to strive to maximize the company’s stream of future evas), capital allocation toward value-added investments, aligning the management compensation with the interests of shareholders, facilitating communication between managers at operating unit levels as well as the communication with the capital market (young & o`byrne, 2001, pp. 18-19). of course, the logic of calculating individual measures follows the logic of setting goals that are to be achieved. despite the fact that performance measures are highly important, we must not forget that they do not create value in themselves. in other words, even the most excellent measures cannot help companies that lack an attractive production program, make low-quality products, have no customers or ignore demands of other key stakeholders. we could agree with the opinion that today we are witnessing a kind of “metric mania”, but the essential purpose of metrics is “...to help managers make value-creating decisions and to orient all company employees toward value creation” (copeland et al., 2000, p. 55). at the core of vbm approach lies the effort to create value added by managing value drivers. hence, the successful implementation of vbm requires the management to have the ability to identify value drivers and manage them in a way that leads to value creation. also, value drivers can be found at different levels. for example, in the case of eva, key value drivers at the first level include return on invested capital (roic), weighted average cost of capital (wacc) and invested capital. this means that value could be created by increasing roic, reducing wacc, increasing investments with positive net performance measures traditional accounting and market measures profitability indicators financial structure indicators cash flow based indicators market values based indicators economic value added measures residual income (ri) (economic profit ep) economic value added (eva) readjusted economic value added (reva) cash economic value added market value added measures market value added (mva) excess return (er) future growth value (fgv) created shareholder value (csv) cash flow-based measures cash flow return on investment (cfroi) free cash flow (fcf) shareholder value added (sva) total business return (tbr) 362 d. malinić present value, as well as by disinvesting or selling assets that do not contribute to the creation of value added. however, even the foregoing steps do not suffice to ensure successful management. if we follow the line of return on invested capital, then at the second level we can see that roic, as a broader performance measure, also has its own value drivers, including profit margin and turnover. revenues are an important determinant of both value drivers (profit margin and turnover). a more thorough analysis shows that revenues are determined by market size, market share, sales prices, and sales mix. the situation is similar with other value drivers that determine eva or some other measures of value. in the context of vbm approach, the managers must know what is behind each value driver and take actions that create value. managers must adopt a value-based mindset, which directs their attention to value drivers rather than to eva score. 3. the broader interpretation of value-based management after all, the question arises as to whether vbm is in conflict with the requirements for satisfying the interests of all stakeholders. this issue is closely related to the answer to the question as to whether it is possible to create shareholder value without taking into consideration the claims of other constituencies. anyway, there is an additional problem here. when it comes to multiple goals (from the perspective of various constituencies), then we might ask what would be a priority (decision criterion) in conflict situations where the interests of different stakeholders collide. value creation is important for any profit-oriented organization, and therefore indisputable. however, putting a strong focus on shareholder value creation does not necessarily mean ignoring the interests of other stakeholders. it is just not possible, as ignoring the customers’ interests concerning design, functionality, provision of after-sales services and product quality obviously cannot lead to shareholder value creation. the same goes for other constituencies, including the community as a whole. in fact, we would rather say that the best way to satisfy the shareholders’ interests is to provide that the interests of other stakeholders are met. on the other hand, when it comes to the tradeoffs in the decision-making process, i.e. when interests collide, the situation appears to be much more complex. in such circumstances, while publicly advocating the idea of “balancing the interests of all stakeholders” some managers might actually cover up the company’s poor performance and bad investments (rappaport, 1997, p. 7). if there is a great number of goals, it becomes more challenging to make optimal decisions and control managers’ behavior. shareholder value creation stands out as the best criterion for decision making because it represents a clearly defined goal, which enables to make rational decisions that lead to an increase in value. the efficient use of resources should enable the generation of return that exceeds the total cost of capital (ameels et al., 2002, p. 11). jensen points out that “without the clarity of mission provided by a single-valued objective function, companies embracing stakeholder theory will experience managerial confusion, conflict, inefficiency, and perhaps even competitive failure” (jensen, 2001, p. 9). undoubtedly, stakeholders also tend to be very sensitive to the management’s failure to create value. however, all this does not necessarily mean that vbm is irreconcilably opposed to the stakeholder theory. in this regard, jensen sees a possibility that vbm may embody some elements of the stakeholder theory, calling that form “enlightened value maximization” or value-based management, long term sustainability and corporate social responsibility 363 “enlightened stakeholder theory”. this theory “…uses much of the structure of stakeholder theory but accepts maximization of the long-run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders” (jensen, 2001, p. 9). wallace also supports the idea of the complementarity between vbm and stakeholder theory, emphasizing that each key stakeholder could be considered as value driver. nevertheless, value creation remains the predominant goal (wallace, 2003, p. 122). speaking of the corporate form of business activity, one should not neglect the fact that returns have to be risk-adjusted. in other words, the hierarchy of interests with regard to the correlation between return and risk must be preserved. for example, in the context of the risk borne by the company’s constituencies, the greater returns to creditors in comparison to the returns to shareholders would make no sense. besides, this situation cannot be sustainable in the long run. if such an environment even existed, then the interest of shareholders as providers of the riskiest capital would vanish, so there would be no primary issues and, consequently, no trading material for the secondary capital market. in addition to all previously mentioned issues, we should bear in mind that benefits are not distributed exclusively to shareholders. in different phases they are also distributed to other stakeholders: to customers by delivering the products of required quality, to employees in the form of monthly salaries, to creditors through interest payments, to suppliers by making payments within agreed deadlines, while shareholders participate in the created value through dividends and capital gains. all this is possible only if value is created. the problem lies in the fact that value distribution is largely understood as the distribution of generated income which, formally and legally, belongs to shareholders. at the same time, it seems to be forgotten that in this case the interests of other interest groups must have been settled before. clearly, there will be no income for distribution if a company does not pay off its liabilities to suppliers, ignore the customers’ requests, does not pay interest to creditors or taxes to the government. so, it turns out that as long as vbm enables an efficient internal capital allocation and creates value, it suits not only the interest of shareholders, but also the interest of other stakeholders. 4. reexamination of value-based management in the context of long-term sustainability and corporate social responsibility sustainability, as a global imperative, along with sustainable growth and corporate social responsibility at the company level are essential features of the environment in which companies operate. economic responsibility has been a primary concern of the companies operating in a market economy, but it is obvious that in today’s business environment companies’ activities are also becoming a socio-economic phenomenon. “though society expects business organizations to be profitable, as this is a precondition to their survival and prosperity, profitability may be perceived as `what business does for itself,` and obeying the law, being ethical, and being a good corporate citizen may be perceived as `what the firm is doing for others`, society or stakeholders” (gal et al., 2018, p. 6). sustainable development is often defined “... as development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (wced, 1987. p. 43). it is originally based on the requirement for balancing the exploitation of non-renewable and renewable natural resources with the needs of economy and society in the long run. if the use of natural resources exceeds the capacity for their renewal, that leads 364 d. malinić to unsustainable consumption of the resources that belong to future generations and, consequently, to intergenerational inequality. speaking of growth from a macro perspective, it has been emphasized “… that growth should be smart (implies the development of a knowledge-based economy), sustainable (calls for promoting a more efficient use of resources, competitive economy and corporate social responsibility), and inclusive (supposes the equal opportunities for everyone, high level of employment, social protection, and fight against poverty)” (malinić, 2019, pp. 57-58). however, our attention is focused on the issue of sustainability at the level of business entities. in this case, the issue of sustainable growth could be addressed in a more concrete manner. first, sustainable growth implies cautiously differentiated financing (due to risks, cost of capital and the effect of financial leverage), reasonable income distribution policy (relating to dividends and the portion of income that will be retained in the company), and the required level of operating efficiency (to ensure expected roic). second, when it comes to sustainable growth, vbm approach goes a step further regard to both of required returns and the use of metric. the relationship between roic, eva, mva and growth rate could be expressed as follows: 𝑴𝑽𝑨 = (𝑅𝑂𝐼𝐶 −𝑊𝐴𝐶𝐶 ) 𝑥 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑊𝐴𝐶𝐶 −𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒 (1) growth is deemed to be attractive only if roic is greater than wacc. it enables to create value for shareholders as well as for other constituencies. therefore, “positive expected returns spreads are the source of value creation, and negative expected returns spreads are the source of value destruction” (hawawini & viallet, 2007, str. 530). obviously, growth does not always lead to value creation. “sometimes, high-growth companies may even destroy value. by contrast, companies with lower growth may create value. only the growth that is accompanied by a positive spread can generate value” (malinić, 2019, p. 59). sustainable growth based on vbm mindset enables the fulfillment of economic responsibility in terms of creating value for key stakeholders. nevertheless, this is not enough for a company to operate successfully in a complex environment. another important dimension is corporate social responsibility. csr implies that companies’ activities should always be considered in the context of their impact on the community and environmental protection for the purpose of ensuring long-term sustainable development. this further involves balancing the needs of society and other stakeholders with the needs for making a profit. such behavior goes beyond the legal obligations of companies and one-dimensional corporate goals. as such, csr is based on the respect for moral values and ethical behavior, and implies a broader perspective of the role and importance of companies in the society. there are moral and economic reasons behind the commitment to embrace social responsibility. moral reasons stem from the belief that the goal of “making money” is too narrow and that the community expects far more from companies. besides, it is an undeniable fact that companies are responsible for the pollution of air, water and soil and the disposal of toxic substances, so it would be fair that they bear a portion of the costs of environmental damage (mowen & hansen, 2011, pp. 688-689). moreover, responsible behavior means “doing more with less” (producing more output with less consumption of natural resources and less environmental pollution) and moving towards cleaner production and environmentallyfriendly processes. value-based management, long term sustainability and corporate social responsibility 365 economic arguments in favor of social responsibility seem quite convincing. given that vbm approach calls for the efficient allocation of resources and creation of more value for all stakeholders, it could be concluded that vbm approach is also compatible with the requirements for environmental protection and the fulfillment of other needs of the society. orlitzky, schmidt and rynes, analyzing 52 studies examining the link between corporate financial performance (cfp) and corporate social responsibility, concluded that csr is profitable for companies. the results of the analysis have shown that (1) there is a positive correlation between csr and cfp, (2) the relationship tends to be bidirectional and simultaneous (companies with better financial performance spend more on socially responsible activities, but such activities help them to be even more successful) and (3) reputation appears to be an important mediator of the relationship (orlitzky et al., 2003, p. 427). based on the analysis of 42 studies which also focused on the relationship between csr and cfp, wang, dou and jia showed that there is a positive relationship between csr and cfp whereby it was confirmed that csr improves cfp, but a similar impact was not confirmed in the reverse direction. furthermore, the authors have concluded that csr has greater social visibility in developed countries with strong institutions and developed capital markets, than in the case of companies in developing countries (wang et al., 2016). another research study analyzed 120 companies belonging to the dow jones sustainability indices (djsi) and 120 non-djsi companies (all from north america, similar in size and from related industries). the authors have found that the companies from the djsi have a higher gross profit margin and greater return on assets than non-djsi companies. they also believe that higher return on assets has a long-term character associated with sustainability (byus et al., 2010). let us add “that the u.s. and european companies that created the most shareholder value from 2007 to 2017 measured as total shareholder return – have shown stronger employment growth” (koller et al., 2020, p. 13-14). an ever-increasing number of companies grasp the importance of social responsibility and the necessity of bearing a portion of social costs. so, they think proactively, and socially responsible behavior is becoming an integral part of their strategy. a one-sided observation of the issue of csr, i.e. from the perspective of only one stakeholder group, obscures the reality of companies’ functioning. at first glance, it seems that providing assistance to the community through various projects and donations may reduce returns to shareholders, giving more favorable terms to suppliers may partially spill over to customers in the form of higher prices, and overly generous compensation packages may mean less value left to other stakeholders. however, a more thorough analysis shows that these activities also bring some benefits. helping the local community may result in increased sales, better negotiating position, more favorable reputation, exemption from local taxes, etc. providing better terms for suppliers may contribute to optimal long-term supply contracts, better quality of production inputs and greater customer trust in product quality. investment in employees could help retain and recruit a high-quality workforce, which could have a substantial impact on the creation of value added. it is obvious that stakeholders are interdependent, i.e. creating value for one stakeholder at the same time may also signify creating value for other groups (freeman & dmytriyev, 2017, p. 13). incorporating csr into a company’s strategy as a means of creating long-term value leads to the conclusion that vbm actually directs a company to a win-win situation (martin et al., 2009, pp. 116-117). companies that invest in csr projects can simultaneously achieve both goals: to be socially responsible and to make a positive impact on value creation through these activities. 366 d. malinić 5. conclusion the environment in which today’s companies operate has significantly changed. companies are increasingly seen as socio-economic institutions whose role does not boil down to just profit making. in this regard, managers must take into account broader social, environmental and regulatory trends. consequently, there is a need to cover some additional costs arising from operating in a socially responsible manner, including the costs related to environmental protection. all this does not negate the economic responsibility of business entities, which is considered a key characteristic of market economies. on the contrary, value creation, which is based on vbm approach, is a necessary precondition for satisfying the interests of all stakeholders, including the community. it therefore follows that vbm is compatible with csr. this is a two-way relationship so that vbm cannot ignore csr, while csr cannot be achieved without vbm. finally, we should not overlook a significant role of the government that participates in companies’ income and has to allocate a portion of income for socially responsible projects. also, we must not lose sight of the fact that the government is the owner of public companies and, consequently, it should bear a part of social costs just as private owners. its responsibility goes a step further. it is responsible for providing an effective regulatory framework and conditions for transparent reporting. governments may create regulations, taxes and other incentives that encourage companies to migrate away from environmentally unacceptable sources of energy. such an approach would facilitate replacing aging technologies with cleaner and more efficient sources of energy and would not be at odds with the market forces (koller et al., 2020, p. 10). socially responsible behavior of the government could definitely contribute to the creation of a business climate in which corporate social responsibility would be highly valued. references ameels, a., bruggeman, w., & scheipers, g. 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(2009). value-based management with corporate social responsibility. new york: oxford university press, inc. mowen, m. m., & hansen, d. r. (2011). introduction to cost accounting. south-western, cengage learning. orlitzky, m., schmidt, f. l., & rynes, s. l. (2003). corporate social responsibility and corporate financial performance: a meta-analysis. organization studies, 24(3), 403-441. rappaport, a. (1997). creating shareholder value a guide for managers and investors. free press. wallace, j. s. (2003). value maximization and stakeholder theory: compatible or not. journal of applied corporate finance, 120-127. wang, q., dou, j., & jia, s. (2016). a meta-analytic review of corporate social responsibility and corporate financial performance. business & society, 1-39. wced (world commission on environment and development). (1987). our common future. new york: oxford university press. young, d. s., & o`byrne, s. f. (2001). eva and valued-based management a practicalguide to implementation. new york: mcgraw-hill. upravljanje zasnovano na vrednosti, dugoročna održivost i korporativna društvena odgovornost od današnjih preduzeća, posebno velikih multinacionalnih kompanija, se očekuje da budu finansijski uspešna u skladu sa očekivanjima vlasnika, da posluju u skladu sa zahtevima održivog razvoja, vodeći računa o interesima budućih generacija, kao i da se ponašaju na društveno odgovoran način, uvažavajući interese ključnih stejkholdera, uključujući i interese društvene zajednice. u takvim okolnostima od menadžera se očekuje da kreiraju vrednost koja će moći da zadovolji sve ove interese. primena value–based management (vbm) pristupa doprinela je boljem razumevanju vlasnika i menadžera i usklađivanja njihovih interesa. u radu je analizirana kompatibilnost vbm sa zahtevima drugih stejkholdera, uključujući i zahteve u pogledu održivosti i korporativne društvene odgovornosti. u tom kontekstu može se reći da šire shvatanje vbm osnažuje logiku funkcionisanja korporativnih preduzeća koja se zasniva na interesima, ali da istovremeno omogućava integrisanje zahteva koji se vezuju za održivost i korporativnu društvenu odgovornost. ključne reči: upravljanje zasnovano na vrednosti, kreiranje vrednosti, održivost, korporativna društvena odgovornost, rast facta universitatis series: economics and organization vol. 18, no 3, 2021, pp. 243 257 https://doi.org/10.22190/fueo210616017d © 2021 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper what can be learned from sustainability reporting at the frontier markets? the case of the republic of serbia and north macedonia1 udc 502.131.1(497.11+497.7) ksenija denčić-mihajlov1, klime poposki2, milica pavlović1* 1faculty of economics, university of niš, niš, serbia 2faculty of tourism and hospitality, university st. kliment ohridski, ohrid, north macedonia orcid id: ksenija denčić-mihajlov https://orcid.org/0000-0002-2419-0676 klime poposki https://orcid.org/0000-0002-7497-5826 milica pavlović https://orcid.org/0000-0002-3442-4560 abstract. the paper examines the corporate social responsibility (csr) reporting practice at the frontier markets by using a comparative review of sustainability reporting practice according to the gri framework. the research covers 31 companies included in the belexline and mbi10 indices in the period 2014-2018. the values of social, environmental, economic and aggregate sustainability index, calculated using content analysis, indicate a low level of sustainability reporting practice. this is a consequence of a passive ownership and modest stakeholder pressures to the companies at two frontier markets and the lack of normative pressure on sustainability reporting. the grouping of the companies into clusters in accordance with the disclosure of sustainability indicators indicates significant interand intra-countries variations in practice. the reporting on sustainability issues differs among the companies according to their size, ownership structure, exchange market and industrial sector affiliation, which is on par with the developed capital markets. key words: sustainability reporting, social, environmental, economic indicators, gri standards, disclosure index, frontier markets jel classification: g15, m14, m48, q56 received june 16, 2021 / revised august 10, 2021 / accepted august 12, 2021 corresponding author: milica pavlović * phd student at university of niš, faculty of economics niš university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia | e-mail: milapavlovic@yahoo.com https://orcid.org/0000-0002-2419-0676 https://orcid.org/0000-0002-7497-5826 https://orcid.org/0000-0002-3442-4560 mailto:milapavlovic@yahoo.com 244 k. denčić-mihajlov, k. poposki, m. pavlović introduction growing legislative pressure and increasing public concern about the global warming, climate change and energy regulation, resource scarcity, social conflicts and migrations, bring increasing demands for organizations to act in sustainable ways and, consequently, to report on sustainability issues. sustainability reporting, as an extended reporting model, “aims to highlight the view that a company’s consideration of only financial matters as an indicator of its success is inadequate” (nolan, 2007, p.2). this reporting model should include not only financial indicators, but also environmental and social aspects of the company`s business. the economic dimension of sustainability refers to the impact of an organization on the economic condition of its stakeholders, as well as to the economic system at the local, national and global levels. the environmental dimension of sustainability reporting focuses on the organization's impacts on living and non-living natural resources, including ecosystems, land, air and water. disclosure of information on social performance indicators is relevant for considering the impact that companies have on the social system in which they operate, as well as the ability to manage the potential risk that may arise from the interactions of companies with their stakeholders. the development of sustainability reporting largely depends on the adopted regulatory measures and guidelines for reporting at the national level (stojanović-blab, blab & spasić, 2016). the research results conducted in the united states also show this, given that after the adoption of the sarbanes-oxley act, information on corporate social responsibility became more comprehensive, and in some areas more transparent (cohen et al., 2011). in addition to legislation, some studies state that the development of sustainable accounting and sustainability reporting depends on other factors. zyznarska-dworczak (2018), in her study, shows that in the countries of central and eastern europe, the progress of sustainability reporting is determined by the national culture and the historical environment. namely, in these countries, political, structural, social and economic changes come to the fore, which affect all activities of companies, and thus the reporting on sustainability (zyznarskadworczak, 2018). mahmood, kouser & masud (2019), in their paper also point out that in emerging markets, reporting on sustainable business is influenced by structural and cultural conditions. promoting transparency and disclosure of non-financial information is a key issue on the european union agenda (see more: denčić-mihajlov & stojanović-blab, 2018). the practice of the sustainability reporting among eu and other developed countries has been broadly examined. hąbek & wolniak (2016) outline the practice of csr reporting in selected eu member states and identify differences in the scope and quality of disclosure, taking into account mandatory and voluntary reporting model. research on the scope and quality of csr reporting in national economies across europe can be found in numerous studies (such as holgaard & jørgensen (2005) in denmark, kuznetsov & kuznetsova (2010) in russia, hąbek (2014) in poland, cerin (2002) in sweden, cormier & magnan (2003) in france). many researchers in developed countries outside the eu have also tried to identify the factors influencing the disclosure of information about social responsibility (such as giannarakis (2014) in us, ashcroft (2012) in canada and us, andrew & wickham (2010) in australia). unlike developed western countries, reporting on sustainability issues is still in the early stages of development in emerging and frontier economies. in accordance, the studies on the sustainability reporting practice and determinants, and particularly on the what can be learned from sustainability reporting at the frontier markets? the case of ... 245 relevance of sustainability reporting for the financial and market position of companies at these markets are limited. the different level of sustainability reporting between developed and developing countries is a consequence of differences in the institutional framework, which mainly concern the degree of economic development and growth rate (filatotchev, buck & zhukov, 2000). comparing western and central and eastern european countries, in terms of access to corporate social responsibility, fijałkowska, zyznarska-dworczak & garsztka (2018) conclude that central and eastern european countries are more oriented towards maximizing economic growth goals, while western european countries that generally have a higher level of economic security and stability are more geared towards addressing environmental, social protection and sustainability issues. due to these reasons, in emerging and frontier markets, sustainability reporting is mainly practiced by large corporations or subsidiaries of multinational companies. according to dow jones’ description (cme group index services llc, 2012), “frontier markets are typically much less accessible to foreign investors, exhibit notable limitations in their regulatory and operational environments, and support a smaller investment landscape.” the fact that the under-development of market and financial services, the absence of an equity culture and a slow process of financial inclusion, are the main features of many frontier economies generates opportunities, challenges and risks for investors. namely, as frontier markets face considerable sustainability challenges, such as poverty, inequality, pollution, disease, corruption, unequal governance, weak institutions and a lack of regulations, the practice, quality and materiality of the data on sustainability issues are getting increasingly important (odell & ali, 2016). this study aims to extend the current research on sustainability reporting practices in the context of two frontier capital markets – the republic of serbia and north macedonia in two ways. first, to our best knowledge, this is the first study to give a comparative overview of recent sustainability reporting practice according to the gri framework at the two frontier markets of southeastern europe. second, we examine the development of sustainability reporting practices over time, as well as the differences among two markets, companies´ size, stock exchange segments, ownership structure and industrial sectors. also, in this paper, by discussing the combined institutional and stakeholder theory, we explain the practice of sustainability reporting among serbian and macedonian companies and identify the challenges that the sample companies face in the field of sustainability reporting. this offers a more comprehensive view on the content of the reporting on the sustainability issues at the frontier markets and offers some messages to policy makers, investors and companies. the paper is structured as follows: a brief theoretical background is given in section 1. section 2 describes the dataset and the research method, while section 3 discusses the research findings. the last section concludes the paper. 1. theoretical background theoretical background for understanding the nature of sustainability reporting and csr in most of the conducted research can be found in the institutional, legitimacy, and stakeholder theory. these theories provide different but complementary explanatory perspectives of analyzed sustainability issues. according to the legitimacy theory, the legality of a business entity to operate in a society is based on an implicit social contract between the business entity and society. if a 246 k. denčić-mihajlov, k. poposki, m. pavlović company acts contrary to society’s norms and expectations, it can be deprived of the permission to operate in society. in this regard, legitimacy theory anticipates that companies use sustainability reporting to legalize their operations and ensure that their activities and performance are acceptable to the community (wilmshurst & frost, 2000; deegan, 2002; o’donovan, 2002). even though some empirical evidence supports legitimacy theory, the conclusion regarding its validity in explaining sustainability disclosure should be taken with caution since most of these studies that test legitimacy theory are focused mainly on environmental issues associated with public concern and fear. yet, as indicated by lanis & richardson (2013) there are many other issues at least as important to society as the environment. developed by the business ethicists in the mid-1980s, stakeholder theory has become both a model upon which many business people rely and the central point of many debates. as radin (2015) indicates “it signifies the recognition that firms have responsibilities to people or entities in addition to stockholders”. furthermore, according to oruc and sarikaya (2011) “the stakeholder theory aims at increasing the efficiency of organizations by bringing new definitions to organizational responsibilities. in this respect, the theory suggests that the needs of shareholders cannot be met before the needs of stakeholders are met”. the institutional theory has as a focal point the pressures and constraints of the institutional environment and “illustrates how the exercise of strategic choice may be preempted when organizations are unconscious of, blind to, or otherwise take for granted the institutional processes to which they adhere” (oliver, 1991, p.148). institutional theorists claim that organizations face similar institutional pressures, ending up with the adoption of similar strategies. this happens because they integrate a society, and their actions are influenced by stakeholders, “including governments (through regulations), an industry (through standards and norms), competitors (through better business models), and consumers (through loyalty)” (tavares & dias, 2018). as it can be concluded, all three theories tend to provide a complementary perspective in explaining corporate disclosure strategies. this theoretical background has typically been applied in the context of developed countries. however, as indicated by islam & deegan (2008), “there is no apparent reason why the theories would be more appropriate in one national context as opposed to another”. hence, for the purposes of this study, and having in mind the above-mentioned theories, the main aim of this paper is to explore the reporting activities on sustainability issues among companies operating at two frontier markets. further, we explore whether the sustainability reporting practices are shaped by stakeholder demands and expectations or by institutional pressure at the frontier markets in which companies operate. 2. materials and methods 2.1. research design the empirical part of this paper is devoted to the consideration of the practice of the sustainability reporting at two capital markets of southeast europe – serbian and north macedonian. the situation and trends in these markets, which in terms of size, liquidity, risk and level of development belong to the group of frontier markets (ftse russell, 2020), have not sufficiently captured the attention of the academic public. we will try to fill the gap in the empirical research and provide answers to two important questions: what can be learned from sustainability reporting at the frontier markets? the case of ... 247 rq1: what is the degree and the content of the sustainability indicators disclosed among companies included in the belexline and mbi10 indices? is it possible to classify these companies according to their sustainability reporting practices into special groups (clusters)? rq2: does the sustainability reporting of companies included in belexline and mbi10 differ according to the size, ownership structure, exchange market and industrial sector affiliation? when it comes to the regulation in the sustainability reporting area, in the republic of serbia, some progress has been made with the introduction of the law on accounting from 2013 which pursuant to article 29, binds large and listed companies to publish information on certain dimensions of sustainable business, through the business report starting from 2014 (law on accounting, 2013). with regard to north macedonia, there is no legal obligation to disclose information on non-financial indicators. however, in the law on companies from 2016 pursuant to article 348, paragraph 7, companies, among other things, shall disclose information on their activities in the field of research and development, as well as information on the rights and benefits of the management and supervisory board members within the annual business report (law on companies, 2016). in order to assess csr disclosure, researchers mainly use content analysis (akin & yilmaz, 2016; kansal, joshi, & batra, 2014). there are several different approaches to this analysis, the most objective being the one that involves disclosure index calculation, where the presence or absence of certain information is determined by binary coding, e.g. assign “1” to the index position if the information exists or “0” if the information is not available, and formulate the index based on the summary result of all information (ehsan et al., 2018). this study employs content analysis technique and develops four indices: social disclosure index, environmental disclosure index, economic disclosure index, and aggregate, sustainability index. the social dimension of sustainable development has been taken into account and covered by the following gri standards: gri 401: employment, gri 403: occupational health and safety, gri 404: training and education and gri 413: local communities. in accordance with the practice of disclosing social performance indicators in the republic of serbia and north macedonia, 11 indicators that make up the social disclosure index (sdi) structure have been identified: qualification structure, gender structure, age structure, number of employees, termination of employment, volunteer activities, employee training, support for employees, internal and external communication capabilities, injuries at work and work days lost due to work injuries. with regard to the environmental dimension of sustainability, the analysis includes environmental performance indicators covered by gri 302: energy, gri 305: air emissions, gri 306: effluents and waste and gri 307: environmental compliance. based on the reporting practice on these indicators, the structure of the environmental disclosure index (envdi) consists of five indicators: energy management, harmful substances air emissions, waste management, wastewater management and environmental compliance. economic disclosure index (econdi) has been developed taking into account the standards gri 201: economic performance, gri 203: indirect economic impacts and gri 205: anti-corruption. five indicators make up the structure of the index: defined benefits when retiring, donations, investments in environmental protection, investments in research and development and procedures related to anti-corruption activities. 248 k. denčić-mihajlov, k. poposki, m. pavlović the positions of indices in this paper are coded with 0 (if the information about indicators is not disclosed), 1 (if the information in the report is descriptive, for example the possibility for internal and external communication) or 2 (the information is disclosed and of a quantitative nature, for example, the number of employees). sdi index is determined as a sum of equally weighted sdi positions giving the possible maximum index value of 22. consequently, the maximum index values of both envdi and econdi are 10, while the aggregate sustainability index (si), calculated as a sum of sdi, envdi and econdi, takes the highest value of 42. in order to answer rq1, the paper uses hierarchical cluster analysis to statistically determine similarities and differences between companies, taking into account the level of disclosure of economic, environmental and social performance (the ward clustering method and euclidean distance were used) (for more details, see: kaufman & rousseeuw, 2009). 2.2. sample description in order to explore the practice of non-financial reporting at two frontier markets, we used samples of companies included in two stock market indices – belexline and mbi10. while opting for companies constituents of the indices, we have two facts in mind. firstly, market indices properly represent the situation on the market. they are made up of respectable companies whose shares are traded frequently; they have satisfactory liquidity, and a solid approximation of market value. second, these shares are in the focus of institutional investors (foreign and domestic), so they are relevant from the point of view of disclosure of financial and non-financial information, and thus for research on disclosure of information on sustainability reporting. in the process of disclosure indices developing, secondary data were collected from external sources, mainly through the search of companies' websites and access to relevant data, documents and annual reports on the belgrade stock exchange and macedonian stock exchange’s website from 2014 to 2018. table 1 presents characteristics of the sample companies. the analysis is based on the data from 21 real and financial sector companies that made up the belexline index basket on august 17th , 2019. as to mbi10 index, the analysis included 5 companies from real and 5 from financial sector. the sample companies are classified according to: 1) market segment (trading at the belgrade se is organized at the regulated market (prime listing, standard listing and open market) and multilateral trading facility – mtp, while macedonian stock exchange consists of super, mandatory and exchange listing segments); 2) sector affiliation (the secondary sector includes production activities industry, construction and manufacturing, while tertiary sector covers non-manufacturing activities transport, trade, tourism, catering, craft services, banking and utilities); 3) ownership structure (the companies are differentiated according to the existence of a majority owner, owning 51% of the shares), and 4) company size (companies are classified according to annual turnover into small (≤ eur 10 million), medium (≤ eur 50 million) and large ones (> eur 50 million) (european commission, 2016). a detailed overview of the sample companies according to their listing on the macedonian and belgrade stock exchanges is given in appendix. what can be learned from sustainability reporting at the frontier markets? the case of ... 249 table 1 aggregate characteristics of the sample companies number of companies market segment* prime listing standard listing open market super listing mandatory listing exchange listing 3 3 15 1 3 6 sector of economy secondary tertiary 18 13 company size small medium large 6 7 18 ownership structure majority shareholder diffuse ownership 14 17 source: authors’ calculation we analyzed 155 annual reports published between 2014 and 2018 by 31 companies constituencies of two national capital markets indices. having previously applied content analysis, we based our study on 11 topic indicators related to social, five related to ecological and five related to economic dimension of sustainability. 3. results and discussion we conducted cluster analysis and content analysis for each sustainability issue, including its development over time, its distribution over industries, and size of organization. based on this analysis, we came up with eleven findings that are summarized and presented in table 2. finding 1: companies included in the two indices report on environmental, social, and economic sustainability, yet fragmentarily and not equally distributed. the cluster analysis findings point to significant interand intra-countries variations in practice. according to the hierarchical grouping method, companies are classified into three clusters in 2014, 2015 and 2016, and into four clusters in 2017 and 2018. based on the data shown in table 3, changes in the cluster structure can be observed, given that, during the analyzed period, there were changes in the level of reporting in the companies from the sample. the first cluster includes companies that disclose information on the largest number of economic, environmental and social indicators and which also have the highest values of the aggregate sustainability index, compared to companies grouped in other clusters. within this cluster, the companies that stand out are three companies whose shares are traded on the belgrade stock exchange (niis, alfa, mtlc) and one company (alk) whose shares are traded on the macedonian stock exchange. these companies are characterized not only by a significant level, but also by better quality of reporting on all dimensions of sustainability. namely, the mentioned companies paid great attention to socially responsible business and sustainable development, which resulted in a serious approach to reporting on sustainability. for companies grouped in the second cluster, reporting on selected indicators is at a slightly lower level compared to companies grouped within the first cluster, with these companies generally disclosing qualitative information on economic, environmental and social performance. companies classified in the third cluster in the period from 2014 to 2016, as well as companies in the fourth cluster in 2017 and 2018 report on sustainability 250 k. denčić-mihajlov, k. poposki, m. pavlović at an extremely low level, given the fact that these companies disclosed only information on the number of employees, defined benefits upon retirement, as well as information on compliance with laws and standards in the field of environmental protection. table 2 results of the analysis findings 1 the data on environmental, social, and economic sustainability are mainly presented in annual reports; organizations pay more attention to the form than to the content and value of the information provided. taking into account the level of disclosure of sustainability performances, the companies can be classified into special groups (clusters). 2 environmental, social, and economic sustainability issues are not equally disclosed in companies reports. 3 the indicators that are the most frequently disclosed are those that are easily quantified and measured (e.g. the number of employees). 4 social sustainability topics are of increasing importance for organizations. 5 as to the environmental dimension of sustainability, organizations report mostly qualitative information on waste management processes and compliance with laws and standards in the field of environmental protection. 6 regarding the economic dimension of sustainability, the most frequently reported are data on defined benefits when retiring and investments in research and development. 7 serbian companies on average report more frequently on csr and a decline in the average value of si for companies included in mbi10 is observed. 8 large companies disclose more information on sustainable development indicators in their annual reports compared to small and medium-sized companies. 9 the highest level of information disclosure on corporate social responsibility is observed in companies listed on the standard listing at the belgrade stock exchange. 10 companies from the secondary sector report more on sustainable development in relation to companies from the tertiary sector. 11 companies with diffuse ownership report more on all dimensions of sustainable business. source: authors only one company (nis, a.d. novi sad) has organized and presented information on sustainability development in the form of a separate sustainability report. like in most other emerging and frontier markets, there is a substantial gap between companies that are leaders in csr and doing a great deal in sustainability reporting (e,g. nis novi sad, serbia and alkaloid skopje, north macedonia) and those that are doing little or nothing. finding 2: information on the environmental, social, and economic sustainability issues is not equally disclosed among analyzed companies. indicators on social performances are more frequently disclosed in comparison to two other categories of indicators. average values of sdi among serbian and macedonian companies are 7.15 and 5.58 respectively. this finding indicates that social concerns and challenges dominate in these frontier markets. such a conclusion is expected, taking into account that weak institutions, social poverty, limited consumer protection, human rights abuses or employee exploitation are at the heart of social debate in these countries. what can be learned from sustainability reporting at the frontier markets? the case of ... 251 table 3 results of the cluster analysis cluster 2014 2015 2016 2017 2018 i alk, niis, mtlc, kmbn, alfa, fito, impl, lsta alk, niis, tel, kmb, aero, tigr, dnos, alfa, mtlc alk, mtlc, niis, fito, impl, lsta, sjpt, vbse, alfa alk, niis, alfa, mtlc alk, niis, alfa, mtlc ii ttk, tnb, kmb, sjpt, jmbn ttk, tnb, kmb, sjpt, jmbn, fito, impl, lsta kmbn, ttk, tnb, jmbn, kmb ttk, tnb, kmbn, jmbn ttk, tnb, kmb, aero, kmbn, tigr, impl, dnos, jmbn iii grnt, mpt, mtur, sbt, tel, stb, enhl, aero, jesv, tigr, epen, epin, kopb, vdav, vbse, tgas, dnos, glos grnt, mpt, mtur, sbt, stb, enhl, jesv, epen, epin, kopb, vdav, vbse, tgas, glos grnt, mpt, mtur, sbt, stb, tel, enhl, aero, jesv, tigr, epen, epin, kopb, vdav, tgas, dnos, glos mtur, fito, impl, lsta, sjpt, vdav, vbse, glos mtur, fito, lsta, sjpt, vdav, vbse, glos iv grnt, mpt, sbt, stb, tel, kmb, enhl, aero, jesv, tigr, epen, epin, kopb, tgas, dnos grnt, mpt, sbt, stb, tel, enhl, jesv, epen, epin, kopb, tgas source: authors’ calculation note:* symbols from the belgrade stock exchange and macedonian stock exchange were used to indicate companies finding 3: the indicators that are the most frequently disclosed are those that are easily quantified and measured (e.g. the number of employees and defined benefits when retiring) (table 4). this finding is in accordance with szekely & kemanian (2016), who state that “most emerging market firms cannot afford to divert resources from their main business activities to focus on areas not generating returns”. finding 4: the most disclosed social topics are on the number of employees and internal and external communication capabilities (topics reported from 90.32% and 64.52% companies during 2018) (table 4). even though companies have been slow to integrate social dimension of sustainability into their reporting practice, a trend of a slow improvement of this practice is present among companies included in belexline (sdi average value is 6.62 in 2014 and 7.76 in 2018). table 4 most commonly disclosed social, environmental and economic indicators in the period 2014-2018 indicators 2014 2015 2016 2017 2018 social indicators number of employees 90.32% 90.32% 90.32% 90.32% 90.32% internal and external communication capabilities 58.06% 64.52% 64.52% 64.52% 64.52% environmental indicators environmental compliance 74.19% 77.41% 74.19% 77.41% 80.64% waste management 58.06% 58.06% 58.06% 58.06% 58.06% economic indicators defined benefits when retiring 90.32% 93.54% 93.54% 93.54% 93.54% investments in research and development 67.74% 74.19% 77.41% 77.41% 77.41% source: authors’ calculation 252 k. denčić-mihajlov, k. poposki, m. pavlović finding 5: as to environmental dimension of sustainability, organizations report mostly in a qualitative manner on waste management processes and compliance with laws and standards in the field of environmental protection. research results show that companies from industries that may have a potential negative impact on the environment (processing industry and mining e.g. alkaloid, nis, metalac) on average disclosed more information on the environmental dimension of sustainability compared to companies from the financial sector. finding 6: regarding the economic dimension of sustainability, as shown in table 4, the most often disclosed information is about defined benefits during retirement (93.54% of companies), which are mostly quantitative in nature, as well as the information on investments in research and development (77.41% of companies). the practice of reporting on economic dimension of sustainability is a reflection of corporate ownership structures, immature capital markets and investors` passiveness immanent to these two frontier markets. finding 7: serbian companies on average report more frequently on csr, and a trend of improvement in sustainability reporting can be observed among companies included in belexline index (average value of si rises from 14.48 in 2014 to 16.19 in 2018 reaching 40.23% of compliance level) (table 5). on the other hand, a decline in the average value of si for companies included in mbi10 is observed. during 2018, the average value of si was 10.00, which corresponds to 23.8% compliance level of maximal si value. finding 8: company size plays an important role in determining the level and quality of sustainable development reporting. large companies from the sample have on average higher si values in comparison to small and medium-sized companies (table 5). these companies have also seen a shift in transparency (the si average values reach 14.50 and 15.89 in 2014 and 2018 respectively). the results are consistent with nayak & venkatraman (2011) who state that large companies report more since they are exposed more to pressure from stakeholders, regulatory bodies and the community. finding 9: the highest level of information disclosure on csr is observed in companies listed on the standard listing at the belgrade stock exchange. the si average values for companies listed on prime and standard listing in 2018 are 20.00 and 21.33 respectively (table 5). having in mind more rigorous conditions for inclusion of securities of companies on these two segments of the belgrade stock exchange, the listed companies are under pressure to increase the quality of disclosure. finding 10: companies from the secondary sector (dominantly from processing industry (44%), construction and mining sector) report more on sustainable development in relation to companies from the tertiary sector. this analysis indicates that a higher level and quality of information disclosure on social, environmental and economic dimension of sustainability is expected from those companies whose sector is closely related to sustainability issues. finding 11: companies without majority owner report more on all dimensions of sustainable business, with the si average values ranging from 13.71 to 14.29 (table 5). this finding is in line with la porta et al. (1998), who state that in companies with concentrated ownership the need for disclosing additional non-financial information decreases, since the companies are less dependent on external shareholders. what can be learned from sustainability reporting at the frontier markets? the case of ... 253 table 5 trends in the si average values by exchange markets, size of company, stock market segment, sector and ownership structure classification average value of sustainability index 2014 2015 2016 2017 2018 exchange market index belexline 14.48 14.90 15.00 15.66 16.19 mbi10 10.50 10.30 10.20 10.2 10.00 company size small 9.00 9.17 9.00 9.17 9.33 medium 13.43 13.57 13.28 13.57 14.00 large 14.50 14.78 15.00 15.61 15.89 stock market segment prime listing 13.33 14.67 16.33 17.67 20.00 standard listing 18.67 17.67 17.33 20.33 21.33 open market 13.87 14.40 14.26 14.33 14.40 exchange listing 8.67 8.67 8.67 8.67 8.67 mandatory listing 12.67 12.00 11.33 11.67 11.00 super listing 15.00 15.00 16.00 15.00 15.00 sector of the economy secondary sector 14.00 14.22 14.50 15.00 15.50 tertiary sector 12.07 12.31 12 12.38 12.38 ownership structure majority shareholder 12.57 13.14 13.43 13.64 14.07 diffuse ownership 13.71 13.64 13.47 14.11 14.29 source: authors’ calculation conclusion emerging and frontier markets offer both attractive opportunities for investors, and multiple environmental, social, and governance-related challenges. as indicated in this study, these challenges are often neglected and not considered in the long-term business strategies and disclosed in the companies` annual reports. disclosure practices are one of the most acknowledged and favoured means of being accountable to society and stakeholders. in contrast to this trend at the developed capital markets, this study indicates a serious level of resistance by companies operating at two frontier markets related to transparency and accountability towards sustainability performance. the mean values of si during the period 2014-2018 of companies included in belexline and mbi10 index are 15.25 and 10.24 respectively (maximum 42). the disclosure at these two frontier markets still appears to be driven by survival concerns. still, the findings of cluster analysis show that there are some groups of companies at these markets that make real efforts to embrace broader accountability and take into account sustainability issues in order to acquire competitive advantage and manage risks. the degree and the content of reporting on sustainability issues differ among the companies according to the size, ownership structure, exchange market and industrial sector affiliation, which is in line with sustainability practice drivers at the developed capital markets. the theoretical background used to explain sustainability reporting practices at developed capital market can also be applied at the frontier markets. the reporting practices among the serbian and macedonian companies can be explained by a combined consideration of 254 k. denčić-mihajlov, k. poposki, m. pavlović stakeholder and institutional theory. the low level and the quality of sustainability reporting can be interpreted as a consequence of a modest stakeholder pressures to the companies existing at these two markets and the lack of normative pressure on sustainability reporting. we consider this result consistent with zyznarska-dworczak (2018) who concludes that market participants in the central and eastern european countries are not sufficiently interested in socially responsible business issues, due to the cultural and historical environment, as well as the lack of widely accepted and used ethics and ethical standards. in spite of the apparent sustainability challenges in the republic of serbia and north macedonia (such as inequality, pollution, corruption, weak institutions and a lack of regulations), recognition of these challenges and the contribution of sustainability reporting, even by the most successful and liquid companies included in the national capital markets indices, is quite modest. this is in line with previous research on sustainability reporting practice in the emerging economies (islam & deegan, 2008; kansal et al, 2014; odell & ali, 2016). this sends a clear message to policy makers, industry affiliations and companies` management to engage in a creation of a more transparent and accountable business environment with active ownership which is leading to sustainable development goals achievement. acknowledgement: the paper is a part of the research done with the support of the erasmus+ programme of the european union within the project no. 611831-epp-1-2019-1-rs-eppjmomodule. references akin, a., & yilmaz, i. 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(2018). the development perspectives of sustainable management accounting in central and eastern european countries. sustainability, 10(5), 1445-1466. https://doi.org/10.3390/su10051445 šta se može saznati iz izveštavanja o održivom razvoju na graničnim tržištima kapitala? slučaj republike srbije i severne makedonije cilj sprovedenog istraživanja je da se kroz uporedni pregled prakse izveštavanja o održivosti u skladu sa gri okvirom dođe do zaključaka o nivou prakse izveštavanja o društvenom odgovornom poslovanju na dva posmatrana granična tržišta kapitala. istraživanje obuhvata 31 kompaniju uključenu u strukturu indeksa belexline i mbi10 u periodu 2014-2018. godine. vrednosti društvenog, ekološkog, ekonomskog indeksa obelodanjivanja, kao i zbirnog indeksa održivosti, izračunate primenom analize sadržaja, ukazuju na nizak nivo prakse izveštavanja o održivosti. to je posledica pasivnog vlasništva i skromnih pritisaka stejkholdera na kompanije na ovima graničnim tržištima, kao i izostanka normativnog regulisanja izveštavanja o održivosti. grupisanje kompanija u klastere u skladu sa obelodanjivanjem pokazatelja održivosti ukazuje na značajne razlike u praksi nefinansijkog izveštavanja unutar i između dva posmatrana tržišta. izveštavanje o pitanjima održivosti razlikuje se između analiziranih kompanija prema njihovoj veličini, vlasničkoj strukturi, berzanskom tržištu i pripadnosti industrijskom sektoru, što je u skladu sa praksom na razvijenim tržištima kapitala. ključne reči: izveštavanje o održivom razvoju, društveni, ekonomski, ekološki indikatori, indeks obelodanjivanja, gri standardi, granična tržišta kapitala https://www.imd.org/research-knowledge/articles/emerging-markets-approach-to-corporate-sustainability/ https://www.imd.org/research-knowledge/articles/emerging-markets-approach-to-corporate-sustainability/ https://doi.org/10.5772/intechopen.76951 https://doi.org/10.1108/09513570010316126 https://doi.org/10.3390/su10051445 what can be learned from sustainability reporting at the frontier markets? the case of ... 257 appendix table a1 classification of companies from the sample according to market segment, sector of economy, company size and ownership structure belgrade stock exchange companies market segment sector of economy company size ownership structure nis (niis) prime listing secondary large majority shareholder energoprojekt holding (enhl) prime listing secondary large diffuse ownership aerodrom nikola tesla (aero) prime listing tertiary large majority shareholder metalac (mtlc) standard listing secondary large diffuse ownership jedinstvo (jesv) standard listing secondary medium diffuse ownership komercijalna banka (kmbn) standard listing tertiary large diffuse ownership alfa plam (alfa) open market secondary medium diffuse ownership tigar (tigr) open market secondary medium diffuse ownership galenika fitofarmacija (fito) open market secondary medium diffuse ownership impol seval (impl) open market secondary large majority shareholder energoprojekt entel (epen) open market secondary medium majority shareholder energoprojekt industrija (epin) open market secondary small majority shareholder sojaprotein (sjpt) open market secondary large majority shareholder kopaonik (kopb) open market secondary medium diffuse ownership voda vrnjci (vdav) open market secondary medium diffuse ownership valjaonica bakra sevojno (vbse) open market secondary large majority shareholder messer tehnogas (tgas) open market secondary large majority shareholder lasta (lsta) open market tertiary large diffuse ownership dunav osiguranje (dnos) open market tertiary large majority shareholder globos osiguranje (glos) open market tertiary small diffuse ownership alta banka (jmbn) open market tertiary small diffuse ownership macedonian stock exchange companies market segment sector of economy company size ownership structure alkaloid (alk) exchange listing secondary large diffuse ownership granit (grnt) exchange listing secondary large diffuse ownership makpetrol (mpt) exchange listing secondary large diffuse ownership ttk banka (ttk) exchange listing tertiary small majority shareholder makedonija turist (mtur) exchange listing tertiary small diffuse ownership stopanska banka bitola (sbt) exchange listing tertiary small diffuse ownership stopanska banka skopje (stb) mandatory listing tertiary large majority shareholder makedonski telekom (tel) mandatory listing tertiary large diffuse ownership nlb banka (tnb) mandatory listing tertiary large majority shareholder komercijalna banka (kmb) super listing tertiary large diffuse ownership source: authors 11224 facta universitatis series: economics and organization vol. 19, no 4, 2022, pp. 285 296 https://doi.org/10.22190/fueo221019020d © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper modified audit opinion and earnings management in state-owned companies: evidence from serbia1 udc 657.6+005]: 658.115(497.11) milica đorđević1, dejan spasić1,2 1university of niš, faculty of economics, niš, republic of serbia 2university of belgrade, faculty of economics, belgrade, republic of serbia orcid id: milica đorđević https://orcid.org/0000-0003-1652-4186 dejan spasić https://orcid.org/0000-0002-8540-579x abstract. the aim of the author of this paper is to examine the relationship between earning management (em) and modified audit opinion among state-owned companies in the republic of serbia. the study sample consists of 64 state-owned companies whose financial statements were subject of audit by state audit institution in period 2018-2021. to detect em, the financial statements of these companies for the four-year period 2018-2021 were used. the results of the study indicate that there is no positive relationship between em and the auditor's modified opinion, i.e. that the difference in the distribution of the modified opinion in state-owned companies in which em is identified and those in which em is not identified is not statistically significant. these results initially point to the conclusion that auditors do not take em into account when forming opinions, and do not send warning signals to users of financial statements. however, if one looks at the participation of the modified opinion on the financial statements of state-owned companies in which em is identified, and especially the motive of em, it can be said that the auditors of the state audit institution are adequately dedicated to this issue. key words: discretionary accruals, manipulations, qualified opinion, adverse opinion, disclaimer of opinion jel classification: h83, m41, m42 received october 19, 2022 / accepted november 25, 2022 corresponding author: milica đorđević university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, republic of serbia | e-mail: milica.djordjevic@eknfak.ni.ac.rs https://orcid.org/0000-0003-1652-4186 https://orcid.org/0000-0002-8540-579x mailto:milica.djordjevic@eknfak.ni.ac.rs 286 m. đorđević, d. spasić 1. introduction state-owned companies, with their important role in the provision of services of general interest, are oftenviewed as a tool for accelerated economic development and expansion, in strategically important economic activities. state-owned companies fulfill their obligation to provide information on financial position and business success through financial reporting. financial statements, as the final product of financial reporting, contain a variety of useful information on the basis of which it is possible to evaluate previous and future achievements. as this information is crucial for decision-makers, its reliability and objectivity must not be questioned. in this regard, it is necessary to ensure high-quality financial reporting that will ensure social well-being as the supreme goal of society. audit plays a significant role in increasing the credibility of information in financial statements, providing independent assurance of its truthfulness and fair presentation. the auditor's opinion based on objective evidence strengthens the financial accounting discipline and the responsibility of the ones preparing financial statements, thus laying the foundations of trust and mutual communication between state-owned companies and their stakeholders. there is plenty of information in financial statements; however, “one of the most significant criteria for evaluating the performance and prospects of a business is earning measured by accounting” (doan et al., 2021, 131). as state-owned companies are more than ever under pressure to increase their operational efficiency, improve their own and competitiveness of the economy as a whole, provide public services of higher quality at a lower price and responsibly use limited public funds, the auditors should pay special attention to earnings management (em). em implies active profit manipulation in order to make a changed impression of the company operations. em is a “hot” topic because the management's tendency to show the company's performance as different from what it really is, by profit smoothing, is not rare. for this reason, auditors are expected to focus additionally on em when performing their procedures and, in the case of its identification, send a clear signal to the users of the information in the form of a modified opinion. by modifying opinions, the auditor controls the work of managers and limits their opportunistic behavior (barizah et al., 2005). failure to disclose em in financial statements of state-owned companies and issue an unmodified/positive opinion can have far-reaching negative consequences for the entire economy. examining the relationship between the auditor's modified opinion and em in state-owned companies in the republic of serbia is primarily aimed at assessing the auditor's commitment to this issue. the auditor's modified opinion on financial statements in which profit manipulation is identified indicates the quality of the procedures they have implemented. as akbaryan fard et al. (2020) point out, audit quality is the auditor’s ability to discover and report important distortions and discover manipulations in net income. this further significantly reduces em (imen & anis, 2021), that is, as othman & zegnal (2006) point out, in case of high quality of audit, managers are not willing to perform manipulations through profit management. the remainder of the paper is structured as follows. after this introduction, the second section of the paper provides literature review on the basis of which hypotheses are defined. in the third section of the paper, the design of empirical research is presented. results of research are presented and discussed in the fourth section, while the fifth section provides the conclusions. modified audit opinion and earnings management in state-owned companies: evidence from serbia 287 2. literature review and hypotheses development em practices were introduced in recent years, as a number of serious scandals occurred in some firms (like the collapse of entron company) that overstated profits to trick investors and users (sharf & nassar, 2021). many authors have dealt with the definition of em, so ronen & yaari (2008) argue that em can be defined as the alteration of the firm's reported earnings by managers to either mislead external users of financial statements or to influence contractual outcomes. healy & wahlen (1999) indicate that “em occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.” some authors focus on flexibility in accounting standards when defining this concept, so dechow & skinner (2000) define em as the abuse of accounting techniques and principles, i.e. a legitimate practice or deliberate omission of material facts with the intention of deceiving users of accounting information. also, baralexis (2004) notes that “em is the process of intentionally exploiting or violating the gaap or the law to present financial statements to suit one’s interest.” certainly, whichever approach is present in the definition, em implies the management intervention to determine the amount of profit, i.e. showing a higher profit and a better balance sheet or showing a lower profit and a worse balance sheet, depending on the interest. although the em concept is initially associated with private companies, the application of the accrual accounting basis in state-owned companies brought em to the attention of many scholars in the field (bisogno & donatella, 2022). also, the reason is that stateowned companies assume an arrangement in which the management characteristics of private and state-owned companies coexist, all in order to provide public services at a high level, and due to increased exposure to the capital market and tougher competition, stateowned companies must continuously improve their performance in order to survive on the market (bonić & đorđević, 2017). state-owned companies with poor results have a harder time accessing the capital market, which can additionally slow down their development, and for these reasons, management's tendency to hide profit, i.e. to abuse flexibility in financial reporting based on the choice of alternative accounting methods and estimates is not rare. apart from this, capalbo et al. (2018) highlight that “there are as many reasons to expect a positive relationship between the ownership of state-owned companies enterprises by political communities and em as there are reasons to presume a negative one.” “arguments in favour of a positive relationship rely on: (a) the expectation of a relatively lower quality of corporate governance in state-owned companies, which is often linked to a greater degree of managerial discretion; (b) the greater heterogeneity of stat-owned accountees, which increases the potential addressees of state-owned companies and creates incentives for em; (c) the fact that state-owned companies’ economic and financial results impact a quantitatively and qualitatively unidentifiable group of subjects (the community acting as the residual owner), thus decreasing the expectation that reporting of those results will be monitored, as compared to the alternative hypothesis of readily-identifiable private investors” (jones, 1991); and (d) the limited technical expertise of the addressees of stateowned companies reporting (shleifer, 1998, grossi & thomasson, 2015, bruton et al., 2015, koh, 2003, in ruggiero et. al. 2022). examinations of the presence of em in state-owned companies are relatively recent and therefore limited. however, the results of the ruggiero et al. (2022) research show that “managers of state-owned companies with higher https://www.ncbi.nlm.nih.gov/pmc/articles/pmc8246424/#cr68 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc8246424/#cr113 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc8246424/#cr25 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc8246424/#cr73 288 m. đorđević, d. spasić levels of public ownership are more likely to practice em”, while capalbo, (2014) also provides evidence that “em by state-owned companies decreases with firm size and increases with profitability.” the flexibility of international financial reporting standards/international accounting standards and the possibility of choices between accounting policies and estimates have created a scope for applying different methods of earnings management. for these reasons, the question of whether financial statements are a reliable information base for business decision-making is quite justified. audit should provide an answer to that question. “the objective of auditing financial statements is to allow the auditor to express an opinion as to whether the financial statements, on all material issues, have been prepared in accordance with the prepared financial reporting framework.” however, “audit opinion issued by an auditor not only indicates whether the organization is complying with accounting standards and is concerned about its financial management, but it is also an important factor for detecting and preventing fraudulent activities” (bell & zimmerman, 2007). the auditor's opinion can be: positive/unmodified and modified. auditors express a positive opinion when they are convinced that the financial statements truthfully and honestly show the real state of affairs, profit, financial status, income, expenses, in accordance with accounting standards. however, when identifying em the auditor is expected to express a modified opinion (qualified opinion, adverse opinion or disclaimer of opinion) and thus provide signals to the users of the information. which type of modification “the auditor will apply is determined by the effect of er on the truthfulness and objectivity of the financial statements” (in accordance with isa 705). if the auditor assesses that the identified em has a material but not pervasive effect on the financial statements he will express a qualified opinion. on the other hand, if the em has a material and pervasive effect on the financial statements, and they contain misstatements, he will express a negative opinion. if, on the other hand, the auditors are unable to collect enough adequate evidence (which may be a consequence of concealment by the management due to the presence of em), the auditors will express a qualified opinion if those limitations have a material but not pervasive effect, that is, they will abstain from giving an opinion if they have a material and pervasive effect on the financial statements. as audit is seen as one of the main guardians of the truth and objectivity of financial statements, therefore “it is vital to examine the association between auditor’s opinion and em in a situation where the propensity to manage earnings is high” (tsipouridou1 & spathis, 2014). the relationship between auditor opinion and em is one of the most important issues among researchers in this field. to date, several studies have been conducted that deal with this relationship; however, the results show conflicting opinions. some authors claim that there is no positive correlation between em and the auditor's modified opinion, that is, that the em is negatively related to the qualified audit opinion. this group of authors includes: tsipouridou & spathis (2014) who “examined this relationship in companies listed on the athens stock exchange”; gajevszky (2014) in companies listed on the bucharest stock exchange; othman et al. (2017) in companies listed on the bursa malaysia which is classified as pn17, garcia-blandon et al. (2014) in companies in spain, veronika & julisar (2020) in companies listed on the indonesia stock exchange, sharf & nassar (2021) in companies listed in amman stock exchange in jordan, imen & anis (2021) in tunisian firms listed on the tunis stock exchange. on the other hand, there are numerous research results that indicate the opposite, i.e. the existence of a positive correlation the probability of expressing a modified audit modified audit opinion and earnings management in state-owned companies: evidence from serbia 289 opinion and em. francis and krishnan (1999) examined this relationship in listed companies in the united states; doan et al. (2021) in vietnamese listed companies on the ho chi minh city stock exchange and hanoi stock exchange; two studies: moazedi & khansalar (2016) and abolverdi & kheradmand (2017) “evaluate the effect of em on type of auditor report in companies listed on tehran stock exchange (tse).” based on the above, the following hypotheses are developed: h1: there is a significant positive correlation between auditor's modified opinion and em, h2: the auditor’s modified opinion is represented to a greater extent than expected in state-owned companies in which em has been identified, in contrast to state-owned companies in which it has not been identified. 3. methodology 3.1. sample selection and variables for the purposes of testing the correlation between em in state-owned companies in the republic of serbia and the auditor’s modified opinion, state-owned companies whose financial statements were audited in the period from 2018 to 2021 were taken into account. the data was primarily collected from the 2018, 2019, 2020 and 2021 annual reports of the state audit institution, to identify that the financial statements of 73 stateowned companies were subject to audit. the same reports were the source of data on auditors' opinions on the financial statements of the mentioned companies. that is, to detect manipulative financial reporting., the financial statements of these companies for the four-year period 2018-2021, available on the business registers agency website, were used. since complete data were not available for nine state-owned companies, those companies were excluded from the research. after the implementation of the mentioned criteria, the final sample included 64 state-owned companies and a total of 264 financial statements for the purposes of em calculation. 3.2. selection and measurement of variables in order to test the defined hypotheses, the auditor's opinion on the financial statements of state-owned companies represents a categorical variable. bearing in mind that the auditor's opinion on financial statements can be unmodified/positive and modified (qualified opinion, adverse opinion or disclaimer of opinion), this variable has two values: 0 if the opinion is unmodified and 1 if the opinion is modified. analysis of audit opinions on financial statements of state-owned companies by year and type is presented in table 1. table 1 audit opinions on financial statements of state-owned companies by year and type audit opinion type 2018 2019 2020 2021 total unmodified opinion 3 13.04% 2 16.67% 4 26.67% 1 7.14% 10 15.63% modified opinion: 20 86.96% 11 83.33% 11 73.33% 12 85.71% 54 82.81% with exception/s 19 82.61% 9 75%% 11 73.33% 12 85.71% 50 78.13% adverse 0 0 2 16.67% 0 0% 0 0% 2 3.13% disclaimer of opinion 1 4.35% 0 0% 0 0% 1 7.14% 2 3.13% total audit opinions 23 100% 12 100% 15 100% 14 100% 64 100% source: annual activity reports for 2018, 2019, 2020 and 2021. 290 m. đorđević, d. spasić em defined as the second variable indicates manipulation in financial statements. numerous models have been developed to calculate em over time (discretionary accruals models, accruals quality models, probit and logit models, etc.). however, auditors mostly use discretionary accruals models, which imply the separation of the total accruals into a non-discretionary part, as economically determined accruals, and a discretionary part, as managerially determined accruals, because managers have discretion over the choice of accounting methods and estimates. for those reasons, discretionary accruals (da) is a measure of em. if state-owned companies do not manipulate earnings, it is to be expected that the da component will be zero. otherwise, if the value of da is significantly different from zero, it means that there is a practice of manipulating earnings in the observed period. at the same time, if the value has a positive sign, it means that earnings manipulation was carried out at a higher level, and on the contrary, if the value is negative, it means that the manipulation was carried out with the aim of presenting the financial result worse than it is. according to a large number of conducted studies, the discretionary accruals models that are considered the most reliable are the jones model (1991) and the modified jones model (dechow model (1995) and kasznik model (1999)). for the purposes of da in state-owned companies, we opted for kasznik, a modified jones model, which, in addition to possible income manipulation under the jones model, also monitors changes in receivables from sales and changes in net cash flow from business activities. kasznik model has the following form: tait/ait-1 = β0*1/ait-1+ β1*(δrevit-δrecit/ait-1) + β2*(ppeit/ ait-1)+ β3*(δcfoit/ ait-1) + εit (1) where: tait total accruals for the company i in the current period t; ait-1 total assets for the company i in the previous year t-1 β0, β1, β2, β3 estimated parameters or regression coefficients; εit residual variable or discretionary accruals (da)=earnings management (em) δrevit change in net sales revenues of the company i in the current year t compared to the previous year t-1; δrecit changes in net receivables from sales in the current year t compared to the previous year t-1 δcfoit change in net cash flow from operating activities in the current year t compared to the previous t-1 ppeit gross value of property, plant and equipment for the company i in the current year t the da procedure involves a three-phase approach: first of all, tait is calculated using the cash approach, as follows: tait = niit – cfoit, where niit net income for the company i in current year t. in the second stage, the non-discretionary ndait follows. more precisely, as tait= ndait + da it, i.e. tait= ndait + εi, then using multiple linear regression analysis we get ndait in the third stage, we get dait as follows: da it (εit)= tait -ndait. all variables in the model are divided by the value of total assets at the beginning of year at-1 to mitigate potential heteroskedasticity. after calculating the variables and initiating a multiple linear regression analysis, the values of the regression coefficients (β0, β1, β2, β3) were obtained, which gave the model of discretionary accruals for state-owned companies in the republic of serbia the following form: εit = tait/ait-1 – ((-8309,77)/ait-1+ (-0,008)*(δrevit-δrecit/ait-1) + -0,063*(ppeit/ait-1)+ 0,616*(δcfoit/ ait-1) (2) modified audit opinion and earnings management in state-owned companies: evidence from serbia 291 this model was applied to a selected sample of state-owned companies in order to reveal the prevalence of earnings manipulation in financial statements. in order to test the claim about earnings manipulation in financial statements, i.e., to determine which state-owned companies' da deviates statistically significantly from zero, a t-test was performed for each public company individually. by comparing the average da value of each state-owned company with the expected value of this parameter (zero), we found that in 23 state-owned companies this deviation was statistically significant, that is, they manipulated income. at the same time, in 6 state-owned companies, da had a negative sign, which indicates that in these companies the results were manipulated downwards, while in as many as 17 companies, this indicator had a positive sign, that is, in those companies, manipulation was performed in order to present income as better than it is. for the purposes of connecting the em and the auditor's opinion, da takes the following values: 0 if manipulation is identified and 1 if manipulation is not identified. 3.3. methods as the research relates to the correlation between two categorical variables, the chi-square test of independence will be applied in order to examine whether there is a statistically significant difference in the modified auditor's opinion in state-owned companies in which manipulation was identified and those in which it was not identified. also, the chi-square goodness of fit test will be used to test whether the observed distribution of modified opinion within state-owned companies where manipulation was identified corresponds to the one expected based on the structure of modified opinion for the total population. 4. empirical results and discussion a chi-square test of independence was applied to test the correlation between the auditor's modified opinion and em. table 2 summarizes the results of the distribution of auditors' opinions in state-owned companies of the republic of serbia in which manipulation was identified and those in which manipulation was not identified. table 2 distribution of auditors' opinions in state-owned companies of the republic of serbia manipulation total exists does not exist a u d it o p in io n modified count 22 32 54 % within audit opinion 40.7% 59.3% 100.0% % within manipulation 95.7% 78.0% 84.4% % of total 34.4% 50.0% 84.4% unmodified count 1 9 10 % within audit opinion 10.0% 90.0% 100.0% % within manipulation 4.3% 22.0% 15.6% % of total 1.6% 14.1% 15.6% count 23 41 64 % of total 35.9% 64.1% 100.0% source: author’s calculations based on data available in annual activity reports for 2018, 2019, 2020 and 2021 of state audit institution and financial reports for 2018, 2019, 2020 and 2021 state-owned companies in sample 292 m. đorđević, d. spasić chi-square test of independence (with continuity correction according to yates') showed no significant correlation between observed variables, x2 (1, n = 64) = 2.257, p = .133, phi= .233. table 3 shows the results of the chi-square goodness of fit test of differences between the identified and expected distribution of modified opinion within state-owned companies where manipulation was identified and those where it was not. table 3 observed and expected frequencies of audit opinion by type and the existence of manipulation in financial statements observed n expected n residual manipulation exists modified 22 19.1 2.9 unmodified 1 3.9 -2.9 manipulation does not exist modified 32 34 -2.0 unmodified 9 7 2.0 source: author’s calculations based on data available in annual activity reports for 2018, 2019, 2020 and 2021 of state audit institution and financial reports for 2018, 2019, 2020 and 2021 state-owned companies in sample table 3 clearly shows that the observed modified auditor opinion on the financial statements of state-owned companies in which manipulation was identified (22 modified opinions) is higher than expected (19.1), established based on the previously set proportion, i.e. the opinion structure for the total population. nevertheless, the result of the chi-square goodness of fit test indicates that it is a very small difference that is not statistically significant ((x2 (1, n = 23) = 2.609, p = .106). the previous table also indicates that the observed modified auditor opinion is represented to a lesser extent (32) than expected (34) in state-owned companies in which manipulation in financial statements was not identified. however, even that difference is not considered statistically significant ((x2 (1, n = 41) = .712, p=.399). the presented results make it clear that none of the hypotheses about the correlation between em and the modified auditor opinion have been confirmed. first, the distribution of modified opinion in state-owned companies in which manipulation was identified and in those in which it was not is not statistically significant. true, most of the auditor opinions on financial statements of state-owned companies in which manipulation was identified was modified (as many as 22 out of 23). however, the situation in terms of modified auditor opinion is no better for state-owned companies where manipulation was not confirmed out of 41 auditor's opinions, 32 have been modified. also, although the modified auditor opinion in state-owned companies in which manipulation was identified is more prevalent than expected, and on the contrary, less prevalent than expected in state-owned companies in which manipulation was not identified, these differences are minor, i.e. they have no statistical significance. the results obtained in this way on the sample of state-owned companies in the republic of serbia are consistent with the results of research by tsipouridou & spathis (2014), gajevszky (2014), othman (2017), garcia-blandon (2014) spain, veronika (2020), sharf&abu-nassar (2021), imen&anis (2021) and point to the fact that there is no significant correlation between em and the modified auditor opinion. since, according to many authors (othman & zeghal, 2006; imen & anis, 2021), audit quality is a significant factor in identifying em, the obtained research results, at modified audit opinion and earnings management in state-owned companies: evidence from serbia 293 first glance, point to a low level of auditor commitment to the issue of em, that is, “auditors do not take into account the effect of em when forming the audit opinion.” in this way, they are not even able to warn users of information from financial statements by modifying their opinion. however, if we analyze modified opinions in relation to non/identification of em, the situation may change. table 4 presents the types of modified auditor opinion on financial statements of state-owned companies in which em has been identified. as the table shows, as many as 22 state-owned companies in which em was identified received a modified auditor opinion (which makes up 95.65% of the total of 23). table 4 modification of audit opinion in state-owned companies in which em has been identified type of modified opinion number of state-owned companies with identified em with exception/s 19 adverse 2 disclaimer of opinion 1 total 22 source: authors’ calculation based on the analysis of the audit reports of these state-owned companies and especially the summary of detected irregularities and the stated basis for expressing a modified opinion, the auditors identified 20 state-owned companies that manipulated earnings by overestimating or underestimating income and expenses. of those 20 state-owned companies, 17 were found to have manipulated revenues and expenses, which had a material but not pervasive effect on the financial statements, which is why those companies received a qualified auditor opinion on financial statements. in 2 state-owned companies, the manipulation had a material and pervasive effect on financial statements, which is why those companies received a negative opinion. in one company, the auditors were limited in gathering enough relevant audit evidence (which may be a consequence of concealment of evidence by the management due to manipulations), and the auditor abstained from issuing an opinion at that company. in the remaining 2 state-owned companies, the auditors failed to identify the manipulation of income and expenses, but based their qualified opinion on financial statements on non-up-to-date records and non-compliance of data with relevant state institutions. based on this analysis, it would be unrealistic to criticize the quality of the audit procedures implemented, because out of 23 state-owned companies where em was identified, 22 received a modified opinion on the financial statements, while in one company the auditors made an omission. on the other hand, if we looked at the 32 state-owned companies that received a modified opinion and the da did not indicate that, then we could look for the answer in the em category. more precisely, ronen & yaari (2008) “classify em in three distinct groups: ▪ white em (beneficial) enhances the transparency of reports, ▪ gray – managing reports within the boundaries of compliance with bright-line standards (gray), which could be either opportunistic or efficiency enhancing and ▪ black – black earnings management involves absolute misrepresentation. it assumes practices intended to misrepresent or reduce transparency in financial statements.” 294 m. đorđević, d. spasić therefore, in 32 companies in which no em was identified and which received a modified auditor’s opinion on the financial statements, it is possible that the auditors identified the so-called gray em. 5. conclusion earnings management assumes one of the strategies of financial result’ manipulation, where the management tends to show a changed impression of the business by a legitimate choice of accounting procedures or a deliberate omission of material facts. although it was initially associated with companies in the private sector, the concept of em is increasingly discussed in the public sector as well. this is primarily in state-owned companies that use the accrual basis of accounting, which is also the case with stateowned companies in the republic of serbia. in addition, state-owned companies are increasingly exposed to competition, along with strict budget constraints and institutional and management changes, which results in the management's desire to make appropriate interventions in the financial reporting process in order to achieve some specific goal. as ем seriously questions the truthfulness and reliability of information in financial reports, and auditing is one of the most important links in the supply chain of financial reporting quality, the question of the ability of auditors to recognize em is increasingly highlighted. users of information from financial statements expect the audit to adequately control the correct application of accounting standards, pre-defined accounting policies and procedures and, accordingly, to express their opinion on the objectivity and fairness of the financial statements, i.e. on whether they have been drawn up in accordance with all relevant issues with legal and professional regulations. in cases of identification of ем, auditors act in the public interest by modifying their opinion. the purpose of the research conducted in the paper was to examine the relationship between the auditor's modified opinion and em in state-owned companies in the republic of serbia. the obtained results did not support the hypothesis that there is a significant positive relationship between modified audit opinion and em, nor that there is a statistically significant difference in the distribution of modified audit opinion in stateowned companies in which em is identified and in those where it is not. based on these results, one gets the first impression that auditors do not approach em with due care. however, the distribution of the auditor's modified opinion in state-owned enterprises in which em was identified and the analysis of the basis for the expression of the modified opinion in the entire population indicate the opposite. the contribution of this paper is twofold. furthermore, bearing in mind that the relationship between em and modified audit opinion is one of the most important subjects of interest among researchers worldwide, it is of great importance to determine and present this relationship in state-owned companies in the republic of serbia. in this way, awareness will certainly be raised about the presence of em in state-owned companies and, in particular, about the importance of auditing as a mechanism for preventing and detecting manipulations. consequently, all this has the potential to influence the improvement of the quality of financial reporting of state-owned companies in the republic of serbia. modified audit opinion and earnings management in state-owned companies: evidence from serbia 295 references abolverdi, z., & kheradmand, a. 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(2021, may). factors that influence the auditors in issuing qualified opinion. in proceedings of the ninth international conference on entrepreneurship and business management (icebm 2020) (pp. 144-151). atlantis press. https://dx.doi.org/10.2991/aebmr.k.210507.022 modifikovano mišljenje revizije i upravljanje dobitkom u javnim preduzećima – stanje u srbiji cilj autora ovog rada jeste da istraže vezu između upravljanja dobitkom i modifikovanog mišljenja revizora u javnim preduzećima u republici srbiji. uzorak istraživanja čine 64 javna preduzeća čiji su finansijski izveštaji bili predmet revizije od strane državne revizorske institucije u periodu 2018-2021. godine. za potrebe identifikovanja upravljanja dobitkom u ovim javnim preduzećima korišćeni su finansijski izveštaji u periodu 2018-2021. rezultati istraživanja ukazuju da ne postoji pozitivna veza između upravljanja dobitkom i modifikovanog mišljenja revizora, odnosno da razlika u distribuciji modifikovanog mišljenja u javnim preduzećima u kojima je identifikovano i onima u kojima nije identifikovano upravljanje dobitkom nije statistički značajna. ovakvi rezultati inicijalno upućuju na zaključak da revizori ne uzimaju u obzir upravljanje dobitkom prilikom formiranja mišljenja, te ne šalju upozoravajuće signale korisnicima finansijskih izveštaja. međutim, ukoliko se sagleda distribucija modifikovanog mišljenja o finansijskim izveštajima javnih preduzeća u kojima je identifikovano upravljanje dobitkom, a posebno motiv upravljanja dobitkom, može se reći da su revizori državne revizorske institucije adekvatno posvećeni ovom pitanju. ključne reči: diskrecioni obračun, manipulacije, mišljenje sa rezervom, negativno mišljenje, uzdržavanje od mišljenja https://doi.org/10.1007/s10997-021-09589-3 https://doi.org/10.1007/s10997-021-09589-3 https://journals.ju.edu.jo/jjba/%0barticle/view/101354 https://journals.ju.edu.jo/jjba/%0barticle/view/101354 https://www.dri.rs/dokumenti/godisnji-izvestaji-o-radu.93.html https://doi.org/10.1016/j.accfor.2013.09.002 https://dx.doi.org/10.2991/aebmr.k.210507.022 plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 2, 2016, pp. 177 185 higher education and economic growth: swedish evidence from multivariate framework1 udc 378+330.35 saša obradović, nemanja lojanica faculty of economics university of kragujevac, serbia abstract. in this article, we investigate the long and short term relationship between higher education and economic growth in multivariate framework for sweden, for the period from 1971 to 2013, by using ardl approach. toda-yamamoto procedures of granger noncausality test were applied to detect the direction of causality in the relationship between economic growth and higher education. we found that unidirectional causality between higher education and real gdp per capita exists. this relationship is positive, but not mutually reinforcing. key words: education, economic growth, ardl, toda-yamamoto, sweden introduction in this research, the long term and causal relationships between higher education and economic growth in sweden were investigated using ardl co-integration and toda yamamoto causality test. the mutual interaction between higher education and economic growth was investigated in the presence of different variables, in the case of developed and developing countries, considering previous researches. theory of endogenous growth suggests importance of the human capital as one of the main sources of the economic growth. apart from theoretical aspects, numerous empirical studies have focused on the issue of education and economic growth. in that sense, great number of empirical researches used education level to measure the level of human capital. the positive impact of education on the economic growth is confirmed in a lot of studies (barro 1991; mankiw et al. 1992; barro i sala martin 1995; hanushek i kimko 2000, zivengwa 2012, hussin, et al 2012, pegkas, 2014). furthermore, de meulemeester and rochat (1995), analyzed the relationships between higher education and economic development for various developed countries using the johansen co-integration and the granger causality approach,. their results show that there 1received january 7, 2016 / revised april 26, 2016 / accepted may 10, 2016 corresponding author: nemanja lojanica faculty of economics, university of kragujevac, đure pucara 3, 34 000 kragujevac, serbia e-mail: nlojanica@kg.ac.rs 178 s. obradović, n. lojanica is unidirectional causality running from higher education to economic development for four countries: sweden (1910-1986), uk (1919-1987), and france (1899-1986). khorasgani (2009) demonstrates by using ardl model that long and short-term relationship exists between higher education variable and economic growth of iran. his results suggest that higher education had positive influence on the economic growth. katircioğlu et al. (2014) investigate the higher education-led growth hypothesis in the case of northern cyprus. they found that unidirectional causality from higher education to real income growth exists. there is also long-term equilibrium relationship between economic growth and higher education sector in northern cyprus. narayan and smyth (2006) analyzed the causality between real income, real investment and higher education for the republic of china in the period of 1952-1999. the obtained results show evidence of co-integration when real investment is the dependent variable. their findings suggest that tertiary education and economic growth have major role in propelling real investment. the interrelationship between higher education and economic growth has been subject of danacica et al. (2010) research. the authors examined this relationship in romania for the period 1980-2008 using the bivariate causality analysis,. their results showed unidirectional causality running from gdp to higher education. huang et al. (2009) discovered that co-integration relationship exists between enrollment of higher education and actual gdp per capita in china for the period 1972-2007. empirical result from this study reveals the long-term positive interaction. lin (2004) investigates the effects of higher education on economic growth in taiwan over the time period 1965–2000. results reveal that higher education provided a positive and significant effect on taiwan’s economic growth. on the otherhand , increasing education at all levels, except tertiary has a significant effect on growth, according to pereira and aubyn (2009). considering the higher education and growth performance of pakistan, for the period 1980-2011, wasim et al. (2014) discovered bidirectional causal relationship between these two variables. this result is in accordance with asteriou and agiomirgianakis (2001), omojimite (2010) and yakubu and akanegbu (2015). the conducted empirical research in a number of countries around the world showed that the causal link between higher education and economic growth as a rule, should exist. the rest of the paper is as follows: after the introduction, we present the methodology used, followed by the empirical results and causality test. finally, the concluding observations include a brief discussion of the results. 1. methodology to test the relationship between economic growth and the observed variables, ardl bounds testing approach was used (pesaran et al., 2001). the advantages of this approach are reflected in the fact that it is not necessary to accurately identify the order of the underline series (hsiao, 1997). this is an advantage, if we consider a standard co-integration analysis that requires classification variables of the same order of integration. in tests by ardl model, the relation between the variables is possible regardless of whether the variables are i (1), i(0) or mixed order of integration. this approach is particularly suitable for a given sample, because it can be applied to the variables that have a different order of integration. the only previous requirement for applying ardl testing approach is that no higher education and economic growth: swedish evidence from multivariate framework 179 variable is of the order of integration i (2). this approach is extremely suitable for small sample data, because it can get reliable results. the following empirical model describes the relationship between economic growth (gdp), life expectancy (lex), higher education (edu) and health expenditure (hec): gdpt = f (edut, lext, hect) (1) table 1 clemente–montanes-reyes structural breaks trended unit root test variable at level at first difference t-statistic tb1 tb2 t-statistic tb1 tb2 lex -1.891 (3) 1979 1992 -7.567 * (4) 1975 1993 edu -4.503 (2) 1991 1997 -5.212 *** (4) 1994 2003 lhec -5.829 (1) 1997 2004 -5.734 ** (3) 1981 1993 lgdp -3.956 (1) 1982 1996 -6.332 * (4) 1992 2006 note: the * , ** and *** indicates significant at 5 and 10 % level respectively. lag length of variables are shown in small parenthesis. source: author’s calculation in general, structural breaks test suggests that all variables have maximum order of integration of 1. formatting unrestricted error correction modela (uecm) involves short run dynamics and the long run information based on ardl testing approach. it can be expressed like this: 1 1111 11110t μlnhec+δeduα+δlexα+δlngdpα+ lnheceduα+lexα+lngdpα+α=lngdp zt n z zlt m =l l q =j jtj p i iti tlhectedutlextgdp            (2) co-integrating relationship among the variables in the equation is tested using the wald coefficient test. f-test for joint significance of the coefficients is performed to test the null hypothesis of no long term relationship between the variables against the alternative hypothesis of co-integration. it is as follows: ho: αlngdp = αlex = αlnhec = αedu = 0 (no co-integration); ha: αlngdp ≠ αlex ≠ αlnhec ≠ αedu ≠ 0 (co-integration); in the case that the computed value of f statistics exceeds the upper critical bound, we need to establish long and short run models. there is also need to check the robustness of ardl model through the diagnostic tests. it includes checking of normality (j-b test), serial correlation (lm test), heteroscedasticity (arch test) and the functional form of the model (ramsey reset test). it is also necessary to test the stability of the ardl approach by applying the cusum and cusumsq tests. for further verification of connection between observed variables, we employed granger non-causality test. this is based on the alternative method proposed by todayamamoto (1995). in this procedure, the augmented var (k+dmax) system is based on seemingly unrelated regression (sur) at the level which improves the power of the wald test (rambaldi and doran, 1996). the model is valid only if k > dmax where k is the number of lags and dmax is the maximum order of integration among all time series. the advantage of this model is suitability of performance even when the order of the 180 s. obradović, n. lojanica integration is mixed. there is no need for pre-testing of co-integration of the time series in order to obtain reliable results, which is another advantage of this model. the model can be specified as follows: tgdpit dk i i dk i itit eedublngdpaalngdp ln max 1 1 max 1 10         (3) teduit dk i i dk i itit elngdpdeduccedu         max 1 1 max 1 10 (4) where lngdp and edu are the variables, a0 and c0 are the constants a1 i , b1 i, c1 i and d1 i are parameters of the model and elngdpt and eedut are the error terms with the distinction of white noise. 2. data and empirical results in this study, we employed annual data from two different sources. data covers 1971-2013 period. the value of real gdp per capita was taken for the economic growth. higher education is proxied by gross enrollment rate, tertiary, both sexes (%). these two variables were taken from the world development indicators available online (world bank). we used health expenditure per capita and life expectancy from oecd health statistics. table 2 the results of ardl co-integration test panel i: bounds testing to co-integration estimated models fgdp(lngdp/lnhec,lex, edu) optimal lag structure (4,4,5,3) f statistics 4.833 ** significant level critical values (t=43) lower bounds upper bounds 1% level 4.983 6.423 5% level 3.535 4.733 10% level 2.893 3.983 panel ii: diagnostic tests r 2 0.750 adjusted-r 2 0.439 breusch-godfrey lm test 3.170(0.073) jarque-bera normality test 0.691(0.707) arch test for heteroscedasticity 3.466(0.071) ramsey reset test 0.953(0.344) note: asymptotic critical values are obtained from narayan (2005); the bounds test: case iii: unrestricted intercept and no trend. the ** indicates significant at 5 % level, respectively. source: author’s calculation ardl procedure requires appropriate lag to calculate f statistics. the lag length is selected by using akaike information criteria. in the next step, the calculation of f statistics should reveal whether there is co-integration among economic growth, education, healthcare higher education and economic growth: swedish evidence from multivariate framework 181 expenditures and life expectancy. we have used critical bounds provided by narayan (2005) which are more suitable for small sample data (between 30 and 80 observations). our empirical evidence reveals that upper critical bound is less than calculating f statistics at 5% level. this implies co-integration confirming long run relationship between the observed variables. post-estimation diagnostics confirms the robustness of the model. jarque-bera normality test reports that the estimated residuals are normally distributed. also, there is no heteroscedasticity problem and residuals are not serially correlated. the functional form of the model is well specified. table 3 long and short run results long run analysis dependent variable lngdp variable coefficient t-statistic c 5.22 4.91 lnhec -0.011 -0.204 lex 0.066 3.806 edu 0.002 3.012 short run analysis dependent variable δlngdp c 0.015 0.744 δlnhec 0.054 0.429 δlex 0.074 0.839 δedu 0.002 1.656 ecm(-1) -0.987 -2.841 short run diagnostic test r 2 0,606 adjustedr 2 0.235 f-statistics 1.632 statistic prob. value breusch-godfrey lm test 1.884 0.184 jarque-bera normality test 1.796 0.202 arch test for heteroscedasticity 2.880 0.099 ramsey reset test 2.756 0.093 source: author’s calculation based on the results, it can be noted that a 1% increase in higher education is linked with an increase in gdp by 0.002%, considering the long run elasticity and keeping all other things constant. the coefficient of the error correction term, ecm(-1) shows the speed of equilibrium adjustment from short to long run. this is confirmation of the integrity of the long termrelationship (bannerjee et al., 1998). it is statistically significant and negative. the value of ecm(-1) implies that the economic growth is corrected from the short to long run equilibrium almost perfectly by 98%. sensitivity analysis shows satisfactory results which are shown in lower segment of table 3. 182 s. obradović, n. lojanica -15 -10 -5 0 5 10 15 1996 1998 2000 2002 2004 2006 2008 2010 2012 cusum 5% significance fig. 1 cusum test -0.4 0.0 0.4 0.8 1.2 1.6 1996 1998 2000 2002 2004 2006 2008 2010 2012 cusum of squares 5% significance fig. 2 cusum of squares source: author’s calculation short term stability is investigated by cusum and cusumsq tests. according to the cusumsq test, the plots fall outside the critical bands at the 5 % level. this means possible instability of the parameters and it happens around the year 2004. we also examine significance and check for structural break in the data using chow test which is more reliable than graphs. plots of graphs often tend to present dissimilar and misleading results (leow, 2004). chow test does not indicate any significant structural break, because the p-value of the f-statistics is more than 0.05, so the null hypothesis is not rejected. in other words, ardl estimates are efficient. higher education and economic growth: swedish evidence from multivariate framework 183 table 4 chow forecast test forecast period f-statistics probability of f-statistics 2004 2013 2.790 0.079 source: author’s calculation 3. causality test since the focus of our attention is the relationship of the higher education and gdp, for further testing and verification of the relation between these two variables the causality test procedure is used. before the access to testing by toda yamamoto procedure, it is necessary to make a minimum diagnostics of the model. according to the test results, the var model is stable (stationary) because all the roots are within the unit circle. var residual normality tests satisfies the null hypothesis that residuals are multivariate normal with p-value (0.3497). the test of serial correlation is also with adequate p-value (0.8525). finally, we conduct the test of causality. test results of the toda-yamamoto model are shown in the table 5. the null hypothesis that the higher education does not cause gdp is rejected, which means that there is a causal relation in granger terms from the direction of higher education to the economic growth, at the 10 % level, respectively. otherwise, the results indicate that there is no unidirectional causal relation that goes from the direction of economic growth to higher education based on the results of the testing. results of the analysis indicate the existence of the unidirectional causality. table 5 results of the granger non-causality test null hypothesis chi-square df probability edu does not granger cause gdp 9.49 5 0.09 gdp does not granger cause edu 5.72 5 0.33 source: author’s calculation conclusion this paper examines the co-integration and causal relationship between higher education and real gdp in sweden within a multivariate framework that includes healthcare expenditure and life expectancy during the time period 1971-2013. the specified speed of adjustment to long-term equilibrium is very high and unidirectional relationship has been determined. multivariate co-integration analysis provided in the paper shows that co-integration exists in the relations which include real gdp, healthcare expenditure, life expectancy and higher education. a unidirectional causality is found that runs from higher education to real gdp per capita. considering the future research, it may be interesting to explore the multivariate causality between the observed variables and economic growth in comparison with other eu member states. acknowledgement: this paper is a part of research 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(2012), investigating the causal relationship between education and economic growth in zimbabwe, global journal of management and business research, volume 12(8): 107-117. http://link.springer.com/journal/11135 http://www.emeraldinsight.com/author/fadaee+khorasgani%2c+mahdi http://www.oecd.org/els/health-systems/health-data http://www.oecd.org/els/health-systems/health-data higher education and economic growth: swedish evidence from multivariate framework 185 visoko obrazovanje i ekonomski rast: multivarijantni okvir na primeru švedske u ovom radu, ispitujemo kratkoročnu i dugoročnu povezanost visokog obrazovanja i ekonomskog rasta na primeru ekonomije švedske koristeći multivarijantni pristup u periodu 1971-2013, primenom ardl metoda. toda-yamamoto procedura grendžerove neuzročnosti je primenjena za ispitivanje pravca kauzalnosti varijabli ekonomskog rasta i visokog obrazovanja. rezultati su potvrdili jednosmernu uzročnost visokog obrazovanja i bruto domaćeg proizvoda po glavi stanovnika. ova veza je pozitivna, ali se uzajamno ne pojačava. ključne reči: visoko obrazovanje, ekonomski rast, ardl, toda-yamamoto, švedska 10751 facta universitatis series: economics and organization vol. 19, no 2, 2022, pp. 155 166 https://doi.org/10.22190/fueo220511012s © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper impact of the covid-19 pandemic on the economic effects of tourism in central, eastern and southeastern europe (cesee) countries1 udc 616.98:578.834]:338.48(4) tanja stanišić, miljan leković, sonja milutinović university of kragujevac, faculty of hotel management and tourism in vrnjačka banja, republic of serbia orcid id: tanja stanišić https://orcid.org/0000-0001-5809-794x miljan leković https://orcid.org/0000-0002-4952-3991 sonja milutinović https://orcid.org/0000-0001-9913-4495 abstract. the covid-19 pandemic has brought numerous challenges and limitations globally. countries around the world are facing the negative socio-economic consequences of the global health crisis. as the tourism sector is one of the most important sectors of the global economy and also one of the sectors hit hardest by the crisis, the consequences of the negative impact of this crisis in tourism are very wide. the subject of this paper is to investigate the impact of the covid-19 pandemic on the economic effects of tourism in central, eastern and southern european (cesee) countries. the aim of this paper is to analyse the homogeneity, i.e. heterogeneity of the analysed countries in terms of the negative impacts of the crisis on the economic effects of tourism through the analysis of the reduction of the contribution of tourism to key macroeconomic indicators under the influence of the covid-19 pandemic. by applying cross-country comparison and cluster analysis, it was concluded that cesee countries are not homogeneous in this sense, as well as that countries in which the importance of tourism for the national economy is greater are more severely affected by the crisis. key words: tourism, economic effects, covid-19 jel classification: z30, z32 received may 11, 2022 / accepted august 18, 2022 corresponding author: tanja stanišić faculty of hotel management and tourism in vrnjačka banja, university of kragujevac, vojvodjanska bb, 36210 vrnjačka banja, republic of serbia | e-mail: tanja.stanisic@gmail.com https://orcid.org/0000-0001-5809-794x https://orcid.org/0000-0002-4952-3991 https://orcid.org/0000-0001-9913-4495 mailto:tanja.stanisic@gmail.com 156 t. stanišić, m. leković, s. milutinović 1. introduction tourism is an industry that has shown exceptional sensitivity to various types of crises of economic and non-economic nature. the data show that tourist demand has always shown a high degree of elasticity in relation to the influence of external factors. on the other hand, tourism has usually shown an exceptional ability to recover in the previous period. tourist traffic reached the level of the pre-crisis period very quickly in the years after the crisis or even exceeded it. however, none of the crises recorded so far in the modern development of tourism has had such intense negative effects as the still current health crisis, i.e. the covid-19 pandemic. the world is currently facing a health crisis that has a number of specifics in general, but also in terms of the way it affects the tourism sector. the dramatic decline in tourist traffic is of a global character and applies to all countries of the world, and a complete recovery is uncertain even after a little more than two years. the economic collapse caused by the crisis has been extremely dramatic, the impact on the tourism industry is very destructive, the crisis has led and is expected to lead to further changes in many tourism segments (kreiner & ram, 2020; škare et al., 2021). the covid-19 pandemic has brought a number of lessons to learn from both demand side and supply side in tourism. in addition to its sensitivity, tourism is a strategic sector of the economy in many countries around the world with numerous economic effects (luković & stojković, 2020). the contribution of tourism to key macroeconomic aggregates, i.e. gross domestic product (gdp) and employment is significant. this fact further deepens the serious negative effects of the crisis. considering the differently perceived importance of tourism for the national economy of a certain country, but also considering their different possibilities, in the past period, different responses of the tourism policy of countries have been recorded when it comes to mitigating the negative effects of the crisis on tourism. when it comes to the economic effects of tourism, it can be generally concluded that all countries are facing a serious reduction in the share of tourism in gdp and employment. despite numerous papers published on the topic of the covid-19 impact on tourism, there is still, to the knowledge of the authors, no significant academic discussion on the impact of the pandemic on the economic effects of tourism, nor have significant efforts to perform comparative cross-country analysis been made. the paper is an attempt to contribute to filling this gap in the literature. the subject of the analysis are the central, eastern and southeastern europe (cesee) countries, with the intention to review and compare the intensity of the reduction of tourism share in gdp and employment of the analysed countries under the influence of the covid-19 pandemic. the aim of this paper is to analyse the participation of tourism in key macroeconomic indicators in the year before the crisis and the first year of the crisis, to see the homogeneity and heterogeneity of the analysed countries in terms of negative impacts of the crisis on economic effects of tourism. the analysis will provide an answer to the question of whether countries in which tourism is more important in the national economy are more affected by the negative effects of the crisis. 2. literature review as tourism is based on the movement of people, it is not surprising that the covid-19 pandemic has made tourism one of the most vulnerable activities. namely, governments around the world have made enormous efforts to prevent the spread of the virus, and impact of the covid-19 pandemic on the economic effects of tourism in cesee countries 157 these efforts have largely related to restricting the movement of people. restrictions on mobility have had a direct negative impact on tourism (özen & özdemir, 2021). drastic measures taken by certain countries, which were reflected in the locking in a certain period of the country as a whole or its most endangered cities and areas and banning or restricting the entry of foreign citizens into the country, resulted in a huge blow to the tourism sector, tourist destinations and tourism economy (fotiadis et al., 2021; radić et al., 2021). it should be emphasized that the states on the one hand made efforts to support tourism, but also that tourism is often characterized by governments during the pandemic as a potentially risky activity. residents are urged not to travel abroad. also, in many countries there were different entry conditions for foreign and domestic citizens. in the academic literature, the issue of interdependence between international tourism and covid19 cases has been addressed by farzanegan et al. (2020). using regression analysis, they confirmed that countries with developed international tourism and a higher number of foreign tourist arrivals are more prone to cases of the covid-19. restrictions imposed by governments around the world are one of the causes of the decline in tourism, but other equally important causes are the tourists themselves. concerned about their safety and security, with the spread of news about the covid-19 pandemic, travellers often decided to cancel or delay the trips immediately and showed a high degree of sensitivity to the effects of this external shock (uğur & akbıyık, 2020). certain authors emphasize that the pandemic has changed, not only behaviour, but also the psyche of tourists and that it will likely settle on a different, i.e. new equilibrium in the post-crisis period (kock, 2020; perčić & spasić, 2021). this new balance will most likely be characterized by an increased level of fear, concern and carefulness of tourists. in the literature, in addition to analysing the impact of the pandemic on consumer behaviour, indicators of tourism development and tourism enterprises, with special emphasis on the sensitivity of the hospitality and air travel industry, special attention is paid to the fact that the new circumstances represent a challenge, but also a chance for significant changes in tourism and the establishment of a certain new, more desirable paradigm of tourism development. the success of modern tourism development has been measured and expressed by the growing number of tourists for decades. intense growth has led to over-tourism, and the covid-19 pandemic is an opportunity to critically rethink this way of looking at success. the massiveness of global tourism carries a number of interrelated risks and increases the negative contribution of the tourism sector to climate change. the current pandemic is an opportunity for collective learning how to transform tourism into a sustainable form and to rethink the model of tourism growth (gössling et al., 2020; payne et al., 2021). sharma et al. (2021) state that this challenge may be an opportunity for long-discussed forms of tourism, but which do not yet have the position they deserve, such as local tourism and sustainable tourism. the current situation is seen as an opportunity for awakening and desirable transformations in tourism, which will become more sustainable, inclusive and in which the needs and interests of all stakeholders will have equal importance and attention (cheer, 2020). the changes that are taking place point to the need to re-respect the needs of host communities in the survival and development strategy of tourism (lapointe, 2020). in this context, it can be concluded that we are at a crossroads which is a perfect opportunity to choose the path that the future development of tourism will takeby taking advantage of favourable environmental and other impacts brought by the covid-19 pandemic (ioannides & gyimóthy, 2020; nagaj & žuromskaitė, 2021). a 158 t. stanišić, m. leković, s. milutinović more balanced and sustainable tourism development is currently seen as an option with no alternative. the question that can be asked is whether the cost of potential greater environmental sustainability will be paid by the economic importance and role of tourism. also, residents of tourist destinations themselves have shown a willingness to sacrifice the economic well-being in order to avoid the risks posed by the covid-19 pandemic, i.e. potential social costs. (qiu et al., 2020). the revenues generated by the tourism industry are seriously threatened by the covid-19 pandemic. polyzos et al. (2020), predicting the impact of the current pandemic on tourist arrivals, emphasize that they will not so easily return to previous trend values, which can cause a number of devastating economic effects. the problems faced by the enterprises of the tourism industry due to the reduction and cancellation of travels in the past two years have led and will continue to lead to a reduction in the number of employees in the future as one of the ways of cost cutting. the other side of the problem is the fact that tourism is a labour-intensive activity and that many workers have direct contact with tourists, which accelerates the transmission of the virus (volkmann et al., 2021). as tourism is a significant generator of gdp and employment in many countries, some authors have focused their research on the impact of the covid-19 pandemic on the economic effects of tourism. zhang et al. (2021) use a combination of econometric and qualitative methodology to predict the recovery of tourist demand and evaluate the economic effects of the covid-19 pandemic on the tourism industry. salehnia et al. (2020), examining the impact of the covid-19 pandemic on the tourism industry of european countries, conclude that the impact is much more acute than expected, and that countries, especially those in which tourism generated high incomes, must seek solutions to compensate tourism industry losses. in the european union, either at the supranational level or at the national level, i.e. at the level of individual member states, a number of tourism policy measures have been implemented which were expected to enable the recovery of tourism. these measures were of a financial nature, through various types of assistance to companies in the field of tourism, but also measures aimed at ensuring a higher level of safety and security of tourists and health protection. a joint action and recovery plan at the eu level is unlikely, due to the fact that tourism is not equally important for the all eu member states (bera et al., 2020). in the existing literature, there are attempts to compare the impact of the covid-19 pandemic on the economic effects of tourism between individual countries or groups of countries. investigating the effects of covid-19 in central european countries, romisch (2020) states that economic effects vary by country, but that italy, as the first country affected by the pandemic in europe, and croatia, as the country that suffered a sharp decline in tourism, experienced the greatest negative economic consequences in 2020. the author estimates that the intensity of the negative impact of the decline in tourism on the countries of the region will depend on the importance of tourism as a source of income and employment. xu (2021) is researching the impact of the covid-19 pandemic on the international tourism of northern and southern european countries. the author estimates that the impact of the crisis on tourism is worse in the north than in the southern european countries. as one of the arguments for such a situation, he cites the fact that in countries in which economic development is more dependent on tourism, greater efforts are being made to stabilize the effect of external shocks on tourism. this is in contradiction with the conclusions reached by barkas et al. (2020). namely, they state that the economic contributions of tourism, in terms impact of the covid-19 pandemic on the economic effects of tourism in cesee countries 159 of both output and employment, are not significantly correlated with the measures that countries are taking to respond to the crisis. the governments of many countries have prioritized the preservation of employee income and in this regard have given priority to financial support to companies to retain their employees, preserve their salaries or provide retraining of workers in tourism, regardless of the level of tourism contribution to key macroeconomic aggregates. given the unprecedented decline in the number of tourist arrivals at the global level, there is a certain degree of persistence in the movement of both indicators, the contribution of tourism to gdp and the contribution of tourism to employment, but the indicators are much lower than before the pandemics (payne et al., 2021). 3. methodological framework of research the methodological basis of the research is cross-country comparison and cluster analysis. the cross-country comparison is made based on data on the economic effects of tourism in cesee countries. cluster analysis as a set of multivariate statistical analysis methods is widely used in tourism research (brida et al., 2020; hrubcova et al., 2016; roman et al., 2020) and in this paper it is used as a quantitative method of classifying cesee countries according to the intensity of the impact of the covid-19 pandemic on the economic effects of tourism. the economic effects of tourism are measured by the contribution of tourism to gdp and employment as the basic macroeconomic aggregates. the information base of the research consists of data of the world tourism and travel council (wttc). the classification of countries into central, eastern, and southeastern europe countries is performed according to the methodology of the international monetary fund (imf, 2016). in accordance with the defined subject and the aim of the research, the paper starts from the following hypotheses: h1: central, eastern, and southeastern european countries (cesee) are not homogeneous in terms of the negative impact of the covid-19 pandemic on the economic effects of tourism. h2: the negative impact of the covid-19 pandemic is greater in cesee countries in which the contribution of tourism to basic macroeconomic aggregates is higher. the presentation of research results and their discussion are divided into two segments. first, the information base of the research is presented, with cross-country comparisons performed according to the analysed indicators (contribution of tourism to gdp and contribution of tourism to employment). the main goal of this part of the analysis is to identify cesee countries in which tourism in regular circumstances is of relatively great economic importance. after that, the results of the cluster analysis are presented in order to determine the homogeneity, i.e. heterogeneity of cesee countries according to the intensity of the negative effects of the covid-18 pandemic on the economic effects of tourism. 4. research results and discussions 4.1. cross-country comparison table 1 shows data on the contribution of tourism to gdp and employment in cesee countries in the year before the crisis (2019) and the first year of the crisis (2020), as well as the percentage reduction of tourism contribution to these macroeconomic aggregates 160 t. stanišić, m. leković, s. milutinović 2020 compared to 2019. also, the average values of tourism share in gdp and employment for the observed group of countries are given, primarily with the aim of identifying countries in which tourism is of relatively greater economic importance. table 1 the contribution of tourism to gdp and employment in cesee countries (2019 and 2020) country contribution to gdp contribution to employment 2019 (% of total gdp) 2020 (%) 20/19 (%) 2019 (% of total employment) 2020 (%) 20/19 (%) albania 20.5 10.6 -51.6 21.3 17.5 -20.2 belarus 6.1 2.8 -54.6 5.9 4.6 -21.8 bosnia and herzegovina 9.8 3.5 -66.1 10.5 8.4 -21.2 bulgaria 10.7 4.8 -57.4 10.6 9.5 -13.3 croatia 24.3 10.2 -61.9 22.2 19.0 -15.6 czech republic 6.2 3.9 -40.0 8.2 7.5 -9.6 estonia 11.8 5.6 -53.5 11.3 11.4 -2.3 hungary 7.8 3.8 -54.4 9.2 8.7 -6.7 latvia 7.7 4.0 -50.4 8.3 4.6 -11.1 lithuania 6.0 2.7 -55.2 4.8 3.9 -20.3 moldova 6.6 3.1 -55.7 11.4 10.0 -17.6 montenegro 30.9 8.8 -75.0 31.9 27.3 -20.3 north macedonia 6.6 3.3 -53.0 6.8 5.7 -17.7 poland 4.7 2.2 -54.1 5.0 4.8 -4.6 romania 6.1 2.9 -55.5 6.8 6.7 -2.8 russia 4.9 2.7 -47.0 5.6 5.4 -5.1 serbia 5.9 2.8 -54.0 6.3 5.0 -19.3 slovak republic 6.4 3.2 -53.0 6.3 5.9 -8.9 slovenia 10.5 6.5 -42.3 11.0 10.6 -4.7 turkey 11.0 5.0 -54.2 9.3 8.1 -16.3 ukraine 6.3 3.4 -44.2 6.9 6.3 -11.9 average 10.3 4.5 10.4 9.1 note: ◼ country with an indicator value that is above the group average. source: authors based on wttc (2021) if the economic effects of tourism in cesee countries in 2019 are observed, it can be concluded that countries in which tourism is relatively important for their economic development are the following: albania, bulgaria, croatia, estonia, montenegro, slovenia and turkey. in these countries, the share of tourism in gdp was higher than the average for the analysed group as a whole. at the same time, montenegro is the country with the largest share of tourism in gdp in 2019. the mentioned countries are also the countries that recorded a percentage share of tourism in gdp higher than the average for the cesee group of countries as a whole in 2020. when it comes to the importance of tourism as a generator of jobs, i.e. the driver of employment, the countries in which this importance can be assessed relatively large according to data for 2019 are: albania, slovenia, bulgaria, estonia, moldova, montenegro and bosnia and herzegovina. with the exception of bosnia and herzegovina, these are also countries that record the share of tourism in employment higher than the average share for the group as a whole in 2020. impact of the covid-19 pandemic on the economic effects of tourism in cesee countries 161 the leader in the contribution of tourism to employment is montenegro, with the highest percentage in both years. if the average values of tourism share in the basic macroeconomic indicators of the analysed group of countries are observed, another conclusion can be reached. namely, it is evident that the covid-19 pandemic had a much more negative impact on the share of tourism in gdp than a negative impact on employment in tourism during 2020. this may be a consequence of the intensive efforts of governments to maintain employment as much as possible in the country, which have been reflected in various measures and support programs. this is in line with the conclusions reached by barkas et al. (2020), which state that many countries have made as a priority in the fight against the covid-19 pandemic to preserve employment, in general, and, above all, in the tourism sector as the most affected part of the economy. 4.2. results of cluster analysis cluster analysis is used for the purpose of grouping cesee countries into three separate clusters, where the criteria for the classification of countries are the percentage reduction in the contribution of tourism to gdp and the percentage reduction in the contribution of tourism to employment in 2020 compared to 2019. the k-means cluster analysis is applied and the final cluster centres are shown in table 2. table 2 final cluster centres variables cluster 1 2 3 contribution to gdp [20/19 (%)] -55.29 -49.44 -70.55 contribution to employment [20/19 (%)] -18.01 -6.77 -20.75 source: author’s research based on the data shown in table 2, cluster 3 can be identified as the cluster with the worst performance, i.e. the cluster that includes countries with the most intensive reduction in tourism contribution to gdp and employment in 2020 compared to 2019. it is followed by cluster 1, while cluster 2 can be marked as a cluster with the best performance, i.e. this cluster includes countries with the lowest percentage reduction in the contribution of tourism to gdp and employment. in order to test the statistical significance of the difference between clusters according to the observed variables, the post hoc test is applied in the research. the test results are shown in table 3. these results indicate that there is a statistically significant difference between the selected clusters according to the analysed indicators, i.e. according to the percentage reduction of tourism contribution to gdp and the percentage reduction of tourism contribution to employment 2020 compared to 2019 in almost all observed comparative combinations. in this way, the first initial assumption of the research was confirmed. specifically, cluster 2, which was designated as cluster with the best performance or the cluster that includes countries in which the negative effects of the covid-19 pandemic on the economic effects of tourism are least pronounced, is statistically significantly different from cluster 1 and cluster 3 according to both observed indicators (contribution of tourism to gdp and contribution of tourism to employment). 162 t. stanišić, m. leković, s. milutinović table 3 multiple comparisons (post hoc test) variables (i) cluster (j) cluster mean difference (i-j) std. error sig. contribution to gdp [20/19 (%)] 1.00 2.00 -5.84889 * 2.15710 0.036 3.00 15.26111 * 3.67008 0.002 2.00 1.00 5.84889 * 2.15710 0.036 3.00 21.11000 * 3.63656 0.000 3.00 1.00 -15.26111 * 3.67008 0.002 2.00 -21.11000 * 3.63656 0.000 contribution to employment [20/19 (%)] 1.00 2.00 -11.24111 * 1.38178 0.000 3.00 2.73889 2.35095 0.488 2.00 1.00 11.24111 * 1.38178 0.000 3.00 13.98000 * 2.32948 0.000 3.00 1.00 -2.73889 2.35095 0.488 2.00 -13.98000 * 2.32948 0.000 note: *the mean difference is significant at the 0.05 level source: author’s research there is a statistically significant difference between cluster 1 and cluster 3 when it comes to the percentage reduction in the contribution of tourism to gdp. on the other hand, a statistically significant difference is not observed only in the comparison of cluster 1 and cluster 3 when it comes to the percentage reduction of the contribution of tourism to employment. in other words, there are no significant oscillations of the percentage reduction in the contribution of tourism to employment between countries classified in cluster 3, as the cluster with the most intense negative impact of the covid19 pandemic on the economic effects of tourism, and countries classified in cluster 2, with a relatively moderate negative impact of the covid-19 pandemic on the economic effects of tourism. the differentiation between the countries of the first and third clusters was primarily based on the difference in the negative impacts of the covid-19 pandemic on the contribution of tourism to gdp. the number of countries in each cluster, as well as their membership to defined clusters, is shown in table 4. table 4 number of cases in each cluster and cluster membership cluster number of cases cluster membership 1 9 albania, belarus, bulgaria, croatia, lithuania, moldova, north macedonia, serbia, turkey 2 10 czech republic, estonia, hungary, latvia, poland, romania, russia, slovak republic, slovenia, ukraine 3 2 bosnia and herzegovina, montenegro source: author’s research taking into account the intensity of the impact of the covid-19 pandemic on the economic effects of tourism in cesee countries, i.e. the intensity of reducing the contribution of tourism to gdp and employment in 2020 compared to 2019, the following cluster structure of cesee countries is identified: ▪ cluster 1 – albania, belarus, bulgaria, croatia, lithuania, moldova, north macedonia, serbia, turkey. this cluster includes countries in which the negative effects of the crisis on the economic effects of tourism are more moderate compared to cesee countries belonging to cluster 3, and more intense than in cesee impact of the covid-19 pandemic on the economic effects of tourism in cesee countries 163 countries belonging to cluster 2. if the results of cross-country comparison are taken into account table 1) four out of nine countries in this cluster are identified in the previous segment of the analysis as countries that in regular circumstances had a contribution of tourism to basic macroeconomic aggregates higher than the average of the cesee group of countries (albania, bulgaria, croatia, turkey). ▪ cluster 2 – czech republic, estonia, hungary, latvia, poland, romania, russia, slovak republic, slovenia, ukraine. this cluster includes countries in which the negative effects of the crisis on the economic effects of tourism were least pronounced in 2020 in the observed group of countries. the results of the crosscountry comparison (table 1) show that one out of ten countries in this cluster is marked as a country that had a share of tourism in gdp and employment in the year before the crisis higher than the cesee average (estonia). ▪ cluster 3 – bosnia and herzegovina, montenegro. this cluster includes the countries with the most pronounced negative impact of the covid-19 pandemic on the economic effects of tourism, i.e. the countries that recorded the largest percentage reduction in the share of tourism in gdp and employment. while montenegro is undoubtedly a country that, compared to other countries in the analysed group, based its development on tourism in the period before the crisis, bosnia and herzegovina recorded a share of tourism in gdp lower than the average of the analysed group of countries and tourism in employment more than the average of the analysed group of countries in 2019. previous results of cross-country comparisons have made it possible to single out countries in which the importance of tourism for the economy in regular circumstances is relatively large. comparing these results and the results shown in table 4, it can be concluded that almost all of these countries (except estonia) are in cluster 1 or cluster 3 identified as clusters with a greater impact of the covid-19 pandemic on the economic effects of tourism, which confirms the second starting assumption of the research. this is in line with the findings of the research of the authors romisch (2020) and škare et al. (2021) and which indicate that the level of negative effects depends on the importance that the tourism industry has for the national economy of a particular country. 5. conclusion the tourism sector is one of those most affected by the covid-19 pandemic. the reason for this is the specificity of the sector itself, but also the specificity of the still current health crisis. numerous measures aimed at the prevention of the pandemic had a direct negative impact on tourism. on the other hand, the tourism sector was considered one of the fastest growing sectors of the global economy in the period before the pandemic, but also its driving force, as a sector with a significant contribution to global gdp and jobs. in this way, the challenges facing the tourism sector due to the covid-19 pandemic are also part of the challenges of the global economy. it is evident that the unprecedented decrease in the number of tourists has resulted in numerous economic constraints, drastic reduction in the level of income generated by the tourism sector and a serious loss of jobs in tourism and related sectors. the impact of the covid-19 pandemic on the economic effects of tourism in cesee countries is analysed in the paper. the contribution of tourism to key macroeconomic 164 t. stanišić, m. leković, s. milutinović aggregates (gdp and employment) in the countries of the selected group is observed. the results of the research are divided into two segments, the findings of which complement each other. namely, the cross-country comparison of selected countries made it possible to identify countries whose economic development and employment in regular circumstances rely relatively heavily on tourism. the second part of the research results, i.e. the results of the applied cluster analysis, indicate that cesee countries can be divided into three clusters among which there is a statistically significant difference when it comes to the intensity of declining tourism contributions to gdp and employment under the influence of the covid-19 pandemic. in this way, it was concluded that cesee countries are not homogeneous in terms of the negative impact of the covid-19 pandemic on the economic effects of tourism. although the impact of the covid-19 pandemic on tourism and its economic effects in all countries around the world can be assessed as unprecedented negative, there are still some differences in the intensity of this impact in specific countries. concluding from the findings of cross-country comparison and cluster analysis, it can further be argued that countries in which the economic importance of tourism is greater are more affected by the negative impact of the covid-19 pandemic. in theoretical sense, the paper is an attempt to contribute to the academic debate on the negative impacts of the crisis on tourism and its economic effects. in practical terms, the paper may have implications for the creators of post-crisis tourism recovery strategies at the national level, pointing to those countries where the negative impacts of the pandemic on the analysed indicators were relatively lower. the practical implications would be broader if the research findings included a comprehensive analysis of the applied measures in specific countries, both epidemiological which affected the tourism sector and measures to support this sector, which can be considered as limitation of this research. it is generally possible to look for one of the causes of the greater or lesser impact of the crisis on the economic effects of tourism in specific countries in these measures and in the tourism policy of individual countries. the combination of a qualitative approach to this issue with the quantitative research applied in this paper is a recommendation for future research on the impact of the covid-19 pandemic on the economic effects of tourism in selected countries or other groups of countries. references barkas, p., honeck, d., & rubio, e. 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(radević and lekpek, 2010). this is a contribution to the reduction of brownfield investments that could not be traced. brownfield sites pertain to urban areas in the southeast european countries. these countries are characterized by a lack of awareness and relevant data with respect to brownfield sites. unlike greenfield investments where the situation related to potential received november 16, 2015 / accepted december 29, 2015 corresponding author: borislav radević state university of novi pazar, department of economics, vuka karadžića street nn, 36300 novi pazar, serbia tel: + 38163505060  e-mail: bradevic@np.ac.rs 250 b. radević, s. kurtović, b. siljković investment sites and facilities is completely clear, in the case of brownfield investments it is much more difficult to attain information related to current use and status of the site. also, there is no clearly defined list of brownfield sites, no information on contamination level or a clearly defined program of their economic revitalization (jackson and grab, 2002). in most countries of the central and southeast europe brownfield sites include industry, military, railway and transport, agricultural, institutional (schools, hospitals, prisons), commercial (shopping centers, offices), cultural (culture houses, cinemas), leisure (sports grounds, parks, open space) (ferber, 2010). in serbia, due to the slow company privatization process and delay in the adoption of the bankruptcy law, some of the state-owned companies “turned into brownfield sites“ because legal status of investments into current maintenance of buildings and infrastructure, production and the like was not clearly defined. the solutions for brownfield sites lie in priorities, strategies, legal framework, programs and support to investments. financing of brownfield regeneration by the state is less likely and it is recommended for the public interventions to be primarily focused on in-kind assistance including creation of legal framework, favourable fiscal benefits, favourable use of land, publishing of contamination data, clear and implementable strategies at all levels, informal assistance upon land consolidation, more flexible licensing and the like. not all brownfield sites in serbia have the same status or receive the same treatment. there are several types of brownfield sites. the first type implies the good brownfield sites that are being taken care of by the market itself. the second type includes the brownfield sites that do not occupy such an exclusive location and therefore often require strong public support and financial or in-kind intervention. with respect to the third type, we mainly talk about non-commercial locations that are primarily developed for ecological or social purposes. as for the fourth type, brownfield sites are in such a state that they represent a direct threat to health and environment. however, lately we also have certain change in the direction in which horizontal forms of foreign direct investments move, towards less developed countries or transition economies. this change can be attributed to the process of economic progress of transition economies. transition economies that record significant economic results see in horizontal forms a possibility for the accomplishment of positive effects. those effects are particularly reflected in technological transfer, mobility of workers, process of learning and transfer of business philosophy, etc. the mentioned effects are achieved in almost all those industries where horizontal forms of foreign direct investments existed. (kurtovic et al., 2012). regeneration of brownfield sites in serbia requires both vertical and horizontal approach. vertical approach encompasses three aspects: state, regional and local level. at the state level, implementation is performed through regulation of internal strategy and national legislation. at the regional level, instruments and measures that will help attract foreign investors are being implemented. finally, at the local level, attraction of brownfield investments can be stimulated through urban planning and various fiscal measures and land related policies. horizontal approach pertains to the activities and cooperation with partners on the local community development (dulic, 2013). in the european context there are a number of definitions and interpretations, with the most common one suggested by the working group clarinet (contaminated land rehabilitation network for environmental technologies), which states: "the brownfield are sites that had previously been under the influence of their users and the surrounding the impact of macroeconomic indicators on brownfield investment in serbia 251 areas, which are neglected or underutilized, which may have potential problems with lack of maintenance, which are located mainly in developed urban areas and require intervention to bring them back to beneficial use and may have real or perceived contamination problems" (cabernet, 2006; oliver, et al., 2005). brownfield sites revitalization in serbia is at a very low level. one of the reasons for such a state is the rather late adoption of the brownfield definition. brownfield site is defined in serbia as the “(…) land which was previously built and used, but in the meantime, due to financial or other economic reasons became abandoned” (peric and furundzic, 2014). serbia grants high direct incentives to foreign investors in the form of subsidies (eur 4,000-10,000 per job created, where the average incentive approved so far per job created per foreign company has been 4,693 million euros). even though serbia is not alone in giving incentives to foreign investors, since incentives are a method of attracting fdi in other cee countries as well, it is evident that it is the indirect incentives that are predominant in other countries, such as tax benefits, giving free land, creating infrastructure on the land, and these are mostly offered to large investors only (gligoric, 2013). in 2014, there were 449 brownfield sites registered in serbia (siepa, 2015). serbian military and ministry of defense own the majority of brownfield sites. the master plan, adopted as early as june 2006, foresaw the sales of most of the military complexes, the estimated value of which was around one billion euros at the time. in the meantime, a small part of the property was sold for only 10 million euros, while a number of local self-governments became owners of the former military facilities and put them up for sale or lease to interested investors. at the moment, the military owns 3,942 buildings with total area of 2 833 406 m 2 and 21,773 ha of land (reactivation of brownfield in serbia, 2011). from 2000 to 2014, serbia achieved the inflow of fdi in the amount of 21 billion euros. based on the world investment report of 2012, 50% of greenfield investments in the see region pertained to serbia. brownfield investments during 2012 and 2013 were dominantly made in the energy sector 48%, production sector 20% and trade 7% (invest in serbia, 2013). the main subject of this paper is identifying the current state and the potential of brownfield sites with the aim of attracting fbi in serbia. it is evident that brownfield sites in serbia have not been fully utilized during the last two decades and that transitional processes, reflected in the privatization and changes to legislation, have not been sufficiently efficient and fast to enable brownfield sites to attract fbi. to that effect, this paper aims to demonstrate the potential of brownfield sites in serbia to attract fbi and enhance economic competitiveness. the main objectives of this paper are to study the individual effect of macroeconomic variables on attracting foreign brownfield investments in serbia. the starting point of this study is the main hypotheses, which we have proven using the multiple regression model. the research hypotheses are as follows: hypothesis : positive macroeconomic indicators do not have a significant impact on attracting foreign brownfield investments in serbia or . we have also set an alternative hypothesis stating that macroeconomic indicators have an impact on attracting foreign brownfield investments in serbia or . the paper consists of sections as follows: the introductory section provides the subject, research objectives and research hypotheses; section 2 provides an overview of literature or research closely related to this paper’s research subject; section 3 describes 252 b. radević, s. kurtović, b. siljković econometric techniques and databases used in the research; section 4 provides the empirical results of the research and, finally, section 5 contains the conclusion. 1. literature review jankovych (2005) studied the factors based on which a mechanism is created for the selection of sites for reuse or regeneration. the analysis was focused on germany and france, which have criteria for classification of brownfield sites in place. these countries’ experiences were suggested as a possible solution for the czech republic. groenendijk (2006) researched the importance of brownfield revitalization and concluded that this process faces certain problems that require consideration. his research also covered benefits and costs of brownfield revitalization, four models of public-private partnership financial initiatives, legislation, etc. ganser and williams (2007) studied the issue of brownfield sites in england and germany. they particularly tackled quantification of objectives for the development of brownfields at the national level and pointed out the significance of regeneration of urban brownfield sites and the reduction in use of greenfield sites. in his research, paull (2008) quantified the effect of brownfield reuse on the environment, economy and community. in the economic sense, brownfield reuse helps create new jobs, encourages investments and enhances the environment. additionally, it prevents total land contamination, gas emissions and creation of greenhouse gases, improves quality of water, etc. chilton et al. (2009) studied the impact of brownfield revitalization in charlotte, usa on the social, economic and natural environment. they determined a positive effect of brownfield revitalization in all mentioned areas applying ordinary least squares method. estrin and meyer (2010) studied the importance of brownfield acquisition as a way of searching for innovative resources on the fast-growing markets. they applied regression analysis and concluded that many companies that were purchased in the growing markets went through a certain level of reorganization, while simultaneously retaining key competencies that made them recognizable and combining them with the new skills and techniques brought in by the companies that took them over. in his research, tang (2011) developed a framework for defining brownfield sites for the purpose of enhancement of brownfield revitalization and then analyzed qualitative and quantitative data pertaining to the land use and sustainability. the subjects of his analysis were england and taiwan i.e. their brownfield revitalization policies and the conclusion was that their policies differed depending on the population density and the level of economic development. frantal et al. (2013) studied the impact of location and specific factors on the successful regeneration of brownfield sites. using the case of south moravia they analyzed the spatial and functional distribution of brownfield sites and tested the correlation between the potential of municipalities and brownfield sites that had already been regenerated. finally, they concluded that regenerated brownfield sites were located in municipalities with greater economic potential. frank (2014) carried out a research on economic and fiscal benefits, availability of information on brownfields, as well as on benefits for the environment. based on several case studies on american cities, he determined advantages and disadvantages of brownfields. frantal et al. (2015) performed a comparative study on interest groups or stakeholders from the czech republic, germany, romania and poland. the main objective of their research was to study the main factors impacting regeneration of brownfield sites and detect the barriers negatively affecting the the impact of macroeconomic indicators on brownfield investment in serbia 253 given process. they found that, apart from the total costs, the process of regeneration of contaminated land in poland and romania were also affected by the ownership issues, local self-government, legislation, etc. 2. the econometric model and data our economic analysis is based on the application of the multiple regression model and the ordinary least squares (ols) method. we have used cross-section data for the period from 2005 to 2013. the data has been acquired from the world bank database (world databank/world development indicators), national bank of serbia, www.naledserbia.org/search and eurostat. applying the multiple regression model we have measured the impact of macroeconomic factors on the inflow of foreign brownfield investments in serbia. within the quantitative approach, we set up brownfield investment as a dependent variable, while independent variables include unemployment rate, gdp, real gdp growth, average annual wages, consumer price, exchange rate and subsidies and other transfers. we chose the mentioned variables based on the relevance of their impact and data availability. through application of the multiple regression method we shall attempt to determine the impact of macroeconomic factors on the inflow of foreign brownfield investments in serbia. our multiple regression method shall be introduced through the following equations browi = 0 + 1 gdp + 2 rggdp+ 3wage + + 4subt + + 5 unepl+ 6cp + 7 er + , ... , + . where: browi – ownfield investment gdp – gross domestic product rggdp – real gdp growth (in %) wage – average annual wages subt – subsidies and other transfers unpel – unemployment rate cp – consumer prices (in %) er – exchange rate  – residual or error. brownfield investments mostly occur in the form of acquisitions. these investments are essential to the revitalization and economic enhancement of derelict and abandoned sites. gross domestic product represents a very important macroeconomic indicator showing the value of final goods and services produced in the country within a given year, expressed nominally. its increase or reduction is a powerful indicator considered by the investors when deciding upon site selection. also, real gdp growth is an indicator that illustrates the real growth rate of economic activity with respect to produced goods and services. its positive or negative value plays an important role in the potential investors’ decision-making process. average annual wages is an important factor in the process of attracting foreign brownfield investments. lower average annual wages means less costs and more profit for a foreign investor, but that is not the case when it comes to vertical investments. subsidies and other transfers have a powerful impact on attracting foreign investment. it is on their character and scope that the inflow of brownfield http://www.naled-serbia.org/search http://www.naled-serbia.org/search 254 b. radević, s. kurtović, b. siljković investment, fdi and other forms of investment largely depend. unemployment rate informs us about the state of macroeconomics. for foreign investors high unemployment rate means access to cheaper labour force. consumer price pertains to the rate of increase in prices in the host country i.e. inflation rate. high inflation rate poses potential risk for a foreign investor. exchange rate represents the value of local currency expressed in foreign currency. undervalued or overvalued exchange rate can have positive or negative implications on the inflow of foreign investment. 3. the empirical results our research resulted in several findings. after the analysis of the correlation between independent variables, we concluded that there is a high correlation between gross domestic product (gdp) and subsidies and other transfers (subt) i.e. that their p values are 0.938199% and 0.987257%, respectively. in addition, there is a high correlation between the average annual wage ( ) and subsidies and other transfers ( ) where p value amounts to 0.890134% (see table 1). in other cases, there is a moderate negative correlation between independent variables. based on the above stated, we can conclude that our model does not have a problem with multicollinearity. table 1 correlation between the independent macroeconomic variables rgdpg subt wage unepl gdp cp er rgdpg 1.000.000 -0.555951 -0.297025 -0.158183 -0.387101 0.245759 -0.661231 subt -0.555951 1.000.000 0.890134 0.120935 0.938199 -0.645457 0.791440 wage -0.297025 0.890134 1.000.000 -0.165814 0.987257 -0.582294 0.532819 unepl -0.158183 0.120935 -0.165814 1.000.000 -0.098945 0.037356 0.489258 gdp -0.387101 0.938199 0.987257 -0.098945 1.000.000 -0.636118 0.619675 cp 0.245759 -0.645457 -0.582294 0.037356 -0.636118 1.000.000 -0.319250 er -0.661231 0.791440 0.532819 0.489258 0.619675 -0.319250 1.000.000 source: author's note: ***, **, and * represent statistical significance at the 1%, 5%, and 10% level, respectively. through application of multiple regression method, we have concluded that in most cases the increase in macroeconomic variables positively affects the growth of inflow of brownfield investments in serbia (see table 2). in order to determine the effect of macroeconomic variables on the inflow of brownfield investments in serbia, we have attempted to observe the individual effect of independent variables on the dependent variable. thus, the average annual wage ( ) has a p  value of 0.0167%, which is statistically significant or lower than the determined value of 0.05%, i.e. positively affects the inflow of brownfield investments; therefore, we reject hypothesis and accept the alternative h1 hypothesis. there has been no significant increase in the average annual wage in serbia during the considered time period, which had a positive impact on the inflow of brownfield investments. lower average annual wage represents a stronger motive for the investor in terms of gaining profit. unemployment rate ( ) has a of 0.0321%, which is statistically significant or lower than the determined value of 0.05%, i.e. positively affects the inflow of brownfield investments in serbia; therefore, we reject h0 hypothesis and accept the alternative h1 hypothesis. unemployment the impact of macroeconomic indicators on brownfield investment in serbia 255 rate in serbia constantly grew in the given time interval, which is the result of the poor state of industries within which there was no restructuring of enterprises, as well as of the negative elasticity of demand both in the local market and by the main trade partners. high unemployment rate positively impacted the inflow of investments in brownfield sites and created better conditions for foreign investors. table 2 impact of macroeconomic variables on the inflow of brownfield investments dependent variable: browi method: least squares sample: 1 9 included observations: 9 variable coefficient std. error t-statistic prob. rggdp 45793.45 3703.911 12.36354 0.0514 subt -2138.512 759.1479 -2.816990 0.2172 wage -48810.31 1281.234 -38.09634 0.0167 unepl 69910.66 3525.894 19.82778 0.0321 gdp 851.4499 21.73882 39.16725 0.0163 cp 100588.6 2981.566 33.73684 0.0189 er -39137.83 1559.063 -25.10344 0.0253 c -6094815. 287162.6 -21.22427 0.0000 r-squared 0.999530 mean dependent var 238073.3 adjusted r-squared 0.996240 s.d. dependent var 343148.9 s.e. of regression 21041.87 akaike info criterion 22.32697 sum squared resid 4.43e+08 schwarz criterion 22.50228 log likelihood -92.47136 hannan-quinn criter. 21.94865 f-statistic 303.7976 durbin-watson stat 1.947094 prob(f-statistic) 0.044149 source: author's note: ***, **, and * represent statistical significance at the 1%, 5%, and 10% level, respectively. gross domestic product ( ) has a of 0.0163%, which makes it statistically significant when compared to the determined value of 0.05%, i.e. it positively affects inflow of brownfield investment in serbia; hence, we reject hypothesis and accept the alternative hypothesis. in terms of , serbia registered cumulative growth of gdp within the time period under consideration, albeit with a certain fall during 2009 and 2010, which nevertheless had no negative impact on the inflow of brownfield investments. consumer prices ( ) have a of 0.0189% that is statistically significant when compared to the determined value of 0.05%, i.e. positively affects the inflow of brownfield investments in serbia; therefore we reject hypothesis and accept the alternative hypothesis. consumer prices i.e. inflation rate was moderate, which had a positive impact on the inflow of brownfield investments. exchange rate ( ) has a of 0.0253%, which makes it statistically significant when compared to the determined value of 0.05%, i.e. it positively affects the inflow of brownfield investments in serbia; hence, we reject hypothesis and accept the alternative hypothesis. in the case of exchange rate, frequent devaluation of the national currency (dinar) resulted in significant inflow of brownfield investments due to a 256 b. radević, s. kurtović, b. siljković positive effect of devaluation on the increase in exports. however, in the case of real gdp growth ( ) and subsidies and other transfers ( ) es are 0.0514% and 0.2172% respectively, which renders them statistically insignificant because they exceed the determined value of 0.05% and they do not positively affect the inflow of brownfield investments; therefore, we cannot reject the hypothesis. finally, a slow real gdp growth and low subsidies and other transfers have a negative impact on the inflow of brownfield investments in serbia. this is because majority of subsidies and transfers are aimed at fdi, portfolio investments, mergers and, to a small extent, brownfield investments. in the case of and es are 0.999530% and 0.996240% respectively, which means that the observed dependent variable is strongly explained by independent variables. durbin-watson statistic has a e of 1.947094%, which is within optimum limits i.e. there is no serial correlation. finally, ( ) has a e of 0.044149% that is statistically significant and demonstrates that the applied model is significant i.e. that the majority of independent variables positively affect or explain the dependent variable; therefore, we reject hypothesis and accept the alternative hypothesis. conclusion after 2000, serbia initiated certain reforms in the area of opening of the economy, state property privatization and other structural reforms aimed at attracting foreign investors. implementation of these reforms did not proceed to the desired speed, which led to a failure to achieve significant results in the area of brownfield sites revitalization i.e. to attract investments as an important driver of the economic growth of the country and squalid economies of local communities in particular. one of the main obstructions to the process of revitalization of brownfield sites in serbia are the unresolved property-legal relations. apart from this, the process of privatization is rather inefficient and time-consuming, which has caused over 30% of state-owned companies to remain unprivatized. in order to resolve the issue of brownfield sites, serbia must develop a clear strategy, legal framework and stimulative investment support programs. to that effect, serbia, as well as other central and eastern european countries, has undertaken clear measures as to classify all brownfield sites and it gives primacy to acquisitions as a form of foreign brownfield investment. the proposed measures pertain to the application of fiscal incentives, favourable measures for the use of land and sites, formal assistance in land revitalization, better access to the information on contamination levels, transparent and implementable strategies at all levels, more flexible and shorter time periods for licensing and implementing procedures. during 2006, serbia adopted the bankruptcy law and carried out necessary reforms that brought results in the area of enhancing macroeconomic indicators of business operations. these changes positively affected the inflow of investments in brownfield sites, but their scope remains unsatisfactory having the existing potential in mind. in our research paper we have applied the multiple regression model and measured the effect of macroeconomic on the inflow of brownfield investments in serbia. within the quantitative approach, we set up brownfield investment as a dependent variable, while independent variables include unemployment rate, gdp, real gdp growth, average annual wages, consumer price, exchange rate and subsidies and other transfer. our 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(2011), “investigating sustainable land use: possible implications for brownfield regeneration policy”, ph.d. dissertation, vol. 1, the university of nottingham, september, http://eprints. nottingham.ac.uk/12380/1/thesis_print_out_for_submission%2808112011%29_vol1.pdf , 1-368. appendix a table 3a variable definitions variable data sources – brownfield investment www.naled-serbia.org/search – gross domestic product at market prices (million euros) eurostat real gdp growth (in %) national bank of serbia – average annual wages national bank of serbia – subsidies and other transfers world development indicators unpel – unemployment rate national bank of serbia cp – consumer prices (in %) national bank of serbia er – exchange rate national bank of serbia table 4a data pertaining to serbia country year gdp % rggdp %unpel browi wage cp er subt srb_ 2005 21.103 5.54 20.80 604.910 209.7 17.7 85.50 0 srb_ 2006 24.435 4.90 20.90 0 260.0 6.6 79.00 0 srb_ 2007 29.452 5.89 18.10 292.000 347.1 11.0 79.23 602.8 srb_ 2008 33.705 5.37 13.60 202.000 400.5 8.6 88.60 675.1 srb_ 2009 30.655 -3.12 16.10 23.000 337.4 6.6 95.88 656.8 srb_ 2010 29.766 0.58 19.20 33.000 330.1 10.3 105.49 654.5 srb_ 2011 33.424 1.40 23.00 979.000 372.5 7.0 104.64 695.8 srb_ 2012 31.683 -1.02 23.90 8.750 364.5 12.2 113.72 691.8 srb_ 2013 34.263 2.57 22.10 0 388.6 2.2 114.64 0 uticaj makroekonomskih pokazatelja na braunfild investicije u srbiji u radu se analizirаju podaci preseka za srbiju u vremenskom periodu od 2005. do 2013. godine. uz primenu višestruke regresivne tehnike, meri se uticaj makroekonomskih varijabli na privlačenje stranih inveticija u braunfild lokacije u srbiji. istraživanje je pokazalo da makroekonomski indikatori, kao što su: stopa nezaposlenosti, prosečne godišnje plate, bruto domaći proizvod, cene potrošačkih proizvoda i deviznog kursa su statistički značajni, dok pravi bruto domaći proizvod opada dok su ostali transferi statistički beznačajni. ključne reči: makroekonomski, stopa nezaposlenosti, indikatori, braunfild lokacije, liberalizacija http://www.skgo.org/upload/files/analiz_reaktiviranje_braunfilda_u_srbiji.pdf http://www.skgo.org/upload/files/analiz_reaktiviranje_braunfilda_u_srbiji.pdf file:///i:/un/eao201504/lektorisano/%20http:/siepa.gov.rs/sr/files/pdf2010/uredba%20o%20uslovima%20i%20nacinu%20privlacenja%20direktnih%20investicija%20-%2055-65-2014.pdf file:///i:/un/eao201504/lektorisano/%20http:/siepa.gov.rs/sr/files/pdf2010/uredba%20o%20uslovima%20i%20nacinu%20privlacenja%20direktnih%20investicija%20-%2055-65-2014.pdf http://eprints.nottingham.ac.uk/12380/1/thesis_print_out_for_submission%2808112011%29_vol1.pdf http://eprints.nottingham.ac.uk/12380/1/thesis_print_out_for_submission%2808112011%29_vol1.pdf plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 1, 2016, pp. 59 72 the transformation of business models and markets in the era of internet and electronic business udc 004.738.5:339 tanja janaćković 1 , slavoljub milovanović 2 , goran milovanović 2 1 higher business school of professional studies, leskovac, serbia 2 university of niš, faculty of economics, niš, serbia abstract. the focus of this paper is the transformation of the business model of companies that ensues due to the application of information technology and the transition from traditional to electronic business. a growing number of companies today realize that the transformation of their business models and processes is no longer optional, but necessary in order to survive and remain competitive on the markets which are increasingly becoming electronic and whose functioning is increasingly based on the internet. the subject matter of this research is the transformation of the business model and using the potential of the electronic market, as well as models of electronic markets. even though the process of transformation from traditional to electronic ways of business is inevitable, it is considered risky and unpredictable, so it is especially significant to explore the managing of the main aspects of changes that occur in the company. the goal of this paper is to analyze the changes in a company that relate to business models, the factors influencing the changes of the business model, with a focus on technology, the potential of electronic markets and online business models for e-commerce. the key issues that the research seeks to solve are the goals, the tasks and the purpose of the changes, as well as the ways of implementing them and the segments that experience change. the paper also points out the management problems and challenges that companies face due to the transition to electronic business, especially regarding management problems related to the changes. key words: electronic business, company, changes, business model, electronic market received december 7, 2015 / accepted march 23, 2016 corresponding author: tanja janaćković higher business school of professional studies, leskovac, serbia e-mail: tanja-spasic@hotmail.com 60 t. janaćković, s. milovanović, g. milovanović introduction changes in the current business models are considered a key component of managing a business model and are necessary if a company is to survive on the market on the long-term basis and adapt to the changing conditions of business operations. almost every company adapts the existing business models under the influence of new technologies, with the goal of responding to the needs of consumers. a large number of companies consider that many cases require a radical change in the business model in order to remain competitive on the market. the example confirming the significance of successful business model management is the company dell. today, dell is a leading computer system manufacturer and one of the most dynamic companies in the world of computer business. their business model of direct sales enabled the company to shorten the value chain, which was better adjusted to the needs of the consumers. modification or reorganization in creating value—especially a value chain—is one of the central aspects of managing a business model and a significant and essential factor of business success. the innovations of the business model are another key element of managing a business model, and it is relevant in the context of business model changes. innovative business models can be identified and successfully implemented using the concept of business model management. examples of successful innovation in the business model are apple’s ipod and the itunes store. by combining a portable, attractively designed media player with digital music, apple not only achieved a transformation of the entire company, but it also created a completely new market. the innovation of this company is mainly established in the business model area. the concept of the business model is very significant and is today considered equally relevant both in academic circles and in management practice. based on the management of the business model, the company can differentiate itself from the competition, and build and secure long-term competitive advantages. the development of new technologies, such as electronic communications (ecommunications), provokes changes in business models, but also in the industrial and market structure. the transformation of the industrial structure involves the digitization of the market mechanism, the digitization and distribution of products. e-communications affect the creation of new market structures and allow the use of e-channels to distribute products and services worldwide. on the other hand, the changes of power and competition in the market are significantly affected by the change of traditional business models. in addition to the internal impact of electronic commerce (e-commerce) to changes in the enterprise and existing business models, external influences are reflected in the possible use of the potential of electronic markets (e-markets) and the introduction of new business models based on the internet. e-markets are becoming increasingly significant in modern business operations. when buying a product, from music cds to cars, consumers can choose from a number of emarkets (strader, shaw 2000). according to strader and shaw (2000), owing to the internet and digital technologies, new car shoppers have more options, including access to valuable information, such as what a car really does cost a dealer. having that in mind, buyers tend to do business online and negotiate better business arrangements. ,,electronic markets now exist to enable consumers to shop for and buy a new car, insure it and take delivery without ever setting foot in a dealership’’ (calem 1996). books are another the transformation of business models and markets in the era of internet and electronic business 61 product that people buy over the internet. one of the online booksellers is amazon.com books. their website advertises miscellaneous books, and clicking the book title or author provides more detailed information on the particular product. so, it is obvious that the industry’s e-market expansion has a major significance for the structure of the value chain included in supplying end users with products and services, while modification or reorganization in creating the value, particularly the value chain, is one of the key aspects of the business model and management, important for business success. the paper analyzes the impact of e-business to changes in the company, and then points out the factors of the business model changes with a focus on technology that is one of the main drivers of changes, the potential of e-markets, which are a key feature of electronic commerce (e-commerce), as well as new e-commerce business models based on the internet. 1. dimensions and factors of changes under the influence of e-business integrating information technology (it) and web-standards is a main technological factor in the emergence of electronic business (e-business). dti (2000) describes e-business as follows: ,,when a business has fully integrated information and communications technologies (icts) into its operations, potentially redesigning its business processes around ict or completely reinventing its business model... e-business, is understood to be the integration of all these activities with the internal processes of a business through ict’’. the key business processes referred to in the dti definitions include research and development, marketing, manufacturing and inbound and outbound logistics. the buy-side e-commerce transactions with suppliers and the sell-side e-commerce transactions with customers can also be considered to be key business processes (chaffey 2009, 13). e-business requires organizations to revise their strategies and goals in order to respond to the market rules of supply and demand. the transition from traditional to e-business caused organizations to redesign and reshape. e-business implies a combination of economic, market and technological forces, which revise the strategies of traditional ways of performing business operations. the business process is based on the power of computers and communication networks, which enables the organization to be competitive and more efficient. new business models are introduced and implemented in various ways. e-business and the internet caused organizations to use new and combined models, which influenced them to explore and create solutions in the area of change management. the main aspect of changes in companies is related to the market and the business models, business processes, organizational structure, culture, staff responsibilities, and technological infrastructure changes. a successful change is a result of interaction between these aspects and is defined as the content, process and context, or the what, how and where. figure 1 shows the three dimensions of change under the influence of ebusiness. 62 t. janaćković, s. milovanović, g. milovanović fig. 1 three dimensions (aspects) of changes under the influence of e-business source: (pettigrew, whipp 1993; rabbani et al. 2011, 3; alshamlan 2006, 4) undergoing changes includes a process of strategic management in order to determine goals, develop policies and allocate resources to execute plans. some of the change management components are the process of change management, the readiness to evaluate, the communication and its planning, training managers to manage changes, training employees and developing their skills, sponsorships, management resilience, back analysis and, finally, the reward. these components could be considered tools, or guidelines whose goal is to implement efficient change and come closer to the desired project goals. the aspects of the success of e-business include the dedication of the management, project management, as well as the engagement, retention and rewarding. fig. 2 key factors for achieving change source: (chaffey 2009, 562) the transformation of business models and markets in the era of internet and electronic business 63 figure 2 shows the interaction between the aspect of changes being estimated with the goal of maximizing the benefits of e-business and the aspects of success that need to be implemented in order to achieve these benefits and goals of the organization. the key aspects of change in the company caused by the implementation of e-business and the application of it are related to the change in the business model and using the potentials of the e-market; re-engineering the business processes; changes in the organizational structure and culture; and changes in the technological infrastructure. the subsequent part will explore in more detail the influences of e-business on the changes in the business model of a company and on the e-market models, and using the potential of the e-market. 2. changing the business model today, business models have become an integrated concept of management. a successful change in the model is directly reflected on the business success of the company. the business model is a structured management tool that helps a company achieve its goals. this is also confirmed by a research performed by ibm, which dealt with examining the factors of business success. the research found that financially successful companies emphasize consistent and sustainable business model management twice as much as compared to financially less successful companies (giesen, berman, bell, blitz 2007, 3). furthermore, the research showed that business models could be especially beneficial to success when a company wants to differentiate its product range, and change or implement innovative ideas (ibid.). an adequate business model will contribute to the increase in the sustainability of a competitive strategy, and, therefore, ascertain long-term business success. apart from that, a business model is a conceptual and comprehensive management tool with the goal of differentiating a company from the competition in the long run. through consistent analysis of partial models of the business model, the company can better assess the relevant competitors. if this analysis shows the competitors being weak within particular partial models, the company should pay attention to these models and in this way attract new consumers. 2.1. defining the concept of the business model in 1998, timmers introduced one of the approaches in defining a business model. his considerations are based on the approach of porter’s value chain. according to timmers (1998), new business models could be created by reconfiguring the value chain. in this way, the traditional value chain could be adjusted to the challenges of modern activities which add value and in this way give the necessary flexibility in a highly competitive environment. the business model is an ,,architecture for product, service and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for various business actors; and a description of the sources of revenue‖ (timmers 1998, 3–8). timmers (1998) considers that merely defining the business model is insufficient to describe the goals of the company, so he introduces the marketing model, which encompasses both the business model and the marketing strategy. the goal of his approach is designing a framework for the internet business models. 64 t. janaćković, s. milovanović, g. milovanović weill and vitale (2001) present a similar definition of the e-business model, i.e., they define it as a description of the roles and connections between the company’s consumers, clients, and suppliers which identifies the main product, information, and financial flows, as well as the main benefits for all participants. wirtz (2000) presents a different definition—a typology of business models adjusted for e-business—and for the first time presents a description of an integrated business model divided into different partial models. on the one hand, his definition is related to the process of creating goods and services in a company, while, on the other hand, it discusses the connection between the business model and the strategies. wirtz (2000, 81) defines the business model in the following way: ,,the concept of the business model refers to the depiction of a company’s internal production and incentive system.‖ a business model is a simplified and aggregated representation of the resources relevant in a company and the way the internal processes of product creation or service providing transform these resources into market information, products or services. ,,a business model therefore reveals the combination of production factors which should be used to implement the corporate strategy and the functions of the actors involved‖ (wirtz 2000, 81). 2.2. managing the business model change and the factors of change considering the fact that we live in a world of growing globalization and networking, the pressure competitors exert on business operations also increases. in order to survive in a highly competitive environment, businesses must adapt to the ever-changing conditions of the environment. the business process is fueled both by internal and external influences. the change can be small or radical. apart from that, it can influence the parts related to the strategy, the consumers, the market, the value creation, as well as all the partial models simultaneously. the change in the business model might be dangerous, but it can also be an opportunity for doing business. while, on the one hand, a change can cause a decrease of the existing competitive advantage, on the other hand, it can present a possibility for generating new kinds of competitive advantages. there are three important factors which can condition a change in the business model, and they encompass the market, the technology, and the regulations. technology is one of the basic drivers of change, having in mind that technological advances force the market players to adjust their business models. business models should not only consider the evolutionary movements, but also the ,,disruptive technologies’’. a good example is digital photography and its destructive effect on classic business models of analog camera and movie manufacturers. consider a b2b organization. ,,traditionally it has sold its products through a network of distributors. with the advent of e-commerce it now has the opportunity to bypass distributors and trade directly with customers via a destination web site, and it also has the opportunity to reach customers through new b2b marketplaces’’ (chaffey 2009, 52). the second important driver of business model change is the market and the competition. changes in power in the market or new competitors can have a substantial effect on a company’s business model. an example of this is amazon, an online sales company, which exerts significant amounts of pressure on traditional bookstores. deregulation is also a significant driver of change. state interventions and regulations can affect the competitive environment and the change in basic legal requirements. this means that the business models can lose their entire foundation simultaneously with the creation of the basis for new business models. the transformation of business models and markets in the era of internet and electronic business 65 the effect of these drivers forced companies to increasingly initiate changes in the business model. these changes include a risk that can significantly disrupt the competitive position of the company. professional change management is necessary in order to conduct a strategic process and increase the likelihood of a successful change in the business model. the change process flow is based on the concept of the project flow, which includes the activities of initiation, analysis, concept creation, implementation, and evaluation. the different specifics that exist within the context of the business model should also be taken into account. the phases of the business model change process encompass the initial phase, the conceptual phase, the phase of implementation, and the phase of evaluation. the initial phase includes: 1) driving change through outer and inner factors due to the mentioned business model change drivers: the market, the technology, and the regulation; 2) analyzing the strengths and weaknesses of the existing business model (the partial model and the structure); 3) gathering ideas and starting points; 4) evaluating inventions for innovational ability. the conceptual phase includes 1) developing a rough and detailed concept; 2) a detailed description and assessment of the interactions between the partial models within the business model; 3) developing the business structure of a model; 4) initial research and negotiations with potential partners. the implementation phase includes 1) constructing project plans; 2) comparing the target performance of resources and competencies; 3) initiating changes; 4) managing risks during implementation. the evaluation phase (the execution phase) includes: 1) the evaluation of success up to the current point, i.e., the change in the perception of buyers; 2) the control of success; 3) initiating component and structure correction (if necessary); 4) the continual control of unwanted changes in order to ensure sustainability. the volume of the business model change can vary. during the change process, it is possible to focus on a single part of the business model, i.e., a partial model that needs to be changed, or the change of the business model as a whole. the following questions arise within the management practices: what kind of change is the right one and which implications are related to a certain level of change? there is a distinction between five models of the business model change: the stabilization model, the evolution adaption model, the extension model, the migration model, and the radical innovation model (wirtz 2011, 248). the stabilization business model is applied 1) within industries with a low degree of competition and a small level of environment change; 2) when there are different players with a similar market share; 3) when it is not profitable to change the partial model or the structure of the business model. the evolution adaption business model is characterized by 1) a continual development of business models; and 2) an adaptation to market trends. the extension model is distinguished by 1) the expansion of the existing market; and 2) the development of a unique characteristic of the partial model, i.e., the new distributive channel. the migration model is characterized by 1) new ways of interaction between the existing partial models; and 2) differentiation through a unique structure. the radical innovation model includes 1) a radical change in the existing business model; and 2) a new structure and new partial models; the change in the business model can enable the company to achieve a dominant competitive position on the market. as far as management practices are concerned, the sustainability of the business model is highly significant. if the business model is unique, a differentiation relative to the market can create higher value for the buyers. 66 t. janaćković, s. milovanović, g. milovanović gaining competitive advantage and long-term survival in the market requires not only modification of existing business models, but their more radical changes. companies introducing e-commerce adapt their business models, accept online business models and use the potential of the e-market. businesses that follow, understand and adequately respond to changes in the online market, can use digital technology to effectively compete with its competitors. with regard to e-business and e-commerce enabling a variety of online business models, with the e-market key feature of e-commerce, in the following text we will describe representative e-market models, as well as the potentials of use of e-markets. 3. the characteristics and models of electronic markets e-markets represent a place where e-trade is performed, i.e., a network of interactions and connections where information, products, services, and payments are exchanged. they potentially integrate advertising, product ordering, their shipment and payment systems. the emarket (or the electronic market system) is an interorganizational information system that enables sellers and buyers to exchange information on the prices and supply of products. the center of business is a network based on location, where the buyers, sellers, and other partners that find each other and do business electronically are located. an electronic market is a place where all the necessary transactions are performed, which includes the transfer of monetary funds. in the traditional market, the consumers explore information on prices and available products, their quality and their characteristics. the information is gathered from different sources, like advertisements, going to the stores, etc. at a particular time, the consumers cease further research, realizing there is no further benefit from it. when they perform the analysis of information, consumers decide where to purchase a product. after that, they buy the product and transport it to their homes, or it is delivered through the distributive network. figure 3 shows the exchange of information and products in a traditional market. information product fig. 3 traditional market source: (strader, shaw 2000, 82) the transformation of business models and markets in the era of internet and electronic business 67 e-markets influence the purchasing process of the consumers. the first phase in transforming the industry structure is the digitalization of the market mechanism. the following figure shows the flow of information and products in an electronic market. fig. 4 electronic market source: (strader, shaw 2000, 83) the e-market provides a mechanism to reduce the costs of the consumer’s search (the money, time, and effort it would take to gather information on the price, quality and characteristics of the product). the search reduces the possibility of a seller to sell products at prices significantly higher from those of competitors since the buyer is aware of the other prices. the result of doing business on the e-market is buying at lower prices, since the intermediaries, like wholesale companies, are eliminated from the value chain. the second phase of transforming the industry structure is the digitalization of products and their distribution. examples of digitalized products include newspapers, books, magazines, music, movies, and computer software. these products include a cost structure with increasing returns and low marginal costs of reproduction. the e-market and the distributive network enable a wide variety of buyer and seller activities to converge in one place, including marketing, the order process, distribution, payment and even the product development process which includes several separate businesses. this facilitates the performing of activities and contributes to cost reduction. the value chain costs can be additionally decreased through product digitalization. product digitalization reduces inventory and packing costs. after that, digital products can be distributed electronically to the consumer, which affects the reduction of distribution costs that would be paid to the company in the distributive network. apart from the savings in costs, the time cycle of filling out orders is also minimized, which affects the increase in customer satisfaction. digitalized information can be distributed right away while the product shipment usually takes a couple of days or longer. even though new intermediaries and additional costs may occur in the value chain, the majority of cases show that the potential benefits of the e-market outnumber these costs. timmers (1999) identifies eleven different types of business model that can be facilitated by the web: e-shop; e-procurement; e-malls; e-auctions; virtual communities; 68 t. janaćković, s. milovanović, g. milovanović collaboration platforms; third-party marketplaces; value-chain integrators; value-chain service providers; information brokerage; trust and other services. there is a large number of classifications of the e-market model, but literature often cites the following models: the electronic store, electronic procurement center, electronic mall, electronic bazaar, electronic auction and electronic brokerage (stankić 2007, 40–41). an electronic shop (an e-shop) is a website that advertises products and services that a company provides, and it is gradually starting to be used for advertising and payment purposes. the income of an electronic shop operating 24 hours a day comes from the lower price of doing business, the increase in sale and cheaper advertising (e.g. www.amazon.com) an electronic procurement center (e-procurement) of a large company or a public institution enables offering and purchasing larger quantities of goods or services. this way provides a wider choice of suppliers, lower purchase prices, higher quality and a cheaper procurement process. the work of these centers can include both electronic negotiation and cooperation on preparing specifications. an electronic mall (e-mall) is a collection of electronic stores that achieves the standardization of certain transactions (e.g. payment). these centers can be specialized according to certain market segments, where they also offer specific additional services, such as answers to frequently asked questions. an electronic bazaar (e-bazaar) offers buyers the possibility to communicate and trade while income is made on the basis of memberships and advertisements. an electronic auction (e-auction) includes an electronic form of offering, which can use a multimedia presentation of the product, and is often extended to also include the negotiation, payment and delivery of the product. income is made by the auction technology sales, transaction unit charges and advertisements. electronic brokerage (e-brokerage) is mediation between the consumer and the supplier, where the intermediary looks for supplier offers based on the demands set by the consumer, and chooses the most suitable offer. income is achieved on the basis of membership and charges for the work provided. 4. b2b trade and e-markets regardless of the communication medium and the business technology, the basic ebusiness models are the b2c (business to consumer) and the b2b (business to business) models (milovanović 2015, 280). the b2b model includes trade between companies over the internet, where both the buyers and the sellers are companies while the b2c model includes every trade activity over the internet between a company and a buyer for his/her personal use, where they perform direct business transactions. because the e-markets based on the internet are the dominant form of b2b trade, the following text indicates the classification of the e-markets according to different criteria, as well as the features and advantages of the b2b e-market. the emergence of the e-market was not only conditioned by a rapid technological advance but also the advantages that this way of business gives to both the buyers and the suppliers of certain products. this market functions based on the ―many-to-many‖ principle and represents a large trading community. e-markets can be grouped according to different criteria (e.g. ownership, the participants in trade, the type of product...), and some of the the transformation of business models and markets in the era of internet and electronic business 69 kinds that exist are e-markets oriented towards buyers, e-markets oriented towards vendors, as well as independent, vertical and horizontal e-markets. e-markets oriented towards buyers are founded by companies which perform large procurements, i.e., purchases. they open their own e-market on their own server and invite bidders to offer products, which reduces the high cost of finding and comparing vendors. this model is unique to the b2b trade and it does not exist in the b2c model. e-markets oriented towards vendors are founded by big supplier companies. these markets include the collection of offers, which opens a kind of an auction for buyers. this kind of a market is often formed as a means of defense or the effort to stop buyers from founding their own markets. small suppliers have a problem with this model and it is not suitable for large and frequent purchases of a single buyer. the problem of opening this kind of market is attracting large buyers. independent e-markets (third-party e-markets) are a form of intermediaries and provide a forum for buyers and sellers, which need to find each other in order to realize certain transactions. the problem in the functioning of these kinds of markets is in the possibilities for securing a sufficient number of buyers and sellers. independent e-markets are significant for big and frequent trade transactions between buyers and sellers. these markets have found their application in the automotive industry, airline industry etc. the purpose of vertical e-markets is performing trade transactions between buyers and sellers of homogenous products in a single industrial sector (food, health, education) and securing the exchange of direct products between buyers and sellers, which are a part of the company’s end products in a certain industrial sector. horizontal markets are markets that perform exchange between buyers and sellers from different industrial sectors and which supply products that are not a part of the company’s end products. the subject of the exchange in horizontal markets includes, for example, construction material, office supplies, accounting services etc. according to the spatial span, e-markets can be divided into local, national, regional, and global ones. this division is also conditioned by other factors such as the vernacular, the commercial practice, the applicable local legislation, the convertibility of the currencies used and the internet coverage. the basic characteristics of b2b e-markets are conditioned by the line of work, i.e., the industry sector, the buyers and the sellers across the geographical space belong to. the reasons for companies entering the e-market are: 1) high variability in product demand and difficulties in acquiring important information about the products in the traditional market; and 2) a high level of supply fragmentation on the side of supply and demand, and the need to achieve a good price and the reduction of the distribution costs. some of the factors that slow down the introduction of e-trade in a certain industrial branch are: 1) the inability to create a neutral production environment; 2) the rivalry between the members in the e-trade chain; 3) the risks in distributing data due to competition; 4) the problem regarding ownership and corporative structure; 5) the problem of integrating backend technologies. the functions of an e-market could be grouped into the following four categories: 1) supplying information; 2) connecting the buyer and the seller; 3) the ability to perform online transactions; 4) the ability to support cooperation and include all the basic functions of a traditional market. 70 t. janaćković, s. milovanović, g. milovanović supplying information, i.e., the appropriate content, to buyers and sellers is the basic function of all markets, e-markets included. e-markets provide diverse information, such as product lists, databases with data on the price of the goods, conditions of delivery, taxes and so on. the function of connecting the buyer and seller is achieved through emarkets by means of auctions, online negotiations, requests for offers etc. the ability to perform online transactions, i.e., the ability to perform a business transaction, includes the ability of the e-market to perform billing and credit functions, the exchange of information and accompanying documents online, and online connections with transport organizations and other third-party service providers. the ability to support cooperation and include all the basic functions of a traditional market includes the ability of the market to provide the participants with the exchange of a high volume of information on products and prices by using various social channels like discussion forums, virtual conferences, chat and meeting rooms, magazines, and commercials. b2b e-markets contribute to lower transaction costs, the elimination of intermediaries, and achieving price transparency. the emergence of these markets led to the disappearance of the need for many standard intermediaries while one of the results of price transparency is the reduction of differences in the price level occurring in the market, since the buyers have more time to compare prices, making better decisions on buying something at a better price. conclusion changes in the current business models are considered an essential component in managing a business model and are necessary if a company is to survive on the market on the long-term basis and adapt to the changing conditions of the environment. a successful change of a business model is directly reflected on the business success of the company. technological progress which brings new digital technology and creates new business opportunities through the use of the internet causes major strategic implications. certain changes require new ways of doing business while others involve more effectively the implementation of traditional business strategy. the e-business environment requires a radical change in the business model to enable the companies to stay competitive in the market. reorganization or modifications in creation of values, especially in the value chains, are the most important for the business model management and the key factor for business success. dell is an example of a company that applies the direct sales business model, cuts the value chain, and applies more effective and responsive model to the demands of consumers. the introduction of digital technology affects the innovations in the business model. an example is apple, which combining the digital music, design and portable media players, not only transformed the business, but created a new market. through managing the business model, the company can differentiate itself from the competitors and secure a longterm competitive advantage. technology is one of the basic drivers of change and almost every company adjusts its business models under the influence of it and e-commerce. the development of technology is forcing market players to adapt business models, taking into account not only the evolutionary trends, but also „disruptive technologies―, such as e-communications. ecommunication not only influenced the change in business models, but also in industry and market structure. b2b organizations traditionally sell products through a network of the transformation of business models and markets in the era of internet and electronic business 71 distributors, while the development of new technologies means that the trade is obtained directly with consumers through a website. the market and competition are also an important driver of changes in the business model, as seen in the case of online sales company amazon, which exerts a huge pressure on the traditional bookstores. under the influence of e-communication there is digitalisation of the market mechanism, the product and its distribution, the creation of new market structures and the use of echannels to distribute products and services. the development of e-commerce and e-trade leads to an increasing significance of e-markets. using the potential of e-market is important to ensure the company a long-term competitive advantage. spreading the e-market in the industry has a major impact on the structure of the value chain involved in the supply of final consumer goods and services, while the modification or reorganization in the creation of values, especially the value chain, is one of the key aspects of management and business models, important for business success. the e-market and the distributive network enable a wide variety of buyer and seller activities to converge in one place, including marketing, the order process, distribution, payment, and the product development process. e-business and e-commerce means new online business models. there are many different models of e-markets. the basic business models of the e-market include the e-shop, the e-procurement center, the e-mall, the e-bazaar, e-auction, and e-brokerage. e-markets based on the internet are a dominant form of b2b trade. b2b e-markets contribute to lower transaction costs, the elimination of intermediaries, and achieving price transparency. this research is expected to provide insights from the area of company transformation management and the implementation of e-business. these findings would help heads of companies to successfully manage these transformation processes in order to improve business operations, respond to the demands of the e-market and create greater value for the buyers. references 1. alshamlan, a. (2006), e-business management: concepts and successful factors, social science research network, pp.1-10. 2. calem, r. e. (1996), auto sales are booming on the web, the new york times: cybertimes. 3. chaffey, d. (2009), e-business and e-commerce management, strategy, implementation and practice, fourth edition, pearson education. 4. dti (2000), business in the information age – international benchmarking study 2000, uk department of trade and industry. 5. giesen, e., berman, s.j., bell, r., blitz, a. (2007), paths to success, three ways to innovate your business model, ibm institute for business value, ibm global services, u.s.a.. 6. jovanović, r., milovanović, s. (2008), upravljanje elektronskim poslovanjem, niš, ekonomski fakultet. 7. milovanović, s. (2015), application of internet technology and electronic business concept in serbia, the economies of balkan and eastern europe countries in the changed world, ebeec, nis, serbia, procedia economics and finance 19, pp.278-286. 8. pettigrew, a.m., whipp, r. (1993), managing change for competitive success, blackwell publishing. 9. rabbani, f., lalji s. nh., abbas , f., jafri, sm. w., razzak, j.a., nabi , n., jahan , f., ajmal, a., max petzold, m., brommels, m., tomson, g. (2011), understanding the context of balanced scorecard implementation: a hospital-based case study in pakistan, implementation science, 6:31, pp.1-14. 10. stankić, r. (2007), elektronsko poslovanje, 1.izdanje, beograd, ekonomski fakultet, str. 40-41. 11. strader, t. j., shaw m. j. (2000), electronic markets: impact and implications, in handbook on electronic commerce. m shaw, r blanning, t strader and a whinston (eds), heilderberg: springer verlag, pp. 77-100. 12. timmers, p. (1998), business models for electronic commerce, electronic markets, vol.8, no.2, pp. 3-8. 72 t. janaćković, s. milovanović, g. milovanović 13. timmers, p. (1999), electronic commerce strategies and models for business-to-business trading, series on information systems, wiley, chichester. 14. weill, p., vitale, m. r. (2001), place to space: migrating to e-business models, harvard business school press, boston. 15. wirtz, b. w. (2000), electronic business, wiesbaden, p.81. 16. wirtz, b.w. (2011), business model management, design-instruments-success factors, gabler verlag, germany. 17. zheng, w. (2006), the business models of e-marketplace, communications of the iima, vol.6, iss.4. transformacija poslovnih modela i tržišta u eri interneta i elektronskog poslovanja u radu je fokus na transformaciji poslovnog modela preduzeća, koja nastaje kao posledica primene informacionih tehnologija i prelaska sa tradicionalnog na elektronsko poslovanje. sve veći broj preduzeća danas, shvata da transformacija njihovih poslovnih modela i procesa nije više opcija, već nužnost, kako bi opstala i ostala konkurentna na tržištima koja sve više postaju elektronska i čije se funkcionisanje sve više zasniva na internetu. predmet istraživanja je transformacija poslovnog modela i korišćenje potencijala elektronskog tržišta, kao i modeli elektronskih tržišta. iako je proces transformacije sa tradicionalnog na elektronsko poslovanje neizbežan, on se smatra rizičnim i nepredvidivim, i od posebnog je značaja da se ispita upravljanje glavnim aspektima promena do kojih dolazi u preduzeću. cilj rada je analiza promena u preduzeću koji se odnose na poslovne modele, faktora promene poslovnog modela sa naglaskom na tehnologiju, potencijala elektronskih tržišta i onlajn poslovnih modela za elektronsku trgovinu. ključna pitanja na koja istraživanje traži odgovor su ciljevi, zadaci i svrha promena, kako implementirati promene, i u kojim segmentima dolazi do promene. u radu se ukazuje i na upravljačke probleme i izazove sa kojima se susreću preduzeća usled prelaska na elektronsko poslovanje, a posebno na upravljačke probleme vezane za promene. ključne reči: elektronsko poslovanje, preduzeće, promene, poslovni model, elektronsko tržište facta universitatis series: economics and organization vol. 12, n o 3, 2015, pp. 209 223 perspectives for the development of knowledge economy, innovativeness, and competitiveness of cefta countries  udc 005.94+330.341.1]:339.54(4-672eu) danijela despotović 1 , dušan cvetanović 2* , vladimir nedić 1 1 university of kragujevac, faculty of economics, serbia 2 university of niš, faculty of economics, serbia abstract. knowledge and innovativeness are the key determinants of the competitiveness of countries in the contemporary economic conditions. based on these facts, the paper presents a comparative analysis of readiness for the development of the knowledge economy, the achieved level of innovativeness and competitiveness of countries involved in the central european free trade agreement – cefta and a group of selected eu countries), which used to be cefta members. the aim of the study is to assess differences in the levels of readiness for the development of knowledge economy, innovativeness, and competitiveness of these two groups of countries. the research results confirm the significant lagging of cefta countries in relation to the selected eu countries, once cefta members. key words: competitive advantage, innovation, knowledge economy, cefta, selected eu countries. jel classification: o33, o52. introduction the central european free trade agreement (cefta) today consists of the following members: serbia, bosnia and herzegovina, albania, macedonia, moldova, montenegro, and kosovo. its former members are: czech republic, slovakia, hungary, slovenia, romania, bulgaria, and croatia, which ceased to be members of cefta once they joined the eu. the agreement now defines a single free trade zone of the western balkan countries and moldova. received september 29, 2015 / accepted october 27, 2015 corresponding author: danijela despotović faculty of economics, jovana cvijica bb, kragujevac, serbia, 34000 kragujevac, serbia e-mail: ddespotovic@kg.ac.rs * phd candidate 210 d. despotović, d. cvetanović, v. nedić cefta agreement replaced 32 previous bilateral free trade agreements, which significantly contributed to the development of trade relations in this region. liberalisation and facilitation of trade among the signatory countries aims at: improving the economic development of national economies and the region as a whole, stabilisation and joining the eu, speeding up the process of joining the world trade organisation, increasing the region’s ability to attract investment, encouraging integration of the signatory countries into the world economy. the most important advantages of the cefta agreement are increased and improved exchange, direct flow of goods and services, linking the economies in all sectors, improved balance of payment of countries, improved trade relations among countries. in addition, the advantages of cefta are reflected in overcoming political tensions in the region, reducing the costs of production, introduction of modern technologies and compliance with international standards, strengthening competition, and increasing the competitiveness of domestic products. for companies in the region, the process of trade liberalisation implies market conditions and fierce competition, which means the necessity of raising the technological level of production, productivity, efficiency, application of modern management and marketing. this is the first test that must be passed on the way to the eu. what is more, all selected eu countries were formerly members of cefta. through its strategy for sustainable smart and inclusive growth – europe 2020, adopted in lisbon in 2010, the european union clearly emphasised the importance of knowledge and innovativeness for the improvement of competitiveness and future economic development of regional economic integration (europe 2020). it seems completely logical to ask, then, to what extent are cefta countries really able to follow the set objective of the eu to become the world’s most developed knowledge economy, by continuously transforming their economies towards knowledge-based model. in this context, the main problem to be studied in this work can be reduced to the question of whether there is a lag of cefta countries in relation to the selected countries of the european union, its former members, in the areas of readiness for the development of the knowledge economy, innovativeness, and competitiveness, and whether that gap, if any, can stand for the limiting factor of progress of these countries towards eu membership. in order to get acceptable answer to the research question, the following analytical methods have been used:  comparative overview of the values of the parameters knowledge economy index (kei), global innovation index (gii), and global competetiveness index (gci), in order to detect differences in the values of these parameters in respect of cefta countries and the group of selected eu countries;  cluster analysis according to the parameters of innovation, in order to explain the depth of the gap between the cefta countries and the group of selected eu countries;  correlation analysis of the parameters knowledge economy index (kei), global innovation index (gii), and global competetiveness index (gci), in cefta countries and the group of selected eu countries; in order to point to differences in terms of the degree of correlation of the analysed variables. the answer to the above question cannot be simple. this is, among other things, due to the fact that the political and many other unpredictable events can have an extremely perspectives for the development of knowledge economy, innovativeness, and competitiveness... 211 adverse effect on the quality of functioning of individual national economies 1 . however, upon abstracting this aspect of the problem, it can be said that pronounced readiness of cefta countries for the development of the knowledge economy, innovativeness, and competitiveness per se facilitates and accelerates their path to eu membership. knowing that cefta countries are economically least developed part of europe, and that in the recent past they functioned in a much different economic and political environment in comparison with the members of eu15, we chose to compare the indicators of readiness for the development of the knowledge economy, innovativeness, and competitiveness of cefta countries with the respective data relating to the group of six selected eu countries, which used to be socialist countries and later cefta members, and which, due to the successful completion of the transition process, joined the eu in the period from 1 january 2004 to 1 july 2013 (1 january 2004 – hungary, slovakia, and slovenia, 1 january 2007 – romania and bulgaria, 1 july 2013 – croatia), when they ceased membership in cefta (see scheme 1). 1. theoretical background over the past three decades, the rate of knowledge creation and distribution has significantly increased. in order to effectively advance towards knowledge-based economy, the countries must invest in the creation and dissemination of new knowledge (despotovic et al., 2014). to tell the truth, in a sense, economic development has always been based on knowledge. however, the scope and importance of knowledge for economic processes have fundamentally changed in recent years (nijkamp & siedschlag, 2011). the growth of productivity, driven by technological and organisational innovation, has become the most important source of economic growth in knowledge economies (huggins et al., 2008). powell and snellman define the knowledge economy as the production of goods and services, predominantly based on knowledge-intensive activities, which generates technological changes, causing funda mental changes in the economy and society as a whole (powell & snellman, 2004) a key component of the knowledge economy is the dominant reliance of economic activities on the intellectual capacity of people. in contemporary society, innovativeness is one of the most important factors of growth and development of the companies and the success and prosperity of the economy and society as a whole. lack or inadequate level of innovativeness leads to stagnation in all areas of production and business of companies. that is why the slogan “innovate or perish” has become generally accepted at the level of individual companies, as well as at the level of individual countries. innovativeness at the micro level enables the creation of new or improvement of the performance of existing products and services, and better fulfilment of existing or creation of new consumer needs (crespell & hansen, 2008) for most authors, innovativeness is associated with creativity and the creation of new ideas, and their transformation into new products, services, and processes (rothwell, 1994; amidon, 2003; akamavi, 2005). moreover, innovation can be seen as a process that transforms knowledge into economic development and social welfare. 1 in this respect, the possible adverse effect of the conflict in ukraine on the economy of the eu and a number of european countries is worth mentioning. 212 d. despotović, d. cvetanović, v. nedić in theory, there are rather conflicting views on the relevance of the concept of competitiveness. due to the number and complexity of factors, as well as the very nature of the competitive processes, the concept of competitiveness is often very difficult to understand and confusing (snieška & bruneckienė, 2009). a number of economists, however, believes that competitiveness has traits of ”natural law of modern capitalist economy” (kitson et al., 2004). without going into in-depth analysis of issues related to the character and nature of the concept itself, it should be noted that the level at which the phenomenon of competitiveness is examined is the most important aspect of observation of this phenomenon (kitson et al., 2004). in short, one should distinguish between microeconomic and macroeconomic aspects of the complex of , competitiveness. at the micro level, competitiveness is the ability of companies to compete, grow, and be profitable (powell, 2001; martin, 2004). therefore, competitiveness is the ability of companies to produce and sell products and services at a price that is lower than the competitors’, or on the basis of other, non-price factors that are more attractive when compared to other companies (imd & wef, 1990). unlike the competitiveness of companies, the concept of macroeconomic competitiveness is, in the theoretical sense, a controversial phenomenon. it is most commonly identified with the ability to produce and market goods and services on the foreign markets, but also with the pace of growth of real gross domestic product per capita, or the capacity to increase the wealth of the country (marginen, 2006). we believe that the identification of a country’s competitiveness with its ability to export goods and services to foreign markets is a too narrow approach, and that it does not answer the contemporary economic conditions. furthermore, we believe that the interpretation of a country’s competitiveness as a potential increase of wealth is ultimately reduced to work productivity, since higher gross domestic product means greater productivity (aiginger, 2006). national competitiveness resulting from the country’s ability to generate innovation in order to achieve or maintain advantage over other nations in a number of key industries was first defined by (porter, 1990). further works emphasise that within the knowledge economies, the state should primarily focus on achieving a high living standard (thurow, 1996; huggins et al., 2008). many researchers, however, explicitly note that they are not interested in measuring the competitiveness of the country (schuller & lidbom, 2009). others argue that companies have to be competitive, not the countries, because when companies cannot compete, they disappear (krugman, 1994). the fact is, however, that the complex of the country’s competitiveness is increasingly in circulation in theoretical as well as empirical research (fagerberg, 1988). the importance of the concept of competitiveness of the country is firmly incorporated in the economic policy. therefore, understanding, quantification, and analysis of the factors of competitiveness of the country are becoming an important dimension of development policy, which is largely devoted to finding ways to improve quality of macroeconomic prerformance. while it is clear that the country’s competitiveness is essentially linked to economic performance, the fact is that this complex is increasingly seen in relation to the relative position of the country to other countries, and far less in relation to its accumulated wealth (nijkamp & siedschlag, 2011). perspectives for the development of knowledge economy, innovativeness, and competitiveness... 213 although these are two different aspects, i.e. two views on competitiveness, between macro and micro level there is a strong and direct relationship (porter & schwab, 2008). it is indisputable that knowledge and innovativeness form the basis of both concepts of competitiveness in today’s conditions. 2. knowledge assessment methodology 2.1. knowledge economy index (kei) to facilitate the countries’ construction of the knowledge society, the world bank developed a knowledge assessment methodology (kam), which identifies specific sectors or areas to which economic policy makers should pay special attention. the approach is based on the quantification of two indices: knowledge economy index (kei) and knowledge index (ki). kei is an indicator that measures the ability of a country or region to develop a knowledge economy, i.e. which illustrates the suitability of the environment for the efficient use of knowledge for economic development (figure 1). kei is an aggregate index, which measures the country’s readiness for the development of the knowledge economy. it is calculated as the average of the normalised performance of the country on all four pillars related to knowledge economy: economic and institutional regime, education and skills, ict infrastructure, and innovation system (chen & dahlman, 2005). fig. 1 description of the pillars of the knowledge economy (source: knowledge assessment methodology 2012, www.worldbank.org/kam) economic and institutional regime provides incentives for efficient use of existing and new knowledge, and leads to the affirmation of entrepreneurship. educated and adequately trained population can create, share, and use knowledge. companies’ efficient innovation system, research centres, universities, consultants, and other organisations can be incorporated into the growing actions of global knowledge, assimilate, and adapt to local needs, and create new technology. modern and affordable ict infrastructure can facilitate effective communication, dissemination, and processing of information. ki is an indicator of the total potential for the development of knowledge in a country, and measures its ability to create, adopt, and expand knowledge. it is calculated http://www.worldbank.org/kam 214 d. despotović, d. cvetanović, v. nedić as the average of the normalised performance of the most important indicators of a country or a region, included in the first three pillars of the knowledge economy. measuring and comparing countries on the basis of this methodology is suitable for providing a preliminary assessment of the development of knowledge economy. it provides a quick and concise insight into the major strengths and weaknesses, as well as areas in which progress has been made. 2.2. global innovation index (gii) the existence of a strong correlation between innovation and economic development has been documented in economic history and confirmed in economic theory (grossman & helpman, 1991; cimoli & dosi, 1995; helpman, 1998). recognising this fact, in 2007 insead developed gii, in order to measure the achieved level and changes in innovativeness, and to identify obstacles that hinder the growth of innovativeness and, consequently, economic and social development of the observed countries. the main aspiration is to find indicators that best track the growth of innovativeness of the economy. gii combines various indicators of innovativeness, which are obtained on the basis of carefully selected and weighted variables. its main characteristic is that it is in the process of continuous improvement, so that it could track innovativeness in countries with different levels of development in the best possible way. the developers of gii started from the fact that innovativeness is important for economic growth and improving competitiveness, both for developed and developing countries. this approach supports the modern understanding of innovativeness that is not limited only to the results of research and development and the number of published scientific papers (greenhalgh & rogers, 2010). global innovation index (gii) relies on two sub-indices, the innovation input index and the innovation output index, each composed of the pillars (figure 2). the relationship between innovation output index and innovation input index is indicated by innovation efficiency index (iei). fig. 2 description of components of the global inovation index (source: the global innovation index, insead & wipo, 2012-2013.) perspectives for the development of knowledge economy, innovativeness, and competitiveness... 215 2.3. global competitiveness index by far the most commonly used approach to quantifying the competitiveness of countries is the gci model that has been developed by jeffrey sachs and john mcarthur in 2001, and which was first introduced in the global competetiveness report 2001-2002 of the world economic forum. gci is now considered the best and most comprehensive indicator of the competitiveness of countries. gci groups the factors of competitiveness of countries into twelve pillars, given in figure 3 (the global competetiveness report, 2012-2013, insead & wipo). fig. 3 description of components of the global competitiveness index (source: the global competetiveness report, 2012-2013, wef) the priorities of the policy of improving competitiveness depend on the stage of economic development of the observed economy. depending on the stage in which the economy of a particular country is found, the factors are classified into three groups and receive different weights during gci quantification. in the initial stage of development, the economy can compete on the basis of the relative abundance of factors of production. in the following stage, the most important generators are efficiency and quality of products, while in the third stage of development, countries can maintain a high living standard solely on the basis of innovativeness (sala-i -martin et al., 2010). although the results of all twelve pillars are displayed separately, it is important to know that they are not independent. on the contrary, they are intertwined, so that weaknesses in one area usually have a negative impact on other areas. 3. results and discussion assessment of cefta countries and the selected eu countries in respect of the achieved level of readiness for the development of knowledge economy, innovativeness and competitiveness begins by reviewing the values of the composite index at the level of individual countries. in order to evaluate the relative position of cefta countries in 216 d. despotović, d. cvetanović, v. nedić relation to the selected eu countries, the analysis continues in the direction of comparative presentation of the observed characteristics by selected groups of countries, where the observed characteristics are given as the average of the results that the observed groups achieved in the field of readiness for the development of knowledge economy, innovativeness and competitiveness. in the next step, cluster analysis is performed, with the aim of testing the level of difference in terms of the parameters kei, gii, and gci, and accordingly performing the grouping of the observed countries into clusters, and detecting members of the observed groups that exhibit large deviation from the rest of the group. finally, correlation analysis points to the degree of correlation of the observed indices, in respect of cefta countries and the selected eu countries. table 1 provides an overview of the values of kei, gii, iei, and gci. the last column presents the values of gdp per capita for the analysed countries in 2013. table 1 the values of the observed indices and gdp per capita of cefta countries and the selected eu countries country/region kei (1-10) gii (0-100) iei (0-1) gci (1-10) gdp per capita (us$) albania 3.85 30.90 0.60 4.53 3,912 b&h 4.02 36.20 0.70 5.12 4,461 montenegro 4.20 41.00 0.70 / 6,881 macedonia 4.14 38.20 0.70 5.65 4,682 moldavia 3.94 40.90 1.10 4.92 2,037 serbia 3.77 37.90 0.80 6.02 4,943 cefta 3.98 37.50 0.77 5.25 4,486 bulgaria 4.31 41.30 0.90 6.80 7,033 croatia 4.13 41.90 0.80 7.29 12,971 hungary 4.25 46.90 0.90 8.02 12,735 slovakia 4.10 42.20 0.70 7.64 16,899 slovenia 4.25 47.30 0.80 8.01 22,192 romania 4.13 40.30 0.90 6.82 7,934 selected eu countries 4.19 43.32 0.83 7.43 13,294 source: knowledge assessment methodology 2012, www.worldbank.org/kam; the global innovation index 2012, insead & wipo, and the global competetiveness report, 2012-2013 wef. data given in table 1 confirm the significant lag of cefta countries by all indicators in relation to the group of selected eu countries. in 2013, the value of kei for cefta is 5.25, and 7.43 for the control group. the lag of cefta countries in relation to the group of selected eu countries is even more pronounced when considering the value of gii. regarding the parameter gdp per capita, the gap is evidently alarming, because cefta countries barely reach one-third of the average values of the selected eu countries. the average value of the gci for cefta group is 3.98, and 4.19 for the selected eu countries. figure 4 illustrates the relationship among the average values of the observed composite indices for cefta countries and the selected eu countries. perspectives for the development of knowledge economy, innovativeness, and competitiveness... 217 fig. 4 comparison of the observed variables comparative review of the observed indices indicates that cefta countries are lagging behind the selected eu countries mostly in respect of kei value, while other parameters exhibit milder gap. figure 5 provides somewhat more detailed information, showing the average values of the observed variables in the 2011. 2012. and 2013. year. fig. 5 diagram of the average values of the observed variables in the period 2011 – 2013 3d area chart in figure 5 shows that the average value of gci, after a slight decline in 2012 compared to 2011, records slight growth in 2013, in respect of cefta countries. on the other hand, the average value of gii records growth in both groups of countries in this period. at the level of the selected group of eu countries, the average value of gci shows unchanged value in the examined time interval. gdp per capita has similar cyclical trend in both analysed groups, with cefta countries significantly lagging behind the group of selected eu countries. 218 d. despotović, d. cvetanović, v. nedić for the purpose of classification of the selected countries in two or more groups, based on their differences in terms of all observed variables (gci, gii, kei, and gdp per capita), cluster analysis has been conducted. the intention has been to use this multivariate technique to show the depth of the gap between the selected countries. figure 6 shows the dendrogram of the performed cluster analysis. x axis shows the level of difference between the analysed countries. fig. 6 dendrogram of performed cluster analysis (source: authors) in the process of grouping (clustering according to the data given in table 1) of 6+6 selected countries (cefta countries and the selected eu countries), the bottom-up method of agglomerative hierarchical clustering has been used. in the initial step, each country has been treated as a separate cluster. their grouping, based on similarities in terms of the values of the observed variables, in pairs of clusters, is the result of all subsequent iterations of grouping, until the observed entities have been consolidated within a single cluster. if the level of difference at about 60 is taken as a possible cross-section of the dendrogram, three clusters of observed countries can be clearly identified. the first cluster consists of 4 eu members, the second cluster includes only albania, while the third cluster includes the remaining members of cefta and romania and bulgaria from the group of selected eu countries. at the level of difference slightly greater than 65, albania joins the third cluster. however, only at the level of diversity of about 450, the formation of a single cluster occurs, which indicates a significant gap between the first cluster (the selected eu countries without bulgaria and romania) and cefta countries. on the other hand, there are also important differences among the countries within the clusters. the smallest difference among the members is seen within two subclusters: 1) serbia, b&h, and macedonia, and 2) bulgaria, romania, and montenegro. bulgaria and romania are much closer to cefta countries than the rest of the selected eu countries. through linear correlation analysis, we have tried to get an answer to the question of whether there is a significant difference in terms of the degree of correlation among the analysed variables between the observed groups of countries. since the analysis included reciprocal linear correlation between the two variables, methods of simple linear correlation analysis were used. perspectives for the development of knowledge economy, innovativeness, and competitiveness... 219 matrix (figure 7, 8, and 9) shows the correlation coefficients between the observed variables, according to the latest available data for groups of selected countries. fig. 7 correlation matrix (pearson) – cefta countries (source: authors) correlation matrix by r (figure 7) gives a numerical measure of the potential correlation of the analysed parameters of cefta countries. the values of correlation coefficients point to a weak correlation, i.e. to the existence of weakly expressed linear correlation between the observed variables in countries covered by the sample. the values of correlation coefficients between kei and gii (r = 0.44) and gii and gci (r = 0.49) indicate that there is no statistically significant linear correlation between the observed variables. it is noted that all analysed correlations have the value of r that is significantly below 0.7, and are not significant for further consideration (less than the limit value equalling 0.811 for the level of significance of 5%). this is an indication that cefta countries do not base their competitiveness on innovativeness and knowledge economy, which is logical, given the amount of their gdp per capita. fig. 8 correlation matrix (pearson) – the selected eu countries (source: authors) 220 d. despotović, d. cvetanović, v. nedić when the correlation matrix for the control group of countries is taken into consideration, it can be seen that the strongest correlation exists between gdp per capita and kei (r = 0.82) and kei and gii (r = 0.91). the values of correlation coefficients indicate the presence of high linear correlation. this indicates a strong potential of correlation of these indices in countries covered by the sample. as for the correlation between the variables gii and gci, the value of the correlation coefficient (r = 0.46) indicates that there is no statistically significant linear correlation between the observed variables. upon testing the hypothesis of a linear correlation between the observed variables, with a probability level of significance test of 0.05, it can be concluded that there is a statistically significant linear correlation between variables gdp per capita and kei and variables kei and gii. all other analysed correlations have the value of r below 0.7, and are not significant for further consideration (less than the limit value equalling 0.811 for the level of significance of 5%). this indicates that the countries included in the control group significantly base their innovation potential and gdp on the knowledge economy. however, in this group of countries, no impact of the knowledge economy on the competitiveness of the economy is detected. based on the cluster analysis, romania and bulgaria have been omitted from the selected group of eu countries, and correlation analysis was performed with the data on countries that have been grouped in the first cluster (czech republic, slovenia, croatia, and hungary) (figure 9). fig. 9 correlation matrix (pearson) – the selected eu countries without romania and bulgaria (source: authors) when the correlation matrix for the first cluster of countries is taken into consideration (scheme 8), it can be seen that the strongest correlation exists between gii and gci (r = 0.99), as well as between kei and gii (r = 0.93). the values of correlation coefficients indicate the presence of very high linear correlation between innovativeness and competitiveness (limit value of r is 0.95 for the level of significance of 5%). as for the correlation between the knowledge economy and innovativeness, the correlation is statistically significant for the level of significance of 10% (when the limit value for r is 0.9). perspectives for the development of knowledge economy, innovativeness, and competitiveness... 221 conclusion radar chart analysis shows that cefta countries are significantly lagging behind the selected eu countries according to the observed indicators of gci, gii, and kei. the most prominent recorded lag exists in respect of the parameter kei. in addition, there is a slight growth of gci in cefta countries, and stagnation in the group of selected eu countries, as well as the tendency of growth of gii over the last three years in both groups of countries. if the level of difference of about 60 is taken as a possible cross-section of the dendrogram, three clusters of observed countries can be clearly identified. the first cluster consists of 4 members of the eu, the second cluster includes only albania, while the third cluster includes the remaining members of cefta and romania and bulgaria from the group of eu countries. already at the level of difference slightly greater than 65, albania joins the third cluster. however, only at the level of diversity of about 450, can a single cluster be formed, which indicates a significant gap between the first cluster (the selected eu countries without bulgaria and romania) and cefta countries. on the other hand, there are also important differences among the countries within the cluster. the smallest difference among the members is seen in two subclusters: 1) serbia, b&h, and macedonia, and 2) bulgaria, romania, and montenegro. bulgaria and romania are much closer to cefta group than to the rest of the selected eu countries, which suggests that eu membership is not in itself a guarantee of relatively rapid progress towards the knowledge economy. linear correlation analysis has revealed that in respect of cefta countries there is no statistically significant kei-gii correlation, indicating the absence of potentially basic correlation between the achieved level of knowledge economy and innovativeness of these countries. in addition, for cefta countries, no statistically significant correlation between gii and gci has been detected, which indicates that the competitiveness of these countries is not significantly based on innovativeness. in contrast, for the group of selected eu countries, a very strong direct correlation between gdp per capita and kei, and kei-gii has been established, as well as between gii and gci for the group of eu countries without romania and bulgaria. this suggests that the competitiveness of these countries relies heavily on the innovation potential and the achieved level of knowledge economy. the lack of significant correlation between the observed parameters for cefta countries suggests that these countries do not rely on their innovation potential and the achieved level of knowledge economy in their struggle for competitiveness on the global market. in fact, it is likely that countries with higher gdp per capita can invest more in the process of creation and diffusion of knowledge. correlation in itself does not allow us to predict with certainty whether the strengthening of certain forms of knowledge in cefta countries in the coming period will result in the growth of innovativeness of these countries. however, this study clearly shows that cefta countries are not so objectively capable to follow the set eu’s goal to become the most developed knowledge economy by continuously transforming their economies to knowledge economies. despite the fact that most members of cefta want to become eu members, it is interesting that even small differences in the levels of gci and gii indices result in large 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(1996) the future of capitalism: how today,s economic forces shape tomorrow,s world. william morrow and company, new york. 38. world economic forum and international institute for management development -wef and imd (1990) world competitiveness report, wef and imd, geneva. perspektive za razvoj ekonomije znanja, inovativnost i konkurentnost zemalja cefta znanje i inovativnost predstavljaju ključne determinante konkurentnosti zemalja u savremenim uslovima privređivanja. polazeći od ovih činjenica, u radu je data komparativna analiza spremnosti za razvoj ekonomije znanja, dostignuti nivo inovativnosti i konkurentnosti zemalja uključenih u centralnoevropski sporazum o slobodnoj trgovini -cefta i selektovane grupe bivših članica ovog sporazuma, a danas zemalja evropske unije iz njihovog najbližeg okruženja. cilj studije je da proceni razlike u nivoima spremnosti za razvoj ekonomije znanja, inovativnosti i konkurentnosti ove dve grupe zemalja. rezultati istraživanja su potvrdili značajno zaostajanje zemalja cefta za selektovanim zemljama eu. ključne reči: konkurentska prednost, inovativnost, ekonomija znanja, cefta, selektovane zemlje eu plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 1, 2016, pp. 45 57 time-driven activity-based costing as a tool of building an integrated management system  udc 657.474:005 mirjana todorović faculty of economics, university of kragujevac, serbia abstract. the implementation of the defined strategies and achieving operational excellence are inextricably linked and equally important for achieving excellent enterprise performance. achieving success within both of these vital management processes, strategic and operational, and within enterprise management in general, requires the development and implementation of an integrated approach. in this regard, theory and practice have come up with different approaches. the aim of this paper is to identify opportunities for the use of time-driven activity-based costing (tdabc), for the purpose of linking strategic and operational management. the analysis has shown that tdabc has outstanding performance, to be applied both in the field of strategic and operational management individually, and more importantly, in the domain of their integration. key words: strategic and operational management, performance measurement, cost accounting, time-driven activity-based costing (tdabc) introduction the common position of a large number of theorists and practitioners is that there is a need to create and implement an integrated system of management. such a system should ensure operational excellence, at the operational level of business processes, and implementation of the defined strategies, at the strategic level. the existence and implementation of a formal system of linking strategic and operational management, which is systematic and coherent, is a crucial prerequisite for successful enterprise management, achieving excellent performance, and creating and sustaining competitive advantage. for the purpose of creating such a management system, different tools have been developed. the ones that are often referred to are balanced scorecard (bsc), dupont model, theory of constraints, hoshin kanri planning, etc. also, the key role of an adequate performance received september 18, 2015 / accepted march 11, 2016 corresponding author: mirjana todorović faculty of economics, university of kragujevac, djure pucara starog street 3, 34000 kragujevac, serbia e-mail: mtodorovic@kg.ac.rs 46 m.todorović measurement system in the process of building an integrated management system is emphasized. reviewing the performance measurement system inevitably leads to the question of the role of accounting and its segments, particularly cost accounting, in the processes of implementation of strategic and operational management. with this in mind, the subject of the present research are instruments (tools) for integrating strategic and operational management, with a focus on performance measurement system and tdabc, as a quantitative basis of cost accounting. the main research objective is the consideration of the possibilities and potentials for the tdabc application, as well as its performance evaluation in the field of integration of strategic and operational management. bearing in mind the subject of research and the defined goal, the paper will rely on methodological procedures and techniques, inherent in the social sciences, i.e. qualitative methodology, based on the study and a descriptive analysis of the defined research subject. reference to the relevant literature, based on theoretical analyses and examples from international practice, including a specific case study, should allow the synthesis and drawing general conclusions. the paper consists of four parts. the issue of the necessity of linking strategic and operational management, and the need for building an integrated management system, is the focus of the first part of the paper. the second part is devoted to the analysis of sixstage framework for the integration of strategic and operational management. the third part discusses the tdabc potentials in the construction of an integrated management system, while the fourth part is devoted to the analysis and presentation of a case study, related to the implementation of tdabc in a specific enterprise. 1. necessity of integration of strategic and operational management literature usually describes quality management by using the expressions “effective” and “efficient”, and it is considered that the enterprise is successful if it does “the right things” in the “right way”. although they have different meanings, the link between efficiency and effectiveness is unbreakable. although there are opposing views [2], authors often point out that it is possible to achieve efficiency without effectiveness, while, without efficiency, there can be no effectiveness. this means that the enterprise, as a business system, can be efficient even if it does not do the right things, i.e. if it does not choose the best possible alternative use of capital (if it is not effective). efficiency is, therefore, seen as the essential (necessary) condition [15]. if the enterprise does not operate in the right way, i.e. does not achieve maximum results with minimum investment (if it is not efficient), there is no room for effectiveness [17, 183]. the reason for this lies in the fact that effectiveness is linked to the process of identifying and defining objectives and creating and implementing strategies, and, in this regard, the long-term directing of the enterprise’s course of action. effectiveness is predominantly within the competence of top management, and implies a long-term aspect of contemplating and decision-making. one of the basic instruments to achieve effectiveness is strategic planning. on the other hand, efficiency focuses on the mode of realization of business processes, with the aim of maximizing results, while minimizing waste. efficiency is a measure of operational excellence [16]. it falls within the responsibility of the lower (operational) management, and includes the use of different techniques and tools to achieve operational improvement. time driven activity-based costing as a tool of building integrated management system 47 focus on efficiency, while neglecting effectiveness, leads to ephemeral profitability. in contrast, focus on effectiveness, with disregard for efficiency, leads to unprofitable growth [16]. therefore, the basic assumption of successful management, i.e. the enterprise’s success, is the balance between effectiveness and efficiency, i.e. the coherence and integration of strategic and operational management. strategic management includes both decision-making on the future direction of enterprise development, through strategic planning, and implementation of activities aimed at achieving the defined goals, i.e. strategy implementation. strategic decisionmaking focuses on the future, with the aim of achieving the desired long-term objectives, so that the consequences of these decisions are far-reaching. on the other hand, operational management has a short-term focus. the main activity of operational management is the organization and connection of all, financial, technical, technological, human, financial, and information resources, for creating products and services of different scope, variety, and demand. traditionally, the focus of operational management is the technological, organizational, and architectural dimension of an enterprise’s business processes and operations [18]. business processes, understood as fully enclosed, timeand logically separated activities or series of activities, whose execution leads to the realization of the processes themselves, are treated as the main value generators. they directly determine and are responsible for the consumption of resources and overall efficiency/inefficiency and productivity of the enterprise. an integral aspect of business process management is their improvement. achieving operational excellence at the level of business processes and implementation of the defined strategies are equally important for achieving excellent performance of enterprises [21]. not even a visionary and masterfully defined strategy can be realized unless associated with operational excellence and operational management. conversely, operational excellence can result in lower costs, quality improvement, and lead time reduction, but without integration with strategic vision, it is unlikely that the enterprise will achieve sustainable and long-term success, i.e. achieve and maintain a competitive advantage. accordingly, high-performance business processes are necessary, but not sufficient. the existence of a kind of gap between the formulation of ambitious strategic plans and their implementation, i.e. execution at the level of departments, business processes, and their teams, is a common problem which enterprises face. empirical studies in the last few decades have shown that 60% to 80% of enterprises fail to achieve the goals set in the strategic plan. one of the main reasons for the enterprise’s failure in the implementation of the strategy or business process management lies in the lack of the management system, which integrates and harmonizes these two vital segments of the management process. the above-mentioned gap also stems from the unsystematic and uncoordinated use of various instruments of strategic management and operational management. in recent decades, a large number of these instruments have appeared. the domain of strategy implementation includes defining and statements of mission, values, and vision (mvv), competitive, economic, and environmental analysis, i.e. swot analysis (strengths, weaknesses, opportunities, threats), strategic map, and balanced scorecard (bsc). on the other hand, the area of operational management most commonly refers to the following management instruments: total quality management (tqm), six sigma, kaizen, lean management, business process reengineering (bpr), and others. contemporary costing systems, which basically rely on business activities, are often used to determine the 48 m.todorović profitability of outputs (products and services) and customers, as the key indicators of the strategy success. in addition, they are considered to be very effective in identifying waste and implementation of operational improvements. the use value of the above-mentioned instruments of strategic and operational management is high. however, they often do not give the expected results. the reason for this is their fragmentary, incoherent, unsynchronized, and unsystematic implementation, based on ad hoc solutions. the results of empirical research clearly indicate the need for the creation and implementation of a specific integrated approach to management. some note that the existence of a formal system of linking the strategic and operational management increases the probability of success of implementation of the strategies created by two to three times [8, 3]. the application of systematic, comprehensive, and integrated approach to ensuring coherence between strategy implementation and achieving business process excellence is the key prerequisite for successful enterprise management, and creating and sustaining competitive advantage. however, the crucial question is how these different strategic and operational instruments of improvement can act together as a coherent system [8, 7]. how to successfully realize the set long-term goals and created strategies, aimed at building and sustaining competitive advantage, while at the same time bringing continuous improvement of business processes and operational excellence? the answer lies in a synchronized and coherent management system, whose base comprises processes of adequate measuring and reporting on the results achieved. measurement processes have three basic functions: control, communication, and improvement, thus allowing the creation of links between strategy, its realization, and the process of value creation [14, 211]. performance measurement and determination of results have their stronghold in the top management of the enterprise, but are equally focused and involve the middle management, up to the top line management (operational management), i.e. the level of business processes of the enterprise. 2. possible approaches to integrating strategic and operational management in order to integrate strategic and operational management, different approaches have been developed. some of them are: bsc [10], dupont model [11], theory of constraints [12] and others. bsc is a very important tool of top management. it has a significant role in the rapid and effective strategy implementation, through the integration of the performance measurement system and management system. in fact, it sets the strategy at the center of the management process, thus, in a certain way, leading the enterprise towards strategic orientation. the dupont model allows the operational improvement (in the field of operational management) to be adequately valorized, i.e. presented in financial statements, in a way that responds to the needs of strategic management [14, 215]. the main objectives of the theory of constraints are: increase throughput, reduce inventory, and reduce operating expense. for that reason, there are objections to this theory, as to being too focused on business processes and operational improvements. some enterprises use hoshin kanri planning for translating high strategic goals into the goals of operating departments. it is an instrument that allows the management to communicate objectives through all hierarchical levels of the organization, i.e. create detailed plans for the future, which require serious planning and resources. time driven activity-based costing as a tool of building integrated management system 49 a number of authors speak of a performance measurement system as a key information system that enables effective and efficient management. for this purpose, a performance measurement system needs to integrate all the relevant information, i.e. enable the development of strategic and operational objectives, and provide information for decision making and control [3]. in support of this, and in the context of the measurement process, the issue of the connection between accounting and strategy inevitably arises. although research on this subject has been carried out for more than half a century, a large number of authors point out that this relationship has not been fully explained and clarified yet. furthermore, they often emphasize the accounting support to the process of strategy realization, but not to the process of its adoption [7], [1]. the research carried out in 2010 aimed at analyzing the role of different accounting tools in the process of defining, redefining, and implementing the strategy. the authors’ global conclusion is that the role of accounting in all these processes is very active and important [20]. in connection with the performance measurement system, the essential question is how to develop an adequate measurement system. the traditional performance measurement system is based on cost accounting information, based on the application of the concept of full costs, and financial accounting information, which is primarily of a historical character. traditional accounting information is objected to as being unable to support the realization of strategy, business objectives, and continuous improvement. in their work, kaplan and norton claim that one should rely on the cost accounting information of new type and information based on new accounting methodologies. they developed an approach for the integration of strategic and operational management, which is based on the strategic and operational planning. their theoretical framework, which provides an integrated approach to strategy formulation and planning, and to operational management and achieving excellence, comprises six stages, and is shown in figure 1. fig. 1 stages of integration of strategic and operational planning [8, 7] the first and crucial phase of the presented framework includes strategy development. strategy development includes formulating mission, vision, defining values, implementing 50 m.todorović strategic analysis (including analysis of macro and microeconomic environment, resources, and other business opportunities, but also an analysis of progress of previously formulated strategies), and strategy formulation. the strategy, by its nature, relies on the vision, mission, and goals of the enterprise. it is considered a key link in the chain of dispositive business and financial decisions and operationalization of tasks, and stands for the defined best course of action for the realization of the objectives of enterprise, and the most important interactive element between the enterprise and its environment. after strategy formulation, the focus is on its planning. strategy planning includes defining strategic goals, strategic initiatives (planned action aimed at achieving performance in respect of the goals established in the strategic map), performance measures, and the necessary budget. it can be implemented by introducing the strategic map. the strategic map describes the process of creating value through a series of cause-and-effect links between the defined goals and four different perspectives of bsc. understanding the strategic goals and strategic directions, their development and measurement of achieved performance levels, control of realization and use of the information obtained for the purposes of effective and efficient management in modern business conditions are becoming critical success factors. the key activity in the process of strategy planning is budgeting. budgeting is the process of preparing information for the thoughtful directing of activities of the enterprise, i.e. the process of tracing its path towards the desired goals, directions, and global development strategies [19, 18]. the result of the budgeting process is the budget, i.e. quantitative expression of future of the enterprise, i.e. expected revenues and expenses for a certain period. the budget is the formal expression of planned future actions, and serves as a communication tool by which the defined long-term and strategic goals are, through the delegation of tasks and responsibilities, transformed into specific operational activities. in the context of the integration of strategic planning and operational management, i.e. translating strategy into action, one should distinguish between long-term and short-term budget. the result of the strategic planning is a long-term budget. long-term budget is the instrument which primarily serves to reconsider financial effects of different strategic options and, as such, is used in the area of decision-making, and very rarely, or almost never, as a means of control. in contrast, short-term (master) budget is the expression of the operating management intentions, and, as such, represents an important instrument in the area of decision-making, but it is primarily a means of control, i.e. a tool to assess the quality of decisions made. the relationship between long-term and short-term budget is such that long-term budgeting raises the quality of short-term budgeting, in a way which prevents orientation of management exclusively towards short-term goals. the implementation of strategic initiatives or portfolio of initiatives, according to kaplan and norton, requires the development of a specific budget, also known as stratex – strategic expenditures. this budget defines the resources for the financing of the implementation of selected strategic courses of action, which provide long-term benefits. in fact, it abandons the traditional approach to budgeting, based on existing organizational business units, and switches to cross-functional and cross-sectoral budgeting. strategy planning is followed by the third phase, i.e. alignment and diffusion of the defined strategy at the level of the business units, work teams, and all employees. this is a crucial stage for the success of strategy implementation. strategy diffusion and alignment in the enterprise can be implemented vertically and horizontally. vertical diffusion should ensure that each organizational unit contributes to the realization of high strategic goals, time driven activity-based costing as a tool of building integrated management system 51 at the same time striving for the successful realization of the goals set at the operational level. horizontal alignment among organizational parts should allow for the synergy in respect of the exchange and sharing of technology, knowledge, best practices, joint training and education of employees, and others. implementation of this phase should allow all organizational segments in the enterprise to, through a balanced approach, achieve the optimization at the operational level and contribute to the realization of the strategy of the enterprise as a whole. the fourth stage involves planning at the operational level by using the above-mentioned instruments, namely: quality management, process management, business process reengineering, forecasts, activity-based costing, capacity planning, and dynamic budget development. the fifth phase involves monitoring of the results achieved on the basis of the strategy implementation, as well as improving business processes and defining strategy, based on the obtained information, and learning processes related to identified problems, barriers, and challenges. the sixth phase relates to testing and modification (adaptation) of the strategy, based on internal operational data and data from the environment. the basis of the above theoretical framework is the establishment of clear and unbreakable link between long-term formulated strategy and almost daily operational activities. the key to success is actually coordination of activities related to improving processes (operational improvements) and strategic priorities. therefore, the development of operational plans is a key thing. in the process of developing operational plans, two issues are central, namely: what the key business processes are, i.e. which business processes should be improved in order to ensure the implementation of a defined strategy and how to establish a connection between strategy and operational plans and budgets, i.e. how to plan resource capacities. with regard to the first question, enterprises need to focus on improvements and achieving the desired performance of key business processes, since it is the only path that leads to the implementation of a defined strategy. after identifying key business processes, which will be subject to improvements, operational management needs to define the most important performance indicators for these processes. this ensures employees’ focus on business process improvement, as well as appropriate feedback on achievements. the essence of the second question relates to the adjustment and transformation of operational improvement plans and strategic targets into the annual operating plan, with this operational plan including three components: sales forecast, resource capacity plan, and budgets (operating and capital budgets). the first component of the operational plan involves translating the strategic plan of target revenues into sales forecast. the second component of the operational plan requires translating detailed sales forecasts into the assessment of the required resources of the enterprise, i.e. resource capacity needed for a defined forecast period. the instrument (tool) which, according to kaplan and norton, ensures the most efficient implementation of the given task is time-driven activity-based costing – tdabc [8]. tdabc plays an important role in providing answers to both of the above-mentioned questions in connection with the preparation of operational plans. it allows the measuring of performance at the level of business processes, and determining the necessary resource capacities for the purpose of creating the annual operating plan. 52 m.todorović 3. tdabc contribution to building an integrated management system tdabc is a contemporary cost accounting system, which was created with the aim of overcoming and eliminating defects of traditional activity-based costing (abc). tdabc introduces several essential innovations into cost calculation; it takes into account the practical capacity, i.e. capacity utilization, and introduces a time variable. tdabc methodology requires only two sets of estimates: the capacity cost rate and the time required to perform each business activity. the capacity cost rate is the quotient of the cost of capacity supplied and practical capacity of resources supplied. the primary function of the capacity cost rate is to allocate cost of resources to cost object by estimating the demand for resource capacity that each cost object requires. costs are allocated on the basis of the time necessary for the realization of the specific business activities, where the time is determined by using time equations. hence, organizational and methodological design of tdabc system requires, first, determination of the cost capacity rate, which raises the problem of determining the practical capacity, and second, identification of the time required for the realization of specific business activities, which requires creation of time equations. companies that implemented tdabc identified the following as the most common motives of their decision: increase in the degree of capacity utilization and increase in the efficiency of the processes (operational improvements). they point out that the achievement of these effects is possible due to the fact that tdabc provides more detailed and reliable information for the purpose of performance measurement processes, budgeting, and implementation of “what if” analysis. furthermore, some of the possible positive effects of the use of tdabc can be: creation of profitand profitability-oriented enterprise, through regular reports on the profitability of each customer or product/service, creating a company oriented towards the realization of the goals and strategies, through connecting tdabc and bsc, improving decision-making processes, and others [9]. tdabc information has significant and different application potential. different areas of the use of information provided by tdabc are given in table 1. the systematization of areas of information use has been done from the perspective of strategic and operational management levels. table 1 the fields of application of tdabc information [9, 78] strategic operational profitability analysis at different levels strategic benchmarking cost to serve kpis balanced scorecard capacity analysis order optimization cost reduction inventory reduction internal controls tdabc can successfully respond to information requirements of management at all levels [5]. bearing in mind that creating a tdabc system begins at the lowest, operational, levels, it can measure performance at both higher and lower hierarchical levels. while higher levels of management can monitor the level of profitability and capacity utilization at the level of different business segments, departments, and wider, the management at the departmental level monitors the profitability of individual time driven activity-based costing as a tool of building integrated management system 53 products, orders, and/or customers, and monitors the level of capacity utilization at the level of departments. tdabc significantly affects the change of performance measurement and performance management in enterprises [4]. it also provides strong support for translating the strategy into performance measures, and provides adequate performance measures for bsc. the most common performance measures are: customer and product profitability, market share, customer loyalty, efficiency of inventory management, procurement and sales efficiency, and others. in fact, tdabc essentially supports the design and implementation of the bsc. in the context of the presented six-stage model, tdabc can successfully create a link between sales forecasts, planned efforts toward operational improvements, and the necessary volume and structure of resources to fulfill the plans set. after obtaining information on the volume and mix of resources needed for the future period, it is possible to easily determine the financial implications (financial plan) and operating and capital budgets (operational and capital budget, as an outstanding management innovation, appeared in general motors in 1920. their role was reflected in decentralization of management through the centralization of control. the use of the budget was, in fact, aimed at coordination and control of diversified business units.). this is the third component of the operational plan. its essence is reflected in the realization of operating expense budget (opex) and capital expenditure budget (capex) [8]. the third step, i.e. direct application of tdabc, plays a key role in the process of integration of strategic and operational planning. one of the key benefits of the use of tdabc is its ability to efficiently and rapidly forecast the required resource capacities for the implementation of business processes. to make this possible, first, it is necessary to modify the costing model, to reflect the expected improvement of business processes in the next period, for which the forecast is made. this allows for the connection between activities of quality and business process improvements and budgeting processes, i.e. activities of continuous improvement are built into the budgeting process. after that, it is necessary to fill the model with the data arising from sales and operational plans. the result is information on the volume of each type of resource that should be provided in the future, which is essential for the implementation of the plans. in addition, based on the tdabc model, capacity cost rate is determined. multiplying the capacity cost rate with the required volume of that resource results in the forecasted (budgeted) costs for the forecasted period. in view of this, tdabc allows predicting, modifying, and managing the future of the enterprise. the described process shows that tdabc is a powerful management tool that provides a comprehensive and synthesized framework for integrating strategic planning with resource allocation, budget forecasting, and dynamic budgeting. the framework comprises five steps [8]:  sales forecasting for shorter time periods (usually quarterly),  translating the high-level sales forecasts into a detailed sales and operational plan, whose one of the basic functions is determining the necessary resources for their implementation,  inclusion of the sales and operational plan, as well as the projected effectiveness of the process, into the tdabc model, for the purposes of forecasting demands for resources or necessary resource capacities, 54 m.todorović  dynamic budgeting for operating expenses (opex) and capital expenditure (capex) (in this regard, operating expenses include costs of labour, maintenance, and equipment, while investment in resource capacities or some strategic initiatives fall within capital expenditure),  assessment of financial profitability at various levels (products, customers, sales channels, etc.). finally, tdabc is a system of exceptional reporting performance, which allows full insight into the historical and future performance, efficient and effective short-term and long-term decision-making, and assessment of effectiveness of resource, operational, and business process management [6], [9], [22]. not only that tdabc can be used for each of the individually listed strategic and operational purposes, but the previous analysis has pointed to its outstanding performance in the field of integration of strategic and operational management. 4. case study of tdabc system application the relevant literature includes a number of different studies dealing with the application of tdabc. the existing studies point to the examples of tdabc implementation in different fields of economy, namely: financial sector (usa and canada, 2004), university library (usa, 2007, belgium, 2009), trade and distribution (usa, 2008, belgium, 2010), hospital (great britain, 2009), hotel (turkey, 2010), a production company (usa, belgium, turkey, 2010), and university restaurant (belgium, 2012). there is an interesting example of the application of tdabc in the kemps production enterprise in the united states. the study showed that tdabc gives strong support to the implementation of enterprise strategy, and to operational improvements. kemps is one of the famous american producers of dairy products, namely: milk, yogurt, sour cream, cheese, and ice cream. economic trends during the 1990s caused the reduction in the number of customers, i.e. their consolidation, and the emergence of giants in the field of distribution and wholesale. at the same time, the demands of customers, in terms of product packaging, distribution, storage, and delivery “just in time”, became more pronounced. the reduced capacity for product storage on the part of the customers resulted in a further increase in producers’ responsibility regarding product storage. in order to respond to the changed business conditions and the growing needs of customers, this enterprise had to develop a complex production process for a wide variety of products, and a well-organized transport system. furthermore, kemps is known for installing a very expensive production line for the production of yogurt in a tube, worth 2.5 million dollars. the complexity of production processes, a wide range of products, and striving for maximum satisfaction of various customer demands at the end of the 1990s made successful management of this enterprise very difficult. it became necessary to change the business philosophy, objectives, and strategy of the enterprise. orientation to cost reduction, i.e. achievement of cost leadership and brand building, became its primary focus and the only option of survival and further development. however, the implementation of a new business culture and philosophy demanded the complete, accurate, and precise knowledge of costs, revenues, and profitability of products and time driven activity-based costing as a tool of building integrated management system 55 customers. the former system of cost accounting, based on standard costs, could not meet the management information needs. although this system provided excellent data on the costs of materials and operating costs at the departmental level (overhead costs were allocated according to the percentage, compared to direct production costs), it did not reflect the effects of the size of the series, as well as the starting time of the machines (for production series) or their stopping and outages. the unit costs of a product were, for example, the same, regardless of whether the production launch took ten minutes or an hour. this and similar problems gave rise to the need for a new costing system, which could, by providing more reliable and more accurate information, more effectively respond to management information needs. in early 2001, the company started a pilot project of introducing tdabc. by mid2001, a full tdabc model was built and implemented, which included all products and all customers, and an analysis of their profitability. the results of tdabc application were impressive. the operational improvement, i.e. process improvement, through reduction of the number of production series, eliminating waste and overtime, had a direct impact on cost reduction. profitability analysis, based on tdabc information, allowed for the detection of non-profitable products and pointed to the necessary reduction of the production mix. based on analysis of customer profitability and identification of less profitable and unprofitable customers, the company management brought significant business decisions, which resulted in significant revenue growth of the company. important implications of these decisions were the improvement of relations with customers and establishing long-term cooperation with mutual benefit [9, 160]. conclusion for the purposes of integrating strategic and operational management, different concepts, techniques, and tools have been developed. in this paper, the focus is on kaplan and norton’s six-stage model of building an integrated management system, which places an emphasis on tdabc. this modern system of cost accounting has been engaging attention of scientists and experts in the past twenty years. theoretical views, confirmed in empirical research focusing on tdabc, support its high performance. the analysis in this paper aimed at answering the question of whether and why tdabc should be used, as a management tool for integrating strategic and operational management. the arguments in favor are as follows:  it has the potential to measure performance at both higher and lower hierarchical levels, and provides adequate information support to the management at operational and strategic levels,  it has the ability to efficiently forecast capacity (time-related), required for the implementation of business processes, and therefore, allows for the translation of high-level sales forecasts into detailed sales and operational plans,  it successfully creates a link between sales forecasts, planned activities, aimed at the implementation of operational improvements, and the necessary volume and structure of resources to fulfill the plans 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(2014), kljuĉni aspekti kreiranja i primene jednaĉina vremena u obraĉunu troškova, ekonomski horizonti, 16(3):253-264. time driven activity-based costing as a tool of building integrated management system 57 tdabc kao instrument izgradnje integrisanog sistema upravljanja realizacija definisanih strategija i postizanje operativne izvrsnosti neraskidivo su povezani i podjednako važni za postizanje vrhunskih performansi preduzeća. postizanje uspeha u okviru oba ova vitalna upravljačka procesa, strategijskom i operativnom, i upravljanje preduzećem generalno, zahteva izgradnju i primenu integrisanog pristupa, a u vezi sa čim su u teoriji i praksi razvijeni različiti pristupi. cilj ovog rada je sagledavanje mogućnosti za primenu obračuna troškova po aktivnostima zasnovanog na vremenu (time driven activity based costing tdabc) u funkciji povezivanja strategijskog i operativnog upravljanja. analiza je pokazala da tdabc poseduje izuzetne performanse za primenu, kako u sferi strategijskog i operativnog upravljanja pojedinačno, tako i još značajnije, u domenu njihovog integrisanja. kljuĉne reĉi: strategijsko i operativno upravljanje, merenje performansi, računovodstvo troškova, obračun troškova po aktivnostima zasnovan na vremenu (tdabc). plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 1, 2017, pp. 17 30 doi: 10.22190/fueo1701017s preliminary communication internationalization of retail – comparative analysis of croatia and serbia1 udc 339.162.4(497.11+497.13) svetlana sokolov mladenović 1 , đorđe ćuzović 2 1 university of niš, faculty of economics, niš, serbia 2 business school of novi sad, niš, serbia abstract. globalization and integration of the world market leads to internationalization of retail and overall trade. at the turn of the century, internationalization has become a widespread retail phenomenon. thus, it has become a permanent and inevitable process. internationalization of trade, especially retail, covers a large number of countries, but with varying intensity. the subject of this work is the achieved level of internationalization of trade, especially retail, on the markets of the republic of croatia and the republic of serbia. arguments for the selection of these countries are numerous. one of them is the fact that both countries originated from the former yugoslav federation. at the same time, croatia is the newest member of the european union (as of 1 st july 2013), and serbia signed the stabilization and association process, and is on the way of opening membership negotiations. for these reasons, croatian experience can serve serbia as a landmark in the implementation of activities in the segment of trade and its internationalization. the paper aims at mapping serbian activities in the process of further internationalization of retail. key words: retail, internationalization, market, croatia, serbia jel classification: f23, o24 introduction progressive globalization of the world economy has been recorded in the first years of the 21 st century. due to these developments, along with pronounced saturation of the domestic market, a large number of retail chains are starting to carry out their activities outside the domestic market, which allows them to access new customers and new capital. 1received september 29, 2016 / revised january 31, 2017 / accepted february 14, 2017 corresponding author: svetlana sokolov mladenović faculty of economics, university of niš, trg kralja aleksandra 11, 18000 niš, serbia e-mail: svetlana.sokolov@eknfak.ni.ac.rs 18 s. sokolov mladenović, đ. ćuzović increasing globalization of markets has caused a number of processes in trade. one of them is the ever-present internationalization of trade and retail, as a business imperative of large retail chains. thus, internationalization becomes a process of divergence and convergence in the local, regional, and global environment. what is more, reasons for internationalization are numerous and diverse, as evidenced by various papers and studies on “push” and “pull” factors. in this context, the focus is on different directions of internationalization of retail, so that some countries achieve higher and others lower degree of internationalization, measured by the number of present international trade, i.e. retail chains, and achieved sales volume. practice shows that the main part of international retail activity takes place among western european countries. however, due to high market saturation and the economic crisis, eastern european countries emerged as an attractive market for international retailers, as well as countries of the former yugoslavia, especially slovenia and croatia. with these facts in mind, the aim of this paper is to analyze the achieved degree of internationalization of retail on croatian and serbian markets. the starting hypothesis is that the croatian market is characterized by higher degree of internationalization of retail in relation to the serbian market. additional hypothesis to be tested is that croatian experience can serve serbia in tracing the future directions of internationalization of retail. 1. internationalization of retail in theory literature in the field of internationalization of trade, particularly retail, has become quite voluminous and diverse in the last 10 to 15 years. this scientific research field has attracted, and still attracts the attention of a large number of authors, mainly from developed market economies, where internationalization of trade received practical valuation. all this has led to a number of different definitions of this phenomenon, so there is no universally accepted definition of the concept of internationalization of trade. bearing in mind different definitions of internationalization of trade and retail (yeng & yazdanifard, 2015; shulyn & yazdanifard, 2015), their common characteristics can be highlighted, namely: 1) internationalization of trade represents a transfer of knowledge, concepts, and business formats; 2) internationalization of trade involves doing business on two or more different international markets; 3) internationalization of trade helps overcome linguistic, cultural, social, and legal barriers to communication between the two countries; 4) internationalization of trade allows business expansion beyond national markets and finding new sources to generate profit; 5) internationalization is a complex process, not a series of events. what is especially noticeable is the fact that during the nineteen-eighties and nineteennineties there was a large number of research papers dealing with internationalization of trade, which speaks about a new wave of international trade, especially retail activities. consumer society of the nineteen-eighties made retail chains focus more on international activities, because of increasing market orientation, size of stores, as well as power of the brand. all this generated increased academic interest in the process of internationalization of trade (alexander, 1989; alexander 1990a; alexander, 1990b; williams, 1992a; williams, 1992b). during this period, research interest focused on internationalization strategies, structure of motives, geographic expansion, market positioning, and conceptualization of internationalization process, challenges and assumptions (sternquist, 1997; vida & fairhurst 1998; alexander & myers, 2000). conceptualization of this process opened a new research niche in a number of papers and recognized the new agenda that opened the need for a detailed analysis of various internationalization of retail comparative analysis of croatia and serbia 19 aspects of internationalization of trade and management of these activities. accordingly, new research in the field of internationalization of trade at the beginning of the 21 st century focused on operational aspects of internationalization, such as market selection, entry methods, withdrawal from the market, effects, factors, and motives (doherty, 2008; ćuzović & sokolov mladenović, 2008; ćuzović & sokolov mladenović, 2015a). in all these studies, the focus was also on internationalization of trade companies in the fmcg sector (fast-moving consumer goods), as well as in the field of fashion and luxury brands. this was certainly fueled by accelerated international activity of the world’s leading retail companies, such as wal-mart, carrefour, home depot (in fmcg sector), zara, h&m (the so-called fashion retailers). a common feature of all the research in the first decade of the 21 st century was quantification of research results and analysis of good case studies (alexander & doherty, 2010). starting from 2010, research in the field of internationalization of trade has entered a new phase. thus, alexander and doherty (2009) focus their theoretical and practical research on the pattern of international activity, characteristics of the expanding market, motives for internationalization, market selection, choice of entry methods, supply chain management on foreign markets, marketing and brand management, and reasons for withdrawal from the market due to a number of factors. swoboda, zentes, and elsner (2009) put emphasis on motives of internationalization, internationalization strategy, market selection and entry, choice of entry methods, standardized or tailored “package deal”, international performance, as well as errors in the internationalization of business. the common characteristic of this stage of research is agreement regarding international retail chains, designated as carriers of market globalization and internationalization of trade. at the same time, results of research on internationalization of trade in recent years could serve as a basis for creating the agenda for future research, as can be seen in figure 1. figure 1 shows conceptualization of activities of international retail chains, which can be a platform of research agenda. within the wider competitive market environment, figure 1 shows three key activities: corporate domain, corporate orientation, and marketbased activities. determinants of corporate orientation are environment and corporate characteristics, while determinants of market-based activity are market activity management and market portfolio management. each of these determinants has two additional factors that attracted and still attract the attention of scholars and practitioners. 2. internationalization of retail in croatia trade, including retail, is an important segment of the croatian economy, as figures on the share of entrepreneurs and number of employees in trade in total gva show. thus, croatian trade involves 26% of companies, with 22% of the total number of employees, and its share in gdp is around 9.3% (http://www.hgk.hr/category/djelatnost/gosp_trgovina). in accordance with changes in the overall economic environment, changes take place in croatian trade as well. an example of this is the fact that, before the economic crisis, croatian trade recorded high growth rates, but the share of trade in gdp dropped from 10.9% in 2007 to 9.9% in 2011. in the period from 2008 to 2011, there was a decline in the number of employees in trade. for example, in 2012, compared to 2009, employment in trade decreased by 10.7% (pupavac, 2014). when it comes to sale, its level decreased by 19%, compared to 2008, as a result of lower demand during recession. http://www.hgk.hr/category/djelatnost/gosp_trgovina 20 s. sokolov mladenović, đ. ćuzović fig. 1 structure of internationalization of trade: study of operational activities and environment adapted from: alexander, n. & doherty, a.m.(2010), international retail research: focus, methodology and conceptual development, international journal of retail & distribution management, 38(11/12), 928-942. the importance of trade and retail sector in the overall croatian economy is confirmed by figures such as the share of trade entrepreneurs in the total number, number of employees in trade in the total number, as well as gross fixed capital formation. the analysis of relevant statistics (osnovni pokazatelji trgovine u republici hrvatskoj u 2013, 2014) shows that trade has a leading role in the economy of the republic of croatia. thus, in 2013, a total of 101.191 entrepreneurs operated in croatia, of which 26.342 entrepreneurs in trade, which means that the share of trade amounted to 26.03% (bačelić grgić, 2014). judging by investment, croatian trade also recorded positive results. croatian national bank data shows that, in the period from 1993 to 2013, amount of foreign investment in the cross-functionality competitive market environment corporate domain corporate orientation environment characteristics presentation corporate performance corporate characteristics cultural operational experience market-based activity market activity management market choice market performance market portfolio management market selection withdrawal from the market entry method internationalization of retail comparative analysis of croatia and serbia 21 republic of croatia totaled 28.86 billion euros, with the amount of this investment in the retail sector being 3.98 billion euros (priopćenje inozemna izravna ulaganja u republiku hrvatsku po djelatnostima, 2013). of this, investment in wholesale sector and trade mediation was 2.64 billion euros, and in retail trade and repair sector 1.34 billion euros. as already stated, croatian trade has a significant share in the total number of employees. trade is the second largest employer in the country today, after manufacturing industry (bačelić grgić, 2014). thus, the trade sector employs 15.80% of all employees, with trade being the largest generator of new jobs as well. preliminary data shows gradual convergence of trends in croatian trade to trade trends in the european union. in such an environment, the process of internationalization of trade and retail on the croatian market takes place, which has been rising in intensity since 1999 and still does (knežević & szarucki, 2011). revitalization of the croatian trade sector began in 1997, when construction of a flexible legal framework started, as an additional incentive to the development of trade (knego & knežević, 2010; knežević, 2003; knežević, 2007; knežević et al., 2011). this created conditions for the entry of foreign capital onto the croatian market. after that, a large number of european trade companies, driven by economic interests, entered the croatian market. mercatone (italy), billa (austria), metro (germany), ipercoop (italy), kaufland (germany), and others opened their retail stores in all major croatian cities (zagreb, split, osijek, rijeka, and others.). the biggest retail companies in croatia, seen by sales volume in 2014, are presented in table 1. table 1 leading retail companies in croatia (fmcg sector) company year of establishment/ entry onto the croatian market registered office/ ownership number of branches revenue in 2013 (in millions of kunas) number of countries where the company operates revenue in 2013 in millions of dollars konzum 1957 zagreb/ konzum d.o.o. 700 13.391 3 4.011 plodine 1993 rijeka/plodine d.d. 71 3.268 1 3.268 lidl 1973/2006 nekarsulm (zagreb for croatia/lidl d.o.o. 80 3.004 26 98.662 kaufland 1984/2001 nekarsulm/german kaufland stiftung & co. kg (german schwarzbeteiligungs-gmbh) 28 2.721 26 98.662 merkator 1949/2000 ljubljana (sesvete for croatia)/ mercator-h d.o.o. 22 2.586 5 metro 1964/2001 düsseldorf/metro ag 8 2.177* 32 86.393 spar 1932/2001 amsterdam (zagreb for croatia)/spar hrvatska d.o.o. 22 2.028 8 11.411 tommy 1992 split/tommy d.o.o. 142 1.976 1 1.976 billa 1953/1999 wiener neudorf (zagreb for croatia/rewe international ag 57 1.624 11 51.109 * estimate source: authors, based on http://business.hr/hr/kompanije, deloitte (2015), www.hsz.hr. http://sr.wikipedia.org/w/index.php?title=%c5%a0par_(supermarket)&action=edit&redlink=1 http://www.hsz.hr/ 22 s. sokolov mladenović, đ. ćuzović the share of international retail companies, as well as their sales activity (in %) on the croatian market, can be seen in graphs 1 and 2. graph 1 share of foreign companies’ sales activity in total sales of retail companies (in fmcg sector) source: authors graph 2 share of foreign retail companies’ sales activities on the croatian market source: authors croatian retail companies foreign retail companies internationalization of retail comparative analysis of croatia and serbia 23 analyzing the share of foreign and croatian retail companies’ sales activity in total sales of leading retail companies (graph 1), one can see greater share of foreign (66.7), compared to croatian (33.3) companies. this indicates high concentration of foreign retail companies, but also a high level of internationalization of trade on the croatian market. if one analyzes the percentage share of sales activities of foreign retail companies on the croatian market in total volume of their sales, one can see that it ranges from 0.38 to 2.66%. this leads to the conclusion that the croatian market is relatively new for these companies, and that future expansion of their activities is to be expected. if one compares the analyzed foreign retail companies (graph 2), it can be seen that spar has the biggest share, meaning that this company has the highest percentage share of sales activity (2.66) in the total sales volume on the croatian market, compared to the other analyzed companies. 3. internationalization of retail in serbia trade, including retail, occupies an important place in the overall economy of the republic of serbia, and has a key role in the creation of an integrated market economy. the importance of trade in the overall economy of the republic of serbia is illustrated by statistical data on its share in macroeconomic indicators (graph 3), as well as data on the number of companies, employees, and number of retail stores (tables 2, 3, and 4). graph 3 share of trade in macroeconomic indicators of the republic of serbia (2014) source: http://www.pks.rs/privredasrbije.aspx?id=17&p=2& table 2 number of companies in internal trade (2014) total trade retail wholesale sales and repair of motor vehicles total enterprises and entrepreneurs 44.385 14.313 25.755 4.317 enterprises 34.708 6.112 25.102 3.494 entrepreneurs 9.677 8.201 653 823 source: http://www.pks.rs/privredasrbije.aspx?id=17&p=2& in total gva in total number of employees in total revenue in total number of companies http://www.pks.rs/privredasrbije.aspx?id=17&p=2& 24 s. sokolov mladenović, đ. ćuzović table 3 number of employees in trade (2014) total trade retail wholesale retail and wholesale in motor vehicles total enterprises and entrepreneurs 378.461 274.586 76.117 27.758 enterprises 218.085 114.210 76.117 27.758 entrepreneurs 160.375 160.376 source: http://www.pks.rs/privredasrbije.aspx?id=17&p=2& table 4 number and size of stores number of stores total size (storage and sales space) in m 2 total enterprises and entrepreneurs 114.253 11.101.717 enterprises 42.339 9.291.532 entrepreneurs 71.914 1.810.185 source: http://www.pks.rs/privredasrbije.aspx?id=17&p=2& serbian market in recent years has become attractive to a large number of international retail chains, which apply different strategies and models of business expansion (ćuzović & sokolov mladenović, 2015b; ćuzović & sokolov mladenović, 2015c). international retail chains continuously increase their market share and the number of stores. they are primarily concentrated in market areas of major cities, where they open large retail formats to attract consumers to make major purchases, but they also open smaller retail formats to meet the needs of consumers, who, in choosing stores, give priority to accessibility and comfort of rapid shopping. lately, there are more and more rumors about their further expansion, as well as the potential arrival of new foreign retail chains. arrival of regional players inevitably affected the operations of national retail companies. faced with new competition and new trends that foreign retail companies have brought to our market, local retailers adopt new business strategies, to survive on the market and improve competitive advantage. a large number of local companies have failed in this, so they are totally marginalized, with only few that survived or improved their position on the domestic market. thus, both domestic and foreign trade companies operate on our market. applying a clearly defined strategy of creating and sustaining competitive advantage, they try to maximize their business results. starting from the assumption that revenue is a measure of business performance of companies, table 5 presents leading trading companies on the serbian market in 2014. the share of international retail companies, as well as their sales activity (in %) on the serbian market can be seen in graphs 4 and 5. http://www.pks.rs/privredasrbije.aspx?id=17&p=2& http://www.pks.rs/privredasrbije.aspx?id=17&p=2& internationalization of retail comparative analysis of croatia and serbia 25 table 5 leading trading companies on the serbian market (in fmcg sector) company year of establishment /entry onto the serbian market registered office/ ownership number of branches revenue in 2013 (in millions of dinars) number of countries where the company operates revenue in 2013 (in millions of dollars) delhaize serbia 2012 belgium 381 101.624.416 9 28.037 mercator-s 2002 slovenia 137 63.363.962 5 idea 2005 croatia 190 55.404.705 3 4.011 dis 1999 serbia 16 25.413.272 1 metro cash&carry 2005 germany 9 17.494.013 32 86.393 univer export 1990 serbia 42 13.791.932 1 aman 1992 serbia 139 7.521.939 1 gomex 1995 serbia 91 6.589.587 1 interex 2005 france 9 4.966.353 6 37.351 source: authors, based on deloitte (2015), www.deloitte.com; www.apr.gov.rs. graph 4 share of foreign companies’ sales activity in total sales of retail companies (in fmcg sector) source: authors analyzing the share of foreign and serbian retail companies’ sales in the total sales of leading retail companies (graph 4), one can see greater share of foreign (55.5) in relation to serbian companies (45.5). this indicates high concentration of foreign retail companies, as well as a high level of internationalization of trade on the serbian market. serbian retail companies foreign retail companies http://www.deloitte.com/ http://www.apr.gov.rs/ 26 s. sokolov mladenović, đ. ćuzović graph 5 share of sales activities on the serbian market in the total sales volume of international retail chains source: authors if one analyzes the percentage share of international trading companies’ sales activities on the serbian market in the total volume of their sales, it can be seen that it ranges from 0.12 to 12.9%. this suggests that the serbian market is relatively new for these companies, and that expansion of their activities can be expected in the future. if one compares the analyzed international trading companies (graph 5), it is noticeable that idea has the biggest share, meaning that this company has the highest percentage share of sales activity in the total sales volume on the serbian market, compared to the other analyzed companies. 4. similarities and differences in the level of internationalization in croatia and serbia – recommendations for the future bearing in mind the previous analyses, as well as plenty of theoretical and practical studies on internationalization of trade, especially retail, in croatia, it can be seen that during 2006 and 2007 croatia was one of the most attractive markets in the region (knežević & szarucki, 2011). when it comes to the serbian market, the analysis shows that in 2005 and 2006 serbia was one of the most attractive markets in the region. this, in turn, raises the issue of effects of internationalization of trade on croatian and serbian economies, as well as effects on customers, i.e. consumers. this issue was the subject of research of a large number of theorists and practitioners, trying to conduct an adequate cost-benefit analysis of international retail companies’ operations on the croatian market. relying on dawson’s model (dawson et al., 2003) of internationalization of trade, which observes effects of internationalization on the host country as one of its dimensions, as well as numerous studies of internationalization of retail on the croatian market, the key effects of internationalization of trade on croatian and serbian economies are: internationalization of retail comparative analysis of croatia and serbia 27  changes in the structure and relationships in channels of distribution, as confirmed by cooperation among international retail companies and croatian companies, on the one hand, and serbian companies, on the other hand, in various segments;  increasing competition, as evidenced by intense activity of both croatian and serbian companies in the field of performing marketing functions;  new ways of competitive behavior;  increasing investment, as evidenced by data on such trends in the croatian trade sector, while such investment was less in serbian trade;  restructuring of the sector; and  accelerated innovation, as evidenced by examples of trading companies’ operations on croatian and serbian markets.  from the standpoint of customers, i.e. consumers, effects of internationalization of trade and retail on croatian and serbian markets are the following:  increased awareness of consumers (better knowledge of products, prices, terms of sale), as confirmed by trading companies’ operations aimed at permanent distribution of information on discount prices, products on sale, loyalty programs, and the like;  changes in consumption habits, as evidenced by research results about weekly or monthly shopping;  improved availability of products and services. taking into account these similarities, as well as indicators of the current state of the economy, especially in croatian trade and retail, it can be seen that croatia remains an attractive market and that one can expect a new wave of internationalization. when it comes to trade and retail on the market of serbia, it is evident that trade has predominantly local character, with a small number of retail companies with developed sales network in the narrow regional area within the national market. retail stores are primarily concentrated in relatively larger cities and larger urban areas, where concentration of population and market potential are higher. these stores mostly use insufficiently developed technology, business strategies are focused on the local environment, and product range is dominated by products of local suppliers, whose brands are well-known to a consumer segment that gravitates to them. a specific feature of the serbian market is reflected in the existence of a large number of small retailers. although under strong pressure from large retail chains, small retailers still have a significant share in the total turnover. however, lately there has been a trend of reduction of their market power in favor of an integrated retail. in order to survive on the market, small retailers often change the location of their retail stores, adapting to expansion of large stores. although the number of existing independent retailers constantly decreases, new ones appear, who try to service the needs of narrow market segment from new locations. in addition to weak purchasing power of the population and a decrease in retail sales, retail operators on the serbian market face many other problems, which mainly arise from general characteristics of underdeveloped domestic market and overall economic situation. the current situation in the economy and trade of serbia will mark future directions of internationalization of trade. in that regard, what encourages is the announced opening of the first department store of the swedish company ikea, as well as the first sales outlets of the german company lidl. 28 s. sokolov mladenović, đ. ćuzović conclusion today’s trade, as well as retail, carries out its activities in conditions of intense market globalization. market globalization brings internationalization of trade and retail. due to saturation of domestic markets, large trade, i.e. retail chains direct their activities towards foreign markets. numerous factors dictate their international activities. in fact, the current economic crisis has changed the direction of internationalization of trade and retail, so that the so-called emerging markets are becoming more and more attractive. markets in former socialist countries are particularly interesting and attractive to large retail chains. bearing in mind all these facts, the paper analyzed the achieved level of internationalization of retail on croatian and serbian markets. the aim of the study was to analyze market and trade characteristics in both countries, in order to determine the achieved level of internationalization of retail. both markets have the same social and economic legacy, with croatia being the member of the european union, while serbia is currently a signatory of the stabilization and association agreement, oriented to full membership in the european union. the analysis showed that the croatian market has realized a higher level of internationalization of retail in relation to the market of serbia, and that croatia can expect a further wave of internationalization. what is more, croatian positive experience can serve serbia in tracing future directions of internationalization of retail and attracting further investment by leading retail chains. acknowledgement: the paper is a part of the research done within the project 179081, funded by the ministry of education, science and technological development of the republic of serbia. 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(1998). international expansion of retail firms: a theoretical approach for future investigations. journal of retailing and consumer services, 5(3), 143-151. williams, d. (1992a). motives for retailer internationalization: their impacts, structure and implications. journal of marketing management, 8, 269-285. williams, d. (1992b). retailer internationalization: and empirical inquiry. european journal of marketing, 29, (8/9), 269-285. yeng, w. f., & yazdanifard, r. (2015). opportunities and challenges in the world of retailing and the importance of adaption to the new markets. international journal of management, accounting and economics, 2(9), 1110-1121. http://www.deloitte.com/ http://www.apr.gov.rs/ http://www.hsz.hr/ 30 s. sokolov mladenović, đ. ćuzović internacionalizacija maloprodaje – komparativna analiza hrvatske i srbije globalizacija i integracija svetskog tržišta za svoju posledicu ima internacionalizaciju maloprodaje i ukupne trgovine. krajem 20. i početkom 21. veka internacionalizacija postaje sveprisutna pojava odnosno fenomen u maloprodaji. tako postaje permanentan i neminovan proces. internacionalizacija trgovine, posebno maloprodaje, zahvata mnoge zemlje, s tim što se odvija različitim intenzitetom. predmet istraživanja ovog rada jeste dostignuti nivo internacionalizacije trgovine, posebno maloprodaje, na tržištu republike hrvatske i republike srbije. razlozi odabira upravo ovih zemalja su brojni. jedan od njih jeste i činjenica da obe država potiču od bivše jugoslovenske federacije. s druge strane, hrvatska je najnovija članica evropske unije (od 1. jula 2013. godine), a srbija je potpisala sporazum o stabilizaciji i pridruživanju i nalazi se na putu otvaranja pregovora o članstvu. iz ovih razloga, iskustvo hrvatske može da posluži srbiji kao orijentir u realizaciji aktivnosti iz segmenta trgovine i njene internacionalizacije. cilj rada jeste mapiranje aktivnosti srbije u procesu dalje internacionalizacije maloprodaje. ključne reči: maloprodaja, internacionalizacija, tržište, hrvatska, srbija plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 4, 2016, pp. 415 426 doi: 10.22190/fueo1604415s review paper international franchising in the hotel industry1 udc 339.187.44 640.4 milica stanković high school of applied professional studies, vranje, serbia abstract. international franchising in the hotel industry is still insufficiently researched theme in the literature. however, due to the fact that for the internationalization of the hotel chains it is necessary to ensure a large amount of capital, hotels increasingly decide to expand internationally through franchising. therefore, it is necessary to devote more attention to franchising as the strategy of internationalization in the hotel industry. the greatest number of hotels which operate as franchisors comes from the u.s. on the other hand, the international franchising in hotel industry is significantly less developed in the rest of the world. therefore, the paper focuses on the hotel franchise companies from the u.s. that have an international franchise units. the aim of the paper is to determine the impact of internal factors, the size and the age of the franchise system, on the use of franchising as a strategy of internationalization for hotel franchise company. key words: international franchising, franchisor, franchisee, hotel industry introduction the growth in service sector is evident in recent decades. the hospitality industry differs from other services in terms of complexity of logistics and supply chain, but also in terms of high investment required to start a business. with the aim of minimizing costs and risks of doing business, hotel chains usually decide to internationalize their business activities by using non-equity model of entry into the foreign markets, among which franchising has an important role. therefore, the aim of this paper is to point out the importance of international franchising in the hotel industry sector and to determine the impact of internal factors, size and age of the hotel franchise companies, on the use of franchising as a strategy of internationalization. 1received september 17, 2016 / accepted november 25, 2016 corresponding author: milica stanković high school of applied professional studies, filipa filipovića 20, 17500 vranje, serbia e-mail: milica.stankovic.visokaskola@gmail.com 416 m. stanković the first hypothesis is that internal factors (hotel chains’ characteristics) have impact on the implementation of franchising as a strategy of internationalization. this paper tends to prove the assumption that the size of the hotel franchise company has an impact on the use of franchising in order to enter the foreign markets. the third hypothesis relates to the impact of the age of the hotel franchise company on using the franchising as a strategy of internationalization. the size of the hotel franchise company is observed through the total number of franchise units, while the age of the hotel franchise company is analyzed through the number of years in franchise business. in accordance with the above assumptions, the paper answers the following questions: do the internal factors (hotel company’s characteristics) have an impact on the implementation of franchising as a strategy of internationalization? does the size of the hotel franchise company have an impact on the implementation of franchising as a strategy of internationalization? does the age (and hence, experience) of hotel franchise company have an impact on the implementation of franchising as a strategy of internationalization? in the first part of this paper we establish a theoretical framework for further empirical research that will follow in the second part of study. the empirical research will be conducted on the basis of secondary data about hotels franchising companies that are ranked on the list top 500 franchises 2016 published by entrepreneur magazine. based on the descriptive analysis of secondary data, correlation and regression analysis, we will obtain proper empirical results. after summarizing the literature review and the empirical results, we will make relevant conclusions and recommendations for further research. 1. theoretical background the key drivers for the company to enter into various forms of partnership are high costs and high risks of starting a business and expansion into new markets (guilloux, gauzente, kalika & dubost, 2004; tuunanen & hyrsky, 2001). in recent decades, franchising is one of the forms of partnerships that has gained increasing importance (brookes & roper, 2012; mason & duquette, 2008; rodriguez, 2002). ifa defines franchising as “a method of distributing products and services that involves a franchisor who lends their trademark and business system to a franchisee who, in return, pays a royalty for the right to use the franchisor’s trademark and system in their business” (ifa, n.d.). thus, franchisees get access to a proven franchise business concept, while franchisors gain access to franchisees’ knowledge about the local market (brookes & altinay, 2011). despite the aspiration to maintain a harmonious relationship between franchisors and franchisees in the franchise system, disagreements between them may occur often, primarily because the franchisors usually insist on maintaining the brand's uniformity, while franchisees want greater autonomy in business in order to respond better to local market needs (weave & frazer, 2007). therefore, there is often a dilemma: standardization or adaptation of the franchise concept? in essence, it is best to ensure the standardization of basic performances, with the possibility of adjusting the peripheral components with low additional costs (palmer, 1985). the service sector has grown rapidly in recent decades, in both developed and developing countries. it should be noted that the hospitality industry is one of the key drivers of this rapid growth in service sector (ketchen, upson & combs, 2006). unlike international franchising in the hotel industry 417 most service industries, the characteristic of hospitality industry is high capital intensity (contractor & kundu, 1998), while logistics and supply chains may be very complex (chen & dimou, 2005). hotel chains rarely decide to internationalize using their own resources, bearing in mind that internationalization requires a large amount of capital. in this regard, hotel chains increasingly apply non-equity models of entering the international markets, with the aim of minimizing costs and risks of operations (alon, ni & wang, 2012; contractor & kundu, 1998; dunning, pak & beldona, 2007). therefore, it is important to point out the importance of franchising as a strategy of internationalization in the hotel industry. given the fact that multinational franchisors, including hotel chains, actively seek opportunities for growth and expansion to the international markets, international franchising is gaining more attention in academic research (xiao, o'neill & wang, 2008). in the hotel industry, franchising arises initially in the u.s., in the 1960s, as a strategy of expansion of holiday inn and other large hotel chains (cruz, 1998; pine, & zhang qi, 2000). by the 1980s, franchising was rarely used as a strategy of internationalization by hotel companies. hotel chains relied more on leasing arrangements and management contracts. however, in order to provide greater flexibility and adapt to the needs of foreign customers, hotel chains usually decide to implement several different internationalization strategies simultaneously (connell, 1997). the literature review suggests that a number of organizational and market conditions have impact on using the franchising as a strategy of internationalization by hotel chains: saturation of the domestic market, competition in the domestic market, potential in developing countries, particularly in asia and latin america, regional trade agreements, such as the european union (eu) or the north american free trade agreement (nafta) and liberalization of the former communist countries (johnson & vanetti, 2005). globally, franchising is one of the fastest growing business strategies, bearing in mind that it enables the franchisor to develop a franchise system with minimal capital investment (cherkasky, 1996). through franchising, the franchisor can achieve rapid expansion with limited resources, early entry into new markets and higher market share. also, franchisor can strengthen its market position and he can share the business operations risks with franchisees. in fact, franchising offers the hotel franchise company a chance to expand with the lower level of investment and risk. franchisor shares the expansion costs with the franchisees who typically pay start-up costs, initial fees and ongoing royalties. in return, franchisees operate under the name of well-known brand, they achieve economies of scale and acquire franchisor’s managerial expertise (alon, ni & wang, 2012). franchising offers the possibility for rapid international expansion of hotel companies and has the potential to overcome many of the cultural, linguistic, technical, legal and employment problems that are commonly associated with internationalization (abell, 1990, p. 5; aydin & kacker, 1990, alon, ni & wang, 2012). thus, franchising is a bridge between the franchisor and the franchisees which enables both parties to realize an effective method of growth. the u.s. is the largest world market when it comes to franchising in the field of hotel industry, given that more than 65% of the existing hotel chains in the u.s. are franchises (dev & brown, 1997). in other parts of the world, franchising in the field of hotel industry is less developed, but in recent years an increasing number of hotels opt for the use of franchising as a growth strategy (pine, & zhang qi, 2000). 418 m. stanković when the hotel chain decides to expand internationally, it has two options: franchise units and company-owned units. oxenfeldt & kelly (1968) point out that the franchise chains have a life cycle that explains ownership redirection. the franchising is considered to be a temporary phenomenon in the life cycle of the franchise system. in fact, it is considered that the attractiveness of the franchising significantly decreases when the limitations of availability of financial, human and information resources are eliminated. in this case, the hotel decides to establish company-owned unit, rather than franchise unit. manolis & dahlstrom (1995) and caves & murphy (1976) point out that the ownership redirection is caused primarily by quality standards. if the maintenance costs of quality standards are too high for some franchise unit, the franchisor will decide to buy that particular unit. the dilemma between company-owned units or franchise units is often solved by a plural form of business, which involves the simultaneous use of the companyowned and franchise units. therefore, company-owned units and franchise units are complementary. when there are company-owned units and franchise units in the franchise chain, franchise system can achieve appropriate benefits by overcoming disadvantages associated with each of the given business options (botti, briec & cliquet, 2009). a number of factors, in particular the organizational and market value factor, have an impact on the internationalization through franchising. the largest number of previous studies was focused on the analysis of the factors that affect the internationalization through franchising as the strategy of internationalization in the manufacturing sector (eg. baker & dant, 2008; gatignon & anderson, 1988) and in the fast food sector (ni & alon, 2010). however, it is necessary to devote greater attention to this issue in the hospitality sector. huszagh, huszagh & mcintyre (1992) found that the age of the company (number of years of franchise operations), company size (the total number of franchise units) are significant factors that influence the use of franchising as a strategy of internationalization. before the decision to enter the foreign market, hotel chain needs to gain some experience and reach a certain size on the domestic market. premature appearance on the global market can be very dangerous for franchise systems from the hotel industry, because internationalization in this sector often requires large costs (alon, ni & wang, 2012). the higher the number of units in the franchise system, the company has a greater market power and can achieve greater economies of scale (huszagh et al., 1992). in addition, finding international franchisee is easier for large hotel chains, due to higher brand recognition (aydin & kacker, 1990). franchising experience and size are positively related to the hotel franchise company’s decision to internationalize. this is in accordance with the earlier research that indicates that the lack of franchise experience leads to high organizational uncertainty. this makes internationalization challenging and expensive, so the franchise company is reluctant to make a decision to enter the foreign markets. the international experience is important for hotel chains, because the franchising as a strategy of internationalization includes large investments and expenses for the development of franchise package (alon, ni & wang, 2012). also, the size of the hotel franchise company has a positive effect on the use of franchising as a strategy of internationalization, primarily because large companies have more resources to allocate and they have greater resistance to business failure (ibid.). international franchising in the hotel industry 419 2. methodology the subject of the study is international franchising in the hotel industry. the purpose of the research is to determine the influence of internal factors from the domain of the size and age of the hotel franchise company on implementation of franchising as a strategy of internationalization. this paper attempts to answer the following research questions: do the internal factors have an impact on the implementation of franchising as a strategy of internationalization by the hotel franchise company? does the size of the hotel franchise company, measured by the total number of franchise units, influence the decision to implement franchising as a strategy for entering the foreign markets? does the age or experience of hotel franchise company, measured by the number of years in franchise business, have an impact on the implementation of franchising as a strategy of internationalization? based on these research questions, the following hypotheses are defined: h1: internal factors from the domain of the characteristics of the hotel franchise company have an impact on the implementation of franchising as a strategy of internationalization h2: the size of hotel franchise company has an impact on the implementation of franchising as a strategy of internationalization. h3: the age of hotel franchise company has an impact on the implementation of franchising as a strategy of internationalization. considering that the academic community still insufficiently writes about international franchising in the hotel industry, especially about the factors that influence the choice of franchising as a strategy of internationalization, we recognize the need to devote special attention to this topic. the subjects of research are hotel franchise companies which are ranked on entrepreneur magazine's list 2016 top 500 franchises. there are 26 hotel franchisors on this list. the proposed hypotheses are confirmed based on the analysis of secondary data about a given hotel franchisors, using the software package spss. the number of international franchise units (i.e. franchise units outside the u.s.) of each hotel chain from the sample is used as the dependent variable. the independent variables are internal factors from the domain of the size and age of the hotel franchise company. the hotel franchise company’s size is observed through the total number of franchise units, while the hotel franchise company’s age (i.e. experience) is determined by the number of years in franchise business. in accordance with the defined object and purpose of survey, proper theoretical and empirical research methods were used in the paper. descriptive analysis was used for the understanding the state of activity of hotel chains that implement franchising as a strategy of internationalization. statistical analysis of secondary data was performed using the spss software package. statistical techniques for the investigation of connections and relationships between variables: correlation analysis and simple and multiple linear regression were used to verify the hypotheses. 3. results the fact that there are 26 franchises from the hotel industry on the list 2016 top 500 franchises, indicates the importance of this sector in the field of franchising. it is important to mention that the second company on this list is franchise company hampton 420 m. stanković by hilton, which has over 2.000 franchise units all over the world. in addition, there are six hotel chains in the top 100 companies on the list of top 500 franchises: hampton by hilton (hilton worldwide), days inn (wyndham hotel group), intercontinental hotels group (holiday corporation), super 8 (wyndham hotel group) motel 6 (g6 hospitality), hilton garden in (hilton worldwide) (table 1). table 1 the ranking of hotel franchise companies on the list 2016 top 500 franchises rank company 2 hampton by hilton 32 days inn 38 intercontinental hotels group 52 super 8 56 motel 6 85 hilton garden in 129 homewood suites by hilton 136 doubletree by hilton 138 knights inn 141 baymont inn &v suites 164 red roof franchising llc 176 microtel inn & suites 180 country inns & suites 189 embassy suites 210 ramada worldwide 273 wyndhams hotels & resorts 278 hilton hotels and resorts 290 travelodge 306 hawthorn suites 331 studio 6 339 woodspring suites 349 howard johnson 372 hospitality int'l. inc. 374 home2 suites 470 wintage 478 radisson the oldest franchise hotel chain on the list 2016 top 500 franchises is hilton hotels and resorts, which was founded in 1919, while the youngest franchise system in the hotel industry from this list started the business 8 years ago (home2 suites). observed by the number of years in franchise business, companies howard johnson and ihg (intercontinental hotels group) have used franchise business model since 1954, i.e. for 62 years. right behind them is the company hilton hotels and resorts, which started with franchise business in 1965. the youngest company in terms of franchise business is home2 suites, which has used franchise business model for only 7 years (table 2). the total number of franchise units ranges from 82 in the case of company home2 suites to even 5.032 franchise units, in case of hotel chain ihg (intercontinental hotels group). the average number of franchise units in hotel chains that are on the list 2016 top 500 franchise is 783 franchise units. there are five largest hotel franchise systems international franchising in the hotel industry 421 that have over 1,000 franchise units: motel 6 (1.235 franchise units), days inn (1.791 franchise units), hampton by hilton (2.123 franchise units), super 8 (2.665 franchise units) and ihg (5.032 franchise units). all companies from the sample, except one (woodspring suites) have international franchise units (i.e. franchise units outside the u.s.). the number of international franchise units ranges from 0 to 1.644 (in the case of company ihg). even 10 of the 26 hotel chains (38,5%) have more than 100 international franchise units, while two hotel chains (super 8 and ihg) have over 1.000 franchise units outside the united states (table 2). the initial investment required to start a business within one of the hotel chains that are on the list 2016 top 500 franchises ranges from 1.367.800$ (hospitality int'l. inc.) to 76.558.687$ (hilton hotels and resorts). the average initial investment required to start a business within one of the famous hotel franchise company is 14.462.795$. the initial franchise fee ranges between 7.000$ (knights inn) and 95.000$ (hilton hotels and resorts). the average initial franchise fee is 47.192$. the ongoing fee (royalty) ranges from 3.25% (hospitality int'l. inc.) to 6% (microtel inn & suites and hampton by hilton). almost half of franchise companies in the hotel sector (44%) have an ongoing fee of 5% (table 2). table 2 descriptive analysis of hotel franchise companies minimum maximum average number of years in business 8 97 43 number of years in franchise business 7 62 31 total number of franchise units 82 5.032 783 number of international franchise units (franchise units outside u.s.) 0 1.644 185 initial investition 1.367.800 76.558.687 14.462.795 initial franchisee fee 7.000 95.000 47.192 ongoing royalty fee 3,25 6 5 in accordance with the defined aim of the study, we will observe the impact of the internal factors (hotel franchise company’s size and age) on the implementation of franchising as a strategy of internationalization. first of all, simple linear regression will be conducted in order to examine the impact of each of these internal factors on the implementation of franchising as a strategy of internationalization. then, common impact of the hotel franchise company’s size and age on the implementation of franchising as a strategy of internationalization will be examined by using multiple linear regression. pearson's correlation coefficient indicates that there is a strong positive correlation between the size of the hotel franchise company and the implementation of franchising as a strategy of internationalization, r=0,900. this result is statistically significant, p=0,000. we can conclude that there is a statistically significant strong positive correlation between the hotel franchise company’s size (total number of franchise units) and implementation of franchising as a strategy of internationalization (number of international franchise units), r=0,900, p<0,005. the coefficient of determination in this case is r2=0,809, so the size of the hotel franchise company explains 80.9% of variance in the answers relating to the use of franchising as a strategy of internationalization. this regression model reaches statistical significance (f=101,746, p=0,000) (table 3). 422 m. stanković table 3 results of simple linear regression the impact of the hotel franchise company’s size on the implementation of franchising as a strategy of internationalization correlations number of international franchise units total number of franchise units pearson correlation number of international franchise units 1,000 0,900 total number of franchise units 0,900 1,000 sig. number of international franchise units , 0,000 total number of franchise units 0,000 , model summary model r r square adjusted r square 1 0,900 0,809 0,801 anova sum of squares df mean square f sig. regression residual total 2746518,679 647855,975 3394374,654 1 24 25 2746518,679 26993,999 101,746 0,000 coefficients model b std. error beta t sig. (constant) total number of franchise units -55,458 0,307 40,088 0,030 0,900 -1,383 10,087 0,179 0,000 simple linear regression will be conducted in order to determine the effect of the hotel franchise company’s age on the implementation of franchising as a strategy of internationalization. pearson's correlation coefficient indicates that there is a strong positive correlation between the age of the hotel franchise company and the implementation of franchising as a strategy of internationalization, r=0,555. this result is statistically significant, p=0,002. the conclusion is that there is a statistically significant strong positive correlation between the hotel franchise company’s age (number of years in franchise business) and implementation of franchising as a strategy of internationalization (number of international franchise units), r=0,555, p<0,005. the coefficient of determination in this case is r2=0,308, so the age of the hotel franchise company explains 30,8% of variance in the answers relating to the use of franchising as a strategy of internationalization. this regression model reaches statistical significance (f=10,685, p=0,002) (table 4). for the purpose of conducting the multiple linear regression, we tested whether there is multicollinearity between independent variables. given that the correlation coefficient between the hotel franchise company’s size and age is less than 0.7, we will analyze both variables. the value tolerance is greater than 0,10, while the value vif is less than 10, which confirms the absence of multicollinearity. in the regression model which includes the hotel franchise company’s size and age, coefficient of determination is r2=0,818. this indicates that the model explains 81.8% of variance in the answers concerning the implementation of franchising as a strategy of internationalization. international franchising in the hotel industry 423 table 4 results of simple linear regression the impact of the hotel franchise company’s age on the implementation of franchising as a strategy of internationalization correlations number of international franchise units number of years in franchise business pearson correlation number of international franchise units 1,000 0,555 number of years in franchise business 0,555 1,000 sig. number of international franchise units , 0,002 number of years in franchise business 0,002 , model summary model r r square adjusted r square 1 0,555 0,308 0,279 anova sum of squares df mean square f sig. regression residual total 1045643,095 2348731,559 3394374,654 1 24 25 1045643,095 97863,815 10,685 0,003 coefficients model b std. error beta t sig. (constant) total number of franchise units -266,833 14,688 151,264 4,494 0,555 -1,764 3,269 0,090 0,003 the regression model that includes internal factors from the domain of hotel franchise company’s size and age reaches statistical significance (f=51,812, p=0,000). beta coefficient is higher for variable total number of franchise units (beta=0,840), so the size of the hotel franchise company contribute more to the explanation of the dependent variable, while the contribution of the hotel franchise company’s age is smaller (beta=0,113). also, part correlation coefficient is higher for variable total number of franchise units (part=0,714). this means that the size of the hotel franchise company uniquely explains about 51% of the variance in the dependent variable values. the hotel franchise company’s size provides a significant unique contribution to the prediction of the dependent variable (p=0,000). the age of hotel franchise company uniquely explains only about 1% of the variance in the values of the dependent variable (part=0,096), but it does not give a significant unique contribution to the prediction of the dependent variable (p=0,291) (table 5). based on a comprehensive analysis, it can be concluded that there is statistically significant strong positive correlation between the hotel franchise company’s size and the implementation of franchising as a strategy of internationalization. the regression model that explains the impact of the hotel franchise company’s size on the implementation of franchising as a strategy of internationalization reaches statistical significance. therefore, we confirm the hypothesis that the size of the hotel franchise companies has an impact on the implementation of franchising as a strategy of internationalization. also, there is a statistically significant strong positive correlation between the age of the hotel franchise companies and the use of franchising for international expansion. the regression model that explains the impact of the hotel franchise company’s age on the implementation of the franchising as a strategy of internationalization reaches statistical significance. therefore, we confirm the assumption that the age of the hotel franchise company has an 424 m. stanković table 5 results of multiple linear regression the impact of the hotel franchise company’s size and age on the implementation of franchising as a strategy of internationalization model summary model r r square adjusted r square 1 0,905 0,818 0,803 anova model sum of squares df mean square f sig. regression residual total 2777821,649 616553,005 3394374,654 2 23 25 1388910,824 26806,652 51,812 0,000 coefficients model b std. error beta t sig. correlations collinearity statistics zero-order partial part tollerance vif (constant) total number of franchise units number of years in franchise business -131,523 0,287 2,989 80,937 0,036 2,766 0,840 0,113 -1,625 8,039 1,081 0,118 0,000 0,291 0,900 0,555 0,859 0,220 0,714 0,096 0,723 0,723 1,383 1,383 impact on the implementation of franchising as a strategy of internationalization. the regression model that includes internal factors from the domain of the hotel franchise company’s size and age explains 81.8% of variance in the answers concerning the implementation of franchising as a strategy of internationalization and this model reaches statistical significance (f=51,812, p=0,000). the hypothesis that the internal factors from the domain of hotel franchise company’s characteristics have an impact on the implementation of franchising as a strategy of internationalization is confirmed. conclusion the world famous hotel chains continuously look for expansion opportunities in the international markets. therefore, the international franchising in hotel industry gains growing importance. the largest number of hotels that operate in franchise business come from the united states. in the rest of the world, franchising in the hotel industry is less developed. however, benefits that are achieved through franchising in the domestic and foreign markets are promoted more intensively in recent years. previous analysis about the impact of hotel franchise company’s size and age on the implementation of franchising as a strategy of internationalization indicate that larger and older hotel franchise companies more often decide to spread their business activities in foreign markets through franchising. some of the reasons for this are as follows: greater market strength of larger and older franchise systems, greater brand recognition, lower operating costs per franchise unit and easier obtaining of the necessary resources for international expansion. the paper analyzes hotel franchise companies that are ranked on the list 2016 top 500 franchises. based on the conducted statistical analysis, it is found that there is a statistically international franchising in the hotel industry 425 significant strong positive correlation between the size of hotel franchise system (total number of franchise units) and the implementation of the franchising as a strategy for internationalization (number of international franchise units), as well as statistically significant strong positive correlation between the age of hotel franchise system (number of years in franchise business) and internationalization by using franchising. the limitation of the study is that the focus is only on the impact of internal factors on the implementation of franchising as a strategy of internationalization by the hotel franchise companies. the future studies should, in addition to internal factors, include the analysis of external factors, primarily cultural and geographic distance. this study refers to hotel franchise companies from the u.s., so future studies might deal with the analysis of international franchising in the european hotel industry and comparative analysis in a several different countries. references abell, m. (1990), the international franchise option. bfa waterlow. london. alon, i., ni, l.q., wang, y.c. (2012). examining the determinants of hotel chain expansion through international franchising. international journal of hospitality management, 31(2), 379-386. aydin, n., kacker, m. (1990). international outlook on us-based franchisors. international marketing review, 7(2), 43-53. baker, b., dant, r.p. (2008). stable plural forms in franchise systems: an examination of the evolution of ownership redirection research. in: hendrikse, g.w.j., cliquet, g., et al. (eds.), strategy and governance of networks cooperatives, franchising and strategic alliances, physica-verlag, heidelberg, 87-112. botti,l., briec, w., cliquet, g. (2009). plural forms versus franchise and company-owned systems:adea approach of hotel chain performance. omega, 37, 566-578. brookes, m., altinay, l. 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(2002). determining factors in entry choice for international expansion. the case of the spanish hotel industry. tourism management, 23, 597-607. tuunanen, m., hyrsky, k. (2001). entrepreneurial paradoxes in business format franchising: an empirical survey of finnish franchisees. international small business journal, 19(4), 47-62. weaven, s., frazer, l. (2007). expansion through multiple unit franchising: australian franchisors reveal their motivations. international small business journal, 25(2), 173-205. xiao, q., o’neill, j., wang, h. (2008). international hotel development: a study of potential franchisees in china. international journal of hospitality management, 27(3), 325-336. internacionalni franšizing u sektoru hotelijerstva internacionalni franšizing u sektoru hotelijerstva je još uvek nedovoljno istražena tema u literaturi. ipak, s obzirom na to da je za internacionalizaciju poslovanja hotelskog lanca neophodno obezbediti veliki kapital, hoteli se sve češće odlučuju da se šire internacionalno putem franšizinga. iz tog razloga je potrebno veću pažnju posvetiti temi franšizinga kao strategije internacionalizacije u sektoru hotelijerstva. najveći broj hotela koji posluju po sistemu franšizinga potiče iz sad-a, dok je u ostatku sveta internacionalni franšizing u sektoru hotelijerstva znatno manje razvijen. stoga se rad fokusira na davaoce franšize iz sektora hotelijerstva iz sad-a koja imaju internacionalne franšizne jedinice. cilj rada je da se sagleda uticaj internih faktora, veličine i starosti franšiznog sistema, na primenu franšizinga kao strategije internacionalizacije od strane hotela davaoca franšize. ključne reči: internacionalni franšizing, korisnik franšize, davalac franšize, hotelijerstvo plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 1, 2017, pp. 83 92 doi: 10.22190/fueo1701083k review paper the impact of the great depression (1929–1933) on trade relations between the kingdom of yugoslavia and germany1 udc 338.124.4:339.5(497.1+430)‖1929/1933‖ milena s. kocić faculty of philosophy, university of niš, serbia abstract. this paper examines the impact of the great depression (1929–1933), the biggest blow that the capitalist world had undergone in its history up to that point, on trade relations between the kingdom of yugoslavia and germany. at that time, the trade relations were based on a trade agreement of 1927, which would be cancelled during the crisis and replaced with a new one in 1934. germany skillfully used the difficulties that the countries of southeastern europe, including the kingdom of yugoslavia, suffered from the great depression regarding the marketing of their main export commodity, agricultural products. a contributing factor to this was the fact that france and great britain, the main partners of the aforementioned countries, were losing economic interest in this area, which enabled germany to impose itself as the leading trade partner through the expansion of existing and the making of new trade agreements. a key factor in this process was the existing economic complementarity of the two countries, which gained special significance in the years following the crisis. in this sense, it can be said that the world economic crisis, i.e., its aftermath, combined with a general state of political affairs in europe in the 1930s, ultimately contributed to the promotion of economic cooperation between the kingdom of yugoslavia and germany and the strengthening of the ties between the two countries. key words: the kingdom of yugoslavia, germany, trade relations, great depression jel classification: n54, n74 received october 12, 2016 / revised february 6, 2017 / accepted february 27, 2017 corresponding author: milena s. kocić faculty of philosophy, university of niš, ćirila i metodija 2 , 18000 niš, serbia e-mail: milena.kocic@filfak.ni.ac.rs 84 m. kocić introduction the great depression, which started in october 1929 in the united states of america with the crash of the new york stock exchange, and then, due to the interconnected nature of the world economy, spread like wildfire onto other countries, was in its devastating impact an unprecedented event in the history of the capitalist world, hitting all the key areas of economic activity with equal force. the industrial crisis was followed by a crisis of agricultural production, which even surpassed it in terms of its territorial reach, as well as severe disturbances in the credit and financial mechanisms. the consequences of the crisis were especially dominant in the area of international trade exchange, manifesting themselves through the intensification of competition in the markets and growing protectionism (popov, 1995, p. 30-33). having this in mind, the severe and comprehensive nature of the great depression (1929-1933) meant that it had to leave its mark on international relations since it directly endangered the economic and political system built in the years following world war i and contributed to the shift of power in europe (cvetković, 2006, p. 119). the great depression (1929-1933) and its impact on the economy of the kingdom of yugoslavia was the topic of the following domestic historiographers (vinaver, 1987; vuĉo, 1968; vuĉo, 1976; lukaĉ, 1976; vuĉković, 1976; pejić, 1976, etc). having united historical areas that used to belong to four different countries before world war i and have different kinds of political and economic development, the kingdom of serbs, croats and slovenes—yugoslavia—was not able to overcome this inhomogeneity a decade after its unification, and its economy retained its colorful character during the entire period between the two wars (aleksić, 2010, p. 15-16). because of this, the kingdom of yugoslavia, or at least a greater part of it, failed to completely go with the trends of modernization which were present in europe at the time (đurović, 1993, p. 182). throughout its existence, it retained the characteristics of a distinctly agricultural country, so the consequences of the great depression were the gravest in this sphere. in the field of agriculture, the crisis manifested itself in the same way as in the economy—by a rapid drop in product prices, primarily of grain, which was more than a serious problem for a country which was one of the european exporters of agricultural produce, along with romania, bulgaria, hungary and spain (popov, 1995, p. 31). another important consequence was the massive outflow of foreign capital from the kingdom of yugoslavia at the peak of the banking crisis in europe during 1931 (obradović, 1939, p. 18). 1. trade relations between the kingdom of yugoslavia and germany before the great depression (1925-1929) since germany’s national unification in 1871, german political and economic circles had an interest in the area of central and southeastern europe in the context of creating a ―large economic space‖, which was considered necessary for the survival of the state and the nation (ristović, 1991; mitrović, 1974b). the loss of the colonies and the overseas territories after world war i, followed by the great depression, have largely intensified and spotlighted the aforementioned idea, only to particularly put this issue in the political foreground in the 1930s with the preparations of the third reich for war (gašić, 2013, p. 9-10). in the so-called grosswirtschaftsraum project, yugoslavia was primarily accorded the role of a base for raw material, a food manufacturer and a market the impact of the great depression (1929-1933) on the trade relations between yugoslavia and germany 85 for industrial goods (đurović, 1997, p. 134). in an attempt to protect its interests endangered by the measures of agricultural protectionism, through which industrial countries tried to protect their own agriculture, the kingdom of yugoslavia formed the so-called ―agricultural block‖ with romania and hungary during the bucharest conference in july 1930 (vuĉo, 1968, p. 161-163) and, in a way, contributed to the realization of the german project (đurović, 1993, p. 183). at that time, the trade relations and the exchange of goods between the kingdom of yugoslavia and germany were governed by the agreement on trade and navigation signed on october 6, 1927, in berlin (službene novine, no. 288, 1927). this contract took effect by its mutual acceptance on december 17 of the same year, i.e. the day when the ratification instruments were exchanged (đorċević, 1960, p. 25), and it was based on the usual principles of regular contracts of that kind that the kingdom of yugoslavia made with other countries, as well, i.e., the principles of free trade exchange and the most favored nation clause (ay, 335-99, p. 401). table 1 germany’s participation in the export of the kingdom of serbs, croats and slovenes from 1925 to 1929 (millions of dinars) year 1925 1926 1927 1928 1929 the total export of the kingdom of serbs, croats and slovenes 8,905 7,818 6,400 6,445 7,922 export to germany 639 724 679 779 675 share in percentage 7.18% 9.26% 10.6% 12.1% 8.52% source: jugoslavija 1918-1988: statistiĉki godišnjak [yugoslavia 1918-1988: a statistical yearbook], belgrade 1989, 299-301. the appended table shows that the export from the kingdom of serbs, croats and slovenes to germany in the five-year period before the great depression, up to 1929, oscillated from 639 million dinars in 1925 to 779 million dinars in the year after the aforementioned trade agreement was signed. seen in percentages, the value of yugoslavian export to germany in relation to its entire amount ranged between 7.18% in 1925 and 12.1% in 1928, which placed germany among the most important trade partners of the kingdom of serbs, croats and slovenes, along with italy, austria and czechoslovakia. it should be noted that until 1927, czechoslovakia was in third and germany in fourth place regarding yugoslavian exports, while 1928 saw germany climb to the third position (paaa, r 240726/200). table 2 germany’s participation in the import of the kingdom of serbs, croats and slovenes from 1925 to 1929 (millions of dinars) year 1925 1926 1927 1928 1929 total import of the kingdom of serbs, croats and slovenes 8,753 7,632 7,286 7,835 7,595 import from germany 866 918 899 1,067 1,188 share in percentage 9.89% 12.02% 12.34% 13.61% 15.64% source: jugoslavija 1918-1988: statistiĉki godišnjak [yugoslavia 1918-1988: a statistical yearbook], 299-304. 86 m. kocić on the other hand, when a percentage of its part in the total import of the kingdom of serbs, croats and slovenes is taken into consideration, import from germany was visibly and constantly growing in the aforementioned period. during 1928, germany got into third place regarding the countries with the highest import into yugoslavia with 13.61%, additionally securing this place in 1929, when its import of 15.64% meant it was just behind czechoslovakia (17.5%) and austria (17.43%) (paaa, r 240726/199). at the same time, the kingdom of yugoslavia took second place regarding german export targeted towards the balkans, with a german tendency and an expectation for yugoslavia to replace romania in the first place (paaa, r 240726/200). as far as the structure of the trade between germany and yugoslavia is concerned, the most important items exported to germany by the kingdom of yugoslavia were copper, wood, eggs, corn, meat, grain and fruit, while german export into yugoslavia mostly consisted of machines necessary for different economic activities and metallurgical products (paaa, r 240726/217-219). a significant portion of the needs of the kingdom of yugoslavia was settled through germany’s execution of its war-reparation obligations (paaa, r 240726/191). 2. the impact of agricultural crisis on economic and political movements in europe during the great depression the onslaught of the great depression caused a massive upheaval in the area of international traffic of goods. due to a sharp drop in agricultural product prices in the world market, germany was, like france and italy, forced to take measures to protect its own agriculture, which encompassed introducing high customs, and different restrictions and limitation, which would ultimately lead to the revision or cancelling of a whole series of its trade agreements (ay, 335-99, p. 401). until then, germany, being a highly industrialized country, had not paid too much attention to developing its agriculture since it had been able to import those products easily and at an affordable price. the question of the agricultural crisis was foregrounded at the moment the great depression reached its peak since german agricultural manufacturers increasingly started feeling unrightfully sacrificed in favor of industrial manufacturers, which, in their opinion, turned out to be an obviously wrong idea. in order to mitigate their discontent, germany had to introduce measures of agricultural protectionism (politika, february 8 th , 1931, no. 8174, p. 5). at the same time, the crisis served as an excellent playing field for different political moves and combinations. considering that the other states were too busy with their own economic issues and that they would not react to potential changes in the status quo, the german and austrian governments worked on economic and political rapprochement in utmost secrecy during 1930 and 1931, crowning their efforts with an agreement on the ―assimilation of customs conditions‖ and a joint trade policy of the two states, which was actually an agreement on the creation of a trade alliance between germany and austria. however, not only could this event not go unnoticed, but it also deeply concerned the european public. france considered this mentioned ―economic anschluss‖ as a precursor to the political annexation of austria to germany. its intensive protests were joined by the little entente, especially yugoslavia and czechoslovakia, in line with the decisions made at the bucharest conference (may 3–5, 1931). pointing to the political and legal unsustainability of the agreement, which, as a first step towards the anschluss, was contrary the impact of the great depression (1929-1933) on the trade relations between yugoslavia and germany 87 to the principles and provisions of the peace treaty of versailles and st. germaine, france and the little entente brought this issue up at the league of nations council, and it was finally resolved by the international court of justice in the hague, whose negative decision was preemptively confirmed by germany and austria themselves by saying they gave up the project of a customs union. however, germany used the great depression as an excellent opportunity for something even more important—its liberation from paying war reparations and rejection of the young plan, which failed mid-1932 (popov, 1995, p. 273-276). on the other hand, as an exporter of agricultural products, the kingdom of yugoslavia started facing increasing difficulties from 1930 onward. the basic factors that endangered its international economic position were the drop of agricultural product prices, reduced amounts of those products which it could export to foreign markets, as well as the decreasing propensity of foreign markets to accept agricultural products (cvetković, 2006, p. 131-134). the escalation of the agricultural crisis in 1931 and 1932 led to the deterioration of the economic position of the danube basin countries (vuĉo, 1976, p. 47-48). the socalled ―wheat problem‖ in the danube basin, the problem that the exporters of wheat and other grain faced when distributing their products in industrial countries that introduced the measures of agricultural protectionism, was additionally complicated by the fact that the escalation of the economic crisis led to a more intense overlapping of economic and political interests. alarmed by germany’s attempt at an ―economic anschluss‖ and wishing to preserve its political influence in central and southeastern europe, france attempted to find a solution for the economic problems in the danube basin countries and stop the german breakthrough by uniting them in a single economic block (vinaver, 1985, p. 214). the concrete realization of these tendencies was the project of the french prime minister andré tardieu presented to the league of nations on march 2 nd , 1932, which the contemporaries dubbed the tardieu plan (cvetković, 2006, p. 128-129). this plan envisaged forming an economic block between hungary, austria, czechoslovakia, romania and yugoslavia, which would be based on the system of preferential tariffs which the danube basin countries would grant each other regarding agricultural products (vanku, 1976, p. 154). the plan should have ultimately lead to the economic stabilization of the danube basin through forming bonds among the mentioned countries, backed by french financial aid, and it was expected that great britain, germany, and italy would aid its execution. however, the great powers viewed the french motivation for this action with suspicion, looking for underlying political instead of economic interests (cvetković, 2006, p. 129). the tardieu plan was especially opposed by germany since it considered that it would thwart their breakthrough to the balkans and the anschluss of austria (vanku, 1969, p. 65). instead of that, it offered the signing of bilateral preferential agreements to the agricultural states of the danube basin (vinaver, 1987, p. 138). however, the main reason why the tardieu plan could not succeed was the fact that the very countries that were to be part of it were not enthusiastic about it (vanku, 1969, p. 65). at the little entente conference held in belgrade from may 15 to may 17, 1932, the members of this alliance discussed, among other things, the tardieu plan on the reorganization of central europe and reached the conclusion that it was good in theory, but that it was still far from realization. that was why they adopted the stance that solving the central european economic and political issue needed to be left to the danube basin countries, with the affirmation of the great powers, but by no means under the influence of any of them 88 m. kocić (krizman, 1975, p. 63). in fact, at that time, romania and yugoslavia already started facing a dilemma: stand by france, to which they were tied by political interests, or turn to germany, which was increasingly becoming the focal point of their economic interests (cvetković, 2006, p. 130). 3. effects of the great depression on the trade relations between kingdom of yugoslavia and germany due to the crisis, the german market increasingly gained significance for the kingdom of yugoslavia, and after a rough 1931 and a disastrous 1932 regarding export, 1933 saw germany and austria become the most significant buyers of yugoslav products, as opposed to the italian and czechoslovakian markets, whose share in the exports of the kingdom of yugoslavia declined (cvetković, 2006, p. 130; mirković, 1968, p. 373-374). table 3 germany’s participation in the export of the kingdom of yugoslavia from 1930 to 1934 (millions of dinars) year 1930 1931 1932 1933 1934 the total export of the kingdom of yugoslavia 6,780 4,801 3,056 3,378 3,878 export to germany 791 543 345 471 598 share in percentage 11.67% 11.31% 11.29% 13.94% 15.42% source: jugoslavija 1918-1988: statistiĉki godišnjak [yugoslavia 1918-1988: a statistical yearbook], 299-301. at the same time, the value of german import in the kingdom of yugoslavia decreased during the great depression, and its share in the total yugoslav import reached its lowest value in 1933 (13.15%). yugoslavia had an active balance of trade with germany during 1933 and 1934, achieving a surplus of 92 and 101 million dinars respectively. the cause to this should be primarily sought in germany cancelling its war reparations, since the liabilities in yugoslavia’s trade with germany up to that moment consisted of germany’s consignments on account of reparation payments, as import that did not have an adequate counterpart in the regular balance of payments (đorċević, 1960, p. 27). table 4 germany’s participation in the import of the kingdom of yugoslavia from 1930 to 1934 (millions of dinars) year 1930 1931 1932 1933 1934 total import of the kingdom of yugoslavia 6,960 4,800 2,860 2,883 3,573 import from germany 1,221 925 506 379 497 share in percentage 17.54% 19.27% 17.69% 13.15% 13.91% source: jugoslavija 1918-1988: statistiĉki godišnjak [yugoslavia 1918-1988: a statistical yearbook], 299-304. however, at that time, the trade agreement between the two countries from 1927 was no longer in effect. the aforementioned need of germany to protect its own agricultural the impact of the great depression (1929-1933) on the trade relations between yugoslavia and germany 89 production in the midst of the crisis encountered problems due to fixed custom rate items that certain trade agreements contained, and that was the reason why it eventually had to cancel them. as far as the kingdom of yugoslavia was concerned, a fixed custom rate for eggs forced germany to cancel the agreement on trade and navigation in september 1932 (ay 38-860-1044, 1932). so, after the end of a six-month cancellation term, on march 6, 1933, yugoslavia stopped having a contractual relation with germany, which was a state that lasted until august 1 of the same year, ending in a provisional agreement concluded in the form of the exchange of notes, which regulated trade relations based on the most favored nation status (ay 334-386-1213), while payments between the countries were performed based on a clearing agreement of september 13, 1932, between the national bank and the reichsbank (ay, 335-99, p. 401). the nazis coming to power in germany in january 1933 introduced new components into its trade, and especially its agricultural policy. it was in one of the first government sessions of the nazi regime, held on april 7, 1933, that the german minister of foreign affairs, konstantin von neurath presented the basic guidelines of the reich’s international policy, emphasizing the importance of assuring political and economic influence in the countries of southeastern europe, primarily romania and yugoslavia. not long after that, experts from corresponding ministries submitted to hitler a note on the state and outlook of the german export, which labeled the general trade exchange of germany, especially the segment with the countries of southeastern europe, as unsatisfactory. the document emphasized the necessity of preserving natural ties with this area, despite the fact that german foreign trade balance was passive, and appealed to the government to mitigate the existing export limitations and protective customs in order not to cut the achieved trade flows. further specification of the economic strategy was agreed on the session of the reichstag held on october 4, 1933, when they ratified the conception of connecting the economies of southeastern europe countries into a unique market, i.e. economic space, in which germany ―could achieve the status of a leading state through its technology, it entrepreneurial spirit and its talent for organization― (mitrović, 1974a, p. 227-234). in accordance with these guidelines for starting an active trade policy, concrete steps were made towards the promotion of economic cooperation and expanding trade exchange with countries from southeastern europe through updating and renewing trade relations and the existing contracts with them (lukaĉ, 1976, p. 66). in the case of the kingdom of yugoslavia, the interim agreement of 1933 was replaced by a definitive and permanent agreement signed on may 1, 1934, in belgrade (službene novine no. 123, 1934). this agreement was based on the most favored nation clause for all relations in the field of trade, navigation, and citizen mobility (đorċević, 1960, p. 140-141). according to the then minister of trade and industry, juraj demetrović, its main significance was reflected in its large scale basis and its longer (two-year) term, which was supposed to introduce stability and the prerequisites for a peaceful development into the trade relations between the two countries (ay 38-860-1044, 1934). the agreement, among other things, envisages the establishment of a permanent yugoslav-german economic committee, which would meet at least once a year, and whose task would be to discuss issues relating to the implementation of the agreement, work on the expansion of mutual trade, and care about adapting yugoslav production to the needs of german imports (đorċević, 1960, p. 147). the essence of the said trade agreement was the fact that through it germany would, not without certain financial sacrifices, commit to purchasing large amounts of yugoslav agricultural products at high prices, but on a clearing 90 m. kocić basis, thus providing its industrial goods with a safe market. the implementation of this agreement brought about significant relief and benefits to yugoslav farmers; however, on the other hand, the dependence of the yugoslav economy on the third reich it caused started to be noticed as early as 1935 (popov, 1995, p. 332). once started, this change in the foreign trade orientation of the kingdom of yugoslavia was not transient; on the contrary, it led to its growing economic reliance on germany in the following years (aleksić, 1998, p. 66). conclusion it can be said that the great depression, i.e., its aftermath, combined with a general state of political affairs in europe in the 1930s, ultimately shifted the kingdom of yugoslavia's orientation towards germany, which contributed to the promotion of their economic cooperation and the strengthening of the ties between them. a key factor in this process was the existing economic complementarity of the two countries, which gained special significance in the years following the crisis. germany skillfully used the difficulties that the countries of southeastern europe, including the kingdom of yugoslavia, suffered from the great depression regarding the marketing of their main export commodity, agricultural products. a contributing factor to this was the fact that france and great britain, the main partners of the aforementioned countries, were losing economic interest in this area, which enabled germany to impose itself as the leading trade partner through the expansion of existing and the making of new trade agreements. acknowledgement: this paper was produced as a result of the research performed on the project tradition, modernization and national identity in serbia and the balkans in the process of european integration (179074), funded by the ministry of education, science and technological development of the republic of serbia. references aleksić, d. 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(ed.), svetska ekonomska kriza 1929-1934. godine i njen odraz u zemljama jugoistočne evrope [the great depression of 1929-1934 and its impact on the countries of southeastern europe]. belgrade: institute for balkan studies of the serbian academy of sciences and arts, 261-336. popov, ĉ. (1995). od versaja do danciga [from versaille to danzig]. belgrade: the official gazette of the federal republic of yugoslavia ristović, m. d. (1991). nemački „novi poredak― i jugoistočna evropa 1940/41-1944/45. planovi o budućnosti i praksa. [the german ―new order‖ and southeastern europe 1940/41-1944/45. plans on the future and practice.] belgrade: vojnoizdavaĉki i novinski centar vanku, m. (1969). mala antanta 1920-1938. [little entente 1920-1938]. titovo užice: dimitrije tucović vanku, m. (1976). mala antanta u velikoj ekonomskoj krizi 1929-1933. [the little entente in the great depression 1929-1933]. in: ĉubrilović, v. 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(ed.), svetska ekonomska kriza 1929-1934. godine i njen odraz u zemljama jugoistočne evrope [the great depression of 1929-1934 and its impact on the countries of southeastern europe]. belgrade: institute for balkan studies of the serbian academy of sciences and arts, 197-227. vuĉo, n. (1968). agrarna kriza u jugoslaviji 1930-1934 [the agricultural crisis in yugoslavia 1930-1934]. belgrade: prosveta vuĉo, n. (1976). „agrarni blok― podunavskih zemalja za vreme ekonomske krize 1929-1933. godine [the ―agricultural block‖ of the danube basin countries during the great depression of 1929-1933]. in: ĉubrilović, v. (ed.), svetska ekonomska kriza 1929-1934. godine i njen odraz u zemljama jugoistočne evrope [the great depression of 1929-1934 and its impact on the countries of southeastern europe]. belgrade: institute for balkan studies of the serbian academy of sciences and arts, 29-51. 92 m. kocić sources archives unpublished sources politisches archiv des auswärtigen amtes, berlin (=paaa) r 240726: аа, аbteilung ii. akten betreffend: jugoslawiens handelsbeziehungen zu deutschland. jugoslawien, handel 11, bd. 3: paaa, r 240726/191, jugoslawiens außenhandel, berliner börsen-courier, december 20, 1929. paaa, r 240726/199, deutsches konsulat zagreb an das aa berlin, october 2, 1930. paaa, r 240726/200, wirtschaft und finanzen: die jugoslawisch-deutschen handelsbeziehungen, october 2, 1930. paaa, r 240726/217-219, die handelsbeziehungen zwischen jugoslavien und deutschland während des 1. halbjahres 1930, december 22, 1930. archives of yugoslavia, belgrade (=ay): ay 334-386-1213. the fund of the ministry of foreign affairs of the kingdom of yugoslavia (=334), consular-economic department (ced), folder no. 386, archive unit no. 1213, belgrade, july 29, 1933. ay 335-99. the collection of vojislav jovanović marambo (=335), folder no. 99, no archive unit, pregled spoljno-trgovinske politike (nedatirani i nepotpuni referat) [an overview of the foreign trade policy (an undated and incomplete report)], p. 401 ay 38-860-1044. the fund of the central press bureau of the presidency of the ministerial council of the kingdom of yugoslavia (=38), folder no. 860, archive unit no. 1044: ay 38-860-1044, 1932. ―ministar trgovine i industrije o otkazu trgovinskog ugovora s nemaĉkom‖ [minister of trade and industry on the cancellation of the trade agreement with germany], politika, september 14, 1932. ay 38-860-1044, 1934. ―ministar g. j. demetrović o trgovinskom ugovoru s nemaĉkom‖ [minister mr. j. demetrović on the trade agreement with germany], politika, may 10, 1934. published sources jugoslavija 1918-1988: statistički godišnjak [yugoslavia 1918-1988: a statistical yearbook], belgrade 1989. službene novine [the official gazette], no. 288 – lxxx, december 20, 1927. službene novine [the official gazette], no. 123 – xxxii, june 1, 1934. press politika, february 8, 1931, no. 8174, p. 5 (―borba za poljoprivredu u industrijskoj nemaĉkoj‖ [the fight for agriculture in an industrial germany], berlin correspondent p. milojević) uticaj svetske ekonomske krize (1929-1933) na trgovinske odnose kraljevine jugoslavije i nemačke u ovom radu razmatra se uticaj svetske ekonomske krize (1929-1933), kao najvećeg potresa koji je kapitalistički svet doživeo u svojoj dotadašnjoj istoriji, na trgovinske odnose kraljevine jugoslavije i nemačke, zasnovane u to vreme na trgovinskom ugovoru iz 1927. godine, koji će za vreme krize biti otkazan i 1934. godine zamenjen novim. nemačka je vešto iskoristila teškoće na koje su zemlje evropskog jugoistoka, uključujući i kraljevinu jugoslaviju, nailazile pri plasmanu svojih poljoprivrednih proizvoda, kao glavnog izvoznog artikla, za vreme svetske ekonomske krize, što joj je, uz istovremeno slabljenje ekonomskog interesa njihovih dotadašnjih glavnih partnera – francuske i velike britanije za ovaj prostor, omogućilo da im se proširivanjem postojećih ili sklapanjem novih ugovora nametne kao vodeći trgovinski partner. ključni faktor u tom procesu bila je, od ranije prisutna, komplementarnost privreda dveju zemalja, koja je u godinama nakon krize posebno dobila na značaju. u tom smislu, može se reći da je svetska ekonomska kriza, odnosno njene posledice, u kombinaciji sa sveopštom konstelacijom političkih prilika u evropi tridesetih godina 20. veka, u krajnjoj liniji doprinela unapređenju privredne saradnje kraljevine jugoslavije i nemačke i produbljivanju njihovih veza. kljuĉne reĉi: kraljevina jugoslavija, nemačka, trgovinski odnosi, svetska ekonomska kriza plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 4, 2016, pp. 351 364 doi: 10.22190/fueo1604351a review paper activity-based costing in health care organizations1 udc 657.474 614.2 ljilja antić, vesna sekulić university of niš, faculty of economics, serbia abstract. the concept of activity-based costing (abc) provides informational support to the performance of key management activities in different organizations. focused on activities and processes within the organization, this concept, using appropriate cost drivers, provides more accurate information on activity costs and costs objects. the paper analyzes the specificities of applying the traditional and improved model of activity-based costing in health organizations. key words: health care organizations, costing, activities, cost drivers introduction as organizations that exist and work in order to provide the general well-being of society as a whole, certain groups of people and individuals, nonprofit organizations do not have in their focus achieving their own profit or high wages of their individual employees. the primary purpose of establishment and functioning of the nonprofit organizations is contented in providing the goods and services that a society asks for but profit organizations cannot or do not provide. this fact makes the nonprofits significant factor of functioning for many national economies. nonprofit organizations are, in principle, relatively easy to “identify” if it starts from the fact that these organizations, in order to cover their costs, perform a wide range of operations and activities on a nonprofit base, that are aimed at providing certain services to the wider community. these are public (collective) goods, such as health care, education, social protection, transport infrastructure, culture and arts, which are of common interest and are needed for the particular community to function 1received july 25, 2016 / accepted november 25, 2016 corresponding author: ljilja antić university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: ljilja.antic@eknfak.ni.ac.rs 352 lj. antić, v. sekulić normally. due to specific effects achieved through the provision of health care and protection, nonprofit organizations in health care sector deserve a special attention. consequently, the business goals of these organizations are not profit-oriented, but have non-economic nature and their human character is dominant – to provide services that will meet the needs of preserving the health of people in a given community. therefore, social responsibility in carrying out the objectives is largely expressed in health and other nonprofit organizations. the dominance of non-economic objectives, that are not easy to follow, as well as to monitor the effects of their realization, make the process of identification, control and improvement the measures of effective functioning of these organizations fairly complex. thus, the objective function of a health care organization depends on the board of directors, type of services, respective financing, level of competition, and the current financial condition of the organization (hughes & luksetich, 2010, p. 121) various objectives have been formulated in models, including social welfare, quality and quantity maximization, budget, inputs, equity, and even profit. the objective should be consistent with the competitive and legal environment and flexible enough to deal with changing business conditions. considering that health care organizations should primarily achieve results deriving from their mission which are not measurable exclusively by financial expression, in these organizations nonfinancial performance indicators are becoming increasingly important and relevant. however, the attribute “nonprofit” does not mean that these organizations cannot make profit (which is, otherwise, determined as a surplus). when realizing their basic objectives, the health care organizations can also undertake activities that could make them certain earnings or profit. the earnings are usually used to increase the quality of health services, or to achieve a higher level of satisfaction with health care as well as to achieve a higher level of setting noneconomic objectives. however, the absence of traditional profit and adequate quantitative way for monitoring the success of health care organizations is a serious problem, especially in the area of management control. the problem is only partially solved by showing surplus or deficit in the financial statements of these organizations. in principle, monitoring the success of health care organizations should be based on establishing the appropriate relations between their output and input in order to assess efficiency and effectiveness of health services to a wide range of users. in this sense, the economics of health care organizations means their ability to control the assigned spending of funds received as well as providing a certain amount of inputs quality at the lowest possible cost. this means that the information on the cost of health care services is of particular importance for the managers in health care organizations in making business decisions, regardless of the limits in deciding caused by nature of their activities. just starting from the given characteristics of the functioning and monitoring health care organization performance, the activity-based costing, as a modern method of costing, provides the information necessary to determine the precise cost of health care services, more than for business improvement, as well as for identification of the cost drivers. recently, activity-based costing is used in health care organizations as an important instruments for more efficient use of strategic resources in order to meet the expected requirements and needs of their customers. activity based costing in the health care organizations 353 1. problems and specificities of measuring success of health care organizations it is a fact that measuring and monitoring business success of nonprofit organizations is different and not so simple as in profit organizations. it is rather complicated, because it is based on their multiobjective orientation, in which it is quite difficult to identify all individual objectives and allocate some of them as dominant. the complexity also arises from the numerous methodological problems in expressing certain categories, due to noneconomic character of the effects of these organizations functioning. health care organizations, as nonprofit ones, have different objectives. namely, depending on the area of operation, each nonprofit organization defines its objectives. so for most health care organizations it may be relevant to some general strategic goals which they should seek and these are (kaplan & norton, 1996, p. 185.):  maximizing the volume of health care services provided from available resources (input),  maximizing revenues and financial surplus,  target use of resources aimed at better meeting the wider social needs,  fully (partially) cover the costs and minimizing subsidies,  maximize budget – the extent of possible resources (funds) to achive the setting goals,  maximizing satisfaction od customers patients,  realizing the public image of a socially responsible organization. after analyzing the above general objectives of health care organization it may be noted that most of them coincide with the objectives that can be found in profit oriented organization. however, the essential difference is that nonprofit organizations are not funded by the users of their services, but by the government, so their objectives to a large degree are limited by the approved budget. consequently, obtaining additional resources in these organizations is usualy caused by the current policy and the volume of provided services, so the link between success in achieving the objectives and obtaining additional funds is almost non-existent. in many cases, failure in business entails even greater investment. on the other hand, health care as nonprofits have to provide services regardless of weather they are efficient or effective and to provide services to all users, without exception. all this points to the absence of market competition and „profit iniative“ in nonprofit organizations, so these organizations are not subject to sanctions of financial markets as profit-oriented organizations. but, nonprofit organizations are exposed to latent threat of domination of individual and selfish interests of their managers, especially those at the top, that may not be consistent with corporate interest and goals. eliminating this danger assumes considering the performance of nonprofit organizations through the monitoring of achieving strategic goals, not through controlling the achieved financial excess or surplus. in principle, particularities of health care as nonprofit organizations disable the use of measures wherebudget is based on profit or other financial indicators in monitoring their performance. therefore, most authors agree that in a number of nonprofit organizations such measures are not present (anthony & govindarajan, 2007, p. 628, poister, 2003, pp. 8-10, kaplan & norton, 2001, pp.97-99.) the reason is primarily noneconomic character of the objectives of these organizations, but also the existence of a serious control and managerial problem which concerns the lack of a single, relatively satisfactory quantitative and comprehensive indicator of their performance. 354 lj. antić, v. sekulić since it is assumed to correlate the generated output with the invested (spent) resources, the efficiency of health care organizations is quite difficult to determine. namely, the fact is that outputs of these organizations do not usually have a market value or they are generally dificult to measure. so, there arises the greatest number of problems related to measuring the efficiency of these organizations. it should be added that the nonprofits, including the health care organizations, are characterized by a wide range of different objectives, which enables comparing the efficiency of one with the efficiency of the other activities to realize the set objectives. in addition, many nonprofit organizations provide services for which is difficult to calculate average costs. also, in most nonprofit organizations, there is very little opportunity to determine the optimum level of spending (investment). in such a situation, the managers of these organizations are trying to spend as much as the approved budget allows, although the predicted amount of spending in budget may be higher than the objectively required one. to this end, it is important to conduct more frequent budgetary control, concerning the control of economy of spending in relation to the financial plan (approved budget) of health care organizations. a particular problem of efficient business activities of health care organizations relates to the financial constraints to which they are exposed. in fact, these organizations have very little control over the funds they receive and the goals to achieve, but also a completely limited ability of their management to provide additional financial resources. also, health care organizations are often asked to provide a full range of services regardless of the fact that some of them surely know that they are not cost efficient. finally, functioning and monitoring business performance of these organizations is significantly burdened with political, social, and legal restrictions. it is also complex to monitor the effectiveness of health care organizations, through which the relationship between output and set objectives is tested in order to assess the degree of their achievement. since most of the objectives of health care organizations can not be expressed in financial terms, nonfinancial objectives shall be established. consequently, the effectiveness is measured as the degree of realization of the planned nonfinancial objectives, where new problems arise in monitoring business performance in this area. first of all, almost every health care organization can have several different objectives that are quite difficult to reconcile, and it can happen that the achievement of a particular goal is possible only at the expense of other goals. also, there is a limitation of health care organizations regarding the use of available funds. finally, the objectives of health care organizations are not directly comparable and, since they are not expressed through profit, the attitude on their effectiveness can be significantly influenced by the opinion of some managers. essentially, monitoring the business performance of health care organizations as the nonprofit ones is complex, specific and associated with numerious methodological but also essential problems. therefore, success in business activities of these organizations should be established and evaluated in the context of achieving the purpose of their existence and setting strategic goals. lately, activity-based costing and activity-based management are more used in health care organizations as important instruments for more efficient use of strategic resources for achieving the set objectives and complete satisfaction of the expected demands of their service users. activity based costing in the health care organizations 355 2. the main settings and development of activity based costing reliable and accurate information on the costs of activities that are carried out, the products produced and services provided, are crucial for any organization that wants to maintain and improve the competitive position in the globalized business environment. in that sense, managers in health care organizations continually search for methods of costing which will result in information that will be a good basis for making decisions on limited resources allocation, planning and control. as one of the most commonly used concepts of costing for those purposes, which is used in a number of organizations in the field of health care, is activity-based costing. designed in the 80s of the last century, as aresponse of accounting theory on criticism on hitherto applied methods of costing, so-called traditional methods, was first appled in manufacturing companies. later, with realizing the information potential of this concept of costing, its use has expanded to nonprofit organizations. in the basis of this concept are the activities carried out by the organization, which are necessary for the production of products or services provision and for whose performing it is necessary to consume the adequate resources. in order to implement the concept it is necessary to analyze in detail all activities performed in the organization and choose the ones that will be kept on record on costs. this can be done by analyzing the business activities of organizational units, business processes, business functions, etc. (brimson, 1991, pp. 85-91) and using different techniques for collecting data on activities, such as conducting interviews, using records of employees, directly studying the units to be analyzed (brimson, 1991, pp.86-89; mowen & hansen, 2011, p. 147). this is the kind of way that organizations review their business activities to receive an answer to the question whether all the activities carried out add value, in order to eliminate those activities that do not add value and increase the time and expenses, as well as whether the activities that add value are performed efficiently. accordingly, the primary role of activity-based costing to provide accurate information on the the costs of activities, products, and services, is expanded on the use of its information for making business decisions on product-service assortment, customer relationships, improvement of business activities and others. activity-based costing enables the organization to monitor, control and manage costs more efficiently. the conceptual basis of costing are the activities that are carried out within an organization, which can be classified in different ways: repetitive and nonrepetitive activities, activities that have a high degree of influence on the market and activities that have a low impact on the market, primary and secondary activities, activities that add value and activities that do not add value (brimson, 1991, pp.54-55). the hierarchy of activities performed in the organization can be calculated in different ways, but the most common are differentiation on the activities at the level of product unit that are performed every time when the unit of product is produced, then the activities at the level of series that are performed each time a series of product is launched, the activities at the product level that are performed every time when it is needed to provide support to a variety of products that the organization produces, and the activities at the level of resources related to the maintenance of resources in order to perform the production process (cooper, 1990). in addition to these activities, institute of management accountants (1993) adds the activities related to customers/market. activity-based costing is based on the following assumptions: to produce a product or provide a service it is necessary to perform appropriate activities, to perform the activities 356 lj. antić, v. sekulić it is necessary to spend resources, the activities are the basis of cost allocation and the cost drivers do not have to be related to the volume of production (antić & georgijevski, 2010, p. 501). cost allocation in the activity-based costing is done on two levels. first, the resource costs are allocated to the activities performed in the organization by using the appropriate resource drivers. then, the cost of activities are allocated on the cost objects by using the appropriate activity drivers. activity-based costing at both levels of allocation uses the bases for the allocation that are related to the volume of production, but also those that are independent of production volume, and whose importance is growing in the changed, globalized business environment. to be able to respond to the information management requirements of organizations in the business environmnet that is subject to constant changes, the concept of activitybased costing (abc) is continuously improved and developed from the original onedimensional model through the two-dimensional model to the improved time driven activity-based costing. development of activity-based concept is similar to the life cycle of mature and successful technology because it features two milestones relating to the improvement of concept performance over time, the learning that has been cumulated through concept using and the enhancement in systems technology, as well as improvement of behavioral response to the concept that begins from user enthusiasm, through their disappointments, to eventual acceptance of technology`s relevance to business success (turney, 2008). accordingly, turney (2008) distinguishes several stages in development of abc concept. the period from 1984 to 1987 was characterized by innovation in the costing with the aim of finding new methods of calculation which produce more accurate and reliable information on the product costs than those which were produced by the traditional costing methods and which are necessary for making business decisions. the organizations that implement activity based costing manage to sustain and improve competitive advantage, which is an important step in the development of the first generation of abc model. the period from 1987 to 1991 was characterized by the expansion of articles in leading magazines and numerous conferences on the subject of the new concept of costing and cost management. at this stage, the importance of information produced by activity-based costing for analyzing and review of the product profitability was recognized, eliminating those activities that do not add value, reducing costs, and increasing profitablity. in the period from 1991 to 1995 there was a reduced interest in the abc concept due to high costs of its design, implementation and maintenance. however, in the period from 1995 to 2000, the information contained in the abc method data bases was identified, which was useful for the analysis of customer profitability, markets, distribution channels, while its implementation expanded from manufacturing to service organizations, which, thanks to the implementation of abc concept, fought successfully with the increased competition in the 90-ies. in the period from 2000 to 2006 the interest in abc concept has again increased. the benefits of information produced by abc have been recognized, while the effort and costs of implementing and maintaining the system have been reduced thanks to erp (enterprise resource planning) models and bi (business intelligence) tools. in the period up to 2006 abc concept has become an integral component of new solutions in the field of business performance management. activity based costing in the health care organizations 357 3. the specifics of activity-based costing in health care organizations in the changed business environment, managers of nonprofit organizations, and therefore the managers in health care sector, can not make significant business decisions and maintain the competitiveness without reliable information on the costs of activities performed and services provided. in this sense, applying activity-based costing comes to the fore. similarly to the manufacturing organizations, in health care organizations it is possible to indentify a large number of activities that need to be done in order to provide a service with adequate quality, with a rational use of limited resources at an acceptable cost. in contrast to activities of manufacturing organizations that are most oftenly of the same or similar type and are performed in a similar manner and in which the outputs can be precisely defined, in health care institutions it is possible to identify many different activities that are performed by using different procedures and which do not yield simply and easily defined output. for example, the output in health care institutions can be defined as a stay and treatment of the patient, whereby it is possible to identify many different types of rooms and treatment (hansen & mowen, 1994, p. 226). kalhor et al. (2016) in the paper where they deal with the establishing cost of radiology services and compare it with governmental tariffe identify the main groups of activities, activity centers and give the description of activities as shown in table 1. table 1 activity centers and the nature of related activities main group of activity name of activity center nature of activity clinical surgery delivering clinical services directly to the surgery patients internal delivering clinical services to patients icu delivering clinical services to patients that need special care para clinical laboratory performing diagnostic tests to inpatient and outpatient imaging radiography performed for inpatients and outpatients physiotherapy delivering rehabilitation services to inpatients and outpatients supporting kitchen cook and distribute food to patients and staff laundry washing dirty clothes of patients reception reception of patients that need treatment in the inpatient departments educational library delivering educational books to the students educational classes educational classes for students head of educational department office delivering educational services to the students other office of insurance agents review patient records for insurance organizations bank delivering financial services to the empleyees and patients prayer house holding prayer ceremonies source: (kalhor et al, 2016, p.2020) 358 lj. antić, v. sekulić laurila et al. (2000, p. 192) indicate a growing interest in using abc method in health care and identify the following activities: time scheduling and registration, direct procedure, assistant procedure, film developing, interpretation of procedure and typing, conferences for clinicians, quality assurance and product development and research and teaching. their intention is to get an informative and detailed picture of the resource utilization in a radiology department in order to support its pricing and management. ergun et al. (2013) in their paper demonstrate the real cost data of the pathology examinations by using abc method and identify the following activity centers: patient registry and sample acceptance, the delivery of material to the laboratory, determination of the material and macroscopic examination, the tissue follow up procedure of the part, the paraffin block procedure of the part, paraffin cutting procedure of the part, staining, sealing and control procedure of the paraffin section, microscopic investigation, report writing, result reporting, archive. this clearly shows the diversity of activities performed and can be identified in various health care organizations to implement activity-based costing and provide the information of costs for different purposes. hansen & mowen (1994, p.226-227) in the case of day care services illustrate the application of abc in health institutions. according to the steps in implementing the abc method it is firstly necessary to identify activities whose resources and costs can be recorded. day care of the patient involves the following activities: the activity of providing space for a stay of the patient, the activities of providing food for the patient, and the activity of nurturing the patient. in this case the output can be defined as a day stay patient. the initial assumption is that the annual activity costs of providing space and food are 1,000,000 m.u.,nurturing patient activities 1,000,000 m.u.,the total number of days of patient stays annually amounts to 11,000 days, and the total number of hours of care amounts to 50,000 hours. the difference in the costs calculated on the basis of the traditional costing method and activity-based costing will be presented in the case of mothers, where there will especially be analyzed mothers who had normal childbirth, those who gave birth by caesarean section and those who have had childbirth with complications (the example adapted from: hansen and mowen, 1994). table 2 presents the data necessary for calculation. table 2 data on patient type, patient days of stay, and hours of care patient type days of stay hours of care normal childbirth 7,300 27,000 birth by caesarean section 1,800 12,000 childbirth with complications 900 11,000 total 10,000 50,000 the traditional costing method for cost allocation uses one cost driver – patient days of stay, regardless of the patient type and differences in the requirements for the activities. the traditional costing method determines the costs per patient day in the amount of 200 m.u. by dividing the annual costs of space, food and nurturing (2,000,000 m.u.) with the number of patient days of stays (10,000 days). activity-based costing takes into account the type of patient in the allocation of costs. to allocate activity costs of providing space and food as cost driver the number of patient days activity based costing in the health care organizations 359 of stay is used, so these costs per day amount to 100 m.u. (1,000,000 m.u. : 10,000 days), and for allocation of costs of patient care activities the cost driver is the number of hours of patient care so these costs per hour of care is 20 m.u. (1,000,000 : 50,000 hours). using these cost drivers leads to different costs per patient day for different types of patients. in the case of normal childbirth, which accounts for the largest percentage of the total number of patients days of stay and the total number of hours of care, because this type of patients is most commonly used, the costs per patient day amount to 174 m.u. on average, 3,7 hours of care per day of stay should be spent (27,000 h : 7,300 days). accordingly, the costs calculated by using the activity-based costing method are for 26 m.u. lower than the costs calculated by using the traditional methods. costs per patient day are calculated as follows: (7,300 days × 100 m.u.) + (27,000 h × 20 m.u.) : 7,300 days = 174 m.u. in the case of caesarean section there is less number of patient days and the number of hours of care on the annual basis compared to a normal childbirth, but in this case an average of 6,7 hours of care per day should be spent – twice as many hours of care per day than in the case of normal childbirth, because, by nature of the problem, these patients require more care. costs per patient day calculated by using the activity-based costing method amount to 233 m.u. and are higher for 33 m.u. in comparison to the costs calculated by the traditional method. costs per patient day are calculated as follows: (1,800 days × 100 m.u.) + (12.000 h × 20 m.u.) : 1.800 days = 233 m.u. patients with complications make up the smallest percentage number of patient days and the least number of hours of care per year. however, an average of 12,2 hours of care per day should be spent twice as many hours of care per day than in the case of caesarean section and three times more hours of care in relation to the normal childbirth. by nature of the problem, these patients require more care. costs per patient day calculated by using the activity-based costing method amount to 344 m.u. and are higher for 144 m.u. in comparison to the costs calculated by the traditional method. costs per patient day are calculated as follows: (900 days × 100 m.u.) + (11.000 h × 20 m.u.) : 900 days = 344 m.u. hansen & mowen (2011, p.147-156), also detail the process of designing and implementing abc in health institutions in the case of the department of cardiology. by applying well thought interview that was conducted with the head nurse in the department of cardiology the information on the performed activities was collected, resources that are necessary to spend on the performed activities, resource drivers that are used for allocating the resource cost on activities, activity drivers that are used for allocating activity costs on cost drivers, as well as information about potential cost objects. on the basis of data obtained from the interview it was created an activity dictionary which next to the activity name contained a description of each activity, the classification into primary and secondary activities, cost objects and activity drivers, as shown in the table 3. 360 lj. antić, v. sekulić table 3 activity dictionary: cardiology unit activity name activity description activity type cost object(s) activity driver supervising nurses scheduling, coordinating, and performance evaluation secondary activities within department percentage of time nurses spend on each activity treating patients administering medicine and changing dressings primary patient types number of treatments providing hygienic care bathing, changing bedding and clothes, walking patients primary patient types labor hours responding to patient requests answering calls, counseling, providing snacks, etc. primary patient types number of requests monitoring patients checking vital signs and posting patient information primary patient types monitoring hours source: (mowen & hansen, 2011, p.149) data from the table are a good starting point for the implementation of the activitybased costing in health care organizations. there are many examples of the application of abc in health care organizations. the present case related to day care services is given as an insight into the differences between the traditional method of costing and the activitybased costing and it is quite simple. however, in practice, it is necessary to spend a lot of time and not to carry out cheap interviews and researches to identify and classify activities, resource drivers and activity drivers, in order to determine the cost for each activity and various cost objects. the answer of accounting to overcoming the perceived shortcomings of activity-based costing is to find an improved time driven activity-based costing model, which has also found wide application in health care. 4. applying the improved model of activity-based costing in health care organizations as it has been noted in previous presentations, during the implementation of activitybased costing the constraints and problems that were identified related to: the high costs of implementing the concept, the purchase or development of software, payment of consultations, reorganization and possible costs of firing employees; resistance of staff who are afraid of possible layoffs or changed modes; a large number of activities and cost drivers which enable to more precise costs allocation, but increase the cost of implementation of the concept and complexity of its processing and understanding (gowthrope, 2009, pp.84-85). in order to overcome the perceived problems, the activity-based costing model was promoted to the time driven activity-based costing (time driven activity-based costing tdabc), which is simpler, cheaper, faster to implement and enables that the rates for cost allocation are based on the practical capacity of provided resources (kaplan & anderson, 2003). activity based costing in the health care organizations 361 the process of calculating the costs of cost objects within the tdabc implies a somewhat different methodology compared to the abc method. namely, the tdabc method simplifies the first stage in the cost allocation – allocation of resource costs to activities through eliminating the need for detailed interviews and researches in order to determined the resource drivers. (mowen & hansen, 2011, p. 154) in applying this concept, the different groups, the amounts and the total cost of the resources needed to perform activities should firstly be identified. the practical capacity is often calculated as a percentage, in the range of 80% to 85% of the theoretical capacity. the resource costs per unit of time are calculated by sharing the costs of the available capacity with the practical capacity of available resources, expressed in hours of work. the costs for each activity are calculated by multiplying the resource costs per unit of time with the number of time units necessary for performing the activity. tdabc requires to calculate the time needed to perform each activity, by direct observation or conducting interviews. tdabc in costing includes the variations in the demand for time, depending on the category of patients who are treated, for example. if it assumes that it takes 0.4 hours to reply to requests from patients that require normal care, than an additional 0.3 hours when it comes from the patients in the semi-intensive care and an additional 0.8 hours for the patients in the intensive care, in a particular department in health care institution it should define new activities for these situations. tdabc introduces the equation of time. in general terms, the equation of time of given activities is a function of n potential factors of this activity and is expressed as follows (kaplan & anderson, 2003): t = β0 + β1x1 + … + βnxn, where are: t – the time required to perform the activities, β0 – the standard time required to perform the activities, βi – the estimated additional time required to perform the activity i, (i = 1,…, n), xn – the amount of incremental activity i, (i = 1,…, n). or in the example: response time = 0.40 + 0.30 (for the patient in the semi-intensive care) + 0.80 (for the patient in the intensive care) for its simplicity and advantages over the traditional abc, tdabc has found wide application in health care organizations. therefore, demeere et al. (2009) through a case study showed how to perform tdabc of five patient in clinic's departments and provide evidence of the benefits of such an analysis. they pointed out the advantages of tdabc in terms of two parameters necessary for determining the costs: the unit cost of supplying capacity and the time required to perform a transaction or an activity, as well as concerning possibility to provide many opportunities to design cost models in an environment with complex activities as in health care organizations and provide accurate and relevant information to health care managers and physicians which assisted them in operational improvements, making a profitability analysis per department and deciding on future investments. 362 lj. antić, v. sekulić kaplan et al. (2015, pp. 43-48) implemented tdabc to assess the cost of benign prostatic hyperplasia across the entire care pathway, from initial primary care visit to urologic consultation through surgical intervention, to improve value at their institution. campanale et al. (2014) presented and discussed an ir project that involved all the 16 hospitals of tuscany in the designs the tdabc, whose results showed the extent to which tdabc provided support to and could help health care organizations to face new challenge of managing available limited resources in order to satisfy a growing demand of users patients. on the example of cardiology unit hansen & mowen (2011, pp.155-156) ilustrated the basic concepts of tdabc. the needed information to calculate the capacity cost rate for the cardiology unit and calculate the activity rate and the cost of the activity treating patients (a total of 3,000 hours were spent to perform this activity) and monitoring patients (a total of 5,400 hours were spent to perform this activity) are given in the table 4. table 4 resources, activities and time/unit of activity on a cardiology unit resources activities time/ unit of activity supervision $50,000 treating patients 1.40 hrs. supplies&uniforms 60,000 providing hygienic care 1.00 hr. salaries 340,000 responding to requests 0.60 hr. computer 10,000 monitoring patients 1.00 hr. monitor 26,000 total $486,000 total nursing hours 18,000 (practical capacity) source: (mowen & hansen, 2011, p.155) capacity cost rate is $27 per hour and it is calculated by dividing the total resources cost in the amount of $486,000 with the practical capacity of 18,000 hours. in a very simple way the activity rate and the cost of the activities treating patients and monitoring patients can be determined. treating patients activity rate: $27 × 1.40 = $37.80 cost of activity: $37.80 × 3,000 = $113,400 monitoring patients activity rate: $27 × 1 = $27 cost of activity: $27 × 5,400 = $145,800 tdabc demonstrated numerous advantages over the use of other concepts of costing, which are reflected in the fact that the model can be quickly and easily implemented and updated, allow assessment of the efficiency of the processes that are carried out as well as the capacity utilization, the model can be used for what-if analysis and provide information for planning and control, and the like. a well-designed tdabc model provides a complete picture of the performance of activities and processess in health-care organizations and necessary information for making strategically important decisions. activity based costing in the health care organizations 363 conclusion nonprofit organization form the backbone of any society in terms of providing goods of common interest and creating a more humane society. due to specific effects achieved through the provision of health care and protection, nonprofit organizations in health care sector are of special importance. in order to survive in an economy that requires greater efficiency and greater accountability, nonprofit organizations need to adapt to changes, to maintain their mission and the reason for their existence, which is quite a complex task. one of the ways to improve the efficiency and effectiveness of operations of these organizations, accompanied by their performance, is to improve the control and management of certain activities in their business. this can be achieved by respecting and strengthening the role of management accounting in these organizations, especially in the field of providing information on the costs of services. namely, in the process of decision making in health care organizations, as socially responsible nonprofit organizations, information about the cost of services they provide is very important. in that sense, the activity-based costing, and the improved model of time driven activity-based costing as a modern method of cost accounting that is used in health care organizations, provide necessary information to determine the precise cost of providing health services, to improve business activities, to eliminate the activities that do not add value for customers – patients, to identify cost drivers, and to plan and create corporate strategy. the pieces of information that the activity-based costing provides for the management of health care and other nonprofit organizations, due to their high level of reliability are very useful for making various business decisions, particularly related to the planning and allocation of resources and assessment of performance of activities. acknowledgement: the paper is a part of the research done within the project 179066 »improving the competitiveness of the public and private sector in serbia by networking competences in the process of european integration of serbia« financed by the ministry of science and technological development of the republic of serbia. references anthony, r., govindarajan, v. 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(2008) activity-based costing: an emerging foundation for performance management, cost technology, dostupno:http://www.sas.com/resources/whitepaper/wp5073.pdf. obračun troškova po aktivnostima u zdravstvenim organizacijama koncept obračuna troškova po aktivnostima pruža informacionu podršku obavljanju ključnih aktivnosti menadžmenta u različitim organizacijama. fokusiran na aktivnosti i procese u organizaciji, ovaj koncept, korišćenjem odgovarajućih uzročnika troškova, pruža preciznije informacije o troškovima aktivnosti i nosilaca troškova. u radu se analiziraju specifičnosti primene tradicionalnog i unapređenog modela obračuna troškova po aktivnostima u zdravstvenim organizacijama. ključne reči: zdravstvene organizacije, obračun troškova, aktivnosti, uzročnici troškova 10857 facta universitatis series: economics and organization vol. 19, no 3, 2022, pp. 183 197 https://doi.org/10.22190/fueo220614014d © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper testing the applicability of the capm model using selected shares listed on the belgrade stock exchange1 udc 336.76(497.11) miloš đaković, jelena andrašić, danica cicmil the university of novi sad, faculty of economics in subotica, serbia orcid id: miloš đaković https://orcid.org/0000-0003-0167-4026 jelena andrašić https://orcid.org/0000-0003-3941-1184 danica cicmil https://orcid.org/0000-0001-6373-5264 abstract. one of the basic types of portfolio valuation as well as valuation of individual company shares is the capm (capital asset pricing) model, which uses a well-known measure of systemic risk in its analysis, which is beta. the capm model in its analysis uses the link between the systemic risk measure (beta) and the expected market return. guided by this model, the analysis of monthly returns of selected shares on the belgrade stock exchange in the period from 2011 to 2021 was performed in this research. in the research, the beta coefficient of selected shares was calculated with the help of the covariance of market return and stock return. the results and their statistical value were confirmed by the linear regression test. the rest of the research tests the applicability of the capm model to selected actions and in the same way, the sml (security market line) is devised, which is a graphical representation of the model. the research indicated that the basic assumptions of the capm model are not applicable as a predictor of future expected returns of selected shares on the belgrade stock exchange due to various other elements that affect price movements and returns of selected shares not covered by the model. keywords: capm model, beta coefficient, belgrade stock exchange, belexline jel classification: g17, g12 received june 14, 2022 / revised september 11, 2022 / accepted september 16, 2022 corresponding author: miloš đaković university of novi sad, faculty of economics in subotica, segedinski put 9-11, 24000 subotica, republic of serbia | e-mail: milos.djakovic@ef.uns.ac.rs https://orcid.org/0000-0003-0167-4026 https://orcid.org/0000-0003-3941-1184 https://orcid.org/0000-0001-6373-5264 mailto:milos.djakovic@ef.uns.ac.rs 184 m. đaković, j. andrašić, d. cicmil 1. introduction the capital asset pricing model makes a significant contribution to our understanding of asset price determinants. according to the capm, diversified investors' ownership of assets lowers expected returns and raises prices. furthermore, investors with undiversified portfolios are more inclined to take risks for which they will not be compensated (perold, 2004, p 3-24). the capm's attractiveness stems from its ability to make powerful and appealing predictions about how to evaluate risk and the connection between expected returns and risk. the model is a simplified representation of how financial markets determine prices of securities and, as a result, also determine predicted capital investment returns. the capm model is a mechanism used to evaluate risk and convert it into expected return on equity projections (roe). the main benefit of the capital asset pricing model is the objectivity of the predicted costs of equity that the model may produce. to generate an accurate and meaningful cost of equity calculations, financial managers might utilize it to enhance other methodologies and their judgment (rossi, 2015, p. 604-617). the capital asset pricing model is undoubtedly the most important and commonly utilized contribution to finance (ross, westerfield, and jordan, 1996). it is necessary to describe the company's business purpose while discussing the financial market and individual stocks of specific corporations. in today's business world, a company's ability to adapt to increasingly unstable business conditions is critical to its survival. companies analyze the success of their management decisions against a predetermined aim, hence they require a goal. companies develop metrics and operational goals that they wish to attain in their business to reach the defined goal. (mirović, mijić, andrašić & kalaš, 2019, p. 5). the capm model's assumptions for proper implementation are concerned with investor behavior and capital market conditions. according to these assumptions, the market should be made up of risk-averse investors, risk should be measured by the standard deviation of portfolio income, investors should have a common period for making investment decisions, and investors should have similar expectations about future income and security risks. finally, the capital market must be perfect. regardless of the capm model's broad application, the model's fundamental flaw is the anticipated investor expectation, not the achieved return (vunjak, 2008, p. 251). in the continuation of the research, we review the literature related to the application of the capm model. after reviewing the literature, we review the methodology of the paper and finally present the results of the research and discuss the results obtained. in the conclusion, we express our concluding remarks and give suggestions for further research. 2. literature review the model itself assumes the existence of perfect market conditions, which is not the case in practice. the model itself was developed by william f. sharpe (1964) and john lintner (1965) as a reaction to the modern portfolio theory developed by markowitz (1952). portfolios are classified into two types, according to markowitz: efficient and inefficient. the efficient frontier is the boundary between an efficient and an inefficient portfolio. the efficiency frontier is made up of a set of portfolios that have a good balance of expected return and risk. according to the frontier, the higher the return dispersion around the predicted returns, the more uncertain future returns, as well as the risk, which increases exponentially. (brealy & myers, 2016). additionally, the cautious long-term investor will testing of applicability of the capm model using selected stocks listed on the belgrade stock exchange 185 stay away from such overweights to protect themselves from two types of declines in investing opportunities: declining anticipated returns on stocks and rising volatility (cambell, giglio, polk & turley, 2018). modern portfolio theory served as a common foundation for the creation of many financial ideas and concepts that are still frequently employed today but are also subject to ongoing critique. the introduction of new financial instruments, as well as various sorts of investors, has necessitated the inclusion of severe risk effects in portfolio optimization models. investors will choose to put their funds in financial assets whose return distribution is favorably asymmetrical, while they will avoid financial assets whose return distribution is long-tailed, based on statistical features of return distributions. (stanković, petrović & denčić mihajlov, 2020, p. 17-26). some researchers employed a variety of techniques to forecast market movement. the box-jenkins (arima) test was used by jakšić, milanović, and stojković (2020) to perform an empirical study that found that the share market in the republic of serbia will not have any noteworthy trends in 2019. forecasting, on the other hand, cannot accurately predict future movements, thus the analysis and interpretation of the gathered data should be viewed as potentially erroneous. because uncertainty and potential errors are proportional to the length of the forecast period, the prediction should be focused on a short time frame (jakšić, milanović & stojković, 2020, p. 87-96). in this example, we can see the breadth of predictable research on the results of stock market actions. the capm model is one of the first widely recognized models for determining future expected results of actions concerning the market. there is also minimal support for the theory's basic concept that increased risk (beta) is associated with higher returns, according to some research. to alleviate the statistical issues that occur from measurement errors in individual beta estimations, the securities are merged into portfolios to diversify away from the majority of the company's elements of returns, hence increasing the precision of estimates of the beta coefficient (fama and french, 2004, p. 25-46). the generalized capm with iiapd errors has beneficial qualities, according to bao, diks, and li's research findings. in terms of commonly used performance measures, portfolios produced with iiapd errors beat portfolios constructed with normally distributed errors, according to the testing. (bao, diks & li, 2018, p. 611-621). on the other hand, in one study, the author employed the capital asset pricing model approach of financial asset evaluation to estimate future yields on both the titles in the portfolio and the return on the portfolio. they discovered an increase in both the beta and the coefficient of market risk, with the latter being substantially connected with capital market development. (anghel & paschia, 2013, p. 541). also according to baltes, dragoe & ardelean (2014), the c.a.p.m. model continues to be the most often utilized one for both portfolio selection and company evaluation, particularly those aspects linked to the beta coefficient variability over time and the potential for mere approximation. focusing on the applicability of the capm model in similar financial markets as the market of the republic of serbia, we can see the following: using monthly stock returns from nine countries, spanning the period from january 2006 to december 2010, one of the research articles looked at whether the model is adequate for capital asset assessment in the central and south-east european emerging securities markets. it was determined that the capm model is not appropriate for appraising capital assets in the central and southeastern european emerging economies, according to a cross-sectional study of the test data. it was discovered that stock market indices do not lie on the efficient frontier, do not reflect an efficient portfolio, and thus cannot be considered a market portfolio of 186 m. đaković, j. andrašić, d. cicmil models, as was previously supposed (džaja & alijanović, 2013, p. 164-175). therefore we can see the use of other predictive models in addition to the capm model. according to research, variations in stock prices on the croatian capital market indicate that certain undiscovered elements influence share valuation. it was found that the fundamental analysis of shares is insufficient for determining the true value of a share in light of different invisible variables and all available information that affects its value (odobašić, tolušić & tolušić, 2014, p. 297-311). the extension of the capm model is precisely apt (arbitrage pricing theory) which includes much larger macroeconomic predictable variables compared to the capm model. the key difference is that apt takes many more components in its model instead. its primary limitation is the precise measurement of the values of all its variables. in the period 2008-2010, kisman and restiyanita investigated whether there was an effect of market excess return on lq45 company stock returns (using the capm model), as well as whether there was an effect of variable/factor (such as gross domestic product and interest rates) arbitrage pricing model (apt) on stock returns. the findings of multiple regression demonstrated that capm and apt are highly significant, as evidenced by the t-test and f-test results. apt model outperformed the capm model in predicting stock returns based on the coefficient of determination. the model's drawback is that it is dependent on whether or not the capital market is efficient (kisman & restiyanita, 2015, p. 184-189). some studies favor the arbitrage model while on the other hand there are studies that support the capm model. one of the examples of support for the apt model is the findings of kisman & restiyanita (2015), who claim that the coefficient of apt is more accurate than capm at forecasting stock returns. on the other hand, the suroso et. al (2018) study states, analyzing the application of the model to different periods, that the capm model is a better predictor of stock values in the short, medium, and long periods than the apt model. also in the study by french (2017), researching the effects of macroeconomic variables on the stock returns of stock markets of singapore, thailand, indonesia, malaysia, and the philippines, the capital asset pricing model was proven to be a more reliable pricing tool for the six countries studied than the arbitrage pricing theory. the main basis of different sites is the analysis of returns of certain types of markets. kisman & restiyanita (2015) based their research on the return of shares of companies listed on the indonesian stock exchange, while suroso et. al (2018) focused more on the return of banking stocks also in the indonesian market. in addition to the previously mentioned research, there are other papers related to the practical application of the apt model, but in this paper, we focus on the capm (capital asset pricing model). 3. research methodology this research paper consists of five parts. in the beginning, we dealt with the introduction of the concept of the capm model and then a review of the literature related to the application of the model itself. in this chapter, we present the main mathematical formulas on which the capm model itself is based and which were used in the calculation of the obtained results. also in this chapter, we present the basic hypotheses of the research itself. in the next section, we present the obtained calculated results using linear regression and covariance. in the last chapter, we make concluding remarks and give suggestions for testing of applicability of the capm model using selected stocks listed on the belgrade stock exchange 187 future research. the paper itself covers the period from 2011 to 2021 of selected shares of the belgrade stock exchange as shown in table 1 below. due to the accuracy of the data, the data from january 2011 to december 2021 were used to calculate the beta coefficient, while the annual returns of selected shares of companies calculated based on monthly data were used to calculate the application of the capm model. the main hypotheses derived in this research are the following: h0: a higher return on stocks is expected at a higher level of risk h1: the capm model is a valid predictor of stock returns as mentioned earlier, we deal with the presentation of the main formulas and graphs that represent the assumptions and components of the capm model. a market portfolio is more of a theoretical concept than a real-world application. it is a value-weighted portfolio that includes all risk assets in the global economy, resulting in a percentage equal share of the market value of all capital investments around the world. given the unpredictability of the number and market value of the world's risk activity, it is evident that calculating a value-weighted entirely comprehensive market index, especially for everyday use, is extremely difficult. instead, several estimates are utilized, the most common of which are larger stock market indices (šoškić, 2010, p. 105). graphically, the market portfolio can be presented with the help of the so-called cml (capital market line), which is a set of efficient solutions equal for all investors. for the investor, in theory, it is ideal for the portfolio to be on this line because cml is an efficient frontier. in theory, a portfolio gathered from certain stocks closer to the x-axis represents a portfolio that contains more secure securities (mostly bonds) while a portfolio further than the x-axis and along the line represents a risky portfolio, and the main assumption of the modern portfolio theory is that the higher the amount of risk (standard deviation) the higher the profit is expected. fig. 1 capital market line (cml) source: schoenmaker & schramade (2020) one of the foundations of the model is the understanding of the beta coefficient. the beta coefficient is usually calculated by reviewing historical data. because investment and financial decision-making are future-oriented, the argument for employing a beta coefficient whose value is based on historical data can be questioned, especially since we know that financial market occurrences are not a straightforward extrapolation of past events (krneta, 2006, p. 65). the basic idea of the beta coefficient or beta index is that if 188 m. đaković, j. andrašić, d. cicmil β> 1 the stock price moves more aggressively concerning the market portfolio. when β <1 represents a slower movement of stock prices but in the same direction while β = 1 represents the beta coefficient of the market portfolio itself. one of the basic assumptions of the capm model is the existence of a market portfolio, but in practice, it is quite difficult to determine the real representation of the market portfolio, which is one of the limitations of the capm model. in practice, the stock exchange index of the country that is the subject of the research is mostly used, namely the index that includes the largest number of shares, so that its movements most accurately represent market movements. the most comprehensive index on the belgrade stock exchange is the belexline index, which we used in this research as a representative of the market portfolio. for calculating the beta coefficient we use the covariance/variance method. ( ) * ( ) ( , ) rmi rsj v cov rm rs n  − − = (1) cov(rm, rs) – represents the covariance of variables rm and rs. σ – represents the sum of other parts of the formula. (rmi) – represents all values of the rm-variable. µ – represents the average value of the rm-variable. rsj – represents all values of the rs-variable. v – represents the average value of the rs-variable. σ – represents the sum of the values for both rmi − µ) and (rsj − v). n – represents the total number of data points across both variables. ( , ) ( ) cov rm rs var rm  = (2) β – beta coefficient rm – the return of the market rs – the return of the stock cov – covariance var – variance as we can see, the beta coefficient is calculated as the quotient of the stock return and market return, and the return variance. based on that, we get a beta coefficient that represents the representative of systemic risk, i.e. risks that cannot be eliminated by diversification. however, according to other research, the beta coefficient as the only risk component in the capm may also require the addition of dividend yield, company size, and skewness, that are a few other risk factors that can be used to explain asset returns. additionally, contrary to one of the capm assumptions, there are real-world restrictions on investor borrowing, such as those regarding short selling (fernandez, 2019). in this research, as mentioned, we use selected shares listed on the belgrade stock exchange, which are included in the belexline index. in the table below we can see which companies were taken for analysis and which their symbols will be used in the rest of the research. testing of applicability of the capm model using selected stocks listed on the belgrade stock exchange 189 table 1 stocks listed on the belgrade stock exchange aerodrom nikola tesla a.d. aero nis a.d. nis enegroprojekt holding a.d. ehnl impol seval a.d. impl dunav osiguranje a.d. dnos komercijalna banka a.d. kmbn messer tehnogas a.d. tgas jedinstvo a.d. jesv ams osiguranje a.d. amso lasta a.d. lsta source: belgrade stock exchange as we can see in the paper, we used ten companies listed on the belgrade stock exchange, where we used data on the return of shares in the period from january 2011 to december 2021 to calculate the exposure to systemic risk according to the capm model. expected stock returns are determined by their matching amount of systematic risk, or ß, according to the model. to put it another way, the market does not reward risk that is taken unnecessarily. the model can be used to calculate the cost of capital, conduct event studies, and manage and appraise portfolios, among other things. economists have been able to quantify risk and the payoff for taking it on (ansari, 2000, p. 55-64). divide the final index or stock value by the beginning value and remove one to get the returns. subtracting the beginning value from the finishing value and dividing it by the beginning value is another way to calculate the return (gardner, mcgowan & moeller, 2010). the second way is used in this research. since we are testing the capm model itself, we need to present the model itself in the following formula. ( ) ( ( ) )capm ers rf e rm rf= + − (3) capm (ers) – expected returns of the stock (security) using the model rf – risk-free rate β – beta coefficient rm – return of the market (e(rm) – rf )– market premium sml (security market line) is the graphic depiction of the capm model. according to the sml, the desired rate of return on an asset is determined by its beta, or market risk (systematic), risk-free rate of return (rf), and market risk premium (e(rm) − rf). as a result of changing the desired rate of return under the effect of changes in the nominal rate of return without risk, beta, or market risk premium, the sml equation indicates that the share price can vary even if the company's cash flows do not change. 190 m. đaković, j. andrašić, d. cicmil fig. 2 security market line (sml) source: https://assignmentpoint.com/security-market-line-sml/ 4. findings and discussion in this part of the research, we present the obtained results and discussthem. the pspp statistical program was used in the calculation of the obtained results. in the first part of this chapter, we present descriptive statistics of the shares used in the research as well as the market index. table 2 descriptive statistics mean standard error median standard deviation minimum maximum count belex line 1375.882 21.11682 1434.37 242.6138 858.41 1733.14 132 aero 909.7204 32.63811 907.6091 374.9833 386.381 1801.65 132 nis 694.2481 9.468468 683.4762 108.3716 482.2632 966.36364 132 ehnl 775.1323 26.59373 705.1579 304.3791 326.1905 1489.8889 132 impl 2090.748 107.2683 1736.1 1227.742 584.95 4012.7391 132 dnos 1546.611 84.17999 1164.834 967.1545 538.1 3936.2105 132 kmnb 2160.63 64.27649 1889.297 738.4806 994.7391 4368.0909 132 tgas 9044.952 335.7279 8746.1 3857.22 3132.45 16566.818 132 jesv 5385.555 98.49262 5074.601 1131.594 3826.696 8863.6364 132 amso 542.3225 33.9663 420.0000 390.2433 114.0000 1886.0909 132 lsta 462.6345 18.22758 420.445 209.419 200 1147.1053 132 source: belgrade stock exchange in the table above we see data on the prices of selected shares. the subject of the analysis was the share prices in the period from 2011 to 2021 (monthly data). we notice looking at the level of standard deviation as a representative of the risk that the shares of impl, jesv, and tgas show the highest level of standard deviation, which means that these shares have a large class of movement between the maximum and minimum price in the observation period. we notice the lowest level of variation at nis because the amount of standard deviation is 108.37, which is the lowest amount in the sample. https://assignmentpoint.com/security-market-line-sml/ testing of applicability of the capm model using selected stocks listed on the belgrade stock exchange 191 table 3 risk-free rate, market return, and market risk premium 10year international bonds serbia market return (belexline) market risk premium 6.813% 3.426% -5.068% source: author’s calculation as we want to calculate the return on shares according to the capm model, we need certain variables such as risk-free rate and market return. the rate of return on 10-year bonds was taken as a representative of the risk-free rate. serbian 10-year bonds experienced a maximum rate of 7.071% while the minimum rate was 2.264%. in addition, the return rate of the belexline stock index is shown, which is 3.426% per year on average, based on monthly data used to more accurately determine the actual return. here we notice a violation of the concept of the capm model, which immediately gives us an indication of the impossibility of applying, in the form of predictability, this model on the belgrade stock exchange. we notice that the premium market is negative, which means that in our market it pays more for investors to invest in bonds because the expected return from them is higher than from investing in the stock exchange index itself. this problem was later presented graphically with the help of sml (security market line). table 4 risk-free rate, market return, and market risk premium market aero nis ehnl impl dnos kmbn tgas jesv amso lsta market 0,0012515 aero 0,0010588 0,014053 nis 0,0006772 0,000329 0.0029321 ehnl 0,0012405 0,001208 0,000759 0,0050265 impl 0,000529 0,000659 6,822e-5 0,0010009 0,008422 dnos 0,0009408 -0,000449 0,0003273 0,0008577 0,0016251 0.0126168 kmbn 0,001297 0,000532 0,0008446 0,0014182 0,0009601 0,0011263 0,0051577 tgas 0,0009756 0,001015 0,0005959 0,0015253 0,0011636 0,0002633 0,0012259 0,0035905 jesv 0,000582 0,00063 -0,000182 0,0010567 0,0014391 0,0006473 0,0007161 0,0007841 0,002585 amso 4,257e-05 -0,001694 -0,000585 -0,001616 0,0005096 0,0006096 0,0013337 -0,000394 0,000916 0,0183287 lsta 0,0011164 0,000709 7,421e-05 0,0014069 0,0021323 0,0046685 0,0019706 0,000567 0,001109 -0,0004926 0,0187351 calculated beta 0,846 0,540 0,991 0,423 0,752 1,036 0,780 0,465 0,034 0,892 variance (stock) / covariance (market;stock) source: author’s calculation using the previously mentioned formula for calculating the beta coefficient as a representative of the systemic risk to which an individual stock company is exposed, with the help of covariance performed using monthly return data, we obtained the following results which can be seen in the table above. we can notice that kbmn has the maximum amount of beta coefficient in the amount of 1.03, which means that the return on kbmn shares is moving a little stronger than the market itself. also, the results affirm the statement of baltes, dragoe & ardelean (2014) that said that the majority of cases have positive ß coefficient values and that the cases with ß0 are extremely uncommon. the volatility value suggests that the stock will evolve differently from the market. accordingly, the research by duangjan & amporn (2019) examined the application of the capm model to the valuation of five stocks of highly profitable companies in the american market and discovered that the beta of all five sampling companies is positive, meaning that bigger the increase in the value of the stock, the 192 m. đaković, j. andrašić, d. cicmil beta of all five sampling companies will increase. as the market grows, so will the returns of the sampling companies, and vice versa. the rest of the shares in the sample are bets below 1, which means that they are more defensive and less volatile. the average value of the beta coefficient of the observed stock is 0.729 which tells us that the hypothetical portfolio including these stocks is not as volatile as the market. this coincides with the results of hundal, eskola & tulan (2019) who, observing 90 stocks on the finnish stock market, discovered that the average beta was 0.64 which means that the market change of 10% implies that the hypothetical portfolio changes by 6.4% in the same direction. for a more precise calculation of the beta coefficient, monthly data were used concerning the annual ones, used mainly due to the statistical significance of the sample itself. in the following table, with the help of linear regression (which is another way of obtaining the beta coefficient), we also calculated the amounts of the beta coefficient but checked their statistical significance using pvalues. in theory, if the p-value does not exceed 0.05, the sample is statistically significant. the only sample that we can say does not fit the required parameters is the p-value of the beta coefficient of the company impl. linear regression shows us the average change of the dependent variable (return on shares) when changing the independent variable (return on the market) by one. table 5 results of linear regression companies beta p-value observations aero 0.8460 0.0036 131 nis 0.5401 0.0000 131 ehnl 0.9912 0.0000 131 impl 0.4227 0.0629 131 dnos 0.7518 0.0065 131 kmbn 1.0364 0.0000 131 tgas 0.7795 0.0000 131 jesv 0.4650 0.0002 131 0.7291 source: author’s calculation in the last part of the research, we come to the calculation of the expected returns on shares with the help of the capm model. we apply the formula given in the chapter on methodology of calculation work. as the capm model uses the annual return on shares in its assumptions, we calculated the average annual returns of each share in the sample for the period from 2011 to 2021 using monthly data. the table below shows the results obtained. we note that the basic assumptions of the capm model do not apply to the belgrade stock exchange. an additional component of the alpha coefficient was introduced, which represents the deviation of the actual yields from the expected yields or the so-called abnormal yield. as we can see, the results produced using the capm model's assumptions do not demonstrate the predicted relationship between risk and expected returns. the results obtained are the outcome of a negative risk premium. a greater beta index value reduces the return as long as the risk premium is negative which is contradictory to the basis of the model. the average return of selected shares under the capm assumptions is 4.34% but actual returns differ. testing of applicability of the capm model using selected stocks listed on the belgrade stock exchange 193 table 6 calculation of capm expected returns beta capm return annual return alpha rf 0 8.49% aero 0.8460 4.21% 7.08% 2.87% nis 0.5401 5.76% 1.12% -4.64% ehnl 0.9912 3.47% -2.43% -5.90% impl 0.4227 6.35% 20.54% 14.19% dnos 0.7518 4.68% 13.41% 8.72% kmbn 1.0364 3.24% 7.24% 4.00% tgas 0.7795 4.54% 11.94% 7.40% jesv 0.4650 6.14% 3.84% -2.30% amso 0.0340 8.32% 19.03% 10.71% lsta 0.8920 3.97% 12.49% 8.52% source: author’s calculation fig. 3 security market line of selected shares source: author’s calculation the negative slope of the sml line is the result of the negative market premium present in the financial market of serbia. on the chart, we can see the actual returns of selected stocks and their deviation from expected returns using the capm model. based on this line, we can determine which shares are overvalued and which are undervalued. in theory, if the return is above the sml line then it means the stock is undervalued but if the return is below the line it means the stock is overvalued. this statement coincides with the findings of baltes, dragoe & ardelean (2014) who, using the assumptions of the capm model on the bucharest stock exchange, found that the shares were overvalued because their price was positioned under the security market line of the market. this represents one of the useful ways to check the real value of shares in the financial market. after applying the capm model to the example of selected shares listed on the belgrade stock exchange, we established that, mainly due to the negative market premium, the capm model itself is not applicable as a valid model for valuing shares on the financial market of serbia which coincides with the findings of odobasic, tolusic & tolusic (2014) which also stated that the assumptions of the capm model, because of the negative market premium and the high risk-free rate, cannot be applied to the croatian market. also, similar results were obtained by khudoykulov, khamidov, & aktamov (2015) whose findings, 194 m. đaković, j. andrašić, d. cicmil analyzing the czech republic, portugal, greece, poland, and italy, claim that after capm model testing it was determined that high returns did not equal high beta. for that reason, the model was not adequate for the five countries' stock exchange markets. other studies employing the sample of 33,301 us stock observations using data from 1991 to 2012 found that the fama and french model (ex-ante ff3m) offers a better explanation of the dispersion of the implied cost of equity observations than the capital asset pricing model (capm) and that there was a significant average absolute difference between the cost of equity estimates of the two models (mishra, thomas, and o'brien, 2018). the actual application of the ex-ante ffm model on the capital market of serbia can be the subject of future research in addition to the apt model as a potential predictor of future share prices. in addition to the capm model, the so-called arbitrage model (apt) is widely used in the valuation of shares, which, unlike the capm model, takes into account various other variables in the analysis of the value of shares. the underlying premise of capm is fairly difficult to accept when taken literally. contrarily, apt is slightly less demanding than capm in terms of fundamental presuppositions, but it is significantly less precise in its outcomes because it does not identify the model's input variables (brandimarte, 2017). in the basic assumptions of the capm model, we noticed the application of the beta coefficient, which is a measure of systemic risk, or that risk that cannot be eliminated by diversification, which, together with the market premium, is used to value shares. an alternative to this model is the apt model, which in its application takes more dependent variables that can have an impact on price formation. the apt model mainly takes into account macroeconomic factors such as gdp (gross domestic product), unemployment rate, inflation rate or cpi (consumer price index), external debt as well as certain internal factors such as trading volume on the stock exchange itself. table 7 correlation model belexline belexline 1 trading volume 0.70383886 gdp 0.462281296 gdp per capita 0.526415086 unemployment (%) -0.916047487 gross external dept 0.557048549 cpi 0.797684042 source: author’s calculation in the analysis, we take exactly these factors collected for the period from 2011 to 2021, and, using correlation methods, we establish the connection of certain variables with the price movement of the belexline stock market index. in table no. 7 we observe a significant correlation between the cpi index and the unemployment rate with index price movements. in the case of the cpi index, there is a positive correlation, while there is a negative but strong correlation with the unemployment rate. there is also a noticeable positive correlation between trading volume and share price growth. with the help of the analysis, we notice that the prices of shares on the belgrade stock exchange are influenced by other factors. since the analysis of these factors does not represent a problem of this research, we suggest that future deeper analysis of the effects of these factors can contribute to the establishment of a more precise model of the predictability of stock valuation on the belgrade stock exchange. testing of applicability of the capm model using selected stocks listed on the belgrade stock exchange 195 5. conclusion using the assumptions of the capm model, in this study we tried to test its actual applicability on the example of selected shares listed on the belgrade stock exchange. using a long time series, we aimed for the greatest possible precision of the model itself. it was determined that there is a negative market premium on the financial market of the republic of serbia, which means that it pays more for investors to invest money in bonds (as a representative of risk-free return) than in shares listed on the stock exchange. due to the violation of this assumption of the capm model, which states that the market premium represents the market return above the risk-free market, we must conclude that the applicability of the capm model as a predictor of future stock returns is not valid. the serbian financial capital market is still an emerging market with a small number of shares in circulation and a small volume of total transactions. we noticed that the actual stock returns in the sample differed significantly from those assumed by the capm model. also, based on the obtained results, we could conclude that the biggest limitation of this research is the examination of the variable covered by the capm model. the significance of the research is reflected in the knowledge that the basic assumptions of the capm model cannot be applied 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(2008). finansijski menadžment, poslovne finansije [financial management, business finance]. proleter, ekonomski fakultet u subotici. belgrade stock exchange, retrieved from: https://www.belex.rs/trgovanje/indeksi/belexline/korpa, accessed on: 3 june 2022. assignment point, retrieved from: https://assignmentpoint.com/security-market-line-sml/, accessed on: 02 june 2022. https://doi.org/10.1080/15339114.2017.1297245 https://doi.org/10.19030/%0bjbcs.v6i6.264 https://doi.org/10.19030/%0bjbcs.v6i6.264 https://doi.org/10.1080/15475778.2019.1641394 https://doi.org/%0b10.22190/fueo190828007j https://doi.org/%0b10.22190/fueo190828007j http://www.aiscience.org/journal/ajefm https://doi.org/%0b10.5261/2015.gen3.01 https://doi.org/%0b10.5261/2015.gen3.01 https://doi.org/10.2307/1924119 https://doi.org/10.2307/%0b2975974 https://doi.org/10.2307/%0b2975974 https://doi.org/10.1016/j.jeconbus.2018.08.002 https://doi.org/10.2307/%0b1910098 https://doi.org/10.2307/%0b1910098 https://hrcak.srce.hr/132838 https://doi.org/10.2307/3216804 https://doi.org/10.1504/gber.2016.078682 https://doi.org/10.22190/fueo191016002s https://doi.org/10.2139/ssrn.3539080 http://www.iaeme.com/ijciet/issues.asp?jtype=ijciet&vtype=9&itype=9 https://doi.org/10.2307/2977928 https://www.belex.rs/trgovanje/indeksi/belexline/korpa https://assignmentpoint.com/security-market-line-sml/ testing of applicability of the capm model using selected stocks listed on the belgrade stock exchange 197 ispitivanje primenljivost capm modela korišćenjem odabranih akcija koje se kotiraju na beogradskoj berzi jedan od osnovnih vidova procene portfolija kao i vrednovanja pojedinačnih akcija preduzeća je capm (capital asset pricing) model, koji u svojoj analizi koristi dobro poznatu meru sistemskog rizika, a to je beta. capm model u svojoj analizi koristi vezu između mere sistemskog rizika (beta) i očekivanog tržišnog prinosa. rukovodeći se ovim modelom, u ovom istraživanju izvršena je analiza mesečnih prinosa odabranih akcija na beogradskoj berzi u periodu od 2011. do 2021. godine. u istraživanju je beta koeficijent odabranih akcija izračunat uz pomoć kovarijanse tržišnog prinosa i prinosa akcija. rezultati i njihova statistička vrednost potvrđeni su testom linearne regresije. ostatak istraživanja testira primennjivost capm modela na odabrane radnje i na isti način se izvodi sml (linija tržišta bezbednosti), koja predstavlja grafički prikaz modela. istraživanje je pokazalo da osnovne pretpostavke capm modela nisu primenljive kao prediktor budućih očekivanih prinosa odabranih akcija na beogradskoj berzi zbog raznih drugih elemenata koji utiču na kretanje cena i prinose odabranih akcija koje nisu obuhvaćene modelom. ključne reči: capm model, beta koeficijent, beogradska berza, belexline 11308 facta universitatis series: economics and organization vol. 20, no 1, 2023, pp. 53 69 https://doi.org/10.22190/fueo221121005r © 2023 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper long-range correlations and cryptocurrency market efficiency1 udc 336.7:004]:336.76 jelena radojičić, ognjen radović university of niš, faculty of economics, niš, republic of serbia orcid id: jelena radojičić https://orcid.org/0000-0003-3444-0138 ognjen radović https://orcid.org/0000-0001-7428-565x abstract. this paper examines the market efficiency of the most significant cryptocurrencies, bitcoin and ethereum. in the paper, we use several different tests to check the normality of return distribution, long-run correlation and heteroscedasticity of return volatility. we compare the characteristics of cryptocurrency returns with the returns on stocks of the most important companies producing hardware components for cryptocurrency mining. the correlation of returns, trading volume and volatility between cryptocurrencies and selected stocks is tested using a granger causality test. the research results reject the efficient market hypothesis and show that the cryptocurrency market is a completely new speculative market that is weakly correlated with the stock market. key words: efficient market hypothesis, cryptocurrency markets, random walk hypothesis, the long-run correlations. jel classification: g14, g15 introduction cryptocurrencies are not issued by monetary authorities, but are privately issued money based on cryptographic algorithms; they are not legal tender, they have not reached the status of a generally accepted means of payment, and they may face a limited supply due to the limitation of the total available amount or the annual amount which can be “mined”. the creation and transfer of cryptocurrencies is based on the blockchain technology where each block contains transactions, a time stamp, a digital signature to identify the account and a unique received november 21, 2022 / accepted march 06, 2023 corresponding author: jelena radojičić faculty of economics, trg kralja aleksandra 11, 18000 niš, republic of serbia | e-mail: jelena.radojicic@eknfak.ni.ac.rs https://orcid.org/0000-0003-3444-0138 https://orcid.org/0000-0001-7428-565x mailto:jelena.radojicic@eknfak.ni.ac.rs 54 j. radojičić, o. radović identification link (van der auwera et al., 2020). investors treat cryptocurrencies as an asset and see them as an investment alternative for investing savings, as a way to diversify a portfolio or as an asset for speculation (elliott & de lima 2018). after the success of bitcoin, other cryptocurrencies appeared, but bitcoin maintained its dominant position on this market. bitcoin and ethereum have the largest share of the total market capitalization on the cryptocurrency markets. in early 2017, the share of bitcoin in total market capitalization was about 85%, and in late 2021, the share of bitcoin was 40.21%, and ethereum's 20.03% (coinmarketcap, 2022). the cryptocurrency market is continuously developing and the popularity of cryptocurrencies is growing, which increases the volume of trading, and with it, interest in its effectiveness. the aim of this paper is to check the market efficiency of the most important cryptocurrencies, bitcoin and ethereum. we compare the characteristics of cryptocurrency returns with the stock returns of the most important companies producing hardware components for cryptocurrency mining, intel, amd, nvidia and tsmc. also, the sp500 index is used as a proxy for global market trends. the paper is organized as follows: the theoretical framework is presented in the first part of the paper. the second part of the paper presents an overview of literature. research methodology and results are presented in the third part of the paper. finally, the conclusion of the research is given in the fourth part of the paper. 1. theoretical framework 1.1. efficient market hypothesis examining the efficiency of the cryptocurrency market is based on the efficient market hypothesis (emh). fama (1970) uses the term “efficient” to describe a market where “prices always fully reflect available information” but ignores the costs of obtaining and processing information. in his later paper, fama (1991) modifies the emh to make the simplest but economically reasonable statement that the prices of securities at any point in time fully reflect all available information to the extent that the profit based on that information does not exceed the cost of obtaining the information and transaction costs. when stock prices satisfy this claim, market participants cannot make above-average profits based on available information. within emh, three sub-hypotheses of information efficiency can be distinguished, namely weak, semi-strong and strong form of emh (fama, 1970). the mentioned emh forms differ in the information set and the perception of the information flow speed, that is, the speed and ability of the investor to adequately interpret the information. the weak form of emh assumes that current stock prices reflect all the information that has already been generated on the market at a given moment (historical prices, returns, volatility, etc.). investors cannot make above-average profits based on historical market information, but they can create “above-average” returns by looking for private information that is not yet available to the market and trading in it at times when its appearance disrupts the market. the semi-strong form of emh assumes that the price of stocks quickly adjusts to all public information, which, in addition to market information, includes non-market information such as announcements of dividends, various coefficients (p/e, d/p, p/bv, etc.), companies’ financial statements, competition, macroeconomic factors (inflation, unemployment), etc. long-range volatility correlations and the inefficiency of cryptocurrency markets 55 the strong form of emh assumes that stock prices at any point in time fully reflect all available information (from public and private sources). no investor has monopolistic access to “sensitive” information, that is, there is no “superior” investor. 1.2. random walk theory the efficient market hypothesis evolved from the random walk theory. when the term random walk is applied to stock markets, it means that short-term changes in stock prices cannot be predicted. the random walk model and the submartingale represent two basic cases of the fair game model that describes expected sequences of price changes. the correlation of stock returns rt at time t and rt+k at time t+k is expressed by their covariance. on an efficient market, with an appropriate choice of f(∙) and g(∙), ( ), ( ) 0t t kcov f r g r + =   (1) for each t and k ≠ 0, where f(∙) and g(∙) are arbitrarily chosen functions. equation (1.5) includes all versions of the random walk and martingale models. campbell et al. (1997) consider three random walk models: rw1, rw2 i rw3. rw1 model (“independently and identically distributed returns”) implies that the increase in prices is independently and identically distributed (iid), and in that case the process pt is pt = μ + pt-1 + et, et ~ iid (0,σ 2) (2) where  is the expected price change or drift. the price increase (innovation) et is independently and identically distributed with mean zero and variance 𝜎 2, denoted iid(0, 𝜎 2). rw2 (“independent returns”) further relaxes the assumption of identical distribution and allows heteroscedasticity to appear in the innovation et, i.e. it allows time variability of the variance in the time series of stock returns. rw3 (“uncorrelated returns”) relaxes the assumption of independence of returns by introducing the possibility of dependence but not correlation of price innovations et. this is the weakest form of the random walk hypothesis and contains rw1 and rw2 as special cases. 1.3. long-range correlations in the case of a weak form of efficiency, investors cannot profit above average based on historical market information. however, if the presence of long-term memory in returns on financial assets allows investors to make above-average profits, then the hypothesis of a weak form of market efficiency is not supported. if we proceed from the assumption that cryptocurrency returns may not be independent and identically distributed, checking the existence of long-range correlations in the observed data must be done with some of the non-parametric tests. hurst (1951) developed a robust r/s (rescaled range) non-parametric methodology for distinguishing between random and non-random series. r/s statistic is the range of partial sums of deviations of a time series from its mean, rescaled by its standard deviation (peters, 1994): (𝑅/𝑆)𝑛 = 1 𝑆𝑛 [ max 1≤𝑘≤𝑛 ∑(𝑟𝑡 − �̅�𝑛 ) − 𝑚𝑖𝑛 1≤𝑘≤𝑛 ∑(𝑟𝑡 − �̅�𝑛 ) 𝑘 𝑡=1 𝑘 𝑡=1 ] = 𝐶𝑛𝐻 (3) 56 j. radojičić, o. radović where 𝑟𝑡 is calculated as 𝑟𝑡 = ( (𝑥1 − �̅�) + (𝑥𝑡 − �̅�)) and �̅� denotes the mean of a time series of length n. the h exponent in the relation (3) is the hurst exponent, rn is the adjusted range 𝑆𝑛 is its standard deviation and c is a constant. if h=0.5, the observed series follows a random walk. if 0.5<h<1, observed series shows persistence and long memory. in the case that 0<h<0.5, the observed series shows the existence of anti-persistence, generating reversals much more often than a random walk. using the results of multifractality research in financial time series, the inefficiency index can be defined as follows (gu et al., 2013): 𝐼𝑛𝑓𝑓𝐼𝑑𝑥 = |𝐻(2) − 0.5| (4) where h(2) is the hurst exponent calculated by mf-dfa when q = 2. if h (2) > 0,55 or h (2) < 0,45 then we assume that the market is inefficient. 2. review of literature the first research on the efficiency of the bitcoin market shows its inefficiency, but also that this inefficiency decreases over time (urquhart, 2016). the results of a portion of subsequent studies also do not support the emh for the cryptocurrency market (cheah et al., 2018; al-yahyaee et al., 2018; vidal-tomás et al., 2019) suggesting that cryptocurrency returns are not independent but predictable. some authors, however, find evidence of cryptocurrency market efficiency (for example, bariviera et al., 2017; tiwari et al., 2018; dimitrova et al., 2019, mnif et. al, 2020). tiwari et al. (2018) apply the market efficiency index based on the time-varying hurst exponent and conclude that the bitcoin market is efficient. bariviera et al. (2017) apply detrended fluctuation analysis (dfa) over a sliding window to calculate the hurst exponent and find that the hurst exponent significantly changes during the first years of bitcoin’s existence, with a tendency to stabilize since the beginning of 2014 around a value of 0.5 ± 0.05 which indicates a more informationally efficient market. assuming that the efficiency of the cryptocurrency market changes over time, some authors base their research on the adaptive market hypothesis (amh), and their results support amh on these markets (chu et al., 2019; khuntia & pattanayak; 2018, noda; 2021). the majority of studies focus on the bitcoin market, while some examine market efficiency and multiple cryptocurrencies. noda (2021) focuses his research on the bitcoin and ethereum markets and finds that the degree of their efficiency changes over time and that the level of efficiency on the bitcoin market is higher than on the ethereum market. caporale et al. (2018) investigate long-memory behavior in the returns of several cryptocurrencies (bitcoin, litecoin, ripple and dash) and find evidence of market inefficiency. vidal-thomas et al. (2019) find market inefficiency by applying a portfolio approach to investigate the market efficiency of 118 cryptocurrencies. mnif et al. (2022) conclude that the bitcoin market is the most efficient on the short trade horizon. long-range volatility correlations and the inefficiency of cryptocurrency markets 57 3. methodology and research results 3.1. data and descriptive statistics in this paper, we analyze the logarithmic returns of the two most important cryptocurrencies: bitcoin (btc) and ethereum (eth). a comparison with the properties of the financial series of stock price trends is made regarding the amd (amd), intel (intc), nvidia (nvda) and tsmc (tsmc) stocks. in addition, the stock market index s&p500 (sp500) is used as an indicator of market trends. daily prices of cryptocurrencies (bitcoin and ethereum) expressed in us dollars are taken from the coinbase website. the daily prices of the observed stocks are taken from the yahoo!finance website. data on all series are in the interval from 04/01/2017 31/12/2021 (1258 observations). table 1 descriptive statistics of logarithmic returns amd btc eth intc nvda tsmc sp500 descriptive statistics mean 0.002 0.003 0.005 0.000 0.002 0.001 0.001 median 0.001 0.003 0.003 0.001 0.003 0.001 0.001 maximum 0.182 0.258 0.410 0.178 0.164 0.119 0.090 minimum -0.277 -0.368 -0.323 -0.199 -0.208 -0.151 -0.128 std. dev. 0.035 0.050 0.068 0.022 0.030 0.020 0.012 skewness -0.243 -0.500 0.193 -0.872 -0.595 -0.182 -1.145 kurtosis 8.919 8.239 7.303 18.935 9.248 8.508 24.923 nonnormality test jarque-bera (cv=5.9433) 1849.05 6 1491.363 978.527 13468.910 2120.322 1597.366 25466.460 p-val 0.000 0.000 0.000 0.000 0.000 0.000 0.000 kolmogorov-smirnov (5%) (cv=0.0381) 0.454 0.439 0.421 0.466 0.463 0.472 0.479 p-val 0.000 0.000 0.000 0.000 0.000 0.000 0.000 unit root tests augmented dickey-fuller test statistic -37.756 -36.025 -35.154 -19.108 -39.789 -42.271 -10.606 p-val 0.000 0.000 0.000 0.000 0.000 0.000 0.000 phillips-perron test statistic -37.874 -36.152 -35.352 -43.550 -39.658 -42.065 -44.314 p-val 0.000 0.000 0.000 0.000 0.000 0.000 0.000 kpss-kwiatkowskiphillips-schmidt-shin test statistic 0.071 0.110 0.282 0.181 0.181 0.117 0.079 unit root with break test -38.548 -36.981 -36.001 -44.802 -40.509 -43.655 -45.249 break date: 5/2/2017 3/12/2020 6/12/2017 3/12/2020 11/19/2018 7/27/2020 1/25/2017 random walk hypothesis/variance/heteroskedasticity test variance ratio test 2.032 0.893 0.854 2.579 1.584 3.085 2.409 p-val 0.158 0.844 0.864 0.039 0.382 0.008 0.063 rank score variance ratio test 2.791 1.701 1.584 4.277 2.717 4.709 3.594 p-val 0.012 0.206 0.243 0.000 0.018 0.000 0.001 sign variance ratio test 2.621 3.907 1.748 1.012 3.214 1.353 1.410 p-val 0.031 0.001 0.185 0.596 0.011 0.374 0.727 arch test (a=0.01, lag=10, cv=23.209) 27.567 17.990 76.636 283.897 283.897 299.319 543.390 p-val 0.002 0.055 0.000 0.000 0.000 0.000 0.000 nonlinearity test bds (dim=6, s=1.0) 0.020 0.024 0.026 0.062 0.033 0.033 0.143 p-val 0.000 0.000 0.000 0.000 0.000 0.000 0.000 source: authors’ calculations 58 j. radojičić, o. radović table 1 shows the descriptive statistics of the logarithmic returns of the cryptocurrencies bitcoin (btc) and ethereum (eth), as well as the returns of selected financial series. the table clearly shows, based on the values of the maximum and minimum values, as well as on the basis of the standard deviation, that the returns on cryptocurrencies are significantly higher compared to the selected stocks and significantly higher than the returns on the sp500 market index. the median for cryptocurrencies is lower than the mean, which indicates the presence of positive deviations. on the other hand, for the selected returns (except for amd), the median is higher than the mean, which shows that in the observed period, the stocks of the selected companies and the sp500 index have more negative deviations. taking into account the difference of the highest and lowest values, as well as the value of the standard deviation, the cryptocurrency ethereum (eth) has the most volatile behavior. the returns of all series show a significantly higher value of the coefficient of kurtosis than expected for a normal distribution of returns, indicating that the distributions of returns are likely to have fat tails. the kurtosis of cryptocurrencies is slightly lower than that in selected stocks, and significantly lower than intel (intc) and sp500. the coefficient of skewness of daily returns is positive for all series except for ethereum (eth). this positive skewness is generally not present in stock markets. fig. 1 cumulative sum of logarithmic returns source: authors’ calculations figure 1 shows the cumulative returns of the selected time series in the observed period. during the entire observed period, the returns on cryptocurrencies are significantly higher than the returns on selected stocks and the sp500 index. in addition, cryptocurrencies have an upward trend from the beginning of 2017 to the end of 2017, and from may 2020 to the end of 2021. from 2018 to may 2020, returns are mostly negative. there is similar behavior on the stock market since may 2020. long-range volatility correlations and the inefficiency of cryptocurrency markets 59 a) bitcoin – price-return, volume, volatility b) ethereum – price-return, volume, volatility fig. 2 graphical presentation of price and returns, trading volume and volatility for cryptocurrencies: a) bitcoin (btc) and b) ethereum (eth) source: authors’ calculations 3.2. test of normality of distribution of returns checking the normality of return distribution can be done using various statistical tests. one of the most famous is the jarque-bera test (jarque and bera, 1987), which is based on coefficients of skewness and kurtosis. the kolmogorov-smirnov test is based on the analysis of the deviation of the empirical cumulative distribution of the sample from the normal distribution. both tests clearly reject the null hypothesis of normality of the daily return distribution of the selected financial time series (table 1). figure 3 shows the 60 j. radojičić, o. radović histograms of bitcoin and ethereum cryptocurrencies, which clearly graphically show the deviation of the distribution of log returns from the expected normal distribution. both tests clearly reject the null hypothesis of normality of the daily return distribution of the selected financial time series (table 1) a) btc b) eth fig. 3 histograms of cryptocurrencies compared to normal distribution 3.3. tests of stationarity of returns testing the stationarity of the returns of the selected series is done using the augmented dickey-fuller (adf) and phillips-perron (pp) tests. the null hypothesis of these tests is that the time series is non-stationary. table 1 shows that the null hypothesis is rejected at the 1% significance level because the p-value for the adf and pp test is less than 0.01, indicating that the process is stationary. the null hypothesis for the pp test is that the observed series has a unit root. for the kpss test, the null hypothesis is that the observed series is stationary. the tests (table 1) clearly show (with 5% statistical significance) that all observed series do not have unit roots and are stationary. for all series (except ethereum) weak stationarity cannot be rejected. 3.4. power law of distribution of returns the random variable x shows the properties of the power law of the tail distribution if there are constants a and λ so long-range volatility correlations and the inefficiency of cryptocurrency markets 61 𝑃(𝑋 > 𝑥) ~𝑥 −𝛼 , 𝑥 ≥ 𝑥𝑚𝑖𝑛 (5) where α is the power coefficient. the correlation is tested using a log-log plot of the tail of the distribution (𝑋>𝑥). linear regression log(𝑃(𝑋>𝑥)) against log(𝑥) gives coefficient α. as the law is directed towards the tail of the distribution, the regression is calculated only for values of x that exceed some given threshold (xmin). the presence of a power law distribution of returns has been observed in the stock market (gabaix et al., 2003). figure 4(a) shows the power law for the selected set of stocks. also, figure 4 (b,c) shows the power law for positive and negative log returns of bitcoin and ethereum cryptocurrencies. a) power law distribution of selected time series a) btc b) eth fig. 4 power law distribution of cryptocurrencies. a) distribution of returns of selected time series; b) distribution of positive and negative log returns of bitcoin (btc); c) distribution of positive and negative log returns of ethereum (eth) source: authors’ calculations 62 j. radojičić, o. radović 𝑃(𝑋 > 𝑥) ~𝑥 −𝛼 , 𝑥 ≥ 𝑥𝑚𝑖𝑛 the estimation of parameters α and xmin is based on the procedure described by clauset, shalizi, newman (2007). the results are shown in table 2 for all log returns of the selected series. in addition, the results for the distribution of positive returns and negative returns are shown separately. finally, the range between the slopes of positive and negative returns is given (range=|α (+)-α (-)|). research results show that cryptocurrencies have similar dynamics to the stock market (parameter α is close to 3). the difference between the negative and positive tails of the distribution is significant, but similar to stock market behavior. however, significantly lower than the global market represented by the sp500 index. table 2 power law parameters for selected data series. (+) and (-) indicate coefficients for positive log returns and negative log returns, respectively. power law distribution (p(x) ~ x-α for x >= xmin)  xmin α (+) xmin (+) α (-) xmin (-) range amd 2.80475 0.72892 2.45786 0.50282 2.90595 0.72892 0.44808 btc 2.85607 0.78591 3.07467 0.84342 2.74668 0.78593 0.32799 eth 2.94765 0.91062 2.69633 0.68397 2.99773 0.92091 0.30140 intc 3.09913 0.91523 3.13352 0.84037 3.13837 0.96179 0.00485 nvda 3.53004 1.15357 2.95134 0.75291 3.14708 1.03856 0.19574 tsmc 3.20485 0.95544 3.12442 0.93705 3.26226 0.95544 0.13784 sp500 2.96575 0.98602 3.22375 0.78258 2.31110 0.48015 0.91265 source: authors’ calculations 3.5. serial correlation of returns the efficient market hypothesis assumes that there is no significant serial autocorrelation of returns. the autocorrelation function of returns drops to zero very quickly and is one of the first documented stylized facts that gives indirect support to the emh. to check serial correlation, we use the ljung-box q-test, which tests the null hypothesis that all autocorrelation coefficients are equal to zero. the test is also used to check for randomness in time series. the test results are shown in table 3. the table shows that despite the high statistical value, the null hypothesis can be accepted. 3.6. serial correlation of volatility figure 1 clearly shows that the returns of both cryptocurrencies show periods where high and low returns are clustered together indicating volatility clustering. the previously mentioned ljung-box q-test and engle's arch test are used to test the null hypothesis of the absence of significant serial autocorrelation of volatility. in contrast to returns, the ljung-box q-test of the absolute value of returns and squared returns of the selected financial series strongly rejects the null hypothesis and indicates a significant temporal correlation of volatility (table 3). the arch test examines the existence of clustering of volatility (heteroscedasticity) in time series. like the previous test, the arch long-range volatility correlations and the inefficiency of cryptocurrency markets 63 test strongly rejects the null hypothesis of no volatility correlation (table 3). it is a general observation that the volatility of financial series is clustered and persistent. also, there is an asymmetry in volatility, with some stocks volatility more sensitive to negative returns (takaishi, 2018). table 3 results of ljung-box q-test of serial correlation of returns (r), absolute value of returns (|r|) and square of returns r2, and arch of existence of heteroscedasticity in the data. ljung-box q-test (cv=18.3070) arch (cv=18.3070) r |r| r2 q-test p-val q-test p-val q-test p-val stat p-val amd 30.131 0.000 95.870 0.000 36.886 0.000 27.566 0.000 btc 13.118 0.217 133.206 0.000 25.144 0.005 17.990 0.005 eth 19.203 0.038 154.245 0.000 102.722 0.000 76.6360 0.000 intc 138.601 0.000 682.162 0.000 472.631 0.000 283.897 0.000 nvda 54.662 0.000 397.421 0.000 235.553 0.000 129.562 0.000 tsmc 95.219 0.000 488.278 0.000 520.639 0.000 299.319 0.000 sp500 363.258 0.000 2491.000 0.000 1756.100 0.000 543.389 0.000 source: authors’ calculations based on the arch test, we conclude that returns are variable and choose the gjrgarch (glosten-jagannathan-runkle garch) model for volatility modeling. the econometric literature is rich in various models from the arch/garch family (bollerslev, 1992). in this paper, we use gjr-garch(1,1) to estimate the conditional mean and variance of returns on selected time series assuming a t distribution of returns. the assumed gjr-garch (1,1) process can be expressed as follows: 𝑟𝑡 = 𝜇 + 𝜀𝑡, 𝜀𝑡 = 𝜎𝑡𝑧𝑡 (6) 𝜎𝑡 2 = 𝜔 + (𝛼 + 𝛾𝐼𝑡−1)𝜀𝑡−1 2 + 𝛽𝜎𝑡−1 2 (7) 𝐼𝑡−1 ∶= { 0 if 𝑟𝑡−1 ≥ 𝜇 1 if 𝑟𝑡−1 < 𝜇 (8) table 4 gives the specifications of the gjr-garch(1,1) model for the selected time series. all estimated gjr-garch coefficients are statistically significant. table 4 parameters of gjr-garch(1,1) model for selected time series gjr-garch(1,1)-t ω β α γ amd 0.00007 0.88166 0.05415 0.04188 btc 0.00003 0.92046 0.09529 -0.03152 eth 0.00032 0.82304 0.17377 -0.04015 intc 0.00001 0.91383 0.12578 -0.07923 nvda 0.00009 0.73457 0.07570 0.21101 tsmc 0.00001 0.88769 0.07964 0.03606 sp500 0.00000 0.77255 0.04105 0.37279 source: authors’ calculations 64 j. radojičić, o. radović since the value of the garch coefficient (β) is greater than the value of the arch coefficient (α), we can conclude that volatility is very persistent and clustered. a high value of the garch coefficient (β) implies persistent volatility clustering. the existence of leverage effect (γ), indicates that negative news has a greater impact (γ >0) in amd, nvda, tsmc, sp500, while positive news has a greater impact (γ <0) in btc, eth, intc. that is, cryptocurrency volatility is more sensitive to positive news. 3.7. non-linearity test the presence of non-linearity in the data can be checked using various tests; however, most empirical research on financial time series uses the brock-dechert-scheinkman test (bds test) (brock et al., 1996). this test is based on the serial independence check of the correlation integral and serves as an indirect proof of the existence of nonlinearity in the sample of the unknown distribution of the time series. that is, it serves to distinguish random time series from non-linear stochastic processes. the null hypothesis about the iid process is rejected when the value of the bds statistic is greater than the given critical value for the given confidence interval (1.645 (90% ci), 1.960 (95% ci), 2.326 (2% ci) and 2.576 (99% ci)). bds test statistics show significantly higher values than the critical value (cv=1.960) of the selected time series so that the null hypothesis about the iid process can be rejected. table 1 shows only the results for the embedding dimension dim=6 and s=1.0. these results strongly suggest the potential existence of non-linear dependence in the selected time series. 3.8. long-run correlation test checking the existence of long-term correlation of cryptocurrency returns and selected stock returns is based on the hurst exponent and is shown in table 5. to estimate the hurst exponent, the mfdfa (multifractal detrended fluctuation analysis) method is used for different scales of the observed time series (scale = [16, 32, 64, 128, 256, 512]), taking into account different degrees (q) of the partition function. the table shows the results for q=2 used to estimate the index of market inefficiency (inffidx). hurst's h(2) exponent is significantly higher than 0.55, that is, inffidx is significantly higher than zero for both cryptocurrencies, which indicates that the cryptocurrency market is inefficient. however, individual stocks (amd) and the market index sp500 also show inefficiency. the range between the highest and lowest values for the hurst exponent (range) shows that during the observed interval all time series had variable exponent values and had periods of high market efficiency. for the sake of comparison, table 5 also shows the standard estimate for the hurst exponent using the r/s analysis method. and its values for cryptocurrencies are significantly higher than the 0.5 expected for normally distributed data and an efficient market. table 5 results of testing the long-term correlation in the data and the index of inefficiency h(2) inffidx min hurst max hurst range r/s hurst amd 0.58917 0.08917 0.21618 0.81897 0.60279 0.46130 btc 0.59947 0.09947 0.31394 1.02880 0.71486 0.61250 eth 0.62955 0.12955 0.28887 0.95359 0.66472 0.66690 intc 0.52057 0.02057 0.19280 0.87512 0.68232 0.46640 nvda 0.50463 0.00463 0.19871 0.77676 0.57805 0.53150 tsmc 0.49650 0.00350 0.17906 0.79443 0.61537 0.50700 sp500 0.57306 0.07306 0.05215 0.88239 0.83024 0.45320 source: authors’ calculations long-range volatility correlations and the inefficiency of cryptocurrency markets 65 3.9. correlation between series table 6 shows the return correlation coefficients between cryptocurrencies and selected stocks. all correlations have a statistical significance of 1% (p-value less than 0.001) and all are positive. bitcoin (btc) and ethereum (eth) show a high positive correlation during the observed period (r=0.665) which indicates that cryptocurrency returns have similar behavior and that the cryptocurrency market as a whole is moving in the same direction. note that a large number of other cryptocurrencies are purchased using bitcoin or ethereum. table 6 correlation results of cryptocurrencies, selected stocks and sp500 index. correlations greater than 0.5 are marked in red correlation amd btc eth intc nvda tsmc sp500 amd 1 btc 0.10460 1 eth 0.09263 0.66518 1 intc 0.35295 0.14118 0.11647 1 nvda 0.64016 0.15930 0.15554 0.53257 1 tsmc 0.47279 0.09446 0.11301 0.51571 0.59454 1 sp500 0.50012 0.18567 0.18850 0.67673 0.65033 0.62876 1 source: authors’ calculations correlations of cryptocurrencies and selected stocks and the sp500 index show a positive but small correlation. however, a high positive correlation exists among the selected stocks, especially with the market trend as a whole represented by the sp500 index. all stocks are highly positively correlated with each other as well as with the sp500 index. the correlation between intel (intc) and amd is positive but not that high. the results indicate that the behavior of cryptocurrencies differs from the behavior of the stock market. 3.10. granger correlations one way of testing statistical causality between stationary time series is the granger causality test (granger, 1969). causality refers to the time sequence between observed series. according to the test, if the past values of the potentially causal variable (data series) better predict the current (lagged) value of the dependent variable (time series) than the past values of the dependent variable itself, we say that the hypothesized explanatory variable granger-causes the hypothesized dependent variable. granger causality is based on the generally accepted observation that a cause occurs before its effect. granger tests the null hypothesis that there is no evidence of a causal relationship. if the null hypothesis is rejected with statistical significance, we conclude that there is causality in the tested direction. then the test is repeated in the opposite order, to see if there is causality between the two variables in the opposite direction. the f-statistic shown is the wald statistic for the null hypothesis. table 7 shows the results of granger causality testing between volatility (vty) and trading volume (vol) of all observed time series. at the 5% significance level, the null hypothesis of mutual granger causality cannot be rejected for all observed time series. the results show that cryptocurrencies do not show differences in volatility behavior and trading volume compared to the stock market. the results are in agreement with earlier research. 66 j. radojičić, o. radović table 7 granger causality test between volatility and trading volume pairwise granger causality tests sample: 1/04/2017 12/31/2021 null hypothesis: f-statistic prob. amdvty does not granger cause amdvol 6.69286 0.0013 amdvol does not granger cause amdvty 190.257 0.0000 btcvty does not granger cause btcvol 14.8545 0.0000 btcvol does not granger cause btcvty 211.535 0.0000 ethvty does not granger cause ethvol 20.763 0.0000 ethvol does not granger cause ethvty 33.7269 0.0000 intcvty does not granger cause intcvol 3.50474 0.0303 intcvol does not granger cause intcvty 155.351 0.0000 nvdavty does not granger cause nvdavol 2.8523 0.0581 nvdavol does not granger cause nvdavty 209.425 0.0000 tsmcvty does not granger cause tsmcvol 5.77802 0.0032 tsmcvol does not granger cause tsmcvty 313.154 0.0000 source: authors’ calculations table 8 shows the results of granger causality testing between returns of all observed time series. the results show that cryptocurrencies do not show a significant correlation with the returns of the listed stocks. however, the results show that there is a granger causality between the movement of stock returns of intel (intc) with all selected stocks and the market movement (sp500). also, market movements (sp500) granger-cause movements in the stock market table 8 granger causality test between cryptocurrency returns and market movements pairwise granger causality tests sample: 1/04/2017 12/31/2021 null hypothesis: f-statistic prob. btc does not granger cause amd 2.78484 0.0621 intc does not granger cause amd 6.51704 0.0015 amd does not granger cause intc 9.58769 0.0000 amd does not granger cause nvda 2.6172 0.0734 sp500 does not granger cause amd 3.86631 0.0212 btc does not granger cause nvda 2.32612 0.0981 btc does not granger cause tsmc 2.74578 0.0646 eth does not granger cause sp500 2.46053 0.0858 intc does not granger cause nvda 12.6769 0.0000 sp500 does not granger cause intc 11.9537 0.0000 intc does not granger cause tsmc 19.4915 0.0000 sp500 does not granger cause nvda 24.2994 0.0000 nvda does not granger cause sp500 3.10401 0.0452 tsmc does not granger cause nvda 3.27035 0.0383 sp500 does not granger cause tsmc 22.5196 0.0000 the table only shows causes that cannot be rejected with a 5% confidence interval (the null hypothesis is not rejected at 5% significant level). source: authors’ calculations the results of testing the granger causality between the trading volume of all observed time series are shown in table 9. the results show that cryptocurrencies show a certain granger long-range volatility correlations and the inefficiency of cryptocurrency markets 67 causality with the trading volume of the selected stocks. the correlation between the trading volume of bitcoin (btc_vol) and the trading volume of nvidia (nvda_vol) and tsmc (tsmc_vol) cannot be dismissed. also, the correlation of ethereum (eth_vol) trading volume with nvidia (nvda_vol) trading volume cannot be dismissed. finally, the trading volumes of bitcoin (btc_vol) and ethereum (eth_vol) are mutually granger related. table 9 granger causality test of trading volume between cryptocurrencies and market movements pairwise granger causality tests sample: 1/04/2017 12/31/2021 null hypothesis: f-statistic prob. intc_vol does not granger cause amd_vol 3.07418 0.0466 eth_vol does not granger cause btc_vol 4.92155 0.0074 btc_vol does not granger cause eth_vol 52.7704 0.0000 nvda_vol does not granger cause btc_vol 11.4048 0.0000 btc_vol does not granger cause nvda_vol 14.4122 0.0000 tsmc_vol does not granger cause btc_vol 4.57452 0.0105 btc_vol does not granger cause tsmc_vol 3.46531 0.0316 nvda_vol does not granger cause eth_vol 15.6268 0.0000 eth_vol does not granger cause nvda_vol 6.37473 0.0018 tsmc_vol does not granger cause eth_vol 3.99406 0.0187 tsmc_vol does not granger cause intc_vol 2.39853 0.0913 intc_vol does not granger cause tsmc_vol 8.66661 0.0002 nvda_vol does not granger cause tsmc_vol 3.05422 0.0475 the table only shows causes that cannot be rejected with a 5% confidence interval (the null hypothesis is not rejected at 5% significant level). source: authors’ calculations table 10 granger causality test of volatility between cryptocurrencies and market movements pairwise granger causality tests sample: 1/04/2017 12/31/2021 null hypothesis: f-statistic prob. amd_vty does not granger cause intc_vty 16.5478 0.0000 nvda_vty does not granger cause amd_vty 3.03975 0.0482 amd_vty does not granger cause nvda_vty 6.85922 0.0011 btc_vty does not granger cause intc_vty 51.1661 0.0000 btc_vty does not granger cause tsmc_vty 2.5083 0.0818 eth_vty does not granger cause intc_vty 6.19997 0.0021 nvda_vty does not granger cause intc_vty 22.0374 0.0000 intc_vty does not granger cause nvda_vty 28.6428 0.0000 tsmc_vty does not granger cause intc_vty 9.66306 0.0000 intc_vty does not granger cause tsmc_vty 56.8068 0.0000 nvda_vty does not granger cause tsmc_vty 4.81175 0.0083 the table only shows causes that cannot be rejected with a 5% confidence interval (the null hypothesis is not rejected at 5% significant level). source: authors’ calculations 68 j. radojičić, o. radović table 10 shows the results of granger causality testing between the volatility of all observed time series. the results show that we cannot reject the causality of bitcoin return volatility (btc_vty) and the volatility of intel (intc_vty) and tsmc (tsmc_vty). also, the correlation of the volatility of ethereum (eth_vty) with the volatility of intel (intc_vty) cannot be dismissed. however, the results show that there is no significant volatility correlation between bitcoin and ethereum. conclusion our research has shown, using various tests, that the null hypothesis about the normality of the distribution of daily returns of the most important cryptocurrencies, bitcoin and ethereum, can be rejected. research results based on the estimation of the parameter α of the power law show that cryptocurrencies have similar dynamics to the stock market and that the difference between the negative and positive tails of the return distribution is significant. the results of tests of serial autocorrelation of volatility indicate a significant temporal correlation of the volatility of cryptocurrencies. the existence of data non-linearity contradicts the efficient market theory and is strongly confirmed by the bds test. additional support for the inefficiency of the cryptocurrency market comes from the hurst exponent and the inefficiency index. the results of testing the correlation and granger causality of cryptocurrency returns, trading volume and volatility show that the cryptocurrency market is a brand new speculative market that is weakly correlated with the stock market. based on all the tests conducted in this research, we can conclude that the cryptocurrency market is inefficient and provides a potential opportunity for investors to predict price trends. in this paper, we did not investigate the strong form of market efficiency and possible 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(2019). weak efficiency of the cryptocurrency market: a market portfolio approach. applied economics letters, 26(19), 1627-1633. https://doi.org/10.1080/13504851. 2019.1591583 dugoročna korelacija i efikasnost tržišta kriptovaluta ovaj rad ispituje efikasnost tržišta najznačajnijih kriptovaluta, bitcoin i ethereum. u radu koristimo više različitih testova za proveru normalnosti distribucije prinosa, dugoročne zavisnosti i postojanja heteroskedastičnosti volatilnosti prinosa. osobine prinosa kriptovaluta upoređujemo sa prinosima akcija najznačajnijih kompanija proizvođača hardverskih komponenti za rudarenje (mining) kriptovaluta. međupovezanost prinosa, obima trgovanja i volatilnosti između kriptovaluta i izabranih akcija izvršena je pomoću granger testa uzročnosti. rezultati istraživanja odbaciju hipotezu o efikasnom tržištu i pokazuju da je tržište kriptovaluta potpuno novo spekulativno tržište koje je slabo korelisano sa tržištem akcija. ključne reči: hipoteza efikasnog tržišta, 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https://doi.org/10.1016/j.econlet.2017.12.006 https://doi.org/10.1016/j.econlet.%0b2016.09.019 https://doi.org/10.1016/j.econlet.%0b2016.09.019 https://doi.org/10.1080/13504851.%0b2019.1591583 https://doi.org/10.1080/13504851.%0b2019.1591583 plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 3, 2017, pp. 255 264 https://doi.org/10.22190/fueo1703255l review paper the impact of big data technologies on competitive advantage of companies 1 udc 004.6:339.137.2 jelena lukić modern business school, belgrade, serbia abstract. the emergence of a large quantity of data, from various sources, available in real-time, known as big data, has stimulated development of new technologies, techniques, tools, knowledge and skills, which enable us to work with this data. big data represents not only a factor from the environment that confronts the companies with an avalanche of data, but also a very imporant resource which provides opportunities for companies to make value on the basis of collected data. characteristics and possibilities which big data technologies offer have positioned them as a valuable factor for gaining and sustaining the competitive advantage of companies. the aim of this paper is to examine the impact of big data technologies on competitive advantage of the companies that use them. key words: big data, big data analytics, competitive advantage, strategic activities, companies jel classification: 033, l21 introduction the development and application of various social networks, smart phones, tablets and intelligent devices connected with sensors have lead to an enormous increase of the volume and variety of data which have become available for processing and analysis in real-time (heisterberg & verma, 2014). all that data were named as „big data” and caused the development of new technologies, techniques and tools that have the possibility to acquire, process, analyze and store them. through history companies have striven to get regular and reliable information, but today in a hyper-networked world, they have realized received february 16, 2017 / accepted june 12, 2017 corresponding author: jelena lukić modern business school, terazije 27, 11000 belgrade, serbia e-mail: jelena.jl.lukic@gmail.com 256 j. lukić the importance of big data for their functioning and started to implement some of the big data solutions. the aim of this paper is to examine the impact of big data technologies on competitive advantage of the companies that use them. the paper is organized as follows. the first two headings are focused on big data definitions, key characteristics, technologies and tools. the fourth and fifth headings are focused on the impact of big data technologies on functioning of companies and on key advantages that companies can gain by using those technologies. 1. big data definition by reviewing the literature, numerous definitions regarding big data can be found (lukić, 2015). one of the most accepted and cited is the mckinsey definition, according to which big data refers to datasets whose size is beyond the ability of typical database software tools to capture, store, manage, and analyze data (manyika et al., 2011, p. 1). however, big data as a concept is not just a matter of size and challenges for working with these data cannot be overcome with larger storage space and proccesors (lukić, 2015). the facts that data are largely semi-structured or unstructured and that these data represent 95% of all new data are often neglected (berman, 2013, p. 2). some authors pointed out that big data represents large quantities of structured, semi-structured and unstructured data that cannot be placed in relational databases (rouse, 2014), while others stated that big data represents data sets whose size and complexity need innovative and special approaches for storing, managing, processing, analyzing and visualization of these data (chen et al., 2012). some attributes that need to exist in order to name data as big data are determined over time. these attributes vary from author to author, but there is a consensus among all the authors around three attributes, popularly known as 3vs: volume, variety and velocity (mcafee & brynjolfsson, 2012; minelli et al., 2013). volume is the huge amount of data that companies are trying to use in order to improve the decision making process across the enterprise. nowadays, companies measure their collected data in terabytes, petabytes and zettabytes, and there are estimations that people create 2.5 quintillion bytes of data on a daily basis (walker, 2015). variety, as the second attribute of big data, refers to different types of data because data are available from numerous sources (social networks, digital tv, credit cards, medical devices, sensors, bar codes, smart phones, tablets, etc.) and can be structured, semi-structured and unstructured (minelli et al., 2013; kudyba & kwatinetz, 2014). the third attribute of big data, velocity, is the speed at which data are created, processed and analyzed and reflects the need for real-time decision making on the basis of collected data (mcafee & brynjolfsson, 2012; minelli et al., 2013). beside these three attributes of big data, some authors propose volume as the fourth „v“ in the sense that there can be revealed significant values for companies through analysis of data, while some other authors propose veracity which refers to questions of consistency, relevance and quality of all available data (schroeck et al., 2012). it is important to acknowledge that big data is not just one of the newest trends in information and communication technologies, but a significant and valuable factor of competitiveness of any company which is surrounded by an avalanche of data (nerney, 2013; hagen et al., 2013). in practice, there are no industries or sectors that are immune the impact of big data technologies on competitive advantage of the companies 257 to big data, because everything we do now leaves a digital trace – data that can be used (marr, 2015). a few events gave legitimacy and significance to big data. mckinsey institute pubslished a report „big data: the next frontier for innovation, competition and productivity“ in 2011, the world economic forum held a conference „big data, big impact: new possibilities for international development“ in 2012, while in the last couple of years a large number of books regarding big data impact on productivity and competitiveness of companies has been published (mayer-schönberger & cukier, 2013; van rijmenam, 2014; wasterman et al., 2014; marr, 2016). simultaneously, big data has become the subject of numerous media (the economist, new york times, national public radio), leading publishers have introduced new journals regarding big data topics [journal of big data (springer), big data research (elsevier), big data and society (sage), international journal of big data intelligence (interscience publishers)], while existing journals frequently publish calls for papers regarding big data technologies (journal of organization design, journal of information systems and e-business management, journal of biomedical and health informatics, etc.). meanwhile, conferences on big data started to be organized worldwide, but also in our region. 2 in just a few years, big data as a concept has entered the scene and become the subject of interest of countries, academics, communities, individuals. the number of faculties, educational institutions and consulting companies which offer different educational programs and trainings in the field of big data is also increasing. because of all of this, big data technologies have found their place not just in theory, but also in practice. 2. big data technologies and techniques there are a number of technologies that are developed to work with big data. it is believed that at the beginning of the 2000s google developed tools for big data and encouraged the emergence of other technologies and tools that enable collection, processing, analysis and storage of large quantities of different types of data in real-time in a more economical way (heisterberg & verma, 2014). some of these technologies are new, while some of them already existed but were upgraded in order to be able to work with big data. different authors classify big data technologies in different ways. there is no single list of all available technologies for working with big data because their number is constantly changing there are new technologies almost every day. also, a lot of these technologies overlap or are interdependent. without intending to cover all existing technologies for working with big data, in table 1 are presented some of them, according to joshi who classified those technologies into several segments – big data platforms, databases, business intelligence, data mining, file systems, programming languages, search, aggregation and transfer of data. 2 significant conferences and forums devoted to big data were organized in belgrade: conference „big data analytics for decision-making“ in may 2015 at the faculty of organizational sciences, forum „south-east european forum on data science“ in june 2016 at the faculty of organizational sciences, and data science conferences (organized by institute of modern sciences) were held in october 2015 and 2016. https://www.google.rs/search?tbo=p&tbm=bks&q=inauthor:%22viktor+mayer-sch%c3%b6nberger%22 https://www.google.rs/search?tbo=p&tbm=bks&q=inauthor:%22kenneth+cukier%22 258 j. lukić table 1 the review of available big data technologies segment technologies big data platforms and tools hadoop, mapreduce, gridgain, hpcc, storm databases/ warehouses cassandra, hbase (hadoop tools), mongodb, neo4j, couchdb, orientdb, terrastore, flockdb, hibari, riak, hypertable, bigdata, hive (hadoop tools), infobright community edition, infinispan, redis business intelligence talendchn, jaspersoft, palo bi suite/jedox, pentaho, spagobi, knime, birt/actuate data mining rapidminer/, rapid analytics, mahout (hadoop tools), orange, weka, jhepwork, keel, spmf, rattle file systems hdfs (hadoop distributed file system) programming languages pig/pig latin, r, ecl big data search lucene, solr data aggregation and transfer sqoop (hadoop tools), flume (hadoop tools), chukwa various big data tools terracotta, avro, oozie, zookeeper source:adapted according to joshi, p. (2015). analyzing big data tools and deployment platforms. international journal of multidisciplinary approach and studies, 2(2), 45-56. the most frequently used technologies for working with big data are hadoop, map reduce and big table which provide opportunities for prompt and effective processing of large amounts of data in real-time or near real-time (khan et al., 2014). in the last couple of years, there is a rise of interest on the impact of big data analytics which represents the usage of various analytical techniques on large amounts of data from different sources in order to discover hidden patterns, regularities and other useful information (daft, 2015). there are some important differences between traditional analytics and big data analytics. those differences are presented in table 2. table 2 the key differences between traditional and big data analytics characteristics traditional analytics big data analytics key data characteristics structured data typical data volume is measured with megabytes and gigabytes any type of data: structured, semistructured and unstructured typical data volume is measured with terabytes and petabytes the object of analysis the sample from known population entire population facts and findings answers on already defined questions new and unespected findings and facts necessary knowledge knowledge of analytical techniques and tools, basic knowledge of reporting advanced analytical, mathematical, statistical and computer knowledge source: adapted according to yan, j. (2013). big data, bigger opportunities, retrieved from: http://www.meritalk.com/pdfs/bdx/bdx-whitepaper-090413.pdf, accessed on: 05 november 2014. as presented in table 2, the key characteristics of data are significantly changed, data are largely unstructured, present in large quantities and available in real-time. the subject of analysis is extended from the sample to the entire population, while answers are provided to questions that companies were not able to recognize as meaningful for their the impact of big data technologies on competitive advantage of the companies 259 functioning. due to this fact, there is a need for new and different types of thinking on how to gain value on the basis of available data (taylor et al., 2014). the solution has been found in numerous techniques for analytical processing of data that derive more disciplines including computing, mathematics, statistics and economics. some of the most frequently used techniques originate from machine learning, neural networks, social networks analysis, optimization methods and similar (chen & zhang, 2014). manyika et al. (2011) made a list of big data analytics techniques in which they classified: a/b testing, association rules, classification, clustering, genetic algorithms, machine learning, neural networks, predictive modeling, regression, signal processing, spatial analysis, simulation, time series analysis. some of the most frequently used algorithms are (erl et al., 2016):  association rule learning presents an algorithm for identifying the connections and relationships among variables. one common application is in retail when this technique detects which products are frequently bought together.  classification presents an algorithm that identifies to which category of data belongs some generated information. with this techniques, companies are able to make special customer segments and monitor their behavior.  clustering has the goal to classify various objects into groups/clusters based on some common characteristics, for example, classification of customers into groups based on their behavior and adjustment of marketing activities. in the past few years various software solutions have been developed for visualization of results, because the manner in which results are presented is very important for their analysis and interpretation. it is easier to examine given results and to make conclusions using different tables, graphs and figures. some of the most popular visualization techniques are (olshannikova et al., 2015):  tag cloud which is used during the analysis of text and refers to the frequency of the usage of certain words or phrases.  clustergram is used in cluster analysis and displays the connections and relationships among individual elements in the data depending on the cluster to which they belong.  motion charts represent a large number of different data on two-dimensional graphs. very frequently used in practice are heat maps which present desired results according to provided categories – for example location, brand, market, sales manager and similar. also, dashboards are very popular because they provide results of all analyses that users want in one place. 3. the impact of big data technologies on functioning of companies the potential for strategic value creation based on data has always existed, but today this potential is much larger due to all available data and new technological opportunities for handling them. according to porter and millar, information can affect competition by changing industry structure and rules of competition, by giving companies new ways to be better than rivals, and by opportunities to introduce new business models (porter & millar, 1985). in the last couple of years, data have been named as the new frontier for innovation, competitiveness and productivity (manyika et al., 2011), the resource responsible for management revolution (mcafee & brynjolfsson, 2012), the resource equal to oil and gold (bilbao-osorio et al., 2014), and the key determinant for innovation 260 j. lukić and creative destruction (pepper & garrity, 2014). these attitudes regarding the importance of data are very frequently expressed, because modern companies have become overwhelmed with data, the amount of which is increasing each year by 35% to 50% (beath et al., 2012). also, unlike the time when it was possible for information technologies to work only with quantitative data while all other information was not possible to use (drucker, 2002), in the last few years, due to big data technologies, it becomes possible to interpret even data in the qualitative form. mayer-schönberger and cukier introduced the term „datafication“ in 2013 with the aim to describe the process of collecting all available data and their transformation into valuable business decisions (mayer-schönberger & cukier, 2013). on the one hand, big data technologies are the factor from environment that confronts the companies with large quantities of data from a variety of sources, while on the other hand those technologies represent the resource of organization which allows the companies that use them to make value on the basis of collected data (lukić, 2016). companies which operate in a highly competitive environment must be able to cope with the constantly changing conditions (janaćković, milovanović & milovanović, 2016). the key question which needs to be examined through implementation of big data technologies is whether these technologies fundamentally change the business model of a company by creating new business opportunities or if they improve the existing business model (morabito, 2015; stackowiak et al., 2015). the managements of organizations need to answer the following questions (kiron et al., 2014):  is the company ready for new ideas?  is the company ready to change the way in which it functions?  does the company consider data as a valuable resource for its functioning?  in which way do the employees need to be encouraged to be led by data in the decision making process? 5. the key advantages of using big data technologies big data technologies offer new opportunities for growth and development, but also for the creation of new companies whose business model is based on data (mcguire et al., 2012). having in mind that customer perspective has become integrated in all processes and activities in a company (dehghan et al., 2015), and that strategies related to creation of new products or services are based on analysis of information related to customer needs (stefanovska & soluncevski, 2015), the application of big data can be of tremendous value not only for retaining the existing customers, but for identifying and attracting new ones. the companies that use big data technologies can better understand their customers, employees, business processes, partners and identify all those activities in which improvements are needed (adduci et al., 2011; wamba et al., 2015). there are few characteristics of big data technologies that can be very useful to companies that use them (manyika et al., 2011, pp. 4-6):  transparency. all data that exist inside and outside the company become available in one place, so the company can establish „one version of the truth“. employees can easily find data which they need in one location, which consequently leads to savings in time and effort. the impact of big data technologies on competitive advantage of the companies 261  experimentation in order to identify different needs of customers and to create more custom products and services. companies can collect more detailed data about customers, their opinions and attitudes about products and services. thanks to different analytical techniques, companies can examine the effects of certain improvements in products and services.  identification of different customer segments in order to adjust products and services according to their needs and requirements. by creating different customer segments, companies gain a clearer picture of how they can meet customer needs better, and thus have a basis not only for improvement of existing products and services, but for the creation of new ones. segmentation may be based on the large number of different criteria – income, age, location, buying habits, etc. (kiron et al., 2011).  support for decision making process with automated algorithms. sophisticated software has the possibility to improve the decision making process with automated algorithms which automatically analyze collected data and initiate corrective actions. the application of controlled experiments to test hypotheses and analyze the results of the decisions made, can significanly improve the decision making process (mcguire et al., 2012). many authors pointed out that one of the significant changes is a shift from intuitive decision making to data driven decision making (provost & fawcett, 2013; minelli et al., 2014).  improvement of existing products and services and the introduction of new ones. by identifying certain relationships in data, companies can realize important facts about products and services. the results of the analysis can be a new product, service, improvement of existing product or service, a new approach to pricing, etc. (davenport, 2014). the application of big data technologies requires from company’s management to be focused on activities related to customers, products, processes in order to optimize the key activities and identify new opportunities for further growth and development. the key objectives that companies want to achieve by using big data technologies are: identifying new sources of revenue, cost reduction, better sales, distribution, marketing activities (schmarzo, 2013). besides that, big data technologies have a great impact on the decision making process. decision makers want to have the right data at the right time and in the right format (power, 2015), so the decisions can be based on data, leaving intuition and gut feeling aside (provost & fawcett, 2013). morabito emphasized that due to the application of big data technologies it is possible to: (1) improve the decision making process; (2) improve business performance in the entire company; (3) develop integrated access to key information and data (morabito, 2015). furthermore, big data technologies create opportunities for more precise adjustment of products and services because companies can monitor data for each customer individually and consider their buying habits, location, response to incentives, demographic characteristics such as business, memberships in various organizations, opinions and attitudes on social networks, blogs and forums (morabito, 2015). consequently, big data technologies have an impact on strategic and operational activities of companies (table 3). 262 j. lukić table 3 key impacts of big data technologies on strategic and operational activities impacts benefits examples strategic activities faster decisions faster strategic decisions advanced and precise data analysis better decisions assessment of the effects of made decisions quantified impact of decisions which are made proactive decisions application of predictive analytics to identify potential customers operational activities the improvement of organizational capabilities finding the causes of problems and making proposals for their overcoming the release of employees from the activities that have small value increased automation reduction of effort needed for reporting the release of management from activities that have small value elimination of redudant tools elimination of all redundant tools for data collection, processing, reporting and analysis speeding up the processes transparency of all information and data regarding processes source: adapted according to hagen, c., ciobo, m., wall, d., yadav, a., khan, k., miller j., evans, h. et al. (2013). big data and the creative destructions of today’s business models, a.t. kearney inc. regarding strategic activities of companies, big data technologies have a large impact on the decision making process, because due to their application decisions are faster, better and proactive. beside strategic, operational activities are also under the impact of big data technologies, firstly through automation and improvement of business processes, but also through development of organizational capabilities for solving problems and elimination of activities with small added value. conclusion technology progress caused generation of data with high volume, velocity, and variety, known as big data, which are available in each industry and company. these data have stimulated the development of new technologies, techniques and tools that are able to collect, process, analyze and store them. companies that realized the potential for value creation on the basis of collected data, started to implement some of the big data solutions. in this paper are examined the key impacts of big data technologies on competitive advantage of the companies that use them. transparency, identification of new customer segments, support for the decision making process with automated algorithms, improvement of the existing products and services, and introduction of new ones are among the key advantages that companies can gain. consequently, big data technologies have lead to better strategic and operational activities in companies and become an important factor of their competitiveness. any aspect of further investigation of the impact of big data technologies on competitive advantage of companies may be of great benefit not only for managers, but also for all employees who work with those technologies. one of the important questions that requires further investigation is to identify which factors are necessary for successful use of big data technologies in companies, because technology on its own, without broader purview about other factors will not have great benefits. the impact of big data technologies on competitive advantage of the companies 263 references adduci, r., blue, d., chiarello, g., chickering, j., mavroyinnanis, d., et al. 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(2013). big data, bigger opportunities, retrieved from: http://www.meritalk.com/pdfs/bdx/bdxwhitepaper-090413.pdf, accessed 05 november 2014. uticaj tehnologija za rad sa velikim obimom podataka na konkurentsku prednost kompanija pojava velikih količina podataka koji potiču iz različitih izvora i koji su dostupni u realnom vremenu, stimulisala je razvoj novih tehnologija, tehnika, alata, znanja i veština koje omogućavaju rad sa njima. velike količine podataka i tehnologije za rad sa njima predstavljaju značajan resurs koji kompanijama koje ih primenjuju omogućava da na osnovu raspoloživih podataka kreiraju vrednost. karakteristike i mogućnosti koje tehnologije za rad sa velikim obimom podataka pružaju pozicionirale su ih na mesto važnog faktora za sticanje i održavanje konkurentske prednosti kompanija. cilj ovog rada jeste da ukaže na koji način primena tehnologija za rad sa velikim obimom podataka utiče na konkurentsku prednost kompanija. ključne reči: veliki podaci, analitika velikih podataka, konkurentska prednost, strategijske aktivnosti, kompanije http://data-informed.com/mckinsey-report-big-data-at-center-of-disruptive-technologies/ http://searchcloudcomputing.techtarget.com/definition/big-data-big-data http://searchcloudcomputing.techtarget.com/definition/big-data-big-data plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 19, no 3, 2022, pp. 199 211 https://doi.org/10.22190/fueo220806015u © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper consumers’ knowledge of products with geographical indications in serbia1 udc 659.113.25(497.11) dubravka užar university of novi sad, faculty of agriculture, serbia orcid id: dubravka užar n/a abstract. the main purpose of this study is to shed light on consumers’ knowledge of geographical indications in serbia. we therefore present the results obtained from a consumer survey on a sample of 806 respondents in the territory of serbia. differences in consumers’ knowledge of geographical indications as well as in the self-perceived level of knowledge of gi food were tested according to several socio-demographic criteria. the results showed that there are significant statistical differences in gender, age, and level of education regarding consumer knowledge of gis. in addition, the respondents indicated a low level of knowledge about the gis, qualities, benefits, and method of production of these products, as well as the existence of an adequate control system. as consumers consider themselves insufficiently informed, this finding suggests that it is necessary to undertake actions that will contribute to the consumers’ education and information. based on the obtained results, recommendations useful for marketing managers, decision-makers, agricultural producers as well as future research are given in the paper. key words: geographical indications, consumers’ knowledge, food marketing jel classification: m31, q13 1. introduction in recent years, the concept of marketing traditional and geographically labeled products has gained importance due to the increasing consumers' desire to consume high-quality food, preserve the cultural and historical heritage and support the local economy (caputo et al., 2018). from the consumer's point of view, this growing demand for local and regional food can be seen as a counter-trend against the globalization of industrially received august 06, 2022 / accepted october 13, 2022 corresponding author: dubravka užar university of novi sad, faculty of agriculture, trg dositeja obradovića 8, 21102 novi sad, republic of serbia | e-mail: dubravkauzar@gmail.com mailto:dubravkauzar@gmail.com 200 d. užar produced food trade (teuber, 2011). the generated growing demand is reflected in an increasing number of products registered in accordance with eu regulation no. 510/2006 and efforts at the national and international level to encourage product protection either as a protected designation of origin (pdo) or a protected geographical indication (pgi). in order to preserve diversity, authenticity, and local identity, regional products have been supported by european protection since 1992 (eu regulation 2081/92, eu regulation 1151/2012). geographical indications reflect the link between the product and the territory, preventing misleading or imitation of the registered name and ensuring consumers that the product is authentic (török et al., 2022) and has the quality inherent to the origin. gis have been recognized as a tool to encourage rural development, supporting localized agri-food systems and family farming in the context of globalized food markets (van caenegem & cleary, 2017). geographical indications can increase producer incomes and contribute to local economic development, but the extent to which they do so depends on the nature of consumer demand. additionally, the information provided by labels gives consumers the opportunity to make an informed choice if they are familiar with the meaning of the label itself (hartman et al., 2019). thus, geographical indications have become one of the most commonly used tools for product valorization with limited geographical origin (vandecandelare, et al., 2009), as well as strengthening the commercialization and promotion of domestic agricultural and food products. european consumers largely support the principles on which gis are based. this is supported by the information that more than half of eu citizens choose food that originates from the appropriate geographical area and that has a special label that guarantees the product quality (european commission, 2020). today, the sales value of these products has achieved 74.8 billion euros (török et al., 2018). the provision of new production alternatives in the economic development in rural areas of serbia is of particular importance. in serbia, in areas that are not suitable for industrial development, but are open to the improvement of agriculture, increasing the production of traditional food represents a good opportunity for the local economy. the production of traditional products by small enterprises without extensive technology has been shown to be extremely effective in promoting sustainable agriculture and responding to consumers' growing interest in healthy natural food products (lambarraa-lehnhardt et al., 2021). consumer knowledge about food products is an important determinant of choice in the purchasing process. knowledge of geographical indications is considered one of the drivers for consumers to engage in the intended behavior (mitić & gligorijević, 2015). when it comes to special categories of products, such as food with geographical indications, consumers will not buy them if they consider them to be of poor quality or unsafe for health (sääksjärvi et al., 2009). consumers can only be expected to purchase gi food over conventional ones if they have awareness and knowledge about these products and believe that the specific characteristics justify the higher prices. without specific knowledge, a consumer is likely to buy food only occasionally, which reflects random fluctuations in his buying behavior rather than a consistent food preference (sääksjärvi et al., 2009). a relatively low level of knowledge and acceptance of geographically labeled products among consumers represents a special market challenge. therefore, the preferences and knowledge of consumers according to established labels are decisive components in determining the success of these products on the market (lambarraalehnhardt et al., 2021). in the case of labeled products, previous research has shown that consumers have unclear and inadequate knowledge about their definition and characteristics, although an consumers' knowledge of products with geographical indications in serbia 201 increasing number of these products are available to consumers (sääksjärvi et al., 2009). also, research has shown that greek consumers have inadequate knowledge about the labels of certified products, which affects their intention to purchase them (fotopoulos & kristallis, 2001). additionally, eu certification labels are the main motive in the purchasing process for italian consumers with excellent knowledge, according to vecchio and annunziata (2011), whereas consumers with insufficient knowledge base their decisions on the product's low price and attractive appearance. according to the research of wilson (2002), italian, greek and french respondents are more familiar with the system of designations of geographical origin compared to respondents in northern european countries. consumers from northern european countries have less knowledge about the protection of traditional regional food products and are less interested in specific product attributes related to the local environment and origin. the aim of this research is to determine the perceived knowledge of consumers regarding geographical origin labels in order to consider the possibilities of creating appropriate channels of marketing communications and increasing the offer of these products on the market. furthermore, the aim is to provide a better understanding of consumer knowledge regarding the existence of significant differences between the socio-demographic characteristics of respondents. the research is of great importance for agriculture producers and managers in order to identify what consumers know about food with gis and how to identify customers who have different predispositions to purchase this group of products. given that no empirical research has been conducted to examine the relationship between the multidimensional construct of consumer knowledge of origin-labeled products and labeling systems and other important constructs in marketing, this study aims to fill in this gap in the literature by specifying the extent of consumer knowledge of geographically labeled food. 2. literature review 2.1. products with geographical indications in serbia in serbia, the protection of the geographical origin of agricultural and food products is regulated by law, and a unique database of products and registered producers has been defined. the procedure for labeling products and obtaining legal protection is defined by the law on the indications of geographical origin (official gazette rs, no. 18/2010; 44/2018). this law is harmonized with the lisbon agreement on the protection of names of origin, to a large extent with eu regulations, gatt (general agreement on tariffs and trade), wto (world trade organization), world intellectual property organization (wipo) standards and requirements of the stabilization and association agreement between the european communities and their member states, on the one hand, and the republic of serbia, on the other hand. the law on the indications of geographical origin regulates the method of acquiring and protecting the rights of the label, the protection procedure and the procedure for registering the mark of geographical origin, the method of acquiring the status of an authorized user of labels, the content, and scope of the rights of the authorized user, as well as termination of the status of the authorized user of the mark. according to the official definition of the intellectual property office, the designation of geographical origin combines two similar terms: protected designation of origin and geographical indication. the label of traditional specialty guaranteed is not regulated by this law, so a registration of this type of label is not even possible at the national level. 202 d. užar the protected designation of origin refers to agricultural and food products that are produced, processed, and prepared entirely in a certain geographical area, a certain place or country, whose quality or characteristics are essentially or exclusively attributed to a certain geographical environment with its inherent natural and human factors (zis, 2022). on the other hand, a protected geographical indication describes agricultural and food products closely related to the territory of a certain country, region, or locality from that territory, where certain quality, reputation or other characteristics of the product can essentially be attributed to its geographical origin (zis, 2022). according to the european commission, designations of geographical origin contribute to the sustainable use of local resources, the protection of natural and social heritage, tradition, and culture, the stabilization of living standards, the regeneration of villages, the increase of income of local producers, the development of gastro tourism and rural diversity (european commission, 2020). in our country, the acquisition of intellectual property rights is carried out in interaction with the competent institutions for protection and certification, namely the institute for intellectual property and the ministry of agriculture, as well as institutions at the local level that use labels as a tool to encourage rural development. in addition, the rulebook on the form and content of the designation of geographical origin, as well as on the method of controlling the labeling of agricultural and food products with the designation of geographical origin ("official gazette rs", no. 92/2012; 19/2013) defined the form and content of two types of control stamp, ensuring that agricultural and food products with gis are recognizable on the market. products marked with a control stamp are subject to official control carried out in accordance with the law regulating food safety. control stamps are a guarantee to consumers that the product originates from a certain area and has a specific quality or characteristics associated with the geographical origin. 2.2. awareness of geographical indications in serbia the republic of serbia has a great variety of traditional and autochthonous products, but there is a small number of registered and protected products at the national level. according to the data of the institute for intellectual property in the republic of serbia, 79 products are currently protected, of which 53 products have a protected designation of origin, and 26 products have a protected geographical indication (zis, 2022). during the last decade, there has been an increasing demand for traditional and handmade products, strictly linked to their geographical origin, and distinguished by specific characteristics making them worthy of protection and differentiating them from similar products created in the industrial process of production (aquilanti et al., 2013). autochthonous products in serbia have a great reputation among consumers due to their geographical and climatic factors, local production practices, as well as cultural and historical heritage. the current state of the domestic market for products with gis is characterized by rather difficult development with slow tendencies due to the lack of organizational structure in production, promotional activities, and the selection of appropriate channels of marketing communications. in order to increase the consumption of these products, it is necessary to highlight the importance of labels in terms of local community development, the income of small producers, contribution to the rural economy, and overall sustainable development. scare studies (giraud et al., 2013) on consumer preferences in the territory of the western balkans indicate that the majority of consumers from these territories do not share preferences of their colleagues in western countries directing their preferences to industrial products sold consumers' knowledge of products with geographical indications in serbia 203 in supermarkets. although according to alboi and voicilas (2014), consumers in serbia have a positive attitude towards the production and commercialization of traditional food products, only a small percentage of the population values traditionally produced food. due to insufficient promotion of gi products and lack of knowledge (pinna et al., 2017), the consumers' ability to identify traditional and locally produced food is very weak (filipović, 2019). on the other hand, from the consumer's point of view, the question arises of the readiness of the domestic market to use this market potential, as well as whether, despite motivation to consume these products, there is the purchasing power of the population that can realize higher consumption. a literature review (stojanović & barjolle, 2012; likoudis et al., 2015; vecchio & annunziata, 2015) found that the socio-demographic characteristics (gender, age, income, education level and household size) of respondents influence the perception of consumer knowledge as well as higher consumption of these products. therefore, previous studies have shown that gender influences the behavior of purchasing gi products. the results of the research by stojanović and barjolla (2012) and amuquandoh and asafo‐adjei, (2013) point out that members of the male gender are more inclined to consume traditional food. on the other hand, women tend to be more open and interested in information about gi foods (vecchio & annunziata, 2015). women are more attached to labeled products because such products give them a guarantee of verified quality and safety (skubic et al., 2018). such outcomes may result from the fact that women purchase groceries and food products for their families before men. as a result, the hypothesis was defined as follows: h1: there are statistically significant differences between gender and respondents' knowledge about products with a geographical indication the age of the respondents is a statistically significant characteristic for consumers regarding products with gis (goudis & skuras, 2020). according to research by fotopoulos and krystallis (2003), older and highly educated consumers, as well as those with high incomes, have a greater preference for these products. regarding knowledge of pdo/pgi labels, the most knowledgeable age group of respondents belongs to the group between 25-50 years old (wilson, 2002). additionally, velčovská (2018) points out that the recognition of at least one label is slightly higher among younger respondents who belong to the 15-39 age group. on the other hand, the research of stojanović and barjolle (2012) confirms the existence of a significant statistical difference in the age of respondents according to the consumption of traditional food, and that this group of consumers includes respondents who are slightly less than 50 years old. as a result, the following hypothesis was proposed: h2: there are statistically significant differences between age and respondents' knowledge about products with a geographical indication households with higher incomes tend to buy more products with gi products, which is confirmed by the research of fotopoulus and krystallis (2003) who found that greek consumers with higher incomes prefer quality schemes in the case of buying cheese, ham, and honey. this study supports the findings of stojanović et al. (2013), who points out that consumers with a higher level of income purchase more gi products. however, given that gi foods are more expensive than conventional food products, it would seem likely that higher-income consumers would be more knowledgeable about traditional food products since they are able to purchase them with fewer financial barriers than low-income consumers. as a result, the following hypothesis was proposed: h3: there are statistically significant differences between income and respondents' knowledge about products with a geographical indication 204 d. užar education is another socio-demographic characteristic of consumers that is considered important when purchasing products with gis. previous research has shown that socioeconomic groups with a higher level of education scored better knowledge about nutrition and traditional products compared to socio-economic groups with a lower level of education (bogue et al., 2005). the importance of education as a consumer characteristic also indicated that highly educated respondents tend to buy locally produced food (skubic et al., 2018). previous research is confirmed by the research of sanchez-villegas et al., (2003) confirming a statistically significant connection between a higher level of education and higher consumption of these products. in accordance with the above, the following hypothesis was proposed: h4: there are statistically significant differences between education and respondents' knowledge about products with a geographical indication 3. methodology 3.1. sample the research was conducted in the period from the beginning of april to the beginning of june 2021 based on a structured questionnaire. the research used a convenient (quota) sample of selected respondents across the country. based on the administrative division of serbia into 4 regions, and based on the data of the statistical office of republic of serbia on the number of adult citizens the required sample size within each region was defined. the data was collected through an online questionnaire and distributed to respondents via social networks (facebook groups and linkedin) directly on e-mail or by personal interviewing of selected respondents. questionnaires were distributed to adult respondents using the snowball sampling method; respondents were given a questionnaire along with a cover letter asking them to forward it to their friends and family members of various demographic profiles. a total of 806 valid and complete fulfilled questionnaires were collected. by analyzing the sample, it was determined that 315 (39.1%) male persons, 486 (60.3%) female persons and 6 (0.6%) persons who did not want to identify themselves participated in the research. the majority of respondents (36.8%) belong to the age category between 25 and 44 years old, while regarding the level of education, the highest percentage of respondents has a secondary vocational education, that is, completed a fouryear high school (44.7% of respondents). the majority of respondents earn monthly income between 90,001 and 120,000 rsd (20.1%) (table 1). 3.2. research instrument in the research, a structured online questionnaire was used as an instrument. the questionnaire covered a large number of questions, among which the following were singled out for the purposes of this research: respondents' perceptions regarding the determination, characteristics and advantages of geographical origin designations and perceived consumer knowledge about the labeling system, the method of production of products with designation of origin and the existence of a certification body responsible for the control process of these products. the scales for measuring consumer knowledge about products with a geographical origin label were defined on the basis of scales from previous research in this area. respondents were asked to express their degree of agreement with regard to perceived knowledge using a likert scale of 1 to 5 (where 1 indicates "strongly disagree" and 5 "strongly agree"). consumers' knowledge of products with geographical indications in serbia 205 table 1 socio-demographic characteristics of the respondents variables % sv* sd* gender female 60.3 1.615 male 39.1 i can't identify myself 0.6 age 18-24 10.3 3.628 1.599 25-44 36.8 45-64 35.3 > 65 17.6 level of education unfinished elementary school 1.1 4.476 1.053 completed elementary school 4.2 completed high school 44.7 completed high school or college 33.5 completed master's or doctoral studies 16.5 income (rsd) < 30000 8.2 3.832 1.599 from 30001 to 50000 17.7 from50001 to 70000 15.8 from 70001 to 90000 18.7 from 90001 to 120000 20.1 > 120001 19.5 n=806; *sv=mean value; sd=standard deviation source: authors' calculation additionally, respondents were asked to assess their level of familiarity with the designation of geographical origin (measured by the question: in your opinion, are you familiar with the concept of designation of geographical origin?). additionally, the socio-demographic features that are important for this research are gender, age, level of education, and monthly income of the respondents. 3.3. data processing in the data analysis, descriptive statistics and analysis of variance (anova) were used in order to test the difference in consumer knowledge according to labels on food products according to socio-demographic features. data were analyzed using the statistical package for social sciences software (ibm spss statistics 21.0). 4. research results with discussion consumer awareness of products with gis is an important antecedent of food products knowledge. it is necessary to examine whether consumers are aware of the labels of origin and whether they understand their meaning. in the first phase of the research, the familiarity of consumers with products with a geographical origin label was examined, i.e the percentage of potential and existing consumers who were aware of the existence of this label. it was found that the majority of the respondents (85.1%) has developed awareness and are familiar with the concept of designation of origin, which is considered a very good indicator in comparison with previous research in this area. although it has been established that consumers are aware of labeling, the next step is to determine consumers' actual knowledge of label meaning, certification, and labeling procedures. 206 d. užar table 2 presents the results regarding the characteristics of labels that consumers consider important and the extent to which these labels in the domestic market fulfill those characteristics. according to the respondents, the guarantee of the region of origin is the most important feature of the geographical indication (sv=3.84), while the statement that products with gis have more nutritional value than other products received the lowest average score (sv=2.55). the expressed views on the labels' validity and benefits were evaluated differently. respondents are uncertain whether products with a label of origin contain more nutrients than conventional foods, but the guarantee of origin and place of production is highly ranked and can be considered a significant characteristic when purchasing these products with added value. table 2 distribution of general consumer perceptions of the importance of gi characteristics source: authors' calculation in addition to consumer attitudes toward the characteristics of gi products, respondents were asked to rate their level of knowledge about the labeling system. in terms of knowledge self-assessment about the method of food production, their quality and the possibility of recognition, the analysis of the answers has shown a low level of respondents’ knowledge (table 3). respondents completely or partially disagree (63.5%) that they have the skills and knowledge about the production method, the benefits of these products (60.3%), the quality (58.1%), and the ability to distinguish products from geographical origin of organic and other products (55.2 %). characteristics and meaning of the gis sv sd frequency (%) 1 2 3 4 5 the label is an indication of a more expensive product 2.76 1.298 21.2 22.1 28.5 15.3 12.9 the label guarantees compliance with regulations and standards 3.57 1.245 6.9 14.1 24.2 24.6 30.1 the label has a clear logo, easy to recognize 3.57 1.181 6.5 11.5 27.4 28.2 26.4 the label indicates the attractiveness of the product 3.26 1.232 10.9 14.6 30.6 25.1 18.7 the label is part of the producers marketing activity 3.72 1.183 5.3 11.0 22.5 28.3 32.9 the label is self-explanatory 3.59 1.134 5.3 10.5 29.7 28.9 25.6 the label is a guarantee of product quality 3.43 1.300 10.5 13.9 24.4 24.4 26.7 the label is a guarantee of tradition and production methods 3.61 1.277 8.6 11.8 21.5 26.1 32.1 the label is a guarantee of the region of origin 3.84 1.256 6.1 10.9 18.7 21.3 42.9 the label is a guarantee of the place of production 3.79 1.243 6.6 10.3 19.2 24.9 39.0 the label is an indicator of reliability 3.43 1.248 8.8 14.3 26.3 25.8 24.8 labeled products have more nutrients 2.55 1.298 27.4 24.2 25.4 12.3 10.7 labeled products are better looking 2.74 1.292 22.2 21.7 28.2 16.1 11.8 n =806; 1-i completely disagree; 5-i completely agree; sv=mean value; sd=standard deviation; kronbah α= 0,905 consumers' knowledge of products with geographical indications in serbia 207 table 3 distribution of respondents' knowledge responses sv sd frequency (%) 1 2 3 4 5 i consider myself to have enough knowledge about the production methods of products with gis 2.11 1.1381 38.6 27.9 21.8 6.9 4.7 i consider myself to have sufficient knowledge about the benefits of gi products 2.28 1.1782 32.8 27.5 23.4 11.2 5.1 i consider myself to have sufficient knowledge about the qualities of gi products 2.31 1.1886 32.8 25.6 25.4 10.8 5.5 i consider that i can distinguish gi products from organic and traditional ones 2.44 1.2856 31.4 23.8 22.8 13.5 8.4 n =806; 1-i completely disagree; 5-i completely agree; sv=mean value; sd=standard deviation; kronbah α=0,932 source: authors' calculation control and certification of products with gis are crucial to consumer trust in the protection system, given that they guarantee control and confirmation of quality by competent institutions. respondents were asked about the existence of a special certification body for the certification and control of labeling processes and labeled products. the interpretation of the results indicates that consumers have a low level of knowledge, as more than half of the respondents (55.1 percent) responded that it is not certain that our country has a special regulatory body responsible for the implementation of control and certification of products with gis. another group of respondents recognize the existence of the control system, but consider they do not have sufficient knowledge of how these institutions function (37.6 percent), while only 3.7 percent stated that they were informed about the competencies and activities of the control and certification authorities. a small percentage (3.6 percent) of all respondents believe that competent authorities, as well as the labeling control and certification system, do not exist. the research hypotheses were then tested, specifically the presence of statistical significance between the selected socio-demographic characteristics and consumers' perceived knowledge of the quality, benefits, and production method of the labeled products. based on the f-test, gender (p≤0.05), age (p≤0.01) and education (p≤0.01) had a statistically significant influence on consumer knowledge (table 4). table 4 anova at the 95% significance level for consumer knowledge of products with gis variables type iii sum of squares degrees of freedom the middle of the square f sig. partial eta square model 74.855a 17 4.403 3.914 .000 .078 148.260 1 148.260 131.773 .000 .143 gender 8.727 2 4.364 3.878 .021 .010 age 29.027 5 5.805 5.160 .000 .032 education 30.347 5 6.069 5.394 .000 .033 income 6.815 5 1.363 1.211 .302 .008 error 886.592 788 1.125 total 5169.938 806 corrected total 961.447 805 source: authors' calculation 208 d. užar as the previous table shows, there are significant differences in the knowledge of male, female consumers and those who can not identify themselves regarding labels on food products, supporting hypothesis h1. based on the lsd test, it was determined that males have statistically more knowledge and are better informed about the method of production and preparation of products with gis and their quality (p≤0.05) compared to females and those who can not identify themselves. furthermore, age, as a selected characteristic of the respondents, has a positive influence on consumer knowledge about products with gis, supporting hypothesis h2. older consumers in the 55-64 age category have more knowledge about products with a label of origin compared to younger consumers. more precisely, younger consumers who belong to the age categories of 18-24 and 25-34 years, have less knowledge about products gis compared to other age groups. a significant statistical difference was identified between the level of education of the respondents and the level of knowledge, supporting hypothesis h3. the results of the lsd test show that respondents who have completed high school or college have more positive attitudes and more knowledge than respondents who have not completed primary school, but also than those who have completed secondary school. additionally, respondents with completed primary school have a statistically higher level of knowledge of the marking system compared to the group of respondents with incomplete primary school. monthly income had no statistically significant effect, indicating that there are no differences in income and perceived consumer knowledge, thus rejecting hypothesis h4. the obtained results suggest that consumers have difficulties in recognizing and identifying the characteristics and quality of products that are in the system of geographical indications, as well as the benefits that these products provide. the identified lack of knowledge is due to a lack of information and/or its unavailability to consumers. 5. conclusions and recommendations profiling consumers with a desire to consume food with an origin label can be the first step toward increasing consumption. product knowledge and trust are regarded as the most important marketing factors influencing consumer behavior because they reduce complexity and uncertainty when making a purchase decision. the research provided insight into the level of perceived consumer knowledge about the characteristics of the geographical origin designation, the method of production, the labeling system and the existence of a certification body. according to the findings of the study, consumers have relatively little knowledge of geographical indications, but they are aware of their existence. if consumers do not understand what the labels represent and the quality of these products, the label cannot assist them in making an informed decision. the knowledge gap shown by consumers is increased by the difficulty in defining the link between labels and products: the consumer is not able to identify products with a geographical indication and those without. furthermore, undeveloped product certification and labeling schemes contribute to a lack of market knowledge of these products. the obtained results confirm the importance of defining appropriate actions and strategies for the rationalization of methods of conveying information about product quality marks and marking processes. the recommendation to policymakers is to envisage effective interventions aimed at guaranteeing an adequate transfer of information to the final consumers and to develop campaigns to educate them on the differences between food consumers' knowledge of products with geographical indications in serbia 209 products with and without gis and other characteristics. it is essential that the schemes and standards are transparent enough to allow consumers to understand what they are purchasing, while also simplifying and understanding all information so that they are confident of the benefits they receive for the appropriate quality. from a managerial perspective, gaining insight into consumer knowledge about traditional foods allows companies to achieve better market segmentation. given the existence of differences in socio-demographic characteristics, targeting consumers with a high level of knowledge ensures a positive response to promotional offers. the research can also help food producers to identify their target consumers and to provide appropriate information in order to increase their knowledge, and consequently the demand in the market. what is certainly positive for agricultural producers is the fact that the majority of consumers expressed positive views that geographical indications are a guarantee of the region of origin and the place of production. therefore, the producers' primary aim should be to educate consumers and present their products, i.e. their benefits and distinctive characteristics. the greater consumer preferences are recognized, the higher the benefits for small local manufacturers. the major findings given in this work have various limitations that should be considered before conducting further research. one of the limitations of the research is the lack of influence of perceived knowledge on the intended behavior of consumers, therefore future research should be focused in this direction. in further research, it is necessary to look at the statistically significant influence between the mentioned socio-demographic characteristics of the respondents and the actual purchase of products with gis. another idea is to analyze the differences between defined characteristics and consumer knowledge about traditional food compared to conventional food. therefore, this research is 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(2002). consumer attitudes towards regional foods: a case study of protected designation of origin (pdo) and protected geographical indication (pgi) products (doctoral dissertation, imperial college london (university of london). zakon o oznakama geografskog porekla (sl.glasnik rs, br.18/2010 i 44/2018), available at: https://www.paragraf. rs/propisi/zakon_o_oznakama_geografskog_porekla.html accessed: 14.7.2022. zavod za intelektualnu svojinu republike srbije, available at: https://www.zis.gov.rs/prava/oznake-geografskog-porekla/ accessed: 14.7.2022. percepcija znanja potrošača o proizvodima sa oznakom geografskog porekla u srbiji cilj istraživanja jeste analiza percipiranog znanja potrošača o oznakama geografskog porekla u srbiji. u tu svrhu, prezentovani su rezultati istraživanja spovedenog na uzorku od 806 ispitanika na teritoriji srbije. statistička analiza obuhvatila je analizu percipiranog znanja o proizvodima sa oznakom geografskog porekla kao i testiranje razlika u znanju ispitanika prema oznakama na hrani, uzevši u obzir socio-demografska obeležja. rezultati su ukazali da postoje značajne statističke razlike pola, godina starosti i nivoa obrazovanja u pogledu znanja potrošača o oznakama porekla. dodatno, ispitanici su pokazali nizak nivo znanja o oznakama geografskog porekla, kvalitetu, koristima i načinu proizvodnje ovih proizvoda, kao i postojanju adekvatnog sistema kontrole i sertifikacije. kako potrošači sebe smatraju nedovoljno informisanim ovakav nalaz sugeriše da je potrebno preduzeti akcije koje će doprineti edukaciji i informisanju potrošača. na osnovu dobijenih rezultata, u radu su date preporuke korisne za marketing menadžere, donosioce odluka, poljoprivredne proizvođače kao i buduća istraživanja. ključne reči: oznake geografskog porekla, znanje potrošača, marketing prehrambenih proizvoda https://doi.org/10.1016/j.jclepro.2014.08.006 https://doi.org/10.1108/bfj-10-2014-0350 https://www.paragraf.rs/propisi/zakon_o_oznakama_geografskog_porekla.html https://www.paragraf.rs/propisi/zakon_o_oznakama_geografskog_porekla.html https://www.zis.gov.rs/prava/oznake-geografskog-porekla/ plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 14, n o 3, 2017, pp. 281 289 https://doi.org/10.22190/fueo1703281e preliminary communication concentration effect on the efficiency of banking sector in the republic of serbia 1 udc 347.734:65.015.25(497.11) eva eraković * university of niš, faculty of economics, serbia abstract. for qualitative analysis of the effect of specific activities, such as banking, on other movements in this sector, precise measuring is needed. due to the transformation of the banking sector in the republic of serbia, in a relatively short period of time, there has been a significant reduction in the number of banks and in increasing the concentration. on the other hand, the business efficiency has become a key factor for the survival of banks in the market. in this study, the concentration was measured by herfindahl-hirscham index, while the degree of efficiency was determined by cost to income ratio. a linear correlation and regression analysis examined the relationship between the degree of concentration and the level of efficiency of serbian banking sector in the time interval from 2008 to 2015, which confirmed the existence of a strong relationship between these variables. key words: concentration, efficiency, banking sector, republic of serbia jel classification: d40, g21 introduction in the analysis of the market structures, the basic element is the concentration. it is believed that a particular branch, sector or industry is concentrated when a small number of participants control the majority of overall activities or resources. every company or an individual market participant aims to increase their market share because there is a positive reciprocity between market share and profitability. increasing the concentration in certain sectors of the banking market can lead to undesirable market power of banks. also, the accuracy and stability of the financial sector can variously affect the degree of the concentration and competition. the concentration of received february 28, 2017 / revised april 25, 2017/ revised july 07, 2017 / accepted july 13, 2017 corresponding author: eva eraković, * phd student university of niš, faculty of economics, trg kralja aleksandra 11, serbia e-mail: evaerakovic89@yahoo.com 282 e. eraković several banks in the market indicates an unsuccessful bank competition and the inability of the market to prevent this phenomenon. this leads to improper functioning of the system and has a negative impact on the normal operation of banks. today, the protection of the financial system health is one of the key objectives of banking supervision. changing business conditions in the market make constant pressure on banks to increase their income and to control their costs. technological innovation in the form of improved communication and data processing, also, emphasizes the importance of efficiency. numerous statistical studies have shown that the most efficient banks have significant cost savings and a competitive advantage compared to those with average or below average level of efficiency. the subject of this research is to determine the relationship level between the concentration and efficiency in the banking sector of the republic of serbia, in the time interval from 2008 to 2015. for the purpose of the study, as a concentration indicator, herfindahl-hirschman index was used, and as a measure of efficiency, cost to income ratio. 1. market concentration in the banking sector “concentration, as an indicator of the degree to which the total production or sale in the market is in the hands of a small number of market participants, is the measure of the competition intensity. the high level of competition with the low level of concentration is healthy for each branch and the economy in general” (stojanović et al., 2010, p. 58). the concept of concentration is one of the basic elements in the analysis of market structure, i.e. market power in a particular industry, sector or branch. the concentration exists when there is a larger part of the total resources or activities under the supervision of a small part of the total number of units that supervise this resource, i.e. this activity. there are two factors of concentration: the absolute number of enterprises, which constitute one industry, and the relative size of companies in relation to the entire industry. concentrations can be: horizontal, vertical and conglomerate. in the banking sector, as a rule, concentrations are horizontal. these include connecting of competitors in a market who offer mutual substituent products and services. affiliation, merging and acquisition of banks by more market-powerful banking institutions are the most visible aspect of concentrations in this area. however, due to strengthening of the banking sector, there has also been bank merging with other types of financial institutions which have offered different products and services, by which the banks expanded their range of products and services. these processes have resulted in a creation of large banks, i.e. "financial institutions that are so big that their activities represent a significant share in the payment system of a country, in the process of granting loans and in other financial services. the result is that any significant disruption in the operations of such institution has a serious impact on the financial market of that country. the consequence of this big to fail factor is that the country protects the business of such institutions and their customers in a way that does not guarantee the other market participants" (petrović & ružić, 2001, p. 9). as in other industries, the level of competition in the banking sector is essential to the production efficiency of banking services, product quality and level of innovation in the sector. determining the degree of competition and concentrations in the banking sector and the relationship between these concepts represents the analytical and methodological issue. concentration effect on the efficiency of banking sector in the republic of serbia 283 numerous empirical studies have been devoted to this topic. most studies reach the conclusion that the market conditions prevailing in banking sectors can be best characterized as naturally oligopolistic. this means that – in the long term – there is just room for a few viable banks. in this context, a highly concentrated banking sector is the logical outcome of market forces (bikker & groeneveld, 1998, p. 3). a group of authors claessens, demirguec-kunt and huizinga (2000) investigated the role of foreign banks and indicated that the entry of foreign banks makes the domestic banking system more efficient and reduces interest margins. using data from the banks of 80 countries, they examined the effects of the bank concentration and their regulation on banks efficiency. they came to the conclusion that the concentration of banks has a negative and significant impact on the efficiency of the banking system, except in rich countries with welldeveloped financial systems. in addition, they consider that regulatory barriers of new banks entries, especially those relating to foreign banks, as well as implicit and explicit restrictions of the bank activities are associated with the lower level of bank margins. their measure of bank efficiency, the net interest margin is not necessarily an indicator of the actual level of competitiveness on the market, but it can demonstrate other factors, such as market power and risk appetite. claеssens and laeven (2003) examined the relationship between the type of market structure and net interest margin. using data from banks and a customized version of methodology panzar and rosse, they assessed the degree of competition in the banking systems of fifty countries. their results confirm that competitiveness helps determine the degree of efficiency, especially through the entry of foreign banks and the elimination of activity restrictions. larger presence of foreign banks and smaller number of restrictive measures in the banking sector make the banking system more competitive. also, the restrictions on entering commercial banks reduce competition, which indicates that the most important element of the competitiveness is the freedom of entry. they have not shown that the concentration of the banking sector is negatively correlated with competitiveness. on the contrary, their research proves that the banking system which is more concentrated is more competitive. the results show that a compromise had not to exist between higher and lower concentrated systems. a competitive system can be more important for ensuring the competitiveness of the system with a low concentration. in the study of rules governing the banking system, including input and output constraints, barth, caprio and levine (2001) have come to the conclusion that stricter entry conditions have a negative impact on the bank efficiency, which results in increase of the interest margin and costs, while restrictions on participation of foreign banks lead to increased fragility of banks. the theory provides conflicting forecasts about the relationship between regulations, concentration, institutions and bank efficiency. many of these contradictions are the result of different beliefs about the causes of concentration. one common view holds that regulatory impediments to competition and monopolistic power create an environment in which a few powerful banks stymie competition with deleterious implications for efficiency (demirgueckunt et al., 2003, p. 1). from that aspect, concentration is a useful signal for lack of competitiveness, and therefore for an inefficient market. the theory of "efficiency-structure” claims that more effective banks have lower costs and a higher market share (demsetz, 1973). with this perspective, the competitive environment can produce concentrated and efficient banking systems. enlargement, i.e. strengthening the concentration of banks should positively affect the entire economic system (marinković, 2012). the arguments that support this claim are that big banks have a more efficient organization and management, and thus a greater potential for higher quality services. 284 e. eraković one of the most commonly used indicators is herfindahl–hirschman index (hhi). it measures the concentration summing squares of market shares of all companies in an industry. the formula for calculating is: 2 1 ( ) n i i hhi x    where is n – the number of companies in the market, a x – a share of i company. the advantage of herfindahl-hirschman index is that it includes the value of market shares of all the companies of an industry and, by their squaring, it gives greater weight shares of larger companies. the value of hhi, theoretically, may be in the range of 0 to 10 000. in the case of monopoly, the herfindahl-hirschman index value is 10 000, because the offer of the monopoly company equals the entire branch. in perfect competition, the offer of each company tends to 0, so the value of this index tends to 0. table 1 types of markets according to the values of herfindahl-hirschman index hhi value concentration level hhi < 1000 non-concentrated (low concentrated) offer. 1000 ≤ hhi < 1800 medium concentrated offer. 1800 ≤ hhi < 2600 high concentrated offer. 2600 ≤ hhi <10000 very high concentrated offer. hhi = 10000 monopolistic concentrated offer. source: (begović et al., 2002, p. 35) by herfindahl-hirschman index, the concentration of the banking sector in the time interval from 2008 to 2015 will be analyzed. 2. efficiency of the banking sector comparing the financial systems and different countries and regions, allen and gale (2001) conclude that there is inherent inefficiency within the monopolistic power of banks, which may also adopt an excessively conservative approach while the competitive nature of markets tends to encourage innovation and growth-enhancing activities (ferreira, 2012, p. 7). in recent decades, banks have been operating in a very competitive environment, and in addition to size, capitalization, liquidity and other quantitative variables, they have been "forced" to take into account the efficiency as well. however, it should not be concluded that the efficiency is a new asset for the banking system. on the contrary, this variable has always been an asset for the banking system, but it has not been a priority, because the business conditions have been different than today. the structure, performance and function of the banking sector had to adapt to modern conditions, demanding a higher level of efficiency which is crucial for their survival and it can create a competitive advantage for them. an efficient banking sector is able to neutralize negative shocks and to contribute to the stability of the financial system. the performance of each bank is measured relative to what the best performance of a best practice bank on the efficient frontier would be expected to be if it faced the same exogenous conditions as the bank being measured (berger, 2007, p. 122). concentration effect on the efficiency of banking sector in the republic of serbia 285 there are three categories of efficiency: productive, cost and profit efficiency (apergis & alevizopoulou, 2011, p. 330). the first type refers to the production based on given input parameters. the production plan is effective if there is a way to increase production with the same amount of inputs, i.e. it is not possible to produce the same amount with less inputs. the second type of efficiency measures the ability of banks to reduce costs at a given price of input parameters. in fact, this type of efficiency measures how close or far the costs of banks are from the banks with the best practice, producing the same amount in the same business conditions. if the costs of a bank are higher than the costs of the best bank practice, and that difference cannot be explained by any statistical noise, then, that bank is characterized as cost inefficient. finally, profit efficiency measures the ability of banks to maximize profits given the prices of inputs and outputs. in fact, it implies maximizing production at a given level of expenditure. in addition to the traditional way of measuring efficiency, there are two approaches that can be used to assess the efficiency of banks – the parametric approach and nonparametric approach. both require the specification of a cost or production function or frontier, but former involves the specification and econometric estimation of a statistical or parametric function/frontier, while the non-parametric approaches provides a piecewise linear frontier by enveloping the observed data points (drake & hall, 2003, p. 897). in general, both approaches analyze the best practices of production, cost or profit. a serious lack of the non-parametric approach is that it does not allow that there is any error in the data, and therefore assumes that the final assessment is solely because of inefficiencies. in this paper, the concept of efficiency will be reflected cost to income ratio (c/i ratio). this indicator shows the ability of banks that, by achieved interest margin, as a major generator of profits, and other operating income, covers the part of business expenses arising mainly out of the credit-deposit operations themselves (ljumović et al., 2011, p. 44). on the cost side, there are non-interest expenses, whose most important elements are gross earnings, depreciation expenses, tangible and intangible expenses and certain categories of expenditures that may arise on the basis of credit-deposit operations. in the denominator, there are incomes that pose a sum of net interest income and other operating incomes. based on the cost-to-income ratio investors have a clear picture of how efficiently the firm is being run – if it is lower, the bank will be more profitable. also, changes in the ratio indicate potential problems: if the ratio rises from one period to the next, it means that costs are rising at a higher rate than income, which could suggest that the company is failing to remain focused on attracting more business. 3. data and methodology the subject of analysis in this study is to determine how the concentration in the banking sector of the republic of serbia affects the efficiency of the banking sector of the republic of serbia. the starting hypothesis is: higher concentration in the banking sector of the republic of serbia contributes to the reduction of efficiency. in this study, the methods of statistical analysis were: correlation and regression analysis. using these methods it is possible to determine the nature of the connection, the significance of the connection and influence hhi on c/i ratio. 286 e. eraković for the purposes of methodological explanations and analysis, the data from the balance sheet and income statement which commercial banks deliver to the national bank of serbia have been used, for the period from 2008 to 2015. 3.1. the results of research and discussion in the time period from 2008 to 2015 there was a decrease in the number of banks. at the end of 2008, in the republic of serbia, thirty-four commercial banks were operating, six of which were large, seventeen medium and eleven small ones 2 . the group of large banks, in that year, had 51.22% of the total assets of all commercial banks. also, in that year, there were fourteen banks in majority domestic ownership (eight banks in majority state, six of them in majority privately owned), while twenty banks were with majority foreign ownership. at the end of the observed time period, or at the end of 2015, in the republic of serbia, thirty commercial banks operated, representing a decrease of 12% compared to the initial year. the structure of commercial banks consisted of six large banks with a share of 60.10% of the total assets of all commercial banks, twelve medium and twelve small banks. of the total number of banks, seven banks were in majority domestic ownership (six of which were majority stateowned and majority privately owned), and twenty-three banks with majority foreign ownership. in the observed period, there is a continuous increase in total assets of commercial banks. a decrease is only present in 2013, which is a consequence of decreasing the biggest key categories of assets, with the most prominent decrease in loans and advances. in terms of ownership structure of banks in the republic of serbia, foreign-owned banks dominate, whose shares in total assets are around 75% during each year of the period under consideration. the results of the research on the concentration, according to the herfindahl-hirschman index, show that the banking market of the republic of serbia is one of the fragmented markets with a large number of small uncompetitive banks. chart 1 movement of hhi values in the period from 2008 to 2015. source: author's calculations based on data from commercial banks financial reports of the republic of serbia 2 small banks have assets of less than 1% of total assets of all banks, medium-sized banks have assets of more than 1% but less than 5% of the total assets of all banks, while large banks are banks with assets exceeding 5% of the total assets of all banks. concentration effect on the efficiency of banking sector in the republic of serbia 287 based on chart 1, it can be seen that the herfindahl-hirschman index has a maximum value for capital. due to the growth of large banks, there has been an increase in the value of the index. the index value of the total assets of all banks rose from 629.58 at the end of 2008 to 796.38 at the end of 2015. measured by the index, the higher level of concentration is present in all variables. also, the highest concentration level was recorded in the capital in 2015 and amounted to 855.34. for the observed period, it can be concluded, that the banking sector, from year to year, is characterized by a higher level of concentration. in the analyzed period, increasing revenues and reducing costs can be seen, which had a positive impact on the bank efficiency measured by the cost to income ratio. the banking sector was the least effective in 2010 and 2012, which resulted in a considerable increase in costs. by statistical analysis, correlation, the relationship was examined between the value of cost to income ratio and herfindahl-hirschman value index for total assets, capital and net interest for the period from 2008 to 2015. the degree of quantitative agreement was 0.721; -0.715; -0.716 respectively. the highest degree of linear correlation is between total assets and the level of efficiency, where pearson's coefficient has a value of 0.043 which indicates a high degree of linear correlation between these two variables. by applying the regression analysis of the cost to income ratio, which represents the dependent variable and herfindahl-hirschman index for total assets (independent variable), the degree of influence of the independent variable on the dependent was examined. unit increase in hhi of total assets affects the change in the value of cost to income ratio for the -0.721. the regression model is statistically representative and based on it, it is possible to predict changes in cost to income ratio at hhi increase of total assets. in the regression model, it can be noted that it is possible to predict the movement of the dependent variable values based on the changes of the independent variable. table 2 regression analysis model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.158 .331 3.496 .013 hhi total assets -.001 .000 -.721 -2.551 .043 source: author’s calculation conclusion concentration in the banking sector is generally horizontal, which means that there is joining of market participants that offer substituent products. the main motives because of which concentration appears are: ratio economy, diversification of credit risk, improving organizational efficiency, lower financing costs and scale economy. however, noncompetitive market structures, especially monopolies, generate adverse effects on social welfare. for this reason, it is necessary to create adequate antitrust politics and to establish an effective antitrust institution. the politics of competition protection contributes to the achievement of effective competition that is a prerequisite for economic and social progress (stojanović & kostić, 2013). 288 e. eraković to demonstrate the state of concentration in the banking sector of the republic of serbia, a statistical analysis of the variables has been conducted: total assets, capital and net interest income. concentration analysis was performed using market herfindahl-hirschman index. the highest level of concentration measured by the herfindahl-hirschman index is in the capital, while the lowest concentration level achieved is in net interest income. in general, the banking sector of the republic of serbia can be characterized as fragmented, and the degree of concentration increases from year to year. how the concentration and efficiency of the banking sector of the republic of serbia will change in the future depends on many external and internal factors on the state of the global market, new regulatory requirements and internal strategies of individual banks. thereby, it should be borne in mind that prevention of monopoly in the banking sector should be imperative. references apergis, n. & alevizopoulou, e. (2011). bank efficiency: evidence from a panel of european banks. panoeconomicus, 3, 329-341. barth, j. r., caprio, g. jr. & levine, r. (2001). the regulation and supervision of banks around the world: a new database, retrieved from: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.198.7983&rep= rep1&type=pdf, accessed on: 23 august 2016. begović, b., bukvić, r., mijatović, b., paunović, m., sepi, r. & hiber, d. (2002). antimonopolska politika u sr jugoslaviji [antimonopoly policy in fr yugoslavia]. centar za liberalno – demokratske studije. beograd. berger, a. n. (2007). international comparisons of banking efficiency. financial markets, institutions and instruments, 16, 119-144. bikker, j. a. & groeneveld, j. m. (1998). competition and concentration in the eu banking industry. research series supervision no. 8. de nederlandsche bank. claessens, s., demirguec-kunt, a. & huizinga, h. 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(2012). bank efficiency, market concentration and economic growth in european union. working papers issn 0874-4548. school of economics and management, technical university of lisbon. ljumović, i., marinković, s. & pejović, b. (2011). efikasnost i profitabilnost banaka – koliko su koncepti međusobno isključivi? [efficiency and profitability of banks – how many concepts are mutually exclusive?]. retrieved from: http://scindeks-clanci.ceon.rs/data/pdf/0350-0373/2011/0350-03731104043l.pdf, accessed on: 20 september 2016. marinković, m. (2012). nivo koncentracije u bankarskom sektoru srbije [the level of concentration in the banking sector of serbia]. makroekonomske analize i trendovi, novembar, 39-40. petrović, s. & ružić, t. (2001). koncentracija banaka [the concentration of banks]. hrvatska pravna revija, br. 9/2001. stojanović, b., stanišić, t. & veličković, m. (2010). problem zaštite konkurencije u trgovini na malo u srbiji [the problem of protecting competition in retail in serbia]. škola biznisa, 3/2010, 57-66. stojanović, b. & kostić, m. (2013). competition condition and the impact of market share on firms’ profitability. ekonomika preduzeća (pp.325-338). yu issn 0353-433 x, serbian association of economists journal of business economics and management. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.198.7983&rep=rep1&type=pdf http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.198.7983&rep=rep1&type=pdf http://siteresources.worldbank.org/dec/resources/84797-1114437274304/final.pdf http://scindeks-clanci.ceon.rs/data/pdf/0350-0373/2011/0350-03731104043l.pdf concentration effect on the efficiency of banking sector in the republic of serbia 289 uticaj koncentracije na efikasnost bankarskog sektora republike srbije za kvalitetnu analizu uticaja koncentracije specifične delatnosti, kao što je bankarstvo, na ostala kretanja u bankarskom sektoru neophodno je njeno precizno merenje. usled transformacije bankarskog sektora u republici srbiji, u relativno kratkom vremenskom intervalu, došlo je do značajnog smanjenja broja banaka i povećanja koncentracije. sa druge strane, ključni faktor za opstanak banaka na tržištu postala je efikasnost poslovanja. u radu je koncentracija merena herfindahl-hirscham-ovim indeksom, dok je stepen efikasnosti određen količnikom troškova i prihoda (cost to income ratio). pomoću linearne korelacije i regresione analize ispitana je povezanost između stepena koncentracije i nivoa efikasnosti bankarskog sektora republike srbije u vremenskom intervalu od 2008. do 2015. godine, kojima je potvrđeno postojanje jake veze između ovih varijabli. ključne reči: koncentracija, efikasnost, bankarski sektor, republika srbija 2267 facta universitatis series: economics and organization vol. 14, n o 2, 2017, pp. 93 104 doi: 10.22190/fueo1702093p original scientific paper market size as a determinant of the foreign direct investment inflows in the western balkans countries 1 udc 339.1:339.727.22(497-15) marija petrović-ranđelović, vesna janković-milić, ivana kostadinović university of niš, faculty of economics, serbia abstract. numerous empirical studies confirm that market size is one of the key determinants of foreign direct investment inflows, particularly market-oriented projects of foreign direct investment. basically, the dominant view is that a larger market of the host country attracts a greater quantum of foreign direct investment. this paper examines the influence of market size, as well as the impact of market growth, trade openness, and population size on the foreign direct investment inflows into the six countries of the western balkans region in the period 2007-2015. multiple regression analysis was applied in examining the impact of these variables on foreign direct investment inflows. the obtained results show that market size, market growth and population size had a significant positive impact, while trade openness had a negative impact on foreign direct investment inflows in the observed countries. thus, the main findings of this research confirm that market size is an important determinant of the foreign direct investment inflows in the western balkans countries. key words: market size, foreign direct investment, western balkans countries jel classification: f21, f23, p20 introduction the global business environment is increasingly taking the character of multidimensional phenomena influenced by intensive changes in the modern world economy. in the conditions when the intensification of global flows of economic activity are accompanied by increased uncertainty and risk in maximizing profitable business expectations, a growing number of 1received november 2, 2016 / accepted april 10, 2017 corresponding author: marija petrović-ranđelović university of niš, faculty of economics, serbia e-mail: mrjpetrovic76@gmail.com 94 m. petrović-ranđelović, v. janković-milić, i. kostadinović companies are involved in the processes of internationalization realizing their activities beyond the borders of the national economy. the significant processes of internationalization of the activities of multinational corporations in the period after the 1980s were followed by an impressive growth of international flows of private capital in the form of foreign direct investment. this statement is confirmed by the fact that global inflows of foreign direct investment increased from 54.396 million in 1980 to 1,762.155 million in 2015 (unctadstat). according to unctad (1991), the explosive growth of foreign direct investment after 1985, is a consequence of the recovery of most economies in the world from the recession of the early 80s, achieving high growth rates in both developed and developing countries and improvement of cross-border mergers and acquisitions activity. in addition, the growth of the service sector in the world economy, supported by the measures of liberalization of regulations on the movement of capital flows in this sector, contributed to the increase of investment activities of multinational corporations. practical research confirms that foreign direct investment “for two decades had sovereign rule on the global level in the role of promoter of growth and development, especially in developing countries and countries in transition” (aranđelović & petrović-ranđelović, 2011, p. 143). despite the fact that developed countries participated with the highest percentage of total inflows of foreign direct investment in the period from 1980 to 2015, an increase in inward foreign direct investment flows towards developing countries from 7,396 million dollars in 1980 to 764,670 million in 2015 is noticeable. in addition, the opening up of markets in the former socialist countries and entering into intensive processes of economic and political reforms in the early 90s the interest of multinational corporations to undertake foreign direct investment in these countries sharply increased. inward foreign direct investment towards the countries in transition increased from only 75 million in 1990 to 34,988 million in 2015 (unctadstat). the growing role of foreign direct investment in the global economy over the past three decades has launched a number of discussions and intensive research in order to determine the relationship between foreign direct investment and economic growth and development. the availability of capital and the level of applied technology is an essential difference between developed countries, on the one hand, and developing countries and countries in transition, on the other hand. the low level of domestic savings certainly represents a far greater development problem for developing countries and countries in transition. in order to compensate for the gap that exists between the volume of domestic savings and the need to finance investment, developing countries and countries in transition are forced to hire additional funds from abroad. the transfer of capital through foreign direct investment represents significant support in their development efforts and catching up with developed countries. besides, the importance of foreign direct investment in this country lies not only in providing financial support for the establishment of new production capacity and the purchase of equipment, but also in technology transfer and higher forms of organization from a relatively technologically advanced economy. hence, the fact that the attraction of foreign direct investment has become an important element of the development strategy of developing countries and countries in transition is not surprising. however, despite the existence of consensus among researchers that foreign direct investment is accompanied by a variety of developmental benefits to the host country, “the major reasons behind foreign investors seeking a country in which to invest and the uneven spatial distribution of fdi across countries are still unanswered questions in both market size as a determinant of foreign direct investment inflows in the western balkans countries 95 the theoretical and the empirical international business literature” (burcak, 2015, p. 39). basically, the point is to clarify why companies from some countries decide to locate their production activities in other countries. the structure of this paper is as follows. after introduction, an overview of the determinants of foreign direct investment is given. the third part of the paper provides a brief review of the empirical literature on market size as a determinant of foreign direct investment inflows. in the fourth part of the paper, is presented the methodology and the information base of research are presented and the initial hypothesis is defined. the fifth part concerns the research results and their discussion. in conclusion, the research results are summarized. 1. an overview of the determinants of foreign direct investment the fact that foreign direct investment is an extremely complex phenomenon gave rise to an active consideration of all relevant factors that basically encourage the movement of this form of private capital in the international context. great debates are led in the scientific community about the determinants of foreign direct investment inflows. dunning's approach in explaining the limits and models of international production synthetized the oli paradigm or eclectic theory on foreign direct investment, and is the most reliable theoretical framework for analyzing the determinants of international production. as a comprehensive and internationally accepted concept of foreign direct investment, the oli paradigm represents a synthesis of the key elements of the three partial theoretical explanations (o + l + i) and their combination into a single theory on foreign direct investment. its importance is reflected in the fact that it implicitly indicates the conditions under which foreign direct investment is realized. these terms do not represent anything other than benefits (ownership advantages of the company, internalization advantages and locational advantages of the host country) which, in themselves, do not represent a direct incentive for the transfer of business activities abroad, but a precondition for achieving adequate profits. the expansion of cross-border activities of multinational corporations in the period after the second half of the 1980s is the result of imperfections in the market as a dominant feature of international economic relations. in such circumstances, ownership specific advantages are gaining importance. the most common of these are technology or marketing. in this regard, o (ownership-specific advantages) provides an answer to the question why invest abroad. multinational companies undertake direct investment abroad on the ground that having one or more specific benefits must clearly outweigh the additional costs which the company is exposed to in its operations in foreign markets. ownership advantages of the company relate to the possession of a particular product or a particular manufacturing process which other companies do not have the right to use. also, this includes parts of intangible capital of the company, such as managerial, marketing and entrepreneurial knowledge and skills, organizational skills, and more. regardless of the form in which they appear, the ownership advantages either increase revenue or minimize the cost of doing business to the extent that is sufficient to neutralize the adverse circumstances in the investment environment of the host country. however, the ownership-specific advantages alone are not sufficient to explain the expansion of cross-border investment activities of multinational corporations, since the company could exploit them either through licenses or through trade. therefore, dunning (2001) analyzed the following elements: 96 m. petrović-ranđelović, v. janković-milić, i. kostadinović 1. l locational advantages (locational advantages the specific advantages of the host country) which provide an answer to the question of where to execute an investment location. the selection of a specific investment location depends not only on the availability of resources, but also on economic, social and political factors, such as the size of the market and its structure, the achieved level of economic development and prospects for future growth, cultural, legal, political and institutional environment and national legislation and policies. besides, the market potential of the host country of foreign direct investment should offer such a package of locational advantages that will make it a profitable attractive investment location compared to other ways of servicing foreign markets; and 2. i internalization advantages provide the answer to the question of which model of entering the foreign markets the company should choose. in the conditions of the existence of market imperfections, companies find it more useful to exploit internally their specific ownership advantages, rather than to sell, or transfer the right to use through the market. internalization of transactions within the system of multinational corporations is a way not only to use more efficiently the specific ownership advantages, but also a condition for the retention of control over the use of the transferred benefits. the eclectic theory of foreign direct investment provides a framework for fundamental understanding the motives for undertaking foreign direct investment from the perspective of the investor, as well as the determinants of foreign direct investment inflows. starting from the fact that in deciding on the operations abroad, multinational corporations have in mind different kinds of motives. according to dunning we could distinguish the following types of foreign direct investment in terms of their motivation: “(1) natural-resource seeking foreign direct investment, which aims to gain access to a natural resource not available in the company's home market; (2) market-seeking foreign direct investment, which aims to gain access to new customers, clients, and export markets; (3) efficiency-seeking foreign direct investment, which aims to reduce production costs by gaining access to new technologies or competitively priced inputs and labor; (4) strategic-asset seeking foreign direct investment, which aims to go after strategic assets in a local economy, such as brands, new technologies, or distribution channels” (hornberger et al., 2011, p. 2). from the point of the eclectic theory of foreign direct investments, the determinants of foreign direct investment can be classified into two groups: micro determinants or factors on the supply side (company specific), which are specific to each company and involve ownership advantages and internalization advantages, and macro determinants or the factors on the demand side (country specific), which refers to the location advantages of the host country. the importance of individual determinants in determining inward flows of foreign direct investment is largely determined by the country of destination, the sectoral orientation of foreign direct investment, and the model of entry of foreign direct investment in the host country. let us add that although the role of individual factors in certain situations can be crucial for making investment decisions, yet usually it brings on the basis of observing the interactive operation of factors that shape the investment environment. since the attractiveness of a prospective host country of foreign direct investment is conditioned by the location-specific advantages it possesses, it is quite understandable that variations in the distribution of inward foreign direct investment flows globally solely attributed to a number of factors on the demand side, or country specific determinants different in character and practical intensity. according to the literature on foreign direct market size as a determinant of foreign direct investment inflows in the western balkans countries 97 investment, the country specific determinants of inward foreign direct investment flows can be classified for analytical convenience into three categories: a) the policy of the host country, b) economic determinants, and c) business facilities (unctad, 1999). this study will focus on the economic determinants, with special emphasis on market size as an important economic determinant of inward foreign direct investment flows. 2. literature review in modern conditions and trends prevailing in the global economy the question of the amount of the rate of profit as the driving force that encourages owners of private capital to undertake direct investment is becoming less important in comparison to the question of ensuring and maintaining the market. following the logic of modern economy, it is better to stay in one market in an even lower rate of profit, than to be eliminated from the market. “the former magnetic force high profit rate is now replaced by the large and expansive perspective of the market, former aspirations for higher wages the desire to avoid large losses. so, the need to conquer new and retain existing markets and the need to establish a long-term fundamentals of international economic cooperation are motivated by the desire for direct foreign investment. they are offered either to provide a long-term investor mainly export finished products or provide long-term and safe imports, mainly raw materials or semi-finished products” (trlin, 1983, p. 289). one of the main reasons for undertaking market-seeking foreign direct investment is to avoid the tariff and non-tariff barriers that exist in the country in which it invests directly and to avoid high transaction costs. however, generally speaking, they are taken in order to achieve market access of the host country, as well as achieve a favourable position on it, especially in those where there are good prospects for achieving a dynamic growth in the future, so that the market size of the host country and its growth play a significant role in determining the inward foreign direct investment flows. according to chakrabarti (2001), market size has, by far, been the single most widely accepted significant determinant of foreign direct investment flows. pointing to the importance of market size as the fundamentals of inward flows of foreign direct investment has a long tradition in the literature on foreign direct investment. the market size hypothesis, proposed by balassa (1966) and later developed by scaperlanda & mauer (1969), supports the idea that “a large market is necessary for efficient utilization of resources and exploitation of economies of scale: as the market-size grows to some critical value, foreign direct investment will start to increase thereafter with its further expansion” (chakrabarti, 2001, p. 96). by investigating the determinants of us foreign direct investment in the european economic community in the period 1958-1968, scaperlanda & mauer (1969) came to the conclusion that the size and growth of the market of the host country play a significant role in the decision on the location of foreign direct investment. the market size hypothesis claims that, due to economies of scale, foreign direct investment will not be taken in any country, if it does not meet the market requirements in terms of size which is necessary for the effective implementation of production technology. when a foreign investor builds production capacity in a given country, the inflow of capital will increase as the demand grows. the role of demand growth is based on the relationship between the total (aggregate) demand and the capital necessary to meet the demand. the hypothesis of growth presupposes the existence of a positive 98 m. petrović-ranđelović, v. janković-milić, i. kostadinović relationship between capital inflows and the growth rate of gdp of the host country. by applying simple regression, scaperlanda and mauer proved that the inflow of us direct investment, measured on the basis of annual changes in the value position of the european economic community, is in accordance with the hypothesis about the size of the market. the market size hypothesis, as an explanatory variable of inward foreign direct investment flows, is supported by a number of empirical studies on the determinants of inward foreign direct investment flows, in both developed and developing countries, which take gdp per capita as a proxy for market size. among the earliest research, the study by bandera & white (1968) is emphasized. they used pooled data on the united states manufacturing foreign direct investment in seven european economies over the period 1958-1962, and strongly supported the hypothesized dependency of the level of foreign direct investment on the level of national income and the host country. schmitz & bieri (1972) and lunn (1980) also found a statistically significant effect of market size in determining inward flows of the us foreign direct investment in the eec, while kravis & lipsey (1982) verified that the host country's market size had a decisive influence on the location decision by the us multinationals in the 1960s. by applying econometric analysis of data on the us manufacturing investment in 24 countries in the period 1954-1975, nigh (1985) found that the host country gdp per capita was an important factor in determining the inflows of foreign direct investment. the market size hypothesis was confirmed in the study of bilateral flows of direct investment among 6 industrialized countries over the period 1969-1982 (culem 1998). by applying econometric analysis of a single equation model using aggregate sectoral data on us multinational investment in 42 countries in the period 1982-1988, wheeler & mody (1992) showed that market size is a more significant factor in determining the inflow of foreign direct investment in developing countries than in industrialized countries. the existence of a strong correlation between foreign direct investment and market size in developing countries as host countries is confirmed in previous studies by root & ahmed (1979), schneider & frey (1985) and sader (1993). by applying econometric analysis of a non-linear simultaneous equations model using pooled aggregate data for 62 countries over the period 1975-1978 and for 51 countries over the period 1983-1986, tsai (1994) observed that a higher per capita gdp is associated with a higher level of inward foreign direct investment. his findings also support the research by shamsuddin (1994), billington (1999), and pistoresi (2000). “looking at a set of 30 empirical studies that focus on developing and transition economies, which have been conducted since 2000, some interesting insights are revealed. the studies vary in geographic coverage, with some focusing on transition economies in eastern europe and asia, some on africa or latin america only, and some on single countries. regardless of the geographic focus, the majority of the studies find that the size and growth potential of markets are significantly associated with foreign direct investment inflows” (hornberger et al., 2011, p. 327). so, for example, resmini (2000) investigates the determinants of the european union foreign direct investment concentrates on the manufacturing sectors in the ceecs at the sectoral level. she found that central and eastern european countries with larger populations attract a larger quantum of inward fdi. bevan & estrin (2000) came to similar findings. they pointed out the fact that european transition economies with larger economies tend to attract more foreign direct investment. market size as a determinant of foreign direct investment inflows in the western balkans countries 99 using panel data for 24 developing countries, kok & ersoy (2009) confirmed in a more recent study that there is a positive relationship between foreign direct investment and market size. wadhwa & reddy (2011) explored the impact of market seeking, efficiency seeking and resource seeking factors of host countries on foreign direct investment inflows of host countries by taking a sample of 10 asian countries in the time period 1991-2008. panel regression results show that among market seeking factors, gdp and exports show a significant and positive relationship with foreign direct investment which was also hypothesized. gabriel et. al. (2016) examined the influence of market size on foreign direct investment to nigeria for the period 1970-2011, and found that economy size and population size have a positive and significant effect on foreign direct investment to nigeria. 3. methodology and research hypothesis the data for this research is collected from the world development indicators. the data set covers the period 2007-2015 for the six western balkans countries, namely, albania, bosnia and herzegovina, croatia, macedonia, montenegro and serbia. the dependent variable in this study is the annual fdi net inflow in current us$. the main reason why we use this dependent variable is because if we use fdi per capita the results may not be comparable, apropos; market size can impact the level of fdi per capita, but not its annual change. for the purpose of this study we chose four independent variables. the first independent variable is the market size, measured by gdp per capita, which “in most empirical works on the determinants of foreign direct investment and has, by far, been the most widely accepted as having a significantly positive impact on foreign direct investment (chakrabarti, 2001, p. 97). however, it should be noted that some studies have used absolute gdp as an alternative measure. “it has been pointed out that absolute gdp is a relatively poor indicator of market potential for the products of foreign investors, particularly in many developing economies, since it reflects the size of the population rather than income” (chakrabarti, 2001, p. 98). starting from the fact that for “developing and transition countries perhaps more important than market size is market growth potential”, (hornberger et. al., 2011) in this study we introduce another independent variable that refers to market growth, measured by the gdp growth rate. the introduction of these variables is based on the knowledge that the potential advantages of being a fast growing market are reflected in the realization of the basic motivation for investing maximizing profits. the third independent variable is trade openness. the inclusion of this variable in the study was carried out because in the present conditions of globalization of the world economy, the survival and promotion of an economy is almost unimaginable if it does not follow the model of open and connected with the world economy. international economic cooperation between the countries causes an increasing dependence of countries on foreign trade. the degree of openness of the economy measures the involvement of countries in the international division of labor and the degree of its dependence on other countries. “openness to “merchandise” trade is the value of merchandise trade (exports plus imports) as a percent of gross domestic product (gdp)” (world integrated trade solution). when the coefficient of trade openness is greater than 50%, it means that one country is heavily dependent on foreign trade. since by foreign trade the boundaries of the domestic market 100 m. petrović-ranđelović, v. janković-milić, i. kostadinović expand, a greater degree of openness of the host country provides an opportunity for foreign investors to realize economies of scale through international markets, rather than just rely on the market of the host country. a greater degree of openness not only contributes to the achievement of economies of scale, but also encourages specialization and efficient absorption of the technology that is transferred through foreign direct investment. as the fourth explanatory variable in this study, we take population size. we include this variable in the analysis because, in the development process, population does not occur in a one-sided role of the manufacturers, but also in the role of the factor which, by its purchasing capacity, determines the scale of the internal market. the objective of this paper is to analyze the impact of market size, along with market growth, trade openness, and population size on the foreign direct investment inflows in the context of the western balkans countries. however, the study does not analyze the impact of selected variables on the foreign direct inflow on each country, but on the region as a whole. in order to investigate the impact of the selected variables on the foreign direct inflows in the western balkans countries, the following hypothesis are developed and tested: h1: there is a statistically significant relationship between market size estimated by the gdp per capita and foreign direct inflows in the region. h2: there is a statistically significant relationship between gdp growth, as a measure of market growth of the observed countries, and the foreign direct investment inflows. h3: trade openness does not have a statistically significant impact on the foreign direct investment inflows in the region. h4: the inflows of foreign direct investment in the western balkans countries were statistically significantly determined by population size. multiple regression analysis will be applied in order to estimate the influence of the selected variables on the foreign direct investment inflows in the western balkans countries. 4. empirical results and discussion in connection with the discussion in the previous section, the following variables are included in the multiple regression model: fdi  foreign direct investment, net inflows (bop, current us$) gdppc  gdp per capita (current us$) gdp growth  annual % trdo  trade openness (% of gdp) population – total population in observed countries in the multiple regression model variable, fdi has the character of a dependent variable, while the remaining variables included in the model are treated as independent variables. this model provides the best value possible to predict the dependent variable based on the value of independent variables if all conditions are met. based on the size of regression coefficients, it is possible to conclude what the relative impact or importance of each independent variable is if these coefficients are converted into beta coefficient β. one of the conditions for the use of regression analysis is that there is a linear dependence between variables. it is necessary because the analysis begins by calculating the coefficients of simple correlation (bivariate correlations) for all pairs of variables, all of these calculations require a linear relationship between pairs of variables. market size as a determinant of foreign direct investment inflows in the western balkans countries 101 table 1 correlations coefficients fdi gdpr gdppc trdo population fdi pearson correlation 1 -.050 .464 ** -.322 * .599 ** sig. (2-tailed) .720 .000 .019 .000 gdp growth pearson correlation -.050 1 -.335 * .269 -.221 sig. (2-tailed) .720 .013 .052 .108 gdppc pearson correlation .464 ** -.335 * 1 -.341 * .147 sig. (2-tailed) .000 .013 .012 .288 trdo pearson correlation -.322 * .269 -.341 * 1 -.146 sig. (2-tailed) .019 .052 .012 .298 population pearson correlation .599 ** -.221 .147 -.146 1 sig. (2-tailed) .000 .108 .288 .298 ** correlation is significant at the 0.01 level (2-tailed). * correlation is significant at the 0.05 level (2-tailed). based on the value of the pearson correlation coefficient (bivariate correlation), it can be concluded that there is a linear relationship between variables. the conclusion can be made that there is no multicollinearity between the variables included in the model, because the values of correlation coefficients do not exceed 0.5. which means that this assumption of multiple linear regression model is fulfilled. table 2 shows the values of the coefficient of multiple determination and adjusted coefficient of multiple determination. on the basis of these values, it can be concluded that the selected independent variables explain 57% of the variability dependent return variables, i.e. fdi. table 2 model summary b model r r square adjusted r square std. error of the estimate durbin-watson 1 .755 a .570 .534 900773997.19 1.887 a. predictors: (constant), population, gdppc, trdo, gdpr b. dependent variable: fdi table 2 shows the realized value of the durbin-watson's statistics, which amounts to 1,887. this test is used to detect the presence of autocorrelation in the residuals, which is characteristic of the time series. for a number of observations at our disposal (54) and the number of independent variables included in the model (4), the upper limit value of the durbin-watson statistic is 1.72. given that the realized value of the durbin-watson statistic is greater than this limit value, it can be concluded that there is no correlation between residuals. table 3 shows the estimated value of the regression parameters obtained by the ols (ordinary least squares) method. based on the obtained values it can be concluded that variable population (beta coefficient is 0.569) has the greatest relative impact on fdi, as well as the highest relative importance in her prediction. variables gdppc (significance ˂0,001) and gdpgrowth (˂0,015 significance) also have statistically significant impacts on the inflow of fdi. variable trdo (beta coefficient is -0.170) has the smallest relative influence and importance in predicting the fdi inflow. the impact of 102 m. petrović-ranđelović, v. janković-milić, i. kostadinović this variable is negative, indicating an inverse relationship with fdi. the estimated value of the regression parameter related to this variable is not statistically significant (significance = 0.105), so it can be concluded that the trade openness has no significant impact on the net inflows of foreign direct investment in the observed countries. table 3 regression coefficients a model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) -228675232.622 740664830.473 -.309 .759 gdpgrowth 103447572.743 40851735.385 .262 2.532 .015 gdppc 159752.147 40915.221 .408 3.904 .000 trdo -12458245.146 7522325.622 -.170 -1.656 .104 population 358.900 61.507 .569 5.835 .000 a. dependent variable: fdi conclusion by applying multiple regression analysis, this paper examines the impact of market size, measured using gdp per capita, market growth, measured using gdp growth rate, trade openness, measured using the value of exports plus imports as a percent of gross domestic product gdp and population size, measured using the total population, on the foreign direct investment inflows in the western balkans countries in the period 2007-2015. the key results of this study are consistent with the laid hypothesis. in the above mentioned period, the highest relative impact on the foreign direct investment inflows was recorded for variable population size (beta coefficient is 0.569); whereas, statistically significant impact on the foreign direct investment inflows was recorded for market size and market growth (significance ˂0,001 and ˂0,015, respectively). also, the obtained results hold up the hypothesis that trade openness had no statistically significant impact on the foreign direct investment inflows. moreover, this variable had a negative impact on the foreign direct investment inflows in the observed countries. based on the foregoing, it can be concluded that the results of our study support the findings of other empirical studies on the significant impact of market size on the foreign direct investment inflows. besides, the obtained results of our study especially emphasise that market size occupies a particularly important place among the determinants of the foreign direct investment inflows and, on that basis, achieves a large influence over the investment decision of multinational corporations in the countries of the western balkans. references aranđelović, z. & petrović-ranđelović, m. (2011). uticaj države na priliv i efikasnost stranih direktnih investicija [the impact of the state on the inflow and efficiency of foreign direct investment]. ekonomika preduzeća, 59 (3-4), 143-156. balassa, b. (1966). american direct investments in the common market. banca nazionale del lavoro quarterly review, 77, 121–146. market size as a determinant of foreign direct investment inflows in the western balkans countries 103 bandera, v. n. & white, j.t. (1968). u.s. direct investments and domestic markets in europe. economia internazionale, 21, 117-133. bevan, a. a. & estrin, s. (2000). the determinants of foreign direct investment into european transition economies. journal of comparative economics, 32 (2004), 775–787. billington, n. (1999). the location of foreign direct investment: an empirical analysis. applied economics, 31, 65–76. burcak, p. 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(1994). determinants of foreign direct investment and its impact on economic growth. journal of economic development, 19, 137–163. unctad (1991). world investment report 1991: the triad in foreign direct investment. new york: united nations. unctad (1999). world investment report: trends and determinants. new york and geneva: united nations. unctadstat, http://unctadstat.unctad.org/wds/tableviewer/tableview.aspx, accessed on: 15.12.2016. wadhwa, k. & reddy, s. s. (2011). foreign direct investment into developing asian countries: the role of market seeking, resource seeking and efficiency seeking factors. international journal of business and management, 6(11), 219-226. wheeler, d. & mody, a. (1992). international investment location decisions: the case of u.s. firms. journal of international economics, 33(1-2), 57-76. world integrated trade solution, http://wits.worldbank.org/openness-to-trade-visualization.html, accessed on: 15.12.2016. 104 m. petrović-ranđelović, v. janković-milić, i. kostadinović veličina tržišta kao determinanta priliva stranih direktnih investicija u zemljama zapadnog balkana brojna empirijska istraživanja potvrđuju da veličina tržišta predstavlja jednu od ključnih determinanti priliva stranih direktnih investicija, i to naročito tržišno orijentisanih projekata stranih direktnih investicija. u osnovi, dominantno stanovište je da veće tržište zemlje domaćina privlači veći kvantum stranih direktnih investicija. ovaj rad ispituje uticaj veličine tržišta, kao i uticaj rasta tržišta, trgovinske otvorenosti i veličine stanovništva na priliv stranih direktnih investicija u šest zemalja zapadnog balkana u periodu 2007-2015. u ispitivanju uticaja ovih varijabli na priliv stranih direktnih investicija primenjena je višestruka regresiona analiza. dobijeni rezultati istraživanja pokazuju da su veličina tržišta, rast tržišta i veličina stanovništva imali značajan pozitivan uticaj, dok je trgovinska otvorenost ostvarila negativan uticaj na priliv stranih direktnih investicija u posmatranim zemaljama. usled toga, osnovni rezultati ovog istraživanja potvrđuju da je veličina tržišta značajna determinanta priliva stranih direktnih investicija u zemljama zapadnog balkana. ključne reči: veličina tržišta, strane direktne investicije, zemlje zapadnog balkana facta universitatis series: economics and organization vol. 12, n o 4, 2015, pp. 297 309 contribution of internal audit in the fight against fraud  udc 343.53:657.6 milica đorđević, tadija đukić faculty of economics, university of niš, serbia abstract. the constant increase in the volume of fraud, which leaves devastating effects on business performance, causes a significant preoccupation of enterprises with this problem. being aware of the fact that the establishment of an adequate fraud risk management process is necessity, enterprises are increasingly basing the effectiveness of the mentioned process on the potentials of internal audit. bearing in mind that internal audit does not have the primary responsibility to prevent and detect fraud, its integration in fraud risk management process represents a new challenge for this function. in the paper, authors initially point out the factors that determine the ability of the internal audit to fight against fraud, then the contribution that this function can provide in its prevention, detection and investigation. key words: internal audit, fraud risk management, fraud prevention, fraud detection, fraud investigation. introduction frauds stand for the risk that no company can fully eliminate. aware of this, companies are making significant efforts to establish an effective fraud risk management process, in order to minimize and mitigate its multiple negative consequences. in addition to defining the roles and responsibilities of the audit board, management, and committee, as primarily responsible participants in this process, companies increasingly rely on the strength of internal audit. increased expectations from internal audit in the fight against fraud arise from the fact that it is a function which, focused on creating added value for the company, knows all its processes and activities. indeed, through the proper implementation of its tasks and activities, internal audit can actually greatly contribute to the prevention and detection of fraud. however, it often happens that internal audit is given the responsibilities which it does not have and cannot have. in addition, professional regulations covering internal received october 20, 2015 / accepted december 29, 2015 corresponding author: milica đorđević faculty of economics, university of niš, serbia e-mail: milica.djordjevic@eknfak.ni.ac.rs 298 m. đorđević, t. đukić audit provide for the liability of internal auditors to detect the risk of fraud which the company is exposed to, as well as the way in which the company manages these risks, but do not specify the tasks of internal audit in this process. possibilities and expectations from internal audit as regards effective defence of the company against fraud, on the one hand, and insufficiently precise regulation of its responsibilities in this part, on the other hand, are the reason for reviewing the scope of internal audit in this area. what are the conditions under which the internal audit provides support and security to the board of directors and management that the likelihood of fraud is minimized and is internal audit up to this challenge are the questions whose answers affect the further development of this profession in the field of fraud risk management. 1. risks of fraud in companies’ operations fraud is not a recent phenomenon. even the earliest human history recorded cases of using tricks, various forms of manipulation, and deception, in order to acquire some benefit: land, goods, money, some form of profit, or even someone’s trust [23, 490]. thus, with the advent of organized performance of economic activity, fraud has become a serious threat, to which the business of each company is exposed. this includes a wide range of irregular and illegal activities: deception, bribery, intentional concealment of events or information, forgery, giving false information, concealment of material facts, theft, misuse of funds or other resources, and the like. the association of certified fraud examiners (acfe) classifies all these forms of fraud into three broad groups: (1) manipulation in the financial reporting, (2) misuse of tangible and intangible assets of the company, and (3) corruption. the variety of forms of fraud is one of the reasons why there is no single definition of this category today. thus, the institute of internal auditors (iia) defines fraud as “any illegal act characterized by deceit, concealment, or violation of trust. these actions are not dependent upon the threat of violence or physical force. fraud is perpetrated by persons and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage” [27]. “fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain” [25, 5]. acfe sees fraud as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” [2, 6]. “in a more complex definition, fraud can be accomplished by any person that aims to obtain a certain gain or cause a certain loss, or even to expose others to risk in a dishonest manner” [16]. approaches to determine fraud are different. however, each of these definitions suggests that fraud can be committed by all employees in the company, regardless of their hierarchical level, as well as persons outside the company. in this regard, studies have shown that the three key factors, or conditions, determine the probability that fraud will be made, which is known as the triangle of fraud:  the existence of pressure, i.e. stimulus – financial benefit, i.e. money is the most frequent motive for committing fraud. however, fraud is often committed to preserve the workplace, achieve a prestigious position, and advance in career. company managers are often willing to commit fraud, in order to preserve profitability and positive trends, in line with the expectations of investment analysts, investors, significant creditors, or other persons, and in order to secure new sources of funding. contribution of internal audit in the fight against fraud 299  the existence of opportunities, i.e. circumstances, which allow the perpetrator to find a way to commit fraud. these opportunities are determined by the position of the individual, the position of some close influential people in the company, inadequate division of tasks, the lack or weakness of existing controls, the lack of well-defined punitive measures, etc., and  the possibility of rationalization, i.e. providing justification for the committed actions. specifically, individuals will not commit fraud if it cannot be justified as the process consistent with their ethical behaviour [13, 354]. this particularly refers to: interest of the management to preserve or increase the stock price or earnings trend, the achievement of financial targets of the company, etc. regardless of the different definitions aimed at clear determination of fraud, and despite the different motives, opportunities, and possibilities of justification of fraudulent behaviour, consequences which fraud brings about are the same – the loss of value for stakeholders of the company. apart from the financial losses, which are very important, fraud inflicts much greater damage by distorting labour productivity in the company, compromising its reputation, social responsibility, the negative impact on the image, the destruction of investor confidence, lowering the credit rating, etc. looking beyond, fraud adversely affects the economy of a country as a whole, causing major financial losses, weakening the social stability, endangering the democratic structures, reducing confidence in the economic system, and compromising economic and social institutions. study of the problems of fraud, in terms of timely recognition and perception, consideration of possible consequences, and the establishment of mechanisms to prevent them, is a very complex task. in addition to the precise determination of fraud, in terms of establishment of the criteria for the recognition of its origin, it is necessary to adequately recognize the aspects of the risk of fraud: the position of the manager, the complicity between employees, inadequate division of tasks, unauthorized handling of company resources, conflict of interest, inappropriate storage of documents, and the like [23, 492]. it is also necessary to take into account the overall economic, legal, criminological, psychological, and sociological aspects and relations [14, 326]. the gravity of this problem has particularly come to the fore with the growing complexity of business methods, the characteristics of the modern business environment, and the development and implementation of methods of committing fraud under the influence of the information technology progress. this is confirmed by large, well-known financial scandals of the late 20 th and early 21 st century, linked to the companies enron, waste management, world com, and others. the consequences of these cases of fraud were fatal: the collapse of companies, large investment losses, significant litigation costs, erosion of confidence in the capital market, and others. these events have certainly raised awareness of the importance of strengthening the mechanisms for combating fraud. however, unfortunately, the fact is that, today, fraud is one of the most important business risks which the companies are exposed to. this is supported by the continuous annual surveys by acfe, which monitors the effect of fraud on the world economy. the latest report [2], published in 2014, which included 1,483 cases of fraud in commercial companies, financial institutions, government institutions and agencies, non-profit organizations, etc. in more than hundred countries of the world, contains alarming data. specifically, the results indicate that the typical company loses on average 5% of its total revenue due to fraud committed by employees, which, compared to the gross world product, is as much as 3.7 trillion us dollars. the largest number of acts of 300 m. đorđević, t. đukić fraud related to the misuse of funds, in 85% of cases, while corruption was observed in 37% of cases, and 9% related to the manipulation of the financial statements. however, despite the presented relative amounts, in absolute values, loss due to misuse of funds amounted to 130,000 us dollars, corruption to 200,000, while manipulations of the financial statements made a loss of as much as 1,000,000 us dollars. these results immediately suggest that, in many cases, there are more categories of fraud. on average, 30% of the schemes involve two or more forms of fraud. the interesting part of this study concerns the relation between the hierarchical position of the perpetrator and a number of committed acts of fraud. the obtained results show that, out of the total number of acts of fraud, 19% were committed by senior managers and owners, 36% by mid-level managers, and 42% by employees. however, although the number of acts of fraud committed by employees is far greater than the number of cases of fraud committed by mid-level managers, the damage caused in this way is two times less than the damage committed by mid-level managers, which is, in turn, three times less than the damage made by senior managers and business owners. this confirms the fact that the possibility of committing fraud and the seriousness of its consequences are, in fact, determined by the availability of resources to perpetrators [13, 354]. recognizing this situation, which has been present for years, company investors, the public, and other stakeholders significantly lose confidence in the management of the company and the way they manage, and become more sensitive to the problems that occur as a result of fraud. in response to this, they expect the company to take a position of “zero tolerance to fraud” [25, 5], and to establish mechanisms aimed at preventing and detecting fraud, i.e. fraud risk management. in this regard, companies need to establish an adequate framework, i.e. fraud risk management program, which involves proper definition of policies that include expectations of the board of directors and management in relation to risk management. providing such a program involves clear setting and understanding of the roles and responsibilities of all persons in the company, at all hierarchical levels, to be achieved by establishing policies, job descriptions, rules of work, delegation of authority, etc. adequately established fraud risk management process involves, first, periodic assessment of fraud risk exposure, in order to identify potential events whose occurrence the company should prevent. in this regard, iia suggests that the company should: identify relevant fraud risk factors, potential fraud schemes and rank them based on the probability of their occurrence, map existing controls and identify the existence of gaps, test the effectiveness of controls aimed at preventing and detecting fraud, and document and report on the completed risk assessment. on this basis, it is necessary to establish preventive mechanisms, in order to avoid potential risk events and mitigate possible negative consequences for the company. although the company can never minimize the risk of fraud to zero, the establishment of mechanisms and activities, aimed at preventing fraud and reducing the negative consequences, is of great importance. the basis of good prevention of fraud, above all, lies in raising the awareness of all employees on the established fraud risk management process, communication of efforts aimed at preventing the occurrence of fraud, and the possibility of starting potential disciplinary and criminal proceedings against the perpetrators. establishment of fraud detection techniques is done in cases when preventive measures have not yielded a result, i.e. when the fraud occurred. in this respect, companies rely on techniques aimed at recognizing the signs of occurrence of fraud, and they, as such, must be flexible and adaptable to variable risk environment. finally, establishment of a coordinated process of investigating fraud is aimed at revealing the nature and extent of fraudulent activity, and involves performing contribution of internal audit in the fight against fraud 301 procedures to obtain information and specific details that would indicate whether the fraud occurred, the loss which the company is exposed to due to fraud, persons involved in the fraud, and the way in which the fraud occurred. the fact is that some cases of fraud are difficult to prevent, because they are carried out in collusion, with careful removal of evidence. however, well-designed and consistently applied procedures of fraud risk management may in a number of cases deter people who have the ability to commit fraud [29, 12]. 2. effectiveness of internal audit in fraud risk management at today’s level of development, internal audit is a key participant in the system of corporate governance. by introducing a systematic and disciplined approach, internal audit is aimed at supporting and strengthening the mechanisms of company management, as well as assessing and improving the effectiveness of risk management and control processes [28]. more specifically, internal audit is expected to be focused on assessing the risks that could adversely affect the organization, as well as on the establishment of a mechanism that will monitor and control that risk, with a view to its elimination, or, at least, reduction [9, 354]. this role of internal audit means that it is a function that knows all the processes in the company, the risks to which the company is exposed, and internal control and the persons who carry out this control, which is why its potential and ability to achieve high effectiveness in preventing and detecting fraud is recognized. in this respect, the iia standards oblige internal audit to, “in determining the objectives of its engagement, assess and take into account the potential possibility of fraud” (isppia 2210.a2) and “...assess the way in which the company manages the risk of fraud” (isppia 2120.a1). for these reasons, today, the companies increasingly focus their programs, aimed at reducing fraud, on internal audit, which is seen as the first line of defence, i.e. significant management tool that ensures the protection of the company from internal criminal behaviour [22]. the expectations that are put before internal audit are related to the investigation of [10, 276]: 1. attitude of the highest level company management towards risk, 2. risk management strategy – how risks are treated in different areas of the company, whether the risks are embedded in the company, ignored, accepted, minimized, or eliminated, 3. the general attitude on risk management – whether risks are embedded within the entire business process of the company or built into a business process of certain areas, 4. the attitude of the environment towards risk and control, 5. whether there are written policies and measures that prohibit the violation of company goals in the fight against fraud, 6. whether specific procedures of authorization for certain transactions are established and respected, 7. whether the mechanisms for monitoring the activities and safeguarding the property are established, particularly in high-risk areas, 8. whether the information system works in such a way that it provides the management with credible and reliable information, and 9. whether the recommendations of the internal audit, with regard to establishing a control system in the fight against fraud, are respected. 302 m. đorđević, t. đukić internal auditors can realize the thus defined expectations, according to the recommendation 1210a2-1, by considering the elements of the coso framework: control environment, risk assessment, control activities, information, and communication and monitoring. example of good practice of the use of coso components is the program framework aimed at preventing fraud, developed in the company hewlettpackard (figure 1). fig. 1 the fraud mitigation program framework [17, 49] however, despite the obvious great potential of the internal audit to prevent and detect fraud, and, in that regard, the expectations that have been placed before it, the question arises as to how much internal auditors are actually really up to the challenge in practice. the question arises because the standard 1210.a2 itself stipulates that “internal auditors must have sufficient knowledge to assess the risk of fraud and the way in which the company manages that risk, but they are not expected to have a level of expertise as the person whose primary responsibility is detecting and investigating fraud”. so, with twelve years of experience in this profession, hodge [12] recognizes that, in some cases, internal auditors have not adequately responded to this task. in her view, the problem resides in the fact that internal auditors do not really understand what it means to incorporate the understanding of the risk of fraud into their work, not in the fact that they are incompetent, negligent, or that there is some other reason why they are not able to contribute to the prevention and detection of fraud. some auditors interpret the standard contribution of internal audit in the fight against fraud 303 requirements in the sense that they do not have too much responsibility to prevent and detect fraud – they are not required to be fraud investigators, while others are convinced that they possess the required knowledge, while reality is actually the opposite. based on her own experience, hodge further states that the understanding of the fraud risks is the individual responsibility of each auditor, which is why they should constantly bear in mind their role in managing the risk of fraud, and continually increase their knowledge about ways of preventing and detecting fraud. a similar attitude was taken by dezoort [8] indicating that the level of responsibilities of internal auditors in preventing and detecting fraud is, in fact, determined by their perception of the responsibility they should have. starting from the model of the triangle, first applied by schlenker et al. (1994), dezoort investigated the effect of different types of fraud (manipulation in financial statements, misuse of funds, and corruption) and the professional obligation of application of standards on the internal auditor’s responsibility to prevent and detect fraud. according to the triangle model, personal responsibility of internal auditors is conditioned by the extent to which an individual: (1) has a clear, welldefined set of regulations (standards, rules, policies...), (2) feels a professional obligation, and (3) feels the connection with the event by controlling it (there is an intention and possibility to establish and apply specific measures as regards perpetrators). starting from this model, results obtained by dezoort indicate that internal auditors show a higher degree of responsibility for the prevention and detection of fraud relating to the misuse of funds in relation to fraud related to the financial reporting process and corruption. so, although the standards of internal audit do not distinguish between types of fraud that internal auditors should pay attention to, their perception of possibility to control misuse of funds is perhaps the most pronounced. in addition, the study results point to the position of internal auditors, based on which the highest degree of responsibility for detecting fraud should be in the hands of the company bodies, rather than the bodies outside of it (for example, external audit). however, at the same time, internal auditors hold the position that the highest professional responsibility belongs to the company management, accountants, and then the internal auditors. bearing in mind that the effectiveness of internal audit is largely determined by the auditor’s personal attitude, knowledge, skills, etc., there are a number of seminars, workshops, and conferences nowadays, which emphasize the need for improvement of internal auditors in this area. more specifically, the internal auditors are expected to: (1) become familiar with the work of the specific part or process that is audited, in connection with possible acts of fraud, characteristic of the subject of audit; (2) in work always apply professional scepticism, i.e. deeper examination and critical evaluation of the findings, starting from the assumption that managers or employees are neither honest nor dishonest. this is a priority because the inadequate observance of the principle of professional skepticism is cited as the most common cause of failing to detect fraud [26, 14]; (3) understand fraud and the risk of irregularities in the work, i.e. know the fraud schemes and techniques that are used, as this allows them to promptly detect red flags (indicators) that the fraud was committed or may be committed; (4) be able to adequately assess the likelihood of fraud risk, i.e. its identification and ranking, based on the impact on the achievement of company goals; (5) apply the brainstorming, which, without increasing costs due to the interaction between the auditors in a group, can maximize the generation of ideas on fraud, which inevitably contributes to improving the effectiveness and efficiency of internal audit [7]. although the idea of brainstorming application in internal audit has not gained momentum until the early 304 m. đorđević, t. đukić 2000s, it is believed that, today, “this procedure should be an integral part of a proactive approach of internal auditing in detecting fraud” [18, 67]. despite the efforts that the internal auditors need to make, for the purpose of improving their effectiveness in fighting fraud, great support must be provided by the companies in which they operate, in a way to enable them to [11, 69-70]:  align their actions with the priorities and goals of the company, both in the long and in the short term. internal auditors will achieve this by becoming familiar with: the way in which management undertakes to respect ethics and incorporate mechanisms of compliance with regulations in the objectives, strategies, decision-making, and daily operations of the company; the methods used by management to promote and improve the integrity and ethics, and compliance with the core values of the company; the specific policies, programs, and control of compliance; possible responses to the challenges of implementing ethics and compliance activities, etc.  gain support from the board of directors and senior management in terms of establishing clear objectives, clear reporting lines and line of responsibility, allocating the necessary resources (human and material), obtaining input in planning, establishing processes for monitoring the success of implemented activities, and the like.  design an adequate process of reporting on the results of the work, which will ensure effective and efficient communication with relevant stakeholders, and specify structure of the report, which is essential for proper interpretation of the findings. although the issue of effectiveness of internal audit in fraud risk management is fully justified, many studies show that the internal audit is up to this challenge. this is confirmed by the results of research conducted by monisola et al. [19] and coram et al. [6], indicating that, in the companies with the established internal audit function, much more acts of fraud are detected, in relation to the companies in which internal audit is not functioning. furthermore, research carried out by acfe in 2014 indicates that about 14.1% acts of fraud were initially detected by internal audit, which is more in relation to accounting (6.6%), examination of documents (4.2%), external auditing (3%), monitoring activities (2.6%), it control (1.1%), and others. internal audit is actually seen as a proactive mechanism that is able to quickly “catch” fraud and greatly minimize its negative consequences. 3. powers and responsibilities of internal audit in the fight against fraud comprehensive knowledge and understanding of the risks of fraud allow internal audit to adequately specify its tasks, objectives, and activities, focused on fraud risk assessment, prevention and detection of fraud, and, ultimately, investigation of fraud. in this way, internal audit significantly improves the process of fraud risk management, and its unique position enables it to support other stakeholders in this process – the board of directors, audit committee, management, and employees, by [3]:  providing assurance about the effectiveness of fraud risk management and internal control processes,  providing advice in defining fraud risk management strategy,  providing advice on the possibilities of improving fraud risk management and internal control processes in the company. contribution of internal audit in the fight against fraud 305 as regards the power of internal auditing in the fight against fraud, it in the first place refers to its activities within the framework of a fraud risk assessment process, which involves identification of where, how, and who can commit fraud in the company. internal audit activities in this process are aimed at:  identification of relevant risk factors, where the internal audit collects information about the activities and processes of the company, in order to be able to identify areas of potential fraud. the techniques used in this process include: oral interviews with management and employees, questionnaires, and, most often, the use of the already mentioned, “fraud triangle” technique [21, 16-17]. in this way, the auditors identify areas where there are possibilities of occurrence of fraud, i.e. persons who have the motive, the opportunity, and the possibility of rationalizing the possibly committed fraud. in cases of identifying the presence of some of the factors, internal audit examines what could be the subject of fraud, and how fraud could be done, i.e. identifies possible fraud schemes.  ranking the fraud risk in relation to the estimated amount of loss and the likelihood of fraud. loss, i.e. damage, which may occur in the form of cash loss, decline in reputation, decreased productivity, loss of resources, reduction in liquidity of assets, etc., is difficult to assess. for these reasons, internal auditors largely rely on their experience, and rank loss in respect of a given period of time, expressed in cash units, for certain intervals of likelihood of occurrence. on the other hand, the likelihood of occurrence is mainly based on fraud triangle: where all the factors are present (motive, opportunity, and rationalization), the likelihood of fraud is higher, and vice versa.  mapping and testing of existing internal control mechanisms – internal auditors first identify the control mechanisms established by the company, directed towards the prevention and detection of fraud in the company. in this regard, they compare them with potential fraud schemes, all in order to identify the existence of a possible gap. in addition, internal audit carries out in particular the evaluation of effectiveness, because the existence of internal control does not mean at the same time certain protection from fraud occurrence, which subsequently affects the likelihood of risk which internal audit will assess, and  documenting and reporting on the assessed risk, which internal auditors are obliged to do, based on isppia 2060. key elements of the report, of benefit to the company management, include [26, 18]: types of fraud that have a chance to appear, the inherent risk of fraud, the adequacy of the established anti-fraud and internal control programs, the potential gap between the established control mechanisms, the likelihood of significant fraud, the possible impact of fraud on the company’s operations. after risk assessment, internal audit directs its activities to the prevention of fraud occurrence, and limiting the negative impact of fraud that occurred. these activities are largely focused on providing assistance to the company management, which is primarily responsible for the establishment of mechanisms to defend the company against fraud. in fulfilling this responsibility, internal audit determines:  whether the company has created an atmosphere that raises awareness about the existence and importance of control mechanisms,  the existence of a written policy (for example, a code of ethics), which describes the prohibited activities and measures to be taken if the violation is discovered, 306 m. đorđević, t. đukić  the adequacy of established policies relating to the transaction authorization,  the existence of policies, procedures, practices, and other mechanisms for the monitoring of activities and the protection of resources, particularly in high-risk areas,  the effectiveness of communication channels, in terms of providing adequate and reliable information to the management, and  the need to provide recommendations for the establishment and improvement of control mechanisms, to prevent fraud in the company [20, 581]. in addition to providing support, internal audit can conduct activities that are directly aimed at preventing fraud. some of them are: constant analytical reviews, review of contracts in the company, creation of power rotation programs in the company, assessment of the electronic data protection system, conducting surprise audits, monitoring of failed attempts to access the computer, and others [1]. the fact is that even the best mechanisms established to combat fraud do not guarantee that fraud will not occur, which is why the internal audit specifies its tasks and activities in detecting fraud. the degree of success of recognizing fraud red flags (indicators) is determined by the good knowledge of the fraud schemes, and, according to joan [15, 27], in particular, by the ability of internal auditors to think as perpetrators of fraud. in detecting fraud, internal auditors use different methods: statistical, mathematical, interviews, etc., all of which need to be flexible and adaptable to risk areas [26, 21]. table 1 presents the most commonly used methods of internal audit, depending on the type of fraud. table 1 the most commonly used methods of internal audit in detecting fraud type of fraud procedures of internal audit manipulation in the financial reporting inventory observation, cut-off tests, tracing to supporting documents and reconciliations internal control reviews review of separation of duties, control monitoring, reviews of employees that had access to various accounts analytical review for period to period revenues and costs, changes between accounts and reasonableness of estimates misuse of assets of the company cut-off testing, reconciliations, scan accounts for unusual items, review of wire transfers, physical inventories review of controls such as tip hotlines, segregation of duties, treasury transactions, approvals of accounts payable, and management review of work of lower level people. corruption review of internal controls around the segregation of duties, auditing employees’ expense reports, reviewing company policies and following up filed complaints, analytical procedures and risk assessment techniques, look for weaknesses in internal controls, performed audit tests and in-depth audits. review the whistleblower policy and tips submitted to a hotline source: adapted from [4] contribution of internal audit in the fight against fraud 307 after detection, fraud needs to be explored further – by collecting data through observation, interviews, or written statements, with the aim of determining the nature of fraud, i.e. determining areas of fraud and techniques used, estimating the causes of fraud, identifying perpetrators, and assessing the consequences. the role of internal audit in this process may be different [26, 23]:  to have the primary responsibility in investigating fraud,  to serve as a significant source of information, and  to have no role in this process. which one of these roles internal audit will have depends on many factors. specifically, even though the traditional internal audit activities are not directed to investigating fraud, internal auditors are increasingly expected to meet and adopt techniques and methods of forensic investigators. greater involvement of internal audit in detecting fraud includes [24, 47-48] that this function has a high degree of independence – actual and factual, in order to freely investigate fraud. next, knowledge of different types of fraud and associated schemes is needed. bearing in mind that most of the identified schemes are linked to the misuse in the process of financial reporting, internal auditors are specifically required to possess the knowledge of accounting. possession of interviewing skills stands out in particular, because knowing which question to ask, and, more importantly, in which way, is determined by the importance of the information they want to collect [15, 30]. knowledge of it technology and the skills of collecting and analysing electronic information (e-mail, files, etc.) are now the key requirements, considering that lack of knowledge or poor handling of electronic data can cause their irrevocable destruction. finally, entrusting the role of fraud investigator to internal audit involves the possibility that the work will be examined by the regulatory bodies. therefore, notes, working papers, work schedules, and other documents that reflect the internal audit activities must be consistent with regulatory requirements. a well-established team of internal auditors, who meet the above-mentioned conditions, largely ensures success in fraud investigation. in addition, companies realize significant cost savings by avoiding hiring forensic investigators, specialized law firms, or other bodies that provide professional services of this type. however, adequate assessment of the audit team with respect to the possession of skills, resources, and other issues, is very important, because the costs of poor investigation can several times exceed the costs of hiring wellqualified external investigators. conclusion with a devastating effect on the profitability, productivity, social responsibility, and reputation of the company, fraud is one of the most significant risks that companies face. although it is clear that even the best established programs and mechanisms cannot provide a guarantee that fraud will not occur, the internal audit is the function from which much is expected in this regard. it is completely logical, given that, by directing its activities towards providing assurance on the effectiveness of all processes in the company and their improvement, internal audit cooperates with everyone in the company, which gives it the ideal position to take a proactive approach to reducing the risk of fraudulent behaviour of employees. 308 m. đorđević, t. đukić iia emphasizes the importance of internal audit in the fight against fraud, by appropriate standardization and closer determination of the role of internal audit through practical guides. however, the above-mentioned regulations do not specify the tasks and responsibilities of internal audit, which points to the conclusion that its effectiveness depends on the support it receives from the company in which it functions, and, especially, on the knowledge, skills, and personal responsibility of internal auditors. in this regard, wellorganized internal audit, consisting of independent internal auditors, for whom the application of professional scepticism is an imperative, and who feel the responsibility of continuous improvement of knowledge on fraud, can significantly reduce the risk of fraud. this is achieved by providing opinions on the adequacy and effectiveness of fraud risk management strategies, fraud prevention and detection, fraud risk assessment, consideration of potential cases of fraud during each audit, identification of fraud indicators, monitoring and identification of systemic weaknesses and missing internal control mechanisms, fraud investigation according to the knowledge and expertise of the members of the team, reporting to the board and management on the activities conducted in relation to the detection and prevention of fraud, etc. through the adequate implementation of the above activities, internal audit is able to respond to the increased expectations of company stakeholders and justify the trust placed in it. references 1. association of certified fraud examiners, (1995) fraud examiner’s manual, 2 nd review, austin, texas 2. association of certified fraud examiners, (2014) report to the nations on occupational fraud and abuse 3. bagshaw, k., the role of internal audit in risk management, www. accaglobal.com (05.10.2015.) 4. burnaby, p., howe, m., muehlmann, b. (2011) detecting fraud in the organization: an internal auditor perspective, journal of forensic & investigative accounting, vol.3, (1): 195-233 5. coram, p., ferguson, c., moroney, r. (2006) the importance of internal audit in fraud detection, available on: http://www.researchgate.net/publication/253527357_the_importance_of_internal_audit_in_fraud_detection 6. coram, p., ferguson, c., moroney, r. (2008) internal audit, alternative internal audit structures and the level of misappropriation of assets fraud, accounting and finance, 48: 543-559 7. carpenter, t., reimers, j, fretwell p. (2011) internal auditor’s fraud judgments: the benefits of brainstorming in groups, auditing: a journal of practice & theory, vol.30, (3): 221-224 8. dezoort, t., harrison, p. (2008) an evaluation of internal auditor responsibility for fraud detection, the institute of internal auditors research foundation 9. đukić, t., đorđević, m. (2014) needs and specifics of ensuring effective internal audit, facta universitatis, series: economics and organization, vol.11, (4): 353-365 10. gavrilović, m. (2013) interna revizija u procesu upravljanja rizicima prevare, 17. kongres srrrs „računovodstvo, revizija i poslovne finansije u uslovima odgovornijeg ponašanja učesnika na tržištu“, banja brućica 11. hedley, t., ben-chorin, o. (2011) auditing and monitoring activities help uncover fraud and assess control effectiveness, the cpa journal: 68-71 12. hodge, c. (2012) journey to fraud awareness, internal auditor, vol. 69 (4): 80 13. hillson, w., pacini, c., sinason, d. (1999) the internal auditor as fraud-buster, managerial auditing journal, vol.14, (7): 351-362 14. ilić, m., saković, d. (2012) uloga interne revizije u upravljanju poslovnim rizikom prevare, finansije br. 1-6: 324-335 15. joan, c. (2009) how internal audit can be effective in combating occupational fraud, internal auditing, vol. 24, (3): 22-32 16. judicial commission of the parliament of the united kingdom of great britain and northern ireland (2002), report on fraud 17. laxman, s., randles, r., nair, a. (2014) the fight against fraud, internal auditor, vol.71, (1): 49-53 http://www.researchgate.net/publication/253527357_the_importance_of_internal_audit_in_fraud_detection contribution of internal audit in the fight against fraud 309 18. lynch, a. (2006) think like a fraudster, internal auditor, vol.63 (1): 66-70 19. monisola, o. (2013) effect of internal audit on prevention of frauds, errors and irregularities in corporate organisation, research journal of finance and accounting, vol.4, (19): 103-108 20. moeller, b. (2009) brink’s modern internal auditing, a common body of knowledge, 7 th edition, john wiley & sons, inc 21. naame, d. (2003) cia, cisa, cfe, cgfm, all enclosed material 22. nestor, s. (2004) the impact of changing corporate governance norms on economic crime, journal of financial crime 11 (4): 347-352 23. petrascu, d., tieanu, a. (2014) the role of internal audit in fraud prevention and detection, 21 th international economic conference iecs 2014, procedia economics and finance 16: 489-497 24. pollock, j., sumner, d. (2009) the new fraud detectives, internal auditor vol. 66 (5): 44-48 25. richards, d., melancon, b., ratley, j. (2009) managing the business risk of fraud: a practical guide, sponsored by: the institute of internal auditors (iia), the american institute of certified public accountants (aicpa), association of certified fraud examiners (acfe) 26. the institute of internal auditors, (2009) internal auditing and fraud, ippf practice guide 27. the institute of internal auditors, (2011) international professional practices framework 28. the institute of internal auditors, www.theiia.org (10.09.2015.) 29. wayne, a., (2010) anti-fraud control, what internal auditors need to know, internal auditing, vol. 25, (1): 10-26. doprinos interne revizije u borbi protiv prevara konstatni porast obima prevara, koje ostavljaju razorne posledice na uspešnost poslovanja, uslovljava značajnu zaokupljenost preduzeća ovim problemom. svesna činjenice da je uspostavljaje adekvatnog procesa upravljanja rizikom prevare nužnost, preduzeća u sve većoj meri efektivnost pomenutog procesa baziraju na potencijalima interne revizije. imajući u vidu da interna revizija nema primarnu odgovornost u sprečavanju i otkrivanju prevara njeno integrisanje u proces upravljanja rizikom prevara predstavlja novi izazov za ovu funkciju. u radu autori najpre ukazuju na faktore koji opredeljuju mogućnost interne revizije da se bori protiv prevara, a onda i doprinos koji ova funkcija može da pruži u njihovom sprečavanju, otkrivanju i istraživanju. ključne reči: interna revizija, upravljanje rizikom prevara, sprečavanje prevara, otkrivanje prevara, istraživanje prevara. http://www.theiia.org/ 10415 facta universitatis series: economics and organization vol. 19, no 4, 2022, pp. 229 251 https://doi.org/10.22190/fueo220110017c © 2022 by university of niš, serbia | creative commons licence: cc by-nc-nd original scientific paper financial sector development and real sector growth – association, spillover and causality during pre covid and covid regimes1 udc 616.98:578.834]:330.12 616.98:578.834]:336 tamal datta chaudhuri1, indranil ghosh2 1bengal economic association, kolkata, india 2institute of management technology hyderabad, shamshabad, hyderabad, telangana, india orcid id: tamal datta chaudhuri https://orcid.org/0000-0002-5086-6019 indranil ghosh https://orcid.org/0000-0001-7064-4774 abstract. in this paper, we propose an alternative approach to understanding the relationship between financial sector development and real sector growth in india. we use stock market sectoral indices available on national stock exchange (nse) like capital goods index, fmcg index, energy index, infra index, metal index, realty index, and auto index to represent the real sector. to represent the financial sector, we consider bank index and financial services index separately. the proposed framework examines the relationships at a granular level to understand the extent of association, spillover, and causality. we also analyze the relationship between the financial sector and the real sector in pre covid and covid periods separately. our research methodology includes the use of detrended cross-correlation analysis (dcca), wavelet multiple correlation (wmc), wavelet multiple cross correlation (wmcc), diebold-yilmaz spillover framework, and non-linear causality test. our granular approach has enabled us to examine the relationships in different periods and we observe that the results change. the intensity of the relationships also is different during the covid period as compared to pre covid period. key words: financial sector, real sector, detrended cross-correlation analysis (dcca), wavelet multiple correlation (wmc), wavelet multiple cross correlation (wmcc), diebold-yilmaz spillover jel classification: c01, c22. received january 10, 2022 / revised may 05, 2022 / revised november 17, 2022 / accepted november 21, 2022 corresponding author: indranil ghosh institute of management technology hyderabad, # 38, cherlaguda (v), shamshabad (m), rr district, hyderabad501 218, india | e-mail: fri.indra@gmail.com https://orcid.org/0000-0002-5086-6019 https://orcid.org/0000-0001-7064-4774 mailto:fri.indra@gmail.com 230 t. d. chaudhuri, i. ghosh 1. introduction world development report (1989) dwells in great detail on the role of the financial sector in economic growth. the financial sector pools the savings of individuals and lends them for large investment projects which help in economic growth. further, various financial instruments make it easier to trade and exchange goods and services and also make the cost of raising resources cheaper for firms. self-financed investments have obvious limitations and profitable investment opportunities can be explored only in the presence of external finance. in today's world of globalization and with the growth of the internet, accessing finance has become easier, and the financial wealth of a nation is now no longer confined within its geographical boundaries. the institutions in the financial sector, through their lending activities, also appraise projects for lending. this generates comfort to the savers that their savings are protected by people specializing in lending activities. risk management and risk monitoring are done systematically and generate confidence in the savers, encouraging further savings with institutions. the financial sector, through its lending activities, also takes care of the agency problem thus encouraging shareholders to undertake projects, either for expansion or diversification. some papers in this area include jensen and meckling (1976), rozeff (1982), easterbrook (1984), and jensen (1986). there is considerable literature on the relationship between financial sector growth and real sector growth. king and levine (1993), levine (1997), and aghion et al. (2004) have laid the foundation of research in this area. in this context, different variables have been identified for understanding the relationship between financial sector growth and real sector growth. for financial sector development, variables like the ratio of liquid liabilities to gdp, the ratio of bank credit to total credit, the ratio of non-banking credit to total credit (except credit to the public sector), the ratio of bank credit divided by bank credit plus central bank domestic assets, the ratio of credit allocated to private enterprises to total domestic credit (excluding credit to banks), and credit to private enterprises divided by gdp have been considered. growth in per capita output and growth in physical capital formation has been considered to represent real sector growth. during the recent covid-19 pandemic, the real sector came under pressure all over the world due to lockdowns, a standstill in world trade, closure of operations in factories, and shutdown in international and domestic travel (özen and özdemir, 2021; jana et al., 2022; babalola, 2022). in india, a few trains were running, airlines were running at low capacity, inter-state movement in the workforce went down significantly and factories were struggling to resume operations (patil et al., 2022; rajak et al., 2022). loss of income and employment led to a fall in demand. the gdp growth rate has turned negative and there is little evidence of when things will get back to the pre-covid stage. the banking sector and the non-banking financial services sector came under pressure as loan defaults had increased and fresh financial assistance was not being sought. the focus is on how to ease the financial burden of the borrowers. there was a huge requirement for liquidity and the indian government used the banking sector to channel financial assistance to the needy. mutual funds witnessed large redemptions as individuals faced liquidity constraints. in this background, we propose an alternative approach to understanding the relationship between the financial sector and the real sector in india. we use stock market indices in india from the national stock exchange (nse) for modeling and to represent the real sector, we consider capital goods index, fmcg index, energy index, infra index, metal index, and auto financial sector development and real sector growth – association, spillover and causality... 231 index. to represent the financial sector, we consider bank index and financial services index. we propose a framework where the relationship is examined at a granular level to understand the extent of association, spillover, and causality. although we will be using stock market indices which are financial sector indices, our contention is that company stock prices and consequently, sectoral indices, except for speculative waves, do reflect the state of the real sector. the sectoral indices that we have chosen, representing the real sector, reflect the fortunes of the companies within the sector, the state of that sector, and their growth prospects. macroeconomic studies dealing with overall aggregative data fail to capture these sectoral characteristics. the financial sector is represented by the banking sector index and the non-banking financial services sector index. in a similar vein, these reflect the state of the financial sector institutions and their future prospects. the bank index represents the health of the banking sector. it considers not only growth in assets and their profitability but also factors in the quality of assets and composition of assets. if banks are deploying more funds in government securities and government-sponsored directional lending, then the share of the private sector falls. this can impact the growth rate. the financial services index represents the state of the nbfc (non-banking financial services companies) sector. here again the growth in assets and the quality of assets step in. also, such entities tend to be innovative in their asset allocation and more risk-taking as their cost of funds is higher. their risk-taking can fund innovative ventures through different instruments. for our study, we have focused on the indian economy predominantly due to two reasons. first, it has a strong and varied industrial structure with highly profitable and renowned companies, along with thriving micro, small and medium enterprises. this makes its requirements from the financial sector quite varied. second, the covid pandemic revealed the existence of a large migrant labor force who contribute to the supply chain and also constitute a significant part of the market for goods and services. the pandemic affected economic activities and, in turn, affected demand for financial services and products. our framework can be applied to other economies and would reveal the structure of their real and financial sectors and the nature of dependence. in this alternative approach, to understand the relation between financial sector development and real sector growth in different time scales, we use several non-parametric frameworks in conjunction with wavelet analysis methodology to enable multi-resolution examination. at first, detrended cross-correlation analysis (dcca) is employed for extracting the nature association between the variables at different lags. next, for expounding the time-varying traits of the association between the financial and real sectors, wavelet multiple correlation (wmc) and wavelet multiple cross correlation (wmcc) techniques have been utilized. diebold-yilmaz spillover analysis is used to critically evaluate the spillover connectedness among the assets. finally, to comprehend the direction and extent of causal structure, nonlinear granger causality test has been used in conjunction with maximal overlap discrete wavelet transformation (modwt) in a scale-wise manner. 232 t. d. chaudhuri, i. ghosh 2. objectives for the indian economy, the questions that we ask with respect to the relationship between financial sector development and real sector growth are: ▪ is the relation similar in all time scales? ▪ how long do the impacts last? ▪ what is the nature of the association? ▪ are the spillovers significant? if so, on what scale? ▪ is the causality in the relationship between the two unidirectional or bidirectional? we use a wavelet-based framework for our study which allows for granular analysis. our framework enables us to understand, not only the directionality of the relationship, but also whether the relationships are strong or weak and during what time; do the relationships spill over, do short-term shocks have long-run consequences, are these relationships stable over all periods, and also are their lagged effects significant? instead of using gdp as a proxy for the real sector, we study different real sectors separately. our analysis will bring out the time-varying relationship between the financial sector and these sectors. our study will also bring out which sectors correlate with the banking sector and the non-banking financial services sector separately. 3. previous research owing to practical implications, modelling financial and real sector interplay has received considerable traction in the literature. in this section, we briefly describe some of the previous research work that has investigated the relationship between the financial sector and the real sectors across different economies and different time scales. based on data from 1981 to 2000, tang (2006) examined whether financial development would facilitate economic growth among the asia-pacific economic cooperation (apec) countries. the paper considers the effects of three aspects of financial development on growth, namely the stock market, banking sector, and capital flows. results suggest that among the three financial sectors, only stock market development shows a strong growth-enhancing effect, especially among the developed member countries. aizenman et al. (2013) suggested that developments in the financial sector had an asymmetric effect on the real sectors. the real sectors were sensitive to contractions in the financial sector, while they are not significantly responsive to expansion. samargandi et al. (2015) show that financial development does not have a linear positive long-run impact on economic growth. however, if a non-linear relationship is considered, then they find an inverted u-shaped relationship between finance and growth in the long run. this finding suggests that middle-income countries face a threshold point after which financial development no longer contributes to economic growth. ductor and grechyna (2015) empirically evaluated the nexus of financial development, real sector, and economic growth. their findings suggested the presence of nonlinear relationships and real sector growth heavily influenced the effects of financial sector development on economic growth. kenza and eddine (2016) examine the impact of financial development on economic growth in the context of mena countries. the measures of financial development they consider are private credit to gdp, m2/gdp, the ratio of commercial bank assets to the total of commercial bank assets, and central bank assets. their results indicate that financial financial sector development and real sector growth – association, spillover and causality... 233 intermediaries had a negative effect on the growth rate and they suggest financial reforms to improve the quality and quantity of financial services. guru and yadav (2018) examined the relationship between financial development and growth using the banking sector and stock market development indicators as independent variables and gdp per capita growth as the dependent variable. the banking sector development indicators are the size of the financial intermediaries, credit to deposit ratio (cdr), and domestic credit to private sector, and stock market development indicators are the value of shares traded and turnover ratio. radjenovic and rakic (2017) examine the interdependence between financial sector development, particularly capital market development and economic growth in serbia. the variables include capital market size, the extent of liquidity, government consumption, interest rates, and inflation rates. the granger causality test is carried out to determine long-run causality between the variables. the results indicate that capital market development stimulates economic growth. silva et al. (2018) demonstrated the interconnection of financial and real sectors in the brazilian market and that shocks from the real sector transmitted to government-owned banks. their work suggested close monitoring of interlinks for estimating systematic risk. biplob and rokeya (2018) examine the relationship between financial sector development and economic growth in bangladesh using time series data for the period of 1977-2016. using the johansen co-integration test and granger-causality test in vector error correction model (vecm) framework, the study found significant long-run causality from financial development to economic growth. paun et al. (2019) selected 45 low-income, middle-income, and high-income countries covering ten years (2006–2015) and observed that financial sector development, sophistication, and performance had a statistically significant effect on economic growth. ghosh and datta chaudhuri (2020) explored the dynamic interplay of market sentiment, sectoral indices, and individual stock prices in india by applying wavelet-based methodologies. the presence of herding behavior in the long run after the global financial crisis was observed. raghutla and chittedi (2020) show that brics nations' money supply, exchange rate, and inflation have a significant positive effect on economic growth. thus, policymakers should increase the real sector expenditure and develop the financial sector. sharma and kautish (2020) investigate the impact of financial sector development on gdp growth in the four middle-income countries of south asia over the period of 1990–2016. using pooled mean group (pmg) estimation, this study examines whether, for these developing countries, gdp growth has been affected by the size of market capitalization and size of market turnover in the long run which is used as a proxy for stock market development. the study finds that the impact of the banking sector on gdp growth has remained relatively low in the region. ibrahim and acquah (2021) use panel data from 45 african countries from 1980 to 2016 to examine causal linkages between the financial sector and real sector variables. they apply the panel granger non-causality test and find that the causal nexus between fdi and economic growth is conditioned on the indicator of economic growth. they also find feedback causality between fdi and financial sector development, and financial sector development and economic growth. ghosh et al. (2022) thoroughly explored the detailed dynamics of the futures market in india during normal and new normal time horizons applying appropriate indicators of spot counterparts, sectoral outlook, market sentiment, market fear, and volatility as explanatory 234 t. d. chaudhuri, i. ghosh variables. an ensemble of machine learning and explainable artificial intelligence-based frameworks suggested the futures prices of stocks belonging to different sectors were indeed predictable and predominantly driven by the spot markets and sectoral outlook. xu and pal (2022) measured the impact of financial liberalization on the performance of the manufacturing sector in india using dynamic panel analysis. it was revealed that the financial liberalization policies exerted a positive influence on the overall productivity of the indian manufacturing sector. the impact of globalization and financial development on different socio-economic aspects in india has been documented in literature as well (ohlan, 2017; godil et al., 2021; sethi et al., 2021; panagariya, 2022). the said studies are, nonetheless, strictly restricted to a normal time horizon. it can be observed that, although the existing literature has made considerable effort in decoding the interaction, it has remained confined to static analysis with limited variables. it, therefore, becomes imperative to extend the research towards modelling the dynamic time-varying nature of the interrelationship, and also at a granular level. further, in the context of the current covid pandemic which has caused worldwide instability, the relationship between the financial sector and the real sector has gained significance where demand and supply side effects have affected market outcomes and financial support in the form of interest waivers, liquidity infusion, increased government spending, and financial restructuring have gained importance. the present paper analyses whether the nature of the relationship between the financial sector and the real sector in the covid phase is different from that of the pre covid phase. 4. data description two separate modelings have been carried out to achieve research objectives. the first one examines the relationship between the banking (bank) sector with 3 real sectors, metal, capital goods, and energy. this set of variables has been referred to as set a variables throughout the remaining portion of the paper. the other scenario deals with the evaluation of the dynamic interaction of the financial service (fs) sector with automobile (auto), infrastructure, and realty, as representatives of the real sector. these variables have been referred to as set b variables onwards. to capture the interplay during pre-covid time horizons, daily closing returns of underlying variables from april 1st, 2019, to march 31st, 2020, have been compiled from the data repository of 'metastock'. the same data source has been leveraged to compile daily closing returns of all variables from april 1st, 2020, to september 30th, 2020, to capture the nature of interrelationship during the covid phase. tables 1-4 outline the descriptive statistics of the underlying datasets of our study. it can be clearly seen that shapiro-wilk and jarque-bera test statistics have emerged to be significant during both pre covid and covid phases. thus, the considered variables under the set a category do not abide by normal distribution during both regimes. a clear presence of nonlinearity in all four sectors during pre covid phase is imminent from the outcome of terasvirta's nn test. it is largely due to the slowing down of the indian economy during the said time horizons which created uncertainty in the market. interestingly, during the covid phase, none of the variables demonstrate a sign of significant nonlinear traits. extreme shocks and fear owing to the pandemic led the financial sector development and real sector growth – association, spillover and causality... 235 underlying variables to a bearish state. the dominance of unidirectional movement may explain the lack of nonlinearity. table 1 properties of set a sectors pre covid properties bank metal capital goods energy minimum -0.17 -0.12 -0.15 -0.10 maximum 0.08 0.08 0.08 0.09 mean -0.003 -0.002 -0.002 -0.001 median -0.0005 -0.002 -0.002 -0.001 shapiro-wilk test 0.77*** 0.94*** 0.80*** 0.86*** jarque-bera test 3354.3*** 199.61*** 2433.1*** 742.03*** terasvirta’s nn test 6.03** 16.68*** 9.11** 28.13*** note: *** significant at 1% level of significance, ** significant at 5% level of significance, # not significant, terasvirta’s nn test: terasvirta’s neural network test table 2 properties of set a during covid properties bank metal capital goods energy minimum -0.08 -0.08 -0.05 -0.03 maximum 0.11 0.08 0.05 0.07 mean 0.002 0.003 0.002 0.002 median 0.002 0.004 0.001 0.003 shapiro-wilk test 0.97*** 0.96*** 0.97** 0.97*** jarque-bera test 24.23*** 24.23*** 8.22** 21.854*** terasvirta’s nn test 0.073# 4.38# 0.14# 0.35# table 3 properties of set b during pre covid properties fs auto infrastructure realty minimum -0.16 -0.14 -0.12 -0.11 maximum 0.09 0.1 0.07 0.06 mean -0.001 -0.002 -0.001 -0.001 median 0.001 -0.002 -0.0003 0.0009 shapiro-wilk test 0.75*** 0.87*** 0.83*** 0.89*** jarque-bera test 3000.6*** 1244.9*** 1337.3*** 440.95*** terasvirta’s nn test 74.51*** 32.23*** 79.28*** 15.92** table 4 properties of set b sectors pre covid properties fs auto infrastructure realty minimum -0.08 -0.07 -0.04 -0.07 maximum 0.08 0.10 0.07 0.06 mean 0.002 0.005 0.003 0.002 median 0.002 0.004 0.002 0.004 shapiro-wilk test 0.98** 0.91*** 0.96*** 0.98# jarque-bera test 14.01** 121.23*** 61.47*** 4.33* terasvirta’s nn test 5.96# 31.77*** 10.3# 8.43# 236 t. d. chaudhuri, i. ghosh it can be observed that the variables belonging to set b emerged to be nonparametric during both pre covid and covid regimes. the outcome of nonlinearity inspection through terasvirta's nn test suggests during pre covid phase all four sectors appeared to be nonlinear in nature. abrupt state changes in the financial market owing to economic slowdown during the said period have largely accounted for nonlinearity. on the other hand, during covid regimes, barring the auto sector, none of the sectors have shown signs of significant nonlinearity. 5. research methodology 5.1. detrended cross-correlation analysis (dcca) as the underlying variables of financial and real sectors have demonstrated traits of heteroscedasticity and nonlinearity, the mere usage of the orthodox correlation test would not be appropriate to draw insights into the prevailing association. podobnik and stanley (2008) proposed a new framework, detrended cross-correlation analysis (dcca) based on the theoretical framework of detrended fluctuation analysis (dfa) for investigating power-law cross-correlation between two-time series need not abiding parametric properties. in this research, we have adopted an extension of the dcca method namely, the dcca crosscorrelation coefficient proposed by zebenede (2011) for measuring the magnitude of association between daily returns of two variables at a time. it is estimated using eq. (1): 𝜌𝐷𝐶𝐶𝐴 (𝑠) = 𝐹𝐷𝐶𝐶𝐴 2 (𝑠) 𝐹𝐷𝐹𝐴(𝑥𝑖 1)(𝑠)∗𝐹𝐷𝐹𝐴(𝑥𝑖 2)(𝑠) (1) where, fdcca denotes the traditional fluctuation function derived from dcca whilst fdfa representing the fluctuation function generated from dfa, 𝑥𝑖 1 and 𝑥𝑖 2denotes the twotime series under consideration. the computed dcca measures the amount of crosscorrelation at a selected time scale, s. the magnitude of the dcca cross-correlation coefficient ranges between -1 to 1. a value close to -1 signifies a negative association whereas a positive association prevails when its value emerges close to 1. 5.2. detrended cross-correlation analysis (dcca) fernández-macho (2012) introduced wmc and wmcc techniques to overcome several computational drawbacks of scale-wise assessment correlation and cross-correlation. basically, the frameworks are built upon generated wavelet coefficients, 𝑊𝑖𝑗𝑡 = (𝑤1𝑗𝑡 , 𝑤2𝑗𝑡 , … , 𝑤𝑛𝑗𝑡 ) on a multivariate stochastic process 𝑋𝑡 = (𝑥1𝑡 , 𝑥2𝑡 , … , 𝑥𝑛𝑡 ), using modwt at respective scales (𝜆𝑗 ). wmc (𝜑𝑥 (𝜆𝑗 ))denotes a set of estimated multi-scale correlation figures by determining the square root of the regression coefficient of determination at each scale (𝜆𝑗 ) in a linear combination of wavelet coefficients having a maximum coefficient of determinism. the coefficient of determination regression of a variable (𝑧𝑖 ) on a regressor set (𝑧𝑘 , 𝑘 ≠ 𝑖) is computed using eq. (2) 𝑅2 = 1 − 1 𝜌𝑖𝑖⁄ (2) where  ii indicate the ith diagonal element of the inverse of the correlation matrix financial sector development and real sector growth – association, spillover and causality... 237 subsequently, the wmc is calculated using eq. (3): 𝜑𝑥 (𝜆𝑗 ) = √1 − 1 max 𝑑𝑖𝑎𝑔 𝑃𝑗 −1 (3) where pj denotes the correlation matrix defined on wjt and the max diag (.) operator is used for selecting the largest element. the wmcc is computed by letting a lag (𝜏) between the actual and estimated figures of the criterion construct at each scale (𝜆𝑗 ) as shown in eq. (4). 𝜑𝑥 𝜏(𝜆𝑗 ) = 𝐶𝑜𝑟(𝑤𝑖𝑗𝑡 , �̂�𝑖𝑗𝑡+𝜏) = 𝐶𝑜𝑟(𝑤𝑖𝑗𝑡,�̂�𝑖𝑗𝑡+𝜏) √𝑉𝑎𝑟(𝑤𝑖𝑗𝑡)𝑉𝑎𝑟(�̂�𝑖𝑗𝑡+𝜏) (4) 5.3. diebold-yilmaz spillover to gauge the extent of volatility contagion, the spillover index (soi) measure of diebold and yilmaz (2009), has been utilized in this work. it estimates the soi by determining the forecast's error variance by implementing a vector auto-regression model. the present research has utilized the soi index to estimate the intra-spillover rates among the four chosen sectors during pre covid and covid phases. 5.4. wavelet decomposition using discrete wavelet decomposition, the original time series observation disentangled into a series of subcomponents of different frequencies reflecting linear and nonlinear components. decomposed parts of lower frequency bandwidth prevail for longer periods whilst the components associated with higher bandwidth prevail for shorter periods. several algorithms have been reported for implementing decomposition. in this research, modwt has been used which has previously been successfully applied for modelling financial time series and is known for having several advantages over orthodox discrete wavelet transformation (dwt) (ghosh and datta chaudhuri, 2019; ghosh et al., 2019; ghosh et al., 2021; jana et al., 2020). the present research has utilized multi-resolution analysis using modwt at 4 levels of decomposition considering the number of samples available for both pre covid and covid time frames. current work resorts to daubechies least asymmetric (la) wavelet filter of length 8 for the actual decomposition process. the said decomposition is combined with nonlinear causality test based on neural network models for capturing scalewise causal structure. 5.5. nonlinear causality test the causal association of financial time series is predominantly explored via the granger causality test. however, the said test is only capable of detecting linear causal structure owing to its fundamental properties. literature reports several nonlinear causality tests for time series analysis. in this research, we have utilized the nonlinear granger causality test of the 'nlints' package of r to detect the causal structure across the decomposed granular components obtained using modwt. the said test is designed based on the incorporation 238 t. d. chaudhuri, i. ghosh of feed-forward neural networks based on two-way predictive analysis to account for nonlinearity. 6. results and analysis in this section, based on the methodology adopted, we examine the dynamic association of financial and real sectors across the specified time regimes. 6.1. findings of dcca tables 5-8 present the figures of dcca-cross-correlation figures for underlying variables. table 5 outcome of dcca on set a during pre covid regime time scale (days) 3 7 15 bank-metal 0.7233527 0.6798493 0.6781169 bank-capital goods -0.1339252 0.08462575 0.48167117 bank-energy 0.7419062 0.6684102 0.6760967 metal-capital goods 0.03626816 0.14215420 0.40242120 metal-energy 0.8163277 0.801333 0.7822637 capital goods-energy 0.001819431 0.153852819 0.456903162 estimated dcca coefficient figures suggest the existence of a strong positive cross correlation between bank and metal across all time scales. cross-correlation between bank and capital goods, on the other hand, has appeared to be relatively weaker and advocates the presence of negative association as well during 3 days lag. the association of bank and energy sectors has emerged to be similar to that of bank and metal. therefore, among the chosen real sectors, metal and energy share a comparatively stronger bond with the financial sector. table 6 outcome of dcca on set a during the covid regime time scale (days) 3 7 15 bank-metal 0.6936634 0.6437001 0.33075862 bank-capital goods -0.19594646 0.04006762 0.48167117 bank-energy 0.6270362 0.5595826 0.6337167 metal-capital goods -0.15978826 0.09168101 0.32339216 metal-energy 0.6519984 0.5794979 0.5504941 capital goods-energy -0.10206444 0.03918955 0.27305501 it can be noticed that bank and metal sectors are highly positively cross-correlated at 3 days and 7 days lags while their association observes a dip in 15 days scale. a relatively low degree of cross correlation has emerged for bank and capital goods sector at a time scale of 7 days and 15 days lag. bank and energy sectors have been found to be positively associated across different time lags. on the other hand, dcca among the subsectors of financial sector development and real sector growth – association, spillover and causality... 239 real sectors also demonstrates the presence of positive, negligible, and negative association patterns. overall, the strength of association has seen a marginal decrease as compared to pre covid period. table 7 outcome of dcca on set b during pre covid regime time scale (days) 3 7 15 fs-auto 0.8092923 0.8008604 0.7772776 fs-infrastructure 0.8675846 0.8445019 0.8246986 fs-realty 0.7862788 0.7774274 0.7849782 auto-infrastructure 0.8449540 0.8191228 0.7842454 auto-realty 0.7372148 0.7240827 0.6979275 infrastructure-realty 0.7799858 0.7665851 0.7630102 estimated dcca coefficient figures clearly indicate the existence of a strong association across the time scales between all the pairs. all four sectors of set b have been found to be positively associated with each other during pre covid regime. fs and infrastructure sectors have emerged to share comparatively strongest association at a lag of 3 days. with the increase in time scale, the extent of association has declined for all constituent pairs. amongst the real sectors, auto and infrastructure appear to be comparatively more linked to fs. this provides support to the fact that sales of these sectors depend on consumer/housing loans which are provided mostly by financial services companies. table 8 outcome of dcca on set b during the covid regime time scale (days) 3 7 15 fs-auto 0.7197197 0.7095076 0.7516264 fs-infrastructure 0.6961058 0.6592394 0.7261145 fs-realty 0.6775208 0.6993603 0.7342715 auto-infrastructure 0.7566446 0.7707571 0.8004676 auto-realty 0.6806652 0.6648038 0.6913267 infrastructure-realty 0.6573807 0.6610222 0.7225326 it may be observed from table 8 that in the covid period, the strength of association among the pairs has diminished to some extent. however, with an increase in time scale, the extent of association has increased. 6.2. outcome of wmc and wmcc the following figures 1-4 exhibit the outcome of wmc-driven analyses. 240 t. d. chaudhuri, i. ghosh fig. 1 outcome of wmc analysis of set a during pre-covid regime fig. 2 outcome of wmc analysis of set a sectors during the covid regime figure 1 suggests the presence of a strong correlation between the financial and real sectors of set a initially in scale 1 (2-4 days). it then experiences a marginal dip in scales 3 and 4 (weekly and fortnightly duration) and gains momentum again in scale 8 (monthly time horizon). nevertheless, the co-integration manifested by wmc more or less remained stable and highly positive (0.7 on average) across the granular time scales which indicates that the considered sectors would offer very little diversification benefits during pre covid regime. bank leads the co-movement in the long run while metal dominates in the short run. on the other hand, during the covid regime stable and positive co-integration can be observed across the scales, which also suggests little scope for diversification. interestingly, bank has appeared to be leading in the short run scale whilst energy leads in the long run. financial sector development and real sector growth – association, spillover and causality... 241 fig. 3 outcome of wmc analysis of set b during pre covid regime fig. 4 outcome of wmc analysis of set b during the covid regime financial and real sectors belonging to set b demonstrate a strong positive co-integration structure during pre covid regime with a marginal dip in the strength of correlation on a higher scale as manifested by wmc. the average strength of correlation spanning across the four-time scales is above 0.8 roughly, which suggests the strength of co-movement of set b sectors is relatively higher than the set a counterparts which basically conforms to the findings of dcca. infrastructure has turned out to be the leader both in the shortest and longest time scales. fs and the auto sector respectively lead in the intermediate time scales. like set a, set b offers little scope for diversification. during the covid regime (figure 4), a monotonic increase in correlation from short to long-run scales can be observed among the underlying sectors. the auto sector and fs lead in the shortest and longest time scales, whereas infrastructure and fs lead in intermediate scales. the overall strength of association between set b sectors has turned out to be comparatively greater than set a sectors. however, the influence of the financial sector of set b, i.e. fs sector, is not as impressive as that of the financial sector of set a, i.e. bank. we, next, present the findings of wmcc 242 t. d. chaudhuri, i. ghosh analyses for a lag of one month. in figures 5-8, the color bar on the right-hand side indicates the strength of correlation and also the names of leading sectors across the scales. fig. 5 outcome of wmcc analysis of set a during pre-covid regime fig. 6 outcome of wmcc analysis of set a during the covid regime financial sector development and real sector growth – association, spillover and causality... 243 for set a, the strongest correlation during the pre covid phase can be observed at a lag of 10 days forward and backward direction. no sign of negative association can be observed. in other time scales (intraweek, weekly, and fortnightly periods), a marginal degree of association can be observed at different lags. bank appears to be the leader in cross-correlation in long-run scales while energy dominates the short-duration movement. during the covid regime, the strongest correlation can be found to approximately spread across a lag of 25 days roughly at scale 4 of the monthly time horizon. it simply implies that the effect of the pandemic has extended the prevalence of point-wise correlation across the lags. similar to pre covid context, no sign of negative co-movement could be observed. a relatively low degree of correlation can be seen to be scattered across smaller time scales. fig. 7 outcome of wmcc analysis of set b during pre-covid regime fig. 8 outcome of wmcc analysis of set b sector during the covid regime 244 t. d. chaudhuri, i. ghosh the concentration of the strongest correlation of set b during pre covid context can be seen to span across entire 30-day lags at the highest time scale. infrastructure leads in scales 1 and 2 while fs and auto sectors dominate scales 4 and 8, respectively. likewise, in the earlier scenarios, no evidence of negative association can be found. for the covid regime, the cross-correlation at different lags is lower, thus contradicting earlier cases. so fs and sector b demonstrate different traits during the covid pandemic. 6.3. findings of spillover analysis this section illustrates the findings of diebold-yilmaz spillover analysis to comprehend the nature and extent of volatility contagion from the financial to real sectors and inside real sectors. the following tables 9-12 outline the results. individual rows in the tables account for the quantum of received spillovers whilst the columns reflect the quantum of imparted spillovers. table 9 outcome of diebold-yilmaz spillover analysis of set a during pre covid regime bank metal capital goods energy from others bank 40.21 6.09 43.34 10.36 14.95 metal 4.49 68.93 24.94 1.64 7.77 capital goods 6.32 5.18 78.33 10.18 5.42 energy 6.90 8.35 28.72 56.03 10.99 to others 4.43 4.90 24.25 5.54 39.13 it can be seen that during pre covid phase bank received high amount of spillover from the capital goods sector. thus uncertainty in the capital goods sector resulted in a high degree of volatility in bank sector. the metal and energy sector received a considerable amount of spillover from the capital goods sector as well. capital goods on the other hand remained highly immune to significant contagion from other sectors. overall it can be inferred that the shock in capital goods caused a ripple in the financial sector and other real sectors. table 10 outcome of diebold-yilmaz spillover analysis of set a sector during the covid regime bank metal capital goods energy from others bank 16.99 54.45 12.76 15.81 20.75 metal 19.48 44.79 8.31 27.42 13.80 capital goods 18.28 50.54 13.46 17.72 21.64 energy 14.68 53.37 9.42 22.53 19.37 to others 13.11 39.59 7.62 15.24 75.56 in the ongoing covid regime, the metal sector has emerged to be the top contributor to volatility spillover. it has affected bank, followed by the energy sector. metal, on the other hand, has received the highest spillover from the energy sector. capital goods, unlike pre covid time horizon, have remained largely dormant in transmitting volatility. financial sector development and real sector growth – association, spillover and causality... 245 table 11 outcome of diebold-yilmaz spillover analysis of set b during pre covid regime fs auto infrastructure realty from others fs 76.91 3.33 19.73 0.03 5.77 auto 5.24 85.57 8.74 0.44 3.61 infrastructure 9.27 0.28 90.07 0.39 2.48 realty 2.54 2.37 5.58 89.52 2.62 to others 4.26 1.49 8.51 0.22 14.48 in set b during pre covid period, the fs sector received maximum volatility spillover from infrastructure. infrastructure has emerged to be the topmost contributor of volatility among the sectors. however, unlike set a sectors, set b sectors demonstrate relatively more resilience and immunity towards external shocks and interconnectedness through contagions. table 12 outcome of diebold-yilmaz spillover analysis of set b during the covid regime fs auto infrastructure realty from others fs 12.68 26.49 11.39 49.43 21.83 auto 13.52 28.88 9.09 48.52 17.78 infrastructure 13.35 28.82 9.12 48.71 22.72 realty 14.01 30.04 8.25 47.69 13.08 to others 10.22 21.34 7.18 36.67 75.41 the structure of volatility spillover for set b during the ongoing covid regime, however, was completely different. it can be seen from table 12 that fs has received maximum volatility spillover from the realty sector, followed by the auto sector. defaults in auto emi payments and housing loans have generated uncertainty in the financial services sector. in terms of imparting volatility, the auto and realty sector have again played a leading role. inherent fear owing to the covid pandemic has resulted in strong volatility transmission. 6.4 outcome of causality inspection to enable multi-resolution analysis, four levels of decomposition have been carried out using modwt. table 13 provides the time interpretation of scales of the decomposition process by modwt. table 13 time interpretation of different scales details wavelet scales durations d1 1 2 to 4 days(intraweek scale) d2 4 4 to 8 days(weekly scale) d3 8 8 to 16 days (fortnightly scale) d4 16 16 to 32 days (monthly scale) tables 14-17 report the results of the nonlinear granger causality evaluation. the bidirectional arrow, ↔ denotes the existence of bidirectional causality, and left headed arrow, ← indicates that the second variable granger causes the first one, and the rightheaded arrow, → suggests that the first variable granger causes the second one. 246 t. d. chaudhuri, i. ghosh table 14 results of causal assessment of set a during pre covid phase d1 d2 d3 d4 bank-metal # # ↔*** ↔*** bank-capital goods # # ↔*** ↔*** bank-energy # # ↔*** ↔*** metal-capital goods # # ↔*** ↔*** metal-energy # # ↔*** ↔*** capital goods-energy # # ↔*** ↔*** note: # not significant, *** significant at 1% level of significance it is evident from table 14 that during the pre-covid period for set a, at short run time scales, intraweek, and weekly time horizons there was no significant causal interaction among the sectors. on the other hand, significant bidirectional causal interplay can be observed between all possible constituent pairs during fortnightly and monthly time scales. table 15 results of causal assessment of set a during the covid phase d1 d2 d3 d4 bank-metal # # ←*** ↔*** bank-capital goods # # ←*** ↔*** bank-energy # # ↔*** ↔*** metal-capital goods # # ↔*** ↔*** metal-energy # # ↔*** ↔*** capital goods-energy # # ↔*** ↔*** causal dependence analysis of set a during the covid regime indicates pretty similar findings as can be seen in figure 15. however, on a fortnightly scale, the bank sector has been causally driven by the metal and capital good sectors in a unidirectional manner. table 16 results of causal assessment of set b during pre covid phase d1 d2 d3 d4 fs-auto # # ↔*** ↔*** fs-infrastructure # # ↔*** ↔*** fs-realty # # ↔*** ↔*** auto-infrastructure # # ↔*** ↔*** auto-realty # # ↔*** ↔*** infrastructure-realty # # ↔*** ↔*** for set b, causality develops in higher time scales, i.e. fortnightly and monthly scales as bidirectional causality is observed for all concerned pairs (figure16). the same result holds for the covid phase (figure 17). table 17 results of causal assessment of set b during the covid phase d1 d2 d3 d4 fs-auto # # ↔** ↔*** fs-infrastructure # # ↔*** ↔*** fs-realty # # ↔*** ↔*** auto-infrastructure # # ↔*** ↔*** auto-realty # # ←** ↔*** infrastructure-realty # # ↔*** ↔*** financial sector development and real sector growth – association, spillover and causality... 247 7. concluding remarks at the beginning of the paper, we mentioned that we will not be taking any position regarding the causality between real sector growth and financial sector growth. our objective is not to establish whether financial sector growth leads to real sector growth or vice versa. instead, we delve into exploring the relationship between the two at i) a granular level and ii) at different time intervals. the belief behind this approach is that some information may be lost when we take broad sweeps of time and analyze data at an aggregative level. in terms of approach, our contribution has four distinct aspects. first, it tries to understand the relationship between financial sector development and real sector growth through stock market indicators. we contend that sectoral stock market indices represent the current and expected real future performance of the constituent companies. second, we differentiate between the banking sector and the financial services sector as the two primarily serve two different sets of companies. this enables us to analyze one-to-one correspondence between specific sectors of the real economy with the corresponding segment of the financial sector. third, we consider a granular approach where we break down the time series data into different time intervals and then analyze the relationships for various time intervals. fourth, we separately analyze the data for both pre covid and covid periods. this helped us in understanding the nature, intensity, and duration of the shock that india faced, along with the rest of the world. our analysis yields the following results. the linear correlation plots for the aggregative level data show that the association between the metal and the energy sector with the banking sector was strong in the pre-covid period, but the strength of the association fell during the covid period. this fall in the level of association between pre covid and covid period is even more marked for the financial services sector with the auto, infrastructure, and the realty sector, the latter seeing the most decline. the decline in the overall relationship for the banking sector can be attributed to the slowing down of the economy. the result for the financial services sector is the result of loss in income and livelihood at the micro level. the dcca analysis gives more focus to the relationships for different time intervals. one can observe that the relationship between the banking sector and the metal sector decreased significantly during the covid regime as the time interval increased from 3 days to 15 days. for the financial services sector, there has been an across-the-board reduction in the correlation levels in the covid period as against the pre covid period for different time intervals. we can infer that as the virus spread, the effect of a fall in demand was felt by the financial services sector as time increased. wmcc calculations for the banking and the corresponding real sectors suggest that during the covid regime, the strongest correlation can be found to be approximately spread across a lag of 25 days as against a lag of 10 days in the pre covid regime. it implies that the effects of the pandemic have extended the point-wise correlation across the lags. while the capital goods sector has led the other sectors, including the banking sector, in a longer time horizon in the covid period, the auto sector has led the financial services sector in the same period. the results of the diebold-yilmaz spillover analysis suggest that in the pre-covid regime, there was not much volatility spillover from the banking sector to the real sectors, whereas there was a strong spillover from the capital goods sector to the banking sector. this changed during the covid regime when an increase in banking sector volatility was felt in the real sectors. further, the metal sector did affect the banking sector significantly. 248 t. d. chaudhuri, i. ghosh the extent of volatility spillover from the financial services sector to the corresponding real sectors was not significant in the pre-covid period, although there was some spillover from the infrastructure sector to the financial services sector. this changed significantly during the covid period where we observe a significant large volatility spillover from the realty sector, followed by the auto sector. our results corroborate real-life relationships where many nonbanking financial services companies suffered defaults and liquidity shortages because of a severe downturn in the realty sector during this period. to understand causal interplay, a nonlinear granger causality assessment has been carried out on decomposed components through modwt. our results indicate that for the banking sector, in the pre covid period there was significant both-way causality between banking sector development and real sector growth on fortnightly and monthly scales. however, in the covid period, we observe one-way causality between the metal and capital goods sector and the banking sector on a fortnightly scale. for the financial services sector, significant two-way granger causality was observed in the fortnightly and monthly scales. this persisted in the covid period also. the contribution of the study lies in breaking up the financial sector into the banking sector and the financial services sector and also relating specific real sectors with the corresponding part of the financial sector. this has enabled us to garner deeper insight into the relationship. our granular approach has enabled us to examine the relationships in different time spans and we have observed that the results have undergone a change. we have not come across any paper in the literature that has used this approach. the literature has not identified any specific relation between the financial sector and the real sector. our approach supports that, but establishes that the relationship is bi-directional at granular levels. the methodology adopted enables analysis of the relationship between specific sectors of the real economy with specific sectors of the financial sector. it goes beyond the literature in looking at the relationship at different time intervals and also during pre – covid and covid periods. the results indicate an overall weakening of the relationships in the covid period. our framework revealed which section of the real sector affected the banking and 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https://doi.org/10.1016/j.jfs.%0b2017.08.006 https://doi.org/10.1016/j.jfs.%0b2017.08.006 https://doi.org/10.1080/00036840500427239 https://openknowledge.worldbank.org/handle/10986/5972 https://doi.org/10.%0b1016/j.jmse.2022.04.001 https://doi.org/10.%0b1016/j.jmse.2022.04.001 https://doi.org/10.1016/j.physa.2010.10.022 financial sector development and real sector growth – association, spillover and causality... 251 razvoj finansijskog sektora i rast realnog sektora – povezanost, prelivanje i uzročnost pre i tokom kovid pandemije u ovom radu predlažemo alternativni pristup razumevanju veze između razvoja finansijskog sektora i rasta realnog sektora u indiji. koristimo sektorske indekse sa nacionalne berze (nse) kao što su: indeks kapitalnih dobara, fmcg indeks, energentski indeks, infrastrukturni indeks, metal indeks, indeks nekretnina i auto indeks kako bi prestavili realni sektor. za predstavljanje finansijskog sektora, koristimo bankovni indeks i indeks finansijskih usluga odvojeno. predloženi okvir proučava veze na granularnom nivou kako bi razumeli nivo povezanosti, prelivanja i uzročnosti. takođe analiziramo odnost između finansijskog sektora i realnog sektora u periodima pre i za vreme kovid pandemije odvojeno. naša metodologija istraživanja uključuje korišćenje detrended kros-korelacione analize (dcca), vejvlet multiple korelacije (wmc), vejvlet multuple kros-korelacije (wmcc), diebold-yimlaz okvira prelivanja i ne-llinearni test kauzalnosti. naš granularni pristup nam je omogućio da ispitamo povezanost u različitim vremenskim intervalima i primećujemo da se rezultati menjaju. intenzitet veze takođe je drugačiji u vreme pre i tokom pandemije kovida. ključne reči: finansijski sektor, realni sektor, detrended kros-korelaciona analiza (dcca), vejvlet multipla korelacija (wmc), vejvlet multipla kros-korelacija (wmcc), diebold-yilmaz prelivanje plane thermoelastic waves in infinite half-space caused facta universitatis series: economics and organization vol. 13, n o 4, 2016, pp. 387 399 doi: 10.22190/fueo1604387r preliminary communication structural changes and commodity exports increase of the republic of serbia1 udc 330.342.3:339.564(497.11) goran radisavljević 1 , bojan đorđević 2 , goran milovanović 3 1 municipality of sokobanja, serbia 2 john neisbitt university, belgrade, faculty of management, zaječar, serbia 3 university of niš, faculty of economics, serbia abstract. the aim of this paper is to show, on the basis of relevant systematized knowledge from the scientific and professional publications, the key changes in the structure of the world economy and world trade, as well as to identify the impacts of these changes on the structure and volume of exports of the republic of serbia. first of all, we show the theoretical and methodological limitations in the study of the dynamics and structure of the world economy and world trade. secondly, imf evaluations in relation to the global growth in trade and gdp relating to 2016 and 2017 are presented. then follows the analysis of the structure of the global import and export of goods by sector, according to the standard international trade classification (sitc), and the analysis of the structure of foreign trade of the republic of serbia divided by products, as well as by sitc sections and divisions. finally, the paper shows the importance of foreign direct investments (fdi) for the structural improvement of production and export increase of the republic of serbia. key words: global trade, export structure, improvement and increase exports, fdi introduction the movements in global economy determine to a large extent the dynamics and structure of the global trade. in the period from 2005 to 2014 the increase of global exports was larger than the increase of global production and the global gdp. the global economic crisis which, in 2008 emanated as a financial crisis, and later spread also into the realty sector, has shaken the foundations of the global economy and trade. the consequences of this crisis are still present. the global trade of the 1990s was characterized by a dynamic increase of exports of industrial products of a high technological intensity, and the decrease of exports of 1received august 8, 2016 / accepted october 3, 2016 corresponding author: goran milovanović university of niš, faculty of economics, trg kralja aleksandra 11, 18000 niš, serbia e-mail: goran.milovanovic@eknfak.ni.ac.rs 388 g. radisavljević, b. djordjević, g. milovanović agricultural produce and raw materials. in the year 2000 followed the changes in the global tendencies of the export structure. the export of the republic of serbia was manifested by a high degree of raw, reproduction materials and products generated from lower processing phases. the insufficient import of modern equipment and technology limits the development of a more modern production structure. in order to generate more evident changes in the realty sector it is necessary to attract sufficient fdis that shall stimulate the import of new equipment and modern technologies. 1. the theorethical basis of research the commodity export of the republic of serbia is intrinsically connected to the industrial production, which constitutes more than 90% of domestic. this is why the key to the promotion of the export of commodities lies in the improvement of the structure of the industrial production. however, the present structure of industrial production has manifested certain deficiencies of which the key deficiencies are: deficiency of commodities in goods destined for export; a large share of products of lower processing grade; a vast assortment of goods without narrower specialization; low competitiveness of exports concerning the design and product development; inadequate technical standards; and the durability and design of the products (nikolić, 2010, 181). based on an extensive research h. lewer-van den berg has established that the structure of trade determines exports and economic growth. countries that export more capital goods and consumer goods have a faster growth than countries that export capital goods (lewer-van den berg, 2003, 39-96). a study conducted by l. benedictisand l. tajoli, which encompassed the exporting structure of four countries in transition (poland, hungary, romania and bulgaria) into the eu for the period from 1989 to 2000 has shown that the approximation towards a more progressive exporting structure is a long process and that this process is still ongoing. in all these countries, the degree of change concerning the exporting structure into the eu is higher than the degree of the change of the exporting structure of the eu. however, the evolution of structural changes in these countries was different. poland and hungary underwent a faster adaptation of the exporting structure to the importing structure of the eu. in romania that process was much slower, whereas in bulgaria it had divergent tendencies. however, it was proven that the structural changes of these countries’ foreign trade were in accordance with the tendencies of the main economic indicators. (benedictis, l., tajoli, l., 2003). y. kandogan has analyzed the industrial (sitc 5-8) export of the ceecs central and eastern european countries and the union of independent stated (uis) for the period from 1992 until 1999. this author stated that the increase of the value of exports of the countries in transition, which followed the opening of the market, was implemented by means of: exporting larger quantities of products, exporting a larger number of products, and increasing the quality of these products (kandogan, 2003). as far as the republic of serbia is concerned, also important are the conclusions of a. galego and j. caetano based on their research (galego, caetano 2002). these authors have proven that the increase of exchange of goods between the ceecs and the eu is structural changes and commodity exports increase of the republic of serbia 389 foremost the result of the convergence of income and structural reforms implemented in the ceecs. they have also indicated the fact that technologically intensive sectors (especially sector 7) generate comparable advantages and that the participation of sectors with resource-and-labor intensive products is decreasing. a. zaghini studied the commercial specialization of the 10 new eu member states within the framework of its expansion in 2004 (zaghini, 2005, 629-650). he established that the new member states have changed the structure of trade and have very quickly realized comparative advantages in sectors in which they were lagging at the beginning of their transition (especially concerning high-tech products). a large portion of that specialization was realized in the production of those products for which there was a faster growing global demand, and which in turn had led to the increase of their share in global trade. 2. research methodology structural changes and the increase of commodity exports must have a key role in the new strategy of the economic growth of the republic of serbia. the present qualitative improvements of the domestic export of goods were insufficient for a considerable increase of the gdp, the export-generated incomes and the decrease of the commercial deficit. the basic conditions for increasing the export of goods are structural changes of the production in the direction of production growth in the higher phases of processing. can something like this be achieved? for the purpose of answering this question we shall first analyze the dynamics and structure of the global economy and global trade. then we shall analyze the technological structure of the exports of commodities and the share of high-tech commodity exports in the total export of goods of the republic of serbia. based on the analysis of the structure of imports and exports of the republic of serbia, according to the purpose of the type of products, we shall identify qualitative changes in the industrial structure. by evaluating the change of the share of certain groups of products in the export, we shall establish whether there has been any qualitative improvement in the structure of domestic exports. finally, we shall analyze the relevance of the fdis for the implementation of structural changes in the foreign trade of the republic of serbia, as well as for its more successful harmonization with modern tendencies in the global trade. 3. the dynamics and structure of the global economy and global trade movements in the global economy have a large influence on the dynamics and structure of global trade. in the period from 2005 to 2013, the global export of goods grew at a rate of 3,5% whereas the global production and global gdp grew at a rate of 2%. immediately before the outbreak of the world economic crisis (2007) the largest growth in the structure of global exports had industrial products (8%), whereas the global export of agricultural produce increased by 5.5%. due to the financial crisis, which engulfed the world and expanded into a world economic crisis, global export began to decrease. its increase in 2008 was only 2.5%. as early as in 2009 a negative rate of export increase of 12% was registered. the same year shows also a negative rate of increase of the global gdp of 2.5%, production of 5.5%, industrial production of 4% and mining of 1.5%. due to the large decrease of industrial production, the export of industrial products in 2009 even dropped by 15.5%, 390 g. radisavljević, b. djordjević, g. milovanović which is three times more than the decrease of exports of fuel and ore and approximately five times more than the decrease of exports of agricultural produce. however, as early as in 2010, there was short-term increase of global exports, production and gdp, but in the period from 2011 to 2014 there was a deceleration of their growth (see table 1). according to the estimates made by the experts of the international monetary fund (imf) from april 2016, in 2016 it is to be expected that the global gdp shall be at the rate of 3.2%, which is somewhere at the level of its increase in 2015. the projected gdp increase rate for 2017 is 3.5%. the imf experts estimate that the largest increase of the gdp, within this group of developed countries shall in 2016 be realized by spain (2.6%), which has also in 2015 realized the largest growth of gdp among these countries of 3.2%, whereas the usa shall be in the second place with the gdp growth of 2.4%. from the group of developed countries, the usa shall realize the largest rate of increase (2.5%) of gdp in 2017. table 1 relative changes of global commodity trade, production and gdp in the period from 2005 to 2014 period 2005-2013 2007 2008 2009 2010 2011 2012 2013 2014 global export 3.5 6.5 2.5 -12.0 14.0 5.5 2.5 2.5 2.5 agricultural products 3.5 5.5 2.0 -3.0 8.0 6.0 2.0 3.0 2.5 fuels and ore 1.5 3.5 0.5 -4.5 5.5 2.0 2.5 0.5 1.0 industrial products 4.0 8.0 2.5 -15.5 18.5 7.0 2.5 2.0 4.0 global production 2.0 0.5 1.0 -5.5 4.5 3.0 2.5 2.0 2.0 agricultural production 2.5 2.5 3.5 0.5 0.0 2.0 1.5 5.5 1.5 mining 1.0 0.0 1.5 -1.5 2.0 1.5 2.5 0.5 2.5 industrial production 2.5 0.0 0.0 -4.0 5.5 4.0 2.5 1.5 2.5 global gdp 2.0 4.0 1.5 -2.5 4.0 2.5 2.0 2.0 2.0 source: (wto, international trade statistics, 2010, 2011, 2012, 2013, 2014, 2015) the projected global trade increase rates from april 2016 were decreased in comparison to those in october 2015 and january 2016. in spite of all these corrections, the growth of the global trade in 2016 is estimated to be 3.1%, and 3.8% in 2017 (imf, 2016, p. 2). according to other prognoses from april 2015 (wto, 2015), the expected growth of global trade in 2016 shall be approximately 4% (see chart 1.). as opposed to the usa which in 2014 recorded a rate of economic growth of more than 2%, the countries of the eurozone are facing a much slower development. since the countries of the eurozone are the most important trade partners of the republic of serbia, the prospects of its exports depend to a large extent of their import demand. the demonstrated tendencies concerning the growth of global trade and the gdp indicate a loss of the development continuity which is marked by stable and moderate world trade and production growth rates. following the world economic crisis of 2008, the development of global trade had a slower dynamics in comparison to the year before the crisis. before this crisis the growth rates of the global trade were approximately two times higher than the growth rate of the global gdp (kovačević, 2016, p. 117). the structure of the global export of commodities during the 1990s changed in the direction of decreasing the relative share of food and agricultural raw materials, on the one hand, and the structural changes and commodity exports increase of the republic of serbia 391 increase of the relative share of industrial products, on the other. this trend was interrupted after 2000 due to the increase of oil prices, which caused a constant increase of the share of mineral fuels and lubricants in the global exports from 10.6% in 2000 to 13.3% in 2005, to 15.4% in 2010 and to 16.7% in 2014. such movements also led to a decreased participation of industrial products in global trade from 75.3% in 2000 to 64.8% in 2014. note: projected values are shown for the years of 2015 and 2016. chart 1 relative annual scope of increase of global trade and the real gdp in the period from 2007 to 2016 table 2 the structure of the global export and import of commodities divided by sitc sectors, in the period from 2000 to 2014 (in %) group of products: 0+1+22+4 group of products: 2-(22+27+28) group of products: 3 group of products: 27+28+68+667+971 group of products: 5+6+7+8-(667+68) e x p o r t 2000 6.7 1.8 10.6 2.8 75.3 2005 6.4 1.6 13.3 3.3 71.7 2010 7.5 1.6 15.4 6.4 66.2 2014 7.9 1.5 16.7 6.3 64.8 i m p o r t 2000 6.9 2.0 10.4 3.2 74.4 2005 6.6 1.7 13.6 3.6 71.3 2010 7.6 1.6 15.4 6.4 66.8 2014 7.9 1.5 16.2 6.5 65.5 note: the sectors are divided according to sitc and include the following groups of products: group (0+1+22+4) includes the export of all foodstuffs including drinks, tobacco, edible oils and seeds; group 2-(22+27+28) includes the exports of raw agricultural materials; group (27+28) includes unprocessed fertilizers, raw minerals, black metal ores and scrapped metals; group (3) includes the export of mineral fuels, lubricants and similar materials; group (68+667+971) includes the export of ferrous metals, precious gems and nonmonetary gold; sectors 5 to 8(667+68) include the export of industrial products; sector (5) includes the export of chemical products; group (7) includes the export of machines and transporting equipment. source: united nations, (2006-2007, 2011, 2015), unctad handbook of statistics, united nations publication, new york and geneva average growth of world trade from 1990 to 2014 average growth of global gdp from 1990 to 2014  volume of global trade (average exports and import)  actual global gdp according to market foreign currency exchange rates 392 g. radisavljević, b. djordjević, g. milovanović it is evident that there has been an increase of the share of import of mineral fuels and lubricants in the global import from 10.4% in 2000 to 16.2% in 2014. contrary to this, the share of imported industrial products in the global import has dropped from 74.4% in 2000 to 65.5% in 2014 (table 2). 4. structural characteristics of foreign trade of the republic of serbia during the period of the economic sanctions against the fry imposed by the eu and the united nations security council, there has been a large drop of exports of the republic of serbia. numerous competitor companies from other countries have taken positions on markets on which the serbian companies used to conduct their businesses. the serbian economy was marginalized during the sanctions. the republic of serbia lacked domestic accumulation so as to implement substantial structural economic changes and improve its export (kovačević, 2012, 381). due to that fact, in the period from 2006 to 2015 the republic of serbia had founded approximately 60% of its export mainly on raw materials. as opposed to that, consumer goods comprised in average approximately 31% and equipment approximately 8% of its exports (table 3). table 3 the structure of export and import of the republic of serbia divided by the purpose of products in the period from 2006 to 2015 (in %) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 average 2006-2015 e x p o r t reproduction materials (raw materials) 66.8 65.5 64.4 59.4 65.0 66.4 57.8 52.7 52.3 52.8 60.3 consumer goods 27.1 26.8 26.3 30.9 26.8 25.2 32.6 39.5 40.0 38.3 31.3 equipment 6.1 7.7 9.3 9.7 8.2 8.4 9.6 7.8 7.8 9.0 8.4 total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100 i m p o r t reproduction materials (raw materials) 63.0 70.6 71.8 68.8 67.0 67.2 68.2 70.2 61.2 57.3 66.5 consumer goods 21.4 15.6 15.4 19.2 21,7 20.0 19.5 18.8 19.5 19.2 19.0 equipment 15.6 13.8 12.8 12.0 11,3 12.8 12.3 11.0 11.2 11.8 12.5 total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 source: nbs, statistički bilten, january 2014, p. 98; rzs, statistički kalendar republike srbije, beograd, 2014. p. 72; rzs, (2016), statistika spoljne trgovine , saopštenje br. 24. imported from: http://webrzs.stat.gov.rs/website/repository/documents/00/02/00/75/st12012016.pdf. accessed on: 29.01.2016. in the period from 2006 to 2015 the structure of imports of the republic of serbia was also mostly dominated by reproduction materials (average 66.5%), which was mostly the consequence of a high dependability on imports of its economy. in the same period, the participation of consumer goods in the export was on average approximately 19%, whereas the average participation of equipment in the import was only 12.5%. the drop of exports of the republic of serbia was accompanied by a deterioration of the industrial component of its export. proof of that is the decrease of the relative participation of machines and car parts in the structural changes and commodity exports increase of the republic of serbia 393 export and the increase of agricultural produce and foodstuffs. in order to increase the share of exports in the implementation of the gdp, the republic of serbia needs to harmonize the structure of its export with the structure of the demand for imports, above all with those of eu countries. the structural characteristics of the foreign trade of the republic of serbia may be observed based on the analysis of information contained in table 4. it is evident that a dominant part of the exports in 2010 was comprised of products belonging to the following four sitc sectors: processed products divided by materials (6), food and live animals (0), machines and transporting equipment (7) and different finalized products (8). these four sectors comprised together approximately 76% of goods exported from the republic of serbia in 2010. in the first place, according to the participation in the total export of goods, was sector 6 (processed products divided by materials). the second place according to the value of exports belongs to sector 0 (food and live animals) which is mostly comprised of products from lower phases of processing. the most dominant products from this sector are cereals, fruit and vegetables. the third place according to the value of exports belongs to sector 7 (machines and transporting equipment). the same sectors were dominant in the export also in the following five years, with the difference that the leading sector 6 (processed products divided by material) was in second place in 2015 and the leading role was taken by sector 7 (machines and transporting equipment). in the period from 2010 to 2013 the exports of products from sector 7 showed a constant tendency of growth, whereas the export of products from sector 0 was in a mild decline in the period from 2012 to 2015, which indicates a certain improvement and structural progress of the exports of the republic of serbia. table 4 structure of foreign trade exchange of the republic of serbia divided by sitc sectors, in the period from 2010 to 2015 (in %) 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 export import total 100 100 100 100 100 100 100 100 100 100 100 100 0 18.0 17.8 18.7 14.3 16,0 15.6 5.3 5.3 5.8 5.6 6.4 6.0 1 2.4 2.3 2.5 2.2 2,7 3.3 1.0 1.0 1.0 1.00 1.0 1.2 2 4.7 5.6 5.0 4.4 3,6 3.4 4.2 4.0 3.2 3.1 3.2 3.9 3 5.1 4.2 3.6 4.9 3,7 2.8 19.8 20.0 17.5 15.1 14.1 11.3 4 1.5 1.7 1.7 1.3 1,0 1.2 0.2 0.2 0.3 0.3 0.3 0.3 5 9.0 8.5 8.1 8.6 8,0 8.5 14.9 15.0 16.5 15.1 14.8 14.4 6 29.0 29.5 22.9 20.0 20,9 21.5 19.9 19.3 18.4 17.0 17.9 17.7 7 16.2 16.7 22.7 31.0 30,0 29.1 21.0 22.8 23.6 27.3 26.3 26.3 8 12.6 12.8 13.8 12.5 13,1 13.2 7.9 7.6 7.1 7.5 7.8 7.2 9 1.5 0.9 1.0 0.8 0,8 1.5 5.8 4.8 6.6 8.0 8.0 11.8 sectors 0 – food and live animals 5 – chemical products 1 – drinks and tobacco 6 – processed products divided by material 2 – raw materials, except fuel 7 – machines and transporting equipment 3 – mineral fuels and lubricant 8 – various finalized products 4 – animal and vegetable oils and fats 9 – products not mentioned in the sitc rev. 4 source: nbs, statistički bilten, january 2014; rzs, (2016), statistika spoljne trgovine, saopštenje no. 24. taken from: http://webrzs.stat.gov.rs/website/repository/documents/00/02/00/75/st12012016.pdf. accessed on: 29.01.2016. 394 g. radisavljević, b. djordjević, g. milovanović the increase of exports of products from sector 8 (various finalized products) in the period from 2010 to 2015, shows a decelerated development of the processing industry of the republic of serbia. on the importing side in 2010 products from sector 7, sector 6, sector 3 (mineral fuels and lubricants) and sector 5 (chemical products were dominant). imports of products from these four sectors comprised approximately 76% of the total imports of the republic of serbia in 2010. the same group of sectors had the largest share in the imports also during the following years. the structure of export of goods of the republic of serbia shows that a larger portion of the export value is comprised of products of lower processing stages (see table 4). a special problem in the structure of exports is the outdated equipment, which is lagging several technological cycles in comparison to the same equipment in developed countries. with such weak technical and technological features the domestic economy cannot be competitive on the global market. table 5 the relative structure of imports and exports of the most important groups of products ranked according to sitc sections, revision 4, in 2015 (in millions of euros) e x p o r t i m p o r t 1. road vehicles 1.569,1 11.7 road vehicles 1.828,6 10.0 2. electrical machines and appliances 1.031,4 7.7 oil and oil derivatives 1.190,3 6.5 3. fruit and vegetables 764.0 5.7 electrical machines and appliances 770.0 4.2 4. cereals and products made of cereals 638.1 4.8 industrial machines 684.1 3.8 5. ferrous metals 563.1 4.2 natural gas 617.6 3.4 participation in the total export 4.565,7 34.1 participation in the total import 5.090,6 27.9 source: rzs, spoljnotrgovinska robna razmena republike srbije, december 2015. taken from: http://webrzs.stat.gov.rs/website/public/publicationview.aspx?pkey=41&plevel=1&pubtype=2&pub key=3408. accessed on: 17.05.2016. table 5 shows that the export of road vehicles represented the leading group of exports of products ranked according to sitc sectors in 2015, with a share of 11.7% in the total export. in the second place according to the value of exports were products from the group electrical machines and appliances with 7.7%. fruit and vegetables, cereals and products made of cereals, as well as ferrous metals were the five leading export products. the leading group of imported products was the group of road vehicles with a value of 1.828,6 millions of euros and a share of 10% in the total import. in the second place were oil and oil derivatives with the value of 1.190,3 millions of euros, whereas the third position was taken by electrical machines with a share of 4.2%. in the fifth place of imports in 2015 was natural gas with a value of 617.6 mil. usd. the first five groups of products in the total exports of 2015 had a share of 34.1%, whereas the five leading groups of products in the total imports had a share of 27.9%. the high share of road vehicles in the structure of exports divided by sections is a consequence of the expansion of exports achieved by the company fiat automobili srbija in 2012. the export of electrical machines and appliances is also growing, which is the result of the purchase of numerous serbian companies from this field by foreign companies (e.g. the company sever from subotica was purchased by the foreign company atb austria). cereals comprise a considerable share of domestic exports, above all corn, and concerning fruit, the leading export products are frozen raspberries and fresh apples. ferrous metals, structural changes and commodity exports increase of the republic of serbia 395 copper cathodes and products made of aluminum are a standard part of serbian exports. the drop of copper exports is a consequence of the raise of prices of copper on the stock exchanges during the past few years, whereas the export of aluminum was stimulated by the successful privatization (impol-seval) of the aluminum rolling mill in sevojno. based on the presented data in tables 4 and 5, one can conclude that the republic of serbia has increased its exporting potential in the sector of the processing industry, i.e. in the sectors of production of motor vehicles and trailers and the production of electrical equipment. passenger vehicles, as the leading group of exports, according to its factorial availability and technological intensiveness, belong to the segment of the mid-technological level, intensified by human capital. in order to make the exports more competitive, it is necessary to increase the export of high-tech products such as: airplanes and light aircrafts; computers; products of the pharmaceutical industry; radio, tv and communication equipment; scientific instruments; and electrical machines (oecd, 2009, 32). the share of exports of high-tech products from the republic of serbia in the total export of goods of the federal republic of yugoslavia (fry) in the period from 1996 to 2005 had variable values. the share of these products in the total export of goods of the fry in 1996 was 6% with a subsequent declining trend all until 2000. in 2001 there was again an increase of the share of high-tech products in the total export of goods to 6%, but as soon as in 2003 this trend dropped to even 0%. in 2004 followed an increase of the share of these products to 4% and a repeated decrease in 2005 to 3%. the average share of high-tech products in the total export of goods in this period was 3.7% (world bank, 2015). chart 2 average relative share of exports of high-tech products in the total export of goods of selected countries in the period from 2006 to 2014 source: world bank, (2015). taken from: http://data.worldbank.org/indicator/ne.exp.gnfs.zs/countries. accessed on: 21.06.2016. if we compare the share of exports of high-tech products in the total export of goods of the republic of serbia with the selected countries we can see that it is considerably lagging behind in comparison to these countries. the average share of high-tech products in the total export of goods of the republic of serbia in the period from 2006 to 2014 was approximately 4%, and was only higher than the average of bosnia and herzegovina 396 g. radisavljević, b. djordjević, g. milovanović (bih) which amounted approximately to 3% and the average of the fyrom which also amounted to approximately 3%. in comparison to other selected countries, the average share of high-tech products in the total export of goods of the republic of serbia was 1.5 times lower than in the case of poland and slovenia, and almost six times lower than in the case of france. by having joined the eu, many countries have managed to improve their exports of high-tech products. according to the latest world bank report, data for the republic of serbia exist only until 2007, which indicates that there has not been any substantial progress in the technological structure of the exports. 5. the influence of foreign direct investments on the structural changes and increase of the export of goods of the republic of serbia structural changes in production and the increase of exports represent the most important effects of the influx of fdis. in his study, g. broadman confirmed a highly positive correlation between the level of fdis per capita and the level of foreign-trade exchange in the ceecs in the period from 1995 to 2003 (broadman, 2005, 19). he has also proven that in the ceecs, but also in other countries, the foreign-trade exchange and the fdis are complementary. the results of other empirical analyses have shown that the influx of fdis creates potential for developing countries to increase the structural quality of their exports (harding, javorcik, 2012, 964-980). insufficient investments in the past period, insufficient domestic accumulation and the weak influx of foreign capital have led to a deceleration of structural changes in the economy of the republic of serbia. in order to become more competitive on the global market, the economy of the republic of serbia needs to increase the qualitative structure of its exports. the improvement of the structure of the exports requires prior investments in the import of modern equipment and technology, so that the final products are able to satisfy the standards of the global market. the attracting of fdis, especially of greenfield investments in the exporting sector is therefore of special importance. the present fdi structure was very unfavorable because investments were mostly made into the service sector which does not have the potential for increasing exports. theoretical and empirical studies indicate that fdis have a positive influence on economic growth, the growth of employment and increase of exports. fdis invested in production goods have a direct and multiply important effect on the increase of the gdp. the most frequent investors are multinational companies which dispose of developed technology and are mostly leaders in production. these companies bring greenfield investments to the country of investing and thus also new technologies. if the product of new investors is a capital commodity it: (a) increases the accumulation of capital (expansion of the existing capital) and (b) enhances the quality of the existing capital or increases its diversion through technological progress. fdis are indirectly spilt over by means of transferring a knowledge-based management system or production know-how. this is most frequently manifested in the case of brownfield investments. by means of spilling over the technology (the so-called spill-over effect) foreign companies influence the domestic companies to adopt the new technology and the productional know-how. structural changes and commodity exports increase of the republic of serbia 397 thus the production process is modernized and the quality of the products increased (gligorić, 2014, 277). empirical studies confirm a highly positive correlation between the level of fdi per capita and the level of foreign-trade exchange. the developed countries of the eu will have to engage more in improving designs, patenting, as well as in the production of sophisticated products the ceecs have moved through the transition process towards products of a higher level of finalization thanks to the spill-overs effects brought in by the fdis. there have been deep structural changes in the economies of these countries. ever since the mid-1990s, the ceecs have also begun to achieve comparative advantages in the production of technologically intensive products (such as machines and equipment, means of transport, electrical and optical instruments) especially in central europe, which was under the influence of german industry. the positive effects of the fdis on structural changes and exports could have certainly been even greater had their larger portion not been directed into the service sector (finances, construction, transport and communications). the republic of serbia must apply appropriate measures of economic policy and thus constantly improve the investment climate so as to attract as much as possible fdis into the production of high-tech products. the high increase of the share of high-tech products in the export would follow the trend of the share of high-tech products in the global export of commodities. structural changes in global production have influence on the increase of the international trade in technologically intensive products. conclusion the global economy of the last decade of the 20 th century has as its key feature a dynamic growth of international trade. the growth of global export was more dynamic than the growth of the global production and the global gdp. in the period from 2005 to 2013 the growth of the global export was 3.5%, which is considerably above the rate of growth of the global production and the global gdp. the growth of global trade also caused the change in its structure divided by sitc sectors. the period of the 1990s was accompanied by a drop of the share of exports of food and agricultural raw materials (due to a long-term drop of their exporting prices) and an increase of the share of exports of industrial products. after 2000, due to the increase of oil prices, there is an increase of the share of mineral fuels and lubricants. there is also an increase of the share of minerals, black and ferrous metals, the prices of which have also increased. such trends have led to the decrease of the global export of industrial products. in the period from 2010 to 2015 the republic of serbia predominantly exported reproduction materials and consumer goods and, to a far lesser degree, equipment. sector 7 (machines and transporting equipment) has recorded the highest level of export. its average growth at that time used to be approximately 24.3%. in the second place was sector 6 (processed products divided by materials) with an average growth of approximately 24%. a positive tendency is the fact that sector 0 (food and live animals) is recording a decrease during the past years. according to sitc sectors, products from the group road vehicles comprised in 2015 11.7% of the value of the total exports. in second place were products from the group 398 g. radisavljević, b. djordjević, g. milovanović electrical machines and appliances with a share of 7.7% of the total value of exports. the leading imported products also belonged to the group road vehicles, whereas the second position was held by oil and oil derivatives. in order to achieve a considerable structural progress and increase of exports, it is necessary to develop products that are the result of a high-level research and development activity. due to the lack of the country’s own accumulation for financing these products it is necessary to provide an influx of fdis. references benedictis, l. & tajoli, l. 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(2003). the reorentation of transition countries export: changes in quantiti, quality and variety. the william davidson institute at the university of michigan business school, working paper number 631. kovačević, r. (2012). ekonomski odnosi srbije sa inostranstvom. beograd, ekonomski fakultet. kovačević, r. (2016). oporavak svetske privrede-efekti na izvoz srbije. ekonomska politika srbije u 2016. godini. beograd, ekonomski fakultet. lewer, j., & van den berg, h. (2003). does trade composition influence economic growth? time series evidence for 28 oecd and developing countries. journal of international trade and economic development, 12(1), 39-96. nbs, (2014 january). statistički bilten. nikolić, g. 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(2005). evolution of trade patterns in the new eu member state. economics of transition. the european bank for reconstruction and development, 13/4: 629-650. strukturne promene i povećanje izvoza robe republike srbije cilj ovog rada je da pokaže, na osnovu relevantnih sistematizovanih znanja u naučnim i stručnim publikacijama, ključne promene u strukturi svetske privrede i svetske trgovine, kao i da se identifikuje uticaj tih promena na strukturu i obim izvoza republike srbije. najpre, pokazali smo teorijska i metodološka ograničenja u studiji dinamike i strukture trgovine svetske privrede i svetske trgovine. drugo, prezentovane su procene mmf-a u odnosu na globalni rast u trgovini i bdp-a koji se odnose na 2016. i 2017. godinu. sledi analiza strukture svetskog izvoza i uvoza robe po sektorima, u skladu sa standardnom međunarodnom trgovinskom klasifikacijom (smtk), a analiza strukture spoljne trgovine republike srbije prema proizvodima, kao i po oblastima i odsecima smtk. na kraju se ukazuje na značaj stranih direktnih investicija (sdi) na strukturno unapređenje proizvodnje i povećanje izvoza republike srbije. ključne reči: svetska trgovina, struktura izvoza, unapređenje i povećanje izvoza, sdi 2358 facta universitatis series: economics and organization vol. 14, n o 2, 2017, pp. 139 153 doi: 10.22190/fueo1702139r review paper features of funding for higher education in european countries and in the russian federation in the light of reforms 1 udc 378.3(4+470) olga rimskaya konrad adenauer foundation, russia abstract. modern education reforms undertaken in the countries all over the world have inevitably affected the management and funding system of education. the tendency towards decentralization of management of education is the most expressed in many countries. however, the state budget is still responsible for education funding. taking into account national peculiarities in the sphere of funding, there are various approaches and schemes. as international experience shows, a state participation in higher education funding leads to its gradual reduction with a simultaneous increase of the share of extrabudgetary funding at the expense of the entities, public granting organizations, government programs, and students. it should be noted that basic approaches and methods of education funding change, depending on the economic situation in the specific country. key words: education reforms, decentralization of education management, systems of international funding indicators, share of the state participation, strengthening of the extrabudgetary funding jel classification: i22, i25, i28 introduction expenditures on education are considered to be one of the key indicators of social development, as they reflect the level of state and society consideration for the education of its citizens. funding for education is not only an important method for increasing the capital of citizens and improving economic growth perspectives. funding also has its own 1received december 1, 2016 / revised march 23, 2017/ accepted march 28, 2017 corresponding author: olga rimskaya konrad adenauer foundation russia, russian federation e-mail: olgarim@mail.ru 140 o. rimskaya value, because education broadens people’s views, gives an opportunity for self-realization, promotes their material welfare, and healthy way of life. an increase in the quality and competitiveness of educational services is possible if there are all kinds of resources (first of all, funds) and if they are effectively used. in terms of market relations in economy, a successful development of the education system is provided by attracting and using various funding sources. at this, an important role is still played by the sole guaranteed source of funding: the state budged. a present state of the education system of almost all countries is characterized by the lack of budgetary funds allocated for the functioning of this field. often, many other problems in the education system (the content and quality of education, the availability of education for different sections of the population, relations development with the labour market, etc.) are directly connected to the lack of funding. this article presents the analysis of the funding system of the education system in several countries: france, the czech republic, greece, estonia, and russia. in the context of this research, quantitative and qualitative funding aspects of all education levels are analyzed, possible evaluation directions of their effectiveness are studied, and main trends of the model for funding advancement of the budgetary education are determined. 1. prerequisites for research various education reforms which affected the management and funding system of education were undertaken in the last decades of the xxi century in the majority of developed countries in the world. the tendency to decentralization and delegation of many management powers and functions from the center to lower levels, as well as the expansion of society participation in the management process, turned out to be the most expressed. despite management reforms, state powers of different levels are still responsible for providing education and its funding. in the 1990s, higher schools in the majority of the countries suffered financial crisis mainly connected to the slowing of the growth rate of the state support of higher educational institutions which ran simultaneously with an increase in the students’ flow. the state tried to make students and their parents play a bigger expenditure part by making special amendments in the funding system. from the mid-1950s to the mid-1990s, the number of students in almost all european countries increased by more than 10 times. the transition from an elite to a mass system of higher education, covering now up to 2/3 of the pupils finishing secondary school, occurred. this growth was accompanied by significant structural changes in the system of higher education: along with traditional universities, there appeared higher educational universities providing more specialized and professional training. in the 1980s and 1990s, the evaluation procedures for the university activity were introduced. moreover, a decrease in funds allocated by the state for higher professional institutions (per one student) took place. expediency of keeping a traditional funding system almost based on the state support was called in question at the official level. the ratio of state and private funding for higher education is not the same. for example, in germany, austria, and italy a share of state funding in expenditures on higher features of funding of higher education in european countries and in the russian federation ... 141 education is about 90%, in great britain and finland, it is about 80%, in denmark and sweden, it is near 2/3, and in the usa and canada, it is 50% and 73% respectively (абанкина, 2008). in the last 30 years, the leadership of universities all over the world is being criticized due to inability to take into consideration market demands, ineffective management, and high expenditures. the necessity of reform in the education system has become imminent. within the limits of international comparison, the amount of funding for education in general and its separate levels is characterized by four main indicators:  education expenditures ratio to the gross domestic product (gdp);  expenditures ratio per one student to the size of gdp per capita;  expenditures per one student on a purchasing power parity basis of national currency;  weight of the state expenditures on education in the combined state expenditures (according to education levels). each of these indicators has advantages and disadvantages and characterizes various aspects of funding for the education system. today, the system of the international education indicators of the organization for economic co-operation and development (oecd) is the most complete and conceptually grounded and, at the same time, constantly developing and changing. the indicators prepared by the oecd/eurostat, due to the difficult methodology and calculation mechanism, allow one to carry out more precisely the analysis of education systems and comparison between various countries. the international standard classification of education (isced) of unesco (unesco institute for statistics, 2015) became a basis for the classification of educational structures and programs when developing international indicators of the oecd. the isced is a tool for data processing collected in various education systems into comparable international frames based on strict definitions and education levels classification, academic programs, their duration, and other data. it is obvious that a national classification of education levels in different countries has its own unique features. hence, comparability of the international oecd indicators is not absolutely exact and comprehensive. besides, when carrying out financial indicators research according to education levels, the author faced a problem of the lack of official data on education levels of some countries. further (table 1), the expenditures on all education levels of the countries under research are given 2 . table 1 current expenditures on education in percentage of gni within 2000-2014 years countries 2014 2012 2011 2010 2009 2008 2005 2000 greece 3.1 3.1 3.1 3.1 3.1 3.1 2.1 france 5.0 5.0 5.0 5.1 5.1 4.9 4.9 4.9 czech republic 4.1 4.1 4.7 4.3 3.9 4.0 3.4 2.9 russia 3.5 3.5 3.5 3.5 3.5 3.5 3.5 2.5 estonia 4.4 4.4 4.8 5.4 5.2 5.4 4.8 5.0 source: the world data at knoema 2 current expenditures on education in percentage of gni are total state current expenditures on education expressed in percentage of gni in the fiscal year. instead of gni, gnp is also used. 142 o. rimskaya referring to the data of the international statistics on gni (вестник вгу, 2001) in the countries all over the world within the same period, the following will be obtained (table 2). table 2 gni of the countries within 2000-2012 (million us dollars) years countries 2012 2011 2010 2009 2008 2005 2000 greece 247300 279940 293229 322655 343916 248168 132622 france 271446 2928598 2700865 2741772 2985992 2242152 1394044 czech republic 193729 209850 191444 191245 219943 129840 60341 russia 1947838 1844591 1476251 1182914 1612145 742291 251903 estonia 22230 22014 18491 19061 22858 13457 5476 source: the world data at knoema in the context of comparing international indicators (table 2), greece and france have close meaning in gni for the period under research. in 2012, the gni of russia exceeded that of greece 12.7 times, and it exceeded the gni of france 14 times. however, current expenditures on education in percentage of gni within 2000-2014 (table 1) in russia and greece are very similar. in france, a share of expenditures on education is even bigger than in russia. this fact shows that greece allocates a considerable part of the state budget on the education system in comparison with russia, and france exceeds the similar expenditures of russia on education. according to the isced scheme in the edition of 2011 (un educational, scientific and cultural organization, 2011), the oecd offers a methodology of transferring national academic programs into the internationally comparable set of categories to determine the stages of education. 2. experience of funding for higher education various forms of private higher education are introduced in the world. an enormous distinction between private and state higher education are at the same time observed. the variety of systems of education management in the countries all over the world leaves a direct mark on approaches to its funding, which is considered to be one of the components of the general management process. according to the powers distribution structure and degree of their concentration at any level, developed countries can be divided into two primary groups: with centralized and with decentralized management of education. the first group is greece, ireland, italy, portugal, france, israel, japan, and several other countries. centralization in management is observed to be especially strong in greece, where almost all powers in the field of education are in the hands of the ministry of national education. centralization of management is expressed more moderately in italy and france, where, since the end of last century, a stable tendency to its gradual decentralization is observed. as a rule, the greatest part of funds for education in these countries is taken from the central state budget; however, funds can be allocated from regional and local budgets, industrial enterprises, public funds, and from private individuals (in the form of a tuition fee). features of funding of higher education in european countries and in the russian federation ... 143 belgium, germany, great britain, spain, the netherlands, norway, switzerland, sweden, and also the usa, canada, australia, and some other countries belong to the second, more numerous group. funding in the countries with the decentralized education management system is performed according to various schemes, which do not always correspond to the type of education management existing in the country, and can sometimes be mixed. state higher educational institutions continue to prevail in western europe, where 95% of students study. in spite of the fact that the most known american universities are private, more than 80% of students study at state universities. in the countries of asia (except china), 80% of students study at private higher educational institutions (unesco institute for statistics, 2015). for comparison: in russia, where the total quantity of higher educational institutions constitutes 1046, including non-state higher educational institutions (437), the number of students at state universities is 5 times bigger than the number of students at nonstate universities (мировой атлас данных). the bigger part of funds (31% and 19% respectively (абанкина, 2008) allocated from private establishments is for higher educational institutions. a tendency towards the growth of state funding for educational institutions of all levels is observed: there was a stable growth from 2000 to 2011 all over the world (except italy), according to which comparable data is available (oecd, 2014). expenditures on higher education are made up of academic expenditures on higher education in percentage of total state expenditures on the education system in the country (the world data at knoema) (table 3). table 3 expenditures on higher education in the countries years countries 2012 2011 2010 2009 2008 2005 2000 greece * 36.1 24.0 france 22.3 22.8 22.1 22.7 22.2 21.1 17.6 czech republic * 25.8 22.5 23.2 23.7 21.0 19.0 russia * 21.2 36.4 36.4 16.1 estonia * 25.1 21.7 22.1 19.9 18.9 source: the world data at knoema, * data is absent a relevant comparison of the indicators is impossible due to the lack of complete data on the countries and years. however, based on the given statistical data of the countries, one can notice the increase in state expenditures on higher education: stable and gradual in france and a growth in the czech republic. the indicators of the increase in state funding for higher educational institutions in estonia is also quite gradual. the similar cannot be written about russia: a substantial decrease in the state participation in support of higher education was observed in 2012. this can be explained by the education transferring to normative funding per capita according to the decree of the minister of the russian federation in 2011. 144 o. rimskaya 3. results 3.1. france france is included into the group of industrially developed countries, which allocate a great part of their gni for education development. the years, which students spend studying, can be divided into several education stages:  preschool education;  secondary education is a process for getting education at the college or lycee;  higher education, when a student gets a bachelor’s diploma confirming his specialization after graduating. in france, for example, funds allocation for education considerably differs from other countries. in particular, large sums are aimed at development of rather expensive secondary education, while expenditures on primary education are at the level of average values, according to the oecd. the share of the funds allocated for higher education in france is below average values, according to the oecd, and is much lower than in the most developed countries. in france, the share of expenditures on education constitutes 9.7% of all public expenditures, and the average value among the countries of the oecd is at the level of 12.9% (ситерманн, 2008). the usa, australia, great britain, and the scandinavian countries outrun france as regards this indicator. however, the main feature of the french system is that in case of funds distribution, emphasis is put on funding for secondary education. in this country funds for expenditures on education depend on their type (investments, current expenditures, personal, etc.) and on the education level. communities (preschool establishments and elementary schools), departments (lower secondary schools – colleges), regions (upper secondary schools – lycees), and, finally, the state (universities) are responsible for constructing buildings and their equipment. current expenditures are distributed proportionally according to almost the same scheme, but the main part belongs to the state budget. the ratio of investment of different participants of funding is the following: the ministry of national education and other ministries make up 64.6%; regions, departments, and communes are 20.4%; social welfare institutions (mainly in the form of grants for children education) constitute 2.3%; industrial and other enterprises (due to the special tax) amount to 5.8%; families of pupils and students (a tuition fee, educational materials, and so on) make up 6.9% (ситерманн, 2008). gradually, the share of ministries decreases and the share of regional and local authorities increases. 3.2. the czech republic the system of education in the czech republic has the following structure:  preschool establishments for education;  elementary education at schools;  secondary education at schools and gymnasiums;  higher and postgraduate education. the czech republic joined the isced and estimates all levels of education based on this classification. features of funding of higher education in european countries and in the russian federation ... 145 nowadays higher education in the czech republic is a progressively developing system of higher educational institutions and scientific and administrative centers. after a process of initial integration into the education system of the european union, the czech higher educational institutions continue to enrich their experience finding new ways of cooperation with the world. about 30 state and 40 private higher educational institutions, which offer accredited programs at bachelor, master, and doctor levels, exist in the czech republic. the result of the educational policy is obvious: the diplomas obtained at the czech universities are recognized worldwide, students get the state support, and education is provided with privileges and discounts, as well as with a possibility of getting various grants. the government of the country planned to allocate 11.34% of gdp to the ministry of education, youth and sports of the czech republic for 2014, and this line of the czech budget is a priority in funds allocation (обзор состояния экономики чехии). after the czech republic had joined the european union, higher educational institutions actively improved the content of subjects taking into consideration all-european requirements which considerably improve the quality of education. this is the difference of the higher educational institutions of this country from that of the cis countries (the commonwealth of independent states), which gradually enhance their educational policy. before the change of the law on higher education, higher education was free for citizens of the czech republic and paid for foreigners. after adoption of the new law, according to the requirements of the european legislation, the principle of equal conditions in a tuition fee for all students regardless of their nationality was established. 3.3. estonia the law of the estonian republic “on popular education” is the main document, the aim of which is a legal provision of forming, functioning, and developing a popular education system. depending on the tasks, education in estonia is divided into general, professional, and education of interests. according to the international standard adopted by unesco, popular education has the following levels:  preschool education;  elementary education (first level of education);  secondary education (second level of education);  higher education (third level of education). the system of higher education in estonia is based on the following laws: “on education” (adopted in 1992), revised and amended; “on universities” (1995); “on the university of tartu” (1995); “on applied higher educational institutions” (1998); “on private school” (1998). there are two types of higher educational institutions: universities and applied higher educational institutions. the difference between them is in that, according to the law on universities, education is carried out on all three levels of higher education (bachelor’s, master’s, and doctor’s) in various departments. there is only one stage of education at applied educational institutions. the system of higher education in estonia is made up of six public (social and legal universities) and six private universities. there are also eight state and twelve private 146 o. rimskaya applied higher educational institutions. besides, there is a system of colleges at universities, where only the first level of higher education is provided. in this country, education on a paid basis is carried out not only at private higher educational institutions, but also at public universities and applied higher educational institutions. in estonia, as well as in the european union countries in general, there are several methods of receiving a grant by foreign students, especially for a master’s and doctor’s degree. estonia is included in the european naric/enic and its diplomas are recognized by all countries of the european union (система образования в эстонии). estonia belongs to the european union countries, where it is possible to receive education. though, it is necessary to understand that the government gives preference, first of all, to the locals who want to stay in the country in the future and develop its economics. almost all academic programs in foreign languages (especially in english) are on a paid basis. there is also a system for getting grants and allowances. a system of grants for foreign students is available. 3.4. greece it is well-known that greece is the cradle of science and the education system. the greek education system, as in many countries, consists of three levels of getting education: elementary, secondary, and higher. a national education classification on the following levels was adopted in 1997:  preschool education;  elementary education;  secondary education;  complete secondary education;  secondary professional education;  university education;  postgraduate education. the greek education system is centralized: the activity of education institutions is governed by the ministry of education and religion. it is made up of departments of elementary, secondary, and higher school, as well as departments of education of the greek people living abroad, ethnic groups, international relations, and so on. funding for education is a duty of the state; education at all levels offered by the state is free of charge. the country, despite the economic crisis, continues to hold a high education level: the leading greek higher educational institutions were included in the 500 world’s higher educational institutions. higher education in greece is divided into higher technical education and university education. in greece, the all-european system of higher education is implemented: bachelor’s and master’s programs. higher technical education prepares new personnel in the field of science. in greece, there are 14 higher technical institutions, each has two faculties, and each faculty has two or more departments (образование в греции, 2013). funding for higher education is at the expense of the state. based on the constitution of greece, all higher educational institutions are legal and self-governed, at the same time the educational process and management of the organization is controlled by the state. features of funding of higher education in european countries and in the russian federation ... 147 the constitution forbids creating private educational institutions of the higher school; nevertheless, there is a number of foreign institutions in the country. in fact, private educational institutions exist, they are just training centers or faculties of foreign universities that function as non-accredited by the state. at the same time, despite reducing the total amount of state funding, higher education in the eu countries is almost 80% financed by the public and state expenditures, about 6% is received from non-profit organizations and companies and only 12% of funds are paid as a tuition fee (чепыжова, 2012). in some countries in europe: finland, norway, denmark, sweden, and also austria and greece (a bachelor’s degree), the training at state institutions of the higher school remains free. in greece, spain, france, portugal, romania, slovakia, etc., more than 90% of the state funds allocated for higher education go directly to the budget of educational institutions. the peculiarity of the higher education in greece is a difficulty in entering the majority of higher educational institutions for the greeks. the competitive examinations are very difficult, and applicants, who did not manage to overcome this barrier, have no alternative in the form of education programs on a paid basis. education, apart from giving knowledge, is aimed at enhancing the graduate’s competitiveness on the labour market. it is easier for foreign applicants to enter a greek higher educational institution. the main problem that foreign applicants face is a language barrier. all education programs in the country are in greek except foreign languages departments. many are attracted by the greek education and its availability: it is free of charge (first and second higher education). however, the most persistent can bear the difficulties at the level of learning a language. that is way the percentage of foreign students at greek higher educational institutions is small. a small part of greek students study abroad. some of them receive state grants from the ministry of education and religion and private charity foundations. 3.5. the russian federation nowadays russia is one of the countries with the most developed education system based on the participation in education and on the education level of the population. at the same time, according to the current tendencies in the world, a country with such an education system should have a high living standard and low social and economic differentiation of the population. however, these statements cannot refer to russia to the full extent. in the russian federation, there are the following levels of education according to the federal law “on education in the russian federation”:  preschool education;  elementary education;  basic general education;  secondary education;  secondary professional education;  higher education: bachelor’s program, specialist’s program, and master’s program;  higher education: training of personnel of the higher qualification. the education in russia is carried out according to the bologna convention. the country joined the bologna convention on the unification of higher education in europe in november 2003. the russian model of funding for education based on education levels significantly differs from the world tendencies: at the same share of expenditures on preschool education, 148 o. rimskaya russia allocates a quarter less funds for secondary education and one and half more for tertiary education. this can be explained by two factors: a shorter duration of secondary education, compared to the majority of developed countries and countries with a middle development level, and a record high scope of tertiary education. the level of budgetary funding for higher education in russia is rather low. the size of budgetary expenditures on education in russia both in relation to gdp and in relation to state expenditures in general is below average values of the oecd countries. expenditures on education in general constitute 3.5% of gdp and 12% of the total amount of budgetary expenditures in the russian federation. these indicators in the oecd countries are on average 5.6% and 12.9% respectively. in russia, with the adoption of the federal law “on education in the russian federation” no. 273, a new approach to economic activity and financial provision in education was consolidated – to per capita funding. the government of russia accepted a policy of targeted support of state universities, which means funding for research and federal universities and search for a form of business of the property allowing educational institutions to react more quickly to the arising financial, economic and other problems. concentration of efforts is aimed at searching for points of growth, increase in selfsufficiency of higher educational institutions due to realization of scientific ideas and projects in the market, and aimed at new step of rapprochement with production. it should be noted that in the majority of the european countries targeted support of higher educational institutions has no broad application in education management, as it does not meet the principles of uniformity of budgetary funds distribution. since 2010, staff training within the state order (римская, кранбихлер, 2013) has been implemented in russia, which is based on the expected demand of territorial subjects of the russian federation in specialists with higher education. any citizen of russia has an opportunity, after undergoing a competitive selection, to get professional education on a grant basis due to budgetary funding or on a commercial basis, having paid educational services by means of the funding provided by a future employer. referring to the fact that russia invests funds for education that are not enough for intensification of education development and making education into the most important factor for economy, modernization negatively affects competiveness of the russian education. 4. funding mechanisms funding mechanisms for education in the countries all over the world have common methods and principles:  funding from budgetary and extrabudgetary funds;  cofunding from educational institutions and enterprises, training centers, and private capital;  ratio of budgetary, private, and commercial capital depends on political and economic situation in the country and in the world;  search for new ways of funding for education is executed regardless of the country’s position in the world’s top list;  education system reform;  search for effective ways of development and functioning of the education system. features of funding of higher education in european countries and in the russian federation ... 149 the analysis of the budgetary funding practice for education permits one to lead national variety of funding mechanisms to six budgetary techniques:  according to the results of the negotiating process between authorized state bodies and higher educational institutions, when a budget project submitted by the higher educational institution is discussed;  based on the estimation of the higher educational institutions expenditures for the previous period by authorized state bodies;  according to the funding for higher educational institutions full of formulae, when authorized state bodies define the volume of funding by means of calculating formulae based on the indicators of expenditures or results of achievements of the higher educational institutions activity;  based on contracts conclusion between higher educational institutions and authorized state bodies on providing educational services in accordance with the strategic aims of the country and certain higher educational institution;  in compliance with contracts conclusion between higher educational institutions and authorized state bodies containing target indicators of specialists of different professions;  targeted funding for specific research and educational projects of higher educational institutions. during the last twenty years, in many countries there appeared a tendency of transferring from a “cost-intensive” funding model to the budgetary system aimed at getting results. thus, majority of countries use two key methods: normative and programtargeted when planning budgetary expenditures. the normative method is applied for planning expenditures on budgetary events. norms are set by the law or bylaws and serve as foundations for drawing estimates of budgetary establishments. norms can be in the form of money terms of natural indicators that meet social needs. for example, the norm for nutrition per child at an education establishment per day. another form of norms are the norms of individual payments. tariff schedules of employees labour payments of state-financed organizations can serve as an example. the third group of norms are the norms of expenditures and consumptions of corresponding services in the form of physical indicators: energy, water, and other resources consumption limits. based on natural indicators and financial norms, budget estimates of expenditures are constituted. as practice shows, estimates can be individual (for separate organizations) and general (for groups of uniform organizations). summary estimates are made according to credit managers. estimates on centralized events are made up in accordance with uniform expenditures for a group of organizations. the program-targeted method of budgetary planning is in system planning of budgetary funds allocation for implementation of the targeted programs approved by the law. a targeted program is a complex document, whose purpose is the decision of a task that is a priority for this period. depending on tasks complexity, financial and organizational technical capabilities, programs are accepted for a period from 2 up to 5-8 years, often for more than a 5year term. determining necessary expenditures on each article of the economic classification with a help of a method of the direct account, by the direct expenditures determination, 150 o. rimskaya which are necessary according to the established regulations, norms and other decisions determining the scales of activities and the sizes of expenditures corresponding to them in the conditions of the specific educational institution or a subsystem of education, becomes the basis for calculating the need for budgetary funding. considering the provided approach in general, regardless of the education level and the considered features of educational institutions, it is possible to reveal the following features. calculating the need in budgetary funds is a laborious and complex work. basic data for calculating the need in funding for educational institutions is the following:  contingent of students, pupils, and alumni;  salary system of employees;  norms of social and material security of students, pupils, alumni, and employees of educational institutions;  material resources of educational institutions: occupied spaces, devices and equipment used in the educational process, etc. the program budgeting represents the methodology of planning, execution, and control of budget implementation providing interrelation of the allocating process of state expenditures with the results from programs implementation developed on the basis of the strategic objectives, taking into account priorities of the state policy, public importance of the expected, and end results of using budgetary funds. the main aim of the program budgeting is the increase in social and economic efficiency of budgetary expenditures. the program budget is a reflection of financial provision of programs. it is not distribution on departments, but distribution according to programs. if earlier programs existed separately from the budget and portfolio management of department was exercised, so today control of programs is carried out. all annexes to the budget for expenditures have a program character. ideally, the structure of the program budget should be the simplest and correspond to information provision necessary for the analysis and adoption of effective budget solutions. it is connected with the fact that the main task of the program budgeting is ensuring strong communication between the strategic plans of the state and the state budget. thus, a program-targeted method is a method for solving large social and economic problems by means of development and implementation by bodies of state power and governing of the interconnected program measures directed towards solving tasks in various fields of social activity. peculiar features of the program-targeted planning are: exact formulations and aims systematization (“a tree of the purposes and tasks”); implementable actions stipulated by the set objectives (a system of “aims implementing” actions); initial determination of means and resources for executing program actions; a system approach to program management and control of implementation of measures from governing bodies. in general, almost in all countries implicitly expressed communication between the level of economic development of the country and shares of private expenditures on education is observed: the higher the country’s gdp level per capita, the lower in it is a share of private sources in funding for education. in other words, the state in developed countries spends more on education, than a less economically developed one, not only absolutely, but also relatively. the established practice showed that in the conditions of a combination of the state and market approaches, it became obvious that insufficiency of the budgetary funds causes the objective necessity of increasing the efficiency of using the allocated public financial resource by state universities on the one hand, and more active attraction of means by them from extrabudgetary sources on the other one. features of funding of higher education in european countries and in the russian federation ... 151 5. world practice of funding for education the practice of the organization of general education systems in various countries shows that regardless of the one that provides educational services in the sphere of the general education (private firms or state institutions), funding for general education by the state is executed in certain average sizes, in a certain share of gdp. in developed countries, where population has an income to meet the demand for general education, which means that it is capable to pay for general education, participation of the state in funding for general education is determined by the created demand for education as for the component of the human potential. moreover, public institutions, bearing a burden of expenditures, provide essential support in this process. in the countries with the insufficient level of development, the state is forced to allocate funds for general education for other reasons. firstly, the population, which has an income level that is not enough for full satisfaction of the urgent needs, cannot pay for general education. secondly, in case of inability of the population to pay for general education, the state is faced by a prospect of degradation both social and economic, because of loss of the components of human capital (рудн, 2015). the third type of countries, the poorest, cannot fund for development of the general education system. in that case, the world community, by means of international organizations, gives financial assistance to these countries. at the same time, the larger size of funding from sponsors is received by the countries, which were more strongly affected by the economic and financial restrictions connected with a burden of an external debt. the second indispensable condition of the financial aid is availability of a political will and formal liabilities on development of general education in the countries of the recipient accepted at the highest political level. in the countries that receive financial aid, general education is performed by state institutions and is supported by the efforts of nongovernmental organizations. in the countries of the european union, education systems can differ; however, almost everywhere secondary education at public schools is free, but is closed for non-resident foreigners, and elite gymnasiums and private schools (boarding schools) are on a paid basis. until 1980, education at the higher school of the western european countries was almost free with rare exception. besides, students in a number of the countries got the grants giving them a chance to compensate a part of the accommodation expenditures during their study. since then, a number of changes in the sphere of funding for higher education took place. in the second half of the 1990s, these countries could be divided into three groups depending on the size of payment for higher education: free (germany, denmark, finland, norway, greece, sweden, and austria), average (france), high (switzerland, belgium, spain, italy, the netherlands, and ireland). higher education includes bachelor’s and master’s programs. a higher education diploma can be gained practically in any country. conclusions the development of society and economy of any country is followed by an increase in effectiveness of the importance of funding for higher education with the budgetary expenditures. an effective system of state funding should conform to new tendencies and changes in education models. 152 o. rimskaya as the analysis of practice of the majority of the countries shows, state participation in funding for the education levels reduces to the following:  the budgetary funding for preschool education and pre-primary training of children for school. the possibility of getting additional education, developing creative capabilities of children, can be provided on a state and paid basis;  the budgetary funding for general secondary education with a possibility of getting additional free and paid services at the desire of pupils and their parents. the existence of fee-based schools and gymnasiums is desirable; however, public schools should provide the education of this level according to the need of the population;  the budgetary funding for secondary professional education as the most demanded in real economic conditions with a possibility to work in the market of private colleges;  the budgetary and extrabudgetary funding for higher educational institutions with strengthening of the role of the extrabudgetary funding, and also functioning of a number of private higher educational institutions sufficient to meet the requirements of the population. in conclusion, it should be noted that basic approaches and methods of funding for education change depending on the economic situation in the specific country. as the international practice shows, no system can be considered optimal among a variety of funding systems. in the course of carrying out the analysis of the principles of funding for education according to the levels of the budget system of the countries, it is possible to draw the conclusion that there is no basic distinction between the countries, and the existing difference is determined mainly by the structure of the national budgetary system. references абанкина, и. в. и др. 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